Pilgrim America Prime Rate Trust
Supplement dated September 10, 1998 to
Prospectus dated June 11, 1998
Change in Investment Management Fee
Effective August 6, 1998, pursuant to an Amendment to the Investment Management
Agreement between Pilgrim America Prime Rate Trust (the "Trust") and Pilgrim
America Investments, Inc. ("PAII"), the investment management fee paid by the
Trust to PAII is equal to an annual rate of 0.80% of the Trust's average daily
net assets, plus the proceeds of any outstanding borrowings. PAII will 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. This replaces the investment management
fee for the Trust as described on page 21 of the Prospectus. The Trust Expense
information on pages 3-4 the prospectus is also revised to reflect this fee as
follows:
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)
<TABLE>
<CAPTION>
Net Assets Net Assets
Plus Without
Borrowings(2) Borrowings(3)
<S> <C> <C>
Shareholder Transaction Expenses
Shareholder Investment Program
Commission (as a percentage of offering price) (4) 1.00% 1.00%
Shareholder Investment Program.................... NONE NONE
Privately Negotiated Transactions
Commission (as a percentage of offering price) (4) 3.00% 3.00%
Shareholder Investment Program.................... NONE NONE
Annual Expenses (as a percentage of net assets
attributable to 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%
<FN>
(1) The calculations in the fee table above are based on the Trust's expenses
as a percentage of net assets. Certain expenses of the Trust, such as
management and administrative fees, are calculated on the basis of net
assets plus borrowings. If the Trust's expenses are calculated on the basis
of net assets plus borrowings (including borrowings equal to 33 1/3% of net
assets plus borrowings), the annual expenses in the fee table would read as
follows:
Annual Expenses (as a percentage of net assets plus borrowings
attributable to Shares)
Management and Administrative Fees......................0.85%
Other Operating Expenses................................0.16%
Total Annual Expenses before Interest Expense................1.01%
Interest Expense on Borrowed Funds...........................2.05%
Total Annual Expenses........................................3.06%
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 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) In connection with optional cash investments in excess of $5,000 pursuant
to a waiver, a commission of up to 1.00% of the amount of such investment
may be paid to PASI for services in connection with the sale of the Shares,
while in connection with certain privately negotiated transactions, a
commission of up to 3.00% of such investment may be paid to PASI. PASI may
allow all or some of such commission to other broker-dealers. See
"Distribution Arrangements." No commissions will be paid by the Trust or
its Shareholders in connection with the reinvestment of dividends and
capital gains distributions or in connection with optional cash investments
up to the maximum of $5,000 per month.
(5) Pursuant to an investment management agreement with the Trust, PAII is
entitled to receive a fee of 0.80% of the average daily net assets of the
Trust, plus the proceeds of any outstanding borrowings. PAII has agreed to
reduce its management fee until November 12, 1999 to 0.60% on that portion
of the Trust's average daily net assets, plus the proceeds of any
outstanding borrowings, in excess of $1.15 billion. See "Investment
Management and Other Services -- Investment Manager." Pursuant to its
Administration Agreement with the Trust, Pilgrim America Group, Inc.
("PAGI" or the "Administrator"), the Trust's Administrator, is entitled to
receive a fee of 0.15% of the Trust's average daily net assets, plus the
proceeds of any outstanding borrowings, up to $800 million; and 0.10% of
the average daily net assets, plus the proceeds of any outstanding
borrowings, in excess of $800 million. See "Investment Management and Other
Services - The Administrator."
(6) "Other Operating Expenses" are based on estimated amounts for the current
fiscal year.
</FN>
</TABLE>
The following example applies to shares issued in connection with the
Trust's Shareholder Investment Program. Because the assumed amount of investment
in the example is $1,000, the example does not reflect the maximum front-end
commission of 1.0% on sales of greater than $5,000 per month pursuant to a
request for waiver.
<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 $46 $139 $232 $469
the Trust has borrowed . . . . .
You would pay the following expenses on a $1,000
investment, assuming a 5% annual return and where $12 $36 $63 $139
the Trust has not borrowed . .
</TABLE>
The following example applies to shares issued in connection with
privately negotiated transactions, which may have a maximum front-end commission
of 3.0%.
<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 $75 $164 $255 $484
the Trust has borrowed . . . . .
You would pay the following expenses on a $1,000
investment, assuming a 5% annual return and where $41 $65 $91 $164
the Trust has not borrowed . .
</TABLE>
These hypothetical examples assume 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 examples should not be considered a representation of
past or future expenses, and actual expenses may be greater or less than those
shown.
Policies Subject to Shareholder Approval
The section captioned "Policies Subject to Shareholder Approval" is deleted from
the Prospectus.
Policy on Borrowing
The section captioned "Policy on Borrowing" on page 8 of the Prospectus is
revised to read as follows:
Beginning in May of 1996, the Trust began a policy of borrowing for investment
purposes. The Trust seeks to use proceeds from borrowing to acquire
income-producing investments which, by their terms, pay interest at a rate
higher than the rate the Trust pays on borrowings. Accordingly, borrowing has
the potential to increase the Trust's total income. The Trust currently is a
party to credit facilities with financial institutions that permit the Trust to
borrow up to $700,000,000. Interest is payable on the credit facilities by the
Trust at a variable rate that is tied to LIBOR, the federal funds rate, or a
commercial paper based rate, plus a facility fee on unused commitments. As of
August 31, 1998, the Trust had outstanding borrowings of $509,000,000. The
lenders under the credit facilities have a security interest in all assets of
the Trust. The lenders have the right to liquidate Trust assets in the event of
default by the Trust, and the Trust may be inhibited from paying dividends in
the event of a material adverse event or condition respecting the Trust or
Investment Manager until outstanding debts are paid or until the event or
condition is cured. The Trust is permitted to borrow up to 33 1/3%, or such
other percentage permitted by law, of its total assets (including the amount
borrowed) less all liabilities other than borrowings. See "Risk Factors and
Special Considerations - Borrowing and Leverage."
Secondary Market for Senior Loans
The last paragraph on page 19 carrying over to page 20 of the Prospectus is
revised to read as follows:
Limited Secondary Market for Senior Loans. Although it is growing, the secondary
market for Senior Loans is currently limited. There is no organized exchange or
board of trade on which Senior Loans may be traded; instead, the secondary
market for Senior Loans is an unregulated inter-dealer or inter-bank market.
Accordingly, some or many of the Senior Loans in which the Trust invests will be
relatively illiquid. In addition, Senior Loans in which the Trust invests
generally require the consent of the borrower prior to sale or assignment. These
consent requirements may delay or impede the Trust's ability to sell Senior
Loans. The Trust may have difficulty disposing of illiquid assets if it needs
cash to repay debt, to pay dividends, to pay expenses or to take advantage of
new investment opportunities. Although the Trust has not conducted a tender
offer since 1992, in the event that it determines to again conduct a tender
offer, limitations of a secondary market may result in difficulty raising cash
to purchase tendered Shares. These events may cause the Trust to sell securities
at lower prices than it would otherwise consider to meet cash needs and may
cause the Trust to maintain a greater portion of its assets in cash equivalents
than it would otherwise, which could negatively impact performance. If the Trust
purchases a relatively large Senior Loan to generate income, the limitations of
the secondary market may inhibit the Trust from selling a portion of the Senior
Loan and reducing its exposure to a borrower when the Investment Manager deems
it advisable to do so.
