PROSPECTUS
10,000,000 Shares of Beneficial Interest
Pilgrim America Prime Rate Trust
New York Stock Exchange Symbol: PPR
Pilgrim America Prime Rate Trust (the "Trust") is a diversified, closed-end
management investment company. The Trust's investment objective is to seek as
high a level of current income as is consistent with the preservation of
capital. The Trust seeks to achieve its objective by investing primarily in
interests in senior floating-rate loans ("Senior Loans"), the interest rates of
which float periodically based upon a benchmark indicator of prevailing interest
rates. Shares of the Trust trade on the New York Stock Exchange (the "NYSE")
under the symbol "PPR." The Trust's Investment Manager is Pilgrim America
Investments, Inc. ("PAII" or the "Investment Manager"). The address of the Trust
is 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004.
Investment in the Trust involves certain risks and special considerations,
including risks associated with the Trust's use of leverage. See "Risk Factors
and Special Considerations" beginning on page 18.
This prospectus applies to 10,000,000 shares of beneficial interest (the
"Shares") of the Trust which may be issued and sold from time to time by the
Trust (the "Offering") through PaineWebber Incorporated ("PaineWebber" or the
"Sales Agent"). See "Plan of Distribution." Such sales, if any, will be made by
means of transactions on the NYSE. The Shares offered hereby are to be sold from
time to time through PaineWebber, as exclusive sales agent for the Trust. Sales
may be effected, at the discretion of the Trust and the Sales Agent, on any day
that the NYSE is open for trading, subject to a minimum price which will be an
amount equal to the current net asset value ("NAV") per Share plus the per Share
amount of the commission to be paid to the Sales Agent and any front-end
administrative fee. As of May 12, 1998, the last reported sales price of a Share
of the Trust on the NYSE was $10.125.
Any Shares sold on behalf of the Trust will be subject to commissions and fees
of 3% of the gross sales price per share of the Shares sold. See "Plan of
Distribution."
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------------
Investors are advised to read this Prospectus and retain it for future
reference. This Prospectus sets forth concisely the information about the Trust
that a prospective investor ought to know before investing. A Statement of
Additional Information dated May 18, 1998 (the "SAI") containing additional
information about the Trust has been filed with the Securities and Exchange
Commission (the "Commission") and is incorporated by reference in its entirety
into this Prospectus. A copy of the SAI, the table of contents of which appears
on page 28 of this Prospectus, may be obtained without charge by contacting the
Trust toll-free at (800) 992-0180.
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PaineWebber Incorporated
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The date of this Prospectus is June 19, 1998.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information appearing elsewhere in this Prospectus.
THE TRUST AT A GLANCE
The Trust The Trust is a diversified, closed-end management investment
company organized as a Massachusetts business trust. As of
May 12, 1998, the Trust's NAV per Share was $9.31.
NYSE Listed As of May 12, 1998, the Trust had 111,017,618 Shares
outstanding, which are traded on the NYSE under the symbol
"PPR." As of May 12, 1998, the last reported sales price of
a Share of the Trust was $10.125.
Investment To obtain as high a level of current income as is consistent
Objective with the preservation of capital. There can be no assurance
that the Trust will achieve its investment objective.
Primary Investment The Trust seeks to achieve its investment objective by
Strategy primarily acquiring interests in Senior Loans with interest
rates that float periodically based on a benchmark indicator
of prevailing interest rates, such as the Prime Rate or the
London Inter-Bank Offered Rate ("LIBOR"). The Trust may also
employ techniques such as borrowing for investment purposes.
Diversification The Trust maintains a diversified investment portfolio. As a
diversified management investment company, the Trust, with
respect to 75% of its total assets, may invest no more than
5% of the value of its total assets in any one issuer (other
than the U.S. Government). This strategy of diversification
is intended to manage risk by limiting exposure to any one
issuer.
General Investment Under normal circumstances, at least 80% of the Trust's
Guidelines net assets is invested in Senior Loans.
A maximum of 25% of the Trust's assets is invested in any
one industry.
The Trust only invests in Senior Loans of U.S. corporations,
partnerships, limited liability companies, or other business
entities organized under U.S. law or domiciled in Canada or
U.S. territories and possessions. The Senior Loans must be
denominated in U.S. dollars.
Distributions Income dividends are declared and paid monthly. Income
dividends may be distributed in cash or reinvested in
additional full and fractional shares through the Trust's
Shareholder Investment Program.
Investment Manager Pilgrim America Investments, Inc.
Administrator Pilgrim America Group, Inc.
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS AT A GLANCE
This Prospectus contains certain statements that may be deemed to be
"forward-looking statements." Actual results could differ materially from those
projected in the forward-looking statements as a result of uncertainties set
forth below and elsewhere in the Prospectus. For additional information, see
"Risk Factors and Special Considerations."
<TABLE>
<S> <C>
Discount from or Premium to NAV o The Offering will be conducted only when Shares
of the Trust are trading at a price equal to or
above the Trust's NAV per Share plus the per
Share amount of commissions and fees.
o As with any security, the market value of
the Shares may increase or decrease from the
amount that you paid for the Shares.
o The Trust's Shares may trade at a discount to
NAV. This is a risk separate and distinct from the
risk that the Trust's NAV may decrease.
Credit Risk Investment in the Trust involves the risk that
borrowers under Senior Loans may default on
obligations to pay principal or interest when due,
that lenders may have difficulty liquidating the
collateral securing the Senior Loans or enforcing
their rights under the terms of the Senior Loans, and
that the Trust's investment objective may not be
realized.
Leverage The Trust may borrow for investment purposes, which
increases both investment opportunity and risk.
Secondary Market for the Trust's Shares The issuance of the Shares through the Offering may
have an adverse effect on prices in the secondary
market for the Trust's Shares by increasing the
number of Shares available for sale. In a separate
offering, the Trust may also issue Shares of the Trust
through its Shareholder Investment Program
and through privately negotiated transactions at a
discount to the market price for such Shares, which may put
downward pressure on the market price for Shares of the Trust.
Limited Secondary Market for Senior Loans Because of a limited secondary market for
Senior Loans, the Trust may be limited
in its ability to sell portfolio holdings at
carrying value to generate gains or avoid
losses.
Demand for Senior Loans An increase in demand for Senior Loans may
adversely affect the rate of interest
payable on Senior Loans acquired by the Trust.
</TABLE>
<PAGE>
TRUST EXPENSES
The following table is intended to assist the Trust's shareholders (the
"Shareholders") in understanding the various costs and expenses associated with
investing in the Trust. (1)
Net Assets Net Assets
Plus Without
Borrowings (2) Borrowings (3)
Shareholder Transaction Expenses
Commissions and Front-End Fees
(as a percentage of Offering price) (4) .. 3.00% 3.00%
Shareholder Investment Program
Fees ....................................... NONE NONE
Annual Expenses (as a percentage of net assets
attributable to Common Shares)
Management and Administrative Fees (5) ..... 1.27% 0.92%
Other Operating Expenses(6) ................ 0.25% 0.22%
----- -----
Total Annual Expenses before Interest ........... 1.52% 1.14%
Interest Expense on Borrowed Funds .............. 3.07% 0.00%
----- -----
Total Annual Expenses............................ 4.59% 1.14%
(1) The calculations in the fee table above are based on the Trust's expenses as
a percentage of net assets. Certain expenses of the Trust, such as management
and administrative fees, are calculated on the basis of net assets plus
borrowings. If the Trust's expenses are calculated on the basis of net assets
plus borrowings (including borrowings equal to 33 1/3% of net assets plus
borrowings), the annual expenses in the fee table would read as follows:
Annual Expenses (as a percentage of net assets
plus borrowings attributable to Shares)
Management and Administrative Fees.........................0.84%
Other Operating Expenses...................................0.16%
Total Annual Expenses before Interest Expense..................1.00%
Interest Expense on Borrowed Funds.............................2.05%
Total Annual Expenses..........................................3.05%
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 the Sales Agent with respect to the Shares will be at a
fixed commission rate of 3% of the gross sales price per Share of the Shares
sold with respect to the first 4,000,000 Shares sold and 2.25% of the gross
sales price per share of the Shares sold thereafter. Following the sale of
4,000,000 Shares pursuant to the Offering, the Trust will pay Pilgrim America
Securities, Inc. a fee of up to 0.75% of the gross sales price per share of the
Shares sold for providing administrative assistance to the Trust in connection
with the Offering.
(5) Pursuant to an investment management agreement with the Trust, PAII is
entitled to receive a fee of 0.85% of the average daily net assets of the Trust,
plus the proceeds of any outstanding borrowings, up to $700 million; 0.75% of
the average daily net assets, plus the proceeds of any outstanding borrowings,
in excess of $700 million up to $800 million; and 0.65% of the average daily net
assets, plus the proceeds of any outstanding borrowings, in excess of $800
million. PAII has agreed to reduce its management fee until November 12, 1999 to
0.60% on that portion of the Trust's average daily net assets, plus the proceeds
of any outstanding borrowings, in excess of $1.15 billion. See "Investment
Management and Other Services -- Investment Manager." On May 2, 1998, the Board
of Trustees approved an amendment to the Trust's investment management agreement
with PAII that changes the investment management fee to a rate of 0.80% of the
average daily net assets of the Trust, plus the proceeds of any outstanding
borrowings. The amendment will not be effective until approved by a majority of
the shareholders of the Trust. The amendment will be submitted to shareholders
for their approval at the Trust's annual shareholders meeting currently
scheduled for August, 1998. Pursuant to its Administration Agreement with the
Trust, Pilgrim America Group, Inc. ("PAGI" or the "Administrator"), the Trust's
Administrator, is entitled to receive a fee of 0.15% of the Trust's average
daily net assets, plus the proceeds of any outstanding borrowings, up to $800
million; and 0.10% of the average daily net assets, plus the proceeds of any
outstanding borrowings, in excess of $800 million. See "Investment Management
and Other Services - The Administrator."
(6) "Other Operating Expenses" are based on estimated amounts for the current
fiscal year.
<PAGE>
<TABLE>
<CAPTION>
Example 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming a 5% annual return and
where the Trust has borrowed. $75 $164 $255 $484
You would pay the following expenses on a $1,000
investment, assuming a 5% annual return and
where the Trust has not borrowed. $41 $65 $91 $164
</TABLE>
This hypothetical example assumes that all dividends and other
distributions are reinvested at NAV and that the percentage amounts listed under
Annual Expenses above remain the same in the years shown. The above tables and
the assumption in the hypothetical example of a 5% annual return are required by
regulation of the Commission applicable to all investment companies; the assumed
5% annual return is not a prediction of, and does not represent, the projected
or actual performance of the Trust's Shares. For more complete descriptions of
certain of the Trust's costs and expenses, see "Investment Management and Other
Services."
The foregoing example should not be considered a representation of past
or future expenses, and actual expenses may be greater or less than those shown.
<PAGE>
FINANCIAL HIGHLIGHTS AND INVESTMENT PERFORMANCE
Financial Highlights Table
The table below sets forth selected financial information which has been
derived from the financial statements in the Trust's Annual Report dated as of
February 28, 1998. For the fiscal years ended February 28, 1998, February 28,
1997, and February 29, 1996, the information in the table below has been audited
by KPMG Peat Marwick LLP, independent certified public accountants. For all
periods ending prior to February 29, 1996, the financial information was audited
by the Trust's former auditors. This information should be read in conjunction
with the Financial Statements and Notes thereto included in the Trust's February
28, 1998 Annual Report to Shareholders, which contains further information about
the Trust's performance, and which is available to Shareholders upon request and
without charge.
<TABLE>
<CAPTION>
Year Ended February 28 or February 29,
1998 1997(8) 1996(6) 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance $9.45 $9.61 $ 9.66 $ 10.02 $ 10.05 $ 9.96
NAV, beginning of period
Net investment income ... 0.87 0.82 0.89 0.74 0.60 0.60
Net realized and unrealized
gain (loss) on investment (0.13) (0.02) (0.08) 0.07 (0.05) 0.01
Increase in NAV from
investment operations 0.74 0.80 0.81 0.81 0.55 0.61
Distributions from net
investment income .... (0.85) (0.82) (0.86) (0.73) (0.60) (0.57)
Reduction in NAV from
rights offering....... -- (0.14) -- (0.44) -- --
Increase in NAV from
repurchase of capital -- --- -- -- 0.02 0.05
stock ...................
NAV, end of period ...... $9.34 $9.45 $ 9.61 $ 9.66 $ 10.02 $ 10.05
Closing market price at end
of period $10.31 $10.00 $ 9.50 $ 8.75 $ 9.25 $ 9.13
Total Return
Total investment return at
closing market price (3) 12.70% 15.04%(5) 19.19% 3.27%(5) 8.06% 10.89%
Total investment return
based on NAV (4) 8.01% 8.06% (5) 9.21% 5.24%(5) 6.28% 7.29%
Ratios/ Supplemental Data
Net assets, end of period
(000's).................. $1,034,403 $1,031,089 $862,938 $867,083 $719,979 $738,810
Average Borrowings (000's) $346,110 $131,773 -- -- -- --
Ratios to average net assets
plus borrowings: 1.04% 1.13% -- -- -- --
Expenses (before interest
and other fees related to
revolving credit facility)
Expenses............... 2.65% 1.92% -- -- -- --
Net investment income . 6.91% 7.59% -- -- -- --
Ratios to average net assets:
Expenses (before interest 1.39% 1.29% -- -- -- --
and other fees related to
revolving credit facility)
Expenses............... 3.54% 2.20% 1.23% 1.30% 1.31% 1.42%
Net investment income . 9.23% 8.67% 9.23% 7.59% 6.04% 5.88%
Portfolio turnover rate . 90% 82% 88% 108% 87% 81%
Shares outstanding at end
of period (000's) 110,764 109,140 89,794 89,794 71,835 73,544
Average daily balance of
debt outstanding during the
period (000's) (7) .......... $346,110 $131,773 $ -- $ 2,811 $ -- $ 636
Average monthly shares
outstanding during the
period (000's) 109,998 95,917 89,794 74,598 -- 79,394
Average amount of debt per
share during the period (7) $3.15 $1.37 $ -- $ 0.04 $ -- $ 0.01
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended February 28 or February 29,
1992 1991 1990 May 12, 1988* to
February 28, 1989
<S> <C> <C> <C> <C>
Per Share Operating Performance
NAV, beginning of period $ 9.97 $ 10.00 $ 10.00 $ 10.00
Net investment income ... 0.76 0.98 1.06 0.72
Net realized and unrealized
gain (loss) on investment (0.02) (0.05) -- --
Increase in NAV from
investment operations 0.74 0.93 1.06 0.72
Distributions from net
investment income .... (0.75) (0.96) (1.06) (0.72)
Reduction in NAV from
rights offering....... -- -- -- --
Increase in NAV from
repurchase of capital
stock ................... -- -- -- --
NAV, end of period ...... $ 9.96 $ 9.97 $ 10.00 $ 10.00
Closing market price at end
of period $ -- $ -- $ -- $ --
Total Return
Total investment return at
closing market price (3) -- -- -- --
Total investment return
based on NAV (4) 7.71% 9.74% 11.13% 7.35%
Ratios/ Supplemental Data
Net assets, end of period
(000's).................. $874,104 $1,158,224 $1,036,470 $252,998
Average Borrowings (000's) -- -- -- --
Ratios to average net assets
plus borrowings:
Expenses (before interest
and other fees related to
revolving credit facility) -- -- -- --
Expenses............... -- -- -- --
Net investment income -- -- -- --
Ratios to average net assets:
Expenses (before interest
and other fees related to
revolving credit facility) -- -- -- --
Expenses............... 1.42%(2) 1.38% 1.46%(2) 1.18%(1)(2)
Net investment income . 7.62%(2) 9.71% 10.32%(2) 9.68%(1)(2)
Portfolio turnover rate . 53% 55% 100% 49%(1)
Shares outstanding at end
of period (000's) 87,782 116,022 103,600 25,294
Average daily balance of
debt outstanding during the
period (000's) (7) .......... $ 8,011 $ 2,241 $ -- $ --
Average monthly shares
outstanding during the
period (000's) 102,267 114,350 -- --
Average amount of debt per
share during the period (7) $ 0.08 $ 0.02 $ -- $ --
- -------------------------------------
* Commencement of operations
<FN>
(1) Annualized.
(2) Prior to the waiver of expenses, the ratios of expenses to average net
assets were 1.95% (annualized), 1.48% and 1.44% for the period from May 12,
1988 to February 28, 1989, and for the fiscal years ended February 28, 1990
and February 29, 1992, respectively, and the ratios of net investment
income to average net assets were 8.91% (annualized), 10.30% and 7.60% for
the period from May 12, 1988 to February 28, 1989 and for the fiscal years
ended February 28, 1990 and February 29, 1992, respectively.
(3) Total investment return measures the change in the market value of your
investment assuming reinvestment of dividends and capital gain
distributions, if any, in accordance with the provisions of the dividend
reinvestment plan. On March 9, 1992, the shares of the Trust were initially
listed for trading on the NYSE. Accordingly, the total investment return
for the year ended February 28, 1993, covers only the period from March 9,
1992 to February 28, 1993. Total investment return for the periods prior to
the year ended February 28, 1993 is not presented since market values for
the Trust's shares were not available. Total returns for less than one year
are not annualized.
(4) Total investment return at NAV has been calculated assuming a purchase at
NAV at the beginning of each period and a sale at NAV at the end of each
period and assumes reinvestment of dividends and capital gain distributions
in accordance with the provisions of the dividend reinvestment plan. This
calculation differs from total investment return because it excludes the
effects of changes in the market values of the Trust's shares. Total
returns for less than one year are not annualized.
(5) Calculation of total return excludes the effect of the per share dilution
resulting from the rights offering as the total account value of a fully
subscribed shareholder was minimally impacted.
(6) PAII, the Trust's Investment Manager, acquired certain assets of Pilgrim
Management Corporation, the Trust's former investment manager, in a
transaction that closed on April 7, 1995.
(7) Prior to May 2, 1996, the Trust borrowed to enable it to purchase its
Shares in connection with periodic tender offers. On May 2, 1996, the Trust
received shareholder approval to borrow for investment purposes. As of
February 28, 1998, the Trust had outstanding borrowings of $342,000,000
under a $515,000,000 line of credit. See "Policy on Borrowing" in this
section.
(8) PAII has agreed to reduce its fee for a period of three years from November
12, 1996 (the expiration of the 1996 rights offering) to 0.60% of the
Trust's average daily net assets, plus the proceeds of any outstanding
borrowings, over $1.15 billion.
</FN>
</TABLE>
<PAGE>
Trust Characteristics and Composition
The following tables set forth certain information with respect to the
characteristics and the composition of the Trust's investment portfolio in terms
of percentages of net assets as of February 28, 1998.
Trust Characteristics
Net Assets $1,034,402,810
Assets Invested in Senior Loans $1,352,588,772*
Outstanding Borrowings $342,000,000
Total Number of Senior Loans 132
Average Amount Outstanding per Senior Loan $10,246,885
Total Number of Industries 28
Portfolio Turnover Rate 90%
Average Senior Loan Amount per Industry $48,306,742
Weighted Average Days to Interest Rate Reset 46 days
Average Senior Loan Maturity 68 months
Average Age of Senior Loans Held in Portfolio 12 months
______________________________
(*Includes Senior Loans and other securities received through restructures)
Top 10 Industries as a % of
Net Assets Total Assets
Healthcare, Education and Childcare 17.3% 12.9%
Beverage, Food and Tobacco 10.5% 7.8%
Electronics 9.9% 7.4%
Chemicals, Plastics and Rubber 8.8% 6.5%
Automobile 7.7% 5.7%
Buildings and Real Estate 6.3% 4.7%
Personal, Food and Misc. Services 5.9% 4.4%
Broadcasting 5.6% 4.2%
Printing and Publishing 5.2% 3.9%
Telecommunications 5.1% 3.8%
Top 10 Senior Loan Holdings as a % of
Net Assets Total Assets
MAFCO Financial Corp. 2.9% 2.2%
Community Health Systems 2.4% 1.8%
Favorite Brands International 2.3% 1.7%
Outsourcing Solutions 2.0% 1.5%
Papa Gino's, Inc. 2.0% 1.5%
Fairchild Semiconductor Corp. 2.0% 1.5%
Integrated Health Services 1.9% 1.4%
Sun Healthcare 1.9% 1.4%
24-Hour Fitness, Inc. 1.9% 1.4%
Atlas Freighter Leasing 1.9% 1.4%
Policy on Borrowing
Beginning in May of 1996, the Trust began a policy of borrowing for
investment purposes. The Trust currently is a party to credit facilities with
financial institutions that permit the Trust to borrow up to $515,000,000.
Interest is payable on the credit facilities by the Trust at a variable rate
that is a multiple of LIBOR or the federal funds rate, plus a facility fee on
unused commitments. As of February 28, 1998, the Trust had outstanding
borrowings of $342,000,000. The Trust seeks to use proceeds from borrowings to
acquire income-producing investments which, by their terms, pay interest at a
rate higher than the rate the Trust pays on borrowings. Accordingly, borrowing
has the potential to increase the Trust's total income. The Trust is permitted
to borrow up to 33 1/3%, or such other percentage permitted by law, of its total
assets (including the amount borrowed) less all liabilities other than
borrowings. See "Risk Factors and Special Considerations - Borrowing and
Leverage."
Trading And NAV Information
The following table shows for the Trust's Shares for the periods indicated:
(1) the high and low closing prices as shown on the NYSE Composite Transaction
Tape; (2) the NAV per Share represented by each of the high and low closing
prices as shown on the NYSE Composite Transaction Tape; and (3) the discount
from or premium to NAV per Share (expressed as a percentage) represented by
these closing prices. The table also sets forth the aggregate number of shares
traded as shown on the NYSE Composite Transaction Tape during the respective
quarter.
<TABLE>
<CAPTION>
Premium/(Discount)
Price NAV To NAV Reported
Calendar High Low High Low High Low NYSE Volume
Quarter Ended ---- --- ---- --- ---- --- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1994 $ 9.875 $ 9.000 $ 10.080 $ 10.020 (2.03)% (10.18)% 15,590,400
March 31, 1995 9.000 8.500 10.040 9.650 (10.36) (11.92) 24,778,200
June 30, 1995 9.250 8.750 9.650 9.600 (4.15) (8.85) 16,974,600
September 30, 1995 9.375 8.875 9.660 9.660 (2.95) (8.13) 15,325,900
December 31, 1995 9.500 9.000 9.650 9.620 (1.55) (6.45) 16,428,200
March 31, 1996 9.625 9.250 9.610 9.590 0.16 (3.55) 17,978,300
June 30, 1996 9.750 9.375 9.610 9.570 1.46 (2.04) 13,187,700
September 30, 1996 10.000 9.500 9.560 9.580 4.60 (0.84) 15,821,000
December 31, 1996 10.000 9.250 9.580 9.430 4.38 (1.91) 28,740,200
March 31, 1997 10.000 9.625 9.390 9.420 6.50 2.18 18,483,600
June 30, 1997 10.125 9.875 9.400 9.380 7.71 5.28 18,863,600
September 30, 1997 10.250 10.000 9.400 9.410 9.04 6.27 15,034,200
December 31, 1997 10.375 10.125 9.310 9.380 11.44 7.94 13,270,900
March 31, 1998 10.500 9.875 9.360 9.340 12.18 5.73 15,588,500
</TABLE>
<PAGE>
The following chart shows for the Trust's Shares for the period from March 3,
1995 to May 8, 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.
The following plot points replace a chart showing the premium and discount at
which the Trust's shares have traded.
PREMIUM/
DATE NAV MARKET DISCOUNT
3/3/95 8.750 9.660 -9.42%
3/10/95 8.750 9.610 -8.95%
3/17/95 8.750 9.630 -9.14%
3/24/95 8.750 9.650 -9.33%
3/31/95 8.750 9.670 -9.51%
4/7/95 8.750 9.610 -8.95%
4/14/95 8.750 9.620 -9.04%
4/21/95 8.875 9.640 -7.94%
4/28/95 8.875 9.660 -8.13%
5/5/95 8.875 9.600 -7.55%
5/12/95 8.875 9.620 -7.74%
5/19/95 9.000 9.640 -6.64%
5/26/95 8.875 9.660 -8.13%
6/2/95 9.000 9.670 -6.93%
6/9/95 9.125 9.620 -5.15%
6/16/95 9.000 9.630 -6.54%
6/23/95 9.125 9.650 -5.44%
6/30/95 9.125 9.650 -5.44%
7/7/95 9.125 9.600 -4.95%
7/14/95 9.000 9.620 -6.44%
7/21/95 8.875 9.630 -7.84%
7/28/95 9.000 9.650 -6.74%
8/4/95 9.125 9.670 -5.64%
8/11/95 9.000 9.610 -6.35%
8/18/95 9.125 9.620 -5.15%
8/25/95 9.250 9.640 -4.05%
9/1/95 9.250 9.670 -4.34%
9/8/95 9.250 9.610 -3.75%
9/15/95 9.375 9.630 -2.65%
9/22/95 9.250 9.640 -4.05%
9/29/95 9.375 9.660 -2.95%
10/6/95 9.375 9.610 -2.45%
10/13/95 9.375 9.620 -2.55%
10/20/95 9.250 9.640 -4.05%
10/27/95 9.250 9.660 -4.24%
11/3/95 9.125 9.670 -5.64%
11/10/95 9.000 9.620 -6.44%
11/17/95 9.250 9.620 -3.85%
11/24/95 9.125 9.650 -5.44%
12/1/95 9.125 9.670 -5.64%
12/8/95 9.250 9.610 -3.75%
12/15/95 9.375 9.630 -2.65%
12/22/95 9.375 9.630 -2.65%
12/29/95 9.250 9.580 -3.44%
1/5/96 9.375 9.590 -2.24%
1/12/96 9.375 9.600 -2.34%
1/19/96 9.375 9.620 -2.55%
1/26/96 9.375 9.620 -2.55%
2/2/96 9.313 9.640 -3.40%
2/9/96 9.375 9.580 -2.14%
2/16/96 9.375 9.590 -2.24%
2/23/96 9.500 9.610 -1.14%
3/1/96 9.610 9.375 -2.45%
3/8/96 9.560 9.375 -1.94%
3/15/96 9.570 9.375 -2.04%
3/22/96 9.590 9.500 -0.94%
3/29/96 9.610 9.625 0.16%
4/5/96 9.540 9.500 -0.42%
4/12/96 9.550 9.500 -0.52%
4/19/96 9.570 9.500 -0.73%
4/26/96 9.580 9.375 -2.14%
5/3/96 9.600 9.625 0.26%
5/10/96 9.560 9.500 -0.63%
5/17/96 9.570 9.625 0.57%
5/24/96 9.590 9.500 -0.94%
5/31/96 9.610 9.625 0.16%
6/7/96 9.560 9.625 0.68%
6/14/96 9.570 9.625 0.57%
6/21/96 9.590 9.625 0.36%
6/28/96 9.610 9.750 1.46%
7/5/96 9.550 9.625 0.79%
7/12/96 9.570 9.625 0.57%
7/19/96 9.580 9.625 0.47%
7/26/96 9.600 9.750 1.56%
8/2/96 9.620 9.875 2.65%
8/9/96 9.560 9.875 3.29%
8/16/96 9.580 9.875 3.08%
8/23/96 9.600 10.000 4.17%
8/30/96 9.600 9.875 2.86%
9/6/96 9.550 9.875 3.40%
9/13/96 9.560 10.000 4.60%
9/20/96 9.580 9.625 0.47%
9/27/96 9.600 9.875 2.86%
10/4/96 9.620 9.875 2.65%
10/11/96 9.570 9.750 1.88%
10/18/96 9.580 9.625 0.47%
10/25/96 9.600 9.625 0.26%
11/1/96 9.610 9.375 -2.45%
11/8/96 9.560 9.250 -3.24%
11/15/96 9.560 9.375 -1.94%
11/22/96 9.430 9.375 -0.58%
11/29/96 9.450 9.375 -0.79%
12/6/96 9.390 9.375 -0.16%
12/13/96 9.410 9.625 2.28%
12/20/96 9.430 9.750 3.39%
12/27/96 9.380 9.625 2.61%
1/3/97 9.390 9.875 5.17%
1/10/97 9.410 9.875 4.94%
1/17/97 9.430 9.750 3.39%
1/24/97 9.440 9.875 4.61%
1/31/97 9.460 9.750 3.07%
2/7/97 9.410 9.750 3.61%
2/14/97 9.420 9.875 4.83%
2/21/97 9.430 10.000 6.04%
2/28/97 9.450 10.000 5.82%
3/7/97 9.400 9.875 5.05%
3/14/97 9.390 10.000 6.50%
3/21/97 9.410 9.750 3.61%
3/28/97 9.420 9.875 4.83%
4/4/97 9.440 10.125 7.26%
4/11/97 9.380 10.125 7.94%
4/18/97 9.400 10.000 6.38%
4/25/97 9.420 10.000 6.16%
5/2/97 9.420 10.000 6.16%
5/9/97 9.370 10.000 6.72%
5/16/97 9.380 10.000 6.61%
5/23/97 9.400 10.125 7.71%
5/30/97 9.420 10.000 6.16%
6/6/97 10.063 9.370 7.39%
6/13/97 10.125 9.390 7.83%
6/20/97 10.125 9.400 7.71%
6/27/97 10.031 9.420 6.49%
7/4/97 10.000 9.430 6.04%
7/11/97 10.000 9.380 6.61%
7/18/97 10.000 9.380 6.61%
7/25/97 10.125 9.410 7.60%
8/1/97 10.188 9.430 8.03%
8/8/97 10.125 N.A. N.A.
8/15/97 10.188 9.370 8.72%
8/22/97 10.125 9.380 7.94%
8/29/97 10.125 9.400 7.71%
9/5/97 10.125 9.330 8.52%
9/12/97 10.125 9.350 8.29%
9/19/97 10.188 9.380 8.61%
9/26/97 10.188 9.390 8.49%
10/3/97 10.250 9.410 8.93%
10/10/97 10.188 9.360 8.84%
10/17/97 10.188 9.380 8.61%
10/24/97 10.313 9.390 9.82%
10/31/97 10.250 9.400 9.04%
11/7/97 10.250 9.350 9.63%
11/14/97 10.188 9.360 8.84%
11/21/97 10.188 9.390 8.49%
11/28/97 10.250 9.390 9.16%
12/5/97 10.250 9.340 9.74%
12/12/97 10.250 9.360 9.51%
12/19/97 10.375 9.380 10.61%
12/26/97 10.375 9.390 10.49%
1/2/98 10.313 9.310 10.77%
1/9/98 10.313 9.330 10.53%
1/16/98 10.313 9.340 10.41%
1/23/98 10.500 9.360 12.18%
1/30/98 10.250 9.380 9.28%
2/6/98 10.250 9.320 9.98%
2/13/98 10.250 9.340 9.74%
2/20/98 10.313 9.340 10.41%
2/27/98 10.313 9.340 10.41%
3/6/98 10.250 9.290 10.33%
3/13/98 10.125 9.310 8.75%
3/20/98 10.000 9.330 7.18%
3/27/98 9.875 9.340 5.73%
4/3/98 10.063 9.360 7.51%
4/10/98 9.938 9.300 6.85%
4/17/98 10.063 9.320 7.97%
4/24/98 10.000 9.330 7.18%
5/14/98 10.125 9.340 8.40%
5/8/98 10.063 9.290 8.32%
Source: BLOOMBERG Financial Markets.
On May 12, 1998, the last reported sale price of a Share of the Trust's
Shares on the NYSE was $10.125. The Trust's NAV on May 12, 1998 was $9.31. See
"Net Asset Value" in the SAI. On May 12, 1998, the last reported sale price of a
share of the Trust's Common Shares on the NYSE ($10.125) represented a 8.75%
premium above NAV ($9.31) as of that date.
The Trust's Shares have traded in the market above, at, and below NAV since
March 9, 1992, when the Trust's Shares were listed on the NYSE. The Trust cannot
predict whether its Shares will trade in the future at a premium or discount to
NAV, and if so, the level of such premium or discount. Shares of closed-end
investment companies frequently trade at a discount from NAV.
<PAGE>
Investment Performance
Morningstar Ratings
For the three-year and five-year periods ended February 28, 1998, the Trust
had a 3 star and a 4 star Morningstar risk-adjusted performance rating when
rated among 143 and 106 taxable bond funds, respectively. The Trust's overall
rating through February 28, 1998 was 4 stars.1 For the three-year and five-year
periods ended February 28, 1998, the Trust's risk score placed the Trust 1st out
of 32 and 29 Corporate Bond - General funds. For the three-year and five-year
periods ended February 28, 1998, the Trust's risk score placed the Trust 2nd and
1st out of all closed-end funds (570 and 446 closed-end funds, respectively)
tracked by Morningstar.2 Morningstar's risk score evaluates an investment
company's downside volatility relative to all other investment companies in its
class.
Lipper Rankings
According to Lipper Analytical Services, Inc. ("Lipper") (a company that
calculates and publishes rankings of closed-end and open-end management
investment companies), for the one-, three-, and five-year periods ended
February 28, 1998, the Trust ranked first among all funds in the Loan
Participation Fund Category of closed-end funds, defined by Lipper to include
closed-end management investment companies that invest in Senior Loans.
Investors should note that past performance is no assurance of future results.
<TABLE>
<CAPTION>
Periods ended Total Number of Funds
February 28, 1998 Ranking(3) Return (3) in Category (4)
<S> <C> <C> <C>
One year 1 8.24% 7
Three years 1 28.01% 6
Five years 1 46.93% 5
<FN>
- ----------------------
(1) The Trust's overall rating is based on a weighted average of its
performance for the three-year and five-year periods ended February 28,
1998.
(2) Morningstar's taxable bond fund category includes Corporate Bond - General,
Government Bond, International Bond and Multisector Bond funds. On
Morningstar's risk-adjusted performance rating system, funds falling into
the top 10% of all funds within their category are awarded five stars and
funds in the next 22.5% receive four stars, and the next 35% receive three
stars. Morningstar ratings are calculated from the Trust's three and five
year returns (with fee adjustment, if any) in excess of 90-day Treasury
bill returns, and a risk factor that reflects the Trust's performance below
90-day Treasury bill returns. The ratings are subject to change every
month. Morningstar ranks funds within the Corporate Bond - General category
and the closed-end universe for risk for the three, five and ten-year
periods based upon their downside volatility compared to a 90-day Treasury
bill.
(3) Ranking is based on total return. Total return is measured on the basis of
NAV at the beginning and end of each period, assuming the reinvestment of
all dividends and distributions, but not reflecting the January 1995 and
November 1996 rights offerings. The Trust's expenses were partially waived
for the fiscal year ended February 29, 1992.
(4) This category includes other closed-end investment companies that, unlike
the current practices of the Trust, offer their shares continuously and
have conducted periodic tender offers for their shares. These practices may
have affected the total returns of these companies.
</FN>
</TABLE>
<PAGE>
Comparative Performance - Trailing 12 Month Average
Presented below are distribution rates for the Trust. Also shown are
distribution rates of a composite of other investment companies with investment
objectives and policies comparable to those of the Trust. In addition, presented
below are various benchmark indicators of interest and borrowing rates. The
distribution rates for the Trust and the composite of the other investment
companies are calculated using actual distributions annualized for the preceding
twelve months.
The following plot points replace a graph showing comparative yield of the
Trust, the prime rate, the 60-day LIBOR rate, and a composite of comparable
investment companies.
Pilgrim
America
Month Prime Rate Composite Prime 60-Day
Ended Trust Average Rate LIBOR
1/31/91 9.675% 9.537% 9.917% 8.063%
2/28/91 9.627% 9.501% 9.833% 7.943%
3/31/91 9.500% 9.421% 9.750% 7.792%
4/30/91 9.379% 9.340% 9.667% 7.579%
5/31/91 9.203% 9.256% 9.542% 7.386%
6/30/91 9.052% 9.031% 9.417% 7.199%
7/31/91 8.896% 8.873% 9.292% 7.032%
8/31/91 8.730% 8.660% 9.167% 6.834%
9/30/91 8.527% 8.476% 9.000% 6.600%
10/31/91 8.372% 8.270% 8.833% 6.365%
11/30/91 8.160% 8.039% 8.625% 6.084%
12/31/91 7.963% 7.779% 8.375% 5.818%
1/31/92 7.739% 7.587% 8.125% 5.574%
2/29/92 7.526% 7.340% 7.917% 5.349%
3/31/92 7.382% 7.133% 7.708% 5.157%
4/30/92 7.199% 6.959% 7.500% 4.990%
5/31/92 7.072% 6.774% 7.333% 4.823%
6/30/92 6.939% 6.674% 7.167% 4.641%
7/31/92 6.790% 6.534% 6.958% 4.432%
8/31/92 6.671% 6.353% 6.750% 4.250%
9/30/92 6.578% 6.194% 6.583% 4.063%
10/31/92 6.498% 6.041% 6.417% 3.932%
11/30/92 6.394% 5.888% 6.292% 3.844%
12/31/92 6.277% 5.838% 6.250% 3.755%
1/31/93 6.203% 5.725% 6.208% 3.677%
2/28/93 6.151% 5.705% 6.167% 3.589%
3/31/93 6.095% 5.675% 6.125% 3.500%
4/30/93 6.070% 5.698% 6.083% 3.432%
5/31/93 6.056% 5.608% 6.042% 3.375%
6/30/93 6.022% 5.521% 6.000% 3.318%
7/31/93 5.998% 5.476% 6.000% 3.302%
8/31/93 6.002% 5.460% 6.000% 3.281%
9/30/93 5.975% 5.443% 6.000% 3.281%
10/31/93 5.899% 5.453% 6.000% 3.266%
11/30/93 5.910% 5.433% 6.000% 3.224%
12/31/93 5.932% 5.475% 6.000% 3.219%
1/31/94 5.955% 5.496% 6.000% 3.214%
2/28/94 5.978% 5.489% 6.000% 3.255%
3/31/94 6.017% 5.472% 6.021% 3.302%
4/30/94 6.068% 5.388% 6.083% 3.385%
5/31/94 6.157% 5.443% 6.188% 3.484%
6/30/94 6.258% 5.545% 6.292% 3.609%
7/31/94 6.374% 5.639% 6.396% 3.734%
8/31/94 6.474% 5.744% 6.542% 3.875%
9/30/94 6.604% 5.906% 6.688% 4.042%
10/31/94 6.738% 6.012% 6.833% 4.219%
11/30/94 6.874% 6.175% 7.042% 4.432%
12/31/94 7.076% 6.374% 7.250% 4.677%
1/31/95 7.288% 6.551% 7.458% 4.927%
2/28/95 7.487% 6.791% 7.708% 5.135%
3/31/95 7.711% 7.067% 7.938% 5.333%
4/30/95 7.915% 7.261% 8.125% 5.495%
5/31/95 8.089% 7.412% 8.271% 5.625%
6/30/95 8.249% 7.598% 8.417% 5.734%
7/31/95 8.396% 7.672% 8.542% 5.828%
8/31/95 8.534% 7.761% 8.625% 5.854%
9/30/95 8.650% 7.818% 8.708% 5.911%
10/31/95 8.749% 7.886% 8.792% 5.943%
11/30/95 8.855% 7.919% 8.813% 5.930%
12/31/95 8.876% 7.877% 8.813% 5.878%
1/31/96 8.886% 7.853% 8.813% 5.812%
2/29/96 8.895% 7.670% 8.750% 5.739%
3/31/96 8.836% 7.534% 8.688% 5.677%
4/30/96 8.773% 7.441% 8.625% 5.622%
5/31/96 8.727% 7.407% 8.563% 5.573%
6/30/96 8.671% 7.257% 8.500% 5.527%
7/31/96 8.639% 7.203% 8.458% 5.503%
8/31/96 8.612% 7.147% 8.417% 5.524%
9/30/96 8.590% 7.066% 8.375% 5.493%
10/31/96 8.577% 7.033% 8.333% 5.456%
11/30/96 8.563% 7.002% 8.292% 5.422%
12/31/96 8.567% 6.896% 8.271% 5.413%
1/31/97 8.569% 6.814% 8.250% 5.422%
2/28/97 8.564% 6.869% 8.250% 5.436%
3/31/97 8.595% 6.879% 8.271% 5.459%
4/30/97 8.647% 6.908% 8.292% 5.483%
5/31/97 8.666% 6.913% 8.313% 5.507%
6/30/97 8.715% 6.936% 8.333% 5.523%
7/31/97 8.734% 6.960% 8.354% 5.529%
8/31/97 8.744% 6.964% 8.375% 5.544%
9/30/97 8.758% 6.967% 8.396% 5.560%
10/31/97 8.768% 6.987% 8.417% 5.581%
11/30/97 8.771% 6.970% 8.438% 5.615%
12/31/97 8.777% 7.064% 8.458% 5.633%
1/31/98 8.780% 7.066% 8.479% 5.639%
2/28/98 8.777% 7.081% 8.500% 5.655%
3/31/98 8.788% 7.048% 8.500% 5.652%
4/30/98 8.788% 7.071% 8.500% 5.647%
- ------------------------
(1) The distribution rate is the annualization of the Trust's distributions
per Share, divided by the NAV of the Trust at month-end. For the
one-year and five-year periods ended February 28, 1998 and the period
of May 12, 1988 (inception of the Trust) to February 28, 1998, the
Trust's average annual total returns, based on NAV and assuming all
rights were exercised, were 8.01%, 7.97%, and 8.47%, respectively. The
Trust's 30-day standardized SEC yields as of February 28, 1998 were
8.60% at NAV and 7.77% at market. The Trust's expenses were partially
waived for the fiscal year ended February 29, 1992. As part of the 1996
rights offering the Investment Manager has voluntarily reduced its
management fee for the period from November, 1996 through November,
1999.
(2) The composite represents an unweighted average for investment companies
included in Lipper Analytical Services, Inc.'s Loan Participation Fund
Category of closed-end funds (for funds excluding the Trust in
existence for the entire period shown). Historical yields are based on
monthly dividends divided by corresponding month-end NAVs, annualized.
The closed-end investment companies reflected in the composite, unlike
the current practices of the Trust, offer their shares continuously and
have conducted periodic tender offers for their shares. These practices
may have affected the yield of these companies.
(3) The distribution rate is based solely on the actual dividends and
distributions, which are made at the discretion of management. The
distribution rate may or may not include all investment income, and
ordinarily will not include capital gains or losses, if any.
(4) Source: BLOOMBERG Financial Markets.
(5) Source: IDD/Tradeline. The LIBOR rate is the London Inter-Bank Offered
Rate and is the benchmark for determining the interest paid on more
than 90% of the Senior Loans in the Trust's portfolio. Generally, the
yield on such loans has reflected, during the periods presented, a
premium of approximately 2% or more to LIBOR.
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Trust's investment objective is to provide as high a level of current
income as is consistent with the preservation of capital. The Trust seeks to
achieve its objective primarily by investing in interests in variable or
floating rate Senior Loans, which, in most circumstances, are fully
collateralized by assets of a corporation, partnership, limited liability
company, or other business entity that is organized or domiciled in the United
States, Canada or in U.S. territories and/or possessions. The Trust primarily
invests in Senior Loans that have interest rates that float periodically based
upon a benchmark indicator of prevailing interest rates, such as the Prime Rate
or LIBOR, and will invest only in Senior Loans that are U.S. dollar-denominated.
Under normal circumstances, at least 80% of the Trust's gross assets is invested
in Senior Loans.
Under the Trust's policies, Senior Loans are considered loans that hold a
senior position in the capital structure of the borrower. These may include
loans that hold the most senior position, that hold an equal ranking with other
senior debt, or loans that are, in the judgment of PAII, in the category of
senior debt of the borrower. Generally, the Senior Loans in which the Trust
invests are fully collateralized with assets and/or cash flow that PAII believes
have a market value at the time of acquisition that equals or exceeds the
principal amount of the Senior Loan. The Trust also only purchases interests in
Senior Loans of borrowers that PAII believes can meet debt service requirements
from cash flow. Senior Loans vary in yield according to their terms and
conditions, how often they pay interest, and when rates are reset. The Trust
does not invest in Senior Loans whose interest rates are tied to non-domestic
interest rates other than LIBOR.
Senior Loans that the Trust may acquire include participation interests in
lease financings ("Lease Participations") where the collateral quality, credit
quality of the borrower and the likelihood of payback are believed by PAII to be
the same as those applied to conventional Senior Loans. A Lease Participation is
also required to have a floating interest rate that is indexed to a benchmark
indicator of prevailing interest rates, such as LIBOR or the Prime Rate.
Subject to certain limitations, the Trust may acquire Senior Loans of
borrowers engaged in any industry. With respect to no more than 25% of its total
assets, the Trust may acquire Senior Loans that are unrestricted as to the
percentage of a single issue the Trust may hold and, with respect to at least
75% of its total assets, the Trust will hold no more than 25% of the amount
borrowed from all lenders in a single Senior Loan or other issue. The investment
standards in this paragraph are fundamental and may not be changed without
approval by Shareholders.
Investors should recognize that there can be no assurance that the
investment objective of the Trust will be realized. Moreover, substantial
increases in interest rates may cause an increase in loan defaults as borrowers
may lack resources to meet higher debt service requirements. The value of the
Trust's assets may also be affected by other uncertainties such as economic
developments affecting the market for Senior Loans or affecting borrowers
generally. For additional information on Senior Loans, see "General Information
on Senior Loans -- About Senior Loans."
Investment in the Trust's shares is intended to offer several benefits. The
Trust offers investors the opportunity to seek a high level of current income by
investing in a professionally managed portfolio comprised primarily of Senior
Loans, a type of investment typically not available directly to individual
investors. Other benefits are the professional credit analysis provided to the
Trust by the Investment Manager and portfolio diversification.
The Trust can normally be expected to have a more stable net asset value
per share than investment companies investing primarily in fixed income
securities (other than money market funds and some short-term bond funds).
Generally, the net asset value of the shares of an investment company which
invests primarily in fixed-income securities changes as interest rates
fluctuate. When interest rates decline, the value of a fixed-income portfolio
normally can be expected to increase. The Investment Manager expects the Trust's
net asset value to be relatively stable during normal market conditions, because
the floating and variable rate Senior Loans in which the Trust invests float
periodically in response to changes in interest rates. However, because variable
interest rates only reset periodically, the Trust's net asset value may
fluctuate from time to time in the event of an imperfect correlation between the
interest rates on the Trust's loans and prevailing interest rates. Also, a
default on a Senior Loan in which the Trust has invested or a sudden and extreme
increase in prevailing interest rates may cause a decline in the Trust's net
asset value. Changes in interest rates can be expected to affect the dividends
paid by the Trust, so that the yield on an investment in the Trust's shares will
likely fluctuate in response to changes in prevailing interest rates.
Portfolio Maturity
Although the Trust has no restrictions on portfolio maturity, normally at
least 80% of the net assets invested in Senior Loans are composed of Senior
Loans with maturities of one to ten years with rates of interest which typically
reset either daily, monthly, or quarterly. The maximum period of time of
interest rate reset on any Senior Loans in which the Trust may invest is one
year. In addition, the Trust will ordinarily maintain a dollar-weighted average
time to next interest rate adjustment on its Senior Loans of 90 days or less.
In the event of a change in the benchmark interest rate on a Senior Loan,
the rate payable to lenders under the Senior Loan will, in turn, change at the
next scheduled reset date. If the benchmark rate goes up, the Trust as lender
would earn interest at a higher rate, but only on and after the reset date. If
the benchmark rate goes down, the Trust as lender would earn interest at a lower
rate, but only on and after the reset date.
Credit Analysis
In acquiring a Senior Loan, PAII considers the following factors: positive
cashflow coverage of debt service; adequate working capital; appropriate capital
structure; leverage ratio consistent with industry norms; historical experience
of attaining business and financial projections; the quality and experience of
management; and adequate collateral coverage. The Trust does not impose any
minimum standard regarding the rating of any outstanding debt securities of
borrowers.
PAII performs its own independent credit analysis of the borrower. In so
doing, PAII may utilize information and credit analyses from the agents that
originate or administer loans, other lenders investing in a Senior Loan, and
other sources. These analyses will continue on a periodic basis for any Senior
Loan purchased by the Trust. See "Risk Factors and Special Considerations --
Credit Risks and Realization of Investment Objective."
Other Investments
Assets not invested in Senior Loans will generally consist of 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), and other instruments, including longer term debt securities,
Hybrid Loans, unsecured loans, subordinated loans, equity securities acquired in
connection with investment or restructuring of a Senior Loan, and other
instruments as described under "Additional Information About Investments and
Investment Techniques" in the SAI. Short-term instruments may include (i)
commercial paper rated A-1 by Standard & Poor's Ratings Services or P-1 by
Moody's Investors Service, Inc., or of comparable quality as determined by PAII,
(ii) certificates of deposit, bankers' acceptances, and other bank deposits and
obligations, and (iii) securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities. During periods when, in the opinion of PAII,
a temporary defensive posture in the market is appropriate, the Trust may hold
up to 100% of its assets in cash, or in the instruments described above.
Hybrid Loans
The growth of the syndicated loan market has produced loan structures with
characteristics similar to Senior Loans but which resemble bonds in some
respects, and generally offer less covenant or other protections than
traditional Senior Loans while still being collateralized ("Hybrid Loans"). The
Trust may invest only in Hybrid Loans that are secured debt of the borrower,
although they may not in all instances be considered senior debt of the
borrower. With Hybrid Loans, the Trust may not possess a senior claim to all of
the collateral securing the Hybrid Loan. Hybrid Loans also may not include
covenants that are typical of Senior Loans, such as covenants requiring the
maintenance of minimum interest coverage ratios. As a result, Hybrid Loans
present additional risks besides those associated with traditional Senior Loans,
although they may provide a relatively higher yield. Because the lenders in
Hybrid Loans waive or forego certain loan covenants, their negotiating power or
voting rights in the event of a default may be diminished. As a result, the
lenders' interests may not be represented as significantly as in the case of a
conventional Senior Loan. In addition, because the Trust's security interest in
some of the collateral may be subordinate to other creditors, the risk of
nonpayment of interest or loss of principal may be greater than would be the
case with conventional Senior Loans. The Trust will invest only in Hybrid Loans
which meet credit standards established by PAII with respect to Hybrid Loans and
nonetheless provide certain protections to the lender such as collateral
maintenance or call protection. The Trust may only invest up to 20% of its
assets in Hybrid Loans as part of its investment in "Other Investments" as
described above, and Hybrid Loans will not count toward the 80% of the Trust's
assets that are normally invested in Senior Loans.
Subordinated and Unsecured Loans
The Trust may also invest up to 5% of its total assets, measured at the
time of investment, in subordinated and unsecured loans. The Trust may acquire a
subordinated loan only if, at the time of acquisition, it acquires or holds a
Senior Loan from the same borrower. The primary risk arising from a holder's
subordination is the potential loss in the event of default by the issuer of the
loans. Subordinated loans in an insolvency bear an increased share, relative to
senior secured lenders, of the ultimate risk that the borrower's assets are
insufficient to meet its obligations to its creditors. Unsecured loans are not
secured by any specific collateral of the borrower. They do not enjoy the
security associated with collateralization and may pose a greater risk of
nonpayment of interest or loss of principal than do secured loans. The Trust
will acquire unsecured loans only where the Investment Manager believes, at the
time of acquisition, that the Trust would have the right to payment upon default
that is not subordinate to any other creditor. The maximum of 5% of the Trust's
assets invested in subordinated and unsecured loans will constitute part of the
20% of the Trust's assets that may be invested in "Other Investments" as
described above, and will not count toward the 80% of the Trust's assets that
are normally invested in Senior Loans.
Use of Leverage
The Trust is permitted to borrow up to 33 1/3%, or such other percentage
permitted by law, of its total assets (including the amount borrowed) less all
liabilities other than borrowings.
The Trust is currently a party to credit facilities with financial
institutions that permit the Trust to borrow up to $515,000,000. Borrowing may
be made for the purpose of acquiring additional income-producing investments
when the Investment Manager believes that such use of borrowed proceeds will
enhance the Trust's net yield. The amount of outstanding borrowings may vary
with prevailing market or economic conditions. In addition, although the Trust
has not conducted a tender offer since 1992 or repurchased its shares since
January 1994, in the event that it determines to again conduct a tender offer or
repurchase its shares, the Trust may use borrowings to finance the purchase of
its shares. For information on risks associated with borrowing, see "Risk
Factors and Special Considerations -- Borrowing and Leverage."
Policies Subject to Shareholder Approval
Certain of the investment policies of the Trust described above have been
approved by the Board of Trustees of the Trust, but will not be effective until
approved by a majority of the shareholders of the Trust. These policies are
those (i) permitting the Trust to invest in Senior Loans of business entities
other than corporations, (ii) treating investments in Lease Participations as
Senior Loans, and (iii) permitting the Trust to invest in certain Hybrid Loans
and in unsecured loans. The proposed policy changes will be submitted to
shareholders for their approval at the Trust's annual shareholders meeting
currently scheduled for July, 1998.
GENERAL INFORMATION ON SENIOR LOANS
Primary Market Overview
The primary market for Senior Loans has become much larger and varied in
recent years. The volume of loans originated in the Senior Loan market has
increased from $376 billion in 1992 to $1.1 trillion in 1997. Senior Loans
tailored to the institutional investor, such as the Trust, have increased from
$2.5 billion in 1993 to nearly $25.0 billion in 1997. In 1997, the volume of
leveraged loans (priced at LIBOR + 1.5% or higher) reached the highest level
since 1989 with $194.0 billion in volume. Leveraged loan volume of $74.5 billion
in the fourth quarter of 1997 is above fourth quarter volume in each of the
preceding two years.
The following plot points replace a bar chart showing the growth of the primary
loan market from 1992 to 1997.
$ in billions
1988 $ 284.4
1989 $ 333.2
1990 $ 241.3
1991 $ 234.4
1992 $ 375.5
1993 $ 389.3
1994 $ 665.3
1995 $ 816.9
1996 $ 887.6
1997 $ 1,111.9
Source: Loan Pricing Corporation.
The total Senior Loan market for both leveraged and non-leveraged
transactions has averaged an annual growth rate of 24.2% since 1992. The Trust's
net assets, $734 million at the end of 1992 and $1 billion at the end of 1997,
have grown at an average annual growth rate of 7.0% for the same period.
At the same time primary Senior Loan volume has grown, demand has remained
strong as institutional investors other than banks have begun to enter the
Senior Loan market. Investment companies, insurance companies, and private
investment vehicles are joining U.S. and foreign banks as lenders. The entrance
of new investors has helped grow the bank loan trading market with record volume
of $62.0 billion during 1997. The active secondary market, coupled with banks'
focus on portfolio management and the move toward standard market practices, has
helped increase the liquidity for Senior Loans. With this growth in volume and
demand, Senior Loans have adopted innovative structures and characteristics, as
described elsewhere in this Prospectus.
About Senior Loans
Senior Loans vary from other types of debt in that they generally hold the
most senior position in the capital structure of a borrower. Priority liens are
obtained by the lenders that typically provide the first right to cash flows or
proceeds from the sale of a borrower's collateral if the borrower becomes
insolvent (subject to the limitations of bankruptcy law, which may provide
higher priority to certain claims such as, for example, employee salaries,
employee pensions and taxes). Thus, Senior Loans are generally repaid before
unsecured bank loans, corporate bonds, subordinated debt, trade creditors, and
preferred or common stockholders.
Senior Loans typically will be secured by pledges of collateral from the
borrower in the form of tangible assets such as cash, accounts receivable,
inventory, property, plant and equipment, common and/or preferred stock of
subsidiaries, and intangible assets including trademarks, copyrights, patent
rights and franchise value. The Trust may also receive guarantees as a form of
collateral. In some instances, the Trust may invest in Senior Loans that are
secured only by stock of the borrower or its subsidiaries or affiliates.
Generally, the agent on a Senior Loan is responsible for monitoring collateral
and for exercising remedies available to the lenders such as foreclosure upon
collateral.
Senior Loans generally are arranged through private negotiations between a
borrower and several financial institutions ("lenders") represented in each case
by an agent ("agent"), which usually is one or more of the lenders. The Trust
will acquire Senior Loans from and sell Senior Loans to the following lenders:
money center banks, selected regional banks and selected non-banks, insurance
companies, finance companies, other investment companies, private investment
funds, and lending companies. The Trust may also acquire Senior Loans from and
sell Senior Loans to U.S. branches of foreign banks which are regulated by the
Federal Reserve System or appropriate state regulatory authorities. On behalf of
the lenders, generally the agent is primarily responsible for negotiating the
loan agreement ("loan agreement"), which establishes the terms and conditions of
the Senior Loan and the rights of the borrower and the lenders. The agent and
the other original lenders typically have the right to sell interests
("participations") in their share of the Senior Loan to other participants. The
agent and the other original lenders also may assign all or a portion of their
interests in the Senior Loan to other participants.
The Trust's investment in Senior Loans generally may take one of several
forms including: acting as one of the group of lenders originating a Senior Loan
(an "original lender"); purchase of an assignment ("assignment") or a portion of
a Senior Loan from a third party, or acquiring a participation in a Senior Loan.
The Trust may pay a fee or forego a portion of interest payments to the lender
selling a participation or assignment under the terms of such participation or
assignment.
The agent that arranges a Senior Loan is frequently a commercial or
investment bank or other entity that originates a Senior Loan and the entity
that invites other parties to join the lending syndicate. In larger
transactions, it is common to have several agents; however, generally only one
such agent has primary responsibility for documentation and administration of
the Senior Loan. Agents are typically paid fees by the borrower for their
services. The Trust may serve as the agent or co-agent for a Senior Loan. See
"Additional Information About Investments and Investment Techniques --
Originating Senior Loans" in the SAI.
When the Trust is a member of the originating syndicate group for a Senior
Loan, it may share in a fee paid to the original lenders. When the Trust is an
original lender or acquires an assignment, it will have a direct contractual
relationship with the borrower, may enforce compliance by the borrower with the
terms of the Senior Loan agreement, and may have rights with respect to any
funds acquired by other lenders through set-off. Lenders also have certain
voting and consent rights under the applicable Senior Loan agreement. Action
subject to lender vote or consent generally requires the vote or consent of the
holders of some specified percentage of the outstanding principal amount of the
Senior Loan. Certain decisions, such as reducing the amount or increasing the
time for payment of interest on or repayment of principal of a Senior Loan, or
releasing collateral therefor, frequently require the unanimous vote or consent
of all lenders affected.
When the Trust is a purchaser of an assignment it typically succeeds to all
the rights and obligations under the loan agreement of the assigning lender and
becomes a lender under the loan agreement with the same rights and obligations
as the assigning lender. Assignments are, however, arranged through private
negotiations between potential assignees and potential assignors, and the rights
and obligations acquired by the purchaser of an assignment may be more limited
than those held by the assigning lender. The Trust will purchase an assignment
or act as lender with respect to a syndicated Senior Loan only where the agent
with respect to such Senior Loan is determined by the Investment Manager to be
creditworthy at the time of acquisition.
To a lesser extent, the Trust invests in participations in Senior Loans.
With respect to any given Senior Loan, the rights of the Trust when it acquires
a participation may be more limited than the rights of original lenders or of
investors who acquire an assignment. Participations may entail certain risks
relating to the creditworthiness of the parties from which the participations
are obtained. Participation by the Trust in a lender's portion of a Senior Loan
typically results in the Trust having a contractual relationship only with the
lender, not with the borrower. The Trust has the right to receive payments of
principal, interest and any fees to which it is entitled only from the lender
selling the participation and only upon receipt by such lender of such payments
from the borrower. In connection with purchasing participations, the Trust
generally will have no right to enforce compliance by the borrower with the
terms of the Senior Loan agreement, nor any rights with respect to any funds
acquired by other lenders through set-off against the borrower with the result
that the Trust may be subject to delays, expenses and risks that are greater
than those that exist where the Trust is the original lender, and the Trust may
not directly benefit from the collateral supporting the Senior Loan because it
may be treated as a creditor of the lender instead of the borrower. As a result,
the Trust may assume the credit risk of both the borrower and the lender selling
the participation. In the event of insolvency of the lender selling a
participation, the Trust may be treated as a general creditor of such lender,
and may not benefit from any set-off between such lender and the borrower. In
the event of bankruptcy or insolvency of the borrower, the obligation of the
borrower to repay the Senior Loan may be subject to certain defenses that can be
asserted by such borrower as a result of improper conduct of the lender selling
the participation. The Trust will only acquire participations if the lender
selling the participations and any other persons interpositioned between the
Trust and the lender are determined by the Investment Manager to be
creditworthy.
When the Trust is an original lender, it will have a direct contractual
relationship with the borrower. If the terms of an interest in a Senior Loan
provide that the Trust is in privity with the borrower, the Trust has direct
recourse against the borrower in the event the borrower fails to pay scheduled
principal or interest. In all other cases, the Trust looks to the agent to use
appropriate credit remedies against the borrower. When the Trust purchases an
assignment, the Trust typically succeeds to the rights of the assigning lender
under the Senior Loan agreement, and becomes a lender under the Senior Loan
agreement. When the Trust purchases a participation in a Senior Loan, the Trust
typically enters into a contractual arrangement with the lender selling the
participation, and not with the borrower.
Should an agent become insolvent, or enter Federal Deposit Insurance
Corporation ("FDIC") receivership or bankruptcy, any interest in the Senior Loan
transferred by such person and any Senior Loan repayment held by the agent for
the benefit of participants may be included in the agent's estate where the
Trust acquires a participation interest from an original lender, should that
original lender become insolvent, or enter FDIC receivership or bankruptcy, any
interest in the Senior Loan transferred by the original lender may be included
in its estate. In such an event, the Trust might incur certain costs and delays
in realizing payment or may suffer a loss of principal and interest.
RISK FACTORS AND SPECIAL CONSIDERATIONS
The following summarizes certain risks that should be considered, among
others, in connection with an investment in the Trust. For further information
on risks associated with the possible investments of the Trust, see "Additional
Information About Investments and Investment Techniques" in the Statement of
Additional Information.
This Prospectus includes certain statements that may be deemed to be
"forward-looking statements." All statements, other than statements of
historical facts, included in this Prospectus that address activities, events or
developments that the Trust or PAII, as the case may be, expects, believes or
anticipates will or may occur in the future, including such matters as the use
of proceeds, investment strategies, and other such matters could be considered
forward-looking statements. These statements are based on certain assumptions
and analyses made by the Trust or PAII, as the case may be, in light of its
experience and its perception of historical trends, current conditions, expected
future developments and other factors it believes are appropriate in the
circumstances. Such statements are subject to a number of assumptions, risks and
uncertainties, including the risk factors discussed below, general economic and
business conditions, the investment opportunities (or lack thereof) that may be
presented to and pursued by the Trust, changes in laws or regulations and other
factors, many of which are beyond the control of the Trust. Prospective
investors are cautioned that any such statements are not guarantees of future
performance and that actual results or developments may differ materially from
those described in the forward-looking statements.
Discount or Premium From NAV. The Trust's Shares have traded in the market
above, at, and below NAV since March 9, 1992, when the Trust's shares were
listed on the NYSE. The reasons for the Trust's Shares trading at a premium to
or discount from NAV are not known to the Trust, nor can the Trust predict
whether its Shares will trade in the future at a premium to or discount from
NAV, and if so, the level of such premium or discount. Shares of closed-end
investment companies frequently trade at a discount from NAV. The possibility
that shares of the Trust will trade at a discount from NAV is a risk separate
and distinct from the risk that the Trust's NAV may decrease.
The Offering may be conducted only if Shares of the Trust are trading at a
price equal to at least the Trust's NAV per Share plus the per Share amount of
the commission and any front-end administrative fees to be paid at the time of
the sale of the Shares. At any time when shares of a closed-end investment
company are purchased at a premium above NAV, the NAV of the shares purchased is
less than the amount invested by the shareholder. Furthermore, to the extent the
Shares of the Trust are trading at a premium above the minimum sales price, the
Trust will receive and benefit from the difference in those amounts.
Credit Risks and Realization of Investment Objective. While all investments
involve some amount of risk, Senior Loans generally involve less risk than
equity instruments of the same issuer because the payment of principal of and
interest on debt instruments is a contractual obligation of the issuer that, in
most instances, takes precedence over the payment of dividends, or the return of
capital, to the issuer's shareholders. Although the Trust will generally invest
in Senior Loans that will be fully collateralized with assets whose market
value, at the time of acquisition, equals or exceeds the principal amount of the
Senior Loan, the value of the collateral may decline below the principal amount
of the Senior Loan subsequent to the Trust's investment in such Senior Loan. In
addition, to the extent that collateral consists of stock of the borrower or its
subsidiaries or affiliates, the Trust will be subject to the risk that this
stock may decline in value, be relatively illiquid, or may lose all or
substantially all of its value, causing the Senior Loan to be
undercollateralized. Senior Loans are also subject to the risk of nonpayment of
scheduled interest or principal payments. In the event of a failure to pay
scheduled interest or principal payments on Senior Loans held by the Trust, the
Trust could experience a reduction in its income, and would experience a decline
in the market value of the particular Senior Loan so affected, and may
experience a decline in the NAV of Trust Shares or the amount of its dividends.
To the extent that the Trust's investment is in a Senior Loan acquired from
another lender, the Trust may be subject to certain credit risks with respect to
that lender. See "About Senior Loans." Further, there is no assurance that the
liquidation of the collateral underlying a Senior Loan would satisfy the
issuer's obligation to the Trust in the event of non-payment of scheduled
interest or principal, or that collateral could be readily liquidated. The risk
of non-payment of interest and principal also applies to other debt instruments
in which the Trust may invest. As of February 28, 1998, approximately 1.31% of
the Trust's net assets and .97% of total assets consisted of non-performing
Senior Loans.
In the event of a bankruptcy of the borrower, the Trust could experience
delays or limitations with respect to its ability to realize the benefits of the
collateral securing the Senior Loan. Among the credit risks involved in a
bankruptcy would be an assertion that the pledging of collateral to secure the
Senior Loan constituted a fraudulent conveyance or preferential transfer that
would have the effect of nullifying or subordinating the Trust's rights to the
rights of other creditors of the borrower under applicable law.
Investment decisions will be based largely on the credit analysis performed
by the Investment Manager's investment personnel, and such analysis may be
difficult to perform for many issuers. Information about interests in Senior
Loans generally will not be in the public domain, and interests are generally
not currently rated by any nationally recognized rating service. Many issuers
have not issued securities to the public and are not subject to reporting
requirements under federal securities laws. Generally, issuers are required to
provide financial information to lenders, including the Trust, and information
may be available from other Senior Loan participants or agents that originate or
administer Senior Loans.
While debt instruments generally are subject to the risk of changes in
interest rates, the interest rates of the Senior Loans in which the Trust will
invest will float with a specified interest rate. Thus the risk that changes in
interest rates will affect the market value of such Senior Loans is
significantly decreased.
Borrowing and Leverage. The Trust is permitted to enter into borrowing
transactions representing up to 33 1/3% (or such other percentage permitted by
law) of its total assets (including the amount borrowed) less all liabilities
other than borrowings. Borrowing for investment purposes increases both
investment opportunity and investment risk. Capital raised through borrowings
will be subject to interest and other costs. There can be no assurance that the
Trust's income from borrowed proceeds will exceed these costs; however, the
Investment Manager seeks to borrow for the purposes of making additional
investments only if it believes, at the time of entering into a Senior Loan,
that the total return on such investment will exceed interest payments and other
costs. In addition, the Investment Manager intends to mitigate the risk that the
costs of borrowing will exceed the total return on an investment by borrowing on
a variable rate basis. In the event of a default on one or more Senior Loans or
other interest-bearing instruments held by the Trust, borrowing would exaggerate
the loss to the Trust and may exaggerate the effect on the Trust's NAV. The
Trust's lenders will have priority to the Trust's assets over the Trust's
Shareholders.
As prescribed by the Investment Company Act of 1940, as amended (the
"Investment Company Act"), the Trust will be required to maintain specified
asset coverages of at least 300% with respect to any bank borrowing immediately
following any such borrowing and on an ongoing basis as a condition of declaring
dividends. The Trust's inability to make distributions as a result of these
requirements could cause the Trust to fail to qualify as a regulated investment
company and/or subject the Trust to income or excise taxes.
The interest rate on the Trust's credit facilities as of February 28, 1998
was a variable rate based on LIBOR or the federal funds rate, at the Trust's
option, plus 0.40% of outstanding borrowings on the 364-day credit facility and
0.375% of outstanding borrowings on the four-year credit facility, plus a
facility fee on unused commitments of 0.10% on the 364-day credit facility and
0.125% on the four-year credit facility. At such rates, and assuming the Trust
has borrowed an amount equal to 33 1/3% of its net assets plus borrowings, the
Trust must produce a 2.05% annual return (net of expenses) in order to cover
interest payments. The Trust intends to borrow only for investment purposes when
it believes at the time of borrowing that total return on investment will exceed
interest and other costs.
The following table is designed to illustrate the effect on return to a
holder of the Trust's Common Shares of the leverage obtained by the Trust's use
of borrowing, assuming hypothetical annual returns on the Trust's portfolio of
minus 10 to plus 10 percent. As can be seen, leverage generally increases the
return to shareholders when portfolio return is positive and decreases return
when the portfolio return is negative. Actual returns may be greater or less
than those appearing in the table.
<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Portfolio Return,
net of expenses(1) .......................... (10%) (5%) 0% 5% 10%
Corresponding Return to
Common Shareholders(2) ...................... (18.07%) (10.57%) (3.07%) 4.43% 11.92%
<FN>
(1) The Assumed Portfolio Return is required by regulation of the Commission
and is not a prediction of, and does not represent, the projected or actual
performance of the Trust.
(2) In order to compute the "Corresponding Return to Common Shareholders," the
"Assumed Portfolio Return" is multiplied by the total value of the Trust's
assets at the beginning of the Trust's fiscal year to obtain an assumed
return to the Trust. From this amount, all interest accrued during the year
is subtracted to determine the return available to Shareholders. The return
available to Shareholders is then divided by the total value of the Trust's
net assets as of the beginning of the fiscal year to determine the
"Corresponding Return to Common Shareholders."
</FN>
</TABLE>
Secondary Market for the Trust's Shares. The issuance of Shares through the
Offering may have an adverse effect on the secondary market for the Trust's
Shares. The increase in the amount of the Trust's outstanding Shares resulting
from the Offering may put downward pressure on the market price for the Shares
of the Trust. Shares will not be issued pursuant to the Offering at any time
when Shares are trading at a price lower than a price equal to the Trust's NAV
per Share plus the per Share amount of commissions to be paid to the Sales Agent
and any front-end administrative fees.
The Trust also issues Shares of the Trust through its Shareholder
Investment Program, and to specific investors pursuant to privately negotiated
transactions. See "Dividends and Distributions -- Shareholder Investment
Program." Shares may be issued under the Shareholder Investment Program or
pursuant to privately negotiated transactions at a discount to the market price
for such Shares, which may put downward pressure on the market price for Shares
of the Trust.
Limited Secondary Market for Senior Loans. Although it is growing, the
secondary market for Senior Loans is currently limited. Accordingly, some or
many of the Senior Loans in which the Trust invests will be relatively illiquid.
The Trust may have difficulty disposing of illiquid assets if it needs cash to
repay debt, to pay dividends, to pay expenses or to take advantage of new
investment opportunities. Although the Trust has not conducted a tender offer
since 1992, in the event that it determines to again conduct a tender offer,
limitations of a secondary market may result in difficulty in raising cash to
purchase tendered Shares. These events may cause the Trust to sell securities at
lower prices than it would otherwise consider to meet cash needs and may cause
the Trust to maintain a greater portion of its assets in cash equivalents than
it would otherwise, which could negatively impact performance. If the Trust
purchases a relatively large Senior Loan to generate income, the limitations of
the secondary market may inhibit the Trust from selling a portion of the Senior
Loan and reducing its exposure to a borrower when the Investment Manager deems
it advisable to do so.
In addition, because the secondary market for Senior Loans may be limited,
it may be difficult to value Senior Loans. Market quotations may not be
available and valuation may require more research than for liquid securities. In
addition, elements of judgment may play a greater role in the valuation, because
there is less reliable, objective data available.
Demand for Senior Loans. Although the volume of Senior Loans has increased
in recent years, demand for Senior Loans has also grown. An increase in demand
may benefit the Trust by providing increased liquidity for Senior Loans, but may
also adversely affect the rate of interest payable on Senior Loans acquired by
the Trust and the rights provided to the Trust under the terms of the Senior
Loan.
DESCRIPTION OF THE TRUST
The Trust was organized as a Massachusetts business trust on December 2,
1987, and is registered with the Commission as a diversified, closed-end
management investment company under the Investment Company Act. The Trust's
Agreement and Declaration of Trust, a copy of which is on file in the office of
the Secretary of State of the Commonwealth of Massachusetts, authorizes the
issuance of an unlimited number of shares of beneficial interest without par
value.
The Trust issues shares of beneficial interest in the Trust. Under
Massachusetts law, Shareholders could, under certain circumstances, be held
liable for the obligations of the Trust. However, the Agreement and Declaration
of Trust disclaims shareholder liability for acts or obligations of the Trust
and requires that notice of such disclaimer be given to all parties in each
agreement, obligation or instrument entered into or executed by the Trust or the
Trustees, and each party thereto must expressly waive all rights or any action
directly against Shareholders. The Agreement and Declaration of Trust provides
for indemnification out of the Trust's property for all loss and expense of any
Shareholder held liable on account of being or having been a Shareholder. Thus,
the risk of a Shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Trust would be unable to meet
its obligations wherein the complaining party was held not to be bound by the
disclaimer.
As of April 30 1998, to the best of the Trust's knowledge, no Shareholders
owned of record or beneficially more than 5% of the outstanding Common Shares of
the Trust. The number of Common Shares outstanding as of May 12, 1998 was
111,017,618, none of which were held by the Trust. The Shares are listed on the
NYSE.
Dividends, Voting and Liquidation Rights
Each Share of the Trust has one vote and shares equally in dividends and
distributions when and if declared by the Trust and in the Trust's net assets
upon liquidation. All Shares, when issued, are fully paid and are non-assessable
by the Trust. There are no preemptive or conversion rights applicable to any of
the Shares. Trust Shares do not have cumulative voting rights and, as such,
holders of more than 50% of the Shares voting for trustees can elect all
trustees and the remaining Shareholders would not be able to elect any trustees.
Status of Shares
The Board of Trustees may classify or reclassify any unissued Shares of the
Trust into Shares of any series by setting or changing in any one or more
respects, from time to time, prior to the issuance of such Shares, the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption of such shares. Any such classification or reclassification will
comply with the provisions of the Investment Company Act.
Fundamental and Non-Fundamental Policies of the Trust
The investment objective of the Trust, certain policies of the Trust
specified herein as "fundamental" and the investment restrictions of the Trust
described in the Statement of Additional Information are fundamental policies of
the Trust and may not be changed without a "Majority Vote" of the shareholders
of the Trust. The term "Majority Vote" means the affirmative vote of (a) more
than 50% of the outstanding shares of the Trust or (b) 67% or more of the shares
present at a meeting if more than 50% of the outstanding shares of the Trust are
represented at the meeting in person or by proxy, whichever is less. All other
policies of the Trust may be modified by resolution of the Board of Trustees of
the Trust.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Manager
PAII, 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004, serves
as Investment Manager to the Trust and has overall responsibility for the
management of the Trust. The Trust and PAII have entered into an Investment
Management Agreement that requires PAII to provide all investment advisory and
portfolio management services for the Trust. It also requires PAII to assist in
managing and supervising all aspects of the general day-to-day business
activities and operations of the Trust, including custodial, transfer agency,
dividend disbursing, accounting, auditing, compliance and related services. PAII
provides the Trust with office space, equipment and personnel necessary to
administer the Trust. The agreement with PAII can be canceled by the Board of
Trustees upon 60 days' written notice. Organized in December 1994, PAII is
registered as an investment adviser with the Commission. PAII serves as
investment manager to seven other registered investment companies (or series
thereof), as well as privately managed accounts, and currently has assets under
management of approximately $4 billion as of the date of this Prospectus.
PAII is an indirect, wholly-owned subsidiary of Pilgrim America Capital
Corporation ("Pilgrim America") (NASDAQ: PACC) (formerly, Express America
Holdings Corporation). Through its subsidiaries, Pilgrim America engages in the
financial services business, focusing on providing investment advisory,
administrative and distribution services to open-end and closed-end investment
companies and private accounts.
PAII bears its expenses of providing the services described above. PAII
currently receives from the Trust an annual fee, paid monthly, of 0.85% of the
average daily net assets of the Trust, plus the proceeds of any outstanding
borrowings, up to $700 million; 0.75% of the average daily net assets of the
Trust, plus the proceeds of any outstanding borrowings, in excess of $700
million up to $800 million; and 0.65% of the average daily net assets of the
Trust, plus the proceeds of any outstanding borrowings, in excess of $800
million. PAII has agreed to reduce its fee until November 12, 1999 to 0.60% of
the average daily net assets, plus the proceeds of any outstanding borrowings,
over $1.15 billion. On May 2, 1998, the Board of Trustees approved an amendment
to the Trust's investment management agreement with PAII that changes the
investment management fee to a rate of 0.80% of the average daily net assets of
the Trust, plus the proceeds of any outstanding borrowings. The amendment will
not be effective until aproved by a majority of the shareholders of the Trust.
The amendment will be submitted to shareholders for their approval at the
Trust's annual shareholders meeting currently scheduled for August, 1998.
The Trust pays all operating and other expenses of the Trust not borne by
PAII including, but not limited to, audit and legal fees, transfer agent,
registrar and custodian fees, expenses in preparing tender offers, shareholder
reports and proxy solicitation materials and other miscellaneous business
expenses. The Trust also pays all taxes imposed on it and all brokerage
commissions and loan-related fees. The Trust is responsible for paying all of
the expenses of the Offering.
Portfolio Management. The Trust's portfolio is managed by a portfolio
management team consisting of a Senior Portfolio Manager, three Assistant
Portfolio Managers, and credit analysts.
Howard Tiffen is a Senior Vice President of PAII and the President,
Chief Operating Officer, and Senior Portfolio Manager of the Trust. He
has had primary responsibility for investment management of the Trust
since November, 1995. Prior to November 1995, Mr. Tiffen worked as a
Managing Director of various divisions of Bank of America (and its
predecessor, Continental Bank).
James R. Reis is Executive Vice President, Chief Financial Officer,
Chief Credit Officer, and Assistant Secretary of the Trust. Mr. Reis
is Director, Vice Chairman (since December 1994), Executive Vice
President (since April 1995), and Treasurer (since September 1996), of
PAGI and PAII and Director (since December 1994), Vice Chairman (since
November 1995) and Assistant Secretary (since January 1995) of PASI.
Mr. Reis is also Executive Vice President, Treasurer and Assistant
Secretary of each of the other funds in the Pilgrim America Group of
Funds and Chief Financial Officer (since December 1993), Vice Chairman
and Assistant Secretary (since April 1993) and former President (May
1991-December 1993) of Pilgrim America (formerly, Express America
Holdings Corporation). Mr. Reis currently serves or has served as an
officer or director of other affiliates of Pilgrim America.
Daniel A. Norman is Senior Vice President, Treasurer and Assistant
Portfolio Manager of the Trust. He has served as Assistant Portfolio
Manager of the Trust since September 1996. Mr. Norman is a Senior Vice
President of PAGI and PAII (since December 1994) and Senior Vice
President (since November 1995) and Treasurer and Chief Financial
Officer (since April 1997) of PASI. Mr. Norman was Senior Vice
President of Express America Mortgage Corporation and Express America
Holdings Corporation (February 1992-February 1996).
Jeffrey A. Bakalar has served as Assistant Portfolio Manager of the
Trust since January 1998. Prior to joining PAII, Mr. Bakalar was Vice
President of First National Bank of Chicago (July 1994 - January 1998)
and Corporate Finance Officer of the Securitized Products Group of
Continental Bank (November 1993-July 1994).
Michel Prince has served as Assistant Portfolio Manager of the Trust
since May 1998. Prior to joining PAII, Mr. Prince was Vice President
of Rabobank International, Chicago Branch (July 1996 - April 1998) and
Vice President of Fuji Bank, Chicago Branch (April 1992 - July 1996).
Thomas (Tim) C. Hunt has served as Assistant Portfolio Manager of the
Trust since June 1997. He has also served as Senior Portfolio Analyst
for the Trust from December 1995 to June 1997. Prior to joining PAII,
Mr. Hunt was a Corporate Finance Analyst with Bank of America (June
1995-December 1995), received a masters degree from the American
Graduate School of International Management (1993-1995), and worked
for the Japanese Ministry of Education in Saitama, Japan (1991-1993).
The Administrator
The Administrator of the Trust is PAGI. Its principal business address is,
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. The Administrator
is a wholly-owned subsidiary of Pilgrim America and the immediate parent company
of PAII.
Under an Administration Agreement between PAGI and the Trust, PAGI
administers the Trust's corporate affairs subject to the supervision of the
Trustees of the Trust. In that connection PAGI monitors the provisions of the
Senior Loan agreements and any agreements with respect to interests in Senior
Loans and is responsible for recordkeeping with respect to the Senior Loans in
the Trust's portfolio. PAGI also furnishes the Trust with office facilities and
furnishes executive personnel together with clerical and certain recordkeeping
and administrative services. These include preparation of annual and other
reports to shareholders and to the Commission. PAGI also handles the filing of
federal, state and local income tax returns not being furnished by the Custodian
or Transfer Agent (as defined below). The Administrator has authorized all of
its officers and employees who have been elected as Trustees or officers of the
Trust to serve in the latter capacities. All services furnished by the
Administrator under the Administration Agreement may be furnished by such
officers or employees of the Administrator.
The Trust pays PAGI for the services performed and the facilities furnished
by PAGI as Administrator a fee, computed daily and payable monthly. The
Administration Agreement states that PAGI is entitled to receive a fee at an
annual rate of 0.15% of the average daily net assets of the Trust, plus the
proceeds of any outstanding borrowings, up to $800 million; and 0.10% of the
average daily net assets of the Trust, plus the proceeds of any outstanding
borrowings, in excess of $800 million.
Transfer Agent, Dividend Disbursing Agent and Registrar
The transfer agent, dividend disbursing agent and registrar for the Shares
is DST Systems, Inc. ("DST"), whose principal business address is 330 West 9th
Street, Kansas City, Missouri 64105. In addition, DST acquires shares on behalf
of the Trust for distribution to Shareholders under the Trust's Shareholder
Investment Program.
Custodian
The Trust's securities and cash are held under a Custody Agreement with
Investors Fiduciary Trust Company ("IFTC"), whose principal business address is
801 Pennsylvania, Kansas City, Missouri 64105.
PLAN OF DISTRIBUTION
The Trust has entered into a Sales Agency Agreement with PaineWebber, a
form of which has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part. The summary of the Sales Agency Agreement
contained herein is qualified by reference to such Agreement. Subject to the
terms and conditions of the Sales Agency Agreement, the Trust may issue and sell
up to 10,000,000 Shares (the "Maximum Amount") of the Trust from time to time
through PaineWebber, as sales agent for the Trust, which shares are being
offered under this Prospectus. The Shares offered hereby are to be sold from
time to time through PaineWebber, as exclusive sales agent for the Trust, by
means of transactions effected on the NYSE. Sales may be effected, at the
discretion of the Trust and PaineWebber, on any day that the NYSE is open for
trading, subject to a minimum price which will be an amount equal to the current
NAV per Share plus the per Share amount of the commission to be paid to
PaineWebber and any front-end administrative fee. The price per Share is
expected to be at or about the last sales price in a transaction of the Trust's
shares on the NYSE. As of May 12, 1998, the last reported sales price of a Share
of the Trust on the NYSE was $10.125.
The Trust will instruct PaineWebber not to sell the Shares below a minimum
price, which will be an amount equal to the current NAV per Share plus the per
Share amount of the commission to be paid to PaineWebber. The compensation to
PaineWebber with respect to the Shares will be at a fixed commission rate of 3%
of the gross sales price per Share of the Shares sold with respect to the first
4,000,000 Shares sold and 2.25% of the gross sales price per share of the Shares
sold thereafter.
Settlements of sales of Shares will occur on the third business day
following the date on which any such sales are made. Purchases of Shares through
PaineWebber as sales agent for the Trust will settle the regular way.
Following the sale of Shares pursuant to the Sales Agency Agreement, the
Trust will file a prospectus supplement under the applicable paragraph of Rule
497 promulgated under the Securities Act of 1933, as amended (the "Act"), which
prospectus supplement will set forth the number of Shares sold through
PaineWebber as sales agent, the high and low prices at which the Shares were
sold, the net proceeds to the Trust, and the compensation received by
PaineWebber and other fees with respect to such sales. Unless otherwise
indicated in a further prospectus supplement, PaineWebber as sales agent will
act as sales agent on a reasonable efforts basis.
In connection with the sale of the Shares on behalf of the Trust,
PaineWebber may be deemed to be an underwriter within the meaning of the Act,
and the compensation of PaineWebber may be deemed to be underwriting commissions
or discounts. The Trust has agreed to provide indemnification and contribution
to PaineWebber against certain liabilities, including liabilities under the Act.
PaineWebber may engage in transactions with, or perform services for, the Trust
in the ordinary course of business.
The offering of Shares pursuant to the Sales Agency Agreement will
terminate upon the earlier of (i) the sale of all Shares subject thereto or (ii)
termination of the Sales Agency Agreement. The Trust will have the right to
terminate the Sales Agency Agreement in its discretion after the first
anniversary of the date of the Agreement. PaineWebber will have the right to
terminate the Sales Agency Agreement in its discretion at any time after the
first anniversary of the date of the Agreement, and in certain other
circumstances specified in the Sales Agency Agreement.
Pursuant to an agreement between the Trust and Pilgrim America Securities,
Inc. ("PASI"), the Trust will pay PASI a fee of up to 0.75% of the gross sales
price per share of the Shares sold for providing administrative assistance to
the Trust in connection with the Offering. Administrative services include
providing information to the Sales Agent on a daily basis, conferring with the
Sales Agent regarding the amount of Shares issued under the Offering, and
providing other services necessary to administer the Offering. The payment of
such fee will commence following the sale of 4,000,000 Shares pursuant to the
Offering. PASI and PAII, the Trust's Investment Manager, are indirect,
wholly-owned subsidiaries of PACC. See "Investment Management and other Services
- - Investment Manager."
The Trust will bear the expenses of the Offering. These expenses include,
but are not limited to, the expense of preparation of the Prospectus and SAI for
the Offering, the expense of counsel and auditors in connection with the
Offering, and others.
USE OF PROCEEDS
It is expected that the net proceeds of the Offering will be invested in
Senior Loans and other securities consistent with the Trust's investment
objective and policies. Pending investment in Senior Loans, the proceeds will be
used to pay down the Trust's outstanding borrowings under its credit facilities.
See "Financial Highlights and Investment Performance - Policy on Borrowing." As
of February 28, 1998, $342,000,000 was outstanding. By paying down the Trust's
borrowings, it will be possible to invest the proceeds of the Offering
consistent with the Trust's investment objectives and policies almost
immediately. As investment opportunities are identified, it is expected that the
Trust will redeploy its available credit to increase its investment
opportunities in additional Senior Loans.
DIVIDENDS AND DISTRIBUTIONS
Distribution Policy. Income dividends are declared and paid monthly. Income
dividends may be distributed in cash or reinvested in additional full and
fractional shares pursuant to the Trust's Shareholder Investment Program
discussed below. Shareholders receive statements on a periodic basis reflecting
any distributions credited or paid to their account. Income dividends consist of
interest accrued and amortization of fees earned less any amortization of
premiums paid and the estimated expenses of the Trust, including fees payable to
PAII. Income dividends are calculated monthly under guidelines approved by the
Trustees. Each dividend is payable to Shareholders of record at the time of
declaration. Accrued amounts of fees received, including facility fees, will be
taken in as income and passed on to Shareholders as part of dividend
distributions. Any fees or commissions paid to facilitate the sale of portfolio
Senior Loans in connection with quarterly tender offers or other portfolio
transactions may reduce the dividend yield. The Trust may make one or more
annual payments from any net realized capital gains, if any.
Shareholder Investment Program. The Trust's Shareholder Investment Program
(the "Program") allows participating Shareholders to reinvest all dividends and
capital gain distributions in additional shares of the Trust. The Program also
allows participants to make optional cash investments monthly through DST (the
"Program Agent"), in amounts ranging from a minimum of $100 to a maximum of
$5,000. Subject to the permission of the Trust, participating Shareholders may
also make optional cash investments in excess of the monthly maximum. Shares
purchased by participants in the Program in connection with the reinvestment of
dividends or optional cash investments may be issued by the Trust if the Trust's
Shares are trading at a premium to net asset value. If the Trust's Shares are
trading at a discount to net asset value, Shares purchased under the Program
will be purchased on the open market. Shares issued by the Trust in connection
with the reinvestment of dividends will be issued at the greater of (i) net
asset value or (ii) a discount of 5% to the market price. Shares issued by the
Trust in connection with optional cash investments will be issued at the greater
of (i) net asset value or (ii) a discount, determined by the Trust, ranging from
0% to 5% to the market price. All distributions to Shareholders whose Shares are
registered in their own names automatically will be paid in cash, unless the
Shareholder elects to reinvest the distributions in additional shares of the
Trust pursuant to the Program. Shareholders who receive dividends and capital
gain distributions in cash may elect to participate in the Program by notifying
DST. Additional information about the Program may be obtained from The Pilgrim
America Group's Shareholder Services Department at 1 (800) 992-0180. For
additional information, see "Shareholder Investment Program" in the SAI.
TAX MATTERS
The Trust intends to operate as a "regulated investment company" under the
Internal Revenue Code of 1986, as amended. To do so, the Trust must meet certain
income, distribution and diversification requirements. In any fiscal year in
which the Trust so qualifies and distributes to Shareholders substantially all
of its net investment income and net capital gains, the Trust itself is
generally relieved of any federal income or excise tax.
All dividends and capital gains distributed to Shareholders are taxable
whether they are reinvested or received in cash, unless the Shareholder is
exempt from taxation or entitled to tax deferral. Dividends paid out of the
Trust's investment company taxable income (including interest, dividends, if
any, and net short-term capital gains) will be taxable to Shareholders as
ordinary income. If a portion of the Trust's income consists of dividends paid
by U.S. corporations, a portion of the dividends paid by the Trust may be
eligible for the corporate dividends-received deduction. Distributions of net
capital gains (the excess of net long-term capital gains over net short-term
capital losses), if any, designated as capital gain dividends are taxable as
long-term capital gains, regardless of how long a Shareholder has held the
Trust's Shares, and will generally be subject to a minimum tax rate of 28% or
20%, depending upon the Trust's holding period for the assets whose sale
produces the gain. Early each year, Shareholders will be notified as to the
amount and federal tax status of all dividends and capital gains paid during the
prior year. Such dividends and capital gains may also be subject to state or
local taxes. Dividends declared in October, November, or December with a record
date in such month and paid during the following January will be treated as
having been paid by the Trust and received by Shareholders on December 31 of the
calendar year in which declared, rather than the calendar year in which the
dividends are actually received.
If a Shareholder sells or otherwise disposes of his or her Shares of the
Trust, he or she may realize a capital gain or loss which will be long-term or
short-term, generally depending on the holding period for the Shares.
If a Shareholder has not furnished a certified correct taxpayer
identification number (generally a Social Security number) and has not certified
that withholding does not apply, or if the Internal Revenue Service has notified
the Trust that the taxpayer identification number listed on the account is
incorrect according to their records or that the Shareholder is subject to
backup withholding, federal law generally requires the Trust to withhold 31%
from any dividends and/or redemptions (including exchange redemptions). Amounts
withheld are applied to federal tax liability; a refund may be obtained from the
Service if withholding results in overpayment of taxes. Federal law also
requires the Trust to withhold 30% or the applicable tax treaty rate from
ordinary income dividends paid to certain nonresident alien and other non-U.S.
shareholder accounts.
This is a brief summary of some of the federal income tax laws that affect
an investment in the Trust. Please see the SAI and a tax adviser for further
information.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed on for the Trust
by Dechert Price & Rhoads, Washington, D.C., counsel to the Trust. Certain legal
matters in connection with this distribution will be passed on for the Sales
Agent by Brown & Wood LLP, New York, New York.
EXPERTS
The financial statements and financial highlights contained in the Trust's
February 28, 1998 annual report to shareholders except for those periods ending
prior to February 29, 1996 have been incorporated by reference herein in
reliance upon the report of KPMG Peat Marwick LLP, independent auditors,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing. The address of KPMG Peat Marwick LLP is 725 South
Figueroa Street, Los Angeles, California 90017-5491.
REGISTRATION STATEMENT
The Trust has filed with the Commission, Washington, D.C., a Registration
Statement under the Securities Act, relating to the Shares offered hereby. For
further information with respect to the Trust and its Common Shares, reference
is made to such Registration Statement and the exhibits filed with it.
SHAREHOLDER REPORTS
The Trust issues reports that include financial information to its
shareholders quarterly.
FINANCIAL STATEMENTS
The Trust's audited financial statements for the fiscal year ended February
28, 1998 are incorporated into the SAI by reference from the Trust's Annual
Report to Shareholders. The Trust will furnish without charge copies of its
Annual Report and any subsequent Quarterly or Semi-Annual Report to Shareholders
upon request to the Trust, 40 North Central Avenue, Suite 1200, Phoenix, Arizona
85004, toll-free telephone 1 (800) 992-0180.
<PAGE>
TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
Page
Change of Name........................................................ 2
Additional Information about Investments and Investment Techniques.... 2
Investment Restrictions............................................... 8
Trustees and Officers................................................. 9
Investment Management and Other Services.............................. 12
Portfolio Transactions................................................ 14
Net Asset Value....................................................... 15
Methods Available to Reduce Market Value Discount from NAV............ 15
Shareholder Investment Program........................................ 16
Tax Matters........................................................... 19
Advertising and Performance Data...................................... 23
Financial Statements.................................................. 24
<PAGE>
<TABLE>
<S> <C>
No dealer, salesperson or any other person has been
authorized to give any information or to make any
representations other than those contained in this 10,000,000 Shares of Beneficial Interest
Prospectus in connection with the offer made by this Prospectus
and, if given or made, such information or representations must
not be relied upon as having been authorized by the Trust or
the Investment Manager. This Prospectus does not constitute Pilgrim America Prime Rate Trust
an offer to sell or the solicitation of any offer to buy any
security other than the Shares offered by this Prospectus,
nor does it constitute an offer to sell or a solicitation of
any offer to buy the Shares by anyone in any jurisdiction in
which such offer or solicitation is not authorized, or in which
the person making such offer or solicitation is not New York Stock Exchange Symbol: PPR
qualified to do so, or to any such person to whom it is
unlawful to make such offer or solicitation. Neither the
delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that
information contained herein is correct as of any time
subsequent to the date hereof. However, if any material
change occurs while this Prospectus is required by law to
be delivered, this Prospectus will be amended or
supplemented accordingly. __________________________
____________________________________________ PROSPECTUS
--------------------------
TABLE OF CONTENTS
Prospectus Summary................................... 2
Trust Expenses....................................... 4
Financial Highlights and Investment Performance...... 6 PaineWebber Incorporated
Investment Objective and Policies.................... 13
General Information on Senior Loans.................. 16
Risk Factors and Special Considerations.............. 18
Description of the Trust ............................ 21
Investment Management and Other Services............. 22 _________________________
Plan of Distribution................................. 24
Use of Proceeds...................................... 25
Dividends and Distributions.......................... 26
Tax Matters.......................................... 26
Legal Matters........................................ 27 June 19, 1998
Experts.............................................. 27
Registration Statement............................... 27
Financial Statements................................. 27
Table of Contents of Statement of Additional Information 28
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