<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 18, 1996
1933 ACT FILE NO. 333-12123
1940 ACT FILE NO. 811-5410
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
/ / REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
/X/ PRE-EFFECTIVE AMENDMENT NO. 1
AND
/ / REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
/X/ AMENDMENT NO. 21
------------------------
PILGRIM AMERICA PRIME RATE TRUST
(FORMERLY PILGRIM PRIME RATE TRUST)
EXACT NAME OF REGISTRANT SPECIFIED IN CHARTER
TWO RENAISSANCE SQUARE
40 NORTH CENTRAL AVENUE, SUITE 1200
PHOENIX, AZ 85004
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES (NUMBER, STREET, CITY, STATE, ZIP CODE)
(800) 334-3344
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
JAMES M. HENNESSY
PILGRIM AMERICA GROUP, INC.
TWO RENAISSANCE SQUARE
40 NORTH CENTRAL AVENUE, SUITE 1200
PHOENIX, AZ 85004
NAME AND ADDRESS (NUMBER, STREET, CITY, STATE, ZIP CODE) OF AGENT FOR SERVICE
COPIES TO:
JEFFREY S. PURETZ STEVEN N. ROBINSON
DECHERT PRICE & RHOADS CLEARY, GOTTLIEB, STEEN & HAMILTON
1500 K STREET, N.W. 1752 N STREET, N.W.
WASHINGTON, D.C. 20005 WASHINGTON, D.C. 20036
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING
If any 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. / /
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
================================================================================
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED REGISTERED UNIT PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Shares of Beneficial Interest
(without par value)........ 22,588,788 shares $9.56(1) $215,948,813(1) $74,465.11(1)(2)
- -----------------------------------------------------------------------------------------------------
Shares of Beneficial Interest
(without par value)........ 64,932 shares $9.58(3) $622,049(3) $188.50(3)
================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(d) under the Securities Act of 1933 on the basis of
net asset value per share on September 13, 1996.
(2) Previously paid.
(3) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(d) under the Securities Act of 1933 on the basis of
net asset value per share on October 15, 1996.
------------------------
THIS REGISTRATION STATEMENT SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
THE PROVISIONS OF SECTION 8(A) OF THE SECURITIES ACT OF 1933.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
PILGRIM AMERICA PRIME RATE TRUST
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NO. CAPTION LOCATION IN PROSPECTUS
- -------- ---------------------------------------- -------------------------------------------
<C> <S> <C>
PART A
1. Outside Front Cover..................... Front Cover Page
2. Inside Front and Outside Back Cover
Page.................................... Front Cover Page
3. Fee Table and Synopsis.................. Prospectus Summary; Trust Expenses
4. Financial Highlights.................... Financial Highlights and Investment
Performance -- Financial Highlights Table
5. Plan of Distribution.................... Front Cover Page; Prospectus Summary; The
Offer; Distribution Arrangements
6. Selling Shareholders.................... Not Applicable
7. Use of Proceeds......................... Use of Proceeds
8. General Description of the Registrant... Front Cover Page; Prospectus Summary;
Financial Highlights and Investment
Performance -- Portfolio Characteristics
and Composition; Financial Highlights and
Investment Performance -- Trading and Net
Asset Value Information; The Offer;
Description of the Common Shares;
Investment Objectives and Policies; Risk
Factors and Special Considerations; General
Information on Senior Loans
9. Management.............................. Prospectus Summary; Investment Management
and Other Services
10. Capital Stock, Long-Term Debt, and Other
Securities.............................. Front Cover Page; Description of the Common
Shares; Dividends and Distributions --
Distribution Policy; Dividends and
Distributions -- Dividend Reinvestment and
Cash Purchase Plan; Tax Matters
11. Defaults and Arrears on Senior
Securities.............................. Not Applicable
12. Legal Proceedings....................... Not Applicable
13. Table of Contents of Statement of
Additional Information.................. Table of Contents of Statement of
Additional Information
</TABLE>
<TABLE>
<C> <S> <C>
PART B
14. Cover Page.............................. Cover Page
15. Table of Contents....................... Table of Contents
16. General Information and History......... Change of Name
17. Investment Objective and Policies....... Additional Information About Investments
and Investment Techniques; Investment
Restrictions
18. Management.............................. Trustees and Officers
19. Control Persons and Principal Holders of
Securities.............................. Trustees and Officers; Prospectus:
Description of the Common Shares
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
ITEM NO. CAPTION LOCATION IN PROSPECTUS
- -------- ---------------------------------------- -------------------------------------------
<C> <S> <C>
20. Investment Advisory and Other
Services................................ Investment Management and Other Services;
Prospectus: Investment Management and Other
Services; Prospectus: Experts
21. Brokerage Allocation and Other
Practices............................... Portfolio Transactions
22. Tax Status.............................. Tax Matters
23. Financial Statement..................... Prospectus: Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C of this Registration Statement.
<PAGE> 4
PROSPECTUS
- --------------------------------------------------------------------------------
18,122,976 Shares of Beneficial Interest
PILGRIM AMERICA PRIME RATE TRUST
Issuable Upon Exercise of Non-Transferable Rights
to Subscribe for Such Shares of Beneficial Interest
New York Stock Exchange Symbol: PPR
- --------------------------------------------------------------------------------
Pilgrim America Prime Rate Trust (the "Trust") is issuing to its shareholders
("Shareholders") of record as of the close of business on October 18, 1996 (the
"Record Date") non-transferable rights (the "Rights") entitling the holders
thereof to subscribe for up to an aggregate of 18,122,976 shares of beneficial
interest of the Trust ("Common Shares" or "Shares"), at the rate of ONE COMMON
SHARE FOR EACH FIVE RIGHTS HELD (the "Offer"). Shareholders of record will
receive one NON-TRANSFERABLE right for each Share held and Shareholders who
fully exercise their Rights will have, subject to certain limitations and
subject to allotment, an OVER-SUBSCRIPTION privilege (the "Over-Subscription
Privilege"). Fractional shares will not be issued upon the exercise of Rights.
The Rights are non-transferable and will not be admitted for trading on the New
York Stock Exchange (the "NYSE") or any other exchange. Shares of the Trust
trade on the NYSE under the symbol "PPR." See "The Offer." THE SUBSCRIPTION
PRICE (THE "SUBSCRIPTION PRICE") PER SHARE WILL BE 97.5% OF THE LOWER OF (a) THE
AVERAGE OF THE LAST REPORTED SALES PRICE OF A SHARE OF THE TRUST'S COMMON SHARES
ON THE NYSE ON NOVEMBER 12, 1996 (THE "PRICING DATE") AND THE FOUR PRECEDING
BUSINESS DAYS OR (b) THE NET ASSET VALUE ("NAV") PER SHARE AS OF THE PRICING
DATE.
THE OFFER WILL EXPIRE AT 5:00 P.M., EASTERN STANDARD TIME, ON NOVEMBER 12, 1996
(THE "EXPIRATION DATE"). FOR ADDITIONAL INFORMATION REGARDING THE OFFER, PLEASE
CALL SHAREHOLDER COMMUNICATIONS CORPORATION (THE "INFORMATION AGENT") AT (800)
733-8481, EXTENSION 350.
The Trust is a diversified, closed-end management investment company. The
Trust's investment objective is to seek as high a level of current income as is
consistent with the preservation of capital. The Trust seeks to achieve its
objective by investing in interests in variable or floating-rate senior
collateralized corporate loans ("Senior Loans"), the interest rates of which
float periodically based upon a benchmark indicator of prevailing interest
rates. Investment in the Trust involves certain risks and special
considerations, including risks associated with the Trust's use of leverage. See
"Risk Factors and Special Considerations." The Trust's Investment Manager is
Pilgrim America Investments, Inc. ("PAII" or the "Investment Manager"). The
address of the Trust is Two Renaissance Square, 40 North Central Avenue, Suite
1200, Phoenix, Arizona 85004.
The Trust announced the Offer after the close of trading on the NYSE on
September 16, 1996. The NAV of the Common Shares at the close of business on
September 16, 1996 and October 18, 1996 was $9.57 and $ , respectively,
and the last reported sales prices per Common Share on the NYSE for those dates
was $9.875 and $ , respectively.
As a result of the terms of the Offer, Shareholders who do not fully exercise
their Rights will, upon the completion of the Offer, own a smaller proportional
interest in the Trust than they owned prior to the Offer. In addition, because
the Subscription Price per Share will be less than the current NAV per Share,
the Offer will result in an immediate dilution of the NAV per Share for all
existing shareholders. Such dilution, which might be substantial, is not
currently determinable because it is not known how many Shares will be
subscribed for, what the NAV or market price of the Common Shares will be on the
Pricing Date or what the Subscription Price will be. Shareholders will
experience a decrease in the NAV per Share held by them, irrespective of whether
they exercise all or any portion of their Rights. See "The Offer" and "Risk
Factors and Special Considerations."
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
Estimated Estimated Estimated Proceeds to
Subscription Price(1) Sales Load(2) Trust(3)
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Per Share................................ $ $ $
- --------------------------------------------------------------------------------------------------------------
Total Maximum............................ $ $ $
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Footnotes set forth on next page
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE. A Statement of Additional Information dated October 18, 1996 (the
"SAI") containing additional information about the Trust has been filed with the
Securities and Exchange Commission (the "Commission") and is incorporated by
reference in its entirety into this Prospectus. A copy of the SAI, the table of
contents of which appears on page of this Prospectus, may be obtained without
charge by contacting the Trust at (800) 331-1080.
DEALER MANAGERS
PRUDENTLAL SECURLTLES INCORPORATED MERRILL LYNCH & CO.
October 18, 1996
<PAGE> 5
(continued from previous page)
(1) Estimated on the basis of the NAV per share of the Trust's Common Shares on
October 18, 1996. Pursuant to the Over-Subscription Privilege, the Trust may
increase the number of Shares subject to subscription by up to 25% of the
Shares offered hereby. If the Trust increases the number of Shares subject
to subscription by 25%, the total maximum Estimated Subscription Price will
be approximately $ , the total maximum Estimated Sales Load will be
approximately $ , and the total maximum Estimated Proceeds to the
Trust will be approximately $ .
(2) In connection with the Offer, the Trust has agreed to pay Prudential
Securities Incorporated and Merrill Lynch, Pierce, Fenner & Smith
Incorporated (the "Dealer Managers") a fee for their financial advisory,
marketing and soliciting services equal to 3.5% of the aggregate
Subscription Price for the Shares issued pursuant to the Offer and to
reimburse Prudential Securities Incorporated for out-of-pocket expenses up
to $150,000. The Dealer Managers will reallow to certain broker-dealers a
concession of 2.25% of the Subscription Price per Share for Shares issued
pursuant to the Offer. See "Distribution Arrangements." These fees and
expense reimbursement will be borne by the Trust and indirectly by all of
the Trust's Shareholders, including those who do not exercise their Rights.
The Trust and the Investment Manager have agreed to indemnify the Dealer
Managers against certain liabilities under the Securities Act of 1933, as
amended (the "Securities Act") and the Investment Company Act of 1940, as
amended (the "Investment Company Act").
(3) Before deduction of expenses incurred by the Trust, estimated at
approximately $________, including $150,000 to be paid to Prudential
Securities Incorporated for reimbursement of their expenses.
2
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information appearing elsewhere in this Prospectus. Unless otherwise
indicated, the information in this Prospectus assumes 100% participation in the
Primary Subscription and that the allowable increase of 25% of the Shares
offered hereby pursuant to the Over-Subscription Privilege will not occur.
THE OFFER AT A GLANCE
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
The Offer The Trust is issuing to Record Date Shareholders one non-
transferable Right for each share held entitling
Shareholders to subscribe for Shares of the Trust at the
rate of one Common Share for each five Rights.
- ------------------------------------------------------------------------------------------
Subscription Price The Subscription Price will be 97.5% of the lower of (a)
the average of the last reported sales price per Common
Share on the NYSE on the Pricing Date and the four
preceding business days or (b) the NAV per Share as of
the Pricing Date.
- ------------------------------------------------------------------------------------------
Over-Subscription Privilege Shareholders who fully exercise their Rights may have,
subject to certain limitations and subject to allotment,
a privilege to subscribe for additional Shares. The Trust
may, at its discretion, issue up to an additional 25% of
the Shares available in the Offer to honor over-
subscriptions.
- ------------------------------------------------------------------------------------------
Purpose of Offer The Trust's Investment Manager believes that increasing
the Trust's assets through the Offer will improve the
Trust's competitive position within the Senior Loan
market. While there can be no assurance that potential
benefits will be realized, improving the Trust's
competitive position is intended to:
- increase income from investments over time;
- allow the Trust to increase its average investment size
while maintaining portfolio diversification; and
- enhance the Trust's ability in the secondary Senior
Loan market to generate cash for new investments and to
sell Senior Loans at a profit.
PAII believes the Offer will reduce the Trust's operating
costs per share.
The Offer affords Shareholders the opportunity to
purchase additional Shares of the Trust at a price that
will be below market value and NAV at the Expiration
Date.
(See "The Offer -- Purpose of the Offer.")
- ------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 7
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------
Use of Proceeds It is expected that net proceeds of the Offer will be
used to pay down the Trust's outstanding borrowings, and
therefore will be invested in Senior Loans consistent
with the Trust's investment policies almost immediately.
PAII believes that the Trust's monthly dividend will not
be reduced as a result of the Offer, although there can
be no assurance of this. (See "Use of Proceeds.")
- ------------------------------------------------------------------------------------------
How to Obtain Subscription Contact your broker.
Information
Contact the Information Agent toll-free at (800)
733-8481, extension 350.
- ------------------------------------------------------------------------------------------
How to Subscribe Shareholders may subscribe in one of the two following
ways:
Deliver a completed Exercise Form and payment
to the Subscription Agent by the Expiration
Date.
If your Shares are held in a brokerage or bank
account, have your broker or bank deliver a
Notice of Guaranteed Delivery to the Subscription
Agent by the Expiration Date.
- ------------------------------------------------------------------------------------------
Subscription Agent State Street Bank and Trust Company
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
IMPORTANT DATES TO REMEMBER:
Record Date..........................................................
October 18, 1996
Subscription Period..................................................
October 21, 1996-
November 12, 1996
Deadline for delivery of Exercise Form together with payment of
Estimated Subscription Price or for delivery of Notice of Guaranteed
Delivery.............................................................
November 12, 1996
Expiration Date and Pricing Date.....................................
November 12, 1996
Deadline for payment pursuant to Notice of Guaranteed Delivery.......
November 15, 1996
Confirmation Date to Registered Shareholders.........................
November 27, 1996
For Registered Shareholder Purchases -- deadline for payment of
unpaid balance if final Subscription Price is higher than Estimated
Subscription Price...................................................
December 6, 1996
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 8
THE TRUST AT A GLANCE
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
The Trust The Trust is a diversified, closed-end
management investment company organized as a
Massachusetts business trust. As of October
18, 1996, the Trust's NAV was $[ ].
- ------------------------------------------------------------------------------------------
NYSE Listed As of August 31, 1996, the Trust had
90,614,878 Shares outstanding, which are
traded on the NYSE under the symbol "PPR." As
of October 18, 1996, the last reported sales
price of a Share of the Trust was $[ ].
The Rights are non-transferable and therefore
will not be admitted for trading on the NYSE.
- ------------------------------------------------------------------------------------------
Investment Objective To obtain as high a level of current income
as is consistent with the preservation of
capital.
- ------------------------------------------------------------------------------------------
Primary Investment Strategy The Trust seeks to achieve its investment
objective by acquiring interests in Senior
Loans with interest rates that float
periodically based on a benchmark indicator
of prevailing interest rates, such as the
prime rate or London Inter-Bank Offered Rate
("LIBOR"). The Trust may also employ
techniques such as borrowing for investment
purposes. There can be no assurance that the
Trust will achieve its investment objective.
- ------------------------------------------------------------------------------------------
Diversification The Trust maintains a diversified investment
portfolio. As a diversified management
investment company, the Trust, with respect
to 75% of its total assets, may invest no
more than 5% of the value of its total assets
in any one issuer (other than the U.S.
Government). This strategy of diversification
is intended to manage risk by limiting
exposure to any one issuer.
- ------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 9
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------
General Investment Guidelines Under normal circumstances, at least 80% of
the Trust's assets is invested in Senior
Loans.
A maximum of 25% of the Trust's assets is
invested in any one industry.
The Trust only invests in Senior Loans in
U.S. corporations or corporations domiciled
in Canada or U.S. territories and
possessions, and the Senior Loans must be
denominated in U.S. dollars.
- ------------------------------------------------------------------------------------------
Distributions Income dividends are declared and paid
monthly. Income dividends may be distributed
in cash or reinvested in additional full and
fractional shares through the Trust's
Dividend Reinvestment and Cash Purchase Plan.
- ------------------------------------------------------------------------------------------
Investment Manager Pilgrim America Investments, Inc.
- ------------------------------------------------------------------------------------------
Administrator Pilgrim America Group, Inc.
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 10
RISK FACTORS AND SPECIAL CONSIDERATIONS AT A GLANCE
This Prospectus contains certain statements that may be deemed to be
"forward-looking statements." Actual results could differ materially from those
projected in the forward-looking statements as a result of uncertainties set
forth below and elsewhere in the Prospectus. For additional information, see
"Risk Factors and Special Considerations".
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
Dilution The Offer will result in dilution.
Record Date Shareholders who do not fully
exercise their Rights will experience as a
result of the Offer: dilution of NAV per
Share; dilution of a proportionate ownership
interest in the Trust; and dilution of voting
power.
Also, an immediate dilution of the NAV per
Share will be experienced by all
Shareholders, regardless of whether they
exercise any or all of their rights, because
the Subscription Price will be less than the
current NAV per Share, and the number of
Shares outstanding after the Offer will
increase by a greater percentage than the
increase in the size of the Trust's assets.
- ------------------------------------------------------------------------------------------
Discount The Trust's Shares may trade at a discount to
NAV. This is a risk separate and distinct
from the risk that the Trust's NAV will
decrease.
- ------------------------------------------------------------------------------------------
Credit Risk Investment in the Trust involves the risk
that borrowers under Senior Loans may default
on obligations to pay principal and interest
when due, and the risk that the Trust's
investment objective may not be realized.
- ------------------------------------------------------------------------------------------
Limited Secondary Market Because of a limited secondary market for
Senior Loans, the Trust may be limited in its
ability to sell portfolio holdings to
generate gains or avoid losses.
- ------------------------------------------------------------------------------------------
Leverage The Trust may borrow for investment purposes,
which increases both investment opportunity
and investment risk.
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
------------------------
7
<PAGE> 11
TRUST EXPENSES
The following table is intended to assist the Trust's investors in understanding
the various costs and expenses associated with investing in the Trust through
the exercise of Rights.(1)
<TABLE>
<CAPTION>
NET ASSETS NET ASSETS
PLUS WITHOUT
BORROWINGS(2) BORROWINGS(3)
------------- -------------
<S> <C> <C>
Shareholder Transaction Expenses
Sales Load (as a percentage of Subscription
Price)(4)........................................... 3.50% 3.50%
Dividend Reinvestment and Cash Purchase Plan Fees...... NONE NONE
Annual Expenses (as a percentage of net assets
attributable to Common Shares)
Management and Administrative Fees(5).................. 1.17% 0.94%
Other Operating Expenses(6)............................ 0.31% 0.26%
---- ----
Total Annual Expenses before Interest Expense............ 1.48% 1.20%
Interest Expense on Borrowed Funds..................... 2.00% 0.00%
---- ----
Total Annual Expenses(7)....................... 3.48% 1.20%
==== ====
</TABLE>
- ---------------
(1) The calculations in the fee table above are based on the Trust's expenses as
a ratio of net assets. Certain expenses of the Trust, such as management and
administrative fees, are calculated on the basis of net assets plus
borrowings. If the Trust's expenses are calculated on the basis of net
assets plus borrowings (including borrowings equal to 25% of net assets),
the annual expenses in the fee table would read as follows:
<TABLE>
<S> <C>
Annual Expenses (as a percentage of net assets
plus borrowings attributable to Common Shares)
Management and Administrative Fees.................................. 0.88%
Other Operating Expenses............................................ 0.23%
----
Total Annual Expenses before Interest Expense......................... 1.11%
Interest Expense on Borrowed Funds.................................. 1.50%
----
Total Annual Expenses....................................... 2.61%
</TABLE>
(2) Expenses are calculated based upon the Trust's net assets plus outstanding
borrowings (at 25% of net assets) and are shown as a ratio of net assets.
(3) Expense ratios are calculated based upon net assets of the Trust and assume
that no borrowings have been made.
(4) The Trust has agreed to pay the Dealer Managers a fee for their financial
advisory, marketing and soliciting services equal to 3.5% of the aggregate
Subscription Price for the Shares issued pursuant to the Offer and to
reimburse Prudential Securities Incorporated for out-of-pocket expenses up
to $150,000. Total offering expenses are estimated to be $________. In
addition, the Trust has agreed to pay a fee to the Subscription Agent and
the Information Agent estimated to be $150,000 and $56,000, respectively,
which includes reimbursement for their out-of-pocket expenses related to the
Offer. These fees will be borne by the Trust and indirectly by all of the
Trust's Shareholders, including those who do not exercise their Rights. See
"Distribution Arrangements."
(5) Pursuant to an Investment Management Agreement with the Trust, PAII is
entitled to receive a fee of 0.85% of the average daily net assets of the
Trust, plus the proceeds of any outstanding borrowings, up to $700 million;
0.75% of the average daily net assets, plus the proceeds of any outstanding
borrowings, in excess of $700 million up to $800 million; and 0.65% of the
average daily net assets, plus the proceeds of any outstanding borrowings,
in excess of $800 million. PAII has agreed to reduce its management fee for
a period of three years from the Expiration Date to 0.60% on that portion of
the Trust's average daily net assets, plus the proceeds of any outstanding
borrowings, in excess of $1.15 billion. See "Investment
8
<PAGE> 12
Management and Other Services -- Investment Manager." Pursuant to its
Administration Agreement with the Trust, Pilgrim America Group, Inc. ("PAGI"
or the "Administrator"), the Trust's Administrator, is entitled to receive a
fee of 0.15% of the Trust's average daily net assets, plus the proceeds of
any outstanding borrowings, up to $800 million; and 0.10% of the average
daily net assets, plus the proceeds of any outstanding borrowings, in excess
of $800 million. See "Investment Management and Other Services -- The
Administrator."
(6) "Other Operating Expenses" are based on estimated amounts for the current
fiscal year.
(7) The indicated 3.48% expense ratio assumes that the Offer is fully
subscribed, yielding estimated net proceeds of approximately $[ ]
million (with an estimated Subscription Price of $ per share) and
that, as a result, based on the Trust's net assets of $[ ] on
October 18, 1996, the net assets attributable to Shareholders would be
$[ ].
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------- ------- ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming a 5% annual return and
where the Trust has borrowed.................... $69 $ 138 $ 209 $397
You would pay the following expenses on a $1,000
investment, assuming a 5% annual return and
where the Trust has not borrowed................ $47 $ 72 $ 99 $175
</TABLE>
This hypothetical example assumes that all dividends and other distributions
are reinvested at NAV and that the percentage amounts listed under Annual
Expenses above remain the same in the years shown. See also Note (7) above
for assumptions made in calculating the expenses in this hypothetical
example. The above tables and the assumption in the hypothetical example of
a 5% annual return are required by regulation of the Commission applicable
to all investment companies; the assumed 5% annual return is not a
prediction of, and does not represent, the projected or actual performance
of the Trust's Shares. For more complete descriptions of certain of the
Trust's costs and expenses, see "Investment Management and Other Services."
THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
9
<PAGE> 13
FINANCIAL HIGHLIGHTS AND INVESTMENT PERFORMANCE
FINANCIAL HIGHLIGHTS TABLE
The table below sets forth selected financial information which has been derived
from the financial statements in the Trust's Annual Report dated as of February
29, 1996 and Semi-Annual Report dated as of August 31, 1996. For the fiscal year
ended February 29, 1996, the information in the table below has been audited by
KPMG Peat Marwick, LLP, independent certified public accountants. For all
periods ending prior to February 29, 1996, the financial information was audited
by the Trust's former auditors, Tait, Weller & Baker, independent certified
public accountants. This information should be read in conjunction with the
Financial Statements and Notes thereto included in the Trust's February 29, 1996
Annual Report to Shareholders and August 31, 1996 Semi-Annual Report to
Shareholders, which contain further information about the Trust's performance,
and which are available to Shareholders upon request and without charge.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED FEBRUARY 28*
AUGUST 31, -----------------------------------------------------------------------
1996 1996(6) 1995 1994 1993 1992 1991
---------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE
NAV,
beginning
of
period.... $ 9.61 $ 9.66 $ 10.02 $ 10.05 $ 9.96 $ 9.97 $ 10.00
-------- -------- -------- -------- -------- ---------- ----------
Net
investment
income.... 0.40 0.89 0.74 0.60 0.60 0.76 0.98
Net realized
and
unrealized
gain
(loss) on
investment.. (0.01) (0.08) 0.07 (0.05) 0.01 (0.02) (0.05)
-------- -------- -------- -------- -------- ---------- ----------
Increased in
NAV from
investment
operations... 0.39 0.81 0.81 0.55 0.61 0.74 0.93
-------- -------- -------- -------- -------- ---------- ----------
Distributions
from net
investment
income.... (0.40) (0.86) (0.73) (0.60) (0.57) (0.75) (0.96)
-------- -------- -------- -------- -------- ---------- ----------
Reduction in
NAV from
rights
offering... -- -- (0.44) -- -- -- --
-------- -------- -------- -------- -------- ---------- ----------
Increase in
NAV from
repurchase
of capital
stock..... -- -- -- 0.02 0.05 -- --
-------- -------- -------- -------- -------- ---------- ----------
NAV, end of
period.... $ 9.60 $ 9.61 $ 9.66 $ 10.02 $ 10.05 $ 9.96 $ 9.97
======== ======== ======== ======== ======== ========== ==========
Closing
market
price at
end of
period.... $ 9.88 $ 9.50 $ 8.75 $ 9.25 $ 9.13 $ -- $ --
======== ======== ======== ======== ======== ========== ==========
TOTAL RETURN
Total
investment
return
based on
closing
market
price(3)... 8.40% 19.19% 3.27%(5) 8.06% 10.89% -- --
Total
investment
return
based on
NAV(4).... 4.18% 9.21% 5.24%(5) 6.28% 7.29% 7.71% 9.74%
RATIOS/SUPPLEMENTAL
DATA
Net assets,
end of
period
(thousands)... $867,306 $862,938 $867,083 $719,979 $738,810 $874,104 $1,158,224
Ratios to
average
net
assets:
Expenses... 1.58%(1) 1.23% 1.30% 1.31% 1.42% 1.42%(2) 1.38%
Net
investment
income... 8.41%(1) 9.23% 7.59% 6.04% 5.88% 7.62%(2) 9.71%
Portfolio
turnover
rate...... 42% 88% 108% 87% 81% 53% 55%
<CAPTION>
MAY 12,
1988** TO
FEBRUARY 28,
1990 1989
------- ------------
<S> <C> <C>
PER SHARE
OPERATING
PERFORMANCE
NAV,
beginning
of
period.... $ 10.00 $ 10.00
-------- --------
Net
investment
income.... 1.06 0.72
Net realized
and
unrealized
gain
(loss) on
investment.. -- --
-------- --------
Increased in
NAV from
investment
operations 1.06 0.72
-------- --------
Distribution
from net
investment
income.... (1.06) (0.72)
-------- --------
Reduction in
NAV from
rights
offering... -- --
-------- --------
Increase in
NAV from
repurchase
of capital
stock..... -- --
-------- --------
NAV, end of
period.... $ 10.00 $ 10.00
======== ========
Closing
market
price at
end of
period.... $ -- $ --
======== ========
TOTAL RETURN
Total
investment
return
based on
closing
market
price(3)... -- --
Total
investment
return
based on
NAV(4).... 11.13% 7.35%
RATIOS/SUPPLEMENTAL
DATA
Net assets,
end of
period
(thousands $1,036,470 $252,998
Ratios to
average
net
assets:
Expenses... 1.46%(2) 1.18%(1)(2)
Net
investment
income... 10.32%(2) 9.68%(1)(2)
Portfolio
turnover
rate...... 100% 49%
Shares
outstanding
at end of
period
(thousands 103,600 25,294
Average
daily
balance of
debt
outstanding
during the
period
(thousands $ -- $ --
Average
monthly
shares
outstanding
during the
period
(thousands -- --
Average
amount of
debt per
share
during the
period(7)... $ -- $ --
</TABLE>
10
<PAGE> 14
- ---------------
* Or February 29, if applicable.
** Commencement of operations.
(1) Annualized.
(2) Prior to the waiver of expenses, the ratio of expenses to average net assets
was 1.95% (1), 1.48% and 1.44% for the period from May 12, 1988 to February
28, 1989, and for the fiscal years ended February 28, 1990 and February 29,
1992, respectively, and the ratio of net investment income to average net
assets was 8.91%(1), 10.30% and 7.60% for the period from May 12, 1988 to
February 28, 1989 and for the fiscal years ended February 28, 1990 and
February 29, 1992, respectively.
(3) Total investment return measures the change in the market value of your
investment assuming reinvestment of dividends and capital gain
distributions, if any, in accordance with the provisions of the dividend
reinvestment plan. On March 9, 1992, the Shares of the Trust were initially
listed for trading on the New York Stock Exchange. Accordingly, the total
investment return at closing market price for the periods prior to the year
ended February 28, 1993 is not presented since market values for the Trust's
Shares were not available.
(4) Total investment return at NAV has been calculated assuming a purchase at
NAV at the beginning of each period and a sale at NAV at the end of each
period and assumes reinvestment of dividends and capital gain distributions
in accordance with the provisions of the dividend reinvestment plan. This
calculation differs from total investment return because it excludes the
effects of changes in the market values of the Trust's Shares.
(5) Calculation of total return excludes the effect of the per share dilution
resulting from the rights offering in 1995 as the total account value of a
fully subscribed Shareholder was minimally impacted.
(6) PAII, the Trust's Investment Manager, acquired certain assets of Pilgrim
Management Corporation, the Trust's former investment manager, in a
transaction that closed on April 7, 1995.
(7) Prior to May 2, 1996, the Trust borrowed to enable it to purchase its Shares
in connection with periodic tender offers. On May 2, 1996, the Trust
received shareholder approval to borrow for investment purposes. As of
August 31, 1996, the Trust had outstanding borrowings of $197,000,000 under
a $285 million line of credit. See "Policy on Borrowing" in this section.
11
<PAGE> 15
TRUST CHARACTERISTICS AND COMPOSITION
The following tables set forth certain information with respect to the
characteristics and the composition of the Trust's investment portfolio in terms
of percentages of total investments as of August 31, 1996.
--------------------------------------------------------------------
TRUST CHARACTERISTICS
<TABLE>
<CAPTION>
<S> <C>
Net Assets................................................... $ 867,305,590
Assets Invested in Senior Loans.............................. $1,049,886,435
Total Number of Senior Loans................................. 105
Average Amount Outstanding per Senior Loan................... $ 9,998,918
Total Number of Industries................................... 28
Year to Date Portfolio Turnover Rate......................... 42%
Average Amount Invested per Industry......................... $ 37,495,944
Weighted Average Days to Interest Rate Reset................. 38 days
Average Senior Loan Maturity................................. 67 months
Average Age of Senior Loans Held in Portfolio................ 10 months
</TABLE>
--------------------------------------------------------------------
<TABLE>
<CAPTION>
----------------------------------------- -----------------------------------------
LARGEST SENIOR LOANS HELD LARGEST INDUSTRY GROUPS
(AS A % OF TOTAL INVESTMENTS) (AS A % OF TOTAL INVESTMENTS)
----------------------------------------- -----------------------------------------
<S> <C> <C> <C>
KMart Corp.......................... 4.7% Aerospace Products & Services....... 8.9%
Riverwood International Corp........ 2.8% General Merchandise Retailing....... 8.6%
Smith's Food & Drug Co.............. 2.5% Media/Broadcast..................... 8.3%
Favorite Brands International....... 2.3% Diversified Manufacturing........... 7.7%
Community Health Systems............ 1.9% Food Stores......................... 7.0%
Graco Children's Products, Inc...... 1.9% Electronic Equipment................ 5.7%
Liberty House, Inc.................. 1.9% Food/Tobacco Products & Services.... 4.8%
Ralph's Grocery Co.................. 1.7% Industrial Equipment................ 4.1%
MTF Acquisition Corp................ 1.7% Health Care Services................ 3.9%
Lifestyle Furnishings
International..................... 1.6% Paper Products...................... 3.7%
------------------------------------ -----------------------------------------
</TABLE>
POLICY ON BORROWING
Beginning in May of 1996, the Trust began a policy of borrowing for investment
purposes. This policy was approved by shareholders of the Trust at a meeting
held on May 2, 1996. The Trust has entered into a four-year credit agreement
("Credit Facility") with a syndicate of banks providing for a revolving line of
credit of up to $285 million with interest payable by the Trust at a variable
rate of LIBOR or the federal funds rate plus 0.50% of outstanding borrowings
plus a 0.125% fee on unused credit. As of August 31, 1996, the Trust had
outstanding borrowings of $197,000,000. Because additional income producing
investments can be acquired with borrowed proceeds, borrowing has the potential
to increase the Trust's total income.
The Trust is permitted to borrow up to 33 1/3%, or such other percentage
permitted by law, of its total assets (including the amount borrowed) less all
liabilities other than borrowings. Upon completion of the Offer, the Trust
intends to increase the Trust's Credit Facility and use the proceeds for
investment purposes. No assurance can be given that the terms on the new
borrowings under the Trust's Credit Facility will be the same as the current
terms. See "Risk Factors and Special Considerations -- Borrowing and Leverage."
TRADING AND NAV INFORMATION
The following table shows, for the Trust's Shares for the periods indicated: (1)
the high and low closing prices on the NYSE; (2) the NAV represented by each of
the corresponding high and low closing prices on the NYSE; and (3) the discount
or premium to NAV per Share (expressed as a percentage) represented by these
12
<PAGE> 16
closing prices. The table also sets forth the aggregate number of Shares traded
on the NYSE during the respective quarter.
<TABLE>
<CAPTION>
PREMIUM/(DISCOUNT)
PRICE NAV TO NAV
---------------- ----------------- ----------------- REPORTED
HIGH LOW HIGH LOW HIGH LOW NYSE VOLUME
------- ------ ------- ------- ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CALENDAR QUARTER ENDED
March 31, 1994............. $ 9.500 $9.000 $10.010 $ 9.960 (5.10)% (9.64)% 15,317,700
June 30, 1994.............. 9.875 9.375 10.050 9.980 (1.74) (6.06) 14,307,500
September 30, 1994......... 10.000 9.750 10.090 10.090 (0.89) (3.37) 11,814,700
December 31, 1994.......... 9.875 9.000 10.090 10.060 (2.13) (10.53) 15,590,400
March 31, 1995............. 9.000 8.375 10.040 9.650 (10.36) (13.21) 24,778,200
June 30, 1995.............. 9.250 8.750 9.650 9.620 (4.15) (9.04) 16,974,600
September 30, 1995......... 9.375 8.875 9.660 9.660 (2.95) (8.13) 15,325,900
December 31, 1995.......... 9.500 9.000 9.630 9.620 (1.35) (6.45) 16,428,200
March 31, 1996............. 9.625 9.250 9.550 9.590 0.79 (3.55) 17,978,300
June 30, 1996.............. 9.750 9.375 9.580 9.580 1.78 (2.14) 13,187,700
September 30, 1996......... 10.000 9.375 9.560 9.570 4.60 (2.04) 15,821,000
</TABLE>
The following chart shows, for the Trust's Shares for the period indicated: (1)
the closing price of the Shares on the NYSE; (2) the NAV of the Shares; and (3)
the discount or premium to NAV.
<TABLE>
<CAPTION>
DATE PRICE NAV % PREM
<S> <C> <C> <C>
11/4/94 9.688 10.050 -3.61
11/11/94 9.750 10.060 -3.08
11/18/94 9.875 10.070 -1.94
11/25/94 9.625 10.080 -4.51
12/2/94 9.750 10.010 -2.60
12/9/94 9.250 10.050 -7.96
12/16/94 9.250 10.060 -8.05
12/23/94 9.125 n.a. n.a.
12/30/94 9.125 10.030 -9.02
1/6/95 8.875 10.030 -11.52
1/13/95 8.750 10.060 -13.02
1/20/95 8.625 10.080 -14.43
1/27/95 8.500 10.090 -15.76
2/3/95 8.625 9.660 -10.71
2/10/95 8.750 9.610 -8.95
2/17/95 8.750 9.630 -9.14
2/24/95 8.625 9.650 -10.62
3/3/95 8.750 9.660 -9.42
3/10/95 8.750 9.610 -8.95
3/17/95 8.750 9.630 -9.14
3/24/95 8.750 9.650 -9.33
3/31/95 8.750 9.670 -9.51
4/7/95 8.750 9.610 -8.95
4/14/95 8.750 9.620 -9.04
4/21/95 8.875 9.640 -7.94
4/28/95 8.875 9.660 -8.13
5/5/95 8.875 9.600 -7.55
5/12/95 8.875 9.620 -7.74
5/19/95 9.000 9.640 -6.64
5/26/95 8.875 9.660 -8.13
6/2/95 9.000 9.670 -6.93
6/9/95 9.125 9.620 -5.15
6/16/95 9.000 9.630 -6.54
6/23/95 9.125 9.650 -5.44
6/30/95 9.125 9.650 -5.44
7/7/95 9.125 9.600 -4.95
7/14/95 9.000 9.620 -6.44
7/21/95 8.875 9.630 -7.84
7/28/95 9.000 9.650 -6.74
8/4/95 9.125 9.670 -5.64
8/11/95 9.000 9.610 -6.35
8/18/95 9.125 9.620 -5.15
8/25/95 9.250 9.640 -4.05
9/1/95 9.250 9.670 -4.34
9/8/95 9.250 9.610 -3.75
9/15/95 9.375 9.630 -2.65
9/22/95 9.250 9.640 -4.05
9/29/95 9.375 9.660 -2.95
10/6/95 9.375 9.610 -2.45
10/13/95 9.375 9.620 -2.55
10/20/95 9.250 9.640 -4.05
10/27/95 9.250 9.660 -4.24
11/3/95 9.125 9.670 -5.64
11/10/95 9.000 9.620 -6.44
11/17/95 9.250 9.620 -3.85
11/24/95 9.125 9.650 -5.44
12/1/95 9.125 9.670 -5.64
12/8/95 9.250 9.610 -3.75
12/15/95 9.375 9.630 -2.65
12/22/95 9.375 9.630 -2.65
12/29/95 9.250 9.580 -3.44
1/5/96 9.375 9.590 -2.24
1/12/96 9.375 9.600 -2.34
1/19/96 9.375 9.620 -2.55
1/26/96 9.375 9.620 -2.55
2/2/96 9.313 9.640 -3.40
2/9/96 9.375 9.580 -2.14
2/16/96 9.375 9.590 -2.24
2/23/96 9.500 9.610 -1.14
3/1/96 9.375 9.610 -2.45
3/8/96 9.375 n.a. n.a.
3/15/96 9.375 9.570 -2.04
3/22/96 9.375 9.590 -2.24
3/29/96 9.625 9.610 .16
4/5/96 9.500 9.540 -.42
4/12/96 9.625 9.550 .79
4/19/96 9.625 9.570 .57
4/26/96 9.500 9.580 -.84
5/3/96 9.625 9.600 .26
5/10/96 9.500 9.560 -.63
5/17/96 9.625 9.570 .57
5/24/96 9.625 9.590 .36
5/31/96 9.500 9.610 -1.14
6/7/96 9.625 9.560 .68
6/14/96 9.750 9.570 1.88
6/21/96 9.625 9.590 .36
6/28/96 9.750 9.610 1.46
7/5/96 9.750 9.550 2.09
7/12/96 9.625 9.570 .57
7/19/96 9.625 9.580 .47
7/26/96 9.750 9.600 1.56
8/2/96 9.813 9.620 2.00
8/9/96 9.875 9.560 3.29
8/16/96 9.875 9.580 3.08
8/23/96 9.875 9.600 2.86
8/30/96 9.875 9.600 2.86
9/6/96 9.875 n.a. n.a.
9/13/96 10.000 9.560 4.60
9/20/96 9.625 9.580 .47
9/27/96 9.875 9.600 2.86
10/4/96 9.875 9.620 2.65
10/11/96 9.750 9.570 1.88
</TABLE>
Source: BLOOMBERG Financial Markets.
Immediately prior to the Trust's announcement of the Offer on September 16, 1996
and on October 18, 1996, the last reported sale price of a share of the Trust's
Common Shares on the NYSE was $9.875 and $ , respectively. The Trust's
NAV on September 16, 1996 and on October 18, 1996 was $9.57 and $ ,
respectively. See "NAV" in the SAI. On September 16, 1996, the last reported
sale price of a share of the Trust's Common Shares on the NYSE ($9.875)
represented a 3.19% premium above NAV ($9.57) as of that date. On October 18,
1996, the last reported sale price of a share of the Trust's Common Shares on
the NYSE represented a [premium above][discount to] NAV of ($ ) as of
that date.
The Trust's Shares have traded in the market above, at, and below NAV since
March 9, 1992, when the Trust's Shares were listed on the NYSE. The Trust cannot
predict whether its shares will trade in the future at
13
<PAGE> 17
a premium or discount to NAV, and if so, the level of such premium or discount.
Shares of closed-end investment companies frequently trade at a discount from
NAV.
INVESTMENT PERFORMANCE
Morningstar Ratings
For the three and five year periods ended August 31, 1996, the Trust had a five
star and a four star Morningstar risk-adjusted performance rating, respectively,
when rated among 92 and 63 taxable bond funds. The Trust's overall rating
through August 31, 1996, is four stars(1). For the three-year and five-year
periods ended August 31, 1996, the Trust's risk score placed the Trust first out
of 30 and 25 Corporate Bond -- General funds, respectively. For the three-year
and five-year periods ended August 31, 1996, the Trust's risk score placed the
Trust third out of the universe of 415 and 230 closed-end funds,
respectively(2). Morningstar's risk score evaluates an investment company's
downside volatility relative to all other investment companies in its class.
Lipper Rankings
According to Lipper Analytical Services, Inc. ("Lipper") (a company that
calculates and publishes rankings of closed-end and open-end management
investment companies), in the five-year period ended August 31, 1996, the Trust
ranked in first place among all funds in the Loan Participation Category of
Closed-End Funds, defined by Lipper to include closed-end management investment
companies that invest in Senior Loans. Investors should note that past
performance is no assurance of future results.
<TABLE>
<CAPTION>
PERIODS ENDED TOTAL NUMBER OF FUNDS
AUGUST 31, 1996 RANKING(3) RETURN(3) IN CATEGORY(4)
-------------------------------------------- ---------- --------- ---------------
<S> <C> <C> <C>
One year.................................... 1 8.35% 7
Three years................................. 1 27.55% 6
Five years.................................. 1 43.91% 5
</TABLE>
- ---------------
(1) The Trust's overall rating is based upon a weighted average of its
performance for the three-year and five-year periods ended August 31, 1996.
(2) Morningstar's taxable bond fund category includes Corporate Bond -- General,
Government Bond, International Bond and Multisector Bond funds. On
Morningstar's risk-adjusted performance rating system, funds falling into
the top 10% of all funds within their category are awarded five stars and
funds in the next 22.5% receive four stars. Morningstar ratings are
calculated from the fund's three, five and ten-year returns (with fee
adjustment) in excess of 90-day Treasury bill returns, and a risk factor
that reflects fund performance below 90-day Treasury bill returns. The
ratings are subject to change every month. To determine a fund's risk score,
Morningstar ranks funds within the Corporate Bond -General category and the
closed end universe for the three, five and ten-year periods based upon
their downside volatility compared to a 90-day Treasury bill.
(3) Ranking is based on total return. Total return is measured on the basis of
NAV at the beginning and end of each period, assuming the reinvestment of
all dividends and distributions, and reflects a January 1995 rights
offering. The Trust's expenses were partially waived for the fiscal year
ended February 29, 1992.
(4) This category includes other closed-end investment companies that, unlike
the current practices of the Trust, offer their shares continuously and have
conducted periodic tender offers for their shares. These practices may have
affected the total return of these companies.
14
<PAGE> 18
COMPARATIVE PERFORMANCE -- TRAILING 12 MONTH AVERAGE
Presented below are distribution rates for the Trust. Also shown are
distribution rates of a composite of other investment companies with investment
objectives and policies comparable to those of the Trust. In addition, presented
below are various benchmark indicators of interest and borrowing rates. The
distribution rates for the Trust and the composite of the other investment
companies are calculated using actual distributions annualized for the
preceeding twelve months.
<TABLE>
<CAPTION>
COMPOSITE
OF PILGRIM AMERICA
COMPARABLE PRIME RATE PRIME 60 DAY
FUNDS(2),(3) TRUST(1),(3) RATE(4) LIBOR(5)
<S> <C> <C> <C> <C>
TRAILING 12 MONTHS
Jan-91 9.54% 9.68% 9.92% 8.15%
Feb-91 9.48% 9.63% 9.83% 8.03%
Mar-91 9.40% 9.50% 9.75% 7.86%
Apr-91 9.32% 9.39% 9.67% 7.65%
May-91 9.24% 9.21% 9.54% 7.45%
Jun-91 9.02% 9.06% 9.42% 7.27%
Jul-91 8.86% 8.91% 9.29% 7.10%
Aug-91 8.65% 8.76% 9.17% 6.90%
Sep-91 8.47% 8.58% 9.00% 6.66%
Oct-91 8.26% 8.41% 8.83% 6.44%
Nov-91 8.03% 8.20% 8.63% 6.15%
Dec-91 7.77% 8.00% 8.38% 5.87%
Jan-92 7.58% 7.78% 8.13% 5.63%
Feb-92 7.37% 7.56% 7.92% 5.41%
Mar-92 7.16% 7.42% 7.71% 5.24%
Apr-92 6.98% 7.23% 7.50% 5.06%
May-92 6.80% 7.10% 7.33% 4.89%
Jun-92 6.70% 6.96% 7.17% 4.71%
Jul-92 6.55% 6.81% 6.96% 4.49%
Aug-92 6.37% 6.67% 6.75% 4.31%
Sep-92 6.21% 6.57% 6.58% 4.12%
Oct-92 6.05% 6.48% 6.42% 3.97%
Nov-92 5.90% 6.38% 6.29% 3.88%
Dec-92 5.84% 6.26% 6.25% 3.81%
Jan-93 5.73% 6.19% 6.21% 3.73%
Feb-93 5.70% 6.14% 6.17% 3.64%
Mar-93 5.67% 6.08% 6.13% 3.55%
Apr-93 5.69% 6.06% 6.08% 3.48%
May-93 5.60% 6.05% 6.04% 3.42%
Jun-93 5.51% 6.01% 6.00% 3.36%
Jul-93 5.47% 5.99% 6.00% 3.35%
Aug-93 5.45% 6.00% 6.00% 3.33%
Sep-93 5.44% 5.97% 6.00% 3.33%
Oct-93 5.45% 5.89% 6.00% 3.32%
Nov-93 5.44% 5.91% 6.00% 3.28%
Dec-93 5.48% 5.93% 6.00% 3.27%
Jan-94 5.50% 5.95% 6.00% 3.27%
Feb-94 5.49% 5.97% 6.00% 3.32%
Mar-94 5.48% 6.01% 6.02% 3.36%
Apr-94 5.39% 6.06% 6.08% 3.45%
May-94 5.45% 6.15% 6.19% 3.55%
Jun-94 5.55% 6.25% 6.29% 3.67%
Jul-94 5.64% 6.37% 6.40% 3.80%
Aug-94 5.75% 6.47% 6.54% 3.94%
Sep-94 5.91% 6.60% 6.69% 4.11%
Oct-94 6.01% 6.73% 6.83% 4.28%
Nov-94 6.17% 6.86% 7.04% 4.50%
Dec-94 6.37% 7.07% 7.25% 4.74%
Jan-95 6.55% 7.28% 7.46% 4.99%
Feb-95 6.77% 7.48% 7.71% 5.20%
Mar-95 7.04% 7.70% 7.94% 5.40%
Apr-95 7.24% 7.91% 8.13% 5.56%
May-95 7.39% 8.09% 8.27% 5.69%
Jun-95 7.58% 8.25% 8.42% 5.80%
Jul-95 7.66% 8.40% 8.54% 5.89%
Aug-95 7.75% 8.54% 8.63% 5.97%
Sep-95 7.81% 8.66% 8.71% 6.03%
Oct-95 7.88% 8.76% 8.79% 6.06%
Nov-95 7.91% 8.87% 8.81% 6.05%
Dec-95 7.86% 8.89% 8.81% 6.00%
Jan-96 7.88% 8.91% 8.81% 5.93%
Feb-96 7.82% 8.89% 8.75% 5.86%
Mar-96 7.69% 8.83% 8.69% 5.79%
Apr-96 7.58% 8.76% 8.63% 5.74%
May-96 7.55% 8.71% 8.56% 5.69%
Jun-96 7.42% 8.66% 8.50% 5.64%
Jul-96 7.37% 8.62% 8.46% 5.62%
Aug-96 7.31% 8.59% 8.42% 5.59%
</TABLE>
- ---------------
(1) The distribution rate is the annualization of the Trust's distributions per
share, divided by the NAV of the Trust at month-end. For the one-year and
five-year periods ended February 29, 1996 and the period of May 12, 1988
(inception of the Trust) to February 29, 1996, the Trust's annual total
returns, based on NAV and assuming all rights were exercised, were 9.21%,
7.74%, and 8.58%, respectively. The Trust's 30-day standardized SEC yields
as of February 29, 1996 were 8.08% at NAV and 8.17% at market. The Trust's
expenses were partially waived for the fiscal year ended February 29, 1992.
(2) The composite represents an unweighted average for investment companies
included in the Lipper Loan Participation category of closed-end funds (for
funds excluding the Trust in existence for the entire period shown). The
distribution rate is a composite based on the annualization of each
investment company's distributions per share, divided by the NAV of that
investment company at month-end. The closed-end investment companies
reflected in the composite, unlike the current practices of the Trust, offer
their shares continuously and have conducted periodic tender offers for
their shares. These practices may have affected the distributions of these
companies.
(3) The distribution rate is based solely on the actual dividends and
distributions, which are, made at the discretion of management. The
distribution rate may or may not include all investment income, and
ordinarily will not include capital gains or losses, if any.
(4) Source: BLOOMBERG Financial Markets.
(5) Source: IDD/Tradeline. The LIBOR rate is the London Inter-Bank Offer Rate
and is the benchmark for determining the interest paid on approximately 80%
to 85% of the Senior Loans in the Trust's portfolio. Generally, the yield on
such loans has reflected, during the periods presented an approximately 2%
or more premium to LIBOR.
15
<PAGE> 19
COMPARISON OF EXPENSE RATIOS
The chart below depicts the annual total expense ratios of the Trust compared to
the annual expense ratios of a composite of other investment companies with
investment objectives and policies comparable to those of the Trust. The Trust
has maintained a lower total expense ratio than the composite group throughout
most of the 1990's. The expense ratios for some of the funds included in the
composite group may reflect the expenses of borrowing, and the expense ratios
for the Trust do not reflect expenses of any significant borrowing. The Trust
began borrowing for investment purposes in June, 1996, and will incur interest
expenses on these borrowings.
<TABLE>
<CAPTION>
Pilgrim
Composite of America Prime
Comparable Rate
Funds(1) Trust(2,3)
<S> <C> <C>
1991 1.47 1.38
1992 1.51 1.42
1993 1.56 1.42
1994 1.60 1.31
1995 1.48 1.30
</TABLE>
- ---------------
(1) The composite represents an unweighted average for investment companies
included in the Lipper Loan Participation category of closed-end funds (for
funds excluding the Trust in existence for the entire period shown). Expense
ratios for investment companies in the composite reflect any fee waivers
applicable during the years presented.
(2) The Trust's expenses were partially waived for the fiscal year ended
February 29, 1992. Prior to the waiver of expenses, the Trust's ratio of
expenses to average daily net assets was 1.44%.
(3) For the twelve month period ended February 29, 1996, the Trust's total
expense ratio was 1.23%. For more information on the Trust's expenses,
including the expenses of borrowing, see "Trust Expenses."
16
<PAGE> 20
THE OFFER
TERMS OF THE OFFER
The Trust is issuing to Record Date Shareholders non-transferable Rights to
subscribe for an aggregate of 18,122,976 Shares of the Trust. Each such
Shareholder is being issued one non-transferable Right for each full Common
Share owned on the Record Date. The Rights entitle the holder to acquire at the
Subscription Price (as hereinafter defined) one Share for each five Rights held.
Rights may be exercised at any time during the Subscription Period, which
commences on October 21, 1996 and ends at 5:00 p.m., Eastern Standard Time, on
November 12, 1996. A Shareholder's right to acquire during the Subscription
Period at the Subscription Price one additional Share for each five Rights held
is hereinafter referred to as the "Primary Subscription." A Shareholder who
exercises Rights pursuant to the Primary Subscription is hereinafter referred to
as an "Exercising Shareholder." Fractional shares will not be issued upon the
exercise of Rights. Shareholders who receive, and who are left with, a number of
Rights which are not in a multiple of five will be unable to exercise such
Rights and will not be entitled to receive any cash in lieu thereof. The Rights
are non-transferable, and, therefore, may not be purchased or sold. Only the
underlying Shares will be listed for trading on the NYSE or any other exchange.
Any Shareholder who fully exercises all Rights issued to him or her (other than
those Rights which cannot be exercised because they represent the right to
acquire less than one Share) is entitled to subscribe for additional Shares (the
"Over-Subscription Privilege"). For purposes of determining the number of Shares
a Shareholder may acquire pursuant to the Offer, broker-dealers, trust
companies, banks or others whose Shares are held of record by Cede & Co. Inc.
("Cede"), nominee for The Depository Trust Company, or by any other depository
or nominee will be deemed to be the holders of the Rights that are issued to
Cede or such other depository or nominee on their behalf. Shares acquired
pursuant to the Over-Subscription Privilege are subject to allotment or
increase, as is more fully discussed under "The Offer -- Over-Subscription
Privilege."
The Offer affords Record Date Shareholders the opportunity to purchase the
Trust's Common Shares at a price that will be below the market price and NAV of
the Shares at the Expiration Date. The Offer, however, will result in a decrease
in the NAV per share of the Common Shares, thus adversely affecting all
shareholders.
The Rights will be evidenced by Exercise Forms which will be mailed to Record
Date Shareholders. Rights may be exercised by completing an Exercise Form and
delivering it, together with payment (in the manner described below), either by
means of (i) a check or money order or (ii) a Notice of Guaranteed Delivery to
the Subscription Agent during the Subscription Period. The method by which
Rights may be exercised and Shares paid for is set forth below in "Exercise of
Rights" and "Payment for Shares."
PURPOSE OF THE OFFER
As discussed below, the Board of Trustees of the Trust has determined that it is
in the best interests of the Trust and its Shareholders to make the Offer for
several reasons. The Board of Trustees considered the proposal for the Offer at
several meetings, including a meeting at which the Independent Trustees met
without management present to discuss the Offer. The Board, including all of the
Independent Trustees, unanimously approved the Offer. The Trustees concluded
that increasing the assets of the Trust would be beneficial to the Trust and its
Shareholders. However, there can be no assurance that the anticipated benefits
discussed herein will occur as a result of increasing the assets of the Trust.
Improving Competitive Position Within the Market. PAII advised the Trustees
that increasing the assets of the Trust is important to sustaining the Trust's
ability to compete effectively with other lenders for Senior Loans. PAII
informed the Trustees that it believes that to obtain optimal terms on Senior
Loans and to have an opportunity to review the largest variety of Senior Loan
opportunities, the asset base of the Trust should be increased. Recently,
increased numbers of lending institutions have entered the Senior Loan market,
and the asset size of other comparable Senior Loan funds has increased in
relation to the size of the Trust. For information on Senior Loans and the
Senior Loan market, see "General Information on Senior Loans."
17
<PAGE> 21
PAII advised the Board that the lenders with the most assets to invest generally
are offered a larger number of opportunities to invest in offerings of Senior
Loans. Thus, there is a concern that if the Trust's assets are not increased, as
assets of comparable funds continue to grow and as new institutional investors
become active in the Senior Loan market, the competitive ability of the Trust to
invest in Senior Loans on favorable terms may be harmed. With an increased asset
base as a result of the Offer and an increased ability to leverage the Trust's
portfolio, PAII believes the Trust would be offered the opportunity to invest in
Senior Loans from a larger universe of potential offerings, which PAII believes
would have the benefits described below.
Potential to Increase Income on Investments. As a result of a larger asset
base and the resulting increased access to Senior Loan opportunities, it is
expected that the Trust will have greater opportunities to enter into
certain Senior Loans on relatively more favorable terms than are currently
available to the Trust. PAII's experience has been that lenders who acquire
a relatively larger portion of a Senior Loan are able to obtain a larger
share of fees generated upon entering into Senior Loans ("arrangement
fees"). In particular, PAII believes that acquisition of larger portions of
Senior Loans will enhance the Trust's ability to act as co-agent, thereby
generating greater income from the investment. Increased loan size and
increased co-agent opportunities may increase the Trust's income per share.
While there can be no assurance that these benefits will be achieved, PAII
believes that larger net assets would improve the Trust's ability to attain
proportionately larger income in changing markets.
Increasing Investment Size While Maintaining Portfolio Diversification.
PAII believes that larger commitments are necessary to obtain Senior Loans
on relatively attractive terms. The Trust, however, is a diversified
investment company and therefore is limited in the percentage of its assets
that can be invested in any one issuer. With respect to 75% of the Trust's
total assets, no more than 5% of the value of its total assets may be
invested in any one issuer. PAII expects that with a larger asset base, the
Trust will have greater flexibility to make the commitments of the size
necessary to be more competitive in attracting favorable Senior Loan
opportunities without compromising the Trust's diversification or risking
the Trust's qualification as a diversified investment company. In addition,
with a larger asset base and increased access to Senior Loans, PAII should
have greater flexibility in assessing credit risks.
Potential to Seek Opportunities in the Secondary Market to Generate Fees
and Capital Gains. With an increased amount of assets, PAII believes that
the Trust will be able to make larger commitments in Senior Loans. PAII
believes that larger commitments may enhance opportunities to trade Senior
Loans more easily in the secondary market. Enhanced access to the secondary
market could benefit the Trust in several ways. First, the Trust may have
greater flexibility to liquidate positions and reallocate proceeds to new
Senior Loans which offer additional arrangement fee opportunities. Second,
increased access to the secondary market would provide the Trust with
greater opportunity to seek gains from sales of the Senior Loan interests
as well as give the Trust additional flexibility to sell Senior Loans to
seek to avoid losses.
Potential Reduction in Operating Costs Per Share. The Trustees were advised by
PAII that the Trust could potentially achieve additional economies of scale as a
result of an increase in total assets. In particular, the Trustees believe that
a well-subscribed Offer would tend to reduce the Trust's expenses as a
proportion of average net assets per share. There can be no assurance, however,
that such a reduction will occur as a result of increasing the asset size of the
Trust.
Opportunity to Purchase Below NAV. In addition, the Trustees have concluded
that the Offer affords existing Shareholders the opportunity to purchase
additional shares of the Trust at a price that will be below market value and
NAV at the Expiration Date. However, Shareholders who do not fully exercise
their Rights will own, upon completion of the Offer, a smaller proportional
interest in the Trust than they owned prior to the Offer. The Board of Trustees
took this into account by adopting the subscription price formula applicable to
the Offer and selecting a Rights ratio by which dilution could be minimized.
Special Considerations. The Trustees noted that PAII and its parent company,
PAGI, will benefit from the Offer because their respective fees for investment
management and administrative services are based on the net assets of the Trust,
plus the proceeds of any outstanding borrowings. It is not possible to state
precisely the amount of additional compensation PAII and PAGI will receive as a
result of the Offer because it is not known how many Shares will be subscribed,
and because the proceeds of the Offer will be invested in
18
<PAGE> 22
additional portfolio securities that may fluctuate in value. In addition, the
amount of proceeds from outstanding borrowings will fluctuate. However, in the
event that all the Rights are exercised in full based on the Estimated
Subscription Price of $ per share, PAII and PAGI would receive
additional fees for investment management and administrative services of
approximately $ and $ , respectively, per annum as a result of
the increase in assets under management. In addition, in the event that all
Rights are exercised in full based upon the Estimated Subscription Price of
$ per share, and the Trust were to borrow an additional $ ,
PAII and PAGI would receive additional fees for investment management and
administrative services of approximately $[ ] and $[ ],
respectively, per annum as a result of the increase in assets attributed to such
borrowed amounts. PAII has undertaken to reduce from 0.65% per year to 0.60% per
year the portion of its management fee related to average daily net assets, plus
the proceeds of any outstanding borrowings, on that portion of the Trust's
assets over $1.15 billion, effective upon the Final Payment Date for a minimum
of three years from the Expiration Date. In addition, certain Officers and
Trustees of the Trust owning Shares in the Trust have indicated that they will
exercise the Rights issued to them in the Offer and will purchase the Trust's
Shares in the Primary Subscription. Those Officers and Trustees may elect to
purchase additional amounts of the Trust's Shares in the Over-Subscription
Privilege; such election will disproportionately increase their already existing
ownership, resulting in a higher percentage of ownership of the Trust's
outstanding Common Shares.
The Trust held one prior rights offering in January 1995. At that time, the
Trust had a different investment manager and portfolio manager and a
substantially different Board of Trustees. Further, the primary market for
Senior Loans was undergoing an expansion. See "General Information on Senior
Loans -- Market Overview." For these and other reasons, it is difficult for the
Trust to assess the results of the prior rights offering. The stated purposes of
the 1995 offering included increasing the assets of the Trust to enable the
Trust to purchase larger portions of Senior Loans and thereby obtain greater
income from investments and to allow the Trust to assume a larger role in the
market for Senior Loans. The rights offering prospectus also stated that the
offering was expected to decrease expenses of the Trust's Shareholders because
of economies of scale.
It is difficult to assess the impact of the prior rights offering on the Trust's
income. The spread between the yield distributed to the Trust's Shareholders (as
a percentage of NAV) and the prime rate increased as a result of the 1995 rights
offering. From January 1, 1994 to the expiration date of the prior offer on
January 31, 1995, the average spread was -0.168%. In the period following the
offering, (February 1995 to August 1996), the spread averaged 0.121%. While
there was no sustained impact on the average size of the Senior Loans in the
Trust's portfolio and the percentage of fee income to total income has not
increased, the Trust generally has achieved a distribution rate that equals or
exceeds the prime rate and has increased its yield advantage over that of a
composite of funds in its peer group. See "Investment Performance."
The Trust achieved economies of scale as a result of the 1995 rights offering.
The Trust's expense ratio for the year ended February 29, 1996 was 1.23%
compared with expense ratios of 1.30%, 1.31%, and 1.42% for the fiscal years
ended February 28, 1995, 1994, and 1993, respectively. The Trust's expense ratio
for the six-month period ended August 31, 1996 was 1.58%. The higher ratio for
this period is largely attributable to the commencement of borrowing by the
Trust during this period. Without borrowing the ratio would be 1.27%. Expenses
after the last rights offering, however, are not indicative of what expenses
will be after the current rights offering.
The current Offer differs significantly in several respects from the prior
rights offering, so that it is difficult to assess the precedential value of the
distribution expenses of the prior offering. The rights in the prior offering
were transferable while the Rights issued pursuant to the current Offer are
non-transferable. In the prior rights offering, one share was issued for each
four rights held, whereas the present Offer grants one share for each five
rights held. At the time of the announcement of the 1995 rights offering, the
Trust's shares were trading at a discount to NAV. For several months, prior to
the announcement of the present Offer, shares have been trading at a premium to
NAV. See "Financial Highlights and Investment Performance -- Trading and NAV
Information." In the prior rights offering, shares were offered at 95% of the
lesser of (i) the Trust's NAV per share at the close of business on the date the
offer expired and (ii) the average of the closing prices of the Trust's shares
on the date the offer expired and the preceding four trading dates. The
Subscription Price in the
19
<PAGE> 23
current offer is 97.5% as of comparable dates. The dilution was 4.4% in the 1995
rights offering. The extent of dilution that will occur depends upon the amount
by which the Subscription Price is less than NAV on the date new Shares are
issued.
The Trust may, in the future and at its discretion, choose to make additional
offerings of its Common Shares from time to time for a number of Shares and on
terms which may or may not be similar to this Offer. Any such future offering
will be made in accordance with the Investment Company Act.
OVER-SUBSCRIPTION PRIVILEGE
If some Shareholders do not exercise all of the Rights initially issued to them
in the Primary Subscription, any Shares for which subscriptions have not been
received from Shareholders will be offered by means of the Over-Subscription
Privilege to the Exercising Shareholders. Exercising Shareholders who exercise
on Primary Subscription all of the Rights initially issued to them will be asked
to indicate on the Exercise Form (at the time they submit the Exercise Form with
respect to the Rights issued to them) how many Shares they would like to
purchase pursuant to the Over-Subscription Privilege. See "Exercise of Rights"
for a description of the exercise of the Over-Subscription Privilege through the
use of DTC Participant Over-Subscription Forms. If sufficient Shares remain as a
result of unexercised Rights, all over-subscriptions will be honored in full.
The Trust may, at its discretion, issue up to an additional 25% of the Shares to
honor over-subscriptions, if sufficient Shares are not available from the
Primary Subscription to honor all over-subscriptions. To the extent the Trust
determines not to issue additional Shares to honor all over-subscriptions, the
available Shares will be allocated among those who over-subscribe based on the
number of Rights originally issued to them, so that the number of Shares issued
to Exercising Shareholders who subscribe pursuant to the Over-Subscription
Privilege will generally be in proportion to the number of Shares held by them
on the Record Date.
The percentage of remaining Shares each over-subscribing Exercising Shareholder
may acquire will be rounded down to result in delivery of whole Shares. The
allocation process may involve a series of allocations to assure that the total
number of Shares available for over-subscriptions is distributed on a pro rata
basis. The Trust will provide interested Exercising Shareholders who so request
with an accounting of how the Over-Subscription Privilege allocation was
determined.
Nominee holders of Rights will be required to certify to the Subscription Agent,
before any Over-Subscription privilege may be exercised as to any particular
beneficial owner, as to the aggregate number of Rights exercised pursuant to the
Primary Subscription and the number of Shares subscribed for pursuant to the
Over-Subscription Privilege by such beneficial owner and that such beneficial
owner's Primary Subscription was exercised in full.
THE SUBSCRIPTION PRICE
The Subscription Price per Share will be 97.5% of the lower of (a) the average
of the last reported sales price per share of the Trust's Common Shares on the
NYSE on November 12, 1996 (the "Pricing Date") and the four preceding business
days or (b) the NAV per share as of the Pricing Date. Since the Expiration Date
and the Pricing Date are each November 12, 1996, Shareholders who choose to
exercise their Rights will not know at the time of exercise the Subscription
Price for Shares acquired pursuant to such exercise.
The Trust announced the Offer on September 16, 1996. The NAV per share of Common
Shares at the close of business on September 16, 1996 (the date on which the
Trust announced the Offer) and on October 18, 1996 was $9.57 and $ ,
respectively, and the average of the closing sale prices of a share of the
Trust's Common Shares on the NYSE for such dates and the four trading dates
immediately preceding those dates was $9.90 and $ , respectively. See
"Net Asset Value" in the SAI. There is no minimum number of Rights which must be
exercised in order for the Offer to close.
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 p.m., Eastern Standard Time, on November 12, 1996.
Rights will expire on the Expiration Date and thereafter may not be exercised.
20
<PAGE> 24
Any extension, termination, or amendment will be followed as promptly as
practical by announcement thereof, such announcement in the case of an extension
to be issued no later than 9:00 a.m., Eastern Standard Time, on the next
business day following the previously scheduled Expiration Date. The Trust will
not, unless otherwise obligated by law, have any obligation to publish,
advertise, or otherwise communicate any such announcement other than by making a
release to the Dow Jones News Service or such other means of announcement as the
Trust deems appropriate.
SUBSCRIPTION AGENT
State Street Bank and Trust Company, P.O. Box 9061, Boston, Massachusetts 02205
will perform administrative, processing, invoice, and other services as
Subscription Agent in connection with the Offer. Signed Exercise Forms should be
sent to the Subscription Agent by one of the methods described below.
Shareholders may also subscribe for the Offer by contacting their brokers and
nominees. The Trust reserves the right to accept Exercise Forms actually
received on a timely basis at any of the addresses listed.
The Subscription Agent will receive a fee for its services estimated to be
$150,000, including reimbursement for all out-of-pocket expenses related to the
Offer. The Subscription Agent is the parent of Investors Fiduciary Trust Company
("IFTC") which serves as the Trust's transfer agent, dividend paying agent,
registrar, custodian, and recordkeeper.
- --------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXERCISE FORM
DELIVERY METHOD ADDRESS/NUMBER
--------------------------------------- -------------------------------------------
<S> <C>
By Mail................................ Pilgrim America Prime Rate Trust
c/o State Street Bank and Trust Company
P.O. Box 9061
Boston, MA 02205
By Hand to New York Delivery Window.... Pilgrim America Prime Rate Trust
c/o Banc Boston Trust Company of New York
55 Broadway, 3rd Floor
New York, NY 10006
By Express Mail or Overnight Courier... Pilgrim America Prime Rate Trust
c/o Boston EquiServe
150 Royall Street
Mail Stop #45-02-53
Canton, MA 02021
By Notice of Guaranteed Delivery....... Contact your broker-dealer, trust company,
bank, or other nominee to notify the Trust
of your intent to exercise the Rights.
</TABLE>
-------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
21
<PAGE> 25
INFORMATION AGENT
Any questions or requests for assistance may be directed to the Information
Agent at its telephone number and address listed below:
The Information Agent for the Offer is:
Shareholder Communications Corporation
17 State Street -- 27th and 28th Floors
New York, New York 10004
Toll Free: (800) 733-8481, Extension 350
Shareholders may also contact Pilgrim America Group, Inc., toll free at (800)
331-1080, or their brokers or nominees for information with respect to the
Offer.
The Information Agent will receive a fee estimated to be $56,000 including
reimbursement for all out-of-pocket expenses related to the Offer.
EXERCISE OF RIGHTS
Rights may be exercised by completing and signing the reverse side of the
Exercise Form which accompanies this Prospectus and mailing it in the envelope
provided, or otherwise delivering the completed and signed Exercise Form to the
Subscription Agent, together with payment for the Shares as described below
under "Payment for Shares." Completed Exercise Forms and related payments must
be received by the Subscription Agent prior to 5:00 p.m. on or before the
Expiration Date (unless payment is effected by means of a Notice of Guaranteed
Delivery as described below under "Payment for Shares") at the offices of the
Subscription Agent at the address set forth above. Rights may also be exercised
through an Exercising Shareholder's broker, who may charge such Exercising
Shareholder a servicing fee.
Record Date Shareholders who are issued fewer than five Rights or Exercising
Shareholders who hold fewer than five Rights or who, upon exercising their
Rights, are left with fewer than five Rights will not be able to exercise such
Rights to purchase a Share or one additional Share, respectively, as described
under "The Offer -- Terms of the Offer" and "Over-Subscription." In addition,
Record Date Shareholders who are issued fewer than five Rights or for whom there
is not a current address ("stop mail" accounts) will not be mailed the Offering
Prospectus or other subscription materials.
Exercising Shareholders Who Are Record Owners. Exercising Shareholders who are
owners of record may choose between either option set forth under "Payment for
Shares" below. If time is of the essence, option (2) will permit delivery of the
Exercise Form and payment after the Expiration Date.
Investors Whose Shares Are Held By A Nominee. Exercising Shareholders whose
shares are held by a nominee such as a broker or trustee must contact the
nominee to exercise their Rights. In that case, the nominee will complete the
Exercise Form on behalf of the Exercising Shareholder and arrange for proper
payment by one of the methods set forth under "Payment for Shares" below.
Nominees. Nominees who hold Shares for the account of others should notify the
respective beneficial owners of such Shares as soon as possible to ascertain
such beneficial owners' intentions and to obtain instructions with respect to
exercising the Rights. If the beneficial owner so instructs, the nominee should
complete the Exercise Form and submit it to the Subscription Agent with the
proper payment described under "Payment for Shares" below.
All questions as to the validity, form, eligibility (including times of receipt
and matters pertaining to beneficial ownership) and the acceptance of
subscription forms and the Subscription Price will be determined by the Trust,
which determinations will be final and binding. No alternative, conditional or
contingent subscriptions will be accepted. The Trust reserves the absolute right
to reject any or all subscriptions not properly submitted or the acceptance of
which would, in the opinion of the Trust's counsel, be unlawful. The Trust also
reserves the right to waive any irregularities or conditions, and the Trust's
interpretations of the terms and conditions of
22
<PAGE> 26
the Offer shall be final and binding. Any irregularities in connection with
subscriptions must be cured within such time as the Trust shall determine unless
waived. Neither the Trust nor the Subscription Agent shall be under any duty to
give notification of defects in such subscriptions or incur any liability for
failure to give such notification. Subscriptions will not be deemed to have been
made until such irregularities have been cured or waived.
PAYMENT FOR SHARES
Exercising Shareholders may exercise their Rights and pay for Shares subscribed
for pursuant to the Primary Subscription and Over-Subscription Privilege in one
of the following ways:
(1)Deliver Exercise Form and Payment to the Subscription Agent by the
Expiration Date:
Exercising Shareholders may deliver to the Subscription Agent at any of the
offices set forth above on page (1) a complete and executed Exercise Form
indicating the number of Rights they have been issued and the number of
Shares they are acquiring pursuant to the Primary Subscription, as well as
the number of any additional Shares they would like to subscribe for under
the Over-Subscription Privilege and (2) payment for all such ordered Shares
based on the Estimated Subscription Price of $ per Share, both no
later than 5:00 p.m., Eastern Standard Time, on the Expiration Date.
The Subscription Agent will deposit all checks received by it for the
purchase of Shares into a segregated interest bearing account of the Trust
(the interest from which will belong to the Trust) pending proration and
distribution of Shares.
A PAYMENT PURSUANT TO THIS METHOD (1) MUST BE IN U.S. DOLLARS BY MONEY
ORDER OR CHECK DRAWN ON A BANK LOCATED IN THE UNITED STATES, (2) MUST BE
PAYABLE TO "PILGRIM AMERICA PRIME RATE TRUST" AND (3) MUST ACCOMPANY AN
EXECUTED EXERCISE FORM FOR SUCH SUBSCRIPTION TO BE ACCEPTED. THIRD (OR
MULTIPLE) PARTY CHECKS WILL NOT BE ACCEPTED.
(2)Contact Your Broker, Bank or Trust Company to Deliver Notice of
Guaranteed Delivery to the Subscription Agent by the Expiration Date:
Exercising Shareholders may request a NYSE or National Association of
Securities Dealers, Inc. ("NASD") member or bank or trust company (each a
"nominee") to execute a Notice of Guaranteed Delivery (or equivalent
electronic information) and deliver it, by facsimile or otherwise, to the
Subscription Agent by 5:00 p.m., Eastern Standard Time, on the Expiration
Date indicating (i) the number of Rights they wish to exercise, the number
of Primary Subscription Shares they wish to acquire, and the number of
Over-Subscription Privilege Shares for which they wish to subscribe and
(ii) guaranteeing delivery of payment and a completed Exercise Form from
such Exercising Shareholder by November 15, 1996. Exercising Shareholders
must arrange for payment to the nominee, who will in turn submit the
Exercise Form and payment on their behalf by November 15, 1996. The
Subscription Agent will not honor a Notice of Guaranteed Delivery unless
the completed Exercise Form and full payment are received by November 15,
1996.
On November 27, 1996 (the "Confirmation Date"), the Subscription Agent will send
a confirmation to each Exercising Shareholder (or, if the Shares are held by a
depository or other nominee, to such depository or other nominee), showing (i)
the number of Shares acquired pursuant to the Primary Subscription, (ii) the
number of Shares, if any, acquired pursuant to the Over-Subscription Privilege,
(iii) the per Share and total purchase price for the Shares, and (iv) any
additional amount payable by such Exercising Shareholder to the Trust or any
excess to be refunded by the Trust to such Exercising Shareholder in each case
based upon the final Subscription Price. Any additional payment required from an
Exercising Shareholder must be received by the Subscription Agent within seven
business days after the Confirmation Date (the "Final Payment Date"). Any excess
payment to be refunded by the Trust to an Exercising Shareholder will be mailed
by the Subscription Agent to the holder as promptly as practicable after the
Final Payment Date.
23
<PAGE> 27
Issuance and delivery of certificates for the Shares purchased are subject to
actual collection of checks and actual payment pursuant to any Notice of
Guaranteed Delivery.
If an Exercising Shareholder does not make payment of any additional amounts
due, the Trust reserves the right to take any or all of the following actions:
(i) apply any payment received by it toward the purchase of the greatest whole
number of Shares which could be acquired by such Exercising Shareholder upon
exercise of the Primary Subscription and/or Over-Subscription Privilege based on
the amount of such payment; (ii) allocate the Shares subject to subscription
rights to one or more other Shareholders; (iii) sell all or a portion of the
Shares deliverable upon exercise of subscription rights on the open market and
applying the proceeds thereof to the amount owed; and/or (iv) exercise any and
all other rights or remedies to which it may be entitled, including, without
limitation, the right to set-off against payments actually received by it with
respect to such subscribed Shares.
AN EXERCISING SHAREHOLDER WILL HAVE NO RIGHT TO CANCEL THE EXERCISE OF RIGHTS OR
RESCIND A PURCHASE AFTER THE SUBSCRIPTION AGENT HAS RECEIVED PAYMENT, EITHER BY
MEANS OF A NOTICE OF GUARANTEED DELIVERY OR A CHECK OR MONEY ORDER, EXCEPT AS
DESCRIBED UNDER "THE OFFER -- NOTICE OF NAV DECLINE."
The risk of delivery of Exercise Forms and payments to the Subscription Agent
will be borne by the Exercising Shareholder and not the Trust, the Dealer
Managers, the Subscription Agent, the Information Agent or broker-dealers
designated by the Dealer Managers. If the mail is used to exercise Rights,
insured registered mail is recommended.
NOTICE OF NAV DECLINE
The Trust will suspend the Offer until it amends this Prospectus if, subsequent
to the effective date of this Prospectus, the Trust's NAV declines more than 10%
from its NAV as of that date. In such event, the Trust will notify Shareholders
of any such decline and thereby permit them to cancel their exercise of their
Rights.
DELIVERY OF STOCK CERTIFICATES
Participants in the Trust's Dividend Reinvestment and Cash Purchase Plan (the
"Dividend Reinvestment Plan") will have any Shares that they acquire pursuant to
the Offer credited to their shareholder dividend reinvestment accounts in the
Dividend Reinvestment Plan. Shareholders whose Shares are held of record by Cede
or by any other depository or nominee on their behalf or their broker-dealers'
behalf will have any Shares that they acquire pursuant to the Offer credited to
the account of Cede or such other depository or nominee. With respect to all
other Shareholders, stock certificates for all Shares acquired pursuant to the
Offer will be mailed after payment for all the Shares subscribed for has
cleared, which clearance may take up to fifteen days from the date of receipt of
the payment. It is expected that Shares purchased pursuant to the Offer will be
issued after the record date for the monthly dividend declared in October, 1996,
and accordingly, the Trust will not pay such monthly dividend with respect to
such Shares.
EMPLOYEE PLAN CONSIDERATIONS
Shareholders that are employee benefit plans subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") (including corporate savings
and 401(k) plans), profit sharing/retirement plans for corporations and
self-employed individuals and Individual Retirement Accounts (collectively,
"Plans") should be aware that additional contributions of cash to the Plan
(other than rollover contributions or trustee-to-trustee transfers from other
Plans) in order to exercise Rights would be treated as Plan contributions and
therefore, when taken together with contributions previously made, may be
treated as excess or nondeductible contributions subject to excise taxes. In the
case of Plans qualified under Section 401(a) of the Internal Revenue Code of
1986, as amended (the "Code"), additional cash contributions could cause
violations of the maximum contribution limitations of Section 415 of the Code or
other qualification rules. Plans in which contributions are so limited should
consider whether there is an additional source of funds available within the
Plan, including the liquidation of assets, with which to exercise the Rights.
Because the rules governing plans are extensive and complex, Plans contemplating
the exercise of Rights should consult with their counsel prior to such exercise.
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<PAGE> 28
Plans and other tax exempt entities, including governmental plans, should also
be aware that if they borrow in order to finance their exercise of Rights, they
may become subject to the tax on unrelated business taxable income ("UBTI")
under Section 511 of the Code. If any portion of an Individual Retirement
Account ("IRA") is used as security for a loan, the portion so used is treated
as a distribution to the IRA depositor.
ERISA contains fiduciary responsibility requirements, and ERISA and the Code
contain prohibited transactions rules that may impact the exercise of Rights.
Due to the complexity of these rules and the penalties for noncompliance, Plans
should consult with their counsel regarding the consequences of their exercise
of Rights under ERISA and the Code.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE OFFER
The following discussion summarizes the principal federal income tax
consequences of the Offer to Record Date Shareholders and Exercising
Shareholders. It is based upon the Code, U.S. Treasury regulations, Internal
Revenue Service rulings and policies and judicial decisions in effect on the
date of this Prospectus. This discussion does not address all federal income tax
aspects of the Offer that may be relevant to a particular Shareholder in light
of his individual circumstances or to Shareholders subject to special treatment
under the Code (such as insurance companies, financial institutions, tax-exempt
entities, dealers in securities, foreign corporations, and persons who are not
citizens or residents of the United States), and it does not address any state,
local or foreign tax consequences. Accordingly, each Shareholder should consult
his own tax advisor as to the specific tax consequences of the Offer to him.
Each Shareholder should also review the discussion of certain tax considerations
affecting the Trust and its shareholders set forth under "Tax Matters" below.
For federal income tax purposes, neither the receipt nor the exercise of the
Rights by Record Date Shareholders will result in taxable income to those
Shareholders, and no loss will be realized if the Rights expire without
exercise.
A Record Date Shareholder's holding period for a Share acquired upon exercise of
a Right begins with the date of exercise. A Record Date Shareholder's basis for
determining gain or loss upon the sale of a Share acquired upon the exercise of
a Right will be equal to the sum of the Shareholder's basis in the Right, if
any, and the Subscription Price per Share. The Shareholder's basis in the Right
will be zero unless either (i) the fair market value of the Right on the date of
distribution is 15% or more of the fair market value on such date of the Shares
with respect to which the Right was distributed, or (ii) the Shareholder elects,
in its federal income tax return for the taxable year in which the Right is
received, to allocate part of the basis of such Shares to the Right. If either
of clauses (i) and (ii) is applicable, then if the Right is exercised, the
Shareholder will allocate its basis in the Shares with respect to which the
Right was distributed between such Shares and the Right in proportion to the
fair market values of each on the date of distribution. A Shareholder's gain or
loss recognized upon a sale of a Share acquired upon the exercise of a Right
will be capital gain or loss (assuming the Share was held as a capital asset at
the time of sale) and will be long-term capital gain or loss if the Share was
held at the time of sale for more than one year.
The foregoing is only a summary of the applicable federal income tax laws
presently in effect and does not include any state or local tax consequences of
the Offer. Shareholders should consult their own tax advisers concerning the tax
consequences of this transaction.
USE OF PROCEEDS
If [18,122,976] Shares are sold at the Estimated Subscription Price of $[ ]
per Share, the net proceeds of the Offer are estimated to be approximately
$[ ], after deducting commissions and expenses payable by the Trust
estimated at approximately $[ ]. If the Trust in its sole discretion
increases the number of shares subject to the Offer by 25% in order to satisfy
over-subscriptions, the additional net proceeds will be approximately
$[ ]. The net proceeds will be invested in Senior Loans and other
securities consistent with the Trust's investment objective and policies.
Initially, it is expected that the proceeds will be used to pay down the Trust's
outstanding borrowings under its Credit Facility as quickly as practicable. See
"Financial Highlights and Investment Performance -- Policy on Borrowing." As of
Au-
25
<PAGE> 29
gust 31, 1996, $197,000,000 was outstanding. By paying down the Trust's
outstanding borrowings, it will be possible to invest the proceeds of the Offer
consistent with the Trust's investment objective and policies almost
immediately. For this and other reasons, PAII has advised the Trust's Board of
Trustees that it believes that the Trust's monthly dividend will not be reduced
as a result of the Offer. There can be no assurance as to this result, and the
Trust's dividend may be affected by factors other than the Offer.
After the Offer, the Trust intends, however, to increase the Credit Facility in
proportion to the increase in the Trust's net assets as a result of the Offer
and to use the expanded Credit Facility for investment. As investment
opportunities are identified, it is expected that the Trust will redeploy its
available credit to increase its investments in additional Senior Loans. It is
expected that the additional borrowing under the Credit Facility will be
redeployed within three months of receipt of the proceeds from the Offer,
although it may take longer.
INVESTMENT OBJECTIVE AND POLICIES
The Trust's investment objective is to provide as high a level of current income
as is consistent with the preservation of capital. The Trust seeks to achieve
its objective primarily by investing in interests in variable or floating rate
Senior Loans, which are fully collateralized by the assets of a domestic
corporation or a corporation headquartered in Canada or U.S. territories and
possessions. The Trust only invests in Senior Loans that have interest rates
that float periodically based upon a benchmark indicator of prevailing interest
rates, such as the prime rate or LIBOR. Under normal circumstances, at least 80%
of the Trust's net assets is invested in Senior Loans.
The Trust will only purchase interests in Senior Loans that, at the time of
acquisition, are fully collateralized and where the market value of the
collateral securing the Senior Loans, in the opinion of the Investment Manager,
equals or exceeds the principal amount of the Senior Loan. There is no assurance
that the collateral could be readily liquidated. The Trust also will only
purchase interests in Senior Loans of corporate borrowers which PAII believes
can meet the debt service requirements from cash flow. In addition, the Trust
invests only in loans that occupy a senior position in the capital structure of
the borrowing company, so that they are characterized by liens that, subject to
bankruptcy law, generally entitle the lender to priority rights to cash flows or
proceeds from collateral if the borrower becomes insolvent. Senior Loans vary in
yield according to their terms and conditions, how often they pay interest, and
when rates are reset.
The Trust may only invest in Senior Loans made to domestic corporations or in
U.S. dollar-denominated Senior Loans made to corporations headquartered in
Canada or U.S. territories and possessions. The Trust does not invest in Senior
Loans whose interest rates are tied to non-domestic interest rates other than
LIBOR.
Subject to certain limitations, the Trust may acquire Senior Loans of corporate
borrowers engaged in any industry. With no more than 25% of its total assets,
the Trust may acquire Senior Loans that are unrestricted as to the percentage of
a single issue the Trust may hold and, with respect to at least 75% of its total
assets, the Trust will hold no more than 25% of the amount borrowed from all
lenders in a single Senior Loan or other issue. The Trust may not always achieve
its objective but will follow these investment standards at all times because
they are fundamental and may not be changed without approval by Shareholders.
Investors should recognize that, because of the issues involved in securities
investments in any market, there can be no assurance that the investment
objective of the Trust will be realized. Moreover, the value of the Trust's
assets may be affected by other uncertainties such as economic developments
affecting the market for Senior Loans or affecting corporate borrowers
generally. For additional information on Senior Loans, see "General Information
on Senior Loans -- About Senior Loans."
PORTFOLIO MATURITY
Although the Trust has no restrictions on portfolio maturity, normally at least
80% of the net assets invested in Senior Loans are composed of Senior Loans with
maturities of one to ten years with rates of interest which typically reset
either daily, monthly, or quarterly. The maximum period of time of interest rate
reset on any
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<PAGE> 30
Senior Loans in which the Trust may invest is one year. In addition, the Trust
will ordinarily maintain a dollar-weighted average time to next interest rate
adjustment on its Senior Loans of 90 days or less.
In the event of a change in the benchmark interest rate on a Senior Loan, the
rate payable to lenders under the Senior Loan will, in turn, change at the next
scheduled reset date. If the benchmark rate goes up, the Trust as lender would
earn interest at a higher rate, but only on and after the reset date. If the
benchmark rate goes down, the Trust as lender would earn interest at a lower
rate, but only on and after the reset date.
CREDIT ANALYSIS
In acquiring a Senior Loan, PAII considers the following factors: positive
coverage of debt service; adequate working capital; appropriate capital
structure; leverage ratio consistent with industry norms; historical experience
of attaining business and financial projections; the quality and experience of
management; and adequate collateral coverage. The Trust does not impose any
minimum standard regarding the rating of any outstanding debt securities of
corporate borrowers.
PAII performs its own independent credit analysis of the corporate borrower. In
so doing, PAII may utilize information and credit analyses from the agents that
originate or administer loans, other lenders investing in a Senior Loan, and
other sources. These analyses will continue on a periodic basis for any Senior
Loan purchased by the Trust. See "Risk Factors and Special
Considerations -- Credit Risks and Realization of Investment Objective."
OTHER INVESTMENTS
Assets not invested in Senior Loans will generally consist of short-term debt
instruments with remaining maturities of 120 days or less (which may have yields
tied to the prime rate, commercial paper rates, federal funds rate or LIBOR),
and other instruments, including longer term debt securities, lease
participation interests, equity securities acquired in connection with a workout
on a Senior Loan, and other instruments as described under "Additional
Information About Investments and Investment Techniques" in the SAI. Short-term
instruments may include (i) commercial paper rated A-1 by Standard & Poor's
Corporation or P-1 by Moody's Investors Service, Inc., or of comparable quality
as determined by PAII, (ii) certificates of deposit and bankers' acceptances,
and (iii) securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities. During periods when, in the opinion of PAII, a temporary
defensive posture in the market is appropriate, the Trust may hold up to 100% of
its assets in cash, or in the instruments described above.
USE OF LEVERAGE
The Trust is permitted to borrow up to 33 1/3%, or such other percentage
permitted by law, of its total assets (including the amount borrowed) less all
liabilities other than borrowings.
The Trust has entered into a revolving credit agreement with a syndicate of
banks pursuant to which the Trust may borrow any amount up to $285 million.
Borrowing may be made for the purpose of acquiring additional income-producing
investments when the Investment Manager believes that such use of borrowed
proceeds will enhance the Trust's net yield. The amount of outstanding
borrowings may vary with prevailing market or economic conditions. The Trust
also may borrow money to pay expenses or for temporary or emergency purposes. In
addition, although the Trust has not conducted a tender offer since 1992 or
repurchased its shares since January, 1994, in the event that it determines to
again conduct a tender offer or repurchase its shares, the Trust may use
borrowings to finance such purchase. For information on risks associated with
borrowing, see "Risk Factors and Special Considerations -- Borrowing and
Leverage."
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<PAGE> 31
RISK FACTORS AND SPECIAL CONSIDERATIONS
The following summarizes certain risks that should be considered, among others,
in connection with the Offer and an investment in the Trust.
This Prospectus includes certain statements that may be deemed to be
"forward-looking statements." All statements, other than statements of
historical facts, included in this Prospectus that address activities, events or
developments that the Trust or PAII, as the case may be, expects, believes or
anticipates will or may occur in the future, including such matters as the use
of proceeds of the Offer, investment strategies, results of the Offer, and other
such matters could be considered forward-looking statements. These statements
are based on certain assumptions and analyses made by the Trust or PAII, as the
case may be, in light of its experience and its perception of historical trends,
current conditions, expected future developments and other factors it believes
are appropriate in the circumstances. Such statements are subject to a number of
assumptions, risks and uncertainties, including the risk factors discussed
below, general economic and business conditions, the investment opportunities
(or lack thereof) that may be presented to and pursued by the Trust, changes in
laws or regulations and other factors, many of which are beyond the control of
the Trust. Prospective investors are cautioned that any such statements are not
guarantees of future performance and that actual results or developments may
differ materially from those described in the forward-looking statements.
Dilution. Record Date Shareholders who do not fully exercise their Rights will
experience as a result of the Offer: dilution of NAV per Share; dilution of a
proportionate ownership interest in the Trust; and dilution of voting power. In
addition, the Offer will result in an immediate dilution per Share for all
existing Shareholders. Although it is not possible to state precisely the dollar
amount of a decrease in NAV per share, because it is not known at this time what
the Subscription Price and the NAV per share on the Pricing Date will be, the
dilution resulting from the Offer could be substantial. For example, assuming
that all Shares offered hereby are purchased in the Offer at the Estimated
Subscription Price of $ (97.5% of the lower of (a) the average of the
last reported sales price per share of the Trust's common shares last reported
on the NYSE on October 18, 1996 and the four trading days immediately preceding
such date or (b) the Trust's NAV on October 18, 1996), the Trust's NAV per share
would be reduced by approximately $ per share as of that date.
Discount From NAV. The Trust's shares have traded in the market above, at, and
below NAV since March 9, 1992, when the Trust's shares were listed on the NYSE.
The reasons for the Trust's shares trading at a premium or discount to NAV are
not known to the Trust, nor can the Trust predict whether its shares will trade
in the future at a premium or discount to NAV, and if so, the level of such
premium or discount. Shares of closed-end investment companies frequently trade
at a discount from NAV. The possibility that Shares of the Trust will trade at a
discount from NAV is a risk separate and distinct from the risk that the Trust's
NAV would decrease. See "Description of the Common Shares -- Status of Shares."
Credit Risks and Realization of Investment Objective. While all investments
involve some amount of risk, Senior Loans generally involve less risk than
equity instruments of the same issuer because the payment of principal and
interest on debt instruments is a contractual obligation of the issuer that
takes precedence over the payment of dividends, or the return of capital, to the
issuer's shareholders. Senior Loans are subject to the risk of nonpayment of
scheduled interest or principal payments. In the event of a failure to pay
scheduled interest or principal payments on Senior Loans held by the Trust, the
Trust could experience a reduction in its income, and would experience a decline
in the market value of the particular Senior Loan so affected, and may
experience a decline in the NAV of Trust Shares or the amount of its dividends.
Further, there is no assurance that the liquidation of the collateral underlying
a Senior Loan would satisfy the issuer's obligation to the Trust in the event of
non-payment of scheduled interest or principal, or that collateral could be
readily liquidated. The risk of non-payment of interest and principal also
applies to other debt instruments in which the Trust may invest. As of August
31, 1996 approximately 2.50% of the Trust's net assets consisted of
non-performing Senior Loans.
Investment decisions will be based largely on the credit analysis performed by
the Investment Manager's investment personnel, and such analysis may be
difficult to perform for many issuers. Information about interests in Senior
Loans generally will not be in the public domain, and interests are generally
not currently
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<PAGE> 32
rated by any nationally recognized rating service. Many issuers have not issued
securities to the public and are not subject to reporting requirements under
federal securities laws. Generally, issuers are required to provide financial
information to lenders including the Trust, and information may be available
from other Senior Loan participants or agents that originate or administer
Senior Loans.
While debt instruments generally are subject to the risk of changes in interest
rates, the interest rates of the Senior Loans in which the Trust will invest
will float with a specified interest rate. Thus the risk that changes in
interest rates will affect the market value of such Senior Loans is
significantly decreased.
Borrowing and Leverage. The Trust is permitted to enter into borrowing
transactions up to 33 1/3% (or such other percentage permitted by law) of its
total assets (including the amount borrowed) less all liabilities other than
borrowings. Borrowing for investment purposes increases both investment
opportunity and investment risk and, accordingly, such borrowing may be
speculative. Capital raised through borrowings will be subject to interest and
other costs. There can be no assurance that the Trust's income from borrowed
proceeds will exceed these costs; however, the Investment Manager seeks to
borrow for the purposes of making additional investments only if it believes, at
the time of entering into a Senior Loan, that the total return on investments
will exceed interest payments and other costs. In addition, the Investment
Manager intends to mitigate the risk that the costs of borrowing will exceed the
total return on an investment by borrowing on a variable rate basis. In the
event of a default on one or more Senior Loans or other interest-bearing
instruments held by the Trust, borrowing would exaggerate the loss to the Trust
and may exaggerate the effect on the Trust's NAV. The Trust's lenders will have
priority to the Trust's assets over the Trust's shareholders.
As prescribed by the Investment Company Act, the Trust will be required to
maintain specified asset coverages of at least 300% with respect to any bank
borrowing immediately following any such borrowing and on an ongoing basis as a
condition of declaring dividends. The Trust's inability to make distributions as
a result of these requirements could cause the Trust to fail to qualify as a
regulated investment company and/or subject the Trust to income or excise taxes.
The interest rate on the Trust's Credit Facility as of August 31, 1996 is LIBOR
plus 0.50% of outstanding borrowings plus a 0.125% fee on unused credit. At such
a rate, and assuming the Trust has borrowed an amount equal to 25% of its total
assets, the Trust must produce a 1.50% annual return (net of expenses) in order
to cover interest payments. The Trust intends to borrow only for investment
purposes when it believes at the time of borrowing that total return on
investment will exceed interest and other costs.
The following table is designed to illustrate the effect on return to a holder
of the Trust's Common Shares of the leverage obtained by the Trust's use of
borrowing, assuming hypothetical annual returns on the Trust's portfolio of
minus 10 to plus 10 percent. As can be seen, leverage generally increases the
return to shareholders when portfolio return is positive and decreases return
when the portfolio return is negative. Actual returns may be greater or less
than those appearing in the table.
<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Portfolio Return (net of
expenses)(1).................... -10% -5% 0% 5% 10%
Corresponding Return to Common
Shareholders(2)................. -15.33% -8.67% -2.00% 4.67% 11.33%
</TABLE>
- ---------------
(1) The Assumed Portfolio Return is required by regulation of the Commission and
is not a prediction of, and does not represent, the projected or actual
performance of the Trust.
(2) In order to compute the "Corresponding Return to Common Shareholders," the
"Assumed Portfolio Return" is multiplied by the total value of Trust assets
at the beginning of the Trust's fiscal year to obtain an assumed return to
the Trust. From this amount, all interest accrued during the year is
subtracted to determine the return available to the Trust's shareholders.
The return available to the Trust's shareholders is then divided by the
total value of the Trust's assets as of the beginning of the fiscal year to
determine the "Corresponding Return to Common Shareholders."
Limited Secondary Market. Although it is growing, the secondary market for
Senior Loans is currently limited. Accordingly, some or many of the Senior Loans
in which the Trust invests will be relatively illiquid.
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<PAGE> 33
The Trust may have difficulty disposing of illiquid assets if it needs cash to
repay debt, to pay dividends, to pay expenses or to take advantage of new
investment opportunities. Although the Trust has not conducted a tender offer
since 1992, in the event that it determines to again conduct a tender offer,
limitations of a secondary market may result in difficulty in raising cash to
purchase tendered Shares. These events may cause the Trust to sell securities at
lower prices than it would otherwise consider to meet cash needs and may cause
the Trust to maintain a greater portion of its assets in cash equivalents than
it would otherwise, which could negatively impact performance. If the Trust
purchases a relatively large Senior Loan to generate income, the limitations of
the secondary market may inhibit the Trust from selling a portion of the Senior
Loan and reducing its exposure to a borrower when the Investment Manager deems
it advisable to do so.
In addition, because the secondary market for Senior Loans may be limited, it
may be more difficult to value Senior Loans. Market quotations may not be
available and valuation may require more research than for more liquid
securities. In addition, elements of judgment may play a greater role in the
valuation, because there is less reliable, objective data available.
Employee Benefit Plan Considerations. In the case of certain employee benefit
plans, additional cash contributions may cause violation of maximum contribution
limitations or other qualification rules.
Plans in which contributions are so limited should consider whether there is an
additional source of funds available within the Plan, including the liquidation
of assets, with which to exercise the Rights. Because the rules governing plans
are extensive and complex, Plans contemplating the exercise of Rights should
consult with their counsel prior to such exercise. See "The Offer -- Employee
Plan Considerations."
GENERAL INFORMATION ON SENIOR LOANS
PRIMARY MARKET OVERVIEW
The primary market for Senior Loans has become much larger in recent years. The
volume of loans originated in the syndicated credit market has increased from
$2.75 billion in 1992 to $35.46 billion during the 12 month period ended June
1996. In June 1996, the volume of leveraged loans (loans for which interest is
priced at LIBOR plus 150 basis points and above) reached the highest level since
1989. Additionally, an active secondary market has developed. The following
chart shows the growth of the primary and secondary markets in recent years, and
compares the size of the Senior Loan Market to the size of the Trust's net
assets.
<TABLE>
<CAPTION>
1992 1993 1994 1995 JUNE 1995-96
------ ------ ------ ------ ---------------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS)
Senior Loan Origination Volume 2.75 8.15 17.25 28.66 35.46
The Trust's Net Assets $734 $717 $721 $860 $868
Senior Loan Orgination Volume
</TABLE>
Source: Loan Pricing Corporation.
At the same time, demand has remained strong as institutional investors other
than banks have begun to enter the Senior Loan market. Investment companies,
insurance companies, and private investment vehicles are
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<PAGE> 34
replacing U.S. and foreign banks as lenders. In 1992, institutional investors
comprised 8% of the Senior Loan market; by 1996, such investors comprised 30% of
the market. In addition, certain institutional investors, such as
publicly-registered investment companies, have grown in size. Since 1995,
investment companies that invest primarily in Senior Loans have received a
record amount of cash inflows.
ABOUT SENIOR LOANS
Senior Loans vary from other types of debt in that they generally hold the most
senior position in the capital structure of a company. Priority liens are
obtained by the lenders that typically provide the first right to cash flows or
proceeds from the sale of a borrower's collateral if the borrower becomes
insolvent (subject to the limitations of bankruptcy law, which may provide
higher priority to certain claims such as, for example, employee salaries,
employee pensions and taxes). Thus, Senior Loans are generally repaid before
unsecured bank loans, corporate bonds, subordinated debt, trade creditors, and
preferred or common stockholders. Generally, the agent on a Senior Loan is
responsible for monitoring collateral and for exercising remedies available to
the lenders such as foreclosure upon collateral.
Senior Loans generally are arranged through private negotiations between a
corporate borrower and several financial institutions ("lenders") represented in
each case by an agent ("agent"), which usually is one or more of the lenders.
The Trust will acquire Senior Loans from and sell Senior Loans to the following
lenders: money center banks, selected regional banks and selected non-banks,
insurance companies, finance companies, other investment companies, and lending
companies. The Trust may also acquire Senior Loans from and sell Senior Loans to
U.S. branches of foreign banks which are regulated by the Federal Reserve System
or appropriate state regulatory authorities. On behalf of the lenders, generally
the agent is primarily responsible for negotiating the loan agreement ("loan
agreement"), which establishes the terms and conditions of the Senior Loan and
the rights of the corporate borrower and the lenders. The agent and the other
original lenders typically have the right to sell interests ("participations")
in their share of the Senior Loan to other participants. The agent and the other
original lenders also may assign all or a portion of their interests in the
Senior Loan to other participants.
The Trust's investment in Senior Loans generally may take one of several forms
including: acting as one of the group of lenders originating a Senior Loan (an
"original lender"); purchasing of an assignment ("assignment") of a portion of a
Senior Loan from a third party, or acquiring a participation in a Senior Loan.
With respect to any given Senior Loan, the rights of the Trust when it acquires
a participation may be more limited than the rights of original lenders or of
persons who acquire an assignment. Participations may entail certain risks
relating to the creditworthiness of the parties from which the participations
are obtained. Further, the Trust may pay a fee or forego a portion of interest
payments to the lender selling a participation or assignment under the terms of
such participation or assignment.
The agent that arranges a Senior Loan is frequently the commercial bank or other
entity that originates the Senior Loan and the entity that invites other parties
to join the lending syndicate. In larger transactions, it is common to have
several agents; however, generally only one such agent has primary
responsibility for documentation and administration of the Senior Loan. Agents
are typically paid fees by the corporate borrower for their services. The Trust
may serve as the agent or co-agent for a Senior Loan. See "Additional
Information About Investments and Investment Techniques -- Originating Senior
Loans" in the SAI.
When the Trust is an original lender originating a Senior Loan, it may share in
a fee paid to the original lenders. When the Trust is an original lender or
acquires an assignment, it will have a direct contractual relationship with the
corporate borrower, may enforce compliance by the corporate borrower with the
terms of the Senior Loan agreement, and may have rights with respect to any
funds acquired by other lenders through set-off. Lenders also have certain
voting and consent rights under the applicable Senior Loan agreement. Action
subject to lender vote or consent generally requires the vote or consent of the
holders of some specified percentage of the outstanding principal amount of the
Senior Loan. Certain decisions, such as reducing the amount or increasing the
time for payment of interest on or repayment of principal of a Senior Loan, or
releasing collateral therefor, frequently require the unanimous vote or consent
of all lenders affected.
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<PAGE> 35
The Trust may also purchase assignments from lenders. The purchaser of an
assignment typically succeeds to all the rights and obligations under the loan
agreement of the assigning lender and becomes a lender under the loan agreement
with the same rights and obligations as the assigning lender. Assignments are,
however, arranged through private negotiations between potential assignees and
potential assignors, and the rights and obligations acquired by the purchaser of
an assignment may be more limited than those held by the assigning lender. The
Trust will purchase an assignment or act as lender with respect to a syndicated
Senior Loan only where the agent with respect to such Senior Loan is determined
by the Investment Manager to be creditworthy at the time of acquisition.
To a lesser extent, the Trust invests in participations in Senior Loans.
Participation by the Trust in a lender's portion of a Senior Loan typically
results in the Trust having a contractual relationship only with the lender, not
with the corporate borrower. The Trust has the right to receive payments of
principal, interest and any fees to which it is entitled only from the lender
selling the participation and only upon receipt by such lender of such payments
from the corporate borrower. In connection with purchasing participations, the
Trust generally will have no right to enforce compliance by the corporate
borrower with the terms of the Senior Loan agreement, nor any rights with
respect to any funds acquired by other lenders through set-off against the
borrower, and the Trust may not directly benefit from the collateral supporting
the Senior Loan. As a result, the Trust may assume the credit risk of both the
corporate borrower and the lender selling the participation. In the event of
insolvency of the lender selling a participation, the Trust may be treated as a
general creditor of such lender, and may not benefit from any set-off between
such lender and the corporate borrower. The Trust will only acquire
participations if the lender selling the participations and any other persons
interpositioned between the Trust and the lender are determined by the
Investment Manager to be creditworthy.
If the terms of an interest in a Senior Loan provide that the Trust is in
privity with the corporate borrower, the Trust has direct recourse against the
corporate borrower in the event the corporate borrower fails to pay scheduled
principal or interest. In all other cases, the Trust looks to the agent to use
appropriate credit remedies against the corporate borrower. When the Trust is an
original lender, it will have a direct contractual relationship with the
corporate borrower. When the Trust purchases an assignment, the Trust typically
succeeds to the rights of the assigning lender under the Senior Loan agreement,
and becomes a lender under the Senior Loan agreement. When the Trust purchases a
participation in a Senior Loan, the Trust typically enters into a contractual
arrangement with the lender selling the participation, and not with the
corporate borrower.
Should an agent become insolvent, or enter FDIC receivership or bankruptcy, any
interest in the Senior Loan transferred by such person and any Senior Loan
repayment held by the agent for the benefit of participants may be included in
the agent's estate where the Trust acquires a participation interest from an
original lender, should that original lender become insolvent, or enter FDIC
receivership or bankruptcy, any interest in the Senior Loan transferred by the
original lender may be included in its estate. In such an event, the Trust might
incur certain costs and delays in realizing payment or may suffer a loss of
principal and interest.
DESCRIPTION OF THE COMMON SHARES
The Trust was organized as a Massachusetts business trust on December 2, 1987,
and is registered with the Commission as a diversified closed-end investment
company under the Investment Company Act. The Trust's Agreement and Declaration
of Trust, a copy of which is on file in the office of the Secretary of State of
the Commonwealth of Massachusetts, authorizes the issuance of an unlimited
number of shares of beneficial interest without par value.
The Trust issues shares of beneficial interest in the Trust. Under Massachusetts
law, shareholders could, under certain circumstances, be held liable for the
obligations of the Trust. However, the Agreement and Declaration of Trust
disclaims shareholder liability for acts or obligations of the Trust and
requires that notice of such disclaimer be given to all parties in each
agreement, obligation or instrument entered into or executed by the Trust or the
Trustees, and each party thereto must expressly waive all rights or any action
directly against shareholders. The Agreement and Declaration of Trust provides
for indemnification out of the Trust's property for all loss and expense of any
shareholder of the Trust held liable on account of being or having been
32
<PAGE> 36
a shareholder. Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which the Trust
would be unable to meet its obligations wherein the complaining party was held
not to be bound by the disclaimer.
As of September 30, 1996, to the best of the Trust's knowledge, no shareholders
owned of record or beneficially more than 5% of the outstanding Common Shares of
the Trust. The number of Common Shares outstanding as of October 18,, 1996 was
[90,614,878], none of which were held by the Trust. Assuming that all Rights are
exercised, an additional [18,122,976] Shares will be issued. The Shares are
listed on the NYSE.
DIVIDENDS, VOTING AND LIQUIDATION RIGHTS
Each share of the Trust has one vote and shares equally in dividends and
distributions when and if declared by the Trust and in the Trust's net assets
upon liquidation. All shares, when issued, are fully paid and are non-assessable
by the Trust. There are no preemptive or conversion rights applicable to any of
the shares. Trust shares do not have cumulative voting rights and, as such,
holders of more than 50% of the shares voting for trustees can elect all
trustees and the remaining shareholders would not be able to elect any trustees.
STATUS OF SHARES
The Board of Trustees may classify or reclassify any unissued shares of the
Trust into shares of any series by setting or changing in any one or more
respects, from time to time, prior to the issuance of such shares, the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption of such shares. Any such classification or reclassification will
comply with the provisions of the Investment Company Act.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER
PAII, Two Renaissance Square, 40 North Central Avenue, Suite 1200, Phoenix,
Arizona 85004, serves as Investment Manager to the Trust and has overall
responsibility for the management of the Trust. The Trust and PAII have entered
into an agreement dated November 15, 1995, as amended and restated February 17,
1995, April 7, 1995, and as further amended May 2, 1996, that requires PAII to
provide all investment advisory and portfolio management services for the Trust.
It also requires PAII to assist in managing and supervising all aspects of the
general day-to-day business activities and operations of the Trust, including
custodial, transfer agency, dividend disbursing, accounting, auditing,
compliance and related services. PAII provides the Trust with office space,
equipment and personnel necessary to administer the Trust. The agreement with
PAII can be canceled by the Board of Trustees upon 60 days' written notice.
Organized in December 1994, PAII is registered as an investment adviser with the
Commission.
PAII acquired certain assets of an investment adviser to certain investment
companies, including certain funds in the Pilgrim America family of funds, in a
transaction that closed on April 7, 1995. Prior to that date, PAII had not
previously served as an investment adviser to a registered investment company,
although investment personnel of PAII had managed other registered investment
companies. PAII serves as investment manager to seven other registered
investment companies (or series thereof) and currently has assets under
management of approximately $ billion as of the date of this Prospectus.
PAII is an indirect, wholly-owned subsidiary of Express America Holdings
Corporation ("Express America") (NASDAQ: EXAM). Through its subsidiaries,
Express America engages in the financial services business, focusing on
providing investment advisory, administrative and distribution services to
open-end and closed-end investment companies. For additional information
regarding Express America, the Investment Manager, and the Officers and
Trustees, please see the SAI.
PAII bears its expenses of providing the services described above. PAII
currently receives from the Trust an annual fee, paid monthly, of 0.85% of the
average daily net assets of the Trust, plus the proceeds of any outstanding
borrowings, up to $700 million; 0.75% of the average daily net assets of the
Trust, plus the
33
<PAGE> 37
proceeds of any outstanding borrowings, over $700 million up to $800 million;
and 0.65% of the average daily net assets of the Trust, plus the proceeds of any
outstanding borrowings, over $800 million. PAII has agreed to reduce its fee for
a period of three years from the Expiration Date to 0.60% of the average daily
net assets, plus the proceeds of any outstanding borrowings, over $1.15 billion.
The Trust pays all operating and other expenses of the Trust not borne by PAII
including, but not limited to, audit and legal fees, transfer agent, registrar
and custodian fees, expenses in preparing tender offers, shareholder reports and
proxy solicitation materials and other miscellaneous business expenses. The
Trust also pays all taxes imposed on it and all brokerage commissions and
loan-related fees. The Trust is responsible for paying all of the expenses of
the Offer from the proceeds of the Offer.
Portfolio Management. The Trust's portfolio is managed by a portfolio
management team consisting of a Senior Portfolio Manager, two Assistant
Portfolio Managers, and credit analysts.
HOWARD TIFFEN is a Senior Vice President of PAII and the Senior Portfolio
Manager of the Trust. He has had primary responsibility for investment
management of the Trust since November, 1995. Mr. Tiffen's banking career
spans more than 25 years. Mr. Tiffen served in a series of positions in the
lending and capital market functions at a major United States Bank for 13
years and has served in international investment banking functions in Hong
Kong, Malta, the Caribbean, Singapore, Thailand, and Japan. From 1982 to
November 1995, Mr. Tiffen worked for Bank of America (and its predecessor,
Continental Bank) in the following capacities: Managing Director, Money
Managers Group (1993-1995); Managing Director, Loan Sales Trading
(1990-1993); Managing Director, Distribution (London, England, 1984-1990);
and Vice President and Managing Director, Capital Markets (1982-1984). Mr.
Tiffen is a graduate of Northwestern University and is an associate of the
Chartered Institute of Bankers.
DANIEL A. NORMAN has served as Senior Vice President and Assistant
Portfolio Manger of the Trust since April 1995 and September 1996,
respectively. Mr. Norman is a Senior Vice President of PAGI (since April
1995), PAII (since April 1995), PASI (since December 1994), Express America
(since April 1995), and Express America Mortgage Corporation (since
February 1992). Mr. Norman was Chief Financial Officer of Prime Financial
Inc. (December 1985 -- February 1992) and from 1981 to 1985 was employed by
Arthur Andersen & Co. Mr. Norman received an MBA from the University of
Nebraska.
MICHAEL BACEVICH has served as Assistant Portfolio Manager and Vice
President of the Trust since December 1995 and September 1996,
respectively. Prior to joining Pilgrim America, Mr. Bacevich was a Vice
President with the Bank of America (and its predecessor, Continental Bank)
in its Leveraged Finance Group (July 1994 -- November 1995) and prior to
that in Special Assets Administration (July 1990 -- July 1994). Mr.
Bacevich began his banking career with Chemical Bank in June 1988. Prior to
that time, Mr. Bacevich was in the United States Army where he achieved the
rank of Captain (June 1981 -- August 1986). Mr. Bacevich is a graduate of
West Point and received an MBA from the University of Chicago.
THE ADMINISTRATOR
The Administrator of the Trust is PAGI. Its principal business address is Two
Renaissance Square, 40 North Central Avenue, Suite 1200, Phoenix, Arizona
85004-4424. The Administrator is a wholly-owned subsidiary of Express America
and the immediate parent company of PAII.
Under an Administration Agreement between PAGI and the Trust, PAGI administers
the Trust's corporate affairs subject to the supervision of the Trustees of the
Trust. In that connection PAGI monitors the provisions of the Senior Loan
agreements and any agreements with respect to interests in Senior Loans and is
responsible for recordkeeping with respect to the Senior Loans in the Trust's
portfolio. PAGI also furnishes the Trust with office facilities and furnishes
executive personnel together with clerical and certain recordkeeping and
administrative services. These include preparation of annual and other reports
to shareholders and to the Commission. PAGI also handles the filing of federal,
state and local income tax returns not being furnished by the Custodian or
Transfer Agent. The Administrator has authorized all of its officers and
employees who have been elected as Trustees or officers of the Trust to serve in
the latter capacities. All services furnished by the
34
<PAGE> 38
Administrator under the Administration Agreement may be furnished by such
officers or employees of the Administrator.
The Trust pays PAGI for the services performed and the facilities furnished by
PAGI as Administrator a fee, computed daily and payable monthly. The
Administration Agreement states that PAGI is entitled to receive a fee at an
annual rate of 0.15% of the average daily net assets of the Trust, plus the
proceeds of any outstanding borrowings, up to $800 million; and 0.10% of the
average net assets of the Trust, plus the proceeds of any outstanding
borrowings, in excess of $800 million.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The transfer agent, dividend disbursing agent and registrar for the shares is
IFTC, whose principal business address is 127 W. 10th Street, Kansas City,
Missouri 64105.
CUSTODIAN
The Trust's securities and cash are held under a Custodian Agreement with IFTC.
In addition to serving as custodian, IFTC acquires shares on behalf of the Trust
for distribution to shareholders under the Trust's Dividend Reinvestment and
Cash Purchase Plan.
DIVIDENDS AND DISTRIBUTIONS
Distribution Policy. Income dividends are declared and paid monthly. Income
dividends may be distributed in cash or reinvested in additional full and
fractional shares pursuant to the Trust's Dividend Reinvestment Plan discussed
below. Shareholders receive statements on a monthly basis reflecting any
distributions credited or paid to their account. Income dividends consist of
interest accrued and amortization of fees earned less any amortization of
premiums paid and the estimated expenses of the Trust, including fees payable to
PAII. Income dividends are calculated monthly under guidelines approved by the
Trustees. Each dividend is payable to shareholders of record at the time of
declaration. Accrued amounts of fees received, including facility fees, will be
taken in as income and passed on to shareholders as part of dividend
distributions. Any fees or commissions paid to facilitate the sale of portfolio
Senior Loans in connection with quarterly tender offers or other portfolio
transactions may reduce the dividend yield. The Trust may make one or more
annual payments from any net realized capital gains, if any.
Dividend Reinvestment and Cash Purchase Plan. The Trust's Dividend Reinvestment
and Cash Purchase Plan (the "Plan") allows participating shareholders to
reinvest all dividends and capital gain distributions in additional shares of
the Trust. The Plan also allows participants to make voluntary purchases monthly
through IFTC (the "Plan Agent"), in amounts ranging from a minimum of $100 to a
maximum of $5,000 (such minimum and maximum may be waived at management's
discretion). All distributions to shareholders whose shares are registered in
their own names automatically will be paid in cash, unless the shareholder
elects to reinvest the distributions in additional shares of the Trust pursuant
to the Plan. Shareholders who receive dividends and capital gain distributions
in cash may elect to participate in the Plan by notifying IFTC. Additional
information about the Plan may be obtained from The Pilgrim America Group's
Shareholder and Dealer Services Department ((800) 331-1080). For additional
information, see "Dividend Reinvestment and Cash Purchase Plan" in the SAI.
TAX MATTERS
The Trust intends to operate as a "regulated investment company" under the
Internal Revenue Code. To do so, the Trust must meet certain income,
distribution and diversification requirements. In any fiscal year in which the
Trust so qualifies and distributes to shareholders substantially all of its net
investment income and net capital gains, the Trust itself is generally relieved
of any federal income or excise tax.
All dividends and capital gains distributed to shareholders are taxable whether
they are reinvested or received in cash, unless the shareholder is exempt from
taxation or entitled to tax deferral. Dividends paid out of the
35
<PAGE> 39
Trust's investment company taxable income (including interest, dividends, if
any, and net short-term capital gains) will be taxable to shareholders as
ordinary income. If a portion of the Trust's income consists of dividends paid
by U.S. corporations, a portion of the dividends paid by the Trust may be
eligible for the corporate dividends-received deduction. Distributions of net
capital gains (the excess of net long-term capital gains over net short-term
capital losses), if any, designated as capital gain dividends are taxable as
long-term capital gains, regardless of how long a shareholder has held the
Trust's shares. Early each year, shareholders will be notified as to the amount
and federal tax status of all dividends and capital gains paid during the prior
year. Such dividends and capital gains may also be subject to state or local
taxes. Dividends declared in October, November, or December with a record date
in such month and paid during the following January will be treated as having
been paid by the Trust and received by shareholders on December 31 of the
calendar year in which declared, rather than the calendar year in which the
dividends are actually received.
If a shareholder sells or otherwise disposes of his or her shares of the Trust,
he or she may realize a capital gain or loss which will be long-term or
short-term, generally depending on the holding period for the shares.
If a shareholder has not furnished a certified correct taxpayer identification
number (generally a Social Security number) and has not certified that
withholding does not apply, or if the Internal Revenue Service has notified the
Trust that the taxpayer identification number listed on the account is incorrect
according to their records or that the shareholder is subject to backup
withholding, federal law generally requires the Trust to withhold 31% from any
dividends and/or redemptions (including exchange redemptions). Amounts withheld
are applied to federal tax liability; a refund may be obtained from the Service
if withholding results in overpayment of taxes. Federal law also requires the
Trust to withhold up to 30% or the applicable tax treaty rate from ordinary
dividends paid to certain nonresident alien and other non-U.S. shareholder
accounts.
This is a brief summary of some of the tax laws that affect an investment in the
Trust. Please see the SAI and a tax adviser for further information.
DISTRIBUTION ARRANGEMENTS
Prudential Securities Incorporated and Merrill Lynch, Pierce, Fenner & Smith
Incorporated (the "Dealer Managers"), will act as Dealer Managers for the Offer.
Under the terms and subject to the conditions contained in a Dealer Manager
Agreement dated the date hereof, the Dealer Managers will provide financial
advisory, marketing and soliciting services. The Trust has agreed to pay the
Dealer Managers a fee for their financial advisory, marketing and soliciting
services equal to 3.5% of the aggregate Subscription Price for the Shares issued
pursuant to the Offer (the "Dealer Manager Fee"). The Dealer Managers will
reallow to the broker-dealer designated on the related Exercise Form a
concession of 2.25% of the Subscription Price per Share for each Share issued
pursuant to the Offer, provided that the designated broker-dealer has executed a
confirmation accepting the terms of the Soliciting Dealer Agreement relating to
the Offer. The Dealer Manager Fee will be borne by the Trust and indirectly by
all of the Trust's shareholders, including those who do not exercise their
Rights.
The Trust will bear the expenses of the Offer, which will be paid from the
proceeds of the Offer. These expenses include, but are not limited to: the
expense of preparation and printing of the prospectus for the Offer, the expense
of counsel and auditors in connection with the Offer, the out-of-pocket expenses
of Prudential Securities Incorporated incurred in connection with the Offer up
to $150,000, the out-of-pocket expenses incurred by the officers of the Trust in
connection with the Offer, and others. In addition, the Trust has agreed to
indemnify the Dealer Managers against certain liabilities under the Securities
Act of 1933, and the Investment Company Act. Prudential Securities Incorporated
acted as financial adviser to Express America in connection with its acquisition
in 1995 of certain investment advisory assets.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed on for the Trust by
Dechert Price & Rhoads, Washington, D.C., counsel to the Trust. Certain legal
matters in connection with this Offer will be passed on for the Dealer Managers
by Cleary, Gottlieb, Steen & Hamilton, Washington D.C.
36
<PAGE> 40
EXPERTS
The audited financial statements and financial highlights of the Trust as of
February 29, 1996 and for the year then ended have been incorporated herein in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing. The address of KPMG Peat Marwick LLP is 725
South Figueroa Street, Los Angeles, California 90017-5491. Tait Weller & Baker,
Two Penn Center Plaza, Philadelphia, Pennsylvania, served as independent
auditors for the Trust with respect to its financial statements for the year
ended February 28, 1995 and prior years.
REGISTRATION STATEMENT
The Trust has filed with the Securities and Exchange Commission, Washington,
D.C., a Registration Statement under the Securities Act, relating to the Shares
offered hereby. For further information with respect to the Trust and its Common
Shares, reference is made to such Registration Statement and the exhibits filed
with it.
FINANCIAL STATEMENTS
The Trust's audited financial statements for the fiscal year ended February 29,
1996, are incorporated into the SAI by reference from the Trust's Annual Report
dated as of February 29, 1996. The Trust's unaudited financial statements for
the six months ended August 31, 1996, are included as an Appendix to this
Prospectus. The Trust will furnish without charge copies of its Annual Report
and Semi-Annual Report, upon request to the Trust, Two Renaissance Square, 40
North Central Avenue, Suite 1200, Phoenix, Arizona 85004-4424, toll-free
telephone (800) 331-1080.
TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Change of Name.......................................................................
Additional Information About Investments and Investment Techniques...................
Investment Restrictions..............................................................
Trustees and Officers................................................................
Investment Management and Other Services.............................................
Portfolio Transactions...............................................................
Net Asset Value......................................................................
Methods Available to Reduce Market Value Discount from NAV...........................
Dividend Reinvestment and Cash Purchase Plan.........................................
Tax Matters..........................................................................
Advertising and Performance Data.....................................................
</TABLE>
37
<PAGE> 41
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
SENIOR LOAN INTERESTS
(DOLLAR WEIGHTED PORTFOLIO INTEREST RESET PERIOD IS 38 DAYS)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT LOAN STATED
(000'S) INDUSTRY/BORROWER TYPE MATURITY VALUE
- --------- ------------------------------------------------------------------- ----------- -------- --------------
<C> <S> <C> <C> <C>
AEROSPACE PRODUCTS & SERVICES: 8.9%
$ 4,528 Atlas Air (air cargo carrier) Revolver 06/30/98 $ 4,527,922
14,546 Aviall, Inc. (aircraft parts distributor) Term 11/30/00 14,546,287
15,000 Banner Aerospace (aerospace fasteners) Term B 07/01/03 15,000,000
15,000 Continental Micronesia (airline) Axel (A) 07/26/03 15,000,000
8,000 Dallas Airmotive, Inc. (aircraft engine maintenance) Term 03/15/01 8,000,000
8,936 Fiberite, Inc. (plastic composite manufacturer) Term B 12/31/01 8,935,714
2,329 Grimes Aerospace Corp. (aerospace products) Revolver 12/31/99 2,328,653
13,844 Grimes Aerospace Corp. Term 12/31/99 13,844,331
5,000 Gulfstream Delaware Corp. (aircraft manufacturer) Term B 03/31/98 5,000,000
8,000 Technetics Corp. (aircraft engine components) Term 06/20/02 8,000,000
----------
95,182,907
----------
APPAREL PRODUCTS: 1.6%
1,078 Butterick Pattern Co. (sewing aids) (1) Term 05/31/96 646,624
6,930 Humphreys, Inc. (belts and personal leather goods) Term B 11/15/03 6,930,000
9,696 Scovill Fasteners (metal fasteners for apparel products) Term B 01/24/03 9,695,596
----------
17,272,220
----------
COMMUNICATIONS: 1.7%
8,000 Executone Business Solutions (telecommunication service) Term B 07/01/03 8,000,000
9,929 Shared Technologies, Inc. (communication services) Term B 03/31/03 9,928,571
----------
17,928,571
----------
CONSTRUCTION PRODUCTS AND SERVICES: 2.3%
18,400 MTF Acquisition Corp. (paint and coating products) Term 11/30/02 18,400,000
4,000 The Presley Companies (homebuilder) Revolver 05/20/97 4,000,000
1,908 United Building Materials, Inc. (stone and concrete products) Term 04/30/96 1,860,362
----------
24,260,362
----------
CONTAINER PRODUCTS: 0.9%
10,000 Reid Plastics, Inc. (plastic bottle manufacturer) Term B 03/31/02 10,000,000
----------
DIVERSIFIED FINANCIAL: 1.4%
15,000 Dollar Financial Group, Inc. (retail check cashing) Term B 06/30/01 15,000,000
----------
DIVERSIFIED MANUFACTURING: 7.7%
5,688 Cambridge Industries, Inc. (automotive plastics) Term B 05/17/02 5,687,742
6,399 Cambridge Industries, Inc. Term C 11/17/03 6,398,580
2,844 Cambridge Industries, Inc. Term D 05/17/04 2,843,842
10,000 Capital Tool & Design (brake backing plates) Term B 07/19/03 10,000,000
19,800 Graco Children's Products, Inc. (juvenile products) Term B 06/30/03 19,800,000
13,959 The Hawk Group (metal products and fabrication) Term B 06/30/02 13,959,000
276 @ KDI Corp. (defense and leisure products) (2) Term A 12/31/96 16,791
13 @ KDI Corp. (2) Term B 12/31/96 13,187
</TABLE>
F-1
<PAGE> 42
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT LOAN STATED
(000'S) INDUSTRY/BORROWER TYPE MATURITY VALUE
- --------- ------------------------------------------------------------------- ----------- -------- --------------
<C> <S> <C> <C> <C>
DIVERSIFIED MANUFACTURING (CONTINUED)
$ 900 Rowe International, Inc. (vending, jukebox, currency machines) (1) Revolver 12/31/96 $ 900,000
7,375 Rowe International, Inc. (1) Term C 12/31/96 4,056,250
7,933 Spalding & Evenflo Companies, Inc. (sporting, juvenile products) Term B 10/17/02 7,932,584
10,978 Worldwide Sports & Recreation Corp. (optics, sports products) Term B 03/31/01 10,703,160
----------
82,311,136
----------
DIVERSIFIED SERVICES/ENTERTAINMENT: 3.6%
7,160 AMF Group (bowling centers and equipment) Term A 05/01/04 7,231,981
2,825 AMF Group Term B 05/01/03 2,852,774
6,913 Bankers Systems, Inc. (compliance services to banking industry) Term B 11/01/02 6,912,500
13,080 Marvel IV Holdings, Inc. (diversified services and entertainment) Revolver 06/22/99 13,080,000
7,880 Staff Capital, L.P. (payroll and human resource services) Term 12/08/99 7,880,000
----------
37,957,255
----------
ELECTRICAL EQUIPMENT: 0.9%
9,905 Merkle-Korff Industries (custom industrial electric motors) Term B 03/15/03 9,905,232
----------
ELECTRONIC EQUIPMENT: 5.7%
6,763 Details, Inc. (prototype circuit boards) Term 02/13/01 6,762,712
12,500 Dictaphone Acquisition, Inc. (dictation and recording equipment) Term 06/30/02 12,500,000
4,881 Elgar Electronics (electronic testing equipment) Term B 03/31/03 4,881,140
8,780 Intesys Technologies, Inc. (contract engineering and manufacturing) Term B 12/31/01 8,780,488
3,471 K-Tec Holdings (telephone and communications equipment) Term B 02/01/03 3,471,269
3,968 K-Tec Holdings Term C 02/01/04 3,967,647
5,360 Packard Bell Electronics, Inc. (personal computer manufacturer) Revolver 04/18/97 5,359,564
15,000 PSC Incorporated (scanning equipment) Term B 06/28/02 15,000,000
----------
60,722,820
----------
FOOD/TOBACCO PRODUCTS AND SERVICES: 4.8%
2,563 Bumble Bee Seafoods, Inc. (canned seafood) Term A 09/15/96 2,562,500
3,750 Bumble Bee Seafoods, Inc. Term B 09/15/96 3,750,000
4,478 Edward's Baking Co. (food service bakery) Term B 09/30/02 4,477,500
25,000 Favorite Brands International (confectionary manufacturer) Term B 08/01/04 25,000,000
2,500 Liggett Group Inc. (tobacco products) Revolver 09/15/97 2,500,000
2,162 Tom's Foods, Inc. (snack foods) (1) Term 12/31/98 864,905
7,385 Van De Kamp's (frozen foods) Term B 04/30/03 7,384,615
4,615 Van De Kamp's Term C 09/30/03 4,615,385
----------
51,154,905
----------
FOOD STORES: 7.0%
6,202 Dominick's Finer Foods, Inc. (Chicago area supermarkets) Term C 03/31/03 6,217,878
6,202 Dominick's Finer Foods, Inc. Term D 09/30/03 6,217,878
1,000 @ New Almac's Inc. (Rhode Island supermarkets) (3) Sr. Note 11/18/01 390,000
40 @ New Almac's Inc. (3) Sr. Note 11/18/04 15,722
6,723 Ralph's Grocery Co. (Southern California supermarkets) Term B 06/15/02 6,756,317
6,726 Ralph's Grocery Co. Term C 06/15/03 6,759,275
4,988 Ralph's Grocery Co. Term D 06/15/04 5,013,042
</TABLE>
F-2
<PAGE> 43
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT LOAN STATED
(000'S) INDUSTRY/BORROWER TYPE MATURITY VALUE
- --------- ------------------------------------------------------------------- ----------- -------- --------------
<C> <S> <C> <C> <C>
FOOD STORES (CONTINUED)
$ 11,675 Smith's Food & Drug Co. (western states supermarkets) Term A 08/31/02 $ 11,733,131
4,988 Smith's Food & Drug Co. Term B 08/31/02 5,012,438
4,988 Smith's Food & Drug Co. Term C 08/31/04 5,012,437
4,988 Smith's Food & Drug Co. Term D 08/31/04 5,012,437
16,333 Star Markets Co., Inc. (Boston area supermarkets) Term B 12/31/01 16,332,895
----------
74,473,450
----------
FURNITURE & GARDEN PRODUCTS: 2.6%
2,472 Interco (furniture) Term B 03/29/03 2,472,429
460 Interco Term C 03/29/04 459,698
17,500 Lifestyle Furnishings International (furniture) Term B 06/20/04 17,500,000
6,957 Simmons Company (mattress manufacturer) Term B 03/31/03 6,956,774
----------
27,388,901
----------
GENERAL MERCHANDISE RETAILING: 8.6%
50,000 Kmart Corp. (general merchandise retailer) Term 12/19/99 50,000,000
19,700 Liberty House, Inc. (Hawaiian department store chain) Term B 06/30/02 19,700,000
6,919 Peebles, Inc. (department store chain) Term A 04/30/01 6,919,187
7,901 Peebles, Inc. Term B 04/30/02 7,900,750
3,504 Saks and Company (general merchandise retailer) Term A 06/30/00 3,504,428
1,413 Saks and Company Term B 06/30/98 1,413,481
2,183 Saks and Company Term B3 06/30/00 2,182,887
----------
91,620,733
----------
HEALTH CARE SERVICES: 3.9%
7,260 Community Health Systems (hospitals) Term B 12/31/03 7,260,274
7,260 Community Health Systems Term C 12/31/04 7,260,274
5,479 Community Health Systems Term D 12/31/05 5,479,452
6,000 Covenant Care, Inc. (long-term healthcare facilities) Term 06/30/99 6,000,000
4,853 H.E.C. Investments, Inc. (health club operator) Term A 12/31/00 4,852,941
7,000 H.E.C. Investments, Inc. Term B 12/31/99 7,000,000
3,261 Mediq/PRN Life Support Inc. (hospital equipment leasing) Term 09/28/98 3,260,799
----------
41,113,740
----------
HEALTH & BEAUTY PRODUCTS: 2.6%
17,375 ICON Health & Fitness Co. (exercise equipment) Term B 11/14/01 17,375,000
10,000 Revlon Inc. (cosmetics manufacturer) Term 12/31/00 10,000,000
----------
27,375,000
----------
INDUSTRIAL CHEMICALS: 2.3%
9,250 Cedar Chemical Corp. (specialized chemicals) Term B 10/30/03 9,250,000
10,000 Sterling Chemicals (industrial chemicals) Term B 09/30/04 10,000,000
5,000 Texas Petrochemicals (industrial chemicals) Term B 06/30/04 5,000,000
----------
24,250,000
----------
</TABLE>
F-3
<PAGE> 44
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT LOAN STATED
(000'S) INDUSTRY/BORROWER TYPE MATURITY VALUE
- --------- ------------------------------------------------------------------- ----------- -------- --------------
<C> <S> <C> <C> <C>
INDUSTRIAL EQUIPMENT: 4.1%
$ 2,836 Calmar (non-aerosol fluid dispensing systems) Term A 09/15/03 $ 2,835,714
2,127 Calmar Term B 03/15/04 2,126,786
9,947 Graphic Controls Corp. (industrial and medical charts) Term B 09/28/03 9,947,195
5,063 Intermetro Industries Inc. (storage and material transport
products) Term B 06/30/03 5,062,500
3,938 Intermetro Industries Inc. Term C 06/30/04 3,937,500
4,961 Jackson Products, Inc. (industrial safety equipment manufacturer) Term B 09/01/03 4,960,870
4,963 Jackson Products, Inc. Term C 09/01/02 4,962,500
9,929 Schrader, Inc. (fluid/air control valve manufacturer) Term B 11/30/02 9,928,572
----------
43,761,637
----------
INDUSTRIAL SERVICES: 2.2%
13,750 Clean Harbors (environmental services) Term 05/08/00 13,750,000
9,880 Primeco, Inc. (equipment rental) Term 12/31/00 9,880,000
----------
23,630,000
----------
MEDIA/BROADCAST: 8.3%
4,600 Benedek Broadcasting Corp. (broadcasting) Axel A (A) 12/05/02 4,600,000
4,500 Benedek Broadcasting Corp. Axel B (A) 12/05/02 4,500,000
7,250 Eller Media Company (outdoor advertising) Term 12/31/03 7,250,000
10,000 FrontierVision (cable television) Term B 06/30/05 10,000,000
10,000 Intermedia Partners IV (cable television) Term 01/01/05 10,000,000
4,866 Maryland Cable (cable television) Term A 12/31/02 4,866,495
7,788 Maryland Cable Term B 12/31/02 7,788,206
10,000 Metro-Goldwyn-Mayer, Inc. (film library) Term 04/15/97 10,000,000
5,844 Outdoor Systems, Inc. (outdoor advertising) Term B 12/31/02 5,843,750
5,844 Outdoor Systems, Inc. Term C 12/31/03 5,843,750
8,000 Panavision International, Inc. (motion picture cameras) Term B 03/31/04 8,000,000
9,900 Phoenix Associates, Inc. (cable television) Term B 12/31/99 9,900,000
----------
88,592,201
----------
METAL PRODUCTS: 3.4%
9,925 GS Technologies (metal products fabricator) Term 09/30/02 9,925,000
9,444 Hayes Wheels International (automotive wheels) Term B 07/31/04 9,444,444
7,556 Hayes Wheels International Term C 07/31/04 7,555,556
800 National Refractories Inc. (kiln lining materials) Term B 09/30/99 800,000
5,000 National Refractories Inc. Term C 09/30/99 5,000,000
3,250 Triangle Wire and Cable Inc. (metal products fabricator) Revolver 03/28/97 3,250,000
----------
35,975,000
----------
MISCELLANEOUS COMPANIES: 1.3%
4,255 Dade International (medical testing equipment manufacturer) Term B 12/31/04 4,254,545
4,255 Dade International Term C 12/31/04 4,254,545
4,491 Dade International Term D 12/31/04 4,490,910
263 General Aquatics, Inc. (swimming pool manufacturer) Term 06/30/00 263,292
----------
13,263,292
----------
</TABLE>
F-4
<PAGE> 45
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT LOAN STATED
(000'S) INDUSTRY/BORROWER TYPE MATURITY VALUE
- --------- ------------------------------------------------------------------- ----------- -------- --------------
<C> <S> <C> <C> <C>
PAPER PRODUCTS: 3.7%
$ 6,979 Mail-Well Corp. (envelopes and specialty printing) Term B 07/31/03 $ 6,979,164
5,000 RIC Holdings, Inc. (packaging and paper products) Term A 02/28/03 5,000,000
17,857 RIC Holdings, Inc. Term B 02/27/04 17,857,143
7,143 RIC Holdings, Inc. Term C 08/31/04 7,142,857
2,827 Supremex, Inc. (Canadian envelope manufacturer) Term B 07/31/03 2,826,525
----------
39,805,689
----------
PUBLISHING AND INFORMATION SERVICES: 1.6%
7,470 NBC Acquisition (wholesale and retail textbooks) Term 08/31/03 7,470,000
5,000 Softworld Services (software fulfillment services) Term A 06/30/00 5,000,000
5,000 Softworld Services Term B 06/30/01 5,000,000
----------
17,470,000
----------
RESTAURANTS: 1.6%
12,761 America's Favorite Chicken Co. (food service franchisor) Term A 10/31/01 12,760,614
4,028 Long John Silvers Inc. (quick service seafood restaurant chain) Bridge 09/30/97 4,027,554
177 Long John Silvers Inc. Term-PIK 09/30/97 176,694
----------
16,964,862
----------
SPECIALTY RETAILING: 2.6%
340 American Blind & Wallpaper (home furnishings retailer) Term 10/31/96 340,409
4,844 Camelot Music, Inc. (music stores) (3) Term B 02/28/02 3,148,821
7,093 Color Tile, Inc. (home improvement retailer) (3) Term A 12/31/96 5,461,867
8,035 Color Tile, Inc. (3) Term C 12/31/98 6,186,861
1,244 Color Tile, Inc. (D.I.P.) (3) Revolver 12/31/98 1,243,577
2,484 M & H Drugs, Inc. (Midwestern retail drugstores) Term 12/31/96 2,422,080
8,825 Murray's Discount Auto Parts (auto parts retailer) Term 09/30/01 8,824,745
----------
27,628,360
----------
TEXTILE & LEATHER PRODUCTS: 1.4%
1,920 Blackstone Capital (carpet manufacturer) Term 01/13/97 1,920,000
580 Blackstone Capital Term 01/13/97 580,000
10,000 Glenoit Mills, Inc. (specialty and decorative fabrics) Term 03/31/00 10,000,000
2,500 Wasserstein (carpet manufacturer) Term 01/13/97 2,500,000
----------
15,000,000
----------
TRANSPORTATION: 1.9%
5,000 Cruise Ship L.L.C. (cruise ship operator) Term 07/01/01 5,000,000
7,339 Sky Chef's International, Inc. (airline food service) Term B 09/15/01 7,347,830
1,616 Sky Chef's International, Inc. Term C 09/15/03 1,619,971
5,886 Sky Chef's International, Inc. Term B 09/15/01 5,910,361
----------
19,878,162
----------
Total Senior Loan Interests - 98.6% 1,049,886,435
-------------
(Cost $1,059,970,525)
</TABLE>
F-5
<PAGE> 46
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT LOAN STATED
(000'S) INDUSTRY/BORROWER TYPE MATURITY VALUE
- --------- ------------------------------------------------------------------- ----------- -------- --------------
<C> <S> <C> <C> <C>
OTHER CORPORATE DEBT
DIVERSIFIED MANUFACTURING: 0.6%
$ 6,000 Capital Tool & Design (brake backing plates) Sub. Note 07/26/03 $ 6,000,000
----------
FOOD STORES: 0.0%
1,111 @ New Almac's Inc. (formerly Almac's, Rhode Island
supermarkets) (3) Sub. Note 12/01/04 --
----------
Total Other Corporate Debt - 0.6% 6,000,000
----------
(Cost $6,848,197)
</TABLE>
COMMON STOCK AND PREFERRED STOCK
<TABLE>
<CAPTION>
SHARES
- ----------
<C> <S> <C>
DIVERSIFIED MANUFACTURING: 0.0%
2,633 @ KDI Corp.--common (defense and leisure products) (2) --
-----------
MISCELLANEOUS COMPANIES: 0.0%
26,121 @ General Aquatics, Inc.--common (swimming pool manufacturer) (R) 156,700
-----------
RESTAURANTS: 0.4%
413,980 @ America's Favorite Chicken Co.--common (quick service restaurant chain) (R) 1,373,141
24,848 America's Favorite Chicken Co.--preferred (quick service restaurant chain) (R) 2,484,800
17,664 @ Flagstar, Inc.--common (family restaurants, institutional food service companies) 46,368
-----------
3,904,309
-----------
TEXTILES: 0.2%
12,764 @ Dan River (Braelan) Corp.--common (diversified textiles) (R) 2,288,045
-----------
6,349,054
Total Common Stock and Preferred Stock - 0.6%
-----------
(Cost $4,462,495)
STOCK PURCHASE WARRANTS AND OTHER SECURITIES
1 @ Autotote Systems, Inc., Warrant representing 48,930 common shares (designer and
$ 57,494
manufacturer of wagering equipment), Expires 10/30/03 (R)
80,634 @ Capital Tool & Design, Warrants representing 80,634 common shares
143,530
(brake backing plates) (R)
19,000 @ Covenant Care, Inc., Warrants representing 19,000 common shares
285,000
(long-term healthcare facilities) (R)
1 @ Cruise Ship, L.L.C., Warrant representing 4,105 voting shares (cruise ship operator) (R) 129,446
1 @ Cruise Ship, L.L.C., Warrant representing 4,666 non-voting shares (R) 147,136
26,606 @ KDI Corp. Units of Trust (defense and leisure products) (R)(2) --
1 @ Staff Capital, L.P., Warrant to purchase 0.5% of the Common Limited Partnership
614,789
Units (payroll and human resource services), Expires 11/05/03 (R)
1 @ Staff Capital, L.P., Warrant to purchase 0.5% of the Preferred Limited Partnership
61,000
Units, Expires 11/05/03 (R)
45,000 @ Victory Holding Corp., Warrants representing 45,000 common shares
--
(Rhode Island supermarkets), Expires 12/01/01 (R)(3)
-----------
1,438,395
Total Stock Purchase Warrants and Other Securities - 0.1%
-----------
(Cost $60,927)
</TABLE>
F-6
<PAGE> 47
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000'S) VALUE
- ---------- --------------
<C> <S> <C>
COMMERCIAL PAPER: 0.1%
$ 800 GE Capital Corp., 5.10% Due 09/03/96 $ 799,773
--------------
Total Short-Term Investments - 0.1% 799,773
--------------
(Cost $799,773)
TOTAL INVESTMENTS - 100.0% $1,064,473,657
=============
(COST $1,072,141,977)
</TABLE>
- -------------------
@ Non-income producing security
(A) Axel describes an amortizing extended term loan with limited call
protection.
(R) Restricted security
* Senior loan interests, while exempt from registration under the Securities
Act of 1933, contain certain restrictions on resale and cannot be sold
publicly. These senior loan interests bear interest (unless otherwise
noted) at rates that float periodically at a margin above the Prime Rate of
a U.S. bank specified in the credit agreement, LIBOR, the certificate of
deposit rate, or in some cases another base lending rate.
(1) The borrower is restructuring and interest is being recognized as cash
payments are received.
(2) The borrower filed for protection under Chapter 7 of the U.S. Federal
bankruptcy code and is in the process of developing a plan of liquidation.
(3) The borrower filed for protection under Chapter 11 of the U.S. Federal
bankruptcy code and is in the process of developing a plan of
reorganization.
(4) For Federal income tax purposes, which is the same for financial reporting
purposes, cost of investments is $1,072,141,977 and net unrealized
depreciation consists of the following:
<TABLE>
<C> <S> <C>
Gross Unrealized Appreciation $ 4,990,929
Gross Unrealized Depreciation (12,659,249)
------------
Net Unrealized Depreciation $ (7,668,320)
===========
</TABLE>
See Accompanying Notes to Financial Statements
F-7
<PAGE> 48
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES as of August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments in securities at value (Cost $1,072,141,977) $1,064,473,657
Dividends and interest receivable 8,591,980
Prepaid facility fees 422,017
Prepaid expenses 120,650
-------------
Total assets 1,073,608,304
-------------
LIABILITIES:
Notes payable 197,000,000
Deferred facility fees 5,776,486
Accrued interest payable 1,190,194
Accrued management fees 699,275
Overdraft payable to custodian 892,452
Accrued administration fees 121,954
Accrued expenses 622,353
-------------
Total liabilities 206,302,714
-------------
NET ASSETS (equivalent to $9.60 per share, based on 90,355,152 shares
outstanding, unlimited number of shares of beneficial interest
authorized, no par value) $ 867,305,590
==============
Net Assets Consist of:
Paid-in capital $ 871,819,408
Undistributed net investment income 9,481,619
Accumulated net realized loss on investments (6,327,117)
Net unrealized depreciation of investments (7,668,320)
-------------
Net assets $ 867,305,590
==============
</TABLE>
See Accompanying Notes to Financial Statements
F-8
<PAGE> 49
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS for the Six Months Ended August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $ 39,168,095
Facility fees earned 3,295,607
Other 921,866
Dividends 36,443
------------
Total investment income 43,422,011
------------
EXPENSES:
Investment management fees 3,713,854
Interest expense 1,194,898
Administration fees 656,673
Transfer agent and registrar fees 391,336
Miscellaneous expense 320,076
Recordkeeping and pricing fees 173,927
Security loan fees 147,751
Professional fees 92,592
Reports to shareholders 86,964
Custodian fees 61,095
Trustees' fees 43,482
Insurance expense 18,703
------------
Total expenses 6,901,351
------------
Less: Earnings credits (17,613)
Net expenses 6,883,738
------------
Net investment income 36,538,273
------------
REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENTS:
Net realized gain on investments 1,583,402
Change in unrealized depreciation of investments (2,954,878)
------------
Net loss on investments (1,371,476)
------------
Net increase in net assets resulting from operations $ 35,166,797
============
</TABLE>
See Accompanying Notes to Financial Statements
F-9
<PAGE> 50
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
AUGUST 31, YEAR ENDED
1996 FEBRUARY 29,
(UNAUDITED) 1996
---------------- ------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income $ 36,538,273 $ 79,824,660
Net realized gain (loss) on investments 1,583,402 (3,827,587)
Change in unrealized depreciation of investments (2,954,878) (3,260,231)
------------ ------------
Net increase in net assets resulting from operations 35,166,797 72,736,842
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income (36,167,238) (76,983,896)
CAPITAL SHARE TRANSACTIONS:
Issuance from dividend reinvestment 5,368,440 --
Net increase in net assets derived from the sale of shares in
connection with rights offering -- 101,482
------------ ------------
Total increase (decrease) in net assets 4,367,999 (4,145,572)
NET ASSETS:
Beginning of period 862,937,591 867,083,163
------------ ------------
End of period (including undistributed net investment income
of $9,481,619 and $9,110,584, respectively) $867,305,590 $862,937,591
============ ============
</TABLE>
See Accompanying Notes to Financial Statements
F-10
<PAGE> 51
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS for the Six Months Ended August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INCREASE (DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 40,884,855
Dividends received 36,443
Facility fees received 3,991,253
Commitment fees received 64,724
Other income received 947,998
Operating expenses paid (6,077,871)
Net proceeds of short-term investments 37,577,689
Purchases of portfolio securities (618,873,393)
Proceeds from disposition of portfolio securities 368,869,194
-------------
Net cash used for operating activities (172,579,108)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (30,798,798)
Loan advance 197,000,000
-------------
Net cash provided by financing activities 166,201,202
-------------
Net increase in cash (6,377,906)
Cash at beginning of period 5,485,454
-------------
Cash at end of period $ (892,452)
=============
RECONCILIATION OF NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net increase in net assets resulting from operations 35,166,797
-------------
Adjustments to reconcile net increase in net assets resulting from
operations to net cash provided by operating activities:
Increase in investments in securities (209,522,259)
Decrease in dividends and interest receivable 343,861
Increase in prepaid facility fees (422,017)
Increase in prepaid expenses (29,115)
Increase in deferred facility fees 695,646
Increase in accrued interest payable 1,190,194
Decrease in accrued expenses (2,215)
-------------
Total adjustments (207,745,905)
-------------
Net cash used for operating activities $(172,579,108)
=============
</TABLE>
See Accompanying Notes to Financial Statements
F-11
<PAGE> 52
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
AUGUST 31, YEAR ENDED YEARS ENDED FEBRUARY 28,
1996 FEBRUARY 29, -------------------------
(UNAUDITED) 1996(6) 1995 1994
----------- ------------ -------- --------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 9.61 $ 9.66 $ 10.02 $ 10.05
-------- -------- -------- --------
Net investment income 0.40 0.89 0.74 0.60
Net realized and unrealized gain (loss) on
investments (0.01) (0.08) 0.07 (0.05)
-------- -------- -------- --------
Increase in net asset value from investment
operations 0.39 0.81 0.81 0.55
-------- -------- -------- --------
Distributions from net investment income (0.40) (0.86) (0.73) (0.60)
-------- -------- -------- --------
Reduction in net asset value from rights offering -- -- (0.44) --
Increase in net asset value from repurchase of
capital stock -- -- -- 0.02
-------- -------- -------- --------
Net asset value, end of period $ 9.60 $ 9.61 $ 9.66 $ 10.02
======== ======== ======== ========
Closing market price at end of period $ 9.88 $ 9.50 $ 8.75 $ 9.25
TOTAL RETURN
Total investment return at closing market price
(3) 8.40% 19.19% 3.27%(5) 8.06%
Total investment return at closing net asset
value (4) 4.18% 9.21% 5.24%(5) 6.28%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 867,306 $862,938 $867,083 $719,979
Ratios to average net assets:
Expenses 1.58%(1) 1.23% 1.30% 1.31%
Net investment income 8.41%(1) 9.23% 7.59% 6.04%
Portfolio turnover rate 42% 88% 108% 87%
Shares outstanding at end of period (000's) 90,355 89,794 89,794 71,835
Average daily bank loans outstanding during the
period (000's) $ 40,054 $ -- $ 2,811 $ --
Average monthly shares outstanding during the
period (000's) 90,010 89,794 74,598 --
Average daily bank loans per share during the
period $ 0.45 $ -- $ 0.04 $ --
</TABLE>
- ---------------
* Commencement of operations.
(1) Annualized.
(2) Prior to the waiver of expenses, the ratio of expenses to average net assets
was 1.95%(1), 1.48% and 1.44% for the period from May 12, 1988 to February
28, 1989, and for the fiscal years ended February 28, 1990 and February 29,
1992, respectively, and the ratio of net investment income to average net
assets was 8.91%(1), 10.30% and 7.60% for the period from May 12, 1988 to
February 28, 1989 and for the fiscal years ended February 28, 1990 and
February 29, 1992, respectively.
(3) Total investment return measures the change in the market value of your
investment assuming reinvestment of dividends and capital gain
distributions, if any, in accordance with the provisions of the dividend
reinvestment plan. On March 9, 1992, the shares of the Trust were initially
listed for trading on the New York Stock Exchange. Accordingly, the total
investment return for the year ended February 28, 1993 covers only the
period from March 9, 1992, to February 28, 1993. Total investment return for
periods prior to the year ended February 28, 1993, are not presented since
market values for the Trust's shares were not available. Total returns for
less than one year are not annualized.
F-12
<PAGE> 53
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEARS ENDED FEBRUARY 28, MAY 12, 1988*
FEBRUARY 28, FEBRUARY 29, ------------------------- TO FEBRUARY 28,
1993 1992 1991 1990 1989
------------ ------------ ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
$ 9.96 $ 9.97 $ 10.00 $ 10.00 $ 10.00
-------- -------- -------- ---------- ---------
0.60 0.76 0.98 1.06 0.72
0.01 (0.02) (0.05) -- --
-------- -------- -------- ---------- ---------
0.61 0.74 0.93 1.06 0.72
-------- -------- -------- ---------- ---------
(0.57) (0.75) (0.96) (1.06) (0.72)
-------- -------- -------- ---------- ---------
-- -- -- -- --
0.05 -- -- -- --
-------- -------- -------- ---------- ---------
$ 10.05 $ 9.96 $ 9.97 $ 10.00 $ 10.00
======== ======== ======== ========== =========
$ 9.13 -- -- -- --
10.89% -- -- -- --
7.29% 7.71% 9.74% 11.13% 7.35%
$738,810 $874,104 $1,158,224 $1,036,470 $ 252,998
1.42% 1.42%(2) 1.38% 1.46%(2) 1.18%(1)(2)
-- -- -- -- --
5.88% 7.62%(2) 9.71% 10.32%(2) 9.68%(1)(2)
81% 53% 55% 100% 49%(1)
73,544 87,782 116,022 103,660 25,294
$ 636 $ 8,011 $ 2,241 $ -- $ --
79,394 102,267 114,350 -- --
$ 0.01 $ 0.08 $ 0.02 $ -- $ --
</TABLE>
- ---------------
(4) Total investment return at net asset value has been calculated assuming a
purchase at net asset value at the beginning of each period and a sale at
net asset value at the end of each period and assumes reinvestment of
dividends and capital gain distributions in accordance with the provisions
of the dividend reinvestment plan. This calculation differs from total
investment return because it excludes the effects of changes in the market
values of the Trust's shares. Total returns for less than one year are not
annualized.
(5) Calculation of total return excludes the effects of the per share dilution
resulting from the rights offering as the total account value of a fully
subscribed shareholder was minimally impacted.
(6) Pilgrim America Investments, Inc., the Trust's investment manager, acquired
assets of Pilgrim Management Corporation, the Trust's former investment
manager, in a transaction that closed on April 7, 1995.
See Accompanying Notes to Financial Statements
F-13
<PAGE> 54
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS as of August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Pilgrim America Prime Rate Trust (the "Trust", formerly Pilgrim Prime Rate
Trust) is registered under the Investment Company Act of 1940, as amended, as a
diversified, closed-end, management investment company. The Trust invests in
senior loan interests which are exempt from registration under the Securities
Act of 1933 but contain certain restrictions on resale and cannot be sold
publicly. These loans bear interest (unless otherwise noted) at rates that float
periodically at a margin above the Prime Rate of a U.S. bank specified in the
credit agreement, London Inter-Bank Offered Rate (LIBOR), the certificate of
deposit rate, or in some cases another base lending rate. The following is a
summary of the significant accounting policies consistently followed by the
Trust in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles.
A. Security Valuation. Senior loan interests are valued at fair value in the
absence of readily ascertainable market values. Fair value is determined by
Pilgrim America Investments, Inc. (the "Manager") under procedures
established and monitored by the Trust's Board of Trustees. In valuing a
loan, the Manager will consider, among other factors: (i) the
creditworthiness of the corporate issuer and any interpositioned bank; (ii)
the current interest rate, period until next interest rate reset and
maturity date of the senior corporate loan; (iii) recent market prices for
similar loans, if any; and (iv) recent prices in the market for instruments
with similar quality, rate, period until next interest rate reset, maturity,
terms and conditions. The Manager may also consider prices or quotations, if
any, provided by banks, dealers or pricing services which may represent the
prices at which secondary market transactions in the loans held by the Trust
have or could have occurred. However, because the secondary market in senior
loan interests has not yet fully developed, the Manager will not rely solely
on such prices or quotations. Securities for which the primary market is a
national securities exchange or the NASDAQ National Market System are stated
at the last reported sale price on the day of valuation. Debt and equity
securities traded in the over-the-counter market and listed securities for
which no sale was reported on that date are valued at the mean between the
last reported bid and asked price. Securities other than senior loan
interests for which reliable quotations are not readily available and all
other assets will be valued at their respective fair values as determined in
good faith by, or under procedures established by, the Board of Trustees of
the Trust. Investments in securities maturing in less than 60 days are
valued at amortized cost, which when combined with accrued interest,
approximates market value.
B. Federal Income Taxes. It is the Trust's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no federal income tax provision is required. Due to
the timing of dividend distributions and the differences in accounting for
income and realized gains (losses) for financial statement and federal
income tax purposes, the fiscal year in which amounts are distributed may
differ from the year in which the income and realized gains (losses) were
recorded by the Trust. The differences between the income or gains
distributed on a book versus tax basis, if any, are shown as excess
distributions of net investment income and net realized gain on sales of
investments in the accompanying Statements of Changes in Net Assets.
C. Security Transactions and Revenue Recognition. Security transactions are
accounted for on trade date. Realized gains or losses are reported on the
basis of identified cost of securities delivered. Interest income is
recorded on an accrual basis at the then current loan rate, and dividend
income is recorded on the ex-
F-14
<PAGE> 55
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS as of August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
dividend date. Facility fees, which represent non-refundable fees associated
with the acquisition of loans, are deferred and recognized ratably over the
shorter of 2.5 years or the actual term of the loan.
D. Distributions to Shareholders. The Trust records distributions to its
shareholders on the ex-date. The amount of distributions from net investment
income and net realized capital gains are determined in accordance with
federal income tax regulations, which may differ from generally accepted
accounting principles. These "book/tax" differences are either considered
temporary or permanent in nature. Key differences are the treatment of
short-term capital gains and other timing differences. To the extent that
these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassifications. Distributions which
exceed net investment income and net realized capital gains for financial
reporting purposes but not for tax purposes are reported as distributions in
excess of net investment income and/or realized capital gains. To the extent
they exceed net investment income and net realized capital gains for tax
purposes, they are reported as a tax return of capital.
E. Dividend Reinvestments. Pursuant to the Automatic Dividend Reinvestment
Plan, Investors Fiduciary Trust Co., the Plan Agent, may purchase, from time
to time, shares of beneficial interest of the Trust on the open market to
satisfy dividend reinvestments. Such shares will be purchased only when the
closing sale of bid price plus commission is less than the net asset value
per share of the stock. If the market price plus commissions is equal to or
exceeds the net asset value, new shares valued at the net asset value most
recently calculated will be issued.
F. Use of Estimates. Management of the Trust has made certain estimates and
assumptions relating to the reporting of assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. Actual results could differ from these estimates.
NOTE 2 - INVESTMENTS
For the six-months ended August 31, 1996, the cost of purchases and the proceeds
from principal repayment and sales of investments, excluding short-term notes,
totaled $618,873,393 and $368,869,194, respectively. At August 31, 1996, the
Trust held senior loans valued at $1,049,886,435 representing 98.6% of its total
investments. The Trust had $197.0 million outstanding under its revolving credit
facility on August 31, 1996. The market value of these securities can only be
established by negotiation between parties in a sales transaction. Due to the
uncertainty inherent in the valuation process, the fair values as determined may
materially differ from the market values that would have been used had a ready
market for these securities existed.
The senior loan interests acquired by the Trust may take the form of a direct
co-lending relationship with the corporate issuer, an assignment of a
co-lender's interest in a loan, or a participation interest in a co-lender's
interest in a loan. The lead lender in a typical corporate loan syndicate
administers the loan and monitors collateral. In the event that the lead lender
becomes insolvent, enters FDIC receivership or, if not FDIC insured, enters into
bankruptcy, the Trust may incur certain costs and delays in realizing payment,
or may suffer a loss of principal and/or interest. Additionally, certain
situations may arise where the Trust acquires a participation in a co-lender's
interest in a loan and the Trust does not have privity with or direct recourse
against the corporate issuer. Accordingly, the Trust may incur additional credit
risk as a participant because it must assume the risk of insolvency or
bankruptcy of the co-lender from which the participation was acquired.
F-15
<PAGE> 56
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS as of August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
Common and preferred stocks, and stock purchase warrants held in the portfolio
were acquired in conjunction with senior loan interests held by the Trust.
Certain of these stocks and warrants are restricted and may not be publicly sold
without registration under the '33 Act, or without an exemption under the '33
Act. In some cases, these restrictions expire after a designated period of time
after issuance of the stock or warrant. These restricted securities are valued
at fair value as determined by the Board of Trustees by considering quality,
dividend rate, and marketability of the securities compared to similar issues.
In order to assist in the determination of fair value, the Trust will obtain
quotes from dealers who periodically trade in such securities where such quotes
are available. Dates of acquisition and cost or assigned basis of restricted
securities are as follows:
<TABLE>
<CAPTION>
DATES OF COST OR
ACQUISITION ASSIGNED BASIS
------------ --------------
<S> <C> <C>
America's Favorite Chicken Co.-Common 11/05/92 $ 1
America's Favorite Chicken Co.-Preferred 11/05/92 2,484,761
Autotote Systems, Inc.-Warrant 11/11/92 --
Capital Tool & Design-Warrant 07/26/96 --
Covenant Care, Inc.-Warrants 12/22/95 --
Cruise Ship, LLC-Warrant, Voting Share 09/13/95 --
Cruise Ship, LLC-Warrant, Non-Voting Share 09/13/95 --
Dan River (Braelen) Corp.-Common 09/15/91 1,529,753
General Acquatics, Inc.-Common 09/19/95 193,619
KDI Corp. Units of Trust 09/19/95 --
Staff Capital, L.P., Common Warrant 09/01/95 100
Staff Capital, L.P., Preferred Warrant 09/01/95 61,000
Victory Holding Corp.-Warrants 11/18/94 --
----------
Total restricted securities excluding senior loans (market value
of $5,453,036 was 0.63% of net assets at August 31, 1996) $4,269,234
==========
</TABLE>
At February 29, 1996, the Trust had a capital loss carryforward for federal
income tax purposes of approximately $7,557,291 which is scheduled to expire
through February 28, 2004.
NOTE 3 - MANAGEMENT AND ADMINISTRATIVE SERVICES AGREEMENT
The Trust has entered into an Investment Management Agreement with the Manager,
a wholly-owned subsidiary of Pilgrim America Group, Inc. ("PAG"), to provide
advisory and management services. The Investment Management Agreement
compensates the Manager with a fee, computed daily and payable monthly, at an
annual rate of 0.85% of the Trust's average daily net assets plus borrowings up
to $700 million; 0.75% of the average daily net assets plus borrowings of $700
to $800 million; and 0.65% of the average daily net assets plus borrowings in
excess of $800 million. At August 31, 1996, the Trust owed the Manager $699,275
in investment management fees.
The Manager has agreed to review its fee for a period of three years from the
Expiration Date to 0.60% of the average daily net assets, plus the proceeds of
any outstanding borrowings, over $1.15 billion.
The Trust has also entered into an Administration Agreement with PAG to provide
administrative services and also to furnish facilities. The Administration
Agreement compensates the Administrator with a fee, computed daily and payable
monthly, at an annual rate of 0.15% of the Trust's average daily net assets plus
F-16
<PAGE> 57
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS as of August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
borrowings up to $800 million; and 0.10% of the average daily net assets plus
borrowings in excess of $800 million. At August 31, 1996, the Trust owed the
Manager $121,954 in administration fees.
NOTE 4 - COMMITMENTS
The Trust has entered into a four year revolving credit agreement to borrow up
to $285 million from a syndicate of major banks. The borrowing rate under this
loan agreement is 0.50% over LIBOR, or if lower, the federal funds rate. The
Trust will also pay a 0.125% fee for any unborrowed amount. The amount of
borrowings outstanding at August 31, 1996, was $197 million.
As of August 31, 1996, the Trust had unfunded loan commitments pursuant to the
terms of the following loan participation agreements:
<TABLE>
<S> <C> <C> <C>
Atlas Air $10,472,078 Packard Bell Electronics, Inc. $ 9,640,436
Color Tile, Inc. 659,857 Presley Companies 2,000,000
Edward's Baking Co. 1,011,250 Rowe International, Inc. 100,000
Grimes Aerospace Corp. 1,442,947 Smith's Food & Drug Co. 6,825,193
Liggett Group, Inc. 1,500,000 Titanium Metals, Inc. 5,000,000
Marvel IV Holdings 16,920,000 Triangle Wire and Cable, Inc. 2,903,846
-----------
$58,475,607
===========
</TABLE>
At a meeting of the Board of Trustees held on July 16, 1992, the Trustees
authorized the Trust to institute a $75,000,000 Repurchase Program, whereby the
Trust would repurchase shares of its outstanding stock on the New York Stock
Exchange. At their April 21, 1993 meeting, the Board of Trustees authorized an
additional $25,000,000 Repurchase Program. As of August 31, 1996, the Trust had
repurchased 8,392,000 shares of its common stock at a total cost of $78,788,625
pursuant to the Repurchase Programs. The weighted average discount per share
between the cost of the repurchases and the net asset value applicable to such
shares at the date of repurchase was 5.8%.
NOTE 5 - RIGHTS OFFERING
On December 27, 1994, the Trust issued to its shareholders transferable rights
which entitled the holders to subscribe for 17,958,766 shares of the Trust's
common stock at the rate of one share of common stock for each four rights held.
On January 27, 1995, the offering expired and was fully subscribed. The Trust
issued 17,958,766 shares of its common stock to exercising rights holders at a
subscription price of $8.12. Offering costs of $4,470,955 were charged against
the offering proceeds.
NOTE 6 - CUSTODIAL AGREEMENT
Investors Fiduciary Trust Company ("IFTC") serves as the Trust's custodian and
recordkeeper. Custody fees paid to IFTC are reduced by earnings credits based on
the cash balances held by IFTC for the Trust. For the six months ended August
31, 1996, the Trust received earnings credits of $17,613.
F-17
<PAGE> 58
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS as of August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
NOTE 7 - SUBSEQUENT EVENTS
On September 16, 1996, the Trust's Board of Trustees approved the filing of a
Form N-2 registration statement (the "Registration Statement") with the
Securities and Exchange Commission (the "SEC") regarding the proposed offering
of additional shares of beneficial interest of the Trust pursuant to a non-
transferable rights offering. The Registration Statement contemplates that the
Trust will issue to shareholders one non-transferable right for each full share
of the Trust's Common Shares owned. Shareholders would be entitled to acquire
one common share for each five rights held at a price equal to 97.5% of the
lower of (i) the average of the last reported sales price of a share of the
Trust's Common Shares on the New York Stock Exchange on the pricing date and the
four preceding business days or (ii) the net asset value of a share of the
Trust's Common Shares on the pricing date. The Trust will not issue any rights
until the Registration Statement is declared effective by the SEC.
F-18
<PAGE> 59
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS as of August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
MANAGEMENT'S ADDITIONAL OPERATING INFORMATION
APPROVAL OF CHANGES IN INVESTMENT POLICIES
At the Annual Meeting of Trust Shareholders, held August 30, 1994, shareholders
approved changes in the Trust's fundamental investment policies which make
available certain additional investment opportunities to the Trust, including
the purchase (i) of U.S. dollar denominated senior corporate loans made to
companies headquartered in Canada or U.S. Territories or Possessions; (ii)
subject to certain limitations, loans in excess of 10% of an issue of senior
bank debt of a corporate borrower; and (iii) with up to 5% of the Trust's
assets, loans in tranches of senior collateralized corporate loans that are
subordinated in some manner as to the payment of interest and/or principal. At a
special meeting of held May 2, 1996, Trust Shareholders approved an amendment to
the Trust's fundamental investment policies to expand its ability to engage in
borrowing transactions up to 33.33% of net assets including borrowings,
primarily to acquire additional income producing investments.
The Trust's Manager believes that these changes in the Trust's investment
policies will increase the number of loan offerings which the Trust may consider
acquiring. Furthermore, the Manager also believes that these changes are fully
consistent with the Trust's overall investment philosophy of purchasing senior
collateralized corporate loans.
REPURCHASE OF SECURITIES BY CLOSED-END COMPANIES
In accordance with Section 23(c) of the Investment Company Act of 1940, and Rule
23c-1 under the Investment Company Act of 1940, the Trust may from time to time
purchase shares of beneficial interest of the Trust in the open market, in
privately negotiated transactions and/or purchase shares to correct erroneous
transactions.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
The Trust offers a Dividend Reinvestment and Cash Purchase Plan (the "Plan")
which enables investors to conveniently add to their holdings at reduced costs.
Should you desire further information concerning this Plan, please contact the
Shareholder Servicing Agent at (800) 331-1080.
F-19
<PAGE> 60
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE TRUST, THE INVESTMENT MANAGER OR ANY OF THE DEALER MANAGERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON SHARES OFFERED BY THE
PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY
OFFER TO BUY THE SHARES OF COMMON SHARES BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY SUCH PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF. HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE THIS
PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THE PROSPECTUS WILL BE AMENDED OR
SUPPLEMENTED ACCORDINGLY.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................
Trust Expenses.......................
Financial Highlights And Investment
Performance........................
The Offer............................
Use Of Proceeds......................
Investment Objective and Policies....
Risk Factors and Special
Considerations.....................
General Information On Senior Loans..
Description of the Common Shares.....
Investment Management and Other
Services...........................
Dividends and Distributions..........
Tax Matters..........................
Distribution Arrangements............
Legal Matters........................
Experts..............................
Registration Statement...............
Financial Statements.................
Appendix I: Financial Statements
dated August 31, 1996..............
Table Of Contents of Statement of
Additional Information.............
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
18,122,976 Shares of
Beneficial Interest
PILGRIM AMERICA PRIME RATE TRUST
Issuable Upon Exercise of
Non-Transferable Rights to
Subscribe for Such
Shares of Beneficial Interest
------------------------
PROSPECTUS
------------------------
DEALER MANAGERS
PRUDENTIAL SECURITIES INCORPORATED
MERRILL LYNCH & CO.
OCTOBER 18, 1996
------------------------------------------------------
------------------------------------------------------
<PAGE> 61
PILGRIM AMERICA PRIME RATE TRUST
STATEMENT OF ADDITIONAL INFORMATION
Pilgrim America Prime Rate Trust (the "Trust") is a diversified, closed-end
management investment company registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"). The Trust's investment
objective is to seek as high a level of current income as is consistent with the
preservation of capital. The Trust seeks to achieve its objective by investing
in variable or floating-rate senior collateralized corporate loans ("Senior
Loans"), the interest rates of which float periodically based upon a benchmark
indicator of prevailing interest rates, such as the prime rate or the London
Inter-Bank Offered Rate ("LIBOR"). Under normal circumstances, at least 80% of
the Trust's net assets are invested in Senior Loans. The Trust is managed by
Pilgrim America Investments, Inc. ("PAII" or the "Investment Manager").
This Statement of Additional Information ("SAI") is not a prospectus, but should
be read in conjunction with the Prospectus for the Trust dated October 18, 1996
(the "Prospectus"). This SAI does not include all information that a prospective
investor should consider before purchasing shares of the Trust, and investors
should obtain and read the Prospectus prior to purchasing shares. A copy of the
Prospectus may be obtained without charge, by calling PAII at (800) 331-1080.
This SAI incorporates by reference the entire Prospectus.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Change of Name.......................................................................
Additional Information About Investments and Investment Techniques...................
Investment Restrictions..............................................................
Trustees and Officers................................................................
Investment Management and Other Services.............................................
Portfolio Transactions...............................................................
Net Asset Value......................................................................
Methods Available to Reduce Market Value Discount From NAV...........................
Dividend Reinvestment and Cash Purchase Plan.........................................
Tax Matters..........................................................................
Advertising and Performance Data.....................................................
</TABLE>
The Prospectus and this SAI omit certain of the information contained in the
registration statement filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. The registration statement may be obtained from
the Commission upon payment of the fee prescribed, or inspected at the
Commission's office at no charge.
This SAI is dated October 18, 1996.
<PAGE> 62
CHANGE OF NAME
The Trust changed its name from "Pilgrim Prime Rate Trust" to "Pilgrim America
Prime Rate Trust" in April 1996.
ADDITIONAL INFORMATION ABOUT INVESTMENTS
AND INVESTMENT TECHNIQUES
Some of the different types of securities in which the Trust may invest, subject
to its investment objective, policies and restrictions, are described in the
Prospectus under "Investment Practices." Additional information concerning
certain of the Trust's investments and investment techniques is set forth below.
EQUITY SECURITIES
In connection with its purchase or holding of interests in Senior Loans, the
Trust may acquire (and subsequently sell) equity securities or exercise warrants
that it receives. The Trust will acquire such interests only as an incident to
the intended purchase or ownership of Senior Loans or if, in connection with a
reorganization of a borrower, the Trust receives an equity interest in a
reorganized corporation or warrants to acquire such an equity interest. The
Trust normally will not hold more than 20% of its total assets in equity
securities. Equity securities will not be treated as Senior Loans; therefore, an
investment in such securities will not count toward the 80% of the Trust's total
assets that normally will be invested in Senior Loans. Equity securities are
subject to financial and market risks and can be expected to fluctuate in value.
LEASE PARTICIPATIONS
The Trust may invest up to 20% of its assets in participation interests in lease
financings ("Lease Participations"). Investments in Lease Participations will
not be counted toward the 80% of the Trust's assets that under normal market
conditions are invested in Senior Loans.
The Trust will invest in Lease Participations only if they generally meet the
same credit quality standards and general requirements that the Trust applies to
Senior Loans. Thus, the collateral quality, the credit quality of the borrower
and the likelihood of payback for a Lease Participation are the same as those
applied to a Senior Loan. A Lease Participation is also required to have a
floating interest rate that is indexed to the federal funds rate, LIBOR, or
prime rate in order to be eligible for investment.
The Office of the Comptroller of the Currency has established regulations which
set forth circumstances under which national banks may engage in lease
financings. Among other things, the regulation requires that a lease be a
net-full payout lease representing the noncancelable obligation of the lessee,
and that the bank make certain determinations with respect to any estimated
residual value of leased property relied upon by the bank to yield a full return
on the lease. The Trust may invest in lease financings only if the Lease
Participation meets these banking law requirements.
REPURCHASE AGREEMENTS
In general, the Trust does not engage, nor does it intend to engage in the
foreseeable future, in repurchase agreements. The Trust has the ability,
however, pursuant to its investment objective and policies, to enter into
repurchase agreements (a purchase of, and a simultaneous commitment to resell, a
financial instrument at an agreed upon price on an agreed upon date) only with
member banks of the Federal Reserve System, member firms of the New York Stock
Exchange ("NYSE") or other entities determined by PAII to be creditworthy. When
participating in repurchase agreements, the Trust buys securities from a vendor,
e.g., a bank or brokerage firm, with the agreement that the vendor will
repurchase the securities at a higher price at a later date. The Trust may be
subject to various delays and risks of loss if the vendor is unable to meet its
obligation to repurchase. Under the Investment Company Act, repurchase
agreements are deemed to be collateralized loans of money by the Trust to the
seller. In evaluating whether to enter into a repurchase agreement, PAII will
consider carefully the creditworthiness of the vendor. If the member bank or
member firm that is the party to the repurchase agreement petitions for
bankruptcy or otherwise becomes subject to the U.S. Bankruptcy
2
<PAGE> 63
Code, the law regarding the rights of the Trust to enforce the terms of the
repurchase agreement is unsettled. The securities underlying a repurchase
agreement will be marked to market every business day so that the value of the
collateral is at least equal to the value of the loan, including the accrued
interest thereon, and PAII will monitor the value of the collateral. No specific
limitation exists as to the percentage of the Trust's assets which may be used
to participate in repurchase agreements.
REVERSE REPURCHASE AGREEMENTS
In general, the Trust does not engage, nor does it intend to engage in the
foreseeable future, in reverse repurchase agreements. The Trust has the ability,
however, pursuant to its investment objective and policies, to enter into
reverse repurchase agreements. A reverse repurchase agreement is an instrument
under which the Trust may sell an underlying debt instrument and simultaneously
obtain the commitment of the purchaser to sell the security back to the Trust at
an agreed upon price on an agreed upon date. Reverse repurchase agreements will
be considered borrowings by the Trust and as such are subject to the
restrictions on borrowing. Borrowings by the Trust create an opportunity for
greater total return, but at the same time, increase exposure to capital risk.
The Trust will maintain in a segregated account with its custodian cash or
liquid high grade portfolio securities in an amount sufficient to cover its
obligations with respect to reverse repurchase agreements. The Trust will
receive payment for such securities only upon physical delivery or evidence of
book entry transfer by its custodian. Regulations of the Commission require
either that securities sold by the Trust under a reverse repurchase agreement be
segregated pending repurchase or that the proceeds be segregated on the Trust's
books and records pending repurchase. Reverse repurchase agreements may involve
certain risks in the event of default or insolvency of the other party,
including possible loss from delays or restrictions upon the Trust's ability to
dispose of the underlying securities. An additional risk is that the market
value of securities sold by the Trust under a reverse repurchase agreement could
decline below the price at which the Trust is obligated to repurchase them.
LENDING SENIOR LOANS AND OTHER PORTFOLIO INSTRUMENTS
To generate additional income, the Trust may lend its portfolio securities,
including an interest in a Senior Loan, in an amount up to 33 1/3% of total
Trust assets to broker-dealers, major banks, or other recognized domestic
institutional borrowers of securities. No lending may be made with any companies
affiliated with PAII. During the time portfolio securities are on loan, the
borrower pays the Trust any dividends or interest paid on such securities, and
the Trust may invest the cash collateral and earn additional income, or it may
receive an agreed-upon amount of interest income from the borrower who has
delivered equivalent collateral or a letter of credit. As with other extensions
of credit, there are risks of delay in recovery or even loss of rights in the
collateral should the borrower fail financially.
The Trust may seek to increase its income by lending financial instruments in
its portfolio in accordance with present regulatory policies, including those of
the Board of Governors of the Federal Reserve System and the Commission. The
lending of financial instruments is a common practice in the securities
industry. The loans are required to be secured continuously by collateral,
consistent with the requirements of the Investment Company Act discussed below,
maintained on a current basis at an amount at least equal to the market value of
the portfolio instruments loaned. The Trust has the right to call a Senior Loan
and obtain the portfolio instruments loaned at any time on such notice as
specified in the transaction documents. For the duration of the Senior Loan, the
Trust will continue to receive the equivalent of the interest paid by the issuer
on the portfolio instruments loaned and may also receive compensation for the
loan of the financial instrument. Any gain or loss in the market price of the
instruments loaned that may occur during the term of the Senior Loan will be for
the account of the Trust.
The Trust may lend its portfolio instruments so long as the terms and the
structure of such loans are not inconsistent with the requirements of the
Investment Company Act, which currently require that (a) the borrower pledge and
maintain with the Trust collateral consisting of cash, a letter of credit issued
by a domestic U.S. bank, or securities issued or guaranteed by the U.S.
government having a value at all times not less than 100% of the value of the
instruments loaned, (b) the borrowers add to such collateral whenever the price
of the instruments loaned rises (i.e., the value of the loan is "marked to the
market" on a daily basis),
3
<PAGE> 64
(c) the loan be made subject to termination by the Trust at any time, and (d)
the Trust receive reasonable interest on the loan (which may include the Trust's
investing any cash collateral in interest bearing short-term investments), any
distributions on the loaned instruments and any increase in their market value.
The Trust may lend its portfolio instruments to member banks of the Federal
Reserve System, members of the NYSE or other entities determined by PAII to be
creditworthy. All relevant facts and circumstances, including the
creditworthiness of the qualified institution, will be monitored by PAII, and
will be considered in making decisions with respect to the lending of portfolio
instruments.
The Trust may pay reasonable negotiated fees in connection with loaned
instruments. In addition, voting rights may pass with the loaned securities, but
if a material event were to occur affecting such a loan, the Trust will retain
the right to call the loan and vote the securities. If a default occurs by the
other party to such transaction, the Trust will have contractual remedies
pursuant to the agreements related to the transaction but such remedies may be
subject to bankruptcy and insolvency laws which could materially and adversely
affect the Trust's rights as a creditor. However, the loans will be made only to
firms deemed by PAII to be of good financial standing and when, in the judgment
of PAII, the consideration which can be earned currently from loans of this type
justifies the attendant risk.
INTEREST RATE HEDGING TRANSACTIONS
Generally, the Trust does not engage, nor does it intend to engage, in the
foreseeable future, in interest rate swaps, or to purchase or sell interest rate
caps and floors. The Trust has the ability, however, pursuant to its investment
objectives and policies, to engage in certain hedging transactions including
interest rate swaps and the purchase or sale of interest rate caps and floors.
The Trust may undertake these transactions primarily for the following reasons:
to preserve a return on or value of a particular investment or portion of the
Trust's portfolio, to protect against decreases in the anticipated rate of
return on floating or variable rate financial instruments which the Trust owns
or anticipates purchasing at a later date, or for other risk management
strategies such as managing the effective dollar-weighted average duration of
the Trust's portfolio. Market conditions will determine whether and in what
circumstances the Trust would employ any of the hedging techniques described
below.
Interest rate swaps involve the exchange by the Trust with another party of
their respective commitments to pay or receive interest, e.g., an exchange of an
obligation to make floating rate payments on a specified dollar amount referred
to as the "notional" principal amount for an obligation to make fixed rate
payments. For example, the Trust may seek to shorten the effective interest rate
redetermination period of a Senior Loan in its portfolio that has an interest
rate redetermination period of one year. The Trust could exchange its right to
receive fixed income payments for one year from a borrower for the right to
receive payments under an obligation that readjusts monthly. In such event, the
Trust would consider the interest rate redetermination period of such Senior
Loan to be the shorter period. The purchase of an interest rate cap entitles the
purchaser, to the extent that a specified index exceeds a predetermined interest
rate, to receive payments of interest on a notional principal amount from the
party selling such interest rate cap. The purchase of an interest rate floor
entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate floor. The Trust will
not enter into swaps, caps or floors if, on a net basis, the aggregate notional
principal amount with respect to such agreements exceeds the net assets of the
Trust or to the extent the purchase of swaps, caps or floors would be
inconsistent with the Trust's other investment restrictions.
The Trust will not treat swaps covered in accordance with applicable regulatory
guidance as senior securities. The Trust will usually enter into interest rate
swaps on a net basis, i.e., where the two parties make net payments with the
Trust receiving or paying, as the case may be, only the net amount of the two
payments. The net amount of the excess, if any, of the Trust's obligations over
its entitlement with respect to each interest rate swap will be accrued and an
amount of cash or liquid securities having an aggregate net asset value ("NAV")
at least equal to the accrued excess will be maintained in a segregated account.
If the Trust enters into a swap on other than a net basis, the Trust will
maintain in the segregated account the full amount of the Trust's obligations
under each such swap. The Trust may enter into swaps, caps and floors with
member banks of the Federal Reserve System, members of the NYSE or other
entities determined by PAII. If a
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default occurs by the other party to such transaction, the Trust will have
contractual remedies pursuant to the agreements related to the transaction but
such remedies may be subject to bankruptcy and insolvency laws which could
materially and adversely affect the Trust's rights as a creditor.
The swap, cap and floor market has grown substantially in recent years with a
large number of banks and financial services firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, this market
has become relatively liquid. There can be no assurance, however, that the Trust
will be able to enter into interest rate swaps or to purchase interest rate caps
or floors at prices or on terms PAII believes are advantageous to the Trust. In
addition, although the terms of interest rate swaps, caps and floors may provide
for termination, there can be no assurance that the Trust will be able to
terminate an interest rate swap or to sell or offset interest rate caps or
floors that it has purchased.
The successful utilization of hedging and risk management transactions requires
skills different from those needed in the selection of the Trust's portfolio
securities and depends on PAII's ability to predict correctly the direction and
degree of movements in interest rates. Although the Trust believes that use of
the hedging and risk management techniques described above will benefit the
Trust, if PAII's judgment about the direction or extent of the movement in
interest rates is incorrect, the Trust's overall performance would be worse than
if it had not entered into any such transactions. The Trust will incur brokerage
and other costs in connection with its hedging transactions.
BORROWING
Under the Investment Company Act, the Trust is not permitted to incur
indebtedness unless immediately after such incurrence the Trust has an asset
coverage of 300% of the aggregate outstanding principal balance of indebtedness.
Additionally, under the Investment Company Act the Trust may not declare any
dividend or other distribution upon any class of its capital stock, or purchase
any such capital stock, unless the aggregate indebtedness of the Trust has at
the time of the declaration of any such dividend or distribution or at the time
of any such purchase an asset coverage of at least 300% after deducting the
amount of such dividend, distribution, or purchase price, as the case may be.
SUBORDINATED TRANCHES OF SENIOR LOANS
In connection with its purchase or holding of interests in Senior Loans, the
Trust may acquire, with up to 5% of the Trust's total assets, Senior Loans that
are subordinated in some manner as to the payment of interest and/or principal
to other Senior Loans or to other secured lenders (otherwise known as
"subordinated classes" or "subordinated tranches" of Senior Loans). Such
subordinated tranches of Senior Loans may be acquired to provide the Trust
opportunities to enhance Trust performance by obtaining higher interest rates
and/or higher fees.
Subordinated tranches of Senior Loans in an insolvency would bear an increased
share of the ultimate credit losses relative to other senior secured bank
lenders. The primary risk arising from a holder's subordination is the potential
loss in the event of default by the issuer of Senior Loans. The Trust, in this
instance, continues to be a senior, fully secured lender in these Senior Loans.
The Trust will only invest in such subordinated tranches when PAII believes that
the Trust would receive an appropriately higher interest rate and/or higher fees
in connection with its purchase as compensation for assuming this additional
risk.
ORIGINATING SENIOR LOANS
The Trust may act as an "agent" in originating and administering a loan on
behalf of all lenders or as one of a group of "co-agents" in originating Senior
Loans. Senior Loans are typically arranged through private negotiations between
a corporate borrower and several financial institutions ("lenders") represented
in each case by one or more such lenders acting as agent of the several lenders.
On behalf of the several lenders, the agent, which is frequently the entity that
originates the Senior Loan and invites the other parties to join the lending
syndicate, will be primarily responsible for negotiating the Senior Loan
agreements that establish the relative terms, conditions and rights of the
corporate borrower and the several lenders. The co-agents, on the other hand,
are not responsible for administration of a Senior Loan, but are part of the
initial group of lenders
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that commit to providing funding for a Senior Loan. In large transactions, it is
common to have several agents; however, one such agent typically has primary
responsibility for documentation and administration of the Senior Loan. The
agent is required to administer and manage the Senior Loan and to service or
monitor the collateral. The agent is also responsible for the collection of
principal and interest and fee payments from the corporate borrower and the
apportionment of these payments to the credit of all lenders which are parties
to the loan agreement. The agent is charged with the responsibility of
monitoring compliance by the corporate borrower with the restrictive covenants
in the loan agreement and of notifying the lenders of any adverse change in the
corporate borrower's financial condition. In addition, the agent generally is
responsible for determining that the lenders have obtained a perfected security
interest in the collateral securing the Senior Loan.
Lenders generally rely on the agent to collect their portion of the payments on
the Senior Loan and to use appropriate creditor remedies against the corporate
borrower. Typically under loan agreements, the agent is given broad discretion
in enforcing the loan agreement and is obligated to use the same care it would
use in the management of its own property. The corporate borrower compensates
the agent for these services. Such compensation may include special fees paid on
structuring and funding the Senior Loan and other fees paid on a continuing
basis. The precise duties and rights of an agent are defined in the loan
agreement.
When the Trust is an agent, it has, as a party to the loan agreement, a direct
contractual relationship with the corporate borrower and, prior to allocating
portions of the Senior Loan to the lenders, if any, assumes all risks associated
with the Senior Loan. The agent may enforce compliance by the corporate borrower
with the terms of the loan agreement. Agents also have voting and consent rights
under the applicable loan agreement. Action subject to agent vote or consent
generally requires the vote or consent of the holders of some specified
percentage of the outstanding principal amount of the Senior Loan, which
percentage varies depending on the relevant loan agreement. Certain decisions,
such as reducing the amount or increasing the time for payment of interest on or
repayment of principal of a Senior Loan, or releasing collateral therefor,
frequently require the unanimous vote or consent of all lenders affected.
Pursuant to the terms of a loan agreement, the Trust as agent typically has sole
responsibility for servicing and administering a loan on behalf of the other
lenders. Each lender in a Senior Loan is generally responsible for performing
their own credit analysis and their own investigation of the financial condition
of the corporate borrower. Generally, loan agreements will hold the Trust liable
for any action taken or omitted that amounts to gross negligence or willful
misconduct. In the event of a corporate borrower's default on a loan, the loan
agreements provide that the lenders do not have recourse against the Trust for
its activities as agent. Instead, lenders will be required to look to the
corporate borrower for recourse.
Acting in the capacity of an agent in a Senior Loan may subject the Trust to
certain risks in addition to those associated with the Trust's current role as a
lender. An agent is charged with the above described duties and responsibilities
to lenders and corporate borrowers subject to the terms of the loan agreement.
Failure to adequately discharge such responsibilities in accordance with the
standard of care set forth in the loan agreement may expose the Trust to
liability for breach of contract. If a relationship of trust is found between
the agent and the lenders, the agent will be held to a higher standard of
conduct in administering the loan. In consideration of such risks, the Trust
will invest no more than 10% of its total assets in Senior Loans in which it
acts as agent or co-agent and the size of any individual loan will not exceed 5%
of the Trust's total assets.
ADDITIONAL INFORMATION ON SENIOR LOANS
Senior Loans are direct obligations of corporations and are arranged by banks or
other commercial lending institutions and made generally to finance internal
growth, mergers, acquisitions, stock repurchases, and leveraged buyouts. Senior
Loans usually include restrictive covenants which must be maintained by the
borrowing corporation. Such covenants, in addition to the timely payment of
interest and principal, may include mandatory prepayment provisions arising from
free cash flow, restrictions on dividend payments and usually state that a
company must maintain specific minimum financial ratios as well as establishing
limits on total debt. A breach of a covenant, which is not waived by the agent,
is normally an event of acceleration, i.e., the agent has the right to call the
outstanding Senior Loan. In addition, loan covenants may include
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mandatory prepayment provisions stemming from free cash flow. Free cash flow is
cash that is in excess of capital expenditures plus debt service requirements of
principal and interest. The free cash flow shall be applied to prepay the Senior
Loan in an order of maturity described in the loan documents. Under certain
interests in Senior Loans, the Trust may have an obligation to make additional
loans upon demand by the corporate borrower. The Trust intends to reserve
against such contingent obligations by segregating sufficient assets in high
quality short-term liquid investments or borrowing to cover such obligations.
In a typical interest in a Senior Loan, the agent administers the loan and has
the right to monitor the collateral. The agent is also required to segregate the
principal and interest payments received from the corporate borrower and to hold
these payments for the benefit of the lenders. The Trust normally looks to the
agent to collect and distribute principal of and interest on a Senior Loan.
Furthermore, the Trust looks to the agent to use normal credit remedies, such as
to foreclose on collateral; monitor credit loan covenants; and notify the
lenders of any adverse changes in the corporation's financial condition or
declarations of insolvency. At times the Trust may also negotiate with the agent
regarding the agent's exercise of credit remedies under a Senior Loan. The agent
is compensated for these services by the corporate borrower as is set forth in
the loan agreement. Such compensation may take the form of a fee or other amount
paid upon the making of the Senior Loan and/or an ongoing fee or other amount.
The loan agreement in connection with Senior Loans sets forth the standard of
care to be exercised by the agents on behalf of the lenders and usually provides
for the termination of the agent's agency status in the event that it fails to
act properly, becomes insolvent, enters FDIC receivership, or if not FDIC
insured, enters into bankruptcy or if the agent resigns. In the event an agent
is unable to perform its obligations as agent, another lender would generally
serve in that capacity.
The Trust believes that the principal credit risk associated with acquiring
Senior Loans from another lender is the credit risk associated with the
corporate borrower of the underlying Senior Loan. The Trust may incur additional
credit risk, however, when the Trust acquires a participation in a Senior Loan
from another lender because the Trust must assume the risk of insolvency or
bankruptcy of the other lender from which the Senior Loan was acquired. However,
in acquiring Senior Loans, the Trust conducts an analysis and evaluation of the
financial condition of each such lender. In this regard, if the lenders have a
long-term debt rating, the long term debt of all such Participants is rated BBB
or better by Standard and Poor's Corporation or Baa or better by Moody's
Investors Service, Inc., or has received a comparable rating by another
nationally recognized rating service. In the absence of rated long-term debt,
the lenders or, with respect to a bank, the holding company of such lenders have
commercial paper outstanding which is rated at least A-1 by Standard and Poor's
Corporation or P-1 by Moody's Investors Service, Inc. In the absence of such
rated long-term debt or rated commercial paper if a bank, the Trust may acquire
participations in Senior Loans from lenders whose long-term debt and commercial
paper is of comparable quality to the foregoing rating standards as determined
by the Manager under the supervision of the Trustees. The Trust also diversifies
its portfolio with respect to lenders from which the Trust acquires Senior
Loans. See "Investment Restrictions."
Senior Loans, unlike certain bonds, usually do not have call protection. This
means that interests comprising the Trust's portfolio, while having a stated one
to ten-year term, may be prepaid, often without penalty. The weighted average
maturity of Senior Loans purchased is expected to be approximately
two-and-a-half years. The Trust generally holds Senior Loans to maturity unless
it has become necessary to sell them to satisfy any shareholder tender offers or
to adjust the Trust's portfolio in accordance with PAII's view of current or
expected economic or specific industry conditions.
Senior Loans usually require the prepayment of a loan when there are asset sales
or a securities issuance. Prepayments on Senior Loans may also be made by the
corporate borrower at its election. The rate of such prepayments may be affected
by, among other things, general business and economic conditions, as well as the
financial status of the corporate borrower. Prepayment would cause the actual
duration of a Senior Loan to be shorter than its stated maturity. This should,
however, allow the Trust to reinvest in a new loan and recognize as income any
unamortized loan fees. In many cases this will result in a new facility fee
payable to the Trust.
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Because interest rates paid on these Senior Loans periodically fluctuate with
the market, it is expected that the prepayment and a subsequent purchase of a
new Senior Loan by the Trust will not have a material adverse impact on the
yield of the portfolio. See "Portfolio Transactions."
Under a Senior Loan, the corporate borrower generally must pledge as collateral
assets which may include one or more of the following: cash; accounts
receivable; inventory; property, plant and equipment; and both common and
preferred stock in its subsidiaries. The market value of the assets serving as
collateral will, in the opinion of the Investment Manager, equal or exceed the
principal amount of the Senior Loan. The valuations of these assets may be
performed by an independent appraisal. If the agent becomes aware that the value
of the collateral has declined, the agent normally takes such action as it deems
necessary for the protection of its own interests and the interests of the other
lenders, including, for example, giving the corporate borrower an opportunity to
provide additional collateral or accelerating the loan. There is no assurance,
however, that the corporate borrower would provide additional collateral or that
the liquidation of the existing collateral would satisfy the corporate
borrower's obligation in the event of nonpayment of scheduled interest or
principal, or that such collateral could be readily liquidated.
The Trust may be required to pay and may receive various fees and commissions in
the process of purchasing, selling and holding Senior Loans. The fee component
may include any, or a combination of, the following elements: arrangement fees,
non-use fees, facility fees, letter of credit fees and ticking fees. Arrangement
fees are paid at the commencement of a loan as compensation for the initiation
of the transaction. A non-use fee is paid based upon the amount committed but
not used under the loan. Facility fees are on-going annual fees paid in
connection with a loan. Letter of credit fees are paid if a loan involves a
letter of credit. Ticking fees are paid from the initial commitment indication
until loan closing if for an extended period. The amount of fees is negotiated
at the time of transaction.
In order to allow national banks to purchase shares of the Trust for their own
accounts without limitation, the Trust invests only in obligations which are
eligible for purchase by national banks for their own accounts pursuant to the
provisions of paragraph seven of Section 24 of U.S. Code Title 12. National
banks which are contemplating purchasing shares of the Trust for their own
accounts should refer to Banking Circular 220, issued by the U.S. Comptroller of
the Currency on November 21, 1986, for a description of certain considerations
applicable to such purchases.
INVESTMENT RESTRICTIONS
The Trust has adopted the following restrictions relating to its investments and
activities, which may not be changed without a Majority Vote (as defined in
"Description of Common Shares" in the Prospectus). The Trust may not:
- Issue senior securities, except insofar as the Trust may be deemed to
have issued a senior security by reason of (i) entering into certain
interest rate hedging transactions, (ii) entering into reverse repurchase
agreements, or (iii) borrowing money in an amount not exceeding 33 1/3%,
or such other percentage permitted by law, of the Trust's total assets
(including the amount borrowed) less all liabilities other than
borrowings.
- Invest more than 25% of its total assets in any industry.
- Invest in marketable warrants other than those acquired in conjunction
with Senior Loans and such warrants will not constitute more than 5% of
its assets.
- Make investments in any one issuer other than U.S. Government securities
if, immediately after such purchase or acquisition, more than 5% of the
value of the Trust's total assets would be invested in such issuer, or the
Trust would own more than 25% of any outstanding issue, except that up to
25% of the Trust's total assets may be invested without regard to the
foregoing restrictions. For the purpose of the foregoing restriction, the
Trust will consider the corporate borrower of a Senior Loan to be the
issuer of such Senior Loan. In addition, with respect to a Senior Loan
under which the Trust does not have privity with the corporate borrower or
would not have a direct cause of action against the corporate
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borrower in the event of the failure of the borrower to pay scheduled
principal or interest, the Trust will also separately meet the foregoing
requirements and consider each interpositioned bank (a lender from which
the Trust acquires a Senior Loan) to be an issuer of the Senior Loan.
- Act as an underwriter of securities, except to the extent that it may be
deemed to act as an underwriter in certain cases when disposing of its
portfolio investments or acting as an agent or one of a group of Co-Agents
in originating Senior Loans.
- Purchase or sell equity securities (except that the Trust may, incidental
to the purchase or ownership of an interest in a Senior Loan, or as part
of a borrower reorganization, acquire, sell and exercise warrants and/or
acquire or sell other equity securities), real estate, real estate
mortgage loans, commodities, commodity futures contracts, or oil or gas
exploration or development programs; or sell short, purchase or sell
straddles, spreads, or combinations thereof, or write put or call options.
- Make loans of money or property to any person, except that the Trust (i)
may hold Senior Loans in accordance with its investment objectives and
policies; (ii) may lend portfolio instruments; and (iii) may acquire
securities subject to repurchase agreements.
- Purchase shares of other investment companies, except in connection with
a merger, consolidation, acquisition or reorganization.
- Make investments on margin or hypothecate, mortgage or pledge any of its
assets except for the purpose of securing borrowings as described above in
connection with the issuance of senior securities and then only in an
amount up to 33 1/3%, or such other percentage permitted by law, of the
value of the Trust's total net assets (including the amount borrowed) less
all liabilities other than borrowings.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage resulting from a change in value of the
Trust's investments or amount of total assets will not be considered a violation
of any of the foregoing restrictions.
There is no limitation on the percentage of the Trust's assets that may be
invested in instruments which are not readily marketable or subject to
restrictions on resale, and to the extent the Trust invests in such instruments,
the Trust's portfolio should be considered illiquid. The extent to which the
Trust invests in such instruments may affect its ability to realize the NAV of
the Trust in the event of the voluntary or involuntary liquidation of its
assets.
TRUSTEES AND OFFICERS
BOARD OF TRUSTEES. The Trust is governed by its Board of Trustees. The Trustees
and Officers of the Trust are listed below. An asterisk (*) has been placed next
to the name of each Trustee who is an "interested person," as that term is
defined in the Investment Company Act, by virtue of that person's affiliation
with the Trust or PAII.
Mary A. Baldwin, Ph.D, 2525 E. Camelback Road, Suite 200, Phoenix, Arizona
85016. (Age 55.) Trustee. Realtor, The Prudential Arizona Realty, for more
than the last five years. Ms. Baldwin is also Treasurer, United States
Olympic Committee, and formerly was on the teaching staff at Arizona State
University. Ms. Baldwin also is a director and/or trustee of each of the
funds managed by the Investment Manager.
Al Burton, 2300 Coldwater Canyon, Beverly Hills, California 90210. (Age
67.) Trustee. President of Al Burton Productions, for more than the last
five years, and Executive Producer, Castle Rock Entertainment. Mr. Burton
also is a director and/or trustee of each of the funds managed by the
Investment Manager.
Bruce S. Foerster, 4045 Sheridan Avenue, Suite 432, Miami Beach, Florida
33140. (Age 55.) Trustee. President, South Beach Capital Markets Advisory
Corporation (since January 1995). Mr. Foerster was formerly Managing
Director, U.S. Equity Syndicate Desk, Lehman Brothers (June 1992-December
1994) and Managing Director, Equity Transactions Group/Equity Syndicate,
PaineWebber Incorporated (September 1984-May 1992). Mr. Foerster also is a
director and/or trustee of each of the funds managed by the Investment
Manager.
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Jock Patton, 100 West Clarendon, Phoenix, Arizona 85013. (Age 49.) Trustee.
President, StockVal, Inc. (1992-present); director and co-owner, StockVal,
Inc. (1982-present); director of Artisoft, Inc. Mr. Patton was formerly a
partner and director of the law firm of Streich, Lang, P.A. (1972-1992).
Mr. Patton is also a director or trustee of each of the funds managed by
the Investment Manager.
*Robert W. Stallings, Two Renaissance Square, 40 North Central Avenue,
Suite 1200, Phoenix, AZ 85004. (Age 46.) Trustee and President. Chairman,
Chief Executive Officer and President of Pilgrim America Group, Inc.
("Pilgrim America Group" or the "Administrator") and PAII, and a director
of Pilgrim America Securities, Inc. ("PASI") since December 1994).
Chairman, Chief Executive Officer and President of Pilgrim America Bank and
Thrift Fund, Inc., Pilgrim Government Securities Income Fund, Inc., Pilgrim
America Investment Funds, Inc. and Pilgrim America Master Series, Inc.
(since April 1995). Chairman and Chief Executive Officer of Express America
Holdings Corporation ("Express America") (since August 1990) and Express
America Mortgage Corporation (since May 1991) and President of Express
America and Express America Mortgage Corporation (since December 1993). Mr.
Stallings formerly was Chairman and Chief Executive Officer of First
Western Partners, Inc., a consulting and management services firm to
financial institutions and private investors (February 1990-December 1991)
and Chairman and Chief Executive Officer of Western Savings & Loan Assoc.
(April 1989-February 1990).
The Board of Trustees has an Audit Committee comprised of the disinterested
Trustees. The Trust pays each Trustee who is not an interested person a pro rata
share, based on all of the investment companies in the Pilgrim America Group, of
(i) an annual retainer of $20,000; (ii) $1,500 per quarterly and special Board
meeting; (iii) $500 per committee meeting; (iv) $100 per special telephonic
meeting; and (v) out-of-pocket expenses. The pro rata share paid by the Trust is
based on the Trust's average net assets for the previous quarter as a percentage
of the average net assets of all the funds managed by PAII for which the
Trustees serve in common as directors/trustees.
COMPENSATION OF TRUSTEES
The following table sets forth information regarding compensation of Trustees by
the Trust and other funds managed by PAII for the fiscal year ended February 29,
1996. Officers of the Trust and Trustees who are interested persons of the Trust
do not receive any compensation from the Trust or any other funds managed by
PAII. In the column headed "Total Compensation From Registrant and Fund Complex
Paid to Trustees," the number in parentheses indicates the total number of
boards in the Pilgrim America family of funds on which the Trustee serves.
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
FROM
AGGREGATE REGISTRANT
COMPENSATION AND FUND
FROM COMPLEX PAID
NAME OF PERSON, POSITION REGISTRANT TO TRUSTEES
---------------------------------------------------- ------------ ------------------
<S> <C> <C>
Mary A. Baldwin(1)(2), Trustee...................... $ 15,788 $24,800 (5 boards)
Al Burton(2)(3), Trustee............................ $ 16,288 $25,300 (5 boards)
Bruce S. Foerster(1)(2), Trustee.................... $ 15,853 $24,900 (5 boards)
Jock Patton(2)(4), Trustee.......................... $ 10,556 $15,300 (5 boards)
Robert W. Stallings(5), Trustee and Chairman........ $ 0 $ 0 (5 boards)
</TABLE>
- ---------------
(1) Commenced service as a Trustee on April 7, 1995.
(2) Member of the Audit Committee.
(3) Commenced service as a Trustee in 1986.
(4) Commenced service as a Trustee on August 28, 1995.
(5) "Interested person," as defined in the Investment Company Act, of the Trust
because of the affiliation with the Investment Manager.
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OFFICERS
James R. Reis, Executive Vice President
Two Renaissance Square, 40 North Central Avenue, Suite 1200, Phoenix,
Arizona 85004. (Age 39.) Mr. Reis serves in the capacity of Chief Credit
Officer for the Trust. Mr. Reis reviews each potential portfolio investment
based on the Portfolio Managers' recommendation prior to providing purchase
approval. Vice Chairman (since December 1994) and Executive Vice President
(since April 1995) of Pilgrim America Group and PAII and a director (since
December 1994) and Assistant Secretary (since January 1995) of PASI
Executive Vice President of Pilgrim Government Securities Income Fund,
Inc., Pilgrim America Investment Funds, Inc., Pilgrim America Masters
Series, Inc., and Pilgrim America Bank and Thrift Fund, Inc., Vice Chairman
and Chief Financial Officer of Express America (since December 1993) and
President and Chief Financial Officer of Express America (May 1991-December
1993). Mr. Reis is also Vice Chairman (since December 1993) of Express
America Mortgage Corporation and formerly was President (May 1991-December
1993), and he was also the President and Chief Financial Officer of First
Western Partners, Inc. (February 1990-December 1991).
James M. Hennessy, Senior Vice President and Secretary
Two Renaissance Square, 40 North Central Avenue, Suite 1200, Phoenix,
Arizona 85004. (Age 47.) Mr. Hennessy serves in the capacity of counsel to
all of the funds in the Pilgrim America family of funds. In this capacity,
Mr. Hennessy monitors all matters relating to regulatory compliance for
Pilgrim America Group. Senior Vice President and Secretary, Express
America, Pilgrim America Group, PAII and PASI (since April 1995). Senior
Vice President and Secretary of Pilgrim Government Securities Income Fund,
Inc., Pilgrim America Investment Funds, Inc., Pilgrim America Masters
Series, Inc. and Pilgrim America Bank and Thrift Fund, Inc., Senior Vice
President, Express America Mortgage Corporation (June 1992-August 1994).
Mr. Hennessy was also the President of Beverly Hills Securities (January
1990-June 1992).
Daniel A. Norman, Senior Vice President and Assistant Portfolio Manager
Two Renaissance Square, 40 North Central Avenue, Suite 1200, Phoenix,
Arizona 85004. (Age 39.) Mr. Norman has served as Senior Vice President and
Assistant Portfolio Manager of the Trust since April 1995 and September
1996, respectively. Mr. Norman is a Senior Vice President of PAGI (since
April 1995), PAII (since April 1995), PASI (since December 1994), Express
America (since April 1995), and Express America Mortgage Corporation (since
February 1992). Mr. Norman was Chief Financial Officer of Prime Financial
Inc. (December 1985-February 1992) and from 1981 to 1985 was employed by
Arthur Andersen & Co. Mr. Norman received an MBA from the University of
Nebraska.
Michael J. Roland, CPA, Senior Vice President, Treasurer and Principal
Accounting Officer
Two Renaissance Square, 40 North Central Avenue, Suite 1200, Phoenix,
Arizona 85004. (Age 38.) Mr. Roland serves as the senior financial
accounting and compliance officer for all of the funds in the Pilgrim
America family of funds. Senior Vice President and Chief Financial Officer
of Pilgrim America Group, PAII and PASI (since April 1995). Senior Vice
President and Treasurer of Pilgrim Government Securities Income Fund, Inc.,
Pilgrim America Bank and Thrift Fund, Inc., Pilgrim America Masters Series,
Inc., and Pilgrim America Investment Funds, Inc. (since January 1995). From
July 1994 through December 1994, Partner at the consulting firm of
Corporate Savings Group in Newport Beach, California. From 1992 to June
1994, Vice President of Pacific Financial Asset Management Corp. Funds in
Newport Beach, California. From 1988 to 1992, Director of Financial
Reporting for Pacific Mutual Life Insurance Company in Newport Beach,
California.
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Howard Tiffen, Senior Vice President and Senior Portfolio Manager
Two Renaissance Square, 40 North Central Avenue, Suite 1200, Phoenix,
Arizona 85004. (Age 47.) Mr. Tiffen is a Senior Vice President of PAII and
Senior Portfolio Manager of the Trust. He has had primary responsibility
for investment management of the Trust since November, 1995. Mr. Tiffen's
banking career spans more than 25 years. Mr. Tiffen served in a series of
positions in the lending and capital market functions at a major United
States Bank for 13 years and has served in international investment banking
functions in Hong Kong, Malta, the Caribbean, Singapore, Thailand, and
Japan. From 1982 to November 1995, Mr. Tiffen worked for Bank of America
(and its predecessor, Continental Bank) in the following capacities:
Managing Director, Money Managers Group (1993-1995); Managing Director,
Loan Sales Trading (1990-1993); Managing Director, Distribution (London,
England, 1984-1990); and Vice President and Managing Director, Capital
Markets (1982-1984).
Michael Bacevich, Vice President and Assistant Portfolio Manager
Two Renaissance Square, 40 North Central Avenue, Suite 1200, Phoenix,
Arizona 85004. (Age 37.) Mr. Bacevich has served as Assistant Portfolio
Manager and Vice President of the Trust since December 1995 and September
1996, respectively. Mr. Bacevich is Vice President of PAGI and PAII (since
November 1995). Prior to joining Pilgrim America, Mr. Bacevich was a Vice
President with the Bank of America (and its predecessor, Continental Bank)
in its Leveraged Finance Group (July 1994-November 1995) and prior to that
in Special Assets Administration (July 1990-July 1994). Mr. Bacevich began
his banking career with Chemical Bank in June 1988. Prior to that time, Mr.
Bacevich was in the United States Army where he achieved the rank of
Captain (June 1981-August 1986). Mr. Bacevich is a graduate of West Point
and received an MBA from the University of Chicago.
As of October 18, 1996, the Trustees and Officers of the Trust as a group owned
beneficially less than 1% of the Trust's shares.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER. The Investment Manager serves as investment manager to the
Trust and has overall responsibility for the management of the Trust. The
Investment Management Agreement between the Trust and the Investment Manager
requires the Investment Manager to oversee the provision of all investment
advisory services for the Trust. The Investment Manager, which was organized in
December 1994, is registered as an investment adviser with the Commission and
serves as investment adviser to seven other registered investment companies (or
series thereof) and as of October 18, 1996 had total assets under management of
approximately $1.8 billion.
The Investment Manager is a wholly owned subsidiary of Pilgrim America Group,
which itself is a wholly-owned subsidiary of Express America, a Delaware
corporation, the shares of which are traded on the NASDAQ National Market System
and which is a holding company that through its subsidiaries engages in the
financial services business. On May 16, 1991, Express America acquired a now
discontinued mortgage banking operation from the Resolution Trust Corporation
("RTC") following a competitive bidding process. On December 8, 1995, the RTC
filed a complaint in the United States District Court of Arizona against Express
America, its Chief Executive Officer, who is also Chairman and an officer of the
Trust, its Chief Financial Officer, who is also an officer of the Trust, and
others, including Smith Barney, Harris Upham & Co., Incorporated and Rauscher
Pierce Refsnes, Inc. The RTC's complaint alleges various irregularities in the
bidding process and the closing of the acquisition. The RTC has asked for at
least $20 million in actual damages and at least $60 million in punitive damages
from all defendants.
Express America and the officers have advised the Trust that they believe they
have meritorious defenses to the claims brought by the RTC, and that the
litigation is unlikely to have a material adverse effect on the operations of
the Investment Manager.
The Investment Manager pays all of its expenses arising from the performance of
its obligations under the Investment Management Agreement, including executive
salaries and expenses of the Trustees and Officers of
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the Trust who are employees of the Investment Manager or its affiliates. Other
expenses incurred in the operation of the Trust are borne by the Trust,
including, without limitation, expenses incurred in connection with the sale,
issuance, registration and transfer of its shares; fees of its Custodian,
Transfer and Shareholder Servicing Agent; salaries of officers and fees and
expenses of Trustees or members of any advisory board or committee of the Trust
who are not members of, affiliated with or interested persons of the Investment
Manager; the cost of preparing and printing reports, proxy statements and
prospectuses of the Trust or other communications for distribution to its
shareholders; legal, auditing and accounting fees; the fees of any trade
association of which the Trust is a member; fees and expenses of registering and
maintaining registration of its shares for sale under Federal and applicable
State securities laws; and all other charges and costs of its operation plus any
extraordinary and non-recurring expenses.
For the fiscal years ended February 29, 1996, and February 28, 1995 and 1994,
PAII (or, prior to April 7, 1995, its predecessor) was paid $7,122,089,
$6,196,871, and $6,133,835 for services rendered to the Trust.
The Investment Management Agreement continues from year to year if specifically
approved at least annually by the Trustees or the Shareholders. But in either
event, the Investment Management Agreement must also be approved by vote of a
majority of the Trustees who are not parties to the Investment Management
Agreement or "interested persons" of any such party, cast in person at a meeting
called for that purpose.
The use of the name "Pilgrim" in the Trust's name is pursuant to a license
granted by PAII, and in the event the Investment Management Agreement is
terminated, the Trust has agreed to amend its Agreement and Declaration of Trust
to remove the reference to "Pilgrim."
THE ADMINISTRATOR. The Administrator of the Trust is Pilgrim America Group,
which is an affiliate of the Investment Manager. In connection with its
administration of the corporate affairs of the Trust, the Administrator bears
the following expenses: the salaries and expenses of all personnel of the Trust
and the Administrator except for the fees and expenses of Trustees not
affiliated with the Administrator or PAII; costs to prepare information for
determination of daily NAV by the recordkeeping and accounting agent; expenses
to maintain certain of the Trust's books and records that are not maintained by
PAII, the custodian, or transfer agent; costs incurred to assist in the
preparation of financial information for the Trust's income tax returns, proxy
statements, quarterly, semi-annual, and annual shareholder reports; costs of
providing shareholder services in connection with any tender offers or to
shareholders proposing to transfer their shares to a third party; providing
shareholder services in connection with the dividend reinvestment plan; and all
expenses incurred by the Administrator or by the Trust in connection with
administering the ordinary course of the Trust's business other than those
assumed by the Trust, as described below.
Except as indicated above and under "Investment Management Agreement," the Trust
is responsible for the payment of its other expenses including: the fees payable
to PAII; the fees payable to the Administrator; the fees and expenses of
Trustees who are not affiliated with PAII or the Administrator; the fees and
certain expenses of the Trust's custodian and transfer agent, including the cost
of providing records to the Administrator in connection with its obligation of
maintaining required records of the Trust; the charges and expenses of the
Trust's legal counsel and independent accountants; commissions and any issue or
transfer taxes chargeable to the Trust in connection with its transactions; all
taxes and corporate fees payable by the Trust to governmental agencies; the fees
of any trade association of which the Trust is a member; the cost of share
certificates representing shares of the Trust; organizational and offering
expenses of the Trust and the fees and expenses involved in registering and
maintaining registration of the Trust and of its shares with the Commission
including the preparation and printing of the Trust's registration statement and
prospectuses for such purposes; allocable communications expenses, with respect
to investor services and all expenses of shareholders and Trustees' meetings and
of preparing, printing and mailing reports, proxy statements and prospectuses to
shareholders; and the cost of insurance; and litigation and indemnification
expenses and extraordinary expenses not incurred in the ordinary course of the
Trust's business.
For the fiscal years ended February 29, 1996 and February 28, 1995 and 1994,
PAGI (or, prior to April 7, 1995, its predecessor) was paid $1,264,932,
$1,098,740, and $1,086,767 for services rendered to the Trust.
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PORTFOLIO TRANSACTIONS
The Trust will generally have at least 80% of its net assets invested in Senior
Loans. The remaining assets of the Trust will generally consist of short-term
debt instruments with remaining maturities of 120 days or less and certain other
instruments such as interest rate swaps, caps and floors, repurchase agreements
and reverse repurchase agreements. The Trust will acquire Senior Loans from and
sell Senior Loans to major money center banks, selected regional banks and
selected non-banks, insurance companies, finance companies and leasing companies
which usually act as lenders on senior collateralized loans. The Trust may also
purchase Senior Loans from and sell Senior Loans to U.S. branches of foreign
banks which are regulated by the Federal Reserve System or appropriate state
regulatory authorities. The Trust's interest in a particular Senior Loan will
terminate when the Trust receives full payment on the loan or sells a Senior
Loan in the secondary market. Costs associated with purchasing or selling Senior
Loans in the secondary market include commissions paid to brokers and processing
fees paid to agents. These costs are allocated between the purchaser and seller
as agreed between the parties.
Purchases and sales of short-term debt and other financial instruments for the
Trust's portfolio usually are principal transactions, and normally the Trust
will deal directly with the underwriters or dealers who make a market in the
securities involved unless better prices and execution are available elsewhere.
Such market makers usually act as principals for their own account. On occasion,
securities may be purchased directly from the issuer. Short-term debt
instruments are generally traded on a net basis and do not normally involve
either brokerage commissions or transfer taxes. The cost of portfolio securities
transactions of the Trust that are not transactions with principals will consist
primarily of brokerage commissions or dealer or underwriter spreads between the
bid and asked price, although purchases from underwriters may involve a
commission or concession paid by the issuer.
While PAII seeks to obtain the most favorable net results in effecting
transactions in the Trust's portfolio securities, brokers or dealers who provide
research services may receive orders for transactions by the Trust. Such
research services ordinarily consist of assessments and analyses of the business
or prospects of a company, industry, or economic sector. If, in the judgment of
PAII, the Trust will benefit from such research services, PAII is authorized to
pay spreads or commissions to brokers or dealers furnishing such services which
are in excess of spreads or commissions that other brokers or dealers not
providing such research may charge for the same transaction. Information so
received will be in addition to, and not in lieu of, the services required to be
performed by PAII under the Investment Management Agreement between PAII and the
Trust. The expenses of PAII will not necessarily be reduced as a result of the
receipt of such supplemental information. PAII may use any research services
obtained for the benefit of the Trust in providing investment advice to its
other investment advisory accounts. Conversely, such information obtained by the
placement of business for PAII or other entities advised by PAII will be
considered by and may be useful to PAII in carrying out its obligations to the
Trust.
The Trust does not intend to effect any brokerage transaction in its portfolio
securities with any broker-dealer affiliated directly or indirectly with the
Investment Manager, except for any sales of portfolio securities pursuant to a
tender offer, in which event the Investment Manager will offset against the
management fee a part of any tender fees which legally may be received by such
affiliated broker-dealer. To the extent certain services which the Trust is
obligated to pay for under the Investment Management Agreement are performed by
the Investment Manager, the Trust will reimburse the Investment Manager for the
costs of personnel involved in placing orders for the execution of portfolio
transactions.
The Trust paid $7,400, $8,544 and $0 in brokerage commissions during the fiscal
years ended February 29, 1996, February 28, 1995 and February 28, 1994,
respectively.
PORTFOLIO TURNOVER RATE
The annual rate of the Trust's total portfolio turnover for the years ended
February 29, 1996 and February 28, 1995 and 1994, was 88%, 108% and 87%,
respectively. The annual turnover rate of the Trust is generally expected to be
between 50% and 100%, although as part of its investment policies, the Trust
places no restrictions on portfolio turnover and the Trust may sell any
portfolio security without regard to the period of
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time it has been held. The annual turnover rate of the Trust also includes
Senior Loans for which the full payment on the Senior Loan has been prepaid by
the corporate borrower. The Investment Manager believes that prepaid Senior
Loans generally comprise approximately 25% to 75% of the Trust's total portfolio
turnover each year.
NET ASSET VALUE
The NAV per share is determined once daily as of the close of trading on the
NYSE on each day it is open, by dividing the value of the Trust's portfolio
securities plus all cash and other assets (including dividends accrued but not
collected) less all liabilities (including accrued expenses but excluding
capital and surplus) by the number of shares outstanding. In accordance with
generally accepted accounting principles for investment companies, dividend
income is accrued on the ex-dividend date. The NAV per share is made available
for publication.
The value of a Senior Loan is determined by obtaining market quotations. Senior
Loans are valued at fair value in the absence of readily ascertainable market
values. Fair value is determined by PAII under procedures established and
monitored by the Trust's Board of Trustees. In valuing a loan, PAII considers,
among other factors: (i) the creditworthiness of the corporate issuer and any
interpositioned bank; (ii) the current interest rate, period until next interest
rate reset and maturity date of the Senior Loan; (iii) recent market prices for
similar loans, if any; and (iv) recent prices in the market for instruments with
similar quality, rate, period until next interest rate reset, maturity, terms
and conditions, if any. PAII may also consider prices or quotations, if any,
provided by banks, dealers or pricing services which may represent the prices at
which secondary market transactions in the loans held by the Trust have or could
have occurred. However, because the secondary market in Senior Loans has not yet
fully developed, PAII will not currently rely solely on such prices or
quotations. Securities for which the primary market is a national securities
exchange or the NASDAQ National Market System are stated at the last reported
sale price on the day of valuation. Debt and equity securities traded in the
over-the-counter market and listed securities for which no sale was reported on
that date are valued at the mean between the last reported bid and asked price.
Securities other than Senior Loans for which reliable quotations are not readily
available and all other assets will be valued at their respective fair values as
determined in good faith by, or under procedures established by, the Board of
Trustees of the Trust. Investments in securities maturing in less than 60 days
are valued at amortized cost, which when combined with accrued interest,
approximates market value.
METHODS AVAILABLE TO REDUCE MARKET VALUE DISCOUNT FROM NAV
In recognition of the possibility that the Trust's shares may trade at discount
to NAV, the Trustees have determined that it would be in the best interest of
Shareholders for the Trust to take action to attempt to reduce or eliminate a
market value discount from NAV. To that end, the Trustees presently contemplate
that the Trust will take action either to repurchase in the open market or to
consider the making of tender offers to purchase its own shares at NAV. Since
Trust shares became listed on the NYSE on March 9, 1992, the Trust has
authorized two repurchase programs and has not conducted any tender offers. The
Trustees presently intend each quarter to consider the making of such tender
offers. The Trustees will at no time be required to make such tender offers.
Moreover, there can be no assurance that tender offers will result in the
Trust's shares trading at a price which is equal to their NAV. The Trust
anticipates that the market price may, among other things, be determined by the
relative demand for and supply of such shares in the market, the Trust's
investment performance, the Trust's yield, and investor perception of the
Trust's overall attractiveness as an investment as compared with other
investment alternatives.
In deciding whether the Trust will entertain tender offers and whether it will
accept shares tendered, the Trustees will consider several factors. One of the
principal factors in the Board's determinations on whether or not to make
quarterly offers will be the strength of the public market for the Trust's
shares. Other factors include the desire to reduce or eliminate a market value
discount from NAV. In addition, the Trustees will take into consideration the
liquidity of its assets in determining whether to make a tender offer or accept
tendered shares. In paying shareholders for tendered shares, the Trust
anticipates that it will use cash on hand,
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such as proceeds from sales of new Trust shares and specified pay-downs from
Senior Loans, and proceeds from the sale of cash equivalents held by the Trust.
The Trust may also borrow to pay Shareholders for tendered shares. To the extent
more shares are anticipated to be tendered or are tendered than could be paid
for out of such amounts, the liquidity of the Senior Loans held by the Trust may
be a consideration in the Trust's determination whether to make a tender offer
or, if an offer is made, in its determination of whether it will accept shares
tendered. Accepting tendered shares may require the Trust to sell portfolio
investments and incur certain costs which it otherwise would not have. Under
most Senior Loans, it will be necessary for the Trust to obtain the consent of
the agent or lender from whom the Trust purchased the Senior Loan prior to
selling the Senior Loan to a third party. Senior Loans such as those the Trust
intends to invest in have historically been considered by the investment
community to be liquid assets, although in certain instances, the conversion of
such instruments into cash has taken several days or longer. The market for
Senior Loans is relatively new as compared to markets for more established debt
instruments. Accordingly, while PAII does not anticipate any material difficulty
in meeting the liquidity needs for tender offers, there can be no guarantee that
the Trust will be able to liquidate a particular Senior Loan it holds within a
given period of time.
Furthermore, even if a tender offer has been made, it is the Trustees' announced
policy, which may be changed by the Trustees, not to effect tender offers or
accept tenders if: (1) such transactions, if consummated, would impair the
Trust's status as a regulated investment company under the Internal Revenue Code
(which would make the Trust a taxable entity, causing its income to be taxed at
the corporate level in addition to the taxation of shareholders who receive
dividends from the Trust) or (2) there is, in the judgment of the Trustees, any
(a) material legal action or proceeding instituted or threatened challenging
such transactions or otherwise materially adversely affecting the Trust, (b)
declaration of a banking moratorium by federal or state authorities or any
suspension of payment by banks in the United States, (c) limitation affecting
the Trust or the issuers of its portfolio instruments imposed by federal or
state authorities on the extension of credit by lending institutions or on the
exchange of foreign currency, (d) commencement of war, armed hostilities or
other international or national calamity directly or indirectly involving the
United States, or (e) other event or condition which would have a material
adverse effect on the Trust or its shareholders if shares were repurchased. The
Trustees may modify these conditions in light of experience.
Any tender offer made by the Trust will be at a price equal to the NAV of the
shares. Each shareholder will be notified in accordance with the requirements of
the Securities Exchange Act of 1934 and the Investment Company Act, either by
publication or mailing or both. Each offering document will contain such
information as is prescribed by such laws and the rules and regulations
promulgated thereunder. Other procedures to be used in connection with a
particular tender offer will be determined by the Trustees in accordance with
the provisions of applicable law, including the Securities Exchange Act of 1934.
Any tender offer that the Trust makes may have the effect of reducing
shareholder return as a result of the expenses incurred with respect to the
tender offers, the reduced level of interest earned on the money received by the
Trust as payment for shares newly purchased which may be held in cash
equivalents in anticipation of tender offers, and the cost of borrowing money to
fund the tender offers.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
The Trust maintains a Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
which allows participating shareholders to reinvest all dividends and capital
gain distributions in additional shares of the Trust. The Plan also allows
participants to make voluntary purchases monthly through IFTC (the "Plan
Agent"), in amounts ranging from a minimum of $100 to a maximum of $5,000 (such
minimum and maximum may be waived at management's discretion). IFTC establishes
a Dividend Investment Account (the "Account") for each shareholder participating
in the Plan and credits to each participant's Account funds it receives from:
(a) dividends and capital gain distributions paid on Trust shares registered in
the participant's name; and (b) voluntary cash contributions. If on the close of
business on the Trust's dividend valuation date the market price (the average of
sale prices, per share, as reported on the NYSE Composite Transaction Tape) plus
commissions is less than the NAV, funds credited to a participant's Account will
be used to purchase shares. If the market price, plus estimated commissions, of
the shares equals or exceeds their
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NAV at the close of business on such valuation date, the Trust will issue shares
valued at NAV per share to IFTC in the aggregate amount of the distributions
credited to the participants' Accounts.
Shareholders may elect to withdraw from the Plan at any time by giving IFTC
written notice. When a participant withdraws from the Plan, or when the Plan is
terminated or amended, the participant will receive a certificate for full
shares in the Account, plus a check for any fractional shares based on market
price; or if a participant so desires, upon receipt of a request with signature
guaranteed and a properly completed W-9, IFTC will sell such Shares in the Plan
and send the proceeds to the participant less brokerage commissions.
The automatic reinvestment of dividends and capital gain distributions does not
affect the tax characterization of the dividends and capital gains (i.e.,
capital gains and income are realized even though cash is not received). There
are no direct brokerage charges nor service charges to participants for
reinvesting dividends and capital gain distributions or purchases made with
voluntary cash payments. However, each participant will pay a pro rata share of
brokerage commissions with respect to IFTC's open market purchases in connection
with the reinvestment of distributions and voluntary cash contributions.
In accordance with Section 23(c) of the Investment Company Act and Rule 23c-1
thereunder, the Trust may from time to time purchase shares of beneficial
interest of the Trust in the open market in connection with the Plan.
See "Tax Matters -- Distributions" for a discussion of the federal income tax
ramifications of obtaining Shares under the Plan.
TAX MATTERS
The following is only a summary of certain U.S. federal income tax
considerations generally affecting the Trust and its shareholders. No attempt is
made to present a detailed explanation of the tax treatment of the Trust or its
shareholders, and the following discussion is not intended as a substitute for
careful tax planning. Shareholders should consult with their own tax advisers
regarding the specific federal, state, local, foreign and other tax consequences
of investing in the Trust.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
The Trust has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). As a
regulated investment company, the Trust generally is not subject to federal
income tax on the portion of its investment company taxable income (i.e.,
taxable interest, dividends and other taxable ordinary income, net of expenses,
and net short-term capital gains in excess of net long-term capital losses) and
net capital gains (i.e., the excess of net long-term capital gains over net
short-term capital losses) that it distributes to shareholders, provided that it
distributes at least 90% of its investment company taxable income for the
taxable year (the "Distribution Requirement"), and satisfies certain other
requirements of the Code that are described below.
In addition to satisfying the Distribution Requirement and an asset
diversification requirement discussed below, a regulated investment company must
(1) derive at least 90% of its gross income from dividends, interest, certain
payments with respect to securities loans, gains from the sale or other
disposition of stock or securities or foreign currencies and other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies; and (2) derive less than 30% of its gross income from
the sale or other disposition of stock, securities or foreign currencies (or
options, futures or forward contracts thereon) held for less than three months
(the "Short-Short Test"). However, foreign currency gains, including those
derived from options, futures and forwards, will not in any event be
characterized as Short-Short if they are directly related to the regulated
investment company's investment in stock or securities (or options or futures
thereon). Because of the Short-Short Test, the Trust may have to limit the sale
of appreciated securities that it has held for less than three months.
In general, gain or loss recognized by the Trust on the disposition of an asset
will be a capital gain or loss. However, gain recognized on the disposition of a
debt obligation purchased by the Trust other than at original
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issue at a market discount (generally, at a price less than its principal
amount) will be treated as ordinary income to the extent of the portion of the
market discount which accrued during the period of time the Trust held the debt
obligation.
In general, investments by the Trust in zero coupon or other original issue
discount securities will result in income to the Trust equal to a portion of the
excess of the face value of the securities over their issue price (the "original
issue discount") each year that the Trust holds the securities, even though the
Trust receives no cash interest payments. This income is included in determining
the amount of income which the Trust must distribute to maintain its status as a
regulated investment company and to avoid federal income and excise taxes.
In addition to satisfying the requirements described above, the Trust must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the Trust's
taxable year, at least 50% of the value of the Trust's assets must consist of
cash and cash items (including receivables), U.S. Government securities,
securities of other regulated investment companies, and securities of other
issuers (as to which the Trust has not invested more than 5% of the value of the
Trust's total assets in securities of any such issuer and as to which the Trust
does not hold more than 10% of the outstanding voting securities of any such
issuer), and no more than 25% of the value of its total assets may be invested
in the securities of any one issuer (other than U.S. Government securities and
securities of other regulated investment companies), or in two or more issuers
which the Trust controls and which are engaged in the same or similar trades or
businesses.
If for any taxable year the Trust does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable as
ordinary dividends to the extent of the Trust's current and accumulated earnings
and profits. Such distributions generally will be eligible for the
dividends-received deduction in the case of corporate shareholders.
EXCISE TAX ON REGULATED INVESTMENT COMPANIES
A 4% non-deductible excise tax is imposed on a regulated investment company that
fails to distribute in each calendar year an amount equal to at least 98% of
ordinary taxable income for the calendar year, at least 98% of capital gain net
income (i.e., capital gains in excess of capital losses) for the one-year period
ended on October 31 of such calendar year and any ordinary taxable income and
capital gain net income for previous years that was not distributed during those
years. A distribution will be treated as paid on December 31 of the current
calendar year if it is declared by the Trust in October, November or December
with a record date in such a month and paid by the Trust during January of the
following calendar year. Such distributions will be taxable to shareholders in
the calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are received.
The Trust intends to make sufficient distributions or deemed distributions of
its ordinary taxable income and capital gain net income to avoid liability for
the excise tax.
DISTRIBUTIONS
The Trust anticipates distributing substantially all of its investment company
taxable income for each taxable year. Such distributions will be taxable to
shareholders as ordinary income. If a portion of the Trust's income consists of
dividends paid by U.S. corporations, a portion of the dividends paid by the
Trust may be eligible for the corporate dividends received deduction.
The Trust may either retain or distribute to shareholders its net capital gain
for each taxable year. The Trust currently intends to distribute any such
amounts. If net capital gain is distributed and designated as a capital gain
dividend, it will be taxable to shareholders as long-term capital gain,
regardless of the length of time the shareholder has held his shares.
Conversely, if the Trust elects to retain its net capital gain, the Trust will
be taxed thereon (except to the extent of any available capital loss carryovers)
at the 35% corporate tax rate. In such event, it is expected that the Trust also
will elect to treat such gain as having been distributed to
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shareholders. As a result, each shareholder will be required to report his pro
rata share of such gain on his tax return as long-term capital gain, will be
entitled to claim a tax credit for his pro rata share of tax paid by the Trust
on the gain, and will increase the tax basis for his shares by an amount equal
to the deemed distribution less the tax credit.
Distributions by the Trust in excess of the Trust's earnings and profits will be
treated as a return of capital to the extent of (and in reduction of) the
shareholder's tax basis in his shares; any such return of capital distributions
in excess of the shareholder's tax basis will be treated as gain from the sale
of his shares, as discussed below.
Distributions by the Trust will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Trust. If the NAV at the time a shareholder purchases
shares of the Trust reflects undistributed income or gain, distributions of such
amounts will be taxable to the shareholder in the manner described above, even
though such distributions economically constitute a return of capital to the
shareholder.
The Trust will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of all taxable distributions payable to any shareholder (1) who
fails to provide the Trust with a certified, correct tax identification number
or other required certifications, or (2) who is notified by the Internal Revenue
Service that he or she is subject to backup withholding for failure to report
the receipt of interest or dividend income properly.
SALE OF SHARES
A shareholder will recognize gain or loss on the sale or exchange of shares of
the Trust in an amount generally equal to the difference between the proceeds of
the sale and the shareholder's adjusted tax basis in the shares. In general, any
such gain or loss will be considered capital gain or loss and will be long-term
capital gain or loss if the shares were held for longer than one year. However,
any capital loss arising from the sale of shares held for six months or less
will be treated as a long-term capital loss to the extent of any long-term
capital gains distributed (or deemed distributed) with respect to such shares.
Also, any loss realized on a sale or exchange of shares will be disallowed to
the extent the shares disposed of are replaced within a period of 61 days
beginning 30 days before and ending 30 days after the shares are disposed of. In
such case, the tax basis of the acquired shares will be adjusted to reflect the
disallowed loss.
FOREIGN SHAREHOLDERS
U.S. taxation of a shareholder who, as to the United States, is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign
partnership ("foreign shareholder") depends on whether the income from the Trust
is "effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from the Trust is not effectively connected with a U.S. trade or
business carried on by a foreign shareholder, distributions of investment
company taxable income will be subject to U.S. withholding tax at the rate of
30% (or lower treaty rate). Such a foreign shareholder would generally be exempt
from U.S. federal income tax on gains realized on the sale or exchange of shares
of the Trust, capital gain dividends, and amounts retained by the Trust that are
designated as undistributed capital gains.
If the income from the Trust is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then distributions of investment
company taxable income, capital gain dividends, amounts retained by the Trust
that are designated as undistributed capital gains and any gains realized upon
the sale or exchange of shares of the Trust will be subject to U.S. federal
income tax at the rates applicable to U.S. citizens or domestic corporations.
Such shareholders that are classified as corporations for U.S. tax purposes also
may be subject to a profits tax.
In the case of foreign noncorporate shareholders, the Trust may be required to
withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless such shareholders furnish the Trust with proper notification of their
foreign status.
19
<PAGE> 80
The tax consequences to a foreign shareholder entitled to claim the benefits of
an applicable tax treaty may be different from those described herein. Foreign
shareholders are urged to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the Trust, including the
applicability of foreign taxes.
EFFECT OF FUTURE LEGISLATION; OTHER TAX CONSIDERATIONS
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations issued thereunder as in effect on
the date of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Income received by the Trust from foreign sources may be subject to withholding
and other taxes imposed by such foreign jurisdictions, absent treaty relief.
Distributions to shareholders also may be subject to state, local and foreign
taxes, depending upon each shareholder's particular situation. Shareholders are
urged to consult their tax advisers as to the particular consequences to them of
an investment in the Trust.
ADVERTISING AND PERFORMANCE DATA
ADVERTISING
From time to time advertisements and other sales materials for the Trust may
include information concerning the historical performance of the Trust. Any such
information may include annual total return, aggregate total return,
distribution rate, average compounded distribution rate and yield of the Trust
for specified periods of time. Such information may also include performance
rankings and similar information from independent organizations such as Lipper
Analytical Services, Inc. ("Lipper"), Morningstar, or other industry
publications.
On occasion, the Trust may quote total return calculations published by Lipper,
a widely recognized independent publication that monitors the performance of
both open and closed-end investment companies. The Trust may also cite
investment company rankings published by Lipper based on total return. These
rankings will typically compare the Trust to other Senior Loan funds and also to
taxable closed-end fixed income funds. The Trust may also refer to ratings
received for its overall risk-adjusted performance from Morningstar, another
widely recognized independent publisher of investment company ratings. Any such
use of rankings and ratings in advertisements and sales literature will conform
with the guidelines proposed by the NASD and subsequently approved by the
Commission on July 13, 1994. Ranking comparisons and ratings should not be
considered representative of the Trust's relative performance for any future
period.
In addition, the Trust may compare its yield to (i) 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, (ii) 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, (iii) the average yield reported by
the Bank Rate Monitor National Index for money market deposit accounts offered
by the 100 leading banks and thrift institutions in the ten largest standard
metropolitan statistical areas, (iv) yield data published by Lipper, or (v) the
yield on an investment in 90-day Treasury bills on a rolling basis, assuming
quarterly compounding. Also, the Trust may compare such other yield data
described above to each other. As with yield and total return calculations,
yield comparisons should not be considered representative of the Trust's yield
or relative performance for any future period.
PERFORMANCE DATA
The Trust may quote annual total return and aggregate total return performance
data. Total return quotations for the specified periods will be computed by
finding the rate of return (based on net investment income and
20
<PAGE> 81
any capital gains or losses on portfolio investments over such periods) that
would equate the initial amount invested to the value of such investment at the
end of the period.
The Trust's distribution rate generally is determined on a monthly basis with
respect to the immediately preceding monthly distribution period. The
distribution rate is computed by first annualizing the Trust's distributions per
share during such a monthly distribution period and dividing the annualized
distribution by the Trust's maximum offering price per share on the last day of
such period. The Trust calculates the compounded distribution rate by adding one
to the monthly distribution rate, raising the sum to the power of 12, and
subtracting one from the product. In circumstances in which the Trust believes
that, as a result of decreases in market rates of interest, its expected monthly
distributions may be less than the distributions with respect to the immediately
preceding monthly distribution period, the Trust reserves the right to calculate
the distribution rate on the basis of a period of less than one month.
Historical distribution rates on a month to month basis may also be presented.
Total return, distribution rate and compounded distribution rate figures
utilized by the Trust are based on historical performance and are not intended
to indicate future performance. Distribution rate, compounded distribution rate
and NAV per share can be expected to fluctuate over time. Total return will vary
depending on market conditions, the Senior Loans, and other securities
comprising the Trust's portfolio, the Trust's operating expenses and the amount
of net realized and annualized capital gains or losses during the period.
21
<PAGE> 82
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
Financial Statements
Contained in Part A:
Financial Highlights for the six months ended August 31, 1996 (unaudited)
and the years ended February 29, 1996; February 28, 1995, 1994, 1993;
February 29, 1992; February 28, 1991, 1990 and 1989
Portfolio of Investments as of August 31, 1996 (unaudited)
Statement of Assets and Liabilities as of August 31, 1996 (unaudited)
Statement of Operations for the six months ended August 31, 1996
(unaudited)
Statements of Changes in Net Assets for the six months ended August 31,
1996 (unaudited) and the year ended February 29, 1996
Statement of Cash Flows for the six months ended August 31, 1996
(unaudited)
Notes to Financial Statements (unaudited)
Incorporated in Part B by reference to Registrant's February 29, 1996 Annual
Report:
Portfolio of Investments as of February 29, 1996
Statement of Assets and Liabilities as of February 29, 1996
Statement of Operations for the year ended February 29, 1996
Statements of Changes in Net Assets for the years ended February 28, 1995
and February 29, 1996
Statement of Cash Flows for the year ended February 29, 1996
Notes to Financial Statements
Report of Independent Accountants dated April 12, 1996
<TABLE>
<S> <C> <C> <C>
2. Exhibits
(a) (i) Agreement and Declaration of Trust(1)
(ii) Amendment to the Agreement and Declaration of Trust dated March 26, 1996
and effective April 12, 1996(1)
(b) By-Laws(2)
(c) Not Applicable
(d) (i) Specimen Certificate for Shares of Beneficial Interest(3)
(ii) Form of Notice of Guaranteed Delivery
(iii) Form of Exercise Form
(iv) Form of Beneficial Owner Certification(1)
(e) Dividend Reinvestment and Cash Purchase Plan(1)
(f) Not Applicable
(g) (i) Investment Management Agreement(1)
</TABLE>
<PAGE> 83
<TABLE>
<S> <C> <C> <C>
(ii) Amendment to Investment Management Agreement(1)
(h) (i) Form of Dealer Manager Agreement
(ii) Form of Soliciting Dealer Agreement
(i) Not Applicable
(j) Custodian Agreement(3)
(k) (i) Administration Agreement
(ii) Amendment to Administration Agreement(1)
(iii) Subscription Agency Agreement(1)
(iv) Form of Information Agency Agreement(1)
(l) Opinion of Dechert Price & Rhoads
(m) Not Applicable
(n) (i) Consent of KPMG Peat Marwick LLP
(ii) Consent of Tait, Weller & Baker
(o) Not Applicable
(p) Certificate of Initial Capital(2)
(q) Not Applicable
(r) Financial Data Schedule
</TABLE>
- ---------------
(1) Incorporated herein by reference to Registrant's registration statement on
Form N-2 (File No. 333-12123), filed September 16, 1996.
(2) Incorporated herein by reference to pre-effective amendment no. 1 to
Registrant's initial registration statement on Form N-2 (File No. 33-18886),
filed on January 22, 1988 (hereinafter "Initial Registration Statement").
(3) Incorporated herein by reference to pre-effective amendment no. 4 to
Registrant's Initial Registration Statement, filed on April 8, 1988.
ITEM 25. MARKETING AGREEMENTS
See Form of Dealer Manager Agreement filed as Exhibit (h)(i) to this
Registration Statement.
2
<PAGE> 84
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth estimated expenses to be incurred in connection
with the offering described in the Registration Statement.
<TABLE>
<S> <C>
Registration Fees....................................................... $ 78,000.00
State Taxes and Fees.................................................... 1,500.00
Trustee Fees............................................................ 7,200.00
Transfer Agent's Fees................................................... 37,000.00
Printing Expenses....................................................... 60,000.00
Legal Fees.............................................................. 200,000.00
New York Stock Exchange Listing Fees.................................... 79,288.00
National Association of Securities Dealers, Inc. Fees................... 22,100.00
Accounting Fees......................................................... 25,000.00
Dealer Manager Expenses................................................. 150,000.00
Subscription Agent Fees................................................. 150,000.00
Information Agent Fees.................................................. 56,000.00
Miscellaneous Expenses.................................................. 150,000.00
Total......................................................... 1,016,088.00
</TABLE>
ITEM 27. PERSON CONTROLLED BY OR UNDER COMMON CONTROL
Not Applicable.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
As of August 30, 1996:
<TABLE>
<CAPTION>
(1) TITLE OF CLASS (2) NUMBER OF RECORD HOLDERS
--------------------------------- ---------------------------------
<C> <S> <C> <C>
Shares of Beneficial Interest Approximately 53,285
</TABLE>
ITEM 29. INDEMNIFICATION
Registrant's Agreement and Declaration of Trust generally provides that the
Trust shall indemnify each of its Trustees and officers (including persons who
serve at the Trust's request as directors, officers or trustees of another
organization in which the Trust has any interest as a shareholder, creditor or
otherwise) ("Covered Persons") against all liabilities and expenses, including
amounts paid in satisfaction of judgments, in compromise or as fines and
penalties, and counsel fees reasonably incurred in connection with the defense
or disposition of any action, suit or other proceeding, whether civil or
criminal, by reason of being or having been such a Covered Person except with
respect to any matter as to which such Covered Person shall have been finally
adjudicated (a) not to have acted in good faith in the reasonable belief that
such Covered Person's action was in the best interest of the Trust or (b) to be
liable to the Trust or its shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of duties involved in the conduct
of such Covered Person's office.
Reference is made to Section 7 of the Form of Dealer Manager Agreement filed as
Exhibit (h)(i) to this Registration Statement for the provisions relating to
indemnification of the Dealer Managers.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to Trustees, 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 Commission, such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment of the Registrant of expenses incurred or
paid by a Trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the securities being
registered, the Registrant
3
<PAGE> 85
will submit, unless in the opinion of its counsel the matter has been settled by
controlling precedent, to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Certain of the officers and directors of the Registrant's Investment Manager
also serve as officers and/or directors for other registered investment
companies in the Pilgrim America family of funds and with Pilgrim America Group,
Inc. and its subsidiaries. Information as to the directors and officers of the
Investment Manager is included in the Investment Manager's Form ADV and
amendments thereto filed with the Commission and is incorporated herein by
reference thereto. For additional information, see "Investment Management and
Other Services" in the Prospectus.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The amounts and records of the Registrant will be maintained at its office at
Two Renaissance Square, 40 North Central Avenue, Suite 1200, Phoenix, Arizona
85004 and at the office of its custodian, Investors Fiduciary Trust Company, 127
W. 10th Street, Kansas City, Missouri 64105.
ITEM 32. MANAGEMENT SERVICES
Not Applicable.
ITEM 33. UNDERTAKINGS
1. The Registrant undertakes to suspend the Offer until the prospectus is
amended if (1) subsequent to the effective date of this registration statement,
the net asset value declines more than ten percent from its net asset value as
of the effective date of this registration statement or (2) the net asset value
increases to an amount greater than the net proceeds as stated in the prospectus
included in this registration statement.
2. Not Applicable.
3. Not Applicable.
4. Not Applicable.
5. The Registrant undertakes:
a. for the purpose of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant under Rule 497(h) under the
Securities Act shall be deemed to be part of this registration statement as
of the time it was declared effective; and
b. for the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of the securities at that time shall be
deemed to be the initial bona fide offering thereof.
6. The Registrant undertakes 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.
4
<PAGE> 86
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Pre-Effective Amendment
No. 1 to its Registration Statement to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of Phoenix in the State of
Arizona this 18th day of October, 1996.
PILGRIM AMERICA PRIME RATE TRUST
--------------------------------------
Robert W. Stallings*
President
Pursuant to the requirements of the Securities Act of 1933, this Pre-Effective
Amendment No. 1 to the Registration Statement has been signed below by the
following persons in the capacities and on the date indicated:
<TABLE>
<C> <S> <C>
- ------------------------------------- President and Trustee October 18, 1996
Robert W. Stallings*
/s/ MICHAEL J. ROLAND
- ------------------------------------- Treasurer October 18, 1996
Michael J. Roland
Trustee October 18, 1996
- -------------------------------------
Mary A. Baldwin*
Trustee October 18, 1996
- -------------------------------------
Al Burton*
Trustee October 18, 1996
- -------------------------------------
Bruce S. Foerster*
Trustee October 18, 1996
- -------------------------------------
Jock Patton**
/s/ JAMES M. HENNESSY
- -------------------------------------
James M. Hennessy**
</TABLE>
** Powers of attorney were filed in the Registrant's Registration Statement on
Form N-2 on September 16, 1996 and are incorporated by reference herein.
<PAGE> 87
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NAME OF EXHIBIT
- ---------- ---------------------------------
<S> <C>
2(d)(ii) Form of Notice of Guaranteed
Delivery
2(d)(iii) Form of Exercise Form
2(h)(i) Form of Dealer Manager Agreement
2(h)(ii) Form of Soliciting Dealer
Agreement
2(k)(i) Administration Agreement
2(l) Opinion of Dechert Price & Rhoads
2(n)(i) Consent of KPMG Peat Marwick LLP
2(n)(ii) Consent of Tait, Weller & Baker
2(r) Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 2(d)(ii)
FORM OF NOTICE OF GUARANTEED DELIVERY
<PAGE> 2
<TABLE>
<S> <C>
Any questions regarding this form or the Offer may be directed to Shareholder
Communications Corporation, the Information Agent, at (800) 733-8481, extension
350. [PILGRIM AMERICA LOGO]
</TABLE>
- --------------------------------------------------------------------------------
PILGRIM AMERICA PRIME RATE TRUST
NON-TRANSFERABLE RIGHTS OFFERING
NOTICE OF GUARANTEED DELIVERY
TO BE DELIVERED PRIOR TO NOVEMBER 12, 1996
5:00 EASTERN STANDARD TIME
- --------------------------------------------------------------------------------
As set forth in the Prospectus under "The Offer -- Payment for Shares," this
form or one substantially equivalent hereto may be used by a New York Stock
Exchange or National Association of Securities Dealers, Inc. ("NASD") member or
by a bank or trust company with an office or correspondent in the United States
as a means of effecting a subscription on behalf of a shareholder pursuant to
the rights offering (the "Offer") of shares of beneficial interest of the Trust.
The form may be delivered by hand or sent by facsimile transmission, express
mail or overnight courier or first class mail to the Subscription Agent prior to
5:00 p.m., Eastern Standard Time, on Tuesday, November 12, 1996 (the "Expiration
Date"). If sent by facsimile, the original executed form must also be sent
promptly thereafter by hand or mail delivery.
- --------------------------------------------------------------------------------
THE SUBSCRIPTION AGENT IS STATE STREET BANK AND TRUST COMPANY.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
BY EXPRESS MAIL OR OVERNIGHT BY FIRST CLASS MAIL: BY HAND DELIVERY TO NEW YORK
COURIER: PILGRIM AMERICA PRIME RATE TRUST DELIVERY WINDOW:
PILGRIM AMERICA PRIME RATE TRUST C/O STATE STREET BANK AND TRUST PILGRIM AMERICA PRIME RATE TRUST
C/O BOSTON EQUISERVE COMPANY C/O BANC BOSTON TRUST COMPANY OF
150 ROYALL STREET P.O. BOX 9061 NEW YORK
MAIL STOP #45-02-53 BOSTON, MA 02205 55 BROADWAY, 3RD FLOOR
CANTON, MA 02021 NEW YORK, NY 10006
BY FACSIMILE (TELECOPIER):
(617) 774-4519
- ---------------------------------
FACSIMILE DELIVERY MAY BE
CONFIRMED BY TELEPHONE TO:
(617) 774-4511
- ---------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS VIA A
TELECOPY OR FACSIMILE NUMBER, OTHER THAN AS SET FORTH ABOVE, DOES NOT CONSTITUTE
A VALID DELIVERY.
This notice specifies the number of shares subscribed for under both the Primary
Subscription and the Over-Subscription Privilege, and guarantees payment for all
subscribed shares and delivery of confirmed exercise instructions electronically
or by a form of the enclosed Beneficial Owner Certificate, no later than the
close of business on November 12, 1996. Failure to deliver such exercise
instructions and payments will result in a shareholder's forfeiture of the
Rights. In the event the Subscription Price exceeds the Estimated Subscription
Price, an invoice for any additional amounts due will be sent by November 27,
1996 (the "Confirmation Date"). Payment for such additional amounts, if any,
must be made by December 6, 1996. In the event the Subscription Price is less
than the Estimated Subscription Price, the Subscription Agent will mail a refund
to exercising shareholders.
- --------------------------------------------------------------------------------
<PAGE> 3
- --------------------------------------------------------------------------------
NOTICE OF GUARANTEED DELIVERY
- --------------------------------------------------------------------------------
GUARANTEE
The undersigned, a member firm of the New York Stock Exchange or the NASD or a
bank or trust company having an office or correspondent in the United States,
guarantees delivery to the Subscription Agent of (a) payment of the Estimated
Subscription Price of $9.XX per share for the total number of Shares subscribed
for pursuant to the Primary Subscription and for any additional Shares
subscribed for pursuant to the Over-Subscription Privilege, as indicated herein
together with confirmed exercise instructions by the close of business on
November 15, 1996, and (b) payment of any additional invoice amounts, as
described above, by the close of business on December 6, 1996.
BROKER ASSIGNED CONTROL NUMBER
Please assign a unique control number to each guarantee submitted. This number
needs to be referenced on any direct delivery of Rights or any delivery through
DTC.
Broker Assigned Control Number
- ---------------------------
<TABLE>
<C> <S> <C> <C> <C>
1. Primary Subscription Number of Rights to be Number of Primary Shares Payment amount based on
exercised: requested for which you are Estimated Subscription
guaranteeing delivery of Rights Price of $9.XX per share.
and payment:
-------------------------- -------------------- x $9.XX = $ ----------------
(Rights/by 5)
2. Over-Subscription Number of Over-Subscription Payment amount based on
Privilege Shares requested for which you Estimated Subscription
are guaranteeing payment: Price of $9.XX per share.
-------------------- x $9.XX = $ ----------------
3. Totals Total Number of Rights Total Payment:
Subscribed For:
-------------------- x $9.XX = $ ----------------
</TABLE>
- --------------------------------------------------------------------------------
Method of Delivery (Check one)
/ / Through DTC / / Directly to State Street Bank and Trust Company, as
Subscription Agent
- --------------------------------------------------------------------------------
IF PROVIDING FOR GUARANTEED DELIVERY ON BEHALF OF A REGISTERED SHAREHOLDER(S),
PLEASE LIST THE CONTROL NUMBER(S) BELOW.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
Name of Firm Authorized Signature
- ------------------------------------------------------------------------------------------------------------------
DTC Participant Number Title
- ------------------------------------------------------------------------------------------------------------------
Address Name (Please Type or Print)
- ------------------------------------------------------------------------------------------------------------------
City State Zip Code Phone Number Facsimile Number
- ------------------------------------------------------------------------------------------------------------------
Contact Name Date
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 2(D)(III)
FORM OF EXERCISE FORM
<PAGE> 2
<TABLE>
<S> <C>
Any questions regarding this form or the Offer may be directed to Shareholder
Communications Corporation, the Information Agent, at (800) 733-8481, extension
350. [PILGRIM AMERICA LOGO]
</TABLE>
- --------------------------------------------------------------------------------
PILGRIM AMERICA PRIME RATE TRUST
NON-TRANSFERABLE RIGHTS OFFERING
SUBSCRIPTION CERTIFICATE AND EXERCISE FORM
OFFER EXPIRES IF NOT RECEIVED BY THE SUBSCRIPTION AGENT BEFORE 5:00 P.M.
EASTERN STANDARD TIME ON NOVEMBER 12, 1996
- --------------------------------------------------------------------------------
Number of Rights Issued:
- ------------------------- Shares Available for Primary Subscription:
-------------------------
Control No.:
- ------------------------------
As the registered holder of this Subscription Certificate, you are entitled to
exercise the Rights granted to you (based on the number of Pilgrim America Prime
Rate Trust (the "Trust") Shares that you owned on October 18, 1996) to subscribe
for the number of the Shares shown above.
Under the Trust's Primary Subscription, you may purchase one new Share for each
five Rights held, at the Estimated Subscription Price of $9.XX and on the terms
and conditions set forth in the Trust's prospectus. Under the Over-Subscription
Privilege, you may apply for any number of additional Shares, provided you have
subscribed for the maximum number of Shares for which you are eligible under the
Primary Subscription. The price of the Shares, $9.XX, is an Estimated
Subscription Price only. The final price will be determined on November 12, 1996
(the Expiration Date), and could be higher or lower than $9.XX. You will receive
a refund or be required to pay an additional amount equal to the difference
between $9.XX and the final price.
The following is a sample calculation showing how you can exercise your Rights:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
A. PRIMARY SUBSCRIPTION ------------------------------------------------------- X $9.XX = $------------
(Number of Shares Requested - See Shares Available Listed
Above)
B. OVER-SUBSCRIPTION PRIVILEGE ------------------------------------------------------- X $9.XX = $------------
(Number of Additional Shares Requested - No Maximum)
C. TOTAL PURCHASE PRICE ------------------------------------------------------- X $9.XX = $------------
(Total A / B)
</TABLE>
*ESTIMATED PRICE
To exercise your Rights and subscribe for Shares of the Trust, complete the
reverse side of this form, enclose your payment for the Shares, and deliver this
Exercise Form and payment to the Subscription Agent at one of the addresses
shown below by 5:00 p.m., Eastern Standard Time, on November 12, 1996. A postage
pre-paid envelope is enclosed.
<TABLE>
<CAPTION>
<S> <C>
- ---------------------------------------------------------------------------------- BY EXPRESS MAIL OR OVERNIGHT COURIER:
Pilgrim America Prime Rate Trust
c/o Boston EquiServe
150 Royal 1 Street
Mail Stop #45-02-53
Canton, MA 02021
BY FIRST CLASS MAIL:
Pilgrim America Prime Rate Trust
c/o State Street Bank and Trust Company
P.O. Box 9061
Boston, MA 02205
BY HAND DELIVERY TO NEW YORK DELIVERY
WINDOW:
Pilgrim America Prime Rate Trust
c/o Banc Boston Trust Company
of New York
55 Broadway, 3rd Floor
New York, NY 10006
- ----------------------------------------------------------------------------------
</TABLE>
RIGHTS TO PURCHASE SHARES ARE NON-TRANSFERABLE
<PAGE> 3
- --------------------------------------------------------------------------------
EXERCISE FORM
- --------------------------------------------------------------------------------
SECTION 1: TO SUBSCRIBE
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
A. PRIMARY SUBSCRIPTION
I wish to exercise the following X $9.XX* = $ --------------
number of Rights to purchase Shares --------------------- ------
of the Trust: (Shares Requested Cannot
Exceed Shares Available
Listed on the Front of
this Form
B. OVER-SUBSCRIPTION PRIVILEGE**
I wish to purchase additional X $9.XX* = $ --------------
Shares, if available, pursuant to ----------------------- --------
the Over-Subscription Privilege (Number of Additional
Shares Requested -- No Maximum)
* ESTIMATED PRICE. THE ESTIMATED PRICE IS $9.XX. THE FINAL PRICE WILL BE CALCULATED ON NOVEMBER 12, 1996 AND YOU WILL RECEIVE A
REFUND OR BE REQUIRED TO PAY AN ADDITIONAL AMOUNT EQUAL TO THE DIFFERENCE BETWEEN $9.XX AND THE FINAL PRICE.
** YOU MAY REQUEST TO PURCHASE ANY NUMBER OF ADDITIONAL SHARES, IF AVAILABLE, PURSUANT TO THE OVER-SUBSCRIPTION PRIVILEGE,
PROVIDED YOU HAVE FULLY EXERCISED ALL THE RIGHTS ISSUED TO YOU.
Amount of Check or Money Order Enclosed: Total Purchase Price (A + B) = $ -------------
Make payable to "Pilgrim America Prime Rate Trust"
</TABLE>
SECTION 2: CERTIFICATION
CERTIFICATION: I acknowledge that I have received the Prospectus for this Offer
and I hereby irrevocably subscribe for the number of Shares indicated above on
the terms and conditions set forth in the Prospectus. I understand and agree
that I will be obligated to pay any additional amounts to the Trust if the price
of the Shares, as determined on the Expiration Date, is in excess of the $9.XX
Estimated Subscription Price.
I hereby agree that if I fail to pay the full Subscription Price for the
Shares I request, the Trust may exercise any of its remedies, as described in
the Prospectus.
Signature of Shareholder(s)
- ------------------------------------------------
(Please sign exactly as your account is registered.)
------------------------------------------------
Please provide your daytime telephone number: ( )
- -------------------------------------
- --------------------------------------------------------------------------------
CHANGE OF ADDRESS
If you wish to have your Shares and refund check (if any) delivered to an
address other than the address of record listed on the front of this form, you
must have your signature guaranteed by a member/broker of the New York Stock
Exchange or by a bank or trust company. Please provide the delivery address
below and check the box below if this change is permanent.
Delivery Address:
- ------------------------------------------ Change my address of record / /
- ------------------------------------------ to such delivery address
- ------------------------------------------
SECTION 3: DESIGNATION OF BROKER/DEALER
<TABLE>
<S> <C>
The following Broker/Dealer is hereby designated as having been instrumental in my exercise of the
Rights:
Name of Financial Professional:
- -----------------------------------------------------------------------------------------------------------
Name of Brokerage Firm Your Account Number
</TABLE>
<PAGE> 1
EXHIBIT 2(h)(i)
FORM OF DEALER MANAGER AGREEMENT
<PAGE> 2
The Pilgrim and America Prime Rate Trust
(a Massachusetts business trust)
18,122,976* Shares of Beneficial Interests Issuable Upon
Exercise of Non-Transferable Rights to Subscribe for
Such Shares of Beneficial Interests
(Shares of Beneficial Interests)
DEALER MANAGER AGREEMENT
October 18, 1996
PRUDENTIAL SECURITIES INCORPORATED
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
c/o Prudential Securities Incorporated
One New York Plaza
New York, NY 10292
Ladies and Gentlemen:
Pilgrim America Prime Rate Trust, a Massachusetts
business trust (the "Trust") and Pilgrim America Investments, Inc. (the
"Investment Manager"), a Delaware corporation, each confirms its agreement with
and appointment of Prudential Securities Incorporated ("Prudential") and Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") (together, the
"Dealer Managers") to act as dealer managers in connection with the issuance by
the Trust to the holders of record (the "Holders") of shares of the beneficial
interests of the Trust (the "Common Shares"), of non-transferable rights (each a
"Right" and collectively, the "Rights") entitling such Holders to subscribe for
shares of Common Shares and, subject to certain conditions and at the Trust's
sole discretion, additional shares
- --------
* Pursuant to the over-subscription privilege in connection with the
Offer, the Fund may, at its discretion, increase the number of Shares
subject to subscription by up to 25%.
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of Common Shares pursuant to an over-subscription privilege (the "Offer"). The
shares of Common Shares for which Holders may subscribe pursuant to the Offer
are herein referred to as the "Shares". Pursuant to the terms of the Offer, the
Trust is issuing each Holder one Right for each share of Common Shares held on
the record date set forth in the Prospectus (as defined herein) (the "Record
Date"). Such Rights entitle Holders to acquire during the subscription period
set forth in the Prospectus (the "Subscription Period"), at the price set forth
in the Prospectus (the "Subscription Price"), one Share for each five Rights
exercised on the terms and conditions set forth in the Prospectus. Pursuant to
the terms of the Offer, such Rights also entitle Holders to acquire during the
Subscription Period at the Subscription Price certain additional Shares on the
terms and conditions of the over-subscription privilege as set forth in the
Prospectus.
The Trust has filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form N-2 (No.
333-12123) and a related preliminary prospectus for the registration of the
Shares under the Securities Act of 1933 (the "1933 Act"), and has filed such
amendments to such registration statement on Form N-2, if any, and such amended
preliminary prospectuses as may have been required to the date hereof. The Trust
will prepare and file such additional amendments thereto and such amended
prospectuses as may hereafter be required. The Trust previously filed a
notification on Form N-8A of registration of the Trust as an investment company
under the Investment Company Act of 1940, as amended (the "1940 Act"), and the
rules and regulations of the Commission under the 1940 Act (together with the
rules and regulations under the 1933 Act, the "Rules and Regulations"). The
registration statement, and the prospectus constituting a part thereof, each as
from time to time amended or supplemented pursuant to the 1933 Act, are herein
referred to as the "Registration Statement" and the "Prospectus," respectively,
except that if any revised prospectus shall be provided to the Dealer Managers
by the Trust for use in connection with the Offer that differs from the
Prospectus on file at the Commission at the time the Registration Statement
becomes effective (whether such revised prospectus is required to be filed by
the Trust pursuant to Rule 497(b) or Rule 497(h) of
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the Rules and Regulations), the term "Prospectus" shall refer to each such
revised prospectus from and after the time it is first provided to the Dealer
Managers for such use. The Prospectus and letters to beneficial owners of the
Common Shares, forms used to exercise rights, any letters from the Trust to
securities dealers, commercial banks, trust companies and other nominees and any
newspaper announcements, press releases and other offering materials and
information that the Trust may use, approve, prepare or authorize for use in
connection with the Offer, are collectively referred to hereinafter as the
"Offering Materials."
SECTION 1. Representations and Warranties.
(a) The Trust and the Investment Manager each severally represents
and warrants to the Dealer Managers as of the date hereof and as of the date of
the commencement of the Offer (such later date being hereinafter referred to as
the "Representation Date") as follows:
(i) At the time the Registration Statement becomes effective
and at the Representation Date, the Registration Statement will comply
in all material respects with the requirements of the 1933 Act, the
1940 Act and the Rules and Regulations and will not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading. From the time the Registration Statement becomes effective
through the expiration date of the Offer set forth in the Prospectus
(the "Expiration Date"), the Prospectus (unless the term "Prospectus"
refers to a prospectus that has been provided to the Dealer Managers by
the Trust for use in connection with the Offer but which differs from
the Prospectus on file with the Commission at the time the Registration
Statement becomes effective, in which case at the time such prospectus
is first provided to the Dealer Managers for such use) and the other
Offering Materials will not contain an untrue statement of a material
fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading; provided, however, that the representations
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and warranties in this subsection shall not apply to statements in or
omissions from the Registration Statement or Prospectus made in
reliance upon and in conformity with information furnished to the Trust
in writing by the Dealer Managers expressly for use in the Registration
Statement or Prospectus.
(ii) The accountants who certified the financial statements
included in the Registration Statement are independent public
accountants as required by the 1933 Act, the 1940 Act and the Rules and
Regulations.
(iii) The financial statements included in the Registration
Statement present fairly the financial position of the Trust as at the
date indicated and the results of its operations for the period
specified; such financial statements have been prepared in conformity
with generally accepted accounting principles; and the information in
the Prospectus under the heading "Financial Highlights and Investment
Performance" -- Portfolio Characteristics and Composition" sets forth
the composition of the investment portfolio of the Trust as of its
date.
(iv) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as
otherwise stated therein, (A) there has been no material adverse
change, or any development involving a prospective material adverse
change, in the condition (financial or otherwise) or management of the
Trust, or in the earnings, business affairs or business prospects of
the Trust, whether or not arising in the ordinary course of business,
(B) there have been no transactions entered into by the Trust that are
material to the Trust, other than those in the ordinary course of
business, and (C) there has been no dividend or distribution of any
kind declared, paid or made by the Trust on any class of its capital
stock.
(v) The Trust has been duly organized and is validly existing
as a business trust in good standing under the laws of the State of
Massachusetts with trust power and
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authority to own, lease and operate its properties and conduct its
business as described in the Registration Statement and the Prospectus;
the Trust is duly qualified as a foreign trust to transact business and
is in good standing in each jurisdiction in which the failure to so
qualify, either individually or in the aggregate, would have a material
adverse effect upon the operations or financial condition of the Trust,
and the Trust has no subsidiaries.
(vi) The Trust is registered with the Commission under the 1940
Act as a closed-end diversified management investment company, and no
order of suspension or revocation of such registration has been issued
or proceedings therefor initiated or threatened by the Commission.
(vii) The authorized, issued and outstanding shares of
beneficial interest of the Trust as of the date hereof is as set forth
in the Prospectus under the caption "Description of the Common Shares";
the outstanding Common Shares have been duly authorized by all
requisite corporate action on the part of the Trust and are validly
issued and fully paid and non-assessable by the Trust; the Rights and
the Shares have been duly authorized by all requisite corporate action
on the part of the Trust for issuance pursuant to the Offer; the Shares
have been duly authorized by all requisite corporate action on the part
of the Trust for sale pursuant to the terms of the Offer and, when
issued and delivered by the Trust pursuant to the terms of the Offer
against payment of the consideration set forth in the Prospectus, will
be validly issued and fully paid and non-assessable by the Trust; the
Common Shares, the Rights and the Shares conform in all material
respects to the descriptions thereof set forth in the Prospectus under
the captions "Description of the Common Shares" and "The Offer"; and
the issuance of each of the Rights and the Shares is not subject to
preemptive rights.
(viii) (A) The Trust is not in any material violation of its
Agreement and Declaration of Trust, as amended (the "Declaration"), or
as supplemented by its by-laws (the "By-Laws") or in default in the
performance or
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observance of any material obligation, agreement, covenant or condition
contained in any material contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which it is a party or by
which it or its properties may be bound; (B) (i) the execution and
delivery of each of this Agreement, the Investment Management Agreement
referred to in the Prospectus (the "Investment Management Agreement"),
the Administration Agreement referred to in the Prospectus (the
"Administration Agreement"), the Custodial Agreement referred to in the
Prospectus (the "Custodial Agreement") and the Subscription Rights
Agency Agreement referred to in the Prospectus (the "Subscription
Rights Agency Agreement") and the consummation of the transactions
contemplated herein and therein have been duly authorized by all
necessary trustee action of the Trust and will not conflict with or
constitute a breach of, or, with or without giving notice or the lapse
of time or both, a default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or
assets of the Trust pursuant to any material contract, indenture,
mortgage, loan agreement, note, lease or other instrument to which the
Trust is a party or by which it may be bound or to which any of the
property or assets of the Trust is subject, nor will such action result
in any violation of the provisions of the Declaration or By-Laws or, to
the best knowledge of the Trust and the Investment Manager, any law,
administrative regulation or administrative or court decree applicable
to the Trust, and no consent, approval, authorization or order of any
court or governmental authority or agency is required for the
consummation by the Trust of the transactions contemplated by this
Agreement and the Subscription Rights Agency Agreement except such as
has been obtained under the 1940 Act or as may be required under the
1933 Act, state securities or Blue Sky laws or foreign securities laws
in connection with the Offer, (ii) each complies with all applicable
provisions of the 1940 Act, except that with respect to this Agreement,
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no representation is made as to compliance with Section 17(i) of the
1940 Act, and (iii) each is in full force and effect and constitutes a
valid and binding obligation of the Trust, enforceable in accordance
with its terms, except that with respect to this Agreement, no
representation is made as to compliance with Section 17(i) of the 1940
Act, and subject, as to enforcement, to bankruptcy, insolvency,
reorganization, or other similar laws relating to or affecting
creditors' rights generally and to general principles of equity.
(ix) The Trust owns or possesses or has obtained all material
governmental licenses, permits, consents, orders, approvals and other
authorizations necessary to lease or own, as the case may be, and to
operate its properties and to carry on its businesses as contemplated
in the Prospectus, and the Trust has not received any notice of
proceedings relating to the revocation or modification of any such
licenses, permits, consents, orders, approvals or authorizations.
(x) There is no action, suit or proceeding before or by any
court or governmental agency or body, domestic or foreign, now pending,
or, to the knowledge of the Trust or the Investment Manager, threatened
against or affecting the Trust, which might result in any material
adverse change in the condition, financial or otherwise, business
affairs or business prospects of the Trust or materially and adversely
affect the properties or assets of the Trust; and there are no material
contracts or documents of the Trust that are required to be filed as
exhibits to the Registration Statement by the 1933 Act, the 1940 Act or
the Rules and Regulations that have not been so filed.
(xi) The Trust owns or possesses, or can acquire on reasonable
terms, adequate trademarks, service marks and trade names necessary to
conduct its business as described in the Registration Statement, and
the Trust has not received any notice of infringement of or conflict
with asserted rights of others with respect to any trademarks, service
marks or trade names that, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would materially
adversely affect the conduct of the business, operations, financial
condition or income of the Trust.
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(xii) Since the date of its organization, the Trust has
qualified as a regulated investment company that is entitled to the
benefits of Subchapter M of the Internal Revenue Code of 1986, as
amended ("Subchapter M of the Code") (except that the Investment
Manager only makes such representation as of April 7, 1995, the date
that it first became the Investment Manager) and intends to continue so
to qualify. In addition, the Trust intends to direct the investment of
the proceeds of the Offer in such a manner as to comply with the
requirements of Subchapter M of the Code.
(xiii) The Shares shall have been approved for listing, subject
to official notice of issuance, on the New York Stock Exchange by the
Expiration Date.
(xiv) The Trust has not, directly or indirectly, (i) taken any
action designed to cause or result in, or that has constituted or might
reasonably be expected to constitute, the stabilization or manipulation
of the price of any security of the Trust to facilitate the sale or
resale of the Shares or (ii) since the filing of the Registration
Statement, (A) sold, bid for, purchased, or paid anyone any
compensation for soliciting purchases of, the Common Shares or (B) paid
or agreed to pay to any person any compensation for soliciting another
to purchase any other securities of the Trust (except for the
solicitation of exercises of Rights pursuant to this Agreement).
(b) The Investment Manager represents and warrants to the Dealer
Managers as of the date hereof and as of the Representation Date as follows:
(i) The Investment Manager has been duly organized as a
corporation under the laws of the State of Delaware with corporate
power and authority to conduct its business as described in the
Prospectus; the Investment Manager is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction in which the failure to so qualify, either individually or
in the aggregate, would have a material
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adverse effect upon the operations or financial condition of the
Investment Manager.
(ii) The Investment Manager is duly registered as an investment
adviser under the Investment Advisers Act of 1940, as amended (the
"Advisers Act"), and is not prohibited by the Advisers Act or the 1940
Act, or the rules and regulations under such acts, from acting as
Investment Manager to the Trust under the terms of the Investment
Management Agreement as contemplated by the Prospectus.
(iii) The description of the Investment Manager in the
Prospectus is true and correct in all material respects and does not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to
make the statements therein not misleading; and there are no pending
legal proceedings that would be required to be described under Item 12
of Form N-2.
(iv) Each of this Agreement and the Investment Management
Agreement has been duly authorized, executed and delivered by the
Investment Manager; each of this Agreement and the Investment
Management Agreement is in full force and effect and constitutes a
valid and binding obligation of the Investment Manager, enforceable in
accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization or other similar laws relating to or
affecting creditors' rights generally and to general principles of
equity; and neither the execution and delivery of this Agreement nor
the performance by the Investment Manager of its obligations hereunder
or under the Investment Management Agreement will conflict with, or
result in a breach of, any of the terms and provisions of, or
constitute, with or without giving notice or lapse of time or both, a
material default under any agreement or instrument to which the
Investment Manager is a party or by which the Investment Manager is
bound, or any law, order, rule or regulation applicable to it of any
jurisdiction, court, federal or state regulatory body, administrative
agency or other governmental body, stock exchange or
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securities association having jurisdiction over the Investment Manager
or its properties or operations.
(v) The Investment Manager has the financial resources
available to it necessary for the performance of its services and
obligations as contemplated in the Prospectus.
(vi) The Investment Manager has not, directly or indirectly,
(i) taken any action designed to cause or result in, or that has
constituted or reasonably might be expected to constitute, the
stabilization or manipulation of the price of any security of the Trust
to facilitate the sale or resale of the Shares or (ii) since the filing
of the Registration Statement, (A) sold, bid for, purchased, or paid
anyone any compensation for soliciting purchases of the Common Shares
or (B) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Trust
(except for the solicitation of exercises of Rights pursuant to this
Agreement).
(vii) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as
otherwise stated therein, there has been no material adverse change, or
any development involving a prospective material adverse change, in the
condition (financial or otherwise) or management of the Investment
Manager, or in the earnings, business affairs or business prospects of
the Investment Manager, whether or not arising in the ordinary course
of business.
(viii) There is no action, suit or proceeding before or by any
court or governmental agency or body, domestic or foreign, now pending,
or, to the knowledge of the Investment Manager, threatened against or
affecting the Investment Manager, which might result in any material
adverse change in the condition, financial or otherwise, business
affairs or business prospects of the Manager or materially and
adversely affect the properties or assets of the Investment Manager;
and there are no material contracts or documents of the Investment
Manager that are required to
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be disclosed in the Registration Statement by the 1933 Act, the 1940
Act or by the Rules and Regulations that have not been so disclosed
therein.
(c) Any certificate signed by any officer of the Trust or the
Investment Manager and delivered to the Dealer Managers or counsel for the
Dealer Managers shall be deemed a representation and warranty by the Trust or
the Investment Manager, as the case may be, to the Dealer Managers, as to the
matters covered thereby.
SECTION 2. Agreement to Act as Dealer Managers.
(a) On the basis of the representations and warranties contained
herein, and subject to the terms and conditions of this Agreement and the Offer:
(i) The Trust hereby appoints the Dealer Managers and other
soliciting dealers entering into a Soliciting Dealer Agreement with the
Dealer Managers (together, the "Soliciting Dealers") in the form
attached hereto as Exhibit A (the "Soliciting Dealer Agreement") to
solicit, in accordance with the 1933 Act, the 1940 Act, the Securities
Exchange Act of 1934 (the "Exchange Act"), and the Conduct Rules of the
National Association of Securities Dealers, Inc. (the "NASD"), and
their customary practice, the exercise of the Rights, subject to the
terms and conditions of this Agreement and the procedures described in
the Registration Statement; and
(ii) The Trust agrees to furnish, or cause to be furnished, to
the Dealer Managers, lists, or copies of those lists, showing the names
and addresses of, and number of shares of Common Shares held by,
Holders as of the Record Date, and the Dealer Managers agree to use
such information only in connection with the Offer, and not to furnish
the information to any other person except for securities brokers and
dealers that the Dealer Managers have requested to solicit exercises of
Rights.
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(b) Each of the Dealer Managers agrees to provide to the Trust, in
addition to the services described in paragraph (a) of this Section 2, financial
advisory and marketing services in connection with the Offer.
(c) The Trust and the Dealer Managers agree that the Dealer
Managers are independent contractors with respect to the solicitation of the
exercise of Rights and the performance of financial advisory and marketing
services to the Trust contemplated by this Agreement.
(d) In rendering the services contemplated by this Agreement, none
of the Dealer Managers will be subject to any liability to the Trust and the
Investment Manager, or to any of their respective affiliates, for any act or
omission on the part of any securities broker or dealer (except with respect to
the Dealer Managers acting in such capacity) or any other person, and none of
the Dealer Managers will be liable for any of their respective acts or omissions
in performing any of their respective obligations under this Agreement, except
for any losses, claims, damages, liabilities and expenses determined in a final
judgment by a court of competent jurisdiction to have resulted from a Dealer
Manager's reckless disregard of its obligations and duties under this Agreement
or a Dealer Manager's bad faith, gross negligence or willful misconduct in such
acts or omissions.
SECTION 3. The Dealer Manager Fee and Reallowance. In full payment
for services rendered and to be rendered hereunder by the Dealer Managers, the
Trust agrees to pay the Dealer Managers a fee for their financial advisory,
marketing and soliciting services equal to 3.50% of the aggregate Subscription
Price for the Shares issued pursuant to the Offer (the "Dealer Manager Fee").
The Dealer Managers agree with the Trust that the Dealer Managers will reallow a
concession of 2.25% of the Subscription Price per Share for each Share issued
pursuant to the Offer (a "Reallowance") to the broker-dealer designated on the
applicable portion of the form used by the Holder of such Share to exercise
Rights, provided, however, that the Dealer Managers will pay such Reallowance
only if the designated broker-dealer has executed a confirmation accepting the
terms and
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conditions of, and subject, however, to the conditions and restrictions in, the
Soliciting Dealer Agreement. Payment to the Dealer Managers by the Trust will be
by wire transfer of same day funds to an account or accounts identified by the
Dealer Managers. Such payment will be made on the day after the final payment
for Shares is due as set forth in the Prospectus. Payment of the Reallowance to
Soliciting Dealers that executed a confirmation will be made by the Dealer
Managers or their agent directly to such Soliciting Dealers, as the case may be,
by U.S. dollar checks drawn upon an account at a bank in New York City. Such
payments to such Soliciting Dealers shall be made as soon as practicable after
payment of the Dealer Manager Fee is made to the Dealer Managers.
SECTION 4. Covenants of the Trust. The Trust covenants with the
Dealer Managers as follows:
(a) The Trust will use its best efforts (i) to cause the
Registration Statement to become effective under the 1933 Act, and (ii) if
required, to cause the issuance of any orders exempting the Trust from any
provisions of the 1940 Act and will advise the Dealer Managers promptly as to
the time at which any such orders are granted.
(b) The Trust will orally notify the Dealer Managers promptly, and
confirm the notice in writing, of the (i) effectiveness of the Registration
Statement and any amendment thereto (including any post-effective amendment),
(ii) receipt of any comments from the Commission, (iii) request by the
Commission for any amendment to the Registration Statement, any amendment or
supplement to the Prospectus or additional information, (iv) issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or the initiation of any proceedings for that purpose, (v) issuance by
the Commission of an order of suspension or revocation of the notification on
Form N-8A of registration of the Trust as an investment company under the 1940
Act or the initiation of any proceeding for that purpose and (vi) suspension of
the qualification of the Shares or the Rights for offering or sale in any
jurisdiction. The Trust will make every reasonable effort to prevent the
issuance of any stop order described in subsection (iv) hereunder or any order
of
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suspension or revocation described in subsection (v) or subsection (vi)
hereunder and, if any such stop order or order of suspension or revocation is
issued, to obtain the lifting thereof at the earliest possible moment.
(c) The Trust will give the Dealer Managers notice of its
intention to file any amendment to the Registration Statement (including any
post-effective amendment) or any amendment or supplement to the Prospectus
(including any revised prospectus that the Trust proposes for use by the Dealer
Managers in connection with the Offer, which differs from the prospectus on file
at the Commission at the time the Registration Statement becomes effective,
whether such revised prospectus is required to be filed pursuant to Rule 497(c)
or Rule 497(h) of the Rules and Regulations), whether pursuant to the 1940 Act,
the 1933 Act, or otherwise, and will furnish the Dealer Managers with copies of
any such amendment or supplement within a reasonable amount of time prior to
such proposed filing or use, as the case may be, and will not file any such
amendment or supplement to which the Dealer Managers or counsel for the Dealer
Managers reasonably shall object.
(d) The Trust will deliver to each of the Dealer Managers, as soon
as practicable, two copies of the Registration Statement as originally filed and
of each amendment thereto, in each case with two sets of the exhibits filed
therewith.
(e) The Trust will furnish to each of the Dealer Managers, from
time to time during the period when the Prospectus is required to be delivered
under the 1933 Act, such number of copies of the Prospectus (as amended or
supplemented) as each of the Dealer Managers reasonably may request for the
purposes contemplated by the 1933 Act or the Rules and Regulations.
(f) If any event shall occur as a result of which it is necessary,
in the reasonable opinion of counsel for the Dealer Managers, to amend or
supplement the Registration Statement or the Prospectus in order to make the
Prospectus not misleading in the light of the circumstances existing at the time
it is delivered to a Holder, the Trust will forthwith amend or supplement the
Prospectus by preparing and filing with the
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Commission (and furnishing to the Dealer Managers a reasonable number of copies
of) an amendment or amendments of the Registration Statement or an amendment or
amendments of, or a supplement or supplements to, the Prospectus (in form and
substance satisfactory to counsel for the Dealer Managers) that will amend or
supplement the Registration Statement or the Prospectus so that the Prospectus
will not contain an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances existing at the time the Prospectus is delivered to a Holder,
not misleading.
(g) The Trust will endeavor, in cooperation with the Dealer
Managers, to qualify the Rights and the Shares for offering and sale under the
applicable securities laws of such states and other jurisdictions of the United
States as the Dealer Managers may designate, and will maintain such
qualifications in effect for as long as may be necessary to complete the
distribution of the Shares. The Trust will file such statements and reports as
may be required by the laws of each jurisdiction in which the Shares have been
qualified as above provided.
(h) The Trust will make generally available to its security
holders as soon as practicable, but no later than 60 days after the close of the
period covered thereby, an earning statement (in form complying with the
provisions of Rule 158 of the Rules and Regulations) covering a twelve-month
period beginning not later than the first day of the Trust's fiscal quarter next
following the "effective" date (as defined in said Rule 158) of the Registration
Statement.
(i) For a period of 180 days from the date of this Agreement, the
Trust will not, without your prior consent, offer or sell, or enter into any
agreement to sell, any equity or equity-related securities of the Trust other
than the Shares and the Common Shares issued in reinvestment of dividends or
distributions or the related Dividend Reinvestment and Cash Purchase Plan
(including distributions that give Holders the option either to reinvest their
distributions or receive such distributions in cash).
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(j) The Trust will use its best efforts to maintain its
qualification as a regulated investment company entitled to the benefits of
Subchapter M of the Code.
(k) The Trust will advise or cause the subscription agent for the
Offer (the "Subscription Agent") to advise the Dealer Managers and each
Soliciting Dealer from day to day during the period of, and promptly after the
termination of, the Offer, as to all names and addresses of Holders exercising
Rights, the total number of Rights exercised by each Holder during the
immediately preceding day, indicating the total number of Rights verified to be
in proper form for exercise, rejected for exercise and being processed and, for
each of the Dealer Managers and each Soliciting Dealer, the number of Rights
exercised for Shares on exercise forms indicating one of the Dealer Managers or
such Soliciting Dealer as the broker-dealer with respect to such exercise, and
as to such other information as the Dealer Managers may reasonably request. The
Trust also will notify the Dealer Managers and each Soliciting Dealer, not later
than 5:00 P.M., New York City time, on the first business day following the
Expiration Date, of the total number of Rights exercised and Shares related
thereto, the total number of Rights verified to be in proper form for exercise,
rejected for exercise and being processed and, for each of the Dealer Managers
and each Soliciting Dealer, the number of Rights exercised for Shares on
exercise forms indicating the Dealer Manager or such Soliciting Dealer as the
broker-dealer with respect to such exercise, and as to such other information as
the Dealer Managers may reasonably request.
(l) The Trust and the Investment Manager will not, directly or
indirectly, (i) take any action designed to cause or result in, or that has
constituted or might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Trust to facilitate the sale or
resale of the Shares or (ii) sell, bid for, purchase, or pay anyone any
compensation for soliciting purchases of the Shares or pay or agree to pay any
person any compensation for soliciting another to purchase any other securities
of the Trust (except for the sale of Shares under this Agreement).
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SECTION 5. Payment of Expenses.
(a) The Trust will pay all expenses incident to the performance of
its obligations under this Agreement, including, but not limited to, expenses
relating to (i) the printing and filing of the registration statement as
originally filed and of each amendment thereto, (ii) the preparation, issuance
and delivery of the certificates for the Shares, (iii) the reasonable fees and
disbursements of the Trust's counsel and accountants, the Information Agent and
the Subscription Agent, (iv) the qualification of the Rights and the Shares
under securities laws in accordance with the provisions of Section 4(g) of this
Agreement, including filing fees and any reasonable fees or disbursements of
counsel for the Dealer Managers in connection therewith and in connection with
the preparation of the Blue Sky Survey, (v) the printing and delivery to the
Dealer Managers of copies of the registration statement as originally filed and
of each amendment thereto, of the preliminary prospectus, of the Prospectus and
any amendments or supplements thereto, of this Agreement and of the Soliciting
Dealer Agreement, (vi) the printing and delivery of copies of the Blue Sky
Survey, (vii) the fees and expenses incurred in connection with the listing of
the Shares on the New York Stock Exchange, (viii) the filing fees of the
Commission and the National Association of Securities Dealers, Inc., (ix) the
printing, mailing and delivery expenses incurred in connection with the Offering
Materials and (x) the out-of-pocket expenses incurred by the Officers of the
Trust in connection with the Offer.
(b) In addition to any fees that may be payable to the Dealer
Managers under this Agreement, the Trust agrees to reimburse the Dealer Managers
upon request made from time to time for their reasonable expenses incurred in
connection with their activities under this Agreement, in an aggregate amount
not to exceed $150,000, including the fees and disbursements of their legal
counsel.
(c) If this Agreement is terminated by the Dealer Managers in
accordance with the provisions of Section 6 or Section 9(a)(i) or 9(a)(ii), the
Trust shall reimburse the Dealer Managers for all of their reasonable
out-of-pocket expenses,
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including the fees and disbursements of counsel for The Dealer Managers. In the
event the transactions contemplated hereunder are not consummated, the Trust
agrees to pay all of the costs and expenses set forth in paragraphs (a) and (b)
of this Section 5 that the Trust would have paid if such transactions had been
consummated.
(d) The Investment Manager agrees that, to the extent the Trust
fails to fulfill its obligations in paragraphs (b) and (c) of this Section 5,
the Investment Manager will pay all the costs and expenses set forth in this
Section 5. The Investment Manager hereby abandons and waives any right that the
Investment Manager may have at any time under any applicable laws, existing or
future, to require that recourse be made to the assets of the Trust before any
claim is enforced against the Investment Manager in respect of the Investment
Manager's obligations under this paragraph (d) of this Section 5. The Investment
Manager agrees that if at any time the Investment Manager is sued in respect of
its obligations under this paragraph (d) of this Section 5 and the Trust is not
also sued in respect of its obligations under this Section 5, the Investment
Manager shall not claim that the Trust be made a party to such proceedings
against the Investment Manager.
SECTION 6. Conditions of Dealer Managers' Obligations. The
obligations of the Dealer Managers hereunder are subject to the accuracy of the
respective representations and warranties of each of the Trust and the
Investment Manager, herein contained, to the performance by each of them of each
of their respective obligations hereunder, and to the following further
conditions:
(a) The Registration Statement shall have become effective not
later than 5:30 P.M., New York City time, on the date of this Agreement, or at a
later time and date not later, however, than 5:30 P.M. on the first business day
following the date hereof, or at such later time and date as may be approved by
the Dealer Managers, and, at the commencement of the Offer, no stop order
suspending the effectiveness of the Registration Statement shall have been
issued under the 1933 Act or proceedings therefor initiated or threatened by the
Commission.
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(b) On the date of this Agreement, the Dealer Managers shall
have received:
(1) The favorable opinion, dated as of the date of this
Agreement, of Dechert Price & Rhoads, general counsel for the Trust and the
Investment Manager, in form and substance satisfactory to counsel for the Dealer
Managers, which opinion may rely, in part, as to matters of Delaware law, upon
an opinion from other counsel to the Trust or the Investment Manager subject to
the approval of such counsel by the Dealer Managers, to the effect that:
(i) The Trust has been duly established and is validly
existing as a business trust in good standing under the laws of the
Commonwealth of Massachusetts, and the Investment Manager has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the State of Delaware.
(ii) Each of the Trust and the Investment Manager has the trust
and corporate power and authority, respectively, to own, lease and
operate its respective properties and conduct its respective business
as described in the Registration Statement and the Prospectus.
(iii) Each of the Trust and the Investment Manager is duly
qualified as a foreign trust and corporation, respectively, to transact business
and is in good standing in the jurisdiction of its principal place of business.
(iv) The Trust has an authorized, issued and outstanding
capitalization as set forth in the Prospectus. All of the outstanding
Common Shares have been duly authorized by requisite corporate action
on the part of the Trust and validly issued, are fully paid and
non-assessable by the Trust and conform to the description thereof in
the Prospectus.
(v) The Rights and the Shares have been duly authorized for
issuance pursuant to the Offer; the Shares
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have been duly authorized for sale pursuant to the Offer and, when the
Shares are issued and delivered by the Trust pursuant to the Offer
against payment of the consideration set forth in the Prospectus, the
Shares will be validly issued and fully paid and non-assessable by the
Trust; the issuance of the Rights and the Shares is not subject to any
preemptive or other rights to subscribe for any of the Shares under any
indenture, mortgage, deed of trust, lease or other agreement or
instrument to which the Trust is a party or by which the Trust or any
of its properties are bound, or under the Declaration or By-Laws of the
Trust, or under Massachusetts General Laws; the statements set forth in
the Prospectus under the headings "Description of the Common Shares"
and "The Offer -- Employee Plan Considerations", insofar as such
statements constitute a summary of legal matters or documents referred
to therein, are accurate and provide a fair summary of such legal
matters or documents.
(vi) This Agreement has been duly authorized, executed
and delivered by the Trust and the Investment Manager, complies with
all applicable provisions of the 1940 Act, the Advisers Act and the
rules and regulations under such acts and constitutes a valid and
binding agreement of the Trust and the Investment Manager, enforceable
in accordance with its terms (except that with respect to this
Agreement, no representation is made as to compliance with Section
17(i) of the 1940 Act), subject, as to enforcement, to bankruptcy,
insolvency, reorganization and other laws of general applicability
relating to or affecting creditors' rights and to general equity
principles.
(vii) The Investment Management Agreement has been duly
authorized, executed and delivered by the Trust and the Investment
Manager, complies as to form in all material respects with all
applicable provisions of the 1940 Act, the Advisers Act and the rules
and regulations under such acts and constitutes the valid and binding
obligation of each of the Trust and the Investment Manager, enforceable
in accordance with its terms, subject, as to enforcement, to
bankruptcy, insolvency, reorganization and other laws of
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general applicability relating to or affecting creditors' rights and to
general equity principles.
(viii) Each of the Administration Agreement, the
Subscription Rights Agency Agreement and the Custodial Agreement has
been duly authorized, executed and delivered by the Trust and complies
as to form in all material respects with all applicable provisions of
the 1940 Act and the rules and regulations thereunder, and each
constitutes the valid and binding obligation of the Trust, enforceable
in accordance with its terms, subject, as to enforcement, to
bankruptcy, insolvency, reorganization and other laws of general
applicability relating to or affecting creditors' rights and to general
equity principles.
(ix) The Registration Statement is effective under the 1933 Act
and, to the best of such counsel's knowledge and information, no stop
order suspending the effectiveness of the Registration Statement has
been issued under the 1933 Act and no proceedings therefor have been
initiated or threatened by the Commission.
(x) The Registration Statement and the Prospectus (other than
the financial statements and other financial information included
therein, as to which no opinion need be rendered) comply as to form in
all material respects with the requirements of the 1933 Act and the
1940 Act and the Rules and Regulations.
(xi) To the best of such counsel's knowledge and information,
there are no legal or governmental proceedings pending or threatened
against the Trust or the Investment Manager that are required to be
disclosed in the Registration Statement and the Prospectus, other than
those disclosed therein.
(xii) To the best of such counsel's knowledge and information,
there are no contracts, indentures, mortgages, loan agreements, notes,
leases or other instruments of the Trust or the Investment Manager that
are required to be described or referred to in the Registration
Statement or to
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be filed as exhibits thereto other than those respectively described or
referred to therein or filed as exhibits thereto, the descriptions
thereof and references thereto are correct in all material respects,
and no default exists in the due performance or observance of any
material obligation, agreement, covenant or condition contained in any
contract, indenture, loan agreement, note or lease so described,
referred to or filed.
(xiii) No consent, approval, authorization or order of any court
or governmental authority or agency is required in connection with the
sale of the Shares pursuant to the Offer, except such as has been
obtained under the 1933 Act, the 1940 Act or the Rules and Regulations
or such as may be required under state securities laws; and to the best
of such counsel's knowledge and information, the execution, delivery
and performance of, and the consummation of the transactions
contemplated by, (x) this Agreement by the Trust and the Investment
Manager, (y) the Investment Management Agreement by the Trust and the
Investment Manager or (z) the Administration Agreement and the
Custodial Agreement by the Trust, will not conflict with, or constitute
or result in a breach or violation by the Trust or the Investment
Manager of or a default under, any of the terms or provisions of, (i)
any contract, indenture, mortgage, loan agreement, note, lease or other
instrument known to such counsel to which the Trust or the Investment
Manager is a party or by which any of them is bound or to which any of
their property or assets are subject, (ii) the provisions of the
Declaration or By-Laws of the Trust and the charter and by-laws of the
Investment Manager or (iii) any statute or any order, rule or
regulation known to such counsel of any court or governmental agency or
body applicable to the Trust or the Investment Manager or any of their
properties.
(xiv) The Trust is registered with the Commission under the 1940
Act as a closed-end diversified management investment company, and all
required action has been taken by the Trust under the 1933 Act, the
1940 Act and the Rules and Regulations to make and consummate the
Offer; the
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provisions of the Declaration and By-Laws of the Trust comply in all
material respects with the requirements of the 1940 Act and the rules
and regulations thereunder; and, to the best of such counsel's
knowledge and information, no order of suspension or revocation of such
registration under the 1940 Act, pursuant to Section 8(e) of the 1940
Act, has been issued or proceedings therefor initiated or threatened by
the Commission.
(xv) The information in the Prospectus under the captions "The
Offer -- Certain Federal Income Tax Consequences of the Offer" and "Tax
Matters", to the extent that it constitutes matters of law or legal
conclusions thereunder, has been reviewed by such counsel and is
accurate and correct in all material respects.
(xvi) The Investment Manager is duly registered as an investment
adviser under the Advisers Act and is not prohibited by the Advisers
Act or the 1940 Act, or the rules and regulations under such acts, from
acting under the Investment Management Agreement for the Trust as
contemplated by the Registration Statement and the Prospectus.
(2) In giving their opinion required by subsection (b)(1) of this
Section , Dechert, Price & Rhoads shall additionally state that nothing has come
to such counsel's attention that would lead them to believe that the
Registration Statement (other than the financial statements and other financial
information included therein, as to which no belief need be stated), at the date
of this Agreement, contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus (other than the
financial statements and other financial information included therein, as to
which no belief need be stated), at the date of this Agreement, included an
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
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(3) The favorable opinion, dated as of the date of this
Agreement, of Cleary, Gottlieb, Steen & Hamilton, counsel for the Dealer
Managers, with respect to the issuance and sale of the Shares, and such other
related matters as the Dealer Managers may reasonably require.
(c) At the date of this Agreement, (i) the Registration
Statement and the Prospectus shall contain all statements that are required to
be stated therein in accordance with the 1933 Act, the 1940 Act and the Rules
and Regulations and in all material respects shall conform to the requirements
of the 1933 Act, the 1940 Act and the Rules and Regulations and the Registration
Statement and the Prospectus shall not contain any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, and no action, suit or proceeding at law or in equity
shall be pending or, to the knowledge of the Trust or the Investment Manager,
threatened against the Trust or the Investment Manager, that would be required
to be set forth in the Registration Statement and the Prospectus other than as
set forth therein, (ii) there shall not have been, since the respective dates as
of which information is given in the Registration Statement and the Prospectus,
any material adverse change in the condition, financial or otherwise, of the
Trust or in its earnings, business affairs or business prospects, whether or not
arising in the ordinary course of business, from that set forth in the
Registration Statement and Prospectus, (iii) the Investment Manager shall have
the financial resources available to it necessary for the performance of its
services and obligations as contemplated in the Registration Statement and the
Prospectus and (iv) no proceedings shall be pending or, to the knowledge of the
Trust or the Investment Manager, threatened against the Trust or the Investment
Manager, before or by any federal, state or other commission, board or
administrative agency wherein an unfavorable decision, ruling or finding would
materially and adversely affect the business, property, financial condition or
income of either the Trust or the Investment Manager, other than as set forth in
the Registration Statement and the Prospectus; and the Dealer Managers shall
have received, at the commencement date of the Offer, a certificate of the
President or Treasurer of each of the
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Trust and the Investment Manager, dated as of such date, confirming the
respective representations and warranties contained in Section 1 of this
Agreement and evidencing, to the best of his or her respective knowledge and
belief, after reasonable investigation, compliance with the appropriate
provisions of this subsection (c).
(d) At the time of execution of this Agreement, the
Dealer Managers shall have received from KPMG Peat Marwick LLP a letter, dated
such date in form and substance satisfactory to the Dealer Managers, to the
effect that:
(i) They are independent accountants with respect to the Trust
within the meaning of the 1933 Act, the 1940 Act and the Rules and
Regulations;
(ii) In their opinion, the audited financial statements
examined by them and included in the Registration Statement comply as
to form in all material respects with the applicable accounting
requirements of the 1933 Act and the 1940 Act and the Rules and
Regulations;
(iii) They have performed specified procedures, not constituting
an audit, including a reading of the latest available interim financial
statements of the Trust, a reading of the minute books of the Trust,
inquiries of officials of the Trust responsible for financial
accounting matters and such other inquiries and procedures as may be
specified in such letter, and on the basis of such inquiries and
procedures nothing came to their attention that caused them to believe
that (A) the unaudited financial statements as of August 31, 1996
included in the Registration Statement do not comply as to form in all
material respects with the applicable accounting requirements of the
1933 Act and the 1933 Act Regulations applicable to unaudited interim
financial statements included in registration statements or are not in
conformity with generally accepted accounting principles applied on a
basis substantially consistent with that of the audited financial
statements included in the Registration Statement and (B) at the date
of the latest available financial statements read by such accountants,
or
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at a subsequent specified date not more than three days prior to the
date of this Agreement, there was any change in the capital stock or
net assets of the Trust as compared with amounts shown on the statement
of net assets included in the Prospectus; and
(iv) In addition to the procedures referred to in clause (iii)
above, they have performed other specified procedures, not constituting
an audit, with respect to certain amounts, percentages, numerical data,
financial information and financial statements appearing in the
Registration Statement, which have previously been specified by you and
which shall be specified in such letter, and have compared certain of
such items with, and have found such items to be in agreement with, the
accounting and financial records of the Trust.
(e) On (i) the date of this Agreement and (ii) the day
immediately preceding the commencement of the Offer, the Trust, the Investment
Manager, and any other party affiliated to the Investment Manager that the Trust
and the Dealer Managers may agree to include, shall have furnished to the Dealer
Managers such further information, certificates and documents, dated as of the
date of this Agreement, as the Dealer Managers reasonably may request to
evidence the fulfillment of any of the agreements contained in Section 7 hereof.
(f) On (i) the date of this Agreement and (ii) the day
immediately preceding the commencement date of the Offer, the Trust, the
Investment Manager and Dechert, Price & Rhoads shall have furnished to the
Dealer Managers such information, certificates, documents and opinions, dated as
of, respectively, (i) the date of this Agreement and (ii) the day immediately
preceding the commencement date of the Offer, as the Dealer Managers reasonably
may require for the purpose of enabling counsel for the Dealer Managers to pass
upon the issuance of the Rights and the Shares and the sale of the Shares as
contemplated herein and in the Registration Statement and the Prospectus and to
pass upon related proceedings, or in order to evidence the accuracy of any of
the representations or warranties, or the fulfillment of any of the conditions,
herein contained; and all
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proceedings taken by the Trust and the Investment Manager in connection with the
issuance of the Rights and the Shares and sale of the Shares as contemplated
herein and in the Registration Statement shall be satisfactory in form and
substance to the Dealer Managers and counsel for the Dealer Managers.
If any condition specified in this Section shall not have been
fulfilled when and as required to be fulfilled, this Agreement may be terminated
by the Dealer Managers by notice to the Trust at any time at or prior to the
termination of the Offer, and such termination shall be without liability of any
party to any other party except as provided in Section 5.
SECTION 7. Indemnification and Contribution.
(a) Each of the Trust and the Investment Manager (together,
the "Indemnifying Parties") jointly and severally, agree to indemnify and hold
harmless each of the Dealer Managers and each of their affiliates, directors,
officers, employees, agents and controlling persons (each of the Dealer Managers
and each of such persons being an "Indemnified Party") as follows:
(i) from and against any and all loss, liability, claim,
damage and expense whatsoever, as incurred, joint or several, to which
such Indemnified Party may become subject under any applicable federal
or state law, or otherwise, and related to or arising out of (A) an
untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement (or any amendment thereto) and
the Prospectus or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary in order to
make the statements therein not misleading, (B) an untrue statement or
alleged untrue statement of a material fact contained in the Offering
Materials (or any amendment or supplement thereto), or the omission or
alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading, (C) any
breach by any of the Indemnifying Parties of any of their respective
representations, warranties and agreements contained in this
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Agreement or in any certificate or document furnished pursuant to
Section 6(c), 6(e) and 6(f) hereof, (D) the Trust's failure to make the
Offer, or its withdrawal, termination or extension of the Offer or any
other failure on its part to comply with the terms and conditions
specified in the Registration Statement or the Offering Materials, or
(E) the Offer, the engagement of the Dealer Managers pursuant to, and
the performance by the Dealer Managers of the services contemplated by,
this Agreement;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or investigation or proceeding by
any governmental agency or body, commenced or threatened, or of any
claim whatsoever based upon the occurrence of any matter described in
clause (i) above, if such settlement is effected with the written
consent of any of the Indemnifying Parties; and
(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by the Dealer
Managers), reasonably incurred in investigating, preparing or defending
against any litigation, or investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon the occurrence of any matter described in clause
(i) above, whether or not such Indemnified Party is a party and whether
or not such claim, action or proceeding is initiated or brought by or
on behalf of any of the Indemnifying Parties, to the extent that any
such expense is not paid under clause (i) or (ii) above.
This indemnity agreement will be in addition to any liability that any of the
Indemnifying Parties may otherwise have.
The Indemnifying Parties shall not, however, be liable to an
Indemnified Party for any loss, liability, claim, settlement, damage or expense
under (A) clauses (i)(A) and (B) of this subsection 7(a) to the extent arising
out of an untrue statement or omission or alleged untrue statement or omission
made in the Registration Statement or the Offering Materials in
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reliance upon and in conformity with written information furnished to the Trust
by or on behalf of the Dealer Managers expressly for use in the Registration
Statement (or any amendment thereto) or any Offering Materials (or any amendment
or supplement thereto) and (B) clause (i)(E) of this subsection 7(a) that is
found in a final judgment by a court of competent jurisdiction to have resulted
from the bad faith, willful misconduct or gross negligence of the Dealer
Managers or the reckless disregard by the Dealer Managers of their obligations
and duties hereunder.
Each of the Indemnifying Parties also agrees that no
Indemnified Party shall have any liability (whether direct or indirect, in
contract or tort or otherwise) to any of the Indemnifying Parties or their
respective security holders or creditors related to or arising out of the Offer
or the engagement of the Dealer Managers pursuant to, or the performance by the
Dealer Managers of the services contemplated by, this Agreement except to the
extent that any loss, liability, claim, damage or expense is found in a final
judgment by a court of competent jurisdiction to have resulted from the bad
faith, willful misconduct or gross negligence of such Indemnified Party or the
reckless disregard by the Indemnified Party of its obligations and duties under
the Dealer Manager Agreement.
Each of the Indemnifying Parties agrees that, without each of
the Dealer Managers' prior written consent, it will not settle, compromise or
consent to the entry of any judgment in any pending or threatened claim, action
or proceeding in respect of which indemnification could be sought under the
indemnification provisions of this Section 7 (whether or not the Dealer Managers
or any other Indemnified Party is an actual or potential party to such claim,
action or proceeding), unless such settlement, compromise or consent includes an
unconditional release of each Indemnified Party from all liability arising out
of such claim, action or proceeding.
(b) In circumstances in which the indemnity agreement provided
for in the preceding paragraphs of this Section 7 is unavailable or
insufficient, for any reason, to hold harmless an indemnified party in respect
of any losses, claims,
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damages or liabilities (or actions in respect thereof), each indemnifying party,
in order to provide for just and equitable contribution, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect (i) the relative benefits received by
the indemnifying party or parties on the one hand and the indemnified party on
the other from the Offer or (ii) if the allocation provided by the foregoing
clause (i) is not permitted by applicable law, not only such relative benefits
but also the relative fault of the indemnifying party or parties on the one hand
and the indemnified party on the other in connection with the statements or
omissions or alleged statements or omissions that resulted in such losses,
claims, damages or liabilities (or actions in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Indemnifying Parties on the one hand and the Dealer Managers on the other shall
be deemed to be in the same proportion as the total proceeds from the Offer
(before deducting expenses) received by the Trust bear to the total compensation
received by the Dealer Managers. The relative fault of the parties shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Trust or the Dealer
Managers, the parties' relative intents, knowledge, access to information and
opportunity to correct or prevent such statement or omission, and any other
equitable considerations appropriate in the circumstances. The Indemnifying
Parties and the Dealer Managers agree that it would not be equitable if the
amount of such contribution were determined by pro rata or per capita allocation
or by any other method of allocation that does not take into account the
equitable considerations referred to above in this paragraph (b).
Notwithstanding any other provision of this paragraph (b), no Dealer Manager
shall be obligated to make contributions hereunder that in the aggregate exceed
the respective amount of the compensation paid to it under this Agreement, less
the aggregate amount of any damages that it has otherwise been required to pay
in respect of the same or any substantially similar claim and the aggregate
amount of any Reallowance paid by the Dealer Managers to the Soliciting
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Dealers, and no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. For purposes of
this paragraph (b), each person, if any, who controls any of the Indemnifying
Parties or the Dealer Managers within the meaning of Section 15 of the 1933 Act
or Section 20 of the Exchange Act shall have the same rights to contribution as
the Indemnifying Parties or the Dealer Managers, as the case may be.
(c) In the event that an Indemnified Party is requested or
required to appear as a witness in any action brought by or on behalf of or
against the Trust in which such Indemnified Party is not named as a defendant,
each of the Indemnifying Parties, jointly and severally, agree to reimburse the
Dealer Managers for all reasonable expenses incurred by them in connection with
such Indemnified Party's appearing and preparing to appear as a witness,
including, without limitation, the fees and disbursements of its legal counsel,
and to compensate the Dealer Managers in an amount to be mutually agreed upon.
(d) Each of the Indemnifying Parties agrees to notify the
Dealer Managers promptly of the assertion against any of them or any other
person of any claim or the commencement of any action or proceeding relating to
a transaction contemplated by this Agreement. Promptly after receipt by an
Indemnified Party of written notice of any claim or commencement of any action
or proceeding with respect to which indemnification is being sought hereunder,
such Indemnified Party will notify the Trust and the Investment Manager in
writing of such claim or of the commencement of such action or proceeding, but
failure so to notify the Trust will not relieve any of the Indemnifying Parties
from any liability that they may have to such Indemnified Party under this
indemnification agreement except to the extent that any of the Indemnifying
Parties are materially prejudiced by such failure, and will not relieve any of
the Indemnifying Parties from any other liability that they may have to such
Indemnified Party.
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(e) Each of the Indemnifying Parties, jointly and severally,
agrees to indemnify each Soliciting Dealer and its affiliates and their
respective directors, officers, employees, agents and controlling persons to the
same extent and subject to the same conditions and to the same agreements,
including with respect to contribution, provided for in subsections (a), (b) and
(c) of this Section 7. This indemnity agreement will be in addition to any
liability that any of the Indemnifying Parties may otherwise have.
SECTION 8. Representations, Warranties and Agreements to
Survive Delivery. All representations, warranties and agreements contained in
this Agreement, or contained in certificates of officers of the Trust or the
Investment Manager submitted pursuant hereto, shall remain operative and in full
force and effect, regardless of any investigation made by or on behalf of the
Dealer Managers or any controlling person, or by or on behalf of the Trust or
the Investment Manager and shall survive delivery of the Shares pursuant to the
Offer.
SECTION 9. Termination of Agreement.
(a) This Agreement may be terminated in the sole discretion of
the Dealer Managers by notice to the Trust given at or prior to the termination
of the Offer in the event that the Trust and the Investment Manager shall have
failed, refused or been unable to perform all material obligations and satisfy
all material conditions on its part to be performed or satisfied hereunder at or
prior thereto or, if at or prior to the termination of the Offer,
(i) the Trust or the Investment Manager shall have sustained
any material loss or interference with its business or properties from
fire, accident or other calamity, whether or not covered by insurance,
or from any labor dispute or any legal or governmental proceeding or
there shall have been any material adverse change or any development
involving a prospective material adverse change (including without
limitation a change in management or control of the Trust or the
Investment Manager, as the case may be), in the condition (financial or
otherwise), business
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prospects, net worth or results of operations of the Trust or the
Investment Manager except in each case as described in or contemplated
by the Registration Statement and the Prospectus (exclusive of any
amendment or supplement thereto) and except for changes in the Trust's
net asset value due to its normal investment operations,
(ii) trading in the Common Shares shall have been suspended by
the Commission or the New York Stock Exchange,
(iii) there has occurred any material adverse change in the
existing political or economic conditions or in the financial markets
in the United States or elsewhere or any outbreak of hostilities or
other calamity or crisis or any escalation of existing hostilities the
effect of which is such as to make it, in the Dealer Managers'
judgment, impracticable to market the Shares or enforce contracts for
the sale of the Shares, or
(iv) trading generally on the New York Stock Exchange or the
National Association of Securities Dealers Automated Quotations System
shall have been suspended, or minimum or maximum prices for trading
have been fixed, or maximum ranges for prices for securities have been
required, by any of said exchanges or by order of the Commission or any
other governmental authority, or if a banking moratorium shall have
been declared by United States or New York authorities.
(b) If this Agreement is terminated pursuant to this Section ,
such termination shall be without liability of any party to any other party
except as provided in Section 5.
SECTION 10. Notices. All notices and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
mailed or transmitted by any standard form of written telecommunication. Notices
to the Dealer Managers shall be directed to Prudential Securities Incorporated,
One New York Plaza, New York, New York 10292, Attention: Equity Transactions
Group; notices to the Trust and the Investment Manager shall be sent to each of
them at Two Renaissance Square,
33
<PAGE> 35
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004, Attention: James M.
Hennessy.
SECTION 11. Parties. This Agreement shall inure to the benefit
of and be binding upon the Dealer Managers, the Trust and the Investment Manager
and their respective successors. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person, firm or
corporation, other than the parties hereto and their respective successors and
the controlling persons and officers and directors referred to in Section 7 and
their heirs and legal representatives, any legal or equitable right, remedy or
claim under or in respect of this Agreement or any provision herein contained.
This Agreement and all conditions and provisions hereof are intended to be for
the sole and exclusive benefit of the parties hereto and thereto and their
respective successors, and said controlling persons and officers and directors
and their heirs and legal representatives, and for the benefit of no other
person, firm or corporation.
As required by the Trust's Declaration, a copy of the Trust's
Declaration is on file with the Secretary of the Commonwealth of Massachusetts,
and notice is hereby given that this Agreement has been executed on behalf of
the Trust by officers and/or trustees of the Trust in their capacity as such and
not individually. The obligations of this Agreement shall be binding upon the
assets and property of the Trust and shall not be binding upon any trustee,
officer or shareholder of the Trust individually.
SECTION 12. Governing Law and Time. This Agreement shall be
governed by the laws of the State of New York applicable to agreements made and
to be performed in said State. Specified times of day refer to New York City
time.
If the foregoing is in accordance with your understanding of
our Agreement, please sign and return to us a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a single binding agreement
among the
34
<PAGE> 36
Dealer Managers, the Trust and the Investment Manager in accordance with its
terms.
Very truly yours,
PILGRIM AMERICA PRIME RATE TRUST
By:
-----------------------------
Name:
Title:
PILGRIM AMERICA INVESTMENTS, INC.
By:
------------------------------
Name:
Title:
35
<PAGE> 37
Confirmed and Accepted, as of the date first above written:
PRUDENTIAL SECURITIES INCORPORATED
By:
------------------------------------------
Name: Jean-Claude Canfin
Title: Director, Equity Transactions Group
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
By:
------------------------------------------
Name:
--------------------------
Title:
-------------------------
36
<PAGE> 1
EXHIBIT 2(h)(ii)
FORM OF SOLICITING DEALER AGREEMENT
<PAGE> 2
Exhibit A
October 18, 1996
SOLICITING DEALER AGREEMENT
Ladies and Gentlemen:
The Pilgrim America Prime Rate Trust, a Massachusetts business
trust (the "Trust"), proposes to issue to holders of record (the "Holders") of
its outstanding shares of beneficial interests (the "Common Shares"),
non-transferable rights entitling such Holders to subscribe for shares of Common
Shares and, subject to certain conditions, additional shares of Common Shares
pursuant to an over-subscription privilege (the "Offer"). The shares of Common
Shares for which Holders may subscribe pursuant to the Offer are herein referred
to as the "Shares". Pursuant to the terms of the Offer, the Trust is issuing
each Holder one non-transferable right (each a "Right" and collectively, the
"Rights") for each share of Common Shares held on the record date set forth in
the accompanying Prospectus (the "Prospectus"). Such Rights entitle Holders to
acquire during the subscription period set forth in the Prospectus (the
"Subscription Period"), and at the subscription price set forth in the
Prospectus (the "Subscription Price"), one Share for each five Rights held on
the terms and subject to the conditions set forth in the Prospectus. Pursuant to
the terms of the Offer, such Rights also entitle Holders to acquire during the
Subscription Period at the Subscription Price certain additional Shares on the
terms and conditions of the over-subscription privilege as set forth in such
Prospectus.
The undersigned, as the dealer managers (the "Dealer
Managers") named in the Prospectus, have entered into a Dealer Manager Agreement
dated October 18, 1996 with the Trust and Pilgrim America Investments, Inc., a
Maryland corporation (the "Investment Manager"), pursuant to which the
undersigned have agreed to form and manage, for purposes of soliciting exercises
of Rights pursuant to the Offer, a group of soliciting dealers, including the
undersigned, consisting of brokers and dealers who shall be members in good
standing of the National Association of Securities Dealers, Inc. (the "NASD") or
brokers or dealers not registered under the Securities Exchange Act of 1934 with
their principal place of
<PAGE> 3
business located outside the United States, its territories or possessions who
agree to solicit exercises of Rights only in accordance with the laws applicable
to such activities and agree to solicit no exercises of Rights within the United
States, its territories or its possessions or from persons who are nationals
thereof or residents therein and who agree, although not members of the NASD, to
conform to the Conduct Rules of the NASD, in soliciting exercises of Rights
outside the United States, its territories and possessions, to the same extent
as though they were members thereof (the members of such group being hereinafter
called the "Soliciting Dealers"). You are invited to become one of the
Soliciting Dealers and by your confirmation hereof you agree to act in such
capacity, in accordance with the terms and conditions herein and in your
confirmation hereof, to obtain exercises of Rights pursuant to the Offer.
1. Solicitation and Solicitation Material. Solicitation and
other activities by you hereunder shall be undertaken only in accordance with
this Agreement, the Securities Act of 1933 (the "Securities Act"), the
Securities Exchange Act of 1934 (the "Exchange Act"), and the applicable rules
and regulations of the Securities and Exchange Commission. Accompanying this
Agreement are copies of the following documents: the Prospectus describing the
terms of the Offer, an exercise form for the exercise of the Rights (an
"Exercise Form") and letters to stockholders. Additional copies of these
documents will be supplied in reasonable quantities upon your request. You agree
that during the period of the Offer you will not use any solicitation material
other than that referred to above and such as may hereafter be furnished to you
by the Trust through us.
2. Compensation of Soliciting Dealers. As compensation for the
services of the Soliciting Dealers hereunder, the Dealer Managers will reallow
to each Soliciting Dealer a concession of 2.25% of the subscription price per
Share purchased pursuant to the Offer through such Soliciting Dealer's efforts,
(excluding the exercise of Rights by a Soliciting Dealer for its own account or
for the account of any affiliate, other than a natural person, pursuant to the
Offer) (a "Reallowance"). A Soliciting Dealer, other than Prudential Securities
Incorporated acting in such capacity, shall be entitled to a Reallowance only
where the insertion of such Soliciting Dealer's name has been made on the
Exercise Form in the place so provided and where the Dealer Managers shall have
received from such Soliciting Dealer an executed copy of this Agreement in the
form hereof. Payment of such Reallowance will be made by the Dealer Managers or
their agent
2
<PAGE> 4
directly to such Soliciting Dealer by U.S. Dollar check drawn upon an account at
a bank in New York City. Such payments to Soliciting Dealers shall be made as
soon as practicable after payment of the Dealer Manager Fee is made to the
Dealer Managers.
No Reallowance shall be payable in respect of any particular
exercise of Rights if, in the opinion of counsel for the Dealer Managers, such
Reallowance cannot legally be paid in respect of such exercise of Rights because
of the provisions of applicable state law or for any other reason. In case of
any dispute or disagreement as to the amount of Reallowance payable to any
Soliciting Dealer hereunder or as to the proper recipient of any such
Reallowance, the decision of the Dealer Managers shall be conclusive. The
payment of any Reallowance to Soliciting Dealers shall be solely the
responsibility of the Dealer Managers, but the Dealer Managers shall have no
obligation or liability to any Soliciting Dealer for any obligation of the Trust
hereunder.
For the purpose of this Section 2, the Offer will expire on
the expiration date set forth in the Prospectus. No Reallowance will be payable
to Soliciting Dealers with respect to Rights exercised after expiration of the
Offer.
3. Trading. You represent to the Trust and the Dealer Managers
that you have not engaged, and agree that you will not engage, in any activity
in respect of the Rights or the Shares in violation of the Exchange Act,
including Rule 10b-6 and Rule 10b-8 thereunder. Your acceptance of a Reallowance
will constitute a representation that you are eligible to receive such
Reallowance and that you have complied with the preceding sentence and your
other agreements hereunder.
4. Unauthorized Information and Representations. Neither you
nor any other person is authorized by the Trust or the Dealer Managers to give
any information or make any representations in connection with this Agreement or
the Offer other than those contained in the Prospectus and other authorized
solicitation material furnished by the Trust through the Dealer Managers, and
you hereby agree not to use any solicitation material other than material
referred to in this Section 4 and not to give any unauthorized information or
make any unauthorized representations. Without limiting the generality of the
foregoing, you agree for the benefit of the Trust and the Dealer Managers not to
publish, circulate or otherwise use any other advertisement or solicitation
material without the prior approval of the Trust and the Dealer Managers. You
are not authorized to act as agent of the Trust or
3
<PAGE> 5
the Dealer Managers in any respect, and you agree not to act as such agent and
not to purport to act as such agent. On becoming a Soliciting Dealer and in
soliciting exercises of Rights, you agree for the benefit of the Trust and the
Dealer Managers to comply with any applicable requirements of the Securities
Act, the Exchange Act, the rules and regulations thereunder, any applicable
securities laws of any state or jurisdiction where such solicitations may
lawfully be made, and the applicable rules and regulations of any
self-regulatory organization or registered national securities exchange, and to
perform and comply with the agreements set forth in your confirmation of your
acceptance of this Agreement, a copy of the form of which is appended hereto.
5. Blue Sky and Securities Laws. The Dealer Managers assume no
obligation or responsibility in respect of the qualification of the Shares
issuable pursuant to the Offer or the right to solicit Rights under the laws of
any jurisdiction. The enclosed Blue Sky Memorandum indicates the states in which
it is believed that acceptances of the Offer may be solicited under the
applicable Blue Sky or securities laws. Under no circumstances will you as a
Soliciting Dealer engage in any activities hereunder in any state (a) that is
not listed in said enclosed Blue Sky Memorandum as a state in which acceptances
of the Offer may be solicited under the Blue Sky or securities law of such state
or (b) in which you may not lawfully so engage. The Blue Sky Memorandum shall
not be considered solicitation material as that term is herein used. You
authorize the undersigned to cause to be filed in the Department of State of the
State of New York a Further State Notice with respect to the Shares complying
with the provisions of Article 23-A of the General Business Law of the State of
New York, if required by such provisions. You agree that you will not engage in
any activities hereunder outside the United States except in jurisdictions where
such solicitations and other activities may lawfully be undertaken and in
accordance with the laws thereof.
6. Termination. This Agreement may be terminated by written or
telegraphic notice to you from the Dealer Managers, or to the Dealer Managers
from you, and in any case it will terminate upon the expiration or termination
of the Offer; provided, however, that such termination shall not relieve the
Dealer Managers of the obligation to pay when due any Reallowance payable to you
hereunder with respect to Shares acquired pursuant to the exercise of Rights
through the close of business on the date of such termination that are
thereafter exercised pursuant to the Offer or relieve the Trust or the
Investment Manager of each of their obligations referred to
4
<PAGE> 6
under Section 8 hereof, and shall not relieve you of any obligation or liability
under Sections 3, 4, 9 and 10 hereof.
7. Liability of the Dealer Managers. Nothing herein contained
shall constitute the Soliciting Dealers as partners with the Dealer Managers or
with one another, or agents of the Dealer Managers or the Trust, or shall render
the Trust liable for the obligations of the Dealer Managers or the obligations
of any Soliciting Dealers, or shall render the Dealer Managers liable for the
obligations of any Soliciting Dealers other than each of themselves nor
constitute the Trust or the Dealer Managers as the agent of any Soliciting
Dealer. The Trust, the Investment Manager and the Dealer Managers shall be under
no liability to any Soliciting Dealer or any other person for any act or
omission or any matter connected with this Agreement or the Offer, except that
the Trust and the Investment Manager shall be liable on the basis set forth in
Section 8 hereof to indemnify certain persons. You represent that you have not
purported, and agree that you will not purport, to act as agent of the Trust or
the Dealer Managers in any connection or transaction relating to the Offer.
8. Indemnification. Under the Dealer Manager Agreement, each
of the Trust and the Investment Manager has agreed to indemnify and hold
harmless the Dealer Managers, each Soliciting Dealer and each person, if any,
controlling the Dealer Managers or any Soliciting Dealer within the meaning of
Section 15 of the Securities Act against certain liabilities, including
liabilities under the Securities Act and the Exchange Act. By returning an
executed copy of this Agreement, you agree to indemnify the Trust, the
Investment Manager and the Dealer Managers (the "Indemnified Persons") against
losses, claims, damages and liabilities to which the Indemnified Persons may
become subject (a) as a result of your breach of your representations or
agreements made herein or (b) if you (as custodian, trustee or fiduciary or in
any other capacity) are acting on behalf of another entity that is soliciting
exercises of Rights pursuant to the Offer (a "Soliciting Entity"), as a result
of any breach by any such Soliciting Entity of the representations or agreements
made herein by the Soliciting Dealers to the same extent as if such Soliciting
Entity had executed the confirmation referred to in Section 13 hereof and was
therefore a Soliciting Dealer that had directly made such representations and
agreements. This indemnity agreement will be in addition to any liability that
you may otherwise have.
9. Delivery of Prospectus. You agree for the benefit of the
Trust and the Dealer Managers to deliver to each person who
5
<PAGE> 7
owns beneficially Common Shares registered in your name, and who exercises
Rights on an Exercise Form on which your name, to your knowledge, has been
inserted, a Prospectus prior to the exercise of such person's Rights.
10. Status of Soliciting Dealer. Your acceptance of a
Reallowance will constitute a representation to the Trust and the Dealer
Managers that you (i) have not purported to act as agent of the Trust or the
Dealer Managers in any connection or in any transaction relating to the Offer,
(ii) except to the extent that you have given the Dealer Managers prior written
notification, are not affiliated with the Trust, (iii) will not accept a
Reallowance from the Dealer Managers pursuant to the terms hereof with respect
to Shares purchased by you pursuant to an exercise of Rights for your own
account or the account of any affiliate, other than a natural person, (iv) will
not remit, directly or indirectly, any part of any Reallowance to any beneficial
owner of Shares purchased pursuant to the Offer, (v) agree to the amount of the
Reallowance and the terms and conditions set forth herein with respect to
receiving such Reallowance, (vi) have read and reviewed the Prospectus, and
(vii) are (a) a member in good standing of the NASD and will comply with Rules
2730, 2740 and 2750 of the Conduct Rules of the NASD or (b) a broker or dealer
with your principal place of business located outside the United States, its
territories or its possessions and not registered under the Exchange Act, and
you agree for the benefit of the Trust and the Dealer Managers (1) to solicit
exercises of Rights only in accordance with the laws applicable to such
activities and to solicit no exercises of Rights within the United States, its
territories or possessions or from persons who are nationals thereof or
residents therein, and (2) that, although not a member of the NASD, in acting
under this Agreement you will conform to the Conduct Rules of the NASD,
including Rules 2420, 2730, 2740, and 2750 thereof, in soliciting exercises of
Rights outside the United States, its territories and possessions to the same
extent as though you were a member thereof.
11. Notices. Any notice hereunder shall be in writing or by
telegram and if to you as a Soliciting Dealer shall be deemed to have been duly
given if mailed or telegraphed to you at the address to which this letter is
addressed, and if to the Dealer Managers, if delivered or sent to Prudential
Securities Incorporated at One New York Plaza, New York, New York 10292,
Attention: Equity Transactions Group.
6
<PAGE> 8
12. Parties in Interest. The Agreement herein set forth is
intended for the benefit of the Dealer Managers, the Soliciting Dealers, the
Trust, and the Investment Manager.
13. Confirmation. Please confirm your agreement to become one
of the Soliciting Dealers under the terms and conditions set forth herein and in
the attached confirmation by completing and executing the confirmation and
sending it via facsimile ((212) 778-3621/1564) to Prudential Securities
Incorporated, Attention: Ms. Adrienne Garofalo, Equity Transactions Group.
14. Governing Law and Time. This Agreement shall be governed
by the laws of the State of New York applicable to agreements made and to be
performed in said State.
NOTICE: IF A COPY OF THE CONFIRMATION REFERRED TO IN SECTION
13 HEREOF IS NOT SIGNED, DATED AND RETURNED TO THE DEALER MANAGERS PRIOR TO THE
EXPIRATION OF THE OFFER, NO REALLOWANCE WILL BE PAYABLE HEREUNDER.
Very truly yours,
PRUDENTIAL SECURITIES INCORPORATED
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
As Dealer Managers
By: PRUDENTIAL SECURITIES INCORPORATED
By_____________________________________
Jean-Claude Canfin, Director
7
<PAGE> 9
CONFIRMATION
PRUDENTIAL SECURITIES INCORPORATED
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
c/o PRUDENTIAL SECURITIES INCORPORATED
One New York Plaza
New York, New York 10292
Attention: Ms. Adrienne Garofalo
Equity Transactions Group
Facsimile: (212) 778-3621/1564
Ladies and Gentlemen:
We hereby confirm our acceptance of the terms and conditions
of the letter captioned "Soliciting Dealer Agreement" which was attached hereto
upon our receipt hereof (this "Agreement") with reference to the Offer of
Pilgrim America Prime Rate Trust (the "Trust") described therein. We hereby
acknowledge that we (i) have received, read and reviewed the Prospectus and
other solicitation material referred to in this Agreement, and confirm that in
executing this confirmation we have relied upon such Prospectus and other
solicitation materials authorized by the Trust or Pilgrim America Investments,
Inc. (the "Investment Manager") and upon no other representations whatsoever,
written or oral,(ii) have not purported to act as agent of the Trust or the
Dealer Managers in any connection or in any transaction relating to the Offer,
(iii) are not affiliated with the Trust, (iv) are not purchasing Shares for our
own account or the account of any of our affiliates, other than a natural
person, (v) will not remit, directly or indirectly, any part of any Reallowance
to any beneficial owner of Shares purchased pursuant to the Offer, and (vi)
agree to the amount of the Reallowance and the terms and conditions set forth in
this Agreement with respect to receiving such Reallowance. We also confirm that
we are a broker or dealer who is a member in good standing of the National
Association of Securities Dealers, Inc. (the "NASD") and will comply with Rules
2730, 2740 and 2750 of the Conduct Rules of the NASD or a broker or dealer not
registered under the Securities Exchange Act of 1934 with its
<PAGE> 10
principal place of business located outside the United States, its territories
or possessions who by signing below also (a) agrees to solicit exercises of
Rights only in accordance with the laws applicable to such activities and to
solicit no exercises of Rights within the United States, its territories or its
possessions, or from persons who are nationals thereof or residents therein and
(b) agrees, although not a member of the NASD, to conform to the Conduct Rules
of the NASD, including Rules 2420, 2730, 2740, and 2750 thereof, in acting under
this Agreement in soliciting exercises of Rights outside the United States, its
territories and possessions, to the same extent as though we were a member
thereof. In connection with the Offer, we represent that we have complied, and
agree that we will comply, with any applicable requirements of the Securities
Act of 1933, the Securities Exchange Act of 1934, any applicable securities or
Blue Sky laws, and the rules and regulations under the Securities Act of 1933,
the Securities Exchange Act of 1934 and any applicable securities or Blue Sky
laws.
_____________________________
Firm Name
By_____________________________
Authorized Signature
Address:
_______________________________
_______________________________
DTC Number:
_______________________________
Nominee Name:
_______________________________
_______________________________
_______________________________
Dated:__________________________, 1996
2
<PAGE> 11
NOTICE: IF A COPY OF THIS CONFIRMATION IS NOT SIGNED, DATED AND
RETURNED TO THE DEALER MANAGERS PRIOR TO THE EXPIRATION OF THE OFFER, NO
REALLOWANCE WILL BE PAYABLE HEREUNDER.
3
<PAGE> 1
EXHIBIT 2(k)(i)
ADMINISTRATION AGREEMENT
<PAGE> 2
AMENDED AND RESTATED
ADMINISTRATION AGREEMENT
THIS ADMINISTRATION AGREEMENT made as of the 20th day of October, 1992, amended
and restated as of the 17th day of February, 1995, and the 7th day of April,
1995, by and between PILGRIM PRIME RATE TRUST, a Massachusetts Business Trust
(hereinafter referred to as the "Trust"), and PILGRIM AMERICA GROUP, INC., a
corporation organized and existing under the laws of Delaware (hereinafter
called the "Administrator").
W I T N E S S E T H:
WHEREAS, the Trust is a closed-end management investment company, registered as
such under the Investment Company Act of 1940; and
WHEREAS, the Administrator is engaged in the business of providing management
and administrative services, as an independent contractor; and
WHEREAS, the Trust desires to retain the Administrator to furnish management and
administrative services to the Trust pursuant to the terms and provisions of
this Agreement, and the Administrator is interested in providing said services.
NOW, THEREFORE, in consideration of the covenants and the mutual promises
hereinafter set forth, the parties hereto, intending to be legally bound hereby,
mutually agree as follows:
1. The Trust hereby employs the Administrator and the Administrator hereby
accepts such employment, to render management and administrative services to the
Trust, subject to the supervision and direction of the Trust's Board of
Trustees. The Administrator shall furnish to the Trust the services of executive
and administrative personnel to supervise the performance of all administrative
functions concerning the operation of the Trust, other than the investment
management function. The Administrator shall, as part of its duties hereunder
(i) administer the Trust's corporate affairs including preparing and filing all
reports required by the Commonwealth of Massachusetts, (ii) furnish the Trust
such office space, equipment, and personnel as is needed by the Trust, (iii)
furnish clerical and bookkeeping services as are needed by the Trust, (iv)
prepare and furnish annual and other reports to shareholders, the Securities and
Exchange Commission, the New York Stock Exchange and to any appropriate
governmental body, (v) prepare and file any federal, state and local income tax
returns as requested by the Trust; (vi) provide shareholder services as are
needed by the Trust; (vii) permit its officers and employees to serve without
compensation as trustees or officers of the Trust if elected to such positions,
and (vii) in general, supervise the performance of all administrative functions
of the Trust, subject to the ultimate supervision and direction of the Trust's
Board of Trustees.
2. The Administrator shall, for all purposes herein, be deemed to be an
independent contractor, and shall, unless otherwise expressly provided and
authorized, have no authority to act for or represent the Trust in any way, or
in any way be deemed an agent for the Trust. It is expressly understood and
agreed that the services to be rendered by the Administrator to the Trust under
the provisions of this Agreement are not to be deemed exclusive, and the
Administrator shall be free to render similar or different services to others so
long as its ability to render the services provided for in this Agreement shall
not be impaired thereby.
3. The Administrator agrees to use its best judgment and efforts in performing
the services to the Trust as contemplated hereunder, and for this purpose the
Administrator shall, at its own expense, maintain such staff and employ or
retain such personnel and consult with such other persons as it shall from time
to time determine to be necessary to the performance of its obligations under
this Agreement.
4. In performing the administrative services hereunder, the Administrator shall
at all times comply with the applicable provisions of the Investment Company Act
of 1940 and any other federal or state securities laws.
5. The Administrator shall bear and pay the costs of rendering the services to
be performed by it under this Agreement. Without limiting the generality of the
foregoing, the Administrator shall bear the following expenses: the salaries and
expenses of all personnel of the Trust and the Administrator, except for the
fees and
<PAGE> 3
expenses of Trustees not affiliated with the Trust or the Administrator; costs
to prepare information for determination of net asset value by the Trust's
recordkeeping and accounting agent; expenses to maintain the Trust's books and
records that are not maintained by the Trust's Manager, Custodian or Transfer
Agent; costs incurred to assist in the preparation of financial information for
the Trust's income tax returns, proxy statements, quarterly and annual
shareholder reports; expenses to provide shareholder services in connection with
the Trust's dividend reinvestment and cash purchase plans; expenses to provide
shareholder services in preparation of tender offers, if any, or to shareholders
proposing to transfer their shares to a third party; and all expenses incurred
by the Administrator or by the Trust in rendering the administrative services
pursuant to the terms of this Agreement.
6. The Trust shall bear and pay for all other expenses of its operation, except
for those expenses expressly assumed by the Manager to the Trust pursuant to an
Investment Management Agreement between the Manager and the Trust, including,
but not limited to, the fees payable to the Manager; the fees and expenses of
Trustees who are not affiliated with the Manager or the Administrator; the fees
and certain expenses of the Trust's Custodian and Transfer Agent, including the
cost of providing records to the Administrator in connection with its obligation
of maintaining required records of the Trust; the charges and expenses of the
Trust's legal counsel and independent accountants; commissions and any issue or
transfer taxes chargeable to the Trust in connection with its transactions; all
taxes and corporate fees payable by the Trust to governmental agencies; the fees
of any trade association of which the Trust is a member; the cost of share
certificates representing shares of the Trust; organizational and offering
expenses of the Trust and the fees and expenses involved in registering and
maintaining registration of the Trust and of its shares with the Securities and
Exchange Commission, the New York Stock Exchange and qualifying its shares under
applicable state securities laws including the preparation and printing of the
Trust's registration statements and prospectuses for such purposes; allocable
communications expenses, with respect to investor services and all expenses of
stockholders and Trustees' meetings and of preparing, printing and mailing
reports, proxy statements and prospectuses to stockholders; the cost of
insurance; and litigation and indemnification expenses and extraordinary
expenses not incurred in the ordinary course of the Trust's business.
7. To the extent the Administrator incurs any costs or performs any services
which are an obligation of the Trust, as set forth herein, the Trust shall
promptly reimburse the Administrator for such costs and expenses. To the extent
the services for which the Trust is obligated to pay are performed by the
Administrator, the Administrator shall be entitled to recover from the Trust
only to the extent of its costs for such services.
8. (a) The Trust agrees to pay to the Administrator, and the Administrator
agrees to accept, as full compensation for all administrative services furnished
or provided to the Trust and as full reimbursement for all expenses assumed by
the Administrator, an administration fee computed at the annual rate of .15% of
the average daily net assets of the Trust up to $800 million and at an annual
rate of .10% of the Trust's average daily net assets over $800 million.
(b) The administration fee shall be accrued daily by the Trust and paid to the
Administrator at the end of each calendar month.
9. The Administrator agrees that neither it nor any of its officers or employees
shall take any short position in the capital stock of the Trust. This
prohibition shall not prevent the purchase of such shares by any of the officers
and directors or bona fide employees of the Administrator or any trust, pension,
profit-sharing or other benefit plan for such persons or affiliates thereof.
10. Nothing herein contained shall be deemed to require the Trust to take any
action contrary to its Trust Indenture or any applicable statute or regulation,
or to relieve or deprive the Board of Trustees of the Trust of its
responsibility for and control of the conduct of the affairs of the Trust.
11. (a) In the absence of willful misfeasance, bad faith, gross negligence, or
reckless disregard of obligations or duties hereunder on the part of the
Administrator, the Administrator shall not be subject to liability to the Trust
or to any shareholder of the Trust for any act or omission in the course of, or
connected with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding or sale of any security by the Trust.
2
<PAGE> 4
(b) Notwithstanding the foregoing, the Administrator agrees to reimburse the
Trust for any and all costs, expenses, and counsel and Trustees' fees
reasonably incurred by the Trust in the preparation, printing and
distribution of amendments to its registration statement, holding of
meetings of its shareholders or Trustees, the conduct of factual
investigations, any legal or administrative proceedings including any
applications for exemptions or determinations by the Securities and Exchange
Commission which the Trust incurs as the result of action or inaction of the
Administrator or any of its shareholders where the action or inaction
necessitating such expenditures (i) is directly or indirectly related to any
transactions or proposed transaction in the shares or control of the
Administrator or its affiliates (or litigation relates to any pending or
proposed future transaction in such shares or control) which shall have been
undertaken without the prior, express approval of the Trust's Board of
Trustees; or (ii) is within the sole control of the Administrator or any of
its affiliates or any of their officers, directors, employees or
shareholders. The Administrator shall not be obligated pursuant to the
provisions of this Subparagraph 11(b), to reimburse the Trust for any
expenditures related to the institution of an administrative proceeding or
civil litigation by the Trust or a Trust shareholder seeking to recover all
or a portion of the proceeds derived by any shareholder of the Administrator
or any of its affiliates from the sale of his shares of the Administrator,
or similar matters. So long as this Agreement is in effect, the
Administrator shall pay to the Trust the amount due for expenses subject to
this Subparagraph 11(b) within thirty (30) days after a bill or statement
has been received by the Trust therefor. This provision shall not be deemed
to be a waiver of any claim the Trust may have or may assert against the
Administrator or others or costs, expenses, or damages heretofore incurred
by the Trust for costs, expenses, or damages by the Trust may hereafter
incur which are not reimbursable to it hereunder.
(c) No provision of this Agreement shall be construed to protect any Trustee or
officer of the Trust, or the Administrator, from liability in violation of
Section 17(h) and (i) of the Investment Company Act of 1940, as amended.
12. (a) This Agreement shall become effective at the close of business on the
date hereof and shall continue in effect from year to year thereafter so long as
such continuation is specifically approved at least annually by (i) the Board of
Trustees of the Trust, and (ii) the vote of a majority of the trustees of the
Trust who are not parties to this Agreement or interested persons thereof, cast
in person at a meeting called for the purpose of voting on such approval.
(b) This Agreement may be terminated at any time, without penalty, by the Trust
by giving 60 days' written notice of such termination to the Administrator
at its principal place of business, or may be terminated at any time by the
Administrator by giving 60 days' written notice of such termination to the
Trust at its principal place of business.
13. If any provision of this Agreement shall be held or made invalid by a court
decision, statute, rule, or otherwise, the remainder of this Agreement shall not
be affected thereby.
14. This Agreement may be amended only by written instrument signed by the
parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers on the day and year first above
written.
3
<PAGE> 5
<TABLE>
<S> <C>
PILGRIM PRIME RATE TRUST
Attest: By:
--------------------------------------------
Senior Vice President
and Assistant Secretary
- --------------------------------------------
Assistant Vice President
PILGRIM AMERICA GROUP, INC.
Attest: By:
Senior Vice President
and Secretary
- --------------------------------------------
Assistant Vice President
</TABLE>
4
<PAGE> 1
EXHIBIT 2(l)
OPINION OF DECHERT PRICE & RHOADS
<PAGE> 2
Exhibit 2(l)
[DECHERT PRICE & RHOADS LETTERHEAD]
Pilgrim America Prime Rate Trust
Two Renaissance Square
40 North Central Avenue, Suite 1200
Phoenix, AZ 85004-4424
Re: Pilgrim America Prime Rate Trust
(File Nos. 333-12123 and 811-5410)
Dear Sir or Madam:
We have acted as counsel for Pilgrim America Prime Rate Trust (the
"Trust") in connection with the above-captioned registration statement (the
"Registration Statement"). In our capacity as counsel, we have examined the
Trust's Agreement and Declaration of Trust and its By-laws, and are familiar
with the Trust's proceedings in connection with the authorization of the
issuance by the Trust to the holders (the "Holders") of the Trust's shares of
beneficial interest, with no par value (the "Common Shares"), and of
non-transferable rights entitling the Holders to subscribe for Common Shares
(the "Shares") as contemplated by the Registration Statement. In rendering this
opinion, we have also made such examination of law and of fact reasonably
available to us as we have deemed necessary in connection with the opinion
hereafter set forth.
Based upon such examination, we are of the opinion that the Shares
have been duly authorized and, when issued and sold in the manner contemplated
by the Registration Statement, will be legally issued, fully paid and
non-assessable by the Trust.
We hereby consent to the inclusion of this opinion as an exhibit to the
Registration Statement and to all references to our firm under the caption
"Legal Matters."
Very truly yours,
/s/ Dechert Price & Rhoads
--------------------------
<PAGE> 1
EXHIBIT 2(n)(i)
CONSENT OF KPMG PEAT MARWICK LLP
<PAGE> 2
Exhibit 2(n)(i)
INDEPENDENT AUDITORS' CONSENT
The Board of Trustees
Pilgrim America Prime Rate Trust
We consent to the use of our report incorporated herein by reference and to the
reference of our firm under the headings "Financial Highlights and Investment
Performance" and "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Los Angeles, California
October 17, 1996
<PAGE> 1
EXHIBIT 2(n)(ii)
CONSENT OF TAIT, WELLER & BAKER
<PAGE> 2
Exhibit 2(n)(ii)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our Report of Independent Certified Public Accountants dated
March 16, 1995 (except for Note 5 as to which the date was April 10, 1995)
accompanying Pilgrim Prime Rate Trust's statement of changes in net assets for
the year ended February 28, 1995 and its financial highlights for each of the
six years in the period then ended and for the period from May 12, 1988
(commencement of operations) to February 28, 1989. Reference to this report is
made in the Report of Independent Auditors dated April 12, 1996 which
accompanies Pilgrim America Prime Rate Trust's financial statements and
financial highlights for the fiscal year ended February 28, 1996 appearing in
the Trust's Annual Report which is incorporated by reference into Part B of the
Post-Effective Amendment to this Registration Statement and Prospectus. We
consent to the use of the aforementioned Report of Independent Certified Public
Accountants in this Registration Statement and Prospectus.
/s/ TAIT, WELLER & BAKER
---------------------------
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
October, 16, 1996
<TABLE> <S> <C>
<ARTICLE> 6
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-START> MAR-01-1996
<PERIOD-END> AUG-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 1,072,142
<INVESTMENTS-AT-VALUE> 1,064,474
<RECEIVABLES> 8,592
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 542
<TOTAL-ASSETS> 1,073,608
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 197,000
<OTHER-ITEMS-LIABILITIES> 9,303
<TOTAL-LIABILITIES> 206,303
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 871,819
<SHARES-COMMON-STOCK> 90,355
<SHARES-COMMON-PRIOR> 89,794
<ACCUMULATED-NII-CURRENT> 9,482
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (6,327)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (7,668)
<NET-ASSETS> 867,306
<DIVIDEND-INCOME> 36
<INTEREST-INCOME> 39,168
<OTHER-INCOME> 4,218
<EXPENSES-NET> 6,884
<NET-INVESTMENT-INCOME> 36,538
<REALIZED-GAINS-CURRENT> 1,584
<APPREC-INCREASE-CURRENT> (2,955)
<NET-CHANGE-FROM-OPS> 35,167
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 36,167
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,368
<NUMBER-OF-SHARES-REDEEMED> 0
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<ACCUMULATED-NII-PRIOR> 9,111
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<GROSS-ADVISORY-FEES> 3,714
<INTEREST-EXPENSE> 1,195
<GROSS-EXPENSE> 6,901
<AVERAGE-NET-ASSETS> 862,232
<PER-SHARE-NAV-BEGIN> 9.61
<PER-SHARE-NII> 0.40
<PER-SHARE-GAIN-APPREC> (0.01)
<PER-SHARE-DIVIDEND> 0.40
<PER-SHARE-DISTRIBUTIONS> 0
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<PER-SHARE-NAV-END> 9.60
<EXPENSE-RATIO> 1.58
<AVG-DEBT-OUTSTANDING> 40,054
<AVG-DEBT-PER-SHARE> 0.45
</TABLE>
