As filed with the Securities and Exchange Commission on May 15, 1998
1933 Act File No. 333-29805
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
x Pre-Effective Amendment No. 2
o Post-Effective Amendment No. ___
and
x REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
x Amendment No. 26
PILGRIM AMERICA PRIME RATE TRUST
Exact Name of Registrant Specified in Charter
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.
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
1775 Eye Street, N.W. One World Trade Center
Washington, D.C. 20006 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
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum
Title of Securities Amount Being Offering Price Per Unit Aggregate Offering Amount of
Being Registered Registered Price Registration Fee
<S> <C> <C> <C> <C>
Shares of Beneficial 10,000,000 $10.0625(1) $100,625,000(1) $30,492.42(2)
Interest (without par shares
value)
<FN>
(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.
(2) Previously paid.
</FN>
</TABLE>
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 the provisions of 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
<TABLE>
PART A
<CAPTION>
Item No. Caption Location in Prospectus
<S> <C> <C>
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 NAV Information; Description of the 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 Shares;
Dividends and Distributions -- Distribution
Policy; Dividends and Distributions -
Shareholder Investment Program; 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
</TABLE>
<TABLE>
PART B
<CAPTION>
Location in Statement of Additional
Item No. Caption Information
<S> <C> <C>
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 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 primarily in
interests in senior floating-rate 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 18.
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. 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 and any front-end
administrative fee. As of May 12, 1998, the last reported sales price of a Share
of the Trust on the NYSE was $10.125.
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 May __, 1998 (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 28 of this Prospectus, may be obtained without charge by contacting the
Trust toll-free at (800) 992-0180.
-----------------
PaineWebber Incorporated
-----------------
The date of this Prospectus is May __, 1998.
<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
May 12, 1998, the Trust's NAV per Share was $9.31.
NYSE Listed As of May 12, 1998, the Trust had 111,017,618 Shares
outstanding, which are traded on the NYSE under the symbol
"PPR." As of May 12, 1998, the last reported sales price of
a Share of the Trust was $10.125.
Investment To obtain as high a level of current income as is consistent
Objective with the preservation of capital. There can be no assurance
that the Trust will achieve its investment objective.
Primary Investment The Trust seeks to achieve its investment objective by
Strategy primarily 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 Under normal circumstances, at least 80% of the Trust's
Guidelines 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,
partnerships, limited liability companies, or other business
entities organized under U.S. law or 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
Shareholder Investment Program.
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."
<TABLE>
<S> <C>
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 and fees.
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 or interest when due,
that lenders may have difficulty liquidating the
collateral securing the Senior Loans or enforcing
their rights under the terms of the Senior Loans, and
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 Shares The issuance of the Shares through the 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. In a separate
offering, the Trust may also issue Shares of the Trust
through its Shareholder Investment Program
and through 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 Because of a limited secondary market for
Senior Loans, the Trust may be limited
in its ability to sell portfolio holdings at
carrying value to generate gains or avoid
losses.
Demand for Senior Loans An increase in demand for Senior Loans may
adversely affect the rate of interest
payable on Senior Loans acquired by the Trust.
</TABLE>
<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
Commissions and Front-End Fees
(as a percentage of Offering price) (4) .. 3.00% 3.00%
Shareholder Investment Program
Fees ....................................... NONE NONE
Annual Expenses (as a percentage of net assets
attributable to Common Shares)
Management and Administrative Fees (5) ..... 1.27% 0.92%
Other Operating Expenses(6) ................ 0.25% 0.22%
----- -----
Total Annual Expenses before Interest ........... 1.52% 1.14%
Interest Expense on Borrowed Funds .............. 3.07% 0.00%
----- -----
Total Annual Expenses............................ 4.59% 1.14%
(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) The compensation to the Sales Agent 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. Following the sale of
4,000,000 Shares pursuant to the Offering, the Trust will pay Pilgrim America
Securities, Inc. 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.
(5) Pursuant to an investment management agreement with the Trust, PAII is
entitled to receive a fee of 0.85% of the average daily net assets of the Trust,
plus the proceeds of any outstanding borrowings, up to $700 million; 0.75% of
the average daily net assets, plus the proceeds of any outstanding borrowings,
in excess of $700 million up to $800 million; and 0.65% of the average daily net
assets, plus the proceeds of any outstanding borrowings, in excess of $800
million. PAII has agreed to reduce its management fee until November 12, 1999 to
0.60% on that portion of the Trust's average daily net assets, plus the proceeds
of any outstanding borrowings, in excess of $1.15 billion. See "Investment
Management and Other Services -- Investment Manager." Pursuant to its
Administration Agreement with the Trust, Pilgrim America Group, Inc. ("PAGI" or
the "Administrator"), the Trust's Administrator, is entitled to receive a fee of
0.15% of the Trust's average daily net assets, plus the proceeds of any
outstanding borrowings, up to $800 million; and 0.10% of the average daily net
assets, plus the proceeds of any outstanding borrowings, in excess of $800
million. See "Investment Management and Other Services - The Administrator."
(6) "Other Operating Expenses" are based on estimated amounts for the current
fiscal year.
<TABLE>
<CAPTION>
Example 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming a 5% annual return and
where the Trust has borrowed. $75 $164 $255 $484
You would pay the following expenses on a $1,000
investment, assuming a 5% annual return and
where the Trust has not borrowed. $41 $65 $91 $164
</TABLE>
This hypothetical example assumes that all dividends and other
distributions are reinvested at NAV and that the percentage amounts listed under
Annual Expenses above remain the same in the years shown. 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, 1998. For the fiscal years ended February 28, 1998, 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, 1998 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,
1998 1997(8) 1996(6) 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance $9.45 $9.61 $ 9.66 $ 10.02 $ 10.05 $ 9.96
NAV, beginning of period
Net investment income ... 0.87 0.82 0.89 0.74 0.60 0.60
Net realized and unrealized
gain (loss) on investment (0.13) (0.02) (0.08) 0.07 (0.05) 0.01
Increase in NAV from
investment operations 0.74 0.80 0.81 0.81 0.55 0.61
Distributions from net
investment income .... (0.85) (0.82) (0.86) (0.73) (0.60) (0.57)
Reduction in NAV from
rights offering....... -- (0.14) -- (0.44) -- --
Increase in NAV from
repurchase of capital -- --- -- -- 0.02 0.05
stock ...................
NAV, end of period ...... $9.34 $9.45 $ 9.61 $ 9.66 $ 10.02 $ 10.05
Closing market price at end
of period $10.31 $10.00 $ 9.50 $ 8.75 $ 9.25 $ 9.13
Total Return
Total investment return at
closing market price (3) 12.70% 15.04%(5) 19.19% 3.27%(5) 8.06% 10.89%
Total investment return
based on NAV (4) 8.01% 8.06% (5) 9.21% 5.24%(5) 6.28% 7.29%
Ratios/ Supplemental Data
Net assets, end of period
(000's).................. $1,034,403 $1,031,089 $862,938 $867,083 $719,979 $738,810
Average Borrowings (000's) $346,110 $131,773 -- -- -- --
Ratios to average net assets
plus borrowings: 1.04% 1.13% -- -- -- --
Expenses (before interest
and other fees related to
revolving credit facility)
Expenses............... 2.65% 1.92% -- -- -- --
Net investment income . 6.91% 7.59% -- -- -- --
Ratios to average net assets:
Expenses (before interest 1.39% 1.29% -- -- -- --
and other fees related to
revolving credit facility)
Expenses............... 3.54% 2.20% 1.23% 1.30% 1.31% 1.42%
Net investment income . 9.23% 8.67% 9.23% 7.59% 6.04% 5.88%
Portfolio turnover rate . 90% 82% 88% 108% 87% 81%
Shares outstanding at end
of period (000's) 110,764 109,140 89,794 89,794 71,835 73,544
Average daily balance of
debt outstanding during the
period (000's) (7) .......... $346,110 $131,773 $ -- $ 2,811 $ -- $ 636
Average monthly shares
outstanding during the
period (000's) 109,998 95,917 89,794 74,598 -- 79,394
Average amount of debt per
share during the period (7) $3.15 $1.37 $ -- $ 0.04 $ -- $ 0.01
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended February 28 or February 29,
1992 1991 1990 May 12, 1988* to
February 28, 1989
<S> <C> <C> <C> <C>
Per Share Operating Performance
NAV, beginning of period $ 9.97 $ 10.00 $ 10.00 $ 10.00
Net investment income ... 0.76 0.98 1.06 0.72
Net realized and unrealized
gain (loss) on investment (0.02) (0.05) -- --
Increase in NAV from
investment operations 0.74 0.93 1.06 0.72
Distributions from net
investment income .... (0.75) (0.96) (1.06) (0.72)
Reduction in NAV from
rights offering....... -- -- -- --
Increase in NAV from
repurchase of capital
stock ................... -- -- -- --
NAV, end of period ...... $ 9.96 $ 9.97 $ 10.00 $ 10.00
Closing market price at end
of period $ -- $ -- $ -- $ --
Total Return
Total investment return at
closing market price (3) -- -- -- --
Total investment return
based on NAV (4) 7.71% 9.74% 11.13% 7.35%
Ratios/ Supplemental Data
Net assets, end of period
(000's).................. $874,104 $1,158,224 $1,036,470 $252,998
Average Borrowings (000's) -- -- -- --
Ratios to average net assets
plus borrowings:
Expenses (before interest
and other fees related to
revolving credit facility) -- -- -- --
Expenses............... -- -- -- --
Net investment income -- -- -- --
Ratios to average net assets:
Expenses (before interest
and other fees related to
revolving credit facility) -- -- -- --
Expenses............... 1.42%(2) 1.38% 1.46%(2) 1.18%(1)(2)
Net investment income . 7.62%(2) 9.71% 10.32%(2) 9.68%(1)(2)
Portfolio turnover rate . 53% 55% 100% 49%(1)
Shares outstanding at end
of period (000's) 87,782 116,022 103,600 25,294
Average daily balance of
debt outstanding during the
period (000's) (7) .......... $ 8,011 $ 2,241 $ -- $ --
Average monthly shares
outstanding during the
period (000's) 102,267 114,350 -- --
Average amount of debt per
share during the period (7) $ 0.08 $ 0.02 $ -- $ --
- -------------------------------------
* Commencement of operations
<FN>
(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, 1998, the Trust had outstanding borrowings of $342,000,000
under a $515,000,000 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.
</FN>
</TABLE>
<PAGE>
Trust Characteristics and Composition
The following tables set forth certain information with respect to the
characteristics and the composition of the Trust's investment portfolio in terms
of percentages of net assets as of February 28, 1998.
Trust Characteristics
Net Assets $1,034,402,810
Assets Invested in Senior Loans $1,352,588,772*
Outstanding Borrowings $342,000,000
Total Number of Senior Loans 132
Average Amount Outstanding per Senior Loan $10,246,885
Total Number of Industries 28
Portfolio Turnover Rate 90%
Average Senior Loan Amount per Industry $48,306,742
Weighted Average Days to Interest Rate Reset 46 days
Average Senior Loan Maturity 68 months
Average Age of Senior Loans Held in Portfolio 12 months
______________________________
(*Includes Senior Loans and other securities received through restructures)
<TABLE>
<CAPTION>
Top 10 Industries Top 10 Senior Loan Holdings
(As a % of Net Assets) (As a % of Net Assets)
<S> <C> <C> <C>
Healthcare, Education and Childcare 17.3% MAFCO Financial Corp. 2.9%
Beverage, Food and Tobacco 10.5% Community Health Systems 2.4%
Electronics 9.9% Favorite Brands International 2.3%
Chemicals, Plastics and Rubber 8.8% Outsourcing Solutions 2.0%
Automobile 7.7% Papa Gino's, Inc. 2.0%
Buildings and Real Estate 6.3% Fairchild Semiconductor Corp. 2.0%
Personal, Food and Misc. Services 5.9% Integrated Health Services 1.9%
Broadcasting 5.6% Sun Healthcare 1.9%
Printing and Publishing 5.2% 24-Hour Fitness, Inc. 1.9%
Telecommunications 5.1% Atlas Freighter Leasing 1.9%
</TABLE>
<PAGE>
Policy on Borrowing
Beginning in May of 1996, the Trust began a policy of borrowing for
investment purposes. The Trust currently is a party to credit facilities with
financial institutions that permit the Trust to borrow up to $515,000,000.
Interest is payable on the credit facilities by the Trust at a variable rate
that is a multiple of LIBOR or the federal funds rate, plus a facility fee on
unused commitments. As of February 28, 1998, the Trust had outstanding
borrowings of $342,000,000. The Trust seeks to use proceeds from borrowings to
acquire income-producing investments which, by their terms, pay interest at a
rate higher than the rate the Trust pays on borrowings. Accordingly, 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. 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 as shown on the NYSE Composite Transaction
Tape; (2) the NAV per Share represented by each of the high and low closing
prices as shown on the NYSE Composite Transaction Tape; 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 as shown on the NYSE Composite Transaction Tape during the respective
quarter.
<TABLE>
<CAPTION>
Premium/(Discount)
Price NAV To NAV Reported
Calendar High Low High Low High Low NYSE Volume
Quarter Ended ---- --- ---- --- ---- --- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1994 $ 9.875 $ 9.000 $ 10.080 $ 10.020 (2.03)% (10.18)% 15,590,400
March 31, 1995 9.000 8.500 10.040 9.650 (10.36) (11.92) 24,778,200
June 30, 1995 9.250 8.750 9.650 9.600 (4.15) (8.85) 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 9.650 9.620 (1.55) (6.45) 16,428,200
March 31, 1996 9.625 9.250 9.610 9.590 0.16 (3.55) 17,978,300
June 30, 1996 9.750 9.375 9.610 9.570 1.46 (2.04) 13,187,700
September 30, 1996 10.000 9.500 9.560 9.580 4.60 (0.84) 15,821,000
December 31, 1996 10.000 9.250 9.580 9.430 4.38 (1.91) 28,740,200
March 31, 1997 10.000 9.625 9.390 9.420 6.50 2.18 18,483,600
June 30, 1997 10.125 9.875 9.400 9.380 7.71 5.28 18,863,600
September 30, 1997 10.250 10.000 9.400 9.410 9.04 6.27 15,034,200
December 31, 1997 10.375 10.125 9.310 9.380 11.44 7.94 13,270,900
March 31, 1998 10.500 9.875 9.360 9.340 12.18 5.73 15,588,500
</TABLE>
<PAGE>
The following chart shows for the Trust's Shares for the period indicated:
(1) the closing price of the Shares as shown on the NYSE Composite Transaction
Tape; (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.
PREMIUM/
DATE NAV MARKET DISCOUNT
3/3/95 8.750 9.660 -9.42%
3/10/95 8.750 9.610 -8.95%
3/17/95 8.750 9.630 -9.14%
3/24/95 8.750 9.650 -9.33%
3/31/95 8.750 9.670 -9.51%
4/7/95 8.750 9.610 -8.95%
4/14/95 8.750 9.620 -9.04%
4/21/95 8.875 9.640 -7.94%
4/28/95 8.875 9.660 -8.13%
5/5/95 8.875 9.600 -7.55%
5/12/95 8.875 9.620 -7.74%
5/19/95 9.000 9.640 -6.64%
5/26/95 8.875 9.660 -8.13%
6/2/95 9.000 9.670 -6.93%
6/9/95 9.125 9.620 -5.15%
6/16/95 9.000 9.630 -6.54%
6/23/95 9.125 9.650 -5.44%
6/30/95 9.125 9.650 -5.44%
7/7/95 9.125 9.600 -4.95%
7/14/95 9.000 9.620 -6.44%
7/21/95 8.875 9.630 -7.84%
7/28/95 9.000 9.650 -6.74%
8/4/95 9.125 9.670 -5.64%
8/11/95 9.000 9.610 -6.35%
8/18/95 9.125 9.620 -5.15%
8/25/95 9.250 9.640 -4.05%
9/1/95 9.250 9.670 -4.34%
9/8/95 9.250 9.610 -3.75%
9/15/95 9.375 9.630 -2.65%
9/22/95 9.250 9.640 -4.05%
9/29/95 9.375 9.660 -2.95%
10/6/95 9.375 9.610 -2.45%
10/13/95 9.375 9.620 -2.55%
10/20/95 9.250 9.640 -4.05%
10/27/95 9.250 9.660 -4.24%
11/3/95 9.125 9.670 -5.64%
11/10/95 9.000 9.620 -6.44%
11/17/95 9.250 9.620 -3.85%
11/24/95 9.125 9.650 -5.44%
12/1/95 9.125 9.670 -5.64%
12/8/95 9.250 9.610 -3.75%
12/15/95 9.375 9.630 -2.65%
12/22/95 9.375 9.630 -2.65%
12/29/95 9.250 9.580 -3.44%
1/5/96 9.375 9.590 -2.24%
1/12/96 9.375 9.600 -2.34%
1/19/96 9.375 9.620 -2.55%
1/26/96 9.375 9.620 -2.55%
2/2/96 9.313 9.640 -3.40%
2/9/96 9.375 9.580 -2.14%
2/16/96 9.375 9.590 -2.24%
2/23/96 9.500 9.610 -1.14%
3/1/96 9.610 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%
6/6/97 10.063 9.370 7.39%
6/13/97 10.125 9.390 7.83%
6/20/97 10.125 9.400 7.71%
6/27/97 10.031 9.420 6.49%
7/4/97 10.000 9.430 6.04%
7/11/97 10.000 9.380 6.61%
7/18/97 10.000 9.380 6.61%
7/25/97 10.125 9.410 7.60%
8/1/97 10.188 9.430 8.03%
8/8/97 10.125 N.A. N.A.
8/15/97 10.188 9.370 8.72%
8/22/97 10.125 9.380 7.94%
8/29/97 10.125 9.400 7.71%
9/5/97 10.125 9.330 8.52%
9/12/97 10.125 9.350 8.29%
9/19/97 10.188 9.380 8.61%
9/26/97 10.188 9.390 8.49%
10/3/97 10.250 9.410 8.93%
10/10/97 10.188 9.360 8.84%
10/17/97 10.188 9.380 8.61%
10/24/97 10.313 9.390 9.82%
10/31/97 10.250 9.400 9.04%
11/7/97 10.250 9.350 9.63%
11/14/97 10.188 9.360 8.84%
11/21/97 10.188 9.390 8.49%
11/28/97 10.250 9.390 9.16%
12/5/97 10.250 9.340 9.74%
12/12/97 10.250 9.360 9.51%
12/19/97 10.375 9.380 10.61%
12/26/97 10.375 9.390 10.49%
1/2/98 10.313 9.310 10.77%
1/9/98 10.313 9.330 10.53%
1/16/98 10.313 9.340 10.41%
1/23/98 10.500 9.360 12.18%
1/30/98 10.250 9.380 9.28%
2/6/98 10.250 9.320 9.98%
2/13/98 10.250 9.340 9.74%
2/20/98 10.313 9.340 10.41%
2/27/98 10.313 9.340 10.41%
Source: BLOOMBERG Financial Markets.
On May 12, 1998, the last reported sale price of a Share of the Trust's
Shares on the NYSE was $10.125. The Trust's NAV on May 12, 1998 was $9.31. See
"Net Asset Value" in the SAI. On May 12, 1998, the last reported sale price of a
share of the Trust's Common Shares on the NYSE ($10.125) represented a 8.75%
premium above NAV ($9.31) 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, 1998, the Trust
had a 3 star and a 4 star Morningstar risk-adjusted performance rating when
rated among 143 and 106 taxable bond funds, respectively. The Trust's overall
rating through February 28, 1998 was 4 stars.1 For the three-year and five-year
periods ended February 28, 1998, the Trust's risk score placed the Trust 1st out
of 32 and 29 Corporate Bond - General funds. For the three-year and five-year
periods ended February 28, 1998, the Trust's risk score placed the Trust 2nd and
1st out of all closed-end funds (570 and 446 closed-end funds, respectively)
tracked by Morningstar.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, 1998, 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.
<TABLE>
<CAPTION>
Periods ended Total Number of Funds
February 28, 1998 Ranking(3) Return (3) in Category (4)
<S> <C> <C> <C>
One year 1 8.24% 7
Three years 1 28.01% 6
Five years 1 46.93% 5
<FN>
- ----------------------
(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,
1998.
(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, and the next 35% receive three
stars. Morningstar ratings are calculated from the Trust's three and five
year returns (with fee adjustment, if any) in excess of 90-day Treasury
bill returns, and a risk factor that reflects the Trust's 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.
</FN>
</TABLE>
<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.
Pilgrim
America
Month Prime Rate Composite Prime 60-Day
Ended Trust Average Rate LIBOR
1/31/91 9.675% 9.537% 9.917% 8.063%
2/28/91 9.627% 9.501% 9.833% 7.943%
3/31/91 9.500% 9.421% 9.750% 7.792%
4/30/91 9.379% 9.340% 9.667% 7.579%
5/31/91 9.203% 9.256% 9.542% 7.386%
6/30/91 9.052% 9.031% 9.417% 7.199%
7/31/91 8.896% 8.873% 9.292% 7.032%
8/31/91 8.730% 8.660% 9.167% 6.834%
9/30/91 8.527% 8.476% 9.000% 6.600%
10/31/91 8.372% 8.270% 8.833% 6.365%
11/30/91 8.160% 8.039% 8.625% 6.084%
12/31/91 7.963% 7.779% 8.375% 5.818%
1/31/92 7.739% 7.587% 8.125% 5.574%
2/29/92 7.526% 7.340% 7.917% 5.349%
3/31/92 7.382% 7.133% 7.708% 5.157%
4/30/92 7.199% 6.959% 7.500% 4.990%
5/31/92 7.072% 6.774% 7.333% 4.823%
6/30/92 6.939% 6.674% 7.167% 4.641%
7/31/92 6.790% 6.534% 6.958% 4.432%
8/31/92 6.671% 6.353% 6.750% 4.250%
9/30/92 6.578% 6.194% 6.583% 4.063%
10/31/92 6.498% 6.041% 6.417% 3.932%
11/30/92 6.394% 5.888% 6.292% 3.844%
12/31/92 6.277% 5.838% 6.250% 3.755%
1/31/93 6.203% 5.725% 6.208% 3.677%
2/28/93 6.151% 5.705% 6.167% 3.589%
3/31/93 6.095% 5.675% 6.125% 3.500%
4/30/93 6.070% 5.698% 6.083% 3.432%
5/31/93 6.056% 5.608% 6.042% 3.375%
6/30/93 6.022% 5.521% 6.000% 3.318%
7/31/93 5.998% 5.476% 6.000% 3.302%
8/31/93 6.002% 5.460% 6.000% 3.281%
9/30/93 5.975% 5.443% 6.000% 3.281%
10/31/93 5.899% 5.453% 6.000% 3.266%
11/30/93 5.910% 5.433% 6.000% 3.224%
12/31/93 5.932% 5.475% 6.000% 3.219%
1/31/94 5.955% 5.496% 6.000% 3.214%
2/28/94 5.978% 5.489% 6.000% 3.255%
3/31/94 6.017% 5.472% 6.021% 3.302%
4/30/94 6.068% 5.388% 6.083% 3.385%
5/31/94 6.157% 5.443% 6.188% 3.484%
6/30/94 6.258% 5.545% 6.292% 3.609%
7/31/94 6.374% 5.639% 6.396% 3.734%
8/31/94 6.474% 5.744% 6.542% 3.875%
9/30/94 6.604% 5.906% 6.688% 4.042%
10/31/94 6.738% 6.012% 6.833% 4.219%
11/30/94 6.874% 6.175% 7.042% 4.432%
12/31/94 7.076% 6.374% 7.250% 4.677%
1/31/95 7.288% 6.551% 7.458% 4.927%
2/28/95 7.487% 6.791% 7.708% 5.135%
3/31/95 7.711% 7.067% 7.938% 5.333%
4/30/95 7.915% 7.261% 8.125% 5.495%
5/31/95 8.089% 7.412% 8.271% 5.625%
6/30/95 8.249% 7.598% 8.417% 5.734%
7/31/95 8.396% 7.672% 8.542% 5.828%
8/31/95 8.534% 7.761% 8.625% 5.854%
9/30/95 8.650% 7.818% 8.708% 5.911%
10/31/95 8.749% 7.886% 8.792% 5.943%
11/30/95 8.855% 7.919% 8.813% 5.930%
12/31/95 8.876% 7.877% 8.813% 5.878%
1/31/96 8.886% 7.853% 8.813% 5.812%
2/29/96 8.895% 7.670% 8.750% 5.739%
3/31/96 8.836% 7.534% 8.688% 5.677%
4/30/96 8.773% 7.441% 8.625% 5.622%
5/31/96 8.727% 7.407% 8.563% 5.573%
6/30/96 8.671% 7.257% 8.500% 5.527%
7/31/96 8.639% 7.203% 8.458% 5.503%
8/31/96 8.612% 7.147% 8.417% 5.524%
9/30/96 8.590% 7.066% 8.375% 5.493%
10/31/96 8.577% 7.033% 8.333% 5.456%
11/30/96 8.563% 7.002% 8.292% 5.422%
12/31/96 8.567% 6.896% 8.271% 5.413%
1/31/97 8.569% 6.814% 8.250% 5.422%
2/28/97 8.564% 6.869% 8.250% 5.436%
3/31/97 8.595% 6.879% 8.271% 5.459%
4/30/97 8.647% 6.908% 8.292% 5.483%
5/31/97 8.666% 6.913% 8.313% 5.507%
6/30/97 8.715% 6.936% 8.333% 5.523%
7/31/97 8.734% 6.960% 8.354% 5.529%
8/31/97 8.744% 6.964% 8.375% 5.544%
9/30/97 8.758% 6.967% 8.396% 5.560%
10/31/97 8.768% 6.987% 8.417% 5.581%
11/30/97 8.771% 6.970% 8.438% 5.615%
12/31/97 8.777% 7.064% 8.458% 5.633%
1/31/98 8.780% 7.066% 8.479% 5.639%
2/28/98 8.777% 7.081% 8.500% 5.655%
3/31/98 8.788% 7.048% 8.500% 5.652%
4/30/98 8.788% 7.071% 8.500% 5.647%
- ------------------------
(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, 1998 and the period
of May 12, 1988 (inception of the Trust) to February 28, 1998, the
Trust's average annual total returns, based on NAV and assuming all
rights were exercised, were 8.01%, 7.97%, and 8.47%, respectively. The
Trust's 30-day standardized SEC yields as of February 28, 1998 were
8.60% at NAV and 7.77% 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 more
than 90% 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, in most circumstances, are fully
collateralized by assets of a corporation, partnership, limited liability
company, or other business entity that is organized or domiciled in the United
States, Canada or in U.S. territories and/or possessions. The Trust primarily
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, and will invest only in Senior Loans that are U.S. dollar-denominated.
Under normal circumstances, at least 80% of the Trust's gross assets is invested
in Senior Loans.
Under the Trust's policies, Senior Loans are considered loans that hold a
senior position in the capital structure of the borrower. These may include
loans that hold the most senior position, that hold an equal ranking with other
senior debt, or loans that are, in the judgment of PAII, in the category of
senior debt of the borrower. Generally, the Senior Loans in which the Trust
invests are fully collateralized with assets and/or cash flow that PAII believes
have a market value at the time of acquisition that equals or exceeds the
principal amount of the Senior Loan. The Trust also only purchases interests in
Senior Loans of borrowers that PAII believes can meet debt service requirements
from cash flow. Senior Loans vary in yield according to their terms and
conditions, how often they pay interest, and when rates are reset. The Trust
does not invest in Senior Loans whose interest rates are tied to non-domestic
interest rates other than LIBOR.
Senior Loans that the Trust may acquire include participation interests in
lease financings ("Lease Participations") where the collateral quality, credit
quality of the borrower and the likelihood of payback are believed by PAII to be
the same as those applied to conventional Senior Loans. A Lease Participation is
also required to have a floating interest rate that is indexed to a benchmark
indicator of prevailing interest rates, such as LIBOR or the Prime Rate.
Subject to certain limitations, the Trust may acquire Senior Loans of
borrowers engaged in any industry. With respect to 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 investment
standards in this paragraph are fundamental and may not be changed without
approval by Shareholders.
Investors should recognize that there can be no assurance that the
investment objective of the Trust will be realized. Moreover, substantial
increases in interest rates may cause an increase in loan defaults as borrowers
may lack resources to meet higher debt service requirements. The value of the
Trust's assets may also be affected by other uncertainties such as economic
developments affecting the market for Senior Loans or affecting borrowers
generally. For additional information on Senior Loans, see "General Information
on Senior Loans -- About Senior Loans."
Investment in the Trust's shares is intended to offer several benefits. The
Trust offers investors the opportunity to seek a high level of current income by
investing in a professionally managed portfolio comprised primarily of Senior
Loans, a type of investment typically not available directly to individual
investors. Other benefits are the professional credit analysis provided to the
Trust by the Investment Manager and portfolio diversification.
The Trust can normally be expected to have a more stable net asset value
per share than investment companies investing primarily in fixed income
securities (other than money market funds and some short-term bond funds).
Generally, the net asset value of the shares of an investment company which
invests primarily in fixed-income securities changes as interest rates
fluctuate. When interest rates decline, the value of a fixed-income portfolio
normally can be expected to increase. The Investment Manager expects the Trust's
net asset value to be relatively stable during normal market conditions, because
the floating and variable rate Senior Loans in which the Trust invests float
periodically in response to changes in interest rates. However, because variable
interest rates only reset periodically, the Trust's net asset value may
fluctuate from time to time in the event of an imperfect correlation between the
interest rates on the Trust's loans and prevailing interest rates. Also, a
default on a Senior Loan in which the Trust has invested or a sudden and extreme
increase in prevailing interest rates may cause a decline in the Trust's net
asset value. Changes in interest rates can be expected to affect the dividends
paid by the Trust, so that the yield on an investment in the Trust's shares will
likely fluctuate in response to changes in prevailing interest rates.
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.
Credit Analysis
In acquiring a Senior Loan, PAII considers the following factors: positive
cashflow 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
borrowers.
PAII performs its own independent credit analysis of the 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, Hybrid
Loans, unsecured loans, subordinated loans, equity securities acquired in
connection with investment or restructuring of 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.
Hybrid Loans
The growth of the syndicated loan market has produced loan structures with
characteristics similar to Senior Loans but which resemble bonds in some
respects, and generally offer less covenant or other protections than
traditional Senior Loans while still being collateralized ("Hybrid Loans"). The
Trust may invest only in Hybrid Loans that are secured debt of the borrower,
although they may not in all instances be considered senior debt of the
borrower. With Hybrid Loans, the Trust may not possess a senior claim to all of
the collateral securing the Hybrid Loan. Hybrid Loans also may not include
covenants that are typical of Senior Loans, such as covenants requiring the
maintenance of minimum interest coverage ratios. As a result, Hybrid Loans
present additional risks besides those associated with traditional Senior Loans,
although they may provide a relatively higher yield. Because the lenders in
Hybrid Loans waive or forego certain loan covenants, their negotiating power or
voting rights in the event of a default may be diminished. As a result, the
lenders' interests may not be represented as significantly as in the case of a
conventional Senior Loan. In addition, because the Trust's security interest in
some of the collateral may be subordinate to other creditors, the risk of
nonpayment of interest or loss of principal may be greater than would be the
case with conventional Senior Loans. The Trust will invest only in Hybrid Loans
which meet credit standards established by PAII with respect to Hybrid Loans and
nonetheless provide certain protections to the lender such as collateral
maintenance or call protection. The Trust may only invest up to 20% of its
assets in Hybrid Loans as part of its investment in "Other Investments" as
described above, and Hybrid Loans will not count toward the 80% of the Trust's
assets that are normally invested in Senior Loans.
Subordinated and Unsecured Loans
The Trust may also invest up to 5% of its total assets, measured at the
time of investment, in subordinated and unsecured loans. The Trust may acquire a
subordinated loan only if, at the time of acquisition, it acquires or holds a
Senior Loan from the same borrower. The primary risk arising from a holder's
subordination is the potential loss in the event of default by the issuer of the
loans. Subordinated loans in an insolvency bear an increased share, relative to
senior secured lenders, of the ultimate risk that the borrower's assets are
insufficient to meet its obligations to its creditors. Unsecured loans are not
secured by any specific collateral of the borrower. They do not enjoy the
security associated with collateralization and may pose a greater risk of
nonpayment of interest or loss of principal than do secured loans. The Trust
will acquire unsecured loans only where the Investment Manager believes, at the
time of acquisition, that the Trust would have the right to payment upon default
that is not subordinate to any other creditor. The maximum of 5% of the Trust's
assets invested in subordinated and unsecured loans will constitute part of the
20% of the Trust's assets that may be invested in "Other Investments" as
described above, and will not count toward the 80% of the Trust's assets that
are normally invested in Senior Loans.
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 is currently a party to credit facilities with financial
institutions that permit the Trust to borrow up 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."
Policies Subject to Shareholder Approval
Certain of the investment policies of the Trust described above have been
approved by the Board of Trustees of the Trust, but will not be effective until
approved by a majority of the shareholders of the Trust. These policies are
those (i) permitting the Trust to invest in Senior Loans of business entities
other than corporations, (ii) treating investments in Lease Participations as
Senior Loans, and (iii) permitting the Trust to invest in certain Hybrid Loans
and in unsecured loans. The proposed policy changes will be submitted to
shareholders for their approval at the Trust's annual shareholders meeting
currently scheduled for July, 1998.
GENERAL INFORMATION ON SENIOR LOANS
Primary Market Overview
The primary market for Senior Loans has become much larger and varied in
recent years. The volume of loans originated in the Senior Loan market has
increased from $376 billion in 1992 to $1.1 trillion in 1997. Senior Loans
tailored to the institutional investor, such as the Trust, have increased from
$2.5 billion in 1993 to nearly $25.0 billion in 1997. In 1997, the volume of
leveraged loans (priced at LIBOR + 1.5% or higher) reached the highest level
since 1989 with $194.0 billion in volume. Leveraged loan volume of $74.5 billion
in the fourth quarter of 1997 is above fourth 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 1997.
$ in billions
1988 $ 284.4
1989 $ 333.2
1990 $ 241.3
1991 $ 234.4
1992 $ 375.5
1993 $ 389.3
1994 $ 665.3
1995 $ 816.9
1996 $ 887.6
1997 $ 1,111.9
Source: Loan Pricing Corporation.
The total Senior Loan market for both leveraged and non-leveraged
transactions has averaged an annual growth rate of 24.2% since 1992. The Trust's
net assets, $734 million at the end of 1992 and $1 billion at the end of 1997,
have grown at an average annual growth rate of 7.0% 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 joining U.S. and foreign banks as lenders. The entrance
of new investors has helped grow the bank loan trading market with record volume
of $62.0 billion during 1997. 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. With this growth in volume and
demand, Senior Loans have adopted innovative structures and characteristics, as
described elsewhere in this Prospectus.
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 borrower. 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.
Senior Loans typically will be secured by pledges of collateral from the
borrower in the form of tangible assets such as cash, accounts receivable,
inventory, property, plant and equipment, common and/or preferred stock of
subsidiaries, and intangible assets including trademarks, copyrights, patent
rights and franchise value. The Trust may also receive guarantees as a form of
collateral. In some instances, the Trust may invest in Senior Loans that are
secured only by stock of the borrower or its subsidiaries or affiliates.
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
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 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"); purchase of an assignment ("assignment") or a portion of
a Senior Loan from a third party, or acquiring a participation in a Senior Loan.
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 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 a member of the originating syndicate group for 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 borrower, may enforce compliance by the 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.
When the Trust is a purchaser of an assignment it 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.
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
investors who acquire an assignment. Participations may entail certain risks
relating to the creditworthiness of the parties from which the participations
are obtained. 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 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 borrower. In connection with purchasing participations, the Trust
generally will have no right to enforce compliance by the 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 with the result
that the Trust may be subject to delays, expenses and risks that are greater
than those that exist where the Trust is the original lender, and the Trust may
not directly benefit from the collateral supporting the Senior Loan because it
may be treated as a creditor of the lender instead of the borrower. As a result,
the Trust may assume the credit risk of both the 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 borrower. In
the event of bankruptcy or insolvency of the borrower, the obligation of the
borrower to repay the Senior Loan may be subject to certain defenses that can be
asserted by such borrower as a result of improper conduct of the lender selling
the participation. 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.
When the Trust is an original lender, it will have a direct contractual
relationship with the borrower. If the terms of an interest in a Senior Loan
provide that the Trust is in privity with the borrower, the Trust has direct
recourse against the borrower in the event the 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 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 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.
RISK FACTORS AND SPECIAL CONSIDERATIONS
The following summarizes certain risks that should be considered, among
others, in connection with an investment in the Trust. For further information
on risks associated with the possible investments of the Trust, see "Additional
Information About Investments and Investment Techniques" in the Statement of
Additional Information.
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 and any front-end administrative fees to be paid 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, in
most instances, takes precedence over the payment of dividends, or the return of
capital, to the issuer's shareholders. Although the Trust will generally invest
in Senior Loans that will be fully collateralized with assets whose market
value, at the time of acquisition, equals or exceeds the principal amount of the
Senior Loan, the value of the collateral may decline below the principal amount
of the Senior Loan subsequent to the Trust's investment in such Senior Loan. In
addition, to the extent that collateral consists of stock of the borrower or its
subsidiaries or affiliates, the Trust will be subject to the risk that this
stock may decline in value, be relatively illiquid, or may lose all or
substantially all of its value, causing the Senior Loan to be
undercollateralized. Senior Loans are also 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.
To the extent that the Trust's investment is in a Senior Loan acquired from
another lender, the Trust may be subject to certain credit risks with respect to
that lender. See "About Senior Loans." 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, 1998, approximately 1.31% of
the Trust's net assets and .97% of total assets consisted of non-performing
Senior Loans.
In the event of a bankruptcy of the borrower, the Trust could experience
delays or limitations with respect to its ability to realize the benefits of the
collateral securing the Senior Loan. Among the credit risks involved in a
bankruptcy would be an assertion that the pledging of collateral to secure the
Senior Loan constituted a fraudulent conveyance or preferential transfer that
would have the effect of nullifying or subordinating the Trust's rights to the
rights of other creditors of the borrower under applicable law.
Investment decisions will be based largely on the credit analysis performed
by the Investment Manager's investment personnel, and such analysis may be
difficult to perform for many issuers. Information about interests in Senior
Loans generally will not be in the public domain, and interests are generally
not currently rated by any nationally recognized rating service. Many issuers
have not issued securities to the public and are not subject to reporting
requirements under federal securities laws. Generally, issuers are required to
provide financial information to lenders, including the Trust, and information
may be available from other Senior Loan participants or agents that originate or
administer Senior Loans.
While debt instruments generally are subject to the risk of changes in
interest rates, the interest rates of the Senior Loans in which the Trust will
invest will float with a specified interest rate. Thus the risk that changes in
interest rates will affect the market value of such Senior Loans is
significantly decreased.
Borrowing and Leverage. The Trust is permitted to enter into borrowing
transactions representing up to 33 1/3% (or such other percentage permitted by
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 facilities as of February 28, 1998
was a variable rate based on LIBOR or the federal funds rate, at the Trust's
option, plus 0.40% of outstanding borrowings on the 364-day credit facility and
0.375% of outstanding borrowings on the four-year credit facility, plus a
facility fee on unused commitments of 0.10% on the 364-day credit facility and
0.125% on the four-year credit facility. At such rates, 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.
<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Portfolio Return,
net of expenses(1) .......................... (10%) (5%) 0% 5% 10%
Corresponding Return to
Common Shareholders(2) ...................... (18.07%) (10.57%) (3.07%) 4.43% 11.92%
<FN>
(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."
</FN>
</TABLE>
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 the Sales Agent
and any front-end administrative fees.
The Trust also issues Shares of the Trust through its Shareholder
Investment Program, and to specific investors pursuant to privately negotiated
transactions. See "Dividends and Distributions -- Shareholder Investment
Program." Shares may be issued under the Shareholder Investment Program 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 rate of interest payable on Senior Loans acquired by
the Trust and the rights provided to the Trust under the terms of the Senior
Loan.
DESCRIPTION OF THE TRUST
The Trust was organized as a Massachusetts business trust on December 2,
1987, and is registered with the Commission as a diversified, closed-end
management investment company under the Investment Company Act. The Trust's
Agreement and Declaration of Trust, a copy of which is on file in the office of
the Secretary of State of the Commonwealth of Massachusetts, authorizes the
issuance of an unlimited number of shares of beneficial interest without par
value.
The Trust issues shares of beneficial interest in the Trust. Under
Massachusetts law, Shareholders could, under certain circumstances, be held
liable for the obligations of the Trust. However, the Agreement and Declaration
of Trust disclaims shareholder liability for acts or obligations of the Trust
and requires that notice of such disclaimer be given to all parties in each
agreement, obligation or instrument entered into or executed by the Trust or the
Trustees, and each party thereto must expressly waive all rights or any action
directly against Shareholders. The Agreement and Declaration of Trust provides
for indemnification out of the Trust's property for all loss and expense of any
Shareholder 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 April 30 1998, 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 12, 1998 was
111,017,618, 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.
Fundamental and Non-Fundamental Policies of the Trust
The investment objective of the Trust, certain policies of the Trust
specified herein as "fundamental" and the investment restrictions of the Trust
described in the Statement of Additional Information are fundamental policies of
the Trust and may not be changed without a "Majority Vote" of the shareholders
of the Trust. The term "Majority Vote" means the affirmative vote of (a) more
than 50% of the outstanding shares of the Trust or (b) 67% or more of the shares
present at a meeting if more than 50% of the outstanding shares of the Trust are
represented at the meeting in person or by proxy, whichever is less. All other
policies of the Trust may be modified by resolution of the Board of Trustees of
the Trust.
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), as well as privately managed accounts, and currently has assets under
management of approximately $4 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 and private accounts.
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).
James R. Reis is Executive Vice President, Chief Financial Officer,
Chief Credit Officer, and Assistant Secretary of the Trust. Mr. Reis
is Director, Vice Chairman (since December 1994), Executive Vice
President (since April 1995), and Treasurer (since September 1996), of
PAGI and PAII and Director (since December 1994), Vice Chairman (since
November 1995) and Assistant Secretary (since January 1995) of PASI.
Mr. Reis is also Executive Vice President, Treasurer and Assistant
Secretary of each of the other funds in the Pilgrim America Group of
Funds and Chief Financial Officer (since December 1993), Vice Chairman
and Assistant Secretary (since April 1993) and former President (May
1991-December 1993) of Pilgrim America (formerly, Express America
Holdings Corporation). Mr. Reis is Vice Chairman (since April 1993)
and former President (May 1991-December 1993), of Express America
Mortgage Corporation; Vice Chairman and Treasurer (since December
1996) of Express America T.C. Corp. and EAMC Liquidation Corp.;
Director, President and Assistant Secretary (since August 1992) of
WESAV Investments Corp.; and Assistant Secretary (since May 1991) of
WESAV Investments Inc. 2. Mr. Reis was Treasurer of Pilgrim America
Group and PAII (September 1996-April 1998) and Principal Accounting
Officer of each of the other funds in the Pilgrim America Group of
Funds.
Daniel A. Norman is Senior Vice President, Treasurer and Assistant
Portfolio Manager 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
(July 1992-November 1995) and Assistant Vice President (July 1990-July
1992) of Bank of America (and its predecessor, Continental Bank).
Jeffrey A. Bakalar has served as Assistant Portfolio Manager of the
Trust since January 1998. Prior to joining PAII, Mr. Bakalar was Vice
President of First National Bank of Chicago (July 1994 - January 1998)
and Corporate Finance Officer of the Securitized Products Group of
Continental Bank (November 1993-July 1994).
Michel Prince has served as Assistant Portfolio Manager of the Trust
since May 1998. Prior to joining PAII, Mr. Prince was Vice President
of Rabobank International, Chicago Branch (July 1996 - April 1998) and
Vice President of Fuji Bank, Chicago Branch (April 1992 - July 1996).
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 masters 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.
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. ("DST"), whose principal business address is 330 West 9th
Street, Kansas City, Missouri 64105. In addition, DST acquires shares on behalf
of the Trust for distribution to Shareholders under the Trust's Shareholder
Investment Program.
Custodian
The Trust's securities and cash are held under a Custody Agreement with
Investors Fiduciary Trust Company ("IFTC"), whose principal business address is
801 Pennsylvania, Kansas City, Missouri 64105.
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 transactions effected on 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 and any front-end administrative fee. 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 May 12, 1998, the last reported sales price of a Share
of the Trust on the NYSE was $10.125.
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.
Following the sale of Shares pursuant to the Sales Agency Agreement, 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 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. Administrative services include
providing information to the Sales Agent on a daily basis, conferring with the
Sales Agent regarding the amount of Shares issued under the Offering, and
providing other services necessary to administer the Offering. The payment of
such fee will commence following the sale of 4,000,000 Shares pursuant to the
Offering. 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 facilities.
See "Financial Highlights and Investment Performance - Policy on Borrowing." As
of February 28, 1998, $342,000,000 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 Shareholder Investment Program
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.
Shareholder Investment Program. The Trust's Shareholder Investment Program
(the "Program") allows participating Shareholders to reinvest all dividends and
capital gain distributions in additional shares of the Trust. The Program also
allows participants to make optional cash investments monthly through DST (the
"Program Agent"), in amounts ranging from a minimum of $100 to a maximum of
$5,000. Subject to the permission of the Trust, participating Shareholders may
also make optional cash investments in excess of the monthly maximum. Shares
purchased by participants in the Program in connection with the reinvestment of
dividends or optional cash investments may be issued by the Trust if the Trust's
Shares are trading at a premium to net asset value. If the Trust's Shares are
trading at a discount to net asset value, Shares purchased under the Program
will be purchased on the open market. Shares issued by the Trust in connection
with the reinvestment of dividends will be issued at the greater of (i) net
asset value or (ii) a discount of 5% to the market price. Shares issued by the
Trust in connection with optional cash investments will be issued at the greater
of (i) net asset value or (ii) a discount, determined by the Trust, ranging from
0% to 5% to the market price. 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 Program. Shareholders who receive dividends and capital
gain distributions in cash may elect to participate in the Program by notifying
DST. Additional information about the Program may be obtained from The Pilgrim
America Group's Shareholder Services Department at 1 (800) 992-0180. For
additional information, see "Shareholder Investment Program" 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, and will generally be subject to a minimum tax rate of 28% or
20%, depending upon the Trust's holding period for the assets whose sale
produces the gain. 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 income dividends paid to certain nonresident alien and other non-U.S.
shareholder accounts.
This is a brief summary of some of the federal income tax laws that affect
an investment in the Trust. Please see the SAI and a tax adviser for further
information.
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 contained in the Trust's
February 28, 1998 annual report to shareholders except for those periods ending
prior to February 29, 1996 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.
SHAREHOLDER REPORTS
The Trust issues reports that include financial information to its
shareholders quarterly.
FINANCIAL STATEMENTS
The Trust's audited financial statements for the fiscal year ended February
28, 1998 are incorporated into the SAI by reference from the Trust's Annual
Report to Shareholders. The Trust will furnish without charge copies of its
Annual Report and any subsequent Quarterly or Semi-Annual Report to Shareholders
upon request to the Trust, 40 North Central Avenue, Suite 1200, Phoenix, Arizona
85004, toll-free telephone 1 (800) 992-0180.
<PAGE>
TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
Page
Change of Name........................................................ 2
Additional Information about Investments and Investment Techniques.... 2
Investment Restrictions............................................... 8
Trustees and Officers................................................. 9
Investment Management and Other Services.............................. 12
Portfolio Transactions................................................ 14
Net Asset Value....................................................... 15
Methods Available to Reduce Market Value Discount from NAV............ 15
Shareholder Investment Program........................................ 16
Tax Matters........................................................... 19
Advertising and Performance Data...................................... 23
Financial Statements.................................................. 24
<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 Pilgrim America Prime Rate Trust
an offer to sell or the solicitation of any offer to buy any
security other than 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................................... 2
Trust Expenses....................................... 4
Financial Highlights and Investment Performance...... 6 PaineWebber Incorporated
Investment Objective and Policies.................... 13
General Information on Senior Loans.................. 16
Risk Factors and Special Considerations.............. 18
Description of the Trust ............................ 21
Investment Management and Other Services............. 22 _________________________
Plan of Distribution................................. 24
Use of Proceeds...................................... 25
Dividends and Distributions.......................... 26
Tax Matters.......................................... 26
Legal Matters........................................ 27 May ___, 1998
Experts.............................................. 27
Registration Statement............................... 27
Financial Statements................................. 27
Table of Contents of Statement of Additional Information 28
</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
primarily in senior floating-rate 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 May __, 1998 (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)
992-0180. 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.....................................................8
Trustees and Officers.......................................................9
Investment Management and Other Services....................................12
Portfolio Transactions......................................................14
Net Asset Value.............................................................15
Methods Available to Reduce Market Value Discount from NAV..................15
Shareholder Investment Program..............................................16
Tax Matters.................................................................19
Advertising and Performance Data............................................23
Financial Statements........................................................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 May __, 1998.
<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 other form of business entity 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 credit quality standards and general requirements that the Trust applies to
Lease Participations including collateral quality, the credit quality of the
borrower and the likelihood of payback are substantially the same as those
applied to conventional Senior Loans. 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.
Originating Senior Loans
Although the Trust does not act, nor does it intend to act in the foreseeable
future, 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, it does
have the ability to do so. Senior Loans are typically arranged through private
negotiations between a 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 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 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 borrower with the restrictive
covenants in the loan agreement and of notifying the lenders of any adverse
change in the 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 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 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 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 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 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 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 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 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 or other business entities
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 borrower. 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 borrower 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 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 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 borrower'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 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 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 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 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 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 borrower generally must pledge as collateral assets
which may include one or more of the following: cash; accounts receivable;
inventory; property, plant and equipment; both common and preferred stock in its
subsidiaries, trademarks, copyrights, patent rights and franchise value. The
Trust may also receive guarantees as a form of collateral. In some instances, a
Senior Loan may be secured only by stock in a borrower or its affiliates. The
market value of the assets serving as collateral will, at the time of
investment, 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 may take action as it deems necessary
for the protection of its own interests and the interests of the other lenders,
including, for example, giving the borrower an opportunity to provide additional
collateral or accelerating the loan. There is no assurance, however, that the
borrower would provide additional collateral or that the liquidation of the
existing collateral would satisfy the 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 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 borrower or would not have a direct cause of action against
the 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 make loans to corporations or other business entities, or
enter into leases or other arrangements that have the characteristics
of a loan; (ii) may lend portfolio instruments; and (iii) may acquire
securities subject to repurchase agreements.(1)
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.
__________________________
1. This investment restriction in the form presented has been approved by
the Board of Trustees, but will not become effective until approved by
the shareholders of the Trust. Until such shareholder approval is
obtained, this restriction is as follows: "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." The proposed change to this investment
restriction will be submitted to shareholders for their approval at the
Trust's annual shareholders meeting currently scheduled for July, 1998.
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 58.) Trustee. Realtor, Coldwell Banker Success Realty
(formerly, 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
66.) 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
70.) 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 57.) Trustee. President, South Beach Capital Markets Advisory
Corporation (January 1995-Present); Governor, Philadelphia Stock Exchange
(October 1997-present); Director of Aurora Capital, Inc. (since February
1995). Mr. Foerster was formerly Director of Mako Marine International
(January 1996-December 1997) and 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, 40 North Central Avenue, Suite 1200, Phoenix, AZ 85004. (Age
52.) Trustee. Private Investor. Director of Artisoft, Inc. Mr. Patton was
formerly President and Co-owner, StockVal, Inc. (April 1993-June 1997) and
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 49.) 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). Chairman, President and Chief
Executive Officer of WESAV Investments Inc. 2 (May 1991-Present); Express
America T.C. Corp. and EAMC Liquidation Corp. (December 1996-Present);
Chairman of WESAV Investments Corp. (August 1992-Present).
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) $500 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,
1998. 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.
<TABLE>
<CAPTION>
Total
Compensation
From
Aggregate Trust
Compensation and Fund
from Complex Paid
Name of Person, Position Trust to Trustees
<S> <C> <C>
Mary A. Baldwin (1)(2), Trustee $ 14,616 $ 28,300 (5 boards)
John P. Burke (2)(3), Trustee $ 14,667 $ 28,400 (5 boards)
Al Burton (2)(4), Trustee $ 14,667 $ 28,400 (5 boards)
Bruce S. Foerster (1)(2), Trustee $ 14,667 $ 28,400 (5 boards)
Jock Patton (2)(5), Trustee $ 14,667 $ 28,400 (5 boards)
Robert W. Stallings (6), Trustee
and Chairman $ 0 $ 0 (5 boards)
<FN>
- ----------------------------------
(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 affiliation with the Investment Manager.
</FN>
</TABLE>
Officers
Howard Tiffen, President, Chief Operating Officer, and Senior Portfolio
Manager
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 50.)
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 40.)
Director, Vice Chairman (since December 1994) and Executive Vice President
(since April 1995), 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 and
Assistant Secretary 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; Vice Chairman
and Treasurer (since December 1996), Express America T.C. Corp. and EAMC
Liquidation Corp.; Director, President and Assistant Secretary (since
August 1992), WESAV Investments Corp.; Assistant Secretary (since May
1991), WESAV Investments Inc. 2; and formerly Treasurer, Pilgrim America
Group and PAII (September 1996-April 1998).
James M. Hennessy, Executive Vice President, Chief Financial Officer and
Secretary
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 49.).
Executive Vice President (since April 1998) and Secretary (since April
1995), Pilgrim America Capital Corporation (formerly Express America
Holdings Corporation), Executive Vice President and Treasurer, Pilgrim
America Group, PAII; Executive Vice President, PASI, Executive Vice
President, Principal Accounting Officer 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);
Senior Vice President and Secretary, Express America T.C. Corp. and EAMC
Liquidation Corp. (since December 1996).
Daniel A. Norman, Senior Vice President, Treasurer, and Assistant Portfolio
Manager
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 40.)
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 39.)
Formerly, Vice President (July 1992 - November 1995) and Assistant Vice
President (July 1990 - July 1992), Bank of America (and its predecessor,
Continental Bank).
Robert S. Naka, Vice President and Assistant Secretary
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 34.) Vice
President, Pilgrim America Investments, Inc. (since April 1997) and Pilgrim
America Group, Inc. (since February 1997). Vice President and Assistant
Secretary of each of the funds in the Pilgrim America Group of Funds.
Formerly Assistant Vice President (August 1995 - February 1997), Pilgrim
America Group, Inc. and Operations Manager (April 1992 - April 1995),
Pilgrim Group, Inc.
As of April 30, 1998, 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), as well as privately managed accounts, and as of the date of
this Statement of Additional Information had total assets under management of
approximately $4 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, 1998, February 28, 1997 and February 29,
1996, PAII was paid $10,369,772, $8,268,263 and $7,122,089, 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, 1998, February 28, 1997 and February 29,
1996, PAGI was paid $1,778,473, $1,441,271 and $1,264,932, 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 subordinated loans up to a maximum of 5% of the Trust's net
assets, Hybrid Loans, unsecured loans, 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. 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, even if the
specific services were not imputed to the Trust and were useful to the
Investment Manager in advising other clients. 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 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, $0, and $7,400 in brokerage commissions during the fiscal
years ended February 28, 1998, February 28, 1997 and February 29, 1996,
respectively.
Portfolio Turnover Rate
The annual rate of the Trust's total portfolio turnover for the years ended
February 28, 1998 and February 28, 1997, was 90% and 82%, 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 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.
Generally, Senior Loans are valued at fair value in the absence of readily
ascertainable market values believed to be true. 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 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 shares in the
open market in accordance with Section 23(c) of the Investment Company Act and
Rule 23c-1 thereunder 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.
SHAREHOLDER INVESTMENT PROGRAM
The Trust maintains a Shareholder Investment Program (the "Program"), which
allows participating shareholders to reinvest all dividends and capital gain
distributions ("Dividends") in additional shares of the Trust. The Program also
allows participants to purchase additional shares through optional cash
investments in amounts ranging from a minimum of $100 to a maximum of $5,000 per
month. Subject to the permission of the Trust, participating Shareholders may
also make optional cash investments in excess of the monthly maximum. Shares may
be issued by the Trust under the Program only if the Trust's Shares are trading
at a premium to net asset value. If the Trust's Shares are trading at a discount
to net asset value, Shares purchased under the Program will be purchased on the
open market.
Shareholders may elect to participate in the Program by telephoning the Trust or
submitting a completed Participation Form to DST Systems, Inc. ("DST"), the
Program administrator. DST will credit 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. DST will apply all
Dividends and optional cash investments received to purchase Shares as soon as
practicable beginning on the relevant Investment Date (as described 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 order for participants to purchase shares through the Program in any month,
the Administrator must receive from the participant any optional cash investment
not exceeding $5,000 by the OCI Payment Due Date and any optional cash
investment exceeding $5,000 by the Waiver Payment Due Date. The "DRIP Investment
Date" will be the date upon which Dividends will be reinvested in additional
Shares of the Trust, which will be on the Dividend Payment Date. The "OCI
Investment Date" will be the date, set in advance by the Trust, upon which
optional cash investments not exceeding $5,000, are first applied by DST to the
purchase of Shares. The "Waiver Investment Date" will be the date, set in
advance by the Trust, upon which optional cash investments exceeding $5,000,
which have been approved by the Trust, are first applied by the Administrator to
the purchase of Shares. Participants may obtain a schedule of upcoming OCI
Payment Due Dates, Waiver Payment Due Dates and Investment Dates by referring to
the Summary Program Description or calling the Trust at 1 (800) 992-0180.
If the Market Price (the volume-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 Valuation Date (defined below),
DST will 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 DST has completed its purchases, DST 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 Valuation Date, the Trust will issue the Shares to be acquired by the
Program. The "Valuation Date" is a date preceding the DRIP Investment Date, OCI
Investment Date, and Waiver Investment Date on which it is determined, based on
the Market Price and net asset value of Shares of the Trust, whether DST will
purchase Shares on the open market or the Trust will issue the Shares for the
Program. The Trust may, without prior notice to participants, determine that it
will not issue new Shares for purchase pursuant to the Program, even when the
Market Price plus estimated commissions equals or exceeds net asset value, in
which case DST will purchase Shares on the open market.
Shares issued by the Trust under the Program will be issued commission free.
Shares purchased for the Program directly from the Trust in connection with the
reinvestment of Dividends will be acquired on the DRIP Investment Date at the
greater of (i) net asset value at the close of business on the Valuation Date or
(ii) the average of the daily Market Price of the Shares during the "DRIP
Pricing Period," minus a discount of 5%. The "DRIP Pricing Period" for a
dividend reinvestment is the Valuation Date and the prior Trading Day. A
"Trading Day" means any day on which trades of the Shares of the Trust are
reported on the NYSE.
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 an OCI Investment Date at the greater of
(i) net asset value at the close of business on the Valuation Date or (ii) the
average of the daily Market Price of the Shares during the OCI Pricing Period
minus a discount, determined at the sole discretion of the Trust and announced
in advance, ranging from 0% to 5%. The "OCI Pricing Period" for an OCI
Investment Date means the period beginning four Trading Days prior to the
Valuation Date through and including the Valuation 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. The discount for
optional cash investments is determined on the last business day of each month.
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 DST no later than 4:00
p.m. Eastern time on the OCI Payment Due Date to be invested on the relevant OCI
Investment Date.
Optional cash investments in excess of $5,000 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
Request for Waiver Deadline date. Good funds on all approved Requests For Waiver
must be received by DST not later than 4:00 P.M. Eastern time on the Waiver
Payment Due Date in order for such funds to be invested on the relevant Waiver
Investment Date.
It is solely within the Trust's discretion as to whether approval for any cash
investments in excess of $5,000 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 Program 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
Program, the participant submitting the request, the extent and nature of such
participant's prior participation in the Program, 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 Waiver 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 Waiver Investment Date at the greater of (i)
net asset value at the close of business on the Valuation Date, or (ii) the
average of the daily Market Price of the Shares for the Waiver Pricing Period
minus the pre-announced Waiver Discount (as defined below), if any, applicable
to such shares. The "Waiver Pricing Period" for a Waiver Investment Date means
the period beginning four Trading Days prior to the Valuation Date through and
including the Valuation Date. The Trust may establish a discount applicable to
cash investments exceeding $5,000 (the "Waiver Discount") on the last business
day of each month. 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 Program 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 Waiver 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 Waiver Pricing Period must equal or exceed. In the event that
such minimum price is not satisfied for a Trading Day of the Waiver Pricing
Period, then such Trading Day and the trading prices for that day will be
excluded from (i) the Waiver 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
$5,000. No shares will be issued and funds submitted pursuant to Requests for
Waiver will be returned to the participant if the minimum price is not obtained
for at least three of the five Trading Days.
Participants will pay a pro rata share of brokerage commissions with respect to
DST'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 Program.
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 Program, 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.
Subject to the availability of Shares registered for issuance under the Program,
there is no total maximum number of Shares that can be issued pursuant to the
Program. As of the date hereof, 15,000,000 Shares have been registered and are
available for sale under the Program.
The Program is intended for the benefit of investors in the Trust and not for
persons or entities who accumulate accounts under the Program over which they
have control for the purpose of exceeding the $5,000 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 Program to the contrary, the Trust
reserves the right to exclude from participation, at any time, (i) persons or
entities who attempt to circumvent the Program's standard $5,000 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 Program. 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 Program.
Shareholders may request to receive their Dividends in cash at any time by
giving DST written notice or by contacting the Trust's Shareholder Services
Department at 1 (800) 992-0180. Shareholders may elect to close their account at
any time by giving DST written notice. When a participant closes their account,
the participant upon request will receive a certificate for full Shares in the
Account. Fractional Shares will be held and aggregated with other Fractional
Shares being liquidated by DST as agent of the Program and paid for by check
when actually sold.
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). If shares are issued pursuant to the Program's dividend
reinvestment provisions or cash purchase provisions at a discount from market
price, participants may have income equal to the discount.
Additional information about the Program may obtained from the Trust's
Shareholder Services Department at 1(800) 992-0180.
See "Tax Matters--Distributions" for a discussion of the federal income tax
ramifications of obtaining shares under the Program.
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 each year 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
derive at least 90% of its gross income for each taxable year 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.
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.
Hedging Transactions
The Trust has the ability, pursuant to its investment objectives and policies,
to hedge its investments in a variety of transactions, including interest rate
swaps and the purchase or sale of interest rate caps and floors. The treatment
of these transactions for federal income tax purposes may in some instances be
unclear, and the regulated investment company qualification requirements may
limit the extent to which the Trust can engage in hedging transactions.
In addition, recently enacted rules may affect the timing and character of gain
if the Fund engages in transactions that reduce or eliminate its risk of loss
with respect to appreciated financial positions. If the Trust enters into
certain transactions in property while holding substantially identical property,
the Trust would be treated as if it had sold and immediately repurchased the
property and would be taxed on any gain (but not loss) from the constructive
sale. The character of gain from a constructive sale would depend upon the
Trust's holding period in the property. Loss from a constructive sale would be
recognized when the property was subsequently disposed of, and its character
would depend on the Trust's holding period and the application of various loss
deferral provisions of the Code.
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 "20% Rate Gain" or "28% Rate
Gain," depending upon the Trust's holding period for the assets sold. "20% Rate
Gains" arise from the sale of assets held by the Trust for more than 18 months
and are subject to a maximum tax rate of 20%; "28% Rate Gains" arise from the
sale of assets held by the Trust for more than one year but not more than 18
months and are subject to a maximum tax rate of 28%. Distributions are subject
to these capital gains rates 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 applicable 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) if the Internal Revenue Service
notifies the Trust that the shareholder is subject to backup withholding.
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 if the shares are held
as capital assets, and gain or loss will be long-term or short-term, depending
upon the shareholder's holding period for the shares. 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.
Tender Offers to Purchase Shares
As described earlier, the Trust will consider making tender offers for its
shares on a quarterly basis. Under current law, a shareholder, who pursuant to a
tender offer, tenders all of his shares and any shares considered owned by such
shareholder under attribution rules contained in the Code, will recognize gain
or loss, taxable as described above (see "Sale of Shares"). Different tax
consequences may apply to shareholders who tender less than all their shares in
connection with a tender offer and possibly to non-tendering shareholders. The
tax consequences to shareholders of a tender offer will be more fully described
in offering documents related to the tender offer.
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 and risk rankings and similar information from
independent organizations such as Lipper Analytical Services, Inc. ("Lipper"),
Morningstar, Value Line, Inc., CDA Technology, Inc. or other industry
publications. These rankings will typically compare the Trust to all closed-end
funds, to other Senior Loan funds, and/or also to taxable closed-end fixed
income funds. Any such use of rankings and ratings in advertisements and sales
literature will conform with the guidelines of 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.
Reports and promotional literature may also contain the following information:
(i) number of shareholders; (ii) average account size; (iii) identification of
street and registered account holdings; (iv) lists or statistics of certain of
the Trust's holdings including, but not limited to, portfolio composition,
sector weightings, portfolio turnover rates, number of holdings, average market
capitalization and modern portfolio theory statistics alone or in comparison
with itself (over time) and with its peers and industry group; (v) public
information about the asset class; and (vi) discussions concerning coverage of
the Trust by analysts.
In addition, reports and promotional literature may contain information
concerning the Investment Manager, Pilgrim America, the Portfolio Managers,
Pilgrim America Group, Inc. or affiliates of the Trust, the Investment Manager,
Pilgrim America or Pilgrim America Group, Inc. including (i) performance
rankings of other funds managed by the Investment Manager, or the individuals
employed by the Investment Manager who exercise responsibility for the
day-to-day management of the Trust, including rankings of investment companies
published by Lipper Analytical Services, Inc., Morningstar, Inc., Value Line,
Inc., CDA Technologies, Inc., or other rating services, companies, publications
or other persons who rank investment companies or other investment products on
overall performance or other criteria; (ii) lists of clients, the number of
clients, or assets under management; (iii) information regarding the acquisition
of the Pilgrim America Funds by Pilgrim America; (iv) the past performance of
Pilgrim America and Pilgrim America Group, Inc.; (v) the past performance of
other funds managed by the Investment Manager; (vi) quotes from a portfolio
manager of the Trust or industry specialists; and (vii) information regarding
rights offerings conducted by closed-end funds managed by the Investment
Manager.
The Trust may compare the frequency of its reset period to the frequency with
which the London Inter-Bank Offered Rate ("LIBOR") changes. Further, the Trust
may compare its yield to (i) 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. The Trust may also compare
its total return, NAV stability and yield to other fixed income investments
(such as Certificates of Deposit), open-end mutual funds and Unit Investments
Trusts. 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, and descriptions of the benefits
of working with investment professionals in selecting investments.
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. 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'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 last reported market 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.
FINANCIAL STATEMENTS
The financial statements contained in the Trust's February 28, 1998 Annual
Report to Shareholders are incorporated herein by reference.
<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, 1998, 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, 1998
Annual Report:
(a) Portfolio of Investments as of February 28, 1998
(b) Statement of Assets and Liabilities as of February 28, 1998
(c) Statement of Operations for the year ended February 28, 1998
(d) Statements of Changes in Net Assets for the years ended February
28, 1997 and February 28, 1998
(e) Statement of Cash Flows for the year ended February 28, 1998
(f) Notes to Financial Statements
(g) Report of Independent Auditors dated April 10, 1998
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) (i) By-Laws2/
(ii) Amendment to Bylaws2/
(c) Not Applicable
(d) Not Applicable
(e) Form of Shareholder Investment Program3/
(f) Not Applicable
(g) Form of Amended and Restated Investment Management Agreement4/
(h) (i) Form of Sales Agency Agreement
(ii) Form of Agreement with Pilgrim America Securities, Inc. 4/
(i) Not Applicable
(j) Form of Custody Agreement4/
(k) (i) Form of Amended and Restated Administration Agreement4/
(ii) Form of Recordkeeping Agreement4/
(l) Opinion of Dechert Price & Rhoads
(m) Not Applicable
(n) Consent of KPMG Peat Marwick LLP
(o) Not Applicable
(p) Certificate of Initial Capital5/
(q) Not Applicable
(r) Financial Data Schedule
- --------------------
1/ Incorporated herein by reference to Amendment No. 20 to Registrant's
Registration Statement under the Investment Company Act of 1940 (the
"1940 Act") on Form N-2 (File No. 811-5410), filed on September 16,
1996.
2/ Incorporated herein by reference to Amendment No. 24 to Registrant's
Registration Statement under the 1940 Act on Form N-2 (File No.
811-5410), filed on November 7, 1997.
3/ Incorporated herein by reference to Amendment No. 27 to Registrant's
Registration Statement under the 1940 Act on Form N-2 (File No.
811-5410), filed on May 15, 1998.
4/ Incorporated herein by reference to Amendment No. 22 to Registrant's
Registration Statement under the 1940 Act on Form N-2 (File No.
811-5410), filed on June 23, 1997.
5/ 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, 1998.
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
The following table sets forth estimated expenses to be incurred in
connection with the offering described in the registration statement.
Registration Fees...................................................$30,492.42
Trustee Fees...........................................................$250.00
Transfer Agent's Fees...............................................$10,000.00
Legal Fees.........................................................$110,000.00
New York Stock Exchange Listing Fees................................$24,980.00
National Association of Securities Dealers, Inc. Fees................$8,047.00
Accounting Fees and Expenses.........................................$5,000.00
Sales Agent Expenses................................................$50,000.00
Miscellaneous Expenses...............................................$2,000.00
Total.....................................................$240,769.42
Item 27. Persons Controlled by or Under Common Control
Not Applicable.
Item 28. Number of Holders of Securities
As of April 30, 1998:
(1) Title of Class (2) Number of Record Holders
-------------- ------------------------
Shares of Beneficial 59,416
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)(i) 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 13th day of May, 1998.
PILGRIM AMERICA PRIME RATE TRUST
By: /s/ James M. Hennessy
---------------------------
James M. Hennessy
Executive Vice President,
Chief Financial Officer and Secretary
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 May 13, 1998
- --------------------------- and Trustee
Robert W. Stallings*
/s/ James M. Hennessey Chief Financial Officer May 13, 1998
- ---------------------------
James M. Hennessey
/s/ Mary A. Baldwin Trustee May 13, 1998
- ---------------------------
Mary A. Baldwin*
/s/ John P. Burke Trustee May 13, 1998
- ---------------------------
John P. Burke*
/s/ Al Burton Trustee May 13, 1998
- ---------------------------
Al Burton*
/s/ Bruce S. Forester Trustee May 13, 1998
- ---------------------------
Bruce S. Foerster*
/s/ Jock Patton Trustee May 13, 1998
- ---------------------------
Jock Patton*
*By: /s/ James M. Hennessy
---------------------------
James M. Hennessy
Attorney-in-Fact**
- -------------------------------------------
** Powers of attorney were previously filed in Amendment No. 24 to the Trust's
Registration Statement under the 1940 Act on Form N-2 on November 7, 1997.
<PAGE>
EXHIBIT INDEX
Exhibit Number Name of Exhibit
2(h)(i) Form of Sales Agency Agreement
2(l) Opinion of Dechert Price & Rhoads
2(n) Consent of KPMG Peat Marwick LLP
2(r)[EDGAR Exhibit 27] Financial Data Schedule
PILGRIM AMERICA PRIME RATE TRUST
10,000,000 Shares of Beneficial Interest
without par value
SALES AGENCY AGREEMENT
May __, 1998
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 10,000,000 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. 333-29805) 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 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 or to information
describing the manner in which the Agent shall sell Common
Shares under this Agreement.
(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, 1998.
(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, in privately negotiated
transactions of which the Agent shall have received notice
pursuant to Section 4(k) hereof (the "Privately Negotiated
Transactions") or in other transactions which the Agent
receives notice of pursuant to Section 4(k) hereof; 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 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 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, sales pursuant to the Cash Purchase Plan and
other transactions which the Agent receives notice of pursuant
to Section 4(k), 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.
(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 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, sales pursuant to the Cash Purchase Plan and
other transactions which the Agent receives notice of pursuant
to Section 4(k), 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 in accordance with the 1933 Act, the 1940 Act, the
Securities Exchange Act of 1934 (the "1934 Act"), the rules of the NYSE, the
Conduct Rules of the National Association of Securities Dealers, Inc. and 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); provided, further, that the Agent and
the Trust agree that Pilgrim America Securities, Inc. ("PASI") may provide
administrative services to the Trust in connection with sales under this
Agreement but shall not act as a sales agent; provided, further, that the Agent
shall not be deemed to be in violation of this sentence if such violation is
caused by the activities of PASI or by the failure of the Trust to comply with
its agreements and representations contained herein. 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 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
transactions effected 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 3% of the gross sales price per
share of the first 4,000,000 Common Shares sold under this Agreement and 2.25%
of the gross sales price for the next 6,000,000 Common Shares sold.
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 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 the Trust will
file a prospectus supplement under the applicable paragraph of Rule 497 of the
Rules and Regulations at such times as may be required by the 1933 Act and the
Rules and Regulations (but in any event not later than the second business day
after the end of the week during which sales of Common Shares occur), which
prospectus supplement will set forth 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 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 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 2,000,000 Common
Shares are not sold by the Agent pursuant to the terms of this Agreement within
one year of the date of this Agreement, then the Trust 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).
(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.
(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, sales
pursuant to the Cash Purchase Plan and other transactions which the Agent
receives notice of pursuant to Section 4(k), 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 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 (except as set forth in the Prospectus)
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 Trust",
insofar as such statements constitute legal matters, are
accurate; all action required to be taken for the
authorization, issue and sale of the Common Shares have been
validly and sufficiently taken; the form of certificate, if
any, used to evidence the Common Shares are in proper form and
comply with all applicable statutory requirements and the
Common Shares are the subject of an effective registration
statement permitting their sale in the manner contemplated by
this Agreement.
(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.
(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 caption
"Description of the Trust" and in the Statement of Additional
Information under the caption "Tax Matters", to the extent
that it constitutes matters of law or legal conclusions
thereunder, has been reviewed by such counsel and is accurate
and correct in all material respects.
(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 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 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 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 (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 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
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, 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.
(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: Corporate Finance Department, 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: Daniel A.
Norman. 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.
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.
<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:
<PAGE>
Annex I
Form of Comfort Letter
[To come]
DECHERT PRICE & RHOADS
1775 Eye Street, N.W.
Washington, D.C. 20006
Telephone: (202) 261-3300
Fax: (202) 261-3333
May 13, 1998
Pilgrim America Prime Rate Trust
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004-4424
Re: Pilgrim America Prime Rate Trust
(File Nos. 333-29805 and 811-5410)
Dear Sirs:
In connection with the registration under the Securities Act of 1933,
as amended, of 10,000,000 shares of beneficial interest of Pilgrim America Prime
Rate Trust (the "Trust"), we have examined such matters as we have deemed
necessary to give this opinion.
On the basis of the foregoing, it is our opinion that the shares of the
Trust have been duly authorized and, when paid for as contemplated by the
Trust's Registration Statement, will be validly issued, fully paid and
non-assessable by the Trust.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to all references to our firm therein.
Very truly yours,
/s/ Dechert Price & Rhoads
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
May 13, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000826020
<NAME> Pilgrim America Prime Rate Trust
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> FEB-28-1998
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 1,365,685
<INVESTMENTS-AT-VALUE> 1,367,265
<RECEIVABLES> 20,027
<ASSETS-OTHER> 825
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,388,117
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 353,714
<TOTAL-LIABILITIES> 353,714
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,051,266
<SHARES-COMMON-STOCK> 110,764
<SHARES-COMMON-PRIOR> 109,140
<ACCUMULATED-NII-CURRENT> 11,927
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (30,370)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,580
<NET-ASSETS> 1,034,403
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 122,361
<OTHER-INCOME> 9,379
<EXPENSES-NET> 36,523
<NET-INVESTMENT-INCOME> 95,217
<REALIZED-GAINS-CURRENT> (18,935)
<APPREC-INCREASE-CURRENT> 5,319
<NET-CHANGE-FROM-OPS> 81,601
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 93,880
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 15,592
<NET-CHANGE-IN-ASSETS> 3,313
<ACCUMULATED-NII-PRIOR> 10,418
<ACCUMULATED-GAINS-PRIOR> (11,434)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 10,370
<INTEREST-EXPENSE> 21,267
<GROSS-EXPENSE> 36,535
<AVERAGE-NET-ASSETS> 1,031,632
<PER-SHARE-NAV-BEGIN> 9.45
<PER-SHARE-NII> 0.87
<PER-SHARE-GAIN-APPREC> (0.13)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0.85
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.34
<EXPENSE-RATIO> 2.65
<AVG-DEBT-OUTSTANDING> 346,110
<AVG-DEBT-PER-SHARE> 3.15
</TABLE>
