As filed with the Securities and Exchange Commission on May 9, 2000
1933 Act File No. 333-61831
1940 Act File No. 811-5410
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
(Check appropriate box or boxes)
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. __ [ ]
Post-Effective Amendment No. 2 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 33 [X]
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. Copies to:
Pilgrim Group, Inc. Jeffrey S. Puretz, Esq.
40 North Central Avenue, Suite 1200 Dechert Price & Rhoads
Phoenix, AZ 85004 1775 Eye Street, N.W.
Name and Address (Number, Street, State, Washington, D.C. 20006
Zip Code) of Agent for Service
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]
It is proposed that this filing will become effective:
[X] when declared effective pursuant to Section 8(c) of the Securities
Act of 1933.
================================================================================
<PAGE>
[PILGRIM LOGO]
Prospectus
June 30, 2000
PRIME RATE TRUST
25,000,000 Shares of Beneficial Interest
This cover is not a part of the Prospectus
<PAGE>
This cover is not a part of the Prospectus.
<PAGE>
Prospectus
25,000,000 Shares of Beneficial Interest
Pilgrim Prime Rate Trust
New York Stock Exchange Symbol: PPR
[GRAPHIC]
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 19.
This Prospectus applies to 25,000,000 shares of beneficial interest ("Shares")
of the Trust which may be issued and sold by the Trust pursuant to the Trust's
Shareholder Investment Program (the "Program") or pursuant to privately
negotiated transactions. See "Plan of Distribution." The Program allows
participating shareholders to reinvest all dividends and capital gain
distributions in additional Shares of the Trust and allows participants to make
additional optional cash investments in amounts from a minimum of $100 to a
maximum of $5,000 per month. Investments in excess of $5,000 per month can only
be made if a waiver is granted by the Trust. Shares may be issued under the
Program only when the Trust's shares are trading at a premium to net asset value
("NAV"). When Shares are issued by the Trust under the Program in connection
with the reinvestment of dividends and distributions, they will be issued at the
greater of (i) the NAV per Share of the Trust's Shares or (ii) 95% of the
average daily 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) of the Trust's Shares over a two trading day
pricing period. When Shares are issued by the Trust under the Program in
connection with optional cash investments, they will be issued at the greater of
(i) the NAV per Share of the Trust's Shares or (ii) a discount (ranging from 0%
to 5%) to the average daily market price for a five trading day pricing period.
The discount applicable to optional cash investments for amounts less than
$5,000 per month may differ from the discount applicable to optional cash
investments in excess of $5,000 per month.
The Shares may also be offered pursuant to privately negotiated transactions
between the Trust and specific investors. Shares issued by the Trust in
connection with privately negotiated transactions will be issued at the greater
of (i) the NAV per Share of the Trust's Shares or (ii) a discount ranging from
0% to 5% of the market price of the Trust's Shares at the close of business on
the two business days preceding the date upon which Shares are sold pursuant to
the privately negotiated transaction. The discount to apply to such privately
negotiated transactions will be determined by the Trust with regard to each
specific transaction.
In connection with certain investments in excess of $5,000 pursuant to a waiver,
a commission of up to 1.00% of the amount of such investment may be paid to
Pilgrim Securities, Inc. ("Pilgrim Securities"), while in connection with
certain privately negotiated transactions, a commission of up to 3.00% of the
amount of such investment may be paid to Pilgrim Securities. Pilgrim Securities
may allow all or part of such commission to other broker-dealers. In any event,
the net proceeds received by the Trust in connection with the sale may not be
less than the greater of (i) the NAV per share or (ii) 94% of the average daily
market price over the relevant pricing period. See "Distribution Arrangements."
Neither the Securites and Exchange Commission nor any state securities
commission has approvedor disapproved these securities or determined
that 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 Exchange Commission (the
"Commission") a Statement of Additional Information dated June 30, 2000 (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 31 of this
Prospectus, without charge by contacting the Trust toll-free at (800) 992-0180.
The date of this Prospectus is June 30, 2000.
<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 ..................................................... 25
Use of Proceeds .......................................................... 28
Net Asset Value .......................................................... 29
Dividends and Distributions .............................................. 29
Tax Matters .............................................................. 30
Distribution Arrangements ................................................ 30
Legal Matters ............................................................ 31
Experts .................................................................. 31
Registration Statement ................................................... 31
Shareholder Reports ...................................................... 31
Financial Statements ..................................................... 31
Table of Contents of Statement of Additional Information ............... 31
2
<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 June 15, 2000, the Trust's NAV per
Share was $_________.
NYSE LISTED
As of June 15, 2000, the Trust had Shares outstanding, which are traded on the
NYSE under the symbol "PPR." As of June 15, 2000, the last reported sales price
of a Share of the Trust was $_______.
INVESTMENT OBJECTIVE
To obtain as high a level of current income as is consistent with the
preservation of capital. 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
* Shares will be issued under the Program only when the market price of the
Shares, plus the estimated commissions of purchasing Shares on the
secondary market, is greater than NAV.
* 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 per Share may decrease.
CREDIT RISK
Investment in the Trust involves the risk that borrowers under Senior Loans may
default on obligations to pay principal or interest when due, that lenders may
have difficulty liquidating the collateral securing the Senior Loans or
enforcing their rights under the terms of the Senior Loans, and that the Trust's
investment objective may not be realized.
LEVERAGE
The Trust may borrow for investment purposes, which increases both investment
opportunity and risk.
SECONDARY MARKET FOR THE TRUST'S SHARES
The issuance of the Shares through the Program 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 addition, the Shares may be issued at a
discount to the market price for such Shares, which may put downward pressure on
the market price for Shares of the Trust.
LIMITED SECONDARY MARKET FOR SENIOR LOANS
Because of a limited secondary market for Senior Loans, the Trust may be limited
in its ability to sell portfolio holdings at carrying value to generate gains or
avoid losses.
DEMAND FOR SENIOR LOANS
An increase in demand for Senior Loans may adversely affect the rate of interest
payable on Senior Loans acquired by the Trust.
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
Shareholder Investment Program
Commission (as a percentage of offering price)(2) ........ 1.00%
Shareholder Investment Program Fees ...................... NONE
Privately Negotiated Transactions
Commission (as a percentage of offering price)(2) ........ 3.00%
Shareholder Investment Program Fees ...................... NONE
Annual Expenses (as a percentage of net assets)
Management and Administrative Fees(3) .................. %
Other Operating Expenses(4) ............................ %
-----
Total Annual Expenses before Interest .................... %
Interest Expense on Borrowed Funds ..................... %
-----
Total Annual Expenses .................................... %
=====
- ----------
(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 borrowing and shows
expenses as a percentage of net assets. However, certain expenses of the
Trust, such as management 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 ..................... %
Other Operating Expenses ................................. %
-----
Total Annual Expenses before Interest Expense ............ %
Interest Expense on Borrowed Funds ..................... %
-----
Total Annual Expenses .................................... %
=====
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 .................. %
Other Operating Expenses ............................ %
Total Annual Expenses ................................. %
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) In connection with optional cash investments in excess of $5,000 pursuant
to a waiver, a commission of up to 1.00% of the amount of such investment
may be paid to Pilgrim Securities for services in connection with the sale
of the Shares, while in connection with certain privately negotiated
transactions, a commission of up to 3.00% of such investment may be paid to
Pilgrim Securities. Pilgrim Securities may allow all or some of such
commission to other broker-dealers. See "Distribution Arrangements." No
commissions will be paid by the Trust or its Shareholders in connection
with the reinvestment of dividends and capital gains distributions or in
connection with optional cash investments up to the maximum of $5,000 per
month.
(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.
(4) "Other Operating Expenses" are based on estimated amounts for the current
fiscal year.
5
<PAGE>
The following example applies to shares issued in connection with the Trust's
Shareholder Investment Program. Because the assumed amount of investment in the
example is $1,000, the example does not reflect the maximum front-end commission
of 1.00% on sales of greater than $5,000 per month pursuant to a request for
waiver.
<TABLE>
<CAPTION>
Example 1 year 3 years 5 years 10 years
- ------------------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming a 5% annual return and where
the Trust has borrowed ........................ $ $ $ $
You would pay the following expenses on a $1,000
investment, assuming a 5% annual return and where
the Trust has not borrowed ..................... $ $ $ $
</TABLE>
The following example applies to shares issued in connection with privately
negotiated transactions, which may have a maximum front-end commission of 3.0%.
<TABLE>
<CAPTION>
Example 1 year 3 years 5 years 10 years
- -------------------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming a 5% annual return and where
the Trust has borrowed ........................ $ $ $ $
You would pay the following expenses on a $1,000
investment, assuming a 5% annual return and where
the Trust has not borrowed ..................... $ $ $ $
</TABLE>
These hypothetical examples assume that all dividends and other distributions
are reinvested at NAV and that the percentage amounts listed under Annual
Expenses above remain the same in the years shown. The above tables and the
assumption in the hypothetical example of a 5% annual return are required by
regulation of the Commission applicable to all investment companies; the assumed
5% annual return is not a prediction of, and does not represent, the projected
or actual performance of the Trust's Shares. For more complete descriptions of
certain of the Trust's costs and expenses, see "Investment Management and Other
Services."
The foregoing examples should not be considered a representation of past or
future expenses, and actual expenses may be greater or less than those shown.
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
29, 2000. For the fiscal years ended February 29, 2000, February 28, 1999, 1998
and 1997, and February 29, 1996, the information in the table below has been
audited by KPMG LLP, independent auditors. For all periods ended prior to
February 29, 1996, the financial information was audited by the Trust's former
auditors. This information should be read in conjunction with the Financial
Statements and Notes thereto included in the Trust's February 29, 2000 Annual
Report to Shareholders, which contains further information about the Trust's
performance, and which is available to Shareholders upon request and without
charge.
<TABLE>
<CAPTION>
Year Ended February 28 or February 29,
---------------------------------------------------------------------
2000 1999(7) 1998(7) 1997(7) 1996(5)
---- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance
NAV, beginning of period ...................... $ $ 9.34 $ 9.45 $ 9.61 $ 9.66
---------- ---------- ---------- ------------ --------
Net investment income ......................... 0.79 0.87 0.82 0.89
Net realized and unrealized gain (loss)
on investment ................................ (0.10) (0.13) (0.02) (0.08)
---------- ---------- ------------ --------
Increase in NAV from investment operations .... 0.69 0.74 0.80 0.81
Distributions from net investment income ...... (0.82) (0.85) (0.82) (0.86)
Increase in NAV from share offering ........... 0.03
Reduction in NAV from rights offering. ........ -- -- (0.14) --
Increase in NAV from repurchase of
capital stock ................................ -- -- -- --
---------- ---------- ------------ --------
NAV, end of period ............................ $ $ 9.24 $ 9.34 $ 9.45 $ 9.61
========== ========== ========== ============ ========
Closing market price at end of period ......... $ $ 9.56 $ 10.31 $ 10.00 $ 9.50
========== ========== ========== ============ ========
Total Return
Total investment return at closing
market price(2) .............................. % 1.11% 12.70% 15.04%(4) 19.19%
Total investment return based on NAV(3) ....... % 7.86% 8.01% 8.06%(4) 9.21%
Ratios/ Supplemental Data
Net assets, end of period (000's) ............. $ $1,202,565 $1,034,403 $ 1,031,089 $862,938
Average Borrowings (000's) .................... $ $ 490,978 $ 346,110 $ 131,773 --
Ratios to average net assets plus borrowings:
Expenses (before interest and other fees
related to revolving credit facility) ........ % 1.05% 1.04% 1.13% --
Expenses. .................................... % 2.86% 2.65% 1.92% --
Net investment income ........................ % 6.00% 6.91% 7.59% --
Ratios to average net assets:
Expenses (before interest and other fees
related to revolving credit facility) ........ % 1.50% 1.39% 1.29% --
Expenses ..................................... % 4.10% 3.54% 2.20% 1.23%
Net investment income ........................ % 8.60% 9.23% 8.67% 9.23%
Portfolio turnover rate ....................... % 68% 90% 82% 88%
Shares outstanding at end of period (000's) 130,206 110,764 109,140 89,794
Average daily balance of debt outstanding
during the period (000's) (6) ................ $ $ 490,978 $ 346,110 $ 131,773 $ --
Average monthly shares outstanding during
the period (000's) ........................... 123,102 109,998 95,917 89,794
Average amount of debt per share during
the period(6) ................................ $ $ 3.99 $ 3.15 $ 1.37 $ --
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Per Share Operating Performance
NAV, beginning of period ...................... $ 10.02 $ 10.05 $ 9.96 $ 9.97 $ 10.00
-------- --------- -------- -------- ----------
Net investment income ......................... 0.74 0.60 0.60 0.76 0.98
Net realized and unrealized gain (loss)
on investment ................................ 0.07 (0.05) 0.01 (0.02) (0.05)
-------- --------- -------- -------- ----------
Increase in NAV from investment operations .... 0.81 0.55 0.61 0.74 0.93
Distributions from net investment income ...... (0.73) (0.60) (0.57) (0.75) (0.96)
Increase in NAV from share offering ...........
Reduction in NAV from rights offering. ........ (0.44) -- -- -- --
Increase in NAV from repurchase of
capital stock ................................ -- 0.02 0.05 -- --
-------- --------- -------- -------- ----------
NAV, end of period ............................ $ 9.66 $ 10.02 $ 10.05 $ 9.96 $ 9.97
======== ========= ======== ======== ==========
Closing market price at end of period ......... $ 8.75 $ $9.25 $ 9.13 $ -- $ --
======== ========= ======== ======== ==========
Total Return
Total investment return at closing
market price(2) .............................. 3.27%(4) 8.06% 10.89% -- --
Total investment return based on NAV(3) ....... 5.24%(4) 6.28% 7.29% 7.71% 9.74%
Ratios/ Supplemental Data
Net assets, end of period (000's) ............. $867,083 $719,979 $738,810 $874,104 $1,158,224
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 .................................... 1.30% 1.31% 1.42% 1.42%(1) 1.38%
Net investment income ........................ 7.59% 6.04% 5.88% 7.62%(1) 9.71%
Portfolio turnover rate ....................... 108% 87% 81% 53% 55%
Shares outstanding at end of period (000's) 89,794 71,835 73,544 87,782 116,022
Average daily balance of debt outstanding
during the period (000's) (6) ................ $ 2,811 $ -- $ 636 $ 8,011 $ 2,241
Average monthly shares outstanding during
the period (000's) ........................... 74,598 -- 79,394 102,267 114,350
Average amount of debt per share during
the period(6) ................................ $ 0.04 $ -- $ 0.01 $ 0.08 $ 0.02
</TABLE>
7
<PAGE>
- ----------
(1) 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.
(2) 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.
(3) 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.
(4) 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.
(5) 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.
(6) 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 May
28, 1999, the Trust had outstanding borrowings of $516,000,000 under a
$650,000,000 line of credit. See "Policy on Borrowing" in this section.
(7) Pilgrim Investments 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 February 29, 2000.
PORTFOLIO CHARACTERISTICS
Net Assets $
Assets Invested in Senior Loans* $
Total Number of Senior Loans
Average Amount Outstanding per Loan $
Total Number of Industries
Average Loan Amount per Industry $
Portfolio Turnover Rate %
Weighted Average Days to Interest Rate Reset days
Average Loan Maturity months
Average Age of Loans Held in Portfolio months
(* Includes loans and other debt received through restructures)
TOP 10 INDUSTRIES AS A % OF
NET ASSETS TOTAL ASSETS
Healthcare, Education and Childcare % %
Telecommunications % %
Containers, Packaging and Glass % %
Buildings and Real Estate % %
Chemicals, Plastics and Rubber % %
Broadcasting % %
Personal, Food and Miscellaneous Services % %
Aerospace and Defense % %
Leisure, Amusement, Motion Pictures and Entertainment % %
Beverage, Food and Tobacco % %
TOP 10 SENIOR LOANS AS A % OF
NET ASSETS TOTAL ASSETS
Patriot American Hospitality % %
Nextel Finance Co. % %
Lyondell Petrochemical Company % %
MAFCO Finance Corp. % %
Community Health Systems, Inc. % %
Jefferson Smurfit % %
Omnipoint Corp. % %
Ventas, Inc. % %
Gaylord Container Corporation % %
Florida Panthers Holdings, Inc. % %
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
May 31, 2000, the Trust had outstanding borrowings of $________ . The lenders
under the credit facilities have a security interest in all assets of the Trust.
The lenders have the right to liquidate Trust assets in the event of default by
the Trust, and the Trust may be inhibited from paying dividends in the event of
a material adverse event or condition respecting the Trust or Investment Manager
until outstanding debts are paid or until the event or condition is cured. The
Trust is permitted to borrow up to 33 1/3%, or such other percentage permitted
by law, of its total assets (including the amount borrowed) less all liabilities
other than borrowings. See "Risk Factors and Special Considerations -- Borrowing
and Leverage."
Trading And NAV Information
The following table shows for the Trust's Shares for the periods indicated: (1)
the high and low closing prices as shown on the NYSE Composite Transaction Tape;
(2) the NAV per Share represented by each of the high and low closing prices as
shown on the NYSE Composite Transaction Tape; and (3) the discount from or
premium to NAV per Share (expressed as a percentage) represented by these
closing prices. The table also sets forth the aggregate number of shares traded
as shown on the NYSE Composite Transaction Tape during the respective quarter.
<TABLE>
<CAPTION>
Premium/(Discount)
Price NAV To NAV
----------------- ----------------- ------------------- Reported
High Low High Low High Low NYSE Volume
Calendar Quarter Ended ------- ------- ------- ------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1994 $ 9.875 $ 9.000 $10.080 $10.020 (2.03)% (10.18)% 15,590,400
March 31, 1995 9.000 8.500 10.040 9.650 (10.36) (11.92) 24,778,200
June 30, 1995 9.250 8.750 9.650 9.600 (4.15) (8.85) 16,974,600
September 30, 1995 9.375 8.875 9.660 9.660 (2.95) (8.13) 15,325,900
December 31, 1995 9.500 9.000 9.650 9.620 (1.55) (6.45) 16,428,200
March 31, 1996 9.625 9.250 9.610 9.590 0.16 (3.55) 17,978,300
June 30, 1996 9.750 9.375 9.610 9.570 1.46 (2.04) 13,187,700
September 30, 1996 10.000 9.500 9.560 9.580 4.60 (0.84) 15,821,000
December 31, 1996 10.000 9.250 9.580 9.430 4.38 (1.91) 28,740,200
March 31, 1997 10.000 9.625 9.390 9.420 6.50 2.18 18,483,600
June 30, 1997 10.125 9.875 9.400 9.380 7.71 5.28 18,863,600
September 30, 1997 10.250 10.000 9.400 9.410 9.04 6.27 15,034,200
December 31, 1997 10.375 10.125 9.310 9.380 11.44 7.94 13,270,900
March 31, 1998 10.500 9.875 9.360 9.340 12.18 5.73 15,588,500
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
March 31, 1999 9.563 9.188 9.250 9.250 3.38 (0.67) 19,292,300
June 30, 1999
September 30, 1999
December 31, 1999
March 31, 2000
</TABLE>
10
<PAGE>
The following chart shows, for the Trust's Shares for the period from March 1,
1996 to May 31, 2000: (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
- --------------------------------------------------------------------------------
05/31/00 02/25/00
05/26/00 02/18/00
05/19/00 02/11/00
05/12/00 02/04/00
05/05/00
01/28/00
04/28/00 01/21/00
04/21/00 01/14/00
04/14/00 01/07/00
04/07/00
03/31/00
03/24/00
03/17/00
03/10/00
03/03/00
DATE PRICE NAV %PREM DATE PRICE NAV %PREM
- --------------------------------------------------------------------------------
12/31/99 06/25/99
12/24/99 06/18/99
12/17/99 06/11/99
12/10/99 06/04/99
12/03/99
05/28/99 9.500 9.100 4.40
11/26/99 05/21/99 9.375 9.100 3.02
11/19/99 05/14/99 9.313 9.080 2.56
11/12/99 05/07/99 9.438 9.070 4.05
11/05/99 04/30/99 9.438 9.170 2.92
10/29/99 04/23/99 9.438 9.160 3.03
10/22/99 04/16/99 9.313 9.140 1.89
10/15/99 04/09/99 9.375 9.130 2.68
10/08/99 04/02/99 9.438 9.190 2.69
10/01/99 03/26/99 9.375 9.230 1.57
09/24/99 03/19/99 9.313 9.210 1.11
09/17/99 03/12/99 9.438 9.200 2.58
09/10/99 03/05/99 9.500 9.240 2.81
09/03/99 02/26/99 9.563 9.240 3.49
02/19/99 9.500 9.230 2.92
08/27/99
08/20/99 02/12/99 9.500 9.230 2.93
08/13/99 02/05/99 9.438 9.280 1.70
08/06/99 01/29/99 9.563 9.270 3.16
01/22/99 9.438 9.270 1.81
07/30/99 01/15/99 9.313 9.260 0.57
07/23/99
07/16/99 01/08/99 9.313 9.250 0.68
07/09/99 01/01/99 9.313 9.230 0.89
07/02/99
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 7.76 05/15/98 10.188 9.310 9.43
11/06/98 10.000 9.300 7.18 05/08/98 10.063 9.290 8.32
10/30/98 10.000 9.300 6.63 05/01/98 10.125 9.340 8.10
10/23/98 10.000 9.350 7.53 04/24/98 10.000 9.330 7.18
10/16/98 9.938 9.340 7.76 04/17/98 10.063 9.320 7.97
10/02/98 9.938 9.320 7.76 04/10/98 9.938 9.300 6.85
09/25/98 10.000 9.310 7.18 04/03/98 10.063 9.360 7.51
09/18/98 10.125 9.370 6.63 03/27/98 9.875 9.340 5.73
09/11/98 10.250 9.360 7.53 03/20/98 10.000 9.330 7.18
09/04/98 10.188 9.330 7.76 03/13/98 10.125 9.310 8.75
08/28/98 10.188 9.310 7.76 03/06/98 10.250 9.290 10.33
08/21/98 10.063 9.290 7.18 02/27/98 10.313 9.340 10.41
08/14/98 10.125 9.340 6.63 02/20/98 10.313 9.340 10.41
08/07/98 10.000 9.280 7.53 02/13/98 10.250 9.340 9.74
07/31/98 10.000 9.330 7.76 02/06/98 10.250 9.320 9.98
07/24/98 9.938 9.320 7.76 01/30/98 10.250 9.380 9.28
07/17/98 10.000 9.300 6.63 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 7.76 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
08/16/96 9.875 9.580 3.08
08/09/96 9.875 9.560 3.29
08/02/96 9.813 9.620 2.00
07/26/96 9.750 9.600 1.56
07/19/96 9.625 9.580 .47
07/12/96 9.625 9.570 .57
07/05/96 9.750 9.550 2.09
Source: BLOOMBERG Financial Markets.
On June 15, 2000, the last reported sale price of a Share of the Trust's Shares
on the NYSE was $_____. The Trust's NAV on June 15, 2000 was $_____ . See "Net
Asset Value" in the SAI. On June 15, 2000, the last reported sale price of a
share of the Trust's Common Shares on the NYSE ($_______) represented a _____%
premium above NAV ($_____) as of that date.
The Trust's Shares have traded in the market above, at, and below NAV since
March 9, 1992, when the Trust's Shares were listed on the NYSE. The Trust cannot
predict whether its Shares will trade in the future at a premium or discount to
NAV, and if so, the level of such premium or discount. Shares of closed-end
investment companies frequently trade at a discount from NAV.
11
<PAGE>
Investment Performance
Morningstar Ratings
For the three-year, five-year and ten-year periods ended May 31, 2000, the Trust
had a ______ star, ______ star and ______ star Morningstar risk-adjusted
performance rating, when rated among ______, ______, and ______ fixed income
closed-end funds, respectively. The Trust's overall rating through May 31, 2000,
was ______ stars.(1) For the three-year, five-year and ten-year periods ended
May 31, 2000, the Trust's risk score placed the Trust ______ out of ______,
______, and ______ Corporate Bond -- General funds. For the three-year,
five-year and ten-year periods ended May 31, 2000, the Trust's risk score placed
the Trust ______, ______ and ______ out of all closed-end funds (______, ______,
and ______ 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-, five- and ten-year periods ended
May 31, 2000, the Trust ranked ______, ______, ______, and ______ 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
May 31, 2000 Ranking(3) Return (3) in Category (4)
- ---------------------- ---------- ---------- ---------------
One year %
Three years %
Five years %
Ten Years %
- ----------
(1) The Trust's overall rating is based on a weighted average of its
performance for the three-year, five-year and ten-year periods ended May
31, 2000.
(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 May 31, 2000. In addition, presented below are various
benchmark indicators of interest and borrowing rates. The distribution rates for
the Trust are calculated using actual distributions annualized for the preceding
twelve months.
<TABLE>
<CAPTION>
Prime Rate Trust Prime Rate Trust
Month Ended (at NAV)(1)(2) (at Market)(1)(2) Prime Rate(3) 60-Day LIBOR(4)
----------- -------------- ----------------- ------------- ---------------
<S> <C> <C> <C> <C>
1/31/91 9.675% 9.675% 9.917% 8.063%
2/28/91 9.627% 9.627% 9.833% 7.943%
3/31/91 9.500% 9.500% 9.750% 7.792%
4/30/91 9.379% 9.379% 9.667% 7.579%
5/31/91 9.203% 9.203% 9.542% 7.386%
6/30/91 9.052% 9.052% 9.417% 7.199%
7/31/91 8.896% 8.896% 9.292% 7.032%
8/31/91 8.730% 8.730% 9.167% 6.834%
9/30/91 8.527% 8.527% 9.000% 6.600%
10/31/91 8.372% 8.372% 8.833% 6.365%
11/30/91 8.160% 8.160% 8.625% 6.084%
12/31/91 7.963% 7.963% 8.375% 5.818%
1/31/92 7.739% 7.739% 8.125% 5.574%
2/29/92 7.526% 7.526% 7.917% 5.349%
3/31/92 7.382% 7.397% 7.708% 5.157%
4/30/92 7.199% 7.239% 7.500% 4.990%
5/31/92 7.072% 7.142% 7.333% 4.823%
6/30/92 6.939% 7.034% 7.167% 4.641%
7/31/92 6.790% 6.895% 6.958% 4.432%
8/31/92 6.671% 6.779% 6.750% 4.250%
9/30/92 6.578% 6.697% 6.583% 4.063%
10/31/92 6.498% 6.621% 6.417% 3.932%
11/30/92 6.394% 6.533% 6.292% 3.844%
12/31/92 6.277% 6.417% 6.250% 3.755%
1/31/93 6.203% 6.354% 6.208% 3.677%
2/28/93 6.151% 6.305% 6.167% 3.589%
3/31/93 6.095% 6.267% 6.125% 3.500%
4/30/93 6.070% 6.229% 6.083% 3.432%
5/31/93 6.056% 6.196% 6.042% 3.375%
6/30/93 6.022% 6.141% 6.000% 3.318%
7/31/93 5.998% 6.112% 6.000% 3.302%
8/31/93 6.002% 6.110% 6.000% 3.281%
9/30/93 5.975% 6.070% 6.000% 3.281%
10/31/93 5.899% 5.989% 6.000% 3.266%
11/30/93 5.910% 5.985% 6.000% 3.224%
12/31/93 5.932% 6.018% 6.000% 3.219%
1/31/94 5.955% 6.040% 6.000% 3.214%
2/28/94 5.978% 6.055% 6.000% 3.255%
3/31/94 6.017% 6.080% 6.021% 3.302%
4/30/94 6.068% 6.103% 6.083% 3.385%
5/31/94 6.157% 6.163% 6.188% 3.484%
6/30/94 6.258% 6.243% 6.292% 3.609%
7/31/94 6.374% 6.331% 6.396% 3.734%
8/31/94 6.474% 6.404% 6.542% 3.875%
9/30/94 6.604% 6.518% 6.688% 4.042%
10/31/94 6.738% 6.637% 6.833% 4.219%
11/30/94 6.874% 6.758% 7.042% 4.432%
12/31/94 7.076% 6.971% 7.250% 4.677%
1/31/95 7.288% 7.269% 7.458% 4.927%
2/28/95 7.487% 7.533% 7.708% 5.135%
3/31/95 7.711% 7.831% 7.938% 5.333%
4/30/95 7.915% 8.119% 8.125% 5.495%
5/31/95 8.089% 8.367% 8.271% 5.625%
6/30/95 8.249% 8.588% 8.417% 5.734%
7/31/95 8.396% 8.825% 8.542% 5.828%
8/31/95 8.534% 9.034% 8.625% 5.854%
9/30/95 8.650% 9.189% 8.708% 5.911%
10/31/95 8.749% 9.335% 8.792% 5.943%
11/30/95 8.855% 9.488% 8.813% 5.930%
12/31/95 8.876% 9.506% 8.813% 5.878%
1/31/96 8.886% 9.432% 8.813% 5.812%
2/29/96 8.895% 9.351% 8.750% 5.739%
3/31/96 8.836% 9.215% 8.688% 5.677%
4/30/96 8.773% 9.084% 8.625% 5.622%
5/31/96 8.727% 8.983% 8.563% 5.573%
6/30/96 8.671% 8.874% 8.500% 5.527%
7/31/96 8.639% 8.760% 8.458% 5.503%
8/31/96 8.612% 8.679% 8.417% 5.524%
9/30/96 8.590% 8.606% 8.375% 5.493%
10/31/96 8.577% 8.571% 8.333% 5.456%
11/30/96 8.563% 8.530% 8.292% 5.422%
12/31/96 8.567% 8.486% 8.271% 5.413%
1/31/97 8.569% 8.455% 8.250% 5.422%
2/28/97 8.564% 8.434% 8.250% 5.436%
3/31/97 8.595% 8.431% 8.271% 5.459%
4/30/97 8.647% 8.439% 8.292% 5.483%
5/31/97 8.666% 8.411% 8.313% 5.507%
6/30/97 8.715% 8.425% 8.333% 5.523%
7/31/97 8.734% 8.415% 8.354% 5.529%
8/31/97 8.744% 8.384% 8.375% 5.544%
9/30/97 8.758% 8.371% 8.396% 5.560%
10/31/97 8.768% 8.313% 8.417% 5.581%
11/30/97 8.771% 8.248% 8.438% 5.615%
12/31/97 8.777% 8.206% 8.458% 5.633%
1/31/98 8.780% 8.168% 8.479% 5.639%
2/28/98 8.777% 8.128% 8.500% 5.655%
3/31/98 8.788% 8.125% 8.500% 5.652%
4/30/98 8.788% 8.107% 8.500% 5.647%
5/31/98 8.809% 8.109% 8.500% 5.642%
6/30/98 8.798% 8.094% 8.500% 5.640%
7/31/98 8.806% 8.098% 8.500% 5.642%
8/31/98 8.807% 8.101% 8.500% 5.639%
9/30/98 8.810% 8.114% 8.479% 5.610%
10/31/98 8.793% 8.127% 8.438% 5.571%
11/30/98 8.786% 8.155% 8.375% 5.527%
12/31/98 8.782% 8.220% 8.313% 5.470%
1/31/99 8.764% 8.242% 8.250% 5.420%
2/28/99 8.737% 8.259% 8.188% 5.364%
3/31/99 8.704% 8.259% 8.125% 5.304%
4/30/99 8.663% 8.259% 8.063% 5.242%
5/31/99 8.630% 8.261% 8.000% 5.187%
6/30/99
7/31/99
8/31/99
9/30/99
10/31/99
11/30/99
12/31/99
1/31/00
2/28/00
3/31/00
4/30/00
5/31/00
</TABLE>
- ----------
(1) The distribution rate is the average of the Trust's distribution rates for
the preceding twelve months. Distribution rates are calculated by
annualizing each monthly dividend and dividing the resulting annualized
dividend amount by the Trust's net asset value (in the case of NAV) or the
NYSE Composite Closing Price (in the case of Market) at the end of each
month. For the one-year, five-year and ten-year periods ended May 31, 2000
and the period of May 12, 1988 (inception of the Trust) to May 31, 2000,
the Trust's average annual total returns, based on NAV and assuming all
rights were exercised, were ___%, ___%, ___% and ___%, respectively. For
the one-year and five-year periods ended May 31, 2000 and the period of
March 9, 1992 (initial trading on NYSE) to May 31, 2000, the Trust's
average annual total returns based on market and assuming all rights were
exercised, were ___%, ___% and ___%, respectively. The Trust's 30-day
standardized yields as of May 31, 2000 were ___% at NAV and ___% at market.
The Trust's expenses were partially waived for the fiscal year ended
February 29, 1992. As part of the 1996 rights offering the Investment
Manager has voluntarily reduced its management fee for the period from
November 1996 through November 1999.
(2) The 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.
(3) Source: BLOOMBERG Financial Markets.
(4) Source: IDD/Tradeline. The LIBOR rate is the London Inter-Bank Offered Rate
and is the benchmark for determining the interest paid on more than 90% of
the Senior Loans in the Trust's portfolio. Generally, the yield on such
loans has reflected, during the periods presented, a premium of
approximately 2% or more to LIBOR.
13
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Trust's investment objective is to provide as high a level of current income
as is consistent with the preservation of capital. The Trust seeks to achieve
its objective primarily by investing in interests in variable or floating rate
Senior Loans, which, in most circumstances, are fully collateralized by assets
of a corporation, partnership, limited liability company, or other business
entity that is organized or domiciled in the United States, Canada or in U.S.
territories and/or possessions. The Trust primarily invests in Senior Loans that
have interest rates that float periodically based upon a benchmark indicator of
prevailing interest rates, such as the Prime Rate or LIBOR, and will invest only
in Senior Loans that are U.S. dollar-denominated. Under normal circumstances, at
least 80% of the Trust's gross assets is invested in Senior Loans.
Under the Trust's policies, Senior Loans are considered loans that hold a senior
position in the capital structure of the borrower. These may include loans that
hold the most senior position, that hold an equal ranking with other senior
debt, or loans that are, in the judgment of Pilgrim Investments, in the category
of senior debt of the borrower. Generally, the Senior Loans in which the Trust
invests are fully collateralized with assets and/or cash flow that Pilgrim
Investments believes have a market value at the time of acquisition that equals
or exceeds the principal amount of the Senior Loan. The Trust also only
purchases interests in Senior Loans of borrowers that Pilgrim Investments
believes can meet debt service requirements from cash flow. Senior Loans vary in
yield according to their terms and conditions, how often they pay interest, and
when rates are reset. The Trust does not invest in Senior Loans whose interest
rates are tied to non-domestic interest rates other than LIBOR.
Senior Loans that the Trust may acquire include participation interests in lease
financings ("Lease Participations") where the collateral quality, credit quality
of the borrower and the likelihood of payback are believed by Pilgrim
Investments to be the same as those applied to conventional Senior Loans. A
Lease Participation is also required to have a floating interest rate that is
indexed to a benchmark indicator of prevailing interest rates, such as LIBOR or
the Prime Rate.
Subject to certain limitations, the Trust may acquire Senior Loans of borrowers
engaged in any industry. With respect to no more than 25% of its total assets,
the Trust may acquire Senior Loans that are unrestricted as to the percentage of
a single issue the Trust may hold and, with respect to at least 75% of its total
assets, the Trust will hold no more than 25% of the amount borrowed from all
lenders in a single Senior Loan or other issue. The investment standards in this
paragraph are fundamental and may not be changed without approval by
Shareholders.
Investors should recognize that there can be no assurance that the investment
objective of the Trust will be realized. Moreover, substantial increases in
interest rates may cause an increase in loan defaults as borrowers may lack
resources to meet higher debt service requirements. The value of the Trust's
assets may also be affected by other uncertainties such as economic developments
affecting the market for Senior Loans or affecting borrowers generally. For
additional information on Senior Loans, see "General Information on Senior Loans
- -- About Senior Loans."
Investment in the Trust's shares is intended to offer several benefits. The
Trust offers investors the opportunity to seek a high level of current income by
investing in a professionally managed portfolio comprised primarily of Senior
Loans, a type of investment typically not available directly to individual
investors. Other benefits are the professional credit analysis provided to the
Trust by the Investment Manager and portfolio diversification.
The Trust can normally be expected to have a more stable net asset value per
share than investment companies investing primarily in fixed income securities
(other than money market funds and some short-term bond funds). Generally, the
net asset value of the shares of an investment company which invests primarily
in fixed-income securities changes as interest rates fluctuate. When interest
rates decline, the value of a fixed-income portfolio normally can be expected to
increase. The Investment Manager expects the Trust's net asset value to be
relatively stable during normal market conditions, because the floating and
variable rate Senior Loans in which the Trust invests float periodically in
response to changes in interest rates. However, because variable interest rates
only reset periodically, the Trust's net asset value may fluctuate from time to
time in the event of an imperfect correlation between the interest rates on the
Trust's loans and prevailing interest rates. Also, a default on a Senior Loan in
which the Trust has invested or a
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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 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,
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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."
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GENERAL INFORMATION ON SENIOR LOANS
Primary Market Overview
The primary market for Senior Loans has become much larger since inception of
the Fund. The volume of loans originated in the Senior Loan market has increased
from $____ billion in 1992 to $____ billion in 1999. Senior Loans tailored to
the institutional investor, such as the Trust, have increased from $____ billion
in 1993 to approximately $____ billion in 1999.
SENIOR LOAN VOLUME
Year Volume ($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
1998 872.0
1999
Source: Loan Pricing Corporation.
At the same time primary Senior Loan volume has grown, demand has remained
strong as institutional investors other than banks have entered 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 create an active bank loan trading market with
approximately $____ billion in trading volume during 1999. At March 31, 2000,
Senior Loan assets invested in retail oriented investment companies exceeded
$____ billion, up from under $5 billion in 1989. The active secondary market,
coupled with banks' focus on portfolio management and the move toward standard
market practices, has helped increase the liquidity for Senior Loans. With this
growth in volume and demand, Senior Loans have adopted innovative structures and
characteristics, as described elsewhere in this Prospectus.
About Senior Loans
Senior Loans vary from other types of debt in that they generally hold the most
senior position in the capital structure of a borrower. Priority liens are
obtained by the lenders that typically provide the first right to cash flows or
proceeds from the sale of a borrower's collateral if the borrower becomes
insolvent (subject to the limitations of bankruptcy law, which may provide
higher priority to certain claims such as, for example, employee salaries,
employee pensions and taxes). Thus, Senior Loans are generally repaid before
unsecured bank loans, corporate bonds, subordinated debt, trade creditors, and
preferred or common stockholders.
Senior Loans typically will be secured by pledges of collateral from the
borrower in the form of tangible assets such as cash, accounts receivable,
inventory, property, plant and equipment, common and/or preferred stock of
subsidiaries, and intangible assets including trademarks, copyrights, patent
rights and franchise value. The Trust may also receive guarantees as a form of
collateral. In some instances, the Trust may invest in Senior Loans that are
secured only by stock of the borrower or its subsidiaries or affiliates.
Generally, the agent on a Senior Loan is responsible for monitoring collateral
and for exercising remedies available to the lenders such as foreclosure upon
collateral.
Senior Loans generally are arranged through private negotiations between a
borrower and several financial institutions ("lenders") represented in each case
by an agent ("agent"), which usually is one or more of the
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lenders. The Trust will acquire Senior Loans from and sell Senior Loans to the
following lenders: money center banks, selected regional banks and selected
non-banks, insurance companies, finance companies, other investment companies,
private investment funds, and lending companies. The Trust may also acquire
Senior Loans from and sell Senior Loans to U.S. branches of foreign banks which
are regulated by the Federal Reserve System or appropriate state regulatory
authorities. On behalf of the lenders, generally the agent is primarily
responsible for negotiating the loan agreement ("loan agreement"), which
establishes the terms and conditions of the Senior Loan and the rights of the
borrower and the lenders. The agent and the other original lenders typically
have the right to sell interests ("participations") in their share of the Senior
Loan to other participants. The agent and the other original lenders also may
assign all or a portion of their interests in the Senior Loan to other
participants.
The Trust's investment in Senior Loans generally may take one of several forms
including: acting as one of the group of lenders originating a Senior Loan (an
"original lender"); purchase of an assignment ("assignment") or a portion of a
Senior Loan from a third party, or acquiring a participation in a Senior Loan.
The Trust may pay a fee or forego a portion of interest payments to the lender
selling a participation or assignment under the terms of such participation or
assignment.
The agent that arranges a Senior Loan is frequently a commercial or investment
bank or other entity that originates a Senior Loan and the entity that invites
other parties to join the lending syndicate. In larger transactions, it is
common to have several agents; however, generally only one such agent has
primary responsibility for documentation and administration of the Senior Loan.
Agents are typically paid fees by the borrower for their services. The Trust may
serve as the agent or co-agent for a Senior Loan. See "Additional Information
About Investments and Investment Techniques -- Originating Senior Loans" in the
SAI.
When the Trust is a member of the originating syndicate group for a Senior Loan,
it may share in a fee paid to the original lenders. When the Trust is an
original lender or acquires an assignment, it will have a direct contractual
relationship with the borrower, may enforce compliance by the borrower with the
terms of the Senior Loan agreement, and may have rights with respect to any
funds acquired by other lenders through set-off. Lenders also have certain
voting and consent rights under the applicable Senior Loan agreement. Action
subject to lender vote or consent generally requires the vote or consent of the
holders of some specified percentage of the outstanding principal amount of the
Senior Loan. Certain decisions, such as reducing the amount or increasing the
time for payment of interest on or repayment of principal of a Senior Loan, or
releasing collateral therefor, frequently require the unanimous vote or consent
of all lenders affected.
When the Trust is a purchaser of an assignment it typically succeeds to all the
rights and obligations under the loan agreement of the assigning lender and
becomes a lender under the loan agreement with the same rights and obligations
as the assigning lender. Assignments are, however, arranged through private
negotiations between potential assignees and potential assignors, and the rights
and obligations acquired by the purchaser of an assignment may be more limited
than those held by the assigning lender. The Trust will purchase an assignment
or act as lender with respect to a syndicated Senior Loan only where the agent
with respect to such Senior Loan is determined by the Investment Manager to be
creditworthy at the time of acquisition.
To a lesser extent, the Trust invests in participations in Senior Loans. With
respect to any given Senior Loan, the rights of the Trust when it acquires a
participation may be more limited than the rights of original lenders or of
investors who acquire an assignment. Participations may entail certain risks
relating to the creditworthiness of the parties from which the participations
are obtained. Participation by the Trust in a lender's portion of a Senior Loan
typically results in the Trust having a contractual relationship only with the
lender, not with the borrower. The Trust has the right to receive payments of
principal, interest and any fees to which it is entitled only from the lender
selling the participation and only upon receipt by such lender of such payments
from the borrower. In connection with purchasing participations, the Trust
generally will have no right to enforce compliance by the borrower with the
terms of the Senior Loan agreement, nor any rights with respect to any funds
acquired by other lenders through set-off against the borrower with the result
that the Trust may be subject to delays, expenses and risks that are greater
than those that exist where the Trust is the original lender, and the Trust may
not directly benefit from the collateral supporting the
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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.
Discount From or Premium To 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.
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Shares will be issued by the Trust pursuant to the Program only if the market
price of the Shares, plus the estimated commissions of purchasing the Shares on
the secondary market, is greater than NAV. In some circumstances, as described
under "Plan of Distribution," the Trust may issue Shares at a price equal to a
premium above NAV pursuant to the terms of the Program. 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 that the Shares of the Trust are issued at a price
equal to a premium above NAV, 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 pruchases 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 predominately
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 particular 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, all 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 May 31, 2000,
approximately ____% of the Trust's net assets and ____% of total assets
consisted of non-performing Senior Loans.
In the event of a bankruptcy of a borrower, the Trust could experience delays or
limitations with respect to its ability to realize the benefits of the
collateral securing the Senior Loan. Among the credit risks involved in a
bankruptcy would be an assertion that the pledging of collateral to secure the
Senior Loan constituted a fraudulent conveyance or preferential transfer that
would have the effect of nullifying or subordinating the Trust's rights to the
rights of other creditors of the borrower under applicable law.
Investment decisions will be based largely on the credit analysis performed by
the Investment Manager 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.
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Borrowing and Leverage. The Trust may borrow in an amount up to 33 1/3% (or
such other percentage permitted by law) of its total assets (including the
amount borrowed) less all liabilities other than borrowings. Borrowing for
investment purposes increases both investment opportunity and investment risk.
Capital raised through borrowings will be subject to interest and other costs.
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 March 31,
2000 was ____%. At that rate, and assuming the Trust has borrowed an amount
equal to 33 1/3% of its total net assets plus borrowings, the Trust must produce
a ____% 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, assuming hypothetical annual returns on the Trust's portfolio of
minus 10 to plus 10 percent. As can be seen, leverage generally increases the
return to shareholders when portfolio return is positive and decreases return
when the portfolio return is negative. Actual returns may be greater or less
than those appearing in the table.
<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Portfolio Return, net of expenses(1) ... (10%) (5%) 0% 5% 10%
Corresponding Return to Common Shareholders(2).. (17.74%) (10.24%) (2.74%) 4.76% 12.25%
</TABLE>
- ----------
(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
Program 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 issuances pursuant to the Program or pursuant to privately negotiated
transactions, and the discount to the market price at which the Shares may be
issued, may put downward pressure on the market price for Shares of the Trust.
Shares will not be issued pursuant to the Program at any time when Shares are
trading at a price lower than the Trust's NAV per Share.
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When the Trust's Shares are trading at a premium, the Trust may also issue
Shares of the Trust that are sold through transactions effected on the NYSE or
through broker-dealers who have entered into selected dealer agreements with
Pilgrim Securities. The increase in the number of outstanding Shares resulting
from these offerings may 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.
DESCRIPTION OF THE TRUST
The Trust was organized as a Massachusetts business trust on December 2, 1987,
and is registered with the Commission as a diversified, closed-end management
investment company under the Investment Company Act. The Trust's Agreement and
Declaration of Trust, a copy of which is on file in the office of the Secretary
of State of the Commonwealth of Massachusetts, authorizes the issuance of an
unlimited number of shares of beneficial interest without par value.
The Trust issues shares of beneficial interest in the Trust. Under Massachusetts
law, shareholders could, under certain circumstances, be held liable for the
obligations of the Trust. However, the Agreement and Declaration of Trust
disclaims shareholder liability for acts or obligations of the Trust and
requires that notice of such disclaimer be given to all parties in each
agreement, obligation or instrument entered into or executed by the Trust or the
Trustees, and each party thereto must expressly waive all rights or any action
directly against Shareholders. The Agreement and Declaration of Trust provides
for indemnification out of the Trust's property for all loss and expense of any
Shareholder of the Trust 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.
At a meeting held on April 27, 2000, the Board of Trustees of the Trust
determined to amend the Trust's Agreement and Declaration of Trust to permit the
Trust to issue one or more preferred classes or series of shares. The amendments
will become effective upon approval by the shareholders of the Trust. A meeting
of the shareholders of the Trust to consider the amendments is scheduled to
occur in August, 2000. If the shareholders approve the amendments, the Board of
Trustees may consider whether the Trust should offer a preferred class of shares
of the Trust.
As of May __, 2000, to the best of the Trust's knowledge, no Shareholders owned
of record or beneficially more than 5% of the outstanding Shares of the Trust.
The number of Shares outstanding as of June 15, 2000 was ______, none of which
were held by the Trust. The Shares are listed on the NYSE.
Dividends, Voting and Liquidation Rights
Each Share of the Trust has one vote and shares equally in dividends and
distributions when and if declared by the Trust and in the Trust's net assets
upon liquidation. All Shares, when issued, are fully paid and are
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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.
At a meeting held on April 27, 2000, the Board of Trustees of the Trust
determined to amend the Trust's fundamental investment policies to permit the
Trust to issue one or more preferred classes or series of shares. The amendments
will become effective upon approval by the shareholders of the Trust. A meeting
of the shareholders of the Trust to consider the amendments is scheduled to
occur in August, 2000. If the shareholders approve the amendments, the Board of
Trustees may consider whether the Trust should offer a preferred class of shares
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 ______ other registered investment
companies (or series thereof), as well as privately managed accounts, and
currently has assets under management of approximately $_______ billion as of
the date of this Prospectus.
Organized in December 1994, Pilgrim is registered as an investment adviser.
Pilgrim is and indirect wholly-owned subsidiary of ReliaStar Financial Corp.
("ReliaStar") (NYSE: RLR). Through its subsidiaries, ReliaStar offers
individuals and institutions life insurance and annuities, employee benefits
products and services, life and health reinsurance, retirement plans, mutual
funds, bank products, and personal finance education.
On May 1, 2000, ReliaStar entered into an agreement under which it will be
acquired by ING Group (NYSE: ING). ING Group is a global financial institution
active in the field of insurance, banking, and asset management in more than 60
countries, with almost 90,000 employees. Completion of the acquisition is
contingent upon, among other things, approval by the Directors/Trustees of the
Pilgrim Funds and certain shareholder and regulatory approvals. The closing of
the acquisition is expected to occur during the third quarter of 2000. Pilgrim
Investments and Pilgrim Securities are expected to remain intact after the
transaction. Pilgrim Investments does not currently anticipate that there will
be any changes in the investment personnel primarily responsible for management
of the Trust as a result of the acquisition. The advisory contract between the
Trust and Pilgrim Investments may terminate automatically at the time of the
acquisition. As a result, it is expected that the Board of the Trust will
consider approval of a new advisory contract between the Trust and Pilgrim
Investments, and that shareholder approval of this contract will be sought at a
meeting to be scheduled in the near future.
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.
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.
At a meeting held on April 27, 2000, the Board of Trustees approved an amendment
to the Investment Management Agreement between the Trust and Pilgrim Investments
to change the management fee from an annual rate of 0.80% of the daily net
assets of the Trust plus the proceeds of any outstanding borrowings to 0.80% of
"managed assets." Managed assets means the Trust's average daily gross asset
value, minus the sum of the Trust's accrued and unpaid dividends on any
outstanding preferred shares and accrued liabilities (other than liabilities for
the principal amount of any borrowings incurred, commercial paper or notes
issued by the Trust and the liquidation preference of any outstanding preferred
shares). Determining the fee as a function of managed assets has the effect of
compensating the Investment Manager for services on assets derived from the
proceeds of an offering of preferred shares. This change is subject to approval
by the shareholders of the Trust, and will be considered at the meeting
scheduled for August, 2000.
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Portfolio Management. The Trust's portfolio is managed by a portfolio management
team consisting of Senior Portfolio Managers, _______ Assistant Portfolio
Managers, and credit analysts.
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
Director of Structured Finance (since April 1998), of Pilgrim Group and
Pilgrim Investments; Director (since December 1994) and Vice Chairman
(since November 1995) of Pilgrim Securities. Mr. Reis is also Executive
Vice President, Assistant Secretary of each of the other Pilgrim 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. 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 Senior Portfolio
Manager of the Trust. He has served as Assistant Portfolio Manager of the
Trust from September 1996 to December 1999. Mr. Norman is a Senior Vice
President 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. Mr Norman Co-Manages that trust with Jeffery A. Bakalar. Jeffrey A.
Bakalar -- Mr. Bakalar is Senior Vice President and Senior Porfolio Manager
of the Trust. He served as Assistant Portfolio Manager of the Trust from
February 1998 to December 1999. 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). Mr. Bakalar
co-manages the Trust with Daniel A. Norman.
Michel Prince 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 for the Communications/Media Corporate Banking Group with
Bank of Hawaii (May 1997 - June 1998); Vice President, Communications Media
Group with Union Bank of California (November 1994 - May 1997); and Vice
President, Strategic Planning with Bank of California (October 1990 -
November 1994).
Jason T. Groom has served as Assistant Portfolio Manager of the Trust since
July 1998. Mr. Groom is an Assistant Vice President of Pilgrim Investments
(since July 1998). Prior to joining Pilgrim Investments, Mr. Groom was an
Associate in the Corporate Finance Group of NationsBank (January 1998 -
June 1998); Assistant Vice President, Corporate Finance Group of The
Industrial Bank of Japan Limited (August 1995 - December 1997); an
Associate in the Corporate Finance Group of The Long-Term Credit Bank of
Japan Limited (August 1994 - August 1995); he received a masters degree
from the American Graduate School of International Management (1992 -
1993).
Charles Edward LeMieux 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).
Mark F. Haak is an Assistant Portfolio Manager of the Trust. Mr Haak is an
Assistant Vice President of Pilgrim Investments (since June 1999). Prior to
joining Pilgrim Investments, Mr. Haak was Assistant Vice President,
Corporate Banking with Norwest Bank (December 1997 - June 1998); Lead
Financial Analyst and Portfolio Manager for Bank One AZ, N.A. (May 1996 -
December 1997); Credit Manager, Norwest Financial (May 1994 - May 1996).
During past five years, Mr. Haak also received a masters degree form the
University of Notre Dame (May 1999) and a bachelors degree from Marquette
University (May 1994).
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William F. Nutting, Jr. is a Senior Portfolio Analyst and a Secondary Loan
Trader for the Trust. Mr. Nutting joined Pilgrim Group in July 1995 as an
Operations Associate. Prior to joining Pilgrim Group, Mr. Nutting attended
and received a bachelors degree from Arizona State University (December
1994).
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 an indirect wholly-owned subsidiary of ReliaStar Capital and
the immediate parent company of Pilgrim Investments.
Under an Administration Agreement between Pilgrim Group and the Trust, Pilgrim
Group administers the Trust's corporate affairs subject to the supervision of
the Trustees of the Trust. In that connection Pilgrim Group 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 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 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 for the services performed and the facilities
furnished by Pilgrim Group as Administrator a fee, computed daily and payable
monthly. The Administration Agreement states that Pilgrim Group is entitled to
receive a fee at an annual rate of 0.25% of "managed assets" of the Trust.
Managed assets means the Trust's average daily gross asset value, minus the sum
of the Trust's accrued and unpaid dividends on any outstanding preferred shares
and accrued liabilities (other than liabilities for the principal amount of any
borrowings incurred, commercial paper or notes issued by the Trust and the
liquidation preference of any outstanding preferred shares).
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 of the
Trust for distribution to Shareholders under the Trust's Shareholder Investment
Program.
Custodian
The Trust's securities and cash are held under a Custody Agreement with State
Street Bank and Trust -- Kansas City ("State Street"), whose principal business
address is 801 Pennsylvania, Kansas City, Missouri 64105.
PLAN OF DISTRIBUTION
Shareholder Investment Program
The Shares are offered by the Trust through the Trust's Shareholder Investment
Program (the "Program"). The Program allows participating Shareholders to
reinvest all dividends ("Dividends") in additional shares of the Trust, and 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.
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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 in distribution policy, see "Dividends and Distributions."
In order for participants to purchase shares through the Program in any month,
the Administrator must receive from the participant any optional cash investment
not exceeding $5,000 by the OCI Payment Due Date and any optional cash
investment exceeding $5,000 by the Waiver Payment Due Date. The "DRIP Investment
Date" will be the date upon which Dividends will be reinvested in additional
Shares of the Trust, which will be on the Dividend payment date. The "OCI
Investment Date" will be the date, set in advance by the Trust, upon which
optional cash investments not exceeding $5,000 are first applied by DST to the
purchase of Shares. The "Waiver Investment Date" will be the date, set in
advance by the Trust, upon which optional cash investments exceeding $5,000,
which have been approved by the Trust, are first applied by the Administrator to
the purchase of Shares. Participants may obtain a schedule of upcoming OCI
Payment Due Dates, Waiver Payment Due Dates, and Investment Dates by referring
to the Summary Program Description or calling the Trust at 1 (800) 992-0180.
If the Market Price (the volume-weighted average sales price, per share, as
reported on the New York Stock Exchange Composite Transaction Tape as shown
daily on Bloomberg's AQR screen) plus estimated commissions for Shares of the
Trust is less than the net asset value on the Valuation Date (defined below),
DST will purchase Shares on the open market through a bank or securities broker
as provided herein. Open market purchases may be effected on any securities
exchange on which shares of the Trust trade or in the over-the-counter market.
If the Market Price, plus estimated commissions, exceeds the net asset value
before DST has completed its purchases, DST will use reasonable efforts to cease
purchasing Shares, and the Trust shall issue the remaining Shares. If the Market
Price, plus estimated commissions, is equal to or exceeds the net asset value on
the Valuation Date, the Trust will issue the Shares to be acquired by the
Program. The "Valuation Date" is a date preceding the DRIP Investment Date, OCI
Investment Date, and Waiver Investment Date on which it is determined, based on
the Market Price and net asset value of Shares of the Trust, whether DST will
purchase Shares on the open market or the Trust will issue the Shares for the
Program. The Trust may, without prior notice to participants, determine that it
will not issue new Shares for purchase pursuant to the Program, even when the
Market Price plus estimated commissions equals or exceeds net asset value, in
which case DST will purchase Shares on the open market.
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 the 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
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shareholders or of the Commission. Optional cash investments must be received by
DST no later than 4:00 p.m. Eastern time on the OCI Payment Due Date to be
invested on the relevant OCI Investment Date.
Optional cash investments in excess of $5,000 per month may be made only
pursuant to a Request for Waiver accepted in writing by the Trust. A Request for
Waiver must be received by the Trust no later than 4:00 p.m. Eastern time on the
Request for Waiver Deadline date. Good funds on all approved Requests For Waiver
must be received by DST not later than 4:00 P.M. Eastern time on the Waiver
Payment Due Date in order for such funds to be invested on the relevant Waiver
Investment Date.
It is solely within the Trust's discretion as to whether approval for any cash
investments in excess of $5,000 will be granted. In deciding whether to approve
a Request for Waiver, the Trust will consider relevant factors including, but
not limited to, whether the Program is then acquiring newly issued Shares
directly from the Trust or acquiring shares from third parties in the open
market, the Trust's need for additional funds, the attractiveness of obtaining
such additional funds through the sale of Shares as compared to other sources of
funds, the purchase price likely to apply to any sale of Shares under the
Program, the participant submitting the request, the extent and nature of such
participant's prior participation in the Program, the number of Shares held by
such participant and the aggregate amount of cash investments for which Requests
for Waiver have been submitted by all participants. If such requests are
submitted for any Waiver Investment Date for an aggregate amount in excess of
the amount the Trust is then willing to accept, the Trust may honor such
requests in order of receipt, pro rata or by any other method that the Trust
determines in its sole discretion to be appropriate.
Shares purchased directly from the Trust in connection with approved Requests
for Waiver will be acquired on the Waiver Investment Date at the greater of (i)
net asset value at the close of business on the Valuation Date, or (ii) the
average of the daily Market Price of the Shares for the Waiver Pricing Period
minus the pre-announced Waiver Discount (as defined below), if any, applicable
to such shares. The "Waiver Pricing Period" for a Waiver Investment Date means
the period beginning four Trading Days prior to the Valuation Date through and
including the Valuation Date. The Trust may establish a discount applicable to
cash investments exceeding $5,000 (the "Waiver Discount") on the last business
day of each month. The Waiver Discount, which may vary each month between 0% and
5%, will be established in the Trust's sole discretion after a review of current
market conditions, the level of participation in the Program and current and
projected capital needs of the Trust. The Waiver Discount will apply only to
Shares purchased directly from the Trust. For information on a commission that
may apply in connection with an optional cash investment in excess of $5,000,
see "Distribution Arrangements."
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.
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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.
Shareholders may request to receive their Dividends in cash at any time by
giving DST written notice or by contacting the Trust's Shareholder Services
Department at 1 (800) 992-0180. Shareholders may elect to close their account at
any time by giving DST written notice. When a participant closes their account,
the participant upon request will receive a certificate for full Shares in the
Account. Fractional Shares will be held and aggregated with other Fractional
Shares being liquidated by DST as agent of the Program and paid for by check
when actually sold.
The automatic reinvestment of Dividends does not affect the tax characterization
of the Dividends (i.e., capital gains and income are realized even though cash
is not received). If shares are issued pursuant to the Program's dividend
reinvestment provisions or cash purchase provisions at a discount from market
price, participants may have income equal to the discount.
Additional information about the Program may obtained from the Trust's
Shareholder Services Department at 1 (800) 992-0180.
Privately Negotiated Transactions
The Shares may also be offered pursuant to privately negotiated transactions
between the Trust and specific investors. The terms of such privately negotiated
transactions will be subject to the discretion of the management of the Trust.
In determining whether to sell Shares pursuant to a privately negotiated
transaction, the Trust will consider relevant factors including, but not limited
to, the attractiveness of obtaining additional funds through the sale of Shares,
the purchase price to apply to any such sale of Shares and the person seeking to
purchase the Shares.
Shares issued by the Trust in connection with privately negotiated transactions
will be issued at the greater of (i) NAV per Share of the Trust's Shares or (ii)
at a discount ranging from 0% to 5% of the average of the daily market price of
the Trust's Shares at the close of business on the two business days preceding
the date upon which Shares are sold pursuant to the privately negotiated
transaction. The discount to apply to such privately negotiated transactions
will be determined by the Trust with regard to each specific transaction. For
information on a commission that may apply in connection with privately
negotiated transactions, see "Distribution Arrangements."
USE OF PROCEEDS
It is expected that the net proceeds of Shares issued pursuant to the Program
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 May 31, 2000, $________ was outstanding. By paying
down the Trust's borrowings, it will be possible to invest
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the proceeds 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.
NET ASSET VALUE
The NAV per share of the Trust is determined once daily at 4:00 p.m. on each day
the NYSE is open. NAV per share is determined 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.
Senior Loans that are deemed to be liquid under standards approved by the
Trust's Board of Trustees are normally valued on the basis of market quotations
obtained from a pricing service or other sources believed to be reliable. They
are valued at the mean between bid and asked quotations. Other Senior Loans are
valued at fair value as determined in good faith under procedures established by
the Trust's Board of Trustees. Fair value is determined by Pilgrim Investments
and monitored by the Trust's Board of Trustees through its Valuation Committee.
In valuing a loan, consideration is given to several factors, which may include,
among others, the following: (i) the characteristics of and fundamental
analytical data relating to the Senior Loan, including the cost, size, current
interest rate, period until the next interest rate reset, maturity and base
lending rate of the Senior Loan, the terms and conditions of the Senior Loan and
any related agreements, and the position of the Senior Loan in the borrower's
debt structure; (ii) the nature, adequacy and value of the collateral, including
the Trust's rights, remedies and interests with respect to the collateral; (iii)
the creditworthiness of the borrower and the cash flow coverage of outstanding
principal and interest, based on an evaluation of its financial condition,
financial statements and information about the borrower's business, cash flows,
capital structure and future prospects; (iv) information relating to the market
for the Senior Loan, including price quotations for and trading in the Senior
Loan and interests in similar senior loans and the market enviornment and
investor attitudes towards the senior loan and interests in similar senior
loans; (v) the reputation and financial condition of the agent of the Senior
Loan and any intermediate participants in the Senior Loans; (vi) the borrower's
management; and (vii) the general economic and market conditions affecting the
fair value of the Senior Loan. Senior Loans for which the period for interest
rate resets is considered sufficiently short so that the interest rate risk is
considered minimal may, in the absence of known credit impairment, be valued at
cost or par.
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.
DIVIDENDS AND DISTRIBUTIONS
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 above.
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.
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TAX MATTERS
The Trust intends to operate as a "regulated investment company" under the
Internal Revenue Code of 1986, as amended. To do so, the Trust must meet certain
income, distribution and diversification requirements. In any fiscal year in
which the Trust so qualifies and distributes to Shareholders substantially all
of its net investment income and net capital gains, the Trust itself is
generally relieved of any federal income or excise tax.
All dividends and capital gains distributed to Shareholders are taxable whether
they are reinvested or received in cash, unless the Shareholder is exempt from
taxation or entitled to tax deferral. Dividends paid out of the Trust's
investment company taxable income (including interest, dividends, if any, and
net short-term capital gains) will be taxable to Shareholders as ordinary
income. If a portion of the Trust's income consists of dividends paid by U.S.
corporations, a portion of the dividends paid by the Trust may be eligible for
the corporate dividends-received deduction. Distributions of net capital gains
(the excess of net long-term capital gains over net short-term capital losses),
if any, designated as capital gain dividends are taxable as long-term capital
gains, regardless of how long a Shareholder has held the Trust's Shares, and
will generally be subject to a maximum federal tax rate of 20%. Early each year,
Shareholders will be notified as to the amount and federal tax status of all
dividends and capital gains paid during the prior year. Such dividends and
capital gains may also be subject to state or local taxes. Dividends declared in
October, November, or December with a record date in such month and paid during
the following January will be treated as having been paid by the Trust and
received by Shareholders on December 31 of the calendar year in which declared,
rather than the calendar year in which the dividends are actually received.
If a Shareholder sells or otherwise disposes of his or her Shares of the Trust,
he or she may realize a capital gain or loss which will be long-term or
short-term, generally depending on the holding period for the Shares.
If a Shareholder has not furnished a certified correct taxpayer identification
number (generally a Social Security number) and has not certified that
withholding does not apply, or if the Internal Revenue Service has notified the
Trust that the taxpayer identification number listed on the account is incorrect
according to their records or that the Shareholder is subject to backup
withholding, federal law generally requires the Trust to withhold 31% from any
dividends and/or redemptions (including exchange redemptions). Amounts withheld
are applied to federal tax liability; a refund may be obtained from the Service
if withholding results in overpayment of taxes. Federal law also requires the
Trust to withhold 30% or the applicable tax treaty rate from ordinary income
dividends paid to certain nonresident alien and other non-U.S. shareholder
accounts.
This is a brief summary of some of the federal income tax laws that affect an
investment in the Trust. Please see the SAI and a tax adviser for further
information.
DISTRIBUTION ARRANGEMENTS
Pursuant to the terms of a Distribution Agreement, Pilgrim Securities will
provide certain soliciting services on behalf of the Trust in connection with
certain privately negotiated transactions and investments in excess of $5,000
pursuant to a waiver. The Trust has agreed to pay Pilgrim Securities a
commission in connection with the sale of the Shares under the Distribution
Agreement up to 1.00% of the gross sales price of the Shares sold pursuant to
requests for waiver, and up to 3.00% of the gross sales price of the Shares sold
pursuant to privately negotiated transactions, payable from the proceeds of the
sale of the Shares. Pilgrim Securities may allow all or a portion of the fee to
another broker-dealer. In any event, the net proceeds received by the Trust in
connection with the sale may not be less than the greater of (i) the net asset
value per Share or (ii) 94% of the average daily market price over the relevant
Pricing Period (as described in "Plan of Distribution"). No commissions will be
paid by the Trust or its Shareholders in connection with the reinvestment of
dividends and capital gains distributions or in connection with optional cash
investments up to the maximum of $5,000 per month. Pilgrim Securities' principal
business address is 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004.
Pilgrim Securities and Pilgrim Investments, the Trust's Investment Manager, are
indirect, wholly-owned subsidiaries of Pilgrim Capital. See "Investment
Management and Other Services Investment Manager."
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The Trust bears the expenses of issuing the Shares. These expenses include, but
are not limited to, the expense of preparation and printing of the Prospectus
and SAI, the expense of counsel and auditors, and others.
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 29, 2000 annual report to shareholders except for those periods ended
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 29,
2000, 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 to Shareholders and any subsequent Quarterly or Semi-Annual Report to
Shareholders upon request to the Trust, 40 North Central Avenue, Suite 1200,
Phoenix, Arizona 85004, toll-free telephone 1(800) 992-0180.
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
Code of Ethics ............................................................. 13
Investment Management and Other Services.................................... 13
Portfolio Transactions...................................................... 15
Net Asset Value............................................................. 16
Methods Available to Reduce Market Value Discount from NAV.................. 17
Tax Matters................................................................. 18
Advertising and Performance Data............................................ 22
Financial Statements........................................................ 23
<PAGE>
[GRAPHIC]
25,000,000 Shares of Beneficial Interest
PILGRIM PRIME RATE TRUST
New York Stock Exchange Symbol: PPR
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004
(800) 992-0180
- --------------------------------------------------------------------------------
FUND ADVISORS AND AGENTS
- --------------------------------------------------------------------------------
INVESTMENT MANAGER DISTRIBUTOR
Pilgrim Investments, Inc. Pilgrim Securities, Inc.
40 North Central Avenue, Suite 1200 40 North Central Avenue, Suite 1200
Phoenix, AZ 85004-4424 Phoenix, Arizona 85004
ADMINISTRATOR TRANSFER AGENT
Pilgrim Group, Inc. DST Systems, Inc.
40 North Central Avenue, Suite 1200 P.O. Box 419368
Phoenix, AZ 85004-4424 Kansas City, Missouri 64141-6368
CUSTODIAN LEGAL COUNSEL
State Street -- Kansas City 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 90017-5491
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
PRPROS - June 30, 2000
<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 June 30, 2000
(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 and Investment Techniques.......... 2
Investment Restrictions..................................................... 8
Trustees and Officers....................................................... 9
Code of Ethics ............................................................. 13
Investment Management and Other Services.................................... 13
Portfolio Transactions...................................................... 15
Net Asset Value............................................................. 16
Methods Available to Reduce Market Value Discount from NAV.................. 17
Tax Matters................................................................. 18
Advertising and Performance Data............................................ 22
Financial Statements........................................................ 23
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 June 30, 2000.
<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
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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.
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
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<PAGE>
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.
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
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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.
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' 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' 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.
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Lenders generally rely on the agent to collect their portion of the payments on
the Senior Loan and to use appropriate creditor remedies against the borrower.
Typically under loan agreements, the agent is given broad discretion in
enforcing the loan agreement and is obligated to use the same care it would use
in the management of its own property. The borrower compensates the agent for
these services. Such compensation may include special fees paid on structuring
and funding the Senior Loan and other fees paid on a continuing basis. The
precise duties and rights of an agent are defined in the loan agreement.
When the Trust is an agent, it has, as a party to the loan agreement, a direct
contractual relationship with the borrower and, prior to allocating portions of
the Senior Loan to the lenders, if any, assumes all risks associated with the
Senior Loan. The agent may enforce compliance by the borrower with the terms of
the loan agreement. Agents also have voting and consent rights under the
applicable loan agreement. Action subject to agent vote or consent generally
requires the vote or consent of the holders of some specified percentage of the
outstanding principal amount of the Senior Loan, which percentage varies
depending on the relevant loan agreement. Certain decisions, such as reducing
the amount or increasing the time for payment of interest on or repayment of
principal of a Senior Loan, or releasing collateral therefor, frequently require
the unanimous vote or consent of all lenders affected.
Pursuant to the terms of a loan agreement, the Trust as agent typically has sole
responsibility for servicing and administering a loan on behalf of the other
lenders. Each lender in a Senior Loan is generally responsible for performing
their own credit analysis and their own investigation of the financial condition
of the borrower. Generally, loan agreements will hold the Trust liable for any
action taken or omitted that amounts to gross negligence or willful misconduct.
In the event of a borrower's default on a loan, the loan agreements provide that
the lenders do not have recourse against the Trust for its activities as agent.
Instead, lenders will be required to look to the borrower for recourse.
Acting in the capacity of an agent in a Senior Loan may subject the Trust to
certain risks in addition to those associated with the Trust's current role as a
lender. An agent is charged with the above described duties and responsibilities
to lenders and borrowers subject to the terms of the loan agreement. Failure to
adequately discharge such responsibilities in accordance with the standard of
care set forth in the loan agreement may expose the Trust to liability for
breach of contract. If a relationship of trust is found between the agent and
the lenders, the agent will be held to a higher standard of conduct in
administering the loan. In consideration of such risks, the Trust will invest no
more than 10% of its total assets in Senior Loans in which it acts as agent or
co-agent and the size of any individual loan will not exceed 5% of the Trust's
total assets.
ADDITIONAL INFORMATION ON SENIOR LOANS
Senior Loans are direct obligations of corporations or other business entities
and are arranged by banks or other commercial lending institutions and made
generally to finance internal growth, mergers, acquisitions, stock repurchases,
and leveraged buyouts. Senior Loans usually include restrictive covenants which
must be maintained by the borrower. Such covenants, in addition to the timely
payment of interest and principal, may include mandatory prepayment provisions
arising from free cash flow, restrictions on dividend payments and usually state
that a borrower must maintain specific minimum financial ratios as well as
establishing limits on total debt. A breach of a covenant, which is not waived
by the agent, is normally an event of acceleration, I.E., the agent has the
right to call the outstanding Senior Loan. In addition, loan covenants may
include mandatory prepayment provisions stemming from free cash flow. Free cash
flow is cash that is in excess of capital expenditures plus debt service
requirements of principal and interest. The free cash flow shall be applied to
prepay the Senior Loan in an order of maturity described in the loan documents.
Under certain interests in Senior Loans, the Trust may have an obligation to
make additional loans upon demand by the borrower. The Trust intends to reserve
against such contingent obligations by segregating sufficient assets in high
quality short-term liquid investments or borrowing to cover such obligations.
In a typical interest in a Senior Loan, the agent administers the loan and has
the right to monitor the collateral. The agent is also required to segregate the
principal and interest payments received from the borrower and to hold these
payments for the benefit of the lenders. The Trust normally looks to the agent
to collect and distribute principal of and interest on a Senior Loan.
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Furthermore, the Trust looks to the agent to use normal credit remedies, such as
to foreclose on collateral; monitor credit loan covenants; and notify the
lenders of any adverse changes in the borrower's financial condition or
declarations of insolvency. At times the Trust may also negotiate with the agent
regarding the agent's exercise of credit remedies under a Senior Loan. The agent
is compensated for these services by the borrower as is set forth in the loan
agreement. Such compensation may take the form of a fee or other amount paid
upon the making of the Senior Loan and/or an ongoing fee or other amount.
The loan agreement in connection with Senior Loans sets forth the standard of
care to be exercised by the agents on behalf of the lenders and usually provides
for the termination of the agent's agency status in the event that it fails to
act properly, becomes insolvent, enters FDIC receivership, or if not FDIC
insured, enters into bankruptcy or if the agent resigns. In the event an agent
is unable to perform its obligations as agent, another lender would generally
serve in that capacity.
The Trust believes that the principal credit risk associated with acquiring
Senior Loans from another lender is the credit risk associated with the borrower
of the underlying Senior Loan. The Trust may incur additional credit risk,
however, when the Trust acquires a participation in a Senior Loan from another
lender because the Trust must assume the risk of insolvency or bankruptcy of the
other lender from which the Senior Loan was acquired. However, in acquiring
Senior Loans, the Trust conducts an analysis and evaluation of the financial
condition of each such lender. In this regard, if the lenders have a long-term
debt rating, the long-term debt of all such Participants is rated BBB or better
by Standard & Poor's Ratings Services or Baa or better by Moody's Investors
Service, Inc., or has received a comparable rating by another nationally
recognized rating service. In the absence of rated long-term debt, the lenders
or, with respect to a bank, the holding company of such lenders have commercial
paper outstanding which is rated at least A-1 by Standard & Poor's Ratings
Services or P-1 by Moody's Investors Service, Inc. In the absence of such rated
long-term debt or rated commercial paper if a bank, the Trust may acquire
participations in Senior Loans from lenders whose long-term debt and commercial
paper is of comparable quality to the foregoing rating standards as determined
by the Manager under the supervision of the Trustees. The Trust also diversifies
its portfolio with respect to lenders from which the Trust acquires Senior
Loans. See "Investment Restrictions."
Senior Loans, unlike certain bonds, usually do not have call protection. This
means that interests comprising the Trust's portfolio, while having a stated one
to ten-year term, may be prepaid, often without penalty. The Trust generally
holds Senior Loans to maturity unless it has become necessary to sell them to
satisfy any shareholder tender offers or to adjust the Trust's portfolio in
accordance with Pilgrim Investments' 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
7
<PAGE>
principal amount of the Senior Loan. The valuations of these assets may be
performed by an independent appraisal. If the agent becomes aware that the value
of the collateral has declined, the agent may take action as it deems necessary
for the protection of its own interests and the interests of the other lenders,
including, for example, giving the borrower an opportunity to provide additional
collateral or accelerating the loan. There is no assurance, however, that the
borrower would provide additional collateral or that the liquidation of the
existing collateral would satisfy the borrower's obligation in the event of
nonpayment of scheduled interest or principal, or that such collateral could be
readily liquidated.
The Trust may be required to pay and may receive various fees and commissions in
the process of purchasing, selling and holding Senior Loans. The fee component
may include any, or a combination of, the following elements: arrangement fees,
non-use fees, facility fees, letter of credit fees and ticking fees. Arrangement
fees are paid at the commencement of a loan as compensation for the initiation
of the transaction. A non-use fee is paid based upon the amount committed but
not used under the loan. Facility fees are on-going annual fees paid in
connection with a loan. Letter of credit fees are paid if a loan involves a
letter of credit. Ticking fees are paid from the initial commitment indication
until loan closing if for an extended period. The amount of fees is negotiated
at the time of transaction.
In order to allow national banks to purchase shares of the Trust for their own
accounts without limitation, the Trust invests only in obligations which are
eligible for purchase by national banks for their own accounts pursuant to the
provisions of paragraph seven of Section 24 of U.S. Code Title 12. National
banks which are contemplating purchasing shares of the Trust for their own
accounts should refer to Banking Circular 220, issued by the U.S. Comptroller of
the Currency on November 21, 1986, for a description of certain considerations
applicable to such purchases.
INVESTMENT RESTRICTIONS
The Trust has adopted the following restrictions relating to its investments and
activities, which may not be changed without a Majority Vote (as defined in the
Investment Company Act). The Trust may not:
* 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.
8
<PAGE>
* 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.
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.
Paul S. Doherty. (Age 66) Trustee. President, of Doherty, Wallace,
Pillsbury and Murphy, P.C., Attorneys. Mr. Doherty was formerly a Director
of Tambrands, Inc. (1993 - 1998). Mr. Doherty is also a Director and/or
Trustee of each of the Funds managed by the Adviser.
Robert B. Goode. (Age 69) Trustee. Currently retired. Mr. Goode was
formerly Chairman of American Direct Business Insurance Agency, Inc. (1996
2000), Chairman of The First Reinsurance Company of Hartford (1990- 1991)
and President and Director of American Skandis Life Assurance Company
(1987-1989). Mr. Goode is also a Director and/or Trustee of each of the
Funds managed by the Adviser.
Alan L. Gosule. (Age 59) Trustee. Partner, Rogers & Wells (since 1991). Mr.
Gosule is a Director of F.L. Putnam Investment Management Co., Inc, Simpson
Housing Limited Partnership, Home Properties of New York, Inc., CORE Cap,
Inc. and Colonnade Partners. Mr. Gosule is also a Director and/or Trustee
of each of the Funds managed by the Adviser.
*Mark Lipson. (Age 51) Trustee. Chairman and Director of Pilgrim Advisors,
Inc., and Director of Pilgrim Funding, Inc. Mr. Lipson was formerly
Chairman of Pilgrim Capital Corporation and Northstar Distributors, Inc.;
Director of Northstar Administrators Corporation; President of Pilgrim
Funding, Inc.; Director, President and Chief Executive Officer of National
Securities & Research Corporation; and Director/Trustee and President of
the National Affiliated Investment Companies and certain of National's
subsidiaries (prior to August 1993). Mr. Lipson is also a Director and/or
Trustee of each of the Funds managed by the Adviser.
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<PAGE>
Walter H. May. (Age 63) Trustee. Retired. Mr. May was formerly Managing
Director and Director of Marketing for Piper Jaifray, Inc. Mr. May is also
a Director and/or Trustee of each of the Funds managed by the Adviser.
David W.C. Putnam. (Age 60) Trustee. President and Director of F.L. Putnam
Securities Company, Inc. and affiliates. Mr. Putnam is Director of Anchor
Investment Trusts, the Principled Equity Market Trust, and Progressive
Capital Accumulation Trust. Mr. Putnam was formerly Director of Trust
Realty Corp. and Bow Ridge Mining Co. Mr. Putnam is also a Director and/or
Trustee of each of the Funds managed by the Adviser.
John R. Smith. (Age 76) Trustee. President of New England Fiduciary Company
(since 1991). Mr. Smith is Chairman of Massachusetts Educational Financing
Authority (since 1987), Vice Chairman of Massachusetts Health and Education
Authority (since 1979), Vice-Chairman of MIR, Inc. (Massachusetts
non-profit Energy Purchasers Consortium) (since 1996), and formerly
Financial Vice President of Boston College (1970-1991). Mr. Smith is also a
Director and/or Trustee of each of the Funds managed by the Adviser.
*John G. Turner. (Age 60) Chairman. Chairman and Chief Executive Officer of
Relia Star Financial Corp. and Relia Star Life Insurance Co. (since 1993);
Chairman of ReliaStar United Services Life Insurance Company and ReliaStar
Life Insurance Company of New York (since 1995); Chairman of Northern Life
Insurance Company (since 1992); Director of Northstar Investment Management
Corporation and affiliates (since October 1993); Chairman and
Director/Trustee of the Northstar affiliated investment companies (since
October 1993). Mr. Turner was formerly President of ReliaStar Financial
Corp. and ReliaStar Life Insurance Co. (1989-1991) and President and Chief
Operating Officer of ReliaStar Life Insurance Company (1986-1991). Mr.
Turner is also Chairman of each of the Funds managed by the Investment
Manager.
David W. Wallace. (Age 76) Trustee. Chairman of FECO Engineered Systems,
Inc. Mr. Wallace is President and Director/Trustee of the Robert R. Young
Foundation, Governor of the New York Hospital, Trustee of Greenwit Hospital
and Director of UMC Electronics and Zurn Industries, Inc. Mr. Wallace was
formerly Chairman of Lone Star Industries, Putnam Trust Company, Chairman
of Todd Shipyards, Bangor Punta Corporation, and National Securities &
Research Corporation.Mr. Wallace is also a Director and/or Trustee of each
of the Funds managed by the Investment Manager.
Mary A. Baldwin, Ph.D. (Age 60) 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 is also a
Director, Trustee, or a member of the Advisory Board of each of the Funds
managed by the Investment Manager.
A1 Burton. (Age 72) 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 is also a
Director, Trustee, or a member of the Advisory Board of each of the Funds
managed by the Investment Manager.
Jock Patton. (Age 54) Trustee. Private Investor. Director of Hypercom
Corporation (since January 1999), and JDA Software Group, Inc. (since
January 1999). Mr. Patton is, also, a Director of Buick of Scottsdale,
Inc., National Airlines, Inc., BG Associates, Inc. , BK Entertainment,
Inc., Arizona Rotorcraft, Inc. and Director and Chief Executive Officer of
Rainbow Multimedia Group, Inc. Mr. Patton was formerly Director of Stuart
Entertainment, Inc., Director of Artisoft, Inc. (August 1994 - July 1998);
President and Co-owner of 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, Trustee, or a member of the Advisory Board
of each of the Funds managed by the Investment Manager.
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<PAGE>
*Robert W. Stallings. (Age 51) Trustee. Chief Executive Officer and
President. Chairman, Chief Executive Officer and President of Pilgrim
Group, Inc. ("Pilgrim Group") (since December 1994); Chairman, Pilgrim
Investments, Inc. (since December 1994); Chairman, Pilgrim Securities, Inc.
("Pilgrim Securities") (since December 1994); President and Chief Executive
Officer of Pilgrim Funding, Inc. (since November 1999); and President and
Chief Executive Ofcer of Pilgrim Capital Corporation (formerly Pilgrim
Holdings Corporation) (since October 1999). Mr. Stallings is also a
Director, Trustee, or a member of the Advisory Board of each of the Funds
managed by the Investment Manager.
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) $5,000 per quarterly and special Board meeting; (iii)
$500 per committee meeting; (iv) $500 per special telephonic meeting; and (v)
out-of-pocket expenses. The pro rata share paid by the Trust is based on the
Trust's average net assets for the previous quarter as a percentage of the
average net assets of all the funds managed by Pilgrim Investments for which the
Trustees serve in common as directors/trustees.
The Trust currently has an Executive Committee, Audit Committee, Valuation
Committee and a Nominating Committee. The Audit, Valuation and Nominating
Committees consist entirely of Independent Trustees.
The following individuals serve on the Trust's Executive Committee: John G.
Turner, Robert W. Stallings, Walter H. May and Jock Patton. Mr. Turner serves as
Chairman of the Executive Committee.
The following individuals serve on the Trust's Audit Committee: Paul S. Doherty,
Robert B. Goode, Jr., John R. Smith, David W. Wallace and Mary A. Baldwin. Mr.
Wallace serves as Chairman of the Audit Committee.
The following individuals serve on the Trust's Valuation Committee: Alan R
Gosule, Walter H. May, Jr., David W.C. Putnam, Al Burton, and Jock Patton. Mr.
Putnam serves as Chairman of the Valuation Committee.
The following individuals serve on the Trust's Nominating Committee: Paul S.
Doherty, Robert B. Goode, Jr., Walter H. May, Jr., Al Burton and Mary A.
Baldwin. Mr. May serves as Chairman of the Nominating Committee.
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 29, 2000. 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 served during the fiscal year ended February 29, 2000.
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<PAGE>
<TABLE>
<CAPTION>
1999 Total
Compensation Compensation From
Pension or Registrant and
Retirement Fund Complex Paid
Aggregate Benefits Accrued Estimated Annual to Trustees and
Name and Compensation as Part of Fund Benefits Upon Number of
Position From Registrant Expense (1) Retirement Boards (1)(5)
-------- --------------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Walter E. Auch,
Trustee(6)
Mary A. Baldwin, $ N/A N/A $
Trustee(2) (15 Boards)
John P. Burke,
Trustee(6)
Al Burton, $ N/A N/A $
Trustee(2) (15 Boards)
Paul S. Doherty, $ N/A N/A $
Trustee (3) (15 Boards)
Robert B. Goode, Jr., $ N/A N/A $
Trustee (3) (15 Boards)
Alan S. Gosule, $ N/A N/A $
Trustee (3) (15 Boards)
Mark L. Lipson, $ 0 N/A N/A $ 0
Trustee (3) (4) (15 Boards)
Walter H. May, $ N/A N/A $
Trustee (3) (15 Boards)
Jock Patton, $ 0 N/A N/A $
Trustee (2) (15 Boards)
David W.C. Putnam, $ N/A N/A $
Trustee (3) (15 Boards)
John R. Smith, $ N/A N/A $
Trustee (3) (15 Boards)
Robert W. Stallings, $ N/A N/A $ 0
Trustee (2) (4) (15 Boards)
John G. Turner, $ N/A N/A $ 0
Trustee (3) (4) (15 Boards)
David W. Wallace, $ N/A N/A $
Trustee (3) (15 Boards)
</TABLE>
(1) Information provided for the fiscal year ended February 29, 2000.
(2) Elected a Trustee or non-voting board member of Pilgrim Variable Products
Trust, Pilgrim SmallCap Opportunities Fund, Pilgrim Growth Opportunities
Fund, Pilgrim Equity Trust, and Pilgrim Mayflower Trust on November 16,
1999.
(3) Elected a Director/Trustee of Pilgrim Mutual Funds, Pilgrim Advisory Funds,
Pilgrim Investment Funds, Pilgrim Bank and Thrift Fund, Pilgrim Government
Securities Income Fund and Pilgrim Prime Rate Trust at a shareholder
meeting held on October 26, 1999 an took office as Director/Trustee
effective October 29, 1999.
(4) "Interested person" of the Trust as defined in the 1940 Act. Officers and
Trustees who are "interested persons" do not receive any compensation from
the Fund.
(5) As of December 31, 1999, there were 15 boards of directors/trustees in the
Pilgrim fund complex. As a result of three mergers which occurred April 1,
2000, the number of boards of directors/trustees was reduced to 12.
(6) Resigned as Trustee effective October 29, 1999.
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<PAGE>
OFFICERS [UPDATE]
James R. Reis, Executive Vice President, Chief Credit Officer, and
Assistant Secretary 40 North Central Avenue, Suite 1200, Phoenix, Arizona
85004. (Age 42.) 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 51.) Executive Vice
President (since April 1998) and Secretary (since April 1995), Pilgrim
Capital, 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 Senior Portfolio
Manager 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age
42.) Senior Vice President and Assistant Secretary, Pilgrim Investments
(since December 1994); Senior Vice President, Pilgrim Securities (since
November 1995). Mr. Norman has served as an officer of other affiliates of
Pilgrim Capital since February 1992.
Michael J. Roland, Senior Vice President and Chief Financial Officer 40
North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 42) Senior
Vice President and Chief Financial Officer Pilgrim Group, Pilgrim
Investments and Pilgrim Securities (since June 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, Senior Vice President and Assistant Secretary 40 North
Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 37.) Vice
President, Pilgrim Investments (since April 1997) and Pilgrim Group (since
February 1997). Senior Vice President and Assistant Secretary of each of
the funds in the Pilgrim 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 32) Vice President, Pilgrim Investments (since
August 1997) and Accounting Manager (since November 1995). Formerly
Assistant Vice President and Accounting Supervisor for Paine Webber (June,
1993 - April, 1995).
As of May __, 2000, the Trustees and Officers of the Trust as a group owned
beneficially less than 1% of the Trust's shares.
CODE OF ETHICS
The Trust has adopted a Code of Ethics governing personal trading activities of
all Trustees and officers of the Trust and persons who, in connection with their
regular functions, play a role in the recommendation of any purchase or sale of
a security by the Trust or obtain information pertaining to such purchase or
sale. The Code is intended to prohibit fraud against the Trust that may arise
from personal trading. Personal trading is permitted by such persons subject to
certain restrictions; however they are generally required to pre-clear all
security transactions with the Trust's Compliance Officer or her designee and to
report all transactions on a regular basis.
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 eighteen 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 $__ billion.
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The Investment Manager is a wholly owned subsidiary of Pilgrim Group, which
itself is an indirect wholly-owned subsidiary of ReliaStar Financial Corp.
(ReliaStar). ReliaStar is a publicly traded holding company whose subsidiaries
specialize in the insurance business. Through the Affiliated Insurance Companies
and other subsidiaries, ReliaStar issues and distributes individual life
insurance and annuities, employee benefit contracts, retirement contracts and
life and health reinsurance, and mutual funds and provides related investment
management services.
The Investment Manager pays all of its expenses arising from the performance of
its obligations under the Investment Management Agreement, including executive
salaries and expenses of the Trustees and Officers of the Trust who are
employees of the Investment Manager or its affiliates. Other expenses incurred
in the operation of the Trust are borne by the Trust, including, without
limitation, expenses incurred in connection with the sale, issuance,
registration and transfer of its shares; fees of its Custodian, Transfer and
Shareholder Servicing Agent; salaries of officers and fees and expenses of
Trustees or members of any advisory board or committee of the Trust who are not
members of, affiliated with or interested persons of the Investment Manager; the
cost of preparing and printing reports, proxy statements and prospectuses of the
Trust or other communications for distribution to its shareholders; legal,
auditing and accounting fees; the fees of any trade association of which the
Trust is a member; fees and expenses of registering and maintaining registration
of its shares for sale under Federal and applicable State securities laws; and
all other charges and costs of its operation plus any extraordinary and
non-recurring expenses.
For the fiscal years ended February 29, 2000, February 28, 1999 and February 28,
1998 Pilgrim Investments was paid $__________, $11,973,819, and $10,369,772
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
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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 29, 2000, February 28, 1999 and February 28,
1998, Pilgrim Group was paid $_________, $2,022,051, and $1,778,473,
respectively, for services rendered to the Trust.
PORTFOLIO TRANSACTIONS
The Trust will generally have at least 80% of its net assets invested in Senior
Loans. The remaining assets of the Trust will generally consist of short-term
debt instruments with remaining maturities of 120 days or less and certain other
instruments such as subordinated loans up to a maximum of 5% of the Trust's net
assets, Hybrid Loans, unsecured loans, interest rate swaps, caps and floors,
repurchase agreements and reverse repurchase agreements. The Trust will acquire
Senior Loans from and sell Senior Loans to major money center banks, selected
regional banks and selected non-banks, insurance companies, finance companies
and leasing companies which usually act as lenders on senior collateralized
loans. The Trust may also purchase Senior Loans from and sell Senior Loans to
U.S. branches of foreign banks which are regulated by the Federal Reserve System
or appropriate state regulatory authorities. The Trust's interest in a
particular Senior Loan will terminate when the Trust receives full payment on
the loan or sells a Senior Loan in the secondary market. Costs associated with
purchasing or selling Senior Loans in the secondary market include commissions
paid to brokers and processing fees paid to agents. These costs are allocated
between the purchaser and seller as agreed between the parties.
Purchases and sales of short-term debt and other financial instruments for the
Trust's portfolio usually are principal transactions, and normally the Trust
will deal directly with the underwriters or dealers who make a market in the
securities involved unless better prices and execution are available elsewhere.
Such market makers usually act as principals for their own account. On occasion,
securities may be purchased directly from the issuer. Short-term debt
instruments are generally traded on a net basis and do not normally involve
either brokerage commissions or transfer taxes. The cost of portfolio securities
transactions of the Trust that are not transactions with principals will consist
primarily of brokerage commissions or dealer or underwriter spreads between the
bid and asked price, although purchases from underwriters may involve a
commission or concession paid by the issuer.
While 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.
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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 did not pay any brokerage commissions during the fiscal years ended
February 29, 2000, February 28, 1999, and February 28, 1998.
PORTFOLIO TURNOVER RATE
The annual rate of the Trust's total portfolio turnover for the years ended
February 29, 2000, February 28, 1999 and February 28, 1998, was __%, 68% and
90%, respectively. The annual turnover rate of the Trust is generally expected
to be between 50% and 100%, although as part of its investment policies, the
Trust places no restrictions on portfolio turnover and the Trust may sell any
portfolio security without regard to the period of time it has been held. The
annual turnover rate of the Trust also includes Senior Loans for which the full
payment on the Senior Loan has been prepaid by the borrower. The Investment
Manager believes that prepaid Senior Loans generally comprise approximately 25%
to 75% of the Trust's total portfolio turnover each year.
NET ASSET VALUE
The NAV per share of the Trust is determined once daily at 4:00 p.m. on each day
the NYSE is open. NAV per share is determined 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.
Senior Loans that are deemed to be liquid under standards approved by the
Trust's Board of Trustees are normally valued on the basis of market quotations
obtained from a pricing service or other sources believed to be reliable. They
are valued at the mean between bid and asked quotations. Other Senior Loans are
valued at fair value as determined in good faith under procedures established by
the Trust's Board of Trustees. Fair value is determined by Pilgrim Investments
and monitored by the Trust's Board of Trustees through its Valuation Committee.
In valuing a loan, consideration is given to several factors, which may include,
among others, the following: (i) the characteristics of and fundamental
analytical data relating to the Senior Loan, including the cost, size, current
interest rate, period until the next interest rate reset, maturity and base
lending rate of the Senior Loan, the terms and conditions of the Senior Loan and
any related agreements, and the position of the Senior Loan in the borrower's
debt structure; (ii) the nature, adequacy and value of the collateral, including
the Trust's rights, remedies and interests with respect to the collateral; (iii)
the creditworthiness of the borrower and the cash flow coverage of outstanding
principal and interest, based on an evaluation of its financial condition,
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financial statements and information about the borrower's business, cash flows,
capital structure and future prospects; (iv) information relating to the market
for the Senior Loan, including price quotations for and trading in the Senior
Loan and interests in similar senior loans and the market environment and
investor attitudes towards the senior loan and interests in similar senior
loans; (v) the reputation and financial condition of the agent of the Senior
Loan and any intermediate participants in the Senior Loan; (vi) the borrower's
management; and (vii) the general economic and market conditions affecting the
fair value of the Senior Loan. Senior Loans for which the period for interest
rate resets is considered sufficiently short so that the interest rate risk is
considered minimal may, in the absence of known credit impairment, be valued at
cost or par.
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.
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 may from time to time
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 tender
offers will be the strength of the public market for the Trust's shares. Other
factors include the desire to reduce or eliminate a market value discount from
NAV. In addition, the Trustees will take into consideration the liquidity of its
assets in determining whether to make a tender offer or accept tendered shares.
In paying shareholders for tendered shares, the Trust anticipates that it will
use cash on hand, such as proceeds from sales of new Trust shares and specified
pay-downs from Senior Loans, and proceeds from the sale of cash equivalents held
by the Trust. The Trust may also borrow to pay Shareholders for tendered shares.
To the extent more shares are anticipated to be tendered or are tendered than
could be paid for out of such amounts, the liquidity of the Senior Loans held by
the Trust may be a consideration in the Trust's determination whether to make a
tender offer or, if an offer is made, in its determination of whether it will
accept shares tendered. Accepting tendered shares may require the Trust to sell
portfolio investments and incur certain costs which it otherwise would not have.
Under most Senior Loans, it will be necessary for the Trust to obtain the
consent of the agent or lender from whom the Trust purchased the Senior Loan
prior to selling the Senior Loan to a third party. Senior Loans such as those
the Trust intends to invest in have historically been considered by the
investment community to be liquid assets, although in certain instances, the
conversion of such instruments into cash has taken several days or longer. The
market for Senior Loans is relatively new as compared to markets for more
established debt instruments. Accordingly, while 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.
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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.
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.
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In addition to satisfying the Distribution Requirement and an asset
diversification requirement discussed below, a regulated investment company must
derive at least 90% of its gross income for each taxable year from dividends,
interest, certain payments with respect to securities loans, gains from the sale
or other disposition of stock or securities or foreign currencies and other
income (including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies.
In general, gain or loss recognized by the Trust on the disposition of an asset
will be a capital gain or loss. However, gain recognized on the disposition of a
debt obligation purchased by the Trust at a market discount (generally, at a
price less than its principal amount) other than at original issue will be
treated as ordinary income to the extent of the portion of the market discount
which accrued during the period of time the Trust held the debt obligation.
In general, investments by the Trust in zero coupon or other original issue
discount securities will result in income to the Trust equal to a portion of the
excess of the face value of the securities over their issue price (the "original
issue discount") each year that the Trust holds the securities, even though the
Trust receives no cash interest payments. This income is included in determining
the amount of income which the Trust must distribute to maintain its status as a
regulated investment company and to avoid federal income and excise taxes.
In addition to satisfying the requirements described above, the Trust must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the Trust's
taxable year, at least 50% of the value of the Trust's assets must consist of
cash and cash items (including receivables), U.S. Government securities,
securities of other regulated investment companies, and securities of other
issuers (as to which the Trust has not invested more than 5% of the value of the
Trust's total assets in securities of any such issuer and as to which the Trust
does not hold more than 10% of the outstanding voting securities of any such
issuer), and no more than 25% of the value of its total assets may be invested
in the securities of any one issuer (other than U.S. Government securities and
securities of other regulated investment companies), or in two or more issuers
which the Trust controls and which are engaged in the same or similar trades or
businesses.
If for any taxable year the Trust does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable as
ordinary dividends to the extent of the Trust's current and accumulated earnings
and profits. Such distributions generally will be eligible for the
dividends-received deduction in the case of corporate shareholders.
EXCISE TAX ON REGULATED INVESTMENT COMPANIES
A 4% non-deductible excise tax is imposed on a regulated investment company that
fails to distribute in each calendar year an amount equal to at least 98% of
ordinary taxable income for the calendar year, at least 98% of capital gain net
income (I.E., capital gains in excess of capital losses) for the one-year period
ended on October 31 of such calendar year and any ordinary taxable income and
capital gain net income for previous years that was not distributed during those
years. A distribution will be treated as paid on December 31 of the current
calendar year if it is declared by the Trust in October, November or December
with a record date in such a month and paid by the Trust during January of the
following calendar year. Such distributions will be taxable to shareholders in
the calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are received.
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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.
Under certain circumstances, the Trust may recognize gain from a constructive
sale of an appreciated financial position. 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. Constructive sale treatment does not apply to
transactions closed in the 90-day period ending with the 30th day after the
close of the taxable year, if certain conditions are met.
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
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.
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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.
FOREIGN SHAREHOLDERS
U.S. taxation of a shareholder who, as to the United States, is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign
partnership ("foreign shareholder") depends on whether the income from the Trust
is "effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from the Trust is not effectively connected with a U.S. trade or
business carried on by a foreign shareholder, distributions of investment
company taxable income will be subject to U.S. withholding tax at the rate of
30% (or lower treaty rate). Such a foreign shareholder would generally be exempt
from U.S. federal income tax on gains realized on the sale or exchange of shares
of the Trust, capital gain dividends, and amounts retained by the Trust that are
designated as undistributed capital gains.
If the income from the Trust is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then distributions of investment
company taxable income, capital gain dividends, amounts retained by the Trust
that are designated as undistributed capital gains and any gains realized upon
the sale or exchange of shares of the Trust will be subject to U.S. federal
income tax at the rates applicable to U.S. citizens or domestic corporations.
Such shareholders that are classified as corporations for U.S. tax purposes also
may be subject to a branch profits tax.
In the case of foreign noncorporate shareholders, the Trust may be required to
withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless such shareholders furnish the Trust with proper notification of their
foreign status.
The tax consequences to a foreign shareholder entitled to claim the benefits of
an applicable tax treaty may be different from those described herein. Foreign
shareholders are urged to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the Trust, including the
applicability of foreign taxes.
EFFECT OF FUTURE LEGISLATION; OTHER TAX CONSIDERATIONS
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations issued thereunder as in effect on
the date of this SAI. Future legislative or administrative changes or court
decisions may significantly change the conclusions expressed herein, and any
such changes or decisions may have a retroactive effect with respect to the
transactions contemplated herein.
Income received by the Trust from foreign sources may be subject to withholding
and other taxes imposed by such foreign jurisdictions, absent treaty relief.
Distributions to shareholders also may be subject to state, local and foreign
taxes, depending upon each shareholder's particular situation. Shareholders are
urged to consult their tax advisers as to the particular consequences to them of
an investment in the Trust.
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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
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.
22
<PAGE>
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 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 29, 2000 Annual
Report to Shareholders are incorporated herein by reference.
23
<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 29, 2000; February
28, 1999, 1998, 1997; February 29, 1996; February 28, 1995, 1994,
1993; February 29, 1992; and February 28, 1991.
Financial Statements are incorporated in Part B by reference to
Registrant's February 29, 2000 Annual Report (audited).
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)
(iii) Amendment to By-Laws
(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)
(iii) Amended and Restated Investment Management Agreement
(iii) Form of Amendment to the Amended and Restated Investment
Management Agreement
C-1
<PAGE>
(h) Form of Distribution Agreement(5)
(i) Not Applicable
(j) Form of Custody Agreement(3)
(k) (i) Form of Amended and Restated Administration Agreement
(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(6)
(m) Not Applicable
(n) (i) Consent of Dechert Price & Rhoads
(o) Not Applicable
(p) Certificate of Initial Capital4
(q) Not Applicable
(r) Financial Data Schedule
(s) Pilgrim Group Funds Code of Ethics
- ----------
(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.
C-2
<PAGE>
(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.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth expenses incurred or estimated to be
incurred in connection with the offering described in the registration
statement.
Registration Fees............................................. $ 0
Trustee Fees.................................................. $ 250.00
Transfer Agent's Fees......................................... $10,000.00
Printing Expenses............................................. $10,000.00
Legal Fees.................................................... $10,000.00
New York Stock Exchange Listing Fees.......................... $ 0
National Association of Securities Dealers, Inc. Fees......... $ 0
Accounting Fees and Expenses.................................. $ 5,000.00
Miscellaneous Expenses........................................ $ 2,000.00
----------
Total................................................ $37,250.00
==========
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
Not Applicable.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
As of March 31, 2000:
(1) Title of Class (2) Number of Record Holders
-------------- ------------------------
Shares of Beneficial Interest 61,268
C-3
<PAGE>
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.
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
Adviser also serve as officers and/or directors for other registered investment
companies in the Pilgrim Family of funds and with ReliaStar Financial Corp., the
indirect parent of the Investment Adviser, and its subsidiaries. Information as
to the directors and officers of the Adviser is included in the Investment
Adviser'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.
C-4
<PAGE>
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, State Street Bank and Trust - Kansas City, 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;
(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.
C-5
<PAGE>
(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-6
<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 8th day of May,
2000.
PILGRIM PRIME RATE TRUST
By: /s/ James M. Hennessy
--------------------------------------
James M. Hennessy
Executive Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the date indicated:
Signature Title Date
--------- ----- ----
Trustee and Chairman May 8, 2000
- --------------------------
John G. Turner*
Trustee and President May 8, 2000
- -------------------------- (Chief Executive Officer)
Robert W. Stallings*
Senior Vice President and May 8, 2000
- -------------------------- Principal Financial Officer
Michael J. Roland* (Principal Financial Officer)
Trustee May 8, 2000
- --------------------------
Robert B. Goode, Jr.*
Trustee May 8, 2000
- --------------------------
Mary A. Baldwin
Trustee May 8, 2000
- --------------------------
Mark Lipson
Trustee May 8, 2000
- --------------------------
Al Burton
Trustee May 8, 2000
- --------------------------
Jock Patton
<PAGE>
Trustee May 8, 2000
- --------------------------
John R. Smith*
Trustee May 8, 2000
- --------------------------
David W. Wallace*
Trustee May 8, 2000
- --------------------------
David W.C. Putnam*
Trustee May 8, 2000
- --------------------------
Walter H. May*
Trustee May 8, 2000
- --------------------------
Paul S. Doherty*
Trustee May 8, 2000
- --------------------------
Alan L. Gosule*
*By: James M. Hennessy
-------------------------------------
James M. Hennessy, Attorney-in-fact**
**Powers of Attorney for the Trustees and Michael J. Roland are attached hereto.
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Robert W. Stallings, James M. Hennessy, Jeffrey S. Puretz and Karen L.
Anderberg, and each of them his true and lawful attorney-in-fact as agent with
full power of substitution and resubstitution of him in his name, place, and
stead, to sign any and all registration statements on Form N-2 applicable to the
Pilgrim Prime Rate Trust and any amendment or supplement thereto, and to file
the same with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done, as fully to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitutes, may lawfully do or cause to be
done by virtue hereof.
Dated: October 29, 1999
-----------------------------------
Mary A. Baldwin, Ph.D.
/s/ Paul S. Doherty
- ----------------------------------- -----------------------------------
Al Burton Paul S. Doherty
/s/ Robert B. Goode, Jr. /s/ Alan L. Gosule
- ----------------------------------- -----------------------------------
Robert B. Goode, Jr. Alan L. Gosule
/s/ Walter H. May
- ----------------------------------- -----------------------------------
Mark Lipson Walter H. May
/s/ David W.C. Putnam
- ----------------------------------- -----------------------------------
Jock Patton David W.C. Putnam
/s/ John R. Smith /s/ Robert W. Stallings
- ----------------------------------- -----------------------------------
John R. Smith Robert W. Stallings
/s/ John G. Turner /s/ David W. Wallace
- ----------------------------------- -----------------------------------
John G. Turner David W. Wallace
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Robert W. Stallings, James M. Hennessy, Jeffrey S. Puretz and Karen L.
Anderberg, and each of them his true and lawful attorney-in-fact as agent with
full power of substitution and resubstitution of him in his name, place, and
stead, to sign any and all registration statements on Form N-2 applicable to the
Pilgrim Prime Rate Trust and any amendment or supplement thereto, and to file
the same with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done, as fully to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitutes, may lawfully do or cause to be
done by virtue hereof.
Dated: May 8, 2000
/s/ Michael J. Roland
- ------------------------------
Michael J. Roland
<PAGE>
EXHIBIT INDEX
Exhibit Number Name of Exhibit
- -------------- ---------------
2(b)(iii) Amendment to By-Laws
2(g)(iii) Amended and Restated Investment Management Agreement
2(g)(iv) Form of Amendment to Amended and Restated Investment
Management Agreement
2(k)(i) Form of Amended and Restated Administration Agreement
2(n)(i) Consent of Dechert Price & Rhoads
2(r) Financial Data Schedule
2(s) Pilgrim Group Funds Code of Ethics
AMENDMENT
TO THE BY-LAWS OF
PILGRIM PRIME RATE TRUST
On August 2, 1999, the Board of Trustees adopted the following amendment to
the By-laws of Pilgrim Prime Rate Trust. The amendment increases the length of
time permitted between the record date and the shareholder meeting date from 60
to 90 days. Accordingly, the By-laws of Pilgrim Prime Rate Trust are hereby
amended to revise Section 11.5 of ARTICLE 11, to read as follows:
11.5 RECORD DATES. For the purpose of determining the Shareholders who are
entitled to vote or act at any meeting or any adjournment thereof, or who are
entitled to receive payment of any dividend or of any other distribution, the
Trustees may from time to time fix a time, which shall be not more than 90 days
before the date of any meeting of Shareholder or the date for the payment of any
dividend or of any other distribution, as the record date for determining the
Shareholders having the right to notice of and to vote at such meeting and any
adjournment thereof or the right to receive such dividend or distribution, and
in such case only Shareholders of record on such record date shall have such
right notwithstanding any transfer of shares on the books of the Trust after the
record date; or without fixing such record date the Trustees may for any of such
purposes close the register or transfer books for all or any part of such
period.
INVESTMENT MANAGEMENT AGREEMENT
THIS INVESTMENT MANAGEMENT AGREEMENT made as of the 29 day of October,
1999, by and between PILGRIM PRIME RATE TRUST, a Massachusetts Business Trust
(hereinafter called the "Trust"), and PILGRIM INVESTMENTS, INC., a corporation
organized and existing under the laws of the State of Delaware (hereinafter
called the "Manager").
W I T N E S S T H:
WHEREAS, the Trust is a closed-end management investment company,
registered as such under the Investment Company Act of 1940; and
WHEREAS, the Manager is registered as an investment adviser under the
Investment Advisers Act of 1940, and is engaged in the business of supplying
investment advice and investment management services, as an independent
contractor; and
WHEREAS, the Trust desires to retain the Manager to render investment
advice and investment management services to the Trust pursuant to the terms and
provisions of this Agreement, and the Manager is interested in furnishing said
advice and services.
NOW, THEREFORE, in consideration of the covenants and the mutual promises
hereinafter set forth, the parties hereto, intending to be legally bound hereby,
mutually agree as follows:
1. The Trust hereby employs the Manager and the Manager hereby accepts
such employment, to render investment advice and investment management
services with respect to the assets of the Trust, subject to the
supervision and direction of the Trust's Board of Trustees. The Manager
shall, as part of its duties hereunder (i) furnish the Trust with advice
and recommendations with respect to the investment of the Trust's assets
and the purchase and sale of its portfolio securities, including the taking
of such other steps as may be necessary to implement such advice and
recommendations, (ii) furnish the Trust with reports, statements and other
data on securities, economic conditions and other pertinent subjects which
the Trust's Board of Trustees may request, (iii) permit its officers and
employees to serve without compensation as Trustees of the Trust if elected
to such positions and (iv) in general superintend and manage the investment
of the Trust, subject to the ultimate supervision and direction to the
Trust's Board of Trustees.
2. The Manager shall use its best judgment and efforts in rendering
the advice and services to the Trust as contemplated by this Agreement.
3. The Manager shall, for all purposes herein, be deemed to be an
independent contractor, and shall, unless otherwise expressly provided and
authorized, have no authority to act for or represent the Trust in any way,
or in any way be deemed an agent for the Trust. It is expressly understood
and agreed that the services to be rendered by the Manager to the Trust
under the provisions of this Agreement are not to be deemed exclusive, and
the Manager shall be free to render similar or different services to others
so long as its ability to render the services provided for in this
Agreement shall not be impaired thereby.
4. The Manager agrees to use its best efforts in the furnishing of
such advice and recommendations to the Trust, in the preparation of reports
and information, and in the management of the Trust's assets, all pursuant
to this Agreement, and for this purpose the Manager shall, at its own
expense, maintain such staff and employ or retain such personnel and
consult with such other persons as it shall from time to time determine to
be necessary to the performance of its obligations under this Agreement.
Without limiting the generality of the foregoing, the staff and personnel
of the Manager shall be deemed to include persons employed or retained by
<PAGE>
the Manager to furnish statistical, research, and other factual
information, advice regarding economic factors and trends, information with
respect to technical and scientific developments, and such other
information, advice and assistance as the Manager may desire and request.
5. The Trust will from time to time furnish to the Manager detailed
statements of the investments and assets of the Trust and information as to
its investment objectives and needs, and will make available to the Manager
such financial reports, proxy statements, legal and other information
relating to its investments as may be in the possession of the Trust or
available to it and such information as the Manager may reasonably request.
6. Whenever the Manager has determined that the Trust should tender
securities pursuant to a "tender offer solicitation" the Manager shall
designate an affiliate as the "tendering dealer" so long as it is legally
permitted to act in such capacity under the Federal securities laws and
rules thereunder and the rules of any securities exchange or association of
which such affiliate may be a member. Such affiliated dealer shall not be
obligated to make any additional commitments of capital, expenses or
personnel beyond that already committed (other than normal periodic fees or
payments necessary to maintain its corporate existence and membership in
the National Associations of Securities Dealers, Inc.) as of the date of
this Agreement. This Agreement shall not obligate the Manager or such
affiliate (i) to act pursuant to the foregoing requirement under any
circumstances in which they might reasonably believe that liability might
be imposed upon them as a result of so acting, or (ii) to institute legal
or other proceedings to collect fees which may be considered to be due from
others to it as a result of such a tender, unless the Trust shall enter
into an Agreement with such affiliate to reimburse it for all expenses
connected with attempting to collect such fees, including legal fees and
expenses and that portion of the compensation due to their employees which
is attributable to the time involved in attempting to collect such fees.
7. The Manager shall bear and pay the costs of rendering the services
to be performed by it under this Agreement. The Trust shall be responsible
for all other expenses of its operation, including, but not limited to,
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 Manager; the cost of
preparing and printing reports, proxy statements and prospectuses of the
Trust or other communications for distribution to its shareholders; legal,
auditing and accounts fees; the fees of any trade associations 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, except as herein otherwise
prescribed. To the extent the Manager incurs any costs or performs any
services which are an obligation of the Trust, as set forth herein, the
Trust shall promptly reimburse the Manager for such costs and expenses. To
the extent the services for which the Trust is obligated to pay are
performed by the Manager, the Manager shall be entitled to recover from the
Trust only to the extent of its costs for such services.
8.(a) The Trust agrees to pay to the Manager, and the Manager agrees
to accept, as full compensation for all administrative and investment
management services furnished or provided to the Trust and as full
reimbursement for all expenses assumed by the Manager, a management fee
computed at an annual percentage rate of .80% of the average daily net
assets of the Trust, plus the proceeds of any outstanding borrowings.
(b) The management fee shall be accrued daily by the Trust and paid to
the Manager at the end of each calendar month.
(c) If, for any fiscal year, the expenses borne by the Trust,
including the investment advisory fee, but excluding brokerage commissions
and fees, taxes, interest and to the extent permitted, any extraordinary
expenses such as litigation and non-recurring expenses, would exceed the
2
<PAGE>
expense limitations applicable to the Trust imposed by the securities laws
or regulations thereunder of any state in which the Trust's shares are
qualified for sale, the Manager agrees to reduce its fee or reimburse the
Trust for all such excess expenses exceeding such limitation no later than
the last day of the first month of the next succeeding fiscal year. For the
purposes of this paragraph, the term "fiscal year" shall exclude the
portion of the current fiscal year which shall have elapsed prior to the
date hereof and shall include the portion of the then current fiscal year
which shall have elapsed at the date of termination of this Agreement.
(d) The management fee payable by the Trust hereunder shall be reduced
to the extent that an affiliate of the Manager has actually received cash
payments of tender offer solicitation fees less certain costs and expenses
incurred in connection therewith, as referred to in Paragraph 6 herein.
9. The Manager agrees that neither it nor any of its officers or
employees shall take any short position in the capital stock of the Trust.
This prohibition shall not prevent the purchase of such shares by any of
the officers and directors or bona fide employees of the Manager or any
trust, pension, profit-sharing or other benefit plan for such persons or
affiliates thereof.
10. Nothing herein contained shall be deemed to require the Trust to
take any action contrary to its Trust Indenture or applicable statute or
regulation, or to relieve or deprive the Board of Trustees of the Trust of
its responsibility for and control of the conduct of the affairs of the
Trust.
11.(a) In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of obligations or duties hereunder on the
part of the Manager, the Manager shall not be subject to liability to the
Trust or to any shareholder of the Trust for any act or omission in the
course of, or connected with, rendering services hereunder or for any
losses that may be sustained in the purchase, holding or sale of any
investment by the Trust.
(b) Notwithstanding the foregoing, the Manager agrees to reimburse the
Trust for any and all costs, expenses, and counsel and trustees' fees
reasonably incurred by the Trust in the preparation, printing and
distribution of proxy statements, amendments to its Registration Statement,
holding of meetings of its shareholders or trustees, the conduct of factual
investigations, any legal or administrative proceedings including any
applications for exemptions or determinations by the Securities and
Exchange Commission which the Trust incurs as the result of action or
inaction of the Manager or any of its shareholders where the action or
inaction necessitating such expenditures (i) is directly or indirectly
related to any transaction or proposed transaction in the shares or control
of the Manager or its affiliates (or litigation related to any pending or
proposed future transaction in such shares or control) which shall have
been undertaken without the prior express approval of the Trust's Board of
Trustees; or (ii) is within the sole control of the Manager or any of its
affiliates or any of their officers, directors, employees or shareholders.
The Manager shall not be obligated pursuant to the provisions of this
Subparagraph 11(b), to reimburse the Trust for any expenditures related to
the institution of an administrative proceeding or civil litigation by the
Trust or a Trust shareholder seeking to recover all or a portion of the
proceeds derived by any shareholder of the Manager or any of its affiliates
from the sale of his shares of the Manager, or similar matters. So long as
this Agreement is in effect, the Manager shall pay to the Trust the amount
due for expenses subject to this Subparagraph 11(b) within thirty (30) days
after a bill or statement has been received by the Trust therefor. This
provision shall not be deemed to be a waiver of any claim the Trust may
have or may assert against the Manager or others or costs, expenses, or
damages heretofore incurred by the Trust for costs, expenses, or damages
the Trust may hereinafter incur which are not reimbursable to it hereunder.
(c) No provision of this Agreement shall be construed to protect any
trustee or officer of the Trust, or the Manager, from liability in
violation of Section 17(h) and (i) of the Investment Company Act of 1940,
as amended.
3
<PAGE>
12. This Agreement shall become effective on the date first written
above, subject to the condition that the Trust's Board of Trustees,
including a majority of those Trustees who are not interested persons (as
such term is defined in the Investment Company Act of 1940) of the Manager,
and the shareholders of the Trust, shall have approved this Agreement.
Unless terminated as provided herein, the Agreement shall continue in full
force and effect for two (2) years from the effective date of this
Agreement, and shall continue in effect from year to year thereafter so
long as such continuation is specifically approved at least annually by (i)
the Board of Trustees of the Trust or by the vote of a majority of the
outstanding voting securities of the Trust, and (ii) the vote of a majority
of the Trustees of the Trust who are not parties to this Agreement or
interested persons thereof, cast in person at a meeting called for the
purpose of voting on such approval.
13. This Agreement may be terminated at any time, without payment of
any penalty, by the Board of Trustees of the Trust or by vote of a majority
of the outstanding voting securities of the Trust, upon sixty (60) days
written notice to the Manager, and by the Manager upon sixty (60) days
written notice to the Trust.
14. This Agreement shall terminate automatically in the event of any
transfer or assignment thereof, as defined in the Investment Company Act of
1940, as amended.
15. If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule, or otherwise, the remainder of this
Agreement shall not be affected thereby.
16. The term "majority of the outstanding voting securities" of the
Trust shall have the meaning as set forth in the Investment Company Act of
1940, as amended.
17. In consideration of the execution of this Agreement the Manager,
on behalf of its sole shareholder, Pilgrim Group, Inc. hereby grants to the
Trust the right to use the name "Pilgrim" as part of its name. The Manager,
on behalf of its sole shareholder, Pilgrim Group, Inc. reserves the right
to grant to others the right to use the name "Pilgrim" including to any
other investment company. The Trust agrees that in the event this Agreement
is terminated, the Trust shall immediately take such steps as are necessary
to amend its name and remove the reference to "Pilgrim."
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers on the day and year first above written.
PILGRIM PRIME RATE TRUST
By: /s/ Michael J. Roland
------------------------------------
Title: Chief Financial Officer
PILGRIM INVESTMENTS, INC.
By: /s/ James M. Hennessy
------------------------------------
Title: Executive Vice President
5
FORM OF AMENDMENT TO AMENDED AND RESTATED
INVESTMENT MANAGEMENT AGREEMENT
The INVESTMENT MANAGEMENT AGREEMENT made as of the 7th day of April, 1995,
as amended on the 2nd day of May, 1996, restated on the 7th day of April, 1997,
amended on the 6th day of August, 1998 and restated on the _________ day of
____________, by and between PILGRIM PRIME RATE TRUST, a business trust
organized and existing under the laws of the Commonwealth of Massachusetts
(hereinafter called the "Trust"), and PILGRIM INVESTMENTS, INC., a corporation
organized and existing under the laws of the State of Delaware (hereinafter
called the "Manager"), is hereby amended as set forth in this Amendment to the
Investment Management Agreement, which is made as of the _____ day of
_______________, 2000.
W I T N E S S E T H
WHEREAS, the Trust is a closed-end management investment company,
registered as such under the Investment Company Act of 1940, as amended; and
WHEREAS, the Manager is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and is engaged in the business of
supplying investment advice, investment management and administrative services,
as an independent contractor; and
WHEREAS, the Trust and the Manager wish to amend the Investment Management
Agreement as provided below.
NOW, THEREFORE, in consideration of the covenants and the mutual promises
in the Investment Management Agreement, the parties hereto, intending to be
legally bound hereby, mutually agree as follows:
1. Section 8(a) of the Investment Management Agreement is amended by
replacing the language thereof with the following paragraph:
8. (a) The Trust agrees to pay to the Manager, and the Manager
agrees to accept, as full compensation for all administrative and
investment management services furnished or provided to the Trust and
as full reimbursement for all expenses assumed by the Manager, a
management fee computed at an annual percentage rate of .80% of the
Managed Assets of the Trust. For purposes of this Agreement, "Managed
Assets" shall mean the average daily gross asset value of the Trust,
minus the sum of the Trust's accrued and unpaid dividends on any
outstanding preferred shares and accrued liabilities (other than
liabilities for principal amount of any borrowings incurred,
commercial paper or notes issued by the Trust and the liquidation
preference of any outstanding preferred shares).
2. This Amendment shall become effective as of the date indicated
above provided that it has been approved by the shareholders of the Trust
at a meeting held for that purpose.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and attested by their duly authorized officers, on the day and
year first above written.
PILGRIM PRIME RATE TRUST
Attest: By:
--------------------------- ------------------------------------
Title: Title:
---------------------------- ---------------------------------
PILGRIM INVESTMENTS, INC.
Attest: By:
--------------------------- ------------------------------------
Title: Title:
---------------------------- ---------------------------------
FORM OF AMENDED AND RESTATED
ADMINISTRATION AGREEMENT
THIS ADMINISTRATION AGREEMENT which was made as of the 20th day of October,
1992, amended and restated as of February 17, 1995, April 7, 1995, May 2, 1996,
April, 7, 1997, and February 2, 1999, and as further amended and restated on the
1st day of May, 2000, by and between PILGRIM PRIME RATE TRUST (formerly Pilgrim
America Prime Rate Trust), a Massachusetts Business Trust (hereinafter referred
to as the "Trust"), and PILGRIM GROUP, INC. (formerly Pilgrim America Group,
Inc.), a corporation organized and existing under the laws of Delaware
(hereinafter called the "Administrator").
W I T N E S S E T H:
WHEREAS, the Trust is a closed-end management investment company,
registered as such under the Investment Company Act of 1940; and
WHEREAS, the Trust's name was changed to Pilgrim Prime Rate Trust on
November 16, 1998; and
WHEREAS, the Administrator's name was changed to Pilgrim Group, Inc. on
October 30, 1998; and
<PAGE>
WHEREAS, the Administrator is engaged in the business of providing
management and administrative services, as an independent contractor; and
WHEREAS, the Trust desires to retain the Administrator to furnish
management and administrative services to the Trust pursuant to the terms and
provisions of this Agreement, and the Administrator is interested in providing
said services.
NOW, THEREFORE, in consideration of the covenants and the mutual promises
hereinafter set forth, the parties hereto, intending to be legally bound hereby,
mutually agree as follows:
1. The Trust hereby employs the Administrator and the Administrator hereby
accepts such employment, to render management and administrative services to the
Trust, subject to the supervision and direction of the Trust's Board of
Trustees. The Administrator shall furnish to the Trust the services of executive
and administrative personnel to supervise the performance of all administrative
functions concerning the operation of the Trust, other than the investment
management function. The Administrator shall, as part of its duties hereunder
(i) monitor the provisions of the loan agreements and any agreements with
respect to participations and assignments and be responsible for recordkeeping
with respect to senior loans in the Trust's portfolio; (ii) administer the
Trust's corporate affairs including preparing and filing all reports required by
the Commonwealth of Massachusetts; (iii) furnish the Trust such office space,
equipment, and personnel as is needed by the Trust; (iv) furnish clerical and
bookkeeping services as are needed by the Trust; (v) prepare and furnish annual
and other reports to shareholders, the Securities and Exchange Commission, the
New York Stock Exchange and to any appropriate governmental body; (vi) prepare
and file any federal, state and local income tax returns as requested by the
<PAGE>
Trust; (vii) provide shareholder services as are needed by the Trust; (viii)
permit its officers and employees to serve without compensation as trustees or
officers of the Trust if elected to such positions; and (ix) in general,
supervise the performance of all administrative functions of the Trust, subject
to the ultimate supervision and direction of the Trust's Board of Trustees.
2. The Administrator shall, for all purposes herein, be deemed to be an
independent contractor, and shall, unless otherwise expressly provided and
authorized, have no authority to act for or represent the Trust in any way, or
in any way be deemed an agent for the Trust. It is expressly understood and
agreed that the services to be rendered by the Administrator to the Trust under
the provisions of this Agreement are not to be deemed exclusive, and the
Administrator shall be free to render similar or different services to others so
long as its ability to render the services provided for in this Agreement shall
not be impaired thereby.
3. The Administrator agrees to use its best judgment and efforts in
performing the services to the Trust as contemplated hereunder, and for this
purpose the Administrator shall, at its own expense, maintain such staff and
employ or retain such personnel and consult with such other persons as it shall
from time to time determine to be necessary to the performance of its
obligations under this Agreement.
4. In performing the administrative services hereunder, the Administrator
shall at all times comply with the applicable provisions of the Investment
Company Act of 1940 and any other federal or state securities laws.
5. The Administrator shall bear and pay the costs of rendering the services
to be performed by it under this Agreement. Without limiting the generality of
the foregoing, the Administrator shall bear the following expenses: the salaries
<PAGE>
and expenses of all personnel of the Trust and the Administrator, except for the
fees and expenses of Trustees not affiliated with the Trust or the
Administrator; costs to prepare information for determination of net asset value
by the Trust's recordkeeping and accounting agent; expenses to maintain the
Trust's books and records that are not maintained by the Trust's Manager,
Custodian or Transfer Agent; costs incurred to assist in the preparation of
financial information for the Trust's income tax returns, proxy statements,
quarterly and annual shareholder reports; expenses to provide shareholder
services in connection with the Trust's dividend reinvestment and cash purchase
plans; expenses to provide shareholder services in preparation of tender offers,
if any, or to shareholders proposing to transfer their shares to a third party;
and all expenses incurred by the Administrator or by the Trust in rendering the
administrative services pursuant to the terms of this Agreement.
6. The Trust shall bear and pay for all other expenses of its operation,
except for those expenses expressly assumed by the Manager to the Trust pursuant
to an Investment Management Agreement between the Manager and the Trust,
including, but not limited to, the fees payable to the Manager; the fees and
expenses of Trustees who are not affiliated with the Manager 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
<PAGE>
expenses involved in registering and maintaining registration of the Trust and
of its shares with the Securities and Exchange Commission, the New York Stock
Exchange and qualifying its shares under applicable state securities laws
including the preparation and printing of the Trust's registration statements
and prospectuses for such purposes; allocable communications expenses, with
respect to investor services and all expenses of stockholders and Trustees'
meetings and of preparing, printing and mailing reports, proxy statements and
prospectuses to stockholders; the cost of insurance; and litigation and
indemnification expenses and extraordinary expenses not incurred in the ordinary
course of the Trust's business.
7. To the extent the Administrator incurs any costs or performs any
services which are an obligation of the Trust, as set forth herein, the Trust
shall promptly reimburse the Administrator for such costs and expenses. To the
extent the services for which the Trust is obligated to pay are performed by the
Administrator, the Administrator shall be entitled to recover from the Trust
only to the extent of its costs for such services.
8. (a) The Trust agrees to pay to the Administrator, and the Administrator
agrees to accept, as full compensation for all administrative services furnished
or provided to the Trust and as full reimbursement for all expenses assumed by
the Administrator, an administration fee computed at the annual rate of 0.25% of
the managed assets of the Trust. For purposes of this Agreement, "managed
assets" shall mean the average daily gross asset value of the Trust, minus the
sum of the Trust's accrued and unpaid dividends on any outstanding Preferred
Shares and accrued liabilities (other than the liabilities for principal amount
of any borrowings incurred, commercial paper or notes issued by the Trust and
the liquidation preference of any outstanding Preferred Shares.)
<PAGE>
(b) The administration fee shall be accrued daily by the Trust and
paid to the Administrator at the end of each calendar month.
9. The Administrator agrees that neither it nor any of its officers or
employees shall take any short position in the capital stock of the Trust. This
prohibition shall not prevent the purchase of such shares by any of the officers
and directors or bona fide employees of the Administrator or any trust, pension,
profit-sharing or other benefit plan for such persons or affiliates thereof.
10. Nothing herein contained shall be deemed to require the Trust to take
any action contrary to its Trust Indenture or any applicable statute or
regulation, or to relieve or deprive the Board of Trustees of the Trust of its
responsibility for and control of the conduct of the affairs of the Trust.
11. (a) In the absence of willful misfeasance, bad faith, gross negligence,
or reckless disregard of obligations or duties hereunder on the part of the
Administrator, the Administrator shall not be subject to liability to the Trust
or to any shareholder of the Trust for any act or omission in the course of, or
connected with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding or sale of any security by the Trust.
(b) Notwithstanding the foregoing, the Administrator agrees to
reimburse the Trust for any and all costs, expenses, and counsel and Trustees'
fees reasonably incurred by the Trust in the preparation, printing and
distribution of amendments to its registration statement, holding of meetings of
<PAGE>
its shareholders or Trustees, the conduct of factual investigations, any legal
or administrative proceedings including any applications for exemptions or
determinations by the Securities and Exchange Commission which the Trust incurs
as the result of action or inaction of the Administrator or any of its
shareholders where the action or inaction necessitating such expenditures (i) is
directly or indirectly related to any transactions or proposed transaction in
the shares or control of the Administrator or its affiliates (or litigation
relates to any pending or proposed future transaction in such shares or control)
which shall have been undertaken without the prior, express approval of the
Trust's Board of Trustees; or (ii) is within the sole control of the
Administrator or any of its affiliates or any of their officers, directors,
employees or shareholders. The Administrator shall not be obligated pursuant to
the provisions of this Subparagraph 11(b), to reimburse the Trust for any
expenditures related to the institution of an administrative proceeding or civil
litigation by the Trust or a Trust shareholder seeking to recover all or a
portion of the proceeds derived by any shareholder of the Administrator or any
of its affiliates from the sale of his shares of the Administrator, or similar
matters. So long as this Agreement is in effect, the Administrator shall pay to
the Trust the amount due for expenses subject to this Subparagraph 11(b) within
thirty (30) days after a bill or statement has been received by the Trust
therefor. This provision shall not be deemed to be a waiver of any claim the
Trust may have or may assert against the Administrator or others or costs,
expenses, or damages heretofore incurred by the Trust for costs, expenses, or
damages by the Trust may hereafter incur which are not reimbursable to it
hereunder.
<PAGE>
(c) No provision of this Agreement shall be construed to protect any
Trustee or officer of the Trust, or the Administrator, from liability in
violation of Section 17(h) and (i) of the Investment Company Act of 1940, as
amended.
12. (a) This Agreement shall become effective at the close of business on
the date hereof and shall continue in effect from year to year thereafter so
long as such continuation is specifically approved at least annually by (i) the
Board of Trustees of the Trust, and (ii) the vote of a majority of the Trustees
of the Trust who are not parties to this Agreement or interested persons
thereof, cast in person at a meeting called for the purpose of voting on such
approval.
(b) This Agreement may be terminated at any time, without penalty, by
the Trust by giving 60 days' written notice of such termination to the
Administrator at its principal place of business, or may be terminated at any
time by the Administrator by giving 60 days' written notice of such termination
to the Trust at its principal place of business.
13. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule, or otherwise, the remainder of this Agreement
shall not be affected thereby.
14. This Agreement may be amended only by written instrument signed by the
parties hereto.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate by their respective officers on the day and year first
above written.
PILGRIM PRIME RATE TRUST
Attest: By:
------------------------------------
Senior Vice President
- ----------------------------
Vice President
PILGRIM GROUP, INC.
By:
------------------------------------
Attest: Executive Vice President
and Secretary
- ----------------------------
Vice President
[LETTERHEAD OF DECHERT PRICE & RHOADS]
May 9, 2000
Pilgrim Prime Rate Trust
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004-4424
Re: Pilgrim Prime Rate Trust
(File Nos. 333-61831 and 811-5410)
Dear Sirs:
We hereby consent to the incorporation by reference to our opinion as an
exhibit to Post-Effective Amendment No. 2 to the above-referenced Registration
Statement of Pilgrim Prime Rate Trust, and to all references to our firm
therein. In giving such consent, however, we do not admit that we are within the
category of persons whose consent is required by Section 7 of the Securities Act
of 1933, as amended, and the rules and regulations thereunder.
Very truly yours,
/s/ Dechert Price & Rhoads
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 826020
<NAME> PILGRIM PRIME RATE TRUST
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-29-2000
<PERIOD-START> MAR-01-1999
<PERIOD-END> FEB-29-2000
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 1,698,388
<INVESTMENTS-AT-VALUE> 1,690,090
<RECEIVABLES> 19,833
<ASSETS-OTHER> 983
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,710,907
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 493,568
<TOTAL-LIABILITIES> 493,568
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,286,205
<SHARES-COMMON-STOCK> 136,036
<SHARES-COMMON-PRIOR> 130,206
<ACCUMULATED-NII-CURRENT> 11,932
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (72,500)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (8,298)
<NET-ASSETS> 1,217,339
<DIVIDEND-INCOME> 23
<INTEREST-INCOME> 148,319
<OTHER-INCOME> 6,362
<EXPENSES-NET> 48,210
<NET-INVESTMENT-INCOME> 106,494
<REALIZED-GAINS-CURRENT> (37,914)
<APPREC-INCREASE-CURRENT> (2,330)
<NET-CHANGE-FROM-OPS> 66,250
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 104,450
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,798
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 1,032
<NET-CHANGE-IN-ASSETS> 14,774
<ACCUMULATED-NII-PRIOR> 9,888
<ACCUMULATED-GAINS-PRIOR> (36,416)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 13,077
<INTEREST-EXPENSE> 30,491
<GROSS-EXPENSE> 48,221
<AVERAGE-NET-ASSETS> 1,733,244
<PER-SHARE-NAV-BEGIN> 9.24
<PER-SHARE-NII> 0.79
<PER-SHARE-GAIN-APPREC> (0.30)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.78)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.95
<EXPENSE-RATIO> 1.0
</TABLE>
PILGRIM GROUP FUNDS
CODE OF ETHICS
I. STATEMENT OF GENERAL PRINCIPLES
Each of (i) The Pilgrim Group Mutual Funds (as more particularly described
on Exhibit A hereto and collectively referred to as the "Funds"), which are
registered investment companies under the Investment Company Act of 1940
(the "1940 Act"), (ii) Pilgrim Investments, Inc. ("PII"), a registered
investment adviser under the Investment Advisers Act of 1940, as amended,
which serves as the investment adviser for the Funds, and (iii) Pilgrim
Securities, Inc ("PSI"), a registered broker-dealer which serves as the
principal underwriter for the open-end Funds, hereby adopt this Code of
Ethics (hereinafter, the "Code"), pursuant to Rule 17j-1 promulgated by the
Commission under Section 17(j) of the 1940 Act.
In general, Rule 17j-1 imposes an obligation on registered investment
companies and their investment advisers and principal underwriters to adopt
written codes of ethics covering the securities activities of certain of
their directors, trustees, officers, and employees. This Code is designed
to ensure that those individuals who have access to information regarding
the portfolio securities activities of registered investment company
clients do not intentionally use information concerning such clients'
portfolio securities activities for his or her personal benefit and to the
detriment of such clients. For purposes of this Code, a Sub-Adviser of the
Fund shall be treated as an Adviser of the Fund unless the Boards of the
Funds have approved a separate code of ethics for that Sub-Adviser. It is
not the intention of this Code to prohibit personal securities activities
by Access Persons, but rather to prescribe rules designed to prevent actual
and apparent conflicts of interest. While it is not possible to define and
prescribe all-inclusive rules addressing all possible situations in which
conflicts may arise, this Code sets forth the policies of the Funds, PII,
and PSI regarding conduct in those situations in which conflicts are most
likely to develop.
In discharging his or her obligations under the Code, every Access Person
should adhere to the following general fiduciary principles governing
personal investment activities:
A. Every Access Person should at all times scrupulously place the interests of
the Funds' shareholders ahead of his or her own interests with respect to
any decision relating to personal investments.
B. No Access Person should take inappropriate advantage of his or her position
with a Fund, or with PII or PSI, as the case may be, by using knowledge of
any Fund's transactions to his or her personal profit or advantage.
C. Every Access Person should at all times conform to the Policies and
Procedures to Control The Flow And Use Of Material Non-Public Information
In Connection With Securities Activities, copy of which is attached and is
incorporated by reference into this Code of Ethics (that is, the policies
and procedures set forth are legally considered a part of this Code of
Ethics).
<PAGE>
II. DEFINITIONS
This Code defines directors, officers and employees of the Funds, PII, and
PSI into several categories, and imposes varying requirements by category
appropriate to the sensitivity of the positions included in the category.
As used herein and unless otherwise indicated, the following terms shall
have the meanings set forth below:
"PORTFOLIO MANAGER": means any employee of a Fund or of PII who is
entrusted with the direct responsibility and authority to make investment
decisions affecting an investment company, and who, therefore, may be best
informed about such Fund's investment plans and interests.
"INVESTMENT PERSONNEL": includes any employee of the Adviser (or of any
company in a control relationship to the Adviser) who, in connection with
his or her regular functions or duties, makes or participates in making
recommendations regarding the purchase or sale of Securities by the Fund
and includes the following individuals:all Finance Department staff of the
Adviser, Portfolio Managers of the Funds, the Portfolio support staff, and
traders who provide information and advice to a Portfolio Manager of a Fund
or who assist in the execution of such Portfolio Manager's decisions.
"ACCESS PERSONS": includes:
(i) any director, officer, general partner or Advisory Person of the
Funds or the Adviser to the Funds; and
(ii) any director or officer of PSI who, in the ordinary course of
business, makes, participates in or obtains information regarding
the purchase or sale of Securities by the Funds, or whose
functions or duties in the ordinary course of business relate to
the making of any recommendation to the Funds regarding the
purchase or sale of Securities.
This definition includes, but is not limited to, the following individuals:
Portfolio Managers, Investment Personnel, certain employees in Operations,
Marketing employees, Finance department employees, an Information Systems
member, an Accounting/Compliance Department member, and Executive
Management support staff members, as such individuals are defined by the
Company's Human Resource Department. Where the term Access Person is used
without specifying whether such person is an Access Person of a Fund, or of
PII or PSI, such term shall be interpreted to include all Access Persons of
each such entity.
"ADVISORY PERSON" includes each employee of the Adviser (or of any company
in a control relationship to the Adviser) who, in connection with his or
her regular functions or duties, makes, participates in, or obtains
information regarding the purchase or sale of Securities by the Funds or
whose functions relate to the making of any recommendations with respect to
the purchases or sales.
"SEGREGATED PERSON" means an Access Person who in the ordinary course of
business does not have access to information regarding the trading
activities and/or current portfolio holdings of the Funds; does not
ordinarily maintain an office on the premises utilized by Investment
Personnel or Portfolio Managers; and who, by resolution, the Boards of the
Funds have determined may be a Segregated Person because he or she will not
be permitted access to information regarding the trading activities and/or
current portfolio holdings of the Funds.
<PAGE>
"EXEMPT PERSON": means a person who is, or could be, an Access Person who
does not ordinarily maintain an office on the premises utilized by
Investment Personnel or Portfolio Managers, and who, by resolution, the
Boards of the Funds have determined may be an Exempt Person not subject to
the Code because his or her responsibilities are ministerial in function
and therefore the risk of violation of the Code is highly remote.
"DISINTERESTED DIRECTOR": means a director/trustee of the Funds who is not
an "interested person" of the Funds within the meaning of Section 2(a)(19)
of the 1940 Act.
"PII INVESTMENT ADVISER REPRESENTATIVES": means any officer or director of
the investment adviser; any employee who makes any recommendation, who
participates in the determination of which recommendation should be made,
or whose functions or duties relate to the determination of which
recommendation shall be made. These individuals are identified on Form ADV,
Schedule F, Item 6.
"BEING CONSIDERED FOR PURCHASE OR SALE": means, with respect to any
security, that a recommendation to purchase or sell such security has been
made and communicated or, with respect to the person making the
recommendation, such person seriously considers making such recommendation.
"BENEFICIAL OWNERSHIP": An Access Person will be deemed to have "beneficial
ownership" of any Securities and commodities interests for any account held
(i) in the name of his or her spouse or their minor children, (ii) in the
name of another person (for example, a relative of the Access Person or his
or her spouse sharing the same home) if, by reason of any contract,
understanding, relationship or agreement or other arrangement, he or she
obtains benefits substantially equivalent to those of ownership of the
Securities, (iii) by a partnership of which he or she is a partner, (iv) by
a corporation of which he or she is a controlling person and which is used
by him or her alone or with a small group as a medium for investing or
trading in Securities, or (v) by a trust over which he or she has any
direct or indirect influence or control and of which he or she, or a member
of his or her immediate family (spouse, children, grandchildren or parents)
is a beneficiary. Exceptions may be made on a case-by-case basis by the
Designated Officer where the Access Person certifies in writing (and
annually re-certifies, as applicable) that he or she has no control over
the account of e.g., a trust or estate, or of a spouse whose transactions
in Securities are subject to a code of ethics of his or her employer. In
making such exceptions, the Compliance Officer may require the Access
Person to comply with various requirements under this Code, e.g., periodic
filing of holdings or transactions reports, as the Designated Officer deems
appropriate in the circumstances.
"CONTROL": shall have the same meaning as that set forth in Section 2(a)(9)
of the 1940 Act.
"DESIGNATED OFFICER": means, with respect to any Fund, or PII or PSI, the
President of such Fund or of PII or PSI, or such other officer as the board
of directors/trustees of such Fund, or of PII or PSI, as the case may be,
shall designate.
"FUNDS" OR "FUND": means The Pilgrim Group of Funds, or any fund within The
Pilgrim Group of Funds, respectively, as more particularly described on
Exhibit A hereto; provided that such terms shall not include any fund as to
which PII has appointed a sub-adviser if the Board of Directors/Trustees of
that fund has adopted the sub-adviser's code of ethics on behalf of that
fund.
<PAGE>
"PSI": means Pilgrim Securities, Inc.
"PII": means Pilgrim Investments, Inc. and Pilgrim Advisors, Inc..
"PERSONAL SECURITIES HOLDINGS" OR "PERSONAL SECURITIES TRANSACTIONS":
means, with respect to any person, any Security Beneficially Owned, or any
Security purchased or otherwise acquired, or sold or otherwise disposed of
by such person, including any Security in which such person has, or by
reason of such transaction acquires or disposes of, any direct or indirect
Beneficial Ownership in such Security and any account over which such
person has discretion; provided, however, that such terms shall not include
any holding or transaction in a Security held in or effectuated for an
account over which such person does not have any direct or indirect
influence and has certified such fact to the appropriate Designated
Officer. Personal Securities Transactions shall include all Securities or
commodity interests regardless of the dollar amount of the transaction or
whether the sale is in response to a tender offer.
"SECURITY": includes any note, stock, treasury stock, bond, debenture,
evidence of indebtedness,certificate of interest or participation in any
profit-sharing agreement, collateral-trust certificate, preorganization
certificate or subscription, transferable share, investment contract,
voting-trust certificate, certificate of deposit for a security, fractional
undivided interest in oil, gas or other mineral rights, any put, call,
straddle, option, or privilege on any security (including a certificate of
deposit) or on any group or index of securities, or any put, call,
straddle, option or privilege entered into on a national securities
exchange relating to foreign currency. Securities also includes shares of
closed-end investment companies, various derivative instruments such as
ELKs, LEAPs and PERCs, limited partnership interests and private placement
common or preferred stocks or debt instruments. Commodity interests, which
includes futures contracts, and options on futures, relating to any stock
or bond, stock or bond index, interest rate or currency shall also be
included in this Code's definition of Security. Commodity interests in
agricultural or industrial commodities, such as agricultural products or
precious metals, are not covered under this Code.
Security does not include shares of registered open-end investment
companies, securities issued by the government of the United States and any
options or futures thereon, bankers' acceptances, bank certificates of
deposit and time deposits, commercial paper, repurchase agreements, and
such other money market instruments as designated by the board of
directors/trustees of such Fund, and shares of ReliaStar Financial
Corporation.
"SECURITY HELD OR TO BE ACQUIRED" by a Fund means: any Security which,
within the most recent fifteen (15) days, (i) is or has been held by such
Fund, or (ii) is being or has been considered by such Fund for purchase for
such Fund.
<PAGE>
"AUTOMATIC DISGORGEMENT." Where a violation results from a transaction
which can be reversed prior to settlement, such transaction should be
reversed, with the cost of the reversal being borne by the covered person;
or if reversal is impractical or impossible, then any profit realized on
such short-term investment, net of brokerage commissions but before tax
effect, shall be disgorged to the appropriate Fund, or if no fund is
involved then to a charity designated by PII.
III. GOVERNING LAWS, REGULATIONS AND PROCEDURES
All employees shall have and maintain knowledge of and shall comply
strictly with all applicable Federal and State laws and all rules and
regulations of any governmental agency or self-regulatory organization
governing his or her activities.
Each employee will be given a copy of the Code of Ethics at the time of his
or her employment and each Access Person is required to submit a statement
at least annually that he or she has reviewed the Codeof Ethics.
Each employee shall comply with all laws and regulations relating to the
use of material non-public information. Trading on "inside information" of
any sort, whether obtained in the course of research activities, through a
client relationship or otherwise, is strictly prohibited. All employees
shall comply strictly with procedures established by the Funds to ensure
compliance with applicable Federal and State laws and regulations of
governmental agencies and self-regulatory organizations. The employees
shall not knowingly participate in, assist, or condone any acts in
violation of any statute or regulation governing securities matters, nor
any act which would violate any provision of this Code of Ethics, or any
rules adopted thereunder.
Each employee having supervisory responsibility shall exercise reasonable
supervision over employeessubject to his or her control with a view to
preventing any violation by such of the provisions of the Code of Ethics.
Any employee encountering evidence that acts in violation of applicable
statutes or regulations or provisions of the Code of Ethics have occurred
shall report such evidence to the Designated Officer or the Board of
Directors/Trustees of each fund.
IV. CONFIDENTIALITY OF TRANSACTIONS
Information relating to each Fund's portfolio and research and studies
activity is confidential untilpublicly available. Whenever statistical
information or research is supplied to or requested by the Fund, such
information must not be disclosed to any persons other than persons
designated by the Designated Officer or the Board of Directors/Trustees of
the Fund. If the Fund is considering a particular purchase or sale of a
security, this must not be disclosed except to such duly authorized
persons.
Any employee authorized to place orders for the purchase or sale of
Securities on behalf of a Fund shall take all steps reasonably necessary to
provide that all brokerage orders for the purchase and sale of Securities
<PAGE>
for the account of the Fund will be so executed as to ensure that the
nature of the transactions shall be kept confidential until the information
is reported to the Securities and Exchange Commission or each Fund's
shareholders in the normal course of business.
If any employee of the Fund or Access Person should obtain information
concerning the Fund's portfolio (including, the consideration by the Fund
of acquiring, or recommending any security for the Fund's portfolio),
whether in the course of such person's duties or otherwise, such person
shall respect the confidential nature of this information and shall not
divulge it to anyone unless it is properly part of such person's services
to the Fund to do so or such person is specifically authorized to do so by
the Designated Officier of the Fund.
V. ETHICAL STANDARDS
A. INVESTMENT ACTIVITIES RELATED TO THE FUNDS. All Access Persons, in
making any investment recommendations or in taking any investment
action, shall exercise diligence and thoroughness, and shall have a
reasonable and adequate basis for any such recommendations or actions.
B. CONFLICTS. All Access Persons shall conduct themselves in a manner
consistent with the highest ethical standards. They shall avoid any
action, whether for personal profit or otherwise, that results in an
actual or potential conflict of interest, with a Fund or which may
otherwise be detrimental to the interest of a Fund. Therefore, no
Access Person shall undertake independent practice for compensation in
competition with the Fund.
Every employee or Access Person of the Funds who owns beneficially,
directly or indirectly, 1/2% or more of the stock of any corporation
is required to report such holdings to the President of the Funds.
C. OBLIGATION TO COMPLY WITH LAWS AND REGULATIONS. Every Access Person
shall acquire and maintain knowledge of, and shall comply strictly
with, all applicable federal and state laws and all rules and
regulations of any governmental agency or self-regulatory organization
governing such Access Person's activities. In addition, every Access
Person shall comply strictly with all procedures established by the
Funds, or by PII or PSI, to ensure compliance with such laws and
regulations. Access Persons shall not knowingly participate in, assist
or condone any acts in violation of any law or regulation governing
Securities transactions, nor any act which would violate any provision
of this Code.
D. SELECTION OF BROKER-DEALERS. Any employee having discretion as to the
election of broker- dealers to execute transactions in Securities for
the Funds shall select broker-dealers solely on the basis of the
services provided directly or indirectly by such broker-dealers as
provided in the registration statements for the Funds. An employee
shall not directly or indirectly, receive a fee or commission from any
source in connection with the sale or purchase of any security for a
Fund.
<PAGE>
In addition, the Funds shall take all actions reasonably calculated to
ensure that they engage broker-dealers to transact business with each
Fund whose partners, officers and employees, and their respective
affiliates, will conduct themselves in a manner consistent with the
provisions of this Section V.
E. SUPERVISORY RESPONSIBILITY. Every Access Person having supervisory
responsibility shall exercise reasonable supervision over employees
subject to his or her control in order to prevent any violation by
such persons of applicable laws and regulations, procedures
established by the Funds, or PII or PSI, as the case may be, or the
provisions of this Code.
ETHICAL STANDARDS CONTINUED
F. ACCOUNTABILITY. Any Access Person encountering evidence of any action
in violation of applicable laws or regulations, or of Fund procedures
or the provisions of this Code shall report such evidence to the
appropriate Designated Officer or the Board of Directors of each Fund.
G. INABILITY TO COMPLY WITH CODE. If, as a result of fiduciary
obligations to other persons or entities, an Access Person believes
that he or she, is unable to comply with certain provisions of this
Code, such Access Person shall so advise the Designated Officer of any
Fund for which such person is an Access Person in writing and shall
set forth with reasonably specificity the nature of his or her
fiduciary obligations and the reasons why such Access Person believes
that he or she cannot comply with the provisions of the Code.
VI. EXEMPTED TRANSACTIONS
The provisions of Article VII of this Code shall not apply to:
A. Purchases or sales effected in any account over which such Access
Person has no direct or indirect influence or control;
B. Purchases or sales of Securities which are not eligible for purchase
or sale by any Fund e.g. municipal securities.
C. Purchases or sales which are non-volitional on the part of either the
Access Person or a Fund; Purchases which are part of an automatic
dividend reinvestment plan or employee stock purchase plan;
D. Purchases effected upon the exercise of rights issued by an issuer pro
rata to all holders of a class of its securities, to the extent such
rights were acquired from such issuer, and sales of such rights so
acquired; and
E. Purchases or sales of Securities which receive the prior approval of
the appropriate Designated Officer because they (i) are only remotely
potentially harmful to each Fund, (ii) would be very unlikely to
<PAGE>
affect a highly institutional market, or (iii) clearly are not related
economically to the Securities to be purchased, sold or held by each
Fund.
F. Future elections into an employer sponsored 401(k) plan, in an amount
not exceeding $1,000 in any calendar month and any other transfers to
an open end fund. However, an exchange of a current account balance
into or from one of the closed end funds in an amount greater than
$1,000 would still need pre-clearance and be reportable at the end of
the quarter on the quarterly transaction reports.
G. The provisions of Article VII A, B and D of this Code shall not apply
to any Segregated Person EXCEPT with respect to transactions in
Securities where such Segregated Person knew, or in the ordinary
course of fulfilling his or her duties, should have known that such
Security was being purchased or sold by the Funds or that a purchase
or sale of such Security was being considered by or with respect to
the Funds. Pre-clearance approval WILL be required for purchases of
Securities in private transactions conducted pursuant to Section 4(2)
of the Securities Act of 1933 and Securities (debt or equity) acquired
in an initial public offering.
H. The provisions of this Code shall not apply to any Exempt Person
EXCEPT with respect to transactions in Securities where such Exempt
Person knew, or in the ordinary course of fulfilling his or her
duties, should have known that such Security was being purchased or
sold by the Funds or that a purchase or sale of such Security was
being considered by or with respect to the Funds.
VII. RESTRICTIONS ON PERSONAL INVESTING ACTIVITIES
A. GENERAL. No Access Person shall purchase or sell, directly or
indirectly or for any account over which an Access Person has
discretion, any Security (including both publicly traded and private
placement Securities), in which he or she has, or by reason of such
transaction acquires, any direct or indirect Beneficial Ownership and
which he or she knows or should have known at the time of such
purchase or sale
1. is being considered for purchase or sale by a Fund; or
2. is being purchased or sold by a Fund.
B. PRE-CLEARANCE.
1. Every Access Person must pre-clear all Personal Securities
Transactions with the compliance department. In order to receive
pre-clearance for Personal Securities Transactions, an Access Person
must call the Compliance Officer or complete a Personal Trading
Approval form. A member of the compliance department is available each
business day to respond to pre-clearance requests. Access Persons are
directed to identify (i) the subject of the transaction and the number
of shares and principal amount of each security involved, (ii) the
date on which the Access Person desires to engage in the subject
transaction; (iii) the nature of the transaction (i.e., purchase,
sale, private placement, or any other type of acquisition or
<PAGE>
disposition); (iv) the approximate price at which the transaction will
be effected; and (v) the name of the broker, dealer, or bank with or
through whom the transaction will be effected. When granted, clearance
authorizations will be identified by authorization number and will be
effective for Day Orders for 24-hours from the time of authorization
(or in the case of a private placementpurchase, the closing of the
private placement transaction). In cases of Good Till cancelled Orders
(GTC) or Open Orders, authorizations will be effective until theend of
that calendar day, except for transactions in Pilgrim Capital
Corporation (PACC), formerly Express Holdings Corporation (EXAM),
stock for which authorizations will be effective for 30 days. If on
any particular day the Compliance Officer is not present in the
office, pre-clearance may be obtained by providing a completed
Personal Trading Approval form to a Senior Vice President or Vice
President of PII for authorization. The current list of designated
officers of PII authorized to provide pre-clearance trade approval is
attached as Exhibit B. Questions regarding pre-clearance procedures
should be directed to the compliance department.
2. In determining whether to grant approval of Personal Securities
Transactions of Investment Personnel who desire to purchase or
otherwise acquire Securities in private placement transactions
conducted pursuant to Section 4(2) of the Securities Act of 1933, the
appropriate Designated Officer will consider, among other factors,
whether the investment opportunity presented by such private placement
offering should be reserved for investment company and its
shareholders, and whether the opportunity is being offered to an
individual by virtue of his position with the Fund. In the event that
Investment Personnel who have been authorized to acquire Securities in
a private placement transaction later have any role in a Fund's
subsequent consideration of an investment in the issuer of the
Securities acquired in such prior private placement transaction, such
Investment Personnel must provide written notification of such prior
authorization and investment to the compliance department, immediately
upon learning of such Fund's subsequent consideration. In such
circumstances, the Fund's decision to purchase Securities of such
issuer will be subject to an independent review by Investment
Personnel with no personal interest in the issuer.
3. A disinterested Director of a Fund need only pre-clear a
transaction in a security if at the time such director/trustee
proposes to engage in such transaction, he or she knows , in the
ordinary course of fulfilling his or her official duties as a
director/trustee of such Fund, should know that, during the fifteen
(15) day period immediately preceding the date such director/trustee
proposed to engage in the transaction, such security was purchased or
sold by such Fund or was being considered by the Fund or its
investment adviser for purchase by the Fund.
COMPLIANCE OF TRANSACTIONS WITH THIS CODE BY ACCESS PERSONS MAY DEPEND ON THE
SUBSEQUENT INVESTMENT ACTIVITIES OF THE FUNDS, THEREFORE, PRE-CLEARANCE APPROVAL
OF A TRANSACTION BY THE DESIGNATED OFFICER DOES NOT NECESSARILY MEAN THE
TRANSACTION COMPLIES WITH THE CODE.
<PAGE>
C. INITIAL PUBLIC OFFERINGS. INITIAL PUBLIC OFFERINGS (IPOS AND HOT
IPOS). No Access Person (or account over which they have beneficial
ownership) may purchase any securities in an IPO or Hot IPO; provided,
however, an Access Person (or their beneficially owned accounts) may,
upon the prior written approval of a Designated Officer, participate
in the following IPOs:
(i) an IPO in connection with the de-mutualization of a savings
bank or the de mutualization of a mutual insurance company in
which the holder of the account owns a life insurance policy;
(ii) an IPO of a spin-off company where the Access Person
beneficially owns stock in the company that spins off the issuer;
(iii) an IPO of a company in which the Acess Person beneficially
owns stock in the company and the stock was acquired through
participation in a private placement previously approved by thier
Designated Officer; and
(iv) an IPO of the employer of the holder of the Access Persons
account.
An IPO generally means an offering of securities registered with
the Securities and Exchange Commission (SEC), the issuer of
which, immediately before the registration, was not required to
file reports with the SEC. See, rule 17j-1(a)(6). Hot IPOs are
securities of a public offering that trade at a premium in the
secondary market whenever such secondary market begins.
D. BLACKOUT PERIODS.
1. No Access Person may execute any Personal Securities
Transaction on a day during which any Fund has a pending "buy" or
"sell" order in that same security until such order is executed
or withdrawn.
2. Any purchase or sale of any Security by a Portfolio Manager
which occurs within seven (7) calendar days (exclusive of the day
of the relevant trade) from the day a Fund he or she manages
trades in such security will be subject to Automatic
Disgorgement. This seven day blackout period also applies to any
portfolio support staff member who recommends the purchase or
sale of the particular security to a Fund's Portfolio Manager.
<PAGE>
RESTRICTIONS ON PERSONAL INVESTING ACTIVITIES (CONTINUED)
BAN ON SHORT-TERM TRADING PROFITS. Investment Personnel may not profit from
the purchase and sale, or sale and purchase, of the same (or equivalent)
Securities within sixty (60) calendar days, unless (i) such Securities were
not eligible to be purchased by any of the Funds under their respective
investment policies, or (ii) such Investment Personnel have requested and
obtained an exemption from this provision from the compliance department
with respect to a particular transaction. Violations of this policy will be
subject to Automatic Disgorgement.
GIFTS. Investment Personnel may not receive any fee, commission, gift or
other thing, or services, having a value of more than $100.00 each year
from any person or entity that does business with or on behalf of the
Funds.
SERVICES AS A DIRECTOR. Investment Personnel may not serve on the boards of
directors of publicly traded companies, unless (i) the individual serving
as a director has received prior authorization from the appropriate
Designated Officer based upon a determination that the board service would
be consistent with the interests of the Funds and their shareholders and
(ii) policies and procedures have been developed and maintained by the
board of directors/trustees of the Funds that are designed to isolate the
individual from those making investment decisions (a "Chinese Wall").
NAKED OPTIONS. Investment Personnel are prohibited from engaging in naked
options transactions. Transactions under any incentive plan sponsored by
PII or PSI are exempt from this restriction.
SHORT SALES. Short sales of Securities by Investment Personnel are
prohibited.
VIII. COMPLIANCE PROCEDURES
DISCLOSURE OF PERSONAL HOLDINGS. All Investment Personnel must disclose all
Personal Securities Holdings upon commencement of employment and thereafter
on an annual basis. Such annual disclosure shall be made by January 31st of
each year. Any person filing such report may state the report shall not be
deemed an admission that such person is the beneficial owner of any
Securities covered by the report.
DUPLICATE TRADE CONFIRMATION STATEMENTS AND ACCOUNT STATEMENTS. Every
Access Person must cause duplicate trading confirmations for all Personal
Securities Transactions and copies of periodic statements for all
Securities accounts to be sent to the compliance department, except that a
Segregated Person may satisfy this requirement by providing a statement to
the compliance department of an affiliate of the Adviser
<PAGE>
QUARTERLY TRANSACTIONS REPORTS.
1. PII Investment Adviser Representatives.
Quarterly reporting of transactions in Securities is required of all PII
Investment Adviser Representatives pursuant to the requirements of Rules
204-2(a)(12) or 204-2(a)(13) under the Investment Advisers Act of 1940. PII
must have a record of every Personal Securities Transaction including every
transaction in Securities in which PII or any of its "advisory
representatives" (as such term is defined in the rule) has (or by reason of
such transaction acquires) any direct or indirect beneficial interest and
any account over which an Access Person has discretion, except (i) any
Personal Securities Transaction effected in any account over which neither
PII, nor such advisory representative, has any direct or indirect influence
or control, (ii) any Personal Securities Transaction which is a direct
obligation of the United States and (iii) any Personal Securities
Transactions in shares of unaffiliated open-end funds Such record must
state (i) the title and amount of the Securities involved in the
transaction, (ii) the trade date and nature of the transaction (i.e.,
purchase, sale, private placement, or other acquisition or disposition),
(iii) the price at which the transaction was effected, and (iv) the name of
the broker, dealer or bank with or through whom the transaction was
effected, This report must be made no later than ten days following the end
of the calendar quarter in which such Personal Securities Transaction was
effected. A Segregated Person may satisfy this reporting requirement by
providing a statement to the compliance department of an affiliate of the
Adviser.
2. All Other Access Persons
All other Access Persons must prepare a quarterly report of all
transactions in Securities within 10 days following the end of each quarter
in which such Personal Securities Transaction was effected. The
transactional and reporting rules under the Code for these individuals do
not include shares of registered open-end investment companies, securities
issued by the government of the United States, bankers' acceptances, bank
certificates of deposit, commercial paper, and such other money market
instruments as designated by the board of directors/trustees of such Fund.
Such record must state (i) the title and amount of the Securities involved
in the transaction, (ii) the trade date and nature of the transaction
(i.e., purchase, sale, private placement, or other acquisition or
disposition, (iii) the price at which the transaction was effected, and
(iv) the name of the broker, dealer or bank with or through whom the
transaction was effected. This report must be made no later than ten days
following the end of the calendar quarter. A Segregated Person may satisfy
this reporting requirement by providing a statement to the compliance
department of an affiliate of the Adviser.
<PAGE>
COMPLIANCE PROCEDURES CONTINUED
D. CERTIFICATION OF COMPLIANCE WITH CODE OF ETHICS. All Access Persons will
be provided with a copy of this Code upon beginning his or her employment
with a Fund, or with PII or PSI, as the case may be, and must certify
annually that they have read and understand this Code, and that they
recognize that they are subject to the terms and provisions hereof.
Further, all Access Persons must certify by January 31st of each year that
they have complied with the requirements of this Code and that they have
disclosed all personal brokerage accounts and disclosed or reported all
Personal Securities Transactions required to be disclosed or reported
pursuant to the requirements herein.
IX. SANCTIONS
A.GENERALLY. The Designated Officer shall investigate all apparent
violations of this Code. If a Designated Officer for any Fund, or for PII
or PSI, discovers that an Access Person has violated any provision of this
Code, he or she may impose such sanctions as he or she deems appropriate,
including, without limitation, one or more of the following: warnings,
periods of "probation" during which all personal investment activities
(except for specifically approved liquidations of current positions), a
letter of censure, suspension with or without pay, termination of
employment, or Automatic Disgorgement of any profits realized on
transactions in violation of this Code. Any profits realized on
transactions in violation of Sections D and E of Article VII of this Code
shall be subject to Automatic Disgorgement.
B.PROCEDURES. Upon discovering that an Access Person of a Fund, or of PII
or PSI, has violated any provision of this Code, the appropriate Designated
Officer shall report the violation, the corrective action taken, and any
sanctions imposed to the relevant entity's board of irectors/trustees,
which may, at the request of the individual involved, review the matter. If
a transaction in Securities of a Designated Officer is under consideration,
another senior officer of the relevant Fund, or of PII or PSI, as the case
may be, shall act in all respects in the manner prescribed herein for a
Designated Officer.
X MISCELLANEOUS PROVISIONS
A. RECORDS. The Funds shall maintain records in the manner and to the
extent set forth below, which records may be maintained on microfilm under
the conditions described in Rule 31a-2(f)(1) under the 1940 Act and shall
be available for examination by representatives of the Commission:
a copy of this Code and any other code of ethics which is, or at any
time within the past five (5) years has been, in effect shall be
preserved in an easily accessible place;
a record of any violation of this Code and of any action taken as a
result of such violation shall be preserved in an easily-accessible
place for a period of not less than five (5) years following the end
of the fiscal year in which the violation occurs;
<PAGE>
a copy of each duplicate confirmation statement concerning Personal
Securities Transactions of Access Persons, made pursuant to this Code,
shall be preserved for a period of not less than five (5) years from
the end of the fiscal year in which the statement is provided, the
first two (2) years in an easily-accessible place; and
a copy of each report disclosing Personal Securities Holdings of
Investment Personnel, made pursuant to this Code, shall be preserved
for a period of not less than five (5) years from the end of the
fiscal year in which the report is made, the first two (2) years in an
easily-accessible place; and
a list of all persons who are, or within the past five (5) years have
been, required to pre-clear Personal Securities Transactions or make
reports disclosing Personal Securities Holdings pursuant to this Code
shall be maintained in an easily-accessible place.
CONFIDENTIALITY.
All pre-clearance requests pertaining to Personal Securities
Transactions, reports disclosing Personal Securities Holdings, and any
other information filed pursuant to this Code shall be treated as
confidential, but are subject to review as provided herein and by
representatives of the Commission.
All information relating to any Fund portfolio or pertaining to any
research activities is confidential until publicly available. Whenever
statistical information or research is supplied to or requested by a
Fund, such information must not be disclosed to any persons other than
persons designated by the appropriate Designated Officer or the board
of directors/trustees of such Fund. If the Fund is considering a
particular purchase or sale of a security, this fact must not be
disclosed except to such duly authorized persons.
Any employee authorized to place orders for the purchase or sale of
Securities on behalf of a Fund shall take all steps reasonably
necessary to provide that all brokerage orders for the purchase and
sale of Securities for the account of the Fund will be so executed as
to ensure that the nature of the transactions shall be kept
confidential until the information is reported to the Commission or
each Fund's shareholders in the normal course of business.
4. If any employee of a Fund or Access Person should obtain information
concerning such Fund's portfolio (including, the consideration by the
Fund of acquiring, or recommending any security for the Fund's
portfolio), whether in the course of such person's duties or
otherwise, such person shall respect the confidential nature of this
information and shall not divulge it to anyone unless it is properly
part of such person's services to such Fund to do so or such person is
specifically authorized to do so by the Designated Officer of the
Fund.5.No officer, director or employee shall disclose any non-public
information relating to a client's portfolio or transactions or to the
investment recommendations of PII, nor shall any officer,
director/trustee or employee disclose any non-public information
relating to the business or operations of PII, PSI or the Funds unless
properly authorized to do so.
<PAGE>
C. INTERPRETATION OF PROVISIONS. Each Fund's board of directors/trustees
may from time to time adopt such interpretation of this Code as such
board deems appropriate.
D. EFFECT OF VIOLATION OF THIS CODE. In adopting Rule 17j-1, the
Commission specifically noted, in Investment Company Act Release No.
IC-11421, that a violation of any provision of a particular code of
ethics, such as this Code, would not be considered a per se unlawful
act prohibited by the general anti-fraud provisions of this Rule. In
adopting this Code, it is not intended that a violation of this Code
necessarily is or should be considered to be a violation of Rule
17j-1.
<PAGE>
INITIAL CERTIFICATION OF CODE OF ETHICS
PILGRIM GROUP MUTUAL FUNDS
I AM FULLY FAMILIAR WITH THE EFFECTIVE CODE OF ETHICS AS ADOPTED BY EACH OF THE
PILGRIM GROUP MUTUAL FUNDS, PILGRIM INVESTMENTS, INC. AND PILGRIM SECURITIES,
INC., AND WILL COMPLY WITH SUCH CODE AT ALL TIMES DURING THE FORTHCOMING
CALENDAR YEAR.
Name (print):
--------------------------
Signature:
-----------------------------
Date:
----------------------------------
<PAGE>
EXHIBIT A
TO CODE OF ETHICS
Pilgrim Bank and Thrift Fund, Inc.
Pilgrim Advisory Funds, Inc.
Pilgrim LargeCap Leaders Fund
Pilgrim MidCap Value Fund
Pilgrim Asia-Pacific Equity Fund
Pilgrim Investment Funds, Inc.
Pilgrim MagnaCap Fund
Pilgrim High Yield Fund
Pilgrim Mutual Funds
Pilgrim Internationl Core Growth Fund
Pilgrim Worldwide Growth Fund
Pilgrim International SmallCap Growth Fund
Pilgrim Emerging Countries Fund
Pilgrim LargeCap Growth Fund
Pilgrim MidCap Growth Fund
Pilgrim SmallCap Growth Fund
Pilgrim Convertible Fund
Pilgrim Balanced Fund
Pilgrim High Yield Fund II
Pilgrim Strategic Income Fund
Pilgrim Money Market Fund
Pilgrim Government Securities Income Fund, Inc.
Pilgrim Prime Rate Trust
Pilgrim Equity Trust
Pilgrim MidCap Opportunities Fund
Northstar Galaxy Trust
Northstar Galaxy Emerging Growth Portfolio
Northstar Galaxy Growth + Value Portfolio
Northstar Galaxy High Yield Bond Portfolio
Northstar Galaxy International Value Portfolio
Northstar Galaxy Research Enhanced Index Portfolio
Pilgrim SmallCap Opportunities Funds
Pilgrim Growth Opportunities Fund
<PAGE>
Pilgrim Mayflower Trust
Pilgrim Emerging Markets Value Fund
Pilgrim High Growth + Value Fund
Pilgrim High Total Return Fund
Pilgrim High Total Return Fund II
Pilgrim International Value Fund
Pilgrim Research Enhanced Index Fund
USLICO Series Fund
The Stock Portfolio
The Money Market Portfolio
The Bond Portfolio
The Asset Allocation Portfolio
<PAGE>
EXHIBIT B
TO CODE OF ETHICS
Designated Officer of PII able to provide pre-clearance:
Lauren Bensinger
Senior Vice Presidents of PII able to provide pre-clearance:
James M. Hennessy
Rob Naka
Michael Roland
<PAGE>
POLICIES AND PROCEDURES TO CONTROL THE FLOW AND USE OF MATERIAL NON-PUBLIC
INFORMATION IN CONNECTION WITH SECURITIES ACTIVITIES
The reputation for integrity and high ethical standards in the conduct of its
affairs of the Pilgrim Group, Inc., Pilgrim Investments, Inc. and Pilgrim
Securities, Inc. (Pilgrim) is of paramount importance to all of us. To preserve
this reputation, it is essential that all transactions in securities be effected
in conformity with securities laws and in a manner which avoids the appearance
of impropriety. In particular, it has been Pilgrim 's long-standing policy that
there be no trading in securities of public companies on the basis of material
non-public or "inside" information or disclosure of such information to persons
who are in the position to trade on the basis of the information or transmit it
to others.
Material non-public information is information not known to the public that: (1)
might reasonably be expected to affect the market value of securities and (2)
influence investor decisions to buy, sell or hold securities. It is not possible
to define with precision what constitutes "material" information. However,
advance information about the following:
* a merger, acquisition or joint venture;
* a stock split or stock dividend;
* earnings or dividends of an unusual nature;
* the acquisition or loss of a significant contract;
* a significant new product or discovery;
* a change in control or a significant change in management;
* a call of securities for redemption;
* the public or private sale of a significant amount of additional
securities;
* the purchase or sale of a significant asset;
* a significant labor dispute;
* establishment of a program to make purchases of the issuer's own
shares;
* a tender offer for another issuer's securities; and
* an event requiring the filing of a current report under the Act.
Pilgrim Prime Rate Trust, an affiliated regulated investment company
("PPR"), and Pilgrim Investments, Inc as part of its structured finance
activities are both frequently in possession of material non-public
information about public companies as a result of its investments in
participation interests in senior collateralized corporate loans.
The following policies and procedures are designed to help insure that Pilgrim
abides by the prohibition on trading on the basis of material non-public
information by limiting the use and restricting the disclosure of material
non-public information to persons within or outside the Pilgrim organization who
are in the position to trade on the basis of such information or transmit it to
others.
All employees must familiarize themselves with these policies and procedures and
abide by them. Compliance with the law and with the policies and procedures
described in this memorandum is the individual responsibility of each director,
<PAGE>
officer and employee of Pilgrim. It is each person's duty to see that the
policies and procedures set forth herein are followed in both spirit and letter.
In addition, all employees of Pilgrim should understand that supervisory
personnel have special responsibilities for taking appropriate action to prevent
insider trading violations. FAILURE TO COMPLY WITH THESE POLICIES WILL BE DEALT
WITH HARSHLY AND COULD LEAD TO TERMINATION OF EMPLOYMENT, PERSONAL LIABILITY OR
CRIMINAL PROSECUTION.
PERSONAL SECURITIES TRADING
It is a long-standing policy of Pilgrim that if an employee of Pilgrim or any of
its subsidiaries or affiliated investment companies possesses material
non-public information about a public company, the employee may not trade in or
recommend trading in the securities of that company nor disclose such
information to another person, whether within or outside the Pilgrim
organization, except in fulfillment of a legitimate business objective of
Pilgrim. Violations of this policy may result in severe civil and criminal
penalties under the Federal securities laws, as well as disciplinary action by
Pilgrim. Employees should refer to Pilgrim 's Policies and Procedures Governing
Securities Transactions for a complete statement of these policies.
"CHINESE WALL" POLICIES AND PROCEDURES APPLICABLE TO SECURITIES TRADING BY
PILGRIM
Employees of Pilgrim performing investment management related activities for
PPR/Structured Finance Vehicles ("PPR/Structured Finance Investment Activities
(and persons with supervisory or higher management responsibilities for such
employees) are likely to receive in the normal course of their activities
material non-public information about issuers of publicly-traded securities. The
following policies and procedures are designed to prevent the flow of material
non-public information about a public company or its securities from employees
engaged in PPR/Structured Finance Investment Activities to those performing
other "investment management activities." By following these policies and
procedures, Pilgrim can continue, in most instances, to engage in "investment
management activities," even though material non-public information about public
companies may be known to others within the Pilgrim organization who are
involved in performing PPR/Structured Finance Investment Activities.
"INVESTMENT MANAGEMENT ACTIVITIES," FOR PURPOSES OF THESE POLICIES AND
PROCEDURES, ARE ACTIVITIES OF EMPLOYEES OF PILGRIM WHOSE REGULAR FUNCTIONS OR
DUTIES PRINCIPALLY CONSIST OF MAKING, PARTICIPATION IN, OR OBTAINING INFORMATION
REGARDING, THE PURCHASE OR SALE OF PUBLICLY-TRADED SECURITIES OR MAKING, OR
OBTAINING INFORMATION ABOUT, RESEARCH AND RECOMMENDATIONS WITH RESPECT TO
PURCHASES OR SALES OF SUCH SECURITIES.
<PAGE>
GENERAL "CHINESE WALL" POLICY
IN ADDITION TO PILGRIM 'S GENERAL POLICY PROHIBITING TRADING ON THE BASIS OF
MATERIAL NON-PUBLIC INFORMATION OR DISCLOSURE OF SUCH INFORMATION TO OTHERS, IT
IS PILGRIM'S POLICY THAT ANY MATERIAL NON-PUBLIC INFORMATION ABOUT A PUBLIC
COMPANY OR ITS SECURITIES OBTAINED BY A DIRECTOR, OFFICER OR EMPLOYEE OF PILGRIM
OR ANY OF ITS AFFILIATED INVESTMENT COMPANIES, EITHER IN CONNECTION WITH HIS OR
HER PPR/STRUCTURED FINANCE INVESTMENT ACTIVITIES OR OTHERWISE, SHALL NOT BE
DISCLOSED TO ANY DIRECTOR, OFFICER OR EMPLOYEE OF PILGRIM OR ANY OF ITS
AFFILIATED INVESTMENT COMPANIES PERFORMING INVESTMENT MANAGEMENT ACTIVITIES, OR
ANY OTHER PERSON, EXCEPT AS SPECIFICALLY PERMITTED BY THESE POLICIES AND
PROCEDURES. THIS PROHIBITION APPLIES TO ORAL AS WELL AS WRITTEN DISCLOSURE AND
TO INFORMAL AS WELL AS FORMAL DISCLOSURE.
REPORTING MATERIAL NON-PUBLIC INFORMATION TO CHIEF COMPLIANCE OFFICER.
From time to time, a director, officer or employee of Pilgrim may come into
possession of material non-public information (of the type described on page 18
of these policies and procedures) about a company. If such information is
obtained in connection with the performance of such person's responsibilities as
a director, officer or employee of Pilgrim, then he or she shall immediately
report the information as follows:
a. A director, officer or employee of Pilgrim, other than a PPR/Structured
Finance staff member, shall report such information immediately to the
Compliance Department, which is responsible for taking appropriate action,
which may include restricting trading in the affected securities. Depending
on the nature of such information, such director, officer or employee may
have an ongoing duty to inform the Compliance Department of material
changes in the information or the status of the transaction which it
relates in order to permit the Compliance Department to take appropriate
action, including restricting or terminating restrictions on trading in the
affected securities.
b. PPR/Structured Finance staff members who in their normal course of
business deal with material non-public information are to follow the
SPECIFIC "CHINESE WALL" PROCEDURES as set forth below.
c. Such information need not be reported if, after reasonable inquiry, the
director, officer or employee is satisfied that the Compliance Department
has already received such information.
<PAGE>
SPECIFIC "CHINESE WALL" PROCEDURES
COMPLIANCE WITH SECTIONS 13(F) AND 13(G) OF THE SECURITIES EXCHANGE ACT OF 1934
("EXCHANGE ACT")
All directors, executive officers (or persons performing similar functions)
or Investment Personnel of ReliaStar Financial Corp. ("ReliaStar") shall not
have access to current information (less than 7 days old) that relates to the
voting and investment power of the securities held by the Pilgrim Funds'
portfolios. Such persons shall not have access to investment reports, Investment
Personnel, the premises of Investment Personnel or attend meetings of Investment
Personnel of PII, wherever located, except that such persons may attend meetings
of the Board of Directors/Trustees of the Pilgrim Funds based on the premise
that information concerning portfolio holdings is more than 7 days old.
Communications concerning the holdings, voting or investment power of the
Pilgrim Funds' portfolios between Investment Personnel of PII and directors,
executive officers (or persons performing similar functions) or Investment
Personnel of ReliaStar are prohibited. Exceptions may be permitted by the Chief
Compliance Officer where the Chief Compliance Officer believes such persons will
not act in concert with Investment Personnel of PII for purposes of transactions
in securities that would require reporting under Sections 13(f) and 13(g) of the
Exchange Act.
PILGRIM PRIME RATE TRUST
In order to contain material non-public information concerning a public
company or its securities within the immediate group of persons engaged in
performing PPR/Structured Finance Investment Activities who have a need to know
such information, and in order to ensure that such information does not flow to
those engaged in other investment management activities, the following policies
and procedures should be followed:
1. ORAL AND WRITTEN COMMUNICATIONS. Except as specifically permitted by these
policies and procedures, employees engaged in performing PPR/Structured Finance
Investment Activities should not discuss or exchange any written or oral
non-public information, whether or not material, about a company or its
securities with employees performing other investment management activities.
Any communication, whether written or oral, containing material non-public
information (of the type described on the attached copy of Pilgrim 's Policies
and Procedures to Control the Flow and Use of Material Non-Public Information in
Connection with Securities Activities) about an issuer or its securities shall
be restricted, on a need-to-know basis, to employees engaged in performing
PPR/Structured Finance Investment Activities and to the following persons:
a. directors and senior executives of Pilgrim who are not actually
involved in investment management decisions;
b. Compliance personnel; and
c. certain identified accountants, attorneys or other outside
professional advisers.
In addition, the Company involved shall be placed on PPR/Structured Finance's
Watch List/Inside Information List. Written communications containing material
non-public information shall be marked "confidential." Documents prepared for
presentation to PPR's Board of Directors shall be presumed to contain material
non-public information and shall be handled accordingly.
<PAGE>
2. ATTENDANCE AT MEETINGS. Attendance at meetings, whether held inside or
outside the Pilgrim organization, at which personnel performing PPR/Structured
Finance Investment Activities may be present, is limited as follows:
a. Attendance at meetings at which material non-public information
regarding a company or its securities are to be, or are likely to be,
discussed is restricted to employees, on a need-to-know basis, performing
PPR/Structured Finance Investment Activities and to the following persons:
i) directors and senior executives of Pilgrim who are not actually
involved in investment management decisions
ii) compliance personnel; and
iii) certain identified accountants, attorneys, or other outside
professional advisers.
<PAGE>
SPECIFIC "CHINESE WALL" PROCEDURES CONTINUED
Persons engaged in other investment management activities ARE PROHIBITED from
attending meetings at which material non-public information about a public
company or its securities is to be, or is likely to be, discussed, without the
specific authorization of the Compliance Department, after appropriate legal
consultation.
b. The preceding paragraph shall not prohibit investment management personnel
from preparing and participating in written or oral presentations and attending
meetings with persons performing PPR/Structured Finance Investment Activities in
order to develop products or marketing plans, to report on the financial
services of Pilgrim to existing or prospective clients or to discuss matters not
related to PPR/Structured Finance Investment Activities, provi ded, that such
persons shall leave such meetings if non-public matters are raised.
3. LIBRARY AND FILES. A separate credit file room has been established. The door
is closed and locked at all times except when an Authorized Person is working in
the room. NO OTHER PERSONS ARE ALLOWED IN THE PPR/STRUCTURED FINANCE FILE ROOM
EVEN IN THE COMPANY OF AN AUTHORIZED PERSON (AS DEFINED ABOVE) OTHER THAN REPAIR
OR MAINTENANCE PERSONNEL AND THEN ONLY IN THE PRESENCE OF AN AUTHORIZED PERSON.
The Library's access is to be monitored by an Authorized Person.
All information awaiting filing in the Library is to be under the supervision of
an Authorized Person at all times or locked in a PPR/Structured Finance staff
member's office or other lockable file cabinet.
Materials, which have been archived, are stored with a storage company whose
procedures restrict access to archived materials and where only a Pilgrim
Authorized Person may request retrieval of files from the archives.
4. PPR/STRUCTURED FINANCE OFFICES ARE TO BE LOCKED when not occupied or
supervised. Authorized Persons requiring keys must sign in/out for keys on a log
maintained by the Administrative Assistant.
5. COMPUTERS WITH ACCESS TO PPR/STRUCTURED FINANCE FILES ARE TO HAVE SEPARATE
ACCESS PASSWORDS. Pilgrim 's company-wide computer security has also been
reviewed to insure that all reasonable and practical measures have been taken to
limit the possibility that unauthorized access could be made to PPR/Structured
Finance (and all Pilgrim) computer files. Pilgrim 's MIS personnel are required
to notify in writing a PPR Senior Vice President of any file/systems maintenance
work, in advance of beginning any such work.
<PAGE>
6. THE (602) 417-8327 FAX MACHINE IS FOR THE EXCLUSIVE USE OF THE PPR/STRUCTURED
FINANCE CREDIT DEPARTMENT. It is to remain situated in direct proximity to the
PPR/Structured Finance Department Administrative Assistant for monitoring of
incoming/outgoing information. Any Authorized Person noting any unattended
information on the machine is required to take possession of that information
until it can be properly delivered to the appropriate PPR/Structured Finance
staff member.
If any Pilgrim employee should inadvertently receive PPR/Structured Finance
faxes, he/she is to immediately deliver it to a PPR/Structured Finance staff
member and should immediately report the occurrence to a Senior Vice President
of PPR. The Senior Vice President will decide if there has been any exposure of
non-public information and, if so, will immediately inform the Chief Compliance
Officer and place the issuer on the Restricted List.
7. ALL PPR/STRUCTURED FINANCE NON-PUBLIC DUPLICATE MATERIALS OR OTHER SUCH
REFUSE OF A CONFIDENTIAL NATURE MUST BE DISPOSED OF PROPERLY. A document
shredder is available for the use of each Authorized Person.
8. ALL PPR/STRUCTURED FINANCE MAIL IS TO BE DELIVERED UNOPENED TO THE PPR
DEPARTMENT ADMINISTRATIVE ASSISTANT (OR NEAREST AVAILABLE PPR/STRUCTURED FINANCE
STAFF MEMBER). If any Pilgrim employee should inadvertently receive
PPR/Structured Finance mail, he/she is to immediately hand deliver it to a
PPR/Structured Finance staff member. If the mail was opened before receipt by a
PPR/Structured Finance staff member, the occurrence should be immediately
reported to a Senior Vice President of PPR. The Senior Vice President will
decide if there has been any exposure of non-public information and, if so, will
immediately inform the Chief Compliance Officer and place the issuer on the
Restricted List.
9. PPR/STRUCTURED FINANCE'S MAIL DISTRIBUTION IS TO BE HANDLED AS FOLLOWS: Mail
is received and opened. Each item is reviewed to determine content. If the item
is found to contain material, non-public information, the company will be placed
on the Watch List/Inside Information List provided it is not currently in the
portfolio and, therefore, already on the Watch List/Inside Information List. All
items are distributed to the appropriate recipient.
<PAGE>
RESTRICTIONS ON TRADING
From time to time it may be appropriate to restrict or halt trading in a
security if Pilgrim is in possession of material non-public information about
the issuer of such security, particularly if such information is derived from a
significant transaction or proposed transaction involving PPR/Structured Finance
and the issuer. Whenever a trading restriction is in effect, Pilgrim 's
Compliance Department shall implement appropriate procedures to halt trading in
that security for any account for which Pilgrim Investments, Inc. acts as
discretionary investment manager or adviser.
Where PPR/Structured Finance is involved in a transaction, or is otherwise in
possession of material non-public information, the securities of the affected
company shall be placed on the Watch List/Inside Information List and trading in
such securities shall be monitored. Depending on individual circumstance, such
securities may also be considered for placement on Pilgrim 's Restricted List.
HANDLING OF OTHER SENSITIVE INFORMATION
Although the preceding policies deal in particular with the subject of MATERIAL
non-public information, employees of Pilgrim have an obligation to treat ALL
sensitive non-public information in strictest confidence. To safeguard this
information, the following procedures should be followed:
1. Papers relating to non-public matters concerning issuers of securities should
not be left lying in conference rooms or offices and should be locked in file
cabinets or desks overnight or during absence from the office. In addition,
sensitive information stored in computer systems and other electronic files
should be kept secure.
2. Appropriate controls for the reception and oversight of visitors to sensitive
areas should be implemented and maintained. For example, guests should be
escorted around Pilgrim 's offices and should not be left unattended.
3. Document control procedures, such as numbering counterparts and recording
their distribution, and shredding papers containing material non-public
information should be used where appropriate.
4. If an employee is out of the office on business, secretaries and
receptionists should use caution in disclosing the employee's location.
5. Business conversations should be avoided in public places, such as elevators,
hallways, restrooms and public transportation or in any other situation where
such conversations may be overheard.
QUESTIONS
Questions concerning the interpretation or application of these procedures
should be referred to the Compliance Department, who will consult with counsel
about matters requiring legal interpretations.
<PAGE>
POLICIES AND PROCEDURES GOVERNING SECURITIES TRANSACTIONS
RESTRICTIONS ON TRADING IN SECURITIES.
Pilgrim maintains a list of securities that are subject to trading restrictions
or monitoring in accordance with its Code of Ethics, Chinese Wall Procedures and
various provisions of the federal securities laws. These lists, referred to as
the Restricted List, the Watch List/Inside Information List and the Trading
Lists, are maintained and continuously updated under the supervision of the
Compliance Department. Securities included on the Restricted List may not be
purchased or sold in portfolio accounts, except for Pilgrim Prime Rate Trust
("PPR") and structured finance vehicles. Securities Watch List/Inside
Information List securities are securities of issuers with respect to which
there is a significant likelihood that PPR/Structured Finance is in possession
of material inside information. Trading List securities are those with respect
to which a portfolio manager has indicated an intent to trade or Structured
Finance/PPR public companies to which PPR/Structured Finance is a lender or
PPR/Structured Finance is, or within the preceding ninety (90) days has been, in
possession of material non-public information concerning such company. The
Restricted List, the Watch List/Inside Information List and the Trading Lists
will be prepared and maintained for all Pilgrim Funds; provided that exceptions
from the requirement for such lists may be granted on a case by case basis when
the Compliance Department determines that a portfolios manager's alternative
methodology is sufficient to achieve the purposes of such lists.
Each portfolio manager will maintain a separate Trading List, unless an
exception has been granted by the Compliance Department, as provided above. Each
portfolio manager will have access to his/her Trading List and the Restricted
List.
A. CHINESE WALL PROCEDURES.
Employees of Pilgrim performing investment management related activities for
PPR/Structured Finance ("PPR/Structured Finance Investment Activities") (and
persons with supervisory or management responsibilities for such employees) are
likely, in the normal course of their activities, to receive material non-public
information about issuers of publicly traded securities. If any employee of
Pilgrim possesses material non-public information about a public company,
regardless of its source, such employee may not trade in the securities of that
company or recommend trading in such securities to any person nor can they
disclose such information to another person, whether inside or outside the
Pilgrim organization, except in fulfillment of a legitimate business objective
of Pilgrim. Violations of this policy may result in severe civil or criminal
penalties under the federal securities laws, as well as in disciplinary action
by Pilgrim (including termination of employment). Pilgrim has adopted a series
of stringent procedures designed to prevent the flow of material non-public
information about a public company or its securities from employees engaged in
"PPR/Structured Finance Investment Activities" to employees performing other
"investment management activities." As a general matter, it is Pilgrim's policy
that any material non-public information about a public company or its
securities that is obtained by a director, officer or employee of Pilgrim,
either in connection with their PPR/Structured Finance Investment Activities or
otherwise, shall not be disclosed beyond the immediate group of persons involved
in a particular transaction, except as specifically permitted by the firm's
Chinese Wall Procedures. Employees should refer to Pilgrim 's Chinese Wall
Procedures.
<PAGE>
ALL DIRECTORS, OFFICERS AND EMPLOYEES OF PILGRIM MUST FAMILIARIZE THEMSELVES
WITH THESE POLICIES AND PROCEDURES AND ABIDE BY THEM. COMPLIANCE WITH THE LAW
AND THE POLICIES AND PROCEDURES DESCRIBED IN PILGRIM'S CHINESE WALL PROCEDURES
IS THE INDIVIDUAL RESPONSIBILITY OF EACH DIRECTOR, OFFICER OR EMPLOYEE OF
PILGRIM. IT IS EACH SUCH PERSON'S DUTY TO SEE THAT THE POLICIES AND PROCEDURES
SET FORTH IN PILGRIM 'S CHINESE WALL PROCEDURES ARE FOLLOWED IN BOTH SPIRIT AND
LETTER. FAILURE TO COMPLY WITH THE CHINESE WALL PROCEDURES WILL BE DEALT WITH
HARSHLY AND COULD LEAD TO TERMINATION OF EMPLOYMENT, PERSONAL LIABILITY OR
CRIMINAL PROSECUTION.
B. THE RESTRICTED LIST.
Securities are placed on the Restricted List: (i) in the unlikely event that
there is a failure of the Chinese Wall Procedures and material non-public
information is disseminated beyond persons performing PPR/Structured Finance
Investment Activities; (ii) upon a determination by the Compliance Department or
the Firm's General Counsel that the sensitivity of a transaction being
considered by PPR/Structured Finance, the nature of the information in the
possession of PPR/Structured Finance or other circumstances justify a halt in
trading activity in securities of an issuer; and (iii) in other circumstances as
determined by the Compliance Department or the Firm's General Counsel.
Portfolios managed by Pilgrim, other than PPR, may not trade in securities that
have been placed on the Restricted List. Pre-clearance requests for personal
securities transactions in securities of an issuer on the Restricted List will
not be approved. It is anticipated that few, if any, securities will be included
on the Restricted List.
C. WATCH LIST/INSIDE INFORMATION LIST.
Each company will be placed on the Watch List/Inside Information List if
PPR/Structured Finance is, or within the preceding ninety (90) days has been, in
possession of material non-public information concerning such company.
D. PREPARATION OF THE WATCH LIST/INSIDE INFORMATION LIST.
Persons performing PPR/Structured Finance Investment Activities must immediately
log the names of companies on the Watch List/Inside Information List upon the
receipt of material non-public information concerning such company.
PPR's/Structured Finance portfolio managers must advise the Compliance
Department of any changes in the status of such information which might permit
the removal of such securities from the Watch List/Inside Information List or
require placing them on the Restricted List. In addition, the Firm's General
Counsel may advise the Compliance Department to place the securities of a
particular company on the Watch List/Inside Information List. While portfolio
trading in securities on the Watch List/Inside Information List is NOT
prohibited, such trading is monitored frequently to detect any unusual trading
activity involving Watch List/Inside Information List securities. The Watch
List/Inside Information List is prepared by a PPR/Structured Finance Portfolio
Manager.
<PAGE>
E. TRADING LISTS. - OPEN-END FUNDS
A separate Trading List is maintained for each portfolio. A security of an
issuer is placed on a Trading List each Friday or commencing upon the date that
a portfolio manager determines to engage in a transaction involving such
security imminently (generally within seven (7) business days, subject to market
conditions) and for a period of five (5) business days following such
transaction. A portfolio manager's decision to place a security on a Trading
List should be made by reference to a number of factors, including, the
relationship between the target buy/sell price and the market price, the
volatility of the issue and consideration of other factors that may lead a
portfolio manager to trade in a particular security. Obviously, unforeseen
circumstances may lead to a rapid trading decision, in which case a security may
be placed on the Trading List at the same time as a trading order is placed.
Pre-clearance requests for personal securities transactions in securities of an
issuer on the Trading List will not be approved.
F. TRADING LIST - PPR AND STRUCTURED FINANCE VEHICLES
Public companies will be put on PPR/Structured Finance's Trading list if either
entity (I) owns a loan participation with respect to such company or (ii) is, or
within the preceding ninety (90) days has been, in possession of material
non-public information concerning such company. Pre-clearance requests for
personal securities transactions in securities of an issuer on the
PPR/Structured Finance Trading List will not be approved.
G. PERSONAL SECURITIES TRANSACTIONS.
Under Pilgrim 's Code of Ethics, all employees, officers and directors of
Pilgrim, all directors/trustees of registered investment companies managed by
Pilgrim, as well as certain consultants and independent contractors who have
access to confidential information, other than Segregated Persons (collectively,
"Access Persons") must (i) obtain pre-clearance for personal securities
transactions involving beneficial ownership (as defined in Pilgrim 's Code of
Ethics) and (ii) cause duplicate trading confirmations for such personal
securities transactions to be sent to the Compliance Department A Segregated
Person, as that term is defined in Pilgrim's Code of Ethics, need only pre-clear
a transaction in a Security (as that term is defined in Pilgrim's Code of
Ethics) if at the time such Segregated Person proposed to engage in such
transaction, he or she knew, or in the ordinary course of fulfilling his or her
duties, should have known that such Security was being purchased or sold by the
Funds or that a purchase or sale of such Security was being considered by or
with respect to the Funds EXCEPT that pre-clearance approval WILL be required
for purchases of securities in private transactions conducted pursuant to
Section 4(2) of the Securities Act of 1933 and Securities (debt or equity)
acquired in an initial public offering.
All Pilgrim Registered Representatives not deemed to be Access Persons must also
pre-clear all Personal Securities Transactions with the Compliance Department.
In order to receive pre-clearance for Personal Securities Transactions, a
Registered Representative must call the Compliance Officer or complete a
Personal Trading Approval form. A member of the Compliance Department is
available each business day from 9:00 a.m. to 5:00 p.m. to respond to
pre-clearance requests. Registered Representatives are directed to identify (i)
the securities that will be the subject of the transaction and the number of
shares and principal amount of each security involved, (ii) the date on which
they desire to engage in the subject transaction; (iii) the nature of the
transaction (i.e., purchase, sale, private placement, or any other type of
acquisition or disposition); (iv) the approximate price at which the transaction
<PAGE>
will be effected; and (vi) the name of the broker, dealer, or bank with or
through whom the transaction will be effected. Transactions in securities of an
issuer on the Restricted List or the Trading Lists will not be approved. In
order to maintain the confidentiality of the Restricted List, the Watch
List/Inside Information List and the Trading Lists, callers will not be apprised
of the reason for the denial of the authorization to trade. If on any particular
day the Compliance Officer is not present in the office, pre-clearance may be
obtained by providing a completed Personal Trading Approval form to the
Compliance Analyst for authorization who will obtain the signature of an
appropriate designated officer. Questions regarding pre-clearance procedures
should be directed to the Compliance Department.
Exceptions - Certain Transactions No pre-clearance of a securities transaction
is required for the following transactions:
1. Shares of registered open-end investment companies,
2. Securities issued by the government of the United States, bankers'
acceptances, bank certificates of deposit and time deposits, commercial
paper, repurchase agreements and such other money market instruments as
designated by the board of directors/trustees of such Fund and shares of
ReliaStar Financial Corporation.
3. Purchases or sales effected in any account over which such Registered
Representative has no direct or indirect influence or control;
4. Purchases or sales of securities which are not eligible for purchase or
sale by any Fund e.g. municipal securities.
5. Purchases or sales which are non-volitional on the part of either the
Registered Representative or a Fund;
6. Purchases which are part of an automatic dividend reinvestment plan or
employee stock purchase plan;
7. Purchases effected upon the exercise of rights issued by an issuer pro
rata to all holders of a class of its securities, to the extent such rights
were acquired from such issuer, and sales of such rights so acquired.
8. Purchases or sales of securities which receive the prior approval of the
appropriate Designated Officer because they (i) are only remotely
potentially harmful to each Fund, (ii) would be very unlikely to affect a
highly institutional market, or (iii) clearly are not related economically
to the securities to be purchased, sold or held by each Fund.
9. Future elections into an employer sponsored 401(k) plan, in an amount
not exceeding $1,000 in any calendar month and any other transfers to an
open end fund. However, an exchange of a current account balance into or
from one of the closed end funds in an amount greater than $1,000 would
still need pre-clearance and be reportable at the end of the quarter on the
quarterly transaction reports.
<PAGE>
H. PERSONAL BROKERAGE ACCOUNTS
Access Persons and registered representatives pursuant to Article III, Section
28 of the NASD Rules of Fair Practice, are required to notify the securities
brokers with whom he or she opens personal brokerage accounts that he or she is
an affiliated person of PII or PSI as appropriate. This notification should take
place at the time the brokerage account is opened and applies to your personal
accounts and to any account in which you have a beneficial interest as defined
in Pilgrim 's Code of Ethics. If the securities account is with a non-member
institution (e.g., investment adviser, bank or other financial institution) you
are required to notify the Chief Compliance Officer prior to the execution of
any initial transactions, of your intention to open such account or place an
order.
For brokerage and/or non-member institution accounts established prior to your
association with PSI or PII, you are required to notify the Chief Compliance
Officer promptly after your hire date.
I. TRADE CONFIRMATIONS.
Access Persons (other than Segregated Persons) and registered representatives
shall cause broker-dealers maintaining accounts to deliver to Pilgrim duplicate
trade confirmations and statements with respect to all transactions in such
accounts. Pilgrim has prepared a form letter to be used such Access Persons to
direct brokerage firms maintaining such accounts to send duplicate trade
confirmations to the Compliance Department. A copy of this form letter is
attached as Exhibit C.
J. NEW ISSUES.
"Hot issues" are securities which, immediately after their initial public
distribution, sell at a premium in the secondary market. No Access Person nor
Registered Representative ("RR") may purchase hot issue securities during the
primary offering for his or her personal account, for any account in which the
individual has a direct or indirect financial interest, or for the account of
any member of the individual's immediate family. For this purpose, the term
"immediate family" includes parents, spouse, brothers, sisters, in-laws,
children or any other person who is directly or indirectly materially supported
by you.
Because of the difficulty in recognizing a potential "hot issue" until after
distribution, you and your immediate family may not purchase, for any account in
which you have a beneficial interest, any new issue of a security unless such
purchase has been approved in advance by the Chief Compliance Officer.
<PAGE>
EXHIBIT C
SAMPLE LETTER TO BROKERAGE FIRM
TO ESTABLISH DUPLICATE CONFIRMS AND PERIODIC STATEMENTS
(PAGE C12, H. TRADE CONFIRMATIONS)
January 2, 1996
Merrill Lynch, Pierce, Fenner & Smith, Inc.
111 W. Ocean Blvd., 24th Floor
Long Beach, CA 90802
RE: The Brokerage Account of Account Registration
Account No. Your Account Number
AE Name of Your Registered Representative
Dear Ladies/Gentlemen:
In accordance with the policies of Pilgrim Group, Inc., a financial services
firm with which I have become associated, effective immediately, please forward
duplicate trade confirmations and periodic statements on the above-captioned
accounts as follows:
Pilgrim Group, Inc.
ATTN: LAUREN D. BENSINGER
VP & CHIEF COMPLIANCE OFFICER
TWO RENAISSANCE SQUARE
40 North Central Avenue
Suite 1200
Phoenix, AZ 85004
Sincerely,
Your Name
