As filed with the Securities and Exchange Commission on June 23, 1997
1933 Act File No. 33-_____
1940 Act File No. 811-5410
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
(Check appropriate box or boxes)
|X| REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
|_| Pre-Effective Amendment No. ___
|_| Post-Effective Amendment No. ___
and
|X| REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
|X| Amendment No. 23
PILGRIM AMERICA PRIME RATE TRUST
Exact Name of Registrant Specified in Charter
Two Renaissance Square
40 North Central Avenue, Suite 1200
Phoenix, AZ 85004
Address of Principal Executive Offices (Number, Street, City, State, Zip Code)
(602) 417-8256
Registrant's Telephone Number, Including Area Code
James M. Hennessy, Esq.
Pilgrim America Group, Inc.
Two Renaissance Square
40 North Central Avenue, Suite 1200
Phoenix, AZ 85004
Name and Address (Number, Street, State, Zip Code) of Agent for Service
Copies to:
Jeffrey S. Puretz, Esq.
Dechert Price & Rhoads
1500 K Street, N.W.
Washington, D.C. 20005
Approximate Date of Proposed Public Offering: As soon as practical after the
effective date of this Registration Statement.
If any securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, other
than securities offered in connection with a dividend reinvestment plan, check
the following box. |X|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
=========================== ===================== ======================== ===================== ===========================
<S> <C> <C> <C> <C>
Proposed Maximum Proposed Maximum
Title of Securities Amount Being Offering Price Per Aggregate Offering Amount of
Being Registered Registered Unit(1) Price(1) Registration Fee(1)
- ---------------- ---------- ----- -------------------
=========================== ===================== ======================== ======================== ========================
Shares of Beneficial 7,500,000 $10.0625 $75,468,750 $22,869.32
Interest(without par
value)
=========================== ===================== ======================== ======================== ========================
</TABLE>
(1)Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933 based on the
average of the high and low sales prices of the shares of beneficial interest on
June 16, 1997 as reported on the New York Stock Exchange.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the Registration Statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
<PAGE>
===============================================================================
PILGRIM AMERICA PRIME RATE TRUST
===============================================================================
CROSS-REFERENCE SHEET
PART A
<TABLE>
<S> <C> <C>
Item No. Caption Location in Prospectus
1. Outside Front Cover................................. Front Cover Page
2. Inside Front and Outside
Back Cover Page..................................... Inside Front and Outside Back Cover Page
3. Fee Table and Synopsis.............................. Prospectus Summary; Trust Expenses
4. Financial Highlights................................ Financial Highlights and Investment
Performance -- Financial Highlights Table
5. Plan of Distribution................................ Front Cover Page; Prospectus Summary; Plan of
Distribution
6. Selling Shareholders................................ Not Applicable
7. Use of Proceeds..................................... Use of Proceeds
8. General Description of the Registrant............... Front Cover Page; Prospectus Summary;
Financial Highlights and Investment
Performance - Portfolio Composition;
Financial Highlights and Investment
Performance - Trading and Net Asset Value
Information; Description of the Common
Shares; Investment Objectives and Policies;
Risk Factors and Special Considerations;
General Information on Senior Loans
9. Management.......................................... Prospectus Summary; Investment Management and
Other Services
10. Capital Stock, Long-Term Debt, and Other Securities. Front Cover Page; Description of the Common
Shares; Dividends and Distributions --
Distribution Policy; Dividends and
Distributions -- Dividend Reinvestment and
Cash Purchase Plan; Tax Matters
11. Defaults and Arrears on Senior Securities........... Not Applicable
12. Legal Proceedings................................... Not Applicable
13. Table of Contents of the Statement of Additional
Information......................................... Table of Contents of Statement of Additional
Information
PART B
Location in Statement of Additional
Item No. Caption Information
- -------- ------- -----------
14. Cover Page.......................................... Cover Page
15. Table of Contents................................... Table of Contents
16. General Information and History..................... Change of Name
17. Investment Objective and Policies................... Additional Information About Investments and
Investment Techniques; Investment Restrictions
18. Management.......................................... Trustees and Officers
19. Control Persons and Principal Holders of Securities. Trustees and Officers; Prospectus:
Description of the Common Shares
20. Investment Advisory and Other Services.............. Investment Management and Other Services;
Prospectus: Investment Management and Other
Services; Prospectus: Experts
21. Brokerage Allocation and Other Practices............ Portfolio Transactions
22. Tax Status.......................................... Tax Matters
23. Financial Statements................................ Prospectus: Financial Statements
</TABLE>
<PAGE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
PROSPECTUS
- -------------------------------------------------------------------------------
7,500,000 Shares of Beneficial Interest
Pilgrim America Prime Rate Trust
New York Stock Exchange Symbol: PPR
- -------------------------------------------------------------------------------
Pilgrim America Prime Rate Trust (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. Shares of the Trust trade on the New
York Stock Exchange (the "NYSE") under the symbol "PPR." The Trust's Investment
Manager is Pilgrim America Investments, Inc. ("PAII" or the "Investment
Manager"). The address of the Trust is 40 North Central Avenue, Suite 1200,
Phoenix, Arizona 85004.
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" beginning on page 15.
This Prospectus applies to 7,500,000 shares of beneficial interest ("Shares") of
the Trust which may be issued and sold by the Trust pursuant to the Trust's
Dividend Reinvestment and Cash Purchase Plan (the "Plan") or pursuant to
privately negotiated transactions. See "Plan of Distribution." The Plan allows
participating shareholders to reinvest all dividends and capital gain
distributions in additional Shares of the Trust and allows participants to make
additional optional cash investments in amounts from a minimum of $100 to a
maximum of $100,000 per month. Investments in excess of $100,000 per month can
only be made if a waiver is granted by the Trust. When Shares are issued by the
Trust under the Plan in connection with the reinvestment of dividends and
distributions, they will be issued at the greater of (i) the net asset value
("NAV") per Share of the Trust's Shares or (ii) 95% of market price (the
weighted average sales price, per Share, as reported on the New York Stock
Exchange Composite Transaction Tape as shown daily on Bloomberg's AQR screen) of
the Trust's Shares. When Shares are issued by the Trust under the Plan in
connection with optional cash investments, they will be issued at the greater of
(i) the NAV per Share of the Trust's Shares or (ii) a discount (ranging from 0%
to 5%) to the market price. The discount applicable to optional cash investments
for amounts less than $100,000 per month may differ from the discount applicable
to optional cash investments in excess of $100,000 per month.
The Shares may also be offered pursuant to privately negotiated transactions
between the Trust and specific investors. Shares issued by the Trust in
connection with privately negotiated transactions will be issued at the greater
of (i) the NAV per Share of the Trust's Shares or (ii) a discount ranging from
0% to 5% of the market price of the Trust's Shares. The discount to apply to
such privately negotiated transactions will be determined by the Trust with
regard to each specific transaction.
In connection with certain privately negotiated transactions and investments in
excess of $100,000 pursuant to a waiver, a commission of up to 1.00% of the
amount of such investment may be paid to Pilgrim America Securities, Inc.
("PASI"). PASI may allow all or part of such commission to other broker-dealers.
See "Distribution Arrangements."
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.
<PAGE>
Investors are advised to read this Prospectus and retain it for future
reference. This Prospectus sets forth concisely the information about the Trust
that a prospective investor ought to know before investing. A Statement of
Additional Information dated ___________________, 1997 (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 29 of this Prospectus, may be obtained without charge by
contacting the Trust toll-free at (800) 331-1080.
The date of this Prospectus is _________________, 1997.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information appearing elsewhere in this Prospectus.
THE TRUST AT A GLANCE
====================================== ====================================
The Trust The Trust is a diversified,
closed-end management investment
company organized as a Massachusetts
business trust. As of July ___,
1997, the Trust's NAV per Share was
$_________.
====================================== ====================================
NYSE Listed As of July ___, 1997, the Trust
had _______ Shares outstanding
which are traded on the NYSE under
the symbol "PPR." As of July ___,
1997, the last reported sales price
of a Share of the Trust was $_______.
======================================= ====================================
Investment Objective To obtain as high a level of current
income as is consistent with the
preservation of capital. There can
be no assurance that the Trust will
achieve its investment objective.
======================================= ====================================
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
the London Inter-Bank Offered
Rate ("LIBOR"). The Trust may
also employ techniques such as
borrowing for investment purposes.
======================================= ====================================
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.
======================================= ====================================
General Investment Guidelines Under normal
circumstances, at least 80% of the
Trust's net 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 of U.S. corporations or
corporations domiciled in Canada
or U.S. territories and possessions.
The Senior Loans must be denominated
in U.S. dollars.
======================================= ====================================
Distributions Income dividends are declared and
paid monthly. Income dividends may
be distributed in cash or reinvested
in additional full and fractional
shares through the Trust's Dividend
Reinvestment and Cash Purchase Plan.
======================================= ====================================
Investment Manager Pilgrim America Investments, Inc.
======================================= ====================================
Administrator Pilgrim America Group, Inc.
======================================= ====================================
<PAGE>
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."
============================= =====================================
Discount from or Premium to o Shares will be issued under the
NAV plan only when the market price of
the Shares, plus the estimated
commissions of purchasing Shares
on the secondary market, is
greater than NAV.
o As with any security, the market
value of the Shares may increase
or decrease from the amount that
you paid for the Shares.
o 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 per
Share may decrease.
============================= =====================================
Credit Risk Investment in the Trust involves the
risk that borrowers under Senior
Loans may default on obligations to
pay principal and interest when due,
and the risk that the Trust's
investment objective may not be
realized.
============================ =====================================
Leverage The Trust may borrow for investment
purposes, which increases both
investment opportunity and risk.
============================ =====================================
Secondary Market for the The issuance of the Shares through
Trust's Shares the Plan may have an adverse effect
on prices in the secondary market for
the Trust's Shares by increasing the
number of Shares available for sale.
============================ =====================================
Limited Secondary Market for Because of a limited secondary market
Senior Loans for Senior Loans, the Trust may be
limited in its ability to sell
portfolio holdings at carrying value
to generate gains or avoid losses.
============================ =====================================
Demand for Senior Loans An increase in demand for Senior
Loans may adversely affect the rate
of interest payable on Senior Loans
acquired by the Trust.
============================ =====================================
<PAGE>
TRUST EXPENSES
The following table is intended to assist the Trust's shareholders (the
"Shareholders") in understanding the various costs and expenses associated with
investing in the Trust. (1)
Net Assets Net Assets
Plus Without
Borrowings (2) Borrowings (3)
Shareholder Transaction Expenses
Sales Load (as a percentage of offering
price) (4) 1.00% 1.00%
Dividend Reinvestment and Cash Purchase Plan NONE NONE
Fees ..................................
Annual Expenses (as a percentage of net assets
attributable to Shares) 1.28% 0.93%
Management and Administrative Fees (5) ..... 0.24% 0.20%
----- -----
Other Operating Expenses(6) ................ 1.52% 1.13%
Total Annual Expenses before Interest ........... 3.07% 0.00%
----- -----
Interest Expense on Borrowed Funds .............. 4.59% 1.13%
===== =====
Total Annual Expenses............................
(1) The calculations in the fee table above are based on the Trust's expenses
as a percentage 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 33 1/3%
of net assets plus borrowings), the annual expenses in the fee table would
read as follows:
Annual Expenses (as a percentage of net assets
plus borrowings attributable to Shares)
Management and Administrative Fees........................0.85%
Other Operating Expenses..................................0.16%
Total Annual Expenses before Interest Expense.................1.01%
Interest Expense on Borrowed Funds............................2.05%
Total Annual Expenses.........................................3.06%
(2) Expenses are calculated based upon the Trust's net assets plus outstanding
borrowings (at 33 1/3% of net assets plus borrowings) and are shown as a
percentage of net assets.
(3) Expense ratios are calculated based upon net assets of the Trust and assume
that no borrowings have been made.
(4) In connection with certain privately negotiated transactions and
investments in excess of $100,000 pursuant to a waiver, a commission of up
to 1.00% of the amount of such investment may be paid to PASI for services
in connection with the sale of the Shares. PASI may allow all or some of
such commission to other broker-dealers. See "Distribution Arrangements."
No commissions will be paid by the Trust or its Shareholders in connection
with the reinvestment of dividends and capital gains distributions or in
connection with optional cash investments up to the maximum of $100,000 per
month.
(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
until November 12, 1999 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 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."
<PAGE>
(6) "Other Operating Expenses" are based on estimated amounts for the current
fiscal year.
========================================= ======== ======== ========= ==========
Example 1 year 3 years 5 years 10 years
========================================= ======== ======== ========= ==========
You would pay the following expenses
on a $1,000 investment, assuming a 5% $-- $-- $-- $--
annual return and where the Trust has
borrowed . . . . .
========================================= ======== ======== ========= ==========
You would pay the following expenses
on a $1,000 investment, assuming a 5% $-- $-- $-- $--
annual return and where the Trust has
not borrowed . . .
========================================= ======== ======== ========= ==========
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. 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.
<PAGE>
<TABLE>
==================================================================================================================================
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 28, 1997. For the fiscal years ended
February 28, 1997 and 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.
This information should be read in conjunction with the Financial
Statements and Notes thereto included in the Trust's February 28, 1997
Annual Report to Shareholders, which contains further information about
the Trust's performance, and which is available to Shareholders upon
request and without charge.
Year Ended February 28 or February 29,
---------- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
May 12,
1988* to
February
1997(8) 1996(6) 1995 1994 1993 1992 1991 1990 28, 1989
------- --------- ------- ------ ------ ------ ------ ------ --------
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 ... 0.82 0.89 0.74 0.60 0.60 0.76 0.98 1.06 0.72
Net realized and unrealized
gain (loss) on
Investment . . . . . . . (0.02) (0.08) 0.07 (0.05) 0.01 (0.02) (0.05) -- --
------ ------ ---- ------ ---- ------ ------
Increase in NAV from
investment operations 0.80 0.81 0.81 0.55 0.61 0.74 0.93 1.06 0.72
---- ----- ---- ---- ---- ---- ---- ---- ----
Distributions from net
investment income .... (0.82) (0.86) (0.73) (0.60) (0.57) (0.75) (0.96) (1.06) (0.72)
------ ------ ------ ------ ------ ------ ------- ------
Reduction in NAV from
rights offering....... (0.14) -- (0.44) -- -- -- -- -- --
------
Increase in NAV from
repurchase of capital stock --- -- -- 0.02 0.05 -- -- -- --
---- ----
NAV, end of period ...... $9.45 $ 9.61 $ 9.66 $ 10.02 $ 10.05 $ 9.96 $ 9.97 $ 10.00 $ 10.00
===== ======= ======= ======= ======= ====== ======= ======= =======
Closing market price at
end of period $10.00 $ 9.50 $ 8.75 $ $9.25 $ 9.13 $ -- $ -- $ -- $ --
====== ======= ======= ======== ======= ====== ===== ===== =====
Total Return
Total investment return at
closing market price (3) 15.04%(5) 19.19% 3.27%(5) 8.06% 10.89% -- -- -- --
Total investment return
based on NAV (4) 8.06%(5) 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
(000's). ................ $1,031,089 $862,938 $867,083 $719,979 $738,810 $874,104 $1,158,224 $1,036,470 $252,998
Average Borrowings (000's) $131,773 -- -- -- -- -- -- -- --
Ratios to average net assets:
Expenses (before interest
and other fees related to
revolving credit facility) 1.13% -- -- -- -- -- -- -- --
Expenses................. 1.92% 1.23% 1.30% 1.31% 1.42% 1.42%(2) 1.38% 1.46%(2) 1.18%(1)(2)
Net investment income ... 7.59% 9.23% 7.59% 6.04% 5.88% 7.62%(2) 9.71% 10.32%(2) 9.68%(1)(2)
Portfolio turnover rate 82% 88% 108% 87% 81% 53% 55% 100% 49%(1)
Shares outstanding at
end of period (000's) 109,140 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 (000's) $131,773 $ -- $ 2,811 $ -- $ 636 $ 8,011 $ 2,241 $ -- $ --
Average monthly shares
outstanding during the
period (000's) . . . . 95,917 89,794 74,598 -- 79,394 102,267 114,350 -- --
Average amount of debt
per share during the
period (7) $1.37 $ -- $ 0.04 $ -- $ 0.01 $ 0.08 $ 0.02 $ -- $ --
- -----------------------------------------
* Commencement of operations.
<PAGE>
(1) Annualized.
(2) Prior to the waiver of expenses, the ratios of expenses to
average net assets were 1.95% (annualized), 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 ratios of net investment income to
average net assets were 8.91% (annualized), 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
for the year ended February 28, 1993, covers only the period
from March 9, 1992 to February 28, 1993. Total investment
return 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. Total returns for less than one
year are not annualized.
(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. Total returns for less than one year are not
annualized.
(5) Calculation of total return excludes the effect of the per
share dilution resulting from the rights offering 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) PAII has agreed to reduce its fee for a period of three years
from November 12, 1996 (the expiration of the 1996 rights
offering) to 0.60% of the Trust's average daily net assets,
plus the proceeds of any outstanding borrowings, over $1.15
billion.
(8) PAII has agreed to reduce its fee for a period of three years
from November 12, 1996 (the expiration of the 1996 rights
offering) to 0.60% of the Trust's average daily net assets,
plus the proceeds of any outstanding borrowings, over $1.15
billion.
</TABLE>
<PAGE>
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 net assets as of February 28, 1997.
--------------------------------------------------------------------------
Trust Characteristics
-------------------------------------------------------------------------
Net Assets $1,031,089,339
---------------------------------------------- -----------------------
Assets Invested in Senior Loans $1,278,057,350*
---------------------------------------------- -----------------------
Outstanding Borrowings $267,000,000
---------------------------------------------- -----------------------
---------------------------------------------- -----------------------
Total Number of Senior Loans 124
---------------------------------------------- -----------------------
---------------------------------------------- -----------------------
Average Amount Outstanding per Senior Loan $10,306,914
---------------------------------------------- -----------------------
---------------------------------------------- -----------------------
Total Number of Industries 26
---------------------------------------------- -----------------------
---------------------------------------------- -----------------------
Annual Portfolio Turnover Rate 82%
---------------------------------------------- -----------------------
---------------------------------------------- -----------------------
Average Senior Loan Amount per Industry $49,156,052
---------------------------------------------- -----------------------
---------------------------------------------- -----------------------
Weighted Average Days to Interest Rate Reset 42 days
---------------------------------------------- -----------------------
---------------------------------------------- -----------------------
Average Senior Loan Maturity 66 months
---------------------------------------------- -----------------------
---------------------------------------------- -----------------------
Average Age of Senior Loans Held in Portfolio 11 months
---------------------------------------------- -----------------------
(*Includes Senior Loans and other securities received through restructures)
---------------------------------------- -----------------------------------
Top 10 Industries Top 10 Senior Loan Holdings
(As A % Of Net Assets) (As A % Of Net Assets)
---------------------------------------- -----------------------------------
Aerospace Products & Services 12.3% Ralph's Grocery Co. 4.2%
Media / Broadcast 10.0% Favorite Brands International 3.0%
Electronic Equipment 8.7% MAFCO Financial Corp. 2.9%
Food Stores 8.4% RIC Holdings, Inc. 2.7%
Health & Beauty Products 7.8% America's Favorite Chicken Co. 2.7%
Restaurants 7.1% Silgan Corp. 2.5%
Industrial Equipment 6.8% Boston Chicken, Inc. 2.4%
Food/Tobacco Products & Services 6.4% Community Health Systems 2.4%
Diversified Services/Entertainment 6.3% Continental Micronesia 2.2%
Diversified Manufacturing 5.5% Allied Waste Industries, Inc. 1.9%
---------------------------------------- -----------------------------------
<PAGE>
Policy on Borrowing
Beginning in May of 1996, the Trust began a policy of borrowing for
investment purposes. This policy was approved by Shareholders 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 $400,000,000 with interest payable by the Trust at a variable rate at the
option of the Trust of LIBOR or the federal funds rate plus 0.50% of outstanding
borrowings plus a 0.125% fee on unused credit. As of February 28, 1997, the
Trust had outstanding borrowings of $267,000,000. 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. The Trust is currently in the process of amending its Credit
Facility to increase credit commitments to $515,000,000. 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 per
Share represented by each of the high and low closing prices on the NYSE; and
(3) the discount from or premium to NAV per Share (expressed as a percentage)
represented by these closing prices. The table also sets forth the aggregate
number of shares traded on the NYSE during the respective quarter.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Premium/(Discount)
Price NAV To NAV Reported
Calendar Quarter Ended High Low High Low High Low NYSE Volume
---- --- ---- --- ---- --- -----------
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
December 31, 1996 9.875 9.250 9.580 9.430 3.08 (1.91) 12,096,576
March 31, 1997 10.000 9.625 9.430 9.420 6.04 2.18 8,383,718
June 30, 1997 ______ ______ ______ ______ ______ ______ __________
</TABLE>
<PAGE>
The following chart shows, for the Trust's Shares for the period
indicated: (1) the closing price of the Shares on the NYSE; (2) the NAV of the
Shares; and (3) the discount or premium to NAV.
The following plot points replace a chart showing the premium and discount
at which the Trust's shares have traded.
<TABLE>
<S> <C> <C> <C>
PREMIUM/
NAV MARKET DISCOUNT
3/1/96 9.610 9.375 -2.45%
3/8/96 9.560 9.375 -1.94%
3/15/96 9.570 9.375 -2.04%
3/22/96 9.590 9.500 -0.94%
3/29/96 9.610 9.625 0.16%
4/5/96 9.540 9.500 -0.42%
4/12/96 9.550 9.500 -0.52%
4/19/96 9.570 9.500 -0.73%
4/26/96 9.580 9.375 -2.14%
5/3/96 9.600 9.625 0.26%
5/10/96 9.560 9.500 -0.63%
5/17/96 9.570 9.625 0.57%
5/24/96 9.590 9.500 -0.94%
5/31/96 9.610 9.625 0.16%
6/7/96 9.560 9.625 0.68%
6/14/96 9.570 9.625 0.57%
6/21/96 9.590 9.625 0.36%
6/28/96 9.610 9.750 1.46%
7/5/96 9.550 9.625 0.79%
7/12/96 9.570 9.625 0.57%
7/19/96 9.580 9.625 0.47%
7/26/96 9.600 9.750 1.56%
8/2/96 9.620 9.875 2.65%
8/9/96 9.560 9.875 3.29%
8/16/96 9.580 9.875 3.08%
8/23/96 9.600 10.000 4.17%
8/30/96 9.600 9.875 2.86%
9/6/96 9.550 9.875 3.40%
9/13/96 9.560 10.000 4.60%
9/20/96 9.580 9.625 0.47%
9/27/96 9.600 9.875 2.86%
10/4/96 9.620 9.875 2.65%
10/11/96 9.570 9.750 1.88%
10/18/96 9.580 9.625 0.47%
10/25/96 9.600 9.625 0.26%
11/1/96 9.610 9.375 -2.45%
11/8/96 9.560 9.250 -3.24%
11/15/96 9.560 9.375 -1.94%
11/22/96 9.430 9.375 -0.58%
11/29/96 9.450 9.375 -0.79%
12/6/96 9.390 9.375 -0.16%
12/13/96 9.410 9.625 2.28%
12/20/96 9.430 9.750 3.39%
12/27/96 9.380 9.625 2.61%
1/3/97 9.390 9.875 5.17%
1/10/97 9.410 9.875 4.94%
1/17/97 9.430 9.750 3.39%
1/24/97 9.440 9.875 4.61%
1/31/97 9.460 9.750 3.07%
2/7/97 9.410 9.750 3.61%
2/14/97 9.420 9.875 4.83%
2/21/97 9.430 10.000 6.04%
2/28/97 9.450 10.000 5.82%
3/7/97 9.400 9.875 5.05%
3/14/97 9.390 10.000 6.50%
3/21/97 9.410 9.750 3.61%
3/28/97 9.420 9.875 4.83%
4/4/97 9.440 10.125 7.26%
4/11/97 9.380 10.125 7.94%
4/18/97 9.400 10.000 6.38%
4/25/97 9.420 10.000 6.16%
5/2/97 9.420 10.000 6.16%
5/9/97 9.370 10.000 6.72%
5/16/97 9.380 10.000 6.61%
5/23/97 9.400 10.125 7.71%
5/30/97 9.420 10.000 6.16%
</TABLE>
Source: BLOOMBERG Financial Markets.
On July ___, 1997, the last reported sale price of a Share of the
Trust's Shares on the NYSE was $______. The Trust's NAV on July ____, 1997 was
$____. See "Net Asset Value" in the SAI. On July ___,1997, the last reported
sale price of a share of the Trust's Common Shares on the NYSE ($____)
represented a ____% premium above NAV ($_____) 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 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.
<PAGE>
Investment Performance
Morningstar Ratings
For the three-year and five-year periods ended February 28, 1997, the
Trust had a 4 star Morningstar risk-adjusted performance rating, when rated
among 139 and 88 taxable bond funds. The Trust's overall rating through February
28, 1997 was 4 stars.1 For the three-year and five-year periods ended February
28, 1997, the Trust's risk score placed the Trust 1st out of 32 and 26 Corporate
Bond - General funds. For the three-year and five-year periods ended February
28, 1997, the Trust's risk score placed the Trust 3rd and 2nd out of the entire
universe of 487 and 267 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), for the one-, three-, and five-year periods ended
February 28, 1997, the Trust ranked first among all funds in the Loan
Participation Fund 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.
Periods ended Total Number of Funds
February 28, 1997 Ranking(3) Return (3) in Category (4)
- ----------------- ---------- ---------- ---------------
One year 1 8.76% 7
Three years 1 28.29% 5
Five years 1 44.97% 5
- ----------------------
(1) The Trust's overall rating is based on a weighted average of its
performance for the three-year and five-year periods ended February 28,
1997.
(2) Morningstar's taxable bond fund category includes Corporate Bond -
General, Government Bond, International Bond and Multisector Bond
funds. On Morningstar's risk-adjusted performance rating system, funds
falling into the top 10% of all funds within their category are awarded
five stars and funds in the next 22.5% receive four stars. Morningstar
ratings are calculated from the fund's three, five and ten-year returns
(with fee adjustment) in excess of 90-day Treasury bill returns, and a
risk factor that reflects fund performance below 90-day Treasury bill
returns. The ratings are subject to change every month. Morningstar
ranks funds within the Corporate Bond - General category and the
closed-end universe for risk 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, but not reflecting the
January 1995 and November 1996 rights offerings. 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 returns of these
companies.
<PAGE>
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 preceding
twelve months.
The following plot points replace a graph showing comparative yield of
the Trust, the prime rate, the 60-day LIBOR rate, and a composite of comparable
investment companies.
<TABLE>
<S> <C> <C> <C> <C>
Date Prime Rate 60-Day LIBOR PRT Dist. Rate Lipper Composite
1/31/91 9.92 8.063 9.678% 9.539%
2/28/91 9.83 7.943 9.631% 9.479%
3/31/91 9.75 7.792 9.506% 9.401%
4/30/91 9.67 7.579 9.388% 9.322%
5/31/91 9.54 7.386 9.213% 9.240%
6/30/91 9.42 7.199 9.063% 9.017%
7/31/91 9.29 7.032 8.909% 8.861%
8/31/91 9.17 6.834 8.745% 8.649%
9/30/91 9.00 6.600 8.545% 8.467%
10/31/91 8.83 6.365 8.390% 8.262%
11/30/91 8.63 6.084 8.180% 8.033%
12/31/91 8.38 5.818 7.985% 7.774%
1/31/92 8.13 5.574 7.758% 7.580%
2/29/92 7.92 5.349 7.541% 7.372%
3/31/92 7.71 5.157 7.393% 7.163%
4/30/92 7.50 4.990 7.206% 6.985%
5/31/92 7.33 4.823 7.076% 6.797%
6/30/92 7.17 4.641 6.930% 6.698%
7/31/92 6.96 4.432 6.787% 6.554%
8/31/92 6.75 4.250 6.665% 6.371%
9/30/92 6.58 4.063 6.559% 6.209%
10/31/92 6.42 3.932 6.416% 6.053%
11/30/92 6.29 3.844 6.402% 5.897%
12/31/92 6.25 3.755 6.282% 5.844%
1/31/93 6.21 3.677 6.210% 5.733%
2/28/93 6.17 3.589 6.191% 5.696%
3/31/93 6.13 3.500 6.097% 5.667%
4/30/93 6.08 3.432 6.085% 5.692%
5/31/93 6.04 3.375 6.062% 5.603%
6/30/93 6.00 3.318 6.050% 5.513%
7/31/93 6.00 3.302 6.019% 5.469%
8/31/93 6.00 3.281 6.002% 5.455%
9/30/93 6.00 3.281 6.006% 5.438%
10/31/93 6.00 3.266 5.979% 5.454%
11/30/93 6.00 3.224 5.899% 5.435%
12/31/93 6.00 3.219 5.910% 5.478%
1/31/94 6.00 3.214 5.931% 5.500%
2/28/94 6.00 3.255 5.955% 5.492%
3/31/94 6.02 3.302 5.976% 5.476%
4/30/94 6.08 3.385 6.017% 5.392%
5/31/94 6.19 3.484 6.067% 5.447%
6/30/94 6.29 3.609 6.156% 5.549%
7/31/94 6.40 3.734 6.252% 5.643%
8/31/94 6.54 3.875 6.362% 5.748%
9/30/94 6.69 4.042 6.465% 5.910%
10/31/94 6.83 4.219 6.590% 6.008%
11/30/94 7.04 4.432 6.730% 6.171%
12/31/94 7.25 4.677 6.863% 6.369%
1/31/95 7.46 4.927 7.095% 6.548%
2/28/95 7.71 5.135 7.304% 6.765%
3/31/95 7.94 5.333 7.485% 7.043%
4/30/95 8.13 5.495 7.719% 7.239%
5/31/95 8.27 5.625 7.918% 7.392%
6/30/95 8.42 5.734 8.103% 7.580%
7/31/95 8.54 5.828 8.262% 7.656%
8/31/95 8.63 5.906 8.412% 7.746%
9/30/95 8.71 5.964 8.557% 7.805%
10/31/95 8.79 5.995 8.674% 7.879%
11/30/95 8.81 5.983 8.777% 7.913%
12/31/95 8.81 5.931 8.886% 7.863%
1/31/96 8.81 5.865 8.878% 7.878%
2/29/96 8.75 5.792 8.891% 7.821%
3/31/96 8.69 5.729 8.898% 7.685%
4/30/96 8.63 5.675 8.836% 7.581%
5/31/96 8.56 5.625 8.772% 7.549%
6/30/96 8.50 5.580 8.721% 7.422%
7/31/96 8.46 5.556 8.664% 7.368%
8/31/96 8.42 5.524 8.631% 7.313%
9/30/93 8.38 5.493 8.599% 7.224%
10/31/93 8.33 5.456 8.576% 7.187%
11/30/96 8.29 5.422 8.573% 7.158%
12/31/96 8.27 5.413 8.555% 7.045%
1/31/97 8.25 5.422 8.554% 7.026%
2/28/97 8.25 5.436 8.582% 7.012%
3/31/97 8.27 5.459 8.579% 6.978%
4/30/97 8.29 5.483 8.611% 7.022%
5/31/97 8.31 5.507 8.661% 7.007%
</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 28, 1997 and the period
of May 12, 1988 (inception of the Trust) to February 28, 1997, the
Trust's average annual total returns, based on NAV and assuming all
rights were exercised, were 8.06%, 7.81%, and 8.52%, respectively. The
Trust's 30-day standardized SEC yields as of February 28, 1997 were
8.44% at NAV and 7.97% at market. The Trust's expenses were partially
waived for the fiscal year ended February 29, 1992. As part of the 1996
rights offering the Investment Manager has voluntarily reduced its
management fee for the period from November 1996 through November 1999.
(2) The composite represents an unweighted average for investment companies
included in Lipper Analytical Services, Inc.'s Loan Participation Fund
Category of closed-end funds (for funds excluding the Trust in
existence for the entire period shown). Historical yields are based on
monthly dividends divided by corresponding month-end NAVs, annualized.
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 yield 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 Offered
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.
<PAGE>
- --------------------------------------------------------------------------------
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 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.
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.
<PAGE>
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
Ratings Services or P-1 by Moody's Investors Service, Inc., or of comparable
quality as determined by PAII, (ii) certificates of deposit, bankers'
acceptances, and other bank deposits and obligations, 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
$400,000,000 and is currently in the process of increasing this amount to
$515,000,000. 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.
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 the purchase of its shares. For information on risks
associated with borrowing, see "Risk Factors and Special Considerations --
Borrowing and Leverage."
RISK FACTORS AND SPECIAL CONSIDERATIONS
The following summarizes certain risks that should be considered, among
others, in connection with 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, investment strategies, 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
<PAGE>
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.
Discount From or Premium To 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
to or discount from NAV are not known to the Trust, nor can the Trust predict
whether its Shares will trade in the future at a premium to or discount from
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 may decrease.
Shares will be issued by the Trust pursuant to the Plan only if the
market price of the Shares, plus the estimated commissions of purchasing the
Shares on the secondary market, is greater than NAV. In some circumstances, as
described under "Plan of Distribution," the Trust may issue Shares at a price
equal to a premium above NAV pursuant to the terms of the Plan. At any time when
shares of a closed-end investment company are purchased at a premium above NAV,
the NAV of the shares purchased is less than the amount invested by the
shareholder. Furthermore, to the extent that the Shares of the Trust are issued
at a price equal to a premium above NAV, the Trust will receive and benefit from
the difference in those amounts.
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
of 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 February
28, 1997, approximately 2.35% 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 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 representing up to 33 1/3% (or such other percentage permitted by
<PAGE>
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. 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 such investment 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 of 1940, as amended (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 February 28,
1997 is LIBOR plus 0.50% of outstanding borrowings plus a 0.125% fee on unused
credit. At such a rate, and assuming the Trust borrowed an amount equal to 33
1/3% of its total net assets plus borrowings, the Trust must produce a 2.05%
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.
Assumed Portfolio Return,
net of expenses(1) .......... (10%) (5%) 0% 5% 10%
Corresponding Return to
Common Shareholders(2) ...... (18.07%) (10.57%) (3.07%) 4.43% 11.92%
(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 the
Trust's 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
Shareholders. The return available to Shareholders is then divided by
the total value of the Trust's net assets as of the beginning of the
fiscal year to determine the "Corresponding Return to Common
Shareholders."
Secondary Market for the Trust's Shares. The issuance of Shares through
the Plan may have an adverse effect on the secondary market for the Trust's
Shares. The increase in the amount of the Trust's outstanding Shares resulting
from issuances pursuant to the Plan or pursuant to privately negotiated
transactions may put downward pressure on the market price for Shares of the
Trust. Shares will not be issued pursuant to the Plan at any time when Shares
are trading at a price lower than the Trust's NAV per Share.
Limited Secondary Market for Senior Loans. 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.
<PAGE>
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 difficult to value Senior Loans. Market quotations may not be
available and valuation may require more research than for liquid securities. In
addition, elements of judgment may play a greater role in the valuation, because
there is less reliable, objective data available.
Demand for Senior Loans. Although the volume of Senior Loans has
increased in recent years, demand for Senior Loans has also grown. An increase
in demand may benefit the Trust by providing increased liquidity for Senior
Loans, but may also adversely affect the rate of interest payable on Senior
Loans acquired by the Trust.
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 Senior Loan market has increased
from $376 billion in 1992 to $888 billion in 1996. Senior Loans tailored to the
institutional investor, such as the Trust, have increased from $2.5 billion in
1993 to over $13.5 billion in 1996. In 1996, the volume of leveraged loans
(priced at LIBOR + 1.5% or higher) reached the highest level since 1989 with
$134.8 billion in volume. Leveraged loan volume of $23.7 billion in the first
quarter of 1997 is slightly under first quarter volume in each of the preceding
two years.
The following plot points replace a bar chart showing the growth of the
primary loan market from 1992 to 1996.
<TABLE>
<S> <C>
$ in billions
1992 $ 375.5
1993 $ 389.3
1994 $ 665.3
1995 $ 816.9
1996 $ 887.6
</TABLE>
Source: Loan Pricing Corporation.
<PAGE>
The total Senior Loan market for both leveraged and non-leveraged
transactions has averaged an annual growth rate of 18.8% since 1992. The Trust's
net assets, $734 million at the end of 1992 and $1 billion at the end of 1996,
have grown at an average annual growth rate of 6.8% for the same period.
At the same time primary Senior Loan volume has grown, 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 replacing U.S. and foreign banks as lenders. The
entrance of new investors has helped grow the bank loan trading market with
record volume of $41 billion during 1996. The active secondary market, coupled
with banks' focus on portfolio management and the move toward standard market
practices, has helped increase the liquidity for Senior Loans.
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,
private investment funds, 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 a commercial or
investment bank or other entity that originates a 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.
<PAGE>
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.
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 Federal Deposit Insurance
Corporation ("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.
<PAGE>
DESCRIPTION OF THE 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 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 May 31, 1997, to the best of the Trust's knowledge, no
Shareholders owned of record or beneficially more than 5% of the outstanding
Shares of the Trust. The number of Shares outstanding as of May 31, 1997 was
109,525,709.551, none of which were held by the Trust. 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, 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 Investment
Management Agreement 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 serves as
<PAGE>
investment manager to seven other registered investment companies (or series
thereof) and currently has assets under management of approximately $2.3 billion
as of the date of this Prospectus.
PAII is an indirect, wholly-owned subsidiary of Pilgrim America Capital
Corporation ("Pilgrim America") (NASDAQ: PACC) (formerly, Express America
Holdings Corporation). Through its subsidiaries, Pilgrim America engages in the
financial services business, focusing on providing investment advisory,
administrative and distribution services to open-end and closed-end investment
companies.
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 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 until November 12, 1999 to 0.60% of
the average daily net assets, plus the proceeds of any outstanding borrowings,
over $1.15 billion.
The Trust pays all operating and other expenses of the Trust not borne
by PAII including, but not limited to, audit and legal fees, transfer agent,
registrar and custodian fees, expenses in preparing tender offers, shareholder
reports and proxy solicitation materials and other miscellaneous business
expenses. The Trust also pays all taxes imposed on it and all brokerage
commissions and loan-related fees. The Trust is responsible for paying all of
the expenses of the Offering.
Portfolio Management. The Trust's portfolio is managed by a portfolio
management team consisting of a Senior Portfolio Manager, three Assistant
Portfolio Managers, and credit analysts.
Howard Tiffen is a Senior Vice President of PAII and the President,
Chief Operating Officer, and Senior Portfolio Manager of the Trust. He
has had primary responsibility for investment management of the Trust
since November, 1995. Prior to November 1995, Mr. Tiffen worked as a
Managing Director of various divisions of Bank of America (and its
predecessor, Continental Bank).
Daniel A. Norman is Senior Vice President, Principal Financial Officer,
and Treasurer of the Trust. He has served as Assistant Portfolio
Manager of the Trust since September 1996. Mr. Norman is a Senior Vice
President of PAGI and PAII (since December 1994), and Senior Vice
President (since November 1995) and Treasurer and Chief Financial
Officer (since April 1997) of PASI. Mr. Norman was Senior Vice
President of Express America Mortgage Corporation and Express America
Holdings Corporation (February 1992 - February 1996).
Michael Bacevich has served as Vice President and Assistant Portfolio
Manager of the Trust since September 1996 and December 1995,
respectively. Prior to joining PAII, Mr. Bacevich was Vice President of
Bank of America (and its predecessor, Continental Bank) (July 1992 -
November 1995) and Assistant Vice President (July 1990 - July 1992).
Thomas (Tim) C. Hunt has served as Assistant Portfolio Manager of the
Trust since June 1997. He has also served as Senior Portfolio Analyst
for the Trust from December 1995 to June 1997. Prior to joining PAII,
Mr. Hunt was a Corporate Finance Analyst with Bank of America (June
1995-December 1995), received a degree from the American Graduate
School of International Management (1993-1995), and worked for the
Japanese Ministry of Education in Saitama, Japan (1991-1993).
<PAGE>
The Administrator
The Administrator of the Trust is PAGI. Its principal business address
is 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. The
Administrator is a wholly-owned subsidiary of Pilgrim 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 (as defined below). The Administrator has authorized all of
its officers and employees who have been elected as Trustees or officers of the
Trust to serve in the latter capacities. All services furnished by the
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 daily 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 DST Systems, Inc., whose principal business address is 1004 Baltimore
Avenue, Kansas City, Missouri 64105.
Custodian
The Trust's securities and cash are held under a Custody Agreement with
Investors Fiduciary Trust Company ("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.
PLAN OF DISTRIBUTION
Dividend Reinvestment and Cash Purchase Plan
The Shares are offered by the Trust through the Trust's Dividend
Reinvestment and Cash Purchase Plan (the "Plan"). The Plan allows participating
Shareholders to reinvest all dividends ("Dividends") in additional shares of the
Trust, and also allows participants to purchase additional Shares through
optional cash investments in amounts ranging from a minimum of $100 to a maximum
of $100,000 per month. Subject to the permission of the Trust, participating
Shareholders may also make optional cash investments in excess of the monthly
maximum.
Shareholders may elect to participate in the Plan by submitting a
completed Enrollment Form to Investors Fiduciary Trust Company ("IFTC"), the
Plan administrator. IFTC establishes a Plan account for each participant in the
Plan and credits to each participant's account funds it receives from: (a)
Dividends paid on Trust shares registered in the participant's name and (b)
optional cash investments. IFTC will apply all Dividends and optional cash
investments received to purchase Shares as soon as practicable beginning on the
<PAGE>
relevant Investment Date (as defined below) and not later than six business days
after the Investment Date, except when necessary to comply with applicable
provisions of the federal securities laws. For more information on distribution
policy, see "Dividends and Distributions."
The "Investment Date" for Dividend reinvestments will be the Dividend
payment date, and for optional cash investments will be the date, set in advance
by the Trust, upon which optional cash investments received prior to such date
in compliance with the Plan are first applied by IFTC to the purchase of Shares.
Participants can obtain a schedule of upcoming Investment Dates by calling the
Trust at (602) 417-8256.
If the Market Price (the weighted average sales price, per share, as
reported on the New York Stock Exchange Composite Transaction Tape as shown
daily on Bloomberg's AQR screen) plus estimated commissions for Shares of the
Trust is less than the net asset value on the Trading Day (defined below)
immediately preceding the related Dividend payment date or Investment Date, IFTC
will acquire Shares directly from (1) first, those participants selling Shares
from Pilgrim America sponsored Retirement Plan accounts where IFTC acts as
Custodian ("Retirement Accounts") and thereafter (2) purchase Shares on the open
market through a bank or securities broker as provided herein. Open market
purchases may be effected on any securities exchange on which shares of the
Trust trade or in the over-the-counter market. If the Market Price, plus
estimated commissions, exceeds the net asset value before IFTC has completed its
purchases, IFTC will use reasonable efforts to cease purchasing Shares, and the
Trust shall issue the remaining Shares. If the Market Price, plus estimated
commissions, is equal to or exceeds the net asset value on the Trading Day
immediately preceding the related Dividend payment date or Investment Date, the
Trust will issue the Shares to be acquired by the Plan. A "Trading Day" means a
day on which trades of the Shares are reported on the NYSE. The Trust may,
without prior notice to participants, determine that it will not issue new
Shares for purchase pursuant to the Plan, even when the Market Price plus
estimated commissions equals or exceeds net asset value, in which case IFTC will
purchase Shares pursuant to the Plan from Retirement Accounts or on the open
market.
Shares issued by the Trust under the Plan will be issued commission
free. Shares purchased for the Plan directly from the Trust in connection with
the reinvestment of Dividends will be acquired on the Investment Date at the
greater of (i) net asset value at the close of business on the Trading Day
immediately preceding the dividend payment date or (ii) the Market Price of the
Shares on the Trading Day immediately preceding the dividend payment date, minus
a discount of 5%. The Trading Day immediately preceding the dividend payment
date is the "DRIP Pricing Period" for that dividend reinvestment.
Except in the case of cash investments made pursuant to Requests for
Waiver (as discussed below), Shares purchased directly from the Trust pursuant
to optional cash investments will be acquired on the relevant Investment Date at
the greater of (i) net asset value at the close of business on the Trading Day
immediately preceding the Investment Date or (ii) the average of the daily
Market Price of the Shares for the five Trading Days immediately preceding the
relevant Investment Date minus a discount, determined at the sole discretion of
the Trust, ranging from 0% to 5%. The five Trading Days immediately preceding an
Investment Date on which optional cash investments are to be invested constitute
the "OCI Pricing Period" for that Investment Date. The discount for optional
cash investments is set by the Trust and may be changed or eliminated by the
Trust without prior notice to participants at any time. At least three business
days prior to the first day of each OCI Pricing Period, the Trust may establish
a discount applicable to cash investments not exceeding $100,000. In all
instances, however, the discount on Shares issued directly by the Trust shall
not exceed 5% of the market price, and Shares may not be issued at a price less
than net asset value without prior specific approval of shareholders or of the
Commission. Optional cash investments received by IFTC no later than [4:00 p.m.]
Eastern time on the business day immediately preceding an OCI Pricing Period,
and which have cleared on or before the Investment Date, will be invested on
that Investment Date.
Optional cash investments in excess of $100,000 per month may be made
only pursuant to a Request for Waiver accepted in writing by the Trust. A
Request for Waiver must be received by the Trust no later than [4:00 p.m.]
<PAGE>
Eastern time on the second business day preceding the relevant OCI Pricing
Period. Good funds on all approved Requests For Waiver must be received by IFTC
not later than [4:00 P.M.] Eastern time on the business day immediately
preceding the relevant OCI Pricing Period in order for such funds to be invested
on the relevant Investment Date.
It is solely within the Trust's discretion as to whether approval for
any cash investments in excess of $100,000 will be granted. In deciding whether
to approve a Request for Waiver, the Trust will consider relevant factors
including, but not limited to, whether the Plan is then acquiring newly issued
Shares directly from the Trust or acquiring shares from third parties in the
open market, the Trust's need for additional funds, the attractiveness of
obtaining such additional funds through the sale of Shares as compared to other
sources of funds, the purchase price likely to apply to any sale of Shares under
the Plan, the participant submitting the request, the extent and nature of such
participant's prior participation in the Plan, the number of Shares held by such
participant and the aggregate amount of cash investments for which Requests for
Waiver have been submitted by all participants. If such requests are submitted
for any Investment Date for an aggregate amount in excess of the amount the
Trust is then willing to accept, the Trust may honor such requests in order of
receipt, pro rata or by any other method that the Trust determines in its sole
discretion to be appropriate.
Shares purchased directly from the Trust in connection with approved
Requests for Waiver will be acquired on the Investment Date at the greater of
(i) net asset value at the close of business on the Trading Day immediately
preceding the Investment Date, or (ii) the average of the daily Market Price of
the Shares for the five Trading Days immediately preceding the relevant
Investment Date minus the Waiver Discount (as defined below), if any, applicable
to such shares. At least three business days prior to the first day of each OCI
Pricing Period, the Trust may establish a discount applicable to cash
investments exceeding $100,000 (the "Waiver Discount"). The Waiver Discount,
which may vary each month between 0% and 5%, will be established in the Trust's
sole discretion after a review of current market conditions, the level of
participation in the Plan and current and projected capital needs of the Trust.
The Waiver Discount will apply only to Shares purchased directly from the Trust.
The Trust may establish for each OCI Pricing Period a minimum price
applicable to the purchase of newly issued Shares through Requests for Waiver,
which will be a stated dollar amount that the Market Price of the Shares for a
Trading Day of the Pricing Period must equal or exceed. In the event that such
minimum price is not satisfied for a Trading Day of the Pricing Period, then
such Trading Day and the trading prices for that day will be excluded from (i)
the Pricing Period and (ii) the determination of the purchase price of the
Shares for all cash investments made pursuant to Requests for Waiver approved by
the Trust. The minimum price shall apply only to cash investments made pursuant
to Requests for Waiver approved by the Trust and not to the reinvestment of
Dividends or optional cash investments that do not exceed $100,000.
Participants will pay a pro rata share of brokerage commissions with
respect to IFTC's open market purchases in connection with the reinvestment of
Dividends or purchases made with optional cash investments.
From time to time, financial intermediaries, including brokers and
dealers, and other persons may wish to engage in positioning transactions in
order to benefit from the discount from market price of the Shares acquired
under the Plan. Such transactions could cause fluctuations in the trading volume
and price of the Shares. The difference between the price such owners pay to the
Trust for Shares acquired under the Plan, after deduction of the applicable
discount from the market price, and the price at which such Shares are resold,
may be deemed to constitute underwriting commissions received by such owners in
connection with such transactions. The Trust has no arrangements or
understandings, formal or informal, with any person relating to the sale of
Shares to be received under the program.
Subject to the availability of Shares registered for issuance under the
Plan, there is no total maximum number of Shares that can be issued pursuant to
the Plan. As of the date hereof, 7,500,000 Shares have been registered and are
available for sale under the Plan.
<PAGE>
The Plan is intended for the benefit of investors in the Trust and not
for persons or entities who accumulate accounts under the Plan over which they
have control for the purpose of exceeding the $100,000 per month maximum without
seeking the advance approval of the Trust or who engage in transactions that
cause or are designed to cause aberrations in the price or trading volume of the
Shares. Notwithstanding anything in the Plan to the contrary, the Trust reserves
the right to exclude from participation, at any time, (i) persons or entities
who attempt to circumvent the Plan's standard $100,000 maximum by accumulating
accounts over which they have control or (ii) any other persons or entities, as
determined in the sole discretion of the Trust.
Currently, persons who are not Shareholders of the Trust may not
participate in the Plan. The Board of Trustees of the Trust may elect to change
this policy at a future date, and permit non-Shareholders to participate in the
Plan.
Shareholders may elect to withdraw from the Plan at any time by giving
IFTC written notice. When a participant withdraws from the Plan, the participant
will receive a certificate or a credit to his/her brokerage account via
appropriate broker or nominee delivery for full Shares in the Account.
Fractional Shares will be held and aggregated with other Fractional Shares being
liquidated by IFTC as agent of the Plan and as transfer agent of the Trust and
paid for by check when actually sold. After withdrawal, future dividend payments
will be made to the shareholder in cash.
The automatic reinvestment of Dividends does not affect the tax
characterization of the Dividends (i.e., capital gains and income are realized
even though cash is not received).
In accordance with Section 23(c) of the Investment Company Act and Rule
23c-1 thereunder, the Trust may from time to time purchase shares of beneficial
interest of the Trust in the open market in connection with the Plan.
Additional information about the Plan may obtained from The Pilgrim
America Group's Shareholder Services Department (1-800-331-1080).
Privately Negotiated Transactions
The Shares may also be offered pursuant to privately negotiated
transactions between the Trust and specific investors. The terms of such
privately negotiated transactions will be subject to the discretion of the
management of the Trust. In determining whether to sell Shares pursuant to a
privately negotiated transaction, the Trust will consider relevant factors
including, but not limited to, the attractiveness of obtaining additional funds
through the sale of Shares, the purchase price to apply to any such sale of
Shares and the person seeking to purchase the Shares.
Shares issued by the Trust in connection with privately negotiated
transactions will be issued at the greater of (i) NAV per Share of the Trust's
Shares or (ii) at a discount ranging from 0% to 5% of the market price of the
Trust's Shares at the close of business on the business day next preceding the
date upon which Shares are sold pursuant to the privately negotiated
transaction. The discount to apply to such privately negotiated transactions
will be determined by the Trust with regard to each specific transaction.
USE OF PROCEEDS
It is expected that the net proceeds of Shares issued pursuant to the
Plan will be invested in Senior Loans and other securities consistent with the
Trust's investment objective and policies. Pending investment in Senior Loans,
<PAGE>
the proceeds will be used to pay down the Trust's outstanding borrowings under
its Credit Facility. See "Financial Highlights and Investment Performance -
Policy on Borrowing." As of February 28, 1997, $267,000,000 was outstanding. By
paying down the Trust's borrowings, it will be possible to invest the proceeds
consistent with the Trust's investment objectives and policies almost
immediately. As investment opportunities are identified, it is expected that the
Trust will redeploy its available credit to increase its investment
opportunities in additional Senior Loans.
DIVIDENDS AND DISTRIBUTIONS
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 and Cash Purchase Plan discussed
above. Shareholders receive statements on a periodic basis reflecting any
distributions credited or paid to their account. Income dividends consist of
interest accrued and amortization of fees earned less any amortization of
premiums paid and the estimated expenses of the Trust, including fees payable to
PAII. Income dividends are calculated monthly under guidelines approved by the
Trustees. Each dividend is payable to Shareholders of record at the time of
declaration. Accrued amounts of fees received, including facility fees, will be
taken in as income and passed on to Shareholders as part of dividend
distributions. Any fees or commissions paid to facilitate the sale of portfolio
Senior Loans in connection with quarterly tender offers or other portfolio
transactions may reduce the dividend yield. The Trust may make one or more
annual payments from any net realized capital gains, if any.
TAX MATTERS
The Trust intends to operate as a "regulated investment company" under
the Internal Revenue Code of 1986, as amended. To do so, the Trust must meet
certain income, distribution and diversification requirements. In any fiscal
year in which the Trust so qualifies and distributes to Shareholders
substantially all of its net investment income and net capital gains, the Trust
itself is generally relieved of any federal income or excise tax.
All dividends and capital gains distributed to Shareholders are taxable
whether they are reinvested or received in cash, unless the Shareholder is
exempt from taxation or entitled to tax deferral. Dividends paid out of the
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 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.
<PAGE>
DISTRIBUTION ARRANGEMENTS
Pursuant to the terms of a Distribution Agreement, PASI will provide
certain soliciting services on behalf of the Trust in connection with certain
privately negotiated transactions and investments in excess of $100,000 pursuant
to a waiver. The Trust has agreed to pay PASI a fee for services in connection
with the sale of the Shares under the [Distribution] Agreement up to an amount
equal to 1.00% of the gross sales price of the Shares sold pursuant to such
privately negotiated transactions or investments pursuant to a waiver, payable
from the proceeds of the sale of the Shares. PASI may allow all or a portion of
the fee to another broker-dealer. No commissions will be paid by the Trust or
its Shareholders in connection with the reinvestment of dividends and capital
gains distributions or in connection with optional cash investments up to the
maximum of $100,000 per month. PASI's principal business address is 40 North
Central Avenue, Suite 1200, Phoenix, Arizona 85004. PASI and PAII, the Trust's
Investment Manager, are indirect, wholly-owned subsidiaries of PACC. See
"Investment Management and Other Services - Investment Manager."
The Trust bears the expenses of issuing the Shares. These expenses
include, but are not limited to, the expense of preparation and printing of the
Prospectus and SAI, the expense of counsel and auditors, and others.
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.
EXPERTS
The financial statements and financial highlights of the Trust as of
February 28, 1997 and for the year then ended have been incorporated by
reference herein in reliance upon the report of KPMG Peat Marwick LLP,
independent auditors, incorporated by reference herein, and upon the authority
of said firm as experts in accounting and auditing. The address of KPMG Peat
Marwick LLP is 725 South Figueroa Street, Los Angeles, California 90017-5491.
REGISTRATION STATEMENT
The Trust has filed with the 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 28, 1997, are incorporated into the SAI by reference from the Trust's
Annual Report to Shareholders dated as of February 28, 1997. The Trust will
furnish without charge copies of its Annual Report to Shareholders upon request
to the Trust, 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004,
toll-free telephone 1(800) 331-1080.
<PAGE>
TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
Page
Change of Name................................................................
Additional Information about Investments and Investment Techniques............
Investment Restrictions.......................................................
Trustees and Officers.........................................................
Investment Management and Other Services......................................
Portfolio Transactions........................................................
Net Asset Value...............................................................
Methods Available to Reduce Market Value Discount from NAV....................
Tax Matters...................................................................
Advertising and Performance Data..............................................
<PAGE>
<TABLE>
============================================================ ==========================================================
<S> <C>
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 7,500,000 Shares of Beneficial Interest
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 or the Investment Manager. This
Prospectus does not constitute an offer to sell or the
solicitation of any offer to buy any security other than Pilgrim America Prime Rate Trust
the Shares offered by this Prospectus, nor does it
constitute an offer to sell or a solicitation of any offer
to buy the 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 New York Stock Exchange Symbol: PPR
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, this Prospectus will be amended or
supplemented accordingly. __________________________
____________________________________________ PROSPECTUS
--------------------------
TABLE OF CONTENTS
Prospectus Summary...................................
Trust Expenses.......................................
Financial Highlights and Investment Performance......
Investment Objective and Policies....................
Risk Factors and Special Considerations..............
General Information on Senior Loans..................
Description of the Shares............................
Investment Management and Other Services.............
Plan of Distribution.................................
Use of Proceeds......................................
Dividends and Distributions..........................
Tax Matters..........................................
Distribution Arrangements............................
Legal Matters........................................
Experts.............................................. _______________, 1997
Registration Statement...............................
Financial Statements.................................
Table of Contents of Statement of Additional Information
============================================================= ==========================================================
</TABLE>
<PAGE>
PILGRIM AMERICA PRIME RATE TRUST
STATEMENT OF ADDITIONAL INFORMATION
Pilgrim America Prime Rate Trust (the "Trust") is a diversified, closed-end
management investment company registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"). The Trust's investment
objective is to seek as high a level of current income as is consistent with the
preservation of capital. The Trust seeks to achieve its objective by investing
in variable or floating-rate senior collateralized corporate loans ("Senior
Loans"), the interest rates of which float periodically based upon a benchmark
indicator of prevailing interest rates, such as the Prime Rate or the London
Inter-Bank Offered Rate ("LIBOR"). Under normal circumstances, at least 80% of
the Trust's net assets are invested in Senior Loans. The Trust is managed by
Pilgrim America Investments, Inc. ("PAII" or the "Investment Manager").
This Statement of Additional Information ("SAI") is not a prospectus, but should
be read in conjunction with the Prospectus for the Trust dated ___________, 1997
(the "Prospectus"). This SAI does not include all information that a prospective
investor should consider before purchasing shares of the Trust, and investors
should obtain and read the Prospectus prior to purchasing shares. A copy of the
Prospectus may be obtained without charge, by calling PAII toll-free at (800)
331-1080. This SAI incorporates by reference the entire Prospectus.
TABLE OF CONTENTS
PAGE
Change of Name......................................................... 2
Additional Information about Investments and Investment Techniques..... 2
Investment Restrictions................................................ 9
Trustees and Officers.................................................. 10
Investment Management and Other Services............................... 13
Portfolio Transactions................................................. 15
Net Asset Value........................................................ 16
Methods Available to Reduce Market Value Discount from NAV............. 16
Tax Matters............................................................ 18
Advertising and Performance Data....................................... 21
The Prospectus and this SAI omit certain of the information contained in the
registration statement filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. The registration statement may be obtained from
the Commission upon payment of the fee prescribed, or inspected at the
Commission's office at no charge.
This SAI is dated __________, 1997.
<PAGE>
CHANGE OF NAME
The Trust changed its name from "Pilgrim Prime Rate Trust" to "Pilgrim America
Prime Rate Trust" in April, 1996.
ADDITIONAL INFORMATION ABOUT INVESTMENTS
AND INVESTMENT TECHNIQUES
Some of the different types of securities in which the Trust may invest, subject
to its investment objective, policies and restrictions, are described in the
Prospectus under "Investment Objective and Policies." Additional information
concerning certain of the Trust's investments and investment techniques is set
forth below.
Equity Securities
In connection with its purchase or holding of interests in Senior Loans, the
Trust may acquire (and subsequently sell) equity securities or exercise warrants
that it receives. The Trust will acquire such interests only as an incident to
the intended purchase or ownership of Senior Loans or if, in connection with a
reorganization of a borrower, the Trust receives an equity interest in a
reorganized corporation or warrants to acquire such an equity interest. The
Trust normally will not hold more than 20% of its total assets in equity
securities. Equity securities will not be treated as Senior Loans; therefore, an
investment in such securities will not count toward the 80% of the Trust's net
assets that normally will be invested in Senior Loans. Equity securities are
subject to financial and market risks and can be expected to fluctuate in value.
Lease Participations
The Trust may invest up to 20% of its net assets in participation interests in
lease financings ("Lease Participations"). Investments in Lease Participations
will not be counted toward the 80% of the Trust's assets that under normal
market conditions is invested in Senior Loans.
The Trust will invest in Lease Participations only if they generally meet the
same credit quality standards and general requirements that the Trust applies to
Senior Loans. Thus, the collateral quality, the credit quality of the borrower
and the likelihood of payback for a Lease Participation are the same as those
applied to a Senior Loan. A Lease Participation is also required to have a
floating interest rate that is indexed to the federal funds rate, LIBOR, or
prime rate in order to be eligible for investment.
The Office of the Comptroller of the Currency has established regulations which
set forth circumstances under which national banks may engage in lease
financings. Among other things, the regulation requires that a lease be a
net-full payout lease representing the noncancelable obligation of the lessee,
and that the bank make certain determinations with respect to any estimated
residual value of leased property relied upon by the bank to yield a full return
on the lease. The Trust may invest in lease financings only if the Lease
Participation meets these banking law requirements.
Repurchase Agreements
In general, the Trust does not engage, nor does it intend to engage in the
foreseeable future, in repurchase agreements. The Trust has the ability,
however, pursuant to its investment objective and policies, to enter into
repurchase agreements (a purchase of, and a simultaneous commitment to resell, a
financial instrument at an agreed upon price on an agreed upon date) only with
member banks of the Federal Reserve System, member firms of the New York Stock
Exchange ("NYSE") or other entities determined by PAII to be creditworthy. When
participating in repurchase agreements, the Trust buys securities from a vendor,
e.g., a bank or brokerage firm, with the agreement that the vendor will
repurchase the securities at a higher price at a later date. The Trust may be
subject to various delays and risks of loss if the vendor is unable to meet its
obligation to repurchase. Under the Investment Company Act, repurchase
agreements are deemed to be collateralized loans of money by the Trust to the
seller. In evaluating whether to enter into a repurchase agreement, PAII will
consider carefully the creditworthiness of the vendor. If the member bank or
member firm that is the party to the repurchase agreement petitions for
bankruptcy or otherwise becomes subject to the U.S. Bankruptcy Code, the law
regarding the rights of the Trust to enforce the terms of the repurchase
agreement is unsettled. The securities underlying a repurchase agreement will be
marked to market every business day so that the value of the collateral is at
least equal to the value of the loan, including the accrued interest thereon,
and PAII will monitor the value of the collateral. No specific limitation exists
as to the percentage of the Trust's assets which may be used to participate in
repurchase agreements.
Reverse Repurchase Agreements
In general, the Trust does not engage, nor does it intend to engage in the
foreseeable future, in reverse repurchase agreements. The Trust has the ability,
however, pursuant to its investment objective and policies, to enter into
reverse repurchase agreements. A reverse repurchase agreement is an instrument
under which the Trust may sell an underlying debt instrument and simultaneously
obtain the commitment of the purchaser to sell the security back to the Trust at
an agreed upon price on an agreed upon date. Reverse repurchase agreements will
be considered borrowings by the Trust and as such are subject to the
restrictions on borrowing. Borrowings by the Trust create an opportunity for
greater total return, but at the same time, increase exposure to capital risk.
The Trust will maintain in a segregated account with its custodian cash or
liquid high grade portfolio securities in an amount sufficient to cover its
obligations with respect to reverse repurchase agreements. The Trust will
receive payment for such securities only upon physical delivery or evidence of
book entry transfer by its custodian. Regulations of the Commission require
either that securities sold by the Trust under a reverse repurchase agreement be
segregated pending repurchase or that the proceeds be segregated on the Trust's
books and records pending repurchase. Reverse repurchase agreements may involve
certain risks in the event of default or insolvency of the other party,
including possible loss from delays or restrictions upon the Trust's ability to
dispose of the underlying securities. An additional risk is that the market
value of securities sold by the Trust under a reverse repurchase agreement could
decline below the price at which the Trust is obligated to repurchase them.
Lending Senior Loans and Other Portfolio Instruments
To generate additional income, the Trust may lend its portfolio securities,
including an interest in a Senior Loan, in an amount up to 33 1/3% of total
Trust assets to broker-dealers, major banks, or other recognized domestic
institutional borrowers of securities. No lending may be made with any companies
affiliated with PAII. During the time portfolio securities are on loan, the
borrower pays the Trust any dividends or interest paid on such securities, and
the Trust may invest the cash collateral and earn additional income, or it may
receive an agreed-upon amount of interest income from the borrower who has
delivered equivalent collateral or a letter of credit. As with other extensions
of credit, there are risks of delay in recovery or even loss of rights in the
collateral should the borrower fail financially.
The Trust may seek to increase its income by lending financial instruments in
its portfolio in accordance with present regulatory policies, including those of
the Board of Governors of the Federal Reserve System and the Commission. The
lending of financial instruments is a common practice in the securities
industry. The loans are required to be secured continuously by collateral,
consistent with the requirements of the Investment Company Act discussed below,
maintained on a current basis at an amount at least equal to the market value of
the portfolio instruments loaned. The Trust has the right to call a Senior Loan
and obtain the portfolio instruments loaned at any time on such notice as
specified in the transaction documents. For the duration of the Senior Loan, the
Trust will continue to receive the equivalent of the interest paid by the issuer
on the portfolio instruments loaned and may also receive compensation for the
loan of the financial instrument. Any gain or loss in the market price of the
instruments loaned that may occur during the term of the Senior Loan will be for
the account of the Trust.
The Trust may lend its portfolio instruments so long as the terms and the
structure of such loans are not inconsistent with the requirements of the
Investment Company Act, which currently require that (a) the borrower pledge and
maintain with the Trust collateral consisting of cash, a letter of credit issued
by a domestic U.S. bank, or securities issued or guaranteed by the U.S.
government having a value at all times not less than 100% of the value of the
instruments loaned, (b) the borrowers add to such collateral whenever the price
of the instruments loaned rises (i.e., the value of the loan is "marked to the
market" on a daily basis), (c) the loan be made subject to termination by the
Trust at any time, and (d) the Trust receive reasonable interest on the loan
(which may include the Trust's investing any cash collateral in interest bearing
short-term investments), any distributions on the loaned instruments and any
increase in their market value. The Trust may lend its portfolio instruments to
member banks of the Federal Reserve System, members of the NYSE or other
entities determined by PAII to be creditworthy. All relevant facts and
circumstances, including the creditworthiness of the qualified institution, will
be monitored by PAII, and will be considered in making decisions with respect to
the lending of portfolio instruments.
The Trust may pay reasonable negotiated fees in connection with loaned
instruments. In addition, voting rights may pass with the loaned securities, but
if a material event were to occur affecting such a loan, the Trust will retain
the right to call the loan and vote the securities. If a default occurs by the
other party to such transaction, the Trust will have contractual remedies
pursuant to the agreements related to the transaction but such remedies may be
subject to bankruptcy and insolvency laws which could materially and adversely
affect the Trust's rights as a creditor. However, the loans will be made only to
firms deemed by PAII to be of good financial standing and when, in the judgment
of PAII, the consideration which can be earned currently from loans of this type
justifies the attendant risk.
Interest Rate Hedging Transactions
Generally, the Trust does not engage, nor does it intend to engage, in the
foreseeable future, in interest rate swaps, or the purchase or sale of interest
rate caps and floors. The Trust has the ability, however, pursuant to its
investment objectives and policies, to engage in certain hedging transactions
including interest rate swaps and the purchase or sale of interest rate caps and
floors. The Trust may undertake these transactions primarily for the following
reasons: to preserve a return on or value of a particular investment or portion
of the Trust's portfolio, to protect against decreases in the anticipated rate
of return on floating or variable rate financial instruments which the Trust
owns or anticipates purchasing at a later date, or for other risk management
strategies such as managing the effective dollar-weighted average duration of
the Trust's portfolio. Market conditions will determine whether and in what
circumstances the Trust would employ any of the hedging techniques described
below.
Interest rate swaps involve the exchange by the Trust with another party of
their respective commitments to pay or receive interest, e.g., an exchange of an
obligation to make floating rate payments on a specified dollar amount referred
to as the "notional" principal amount for an obligation to make fixed rate
payments. For example, the Trust may seek to shorten the effective interest rate
redetermination period of a Senior Loan in its portfolio that has an interest
rate redetermination period of one year. The Trust could exchange its right to
receive fixed income payments for one year from a borrower for the right to
receive payments under an obligation that readjusts monthly. In such event, the
Trust would consider the interest rate redetermination period of such Senior
Loan to be the shorter period. The purchase of an interest rate cap entitles the
purchaser, to the extent that a specified index exceeds a predetermined interest
rate, to receive payments of interest on a notional principal amount from the
party selling such interest rate cap. The purchase of an interest rate floor
entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate floor. The Trust will
not enter into swaps, caps or floors if, on a net basis, the aggregate notional
principal amount with respect to such agreements exceeds the net assets of the
Trust or to the extent the purchase of swaps, caps or floors would be
inconsistent with the Trust's other investment restrictions.
The Trust will not treat swaps covered in accordance with applicable regulatory
guidance as senior securities. The Trust will usually enter into interest rate
swaps on a net basis, i.e., where the two parties make net payments with the
Trust receiving or paying, as the case may be, only the net amount of the two
payments. The net amount of the excess, if any, of the Trust's obligations over
its entitlement with respect to each interest rate swap will be accrued and an
amount of cash or liquid securities having an aggregate NAV at least equal to
the accrued excess will be maintained in a segregated account. If the Trust
enters into a swap on other than a net basis, the Trust will maintain in the
segregated account the full amount of the Trust's obligations under each such
swap. The Trust may enter into swaps, caps and floors with member banks of the
Federal Reserve System, members of the NYSE or other entities determined by
PAII. If a default occurs by the other party to such transaction, the Trust will
have contractual remedies pursuant to the agreements related to the transaction
but such remedies may be subject to bankruptcy and insolvency laws which could
materially and adversely affect the Trust's rights as a creditor.
The swap, cap and floor market has grown substantially in recent years with a
large number of banks and financial services firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, this market
has become relatively liquid. There can be no assurance, however, that the Trust
will be able to enter into interest rate swaps or to purchase interest rate caps
or floors at prices or on terms PAII believes are advantageous to the Trust. In
addition, although the terms of interest rate swaps, caps and floors may provide
for termination, there can be no assurance that the Trust will be able to
terminate an interest rate swap or to sell or offset interest rate caps or
floors that it has purchased.
The successful utilization of hedging and risk management transactions requires
skills different from those needed in the selection of the Trust's portfolio
securities and depends on PAII's ability to predict correctly the direction and
degree of movements in interest rates. Although the Trust believes that use of
the hedging and risk management techniques described above will benefit the
Trust, if PAII's judgment about the direction or extent of the movement in
interest rates is incorrect, the Trust's overall performance would be worse than
if it had not entered into any such transactions. The Trust will incur brokerage
and other costs in connection with its hedging transactions.
Borrowing
Under the Investment Company Act, the Trust is not permitted to incur
indebtedness unless immediately after such incurrence the Trust has an asset
coverage of 300% of the aggregate outstanding principal balance of indebtedness.
Additionally, under the Investment Company Act, the Trust may not declare any
dividend or other distribution upon any class of its capital stock, or purchase
any such capital stock, unless the aggregate indebtedness of the Trust has at
the time of the declaration of any such dividend or distribution or at the time
of any such purchase an asset coverage of at least 300% after deducting the
amount of such dividend, distribution, or purchase price, as the case may be.
Subordinated Tranches of Senior Loans
In connection with its purchase or holding of interests in Senior Loans, the
Trust may acquire, with up to 5% of the Trust's total assets, Senior Loans that
are subordinated in some manner as to the payment of interest and/or repayment
of principal to other Senior Loans or to other secured lenders (otherwise known
as "subordinated classes" or "subordinated tranches" of Senior Loans). Such
subordinated tranches of Senior Loans may be acquired to provide the Trust
opportunities to enhance Trust performance by obtaining higher interest rates
and/or higher fees.
Subordinated tranches of Senior Loans in an insolvency would bear an increased
share of the ultimate credit losses relative to other senior secured bank
lenders. The primary risk arising from a holder's subordination is the potential
loss in the event of default by the issuer of Senior Loans. The Trust, in this
instance, continues to be a senior, fully secured lender in these Senior Loans.
The Trust will only invest in such subordinated tranches when PAII believes that
the Trust would receive an appropriately higher interest rate and/or higher fees
in connection with its purchase as compensation for assuming this additional
risk.
Originating Senior Loans
The Trust may act as an "agent" in originating and administering a loan on
behalf of all lenders or as one of a group of "co-agents" in originating Senior
Loans. Senior Loans are typically arranged through private negotiations between
a corporate borrower and several financial institutions ("lenders") represented
in each case by one or more such lenders acting as agent of the several lenders.
On behalf of the several lenders, the agent, which is frequently the entity that
originates the Senior Loan and invites the other parties to join the lending
syndicate, will be primarily responsible for negotiating the Senior Loan
agreements that establish the relative terms, conditions and rights of the
corporate borrower and the several lenders. The co-agents, on the other hand,
are not responsible for administration of a Senior Loan, but are part of the
initial group of lenders that commit to providing funding for a Senior Loan. In
large transactions, it is common to have several agents; however, one such agent
typically has primary responsibility for documentation and administration of the
Senior Loan. The agent is required to administer and manage the Senior Loan and
to service or monitor the collateral. The agent is also responsible for the
collection of principal and interest and fee payments from the corporate
borrower and the apportionment of these payments to the credit of all lenders
which are parties to the loan agreement. The agent is charged with the
responsibility of monitoring compliance by the corporate borrower with the
restrictive covenants in the loan agreement and of notifying the lenders of any
adverse change in the corporate borrower's financial condition. In addition, the
agent generally is responsible for determining that the lenders have obtained a
perfected security interest in the collateral securing the Senior Loan.
Lenders generally rely on the agent to collect their portion of the payments on
the Senior Loan and to use appropriate creditor remedies against the corporate
borrower. Typically under loan agreements, the agent is given broad discretion
in enforcing the loan agreement and is obligated to use the same care it would
use in the management of its own property. The corporate borrower compensates
the agent for these services. Such compensation may include special fees paid on
structuring and funding the Senior Loan and other fees paid on a continuing
basis. The precise duties and rights of an agent are defined in the loan
agreement.
When the Trust is an agent, it has, as a party to the loan agreement, a direct
contractual relationship with the corporate borrower and, prior to allocating
portions of the Senior Loan to the lenders, if any, assumes all risks associated
with the Senior Loan. The agent may enforce compliance by the corporate borrower
with the terms of the loan agreement. Agents also have voting and consent rights
under the applicable loan agreement. Action subject to agent vote or consent
generally requires the vote or consent of the holders of some specified
percentage of the outstanding principal amount of the Senior Loan, which
percentage varies depending on the relevant loan agreement. Certain decisions,
such as reducing the amount or increasing the time for payment of interest on or
repayment of principal of a Senior Loan, or releasing collateral therefor,
frequently require the unanimous vote or consent of all lenders affected.
Pursuant to the terms of a loan agreement, the Trust as agent typically has sole
responsibility for servicing and administering a loan on behalf of the other
lenders. Each lender in a Senior Loan is generally responsible for performing
their own credit analysis and their own investigation of the financial condition
of the corporate borrower. Generally, loan agreements will hold the Trust liable
for any action taken or omitted that amounts to gross negligence or willful
misconduct. In the event of a corporate borrower's default on a loan, the loan
agreements provide that the lenders do not have recourse against the Trust for
its activities as agent. Instead, lenders will be required to look to the
corporate borrower for recourse.
Acting in the capacity of an agent in a Senior Loan may subject the Trust to
certain risks in addition to those associated with the Trust's current role as a
lender. An agent is charged with the above described duties and responsibilities
to lenders and corporate borrowers subject to the terms of the loan agreement.
Failure to adequately discharge such responsibilities in accordance with the
standard of care set forth in the loan agreement may expose the Trust to
liability for breach of contract. If a relationship of trust is found between
the agent and the lenders, the agent will be held to a higher standard of
conduct in administering the loan. In consideration of such risks, the Trust
will invest no more than 10% of its total assets in Senior Loans in which it
acts as agent or co-agent and the size of any individual loan will not exceed 5%
of the Trust's total assets.
Additional Information on Senior Loans
Senior Loans are direct obligations of corporations and are arranged by banks or
other commercial lending institutions and made generally to finance internal
growth, mergers, acquisitions, stock repurchases, and leveraged buyouts. Senior
Loans usually include restrictive covenants which must be maintained by the
borrowing corporation. Such covenants, in addition to the timely payment of
interest and principal, may include mandatory prepayment provisions arising from
free cash flow, restrictions on dividend payments and usually state that a
company must maintain specific minimum financial ratios as well as establishing
limits on total debt. A breach of a covenant, which is not waived by the agent,
is normally an event of acceleration, i.e., the agent has the right to call the
outstanding Senior Loan. In addition, loan covenants may include mandatory
prepayment provisions stemming from free cash flow. Free cash flow is cash that
is in excess of capital expenditures plus debt service requirements of principal
and interest. The free cash flow shall be applied to prepay the Senior Loan in
an order of maturity described in the loan documents. Under certain interests in
Senior Loans, the Trust may have an obligation to make additional loans upon
demand by the corporate borrower. The Trust intends to reserve against such
contingent obligations by segregating sufficient assets in high quality
short-term liquid investments or borrowing to cover such obligations.
In a typical interest in a Senior Loan, the agent administers the loan and has
the right to monitor the collateral. The agent is also required to segregate the
principal and interest payments received from the corporate borrower and to hold
these payments for the benefit of the lenders. The Trust normally looks to the
agent to collect and distribute principal of and interest on a Senior Loan.
Furthermore, the Trust looks to the agent to use normal credit remedies, such as
to foreclose on collateral; monitor credit loan covenants; and notify the
lenders of any adverse changes in the corporation's financial condition or
declarations of insolvency. At times the Trust may also negotiate with the agent
regarding the agent's exercise of credit remedies under a Senior Loan. The agent
is compensated for these services by the corporate borrower as is set forth in
the loan agreement. Such compensation may take the form of a fee or other amount
paid upon the making of the Senior Loan and/or an ongoing fee or other amount.
The loan agreement in connection with Senior Loans sets forth the standard of
care to be exercised by the agents on behalf of the lenders and usually provides
for the termination of the agent's agency status in the event that it fails to
act properly, becomes insolvent, enters FDIC receivership, or if not FDIC
insured, enters into bankruptcy or if the agent resigns. In the event an agent
is unable to perform its obligations as agent, another lender would generally
serve in that capacity.
The Trust believes that the principal credit risk associated with acquiring
Senior Loans from another lender is the credit risk associated with the
corporate borrower of the underlying Senior Loan. The Trust may incur additional
credit risk, however, when the Trust acquires a participation in a Senior Loan
from another lender because the Trust must assume the risk of insolvency or
bankruptcy of the other lender from which the Senior Loan was acquired. However,
in acquiring Senior Loans, the Trust conducts an analysis and evaluation of the
financial condition of each such lender. In this regard, if the lenders have a
long-term debt rating, the long-term debt of all such Participants is rated BBB
or better by Standard & Poor's Ratings Services or Baa or better by Moody's
Investors Service, Inc., or has received a comparable rating by another
nationally recognized rating service. In the absence of rated long-term debt,
the lenders or, with respect to a bank, the holding company of such lenders have
commercial paper outstanding which is rated at least A-1 by Standard & Poor's
Ratings Services or P-1 by Moody's Investors Service, Inc. In the absence of
such rated long-term debt or rated commercial paper if a bank, the Trust may
acquire participations in Senior Loans from lenders whose long-term debt and
commercial paper is of comparable quality to the foregoing rating standards as
determined by the Manager under the supervision of the Trustees. The Trust also
diversifies its portfolio with respect to lenders from which the Trust acquires
Senior Loans. See "Investment Restrictions."
Senior Loans, unlike certain bonds, usually do not have call protection. This
means that interests comprising the Trust's portfolio, while having a stated one
to ten-year term, may be prepaid, often without penalty. The weighted average
maturity of Senior Loans purchased is currently approximately two-and-a-half
years. The Trust generally holds Senior Loans to maturity unless it has become
necessary to sell them to satisfy any shareholder tender offers or to adjust the
Trust's portfolio in accordance with PAII's view of current or expected economic
or specific industry or borrower conditions.
Senior Loans frequently require full or partial prepayment of a loan when there
are asset sales or a securities issuance. Prepayments on Senior Loans may also
be made by the corporate borrower at its election. The rate of such prepayments
may be affected by, among other things, general business and economic
conditions, as well as the financial status of the corporate borrower.
Prepayment would cause the actual duration of a Senior Loan to be shorter than
its stated maturity. Prepayment may be deferred by the Trust. This should,
however, allow the Trust to reinvest in a new loan and recognize as income any
unamortized loan fees. In many cases this will result in a new facility fee
payable to the Trust.
Because interest rates paid on these Senior Loans periodically fluctuate with
the market, it is expected that the prepayment and a subsequent purchase of a
new Senior Loan by the Trust will not have a material adverse impact on the
yield of the portfolio. See "Portfolio Transactions."
Under a Senior Loan, the corporate borrower generally must pledge as collateral
assets which may include one or more of the following: cash; accounts
receivable; inventory; property, plant and equipment; and both common and
preferred stock in its subsidiaries. The market value of the assets serving as
collateral will, in the opinion of the Investment Manager, equal or exceed the
principal amount of the Senior Loan. The valuations of these assets may be
performed by an independent appraisal. If the agent becomes aware that the value
of the collateral has declined, the agent normally takes such action as it deems
necessary for the protection of its own interests and the interests of the other
lenders, including, for example, giving the corporate borrower an opportunity to
provide additional collateral or accelerating the loan. There is no assurance,
however, that the corporate borrower would provide additional collateral or that
the liquidation of the existing collateral would satisfy the corporate
borrower's obligation in the event of nonpayment of scheduled interest or
principal, or that such collateral could be readily liquidated.
The Trust may be required to pay and may receive various fees and commissions in
the process of purchasing, selling and holding Senior Loans. The fee component
may include any, or a combination of, the following elements: arrangement fees,
non-use fees, facility fees, letter of credit fees and ticking fees. Arrangement
fees are paid at the commencement of a loan as compensation for the initiation
of the transaction. A non-use fee is paid based upon the amount committed but
not used under the loan. Facility fees are on-going annual fees paid in
connection with a loan. Letter of credit fees are paid if a loan involves a
letter of credit. Ticking fees are paid from the initial commitment indication
until loan closing if for an extended period. The amount of fees is negotiated
at the time of transaction.
In order to allow national banks to purchase shares of the Trust for their own
accounts without limitation, the Trust invests only in obligations which are
eligible for purchase by national banks for their own accounts pursuant to the
provisions of paragraph seven of Section 24 of U.S. Code Title 12. National
banks which are contemplating purchasing shares of the Trust for their own
accounts should refer to Banking Circular 220, issued by the U.S. Comptroller of
the Currency on November 21, 1986, for a description of certain considerations
applicable to such purchases.
INVESTMENT RESTRICTIONS
The Trust has adopted the following restrictions relating to its investments and
activities, which may not be changed without a Majority Vote (as defined in the
Investment Company Act). The Trust may not:
o Issue senior securities, except insofar as the Trust may be
deemed to have issued a senior security by reason of (i)
entering into certain interest rate hedging transactions, (ii)
entering into reverse repurchase agreements, or (iii)
borrowing money in an amount not exceeding 33 1/3%, or such
other percentage permitted by law, of the Trust's total assets
(including the amount borrowed) less all liabilities other
than borrowings.
o Invest more than 25% of its total assets in any industry.
o Invest in marketable warrants other than those acquired in
conjunction with Senior Loans and such warrants will not
constitute more than 5% of its assets.
o Make investments in any one issuer other than U.S. Government
securities if, immediately after such purchase or acquisition,
more than 5% of the value of the Trust's total assets would be
invested in such issuer, or the Trust would own more than 25%
of any outstanding issue, except that up to 25% of the Trust's
total assets may be invested without regard to the foregoing
restrictions. For the purpose of the foregoing restriction,
the Trust will consider the corporate borrower of a Senior
Loan to be the issuer of such Senior Loan. In addition, with
respect to a Senior Loan under which the Trust does not have
privity with the corporate borrower or would not have a direct
cause of action against the corporate borrower in the event of
the failure of the borrower to pay scheduled principal or
interest, the Trust will also separately meet the foregoing
requirements and consider each interpositioned bank (a lender
from which the Trust acquires a Senior Loan) to be an issuer
of the Senior Loan.
o Act as an underwriter of securities, except to the extent
that it may be deemed to act as an underwriter in certain
cases when disposing of its portfolio investments or acting as
an agent or one of a group of co-agents in originating Senior
Loans.
o Purchase or sell equity securities (except that the Trust
may, incidental to the purchase or ownership of an interest in
a Senior Loan, or as part of a borrower reorganization,
acquire, sell and exercise warrants and/or acquire or sell
other equity securities), real estate, real estate mortgage
loans, commodities, commodity futures contracts, or oil or gas
exploration or development programs; or sell short, purchase
or sell straddles, spreads, or combinations thereof, or write
put or call options.
o Make loans of money or property to any person, except that
the Trust (i) may hold Senior Loans in accordance with its
investment objectives and policies; (ii) may lend portfolio
instruments; and (iii) may acquire securities subject to
repurchase agreements.
o Purchase shares of other investment companies, except in
connection with a merger, consolidation, acquisition or
reorganization.
o Make investments on margin or hypothecate, mortgage or pledge
any of its assets except for the purpose of securing
borrowings as described above in connection with the issuance
of senior securities and then only in an amount up to 33 1/3%,
or such other percentage permitted by law, of the value of the
Trust's total assets (including the amount borrowed) less all
liabilities other than borrowings.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage resulting from a change in value of the
Trust's investments or amount of total assets will not be considered a violation
of any of the foregoing restrictions.
There is no limitation on the percentage of the Trust's total assets that may be
invested in instruments which are not readily marketable or subject to
restrictions on resale, and to the extent the Trust invests in such instruments,
the Trust's portfolio should be considered illiquid. The extent to which the
Trust invests in such instruments may affect its ability to realize the net
asset value (NAV) of the Trust in the event of the voluntary or involuntary
liquidation of its assets.
TRUSTEES AND OFFICERS
Board of Trustees. The Trust is governed by its Board of Trustees. The Trustees
and Officers of the Trust are listed below. An asterisk (*) has been placed next
to the name of each Trustee who is an "interested person," as that term is
defined in the Investment Company Act, by virtue of that person's affiliation
with the Trust or PAII.
Mary A. Baldwin, Ph.D, 2525 E. Camelback Road, Suite 200, Phoenix, Arizona
85016. (Age 57.) Trustee. Realtor, The Prudential Arizona Realty for more
than the last five years. Ms. Baldwin is also Vice President, United States
Olympic Committee (November 1996-Present), and formerly Treasurer, United
States Olympic Committee (November 1992-November 1996). Ms. Baldwin also is
a director and/or trustee of each of the funds managed by the Investment
Manager.
John P. Burke, 260 Constitution Plaza, Hartford, Connecticut 06130.
(Age 65.) Trustee. Commissioner of Banking, State of Connecticut (January
1995 - Present). Mr. Burke was formerly President of Bristol Savings Bank
(August 1992 - January 1995) and President of Security Savings and Loan
(November 1989 - August 1992). Mr. Burke is a director and/or trustee of
each of the funds managed by the Investment Manager.
Al Burton, 2300 Coldwater Canyon, Beverly Hills, California 90210.
(Age 69.) Trustee. President of Al Burton Productions for more than the
last five years; formerly Vice President, First Run Syndication, Castle
Rock Entertainment (July 1992-November 1994). Mr. Burton also is a
director and/or trustee of each of the funds managed by the Investment
Manager.
<PAGE>
Bruce S. Foerster, 4045 Sheridan Avenue, Suite 432, Miami Beach, Florida
33140. (Age 56.) Trustee. President, South Beach Capital Markets
Advisory Corporation (January 1995-Present); Director of Mako Marine
International (since January 1996) and Aurora Capital, Inc.
(since February 1995). Mr. Foerster was formerly Managing Director, Equity
Syndicate, Lehman Brothers (June 1992 - December 1994). Mr. Foerster also
is a director and/or trustee of each of the funds managed by the Investment
Manager.
Jock Patton, 100 West Clarendon, Phoenix, Arizona 85013. (Age 51.) Trustee.
Director, President and Co-owner, StockVal, Inc. (April 1993 - Present);
Director of Artisoft, Inc. Mr. Patton was formerly a partner and director
of the law firm of Streich, Lang, P.A. (1972 - 1993). Mr. Patton is also a
director and/or trustee of each of the funds managed by the Investment
Manager.
*Robert W. Stallings, 40 North Central Avenue, Suite 1200, Phoenix, AZ
85004. (Age 48.) Chairman, Chief Executive Officer, and Trustee. Chairman,
Chief Executive Officer and President of Pilgrim America Group, Inc.
(since December 1994); Chairman, Pilgrim America Investments, Inc. (since
December 1994); Director, Pilgrim America Securities, Inc. (since
December 1994); Chairman, Chief Executive Officer and President of Pilgrim
America Bank and Thrift Fund, Inc., Pilgrim Government Securities Income
Fund, Inc., Pilgrim America Investment Funds, Inc. and Pilgrim America
Master Series, Inc. (since April 1995). Chairman and Chief Executive
Officer of Pilgrim America Capital Corporation (formerly, Express America
Holdings Corporation)("Pilgrim America") (since August 1990).
The Board of Trustees has an Audit Committee comprised of the disinterested
Trustees. The Trust pays each Trustee who is not an interested person a pro rata
share, based on all of the investment companies in the Pilgrim America Group, of
(i) an annual retainer of $20,000; (ii) $1,500 per quarterly and special Board
meeting; (iii) $500 per committee meeting; (iv) $100 per special telephonic
meeting; and (v) out-of-pocket expenses. The pro rata share paid by the Trust is
based on the Trust's average net assets for the previous quarter as a percentage
of the average net assets of all the funds managed by PAII for which the
Trustees serve in common as directors/trustees.
Compensation of Trustees
The following table sets forth information regarding compensation of Trustees by
the Trust and other funds managed by PAII for the fiscal year ended February 28,
1997. Officers of the Trust and Trustees who are interested persons of the Trust
do not receive any compensation from the Trust or any other funds managed by
PAII. In the column headed "Total Compensation From Trust and Fund Complex Paid
to Trustees," the number in parentheses indicates the total number of boards in
the Pilgrim America family of funds on which the Trustee serves.
<PAGE>
Total
Compensation
From
Aggregate Trust
Compensation and Fund
from Complex Paid
Name of Person, Position Trust to Trustees
Mary A. Baldwin (1)(2), Trustee $15,085 $ 28,600 (5 boards)
John P. Burke (2)(3), Trustee $ 0 $ 0 (5 boards)
Al Burton (2)(4), Trustee $15,085 $ 28,600 (5 boards)
Bruce S. Foerster (1)(2), Trustee $15,085 $ 28,600 (5 boards)
Jock Patton (2)(5), Trustee $15,085 $ 28,600 (5 boards)
Robert W. Stallings (6), Trustee
and Chairman $ 0 $ 0 (5 boards)
- ----------------------------------
(1) Commenced service as a Trustee on April 7, 1995.
(2) Member of the Audit Committee.
(3) Commenced service as Trustee on May 5, 1997
(4) Commenced service as a Trustee on April 19, 1994.
(5) Commenced service as a Trustee on August 28, 1995.
(6) "Interested person," as defined in the Investment Company Act, of the
Trust because of the affiliation with the Investment Manager.
Officers
Howard Tiffen, President, Chief Operating Officer, and Senior Portfolio
Manager 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004.
(Age 49.) Formerly Managing Director of various divisions of Bank of
America (and its predecessor, Continental Bank) (1982-1995).
James R. Reis, Executive Vice President, Chief Credit Officer, and
Assistant Secretary 40 North Central Avenue, Suite 1200, Phoenix,
Arizona 85004. (Age 39.) Director, Vice Chairman (since December 1994),
Executive Vice President (since April 1995), and Treasurer (since
September 1996), Pilgrim America Group and PAII; Director (since
December 1994), Vice Chairman (since November 1995) and Assistant
Secretary (since January 1995) of PASI; Executive Vice President,
Treasurer, Assistant Secretary and Principal Accounting Officer of each
of the other funds in the Pilgrim America Group of Funds, Chief
Financial Officer (since December 1993), Vice Chairman and Assistant
Secretary (since April 1993) and former President (May 1991 - December
1993), Pilgrim America (formerly Express America Holdings Corporation),
Vice Chairman (since April 1993) and former President (May 1991 -
December 1993), Express America Mortgage Corporation.
<PAGE>
James M. Hennessy, Senior Vice President and Secretary
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 48.)
Senior Vice President and Secretary (since April 1995), Pilgrim America
(formerly Express America Holdings Corporation), Pilgrim America Group,
PASI and PAII; Senior Vice President and Secretary of each of the funds
in the Pilgrim America Group of Funds. Formerly Senior Vice President,
Express America Mortgage Corporation (June 1992 - August 1994) and
President, Beverly Hills Securities Corp. (January 1990 - June 1992).
Daniel A. Norman, Senior Vice President, Treasurer, Principal Financial
Officer, and Assistant Portfolio Manager 40 North Central Avenue, Suite
1200, Phoenix, Arizona 85004. (Age 39.) Senior Vice President and
Assistant Secretary, Pilgrim America Group and PAII (since December
1994); Senior Vice President (since November 1995) and Treasurer and
Chief Financial Officer (since April 1997), PASI. Formerly Senior Vice
President, Express America Mortgage Corporation and Express America
Holding Corporation (February 1992 - February 1996).
Michael J. Bacevich, Vice President and Assistant Portfolio Manager 40
North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 38.)
Formerly Vice President, Bank of America (and its predecessor,
Continental Bank) (July 1992 - November 1995) and Assistant Vice
President (July 1990 - July 1992).
As of May 31, 1997, the Trustees and Officers of the Trust as a group owned
beneficially less than 1% of the Trust's shares.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Manager. The Investment Manager serves as investment manager to the
Trust and has overall responsibility for the management of the Trust. The
Investment Management Agreement between the Trust and the Investment Manager
requires the Investment Manager to oversee the provision of all investment
advisory services for the Trust. The Investment Manager, which was organized in
December 1994, is registered as an investment adviser with the Commission and
serves as investment adviser to seven other registered investment companies (or
series thereof) and as of May 31, 1997 had total assets under management of
approximately $2.2 billion.
The Investment Manager is a wholly owned subsidiary of Pilgrim America Group,
which itself is a wholly-owned subsidiary of Pilgrim America, a Delaware
corporation, the shares of which are traded on the NASDAQ National Market System
and which is a holding company that through its subsidiaries engages in the
financial services business.
The Investment Manager pays all of its expenses arising from the performance of
its obligations under the Investment Management Agreement, including executive
salaries and expenses of the Trustees and Officers of the Trust who are
employees of the Investment Manager or its affiliates. Other expenses incurred
in the operation of the Trust are borne by the Trust, including, without
<PAGE>
limitation, expenses incurred in connection with the sale, issuance,
registration and transfer of its shares; fees of its Custodian, Transfer and
Shareholder Servicing Agent; salaries of officers and fees and expenses of
Trustees or members of any advisory board or committee of the Trust who are not
members of, affiliated with or interested persons of the Investment Manager; the
cost of preparing and printing reports, proxy statements and prospectuses of the
Trust or other communications for distribution to its shareholders; legal,
auditing and accounting fees; the fees of any trade association of which the
Trust is a member; fees and expenses of registering and maintaining registration
of its shares for sale under Federal and applicable State securities laws; and
all other charges and costs of its operation plus any extraordinary and
non-recurring expenses.
For the fiscal years ended February 28, 1997, February 29, 1996 and February 28,
1995, PAII (or, prior to April 7, 1995, its predecessor) was paid $8,268,263,
$7,122,089 and $6,196,871, respectively, for services rendered to the Trust.
The Investment Management Agreement continues from year to year if specifically
approved at least annually by the Trustees or the Shareholders. But in either
event, the Investment Management Agreement must also be approved by vote of a
majority of the Trustees who are not parties to the Investment Management
Agreement or "interested persons" of any such party, cast in person at a meeting
called for that purpose.
The use of the name "Pilgrim" in the Trust's name is pursuant to the Investment
Management Agreement between the Trust and PAII, and in the event that Agreement
is terminated, the Trust has agreed to amend its Agreement and Declaration of
Trust to remove the reference to "Pilgrim."
The Administrator. The Administrator of the Trust is Pilgrim America Group,
which is an affiliate of the Investment Manager. In connection with its
administration of the corporate affairs of the Trust, the Administrator bears
the following expenses: the salaries and expenses of all personnel of the Trust
and the Administrator except for the fees and expenses of Trustees not
affiliated with the Administrator or PAII; costs to prepare information for
determination of daily NAV by the recordkeeping and accounting agent; expenses
to maintain certain of the Trust's books and records that are not maintained by
PAII, the custodian, or transfer agent; costs incurred to assist in the
preparation of financial information for the Trust's income tax returns, proxy
statements, quarterly, semi-annual, and annual shareholder reports; costs of
providing shareholder services in connection with any tender offers or to
shareholders proposing to transfer their shares to a third party; providing
shareholder services in connection with the dividend reinvestment plan; and all
expenses incurred by the Administrator or by the Trust in connection with
administering the ordinary course of the Trust's business other than those
assumed by the Trust, as described below.
Except as indicated above and under "Investment Management Agreement," the Trust
is responsible for the payment of its other expenses including: the fees payable
to PAII; the fees payable to the Administrator; the fees and expenses of
Trustees who are not affiliated with PAII or the Administrator; the fees and
certain expenses of the Trust's custodian and transfer agent, including the cost
of providing records to the Administrator in connection with its obligation of
maintaining required records of the Trust; the charges and expenses of the
Trust's legal counsel and independent accountants; commissions and any issue or
transfer taxes chargeable to the Trust in connection with its transactions; all
taxes and corporate fees payable by the Trust to governmental agencies; the fees
of any trade association of which the Trust is a member; the cost of share
certificates representing shares of the Trust; organizational and offering
expenses of the Trust and the fees and expenses involved in registering and
maintaining registration of the Trust and of its shares with the Commission
including the preparation and printing of the Trust's registration statement and
prospectuses for such purposes; allocable communications expenses, with respect
to investor services and all expenses of shareholders and Trustees' meetings and
of preparing, printing and mailing reports, proxy statements and prospectuses to
shareholders; and the cost of insurance; and litigation and indemnification
expenses and extraordinary expenses not incurred in the ordinary course of the
Trust's business.
For the fiscal years ended February 28, 1997, February 29, 1996 and February 28,
1995, PAGI (or, prior to April 7, 1995, its predecessor) was paid $1,441,271,
$1,264,932 and $1,098,740, respectively, for services rendered to the Trust.
<PAGE>
PORTFOLIO TRANSACTIONS
The Trust will generally have at least 80% of its net assets invested in Senior
Loans. The remaining assets of the Trust will generally consist of short-term
debt instruments with remaining maturities of 120 days or less and certain other
instruments such as interest rate swaps, caps and floors, repurchase agreements
and reverse repurchase agreements. The Trust will acquire Senior Loans from and
sell Senior Loans to major money center banks, selected regional banks and
selected non-banks, insurance companies, finance companies and leasing companies
which usually act as lenders on senior collateralized loans. The Trust may also
purchase Senior Loans from and sell Senior Loans to U.S. branches of foreign
banks which are regulated by the Federal Reserve System or appropriate state
regulatory authorities. The Trust's interest in a particular Senior Loan will
terminate when the Trust receives full payment on the loan or sells a Senior
Loan in the secondary market. Costs associated with purchasing or selling Senior
Loans in the secondary market include commissions paid to brokers and processing
fees paid to agents. These costs are allocated between the purchaser and seller
as agreed between the parties.
Purchases and sales of short-term debt and other financial instruments for the
Trust's portfolio usually are principal transactions, and normally the Trust
will deal directly with the underwriters or dealers who make a market in the
securities involved unless better prices and execution are available elsewhere.
Such market makers usually act as principals for their own account. On occasion,
securities may be purchased directly from the issuer. Short-term debt
instruments are generally traded on a net basis and do not normally involve
either brokerage commissions or transfer taxes. The cost of portfolio securities
transactions of the Trust that are not transactions with principals will consist
primarily of brokerage commissions or dealer or underwriter spreads between the
bid and asked price, although purchases from underwriters may involve a
commission or concession paid by the issuer.
While PAII seeks to obtain the most favorable net results in effecting
transactions in the Trust's portfolio securities, brokers or dealers who provide
research services may receive orders for transactions by the Trust. Such
research services ordinarily consist of assessments and analyses of the business
or prospects of a company, industry, or economic sector. If, in the judgment of
PAII, the Trust will benefit from such research services, PAII is authorized to
pay spreads or commissions to brokers or dealers furnishing such services which
are in excess of spreads or commissions that other brokers or dealers not
providing such research may charge for the same transaction. Information so
received will be in addition to, and not in lieu of, the services required to be
performed by PAII under the Investment Management Agreement between PAII and the
Trust. The expenses of PAII will not necessarily be reduced as a result of the
receipt of such supplemental information. PAII may use any research services
obtained for the benefit of the Trust in providing investment advice to its
other investment advisory accounts. Conversely, such information obtained by the
placement of business for PAII or other entities advised by PAII will be
considered by and may be useful to PAII in carrying out its obligations to the
Trust.
The Trust does not intend to effect any brokerage transaction in its portfolio
securities with any broker-dealer affiliated directly or indirectly with the
Investment Manager, except for any sales of portfolio securities pursuant to a
tender offer, in which event the Investment Manager will offset against the
management fee a part of any tender fees which legally may be received by such
affiliated broker-dealer. To the extent certain services which the Trust is
obligated to pay for under the Investment Management Agreement are performed by
the Investment Manager, the Trust will reimburse the Investment Manager for the
costs of personnel involved in placing orders for the execution of portfolio
transactions.
The Trust paid $0, $7,400 and $8,544 in brokerage commissions during the fiscal
years ended February 28, 1997, February 29, 1996 and February 28, 1995,
respectively.
<PAGE>
Portfolio Turnover Rate
The annual rate of the Trust's total portfolio turnover for the years ended
February 28, 1997 and February 29, 1996, was 82% and 88%, respectively. The
annual turnover rate of the Trust is generally expected to be between 50% and
100%, although as part of its investment policies, the Trust places no
restrictions on portfolio turnover and the Trust may sell any portfolio security
without regard to the period of time it has been held. The annual turnover rate
of the Trust also includes Senior Loans for which the full payment on the Senior
Loan has been prepaid by the corporate borrower. The Investment Manager believes
that prepaid Senior Loans generally comprise approximately 25% to 75% of the
Trust's total portfolio turnover each year.
NET ASSET VALUE
The NAV per share of the Trust is determined once daily as of the close of
trading on the NYSE on each day it is open, by dividing the value of the Trust's
portfolio securities plus all cash and other assets (including dividends accrued
but not collected) less all liabilities (including accrued expenses but
excluding capital and surplus) by the number of shares outstanding. In
accordance with generally accepted accounting principles for investment
companies, dividend income is accrued on the ex-dividend date. The NAV per share
is made available for publication.
The value of a Senior Loan is determined by obtaining market quotations. Senior
Loans are valued at fair value in the absence of readily ascertainable market
values. Fair value is determined by PAII under procedures established and
monitored by the Trust's Board of Trustees. In valuing a loan, PAII considers,
among other factors: (i) the creditworthiness of the corporate issuer and any
interpositioned bank; (ii) the current interest rate, period until next interest
rate reset and maturity date of the Senior Loan; (iii) recent market prices for
similar loans, if any; and (iv) recent prices in the market for instruments with
similar quality, rate, period until next interest rate reset, maturity, terms
and conditions, if any. PAII may also consider prices or quotations, if any,
provided by banks, dealers or pricing services which may represent the prices at
which secondary market transactions in the loans held by the Trust have or could
have occurred. However, because the secondary market in Senior Loans has not yet
fully developed, PAII will not currently rely solely on such prices or
quotations. Securities for which the primary market is a national securities
exchange or the NASDAQ National Market System are stated at the last reported
sale price on the day of valuation. Debt and equity securities traded in the
over-the-counter market and listed securities for which no sale was reported on
that date are valued at the mean between the last reported bid and asked price.
Securities other than Senior Loans for which reliable quotations are not readily
available and all other assets will be valued at their respective fair values as
determined in good faith by, or under procedures established by, the Board of
Trustees of the Trust. Investments in securities maturing in less than 60 days
are valued at amortized cost, which when combined with accrued interest,
approximates market value.
METHODS AVAILABLE TO REDUCE MARKET VALUE DISCOUNT FROM NAV
In recognition of the possibility that the Trust's shares may trade at a
discount from NAV, the Trustees have determined that it would be in the best
interest of shareholders for the Trust to take action to attempt to reduce or
eliminate a market value discount from NAV. To that end, the Trustees presently
contemplate that the Trust will take action either to repurchase in the open
market or to consider the making of tender offers to purchase its own shares at
NAV. Since Trust shares became listed on the NYSE on March 9, 1992, the Trust
<PAGE>
has authorized two repurchase programs and has conducted one tender offer that
expired May 1, 1992. The Trustees presently intend each quarter to consider the
making of such tender offers. The Trustees will at no time be required to make
such tender offers. Moreover, there can be no assurance that tender offers will
result in the Trust's shares trading at a price which is equal to their NAV. The
Trust anticipates that the market price may, among other things, be determined
by the relative demand for and supply of such shares in the market, the Trust's
investment performance, the Trust's yield, and investor perception of the
Trust's overall attractiveness as an investment as compared with other
investment alternatives.
In deciding whether the Trust will entertain tender offers and whether it will
accept shares tendered, the Trustees will consider several factors. One of the
principal factors in the Board's determinations on whether or not to make
quarterly offers will be the strength of the public market for the Trust's
shares. Other factors include the desire to reduce or eliminate a market value
discount from NAV. In addition, the Trustees will take into consideration the
liquidity of its assets in determining whether to make a tender offer or accept
tendered shares. In paying shareholders for tendered shares, the Trust
anticipates that it will use cash on hand, such as proceeds from sales of new
Trust shares and specified pay-downs from Senior Loans, and proceeds from the
sale of cash equivalents held by the Trust. The Trust may also borrow to pay
Shareholders for tendered shares. To the extent more shares are anticipated to
be tendered or are tendered than could be paid for out of such amounts, the
liquidity of the Senior Loans held by the Trust may be a consideration in the
Trust's determination whether to make a tender offer or, if an offer is made, in
its determination of whether it will accept shares tendered. Accepting tendered
shares may require the Trust to sell portfolio investments and incur certain
costs which it otherwise would not have. Under most Senior Loans, it will be
necessary for the Trust to obtain the consent of the agent or lender from whom
the Trust purchased the Senior Loan prior to selling the Senior Loan to a third
party. Senior Loans such as those the Trust intends to invest in have
historically been considered by the investment community to be liquid assets,
although in certain instances, the conversion of such instruments into cash has
taken several days or longer. The market for Senior Loans is relatively new as
compared to markets for more established debt instruments. Accordingly, while
PAII does not anticipate any material difficulty in meeting the liquidity needs
for tender offers, there can be no guarantee that the Trust will be able to
liquidate a particular Senior Loan it holds within a given period of time.
Furthermore, even if a tender offer has been made, it is the Trustees' announced
policy, which may be changed by the Trustees, not to effect tender offers or
accept tenders if: (1) such transactions, if consummated, would impair the
Trust's status as a regulated investment company under the Internal Revenue Code
of 1986, as amended (the "Code") (which would make the Trust a taxable entity,
causing its income to be taxed at the corporate level in addition to the
taxation of shareholders who receive dividends from the Trust) or (2) there is,
in the judgment of the Trustees, any (a) material legal action or proceeding
instituted or threatened challenging such transactions or otherwise materially
adversely affecting the Trust, (b) declaration of a banking moratorium by
federal or state authorities or any suspension of payment by banks in the United
States, (c) limitation affecting the Trust or the issuers of its portfolio
instruments imposed by federal or state authorities on the extension of credit
by lending institutions or on the exchange of foreign currency, (d) commencement
of war, armed hostilities or other international or national calamity directly
or indirectly involving the United States, or (e) other event or condition which
would have a material adverse effect on the Trust or its shareholders if shares
were repurchased. The Trustees may modify these conditions in light of
experience.
Any tender offer made by the Trust will be at a price equal to the NAV of the
shares. Each shareholder will be notified in accordance with the requirements of
the Securities Exchange Act of 1934 and the Investment Company Act, either by
publication or mailing or both. Each offering document will contain such
information as is prescribed by such laws and the rules and regulations
promulgated thereunder. Other procedures to be used in connection with a
particular tender offer will be determined by the Trustees in accordance with
the provisions of applicable law, including the Securities Exchange Act of 1934.
Any tender offer that the Trust makes may have the effect of reducing
shareholder return as a result of the expenses incurred with respect to the
<PAGE>
tender offers, the reduced level of interest earned on the money received by the
Trust as payment for shares newly purchased which may be held in cash
equivalents in anticipation of tender offers, and the cost of borrowing money to
fund the tender offers.
TAX MATTERS
The following is only a summary of certain U.S. federal income tax
considerations generally affecting the Trust and its shareholders. No attempt is
made to present a detailed explanation of the tax treatment of the Trust or its
shareholders, and the following discussion is not intended as a substitute for
careful tax planning. Shareholders should consult with their own tax advisers
regarding the specific federal, state, local, foreign and other tax consequences
of investing in the Trust.
Qualification as a Regulated Investment Company
The Trust has elected to be taxed as a regulated investment company under
Subchapter M of the Code. As a regulated investment company, the Trust generally
is not subject to federal income tax on the portion of its investment company
taxable income (i.e., taxable interest, dividends and other taxable ordinary
income, net of expenses, and net short-term capital gains in excess of net
long-term capital losses) and net capital gains (i.e., the excess of net
long-term capital gains over net short-term capital losses) that it distributes
to shareholders, provided that it distributes at least 90% of its investment
company taxable income for the taxable year (the "Distribution Requirement"),
and satisfies certain other requirements of the Code that are described below.
In addition to satisfying the Distribution Requirement and an asset
diversification requirement discussed below, a regulated investment company must
(1) derive at least 90% of its gross income from dividends, interest, certain
payments with respect to securities loans, gains from the sale or other
disposition of stock or securities or foreign currencies and other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies; and (2) derive less than 30% of its gross income from
the sale or other disposition of stock, securities or foreign currencies (or
options, futures or forward contracts thereon) held for less than three months
(the "Short-Short Test"). However, foreign currency gains, including those
derived from options, futures and forwards, will not in any event be
characterized as Short-Short if they are directly related to the regulated
investment company's investment in stock or securities (or options or futures
thereon). Because of the Short-Short Test, the Trust may have to limit the sale
of appreciated securities that it has held for less than three months.
In general, gain or loss recognized by the Trust on the disposition of an asset
will be a capital gain or loss. However, gain recognized on the disposition of a
debt obligation purchased by the Trust at a market discount (generally, at a
price less than its principal amount) other than at original issue will be
treated as ordinary income to the extent of the portion of the market discount
which accrued during the period of time the Trust held the debt obligation.
In general, investments by the Trust in zero coupon or other original issue
discount securities will result in income to the Trust equal to a portion of the
excess of the face value of the securities over their issue price (the "original
issue discount") each year that the Trust holds the securities, even though the
Trust receives no cash interest payments. This income is included in determining
the amount of income which the Trust must distribute to maintain its status as a
regulated investment company and to avoid federal income and excise taxes.
In addition to satisfying the requirements described above, the Trust must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the Trust's
<PAGE>
taxable year, at least 50% of the value of the Trust's assets must consist of
cash and cash items (including receivables), U.S. Government securities,
securities of other regulated investment companies, and securities of other
issuers (as to which the Trust has not invested more than 5% of the value of the
Trust's total assets in securities of any such issuer and as to which the Trust
does not hold more than 10% of the outstanding voting securities of any such
issuer), and no more than 25% of the value of its total assets may be invested
in the securities of any one issuer (other than U.S. Government securities and
securities of other regulated investment companies), or in two or more issuers
which the Trust controls and which are engaged in the same or similar trades or
businesses.
If for any taxable year the Trust does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable as
ordinary dividends to the extent of the Trust's current and accumulated earnings
and profits. Such distributions generally will be eligible for the
dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment company that
fails to distribute in each calendar year an amount equal to at least 98% of
ordinary taxable income for the calendar year, at least 98% of capital gain net
income (i.e., capital gains in excess of capital losses) for the one-year period
ended on October 31 of such calendar year and any ordinary taxable income and
capital gain net income for previous years that was not distributed during those
years. A distribution will be treated as paid on December 31 of the current
calendar year if it is declared by the Trust in October, November or December
with a record date in such a month and paid by the Trust during January of the
following calendar year. Such distributions will be taxable to shareholders in
the calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are received.
The Trust intends to make sufficient distributions or deemed distributions
(discussed below) of its ordinary taxable income and capital gain net income to
avoid liability for the excise tax.
Distributions
The Trust anticipates distributing substantially all of its investment company
taxable income for each taxable year. Such distributions will be taxable to
shareholders as ordinary income. If a portion of the Trust's income consists of
dividends paid by U.S. corporations, a portion of the dividends paid by the
Trust may be eligible for the corporate dividends received deduction.
The Trust may either retain or distribute to shareholders its net capital gain
for each taxable year. The Trust currently intends to distribute any such
amounts. If net capital gain is distributed and designated as a capital gain
dividend, it will be taxable to shareholders as long-term capital gain,
regardless of the length of time the shareholder has held his shares.
Conversely, if the Trust elects to retain its net capital gain, the Trust will
be taxed thereon (except to the extent of any available capital loss carryovers)
at the 35% corporate tax rate. In such event, it is expected that the Trust also
will elect to treat such gain as having been distributed to shareholders. As a
result, each shareholder will be required to report his pro rata share of such
gain on his tax return as long-term capital gain, will be entitled to claim a
tax credit for his pro rata share of tax paid by the Trust on the gain, and will
increase the tax basis for his shares by an amount equal to the deemed
distribution less the tax credit.
Distributions by the Trust in excess of the Trust's earnings and profits will be
treated as a return of capital to the extent of (and in reduction of) the
shareholder's tax basis in his shares; any such return of capital distributions
in excess of the shareholder's tax basis will be treated as gain from the sale
of his shares, as discussed below.
Distributions by the Trust will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
<PAGE>
additional shares of the Trust. If the NAV at the time a shareholder purchases
shares of the Trust reflects undistributed income or gain, distributions of such
amounts will be taxable to the shareholder in the manner described above, even
though such distributions economically constitute a return of capital to the
shareholder.
The Trust will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of all taxable distributions payable to any shareholder (1) who
fails to provide the Trust with a certified, correct tax identification number
or other required certifications, or (2) who is notified by the Internal Revenue
Service that he or she is subject to backup withholding for failure to report
the receipt of interest or dividend income properly.
Sale of Shares
A shareholder will recognize gain or loss on the sale or exchange of shares of
the Trust in an amount generally equal to the difference between the proceeds of
the sale and the shareholder's adjusted tax basis in the shares. In general, any
such gain or loss will be considered capital gain or loss and will be long-term
capital gain or loss if the shares were held for longer than one year. However,
any capital loss arising from the sale of shares held for six months or less
will be treated as a long-term capital loss to the extent of any long-term
capital gains distributed (or deemed distributed) with respect to such shares.
Also, any loss realized on a sale or exchange of shares will be disallowed to
the extent the shares disposed of are replaced (including shares acquired though
the Dividend Reinvestment and Cash Purchase Plan) within a period of 61 days
beginning 30 days before and ending 30 days after the shares are disposed of. In
such case, the tax basis of the acquired shares will be adjusted to reflect the
disallowed loss.
Foreign Shareholders
U.S. taxation of a shareholder who, as to the United States, is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign
partnership ("foreign shareholder") depends on whether the income from the Trust
is "effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from the Trust is not effectively connected with a U.S. trade or
business carried on by a foreign shareholder, distributions of investment
company taxable income will be subject to U.S. withholding tax at the rate of
30% (or lower treaty rate). Such a foreign shareholder would generally be exempt
from U.S. federal income tax on gains realized on the sale or exchange of shares
of the Trust, capital gain dividends, and amounts retained by the Trust that are
designated as undistributed capital gains.
If the income from the Trust is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then distributions of investment
company taxable income, capital gain dividends, amounts retained by the Trust
that are designated as undistributed capital gains and any gains realized upon
the sale or exchange of shares of the Trust will be subject to U.S. federal
income tax at the rates applicable to U.S. citizens or domestic corporations.
Such shareholders that are classified as corporations for U.S. tax purposes also
may be subject to a branch profits tax.
In the case of foreign noncorporate shareholders, the Trust may be required to
withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless such shareholders furnish the Trust with proper notification of their
foreign status.
The tax consequences to a foreign shareholder entitled to claim the benefits of
an applicable tax treaty may be different from those described herein. Foreign
shareholders are urged to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the Trust, including the
applicability of foreign taxes.
<PAGE>
Effect of Future Legislation; Other Tax Considerations
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations issued thereunder as in effect on
the date of this SAI. Future legislative or administrative changes or court
decisions may significantly change the conclusions expressed herein, and any
such changes or decisions may have a retroactive effect with respect to the
transactions contemplated herein.
Income received by the Trust from foreign sources may be subject to withholding
and other taxes imposed by such foreign jurisdictions, absent treaty relief.
Distributions to shareholders also may be subject to state, local and foreign
taxes, depending upon each shareholder's particular situation. Shareholders are
urged to consult their tax advisers as to the particular consequences to them of
an investment in the Trust.
ADVERTISING AND PERFORMANCE DATA
Advertising
From time to time, advertisements and other sales materials for the Trust may
include information concerning the historical performance of the Trust. Any such
information may include trading volume of the Trust's shares, the number of
Senior Loan investments, annual total return, aggregate total return,
distribution rate, average compounded distribution rate and yield of the Trust
for specified periods of time, and diversification statistics. Such information
may also include performance rankings and similar information from independent
organizations such as Lipper Analytical Services, Inc. ("Lipper"), Morningstar,
or other industry publications. The Trust may compare the frequency of its reset
period to the frequency with which LIBOR changes.
On occasion, the Trust may quote total return calculations published by Lipper,
a widely recognized independent publication that monitors the performance of
both open-end and closed-end investment companies. The Trust may also cite
investment company rankings published by Lipper based on total return. These
rankings will typically compare the Trust to other Senior Loan funds and also to
taxable closed-end fixed income funds. The Trust may also refer to ratings
received for its overall risk-adjusted performance from Morningstar, another
widely recognized independent publisher of investment company ratings. Any such
use of rankings and ratings in advertisements and sales literature will conform
with the guidelines proposed by the NASD and subsequently approved by the
Commission on July 13, 1994. Ranking comparisons and ratings should not be
considered representative of the Trust's relative performance for any future
period.
In addition, the Trust may compare its yield to (i) the London Inter-Bank
Offered Rate ("LIBOR"), (ii) the federal funds rate, (iii) the prime rate,
quoted daily in The Wall Street Journal as the base rate on corporate loans at
large U.S. money center commercial banks, (iv) one or more averages compiled by
Donoghue's Money Fund Report, a widely recognized independent publication that
monitors the performance of money market mutual funds, (v) the average yield
reported by the Bank Rate Monitor National Index for money market deposit
accounts offered by the 100 leading banks and thrift institutions in the ten
largest standard metropolitan statistical areas, (vi) yield data published by
Lipper, or (vii) the yield on an investment in 90-day Treasury bills on a
rolling basis, assuming quarterly compounding. Also, the Trust may compare such
other yield data described above to each other. As with yield and total return
calculations, yield comparisons should not be considered representative of the
Trust's yield or relative performance for any future period.
The Trust may provide information designed to help individuals understand their
investment goals and explore various financial strategies. Such information may
<PAGE>
include information about current economic, market and political conditions;
materials that describe general principles of investing, such as asset
allocation, diversification, risk tolerance, and goal setting; worksheets used
to project savings needs based on assumed rates of inflation and hypothetical
rates of return; and action plans offering investment alternatives. Materials
may also include discussions of other investment companies in the Pilgrim
America Group of Funds, products and services.
Performance Data
The Trust may quote annual total return and aggregate total return performance
data. Total return quotations for the specified periods will be computed by
finding the rate of return (based on net investment income and any capital gains
or losses on portfolio investments over such periods) that would equate the
initial amount invested to the value of such investment at the end of the
period.
The Trust's distribution rate is calculated on a monthly basis by annualizing
the dividend declared in the month and dividing the resulting annualized
dividend amount by the Trust's corresponding month-end net asset value (in the
case of NAV) or the NYSE closing price (in the case of Market). 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.
Total return and distribution rate and compounded distribution rate figures
utilized by the Trust are based on historical performance and are not intended
to indicate future performance. Distribution rate, compounded distribution rate
and NAV per share can be expected to fluctuate over time. Total return will vary
depending on market conditions, the Senior Loans, and other securities
comprising the Trust's portfolio, the Trust's operating expenses and the amount
of net realized and unrealized capital gains or losses during the period.
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
1. Financial Statements
Contained in Part A:
Financial Highlights for the years ended February 28, 1997;
February 29, 1996; February 28, 1995, 1994, 1993; February 29,
1992; February 28, 1991, 1990 and 1989
Incorporated in Part B by reference to Registrant's February
28, 1997 Annual Report:
(a) Portfolio of Investments as of February 28, 1997
(b) Statement of Assets and Liabilities as of February
28, 1997
(c) Statement of Operations for the year ended February
28, 1997
(d) Statements of Changes in Net Assets for the years
ended February 29, 1996 and February 28, 1997
(e) Statement of Cash Flows for the year ended February
28, 1997
(f) Notes to Financial Statements
(g) Report of Independent Auditors dated April 18, 1997
2. Exhibits
(a) (i) Agreement and Declaration of Trust1/
(ii) Amendment to the Agreement and Declaration
of Trust dated March 26, 1996 and effective
April 12, 19961/
(b) By-Laws2/
(c) Not Applicable
(d) Specimen Certificate for Shares of Beneficial
Interest3/
(e) Dividend Reinvestment and Cash Purchase Plan
(f) Not Applicable
(g) Form of Amended and Restated Investment Management
Agreement4/
(h) Form of Distribution Agreement
(i) Not Applicable
(j) Form of Custody Agreement4/
(k) (i) Form of Amended and Restated Administration
Agreement4/
(ii) Form of Recordkeeping Agreement4/
(iii) Form of Dividend Reinvestment and Cash
Purchase Plan Agency Agreement (to be filed
in a subsequent filing on or prior to
effectiveness of this registration
statement)
(l) Opinion of Dechert Price & Rhoads (to be filed in a
subsequent filing on or prior to effectiveness of
this registration statement)
(m) Not Applicable
(n) Consent of KPMG Peat Marwick LLP
(o) Not Applicable
(p) Certificate of Initial Capital2/
(q) Not Applicable
(r) Financial Data Schedule
1/ Incorporated herein by reference to Registrant's registration statement
on Form N-2 (File No. 33-12123), filed on September 16, 1996.
2/ Incorporated herein by reference to pre-effective amendment no. 1 to
Registrant's initial registration statement on Form N-2 (File No.
33-18886), filed on January 22, 1988(hereinafter "Initial Registration
Statement").
3/ Incorporated herein by reference to pre-effective amendment no. 4 to
Registrant's Initial Registration Statement, filed on April 8, 1988.
4/ Incorporated herein by reference to post-effective amendment no. 22 to
Registrant's registration statement on Form N-2 (File No. 811-5410)
filed on June 23, 1997.
<PAGE>
Item 25. Marketing Agreements
Not Applicable.
Item 26. Other Expenses of Issuance and Distribution*
Registration Fees................................................._____________
State Taxes and Fees.............................................._____________
Trustee Fees......................................................_____________
[Transfer Agent's Fees............................................____________]
[Printing and Engraving Expenses..................................____________]
Legal Fees........................................................_____________
New York Stock Exchange Listing Fees.............................._____________
National Association of Securities Dealers, Inc. Fees............._____________
Accounting Fees and Expenses......................................_____________
Miscellaneous Expenses............................................_____________
Total...................................................._____________
* To be completed by amendment.
Item 27. Persons Controlled by or Under Common Control
Not Applicable.
Item 28. Number of Holders of Securities
As of May 31, 1997:
(1) Title of Class (2) Number of Record Holders
-------------- ------------------------
Shares of Beneficial Approximately 60,000
Interest
Item 29. Indemnification
Registrant's Agreement and Declaration of Trust generally provides that
the Trust shall indemnify each of its Trustees and officers (including persons
who serve at the Trust's request as directors, officers or trustees of another
organization in which the Trust has any interest as a shareholder, creditor or
otherwise) ("Covered Persons") against all liabilities and expenses, including
amounts paid in satisfaction of judgments, in compromise or as fines and
penalties, and counsel fees reasonably incurred in connection with the defense
or disposition of any action, suit or other proceeding, whether civil or
criminal, by reason of being or having been such a Covered Person except with
respect to any matter as to which such Covered Person shall have been finally
adjudicated (a) not to have acted in good faith in the reasonable belief that
such Covered Person's action was in the best interest of the Trust or (b) to be
liable to the Trust or its shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of duties involved in the conduct
of such Covered Person's office.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to Trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment of the Registrant of expenses incurred or
paid by a Trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the securities being
registered, the Registrant will submit, unless in the opinion of its counsel the
matter has been settled by controlling precedent, to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
Item 30. Business and Other Connections of Investment Adviser
Certain of the officers and directors of the Registrant's Investment
Manager also serve as officers and/or directors for other registered investment
companies in the Pilgrim America family of funds and with Pilgrim America Group,
Inc. and its subsidiaries. Information as to the directors and officers of the
Adviser is included in the Investment Manager's Form ADV and amendments thereto
filed with the Commission and is incorporated herein by reference thereto. For
additional information, see "Investment Management and Other Services" in the
Prospectus.
Item 31. Location of Accounts and Records
The amounts and records of the Registrant will be maintained at its
office at Two Renaissance Square, 40 North Central Avenue, Suite 1200, Phoenix,
Arizona 85004 and at the office of its custodian, Investors Fiduciary Trust
Company, 127 W. 10th Street, Kansas City, Missouri 64105.
Item 32. Management Services
Not Applicable.
Item 33. Undertakings
1. The Registrant undertakes to suspend the Offer until the prospectus
is amended if (1) subsequent to the effective date of this registration
statement, the net asset value declines more than ten percent from its net asset
value as of the effective date of this registration statement or (2) the net
asset value increases to an amount greater than the net proceeds as stated in
the prospectus included in this registration statement.
2. Not Applicable.
3. Not Applicable.
4. The Registrant hereby undertakes:
a. to file, during any period in which offers or sales
are being made, a post-effective amendment to this registration statement:
(1) to include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933;
(2) to reflect in the prospectus any facts or
events arising after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high and of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 497 if, in the aggregate,
the changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(3) to include any material information with
respect to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement.
b. that, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof; and
c. to remove from registration by means of a
post-effective amendment any of the securities being registered which remain
unsold at the termination of the offering.
5. Not Applicable.
6. The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of receipt
of a written or oral request, any Statement of Additional Information.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereto duly authorized, in the
City of Phoenix in the State of Arizona this 20th day of June, 1997.
PILGRIM AMERICA PRIME RATE TRUST
By: /s/ Robert W. Stallings
Robert W. Stallings
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
hereby constitutes and appoints Robert W. Stallings, James R. Reis, James M.
Hennessy, Daniel A. Norman, Jeffrey S. Puretz, Jeffrey L. Steele and Karen L.
Anderberg, or any one of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place, and stead, in any and all capacities, to sign any and all pre- and
post-effective amendments to this Registration Statement, and to file the same
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the date indicated:
Signatures Title Date
/s/ Robert W. Stallings Chief Executive Officer June 20, 1997
Robert W. Stallings and Trustee
/s/ Daniel A. Norman Treasurer June 20, 1997
Daniel A. Norman
/s/ Mary A. Baldwin Trustee June 20, 1997
Mary A. Baldwin
/s/ John P. Burke Trustee June 3, 1997
John P. Burke
/s/ Al Burton Trustee June 20, 1997
Al Burton
/s/ Bruce S. Foerster Trustee June 20, 1997
Bruce S. Foerster
/s/ Jock Patton Trustee June 3, 1997
Jock Patton
PILGRIM AMERICA PRIME RATE TRUST
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
PURPOSE
The purpose of the Plan is to provide shareholders of Pilgrim America Prime
Rate Trust (the "Trust") with a convenient and economical way to purchase Shares
of the Trust and to reinvest their cash Dividends in additional Shares of the
Trust.
The Plan may also have the effect of raising additional capital through
the direct sale of Shares by the Trust. These sales may be effected, in part,
through the Trust's approval from time to time, in its sole discretion, of
Requests for Waiver regarding the limitations applicable to the optional cash
investment features of the Plan.
DEFINITIONS
The following terms, when capitalized, will have the following meanings
when used in this Plan.
"Administrator" means Investors Fiduciary Trust Company.
"Beneficial Owner" means a shareholder who beneficially owns Shares
that are registered in a name other than such shareholder's name (for example,
where shares are held in the name of a broker, bank or other nominee).
"Dividend" means dividends and capital gain distributions, if any.
"DRIP Pricing Period" means the Trading Day immediately preceding an
Investment Date on which Dividends are reinvested.
"Investment Date" means (i) for Dividend reinvestments the Dividend
payment date, and (ii) for optional cash investments the date upon which
optional cash investments received prior to such date in compliance with the
Plan are first applied by the Administrator to the purchase of Shares.
Investment Dates will be set by the Trust in advance. Participants can obtain a
schedule of upcoming Investment Dates by calling the Trust at (___)
- --------.
"Market Price" means, for any day, the weighted average sales price,
per share, as reported on the New York Stock Exchange Composite Transaction Tape
as shown daily on Bloomberg screen ___.
"OCI Pricing Period" means the period encompassing the five Trading
Days immediately preceding an Investment Date on which optional cash investments
are invested.
"Open Market" means transactions occurring on the New York Stock
Exchange, any other exchange or over-the-counter.
"Shareholder of Record" means a shareholder who owns Shares in his or
her own name.
"Trading Day" means a day on which trades of the Shares are reported on
the New York Stock Exchange.
ADMINISTRATION
The Administrator will administer the Plan, purchase and hold Shares
acquired under the Plan, keep records, send statements of account activity to
participants, and perform other duties related to the Plan as provided herein.
Participants may contact the Administrator by writing to:
Investors Fiduciary Trust Company
c/o Pilgrim America Prime Rate Trust
Post Office Box 419368
Kansas City, MO 64141
The Administrator also serves as custodian for the Trust. Requests for
information pursuant to the Plan may also be made to the Trust's Shareholder
Services Department at (800) 331-1080.
PARTICIPATION
Participation in the Plan is open to any shareholder of the Trust,
provided that such person or entity fulfills the prerequisites for participation
described below under "Enrollment". A Shareholder of Record may participate
directly in the plan. A Beneficial Owner may participate in the Plan by either
(i) becoming a Shareholder of Record by having one or more shares transferred
into such shareholder's own name, or (ii) coordinating such shareholder's
participation with his or its broker, bank or other nominee who is the record
holder to participate on such shareholder's behalf.
The Plan is intended for the benefit of investors in the Trust and not
for persons or entities who accumulate accounts under the Plan over which they
have control for the purpose of exceeding the $100,000 per month maximum without
seeking the advance approval of the Trust or who engage in transactions that
cause or are designed to cause aberrations in the price or trading volume of the
Shares. Notwithstanding anything in the Plan to the contrary, the Trust reserves
the right to exclude from participation in the Plan, at any time, (i) persons or
entities who attempt to circumvent the Plan's standard $100,000 per month
maximum by accumulating accounts over which they have control or (ii) any other
persons or entities, as determined in the sole discretion of the Trust. See
"Cash Investments Exceeding $100,000" below for a discussion of the requirements
for optional cash investments exceeding $100,000.
ENROLLMENT
A Shareholder of Record may become a participant in the Plan by
delivering a completed Enrollment Form to the Administrator.
Beneficial Owners are eligible to participate in the reinvestment of
Dividends and optional cash investments. A Beneficial Owner must instruct his or
its broker, bank or other nominee to complete and sign the Enrollment Form and
forward it to its securities depository, which will provide the Administrator
with the information necessary to allow the Beneficial Owner to participate in
the Plan. To facilitate participation by Beneficial Owners, the Plan is eligible
for the Depository Trust Dividend Reinvestment Services.
Enrollment Forms will be processed as promptly as practicable.
Participation in the Plan will begin after the properly completed Enrollment
Form has been reviewed and accepted by the Administrator. To be effective with
respect to a particular Dividend, an Enrollment Form must be received by the
Administrator on or before the record date for such Dividend.
The Enrollment Form appoints the Administrator as agent for the
participant and directs the Trust to pay to the Administrator all of the
participant's cash Dividends. The Enrollment Form directs the Administrator to
purchase additional Shares of the Trust with such Dividends. The Enrollment Form
also directs the Administrator to purchase additional Shares with optional cash
investments of not more than $100,000, if any, made by Shareholders of Record.
See "Cash Investments Exceeding $100,000" below for a discussion of the
requirements for optional cash investments exceeding $100,000. See "Broker and
Nominee Form" below for a discussion of the requirements for optional cash
investments of a Beneficial Owner. The Enrollment Form also directs the
Administrator to reinvest automatically all subsequent Dividends. Dividends will
continue to be reinvested until the participant withdraws from the Plan or the
Plan is terminated.
BROKER AND NOMINEE FORM
The Broker and Nominee Form provides the only means by which a broker,
bank or other nominee holding shares of a Beneficial Owner in the name of a
major securities depository may invest optional cash investments within the
minimum and maximum investment limitation established for the Plan (see
"Optional Cash Investments" below) on behalf of such Beneficial Owner or
interested investor. A Broker and Nominee Form must be delivered to the
Administrator each time such broker, bank or other nominee transmits optional
cash investments. Broker and Nominee Forms will be furnished at any time upon
request to the Administrator.
The Broker and Nominee Form and appropriate instructions must be
received by the Administrator not later than [4:00 p.m.] Eastern time on the
business day immediately preceding the relevant OCI Pricing Period in order for
any optional cash investment to be invested on the Investment Date.
<PAGE>
REINVESTMENT OF CASH DIVIDENDS
By delivering a completed Enrollment Form to the Administrator, a
participant elects to reinvest cash Dividends in additional Shares of the Trust.
Once a participant enrolls in the Plan, cash Dividends paid to such participant
will be reinvested in additional Shares on the relevant Investment Date. For a
discussion of the source and price of shares purchased pursuant to the
reinvestment of Dividends, see "Source and Price of Shares for Dividend
Reinvestment and Optional Cash Investments" below.
Shares acquired through the reinvestment program will be credited to
shareholder accounts as of the relevant Investment Date.
OPTIONAL CASH INVESTMENTS
Participants may make optional cash investments by personal check or
money order, wire investment, or automatic deduction from a bank account.
Beneficial Owners wanting to participate in optional cash investments must
instruct their broker, bank or other nominee to complete a Broker and Nominee
Form and transmit the optional cash payment to the Administrator. Optional cash
investments must be at least $100 for any single investment and may not exceed
$100,000 per month. (For the purposes of these limitations, all Plan accounts
under the common control or management of a participant may be aggregated, at
the Trust's sole discretion.) Optional cash investments exceeding $100,000 per
month may be made only upon approval by the Trust of a properly completed
Request for Waiver form. There is no obligation to make an optional cash
investment at any time, and the amount of such investments may vary from time to
time. For a discussion of the source and price of shares purchased pursuant to
optional cash investments, see "Source and Price of Shares for Dividend
Reinvestment and Optional Cash Investments" below.
Optional cash investments must be received by the Administrator NO
LATER THAN [4:00 p.m.] Eastern time on the business day immediately preceding
the relevant OCI Pricing Period, and any payment in the form of check, money
order or wire transfer must have cleared on or before the relevant Investment
Date in order to be invested on the Investment Date. Optional cash investments
exceeding $100,000 must be received (together with a completed Request for
Waiver form) by the Administrator in good funds NO LATER THAN [4:00 p.m.]
Eastern time on the business day immediately preceding the related OCI Pricing
Period in order for such funds to be invested on the related Investment Date.
Upon a participant's written request received by the Administrator no later than
two business days prior to the OCI Pricing Period, an optional cash investment
not already invested under the Plan will be canceled or returned to the
participant, as appropriate. However, in such latter event, no refund of a check
or money order will be made until the funds have been actually received by the
Administrator. Accordingly, such refunds may be delayed by up to three weeks.
The Administrator will apply the optional cash investment from a
participant to the purchase of Shares for the account of the participant on the
related Investment Date (see "Source and Price of Shares for Dividend
Reinvestment and Optional Cash Investments" and "Cash Investments Exceeding
$100,000" below).
NO INTEREST WILL BE PAID ON AMOUNTS HELD BY THE ADMINISTRATOR PENDING
INVESTMENT OR TO BE RETURNED TO THE PARTICIPANT. Accordingly, investors should
transmit all optional cash investments, including cash investments exceeding
$100,000 made pursuant to Requests for Waiver approved by the Trust, so as to
reach the Administrator shortly before (but not later than) [4:00 p.m.] Eastern
time on the business day immediately preceding the relevant OCI Pricing Period.
All optional cash investments are subject to collection by the Administrator for
full face value in U.S. funds.
SOURCE AND PRICE OF SHARES FOR DIVIDEND REINVESTMENT AND OPTIONAL CASH
INVESTMENTS
Source
If the Market Price plus estimated commissions for Shares of the Trust
is less than the net asset value on the Trading Day immediately preceding the
related Investment Date, the Administrator will acquire Shares directly from (1)
first, those participants selling Shares from Pilgrim America sponsored
Retirement Plan accounts where the Administrator acts as Custodian ("Retirement
Accounts") and thereafter (2) purchase Shares on the Open Market through a bank
or securities broker (including an affiliate of the Administrator) as provided
herein. If the Market Price, plus estimated commissions, exceeds the net asset
value before the Administrator has completed its purchases, the Administrator
will use reasonable efforts to cease purchasing Shares, and the Trust shall
issue the remaining Shares. If the Market Price, plus estimated commissions, is
equal to or exceeds the net asset value on the Trading Day immediately preceding
the related Investment Date, the Trust will issue the Shares to be acquired by
the Plan.
The Trust may, without prior notice to participants, determine that it
will not issue new Shares for purchase pursuant to the Plan, even when the
Market Price plus estimated commissions equals or exceeds net asset value, in
which case the Administrator will purchase Shares pursuant to the Plan from
Retirement Accounts or on the Open Market.
The Administrator may commingle each participant's funds with those of
other participants for the purpose of executing purchases.
The Administrator will purchase Shares as soon as practicable beginning
on the relevant Investment Date and in no event later than 6 business days after
the relevant Investment Date and will sell Shares on the Open Market as soon as
practicable, except where and to the extent necessary under any applicable
federal securities laws or other government or stock exchange regulations.
Dividend and voting rights on shares purchased in the Open Market will
commence upon settlement, which is normally three business days after purchase.
However, shares purchased in the Open Market within a period of three business
days prior to and including a Dividend record date are considered purchased
"ex-dividend" and therefore are not entitled to payment of that Dividend or
voting rights.
Price
If some or all of the Shares are purchased on the Open Market or from
Retirement Accounts, Shares purchased pursuant to the reinvestment of Dividends
will be credited to the participant's account at the weighted average price per
share of all such shares purchased with respect to the relevant Investment Date.
Shares purchased for the Plan directly from the Trust in connection with the
reinvestment of Dividends will be acquired on the relevant Investment Date at
the greater of (i) net asset value at the close of business on the Trading Day
immediately preceding the Investment Date or (ii) the Market Price of the Shares
on the Trading Day immediately preceding the Investment Date, minus a discount
of 5%.
If some or all of the Shares are purchased on the Open Market or from
Retirement Accounts, Shares purchased pursuant to optional cash investments not
exceeding $100,000 will be credited to the participant's account at the weighted
average price per share of all such Shares purchased with respect to the
relevant Investment Date. Except in the case of cash investments made pursuant
to Requests for Waiver, as detailed below under "Cash Investments Exceeding
$100,000", Shares purchased directly from the Trust will be acquired on the
relevant Investment Date at the greater of (i) net asset value at the close of
business on the Trading Day immediately preceding the Investment Date or (ii)
the average of the daily Market Price of the Shares for the five Trading Days
immediately preceding the relevant Investment Date minus a discount, determined
at the sole discretion of the Trust, ranging from 0% to 5%.
The discount for optional cash investments is set by the Trust and may
be changed or eliminated by the Trust without prior notice to participants at
any time. At least three business days prior to the first day of each OCI
Pricing Period, the Trust may establish a discount applicable to cash
investments not exceeding $100,000. Participants may obtain the applicable
discount by telephoning the Trust at (602) 417-8256. In all instances the
discount on shares issued directly by the Trust shall not exceed 5% of the
closing price for the Shares as reported on the New York Stock Exchange on the
relevant Investment Date, as applicable. Shares purchased on the Open Market
will not be eligible for the discount to Market Price.
Shares purchased in the Open Market are subject to such terms and
conditions, including price and delivery, as the Administrator may accept. When
Retirement Account Shares are purchased for the Plan, the price will be the
Market Price on the Trading Day immediately preceding the relevant Investment
Date.
CASH INVESTMENTS EXCEEDING $100,000
Request for Waiver
Optional cash investments in excess of $100,000 per month may be made
only pursuant to a Request for Waiver accepted in writing by the Trust. A
Request for Waiver must be received by the Trust at its corporate address or via
facsimile at (602) 417-8327 no later than [4:00 p.m.] Eastern time on the second
business day preceding the relevant OCI Pricing Period. Request for Waiver forms
may be obtained from the Trust at (602) 417-8256. It is solely within the
Trust's discretion as to whether any such approval for cash investments in
excess of $100,000 will be granted. In deciding whether to approve a Request for
Waiver, the Trust will consider relevant factors including, but not limited to,
whether the Plan is then acquiring newly issued Shares directly from the Trust
or acquiring shares from third parties in the Open Market, the Trust's need for
additional funds, the attractiveness of obtaining such additional funds through
the sale of Shares as compared to other sources of funds, the purchase price
likely to apply to any sale of Shares under the Plan, the participant submitting
the request, the extent and nature of such participant's prior participation in
the Plan, the number of Shares held by such participant and the aggregate amount
of cash investments for which Requests for Waiver have been submitted by all
participants. If such requests are submitted for any Investment Date for an
aggregate amount in excess of the amount the Trust is then willing to accept,
the Trust may honor such requests in order of receipt, pro rata or by any other
method that the Trust determines in its sole discretion to be appropriate.
The Trust anticipates that it will respond to each Request for Waiver
by [8:00 p.m.] Eastern time on the second business day preceding the relevant
OCI Pricing Period. GOOD FUNDS ON ALL APPROVED REQUESTS FOR WAIVER MUST BE
RECEIVED BY THE ADMINISTRATOR NOT LATER THAN [4:00 P.M.] EASTERN TIME ON THE
BUSINESS DAY IMMEDIATELY PRECEDING THE RELEVANT OCI PRICING PERIOD IN ORDER FOR
SUCH FUNDS TO BE INVESTED ON THE RELEVANT INVESTMENT DATE.
Waiver Price
If some or all of the Shares are purchased on the Open Market or from
Retirement Accounts, Shares purchased pursuant to Requests for Waiver will be
credited to the participant's account at the weighted average price per share of
all Shares purchased pursuant to Requests for Waiver with respect to the
relevant Investment Date. Shares purchased directly from the Trust in connection
with approved Requests for Waiver will be acquired on the Investment Date at the
greater of (i) net asset value at the close of business on the Trading Day
immediately preceding the Investment Date, or (ii) the average of the daily
Market Price of the Shares for the five Trading Days immediately preceding the
relevant Investment Date minus the Waiver Discount, if any, applicable to such
shares (see "Waiver Discount and Minimum Price" below).
Waiver Discount and Minimum Price
At least three business days prior to the first day of each OCI Pricing
Period, the Trust may establish a Waiver Discount applicable to cash investments
exceeding $100,000. The Waiver Discount, which may vary each month between 0%
and 5%, will be established in the Trust's sole discretion after a review of
current market conditions, the level of participation in the Plan and current
and projected capital needs of the Trust. The Waiver Discount will apply only to
Shares purchased directly from the Trust.
Notwithstanding anything contained herein to the contrary, the Trust
may establish for each OCI Pricing Period a minimum price applicable to the
purchase of newly issued Shares purchased through cash investments made pursuant
to Requests for Waiver approved by the Trust. This minimum price, if any, will
be established by the Trust at least three business days prior to the first day
of the OCI Pricing Period, and will be established in the Trust's sole
discretion after a review of current market conditions and other relevant
factors. Participants may obtain the applicable Waiver Discount and minimum
price by telephoning the Trust at (602) 417-8256. The minimum price will be a
stated dollar amount that the Market Price of the Shares for a Trading Day of
the OCI Pricing Period must equal or exceed. In the event that such minimum
price is not satisfied for a Trading Day of the OCI Pricing Period, then such
Trading Day and the trading prices for that day will be excluded from (i) the
OCI Pricing Period and (ii) the determination of the purchase price of the
Shares for all cash investments made pursuant to Requests for Waiver approved by
the Trust. Thus, for example, if the minimum price is not satisfied for two of
the five Trading Days, then the purchase price of the Shares will be based upon
the remaining three Trading Days for which the minimum price was satisfied.
The minimum price discussed above applies only to cash investments made
pursuant to Requests for Waiver approved by the Trust and not to the
reinvestment of Dividends or investments that do not exceed $100,000.
INVESTMENTS MAY BE MADE IN THE FOLLOWING WAYS:
Check Investment
Optional cash investments may be made by personal check or money order
payable in U.S. dollars to "Investors Fiduciary Trust Company." Optional cash
investments mailed to the Administrator should include the Voluntary Purchase
Form attached to each statement sent to participants. Additional Voluntary
Purchase Forms are available upon request from the Administrator.
Wire Investment
Optional cash investments may be made by wire transfer to the
Administrator. Participants who wish to make a wire transfer should contact the
Administrator for instructions. Participants making wire investments may be
charged fees by the commercial bank initiating the transfer.
Automatic Investment from a Bank Account
Participants may make automatic monthly investments of a specified
amount (not less than $100 per month and, unless a Request for Waiver is
approved by the Trust, not more than $100,000 per month) by electronic funds
transfer from a pre-designated U.S. bank account.
To initiate automatic monthly deductions, the participant must provide
written authorization to the Administrator together with a voided blank check
for the account from which funds are to be drawn. The written request for
automatic monthly deduction will be processed and will become effective as
promptly as practicable.
Once automatic monthly deduction is initiated, funds will be drawn from
the participant's designated bank account on the business day immediately
preceding the relevant OCI Pricing Period, and will be invested in Shares
beginning on the Investment Date.
Participants may change or terminate automatic monthly deduction by
providing new written instructions to the Administrator. To be effective with
respect to a particular month, however, the new instructions must be received by
the Administrator prior to the last business day of the preceding calendar
month.
REPORTS TO PARTICIPANTS
Each participant will receive a quarterly account confirmation
statement. Participants will also receive a confirmation statement after each
transaction other than a Dividend reinvestment. Participants should retain these
statements so as to be able to establish the cost basis of shares purchased
under the Plan for income tax and other purposes. Duplicate statements will be
available from the Administrator at the participant's expense. In addition, each
participant will receive copies of the same communications sent to all other
holders of Shares.
All notices, statements and reports from the Administrator to a
participant will be addressed to the participant at his or her latest address of
record with the Administrator. Therefore, participants must promptly notify the
Administrator of any change of address. To be effective with respect to mailings
of Dividend checks and statements, address changes must be received by the
Administrator prior to the record date for that Dividend.
CERTIFICATES FOR SHARES
Shares purchased and held under the Plan will be held in safekeeping by
the Administrator in its name or the name of its nominee. Participants may
obtain a new certificate for all or some of the whole Shares held in their Plan
accounts upon request to the Administrator. Such request may be in writing or by
telephone, and may be made through the Trust's Shareholder Services Program.
Issuance of a certificate pursuant to such request in no way affects Dividend
reinvestment (see "Reinvestment of Cash Dividends" above).
Shares of stock held by the Administrator for a participant's Plan
account may not be pledged or assigned. A participant who wishes to pledge or
assign any such Shares must request that a certificate for such Shares be issued
in the participant's name.
PLAN OF DISTRIBUTION; EXPENSES
Subject to the availability of Shares registered for issuance under the
Plan, there is no total maximum number of Shares that can be issued pursuant to
the Plan.
From time to time, financial intermediaries, including brokers and
dealers, and other persons may engage in positioning transactions in order to
benefit from the discount from the market price of Shares acquired through the
Plan. Such Shares, including Shares acquired pursuant to Requests for Waiver
approved with respect to the optional cash investment features of the Plan, may
be resold in market transactions (including coverage of short positions) on any
national securities exchange on which Shares of the Trust trade or in privately
negotiated transactions. Such transactions could cause fluctuations in the
trading volume and price of the Shares. The difference between the price such
owners pay to the Trust for Shares acquired under the Plan, after deduction of
the applicable discount from the market price, and the price at which such
Shares are resold, may be deemed to constitute underwriting commissions received
by such owners in connection with such transactions. The Trust has no
arrangements or understandings, formal or informal, with any person relating to
the sale of Shares to be received under the program.
The Trust will pay the costs of administering the Plan. There will be
no brokerage commissions on purchases of Shares by the Administrator directly
from the Trust. For shares purchased on the Open Market, participants will pay a
pro rata portion of brokerage commissions for such purchase. Brokerage charges
for purchasing Shares for individual Accounts through the Plan may be expected,
but are not guaranteed, to be less than the usual brokerage charge for such
transactions, as the Administrator will usually be purchasing shares for all
participants in blocks and prorating the lower commission thus attainable.
The Administrator may charge a participant for additional services not
provided under the Plan or where specified charges are indicated. Certain
expenses will be incurred by the participant if the participant requests that
Shares be sold. Brokers or nominees who participate on behalf of Beneficial
Owners for whom they are holding shares may charge such Beneficial Owners fees
in connection with such participation, for which neither the Administrator nor
the Trust will be responsible.
WITHDRAWAL
Shareholders may withdraw from the Plan at any time by giving the
Administrator a written notice. Elections to withdraw from the Plan will be
effective immediately if notice is received by the Administrator not less than
ten days prior to any Dividend Record Date; otherwise such notice will be
effective on the first Trading Day after the Investment Date for such Dividend
with respect to any subsequent Dividend.
When a participant withdraws from the Plan, or when the Plan is
terminated, the participant will receive a certificate or a credit to his/her
brokerage account via appropriate broker or nominee delivery for full Shares in
the Account. Fractional Shares will be held and aggregated with other fractional
Shares being liquidated by the Administrator as agent of the Plan and as
transfer agent of the Fund and paid for by check when actually sold. Fractional
Shares will be sold by the Administrator concurrent with Dividend reinvestment,
either on the open market or to the Plan for use in Dividend reinvestment or
cash investment transactions. The price for fractional Shares will be either the
actual market price received, after deducting any commissions, for open market
sales, or the Market Price on the Trading Day immediately preceding the relevant
Investment Date for sales to the Plan. If the certificate for full Shares or
sale proceeds for fractional Shares are to be sent to anyone other than the
registered owner(s) at the address of record, a signature guarantee will be
required on the request.
In addition, a participant may, if a tender offer is conducted, tender
such Shares pursuant to the terms and conditions of such tender offer. Tendered
Shares accepted for repurchase will be at a price equal to their net asset value
on the expiration date of the tender offer.
MISCELLANEOUS
Stock Dividend or Rights Offering
Any Dividends in Shares distributed by the Trust on Shares held in the
Plan will be added to the participant's account. Dividends distributed on
certificated Shares will be mailed directly to the participant in the same
manner as to shareholders who are not participating in the Plan.
In the event of a rights offering, the participant will receive rights
based upon the total number of whole shares owned, that is, the total number of
Plan and certificated shares outstanding in the participant's name. During
rights offerings, the Administrator, on behalf of Qualified Retirement Plan
investors for whom the Administrator acts as custodian, will be allowed to
conduct transactions to buy and/or sell Shares of the Fund for such investors
pursuant to the terms of the rights offering and such supplemental procedures as
the Administrator may adopt.
Voting of Shares Held in the Plan
Whole and fractional shares held in a Plan account may be voted in
person or by the proxy sent to the participant.
Limitation of Liability
Neither the Trust nor the Administrator (nor any of their respective
agents, representatives, employees, officers, directors, or subcontractors) will
be liable in administering the Plan for any act done in good faith nor for any
good faith omission to act, including, without limitation, any claim of
liability arising with respect to the prices or times at which shares are
purchased or sold for participants, or any change in the market value of shares,
or from failure to terminate a participant's account upon such a participant's
death. The foregoing does not represent a waiver of any rights a participant may
have under applicable securities laws.
Change or Termination of the Plan
The Trust, in its sole discretion, may suspend, modify or terminate the
Plan at any time in whole, in part, or in respect of participants in one or more
jurisdictions. Notice of such suspension, modification or termination will be
sent to all affected participants. No such event will affect any Shares then
credited to a participant's account. Upon any whole or partial termination of
the Plan by the Trust, the participant will receive a certificate or a credit to
his/her brokerage account via appropriate broker or nominee delivery for full
Shares in the Account. Fractional Shares will be held and aggregated with other
fractional Shares being liquidated by the Administrator as agent of the Plan and
as transfer agent of the Fund and paid for by check when actually sold. Any
change in the Waiver Discount made by the Trust shall not constitute a
modification of the Plan requiring notice to the participants.
Termination of a Participant
If a participant does not own in excess of one whole Share of the
Trust, the participant's participation in the Plan may be terminated. [If such a
participant is terminated, the participant will be sent a check for the cash
value of any fractional share held in the participant's Plan account.] The Trust
may also terminate any participant's participation in the Plan for any reason
(including, without limitation, the attempted circumvention by a participant of
the $100,000 monthly maximum for cash purchases through the accumulation of Plan
accounts over which they have control) after written notice in advance mailed to
such participant at the address appearing on the Administrator's records.
Participants whose participation in the Plan has been terminated will receive a
certificate or a credit to his/her brokerage account via appropriate broker or
nominee delivery for full Shares in the Account. Fractional Shares will be held
and aggregated with other fractional Shares being liquidated by the
Administrator as agent of the Plan and as transfer agent of the Fund and paid
for by check when actually sold.
Profits On Sales Of Shares
There is no assurance that participants will be able to sell Shares
purchased pursuant to the Plan at a profit.
Future Dividends
The payment of Dividends is dependent upon the generation of income by
the Trust. There is no assurance that income will continue to be generated by
the Trust in the future from which Dividends may be paid, and, therefore, there
is no assurance that there will continue to be Dividends in the future to be
reinvested pursuant to the Plan.
PILGRIM AMERICA PRIME RATE TRUST
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
June ___, 1997
Pilgrim America Securities, Inc.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
Re: Distribution Agreement
Gentlemen:
Pilgrim America Prime Rate Trust is a Massachusetts business trust
operating as a closed-end management investment company (hereinafter referred to
as the "Trust "). The Trust has filed a registration statement on Form N-2 (File
Nos. 333- ________ and 811-5410) (the "Registration Statement") under the
Investment Company Act of 1940, as amended (the "1940 Act") and the Securities
Act of 1933, as amended (the "1933 Act") to register shares of the Trust which
may be issued and sold in connection with certain optional cash investments made
pursuant to a Request for Waiver under the Trust's Dividend Reinvestment and
Cash Purchase Plan (the "Cash Purchase Plan") or pursuant to privately
negotiated transactions.
You have informed us that your company, Pilgrim America Securities,
Inc. ("PASI"), is registered as a broker-dealer under the provisions of the
Securities Exchange Act of 1934 and that PASI is a member in good standing of
the National Association of Securities Dealers, Inc. You have indicated your
desire to act as the selling agent and underwriter for certain of the shares of
the Trust issued in connection with the Cash Purchase Plan or pursuant to
privately negotiated transactions. We have been authorized by the Trust to
execute and deliver this Agreement to you by a resolution of our Board of
Trustees (the "Trustees") adopted at a meeting of the Trustees, at which a
majority of Trustees, including a majority of our Trustees who are not otherwise
interested persons of our investment manager or its related organizations, were
present and voted in favor of the said resolution approving this Agreement.
1. Appointment of Distributor. Upon the execution of this
Agreement and in consideration of the agreements on your part herein expressed
and upon the terms and conditions set forth herein, we hereby appoint you as the
sales agent for distribution of shares of the Trust in connection with certain
optional cash investments made pursuant to a Request for Waiver under the Cash
Purchase Plan or pursuant to privately negotiated transactions. You agree to use
reasonable best efforts to promote the sale of the shares, but you are not
obligated to sell any specific number of the shares.
<PAGE>
2. Sub-Agents. You may appoint sub-agents or distribute the
shares through broker-dealers (or otherwise) as you may determine necessary
or desirable from time to time. This Agreement shall not, however, be construed
as authorizing any dealer or other person to accept orders for sale on our
behalf or to otherwise act as our agent for any purpose.
3. Offering Price. (a) Shares of the Trust offered pursuant to
a Request for Waiver under the Cash Purchase Plan shall be offered at a price
equal to the greater of (i) the Net Asset Value per share of the Trust's shares
or (ii) a Waiver Discount ranging from 0% to 5% of the market price (the
weighted average sales price, per share, as reported on the New York Stock
Exchange Composite Transaction Tape, as shown daily on Bloomberg screen ___) of
the Trust's shares. The Waiver Discount will be established each month and may
vary each month.
(b) Shares of the Trust offered pursuant to privately
negotiated transactions between the Trust and specific investors shall be
offered at a price equal to the greater of (i) the Net Asset Value per share of
the Trust's shares or (ii) a discount ranging from 0% to 5% of the market price
of the Trust's shares. The discount to apply to such privately negotiated
transactions will be determined by the Trust with respect to each specific
transaction.
Requests to purchase shares offered in connection with the
Request for Waiver and privately negotiated transactions may be accepted only if
approved by the Trust or in accordance with instructions provided by the Trust.
4. Sales Commission. (a) You shall be entitled to receive
a sales commission of up to 1.00% of the amount of an investment pursuant to a
Request for Waiver or privately negotiated transaction. To the extent
permitted under applicable law, you may waive receipt of a sales commission at
your discretion.
(b) You may allow appointed sub-agents or dealers such
commissions or discounts (not exceeding the total sales commission) as you shall
deem advisable, which shall be payable from the commissions payable to you under
Section 4(a) above.
5. Furnishing of Information. We will furnish you with
copies of the Registration Statement, and we warrant that the statements
therein contained are true and correct as of the date of the Registration
Statement, as it may be amended or supplemented from time to time.
6. Other Activities. Your services pursuant to this
Agreement shall not be deemed to be exclusive, and you may render similar
services and act as an underwriter, distributor or dealer for other
investment companies in the offering of their shares.
7. Termination. This Agreement: (i) may be terminated
by the Trust at any time without the payment of any penalty, and (ii) may be
terminated by you at any time without the payment of any penalty. This
Agreement shall remain in full force and effect unless terminated pursuant
to this provision or by the mutual agreement of the parties.
8. Miscellaneous. This Agreement shall be subject to
the laws of the State of Arizona and shall be interpreted and construed to
further and promote the operation of the Trust as a closed-end investment
company.
9. Liability. Nothing contained herein shall be deemed to
protect you against any liability to us or to our shareholders to which you
would otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of your duties hereunder, or by reason of your
reckless disregard of your obligations and duties hereunder.
If the foregoing meets with your approval, please acknowledge
your acceptance by signing each of the enclosed counterparts hereof and
returning such counterparts to us, whereupon this shall constitute a binding
agreement as of the date first above written.
Very truly yours,
PILGRIM AMERICA PRIME RATE TRUST
By: __________________________
Agreed to and Accepted:
PILGRIM AMERICA SECURITIES, INC.
By: ______________________________
KPMG Peat Marwick LLP
725 South Figueroa Street
Los Angeles, CA 90017
INDEPENDENT AUDITORS' CONSENT
The Board of Trustees
Pilgrim America Prime Rate Trust
We consent to the use of our report incorporated herein by reference and to the
references to our Firm under the headings "Financial Highlights and Investment
Performance" and "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Los Angeles, California
June 20, 1997
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