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. 22
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. Michael L. Fitzgerald, Esq.
Dechert Price & Rhoads Brown & Wood LLP
1500 K Street, N.W. One World Trade Center
Washington, D.C. 20005 New York, New York 10048-0557
Approximate Date of Proposed Public Offering: From time to time after the
effective date of this Registration Statement pursuant to Rule 415 under the
Securities Act of 1933.
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 10,000,000 $10.0625 $100,625,000 30,492.42
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 upon 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>
<CAPTION>
<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>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE>
PROSPECTUS
- --------------------------------------------------------------------------------
10,000,000 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 14.
This prospectus applies to 10,000,000 shares of beneficial interest (the
"Shares") of the Trust which may be issued and sold from time to time by the
Trust (the "Offering") through PaineWebber Incorporated ("PaineWebber" or the
"Sales Agent"). See "Plan of Distribution." Such sales, if any, will be made by
means of transactions on the NYSE. The Shares offered hereby are to be sold from
time to time through PaineWebber, as exclusive sales agent for the Trust, by
means of (i) transactions on the NYSE or (ii) block transactions in accordance
with the rules of the NYSE. Sales may be effected, at the discretion of the
Trust and the Sales Agent, on any day that the NYSE is open for trading, subject
to a minimum price which will be an amount equal to the current net asset value
("NAV") per Share plus the per Share amount of the commission to be paid to the
Sales Agent. As of July ___, 1997, the last reported sales price of a Share of
the Trust on the NYSE was $_______.
Any Shares sold on behalf of the Trust will be subject to commissions and fees
of 3% of the gross sales price per share of the Shares sold. See "Plan of
Distribution."
-----------------
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.
-----------------
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 27 of this Prospectus, may be obtained without charge by
contacting the Trust toll-free at (800) 331-1080.
-----------------
PaineWebber Incorporated
-----------------
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 NAV o The Offering will be conducted only when
Shares of the Trust are trading at a
price equal to or above the Trust's NAV
per Share plus the per Share amount of
commissions to be paid to PaineWebber.
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 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 Trust's The issuance of the Shares through the
Shares Offering 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 for
Senior Loans 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 yield of the Senior
Loans.
================================================================================
<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)..... 3.00% 3.00%
Dividend Reinvestment and Cash Purchase Plan
Fees ............................................. NONE NONE
Annual Expenses (as a percentage of net assets
attributable to Common Shares)
Management and Administrative Fees (4) ........... 1.27% 0.92%
Other Operating Expenses(5) ...................... 0.24% 0.20%
----- -----
Total Annual Expenses before Interest ................. 1.51% 1.12%
Interest Expense on Borrowed Funds .................... 3.07% 0.00%
----- -----
Total Annual Expenses.................................. 4.58% 1.12%
===== =====
(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.............................0.84%
Other Operating Expenses.......................................0.16%
Total Annual Expenses before Interest Expense....................1.00%
Interest Expense on Borrowed Funds...............................2.05%
Total Annual Expenses............................................3.05%
(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) 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."
(5) "Other Operating Expenses" are based on estimated amounts for the current
fiscal year.
<PAGE>
================================================================================
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 $76 $174 $282 $603
Trust has borrowed
================================================================================
You would pay the following expenses
on a $1,000 investment, assuming a
5% annual return and where the $41 $65 $92 $170
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>
================================================================================
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.
<TABLE>
<CAPTION>
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 $9.61 $ 9.66 $ 10.02 $ 10.05 $ 9.96 $ 9.97 $ 10.00 $ 10.00 $ 10.00
----- ------ ------- ------- ------ ------ ------- ------- -------
NAV, beginning of period
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 1.13% -- -- -- -- -- -- -- --
and other fees related to
revolving credit facility)
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% 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 25,294 103,600
Average daily balance of
debt outstanding during the
period (000's)(7) ......... $131,773 $ -- $ 2,811 $ -- $ 636 $ 8,011 $ 2,241 $ -- $ --
Average monthly shares
outstanding during 95,917 89,794 74,598 -- 79,394 102,267 114,350 -- --
the period (000's) .....
Average amount of debt
per share during the $1.37 $ -- $ 0.04 $ -- $ 0.01 $ 0.08 $ 0.02 $ -- $ --
period (7)
</TABLE>
<PAGE>
- -----------------
* Commencement of operations.
(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) Prior to May 2, 1996, the Trust borrowed to enable it to
purchase its Shares in connection with periodic tender offers.
On May 2, 1996, the Trust received shareholder approval to
borrow for investment purposes. As of February 28, 1997, the
Trust had outstanding borrowings of $267,000,000 under a
$400,000,000 line of credit. See "Policy on Borrowing" in this
section.
(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.
<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>
remium/(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.
<PAGE>
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.
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%
- -----------------------
(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.
<PAGE>
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
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 or Premium From NAV. The Trust's Shares have traded in the
market above, at, and below NAV since March 9, 1992, when the Trust's shares
were listed on the NYSE. The reasons for the Trust's Shares trading at a premium
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.
The Offering may be conducted only if Shares of the Trust are trading
at a price equal to at least the Trust's NAV per Share plus the per Share amount
of the commission to be paid to PaineWebber at the time of the sale of the
Shares. 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 the Shares of the Trust
are trading at a premium above the minimum sales price, 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.
<PAGE>
Borrowing and Leverage. The Trust is permitted to enter into borrowing
transactions representing up to 33 1/3% (or such other percentage permitted by
law) of its total assets (including the amount borrowed) less all liabilities
other than borrowings. Borrowing for investment purposes increases both
investment opportunity and investment risk. 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 has borrowed an amount equal to
33 1/3% of its 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 Offering 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 the Offering may put downward pressure on the market price for the Shares
of the Trust. Shares will not be issued pursuant to the Offering at any time
when Shares are trading at a price lower than a price equal to the Trust's NAV
per Share plus the per Share amount of commissions to be paid to PaineWebber.
<PAGE>
The Trust also issues Shares of the Trust through its Dividend
Reinvestment and Cash Purchase Plan, and to specific investors pursuant to
privately negotiated transactions. See "Dividends and Distributions -- Dividend
Reinvestment and Cash Purchase Plan." Shares may be issued under the Dividend
Reinvestment and Cash Purchase Plan or pursuant to privately negotiated
transactions at a discount to the market price for such Shares, which may put
downward pressure on the market price for Shares of the Trust.
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.
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 yield of Senior Loans.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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 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
Common Shares of the Trust. The number of Common 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
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.
<PAGE>
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).
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.
<PAGE>
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
The Trust has entered into a Sales Agency Agreement with PaineWebber, a
form of which has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part. The summary of the Sales Agency Agreement
contained herein is qualified by reference to such Agreement. Subject to the
terms and conditions of the Sales Agency Agreement, the Trust may issue and sell
up to 10,000,000 Shares (the "Maximum Amount") of the Trust from time to time
through PaineWebber, as sales agent for the Trust, which shares are being
offered under this Prospectus. The Shares offered hereby are to be sold from
time to time through PaineWebber, as exclusive sales agent for the Trust, by
means of (i) transactions on the NYSE or (ii) block transactions in accordance
with the rules of the NYSE. Sales may be effected, at the discretion of the
Trust and PaineWebber, on any day that the NYSE is open for trading, subject to
a minimum price which will be an amount equal to the current NAV per Share plus
the per Share amount of the commission to be paid to PaineWebber. The price per
Share is expected to be at or about the last sales price in a transaction of the
Trust's shares on the NYSE. As of _______________, 1997, the last reported sales
price of a Share of the Trust on the NYSE was $______.
The Trust will instruct PaineWebber not to sell the Shares below a
minimum price, which will be an amount equal to the current NAV per Share plus
the per Share amount of the commission to be paid to PaineWebber. The
compensation to PaineWebber with respect to the Shares will be at a fixed
commission rate of 3% of the gross sales price per Share of the Shares sold with
respect to the first 4,000,000 Shares sold and 2.25% of the gross sales price
per share of the Shares sold thereafter.
Settlements of sales of Shares will occur on the third business day
following the date on which any such sales are made. Purchases of Shares through
PaineWebber as sales agent for the Trust will settle the regular way.
<PAGE>
On or prior to the second business day after each day on which sales of
Shares pursuant to the Sales Agency Agreement occur, the Trust will file a
prospectus supplement under the applicable paragraph of Rule 497 promulgated
under the Securities Act of 1933, as amended (the "Act"), which prospectus
supplement will set forth, with respect to such day, the number of Shares sold
through PaineWebber as sales agent, the high and low prices at which the Shares
were sold, the net proceeds to the Trust, and the compensation received by
PaineWebber and other fees with respect to such sales. Unless otherwise
indicated in a further prospectus supplement, PaineWebber as sales agent will
act as sales agent on a reasonable efforts basis.
In connection with the sale of the Shares on behalf of the Trust,
PaineWebber may be deemed to be an underwriter within the meaning of the Act,
and the compensation of PaineWebber may be deemed to be underwriting commissions
or discounts. The Trust has agreed to provide indemnification and contribution
to PaineWebber against certain liabilities, including liabilities under the Act.
PaineWebber may engage in transactions with, or perform services for, the Trust
in the ordinary course of business.
The offering of Shares pursuant to the Sales Agency Agreement will
terminate upon the earlier of (i) the sale of all Shares subject thereto or (ii)
termination of the Sales Agency Agreement. The Trust will have the right to
terminate the Sales Agency Agreement in its discretion after the first
anniversary of the date of the Agreement. PaineWebber will have the right to
terminate the Sales Agency Agreement in its discretion at any time after the
first anniversary of the date of the Agreement, and in certain other
circumstances specified in the Sales Agency Agreement.
Pursuant to an agreement between the Trust and Pilgrim America
Securities, Inc. ("PASI"), the Trust will pay PASI a fee of up to 0.75% of the
gross sales price per share of the Shares sold for providing administrative
assistance to the Trust in connection with the Offering. The payment of such fee
will commence following the sale of 4,000,000 Shares pursuant to the Offering.
In connection with the sale of the Shares, PASI may be deemed to be an
underwriter within the meaning of the Act, and the compensation of PASI may be
deemed to be underwriting commissions or discounts. 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 will bear the expenses of the Offering. These expenses
include, but are not limited to, the expense of preparation of the Prospectus
and SAI for the Offering, the expense of counsel and auditors in connection with
the Offering, and others.
USE OF PROCEEDS
It is expected that the net proceeds of the Offering will be invested
in Senior Loans and other securities consistent with the Trust's investment
objective and policies. Pending investment in Senior Loans, 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 of the Offering
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
Distribution Policy. Income dividends are declared and paid monthly.
Income dividends may be distributed in cash or reinvested in additional full and
fractional shares pursuant to the Trust's Dividend Reinvestment and Cash
Purchase Plan discussed below. 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.
<PAGE>
Dividend Reinvestment and Cash Purchase Plan. The Trust's Dividend
Reinvestment and Cash Purchase Plan (the "Plan") allows participating
Shareholders to reinvest all dividends and capital gain distributions in
additional shares of the Trust. The Plan also allows participants to make
voluntary purchases monthly through IFTC (the "Plan Agent"), in amounts ranging
from a minimum of $100 to a maximum of $100,000. Subject to the permission of
the Trust, participating Shareholders may also make voluntary cash contributions
in excess of the monthly maximum. Shares issued to participants in the Plan may
be purchased in the secondary market or may be issued by the Trust. All
distributions to Shareholders whose Shares are registered in their own names
automatically will be paid in cash, unless the Shareholder elects to reinvest
the distributions in additional shares of the Trust pursuant to the Plan.
Shareholders who receive dividends and capital gain distributions in cash may
elect to participate in the Plan by notifying IFTC. Additional information about
the Plan may be obtained from The Pilgrim America Group's Shareholder Services
Department at 1 (800) 331-1080. For additional information, see "Dividend
Reinvestment and Cash Purchase Plan" in the SAI.
TAX MATTERS
The Trust intends to operate as a "regulated investment company" under
the Internal Revenue Code 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>
LEGAL MATTERS
The validity of the Shares offered hereby will be passed on for the
Trust by Dechert Price & Rhoads, Washington, D.C., counsel to the Trust. Certain
legal matters in connection with this distribution will be passed on for the
Sales Agent by Brown & Wood LLP, New York, New York.
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...............
Dividend Reinvestment and Cash Purchase Plan.............................
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 10,000,000 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...... PaineWebber Incorporated
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..........................................
Legal Matters........................................ _______________, 1997
Experts..............................................
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 is 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.......................................................14
Net Asset Value..............................................................16
Methods Available to Reduce Market Value Discount from NAV...................16
Dividend Reinvestment and Cash Purchase Plan.................................17
Tax Matters..................................................................20
Advertising and Performance Data.............................................24
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.
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.
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.
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
Holdings 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
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.
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.
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
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
tender offers, the reduced level of interest earned on the money received by the
Trust as payment for shares newly purchased which may be held in cash
equivalents in anticipation of tender offers, and the cost of borrowing money to
fund the tender offers.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
The Trust maintains a Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
which allows participating shareholders to reinvest all dividends and capital
gain distributions ("Dividends") in additional shares of the Trust. The Plan
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 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" in the Prospectus.
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 for trading 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.] 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.
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).
See "Tax Matters--Distributions" for a discussion of the federal income tax
ramifications of obtaining shares under the Plan.
TAX MATTERS
The following is only a summary of certain U.S. federal income tax
considerations generally affecting the Trust and its shareholders. No attempt is
made to present a detailed explanation of the tax treatment of the Trust or its
shareholders, and the following discussion is not intended as a substitute for
careful tax planning. Shareholders should consult with their own tax advisers
regarding the specific federal, state, local, foreign and other tax consequences
of investing in the Trust.
Qualification as a Regulated Investment Company
The Trust has elected to be taxed as a regulated investment company under
Subchapter M of the 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
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
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.
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. Further, 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
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
Agreement
(h) (i) Form of Sales Agency Agreement
(ii) Form of Agreement with Pilgrim America
Securities, Inc.
(i) Not Applicable
(j) Form of Custody Agreement
(k) (i) Form of Amended and Restated Administration
Agreement
(ii) Form of Recordkeeping Agreement
(k) Opinion of Dechert Price & Rhoads (to be filed in a
subsequent filing on or prior to the date of
effectiveness of this registration statement)
(l) Not Applicable
(m) Consent of KPMG Peat Marwick LLP
(n) Not Applicable
(o) Certificate of Initial Capital2/
(p) Not Applicable
(q) 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.
Item 25. Marketing Agreements
See the Form of Sales Agency Agreement filed as Exhibit (h) (i) to this
Registration Statement.
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......................................_____________
Sales Agent 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.
Reference is made to Section 6 of the Form of Sales Agency Agreement to
be filed as Exhibit (h) to this Registration Statement for the provisions
relating to indemnification of the Sales Agent.
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 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. The Registrant undertakes:
a. for the purpose of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant under Rule 497(h) under the
Securities Act shall be deemed to be part of this registration statement as of
the time it was declared effective; and
b. for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering thereof.
6. The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of receipt
of a written or oral request, any Statement of Additional Information.
<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/ David 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.
AMENDED AND RESTATED
INVESTMENT MANAGEMENT AGREEMENT
THIS AMENDED AND RESTATED INVESTMENT MANAGEMENT AGREEMENT made as of the
7th day of April, 1995, as amended and restated on the 7th day of April, 1997,
by and between PILGRIM AMERICA PRIME RATE TRUST, (formerly Pilgrim Prime Rate
Trust) a Massachusetts Business Trust (hereinafter called the "Trust"), and
PILGRIM AMERICA INVESTMENTS, INC., a corporation organized and existing under
the laws of the State of Delaware (hereinafter called the "Manager").
W I T N E S S T H:
WHEREAS, the Trust is a closed-end management investment company,
registered as such under the Investment Company Act of 1940; and
WHEREAS, the Trust's name was changed to Pilgrim America Prime Rate Trust
on April 12, 1996; and
WHEREAS, the Manager is registered as an investment adviser under the
Investment Advisers Act of 1940, and is engaged in the business of supplying
investment advice and investment management services, as an independent
contractor; and
WHEREAS, the Trust desires to retain the Manager to render investment
advice and investment management services to the Trust pursuant to the terms and
provisions of this Agreement, and the Manager is interested in furnishing said
advice and services.
NOW, THEREFORE, in consideration of the covenants and the mutual promises
hereinafter set forth, the parties hereto, intending to be legally bound hereby,
mutually agree as follows:
1. The Trust hereby employs the Manager and the Manager hereby
accepts such employment, to render investment advice and
investment management services with respect to the assets of the
Trust, subject to the supervision and direction of the Trust's
Board of Trustees. The Manager shall, as part of its duties
hereunder (i) furnish the Trust with advice and recommendations
with respect to the investment of the Trust's assets and the
purchase and sale of its portfolio securities, including the
taking of such other steps as may be necessary to implement such
advice and recommendations, (ii) furnish the Trust with reports,
statements and other data on securities, economic conditions and
other pertinent subjects which the Trust's Board of Trustees may
request, (iii) permit its officers and employees to serve without
compensation as Trustees of the Trust if elected to such
positions and (iv) in general superintend and manage the
investment of the Trust, subject to the ultimate supervision and
direction to the Trust's Board of Trustees.
2. The Manager shall use its best judgment and efforts in rendering
the advice and services to the Trust as contemplated by this
Agreement.
3. The Manager shall, for all purposes herein, be deemed to be an
independent contractor, and shall, unless otherwise expressly
provided and authorized, have no authority to act for or
represent the Trust in any way, or in any way be deemed an agent
for the Trust. It is expressly understood and agreed that the
services to be rendered by the Manager to the Trust under the
provisions of this Agreement are not to be deemed exclusive, and
the Manager shall be free to render similar or different services
to others so long as its ability to render the services provided
for in this Agreement shall not be impaired thereby.
4. The Manager agrees to use its best efforts in the furnishing of
such advice and recommendations to the Trust, in the preparation
of reports and information, and in the management of the Trust's
assets, all pursuant to this Agreement, and for this purpose the
Manager shall, at its own expense, maintain such staff and employ
or retain such personnel and consult with such other persons as
it shall from time to time determine to be necessary to the
performance of its obligations under this Agreement. Without
limiting the generality of the foregoing, the staff and personnel
of the Manager shall be deemed to include persons employed or
retained by the Manager to furnish statistical, research, and
other factual information, advice regarding economic factors and
trends, information with respect to technical and scientific
developments, and such other information, advice and assistance
as the Manager may desire and request.
5. The Trust will from time to time furnish to the Manager detailed
statements of the investments and assets of the Trust and
information as to its investment objectives and needs, and will
make available to the Manager such financial reports, proxy
statements, legal and other information relating to its
investments as may be in the possession of the Trust or available
to it and such information as the Manager may reasonably request.
6. Whenever the Manager has determined that the Trust should tender
securities pursuant to a "tender offer solicitation" the Manager
shall designate an affiliate as the "tendering dealer" so long as
it is legally permitted to act in such capacity under the Federal
securities laws and rules thereunder and the rules of any
securities exchange or association of which such affiliate may be
a member. Such affiliated dealer shall not be obligated to make
any additional commitments of capital, expenses or personnel
beyond that already committed (other than normal periodic fees or
payments necessary to maintain its corporate existence and
membership in the National Associations of Securities Dealers,
Inc.) as of the date of this Agreement. This Agreement shall not
obligate the Manager or such affiliate (i) to act pursuant to the
foregoing requirement under any circumstances in which they might
reasonably believe that liability might be imposed upon them as a
result of so acting, or (ii) to institute legal or other
proceedings to collect fees which may be considered to be due
from others to it as a result of such a tender, unless the Trust
shall enter into an Agreement with such affiliate to reimburse it
for all expenses connected with attempting to collect such fees,
including legal fees and expenses and that portion of the
compensation due to their employees which is attributable to the
time involved in attempting to collect such fees.
7. The Manager shall bear and pay the costs of rendering the
services to be performed by it under this Agreement. The Trust
shall be responsible for all other expenses of its operation,
including, but not limited to, 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
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
accounts fees; the fees of any trade associations 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, except as herein otherwise prescribed. To the extent
the Manager incurs any costs or performs any services which are
an obligation of the Trust, as set forth herein, the Trust shall
promptly reimburse the Manager for such costs and expenses. To
the extent the services for which the Trust is obligated to pay
are performed by the Manager, the Manager shall be entitled to
recover from the Trust only to the extent of its costs for such
services.
8. (a)The Trust agrees to pay to the Manager, and the Manager agrees
to accept, as full compensation for all investment
management services furnished or provided to the Trust and
as full reimbursement for all expenses assumed by the
Manager, a management fee computed at the annual rate of
.85% of the average daily net assets of the Trust, plus the
proceeds of any outstanding borrowings, up to $700 million;
at an annual rate of .75% of the Trust's average daily net
assets, plus the proceeds of any outstanding borrowings, in
excess of $700 million up to but not including $800 million;
and at an annual rate of .65% of the Trust's average daily
net assets, plus the proceeds of any outstanding borrowings,
over $800 million.
(b) The management fee shall be accrued daily by the Trust and
paid to the Manager at the end of each calendar month.
(c) If, for any fiscal year, the expenses borne by the Trust,
including the investment advisory fee, but excluding
brokerage commissions and fees, taxes, interest and to the
extent permitted, any extraordinary expenses such as
litigation and non-recurring expenses, would exceed the
expense limitations applicable to the Trust imposed by the
securities laws or regulations thereunder of any state in
which the Trust's shares are qualified for sale, the Manager
agrees to reduce its fee or reimburse the Trust for all such
excess expenses exceeding such limitation no later than the
last day of the first month of the next succeeding fiscal
year. For the purposes of this paragraph, the term "fiscal
year" shall exclude the portion of the current fiscal year
which shall have elapsed prior to the date hereof and shall
include the portion of the then current fiscal year which
shall have elapsed at the date of termination of this
Agreement.
(d) The management fee payable by the Trust hereunder shall be
reduced to the extent that an affiliate of the Manager has
actually received cash payments of tender offer solicitation
fees less certain costs and expenses incurred in connection
therewith, as referred to in Paragraph 6 herein.
9. The Manager agrees that neither it nor any of its officers or
employees shall take any short position in the capital stock of
the Trust. This prohibition shall not prevent the purchase of
such shares by any of the officers and directors or bona fide
employees of the Manager or any trust, pension, profit-sharing or
other benefit plan for such persons or affiliates thereof.
10. Nothing herein contained shall be deemed to require the Trust to
take any action contrary to its Trust Indenture or applicable
statute or regulation, or to relieve or deprive the Board of
Trustees of the Trust of its responsibility for and control of
the conduct of the affairs of the Trust.
11. (a) In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of obligations or duties
hereunder on the part of the Manager, the Manager shall not
be subject to liability to the Trust or to any shareholder
of the Trust for any act or omission in the course of, or
connected with, rendering services hereunder or for any
losses that may be sustained in the purchase, holding or
sale of any investment by the Trust.
(b) Notwithstanding the foregoing, the Manager agrees to
reimburse the Trust for any and all costs, expenses, and
counsel and trustees' fees reasonably incurred by the Trust
in the preparation, printing and distribution of proxy
statements, amendments to its Registration Statement,
holding of meetings of its shareholders or trustees, the
conduct of factual investigations, any legal or
administrative proceedings including any applications for
exemptions or determinations by the Securities and Exchange
Commission which the Trust incurs as the result of action or
inaction of the Manager or any of its shareholders where the
action or inaction necessitating such expenditures (i) is
directly or indirectly related to any transaction or
proposed transaction in the shares or control of the Manager
or its affiliates (or litigation related to any pending or
proposed future transaction in such shares or control) which
shall have been undertaken without the prior express
approval of the Trust's Board of Trustees; or (ii) is within
the sole control of the Manager or any of its affiliates or
any of their officers, directors, employees or shareholders.
The Manager shall not be obligated pursuant to the
provisions of this Subparagraph 11(b), to reimburse the
Trust for any expenditures related to the institution of an
administrative proceeding or civil litigation by the Trust
or a Trust shareholder seeking to recover all or a portion
of the proceeds derived by any shareholder of the Manager or
any of its affiliates from the sale of his shares of the
Manager, or similar matters. So long as this Agreement is in
effect, the Manager shall pay to the Trust the amount due
for expenses subject to this Subparagraph 11(b) within
thirty (30) days after a bill or statement has been received
by the Trust therefor. This provision shall not be deemed to
be a waiver of any claim the Trust may have or may assert
against the Manager or others or costs, expenses, or damages
heretofore incurred by the Trust for costs, expenses, or
damages the Trust may hereinafter incur which are not
reimbursable to it hereunder.
(c) No provision of this Agreement shall be construed to protect
any trustee or officer of the Trust, or the Manager, from
liability in violation of Section 17(h) and (i) of the
Investment Company Act of 1940, as amended.
12. This Agreement shall remain in effect until April 7, 1998, unless
sooner terminated as hereinafter provided, and shall continue in
effect from year to year so long as such continuation is
specifically approved at least annually by (i) the Board of
Trustees of the Trust or by the vote of a majority of the
outstanding voting securities of the Trust, and (ii) the vote of
a majority of the trustees of the Trust who are not parties to
this Agreement or interested persons thereof, cast in person at a
meeting called for the purpose of voting on such approval.
13. This Agreement may be terminated at any time, without payment of
any penalty, by the Board of Trustees of the Trust or by vote of
a majority of the outstanding voting securities of the Trust,
upon sixty (60) days written notice to the Manager, and by the
Manager upon sixty (60) days written notice to the Trust.
14. This Agreement shall terminate automatically in the event of any
transfer or assignment thereof, as defined in the Investment
Company Act of 1940, as amended.
15. If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule, or otherwise, the remainder
of this Agreement shall not be affected thereby.
16. The term "majority of the outstanding voting securities" of the
Trust shall have the meaning as set forth in the Investment
Company Act of 1940, as amended.
17. In consideration of the execution of this Agreement the Manager,
on behalf of its sole shareholder, Pilgrim America Group, Inc.
hereby grants to the Trust the right to use the name "Pilgrim" as
part of its name. The Manager, on behalf of its sole shareholder,
Pilgrim America Group, Inc. reserves the right to grant to others
the right to use the name "Pilgrim" including to any other
investment company. The Trust agrees that in the event this
Agreement is terminated, the Trust shall immediately take such
steps as are necessary to amend its name and remove the reference
to "Pilgrim."
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers on the day and year first above written.
PILGRIM AMERICA PRIME RATE TRUST
Attest: By:_____________________________
Title: _______________________________ Title: ____________________________
PILGRIM AMERICA INVESTMENTS, INC.
Attest: By:_____________________________
Title: _______________________________ Title: ____________________________
PILGRIM AMERICA PRIME RATE TRUST
__________ Shares of Beneficial Interest
without par value
SALES AGENCY AGREEMENT
_____ __, 1997
PAINEWEBBER INCORPORATED
1285 Avenue of the Americas
New York, New York 10019
Gentlemen:
Pilgrim America Prime Rate Trust, a Massachusetts business trust (the
"Trust"), and Pilgrim America Investments, Inc., a Delaware corporation, (the
"Investment Manager"), each confirms its agreement (the "Agreement") with
PaineWebber Incorporated (the "Agent"), as follows:
SECTION 1. Description of Securities. The Trust proposes to issue and
sell through the Agent, as sales agent, up to __________ shares (the "Maximum
Amount") of beneficial interest, without par value (the "Common Shares"), on the
terms set forth in Section 3 hereof.
SECTION 2. Representations and Warranties of the Trust and the
Investment Manager. (a) The Trust and the Investment Manager each severally
represents and warrants to, and agrees with, the Agent as of the date hereof and
as of each Closing Date (as hereinafter defined) (each such date being
hereinafter referred to as the "Representation Date") that:
(i) The Trust has filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form N-2 (No.
333-o) and a related preliminary prospectus for the registration of the
Common Shares under the Securities Act of 1933, as amended (the "1933
Act"), and the Investment Company Act of 1940, as amended (the "1940
Act"), and has filed such amendments to such registration statement on
Form N-2, if any, and such amended preliminary prospectuses as may have
been required to each Representation Date. The Trust will prepare and
file such additional amendments thereto and such amended prospectuses
as may hereafter be
<PAGE>
required. The Trust previously filed a notification on Form N-8A of
registration of the Trust as an investment company under the 1940 Act
and the rules and regulations of the Commission under the 1940 Act
(together with the rules and regulations under the 1933 Act, the "Rules
and Regulations"). The registration statement, and the prospectus
constituting a part thereof, each as from time to time amended or
supplemented pursuant to the 1933 Act, are herein referred to as the
"Registration Statement" and the "Prospectus," respectively, except
that if any revised prospectus shall be provided to the Agent by the
Trust for use in connection with the offer of the Common Shares (the
"Offer") that differs from the Prospectus on file at the Commission at
the time the Registration Statement becomes effective (whether such
revised prospectus is required to be filed by the Trust pursuant to
Rule 497(c) or Rule 497(h) of the Rules and Regulations), the term
"Prospectus" shall refer to each such revised prospectus from and after
the time it is first provided to the Agent for such use.
(ii) At the time the Registration Statement becomes effective
and at each Representation Date, the Registration Statement will comply
in all material respects with the requirements of the 1933 Act, the
1940 Act and the Rules and Regulations and will not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading. From the time the Registration Statement becomes effective
through the termination of this Sales Agency Agreement (the
"Termination Date"), the Prospectus (unless the term "Prospectus"
refers to a prospectus that has been provided to the Agent by the Trust
for use in connection with the Offer which differs from the Prospectus
on file with the Commission at the time the Registration Statement
becomes effective, in which case at the time such prospectus is first
provided to the Agent for such use) will not contain an untrue
statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that the representations and warranties in this subsection
shall not apply to statements in or omissions from the Registration
Statement or Prospectus made in reliance upon and in conformity with
information relating to the Agent furnished to the Trust by the Agent
in writing for use in the Registration Statement or Prospectus.
(iii) The accountants who certified the financial statements
included in the Registration Statement are independent public
accountants as required by the 1933 Act, the 1940 Act and the Rules and
Regulations.
(iv) The financial statements included in the Registration
Statement present fairly the financial position of the Trust as of the
date indicated and the results of its operations for the period
specified; such financial statements have been prepared in conformity
with generally accepted accounting principles; and the information in
the Prospectus under the heading "Financial Highlights and Investment
Performance -- Trust Characteristics and Composition" sets forth
accurately certain information with respect to the characteristics of
the Trust's investment portfolio as of February 28, 1997.
2
<PAGE>
(v) Since the respective dates as of which information is
given in the Registration Statement and in the Prospectus, except as
otherwise stated therein, (A) there has been no material adverse change
in the condition, financial or otherwise, of the Trust, or in the
earnings, business affairs or business prospects of the Trust, whether
or not arising in the ordinary course of business, (B) there have been
no transactions entered into by the Trust which are material to the
Trust other than those in the ordinary course of business and (C) there
has been no dividend or distribution of any kind declared, paid or made
by the Trust on any class of its shares of beneficial interest, other
than dividends or distribution made in the ordinary course of business
or made for the purpose of maintaining the Trust's qualification as a
regulated investment company under Subchapter M of the Internal Revenue
Code of 1986, as amended ("Subchapter M of the Code").
(vi) The Trust has been duly created and is validly existing
as a business trust in good standing under the laws of the Commonwealth
of Massachusetts with power and authority to own its own properties and
conduct its business as described in the Registration Statement; the
Trust is duly qualified as a foreign business trust to transact
business and is in good standing in each jurisdiction in which the
failure to so qualify, either individually or in the aggregate, would
have a material adverse effect upon the operations or financial
condition of the Trust; and the Trust has no subsidiaries.
(vii) The Trust is registered with the Commission under the
1940 Act as a closed-end diversified, management investment company,
and no order of suspension or revocation of such registration has been
issued or proceedings therefor initiated or, to the knowledge of the
Trust, threatened by the Commission. No person is serving or acting as
an officer of the Trust who is ineligible to serve in such office under
the 1940 Act and no person is acting or serving as trustee of the Trust
except in accordance with the provisions of the 1940 Act.
(viii) The Trust owns or possesses or has obtained all
material governmental licenses, permits, consents, orders, approvals
and other authorizations necessary to lease or own, as the case may be,
and to carry on its businesses as contemplated in the Prospectus and
the Trust has not received any notice of proceedings relating to the
revocation or modification of any such licenses, permits, covenants,
orders, approvals or authorizations.
(ix) The authorized, issued and outstanding Common Shares as
of the date hereof is as set forth in the Prospectus under the caption
"Description of the Shares", except for any Common Shares that may have
been issued under the Trust's Dividend Reinvestment and Cash Purchase
Plan (the "Cash Purchase Plan"), pursuant to this Agreement or in
privately negotiated transactions of which the Agent shall have
received notice pursuant to Section 4(k) hereof (the "Privately
Negotiated Transactions"); the outstanding Common Shares have been duly
authorized by all requisite trustee action on the part of the Trust and
are validly issued and fully paid and non-assessable by the Trust; the
3
<PAGE>
Common Shares to be sold pursuant to this Agreement have been duly
authorized by all requisite trustee action on the part of the Trust for
issuance pursuant to the terms of this Agreement and, when issued and
delivered by the Trust pursuant to the terms of this Agreement against
payment of consideration therefor, will be validly issued and fully
paid and non-assessable by the Trust; the Common Shares conform in all
material respects to the description thereof set forth in the
Prospectus under the caption "Description of the Shares"; and the
issuance of each of the Common Shares is not subject to preemptive
rights.
(x) (A) The Trust is not in violation of its Agreement and
Declaration of Trust, as amended (the "Declaration"), or as
supplemented by its by-laws (the "By-Laws") or in default in the
performance or observance of any material obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage,
loan agreement, note, lease or other instrument to which it is a party
or by which it or its properties may be bound; (B) (i) the execution
and delivery of each of this Agreement and the Investment Management
Agreement referred to in the Prospectus (the "Investment Management
Agreement") and the consummation of the transactions contemplated
herein and therein have been duly authorized by all necessary trustee
action of the Trust and will not conflict with or constitute a breach
of, or, with or without giving notice or the lapse of time or both, a
default under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Trust pursuant
to any contract, indenture, mortgage, loan agreement, note, lease or
other instrument to which the Trust is a party or by which it may be
bound or to which any of the property or assets of the Trust is
subject, nor will such action result in any violation of the provisions
of the Declaration or By-Laws or, to the best knowledge of the Trust
and the Investment Manager, any law, administrative regulation or
administrative or court decree applicable to the Trust, and no consent,
approval, authorization or order of any court or governmental authority
or agency is required for the consummation by the Trust of the
transactions contemplated by this Agreement except such as has been
obtained under the 1940 Act and the 1933 Act or as may be required
under the state securities or Blue Sky laws or foreign securities laws
in connection with the sale of Common Shares pursuant to this
Agreement, (ii) each of this Agreement and the Investment Management
Agreement complies with all applicable provisions of the 1940 Act,
except that with respect to this Agreement, no representation is made
as to compliance with Section 17(i) of the 1940 Act, and (iii) each of
this Agreement and the Investment Management Agreement is in full force
and effect and constitutes a valid and binding obligation of the Trust,
enforceable in accordance with its terms, except that with respect to
this Agreement, no representation is made as to compliance with Section
17(i) of the 1940 Act, and subject, as to enforcement, to bankruptcy,
insolvency, reorganization, or other similar laws relating to or
affecting creditors' rights generally and to general principles of
equity.
(xi) There is no action, suit or proceeding before or by any
court or governmental agency or body, domestic or foreign, now pending,
or, to the knowledge
4
<PAGE>
of the Trust, threatened against or affecting, the Trust, which might
result in any material adverse change in the condition, financial or
otherwise, business affairs or business prospects of the Trust, or
might materially and adversely affect the properties or assets of the
Trust; and there are no material contracts or documents of the Trust
which are required to be filed as exhibits to the Registration
Statement by the 1933 Act, the 1940 Act or the Rules and Regulations
which have not been so filed.
(xii) There are no contracts or documents which are required
to be described in the Registration Statement or the Prospectus or to
be filed as exhibits thereto which have not been so described and filed
as required.
(xiii) The Trust owns or possesses, or can acquire on
reasonable terms, adequate trademarks, service marks and trade names
necessary to conduct its business as described in the Registration
Statement, and the Trust has not received any notice of infringement of
or conflict with asserted rights of others with respect to any
trademarks, service marks or trade names which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or
finding, would materially adversely affect the conduct of the business,
operations, financial condition or income of the Trust.
(xiv) Since the date of its organization, the Trust has
qualified as a regulated investment company under Subchapter M of the
Code (except that the Investment Manager only makes such representation
as of April 7, 1995, the date that it first became the Investment
Manager) and intends to continue so to qualify. In addition, the Trust
intends to direct the investment of the proceeds of the Offer in such a
manner as to comply with the requirements of Subchapter M of the Code.
(xv) The Common Shares have been approved for listing, subject
to official notice of issuance, on the New York Stock Exchange (the
"NYSE").
(xvi) The Trust has not, directly or indirectly, (i) taken any
action designed to cause or result in, or that has constituted or might
reasonably be expected to constitute, the stabilization or manipulation
of the price of any security of the Trust to facilitate the sale or
resale of the Common Shares or (ii) except for the Privately Negotiated
Transactions and sales pursuant to the Cash Purchase Plan, since the
filing of the Registration Statement, (A) sold, bid for, purchased, or
paid anyone any compensation for soliciting purchases of, the Common
Shares or (B) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Trust
(except for the sale of Common Shares under this Agreement).
(xvii) The Common Shares have an ADTV (as defined in
Regulation M of the Exchange Act ("Regulation M")) value of at least $1
million and have a public float of at least $150 million.
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(b) The Investment Manager represents and warrants to the Agent as of
the date hereof and as of each Representation Date as follows:
(i) The Investment Manager has been duly organized as a
corporation under the laws of the State of Delaware with corporate
power and authority to conduct its business as described in the
Prospectus; the Investment Manager is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction in which the failure to so qualify, either individually or
in the aggregate, would have a material adverse effect upon the
operations or financial condition of the Investment Manager.
(ii) The Investment Manager is duly registered as an
investment adviser under the Investment Advisers Act of 1940, as
amended (the "Advisers Act"), and is not prohibited by the Advisers Act
or the 1940 Act, or the rules and regulations under such acts, from
acting as Investment Manager to the Trust under the terms of the
Investment Management Agreement as contemplated by the Prospectus.
(iii) The description of the Investment Manager in the
Prospectus is true and correct in all material respects and does not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to
make the statements therein not misleading; and there are no pending
legal proceedings that would be required to be described under Item 12
of Form N-2.
(iv) Each of this Agreement and the Investment Management
Agreement has been duly authorized, executed and delivered by the
Investment Manager; each of this Agreement and the Investment
Management Agreement is in full force and effect and constitutes a
valid and binding obligation of the Investment Manager, enforceable in
accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization or other similar laws relating to or
affecting creditors' rights generally and to general principles of
equity; and neither the execution and delivery of this Agreement nor
the performance by the Investment Manager of its obligation hereunder
or under the Investment Management Agreement will conflict with, or
result in a breach of, any of the terms and provisions of, or
constitute, with or without giving notice or lapse of time or both, a
material default under any agreement or instrument to which the
Investment Manager is a party or by which the Investment Manager is
bound, or any law, order, rule or regulation applicable to it of any
jurisdiction, court, federal or state regulatory body, administrative
agency or other governmental body, stock exchange or securities
association having jurisdiction over the Investment Manager or its
properties or operations.
(v) The Investment Manager has the financial resources
available to it necessary for the performance of its services and
obligations as contemplated in the Prospectus.
(vi) The Investment Manager has not, directly or indirectly,
(i) taken any action designed to cause or result in, or that has
constituted or might reasonably be expected
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to constitute, the stabilization or manipulation of the price of any
security of the Trust to facilitate the sale or resale of the Common
Shares or (ii) except for the Privately Negotiated Transactions and
sales pursuant to the Cash Purchase Plan, since the filing of the
Registration Statement, (A) sold, bid for, purchased, or paid anyone
any compensation for soliciting purchases of the Common Shares or (B)
paid or agreed to pay to any person any compensation for soliciting
another to purchase any other securities of the Trust.
(vii) Since the respective dates of the latest Form 10-K and
Form 10-Q filed by the Investment Manager's parent company, Pilgrim
America Capital Corporation, except as otherwise stated therein, there
has been no material adverse change, or any development involving a
prospective material adverse change, in the condition (financial or
otherwise) or management of the Investment Manager, or in the earnings,
business affairs or business prospects of the Investment Manager,
whether or not arising in the ordinary course of business.
(viii) There is no action, suit or proceeding before or by any
court or governmental agency or body, domestic or foreign, now pending,
or, to the knowledge of the Investment Manager, threatened against or
affecting the Investment Manager, which might result in any material
adverse change in the condition, financial or otherwise, business
affairs or business prospects of the Investment Manager or materially
and adversely affect the properties or assets of the Investment
Manager; and there are no material contracts or documents of the
Investment Manager that are required to be disclosed in the
Registration Statement by the 1933 Act, the 1940 Act or by the Rules
and Regulations that have not been so disclosed therein.
(c) Any certificate signed by any officer of the Trust or the
Investment Manager and delivered to the Agent or counsel for the Agent shall be
deemed a representation and warranty by the Trust or the Investment Manager, as
the case may be, to the Agent, as to the matters covered thereby.
SECTION 3. Sale and Delivery of Securities. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Trust agrees to issue and sell
through the Agent, as exclusive sales agent for the sale of Common Shares
pursuant to this Agreement or an arrangement similar to that contemplated by
this Agreement, and the Agent agrees to sell, as sales agent for the Trust, on a
reasonable efforts basis, up to the Maximum Amount of Common Shares during the
term of this Agreement on the terms set forth herein; provided, however, the
Trust and the Agent shall suspend the sale of Common Shares if the per share
price for the Common Shares is less than the Minimum Price (as defined below).
The Trust shall calculate the Current Net Asset Value (as such term is used in
Section 23(b) of the 1940 Act) per Common Share at the close of business on each
day and shall notify the Agent of the result of such calculation by 5:30 p.m. on
each day. "Minimum Price" means a price equal to (1) the Current Net Asset Value
per Common Share as determined
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by the Trust on the preceding business day plus (2) the per Common Share amount
of any commission to be paid to the Agent hereunder.
The Common Shares, up to the Maximum Amount, are to be sold on such
days as shall be agreed to by the Trust and the Agent. Subject to the terms and
conditions hereof, the Agent shall use its reasonable efforts to sell the entire
Maximum Amount. The Agent shall sell the Common Shares only by means of ordinary
trading transactions on the NYSE. The Agent shall not solicit or arrange for the
solicitation of customers' orders in anticipation of or in connection with such
transactions. The Agent shall calculate the ADTV (as defined in Regulation M) of
the Common Shares on a weekly basis. If either party has reason to believe that
the exemptive provisions set forth in rule 101(c)(1) of Regulation M, are not
satisfied, it shall promptly notify the other party and sales of Common Shares
under this Agreement shall be suspended until that or other exemptive provisions
have been satisfied in the judgment of each party. In addition, the Trust or the
Agent may, upon notice to the other party hereto by telephone (confirmed
promptly by telecopy), suspend the offering of Common Shares at any time and
each party agrees to promptly suspend the offering of Common Shares upon such
notice; provided, however, that such suspension or termination shall not affect
or impair the parties' respective obligations with respect to Common Shares sold
hereunder prior to the giving of such notice.
In connection with the sale of Common Shares under this Agreement, the
Agent is not authorized by the Trust to give any information or to make any
representations in connection with this Agreement other than those contained in
the Registration Statement and the Prospectus, and agrees not to give any
unauthorized information or to make any unauthorized representations. Except as
specifically provided in this Agreement, the Agent is not authorized to act as
an agent for the Trust, and agrees not to act or to purport to act as an agent
for the Trust.
The Trust and the Agent shall agree upon the number of Common Shares to
be sold on any business day. The compensation to the Agent for sales of Common
Shares shall be at a fixed commission rate of o% of the gross sales price per
share.
The Agent shall provide written confirmation to the Trust following the
close of business on any day in which Common Shares are sold under this
Agreement setting forth the number of Common Shares sold, the gross proceeds
from the sale of such shares, the highest and lowest executed sales price at
which such shares were sold, the net proceeds to the Trust and the compensation
payable by the Trust to the Agent with respect to such sales.
Settlement for sales of Common Shares will occur on the third business
day following the date on which such sales are made (each a "Closing Date"). The
amount of proceeds for such sales to be delivered to the Trust against the
receipt of the Common Shares sold shall be equal to the aggregate sales prices
at which such Common Shares were sold, net of the Agent's compensation for such
sales and after deduction for any transaction fees imposed by any governmental
or self-regulatory organization in respect of such sales. Settlement for Common
Shares shall be effected by free delivery of shares to the Agent's account at
The Depository
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Trust Company in return for payments in same day funds delivered to the account
designated by the Trust.
On each Closing Date, the Trust shall be deemed to have affirmed each
representation, warranty, covenant and other agreement contained in this
Agreement. On the first day of each month, the Trust shall affirm in writing
each representation, warranty, covenant and other agreement contained in this
Agreement. The Trust covenants and agrees with the Agent that on or prior to the
second business day after each day on which sales of Common Shares occur, the
Trust will file a prospectus supplement under the applicable paragraph of Rule
497 of the Rules and Regulations, which prospectus supplement will set forth,
with regard to such day, the number of Common Shares sold through the Agent, the
highest and lowest executed sales price at which Common Shares were sold, the
net proceeds to the Trust and the compensation payable by the Trust to the
Agent. Any obligation of the Agent to use its reasonable efforts to sell the
Common Shares shall be subject to the continuing accuracy of the representations
and warranties of the Trust herein, to the performance by the Trust of its
obligations hereunder and to the continuing satisfaction of the additional
conditions specified in Section 5 of this Agreement.
SECTION 4. Covenants of the Trust. The Trust covenants and agrees
with the Agent that:
(a) The Trust will use its best efforts (i) to cause the Registration
Statement to become effective under the 1933 Act, and (ii) if required, to cause
the issuance of any orders exempting the Trust from any provisions of the 1940
Act, in which case it will advise the Agent promptly as to the time at which any
such orders are issued.
(b) The Trust will orally notify the Agent promptly, and confirm the
notice in writing, of the (i) effectiveness of the Registration Statement and
any amendment thereto (including any post-effective amendment), (ii) receipt of
any comments from the Commission, (iii) request by the Commission for any
amendment to the Registration Statement, any amendment or supplement to the
Prospectus or additional information, (iv) issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose, (v) issuance by the Commission
of an order of suspension or revocation of the notification on Form N-8A of
registration of the Trust as an investment company under the 1940 Act or the
initiation of any proceeding for that purpose and (vi) suspension of the
qualification of the Common Shares for offering or sale in any jurisdiction. The
Trust will make every reasonable effort to prevent the issuance of any stop
order described in subsection (iv) hereunder or any order of suspension or
revocation described in subsection (v) or subsection (vi) hereunder and, if any
such stop order or order of suspension or revocation is issued, to obtain the
lifting thereof at the earliest possible moment.
(c) The Trust will give the Agent notice of its intention to file any
amendment to the Registration Statement (including any post-effective amendment)
or any amendment or supplement to the Prospectus (including any revised
prospectus that the Trust proposes for use by the Agent, which differs from the
prospectus on file at the Commission at the time the
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Registration Statement becomes effective, whether such revised prospectus is
required to be filed pursuant to Rule 497(c) or Rule 497(h) of the Rules and
Regulations), whether pursuant to the 1940 Act, the 1933 Act, or otherwise, and
will furnish the Agent and counsel for the Agent with copies of any such
amendment or supplement within a reasonable amount of time prior to such
proposed filing or use, as the case may be, and will not file any such amendment
or supplement to which the Agent or counsel for the Agent reasonably shall
object.
(d) During the period in which a prospectus relating to the Common
Shares is required to be delivered under the 1933 Act, the Trust will prepare
and file with the Commission, promptly upon the Agent's request, any amendments
or supplements to the Registration Statement or Prospectus that, in the Agent's
or counsel for the Agent's reasonable opinion, may be necessary or advisable in
connection with the distribution of the Common Shares by the Agent; and it will
furnish to the Agent and counsel for the Agent at the time of filing thereof a
copy of any document that upon filing is deemed to be incorporated by reference
in the Registration Statement or Prospectus; and the Trust will cause each
amendment or supplement to the Prospectus to be filed with the Commission as
required pursuant to the applicable paragraph of Rule 497 of the Rules and
Regulations within the time period prescribed.
(e) Within the time during which a prospectus relating to the Common
Shares is required to be delivered under the 1933 Act, the Trust will comply as
far as it is able with all requirements imposed upon it by the 1933 Act and by
the Rules and Regulations, as from time to time in force, so far as necessary to
permit the continuance of sales of or dealings in the Common Shares as
contemplated by the provisions hereof and the Prospectus. If during such period
any event occurs as a result of which the Prospectus as then amended or
supplemented would include an untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in the light of
the circumstances then existing, not misleading, or if during such period it is
necessary to amend or supplement the Registration Statement or Prospectus to
comply with the 1933 Act, the Trust will promptly notify the Agent to suspend
the offering of Common Shares during such period and the Trust will amend or
supplement the Registration Statement or Prospectus so as to correct such
statement or omission or effect such compliance.
(f) The Trust will use its best efforts to qualify the Common Shares
for sale under the securities laws of such jurisdictions as the Agent designates
and to continue such qualifications in effect so long as required for the
distribution of the Common Shares, except that the Trust shall not be required
in connection therewith to qualify as a foreign business trust or to execute a
general consent to service of process in any jurisdiction.
(g) The Trust will furnish to the Agent and its counsel (at the expense
of the Trust) copies of the Registration Statement, the Prospectus and all
amendments and supplements to the Registration Statement or Prospectus that are
filed with the Commission during the period in which a prospectus relating to
the Common Shares is required to be delivered under the 1933 Act, in each case
as soon as available and in such quantities as the Agent may from time to time
reasonably request and will also furnish copies of the Prospectus to the NYSE in
accordance
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<PAGE>
with Rule 153 of the Rules and Regulations and the Trust and the Agent agree
that the delivery of the Prospectus to any other person is not required under
this Agreement for so long as the Common Shares are listed on the NYSE.
(h) The Trust will make generally available to its security holders as
soon as practicable, but in any event not later than 60 days after the close of
the period covered thereby, an earnings statement in form complying with the
provisions of Rule 158 of the Rules and Regulations covering a 12-month period
that satisfies the provisions of Section 11(a) of the Act and Rule 158 of the
Rules and Regulations.
(i) The Trust, whether or not the transactions contemplated hereunder
are consummated or this Agreement is terminated, will pay all expenses incident
to the performance of its obligations hereunder, including, but not limited to,
expenses relating to (i) the printing and filing of the Registration Statement
as originally filed and of each amendment thereto, (ii) the preparation,
issuance and delivery of the Common Shares, (iii) the reasonable fees and
disbursements of the Trust's counsel and accountants, (iv) the qualification of
the Common Shares under securities laws in accordance with the provisions of
Section 4(f) of this Agreement, including filing fees and any reasonable fees or
disbursements of counsel for the Agent in connection therewith, (v) the printing
and delivery to the Agent of copies of the preliminary prospectus, of the
Prospectus and any amendments or supplements thereto, and of this Agreement,
(vi) the fees and expenses incurred in connection with the listing of the Common
Shares on the NYSE, and (vii) the filing fees of the Commission and the National
Association of Securities Dealers, Inc. The Agent will pay the fees and
disbursements of its legal counsel; provided, however, that if o Common Shares
are not sold by the Agent pursuant to the terms of this Agreement within nine
months of the date of this Agreement, then the Company will promptly, upon the
request of the Agent, reimburse the Agent for the fees and disbursements of the
Agent's legal counsel incurred in connection with the establishment of the
structured equity shelf program established by this Agreement up to an amount of
$50,000.
(j) The Trust will apply the net proceeds from the sale of the Common
Shares as set forth in the Prospectus.
(k) The Trust will not, directly or indirectly, offer or sell any
Common Shares (other than the Common Shares offered pursuant to the provisions
of this Agreement) or securities convertible into or exchangeable for, or any
rights to purchase or acquire, Common Shares during the period from the date of
this Agreement through the final Closing Date for the sale of Shares hereunder
without (a) giving the Agent at least one business day's prior written notice
specifying the nature of the proposed sale and the date of such proposed sale
and (b) suspending activity under this program for such period of time as may
reasonably be determined by agreement of the Trust and the Agent; provided,
however, that no such notice and suspension shall be required in connection with
the Trust's issuance or sale of Common Shares issuable upon conversion of
securities or the exercise of warrants, options or other rights in effect or
outstanding on the date hereof or in connection with the Trust's issuance or
sale of Common Shares under the terms of the Cash Purchase Plan (as in effect on
the date hereof).
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(l) The Trust will, at any time during the term of this Agreement, as
supplemented from time to time, advise the Agent immediately after it shall have
received notice or obtain knowledge thereof, of any information or fact that
would alter or affect any opinion, certificate, letter and other document
provided to the Agent pursuant to Section 5 herein.
(m) Each time that the Registration Statement or the Prospectus shall
be amended or supplemented (other than a supplement filed pursuant to Rule
497(h) under the 1933 Act that contains solely the information set forth in the
final paragraph of Section 3 of this Agreement), the Trust shall furnish or
cause to be furnished to the Agent forthwith a certificate dated the date of
filing with the Commission of such amendment or supplement, the date of
effectiveness of amendment, as the case may be, in form satisfactory to the
Agent to the effect that the statements contained in the certificate referred to
in Section 5(f) hereof which were last furnished to the Agent are true and
correct at the time of such amendment, supplement, filing, as the case may be,
as though made at and as of such time (except that such statements shall be
deemed to relate to the Registration Statement and the Prospectus as amended and
supplemented to such time) or, in lieu of such certificate, a certificate of the
same tenor as the certificate referred to in said Section 5(f), modified as
necessary to relate to the Registration Statement and the Prospectus as amended
and supplemented to the time of delivery of such certificate.
(n) Each time that the Registration Statement or the Prospectus is
amended or supplemented (other than a supplement filed pursuant to Rule 497(h)
under the 1933 Act that contains solely the information set forth in the final
paragraph of Section 3 of this Agreement), the Trust shall furnish or cause to
be furnished forthwith to the Agent and to counsel to the Agent a written
opinion of Dechert Price & Rhoads, counsel to the Trust ("Trust Counsel"), or
other counsel satisfactory to the Agent, dated the date of filing with the
Commission of such amendment, supplement or other document and the date of
effectiveness of such amendment, as the case may be, in form and substance
satisfactory to the Agent, of the same tenor as the opinion and additional
statement referred to in Section 5(d) hereof, but modified as necessary to
relate to the Registration Statement and the Prospectus as amended and
supplemented to the time of delivery of such opinion.
(o) Each time that the Registration Statement or the Prospectus shall
be amended or supplemented to include additional amended financial information
or there is filed with the Commission any document incorporated by reference
into the Prospectus which contains additional amended financial information, the
Trust shall cause KPMG Peat Marwick LLP, or other independent accountants
satisfactory to the Agent, forthwith to furnish the Agent, with a copy to
counsel to the Agent, a letter, dated the date of effectiveness of such
amendment, or the date of filing of such supplement or other document with the
Commission, as the case may be, in form satisfactory to the Agent, of the same
tenor as the letter referred to in Section 5(e) hereof but modified to relate to
the Registration Statement and the Prospectus, as amended and supplemented to
the date of such letter; provided, however, that the Agent acknowledges that no
such letter shall be required for a supplement filed pursuant to Rule 497(h)
under the 1933 Act that contains solely the information set forth in the final
paragraph of Section 3 of this Agreement.
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(p) The Trust hereby consents to the Agent trading in the Trust's
Common Shares for the Agent's own account and at the same time as the Trust's
sales agent pursuant to this Agreement.
(q) The Trust will use its best efforts to maintain its qualification
as a regulated investment company entitled to the benefits of Subchapter M of
the Code.
(r) The Trust and the Investment Manager will not, directly or
indirectly, (i) take any action designed to cause or result in, or that
constitutes or might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Trust to facilitate the sale or
resale of the Common Shares or (ii) except for the Privately Negotiated
Transactions and sales pursuant to the Cash Purchase Plan, sell, bid for,
purchase, or pay anyone any compensation for soliciting purchases of the Common
Shares or pay or agree to pay any person any compensation for soliciting another
to purchase any other securities of the Trust (except for the sale of Common
Shares under this Agreement).
SECTION 5. Conditions of Agent's Obligations. The obligations of the
Agent to use reasonable efforts to sell the Common Shares as provided herein
shall be subject to the accuracy, as of the date hereof, and as of each Closing
Date, of the representations and warranties of the Trust and the Investment
Manager contained herein, to the performance by each of them of their respective
obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective and no stop
order suspending the effectiveness of the Registration Statement shall have been
issued and no proceeding for that purpose shall have been instituted or, to the
knowledge of the Trust or the Agent, threatened by the Commission, and any
request of the Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise) shall have been complied
with to the Agent's satisfaction.
(b) The Agent shall not have advised the Trust that the Registration
Statement or Prospectus, or any amendment or supplement thereto, contains an
untrue statement of fact that in the Agent's opinion is material, or omits to
state a fact that in the Agent's opinion is material and is required to be
stated therein or is necessary to make the statements therein not misleading.
(c) Except as contemplated in the Prospectus, subsequent to the
respective dates as of which information is given in the Registration Statement
and the Prospectus, there shall not have been any material change in the
capitalization of the Trust, or any material adverse change, or any development
that may reasonably be expected to cause a material adverse change, in the
condition (financial or other), business, prospects, net worth or results of
operations of the Trust.
(d) The Agent shall have received by the first day on which sales are
permitted to be made by the Agent hereunder (the "Commencement Date") and at
every other date specified in Section 4(n) hereof, opinions of Trust Counsel,
which opinion may rely, in part as to matters
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of Delaware law, upon an opinion from other counsel to the Trust or the
Investment Manager satisfactory to the Agent, dated as of the Commencement Date
and dated as of such other date, respectively, to the effect that:
(i) The Trust has been duly established and is validly
existing as a business trust in good standing under the laws of the
Commonwealth of Massachusetts, and the Investment Manager has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the State of Delaware.
(ii) Each of the Trust and the Investment Manager has the
trust and corporate power and authority, respectively, to own, lease
and operate its respective properties and conduct its respective
business as described in the Registration Statement and the Prospectus.
(iii) Each of the Trust and the Investment Manager is duly
qualified as a trust and corporation, respectively, to transact
business and is in good standing in the jurisdiction of its principal
place of business and is duly qualified to do business in each
jurisdiction where such qualification is required, except where the
failure to so qualify would not have a material adverse effect on the
condition, financial or otherwise, or the earnings, business affairs or
business prospects of the Trust or the Investment Manager.
(iv) The Trust has an authorized, issued and outstanding
capitalization as set forth in the Prospectus as of the dates specified
therein. All of the outstanding Common Shares have been duly authorized
by requisite trustee action on the part of the Trust and validly
issued, are fully paid and non-assessable by the Trust and conform to
the description thereof in the Prospectus.
(v) The Common Shares have been duly and validly authorized,
and, when issued and delivered to and paid for by the purchasers
thereof pursuant to this Agreement, will be fully paid and
nonassessable by the Trust and conform to the description thereof in
the Prospectus; the issuance of the Common Shares is not subject to any
preemptive or other rights to subscribe for any of the Common Shares
under any indenture, mortgage, deed of trust, lease or other agreement
or instrument to which the Trust is a party or by which the Trust or
any of its properties are bound, or under the Declaration or By-Laws of
the Trust, or under Massachusetts General Laws; the statements set
forth in the Prospectus under the headings "Description of the Shares"
and o, insofar as such statements constitute a summary of legal matters
or documents referred to therein, are accurate and provide a fair
summary of such legal matters or documents; all action required to be
taken for the authorization, issue and sale of the Common Shares have
been validly and sufficiently taken; and the Common Shares are the
subject of an effective registration statement permitting their sale in
the manner contemplated by this Agreement.
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(vi) This Agreement has been duly authorized, executed and
delivered by the Trust and the Investment Manager, complies with all
applicable provisions of the 1940 Act, the Advisers Act and the rules
and regulations under such acts and constitutes a valid and binding
agreement of the Trust and the Investment Manager, enforceable in
accordance with its terms (except that with respect to this Agreement,
no representation is made as to compliance with Section 17(i) of the
1940 Act), subject, as to enforcement, to bankruptcy, insolvency,
reorganization and other laws of general applicability relating to or
affecting creditors' rights and to general equity principles.
(vii) The Investment Management Agreement has been duly
authorized, executed and delivered by the Trust and the Investment
Manager, complies as to form in all material respects with all
applicable provisions of the 1940 Act, the Advisers Act and the rules
and regulations under such acts and constitutes the valid and binding
obligation of each of the Trust and the Investment Manager, enforceable
in accordance with its terms, subject, as to enforcement, to
bankruptcy, insolvency, reorganization and other laws of general
applicability relating to or affecting creditors' rights and to general
equity principles.
(viii) The Registration Statement has become effective under
the 1933 Act; to the knowledge of such counsel after due inquiry, no
stop order suspending the effectiveness of the Registration Statement
has been issued and no proceeding for that purpose has been instituted
or threatened by the Commission.
(ix) The Registration Statement, when it became effective, and
the Prospectus and any amendment or supplement thereto, on the date of
filing thereof with the Commission (and at each Closing Date on or
prior to the date of the opinion), complied as to form in all material
respects with the requirements of the 1933 Act, the 1940 Act and the
Rules and Regulations.
(x) The description in the Registration Statement and
Prospectus of statutes, legal and governmental proceedings, contracts
and other documents are accurate in all material respects and fairly
present the information required to be shown; and such counsel do not
know of any statutes or legal or governmental proceedings required to
be described in the Prospectus that are not described as required.
(xi) To the best of such counsel's knowledge and information,
there are no contracts, indentures, mortgages, loan agreements, notes
leases or other instruments of the Trust or the Investment Manager that
are required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those
respectively described or referred to therein or filed as exhibits
thereto, the descriptions thereof and references thereto are correct in
all material respects, and no default exists in the due performance or
observance of any material obligation, agreement, covenant or condition
contained in any contract, indenture, loan agreement, note or lease so
described, referred to or filed.
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(xii) No consent, approval, authorization or order of any
court or governmental authority or agency is required in connection
with the sale of the Common Shares pursuant to this Agreement, except
such as has been obtained under the 1933 Act, the 1940 Act or the Rules
and Regulations or such as may be required under state securities laws;
and to the best of such counsel's knowledge and information, the
execution, delivery and performance of, and the consummation of the
transactions contemplated by, this Agreement by the Trust and the
Investment Manager will not conflict with, or constitute or result in a
breach or violation by the Trust or the Investment Manager of or a
default under, any of the terms or provisions of, (i) any contract,
indenture, mortgage, loan agreement, note, lease or other instrument
known to such counsel to which the Trust or the Investment Manager is a
party or by which any of them is bound or to which any of their
property or assets are subject, (ii) the provisions of the Declaration
or By-Laws of the Trust and the charter and by-laws of the Investment
Manager or (iii) any statute or any order, rule or regulation known to
such counsel of any court or governmental agency or body applicable to
the Trust or the Investment Manager or any of their properties.
(xiii) The Trust is registered with the Commission under the
1940 Act as a closed-end diversified management investment company, and
all required action has been taken by the Trust under the 1933 Act, the
1940 Act and the Rules and Regulations to make and consummate the
Offer; the provisions of the Declaration and By-Laws of the Trust
comply in all material respects with the requirements of the 1940 Act
and the rules and regulations thereunder; and, to the best of such
counsel's knowledge and information, no order of suspension or
revocation of such registration under the 1940 Act, pursuant to Section
8(e) of the 1940 Act, has been issued or proceedings therefor initiated
or threatened by the Commission.
(xiv) The information in the Prospectus under the captions "o"
and "o", to the extent that it constitutes matters of law or legal
conclusions thereunder, has been reviewed by such counsel and is
accurate and correct in all material respects.
(xv) The Investment Manager is duly registered as an
investment adviser under the Advisers Act and is not prohibited by the
Advisers Act or the 1940 Act, or the rules and regulations under such
acts, from acting under the Investment Management Agreement for the
Trust as contemplated by the Registration Statement and the Prospectus.
(xvi) The Investment Management Agreement and the Custody
Agreement have been authorized, executed and delivered in compliance
with the 1940 Act and the Advisers Act.
In addition, such counsel shall additionally state that nothing has
come to such counsel's attention that would lead them to believe that the
Registration Statement (other than the financial statements and other financial
information included therein, as to which no belief need be
16
<PAGE>
stated), at the time it (including any post-effective amendment) became
effective, contained an untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus (other than the
financial statements and other financial information included therein, as to
which no belief need be stated), and any amendments or supplements thereto, on
the date of filing thereof with the Commission and at the Commencement Date and
at each Closing Date on or prior to the date of the opinion included an untrue
statement of a material fact or omitted to state a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(e) At the Commencement Date and at such other dates specified in
Section 4(o) hereof, the Agent shall have received a letter from KPMG Peat
Marwick LLP, independent public accountants for the Trust, or other independent
accountants satisfactory to the Agent, dated the date of delivery thereof,
substantially in the form attached hereto as Annex I and otherwise in form and
substance satisfactory to the Agent.
(f) The Agent shall have received a certificate, or certificates,
signed by the President or a Vice President and by the principal financial or
accounting officer of each of the Trust and the Investment Manager, dated as of
the Commencement Date and dated as of the first day of each month (each a
"Certificate Date"), to the effect that, to the best of their knowledge based
upon reasonable investigation:
(i) the representations and warranties of the Trust in this
Agreement are true and correct, as if made at and as of such
Certificate Date, and the Trust has complied with all the agreements
and satisfied all the conditions on its part to be performed or
satisfied at or prior to the Certificate Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceeding for that
purpose has been instituted or, to the knowledge of such officer after
due inquiry, is threatened, by the Commission;
(iii) the Registration Statement and the Prospectus contain
all statements that are required to be stated therein in accordance
with the 1933 Act, the 1940 Act and the Rules and Regulations and
conform in all material respects to the requirements of the 1933 Act,
1940 Act and the Rules and Regulations and the Registration Statement
and the Prospectus do not contain any untrue statement of a material
fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading, and no action suit or proceeding of law or
in equity is pending or, threatened against the Trust or the Investment
Manager, that would be required to be set forth in the Registration
Statement and the Prospectus other than as set forth therein;
(iv) there has not been, since the respective dates as of
which information is given in the Registration Statement and the
Prospectus, any material adverse change in
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the condition, financial or otherwise, of the Trust or in its earnings,
business affairs or business prospects, whether or not arising in the
ordinary course of business, from that set forth in the Registration
Statement and Prospectus;
(v) the Investment Manager has the financial resources
available to it necessary for the performance of its services and
obligations as contemplated in the Prospectus; and
(vi) no proceedings are pending or, to the knowledge of the
Trust or the Investment Manager, threatened against the Trust or the
Investment Manager, before or by any federal, state or other
commission, board or administrative agency wherein an unfavorable
decision, ruling or finding would materially and adversely affect the
business, property, financial condition or income of either the Trust
or the Investment Manager, other than as set forth in the Registration
Statement and the Prospectus.
In addition, on each Certificate Date the certificate shall also state
that the Common Shares to be sold to that date have been duly and validly
authorized by the Trust and that all action required to be taken for the
authorization, issuance and sale of the Common Shares has been validly and
sufficiently taken.
(g) At the Commencement Date and on each Closing Date, the Trust shall
have furnished to the Agent such appropriate further information, certificates
and documents as the Agent may reasonably request.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are satisfactory in form and
substance to the Agent. The Trust will furnish the Agent with such conformed
copies of such opinions, certificates, letters and other documents as the Agent
shall reasonably request.
SECTION 6. Indemnification and Contribution.
(a) Each of the Trust and the Investment Manager, jointly and
severally, agrees to indemnify and hold harmless the Agent, the directors,
officers, employees and agents of the Agent and each person, if any, who
controls the Agent within the meaning of Section 15 of the 1933 Act or Section
20 of the Exchange Act, from and against any and all losses, claims,
liabilities, expenses and damages (including, but not limited to, any and all
investigative, legal and other expenses reasonably incurred in connection with,
and any and all amounts paid in settlement of, any action, suit or proceeding
between any of the indemnified parties and any indemnifying parties or between
any indemnified party and any third party, or otherwise, or any claim asserted),
as and when incurred, to which the Agent, or any such person, may become subject
under the 1933 Act, the Exchange Act or other Federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims,
liabilities, expenses or damages arise out of or are based on (i) any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus, the Registration Statement or the Prospectus or any
amendment or supplement to the Registration Statement or the Prospectus, or
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<PAGE>
in any application or other document executed by or on behalf of the Trust or
based on written information furnished by or on behalf of the Trust filed in any
jurisdiction in order to qualify the Common Shares under the securities laws
thereof or filed with the Commission, (ii) the omission or alleged omission to
state in such document a material fact required to be stated in it or necessary
to make the statements in it not misleading or (iii) any breach by any of the
indemnifying parties of any of their respective representations, warranties and
agreements contained in this Agreement, or (iv) the engagement of the Agent
pursuant to, and the performance by the Agent of the services contemplated by,
this Agreement; provided that this indemnity agreement shall not apply to the
extent that such loss, claim, liability, expense or damage that (1) arises from
the sale of the Common Shares pursuant to this Agreement and is based on an
untrue statement or omission or alleged untrue statement or omission made in
reliance on and in conformity with information relating to the Agent furnished
in writing to the Trust by the Agent expressly for inclusion in any document
described in clause (a)(i) above, or (2) is found in a final judgment by a court
of competent jurisdiction to have resulted from the bad faith, willful
misconduct or gross negligence of the Agent or the reckless disregard by the
Agent of its duties and obligations hereunder. This indemnity agreement will be
in addition to any liability that the Trust and the Investment Manager might
otherwise have.
(b) The Agent agrees to indemnify and hold harmless the Trust and the
Investment Manager, each person, if any, who controls the Trust or the
Investment Manager within the meaning of Section 15 of the 1933 Act or Section
20 of the Exchange Act, each trustee/director of the Trust and the Investment
Manager and each officer of the Trust who signs the Registration Statement to
the same extent as the foregoing indemnity from the Trust and the Investment
Manager to the Agent, but only insofar as losses, claims, liabilities, expenses
or damages arise out of or are based on any untrue statement or omission or
alleged untrue statement or omission made in reliance on and in conformity with
information relating to the Agent furnished in writing to the Trust by the Agent
expressly for use in any document described in clause (a)(i) above. This
indemnity will be in addition to any liability that the Agent might otherwise
have; provided, however, that in no case shall the Agent be liable or
responsible for any amount in excess of the commissions received by the Agent
hereunder.
(c) Any party that proposes to assert the right to be indemnified under
this Section 6 will, promptly after receipt of notice of commencement of any
action against such party in respect of which a claim is to be made against an
indemnifying party or parties under this Section 6, notify each such
indemnifying party of the commencement of such action, enclosing a copy of all
papers served, but the omission so to notify such indemnifying party will not
relieve it from (i) any liability that it might have to any indemnified party
otherwise than under this Section 6 and (ii) any liability that it may have to
any indemnified party under the foregoing provisions of this Section 6 unless,
and only to the extent that, such omission results in the forfeiture of
substantive rights or defenses by the indemnifying party. If any such action is
brought against any indemnified party and it notifies the indemnifying party of
such commencement, the indemnifying party will be entitled to participate in
and, to the extent that it elects by delivering written notice to the
indemnified party promptly after receiving notice of the commencement of the
action from the indemnified party, jointly with any other indemnifying
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<PAGE>
party similarly notified, to assume the defense of the action, with counsel
satisfactory to the indemnified party, and after notice from the indemnifying
party to the indemnified party of its election to assume the defense, the
indemnifying party will not be liable to the indemnified party, for any legal or
other expenses except as provided below and except for the reasonable costs of
investigation subsequently incurred by the indemnified party in connection with
the defense. The indemnified party will have the right to employ its own counsel
in any such action, but the fees, expenses and other charges of such counsel
will be at the expense of such indemnified party unless (1) the employment of
counsel by the indemnified party has been authorized in writing by the
indemnifying party, (2) the indemnified party has reasonably concluded (based on
advice of counsel) that there may be legal defenses available to it or other
indemnified parties that are different from or in addition to those available to
the indemnifying party, (3) a conflict or potential conflict exists (based on
advice of counsel to the indemnified party) between the indemnified party and
the indemnifying party (in which case the indemnifying party will not have the
right to direct the defense of such action on behalf of the indemnified party)
or (4) the indemnifying party has not in fact employed counsel to assume the
defense of such action within a reasonable time after receiving notice of the
commencement of the action, in each of which cases the reasonable fees,
disbursements and other charges of counsel will be at the expense of the
indemnifying party or parties. It is understood that the indemnifying party or
parties shall not, in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for the reasonable fees, disbursements and
other charges of more than one separate firm admitted to practice in such
jurisdiction at any one time for all such indemnified party or parties. All such
fees, disbursements and other charges will be reimbursed by the indemnifying
party promptly as they are incurred. An indemnifying party will not be liable
for any settlement of any action or claim effected without its written consent
(which consent will not be unreasonably withheld). No indemnifying party shall,
without the prior written consent of each indemnified party, settle or
compromise or consent to the entry of any judgment in any pending or threatened
claim, action or proceeding relating to the matters contemplated by this Section
6 (whether or not any indemnified party is a party thereto), unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising or that may arise out of such
claim, action or proceeding. Notwithstanding any other provision of this Section
6 (c), if at any time an indemnified party shall have requested an indemnifying
party to reimburse the indemnified party for fees and expenses of counsel, such
indemnifying party agrees that it shall be liable for any settlement effected
without its written consent if (i) such settlement is entered into more than 45
days after receipt by such indemnifying party of the aforesaid request, (ii)
such indemnifying party shall have received notice of the terms of such
settlement at least 30 days prior to such settlement being entered into and
(iii) such indemnifying party shall not have reimbursed such indemnified party
in accordance with such request prior to the date of such settlement.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in the foregoing
paragraphs of this Section 6 is applicable in accordance with its terms but for
any reason is held to be unavailable from the Trust and the Investment Manager
or the Agent, the Trust, the Investment Manager and the Agent will contribute to
the total losses, claims, liabilities, expenses and damages (including any
20
<PAGE>
investigative, legal and other expenses reasonably incurred in connection with,
and any amount paid in settlement of, any action, suit or proceeding or any
claim asserted, but after deducting any contribution received by the Trust or
the Investment Manager from persons other than the Agent, such as persons who
control the Trust within the meaning of the 1933 Act, officers of the Trust who
signed the Registration Statement and directors of the Trust, who also may be
liable for contribution) to which the indemnified party may be subject in such
proportion as shall be appropriate to reflect the relative benefits received by
the Trust and the Investment Manager on the one hand and the Agent on the other.
The relative benefits received by the Trust and the Investment Manager on the
one hand and the Agent on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses) received
by the Trust bear to the total commissions received by the Agent from the sale
of the Common Shares on behalf of the Trust. If, but only if, the allocation
provided by the foregoing sentence is not permitted by applicable law, the
allocation of contribution shall be made in such proportion as is appropriate to
reflect not only the relative benefits referred to in the foregoing sentence but
also the relative fault of the Trust and the Investment Manager, on the one
hand, and the Agent, on the other, with respect to the statements or omissions
which resulted in such loss, claim, liability, expense or damage, or action in
respect thereof, as well as any other relevant equitable considerations with
respect to such offering. Such relative fault shall be determined by reference
to whether the untrue or alleged untrue statement of a material fact or omission
or alleged omission to state a material fact, or other conduct giving rise to
liability, relates to information supplied by the Trust or the Agent, the intent
of the parties and their relative knowledge, access to information and
opportunity to correct or prevent such statement or omission, and the conduct of
the parties. The Trust, the Investment Manager and the Agent agree that it would
not be just and equitable if contributions pursuant to this Section 6(d) were to
be determined by pro rata allocation or by any other method of allocation which
does not take into account the equitable considerations referred to herein. The
amount paid or payable by an indemnified party as a result of the loss, claim,
liability, expense or damage, or action in respect thereof, referred to above in
this Section 6(d) shall be deemed to include, for purposes of this Section 6(d),
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 6(d), the Agent shall not be
required to contribute any amount in excess of the commissions received by it
under this Agreement and no person found guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the 1933 Act) will be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 6(d), any person who controls a
party to this Agreement within the meaning of the 1933 Act, and any officers,
directors, employees or agents of the Agent, will have the same rights to
contribution as that party, and each officer of the Trust who signed the
Registration Statement will have the same rights to contribution as the Trust,
subject in each case to the provisions hereof. Any party entitled to
contribution, promptly after receipt of notice of commencement of any action
against such party in respect of which a claim for contribution may be made
under this Section 6(d), will notify any such party or parties from whom
contribution may be sought, but the omission to notify will not relieve the
party or parties from whom contribution may be sought from any other obligation
it or they may have under this Section 6(d). Except for a settlement entered
into pursuant to the last sentence of Section 6(c) hereof,
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<PAGE>
no party will be liable for contribution with respect to any action or claim
settled without its written consent (which consent will not be unreasonably
withheld).
(e) The indemnity and contribution agreements contained in this Section
6 and the representations and warranties of the Trust and the Investment Manager
contained in this Agreement shall remain operative and in full force and effect
regardless of (i) any investigation made by or on behalf of the Agent, (ii)
acceptance of the Common Shares and payment therefore or (iii) any termination
of this Agreement.
SECTION 7. Representations and Agreements to Survive Delivery. All
representations, warranties and agreements of the Trust herein or in
certificates delivered pursuant hereto, and the agreements of the Agent
contained in Section 6 hereof, shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of the Agent or any
controlling persons, or the Trust (or any of their officers, directors or
controlling persons), and shall survive delivery of and payment for the Common
Shares.
SECTION 8. Termination.
(a) The Agent shall have the right by giving notice as hereinafter
specified at any time to terminate this Agreement if (i) any material adverse
change, or any development has occurred that is reasonably expected to cause
material adverse change, in the business, financial condition or results of
operations of the Trust or the Investment Manager has occurred which, in the
judgment of such Agent, materially impairs the investment quality of the Common
Shares, (ii) the Trust or the Investment Manager shall have failed, refused or
been unable to perform any agreement on its part to be performed hereunder,
(iii) any other condition of the Agent's obligations hereunder is not fulfilled,
(iv) any suspension or limitation of trading in the Common Shares on the NYSE,
or any setting of minimum prices for trading of the Common Shares on such
exchange, shall have occurred, (v) any banking moratorium shall have been
declared by Federal or New York authorities or (vi) an outbreak or material
escalation of major hostilities in which the United States is involved, a
declaration of war by Congress, any other substantial national or international
calamity or any other event or occurrence of a similar character shall have
occurred since the execution of this Agreement that, in the judgment of the
Agent, makes it impractical or inadvisable to proceed with the completion of the
sale of and payment for the Common Shares to be sold by the Agent on behalf of
the Trust. Any such termination shall be without liability of any party to any
other party except that the provisions of Section 4(i), Section 6 and Section 7
hereof shall remain in full force and effect notwithstanding such termination.
(b) The Trust shall have the right, by giving notice as hereinafter
specified, to terminate this Agreement in its sole discretion after the first
anniversary of the date of this Agreement. Any such termination shall be without
liability of any party to any other party except that the provisions of Section
4(i), Section 6 and Section 7 hereof shall remain in full force and effect
notwithstanding such termination.
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(c) The Agent shall have the right, by giving notice as hereinafter
specified, to terminate this Agreement in its sole discretion at any time after
the first anniversary of the date of this Agreement. Any such termination shall
be without liability of any party to any other party except that the provisions
of Section 4(i), Section 6 and Section 7 hereof shall remain in full force and
effect notwithstanding such termination.
(d) This Agreement shall remain in full force and effect unless
terminated pursuant to Sections 8(a), (b) or (c) above or otherwise by mutual
agreement of the parties; provided that any such termination by mutual agreement
shall in all cases be deemed to provide that Section 4(i), Section 6 and Section
7 shall remain in full force and effect.
(e) Any termination of this Agreement shall be effective on the date
specified in such notice of termination; provided that such termination shall
not be effective until the close of business on the date of receipt of such
notice by the Agent or the Trust, as the case may be.
SECTION 9. Notices. All notices or communications hereunder shall be in
writing and if sent to the Agent shall be mailed, delivered, telexed or
telecopied and confirmed to the Agent at PaineWebber Incorporated, 1285 Avenue
of the Americas, New York, New York 10019, telecopy no. (212) 713-4205,
attention: Todd A. Reit, or if sent to the Trust or the Investment Manager,
shall be mailed, delivered, telexed or telecopied and confirmed to the Trust or
the Investment Manager at Two Renaissance Square, 40 North Central Avenue, Suite
1200, Phoenix, Arizona 85004, attention: ____________________. Each party to
this Agreement may change such address for notices by sending to the parties to
this Agreement written notice of a new address for such purpose.
SECTION 10. Parties. This Agreement shall inure to the benefit of and
be binding upon the Trust and the Agent and their respective successors and the
controlling persons, officers and directors referred to in Section 6 hereof, and
no other person will have any right or obligation hereunder.
SECTION 11. Adjustments for Stock Splits. The parties acknowledge and
agree that all share related numbers contained in this Agreement (including,
without limitation, the Maximum Amount and the Minimum Price) shall be adjusted
to take into account any stock split effected with respect to the Common Shares.
SECTION 12. Entire Agreement. This Agreement constitutes the entire
agreement and supersedes all other prior and contemporaneous agreements and
undertakings, both written and oral, among the parties hereto with regard to the
subject matter hereof.
SECTION 13. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE
STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF
LAWS.
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SECTION 14. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
24
<PAGE>
If the foregoing correctly sets forth the understanding between the
Trust and the Investment Manager and the Agent, please so indicate in the space
provided below for that purpose, whereupon this letter shall constitute a
binding agreement among the Trust, the Investment Manager and the Agent.
Alternatively, the execution of this Agreement by the Trust and the Investment
Manager and its acceptance by or on behalf of the Agent may be evidenced by an
exchange of telegraphic or other written communications.
Very truly yours,
PILGRIM AMERICA PRIME RATE TRUST
By:
Name:
Title:
PILGRIM AMERICA INVESTMENTS, INC.
By:
Name:
Title:
ACCEPTED as of the date
first above written
PAINEWEBBER INCORPORATED
By:
Name:
Title:
25
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Annex I
Form of Comfort Letter
[To come]
26
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
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 from time to time on the terms set forth in the Sales
Agency Agreement (the "Sales Agency Agreement") between the Trust and
PaineWebber Incorporated (the "Sales Agent).
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 an agent to assist in providing ongoing administrative
assistance to the Trust in connection with the program established by the Sales
Agency Agreement (the "Program"). 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 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 Agent. 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 an agent to
assist in the administration of the Program. You agree to use reasonable efforts
to carry out your duties under this Agreement.
2. Services. You will furnish to the Trust the services of
executive and administrative personnel necessary in connection with the Program.
The services described hereunder shall not include soliciting the sale of shares
or distributing shares of the Trust in connection with the Program. You shall,
as part of your duties hereunder, (i) furnish information to the Trust's Sales
Agent, including, but not limited to, the Trust's current net asset value; (ii)
confer with the Sales Agent regarding the amount of shares to be sold pursuant
to the Program; (iii) consider whether it is necessary to suspend the offering
of shares and confer with the Sales Agent on such consideration; (iv) assist
officers of the Trust in the preparation of any registration statement,
prospectus, or prospectus supplement required to be filed with the Securities
and Exchange Commission pursuant to the 1933 Act; and (v) render any other
services on behalf of the Trust necessary to administer the Program and the sale
of shares pursuant to the Program.
3. Fee. You shall be entitled to receive a fee on
the sale of shares of the Trust of up to 0.75% of the gross sales price per
share of the shares sold pursuant to the Program. The payment of such fee
will apply to shares sold following the sale of the first 4,000,000 shares of
the Trust pursuant to the Program.
4. Furnishing of Information. We will furnish to you such
information with respect to the Trust and its shares, in such form and signed by
such of our officers as you may reasonably request, and we warrant that the
statements therein contained when so signed will be true and correct.
5. Other Activities. Your services pursuant to this
Agreement shall not be deemed to be exclusive, and you may render similar
services or act as an underwriter, distributor or dealer for other
investment companies in the offering of their shares.
6. 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 mutual agreement of the parties. The Agreement will
terminate automatically in the event of the termination of theSales Agency
Agreement.
7. 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.
8. 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.
<PAGE>
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: ______________________________
CUSTODY AGREEMENT
THIS AGREEMENT dated as of the ____ day of July, 1996, is made by and
between INVESTORS FIDUCIARY TRUST COMPANY, a trust company chartered under the
laws of the state of Missouri, having its trust office located at 127 West 10th
Street, Kansas City, Missouri 64105 ("Custodian"), and PILGRIM AMERICA PRIME
RATE TRUST, a Massachusetts business trust, having its principal office and
place of business at Two Renaissance Square, 40 North Central Avenue, Suite
1200, Phoenix, Arizona 85004.
WITNESSETH:
WHEREAS, Fund desires to appoint Investors Fiduciary Trust Company as
Custodian of the Fund; and
WHEREAS, Investors Fiduciary Trust Company is willing to accept such
appointment;
NOW THEREFORE, for and in consideration of the mutual promises contained
herein, the parties hereto, intending to be legally bound, mutually covenant and
agree as follows:
1. APPOINTMENT OF CUSTODIAN. Fund hereby constitutes and appoints Custodian as
custodian of the Assets (as defined below) at any time owned by the Fund.
For purposes of this Agreement, the term "Assets" shall mean investment
securities, interests in loans and other non-cash investment property, and
cash.
2. DUTIES AND RESPONSIBILITIES OF CUSTODIAN.
A. Delivery of Assets
Except as permitted by the Investment Company Act of 1940,
Fund will deliver or cause to be delivered to Custodian all
Assets acquired and owned by it during the time this Agreement
shall continue in effect, including all documentation required
by Fund to be delivered to Custodian relating to or evidencing
the interests in loans acquired by the Fund. Custodian shall
have no responsibility or liability whatsoever for or on
account of Assets or loan documents not so delivered. All
Assets so delivered to Custodian (other than bearer
securities) shall be registered in the name of Fund or its
nominee, or of a nominee of Custodian, or shall be properly
endorsed and in form for transfer satisfactory to Custodian.
B. Delivery of Accounts and Records
Fund shall turn over to Custodian all of the Fund's relevant
accounts and records previously maintained by it. Custodian
shall be entitled to rely conclusively on the completeness and
correctness of the accounts and records turned over to it by
Fund, and Fund shall indemnify and hold Custodian harmless of
and from any and all expenses, damages and losses whatsoever
arising out of or in connection with any error, omission,
inaccuracy or other deficiency of such accounts and records or
in the failure of Fund to provide any portion of such or to
provide in a timely manner any other information needed by the
Custodian knowledgeably to perform its function hereunder.
C. Delivery of Assets to Third Parties
Custodian will receive delivery of and keep safely the Assets
of Fund delivered to it from time to time segregated in a
separate account. Custodian will not deliver, assign, pledge
or hypothecate any such Assets to any person except as
permitted by the provisions of this Agreement or any agreement
executed by it according to the terms of Section 2.S. of this
Agreement. Upon delivery of any such Assets to a subcustodian
pursuant to Section 2.S. of this agreement, Custodian will
create and maintain records identifying those Assets which
have been delivered to the subcustodian as belonging to the
Fund. The Custodian is responsible for the securities and
monies of Fund only until they have been transmitted to and
received by other persons as permitted under the terms of this
Agreement, except for securities and monies transmitted to
subcustodians appointed under Section 2.S. of this Agreement,
for which Custodian remains responsible to the extent provided
in Section 2.S. of this Agreement. Custodian may participate
directly or indirectly through a subcustodian in the
Depository Trust Company, Treasury/Federal Reserve Book Entry
System or Participant Trust Company (PTC) or other depository
approved by the Fund (as such entities are defined at 17 CFR
Section 270.17f-4(b)) (each a "Depository" and collectively
the "Depositories").
D. Registration of Securities
The Custodian shall at all times hold registered securities of
the Fund in the name of the Custodian, the Fund, or a nominee
of either of them, unless specifically directed by
instructions to hold such registered securities in so-called
"street name," provided that, in any event, all such
securities and other Assets shall be held in an account of the
Custodian containing only Assets of the Fund, or only Assets
held by the Custodian as a fiduciary or custodian for
customers, and provided further, that the records of the
Custodian at all times shall indicate the Fund or other
customer for which such securities and other Assets are held
in such account and the respective interests therein. If,
however, the Fund directs the Custodian to maintain securities
in "street name", notwithstanding anything contained herein to
the contrary, the Custodian shall be obligated only to utilize
its best efforts to timely collect income due the Fund on such
securities and to notify the Fund of relevant corporate
actions including, without limitation, pendency of calls,
maturities, tender or exchange offers. All Assets, and the
ownership thereof by Fund, which are held by Custodian
hereunder, however, shall at all times be identifiable on the
records of the Custodian. The Fund agrees to hold Custodian
and its nominee harmless for any liability as a record holder
of securities held in custody.
E. Exchange of Assets
Upon receipt of instructions as defined herein in Section 3.A,
Custodian will exchange, or cause to be exchanged, Assets held
by it for the account of Fund for other Assets issued or paid
in connection with any reorganization, recapitalization,
merger, consolidation, split-up of shares, change of par
value, conversion, refinancing or otherwise, and will deposit
any such Assets in accordance with the terms of any
reorganization or protective plan. Without instructions,
Custodian is authorized to exchange securities held by it in
temporary form for securities in definitive form, to effect an
exchange of shares when the par value of the stock is changed,
and upon receiving payment therefor, to surrender Assets held
by it at maturity or when advised of earlier call for
redemption, except that Custodian shall receive instructions
prior to surrendering any convertible security.
F. Purchases of Investments of the Fund
Fund will, on each business day on which a purchase of Assets
shall be made by it, deliver to Custodian instructions which
shall specify with respect to each such purchase:
1. The name of the issuer and description of the Asset;
2. The number of shares or the principal amount purchased,
and accrued interest, if any;
3. The trade date;
4. The settlement date;
5. The purchase price per unit and the brokerage
commission, taxes and other expenses payable in
connection with the purchase;
6. The total amount payable upon such purchase; and
7. The name of the person from whom or the broker or
dealer through whom the purchase was made.
In accordance with such instructions, Custodian will pay for
out of monies held for the account of Fund, but only insofar
as monies are available therein for such purpose, and receive
the Assets so purchased by or for the account of Fund except
that Custodian may in its sole discretion advance funds to the
Fund which may result in an overdraft because the monies held
by the Custodian on behalf of the Fund are insufficient to pay
the total amount payable upon such purchase. Except as
otherwise instructed by Fund, such payment shall be made by
the Custodian only upon receipt of Assets: (a) by the
Custodian; (b) by a clearing corporation of a national
exchange of which the Custodian is a member; or (c) by a
Depository. Notwithstanding the foregoing, (i) in the case of
a repurchase agreement, the Custodian may release funds to a
Depository prior to the receipt of advice from the Depository
that the securities underlying such repurchase agreement have
been transferred by book-entry into the account maintained
with such Depository by the Custodian, on behalf of its
customers, provided that the Custodian's instructions to the
Depository require that the Depository make payment of such
funds only upon transfer by book-entry of the securities
underlying the repurchase agreement in such account; (ii) in
the case of time deposits, call account deposits, currency
deposits and other deposits, foreign exchange transactions,
futures contracts or options, the Custodian may make payment
therefor before receipt of an advice or confirmation
evidencing said deposit or entry into such transaction; (iii)
in the case of the purchase of securities, the settlement of
which occurs outside of the United States of America, the
Custodian may make, or cause a subcustodian appointed pursuant
to Section 2.S.2. of this Agreement to make, payment therefor
in accordance with generally accepted local custom and market
practice; and (iv) in the case of interests in loans,
Custodian shall make payment therefor and additional advances
relating thereto at such times and to such parties as
instructed by Fund without regard to the time of delivery to
Custodian of documentation evidencing the Fund's interest in
the loan or the additional advance, as applicable.
G. Sales and Deliveries of Investments of the Fund - Other than
Options and Futures
Fund will, on each business day on which a sale of Assets of
Fund has been made, deliver to Custodian instructions
specifying with respect to each such sale:
1. The name of the issuer and description of the Assets;
2. The number of shares or principal amount sold, and
accrued interest, if any;
3. The date on which the Assets sold were purchased or
other information identifying the Assets sold and to be
delivered;
4. The trade date;
5. The settlement date;
6. The sale price per unit and the brokerage commission,
taxes or other expenses payable in connection with such
sale;
7. The total amount to be received by Fund upon such sale;
and
8. The name and address of the broker or dealer through
whom or person to whom the sale was made.
In accordance with such instructions, Custodian will deliver
or cause to be delivered the Assets thus designated as sold
for the account of Fund to the broker or other person
specified in the instructions relating to such sale. Except as
otherwise instructed by Fund, such delivery shall be made upon
receipt of payment therefor: (a) in such form as is
satisfactory to the Custodian; (b) credit to the account of
the Custodian with a clearing corporation of a national
securities exchange of which the Custodian is a member; or (c)
credit to the account of the Custodian, on behalf of its
customers, with a Depository. Notwithstanding the foregoing:
(i) in the case of securities held in physical form, such
securities shall be delivered in accordance with "street
delivery custom" to a broker or its clearing agent; (ii) in
the case of the sale of securities, the settlement of which
occurs outside of the United States of America, the Custodian
may make, or cause a subcustodian appointed pursuant to
Section 2.S.2. of this Agreement to make, payment therefor in
accordance with generally accepted local custom and market
practice; and (iii) in the case of the sale of an interest in
a loan, the Custodian shall receive the purchase price for the
account of Fund and deliver the loan documents relating to the
interest sold as instructed by Fund.
H. Purchases or Sales of Security Options, Options on Indices
and Security Index Futures Contracts
Fund will, on each business day on which a purchase or sale of
the following options and/or futures shall be made by it,
deliver to Custodian instructions which shall specify with
respect to each such purchase or sale:
1. Security Options
a. The underlying security;
b. The price at which purchased or sold;
c. The expiration date;
d. The number of contracts;
e. The exercise price;
f. Whether the transaction is an opening, exercising,
expiring or closing transaction;
g. Whether the transaction involves a put or call;
h. Whether the option is written or purchased;
i. Market on which option traded;
j. Name and address of the broker or dealer through whom
the sale or purchase was made.
2. Options on Indices
a. The index;
b. The price at which purchased or sold;
c. The exercise price;
d. The premium;
e. The multiple;
f. The expiration date;
g. Whether the transaction is an opening, exercising,
expiring or closing transaction;
h. Whether the transaction involves a put or call;
i. Whether the option is written or purchased;
j. The name and address of the broker or dealer through
whom the sale or purchase was made, or other applicable
settlement instructions.
3. Security Index Futures Contracts
a. The last trading date specified in the contract and,
when available, the closing level, thereof;
b. The index level on the date the contract is entered
into;
c. The multiple;
d. Any margin requirements;
e. The need for a segregated margin account (in addition
to instructions, and if not already in the possession
of Custodian, Fund shall deliver a substantially
complete and executed custodial safekeeping account and
procedural agreement which shall be incorporated by
reference into this Custody Agreement); and
f. The name and address of the futures commission merchant
through whom the sale or purchase was made, or other
applicable settlement instructions.
4. Option on Index Future Contracts
a. The underlying index future contract;
b. The premium;
c. The expiration date;
d. The number of options;
e. The exercise price;
f. Whether the transaction involves an opening,
exercising, expiring or closing transaction;
g. Whether the transaction involves a put or call;
h. Whether the option is written or purchased; and
i. The market on which the option is traded.
I. Securities Pledged or Loaned
If specifically allowed for in the prospectus of Fund:
1. Upon receipt of instructions, Custodian will release
or cause to be released securities held in custody to
the pledgee designated in such instructions by way of
pledge or hypothecation to secure any loan incurred
by Fund; provided, however, that the securities shall
be released only upon payment to Custodian of the
monies borrowed, except that in cases where
additional collateral is required to secure a
borrowing already made, further securities may be
released or caused to be released for that purpose
upon receipt of instructions. Upon receipt of
instructions, Custodian will pay, but only from funds
available for such purpose, any such loan upon
redelivery to it of the securities pledged or
hypothecated therefor and upon surrender of the note
or notes evidencing such loan.
2. Upon receipt of instructions, Custodian will release
securities held in custody to the borrower designated
in such instructions; provided, however, that the
securities will be released only upon deposit with
Custodian of full cash collateral as specified in
such instructions, and that Fund will retain the
right to any dividends, interest or distribution on
such loaned securities. Upon receipt of instructions
and the loaned securities, Custodian will release the
cash collateral to the borrower.
J. Routine Matters
Custodian will, in general, attend to all routine and
mechanical matters in connection with the sale, exchange,
substitution, purchase, transfer, or other dealings with
Assets of Fund except as may be otherwise provided in this
Agreement or directed from time to time by the Fund in
writing.
K. Deposit Account
Custodian will open and maintain one or more special purpose
deposit accounts in the name of Custodian ("Accounts"),
subject only to draft or order by Custodian upon receipt of
instructions. All monies received by Custodian from or for the
account of Fund shall be deposited in said Accounts. Barring
events not in the control of the Custodian such as strikes,
lockouts or labor disputes, riots, war or equipment or
transmission failure or damage, fire, flood, earthquake or
other natural disaster, action or inaction of governmental
authority or other causes beyond its control, at 9:00 a.m.,
Kansas City time, on the second business day after deposit of
any check into Fund's Account, Custodian agrees to make Fed
Funds available to the Fund in the amount of the check.
Deposits made by Federal Reserve wire will be available to the
Fund immediately and ACH wires will be available to the Fund
on the next business day. Income earned on the Assets will be
credited to Fund based on the schedule attached as Exhibit A.
The Custodian will be entitled to reverse any credited amounts
where credits have been made and monies are not finally
collected. If monies are collected after such reversal, the
Custodian will credit Fund in that amount. Custodian may open
and maintain Accounts in such banks or trust companies as may
be designated by it or by properly authorized resolution of
the governing Board of the Fund, such Accounts, however, to be
in the name of Custodian and subject only to its draft or
order.
L. Income and other Payments to Fund
Custodian will:
1. Collect, claim and receive and deposit for the account of
Fund all income and other payments which become due and
payable on or after the effective date of this Agreement
with respect to the Assets held under this Agreement, and
credit the account of Fund in accordance with the schedule
attached hereto as Exhibit A. If for any reason, the Fund is
credited with income that is not subsequently collected,
Custodian may reverse that credited amount;
2. Execute ownership and other certificates and affidavits for
all federal, state and local tax purposes in connection with
the collection of bond and note coupons; and
3. Take such other action as may be necessary or proper in
connection with:
a. the collection, receipt and deposit of such income and
other payments, including but not limited to the
presentation for payment of:
1. all coupons and other income items requiring
presentation; and
2. all other securities which may mature or be called,
redeemed, retired or otherwise become payable and
regarding which the Custodian has actual knowledge, or
should reasonably be expected to have knowledge; and
b. the endorsement for collection, in the name of Fund, of
all checks, drafts or other negotiable instruments.
Custodian, however, will not be required to institute
suit or take other extraordinary action to enforce
collection except upon receipt of instructions and upon
being indemnified to its satisfaction against the costs
and expenses of such suit or other actions. Custodian
will receive, claim and collect all stock dividends,
rights and other similar items and will deal with the
same pursuant to instructions.
M. Payment of Dividends and other Distributions
On the declaration of any dividend or other distribution on
the shares of the Fund ("Fund Shares") by the governing Board
of the Fund, Fund shall deliver to Custodian instructions with
respect thereto. On the date specified in such instructions
for the payment of such dividend or other distribution,
Custodian will pay out of the monies held for the account of
Fund, insofar as the same shall be available for such
purposes, and credit to the account of the Dividend Disbursing
Agent for Fund, such amount as may be specified in such
instructions.
N. Shares of Fund Purchased by Fund
Whenever any Fund Shares are repurchased or redeemed by Fund,
Fund or its agent shall advise Custodian of the aggregate
dollar amount to be paid for such shares and shall confirm
such advice in writing. Upon receipt of such advice, Custodian
shall charge such aggregate dollar amount to the account of
Fund and either deposit the same in the account maintained for
the purpose of paying for the repurchase or redemption of Fund
Shares or deliver the same in accordance with such advice.
Custodian shall not have any duty or responsibility to
determine that Fund Shares have been removed from the proper
shareholder account or accounts or that the proper number of
such shares have been cancelled and removed from the
shareholder records.
O. Shares of Fund Purchased from Fund
Whenever Fund Shares are purchased from Fund, Fund will
deposit or cause to be deposited with Custodian the amount
received for such shares. Custodian shall not have any duty or
responsibility to determine that Fund Shares purchased from
Fund have been added to the proper shareholder account or
accounts or that the proper number of such shares have been
added to the shareholder records.
P. Proxies and Notices
Custodian will promptly deliver or mail or have delivered or
mailed to Fund all proxies properly signed, all notices of
meetings, all proxy statements, all payment and rate notices
and other notices, requests or announcements affecting or
relating to Assets held by Custodian for Fund and will, upon
receipt of instructions, execute and deliver or cause its
nominee to execute and deliver or mail or have delivered or
mailed such proxies or other authorizations as may be
required. Except as provided by this Agreement or pursuant to
instructions hereafter received by Custodian, neither it nor
its nominee will exercise any power inherent in any Assets,
including any power to vote the same, or execute any proxy,
power of attorney, or other similar instrument voting any of
Assets, or give any consent, approval or waiver with respect
thereto, or take any other similar action.
Q. Disbursements
Custodian will pay or cause to be paid insofar as funds are
available for the purpose, bills, statements and other
obligations of Fund (including but not limited to obligations
in connection with the conversion, exchange or surrender of
Assets owned by Fund, interest charges, dividend
disbursements, taxes, management fees, custodian fees, legal
fees, auditors' fees, transfer agents' fees, brokerage
commissions, compensation to personnel, and other operating
expenses of Fund) pursuant to instructions of Fund setting
forth the name of the person to whom payment is to be made,
the amount of the payment, and the purpose of the payment.
R. Daily Statement of Accounts
Custodian will, within a reasonable time, render to Fund as of
the close of business on each day, a detailed statement of the
amounts received or paid and of Assets received or delivered
for the account of Fund during said day. Custodian will, from
time to time, upon request by Fund, render a detailed
statement of the Assets held for Fund under this Agreement,
and Custodian will maintain such books and records as are
necessary to enable it to do so and will permit such persons
as are authorized by Fund, including Fund's independent public
accountants, access to such records or confirmation of the
contents of such records; and if demanded, will permit federal
and state regulatory agencies to examine the securities, books
and records. Upon the written instructions of Fund or as
demanded by federal or state regulatory agencies, Custodian
will instruct any subcustodian to give such persons as are
authorized by Fund, including Fund's independent public
accountants, access to such records or confirmation of the
contents of such records; and if demanded, to permit federal
and state regulatory agencies to examine the books, records
and securities held by subcustodian which relate to Fund.
S. Appointment of Subcustodians
1. Notwithstanding any other provisions of this Agreement,
all or any of the Assets of Fund may be held in
Custodian's own custody or in the custody of one or
more other banks or trust companies selected by
Custodian. Any such subcustodian must have the
qualifications required for custodian under the
Investment Company Act of 1940, as amended. Any such
subcustodians may participate directly or indirectly in
any Depository. Custodian shall be responsible to the
Fund for any loss, damage or expense suffered or
incurred by the Fund resulting from the actions or
omissions of any subcustodian selected and appointed by
Custodian (except subcustodians appointed at the
request of Fund and as provided in Subsection 2 below)
to the same extent Custodian would be responsible to
the Fund under Section 4 of this Agreement if it
committed the act or omission itself. Custodian is not
responsible for Depositories except to the extent such
entities are responsible to Custodian. Upon request of
the Fund, Custodian shall be willing to contract with
other subcustodians reasonably acceptable to the
Custodian for purposes of (i) effecting third-party
repurchase transactions with banks, brokers, dealers,
or other entities through the use of a common custodian
or subcustodian, or (ii) providing depository and
clearing agency services with respect to certain
variable rate demand note securities, or (iii) for
other reasonable purposes specified by Fund; provided,
however, that the Custodian shall be responsible to the
Fund for any loss, damage or expense suffered or
incurred by the Fund resulting from the actions or
omissions of any such subcustodian only to the same
extent such subcustodian is responsible to the
Custodian. The Fund shall be entitled to review the
Custodian's contracts with any such subcustodians
appointed at the request of Fund.
2. Notwithstanding any other provisions of this Agreement,
Fund's foreign securities (as defined in Rule
17f-5(c)(1) under the Investment Company Act of 1940)
and Fund's cash or cash equivalents, in amounts deemed
by the Fund to be reasonably necessary to effect Fund's
foreign securities transactions, may be held in the
custody of one or more banks or trust companies acting
as subcustodians, according to Section 2.S.1; and
thereafter, pursuant to a written contract or contracts
as approved by Fund's governing Board, may be
transferred to an account maintained by such
subcustodian with an eligible foreign custodian, as
defined in Rule 17f-5(c)(2), provided that any such
arrangement involving a foreign custodian shall be in
accordance with the provisions of Rule 17f-5 under the
Investment Company Act of 1940 as that Rule may be
amended from time to time. The Custodian shall be
responsible for the monies and securities of Fund held
by eligible foreign subcustodians to the extent the
eligible foreign subcustodians are liable to the
domestic subcustodian with which the Custodian
contracts for foreign subcustody purposes.
T. Adoption of Procedures
Custodian and Fund may from time to time adopt procedures as
they agree upon, and Custodian may conclusively assume that no
procedure approved by Fund, or directed by Fund, conflicts
with or violates any requirements of its prospectus,
declaration of trust, bylaws, or any rule or regulation of any
regulatory body or governmental agency. Fund will be
responsible to notify Custodian of any changes in statutes,
regulations, rules or policies which might necessitate changes
in Custodian's responsibilities or procedures.
U. Overdrafts
In the event Custodian or any subcustodian shall, in its sole
discretion, advance cash or securities for any purpose
(including but not limited to loan advances, securities
settlements, purchase or sale of foreign exchange or foreign
exchange contracts and assumed settlement) for the benefit of
Fund, the advance shall be payable by the Fund on demand. Any
such cash advance shall be subject to an overdraft charge at
the rate set forth in the then-current fee schedule from the
date advanced until the date repaid. As security for each such
advance, Fund hereby grants Custodian and such subcustodian a
lien on and security interest in all property at any time held
for the account of Fund, including without limitation all
Assets acquired with the amount advanced. Should the Fund fail
to repay the advance within a reasonable time after written
notice from Custodian, the Custodian and such subcustodian
shall be entitled to utilize available cash and to dispose of
Assets pursuant to applicable law to the extent necessary to
obtain reimbursement of the amount advanced and any related
overdraft charges.
V. Exercise of Rights; Tender Offers
Upon receipt of instructions, the Custodian shall: (a) deliver
warrants, puts, calls, rights or similar securities to the
issuer or trustee thereof, or to the agent of such issuer or
trustee, for the purpose of exercise or sale, provided that
the new securities, cash or other assets, if any, are to be
delivered to the Custodian; and (b) deposit securities upon
invitations for tenders thereof, provided that the
consideration for such securities is to be paid or delivered
to the Custodian or the tendered securities are to be returned
to the Custodian.
W. Review and Reporting on Loan Documents
Upon receipt of the loan documents for a purchased interest in
a commercial loan, Custodian shall verify that the face dollar
amount of the Fund's interest in the loan as set forth on such
loan documents is equal to the face dollar amount of such
interest as set forth on the Fund's instructions to Custodian
with respect to such purchase. Custodian shall notify the Fund
of any discrepancies and the Fund shall be responsible for
resolving the discrepancies. Custodian shall maintain a record
of all loan documents in its possession and will provide a
report thereof to the Fund monthly, or upon the Fund's
request.
3. INSTRUCTIONS.
A. The term "instructions", as used herein, means written (including
telecopied) or oral instructions to Custodian which Custodian
reasonably believes were given by a designated representative of Fund.
Fund shall provide Custodian, as often as necessary, written
instructions naming one or more designated representatives to give
instructions in the name and on behalf of Fund, which instructions may
be received and accepted from time to time by Custodian as conclusive
evidence of the authority of any designated representative to act for
Fund and may be considered to be in full force and effect (and
Custodian will be fully protected in acting in reliance thereon) until
receipt by Custodian of notice to the contrary. Unless such written
instructions delegating authority to any person to give instructions
specifically limit such authority or require that the approval of
anyone else will first have been obtained, Custodian will be under no
obligation to inquire into the right of the person giving such
instructions to do so. Notwithstanding any of the foregoing provisions
of this Section 3 no authorizations or instructions received by
Custodian from Fund, will be deemed to authorize or permit any
director, trustee, officer, employee, or agent of Fund to withdraw any
of the Assets of Fund upon the mere receipt of such authorization or
instructions from such director, trustee, officer, employee or agent.
Notwithstanding any other provision of this Agreement, Custodian, upon
receipt (and acknowledgment if required at the discretion of
Custodian) of the instructions of a designated representative of Fund
will undertake to deliver for Fund's account monies (provided such
monies are on hand or available) in connection with Fund's
transactions and to wire transfer such monies to such broker, dealer,
subcustodian, bank or other agent specified in such instructions by a
designated representative of Fund.
B. No later than the next business day immediately following each oral
instruction, Fund will send Custodian written confirmation of such
oral instruction. At Custodian's sole discretion, Custodian may record
on tape, or otherwise, any oral instruction whether given in person or
via telephone, each such recording identifying the date and the time
of the beginning and ending of such oral instruction.
C. If Custodian shall provide Fund direct access to any computerized
recordkeeping and reporting system used hereunder or if Custodian and
Fund shall agree to utilize any electronic system of communication,
Fund shall be fully responsible for any and all consequences of the
use or misuse of the terminal device, passwords, access instructions
and other means of access to such system(s) which are utilized by,
assigned to or otherwise made available to the Fund. Fund agrees to
implement and enforce appropriate security policies and procedures to
prevent unauthorized or improper access to or use of such system(s).
Custodian shall be fully protected in acting hereunder upon any
instructions, communications, data or other information received by
Custodian by such means as fully and to the same effect as if
delivered to Custodian by written instrument signed by the requisite
authorized representative(s) of Fund. Fund shall indemnify and hold
Custodian harmless from and against any and all losses, damages,
costs, charges, counsel fees, payments, expenses and liability which
may be suffered or incurred by Custodian as a result of the use or
misuse, whether authorized or unauthorized, of any such system(s) by
Fund or by any person who acquires access to such system(s) through
the terminal device, passwords, access instructions or other means of
access to such system(s) which are utilized by, assigned to or
otherwise made available to the Fund, except to the extent
attributable to any negligence or willful misconduct by Custodian.
4. LIMITATION OF LIABILITY OF CUSTODIAN.
A. Custodian shall at all times use reasonable care and due diligence and
act in good faith in performing its duties under this Agreement.
Custodian shall hold harmless and indemnify Fund from and against any
loss or liability arising out of Custodian's negligence, willful
misconduct, or bad faith. Custodian shall not be responsible for, and
the Fund shall indemnify and hold Custodian harmless from and against,
any loss or liability arising out of actions taken by Custodian
pursuant to this Agreement or any instructions provided to it
hereunder, provided that Custodian has acted in good faith and with
due diligence and reasonable care. Neither party shall be liable to
the other for consequential, special or punitive damages. Custodian
may request and obtain the advice and opinion of counsel for Fund, or
of its own counsel with respect to questions or matters of law, and it
shall be without liability to Fund for any action taken or omitted by
it in good faith, in conformity with such advice or opinion. If
Custodian reasonably believes that it could not prudently act
according to the instructions of the Fund or the Fund's counsel, it
may in its discretion, with notice to the Fund, not act according to
such instructions.
B. Custodian may rely upon the advice and statements of Fund and Fund's
accountants and other persons believed by, it in good faith, to be
expert in matters upon which they are consulted, and Custodian shall
not be liable for any actions taken, in good faith, upon such advice
and statements.
C. If Fund requests Custodian in any capacity to take, with respect to
any Assets, any action which involves the payment of money by it, or
which in Custodian's opinion might make it or its nominee liable for
payment of monies or in any other way, Custodian, upon notice to Fund
given prior to such actions, shall be and be kept indemnified by Fund
in an amount and form satisfactory to Custodian against any liability
on account of such action; provided, however, that nothing herein
shall obligate Custodian to take any such action except in its sole
discretion.
D. Custodian shall be entitled to receive, and Fund agrees to pay to
Custodian, on demand, reimbursement for such cash disbursements, costs
and expenses as may be agreed upon from time to time by Custodian and
Fund.
E. Custodian shall be protected in acting as custodian hereunder upon any
instructions, advice, notice, request, consent, certificate or other
instrument or paper reasonably appearing to it to be genuine and to
have been properly executed and shall, unless otherwise specifically
provided herein, be entitled to receive as conclusive proof of any
fact or matter required to be ascertained from Fund hereunder,
instructions or a certificate signed by the Fund's President, or other
authorized officer.
F. Without limiting the generality of the foregoing, Custodian shall be
under no duty or obligation to inquire into, and shall not be liable
for:
1. The validity of the issue of any Assets purchased by or for Fund,
the legality of the purchase thereof, the validity, completeness,
correctness or sufficiency of any loan documents required by Fund
to be received by Custodian, the sufficiency of the evidence of
ownership of Assets required by Fund to be received by Custodian,
or the propriety of the decision to purchase or amount paid for
any Assets;
2. The legality of the sale of any Assets by or for Fund, or the
propriety of the amount for which the same are sold;
3. The legality of the issue or sale of any Fund Shares, or the
sufficiency of the amount to be received therefor;
4. The legality of the repurchase or redemption of any Fund Shares,
or the propriety of the amount to be paid therefor; or
5. The legality of the declaration of any dividend by Fund, or the
legality of the issue of any Fund Shares in payment of any
dividend.
G. Custodian shall not be liable for, or considered to be
Custodian of, any money represented by any check, draft, wire
transfer, clearing house funds, uncollected funds, or
instrument for the payment of money to be received by it on
behalf of Fund, until Custodian actually receives such money,
provided only that it shall advise Fund promptly if it fails
to receive any such money in the ordinary course of business,
and use its best efforts and cooperate with Fund toward the
end that such money shall be received.
H. Except for any subcustodians or eligible foreign custodians
appointed under Section 2.S. to the extent provided therein,
Custodian shall not be responsible for loss occasioned by the
acts, neglects, defaults or insolvency of any broker, bank,
trust company, or any other person with whom Custodian may
deal in the absence of negligence or bad faith on the part of
Custodian.
I. Notwithstanding anything herein to the contrary, Custodian
may, and with respect to any foreign subcustodian appointed
under Section 2.S.2 must, provide Fund for its approval,
agreements with banks or trust companies which will act as
subcustodians for Fund pursuant to Section 2.S of this
Agreement.
J. Custodian shall not be responsible or liable for the failure
or delay in performance of its obligations under this
Agreement, or those of any entity for which it is responsible
hereunder, arising out of or caused, directly or indirectly,
by circumstances beyond the affected entity's reasonable
control, including, without limitation: any interruption, loss
or malfunction of any utility, transportation, computer
(hardware or software) or communication service; inability to
obtain labor, material, equipment or transportation, or a
delay in mails; governmental or exchange action, statute,
ordinance, rulings, regulations or direction; war, strike,
riot, emergency, civil disturbance, terrorism, vandalism,
explosions, labor disputes, freezes, floods, fires, tornados,
acts of God or public enemy, revolutions, or insurrection.
5. COMPENSATION.
Fund will pay to Custodian such compensation as is stated in the Fee
Schedule from time to time agreed to in writing by Custodian and Fund.
Custodian may charge such compensation against monies held by it for
the account of Fund. Custodian will also be entitled, notwithstanding
the provisions of Sections 4.C. or 4.D. hereof, to charge against any
monies held by it for the account of Fund the amount of any loss,
damage, liability, advance, or expense for which it shall be entitled
to reimbursement under the provisions of this Agreement including fees
or expenses due to Custodian for other services provided to the Fund by
the Custodian. Custodian will not be entitled to reimbursement by Fund
for any loss or expenses of any subcustodian, except to the extent
Custodian would be entitled to reimbursement hereunder if it incurred
the loss or expense itself directly.
6. TERMINATION.
This Agreement shall continue in effect until terminated by either
party by notice in writing received by the other party not less than
ninety (90) days prior to the date upon which such termination shall
take effect. Upon termination of this Agreement, Fund will pay to
Custodian such compensation for its reimbursable disbursements, costs
and expenses paid or incurred to such date. The governing Board of Fund
will, forthwith upon giving or receiving notice of termination of this
Agreement, appoint as successor custodian a qualified bank or trust
company. Custodian will, upon termination of this Agreement, deliver to
the successor custodian so appointed, at Custodian's office, all
securities then held by Custodian hereunder, duly endorsed and in form
for transfer, all funds, loan documents and other properties of Fund
deposited with or held by Custodian hereunder, or will co-operate in
effecting changes in book-entries at the Depositories. In the event no
written order designating a successor custodian has been delivered to
Custodian on or before the date when such termination becomes
effective, then Custodian may deliver the securities, funds and
properties of Fund to a bank or trust company at the selection of
Custodian and meeting the qualifications for custodian, if any, set
forth in the governing documents of the Fund and having not less that
Two Million Dollars ($2,000,000) aggregate capital, surplus and
undivided profits, as shown by its last published report. Upon delivery
to a successor custodian, Custodian will have no further obligations or
liabilities under this Agreement. Thereafter such bank or trust company
will be the successor custodian under this Agreement and will be
entitled to reasonable compensation for its services. In the event that
no such successor custodian can be found, Fund will submit to its
shareholders, before permitting delivery of the cash and securities
owned by Fund to anyone other than a successor custodian, the question
of whether Fund will be liquidated or function without a custodian.
Notwithstanding the foregoing requirement as to delivery upon
termination of this Agreement, Custodian may make any other delivery of
the securities, funds, loan documents and property of Fund which is
permitted by the Investment Company Act of 1940, Fund's governing
documents then in effect or apply to a court of competent jurisdiction
for the appointment of a successor custodian.
7. NOTICES.
Notices, requests, instructions and other writings received by Fund at
Two Renaissance Square, 40 North Central Avenue, Suite 1200, Phoenix,
Arizona 85004, or at such other address as Fund may have designated to
Custodian in writing, will be deemed to have been properly given to
Fund hereunder; and notices, requests, instructions and other writings
received by Custodian at its offices at 127 West 10th Street, 14th
Floor, Kansas City, Missouri 64105, or to such other address as it may
have designated to Fund in writing, will be deemed to have been
properly given to Custodian hereunder.
8. LIMITATION OF LIABILITY.
Notice is hereby given that a copy of Fund's trust agreement and all
amendments thereto is on file with the Secretary of State of the state
of its organization; that this Agreement has been executed on behalf
of Fund by the undersigned duly authorized representative of Fund in
his/her capacity as such and not individually; and that the
obligations of this Agreement shall only be binding upon the assets
and property of Fund and shall not be binding upon any trustee,
officer or shareholder of Fund individually.
9. MISCELLANEOUS.
A. This Agreement is executed and delivered in the State of Missouri
and shall be governed by the laws of said state.
B. All the terms and provisions of this Agreement shall be binding
upon, inure to the benefit of, and be enforceable by the parties
hereto and their respective successors and permitted assigns.
C. No provisions of the Agreement may be amended or modified, in any
manner except by a written agreement properly authorized and
executed by both parties hereto.
D. The captions in this Agreement are included for convenience of
reference only, and in no way define or limit any of the
provisions hereof or otherwise affect their construction or
effect.
E. This Agreement may be executed in two or more counterparts, each
of which will be deemed an original but all of which together
will constitute one and the same instrument.
F. If any part, term or provision of this Agreement is determined to
be illegal, in conflict with any law or otherwise invalid, the
remaining portion or portions shall be considered severable and
not be affected, and the rights and obligations of the parties
shall be construed and enforced as if the Agreement did not
contain the particular part, term or provision held to be illegal
or invalid.
G. Custodian will not release the identity of Fund to an issuer
which requests such information pursuant to the Shareholder
Communications Act of 1985 for the specific purpose of direct
communications between such issuer and Fund unless the Fund
directs the Custodian otherwise.
H. This Agreement may not be assigned by either party without prior
written consent of the other party.
I. If any provision of the Agreement, either in its present form or
as amended from time to time, limits, qualifies, or conflicts
with the Investment Company Act of 1940 and the rules and
regulations promulgated thereunder, such statues, rules and
regulations shall be deemed to control and supersede such
provision without nullifying or terminating the remainder of the
provisions of this Agreement.
J. The representations and warranties and the indemnification
extended hereunder are intended to and shall continue after and
survive the expiration, termination or cancellation of this
Agreement.
K. The Custody Agreement between Custodian and Fund dated as of
November 1, 1989, is hereby cancelled and superseded effective as
of the date hereof, except that all rights, duties and
liabilities which may have arisen under such Custody Agreement
prior to the effectiveness hereof shall continue and survive.
Otherwise, this Agreement does not in any way affect any other
agreements entered into between the parties hereto.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly respective authorized officers.
INVESTORS FIDUCIARY TRUST COMPANY
By:
Title:
PILGRIM AMERICA PRIME RATE TRUST
By:
Title:
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
INVESTORS FIDUCIARY TRUST COMPANY
AVAILABILITY SCHEDULE BY TRANSACTION TYPE
<S> <C> <C> <C> <C> <C> <C>
TRANSACTION DTC PHYSICAL FED
TYPE CREDIT DATE FUNDS TYPE CREDIT DATE FUNDS TYPE CREDIT DATE FUNDS TYPE
Calls Puts As Received C or F* As Received C or F*
Maturities As Received C or F* Mat. Date C or F* Mat. Date F
Tender Reorgs. As Received C As Received C N/A
Dividends Paydate C Paydate C N/A
Floating Rate Int. Paydate C Paydate C N/A
Floating Rate Int. (No N/A As Rate Received C N/A
Rate)
Mtg. Backed P&I Paydate C Paydate + 1 Bus. Day C Paydate F
Fixed Rate Int. Paydate C Paydate C Paydate F
Euroclear N/A C Paydate C
<FN>
Legend
C = Clearinghouse Funds
F = Fed Funds
N/A = Not Applicable
* Availability based on how received.
</FN>
</TABLE>
<TABLE>
<S> <C> <C>
TRANSACTION CREDIT DATE FUNDS TYPE
Loan Payments As Received F
</TABLE>
AMENDED AND RESTATED
ADMINISTRATION AGREEMENT
THIS ADMINISTRATION AGREEMENT which was made as of the 20th day of
October, 1992, amended and restated as of the 17th day of February, 1995 and as
of the 7th day of April, 1995 amended as of the 2nd day of May, 1996, and
further amended and restated as of the 7th day of April, 1997, by and between
PILGRIM AMERICA PRIME RATE TRUST (formerly Pilgrim Prime Rate Trust), a
Massachusetts Business Trust (hereinafter referred to as the "Trust"), and
PILGRIM AMERICA GROUP, INC., a corporation organized and existing under the laws
of Delaware (hereinafter called the "Administrator").
W I T N E S S E T H:
WHEREAS, the Trust is a closed-end management investment company,
registered as such under the Investment Company Act of 1940; and
WHEREAS, the Trust's name was changed to Pilgrim America Prime Rate
Trust on April 12, 1996; and WHEREAS, the Administrator is engaged in
the business of providing management and administrative
services, as an independent contractor; and
WHEREAS, the Trust desires to retain the Administrator to furnish
management and administrative services to the Trust pursuant to the terms and
provisions of this Agreement, and the Administrator is interested in providing
said services.
NOW, THEREFORE, in consideration of the covenants and the mutual
promises hereinafter set forth, the parties hereto, intending to be legally
bound hereby, mutually agree as follows:
1. The Trust hereby employs the Administrator and the Administrator
hereby accepts such employment, to render management and administrative services
to the Trust, subject to the supervision and direction of the Trust's Board of
Trustees. The Administrator shall furnish to the Trust the services of executive
and administrative personnel to supervise the performance of all administrative
functions concerning the operation of the Trust, other than the investment
management function. The Administrator shall, as part of its duties hereunder
(i) monitor the provisions of the loan agreements and any agreements with
respect to participations and assignments and be responsible for recordkeeping
with respect to senior loans in the Trust's portfolio; (ii) administer the
Trust's corporate affairs including preparing and filing all reports required by
the Commonwealth of Massachusetts; (iii) furnish the Trust such office space,
equipment, and personnel as is needed by the Trust; (iv) furnish clerical and
bookkeeping services as are needed by the Trust; (v) prepare and furnish annual
and other reports to shareholders, the Securities and Exchange Commission, the
New York Stock Exchange and to any appropriate governmental body; (vi) prepare
and file any federal, state and local income tax returns as requested by the
Trust; (vii) provide shareholder services as are needed by the Trust; (viii)
permit its officers and employees to serve without compensation as trustees or
officers of the Trust if elected to such positions; and (ix) in general,
supervise the performance of all administrative functions of the Trust, subject
to the ultimate supervision and direction of the Trust's Board of Trustees.
2. The Administrator shall, for all purposes herein, be deemed to be an
independent contractor, and shall, unless otherwise expressly provided and
authorized, have no authority to act for or represent the Trust in any way, or
in any way be deemed an agent for the Trust. It is expressly understood and
agreed that the services to be rendered by the Administrator to the Trust under
the provisions of this Agreement are not to be deemed exclusive, and the
Administrator shall be free to render similar or different services to others so
long as its ability to render the services provided for in this Agreement shall
not be impaired thereby.
3. The Administrator agrees to use its best judgment and efforts in
performing the services to the Trust as contemplated hereunder, and for this
purpose the Administrator shall, at its own expense, maintain such staff and
employ or retain such personnel and consult with such other persons as it shall
from time to time determine to be necessary to the performance of its
obligations under this Agreement.
4. In performing the administrative services hereunder, the
Administrator shall at all times comply with the applicable provisions of the
Investment Company Act of 1940 and any other federal or state securities laws.
5. The Administrator shall bear and pay the costs of rendering the
services to be performed by it under this Agreement. Without limiting the
generality of the foregoing, the Administrator shall bear the following
expenses: the salaries and expenses of all personnel of the Trust and the
Administrator, except for the fees and expenses of Trustees not affiliated with
the Trust or the Administrator; costs to prepare information for determination
of net asset value by the Trust's recordkeeping and accounting agent; expenses
to maintain the Trust's books and records that are not maintained by the Trust's
Manager, Custodian or Transfer Agent; costs incurred to assist in the
preparation of financial information for the Trust's income tax returns, proxy
statements, quarterly and annual shareholder reports; expenses to provide
shareholder services in connection with the Trust's dividend reinvestment and
cash purchase plans; expenses to provide shareholder services in preparation of
tender offers, if any, or to shareholders proposing to transfer their shares to
a third party; and all expenses incurred by the Administrator or by the Trust in
rendering the administrative services pursuant to the terms of this Agreement.
6. The Trust shall bear and pay for all other expenses of its
operation, except for those expenses expressly assumed by the Manager to the
Trust pursuant to an Investment Management Agreement between the Manager and the
Trust, including, but not limited to, the fees payable to the Manager; the fees
and expenses of Trustees who are not affiliated with the Manager or the
Administrator; the fees and certain expenses of the Trust's Custodian and
Transfer Agent, including the cost of providing records to the Administrator in
connection with its obligation of maintaining required records of the Trust; the
charges and expenses of the Trust's legal counsel and independent accountants;
commissions and any issue or transfer taxes chargeable to the Trust in
connection with its transactions; all taxes and corporate fees payable by the
Trust to governmental agencies; the fees of any trade association of which the
Trust is a member; the cost of share certificates representing shares of the
Trust; organizational and offering expenses of the Trust and the fees and
expenses involved in registering and maintaining registration of the Trust and
of its shares with the Securities and Exchange Commission, the New York Stock
Exchange and qualifying its shares under applicable state securities laws
including the preparation and printing of the Trust's registration statements
and prospectuses for such purposes; allocable communications expenses, with
respect to investor services and all expenses of stockholders and Trustees'
meetings and of preparing, printing and mailing reports, proxy statements and
prospectuses to stockholders; the cost of insurance; and litigation and
indemnification expenses and extraordinary expenses not incurred in the ordinary
course of the Trust's business.
7. To the extent the Administrator incurs any costs or performs any
services which are an obligation of the Trust, as set forth herein, the Trust
shall promptly reimburse the Administrator for such costs and expenses. To the
extent the services for which the Trust is obligated to pay are performed by the
Administrator, the Administrator shall be entitled to recover from the Trust
only to the extent of its costs for such services.
8. (a) The Trust agrees to pay to the Administrator, and the
Administrator agrees to accept, as full compensation for all administrative
services furnished or provided to the Trust and as full reimbursement for all
expenses assumed by the Administrator, an administration fee computed at the
annual rate of .15% of the average daily net assets of the Trust, plus the
proceeds of any outstanding borrowings, up to $800 million and at an annual rate
of .10% of the Trust's average daily net assets, plus the proceeds of any
outstanding borrowings, over $800 million.
(b) The administration fee shall be accrued daily by the Trust
and paid to the Administrator at the end of each calendar month.
9. The Administrator agrees that neither it nor any of its officers or
employees shall take any short position in the capital stock of the Trust. This
prohibition shall not prevent the purchase of such shares by any of the officers
and directors or bona fide employees of the Administrator or any trust, pension,
profit-sharing or other benefit plan for such persons or affiliates thereof.
10. Nothing herein contained shall be deemed to require the Trust to
take any action contrary to its Trust Indenture or any applicable statute or
regulation, or to relieve or deprive the Board of Trustees of the Trust of its
responsibility for and control of the conduct of the affairs of the Trust.
11. (a) In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of obligations or duties hereunder on the part
of the Administrator, the Administrator shall not be subject to liability to the
Trust or to any shareholder of the Trust for any act or omission in the course
of, or connected with, rendering services hereunder or for any losses that may
be sustained in the purchase, holding or sale of any security by the Trust.
(b) Notwithstanding the foregoing, the Administrator agrees to
reimburse the Trust for any and all costs, expenses, and counsel and Trustees'
fees reasonably incurred by the Trust in the preparation, printing and
distribution of amendments to its registration statement, holding of meetings of
its shareholders or Trustees, the conduct of factual investigations, any legal
or administrative proceedings including any applications for exemptions or
determinations by the Securities and Exchange Commission which the Trust incurs
as the result of action or inaction of the Administrator or any of its
shareholders where the action or inaction necessitating such expenditures (i) is
directly or indirectly related to any transactions or proposed transaction in
the shares or control of the Administrator or its affiliates (or litigation
relates to any pending or proposed future transaction in such shares or control)
which shall have been undertaken without the prior, express approval of the
Trust's Board of Trustees; or (ii) is within the sole control of the
Administrator or any of its affiliates or any of their officers, directors,
employees or shareholders. The Administrator shall not be obligated pursuant to
the provisions of this Subparagraph 11(b), to reimburse the Trust for any
expenditures related to the institution of an administrative proceeding or civil
litigation by the Trust or a Trust shareholder seeking to recover all or a
portion of the proceeds derived by any shareholder of the Administrator or any
of its affiliates from the sale of his shares of the Administrator, or similar
matters. So long as this Agreement is in effect, the Administrator shall pay to
the Trust the amount due for expenses subject to this Subparagraph 11(b) within
thirty (30) days after a bill or statement has been received by the Trust
therefor. This provision shall not be deemed to be a waiver of any claim the
Trust may have or may assert against the Administrator or others or costs,
expenses, or damages heretofore incurred by the Trust for costs, expenses, or
damages by the Trust may hereafter incur which are not reimbursable to it
hereunder.
(c) No provision of this Agreement shall be construed to
protect any Trustee or officer of the Trust, or the Administrator, from
liability in violation of Section 17(h) and (i) of the Investment Company Act of
1940, as amended.
12. (a) This Agreement shall become effective at the close of business
on the date hereof and shall continue in effect from year to year thereafter so
long as such continuation is specifically approved at least annually by (i) the
Board of Trustees of the Trust, and (ii) the vote of a majority of the Trustees
of the Trust who are not parties to this Agreement or interested persons
thereof, cast in person at a meeting called for the purpose of voting on such
approval.
(b) This Agreement may be terminated at any time, without
penalty, by the Trust by giving 60 days' written notice of such termination to
the Administrator at its principal place of business, or may be terminated at
any time by the Administrator by giving 60 days' written notice of such
termination to the Trust at its principal place of business.
13. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule, or otherwise, the remainder of this Agreement
shall not be affected thereby.
14. This Agreement may be amended only by written instrument signed by
the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in duplicate by their respective officers on the day
and year first above written.
PILGRIM AMERICA PRIME RATE TRUST
Attest: By:
Senior Vice President
Vice President
PILGRIM AMERICA GROUP, INC.
By:
Attest:
Senior Vice President
and Secretary
Vice President
RECORDKEEPING AGREEMENT
THIS AGREEMENT made as of this ____ day of July, 1996, by and between
PILGRIM AMERICA PRIME RATE TRUST, a Massachusetts business trust, having its
principal place of business at Two Renaissance Square, 40 North Central Avenue,
Suite 1200, Phoenix, Arizona 85004 ("Fund"), and INVESTORS FIDUCIARY TRUST
COMPANY, a state chartered trust company organized and existing under the laws
of the State of Missouri, having its principal place of business at 127 West
10th Street, Kansas City, Missouri, 64105 ("IFTC"):
WITNESSETH:
In consideration of the mutual promises herein contained, the parties
hereto, intending to be legally bound, mutually covenant and agree as
follows:
1. Appointment of Recordkeeping Agent
Fund hereby constitutes and appoints IFTC as Recordkeeping Agent for
the Fund to perform certain accounting and recordkeeping functions
related to portfolio transactions required of Fund as a registered
investment company in compliance with Rule 31a of the Investment
Company Act of 1940 ("1940 Act") and to calculate daily the Fund's net
asset value.
2. Representations and Warranties of Fund
A. Fund represents and warrants that it is a business trust duly
organized as heretofore described and existing and in good standing
under the laws of Massachusetts.
B. Fund represents and warrants that it has the power and authority under
applicable laws, its articles of incorporation and bylaws, and has
taken all action necessary, to enter into and perform this Agreement.
C. Fund represents and warrants that it has determined that the
computerized recordkeeping systems to be used by IFTC in maintaining
accounting records of Fund hereunder, the "Portfolio Accounting
System" and the "Loan Servicing System" (collectively, the "Systems"),
are appropriate and suitable for Fund's needs.
D. Fund shall preserve the confidentiality of the Systems and the tapes,
books, reference manuals, instructions, records, programs,
documentation and information of, and other materials relevant to, the
Systems and the business of IFTC ("Confidential Information"). Fund
shall not voluntarily disclose such Confidential Information to any
other person other than its own employees who reasonably have a need
to know such information pursuant to this Agreement. Fund shall return
all such Confidential Information to IFTC upon termination or
expiration of this Agreement.
E. Fund has been informed that the Portfolio Accounting System is
licensed for use by IFTC from DST Systems, Inc. ("DST") and that the
Loan Servicing System is a proprietary system of IFTC's sub-agent
hereunder State Street Bank and Trust Company ("State Street"). Fund
acknowledges that IFTC, DST and State Street have proprietary rights
in and to the Systems and all other IFTC, DST or State Street
programs, code, techniques, know-how, data bases, supporting
documentation, data formats and procedures, including without
limitation any changes or modifications made at the request or expense
or both of Fund (collectively, the "Protected Information"). Fund
acknowledges that the Protected Information constitutes confidential
material and trade secrets of IFTC, DST and State Street. Fund shall
preserve the confidentiality of the Protected Information, and Fund
hereby acknowledges that any unauthorized use, misuse, disclosure or
taking of Protected Information, residing or existing internal or
external to a computer, computer system, or computer network, or the
knowing and unauthorized accessing or causing to be accessed of any
computer, computer system, or computer network, may be subject to
civil liabilities and criminal penalties under applicable law. Fund
shall so inform employees and agents who have access to the Protected
Information or to any computer equipment capable of accessing the
same. DST and State Street are intended to be and shall be third party
beneficiaries of the Fund's obligations and undertakings contained in
this paragraph.
F. If IFTC shall provide Fund direct access to the Systems or if IFTC and
Fund shall agree to utilize any electronic system of communication,
Fund shall be fully responsible for any and all consequences of the
use or misuse of the terminal device, passwords, access instructions
and other means of access to such systems which are utilized by,
assigned to or otherwise made available to the Fund. Fund agrees to
implement and enforce appropriate security policies and procedures to
prevent unauthorized or improper access to or use of such systems.
IFTC shall be fully protected in acting hereunder upon any
instructions, communications, data or other information received by
IFTC by such means as fully and to the same effect as if delivered to
IFTC by written instrument signed by the requisite authorized
representative(s) of the Fund. Fund shall indemnify and hold IFTC
harmless from and against any and all costs, expenses, losses,
liabilities, damages, charges and counsel fees which may be asserted
against or incurred by IFTC as a consequence of the use or misuse,
whether authorized or unauthorized, of the Systems or other
computerized recordkeeping and reporting system to which IFTC provides
Fund direct access hereunder or of any other electronic system of
communication used hereunder by Fund or by any person who acquires
access to any such system through the terminal device, passwords,
access instructions or other means of access to any such system which
are utilized by, assigned to or otherwise made available to the Fund,
except to the extent attributable to any negligence or willful
misconduct by IFTC.
3. Representation and Warranties of IFTC
A. It is a trust company duly organized and existing and in good standing
under the laws of the State of Missouri.
B. It has the requisite power and authority under applicable laws, by its
charter and bylaws, and by agreement to enter into this Agreement and
has taken all action necessary to enter into and perform the services
contemplated herein and this Agreement has been duly executed and
delivered by IFTC and constitutes a legal, valid and binding
obligation of IFTC, enforceable in accordance with its terms.
4. Duties and Responsibilities of IFTC
A. Fund shall turn over to IFTC all of Fund's accounts and records
previously maintained. IFTC shall be entitled to rely conclusively on
the completeness and correctness of the accounts and records turned
over to it by Fund and Fund shall indemnify and hold IFTC harmless of
and from any and all expenses, damages and losses whatsoever arising
out of or in connection with any error, omission, inaccuracy or other
deficiency of such accounts and records or in the failure of Fund to
provide any portion of such or to provide in a timely manner any other
information needed by IFTC to perform its function hereunder.
B. Accounts and Records
1. IFTC, with the direction and as interpreted by the Fund or Fund's
accountants and/or other advisors, will prepare and maintain in
complete, accurate, and current form all accounts and records
needed to be maintained as a basis for calculation of the Fund's
net asset value and as further agreed upon by the parties in
writing, and will preserve such records in the manner and for the
periods required by the 1940 Act or such longer period as the
parties may agree upon in writing.
2. Unless the information necessary to perform the above functions
is furnished in writing or its electronic or digital equivalent
to IFTC prior to the next close of the New York Stock Exchange
and calculation of the Fund's net asset value, IFTC shall incur
no liability and the Fund shall indemnify and hold IFTC harmless
from and against any liability in connection therewith.
3. It shall be the responsibility of Fund to furnish IFTC with the
declaration, record and payment dates and amounts of any
dividends or income and any other special actions required
concerning the assets in the portfolio when such information is
not readily available from generally accepted securities industry
services or publications.
4. The accounts and records maintained and preserved by IFTC shall
be the property of the Fund and shall be made available to the
Fund for inspection or reproduction within a reasonable time,
upon demand.
5. IFTC shall assist Fund's independent accountants, or upon
approval of Fund or upon demand, any regulatory body, in any
requested review of Fund's accounts and records maintained by
IFTC but shall be reimbursed by Fund for all expenses and
employee time invested in any such review outside of routine and
normal periodic reviews.
6. Upon receipt from Fund of any necessary information, IFTC shall
provide information from the books and records it maintains for
Fund that Fund needs for tax returns, questionnaires, or periodic
reports to shareholders and such other reports and information
requests as Fund and IFTC shall agree upon from time to time.
7. IFTC and Fund may from time to time adopt procedures as they
agree upon, and IFTC may conclusively assume that any procedure
approved by Fund, or directed by Fund, does not conflict with or
violate any requirements of Fund's prospectus, declaration of
trust, bylaws, or any rule or regulation of any applicable
regulatory body or governmental agency. Fund shall be responsible
to notify IFTC of any changes in statutes, rules, requirements,
or policies which may necessitate changes in IFTC's
responsibilities or procedures.
8. IFTC will calculate the Fund's net asset value in accordance with
the Fund's prospectus once daily. IFTC will price the securities
and foreign currency holdings of the Portfolios for which market
quotations are available by the use of outside services
designated by Fund which are normally used and contracted with
for this purpose; all other securities and foreign currency
holdings and all loans and interests in loans held by the Fund
will be priced in accordance with Fund's instructions.
5. Limitation of Liability of IFTC
A. IFTC shall not be responsible or liable for, and Fund shall indemnify
and hold IFTC harmless from and against, any loss or liability arising
out of IFTC's action or omission to act pursuant hereto, except for
any loss or damage arising from any negligent act or willful
misconduct of IFTC. IFTC shall indemnify and hold harmless Fund from
and against any loss or liability arising from such negligence or
willful misconduct. The Fund agrees to minimize any potential monetary
loss(es) by reprocessing shareholder transactions or employing any
other customary procedures to reduce such monetary loss(es). Neither
party shall be liable to the other for consequential, special, or
punitive damages. IFTC may request and obtain the advice and opinion
of counsel for Fund or its own counsel at the expense of Fund with
respect to questions or matters of law, and it shall be without
liability to Fund for any action taken or omitted by it in good faith,
in conformity with such advice or opinion.
B. IFTC may rely upon the advice and statements of Fund, its distributor,
its management company and its accountants, officers and other
authorized individuals (as provided by corporate resolution to IFTC)
and others believed by it in good faith to be expert in matters upon
which they are consulted. Actions or inaction taken in reliance on
such advice and statements shall not be considered "negligent" and
IFTC shall not be liable for any actions taken in good faith upon such
advice and statements.
C. If Fund requests IFTC in any capacity to take any action which
involves the payment of money by it, or which in IFTC's opinion might
make it liable for payment of money or in any other way, IFTC shall be
and be kept indemnified by Fund in an amount and form satisfactory to
IFTC against any liability on account of such action; provided,
however that IFTC shall not be obligated to expend its own moneys or
to take any such action except in IFTC's sole discretion.
D. IFTC shall be entitled to receive and Fund agrees to pay to IFTC, on
demand, reimbursement for such cash disbursements, costs and expenses
as may be agreed upon in writing from time to time by IFTC and Fund.
E. IFTC shall be protected in acting hereunder upon any instructions,
advice, notice, request, consent, certificate or other instrument or
paper appearing to it to be genuine and to have been properly executed
and shall, unless otherwise specifically provided herein, be entitled
to receive as conclusive proof of any fact or matter required to be
ascertained from Fund as determined by IFTC, instructions or a
certificate signed by Fund's President or other officer of Fund as
requested by IFTC.
F. Without limiting the generality of the foregoing, IFTC shall be under
no duty or obligation to inquire into, and shall not be liable for:
1. The validity of the issue of any assets purchased by or for Fund,
or the legality of the purchase thereof, the validity,
completeness, correctness or sufficiency of any loan documents,
the sufficiency of the evidence of ownership of any assets of
Fund, or the propriety of the decision to purchase or amount paid
for any assets;
2. The legality of the sale of any assets by or for Fund, or the
propriety of the amount for which the same are sold;
3. The legality of the issue or sale of any shares of Fund, or the
sufficiency of the amount to be received therefore;
4. The legality of the repurchase or redemption of any shares of
Fund, or the propriety of the amount to be paid therefore; or
5. The legality of the declaration of any dividend by Fund, or the
legality of the issue of any shares of Fund in payment of any
dividend.
G. IFTC shall not be liable for, or considered to be the custodian of,
any money represented by any check, draft, wire transfer, clearing
house funds, uncollected funds, or instrument for the payment of money
received by it on behalf of Fund, until IFTC actually receives such
money, provided only that it shall advise Fund promptly if it fails to
receive any such moneys in the ordinary course of business, and use
reasonable efforts and cooperate with Fund toward the end that such
money shall be received.
H. Notwithstanding anything herein to the contrary, it is expressly
understood and agreed that IFTC shall have no responsibility to Fund,
the Fund's shareowners or any other person or entity for moneys or
securities of Fund held by banks or trust companies as custodians in
the absence of negligence or willful misconduct of IFTC.
I. IFTC shall not use any information made available to it under the
terms of this Agreement for any purpose other than complying with its
duties and responsibilities under this Agreement or as specifically
authorized by Fund in writing to IFTC.
6. Force Majeure. IFTC shall not be responsible or liable for any failure or
delay in performance of its obligations under this Agreement arising out of
or caused, directly or indirectly, by circumstances beyond its reasonable
control, including without limitation any interruption, loss or malfunction
of any utility, transportation, computer (hardware or software) or
communication service; or inability to obtain labor, material, equipment or
transportation; nor shall any such failure or delay give Fund any
additional right to terminate this Agreement.
7. Compensation. Fund shall pay to IFTC such compensation at such time as may
from time to time be agreed upon in writing by IFTC and Fund. Fund shall
also reimburse IFTC for all out-of-pocket expenses incurred by IFTC in
connection with services performed pursuant to this Agreement.
8. Procedures. IFTC and Fund may from time to time adopt procedures as they
agree upon, and IFTC may conclusively assume that any procedure approved or
directed by Fund or its accountants or other advisors does not conflict
with or violate any requirements of Fund's prospectus, articles of
incorporation, bylaws, any applicable law, rule or regulation, or any
order, decree or agreement by which the Fund may be bound.
9. Termination. This Agreement shall continue in effect until terminated by
either party by notice in writing received by the other party not less than
ninety (90) days prior to the date upon which such termination shall take
effect. Upon termination of this Agreement:
A. Fund shall pay to IFTC its fees and compensation due hereunder and its
reimbursable disbursements, costs and expenses paid or incurred to
such date.
B. Fund shall designate a successor (which may be Fund) by notice in
writing to IFTC on or before the termination date.
C. IFTC shall deliver to the successor, or if none has been designated,
to Fund, at IFTC's office, all records, funds and other properties of
Fund deposited with or held by IFTC hereunder. In the event that
neither a successor nor Fund takes delivery of all records, funds and
other properties of Fund by the termination date, IFTC's sole
obligation with respect thereto from the termination date until
delivery to a successor or Fund shall be to exercise reasonable care
to hold the same in custody in its form and condition as of the
termination date, and IFTC shall be entitled to reasonable
compensation therefor, including but not limited to all of its
out-of-pocket costs and expenses incurred in connection therewith.
10. Notices. Notices, requests, instructions and other writings received by
Fund at Two Rennaissance Square, 40 North Central Avenue, Suite 1200,
Phoenix, Arizona 85004, or at such address as Fund may have designated to
IFTC in writing, shall be deemed to have been properly given to Fund
hereunder; and notices, requests, instructions and other writings received
by IFTC at its offices at 127 West 10th Street, Kansas City, MO 64105, or
to such other address as it may have designated to Fund in writing, shall
be deemed to have been properly given to IFTC hereunder.
11. Limitation of Liability. Notice is hereby given that a copy of Fund's trust
agreement and all amendments thereto is on file with the Secretary of State
of the state of its organization; that this Agreement has been executed on
behalf of Fund by the undersigned duly authorized representative of Fund in
his/her capacity as such and not individually; and that the obligations of
this Agreement shall only be binding upon the assets and property of Fund
and shall not be binding upon any trustee, officer or shareholder of Fund
individually.
12. Miscellaneous
A. This Agreement is executed and delivered in the State of Missouri and
shall be governed by the laws of said state.
B. All terms and provisions of this Agreement shall be binding upon,
inure to the benefit of and be enforceable by the parties hereto and
their respective successors and permitted assigns.
C. No provisions of the Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed
by both parties hereto.
D. The captions in the Agreement are included for convenience of
reference only, and in no way define or limit any of the provisions
hereof or otherwise affect their construction or effort.
E. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which together shall
constitute one and the same instrument.
F. If any part, term or provision of this Agreement is determined to be
illegal, in conflict with any law or otherwise invalid, the remaining
portion or portions shall be considered severable and not be affected,
and the rights and obligations of the parties shall be construed and
enforced as if the Agreement did not contain the particular part, term
or provision held to be illegal or invalid.
G. This Agreement may not be assigned by either party without prior
written consent in writing of the other party.
H. The representations and warranties, the indemnification extended
hereunder, and the provisions of Section 2.D. and 2.E. are intended to
and shall continue after and survive the expiration, termination or
cancellation of this Agreement.
I. The Recordkeeping Agreement between IFTC and Fund dated as of April 1,
1988, is hereby cancelled and superseded effective as of the date
hereof, except that all rights, duties and liabilities which may have
arisen under such Agreement prior to the effectiveness hereof shall
continue and survive. Otherwise, this Agreement does not in any way
affect any other agreements entered into between the parties hereto.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective and duly authorized corporate or trust officers.
INVESTORS FIDUCIARY TRUST COMPANY
By:
Title:
PILGRIM AMERICA PRIME RATE TRUST
By:
Title:
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
<TABLE> <S> <C>
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<NAME> Pilgrim America Prime Rate Trust
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> FEB-28-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 1,297,372
<INVESTMENTS-AT-VALUE> 1,293,633
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<OTHER-INCOME> 9,002
<EXPENSES-NET> 20,033
<NET-INVESTMENT-INCOME> 78,948
<REALIZED-GAINS-CURRENT> (3,524)
<APPREC-INCREASE-CURRENT> 974
<NET-CHANGE-FROM-OPS> 76,398
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 77,641
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 157,766
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<ACCUMULATED-NII-PRIOR> 9,111
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<GROSS-ADVISORY-FEES> 8,268
<INTEREST-EXPENSE> 7,841
<GROSS-EXPENSE> 20,059
<AVERAGE-NET-ASSETS> 1,041,271
<PER-SHARE-NAV-BEGIN> 9.61
<PER-SHARE-NII> .82
<PER-SHARE-GAIN-APPREC> (0.02)
<PER-SHARE-DIVIDEND> 0
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<AVG-DEBT-PER-SHARE> 1.37
</TABLE>
