As filed with the Securities and Exchange Commission on March 3, 1999
1933 Act File No. 333-68239
1940 Act File No. 811-5410
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2/A
(Check appropriate box or boxes)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] Pre-Effective Amendment No. 1
[ ] Post-Effective Amendment No. ___
and
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 30
PILGRIM PRIME RATE TRUST
(formerly Pilgrim America Prime Rate Trust)
Exact Name of Registrant Specified in Charter
40 North Central Avenue, Suite 1200
Phoenix, AZ 85004
Address of Principal Executive Offices (Number, Street, City, State, Zip Code)
(602) 417-8256
Registrant's Telephone Number, Including Area Code
James M. Hennessy, Esq.
Pilgrim Group, Inc.
40 North Central Avenue, Suite 1200
Phoenix, AZ 85004
Name and Address (Number, Street, State, Zip Code) of Agent for Service
Copies to:
Jeffrey S. Puretz, Esq.
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, D.C. 20006
Approximate Date of Proposed Public Offering: As soon as practical after the
effective date of this Registration Statement.
If any securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, other
than securities offered in connection with a dividend reinvestment plan, check
the following box. [X]
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
=================================================================================================
<S> <C> <C> <C> <C>
Proposed Maximum Proposed Maximum
Title of Securities Amount Being Offering Price Aggregate Offering Amount of
Being Registered Registered Per Unit Price Registration Fee
- -------------------------------------------------------------------------------------------------
Shares of Beneficial 5,000,000 shares $9.59375(1) $47,968,750(1) $13,335.31(2)
Interest (without par
value)
=================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933 based on the
average of the high and low sales prices of the shares of beneficial
interest on November 25, 1998 as reported on the New York Stock Exchange.
(2) Previously paid.
--------------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with the provisions of Section
8(a) of the Securities Act of 1933, as amended, or until the Registration
Statement shall become effective on such date as the Securities and Exchange
Commission, acting pursuant to Section 8(a), may determine.
================================================================================
<PAGE>
PILGRIM PRIME RATE TRUST
CROSS-REFERENCE SHEET
PART A
ITEM
NO. CAPTION LOCATION IN PROSPECTUS
- ---- ------- ----------------------
1. Outside Front Cover...................... Front Cover Page
2. Inside Front and Outside
Back Cover Page.......................... Inside Front and Outside
Back Cover Page
3. Fee Table and Synopsis................... Prospectus Summary; Trust
Expenses
4. Financial Highlights..................... Financial Highlights and
Investment Performance --
Financial Highlights Table
5. Plan of Distribution..................... Front Cover Page;
Prospectus Summary; Plan
of Distribution
6. Selling Shareholders..................... Not Applicable
7. Use of Proceeds.......................... Use of Proceeds
8. General Description of the Registrant.... Front Cover Page; Prospectus
Summary; Financial Highlights
and Investment Performance --
Portfolio Composition;
Financial Highlights and
Investment Performance --
Trading and NAV Information;
Description of the Shares;
Investment Objectives and
Policies; Risk Factors and
Special Considerations;
General Information on Senior
Loans
9. Management............................... Prospectus Summary; Investment
Management and Other Services
10. Capital Stock, Long-Term Debt, and
Other Securities......................... Front Cover Page; Description
of the Shares; Dividends and
Distributions -- Distribution
Policy; Dividends and
Distributions -- Shareholder
Investment Program; Tax
Matters
11. Defaults and Arrears on Senior
Securities............................... Not Applicable
12. Legal Proceedings........................ Not Applicable
13. Table of Contents of the Statement
of Additional Information................ Table of Contents of Statement
of Additional Information
<PAGE>
PART B
ITEM LOCATION IN STATEMENT OF
NO. CAPTION ADDITIONAL INFORMATION
- ---- ------- ------------------------
14. Cover Page............................... Cover Page
15. Table of Contents........................ Table of Contents
16. General Information and History.......... Change of Name
17. Investment Objective and Policies........ Additional Information About
Investments and Investment
Techniques; Investment
Restrictions
18. Management............................... Trustees and Officers
19. Control Persons and Principal Holders
of Securities............................ Trustees and Officers;
Prospectus: Description of the
Shares
20. Investment Advisory and Other Services... Investment Management and
Other Services; Prospectus:
Investment Management and
Other Services; Prospectus:
Experts
21. Brokerage Allocation and Other
Practices................................ Portfolio Transactions
22. Tax Status............................... Tax Matters
23. Financial Statements..................... Prospectus: Financial
Statements
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE>
Prospectus
5,000,000 Shares of Beneficial Interest
PILGRIM PRIME RATE TRUST
New York Stock Exchange Symbol: PPR
PILGRIM(TM)
THE VALUE OF INVESTING(R)
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004
(800) 992-0180
Pilgrim Prime Rate Trust (the "Trust") is a diversified, closed-end management
investment company. The Trust's investment objective is to seek as high a level
of current income as is consistent with the preservation of capital. The Trust
seeks to achieve its objective by investing primarily in interests in senior
floating-rate loans ("Senior Loans"), the interest rates of which float
periodically based upon a benchmark indicator of prevailing interest rates.
Shares of the Trust trade on the New York Stock Exchange (the "NYSE") under the
symbol "PPR." The Trust's Investment Manager is Pilgrim Investments, Inc.
("Pilgrim Investments" or the "Investment Manager"). The address of the Trust
is 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004.
Investment in the Trust involves certain risks and special considerations,
including risks associated with the Trust's use of leverage. See "Risk Factors
and Special Considerations" beginning on page .
This prospectus applies to 5,000,000 shares of beneficial interest (the
"Shares") of the Trust which may be issued and sold from time to time by the
Trust (the "Offering") through Pilgrim Securities, Inc. ("Pilgrim Securities"),
as distributor and principal underwriter, through broker-dealers who have
entered into selected dealer agreements with Pilgrim Securities. See "Plan of
Distribution." The Shares will be sold at market prices, which will be
determined with reference to trades on the New York Stock Exchange, subject to a
minimum price to be established each day by the Trust. The minimum price on any
day will not be less than the current net asset value ("NAV") per Share plus the
per share amount of the sales commission to be paid to Pilgrim Securities. Any
shares sold pursuant to this prospectus will be subject to a commission of 4% of
the gross sales price of the shares sold. As of February 26, 1999, the last
reported sales price of a Share of the Trust on the NYSE was $9.56.
----------------
The Securities and Exchange Commission commission has not approved
or disapproved these securities, or determined if this prospectus
is truthful or complete. Any representation to the contrary
is a criminal offense.
----------------
Please read this Prospectus and retain it for future reference. This Prospectus
sets forth important information about the Trust that you should know before
investing. The Trust has filed with the Securities and Exchange Commission (the
"Commission") a Statement of Additional Information dated , 1999 (the
"SAI") containing additional information about the Trust. The SAI is
incorporated by reference in its entirety into this Prospectus. You may obtain
a copy of the SAI, the table of contents of which appears on page 29 of this
Prospectus, withhout charge by contacting the Trust toll-free at (800)
992-0180.
----------------
The date of this Prospectus is March 4, 1999.
<PAGE>
TABLE OF CONTENTS
Prospectus Summary............................................... 3
Trust Expenses................................................... 5
Financial Highlights and Investment Performance.................. 7
Investment Objective and Policies................................ 14
General Information on Senior Loans.............................. 17
Risk Factors and Special Considerations.......................... 19
Description of the Trust......................................... 22
Investment Management and Other Services......................... 23
Plan of Distribution............................................. 26
Use of Proceeds.................................................. 26
Dividends and Distributions...................................... 27
Tax Matters...................................................... 27
Legal Matters.................................................... 28
Experts.......................................................... 28
Registration Statement........................................... 28
Shareholder Reports ............................................. 28
Financial Statements............................................. 28
Table of Contents of Statement of Additional Information......... 29
<PAGE>
PROSPECTUS SUMMARY
The following is a summary, and does not contain all the information that may
be important to you. You should read the entire Prospectus before deciding to
invest.
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
February 26, 1999, the Trust's NAV per
Share was $9.24.
NYSE Listed As of February 26, 1999, the Trust had
130,206,136 Shares outstanding, which are
traded on the NYSE under the symbol "PPR."
As of February 26, 1999, the last reported
sales price of a Share of the Trust was
$9.56.
Investment Objective To obtain as high a level of current income
as is consistent with the preservation of
capital. The Trust cannot guarantee that it
will achieve its investment objective.
Primary Investment Strategy The Trust seeks to achieve its investment
objective by primarily acquiring interests
in Senior Loans with interest rates that
float periodically based on a benchmark
indicator of prevailing interest rates,
such as the Prime Rate or the London
Inter-Bank Offered Rate ("LIBOR"). The
Trust may also use techniques such as
borrowing for investment purposes.
Diversification The Trust maintains a diversified
investment portfolio. As a diversified
management investment company, the Trust,
with respect to 75% of its total assets,
may invest no more than 5% of the value of
its total assets in any one issuer (other
than the U.S. Government). This strategy of
diversification is intended to manage risk
by limiting exposure to any one issuer.
General Investment Guidelines * Normally, at least 80% of the Trust's net
assets is invested in Senior Loans.
* A maximum of 25% of the Trust's assets is
invested in any one industry.
* The Trust only invests in Senior Loans of
U.S. corporations, partnerships, limited
liability companies, or other business
entities organized under U.S. law or
domiciled in Canada or U.S. territories and
possessions. The Senior Loans must be
denominated in U.S. dollars.
Distributions Income dividends are declared and paid
monthly. Income dividends may be
distributed in cash or reinvested in
additional full and fractional shares
through the Trust's Shareholder Investment
Program.
Investment Manager Pilgrim Investments, Inc.
Administrator Pilgrim Group, Inc.
3
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS AT A GLANCE
This Prospectus contains certain statements that may be deemed to be
"forward-looking statements." Actual results could differ materially from those
projected in the forward-looking statements as a result of uncertainties set
forth below and elsewhere in the Prospectus. For additional information, see
"Risk Factors and Special Considerations."
Discount from or Premium to NAV * 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.
* As with any security, the market value of
the Shares may increase or decrease from the
amount that you paid for the Shares.
* The Trust's Shares may trade at a discount
to NAV. This is a risk separate and distinct
from the risk that the Trust's NAV may
decrease.
Credit Risk Investment in the Trust involves the risk
that borrowers under Senior Loans may
default on obli- gations to pay principal or
interest when due, that lenders may have
difficulty liquidating the collat- eral
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 sec- ondary market for the
Trust's Shares by increasing the number of
Shares available for sale. In a sepa- rate
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
ad- versely affect the rate of interest
payable on Senior Loans acquired by the
Trust.
4
<PAGE>
TRUST EXPENSES
The following table is intended to assist you in understanding the various
costs and expenses associated with investing in the Trust.(1)
Shareholder Transaction Expenses
Commissions (as a percentage of offering price)(2)...... 4.00%
Shareholder Investment Program Fees..................... NONE
Annual Expenses (as a percentage of net assets)
Management and Administrative Fees(3).................. 1.26%
Other Operating Expenses(4)........................... 0.23%
----
Total Annual Expenses before Interest.................. 1.49%
Interest Expense on Borrowed Funds..................... 2.81%
----
Total Annual Expenses.................................... 4.30%
====
- ----------
(1) The table assumes that the Trust has used leverage by borrowing an amount
equal to 33 1/3% of the Trust's net assets plus borrowings, and shows
expenses as a percentage of net assets. However, 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 (assuming the
use of leverage by borrowing an amount equal to 33 1/3% of net assets plus
borrowings), are shown as a percentage of net assets plus borrowings,
rather than as a percentage of net assets, the annual expenses in the fee
table would read as follows:
Annual Expenses (as a percentage of net assets plus borrowings)
Management and Administrative Fees..................... 0.84%
Other Operating Expenses.............................. 0.15%
----
Total Annual Expenses before Interest Expense............ 0.99%
Interest Expense on Borrowed Funds..................... 1.87%
----
Total Annual Expenses.................................... 2.86%
====
If the Trust does not use leverage, the Trust's annual expenses as a
percentage of net assets would be:
Annual Expenses (as a percentage of net assets)
Management and Administrative Fees..................... 0.91%
Other Operating Expenses............................... 0.22%
----
Total Annual Expenses.................................... 1.13%
====
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) The compensation to Pilgrim Securities with respect to the Shares will be
at a fixed commission rate of 4% of the gross sales price per Share of the
Shares sold.
(3) Pursuant to an investment management agreement with the Trust, Pilgrim
Investments is entitled to receive a fee of 0.80% of the average daily net
assets of the Trust plus the proceeds of any outstanding borrowings.
Pilgrim Investments has agreed to reduce its management fee until November
12, 1999 to 0.60% on that portion of the Trust's average daily net assets
plus the proceeds of any outstanding borrowings, in excess of $1.15
billion. See "Investment Management and Other Services -- Investment
Manager." Pursuant to its Administration Agreement with the Trust, Pilgrim
Group, Inc. ("Administrator"), the Trust's Administrator, is entitled to
receive a fee of 0.15% of the Trust's average daily net assets plus the
proceeds of any outstanding borrowings, up to $800 million; and 0.10% of
the average daily net assets plus the proceeds of any outstanding
borrowings, in excess of $800 million. See "Investment Management and Other
Services -- The Administrator."
5
<PAGE>
(4) "Other Operating Expenses" are based on estimated amounts for the current
fiscal year.
Example 1 year 3 years 5 years 10 years
------- ------ ------- ------- --------
You would pay the following expenses on a
$1,000 investment, assuming a 5% annual
return and where the Trust has borrowed...... $81 $165 $250 $468
You would pay the following expenses on a
$1,000 investment, assuming a 5% annual
return and where the Trust has not
borrowed..................................... $51 $ 74 $100 $172
This hypothetical example assumes that all dividends and other distributions
are reinvested at NAV and that the percentage amounts listed under Annual
Expenses above remain the same in the years shown. The above tables and the
assumption in the hypothetical example of a 5% annual return are required by
regulation of the Commission applicable to all investment companies; the
assumed 5% annual return is not a prediction of, and does not represent, the
projected or actual performance of the Trust's Shares. For more complete
descriptions of certain of the Trust's costs and expenses, see "Investment
Management and Other Services."
THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
6
<PAGE>
FINANCIAL HIGHLIGHTS AND INVESTMENT PERFORMANCE
Financial Highlights Table
The table below sets forth selected financial information which has been derived
from the financial statements in the Trust's Annual Report dated as of February
28, 1998, and the Trust's Quarterly Report dated as of November 30, 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 LLP,
independent certified public accountants. For all periods ending prior to
February 29, 1996, the financial information was audited by the Trust's former
auditors. The information in the table for the nine-month period ended November
30, 1998 is unaudited. This information should be read in conjunction with the
Financial Statements and Notes thereto included in the Trust's February 28, 1998
Annual Report, and the Trust's November 30, 1998 Quarterly Report, which
contains further information about the Trust's performance, and which is
available to Shareholders upon request and without charge.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED NOVEMBER YEAR ENDED FEBRUARY 28 OR FEBRUARY 29,
30, 1998 ------------------------------------------------------------
(UNAUDITED) 1998 1997(8) 1996(6) 1995 1994
----------- ---- ------- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
NAV, beginning of period ....... $ 9.34 $ 9.45 $ 9.61 $ 9.66 $ 10.02 $ 10.05
---------- ---------- ---------- -------- -------- --------
Net investment income .......... 0.67 0.87 0.82 0.89 0.74 0.60
Net realized and unrealized
gain (loss) on investment ...... (0.09) (0.13) (0.02) (0.08) 0.07 (0.05)
---------- ---------- ---------- -------- -------- --------
Increase in NAV from
investment operations .......... 0.58 0.74 0.80 0.81 0.81 0.55
Distributions from net
investment income .............. (0.68) (0.85) (0.82) (0.86) (0.73) (0.60)
Increase in NAV from
share offerings................. 0.03 -- -- -- -- --
Reduction in NAV from rights
offering ....................... -- -- (0.14) -- (0.44) --
Increase in NAV from repurchase
of capital stock ............... -- -- -- -- -- 0.02
---------- ---------- ---------- -------- -------- --------
NAV, end of period ............. $ 9.27 $ 9.34 $ 9.45 $ 9.61 $ 9.66 $ 10.02
========== ========== ========== ======== ======== ========
Closing market price at
end of period .................. $ 9.63 $ 10.31 $ 10.00 $ 9.50 $ 8.75 $ 9.25
========== ========== ========== ======== ======== ========
TOTAL RETURN
Total investment return at
closing market price (3) ....... (0.44)% 12.70% 15.04%(5) 19.19% 3.27%(5) 8.06%
Total investment return
based on NAV (4) ............... 5.87% 8.01% 8.06% 9.21% 5.24%(5) 6.28%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000's)................ $1,203,548 $1,034,403 $1,031,089 $862,938 $867,083 $719,979
Average Borrowings (000's) ..... $ 471,793 $ 346,110 $ 131,773 -- -- --
Ratios to average net assets
plus borrowings:
Expenses (before interest and
other fees related to revolving
credit facility) .............. 1.06%(1) 1.04% 1.13% -- -- --
Expenses ..................... 2.90%(1) 2.65% 1.92% -- -- --
Net investment income ........ 6.14%(1) 6.91% 7.59% -- -- --
Ratios to average net assets:
Expenses (before interest and
other fees related to revolving
credit facility) .............. 1.51%(1) 1.39% 1.29% -- -- --
Expenses ..................... 4.14%(1) 3.54% 2.20% 1.23% 1.30% 1.31%
Net investment income ........ 8.77%(1) 9.23% 8.67% 9.23% 7.59% 6.04%
Portfolio turnover rate ........ 70% 90% 82% 88% 108% 87%
Shares outstanding at end of
period (000's).................. 129,775 110,764 109,140 89,794 89,794 71,835
Average daily balance of debt
outstanding during the
period (000's) (7) ........... $ 471,793 $ 346,110 $ 131,773 $ -- $ 2,811 $ --
Average monthly shares outstanding
during the period (000's) .... 120,330 109,998 95,917 89,794 74,598 --
Average amount of debt per share
during the period (7) ....... $ 3.92 $ 3.15 $ 1.37 $ -- $ 0.04 $ --
MAY 12,
YEAR ENDED FEBRUARY 28 OR FEBRUARY 29, 1988* TO
--------------------------------------------- FEBRUARY
1993 1992 1991 1990 28, 1989
---- ---- ---- ---- --------
PER SHARE OPERATING PERFORMANCE
NAV, beginning of period ....... $ 9.96 $ 9.97 $ 10.00 $ 10.00 $ 10.00
-------- -------- ---------- ---------- --------
Net investment income .......... 0.60 0.76 0.98 1.06 0.72
Net realized and unrealized
gain (loss) on investment ...... 0.01 (0.02) (0.05) -- --
-------- -------- ---------- ---------- --------
Increase in NAV from
investment operations .......... 0.61 0.74 0.93 1.06 0.72
Distributions from net
investment income .............. (0.57) (0.75) (0.96) (1.06) (0.72)
Increase in NAV from
share offerings................. -- -- -- -- --
Reduction in NAV from rights
offering ....................... -- -- -- -- --
Increase in NAV from repurchase
of capital stock ............... 0.05 -- -- -- --
-------- -------- ---------- ---------- --------
NAV, end of period ............. $ 10.05 $ 9.96 $ 9.97 $ 10.00 $ 10.00
======== ======== ========== ========== ========
Closing market price at
end of period .................. $ 9.13 $ -- $ -- $ -- $ --
======== ======== ========== ========== ========
TOTAL RETURN
Total investment return at
closing market price (3) ....... 10.89% -- -- -- --
Total investment return
based on NAV (4) ............... 7.29% 7.71% 9.74% 11.13% 7.35%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000's)................ $738,810 $874,104 $1,158,224 $1,036,470 $252,998
Average Borrowings (000's) ..... -- -- -- -- --
Ratios to average net assets
plus borrowings:
Expenses (before interest and
other fees related to revolving
credit facility) .............. -- -- -- -- --
Expenses ..................... -- -- -- -- --
Net investment income ........ -- -- -- -- --
Ratios to average net assets:
Expenses (before interest and
other fees related to revolving
credit facility) .............. -- -- -- -- --
Expenses ..................... 1.42% 1.42%(2) 1.38% 1.46%(2) 1.18%(1)(2)
Net investment income ........ 5.88% 7.62%(2) 9.71% 10.32%(2) 9.68%(1)(2)
Portfolio turnover rate ........ 81% 53% 55% 100% 49%(1)
Shares outstanding at end of
period (000's).................. 73,544 87,782 116,022 103,600 25,294
Average daily balance of debt
outstanding during the
period (000's) (7) ........... $ 636 $ 8,011 $ 2,241 $ -- $ --
Average monthly shares outstanding
during the period (000's) .... 79,394 102,267 114,350 -- --
Average amount of debt per share
during the period (7) ....... $ 0.01 $ 0.08 $ 0.02 $ -- $ --
</TABLE>
7
<PAGE>
- ------------
* Commencement of operations.
(1) Annualized.
(2) Prior to the waiver of expenses, the ratios of expenses to average net
assets were 1.95% (annualized), 1.48% and 1.44% for the period from May 12,
1988 to February 28, 1989, and for the fiscal years ended February 28, 1990
and February 29, 1992, respectively, and the ratios of net investment
income to average net assets were 8.91% (annualized), 10.30% and 7.60% for
the period from May 12, 1988 to February 28, 1989 and for the fiscal years
ended February 28, 1990 and February 29, 1992, respectively.
(3) Total investment return measures the change in the market value of your
investment assuming reinvestment of dividends and capital gain
distributions, if any, in accordance with the provisions of the dividend
reinvestment plan. On March 9, 1992, the shares of the Trust were initially
listed for trading on the NYSE. Accordingly, the total investment return
for the year ended February 28, 1993, covers only the period from March 9,
1992 to February 28, 1993. Total investment return for the periods prior to
the year ended February 28, 1993 is not presented since market values for
the Trust's shares were not available. Total returns for less than one year
are not annualized.
(4) Total investment return at NAV has been calculated assuming a purchase at
NAV at the beginning of each period and a sale at NAV at the end of each
period and assumes reinvestment of dividends and capital gain distributions
in accordance with the provisions of the dividend reinvestment plan. This
calculation differs from total investment return because it excludes the
effects of changes in the market values of the Trust's shares. Total
returns for less than one year are not annualized.
(5) Calculation of total return excludes the effect of the per share dilution
resulting from the rights offering as the total account value of a fully
subscribed shareholder was minimally impacted.
(6) Pilgrim Investments, the Trust's Investment Manager, acquired certain
assets of Pilgrim Management Corporation, the Trust's former investment
manager, in a transaction that closed on April 7, 1995.
(7) Prior to May 2, 1996, the Trust borrowed to enable it to purchase its
shares in connection with periodic tender offers. On May 2, 1996, the Trust
received shareholder approval to borrow for investment purposes. As of
November 30, 1998, the Trust had outstanding borrowings of $550,000,000
under lines of credit totaling $650,000,000. See "Policy on Borrowing" in
this section.
(8) Pilgrim Investments has agreed to reduce its fee for a period of three
years from November 12, 1996 (the expiration of the 1996 rights offering)
to 0.60% of the Trust's average daily net assets, plus the proceeds of any
outstanding borrowings, over $1.15 billion.
8
<PAGE>
TRUST CHARACTERISTICS AND COMPOSITION
The following tables set forth certain information with respect to the
characteristics and the composition of the Trust's investment portfolio in
terms of percentages of net assets and total assets as of November 30, 1998.
TRUST CHARACTERISTICS
Net Assets $1,203,547,938
Assets Invested in Senior Loans* $1,708,720,498
Outstanding Borrowings $550,000,000
Total Number of Senior Loans 168
Average Amount Outstanding per Loan $10,170,955
Total Number of Industries 30
Portfolio Turnover Rate (YTD) 70%
Average Loan Amount per Industry $56,957,350
Weighted Average Days to Interest Rate Reset 46 days
Average Loan Maturity 66 months
Average Age of Loans Held in Portfolio 11 months
(* Includes loans and other debt received through restructures)
TOP 10 INDUSTRIES AS A % OF
NET ASSETS TOTAL ASSETS
---------- ------------
Healthcare, Education and Childcare 16.8% 11.5%
Telecommunications 10.4% 7.1%
Chemicals, Plastics and Rubber 8.2% 5.6%
Broadcasting 8.2% 5.6%
Personal, Food and Miscellaneous Services 7.7% 5.3%
Automobile 7.6% 5.2%
Containers, Packaging and Glass 7.0% 4.9%
Buildings and Real Estate 7.0% 4.8%
Electronics 5.3% 3.6%
Beverage, Food and Tobacco 5.2% 3.6%
TOP 10 SENIOR LOAN HOLDINGS AS A % OF
NET ASSETS TOTAL ASSETS
---------- ------------
MAFCO Finance Corp. 3.7% 2.6%
Community Health Systems 2.0% 1.4%
Lyondell Petrochemical Company 1.9% 1.3%
Ventas, Inc. 1.9% 1.3%
Papa Gino's, Inc. 1.7% 1.2%
24-Hour Fitness, Inc. 1.7% 1.2%
American Wireless Corporation 1.7% 1.2%
Euro United Corp. 1.7% 1.2%
Florida Panthers Holdings, Inc. 1.7% 1.2%
Patriot American Hospitality 1.7% 1.2%
9
<PAGE>
POLICY ON BORROWING
Beginning in May of 1996, the Trust began a policy of borrowing for investment
purposes. The Trust seeks to use proceeds from borrowing to acquire
income-producing investments which, by their terms, pay interest at a rate
higher than the rate the Trust pays on borrowings. Accordingly, borrowing has
the potential to increase the Trust's total income. The Trust currently is a
party to credit facilities with financial institutions that permit the Trust to
borrow up to $650,000,000. Interest is payable on the credit facilities by the
Trust at a variable rate that is tied to LIBOR, the federal funds rate, or a
commercial paper based rate, plus a facility fee on unused commitments. As of
December 31, 1998, the Trust had outstanding borrowings of $552,000,000. 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 331|M/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 Quarter Ended High Low High Low High Low NYSE Volume
- ---------------------- ---- --- ---- --- ---- --- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1994 $ 9.875 $ 9.000 $10.080 $10.020 (2.03)% (10.18)% 15,590,400
March 31, 1995 9.000 8.500 10.040 9.650 (10.36) (11.92) 24,778,200
June 30, 1995 9.250 8.750 9.650 9.600 (4.15) (8.85) 16,974,600
September 30, 1995 9.375 8.875 9.660 9.660 (2.95) (8.13) 15,325,900
December 31, 1995 9.500 9.000 9.650 9.620 (1.55) (6.44) 16,428,200
March 31, 1996 9.625 9.250 9.610 9.590 0.16 (3.55) 17,978,300
June 30, 1996 9.750 9.375 9.610 9.570 1.46 (2.04) 13,187,700
September 30, 1996 10.000 9.500 9.560 9.580 4.60 (0.84) 15,821,000
December 31, 1996 10.000 9.250 9.580 9.430 4.38 (1.91) 28,740,200
March 31, 1997 10.000 9.625 9.390 9.420 6.50 2.18 18,483,600
June 30, 1997 10.125 9.875 9.400 9.380 7.71 5.28 18,863,600
September 30, 1997 10.250 10.000 9.400 9.410 9.04 6.27 15,034,200
December 31, 1997 10.375 10.125 9.310 9.380 11.44 7.94 13,270,900
March 31, 1998 10.500 9.875 9.360 9.340 12.18 5.73 15,588,500
June 30, 1998 10.250 9,875 9.360 9.330 9.51 5.84 16,225,800
September 30, 1998 10.125 9.875 9.310 9.330 8.75 5.84 23,597,200
December 31, 1998 9.938 9.000 9.300 9.240 6.86 (2.60) 25,200,000
</TABLE>
10
<PAGE>
The following chart shows for the Trust's Shares for the period from March 3,
1995 to December 31, 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.
PILGRIM PRIME RATE TRUST
DATE PRICE NAV %PREM DATE PRICE NAV %PREM
- --------------------------------------------------------------------------------
12/25/98 10.000 9.280 7.76 06/26/98 9.938 9.340 6.40
12/11/98 10.000 9.330 7.18 06/19/98 9.938 9.320 6.63
12/11/98 9.938 9.320 6.63 06/12/98 10.000 9.310 7.41
12/04/98 10.000 9.300 7.53 06/05/98 10.125 9.370 8.06
11/27/98 10.000 9.280 7.76 05/29/98 10.250 9.360 9.51
11/20/98 10.000 9.330 7.18 05/22/98 10.188 9.330 9.19
11/13/98 9.938 9.320 6.63 05/15/98 10.188 9.310 9.43
11/06/98 10.000 9.300 7.53 05/08/98 10.063 9.290 8.32
10/30/98 10.000 9.300 7.53 05/01/98 10.125 9.340 8.40
10/23/98 10.063 9.350 7.62 04/24/98 10.000 9.330 7.18
10/16/98 9.938 9.340 6.40 04/17/98 10.063 9.320 7.97
10/02/98 9.938 9.320 6.63 04/10/98 9.938 9.300 6.85
09/25/98 10.000 9.310 7.41 04/03/98 10.063 9.360 7.51
09/18/98 10.125 9.370 8.06 03/27/98 9.875 9.340 5.73
09/11/98 10.250 9.360 9.51 03/20/98 10.000 9.330 7.18
09/04/98 10.188 9.330 9.19 03/13/98 10.125 9.310 8.75
08/28/98 10.188 9.310 9.43 03/06/98 10.250 9.290 10.33
08/21/98 10.063 9.290 8.32 02/27/98 10.313 9.340 10.41
08/14/98 10.125 9.340 8.40 02/20/98 10.313 9.340 10.41
08/07/98 10.000 9.280 7.76 02/13/98 10.250 9.340 9.74
07/31/98 10.000 9.330 7.18 02/06/98 10.250 9.320 9.98
07/24/98 9.938 9.320 6.63 01/30/98 10.250 9.380 9.28
07/17/98 10.000 9.300 7.53 01/23/98 10.500 9.360 12.18
07/10/98 10.000 9.300 7.53 01/16/98 10.313 9.340 10.41
07/03/98 10.063 9.350 7.62 01/09/98 10.313 9.330 10.53
01/02/98 10.313 9.310 10.77
DATE PRICE NAV %PREM DATE PRICE NAV %PREM
- --------------------------------------------------------------------------------
12/26/97 10.375 9.390 10.49 07/04/97 10.000 9.430 6.04
12/19/97 10.375 9.380 10.61 06/27/97 10.031 9.420 6.49
12/12/97 10.250 9.360 9.51 06/20/97 10.125 9.400 7.71
12/05/97 10.250 9.340 9.74 06/13/97 10.125 9.390 7.83
11/28/97 10.250 9.390 9.16 06/06/97 10.063 9.370 7.39
11/21/97 10.188 9.390 8.49 05/30/97 10.063 9.420 6.82
11/14/97 10.188 9.360 8.84 05/23/97 10.125 9.400 7.71
11/07/97 10.250 9.350 9.63 05/16/97 9.875 9.380 5.28
10/31/97 10.250 9.400 9.04 05/09/97 10.000 9.370 6.72
10/24/97 10.313 9.390 9.82 05/02/97 10.000 9.420 6.16
10/17/97 10.188 9.380 8.61 04/25/97 10.000 9.420 6.16
10/10/97 10.188 9.360 8.84 04/18/97 10.125 9.400 7.71
10/03/97 10.250 9.410 8.93 04/11/97 10.125 9.380 7.94
09/26/97 10.188 9.390 8.49 04/04/97 10.125 9.440 7.26
09/19/97 10.188 9.380 8.61 03/28/97 9.875 9.420 4.83
09/12/97 10.125 9.350 8.29 03/21/97 9.750 9.410 3.61
09/05/97 10.125 9.330 8.52 03/14/97 10.000 9.390 6.50
08/29/97 10.125 9.400 7.71 03/07/97 10.000 9.400 6.38
08/22/97 10.125 9.380 7.94 02/28/97 9.875 9.450 4.50
08/15/97 10.188 9.370 8.72 02/21/97 9.875 9.430 4.72
08/08/97 10.125 n.a. n.a 02/14/97 10.000 n.a. n.a.
08/01/97 10.188 9.430 8.03 02/07/97 9.750 9.410 3.61
07/25/97 10.125 9.410 7.60 01/31/97 9.750 9.460 3.07
07/18/97 10.000 9.380 6.61 01/24/97 9.813 9.440 3.95
07/11/97 10.000 9.380 6.61 01/17/97 9.750 9.430 3.39
01/10/97 9.875 9.410 4.94
01/03/97 9.875 9.390 5.17
DATE PRICE NAV %PREM DATE PRICE NAV %PREM
- --------------------------------------------------------------------------------
12/27/96 9.750 9.380 3.94 06/28/96 9.750 9.610 1.46
12/20/96 9.750 n.a. n.a. 06/21/96 9.625 9.590 .36
12/13/96 9.625 9.410 2.28 06/14/96 9.750 9.570 1.88
12/06/96 9.375 9.390 -.16 06/07/96 9.625 9.560 .68
11/29/96 9.375 9.450 -.79 05/31/96 9.500 9.610 -1.14
11/22/96 9.375 9.430 -.58 05/24/96 9.625 9.590 .36
11/15/96 9.375 9.560 -1.94
05/17/96 9.625 9.570 .57
11/08/96 9.250 9.560 -3.24 05/10/96 9.500 9.560 -.63
11/01/96 9.438 9.610 -1.80 05/03/96 9.625 9.600 .26
10/25/96 9.625 9.600 .26 04/26/96 9.500 9.580 -.84
10/18/96 9.625 9.580 .47 04/19/96 9.625 9.570 .57
10/11/96 9.750 9.570 1.88
04/12/96 9.625 9.550 .79
10/04/96 9.875 9.620 2.65 04/05/96 9.500 9.540 -.42
09/27/96 9.875 9.600 2.86 03/29/96 9.625 9.610 .16
09/20/96 9.625 9.580 .47 03/22/96 9.375 9.590 -2.24
09/13/96 10.000 9.560 4.60 03/15/96 9.375 9.570 -2.04
09/06/96 9.875 n.a. n.a.
03/08/96 9.375 n.a. n.a.
08/30/96 9.875 9.600 2.86 03/01/96 9.375 9.610 -2.45
08/23/96 9.875 9.600 2.86 02/23/96 9.500 9.610 -1.14
08/16/96 9.875 9.580 3.08 02/16/96 9.375 9.590 -2.24
08/09/96 9.875 9.560 3.29 02/09/96 9.375 9.580 -2.14
08/02/96 9.813 9.620 2.00
02/02/96 9.313 9.640 -3.40
07/26/96 9.750 9.600 1.56 01/26/96 9.375 9.620 -2.55
07/19/96 9.625 9.580 .47 01/19/96 9.375 9.620 -2.55
07/12/96 9.625 9.570 .57 01/12/96 9.375 9.600 -2.34
07/05/96 9.750 9.550 2.09 01/05/96 9.375 9.590 -2.24
DATE PRICE NAV %PREM DATE PRICE NAV %PREM
- --------------------------------------------------------------------------------
12/29/95 9.250 9.580 -3.44 07/14/95 9.000 9.620 -6.44
12/22/95 9.375 9.630 -2.65 07/07/95 9.125 9.600 -4.95
12/15/95 9.375 9.630 -2.65 06/30/95 9.125 9.650 -5.44
12/08/95 9.250 9.610 -3.75 06/23/95 9.125 9.650 -5.44
06/16/95 9.000 9.630 -6.54
12/01/95 9.125 9.670 -5.64
11/24/95 9.125 9.650 -5.44 06/09/95 9.125 9.620 -5.15
11/17/95 9.250 9.620 -3.85 06/02/95 9.000 9.670 -6.93
11/10/95 9.000 9.620 -6.44 05/26/95 8.875 9.660 -8.13
11/03/95 9.125 9.670 -5.64 05/19/95 9.000 9.640 -6.64
05/12/95 8.875 9.620 -7.74
10/27/95 9.250 9.660 -4.24
10/20/95 9.250 9.640 -4.05 05/05/95 8.875 9.600 -7.55
10/13/95 9.375 9.620 -2.55 04/28/95 8.875 9.660 -8.13
10/06/95 9.375 9.610 -2.45 04/21/95 8.875 9.640 -7.94
09/29/95 9.375 9.660 -2.95 04/14/95 8.750 9.620 -9.04
04/07/95 8.750 9.610 -8.95
09/22/95 9.250 9.640 -4.05
09/15/95 9.375 9.630 -2.65 03/31/95 8.750 9.670 -9.51
09/08/95 9.250 9.610 -3.75 03/24/95 8.750 9.650 -9.33
09/01/95 9.250 9.670 -4.34 03/17/95 8.750 9.630 -9.14
08/25/95 9.250 9.640 -4.05 03/10/95 8.750 9.610 -8.95
03/03/95 8.750 9.660 -9.42
08/18/95 9.125 9.620 -5.15
08/11/95 9.000 9.610 -6.35
08/04/95 9.125 9.670 -5.64
07/28/95 9.000 9.650 -6.74
07/21/95 8.875 9.630 -7.84
Source: BLOOMBERG Financial Markets.
On February 26, 1999, the last reported sale price of a Share of the Trust's
Shares on the NYSE was $9.56. The Trust's NAV on February 26, 1999 was $9.24.
See "Net Asset Value" in the SAI. On February 26, 1999 the last reported sale
price of a share of the Trust's Common Shares on the NYSE ($9.56) represented a
3.49% premium above NAV ($9.24) as of that date.
The Trust's Shares have traded in the market above, at, and below NAV since
March 9, 1992, when the Trust's Shares were listed on the NYSE. The Trust
cannot predict whether its Shares will trade in the future at a premium or
discount to NAV, and if so, the level of such premium or discount. Shares of
closed-end investment companies frequently trade at a discount from NAV.
11
<PAGE>
INVESTMENT PERFORMANCE
MORNINGSTAR RATINGS
For the three-year, five-year and ten-year periods ended December 31, 1998, the
Trust had a 4 star, 5 star and 4 star Morningstar risk-adjusted performance
rating, when rated among 135, 129 and 64 fixed income closed-end funds,
respectively. The Trust's overall rating through December 31, 1998, was 4
stars1. For the three-year, five-year and ten-year periods ended December 31,
1998, the Trust's risk score placed the Trust 1st out of 35, 35 and 26
Corporate Bond -- General funds. For the three-year, five-year and ten-year
periods ended December 31, 1998, the Trust's risk score placed the Trust 1st,
1st and 1st out of all closed-end funds (461, 424 and 137 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
December 31, 1998, the Trust ranked first among all funds in the Loan
Participation Fund Category of closed-end funds, defined by Lipper to include
closed-end management investment companies that invest in Senior Loans.
Investors should note that past performance is no assurance of future results.
Periods ended Total Number of Funds
December 31, 1998 Ranking(3) Return(3) in Category(4)
----------------- ---------- --------- --------------
One year 1 8.26% 8
Three years 1 27.45% 6
Five years 1 50.57% 5
Ten Years 1 124.85% 1
- ----------
(1) The Trust's overall rating is based on a weighted average of its
performance for the three-year and five-year periods ended December 31,
1998.
(2) Morningstar's taxable bond fund category includes Corporate Bond --
General, Government Bond, International Bond and Multisector Bond funds. On
Morningstar's risk-adjusted performance rating system, funds falling into
the top 10% of all funds within their category are awarded five stars and
funds in the next 22.5% receive four stars, and the next 35% receive three
stars. Morningstar ratings are calculated from the Trust's three, five and
ten year returns (with fee adjustment, if any) in excess of 90-day Treasury
bill returns, and a risk factor that reflects the Trust's performance below
90-day Treasury bill returns. The ratings are subject to change every
month. Morningstar ranks funds within the Corporate Bond -- General
category and the closed-end universe for risk for the three, five and
ten-year periods based upon their downside volatility compared to a 90-day
Treasury bill.
(3) Ranking is based on total return. Total return is measured on the basis of
NAV at the beginning and end of each period, assuming the reinvestment of
all dividends and distributions, but not reflecting the January 1995 and
November 1996 rights offerings. The Trust's expenses were partially waived
for the fiscal year ended February 29, 1992. As part of the 1996 rights
offering the Investment Manager has voluntarily reduced its management fee
for the period from November 1996 through November 1999.
(4) This category includes other closed-end investment companies that, unlike
the current practices of the Trust, offer their shares continuously and
have conducted periodic tender offers for their shares. These practices may
have affected the total returns of these companies.
12
<PAGE>
COMPARATIVE PERFORMANCE -- TRAILING 12 MONTH AVERAGE
Presented below are distribution rates for the Trust for the period from
January 1, 1991 through December 31, 1998. Also shown are distribution rates of
a composite of other investment companies with investment objectives and
policies comparable to those of the Trust. In addition, presented below are
various benchmark indicators of interest and borrowing rates. The distribution
rates for the Trust and the composite of the other investment companies are
calculated using actual distributions annualized for the preceding twelve
months.
<TABLE>
<CAPTION>
Month Ended Prime Rate Trust (1)(3) Prime Rate(4) Composite Average(2)(3) 60-Day LIBOR(5)
- ----------- ----------------------- ------------- ----------------------- ---------------
<S> <C> <C> <C> <C>
1/31/91 9.675% 9.917% 9.537% 8.063%
1/31/92 7.739% 8.125% 7.587% 5.574%
1/31/93 6.203% 6.208% 5.725% 3.677%
1/31/94 5.955% 6.000% 5.496% 3.214%
1/31/95 7.288% 7.458% 6.551% 4.927%
1/31/96 8.886% 8.813% 7.853% 5.812%
1/31/97 8.569% 8.250% 6.814% 5.422%
1/31/98 8.780% 8.479% 7.066% 5.639%
</TABLE>
- ------------
(1) The distribution rate is the annualization of the Trust's distributions per
Share, divided by the NAV of the Trust at month-end. For the one-year,
five-year and ten-year periods ended December 31, 1998 and the period of
May 12, 1988 (inception of the Trust) to December 31, 1998, the Trust's
average annual total returns, based on NAV and assuming all rights were
exercised, were 8.07%, 8.38%, 8.44% and 8.47%, respectively. The Trust's
30-day standardized SEC yields as of December 31, 1998 were 8.79% at NAV
and 8.71% at market. The Trust's expenses were partially waived for the
fiscal year ended February 29, 1992. As part of the 1996 rights offering
the Investment Manager has voluntarily reduced its management fee for the
period from November, 1996 through November, 1999.
(2) The composite represents an unweighted average for investment companies
included in Lipper Analytical Services, Inc.'s Loan Participation Fund
Category of closed-end funds (for funds excluding the Trust in existence
for the entire period shown). Historical yields are based on monthly
dividends divided by corresponding month-end NAVs, annualized. The
closed-end investment companies reflected in the composite, unlike the
current practices of the Trust, offer their shares continuously and have
conducted periodic tender offers for their shares. These practices may have
affected the yield of these companies.
(3) The distribution rate is based solely on the actual dividends and
distributions, which are made at the discretion of management. The
distribution rate may or may not include all investment income, and
ordinarily will not include capital gains or losses, if any.
(4) Source: BLOOMBERG Financial Markets.
(5) Source: IDD/Tradeline. The LIBOR rate is the London Inter-Bank Offered Rate
and is the benchmark for determining the interest paid on more than 90% of
the Senior Loans in the Trust's portfolio. Generally, the yield on such
loans has reflected, during the periods presented, a premium of
approximately 2% or more to LIBOR.
13
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Trust's investment objective is to provide as high a level of current
income as is consistent with the preservation of capital. The Trust seeks to
achieve its objective primarily by investing in interests in variable or
floating rate Senior Loans, which, in most circumstances, are fully
collateralized by assets of a corporation, partnership, limited liability
company, or other business entity that is organized or domiciled in the United
States, Canada or in U.S. territories and/or possessions. The Trust primarily
invests in Senior Loans that have interest rates that float periodically based
upon a benchmark indicator of prevailing interest rates, such as the Prime Rate
or LIBOR, and will invest only in Senior Loans that are U.S.
dollar-denominated. Under normal circumstances, at least 80% of the Trust's
gross assets is invested in Senior Loans.
Under the Trust's policies, Senior Loans are considered loans that hold a
senior position in the capital structure of the borrower. These may include
loans that hold the most senior position, that hold an equal ranking with other
senior debt, or loans that are, in the judgment of Pilgrim Investments, in the
category of senior debt of the borrower. Generally, the Senior Loans in which
the Trust invests are fully collateralized with assets and/or cash flow that
Pilgrim Investments believes have a market value at the time of acquisition
that equals or exceeds the principal amount of the Senior Loan. The Trust also
only purchases interests in Senior Loans of borrowers that Pilgrim Investments
believes can meet debt service requirements from cash flow. Senior Loans vary
in yield according to their terms and conditions, how often they pay interest,
and when rates are reset. The Trust does not invest in Senior Loans whose
interest rates are tied to non-domestic interest rates other than LIBOR.
Senior Loans that the Trust may acquire include participation interests in
lease financings ("Lease Participations") where the collateral quality, credit
quality of the borrower and the likelihood of payback are believed by Pilgrim
Investments to be the same as those applied to conventional Senior Loans. A
Lease Participation is also required to have a floating interest rate that is
indexed to a benchmark indicator of prevailing interest rates, such as LIBOR or
the Prime Rate.
Subject to certain limitations, the Trust may acquire Senior Loans of borrowers
engaged in any industry. With respect to no more than 25% of its total assets,
the Trust may acquire Senior Loans that are unrestricted as to the percentage
of a single issue the Trust may hold and, with respect to at least 75% of its
total assets, the Trust will hold no more than 25% of the amount borrowed from
all lenders in a single Senior Loan or other issue. The investment standards in
this paragraph are fundamental and may not be changed without approval by
Shareholders.
Investors should recognize that there can be no assurance that the investment
objective of the Trust will be realized. Moreover, substantial increases in
interest rates may cause an increase in loan defaults as borrowers may lack
resources to meet higher debt service requirements. The value of the Trust's
assets may also be affected by other uncertainties such as economic
developments affecting the market for Senior Loans or affecting borrowers
generally. For additional information on Senior Loans, see "General Information
on Senior Loans -- About Senior Loans."
Investment in the Trust's shares is intended to offer several benefits. The
Trust offers investors the opportunity to seek a high level of current income
by investing in a professionally managed portfolio comprised primarily of
Senior Loans, a type of investment typically not available directly to
individual investors. Other benefits are the professional credit analysis
provided to the Trust by the Investment Manager and portfolio diversification.
The Trust can normally be expected to have a more stable net asset value per
share than investment companies investing primarily in fixed income securities
(other than money market funds and some short-term bond funds). Generally, the
net asset value of the shares of an investment company which invests primarily
in fixed-income securities changes as interest rates fluctuate. When interest
rates decline, the value of a fixed-income portfolio normally can be expected
to increase. The Investment Manager expects the Trust's net asset value to be
relatively stable during normal market conditions, because the floating and
variable rate Senior Loans in which the Trust invests float periodically in
response to changes in interest rates. However, because variable interest rates
only reset periodically, the Trust's net asset value may fluctuate from time to
time in the event of an imperfect correlation between the interest rates on the
Trust's
14
<PAGE>
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, Pilgrim Investments considers the following
factors: positive cashflow coverage of debt service; adequate working capital;
appropriate capital structure; leverage ratio consistent with industry norms;
historical experience of attaining business and financial projections; the
quality and experience of management; and adequate collateral coverage. The
Trust does not impose any minimum standard regarding the rating of any
outstanding debt securities of borrowers.
Pilgrim Investments performs its own independent credit analysis of the
borrower. In so doing, Pilgrim Investments may utilize information and credit
analyses from the agents that originate or administer loans, other lenders
investing in a Senior Loan, and other sources. These analyses will continue on
a periodic basis for any Senior Loan purchased by the Trust. See "Risk Factors
and Special Considerations -- Credit Risks and Realization of Investment
Objective."
OTHER INVESTMENTS
Assets not invested in Senior Loans will generally consist of other
instruments, including Hybrid Loans, unsecured loans, subordinated loans,
short-term debt instruments with remaining maturities of 120 days or less
(which may have yields tied to the Prime Rate, commercial paper rates, federal
funds rate or LIBOR), longer term debt securities, equity securities acquired
in connection with investment or restructuring of a Senior Loan, and other
instruments as described under "Additional Information About Investments and
Investment Techniques" in the SAI. Short-term instruments may include (i)
commercial paper rated A-1 by Standard & Poor's Ratings Services or P-1 by
Moody's Investors Service, Inc., or of comparable quality as determined by
Pilgrim Investments, (ii) certificates of deposit, bankers' acceptances, and
other bank deposits and obligations, and (iii) securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities. During periods when,
in the opinion of Pilgrim Investments, a temporary defensive posture in the
market is appropriate, the Trust may hold up to 100% of its assets in cash, or
in the instruments described above.
HYBRID LOANS
The growth of the syndicated loan market has produced loan structures with
characteristics similar to Senior Loans but which resemble bonds in some
respects, and generally offer less covenant or other protections than
traditional Senior Loans while still being collateralized ("Hybrid Loans"). The
Trust may invest only in Hybrid Loans that are secured debt of the borrower,
although they may not in all instances be considered senior debt of the
borrower. With Hybrid Loans, the Trust may not possess a senior claim to all of
the collateral securing the Hybrid Loan. Hybrid Loans also may not include
covenants that are typical of Senior Loans, such as covenants requiring the
maintenance of minimum interest coverage ratios. As a result, Hybrid Loans
present additional risks besides those associated with traditional Senior
Loans, although they
15
<PAGE>
may provide a relatively higher yield. Because the lenders in Hybrid Loans
waive or forego certain loan covenants, their negotiating power or voting
rights in the event of a default may be diminished. As a result, the lenders'
interests may not be represented as significantly as in the case of a
conventional Senior Loan. In addition, because the Trust's security interest in
some of the collateral may be subordinate to other creditors, the risk of
nonpayment of interest or loss of principal may be greater than would be the
case with conventional Senior Loans. The Trust will invest only in Hybrid Loans
which meet credit standards established by Pilgrim Investments with respect to
Hybrid Loans and nonetheless provide certain protections to the lender such as
collateral maintenance or call protection. The Trust may only invest up to 20%
of its assets in Hybrid Loans as part of its investment in "Other Investments"
as described above, and Hybrid Loans will not count toward the 80% of the
Trust's assets that are normally invested in Senior Loans.
SUBORDINATED AND UNSECURED LOANS
The Trust may also invest up to 5% of its total assets, measured at the time of
investment, in subordinated and unsecured loans. The Trust may acquire a
subordinated loan only if, at the time of acquisition, it acquires or holds a
Senior Loan from the same borrower. The primary risk arising from a holder's
subordination is the potential loss in the event of default by the issuer of
the loans. Subordinated loans in an insolvency bear an increased share,
relative to senior secured lenders, of the ultimate risk that the borrower's
assets are insufficient to meet its obligations to its creditors. Unsecured
loans are not secured by any specific collateral of the borrower. They do not
enjoy the security associated with collateralization and may pose a greater
risk of nonpayment of interest or loss of principal than do secured loans. The
Trust will acquire unsecured loans only where the Investment Manager believes,
at the time of acquisition, that the Trust would have the right to payment upon
default that is not subordinate to any other creditor. The maximum of 5% of the
Trust's assets invested in subordinated and unsecured loans will constitute
part of the 20% of the Trust's assets that may be invested in "Other
Investments" as described above, and will not count toward the 80% of the
Trust's assets that are normally invested in Senior Loans.
USE OF LEVERAGE
The Trust is permitted to borrow up to 33 1/3%, or such other percentage
permitted by law, of its total assets (including the amount borrowed) less all
liabilities other than borrowings.
The Trust is currently a party to credit facilities with financial institutions
that permit the Trust to borrow up to $650,000,000. Borrowing may be made for
the purpose of acquiring additional income-producing investments when the
Investment Manager believes that such use of borrowed proceeds will enhance the
Trust's net yield. The amount of outstanding borrowings may vary with
prevailing market or economic conditions. In addition, although the Trust has
not conducted a tender offer since 1992 or repurchased its shares since January
1994, in the event that it determines to again conduct a tender offer or
repurchase its shares, the Trust may use borrowings to finance the purchase of
its shares. For information on risks associated with borrowing, see "Risk
Factors and Special Considerations -- Borrowing and Leverage."
16
<PAGE>
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 $74.5 billion in the fourth
quarter of 1997 is above fourth quarter volume in each of the preceding two
years.
Year Volume ($bil.)
---- --------------
1988 284.4
1989 333.2
1990 241.3
1991 234.4
1992 375.5
1993 389.3
1994 665.3
1995 816.9
1996 887.6
1997 1111.9
Source: Loan Pricing Corporation.
The total Senior Loan market for both leveraged and non-leveraged transactions
has averaged an annual growth rate of 24.2% since 1992. The Trust's net assets,
$734 million at the end of 1992 and $1.2 billion at the end of 1998, have grown
at an average annual growth rate of 10.6% 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
17
<PAGE>
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
18
<PAGE>
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 you should consider before deciding
whether to invest in the Trust. For further information on risks associated
with investing in the Trust, see "Additional Information About Investments and
Investment Techniques" in the Statement of Additional Information.
This Prospectus includes certain statements that may be deemed to be
"forward-looking statements." All statements, other than statements of
historical facts, included in this Prospectus that address activities, events
or developments that the Trust or Pilgrim Investments, as the case may be,
expects, believes or anticipates will or may occur in the future, including
such matters as the use of proceeds, investment strategies, and other such
matters could be considered forward-looking statements. These statements are
based on certain assumptions and analyses made by the Trust or Pilgrim
Investments, as the case may be, in light of its experience and its perception
of historical trends, current conditions, expected future developments and
other factors it believes are appropriate in the circumstances. Such statements
are subject to a number of assumptions, risks and uncertainties, including the
risk factors discussed below, general economic and business conditions, the
investment opportunities (or lack thereof) that may be presented to and pursued
by the Trust, changes in laws or regulations and other factors, many of which
are beyond the control of the Trust. You 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.
19
<PAGE>
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, and the Trust cannot predict
whether its Shares will trade in the future at a premium to or discount from
NAV, and if so, the level of such premium or discount. Shares of closed-end
investment companies frequently trade at a discount from NAV. The possibility
that shares of the Trust will trade at a discount from NAV is a risk separate
and distinct from the risk that the Trust's NAV may decrease.
The Offering may be conducted only if Shares of the Trust are trading at a
price equal to at least the Trust's NAV per Share plus the per Share amount of
the commission to be paid 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 in most instances takes precedence over the
payment of dividends, or the return of capital, to the issuer's shareholders.
The Trust generally invests in Senior Loans that are fully collateralized with
assets whose market value, at the time the Trust purchases the Senior Loan,
equals or exceeds the principal amount of the Senior Loan. However, 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. Also, to the extent
that collateral consists of stock of the borrower or its subsidiaries or
affiliates, the Trust bears the risk that the 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. Issuers of Senior Loans generally have either issued debt
securities that are rated lower than investment grade, i.e. rated lower than Baa
by Moody's Investors Service or BBB by Standard & Poor's, or, if they had issued
debt securities, such debt securities would likely be rated lower than
investment grade. Debt securities rated lower than investment grade are
frequently called "junk bonds," and are generally considered predominantly
speculative with respect to the issuing company's ability to meet principal and
interest payments. However, unlike other types of debt securities, the Senior
Loans in which the Trust invests are generally fully collateralized. In the
event a borrower fails to pay scheduled interest or principal payments on a
Senior Loan held by the Trust, the Trust could experience a reduction in its
income and a decline in the market value of the Senior Loan, and may experience
a decline in the NAV of the Trust's Shares or the amount of its dividends. If a
Senior Loan is acquired from another lender, the Trust may be subject to certain
credit risks with respect to that lender. See "About Senior Loans." Further, the
liquidation of the collateral underlying a Senior Loan may not satisfy the
issuer's obligation to the Trust in the event of non-payment of scheduled
interest or principal, and the collateral may not 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 December 31, 1998,
approximately 1.49% of the Trust's net assets and 1.01% of total assets
consisted of non-performing Senior Loans.
In the event of a bankruptcy of a borrower, the Trust could experience delays
to or limitations on 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, 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.
20
<PAGE>
BORROWING AND LEVERAGE. The Trust may borrow in an amount up to 331|M/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,
and these costs could exceed the income earned by the Trust on the borrowed
proceeds. 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 reduce
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 is 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 average annualized interest rate on the Trust's borrowings for December 31,
1998 was 5.62%. At that rate, and assuming the Trust has borrowed an amount
equal to 331|M/3% of its net assets plus borrowings, the Trust must produce a
1.87% annual return (net of expenses) in order to cover interest payments. The
Trust intends to borrow for investment purposes only 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 created by the Trust's use of
borrowing, using the annualized interest rate described above and assuming
hypothetical annual returns on the Trust's portfolio of minus 10 to plus 10
percent. As can be seen, leverage generally increases the return to
shareholders when portfolio return is positive and decreases return when the
portfolio return is negative. Actual returns may be greater or less than those
appearing in the table.
Assumed Portfolio Return,
net of expenses(1)......... (10%) (5%) 0% 5% 10%
Corresponding Return to
Common Shareholders(2)..... (17.80%) (10.30%) (2.81%) 4.69% 12.19%
- ------------
(1) The Assumed Portfolio Return is required by regulation of the Commission
and is not a prediction of, and does not represent, the projected or actual
performance of the Trust.
(2) In order to compute the "Corresponding Return to Common Shareholders," the
"Assumed Portfolio Return" is multiplied by the total value of the Trust's
assets at the beginning of the Trust's fiscal year to obtain an assumed
return to the Trust. From this amount, all interest accrued during the year
is subtracted to determine the return available to Shareholders. The return
available to Shareholders is then divided by the total value of the Trust's
net assets as of the beginning of the fiscal year to determine the
"Corresponding Return to Common Shareholders."
SECONDARY MARKET FOR THE TRUST'S SHARES. The issuance of Shares through the
Offering may have an adverse effect on the secondary market for the Trust's
Shares. The increase in the amount of the Trust's outstanding Shares resulting
from the Offering may put downward pressure on the market price for the Shares
of the Trust. Shares will not be issued pursuant to the Offering at any time
when Shares are trading at a price lower than a price equal to the Trust's NAV
per Share plus the per Share amount of commissions to be paid to Pilgrim
Securities.
The Trust also issues Shares of the Trust through its Shareholder Investment
Program, and to specific investors pursuant to privately negotiated
transactions. See "Dividends and Distributions -- Shareholder Investment
Program." Shares may be issued under the Shareholder Investment Program or
pursuant to privately negotiated transactions at a discount to the market price
for such Shares, which may put downward pressure on the market price for Shares
of the Trust.
21
<PAGE>
When the Trust's Shares are trading at a premium, the Trust may also issue
Shares that are sold through transactions effected on the NYSE. The increase in
the number of outstanding Shares resulting from that offering may also put
downward pressure on the market price for the Shares.
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, if 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 would prefer 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.
YEAR 2000 COMPLIANCE. Like other financial organizations, the Trust could be
adversely affected if the computer systems used by the Investment Manager and
the Trust's other service providers do not properly process and calculate
date-related information after January 1, 2000. This is commonly known as the
"Year 2000 Problem." The Year 2000 Problem could have a negative impact on
handling securities trades, payment of interest and dividends, pricing, and
account services. The Investment Manager is taking steps that it believes are
reasonably designed to address the Year 2000 Problem with respect to computer
systems that it uses and to obtain reasonable assurances that comparable steps
are being taken by the Trust's other major service providers. It is not
anticipated that the Trust will directly bear any material costs associated
with the Investment Manager and the Trust's other service providers efforts to
become Year 2000 compliant. At this time, however, there can be no assurance
that these steps will be sufficient to avoid any adverse impact to the Trust
nor can there be any assurance that the Year 2000 Problem will not have an
adverse effect on the companies whose securities are held by the Trust or on
global markets or economies, generally.
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
22
<PAGE>
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 December 31, 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 December 31, 1998
was 129,918,211.044, 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
Pilgrim Investments, 40 North Central Avenue, Suite 1200, Phoenix, Arizona
85004, serves as Investment Manager to the Trust and has overall responsibility
for the management of the Trust. The Trust and Pilgrim Investments have entered
into an Investment Management Agreement that requires Pilgrim Investments to
provide all investment advisory and portfolio management services for the
Trust. It also requires Pilgrim Investments to assist in managing and
supervising all aspects of the general day-to-day business activities and
operations of the Trust, including custodial, transfer agency, dividend
disbursing, accounting, auditing, compliance and related services. Pilgrim
Investments provides the Trust with office space, equipment and personnel
necessary to administer the Trust. The agreement with Pilgrim Investments can
be canceled by the Board of Trustees upon 60 days' written notice. Organized in
December 1994, Pilgrim Investments is registered as an investment adviser with
the Commission. Pilgrim Investments serves as investment manager to seven other
registered investment companies (or series thereof), as well as privately
managed accounts, and currently has assets under management of exceeding $5
billion as of the date of this Prospectus.
23
<PAGE>
Pilgrim Investments is an indirect, wholly-owned subsidiary of Pilgrim America
Capital Corporation ("Pilgrim Capital") (NASDAQ: PACC) (formerly, Express
America Holdings Corporation). Through its subsidiaries, Pilgrim Capital
engages in the financial services business, focusing on providing investment
advisory, administrative and distribution services to open-end and closed-end
investment companies and private accounts.
Pilgrim Investments bears its expenses of providing the services described
above. Pilgrim Investments currently receives from the Trust an annual fee,
paid monthly, of 0.80% of the average daily net assets of the Trust plus the
proceeds of any outstanding borrowings. Pilgrim Investments has agreed to
reduce its fee until November 12, 1999 to 0.60% of the average daily net assets
plus the proceeds of any outstanding borrowings, over $1.15 billion.
The Trust pays all operating and other expenses of the Trust not borne by
Pilgrim Investments including, but not limited to, audit and legal fees,
transfer agent, registrar and custodian fees, expenses in preparing tender
offers, shareholder reports and proxy solicitation materials and other
miscellaneous business expenses. The Trust also pays all taxes imposed on it
and all brokerage commissions and loan-related fees. The Trust is responsible
for paying all of the expenses of the Offering.
PORTFOLIO MANAGEMENT. The Trust's portfolio is managed by a portfolio
management team consisting of a Senior Portfolio Manager, three Assistant
Portfolio Managers, and credit analysts.
HOWARD TIFFEN is a Senior Vice President of Pilgrim Investments and the
President, Chief Operating Officer, and Senior Portfolio Manager of the
Trust. He has had primary responsibility for investment management of the
Trust since November, 1995. Prior to November 1995, Mr. Tiffen worked as a
Managing Director of various divisions of Bank of America (and its
predecessor, Continental Bank).
JAMES R. REIS is Executive Vice President, Chief Credit Officer, and
Assistant Secretary of the Trust. Mr. Reis is Director, Vice Chairman
(since December 1994), Executive Vice President (since April 1995), and
Treasurer (since September 1996), of Pilgrim Group, Inc. and Pilgrim
Investments and Director (since December 1994), Vice Chairman (since
November 1995) and Assistant Secretary (since January 1995) of Pilgrim
Securities. Mr. Reis is also Executive Vice President, Assistant Secretary
of each of the other funds in the Pilgrim Group of Funds, and Chief
Financial Officer (since December 1993), Vice Chairman and Assistant
Secretary (since April 1993) and former President (May 1991-December 1993)
of Pilgrim Capital (formerly, Express America Holdings Corporation). Mr.
Reis currently serves or has served as an officer or director of other
affiliates of Pilgrim Capital.
DANIEL A. NORMAN is Senior Vice President, Treasurer and Assistant
Portfolio Manager of the Trust. He has served as Assistant Portfolio
Manager of the Trust since September 1996. Mr. Norman is a Senior Vice
President and Assistant Secretary of Pilgrim Investments (since December
1994), and Senior Vice President of Pilgrim Securities (since November
1995). Mr. Norman has served as an officer of other affiliates of Pilgrim
Capital since February 1992.
JEFFREY A. BAKALAR has served as Assistant Portfolio Manager of the Trust
since January 1998. Mr. Bakalar is a Vice President of Pilgrim Investments
(since February 1998). Prior to joining Pilgrim Investments, Mr. Bakalar
was Vice President of First National Bank of Chicago (July 1994-January
1998) and Corporate Finance Officer of the Securitized Products Group of
Continental Bank (November 1993-July 1994).
MICHEL PRINCE, CFA, has served as Assistant Portfolio Manager of the Trust
since May 1998. Mr. Prince is a Vice President of Pilgrim Investments
(since May 1998). Prior to joining Pilgrim Investments, Mr. Prince was Vice
President of Rabobank International, Chicago Branch (July 1996-April 1998)
and Vice President of Fuji Bank, Chicago Branch (April 1992-July 1996).
ROBERT L. WILSON has served as Assistant Portfolio Manager of the Trust
since July 1998. Mr. Wilson is a Vice President of Pilgrim Investments
(since July 1998). Prior to joining Pilgrim Investments, Mr. Wilson was a
Vice President of Bank of Hawaii (May 1997-June 1998); Vice President of
Union Bank of California (November 1994-May 1997); and Vice President of
Bank of California (October 1990-November 1994).
24
<PAGE>
JASON T. GROOM has served as Assistant Portfolio Manager of the Trust since
July 1998. Mr. Groom is an Assistant Vice President of Pilgrim Investments
(since July 1998). Prior to joining Pilgrim Investments, Mr. Groom was an
Associate in the Corporate Finance Group of NationsBank (January 1998-June
1998); Assistant Vice President, Corporate Finance Group of The Industrial
Bank of Japan Limited (August 1995-December 1997); an Associate in the
Corporate Finance Group of The Long-Term Credit Bank of Japan Limited
(August 1994-August 1995); he received a masters degree from the American
Graduate School of International Management (1992-1993).
CHARLES EDWARD LEMIEUX, CFA, has served as Assistant Portfolio Manager of
the Trust since July 1998. Mr. LeMieux is an Assistant Vice President of
Pilgrim Investments (since July 1998). Prior to joining Pilgrim
Investments, Mr. LeMieux was Assistant Treasurer Cash Management with Salt
River Project (October 1993-June 1998) and Senior Metals Trader/Senior
Financial Analyst with Phelps Dodge Corporation (January 1992-October
1993).
THE ADMINISTRATOR
The Administrator of the Trust is Pilgrim Group, Inc. Its principal business
address is, 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. The
Administrator is a wholly-owned subsidiary of Pilgrim Capital and the immediate
parent company of Pilgrim Investments.
Under an Administration Agreement between Pilgrim Group, Inc. and the Trust,
Pilgrim Group, Inc. administers the Trust's corporate affairs subject to the
supervision of the Trustees of the Trust. In that connection Pilgrim Group,
Inc. monitors the provisions of the Senior Loan agreements and any agreements
with respect to interests in Senior Loans and is responsible for recordkeeping
with respect to the Senior Loans in the Trust's portfolio. Pilgrim Group, Inc.
also furnishes the Trust with office facilities and furnishes executive
personnel together with clerical and certain recordkeeping and administrative
services. These include preparation of annual and other reports to shareholders
and to the Commission. Pilgrim Group, Inc. also handles the filing of federal,
state and local income tax returns not being furnished by the Custodian or
Transfer Agent (as defined below). The Administrator has authorized all of its
officers and employees who have been elected as Trustees or officers of the
Trust to serve in the latter capacities. All services furnished by the
Administrator under the Administration Agreement may be furnished by such
officers or employees of the Administrator.
The Trust pays Pilgrim Group, Inc. for the services performed and the
facilities furnished by Pilgrim Group, Inc. as Administrator a fee, computed
daily and payable monthly. The Administration Agreement states that Pilgrim
Group, Inc. is entitled to receive a fee at an annual rate of 0.15% of the
average daily net assets of the Trust plus the proceeds of any outstanding
borrowings, up to $800 million; and 0.10% of the average daily net assets of
the Trust plus the proceeds of any outstanding borrowings, in excess of $800
million.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The transfer agent, dividend disbursing agent and registrar for the Shares is
DST Systems, Inc. ("DST"), whose principal business address is 330 West 9th
Street, Kansas City, Missouri 64105. In addition, DST acquires shares on behalf
of the Trust for distribution to Shareholders under the Trust's Shareholder
Investment Program.
United Missouri Trust Company of New York serves as a Co-Transfer
Agent/Co-Registrar for the Trust to perform certain transfer agency functions.
CUSTODIAN
The Trust's securities and cash are held under a Custody Agreement with
Investors Fiduciary Trust Company ("IFTC"), whose principal business address is
801 Pennsylvania, Kansas City, Missouri 64105.
25
<PAGE>
PLAN OF DISTRIBUTION
The Trust has entered into a Distribution Agreement with Pilgrim Securities, a
form of which has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part. The summary of the Distribution Agreement
contained herein is qualified by reference to the Distribution Agreement.
Subject to the terms and conditions of the Distribution Agreement, the Trust
may issue and sell Shares of the Trust from time to time through Pilgrim
Securities, which is the principal underwriter of the Shares, through certain
broker-dealers which have entered into selected dealer agreements with Pilgrim
Securities.
The Shares will only be sold on such days as shall be agreed to by the Trust and
Pilgrim Securities. The Shares will be sold at market prices, which shall be
determined with reference to trades on the New York Stock Exchange, subject to a
minimum price to be established each day by the Trust. The minimum price on any
day will not be less than the current NAV per Share plus the per Share amount of
the commission to be paid to Pilgrim Securities. The Trust and Pilgrim
Securities will suspend the sale of Shares if the per share price of the Shares
is less than the minimum price. As of February 26, 1999, the last reported sales
price of a Share of the Trust on the NYSE was $9.56.
The compensation to Pilgrim Securities with respect to the Shares will be at a
fixed commission rate of 4% of the gross sales price per Share of the Shares
sold. Pilgrim Securities will compensate broker-dealers participating in the
offering at a rate of 3% of the gross sales price per Share of the Shares
purchased from the Trust by such broker-dealer. Dealer reallowance may be
changed by Pilgrim Securities from time to time.
Settlements of sales of Shares will occur on the third business day following
the date on which any such sales are made. Unless otherwise indicated in a
further prospectus supplement, Pilgrim Securities as underwriter will act as
underwriter on a reasonable efforts basis.
In connection with the sale of the Shares on behalf of the Trust, Pilgrim
Securities may be deemed to be an underwriter within the meaning of the Act,
and the compensation of Pilgrim Securities may be deemed to be underwriting
commissions or discounts. Pilgrim Securities also serves as distributor for the
Trust in connection with the sale of shares of the Trust pursuant to privately
negotiated transactions and pursuant to optional cash investments in excess of
$5,000. In addition, Pilgrim Securities provides administrative services in
connection with a separate at-the-market offering of shares of the Trust.
The offering of Shares pursuant to the Distribution Agreement will terminate
upon the earlier of (i) the sale of all Shares subject thereto or (ii)
termination of the Distribution Agreement. The Trust and Pilgrim Securities
each have the right to terminate the Distribution Agreement in its discretion
at any time.
The Trust will bear the expenses of the Offering. These expenses include, but
are not limited to, the expense of preparation of the Prospectus and SAI for
the Offering, the expense of counsel and auditors in connection with the
Offering, and others.
USE OF PROCEEDS
It is expected that the net proceeds of the Offering will be invested in Senior
Loans and other securities consistent with the Trust's investment objective and
policies. Pending investment in Senior Loans, the proceeds will be used to pay
down the Trust's outstanding borrowings under its credit facilities. See
"Financial Highlights and Investment Performance -- Policy on Borrowing." As of
December 31, 1998, $552,000,000 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.
26
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
DISTRIBUTION POLICY. Income dividends are declared and paid monthly. Income
dividends may be distributed in cash or reinvested in additional full and
fractional shares pursuant to the Trust's Shareholder Investment Program
discussed below. Shareholders receive statements on a periodic basis reflecting
any distributions credited or paid to their account. Income dividends consist
of interest accrued and amortization of fees earned less any amortization of
premiums paid and the estimated expenses of the Trust, including fees payable
to Pilgrim Investments. Income dividends are calculated monthly under
guidelines approved by the Trustees. Each dividend is payable to Shareholders
of record at the time of declaration. Accrued amounts of fees received,
including facility fees, will be taken in as income and passed on to
Shareholders as part of dividend distributions. Any fees or commissions paid to
facilitate the sale of portfolio Senior Loans in connection with quarterly
tender offers or other portfolio transactions may reduce the dividend yield.
The Trust may make one or more annual payments from any net realized capital
gains, if any.
SHAREHOLDER INVESTMENT PROGRAM. The Trust's Shareholder Investment Program (the
"Program") allows participating Shareholders to reinvest all dividends and
capital gain distributions in additional shares of the Trust. The Program also
allows participants to make optional cash investments monthly through DST (the
"Program Agent"), in amounts ranging from a minimum of $100 to a maximum of
$5,000. Subject to the permission of the Trust, participating Shareholders may
also make optional cash investments in excess of the monthly maximum. Shares
purchased by participants in the Program in connection with the reinvestment of
dividends or optional cash investments may be issued by the Trust if the
Trust's Shares are trading at a premium to net asset value. If the Trust's
Shares are trading at a discount to net asset value, Shares purchased under the
Program will be purchased on the open market. Shares issued by the Trust in
connection with the reinvestment of dividends will be issued at the greater of
(i) net asset value or (ii) a discount of 5% to the market price. Shares issued
by the Trust in connection with optional cash investments will be issued at the
greater of (i) net asset value or (ii) a discount, determined by the Trust,
ranging from 0% to 5% to the market price. All distributions to Shareholders
whose Shares are registered in their own names automatically will be paid in
cash, unless the Shareholder elects to reinvest the distributions in additional
shares of the Trust pursuant to the Program. Shareholders who receive dividends
and capital gain distributions in cash may elect to participate in the Program
by notifying DST. Additional information about the Program may be obtained from
The Pilgrim Group's Shareholder Services Department at 1 (800) 992-0180. For
additional information, see "Shareholder Investment Program" in the SAI.
TAX MATTERS
The Trust intends to operate as a "regulated investment company" under the
Internal Revenue Code of 1986, as amended. To do so, the Trust must meet
certain income, distribution and diversification requirements. In any fiscal
year in which the Trust so qualifies and distributes to Shareholders
substantially all of its net investment income and net capital gains, the Trust
itself is generally relieved of any federal income or excise tax.
All dividends and capital gains distributed to Shareholders are taxable whether
they are reinvested or received in cash, unless the Shareholder is exempt from
taxation or entitled to tax deferral. Dividends paid out of the Trust's
investment company taxable income (including interest, dividends, if any, and
net short-term capital gains) will be taxable to Shareholders as ordinary
income. If a portion of the Trust's income consists of dividends paid by U.S.
corporations, a portion of the dividends paid by the Trust may be eligible for
the corporate dividends-received deduction. Distributions of net capital gains
(the excess of net long-term capital gains over net short-term capital losses),
if any, designated as capital gain dividends are taxable as long-term capital
gains, regardless of how long a Shareholder has held the Trust's Shares, and
will generally be subject to a maximum federal tax rate of 20%. Early each
year, Shareholders will be notified as to the amount and federal tax status of
all dividends and capital gains paid during the prior year. Such dividends and
capital gains may also be subject to state or local taxes. Dividends declared
in October, November, or December with a record date in such month and paid
during the following January will be
27
<PAGE>
treated as having been paid by the Trust and received by Shareholders on
December 31 of the calendar year in which declared, rather than the calendar
year in which the dividends are actually received.
If a Shareholder sells or otherwise disposes of his or her Shares of the Trust,
he or she may realize a capital gain or loss which will be long-term or
short-term, generally depending on the holding period for the Shares.
If a Shareholder has not furnished a certified correct taxpayer identification
number (generally a Social Security number) and has not certified that
withholding does not apply, or if the Internal Revenue Service has notified the
Trust that the taxpayer identification number listed on the account is
incorrect according to their records or that the Shareholder is subject to
backup withholding, federal law generally requires the Trust to withhold 31%
from any dividends and/or redemptions (including exchange redemptions). Amounts
withheld are applied to federal tax liability; a refund may be obtained from
the Service if withholding results in overpayment of taxes. Federal law also
requires the Trust to withhold 30% or the applicable tax treaty rate from
ordinary income dividends paid to certain nonresident alien and other non-U.S.
shareholder accounts.
This is a brief summary of some of the federal income tax laws that affect an
investment in the Trust. Please see the SAI and a tax adviser for further
information.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed on for the Trust by
Dechert Price & Rhoads, Washington, D.C., counsel to the Trust.
EXPERTS
The financial statements and financial highlights contained in the Trust's
February 28, 1998 annual report to shareholders except for those periods ending
prior to February 29, 1996 have been incorporated by reference herein in
reliance upon the report of KPMG LLP, independent auditors, incorporated by
reference herein, and upon the authority of said firm as experts in accounting
and auditing. The address of KPMG 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 (800) 992-0180.
28
<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
29
<PAGE>
5,000,000 Shares of Beneficial Interest PILGRIM(TM)
PILGRIM PRIME RATE TRUST THE VALUE OF INVESTING(R)
New York Stock Exchange Symbol: PPR
40 NORTH CENTRAL AVENUE, SUITE 1200, PHOENIX, ARIZONA 85004
(800) 992-0180
- --------------------------------------------------------------------------------
FUND ADVISORS AND AGENTS
- --------------------------------------------------------------------------------
INVESTMENT MANAGER DISTRIBUTOR
Pilgrim Investments, Inc. Pilgrim Securities, Inc.
40 North Central Avenue, Suite 1200 40 North Central Avenue, Suite 1200
Phoenix, AZ 85004-4424 Phoenix, Arizona 85004
ADMINISTRATOR TRANSFER AGENT
Pilgrim Group, Inc. DST Systems, Inc.
40 North Central Avenue, Suite 1200 P.O. Box 419368
Phoenix, AZ 85004-4424 Kansas City, Missouri 64141-6368
CUSTODIAN LEGAL COUNSEL
Investors Fiduciary Trust Company Dechert Price & Rhoads
801 Pennsylvania 1775 Eye Street, N.W.
Kansas City, Missouri 64105 Washington, D.C. 20006
INDEPENDENT AUDITORS INSTITUTIONAL INVESTORS AND ANALYSTS
KPMG LLP Call Pilgrim Prime Rate Trust
725 South Figueroa Street 1-800-336-3436, Extension 8256
Los Angeles, California 90017
The Trust has not authorized any person to provide you with any information or
to make any representations other than those contained in this Prospectus in
connection with this offer. You should rely only on the information in this
Prospectus or that we have referred to you. This Prospectus is not an offer to
sell or a solicitation of any offer to buy any security other than the Shares
offered by this Prospectus, nor does it constitute an offer to sell or a
solicitation of any offer to buy the Shares by anyone in any jurisdiction in
which such offer or solicitation is not authorized, or in which the person
making such offer or solicitation is not qualified to do so, or to any person
to whom it is unlawful to make such an offer or solicitation. The delivery of
this Prospectus or any sale made hereunder does not imply that the information
contained in this Prospectus is correct as of any time after the date of this
Prospectus. However, if any material change occurs while this Prospectus is
required by law to be delivered, this Prospectus will be amended or
supplemented.
PROSPECTUS
March 4, 1999
<PAGE>
PILGRIM PRIME RATE TRUST
STATEMENT OF ADDITIONAL INFORMATION
Pilgrim Prime Rate Trust (the "Trust") is a diversified, closed-end management
investment company registered under the Investment Company Act of 1940, as
amended (the "Investment Company Act"). The Trust's investment objective is to
seek as high a level of current income as is consistent with the preservation of
capital. The Trust seeks to achieve its objective by investing primarily in
senior floating-rate loans ("Senior Loans"), the interest rates of which float
periodically based upon a benchmark indicator of prevailing interest rates, such
as the Prime Rate or the London Inter-Bank Offered Rate ("LIBOR"). Under normal
circumstances, at least 80% of the Trust's net assets are invested in Senior
Loans. The Trust is managed by Pilgrim Investments, Inc. ("Pilgrim Investments"
or the "Investment Manager").
This Statement of Additional Information ("SAI") is not a prospectus, but should
be read in conjunction with the Prospectus for the Trust dated March 4, 1999
(the "Prospectus"). This SAI does not include all information that a prospective
investor should consider before purchasing shares of the Trust, and investors
should obtain and read the Prospectus prior to purchasing shares. A copy of the
Prospectus may be obtained without charge, by calling Pilgrim Investments
toll-free at (800) 992-0180. This SAI incorporates by reference the entire
Prospectus.
TABLE OF CONTENTS
Page
----
Change Of Name............................................................. 2
Additional Information About Investments................................... 2
Investment Restrictions.................................................... 8
Trustees and Officers...................................................... 9
Investment Management and Other Services................................... 11
Portfolio Transactions..................................................... 12
Net Asset Value............................................................ 14
Methods Available to Reduce Market Value Discount from NAV................. 14
Shareholder Investment Program............................................. 15
Tax Matters................................................................ 18
Advertising and Performance Data........................................... 21
Financial Statements....................................................... 22
The Prospectus and this SAI omit certain of the information contained in the
registration statement filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. The registration statement may be obtained from
the Commission upon payment of the fee prescribed, or inspected at the
Commission's office at no charge.
This SAI is dated March 4, 1999.
<PAGE>
CHANGE OF NAME
The Trust changed its name from "Pilgrim Prime Rate Trust" to "Pilgrim America
Prime Rate Trust" in April, 1996, and then changed its name back to "Pilgrim
Prime Rate Trust" on November 16, 1998.
ADDITIONAL INFORMATION ABOUT INVESTMENTS
AND INVESTMENT TECHNIQUES
Some of the different types of securities in which the Trust may invest, subject
to its investment objective, policies and restrictions, are described in the
Prospectus under "Investment Objective and Policies." Additional information
concerning certain of the Trust's investments and investment techniques is set
forth below.
EQUITY SECURITIES
In connection with its purchase or holding of interests in Senior Loans, the
Trust may acquire (and subsequently sell) equity securities or exercise warrants
that it receives. The Trust will acquire such interests only as an incident to
the intended purchase or ownership of Senior Loans or if, in connection with a
reorganization of a borrower, the Trust receives an equity interest in a
reorganized corporation or other form of business entity or warrants to acquire
such an equity interest. The Trust normally will not hold more than 20% of its
total assets in equity securities. Equity securities will not be treated as
Senior Loans; therefore, an investment in such securities will not count toward
the 80% of the Trust's net assets that normally will be invested in Senior
Loans. Equity securities are subject to financial and market risks and can be
expected to fluctuate in value.
LEASE PARTICIPATIONS
The credit quality standards and general requirements that the Trust applies to
Lease Participations including collateral quality, the credit quality of the
borrower and the likelihood of payback are substantially the same as those
applied to conventional Senior Loans. A Lease Participation is also required to
have a floating interest rate that is indexed to the federal funds rate, LIBOR,
or Prime Rate in order to be eligible for investment.
The Office of the Comptroller of the Currency has established regulations which
set forth circumstances under which national banks may engage in lease
financings. Among other things, the regulation requires that a lease be a
net-full payout lease representing the noncancelable obligation of the lessee,
and that the bank make certain determinations with respect to any estimated
residual value of leased property relied upon by the bank to yield a full return
on the lease. The Trust may invest in lease financings only if the Lease
Participation meets these banking law requirements.
REPURCHASE AGREEMENTS
In general, the Trust does not engage, nor does it intend to engage in the
foreseeable future, in repurchase agreements. The Trust has the ability,
however, pursuant to its investment objective and policies, to enter into
repurchase agreements (a purchase of, and a simultaneous commitment to resell, a
financial instrument at an agreed upon price on an agreed upon date) only with
member banks of the Federal Reserve System, member firms of the New York Stock
Exchange ("NYSE") or other entities determined by Pilgrim Investments to be
creditworthy. When participating in repurchase agreements, the Trust buys
securities from a vendor, E.G., a bank or brokerage firm, with the agreement
that the vendor will repurchase the securities at a higher price at a later
date. The Trust may be subject to various delays and risks of loss if the vendor
is unable to meet its obligation to repurchase. Under the Investment Company
Act, repurchase agreements are deemed to be collateralized loans of money by the
Trust to the seller. In evaluating whether to enter into a repurchase agreement,
Pilgrim Investments will consider carefully the creditworthiness of the vendor.
If the member bank or member firm that is the party to the repurchase agreement
petitions for bankruptcy or otherwise becomes subject to the U.S. Bankruptcy
Code, the law regarding the rights of the Trust to enforce the terms of the
repurchase agreement is unsettled. The securities underlying a repurchase
agreement will be marked to market every business day so that the value of the
collateral is at least equal to the value of the loan, including the accrued
interest thereon, and Pilgrim Investments will monitor the value of the
collateral. No specific limitation exists as to the percentage of the Trust's
assets which may be used to participate in repurchase agreements.
-2-
<PAGE>
REVERSE REPURCHASE AGREEMENTS
In general, the Trust does not engage, nor does it intend to engage in the
foreseeable future, in reverse repurchase agreements. The Trust has the ability,
however, pursuant to its investment objective and policies, to enter into
reverse repurchase agreements. A reverse repurchase agreement is an instrument
under which the Trust may sell an underlying debt instrument and simultaneously
obtain the commitment of the purchaser to sell the security back to the Trust at
an agreed upon price on an agreed upon date. Reverse repurchase agreements will
be considered borrowings by the Trust and as such are subject to the
restrictions on borrowing. Borrowings by the Trust create an opportunity for
greater total return, but at the same time, increase exposure to capital risk.
The Trust will maintain in a segregated account with its custodian cash or
liquid high grade portfolio securities in an amount sufficient to cover its
obligations with respect to reverse repurchase agreements. The Trust will
receive payment for such securities only upon physical delivery or evidence of
book entry transfer by its custodian. Regulations of the Commission require
either that securities sold by the Trust under a reverse repurchase agreement be
segregated pending repurchase or that the proceeds be segregated on the Trust's
books and records pending repurchase. Reverse repurchase agreements may involve
certain risks in the event of default or insolvency of the other party,
including possible loss from delays or restrictions upon the Trust's ability to
dispose of the underlying securities. An additional risk is that the market
value of securities sold by the Trust under a reverse repurchase agreement could
decline below the price at which the Trust is obligated to repurchase them.
LENDING SENIOR LOANS AND OTHER PORTFOLIO INSTRUMENTS
To generate additional income, the Trust may lend its portfolio securities,
including an interest in a Senior Loan, in an amount up to 33 1/3% of total
Trust assets to broker-dealers, major banks, or other recognized domestic
institutional borrowers of securities. No lending may be made with any companies
affiliated with Pilgrim Investments. During the time portfolio securities are on
loan, the borrower pays the Trust any dividends or interest paid on such
securities, and the Trust may invest the cash collateral and earn additional
income, or it may receive an agreed-upon amount of interest income from the
borrower who has delivered equivalent collateral or a letter of credit. As with
other extensions of credit, there are risks of delay in recovery or even loss of
rights in the collateral should the borrower fail financially.
The Trust may seek to increase its income by lending financial instruments in
its portfolio in accordance with present regulatory policies, including those of
the Board of Governors of the Federal Reserve System and the Commission. The
lending of financial instruments is a common practice in the securities
industry. The loans are required to be secured continuously by collateral,
consistent with the requirements of the Investment Company Act discussed below,
maintained on a current basis at an amount at least equal to the market value of
the portfolio instruments loaned. The Trust has the right to call a Senior Loan
and obtain the portfolio instruments loaned at any time on such notice as
specified in the transaction documents. For the duration of the Senior Loan, the
Trust will continue to receive the equivalent of the interest paid by the issuer
on the portfolio instruments loaned and may also receive compensation for the
loan of the financial instrument. Any gain or loss in the market price of the
instruments loaned that may occur during the term of the Senior Loan will be for
the account of the Trust.
The Trust may lend its portfolio instruments so long as the terms and the
structure of such loans are not inconsistent with the requirements of the
Investment Company Act, which currently require that (a) the borrower pledge and
maintain with the Trust collateral consisting of cash, a letter of credit issued
by a domestic U.S. bank, or securities issued or guaranteed by the U.S.
government having a value at all times not less than 100% of the value of the
instruments loaned, (b) the borrowers add to such collateral whenever the price
of the instruments loaned rises (I.E., the value of the loan is "marked to the
market" on a daily basis), (c) the loan be made subject to termination by the
Trust at any time, and (d) the Trust receive reasonable interest on the loan
(which may include the Trust's investing any cash collateral in interest bearing
short-term investments), any distributions on the loaned instruments and any
increase in their market value. The Trust may lend its portfolio instruments to
member banks of the Federal Reserve System, members of the NYSE or other
entities determined by Pilgrim Investments to be creditworthy. All relevant
facts and circumstances, including the creditworthiness of the qualified
institution, will be monitored by Pilgrim Investments, and will be considered in
making decisions with respect to the lending of portfolio instruments.
-3-
<PAGE>
The Trust may pay reasonable negotiated fees in connection with loaned
instruments. In addition, voting rights may pass with the loaned securities, but
if a material event were to occur affecting such a loan, the Trust will retain
the right to call the loan and vote the securities. If a default occurs by the
other party to such transaction, the Trust will have contractual remedies
pursuant to the agreements related to the transaction but such remedies may be
subject to bankruptcy and insolvency laws which could materially and adversely
affect the Trust's rights as a creditor. However, the loans will be made only to
firms deemed by Pilgrim Investments to be of good financial standing and when,
in the judgment of Pilgrim Investments, the consideration which can be earned
currently from loans of this type justifies the attendant risk.
INTEREST RATE HEDGING TRANSACTIONS
Generally, the Trust does not engage, nor does it intend to engage, in the
foreseeable future, in interest rate swaps, or the purchase or sale of interest
rate caps and floors. The Trust has the ability, however, pursuant to its
investment objectives and policies, to engage in certain hedging transactions
including interest rate swaps and the purchase or sale of interest rate caps and
floors. The Trust may undertake these transactions primarily for the following
reasons: to preserve a return on or value of a particular investment or portion
of the Trust's portfolio, to protect against decreases in the anticipated rate
of return on floating or variable rate financial instruments which the Trust
owns or anticipates purchasing at a later date, or for other risk management
strategies such as managing the effective dollar-weighted average duration of
the Trust's portfolio. Market conditions will determine whether and in what
circumstances the Trust would employ any of the hedging techniques described
below.
Interest rate swaps involve the exchange by the Trust with another party of
their respective commitments to pay or receive interest, E.G., an exchange of an
obligation to make floating rate payments on a specified dollar amount referred
to as the "notional" principal amount for an obligation to make fixed rate
payments. For example, the Trust may seek to shorten the effective interest rate
redetermination period of a Senior Loan in its portfolio that has an interest
rate redetermination period of one year. The Trust could exchange its right to
receive fixed income payments for one year from a borrower for the right to
receive payments under an obligation that readjusts monthly. In such event, the
Trust would consider the interest rate redetermination period of such Senior
Loan to be the shorter period. The purchase of an interest rate cap entitles the
purchaser, to the extent that a specified index exceeds a predetermined interest
rate, to receive payments of interest on a notional principal amount from the
party selling such interest rate cap. The purchase of an interest rate floor
entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate floor. The Trust will
not enter into swaps, caps or floors if, on a net basis, the aggregate notional
principal amount with respect to such agreements exceeds the net assets of the
Trust or to the extent the purchase of swaps, caps or floors would be
inconsistent with the Trust's other investment restrictions.
The Trust will not treat swaps covered in accordance with applicable regulatory
guidance as senior securities. The Trust will usually enter into interest rate
swaps on a net basis, I.E., where the two parties make net payments with the
Trust receiving or paying, as the case may be, only the net amount of the two
payments. The net amount of the excess, if any, of the Trust's obligations over
its entitlement with respect to each interest rate swap will be accrued and an
amount of cash or liquid securities having an aggregate NAV at least equal to
the accrued excess will be maintained in a segregated account. If the Trust
enters into a swap on other than a net basis, the Trust will maintain in the
segregated account the full amount of the Trust's obligations under each such
swap. The Trust may enter into swaps, caps and floors with member banks of the
Federal Reserve System, members of the NYSE or other entities determined by
Pilgrim Investments. If a default occurs by the other party to such transaction,
the Trust will have contractual remedies pursuant to the agreements related to
the transaction but such remedies may be subject to bankruptcy and insolvency
laws which could materially and adversely affect the Trust's rights as a
creditor.
The swap, cap and floor market has grown substantially in recent years with a
large number of banks and financial services firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, this market
has become relatively liquid. There can be no assurance, however, that the Trust
will be able to enter into interest rate swaps or to purchase interest rate caps
or floors at prices or on terms Pilgrim Investments believes are advantageous to
the Trust. In addition, although the terms of interest rate swaps, caps and
floors may provide for termination, there can be no assurance that the Trust
will be able to terminate an interest rate swap or to sell or offset interest
rate caps or floors that it has purchased.
-4-
<PAGE>
The successful utilization of hedging and risk management transactions requires
skills different from those needed in the selection of the Trust's portfolio
securities and depends on Pilgrim Investments's ability to predict correctly the
direction and degree of movements in interest rates. Although the Trust believes
that use of the hedging and risk management techniques described above will
benefit the Trust, if Pilgrim Investments's judgment about the direction or
extent of the movement in interest rates is incorrect, the Trust's overall
performance would be worse than if it had not entered into any such
transactions. The Trust will incur brokerage and other costs in connection with
its hedging transactions.
BORROWING
Under the Investment Company Act, the Trust is not permitted to incur
indebtedness unless immediately after such incurrence the Trust has an asset
coverage of 300% of the aggregate outstanding principal balance of indebtedness.
Additionally, under the Investment Company Act, the Trust may not declare any
dividend or other distribution upon any class of its capital stock, or purchase
any such capital stock, unless the aggregate indebtedness of the Trust has at
the time of the declaration of any such dividend or distribution or at the time
of any such purchase an asset coverage of at least 300% after deducting the
amount of such dividend, distribution, or purchase price, as the case may be.
ORIGINATING SENIOR LOANS
Although the Trust does not act, nor does it intend to act in the foreseeable
future, as an "agent" in originating and administering a loan on behalf of all
lenders or as one of a group of "co-agents" in originating Senior Loans, it does
have the ability to do so. Senior Loans are typically arranged through private
negotiations between a borrower and several financial institutions ("lenders")
represented in each case by one or more such lenders acting as agent of the
several lenders. On behalf of the several lenders, the agent, which is
frequently the entity that originates the Senior Loan and invites the other
parties to join the lending syndicate, will be primarily responsible for
negotiating the Senior Loan agreements that establish the relative terms,
conditions and rights of the borrower and the several lenders. The co-agents, on
the other hand, are not responsible for administration of a Senior Loan, but are
part of the initial group of lenders that commit to providing funding for a
Senior Loan. In large transactions, it is common to have several agents;
however, one such agent typically has primary responsibility for documentation
and administration of the Senior Loan. The agent is required to administer and
manage the Senior Loan and to service or monitor the collateral. The agent is
also responsible for the collection of principal and interest and fee payments
from the borrower and the apportionment of these payments to the credit of all
lenders which are parties to the loan agreement. The agent is charged with the
responsibility of monitoring compliance by the borrower with the restrictive
covenants in the loan agreement and of notifying the lenders of any adverse
change in the borrower's financial condition. In addition, the agent generally
is responsible for determining that the lenders have obtained a perfected
security interest in the collateral securing the Senior Loan.
Lenders generally rely on the agent to collect their portion of the payments on
the Senior Loan and to use appropriate creditor remedies against the borrower.
Typically under loan agreements, the agent is given broad discretion in
enforcing the loan agreement and is obligated to use the same care it would use
in the management of its own property. The borrower compensates the agent for
these services. Such compensation may include special fees paid on structuring
and funding the Senior Loan and other fees paid on a continuing basis. The
precise duties and rights of an agent are defined in the loan agreement.
When the Trust is an agent, it has, as a party to the loan agreement, a direct
contractual relationship with the borrower and, prior to allocating portions of
the Senior Loan to the lenders, if any, assumes all risks associated with the
Senior Loan. The agent may enforce compliance by the borrower with the terms of
the loan agreement. Agents also have voting and consent rights under the
applicable loan agreement. Action subject to agent vote or consent generally
requires the vote or consent of the holders of some specified percentage of the
outstanding principal amount of the Senior Loan, which percentage varies
depending on the relevant loan agreement. Certain decisions, such as reducing
the amount or increasing the time for payment of interest on or repayment of
principal of a Senior Loan, or releasing collateral therefor, frequently require
the unanimous vote or consent of all lenders affected.
-5-
<PAGE>
Pursuant to the terms of a loan agreement, the Trust as agent typically has sole
responsibility for servicing and administering a loan on behalf of the other
lenders. Each lender in a Senior Loan is generally responsible for performing
their own credit analysis and their own investigation of the financial condition
of the borrower. Generally, loan agreements will hold the Trust liable for any
action taken or omitted that amounts to gross negligence or willful misconduct.
In the event of a borrower's default on a loan, the loan agreements provide that
the lenders do not have recourse against the Trust for its activities as agent.
Instead, lenders will be required to look to the borrower for recourse.
Acting in the capacity of an agent in a Senior Loan may subject the Trust to
certain risks in addition to those associated with the Trust's current role as a
lender. An agent is charged with the above described duties and responsibilities
to lenders and borrowers subject to the terms of the loan agreement. Failure to
adequately discharge such responsibilities in accordance with the standard of
care set forth in the loan agreement may expose the Trust to liability for
breach of contract. If a relationship of trust is found between the agent and
the lenders, the agent will be held to a higher standard of conduct in
administering the loan. In consideration of such risks, the Trust will invest no
more than 10% of its total assets in Senior Loans in which it acts as agent or
co-agent and the size of any individual loan will not exceed 5% of the Trust's
total assets.
ADDITIONAL INFORMATION ON SENIOR LOANS
Senior Loans are direct obligations of corporations or other business entities
and are arranged by banks or other commercial lending institutions and made
generally to finance internal growth, mergers, acquisitions, stock repurchases,
and leveraged buyouts. Senior Loans usually include restrictive covenants which
must be maintained by the borrower. Such covenants, in addition to the timely
payment of interest and principal, may include mandatory prepayment provisions
arising from free cash flow, restrictions on dividend payments and usually state
that a borrower must maintain specific minimum financial ratios as well as
establishing limits on total debt. A breach of a covenant, which is not waived
by the agent, is normally an event of acceleration, I.E., the agent has the
right to call the outstanding Senior Loan. In addition, loan covenants may
include mandatory prepayment provisions stemming from free cash flow. Free cash
flow is cash that is in excess of capital expenditures plus debt service
requirements of principal and interest. The free cash flow shall be applied to
prepay the Senior Loan in an order of maturity described in the loan documents.
Under certain interests in Senior Loans, the Trust may have an obligation to
make additional loans upon demand by the borrower. The Trust intends to reserve
against such contingent obligations by segregating sufficient assets in high
quality short-term liquid investments or borrowing to cover such obligations.
In a typical interest in a Senior Loan, the agent administers the loan and has
the right to monitor the collateral. The agent is also required to segregate the
principal and interest payments received from the borrower and to hold these
payments for the benefit of the lenders. The Trust normally looks to the agent
to collect and distribute principal of and interest on a Senior Loan.
Furthermore, the Trust looks to the agent to use normal credit remedies, such as
to foreclose on collateral; monitor credit loan covenants; and notify the
lenders of any adverse changes in the borrower's financial condition or
declarations of insolvency. At times the Trust may also negotiate with the agent
regarding the agent's exercise of credit remedies under a Senior Loan. The agent
is compensated for these services by the borrower as is set forth in the loan
agreement. Such compensation may take the form of a fee or other amount paid
upon the making of the Senior Loan and/or an ongoing fee or other amount.
The loan agreement in connection with Senior Loans sets forth the standard of
care to be exercised by the agents on behalf of the lenders and usually provides
for the termination of the agent's agency status in the event that it fails to
act properly, becomes insolvent, enters FDIC receivership, or if not FDIC
insured, enters into bankruptcy or if the agent resigns. In the event an agent
is unable to perform its obligations as agent, another lender would generally
serve in that capacity.
The Trust believes that the principal credit risk associated with acquiring
Senior Loans from another lender is the credit risk associated with the borrower
of the underlying Senior Loan. The Trust may incur additional credit risk,
however, when the Trust acquires a participation in a Senior Loan from another
lender because the Trust must assume the risk of insolvency or bankruptcy of the
other lender from which the Senior Loan was acquired. However, in acquiring
Senior Loans, the Trust conducts an analysis and evaluation of the financial
condition of each such lender. In this regard, if the lenders have a long-term
debt rating, the long-term debt of all such Participants is rated BBB or better
-6-
<PAGE>
by Standard & Poor's Ratings Services or Baa or better by Moody's Investors
Service, Inc., or has received a comparable rating by another nationally
recognized rating service. In the absence of rated long-term debt, the lenders
or, with respect to a bank, the holding company of such lenders have commercial
paper outstanding which is rated at least A-1 by Standard & Poor's Ratings
Services or P-1 by Moody's Investors Service, Inc. In the absence of such rated
long-term debt or rated commercial paper if a bank, the Trust may acquire
participations in Senior Loans from lenders whose long-term debt and commercial
paper is of comparable quality to the foregoing rating standards as determined
by the Manager under the supervision of the Trustees. The Trust also diversifies
its portfolio with respect to lenders from which the Trust acquires Senior
Loans. See "Investment Restrictions."
Senior Loans, unlike certain bonds, usually do not have call protection. This
means that interests comprising the Trust's portfolio, while having a stated one
to ten-year term, may be prepaid, often without penalty. The Trust generally
holds Senior Loans to maturity unless it has become necessary to sell them to
satisfy any shareholder tender offers or to adjust the Trust's portfolio in
accordance with Pilgrim Investments's view of current or expected economic or
specific industry or borrower conditions.
Senior Loans frequently require full or partial prepayment of a loan when there
are asset sales or a securities issuance. Prepayments on Senior Loans may also
be made by the borrower at its election. The rate of such prepayments may be
affected by, among other things, general business and economic conditions, as
well as the financial status of the borrower. Prepayment would cause the actual
duration of a Senior Loan to be shorter than its stated maturity. Prepayment may
be deferred by the Trust. This should, however, allow the Trust to reinvest in a
new loan and recognize as income any unamortized loan fees. In many cases this
will result in a new facility fee payable to the Trust.
Because interest rates paid on these Senior Loans periodically fluctuate with
the market, it is expected that the prepayment and a subsequent purchase of a
new Senior Loan by the Trust will not have a material adverse impact on the
yield of the portfolio. See "Portfolio Transactions."
Under a Senior Loan, the borrower generally must pledge as collateral assets
which may include one or more of the following: cash; accounts receivable;
inventory; property, plant and equipment; both common and preferred stock in its
subsidiaries, trademarks, copyrights, patent rights and franchise value. The
Trust may also receive guarantees as a form of collateral. In some instances, a
Senior Loan may be secured only by stock in a borrower or its affiliates. The
market value of the assets serving as collateral will, at the time of
investment, in the opinion of the Investment Manager, equal or exceed the
principal amount of the Senior Loan. The valuations of these assets may be
performed by an independent appraisal. If the agent becomes aware that the value
of the collateral has declined, the agent may take action as it deems necessary
for the protection of its own interests and the interests of the other lenders,
including, for example, giving the borrower an opportunity to provide additional
collateral or accelerating the loan. There is no assurance, however, that the
borrower would provide additional collateral or that the liquidation of the
existing collateral would satisfy the borrower's obligation in the event of
nonpayment of scheduled interest or principal, or that such collateral could be
readily liquidated.
The Trust may be required to pay and may receive various fees and commissions in
the process of purchasing, selling and holding Senior Loans. The fee component
may include any, or a combination of, the following elements: arrangement fees,
non-use fees, facility fees, letter of credit fees and ticking fees. Arrangement
fees are paid at the commencement of a loan as compensation for the initiation
of the transaction. A non-use fee is paid based upon the amount committed but
not used under the loan. Facility fees are on-going annual fees paid in
connection with a loan. Letter of credit fees are paid if a loan involves a
letter of credit. Ticking fees are paid from the initial commitment indication
until loan closing if for an extended period. The amount of fees is negotiated
at the time of transaction.
In order to allow national banks to purchase shares of the Trust for their own
accounts without limitation, the Trust invests only in obligations which are
eligible for purchase by national banks for their own accounts pursuant to the
provisions of paragraph seven of Section 24 of U.S. Code Title 12. National
banks which are contemplating purchasing shares of the Trust for their own
accounts should refer to Banking Circular 220, issued by the U.S. Comptroller of
the Currency on November 21, 1986, for a description of certain considerations
applicable to such purchases.
-7-
<PAGE>
INVESTMENT RESTRICTIONS
The Trust has adopted the following restrictions relating to its investments and
activities, which may not be changed without a Majority Vote (as defined in the
Investment Company Act). The Trust may not:
+ Issue senior securities, except insofar as the Trust may be deemed to
have issued a senior security by reason of (i) entering into certain
interest rate hedging transactions, (ii) entering into reverse
repurchase agreements, or (iii) borrowing money in an amount not
exceeding 33 1/3%, or such other percentage permitted by law, of the
Trust's total assets (including the amount borrowed) less all
liabilities other than borrowings.
+ Invest more than 25% of its total assets in any industry.
+ Invest in marketable warrants other than those acquired in conjunction
with Senior Loans and such warrants will not constitute more than 5%
of its assets.
+ Make investments in any one issuer other than U.S. Government
securities if, immediately after such purchase or acquisition, more
than 5% of the value of the Trust's total assets would be invested in
such issuer, or the Trust would own more than 25% of any outstanding
issue, except that up to 25% of the Trust's total assets may be
invested without regard to the foregoing restrictions. For the purpose
of the foregoing restriction, the Trust will consider the borrower of
a Senior Loan to be the issuer of such Senior Loan. In addition, with
respect to a Senior Loan under which the Trust does not have privity
with the borrower or would not have a direct cause of action against
the borrower in the event of the failure of the borrower to pay
scheduled principal or interest, the Trust will also separately meet
the foregoing requirements and consider each interpositioned bank (a
lender from which the Trust acquires a Senior Loan) to be an issuer of
the Senior Loan.
+ Act as an underwriter of securities, except to the extent that it may
be deemed to act as an underwriter in certain cases when disposing of
its portfolio investments or acting as an agent or one of a group of
co-agents in originating Senior Loans.
+ Purchase or sell equity securities (except that the Trust may,
incidental to the purchase or ownership of an interest in a Senior
Loan, or as part of a borrower reorganization, acquire, sell and
exercise warrants and/or acquire or sell other equity securities),
real estate, real estate mortgage loans, commodities, commodity
futures contracts, or oil or gas exploration or development programs;
or sell short, purchase or sell straddles, spreads, or combinations
thereof, or write put or call options.
+ Make loans of money or property to any person, except that the Trust
(i) may make loans to corporations or other business entities, or
enter into leases or other arrangements that have the characteristics
of a loan; (ii) may lend portfolio instruments; and (iii) may acquire
securities subject to repurchase agreements.
+ Purchase shares of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization.
+ Make investments on margin or hypothecate, mortgage or pledge any of
its assets except for the purpose of securing borrowings as described
above in connection with the issuance of senior securities and then
only in an amount up to 33 1/3%, or such other percentage permitted by
law, of the value of the Trust's total assets (including the amount
borrowed) less all liabilities other than borrowings.
-8-
<PAGE>
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage resulting from a change in value of the
Trust's investments or amount of total assets will not be considered a violation
of any of the foregoing restrictions.
There is no limitation on the percentage of the Trust's total assets that may be
invested in instruments which are not readily marketable or subject to
restrictions on resale, and to the extent the Trust invests in such instruments,
the Trust's portfolio should be considered illiquid. The extent to which the
Trust invests in such instruments may affect its ability to realize the net
asset value (NAV) of the Trust in the event of the voluntary or involuntary
liquidation of its assets.
TRUSTEES AND OFFICERS
BOARD OF TRUSTEES. The Trust is governed by its Board of Trustees. The Trustees
and Officers of the Trust are listed below. An asterisk (*) has been placed next
to the name of each Trustee who is an "interested person," as that term is
defined in the Investment Company Act, by virtue of that person's affiliation
with the Trust or Pilgrim Investments.
Mary A. Baldwin, Ph.D, 2525 E. Camelback Road, Suite 200, Phoenix, Arizona
85016. (Age 59.) Trustee. Realtor, Coldwell Banker Success Realty
(formerly, The Prudential Arizona Realty) for more than the last five
years. Ms. Baldwin is also Vice President, United States Olympic Committee
(November 1996-Present), and formerly Treasurer, United States Olympic
Committee (November 1992-November 1996). Ms. Baldwin also is a director
and/or trustee of each of the funds managed by the Investment Manager.
John P. Burke, 260 Constitution Plaza, Hartford, Connecticut 06130. (Age
66.) Trustee. Commissioner of Banking, State of Connecticut (January
1995-Present). Mr. Burke was formerly President of Bristol Savings Bank
(August 1992-January 1995) and President of Security Savings and Loan
(November 1989-August 1992). Mr. Burke is a director and/or trustee of each
of the funds managed by the Investment Manager.
Al Burton, 2300 Coldwater Canyon, Beverly Hills, California 90210. (Age
70.) Trustee. President of Al Burton Productions for more than the last
five years; formerly Vice President, First Run Syndication, Castle Rock
Entertainment (July 1992-November 1994). Mr. Burton also is a director
and/or trustee of each of the funds managed by the Investment Manager.
Jock Patton, 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004.
(Age 52.) Trustee. Private Investor. Director of Artisoft, Inc. Mr. Patton
was formerly President and Co-owner, StockVal, Inc. (April 1993-June 1997)
and a partner and director of the law firm of Streich, Lang, P.A.
(1972-1993). Mr. Patton is also a director and/or trustee of each of the
funds managed by the Investment Manager.
*Robert W. Stallings, 40 North Central Avenue, Suite 1200, Phoenix, Arizona
85004. (Age 49.) Chairman, Chief Executive Officer, and Trustee. Chairman,
Chief Executive Officer and President of Pilgrim Group, Inc. (since
December 1994); Chairman, Pilgrim Investments, Inc. (since December 1994);
Director, Pilgrim Securities, Inc. (since December 1994); Chairman, Chief
Executive Officer and President of each of the other Pilgrim Funds (since
April 1995). Chairman and Chief Executive Officer of Pilgrim America
Capital Corporation (formerly, Express America Holdings Corporation)
("Pilgrim Capital") (since August 1990). Director and officer of other
affiliates of Pilgrim Capital.
The Board of Trustees has an Audit Committee comprised of the disinterested
Trustees. The Trust pays each Trustee who is not an interested person a pro rata
share, based on all of the investment companies in the Pilgrim Group, of (i) an
annual retainer of $20,000; (ii) $1,500 per quarterly and special Board meeting;
(iii) $500 per committee meeting; (iv) $500 per special telephonic meeting; and
-9-
<PAGE>
(v) out-of-pocket expenses. The pro rata share paid by the Trust is based on the
Trust's average net assets for the previous quarter as a percentage of the
average net assets of all the funds managed by Pilgrim Investments for which the
Trustees serve in common as directors/trustees.
COMPENSATION OF TRUSTEES
The following table sets forth information regarding compensation of Trustees by
the Trust and other funds managed by Pilgrim Investments for the fiscal year
ended February 28, 1998. Officers of the Trust and Trustees who are interested
persons of the Trust do not receive any compensation from the Trust or any other
funds managed by Pilgrim Investments. In the column headed "Total Compensation
From Trust and Fund Complex Paid to Trustees," the number in parentheses
indicates the total number of boards in the Pilgrim family of funds on which the
Trustee serves.
================================================================================
TOTAL COMPENSATION
AGGREGATE FROMTRUST AND FUND
COMPENSATION COMPLEX PAID
NAME OF PERSON, POSITION FROM TRUST TO TRUSTEES
- --------------------------------------------------------------------------------
Mary A. Baldwin (1)(2), Trustee $ 14,616 $ 28,300 (5 boards)
John P. Burke (2)(3), Trustee $ 14,667 $ 28,400 (5 boards)
Al Burton (2)(4), Trustee $ 14,667 $ 28,400 (5 boards)
Bruce S. Foerster (1)(5), Trustee $ 14,667 $ 28,400 (5 boards)
Jock Patton (2)(6), Trustee $ 14,667 $ 28,400 (5 boards)
Robert W. Stallings (7), Trustee
and Chairman $ 0 $ 0 (5 boards)
================================================================================
- ----------
(1) Commenced service as a Trustee on April 7, 1995.
(2) Member of the Audit Committee.
(3) Commenced service as Trustee on May 5, 1997.
(4) Commenced service as a Trustee on April 19, 1994.
(5) Mr. Foerster resigned as a Trustee of the Trust effective September 30,
1998.
(6) Commenced service as a Trustee on August 28, 1995.
(7) "Interested person," as defined in the Investment Company Act, of the Trust
because of affiliation with the Investment Manager.
OFFICERS
HOWARD TIFFEN, PRESIDENT, CHIEF OPERATING OFFICER, AND SENIOR PORTFOLIO
MANAGER
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 50.)
Senior Vice President (since November 1995), Pilgrim Investments. Formerly
Managing Director of various divisions of Bank of America (and its
predecessor, Continental Bank) (1982-1995).
JAMES R. REIS, EXECUTIVE VICE PRESIDENT, CHIEF CREDIT OFFICER, AND
ASSISTANT SECRETARY
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 40.)
Director, Vice Chairman (since December 1994), and Executive Vice President
(since April 1995), Pilgrim Group and Pilgrim Investments; Director (since
December 1994), Vice Chairman (since November 1995) and Assistant Secretary
(since January 1995) of Pilgrim Securities; Executive Vice President and
Assistant Secretary of each of the other Pilgrim Funds; Chief Financial
Officer (since December 1993), Vice Chairman and Assistant Secretary (since
April 1993) and former President (May 1991-December 1993), Pilgrim Capital.
Presently serves or has served as an officer or director of other
affiliates of Pilgrim Capital.
JAMES M. HENNESSY, EXECUTIVE VICE PRESIDENT AND SECRETARY
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 49.)
Executive Vice President (since April 1998) and Secretary (since April
1995), Pilgrim Capital,
-10-
<PAGE>
Executive Vice President and Secretary, Pilgrim Group, Pilgrim Investments,
Pilgrim Securities, and of each of the Pilgrim Funds. Presently serves or
has served as an officer of other affiliates of Pilgrim Capital.
DANIEL A. NORMAN, SENIOR VICE PRESIDENT, TREASURER, AND ASSISTANT PORTFOLIO
MANAGER
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 40.)
Senior Vice President and Assistant Secretary, Pilgrim Investments (since
December 1994); Senior Vice President, Pilgrim Securities (since November
1995). Formerly an officer of other affiliates of Pilgrim Capital.
MICHAEL J. ROLAND, SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 40)
Senior Vice President and Chief Financial Officer PAGI, Pilgrim Investments
Pilgrim Securities (since June 1998) and Pilgrim Financial (since August,
1998). He served in same capacity from January, 1995 - April, 1997.
Formerly Chief Financial Officer of Endeaver Group (April, 1997 to June,
1998).
ROBERT S. NAKA, VICE PRESIDENT AND ASSISTANT SECRETARY
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 35.) Vice
President, Pilgrim Investments (since April 1997) and Pilgrim Group (since
February 1997). Vice President and Assistant Secretary of each of the funds
in the Pilgrim Group of Funds. Formerly Assistant Vice President (August
1995 - February 1997), Pilgrim Group and Operations Manager (April 1992 -
April 1995), Pilgrim Group.
ROBYN L. ICHILOV, VICE PRESIDENT
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 30) Vice
President, Pilgrim Investments (since August 1997) and Pilgrim Financial
(since May 1998), Accounting Manager (since November 1995). Formerly
Assistant Vice President and Accounting Supervisor for Paine Webber (June,
1993 - April, 1995).
As of February 26, 1999, the Trustees and Officers of the Trust as a group owned
beneficially less than 1% of the Trust's shares.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER. The Investment Manager serves as investment manager to the
Trust and has overall responsibility for the management of the Trust. The
Investment Management Agreement between the Trust and the Investment Manager
requires the Investment Manager to oversee the provision of all investment
advisory services for the Trust. The Investment Manager, which was organized in
December 1994, is registered as an investment adviser with the Commission and
serves as investment adviser to seven other registered investment companies (or
series thereof), as well as privately managed accounts, and as of the date of
this Statement of Additional Information had total assets under management of
approximately $5.4 billion.
The Investment Manager is a wholly owned subsidiary of Pilgrim Group, which
itself is a wholly-owned subsidiary of Pilgrim Capital, a Delaware corporation,
the shares of which are traded on the NASDAQ National Market System and which is
a holding company that through its subsidiaries engages in the financial
services business.
The Investment Manager pays all of its expenses arising from the performance of
its obligations under the Investment Management Agreement, including executive
salaries and expenses of the Trustees and Officers of the Trust who are
employees of the Investment Manager or its affiliates. Other expenses incurred
in the operation of the Trust are borne by the Trust, including, without
limitation, expenses incurred in connection with the sale, issuance,
registration and transfer of its shares; fees of its Custodian, Transfer and
Shareholder Servicing Agent; salaries of officers and fees and expenses of
Trustees or members of any advisory board or committee of the Trust who are not
members of, affiliated with or interested persons of the Investment Manager; the
cost of preparing and printing reports, proxy statements and prospectuses of the
Trust or other communications for distribution to its shareholders; legal,
-11-
<PAGE>
auditing and accounting fees; the fees of any trade association of which the
Trust is a member; fees and expenses of registering and maintaining registration
of its shares for sale under Federal and applicable State securities laws; and
all other charges and costs of its operation plus any extraordinary and
non-recurring expenses.
For the fiscal years ended February 28, 1998, February 28, 1997 and February 29,
1996, Pilgrim Investments (or, prior to April 7, 1995, its predecessor) was paid
$10,369,772, $8,268,263 and $7,122,089, respectively, for services rendered to
the Trust.
The Investment Management Agreement continues from year to year if specifically
approved at least annually by the Trustees or the Shareholders. But in either
event, the Investment Management Agreement must also be approved by vote of a
majority of the Trustees who are not parties to the Investment Management
Agreement or "interested persons" of any such party, cast in person at a meeting
called for that purpose.
The use of the name "Pilgrim" in the Trust's name is pursuant to the Investment
Management Agreement between the Trust and Pilgrim Investments, and in the event
that Agreement is terminated, the Trust has agreed to amend its Agreement and
Declaration of Trust to remove the reference to "Pilgrim."
THE ADMINISTRATOR. The Administrator of the Trust is Pilgrim Group, which is an
affiliate of the Investment Manager. In connection with its administration of
the corporate affairs of the Trust, the Administrator bears the following
expenses: the salaries and expenses of all personnel of the Trust and the
Administrator except for the fees and expenses of Trustees not affiliated with
the Administrator or Pilgrim Investments; costs to prepare information for
determination of daily NAV by the recordkeeping and accounting agent; expenses
to maintain certain of the Trust's books and records that are not maintained by
Pilgrim Investments, the custodian, or transfer agent; costs incurred to assist
in the preparation of financial information for the Trust's income tax returns,
proxy statements, quarterly, semi-annual, and annual shareholder reports; costs
of providing shareholder services in connection with any tender offers or to
shareholders proposing to transfer their shares to a third party; providing
shareholder services in connection with the dividend reinvestment plan; and all
expenses incurred by the Administrator or by the Trust in connection with
administering the ordinary course of the Trust's business other than those
assumed by the Trust, as described below.
Except as indicated above and under "Investment Management Agreement," the Trust
is responsible for the payment of its other expenses including: the fees payable
to Pilgrim Investments; the fees payable to the Administrator; the fees and
expenses of Trustees who are not affiliated with Pilgrim Investments or the
Administrator; the fees and certain expenses of the Trust's custodian and
transfer agent, including the cost of providing records to the Administrator in
connection with its obligation of maintaining required records of the Trust; the
charges and expenses of the Trust's legal counsel and independent accountants;
commissions and any issue or transfer taxes chargeable to the Trust in
connection with its transactions; all taxes and corporate fees payable by the
Trust to governmental agencies; the fees of any trade association of which the
Trust is a member; the cost of share certificates representing shares of the
Trust; organizational and offering expenses of the Trust and the fees and
expenses involved in registering and maintaining registration of the Trust and
of its shares with the Commission including the preparation and printing of the
Trust's registration statement and prospectuses for such purposes; allocable
communications expenses, with respect to investor services and all expenses of
shareholders and Trustees' meetings and of preparing, printing and mailing
reports, proxy statements and prospectuses to shareholders; and the cost of
insurance; and litigation and indemnification expenses and extraordinary
expenses not incurred in the ordinary course of the Trust's business.
For the fiscal years ended February 28, 1998, February 28, 1997 and February 29,
1996, PAGI (or, prior to April 7, 1995, its predecessor) was paid $1,778,473,
$1,441,271 and $1,264,932, respectively, for services rendered to the Trust.
PORTFOLIO TRANSACTIONS
The Trust will generally have at least 80% of its net assets invested in Senior
Loans. The remaining assets of the Trust will generally consist of short-term
debt instruments with remaining maturities of 120 days or less and certain other
instruments such as subordinated loans up to a maximum of 5% of the Trust's net
assets, Hybrid Loans, unsecured loans, interest rate swaps, caps and floors,
-12-
<PAGE>
repurchase agreements and reverse repurchase agreements. The Trust will acquire
Senior Loans from and sell Senior Loans to major money center banks, selected
regional banks and selected non-banks, insurance companies, finance companies
and leasing companies which usually act as lenders on senior collateralized
loans. The Trust may also purchase Senior Loans from and sell Senior Loans to
U.S. branches of foreign banks which are regulated by the Federal Reserve System
or appropriate state regulatory authorities. The Trust's interest in a
particular Senior Loan will terminate when the Trust receives full payment on
the loan or sells a Senior Loan in the secondary market. Costs associated with
purchasing or selling Senior Loans in the secondary market include commissions
paid to brokers and processing fees paid to agents. These costs are allocated
between the purchaser and seller as agreed between the parties.
Purchases and sales of short-term debt and other financial instruments for the
Trust's portfolio usually are principal transactions, and normally the Trust
will deal directly with the underwriters or dealers who make a market in the
securities involved unless better prices and execution are available elsewhere.
Such market makers usually act as principals for their own account. On occasion,
securities may be purchased directly from the issuer. Short-term debt
instruments are generally traded on a net basis and do not normally involve
either brokerage commissions or transfer taxes. The cost of portfolio securities
transactions of the Trust that are not transactions with principals will consist
primarily of brokerage commissions or dealer or underwriter spreads between the
bid and asked price, although purchases from underwriters may involve a
commission or concession paid by the issuer.
While Pilgrim Investments seeks to obtain the most favorable net results in
effecting transactions in the Trust's portfolio securities, brokers or dealers
who provide research services may receive orders for transactions by the Trust.
Such research services ordinarily consist of assessments and analyses of the
business or prospects of a company, industry, or economic sector. Pilgrim
Investments is authorized to pay spreads or commissions to brokers or dealers
furnishing such services which are in excess of spreads or commissions that
other brokers or dealers not providing such research may charge for the same
transaction, even if the specific services were not imputed to the Trust and
were useful to the Investment Manager in advising other clients. Information so
received will be in addition to, and not in lieu of, the services required to be
performed by Pilgrim Investments under the Investment Management Agreement
between Pilgrim Investments and the Trust. The expenses of Pilgrim Investments
will not necessarily be reduced as a result of the receipt of such supplemental
information. Pilgrim Investments may use any research services obtained in
providing investment advice to its other investment advisory accounts.
Conversely, such information obtained by the placement of business for Pilgrim
Investments or other entities advised by Pilgrim Investments will be considered
by and may be useful to Pilgrim Investments in carrying out its obligations to
the Trust.
The Trust does not intend to effect any brokerage transaction in its portfolio
securities with any broker-dealer affiliated directly or indirectly with the
Investment Manager, except for any sales of portfolio securities pursuant to a
tender offer, in which event the Investment Manager will offset against the
management fee a part of any tender fees which legally may be received by such
affiliated broker-dealer. To the extent certain services which the Trust is
obligated to pay for under the Investment Management Agreement are performed by
the Investment Manager, the Trust will reimburse the Investment Manager for the
costs of personnel involved in placing orders for the execution of portfolio
transactions.
The Trust paid $0, $0, and $7,400 in brokerage commissions during the fiscal
years ended February 28, 1998, February 28, 1997 and February 29, 1996,
respectively.
PORTFOLIO TURNOVER RATE
The annual rate of the Trust's total portfolio turnover for the years ended
February 28, 1998 and February 28, 1997, was 90% and 82%, respectively. The
annual turnover rate of the Trust is generally expected to be between 50% and
100%, although as part of its investment policies, the Trust places no
restrictions on portfolio turnover and the Trust may sell any portfolio security
without regard to the period of time it has been held. The annual turnover rate
of the Trust also includes Senior Loans for which the full payment on the Senior
Loan has been prepaid by the borrower. The Investment Manager believes that
prepaid Senior Loans generally comprise approximately 25% to 75% of the Trust's
total portfolio turnover each year.
-13-
<PAGE>
NET ASSET VALUE
The NAV per share of the Trust is determined once daily as of the close of
trading on the NYSE on each day it is open, by dividing the value of the Trust's
portfolio securities plus all cash and other assets (including dividends accrued
but not collected) less all liabilities (including accrued expenses but
excluding capital and surplus) by the number of shares outstanding. In
accordance with generally accepted accounting principles for investment
companies, dividend income is accrued on the ex-dividend date. The NAV per share
is made available for publication.
Generally, Senior Loans are valued at fair value in the absence of readily
ascertainable market values believed to be reliable. Fair value is determined by
Pilgrim Investments under procedures established and monitored by the Trust's
Board of Trustees. In valuing a loan, Pilgrim Investments considers, among other
factors: (i) the creditworthiness of the issuer and any interpositioned bank;
(ii) the current interest rate, period until next interest rate reset and
maturity date of the Senior Loan; (iii) recent market prices for similar loans,
if any; and (iv) recent prices in the market for instruments with similar
quality, rate, period until next interest rate reset, maturity, terms and
conditions, if any. Pilgrim Investments may also consider prices or quotations,
if any, provided by banks, dealers or pricing services which may represent the
prices at which secondary market transactions in the loans held by the Trust
have or could have occurred. However, because the secondary market in Senior
Loans has not yet fully developed, Pilgrim Investments will not currently rely
solely on such prices or quotations. Securities for which the primary market is
a national securities exchange or the NASDAQ National Market System are stated
at the last reported sale price on the day of valuation. Debt and equity
securities traded in the over-the-counter market and listed securities for which
no sale was reported on that date are valued at the mean between the last
reported bid and asked price. Securities other than Senior Loans for which
reliable quotations are not readily available and all other assets will be
valued at their respective fair values as determined in good faith by, or under
procedures established by, the Board of Trustees of the Trust. Investments in
securities maturing in less than 60 days are valued at amortized cost, which
when combined with accrued interest, approximates market value.
METHODS AVAILABLE TO REDUCE MARKET VALUE DISCOUNT FROM NAV
In recognition of the possibility that the Trust's shares may trade at a
discount from NAV, the Trustees have determined that it would be in the best
interest of shareholders for the Trust to take action to attempt to reduce or
eliminate a market value discount from NAV. To that end, the Trustees presently
contemplate that the Trust will take action either to repurchase shares in the
open market in accordance with Section 23(c) of the Investment Company Act and
Rule 23c-1 thereunder or to consider the making of tender offers to purchase its
own shares at NAV. Since Trust shares became listed on the NYSE on March 9,
1992, the Trust has authorized two repurchase programs and has conducted one
tender offer that expired May 1, 1992. The Trustees presently intend each
quarter to consider the making of such tender offers. The Trustees will at no
time be required to make such tender offers. Moreover, there can be no assurance
that tender offers will result in the Trust's shares trading at a price which is
equal to their NAV. The Trust anticipates that the market price may, among other
things, be determined by the relative demand for and supply of such shares in
the market, the Trust's investment performance, the Trust's yield, and investor
perception of the Trust's overall attractiveness as an investment as compared
with other investment alternatives.
In deciding whether the Trust will entertain tender offers and whether it will
accept shares tendered, the Trustees will consider several factors. One of the
principal factors in the Board's determinations on whether or not to make
quarterly offers will be the strength of the public market for the Trust's
shares. Other factors include the desire to reduce or eliminate a market value
discount from NAV. In addition, the Trustees will take into consideration the
liquidity of its assets in determining whether to make a tender offer or accept
tendered shares. In paying shareholders for tendered shares, the Trust
anticipates that it will use cash on hand, such as proceeds from sales of new
Trust shares and specified pay-downs from Senior Loans, and proceeds from the
sale of cash equivalents held by the Trust. The Trust may also borrow to pay
Shareholders for tendered shares. To the extent more shares are anticipated to
be tendered or are tendered than could be paid for out of such amounts, the
liquidity of the Senior Loans held by the Trust may be a consideration in the
Trust's determination whether to make a tender offer or, if an offer is made, in
its determination of whether it will accept shares tendered. Accepting tendered
shares may require the Trust to sell portfolio investments and incur certain
costs which it otherwise would not have. Under most Senior Loans, it will be
-14-
<PAGE>
necessary for the Trust to obtain the consent of the agent or lender from whom
the Trust purchased the Senior Loan prior to selling the Senior Loan to a third
party. Senior Loans such as those the Trust intends to invest in have
historically been considered by the investment community to be liquid assets,
although in certain instances, the conversion of such instruments into cash has
taken several days or longer. The market for Senior Loans is relatively new as
compared to markets for more established debt instruments. Accordingly, while
Pilgrim Investments does not anticipate any material difficulty in meeting the
liquidity needs for tender offers, there can be no guarantee that the Trust will
be able to liquidate a particular Senior Loan it holds within a given period of
time.
Furthermore, even if a tender offer has been made, it is the Trustees' announced
policy, which may be changed by the Trustees, not to effect tender offers or
accept tenders if: (1) such transactions, if consummated, would impair the
Trust's status as a regulated investment company under the Internal Revenue Code
of 1986, as amended (the "Code") (which would make the Trust a taxable entity,
causing its income to be taxed at the corporate level in addition to the
taxation of shareholders who receive dividends from the Trust) or (2) there is,
in the judgment of the Trustees, any (a) material legal action or proceeding
instituted or threatened challenging such transactions or otherwise materially
adversely affecting the Trust, (b) declaration of a banking moratorium by
federal or state authorities or any suspension of payment by banks in the United
States, (c) limitation affecting the Trust or the issuers of its portfolio
instruments imposed by federal or state authorities on the extension of credit
by lending institutions or on the exchange of foreign currency, (d) commencement
of war, armed hostilities or other international or national calamity directly
or indirectly involving the United States, or (e) other event or condition which
would have a material adverse effect on the Trust or its shareholders if shares
were repurchased. The Trustees may modify these conditions in light of
experience.
Any tender offer made by the Trust will be at a price equal to the NAV of the
shares. Each shareholder will be notified in accordance with the requirements of
the Securities Exchange Act of 1934 and the Investment Company Act, either by
publication or mailing or both. Each offering document will contain such
information as is prescribed by such laws and the rules and regulations
promulgated thereunder. Other procedures to be used in connection with a
particular tender offer will be determined by the Trustees in accordance with
the provisions of applicable law, including the Securities Exchange Act of 1934.
Any tender offer that the Trust makes may have the effect of reducing
shareholder return as a result of the expenses incurred with respect to the
tender offers, the reduced level of interest earned on the money received by the
Trust as payment for shares newly purchased which may be held in cash
equivalents in anticipation of tender offers, and the cost of borrowing money to
fund the tender offers.
SHAREHOLDER INVESTMENT PROGRAM
The Trust maintains a Shareholder Investment Program (the "Program"), which
allows participating shareholders to reinvest all dividends and capital gain
distributions ("Dividends") in additional shares of the Trust. The Program also
allows participants to purchase additional shares through optional cash
investments in amounts ranging from a minimum of $100 to a maximum of $5,000 per
month. Subject to the permission of the Trust, participating Shareholders may
also make optional cash investments in excess of the monthly maximum. Shares may
be issued by the Trust under the Program only if the Trust's Shares are trading
at a premium to net asset value. If the Trust's Shares are trading at a discount
to net asset value, Shares purchased under the Program will be purchased on the
open market.
Shareholders may elect to participate in the Program by telephoning the Trust or
submitting a completed Participation Form to DST Systems, Inc. ("DST"), the
Program administrator. DST will credit to each participant's account funds it
receives from: (a) Dividends paid on Trust shares registered in the
participant's name and (b) optional cash investments. DST will apply all
Dividends and optional cash investments received to purchase Shares as soon as
practicable beginning on the relevant Investment Date (as described below) and
not later than six business days after the Investment Date, except when
necessary to comply with applicable provisions of the federal securities laws.
For more information on distribution policy, see "Dividends and Distributions."
In order for participants to purchase shares through the Program in any month,
the Administrator must receive from the participant any optional cash investment
not exceeding $5,000 by the OCI Payment Due Date and any optional cash
-15-
<PAGE>
investment exceeding $5,000 by the Waiver Payment Due Date. The "DRIP Investment
Date" will be the date upon which Dividends will be reinvested in additional
Shares of the Trust, which will be on the Dividend Payment Date. The "OCI
Investment Date" will be the date, set in advance by the Trust, upon which
optional cash investments not exceeding $5,000, are first applied by DST to the
purchase of Shares. The "Waiver Investment Date" will be the date, set in
advance by the Trust, upon which optional cash investments exceeding $5,000,
which have been approved by the Trust, are first applied by the Administrator to
the purchase of Shares. Participants may obtain a schedule of upcoming OCI
Payment Due Dates, Waiver Payment Due Dates and Investment Dates by referring to
the Summary Program Description or calling the Trust at (800) 992-0180.
If the Market Price (the volume-weighted average sales price, per share, as
reported on the New York Stock Exchange Composite Transaction Tape as shown
daily on Bloomberg's AQR screen) plus estimated commissions for Shares of the
Trust is less than the net asset value on the Valuation Date (defined below),
DST will purchase Shares on the open market through a bank or securities broker
as provided herein. Open market purchases may be effected on any securities
exchange on which shares of the Trust trade or in the over-the-counter market.
If the Market Price, plus estimated commissions, exceeds the net asset value
before DST has completed its purchases, DST will use reasonable efforts to cease
purchasing Shares, and the Trust shall issue the remaining Shares. If the Market
Price, plus estimated commissions, is equal to or exceeds the net asset value on
the Valuation Date, the Trust will issue the Shares to be acquired by the
Program. The "Valuation Date" is a date preceding the DRIP Investment Date, OCI
Investment Date, and Waiver Investment Date on which it is determined, based on
the Market Price and net asset value of Shares of the Trust, whether DST will
purchase Shares on the open market or the Trust will issue the Shares for the
Program. The Trust may, without prior notice to participants, determine that it
will not issue new Shares for purchase pursuant to the Program, even when the
Market Price plus estimated commissions equals or exceeds net asset value, in
which case DST will purchase Shares on the open market.
With the exception of Shares purchased in connection with optional cash
investments in excess of $5,000, Shares issued by the Trust under the Program
will be issued commission free. Shares purchased for the Program directly from
the Trust in connection with the reinvestment of Dividends will be acquired on
the DRIP Investment Date at the greater of (i) net asset value at the close of
business on the Valuation Date or (ii) the average of the daily Market Price of
the Shares during the "DRIP Pricing Period," minus a discount of 5%. The "DRIP
Pricing Period" for a dividend reinvestment is the Valuation Date and the prior
Trading Day. A "Trading Day" means any day on which trades of the Shares of the
Trust are reported on the NYSE.
Except in the case of cash investments made pursuant to Requests for Waiver (as
discussed below), Shares purchased directly from the Trust pursuant to optional
cash investments will be acquired on an OCI Investment Date at the greater of
(i) net asset value at the close of business on the Valuation Date or (ii) the
average of the daily Market Price of the Shares during the OCI Pricing Period
minus a discount, determined at the sole discretion of the Trust and announced
in advance, ranging from 0% to 5%. The "OCI Pricing Period" for an OCI
Investment Date means the period beginning four Trading Days prior to the
Valuation Date through and including the Valuation Date. The discount for
optional cash investments is set by the Trust and may be changed or eliminated
by the Trust without prior notice to participants at any time. The discount for
optional cash investments is determined on the last business day of each month.
In all instances, however, the discount on Shares issued directly by the Trust
shall not exceed 5% of the market price, and Shares may not be issued at a price
less than net asset value without prior specific approval of shareholders or of
the Commission. Optional cash investments received by DST no later than 4:00
p.m. Eastern time on the OCI Payment Due Date to be invested on the relevant OCI
Investment Date.
Optional cash investments in excess of $5,000 per month may be made only
pursuant to a Request for Waiver accepted in writing by the Trust. A Request for
Waiver must be received by the Trust no later than 4:00 p.m. Eastern time on the
Request for Waiver Deadline date. Good funds on all approved Requests For Waiver
must be received by DST not later than 4:00 P.M. Eastern time on the Waiver
Payment Due Date in order for such funds to be invested on the relevant Waiver
Investment Date.
It is solely within the Trust's discretion as to whether approval for any cash
investments in excess of $5,000 will be granted. In deciding whether to approve
a Request for Waiver, the Trust will consider relevant factors including, but
not limited to, whether the Program is then acquiring newly issued Shares
directly from the Trust or acquiring shares from third parties in the open
market, the Trust's need for additional funds, the attractiveness of obtaining
-16-
<PAGE>
such additional funds through the sale of Shares as compared to other sources of
funds, the purchase price likely to apply to any sale of Shares under the
Program, the participant submitting the request, the extent and nature of such
participant's prior participation in the Program, the number of Shares held by
such participant and the aggregate amount of cash investments for which Requests
for Waiver have been submitted by all participants. If such requests are
submitted for any Waiver Investment Date for an aggregate amount in excess of
the amount the Trust is then willing to accept, the Trust may honor such
requests in order of receipt, pro rata or by any other method that the Trust
determines in its sole discretion to be appropriate.
Shares purchased directly from the Trust in connection with approved Requests
for Waiver will be acquired on the Waiver Investment Date at the greater of (i)
net asset value at the close of business on the Valuation Date, or (ii) the
average of the daily Market Price of the Shares for the Waiver Pricing Period
minus the pre-announced Waiver Discount (as defined below), if any, applicable
to such shares. The "Waiver Pricing Period" for a Waiver Investment Date means
the period beginning four Trading Days prior to the Valuation Date through and
including the Valuation Date. The Trust may establish a discount applicable to
cash investments exceeding $5,000 (the "Waiver Discount") on the last business
day of each month. The Waiver Discount, which may vary each month between 0% and
5%, will be established in the Trust's sole discretion after a review of current
market conditions, the level of participation in the Program and current and
projected capital needs of the Trust. The Waiver Discount will apply only to
Shares purchased directly from the Trust.
The Trust may establish for each Waiver Pricing Period a minimum price
applicable to the purchase of newly issued Shares through Requests for Waiver,
which will be a stated dollar amount that the Market Price of the Shares for a
Trading Day of the Waiver Pricing Period must equal or exceed. In the event that
such minimum price is not satisfied for a Trading Day of the Waiver Pricing
Period, then such Trading Day and the trading prices for that day will be
excluded from (i) the Waiver Pricing Period and (ii) the determination of the
purchase price of the Shares for all cash investments made pursuant to Requests
for Waiver approved by the Trust. The minimum price shall apply only to cash
investments made pursuant to Requests for Waiver approved by the Trust and not
to the reinvestment of Dividends or optional cash investments that do not exceed
$5,000. No shares will be issued and funds submitted pursuant to Requests for
Waiver will be returned to the participant if the minimum price is not obtained
for at least three of the five Trading Days.
Participants will pay a pro rata share of brokerage commissions with respect to
DST's open market purchases in connection with the reinvestment of Dividends or
purchases made with optional cash investments.
From time to time, financial intermediaries, including brokers and dealers, and
other persons may wish to engage in positioning transactions in order to benefit
from the discount from market price of the Shares acquired under the Program.
Such transactions could cause fluctuations in the trading volume and price of
the Shares. The difference between the price such owners pay to the Trust for
Shares acquired under the Program, after deduction of the applicable discount
from the market price, and the price at which such Shares are resold, may be
deemed to constitute underwriting commissions received by such owners in
connection with such transactions.
Subject to the availability of Shares registered for issuance under the Program,
there is no total maximum number of Shares that can be issued pursuant to the
Program.
The Program is intended for the benefit of investors in the Trust and not for
persons or entities who accumulate accounts under the Program over which they
have control for the purpose of exceeding the $5,000 per month maximum without
seeking the advance approval of the Trust or who engage in transactions that
cause or are designed to cause aberrations in the price or trading volume of the
Shares. Notwithstanding anything in the Program to the contrary, the Trust
reserves the right to exclude from participation, at any time, (i) persons or
entities who attempt to circumvent the Program's standard $5,000 maximum by
accumulating accounts over which they have control or (ii) any other persons or
entities, as determined in the sole discretion of the Trust.
Currently, persons who are not Shareholders of the Trust may not participate in
the Program. The Board of Trustees of the Trust may elect to change this policy
at a future date, and permit non-Shareholders to participate in the Program.
-17-
<PAGE>
Shareholders may request to receive their Dividends in cash at any time by
giving DST written notice or by contacting the Trust's Shareholder Services
Department at (800) 992-0180. Shareholders may elect to close their account at
any time by giving DST written notice. When a participant closes their account,
the participant upon request will receive a certificate for full Shares in the
Account. Fractional Shares will be held and aggregated with other Fractional
Shares being liquidated by DST as agent of the Program and paid for by check
when actually sold.
The automatic reinvestment of Dividends does not affect the tax characterization
of the Dividends (i.e., capital gains and income are realized even though cash
is not received). If shares are issued pursuant to the Program's dividend
reinvestment provisions or cash purchase provisions at a discount from market
price, participants may have income equal to the discount.
Additional information about the Program may obtained from the Trust's
Shareholder Services Department at (800) 992-0180.
See "Tax Matters--Distributions" for a discussion of the federal income tax
ramifications of obtaining shares under the Program.
TAX MATTERS
The following is only a summary of certain U.S. federal income tax
considerations generally affecting the Trust and its shareholders. No attempt is
made to present a detailed explanation of the tax treatment of the Trust or its
shareholders, and the following discussion is not intended as a substitute for
careful tax planning. Shareholders should consult with their own tax advisers
regarding the specific federal, state, local, foreign and other tax consequences
of investing in the Trust.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
The Trust has elected each year to be taxed as a regulated investment company
under Subchapter M of the Code. As a regulated investment company, the Trust
generally is not subject to federal income tax on the portion of its investment
company taxable income (i.e., taxable interest, dividends and other taxable
ordinary income, net of expenses, and net short-term capital gains in excess of
net long-term capital losses) and net capital gains (i.e., the excess of net
long-term capital gains over net short-term capital losses) that it distributes
to shareholders, provided that it distributes at least 90% of its investment
company taxable income for the taxable year (the "Distribution Requirement"),
and satisfies certain other requirements of the Code that are described below.
In addition to satisfying the Distribution Requirement and an asset
diversification requirement discussed below, a regulated investment company must
derive at least 90% of its gross income for each taxable year from dividends,
interest, certain payments with respect to securities loans, gains from the sale
or other disposition of stock or securities or foreign currencies and other
income (including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies.
In general, gain or loss recognized by the Trust on the disposition of an asset
will be a capital gain or loss. However, gain recognized on the disposition of a
debt obligation purchased by the Trust at a market discount (generally, at a
price less than its principal amount) other than at original issue will be
treated as ordinary income to the extent of the portion of the market discount
which accrued during the period of time the Trust held the debt obligation.
In general, investments by the Trust in zero coupon or other original issue
discount securities will result in income to the Trust equal to a portion of the
excess of the face value of the securities over their issue price (the "original
issue discount") each year that the Trust holds the securities, even though the
Trust receives no cash interest payments. This income is included in determining
the amount of income which the Trust must distribute to maintain its status as a
regulated investment company and to avoid federal income and excise taxes.
In addition to satisfying the requirements described above, the Trust must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the Trust's
taxable year, at least 50% of the value of the Trust's assets must consist of
cash and cash items (including receivables), U.S. Government securities,
-18-
<PAGE>
securities of other regulated investment companies, and securities of other
issuers (as to which the Trust has not invested more than 5% of the value of the
Trust's total assets in securities of any such issuer and as to which the Trust
does not hold more than 10% of the outstanding voting securities of any such
issuer), and no more than 25% of the value of its total assets may be invested
in the securities of any one issuer (other than U.S. Government securities and
securities of other regulated investment companies), or in two or more issuers
which the Trust controls and which are engaged in the same or similar trades or
businesses.
If for any taxable year the Trust does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable as
ordinary dividends to the extent of the Trust's current and accumulated earnings
and profits. Such distributions generally will be eligible for the
dividends-received deduction in the case of corporate shareholders.
EXCISE TAX ON REGULATED INVESTMENT COMPANIES
A 4% non-deductible excise tax is imposed on a regulated investment company that
fails to distribute in each calendar year an amount equal to at least 98% of
ordinary taxable income for the calendar year, at least 98% of capital gain net
income (I.E., capital gains in excess of capital losses) for the one-year period
ended on October 31 of such calendar year and any ordinary taxable income and
capital gain net income for previous years that was not distributed during those
years. A distribution will be treated as paid on December 31 of the current
calendar year if it is declared by the Trust in October, November or December
with a record date in such a month and paid by the Trust during January of the
following calendar year. Such distributions will be taxable to shareholders in
the calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are received.
The Trust intends to make sufficient distributions or deemed distributions
(discussed below) of its ordinary taxable income and capital gain net income to
avoid liability for the excise tax.
HEDGING TRANSACTIONS
The Trust has the ability, pursuant to its investment objectives and policies,
to hedge its investments in a variety of transactions, including interest rate
swaps and the purchase or sale of interest rate caps and floors. The treatment
of these transactions for federal income tax purposes may in some instances be
unclear, and the regulated investment company qualification requirements may
limit the extent to which the Trust can engage in hedging transactions.
In addition, recently enacted rules may affect the timing and character of gain
if the Trust engages in transactions that reduce or eliminate its risk of loss
with respect to appreciated financial positions. If the Trust enters into
certain transactions in property while holding substantially identical property,
the Trust would be treated as if it had sold and immediately repurchased the
property and would be taxed on any gain (but not loss) from the constructive
sale. The character of gain from a constructive sale would depend upon the
Trust's holding period in the property. Loss from a constructive sale would be
recognized when the property was subsequently disposed of, and its character
would depend on the Trust's holding period and the application of various loss
deferral provisions in the Code.
DISTRIBUTIONS
The Trust anticipates distributing substantially all of its investment company
taxable income for each taxable year. Such distributions will be taxable to
shareholders as ordinary income. If a portion of the Trust's income consists of
dividends paid by U.S. corporations, a portion of the dividends paid by the
Trust may be eligible for the corporate dividends received deduction.
The Trust may either retain or distribute to shareholders its net capital gain
for each taxable year. The Trust currently intends to distribute any such
amounts. If net capital gain is distributed and designated as a capital gain
dividend, it will generally be taxable to shareholders at a maximum federal tax
rate of 20%. Distributions are subject to these capital gains rates regardless
of the length of time the shareholder has held his shares. Conversely, if the
Trust elects to retain its net capital gain, the Trust will be taxed thereon
(except to the extent of any available capital loss carryovers) at the
-19-
<PAGE>
applicable corporate tax rate. In such event, it is expected that the Trust also
will elect to treat such gain as having been distributed to shareholders. As a
result, each shareholder will be required to report his pro rata share of such
gain on his tax return as long-term capital gain, will be entitled to claim a
tax credit for his pro rata share of tax paid by the Trust on the gain, and will
increase the tax basis for his shares by an amount equal to the deemed
distribution less the tax credit.
Distributions by the Trust in excess of the Trust's earnings and profits will be
treated as a return of capital to the extent of (and in reduction of) the
shareholder's tax basis in his shares; any such return of capital distributions
in excess of the shareholder's tax basis will be treated as gain from the sale
of his shares, as discussed below.
Distributions by the Trust will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Trust. If the NAV at the time a shareholder purchases
shares of the Trust reflects undistributed income or gain, distributions of such
amounts will be taxable to the shareholder in the manner described above, even
though such distributions economically constitute a return of capital to the
shareholder.
The Trust will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of all taxable distributions payable to any shareholder (1) who
fails to provide the Trust with a certified, correct tax identification number
or other required certifications, or (2) if the Internal Revenue Service
notifies the Trust that the shareholder is subject to backup withholding.
SALE OF SHARES
A shareholder will recognize gain or loss on the sale or exchange of shares of
the Trust in an amount generally equal to the difference between the proceeds of
the sale and the shareholder's adjusted tax basis in the shares. In general, any
such gain or loss will be considered capital gain or loss if the shares are held
as capital assets, and gain or loss will be long-term or short-term, depending
upon the shareholder's holding period for the shares. However, any capital loss
arising from the sale of shares held for six months or less will be treated as a
long-term capital loss to the extent of any long-term capital gains distributed
(or deemed distributed) with respect to such shares. Also, any loss realized on
a sale or exchange of shares will be disallowed to the extent the shares
disposed of are replaced (including shares acquired through the Shareholder
Investment Program within a period of 61 days beginning 30 days before and
ending 30 days after the shares are disposed of. In such case, the tax basis of
the acquired shares will be adjusted to reflect the disallowed loss.
TENDER OFFERS TO PURCHASE SHARES
As described earlier, the Trust will consider making tender offers for its
shares on a quarterly basis. Under current law, a shareholder, who pursuant to a
tender offer, tenders all of his shares and any shares considered owned by such
shareholder under attribution rules contained in the Code, will recognize gain
or loss, taxable as described above (see "Sale of Shares"). Different tax
consequences may apply to shareholders who tender less than all their shares in
connection with a tender offer and possibly to non-tendering shareholders. The
tax consequences to shareholders of a tender offer will be more fully described
in offering documents related to the tender offer.
FOREIGN SHAREHOLDERS
U.S. taxation of a shareholder who, as to the United States, is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign
partnership ("foreign shareholder") depends on whether the income from the Trust
is "effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from the Trust is not effectively connected with a U.S. trade or
business carried on by a foreign shareholder, distributions of investment
company taxable income will be subject to U.S. withholding tax at the rate of
30% (or lower treaty rate). Such a foreign shareholder would generally be exempt
from U.S. federal income tax on gains realized on the sale or exchange of shares
of the Trust, capital gain dividends, and amounts retained by the Trust that are
designated as undistributed capital gains.
-20-
<PAGE>
If the income from the Trust is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then distributions of investment
company taxable income, capital gain dividends, amounts retained by the Trust
that are designated as undistributed capital gains and any gains realized upon
the sale or exchange of shares of the Trust will be subject to U.S. federal
income tax at the rates applicable to U.S. citizens or domestic corporations.
Such shareholders that are classified as corporations for U.S. tax purposes also
may be subject to a branch profits tax.
In the case of foreign noncorporate shareholders, the Trust may be required to
withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless such shareholders furnish the Trust with proper notification of their
foreign status.
The tax consequences to a foreign shareholder entitled to claim the benefits of
an applicable tax treaty may be different from those described herein. Foreign
shareholders are urged to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the Trust, including the
applicability of foreign taxes.
EFFECT OF FUTURE LEGISLATION; OTHER TAX CONSIDERATIONS
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations issued thereunder as in effect on
the date of this SAI. Future legislative or administrative changes or court
decisions may significantly change the conclusions expressed herein, and any
such changes or decisions may have a retroactive effect with respect to the
transactions contemplated herein.
Income received by the Trust from foreign sources may be subject to withholding
and other taxes imposed by such foreign jurisdictions, absent treaty relief.
Distributions to shareholders also may be subject to state, local and foreign
taxes, depending upon each shareholder's particular situation. Shareholders are
urged to consult their tax advisers as to the particular consequences to them of
an investment in the Trust.
ADVERTISING AND PERFORMANCE DATA
ADVERTISING
From time to time, advertisements and other sales materials for the Trust may
include information concerning the historical performance of the Trust. Any such
information may include trading volume of the Trust's shares, the number of
Senior Loan investments, annual total return, aggregate total return,
distribution rate, average compounded distribution rate and yield of the Trust
for specified periods of time, and diversification statistics. Such information
may also include performance and risk rankings and similar information from
independent organizations such as Lipper Analytical Services, Inc. ("Lipper"),
Morningstar, Value Line, Inc., CDA Technology, Inc. or other industry
publications. These rankings will typically compare the Trust to all closed-end
funds, to other Senior Loan funds, and/or also to taxable closed-end fixed
income funds. Any such use of rankings and ratings in advertisements and sales
literature will conform with the guidelines of the NASD and subsequently
approved by the Commission on July 13, 1994. Ranking comparisons and ratings
should not be considered representative of the Trust's relative performance for
any future period.
Reports and promotional literature may also contain the following information:
(i) number of shareholders; (ii) average account size; (iii) identification of
street and registered account holdings; (iv) lists or statistics of certain of
the Trust's holdings including, but not limited to, portfolio composition,
sector weightings, portfolio turnover rates, number of holdings, average market
capitalization and modern portfolio theory statistics alone or in comparison
with itself (over time) and with its peers and industry group; (v) public
information about the asset class; and (vi) discussions concerning coverage of
the Trust by analysts.
In addition, reports and promotional literature may contain information
concerning the Investment Manager, Pilgrim Capital, the Portfolio Managers,
Pilgrim Group, Inc. or affiliates of the Trust, the Investment Manager, Pilgrim
Capital or Pilgrim Group, Inc. including (i) performance rankings of other funds
managed by the Investment Manager, or the individuals employed by the Investment
Manager who exercise responsibility for the day-to-day management of the Trust,
including rankings of investment companies published by Lipper Analytical
Services, Inc., Morningstar, Inc., Value Line, Inc., CDA Technologies, Inc., or
-21-
<PAGE>
other rating services, companies, publications or other persons who rank
investment companies or other investment products on overall performance or
other criteria; (ii) lists of clients, the number of clients, or assets under
management; (iii) information regarding the acquisition of the Pilgrim Funds by
Pilgrim Capital; (iv) the past performance of Pilgrim Capital and Pilgrim Group,
Inc.; (v) the past performance of other funds managed by the Investment Manager;
(vi) quotes from a portfolio manager of the Trust or industry specialists; and
(vii) information regarding rights offerings conducted by closed-end funds
managed by the Investment Manager.
The Trust may compare the frequency of its reset period to the frequency with
which the London Inter-Bank Offered Rate ("LIBOR") changes. Further, the Trust
may compare its yield to (i) LIBOR, (ii) the federal funds rate, (iii) the prime
rate, quoted daily in THE WALL STREET JOURNAL as the base rate on corporate
loans at large U.S. money center commercial banks, (iv) one or more averages
compiled by DONOGHUE'S MONEY FUND REPORT, a widely recognized independent
publication that monitors the performance of money market mutual funds, (v) the
average yield reported by the Bank Rate Monitor National Index for money market
deposit accounts offered by the 100 leading banks and thrift institutions in the
ten largest standard metropolitan statistical areas, (vi) yield data published
by Lipper, or (vii) the yield on an investment in 90-day Treasury bills on a
rolling basis, assuming quarterly compounding. Further, the Trust may compare
such other yield data described above to each other. The Trust may also compare
its total return, NAV stability and yield to other fixed income investments
(such as Certificates of Deposit), open-end mutual funds and Unit Investments
Trusts. As with yield and total return calculations, yield comparisons should
not be considered representative of the Trust's yield or relative performance
for any future period.
The Trust may provide information designed to help individuals understand their
investment goals and explore various financial strategies. Such information may
include information about current economic, market and political conditions;
materials that describe general principles of investing, such as asset
allocation, diversification, risk tolerance, and goal setting; worksheets used
to project savings needs based on assumed rates of inflation and hypothetical
rates of return; and action plans offering investment alternatives. Materials
may also include discussions of other investment companies in the Pilgrim Group
of Funds, products and services, and descriptions of the benefits of working
with investment professionals in selecting investments.
PERFORMANCE DATA
The Trust may quote annual total return and aggregate total return performance
data. Total return quotations for the specified periods will be computed by
finding the rate of return (based on net investment income and any capital gains
or losses on portfolio investments over such periods) that would equate the
initial amount invested to the value of such investment at the end of the
period. On occasion, the Trust may quote total return calculations published by
Lipper, a widely recognized independent publication that monitors the
performance of both open-end and closed-end investment companies.
The Trust's distribution rate is calculated on a monthly basis by annualizing
the dividend declared in the month and dividing the resulting annualized
dividend amount by the Trust's corresponding month-end net asset value (in the
case of NAV) or the last reported market price (in the case of Market). The
distribution rate is based solely on the actual dividends and distributions,
which are made at the discretion of management. The distribution rate may or may
not include all investment income, and ordinarily will not include capital gains
or losses, if any.
Total return and distribution rate and compounded distribution rate figures
utilized by the Trust are based on historical performance and are not intended
to indicate future performance. Distribution rate, compounded distribution rate
and NAV per share can be expected to fluctuate over time. Total return will vary
depending on market conditions, the Senior Loans, and other securities
comprising the Trust's portfolio, the Trust's operating expenses and the amount
of net realized and unrealized capital gains or losses during the period.
FINANCIAL STATEMENTS
The financial statements contained in the Trust's February 28, 1998 Annual
Report to Shareholders and August 31, 1998 Semi-Annual Report are incorporated
herein by reference.
-22-
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
1. Financial Statements
Contained in Part A:
Financial Highlights for the years ended February 28, 1998, 1997;
February 29, 1996; February 28, 1995, 1994, 1993; February 29, 1992;
February 28, 1991, 1990 and 1989, and for the six months ended August
31, 1998.
Financial Statements are incorporated in Part B by reference to
Registrant's February 28, 1998 Annual Report (audited) and
Registrant's August 31, 1998 Semi-Annual Report (unaudited)
2. Exhibits
(a) (i) Agreement and Declaration of Trust (1)
(ii) Amendment to the Agreement and Declaration of Trust dated
March 26, 1996 and effective April 12, 1996 (1)
(iii) Amendment to the Agreement and Declaration of Trust dated
October 23, 1998 and effective November 16, 1998.(7)
(b) (i) By-Laws (2)
(ii) Amendment to By-Laws (2)
(c) Not Applicable
(d) Not Applicable
(e) Form of Shareholder Investment Program (5)
(f) Not Applicable
(g) (i) Form of Amended and Restated Investment Management
Agreement (3)
(ii) Form of Amendment to Investment Management Agreement (6)
(h) (i) Form of Distribution Agreement(7)
(ii) Form of Dealer Agreement
(i) Not Applicable
C-1
<PAGE>
(j) Form of Custody Agreement (3)
(k) (i) Form of Amended and Restated Administration Agreement (3)
(ii) Form of Recordkeeping Agreement (3)
(iii) Form of Revolving Loan Agreement (6)
(iv) Form of Credit Agreement(7)
(l) Opinion of Dechert Price & Rhoads(7)
(m) Not Applicable
(n) Consent of KPMG LLP
(o) Not Applicable
(p) Certificate of Initial Capital (4)
(q) Not Applicable
(r) Financial Data Schedule
- ----------
* To be filed by amendment.
(1) Incorporated herein by reference to Amendment No. 20 to Registrant's
Registration Statement under the Investment Company Act of 1940 (the "1940
Act") on Form N-2 (File No. 811-5410), filed on September 16, 1996.
(2) Incorporated herein by reference to Amendment No. 24 to Registrant's
Registration Statement under the 1940 Act on Form N-2 (File No. 811-5410),
filed on November 7, 1997.
(3) Incorporated herein by reference to Amendment No. 22 to Registrant's
Registration Statement under the 1940 Act on Form N-2 (File No. 811-5410),
filed on June 23, 1997.
(4) Incorporated herein by reference to Pre-Effective Amendment No. 1 to
Registrant's initial registration statement on form N-2 (File No.
33-18886), filed on January 22, 1988.
(5) Incorporated herein by reference to Amendment No. 27 to Registrant's
Registration Statement under the 1940 Act on Form N-2 (File No. 811-5410),
filed on May 15, 1998.
(6) Incorporated herein by reference to Amendment No. 28 to Registrant's
Registration Statement under the 1940 Act on Form N-2 (File No. 811-5410),
filed on August 19, 1998.
(7) Incorporated herein by reference to Amendment No. 29 to Registrant's
Registration Statement under the 1940 Act on Form N-2 (File No. 811-5410),
filed on December 2, 1998.
ITEM 25. MARKETING AGREEMENTS
Not Applicable.
C-2
<PAGE>
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth estimated expenses to be incurred in
connection with the offering described in the registration statement.
Registration Fees................................................. $13,335.31
Trustee Fees...................................................... $ 250.00
Transfer Agent's Fees............................................. $10,000.00
Printing Expenses................................................. $10,000.00
Legal Fees........................................................ $25,000.00
New York Stock Exchange Listing Fees.............................. $17,500.00
National Association of Securities Dealers, Inc. Fees............. $ 5,296.81
Accounting Fees and Expenses...................................... $ 5,000.00
Miscellaneous Expenses............................................ $ 2,000.00
Total.................................................... $78,382.19
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
Not Applicable.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
As of January 31, 1999:
(1) TITLE OF CLASS (2) NUMBER OF RECORD HOLDERS
-------------- ------------------------
Shares of Beneficial 63,727
Interest
ITEM 29. INDEMNIFICATION
Registrant's Agreement and Declaration of Trust generally provides that
the Trust shall indemnify each of its Trustees and officers (including persons
who serve at the Trust's request as directors, officers or trustees of another
organization in which the Trust has any interest as a shareholder, creditor or
otherwise) ("Covered Persons") against all liabilities and expenses, including
amounts paid in satisfaction of judgments, in compromise or as fines and
penalties, and counsel fees reasonably incurred in connection with the defense
or disposition of any action, suit or other proceeding, whether civil or
criminal, by reason of being or having been such a Covered Person except with
respect to any matter as to which such Covered Person shall have been finally
adjudicated (a) not to have acted in good faith in the reasonable belief that
such Covered Person's action was in the best interest of the Trust or (b) to be
liable to the Trust or its shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of duties involved in the conduct
of such Covered Person's office.
C-3
<PAGE>
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to Trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment of the Registrant of expenses incurred or
paid by a Trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the securities being
registered, the Registrant will submit, unless in the opinion of its counsel the
matter has been settled by controlling precedent, to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Certain of the officers and directors of the Registrant's Investment
Manager also serve as officers and/or directors for other registered investment
companies in the Pilgrim America family of funds and with Pilgrim America Group,
Inc. and its subsidiaries. Information as to the directors and officers of the
Adviser is included in the Investment Manager's Form ADV and amendments thereto
filed with the Commission and is incorporated herein by reference thereto. For
additional information, see "Investment Management and Other Services" in the
Prospectus.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The amounts and records of the Registrant will be maintained at its
office at 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004 and at the
office of its custodian, Investors Fiduciary Trust Company, 801 Pennsylvania,
Kansas City, Missouri 64105.
ITEM 32. MANAGEMENT SERVICES
Not Applicable.
ITEM 33. UNDERTAKINGS
1. The Registrant undertakes to suspend the Offer until the prospectus
is amended if (1) subsequent to the effective date of this registration
statement, the net asset value declines more than ten percent from its net asset
value as of the effective date of this registration statement or (2) the net
asset value increases to an amount greater than the net proceeds as stated in
the prospectus included in this registration statement.
2. Not Applicable.
3. Not Applicable.
4. The Registrant hereby undertakes:
a. to file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(1) to include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
C-4
<PAGE>
(2) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high and of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 497 if, in the aggregate, the changes
in volume and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.
(3) to include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
b. that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and
c. to remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
5. Not Applicable.
6. The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of receipt
of a written or oral request, any Statement of Additional Information.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Phoenix in the State of Arizona this 1st day of
March, 1999.
PILGRIM PRIME RATE TRUST
By: /s/ Robert W. Stallings
------------------------------
Robert W. Stallings
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated:
Signatures Title Date
- ---------- ----- ----
/s/ Robert W. Stallings Chief Executive Officer March 1, 1999
- --------------------------- and Trustee
Robert W. Stallings*
Chief Financial Officer March 1, 1999
- ---------------------------
Michael A. Roland*
Trustee March 1, 1999
- ---------------------------
Mary A. Baldwin*
Trustee March 1, 1999
- ---------------------------
John P. Burke*
Trustee March 1, 1999
- ---------------------------
Al Burton*
Trustee March 1, 1999
- ---------------------------
Jock Patton*
* By: /s/ Robert W. Stallings
---------------------------
Robert W. Stallings
Attorney-in-Fact**
- ----------
** Powers of attorney are incorporated herein from Post-Effective Amendment
No. 29 to the Trust's Registration Statement on Form N-2 under the
Investment Company Act.
<PAGE>
EXHIBIT INDEX
Exhibit Number Name of Exhibit
- -------------- ---------------
2(h)(ii) Form of Dealer Agreement
2(n) Consent of KPMG LLP
2(r)[EDGAR Exhibit 27] Financial Data Schedule
PILGRIM SECURITIES, INC. RETURN TO:
40 N. CENTRAL AVE., SUITE 1200
PHOENIX, AZ 85004-4424
(602) 417-8100 OR (800) 334-3444
SELECTED DEALER AGREEMENT
- --------------------------------------------------------------------------------
Broker/Dealer
We are the Distributor for shares of Pilgrim Prime Rate Trust (the "Trust") that
may be issued through broker-dealers that have entered into selected dealer
agreements with us. Subject to your acceptance of the terms of this Agreement,
we hereby appoint you as a non-exclusive distributor for the sale of the shares
in the jurisdictions in which you are registered as a broker/dealer.
- --------------------------------------------------------------------------------
1. ORDERS:
(a) Sales of shares may be made only at their applicable offering price
determined in accordance with the Trust's then current Prospectus relating
to the offering of shares through selected dealers (the "Prospectus").
(b) The procedure relating to orders and the handling and settlement thereof
will be subject to the provisions of the Trust's then current Prospectus
and such further instructions released by us from time to time. Orders
should be transmitted to our office or other offices authorized by us. You
are responsible for the accuracy, timeliness and completeness of purchase
orders that you transmit to us.
(c) All orders are subject to acceptance by us and by the Trust. We will not
accept from you any conditional orders for shares.
(d) You shall be responsible for reporting all transactions through the
Automated Confirmation Transaction Service or through any other means
required or permitted by the Rules of the National Association of
Securities Dealers, Inc. ("NASD"), and for delivering confirmations
relating to such transactions.
(e) You shall distribute the Trust's Prospectus and Statement of Additional
Information and shareholder reports to your customers in compliance with
applicable regulatory requirements.
(f) You shall provide written confirmation to us following the close of
business on any day in which shares are sold under this Agreement setting
forth, for each sale during that day, the number of shares sold, the time
of the sale, the executed sales price at which such shares were sold, and
the gross proceeds from such sale.
- --------------------------------------------------------------------------------
2. CONCESSIONS: On each order accepted by us for shares of the Trust, you will
be entitled to receive a dealers' concession as set forth in the Trust's
then current Prospectus.
-1-
<PAGE>
- --------------------------------------------------------------------------------
3. SALES ACTIVITIES:
(a) You shall make no purchases except for the purpose of covering orders
received by you, or for your own bona fide investment. You agree that you
shall not withhold placing orders so as to profit from such withholding.
You also agree that it is your responsibility to determine the suitability
of the Trust's shares as investments for your customers.
(b) You agree that neither you nor any of your associated persons, as defined
in Section 3(18) of the Securities Exchange Act of 1934, is authorized to
make any representation relating to the shares of the Trust, except those
contained in the Trust's then current Prospectus and Statement of
Additional Information, which you agree to deliver to investors in
accordance with applicable regulations, and in supplemental information
that we or the Trust may issue, which is limited to sales literature
provided or approved by us, filings made with the SEC, and press releases.
We shall provide you with copies of the Prospectus, Statement of Additional
Information, reports to shareholders and available printed information in
reasonable quantities upon request.
(c) You shall not use any advertisement or sales literature with respect to the
Trust without first having obtained our approval.
(d) In no transaction shall you have any authority whatever to act as agent for
the Trust, or for us, or for any other distributor, except as provided in
this Agreement, and nothing in this Agreement shall constitute either of us
the agent of the other, or shall constitute you or the Trust the agent of
the other.
- --------------------------------------------------------------------------------
4. REMITTANCE: Remittance by dealers should be made by check or wire, payable
to the Trust (not to us) and sent to the Trust's servicing agent identified
on Schedule A. Stock certificates, where specifically requested, will be
delivered only after checks have cleared. Payments must be received
promptly, otherwise the right is reserved, without notice, to cancel the
sale, in which event you will be held responsible for any loss to the
Trust, or to us, including loss of profit resulting from your failure to
make payment.
- --------------------------------------------------------------------------------
5. NASD AND OTHER REGULATION: You and we agree to abide by all of the rules
and regulations of the NASD, including its Conduct Rules, as well as all
state or federal laws, rules or regulations that are now or may hereafter
become applicable to the transactions hereunder. You represent and warrant
that you are a member of the NASD. You also agree to that you will not
engage in any activity in respect of shares of the Trust in violation of
the Securities Exchange Act of 1934, as amended, including Regulation M
thereunder.
- --------------------------------------------------------------------------------
6. INDEMNIFICATION:
(a) You agree to be liable for, to hold us, the Trust and our and the Trust's
officers, directors, trustees and employees harmless from, and to indemnify
each of them from any liabilities and costs, including but not limited to
reasonable attorneys' fees, arising from (i) your breach of your
representations or agreements made herein, (ii) any statements or
representations (other than statements or representations contained in the
Trust's current Prospectus and Statement of Additional Information or any
-2-
<PAGE>
other written material we have provided to you relating to the Trust) that
you or your employees make concerning the Trust; or (iii) your wrongful
conduct or alleged wrongful conduct with respect to the sale or
distribution of the Trust's shares.
(b) We agree to be liable for, to hold you, your officers, directors, and
employees harmless from and to indemnify each of them from any liabilities
and costs, including but not limited to reasonable attorneys' fees, arising
from (i) our breach of our representations or agreements made herein, or
(ii) any untrue statement of a material fact or alleged untrue statement of
a material fact contained in the Trust's Prospectus or Statement of
Additional Information or any amendment or supplement thereto, or arising
out of or based on the omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading. No indemnity herein shall apply in respect of any Prospectus or
Statement of Additional Information delivered at a time other than as
required under the 1933 Act or the regulations adopted thereunder.
(c) The provisions of this Section 6 shall survive the termination of this
agreement.
- --------------------------------------------------------------------------------
7. MODIFICATION AND TERMINATION: We reserve the right, in our discretion and
without notice to you or to any distributor, to suspend sales, to withdraw
any offering, to change the offering price or to cancel this Agreement,
which shall be construed in accordance with the laws of the State of
Arizona. This agreement may be canceled at any time by you upon thirty (30)
days' written notice.
- --------------------------------------------------------------------------------
8. ACCEPTANCE OF TERMS: If the foregoing completely expresses the terms of the
Agreement between us, please so signify by executing, in the space
provided, the annexed duplicate of this Agreement and return it to us,
retaining the original copy for your own files. This Agreement shall become
effective upon the earlier of our receipt of a signed copy hereof or the
first order placed by you for any of the Trust's shares, which order shall
constitute acceptance of this Agreement. All amendments to this Agreement
shall take effect as of the date of the first order placed by you for the
Trust's shares after the date set forth in the notice of amendment sent to
you by the undersigned.
- --------------------------------------------------------------------------------
-3-
<PAGE>
DEALER'S ACCEPTANCE
- ----------------------------- PILGRIM SECURITIES, INC.
Firm Name
- -----------------------------
Address
- -----------------------------
Phone Number By
-----------------------------
By
---------------------------
Authorized Officer Signature
By
---------------------------
Authorized Officer Name - Please Print
- -----------------------------
Date
-4-
<PAGE>
SCHEDULE A
The Trust's servicing agent is:
[to be provided]
-5-
INDEPENDENT AUDITORS' CONSENT
The Board of Trustees
Pilgrim Prime Rate Trust
We consent to the use of our report incorporated herein by reference and to the
references to our firm under the headings "Financial Highlights and Investment
Performance" and "Experts" in the prospectus.
/s/ KPMG LLP
Los Angeles, California
March 3, 1999
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 826020
<NAME> PILGRIM PRIME RATE TRUST
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> AUG-31-1998
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 1,655,491
<INVESTMENTS-AT-VALUE> 1,651,752
<RECEIVABLES> 16,601
<ASSETS-OTHER> 1,403
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,669,756
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 509,000
<OTHER-ITEMS-LIABILITIES> 8,164
<TOTAL-LIABILITIES> 517,164
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,174,283
<SHARES-COMMON-STOCK> 123,650
<SHARES-COMMON-PRIOR> 110,764
<ACCUMULATED-NII-CURRENT> 12,476
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 30,428
<ACCUM-APPREC-OR-DEPREC> (3,739)
<NET-ASSETS> 1,152,592
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 66,503
<OTHER-INCOME> 3,334
<EXPENSES-NET> 22,185
<NET-INVESTMENT-INCOME> 47,652
<REALIZED-GAINS-CURRENT> (58)
<APPREC-INCREASE-CURRENT> (5,319)
<NET-CHANGE-FROM-OPS> 42,275
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 47,104
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 12,885
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 118,189
<ACCUMULATED-NII-PRIOR> 11,927
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 30,370
<GROSS-ADVISORY-FEES> 5,674
<INTEREST-EXPENSE> 13,813
<GROSS-EXPENSE> 22,211
<AVERAGE-NET-ASSETS> 1,078,270
<PER-SHARE-NAV-BEGIN> 9.34
<PER-SHARE-NII> 0.04
<PER-SHARE-GAIN-APPREC> (0.03)
<PER-SHARE-DIVIDEND> 0.41
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.32
<EXPENSE-RATIO> 4.08
<AVG-DEBT-OUTSTANDING> 452,049
<AVG-DEBT-PER-SHARE> 3.66
</TABLE>
