<PAGE> 1
PROSPECTUS
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18,122,963 Shares of Beneficial Interest
Pilgrim America Prime Rate Trust Logo
Issuable Upon Exercise of Non-Transferable Rights
to Subscribe for Such Shares of Beneficial Interest
New York Stock Exchange Symbol: PPR
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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 18,122,963 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 $9.58, respectively, and
the last reported sales prices per Common Share on the NYSE for those dates was
$9.875 and $9.625, 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."
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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>
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Estimated Estimated Estimated Proceeds to
Subscription Price(1) Sales Load(2) Trust(3)
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<S> <C> <C> <C>
Per Share................................ $9.34 $0.327 $9.013
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Total Maximum............................ $169,268,474 $5,926,209 $163,342,266
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</TABLE>
Footnotes set forth on next page
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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 36 of this Prospectus, may be obtained without
charge by contacting the Trust at (800) 331-1080.
DEALER MANAGERS
PRUDENTIAL SECURITLES INCORPORATED MERRILL LYNCH & CO.
October 18, 1996
<PAGE> 2
(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 $211,585,586, the total maximum Estimated Sales Load will
be approximately $7,407,761, and the total maximum Estimated Proceeds to the
Trust will be approximately $204,177,825.
(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 $1,016,088, including $150,000 to be paid to Prudential
Securities Incorporated for reimbursement of its expenses.
2
<PAGE> 3
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>
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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.
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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.")
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</TABLE>
3
<PAGE> 4
THE OFFER AT A GLANCE
<TABLE>
<S> <C>
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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.")
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How to Obtain Subscription Contact your broker.
Information
Contact the Information Agent toll-free at (800) 733-8481,
extension 350.
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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.
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Subscription Agent State Street Bank and Trust Company
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</TABLE>
IMPORTANT DATES TO REMEMBER
<TABLE>
<S> <C>
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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
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</TABLE>
4
<PAGE> 5
THE TRUST AT A GLANCE
<TABLE>
<S> <C>
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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 per share was $9.58.
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NYSE Listed As of October 18, 1996, the Trust had 90,614,818 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 $9.625. The Rights are
non-transferable and therefore will not be admitted for
trading on the NYSE.
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Investment Objective To obtain as high a level of current income as is consistent
with the preservation of capital.
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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.
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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.
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General Investment Under normal circumstances, at least 80% of the Trust's
Guidelines 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.
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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.
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Investment Manager Pilgrim America Investments, Inc.
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Administrator Pilgrim America Group, Inc.
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</TABLE>
5
<PAGE> 6
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>
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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.
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Discount from NAV 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.
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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.
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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.
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Leverage The Trust may borrow for investment purposes, which
increases both investment opportunity and investment risk.
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</TABLE>
6
<PAGE> 7
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. 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. Total offering expenses are estimated to be
$1,016,088. 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
7
<PAGE> 8
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 $162,326,178
million (with an estimated Subscription Price of $9.34 per share) and that,
as a result, based on the Trust's net assets of $868,290,878 on October 18,
1996, the net assets attributable to Shareholders would be $1,030,617,056.
<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.
8
<PAGE> 9
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. The
Trust's unaudited financial statements for the six months ended August 31, 1996
are included as an Appendix to this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS MAY 12,
ENDED YEAR ENDED FEBRUARY 28* 1988** TO
AUGUST 31, ----------------------------------------------------------------------- FEBRUARY 28,
1996 1996(6) 1995 1994 1993 1992 1991 1990 1989
---------- -------- -------- -------- -------- --------- ---------- -------- ------------
<S> <C> <C> <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 $ 10.00 $ 10.00
---------- -------- -------- -------- -------- --------- ---------- --------- ---------
Net investment income......... 0.40 0.89 0.74 0.60 0.60 0.76 0.98 1.06 0.72
Net realized and unrealized
gain (loss) on investment... (0.01) (0.08) 0.07 (0.05) 0.01 (0.02) (0.05) -- --
---------- -------- -------- -------- -------- --------- ---------- --------- ---------
Increase in NAV from
investment operations....... 0.39 0.81 0.81 0.55 0.61 0.74 0.93 1.06 0.72
---------- -------- -------- -------- -------- --------- ---------- --------- ---------
Distributions from net
investment income........... (0.40) (0.86) (0.73) (0.60) (0.57) (0.75) (0.96) (1.06) (0.72)
---------- -------- -------- -------- -------- --------- ---------- --------- ---------
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 $ 10.00 $ 10.00
========== ======== ======== ======== ======== ========= ========== ========= =========
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% 11.13% 7.35%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(thousands)................. $ 867,306 $862,938 $867,083 $719,979 $738,810 $874,104 $1,158,224 $1,036,470 $ 252,998
Ratios to average net assets:
Expenses.................... 1.58%(1) 1.23% 1.30% 1.31% 1.42% 1.42%(2) 1.38% 1.46%(2) 1.18%(1)(2)
Net investment income....... 8.41%(1) 9.23% 7.59% 6.04% 5.88% 7.62%(2) 9.71% 10.32%(2) 9.68%(1)(2)
Portfolio turnover rate....... 42% 88% 108% 87% 81% 53% 55% 100% 49%(1)
Shares outstanding at end of
period (thousands).......... 90,355 89,794 89,794 71,835 73,544 87,782 116,022 103,600 25,294
Average daily balance of debt
outstanding during the
period (thousands)(7)....... $ 40,054 $ -- $ 2,811 $ -- $ 636 $ 8,011 $ 2,241 $ -- $ --
Average monthly shares
outstanding during the
period (thousands).......... 90,010 89,794 74,598 -- 79,394 102,267 114,350 -- --
Average amount of debt per
share during the period(7).. $ 0.45 $ -- $ 0.04 $ -- $ 0.01 $ 0.08 $ 0.02 $ -- $ --
</TABLE>
9
<PAGE> 10
- ---------------
* 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 NYSE. 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.
10
<PAGE> 11
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.
<TABLE>
<CAPTION>
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TRUST CHARACTERISTICS
-----------------------------------------------------------------------------
<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
11
<PAGE> 12
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 periods 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 $9.625, respectively. The Trust's NAV
on September 16, 1996 and on October 18, 1996 was $9.57 and $9.58, respectively.
See "Net Asset Value" 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 ($9.625)
represented a 0.47% premium above NAV ($9.58) 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
12
<PAGE> 13
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-year 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 each 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 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.
13
<PAGE> 14
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>
Measurement Period Pilgrim
(Fiscal Year Covered) Composite America Prime Rate 60 Day Libor
<S> <C> <C> <C> <C>
Jan-91 9.54 9.68 9.92 8.15
Mar-91 9.40 9.50 9.75 7.86
May-91 9.24 9.21 9.54 7.45
Jul-91 8.86 8.91 9.29 7.10
Sep-91 8.47 8.56 9.00 6.66
Nov-91 8.03 8.20 8.63 6.15
Jan-92 7.58 7.78 8.13 5.63
Mar-92 7.16 7.42 7.71 5.24
May-92 6.80 7.10 7.33 4.89
Jul-92 6.55 6.81 6.96 4.49
Sep-92 6.21 6.57 6.58 4.12
Nov-92 5.90 6.38 6.29 3.88
Jan-93 5.73 6.19 6.21 3.73
Mar-93 5.67 6.08 6.13 3.55
May-93 5.60 6.05 6.04 3.42
Jul-93 5.47 5.99 6.00 3.35
Sep-93 5.44 5.97 6.00 3.33
Nov-93 5.44 5.91 6.00 3.28
Jan-94 5.50 5.95 6.00 3.27
Mar-94 5.48 6.01 6.02 3.36
May-94 5.45 6.15 6.19 3.55
Jul-94 5.64 6.37 6.40 3.80
Sep-94 5.91 6.60 6.69 4.11
Nov-94 6.17 6.86 7.04 4.50
Jan-95 6.55 7.28 7.46 4.99
Mar-95 7.04 7.70 7.94 5.40
May-95 7.39 8.09 8.27 5.69
Jul-95 7.66 8.40 8.54 5.89
Sep-95 7.81 8.66 8.71 6.03
Nov-95 7.91 8.87 8.81 6.05
Jan-96 7.88 8.91 8.81 5.93
Mar-96 7.69 8.83 8.69 5.79
May-96 7.55 8.71 8.56 5.69
Jul-96 7.37 8.62 8.46 5.62
</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, a premium of
approximately 2% or more to LIBOR.
14
<PAGE> 15
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 1990s. 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
Measurement Period Comparable Rate Trust
(Fiscal Year Covered) Funds (1) (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."
15
<PAGE> 16
THE OFFER
TERMS OF THE OFFER
The Trust is issuing to Record Date Shareholders non-transferable Rights to
subscribe for an aggregate of 18,122,963 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."
16
<PAGE> 17
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
17
<PAGE> 18
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 $9.34 per share, PAII and PAGI would receive additional
fees for investment management and administrative services of approximately
$1,055,223 and $162,342, 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 $9.34 per share, and the
Trust were to borrow $343,544,304, PAII and PAGI would receive additional fees
for investment management and administrative services of approximately
$2,120,949 and $343,544, 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 -- Primary 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 "Financial Highlights and Investment
Performance -- 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
dilution experience 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
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<PAGE> 19
Trust's shares on the date the offer expired and the preceding four trading
dates. The Subscription Price in the 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. 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 and on October 18, 1996
was $9.57 and $9.58, 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 $9.78,
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.
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<PAGE> 20
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>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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<PAGE> 21
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., Eastern Standard Time,
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 "Terms of the Offer" and "Over-Subscription." In addition, Record Date
Shareholders 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 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
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<PAGE> 22
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 20 (i) 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 (ii) payment for all such ordered
Shares based on the Estimated Subscription Price of $9.34 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, 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.
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.
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<PAGE> 23
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 "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.
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
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<PAGE> 24
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 18,122,963 Shares are sold at the Estimated Subscription Price of $9.34 per
Share, the net proceeds of the Offer are estimated to be approximately
$162,326,178, after deducting commissions and expenses payable by the Trust
estimated at approximately $6,942,297. 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
$40,835,559. 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
August 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
24
<PAGE> 25
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 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.
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<PAGE> 26
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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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 $9.34 (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 $0.10 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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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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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 market in recent years, and compares the
size of the Senior Loan market to the size of the Trust's net assets.
Senior Loan Origination Volume
<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
</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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replacing U.S. and foreign banks as lenders. In 1992, institutional investors
other than banks 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> 31
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 management
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
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<PAGE> 32
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
90,614,818, none of which were held by the Trust. Assuming that all Rights are
exercised, an additional 18,122,963 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 amended agreement dated 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 $1.8 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
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<PAGE> 33
proceeds of any outstanding borrowings, in excess of $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, in excess of $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, in excess of $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), and PASI (since December 1994). Mr. Norman
was Senior Vice President of Express America (April 1995 -- July 1996) and
Express America Mortgage Corporation (February 1992 -- July 1996). 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 Vice President and Assistant Portfolio
Manager 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
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been elected as Trustees or officers of the Trust to serve in the latter
capacities. All services furnished by the 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. IFTC is a subsidiary of State Street Bank and Trust Company, the
Subscription Agent.
CUSTODIAN
The Trust's securities and cash are held under a Custody 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 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.
34
<PAGE> 35
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 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, 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.
35
<PAGE> 36
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.
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, incorporated herein by reference, 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....................................................................... 2
Additional Information About Investments and Investment Techniques................... 2
Investment Restrictions.............................................................. 8
Trustees and Officers................................................................ 9
Investment Management and Other Services............................................. 12
Portfolio Transactions............................................................... 14
Net Asset Value...................................................................... 15
Methods Available to Reduce Market Value Discount from NAV........................... 15
Dividend Reinvestment and Cash Purchase Plan......................................... 16
Tax Matters.......................................................................... 17
Advertising and Performance Data..................................................... 20
</TABLE>
36
<PAGE> 37
APPENDIX I:
FINANCIAL STATEMENTS DATED AUGUST 31, 1996
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
</TABLE>
F-1
<PAGE> 38
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)
$ 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
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
</TABLE>
F-2
<PAGE> 39
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)
$ 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
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> 40
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> 41
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> 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
- --------- ------------------------------------------------------------------- ----------- -------- --------------
<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
- ----------
<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
manufacturer of wagering equipment), Expires 10/30/03 (R) $ 57,494
80,634 @ Capital Tool & Design, Warrants representing 80,634 common shares
(brake backing plates) (R) 143,530
19,000 @ Covenant Care, Inc., Warrants representing 19,000 common shares
(long-term healthcare facilities) (R) 285,000
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
Units (payroll and human resource services), Expires 11/05/03 (R) 614,789
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)
-----------
Total Stock Purchase Warrants and Other Securities - 0.1% 1,438,395
(Cost $60,927)
-----------
</TABLE>
F-6
<PAGE> 43
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000'S) VALUE
- ---------- --------------
<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>
<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> 44
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> 45
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> 46
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> 47
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> 48
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> 49
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>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 9.96 $ 9.97 $ 10.00 $ 10.00 $ 10.00
-------- -------- -------- ---------- ---------
Net investment income 0.60 0.76 0.98 1.06 0.72
Net realized and unrealized gain
(loss) on investments 0.01 (0.02) (0.05) -- --
-------- -------- -------- ---------- ---------
Increase in net asset value from
investment operations 0.61 0.74 0.93 1.06 0.72
-------- -------- -------- ---------- ---------
Distributions from net
investment income (0.57) (0.75) (0.96) (1.06) (0.72)
-------- -------- -------- ---------- ---------
Reduction in net asset value from
rights offering -- -- -- -- --
Increase in net asset value from
repurchase of capital stock 0.05 -- -- -- --
-------- -------- -------- ---------- ---------
Net asset value, end of period $ 10.05 $ 9.96 $ 9.97 $ 10.00 $ 10.00
======== ======== ======== ========== =========
Closing market price at
end of period $ 9.13 -- -- -- --
TOTAL RETURN
Total investment return at closing
market price (3) 10.89% -- -- -- --
Total investment return at closing
net asset value (4) 7.29% 7.71% 9.74% 11.13% 7.35%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $738,810 $874,104 $1,158,224 $1,036,470 $ 252,998
Ratios to average net assets:
Expenses 1.42% 1.42%(2) 1.38% 1.46%(2) 1.18%(1)(2)
Net investment income 5.88% 7.62%(2) 9.71% 10.32%(2) 9.68%(1)(2)
Portfolio turnover rate 81% 53% 55% 100% 49%(1)
Shares outstanding at end of
period (000's) 73,544 87,782 116,022 103,660 25,294
Average daily bank loans outstanding
during the period (000's) $ 636 $ 8,011 $ 2,241 $ -- $ --
Average monthly shares outstanding
during the period (000's) 79,394 102,267 114,350 -- --
Average daily bank loans per share
during the period $ 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> 50
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> 51
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> 52
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 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 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> 53
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> 54
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> 55
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> 56
- ------------------------------------------------------
- ------------------------------------------------------
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 COMMON SHARES OFFERED BY THE
PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY
OFFER TO BUY THE 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................... 3
Trust Expenses....................... 7
Financial Highlights And Investment
Performance........................ 9
The Offer............................ 16
Use Of Proceeds...................... 24
Investment Objective and Policies.... 25
Risk Factors and Special
Considerations..................... 27
General Information On Senior Loans.. 29
Description of the Common Shares..... 31
Investment Management and Other
Services........................... 32
Dividends and Distributions.......... 34
Tax Matters.......................... 34
Distribution Arrangements............ 35
Legal Matters........................ 36
Experts.............................. 36
Registration Statement............... 36
Financial Statements................. 36
Table of Contents of Statement of
Additional Information............. 36
Appendix I: Financial Statements
dated August 31, 1996.............. F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
18,122,963
Shares of Beneficial Interest
[LOGO]
Issuable Upon Exercise of
Non-Transferable Rights to
Subscribe for Such
Shares of Beneficial Interest
-----------------
PROSPECTUS
----------------
DEALER MANAGERS
PRUDENTLAL SECURLTLES INCORPORATED
MERRILL LYNCH & CO.
October 18, 1996
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