As filed with the Securities and Exchange Commission on December 2, 1998
1933 Act File No. 333-______
1940 Act File No. 811-5410
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
(Check appropriate box or boxes)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No. ___
[ ] Post-Effective Amendment No. ___
and
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 29
PILGRIM PRIME RATE TRUST
(formerly 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 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.
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, D.C. 20006
Approximate Date of Proposed Public Offering: As soon as practical after the
effective date of this Registration Statement.
If any securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, other
than securities offered in connection with a dividend reinvestment plan, check
the following box. [X]
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
=================================================================================================
<S> <C> <C> <C> <C>
Proposed Maximum Proposed Maximum
Title of Securities Amount Being Offering Price Aggregate Offering Amount of
Being Registered Registered Per Unit Price Registration Fee
- -------------------------------------------------------------------------------------------------
Shares of Beneficial 5,000,000 shares $9.59375(1) $47,968,750(1) $13,335.31
Interest (without par
value)
=================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933 based on the
average of the high and low sales prices of the shares of beneficial
interest on November 25, 1998 as reported on the New York Stock Exchange.
--------------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with 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 PRIME RATE TRUST
CROSS-REFERENCE SHEET
PART A
ITEM
NO. CAPTION LOCATION IN PROSPECTUS
- ---- ------- ----------------------
1. Outside Front Cover...................... Front Cover Page
2. Inside Front and Outside
Back Cover Page.......................... Inside Front and Outside
Back Cover Page
3. Fee Table and Synopsis................... Prospectus Summary; Trust
Expenses
4. Financial Highlights..................... Financial Highlights and
Investment Performance --
Financial Highlights Table
5. Plan of Distribution..................... Front Cover Page;
Prospectus Summary; Plan
of Distribution
6. Selling Shareholders..................... Not Applicable
7. Use of Proceeds.......................... Use of Proceeds
8. General Description of the Registrant.... Front Cover Page; Prospectus
Summary; Financial Highlights
and Investment Performance --
Portfolio Composition;
Financial Highlights and
Investment Performance --
Trading and 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
<PAGE>
PART B
ITEM LOCATION IN STATEMENT OF
NO. CAPTION ADDITIONAL INFORMATION
- ---- ------- ------------------------
14. Cover Page............................... Cover Page
15. Table of Contents........................ Table of Contents
16. General Information and History.......... Change of Name
17. Investment Objective and Policies........ Additional Information About
Investments and Investment
Techniques; Investment
Restrictions
18. Management............................... Trustees and Officers
19. Control Persons and Principal Holders
of Securities............................ Trustees and Officers;
Prospectus: Description of the
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
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>
PILGRIM 5,000,000 Shares of Beneficial Interest
The Value of Investing PILGRIM PRIME RATE TRUST
New York Stock Exchange Symbol: PPR
PROSPECTUS
40 NORTH CENTRAL AVENUE, SUITE 1200
PHOENIX, ARIZONA 85004
(800) 992-0180
Pilgrim 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 Investments, Inc.
("Pilgrim Investments" 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 ___.
This prospectus applies to 5,000,000 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 Pilgrim Securities, Inc. ("Pilgrim Securities"),
as distributor and principal underwriter, through broker-dealers who have
entered into selected dealer agreements with Pilgrim Securities. See "Plan of
Distribution." The Shares will be sold at market prices, which shall be
determined with reference to trades on the New York Stock Exchange, subject to a
minimum price to be established each day by the Trust. The minimum price on any
day will not be less than the current net asset value ("NAV") per Share plus the
per share amount of the sales commission to be paid to Pilgrim Securities. Any
shares sold pursuant to this prospectus will be subject to a commission of 4% of
the gross sales price of the shares sold. As of ______, 1998, the last reported
sales price of a Share of the Trust on the NYSE was $_____.
-----------------
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 __________, 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 __ of this Prospectus, may be obtained without charge by contacting the
Trust toll-free at (800) 992-0180.
-----------------
THE DATE OF THIS PROSPECTUS IS __________, 1998.
<PAGE>
TABLE OF CONTENTS
Prospectus Summary.......................................................... 3
Trust Expenses.............................................................. 5
Financial Highlights and Investment Performance............................. 7
Investment Objective and Policies........................................... 14
General Information on Senior Loans......................................... 16
Risk Factors and Special Considerations..................................... 19
Description of the Trust.................................................... 22
Investment Management and Other Services.................................... 23
Plan of Distribution........................................................ 25
Use of Proceeds............................................................. 26
Dividends and Distributions................................................. 26
Tax Matters................................................................. 27
Legal Matters............................................................... 27
Experts ................................................................... 27
Registration Statement...................................................... 28
Shareholder Reports......................................................... 28
Financial Statements........................................................ 28
Table of Contents of Statement of Additional Information.................... 29
<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 _________, 1998, the Trust's
NAV per Share was $_____.
- --------------------------------------------------------------------------------
NYSE Listed As of _______, 1998, the Trust had
_________ Shares outstanding, which are traded on
the NYSE under the symbol "PPR." As of ________,
1998, the last reported sales price of a Share of
the Trust was $______.
- --------------------------------------------------------------------------------
Investment Objective To obtain as high a level of current income as is
consistent with the preservation of capital. There
can be no assurance that the Trust will achieve
its investment objective.
- --------------------------------------------------------------------------------
Primary Investment Strategy The Trust seeks to achieve its investment
objective by 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
Guidelines Trust's net assets is invested in Senior Loans.
A maximum of 25% of the Trust's assets is invested
in any one industry.
The Trust only invests in Senior Loans of U.S.
corporations, 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 Investments, Inc.
- --------------------------------------------------------------------------------
Administrator Pilgrim Group, Inc.
================================================================================
-3-
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS AT A GLANCE
THIS PROSPECTUS CONTAINS CERTAIN STATEMENTS THAT MAY BE DEEMED TO BE
"FORWARD-LOOKING STATEMENTS." ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF UNCERTAINTIES SET
FORTH BELOW AND ELSEWHERE IN THE PROSPECTUS. FOR ADDITIONAL INFORMATION, SEE
"RISK FACTORS AND SPECIAL CONSIDERATIONS."
================================================================================
Discount from or Premium + The Offering will be conducted only when
to NAV 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.
+ As with any security, the market value of the
Shares may increase or decrease from the
amount that you paid for the Shares.
+ 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 The issuance of the Shares through the Offering
Trust's Shares 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 Because of a limited secondary market for Senior
for Senior Loans 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.
================================================================================
-4-
<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 (as a percentage
of Offering price) (4)..................... 4.00% 4.00%
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) ................ 0.23% 0.23%
---- ----
Total Annual Expenses before Interest ......... 1.50% 1.15%
Interest Expense on Borrowed Funds ............ 2.82% 0.00%
---- ----
Total Annual Expenses.......................... 4.32% 1.15%
==== ====
(1) The calculations in the fee table above are based on the Trust's expenses
as a percentage of net assets. Certain expenses of the Trust, such as
management and administrative fees, are calculated on the basis of net
assets plus borrowings. If the Trust's expenses are calculated on the basis
of net assets plus borrowings (including borrowings equal to 33 1/3% of net
assets plus borrowings), the annual expenses in the fee table would read as
follows:
Annual Expenses (as a percentage of net assets
plus borrowings attributable to Shares)
Management and Administrative Fees.................................. 0.85%
Other Operating Expenses............................................ 0.16%
Total Annual Expenses before Interest Expense........................ 1.01%
Interest Expense on Borrowed Funds................................... 1.88%
Total Annual Expenses................................................ 2.89%
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.
(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 Pilgrim Securities with respect to the Shares will be
at a fixed commission rate of 4% of the gross sales price per Share of the
Shares sold.
(5) Pursuant to an investment management agreement with the Trust, Pilgrim
Investments is entitled to receive a fee of 0.80% of the average daily net
assets of the Trust plus the proceeds of any outstanding borrowings.
Pilgrim Investments 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
Group, Inc. ("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.
-5-
<PAGE>
================================================================================
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
You would pay the following expenses
on a $1,000 investment, assuming a
5% annual return and where the Trust
has borrowed. $81 $166 $251 $469
- --------------------------------------------------------------------------------
You would pay the following expenses
on a $1,000 investment, assuming a
5% annual return and where the Trust
has not borrowed. $51 $ 75 $101 $174
================================================================================
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.
-6-
<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, and the Trust's Semi-Annual report dated as of August 31,
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. The information in the table for the six-month period
ended August 31, 1998 is unaudited. This information should be read in
conjunction with the Financial Statements and Notes thereto included in the
Trust's February 28, 1998 Annual Report, and the Trust's August 31, 1998
Semi-Annual Report, which contain further information about the Trust's
performance, and which is available to Shareholders upon request and without
charge.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
AUGUST 31, YEAR ENDED FEBRUARY 28 OR FEBRUARY 29,
1998 --------------------------------------------------------------
(UNAUDITED) 1998 1997(8) 1996(6) 1995 1994
----------- ---- ------- ------- ---- ----
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C>
NAV, beginning of period ....... $ 9.34 $ 9.45 $ 9.61 $ 9.66 $ 10.02 $ 10.05
---------- ---------- ---------- -------- -------- --------
Net investment income .......... 0.40 0.87 0.82 0.89 0.74 0.60
Net realized and unrealized
gain (loss) on investment ...... (0.03) (0.13) (0.02) (0.08) 0.07 (0.05)
---------- ---------- ---------- -------- -------- --------
Increase in NAV from
investment operations .......... 0.37 0.74 0.80 0.81 0.81 0.55
Distributions from net
investment income .............. (0.41) (0.85) (0.82) (0.86) (0.73) (0.60)
Increase in NAV from
share offerings................. 0.02 -- -- -- -- --
Reduction in NAV from rights
offering ....................... -- -- (0.14) -- (0.44) --
Increase in NAV from repurchase
of capital stock ............... -- -- -- -- -- 0.02
---------- ---------- ---------- -------- -------- --------
NAV, end of period ............. $ 9.32 $ 9.34 $ 9.45 $ 9.61 $ 9.66 $ 10.02
========== ========== ========== ======== ======== ========
Closing market price at
end of period .................. $ 10.00 $ 10.31 $ 10.00 $ 9.50 $ 8.75 $ 9.25
========== ========== ========== ======== ======== ========
TOTAL RETURN
Total investment return at
closing market price (3) ....... 1.21% 12.70% 15.04%(5) 19.19% 3.27%(5) 8.06%
Total investment return
based on NAV (4) ............... 4.15% 8.01% 8.06% 9.21% 5.24%(5) 6.28%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000's)................ $1,152,592 $1,034,403 $1,031,089 $862,938 $867,083 $719,979
Average Borrowings (000's) ..... $ 452,049 $ 346,110 $ 131,773 -- -- --
Ratios to average net assets
plus borrowings:
Expenses (before interest and
other fees related to revolving
credit facility) .............. 1.04%(1) 1.04% 1.13% -- -- --
Expenses ..................... 2.88%(1) 2.65% 1.92% -- -- --
Net investment income ........ 6.18%(1) 6.91% 7.59% -- -- --
Ratios to average net assets:
Expenses (before interest and
other fees related to revolving
credit facility) .............. 1.47%(1) 1.39% 1.29% -- -- --
Expenses ..................... 4.08%(1) 3.54% 2.20% 1.23% 1.30% 1.31%
Net investment income ........ 8.77%(1) 9.23% 8.67% 9.23% 7.59% 6.04%
Portfolio turnover rate ........ 47% 90% 82% 88% 108% 87%
Shares outstanding at end of
period (000's).................. 123,650 110,764 109,140 89,794 89,794 71,835
Average daily balance of debt
outstanding during the
period (000's) (7) ........... $ 452,049 $ 346,110 $ 131,773 $ -- $ 2,811 $ --
Average monthly shares outstanding
during the period (000's) .... 117,217 109,998 95,917 89,794 74,598 --
Average amount of debt per share
during the period (7) ....... $ 3.86 $ 3.15 $ 1.37 $ -- $ 0.04 $ --
MAY 12,
YEAR ENDED FEBRUARY 28 OR FEBRUARY 29, 1988* TO
--------------------------------------------- FEBRUARY
1993 1992 1991 1990 28, 1989
---- ---- ---- ---- --------
PER SHARE OPERATING PERFORMANCE
NAV, beginning of period ....... $ 9.96 $ 9.97 $ 10.00 $ 10.00 $ 10.00
-------- -------- ---------- ---------- --------
Net investment income .......... 0.60 0.76 0.98 1.06 0.72
Net realized and unrealized
gain (loss) on investment ...... 0.01 (0.02) (0.05) -- --
-------- -------- ---------- ---------- --------
Increase in NAV from
investment operations .......... 0.61 0.74 0.93 1.06 0.72
Distributions from net
investment income .............. (0.57) (0.75) (0.96) (1.06) (0.72)
Increase in NAV from
share offerings................. -- -- -- -- --
Reduction in NAV from rights
offering ....................... -- -- -- -- --
Increase in NAV from repurchase
of capital stock ............... 0.05 -- -- -- --
-------- -------- ---------- ---------- --------
NAV, end of period ............. $ 10.05 $ 9.96 $ 9.97 $ 10.00 $ 10.00
======== ======== ========== ========== ========
Closing market price at
end of period .................. $ 9.13 $ -- $ -- $ -- $ --
======== ======== ========== ========== ========
TOTAL RETURN
Total investment return at
closing market price (3) ....... 10.89% -- -- -- --
Total investment return
based on NAV (4) ............... 7.29% 7.71% 9.74% 11.13% 7.35%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000's)................ $738,810 $874,104 $1,158,224 $1,036,470 $252,998
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% 1.42%(2) 1.38% 1.46%(2) 1.18%(1)(2)
Net investment income ........ 5.88% 7.62%(2) 9.71% 10.32%(2) 9.68%(1)(2)
Portfolio turnover rate ........ 81% 53% 55% 100% 49%(1)
Shares outstanding at end of
period (000's).................. 73,544 87,782 116,022 103,600 25,294
Average daily balance of debt
outstanding during the
period (000's) (7) ........... $ 636 $ 8,011 $ 2,241 $ -- $ --
Average monthly shares outstanding
during the period (000's) .... 79,394 102,267 114,350 -- --
Average amount of debt per share
during the period (7) ....... $ 0.01 $ 0.08 $ 0.02 $ -- $ --
</TABLE>
- ----------
* Commencement of operations.
-7-
<PAGE>
(1) Annualized.
(2) Prior to the waiver of expenses, the ratios of expenses to average net
assets were 1.95% (annualized), 1.48% and 1.44% for the period from May 12,
1988 to February 28, 1989, and for the fiscal years ended February 28, 1990
and February 29, 1992, respectively, and the ratios of net investment
income to average net assets were 8.91% (annualized), 10.30% and 7.60% for
the period from May 12, 1988 to February 28, 1989 and for the fiscal years
ended February 28, 1990 and February 29, 1992, respectively.
(3) Total investment return measures the change in the market value of your
investment assuming reinvestment of dividends and capital gain
distributions, if any, in accordance with the provisions of the dividend
reinvestment plan. On March 9, 1992, the shares of the Trust were initially
listed for trading on the NYSE. Accordingly, the total investment return
for the year ended February 28, 1993, covers only the period from March 9,
1992 to February 28, 1993. Total investment return for the periods prior to
the year ended February 28, 1993 is not presented since market values for
the Trust's shares were not available. Total returns for less than one year
are not annualized.
(4) Total investment return at NAV has been calculated assuming a purchase at
NAV at the beginning of each period and a sale at NAV at the end of each
period and assumes reinvestment of dividends and capital gain distributions
in accordance with the provisions of the dividend reinvestment plan. This
calculation differs from total investment return because it excludes the
effects of changes in the market values of the Trust's shares. Total
returns for less than one year are not annualized.
(5) Calculation of total return excludes the effect of the per share dilution
resulting from the rights offering as the total account value of a fully
subscribed shareholder was minimally impacted.
(6) Pilgrim Investments, the Trust's Investment Manager, acquired certain
assets of Pilgrim Management Corporation, the Trust's former investment
manager, in a transaction that closed on April 7, 1995.
(7) Prior to May 2, 1996, the Trust borrowed to enable it to purchase its
Shares in connection with periodic tender offers. On May 2, 1996, the Trust
received shareholder approval to borrow for investment purposes. As of
August 31, 1998, the Trust had outstanding borrowings of $509,000,000 under
lines of credit totaling $650,000,000. See "Policy on Borrowing" in this
section.
(8) Pilgrim Investments has agreed to reduce its fee for a period of three
years from November 12, 1996 (the expiration of the 1996 rights offering)
to 0.60% of the Trust's average daily net assets, plus the proceeds of any
outstanding borrowings, over $1.15 billion.
-8-
<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 and total assets as of August 31, 1998.
TRUST CHARACTERISTICS
- --------------------------------------------------------------------------------
Net Assets $1,152,591,504
Assets Invested in Senior Loans* $1,626,434,169
Outstanding Borrowings $ 509,000,000
Total Number of Senior Loans 152
Average Amount Outstanding per Senior Loan $ 10,700,225
Total Number of Industries 30
Portfolio Turnover Rate (year to date) 47%
Average Amount of Senior Loans per Industry $ 54,214,472
Weighted Average Days to Interest Rate Reset 43 days
Average Senior Loan Maturity 69 months
Average Age of Senior Loans Held in Portfolio 9 months
- --------------------------------------------------------------------------------
(* INCLUDES LOANS AND OTHER DEBT RECEIVED THROUGH RESTRUCTURES)
TOP 10 INDUSTRIES AS A % OF
- --------------------------------------------------------------------------------
NET ASSETS TOTAL ASSETS
Healthcare, Education and Childcare 16.0% 11.1%
Telecommunications 12.7% 8.8%
Personal, Food and Misc. Services 8.1% 5.6%
Automobile 8.0% 5.5%
Broadcasting 7.9% 5.4%
Buildings and Real Estate 7.7% 5.3%
Chemicals, Plastics and Rubber 6.9% 4.8%
Printing and Publishing 6.0% 4.1%
Electronics 5.5% 3.8%
Beverage, Food and Tobacco 5.5% 3.8%
- --------------------------------------------------------------------------------
TOP 10 SENIOR LOAN HOLDINGS AS A % OF
- --------------------------------------------------------------------------------
NET ASSETS TOTAL ASSETS
MAFCO Financial Corp. 3.5% 2.4%
NEXTEL Finance Co. 2.6% 1.8%
Laidlaw Environmental Services 2.5% 1.7%
Community Health Systems 2.1% 1.5%
Ventas, Inc. 2.0% 1.4%
Papa Gino's, Inc. 1.8% 1.2%
24-Hour Fitness, Inc. 1.7% 1.2%
American Wireless Corporation 1.7% 1.2%
Florida Panthers Holdings, Inc. 1.7% 1.2%
Patriot American Hospitality 1.7% 1.2%
- --------------------------------------------------------------------------------
-9-
<PAGE>
POLICY ON BORROWING
Beginning in May of 1996, the Trust began a policy of borrowing for
investment purposes. The Trust seeks to use proceeds from borrowing 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 currently is a
party to credit facilities with financial institutions that permit the Trust to
borrow up to $650,000,000. Interest is payable on the credit facilities by the
Trust at a variable rate that is tied to LIBOR, the federal funds rate, or a
commercial paper based rate, plus a facility fee on unused commitments. As of
____________, 1998, the Trust had outstanding borrowings of $_____________. The
lenders under the credit facilities have a security interest in all assets of
the Trust. The lenders have the right to liquidate Trust assets in the event of
default by the Trust, and the Trust may be inhibited from paying dividends in
the event of a material adverse event or condition respecting the Trust or
Investment Manager until outstanding debts are paid or until the event or
condition is cured. 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
CALENDAR ----- --- ----------------- REPORTED
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW NYSE VOLUME
- ------------- ---- --- ---- --- ---- --- -----------
<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) (6.44) 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
June 30, 1998 10.250 9.875 9.360 9.330 9.51 5.84 16,225,800
September 30, 1998 10.125 9.875 9.310 9.330 8.75 5.84 23,597,200
</TABLE>
-10-
<PAGE>
The following chart shows for the Trust's Shares for the period from March
3, 1995 to _______, 1998: (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.
[INSERT CHART]
Source: BLOOMBERG Financial Markets.
On _____, 1998, the last reported sale price of a Share of the Trust's
Shares on the NYSE was $_____. The Trust's NAV on ______, 1998 was $_____. See
"Net Asset Value" in the SAI. On ______, the last reported sale price of a share
of the Trust's Common Shares on the NYSE ($_____) represented a _____% premium
above NAV ($_____) as of that date.
The Trust's Shares have traded in the market above, at, and below NAV since
March 9, 1992, when the Trust's Shares were listed on the NYSE. The Trust cannot
predict whether its Shares will trade in the future at a premium or discount to
NAV, and if so, the level of such premium or discount. Shares of closed-end
investment companies frequently trade at a discount from NAV.
-11-
<PAGE>
INVESTMENT PERFORMANCE
MORNINGSTAR RATINGS
[TO BE UPDATED PRIOR TO GOING EFFECTIVE] For the three-year, five-year and
ten-year periods ended June 30, 1998, the Trust had a 4 star, 4 star and 5 star
Morningstar risk-adjusted performance rating, when rated among 141, 116 and 49
fixed income closed-end funds, respectively. The Trust's overall rating through
June 30, 1998, was 5 stars.1 For the three-year, five-year and ten-year periods
ended June 30, 1998, the Trust's risk score placed the Trust 1st out of 32, 30
and 24 Corporate Bond --General funds. For the three-year, five-year and
ten-year periods ended June 30, 1998, the Trust's risk score placed the Trust
1st, 2nd and 1st out of all closed-end funds (463, 386 and 108 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
_________, 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.
Periods ended Total Number of Funds
, 1998 Ranking(3) Return (3) in Category (4)
- ------------------ ---------- ---------- ---------------
One year 1 % 8
Three years 1 % 6
Five years 1 % 5
Ten Years 1 % 1
- ----------
(1) The Trust's overall rating is based on a weighted average of its
performance for the three-year and five-year periods ended ________, 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, five and
ten 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. 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.
(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.
-12-
<PAGE>
COMPARATIVE PERFORMANCE - TRAILING 12 MONTH AVERAGE
Presented below are distribution rates for the Trust for the period from
January 1, 1991 through ______, 1998. 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.
[INSERT GRAPH]
- ----------
(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,
five-year and ten-year periods ended _________, 1998 and the period of May
12, 1988 (inception of the Trust) to __________, 1998, the Trust's average
annual total returns, based on NAV and assuming all rights were exercised,
were ____%, ____%, ____% and ____%, respectively. The Trust's 30-day
standardized SEC yields as of ______, 1998 were ____% at NAV and ____% 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.
-13-
<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 Pilgrim Investments, 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
Pilgrim Investments 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 Pilgrim Investments
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 Pilgrim
Investments 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
-14-
<PAGE>
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, Pilgrim Investments 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.
Pilgrim Investments performs its own independent credit analysis of the
borrower. In so doing, Pilgrim Investments 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 other
instruments, including Hybrid Loans, unsecured loans, subordinated loans,
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), longer term debt securities, 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
Pilgrim Investments, (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 Pilgrim Investments, 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
-15-
<PAGE>
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 Pilgrim Investments 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 $650,000,000. 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."
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 $74.5 billion
in the fourth quarter of 1997 is above fourth quarter volume in each of the
preceding two years.
-16-
<PAGE>
The following plot points replace a bar chart appearing in the prospectus:
Year Volume ($bil.)
---- --------------
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 1111.9
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
-17-
<PAGE>
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
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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 Pilgrim Investments, 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 Pilgrim Investments, 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.
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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 October 31, 1998, approximately 0.88% of
the Trust's net assets and 0.62% 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
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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 average annualized interest rate on the Trust's borrowings for the six
months ended August 31, 1998 was 6.1%. At that rate, and assuming the Trust has
borrowed an amount equal to 33 1/3% of its net assets plus borrowings, the Trust
must produce a 2.03% 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, using the annualized interest rate described above and assuming
hypothetical annual returns on the Trust's portfolio of minus 10 to plus 10
percent. As can be seen, leverage generally increases the return to shareholders
when portfolio return is positive and decreases return when the portfolio return
is negative. Actual returns may be greater or less than those appearing in the
table.
Assumed Portfolio Return,
net of expenses(1) .............. (10%) (5%) 0% 5% 10%
Corresponding Return to
Common Shareholders(2) .......... (18.04%) (10.54%) (3.05%) 4.45% 11.95%
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(1) The Assumed Portfolio Return is required by regulation of the Commission
and is not a prediction of, and does not represent, the projected or actual
performance of the Trust.
(2) In order to compute the "Corresponding Return to Common Shareholders," the
"Assumed Portfolio Return" is multiplied by the total value of the Trust's
assets at the beginning of the Trust's fiscal year to obtain an assumed
return to the Trust. From this amount, all interest accrued during the year
is subtracted to determine the return available to Shareholders. The return
available to Shareholders is then divided by the total value of the Trust's
net assets as of the beginning of the fiscal year to determine the
"Corresponding Return to Common Shareholders."
SECONDARY MARKET FOR THE TRUST'S SHARES. The issuance of Shares through the
Offering may have an adverse effect on the secondary market for the Trust's
Shares. The increase in the amount of the Trust's outstanding Shares resulting
from the Offering may put downward pressure on the market price for the Shares
of the Trust. Shares will not be issued pursuant to the Offering at any time
when Shares are trading at a price lower than a price equal to the Trust's NAV
per Share plus the per Share amount of commissions to be paid to Pilgrim
Securities.
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.
When the Trust's shares are trading at a premium, the Trust may also issue
Shares of the Trust that are sold through transactions effected on the NYSE. The
increase in the amount of the Trust's outstanding Shares resulting from that
offering may also put downward pressure on the market price for the Shares of
the Trust.
LIMITED SECONDARY MARKET FOR SENIOR LOANS. Although it is growing, the
secondary market for Senior Loans is currently limited. There is no organized
exchange or board of trade on which Senior Loans may be traded; instead, the
secondary market for Senior Loans is an unregulated inter-dealer or inter-bank
market. Accordingly, some or many of the Senior Loans in which the Trust invests
will be relatively illiquid. In addition, Senior Loans in which the Trust
invests generally require the consent of the borrower prior to sale or
assignment. These consent requirements may delay or impede the Trust's ability
to sell Senior Loans. The Trust may have difficulty disposing of illiquid assets
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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 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 ________, 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 _______, 1998 was
__________, 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
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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
Pilgrim Investments, 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 Pilgrim Investments have entered
into an Investment Management Agreement that requires Pilgrim Investments to
provide all investment advisory and portfolio management services for the Trust.
It also requires Pilgrim Investments 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. Pilgrim Investments provides the
Trust with office space, equipment and personnel necessary to administer the
Trust. The agreement with Pilgrim Investments can be canceled by the Board of
Trustees upon 60 days' written notice. Organized in December 1994, Pilgrim
Investments is registered as an investment adviser with the Commission. Pilgrim
Investments 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 exceeding $5 billion as of the date of
this Prospectus.
Pilgrim Investments is an indirect, wholly-owned subsidiary of Pilgrim
America Capital Corporation ("Pilgrim Capital") (NASDAQ: PACC) (formerly,
Express America Holdings Corporation). Through its subsidiaries, Pilgrim Capital
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.
Pilgrim Investments bears its expenses of providing the services described
above. Pilgrim Investments currently receives from the Trust an annual fee, paid
monthly, of 0.80% of the average daily net assets of the Trust plus the proceeds
of any outstanding borrowings. Pilgrim Investments 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
Pilgrim Investments 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 Pilgrim Investments 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).
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JAMES R. REIS is Executive Vice President, 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 Pilgrim Group, Inc. and Pilgrim
Investments and Director (since December 1994), Vice Chairman (since
November 1995) and Assistant Secretary (since January 1995) of Pilgrim
Securities. Mr. Reis is also Executive Vice President, Assistant Secretary
of each of the other funds in the Pilgrim 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 Capital (formerly, Express America Holdings Corporation).
Mr. Reis currently serves or has served as an officer or director of other
affiliates of Pilgrim Capital.
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 and Assistant Secretary of Pilgrim Investments (since December
1994), and Senior Vice President of Pilgrim Securities (since November
1995). Mr. Norman has served as an officer of other affiliates of Pilgrim
Capital since February 1992.
JEFFREY A. BAKALAR has served as Assistant Portfolio Manager of the Trust
since January 1998. Mr. Bakalar is a Vice President of Pilgrim Investments
(since February 1998). Prior to joining Pilgrim Investments, 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, CFA, has served as Assistant Portfolio Manager of the Trust
since May 1998. Mr. Prince is a Vice President of Pilgrim Investments
(since May 1998). Prior to joining Pilgrim Investments, 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).
ROBERT L. WILSON has served as Assistant Portfolio Manager of the Trust
since July 1998. Mr. Wilson is a Vice President of Pilgrim Investments
(since July 1998). Prior to joining Pilgrim Investments, Mr. Wilson was a
Vice President of Bank of Hawaii (May 1997 - June 1998); Vice President of
Union Bank of California (November 1994 - May 1997); and Vice President, of
Bank of California (October 1990 - November 1994).
JASON T. GROOM has served as Assistant Portfolio Manager of the Trust since
July 1998. Mr. Groom is an Assistant Vice President of Pilgrim Investments
(since July 1998). Prior to joining Pilgrim Investments, Mr. Groom was an
Associate in the Corporate Finance Group of NationsBank (January 1998 -
June 1998); Assistant Vice President, Corporate Finance Group of The
Industrial Bank of Japan Limited (August 1995 - December 1997); an
Associate in the Corporate Finance Group of The Long-Term Credit Bank of
Japan Limited (August 1994 - August 1995); he received a masters degree
from the American Graduate School of International Management (1992 -
1993).
CHARLES EDWARD LEMIEUX, CFA, has served as Assistant Portfolio Manager of
the Trust since July 1998. Mr. LeMieux is an Assistant Vice President of
Pilgrim Investments (since July 1998). Prior to joining Pilgrim
Investments, Mr. LeMieux was Assistant Treasurer Cash Management with Salt
River Project (October 1993 - June 1998) and Senior Metals Trader/Senior
Financial Analyst with Phelps Dodge Corporation (January 1992 - October
1993).
THE ADMINISTRATOR
The Administrator of the Trust is Pilgrim Group, Inc. Its principal
business address is, 40 North Central Avenue, Suite 1200, Phoenix, Arizona
85004. The Administrator is a wholly-owned subsidiary of Pilgrim Capital and the
immediate parent company of Pilgrim Investments.
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Under an Administration Agreement between Pilgrim Group, Inc. and the
Trust, Pilgrim Group, Inc. administers the Trust's corporate affairs subject to
the supervision of the Trustees of the Trust. In that connection Pilgrim Group,
Inc. 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. Pilgrim Group, Inc.
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. Pilgrim Group, Inc. 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 Pilgrim Group, Inc. for the services performed and the
facilities furnished by Pilgrim Group, Inc. as Administrator a fee, computed
daily and payable monthly. The Administration Agreement states that Pilgrim
Group, Inc. 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.
United Missouri Trust Company of New York serves as a Co-Transfer
Agent/Co-Registrar for the Trust to perform certain transfer agency functions.
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 Distribution Agreement with Pilgrim
Securities, 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 Distribution
Agreement contained herein is qualified by reference to the Distribution
Agreement. Subject to the terms and conditions of the Distribution Agreement,
the Trust may issue and sell Shares of the Trust from time to time through
Pilgrim Securities, which is the principal underwriter of the Shares, through
certain broker-dealers which have entered into selected dealer agreements with
Pilgrim Securities. The Shares will only be sold on such days as shall be agreed
to by the Trust and Pilgrim Securities.
The Shares will be sold at market prices, which shall be determined with
reference to trades on the New York Stock Exchange, subject to a minimum price
to be established each day by the Trust. The minimum price on any day will not
be less than the current NAV per Share plus the per Share amount of the
commission to be paid to Pilgrim Securities. The Trust and Pilgrim Securities
will suspend the sale of Shares if the per share price of the Shares is less
than the minimum price. As of __________, 1998, the last reported sales price of
a Share of the Trust on the NYSE was $__________.
The compensation to Pilgrim Securities with respect to the Shares will be
at a fixed commission rate of 4% of the gross sales price per Share of the
Shares sold. Pilgrim Securities will compensate broker-dealers participating in
the offering at a rate of 3% of the gross sales price per Share of the Shares
purchased from the Trust by such broker-dealer. Dealer reallowance may be
changed by Pilgrim Securities from time to time.
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Settlements of sales of Shares will occur on the third business day
following the date on which any such sales are made. Unless otherwise indicated
in a further prospectus supplement, Pilgrim Securities as underwriter will act
as underwriter on a reasonable efforts basis.
In connection with the sale of the Shares on behalf of the Trust, Pilgrim
Securities may be deemed to be an underwriter within the meaning of the Act, and
the compensation of Pilgrim Securities may be deemed to be underwriting
commissions or discounts. Pilgrim Securities also serves as distributor for the
Trust in connection with the sale of shares of the Trust pursuant to privately
negotiated transactions and pursuant to optional cash investments in excess of
$5,000. In addition, Pilgrim Securities provides administrative services in
connection with a separate at-the-market offering of shares of the Trust.
The offering of Shares pursuant to the Distribution Agreement will
terminate upon the earlier of (i) the sale of all Shares subject thereto or (ii)
termination of the Distribution Agreement. The Trust and Pilgrim Securities each
have the right to terminate the Distribution Agreement in its discretion at any
time.
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 ___________, 1998, $____________ 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
Pilgrim Investments. 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
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<PAGE>
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
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 maximum federal tax rate of
20%. 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.
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.
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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 (800) 992-0180.
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<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.................................... 11
Portfolio Transactions...................................................... 12
Net Asset Value............................................................. 14
Methods Available to Reduce Market Value Discount from NAV.................. 14
Shareholder Investment Program.............................................. 15
Tax Matters................................................................. 18
Advertising and Performance Data............................................ 21
Financial Statements........................................................ 22
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<PAGE>
5,000,000 Shares of Beneficial Interest PILGRIM FUNDS
PILGRIM PRIME RATE TRUST
New York Stock Exchange Symbol: PPR
40 NORTH CENTRAL AVENUE, SUITE 1200, PHOENIX, ARIZONA 85004
(800) 992-0180
- --------------------------------------------------------------------------------
FUND ADVISORS AND AGENTS
- --------------------------------------------------------------------------------
INVESTMENT MANAGER DISTRIBUTOR
Pilgrim Investments, Inc. Pilgrim Securities, Inc.
40 North Central Avenue, Suite 1200 40 North Central Avenue, Suite 1200
Phoenix, AZ 85004-4424 Phoenix, Arizona 85004
ADMINISTRATOR TRANSFER AGENT
Pilgrim Group, Inc. DST Systems, Inc.
40 North Central Avenue, Suite 1200 P.O. Box 419368
Phoenix, AZ 85004-4424 Kansas City, Missouri 64141-6368
CUSTODIAN LEGAL COUNSEL
Investors Fiduciary Trust Company Dechert Price & Rhoads
801 Pennsylvania 1775 Eye Street, N.W.
Kansas City, Missouri 64105 Washington, D.C. 20006
INDEPENDENT AUDITORS INSTITUTIONAL INVESTORS AND ANALYSTS
KPMG Peat Marwick LLP Call Pilgrim Prime Rate Trust
725 South Figueroa Street 1-800-336-3436, Extension 8256
Los Angeles, California 90017
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE TRUST OR THE INVESTMENT MANAGER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN 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 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
___________, 1998
<PAGE>
PILGRIM PRIME RATE TRUST
STATEMENT OF ADDITIONAL INFORMATION
Pilgrim 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 are invested in Senior
Loans. The Trust is managed by Pilgrim Investments, Inc. ("Pilgrim Investments"
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 ___________, 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 Pilgrim Investments
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................................... 2
Investment Restrictions.................................................... 8
Trustees and Officers...................................................... 9
Investment Management and Other Services................................... 11
Portfolio Transactions..................................................... 12
Net Asset Value............................................................ 14
Methods Available to Reduce Market Value Discount from NAV................. 14
Shareholder Investment Program............................................. 15
Tax Matters................................................................ 18
Advertising and Performance Data........................................... 21
Financial Statements....................................................... 22
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 ____________, 1998.
<PAGE>
CHANGE OF NAME
The Trust changed its name from "Pilgrim Prime Rate Trust" to "Pilgrim America
Prime Rate Trust" in April, 1996, and then changed its name back to "Pilgrim
Prime Rate Trust" on November 16, 1998.
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 Pilgrim Investments 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,
Pilgrim Investments 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 Pilgrim Investments 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.
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<PAGE>
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 Pilgrim Investments. 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 Pilgrim Investments to be creditworthy. All relevant
facts and circumstances, including the creditworthiness of the qualified
institution, will be monitored by Pilgrim Investments, and will be considered in
making decisions with respect to the lending of portfolio instruments.
-3-
<PAGE>
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 Pilgrim Investments to be of good financial standing and when,
in the judgment of Pilgrim Investments, 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
Pilgrim Investments. 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 Pilgrim Investments 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.
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<PAGE>
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 Pilgrim Investments'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 Pilgrim Investments'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.
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<PAGE>
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
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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 Pilgrim Investments'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.
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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:
+ Issue senior securities, except insofar as the Trust may be deemed to
have issued a senior security by reason of (i) entering into certain
interest rate hedging transactions, (ii) entering into reverse
repurchase agreements, or (iii) borrowing money in an amount not
exceeding 33 1/3%, or such other percentage permitted by law, of the
Trust's total assets (including the amount borrowed) less all
liabilities other than borrowings.
+ Invest more than 25% of its total assets in any industry.
+ Invest in marketable warrants other than those acquired in conjunction
with Senior Loans and such warrants will not constitute more than 5%
of its assets.
+ Make investments in any one issuer other than U.S. Government
securities if, immediately after such purchase or acquisition, more
than 5% of the value of the Trust's total assets would be invested in
such issuer, or the Trust would own more than 25% of any outstanding
issue, except that up to 25% of the Trust's total assets may be
invested without regard to the foregoing restrictions. For the purpose
of the foregoing restriction, the Trust will consider the 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.
+ Act as an underwriter of securities, except to the extent that it may
be deemed to act as an underwriter in certain cases when disposing of
its portfolio investments or acting as an agent or one of a group of
co-agents in originating Senior Loans.
+ Purchase or sell equity securities (except that the Trust may,
incidental to the purchase or ownership of an interest in a Senior
Loan, or as part of a borrower reorganization, acquire, sell and
exercise warrants and/or acquire or sell other equity securities),
real estate, real estate mortgage loans, commodities, commodity
futures contracts, or oil or gas exploration or development programs;
or sell short, purchase or sell straddles, spreads, or combinations
thereof, or write put or call options.
+ Make loans of money or property to any person, except that the Trust
(i) may 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.
+ Purchase shares of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization.
+ Make investments on margin or hypothecate, mortgage or pledge any of
its assets except for the purpose of securing borrowings as described
above in connection with the issuance of senior securities and then
only in an amount up to 33 1/3%, or such other percentage permitted by
law, of the value of the Trust's total assets (including the amount
borrowed) less all liabilities other than borrowings.
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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 Pilgrim Investments.
Mary A. Baldwin, Ph.D, 2525 E. Camelback Road, Suite 200, Phoenix, Arizona
85016. (Age 59.) 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.
Jock Patton, 40 North Central Avenue, Suite 1200, Phoenix, Arizona 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, Arizona
85004. (Age 49.) Chairman, Chief Executive Officer, and Trustee. Chairman,
Chief Executive Officer and President of Pilgrim Group, Inc. (since
December 1994); Chairman, Pilgrim Investments, Inc. (since December 1994);
Director, Pilgrim Securities, Inc. (since December 1994); Chairman, Chief
Executive Officer and President of each of the other Pilgrim Funds (since
April 1995). Chairman and Chief Executive Officer of Pilgrim America
Capital Corporation (formerly, Express America Holdings Corporation)
("Pilgrim Capital") (since August 1990). Director and officer of other
affiliates of Pilgrim Capital.
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 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
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(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 Pilgrim Investments 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 Pilgrim Investments 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 Pilgrim Investments. 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 family of funds on which the
Trustee serves.
================================================================================
TOTAL COMPENSATION
AGGREGATE FROMTRUST AND FUND
COMPENSATION COMPLEX PAID
NAME OF PERSON, POSITION FROM TRUST TO TRUSTEES
- --------------------------------------------------------------------------------
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)(5), Trustee $ 14,667 $ 28,400 (5 boards)
Jock Patton (2)(6), Trustee $ 14,667 $ 28,400 (5 boards)
Robert W. Stallings (7), Trustee
and Chairman $ 0 $ 0 (5 boards)
================================================================================
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(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) Mr. Foerster resigned as a Trustee of the Trust effective September 30,
1998.
(6) Commenced service as a Trustee on August 28, 1995.
(7) "Interested person," as defined in the Investment Company Act, of the Trust
because of affiliation with the Investment Manager.
OFFICERS
HOWARD TIFFEN, PRESIDENT, CHIEF OPERATING OFFICER, AND SENIOR PORTFOLIO
MANAGER
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 50.)
Senior Vice President (since November 1995), Pilgrim Investments. 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 Group and Pilgrim Investments; Director (since
December 1994), Vice Chairman (since November 1995) and Assistant Secretary
(since January 1995) of Pilgrim Securities; Executive Vice President and
Assistant Secretary of each of the other Pilgrim Funds; Chief Financial
Officer (since December 1993), Vice Chairman and Assistant Secretary (since
April 1993) and former President (May 1991-December 1993), Pilgrim Capital.
Presently serves or has served as an officer or director of other
affiliates of Pilgrim Capital.
JAMES M. HENNESSY, EXECUTIVE VICE PRESIDENT 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 Capital,
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Executive Vice President and Secretary, Pilgrim Group, Pilgrim Investments,
Pilgrim Securities, and of each of the Pilgrim Funds. Presently serves or
has served as an officer of other affiliates of Pilgrim Capital.
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 Investments (since
December 1994); Senior Vice President, Pilgrim Securities (since November
1995). Formerly an officer of other affiliates of Pilgrim Capital.
MICHAEL J. ROLAND, SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 40)
Senior Vice President and Chief Financial Officer PAGI, Pilgrim Investments
Pilgrim Securities (since June 1998) and Pilgrim Financial (since August,
1998). He served in same capacity from January, 1995 - April, 1997.
Formerly Chief Financial Officer of Endeaver Group (April, 1997 to June,
1998).
ROBERT S. NAKA, VICE PRESIDENT AND ASSISTANT SECRETARY
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 35.) Vice
President, Pilgrim Investments (since April 1997) and Pilgrim Group (since
February 1997). Vice President and Assistant Secretary of each of the funds
in the Pilgrim Group of Funds. Formerly Assistant Vice President (August
1995 - February 1997), Pilgrim Group and Operations Manager (April 1992 -
April 1995), Pilgrim Group.
ROBYN L. ICHILOV, VICE PRESIDENT
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 30) Vice
President, Pilgrim Investments (since August 1997) and Pilgrim Financial
(since May 1998), Accounting Manager (since November 1995). Formerly
Assistant Vice President and Accounting Supervisor for Paine Webber (June,
1993 - April, 1995).
As of _________, 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 $5.4 billion.
The Investment Manager is a wholly owned subsidiary of Pilgrim Group, which
itself is a wholly-owned subsidiary of Pilgrim Capital, 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,
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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, Pilgrim Investments (or, prior to April 7, 1995, its predecessor) 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 Pilgrim Investments, 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 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 Pilgrim Investments; 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
Pilgrim Investments, 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 Pilgrim Investments; the fees payable to the Administrator; the fees and
expenses of Trustees who are not affiliated with Pilgrim Investments 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 (or, prior to April 7, 1995, its predecessor) 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,
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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 Pilgrim Investments 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. Pilgrim
Investments 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 Pilgrim Investments under the Investment Management Agreement
between Pilgrim Investments and the Trust. The expenses of Pilgrim Investments
will not necessarily be reduced as a result of the receipt of such supplemental
information. Pilgrim Investments 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 Pilgrim
Investments or other entities advised by Pilgrim Investments will be considered
by and may be useful to Pilgrim Investments 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.
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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 reliable. Fair value is determined by
Pilgrim Investments under procedures established and monitored by the Trust's
Board of Trustees. In valuing a loan, Pilgrim Investments 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. Pilgrim Investments 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, Pilgrim Investments 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
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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
Pilgrim Investments 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
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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 (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.
With the exception of Shares purchased in connection with optional cash
investments in excess of $5,000, 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
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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.
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.
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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 (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 (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,
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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 Trust 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 in 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 generally be taxable to shareholders at a maximum federal tax
rate of 20%. 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
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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 through the Shareholder
Investment Program 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.
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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 Capital, the Portfolio Managers,
Pilgrim Group, Inc. or affiliates of the Trust, the Investment Manager, Pilgrim
Capital or Pilgrim 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
-21-
<PAGE>
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 Funds by
Pilgrim Capital; (iv) the past performance of Pilgrim Capital and Pilgrim 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 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 and August 31, 1998 Semi-Annual Report are incorporated
herein by reference.
-22-
<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, and for the six months ended August
31, 1998.
Financial Statements are incorporated in Part B by reference to
Registrant's February 28, 1998 Annual Report (audited) and
Registrant's August 31, 1998 Semi-Annual Report (unaudited)
2. Exhibits
(a) (i) Agreement and Declaration of Trust (1)
(ii) Amendment to the Agreement and Declaration of Trust dated
March 26, 1996 and effective April 12, 1996 (1)
(iii) Amendment to the Agreement and Declaration of Trust dated
October 23, 1998 and effective November 16, 1998.
(b) (i) By-Laws (2)
(ii) Amendment to By-Laws (2)
(c) Not Applicable
(d) Not Applicable
(e) Form of Shareholder Investment Program (5)
(f) Not Applicable
(g) (i) Form of Amended and Restated Investment Management
Agreement (3)
(ii) Form of Amendment to Investment Management Agreement (6)
(h) (i) Form of Distribution Agreement
(ii) Form of Dealer Agreement*
(i) Not Applicable
C-1
<PAGE>
(j) Form of Custody Agreement (3)
(k) (i) Form of Amended and Restated Administration Agreement (3)
(ii) Form of Recordkeeping Agreement (3)
(iii) Form of Revolving Loan Agreement (6)
(iv) Form of Credit Agreement
(l) Opinion of Dechert Price & Rhoads
(m) Not Applicable
(n) Consent of KPMG Peat Marwick LLP
(o) Not Applicable
(p) Certificate of Initial Capital (4)
(q) Not Applicable
(r) Financial Data Schedule
- ----------
* To be filed by amendment.
(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. 22 to Registrant's
Registration Statement under the 1940 Act on Form N-2 (File No. 811-5410),
filed on June 23, 1997.
(4) Incorporated herein by reference to Pre-Effective Amendment No. 1 to
Registrant's initial registration statement on form N-2 (File No.
33-18886), filed on January 22, 1988.
(5) 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.
(6) Incorporated herein by reference to Amendment No. 28 to Registrant's
Registration Statement under the 1940 Act on Form N-2 (File No. 811-5410),
filed on August 19, 1998.
ITEM 25. MARKETING AGREEMENTS
Not Applicable.
C-2
<PAGE>
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................................................. $13,335.31
Trustee Fees...................................................... $ 250.00
Transfer Agent's Fees............................................. $10,000.00
Printing Expenses................................................. $10,000.00
Legal Fees........................................................ $25,000.00
New York Stock Exchange Listing Fees.............................. $17,500.00
National Association of Securities Dealers, Inc. Fees............. $ 5,296.81
Accounting Fees and Expenses...................................... $ 5,000.00
Miscellaneous Expenses............................................ $ 2,000.00
Total.................................................... $78,382.19
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
Not Applicable.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
As of October 31, 1998:
(1) TITLE OF CLASS (2) NUMBER OF RECORD HOLDERS
-------------- ------------------------
Shares of Beneficial 62,509
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.
C-3
<PAGE>
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, 801 Pennsylvania,
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;
C-4
<PAGE>
(2) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high and of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 497 if, in the aggregate, the changes
in volume and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.
(3) to include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
b. that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and
c. to remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
5. Not Applicable.
6. The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of receipt
of a written or oral request, any Statement of Additional Information.
C-5
<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 30th day of
November, 1998.
PILGRIM PRIME RATE TRUST
By: /s/ Robert W. Stallings
------------------------------
Robert W. Stallings
Chief Executive Officer
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 November 30, 1998
- --------------------------- and Trustee
Robert W. Stallings*
Chief Financial Officer November 30, 1998
- ---------------------------
Michael A. Roland*
Trustee November 30, 1998
- ---------------------------
Mary A. Baldwin*
Trustee November 30, 1998
- ---------------------------
John P. Burke*
Trustee November 30, 1998
- ---------------------------
Al Burton*
Trustee November 30, 1998
- ---------------------------
Jock Patton*
* By: /s/ Robert W. Stallings
---------------------------
Robert W. Stallings
Attorney-in-Fact**
- ----------
** Powers of attorney are included herein.
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being a duly
elected Trustee of Pilgrim America Prime Rate Trust (the "Trust"), constitutes
and appoints Robert W. Stallings, James R. Reis, James M. Hennessy, Daniel A.
Norman, Jeffrey S. Puretz and Jeffrey L. Steele and each of them, his true and
lawful attorneys-in-fact and agents with full power of substitution and
resubstitution for his in his name, place and stead, in any and all capacities,
to sign the Trust's registration statement on Form N-2 and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents full power and authority to do
and perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and conforming all that said attorneys-in-fact and agents, or any of
them, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Dated: November 2, 1998
/s/ Robert W. Stallings
------------------------------
Robert W. Stallings
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being a duly
elected Trustee of Pilgrim America Prime Rate Trust (the "Trust"), constitutes
and appoints Robert W. Stallings, James R. Reis, James M. Hennessy, Daniel A.
Norman, Jeffrey S. Puretz and Jeffrey L. Steele and each of them, her true and
lawful attorneys-in-fact and agents with full power of substitution and
resubstitution for her in her name, place and stead, in any and all capacities,
to sign the Trust's registration statement on Form N-2 and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents full power and authority to do
and perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as she might or could do in person, hereby
ratifying and conforming all that said attorneys-in-fact and agents, or any of
them, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Dated: November 2, 1998
/s/ Mary A. Baldwin
------------------------------
Mary A. Baldwin
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being a duly
elected Trustee of Pilgrim America Prime Rate Trust (the "Trust"), constitutes
and appoints Robert W. Stallings, James R. Reis, James M. Hennessy, Daniel A.
Norman, Jeffrey S. Puretz and Jeffrey L. Steele and each of them, his true and
lawful attorneys-in-fact and agents with full power of substitution and
resubstitution for his in his name, place and stead, in any and all capacities,
to sign the Trust's registration statement on Form N-2 and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents full power and authority to do
and perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and conforming all that said attorneys-in-fact and agents, or any of
them, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Dated: November 2, 1998
/s/ John P. Burke
------------------------------
John P. Burke
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being a duly
elected Trustee of Pilgrim America Prime Rate Trust (the "Trust"), constitutes
and appoints Robert W. Stallings, James R. Reis, James M. Hennessy, Daniel A.
Norman, Jeffrey S. Puretz and Jeffrey L. Steele and each of them, his true and
lawful attorneys-in-fact and agents with full power of substitution and
resubstitution for his in his name, place and stead, in any and all capacities,
to sign the Trust's registration statement on Form N-2 and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents full power and authority to do
and perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and conforming all that said attorneys-in-fact and agents, or any of
them, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Dated: November 2, 1998
/s/ Al Burton
------------------------------
Al Burton
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being a duly
elected Trustee of Pilgrim America Prime Rate Trust (the "Trust"), constitutes
and appoints Robert W. Stallings, James R. Reis, James M. Hennessy, Daniel A.
Norman, Jeffrey S. Puretz and Jeffrey L. Steele and each of them, his true and
lawful attorneys-in-fact and agents with full power of substitution and
resubstitution for his in his name, place and stead, in any and all capacities,
to sign the Trust's registration statement on Form N-2 and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents full power and authority to do
and perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and conforming all that said attorneys-in-fact and agents, or any of
them, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Dated: November 2, 1998
/s/ Jock Patton
------------------------------
Jock Patton
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being Senior
Vice President and Chief Financial Officer of Pilgrim America Prime Rate Trust
(the "Trust"), constitutes and appoints Robert W. Stallings, James R. Reis,
James M. Hennessy, Daniel A. Norman, Jeffrey S. Puretz and Jeffrey L. Steele and
each of them, his true and lawful attorneys-in-fact and agents with full power
of substitution and resubstitution for his in his name, place and stead, in any
and all capacities, to sign the Trust's registration statement on Form N-2 and
any and all amendments thereto, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and conforming all that said attorneys-in-fact and
agents, or any of them, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Dated: November 2, 1998
/s/ Michael J. Roland
------------------------------
Michael J. Roland
<PAGE>
EXHIBIT INDEX
Exhibit Number Name of Exhibit
- -------------- ---------------
2(a)(iii) Form of Amendment to the Agreement and Declaration
of Trust
2(h) Form of Distribution Agreement
2(k)(iv) Form of Credit Agreement
2(l) Opinion of Dechert Price & Rhoads
2(n) Consent of KPMG Peat Marwick
2(r)[EDGAR Exhibit 27] Financial Data Schedule
WRITTEN INSTRUMENT AMENDING
THE AGREEMENT AND DECLARATION OF TRUST
OF
PILGRIM AMERICA PRIME RATE TRUST
This Amendment to the Agreement and Declaration of Trust
("Declaration") of Pilgrim America Prime Rate Trust (the "Trust") is made this
23rd day of October, 1998 by the parties signatory hereto, as Trustees of the
Trust (the "Trustees").
WITNESSETH
WHEREAS, the Declaration of Trust was made on December 2, 1987, and
amended on April 12, 1996, and the Trustees now desire to amend the Declaration
to change the name of the Trust; and
WHEREAS, Article IX, Section 7 of the Declaration provides that the
Trustees may amend the Declaration without the vote or consent of Shareholders
to change the name of the Trust by an instrument signed by a majority of the
Trustees; and
WHEREAS, the Trustees have determined that the following amendment to
the Declaration shall not adversely affect the rights of the Shareholders the
Trust;
NOW, THEREFORE, the Trustees hereby declare that Article I, Section 1
be amended, effective November 16, 1998 to read as follows:
Section 1. NAME. This Trust shall be known as "Pilgrim Prime Rate
Trust," and the Trustees shall conduct the business of the Trust under
that name or any other name as they may from time to time determine.
IN WITNESS WHEREOF, the undersigned have executed this instrument this
23rd day of October, 1998.
- -------------------------- --------------------------
Robert W. Stallings Al Burton
- -------------------------- --------------------------
Mary A. Baldwin Jock Patton
- --------------------------
John P. Burke
<PAGE>
CERTIFICATE
Pursuant to Article IX Section 5 of the Declaration, the undersigned
Trustee hereby acknowledges and certifies that this Amendment to the Declaration
of Pilgrim America Prime Rate Trust is made in accordance with the provisions of
the Declaration and shall become effective on the 16th day of November, 1998.
IN WITNESS WHEREOF, the undersigned has executed this instrument this
23rd day of October, 1998.
-----------------------------------
Robert W. Stallings
<PAGE>
CERTIFICATE
Pursuant to Article IX Section 5 of the Declaration, the undersigned
Trustee hereby acknowledges and certifies that this Amendment to the Declaration
of Pilgrim America Prime Rate Trust is made in accordance with the provisions of
the Declaration and shall become effective on the 16th day of November, 1998.
IN WITNESS WHEREOF, the undersigned has executed this instrument this
23rd day of October, 1998.
-----------------------------------
Mary A. Baldwin
<PAGE>
CERTIFICATE
Pursuant to Article IX Section 5 of the Declaration, the undersigned
Trustee hereby acknowledges and certifies that this Amendment to the Declaration
of Pilgrim America Prime Rate Trust is made in accordance with the provisions of
the Declaration and shall become effective on the 16th day of November, 1998.
IN WITNESS WHEREOF, the undersigned has executed this instrument this
23rd day of October, 1998.
-----------------------------------
Al Burton
<PAGE>
CERTIFICATE
Pursuant to Article IX Section 5 of the Declaration, the undersigned
Trustee hereby acknowledges and certifies that this Amendment to the Declaration
of Pilgrim America Prime Rate Trust is made in accordance with the provisions of
the Declaration and shall become effective on the 16th day of November, 1998.
IN WITNESS WHEREOF, the undersigned has executed this instrument this
23rd day of October, 1998.
-----------------------------------
John P. Burke
<PAGE>
CERTIFICATE
Pursuant to Article IX Section 5 of the Declaration, the undersigned
Trustee hereby acknowledges and certifies that this Amendment to the Declaration
of Pilgrim America Prime Rate Trust is made in accordance with the provisions of
the Declaration and shall become effective on the 16th day of November, 1998.
IN WITNESS WHEREOF, the undersigned has executed this instrument this
23rd day of October, 1998.
-----------------------------------
Jock Patton
PILGRIM PRIME RATE TRUST
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
_______________, 1998
Pilgrim Securities, Inc.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
Re: DISTRIBUTION AGREEMENT
Gentlemen:
Pilgrim Prime Rate Trust is a Massachusetts business trust operating as
a closed-end management investment company (hereinafter referred to as the
"Trust"). The Trust has filed a registration statement on Form N-2 (File Nos.
333-_______ and 811-5410) (the "Registration Statement") under the Investment
Company Act of 1940, as amended (the "1940 Act") and the Securities Act of 1933,
as amended (the "1933 Act") to register shares of the Trust which may be issued
and sold from time to time.
You have informed us that Pilgrim Securities, Inc. is registered as a
broker-dealer under the provisions of the Securities Exchange Act of 1934 and is
a member in good standing of the National Association of Securities Dealers,
Inc. You have indicated your desire to act as distributor for certain of the
shares of the Trust issued pursuant to the Registration Statement. We have been
authorized by the Trust to execute and deliver this Agreement to you by a
resolution of our Board of Trustees (the "Trustees") adopted at a meeting of the
Trustees, at which a majority of Trustees, including a majority of our Trustees
who are not otherwise interested persons of our investment manager or its
related organizations, were present and voted in favor of the said resolution
approving this Agreement.
1. APPOINTMENT OF DISTRIBUTOR. Upon the execution of this
Agreement and in consideration of the agreements on your part herein expressed
and upon the terms and conditions set forth herein, we hereby appoint you as the
distributor for shares of the Trust to be issued pursuant to the Registration
Statement (the "Shares"), and agree that we will deliver to you such Shares as
you may sell. You agree to use reasonable efforts to promote the sale of the
Shares, but you are not obligated to sell any specific number of the Shares. The
Shares will only be sold on such days as shall be agreed to by you and the
Trust.
2. SELECTED DEALERS. You may enter into selected dealer
agreements, on such terms and conditions as you determine are not inconsistent
with this Agreement, with broker-dealers for the sale of the Shares. Such
selected broker-dealers shall sell Shares only at the public offering price as
set forth in the Trust's then-current Prospectus under the Registration
Statement. This Agreement shall not be construed as authorizing any dealer or
other person to accept orders for sale on our behalf or to otherwise act as our
agent for any purpose. You shall not be responsible for
<PAGE>
the acts of other dealers or agents except as and to the extent that they shall
be acting for you or under your direction or authority.
3. OFFERING PRICE. The public offering price per Share shall
be determined in accordance with the then current Prospectus of the Trust under
the Registration Statement. In no event shall the public offering price be less
than the current net asset value per Share plus the per Share amount of the
commission to be paid to you (the "Minimum Price"). You shall suspend the sale
of Shares if the per share price of the Shares is less than the Minimum Price.
4. SALES COMMISSION.
(a) You shall be entitled to receive a sales
commission from the Trust of 4% of the gross sales price per Share of the Shares
sold.
(b) You may allow selected broker-dealers such
commissions or discounts (not exceeding the total sales commission) as you shall
deem advisable, which shall be payable from the commissions payable to you under
Section 4(a) above.
5. FURNISHING OF INFORMATION. We will furnish you with copies
of the Registration Statement, and we warrant that the statements therein
contained are true and correct as of the date of the Registration Statement, as
it may be amended or supplemented from time to time. We will also furnish you
with such other information which you may reasonably request for use in
connection with the distribution of the Shares, including, at least annually,
audited financial statements of our books and accounts certified by independent
public accountants.
6. CONDUCT OF BUSINESS. Other than the currently effective
Prospectus and Statement of Additional Information, you will not use any sales
materials or statements except literature or advertising which conforms to the
requirements of federal and state securities laws and regulations and which have
been filed, where necessary, with the appropriate regulatory authorities. You
will furnish us with copies of all material prior to their use and no such
material shall be published if we shall reasonably and promptly object.
You shall comply with the applicable federal and state laws
and regulations where our shares are offered for sale and conduct your affairs
with us and with dealers, brokers or investors in accordance with the Conduct
Rules of the National Association of Securities Dealers, Inc.
7. OTHER ACTIVITIES. Your services pursuant to this Agreement
shall not be deemed to be exclusive, and you may render similar services and act
as an underwriter, distributor or dealer for other investment companies in the
offering of their shares.
<PAGE>
8. SUSPENSION OF SALES. We reserve the right at all times to
suspend or limit the public offering of the shares upon written notice to you,
and to reject any order in whole or in part.
9. PAYMENT OF EXPENSES.
(a) You shall bear all expenses incurred by you in
connection with your duties and activities under this Agreement including the
payment to selected dealers of any sales commissions for sales of the Trust's
Shares.
(b) The Trust shall bear all costs and expenses of
the Trust, including expenses (including legal fees) pertaining to the
preparation and filing of the Registration Statement and Prospectus and any
amendment or supplement thereto, and expenses pertaining to the preparation,
printing and distribution of any reports or communications to shareholders,
including Prospectuses and Statements of Additional Information, annual or
interim reports or proxy materials.
10. TERMINATION. This Agreement: (i) may be terminated by the
Trust at any time without the payment of any penalty, and (ii) may be terminated
by you at any time without the payment of any penalty. This Agreement shall
remain in full force and effect unless terminated pursuant to this provision or
by the mutual agreement of the parties.
11. MISCELLANEOUS. This Agreement shall be subject to the laws
of the State of Arizona and shall be interpreted and construed to further and
promote the operation of the Trust as a closed-end investment company.
12. STANDARD OF CARE. You shall be responsible for exercising
reasonable care in carrying out the provisions of this Agreement.
13. DECLARATION OF TRUST AND LIMITATION OF LIABILITY. A copy
of the Declaration of Trust of the Trust is on file with the Secretary of State
of the Commonwealth of Massachusetts, and notice is hereby given that this
Agreement is executed by an officer of the Trust on behalf of the trustees of
the Trust, as trustees and not individually, and that the obligations of this
Agreement with respect to the Trust shall be binding upon the assets and
properties of the Trust only and shall not be binding upon the assets or
properties of the trustees, officers, employees, agents or shareholders of the
Trust individually.
If the foregoing meets with your approval, please acknowledge
your acceptance by signing each of the enclosed counterparts hereof and
returning such counterparts to us, whereupon this shall constitute a binding
agreement as of the date first above written.
Very truly yours,
PILGRIM PRIME RATE TRUST
By:_____________________________
Agreed to and Accepted:
PILGRIM SECURITIES, INC.
By: ______________________________
================================================================================
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
DATED AS OF SEPTEMBER 2, 1998
AMONG
PILGRIM AMERICA PRIME RATE TRUST
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION,
AS SYNDICATION AGENT,
STATE STREET BANK AND TRUST COMPANY,
AS ADMINISTRATIVE AGENT,
DEUTSCHE BANK AG,
AS DOCUMENTATION AGENT,
AND
COMMERZBANK AG
AS CO-AGENT,
AND
THE OTHER FINANCIAL INSTITUTIONS PARTY HERETO
ARRANGED BY
BANCAMERICA ROBERTSON STEPHENS
================================================================================
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I
DEFINITIONS............................................................ 2
1.1 Certain Defined Terms.......................................... 2
1.2 Other Interpretive Provisions.................................. 19
1.3 Fiscal Periods................................................. 20
ARTICLE II
THE CREDITS............................................................ 21
2.1 Amounts and Terms of Commitments............................... 21
2.2 Loan Accounts.................................................. 21
2.3 Procedure for Committed Borrowing.............................. 22
2.4 Conversion and Continuation Elections for Committed Borrowings. 23
2.5 Bid Borrowings................................................. 24
2.6 Procedure for Bid Borrowings................................... 25
2.7 Voluntary Termination or Reduction of Commitments.............. 28
2.8 Prepayments.................................................... 29
2.9 Repayment...................................................... 29
2.10 Interest....................................................... 29
2.11 Fees........................................................... 31
2.12 Computation of Fees and Interest............................... 31
2.13 Payments by the Company........................................ 31
2.14 Payments by the Banks to the Administrative Agent.............. 32
2.15 Sharing of Payments, Etc....................................... 33
2.16 Subsequent Bank................................................ 34
2.17 Swing Loans.................................................... 34
2.18 Extension of Revolving Termination Date........................ 35
ARTICLE III
TAXES, YIELD PROTECTION AND ILLEGALITY................................. 36
3.1 Taxes. ........................................................ 36
3.2 Illegality..................................................... 37
3.3 Increased Costs and Reduction of Return........................ 38
3.4 Funding Losses................................................. 39
3.5 Inability to Determine Rates................................... 40
3.6 Certificates of Banks.......................................... 40
3.7 Survival....................................................... 41
i
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
ARTICLE IV
CONDITIONS PRECEDENT...................................................41
4.1 Conditions of Initial Loans....................................41
4.2 Conditions to All Borrowings...................................43
4.3. Consequences of Effectiveness, etc.............................43
4.4. Reallocation of Loans..........................................44
4.5. Amounts Outstanding Under the Original Agreement
Deemed to Be Loans Under This Agreement........................44
ARTICLE V
REPRESENTATIONS AND WARRANTIES.........................................44
5.1 Existence and Power............................................44
5.2 Registration of Company and Company's Shares...................45
5.3 Authorization; No Contravention................................45
5.4 Governmental Authorization.....................................45
5.5 Binding Effect.................................................45
5.6 Litigation.....................................................46
5.7 No Default.....................................................46
5.8 ERISA Compliance...............................................46
5.9 Use of Proceeds................................................46
5.10 Financial Condition............................................46
5.11 Taxes..........................................................47
5.12 Environmental Matters..........................................47
5.13 No Burdensome Restrictions.....................................47
5.14 Subsidiaries...................................................47
5.15 Full Disclosure................................................47
5.16 Regulations U and X............................................47
5.17 Investment Policies and Investment Restrictions................48
5.18 Advisory Contract..............................................48
5.19 Compliance with Laws...........................................48
5.20 Tax Status.....................................................48
5.21 Year 2000 Problem..............................................48
ARTICLE VI
AFFIRMATIVE COVENANTS..................................................48
6.1 Financial Statements...........................................49
ii
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
6.2 Notices........................................................50
6.3 Preservation of Existence, Etc.................................51
6.4 Insurance......................................................51
6.5 Payment of Obligations.........................................52
6.6 Compliance with Laws...........................................52
6.7 Inspection of Property and Books and Records...................52
6.8 Environmental Laws.............................................52
6.9 Investment Adviser.............................................52
6.10 Regulated Investment Company...................................53
ARTICLE VII
NEGATIVE COVENANTS.....................................................53
7.1 Limitation on Liens............................................53
7.2 Consolidations and Mergers.....................................53
7.3 Limitation on Indebtedness.....................................54
7.4 Transactions with Affiliates...................................54
7.5 Contingent Obligations.........................................54
7.6 Lease Obligations..............................................54
7.7 Business Activities; Investment Policies.......................54
7.8 Accounting Changes.............................................55
7.9 Financial Covenants............................................55
7.10 Change of Custodian or Auditor.................................55
7.11 Pension Plans..................................................55
ARTICLE VIII
EVENTS OF DEFAULT......................................................55
8.1 Event of Default...............................................55
8.2 Remedies.......................................................58
8.3 Rights Not Exclusive...........................................58
ARTICLE IX
THE AGENTS.............................................................59
9.1 Appointment and Authorization..................................59
9.2 Delegation of Duties...........................................59
9.3 Liability of Agents............................................59
9.4 Reliance by Agents.............................................60
9.5 Notice of Default..............................................60
iii
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
9.6 Credit Decision................................................60
9.7 Indemnification................................................61
9.8 Agent in Individual Capacity...................................61
9.9 Successor Agent................................................62
9.10 Withholding Tax................................................62
9.11 Other Agents...................................................64
ARTICLE X
MISCELLANEOUS..........................................................64
10.1 Amendments and Waivers.........................................64
10.2 Notices........................................................65
10.3 No Waiver; Cumulative Remedies.................................66
10.4 Costs and Expenses.............................................66
10.5 Indemnity......................................................67
10.6 Payments Set Aside.............................................68
10.7 Successors and Assigns.........................................68
10.8 Assignments, Participations, etc...............................68
10.9 Set-off........................................................71
10.10 Notification of Addresses, Lending Offices, Etc................72
10.11 Counterparts...................................................72
10.12 Severability...................................................72
10.13 No Third Parties Benefited.....................................72
10.14 Governing Law and Jurisdiction.................................72
10.15 Waiver of Jury Trial...........................................73
10.16 Entire Agreement...............................................73
10.18 Continuing Effectiveness, etc..................................73
10.19 Facsimile Execution............................................74
SCHEDULES
Schedule 2.1 Commitments and Pro Rata Shares
Schedule 7.1 Permitted Liens
Schedule 10.2 Lending Offices; Address for Notice
EXHIBITS
Exhibit A Form of Notice of Borrowing
Exhibit B Form of Notice of Conversion/Continuation
iv
<PAGE>
Exhibit C Form of Borrowing Base Certificate
Exhibit D Form of Legal Opinion of Company's Counsel
Exhibit E Form of Assignment and Acceptance
Exhibit F Form of Competitive Bid Request
Exhibit G Form of Competitive Bid
Exhibit H Form of Committed Loan Note
Exhibit I Form of Bid Loan Note
Exhibit J Form of Swing Loan Note
Exhibit K Form of Subsequent Bank Supplement
Exhibit L Form of Security Agreement
v
<PAGE>
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
This SECOND AMENDED AND RESTATED CREDIT AGREEMENT is entered into as of
September 2, 1998 by the parties hereto and amends and restates that certain
Amended and Restated Credit Agreement dated as of June 26, 1997, among Pilgrim
America Prime Rate Trust, a Massachusetts business trust (the "COMPANY"), the
several financial institutions from time to time party to this Agreement
(collectively, the "BANKS"; individually, a "BANK"), Bank of America National
Trust and Savings Association, as co-administrative agent and syndication agent
for the Banks and State Street Bank and Trust Company, as co-administrative and
paying agent for the Banks, and Deutsche Bank AG, as co-agent.
WHEREAS, the Company, certain of the Banks, Bank of America National
Trust and Savings Association, as co-administrative agent and syndication agent
for the Banks, and State Street Bank and Trust Company, as co-administrative and
paying agent for the Banks, have entered into an Amended and Restated Credit
Agreement dated as of June 26, 1997 (the "ORIGINAL AGREEMENT"), which provided
for the Banks to extend Loans to the Company from time to time; and
WHEREAS, the Company and the Banks desire to amend the Original
Agreement in certain respects, all as more fully hereinafter set forth (the
"REFINANCING");
NOW, THEREFORE, the parties hereto agree that the Credit Agreement
shall be amended and restated, as of the Refinancing Date, upon satisfaction of
the conditions set forth herein, to state in its entirety as follows:
ARTICLE I
DEFINITIONS
1.1 CERTAIN DEFINED TERMS. The following terms have the following
meanings:
"ABSOLUTE RATE" has the meaning specified in subsection
2.6(b)(ii)(D).
"ABSOLUTE RATE AUCTION" means a solicitation of Competitive Bids
setting forth Absolute Rates pursuant to Section 2.6.
"ABSOLUTE RATE BID LOAN" means a Bid Loan that bears interest at
a rate determined with reference to the Absolute Rate.
<PAGE>
"ACT" means the Investment Company Act of 1940 and the
regulations promulgated thereunder.
"ADMINISTRATIVE AGENT" means State Street in its capacity as
administrative agent for the Banks hereunder, and any successor
administrative agent arising under Section 9.9.
"AFFILIATE" of any Person means (a) any Person directly or
indirectly controlling, controlled by or under common control with
such other Person; (b) any officer, trustee, director, partner,
co-partner or employee of such other Person; (c) if such other Person
is an investment company, any investment adviser thereof or any member
of an advisory board thereof; and (d) if such other Person is an
unincorporated investment company not having a board of directors, the
board of trustees or other similar governing body.
"AGENT" means the Administrative Agent, the Documentation Agent
or the Syndication Agent.
"AGENT-RELATED PERSONS" means BofA, Deutsche, State Street and
any successor agent arising under Section 9.9, together with their
respective Affiliates (including, in the case of BofA, the Arranger),
and the officers, directors, employees, agents and attorneys-in-fact
of such Persons and Affiliates.
"AGENT'S PAYMENT OFFICE" means the address of the Agent set forth
on SCHEDULE 10.2, or such other address as the Agent may from time to
time specify.
"AGREEMENT" means this Credit Agreement.
"APPLICABLE MARGIN" means 0.40%.
"ARRANGER" means BancAmerica Robertson Stephens, a Delaware
corporation.
"ASSET COVERAGE" means, at any time, the "asset coverage" (as
defined in Section 18(h) of the Act) of the Loans; provided, however,
that in calculating total assets for the purpose of determining asset
coverage, any asset with respect to which any payment is due but
unpaid for at least five days shall be subtracted from total assets.
"ASSIGNEE" has the meaning specified in subsection 10.8(a).
3
<PAGE>
"ATTORNEY COSTS" means and includes all reasonable fees and
disbursements of any law firm or other external counsel, the allocated
cost of internal legal services and all reasonable disbursements of
internal legal counsel.
"BANK" has the meaning specified in the introductory clause
hereto.
"BANKRUPTCY CODE" means the Federal Bankruptcy Reform Act of 1978
(11 U.S.C. ss. 101, ET SEQ.).
"BASE RATE" means, for any day, the higher of:
(a) the rate of interest in effect for such day as publicly
announced from time to time by BofA in San Francisco, California,
as its "reference rate." (The "reference rate" is a rate set by
BofA based upon various factors including BofA's costs and
desired return, general economic conditions and other factors,
and is used as a reference point for pricing some loans, which
may be priced at, above, or below such announced rate); or
(b) 0.50% per annum above the latest Federal Funds Rate.
Any change in the reference rate announced by BofA shall take
effect at the opening of business on the day specified in the public
announcement of such change.
"BID BORROWING" means a Borrowing hereunder consisting of one or
more Bid Loans made to the Company on the same day by one or more
Banks.
"BID LOAN" means a Loan by a Bank to the Company under Section
2.5, which may be a LIBOR Bid Loan or an Absolute Rate Bid Loan.
"BID LOAN LENDER" means, in respect of any Bid Loan, the Bank
making such Bid Loan to the Company.
"BID LOAN NOTE" means a promissory note executed by the Company
in favor of a Bank pursuant to subsection 2.2(b), in substantially the
form of EXHIBIT I. For the avoidance of doubt, any reference in a Bid
Loan Note to provisions of this Agreement shall be deemed to mean this
Agreement as supplemented by the terms of the Competitive Bid accepted
by the Company in respect of the relevant Bid Loan evidenced by such
Bid Loan Note.
"BOFA" means Bank of America National Trust and Savings
Association, a national banking association.
4
<PAGE>
"BORROWING" means a borrowing hereunder, other than Swing Loans,
consisting of Loans made to the Company on the same day by the Banks
under Article II, and may be a Committed Borrowing or a Bid Borrowing
and, other than in the case of Federal Funds Rate Committed Loans,
having the same Interest Period.
"BORROWING BASE" has the meaning set forth in subsection 6.1(d).
"BORROWING BASE CERTIFICATE" means a certificate as defined in
subsection 6.1(d).
"BORROWING DATE" means any date on which a Borrowing occurs,
which shall under no circumstances be prior to the Closing Date.
"BUSINESS DAY" means any day other than a Saturday, Sunday or
other day on which commercial banks in Boston, New York or San
Francisco are authorized or required by law to close and, if the
applicable Business Day relates to any Offshore Rate Loan, means such
a day on which dealings are carried on in the applicable offshore
dollar interbank market.
"CAPITAL ADEQUACY REGULATION" means any guideline, request or
directive of any central bank or other Governmental Authority, or any
other law, rule or regulation, whether or not having the force of law,
in each case, regarding capital adequacy of any bank or of any
corporation controlling a bank.
"CASH EQUIVALENTS" means, at any time:
(a) any evidence of Indebtedness, maturing not more than one
year after such time, issued or guaranteed by the United States
Government;
(b) commercial paper, maturing not more than nine months
from the date of issue, which is issued by
(i) a corporation (other than an Affiliate of the
Company) organized under the laws of any state of the United
States or of the District of Columbia and rated A-1 by
Standard & Poor's Ratings Group or P-1 by Moody's Investors
Service, Inc., or
(ii) any Bank (or its holding company);
(c) any certificate of deposit or bankers' acceptance,
maturing not more than one year after such time, which is issued
by either
(i) a commercial banking institution that is a member
of the Federal Reserve System and has a combined capital and
surplus and undivided profits of not less than $500,000,000,
5
<PAGE>
PROVIDED that the deposits offered by such institution are
rated at least A-1 by Standard & Poor's Ratings Group or P-1
by Moody's Investors Service, Inc., or
(ii) any Bank, or
(d) any repurchase agreement entered into with any Bank (or
other commercial banking institution of the stature referred to
in CLAUSE (C)(I)) which
(i) is secured by a fully perfected security interest
in any obligation of the type described in any of CLAUSES
(A) through (C); and
(ii) has a market value at the time such repurchase
agreement is entered into of not less than 100% of the
repurchase obligation of such Bank (or other commercial
banking institution) thereunder.
"CHANGE OF CONTROL" means a change of control of the Investment
Adviser which would constitute an "assignment" within the meaning of
the Act of the Investment Management Agreement or the Administrative
Agreement referred to in Section 5.19.
"CLOSING DATE" means the date on which all conditions precedent
set forth in Section 4.1 are satisfied or waived by all Banks (or, in
the case of subsection 4.1(v), waived by the Person entitled to
receive such payment).
"CODE" means the Internal Revenue Code of 1986, and regulations
promulgated thereunder.
"COLLATERAL AGENT" shall have the meaning assigned to such term
in ANNEX X to the GE Capital Facility.
"COMMITMENT", as to each Bank, has the meaning specified in
Section 2.1.
"COMMITTED BORROWING" means a Borrowing hereunder consisting of
Committed Loans of the same Type made to the Company on the same day
by the Banks ratably according to their respective Commitments and, in
the case of Offshore Rate Committed Loans, having the same Interest
Periods.
"COMMITTED LOAN" means a Loan by a Bank to the Company under
Section 2.1, and may be an Offshore Rate Committed Loan or a Federal
Funds Rate Committed Loan (each, a "TYPE" of Committed Loan).
"COMMITTED LOAN NOTE" means a promissory note executed by the
Company in favor of a Bank pursuant to subsection 2.2(b), in
substantially the form of EXHIBIT H.
6
<PAGE>
"COMPANY" has the meaning specified in the introductory clause
hereto.
"COMPETITIVE BID" means an offer by a Bank to make a Bid Loan in
accordance with subsection 2.6(c).
"COMPETITIVE BID REQUEST" has the meaning specified in subsection
2.6(a).
"CONTINGENT OBLIGATION" means, as to any Person, any direct or
indirect liability of that Person, whether or not contingent, with or
without recourse, (a) with respect to any Indebtedness, lease,
dividend, letter of credit or other obligation (the "primary
obligations") of another Person (the "primary obligor"), including any
obligation of that Person (i) to purchase, repurchase or otherwise
acquire such primary obligations or any security therefor, (ii) to
advance or provide funds for the payment or discharge of any such
primary obligation, or to maintain working capital or equity capital
of the primary obligor or otherwise to maintain the net worth or
solvency or any balance sheet item, level of income or financial
condition of the primary obligor, (iii) to purchase property,
securities or services primarily for the purpose of assuring the owner
of any such primary obligation of the ability of the primary obligor
to make payment of such primary obligation, or (iv) otherwise to
assure or hold harmless the holder of any such primary obligation
against loss in respect thereof (each, a "GUARANTY OBLIGATION"); (b)
with respect to any Surety Instrument issued for the account of that
Person or as to which that Person is otherwise liable for
reimbursement of drawings or payments; (c) to purchase any materials,
supplies or other property from, or to obtain the services of, another
Person if the relevant contract or other related document or
obligation requires that payment for such materials, supplies or other
property, or for such services, shall be made regardless of whether
delivery of such materials, supplies or other property is ever made or
tendered, or such services are ever performed or tendered; or (d) in
respect of any Swap Contract. The amount of any Contingent Obligation
shall, in the case of Guaranty Obligations, be deemed equal to the
stated or determinable amount of the primary obligation in respect of
which such Guaranty Obligation is made or, if such Guaranty
Obligaamount, the maximum liability in respect thereof, or if not
stated or if indeterminable, the maximum reasonably anticipated
liability in respect thereof, and in the case of other Contingent
Obligations, shall be equal to the maximum reasonably anticipated
liability in respect thereof.
"CONTRACTUAL OBLIGATION" means, as to any Person, any provision
of any security issued by such Person or of any agreement,
undertaking, contract, indenture, mortgage, deed of trust or other
instrument, document or agreement to which such Person is a party or
by which it or any of its property is bound.
"CONVERSION/CONTINUATION DATE" means any date on which, under
Section 2.4, the Company (a) converts Committed Loans of one Type to
another Type, or (b) continues as Committed Loans of the same Type,
7
<PAGE>
but with a new Interest Period, Committed Loans having Interest
Periods expiring on such date.
"CUSTODIAN" shall have the meaning assigned to such term in ANNEX
X to the GE Capital Facility.
"CUSTODIAL AGENT" shall have the meaning assigned to such term in
ANNEX X to the GE Capital Facility.
"DEFAULT" means any event or circumstance which, with the giving
of notice, the lapse of time, or both, would (if not cured or
otherwise remedied during such time) constitute an Event of Default.
"DEPOSIT ACCOUNT" means account number 37926342 at State Street.
"DEUTSCHE" means Deutsche Bank AG.
"DOCUMENTATION AGENT" means Deutsche Bank AG in its capacity as
documentation agent for the Banks hereunder, and any successor
documentation agent arising under Section 9.9.
"DOLLARS", "DOLLARS" and "$" each mean lawful money of the United
States.
"ELIGIBLE ASSIGNEE" means (i) a commercial bank organized or
licensed under the laws of the United States, or any state thereof,
and having a combined capital and surplus of at least $100,000,000;
(ii) a commercial bank organized under the laws of any other country
which is a member of the Organization for Economic Cooperation and
Development (the "OECD"), or a political subdivision of any such
country, and having a combined capital and surplus of at least
$100,000,000, provided that such bank is acting through a branch or
agency located in the United States; and (iii) a Person that is
primarily engaged in the business of commercial banking and that is
(A) a Subsidiary of a Bank, (B) a Subsidiary of a Person of which a
Bank is a Subsidiary, or (C) a Person of which a Bank is a Subsidiary;
and (iv) any other financial institution (other than an investment
company) in good standing under the laws of any country which is a
member of the OECD and which has a combined capital and surplus of at
least $100,000,000.
"ENVIRONMENTAL CLAIMS" means all claims, however asserted, by any
Governmental Authority or other Person alleging potential liability or
responsibility for violation of any Environmental Law, or for release
or injury to the environment.
"ENVIRONMENTAL LAWS" means all federal, state or local laws,
statutes, common law duties, rules, regulations, ordinances and codes,
together with all administrative orders, directed duties, requests,
licenses, authorizations and permits of, and agreements with, any
8
<PAGE>
Governmental Authorities, in each case relating to environmental,
health, safety and land use matters.
"ERISA" means the Employee Retirement Income Security Act of
1974, and regulations promulgated thereunder.
"EURODOLLAR RESERVE PERCENTAGE" has the meaning specified in the
definition of "Offshore Rate".
"EVENT OF DEFAULT" means any of the events or circumstances
specified in Section 8.1.
"EXCHANGE ACT" means the Securities and Exchange Act of 1934 and
regulations promulgated thereunder.
"FDIC" means the Federal Deposit Insurance Corporation, and any
Governmental Authority succeeding to any of its principal functions.
"FEDERAL FUNDS RATE" means, for any day, the rate which appears
on Telerate Page 5, as quoted by Garvin Guy Butler, as of 12:00 noon
(in the case of any calculation other than the interest rate for Swing
Loans) or 9:30 a.m. (in the case of the calculation of the interest
rate for Swing Loans) New York time as the "Federal Funds Offered
Rate"; or, if any relevant day such rate is not so published, the rate
for such day will be the arithmetic mean as determined by the
Administrative Agent of the rates for the last transaction in
overnight Federal funds arranged prior to such time (Boston time) on
that day by each of three leading brokers of Federal funds
transactions in New York City selected by the Administrative Agent.
"FEDERAL FUNDS RATE COMMITTED LOAN" means a Committed Loan that
bears interest based on the Federal Funds Rate.
"FEE LETTERS" has the meaning specified in subsection 2.11(a).
"FRB" means the Board of Governors of the Federal Reserve System,
and any Governmental Authority succeeding to any of its principal
functions.
"GAAP" means generally accepted accounting principles set forth
in the opinions and pronouncements of the Accounting Principles Board
and the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards
Board (or agencies with similar functions of comparable stature and
authority within the U.S. accounting profession), which are applicable
to the circumstances as of the date of the financial statements
referred to in subsection 5.10(a) hereof.
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"GE CAPITAL FACILITY" means the Revolving Loan Agreement dated as
of July 16, 1998 among Pilgrim America Prime Rate Trust, Pilgrim
America Investments, Inc., Edison Asset Securitization, L.L.C. and
General Electric Capital Corporation.
"GOVERNMENTAL AUTHORITY" means any nation or government, any
state or other political subdivision thereof, any central bank (or
similar monetary or regulatory authority) thereof, any entity
exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government, and any
corporation or other entity owned or controlled, through stock or
capital ownership or otherwise, by any of the foregoing.
"GUARANTY OBLIGATION" has the meaning specified in the definition
of "Contingent Obligation."
"INDEBTEDNESS" of any Person means, without duplication, (a) all
indebtedness for borrowed money; (b) all obligations issued,
undertaken or assumed as the deferred purchase price of property or
services (other than trade payables entered into in the ordinary
course of business on ordinary terms); (c) all non-contingent
reimbursement or payment obligations with respect to Surety
Instruments; (d) all obligations evidenced by notes, bonds, debentures
or similar instruments, including obligations so evidenced incurred in
connection with the acquisition of property, assets or businesses; (e)
all indebtedness created or arising under any conditional sale or
other title retention agreement, or incurred as financing, in either
case with respect to property acquired by the Person (even though the
rights and remedies of the seller or bank under such agreement in the
event of default are limited to repossession or sale of such
property); (f) all obligations with respect to capital leases; (g) all
net obligations with respect to Swap Contracts; (h) all indebtedness
referred to in clauses (a) through (g) above secured by (or for which
the holder of such Indebtedness has an existing right), property
(including accounts and contracts rights) owned by such Person, even
though such Person has not assumed or become liable for the payment of
such Indebtedness; and (i) all Guaranty Obligations in respect of
indebtedness or obligations of others of the kinds referred to in
clauses (a) through (g) above.
"INDEMNIFIED LIABILITIES" has the meaning specified in Section
10.5.
"INDEMNIFIED PERSON" has the meaning specified in Section 10.5.
"INSOLVENCY PROCEEDING" means (a) any case, action or proceeding
before any court or other Governmental Authority relating to
bankruptcy, reorganization, insolvency, liquidation, receivership,
dissolution, winding-up or relief of debtors, or (b) any general
assignment for the benefit of creditors, composition, marshalling of
assets for creditors, or other, similar arrangement in respect of its
creditors generally or any substantial portion of its creditors;
undertaken under U.S. Federal, state or foreign law, including the
Bankruptcy Code.
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"INTEREST PAYMENT DATE" means, as to any Offshore Rate Loan or
Absolute Rate Bid Loan, the last day of each Interest Period
applicable to such Loan; as to any Federal Funds Rate Committed Loan,
the last Business Day of each calendar quarter; and as to any
Committed Loan, each date such Committed Loan is converted into
another Type of Committed Loan; PROVIDED, HOWEVER, that (a) if any
Interest Period for an Offshore Rate Loan exceeds three months, the
date that falls three months after the beginning of such Interest
Period and after each Interest Payment Date thereafter is also an
Interest Payment Date, and (b) as to any Bid Loan, such intervening
dates, if any, prior to the maturity thereof as may be specified by
the Company and agreed to by the applicable Bid Loan Lender in the
applicable Competitive Bid shall also be Interest Payment Dates.
"INTEREST PERIOD" means, (a) as to any Offshore Rate Loan, the
period commencing on the Borrowing Date of such Loan, or (in the case
of any Offshore Rate Committed Loan) on the Conversion/Continuation
Date on which the Loan is converted into or continued as an Offshore
Rate Committed Loan, and ending on the date one, two, three or six
months thereafter as selected by the Company in its Notice of
Borrowing, Notice of Conversion/Continuation or Competitive Bid
Request, as the case may be; and (b) as to any Absolute Rate Bid Loan,
a period of not less than 30 days and not more than 180 days as
selected by the Company in the applicable Competitive Bid Request;
PROVIDED that:
(i) if any Interest Period would otherwise end on a day that
is not a Business Day, that Interest Period shall be extended to
the following Business Day unless, in the case of an Offshore
Rate Loan, the result of such extension would be to carry such
Interest Period into another calendar month, in which event such
Interest Period shall end on the preceding Business Day;
(ii) any Interest Period pertaining to an Offshore Rate Loan
that begins on the last Business Day of a calendar month (or on a
day for which there is no numerically corresponding day in the
calendar month at the end of such Interest Period) shall end on
the last Business Day of the calendar month at the end of such
Interest Period; and
(iii) no Interest Period for any Loan shall extend beyond
the scheduled Maturity Date.
"INVESTMENT ADVISER" has the meaning specified in Section 6.9.
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"INVESTMENT POLICIES" means the policies described in the most
recent prospectus of the Company prior to the date hereof.
"INVESTMENT RESTRICTIONS" means the restrictions described in the
most recent prospectus of the Company prior to the date hereof.
"IRS" means the Internal Revenue Service, and any Governmental
Authority succeeding to any of its principal functions.
"LENDER AGENT" shall have the meaning assigned to such term in
Annex X of the GE Capital Facility.
"LENDERS" shall have the meaning assigned to such term in ANNEX X
to the GE Capital Facility.
"LENDING OFFICE" means, as to any Bank, the office or offices of
such Bank specified as its "Lending Office" or "Domestic Lending
Office" or "Offshore Lending Office", as the case may be, on SCHEDULE
10.2, or such other office or offices as such Bank may from time to
time notify the Company and the Administrative Agent.
"LIBOR RATE" means, for any Interest Period with respect to a
LIBOR Bid Loan or an Offshore Rate Committed Loan, the rate of
interest per annum determined by the Administrative Agent to be the
arithmetic mean (rounded upward, if necessary, to the nearest 1/16th
of 1%) of the rates of interest per annum notified to the
Administrative Agent by State Street as the rate of interest at which
dollar deposits in the approximate amount of, in the case of LIBOR Bid
Loans, the LIBOR Bid Loans to be borrowed in such Bid Borrowing, and,
in the case of Offshore Rate Committed Loans, the Offshore Rate
Committed Loan to be made by State Street, and having a maturity
comparable to such Interest Period, would be offered to State Street
by major banks in the London interbank market at its request at
approximately 11:00 a.m. (London time) two Business Days prior to the
commencement of such Interest Period.
"LIBOR AUCTION" means a solicitation of Competitive Bids setting
forth a LIBOR Bid Margin pursuant to Section 2.6.
"LIBOR BID LOAN" means any Bid Loan that bears interest at a rate
based upon the LIBO Rate.
"LIBOR BID MARGIN" has the meaning specified in subsection
2.6(b)(ii)(C).
"LIEN" means any security interest, mortgage, deed of trust,
pledge, hypothecation, assignment, charge or deposit arrangement,
segregated asset arrangement established in connection with reverse
repurchase transactions, encumbrance, lien (statutory or other) or
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preferential arrangement of any kind or nature whatsoever in respect
of any property (including those created by, arising under or
evidenced by any conditional sale or other title retention agreement,
the interest of a lessor under a capital lease, any financing lease
having substantially the same economic effect as any of the foregoing,
or the filing of any financing statement naming the owner of the asset
to which such lien relates as debtor, under the Uniform Commercial
Code or any comparable law) and any contingent or other agreement to
provide any of the foregoing, but not including the interest of a
lessor under an operating lease.
"LOAN" means an extension of credit by a Bank to the Company
under Article II, and may be a Committed Loan, a Bid Loan or a Swing
Loan.
"LOAN DOCUMENTS" means this Agreement, any Notes, the Security
Agreement, the Fee Letters and all other documents delivered to any
Agent or any Bank in connection herewith and therewith.
"MAJORITY BANKS" means at any time (a) prior to the Revolving
Termination Date, Banks then holding more than 50% of the then
aggregate unpaid principal amount of the Committed Loans, and (b)
after the Revolving Termination Date, Banks then holding more than 50%
of the then aggregate unpaid principal amount of the Loans; PROVIDED,
HOWEVER, that if at any time (i) prior to the Revolving Termination
Date, no Committed Loans are outstanding, or (ii) after the Revolving
Termination Date, no Loans are outstanding, Majority Banks shall mean
Banks then holding more than 50% of the Commitments.
"MARGIN STOCK" means "margin stock" as such term is defined in
Regulation T, U or X of the FRB.
"MASTER COLLATERAL AGENTS" shall have the meaning assigned to
such term in ANNEX X to the GE Capital Facility.
"MATERIAL ADVERSE EFFECT" means (a) a material adverse change in,
or a material adverse effect upon, the business, properties, condition
(financial or otherwise) or prospects of the Company; (b) a material
impairment of the ability of the Company to perform under any Loan
Document and to avoid any Event of Default; or (c) a material adverse
effect upon the legality, validity, binding effect or enforceability
against the Company of any Loan Document.
"MATURITY DATE" means the earlier to occur of (a) the date three
years after the Revolving Termination Date; and (b) the date on which
all Loans become due and payable (by acceleration or otherwise).
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"1933 ACT" means the Securities Act of 1933 and regulations
promulgated thereunder.
"NOTES" means the Committed Loan Notes, the Bid Loan Notes and
the Swing Loan Note.
"NOTICE OF BORROWING" means a notice in substantially the form of
EXHIBIT A.
"NOTICE OF CONVERSION/CONTINUATION" means a notice in
substantially the form of EXHIBIT B.
"OBLIGATIONS" means all advances, debts, liabilities,
obligations, covenants and duties arising under any Loan Document,
owing by the Company to any Bank, any Agent, or any Indemnified
Person, whether direct or indirect (including those acquired by
assignment), absolute or contingent, due or to become due, now
existing or hereafter arising.
"OFFSHORE RATE" means, for any Interest Period with respect to
Offshore Rate Committed Loans comprising part of the same Borrowing,
the rate of interest per annum (rounded upward to the nearest 1/100th
of 1%) determined by the Administrative Agent as follows:
Offshore Rate = LIBOR RATE
------------------------------------
1.00 - Eurodollar Reserve Percentage
Where,
"EURODOLLAR RESERVE PERCENTAGE" means for any day for any
Interest Period the maximum reserve percentage (expressed as a
decimal, rounded upward to the nearest 1/100th of 1%) in effect
on such day (whether or not applicable to any Bank) under
regulations issued from time to time by the FRB for determining
the maximum reserve requirement (including any emergency,
supplemental or other marginal reserve requirement) with respect
to Eurocurrency funding (currently referred to as "Eurocurrency
liabilities") having a term comparable to such Interest Period.
The Offshore Rate shall be adjusted automatically as to all
Offshore Rate Committed Loans then outstanding as of the
effective date of any change in the Eurodollar Reserve
Percentage.
"OFFSHORE RATE COMMITTED LOAN" means any Committed Loan that
bears interest based on the Offshore Rate.
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"OFFSHORE RATE LOAN" means any LIBOR Bid Loan or any Offshore
Rate Committed Loan.
"OPERATING AGENT" shall have the meaning assigned to such term in
ANNEX X to the GE Capital Facility.
"ORGANIZATION DOCUMENTS" means, for any corporation, the
certificate or articles of incorporation, the bylaws, any certificate
of designation or instrument relating to the rights of preferred
shareholders of such corporation, any shareholder rights agreement,
and all applicable resolutions of the board of directors (or any
committee thereof) of such corporation and, for any trust, its trust
agreement, bylaws, any certificate of designation or instrument
relating to the rights of preferred shareholders of such trust and all
applicable resolutions of the board of trustees (or any committee
thereof) of such trust.
"ORIGINAL AGREEMENT" is defined in the first recital to this
Agreement.
"ORIGINATING BANK" has the meaning specified in subsection
10.8(d).
"OTHER TAXES" means any present or future stamp or documentary
taxes or any other excise or property taxes, charges or similar levies
which arise from any payment made hereunder or from the execution,
delivery or registration of, or otherwise with respect to, this
Agreement or any other Loan Documents.
"PARTICIPANT" has the meaning specified in subsection 10.8(d).
"PBGC" means the Pension Benefit Guaranty Corporation, or any
Governmental Authority succeeding to any of its principal functions
under ERISA.
"PENSION PLAN" means a pension plan (as defined in Section 3(2)
of ERISA) subject to Title IV of ERISA, other than a Multiemployer
Plan, with respect to which the Company or any ERISA Affiliate may
have any liability.
"PERMITTED LIENS" has the meaning specified in Section 7.1.
"PERSON" means an individual, partnership, corporation, business
trust, joint stock company, trust, unincorporated association, joint
venture or Governmental Authority.
"PLAN" means any "pension plan" or "welfare benefit plan" as such
terms are defined under ERISA.
"PRO RATA SHARE" means, as to any Bank at any time, the
percentage equivalent (expressed as a decimal, rounded to the ninth
decimal place) at such time of such Bank's Commitment divided by the
combined Commitments of all Banks.
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"REFINANCING" is defined in the second recital to this Agreement.
"REFINANCING DATE" means September 2, 1998.
"REPORTABLE EVENT" means, any of the events set forth in Section
4043(b) of ERISA or the regulations thereunder, other than any such
event for which the 30-day notice requirement under ERISA has been
waived in regulations issued by the PBGC.
"REQUIREMENT OF LAW" means, as to any Person, any law (statutory
or common), treaty, rule or regulation or determination of an
arbitrator or of a Governmental Authority, in each case applicable to
or binding upon the Person or any of its property or to which the
Person or any of its property is subject.
"RESPONSIBLE OFFICER" means the chief executive officer, the
president, the secretary or the assistant secretary of the Company, or
any other officer having substantially the same authority and
responsibility; or, with respect to compliance with financial
covenants, the chief financial officer, the treasurer, the secretary
or the assistant secretary of the Company, or any other officer having
substantially the same authority and responsibility.
"REVOLVING TERMINATION DATE" means the earlier to occur of:
(a) September 1, 1999, as such date may be extended pursuant
to Section 2.18; and
(b) the date on which the Commitments terminate in
accordance with the provisions of this Agreement.
"SEC" means the Securities and Exchange Commission, or any
Governmental Authority succeeding to any of its principal functions.
"SECURITY AGREEMENT" means a security agreement in the form
attached as EXHIBIT L.
"STATE STREET" means State Street Bank and Trust Company, a
Massachusetts banking corporation.
"SUBSIDIARY" of a Person means any corporation, association,
partnership, joint venture or other business entity of which more than
50% of the voting stock or other equity interests (in the case of
Persons other than corporations), is owned or controlled directly or
indirectly by the Person, or one or more of the Subsidiaries of the
Person, or a combination thereof. Unless the context otherwise clearly
requires, references herein to a "Subsidiary" refer to a Subsidiary of
the Company.
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"SURETY INSTRUMENTS" means all letters of credit (including
standby and commercial), bankers' acceptances, bank guaranties,
shipside bonds, surety bonds and similar instruments.
"SWAP CONTRACTS" means swap agreements (as such term is defined
in Section 101 of the Bankruptcy Code) and any other agreements or
arrangements designed to provide protection against fluctuations in
interest or currency exchange rates or commodity prices.
"SWING LOAN" means a Loan by Administrative Agent to the Company
under Section 2.17.
"SWING LOAN NOTE" means a promissory note executed by the Company
in favor of the Administrative Agent pursuant to subsection 2.2(b), in
substantially the form of EXHIBIT J.
"SYNDICATION AGENT" means BofA in its capacity as syndication
agent for the Banks hereunder, and any successor syndication agent
arising under Section 9.9.
"TAXES" means any and all present or future taxes, levies,
imposts, deductions, charges or withholdings, and all liabilities with
respect thereto arising from any payment made hereunder or from the
execution, delivery or registration of, or otherwise with respect to,
this Agreement or any other Loan Document.
"TOTAL ASSETS" means, an amount equal to the aggregate value of
all items that would be set forth as assets on a balance sheet of such
Company on such date, prepared in accordance with the Act and the
rules and regulations under the Act. The assets of the Company shall
be valued in accordance with the Act, the rules and regulations under
the Act, and the valuation procedures set forth in its most recent
statement of additional information. Upon the written request of the
Administrative Agent, the Company shall promptly furnish all such
information as the Administrative Agent shall reasonably request
relating to the value of any asset or the assignment of values
thereto.
"TOTAL LIABILITIES" means as of any date, the aggregate amount of
all items that would be set forth as liabilities on a balance sheet of
the Company on such date in accordance with GAAP.
"TRUST AGREEMENT" means Agreement and Declaration of Trust of the
Company dated December 2, 1987, as amended April 12, 1996.
"TYPE" has the meaning specified in the definition of Committed
Loan.
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"UNFUNDED PENSION LIABILITY" means the excess of a Plan's benefit
liabilities under Section 4001(a)(16) of ERISA, over the current value
of that Plan's assets, determined in accordance with the assumptions
used for funding the Pension Plan pursuant to Section 412 of the Code
for the applicable plan year.
"UNITED STATES" and "U.S." each means the United States of
America.
"WHOLLY-OWNED SUBSIDIARY" means any corporation in which (other
than directors' qualifying shares required by law) 100% of the capital
stock of each class having ordinary voting power, and 100% of the
capital stock of every other class, in each case, at the time as of
which any determination is being made, is owned, beneficially and of
record, by the Company, or by one or more of the other Wholly-Owned
Subsidiaries, or both.
1.2 OTHER INTERPRETIVE PROVISIONS.
(a) The meanings of defined terms are equally applicable to the
singular and plural forms of the defined terms.
(b) The words "hereof", "herein", "hereunder" and similar words refer
to this Agreement as a whole and not to any particular provision of this
Agreement; and subsection, Section, Schedule and Exhibit references are to this
Agreement unless otherwise specified.
(c) (i) The term "documents" includes any and all instruments,
documents, agreements, certificates, indentures, notices and other writings,
however evidenced.
(ii) The term "including" is not limiting and means "including
without limitation."
(iii) In the computation of periods of time from a specified date
to a later specified date, the word "from" means "from and including"; the words
"to" and "until" each mean "to but excluding", and the word "through" means "to
and including."
(d) Unless otherwise expressly provided herein, (i) references to
agreements (including this Agreement and any other Loan Document) and other
contractual instruments shall be deemed to include all subsequent amendments,
supplements, restatements and other modifications thereto, but only to the
extent such amendments, supplements, restatements and other modifications are
not prohibited by the terms of any Loan Document, and (ii) references to any
statute or regulation are to be construed as including all statutory and
regulatory provisions consolidating, amending, replacing, supplementing or
interpreting the statute or regulation.
(e) The captions and headings of this Agreement are for convenience
of reference only and shall not affect the interpretation of this Agreement.
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(f) This Agreement and other Loan Documents may use several different
limitations, tests or measurements to regulate the same or similar matters. All
such limitations, tests and measurements are cumulative and shall each be
performed in accordance with their terms. Unless otherwise expressly provided
herein, any reference to any action of any Agent, the Banks or the Majority
Banks by way of consent, approval or waiver shall be deemed modified by the
phrase "in its/their sole discretion."
(g) This Agreement and the other Loan Documents are the result of
negotiations among and have been reviewed by counsel to the Agents, the Company
and the other parties, and are the products of all parties. Accordingly, they
shall not be construed against the Banks or the Agents merely because of the
Agents' or Banks' involvement in their preparation.
1.3 FISCAL PERIODS.
Unless the context otherwise clearly requires, all references herein
to "fiscal year" and "fiscal quarter" shall refer to such fiscal periods of the
Company.
ARTICLE II
THE CREDITS
2.1 AMOUNTS AND TERMS OF COMMITMENTS.
Each Bank severally agrees, on the terms and conditions set forth
herein, to make loans to the Company from time to time on any Business Day
during the period from the Refinancing Date to the Revolving Termination Date,
in an aggregate amount not to exceed at any time outstanding the amount set
forth on SCHEDULE 2.1 (as such amount may be reduced under Section 2.7 or as a
result of one or more assignments under Section 10.8, each Bank's "COMMITMENT");
PROVIDED, HOWEVER, that, after giving effect to any Committed Borrowing, the
aggregate principal amount of all outstanding Loans shall not at any time exceed
the lesser of (i) the combined Commitments or (ii) the Borrowing Base. Within
the limits of each Bank's Commitment, and subject to the other terms and
conditions hereof, the Company may borrow under this Section 2.1, prepay under
Section 2.8 and reborrow under this Section 2.1; and PROVIDED FURTHER, that the
Company shall not have Federal Funds Rate Committed Loans outstanding for 30
consecutive days or longer.
2.2 LOAN ACCOUNTS.
(a) The Loans made by each Bank shall be evidenced by one or more
loan accounts or records maintained by such Bank in the ordinary course of
business. The loan accounts or records maintained by the Administrative Agent
and each Bank shall be conclusive absent manifest error of the amount of the
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Loans made by the Banks to the Company and the interest and payments thereon.
Any failure so to record or any error in doing so shall not, however, limit or
otherwise affect the obligation of the Company hereunder to pay any amount owing
with respect to the Loans.
(b) Upon the request of any Bank made through the Administrative
Agent, the Loans made by such Bank may be evidenced by one or more Notes,
instead of loan accounts. Each such Bank shall endorse on the schedules annexed
to its Notes the date, amount and maturity of each Loan made by it and the
amount of each payment of principal made by the Company with respect thereto.
Each such Bank is irrevocably authorized by the Company to endorse its Notes and
each Bank's record shall be conclusive absent manifest error; PROVIDED, HOWEVER,
that the failure of a Bank to make, or an error in making, a notation thereon
with respect to any Loan shall not limit or otherwise affect the obligations of
the Company hereunder or under any such Note to such Bank. If Notes are
delivered to a Bank, the Committed Loans made by such Bank would be evidenced by
a Committed Loan Note, the Bid Loans made by such Bank would be evidenced by a
Bid Loan Note and, in the case of the Administrative Agent, the Swing Loans made
by the Administrative Agent would be evidenced by a Swing Loan Note.
Promptly following the Refinancing Date, each Bank that is a party to
the Original Agreement shall return to the Company for cancellation any
promissory note issued to it by the Company under the Original Agreement and not
theretofore cancelled.
2.3 PROCEDURE FOR COMMITTED BORROWING.
(a) Each Committed Borrowing shall be made upon the Company's
irrevocable written notice delivered to the Administrative Agent in the form of
a Notice of Borrowing (which notice must be received by the Administrative Agent
prior to 12:00 noon (Boston time) (i) three Business Days prior to the requested
Borrowing Date, in the case of Offshore Rate Committed Loans; and (ii) on the
requested Borrowing Date, in the case of Federal Funds Rate Committed Loans,
specifying:
(A) the amount of the Committed Borrowing, which shall be in an
aggregate minimum amount of $1,000,000 and multiples of $1,000,000;
(B) the requested Borrowing Date, which shall be a Business Day;
(C) the Type of Committed Loans comprising the Committed
Borrowing; and
(D) the duration of the Interest Period applicable to any
Offshore Rate Committed Loans included in such notice. If the Notice
of Borrowing fails to specify the duration of the Interest Period for
any Committed Borrowing comprised of Offshore Rate Committed Loans,
such Interest Period shall be three months.
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(b) The Administrative Agent will promptly notify each Bank of its
receipt of any Notice of Borrowing and of the amount of such Bank's Pro Rata
Share of that Committed Borrowing.
(c) Each Bank will make the amount of its Pro Rata Share of each
Committed Borrowing available to the Administrative Agent for the account of the
Company at the Administrative Agent's Payment Office by 2:00 p.m. (Boston time)
on the Borrowing Date requested by the Company in funds immediately available to
the Administrative Agent. The proceeds of all such Committed Loans will then be
made available to the Company by the Administrative Agent by deposit to the
Deposit Account or such other account as the Company may direct.
(d) After giving effect to any Committed Borrowing, there may not be
more than ten different Interest Periods in effect in respect of all Offshore
Rate Committed Loans and Bid Loans together then outstanding.
2.4 CONVERSION AND CONTINUATION ELECTIONS FOR COMMITTED BORROWINGS.
(a) The Company may, upon irrevocable written notice to the
Administrative Agent in accordance with subsection 2.4(b):
(i) elect, as of any Business Day, in the case of Federal Funds
Rate Committed Loans, or as of the last day of the applicable Interest
Period, in the case of Offshore Rate Committed Loans, to convert any
such Committed Loans (or any part thereof in an amount not less than
$1,000,000) into Committed Loans of the other Type; or
(ii) elect, as of the last day of the applicable Interest Period,
to continue any Offshore Rate Committed Loans having Interest Periods
expiring on such day (or any part thereof in an amount not less than
$1,000,000);
PROVIDED, that if at any time the aggregate amount of Offshore Rate Committed
Loans in respect of any Committed Borrowing is reduced, by payment, prepayment,
or conversion of part thereof, to be less than $1,000,000, such Offshore Rate
Committed Loans shall automatically convert into Federal Funds Rate Committed
Loans, and on and after such date the right of the Company to continue such
Committed Loans as, and convert such Committed Loans into, Offshore Rate
Committed Loans shall terminate.
(b) The Company shall deliver a Notice of Conversion/ Continuation to
be received by the Administrative Agent not later than 12:00 noon (Boston time)
at least (i) three Business Days in advance of the Conversion/Continuation Date,
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if the Committed Loans are to be converted into or continued as Offshore Rate
Committed Loans; and (ii) on the Conversion/Continuation Date, if Offshore Rate
Committed Loans are to be converted into Federal Funds Rate Committed Loans,
specifying:
(A) the proposed Conversion/Continuation Date;
(B) the aggregate amount of Committed Loans to be converted or
continued;
(C) the Type of Committed Loans resulting from the proposed
conversion or continuation; and
(D) other than in the case of conversions into Federal Funds Rate
Committed Loans, the duration of the requested Interest Period.
(c) If upon the expiration of any Interest Period applicable to
Offshore Rate Committed Loans, the Company has failed to select timely a new
Interest Period to be applicable to such Offshore Rate Committed Loans, or if
any Default or Event of Default then exists, the Company shall be deemed to have
elected to convert such Offshore Rate Committed Loans into Federal Funds Rate
Committed Loans effective as of the expiration date of such Interest Period.
(d) The Administrative Agent will promptly notify each Bank of its
receipt of a Notice of Conversion/Continuation, or, if no timely notice is
provided by the Company, the Administrative Agent will promptly notify each Bank
of the details of any automatic conversion. All conversions and continuations
shall be made ratably according to the respective outstanding principal amounts
of the Committed Loans with respect to which the notice was given held by each
Bank.
(e) Unless all the Banks otherwise agree, during the existence of a
Default or Event of Default, the Company may not elect to have a Committed Loan
converted into or continued as an Offshore Rate Committed Loan.
(f) After giving effect to any conversion or continuation of
Committed Loans, there may not be more than ten different Interest Periods in
effect in respect of all Offshore Rate Committed Loans and Bid Loans together
then outstanding.
2.5 BID BORROWINGS. In addition to Committed Borrowings pursuant to
Section 2.3, each Bank severally agrees that the Company may, as set forth in
Section 2.6, from time to time request the Banks prior to the Revolving
Termination Date to submit offers to make Bid Loans to the Company; PROVIDED,
HOWEVER, that the Banks may, but shall have no obligation to, submit such offers
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and the Company may, but shall have no obligation to, accept any such offers;
and PROVIDED, FURTHER, that at no time shall (a) the outstanding aggregate
principal amount of all Bid Loans made by all Banks, plus the outstanding
aggregate principal amount of all Committed Loans made by all Banks and Swing
Loans made by the Administrative Agent exceed the combined Commitments or the
Borrowing Base; (b) the outstanding aggregate principal amount of Bid Loans from
any one Bank exceed $100,000,000; (c) the outstanding aggregate principal amount
of Bid Loans made by all Banks exceed 60% of the combined Commitments; or (d)
the number of Interest Periods for Bid Loans then outstanding plus the number of
Interest Periods for Offshore Rate Committed Loans then outstanding exceed ten.
2.6 PROCEDURE FOR BID BORROWINGS.
(a) When the Company wishes to request the Banks to submit offers to
make Bid Loans hereunder, it shall transmit to the Banks by telephone call
followed promptly by facsimile transmission a notice in substantially the form
of EXHIBIT F (a "COMPETITIVE BID REQUEST") so as to be received no later than
12:00 noon (Boston time) (x) four Business Days prior to the date of a proposed
Bid Borrowing in the case of a LIBOR Auction, or (y) two Business Days prior to
the date of a proposed Bid Borrowing in the case of an Absolute Rate Auction,
specifying:
(i) the date of such Bid Borrowing, which shall be a Business
Day;
(ii) the aggregate amount of such Bid Borrowing, which shall be a
minimum amount of $5,000,000 or in multiples of $1,000,000 in excess
thereof;
(iii) whether the Competitive Bids requested are to be for LIBOR
Bid Loans or Absolute Rate Bid Loans or both; and
(iv) the duration of the Interest Period applicable thereto,
subject to the provisions of the definition of "Interest Period"
herein.
Subject to subsection 2.6(b), the Company may not request Competitive Bids for
more than three Interest Periods in a single Competitive Bid Request and may not
request Competitive Bids more than once in any period of five Business Days.
(b) (i) Each Bank may at its discretion submit a Competitive Bid
containing an offer or offers to make Bid Loans in response to any Competitive
Bid Request. Each Competitive Bid must comply with the requirements of this
subsection 2.6(b) and must be submitted to the Company by facsimile transmission
at the Company's office for notices set forth on SCHEDULE 10.2 not later than
(1) 9:30 a.m. (Boston time) three Business Days prior to the proposed Borrowing
Date, in the case of a LIBOR Auction or (2) 9:30 a.m. (Boston time) on the
proposed Borrowing Date, in the case of an Absolute Rate Auction.
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(ii) Each Competitive Bid shall be in substantially the form of
EXHIBIT G, specifying therein:
(A) the proposed Borrowing Date;
(B) the principal amount of each Bid Loan for which such
Competitive Bid is being made, which principal amount (x) may be
equal to, greater than or less than the Commitment of the quoting
Bank, (y) must be $5,000,000 or in multiples of $1,000,000 in
excess thereof, and (z) may not exceed the principal amount of
Bid Loans for which Competitive Bids were requested;
(C) in case the Company elects a LIBOR Auction, the margin
above or below the LIBO Rate (the "LIBOR BID MARGIN") offered for
each such Bid Loan, expressed as a percentage (rounded to the
nearest 1/16th of 1%) to be added to or subtracted from the
applicable LIBO Rate and the Interest Period applicable thereto;
(D) in case the Company elects an Absolute Rate Auction, the
rate of interest per annum (rounded upward to the nearest 1/100th
of 1%) (the "ABSOLUTE RATE") offered for each such Bid Loan; and
(E) the identity of the quoting Bank.
A Competitive Bid may contain up to three separate offers by the
quoting Bank with respect to each Interest Period specified in the
related Competitive Bid Request.
(iii) Any Competitive Bid shall be disregarded if it:
(A) is not substantially in conformity with EXHIBIT G or
does not specify all of the information required by subsection
(b)(ii) of this Section;
(B) contains qualifying, conditional or similar language;
(C) proposes terms other than or in addition to those set
forth in the applicable Competitive Bid Request; or
(D) arrives after the time set forth in subsection (b)(i) of
this Section.
(iv) Notwithstanding anything to the contrary contained in this
subsection 2.6(b), a Competitive Bid by any Bank may contain, and will
not be disregarded if it does contain, a restriction on the use of
proceeds thereof.
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(c) Any subsequent Competitive Bid by a Bank that amends, modifies or
is otherwise inconsistent with a previous Competitive Bid shall be disregarded
by the Company unless subsequent Competitive Bid is submitted solely to correct
a manifest error in such former Competitive Bid and only if received within the
times set forth in subsection 2.6(b). Subject only to the provisions of Sections
3.2, 3.5 and 4.2 hereof and the provisions of this subsection (c), any
Competitive Bid shall be irrevocable except with the written consent of the
Administrative Agent given on the written instructions of the Company.
(d) Not later than 10:30 a.m. (Boston time) three Business Days prior
to the proposed Borrowing Date, in the case of a LIBOR Auction, or 10:30 a.m.
(Boston time) on the proposed Borrowing Date, in the case of an Absolute Rate
Auction, the Company shall notify the Banks of its acceptance or non-acceptance
of the offers so notified to it pursuant to subsection 2.6(b). The Company shall
be under no obligation to accept any offer and may choose to reject all offers.
In the case of acceptance, such notice shall specify the aggregate principal
amount of offers for each Interest Period that is accepted. The Company may
accept any Competitive Bid in whole or in part; PROVIDED that:
(i) the aggregate principal amount of each Bid Borrowing may not
exceed the applicable amount set forth in the related Competitive Bid
Request;
(ii) the principal amount of each Bid Borrowing must be $5,000,000 or
in any multiple of $1,000,000 in excess thereof;
(iii) acceptance of offers may only be made on the basis of ascending
(i.e., from the lowest effective yield to the highest) LIBOR Bid Margins or
Absolute Rates within each Interest Period, as the case may be; and
(iv) the Company may not accept any offer that is described in
subsection 2.6(b)(iii) or that otherwise fails to comply with the
requirements of this Agreement.
(e) If offers are made by two or more Banks with the same LIBOR Bid
Margins or Absolute Rates, as the case may be, for a greater aggregate principal
amount than the amount in respect of which such offers are accepted for the
related Interest Period, the principal amount of Bid Loans in respect of which
such offers are accepted shall be allocated by the Administrative Agent among
such Banks as nearly as possible (in such multiples, not less than $1,000,000,
as the Company may deem appropriate) in proportion to the aggregate principal
amounts of such offers. Determination by the Company of the amounts of Bid Loans
shall be conclusive in the absence of manifest error.
(f) (i) The Company will promptly notify each Bank having submitted a
Competitive Bid if its offer has been accepted and, if its offer has been
accepted, of the amount of the Bid Loan or Bid Loans to be made by it on the
date of the Bid Borrowing. The Company shall also notify the Administrative
Agent of the Bid Loan or Bid Loans to be made.
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(ii) Each Bank, which has received notice pursuant to subsection
2.6(f)(i) that its Competitive Bid has been accepted, shall make the amounts of
such Bid Loans available to the Administrative Agent for the account of the
Company at the Administrative Agent's Payment Office, by 2:00 p.m. (Boston time)
on such date of Bid Borrowing, in funds immediately available to the
Administrative Agent for the account of the Company at the Administrative
Agent's Payment Office.
(iii) Promptly following each Bid Borrowing, the Company shall notify
each Bank of the ranges of bids submitted and the highest and lowest Bids
accepted for each Interest Period requested by the Company and the aggregate
amount borrowed pursuant to such Bid Borrowing.
(g) If, on or prior to the proposed Borrowing Date, the Commitments
have not been terminated and if, on such proposed Borrowing Date all applicable
conditions to funding referenced in Sections 3.2, 3.5 and 4.2 hereof are
satisfied, the Bank or Banks whose offers the Company has accepted will fund
each Bid Loan so accepted. Nothing in this Section 2.6 shall be construed as a
right of first offer in favor of the Banks or to otherwise limit the ability of
the Company to request and accept credit facilities from any Person (including
any of the Banks), provided that no Default or Event of Default would otherwise
arise or exist as a result of the Company executing, delivering or performing
under such credit facilities.
2.7 VOLUNTARY TERMINATION OR REDUCTION OF COMMITMENTS. The Company
may, upon not less than five Business Days' prior notice to the Administrative
Agent, terminate the Commitments, or permanently reduce the Commitments by an
aggregate minimum amount of $5,000,000 or a multiple of $1,000,000 in excess
thereof; UNLESS, after giving effect thereto and to any prepayments of Committed
Loans made on the effective date thereof, the then outstanding principal amount
of the Loans would exceed the amount of the combined Commitments then in effect.
Once reduced in accordance with this Section, the Commitments may not be
increased. Any reduction of the Commitments shall be applied to each Bank
according to its Pro Rata Share. All accrued facility fees to, but not including
the effective date of any reduction or termination of Commitments, shall be paid
on the effective date of such reduction or termination.
2.8 PREPAYMENTS.
(a) If at any time the outstanding principal amount of the Loans plus
other liabilities (as determined in the calculation of the Borrowing Base) shall
exceed the then-current Borrowing Base, the Company shall immediately prepay the
outstanding principal amount of such Loans or other liabilities in an amount
equal to such excess, together with interest accrued thereon and amounts
required under Section 3.4.
(b) Subject to Section 3.4, the Company may, at any time or from time
to time, ratably prepay Committed Loans in whole or in part, in minimum amounts
of $1,000,000 or multiple thereof upon irrevocable notice to the Administrative
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Agent not later than 12:00 noon (Boston time) on the date of a proposed
prepayment of Federal Funds Rate Committed Loans and three Business Days prior
to the date of a proposed prepayment of Offshore Rate Committed Loans. Such
notice of prepayment shall specify the date and amount of such prepayment and
the Type(s) of Committed Loans to be prepaid. The Administrative Agent will
promptly notify each Bank of its receipt of any such notice, and of such Bank's
Pro Rata Share of such prepayment. If such notice is given by the Company, the
Company shall make such prepayment and the payment amount specified in such
notice shall be due and payable on the date specified therein, together with
accrued interest to each such date on the amount prepaid and any amounts
required pursuant to Section 3.4.
(c) Bid Loans may not be voluntarily prepaid.
2.9 REPAYMENT.
(a) All Loans which are outstanding on the Revolving Termination Date
shall be repaid in twelve substantially equal quarterly installments. Such
installments shall be payable at quarterly intervals after the Revolving
Termination Date, commencing on a date one quarter after the Revolving
Termination Date and continuing until the Maturity Date; PROVIDED that, in any
event, all Loans shall be due and payable in full on the Maturity Date.
(b) The Company shall repay each Bid Loan on the last day of the
relevant Interest Period.
2.10 INTEREST.
(a) Each Committed Loan shall bear interest on the outstanding
principal amount thereof from the applicable Borrowing Date at a rate per annum
equal to the Offshore Rate or the Federal Funds Rate, as the case may be (and
subject to the Company's right to convert to other Types of Committed Loans
under Section 2.4), PLUS the Applicable Margin. Each Bid Loan shall bear
interest on the outstanding principal amount thereof from the relevant Borrowing
Date at a rate per annum equal to the LIBO Rate plus (or minus) the LIBOR Bid
Margin, or at the Absolute Rate, as the case may be.
(b) Interest on each Loan shall be paid in arrears on each Interest
Payment Date. Interest shall also be paid on the date of any prepayment of
Committed Loans under Section 2.8 for the portion of the Loans so prepaid and
upon payment (including prepayment) in full thereof and, during the existence of
any Event of Default, interest shall be paid on demand of the Administrative
Agent at the request or with the consent of the Majority Banks.
(c) Notwithstanding subsection (a) of this Section, while any Event
of Default exists or after acceleration, the Company shall pay interest (after
as well as before entry of judgment thereon to the extent permitted by law) on
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the principal amount of all outstanding Loans, at a rate per annum equal to the
Base Rate PLUS 2% plus the Applicable Margin per annum; PROVIDED, HOWEVER, that,
until the expiration of any Interest Period applicable to any Offshore Rate Loan
outstanding on the date of occurrence of such Event of Default or acceleration,
the principal amount of such Loan shall, during the continuation of such Event
of Default or after acceleration, bear interest at a rate per annum equal to the
rate which would otherwise be applicable with respect to such Loans PLUS 2%.
(d) Anything herein to the contrary notwithstanding, the obligations
of the Company to any Bank hereunder shall be subject to the limitation that
payments of interest shall not be required for any period for which interest is
computed hereunder, to the extent (but only to the extent) that contracting for
or receiving such payment by such Bank would be contrary to the provisions of
any law applicable to such Bank limiting the highest rate of interest that may
be lawfully contracted for, charged or received by such Bank, and in such event
the Company shall pay such Bank interest at the highest rate permitted by
applicable law.
2.11 FEES.
(a) ARRANGEMENT AND AGENCY FEES. The Company shall pay (i) an agency
fee to the Administrative Agent for its own account, as required by the letter
agreement between the Company and the Administrative Agent dated September 2,
1998; and (ii) fees to the Arranger and the Syndication Agent for the Arranger's
and the Syndication Agent's own account, as required by the letter agreement
between the Company and the Arranger dated September 2, 1998. The letters
referred to in this subsection 2.11(a) are hereinafter referred to as the "FEE
LETTERS".
(b) FACILITY FEES. The Company shall pay to the Administrative Agent
for the account of each Bank a facility fee on the average daily amount of such
Bank's Commitment (whether or not used), computed on a quarterly basis in
arrears on the last Business Day of each calendar quarter, equal to 0.10% per
annum. Such facility fee shall accrue from the Closing Date to the Maturity Date
and shall be due and payable quarterly in arrears on the last Business Day of
each March, June, September and December commencing on September 30, 1998, to
the Maturity Date, with the final payment to be made on the Maturity Date;
PROVIDED that, in connection with any reduction or termination of Commitments
under Section 2.7, the accrued facility fee calculated for the period ending on
such date shall also be paid on the date of such reduction or termination, with
the following quarterly payment being calculated on the basis of the period from
such reduction or termination date to such quarterly payment date. The facility
fees provided in this subsection shall accrue at all times after the
above-mentioned commencement date, including at any time during which one or
more conditions in Article IV are not met.
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2.12 COMPUTATION OF FEES AND INTEREST.
(a) All computations of fees and interest shall be made on the basis
of a 360-day year and actual days elapsed. Interest and fees shall accrue during
each period during which interest or such fees are computed from the first day
thereof to the last day thereof.
(b) Each determination of an interest rate by the Administrative
Agent shall be conclusive and binding on the Company and the Banks in the
absence of manifest error.
2.13 PAYMENTS BY THE COMPANY.
(a) All payments to be made by the Company shall be made without
set-off, recoupment or counterclaim. Except as otherwise expressly provided
herein, all payments by the Company shall be made to the Administrative Agent
for the account of the Banks at the Administrative Agent's Payment Office, and
shall be made in dollars and in immediately available funds, no later than 2:00
p.m. (Boston time) on the date specified herein. The Administrative Agent will
promptly distribute to each Bank its applicable share as provided herein of such
payment in like funds as received. Any payment received by the Administrative
Agent later than 2:00 p.m. (Boston time) shall be deemed to have been received
on the following Business Day and any applicable interest or fee shall continue
to accrue.
(b) Subject to the provisions set forth in the definition of
"Interest Period" herein, whenever any payment is due on a day other than a
Business Day, such payment shall be made on the following Business Day, and such
extension of time shall in such case be included in the computation of interest
or fees, as the case may be.
(c) Unless the Administrative Agent receives notice from the Company
prior to the date on which any payment is due to the Banks that the Company will
not make such payment in full as and when required, the Administrative Agent may
assume that the Company has made such payment in full to the Administrative
Agent on such date in immediately available funds and the Administrative Agent
may (but shall not be so required), in reliance upon such assumption, distribute
to each Bank on such due date an amount equal to the amount then due such Bank.
If and to the extent the Company has not made such payment in full to the
Administrative Agent, each Bank shall repay to the Administrative Agent on
demand such amount distributed to such Bank, together with interest thereon at
the Federal Funds Rate for each day from the date such amount is distributed to
such Bank until the date repaid.
2.14 PAYMENTS BY THE BANKS TO THE ADMINISTRATIVE AGENT.
(a) Unless the Administrative Agent receives notice from a Bank on or
prior to the Closing Date or, with respect to any Borrowing after the Closing
Date, at least one Business Day prior to the date of such Borrowing, that such
Bank will not make available as and when required hereunder to the
Administrative Agent for the account of the Company the amount of that Bank's
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Bid Loan or its Pro Rata Share of a Committed Borrowing, as the case may be, the
Administrative Agent may assume that each Bank has made such amount available to
the Administrative Agent in immediately available funds on the Borrowing Date
and the Administrative Agent may (but shall not be so required), in reliance
upon such assumption, make available to the Company on such date a corresponding
amount. If and to the extent any Bank shall not have made its full amount
available to the Administrative Agent in immediately available funds and the
Administrative Agent in such circumstances has made available to the Company
such amount, that Bank shall on the Business Day following such Borrowing Date
make such amount available to the Administrative Agent, together with interest
at the Federal Funds Rate for each day during such period. A notice of the
Administrative Agent submitted to any Bank with respect to amounts owing under
this subsection (a) shall be conclusive, absent manifest error. If such amount
is so made available, such payment to the Administrative Agent shall constitute
such Bank's Loan on the date of Borrowing for all purposes of this Agreement. If
such amount is not made available to the Administrative Agent on the Business
Day following the Borrowing Date, the Administrative Agent will notify the
Company of such failure to fund and, upon demand by the Administrative Agent,
the Company shall pay such amount to the Administrative Agent for the
Administrative Agent's account, together with interest thereon for each day
elapsed since the date of such Borrowing, at a rate per annum equal to the
interest rate applicaoans comprising such Borrowing.
(b) The failure of any Bank to make any Loan on any Borrowing Date
shall not relieve any other Bank of any obligation hereunder to make a Loan on
such Borrowing Date, but no Bank shall be responsible for the failure of any
other Bank to make a Loan to be made by such other Bank on any Borrowing Date.
2.15 SHARING OF PAYMENTS, ETC. If, other than as expressly provided
elsewhere herein, any Bank shall obtain on account of the Committed Loans made
by it any payment (whether voluntary, involuntary, through the exercise of any
right of set-off, or otherwise) in excess of its Pro Rata Share, such Bank shall
immediately (a) notify the Administrative Agent of such fact, and (b) purchase
from the other Banks such participations in the Committed Loans made by them as
shall be necessary to cause such purchasing Bank to share the excess payment pro
rata with each of them; PROVIDED, HOWEVER, that if all or any portion of such
excess payment is thereafter recovered from the purchasing Bank, such purchase
shall to that extent be rescinded and each other Bank shall repay to the
purchasing Bank the purchase price paid therefor, together with an amount equal
to such paying Bank's ratable share (according to the proportion of (i) the
amount of such paying Bank's required repayment to (ii) the total amount so
recovered from the purchasing Bank) of any interest or other amount paid or
payable by the purchasing Bank in respect of the total amount so recovered. The
Company agrees that any Bank so purchasing a participation from another Bank
may, to the fullest extent permitted by law, exercise all its rights of payment
(including the right of set-off, but subject to Section 10.9) with respect to
such participation as fully as if such Bank were the direct creditor of the
Company in the amount of such participation. The Administrative Agent will keep
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records (which shall be conclusive and binding in the absence of manifest error)
of participations purchased under this Section and will in each case notify the
Banks following any such purchases or repayments.
2.16 SUBSEQUENT BANK. Upon the agreement of the Company and the
Syndication Agent, one or more additional Banks ("SUBSEQUENT BANKS") may be
added to this Agreement at any time pursuant to the terms of a Subsequent Bank
Supplement substantially in the Form of EXHIBIT K hereto. Upon the addition of
such Subsequent Bank(s), the aggregate of the Commitments shall be increased to
up to $300,000,000 and each Bank's Pro Rata Share of the aggregate Commitments
shall be amended accordingly. The Subsequent Banks shall purchase and the
existing Banks shall sell such assignments of existing Loans as may be necessary
to cause the outstanding Loans of each Borrowing to equal the appropriate Pro
Rata Share.
The addition of such Subsequent Banks is further conditioned upon the
payment by the Company of any amount sufficient to compensate the existing Banks
for any cost related to breakage of existing Interest Periods or to compensate
the Subsequent Banks for the cost of funding existing Loans for the remainder of
the existing Interest Periods.
The Company agrees to deliver such Notes and other documentation as
may be necessary to evidence its obligation to the Banks after the addition of
the Subsequent Banks hereunder and under the other various Loan Documents.
2.17 SWING LOANS.
(a) MAKING OF SWING LOANS. The Administrative Agent may elect in its
sole discretion to make loans of a Federal Funds Rate Loan Type (the "SWING
LOAN(S)") to the Company solely for the Administrative Agent's own account from
time to time on or after the Closing Date and prior to the Revolving Termination
Date up to an aggregate principal amount at any one time outstanding not to
exceed $50,000,000; PROVIDED, HOWEVER, that after giving effect to any Swing
Loan, the aggregate principal amount of all outstanding Loans shall not exceed
the lesser of (i) the combined Commitments or (ii) the Borrowing Base. The
Administrative Agent may make Swing Loans (subject to the conditions precedent
set forth in SECTION 4.2), PROVIDED that the Administrative Agent received
notice no later than 2:00 p.m. (Boston time) either (i) by facsimile
transmission of a Notice of borrowing in writing or (ii) by telephone notice
from a Responsible Officer for funding of a Swing Loan on the Business Day on
which such Swing Loan is requested to be made. The Administrative Agent shall
not make any Swing Loan after the Administrative Agent becomes aware that one or
more of the conditions precedent contained in SECTION 4.2 is not satisfied until
such conditions have been satisfied or waived.
(b) LOAN REQUESTS FOR SWING LOANS. If the Company shall request by
telephone notice and obtain a Swing Loan, it shall deliver promptly by facsimile
transmission to the Administrative Agent and the Administrative Agent a Notice
of Borrowing signed by a Responsible Officer confirming such telephone notice
for a Swing Loan. If the information contained in any such Notice of borrowing
differs in any material respect from the action taken by the Administrative
Agent, the records of the Administrative Agent shall govern, absent manifest
error.
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(c) REPAYMENT OF SWING LOANS. Each outstanding Swing Loan shall be
payable on the Business Day next following the day the Swing Loan was made, with
interest at the rate applicable to Federal Funds Rate Loans accrued thereon, and
shall be subject to all the terms and conditions applicable to Loans, except
that all interest thereon shall be payable to the Administrative Agent solely
for its own account. On the due date for such Swing Loan, unless the Company
delivers or has previously delivered to the Administrative Agent a notice of its
intention to repay and does repay the Swing Loan prior to 12:00 noon (Boston
time), such Swing Loan shall automatically convert to a Federal Funds Rate Loan
under this Agreement, and each Bank (other than the Administrative Agent),
shall, absent the gross negligence or willful misconduct of the Administrative
Agent in making such Swing Loan, irrevocably and unconditionally purchase from
the Administrative Agent, without recourse or warranty, an undivided interest
and participation in such Swing Loan in an amount equal to such Bank's Pro Rata
Share and promptly pay such amount to the Administrative Agent in immediately
available funds (which payment shall be due by 2:00 p.m. (Boston time) on such
day if the Administrative Agent requests payment therefor prior to 12:00 noon
(Boston time) on such day; otherwise such payment shall be due by 2:00 p.m.
(Boston time) on the first Business Day after the Administrative Agent requests
the same). Such payment shall be made by the other Banks whether or not an Event
of Default or a Default is then continuing or any other condition precedent set
forth in SECTION 4.2 is then met and whether or not the Company has then
requested a Loan in such amount. If such amount is not in fact paid to the
Administrative Agent by any Bank, the Administrative Agent shall be entitled to
recover such amount on demand from such Bank, together with accrued interest
thereon from the due date therefor (if made prior to 2:00 p.m., Boston time) on
any Business Day until the date such amount is paid to the Administrative Agent
by such Bank, at the Federal Funds Rate. The failure of any Bank to pay such
amount to the Administrative Agent shall not relieve any other Bank of its
obligation to the Administrative Agent hereunder.
2.18 EXTENSION OF REVOLVING TERMINATION DATE. Between 60 and 45 days
prior to the Revolving Termination Date, the Company may, by notice to the
Administrative Agent, request that all Banks extend for one additional year the
Revolving Termination Date. Such extension so requested shall become effective
if (and only if) on or prior to 30 days after such notice, each Bank shall have
consented to such extension in writing by notice to the Administrative Agent. If
a Bank shall not respond to any such request, it shall be deemed to have refused
to extend. If any Bank (a "NON-EXTENDING BANK") shall not agree to such
extension, but Banks holding at least 80% of the Commitments shall agree to such
extension, the Company may request one or more of the other Banks to purchase
the Commitment of the Non-Extending Bank or, with the consent of the Agents, the
Company may request an Eligible Assignee to purchase the Commitment of the
Non-Extending Bank (any such Bank or Eligible Assignee purchasing all or a
portion of such Commitment being called a "REPLACEMENT BANK"). Any such purchase
by a Replacement Bank shall be subject to the terms of Section 10.8, except that
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the Company shall pay any cost related to breakage of existing Interest Periods
or the cost of funding existing Loans for the remainder of existing Interest
Periods. A requested extension shall not be effective unless all Non-Extending
Banks are replaced by Replacement Banks.
ARTICLE III
TAXES, YIELD PROTECTION AND ILLEGALITY
3.1 TAXES.
(a) Any and all payments by the Company to each Bank or each Agent
under this Agreement and any other Loan Document shall be made free and clear
of, and without deduction or withholding for any Taxes. In addition, the Company
shall pay all Other Taxes.
(b) The Company agrees to indemnify and hold harmless each Bank and
each Agent for the full amount of Taxes or Other Taxes (including any Taxes or
Other Taxes imposed by any jurisdiction on amounts payable under this Section)
paid by such Bank or Agent and any liability (including penalties, interest,
additions to tax and expenses) arising therefrom or with respect thereto,
whether or not such Taxes or Other Taxes were correctly or legally asserted
(other than taxes on the income of a Bank by a jurisdiction with which such Bank
has an effective connection). Payment under this indemnification shall be made
within 30 days after the date the Bank or the Agent makes written demand
therefor.
(c) If the Company shall be required by law to deduct or withhold any
Taxes or Other Taxes from or in respect of any sum payable hereunder to any Bank
or Agent, then:
(i) the sum payable shall be increased as necessary so that after
making all required deductions and withholdings (including deductions
and withholdings applicable to additional sums payable under this
Section) such Bank or Agent, as the case may be, receives an amount
equal to the sum it would have received had no such deductions or
withholdings been made;
(ii) the Company shall make such deductions and withholdings;
(iii) the Company shall pay the full amount deducted or withheld
to the relevant taxing authority or other authority in accordance with
applicable law; and
(iv) the Company shall also pay to each Bank or any Agent for the
account of such Bank, at the time interest is paid, all additional
amounts which the respective Bank specifies as necessary to preserve
the after-tax yield the Bank would have received if such Taxes or
Other Taxes had not been imposed.
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(d) Within 30 days after the date of any payment by the Company of
Taxes or Other Taxes, the Company shall furnish the Administrative Agent the
original or a certified copy of a receipt evidencing payment thereof, or other
evidence of payment reasonably satisfactory to the Administrative Agent.
(e) If the Company is required to pay additional amounts to any Bank
or Agent pursuant to subsection (c) of this Section, then such Bank shall use
reasonable efforts (consistent with legal and regulatory restrictions) to change
the jurisdiction of its Lending Office so as to eliminate any such additional
payment by the Company which may thereafter accrue, if such change in the
judgment of such Bank is not otherwise disadvantageous to such Bank.
3.2 ILLEGALITY.
(a) If any Bank determines that the introduction of any Requirement
of Law, or any change in any Requirement of Law, or in the interpretation or
administration of any Requirement of Law, has made it unlawful, or that any
central bank or other Governmental Authority has asserted that it is unlawful,
for any Bank or its applicable Lending Office to make Offshore Rate Loans, then,
on notice thereof by the Bank to the Company through the Administrative Agent,
any obligation of that Bank to make Offshore Rate Loans (including in respect of
any LIBOR Bid Loan as to which the Company has accepted such Bank's Competitive
Bid, but as to which the Borrowing Date has not arrived) shall be suspended
until the Bank notifies the Administrative Agent and the Company that the
circumstances giving rise to such determination no longer exist.
(b) If a Bank determines that it is unlawful to maintain any Offshore
Rate Loan, the Company shall, upon its receipt of notice of such fact and demand
from such Bank (with a copy to the Administrative Agent), prepay in full such
Offshore Rate Loans of that Bank then outstanding, together with interest
accrued thereon and amounts required under Section 3.4, either on the last day
of the Interest Period thereof, if the Bank may lawfully continue to maintain
such Offshore Rate Loans to such day, or immediately, if the Bank may not
lawfully continue to maintain such Offshore Rate Loan. If the Company is
required to so prepay any Offshore Rate Committed Loan, then concurrently with
such prepayment, the Company shall borrow from the affected Bank, in the amount
of such repayment, a Federal Funds Rate Committed Loan.
(c) If the obligation of any Bank to make or maintain Offshore Rate
Committed Loans has been so terminated or suspended, the Company may elect, by
giving notice to the Bank through the Administrative Agent that all Loans which
would otherwise be made by the Bank as Offshore Rate Committed Loans shall be
instead Federal Funds Rate Committed Loans.
(d) Before giving any notice to the Administrative Agent under this
Section, the affected Bank shall designate a different Lending Office with
respect to its Offshore Rate Loans if such designation will avoid the need for
giving such notice or making such demand and will not, in the judgment of the
Bank, be illegal or otherwise disadvantageous to the Bank.
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3.3 INCREASED COSTS AND REDUCTION OF RETURN.
(a) If any Bank determines that, due to either (i) the introduction
of or any change (other than any change by way of imposition of or increase in
reserve requirements included in the calculation of the Offshore Rate) in or in
the interpretation of any law or regulation or (ii) the compliance by that Bank
with any guideline or request from any central bank or other Governmental
Authority (whether or not having the force of law), there shall be any increase
in the cost to such Bank of agreeing to make or making, funding or maintaining
any Offshore Rate Loans, then the Company shall be liable for, and shall from
time to time, upon demand (with a copy of such demand to be sent to the
Administrative Agent), pay to the Administrative Agent for the account of such
Bank, additional amounts as are sufficient to compensate such Bank for such
increased costs.
(b) If any Bank shall have determined that (i) the introduction of
any Capital Adequacy Regulation, (ii) any change in any Capital Adequacy
Regulation, (iii) any change in the interpretation or administration of any
Capital Adequacy Regulation by any central bank or other Governmental Authority
charged with the interpretation or administration thereof, or (iv) compliance by
the Bank (or its Lending Office) or any corporation controlling the Bank with
any Capital Adequacy Regulation, affects or would affect the amount of capital
required or expected to be maintained by the Bank or any corporation controlling
the Bank and (taking into consideration such Bank's or such corporation's
policies with respect to capital adequacy and such Bank's desired return on
capital) determines that the amount of such capital is increased as a
consequence of its Commitment, Loans, credits or obligations under this
Agreement above what such Bank or corporation would have been required to
maintain but for the occurrence of such circumstances, then, upon demand of such
Bank to the Company through the Administrative Agent, the Company shall pay to
the Bank, from time to time as specified by the Bank, additional amounts
sufficient to compensate the Bank for such increase.
(c) No Bank shall be entitled to compensation under this Section 3.3
for any costs incurred or reduction suffered with respect to any date that it
has such costs unless it shall have notified the Company that it will demand
compensation for such costs or reductions under paragraph (a) or (b) above, as
applicable, not more than 120 days after the later of (i) such date and (ii) the
date on which it shall have become aware of such costs or reductions; provided,
however, that the Company shall not be responsible for any amount in excess of
its allocated share of such cost incurred or reductions suffered by the Company.
3.4 FUNDING LOSSES. The Company shall reimburse each Bank and hold
each Bank harmless from any loss or expense (other than lost profits) which the
Bank may sustain or incur as a consequence of:
(a) the failure of the Company to make on a timely basis any payment
of principal of any Offshore Rate Loan;
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(b) the failure of the Company to borrow a Loan or continue or
convert a Committed Loan after the Company has given (or is deemed to have
given) a Notice of Borrowing or a Notice of Conversion/Continuation;
(c) the failure of the Company to make any prepayment of any
Committed Loan in accordance with any notice delivered under Section 2.8;
(d) the prepayment (including pursuant to Section 2.8) or other
payment (including after acceleration thereof) of any Offshore Rate Loan, or
Absolute Rate Bid Loan on a day that is not the last day of the relevant
Interest Period; or
(e) the automatic conversion under Section 2.4 of any Offshore Rate
Committed Loan to a Federal Funds Rate Committed Loan on a day that is not the
last day of the relevant Interest Period;
including any such loss or expense arising from the liquidation or reemployment
of funds obtained by it to maintain its Offshore Rate Loans or from fees payable
to terminate the deposits from which such funds were obtained. For purposes of
calculating amounts payable by the Company to the Banks under this Section and
under subsection 3.3(a), each Offshore Rate Loan made by a Bank (and each
related reserve, special deposit or similar requirement) shall be conclusively
deemed to have been funded at the LIBO Rate used in determining the Offshore
Rate for such Offshore Rate Loan by a matching deposit or other borrowing in the
interbank eurodollar market for a comparable amount and for a comparable period,
whether or not such Offshore Rate Loan is in fact so funded.
3.5 INABILITY TO DETERMINE RATES. If the Administrative Agent or the
Majority Banks determine that for any reason adequate and reasonable means do
not exist for determining the LIBO Rate for any requested Interest Period with
respect to a proposed Offshore Rate Loan, or that the LIBO Rate applicable
pursuant to subsection 2.10(a) for any requested Interest Period with respect to
a proposed Offshore Rate Loan does not adequately and fairly reflect the cost to
the Banks of funding such Loan, the Administrative Agent will promptly so notify
the Company and each Bank. Thereafter, the obligation of the Banks to make or
maintain Offshore Rate Loans hereunder shall be suspended until the
Administrative Agent, upon the instruction of the Majority Banks, revokes such
notice in writing. Upon receipt of such notice, the Company may revoke any
Notice of Borrowing or Notice of Conversion/Continuation then submitted by it.
If the Company does not revoke such Notice, the Banks shall make, convert or
continue the Committed Loans, as proposed by the Company, in the amount
specified in the applicable notice submitted by the Company, but such Committed
Loans shall be made, converted into or continued as Federal Funds Rate Committed
Loans.
3.6 CERTIFICATES OF BANKS. Any Bank claiming reimbursement or
compensation under this Article III shall deliver to the Company (with a copy to
the Administrative Agent) a certificate setting forth in reasonable detail the
amount payable to the Bank hereunder and the Bank's calculations thereof and
such certificate shall be conclusive and binding on the Company in the absence
of manifest error.
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3.7 SURVIVAL. The agreements and obligations of the Company in this
Article III shall survive the payment of all other Obligations.
ARTICLE IV
CONDITIONS PRECEDENT
4.1 CONDITIONS OF INITIAL LOANS. This Agreement shall become
effective on the Refinancing Date. The occurrence of the Refinancing shall be
subject to the prior or concurrent satisfaction of each of the following
conditions precedent:
(a) DOCUMENTATION. Receipt by the Administrative Agent on or
before the Refinancing Date of (i) evidence, in form and substance satisfactory
to the Administrative Agent, that the GE Capital Facility shall have closed and
(ii) all of the following, in form and substance satisfactory to the
Administrative Agent and each Bank, and in sufficient copies for the
Administrative Agent and each Bank:
(i) CREDIT AGREEMENT. This Agreement executed by each party
thereto;
(ii) RESOLUTIONS; INCUMBENCY.
(A) Copies of the resolutions of the board of trustees of
the Company authorizing the transactions contemplated hereby,
certified as of the Refinancing Date by the Secretary or an
Assistant Secretary of the Company and
(B) A certificate of the Secretary or Assistant Secretary of
the Company certifying the names and true signatures of the
officers of the Company authorized to execute, deliver and
perform, as applicable, this Agreement, and all other Loan
Documents to be delivered by it hereunder;
(iii) ORGANIZATION DOCUMENTS; GOOD STANDING. Each of the
following documents:
(A) to the extent not previously delivered to the
Syndication Agent, any amendment to the Trust Agreement,
certified by the Secretary or Assistant Secretary of the Company
as of the initial Borrowing Date; and
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(B) a good standing certificate from the Company issued by
the Secretary of State of the Commonwealth of Massachusetts.
(iv) SECURITY AGREEMENT. The Security Agreement duly executed by
the parties thereto, together with evidence, satisfactory to the
Administrative Agent, that all filings and other actions reasonably
intended to perfect the Administrative Agent's Lien on any collateral
granted under the Security Agreement have been duly made and done and
are in full force and effect and together with certified copies of the
Intercreditor Agreement and Custody Agreement referred to therein.
(v) LEGAL OPINION. An opinion of Dechert Price & Rhoads, counsel
to the Company, addressed to the Agents and the Banks, substantially
in the form of EXHIBIT D;
(vi) PAYMENT OF FEES. Evidence of payment by the Company of all
accrued and unpaid fees, costs and expenses to the extent then due and
payable on the Refinancing Date, together with Attorney Costs of BofA
to the extent invoiced prior to or on the Refinancing Date; including
any such costs, fees and expenses arising under or referenced in
Sections 2.11 and 10.4;
(vii) CERTIFICATE. A certificate signed by a Responsible Officer,
dated as of the Refinancing Date, stating that:
(A) the representations and warranties contained in Article
V are true and correct on and as of such date, as though made on
and as of such date;
(B) no Default or Event of Default exists; and
(C) there has occurred since February 28, 1998, no event or
circumstance that has resulted or could reasonably be expected to
result in a Material Adverse Effect; and
(viii) OTHER DOCUMENTS. Such other approvals, opinions, documents
or materials as the Agent or any Bank may request.
4.2 CONDITIONS TO ALL BORROWINGS. The obligation of each Bank to make
any Committed Loan to be made by it (other than the reimbursement of a Swing
Loan pursuant to Section 2.17), or any Bid Loan as to which the Company has
accepted the relevant Competitive Bid (including its initial Loan) or of State
Street to make any Swing Loan, is subject to the satisfaction of the following
conditions precedent on the relevant Borrowing Date:
(a) NOTICE OF BORROWING. As to any Committed Loan, the Administrative
Agent shall have received (with a copy for each Bank) a Notice of Borrowing;
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(b) CONTINUATION OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties in Article V shall be true and correct on and as
of such Borrowing Date with the same effect as if made on and as of such
Borrowing Date (except to the extent such representations and warranties
expressly refer to an earlier date, in which case they shall be true and correct
as of such earlier date);
(c) NO EXISTING DEFAULT. No Default or Event of Default shall exist
or shall result from such Borrowing; and
(d) BORROWING BASE CERTIFICATE. The Administrative Agent shall have
received a Borrowing Base Certificate giving effect to the proposed Loan dated
within two Business Days of such Loan.
Each Notice of Borrowing and Competitive Bid Request submitted by the Company
hereunder shall constitute a representation and warranty by the Company
hereunder, as of the date of each such notice or request and as of each
Borrowing Date, that the conditions in Section 4.2 are satisfied.
SECTION 4.3 CONSEQUENCES OF EFFECTIVENESS, ETC. On the Refinancing
Date the Original Agreement shall be automatically amended and restated to read
as set forth herein. On and after the Refinancing Date the rights and
obligations of the parties hereto shall be governed by this Agreement; PROVIDED
that rights and obligations of the parties hereto with respect to the period
prior to the Refinancing Date shall continue to be governed by the provisions of
the Original Agreement. On the Refinancing Date, the Pro Rata Share of each Bank
shall immediately become the percentage set forth opposite the name of such Bank
on SCHEDULE 2.1. With effect from and including the Refinancing Date, each
Person listed on the signature pages hereof that is not a party to the Original
Agreement shall become a party to this Agreement. Any Bank that is a party to
the Original Agreement whose Pro Rata Share becomes 0% on the occurrence of the
Refinancing shall, upon the occurrence thereof and the reallocation of Loans
pursuant to SECTION 4.4, cease to be a Bank party to this Agreement, and all
accrued fees and other amounts payable under the Original Agreement for the
account of such Bank shall be due and payable on such date; PROVIDED that the
provisions of SECTIONS 3.1, 3.3, 3.4, 10.4 and 10.5 shall continue to inure to
the benefit of each such Bank.
SECTION 4.4 REALLOCATION OF LOANS. On the occurrence of the
Refinancing, (a) each Bank that, as a result of the adjustment of the Pro Rata
Shares, is to have a greater principal amount of Loans outstanding than such
Bank had outstanding immediately prior to the occurrence of the Refinancing
shall, if requested by the Administrative Agent, deliver to the Administrative
Agent immediately available funds to cover such Loans (and the Administrative
Agent shall, to the extent of the funds so received and the funds received from
any Banks that are not parties to the Original Agreement, disburse funds to each
Bank that, as a result of such adjustment of the Pro Rata Shares, is to have a
lesser principal amount outstanding than such Bank had outstanding under the
Original Agreement), and (b) immediately prior to the Refinancing each Bank that
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is not a party to the Original Agreement shall deliver to the Administrative
Agent immediately available funds to cover its Loans that will equal such Bank's
Pro Rata Share of the aggregate principal amount outstanding under this
Agreement immediately after the occurrence of the Refinancing.
SECTION 4.5 AMOUNTS OUTSTANDING UNDER THE ORIGINAL AGREEMENT DEEMED
TO BE LOANS UNDER THIS Agreement. The principal amounts of Loans owing under the
Original Agreement as at the Refinancing Date to each Bank that is a party
thereto (as reallocated pursuant to this Agreement) shall be deemed to be Loans
made by that Bank hereunder.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to each Agent and each Bank that:
5.1 EXISTENCE AND POWER. The Company:
(a) is a business trust duly organized, validly existing and in good
standing under the laws of Massachusetts;
(b) has the power and authority and all governmental licenses,
authorizations, consents and approvals to own its assets, carry on its business
and to execute, deliver, and perform its obligations under the Loan Documents;
(c) is duly qualified and is licensed and in good standing under the
laws of each jurisdiction where its ownership, lease or operation of property or
the conduct of its business requires such qualification or license; and
(d) is in compliance with all Requirements of Law; except, in each
case referred to in clause (c) or clause (d), to the extent that the failure to
do so could not reasonably be expected to have a Material Adverse Effect.
5.2 REGISTRATION OF COMPANY AND COMPANY'S SHARES. The Company is a
registered investment company under the Act and has registered the sale of its
shares under the 1933 Act and the Act.
5.3 AUTHORIZATION; NO CONTRAVENTION. The execution, delivery and
performance by the Company of this Agreement and each other Loan Document to
which the Company is party, have been duly authorized by all necessary corporate
action, and do not and will not:
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(a) contravene the terms of any of the Company's Organization
Documents;
(b) conflict with or result in any breach or contravention of, or the
creation of any Lien under, any document evidencing any Contractual Obligation
to which the Company is a party or any order, injunction, writ or decree of any
Governmental Authority to which the Company or its property is subject;
(c) violate any Requirement of Law; or
(d) violate the Investment Policies or Investment Restrictions.
5.4 GOVERNMENTAL AUTHORIZATION. No approval, consent, exemption,
authorization, or other action by, or notice to, or filing with, any
Governmental Authority is necessary or required in connection with the
execution, delivery or performance by, or enforcement against, the Company or
any of its Subsidiaries of this Agreement or any other Loan Document.
5.5 BINDING EFFECT. This Agreement and each other Loan Document to
which the Company is a party constitute the legal, valid and binding obligations
of the Company enforceable against the Company in accordance with their
respective terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, or similar laws affecting the enforcement of creditors'
rights generally or by equitable principles relating to enforceability.
5.6 LITIGATION. There are no actions, suits, proceedings, labor
controversies, claims or disputes pending, or to the best knowledge of the
Company, threatened or contemplated, at law, in equity, in arbitration or before
any Governmental Authority, against the Company or any of its properties which:
(a) purport to affect or pertain to this Agreement or any other Loan
Document, or any of the transactions contemplated hereby or thereby; or
(b) if determined adversely to the Company, would reasonably be
expected to have a Material Adverse Effect. No injunction, writ, temporary
restraining order or any order of any nature has been issued by any court or
other Governmental Authority purporting to enjoin or restrain the execution,
delivery or performance of this Agreement or any other Loan Document, or
directing that the transactions provided for herein or therein not be
consummated as herein or therein provided.
5.7 NO DEFAULT. No Default or Event of Default exists or would result
from the incurring of any Obligations by the Company. As of the Closing Date,
the Company is not in default under or with respect to any Contractual
Obligation in any respect which, individually or together with all such
defaults, could reasonably be expected to have a Material Adverse Effect, or
that would, if such default had occurred after the Closing Date, create an Event
of Default under subsection 8.1(e).
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5.8 ERISA COMPLIANCE.
The Company has not established or maintained, nor is it liable under
any Plan.
5.9 USE OF PROCEEDS. The proceeds of the Loans are to be used to
provide liquidity for one or more of the following: (i) periodic tender offers
for the repurchase of the Company's shares, (ii) to fund general working capital
needs and (iii) to fund obligations with respect to unfunded loans or revolving
credit commitments. The Company may also use the proceeds of the Loans to
leverage the Company's portfolio to enhance yield.
5.10 FINANCIAL CONDITION.
(a) The audited financial statements of the Company dated February
28, 1998, and the related statements of income or operations, equity and cash
flows for the period ended on such date:
(i) were prepared in conformity with GAAP consistently applied
throughout the period covered thereby, except as otherwise expressly
noted therein;
(ii) fairly present the financial condition of the Company as of
the date thereof and results of operations for the period covered
thereby; and
(iii) show all material indebtedness and other liabilities,
direct or contingent of the Company as of the date thereof, including
liabilities for taxes, material commitments and Contingent
Obligations.
(b) Since February 28, 1998, there has been no Material Adverse
Effect.
5.11 TAXES. The Company has filed all Federal and other material tax
returns and reports required to be filed, and has paid all Federal and other
material taxes, assessments, fees and other governmental charges levied or
imposed upon it or its properties, income or assets otherwise due and payable,
except those which are being contested in good faith by appropriate proceedings
and for which adequate reserves have been provided in accordance with GAAP.
There is no proposed tax assessment against the Company that would, if made,
have a Material Adverse Effect.
5.12 ENVIRONMENTAL MATTERS. Environmental Laws and Environmental
Claims could not, individually or in the aggregate, reasonably be expected to
have a Material Adverse Effect.
5.13 NO BURDENSOME RESTRICTIONS. The Company is not a party to or
bound by any Contractual Obligation, or subject to any restriction in any
Organization Document, or any Requirement of Law, which could reasonably be
expected to have a Material Adverse Effect.
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5.14 SUBSIDIARIES. The Company has no Subsidiaries.
5.15 FULL DISCLOSURE. None of the representations or warranties made
by the Company in the Loan Documents as of the date such representations and
warranties are made or deemed made, and none of the statements contained in any
exhibit, report, statement or certificate furnished by or on behalf of the
Company in connection with the Loan Documents (including the offering and
disclosure materials delivered by or on behalf of the Company to the Banks prior
to the Closing Date), contains any untrue statement of a material fact or omits
any material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they are
made, not misleading as of the time when made or delivered.
5.16 REGULATIONS U AND X. The Company is not engaged in the business
of extending credit for the purpose of purchasing or carrying margin stock, and
no proceeds of any Loans will be used by the Company for a purpose which
violates, or would be inconsistent with, FRB Regulation U or X. Terms for which
meanings are provided in F.R.S. Board Regulation U or X or any regulations
substituted therefore, as from time to time in effect, are used in this Section
with such meanings.
5.17 INVESTMENT POLICIES AND INVESTMENT RESTRICTIONS. The Company is
in compliance with all of the Investment Policies and Investment Restrictions.
5.18 ADVISORY CONTRACT. The Company's Amended and Restated Investment
Management Agreement with the Investment Adviser dated April 7, 1997, as further
amended August 7, 1998 and Administrative Agreement with Pilgrim America Group,
Inc., dated April 7, 1997, are in the form delivered to the Agents and the
Banks.
5.19 COMPLIANCE WITH LAWS. The Company is in compliance with all
applicable laws and regulations (including the Act and all regulations
thereunder), and all applicable ordinances, decrees, requirements, orders and
judgments of, and all of the material terms of any applicable licenses and
permits issued by, any governmental body, agency or official to the extent that
non-compliance would be reasonably likely to have a Material Adverse Effect. The
Company has received no notice of any action to be taken by the SEC with respect
to the Company that would be materially adverse to the Company's financial
condition or operations. The SEC has not made any request for any information
from the Company since April 1995 other than information that is routine and/or
periodic in nature.
5.20 TAX STATUS. The Company has taken all steps reasonably necessary
to maintain its status as a regulated investment company under the Code.
5.21 YEAR 2000 PROBLEM. The Company has reviewed the areas within its
business and operations which could be adversely affected by, and has developed
or is developing a program to address on a timely basis, the "Year 2000 Problem"
(that is, the risk that computer applications used by the Company may be unable
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to recognize and perform properly date-sensitive functions involving certain
dates prior to and any date after December 31, 1999). Based on such review and
program, the Company reasonably believes that the "Year 2000 Problem" will not
have a Material Adverse Effect.
ARTICLE VI
AFFIRMATIVE COVENANTS
So long as any Bank shall have any Commitment hereunder, or any Loan
or other Obligation shall remain unpaid or unsatisfied, unless the Majority
Banks waive compliance in writing:
6.1 FINANCIAL STATEMENTS. The Company shall deliver to each Bank and
each Agent:
(a) As soon as available and in any event within 60 days after
each of its Fiscal Years, a copy of its annual audited Statement of
Assets and Liabilities, including a statement of investments, prepared
in conformity with GAAP and certified by an independent certified
public accountant who, in the commercially reasonable judgment of the
Majority Banks, shall be satisfactory to the Majority Banks, together
with a certificate from such accountant (i) acknowledging to the Banks
such accountant's understanding that the Banks are relying on such
Statement of Assets and Liabilities, (ii) containing a computation of,
and showing compliance with, the financial ratios contained in SECTION
7.9 and (iii) to the effect that, in making the examination necessary
for the signing of such Statement of Assets and Liabilities, such
accountant has not become aware of any Event of Default or Default
that has occurred and is continuing, or if such accountant has become
aware of any such event, describing it and the steps, if any, being
taken to cure it;
(b) Within 60 days after the end of the first six months of its
Fiscal Year, a copy of its published semi-annual report and asset
statement, prepared in conformity with GAAP;
(c) (i) Within 15 days following the filing thereof, (i) any
preliminary proxy materials filed with the SEC, (ii) at least annually
within 60 days after the end of each fiscal year of the Company,
copies of its current annual report, except that if its Investment
Policies are changed materially (including any change in its ability
to borrow hereunder), copies of any revised prospectus (or a
prospectus supplement) marked to show changes from the prospectus (or
prospectus supplement) and statement of additional information most
recently delivered to the Banks reflecting any such changes shall be
provided to the Banks within 15 days after the same become available,
and (iii) within 15 days of the filing thereof, any registration
statement filed with the SEC;
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(d) Within 5 days after the end of each month, (i) a certificate
substantially in the form of EXHIBIT C ("BORROWING BASE CERTIFICATE")
setting forth its (A) borrowing base (as calculated in the manner
contemplated by the form of Borrowing Base Certificate) ("BORROWING
BASE") and (B) Asset Coverage as of the last day of such month and
(ii) a certificate signed by a Responsible Officer certifying that, to
the best of such Person's knowledge, no Event of Default has occurred
and is continuing or, if an Event of Default has occurred and is
continuing, the steps being taken to remedy the same;
(e) Within 15 days after the last day of each fiscal quarter, a
list of assets held by the Company as of such day and, within 60 days
after the last day of each fiscal quarter, an opinion Meenan, McDevitt
& Company or such other Person as shall be reasonably acceptable to
the Majority Banks as to the fairness of the values assigned by the
Company to the assets held by the Company as of such day; and
(f) Promptly, such additional information regarding the business,
financial or corporate affairs of the Company as the Syndication
Agent, at the request of any Bank, may from time to time request.
6.2 NOTICES. The Company shall promptly notify each Agent and each
Bank:
(a) of the occurrence of any Default or Event of Default, and of the
occurrence or existence of any event or circumstance that foreseeably will
become a Default or Event of Default;
(b) of any matter that has resulted or may reasonably be expected to
result in a Material Adverse Effect, including (i) breach or non-performance of,
or any default under, a Contractual Obligation of the Company; (ii) any dispute,
litigation, investigation, proceeding or suspension between the Company and any
Governmental Authority; or (iii) the commencement of, or any material
development in, any litigation or proceeding affecting the Company; including
pursuant to any applicable Environmental Laws;
(c) the scheduling of consideration by the board of trustees of the
Company of a change in the Investment Adviser, administrator, custodian or
independent accountant, or the appointment of any sub-adviser of any Person
acting in a similar capacity to the Investment Adviser; PROVIDED that a mailing
to shareholders with respect to any of the foregoing shall not be deemed to be
sufficient notice hereunder;
(d) of any material change in accounting policies or financial
reporting practices by the Company; and
(e) of any change in the name of the Company.
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Without limiting any of the foregoing provisions of this Section 6.2,
the Company will promptly notify the Administrative Agent and each Bank of (and,
to the extent possible, give the Administrative Agent and each Bank at least ten
days' prior written notice of) any contribution failure sufficient to give rise
to a Lien under Section 302(f) of ERISA.
Each notice under this Section shall be accompanied by a written
statement by a Responsible Officer setting forth details of the occurrence
referred to therein, and stating what action the Company proposes to take with
respect thereto and at what time. Each notice under this subsection 6.2(a) shall
describe with particularity any and all clauses or provisions of this Agreement
or other Loan Document that have been (or foreseeably will be) breached or
violated.
6.3 PRESERVATION OF EXISTENCE, ETC. The Company shall:
(a) preserve and maintain in full force and effect its existence and
good standing under the laws of its state of organization;
(b) preserve and maintain in full force and effect all governmental
rights, privileges, qualifications, permits, licenses and franchises necessary
or desirable in the normal conduct of its business;
(c) use reasonable efforts, in the ordinary course of business, to
preserve its business organization and goodwill; and
(d) preserve or renew all of its registered patents, trademarks,
trade names and service marks, the non-preservation of which could reasonably be
expected to have a Material Adverse Effect.
6.4 INSURANCE. The Company will maintain or cause to be maintained
with responsible insurance companies insurance with respect to its properties
and business to the extent required under applicable law, including such
fidelity bond coverage as shall be required by Rule 17g-1 promulgated under the
Act or any successor provision, (b) errors and omissions, and director and
officer liability insurance, and (c) other insurance against such casualties and
contingencies, and, with respect to CLAUSES (B) and (C) hereof, of such types
and in such amounts as are substantially similar to the coverages maintained by
the Company as of the date of this Agreement, and the Company will, upon request
of the Administrative Agent, furnish to each Bank at reasonable intervals a
certificate of a Responsible Officer setting forth the nature and extent of all
insurance maintained by Company in accordance with this Section.
6.5 PAYMENT OF OBLIGATIONS. The Company shall pay and discharge as
the same shall become due and payable, all its obligations and liabilities,
including:
(a) all tax liabilities, assessments and governmental charges or
levies upon it or its properties or assets, unless the same are being contested
in good faith by appropriate proceedings and adequate reserves in accordance
with GAAP are being maintained by the Company;
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(b) all lawful claims which, if unpaid, would by law become a Lien
upon its property; and
(c) all Indebtedness, as and when due and payable, but subject to any
subordination provisions contained in any instrument or agreement evidencing
such Indebtedness.
6.6 COMPLIANCE WITH LAWS. The Company shall comply, in all material
respects with all Requirements of Law of any Governmental Authority having
jurisdiction over it or its business, such compliance to include compliance in
all material respects with the Act, the 1933 Act and the Exchange Act.
6.7 INSPECTION OF PROPERTY AND BOOKS AND RECORDS. The Company shall
maintain proper books of record and account, in which full, true and correct
entries in conformity with GAAP consistently applied shall be made of all
financial transactions and matters involving the assets and business of the
Company. The Company shall permit representatives and independent contractors of
any Agent or Bank to visit and inspect any of its properties, to examine its
organizational, financial and operating records, and make copies thereof or
abstracts therefrom, and to discuss its affairs, finances and accounts with its
directors, officers, and independent public accountants, all at the expense of
the Company and at such reasonable times during normal business hours and as
often as may be reasonably desired, upon reasonable advance notice to the
Company; PROVIDED, HOWEVER, when an Event of Default exists any Agent or Bank
may do any of the foregoing at the expense of the Company at any time during
normal business hours and without advance notice.
6.8 ENVIRONMENTAL LAWS. The Company shall comply with all
Environmental Laws.
6.9 INVESTMENT ADVISER. The Company, to the extent permitted by
applicable law, (a) shall at all times maintain Pilgrim America Investments,
Inc. as its investment adviser (the "INVESTMENT ADVISER"), or (b) if the
contract by which such Investment Adviser is retained by the Company is
terminated pursuant to or by reason of the operation of the Act, the Company's
trustees or shareholders or any action taken by the SEC, the Investment Adviser
shall continue to serve as the Company's investment adviser, with or without a
fee, and a successor investment adviser shall thereafter be approved, within 120
days of such termination, in the manner provided by the Act and with the consent
of the Majority Banks.
6.10 REGULATED INVESTMENT COMPANY. The Company will at all times
maintain its status as a "regulated investment company" under the Code and a
"registered investment company" under the Act.
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ARTICLE VII
NEGATIVE COVENANTS
So long as any Bank shall have any Commitment hereunder, or any Loan or
other Obligation shall remain unpaid or unsatisfied, unless the Majority Banks
waive compliance in writing:
7.1 LIMITATION ON LIENS. The Company shall not directly or
indirectly, make, create, incur, assume or suffer to exist any Lien upon or with
respect to any part of its property, whether now owned or hereafter acquired,
other than the following ("PERMITTED LIENS"):
(a) any Lien existing on property of the Company on the Closing Date
and set forth in SCHEDULE 7.1 securing Indebtedness outstanding on such date or
otherwise described in SCHEDULE 7.1;
(b) any Lien deemed to have been created under any Loan Document;
(c) Liens for taxes, fees, assessments or other governmental charges
which are not delinquent or remain payable without penalty, provided that no
notice of lien has been filed or recorded under the Code;
(d) Liens consisting of judgment or judicial attachment liens,
provided that the enforcement of such Liens is effectively stayed and all such
Liens in the aggregate at any time outstanding for the Company do not exceed
$1,000,000.
7.2 CONSOLIDATIONS AND MERGERS. The Company shall not merge,
consolidate with or into, or convey, transfer, lease or otherwise dispose of
(whether in one transaction or in a series of transactions) all or substantially
all of its assets (whether now owned or hereafter acquired) to or in favor of
any Person.
7.3 LIMITATION ON INDEBTEDNESS. The Company shall not create, incur,
assume, suffer to exist, or otherwise become or remain directly or indirectly
liable with respect to, any Indebtedness or any preferred shares, except:
(a) Indebtedness incurred pursuant to this Agreement;
(b) Indebtedness incurred pursuant to the GE Capital Facility;
(c) Indebtedness consisting of Contingent Obligations permitted
pursuant to Section 7.5;
(d) Deferred taxes; and
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(e) Obligations to Persons who provide services to the Company in the
ordinary course of business as an investment company and similar trade
obligations incurred in the ordinary course of business.
7.4 TRANSACTIONS WITH AFFILIATES. Except for fees payable to the
Investment Adviser, the Company shall not, enter into any transaction with any
Affiliate of the Company, except upon fair and reasonable terms no less
favorable to the Company than would be obtained in a comparable arm's-length
transaction with a Person not an Affiliate of the Company or such Subsidiary;
PROVIDED that any such transaction must be made in substantial compliance with
Section 17 of the Act or an exemption therefrom.
7.5 CONTINGENT OBLIGATIONS. The Company shall not create, incur,
assume or suffer to exist any Contingent Obligations except endorsements for
collection or deposit in the ordinary course of business.
7.6 LEASE OBLIGATIONS. The Company shall not create or suffer to
exist any obligations for the payment of rent for any property under lease or
agreement to lease.
7.7 BUSINESS ACTIVITIES; INVESTMENT POLICIES. The Company shall not
engage in any business activity, except as a diversified closed-end management
investment company and such activities as may be incidental or related thereto.
In addition to, and not in limitation of the foregoing, the Company will not
become an open-end management investment company under the Act without the prior
written consent of the Banks. The Company will not violate any of the Investment
Policies or Investment Restrictions. The Company will not amend, rescind, modify
or otherwise change any of the Investment Policies or Investment Restrictions
without written notice to the Banks and a written determination by the Majority
Banks, that such change will not result in a fundamental change in the credit
quality of the Company.
7.8 ACCOUNTING CHANGES. The Company shall not make any significant
change in accounting treatment or reporting practices, except as required by
GAAP, or change the fiscal year of the Company.
7.9 FINANCIAL COVENANTS. The Company shall not permit:
(a) its Asset Coverage to be less than 300% at any time;
(b) the five largest investments of the Company (including as one
investment multiple investments in one Person or one Person and its Subsidiaries
and Affiliates) to exceed 25% of the Total Assets of the Company; or
(c) the sum at any time of the unused portion of Commitments plus
Cash Equivalent Investments to be an amount less than the sum of unfunded
Indebtedness of the Company.
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7.10 CHANGE OF CUSTODIAN OR AUDITOR. The Company shall promptly
provide written notice to the Banks of any change in its custodian or auditor.
7.11 PENSION PLANS. The Company shall not enter into, or incur any
liability relating to, any Plan.
ARTICLE VIII
EVENTS OF DEFAULT
8.1 EVENT OF DEFAULT. Any of the following shall constitute an "EVENT
OF DEFAULT":
(a) NON-PAYMENT. The Company fails to pay, (i) when and as required
to be paid herein, any amount of principal of any Loan (ii) within two days
after the same becomes due, any amount of interest on any Bid Loan, or (iii)
within five days after the same becomes due, any other interest, fee or any
other amount payable hereunder or under any other Loan Document; or
(b) REPRESENTATION OR WARRANTY. Any representation or warranty by the
Company made or deemed made herein, in any other Loan Document, or which is
contained in any certificate, document or financial or other statement by the
Company or any Responsible Officer, furnished at any time under this Agreement,
or in or under any other Loan Document, is incorrect in any material respect on
or as of the date made or deemed made; or
(c) SPECIFIC DEFAULTS. The Company fails to perform or observe any
term, covenant or agreement contained in Article VII; or
(d) OTHER DEFAULTS. The Company fails to perform or observe any other
term or covenant contained in this Agreement or any other Loan Document, and
such default shall continue unremedied for a period of 20 days after the date
upon which written notice thereof is given to the Company by any Agent or Bank;
or
(e) CROSS-DEFAULT. (A) A default or breach shall occur under the GE
Capital Facility, and such default or breach (i) involves the failure to make
any payment when due in respect of the GE Capital Facility or (ii) causes, or
permits the Lender Agent, the Operating Agent, the Collateral Agent or any
Lender to cause, Debt, under or with respect to the GE Capital Facility, to
become due prior to its stated maturity or prior to its regularly scheduled
dates of payment, regardless of whether such right is exercised or (B) the
Company (i) fails to make any payment in respect of any Indebtedness or
Contingent Obligation having an aggregate principal amount (including undrawn
committed or available amounts and including amounts owing to all creditors
under any combined or syndicated credit arrangement) of more than $1,000,000
when due (whether by scheduled maturity, required prepayment, acceleration,
demand, or otherwise) and such failure continues after the applicable grace or
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notice period, if any, specified in the relevant document on the date of such
failure; or (ii) fails to perform or observe any other condition or covenant, or
any other event shall occur or condition exist, under any agreement or
instrument relating to any such Indebtedness or Contingent Obligation, and such
failure continues after the applicable grace or notice period, if any, specified
in the relevant document on the date of such failure if the effect of such
failure, event or condition is to cause, or to permit the holder or holders of
such Indebtedness or beneficiary or beneficiaries of such Indebtedness (or a
trustee or agent on behalf of such holder or holders or beneficiary or
beneficiaries) to cause such Indebtedness to be declared to be due and payable
prior to its stated maturity, or such Contingent Obligation to become payable or
cash collateral in respect thereof to be demanded; or
(f) INSOLVENCY; VOLUNTARY PROCEEDINGS. The Company (i) ceases or
fails to be solvent, or generally fails to pay, or admits in writing its
inability to pay, its debts as they become due, subject to applicable grace
periods, if any, whether at stated maturity or otherwise; (ii) voluntarily
ceases to conduct its business in the ordinary course; (iii) commences any
Insolvency Proceeding with respect to itself; or (iv) takes any action to
effectuate or authorize any of the foregoing; or
(g) INVOLUNTARY PROCEEDINGS. (i) Any involuntary Insolvency
Proceeding is commenced or filed against the Company, or any writ, judgment,
warrant of attachment, execution or similar process, is issued or levied against
a substantial part of the Company's properties, and any such proceeding or
petition shall not be dismissed, or such writ, judgment, warrant of attachment,
execution or similar process shall not be released, vacated or fully bonded
within 60 days after commencement, filing or levy; (ii) the Company admits the
material allegations of a petition against it in any Insolvency Proceeding, or
an order for relief (or similar order under non-U.S. law) is ordered in any
Insolvency Proceeding; or (iii) the Company acquiesces in the appointment of a
receiver, trustee, custodian, conservator, liquidator, mortgagee in possession
(or agent therefor), or other similar Person for itself or a substantial portion
of its property or business; or
(h) MONETARY JUDGMENTS. One or more non-interlocutory judgments,
non-interlocutory orders, decrees or arbitration awards is entered against the
Company involving in the aggregate a liability (to the extent not covered by
independent third-party insurance as to which the insurer does not dispute
coverage) as to any single or related series of transactions, incidents or
conditions, of $1,000,000 or more, and the same shall remain unsatisfied,
unvacated and unstayed pending appeal for a period of 10 days after the entry
thereof; or
(i) NON-MONETARY JUDGMENTS. Any non-monetary judgment, order or
decree is entered against the Company which does or would reasonably be expected
to have a Material Adverse Effect, and there shall be any period of 10
consecutive days during which a stay of enforcement of such judgment or order,
by reason of a pending appeal or otherwise, shall not be in effect; or
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(j) CHANGE OF CONTROL. There occurs any Change of Control; or
(k) INVESTMENT POLICIES. The Company shall violate or take any action
that would result in a violation of any of its Investment Policies or Investment
Restrictions, except for violations or the taking of such actions that would not
in the determination of the Majority Banks result in a fundamental change in the
credit quality of the Company; or
(l) INVESTMENT ADVISER. Pilgrim America Investments, Inc. shall no
longer be the Investment Adviser; or
(m) SECURITY AGREEMENT. The Security Agreement or any provision
thereof shall cease to be in full force and effect, or shall cease to give the
Collateral Agent the Liens, rights, powers and privileges purported to be
created thereby, or the Company shall default in the due performance or
observance of any term, covenant or agreement on its part to be performed or
observed pursuant to the Security Agreement; or
(n) CHANGE IN CUSTODIAN OR AUDITOR. The Company shall change its
custodian or auditor, and the Majority Banks determine in writing such change
has resulted in a fundamental change in the credit quality of the Company.
(o) MATERIAL ADVERSE EFFECT. A Material Adverse Effect shall have
occurred and be continuing.
8.2 REMEDIES. If any Event of Default occurs, the Administrative
Agent shall, at the request of, or may, with the consent of, the Majority Banks:
(a) declare the Commitment of each Bank to make Committed Loans to be
terminated, whereupon such Commitments shall be terminated;
(b) declare the unpaid principal amount of all outstanding Loans, all
interest accrued and unpaid thereon, and all other amounts owing or payable
hereunder or under any other Loan Document to be immediately due and payable,
without presentment, demand, protest or other notice of any kind, all of which
are hereby expressly waived by the Company; and
(c) exercise on behalf of itself and the Banks all rights and
remedies available to it and the Banks under the Loan Documents or applicable
law;
PROVIDED, HOWEVER, that upon the occurrence of any event specified in subsection
(f) or (g) of Section 8.1 (in the case of clause (i) of subsection (g) upon the
expiration of the 60-day period mentioned therein), the obligation of each Bank
to make Loans shall automatically terminate and the unpaid principal amount of
all outstanding Loans and all interest and other amounts as aforesaid shall
automatically become due and payable without further act of the Administrative
Agent or any Bank.
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8.3 RIGHTS NOT EXCLUSIVE. The rights provided for in this Agreement
and the other Loan Documents are cumulative and are not exclusive of any other
rights, powers, privileges or remedies provided by law or in equity, or under
any other instrument, document or agreement now existing or hereafter arising.
ARTICLE IX
THE AGENTS
9.1 APPOINTMENT AND AUTHORIZATION. Each Bank hereby appoints,
designates and authorizes each Agent to take such action on its behalf under the
provisions of this Agreement and each other Loan Document and to exercise such
powers and perform such duties as are expressly delegated to it by the terms of
this Agreement or any other Loan Document, together with such powers as are
reasonably incidental thereto. Notwithstanding any provision to the contrary
contained elsewhere in this Agreement or in any other Loan Document, none of the
Agents shall have any duties or responsibilities, except those expressly set
forth herein or in each other Loan Document, nor shall any of the Agents have or
be deemed to have any fiduciary relationship with any Bank, and no implied
covenants, functions, responsibilities, duties, obligations or liabilities shall
be read into this Agreement or any other Loan Document or otherwise exist
against any of the Agents.
9.2 DELEGATION OF DUTIES. The Agents may execute any of their duties
under this Agreement or any other Loan Document by or through agents, employees
or attorneys-in-fact and shall be entitled to advice of counsel concerning all
matters pertaining to such duties. The Agents shall not be responsible for the
negligence or misconduct of any agent or attorney-in-fact that it selects with
reasonable care.
9.3 LIABILITY OF AGENTS. None of the Agent-Related Persons shall (i)
be liable for any action taken or omitted to be taken by any of them under or in
connection with this Agreement or any other Loan Document or the transactions
contemplated hereby (except for its own gross negligence or willful misconduct),
or (ii) be responsible in any manner to any of the Banks for any recital,
statement, representation or warranty made by the Company or any Affiliate of
the Company, or any officer thereof, contained in this Agreement or in any other
Loan Document, or in any certificate, report, statement or other document
referred to or provided for in, or received by any Agent under or in connection
with, this Agreement or any other Loan Document, or the validity, effectiveness,
genuineness, enforceability or sufficiency of this Agreement or any other Loan
Document, or for any failure of the Company or any other party to any Loan
Document to perform its obligations hereunder or thereunder. No Agent-Related
Person shall be under any obligation to any Bank to ascertain or to inquire as
to the observance or performance of any of the agreements contained in, or
conditions of, this Agreement or any other Loan Document, or to inspect the
properties, books or records of the Company or any of the Company's Subsidiaries
or Affiliates.
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9.4 RELIANCE BY AGENTS. Each Agent shall be entitled to rely, and
shall be fully protected in relying, upon any writing, resolution, notice,
consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone
message, statement or other document or conversation believed by it to be
genuine and correct and to have been signed, sent or made by the proper Person
or Persons, and upon advice and statements of legal counsel (including counsel
to the Company), independent accountants and other experts selected by such
Agent. Each Agent shall be fully justified in failing or refusing to take any
action under this Agreement or any other Loan Document unless it shall first
receive such advice or concurrence of the Majority Banks as it deems appropriate
and, if it so requests, it shall first be indemnified to its satisfaction by the
Banks against any and all liability and expense which may be incurred by it by
reason of taking or continuing to take any such action. Each Agent shall in all
cases be fully protected in acting, or in refraining from acting, under this
Agreement or any other Loan Document in accordance with a request or consent of
the Majority Banks and such request and any action taken or failure to act
pursuant thereto shall be binding upon all of the Banks.
9.5 NOTICE OF DEFAULT. None of the Agents shall be deemed to have
knowledge or notice of the occurrence of any Default or Event of Default, except
with respect to defaults in the payment of principal, interest and fees required
to be paid to such Agent for the account of the Banks, unless such Agent shall
have received written notice from a Bank or the Company referring to this
Agreement, describing such Default or Event of Default and stating that such
notice is a "notice of default." Each Agent will notify the Banks as soon as is
reasonably practicable of its receipt of any such notice. The Administrative
Agent shall take such action with respect to such Default or Event of Default as
may be requested by the Majority Banks in accordance with Article VIII;
PROVIDED, HOWEVER, that unless and until the Administrative Agent has received
any such request, the Administrative Agent may (but shall not be obligated to)
take such action, or refrain from taking such action, with respect to such
Default or Event of Default as it shall deem advisable or in the best interest
of the Banks.
9.6 CREDIT DECISION. Each Bank acknowledges that none of the
Agent-Related Persons has made any representation or warranty to it, and that no
act by any Agent hereinafter taken, including any review of the affairs of the
Company, shall be deemed to constitute any representation or warranty by any
Agent-Related Person to any Bank. Each Bank represents to the Agents that it
has, independently and without reliance upon any Agent-Related Person and based
on such documents and information as it has deemed appropriate, made its own
appraisal of and investigation into the business, prospects, operations,
property, financial and other condition and creditworthiness of the Company, and
all applicable bank regulatory laws relating to the transactions contemplated
hereby, and made its own decision to enter into this Agreement and to extend
credit to the Company hereunder. Each Bank also represents that it will,
independently and without reliance upon any Agent-Related Person and based on
such documents and information as it shall deem appropriate at the time,
continue to make its own credit analysis, appraisals and decisions in taking or
not taking action under this Agreement and the other Loan Documents, and to make
such investigations as it deems necessary to inform itself as to the business,
prospects, operations, property, financial and other condition and
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creditworthiness of the Company. Except for notices, reports and other documents
expressly herein required to be furnished to the Banks by the Agent, such Agent
shall not have any duty or responsibility to provide any Bank with any credit or
other information concerning the business, prospects, operations, property,
financial and other condition or creditworthiness of the Company which may come
into the possession of any of the Agent-Related Persons.
9.7 INDEMNIFICATION. Whether or not the transactions contemplated
hereby are consummated, the Banks shall indemnify upon demand the Agent-Related
Persons (to the extent not reimbursed by or on behalf of the Company and without
limiting the obligation of the Company to do so), pro rata, from and against any
and all Indemnified Liabilities; PROVIDED, HOWEVER, that no Bank shall be liable
for the payment to the Agent-Related Persons of any portion of such Indemnified
Liabilities resulting solely from such Person's gross negligence or willful
misconduct. Without limitation of the foregoing, each Bank shall reimburse each
Agent upon demand for its ratable share of any costs or out-of-pocket expenses
(including Attorney Costs but without duplication of internal and external
counsel) incurred by such Agent in connection with the preparation, execution,
delivery, administration, modification, amendment or enforcement (whether
through negotiations, legal proceedings or otherwise) of, or legal advice in
respect of rights or responsibilities under, this Agreement, any other Loan
Document (excluding the Fee Letters only to the extent the terms and conditions
of such Fee Letters are not otherwise set forth or addressed herein or in any
other Loan Document), or any document contemplated by or referred to herein, to
the extent that the such Agent is not reimbursed for such expenses by or on
behalf of the Company. The undertaking in this Section shall survive the payment
of all Obligations hereunder and the resignation or replacement of the Agent.
9.8 AGENT IN INDIVIDUAL CAPACITY. BofA, State Street, Deutsche and
their respective Affiliates may make loans to, issue letters of credit for the
account of, accept deposits from, acquire equity interests in and generally
engage in any kind of banking, trust, financial advisory, underwriting or other
business with the Company and its Affiliates as though BofA, State Street and
Deutsche were not Agents hereunder and without notice to or consent of the
Banks. The Banks acknowledge that, pursuant to such activities, BofA, State
Street, Deutsche or their respective Affiliates may receive information
regarding the Company or its Affiliates (including information that may be
subject to confidentiality obligations in favor of the Company) and acknowledge
that the Agents shall be under no obligation to provide such information to
them. With respect to its Loans, BofA, State Street and Deutsche shall have the
same rights and powers under this Agreement as any other Bank and may exercise
the same as though it were not an Agent, and the terms "Bank" and "Banks"
include BofA, State Street and Deutsche in their individual capacity.
9.9 SUCCESSOR AGENT. Either the Administrative Agent or the
Syndication Agent may, and at the request of the Majority Banks shall, resign as
such Agent upon 30 days' notice to the Banks. If such Agent resigns under this
Agreement, the Majority Banks shall appoint from among the Banks a successor
agent for the Banks which successor agent shall be approved by the Company,
which approval shall not be unreasonably withheld. If no successor agent is
appointed prior to the effective date of the resignation of such Agent, such
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Agent may appoint, after consulting with the Banks and the Company, a successor
agent from among the Banks. Upon the acceptance of its appointment as successor
agent hereunder, such successor agent shall succeed to all the rights, powers
and duties of such retiring Agent and the term "Administrative Agent" or
"Syndication Agent", as applicable, shall mean such successor agent and such
retiring Agent's appointment, powers and duties as such Agent shall be
terminated. After any such retiring Agent's resignation hereunder as such Agent,
the provisions of this Article IX and Sections 10.4 and 10.5 shall inure to its
benefit as to any actions taken or omitted to be taken by it while it was such
Agent under this Agreement. If no successor agent has accepted appointment as
such Agent by the date which is 30 days following a retiring Agent's notice of
resignation, such retiring Agent's resignation shall nevertheless thereupon
become effective and the Banks shall perform all of the duties of the Agent
hereunder until such time, if any, as the Majority Banks appoint a successor
agent as provided for above.
9.10 WITHHOLDING TAX.
(a) If any Bank is a "foreign corporation, partnership or trust"
within the meaning of the Code and such Bank claims exemption from, or a
reduction of, U.S. withholding tax under Sections 1441 or 1442 of the Code, such
Bank agrees with and in favor of the Company and the Administrative Agent, to
deliver to the Company and the Administrative Agent:
(i) if such Bank claims an exemption from, or a reduction of,
withholding tax under a United States tax treaty, properly completed
IRS Forms 1001 and W-8 (or any successor form) before the payment of
any interest in the first calendar year and before the payment of any
interest in each third succeeding calendar year during which interest
may be paid under this Agreement;
(ii) if such Bank claims that interest paid under this Agreement
is exempt from United States withholding tax because it is effectively
connected with a United States trade or business of such Bank, two
properly completed and executed copies of IRS Form 4224 (or any
successor form) before the payment of any interest is due in the first
taxable year of such Bank and in each succeeding taxable year of such
Bank during which interest may be paid under this Agreement, and IRS
Form W-9 (or any successor form); and
(iii) such other form or forms as may be required under the Code
or other laws of the United States as a condition to exemption from,
or reduction of, United States withholding tax.
Such Bank agrees to promptly notify the Company and the
Administrative Agent of any change in circumstances which would modify or render
invalid any claimed exemption or reduction.
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(b) If any Bank claims exemption from, or reduction of, withholding
tax under a United States tax treaty by providing IRS Form 1001 (or any
successor form) and such Bank sells, assigns, grants a participation in, or
otherwise transfers all or part of the Obligations of the Company to such Bank,
such Bank agrees to promptly notify the Company and the Administrative Agent of
the percentage amount in which it is no longer the beneficial owner of
Obligations of the Company to such Bank. To the extent of such percentage
amount, the Company and the Administrative Agent will treat such Bank's IRS Form
1001 (or any successor form) as no longer valid.
(c) If any Bank claiming exemption from United States withholding tax
by filing IRS Form 4224 (or any successor form) with the Company and the
Administrative Agent sells, assigns, grants a participation in, or otherwise
transfers all or part of the Obligations of the Company to such Bank, such Bank
agrees to undertake sole responsibility for complying with the withholding tax
requirements imposed by Sections 1441 and 1442 of the Code.
(d) If any Bank realizes a reduction in the applicable withholding
tax, the Company and the Administrative Agent may withhold from any interest
payment to such Bank an amount equivalent to the applicable withholding tax
after taking into account such reduction. If the forms or other documentation
required by subsection (a) of this Section are not delivered to the Company and
the Administrative Agent, then the Company and the Administrative Agent may
withhold from any interest payment to such Bank not providing such forms or
other documentation an amount equivalent to the applicable withholding tax.
(e) If the IRS or any other Governmental Authority of the United
States or other jurisdiction asserts a claim that the Company and the
Administrative Agent did not properly withhold tax from amounts paid to or for
the account of any Bank (because the appropriate form was not delivered, was not
properly executed, or because such Bank failed to notify the Company and the
Administrative Agent of a change in circumstances which rendered the exemption
from, or reduction of, withholding tax ineffective, or for any other reason)
such Bank shall indemnify the Company and the Administrative Agent fully for all
amounts paid, directly or indirectly, by the Company and the Administrative
Agent as tax or otherwise, including penalties and interest, and including any
taxes imposed by any jurisdiction on the amounts payable to the Company and the
Administrative Agent under this Section, together with all costs and expenses
(including Attorney Costs but without duplication for internal and external
counsel). The obligation of the Banks under this subsection shall survive the
payment of all Obligations and the resignation or replacement of the
Administrative Agent.
9.11 OTHER AGENTS. None of the Banks identified on the facing page or
signature pages of this Agreement as a "Co-Agent", "Documentation Agent" or
"Co-Administrative Agent" shall have any right, power, obligation, liability,
responsibility or duty under this Agreement other than those applicable to all
Banks as such. Without limiting the foregoing, none of the Banks so identified
as "Co-Agent", "Documentation Agent" or "Co-Administrative Agent" shall have or
be deemed to have any fiduciary relationship with any Bank. Each Bank
acknowledges that it has not relied, and will not rely, on any of the Banks so
identified in deciding to enter into this Agreement or in taking or not taking
action hereunder.
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ARTICLE X
MISCELLANEOUS
10.1 AMENDMENTS AND WAIVERS. No amendment or waiver of any provision
of this Agreement or any other Loan Document, and no consent with respect to any
departure by the Company therefrom, shall be effective unless the same shall be
in writing and signed by the Majority Banks (or by the Syndication Agent at the
written request of the Majority Banks) and the Company and acknowledged by the
Agents, and then any such waiver and consent shall be effective only in the
specific instance and for the specific purpose for which given; PROVIDED,
HOWEVER, that no such waiver, amendment, or consent shall, unless in writing and
signed by all the Banks and the Company and acknowledged by the Syndication
Agent, do any of the following:
(a) increase or extend the Commitment of any Bank (or reinstate any
Commitment terminated pursuant to subsection 8.2(a)) except as provided in
Section 2.16, unless such Bank has consented thereto in writing;
(b) postpone or delay any date fixed by this Agreement or any other
Loan Document for any payment of principal, interest, fees or other amounts due
to the Banks (or any of them) hereunder or under any other Loan Document
including, without limitation, any date fixed for a mandatory prepayment or a
mandatory reduction in the aggregate Commitments;
(c) reduce the principal of, or the rate of interest specified herein
on any Loan, or (subject to clause (ii) below) any fees or other amounts payable
hereunder or under any other Loan Document;
(d) change the percentage of the Commitments or of the aggregate
unpaid principal amount of the Loans which is required for the Banks or any of
them to take any action hereunder;
(e) release all or substantially all the collateral securing the
Obligations; or
(f) amend this Section, or Sections 2.15, 6.9, 10.7, or any provision
herein providing for consent or other action by all Banks;
and, PROVIDED FURTHER, that (i) no amendment, waiver or consent shall, unless in
writing and signed by an Agent in addition to the Majority Banks or all the
Banks, as the case may be, and the Company, affect the rights or duties of such
58
<PAGE>
Agent under this Agreement or any other Loan Document, and (ii) the Fee Letters
may be amended, or rights or privileges thereunder waived, in a writing executed
by the parties thereto.
10.2 NOTICES.
(a) All notices, requests and other communications shall be in
writing (including, unless the context expressly otherwise provides, by
facsimile transmission, provided that any matter transmitted by the Company by
facsimile (i) shall be immediately confirmed by a telephone call to the
recipient at the number specified on SCHEDULE 10.2, and (ii) shall be followed
promptly by delivery of a hard copy original thereof) and mailed, faxed or
delivered, to the address or facsimile number specified for notices on SCHEDULE
10.2; or, as directed to the Company or the applicable Agent, to such other
address as shall be designated by such party in a written notice to the other
parties, and as directed to any other party, at such other address as shall be
designated by such party in a written notice to the Company and such Agent.
(b) All such notices, requests and communications shall, when
transmitted by overnight delivery, or faxed, be effective when delivered for
overnight (next-day) delivery, or transmitted in legible form by facsimile
machine, respectively, or if mailed, upon the third Business Day after the date
deposited into the U.S. mail, or if delivered, upon delivery; except that
notices pursuant to Article II or IX shall not be effective until actually
received by the Administrative Agent.
(c) Any agreement of the Agents and the Banks herein to receive
certain notices by telephone or facsimile is solely for the convenience and at
the request of the Company. The Agents and the Banks shall be entitled to rely
on the authority of any Person purporting to be a Person authorized by the
Company to give such notice and the Agents and the Banks shall not have any
liability to the Company or other Person on account of any action taken or not
taken by the Agents or the Banks in reliance upon such telephonic or facsimile
notice. The obligation of the Company to repay the Loans shall not be affected
in any way or to any extent by any failure by the Agents and the Banks to
receive written confirmation of any telephonic or facsimile notice or the
receipt by the Agents and the Banks of a confirmation which is at variance with
the terms understood by the Agents and the Banks to be contained in the
telephonic or facsimile notice.
10.3 NO WAIVER; CUMULATIVE REMEDIES. No failure to exercise and no
delay in exercising, on the part of any Agent or Bank, any right, remedy, power
or privilege hereunder, shall operate as a waiver thereof; nor shall any single
or partial exercise of any right, remedy, power or privilege hereunder preclude
any other or further exercise thereof or the exercise of any other right,
remedy, power or privilege.
10.4 COSTS AND EXPENSES. The Company shall:
(a) whether or not the transactions contemplated hereby are
consummated, pay or reimburse BofA and State Street (including in its capacity
as an Agent) within five Business Days after demand for all costs and expenses
59
<PAGE>
incurred by BofA and State Street (including in its capacity as an Agent) in
connection with the development, preparation, delivery, administration and
execution of, and any amendment, supplement, waiver or modification to (in each
case, whether or not consummated), this Agreement, any Loan Document and any
other documents prepared in connection herewith or therewith, and the
consummation of the transactions contemplated hereby and thereby, including
reasonable Attorney Costs (but without duplication for internal and external
counsel) incurred by BofA and State Street (including in its capacity as an
Agent) with respect thereto; and
(b) pay or reimburse each Agent, the Arranger and each Bank within
five Business Days after demand (subject to subsection 4.1(a)(v)) for all costs
and expenses (including Attorney Costs but without duplication for internal and
external counsel) incurred by them in connection with the enforcement, attempted
enforcement, or preservation of any rights or remedies under this Agreement or
any other Loan Document during the existence of an Event of Default or after
acceleration of the Loans (including in connection with any "workout" or
restructuring regarding the Loans, and including in any Insolvency Proceeding or
appellate proceeding).
10.5 INDEMNITY. Whether or not the transactions contemplated hereby
are consummated, the Company shall indemnify and hold the Agent-Related Persons,
and each Bank and each of its respective officers, directors, employees,
counsel, agents and attorneys-in-fact (each, an "INDEMNIFIED PERSON") harmless
from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, charges, expenses and disbursements
(including Attorney Costs but without duplication for internal and external
counsel) of any kind or nature whatsoever which may at any time (including at
any time following repayment of the Loans and the termination, resignation or
replacement of any Agent or replacement of any Bank) be imposed on, incurred by
or asserted against any such Person in any way relating to or arising out of
this Agreement, any other Loan Document or any other document contemplated by or
referred to herein, or the transactions contemplated hereby, or any action taken
or omitted by any such Person under or in connection with any of the foregoing,
including with respect to any investigation, litigation or proceeding (including
any Insolvency Proceeding or appellate proceeding) related to or arising out of
this Agreement or any other Loan Document or the Loans or the use of the
proceeds thereof, whether or not any Indemnified Person is a party thereto (all
the foregoing, collectively, the "INDEMNIFIED LIABILITIES"); PROVIDED, that the
Company shall have no obligation hereunder to any Indemnified Person with
respect to Indemnified Liabilities resulting solely from the bad faith, gross
negligence or willful misconduct of such Indemnified Person or the reckless
disregard by such Indemnified Person of his duties under this Agreement. The
agreements in this Section shall survive payment of all other Obligations. A
Person seeking indemnification from the Company pursuant to this Agreement shall
give prompt notice to the Company of any claim in respect of which
indemnification may be sought and shall provide to the Company a written
affirmation of entitlement to indemnification.
60
<PAGE>
10.6 PAYMENTS SET ASIDE. To the extent that the Company makes a
payment to an Agent or the Banks, or an Agent or the Banks exercise their right
of set-off, and such payment or the proceeds of such set-off or any part thereof
are subsequently invalidated, declared to be fraudulent or preferential, set
aside or required (including pursuant to any settlement entered into by an Agent
or such Bank in its discretion) to be repaid to a trustee, receiver or any other
party, in connection with any Insolvency Proceeding or otherwise, then (a) to
the extent of such recovery, the obligation or part thereof originally intended
to be satisfied shall be revived and continued in full force and effect as if
such payment had not been made or such set-off had not occurred, and (b) each
Bank severally agrees to pay to such Agent upon demand its pro rata or other
applicable share of any amount so recovered from or repaid by such Agent.
10.7 SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, except that the Company may not assign or
transfer any of its rights or obligations under this Agreement without the prior
written consent of the Syndication Agent and each Bank.
10.8 ASSIGNMENTS, PARTICIPATIONS, ETC.
(a) Any Bank may, with the written consent of the Company at all
times other than during the existence of an Event of Default and the Syndication
Agent, which consents shall not be unreasonably withheld, at any time assign and
delegate to one or more Eligible Assignees (provided that no written consent of
the Company or the Syndication Agent shall be required in connection with any
assignment and delegation by a Bank to an Eligible Assignee that is an Affiliate
of such Bank) (each an "ASSIGNEE") all, or any ratable part of all, of the
Loans, the Commitment and the other rights and obligations of such Bank
hereunder, in a minimum amount of $5,000,000; PROVIDED, HOWEVER, that the
Company and the Agents may continue to deal solely and directly with such Bank
in connection with the interest so assigned to an Assignee until (i) written
notice of such assignment, together with payment instructions, addresses and
related information with respect to the Assignee, shall have been given to the
Company and the Agents by such Bank and the Assignee; (ii) such Bank and its
Assignee shall have delivered to the Company and the Syndication Agent an
Assignment and Acceptance in the form of EXHIBIT E ("ASSIGNMENT AND ACCEPTANCE")
and (iii) the assignor Bank or Assignee has paid to the Syndication Agent and
the Administrative Agent a processing fee of $1,500 each except where the
Assignee is an affiliate of the assigning Bank.
(b) From and after the date that the Syndication Agent notifies the
assignor Bank that it has received (and provided its consent with respect to) an
executed Assignment and Acceptance and payment of the above-referenced
processing fee, (i) the Assignee thereunder shall be a party hereto and, to the
extent that rights and obligations hereunder have been assigned to it pursuant
to such Assignment and Acceptance, shall have the rights and obligations of a
Bank under the Loan Documents, and (ii) the assignor Bank shall, to the extent
that rights and obligations hereunder and under the other Loan Documents have
been assigned by it pursuant to such Assignment and Acceptance, relinquish its
rights and be released from its obligations under the Loan Documents.
61
<PAGE>
(c) Within five Business Days after its receipt of notice by the
Syndication Agent that it has received an executed Assignment and Acceptance and
payment of the processing fee, (and provided that it consents to such assignment
in accordance with subsection 10.8(a)), the Company shall execute and deliver to
the Syndication Agent, new Notes evidencing such Assignee's assigned Loans and
Commitment and, if the assignor Bank has retained a portion of its Loans and its
Commitment, replacement Notes in the principal amount of the Loans retained by
the assignor Bank (such Notes to be in exchange for, but not in payment of, the
Notes held by such Bank). Immediately upon each Assignee's making its processing
fee payment under the Assignment and Acceptance, this Agreement shall be deemed
to be amended to the extent, but only to the extent, necessary to reflect the
addition of the Assignee and the resulting adjustment of the Commitments arising
therefrom. The Commitment allocated to each Assignee shall reduce such
Commitments of the assigning Bank by the amount the Commitment assigned.
(d) Any Bank may at any time sell to one or more commercial banks or
other Persons not Affiliates of the Company (a "PARTICIPANT") (other than
investment companies) participating interests in any Loans, the Commitment of
that Bank and the other interests of that Bank (the "Originating Bank")
hereunder and under the other Loan Documents; PROVIDED, HOWEVER, that (i) the
originating Bank's obligations under this Agreement shall remain unchanged, (ii)
the originating Bank shall remain solely responsible for the performance of such
obligations, (iii) the Company and the Agents shall continue to deal solely and
directly with the originating Bank in connection with the originating Bank's
rights and obligations under this Agreement and the other Loan Documents, and
(iv) no Bank shall transfer or grant any participating interest under which the
Participant has rights to approve any amendment to, or any consent or waiver
with respect to, this Agreement or any other Loan Document, except to the extent
such amendment, consent or waiver would require unanimous consent of the Banks
as described in the first proviso to Section 10.1. In the case of any such
participation, the Participant shall be entitled to the benefit of Sections 3.1,
3.3 and 10.5 as though it were also a Bank hereunder, but shall not have any
rights under this Agreement, or any of the other Loan Documents, and all amounts
payable by the Company hereunder shall be determined as if such Bank had not
sold such participation; except that, if amounts outstanding under this
Agreement are due and unpaid, or shall have been declared or shall have become
due and payable upon the occurrence of an Event of Default, each Participant
shall be deemed to have the right of set-off in respect of its participating
interest in amounts owing under this Agreement to the same extent as if the
amount of its participating interest were owing directly to it as a Bank under
this Agreement.
(e) Each Bank agrees to take normal and reasonable precautions and
exercise due care to maintain the confidentiality of all information identified
as "confidential" or "secret" by the Company and provided to it by the Company,
or by an Agent on the Company's behalf, under this Agreement or any other Loan
Document, and neither it nor any of its Affiliates shall use any such
62
<PAGE>
information other than in connection with or in enforcement of this Agreement
and the other Loan Documents; except to the extent such information (i) was or
becomes generally available to the public other than as a result of disclosure
by the Bank, or (ii) was or becomes available on a non-confidential basis from a
source other than the Company, provided that such source is not bound by a
confidentiality agreement with the Company known to the Bank; PROVIDED, HOWEVER,
that any Bank may disclose such information (A) at the request or pursuant to
any requirement of any Governmental Authority to which the Bank is subject or in
connection with an examination of such Bank by any such authority; (B) pursuant
to subpoena or other court process; (C) when required to do so in accordance
with the provisions of any applicable Requirement of Law; (D) to the extent
reasonably required in connection with any litigation or proceeding to which any
Agent, any Bank or their respective Affiliates may be party; (E) to the extent
reasonably required in connection with the exercise of any remedy hereunder or
under any other Loan Document; (F) to such Bank's independent auditors and other
professional advisors; (G) to any Affiliate of such Bank, or to any Participant
or Assignee, actual or potential, provided that such Affiliate, Participant or
Assignee agrees to keep such information confidential to the same extent
required of the Banks hereunder, and (H) as to any Bank, as expressly permitted
under the terms of any other document or agreement regarding confidentiality to
which the Company is party or is deemed party with such Bank.
(f) Notwithstanding any other provision in this Agreement, any Bank
may at any time create a security interest in, or pledge, all or any portion of
its rights under and interest in this Agreement and any Note held by it in favor
of any Federal Reserve Bank in accordance with Regulation A of the FRB or U.S.
Treasury Regulation 31 CFR ss. 203.14, and such Federal Reserve Bank may enforce
such pledge or security interest in any manner permitted under applicable law.
(g) Any Bank may transfer and carry all or a portion of its
Commitment and the Loans at the time held by it at, to or for the account of any
domestic or foreign branch office of such Bank, and such transfer shall not be
deemed an assignment or participation pursuant to this Section 10.8; provided,
however, that such Bank shall not be entitled to receive any amount payable
pursuant to Section 3.3 hereof to the extent that such amount would not have
been payable but for the transfer referred to above; provided, further, that
such Bank shall have delivered to the Syndication Agent revised information with
respect to it as set forth in Section 10.2.
10.9 SET-OFF. In addition to any rights and remedies of the Banks
provided by law, if an Event of Default exists or the Loans have been
accelerated, each Bank is authorized at any time and from time to time, without
prior notice to the Company, any such notice being waived by the Company to the
fullest extent permitted by law, to set off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held by,
and other indebtedness at any time owing by, such Bank to or for the credit or
the account of the Company against any and all Obligations owing to such Bank,
now or hereafter existing, irrespective of whether or not any Agent or such Bank
shall have made demand under this Agreement or any Loan Document and although
63
<PAGE>
such Obligations may be contingent or unmatured. Each Bank agrees promptly to
notify the Company and the Agents after any such set-off and application made by
such Bank; PROVIDED, HOWEVER, that the failure to give such notice shall not
affect the validity of such set-off and application.
Without limiting the foregoing, upon the occurrence and during the
continuance of any Event of Default, the Administrative Agent shall have a right
of set-off with respect to the Deposit Account. To the extent the available cash
in the Deposit Account is insufficient to repay Loans due the Banks, the Company
authorizes the Administrative Agent in its capacity as custodian to dispose of
the Company's assets as selected by the Investment Adviser to the extent
necessary to repay all amounts due to the Banks. All payments so received by the
Administrative Agent with respect to the Loans shall be applied first to
interest and then to principal.
10.10 NOTIFICATION OF ADDRESSES, LENDING OFFICES, ETC. Each Bank
shall notify the Agents in writing of any changes in the address to which
notices to the Bank should be directed, of addresses of any Lending Office, of
payment instructions in respect of all payments to be made to it hereunder and
of such other administrative information as the Agents shall reasonably request.
10.11 COUNTERPARTS. This Agreement may be executed in any number of
separate counterparts, each of which, when so executed, shall be deemed an
original, and all of said counterparts taken together shall be deemed to
constitute but one and the same instrument.
10.12 SEVERABILITY. The illegality or unenforceability of any
provision of this Agreement or any instrument or agreement required hereunder
shall not in any way affect or impair the legality or enforceability of the
remaining provisions of this Agreement or any instrument or agreement required
hereunder.
10.13 NO THIRD PARTIES BENEFITED. This Agreement is made and entered
into for the sole protection and legal benefit of the Company, the Banks, the
Agents and the Agent-Related Persons, and their permitted successors and
assigns, and no other Person shall be a direct or indirect legal beneficiary of,
or have any direct or indirect cause of action or claim in connection with, this
Agreement or any of the other Loan Documents.
10.14 GOVERNING LAW AND JURISDICTION.
(A) THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK; PROVIDED
THAT THE AGENTS AND THE BANKS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW.
(B) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR
ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR
64
<PAGE>
OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK, AND BY EXECUTION AND
DELIVERY OF THIS AGREEMENT, EACH OF THE COMPANY, THE AGENTS AND THE BANKS
CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NONEXCLUSIVE
JURISDICTION OF THOSE COURTS. EACH OF THE COMPANY, THE AGENTS AND THE BANKS
IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE
OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER
HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT
OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT. THE COMPANY, THE AGENTS AND THE
BANKS EACH WAIVE PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS,
WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY NEW YORK LAW.
10.15 WAIVER OF JURY TRIAL. THE COMPANY, THE BANKS AND THE AGENTS
EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF
ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN
DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION,
PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST
ANY OTHER PARTY OR ANY AGENT-RELATED PERSON, PARTICIPANT OR ASSIGNEE, WHETHER
WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE COMPANY, THE
BANKS AND THE AGENTS EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE
TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE
PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED
BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING
WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF
THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF.
THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR
MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS.
10.16 ENTIRE AGREEMENT. This Agreement, together with the other Loan
Documents, embodies the entire agreement and understanding among the Company,
the Banks and the Agents, and supersedes all prior or contemporaneous agreements
and understandings of such Persons, verbal or written, relating to the subject
matter hereof and thereof.
SECTION 10.17 OFFICERS, TRUSTEES AND SHAREHOLDERS OF THE COMPANY NOT
BOUND. Each Bank and Agent agrees that this Agreement has been executed by an
officer of the Company on behalf of the Company and not individually. Each Bank
and Agent agrees that the Obligations of the Company hereunder are not binding
65
<PAGE>
on the officers, trustees or shareholders of the Company, but are only binding
upon the Company and its assets and property. The liability of the officers,
trustees and shareholders of the Company is limited by the Trust Agreement,
which is on file with the Secretary of State of The Commonwealth of
Massachusetts.
SECTION 10.18 CONTINUING EFFECTIVENESS, ETC. After the Refinancing
Date, all references in the Loan Documents or other similar documents to "Credit
Agreement" or words of like import shall refer to this Agreement. The execution,
delivery and effectiveness of this Agreement shall not, except as expressly
provided herein, operate as a waiver of any right, power or remedy of the Banks
under any of the other Loan Documents, nor constitute a waiver of any provision
of the Loan Documents.
SECTION 10.19 FACSIMILE EXECUTION. One or more executed counterparts
of this Agreement or any document or instrument related hereto may be delivered
by facsimile, with the intention that such counterparts have the same effect as
an original executed counterpart hereof or thereof. Any party hereto delivering
an executed counterpart of this Agreement or any related document or instrument
by facsimile, shall promptly provide an original of such executed counterpart to
the Syndication Bank.
66
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their proper and duly authorized officers as of the day and
year first above written.
PILGRIM AMERICA PRIME RATE TRUST
By:
-----------------------------
Title:
--------------------------
S-1
<PAGE>
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as
Syndication Agent
By:
-----------------------------
Title:
--------------------------
S-2
<PAGE>
STATE STREET BANK AND TRUST COMPANY
as Administrative Agent
By:
-----------------------------
Title:
--------------------------
S-3
<PAGE>
DEUTSCHE BANK A.G., New York
branch, as Documentation Agent
By:
-----------------------------
Title:
--------------------------
By:
-----------------------------
Title:
--------------------------
S-4
<PAGE>
COMMERZBANK A.G., Los Angeles
Branch, as Co-Agent and as a Bank
By:
-----------------------------
Title:
--------------------------
By:
-----------------------------
Title:
--------------------------
S-5
<PAGE>
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as a Bank
By:
-----------------------------
Title:
--------------------------
S-6
<PAGE>
STATE STREET BANK AND TRUST
COMPANY, as a Bank
By:
-----------------------------
Title:
--------------------------
S-7
<PAGE>
DEUTSCHE BANK A.G., New York and/or
Cayman Islands branches, as a Bank
By:
-----------------------------
Title:
--------------------------
By:
-----------------------------
Title:
--------------------------
S-8
<PAGE>
THE DAI-ICHI KANGYO BANK, LTD.,
Chicago Branch, as a Bank
By:
-----------------------------
Title:
--------------------------
S-9
<PAGE>
BANK HAPOALIM B.M., as a Bank
By:
-----------------------------
Title:
--------------------------
By:
-----------------------------
Title:
--------------------------
S-10
<PAGE>
FIRST UNION NATIONAL BANK,
as a Bank
By:
-----------------------------
Title:
--------------------------
S-11
<PAGE>
BANQUE NATIONALE DE PARIS, as a
Bank
By:
-----------------------------
Title:
--------------------------
S-12
DECHERT PRICE & RHOADS
1775 Eye Street, N.W.
Washington, D.C.
Telephone: 202-261-3300
Fax: 202-261-3333
November 30, 1998
Pilgrim Prime Rate Trust
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004-4424
Re: Pilgrim Prime Rate Trust
(File No. 811-5410)
Dear Sirs:
In connection with the registration under the Securities Act of 1933,
as amended, of 5,000,000 shares of beneficial interest of Pilgrim 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 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
December 1, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 826020
<NAME> PILGRIM PRIME RATE TRUST
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> AUG-31-1998
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 1,655,491
<INVESTMENTS-AT-VALUE> 1,651,752
<RECEIVABLES> 16,601
<ASSETS-OTHER> 1,403
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,669,756
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 509,000
<OTHER-ITEMS-LIABILITIES> 8,164
<TOTAL-LIABILITIES> 517,164
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,174,283
<SHARES-COMMON-STOCK> 123,650
<SHARES-COMMON-PRIOR> 110,764
<ACCUMULATED-NII-CURRENT> 12,476
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 30,428
<ACCUM-APPREC-OR-DEPREC> (3,739)
<NET-ASSETS> 1,152,592
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 66,503
<OTHER-INCOME> 3,334
<EXPENSES-NET> 22,185
<NET-INVESTMENT-INCOME> 47,652
<REALIZED-GAINS-CURRENT> (58)
<APPREC-INCREASE-CURRENT> (5,319)
<NET-CHANGE-FROM-OPS> 42,275
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 47,104
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 12,885
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 118,189
<ACCUMULATED-NII-PRIOR> 11,927
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 30,370
<GROSS-ADVISORY-FEES> 5,674
<INTEREST-EXPENSE> 13,813
<GROSS-EXPENSE> 22,211
<AVERAGE-NET-ASSETS> 1,078,270
<PER-SHARE-NAV-BEGIN> 9.34
<PER-SHARE-NII> 0.04
<PER-SHARE-GAIN-APPREC> (0.03)
<PER-SHARE-DIVIDEND> 0.41
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.32
<EXPENSE-RATIO> 4.08
<AVG-DEBT-OUTSTANDING> 452,049
<AVG-DEBT-PER-SHARE> 3.66
</TABLE>
