As filed with the Securities and Exchange Commission on April 13, 1999
1933 ACT FILE NO.
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 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. [ ]
AND/OR
REGISTRATION STATEMENT
Under
THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 4 [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) 946-0600
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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)
Copies to:
Ruth S. Epstein, Esquire
Covington & Burling
1201 Pennsylvania Avenue, N.W.
P.O. Box 7566
Washington, D.C. 20044-7566.
Approximate Date of Public Offering: As soon as practicable after the effective
date of this registration statement.
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]
It is proposed that this filing will become effective:
[ ] when declared effective pursuant to section 8 (c).
[ ] immediately upon filing pursuant to paragraph (b).
[ ] on (date) pursuant to paragraph (b).
[X] 60 days after filing pursuant to paragraph (a).
[ ] on (date) pursuant to paragraph (a) of Rule 486.
[X] This post-effective amendment designates a new effective date for a
previously filed registration statement.
[ ] This Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act and the Securities Act
registration statement number of the earlier effective registration
statement for the same offering is ______.
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<PAGE>
This registration incorporates a combined prospectus pursuant to Rule 429,
which relates to earlier registration statements filed by the Registrant on
August 6, 1998, as amended and March 29, 1999 (See File No. 333-49273). This
prospectus will also be used in connection with sales of securities registered
by the Registrant under those registration statements. This registration
statement also constitutes post-effective amendments to those registration
statements, respectively, and such post-effective amendments will become
effective concurrently with the effectiveness of this registration statement.
This registration statement and the registration statements amended hereby will
be collectively referred to as the "Registration Statement."
CALCULATION OF REGISTRATION FEE UNDER THE
SECURITIES ACT OF 1933
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<TABLE>
<CAPTION>
Amount Maximum Maximum Amount of
Being Offering Price Aggregate Registration
Title of Securities Being Registered Registered Per Share Offering Price Fee (1)
<S> <C> <C> <C> <C>
Class B Common Stock 2,000,000 $ 10.00(1) 20,000,000(1) $ 5,560
Class C Common Stock 7,200,000 $ 10.00(1) 72,000,000(1) 20,016
Total 9,200,000 $ 10.00(1) 92,000,000(1) $ 25,576(2)
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933, based on net asset
value per share as of April 8, 1999.
(2) The amount of the registration fee does not include $13,372.35 and
$3,005.75 which has previously been paid to the Commission for
registration fees relating to 4,533,000 Class B shares and 1,065,000 Class
C shares previously registered (see File No. 333-49273) and unsold as of
March 31, 1999.
<PAGE>
[logo]
North American Senior Floating Rate Fund, Inc.
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The North American Senior Floating Rate Fund (the "Fund"), a recently organized
closed-end investment company, seeks 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, which we
generally expect will 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 12. 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 we do not currently
anticipate that a secondary market will develop for the Fund's shares. Fund
shares may not 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 you should
know before investing; you should read and retain it for future reference. The
Fund has filed a Statement of Additional Information dated April 12, 1999 with
the Securities and Exchange Commission, which is incorporated by reference
herein. The Table of Contents of the Statement of Additional Information appears
at the end of this Prospectus. The Statement of Additional Information is
available without charge from the Fund or its distributor, CypressTree Funds
Distributors, Inc., at 286 Congress Street, Boston, Massachusetts 02210 ((800)
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, we
expect will 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 Pricing Date.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED ON THE 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)
---------------- --------------- ----------------
<S> <C> <C> <C>
Per Class B Share $ 10.00 None $ 10.00
- ------------------- ------------ --------------- ------------
Per Class C Share $ 10.00 None $ 10.00
Total $147,980,000 None $147,980,000
=================== ============ =============== ============
</TABLE>
- ------------
(1) The shares are offered on a best efforts basis at a price equal to a net
asset value, which as of April 8, 1999 was $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 shares currently registered but unsold as of March 31,
1999, at a price of $10.00, per share, 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 August
31, 1998, the date the Fund commenced investment operations, and charged
against the Fund's income. Expenses of registering additional shares of
the Fund, in the amount of approximately $65,000, are charged against the
Fund's income on an ongoing basis, subject to expense reimbursements.
CypressTree Funds Distributors, Inc.
PROSPECTUS DATED April 12, 1999
<PAGE>
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TABLE OF CONTENTS
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<TABLE>
<S> <C>
Fund Expenses ........................................................ 3
Summary .............................................................. 5
The Fund ............................................................. 8
Investment Objective ................................................. 8
Use of Proceeds ...................................................... 8
Investment Policies .................................................. 8
Investments .......................................................... 8
Risk Factors ......................................................... 12
Repurchase Offers .................................................... 15
Management of the Fund ............................................... 18
Valuing Fund Shares .................................................. 19
Performance Information .............................................. 20
Multiple Pricing System .............................................. 20
How to Buy Fund Shares ............................................... 22
Shareholder Services ................................................. 26
Distributions ........................................................ 27
Taxes ................................................................ 28
Description of Shares ................................................ 29
Reports to Shareholders .............................................. 31
Year 2000 ............................................................ 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 help you understand the
direct and indirect expenses applicable to each class of shares of the Fund.
Because the Fund does not yet have an operating history for a full fiscal year,
this information is based on estimated fees and expenses for the fiscal year
ending December 31, 1999, 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 for
both Class B and Class C shares.
(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 2.00%; and total Fund
operating expenses of 4.00%. 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 2.00%, with total annual expenses of
1.40%. This reflects reimbursement of the 0.40% administration fee and a
portion of other expenses 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 3.50%.
Service and distribution fees include an asset-based sales charge; as a result
long-term shareholders 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
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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 ......... $44 $64 $77 $168
Class C Shares ......... $24 $44 $77 $168
</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 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%.
4
<PAGE>
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SUMMARY
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Investment Objective
The Fund's investment objective is to provide as high a level of current
income as is consistent with the preservation of capital by investing primarily
in senior secured floating rate loans and other senior secured floating rate
debt obligations ("Loans"). See "Investment Objective" on page 8.
The Loans
The Loans 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 that CypressTree has established.
Under normal market conditions, the Fund will invest at least 80% of its
total assets in Loans. The Fund may hold up to 20% of its total assets in cash,
investment grade short-term debt and medium term obligations, and unsecured
senior floating rate loans. There is no assurance that the Fund's objective
will be achieved. See "Investment Policies" on page 8.
Repurchase Offers
The Fund is a closed-end investment company and, as such, does not redeem
its shares. We do not anticipate 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 we generally expect will 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, we
expect will 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 18.
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 $3.5 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
recently organized entity, the Fund has a limited 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, your ability to liquidate your investment will be subject to
the limits on monthly Repurchase Offers. See "Risk Factors" on page 12.
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.
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 at the time of the
declaration.
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 $500 minimum initial and $500
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 22.
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 you may choose the class that
best suits your 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. You should read this
Summary in conjunction with the more detailed information included elsewhere.
6
<PAGE>
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FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
This table summarizes the Fund's financial history. The information has been
audited by Deloitte & Touche LLP, the Fund's independent auditors. The audit
report covering the period shown appears in the Statement of Additional
Information.
<TABLE>
<CAPTION>
Period from
August 31, 1998*
through
December 31, 1998
-------------------------
Per Share Operating Performance
(For a Share Outstanding Throughout the Period) Class B Class C
- -------------------------------------------------------- ----------- -----------
<S> <C> <C>
Net Asset Value, Beginning of Period $ 10.00 $ 10.00
- -------------------------------------------------------- ------- -------
Investment Operations:
Net investment income 0.20 0.20
Net realized and unrealized gain on investments ( 0.02) ( 0.02)
------- -------
Total from investment operations 0.18 0.18
------- -------
Distributions
Dividends from net investment income ( 0.20) ( 0.20)
- -------------------------------------------------------- ------- -------
Net Asset Value, End of Period $ 9.98 $ 9.98
- -------------------------------------------------------- ------- -------
Total Return 1.89%+ 1.89%+
======================================================== ======= =======
Ratios/Supplemental Data
Net assets, end of period (000's) $ 4,826 $14,259
- -------------------------------------------------------- ------- -------
Ratio of total expenses to average net assets 0.00%# 0.00%#
- -------------------------------------------------------- ------- -------
Ratio of net investment income to average net assets 6.11%# 6.11%#
- -------------------------------------------------------- ------- -------
Portfolio turnover rate 18%+ 18%+
- -------------------------------------------------------- ------- -------
Expense ratio before expense reimbursement by adviser 4.02%# 4.01%#
- -------------------------------------------------------- ------- -------
</TABLE>
* Commencement of Operations
+ Not annualized
# Annualized
7
<PAGE>
- --------------------------------------------------------------------------------
THE FUND
- --------------------------------------------------------------------------------
The Fund is a recently 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. This prospectus will
sometimes refer to the Fund as "we".
- --------------------------------------------------------------------------------
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. 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.
8
<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 a 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.
If 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 an appropriate regulatory authority or court determines that assets held by
the Agent for the benefit of the Fund are 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
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relationship with the Borrower. The Fund would be required to rely on the
lender or the Participant that sold the Participation not only for the
enforcement of the Fund's rights against the Borrower but also for the receipt
and processing of payments due to the Fund under the Loan. The Fund is thus
subject to the credit risk of both the Borrower and 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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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
The Fund may hold up to 20% of its total assets 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 to the
Statement of Additional Information. 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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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. 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, which could allow
creation of a "master/feeder" structure.
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RISK FACTORS
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Because the Fund's assets will include primarily floating rate loans and
other short-term instruments, CypressTree expects that the Fund's net asset
value will be relatively stable during normal market conditions. It is also
likely that the value of the portfolio will fluctuate less with changes in
interest rates than a portfolio that includes fixed-rate debt.
There are, of course, a number of factors that could cause a decline in
the Fund's net asset value, including loan default, changes in
creditworthiness, or a sudden and dramatic increase in interest rates. At the
same time, a sudden and extreme decline in interest rates could result in an
increase in the Fund's net asset value.
Because this is a recently organized entity, the Fund has a limited
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. One of the most significant risks to investing in Loans is credit
risk, the risk that the Borrower will not pay interest or repay principal in a
timely manner. The Fund's receipt of principal and interest also depends on the
credit worthiness of Agents and Intermediate Participants. If payments are late
or do not occur at all, the dividends paid to investors and the net asset value
of the Fund may fall.
Loans made in connection with recapitalizations, acquisitions, leveraged
buy-outs, and refinancings may involve more credit risks than other Loans in
which the Fund invests, including the possibility of default on the Loan or
bankruptcy of the Borrower. This type of Loan may be more volatile and less
liquid than other Loans. We expect the Fund's Loans will be primarily this type
of Loan.
The Fund will generally invest in Loans that are most senior in a
Borrower's capitalization structure. These Loans require repayment ahead of
other obligations if credit restructuring occurs. Still, many of these
Borrowers may also have non-investment grade subordinated debt that they may
find difficult to repay if economic conditions deteriorate. If this occurs, the
Borrower may be perceived as less creditworthy, may have difficulties obtaining
financing to cover short-term cash flow needs, and may even be forced into
bankruptcy or other forms of credit restructuring.
"Bridge" loans provide Borrowers with temporary financing until other
assets are sold, or longer term financing is arranged. The Fund may invest
directly in these types of Loans, or may invest in Loans of Borrowers that have
obtained bridge loans from other parties. Bridge loans are subject to the risk
that the Borrower may not find permanent financing to replace the bridge loan.
This could damage the Borrower's perceived creditworthiness.
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<PAGE>
Collateral Impairment
Collateral impairment is the risk that the value of the collateral for a
loan will fall. The Fund expects to invest in collateralized loans, loans
secured by other things of value the Borrower owns.
Loans are secured unless:
(a) The value of the collateral declines below the amount of the Loan, or
(b) The Fund's security interest in the collateral is invalidated for any
reason by a court, or
(c) The collateral is no longer required under the terms of the Loan
Agreement as the creditworthiness of the Borrower improves.
There is no guarantee that the sale of collateral would allow Borrowers to
meet their obligations should they become unable to repay principal or
interest, or that the collateral could be sold quickly and easily.
The value of the collateral will be set using several criteria:
o The Borrower's financial statements
o An independent appraisal
o The market value of the collateral
o Other customary techniques chosen by CypressTree
Collateral is valued generally with the understanding that the Borrower is
an ongoing concern. As a result, the value of the collateral may exceed its
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)
(d) Security interests in shares of stock of subsidiaries or affiliates,
and
(e) Assets of shareholders of the Borrower, if the Borrower is private
company
If the collateral is 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.
Any type of decline in the value of collateral could cause the Loan to
become undercollateralized or unsecured. In this case, there is usually no
requirement to pledge more collateral. The Fund may invest in Loans that are
guaranteed or collateralized by the shareholders of private companies.
If a Borrower becomes involved in bankruptcy proceedings, a court may
decide that the Loan does not require repayment through the sale of collateral
and may even determine that other obligations be repaid first. Other things
could occur, including errors in paperwork, which could invalidate the Fund's
security interest in Loan collateral. If this occurs, the Fund is unlikely to
recover the full amount of the principal and interest due on the Loan.
Loans may be unsecured for brief periods if a Borrower's principal asset
is the stock of a related company which may not legally be pledged, until this
stock can be pledged or is exchanged for other assets.
Investments in Lower Quality Securities
The Fund may invest all or nearly all of its assets in Loans or other
securities that are rated below investment grade by Moody's Investors Service,
similarly 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.
Moody's considers debt rated Baa by Moody's to have speculative
characteristics. Moody's considers debt rated Ba or B by Moody's to be
predominantly speculative regarding the issuer's ability to pay interest and
repaying principal. Moody's also uses the numerical modifiers 1, 2 and 3 to
indicate where in the generic rating classification a particular security
ranks, with 1 being the highest and 3 the lowest.
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These ratings of debt securities represent the rating agency's opinion
regarding their quality, they are not a guarantee of quality. Rating agencies
try to evaluate the safety of principal and interest payments, they do not take
into consideration the risks of fluctuations in market value. Because rating
agencies may not change ratings quickly in response to company changes, an
issuer's current financial condition may be better or worse than a rating
indicates. 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. They are generally more vulnerable to economic downturns or developments
affecting the Borrower. CypressTree does not expect to invest in any securities
rated lower than B3 at the time of investment. See Appendix A to the Statement
of Additional Information "Description of Ratings" for a full description of
Moody's long-term debt ratings. In the event of a downgrade or decrease in the
rating of a Loan, CypressTree will consider whether to sell that Loan.
Typically, the market values of lower-quality loans change in response to
company changes more than higher quality loans. Higher quality loans react
primarily to fluctuations in the general level of interest rates. Also, lower-
quality debt securities tend to be more sensitive to economic conditions and
generally have more volatile prices than higher-quality securities.
Non-Diversification and Industry Concentration
The Fund is classified as a "non-diversified" investment company within
the meaning of the 1940 Act. This means that the only limits on the amount the
Fund may invest in a single issuer are 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. The Fund plans to invest no more than 10% of its assets in Loans
of any one Borrower.
When the Fund chooses to invest a high percentage of its assets in the
obligations of just a few issuers, the value of the Fund's investments can
react more significantly to any one event than the value of a fund that is more
diversified.
The Fund may acquire Loans made to Borrowers in any industry. The Fund
will not concentrate its investments in any one industry. However, because the
Fund may buy loans through intermediaries who may be legally considered
issuers, the Fund may be deemed concentrated in the financial services
industry. Because this is so, the Fund is subject to certain risks. Some of the
risks related to financial services include regulatory controls and legislative
changes that may limit lending or make it riskier or less profitable, and
general financial and economic conditions. See "Investment Restrictions" in the
Statement of Additional Information.
Illiquid Instruments
Not all Loans are easy to sell because of legal and contractual
restrictions. Although Loans are traded among certain financial institutions,
some of the Loans that the Fund buys are not as liquid, or saleable, as typical
investment grade debt and may be considered illiquid. It may be more difficult
to sell Loans where the creditworthiness of the Borrower has changed, or is
thought to have changed. Reselling loans may also become more difficult with
market changes or other concerns about Borrowers' ability to repay loans in
general.
This illiquidity may affect the Fund's ability to maintain its net asset
value if Loans must be sold. Over time, the liquidity of Loans should improve.
SEC rules and Board of Directors procedures require the Fund to maintain
enough liquidity to make its monthly Repurchase Offers, generally expected to
be 10% of outstanding shares, but there are no other liquidity restrictions.
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. Although it currently does not intend to, the Fund also may
issue one or more series of preferred shares or borrow money to finance
additional investments but only when it believes that the return will exceed
the costs of this strategy. If costs do exceed returns, the return realized by
the Fund's shareholders will be adversely affected. While borrowing and issuing
a class of preferred stock having priority over the Fund's common shares create
an opportunity for greater income per common share, it also involves increased
exposure to losses. These risks may be reduced through borrowing and preferred
stock with floating rates of interest. Borrowing may also limit the Fund's
freedom to pay dividends or engage in other activities.
The Fund may establish an unsecured, discretionary credit facility (the
"Facility") to partially finance Repurchases. The Facility would allow the Fund
to borrow up to $100,000,000 or 331/3% of the Fund's total assets, whichever is
less, on an unsecured, uncommitted basis. This Facility will have a floating
interest rate, such as LIBOR, to be selected at the Fund's option.
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Under the 1940 Act, the Fund may only borrow money provided that right
after borrowing, the Fund has assets that equal 300% of the total outstanding
principal balance of indebtedness. Also, the 1940 Act requires that the Fund
may only declare dividends or distributions or purchase capital stock provided
that right after doing so, the Fund has assets that equal 300% of total
principal balance of debt.
If the Fund cannot make distributions as a result of these requirements
the Fund may no longer qualify as a regulated investment company and could be
required to pay additional taxes. The Fund may also be forced to sell
investments on unfavorable terms if market fluctuations or other factors reduce
the required asset below what is required.
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) Can be redeemed, called or repaid by the Fund by the next Repurchase
Request Date without penalty or premium, if that is necessary to allow
the Fund to repurchase shares as required by the Board of Directors and
the 1940 Act.
Limited Availability of Loans
Investment in Loans that meet the Fund's standards may be subject to
limited availability. There is risk that the Fund may not be able to invest 80%
or more of its total assets in Loans.
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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. Because the Fund is a closed-end fund, you
will not be able to redeem your 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, we expect 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"). We expect that the Repurchase
Amount generally will be 10%, but it 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 you 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.
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<PAGE>
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, we expect 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 you 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.
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 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.
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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;
(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.
Change of Notice and Monthly Board Meeting Requirements
Currently, the Fund's Board of Directors meets once each month to
determine the amount of the Repurchase Offer, and shareholders receive a notice
before each Repurchase Offer, under rules of the Securities and Exchange
Commission. The Fund expects to request approval from the Securities and
Exchange Commission to hold its Board meetings and provide notice to its
shareholders on a quarterly basis. If such approval is granted, then the Board
would meet once each quarter to determine the amount of the next three
Repurchase Offers, and you would receive one notice for those three Repurchase
Offers.
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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 $1.0 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.
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 $11 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 $3.5 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 Management
Jeffrey S. Garner, age 42, 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").
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<PAGE>
Peter K. Merrill, age 38, 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. For purposes of computing
the administration fee, average daily gross assets are determined by deducting
from total assets of the Fund all liabilities 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 the close of regular trading on the
exchange. The Fund is informed that, as of the date of this prospectus, the
NYSE observes the following business holidays: New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
The Fund's net asset value per share is determined by State Street Bank &
Trust Company (as agent for the Fund) in the manner authorized by the Fund's
Board of Directors. State Street Bank & Trust Company also serves as Transfer
Agent and Custodian for the Fund and has custody of the Fund's assets. The
Custodian's address is 225 Franklin Street, Boston, Massachusetts 02110.
In determining the net asset value of a share of the Fund, the value of
the securities held by the Fund plus any cash or other assets (including
interest and dividends accumulated but not yet received) minus all liabilities
(including accrued expenses) is divided by the total number of shares of the
Fund outstanding at that time. Expenses, including the fees payable to CAM, are
accrued daily.
Loans will be valued in accordance with guidelines established by the
Board of Directors. Under the Fund's current guidelines, Loans for which an
active secondary market exists to a reliable degree in 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
19
<PAGE>
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.
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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 12 and adding 1.
The resulting quotient is then taken to the 12th power and reduced by 1. The
result is the effective yield.
On occasion, the Fund may compare its yield to: (a) LIBOR, quoted daily in
the Wall Street Journal, (b) the CD Rate as quoted daily in the Wall Street
Journal as the average of top rates paid by major New York banks on primary new
issues of negotiable CDs, usually on amounts of $1 million or more, (c) the
Prime Rate, quoted daily in The Wall Street Journal as the base rate on
corporate loans at large U.S. money center commercial banks, (d) one or more
averages compiled by Donoghue's Money Fund Report, a widely recognized
independent publication that monitors the performance of money market mutual
funds, (e) the average yield reported by the Bank Rate Monitor National IndexTM
for money market deposit accounts offered by the 100 leading banks and thrift
institutions in the ten largest standard metropolitan statistical areas, (f)
yield data published by Lipper Analytical Services, Inc., (g) the yield on an
investment in 90-day Treasury bills on a rolling basis, assuming quarterly
compounding, or (h) the yield on an index of loan funds comprised of all
continually offered closed-end bank loan funds, as categorized by Lipper (the
"loan fund index"). In addition, the Fund may compare the Prime Rate, the
Donoghue's averages and the other yield data described above to each other.
Yield comparisons should not be considered indicative of the Fund's yield or
relative performance for any future period.
Advertisements and communications to present or prospective shareholders
also may cite a total return for any period. Total return is calculated by
subtracting the net asset value of a single purchase of shares at a given date
from the net asset value of those shares (assuming reinvestment of
distributions) on a later date. The difference divided by the original net
asset value is the total return. The Fund may include information about the
total return on the loan fund index, and compare that to the total return of
the Fund and other indices.
All dividends and distributions are assumed to be reinvested in additional
shares of the Fund at net asset value. Therefore, the calculation of the Fund's
total return and effective yield reflects the effect of compounding. The
calculation of total return, current yield and effective yield does not reflect
the amount of any shareholder income tax liability, which would reduce the
performance quoted. If the Fund's fees or expenses are waived or reimbursed,
the Fund's performance will be higher.
Finally, the Fund may include information on the history of the Fund's net
asset value per share and the net asset value per share of the loan fund index,
including comparisons between them, in advertisements and other material
furnished to present and prospective shareholders. Information about the
performance of the Fund or other investments is not necessarily indicative of
future performance and should not be considered a representation of what an
investor's yield or total return may be in the future.
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MULTIPLE PRICING SYSTEM
- --------------------------------------------------------------------------------
The Fund's Multiple Pricing System permits you to choose the method of
purchasing shares that is most beneficial given the amount of the purchase and
the length of time you expect to hold the shares.
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<PAGE>
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 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 you with the option of choosing the class of shares best suited to
your individual circumstances and objectives. To assist you 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 you
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.
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<PAGE>
In light of these distinctions among the classes of shares, you should
weigh such factors as (a) whether, at the time of purchase, you 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. You should
consult your 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. You should understand that Early Withdrawal
Charges and ongoing distribution and service fees are all intended to
compensate Distributors 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
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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 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, you 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:
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.
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<PAGE>
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 available only where the
exchange may be made legally.
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.
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."
23
<PAGE>
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 701/2, (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 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 Conduct 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
24
<PAGE>
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, Distributors 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.
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.
25
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
For additional information on any of the programs described in the
following sections, you 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 $500). 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).
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.
26
<PAGE>
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
P.O. Box 8505, Boston, MA 02266-8505.
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.
The Fund will confirm all account activity occurring within a calendar
quarter, including the payment of dividend and capital gain distributions and
transactions made as a result of a Systematic Withdrawal Plan, Automatic
Investment Plan, and Systematic Investing Plan, shortly after the end of each
calendar quarter.
The Fund also reserves the right to confirm, with respect to certain tax
qualified plans and certain group plans, purchases and sales of Fund shares on
a quarterly basis.
A copy of all confirmation statements will be sent to the securities
dealer firm listed on the shareholder's account.
2. Shareholder Inquiries. Shareholders should direct any questions or
requests concerning the Fund or your account by writing to North American
Funds, P.O. Box 8505, Boston, Massachusetts 02266-8505, or by calling the
Fund Customer Service Department at 1-800-872-8037.
- --------------------------------------------------------------------------------
DISTRIBUTIONS
- --------------------------------------------------------------------------------
The Fund will declare distributions daily and pay distributions monthly.
Substantially all of the Fund's investment income, less Fund expenses, will be
declared daily as a distribution to shareholders of record as recorded by the
Transfer Agent at the time of declaration. Daily distribution crediting will
begin on the day after the Transfer
27
<PAGE>
Agent has received funds for the purchase of Fund shares, even if orders to
purchase shares had been placed with Authorized Intermediaries. The Fund
ordinarily will pay investment income distributions on the last day of each
month, whether the shareholder elects to receive cash or to reinvest in
additional shares. The Fund will distribute realized net capital gains, if any,
at least annually, usually in December, after offset by any capital loss
carryovers.
- --------------------------------------------------------------------------------
TAXES
- --------------------------------------------------------------------------------
The Fund intends to satisfy those requirements relating to the sources of
its income, the distribution of its income, and the diversification of its
assets necessary to qualify for the special tax treatment afforded to regulated
investment companies under the Internal Revenue Code (the "Code"). Accordingly,
the Fund will not be liable for federal income or excise taxes to the extent
that it distributes its net investment income and net realized capital gains to
shareholders in accordance with the timing requirements imposed by the Code.
(For a detailed discussion of tax issues pertaining to the Fund, see "Taxes" in
the Statement of Additional Information.)
Distributions paid by the Fund from its ordinary income or from an excess
of net short-term capital gain over net long-term capital loss will be treated
as ordinary income in the hands of the shareholders to the extent of the Fund's
earnings and profits. (Any such distributions in excess of the Fund's earnings
and profits first will reduce a shareholder's basis in his or her shares and,
after that basis is reduced to zero, will constitute capital gains to the
shareholder, assuming the shares are held as a capital asset.) Distributions,
if any, from the excess of net long-term capital gain over net short-term
capital loss are taxable to shareholders as long-term capital gain, regardless
of the length of time the shares of the Fund have been held by such
shareholders. Distributions will be taxed as described above, whether received
by the shareholders in cash or in additional shares. It is not expected that
any portion of distributions will be eligible for the corporate
dividends-received deduction.
Not later than 60 days after the close of the calendar year, the Fund will
provide its shareholders with a written notice designating the amounts of any
ordinary income dividends or capital gain dividends. If the Fund pays a
dividend in January that was declared in the previous October, November or
December to shareholders of record on a specified date in one of those months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the earlier year in which
the dividend was declared.
A holder of Fund shares who, pursuant to a Repurchase Offer, tenders all
of his or her Fund shares (and is not considered to own any other Fund shares
pursuant to attribution rules contained in the Code) may realize a taxable gain
or loss depending upon the shareholder's basis in the shares. Such gain or loss
realized on the disposition of shares (whether pursuant to a Repurchase Offer
or in connection with a sale or other taxable disposition of shares in a
secondary market) generally will be treated as long-term capital gain or loss
if the shares have been held as a capital asset for more than one year and as
short-term capital gain or loss if held as a capital asset for one year or
less. If Fund shares are sold at a loss after being held for six months or
less, the loss will be treated as long-term--instead of short-term--capital
loss to the extent of any capital gain distributions received on those shares.
All or a portion of any loss realized on a sale or exchange of shares of the
Fund will be disallowed if the shareholder acquires other Fund shares within 30
days before or after the disposition. In such a case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss. 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
28
<PAGE>
that the investor's TIN (generally, his or her social security number) is
correct and that the investor is not otherwise subject to backup withholding.
Nonresident alien individuals, foreign corporations and certain other
foreign entities generally will be subject to a U.S. withholding tax at a rate
of 30% (or lower treaty rate) on distributions from ordinary income and from
the excess of net short-term capital gain over net long-term capital loss.
Distributions to such shareholders from the excess of net long-term capital
gain over net short-term capital loss and any amount treated as gain from the
sale or other disposition of shares of the Fund generally will not be subject
to U.S. taxation, provided that the shareholder has certified nonresident alien
status. Different U.S. tax consequences may result if the shareholder is
engaged in a trade or business in the United States or is present in the United
States for specified periods of time during a taxable year. Foreign
shareholders should consult their tax advisers regarding the U.S. and foreign
tax consequences of an investment in the Fund.
The discussion contained in this section is a general and abbreviated
summary of certain federal tax considerations affecting the Fund and its
shareholders, and is not intended as tax advice or to address a shareholder's
particular circumstances. This discussion does not address non-federal tax
consequences, or the special tax rules applicable to certain classes of
investors, such as retirement plans, tax-exempt entities, insurance companies
and financial institutions. For further information, reference should be made
to the pertinent sections of the Code and the regulations promulgated
thereunder, which are subject to change by legislative, judicial, or
administrative action, either prospectively or retroactively. Investors are
urged to consult their tax advisors regarding specific questions as to federal,
state, local, or foreign taxes. The Fund does not provide any guarantee
regarding the tax consequences of investing in the Fund.
- --------------------------------------------------------------------------------
DESCRIPTION OF SHARES
- --------------------------------------------------------------------------------
The Fund is a corporation organized under Maryland law. The Fund was
incorporated on March 6, 1998. The Fund's Board of Directors is responsible for
the overall management and supervision of its affairs.
The Fund is authorized to issue 1 billion shares of common stock $0.01 par
value per share. These shares are currently divided into three classes of
shares, designated as Class A, Class B and Class C shares. All shares of common
stock have equal voting rights (except as described below with respect to
matters specifically affecting a class of shares) and have no preemptive or
conversion rights (other than the automatic conversion rights of Class B and
Class C shares to convert to Class A shares under the Multiple Pricing System.)
The per-share net asset value of each class of shares is calculated separately
and may differ as between classes as a result of the differences in
distribution and service fees payable by the classes and the allocation of
certain incremental class-specific expenses to the appropriate class to which
such expenses apply.
All shares of the Fund have equal voting rights and will be voted in the
aggregate, and not by class, except where voting by class is required by law,
or where the matter involved affects only one class (for example matters
pertaining to the plan of distribution relating to Class B shares will only be
voted on by Class B shares). In accordance 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 1940 Act.
29
<PAGE>
The following table sets forth information for each class of the Fund's
authorized securities, as of March 31, 1999:
- --------------------------------------------------------------------------------
<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 10,000
- ---------------- -------------------- ----------------------- ------
Class B 300,000,000 shares None 1,482,920
- ---------------- -------------------- ----------------------- ---------
Class C 300,000,000 shares None 3,229,257
================ ==================== ======================= =========
</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
(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)
30
<PAGE>
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 which, in the case of the
annual reports, will be 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.
- --------------------------------------------------------------------------------
YEAR 2000
- --------------------------------------------------------------------------------
Year 2000 computer problems involve the inability of some computer systems
to properly process date-related information in respect to the end of this
century. While this problem could have a negative effect on the Fund, the
adviser is working to avoid this problem and obtain assurances from the
subadviser and other service providers that they are adequately addressing any
possible year 2000 problems. The year 2000 problem could also have a negative
effect on issuers whose securities are owned by the Fund, potentially
decreasing the value of such securities.
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 ........................ 12
Statement of Operations .................................... 13
Statement of Changes in Net Assets ......................... 14
Statement of Cash Flows .................................... 15
Portfolio of Investments ................................... 16
Notes to Financial Statements .............................. 18
Independent Auditors Report ................................ 21
Other Information .......................................... 22
Description of Ratings ..................................... 23
</TABLE>
32
<PAGE>
North American Senior Floating Rate Fund
PROSPECTUS
April 12, 1999
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>
STATEMENT OF
ADDITIONAL INFORMATION
April 12, 1999
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 APRIL 12, 1999, 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) 872-8037.
<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 ........................ 12
Statement of Operations .................................... 13
Statement of Changes in Net Assets ......................... 14
Statement of Cash Flows .................................... 15
Portfolio of Investments ................................... 16
Notes to Financial Statements .............................. 18
Independent Auditors Report ................................ 21
Other Information .......................................... 22
Description of Ratings ..................................... 23
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
THE FUND
- --------------------------------------------------------------------------------
North American Senior Floating Rate Fund, Inc. (the "Fund") is a recently
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 herein 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.
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,
CypressTree 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-
9/95); Member of Operating Committee and
Founder/President of Fidelity Investments
Institutional Services Co. (1/81-3/90)
William F. Achtmeyer 1955 Director President and Chief Executive Officer, The
200 State Street Parthenon Group (8/91-present); Director,
Boston, MA 02109 CypressTree Senior Floating Rate Fund, Inc.
(7/97-present); Trustee, North American Funds
(10/97-present); Director, Bain & Company
(9/77-6/96)
William F. Devin 1938 Director Member, Board of Governors, Boston Stock
125 High Street Exchange (1/85-present); Director, CypressTree
Boston, MA 02110 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 (10/97-present)
Arthur S. Loring* 1947 Director Managing Director, Cypress Holding Company
125 High Street (1998-present); Director, CypressTree Senior
Boston, MA 02110 Floating Rate Fund, Inc. (7/97-present); Senior
Vice President and General Counsel, FMR Corp.
(7/72-12/97); Secretary, Fidelity Family of Funds
(7/83-12/97)
Jeffrey S. Garner* 1956 Executive Vice President, Vice President, Cypress Holding Company
125 High Street Chief Investment Officer (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,
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 Portfolio Manager, CypressTree Senior Floating
Rate Fund, Inc. (6/97-present); Managing
Director, BankBoston Corp. (7/88-5/97)
Philip C. Robbins* 1967 Vice President Vice President, CypressTree Investment
125 High Street Management Co., (9/96-present); Assistant Vice
Boston, MA 02110 President, CypressTree Senior Floating Rate
Fund, Inc. (6/97-present); Associate, Eaton
Vance Management (9/91-8/96)
Joseph A. Germain* 1969 Vice President Vice President, CypressTree Investment
125 High Street Management Co. (2/97-present); Assistant Vice
Boston, MA 02110 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 Capital 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)
Timothy M. Barns* 1957 Vice President Vice President, CypressTree Investment
125 High Street Management Co., Inc. (3/98-present); Managing
Boston, MA 02110 Director, BankBoston Corp. (1988-2/98)
</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, the Directors earned 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 $6,000 $18,600
William F. Devin $6,600 $19,800
Kenneth J. Lavery $6,600 $19,800
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.
Principal Holders of Securities
As of March 31, 1999, Bear Stearns Securities Corp. of Brooklyn, New York
was the record owner of approximately 25% of the Fund's outstanding Class B
shares, which were held on behalf of their customers who are the beneficial
owners of those shares and as to which they had voting power under certain
limited circumstances. To the Fund's knowledge, as of that date, no other
person owned of record five percent or more of any class of the Fund's
outstanding equity securities. None of the officers or directors owns any
shares of the Fund.
- --------------------------------------------------------------------------------
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 $3.5
billion 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 15.6%) and Berkshire
Fund IV L.P., an investment partnership (approximately 66.5%). 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
$1.1 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 $16.7
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
6
<PAGE>
the Fund's current Prospectus. For the fiscal year ended December 31, 1998, the
Fund paid CAM $26,085 under the Advisory Agreement.
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's current yield for the one month period ending on December 31,
1998 was 7.32% for Class B shares and 7.32% for Class C shares. The Fund's
effective yield for the same period was 7.57% for Class B shares and 7.57% for
Class C shares.
The total investment return for the year ending December 31, 1998 was
1.89% for Class B shares and 1.89% for Class C shares. This total investment
return covers the period beginning on August 31, 1998 and ending on December
31, 1998. On December 31, 1998, the net asset value of one Class B share was
$9.98 and the net asset value for one Class C share was 9.98%.
The calculation for yields and total investment return do not reflect the
imposition of any early withdrawal charges.
The Fund may advertise total return either on a cumulative or annualized
basis.
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
10
<PAGE>
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, modification 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.
The Fund's audited financial statements for the period August 31, 1998
through December 31, 1998, including the auditor's report, are set forth below.
11
<PAGE>
NORTH AMERICAN SENIOR FLOATING RATE FUND, INC.
Statement of Assets and Liabilities -- December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments in loans and securities, at value (Identified cost, $18,603,865.)
(See accompanying Portfolio of Investments) ................................ $18,586,575
Cash ........................................................................ 21,809
Receivables:
Investments sold ........................................................... 3,595
Fund shares sold ........................................................... 695,161
Interest receivable on bank loans .......................................... 79,363
Facility fees .............................................................. 7,500
Prepaid expenses ............................................................ 56,053
Other assets ................................................................ 333
-----------
Total assets .............................................................. $19,450,389
-----------
LIABILITIES:
Payables:
Accrued expenses ........................................................... 56,053
Fund shares redeemed ....................................................... 235,085
Deferred facility fee ....................................................... 74,330
-----------
Total liabilities ......................................................... 365,468
-----------
NET ASSETS .................................................................. $19,084,921
===========
NET ASSETS CONSIST OF:
Accumulated net realized gains (losses) .................................... $ 6,250
Unrealized appreciation (depreciation) on investments ...................... (17,290)
Capital shares at par value of $.01 (Note 3)................................ 19,120
Additional paid-in capital ................................................. 19,076,841
-----------
Net assets ................................................................ $19,084,921
===========
NET ASSET VALUES:
Class B Shares
Net assets at value ........................................................ $ 4,825,955
Shares outstanding ......................................................... 483,486
Net Asset Value, offering and redemption price per share .................... $ 9.98
===========
Class C Shares
Net assets at value ........................................................ $14,258,966
Shares outstanding ......................................................... 1,428,479
Net Asset Value, offering and redemption price per share .................... $ 9.98
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
NORTH AMERICAN SENIOR FLOATING RATE FUND, INC.
Statement of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period from
August 31, 1998*
through
December 31, 1998
--------------------
<S> <C>
INVESTMENT INCOME:
Interest ......................................................... $ 186,082
Facility and other fee income .................................... 1,351
----------
Total income .................................................... 187,433
----------
EXPENSES:
Investment adviser fee (Note 5) .................................. 26,085
Distribution fee for Class B (Note 7) ............................ 5,482
Distribution fee for Class C (Note 7) ............................ 17,534
Transfer agent fee ............................................... 7,383
Audit and legal fees ............................................. 6,668
Accounting and administration fees (Note 5) ...................... 12,275
Directors fees and expenses ...................................... 10,668
Printing expenses ................................................ 24,488
Miscellaneous .................................................... 12,141
----------
Expenses before reimbursement by investment adviser .............. 122,724
Reimbursement of expenses by investment adviser (Note 5) ......... (122,724)
----------
Net expenses .................................................. 0
----------
Net investment income ......................................... 187,433
----------
REALIZED AND UNREALIZED GAIN/(LOSS):
Net realized gain on investment transactions ..................... 6,250
Unrealized (depreciation) on investments ......................... (17,290)
----------
Net realized and unrealized loss .............................. (11,040)
----------
Net increase in net assets resulting from operations .............. $ 176,393
==========
</TABLE>
* Commencement of Operations.
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
NORTH AMERICAN SENIOR FLOATING RATE FUND, INC.
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period from
August 31, 1998*
through
December 31, 1998
--------------------
<S> <C>
Increase/(Decrease) in Net Assets from:
OPERATIONS:
Net investment income .................................................. $ 187,433
Net realized gain (loss) on investment transactions .................... 6,250
Change in unrealized appreciation on investments ....................... (17,290)
-----------
Net increase in net assets resulting from operations .................... 176,393
DISTRIBUTIONS FROM:
Net investment income, Class B ......................................... (45,215)
Net investment income, Class C ......................................... (142,218)
Increase in net assets from capital share transactions (Note 3) ......... 18,995,961
-----------
Increase in net assets .................................................. 18,984,921
Net assets at beginning of period ....................................... 100,000
-----------
Net assets at end of period ............................................. $19,084,921
===========
</TABLE>
* Commencement of Operations
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
NORTH AMERICAN SENIOR FLOATING RATE FUND, INC.
Statement of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period from
August 31, 1998*
through
December 31, 1998
--------------------
<S> <C>
Increase/(Decrease) in Cash
Cash Flows From (Used for) Operating Activities:
Purchase of loans ..................................................... ($ 14,750,000)
Interest and facility fees received ................................... 160,913
Purchase of short-term securities, net ................................ (4,389,237)
Proceeds from loans sold .............................................. 551,681
------------
Net Cash used for operating activities ................................. (18,426,643)
------------
Cash Flows From (Used for) Financing Activities:
Proceeds from shares sold ............................................. 18,871,043
Payments for shares redeemed .......................................... (466,290)
Cash dividends paid (not including reinvested dividends of $131,132).. (56,301)
------------
Net Cash from financing activities ..................................... 18,348,452
------------
Net Decrease in Cash (78,191)
Cash at beginning of period ........................................... 100,000
------------
Cash at end of period ................................................. $ 21,809
============
Reconciliation of Net Increase in Net Assets from Operations to Net
Cash used for Operating Activities
Net increase in net assets from operations ............................ $ 176,393
Increase in interest and facility fee receivable ...................... (86,863)
Increase in receivable for investments sold ........................... (3,595)
Increase in other assets .............................................. (333)
Increase in deferred facility fees .................................... 74,330
Net increase in investments ........................................... (18,586,575)
------------
Net cash used for operating activities ................................. ($ 18,426,643)
============
</TABLE>
* Commencement of Operations
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
NORTH AMERICAN SENIOR FLOATING RATE FUND, INC.
Portfolio of Investments -- December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Industry/Description Type Maturity Date Par Value
- ---------------------------------- ---------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
LOANS -- 74.3%
Automobile -- 2.6%
Environmental Systems Products BTL -- B 9/30/05 $ 250,000 $ 249,688
Federal Mogul Corporation BTL -- C 9/30/06 250,000 249,883
---------
499,571
Broadcasting -- 2.6%
Capstar Broadcasting BTL -- B 5/31/05 500,000 492,500
Chemicals, Plastics and Rubber -- 5.3%
The Scotts Company BTL -- B 6/30/06 509,202 511,434
The Scotts Company BTL -- C 6/30/07 490,798 492,025
---------
1,003,459
Containers, Packaging and Glass -- 3.9%
Jefferson Smurfitt Corp. BTL -- B 3/31/06 750,000 746,845
Consumer Durable -- 3.9%
Sealy Corporation BTL -- B 2/15/04 189,130 188,332
Sealy Corporation BTL -- C 2/15/05 136,222 135,647
Sealy Corporation BTL -- D 2/15/06 174,078 173,344
Simmons Co. BTL -- B 10/29/05 71,429 71,429
Simmons Co. BTL -- C 10/29/06 178,571 178,571
---------
747,323
Consumer Non-durable -- 2.6%
Doane Pet Care Company BTL -- B 9/30/05 240,323 239,722
Doane Pet Care Company BTL -- C 9/30/06 259,677 258,947
---------
498,669
Diversified/Conglomerate Manufacturing -- 6.5%
Alliance Laundry Systems BTL -- A 5/05/05 1,000,000 991,683
SPX Corporation BTL -- B 9/30/06 249,375 250,115
---------
1,241,798
Environmental Services -- 2.6%
Safety Kleen BTL -- B 4/03/05 250,000 249,656
Safety Kleen BTL -- C 4/03/06 250,000 249,656
---------
499,312
Healthcare -- 10.6%
Alliance Imaging, Inc. BTL -- C 9/30/04 250,000 248,750
King Pharmaceuticals, Inc. BTL -- B 2/18/06 750,000 751,992
Stryker Corporation BTL -- B 2/04/05 666,321 668,299
Stryker Corporation BTL -- C 2/04/06 333,679 335,035
---------
2,004,076
Leisure and Amusement -- 5.2%
Regal Cinemas BTL -- B 5/27/05 1,000,000 1,000,000
Mining & Metals -- 1.3%
Neenah Foundry Company BTL -- B 6/30/05 250,000 250,313
Oil & Gas -- 5.2%
Travel Centers of America BTL -- B 3/27/05 998,423 1,000,607
Real Estate -- 1.1%
Atrium Companies, Inc. BTL -- B 6/30/05 95,679 94,842
Atrium Companies, Inc. BTL -- C 6/30/06 109,460 108,502
---------
203,344
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
NORTH AMERICAN SENIOR FLOATING RATE FUND, INC.
Portfolio of Investments -- December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Industry/Description Type Maturity Date Par Value
- ----------------------------------------- ---------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Telecommunications -- 7.9%
Davel Communications, Inc. BTL -- B 6/23/05 $ 500,000 $ 499,063
Superior TeleCom, Inc. BTL -- B 1/27/05 1,000,000 1,003,505
-----------
1,502,568
Textiles and Leather -- 7.8%
Advanced Glassfiber Yarn BTL -- C 9/30/05 500,000 500,000
Pillowtex Corp. BTL -- B 12/31/04 998,607 995,174
-----------
1,495,174
Transportation -- 5.2%
American Commercial Lines BTL -- B 6/30/06 175,692 175,363
American Commercial Lines BTL -- C 6/30/07 824,308 822,762
-----------
998,125
TOTAL LOANS
(Cost $14,200,974) $14,183,684
-----------
SHORT-TERM INVESTMENTS -- 23.1% Shares
----------
SSGA Money Market Fund
(Cost $4,402,891) 4,402,891 $ 4,402,891
-----------
TOTAL INVESTMENTS -- 97.4%
(Cost $18,603,865*) $18,586,575
-----------
OTHER ASSETS AND LIABILITIES, NET -- 2.6% 498,346
-----------
NET ASSETS -- 100.0% $19,084,921
===========
</TABLE>
* The cost for Federal Income Tax purposes is the same.
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
NORTH AMERICAN SENIOR FLOATING RATE FUND, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. ORGANIZATION OF THE FUND. The North American Senior Floating Rate Fund, Inc.
(the "Fund") is a non-diversified closed-end, management investment company.
The Fund is organized as a Maryland Corporation and is registered under the
Investment Company Act of 1940, as amended. 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.
The Fund may offer three classes of shares. Class B shares are sold to the
public at net asset value and are subject to an Early Withdrawal Charge which
declines from 3% in the first year after purchase to zero after the fourth
year. Class C shares are sold to the public at net asset value and are subject
to an Early Withdrawal Charge of 1% in the first year after purchase. Class A
shares are not currently offered, and are available only upon the conversion of
Class B and C shares after being held by the shareholders for eight and ten
years, respectively. The share classes also differ in their respective
distribution and certain other class-specific expenses. Investment income,
realized and unrealized capital gains and losses and common expenses of the
Fund are allocated pro-rata to each class based on the average daily net assets
of each class. Dividends are declared separately for each class. All classes
have equal rights to assets and voting privileges.
CypressTree Asset Management Corporation, Inc. ("CAM"), a wholly-owned
subsidiary of CypressTree Investments, Inc. ("CypressTree") serves as
investment adviser and principal underwriter for the Fund. CypressTree
Investment Management Company, Inc. (CIMCO) serves as the Fund's subadviser.
CypressTree Funds Distributors, Inc. ("CFD"), also a wholly-owned subsidiary of
CypressTree, serves as distributor for the Fund.
2. SIGNIFICANT ACCOUNTING POLICIES. The policies described below are followed
when preparing the Fund's financial statements. These policies are in
accordance with generally accepted accounting principles ("GAAP").
Security Valuation. The Fund's investments in loan interests ("Loans") are
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 CIMCO's opinion and for which CIMCO 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 prices in the market. Loans for which
an active secondary market does not exist to a reliable degree in CIMCO's
opinion will be valued at fair value, which is intended to approximate market
value. In valuing a Loan at fair value, CIMCO 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 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. Obligations purchased with remaining maturities of 60 days or less are
valued at amortized cost unless this method is determined not to produce fair
valuation. Repurchase agreements and investments in money market funds are
valued at cost plus accrued interest. 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.
Federal Income Taxes. It is the Fund's policy to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code, as amended,
and to distribute all of its taxable income and any net realized gain on
investments to its shareholders each year. Accordingly, no federal income tax
provision is required.
Distributions of Income and Gains. Distributions of net investment income are
declared as a dividend to shareholders of record as of the close of business
each day and are paid monthly. The Fund distributes realized net capital gains,
if any, at least annually, after offset by any capital loss carryovers.
18
<PAGE>
NORTH AMERICAN SENIOR FLOATING RATE FUND, INC.
Notes to Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
Repurchase Agreements. The Fund may enter into repurchase agreements. When the
Fund enters into a repurchase agreement through its custodian, it receives
delivery of the underlying securities, the amount of which at the time of
purchase and each subsequent business day is required to be maintained at such
a level that the market value is equal to at least 102% of the resale price,
and the Fund will take constructive receipt of all securities underlying the
repurchase agreements until such agreements expire. If the seller defaults, the
Fund would suffer a loss to the extent that proceeds from the sale of
underlying securities were less than the repurchase price.
Estimates. Preparing the financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the amounts reported for the reporting period and
as of the end of the reporting period. Actual results could differ from those
estimates.
Income. Interest income is determined on the basis of interest accrued,
adjusted for amortization of premium or discount. Facility fees received are
recognized as income over the stated life of the loan. Other income, including
amendment fees, commitment fees, letter of credit fees, etc., are recorded as
income when received or contractually due to the Fund.
Gains/Losses. Gains or losses realized on the sale of portfolio assets are
recognized on the trade date using the specific identification method.
3. CAPITAL SHARES. The Fund has 1,000,000,000 of $.01 par value shares
authorized that may be issued in three different classes. Share activity for
the period ended December 31, 1998 was as follows:
<TABLE>
<CAPTION>
Class B Class C
------------------------- ------------------------------
Shares Capital Shares Capital
--------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Sold ............................. 471,473 $4,708,001 1,487,617 $14,858,203
Reinvestment of distributions..... 2,013 20,087 11,126 111,045
Redeemed ......................... -- -- (70,264) (701,375)
------- ---------- --------- -----------
Net increase/(decrease) ......... 473,486 $4,728,088 1,428,479 $14,267,873
======= ========== ========= ===========
</TABLE>
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 (usually 10%) of outstanding shares at net asset value.
Shareholders will be sent a Notification of Repurchase Offer seven to fourteen
days before each monthly repurchase offer. During the period ended December 31,
1998, the Fund made three Repurchase Offers, and actually redeemed the amounts
shown in the table below. In no case was a monthly Repurchase Offer
oversubscribed.
<TABLE>
<CAPTION>
Amount Tendered
----------------------
Shares Capital
-------- -----------
<S> <C> <C> <C> <C>
October .......... 21,114 $210,925
November ......... 18,316 182,795
December ......... 30,834 307,655
</TABLE>
4. PURCHASES AND SALES OF SECURITIES. During the period ended December 31,
1998, the Fund's cost of purchases of Loans and proceeds from Loan sales were
$14,750,000 and $555,276, respectively. Unrealized appreciation/depreciation in
the value of those investments at December 31, 1998 for federal income tax
purposes were as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation ......... $ 15,527
Gross unrealized depreciation ......... (32,817)
----------
Net unrealized depreciation ........... $ (17,290)
==========
</TABLE>
19
<PAGE>
NORTH AMERICAN SENIOR FLOATING RATE FUND, INC.
Notes to Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
5. INVESTMENT ADVISORY AGREEMENT. The Fund maintains an Investment Advisory
Agreement with CAM ("Adviser"), who is responsible for managing the corporate
and business affairs of the Fund, and selects, contracts with and compensates
the subadviser to manage the Fund's assets. As compensation for its services
the Adviser receives from the Fund an annual fee equal to the following
percentage of average daily gross assets: 0.85% for the first $1 billion of
average daily gross assets; 0.80% for average daily gross assets 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 retained CIMCO to serve as the Fund's subadviser to manage the
investment and reinvestment of the Fund's assets. As compensation for its
services as subadviser, CIMCO receives from CAM an annual fee paid monthly
equal to the following percentage of average daily gross assets: 0.45% for the
first $1 billion of average daily gross assets; 0.40% for average daily gross
assets between $1 billion and $2 billion; and 0.35% for average daily gross
assets of more than $2 billion. Average daily gross assets are computed as
described above. The fee paid to CIMCO is not an additional charge to the Fund
or its shareholders.
CAM, as the Fund's Administrator under an Administration Agreement, is
responsible for managing the Fund's business affairs, subject to supervision by
the Fund's Board of Directors. For its services, CAM receives an annual fee
equal to 0.40% of average daily gross assets of the Fund. Average daily gross
assets are computed as described above.
For the period ended December 31, 1998, CFD, as the Fund's distributor,
received $4,081 in Early Withdrawal Charges on redemptions from the Fund.
6. EXPENSE REIMBURSEMENT. Pursuant to the Investment Advisory Agreement, the
Adviser will reduce the advisory fee or if necessary reimburse each class of
the Fund (excluding taxes, portfolio brokerage commissions, interest, certain
litigation and indemnification expenses, extraordinary expenses and all of the
Fund's distribution fees) for expenses incurred in excess of 1.40% (expense
limitation). For the period ended December 31, 1998, the Adviser waived all
fees, and reimbursed all expenses of the Fund.
7. DISTRIBUTION PLAN. The Fund has adopted Distribution Plans ("Plans")
applicable to Class B and C shares 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 .75% of average net assets to finance
distribution expenses.
8. DIRECTOR COMPENSATON. The Fund pays each Director who is not an employee or
a director of the Adviser or its affiliates a fee of $750 plus travel expenses
for each Board of Directors meeting attended, $250 for each telephone meeting
and an annual retainer of $3,000.
9. LINE OF CREDIT. On September 15, 1998, the Fund entered into an agreement
with Fleet National Bank that provides a $20,000,000 Line of Credit to the Fund
that may be used for cash overdraft protection. The Fund pays a commitment fee
of $20,000 annually, and interest is charged on any borrowed amounts at the
currently effective Federal Funds Rate plus .55%. This Line of Credit was not
used during the period ended December 31, 1998.
20
<PAGE>
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of North American Senior Floating
Rate Fund, Inc:
We have audited the accompanying statement of assets and liabilities of North
American Senior Floating Rate Fund, Inc ("the Fund"), including the portfolio
of investments, as of December 31, 1998, and the related statements of
operations, cash flows, and changes in net assets and the financial highlights
for the period from commencement of operations, August 31, 1998, through
December 31, 1998. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
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 and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1998, by correspondence with the custodian and selling or agent
banks; where replies were not received from selling or agent banks, we
performed other auditing procedures. 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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of North
American Senior Floating Rate Fund, Inc. as of December 31, 1998, the results
of its operations, its cash flows, the changes in its net assets, and the
financial highlights for the period from the commencement of operations, August
31, 1998, through December 31, 1998, in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Boston, Massachusetts
February 24, 1999
21
<PAGE>
- --------------------------------------------------------------------------------
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).
22
<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 category.
23
<PAGE>
North American Senior Floating Rate Fund
STATEMENT OF ADDITIONAL INFORMATION
April 12, 1999
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
24
<PAGE>
- --------------------------------------------------------------------------------
PART C
- --------------------------------------------------------------------------------
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) FINANCIAL STATEMENTS:
INCLUDED IN PART A: Financial Highlights
INCLUDED IN PART B: (i) Portfolio of Investments, December 31, 1998
(ii) Statement of Assets and Liabilities, December
31, 1998
(iii) Statement of Operation - for the period August
31, 1998 through December 31, 1998
(iv) Statement of Changes in Net Assets - for the
period August 31, 1998 through December 31, 1998
(v) Statement of Cash Flows - for the period August
31, 1998 through December 31, 1998
(vi) Notes to Financial Statements
(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 as an exhibit to Amendment No. 2 to Registration Statement on Form N-2
of Registrant, filed August 6, 1998 (File No. 333-49273), incorporated by
reference herein.
**Filed as an exhibit to Registration Statement on Form N-2 of Registrant,
filed April 3, 1998 (File No. 333-49273), incorporated by reference herein.
***Filed as an exhibit to Amendment No. 1 to Registration Statement on Form
N-2 of Registrant, filed July 20, 1998 (File No. 333-49273), incorporated by
reference herein.
****Filed herewith.
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 issuance and distribution of additional shares:
<TABLE>
<S> <C>
Registration fees ............................................ $ 26,000
National Association of Securities Dealers, Inc. fees ........ 10,000*
Printing and engraving expenses .............................. 17,000
Fees and expenses of qualification under state securities
laws (excluding fees of counsel) .............................
Accounting fees and expenses ................................. 2,500*
Legal fees and expenses ...................................... 10,000
</TABLE>
*The Registrant's investment adviser, CypressTree Asset Management
Corporation, Inc. will pay these expenses in lieu of the Registrant.
<PAGE>
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
TITLE OF CLASS NUMBER OF RECORD HOLDERS
<S> <C>
Class A Common Stock 1
Class B Common Stock 322
Class C Common Stock 889
</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 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.
<PAGE>
ITEM 33. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To suspend the offering of shares until the prospectus is amended if
(1) subsequent to the effective date of its registration statement, the
net asset value declines more than 10% from its net asset value as of
the effective date of the registration statement or (2) the net asset
value increases to an amount greater than its net proceeds as stated in
the prospectus.
(2)(a) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(1) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(2) To reflect in the prospectus any facts or events after the effective
date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement; and
(3) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(b) that, for the purpose of determining any liability under the 1993
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of those securities at that time shall be deemed to be
the initial bona fide offering thereof; and
(c) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(3) To send by first class mail or other means designed to ensure equally
prompt delivery, within two business days of receipt of a written or
oral request, any Statement of Additional Information.
<PAGE>
- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
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
12th day of April, 1999.
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;
Bradford K. Gallagher Chief Executive Officer April 12, 1999
/s/ William F. Devin*
- -------------------------
William F. Devin Director April 12, 1999
/s/ William F. Achtmeyer*
- -------------------------
William F. Achtmeyer Director April 12, 1999
/s/ Kenneth J. Lavery*
- -------------------------
Kenneth J. Lavery Director April 12, 1999
/s/ Arthur S. Loring*
- -------------------------
Arthur S. Loring Director April 12, 1999
/s/ Paul F. Foley* Principal Financial and
- -------------------------
Paul F. Foley Accounting Officer April 12, 1999
</TABLE>
*BY /s/ John I. Fitzgerald, Attorney-in-Fact (pursuant to Power of Attorney
filed as an exhibit to Amendment No. 1 to Registration Statement on Form
N-2 of Registration, filed July 20, 1998), File No. 333-49273.
[Covington & Burling Letterhead]
April 9, 1999
North American Senior Floating Rate Fund, Inc.
125 High Street
Boston, MA 02110
Ladies and Gentlemen:
This opinion is being furnished to you in connection with the registration
by North American Senior Floating Rate Fund, Inc., a Maryland corporation (the
"Company"), of an additional 2,000,000 shares of Class B common stock, $0.01
par value per share, of the Company, and an additional 7,200,000 shares of
Class C common stock, $0.01 par value per share, of the Company (collectively,
the "Shares"), pursuant to a registration statement filed by the Company on
Form N-2 under the Securities Act of 1933 (the "Registration Statement").
We have acted as counsel to the Company in connection with the offer and
sale of the Shares. We have examined signed copies of the Registration
Statement, and the exhibits thereto, all as filed with the Commission. We also
have examined and relied on copies of minutes of the Board of Directors of the
Company.
Based on the foregoing, it is our opinion that the Shares 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 on receipt of the consideration specified, will be
validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as part of the
Registration Statement.
It is understood that this opinion is to be used only in connection with
the offer and sale of the Shares while the Registration Statement is in effect.
Very truly yours,
/s/ COVINGTON & BURLING
COVINGTON & BURLING
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in the Registration Statement on Form N-2 of
North American Senior Floating Rate Fund, Inc. of our report dated February 24,
1999 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 "Financial
Highlights" in the Prospectus and the heading "Auditors and Financial
Statements" in the Statement of Additional Information both of which are a part
of the Registration Statement.
/s/ DELOITTE & TOUCHE LLP
April 12, 1999
Boston, Massachusetts
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Fund's
annual financial statements, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0001059040
<NAME> NORTH AMERICAN SENIOR FLOATING RATE FUND
<SERIES>
<NUMBER> 1
<NAME> CLASS B
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> AUG-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 18590211
<INVESTMENTS-AT-VALUE> 18586575
<RECEIVABLES> 785619
<ASSETS-OTHER> 78195
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 19450389
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 365468
<TOTAL-LIABILITIES> 365468
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 19095961
<SHARES-COMMON-STOCK> 483486
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6250
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (17290)
<NET-ASSETS> 19084921
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 186082
<OTHER-INCOME> 1351
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 187433
<REALIZED-GAINS-CURRENT> 6250
<APPREC-INCREASE-CURRENT> 17290
<NET-CHANGE-FROM-OPS> 176393
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 45215
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 471473
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 2013
<NET-CHANGE-IN-ASSETS> 19084921
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 26085
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 122724
<AVERAGE-NET-ASSETS> 9181460
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.20
<PER-SHARE-GAIN-APPREC> (0.02)
<PER-SHARE-DIVIDEND> 0.20
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.98
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the fund's
annual financial statements, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0001059040
<NAME> NORTH AMERICAN SENIOR FLOATING RATE FUND, INC.
<SERIES>
<NUMBER> 2
<NAME> CLASS B
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> AUG-31-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 18590211
<INVESTMENTS-AT-VALUE> 18586575
<RECEIVABLES> 785619
<ASSETS-OTHER> 78195
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 19450389
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 365468
<TOTAL-LIABILITIES> 365468
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 19095961
<SHARES-COMMON-STOCK> 1428479
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6250
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (17290)
<NET-ASSETS> 19084921
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 186082
<OTHER-INCOME> 1351
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 187433
<REALIZED-GAINS-CURRENT> 6250
<APPREC-INCREASE-CURRENT> 17290
<NET-CHANGE-FROM-OPS> 176393
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 142218
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1487617
<NUMBER-OF-SHARES-REDEEMED> 70264
<SHARES-REINVESTED> 11126
<NET-CHANGE-IN-ASSETS> 19084921
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 26085
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 122724
<AVERAGE-NET-ASSETS> 9181460
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.20
<PER-SHARE-GAIN-APPREC> (0.02)
<PER-SHARE-DIVIDEND> 0.20
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.98
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
