As filed with the Securities and Exchange Commission on August 5, 1998
1933 ACT FILE NO. 333-49273
1940 ACT FILE NO. 811-8727
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-2
(Check appropriate box or boxes)
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933 [ ]
PRE-EFFECTIVE AMENDMENT NO. 2 [X]
POST-EFFECTIVE AMENDMENT NO. [ ]
AND/OR
REGISTRATION STATEMENT
Under
THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 2
[X]
North American Senior Floating Rate Fund, Inc.
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(Exact name of registrant as specified in Charter)
125 High Street
Boston, Massachusetts 02110
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(Address of Principal Executive Officers)
Registrant's telephone number, including area code (617) 946-6000
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Bradford K. Gallagher
President
North American Senior Floating Rate Fund, Inc.
125 High Street
Boston, Massachusetts 02110
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(Name and Address of agent for service)
Approximate date of proposed public offering: As soon as
practicable after the effective date of this
Registration Statement.
Copies to:
Ruth S. Epstein, Esquire
Covington & Burling
1201 Pennsylvania Avenue, N.W.
P.O. Box 7566
Washington, D.C. 20044-7566.
If any of the securities being registered on this Form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. [X]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE UNDER THE
SECURITIES ACT OF 1933
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Amount Maximum Maximum Amount of
Being Offering Price Aggregate Registration
Title of Securities Being Registered Registered Per Unit Offering Price(1) Fee
<S> <C> <C> <C> <C>
Class B Common Stock 6,000,000 $ 10.00 60,000,000 $17,700(2)
Class C Common Stock 4,000,000 $ 10.00 40,000,000 $11,800
Total 10,000,000 $ 10.00 100,000,000 $29,500(2)
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933.
(2) $303.03 has been previously paid.
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<PAGE>
North American Senior Floating Rate Fund, Inc.
CROSS REFERENCE SHEET
ITEMS REQUIRED BY FORM N-2
<TABLE>
<CAPTION>
Part A-
Item No. Item Caption Prospectus Caption
<S> <C> <C>
1. Outside Front Cover Cover Page
2. Inside Front and Outside Back Cover Page Cover Page
3. Fee Table and Synopsis Fund Expenses; Summary
4. Financial Highlights Not Applicable
5. Plan of Distribution How to Buy Fund Shares; Management of the Fund
6. Selling Shareholders Not Applicable
7. Use of Proceeds Use of Proceeds
8. General Description of the Registrant The Fund; Description of Shares;
Repurchase Offers; Investment Objective;
Investment Policies; Investments; Risk
Factors; Multiple Pricing System
9. Management Management of the Fund; Valuing Fund
Shares; How to Buy Fund Shares; Cover
Page
10. Capital Stock, Long-Term Debt, and Description of Shares; Valuing Fund
Other Securities Shares; Management of the Fund; Multiple
Pricing System; Shareholder Services,
Taxes
11. Defaults and Arrears on Senior Securities Not Applicable
12. Legal Proceedings Not Applicable
13. Table of Contents of the Statement of Table of Contents of the Statement of
Additional Information Additional Information
</TABLE>
<TABLE>
<CAPTION>
Part B-
Item No. Item Caption Statement of Additional Information Caption
<S> <C> <C>
14. Cover Page Cover Page
15. Table of Contents Table of Contents
16. General Information and History The Fund
17. Investment Objective and Policies Investment Restrictions and Fundamental
Policies; Repurchase Offer Fundamental
Policy
18. Management Management
19. Control Persons and Principal Holders Management; Outside Back Cover Page
of Securities
20. Investment Advisory and Other Services Advisory, Administration and Distribution
Services; Custodian; Auditors and Financial
Statements
21. Brokerage Allocation and Other Practices Portfolio Transactions
22. Tax Status Taxes
23. Financial Statements Auditors and Financial Statements
</TABLE>
<PAGE>
Subject to Completion, dated August 5, 1998
[LOGO] North American Senior Floating Rate Fund, Inc.
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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 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.
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<TABLE>
<CAPTION>
PRICE TO PROCEEDS TO
PUBLIC(1) SALES LOAD(2) FUND(3)
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<S> <C> <C> <C>
Per Class B Share $ 10.00 None $ 10.00
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Per Class C Share $ 10.00 None $ 10.00
Total $100,000,000 None $100,000,000
================================================================================
</TABLE>
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(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.
CypressTree Funds Distributors, Inc.
PROSPECTUS DATED ______, 1998
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor offers
to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation or offer to buy nor shall there be any sale of these securities in
any State in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such State.
<PAGE>
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TABLE OF CONTENTS
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<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>
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FUND EXPENSES
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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>
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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>
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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.
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INVESTMENT OBJECTIVE
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide as high a level of current
income as is consistent with the preservation of capital by investing primarily
in senior secured floating rate loans and other 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-
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<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.
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<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.
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<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.
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RISK FACTORS
- --------------------------------------------------------------------------------
CypressTree expects that, because the Fund's assets will consist primarily
of Loans which are floating rate instruments, and short-term instruments, the
Fund's net asset value will be relatively stable during normal market
conditions. The value of the Fund's assets may fluctuate significantly less with
changes in interest rates than a portfolio of fixed-rate obligations. However, a
number of factors may cause a decline in the Fund's net asset value, including a
default in a Loan, a material deterioration of a Borrower's perceived or actual
creditworthiness, or a sudden and extreme increase in prevailing interest rates.
These and other risks of investing in the Fund are described below. Conversely,
a sudden and extreme decline in interest rates could result in an increase in
the Fund's net asset value. As a newly organized entity, the Fund has no
operating history. The Fund is not a money market fund and its net asset value
will fluctuate.
Credit Risk
Under normal conditions, the Fund will invest at least 80% of its assets in
Loans. These investments are primarily dependent upon the creditworthiness of
the Borrower for payment of interest and principal. The nonreceipt of scheduled
interest or principal on a Loan may adversely affect the Fund's income or the
value of its investments, which may in turn reduce the amount of dividends or
the net asset value of the Fund's shares. The Fund's ability to receive payment
of principal of and interest on a Loan also depends on the creditworthiness of
any institution interposed between the Fund and the Borrower. To reduce credit
risk, CypressTree actively manages the Fund as described above.
Loans made in connection with recapitalizations, acquisitions, leveraged
buy-outs, and refinancings are subject to greater credit risks than other Loans
in which the Fund may invest. It is expected that the Fund's Loans will consist
primarily of such Loans. These credit risks include the possibility of a default
on the Loan or bankruptcy of the Borrower. The value of these Loans is subject
to a greater degree of volatility in response to interest rate fluctuations and
these Loans may be less liquid than other Loans.
Although the Fund generally will invest in Loans holding the most senior
position in a Borrower's capitalization structure, the capitalization of many
Borrowers will include non-investment grade subordinated debt. During periods of
deteriorating economic conditions, a Borrower may experience difficulty in
meeting its payment obligations under its subordinated debt obligations. These
difficulties may detract from the Borrower's perceived creditworthiness or its
ability to obtain financing to cover short-term cash flow needs and may force
the Borrower into bankruptcy or other forms of credit restructuring.
The Fund may acquire Loans designed to provide temporary or "bridge"
financing to a Borrower pending the sale of identified assets or the arrangement
of longer-term loans or the issuance and sale of debt obligations, or may invest
in Loans of Borrowers that have obtained bridge loans from other parties. A
Borrower's use of bridge loans involves a risk that the Borrower may be unable
to locate permanent financing to replace the bridge loan, which may impair the
Borrower's perceived creditworthiness.
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<PAGE>
Collateral Impairment
A Loan will be secured unless (a) the value of the collateral declines
below the amount of the Loan, (b) the Fund's security interest in the collateral
is invalidated for any reason by a court, or (c) the collateral is partially or
fully released under the terms of the Loan Agreement as the creditworthiness of
the Borrower improves. There is no assurance that liquidation of collateral
would satisfy the Borrower's obligation in the event of nonpayment of scheduled
interest or principal, or that collateral could be readily liquidated. The value
of collateral generally will be determined by reference to the Borrower's
financial statements, an independent appraisal performed at the request of the
Agent at the time the Loan was initially made, the market value of the
collateral (e.g., cash or securities) if it is readily ascertainable, and/or by
other customary valuation techniques that CypressTree considers appropriate.
Collateral generally is valued on the basis of the Borrower's status as a going
concern and this valuation may exceed the collateral's immediate liquidation
value.
Collateral may include (a) working capital assets, such as accounts
receivable and inventory, (b) tangible fixed assets, such as real property,
buildings and equipment, (c) intangible assets, such as licenses, trademarks and
patent rights (but excluding goodwill), and (d) security interests in shares of
stock of subsidiaries or affiliates. To the extent that collateral consists of
the stock of the Borrower's subsidiaries or other affiliates, the Fund will be
subject to the risk that this stock will decline in value. Such a decline,
whether as a result of bankruptcy proceedings or otherwise, could cause the Loan
to become undercollateralized or unsecured. Most credit agreements contain no
formal requirement to pledge additional collateral. In the case of Loans made to
non-public companies, the Borrower's shareholders or owners may provide
additional credit support in the form of fully secured guarantees and/or
security interests in assets that they own. The Fund may invest in Loans (a)
guaranteed by such shareholders or owners (provided that the guarantees are
fully secured), or (b) fully secured by assets of such shareholders or owners;
even if the Loans are not otherwise collateralized by the assets of the
Borrower.
If a Borrower becomes involved in bankruptcy proceedings, a court may
invalidate the Fund's security interest in the Loan collateral or may
subordinate the Fund's rights under the Loan to the interests of the Borrower's
unsecured creditors. For example, a court could base this action on a
"fraudulent conveyance" claim to the effect that the Borrower did not receive
fair consideration for granting the security interest in the Loan collateral to
the Fund. For Loans made in connection with a highly leveraged transaction, the
consideration received in exchange for granting a security interest may be
deemed inadequate if the Loan proceeds were not received or retained by the
Borrower, but instead were paid to other persons (such as shareholders of the
Borrower) in an amount that left the Borrower insolvent or without sufficient
working capital. There are also other events, such as the failure to perfect a
security interest due to faulty documentation or faulty official filings, which
could lead to the invalidation of the Fund's security interest in Loan
collateral. If the Fund's security interest in Loan collateral is invalidated or
if the Loan is subordinated to other debt of a Borrower in bankruptcy or other
proceedings, it is unlikely that the Fund would be able to recover the full
amount of the principal and interest due on the Loan.
There may be temporary periods when a Borrower's principal asset is the
stock of a related company, which may not legally be pledged to secure a Loan.
In this event, the Loan will be temporarily unsecured until the stock can be
pledged or is exchanged for or replaced by other assets which will be pledged as
security for the Loan. However, the Borrower's ability to dispose of these
securities, other than in connection with such pledge or replacement, will be
strictly limited for the protection of the holders of Loans.
Investments in Lower Quality Securities
The Fund may invest all or substantially all of its assets in Loans or
other securities that are rated below investment grade by Moody's Investors
Service, comparably rated by another nationally recognized statistical rating
organization, or, if unrated, deemed by CypressTree to be of equivalent quality.
Debt rated Baa or higher by Moody's is considered to be investment grade. Debt
rated Baa by Moody's is considered by Moody's to have speculative
characteristics. Debt rated Ba or B by Moody's is regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and to repay principal in accordance with the terms of the obligation. While
lower-quality debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to adverse
conditions. Securities rated Ba and lower are the equivalent of high-yield,
high-risk bonds, commonly known as "junk bonds," and involve a high degree of
risk. CypressTree does not expect to invest in any securities rated lower than
B3 at the time of investment. See "Appendix A--Description of Ratings" for a
full description of Moody's long-term debt ratings. In the event of a downgrade
in a Loan, CypressTree will consider whether to dispose of that Loan.
Ratings of debt securities represent the rating agency's opinion regarding
their quality and are not a guarantee of quality. Rating agencies attempt to
evaluate the safety of principal and interest payments and do not evaluate
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.
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REPURCHASE OFFERS
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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.
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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;
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<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.
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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.
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VALUING FUND SHARES
- --------------------------------------------------------------------------------
The Fund values its shares once on each day the New York Stock Exchange
("NYSE") is open for trading as of close of regular trading on the exchange. The
Fund is informed that, as of the date of this prospectus, the NYSE observes the
following business holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The Fund's net asset value per share is determined by State Street Bank &
Trust Company (as agent for the Fund) in the manner authorized by the Fund's
Board of Directors. State Street Bank & Trust Company also serves as Transfer
Agent and Custodian for the Fund and has custody of the Fund's assets. The
Custodian's address is 225 Franklin Street, Boston, Massachusetts 02110.
In determining the net asset value of a share of the Fund, the value of the
securities held by the Fund plus any cash or other assets (including interest
and dividends accumulated but not yet received) minus all liabilities
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<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
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<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.
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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
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<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.
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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:
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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.
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<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.
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<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.
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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.
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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.
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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.
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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-
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<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 , 1998 ......... 11
Notes to Financial Statements ................................ 11
Independent Auditors Report .................................. 11
Other Information ............................................ 11
</TABLE>
32
<PAGE>
North American Senior Floating Rate Fund
PROSPECTUS
[Date]
INVESTMENT ADVISER
CypressTree Asset Management Corporation, Inc.
125 High Street
Boston, Massachusetts 02110
INVESTMENT SUBADVISER
CypressTree Investment Management Company, Inc.
125 High Street
Boston, Massachusetts 02110
ADMINISTRATOR
CypressTree Asset Management Corporation, Inc.
125 High Street
Boston, Massachusetts 02110
DISTRIBUTOR
CypressTree Funds Distributors, Inc.
286 Congress Street
Boston, Massachusetts 02210
33
<PAGE>
Subject to Completion, dated August 5, 1998
STATEMENT OF
ADDITIONAL INFORMATION
[Date]
North American Senior Floating Rate Fund, Inc.
125 High Street
Boston, Massachusetts 02110
617 946-0600
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY THE PROSPECTUS OF NORTH AMERICAN SENIOR FLOATING RATE FUND, INC.
(THE "FUND") DATED AS SUPPLEMENTED FROM TIME TO TIME. THIS STATEMENT OF
ADDITIONAL INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS, A COPY
OF WHICH MAY BE OBTAINED WITHOUT CHARGE BY CONTACTING THE FUND'S DISTRIBUTOR,
CYPRESSTREE FUNDS DISTRIBUTORS, INC., 286 CONGRESS STREET, BOSTON, MASSACHUSETTS
02210, AT (800) 860-5575.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor offers
to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation or offer to buy nor shall there be any sale of these securities in
any State in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such State.
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<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 , 1998 ......... 11
Notes to Financial Statements ................................ 11
Independent Auditors Report .................................. 11
Other Information ............................................ 11
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
THE FUND
- --------------------------------------------------------------------------------
North American Senior Floating Rate Fund, Inc. (the "Fund") is a newly
organized, closed-end, non-diversified management investment company that
continuously offers its shares to the public. The Fund will conduct monthly
repurchase offers for its shares. The Fund's principal office is located at 125
High Street, Boston, Massachusetts 02110. Capitalized terms used in this
Statement of Additional Information and not otherwise defined have the meanings
given them in the Fund's Prospectus.
- --------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS AND FUNDAMENTAL POLICIES
- --------------------------------------------------------------------------------
The following fundamental policies cannot be changed without the approval
of the holders of a majority of the Fund's outstanding voting securities. In
accordance with the requirements of the 1940 Act a "majority of the Fund's
outstanding voting securities" means the lesser of either: (1) the vote of 67
percent or more of the voting securities present at the annual or a special
meeting of the Fund's shareholders, if the holders of more than 50 percent of
the Fund's outstanding voting securities are present or represented by proxy; or
(b) the vote of more than 50 percent of the Fund's outstanding voting
securities. The Fund may not:
(a) Borrow money or issue senior securities, except as permitted by the
1940 Act;
(b) Invest more than 25% of the Fund's total assets (taken at current value)
in the securities of Borrowers and other issuers having their principal
business activities in the same industry (the electric, gas, water and
telephone utility industries being treated as separate industries for the
purpose of this restriction); provided that (i) there is no limitation on
purchasing securities the issuer of which is deemed to be in the financial
institutions industry, which includes commercial banks, thrift institutions,
insurance companies and finance companies and (ii) there is no limitation
with respect to obligations issued or guaranteed by the U.S. Government or
any of its agencies or instrumentalities;
(c) Make loans to other persons, except that the Fund may (i) acquire Loans,
debt securities and other obligations in which the Fund is authorized to
invest in accordance with its investment objective and policies, (ii) enter
into repurchase agreements, and (iii) lend its portfolio securities;
(d) Underwrite securities issued by other persons, except insofar as it may
be deemed technically to be an underwriter under the Securities Act of 1933
in selling or disposing of an investment;
(e) Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
securities). The purchase of Loans, securities or other investment assets
with the proceeds of a permitted borrowing or securities offering will not be
deemed to be the purchase of securities on margin;
(f) Purchase or sell real estate, although it may purchase and sell
securities secured by interests in real estate and securities of issuers that
invest or deal in real estate; provided that the Fund reserves the freedom of
action to hold and to sell real estate acquired as a result of the ownership
of securities; or
(g) Purchase or sell physical commodities or contracts for the purchase or
sale of physical commodities. Physical commodities do not include futures
contracts with respect to securities, securities indices or other financial
instruments.
The Fund has adopted the following nonfundamental investment policies which
may be changed by the Fund's Board of Directors without shareholder approval. As
a matter of nonfundamental policy, the Fund may not:
(a) make short sales of securities or maintain a short position, unless at
all times when a short position is open the Fund either owns an equal amount
of such securities or owns securities convertible into or exchangeable for,
without payment of any further consideration, securities of the same issuer
as, and equal in amount to, the securities sold short, and in any event only
to the extent that no more than 5% of its net assets are committed to short
sales;
(b) purchase oil, gas or other mineral leases or purchase partnership
interests in oil, gas or other mineral exploration or development programs;
(c) invest more than 10% of its total assets (taken at current value) in the
securities of issuers that, together with any predecessors, have a record of
less than three years continuous operation, except U.S. Government
securities, securities of issuers that are rated at least "A" by at least one
nationally recognized statistical rating
1
<PAGE>
organization, municipal obligations and obligations issued or guaranteed by
any foreign government or its agencies or instrumentalities; or
(d) invest more than 10% of its total assets in Loans of any single Borrower.
For the purpose of fundamental policies (a) and (e) and nonfundamental
investment policy (a), the Fund's arrangements (including escrow, margin and
collateral arrangements) with respect to transactions in all types of options
and futures contract transactions shall not be considered to be (a) a borrowing
of money or the issuance of securities (including senior securities) by the
Fund, (b) a pledge of the Fund's assets, (c) the purchase of a security on
margin, or (d) a short sale or position.
The Fund has no present intention of engaging in options or futures
transactions, or in short sales, or of issuing preferred shares.
For the purpose of fundamental policy (b), the Fund will consider all
relevant factors in determining who is the issuer of the Loan, including the
Borrower's credit quality, the amount and quality of the collateral, the terms
of the Loan Agreement and other relevant agreements (including inter-creditor
agreements), the degree to which the credit of an interpositioned person was
deemed material to the decision to purchase the Loan, the interest rate
environment, and general economic conditions applicable to the Borrower and an
interpositioned person.
Notwithstanding the Fund's investment policies and restrictions, the Fund
may invest all or part of its investable assets in a management investment
company with substantially the same investment objective, policies and
restrictions as the Fund. This could allow creation of a "master/feeder"
structure in the future, although the Fund has no current intention to
restructure in this manner.
If a percentage restriction on investment policies or the investment or use
of assets set forth above is adhered to at the time a transaction is effected,
later changes in percentage resulting from changing values will not be
considered a violation.
- --------------------------------------------------------------------------------
REPURCHASE OFFER FUNDAMENTAL POLICY
- --------------------------------------------------------------------------------
The Board of Directors has adopted a resolution setting forth the Fund's
fundamental policy that it will conduct monthly Repurchase Offers (the
"Repurchase Offer Fundamental Policy").
The Repurchase Offer Fundamental Policy sets the interval between each
Repurchase Offer at one month and provides that the Fund shall conduct a
Repurchase Offer each month (unless suspended or postponed in accordance with
regulatory requirements. The Repurchase Request Date will be on the last
business day of the month. The Repurchase Offer Fundamental Policy also provides
that the repurchase pricing shall occur not later than three business days after
the Repurchase Request Date.
The Repurchase Offer Fundamental Policy only may be changed by a majority
vote of the Fund's outstanding voting securities. In accordance with the
requirements of the 1940 Act, a "majority of the Fund's outstanding voting
securities" means the lesser of either: (a) the vote of 67 percent or more of
the voting securities present at the annual or a special meeting of the Fund's
shareholders, if the holders of more than 50 percent of the Fund's outstanding
voting securities are present or represented by proxy; or (b) the vote of more
than 50 percent of the Fund's outstanding voting securities.
- --------------------------------------------------------------------------------
MANAGEMENT
- --------------------------------------------------------------------------------
The Fund's Directors and officers and their business backgrounds are listed
below. Those Directors and officers who, as defined in the 1940 Act, are
"interested persons" of the Fund, CAM, CypressTree, or Cypress by virtue of
their affiliation with any one or more of the Fund, CAM, CypressTree, or
Cypress, are indicated by an asterisk (*) ("Interested Persons").
2
<PAGE>
Directors and Officers of the Fund
<TABLE>
<CAPTION>
Year of
Name and Address Birth Position Held Business Background
- ------------------------ -------- -------------------------- ---------------------------------------------------
<S> <C> <C> <C>
Bradford K. Gallagher* 1944 Director; President President, Cypress Holding Company (10/95-
125 High Street present); President, CypressTree Asset
Boston, MA 02110 Management Corp. (8/96-present); President,
Cypress Investments, Inc. (12/96-present);
President, CypressTree Investment Management
Co. (2/97-present); President, CypressTree
Funds Distributors, Inc. (3/97-present);
President, Director, CypressTree Senior Floating
Rate Fund, Inc. (7/97-present); President,
Trustee, North American Funds (10/97-present);
President, Allmerica Financial Services (4/90-
9/85); Member of Operating Committee and
Founder/President of Fidelity Investments
Institutional Services Co. (1/81-3/90)
William F. Achtmeyer 1955 Director President and Chief Executive Officer, The
200 State Street Parthenon Group (8/91-present); Director,
Boston, MA 02109 CypressTree Senior Floating Rate Fund, Inc.
(7/97-present); Trustee, North American Funds;
Director, Bain & Company (9/77-6/96)
William F. Devin 1938 Director Member, Board of Governors, Boston Stock
One Boston Place Exchange (1/85-present); Director, CypressTree
Boston, MA 02108 Senior Floating Rate Fund, Inc. (7/97-present);
Trustee, North American Funds; Executive Vice
President, Fidelity Capital Markets Co. (12/66-
12/96)
Kenneth J. Lavery 1949 Director Vice President, Massachusetts Capital Resource
420 Boylston Street Company (5/82-present); Director, CypressTree
Boston, MA 02116 Senior Floating Rate Fund, Inc. (7/97-present);
Trustee, North American Funds
Arthur S. Loring* 1947 Director Managing Director, Cypress Holding Company
125 High Street (1998-present); Senior Vice President and
Boston, MA 02110 General Counsel, FMR Corp. (7/83-12/97);
Secretary, Fidelity Family of Funds (7/83-12/97);
Jeffrey S. Garner* 1956 Executive Vice President Vice President, Cypress Holding Company
125 High Street (8/96-present); Executive Vice President and
Boston, MA 02110 Chief Investment Officer, CypressTree
Investment Management Co. (8/96-present);
Vice President, CypressTree Funds Distributors,
Inc. (3/97-present); Executive Vice President,
Portfolio Manager, CypressTree Senior Floating
Rate Fund, Inc. (7/97-present); Vice President,
Eaton Vance Management (1/88-7/96)
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Year of
Name and Address Birth Position Held Business Background
- ------------------------ -------- --------------------------- ----------------------------------------------------
<S> <C> <C> <C>
Joseph T. Grause, Jr.* 1952 Executive Vice President Vice President, Cypress Holding Company
286 Congress Street (1/96-present); Treasurer, North American Funds
Boston, MA 02110 (10/97-present); Executive Vice President,
CypressTree Senior Floating Rate Fund, Inc.
(7/97-present); Senior Vice President, First Data
Investor Services Group (5/93-11/95); Senior
Vice President, Fidelity Investments (6/76-5/93)
Peter K. Merrill* 1961 Vice President; Portfolio Vice President, CypressTree Investment
125 High Street Manager Management Co. (6/97-present); Vice President,
Boston, MA 02110 CypressTree Senior Floating Rate Fund, Inc.
(6/97-present); Managing Director, BankBoston
Corp. (7/88-5/97)
Philip C. Robbins* 1967 Assistant Vice President Assistant Vice President, CypressTree
125 High Street Investment Management Co., (9/96-present);
Boston, MA 02110 Assistant Vice President, CypressTree Senior
Floating Rate Fund, Inc. (6/97-present);
Associate, Eaton Vance Management (9/91-8/96)
Joseph A. Germain* 1969 Assistant Vice President Assistant Vice President, CypressTree
125 High Street Investment Management Co. (2/97-present);
Boston, MA 02110 Assistant Vice President, CypressTree Senior
Floating Rate Fund, Inc. (6/97-present);
Supervisor, Investors Bank & Trust Co.
(3/94-1/97)
Thomas J. Brown* 1946 Assistant Treasurer Principal, Cypress Holding Company (7/97-
286 Congress Street present); Assistant Treasurer, CypressTree Senior
Boston, MA 02210 Floating Rate Fund, Inc. (7/97-present);
Consultant (10/95-6/97); Executive Vice President,
Boston Company Advisors (8/94-10/ 95); Executive Vice
President; Chief Financial Officer, Freedom
Management (6/81-8/94).
Paul F. Foley* 1963 Treasurer Vice President, Cypress Holding Company
125 High Street (7/96-present); Treasurer, CypressTree Senior
Boston, MA 02110 Floating Rate Fund, Inc. (7/97-present);
Financial Analyst, Fleet Financial Group (6/95-
7/96); Financial Analyst, Allmerica Financial
Services (4/87-6/95)
John I. Fitzgerald* 1948 Secretary Secretary and Counsel, Cypress Holding
125 High Street Company (4/97-present); Secretary, CypressTree
Boston, MA 02110 Senior Floating Rate Fund, Inc. (7/97-present);
Secretary, North American Funds (10/97-present);
Executive Vice President-Legal Affairs, Boston
Stock Exchange (6/93-3/97)
</TABLE>
4
<PAGE>
Messrs. Devin (Chairman) and Lavery and Achtmeyer are members of the
Administration Committee of the Board of Directors. The Administration Committee
makes recommendations to the Directors regarding the selection of the
independent certified public accountants, reviews with the accountants and the
Fund Treasurer accounting and auditing practices and procedures, accounting
records, and internal accounting controls, reviews the Fund's advisory contracts
and advisory fees, and acts as nominating committee with regard to disinterested
directors.
Messrs. Gallagher (Chairman), Loring and Devin are members of the Pricing
Committee of the Board of Directors. The Pricing Committee is responsible for
the valuation and revaluation, between meetings of the Board, of investments for
which market quotations or sale prices are not readily available.
Messrs. Gallagher (Chairman), Devin and Lavery are members of the
Investment Committee of the Board of Directors. The Investment Committee
provides an overview to the full Board of CypressTree's activities as
subadviser.
Executive Compensation
The Fund pays the fees and expenses of those Directors who are not
Interested Persons (the "noninterested Directors"). The Directors who are
Interested Persons receive no compensation from the Fund. Noninterested
Directors receive $750 per quarter for each quarter during which the Director
serves, plus $750 for each meeting attended in person and $200 for each
telephone meeting. For the period from the start of business, August 5, 1998, to
December 31, 1998, it is estimated that the Directors will earn the following
compensation in their capacities as Directors:
<TABLE>
<CAPTION>
TOTAL COMPENSATION
AGGREGATE FROM FUND AND FUND
COMPENSATION COMPLEX PAID TO
NAME FROM FUND DIRECTORS*
- ----------------------- -------------- -------------------
<S> <C> <C>
Bradford K. Gallagher $ 0 $ 0
William F. Achtmeyer $3,400 $10,000
William F. Devin $3,400 $10,000
Kenneth J. Lavery $3,400 $10,000
Arthur S. Loring $ 0 $ 0
</TABLE>
- ------------
* Includes compensation for service as director of the Fund, as trustee of the
North American Funds, and as director of another closed-end fund also advised
by CAM. See "Advisory, Administration and Distribution Services."
Election of Directors
As permitted by Maryland law, there normally will be no meetings of Fund
shareholders for the purpose of electing Directors in any year in which no such
election is required under the 1940 Act. Under the 1940 Act, an annual meeting
to elect Directors only is required when less than a majority of the Directors
holding office have been elected by shareholders. If a meeting is required, the
Directors then in office will call a shareholders' meeting for the election of
Directors. If no meeting is required, the Directors will continue to hold office
and may appoint successor Directors. The shares of the Fund do not provide for
cumulative voting. As a result, the holders of more than 50% of the shares
voting for the election of Directors can elect 100% of the Directors and, in
this event, the holders of the remaining less than 50% of the shares voting on
the matter will not be able to elect any Directors.
Under the Fund's Articles of Incorporation, no person may serve as a
Director if shareholders holding seventy-five percent (75%) of shares entitled
to vote on the matter have removed him or her from office.
Control Persons and Principal Holders of Shares
As of the date of this Prospectus, CAM owns 100% of the issued and
outstanding shares of Shares of the Fund and, until the Fund completes the
public offering of its Shares, CAM will be deemed to control the Fund under the
1940 Act. See also "Advisory, Administration and Distribution Services."
- --------------------------------------------------------------------------------
ADVISORY, ADMINISTRATION AND DISTRIBUTION SERVICES
- --------------------------------------------------------------------------------
CAM is the Fund's investment adviser and administrator under an investment
advisory agreement ("Advisory Agreement") and an administration agreement (the
"Administration Agreement") between CAM and the Fund. CAM is a Delaware
corporation founded in 1996, and is a general investment advisory firm. The
Directors of CAM are Bradford K. Gallagher and J. Christopher Clifford.
5
<PAGE>
CypressTree serves as the Fund's subadviser under an investment subadvisory
agreement (the "Subadvisory Agreement") between CAM and CypressTree. CypressTree
is a Delaware corporation founded in August, 1996, and is engaged in the
business of providing investment advisory and other services to institutional,
offshore, and other clients with respect to portfolios consisting primarily of
Loans. Currently, CypressTree has approximately $650 million assets under
management. The directors of CypressTree are Bradford K.
Gallagher and J. Christopher Clifford.
CAM is an affiliate of and CypressTree is a wholly-owned subsidiary of
Cypress Holding Company ("Cypress"). Cypress is a Delaware corporation founded
in 1995, and is an integrated investment management firm. The Directors of
Cypress are Bradford K. Gallagher and J. Christopher Clifford. The largest
shareholders of Cypress are Mr. Gallagher (approximately 15%) and Berkshire Fund
IV L.P., an investment partnership (approximately 56%). The remaining stock of
Cypress is owned by Cypress employees.
In October 1997, CAM and other certain affiliates of Cypress acquired from
NASL Financial Services, Inc. ("NASL Financial") that portion of NASL
Financial's business related to acting as investment adviser and distributor of
the North American Funds, an open-end investment company offering shares in 15
different portfolios. The North American Funds currently have approximately $1
billion in assets. CAM serves as investment adviser to the North American Funds.
CAM also serves as investment adviser to a closed-end fund with $4.1
million in assets, and CypressTree serves as investment subadviser to that fund.
The Fund will be responsible for all of its costs and expenses not
expressly stated to be payable by CAM under the Advisory Agreement and the
Administration Agreement by CypressTree under the Subadvisory Agreement, or by
Distributors under its Distribution Agreement. These costs and expenses may
include (without limitation): expenses of acquiring, holding and disposing of
securities and other investments, including brokerage commissions; shareholder
servicing expenses; investment advisory and administration fees; custody and
transfer agency fees and expenses, including those incurred for determining net
asset value and keeping accounting books and records; expenses of pricing and
valuation services; expenses of conducting repurchase offers; fees and expenses
of registering under the securities laws, and other governmental fees; expenses
of reports to shareholders and investors, proxy statements and other expenses of
shareholders' or investors' meetings; compensation and expenses of Directors not
affiliated with CAM, CypressTree or Cypress; interest, taxes and corporate fees;
legal and accounting expenses; printing and mailing expenses; insurance
premiums; expenses incurred in connection with litigation in which the Fund is a
party and any legal obligation to indemnify its officers and Directors with
respect to litigation; membership dues in investment company organizations;
communications equipment expenses; and any nonrecurring or extraordinary
expenses.
The Advisory Agreement, Subadvisory Agreement, and Administration Agreement
each will remain in effect until July 13, 2000, The Advisory Agreement may be
continued from year to year after July 13, 2000 so long as the continuance is
approved at least annually (a) by the vote of a majority of the Fund's Directors
who are not "interested persons" of the Fund or CAM cast in person at a meeting
specifically called for the purpose of voting on such approval and (b) by the
vote of a majority of the Board of Directors or by the vote of a majority of the
outstanding Fund shares. The Advisory Agreement will terminate automatically in
the event of its assignment. The Subadvisory Agreement may be continued from
year to year after July 13, 2000 so long as the continuance is approved at least
annually (a) by the vote of a majority of the Fund's Directors who are not
"interested persons" of the Fund or CypressTree cast in person at a meeting
specifically called for the purpose of voting on such approval; and (b) by the
vote of a majority of the Board of Directors or by the vote of a majority of the
outstanding Fund shares. The Subadvisory Agreement will terminate automatically
in the event of its assignment. The Administration Agreement may be continued
from year to year after July 13, 2000 so long as the continuance is approved
annually (a) by the vote of a majority of the Fund's Directors who are not
"interested persons" of the Fund or CAM cast in person at a meeting specifically
called for the purpose of voting on such approval; and (b) by the vote of a
majority of the Board of Directors or by the vote of a majority of the
outstanding Fund shares. Each agreement may be terminated at any time without
penalty on sixty (60) days' notice by the Directors or CAM or CypressTree, as
applicable, or by the vote of the majority of the outstanding Fund shares. Each
agreement provides that, in the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations or duties to the Fund on the
part of CAM or CypressTree, as applicable, CAM or CypressTree, as applicable,
will not be liable to the Fund for any loss incurred.
CAM will receive fees under the Advisory Agreement and the Administration
Agreement. For a description of the compensation that the Fund pays CAM under
the Advisory Agreement and Administration Agreement, see the Fund's current
Prospectus.
6
<PAGE>
CAM 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. If CAM had not agreed to reimburse these expenses, estimated Fund
expenses would be: management fee of 0.85%, interest payments on borrowed funds
of 0.00%, administration fee of 0.40%, service fee of up to 0.25%, distribution
fee of up to 0.50%, and other expenses of 0.30%; and total annual expenses of
2.30%. This agreement may be terminated by CAM at any time after December 31,
1998, on thirty (30) days' written notice.
- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------
Subject to policies established by the Board of Directors of the Fund and
oversight by CAM, CypressTree is primarily responsible for the execution of the
Fund's portfolio transactions. In executing such transactions, CypressTree seeks
to obtain the best results for the Fund, taking into account such factors as
price (including the applicable fee, commission or spread), size of order,
difficulty of execution and operational facilities of the firm involved, and the
firm's risk in positioning a block of securities. While CypressTree generally
seeks reasonably competitive fee or commission rates, the Fund does not
necessarily pay the lowest commission or spread available.
The Fund will purchase Loans in individually negotiated transactions with
commercial banks, thrifts, insurance companies, finance companies and other
financial institutions. In determining whether to purchase Loans from these
financial institutions, CypressTree may consider, among other factors, the
financial strength, professional ability, level of service and research
capability of the institution. While financial institutions generally are not
required to repurchase Loans which they have sold, they may act as principal or
on an agency basis in connection with the Fund's disposition of Loans. The Fund
has no obligation to deal with any bank, broker or dealer in execution of
transactions in portfolio securities.
Other securities in which the Fund may invest are traded primarily in the
over-the-counter markets, and the Fund intends to deal directly with the dealers
who make markets in the securities involved, except in those circumstances where
better prices and execution are available elsewhere. These dealers attempt to
profit from transactions by buying at the bid price and selling at the higher
asked price in the market for the obligations (the difference between the bid
and asked price customarily is referred to as the "spread"). The Fund also may
purchase fixed-income and other securities from underwriters, the cost of which
may include fees and concessions to the underwriters.
It is not anticipated that the Fund will pay significant brokerage
commissions. However, on occasion it may be necessary or desirable to purchase
or sell a security through a broker on an agency basis, in which case the Fund
will incur a brokerage commission. In executing all transactions, CypressTree
seeks to obtain the best results for the Fund. For the period from the start of
business to the date of this Statement of Additional Information, the Fund has
paid no brokerage commissions.
Consistent with the interests of the Fund, CypressTree may select brokers
to execute the Fund's portfolio transactions on the basis of the research and
brokerage services they provide to CypressTree for its use in managing the Fund
and CypressTree's other advisory accounts. Such services may include (a)
furnishing analyses, reports and information concerning issuers, industries,
securities, geographic regions, economic factors and trends, portfolio strategy,
and performance of accounts; and (b) effecting securities transactions and
performing functions incidental to those securities transactions (such as
clearance and settlement). Research and brokerage services received from such
brokers are in addition to, and not in lieu of, the services required to be
performed by CypressTree under the Subadvisory Agreement. A commission paid to
such brokers may be higher than that which another qualified broker would have
charged for effecting the same transaction, provided that CypressTree determines
in good faith that such commission is reasonable in relation to the value of the
services, in terms either of that particular transaction or the overall
responsibility of CypressTree to the Fund and its other clients. In reaching
this determination, CypressTree will not attempt to place a specific dollar
value on the brokerage and research services provided, or to determine what
portion of the compensation should be related to those services. The receipt of
this research will not reduce CypressTree's normal independent research
activities. However, it enables CypressTree to avoid the additional expenses
that could be incurred if CypressTree tried to develop comparable information
through its own efforts.
The Fund will not purchase securities from its affiliates in principal
transactions.
CypressTree is authorized to use research services provided by and to place
portfolio transactions with brokerage firms that have provided assistance in the
distribution of shares of the Fund or shares of other Cypress funds to the
extent permitted by law.
7
<PAGE>
CypressTree may allocate brokerage transactions to broker-dealers that have
entered into arrangements with CypressTree under which the broker-dealer
allocates a portion of the commission paid by each fund toward payment of the
fund's expenses, such as transfer agent fees or custodian fees. However, the
transaction quality must be comparable to those of other qualified
broker-dealers.
The frequency of portfolio purchases and sales (known as the "turnover
rate") will vary from year to year. It is anticipated that the Fund's turnover
rate will be between 50% and 100%. The Fund's portfolio turnover rate is not
expected to exceed 100%, but may vary greatly from year to year and will not be
a limiting factor when CypressTree deems portfolio changes appropriate. Although
the Fund generally does not intend to trade for short-term profits, the
securities held by the Fund will be sold whenever CypressTree believes it is
appropriate to do so, without regard to the length of time a particular security
may have been held. Higher portfolio turnover involves corresponding greater
brokerage commissions and other transaction costs that the Fund will bear
directly.
If purchases or sales of securities of the Fund and one or more other
investment companies or clients supervised by CypressTree are considered at or
about the same time, transactions in these securities will be allocated among
the several investment companies and clients in a manner deemed equitable to all
by CypressTree, taking into account the respective sizes of the funds and the
amount of securities to be purchased or sold. In some cases this procedure would
have a detrimental effect on the price or volume of the security so far as the
Fund is concerned. In other cases it is possible that the ability to participate
in volume transactions and to negotiate lower brokerage commissions will be
beneficial to the Fund.
- --------------------------------------------------------------------------------
CUSTODIAN
- --------------------------------------------------------------------------------
State Street Bank & Trust Company (the "Custodian"), acts as custodian for
the Fund. Its principal business address is 225 Franklin Street, Boston,
Massachusetts 02110. The Custodian has custody of all the Fund's assets,
maintains the Fund's general ledger, and computes the daily net asset value of
Fund shares. The Custodian attends to details in connection with the sale,
exchange, substitution, transfer or other dealings with the Fund's investments,
receives and disburses all funds, and performs various other ministerial duties
on receipt of proper instructions from the Fund. The custody fees are
competitive within the industry.
CAM, CypressTree and their affiliates and their officers and employees from
time to time have transactions with various banks, including the Fund's
Custodian. It is the opinion of CAM and CypressTree that the terms and
conditions of these transactions were not and will not be influenced by existing
or potential custodial or other relationships between the Fund and these banks.
- --------------------------------------------------------------------------------
TRANSFER AGENT
- --------------------------------------------------------------------------------
State Street Bank & Trust Company serves as transfer and dividend paying
agent and as registrar. Its principal business address is Post Office Box 8360,
Boston, Massachusetts 02266-8360.
- --------------------------------------------------------------------------------
LIQUIDITY REQUIREMENTS
- --------------------------------------------------------------------------------
From the time that the Fund sends a Notification to shareholders until the
Pricing Date, the Fund will maintain a percentage of the Fund's assets equal to
at least 100 percent of the Repurchase Offer Amount either in: (a) assets that
can be sold or disposed of in the ordinary course of business at approximately
the price at which the Fund has valued the investment within a period equal to
the period between the Repurchase Request Date and the next Repurchase Request
Deadline; or (b) assets that mature by the next Repurchase Payment Deadline.
In the event that the Fund's assets fail to comply with the requirements in
the preceding paragraph, the Board shall cause the Fund to take such action as
the Board deems appropriate to ensure compliance.
In supervising the Fund's operations and the actions of CAM and
CypressTree, the Board has adopted written procedures (the "Liquidity
Procedures") reasonably designed, taking into account current market conditions
and the Fund's investment objectives, to ensure that the Fund's assets are
sufficiently liquid so that the Fund can comply with the Repurchase Offer
Fundamental Policy and with the liquidity requirements described above.
From time to time, the Board reviews the Fund's portfolio composition and
makes and approves such changes to the Liquidity Procedures as the Board deems
necessary.
8
<PAGE>
- --------------------------------------------------------------------------------
TAXES
- --------------------------------------------------------------------------------
For a discussion of federal tax issues affecting shareholders in the Fund,
please see "Taxes" in the Prospectus.
The Fund intends to qualify for the special tax treatment afforded
regulated investment companies ("RICs") under Subchapter M of the Internal
Revenue Code (the "Code"). To qualify for that treatment, the Fund must
distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of net ordinary
investment income, net short-term capital gains, and net gains from certain
foreign currency transactions). Such distributions may not take the form of
"preferential dividends" but rather must be pro rata among all shareholders,
except to the extent that shareholders hold shares of a class that is entitled
to a preference. The Fund's Multiple Pricing System may result in dividends
being paid in different amounts to shareholders in different classes. The Fund
has received an opinion of counsel (the "Opinion") (which opinion is not binding
on the Internal Revenue Service) that any dividend differences arising from the
Fund's Multiple Pricing System will not, under current law, be treated as
preferential dividends. The Fund's anticipated fee waivers and reimbursements
also may result in shareholders in different classes receiving different
dividends. Dividend differences could also arise in the context of a Repurchase
Offer because, for example, partially tendering shareholders could be treated as
receiving taxable dividends. See "Taxes" in the Prospectus. The Opinion,
however, concludes that under current law any dividend differences arising from
anticipated fee waivers and reimbursements and Repurchase Offers pose only a
remote possibility that the Fund will be treated as distributing preferential
dividends.
The Fund must meet certain additional requirements to be taxed as a RIC,
including the following: (a) the Fund must derive at least 90% of its gross
income each taxable year from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of securities, and
certain other related income; and (b) the Fund must diversify its investments so
that at the close of each quarter of its taxable year, (i) at least 50% of the
value of its total assets are represented by cash and cash items, U.S.
Government securities, securities of other regulated investment companies and
other securities limited in respect of any one issuer to not more than 5% of the
value of the Fund's total assets and not more than 10% of that issuer's voting
securities, and (ii) not more than 25% of the value of its total assets may be
invested in securities (other than U.S. Government securities and securities of
other regulated investment companies) of any one issuer, or of two or more
issuers controlled by the Fund and engaged in the same, similar or related
trades or businesses.
Provided that the Fund satisfies the above requirements, it will not be
subject to federal income tax on that part of its investment company taxable
income and the excess of net long-term capital gain over net short-term capital
loss that it distributes to shareholders.
The Fund will be subject to a nondeductible 4% federal excise tax to the
extent that it does not distribute during each calendar year 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gain net
income, determined, in general, on an October 31 year end, plus certain
undistributed amounts from previous years. The Fund will be subject to the
excise tax only on the amount by which it does not meet the foregoing
distribution requirements.
The federal income tax rules governing the taxation of interest rate swaps
are not entirely clear and may require the Fund to treat payments received under
such arrangements as ordinary income and to amortize payments under certain
circumstances. The Fund will limit its activity in this regard in order to
enable it to maintain its qualification as a RIC.
Certain Fund investments may bear original issue discount or market
discount for tax purposes. The Fund will be required to include in income each
year a portion of the original issue discount and may elect to include in income
each year a portion of the market discount. The Fund may have to dispose of
investments that it otherwise would have continued to hold in order to provide
cash to satisfy its distribution requirements with respect to such income.
Gains or losses (a) from the disposition of foreign currencies, (b) on the
disposition of a debt security denominated in a foreign currency that are
attributable to fluctuations in the value of the foreign currency between the
date of acquisition of the security and the date of disposition, and (c) that
are attributable to fluctuations in exchange rates that occur between the time
the Fund accrues interest or other receivables or expenses or other liabilities
denominated in a foreign currency and the time it actually collects the
receivables or pays the liabilities generally are treated as ordinary income or
loss. These gains or losses, referred to under the Code as "section 988" gains
or losses, may increase or decrease the amount of investment company taxable
income available to the Fund for distribution to its shareholders.
9
<PAGE>
The Fund may be subject to foreign withholding or other taxes with respect
to income on certain loans to foreign Borrowers. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes.
However, to the extent that foreign taxes are imposed, the taxes would reduce
the yield on the Loans. Because not more than 50% of the value of the Fund's
total assets at the close of any taxable year will consist of Loans to foreign
borrowers, the Fund will not be eligible to pass through to shareholders their
proportionate share of foreign taxes paid by the Fund, with the result that
shareholders will not be entitled to take any foreign tax credits or deductions
for foreign taxes paid by the Fund. However, the Fund may deduct foreign taxes
in calculating its distributable income.
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
The Fund may provide information about CAM, CypressTree, their affiliates
and other related funds in sales material or advertisements provided to
investors or prospective investors. Sales material or advertisements also may
provide information on the use of investment professionals by investors. For
further information, see "Performance Information" in the Fund's Prospectus.
Past performance is not indicative of future results. Investment return and
principal value will fluctuate. When redeemed, shares may be worth more or less
than their original cost.
- --------------------------------------------------------------------------------
INDEMNIFICATION
- --------------------------------------------------------------------------------
Under the Fund's By-Laws, each officer and director of the Fund will be
indemnified by the Fund to the full extent permitted under the General Laws of
the State of Maryland, except that such indemnity will not protect any such
person against any liability to the Fund or any stockholder thereof to which
such person would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office. Absent a court determination that an officer or director
seeking indemnification was not liable on the merits or guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office, the decision by the Fund to indemnify
such person must be based upon the reasonable determination of independent legal
counsel or the vote of a majority of a quorum of the directors who are neither
"interested persons," as defined in Section 2(a)(19) of the Investment Company
Act of 1940, as amended, nor parties to the proceeding ("non-party independent
directors"), after review of the facts, that such officer or director is not
guilty of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or on a plea of nolo contendere or its equivalent, will
not, of itself, create a presumption that any liability or expense arose by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties of the director's or officer's office.
Each officer and director of the Fund claiming indemnification will be
entitled to advances from the Fund for payment of the reasonable expenses
incurred by him or her in connection with proceedings to which he or she is a
party in the manner and to the full extent permitted under the General Laws of
the State of Maryland; provided, however, that the person seeking
indemnification will provide to the Fund a written affirmation of his or her
good faith belief that the standard of conduct necessary for indemnification by
the Fund has been met and a written undertaking to repay any such advance, if it
should ultimately be determined that the standard of conduct has not been met,
and provided further that at least one of the following additional conditions is
met: (a) the person seeking indemnification will provide a security in form and
amount acceptable to the Fund for his or her undertaking; (b) the Fund is
insured against losses arising by reason of the advance; (c) a majority of a
quorum of non-party independent directors, or independent legal counsel in a
written opinion, will determine, based on a review of facts readily available to
the Fund at the time the advance is proposed to be made, that there is reason to
believe that the person seeking indemnification will ultimately be found to be
entitled to indemnification.
The Fund may indemnify, make advances or purchase insurance to the extent
provided in its By-Laws on behalf of an employee or agent who is not an officer
or director of the Fund.
The indemnification provided by the Fund's By-Laws is not exclusive of any
rights to which those seeking indemnification may be entitled under any law,
agreement, vote of shareholders, or otherwise. The Fund's By-Laws do not
authorize indemnification inconsistent with the 1940 Act or the Securities Act
of 1933. Any indemnification provided by the Fund's By-Laws will continue as to
a person who has ceased to be a director, officer, or employee, and will inure
to the benefit of that person's heirs, executors and administrators. In
addition, no amendment, modi-
10
<PAGE>
fication or repeal of the indemnification provisions of the By-Laws will
adversely affect any right or protection of an indemnitee that exists at the
time of the amendment, modification or repeal.
- --------------------------------------------------------------------------------
AUDITORS AND FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Deloitte & Touche LLP are the independent accountants for the Fund,
providing audit services, tax return preparation, and assistance and
consultation with respect to the preparation of filings with the Securities and
Exchange Commission. The auditor's address is 125 Summer Street, Boston,
Massachusetts 02110.
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES--AUGUST , 1998
- --------------------------------------------------------------------------------
ASSETS:
Cash $100,000
Prepaid Expenses 272,500
--------
Total Assets 372,500
LIABILITIES:
Accrued offering and printing costs 272,500
NET ASSETS (applicable to 10,000 shares of beneficial
interest issued and outstanding) $100,000
========
NET ASSET VALUE AND OFFERING PRICE PER SHARE $ 10.00
========
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
For the period from March 6, 1998 (date of incorporation) through August 4, 1998
INVESTMENT INCOME $ 0
EXPENSES:
Organization Costs 15,000
Less expenses assumed by Investment Adviser (15,000)
-------
Net Expenses 0
-------
NET INVESTMENT INCOME $0
=======
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. North American Senior Floating Rate Fund, Inc. ("the Fund"), a Maryland
corporation, was incorporated on March 6, 1998. The Fund has been inactive since
that date, except for matters relating to the Fund's establishment, the
designation and the registration under the Securities Act of 1933 of the Fund's
common stock ("shares") and the sale of shares ("initial shares") to CypressTree
Asset Management Corporation, Inc., the Investment Adviser.
2. The Investment Adviser has agreed to assume the organization costs incurred
by the Fund.
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholder of
North American Senior Floating Rate Fund, Inc. (the Fund)
We have audited the accompanying statement of assets and liabilities of North
American Senior Floating Rate Fund, Inc. (the Fund) as of August 4, 1998 and the
related statement of operations for the period from March 6, 1998, the date of
incorporation, through August 4, 1998. These financial statements are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of North American Floating Rate Fund, Inc. as
of August 4, 1998 and the results of its operations for the period from March 6,
1998, the date of incorporation, through August 4, 1998, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
August 5, 1998
- --------------------------------------------------------------------------------
OTHER INFORMATION
- --------------------------------------------------------------------------------
The Fund's Prospectus and Statement of Additional Information do not
contain all of the information set forth in the Registration Statement that the
Fund has filed with the Securities and Exchange Commission. The complete
Registration Statement may be obtained from the Securities and Exchange
Commission upon payment of the fee prescribed by its rules and regulations. The
complete Registration Statement also is available on the Commission's website
(http://www.sec.gov).
11
<PAGE>
.
North American Senior Floating Rate Fund
STATEMENT OF ADDITIONAL INFORMATION
[Date]
INVESTMENT ADVISER
CypressTree Asset Management Corporation, Inc.
125 High Street
Boston, Massachusetts 02110
INVESTMENT SUBADVISER
CypressTree Investment Management Company, Inc.
125 High Street
Boston, Massachusetts 02110
ADMINISTRATOR
CypressTree Asset Management Corporation, Inc.
125 High Street
Boston, Massachusetts 02110
DISTRIBUTOR
CypressTree Funds Distributors, Inc.
286 Congress Street
Boston, Massachusetts 02210
12
<PAGE>
- --------------------------------------------------------------------------------
PART C
- --------------------------------------------------------------------------------
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) FINANCIAL STATEMENTS:
INCLUDED IN PART A: None.
INCLUDED IN PART B: Report of Independent Accountants*
Statement of Assets and Liabilities*
(2) EXHIBITS:
<TABLE>
<S> <C>
(a) Articles of Incorporation*
(b) By-Laws***
(c) Not applicable
(d) Not applicable
(e) Form of Dividend Reinvestment Plan***
(f) Not applicable
(g)(1) Form of Advisory Agreement***
(g)(2) Form of Sub-Advisory Agreement***
(h)(1) Form of Distribution Agreement***
(h)(2) Form of Dealer Agreement***
(i) Not applicable
(j) Form of Custodian Agreement***
(k) Form of Administration Agreement***
(l) Opinion and Consent of Counsel*
(m) Not applicable
(n) Consent of Independent Auditors*
</TABLE>
<TABLE>
<S> <C>
(o) Not applicable
(p) Investment Letter*
(q) Form of Model Retirement Plan*
(r) Not Applicable
(s)(1) Distribution Plan--Class A Shares***
(s)(2) Distribution Plan--Class B Shares***
(s)(3) Distribution Plan--Class C Shares***
(s)(4) Multi-class Plan***
(z)(1) Power of Attorney of Bradford K.
Gallagher**
(z)(2) Power of Attorney of William F. Devin**
(z)(3) Power of Attorney of William F.
Achtmeyer**
(z)(4) Power of Attorney of Kenneth J. Lavery**
(z)(5) Power of Attorney of Arthur S. Loring***
</TABLE>
*Filed herewith
**Filed as an exhibit to Registration Statement on Form N-2 of Registrant,
filed April 3, 1998.
***Filed as an exhibit to Amendment No. 1 to Registration Statement on Form N-2
of Registrant, filed July 20, 1998.
ITEM 25. MARKETING ARRANGEMENTS
Not Applicable.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses incurred in
connection with the offerings of Registrant:
<TABLE>
<S> <C>
Registration fees ............................................ $ 29,500
National Association of Securities Dealers, Inc. fees ........ 10,500*
Printing and engraving expenses .............................. 20,000
Fees and expenses of qualification under state securities
laws (excluding fees of counsel) ........................... 75,000
Accounting fees and expenses ................................. 2,500*
Legal fees and expenses ...................................... 150,000
</TABLE>
*The Registrant's investment adviser, CypressTree Asset Management
Corporation, Inc. will pay these expenses in lieu of the Registrant.
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Until such time as the Registrant completes the public offering of its
shares, the Registrant's adviser, CypressTree Asset Management Corporation, Inc.
("CAM"), a Delaware corporation, will be a control person of the Registrant. CAM
is a wholly-owned subsidiary of CypressTree Investments, Inc. ("CyressTree"), a
Delaware corporation based in Boston, Massachusetts. CypressTree is also the
parent company of CypressTree Funds Distributors, Inc., a Delaware corporation
and the Registrant's distributor. CypressTree is an affiliate of Cypress Holding
Company, Inc., a Delaware corporation which is controlled by its management and
by Berkshire Fund IV, L.P. Berk-
<PAGE>
shire Fund IV., L.P., a Massachusetts investment partnership, is sponsored by
Berkshire Partners, L.L.C., a private equity investor based in Boston; the
general partner of Berkshire Fund IV, L.P. is Berkshire Investors, L.L.C. The
largest shareholders of Cypress Holding Company, Inc. are Bradford K. Gallagher
(15%) and Berkshire Fund IV L.P. (56%). The remaining stock of Cypress Holding
Company is owned by Cypress employees. The Registrant's subadviser, CypressTree
Investment Management Company, Inc. ("CypressTree"), a Delaware corporation, is
a wholly-owned subsidiary of Cypress Holding Company.
The following is a list of the ownership of interests in CypressTree
Investments as of July 30, 1998.
<TABLE>
<S> <C>
1. Cypress Holding Company, Inc. ......... 20.26%
2. Berkshire Fund IV, L.P. ............... 56.03%
3. Berkshire Investors, LLC .............. 2.61%
4. Standish, Ayer & Wood, Inc. ........... 20.00%
5. Employees and Management .............. 1.10%
</TABLE>
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
TITLE OF CLASS NUMBER OF RECORD HOLDERS
<S> <C>
Common Stock 1
</TABLE>
ITEM 29. INDEMNIFICATION
The Registrant's Articles of Incorporation and By-Laws contain provisions
limiting the liability, and providing for indemnification, of the Directors and
officers under certain circumstances. Article IX of the Fund's Articles of
Incorporation, filed as Exhibit a to this Registration Statement, and Article
VIII of the Fund's By-Laws, filed as Exhibit b to this Registration Statement,
provide that the Fund shall indemnify its present and past Directors and
officers, and may indemnify its employees and agents to the maximum extent
permitted by applicable law (including Maryland law and the 1940 Act). Section
2-418(b) of the Maryland General Corporation Law ("Maryland Code") permits the
Fund to indemnify its Directors unless it is established that the act or
omission of the Director was material to the matter giving rise to the
preceding, and (a) the act or omission was committed in bad faith or was the
result of active and deliberate dishonesty; (b) the Director actually received
an improper personal benefit in money, property or services or; or (c) in the
case of any criminal proceeding, the Director had reasonable cause to believe
the act or omission was unlawful. Indemnification may be made against judgments,
penalties, fines, settlements and reasonable expenses incurred by the Director
in connection with a proceeding, in accordance with the Maryland Code. Pursuant
to Section 2-418(j)(1) and Section 2-418(j)(2) of the Maryland Code, the Fund is
permitted to indemnify its officers, employees and agents to the same extent as
its Directors. The provisions set forth above apply insofar as consistent with
Section 17(h) of the 1940 Act, which prohibits indemnification of any Director
or officer of the Fund against any liability to the Fund or its shareholders to
which such director or officer otherwise would be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
Refer to the information set forth under the captions "Management of the
Fund" in the Prospectus and "Advisory, Administrative and Distribution Services"
in the Statement of Additional Information constituting Parts A and B,
respectively, of this Registration Statement, which summary is incorporated
herein by reference. For information as to the business, profession, vocation or
employment of a substantial nature of each director or officer of the adviser or
subadviser, reference is made to the respective Form ADV, as amended, filed
under the Investment Advisers Act of 1940.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
All applicable accounts, books and documents required to be maintained by
the Registrant by Section 31(a) of the Investment Company Act of 1940 and the
Rules promulgated thereunder will be in the possession and custody
<PAGE>
of the Registrant's custodian, and transfer agent, with the exception of certain
corporate documents and portfolio trading documents which are in the possession
and custody of CAM or CypressTree, 125 High Street, Boston, Massachusetts.
Registrant is informed that all applicable accounts, books and documents
required to be maintained by registered investment advisers are in the custody
and possession of Cypress Holding Company and CypressTree.
ITEM 32. MANAGEMENT SERVICES
None.
ITEM 33. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To suspend the offering of shares until the prospectus is amended if
(1) subsequent to the effective date of its registration statement,
the net asset value declines more than 10% from its net asset value as
of the effective date of the registration statement or (2) the net
asset value increases to an amount greater than its net proceeds as
stated in the prospectus.
(2)(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(1) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(2) To reflect in the prospectus any facts or events after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(3) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(b) that, for the purpose of determining any liability under the 1993 Act,
each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of those securities at that time shall be deemed to be the
initial bona fide offering thereof; and
(c) to remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
(3) To send by first class mail or other means designed to ensure equally
prompt delivery, within two business days of receipt of a written or
oral request, any Statement of Additional Information.
<PAGE>
- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Boston and Commonwealth of Massachusetts on the 5th
day of August, 1998.
North American Senior Floating Rate
Fund, Inc.
By:
/s/ Bradford K. Gallagher*
Bradford K. Gallagher
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------- ------------------------- ---------------
<S> <C> <C>
/s/ Bradford K. Gallagher* Director;
- ------------------------- Chief Executive Officer
Bradford K. Gallagher August 5, 1998
/s/ William F. Devin*
- ------------------------- Director
William F. Devin August 5, 1998
/s/ William F. Achtmeyer*
- ------------------------- Director
William F. Achtmeyer August 5, 1998
/s/ Kenneth J. Lavery*
- ------------------------- Director
Kenneth J. Lavery August 5, 1998
/s/ Arthur S. Loring
- ------------------------- Director
Arthur S. Loring August 5, 1998
/s/ Paul F. Foley* Principal Financial and
- ------------------------- Accounting Officer
Paul F. Foley August 5, 1998
</TABLE>
*BY /s/ John I. Fitzgerald, Attorney-in-Fact (pursuant to Power of Attorney
filed as an exhibit to this Registration Statement)
<PAGE>
- --------------------------------------------------------------------------------
EXHIBIT INDEX
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- ------------------- --------------------------------
<S> <C>
(a) Articles of Incorporation
(l) Opinion and Consent of Counsel
(n) Consent of Independent Auditors
(p) Investment Letter
(q) Form of Model Retirement Plan
</TABLE>
NORTH AMERICAN SENIOR FLOATING RATE FUND, INC.
ARTICLES OF AMENDMENT AND RESTATEMENT OF CHARTER
(UNDER SECTION 2-609)
* * * * *
North American Senior Floating Rate Fund, Inc., a Maryland corporation,
having its principal office at 125 High Street, Boston Massachusetts
(hereinafter called the Corporation), hereby certifies to the State Department
of Assessments and Taxation of Maryland, that:
FIRST: The Charter of the Corporation is hereby amended by deleting in its
entirety Article V, and inserting in lieu thereof, the following:
ARTICLE V
CAPITAL STOCK
(1) The total number of shares of capital stock which the Corporation
shall have authority to issue is one billion (1,000,000,000) shares
of capital stock, of the par value of $0.01 per share and of the
aggregate par value of $10,000,000, all of which shares initially
are classified as "Common Stock," to be divided into three classes,
consisting of 400,000,000 shares of Class A Common Stock (of the
aggregate par value of $4,000,000), 300,000,000 shares of Class B
Common Stock (of the aggregate par value of $3,000,000) and
300,000,000 shares of Class C Common Stock (of the aggregate par
value of $3,000,000). All shares of Common Stock issued and
outstanding as of the date of these Amended and Restated Articles
will be reclassified as Class B Common Stock.
(2) Each share of Class A, Class B and Class C Common Stock of the
Corporation shall represent the same interest in the Corporation and
shall have identical voting, dividend, liquidation and other rights,
except as otherwise set forth in this Article V and except that:
(a) expenses related solely to a particular Class (including,
without limitation, expenses under a service or distribution plan
and administrative expenses under an administration or service
agreement, plan or other arrangement, however designated) shall be
borne by that Class and shall be appropriately reflected (in the
manner determined by the Board of Directors) in the net asset value,
dividends, distribution and liquidation rights of the shares of that
Class;
(b) the Class A Common Stock shall be subject to a front-end sales
load and/or early withdrawal charge, and a distribution fee and/or
<PAGE>
shareholder service fee as determined by the Board of Directors from
time to time;
(c) the Class B Common Stock shall be subject to an early withdrawal
charge and a distribution fee and/or shareholder service fee as
determined by the Board of Directors from time to time;
(d) the Class C Common Stock shall be subject to an early withdrawal
charge and a distribution fee and/or shareholder service fee as
determined by the Board of Directors from time to time;
(e) On the eighth anniversary of the first business day of the month
following the month in which Class B Common Stock shares were
purchased by a stockholder, such Class B Common Stock shares (as
well as a pro rata portion of any Class B Common Stock shares
purchased through the reinvestment of dividends and other
distributions paid in respect of all Class B Common Stock shares
held by such stockholder) shall automatically convert to Class A
Common Stock shares; provided, however, that such conversion shall
be subject to the continuing availability of an opinion of counsel
to the effect that the conversion of the Class B Common Stock shares
does not constitute a taxable event under federal income tax law.
The Board of Directors, in its sole discretion, may suspend the
conversion of Class B Common Stock shares if such opinion is no
longer available;
(f) On the tenth anniversary of the first business day of the month
following the month in which Class C Common Stock shares were
purchased by a stockholder, such Class C Common Stock shares (as
well as a pro rata portion of any Class C Common Stock shares
purchased through the reinvestment of dividends and other
distributions paid in respect of all Class C Common Stock shares
held by such stockholder) shall automatically convert to Class A
Common Stock shares; provided, however, that such conversion shall
be subject to the continuing availability of an opinion of counsel
to the effect that the conversion of the Class C Common Stock shares
does not constitute a taxable event under federal income tax law.
The Board of Directors, in its sole discretion, may suspend the
conversion of Class C Common Stock shares if such opinion is no
longer available.
(g) The number of shares of Class A Common Stock into which the
Class B or Class C Common Stock is converted pursuant to subsections
(2)(e) and (2)(f) above shall equal the number (including for these
purposes fractional shares) obtained by dividing the net asset value
per share of the Class B or Class C Common Stock, as the case may
be, for
2
<PAGE>
purposes of sales and repurchases on the conversion date, by the net
asset value per share of the Class A Common Stock for purposes of
sales and repurchases thereof on the conversion date.
(h) On the conversion date, the shares of the Class B and Class C
Common Stock of the Corporation converted into shares of the Class A
Common Stock will cease to accrue dividends and will no longer be
outstanding and the rights of the holders thereof as holders of
Class B or Class C shares will cease (except the right to receive
declared but unpaid dividends to the conversion date).
(i) The Board of Directors shall have full power and authority to
adopt such other terms and conditions concerning the conversion of
shares of the Class B and Class C Common Stock to shares of the
Class A Common Stock as they deem appropriate; provided such terms
and conditions are not inconsistent with the terms contained in the
Corporation's Charter and subject to any restrictions or
requirements under the Investment Company Act of 1940 and the rules,
regulations and interpretations thereof promulgated or issued by the
SEC, and conditions or limitations contained in any order issued by
the SEC applicable to the Corporation, or any restrictions or
requirements under the Internal Revenue Code of 1986, as amended,
and the rules, regulations and interpretations promulgated or issued
thereunder.
(j) The holders of each Class of capital stock classified or
designated by this Charter shall have such rights to exchange their
shares for stock of any other Class or shares of another investment
company upon such terms as may be approved by the Board of Directors
from time to time and set forth in appropriate disclosure documents
under the applicable laws, rules and regulations of the Securities
and Exchange Commission (the "SEC") and the rules of the National
Association of Securities Dealers (the "NASD"), including but not
limited to such rights to credit holding periods of the shares
exchanged with respect to the shares received in the exchange.
(3) Without the assent or vote of the shareholders, the Board of
Directors may classify and reclassify any unissued shares of capital
stock into one or more additional or other classes or series as may
be established from time to time by setting or changing in any one
or more respects the designations, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption of such shares
of stock and pursuant to such classification or reclassification to
increase or decrease the number of authorized shares of any existing
class or series.
3
<PAGE>
(4) Unless otherwise expressly provided in the Corporation's Charter,
including without limitation Article V, Section (2), the holders of
each class or series of capital stock shall be entitled to dividends
and distributions in such amounts and at such times as may be
determined by the Board of Directors, and the dividends and
distributions paid with respect to the various classes or series of
capital stock may vary among such classes and series. Expenses
related to the distribution of, and other identified expenses that
should properly be allocated to, the shares of a particular class or
series of capital stock may be charged to and borne solely by such
class or series and the bearing of expenses solely by a class or
series may be appropriately reflected (in a manner determined by the
Board of Directors) and cause differences in the net asset value
attributable to, and the dividend, redemption and liquidation rights
of, the shares of each such class or series of capital stock.
(5) Unless otherwise expressly provided in the Corporation's Charter, on
each matter submitted to a vote of stockholders, each holder of a
share of capital stock of the Corporation shall be entitled to one
vote for each share standing in such holder's name on the books of
the Corporation, irrespective of the class thereof, and all shares
of all classes shall vote together as a single class; provided,
however, that (a) as to any matter with respect to which a separate
vote of any class is required by the Investment Company Act of 1940,
as amended (the "Investment Company Act"), and in effect from time
to time, or any rules, regulations or orders issued thereunder, or
by the Maryland General Corporation law, such requirement as to a
separate vote by that class shall apply in lieu of a general vote of
all classes as described above; (b) in the event that the separate
vote requirements referred to in (a) above apply with respect to one
or more classes, then subject to paragraph (c) below, the shares of
all other classes not entitled to a separate vote shall vote
together as a single class; and (c) as to any matter which in the
judgment of the Board of Directors (which shall be conclusive) does
not affect the interest of a particular class, such class shall not
be entitled to any vote and only the holders of shares of the one or
more affected classes shall be entitled to vote.
(6) Except as otherwise provided in the Corporation's Charter, where any
provision of Maryland law requires a greater proportion than a
majority of the votes entitled to be cast in order to take or
authorize any action, notwithstanding such provision of Maryland
law, any such action may be taken or authorized by the Corporation
on the affirmative vote of a majority of the votes entitled to be
cast on the matter (or by a majority of the votes entitled to be
cast thereon as a separate class).
4
<PAGE>
(7) The net asset value per share of any Class shall be the quotient
obtained by dividing the value of the net assets of that Class
(being the value of the securities and other assets attributable to
that Class less the liabilities attributable to that Class) by the
total number of shares of that Class outstanding, all as determined
by or under the direction of the Board of Directors in accordance
with generally accepted accounting principles and the Investment
Company Act. Subject to the applicable provisions of the Investment
Company Act, the Board of Directors, in its sole discretion, may
prescribe and shall set forth in the By-Laws of the Corporation or
in a duly adopted resolution of the Board of Directors such bases
and times for determining the value of the assets attributable to,
and the net asset value per share of outstanding shares of, each
Class, or the net income attributable to such shares, as the Board
of Directors deems necessary or desirable. The Board of Directors
shall have full discretion, to the extent not inconsistent with the
Maryland General Corporation Law and the Investment Company Act, to
determine which items shall be treated as income and which items as
capital and whether any item of expense shall be charged to income
or capital. Each such determination and allocation shall be
conclusive and binding for all purposes.
(8) All shares of each particular Class shall represent an equal
proportionate interest in the assets attributable to the Class
(subject to the liabilities of that Class), and each share of any
particular Class shall be equal to each other share of that Class.
The Board of Directors may from time to time divide or combine the
shares of any particular Class into a greater or lesser number of
shares of that Class without thereby changing the proportionate
interest in the assets attributable to that Class or in any way
affecting the rights of holders of shares of any other Class.
(9) Unless otherwise expressly provided in the Corporation's Charter,
including without limitation, Article V, Section (2), in the event
of any liquidation, dissolution or winding up of the Corporation,
whether voluntary or involuntary, the holders of all classes of
capital stock of the Corporation shall be entitled, after payment or
provision for payment of the debts and other liabilities of the
Corporation (as such liability may affect one or more of the classes
and series of shares of capital stock of the Corporation), to share
ratably in the remaining net assets of the Corporation.
(10) Any fractional shares shall carry proportionately all the rights of
a whole share, excepting any right to receive a certificate
evidencing such fractional share, but including, without limitation,
the right to vote and the right to receive dividends.
5
<PAGE>
(11) All persons who acquire capital stock in the Corporation shall
acquire the same subject to the provisions of the Corporation's
Charter.
SECOND: The Charter of the Corporation is hereby amended by deleting in
its entirety Section 1 of Article VI, and inserting in lieu thereof the
following:
(1) The number of directors of the Corporation shall be three (3), which
number may be increased pursuant to the By-Laws of the Corporation
but shall never be less than three (3).
THIRD: The Charter of the Corporation is hereby amended by deleting in its
entirety Article XI, and inserting in lieu thereof the following:
ARTICLE XI
CONVERSION TO OPEN-END COMPANY
Notwithstanding any other provisions of the Corporation's Charter, the
conversion of the Corporation from a "closed-end company" to an "open-end
company," as those terms are defined in Sections 5(a)(2) and 5(a)(1),
respectively, of the 1940 Act, shall require the affirmative vote or consent of
the holders of two-thirds (66 2/3%) of the shares of capital stock of the
Corporation outstanding and entitled to vote unless such action has previously
been approved, adopted, or authorized by the affirmative vote of at least
two-thirds of the total number of directors fixed in accordance with the
Corporation's By-Laws, in which case the affirmative vote of the holders of a
majority of the outstanding shares of capital stock of the Corporation entitled
to vote on the matter shall be required.
FOURTH: The Charter of the Corporation is hereby amended by deleting in
its entirety Section 1 of Article XIII, and inserting in lieu thereof the
following:
(1) In addition to the affirmative vote of three-fourths (75%) of the
entire Board of Directors, the affirmative vote of at least (i)
three-fourths (75%) of the shares of capital stock of the
Corporation outstanding and entitled to vote on the matter and (ii)
in the case of a "Business Combination" (as defined below),
two-thirds (66 2/3%) of the shares of capital stock of the
Corporation outstanding and entitled to vote on the matter,
excluding votes entitled to be cast by an "Interested Party" (as
defined below) who is, or whose "Affiliate" (as defined below), is a
party to a Business Combination or an Affiliate or associate of the
Interested Party, shall be required to advise, approve, adopt or
authorize any of the following:
FIFTH: The Charter of the Corporation is hereby amended by deleting in its
entirety Article XVI, and inserting in lieu thereof the following:
6
<PAGE>
ARTICLE XVI
AMENDMENT
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in the Corporation's Charter, in the manner now or hereafter
prescribed by statute, including any amendment that alters the contract rights,
as expressly set forth in the Corporation's Charter, of any outstanding stock
and substantially adversely affects the shareholders' rights, and all rights
conferred upon shareholders herein are granted subject to this reservation.
Notwithstanding any other provisions of the Corporation's Charter or By-Laws
(and notwithstanding the fact that a lesser percentage may be specified by law,
the Corporation's Charter or By-Laws), the amendment or repeal of Section (6) of
Article V, Section (1), Section (3), or Section (4) of Article VI, Article IX,
Article X, Article XII, Article XIV, or this Article XVI of these Articles of
Incorporation shall require the affirmative vote of the holders of at least
two-thirds (66 2/3%) of the outstanding shares of capital stock of the
Corporation entitled to be voted on the matter. Notwithstanding any other
provisions of the Corporation's Charter or By-Laws (and notwithstanding the fact
that a lesser percentage may be specified by law, the Corporation's Chapter or
By-Laws), the amendment or repeal of Article XI and this sentence of this
Article XVI shall require the affirmative vote or consent of the holders of at
least two-thirds (66 2/3%) of the Corporation's shares of capital stock
outstanding and entitled to vote on the matter. Notwithstanding any other
provisions of the Corporation's Charter or By-Laws (and notwithstanding the fact
that a lesser percentage may be specified by law, the Corporation's Charter or
By-Laws), the amendment or repeal of Article XIII and this sentence of this
Article XVI shall require the affirmative vote of the holders of at least
three-fourths (75%) of the Corporation's shares of capital stock outstanding and
entitled to vote on the matter.
SIXTH: The Corporation desires to amend and restate its charter as
currently in effect and as hereinafter provided.
SEVENTH: The following provisions are all the provisions of the charter
currently in effect and as amended and restated:
7
<PAGE>
ARTICLE I
The following are the amended and restated Articles of Incorporation of
the North American Senior Floating Rate Fund, Inc., a Maryland corporation.
ARTICLE II
NAME
The name of the Corporation is North American Senior Floating Rate Fund,
Inc. (the "Corporation").
ARTICLE III
PURPOSES AND POWERS
The purpose or purposes for which the Corporation is formed is to act as
and to conduct the business of a closed-end management investment company under
the federal Investment Company Act of 1940, as amended, (the "1940 Act"). The
Corporation shall be authorized to exercise and enjoy all of the powers, rights
and privileges granted to, or conferred on, corporations by the General Laws of
the State of Maryland now or hereafter in force. The term "Charter" refers to
the Corporation's Articles of Incorporation, as amended from time to time, and
as supplemented by Articles Supplementary.
ARTICLE IV
PRINCIPAL OFFICE AND RESIDENT AGENT
The post office address of the principal office of the Corporation in the
State of Maryland is c/o The Corporation Trust Incorporated, 300 East Lombard
Street, Baltimore, Baltimore, Maryland 21202. The name of the resident agent of
the Corporation in this State is The Corporation Trust Incorporated, a
corporation of this State, and the post office address of the resident agent is
300 East Lombard Street, Baltimore, Maryland 21202.
ARTICLE V
CAPITAL STOCK
(1) The total number of shares of capital stock which the Corporation
shall have authority to issue is one billion (1,000,000,000) shares of capital
stock, of the par value of $0.01 per share and of the aggregate par value of
$10,000,000, all of which shares initially are classified as "Common Stock," to
be divided into three classes, consisting of 400,000,000 shares of Class A
Common Stock (of the aggregate par value of $4,000,000), 300,000,000 shares of
Class B Common Stock (of the aggregate par value of $3,000,000) and 300,000,000
8
<PAGE>
shares of Class C Common Stock (of the aggregate par value of $3,000,000). All
shares of Common Stock issued and outstanding as of the date of these Amended
and Restated Articles will be reclassified as Class B Common Stock.
(2) Each share of Class A, Class B and Class C Common Stock of the
Corporation shall represent the same interest in the Corporation and shall have
identical voting, dividend, liquidation and other rights, except as otherwise
set forth in this Article V and except that:
(a) expenses related solely to a particular Class (including, without
limitation, expenses under a service or distribution plan and
administrative expenses under an administration or service
agreement, plan or other arrangement, however designated) shall be
borne by that Class and shall be appropriately reflected (in the
manner determined by the Board of Directors) in the net asset value,
dividends, distribution and liquidation rights of the shares of that
Class;
(b) the Class A Common Stock shall be subject to a front-end sales load
and/or early withdrawal charge, and a distribution fee and/or
shareholder service fee as determined by the Board of Directors from
time to time;
(c) the Class B Common Stock shall be subject to an early withdrawal
charge and a distribution fee and/or shareholder service fee as
determined by the Board of Directors from time to time;
(d) the Class C Common Stock shall be subject to an early withdrawal
charge and a distribution fee and/or shareholder service fee as
determined by the Board of Directors from time to time;
(e) On the eighth anniversary of the first business day of the month
following the month in which Class B Common Stock shares were
purchased by a stockholder, such Class B Common Stock shares (as
well as a pro rata portion of any Class B Common Stock shares
purchased through the reinvestment of dividends and other
distributions paid in respect of all Class B Common Stock shares
held by such stockholder) shall automatically convert to Class A
Common Stock shares; provided, however, that such conversion shall
be subject to the continuing availability of an opinion of counsel
to the effect that the conversion of the Class B Common Stock shares
does not
9
<PAGE>
constitute a taxable event under federal income tax law. The Board
of Directors, in its sole discretion, may suspend the conversion of
Class B Common Stock shares if such opinion is no longer available;
(f) On the tenth anniversary of the first business day of the month
following the month in which Class C Common Stock shares were
purchased by a stockholder, such Class C Common Stock shares (as
well as a pro rata portion of any Class C Common Stock shares
purchased through the reinvestment of dividends and other
distributions paid in respect of all Class C Common Stock shares
held by such stockholder) shall automatically convert to Class A
Common Stock shares; provided, however, that such conversion shall
be subject to the continuing availability of an opinion of counsel
to the effect that the conversion of the Class C Common Stock shares
does not constitute a taxable event under federal income tax law.
The Board of Directors, in its sole discretion, may suspend the
conversion of Class C Common Stock shares if such opinion is no
longer available.
(g) The number of shares of Class A Common Stock into which the Class B
or Class C Common Stock is converted pursuant to subsections (2)(e)
and (2)(f) above shall equal the number (including for these
purposes fractional shares) obtained by dividing the net asset value
per share of the Class B or Class C Common Stock, as the case may
be, for purposes of sales and repurchases on the conversion date, by
the net asset value per share of the Class A Common Stock for
purposes of sales and repurchases thereof on the conversion date.
(h) On the conversion date, the shares of the Class B and Class C Common
Stock of the Corporation converted into shares of the Class A Common
Stock will cease to accrue dividends and will no longer be
outstanding and the rights of the holders thereof as holders of
Class B or Class C shares will cease (except the right to receive
declared but unpaid dividends to the conversion date).
(i) The Board of Directors shall have full power and authority to adopt
such other terms and conditions concerning the conversion of shares
of the Class B and Class C Common Stock to shares of the Class A
Common Stock as they deem appropriate; provided such terms and
conditions are not inconsistent with the terms contained in the
Corporation's Charter and subject to any
10
<PAGE>
restrictions or requirements under the Investment Company Act of
1940 and the rules, regulations and interpretations thereof
promulgated or issued by the SEC, and conditions or limitations
contained in any order issued by the SEC applicable to the
Corporation, or any restrictions or requirements under the Internal
Revenue Code of 1986, as amended, and the rules, regulations and
interpretations promulgated or issued thereunder.
(j) The holders of each Class of capital stock classified or designated
by this Charter shall have such rights to exchange their shares for
stock of any other Class or shares of another investment company
upon such terms as may be approved by the Board of Directors from
time to time and set forth in appropriate disclosure documents under
the applicable laws, rules and regulations of the Securities and
Exchange Commission (the "SEC") and the rules of the National
Association of Securities Dealers (the "NASD"), including but not
limited to such rights to credit holding periods of the shares
exchanged with respect to the shares received in the exchange.
(3) Without the assent or vote of the shareholders, the Board of Directors
may classify and reclassify any unissued shares of capital stock into one or
more additional or other classes or series as may be established from time to
time by setting or changing in any one or more respects the designations,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or terms or conditions of redemption
of such shares of stock and pursuant to such classification or reclassification
to increase or decrease the number of authorized shares of any existing class or
series.
(4) Unless otherwise expressly provided in the Corporation's Charter,
including without limitation Article V, Section (2), the holders of each class
or series of capital stock shall be entitled to dividends and distributions in
such amounts and at such times as may be determined by the Board of Directors,
and the dividends and distributions paid with respect to the various classes or
series of capital stock may vary among such classes and series. Expenses related
to the distribution of, and other identified expenses that should properly be
allocated to, the shares of a particular class or series of capital stock may be
charged to and borne solely by such class or series and the bearing of expenses
solely by a class or series may be appropriately reflected (in a manner
determined by the Board of Directors) and cause differences in the net asset
value attributable to, and the dividend, redemption and liquidation rights of,
the shares of each such class or series of capital stock.
(5) Unless otherwise expressly provided in the Corporation's Charter, on
each matter submitted to a vote of stockholders, each holder of a share of
capital stock of the Corporation shall be entitled to one vote for each share
standing in such holder's name on the books of the Corporation, irrespective of
the class thereof, and all shares of all classes shall
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<PAGE>
vote together as a single class; provided, however, that (a) as to any matter
with respect to which a separate vote of any class is required by the Investment
Company Act of 1940, as amended (the "Investment Company Act"), and in effect
from time to time, or any rules, regulations or orders issued thereunder, or by
the Maryland General Corporation law, such requirement as to a separate vote by
that class shall apply in lieu of a general vote of all classes as described
above; (b) in the event that the separate vote requirements referred to in (a)
above apply with respect to one or more classes, then subject to paragraph (c)
below, the shares of all other classes not entitled to a separate vote shall
vote together as a single class; and (c) as to any matter which in the judgment
of the Board of Directors (which shall be conclusive) does not affect the
interest of a particular class, such class shall not be entitled to any vote and
only the holders of shares of the one or more affected classes shall be entitled
to vote.
(6) Except as otherwise provided in the Corporation's Charter, where any
provision of Maryland law requires a greater proportion than a majority of the
votes entitled to be cast in order to take or authorize any action,
notwithstanding such provision of Maryland law, any such action may be taken or
authorized by the Corporation on the affirmative vote of a majority of the votes
entitled to be cast on the matter (or by a majority of the votes entitled to be
cast thereon as a separate class).
(7) The net asset value per share of any Class shall be the quotient
obtained by dividing the value of the net assets of that Class (being the value
of the securities and other assets attributable to that Class less the
liabilities attributable to that Class) by the total number of shares of that
Class outstanding, all as determined by or under the direction of the Board of
Directors in accordance with generally accepted accounting principles and the
Investment Company Act. Subject to the applicable provisions of the Investment
Company Act, the Board of Directors, in its sole discretion, may prescribe and
shall set forth in the ByLaws of the Corporation or in a duly adopted resolution
of the Board of Directors such bases and times for determining the value of the
assets attributable to, and the net asset value per share of outstanding shares
of, each Class, or the net income attributable to such shares, as the Board of
Directors deems necessary or desirable. The Board of Directors shall have full
discretion, to the extent not inconsistent with the Maryland General Corporation
Law and the Investment Company Act, to determine which items shall be treated as
income and which items as capital and whether any item of expense shall be
charged to income or capital. Each such determination and allocation shall be
conclusive and binding for all purposes.
(8) All shares of each particular Class shall represent an equal
proportionate interest in the assets attributable to the Class (subject to the
liabilities of that Class), and each share of any particular Class shall be
equal to each other share of that Class. The Board of Directors may from time to
time divide or combine the shares of any particular Class into a greater or
lesser number of shares of that Class without thereby changing the proportionate
interest in the assets attributable to that Class or in any way affecting the
rights of holders of shares of any other Class.
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<PAGE>
(9) Unless otherwise expressly provided in the Corporation's Charter,
including without limitation, Article V, Section (2), in the event of any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, the holders of all classes of capital stock of the Corporation
shall be entitled, after payment or provision for payment of the debts and other
liabilities of the Corporation (as such liability may affect one or more of the
classes and series of shares of capital stock of the Corporation), to share
ratably in the remaining net assets of the Corporation.
(10) Any fractional shares shall carry proportionately all the rights of a
whole share, excepting any right to receive a certificate evidencing such
fractional share, but including, without limitation, the right to vote and the
right to receive dividends.
(11) All persons who acquire capital stock in the Corporation shall
acquire the same subject to the provisions of the Corporation's Charter.
ARTICLE VI
PROVISIONS FOR DEFINING, LIMITING AND REGULATING CERTAIN POWERS OF
THE CORPORATION AND OF THE DIRECTORS AND SHAREHOLDERS
(1) The number of directors of the Corporation shall be three (3), which
number may be increased pursuant to the By-Laws of the Corporation but shall
never be less than three (3).
(2) Without the assent or vote of the shareholders, the Board of Directors
shall have the power to authorize the issuance from time to time of shares of
the capital stock of any class of the Corporation, whether now or hereafter
authorized, and securities convertible into shares of capital stock of the
Corporation or of any class or classes, whether now or hereafter authorized, for
such consideration as the Board of Directors may deem advisable.
(3) The Board of Directors of the Corporation is vested with the sole
power, to the exclusion of the shareholders, to make, alter or repeal from time
to time any of the By-Laws of the Corporation except any particular By-Law which
is specified as not subject to alteration or repeal by the Board of Directors,
subject to the requirements of the 1940 Act.
(4) A director may be removed only with cause, and any such removal may be
made only by the vote of three-fourths (75%) of the shares of capital stock of
the Corporation outstanding and entitled to vote on the matter.
(5) The Corporation's books may be kept outside the state of Maryland at
such place or places as may be designated from time to time by the Board of
Directors or in the Corporation's By-Laws, subject to any provisions of Maryland
law.
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(6) All corporate powers and authority of the Corporation shall be vested
in and exercised by the Board of Directors except as otherwise provided by
statute, the Corporation's Charter, or the Corporation's By-Laws. The
enumeration and definition of the particular powers of the Board of Directors
included in the Corporation's Charter shall in no way be limited or restricted
by reference to or inference from the terms of any other clause of this or any
other Article of the Charter, or construed as or deemed by inference or
otherwise in any manner to exclude or limit any powers conferred on the Board of
Directors under the General Laws of the State of Maryland in force now or in the
future.
ARTICLE VII
DENIAL OF PREEMPTIVE RIGHTS
Shareholders shall not have preemptive or preferential rights to acquire
or subscribe to any shares of capital stock of the Corporation, now or hereafter
to be authorized, or any notes, debentures, bonds or other securities
convertible into shares of capital stock, now or hereafter to be authorized,
whether or not the issuance of any such shares, or notes, debentures, bonds or
other securities would adversely affect the dividend or voting rights of such
shareholder. Any or all such shares or securities, whenever authorized, may be
issued, or may be reissued and transferred if such shares have been reacquired
and have treasury status, to any person, firm, corporation, trust, partnership,
association or other entity for such lawful consideration and on such terms as
the Board of Directors determines in its sole discretion without first offering
the shares to any such holder. The Board of Directors may issue shares of any
class of the Corporation, or any notes, debentures, bonds, other securities
convertible into shares of a class, either in whole or in part, to the existing
shareholders.
ARTICLE VIII
DETERMINATION BINDING
The Board of Directors shall have the power to determine, in accordance
with generally accepted accounting principles, the Corporation's net income, its
total assets and liabilities, and the net asset value of the shares of capital
stock of the Corporation. The Board of Directors may delegate such power to any
one or more of the directors or officers of the Corporation, its investment
adviser, administrator, custodian, or depositary of the Corporation's assets, or
another agent of the Corporation appointed for such purposes.
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ARTICLE IX
INDEMNIFICATION AND LIMITATION OF LIABILITY
(1) Each director and each officer of the Corporation shall be indemnified
by the Corporation to the fullest extent permitted by the General Laws of the
State of Maryland, subject to the requirements of the 1940 Act. This paragraph
shall not be construed as the exclusive means of indemnification of directors
and officers. The Corporation shall indemnify and advance expenses to its
officers to the same extent as its directors and to such further extent as is
consistent with law. The Board of Directors may by By-Law, resolution, or
agreement make further provisions for indemnification of directors, officers,
employees, and agents to the fullest extent permitted by the General Laws of the
State of Maryland.
(2) To the fullest extent permitted by the General Laws of the State of
Maryland, subject to the requirements of the 1940 Act, no director or officer of
the Corporation shall be personally liable to the Corporation or its security
holders for money damages. No amendment of the Corporation's Charter or repeal
of any provision of the Corporation's Charter shall limit or eliminate the
benefits provided to directors and officers under this provision in connection
with any act or omission that occurred prior to such amendment or repeal. This
provision applies to events occurring at the time a person serves as a director
or officer of the Corporation, whether or not that person is a director or
officer at the time of any proceeding in which liability is asserted.
(3) References to the General Laws of the State of Maryland in this
Article are to the law as from time to time amended. No further amendment of the
Corporation's Charter shall affect any right of any person under this Article
based on any event, omission, or proceeding prior to such amendment.
ARTICLE X
PRIVATE PROPERTY OF SHAREHOLDERS
The private property of shareholders shall not be subject to the payment
of corporate debts to any extent whatsoever.
ARTICLE XI
CONVERSION TO OPEN-END COMPANY
Notwithstanding any other provisions of the Corporation's Charter, the
conversion of the Corporation from a "closed-end company" to an "open-end
company," as those terms are defined in Sections 5(a)(2) and 5(a)(1),
respectively, of the 1940 Act, shall require the affirmative vote or consent of
the holders of two-thirds (66 2/3%) of the shares of capital stock of the
Corporation outstanding and entitled to vote unless such action has
15
<PAGE>
previously been approved, adopted, or authorized by the affirmative vote of at
least two-thirds of the total number of directors fixed in accordance with the
Corporation's By-Laws, in which case the affirmative vote of the holders of a
majority of the outstanding shares of capital stock of the Corporation entitled
to vote on the matter shall be required.
ARTICLE XII
PERPETUAL EXISTENCE
The duration of the Corporation shall be perpetual.
ARTICLE XIII
CERTAIN TRANSACTIONS
(1) In addition to the affirmative vote of three-fourths (75%) of the
entire Board of Directors, the affirmative vote of at least (i) three-fourths
(75%) of the shares of capital stock of the Corporation outstanding and entitled
to vote on the matter and (ii) in the case of a "Business Combination" (as
defined below), two-thirds (66 2/3%) of the shares of capital stock of the
Corporation outstanding and entitled to vote on the matter, excluding votes
entitled to be cast by an "Interested Party" (as defined below) who is, or whose
"Affiliate" (as defined below), is a party to a Business Combination or an
Affiliate or associate of the Interested Party, shall be required to advise,
approve, adopt or authorize any of the following:
(a) a merger, consolidation or statutory share exchange of the
Corporation with or into another person;
(b) issuance or transfer by the Corporation (in one or a series of
transactions in any 12 month period) of any securities of the
Corporation to any person or entity for cash, securities or other
property (or combination thereof) having an aggregate fair market
value of $1,000,000 or more, excluding issuances or transfers of
debt securities of the Corporation, sales of securities of the
Corporation in connection with a public offering, issuances of
securities of the Corporation pursuant to a dividend reinvestment
plan adopted by the Corporation, issuances of securities by the
Corporation on the exercise of any stock subscription rights
distributed by the Corporation and portfolio transactions effected
by the Corporation in the ordinary course of business;
(c) sale, lease, exchange, mortgage, pledge, transfer or other
disposition by the Corporation (in one or a series of transactions
in any 12 month period) to or with any person or entity of any
assets of the
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Corporation having an aggregate fair market value of $1,000,000 or
more, except for portfolio transactions (including pledges of
portfolio securities in connection with borrowings) effected by the
Corporation in the ordinary course of its business, and except for
transactions undertaken pursuant to the Corporation's fundamental
policy to conduct repurchase offers pursuant to Rule 23c-3 of the
General Rules and Regulations under the 1940 Act, as that rule may
be amended or re- designated from time to time and as modified by
exemptive orders issued by the U.S. Securities and Exchange
Commission;
(d) the voluntary liquidation or dissolution of the Corporation, or
an amendment to the Corporation's Charter to terminate the
Corporation's existence; or
(e) unless the 1940 Act or federal law requires a lesser vote, any
shareholder proposal as to specific investment decisions made or to
be made with respect to the Corporation's assets as to which
shareholder approval is required under federal or Maryland law.
(2) However, the three-fourths (75%) and two-thirds (66 2/3%) shareholder
votes will not be required by this Article XIII with respect to any of the above
described transactions (other than those set forth in (e) above) if they are
approved by a vote of three-fourths (75%) of the Continuing Directors (as
defined below), including a majority of the Continuing Directors who are not
"interested persons" of the Corporation, as that term is defined in the 1940
Act.
(3) For the purposes of this Article XIII, the following terms shall have
the following meaning:
(a) "Affiliate" has the meaning ascribed to that term in Rule 12b-2
of the General Rules and Regulations under the Securities Exchange
Act of 1934, as amended;
(b) "Business Combination" means any of the transactions described
in clauses (1)(a), (1)(b), or (1)(c) of this Article XIII;
(c) "Continuing Director" means any member of the Board of Directors
of the Corporation who is not an Interested Party or an Affiliate of
an Interested Party and has been a member of the Board of Directors
for a period of at least 12 months, or has been a member of the
Board of Directors since the date of these Articles of
Incorporation, or is a successor of a Continuing Director who is
unaffiliated with an Interested Party and is recommended to succeed
a Continuing Director
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<PAGE>
by a majority of the Continuing Directors then on the Board of
Directors;
(d) For purposes of this Article XIII, the term "Corporation"
includes the Corporation and/or any or all of its subsidiaries;
(e) "Interested Party" means any person, other than an investment
company advised by the Corporation's initial investment manager or
any of its Affiliates, which enters, or proposes to entire, into a
Business Combination with the Corporation.
(4) The Board of Directors will have the power and duty to determine for
the purposes of this Article XIII on the basis of information known to them,
whether (i) a corporation, person or entity is an Affiliate of another, or (ii)
the assets being sold or acquired or leased to or by the Corporation have an
aggregate fair market value of less than $1,000,000. Any such determination
shall be conclusive and binding for all purposes of this Article XIII.
ARTICLE XIV
CONSENT OF SHAREHOLDERS
Notwithstanding any other provisions of the Corporation's Charter or
By-Laws, any action taken by the written consent of the holders of the
outstanding shares of the capital stock of the Corporation must be taken by
unanimous written consent of the holders of the outstanding shares of capital
stock of the Corporation entitled to be voted on the matter.
ARTICLE XV
SHAREHOLDER MEETINGS
The Corporation shall not hold annual meetings of shareholders in any year
in which the election of directors is not required to be acted on under the 1940
Act.
ARTICLE XVI
AMENDMENT
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in the Corporation's Charter, in the manner now or hereafter
prescribed by statute, including any amendment that alters the contract rights,
as expressly set forth in the Corporation's Charter, of any outstanding stock
and substantially adversely affects the shareholders' rights, and all rights
conferred upon shareholders herein are granted subject to this reservation.
Notwithstanding any other provisions of the Corporation's Charter or
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By-Laws (and notwithstanding the fact that a lesser percentage may be specified
by law, the Corporation's Charter or By-Laws), the amendment or repeal of
Section (6) of Article V, Section (1), Section (3), or Section (4) of Article
VI, Article IX, Article X, Article XII, Article XIV, or this Article XVI of
these Articles of Incorporation shall require the affirmative vote of the
holders of at least two-thirds (66 2/3%) of the outstanding shares of capital
stock of the Corporation entitled to be voted on the matter. Notwithstanding any
other provisions of the Corporation's Charter or By-Laws (and notwithstanding
the fact that a lesser percentage may be specified by law, the Corporation's
Chapter or By-Laws), the amendment or repeal of Article XI and this sentence of
this Article XVI shall require the affirmative vote or consent of the holders of
at least two-thirds (66 2/3%) of the Corporation's shares of capital stock
outstanding and entitled to vote on the matter. Notwithstanding any other
provisions of the Corporation's Charter or By-Laws (and notwithstanding the fact
that a lesser percentage may be specified by law, the Corporation's Charter or
By-Laws), the amendment or repeal of Article XIII and this sentence of this
Article XVI shall require the affirmative vote of the holders of at least
three-fourths (75%) of the Corporation's shares of capital stock outstanding and
entitled to vote on the matter.
EIGHTH: The amendments of the Charter of the Corporation as hereinabove
set forth have been duly advised by the board of directors and approved by the
stockholders of the Corporation as required by law.
NINTH: The restatement of the Charter as hereinabove set forth has been
approved by a majority of the entire board of directors as required by law.
TENTH: The current address of the principal office of the Corporation is
as set forth in Article IV of the foregoing amendment and restatement of the
Charter.
ELEVENTH: The name and address of the Corporation's current resident agent
is as set forth in Article IV of the foregoing amendment and restatement of the
Charter.
TWELFTH: The number of directors of the Corporation are five and the names
of the directors currently in office are:
Bradford K. Gallagher
William F. Devin
William F. Achtmeyer
Kenneth J. Lavery
Arthur S. Loring
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IN WITNESS WHEREOF, North American Senior Floating Rate Fund, Inc. has
caused these presents to be signed in its name and on its behalf by its
President and attested (or witnessed) by its Secretary on July 23, 1998, and its
President hereby acknowledges, in the name and on behalf of said corporation,
the foregoing Articles of Restatement and Charter to be the corporate act of
said corporation and further certifies that, to the best of his knowledge and
belief, the matters and facts set forth therein with respect to the approval
thereof are true in all material respects, under penalties of perjury.
NORTH AMERICAN SENIOR
FLOATING RATE FUND, INC.
By: /s/ Bradford K. Gallagher
-------------------------------
Name: Bradford K. Gallagher
Title: President
Attested: (Witnessed):
/s/ John I. Fitzgerald
- -----------------------
John I. Fitzgerald
Secretary
20
[COVINGTON & BURLING LETTERHEAD]
August 5, 1998
North American Senior Floating Rate Fund, Inc,
125 High Street
Boston, Massachusetts 02110
Ladies and Gentlemen:
We have acted as counsel to the Company in connection with the offer and
sale of the Shares. We have examined certified copies of the Company's Charter,
as amended, and Restated By-laws. We have also examined a signed copy of the
Registration Statement and the exhibits thereto, all as filed with the
Commission and substantially in the form in which they are to become effective.
We have further examined and relied upon a certificate of the Maryland State
Department of Assessments and Taxation to the effect that the Company is duly
incorporated and existing under the laws of the State of Maryland and is in good
standing and duly authorized to transact business in the State of Maryland. We
also have examined and relied upon resolutions adopted to date by the Board of
Directors of the Company. We have examined and relied upon such other records of
the Company and other documents and certificates with respect to factual matters
as we have deemed necessary to render the opinion expressed herein. In our
examination of the materials described above, we have assumed without
independent verification, the genuineness of all signatures, the authenticity of
all documents submitted to us as originals and the conformity with originals of
all documents submitted to us as copies.
Based on the foregoing, we are of the opinion that:
1. The Company is duly organized and validly existing as a corporation in
good standing under the laws of the State of Maryland.
2. The Shares of the Company to be issued and sold by the Company pursuant
to the Registration Statement have been duly authorized and, upon issuance in
accordance with the terms set forth in the Registration Statement and upon
receipt of the consideration specified therein, will be validly issued, fully
paid and non-assessable.
<PAGE>
North American Senior Floating Rate Fund, Inc,
August 5, 1998
Page 2
We hereby consent to this opinion being filed as an exhibit to the
Registration Statement and to the reference to our firm therein. You may rely on
the foregoing opinion only in connection with the offer and sale of the Shares
while the Registration Statement is currently in effect.
Very truly yours,
/s/ Covington & Burling
COVINGTON & BURLING
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in Pre-Effective Amendment No. 2 to the Registration
Statement of North American Senior Floating Rate Fund, Inc. of our report dated
August 5, 1998 relating to North American Senior Floating Rate Fund, Inc., which
is included in the Statement of Additional Information, which is part of such
Registration Statement.
We also consent to the reference to our Firm under the heading "Auditors and
Financial Statements" caption in the Statement of Additional Information of the
Registration Statement.
DELOITTE & TOUCHE LLP
August 5, 1998
Boston, Massachusetts
CYPRESSTREE ASSET MANAGEMENT CORPORATION, INC.
125 High Street
Boston, Massachusetts 02110
August 3, 1998
North American Senior Floating Rate Fund, Inc.
125 High Street
14th Floor
Boston, Massachusetts 02110
Ladies and Gentlemen:
We propose to acquire 10,000 shares of Common Stock, $10.00 par value per
share (the "Shares") of the North American Senior Floating Rate Fund, Inc. (the
"Fund"), at a purchase price of $10.00 per share, for a total of $100,000. We
will purchase the Shares in a private offering prior to the effectiveness of the
Form N-2 registration statement filed by the Fund under the Securities Act of
1933.
In connection with such purchase, we understand that we, the purchaser,
intend to acquire the Shares for our own account as the sole beneficial owner
thereof and have no present intention of redeeming or reselling the Shares so
acquired.
Sincerely,
CypressTree Asset Management Corporation, Inc.
By: /s/ Bradford K. Gallagher
---------------------------------
Name: Bradford K. Gallagher
Title: President
State Street Bank and Trust Company
Universal Individual Retirement Account
Offered By
- --------------------------------------------------------------------------------
GRAPHIC MISSING
- --------------------------------------------------------------------------------
Custodial Agreement
and Disclosure Statement
For Traditional IRAs, SEP-IRAs,
and Roth IRAs
State Street Bank and Trust Company
Universal Individual Retirement Account
Offered By North American Funds
Information Kit
Introduction
What's New in the World of IRAs?
An Individual Retirement Account ("IRA") has always provided an attractive means
to save money for the future on a tax-advantaged basis. Recent changes to
Federal tax law have now made the IRA an even more flexible investment and
savings vehicle. Among the new changes is the creation of the Roth Individual
Retirement Account ("Roth IRA"), which became available for use January 1, 1998.
Under a Roth IRA, the earnings and interest on an individual's nondeductible
contributions grow without being taxed, and distributions may be tax-free under
certain circumstances. Most taxpayers (except for those with very high income
levels) will be eligible to contribute to a Roth IRA. A Roth IRA can be used
instead of a Regular IRA, to replace an existing Regular IRA, or complement a
Regular IRA you wish to continue maintaining.
Taxpayers with adjusted gross income of up to $100,000 are eligible to convert
existing IRAs into Roth IRAs. The details on conversion are found in the
description of Roth IRAs in this booklet.
Congress has also made significant changes to Regular IRAs. First, Congress
increased the income levels at which IRA holders who participate in
employer-sponsored retirement plans can make deductible Regular IRA
contributions. Also the rules for deductible contributions by an IRA holder
whose spouse is a participant in an employer-sponsored retirement plan have been
liberalized. Second, the 10% penalty tax for premature withdrawals (before age
59 1/2) will no longer apply in the case of withdrawals to pay certain higher
education expenses or certain first-time homebuyer expenses.
What's in This Kit?
In this Kit you will find detailed information about Roth IRAs and about the
changes that have been made to Regular IRAs. You will also find everything you
need to establish and maintain either a Regular or Roth IRA, or to convert all
or part of an existing Regular IRA to a Roth IRA.
<PAGE>
The first section of this Kit contains the instructions and forms you will need
to open a new Regular or Roth IRA, to transfer from another IRA to a North
American Funds IRA, or to convert a Regular IRA to a Roth IRA.
The second section of this Kit contains our Universal IRA Disclosure Statement.
The Disclosure Statement is divided into three parts:
o Part One describes the basic rules and benefits which are specifically
applicable to your Regular IRA.
o Part Two describes the basic rules and benefits which are specifically
applicable to your Roth IRA.
o Part Three describes important rules and information applicable to all
IRAs.
The third section of this Kit contains the Universal IRA Custodial Agreement.
The Custodial Agreement is also divided into three parts:
o Part One contains provisions specifically applicable to Regular IRAs.
o Part Two contains provisions specifically applicable to Roth IRAs.
o Part Three contains provisions applicable to all IRAs (Regular and
Roth).
This Universal Individual Retirement Custodial Account Kit contains information
and forms for both Regular IRAs and Roth IRAs. However, you may use the Adoption
Agreement in this Kit to establish only one Regular IRA or one Roth IRA;
separate Adoption Agreements must be completed if you want to establish multiple
(Roth or Regular) IRA accounts.
<PAGE>
[GRAPHIC OMITTED]
What's the Difference Between a Regular IRA and a Roth IRA?
With a Regular IRA, an individual can contribute up to $2,000 per year and may
be able to deduct the contribution from taxable income, reducing income taxes.
Taxes on investment growth and dividends are deferred until the money is
withdrawn. Withdrawals are taxed as additional ordinary income when received.
Nondeductible contributions, if any, are withdrawn tax-free. Withdrawals before
age 59 1/2 are assessed a 10% penalty in addition to income tax, unless an
exception applies.
With a Roth IRA, the contribution limits are essentially the same as Regular
IRAs, but there is no tax deduction for contributions. All dividends and
investment growth in the account are tax-free. Most important with a Roth IRA:
there is no income tax on qualified withdrawals from your Roth IRA.
Additionally, unlike a Regular IRA, there is no prohibition on making
contributions to Roth IRAs after turning age 70 1/2, and there's no requirement
that you begin making minimum withdrawals at that age. The chart above
highlights some of the major differences between a Regular IRA and a Roth IRA.
Is a Roth or a Regular IRA Right For Me?
<PAGE>
We cannot act as your legal or tax advisor and so we cannot tell you which kind
of IRA is right for you. The information contained in this Kit is intended to
provide you with the basic information and material you will need if you decide
whether a Regular or Roth IRA is better for you, or if you want to convert an
existing Regular IRA to a Roth IRA.
We suggest that you consult with your accountant, lawyer or other tax advisor,
or with a qualified financial planner, to determine whether you should open a
Regular or Roth IRA or convert any or all of an existing Regular IRA to a Roth
IRA. Your tax advisor can also advise you as to the state tax consequences that
may affect whether a Regular or Roth IRA is right for you.
SEPs and SIMPLEs
The North American Funds Regular IRA may be used in connection with a simplified
employee pension (SEP) plan maintained by your employer. To establish a Regular
IRA as part of your Employer's SEP plan, complete the Adoption Agreement for a
Regular IRA, indicating in the proper box that the IRA is part of a SEP plan. A
Roth IRA should not be used in connection with a SEP plan.
A Roth IRA may not be used as part of an employer SIMPLE IRA plan. A Regular IRA
may be used, but only after an individual has been participating for two or more
years (for the first two years, only a special SIMPLE IRA may be used). SIMPLE
IRA plans were added by the 1996 tax law to provide an easy and inexpensive way
for small employers to provide retirement benefits for their employees. If you
are interested in a SIMPLE IRA plan at your place of employment, call or write
to the number or address given at the end of the Disclosure Statement portion of
this Kit.
Other Points to Note
The Disclosure Statement in this Kit provides you with the basic information
that you should know about North American Funds Regular IRAs and Roth IRAs. The
Disclosure Statement provides general information about the governing rules for
these IRAs and the benefits and features offered through each type of IRA.
However, the North American Funds Adoption Agreement and the Custodial
Agreement, are the primary documents controlling the terms and conditions of
your personal North American Funds Regular or Roth IRA, and these shall govern
in the case of any difference with the Disclosure Statement.
You or your when used throughout this Kit refer to the person for whom the North
American Funds Regular or Roth IRA is established. A Roth IRA is either a North
American Funds Roth IRA or any Roth IRA established by any other financial
institution. A Regular IRA is any non-Roth IRA offered by North American Funds
or any other financial institution.
State Street Bank and Trust Company
Universal IRA Offered By
North American Funds
Disclosure Statement
Part One
Description of Regular IRAs
SPECIAL NOTE
Part One of the Disclosure Statement describes the rules applicable to Regular
IRAs beginning January 1, 1998. IRAs described in these pages are called
"Regular IRAs" to distinguish them from the new "Roth IRAs" first available
starting in 1998. Roth IRAs are described in Part Two of this Disclosure
Statement.
For Regular IRA contributions for 1997 (including contributions made up to April
15, 1998 but designated as contributions for 1997), there are different rules
for determining the deductibility of your contribution on your federal tax
return. For contributions for 1997, the "active participant" limits on
deductibility (described below) apply if either spouse is an active participant
in an employer-sponsored plan. Also, the
<PAGE>
adjusted gross income ("AGI") levels for partially deductible or nondeductible
Regular IRA contributions (described below) are lower for 1997 ($25,000 for
single taxpayers, with no deduction if your AGI is above $35,000; and $40,000
for married taxpayers filing jointly, with no deduction if your AGI is above
$50,000). Also, the exceptions to the 10% early withdrawal penalty for
withdrawals to pay certain higher education or first-time homebuyer expenses do
not apply to withdrawals in 1997.
This Part One of the Disclosure Statement describes Regular IRAs. It does not
describe Roth IRAs, a new type of IRA available starting in 1998. Contributions
to a Roth IRA are not deductible (regardless of your AGI), but withdrawals that
meet certain requirements are not subject to federal income tax, so that
dividends and investment growth on amounts held in the Roth IRA can escape
federal income tax. Please see Part Two of this Disclosure Statement if you are
interested in learning more about Roth IRAs.
Regular IRAs described in this Disclosure Statement may be used as part of a
simplified employee pension (SEP) plan maintained by your employer. Under a SEP
your employer may make contributions to your Regular IRA, and these
contributions may exceed the normal limits on Regular IRA contributions. This
Disclosure Statement does not describe IRAs established in connection with a
SIMPLE IRA program maintained by your employer. Employers provide special
explanatory materials for accounts established as part of a SIMPLE IRA program.
Regular IRAs may be used in connection with a SIMPLE IRA program, but for the
first two years of participation a special SIMPLE IRA (not a Regular IRA) is
required.
YOUR REGULAR IRA
Regular IRA are not subject to federal income tax until withdrawn by you. You
may be able to deduct all or part of your Regular IRA contribution on your
federal income tax return. State income tax treatment of your Regular IRA may
differ from federal treatment; ask your state tax department or your personal
tax advisor for details.
Be sure to read Part Three of this Disclosure Statement for important additional
information, including information on how to revoke your Regular IRA,
investments and prohibited transactions, fees and expenses, and certain tax
requirements.
ELIGIBILITY
What are the Eligibility Requirements for a Regular IRA?
You are eligible to establish and contribute to a Regular IRA for a year if:
o You received compensation (or earned income if you are self employed)
during the year for personal services you rendered. If you received
taxable alimony, this is treated like compensation for IRA purposes.
o You did not reach age 70 1/2 during the year.
Can I Contribute to a Regular IRA for My Spouse?
For each year before the year when your spouse attains age 70 1/2, you can
contribute to a separate Regular IRA for your spouse, regardless of whether your
spouse had any compensation or earned income in that year. This is called a
"spousal IRA." To make a contribution to a Regular IRA for your spouse, you must
file a joint tax return for the year with your spouse. For a spousal IRA, your
spouse must set up a different Regular IRA, separate from yours, to which you
contribute.
CONTRIBUTIONS
When Can I Make Contributions to a Regular IRA?
<PAGE>
You may make a contribution to your existing Regular IRA or establish a new
Regular IRA for a taxable year by the due date (not including any extensions)
for your federal income tax return for the year. Usually this is April 15 of the
following year.
How Much Can I Contribute to My Regular IRA?
For each year when you are eligible (see above), you can contribute up to the
lesser of $2,000 or 100% of your compensation (or earned income, if you are
self-employed). However, under the tax laws, all or a portion of your
contribution may not be deductible.
If you and your spouse have spousal Regular IRAs, each spouse may contribute up
to $2,000 to his or her IRA for a year as long as the combined compensation of
both spouses for the year (as shown on your joint income tax return) is at least
$4,000. If the combined compensation of both spouses is less than $4,000, the
spouse with the higher amount of compensation may contribute up to that spouse's
compensation amount, or $2,000 if less. The spouse with the lower compensation
amount may contribute any amount up to that spouse's compensation plus any
excess of the other spouse's compensation over the other spouse's IRA
contribution. However, the maximum contribution to either spouse's Regular IRA
is $2,000 for the year.
If you (or your spouse) establish a new Roth IRA and make contributions to both
your Regular IRA and a Roth IRA, the combined limit on contributions to both
your (or your spouse's) Regular IRA and Roth IRA for a single calendar year is
$2,000.
How Do I Know if My Contribution is Tax Deductible?
The deductibility of your contribution depends upon whether you are an active
participant in any employer-sponsored retirement plan. If you are not an active
participant, the entire contribution to your Regular IRA is deductible.
If you are an active participant in an employer-sponsored plan, your Regular IRA
contribution may still be completely or partly deductible on your tax return.
This depends on the amount of your income (see below).
Similarly, the deductibility of a contribution to a Regular IRA for your spouse
depends upon whether your spouse is an active participant in any
employer-sponsored retirement plan. If your spouse is not an active participant,
the contribution to your spouse's Regular IRA will be deductible. If your spouse
is an active participant, the Regular IRA contribution will be completely,
partly or not deductible depending upon your combined income.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
FOR ACTIVE PARTICIPANTS - TAX YEAR 1998
- ------------------------------------------------------------------------------------------------------------
If You Are Single Married Filed Jointly Regular IRA Contributions
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Up to Lower Limit Up to Lower Limit Fully
($30,000 for 1998) ($50,000 for 1998) Deductible
- ------------------------------------------------------------------------------------------------------------
More than Lower More than Lower Partly Deductible
Limit but less than Limit but less than
Upper Limit Upper Limit
($40,000 for 1998) ($60,000 for 1998)
- ------------------------------------------------------------------------------------------------------------
Upper Limit or Upper Limit or Not Deductible
More More
- ------------------------------------------------------------------------------------------------------------
The Lower Limit and the Upper Limit will change for 1999
And later years. Note: If you are married but filing separate
returns, your Lower Limit is always zero and your Upper Limit is always
$10,000.)
- ------------------------------------------------------------------------------------------------------------
</TABLE>
An exception to the preceding rules applies to high-income married taxpayers,
where one spouse is an active participant in an employer-sponsored retirement
plan and the other spouse is not. A contribution to the non-active participant
spouse's Regular IRA will be only partly deductible at an adjusted gross income
<PAGE>
level on the joint tax return of $150,000, and the deductibility will be phased
out as described below over the next $10,000 so that there will be no deduction
at all with an adjusted gross income level of $160,000 or higher.
How Do I Determine My or My Spouse's "Active Participant" Status?
Your (or your spouse's) Form W-2 should indicate if you (or your spouse) were an
active participant in an employer-sponsored retirement plan for a year. If you
have a question, you should ask your employer or the plan administrator.
In addition, regardless of income level, your spouse's "active participant"
status will not affect the deductibility of your contributions to your Regular
IRA if you and your spouse file separate tax returns for the taxable year and
you lived apart at all times during the taxable year.
What are the Deduction Restrictions for Active Participants?
If you (or your spouse) are an active participant in an employer plan during a
year, the contribution to your Regular IRA (or your spouse's Regular IRA) may be
completely, partly or not deductible depending upon your filing status and your
amount of adjusted gross income ("AGI"). If AGI is any amount up to the lower
limit, the contribution is deductible. If your AGI falls between the lower limit
and the upper limit, the contribution is partly deductible. If your AGI falls
above the upper limit, the contribution is not deductible.
How Do I Calculate the Deduction if I Fall in the "Partly Deductible" Range?
If your AGI falls in the partly deductible range, you must calculate the portion
of your contribution that is deductible. To do this, multiply your contribution
by a fraction. The numerator is the amount by which your AGI exceeds the lower
limit (for 1998: $30,000 if single, or $50,000 if married filing jointly). The
denominator is $10,000 (note that the denominator for married joint filers is
$20,000 starting in 2007). Subtract this from your contribution and then round
down to the nearest $10. The deductible amount is the greater of the amount
calculated or $200 (provided you contributed at least $200). If your
contribution was less than $200, then the entire contribution is deductible.
For example, assume that you make a $2,000 contribution to your Regular IRA in
1998, a year in which you are an active participant in your employer's
retirement plan. Also assume that your AGI is $57,555 and you are married,
filing jointly. You would calculate the deductible portion of your contribution
this way:
1. The amount by which your AGI exceeds the lower limit of the
partly-deductible range:
($57,555 - $50,000) = $7,555
2. Divide this by $10,000:
$7,555 divided by $10,000 = 0.7555
3. Multiply this by your contribution limit:
0.7555 x $2,000 = $1,511
4. Subtract this from your contribution:
($2,000 - $1,551) = $489
5. Round this down to the nearest $10 = $480
6. Your deductible contribution is the greater of this amount or $200,
that is, $480.
Even though part or all of your contribution is not deductible, you may still
contribute to your Regular IRA (and your spouse may contribute to your spouse's
Regular IRA) up to the limit on contributions. When
<PAGE>
you file your tax return for the year, you must designate the amount of
non-deductible contributions to your Regular IRA for the year. See IRS Form
8606.
How Do I Determine My AGI?
AGI is your gross income minus those deductions which are available to all
taxpayers even if they don't itemize. Instructions to calculate your AGI are
provided with your income tax Form 1040 or 1040A.
What Happens if I Contribute More Than Allowed to My Regular IRA?
The maximum contribution you can make to a Regular IRA generally is $2,000 or
100% of compensation or earned income, whichever is less. Any amount contributed
to the IRA above the maximum is considered an "excess contribution." The excess
is calculated using your contribution limit, not the deductible limit. An excess
contribution is subject to excise tax of 6% for each year it remains in the IRA.
How Can I Correct an Excess Contribution?
Excess contributions may be corrected without paying a 6% penalty. You must
withdraw the excess and any earnings on the excess before the due date
(including extensions) for filing your federal income tax return for the year
for which you made the excess contribution. A deduction should not be taken for
any excess contribution. Earnings on the amount withdrawn must also be
withdrawn. The earnings must be included in your income for the tax year for
which the contribution was made and may be subject to a 10% premature withdrawal
tax if you have not reached age 59 1/2.
What Happens if I Don't Correct the Excess Contribution By the Tax Return Due
Date?
Any excess contribution withdrawn after the tax return due date (including any
extensions) for the year for which the contribution was made will be subject to
the 6% excise tax. There will be an additional 6% excise tax for each year the
excess remains in your account.
Under limited circumstances, you may correct an excess contribution after tax
filing time by withdrawing the excess contribution (leaving the earnings in the
account). This withdrawal will not be includable in income nor will it be
subject to any premature withdrawal penalty if (1) your contributions to all
Regular IRAs do not exceed $2,000 and (2) you did not take a deduction for the
excess amount (or you file an amended return (Form 1040X) which removes the
excess deduction).
How are Excess Contributions Treated if None of the Preceding Rules Apply?
Unless an excess contribution qualifies for the special treatment outlined
above, the excess contribution and any earnings on it withdrawn after tax filing
time will be includable in taxable income and may be subject to a 10% premature
withdrawal penalty. No deduction will be allowed for the excess contribution for
the year in which it is made.
Excess contributions may be corrected in a subsequent year to the extent that
you contribute less than your maximum amount. As the prior excess contribution
is reduced or eliminated, the 6% excise tax will become correspondingly reduced
or eliminated for subsequent tax years. Also, you may be able to take an income
tax deduction for the amount of excess that was reduced or eliminated, depending
on whether you would be able to take a deduction if you had instead contributed
the same amount.
Are the Earnings on My Regular IRA Funds Taxed?
Any dividends on or growth of the investments held in your Regular IRA are
generally exempt from federal income taxes and will not be taxed until withdrawn
by you, unless the tax exempt status of your Regular IRA is revoked (this is
described in Part Three of this Disclosure Statement).
TRANSFERS/ROLLOVERS
Can I Transfer or Roll Over a Distribution I Receive from My Employer's
Retirement Plan into a Regular IRA?
<PAGE>
Almost all distributions from employer plans or 403(b) arrangements (for
employees of tax-exempt employers) are eligible for rollover to a Regular IRA.
The main exceptions are:
o Payments over the lifetime or life expectancy of the participant (or
participant and a designated beneficiary),
o Installment payments for a period of 10 years or more,
o Required distributions (generally the rules require distributions
starting at age 70 1/2 or for certain employees starting at retirement,
if later), and
o Payments of employee after-tax contributions.
If you are eligible to receive a distribution from a tax qualified retirement
plan as a result of, for example, termination of employment, plan
discontinuance, or retirement, all or part of the distribution may be
transferred directly into your Regular IRA. This is called a "direct rollover."
Or, you may receive the distribution and make a regular rollover to your Regular
IRA within 60 days. By making a direct rollover or a regular rollover, you can
defer income taxes on the amount rolled over until you subsequently make
withdrawals from your IRA.
The maximum amount you may roll over is the amount of employer contributions and
earnings distributed. You may not roll over any after-tax employee contributions
you made to the employer retirement plan. If you are over age 70 1/2 and are
required to take minimum distributions under the tax laws, you may not roll over
any amount required to be distributed to you under the minimum distribution
rules. Also, if you are receiving periodic payments over your life expectancy,
or over your and your designated beneficiary's life expectancy, or for a period
of at least 10 years, you may not roll over these payments. A rollover to a
regular IRA must be completed within 60 days after the distribution from the
employer retirement plan to be valid.
NOTE: A qualified plan administrator or 403(b) sponsor MUST WITHHOLD 20% OF YOUR
DISTRIBUTION for federal income taxes UNLESS you elect a direct rollover. Your
plan or 403(b) sponsor is required to provide you with information about direct
and traditional rollovers and withholding taxes before you receive your
distribution and must comply with your directions to make a direct rollover.
The rules governing rollovers are complicated. Be sure to consult your tax
advisor or the IRS if you have a question about rollovers.
Once I Have Rolled Over a Plan Distribution into a Regular IRA, Can I
Subsequently Roll Over into another Employer's Qualified Retirement Plan?
Yes. Part or all of an eligible distribution received from a qualified plan may
be transferred from the Regular IRA holding it to another qualified plan.
However, the IRA must have no assets other than those which were previously
distributed to you from the qualified plan. Specifically, the IRA cannot contain
any contributions by you (or your spouse). Also, the new qualified plan must
accept rollovers. Similar rules apply to Regular IRAs established with rollovers
from 403(b) arrangements.
Can I Make a Traditional Rollover from My Regular IRA to Another Regular IRA?
You may make a rollover from one Regular IRA to another Regular IRA you have or
you establish to receive the rollover. Such a rollover must be completed within
60 days after the withdrawal from your first Regular IRA. After making a
traditional rollover from one Regular IRA to another, you must wait a full year
(365 days) before you can make another such rollover. (However, you can instruct
a Regular IRA custodian to transfer amounts directly to another Regular IRA
custodian; such a direct transfer does not count as a rollover.)
What Happens if I Combine Rollover Contributions With My Normal Contributions in
One IRA?
<PAGE>
If you wish to make both a normal annual contribution and a rollover
contribution, you may wish to open two separate Regular IRAs by completing two
Adoption Agreements and two sets of forms. You should consult a tax advisor
before making your annual contribution to the IRA you established with rollover
contributions (or make a rollover contribution to the IRA to which you make your
annual contributions). This is because combining your annual contributions and
rollover contributions originating from an employer plan distribution would
prohibit the future rollover out of the IRA into another qualified plan. If
despite this, you still wish to combine a rollover contribution and the IRA
holding your annual contributions, you should establish the account as a Regular
IRA on the Adoption Agreement (not a Rollover IRA or Direct Rollover IRA) and
make the contributions to that account.
How Do Rollovers Affect My Contribution or Deduction Limits?
Rollover contributions, if properly made, do not count toward the maximum
contribution. Also, rollovers are not deductible and they do not affect your
deduction limits as described above.
What About Converting My Regular IRA to a Roth IRA?
The rules for converting a Regular IRA to a new Roth IRA, or making a rollover
from a Regular IRA to a new Roth IRA, are described in Part Two of this
Disclosure Statement.
WITHDRAWALS
When Can I Make Withdrawals from My Regular IRA?
You may withdraw from your Regular IRA at any time. However, withdrawals before
age 59 1/2 may be subject to a 10% penalty tax in addition to regular income
taxes (see below).
When Must I Start Making Withdrawals?
If you have not withdrawn your entire IRA by the April 1 following the year in
which you reach 70 1/2, you must make minimum withdrawals in order to avoid
penalty taxes. The rule allowing certain employees to postpone distributions
from an employer qualified plan until actual retirement (even if this is after
age 70 1/2) does not apply to Regular IRAs.
The minimum withdrawal amount is determined by dividing the balance in your
Regular IRA (or IRAs) by your life expectancy or the combined life expectancy of
you and your designated beneficiary. The minimum withdrawal rules are complex.
Consult your tax advisor for assistance.
The penalty tax is 50% of the difference between the minimum withdrawal amount
and your actual withdrawals during a year. The IRS may waive or reduce the
penalty tax if you can show that your failure to make the required minimum
withdrawals was due to reasonable cause and you are taking reasonable steps to
remedy the problem.
How Are Withdrawals From My Regular IRA Taxed?
Amounts withdrawn by you are includable in your gross income in the taxable year
that you receive them, and are taxable as ordinary income. Lump sum withdrawals
from a Regular IRA are not eligible for averaging treatment currently available
to certain lump sum distributions from qualified employer retirement plans.
Since the purpose of a Regular IRA is to accumulate funds for retirement,
receipt or use of any portion of your Regular IRA before you attain age 59 1/2
generally will be considered as an early withdrawal and subject to a 10% penalty
tax.
The 10% penalty tax for early withdrawal will not apply if:
o The distribution was a result of your death or disability.
<PAGE>
o The purpose of the withdrawal is to pay certain higher education
expenses for yourself or your spouse, child, or grandchild. Qualifying
expenses include tuition, fees, books, supplies and equipment required
for attendance at a post-secondary educational institution. Room and
board expenses may qualify if the student is attending at least
half-time.
o The withdrawal is used to pay eligible first-time homebuyer expenses.
These are the costs of purchasing, building or rebuilding a principal
residence (including customary settlement, financing or closing costs).
The purchaser may be you, your spouse, or a child, grandchild, parent or
grandparent of you or your spouse. An individual is considered a
"first-time homebuyer" if the individual (or the individual's spouse, if
married) did not have an ownership interest in a principal residence
during the two-year period immediately preceding the acquisition in
question. The withdrawal must be used for eligible expenses within 120
days after the withdrawal. (If there is an unexpected delay, or
cancellation of the home acquisition, a withdrawal may be redeposited as
a rollover).
o There is a lifetime limit on eligible first-time homebuyer expenses of
$10,000 per individual.
o The distribution is one of a scheduled series of substantially equal
periodic payments for your life or life expectancy (or the joint lives
or life expectancies of you and your beneficiary).
o If there is an adjustment to the scheduled series of payments, the 10%
penalty tax may apply. The 10% penalty will not apply if you make no
change in the series of payments until the end of five years or until
you reach age 59 1/2, whichever is later. If you make a change before
then, the penalty will apply. For example, if you begin receiving
payments at age 50 under a withdrawal program providing for
substantially equal payments over your life expectancy, and at age 58
you elect to receive the remaining amount in your Regular IRA in a
lump-sum, the 10% penalty tax will apply to the lump sum and to the
amounts previously paid to you before age 59 1/2.
o The distribution does not exceed the amount of your deductible medical
expenses for the year (generally speaking, medical expenses paid during
a year are deductible if they are greater than 70% of your adjusted
gross income for that year).
o The distribution does not exceed the amount you paid for health
insurance coverage for yourself, your spouse and dependents. This
exception applies only if you have been unemployed and received federal
or state unemployment compensation payments for at least 12 weeks; this
exception applies to distributions during the year in which you received
the unemployment compensation and during the following year, but not to
any distributions received after you have been reemployed for at least
60 days.
How are Nondeductible Contributions Taxed When They are Withdrawn?
A withdrawal of nondeductible contributions (not including earnings) will be
tax-free. However, if you made both deductible and nondeductible contributions
to your Regular IRA, then each distribution will be treated as partly a return
of your nondeductible contributions (not taxable) and partly a distribution of
deductible contributions and earnings (taxable). The nontaxable amount is the
portion of the amount withdrawn which bears the same ratio as your total
nondeductible Regular IRA contributions bear to the total balance of all your
Regular IRAs (including rollover IRAs and SEPs, but not including Roth IRAs).
For example, assume that you made the following Regular IRA contributions:
<TABLE>
<CAPTION>
Year Deductible Nondeductible
--------------------------------------
<S> <C> <C>
1995 $2,000
1996 $2,000
1997 $1,000 $1,000
1998 $1,000
--------- ------
$5,000 $2,000
</TABLE>
<PAGE>
In addition assume that your Regular IRA has total investment earnings through
1998 of $1,000. During 1998 you withdraw $500. Your total account balance as of
12-31-98 is $7,500 as shown below.
<TABLE>
<S> <C>
Deductible Contributions $5,000
Nondeductible Contributions $2,000
Earnings On IRA $1,000
Less 1998 Withdrawal $ 500
-------
Total Account Balance as of 12/31/98 $7,500
</TABLE>
To determine the non-taxable portion of your 1998 withdrawal, the total 1998
withdrawal ($500) must be multiplied by a fraction. The numerator of the
fraction is the total of nondeductible contributions remaining in the account
before the 1998 withdrawal ($2,000). The denominator is the total account
balance as of 12-31-98 ($7,500) plus the 1998 withdrawal ($500) or $8,000. The
calculation is:
Total Remaining
Nondeductible Contributions $2,000 x $500 = $125
- -------------------------------------
Total Account Balance $8,000
Thus, $125 of the $500 withdrawal in 1998 will not be included in your taxable
income. The remaining $375 will be taxable for 1998. In addition, for future
calculations the remaining nondeductible contribution total will be $2,000 minus
$125, or $1,875.
A loss in your Regular IRA investment may be deductible. You should consult your
tax advisor for further details on the appropriate calculation for this
deduction if applicable.
Is There a Penalty Tax on Certain Large Withdrawals or Accumulations in My IRA?
Earlier tax laws imposed a "success" penalty equal to 15% of withdrawals from
all retirement accounts (including IRAs, 401(k) or other employer retirement
plans, 403(b) arrangements and others) in a year exceeding a specified amount
(initially $150,000 per year). Also, there was a 15% estate tax penalty on
excess accumulations remaining in IRAs and other tax-favored arrangements upon
your death. These 15% penalty taxes have been repealed.
Important: Please see Part Three of this Disclosure Statement which contains
important information applicable to all State Street Bank and Trust Company
IRAs.
Part Two Description of Roth IRAs
SPECIAL NOTE
Part Two of the Disclosure Statement describes the rules generally applicable to
Roth IRAs beginning January 1, 1998.
Roth IRAs are a new kind of IRA available for the first time in 1998.
Contributions to a Roth IRA for 1997 are not permitted. Contributions to a Roth
IRA are not tax-deductible, but withdrawals that meet certain requirements are
not subject to federal income taxes. This makes the dividends on and growth of
the investment held in your Roth IRA tax-free for federal income tax purposes if
the requirements are met.
Regular IRAs, which have existed since 1975, are still available. Contributions
to a Regular IRA may be tax-deductible. Earnings and gains on amounts while held
in a Regular IRA are tax-deferred. Withdrawals are subject to federal income tax
(except for prior after-tax contributions which may be recovered without
additional federal income tax).
<PAGE>
This Part Two does not describe Regular IRAs. If you wish to review information
about Regular IRAs, please see Part One of this Disclosure Statement.
This Disclosure Statement also does not describe IRAs established in connection
with a SIMPLE IRA program or a Simplified Employee Pension (SEP) plan maintained
by your employer. Roth IRAs may not be used in connection with a SIMPLE IRA
program or a SEP plan.
YOUR ROTH IRA
Your Roth IRA gives you several tax benefits. While contributions to a Roth IRA
are not deductible, dividends on and growth of the assets held in your Roth IRA
are not subject to federal income tax. Withdrawals by you from your Roth IRA are
excluded from your income for federal income tax purposes if certain
requirements (described below) are met. State income tax treatment of your Roth
IRA may differ from federal treatment; ask your state tax department or your
personal tax advisor for details.
Be sure to read Part Three of this Disclosure Statement for important additional
information, including information on how to revoke your Roth IRA, investments
and prohibited transactions, fees and expenses and certain tax requirements.
ELIGIBILITY
What are the Eligibility Requirements for a Roth IRA?
Starting with 1998, you are eligible to establish and contribute to a Roth IRA
for a year if you received compensation (or earned income if you are self
employed) during the year for personal services you rendered. If you received
taxable alimony, this is treated like compensation for IRA purposes.
In contrast to a Regular IRA, with a Roth IRA you may continue making
contributions after you reach age 70 1/2.
Can I Contribute to Roth IRA for My Spouse?
Starting with 1998, if you meet the eligibility requirements you can not only
contribute to your own Roth IRA, but also to a separate Roth IRA for your spouse
out of your compensation or earned income, regardless of whether your spouse had
any compensation or earned income in that year. This is called a "spousal Roth
IRA." To make a contribution to a Roth IRA for your spouse, you must file a
joint tax return for the year with your spouse. For a spousal Roth IRA, your
spouse must set up a different Roth IRA, separate from yours, to which you
contribute.
Of course, if your spouse has compensation or earned income, your spouse can
establish his or her own Roth IRA and make contributions to it in accordance
with the rules and limits described in this Part Two of the Disclosure
Statement.
CONTRIBUTIONS
When Can I Make Contributions to a Roth IRA?
You may make a contribution to your Roth IRA or establish a new Roth IRA for a
taxable year by the due date (not including any extensions) for your federal
income tax return for the year. Usually this is April 15 of the following year.
For example, you will have until April 15, 1999 to establish and make a
contribution to a Roth IRA for 1998.
Caution: Since Roth IRAs are available starting January 1, 1998, you may not
make a contribution by April 15, 1998 to a Roth IRA for 1997.
How Much Can I Contribute to My Roth IRA?
<PAGE>
For each year when you are eligible (see above), you can contribute up to the
lesser of $2,000 or 100% of your compensation (or earned income, if you are
self-employed). Annual contributions may be made only to a Roth IRA annual
contribution account which does not contain converted or transferred funds from
a Regular IRA.
Your Roth IRA limit is reduced by any contributions for the same year to a
Regular IRA. For example, assuming you have at least $2,000 in compensation or
earned income, if you contribute $500 to your Regular IRA for 1998, your maximum
Roth IRA contribution for 1998 will be $1,500.
If you and your spouse have spousal Roth IRAs, each spouse may contribute up to
$2,000 to his or her Roth IRA for a year as long as the combined compensation of
both spouses for the year (as shown on your joint income tax return) is at least
$4,000. If the combined compensation of both spouses is less than $4,000, the
spouse with the higher amount of compensation may contribute up to that spouse's
compensation amount, or $2,000 if less. The spouse with the lower compensation
amount may contribute any amount up to that spouse's compensation plus any
excess the other spouse's compensation over the other spouse's Roth IRA
contribution. However, the maximum contribution to either spouse's Roth IRA is
$2,000 for the year.
As noted above, the spousal Roth IRA limits are reduced by any contributions for
the same calendar year to a Regular IRA maintained by you or your spouse.
For taxpayers with high income levels, the contribution limits may be reduced
(see below).
Are Contributions to a Roth IRA Tax Deductible?
Contributions to a Roth IRA are not deductible. This is a major difference
between Roth IRAs and Regular IRAs. Contributions to a Regular IRA may be
deductible on your federal income tax return depending on whether or not you are
an active participant in an employer-sponsored plan and on your income level.
Are the Earnings on my Roth IRA Funds Taxed?
Any dividends on or growth of investments held in your Roth IRA are generally
exempt from federal income taxes and will not be taxed until withdrawn by you,
unless the tax exempt status of your Roth IRA is revoked. If the withdrawal
qualifies as a tax-free withdrawal (see below), amounts reflecting earnings or
growth of assets in your Roth IRA will not be subject to federal income tax.
Which is Better, a Roth IRA or a Regular IRA?
This will depend upon your individual situation. A Roth IRA may be better if you
are an active participant in an employer-sponsored plan and your adjusted gross
income is too high to make a deductible IRA contribution (but not too high to
make a Roth IRA contribution). Also, the benefits of a Roth IRA vs. a Regular
IRA may depend upon a number of other factors including: your current income tax
bracket vs. your expected income tax bracket when you make withdrawals from your
IRA, whether you expect to be able to make nontaxable withdrawals from your Roth
IRA (see below), how long you expect to leave your contributions in the IRA, how
much you expect the IRA to earn in the meantime, and possible future tax law
changes.
Consult a qualified tax or financial advisor for assistance on this question.
Are there Any Restrictions on Contributions to My Roth IRA?
Taxpayers with very high income levels may not be able to contribute to a Roth
IRA at all, or their contribution may be limited to an amount less than $2,000.
This depends upon your filing status and the amount of your adjusted gross
income (AGI). The following table shows how the contribution limits are
restricted:
<PAGE>
[GRAPHIC OMITTED]
How Do I Calculate My Limit if I Fall in the "Reduced Contribution" Range?
If your AGI falls in the reduced contribution range, you must calculate your
contribution limit. To do this, multiply your normal contribution limit ($2,000
or your compensation if less) by a fraction. The numerator is the amount by
which your AGI exceeds the lower limit of the reduced contribution range
($95,000 if single, or $150,000 if married filing jointly). The denominator is
$15,000 (single taxpayers) or $10,000 (married filing jointly). Subtract this
from your normal limit and then round down to the nearest $10. The contribution
limit is the greater of the amount calculated or $200.
For example, assume that your AGI for the year is $157,555 and you are married,
filing jointly. You would calculate your Roth IRA contribution limit this way:
1. The amount by which your AGI exceeds the lower limit of the reduced
contribution deductible range:
($157,555-$150,000) = $7,555
2. Divide this by $10,000:
$7,555 divided by $10,000 = 0.7555
3. Multiply this by $2,000 (or your compensation for the year, if less):
0.7555 x $2,000 = $1,511
4. Subtract this from your $2,000 limit:
$2,000 - $1,551 = $489
5. Round this down to the nearest $10 = $480
6. Your contribution limit is the greater of this amount or $200, that is,
$480.
Remember, your Roth IRA contribution limit of $2,000 is reduced by any
contributions for the same year to a Regular IRA. If you fall in the reduced
contribution range, the reduction formula applies to the Roth IRA contribution
limit left after subtracting your contribution for the year to a Regular IRA.
<PAGE>
How Do I Determine My AGI?
AGI is your gross income minus those deductions which are available to all
taxpayers even if they don't itemize. Instructions to calculate your AGI are
provided with your income tax Form 1040 or 1040A.
There are two additional rules when calculating AGI for purposes of Roth IRA
contribution limits. First, if you are making a deductible contribution for the
year to a Regular IRA, your AGI is reduced by the amount of the deduction.
Second, if you are converting a Regular IRA to a Roth IRA in a year (see below),
the amount includable in your income as a result of the conversion is not
considered AGI when computing your Roth IRA contribution limit for the year.
(Note: a bill pending in Congress might affect the first rule -- consult your
tax advisor or the IRS for the latest developments.)
What Happens if I Contribute More than Allowed to My Roth IRA?
The maximum contribution you can make to a Roth IRA generally is $2,000 or 100%
of compensation or earned income, whichever is less. As noted above, your
maximum is reduced by the amount of any contribution to a Regular IRA for the
same year and may be further reduced if you have high AGI. Any amount
contributed to the Roth IRA above the maximum is considered an "excess
contribution."
An excess contribution is subject to excise tax of 6% for each year it remains
in the Roth IRA.
How Can I Correct an Excess Contribution?
Excess contributions may be corrected without paying a 6% penalty. To do so, you
must withdraw the excess and any earnings on the excess before the due date
(including extensions) for filing your federal income tax return for the year
for which you made the excess contribution. Earnings on the amount withdrawn
must also be withdrawn. The earnings must be included in your income for the tax
year for which the contribution was made and may be subject to a 10% premature
withdrawal tax if you have not reached age 59 1/2 (unless an exception to the
10% penalty tax applies).
What Happens if I Don't Correct the Excess Contribution by the Tax Return Due
Date?
Any excess contribution withdrawn after the tax return due date (including any
extensions) for the year for which the contribution was made will be subject to
the 6% excise tax. There will be an additional 6% excise tax for each year the
excess remains in your account.
Unless an excess contribution qualifies for the special treatment outlined
above, the excess contribution and any earnings on it withdrawn after tax filing
time will be includable in taxable income and may be subject to a 10% premature
withdrawal penalty.
You may reduce the excess contributions by making a withdrawal equal to the
excess. Earnings need not be withdrawn. To the extent that no earnings are
withdrawn, the withdrawal will not be subject to income taxes or possible
penalties for premature withdrawals before age 59 1/2. Excess contributions may
also be corrected in a subsequent year to the extent that you contribute less
than your Roth IRA contribution limit for the subsequent year. As the prior
excess contribution is reduced or eliminated, the 6% excise tax will become
correspondingly reduced or eliminated for subsequent tax years.
CONVERSION OF EXISTING REGULAR IRA
Can I Convert an Existing Regular IRA into a Roth IRA?
Yes, starting in 1998 you can convert an existing Regular IRA into a Roth IRA if
you meet the adjusted gross income (AGI) limits described below. Conversion may
be accomplished either by establishing a Roth IRA and then transferring the
amount in your Regular IRA you wish to convert to the new Roth IRA. Or, if you
want to convert an existing Regular IRA with State Street Bank as custodian to a
Roth IRA, you may give us directions to convert.
<PAGE>
You are eligible to convert a Regular IRA to a Roth IRA if, for the year of the
conversion, your AGI is $100,000 or less. The same limit applies to married and
single taxpayers, and the limit is not indexed to cost-of-living increases.
Married taxpayers are eligible to convert a Regular IRA to a Roth IRA only if
they file a joint income tax return; married taxpayers filing separately are not
eligible to convert.
Note: No contributions other than Roth IRA conversion contributions made during
the same tax year may be deposited in a single Roth IRA conversion account.
Caution: You should be extremely cautious in converting an existing IRA into a
Roth IRA early in a year if there is any possibility that your AGI for the year
will exceed $100,000. Although a bill pending in Congress would permit you to
transfer amounts back to your Regular IRA if your AGI exceeds $100,000, under
the current rules, if you have already converted during a year and you turn out
to have more than $100,000 of AGI, there may be adverse tax results for you.
Consult your tax advisor or the IRS for the latest developments.
What are the Tax Results from Converting?
The taxable amount in your Regular IRA you convert to a Roth IRA will be
considered taxable income on your federal income tax return for the year of the
conversion. All amounts in a Regular IRA are taxable except for your prior
non-deductible contributions to the Regular IRA.
If you make the conversion during 1998, the taxable income is spread over four
years. You would include one quarter of the taxable amount on your federal
income tax return for 1998, 1999, 2000 and 2001.
Should I Convert My Regular IRA to a Roth IRA?
Only you can answer this question, in consultation with your tax or financial
advisors. A number of factors, including the following, may be relevant.
Conversion may be advantageous if you expect to leave the converted funds on
deposit in your Roth IRA for at least five years and to be able to withdraw the
funds under circumstances that will not be taxable (see below). The benefits of
converting will also depend on whether you expect to be in the same tax bracket
when you withdraw from your Roth IRA as you are now. Also, conversion is based
upon an assumption that Congress will not change the tax rules for withdrawals
from Roth IRAs in the future, but his cannot be guaranteed.
TRANSFERS/ROLLOVERS
Can I Transfer or Roll Over a Distribution I Receive from My Employer's
Retirement Plan into a Roth IRA?
Distributions from qualified employer-sponsored retirement plans or 403(b)
arrangements (for employees of tax-exempt employers) are not eligible for
rollover or direct transfer to a Roth IRA. However, in certain circumstances it
may be possible to make a direct rollover of an eligible distribution to a
Regular IRA and then to convert the Regular IRA to Roth IRA (see above). Consult
your tax or financial advisor for further information on this possibility.
Can I Make a Rollover from My Roth IRA to Another Roth IRA?
You may make a rollover from one Roth IRA to another Roth IRA you have or you
establish to receive the rollover. Such a rollover must be completed within 60
days after the withdrawal from your first Roth IRA. After making a rollover from
one Roth IRA to another, you must wait a full year (365 days) before you can
make another such rollover. (However, you can instruct a Roth IRA custodian to
transfer amounts directly to another Roth IRA custodian; such a direct transfer
does not count as a rollover.)
How Do Rollovers Affect My Roth IRA Contribution Limits?
Rollover contributions, if properly made, do not count toward the maximum
contribution. Also, you may make a rollover from one Roth IRA to another even
during a year when you are not eligible to contribute to a Roth IRA (for
example, because your AGI for that year is too high).
<PAGE>
WITHDRAWALS
When can I make withdrawals from my Roth IRA?
You may withdraw from your Roth IRA at any time. If the withdrawal meets the
requirements discussed below, it is tax-free. This means that you pay no federal
income tax even though the withdrawal includes earnings or gains on your
contributions while they were held in your Roth IRA.
When must I start making withdrawals?
There are no rules on when you must start making withdrawals from your Roth IRA
or on minimum required withdrawal amounts for any particular year during your
lifetime. Unlike Regular IRAs, you are not required to start making withdrawals
from a Roth IRA by the April 1 following the year in which you reach age 70 1/2.
After your death, there are IRS rules on the timing and amount of distributions.
In general, the amount in your Roth IRA must be distributed by the end of the
fifth year after your death. However, distributions to a designated beneficiary
that begin by the end of the year following the year of your death and that are
paid over the life expectancy of the beneficiary satisfy the rules. Also, if
your surviving spouse is your designated beneficiary, the spouse may defer the
start of distributions until you would have reached age 70 1/2 had you lived.
What are the requirements for a tax-free withdrawal?
To be tax-free, a withdrawal from your Roth IRA must meet two requirements.
First, the Roth IRA must have been open for 5 or more years before the
withdrawal. Second, at least one of the following conditions must be satisfied:
o You are age 59 1/2 or older when you make the withdrawal.
o The withdrawal is made by your beneficiary after you die.
o You are disabled (as defined in IRS rules) when you make the withdrawal.
o You are using the withdrawal to cover eligible first time homebuyer
expenses. These are the costs of purchasing, building or rebuilding a
principal residence (including customary settlement, financing or
closing costs). The purchaser may be you, your spouse or a child,
grandchild, parent or grandparent of you or your spouse. An individual
is considered a "first-time homebuyer" if the individual (or the
individual's spouse, if married) did not have an ownership interest in a
principal residence during the two-year period immediately preceding the
acquisition in question. The withdrawal must be used for eligible
expenses within 120 days after the withdrawal (if there is an unexpected
delay, or cancellation of the home acquisition, a withdrawal may be
redeposited as a rollover).
There is a lifetime limit on eligible first-time homebuyer expenses of $10,000
per individual.
For a Roth IRA that you set up with amounts rolled over or converted from a
Regular IRA, the 5 year period begins with the year in which the conversion or
rollover was made. (Note: a bill pending in Congress might affect this rule --
consult your tax advisor or the IRS for the latest developments.)
For a Roth IRA that you started with a normal contribution, the 5 year period
starts with the year for which you make the initial normal contribution.
How Are Withdrawals From My Roth IRA Taxed if the Tax-Free Requirements are not
Met?
If the qualified withdrawal requirements are not met, a withdrawal consisting of
your own prior contribution amounts to your Roth IRA will not be considered
taxable income in the year you receive it,
<PAGE>
nor will the 10% penalty apply. To the extent that the nonqualified withdrawal
consists of dividends or gains while your contributions were held in your Roth
IRA, the withdrawal is includable in your gross income in the taxable year you
receive it, and may be subject to the 10% withdrawal penalty. All amounts
withdrawn from your Roth IRA are considered withdrawals of your contributions
until you have withdrawn the entire amount you have contributed. After that, all
amounts withdrawn are considered taxable withdrawals of dividends and gains.
Note that, for purposes of determining what portion of any distribution is
includable in income, all of your Roth IRA accounts are considered as one single
account. Amounts withdrawn from any one Roth IRA account are deemed to be
withdrawn from contributions first. Since all your Roth IRAs are considered to
be one account for this purpose, withdrawals from Roth IRA accounts are not
considered to be from earnings or interest until an amount equal to all
contributions made to all of an individual's Roth IRA accounts is withdrawn. The
following example illustrates this:
A single individual contributes $1,000 a year to his North American Funds Roth
IRA account and $1,000 a year to the Brand X Roth IRA account over a period of
ten years. At the end of 10 years his account balances are as follows:
<TABLE>
<CAPTION>
Principal
Contributions Earnings
------------------------
<S> <C> <C>
North American Funds Roth IRA $10,000 $10,000
Brand X Roth IRA $10,000 $10,000
------- -------
Total $20,000 $20,000
</TABLE>
At the end of 10 years, this person has $40,000 in both Roth IRA accounts, of
which $20,000 represents his contributions (aggregated) and $20,000 represents
his earnings (aggregated). This individual, who is 40, withdraws $15,000 from
his Brand X Roth IRA (not a qualified withdrawal). We look to the aggregate
amount of all principal contributions -- in this case $20,000 -- to determine if
the withdrawal is from contributions, and thus non-taxable. In this example,
there is no ($0) taxable income as a result of this withdrawal because the
$15,000 withdrawal is less than the total amount of aggregated contributions
($20,000). If this individual then withdrew $15,000 from his North American
Funds Roth IRA, $5,000 would not be taxable (the remaining aggregate
contributions) and $10,000 would be treated as taxable income for the year of
the withdrawal, subject to regular income taxes and the 10% premature withdrawal
penalty (unless an exception applies).
Note: If passed, a bill currently pending in Congress will change the rules and
the results discussed above. Under the proposed legislation, in general,
separate Roth IRAs established for annual contributions and conversions for
separate years are not aggregated as explained above to determine the tax on
withdrawals. See your tax advisor for more information and the latest
developments.
Taxable withdrawals of dividends and gains from a Roth IRA are treated as
ordinary income. Withdrawals of taxable amounts from a Roth IRA are not eligible
for averaging treatment currently available to certain lump sum distributions
from qualified employer-sponsored retirement plans, nor are such withdrawals
eligible for taxable gains tax treatment.
Your receipt of any taxable withdrawal from your Roth IRA before you attain age
59 1/2 generally will be considered as an early withdrawal and subject to a 10%
penalty tax.
The 10% penalty tax for early withdrawal will not apply if any of the following
exceptions applies:
o The withdrawal was a result of your death or disability.
o The withdrawal is one of a scheduled series of substantially equal
periodic payments for your life or life expectancy (or the joint lives
or life expectancies of you and your beneficiary).
If there is an adjustment to the scheduled series of payments, the 10% penalty
tax will apply. For example, if you begin receiving payments at age 50 under a
withdrawal program providing for substantially equal
<PAGE>
payments over your life expectancy, and at age 58 you elect to withdraw the
remaining amount in your Roth IRA in a lump-sum, the 10% penalty tax will apply
to the lump sum and to the amounts previously paid to you before age 59 1/2 to
the extent they were includable in your taxable income.
o The withdrawal is used to pay eligible higher education expenses. These
are expenses for tuition, fees, books, and supplies required to attend
an institution for post-secondary education. Room and board expenses
are also eligible for a student attending at least half-time. The
student may be you, your spouse, or your child or grandchild. However,
expenses that are paid for with a scholarship or other educational
assistance payment are not eligible expenses.
o The withdrawal is used to cover eligible first time homebuyer expenses
(as described above in the discussion of tax-free withdrawals).
o The withdrawal does not exceed the amount of your deductible medical
expenses for the year (generally speaking, medical expenses paid during
a year are deductible if they are greater than 72% of your adjusted
gross income for that year).
o The withdrawal does not exceed the amount you paid for health insurance
coverage for yourself, your spouse and dependents. This exception
applies only if you have been unemployed and received federal or state
unemployment compensation payments for at least 12 weeks; this
exception applies to distributions during the year in which you
received the unemployment compensation and during the following year,
but not to any distributions received after you have been reemployed
for at least 60 days.
What About the 15 percent Penalty Tax?
The rule imposing a 15% penalty tax on very large withdrawals from tax-favored
arrangements (including IRAs, 403(b) arrangements and qualified
employer-sponsored plans), or on excess amounts remaining in such tax-favored
arrangements at your death, has been repealed. This 15% tax no longer applies.
Important: The discussion of the tax rules for Roth IRAs in this Disclosure
Statement is based upon the best available information. However, Roth IRAs are
new under the tax laws, and the IRS has not issued regulations or rulings on the
operation and tax treatment of Roth IRA accounts. Also, if enacted, legislation
now pending in Congress will change some of the rules. Therefore, you should
consult your tax advisor for the latest developments or for advice about how
maintaining a Roth IRA will affect your personal tax or financial situation.
Also, please see Part Three (below) of this Disclosure Statement which contains
important information applicable to all North American Funds IRAs.
Part Three
Rules for All IRAs (Regular and Roth)
GENERAL INFORMATION
IRA Requirements
All IRAs must meet certain requirements. Contributions generally must be made in
cash. The IRA trustee or custodian must be a bank or other person who has been
approved by the Secretary of the Treasury. Your contributions may not be
invested in life insurance or collectibles or be commingled with other property
except in a common trust or investment fund. Your interest in the account must
be nonforfeitable at all times. You may obtain further information on IRAs from
any district office of the Internal Revenue Service.
<PAGE>
May I Revoke My IRA?
You may revoke a newly established Regular or Roth IRA at any time within seven
days after the date on which you receive this Disclosure Statement. A Regular or
Roth IRA established more than seven days after the date of your receipt of this
Disclosure Statement may not be revoked.
To revoke your Regular or Roth IRA, mail or deliver a written notice of
revocation to the Custodian at the address which appears at the end of this
Disclosure Statement. Mailed notice will be deemed given on the date that it is
postmarked (or, if sent by certified or registered mail, on the date of
certification or registration). If you revoke your Regular or Roth IRA within
the seven-day period, you are entitled to a return of the entire amount you
originally contributed into your Regular or Roth IRA, without adjustment for
such items as sales charges, administrative expenses or fluctuations in market
value.
INVESTMENTS
How Are My IRA Contributions Invested?
You control the investment and reinvestment of contributions to your Regular or
Roth IRA. Investments must be in one or more of the Fund(s) available from time
to time as listed in the Adoption Agreement for your Regular or Roth IRA or in
an investment selection form provided with your Adoption Agreement or from the
Fund Distributor or Service Company. You direct the investment of your IRA by
giving your investment instructions to the Distributor or Service Company for
the Fund(s). Since you control the investment of your Regular or Roth IRA, you
are responsible for any losses; neither the Custodian, the Distributor nor the
Service Company has any responsibility for any loss or diminution in value
occasioned by your exercise of investment control. Transactions for your Regular
or Roth IRA will generally be at the applicable public offering price or net
asset value for shares of the Fund(s) involved next established after the
Distributor or the Service Company (whichever may apply) receives proper
investment instructions from you; consult the current prospectus for the Fund(s)
involved for additional information.
Before making any investment, read carefully the current prospectus for any Fund
you are considering as an investment for your Regular IRA or Roth IRA. The
prospectus will contain information about the Fund's investment objectives and
policies, as well as any minimum initial investment or minimum balance
requirements and any sales, redemption or other charges.
Because you control the selection of investments for your Regular or Roth IRA
and because mutual fund shares fluctuate in value, the growth in value of your
Regular or Roth IRA cannot be guaranteed or projected.
Are There Any Restrictions on the Use of my IRA Assets?
The tax-exempt status of your Regular or Roth IRA will be revoked if you engage
in any of the prohibited transactions listed in Section 4975 of the tax code.
Upon such revocation, your Regular or Roth IRA is treated as distributing its
assets to you. The taxable portion of the amount in your IRA will be subject to
income tax (unless, in the case of a Roth IRA, the requirements for a tax-free
withdrawal are satisfied). Also, you may be subject to a 10% penalty tax on the
taxable amount as a premature withdrawal if you have not yet reached the age of
59 1/2.
Any investment in a collectible (for example, rare stamps) by your Regular or
Roth IRA is treated as a withdrawal; the only exception involves certain types
of government-sponsored coins or certain types of precious metal bullion.
What Is A Prohibited Transaction?
Generally, a prohibited transaction is any improper use of the assets in your
Regular or Roth IRA. Some examples of prohibited transactions are:
o Direct or indirect sale or exchange of property between you and your
Regular or Roth IRA.
<PAGE>
o Transfer of any property from your Regular or Roth IRA to yourself or
from yourself to your Regular or Roth IRA.
Your Regular or Roth IRA could lose its tax exempt status if you use all or part
of your interest in your Regular or Roth IRA as security for a loan or borrow
any money from your Regular or Roth IRA. Any portion of your Regular or Roth IRA
used as security for a loan will be treated as a distribution in the year in
which the money is borrowed. This amount may be taxable and you may also be
subject to the 10% premature withdrawal penalty on the taxable amount.
FEES AND EXPENSES
Custodian's Fees
The following is a list of the fees charged by the Custodian for maintaining
either a Regular IRA or a Roth IRA.
o Account Custodial Fee $10.00
o One annual fee charged for all IRA-type accounts using the same social
security number.
o Fees subject to change on 30 days' notice.
o Fees may be prepaid by separate check to the Custodian.
o Fee will be waived by the Custodian if account(s) value is at least
$25,000 on the Custodian's valuation date.
General Fee Policies
o Fees may be paid by you directly, or the Custodian may deduct them from
your Regular or Roth IRA.
o Fees may be changed upon 30 days written notice to you.
o The full annual maintenance fee will be charged for any calendar year
during which you have a Regular or Roth IRA with us. This fee is not
prorated for periods of less than one full year.
o If provided for in this Disclosure Statement or the Adoption Agreement,
termination fees are charged when your account is closed whether the
funds are distributed to you or transferred to a successor custodian or
trustee.
o The Custodian may charge you for its reasonable expenses for services
not covered by its fee schedule.
Other Charges
There may be sales or other charges associated with the purchase or redemption
of shares of a Fund in which your Regular IRA or Roth IRA is invested. Before
investing, be sure to read carefully the current prospectus of any Fund you are
considering as an investment for your Regular IRA or Roth IRA for a description
of applicable charges.
TAX MATTERS
What IRA Reports does the Custodian Issue?
The Custodian will report all withdrawals to the IRS and the recipient on the
appropriate form. For reporting purposes, a direct transfer of assets to a
successor custodian or trustee is not considered a withdrawal.
The Custodian will report to the IRS the year-end value of your account and the
amount of any rollover (including conversions of a Regular IRA to a Roth IRA) or
regular contribution made during a calendar year, as well as the tax year for
which a contribution is made. Unless the Custodian receives an indication
<PAGE>
from you to the contrary, it will treat any amount as a contribution for the tax
year in which it is received. It is most important that a contribution between
January and April 15th for the prior year be clearly designated as such.
What Tax Information Must I Report to the IRS?
You must file Form 5329 with the IRS for each taxable year for which you made an
excess contribution or you take a premature withdrawal that is subject to the
10% penalty tax, or you withdraw less than the minimum amount required from your
Regular IRA. If your beneficiary fails to make required minimum withdrawals from
your Regular or Roth IRA after your death, your beneficiary may be subject to an
excise tax and be required to file Form 5329.
For Regular IRAs, you must also report each nondeductible contribution to the
IRS by designating it a nondeductible contribution on your tax return. Use Form
8606. In addition, for any year in which you make a nondeductible contribution
or take a withdrawal, you must include additional information on your tax
return. The information required includes: (1) the amount of your nondeductible
contributions for that year; (2) the amount of withdrawals from Regular IRAs in
that year; (3) the amount by which your total nondeductible contributions for
all the years exceed the total amount of your distributions previously excluded
from gross income; and (4) the total value of all your Regular IRAs as of the
end of the year. If you fail to report any of this information, the IRS will
assume that all your contributions were deductible. This will result in the
taxation of the portion of your withdrawals that should be treated as a
nontaxable return of your nondeductible contributions.
Which Withdrawals Are Subject to Withholding?
Roth IRA
Federal income tax will be withheld at a flat rate of 10% of any taxable
withdrawal from your Roth IRA, unless you elect not to have tax withheld.
Withdrawals from a Roth IRA are not subject to the mandatory 20% income tax
withholding that applies to most distributions from qualified plans or 403(b)
accounts that are not directly rolled over to another plan or IRA.
Regular IRA
Federal income tax will be withheld at a flat rate of 10% from any withdrawal
from your Regular IRA, unless you elect not to have tax withheld. Withdrawals
from a Regular IRA are not subject to the mandatory 20% income tax withholding
that applies to most distributions from qualified plans or 403(b) accounts that
are not directly rolled over to another plan or IRA.
ACCOUNT TERMINATION
You may terminate your Regular IRA or Roth IRA at any time after its
establishment by sending a completed withdrawal form (or other withdrawal
instructions in a form acceptable to the Custodian), or a transfer authorization
form, to:
NORTH AMERICAN FUNDS
P.O. Box 8505
Boston, MA 02266-8505
Your Regular IRA or Roth IRA with North American Funds will terminate upon the
first to occur of the following:
o The date your properly executed withdrawal form or instructions (as
described above) withdrawing your total Regular IRA or Roth IRA balance
is received and accepted by the Custodian or, if later, the termination
date specified in the withdrawal form.
o The date the Regular IRA or Roth IRA ceases to qualify under the tax
code. This will be deemed a termination.
<PAGE>
o The transfer of the Regular IRA or Roth IRA to another
custodian/trustee.
o The rollover of the amounts in the Regular IRA or Roth IRA to another
custodian/trustee.
Any outstanding fees must be received prior to such a termination of your
account.
The amount you receive from your IRA upon termination of the account will be
treated as a withdrawal, and thus the rules relating to Regular IRA or Roth IRA
withdrawals will apply. For example, if the IRA is terminated before you reach
age 59 1/2, the 10% early withdrawal penalty may apply to the taxable amount you
receive.
IRA DOCUMENTS
Regular IRA
The terms contained in Articles I to VII of Part One of the State Street Bank
and Trust Company Universal Individual Retirement Custodial Account document
have been promulgated by the IRS in Form 5305-A for use in establishing a
Regular IRA Custodial Account that meets the requirements of Code Section 408(a)
for a valid Regular IRA. This IRS approval relates only to the form of Articles
I to VII and is not an approval of the merits of the Regular IRA or of any
investment permitted by the Regular IRA.
Roth IRA
The terms contained in Articles I to VII of Part Two of the State Street Bank
and Trust Company Universal Individual Retirement Account Custodial Agreement
have been promulgated by the IRS in Form 5305-RA for use in establishing a Roth
IRA Custodial Account that meets the requirements of Code Section 408A for a
valid Roth IRA. This IRS approval relates only to the form of Articles I to VII
and is not an approval of the merits of the Roth IRA or of any investment
permitted by the Roth IRA.
Based on our legal advice relating to current tax laws and IRS meetings, State
Street Bank believes that the use of a Universal Individual Retirement Account
Information Kit such as this, containing information and documents for both a
Regular IRA or a Roth IRA, will be acceptable to the IRS. However, if the IRS
makes a ruling, or if Congress enacts legislation, regarding the use of
different documentation, State Street Bank will forward to you new documentation
for your Regular IRA or a Roth IRA (as appropriate) for you to read and, if
necessary, an appropriate new Adoption Agreement to sign. By adopting a Regular
IRA or a Roth IRA using these materials, you acknowledge this possibility and
agree to this procedure if necessary. In all cases, to the extent permitted
State Street Bank will treat your IRA as being opened on the date your account
was opened using the Adoption Agreement in this Kit.
ADDITIONAL INFORMATION
For additional information you may write to the following address or call the
following telephone number.
NORTH AMERICAN FUNDS
P.O. Box 8505
Boston, MA 02266-8505
800-872-8037
State Street Bank and Trust Company
Universal IRA Offered By
North American Funds
Custodial Agreement
Part One
Provisions Applicable to Regular IRAs
<PAGE>
The following provisions of Articles I to VII are in the form promulgated by the
Internal Revenue Service in Form 5305-A for use in establishing an individual
retirement custodial account.
Article I.
The Custodian may accept additional cash contributions on behalf of the
Depositor for a tax year of the Depositor. The total cash contributions are
limited to $2,000 for the tax year unless the contribution is a rollover
contribution described in section 402(c) (but only after December 31, 1992),
403(a)(4), 403(b)(8), 408(d)(3), or an employer contribution to a simplified
employee pension plan as described in section 408(k). Rollover contributions
before January 1, 1993 include rollovers described in section 403(a)(5),
403(a)(6), 403(a)(7), 403(a)(4), 403(b)(8) or 408(d)(3) of the Code or an
employer contribution to a simplified employee pension plan as described in
section 408(k).
Article II.
The Depositor's interest in the balance in the custodial account is
nonforfeitable.
Article III.
1. No part of the custodial funds may be invested in life insurance
contracts, nor may the assets of the custodial account be commingled
with other property except in a common trust fund or common investment
fund (within the meaning of section 408(a)(5) of the Code).
2. No part of the custodial funds may be invested in collectibles (within
the meaning of section 408(m) except as otherwise permitted by section
408(m)(3) which provides an exception for certain gold and silver coins
and coins issued under the laws of any state.
Article IV.
1. Notwithstanding any provisions of this agreement to the contrary, the
distribution of the Depositor's interest in the custodial account shall
be made in accordance with the following requirements and shall
otherwise comply with section 408(a)(6) and Proposed Regulations
section 1.408-8, including the incidental death benefit provisions of
Proposed Regulations section 1.401(a)(9)-2, the provisions of which are
incorporated by reference.
2. Unless otherwise elected by the time distributions are required to
begin to the Depositor under paragraph 3, or to the surviving spouse
under paragraph 4, other than in the case of a life annuity, life
expectancies shall be recalculated annually. Such election shall be
irrevocable as to the Depositor and the surviving spouse and shall
apply to all subsequent years. The life expectancy of a nonspouse
beneficiary may not be recalculated.
3. The Depositor's entire interest in the custodial account must be, or
begin to be, distributed by the Depositor's required beginning date,
the April 1 following the calendar year end in which the Depositor
reaches age 70 1/2. By that date, the Depositor may elect, in a manner
acceptable to the Custodian, to have the balance in the custodial
account distributed in:
a) A single-sum payment.
b) An annuity contract that provides equal or substantially equal
monthly, quarterly, or annual payments over the life of the
Depositor.
c) An annuity contract that provides equal or substantially equal
monthly, quarterly, or annual payments over the joint and last
survivor lives of the Depositor and his or her designated
beneficiary.
d) Equal or substantially equal annual payments over a specified
period that may not be longer than the Depositor's life
expectancy.
<PAGE>
e) Equal or substantially equal annual payments over a specified
period that may not be longer than the joint life and last
survivor expectancy of the Depositor and his or her designated
beneficiary.
4. If the Depositor dies before his or her entire interest is distributed to him
or her, the entire remaining interest will be distributed as follows:
a) If the Depositor dies on or after distribution of his or her
interest has begun, distribution must continue to be made in
accordance with paragraph 3.
b) If the Depositor dies before distribution of his or her interest
has begun, the entire remaining interest will, at the election of
the Depositor or, if the Depositor has not so elected, at the
election of the beneficiary or beneficiaries, either
i) Be distributed by the December 31 of the year containing the
fifth anniversary of the Depositor's death, or
ii) Be distributed in equal or substantially equal payments over
the life or life expectancy of the designated beneficiary or
beneficiaries starting by December 31 of the year following
the year of the Depositor's death. If, however, the
beneficiary is the Depositor's surviving spouse, then this
distribution is not required to begin before December 31 of
the year in which the Depositor would have turned age
70 1/2.
c) Except where distribution in the form of an annuity meeting the
requirements of section 403(b)(3) and its related regulations has
commenced irrevocably, distributions are treated as having begun
on the Depositor's required beginning date, even though payments
may actually have been made before that date.
d) If the Depositor dies before his or her entire interest has been
distributed and if the beneficiary is other than the surviving
spouse, no additional cash contributions or rollover
contributions may be accepted in the account.
5. In the case of distribution over life expectancy in equal or substantially
equal annual payments, to determine the minimum annual payment for each year,
divide the Depositor's entire interest in the custodial account as of the close
of business on December 31 of the preceding year by the life expectancy of the
Depositor (or the joint life and last survivor expectancy of the Depositor and
the Depositor's designated beneficiary, or the life expectancy of the designated
beneficiary, whichever applies.) In the case of distributions under paragraph 3,
determine the initial life expectancy (or joint life and last survivor
expectancy) using the attained ages of the Depositor and designated beneficiary
as of their birthdays in the year the Depositor reaches age 70 1/2. In the case
of a distribution in accordance with paragraph 4(b)(ii), determine life
expectancy using the attained age of the designated beneficiary as of the
beneficiary's birthday in the year distributions are required to commence.
6. The owner of two or more individual retirement accounts may use the
"alternative method" described in Notice 88-38, 1988-1 C.B. 524, to satisfy the
minimum distribution requirements described above. This method permits an
individual to satisfy these requirements by taking from one individual
retirement account the amount required to satisfy the requirement for another.
Article V.
1. The Depositor agrees to provide the Custodian with information necessary for
the Custodian to prepare any reports required under section 408(i) and
Regulations sections 1.408-5 and 1.408-6.
2. The Custodian agrees to submit reports to the Internal Revenue Service and
the Depositor as prescribed by the Internal Revenue Service.
Article VI.
<PAGE>
Notwithstanding any other articles which may be added or incorporated, the
provisions of Articles I through III and this sentence will be controlling. Any
additional articles that are not consistent with section 408(a) and the related
regulations will be invalid.
Article VII.
This agreement will be amended from time to time to comply with the provisions
of the Code and related regulations. Other amendments may be made with the
consent of the persons whose signatures appear on the Adoption Agreement.
Part Two
Provisions Applicable to Roth IRAs
The following provisions of Articles I to VII are in the form promulgated by the
Internal Revenue Service in Form 5305-RA for use in establishing a Roth
Individual Retirement Custodial Account.
Article I.
1. If this Roth IRA is not designated as a Roth Conversion IRA, then, except in
the case of a rollover contribution described in section 408A(e), the Custodian
will accept only cash contributions and only up to a maximum amount of $2,000
for any tax year of the Depositor.
2. If this Roth IRA is designated as a Roth Conversion IRA, no contributions
other than IRA Conversion Contributions made during the same tax year will be
accepted.
Article IA.
The $2,000 limit described in Article I is gradually reduced to $0 between
certain levels of adjusted gross income (AGI). For a single Depositor, the
$2,000 annual contribution is phased out between AGI of $95,000 and $110,000;
for a married Depositor who files jointly, between AGI of $150,000 and $160,000;
and for a married Depositor who files separately, between $0 and $10,000. In
case of a conversion, the Custodian will not accept IRA Conversion Contributions
in a tax year if the Depositor's AGI for that tax year exceeds $100,000 or if
the Depositor is married and files a separate return. Adjusted gross income is
defined in section 408A(c) (3) and does not include IRA Conversion
Contributions.
Article II.
The Depositor's interest in the balance in the custodial account is
nonforfeitable.
Article III.
1. No part of the custodial funds may be invested in life insurance contracts,
nor may the assets of the custodial account be commingled with other property
except in a common trust fund or common investment fund (within the meaning of
section 403(a)(5),
2. No part of the custodial funds may be invested in collectibles (within the
meaning of section 408(m)) except as otherwise permitted by section 408(m)(3),
which provides an exception for certain gold, silver, and platinum coins, coins
issued under the laws of any state, and certain bullion.
Article IV.
1. If the Depositor dies before his or her entire interest is distributed to him
or her and the Depositor's surviving spouse is not the sole beneficiary, the
entire remaining interest will, at the election of the Depositor or, if the
Depositor has not so elected, at the election of the beneficiary or
beneficiaries, either:
<PAGE>
a) Be distributed by December 31 of the year containing the fifth
anniversary of the Depositor's death, or
b) Be distributed over the life expectancy of the designated
beneficiary starting no later than December 31 of the year
following the year of the Depositor's death.
If distributions do not begin by the date described in b), distribution method
a) will apply.
2. In the case of distribution method 1(b) above, to determine the minimum
annual payment for each year, divide the Depositor's entire interest in the
trust as of the close of business on December 31 of the preceding year by the
life expectancy of the designated beneficiary using the attained age of the
designated beneficiary as of the beneficiary's birthday in the year
distributions are required to commence and subtract 1 for each subsequent year.
3. If the Depositor's spouse is the sole beneficiary on the Depositor's date of
death, such spouse will then be treated as the Depositor.
Article V.
1. The Depositor agrees to provide the Custodian with information necessary for
the Custodian to prepare any reports required under sections 408(i) and
408A(d)(3)(E), and Regulations section 1.408-5 and 1.408-6, and under guidance
published by the Internal Revenue Service.
2. The Custodian agrees to submit reports to the Internal Revenue Service and
the Depositor as prescribed by the Internal Revenue Service.
Article VI.
Notwithstanding any other articles which may be added or incorporated, the
provisions of Articles I through IV and this sentence will be controlling. Any
additional articles that are not consistent with section 408A, the related
regulations, and other published guidance will be invalid.
Article VII.
This agreement will be amended from time to time to comply with the provisions
of the Code, related regulations, and other published guidance. Other amendments
may be made with the consent of the persons whose signatures appear below.
Part Three:
Provisions Applicable to Both
Regular IRAs and Roth IRAs
Article VIII.
1. As used in this Article VIII the following terms have the following meanings:
"Account" or "Custodial Account" means the individual retirement account
established using the terms of either Part One or Part Two and, in either event,
Part Three of this State Street Bank and Trust Company Universal Individual
Retirement Account Custodial Agreement and the Adoption Agreement signed by the
Depositor. The Account may be a Regular Individual Retirement Account or a Roth
Individual Retirement Account, as specified by the Depositor. See Section 24
below.
"Custodian" means State Street Bank and Trust Company.
<PAGE>
"Fund" means any registered investment company which is advised, sponsored or
distributed by Sponsor; provided, however, that such a mutual fund or registered
investment company must be legally offered for sale in the state of the
Depositor's residence.
"Distributor" means the entity which has a contract with the Fund(s) to serve as
distributor of the shares of such Fund(s).
In any case where there is no Distributor, the duties assigned hereunder to the
Distributor may be performed by the Fund(s) or by an entity that has a contract
to perform management or investment advisory services for the Fund(s).
"Service Company" means any entity employed by the Custodian or the Distributor,
including the transfer agent for the Fund(s), to perform various administrative
duties of either the Custodian or the Distributor.
In any case where there is no Service Company, the duties assigned hereunder to
the Service Company will be performed by the Distributor (if any) or by an
entity specified in the second preceding paragraph.
"Sponsor" means North American Funds.
2. The Depositor may revoke the Custodial Account established hereunder by
mailing or delivering a written notice of revocation to the Custodian within
seven days after the Depositor receives the Disclosure Statement related to the
Custodial Account. Mailed notice is treated as given to the Custodian on date of
the postmark (or on the date of Post Office certification or registration in the
case of notice sent by certified or registered mail). Upon timely revocation,
the Depositor's initial contribution will be returned, without adjustment for
administrative expenses, commissions or sales charges, fluctuations in market
value or other changes.
The Depositor may certify in the Adoption Agreement that the Depositor received
the Disclosure Statement related to the Custodial Account at least seven days
before the Depositor signed the Adoption Agreement to establish the Custodial
Account, and the Custodian may rely upon such certification.
3. All contributions to the Custodial Account shall be invested and reinvested
in full and fractional shares of one or more Funds. Such investments shall be
made in such proportions and/or in such amounts as Depositor from time to time
in the Adoption Agreement or by other written notice to the Service Company (in
such form as may be acceptable to the Service Company) may direct.
The Service Company shall be responsible for promptly transmitting all
investment directions by the Depositor for the purchase or sale of shares of one
or more Funds hereunder to the Funds' transfer agent for execution. However, if
investment directions with respect to the investment of any contribution
hereunder are not received from the Depositor as required or, if received, are
unclear or incomplete in the opinion of the Service Company, the contribution
will be returned to the Depositor, or will be held uninvested (or invested in a
money market fund if available) pending clarification or completion by the
Depositor, in either case without liability for interest or for loss of income
or appreciation. If any other directions or other orders by the Depositor with
respect to the sale or purchase of shares of one or more Funds for the Custodial
Account are unclear or incomplete in the opinion of the Service Company, the
Service Company will refrain from carrying out such investment directions or
from executing any such sale or purchase, without liability for loss of income
or for appreciation or depreciation of any asset, pending receipt of
clarification or completion from the Depositor.
All investment directions by Depositor will be subject to any minimum initial or
additional investment or minimum balance rules applicable to a Fund as described
in its prospectus.
All dividends and capital gains or other distributions received on the shares of
any Fund held in the Depositor's Account shall be (unless received in additional
shares) reinvested in full and fractional shares of such Fund (or of any other
Fund offered by the Sponsor, if so directed).
<PAGE>
4. Subject to the minimum initial or additional investment, minimum balance and
other exchange rules applicable to a Fund, the Depositor may at any time direct
the Service Company to exchange all or a specified portion of the shares of a
Fund in the Depositor's Account for shares and fractional shares of one or more
other Funds. The Depositor shall give such directions by written notice
acceptable to the Service Company, and the Service Company will process such
directions as soon as practicable after receipt thereof (subject to the second
paragraph of Section 3 of this Article VIII).
5. Any purchase or redemption of shares of a Fund for or from the Depositor's
Account will be effected at the public offering price or net asset value of such
Fund (as described in the then effective prospectus for such Fund) next
established after the Service Company has transmitted the Depositor's investment
directions to the transfer agent for the Fund(s).
Any purchase, exchange, transfer or redemption of shares of a Fund for or from
the Depositor's Account will be subject to any applicable sales, redemption or
other charge as described in the then effective prospectus for such Fund.
6. The Service Company shall maintain adequate records of all purchases or sales
of shares of one or more Funds for the Depositor's Custodial Account. Any
account maintained in connection herewith shall be in the name of the Custodian
for the benefit of the Depositor. All assets of the Custodial Account shall be
registered in the name of the Custodian or of a suitable nominee. The books and
records of the Custodian shall show that all such investments are part of the
Custodial Account.
The Custodian shall maintain or cause to be maintained adequate records
reflecting transactions of the Custodial Account. In the discretion of the
Custodian, records maintained by the Service Company with respect to the Account
hereunder will be deemed to satisfy the Custodian's recordkeeping
responsibilities therefor. The Service Company agrees to furnish the Custodian
with any information the Custodian requires to carry out the Custodian's
recordkeeping responsibilities.
7. Neither the Custodian nor any other party providing services to the Custodial
Account will have any responsibility for rendering advice with respect to the
investment and reinvestment of Depositor's Custodial Account, nor shall such
parties be liable for any loss or diminution in value which results from
Depositor's exercise of investment control over his Custodial Account. Depositor
shall have and exercise exclusive responsibility for and control over the
investment of the assets of his Custodial Account, and neither Custodian nor any
other such party shall have any duty to question his directions in that regard
or to advise him regarding the purchase, retention or sale of shares of one or
more Funds for the Custodial Account.
8. The Depositor may in writing appoint an investment advisor with respect to
the Custodial Account on a form acceptable to the Custodian and the Service
Company. The investment advisor's appointment will be in effect until written
notice to the contrary is received by the Custodian and the Service Company.
While an investment advisor's appointment is in effect, the investment advisor
may issue investment directions or may issue orders for the sale or purchase of
shares of one or more Funds to the Service Company, and the Service Company will
be fully protected in carrying out such investment directions or orders to the
same extent as if they had been given by the Depositor.
The Depositor's appointment of any investment advisor will also be deemed to be
instructions to the Custodian and the Service Company to pay such investment
advisor's fees to the investment advisor from the Custodial Account hereunder
without additional authorization by the Depositor or the Custodian.
9. Distribution of the assets of the Custodial Account shall be made at such
time and in such form as Depositor (or the Beneficiary if Depositor is deceased)
shall elect by written order to the Custodian. Depositor acknowledges that any
distribution of a taxable amount from the Custodial Account (except for
distribution on account of Depositor's disability or death, return of an "excess
contribution" referred to in Code Section 4973, or a "rollover" from this
Custodial Account) made earlier than age 59 1/2 may subject Depositor to an
"additional tax on early distributions" under Code Section 72(t) unless an
exception to such additional tax is applicable. For that purpose, Depositor will
be considered disabled if Depositor can
<PAGE>
prove, as provided in Code Section 72(m) (7), that Depositor is unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or be of
long-continued and indefinite duration.
It is the responsibility of the Depositor (or the Beneficiary) by appropriate
distribution instructions to the Custodian to insure that any applicable
distribution requirements of Code Section 408(a) (9) and Article IV above are
met. If the Depositor (or Beneficiary) does not direct the Custodian to make
distributions from the Custodial Account by the time that such distributions are
required to commence in accordance with such distribution requirements, the
Custodian (and Service Company) shall assume that the Depositor (or Beneficiary)
is meeting the minimum distribution requirements from another individual
retirement arrangement maintained by the Depositor (or Beneficiary) and the
Custodian and Service Company shall be fully protected in so doing. The
Depositor (or the Depositor's surviving spouse) may elect to comply with the
distribution requirements in Article IV using the recalculation of life
expectancy method, or may elect that the life expectancy of the Depositor and/or
the Depositor's surviving spouse, as applicable, will not be recalculated; any
such election may be in such form as the Depositor (or surviving spouse)
provides (including the calculation of minimum distribution amounts in
accordance with a method that does not provide for recalculation of the life
expectancy of one or both of the Depositor and surviving spouse and instructions
for withdrawals to the Custodian in accordance with such method).
Notwithstanding paragraph 2 of Article IV, unless an election to have life
expectancies recalculated annually is made by the time distributions are
required to begin, life expectancies shall not be recalculated. Neither the
Custodian nor any other party providing services to the Custodial Account
assumes any responsibility for the tax treatment of any distribution from the
Custodial Account; such responsibility rests solely with the person ordering the
distribution.
10. The Custodian assumes (and shall have) no responsibility to make any
distribution except upon the written order of Depositor (or Beneficiary if
Depositor is deceased) containing such information as the Custodian may
reasonably request. Also, before making any distribution or honoring any
assignment of the Custodial Account, Custodian shall be furnished with any and
all applications, certificates, tax waivers, signature guarantees and other
documents (including proof of any legal representative's authority) deemed
necessary or advisable by Custodian, but Custodian shall not be responsible for
complying with any order or instruction which appears on its face to be genuine,
or for refusing to comply if not satisfied it is genuine, and Custodian has no
duty of further inquiry. Any distributions from the Account may be mailed,
first-class postage prepaid, to the last known address of the person who is to
receive such distribution, as shown on the Custodian's records, and such
distribution shall to the extent thereof completely discharge the Custodian's
liability for such payment.
11. a) The term "Beneficiary" means the person or persons designated as such by
the "designating person" (as defined below) on a form acceptable to the
Custodian for use in connection with the Custodial Account, signed by the
designating person, and filed with the Custodian. The form may name individuals,
trusts, estates, or other entities as either primary or contingent
beneficiaries. However, if the designation does not effectively dispose of the
entire Custodial Account as of the time distribution is to commence, the term
"Beneficiary" shall then mean the designating person's estate with respect to
the assets of the Custodial Account not disposed of by the designation form. The
form last accepted by the Custodian before such distribution is to commence,
provided it was received by the Custodian (or deposited in the U.S. Mail or with
a reputable delivery service) during the designating person's lifetime, shall be
controlling and, whether or not fully dispositive of the Custodial Account,
thereupon shall revoke all such forms previously filed by that person. The term
"designating person" means Depositor during his/her lifetime; after Depositor's
death, it also means Depositor's spouse, but only if the spouse elects to treat
the Custodial Account as the spouse's own Custodial Account in accordance with
applicable provisions of the Code.
b) When and after distributions from the Custodial Account to Depositor's
Beneficiary commence, all rights and obligations assigned to Depositor hereunder
shall inure to, and be enjoyed and exercised by, Beneficiary instead of
Depositor.
<PAGE>
12. a) The Depositor agrees to provide information to the Custodian at such time
and in such manner as may be necessary for the Custodian to prepare any reports
required under Section 408(i) or Section 408A(d) (3) (E) of the Code and the
regulations thereunder or otherwise.
b) The Custodian or the Service Company will submit reports to the Internal
Revenue Service and the Depositor at such time and manner and containing such
information as is prescribed by the Internal Revenue Service.
c) The Depositor, Custodian and Service Company shall furnish to each other such
information relevant to the Custodial Account as may be required under the Code
and any regulations issued or forms adopted by the Treasury Department
thereunder or as may otherwise be necessary for the administration of the
Custodial Account.
d) The Depositor shall file any reports to the Internal Revenue Service which
are required of him by law (including Form 5329), and neither the Custodian nor
Service Company shall have any duty to advise Depositor concerning or monitor
Depositor's compliance with such requirement.
13. a) Depositor retains the right to amend this Custodial Account document in
any respect at any time, effective on a stated date which shall be at least 60
days after giving written notice of the amendment (including its exact terms) to
Custodian by registered or certified mail, unless Custodian waives notice as to
such amendment. If the Custodian does not wish to continue serving as such under
this Custodial Account document as so amended, it may resign in accordance with
Section 17 below.
b) Depositor delegates to the Custodian the Depositor's right so to amend,
provided (i) the Custodian does not change the investments available under this
Custodial Agreement and (ii) the Custodian amends in the same manner all
agreements comparable to this one, having the same Custodian, permitting
comparable investments, and under which such power has been delegated to it;
this includes the power to amend retroactively if necessary or appropriate in
the opinion of the Custodian in order to conform this Custodial Account to
pertinent provisions of the Code and other laws or successor provisions of law,
or to obtain a governmental ruling that such requirements are met, to adopt a
prototype or master form of agreement in substitution for this Agreement, or as
otherwise may be advisable in the opinion of the Custodian. Such an amendment by
the Custodian shall be communicated in writing to Depositor, and Depositor shall
be deemed to have consented thereto unless, within 30 days after such
communication to Depositor is mailed, Depositor either (i) gives Custodian a
written order for a complete distribution or transfer of the Custodial Account,
or (ii) removes the Custodian and appoints a successor under Section 17 below.
Pending the adoption of any amendment necessary or desirable to conform this
Custodial Account document to the requirements of any amendment to any
applicable provision of the Internal Revenue Code or regulations or rulings
thereunder, the Custodian and the Service Company may operate the Depositor's
Custodial Account in accordance with such requirements to the extent that the
Custodian and/or the Service Company deem necessary to preserve the tax benefits
of the Account.
c) Notwithstanding the provisions of subsections (a) and (b) above, no amendment
shall increase the responsibilities or duties of Custodian without its prior
written consent.
d) This Section 13 shall not be construed to restrict the Custodian's right to
substitute fee schedules in the manner provided by Section 16 below, and no such
substitution shall be deemed to be an amendment of this Agreement.
14. a) Custodian shall terminate the Custodial Account if this Agreement is
terminated or if, within 30 days (or such longer time as Custodian may agree)
after resignation or removal of Custodian under Section 17, Depositor or
Sponsor, as the case may be, has not appointed a successor which has accepted
such appointment. Termination of the Custodial Account shall be effected by
distributing all assets thereof in a single payment in cash or in kind to
Depositor, subject to Custodian's right to reserve funds as provided in Section
17.
<PAGE>
b) Upon termination of the Custodial Account, this custodial account document
shall have no further force and effect (except for Sections 15(f), 17(b) and (c)
hereof which shall survive the termination of the Custodial Account and this
document), and Custodian shall be relieved from all further liability hereunder
or with respect to the Custodial Account and all assets thereof so distributed.
15. a) In its discretion, the Custodian may appoint one or more contractors or
service providers to carry out any of its functions and may compensate them from
the Custodial Account for expenses attendant to those functions. In the event of
such appointment, all rights and privileges of the Custodian under this
Agreement shall pass through to such contractors or service providers who shall
be entitled to enforce them as if a named party.
b) The Service Company shall be responsible for receiving all instructions,
notices, forms and remittances from Depositor and for dealing with or forwarding
the same to the transfer agent for the Fund(s).
c) The parties do not intend to confer any fiduciary duties on Custodian or
Service Company (or any other party providing services to the Custodial
Account), and none shall be implied. Neither shall be liable (or assumes any
responsibility) for the collection of contributions, the proper amount, time or
tax treatment of any contribution to the Custodial Account or the propriety of
any contributions under this Agreement, or the purpose, time, amount (including
any minimum distribution amounts), tax treatment or propriety of any
distribution hereunder, which matters are the sole responsibility of Depositor
and Depositor's Beneficiary.
d) Not later than 60 days after the close of each calendar year (or after the
Custodian's resignation or removal), the Custodian or Service Company shall file
with Depositor a written report or reports reflecting the transactions effected
by it during such period and the assets of the Custodial Account at its close.
Upon the expiration of 60 days after such a report is sent to Depositor (or
Beneficiary), the Custodian or Service Company shall be forever released and
discharged from all liability and accountability to anyone with respect to
transactions shown in or reflected by such report except with respect to any
such acts or transactions as to which Depositor shall have filed written
objections with the Custodian or Service Company within such 60 day period.
e) The Service Company shall deliver, or cause to be delivered, to Depositor all
notices, prospectuses, financial statements and other reports to shareholders,
proxies and proxy soliciting materials relating to the shares of the Funds(s)
credited to the Custodial Account. No shares shall be voted, and no other action
shall be taken pursuant to such documents, except upon receipt of adequate
written instructions from Depositor.
f) Depositor shall always fully indemnify Service Company, Distributor, the
Fund(s), Sponsor and Custodian and save them harmless from any and all liability
whatsoever which may arise either (i) in connection with this Agreement and the
matters which it contemplates, except that which arises directly out of the
Service Company's, Distributor's, Fund's, Sponsor's or Custodian's bad faith,
gross negligence or willful misconduct, (ii) with respect to making or failing
to make any distribution, other than for failure to make distribution in
accordance with an order therefor which is in full compliance with Section 10,
or (iii) actions taken or omitted in good faith by such parties. Neither Service
Company nor Custodian shall be obligated or expected to commence or defend any
legal action or proceeding in connection with this Agreement or such matters
unless agreed upon by that party and Depositor, and unless fully indemnified for
so doing to that party's satisfaction.
g) The Custodian and Service Company shall each be responsible solely for
performance of those duties expressly assigned to it in this Agreement, and
neither assumes any responsibility as to duties assigned to anyone else
hereunder or by operation of law.
h) The Custodian and Service Company may each conclusively rely upon and shall
be protected in acting upon any written order from Depositor or Beneficiary, or
any investment advisor appointed under Section 8, or any other notice, request,
consent, certificate or other instrument or paper believed by it to be genuine
and to have been properly executed, and so long as it acts in good faith, in
taking or omitting to take any
<PAGE>
other action in reliance thereon. In addition, Custodian will carry out the
requirements of any apparently valid court order relating to the Custodial
Account and will incur no liability or responsibility for so doing.
16. a) The Custodian, in consideration of its services under this Agreement,
shall receive the fees specified on the applicable fee schedule. The fee
schedule originally applicable shall be the one specified in the Adoption
Agreement or Disclosure Statement, as applicable. The Custodian may substitute a
different fee schedule at any time upon 30 days' written notice to Depositor.
The Custodian shall also receive reasonable fees for any services not
contemplated by any applicable fee schedule and either deemed by it to be
necessary or desirable or requested by Depositor.
b) Any income, gift, estate and inheritance taxes and other taxes of any kind
whatsoever, including transfer taxes incurred in connection with the investment
or reinvestment of the assets of the Custodial Account, that may be levied or
assessed in respect to such assets, and all other administrative expenses
incurred by the Custodian in the performance of its duties (including fees for
legal services rendered to it in connection with the Custodial Account) shall be
charged to the Custodial Account. If the Custodian is required to pay any such
amount, the Depositor (or Beneficiary) shall promptly upon notice thereof
reimburse the Custodian.
c) All such fees and taxes and other administrative expenses charged to the
Custodial Account shall be collected either from the amount of any contribution
or distribution to or from the Account, or (at the option of the person entitled
to collect such amounts) to the extent possible under the circumstances by the
conversion into cash of sufficient shares of one or more Funds held in the
Custodial Account (without liability for any loss incurred thereby).
Notwithstanding the foregoing, the Custodian or Service Company may make demand
upon the Depositor for payment of the amount of such fees, taxes and other
administrative expenses. Fees which remain outstanding after 60 days may be
subject to a collection charge.
17. a) Upon 30 days' prior written notice to the Custodian, Depositor or
Sponsor, as the case may be, may remove it from its office hereunder. Such
notice, to be effective, shall designate a successor custodian and shall be
accompanied by the successor's written acceptance. The Custodian also may at any
time resign upon 30 days' prior written notice to Sponsor, whereupon the Sponsor
shall notify the Depositor (or Beneficiary) and shall appoint a successor to the
Custodian. In connection with its resignation hereunder, the Custodian may, but
is not required to, designate a successor custodian by written notice to the
Sponsor or Depositor (or Beneficiary), and the Sponsor or Depositor (or
Beneficiary) will be deemed to have consented to such successor unless the
Sponsor or Depositor (or Beneficiary) designates a different successor custodian
and provides written notice thereof together with such a different successor's
written acceptance by such date as the Custodian specifies in its original
notice to the Sponsor or Depositor (or Beneficiary) (provided that the Sponsor
or Depositor (or Beneficiary) will have a minimum of 30 days to designate a
different successor).
b) The successor custodian shall be a bank, insured credit union, or other
person satisfactory to the Secretary of the Treasury under Code Sec. 408(a)(2).
Upon receipt by Custodian of written acceptance by its successor of such
successor's appointment, Custodian shall transfer and pay over to such successor
the assets of the Custodial Account and all records (or copies thereof) of
Custodian pertaining thereto, provided that the successor custodian agrees not
to dispose of any such records without the Custodian's consent. Custodian is
authorized, however, to reserve such sum of money or property as it may deem
advisable for payment of all its fees, compensation, costs, and expenses, or for
payment of any other liabilities constituting a charge on or against the assets
of the Custodial Account or on or against the Custodian, with any balance of
such reserve remaining after the payment of all such items to be paid over to
the successor custodian.
c) Any Custodian shall not be liable for the acts or omissions of its
predecessor or its successor.
18. References herein to the "Internal Revenue Code" or "Code" and sections
thereof shall mean the same as amended from time to time, including successors
to such sections.
<PAGE>
19. Except where otherwise specifically required in this Agreement, any notice
from Custodian to any person provided for in this Agreement shall be effective
if sent by first-class mail to such person at that person's last address on the
Custodian's records.
20. Depositor or Depositor's Beneficiary shall not have the right or power to
anticipate any part of the Custodial Account or to sell, assign, transfer,
pledge or hypothecate any part thereof. The Custodial Account shall not be
liable for the debts of Depositor or Depositor's Beneficiary or subject to any
seizure, attachment, execution or other legal process in respect thereof except
to the extent required by law. At no time shall it be possible for any part of
the assets of the Custodial Account to be used for or diverted to purposes other
than for the exclusive benefit of the Depositor or his/her Beneficiary except to
the extent required by law.
21. When accepted by the Custodian, this Agreement is accepted in and shall be
construed and administered in accordance with the laws of the state where the
principal offices of the Custodian are located. Any action involving the
Custodian brought by any other party must be brought in a state or federal court
in such state.
If in the Adoption Agreement, Depositor designates that the Custodial Account is
a Regular IRA, this Agreement is intended to qualify under Code Section 408(a)
as an individual retirement Custodial Account and to entitle Depositor to the
retirement savings deduction under Code Section 219 if available. If in the
Adoption Agreement Depositor designates that the Custodial Account is a Roth
IRA, this Agreement is intended to qualify under Code Section 408A as a Roth
individual retirement Custodial Account and to entitle Depositor to the tax-free
withdrawal of amounts from the Custodial Account to the extent permitted in such
Code section.
If any provision hereof is subject to more than one interpretation or any term
used herein is subject to more than one construction, such ambiguity shall be
resolved in favor of that interpretation or construction which is consistent
with the intent expressed in whichever of the two preceding sentences is
applicable.
However, the Custodian shall not be responsible for whether or not such
intentions are achieved through use of this Agreement, and Depositor is referred
to Depositor's attorney for any such assurances.
22. Depositor should seek advice from Depositor's attorney regarding the legal
consequences (including but not limited to federal and state tax matters) of
entering into this Agreement, contributing to the Custodial Account, and
ordering Custodian to make distributions from the Account. Depositor
acknowledges that Custodian and Service Company (and any company associated
therewith) are prohibited by law from rendering such advice.
23. If any provision of any document governing the Custodial Account provides
for notice, instructions or other communications from one party to another in
writing, to the extent provided for in the procedures of the Custodian, Service
Company or another party, any such notice, instructions or other communications
may be given by telephonic, computer, other electronic or other means, and the
requirement for written notice will be deemed satisfied.
24. The legal documents governing the Custodial Account are as follows:
a) If in the Adoption Agreement the Depositor designated the Custodial Account
as a Regular IRA under Code Section 408(a), the provisions of Part One and Part
Three of this Agreement and the provisions of the Adoption Agreement are the
legal documents governing the Depositor's Custodial Account.
b) If in the Adoption Agreement the Depositor designated the Custodial Account
as a Roth IRA under Code Section 408A, the provisions of Part Two and Part Three
of this Agreement and the provisions of the Adoption Agreement are the legal
documents governing the Depositor's Custodial Account.
<PAGE>
c) In the Adoption Agreement the Depositor must designate the Custodian Account
as either a Roth IRA or a Regular IRA, and a separate account will be
established for such IRA. One Custodial Account may not serve as a Roth IRA and
a Regular IRA (through the use of subaccounts or otherwise).
25. Articles I through VII of Part One of this Agreement are in the form
promulgated by the Internal Revenue Service as Form 5305-A. It is anticipated
that, if and when the Internal Revenue Service promulgates changes to Form
5305-A, the Custodian will amend this Agreement correspondingly.
Articles I through VII of Part Two of this Agreement are in the form promulgated
by the Internal Revenue Service as Form 5305-RA. It is anticipated that, if and
when the Internal Revenue Service promulgates changes to Form 5305-RA, the
Custodian will amend this Agreement correspondingly.
The Internal Revenue Service has endorsed the use of documentation permitting a
Depositor to establish either a Regular IRA or Roth IRA (but not both using a
single Adoption Agreement), and this Kit complies with the requirements of the
IRS guidance for such use. If the Internal Revenue Service subsequently
determines that such an approach is not permissible, or that the use of a
"combined" Adoption Agreement does not establish a valid Regular IRA or a Roth
IRA (as the case may be), the Custodian will furnish the Depositor with
replacement documents and the Depositor will if necessary sign such replacement
documents. Depositor acknowledge and agrees to such procedures and to cooperate
with Custodian to preserve the intended tax treatment of the Account.
26. If the Depositor maintains an Individual Retirement Account under Code
section 408(a), Depositor may convert or transfer such other IRA to a Roth IRA
under Code section 408A using the terms of this Agreement and the Adoption
Agreement by completing and executing the Adoption Agreement and giving suitable
directions to the Custodian and the custodian or trustee of such other IRA.
Alternatively, the Depositor may convert or transfer such other IRA to a Roth
IRA by use of a reply card or by telephonic, computer or electronic means in
accordance with procedures adopted by the Custodian or Service Company intended
to meet the requirements of Code section 408A, and the Depositor will be deemed
to have executed the Adoption Agreement and adopted the provisions of this
Agreement and the Adoption Agreement in accordance with such procedures.
27. The Depositor acknowledges that he or she has received and read the current
prospectus for each Fund in which his or her Account is invested and the
Individual Retirement Account Disclosure Statement related to the Account. The
Depositor represents under penalties of perjury that his or her Social Security
Number (or other Taxpayer Identification Number) as stated in the Adoption
Agreement is correct.
