-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FQs/+/hQ6Mfu7+FXOaM2KrR4pbW7MG35kJkFEJTXiy8vupJiOQ0YZO9bgZzzDV7g fNf5g4zJqcLUiaLdZpbHAw== 0000950147-98-000651.txt : 19980820 0000950147-98-000651.hdr.sgml : 19980820 ACCESSION NUMBER: 0000950147-98-000651 CONFORMED SUBMISSION TYPE: N-2 PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19980819 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PILGRIM AMERICA PRIME RATE TRUST CENTRAL INDEX KEY: 0000826020 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 956874587 STATE OF INCORPORATION: MA FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: N-2 SEC ACT: SEC FILE NUMBER: 333-61831 FILM NUMBER: 98694308 FILING VALUES: FORM TYPE: N-2 SEC ACT: SEC FILE NUMBER: 811-05410 FILM NUMBER: 98694309 BUSINESS ADDRESS: STREET 1: TWO RENAISSANCE SQ STREET 2: 40 N CENTRAL STE 1200 CITY: PHOENIX STATE: AZ ZIP: 85004-4424 BUSINESS PHONE: 6024178100 MAIL ADDRESS: STREET 1: TWO RENAISSANCE SQ STREET 2: 40 N CENTRAL STE 1200 CITY: PHOENIX STATE: AZ ZIP: 85004-4424 FORMER COMPANY: FORMER CONFORMED NAME: PILGRIM PRIME RATE TRUST DATE OF NAME CHANGE: 19920703 N-2 1 FORM N-2 As filed with the Securities and Exchange Commission on August 19, 1998 1933 Act File No. 333-______ 1940 Act File No. 811-5410 ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-2 (Check appropriate box or boxes) |X| REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |_| Pre-Effective Amendment No. |_| Post-Effective Amendment No. ___ and |X| REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X| Amendment No. 28 PILGRIM AMERICA PRIME RATE TRUST Exact Name of Registrant Specified in Charter 40 North Central Avenue, Suite 1200 Phoenix, AZ 85004 Address of Principal Executive Offices (Number, Street, City, State, Zip Code) (602) 417-8256 Registrant's Telephone Number, Including Area Code James M. Hennessy, Esq. Pilgrim America Group, Inc. 40 North Central Avenue, Suite 1200 Phoenix, AZ 85004 Name and Address (Number, Street, State, Zip Code) of Agent for Service Copies to: Jeffrey S. Puretz, Esq. Dechert Price & Rhoads 1775 Eye Street, N.W. Washington, D.C. 20006 Approximate Date of Proposed Public Offering: As soon as practical after the effective date of this Registration Statement. If any securities being registered on this form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, other than securities offered in connection with a dividend reinvestment plan, check the following box. |X| CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
====================================================================================================================== Proposed Maximum Proposed Maximum Title of Securities Amount Being Offering Price Per Unit Aggregate Offering Amount of Being Registered Registered Price Registration Fee - ---------------------------------------------------------------------------------------------------------------------- Shares of Beneficial 25,000,000 shares $10.0313 (1) $250,782,500(1) $73,980.84 Interest (without par value) ======================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(c) under the Securities Act of 1933 based on the average of the high and low sales prices of the shares of beneficial interest on August 14, 1998 as reported on the New York Stock Exchange. ------------------ The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with the provisions of Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine. ================================================================================ PILGRIM AMERICA PRIME RATE TRUST CROSS-REFERENCE SHEET PART A
Item No. Caption Location in Prospectus - -------- ------- ---------------------- 1. Outside Front Cover................................. Front Cover Page 2. Inside Front and Outside Back Cover Page..................................... Inside Front and Outside Back Cover Page 3. Fee Table and Synopsis.............................. Prospectus Summary; Trust Expenses 4. Financial Highlights................................ Financial Highlights and Investment Performance -- Financial Highlights Table 5. Plan of Distribution................................ Front Cover Page; Prospectus Summary; Plan of Distribution 6. Selling Shareholders................................ Not Applicable 7. Use of Proceeds..................................... Use of Proceeds 8. General Description of the Registrant............... Front Cover Page; Prospectus Summary; Financial Highlights and Investment Performance - Portfolio Composition; Financial Highlights and Investment Performance - Trading and NAV Information; Description of the Shares; Investment Objectives and Policies; Risk Factors and Special Considerations; General Information on Senior Loans 9. Management.......................................... Prospectus Summary; Investment Management and Other Services 10. Capital Stock, Long-Term Debt, and Other Securities. ........................................ Front Cover Page; Description of the Shares; Dividends and Distributions -- Distribution Policy; Dividends and Distributions - Shareholder Investment Program; Tax Matters 11. Defaults and Arrears on Senior Securities........... Not Applicable 12. Legal Proceedings................................... Not Applicable 13. Table of Contents of the Statement of Additional Information......................................... Table of Contents of Statement of Additional Information
PART B
Location in Statement of Additional Item No. Caption Information - -------- ------- ----------- 14. Cover Page.......................................... Cover Page 15. Table of Contents................................... Table of Contents 16. General Information and History..................... Change of Name 17. Investment Objective and Policies................... Additional Information About Investments and Investment Techniques; Investment Restrictions 18. Management.......................................... Trustees and Officers 19. Control Persons and Principal Holders of Securities. ........................................ Trustees and Officers; Prospectus: Description of the Shares 20. Investment Advisory and Other Services.............. Investment Management and Other Services; Prospectus: Investment Management and Other Services; Prospectus: Experts 21. Brokerage Allocation and Other Practices............ Portfolio Transactions 22. Tax Status.......................................... Tax Matters 23. Financial Statements................................ Prospectus: Financial Statements
PART C Information required to be included in Part C is set forth under the appropriate item, so numbered, in Part C of this Registration Statement. Prospectus 25,000,000 Shares of Beneficial Interest Pilgrim America Prime Rate Trust New York Stock Exchange Symbol: PPR Pilgrim America Funds 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004 (800) 992-0180 Pilgrim America Prime Rate Trust (the "Trust") is a diversified, closed-end management investment company. The Trust's investment objective is to seek as high a level of current income as is consistent with the preservation of capital. The Trust seeks to achieve its objective by investing primarily in interests in senior floating-rate loans ("Senior Loans"), the interest rates of which float periodically based upon a benchmark indicator of prevailing interest rates. Shares of the Trust trade on the New York Stock Exchange (the "NYSE") under the symbol "PPR." The Trust's Investment Manager is Pilgrim America Investments, Inc. ("PAII" or the "Investment Manager"). The address of the Trust is 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. Investment in the Trust involves certain risks and special considerations, including risks associated with the Trust's use of leverage. See "Risk Factors and Special Considerations" beginning on page 17. 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 America Securities, Inc. ("PASI"), 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 PASI. PASI 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." THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Investors are advised to read this Prospectus and retain it for future reference. This Prospectus sets forth concisely the information about the Trust that a prospective investor ought to know before investing. A Statement of Additional Information dated , 1998 (the "SAI") containing additional information about the Trust has been filed with the Securities and Exchange Commission (the "Commission") and is incorporated by reference in its entirety into this Prospectus. A copy of the SAI, the table of contents of which appears on page 28 of this Prospectus, may be obtained without charge by contacting the Trust toll-free at (800) 992-0180. The date of this Prospectus is , 1998. PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information appearing elsewhere in this Prospectus. THE TRUST AT A GLANCE - -------------------------------------------------------------------------------- The Trust The Trust is a diversified, closed-end management investment company organized as a Massachusetts business trust. As of , the Trust's NAV per Share was $ . - -------------------------------------------------------------------------------- NYSE Listed As of , the Trust had Shares outstanding, which are traded on the NYSE under the symbol "PPR." As of , 1998, the last reported sales price of a Share of the Trust was $ . - -------------------------------------------------------------------------------- Investment Objective To obtain as high a level of current income as is consistent with the preservation of capital. There can be no assurance that the Trust will achieve its investment objective. - -------------------------------------------------------------------------------- Primary Investment Strategy The Trust seeks to achieve its investment objective by primarily acquiring interests in Senior Loans with interest rates that float periodically based on a benchmark indicator of prevailing interest rates, such as the Prime Rate or the London Inter-Bank Offered Rate ("LIBOR"). The Trust may also employ techniques such as borrowing for investment purposes. - -------------------------------------------------------------------------------- Diversification The Trust maintains a diversified investment portfolio. As a diversified management investment company, the Trust, with respect to 75% of its total assets, may invest no more than 5% of the value of its total assets in any one issuer (other than the U.S. Government). This strategy of diversification is intended to manage risk by limiting exposure to any one issuer. - -------------------------------------------------------------------------------- General Investment Guidelines * Under normal circumstances, 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 America Investments, Inc. - -------------------------------------------------------------------------------- Administrator Pilgrim America Group, Inc. - -------------------------------------------------------------------------------- 1 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 bor- rowers under Senior Loans may default on obli- gations to pay principal or interest when due, that lenders may have difficulty liquidating the collat- eral securing the Senior Loans or enforcing their rights under the terms of the Senior Loans, and that the Trust's investment objective may not be realized. - -------------------------------------------------------------------------------------------------- Leverage The Trust may borrow for investment purposes, which increases both investment opportunity and risk. - -------------------------------------------------------------------------------------------------- Secondary Market for the Trust's Shares The issuance of the Shares through the 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 addi- tion, 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 ad- versely affect the rate of interest payable on Senior Loans acquired by the Trust. - --------------------------------------------------------------------------------------------------
2 TRUST EXPENSES The following table is intended to assist the Trust's shareholders (the "Shareholders") in understanding the various costs and expenses associated with investing in the Trust.(1)
Net Assets Net Assets Plus Without Borrowings(2) Borrowings(3) ------------- ------------- Shareholder Transaction Expenses Shareholder Investment Program Commission (as a percentage of offering price)(4) ...... 1.00% 1.00% Shareholder Investment Program Fees ..................... NONE NONE Privately Negotiated Transactions Commission (as a percentage of offering price)(4) ...... 3.00% 3.00% Shareholder Investment Program Fees ..................... NONE NONE Annual Expenses (as a percentage of net assets attributable to Shares) Management and Administrative Fees(5) .................. 1.26% 0.91% Other Operating Expenses(6) ........................... 0.23% 0.22% ----- ----- Total Annual Expenses before Interest ..................... 1.49% 1.13% Interest Expense on Borrowed Funds ........................ 3.07% 0.00% ----- ----- Total Annual Expenses .................................... 4.56% 1.13% ===== =====
- ----------------------- (1) The calculations in the fee table above are based on the Trust's expenses as a percentage of net assets. Certain expenses of the Trust, such as management and administrative fees, are calculated on the basis of net assets plus borrowings. If the Trust's expenses are calculated on the basis of net assets plus borrowings (including borrowings equal to 331|M/3% of net assets plus borrowings), the annual expenses in the fee table would read as follows: Annual Expenses (as a percentage of net assets plus borrowings attributable to Shares) Management and Administrative Fees ................................................ 0.84% Other Operating Expenses ......................................................... 0.15% ----- Total Annual Expenses before Interest Expense0 .................................... 0.99% Interest Expense on Borrowed Funds ................................................ 2.05% ----- Total Annual Expenses ............................................................ 3.04% =====
Borrowing may be made for the purpose of acquiring additional income-producing investments when the Investment Manager believes that such use of borrowed proceeds will enhance the Trust's net yield. (2) Expenses are calculated based upon the Trust's net assets plus outstanding borrowings (at 331|M/3% of net assets plus borrowings) and are shown as a percentage of net assets. (3) Expense ratios are calculated based upon net assets of the Trust and assume that no borrowings have been made. (4) In connection with optional cash investments in excess of $5,000 pursuant to a waiver, a commission of up to 1.00% of the amount of such investment may be paid to PASI for services in connection with the sale of the Shares, while in connection with certain privately negotiated transactions, a commission of up to 3.00% of such investment may be paid to PASI. PASI may allow all or some of such commission to other broker-dealers. See "Distribution Arrangements." No commissions will be paid by the Trust or its Shareholders in connection with the reinvestment of dividends and capital gains distributions or in connection with optional cash investments up to the maximum of $5,000 per month. (5) Pursuant to an investment management agreement with the Trust, PAII is entitled to receive a fee of 0.80% of the average daily net assets of the Trust, plus the proceeds of any outstanding borrowings. PAII has agreed to reduce its management fee until November 12, 1999 to 0.60% on that portion of the Trust's average daily net assets, plus the proceeds of any outstanding borrowings, in excess of $1.15 3 billion. See "Investment Management and Other Services -- Investment Manager." Pursuant to its Administration Agreement with the Trust, Pilgrim America Group, Inc. ("PAGI" or the "Administrator"), the Trust's Administrator, is entitled to receive a fee of 0.15% of the Trust's average daily net assets, plus the proceeds of any outstanding borrowings, up to $800 million; and 0.10% of the average daily net assets, plus the proceeds of any outstanding borrowings, in excess of $800 million. See "Investment Management and Other Services -- The Administrator." (6) "Other Operating Expenses" are based on estimated amounts for the current fiscal year. The following example applies to shares issued in connection with the Trust's Shareholder Investment Program. Because the assumed amount 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.
- ------------------------------------------------------------------------------------------------- Example 1 year 3 years 5 years 10 years - ------------------------------------------------------------------------------------------------- You would pay the following expenses on a $1,000 investment, assuming a 5% annual return and where the Trust has borrowed ........................ $46 $138 $231 $466 - ------------------------------------------------------------------------------------------------- You would pay the following expenses on a $1,000 investment, assuming a 5% annual return and where the Trust has not borrowed ..................... $12 $ 36 $ 62 $137 - -------------------------------------------------------------------------------------------------
The following example applies to shares issued in connection with privately negotiated transactions, which may have a maximum front-end commission of 3.0%.
- ------------------------------------------------------------------------------------------------- Example 1 year 3 years 5 years 10 years - ------------------------------------------------------------------------------------------------- You would pay the following expenses on a $1,000 investment, assuming a 5% annual return and where the Trust has borrowed ........................ $74 $164 $254 $482 - ------------------------------------------------------------------------------------------------- You would pay the following expenses on a $1,000 investment, assuming a 5% annual return and where the Trust has not borrowed ..................... $41 $ 65 $ 90 $163 - -------------------------------------------------------------------------------------------------
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. 4 FINANCIAL HIGHLIGHTS AND INVESTMENT PERFORMANCE Financial Highlights Table The table below sets forth selected financial information which has been derived from the financial statements in the Trust's Annual Report dated as of February 28, 1998. For the fiscal years ended February 28, 1998 and 1997, and February 29, 1996, the information in the table below has been audited by KPMG Peat Marwick LLP, independent certified public accountants. For all periods ending prior to February 29, 1996, the financial information was audited by the Trust's former auditors. This information should be read in conjunction with the Financial Statements and Notes thereto included in the Trust's February 28, 1998 Annual Report to Shareholders, which contains further information about the Trust's performance, and which is available to Shareholders upon request and without charge.
Year Ended February 28 or February 29, ----------------------------------------- 1998 1997(8) 1996(6) ---- ------- ------- Per Share Operating Performance NAV, beginning of period ..................... $ 9.45 $ 9.61 $ 9.66 ---------- ------------ -------- Net investment income ........................ 0.87 0.82 0.89 Net realized and unrealized gain (loss) on investment ................................. (0.13) (0.02) (0.08) ---------- ------------ -------- Increase in NAV from investment operations ... 0.74 0.80 0.81 Distributions from net investment income ...... (0.85) (0.82) (0.86) Reduction in NAV from rights offering. ......... -- (0.14) -- Increase in NAV from repurchase of capital stock ................................. -- -- -- ---------- ------------ -------- NAV, end of period ........................... $ 9.34 $ 9.45 $ 9.61 ========== ============ ======== Closing market price at end of period ......... $ 10.31 $ 10.00 $ 9.50 ========== ============ ======== Total Return Total investment return at closing market price(3) .............................. 12.70% 15.04%(5) 19.19% Total investment return based on NAV(4) ...... 8.01% 8.06%(5) 9.21% Ratios/ Supplemental Data Net assets, end of period (000's) ............ $1,034,403 $ 1,031,089 $862,938 Average Borrowings (000's) ..................... $ 346,110 $ 131,773 -- Ratios to average net assets plus borrowings: Expenses (before interest and other fees related to revolving credit facility) ...... 1.04% 1.13% -- Expenses. .................................... 2.65% 1.92% -- Net investment income ........................ 6.91% 7.59% -- Ratios to average net assets: Expenses (before interest and other fees related to revolving credit facility) ......... 1.39% 1.29% -- Expenses .................................... 3.54% 2.20% 1.23% Net investment income ........................ 9.23% 8.67% 9.23% Portfolio turnover rate ........................ 90% 82% 88% Shares outstanding at end of period (000's) ... 110,764 109,140 89,794 Average daily balance of debt outstanding during the period (000's) (7) ............... $ 346,110 $ 131,773 $ -- Average monthly shares outstanding during the period (000's) ........................... 109,998 95,917 89,794 Average amount of debt per share during the period(7) ................................. $ 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) 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(3) .............................. 3.27%(5) 8.06% 10.89% -- -- Total investment return based on NAV(4) ...... 5.24%(5) 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%(2) 1.38% Net investment income ........................ 7.59% 6.04% 5.88% 7.62%(2) 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) (7) ............... $ 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(7) ................................. $ 0.04 $ -- $ 0.01 $ 0.08 $ 0.02 May 12, 1988* to February 1990 28, 1989 ---- -------- Per Share Operating Performance NAV, beginning of period ..................... $ 10.00 $ 10.00 ------------- ------------- Net investment income ........................ 1.06 0.72 Net realized and unrealized gain (loss) on investment ................................. -- -- ------------- ------------- Increase in NAV from investment operations ... 1.06 0.72 Distributions from net investment income ...... (1.06) (0.72) Reduction in NAV from rights offering. ......... -- -- Increase in NAV from repurchase of capital stock ................................. -- -- ------------- ------------- NAV, end of period ........................... $ 10.00 $ 10.00 ============= ============= Closing market price at end of period ......... $ -- $ -- ============= ============= Total Return Total investment return at closing market price(3) .............................. -- -- Total investment return based on NAV(4) ...... 11.13% 7.35% Ratios/ Supplemental Data Net assets, end of period (000's) ............ $ 1,036,470 $ 252,998 Average Borrowings (000's) ..................... -- -- Ratios to average net assets plus borrowings: Expenses (before interest and other fees related to revolving credit facility) ...... -- -- Expenses. .................................... -- -- Net investment income ........................ -- -- Ratios to average net assets: Expenses (before interest and other fees related to revolving credit facility) ......... -- -- Expenses .................................... 1.46%(2) 1.18%(1)(2) Net investment income ........................ 10.32%(2) 9.68%(1)(2) Portfolio turnover rate ........................ 100% 49%(1) Shares outstanding at end of period (000's) ... 103,660 25,294 Average daily balance of debt outstanding during the period (000's) (7) ............... $ -- $ -- Average monthly shares outstanding during the period (000's) ........................... -- -- Average amount of debt per share during the period(7) ................................. $ -- $ --
5 - ------------ * Commencement of operations. (1) Annualized. (2) Prior to the waiver of expenses, the ratios of expenses to average net assets were 1.95% (annualized), 1.48% and 1.44% for the period from May 12, 1988 to February 28, 1989, and for the fiscal years ended February 28, 1990 and February 29, 1992, respectively, and the ratios of net investment income to average net assets were 8.91% (annualized), 10.30% and 7.60% for the period from May 12, 1988 to February 28, 1989 and for the fiscal years ended February 28, 1990 and February 29, 1992, respectively. (3) Total investment return measures the change in the market value of your investment assuming reinvestment of dividends and capital gain distributions, if any, in accordance with the provisions of the dividend reinvestment plan. On March 9, 1992, the shares of the Trust were initially listed for trading on the NYSE. Accordingly, the total investment return for the year ended February 28, 1993, covers only the period from March 9, 1992 to February 28, 1993. Total investment return for the periods prior to the year ended February 28, 1993 is not presented since market values for the Trust's shares were not available. Total returns for less than one year are not annualized. (4) Total investment return at NAV has been calculated assuming a purchase at NAV at the beginning of each period and a sale at NAV at the end of each period and assumes reinvestment of dividends and capital gain distributions in accordance with the provisions of the dividend reinvestment plan. This calculation differs from total investment return because it excludes the effects of changes in the market values of the Trust's shares. Total returns for less than one year are not annualized. (5) Calculation of total return excludes the effect of the per share dilution resulting from the rights offering as the total account value of a fully subscribed shareholder was minimally impacted. (6) PAII, the Trust's Investment Manager, acquired certain assets of Pilgrim Management Corporation, the Trust's former investment manager, in a transaction that closed on April 7, 1995. (7) Prior to May 2, 1996, the Trust borrowed to enable it to purchase Shares in connection with periodic tender offers. On May 2, 1996, the Trust received shareholder approval to borrow for investment purposes. As of February 28, 1998, the Trust had outstanding borrowings of $342,000,000 under a $515,000,000 line of credit. See "Policy on Borrowing" in this section. (8) PAII has agreed to reduce its fee for a period of three years from November 12, 1996 (the expiration of the 1996 rights offering) to 0.60% of the Trust's average daily net assets, plus the proceeds of any outstanding borrowings, over $1.15 billion. 6 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 28, 1998. - ------------------------------------------------------------------------------ Trust Characteristics - ------------------------------------------------------------------------------ Net Assets $1,034,402,810 - ------------------------------------------------------------------------------ Assets Invested in Senior Loans $1,352,588,772* - ------------------------------------------------------------------------------ Outstanding Borrowings $342,000,000 - ------------------------------------------------------------------------------ Total Number of Senior Loans 132 - ------------------------------------------------------------------------------ Average Amount Outstanding per Senior Loan $10,246,885 - ------------------------------------------------------------------------------ Total Number of Industries 28 - ------------------------------------------------------------------------------ Portfolio Turnover Rate 90% - ------------------------------------------------------------------------------ Average Senior Loan Amount per Industry $48,306,742 - ------------------------------------------------------------------------------ Weighted Average Days to Interest Rate Reset 46 days - ------------------------------------------------------------------------------ Average Senior Loan Maturity 68 months - ------------------------------------------------------------------------------ Average Age of Senior Loans Held in Portfolio 12 months - ------------------------------------------------------------------------------ (*Includes Senior Loans and other securities received through restructures) - ----------------------------------------------------------------------------- Top 10 Industries As a % of - ----------------------------------------------------------------------------- Net Assets Total Assets Healthcare, Education and Childcare 17.3% 12.9% Beverage, Food and Tobacco 10.5% 7.8% Electronics 9.9% 7.4% Chemicals, Plastics and Rubber 8.8% 6.5% Automobile 7.7% 5.7% Buildings and Real Estate 6.3% 4.7% Personal, Food and Miscellaneous Services 5.9% 4.4% Broadcasting 5.6% 4.2% Printing and Publishing 5.2% 3.9% Telecommunications 5.1% 3.8% - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- Top 10 Senior Loan Holdings As a % of - ----------------------------------------------------------------------------- Net Assets Total Assets MAFCO Financial Corp. 2.9% 2.2% Community Health Systems 2.4% 1.8% Favorite Brands International 2.3% 1.7% Outsourcing Solutions 2.0% 1.5% Papa Gino's, Inc. 2.0% 1.5% Fairchild Semiconductor Corp. 2.0% 1.5% Integrated Health Services 1.9% 1.4% Sun Healthcare 1.9% 1.4% 24-Hour Fitness, Inc. 1.9% 1.4% Atlas Freighter Leasing 1.9% 1.4% - ----------------------------------------------------------------------------- 7 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 $717,000,000. 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 June 30, 1998, the Trust had outstanding borrowings of $464,000,000. The lenders under the credit facilities have a security interest in all assets of the Trust. The lenders have the right to liquidate Trust assets in the event of default by the Trust, and the Trust may be inhibited from paying dividends in the event of a material adverse event or condition respecting the Trust or Investment Manager until outstanding debts are paid or until the event or condition is cured. The Trust is permitted to borrow up to 33 1/3%, or such other percentage permitted by law, of its total assets (including the amount borrowed) less all liabilities other than borrowings. See "Risk Factors and Special Considerations -- Borrowing and Leverage." 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.
Premium/(Discount) Price NAV To NAV --------------------- ----------------------- ------------------------- Reported Calendar Quarter Ended High Low High Low High Low NYSE Volume ---- --- ---- --- ---- --- ----------- 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
8 The following chart shows, for the Trust's Shares for the period from March 3, 1995 to August 7, 1998: (1) the closing price of the Shares as shown on the NYSE Composite Transaction Tape; (2) the NAV of the Shares; and (3) the discount or premium to NAV. DATE PRICE NAV %PREM DATE PRICE NAV %PREM - -------------------------------------------------------------------------------- 08/07/98 10.000 9.280 7.76 04/24/98 10.000 9.330 7.18 07/31/98 10.000 9.330 7.18 04/17/98 10.063 9.320 7.97 07/24/98 9.938 9.320 6.63 04/10/98 9.938 9.300 6.85 07/17/98 10.000 9.300 7.53 04/03/98 10.063 9.360 7.51 07/10/98 10.000 9.300 7.53 03/27/98 9.875 9.340 5.73 07/03/98 10.063 9.350 7.62 03/20/98 10.000 9.330 7.18 06/26/98 9.938 9.340 6.40 03/13/98 10.125 9.310 8.75 06/19/98 9.938 9.320 6.63 03/06/98 10.250 9.290 10.33 06/12/98 10.000 9.310 7.41 02/27/98 10.313 9.340 10.41 06/05/98 10.125 9.370 8.06 02/20/98 10.313 9.340 10.41 05/29/98 10.250 9.360 9.51 02/13/98 10.250 9.340 9.74 05/22/98 10.188 9.330 9.19 02/06/98 10.250 9.320 9.98 05/15/98 10.188 9.310 9.43 01/30/98 10.250 9.380 9.28 05/08/98 10.063 9.290 8.32 01/23/98 10.500 9.360 12.18 05/01/98 10.125 9.340 8.40 01/16/98 10.313 9.340 10.41 DATE PRICE NAV %PREM DATE PRICE NAV %PREM - -------------------------------------------------------------------------------- 01/09/98 10.313 9.330 10.53 09/26/97 10.188 9.390 8.49 01/02/98 10.313 9.310 10.77 09/19/97 10.188 9.380 8.61 12/26/97 10.375 9.390 10.49 09/12/97 10.125 9.350 8.29 12/19/97 10.375 9.380 10.61 09/05/97 10.125 9.330 8.52 12/12/97 10.250 9.360 9.51 08/29/97 10.125 9.400 7.71 12/05/97 10.250 9.340 9.74 08/22/97 10.125 9.380 7.94 11/28/97 10.250 9.390 9.16 08/15/97 10.188 9.370 8.72 11/21/97 10.188 9.390 8.49 08/08/97 10.125 n.a. n.a 11/14/97 10.188 9.360 8.84 08/01/97 10.188 9.430 8.03 11/07/97 10.250 9.350 9.63 07/25/97 10.125 9.410 7.60 10/31/97 10.250 9.400 9.04 07/18/97 10.000 9.380 6.61 10/24/97 10.313 9.390 9.82 07/11/97 10.000 9.380 6.61 10/17/97 10.188 9.380 8.61 07/04/97 10.000 9.430 6.04 10/10/97 10.188 9.360 8.84 06/27/97 10.031 9.420 6.49 10/03/97 10.250 9.410 8.93 06/20/97 10.125 9.400 7.71 DATE PRICE NAV %PREM DATE PRICE NAV %PREM - -------------------------------------------------------------------------------- 06/13/97 10.125 9.390 7.83 02/28/97 9.875 9.450 4.50 06/06/97 10.063 9.370 7.39 02/21/97 9.875 9.430 4.72 05/30/97 10.063 9.420 6.82 02/14/97 10.000 n.a. n.a. 05/23/97 10.125 9.400 7.71 02/07/97 9.750 9.410 3.61 05/16/97 9.875 9.380 5.28 01/31/97 9.750 9.460 3.07 05/09/97 10.000 9.370 6.72 01/24/97 9.813 9.440 3.95 05/02/97 10.000 9.420 6.16 01/17/97 9.750 9.430 3.39 04/25/97 10.000 9.420 6.16 01/10/97 9.875 9.410 4.94 04/18/97 10.125 9.400 7.71 01/03/97 9.875 9.390 5.17 04/11/97 10.125 9.380 7.94 12/27/96 9.750 9.380 3.94 04/04/97 10.125 9.440 7.26 12/20/96 9.750 n.a. n.a. 03/28/97 9.875 9.420 4.83 12/13/96 9.625 9.410 2.28 03/21/97 9.750 9.410 3.61 12/06/96 9.375 9.390 -.16 03/14/97 10.000 9.390 6.50 11/29/96 9.375 9.450 -.79 03/07/97 10.000 9.400 6.38 11/22/96 9.375 9.430 -.58 DATE PRICE NAV %PREM DATE PRICE NAV %PREM - -------------------------------------------------------------------------------- 11/15/96 9.375 9.560 -1.94 08/02/96 9.813 9.620 2.00 11/08/96 9.250 9.560 -3.24 07/26/96 9.750 9.600 1.56 11/01/96 9.438 9.610 -1.80 07/19/96 9.625 9.580 .47 10/25/96 9.625 9.600 .26 07/12/96 9.625 9.570 .57 10/18/96 9.625 9.580 .47 07/05/96 9.750 9.550 2.09 10/11/96 9.750 9.570 1.88 06/28/96 9.750 9.610 1.46 10/04/96 9.875 9.620 2.65 06/21/96 9.625 9.590 .36 09/27/96 9.875 9.600 2.86 06/14/96 9.750 9.570 1.88 09/20/96 9.625 9.580 .47 06/07/96 9.625 9.560 .68 09/13/96 10.000 9.560 4.60 05/31/96 9.500 9.610 -1.14 09/06/96 9.875 n.a. n.a. 05/24/96 9.625 9.590 .36 08/30/96 9.875 9.600 2.86 05/17/96 9.625 9.570 .57 08/23/96 9.875 9.600 2.86 05/10/96 9.500 9.560 -.63 08/16/96 9.875 9.580 3.08 05/03/96 9.625 9.600 .26 08/09/96 9.875 9.560 3.29 04/26/96 9.500 9.580 -.84 DATE PRICE NAV %PREM DATE PRICE NAV %PREM - -------------------------------------------------------------------------------- 04/19/96 9.625 9.570 .57 01/05/96 9.375 9.590 -2.24 04/12/96 9.625 9.550 .79 12/29/95 9.250 9.580 -3.44 04/05/96 9.500 9.540 -.42 12/22/95 9.375 9.630 -2.65 03/29/96 9.625 9.610 .16 12/15/95 9.375 9.630 -2.65 03/22/96 9.375 9.590 -2.24 12/08/95 9.250 9.610 -3.75 03/15/96 9.375 9.570 -2.04 12/01/95 9.125 9.670 -5.64 03/08/96 9.375 n.a. n.a. 11/24/95 9.125 9.650 -5.44 03/01/96 9.375 9.610 -2.45 11/17/95 9.250 9.620 -3.85 02/23/96 9.500 9.610 -1.14 11/10/95 9.000 9.620 -6.44 02/16/96 9.375 9.590 -2.24 11/03/95 9.125 9.670 -5.64 02/09/96 9.375 9.580 -2.14 10/27/95 9.250 9.660 -4.24 02/02/96 9.313 9.640 -3.40 10/20/95 9.250 9.640 -4.05 01/26/96 9.375 9.620 -2.55 10/13/95 9.375 9.620 -2.55 01/19/96 9.375 9.620 -2.55 10/06/95 9.375 9.610 -2.45 01/12/96 9.375 9.600 -2.34 09/29/95 9.375 9.660 -2.95 DATE PRICE NAV %PREM DATE PRICE NAV %PREM - -------------------------------------------------------------------------------- 09/22/95 9.250 9.640 -4.05 06/09/95 9.125 9.620 -5.15 09/15/95 9.375 9.630 -2.65 06/02/95 9.000 9.670 -6.93 09/08/95 9.250 9.610 -3.75 05/26/95 8.875 9.660 -8.13 09/01/95 9.250 9.670 -4.34 05/19/95 9.000 9.640 -6.64 08/25/95 9.250 9.640 -4.05 05/12/95 8.875 9.620 -7.74 08/18/95 9.125 9.620 -5.15 05/05/95 8.875 9.600 -7.55 08/11/95 9.000 9.610 -6.35 04/28/95 8.875 9.660 -8.13 08/04/95 9.125 9.670 -5.64 04/21/95 8.875 9.640 -7.94 07/28/95 9.000 9.650 -6.74 04/14/95 8.750 9.620 -9.04 07/21/95 8.875 9.630 -7.84 04/07/95 8.750 9.610 -8.95 07/14/95 9.000 9.620 -6.44 03/31/95 8.750 9.670 -9.51 07/07/95 9.125 9.600 -4.95 03/24/95 8.750 9.650 -9.33 06/30/95 9.125 9.650 -5.44 03/17/95 8.750 9.630 -9.14 06/23/95 9.125 9.650 -5.44 03/10/95 8.750 9.610 -8.95 06/16/95 9.000 9.630 -6.54 03/03/95 8.750 9.660 -9.42 Source: BLOOMBERG Financial Markets. On , 1998, the last reported sale price of a Share of the Trust's Shares on the NYSE was $ . The Trust's NAV on , 1998 was $ . See "Net Asset Value" in the SAI. On , 1998, 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. 9 Investment Performance Morningstar Ratings For the three-year, five-year and ten-year periods ended June 30, 1998, the Trust had a 4 star, 4 star and 5 star Morningstar risk-adjusted performance rating, when rated among 141, 116 and 49 fixed income closed-end funds, respectively. The Trust's overall rating through June 30, 1998, was 5 stars.1 For the three-year, five-year and ten-year periods ended June 30, 1998, the Trust's risk score placed the Trust 1st out of 32, 30 and 24 Corporate Bond -- General funds. For the three-year, five-year and ten-year periods ended June 30, 1998, the Trust's risk score placed the Trust 1st, 2nd and 1st out of all closed-end funds (463, 386 and 108 closed-end funds, respectively) tracked by Morningstar.2 Morningstar's risk score evaluates an investment company's downside volatility relative to all other investment companies in its class. Lipper Rankings According to Lipper Analytical Services, Inc. ("Lipper") (a company that calculates and publishes rankings of closed-end and open-end management investment companies), for the one-, three-, five- and ten-year periods ended June 30, 1998, the Trust ranked first among all funds in the Loan Participation Fund Category of closed-end funds, defined by Lipper to include closed-end management investment companies that invest in Senior Loans. Investors should note that past performance is no assurance of future results. Periods ended Total Number of Funds June 30, 1998 Ranking(3) Return (3) in Category (4) --------------- ------------ ------------ ----------------- One year 1 8.74% 8 Three years 1 28.22% 6 Five years 1 48.85% 5 Ten Years 1 126.93% 1 - ------------ (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 June 30, 1998. (2) Morningstar's taxable bond fund category includes Corporate Bond -- General, Government Bond, International Bond and Multisector Bond funds. On Morningstar's risk-adjusted performance rating system, funds falling into the top 10% of all funds within their category are awarded five stars and funds in the next 22.5% receive four stars, and the next 35% receive three stars. Morningstar ratings are calculated from the Trust's three, five and ten year returns (with fee adjustment, if any) in excess of 90-day Treasury bill returns, and a risk factor that reflects the Trust's performance below 90-day Treasury bill returns. The ratings are subject to change every month. Morningstar ranks funds within the Corporate Bond -- General category and the closed-end universe for risk for the three, five and ten-year periods based upon their downside volatility compared to a 90-day Treasury bill. (3) Ranking is based on total return. Total return is measured on the basis of NAV at the beginning and end of each period, assuming the reinvestment of all dividends and distributions, but not reflecting the January 1995 and November 1996 rights offerings. The Trust's expenses were partially waived for the fiscal year ended February 29, 1992. As part of the 1996 rights offering the Investment Manager has voluntarily reduced its management fee for the period from November 1996 through November 1999. (4) This category includes other closed-end investment companies that, unlike the current practices of the Trust, offer their shares continuously and have conducted periodic tender offers for their shares. These practices may have affected the total returns of these companies. 10 Comparative Performance -- Trailing 12 Month Average Presented below are distribution rates for the Trust. Also shown are distribution rates of a composite of other investment companies with investment objectives and policies comparable to those of the Trust. In addition, presented below are various benchmark indicators of interest and borrowing rates. The distribution rates for the Trust and the composite of the other investment companies are calculated using actual distributions annualized for the preceding twelve months. Pilgrim America Month Prime Rate Composite Prime 60-Day Ended Trust Average Rate LIBOR - ----- ---------- --------- ----- ------ 1/31/91 9.675% 9.537% 9.917% 8.063% 2/28/91 9.627% 9.501% 9.833% 7.943% 3/31/91 9.500% 9.421% 9.750% 7.792% 4/30/91 9.379% 9.340% 9.667% 7.579% 5/31/91 9.203% 9.256% 9.542% 7.386% 6/30/91 9.052% 9.031% 9.417% 7.199% 7/31/91 8.896% 8.873% 9.292% 7.032% 8/31/91 8.730% 8.660% 9.167% 6.834% 9/30/91 8.527% 8.476% 9.000% 6.600% 10/31/91 8.372% 8.270% 8.833% 6.365% 11/30/91 8.160% 8.039% 8.625% 6.084% 12/31/91 7.963% 7.779% 8.375% 5.818% 1/31/92 7.739% 7.587% 8.125% 5.574% 2/29/92 7.526% 7.340% 7.917% 5.349% 3/31/92 7.382% 7.133% 7.708% 5.157% 4/30/92 7.199% 6.959% 7.500% 4.990% 5/31/92 7.072% 6.774% 7.333% 4.823% 6/30/92 6.939% 6.674% 7.167% 4.641% 7/31/92 6.790% 6.534% 6.958% 4.432% 8/31/92 6.671% 6.353% 6.750% 4.250% 9/30/92 6.578% 6.194% 6.583% 4.063% 10/31/92 6.498% 6.041% 6.417% 3.932% 11/30/92 6.394% 5.888% 6.292% 3.844% 12/31/92 6.277% 5.838% 6.250% 3.755% 1/31/93 6.203% 5.725% 6.208% 3.677% 2/28/93 6.151% 5.705% 6.167% 3.589% 3/31/93 6.095% 5.675% 6.125% 3.500% 4/30/93 6.070% 5.698% 6.083% 3.432% 5/31/93 6.056% 5.608% 6.042% 3.375% 6/30/93 6.022% 5.521% 6.000% 3.318% 7/31/93 5.998% 5.476% 6.000% 3.302% 8/31/93 6.001% 5.460% 6.000% 3.281% 9/30/93 5.972% 5.443% 6.000% 3.281% 10/31/93 5.894% 5.453% 6.000% 3.266% 11/30/93 5.905% 5.433% 6.000% 3.224% 12/31/93 5.926% 5.475% 6.000% 3.219% 1/31/94 5.948% 5.496% 6.000% 3.214% 2/28/94 5.971% 5.489% 6.000% 3.255% 3/31/94 6.010% 5.472% 6.021% 3.302% 4/30/94 6.061% 5.388% 6.083% 3.385% 5/31/94 6.150% 5.443% 6.188% 3.484% 6/30/94 6.251% 5.545% 6.292% 3.609% 7/31/94 6.367% 5.639% 6.396% 3.734% 8/31/94 6.467% 5.744% 6.542% 3.875% 9/30/94 6.597% 5.906% 6.688% 4.042% 10/31/94 6.731% 6.012% 6.833% 4.219% 11/30/94 6.866% 6.175% 7.042% 4.432% 12/31/94 7.067% 6.374% 7.250% 4.677% 1/31/95 7.279% 6.551% 7.458% 4.927% 2/28/95 7.479% 6.791% 7.708% 5.135% 3/31/95 7.702% 7.067% 7.938% 5.333% 4/30/95 7.907% 7.261% 8.125% 5.495% 5/31/95 8.080% 7.412% 8.271% 5.625% 6/30/95 8.240% 7.598% 8.417% 5.734% 7/31/95 8.387% 7.672% 8.542% 5.828% 8/31/95 8.525% 7.761% 8.625% 5.854% 9/30/95 8.640% 7.818% 8.708% 5.911% 10/31/95 8.739% 7.886% 8.792% 5.943% 11/30/95 8.845% 7.919% 8.813% 5.930% 12/31/95 8.866% 7.877% 8.813% 5.878% 1/31/96 8.878% 7.853% 8.813% 5.812% 2/29/96 8.864% 7.670% 8.750% 5.739% 3/31/96 8.807% 7.534% 8.688% 5.677% 4/30/96 8.746% 7.441% 8.625% 5.622% 5/31/96 8.702% 7.407% 8.563% 5.573% 6/30/96 8.647% 7.257% 8.500% 5.527% 7/31/96 8.617% 7.203% 8.458% 5.503% 8/31/96 8.592% 7.147% 8.417% 5.524% 9/30/96 8.572% 7.066% 8.375% 5.493% 10/31/96 8.561% 7.033% 8.333% 5.456% 11/30/96 8.549% 7.002% 8.292% 5.422% 12/31/96 8.555% 6.896% 8.271% 5.413% 1/31/97 8.555% 6.814% 8.250% 5.422% 2/28/97 8.574% 6.869% 8.250% 5.436% 3/31/97 8.603% 6.879% 8.271% 5.459% 4/30/97 8.653% 6.908% 8.292% 5.483% 5/31/97 8.670% 6.913% 8.313% 5.507% 6/30/97 8.717% 6.936% 8.333% 5.523% 7/31/97 8.734% 6.960% 8.354% 5.529% 8/31/97 8.744% 6.964% 8.375% 5.544% 9/30/97 8.758% 6.967% 8.396% 5.560% 10/31/97 8.768% 6.987% 8.417% 5.581% 11/30/97 8.771% 6.970% 8.438% 5.615% 12/31/97 8.777% 7.064% 8.458% 5.633% 1/31/98 8.780% 7.066% 8.479% 5.639% 2/28/98 8.777% 7.081% 8.500% 5.655% 3/31/98 8.788% 7.048% 8.500% 5.652% 4/30/98 8.788% 7.071% 8.500% 5.647% 5/31/98 8.809% 7.015% 8.500% 5.642% 6/30/98 8.798% 6.988% 8.500% 5.640% - ------------ (1) The distribution rate is the annualization of the Trust's distributions per Share, divided by the NAV of the Trust at month-end. For the one-year, five-year and ten-year periods ended June 30, 1998 and the period of May 12, 1988 (inception of the Trust) to June 30, 1998, the Trust's average annual total returns, based on NAV and assuming all rights were exercised, were 8.43%, 8.19%, 8.55% and 8.47%, respectively. The Trust's 30-day standardized yields as of June 30, 1998 were 8.39% at NAV and 7.83% at market. The Trust's expenses were partially waived for the fiscal year ended February 29, 1992. As part of the 1996 rights offering the Investment Manager has voluntarily reduced its management fee for the period from November 1996 through November 1999. (2) The composite represents an unweighted average for investment companies included in Lipper Analytical Services, Inc.'s Loan Participation Fund Category of closed-end funds (for funds excluding the Trust in existence for the entire period shown). Historical yields are based on monthly dividends divided by corresponding month-end NAVs, annualized. The closed-end investment companies reflected in the composite, unlike the current practices of the Trust, offer their shares continuously and have conducted periodic tender offers for their shares. These practices may have affected the yield of these companies. (3) The distribution rate is based solely on the actual dividends and distributions, which are made at the discretion of management. The distribution rate may or may not include all investment income, and ordinarily will not include capital gains or losses, if any. (4) Source: BLOOMBERG Financial Markets. (5) Source: IDD/Tradeline. The LIBOR rate is the London Inter-Bank Offered Rate and is the benchmark for determining the interest paid on more than 90% of the Senior Loans in the Trust's portfolio. Generally, the yield on such loans has reflected, during the periods presented, a premium of approximately 2% or more to LIBOR. 11 INVESTMENT OBJECTIVE AND POLICIES The Trust's investment objective is to provide as high a level of current income as is consistent with the preservation of capital. The Trust seeks to achieve its objective primarily by investing in interests in variable or floating rate Senior Loans, which, in most circumstances, are fully collateralized by assets of a corporation, partnership, limited liability company, or other business entity that is organized or domiciled in the United States, Canada or in U.S. territories and/or possessions. The Trust primarily invests in Senior Loans that have interest rates that float periodically based upon a benchmark indicator of prevailing interest rates, such as the Prime Rate or LIBOR, and will invest only in Senior Loans that are U.S. dollar-denominated. Under normal circumstances, at least 80% of the Trust's gross assets is invested in Senior Loans. Under the Trust's policies, Senior Loans are considered loans that hold a senior position in the capital structure of the borrower. These may include loans that hold the most senior position, that hold an equal ranking with other senior debt, or loans that are, in the judgment of PAII, in the category of senior debt of the borrower. Generally, the Senior Loans in which the Trust invests are fully collateralized with assets and/or cash flow that PAII believes have a market value at the time of acquisition that equals or exceeds the principal amount of the Senior Loan. The Trust also only purchases interests in Senior Loans of borrowers that PAII believes can meet debt service requirements from cash flow. Senior Loans vary in yield according to their terms and conditions, how often they pay interest, and when rates are reset. The Trust does not invest in Senior Loans whose interest rates are tied to non-domestic interest rates other than LIBOR. Senior Loans that the Trust may acquire include participation interests in lease financings ("Lease Participations") where the collateral quality, credit quality of the borrower and the likelihood of payback are believed by PAII to be the same as those applied to conventional Senior Loans. A Lease Participation is also required to have a floating interest rate that is indexed to a benchmark indicator of prevailing interest rates, such as LIBOR or the Prime Rate. Subject to certain limitations, the Trust may acquire Senior Loans of borrowers engaged in any industry. With respect to no more than 25% of its total assets, the Trust may acquire Senior Loans that are unrestricted as to the percentage of a single issue the Trust may hold and, with respect to at least 75% of its total assets, the Trust will hold no more than 25% of the amount borrowed from all lenders in a single Senior Loan or other issue. The investment standards in this paragraph are fundamental and may not be changed without approval by Shareholders. Investors should recognize that there can be no assurance that the investment objective of the Trust will be realized. Moreover, substantial increases in interest rates may cause an increase in loan defaults as borrowers may lack resources to meet higher debt service requirements. The value of the Trust's assets may also be affected by other uncertainties such as economic developments affecting the market for Senior Loans or affecting borrowers generally. For additional information on Senior Loans, see "General Information on Senior Loans -- About Senior Loans." Investment in the Trust's shares is intended to offer several benefits. The Trust offers investors the opportunity to seek a high level of current income by investing in a professionally managed portfolio comprised primarily of Senior Loans, a type of investment typically not available directly to individual investors. Other benefits are the professional credit analysis provided to the Trust by the Investment Manager and portfolio diversification. The Trust can normally be expected to have a more stable net asset value per share than investment companies investing primarily in fixed income securities (other than money market funds and some short-term bond funds). Generally, the net asset value of the shares of an investment company which invests primarily in fixed-income securities changes as interest rates fluctuate. When interest rates decline, the value of a fixed-income portfolio normally can be expected to increase. The Investment Manager expects the Trust's net asset value to be relatively stable during normal market conditions, because the floating and variable rate Senior Loans in which the Trust invests float periodically in response to changes in interest rates. However, because variable interest rates only reset periodically, the Trust's net asset value may fluctuate from time to time in the event of an imperfect correlation between the interest rates on the Trust's loans and prevailing interest rates. Also, a default on a Senior Loan in which the Trust has invested or a 12 sudden and extreme increase in prevailing interest rates may cause a decline in the Trust's net asset value. Changes in interest rates can be expected to affect the dividends paid by the Trust, so that the yield on an investment in the Trust's shares will likely fluctuate in response to changes in prevailing interest rates. Portfolio Maturity Although the Trust has no restrictions on portfolio maturity, normally at least 80% of the net assets invested in Senior Loans are composed of Senior Loans with maturities of one to ten years with rates of interest which typically reset either daily, monthly, or quarterly. The maximum period of time of interest rate reset on any Senior Loans in which the Trust may invest is one year. In addition, the Trust will ordinarily maintain a dollar-weighted average time to next interest rate adjustment on its Senior Loans of 90 days or less. In the event of a change in the benchmark interest rate on a Senior Loan, the rate payable to lenders under the Senior Loan will, in turn, change at the next scheduled reset date. If the benchmark rate goes up, the Trust as lender would earn interest at a higher rate, but only on and after the reset date. If the benchmark rate goes down, the Trust as lender would earn interest at a lower rate, but only on and after the reset date. Credit Analysis In acquiring a Senior Loan, PAII considers the following factors: positive cashflow coverage of debt service; adequate working capital; appropriate capital structure; leverage ratio consistent with industry norms; historical experience of attaining business and financial projections; the quality and experience of management; and adequate collateral coverage. The Trust does not impose any minimum standard regarding the rating of any outstanding debt securities of borrowers. PAII performs its own independent credit analysis of the borrower. In so doing, PAII may utilize information and credit analyses from the agents that originate or administer loans, other lenders investing in a Senior Loan, and other sources. These analyses will continue on a periodic basis for any Senior Loan purchased by the Trust. See "Risk Factors and Special Considerations -- Credit Risks and Realization of Investment Objective." Other Investments Assets not invested in Senior Loans will generally consist of other instruments, including Hybrid Loans, unsecured loans, subordinated loans, short-term debt instruments with remaining maturities of 120 days or less (which may have yields tied to the Prime Rate, commercial paper rates, federal funds rate or LIBOR), 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 PAII, (ii) certificates of deposit, bankers' acceptances, and other bank deposits and obligations, and (iii) securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities. During periods when, in the opinion of PAII, a temporary defensive posture in the market is appropriate, the Trust may hold up to 100% of its assets in cash, or in the instruments described above Hybrid Loans The growth of the syndicated loan market has produced loan structures with characteristics similar to Senior Loans but which resemble bonds in some respects, and generally offer less covenant or other protections than traditional Senior Loans while still being collateralized ("Hybrid Loans"). The Trust may invest only in Hybrid Loans that are secured debt of the borrower, although they may not in all instances be considered senior debt of the borrower. With Hybrid Loans, the Trust may not possess a senior claim to all of the collateral securing the Hybrid Loan. Hybrid Loans also may not include covenants that are typical of Senior Loans, such as covenants requiring the maintenance of minimum interest coverage ratios. As a result, Hybrid Loans present additional risks besides those associated with traditional Senior Loans, although they may provide a relatively higher yield. Because the lenders in Hybrid Loans waive or forego certain loan covenants, their negotiating power or voting rights in the event of a default may be diminished. As a result, 13 the lenders' interests may not be represented as significantly as in the case of a conventional Senior Loan. In addition, because the Trust's security interest in some of the collateral may be subordinate to other creditors, the risk of nonpayment of interest or loss of principal may be greater than would be the case with conventional Senior Loans. The Trust will invest only in Hybrid Loans which meet credit standards established by PAII with respect to Hybrid Loans and nonetheless provide certain protections to the lender such as collateral maintenance or call protection. The Trust may only invest up to 20% of its assets in Hybrid Loans as part of its investment in "Other Investments" as described above, and Hybrid Loans will not count toward the 80% of the Trust's assets that are normally invested in Senior Loans. Subordinated and Unsecured Loans The Trust may also invest up to 5% of its total assets, measured at the time of investment, in subordinated and unsecured loans. The Trust may acquire a subordinated loan only if, at the time of acquisition, it acquires or holds a Senior Loan from the same borrower. The primary risk arising from a holder's subordination is the potential loss in the event of default by the issuer of the loans. Subordinated loans in an insolvency bear an increased share, relative to senior secured lenders, of the ultimate risk that the borrower's assets are insufficient to meet its obligations to its creditors. Unsecured loans are not secured by any specific collateral of the borrower. They do not enjoy the security associated with collateralization and may pose a greater risk of nonpayment of interest or loss of principal than do secured loans. The Trust will acquire unsecured loans only where the Investment Manager believes, at the time of acquisition, that the Trust would have the right to payment upon default that is not subordinate to any other creditor. Subordinated and unsecured loans will constitute part of the Trust's investment 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. 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|M/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 $717,000,000. 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." 14 GENERAL INFORMATION ON SENIOR LOANS Primary Market Overview The primary market for Senior Loans has become much larger and varied in recent years. The volume of loans originated in the Senior Loan market has increased from $376 billion in 1992 to $1.1 trillion in 1997. Senior Loans tailored to the institutional investor, such as the Trust, have increased from $2.5 billion in 1993 to nearly $25.0 billion in 1997. In 1997, the volume of leveraged loans (priced at LIBOR + 1.5% or higher) reached the highest level since 1989 with $194.0 billion in volume. Leveraged loan volume of $74.5 billion in the fourth quarter of 1997 is above fourth quarter volume in each of the preceding two years. Year Volume($bil.) ---- ------------- 1988 284.4 1989 333.2 1990 241.3 1991 234.4 1992 375.5 1993 389.3 1994 665.3 1995 816.9 1996 887.6 1997 1111.9 Source: Loan Pricing Corporation. The total Senior Loan market for both leveraged and non-leveraged transactions has averaged an annual growth rate of 24.2% since 1992. The Trust's net assets, $734 million at the end of 1992 and $1 billion at the end of 1997, have grown at an average annual growth rate of 7.0% for the same period. At the same time primary Senior Loan volume has grown, demand has remained strong as institutional investors other than banks have begun to enter the Senior Loan market. Investment companies, insurance companies, and private investment vehicles are joining U.S. and foreign banks as lenders. The entrance of new investors has helped grow the bank loan trading market with record volume of $62.0 billion during 1997. The active secondary market, coupled with banks' focus on portfolio management and the move toward standard market practices, has helped increase the liquidity for Senior Loans. With this growth in volume and demand, Senior Loans have adopted innovative structures and characteristics, as described elsewhere in this Prospectus. About Senior Loans Senior Loans vary from other types of debt in that they generally hold the most senior position in the capital structure of a borrower. Priority liens are obtained by the lenders that typically provide the first right to cash flows or proceeds from the sale of a borrower's collateral if the borrower becomes insolvent (subject to the limitations of bankruptcy law, which may provide higher priority to certain claims such as, for example, employee salaries, employee pensions and taxes). Thus, Senior Loans are generally repaid before unsecured bank loans, corporate bonds, subordinated debt, trade creditors, and preferred or common stockholders. Senior Loans typically will be secured by pledges of collateral from the borrower in the form of tangible assets such as cash, accounts receivable, inventory, property, plant and equipment, common and/or preferred stock of subsidiaries, and intangible assets including trademarks, copyrights, patent rights and franchise value. The Trust may also receive guarantees as a form of collateral. The Trust may invest in Senior 15 Loans that are secured only by stock of the borrower or its subsidiaries or affiliates. Generally, the agent on a Senior Loan is responsible for monitoring collateral and for exercising remedies available to the lenders such as foreclosure upon collateral. Senior Loans generally are arranged through private negotiations between a borrower and several financial institutions ("lenders") represented in each case by an agent ("agent"), which usually is one or more of the lenders. The Trust will acquire Senior Loans from and sell Senior Loans to the following lenders: money center banks, selected regional banks and selected non-banks, insurance companies, finance companies, other investment companies, private investment funds, and lending companies. The Trust may also acquire Senior Loans from and sell Senior Loans to U.S. branches of foreign banks which are regulated by the Federal Reserve System or appropriate state regulatory authorities. On behalf of the lenders, generally the agent is primarily responsible for negotiating the loan agreement ("loan agreement"), which establishes the terms and conditions of the Senior Loan and the rights of the borrower and the lenders. The agent and the other original lenders typically have the right to sell interests ("participations") in their share of the Senior Loan to other participants. The agent and the other original lenders also may assign all or a portion of their interests in the Senior Loan to other participants. The Trust's investment in Senior Loans generally may take one of several forms including: acting as one of the group of lenders originating a Senior Loan (an "original lender"); purchase of an assignment ("assignment") or a portion of a Senior Loan from a third party, or acquiring a participation in a Senior Loan. The Trust may pay a fee or forego a portion of interest payments to the lender selling a participation or assignment under the terms of such participation or assignment. The agent that arranges a Senior Loan is frequently a commercial or investment bank or other entity that originates a Senior Loan and the entity that invites other parties to join the lending syndicate. In larger transactions, it is common to have several agents; however, generally only one such agent has primary responsibility for documentation and administration of the Senior Loan. Agents are typically paid fees by the borrower for their services. The Trust may serve as the agent or co-agent for a Senior Loan. See "Additional Information About Investments and Investment Techniques -- Originating Senior Loans" in the SAI. When the Trust is a member of the originating syndicate group for a Senior Loan, it may share in a fee paid to the original lenders. When the Trust is an original lender or acquires an assignment, it will have a direct contractual relationship with the borrower, may enforce compliance by the borrower with the terms of the Senior Loan agreement, and may have rights with respect to any funds acquired by other lenders through set-off. Lenders also have certain voting and consent rights under the applicable Senior Loan agreement. Action subject to lender vote or consent generally requires the vote or consent of the holders of some specified percentage of the outstanding principal amount of the Senior Loan. Certain decisions, such as reducing the amount or increasing the time for payment of interest on or repayment of principal of a Senior Loan, or releasing collateral therefor, frequently require the unanimous vote or consent of all lenders affected. When the Trust is a purchaser of an assignment it typically succeeds to all the rights and obligations under the loan agreement of the assigning lender and becomes a lender under the loan agreement with the same rights and obligations as the assigning lender. Assignments are, however, arranged through private negotiations between potential assignees and potential assignors, and the rights and obligations acquired by the purchaser of an assignment may be more limited than those held by the assigning lender. The Trust will purchase an assignment or act as lender with respect to a syndicated Senior Loan only where the agent with respect to such Senior Loan is determined by the Investment Manager to be creditworthy at the time of acquisition. To a lesser extent, the Trust invests in participations in Senior Loans. With respect to any given Senior Loan, the rights of the Trust when it acquires a participation may be more limited than the rights of original lenders or of investors who acquire an assignment. Participations may entail certain risks relating to the creditworthiness of the parties from which the participations are obtained. Participation by the Trust in a lender's portion of a Senior Loan typically results in the Trust having a contractual relationship only with the lender, not with the borrower. The Trust has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the participation and only upon receipt by such lender of 16 such payments from the borrower. In connection with purchasing participations, the Trust generally will have no right to enforce compliance by the borrower with the terms of the Senior Loan agreement, nor any rights with respect to any funds acquired by other lenders through set-off against the borrower with the result that the Trust may be subject to delays, expenses and risks that are greater than those that exist where the Trust is the original lender, and the Trust may not directly benefit from the collateral supporting the Senior Loan because it may be treated as a creditor of the lender instead of the borrower. As a result, the Trust may assume the credit risk of both the borrower and the lender selling the participation. In the event of insolvency of the lender selling a participation, the Trust may be treated as a general creditor of such lender, and may not benefit from any set-off between such lender and the borrower. In the event of bankruptcy or insolvency of the borrower, the obligation of the borrower to repay the Senior Loan may be subject to certain defenses that can be asserted by such borrower as a result of improper conduct of the lender selling the participation. The Trust will only acquire participations if the lender selling the participations and any other persons interpositioned between the Trust and the lender are determined by the Investment Manager to be creditworthy. When the Trust is an original lender, it will have a direct contractual relationship with the borrower. If the terms of an interest in a Senior Loan provide that the Trust is in privity with the borrower, the Trust has direct recourse against the borrower in the event the borrower fails to pay scheduled principal or interest. In all other cases, the Trust looks to the agent to use appropriate credit remedies against the borrower. When the Trust purchases an assignment, the Trust typically succeeds to the rights of the assigning lender under the Senior Loan agreement, and becomes a lender under the Senior Loan agreement. When the Trust purchases a participation in a Senior Loan, the Trust typically enters into a contractual arrangement with the lender selling the participation, and not with the borrower. Should an agent become insolvent, or enter Federal Deposit Insurance Corporation ("FDIC") receivership or bankruptcy, any interest in the Senior Loan transferred by such person and any Senior Loan repayment held by the agent for the benefit of participants may be included in the agent's estate where the Trust acquires a participation interest from an original lender, should that original lender become insolvent, or enter FDIC receivership or bankruptcy, any interest in the Senior Loan transferred by the original lender may be included in its estate. In such an event, the Trust might incur certain costs and delays in realizing payment or may suffer a loss of principal and interest. RISK FACTORS AND SPECIAL CONSIDERATIONS The following summarizes certain risks that should be considered, among others, in connection with an investment in the Trust. For further information on risks associated with the possible investments of the Trust, see "Additional Information About Investments and Investment Techniques" in the Statement of Additional Information. This Prospectus includes certain statements that may be deemed to be "forward-looking statements." All statements, other than statements of historical facts, included in this Prospectus that address activities, events or developments that the Trust or PAII, as the case may be, expects, believes or anticipates will or may occur in the future, including such matters as the use of proceeds, investment strategies, and other such matters could be considered forward-looking statements. These statements are based on certain assumptions and analyses made by the Trust or PAII, as the case may be, in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate in the circumstances. Such statements are subject to a number of assumptions, risks and uncertainties, including the risk factors discussed below, general economic and business conditions, the investment opportunities (or lack thereof) that may be presented to and pursued by the Trust, changes in laws or regulations and other factors, many of which are beyond the control of the Trust. Prospective investors are cautioned that any such statements are not guarantees of future performance and that actual results or developments may differ materially from those described in the forward-looking statements. Discount 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, nor can the Trust predict 17 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. 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 is a contractual obligation of the issuer that, in most instances, takes precedence over the payment of dividends, or the return of capital, to the issuer's shareholders. Although the Trust will generally invest in Senior Loans that will be fully collateralized with assets whose market value, at the time of acquisition, equals or exceeds the principal amount of the Senior Loan, the value of the collateral may decline below the principal amount of the Senior Loan subsequent to the Trust's investment in such Senior Loan. In addition, to the extent that collateral consists of stock of the borrower or its subsidiaries or affiliates, the Trust will be subject to the risk that this stock may decline in value, be relatively illiquid, or may lose all or substantially all of its value, causing the Senior Loan to be undercollateralized. Senior Loans are also subject to the risk of nonpayment of scheduled interest or principal payments. In the event of a failure to pay scheduled interest or principal payments on Senior Loans held by the Trust, the Trust could experience a reduction in its income, and would experience a decline in the market value of the particular Senior Loan so affected, and may experience a decline in the NAV of Trust Shares or the amount of its dividends. To the extent that the Trust's investment is in a Senior Loan acquired from another lender, the Trust may be subject to certain credit risks with respect to that lender. See "About Senior Loans." Further, there is no assurance that the liquidation of the collateral underlying a Senior Loan would satisfy the issuer's obligation to the Trust in the event of non-payment of scheduled interest or principal, or that collateral could be readily liquidated. The risk of non-payment of interest and principal also applies to other debt instruments in which the Trust may invest. As of February 28, 1998, approximately 1.31% of the Trust's net assets and 0.97% of total assets consisted of non-performing Senior Loans. In the event of a bankruptcy of the borrower, the Trust could experience delays or limitations with respect to its ability to realize the benefits of the collateral securing the Senior Loan. Among the credit risks involved in a bankruptcy would be an assertion that the pledging of collateral to secure the Senior Loan constituted a fraudulent conveyance or preferential transfer that would have the effect of nullifying or subordinating the Trust's rights to the rights of other creditors of the borrower under applicable law. Investment decisions will be based largely on the credit analysis performed by the Investment Manager's investment personnel, and such analysis may be difficult to perform for many issuers. Information about interests in Senior Loans generally will not be in the public domain, and interests are generally not currently rated by any nationally recognized rating service. Many issuers have not issued securities to the public and are not subject to reporting requirements under federal securities laws. Generally, issuers are required to provide financial information to lenders, including the Trust, and information may be available from other Senior Loan participants or agents that originate or administer Senior Loans. While debt instruments generally are subject to the risk of changes in interest rates, the interest rates of the Senior Loans in which the Trust will invest will float with a specified interest rate. Thus the risk that changes in interest rates will affect the market value of such Senior Loans is significantly decreased. Borrowing and Leverage. The Trust is permitted to enter into borrowing transactions representing up to 33 1|M/3% (or such other percentage permitted by law) of its total assets (including the amount borrowed) less all liabilities other than borrowings. Borrowing for investment purposes increases both investment opportunity 18 and investment risk. Capital raised through borrowings will be subject to interest and other costs. There can be no assurance that the Trust's income from borrowed proceeds will exceed these costs; however, the Investment Manager seeks to borrow for the purposes of making additional investments only if it believes, at the time of entering into a Senior Loan, that the total return on such investment will exceed interest payments and other costs. In addition, the Investment Manager intends to mitigate the risk that the costs of borrowing will exceed the total return on an investment by borrowing on a variable rate basis. In the event of a default on one or more Senior Loans or other interest-bearing instruments held by the Trust, borrowing would exaggerate the loss to the Trust and may exaggerate the effect on the Trust's NAV. The Trust's lenders will have priority to the Trust's assets over the Trust's Shareholders. As prescribed by the Investment Company Act of 1940, as amended (the "Investment Company Act"), the Trust will be required to maintain specified asset coverages of at least 300% with respect to any bank borrowing immediately following any such borrowing and on an ongoing basis as a condition of declaring dividends. The Trust's inability to make distributions as a result of these requirements could cause the Trust to fail to qualify as a regulated investment company and/or subject the Trust to income or excise taxes. The interest rate on the Trust's credit facilities as of February 28, 1998, was a variable rate based on LIBOR or the federal funds rate at the Trust's option, plus 0.40% of outstanding borrowings on the 364-day credit facility and 0.375% of outstanding borrowings on the four-year credit facility, plus a facility fee on unused commitments of 0.10% on the 364-day credit facility and 0.125% on the four-year credit facility. At such rates, and assuming the Trust borrowed an amount equal to 33 1|M/3% of its total net assets plus borrowings, the Trust must produce a 2.05% annual return (net of expenses) in order to cover interest payments. The Trust intends to borrow only for investment purposes when it believes at the time of borrowing that total return on investment will exceed interest and other costs. The following table is designed to illustrate the effect on return to a holder of the Trust's Common Shares of the leverage obtained by the Trust's use of borrowing, assuming hypothetical annual returns on the Trust's portfolio of minus 10 to plus 10 percent. As can be seen, leverage generally increases the return to shareholders when portfolio return is positive and decreases return when the portfolio return is negative. Actual returns may be greater or less than those appearing in the table. Assumed Portfolio Return, net of expenses(1) ... (10%) (5%) 0% 5% 10% Corresponding Return to Common Shareholders(2) (18.07%) (10.57%) (3.07%) 4.43% 11.92%
- ------------ (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. When the Trust's Shares are trading at a premium, the Trust may also issue Shares of the Trust that are sold through transactions effected on the NYSE. The increase in the amount of the Trust's outstanding Shares resulting from that offering may put downward pressure on the market price for the Shares of the Trust. Limited Secondary Market for Senior Loans. Although it is growing, the secondary market for Senior Loans is currently limited. There is no organized exhange 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. 19 Accordingly, some or many of the Senior Loans in which the Trust invests will be relatively illiquid. In addition, Senior Loans in which the Trust invests generally require the consent of the borrower prior to sale or assignment. These consent requirements may delay or impede the Trust's ability to sell Senior Loans. The Trust may have difficulty disposing of illiquid assets if it needs cash to repay debt, to pay dividends, to pay expenses or to take advantage of new investment opportunities. Although the Trust has not conducted a tender offer since 1992, in the event that it determines to again conduct a tender offer, limitations of a secondary market may result in difficulty raising cash to purchase tendered Shares. These events may cause the Trust to sell securities at lower prices than it would otherwise consider to meet cash needs and may cause the Trust to maintain a greater portion of its assets in cash equivalents than it would otherwise, which could negatively impact performance. If the Trust purchases a relatively large Senior Loan to generate income, the limitations of the secondary market may inhibit the Trust from selling a portion of the Senior Loan and reducing its exposure to a borrower when the Investment Manager deems it advisable to do so. 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. As of , 1998, 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 , 1998 was , none of which were held by the Trust. The Shares are listed on the NYSE. Dividends, Voting and Liquidation Rights Each Share of the Trust has one vote and shares equally in dividends and distributions when and if declared by the Trust and in the Trust's net assets upon liquidation. All Shares, when issued, are fully paid and are non-assessable by the Trust. There are no preemptive or conversion rights applicable to any of the Shares. Trust Shares do not have cumulative voting rights and, as such, holders of more than 50% of the Shares voting for trustees can elect all trustees and the remaining Shareholders would not be able to elect any trustees. Status of Shares The Board of Trustees may classify or reclassify any unissued Shares of the Trust into Shares of any series by setting or changing in any one or more respects, from time to time, prior to the issuance of such Shares, 20 the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, or terms or conditions of redemption of such shares. Any such classification or reclassification will comply with the provisions of the Investment Company Act. Fundamental and Non-Fundamental Policies of the Trust The investment objective of the Trust, certain policies of the Trust specified herein as "fundamental" and the investment restrictions of the Trust described in the Statement of Additional Information are fundamental policies of the Trust and may not be changed without a "Majority Vote" of the shareholders of the Trust. The term "Majority Vote" means the affirmative vote of (a) more than 50% of the outstanding shares of the Trust or (b) 67% or more of the shares present at a meeting if more than 50% of the outstanding shares of the Trust are represented at the meeting in person or by proxy, whichever is less. All other policies of the Trust may be modified by resolution of the Board of Trustees of the Trust. INVESTMENT MANAGEMENT AND OTHER SERVICES Investment Manager PAII, 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004, serves as Investment Manager to the Trust and has overall responsibility for the management of the Trust. The Trust and PAII have entered into an Investment Management Agreement that requires PAII to provide all investment advisory and portfolio management services for the Trust. It also requires PAII to assist in managing and supervising all aspects of the general day-to-day business activities and operations of the Trust, including custodial, transfer agency, dividend disbursing, accounting, auditing, compliance and related services. PAII provides the Trust with office space, equipment and personnel necessary to administer the Trust. The agreement with PAII can be canceled by the Board of Trustees upon 60 days' written notice. Organized in December 1994, PAII is registered as an investment adviser with the Commission. PAII serves as investment manager to seven other registered investment companies (or series thereof), as well as privately managed accounts, and currently has assets under management of approximately $4 billion as of the date of this Prospectus. PAII is an indirect, wholly-owned subsidiary of Pilgrim America Capital Corporation ("Pilgrim America") (NASDAQ: PACC) (formerly, Express America Holdings Corporation). Through its subsidiaries, Pilgrim America engages in the financial services business, focusing on providing investment advisory, administrative and distribution services to open-end and closed-end investment companies and private accounts. PAII bears its expenses of providing the services described above. PAII currently receives from the Trust an annual fee, paid monthly, of 0.80% of the average daily net assets of the Trust, plus the proceeds of any outstanding borrowings. PAII has agreed to reduce its fee until November 12, 1999 to 0.60% of the average daily net assets, plus the proceeds of any outstanding borrowings, over $1.15 billion. The Trust pays all operating and other expenses of the Trust not borne by PAII including, but not limited to, audit and legal fees, transfer agent, registrar and custodian fees, expenses in preparing tender offers, shareholder reports and proxy solicitation materials and other miscellaneous business expenses. The Trust also pays all taxes imposed on it and all brokerage commissions and loan-related fees. The Trust is responsible for paying all of the expenses of the Offering. Portfolio Management. The Trust's portfolio is managed by a portfolio management team consisting of a Senior Portfolio Manager, five Assistant Portfolio Managers, and credit analysts. Howard Tiffen is a Senior Vice President of PAII and the President, Chief Operating Officer, and Senior Portfolio Manager of the Trust. He has had primary responsibility for investment management of the Trust since November, 1995. Prior to November 1995, Mr. Tiffen worked as a Managing Director of various divisions of Bank of America (and its predecessor, Continental Bank). James R. Reis is Executive Vice President, Chief Credit Officer, and Assistant Secretary of the Trust. Mr. Reis is Director, Vice Chairman (since December 1994), Executive Vice President (since April 1995), and Treasurer (since September 1996), of PAGI and PAII and Director (since December 1994), Vice Chairman (since November 1995) and Assistant Secretary (since January 1995) of PASI. Mr. Reis is 21 also Executive Vice President, Assistant Secretary of each of the other funds in the Pilgrim America Group of Funds, and Chief Financial Officer (since December 1993), Vice Chairman and Assistant Secretary (since April 1993) and former President (May 1991-December 1993) of Pilgrim America (formerly, Express America Holdings Corporation). Mr. Reis currently serves or has served as an officer or director of other affiliates of Pilgrim America. Daniel A. Norman is Senior Vice President, Treasurer and Assistant Portfolio Manager of the Trust. He has served as Assistant Portfolio Manager of the Trust since September 1996. Mr. Norman is a Senior Vice President and Assistant Secretary of PAII (since December 1994), and Senior Vice President of PASI (since November 1995). Mr. Norman was Senior Vice President of Express America Mortgage Corporation and Express America Holdings Corporation (February 1992 - February 1996). Jeffrey A. Bakalar has served as Assistant Portfolio Manager of the Trust since January 1998. Mr. Bakalar is a Vice President of PAII (since February 1998). Prior to joining PAII, Mr. Bakalar was Vice President of First National Bank of Chicago (July 1994 - January 1998) and Corporate Finance Officer of the Securitized Products Group of Continental Bank (November 1993 - July 1994). Michel Prince has served as Assistant Portfolio Manager of the Trust since May 1998. Mr. Prince is a Vice President of PAII (since May 1998). Prior to joining PAII, Mr. Prince was Vice President of Rabobank International, Chicago Branch (July 1996 - April 1998) and Vice President of Fuji Bank, Chicago Branch (April 1992 - July 1996). Robert L. Wilson has served as Assistant Portfolio Manager of the Trust since July 1998. Mr. Wilson is a Vice President of PAII (since July 1998). Prior to joining PAII, 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 PAII (since July 1998). Prior to joining PAII, Mr. Groom was an Associate in the Corporate Finance Group of NationsBank (January 1998 - June 1998); Assisant 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 PAII (since July 1998). Prior to joining PAII, Mr. LeMieux was Assistant Treasurer Cash Management with Salt River Project (October 1993 - June 1998) and Senior Metals Trader/Senior Financial Analyst with Phelps Dodge Corporation (January 1992 - October 1993). The Administrator The Administrator of the Trust is PAGI. Its principal business address is 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. The Administrator is a wholly-owned subsidiary of Pilgrim America and the immediate parent company of PAII. Under an Administration Agreement between PAGI and the Trust, PAGI administers the Trust's corporate affairs subject to the supervision of the Trustees of the Trust. In that connection PAGI monitors the provisions of the Senior Loan agreements and any agreements with respect to interests in Senior Loans and is responsible for recordkeeping with respect to the Senior Loans in the Trust's portfolio. PAGI also furnishes the Trust with office facilities and furnishes executive personnel together with clerical and certain recordkeeping and administrative services. These include preparation of annual and other reports to shareholders and to the Commission. PAGI also handles the filing of federal, state and local income tax returns not being furnished by the Custodian or Transfer Agent (as defined below). The Administrator has authorized all of its officers and employees who have been elected as Trustees or officers of the Trust to serve in the latter capacities. All services furnished by the Administrator under the Administration Agreement may be furnished by such officers or employees of the Administrator. 22 The Trust pays PAGI for the services performed and the facilities furnished by PAGI as Administrator a fee, computed daily and payable monthly. The Administration Agreement states that PAGI is entitled to receive a fee at an annual rate of 0.15% of the average daily net assets of the Trust, plus the proceeds of any outstanding borrowings, up to $800 million; and 0.10% of the average daily net assets of the Trust, plus the proceeds of any outstanding borrowings, in excess of $800 million. Transfer Agent, Dividend Disbursing Agent and Registrar The transfer agent, dividend disbursing agent and registrar for the Shares is DST Systems, Inc. ("DST"), whose principal business address is 330 West 9th Street, Kansas City, Missouri 64105. In addition, DST acquires shares of the Trust for distribution to Shareholders under the Trust's Shareholder Investment Program. Custodian The Trust's securities and cash are held under a Custody Agreement with Investors Fiduciary Trust Company ("IFTC"), whose principal business address is 801 Pennsylvania, Kansas City, Missouri 64105. PLAN OF DISTRIBUTION 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. 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 23 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 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 24 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. 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. 25 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 , 1998, $ was outstanding. By paying down the Trust's borrowings, it will be possible to invest 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. 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 PAII. Income dividends are calculated monthly under guidelines approved by the Trustees. Each dividend is payable to Shareholders of record at the time of declaration. Accrued amounts of fees received, including facility fees, will be taken in as income and passed on to Shareholders as part of dividend distributions. Any fees or commissions paid to facilitate the sale of portfolio Senior Loans in connection with quarterly tender offers or other portfolio transactions may reduce the dividend yield. The Trust may make one or more annual payments from any net realized capital gains, if any. 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. 26 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, PASI 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 PASI 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. PASI 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. PASI's principal business address is 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. PASI and PAII, the Trust's Investment Manager, are indirect, wholly-owned subsidiaries of PACC. See "Investment Management and Other Services Investment Manager." The Trust 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. 27 EXPERTS The financial statements and financial highlights contained in the Trust's February 28, 1998 annual report to shareholders except for those periods ending prior to February 29, 1996 have been incorporated by reference herein in reliance upon the report of KPMG Peat Marwick LLP, independent auditors, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. The address of KPMG Peat Marwick LLP is 725 South Figueroa Street, Los Angeles, California 90017-5491. REGISTRATION STATEMENT The Trust has filed with the Commission, Washington, D.C., a Registration Statement under the Securities Act, relating to the Shares offered hereby. For further information with respect to the Trust and its Common Shares, reference is made to such Registration Statement and the exhibits filed with it. SHAREHOLDER REPORTS The Trust issues reports that include financial information to its shareholders quarterly. FINANCIAL STATEMENTS The Trust's audited financial statements for the fiscal year ended February 28, 1998, are incorporated into the SAI by reference from the Trust's Annual Report to Shareholders. The Trust will furnish without charge copies of its Annual Report 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 Investment Management and Other Services .............................. 12 Portfolio Transactions ................................................ 14 Net Asset Value ...................................................... 15 Methods Available to Reduce Market Value Discount from NAV ............ 15 Tax Matters ............................................................ 17 Advertising and Performance Data ....................................... 20 Financial Statements ................................................... 21 28 25,000,000 Shares of Beneficial Interest PILGRIM AMERICA Pilgrim America Funds PRIME RATE TRUST New York Stock Exchange Symbol: PPR 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004 1-800-992-0180 No dealer, salesperson or any other person has been authorized to give any information or to make any representations other than those contained in this Prospectus in connection with the offer made by this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Trust or the Investment Manager. This Prospectus does not constitute an offer to sell or the solicitation of any offer to buy any security other than the Shares offered by this Prospectus, nor does it constitute an offer to sell or a solicitation of any offer to buy the Shares by anyone in any jurisdiction in which such offer or solicitation is not authorized, or in which the person making such offer or solicitation is not qualified to do so, or to any such person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that information contained herein is correct as of any time subsequent to the date hereof. However, if any material change occurs while this Prospectus is required by law to be delivered, this Prospectus will be amended or supplemented accordingly. ------------------------------- TABLE OF CONTENTS Prospectus Summary .................................... 1 Trust Expenses ....................................... 3 Financial Highlights and Investment Performance ...... 5 Investment Objective and Policies ..................... 12 General Information on Senior Loans .................. 15 Risk Factors and Special Considerations ............... 17 Description of the Trust .............................. 20 Investment Management and Other Services ............ 21 Plan of Distribution ................................. 23 Use of Proceeds ....................................... 26 Dividends and Distributions ........................... 26 Tax Matters .......................................... 26 Distribution Arrangements ........................... 27 Legal Matters ....................................... 27 Experts ............................................. 28 Registration Statement .............................. 28 Shareholder reports ................................. 28 Financial Statements ................................. 28 Table of Contents of Statement of Additional Information ........................... 28 Investment Manager Pilgrim America Investments,Inc. 40 North Central Avenue, Suite 1200 Phoenix, Arizona 85004 Distributor Pilgrim America Securities, Inc. 40 North Central Avenue, Suite 1200 Phoenix, Arizona 85004 Administrator Pilgrim America Group, Inc. 40 North Central Avenue, Suite 1200 Phoenix, Arizona 85004 Transfer Agent DST Systems, Inc. P.O. Box 419368 Kansas City, Missouri 64141-6368 Custodian Investors Fiduciary Trust Company 801 Pennsylvania Kansas City, Missouri 64105 Legal Counsel Dechert Price & Rhoads 1775 Eye Street, N.W. Washington, D.C. 20006 Independent Auditors KPMG Peat Marwick LLP 725 South Figueroa Street Los Angeles, California 90017 PROSPECTUS , 1998 PILGRIM AMERICA PRIME RATE TRUST STATEMENT OF ADDITIONAL INFORMATION Pilgrim America 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 America Investments, Inc. ("PAII" or the "Investment Manager"). This Statement of Additional Information ("SAI") is not a prospectus, but should be read in conjunction with the Prospectus for the Trust dated _________, 1998 (the "Prospectus"). This SAI does not include all information that a prospective investor should consider before purchasing shares of the Trust, and investors should obtain and read the Prospectus prior to purchasing shares. A copy of the Prospectus may be obtained without charge, by calling PAII 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 Investment Management and Other Services..................................... 12 Portfolio Transactions....................................................... 13 Net Asset Value.............................................................. 14 Methods Available to Reduce Market Value Discount from NAV................... 15 Tax Matters.................................................................. 16 Advertising and Performance Data............................................. 20 Financial Statements..........................................................21 The Prospectus and this SAI omit certain of the information contained in the registration statement filed with the Securities and Exchange Commission (the "Commission"), Washington, D.C. The registration statement may be obtained from the Commission upon payment of the fee prescribed, or inspected at the Commission's office at no charge. This SAI is dated ________, 1998. CHANGE OF NAME The Trust changed its name from "Pilgrim Prime Rate Trust" to "Pilgrim America Prime Rate Trust" in April, 1996. 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 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 PAII 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, PAII will consider carefully the creditworthiness of the vendor. If the member bank or member firm that is the party to the repurchase agreement petitions for bankruptcy or otherwise becomes subject to the U.S. Bankruptcy Code, the law regarding the rights of the Trust to enforce the terms of the repurchase agreement is unsettled. The securities underlying a repurchase agreement will be marked to market every business day so that the value of the collateral is at least equal to the -2- value of the loan, including the accrued interest thereon, and PAII 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 PAII. During the time portfolio securities are on loan, the borrower pays the Trust any dividends or interest paid on such securities, and the Trust may invest the cash collateral and earn additional income, or it may receive an agreed-upon amount of interest income from the borrower who has delivered equivalent collateral or a letter of credit. As with other extensions of credit, there are risks of delay in recovery or even loss of rights in the collateral should the borrower fail financially. The Trust may seek to increase its income by lending financial instruments in its portfolio in accordance with present regulatory policies, including those of the Board of Governors of the Federal Reserve System and the Commission. The lending of financial instruments is a common practice in the securities industry. The loans are required to be secured continuously by collateral, consistent with the requirements of the Investment Company Act discussed below, maintained on a current basis at an amount at least equal to the market value of the portfolio instruments loaned. The Trust has the right to call a Senior Loan and obtain the portfolio instruments loaned at any time on such notice as specified in the transaction documents. For the duration of the Senior Loan, the Trust will continue to receive the equivalent of the interest paid by the issuer on the portfolio instruments loaned and may also receive compensation for the loan of the financial instrument. Any gain or loss in the market price of the instruments loaned that may occur during the term of the Senior Loan will be for the account of the Trust. The Trust may lend its portfolio instruments so long as the terms and the structure of such loans are not inconsistent with the requirements of the Investment Company Act, which currently require that (a) the borrower pledge and maintain with the Trust collateral consisting of cash, a letter of credit issued by a domestic U.S. bank, or securities issued or guaranteed by the U.S. government having a value at all times not less than 100% of the value of the instruments loaned, (b) the borrowers add to such collateral whenever the price of the instruments loaned rises (i.e., the value of the loan is "marked to the market" on a daily basis), (c) the loan be made subject to termination by the Trust at any time, and (d) the Trust receive reasonable interest on the loan (which may include the Trust's investing any cash collateral in interest bearing short-term investments), any distributions on the loaned instruments and any increase in their market value. The Trust may lend its portfolio instruments to member banks -3- of the Federal Reserve System, members of the NYSE or other entities determined by PAII to be creditworthy. All relevant facts and circumstances, including the creditworthiness of the qualified institution, will be monitored by PAII, 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 PAII to be of good financial standing and when, in the judgment of PAII, the consideration which can be earned currently from loans of this type justifies the attendant risk. Interest Rate Hedging Transactions Generally, the Trust does not engage, nor does it intend to engage, in the foreseeable future, in interest rate swaps, or the purchase or sale of interest rate caps and floors. The Trust has the ability, however, pursuant to its investment objectives and policies, to engage in certain hedging transactions including interest rate swaps and the purchase or sale of interest rate caps and floors. The Trust may undertake these transactions primarily for the following reasons: to preserve a return on or value of a particular investment or portion of the Trust's portfolio, to protect against decreases in the anticipated rate of return on floating or variable rate financial instruments which the Trust owns or anticipates purchasing at a later date, or for other risk management strategies such as managing the effective dollar-weighted average duration of the Trust's portfolio. Market conditions will determine whether and in what circumstances the Trust would employ any of the hedging techniques described below. Interest rate swaps involve the exchange by the Trust with another party of their respective commitments to pay or receive interest, e.g., an exchange of an obligation to make floating rate payments on a specified dollar amount referred to as the "notional" principal amount for an obligation to make fixed rate payments. For example, the Trust may seek to shorten the effective interest rate redetermination period of a Senior Loan in its portfolio that has an interest rate redetermination period of one year. The Trust could exchange its right to receive fixed income payments for one year from a borrower for the right to receive payments under an obligation that readjusts monthly. In such event, the Trust would consider the interest rate redetermination period of such Senior Loan to be the shorter period. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate floor. The Trust will not enter into swaps, caps or floors if, on a net basis, the aggregate notional principal amount with respect to such agreements exceeds the net assets of the Trust or to the extent the purchase of swaps, caps or floors would be inconsistent with the Trust's other investment restrictions. The Trust will not treat swaps covered in accordance with applicable regulatory guidance as senior securities. The Trust will usually enter into interest rate swaps on a net basis, i.e., where the two parties make net payments with the Trust receiving or paying, as the case may be, only the net amount of the two payments. The net amount of the excess, if any, of the Trust's obligations over its entitlement with respect to each interest rate swap will be accrued and an amount of cash or liquid securities having an aggregate NAV at least equal to the accrued excess will be maintained in a segregated account. If the Trust enters into a swap on other than a net basis, the Trust will maintain in the segregated account the full amount of the Trust's obligations under each such swap. The Trust may enter into swaps, caps and floors with member banks of the Federal Reserve System, members of the NYSE or other entities determined by PAII. 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. -4- 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 PAII 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 PAII's ability to predict correctly the direction and degree of movements in interest rates. Although the Trust believes that use of the hedging and risk management techniques described above will benefit the Trust, if PAII's judgment about the direction or extent of the movement in interest rates is incorrect, the Trust's overall performance would be worse than if it had not entered into any such transactions. The Trust will incur brokerage and other costs in connection with its hedging transactions. Borrowing Under the Investment Company Act, the Trust is not permitted to incur indebtedness unless immediately after such incurrence the Trust has an asset coverage of 300% of the aggregate outstanding principal balance of indebtedness. Additionally, under the Investment Company Act, the Trust may not declare any dividend or other distribution upon any class of its capital stock, or purchase any such capital stock, unless the aggregate indebtedness of the Trust has at the time of the declaration of any such dividend or distribution or at the time of any such purchase an asset coverage of at least 300% after deducting the amount of such dividend, distribution, or purchase price, as the case may be. Originating Senior Loans Although the Trust does not act, nor does it intend to act in the foreseeable future, as an "agent" in originating and administering a loan on behalf of all lenders or as one of a group of "co-agents" in originating Senior Loans, it does have the ability to do so. Senior Loans are typically arranged through private negotiations between a borrower and several financial institutions ("lenders") represented in each case by one or more such lenders acting as agent of the several lenders. On behalf of the several lenders, the agent, which is frequently the entity that originates the Senior Loan and invites the other parties to join the lending syndicate, will be primarily responsible for negotiating the Senior Loan agreements that establish the relative terms, conditions and rights of the borrower and the several lenders. The co-agents, on the other hand, are not responsible for administration of a Senior Loan, but are part of the initial group of lenders that commit to providing funding for a Senior Loan. In large transactions, it is common to have several agents; however, one such agent typically has primary responsibility for documentation and administration of the Senior Loan. The agent is required to administer and manage the Senior Loan and to service or monitor the collateral. The agent is also responsible for the collection of principal and interest and fee payments from the borrower and the apportionment of these payments to the credit of all lenders which are parties to the loan agreement. The agent is charged with the responsibility of monitoring compliance by the borrower with the restrictive covenants in the loan agreement and of notifying the lenders of any adverse change in the borrower's financial condition. In addition, the agent generally is responsible for determining that the lenders have obtained a perfected security interest in the collateral securing the Senior Loan. Lenders generally rely on the agent to collect their portion of the payments on the Senior Loan and to use appropriate creditor remedies against the borrower. Typically under loan agreements, the agent is given broad discretion in enforcing the loan agreement and is obligated to use the same care it would use in the management of its own property. The borrower compensates the agent for these services. Such compensation may include special fees paid on structuring and funding the Senior Loan and other fees paid on a continuing basis. The precise duties and rights of an agent are defined in the loan agreement. -5- 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. 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. -6- 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 PAII's view of current or expected economic or specific industry or borrower conditions. Senior Loans frequently require full or partial prepayment of a loan when there are asset sales or a securities issuance. Prepayments on Senior Loans may also be made by the borrower at its election. The rate of such prepayments may be affected by, among other things, general business and economic conditions, as well as the financial status of the borrower. Prepayment would cause the actual duration of a Senior Loan to be shorter than its stated maturity. Prepayment may be deferred by the Trust. This should, however, allow the Trust to reinvest in a new loan and recognize as income any unamortized loan fees. In many cases this will result in a new facility fee payable to the Trust. Because interest rates paid on these Senior Loans periodically fluctuate with the market, it is expected that the prepayment and a subsequent purchase of a new Senior Loan by the Trust will not have a material adverse impact on the yield of the portfolio. See "Portfolio Transactions." Under a Senior Loan, the borrower generally must pledge as collateral assets which may include one or more of the following: cash; accounts receivable; inventory; property, plant and equipment; both common and preferred stock in its subsidiaries, trademarks, copyrights, patent rights and franchise value. The Trust may also receive guarantees as a form of collateral. In some instances, a Senior Loan may be secured only by stock in a borrower or its affiliates. The market value of the assets serving as collateral will, at the time of investment, in the opinion of the Investment Manager, equal or exceed the principal amount of the Senior Loan. The valuations of these assets may be performed by an independent appraisal. If the agent becomes aware that the value of the collateral has declined, the agent may take action as it deems necessary for the protection of its own interests and the interests of the other lenders, including, for example, giving the borrower an opportunity to provide additional collateral or accelerating the loan. There is no assurance, however, that the borrower would provide additional collateral or that the liquidation of the existing collateral would satisfy the borrower's obligation in the event of nonpayment of scheduled interest or principal, or that such collateral could be readily liquidated. -7- 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: o 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. o Invest more than 25% of its total assets in any industry. o 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. o 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. o 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- o 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. o 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. o Purchase shares of other investment companies, except in connection with a merger, consolidation, acquisition or reorganization. o 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 PAII. Mary A. Baldwin, Ph.D, 2525 E. Camelback Road, Suite 200, Phoenix, Arizona 85016. (Age 59.) Trustee. Realtor, Coldwell Banker Success Realty (formerly, The Prudential Arizona Realty) for more than the last five years. Ms. Baldwin is also Vice President, United States Olympic Committee (November 1996-Present), and formerly Treasurer, United States Olympic Committee (November 1992-November 1996). Ms. Baldwin also is a director and/or trustee of each of the funds managed by the Investment Manager. -9- John P. Burke, 260 Constitution Plaza, Hartford, Connecticut 06130. (Age 66.) Trustee. Commissioner of Banking, State of Connecticut (January 1995 - Present). Mr. Burke was formerly President of Bristol Savings Bank (August 1992 - January 1995) and President of Security Savings and Loan (November 1989 - August 1992). Mr. Burke is a director and/or trustee of each of the funds managed by the Investment Manager. Al Burton, 2300 Coldwater Canyon, Beverly Hills, California 90210. (Age 70.) Trustee. President of Al Burton Productions for more than the last five years; formerly Vice President, First Run Syndication, Castle Rock Entertainment (July 1992-November 1994). Mr. Burton also is a director and/or trustee of each of the funds managed by the Investment Manager. Bruce S. Foerster,1 4045 Sheridan Avenue, Suite 432, Miami Beach, Florida 33140. (Age 57.) Trustee. President, South Beach Capital Markets Advisory Corporation (January 1995-Present); Governor, Philadelphia Stock Exchange (October 1997 - Present); Director of Aurora Capital, Inc. (since February 1995); Director of Technology Flavors and Fragrances, Inc. (since June 1998). Mr. Foerster was formerly Director of Mako Marine International (January 1996 - December 1997) and Managing Director, Equity Syndicate, Lehman Brothers (June 1992 - December 1994). Mr. Foerster also is a director and/or trustee of each of the funds managed by the Investment Manager. Jock Patton, 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 52.) Trustee. Private Investor. Director of Artisoft, Inc. Mr. Patton was formerly President and Co-owner, StockVal, Inc. (April 1993 - June, 1997) and a partner and director of the law firm of Streich, Lang, P.A. (1972 - 1993). Mr. Patton is also a director and/or trustee of each of the funds managed by the Investment Manager. *Robert W. Stallings, 40 North Central Avenue, Suite 1200, Phoenix, AZ 85004. (Age 49.) Chairman, Chief Executive Officer, and Trustee. Chairman, Chief Executive Officer and President of Pilgrim America Group, Inc. (since December 1994); Chairman, Pilgrim America Investments, Inc. (since December 1994); Director, Pilgrim America Securities, Inc. (since December 1994); Chairman, Chief Executive Officer and President of each of the other Pilgrim America Funds (since April 1995). Chairman and Chief Executive Officer of Pilgrim America Capital Corporation (formerly, Express America Holdings Corporation) ("Pilgrim America") (since August 1990). Director and officer of other affiliates of Pilgrim America. - ------------------------------- 1 Mr. Foerster has submitted a letter to the Trust informing it that he will resign as a Trustee of the Trust on the earlier of September 30, 1998, or at such time as he becomes associated with a broker-dealer. The Board of Trustees has an Audit Committee comprised of the disinterested Trustees. The Trust pays each Trustee who is not an interested person a pro rata share, based on all of the investment companies in the Pilgrim America Group, of (i) an annual retainer of $20,000; (ii) $1,500 per quarterly and special Board meeting; (iii) $500 per committee meeting; (iv) $500 per special telephonic meeting; and (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 PAII for which the Trustees serve in common as directors/trustees. -10- Compensation of Trustees The following table sets forth information regarding compensation of Trustees by the Trust and other funds managed by PAII for the fiscal year ended February 28, 1998. Officers of the Trust and Trustees who are interested persons of the Trust do not receive any compensation from the Trust or any other funds managed by PAII. 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 America family of funds on which the Trustee serves.
======================================================================================== Total Compensation From Aggregate Trust Compensation and Fund from Complex Paid Name of Person, Position Trust to Trustees ---------------------------------------------------------------------------------------- Mary A. Baldwin (1)(2), Trustee $14,616 $ 28,300 (5 boards) ---------------------------------------------------------------------------------------- John P. Burke (2)(3), Trustee $14,667 $ 28,400 (5 boards) ---------------------------------------------------------------------------------------- Al Burton (2)(4), Trustee $14,667 $ 28,400 (5 boards) ---------------------------------------------------------------------------------------- Bruce S. Foerster (1)(2), Trustee $14,667 $ 28,400 (5 boards) ---------------------------------------------------------------------------------------- Jock Patton (2)(5), Trustee $14,667 $ 28,400 (5 boards) ---------------------------------------------------------------------------------------- Robert W. Stallings (6), Trustee and Chairman $ 0 $ 0 (5 boards) ========================================================================================
- ---------------------------------- (1) Commenced service as a Trustee on April 7, 1995. (2) Member of the Audit Committee. (3) Commenced service as Trustee on May 5, 1997. (4) Commenced service as a Trustee on April 19, 1994. (5) Commenced service as a Trustee on August 28, 1995. (6) "Interested person," as defined in the Investment Company Act, of the Trust because of affiliation with the Investment Manager. Officers Howard Tiffen, President, Chief Operating Officer, and Senior Portfolio Manager 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 50.) Formerly Managing Director of various divisions of Bank of America (and its predecessor, Continental Bank) (1982-1995). James R. Reis, Executive Vice President, Chief Credit Officer, and Assistant Secretary 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 40.) Director, Vice Chairman (since December 1994), and Executive Vice President (since April 1995), Pilgrim America Group and PAII; Director (since December 1994), Vice Chairman (since November 1995) and Assistant Secretary (since January 1995) of PASI; Executive Vice President and Assistant Secretary of each of the other Pilgrim America Funds; Chief Financial Officer -11- (since December 1993), Vice Chairman and Assistant Secretary (since April 1993) and former President (May 1991-December 1993), Pilgrim America (formerly, Express America Holdings Corporation). Presently serves or has served as an officer or director of other affiliates of Pilgrim America. James M. Hennessy, Executive Vice President and Secretary 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 49.) Executive Vice President (since April 1998) and Secretary (since April 1995), Pilgrim America Capital Corporation (formerly Express America Holdings Corporation), Executive Vice President and Secretary, Pilgrim America Group, PAII, PASI, and of each of the Pilgrim America Funds. Presently serves or has served as an officer of other affiliates of Pilgrim America. Daniel A. Norman, Senior Vice President, Treasurer, and Assistant Portfolio Manager 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 40.) Senior Vice President and Assistant Secretary, PAII (since December 1994); Senior Vice President, PASI (since November 1995). Formerly Senior Vice President and Assistant Secretary, Pilgrim America Group (December 1994 - February 1998). Formerly an officer of other affiliates of Pilgrim America. Michael J. Roland, Senior Vice President and Chief Financial Officer 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 40) Senior Vice President and Chief Financial Officer PAGI, PAII PASI (since June 1998) and Pilgrim America Financial (since August, 1998). He served in same capacity from January, 1995 - April, 1997. Chief Financial Officer of Endeaver Group (April, 1997 to June, 1998). Robert S. Naka, Vice President and Assistant Secretary 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 35.) Vice President, Pilgrim America Investments, Inc. (since April 1997) and Pilgrim America Group, Inc. (since February 1997). Vice President and Assistant Secretary of each of the funds in the Pilgrim America Group of Funds. Formerly Assistant Vice President (August 1995 - February 1997), Pilgrim America Group, Inc. and Operations Manager (April 1992 - April 1995), Pilgrim Group, Inc. Robyn L. Ichilov, Vice President 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004. (Age 30) Vice President, PAII (since August 1997) and Pilgrim America Financial (since May 1998), Accounting Manager (since November 1995). Formerly Assistant Vice President and Accounting Supervisor for Paine Webber (June, 1993 - April, 1995). As of July 31, 1998, the Trustees and Officers of the Trust as a group owned beneficially less than 1% of the Trust's shares. INVESTMENT MANAGEMENT AND OTHER SERVICES Investment Manager. The Investment Manager serves as investment manager to the Trust and has overall responsibility for the management of the Trust. The Investment Management Agreement between the Trust and the Investment Manager requires the Investment Manager to oversee the provision of all investment advisory services for the Trust. The Investment Manager, which was organized in December 1994, is registered as an investment adviser with the Commission and serves as investment adviser to seven other registered investment -12- 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 $4.9 billion. The Investment Manager is a wholly owned subsidiary of Pilgrim America Group, which itself is a wholly-owned subsidiary of Pilgrim America, a Delaware corporation, the shares of which are traded on the NASDAQ National Market System and which is a holding company that through its subsidiaries engages in the financial services business. The Investment Manager pays all of its expenses arising from the performance of its obligations under the Investment Management Agreement, including executive salaries and expenses of the Trustees and Officers of the Trust who are employees of the Investment Manager or its affiliates. Other expenses incurred in the operation of the Trust are borne by the Trust, including, without limitation, expenses incurred in connection with the sale, issuance, registration and transfer of its shares; fees of its Custodian, Transfer and Shareholder Servicing Agent; salaries of officers and fees and expenses of Trustees or members of any advisory board or committee of the Trust who are not members of, affiliated with or interested persons of the Investment Manager; the cost of preparing and printing reports, proxy statements and prospectuses of the Trust or other communications for distribution to its shareholders; legal, auditing and accounting fees; the fees of any trade association of which the Trust is a member; fees and expenses of registering and maintaining registration of its shares for sale under Federal and applicable State securities laws; and all other charges and costs of its operation plus any extraordinary and non-recurring expenses. For the fiscal years ended February 28, 1998, February 28, 1997 and February 29, 1996, PAII (or, prior to April 7, 1995, its predecessor) was paid $10,369,772, $8,268,263 and $7,122,089, respectively, for services rendered to the Trust. The Investment Management Agreement continues from year to year if specifically approved at least annually by the Trustees or the Shareholders. But in either event, the Investment Management Agreement must also be approved by vote of a majority of the Trustees who are not parties to the Investment Management Agreement or "interested persons" of any such party, cast in person at a meeting called for that purpose. The use of the name "Pilgrim" in the Trust's name is pursuant to the Investment Management Agreement between the Trust and PAII, 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 America 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 PAII; 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 PAII, 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 PAII; the fees payable to the Administrator; the fees and expenses of Trustees who are not affiliated with PAII 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 -13- connection with its transactions; all taxes and corporate fees payable by the Trust to governmental agencies; the fees of any trade association of which the Trust is a member; the cost of share certificates representing shares of the Trust; organizational and offering expenses of the Trust and the fees and expenses involved in registering and maintaining registration of the Trust and of its shares with the Commission including the preparation and printing of the Trust's registration statement and prospectuses for such purposes; allocable communications expenses, with respect to investor services and all expenses of shareholders and Trustees' meetings and of preparing, printing and mailing reports, proxy statements and prospectuses to shareholders; and the cost of insurance; and litigation and indemnification expenses and extraordinary expenses not incurred in the ordinary course of the Trust's business. For the fiscal years ended February 28, 1998, February 28, 1997 and February 29, 1996, PAGI (or, prior to April 7, 1995, its predecessor) was paid $1,778,473, $1,441,271 and $1,264,932, respectively, for services rendered to the Trust. PORTFOLIO TRANSACTIONS The Trust will generally have at least 80% of its net assets invested in Senior Loans. The remaining assets of the Trust will generally consist of short-term debt instruments with remaining maturities of 120 days or less and certain other instruments such as subordinated loans up to a maximum of 5% of the Trust's net assets, Hybrid Loans, unsecured loans, interest rate swaps, caps and floors, 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 PAII 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. PAII 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 PAII under the Investment Management Agreement between PAII and the Trust. The expenses of PAII will not necessarily be reduced as a result of the receipt of such supplemental information. PAII 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 PAII or other entities advised by PAII will be considered by and may be useful to PAII in carrying out its obligations to the Trust. The Trust does not intend to effect any brokerage transaction in its portfolio securities with any broker-dealer affiliated directly or indirectly with the Investment Manager, except for any sales of portfolio securities pursuant to a tender offer, in which event the Investment Manager will offset against the management fee a part of any tender -14- fees which legally may be received by such affiliated broker-dealer. To the extent certain services which the Trust is obligated to pay for under the Investment Management Agreement are performed by the Investment Manager, the Trust will reimburse the Investment Manager for the costs of personnel involved in placing orders for the execution of portfolio transactions. The Trust paid $0, $0 and $7,400 in brokerage commissions during the fiscal years ended February 28, 1998, February 28, 1997 and February 29, 1996, respectively. Portfolio Turnover Rate The annual rate of the Trust's total portfolio turnover for the years ended February 28, 1998 and February 28, 1997, was 90% and 82%, respectively. The annual turnover rate of the Trust is generally expected to be between 50% and 100%, although as part of its investment policies, the Trust places no restrictions on portfolio turnover and the Trust may sell any portfolio security without regard to the period of time it has been held. The annual turnover rate of the Trust also includes Senior Loans for which the full payment on the Senior Loan has been prepaid by the borrower. The Investment Manager believes that prepaid Senior Loans generally comprise approximately 25% to 75% of the Trust's total portfolio turnover each year. NET ASSET VALUE The NAV per share of the Trust is determined once daily as of the close of trading on the NYSE on each day it is open, by dividing the value of the Trust's portfolio securities plus all cash and other assets (including dividends accrued but not collected) less all liabilities (including accrued expenses but excluding capital and surplus) by the number of shares outstanding. In accordance with generally accepted accounting principles for investment companies, dividend income is accrued on the ex-dividend date. The NAV per share is made available for publication. Generally, Senior Loans are valued at fair value in the absence of readily ascertainable market values believed to be reliable. Fair value is determined by PAII under procedures established and monitored by the Trust's Board of Trustees. In valuing a loan, PAII considers, among other factors: (i) the creditworthiness of the issuer and any interpositioned bank; (ii) the current interest rate, period until next interest rate reset and maturity date of the Senior Loan; (iii) recent market prices for similar loans, if any; and (iv) recent prices in the market for instruments with similar quality, rate, period until next interest rate reset, maturity, terms and conditions, if any. PAII may also consider prices or quotations, if any, provided by banks, dealers or pricing services which may represent the prices at which secondary market transactions in the loans held by the Trust have or could have occurred. However, because the secondary market in Senior Loans has not yet fully developed, PAII will not currently rely solely on such prices or quotations. Securities for which the primary market is a national securities exchange or the NASDAQ National Market System are stated at the last reported sale price on the day of valuation. Debt and equity securities traded in the over-the-counter market and listed securities for which no sale was reported on that date are valued at the mean between the last reported bid and asked price. Securities other than Senior Loans for which reliable quotations are not readily available and all other assets will be valued at their respective fair values as determined in good faith by, or under procedures established by, the Board of Trustees of the Trust. Investments in securities maturing in less than 60 days are valued at amortized cost, which when combined with accrued interest, approximates market value. METHODS AVAILABLE TO REDUCE MARKET VALUE DISCOUNT FROM NAV In recognition of the possibility that the Trust's shares may trade at a discount from NAV, the Trustees have determined that it would be in the best interest of shareholders for the Trust to take action to attempt to reduce or eliminate a market value discount from NAV. To that end, the Trustees presently contemplate that the Trust will take action either to repurchase shares in the open market in accordance with Section 23(c) of the Investment Company Act and Rule 23c-1 thereunder or to consider the making of tender offers to purchase its own shares at NAV. Since Trust shares became listed on the NYSE on March 9, 1992, the Trust has authorized two repurchase -15- programs and has conducted one tender offer that expired May 1, 1992. The Trustees presently intend each quarter to consider the making of such tender offers. The Trustees will at no time be required to make such tender offers. Moreover, there can be no assurance that tender offers will result in the Trust's shares trading at a price which is equal to their NAV. The Trust anticipates that the market price may, among other things, be determined by the relative demand for and supply of such shares in the market, the Trust's investment performance, the Trust's yield, and investor perception of the Trust's overall attractiveness as an investment as compared with other investment alternatives. In deciding whether the Trust will entertain tender offers and whether it will accept shares tendered, the Trustees will consider several factors. One of the principal factors in the Board's determinations on whether or not to make quarterly offers will be the strength of the public market for the Trust's shares. Other factors include the desire to reduce or eliminate a market value discount from NAV. In addition, the Trustees will take into consideration the liquidity of its assets in determining whether to make a tender offer or accept tendered shares. In paying shareholders for tendered shares, the Trust anticipates that it will use cash on hand, such as proceeds from sales of new Trust shares and specified pay-downs from Senior Loans, and proceeds from the sale of cash equivalents held by the Trust. The Trust may also borrow to pay Shareholders for tendered shares. To the extent more shares are anticipated to be tendered or are tendered than could be paid for out of such amounts, the liquidity of the Senior Loans held by the Trust may be a consideration in the Trust's determination whether to make a tender offer or, if an offer is made, in its determination of whether it will accept shares tendered. Accepting tendered shares may require the Trust to sell portfolio investments and incur certain costs which it otherwise would not have. Under most Senior Loans, it will be 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 PAII does not anticipate any material difficulty in meeting the liquidity needs for tender offers, there can be no guarantee that the Trust will be able to liquidate a particular Senior Loan it holds within a given period of time. Furthermore, even if a tender offer has been made, it is the Trustees' announced policy, which may be changed by the Trustees, not to effect tender offers or accept tenders if: (1) such transactions, if consummated, would impair the Trust's status as a regulated investment company under the Internal Revenue Code of 1986, as amended (the "Code") (which would make the Trust a taxable entity, causing its income to be taxed at the corporate level in addition to the taxation of shareholders who receive dividends from the Trust) or (2) there is, in the judgment of the Trustees, any (a) material legal action or proceeding instituted or threatened challenging such transactions or otherwise materially adversely affecting the Trust, (b) declaration of a banking moratorium by federal or state authorities or any suspension of payment by banks in the United States, (c) limitation affecting the Trust or the issuers of its portfolio instruments imposed by federal or state authorities on the extension of credit by lending institutions or on the exchange of foreign currency, (d) commencement of war, armed hostilities or other international or national calamity directly or indirectly involving the United States, or (e) other event or condition which would have a material adverse effect on the Trust or its shareholders if shares were repurchased. The Trustees may modify these conditions in light of experience. Any tender offer made by the Trust will be at a price equal to the NAV of the shares. Each shareholder will be notified in accordance with the requirements of the Securities Exchange Act of 1934 and the Investment Company Act, either by publication or mailing or both. Each offering document will contain such information as is prescribed by such laws and the rules and regulations promulgated thereunder. Other procedures to be used in connection with a particular tender offer will be determined by the Trustees in accordance with the provisions of applicable law, including the Securities Exchange Act of 1934. Any tender offer that the Trust makes may have the effect of reducing shareholder return as a result of the expenses incurred with respect to the tender offers, the reduced level of interest earned on the money received by the Trust as payment for shares newly purchased which may be held in cash equivalents in anticipation of tender offers, and the cost of borrowing money to fund the tender offers. -16- TAX MATTERS The following is only a summary of certain U.S. federal income tax considerations generally affecting the Trust and its shareholders. No attempt is made to present a detailed explanation of the tax treatment of the Trust or its shareholders, and the following discussion is not intended as a substitute for careful tax planning. Shareholders should consult with their own tax advisers regarding the specific federal, state, local, foreign and other tax consequences of investing in the Trust. Qualification as a Regulated Investment Company The Trust has elected each year to be taxed as a regulated investment company under Subchapter M of the Code. As a regulated investment company, the Trust generally is not subject to federal income tax on the portion of its investment company taxable income (i.e., taxable interest, dividends and other taxable ordinary income, net of expenses, and net short-term capital gains in excess of net long-term capital losses) and net capital gains (i.e., the excess of net long-term capital gains over net short-term capital losses) that it distributes to shareholders, provided that it distributes at least 90% of its investment company taxable income for the taxable year (the "Distribution Requirement"), and satisfies certain other requirements of the Code that are described below. In addition to satisfying the Distribution Requirement and an asset diversification requirement discussed below, a regulated investment company must derive at least 90% of its gross income for each taxable year from dividends, interest, certain payments with respect to securities loans, gains from the sale or other disposition of stock or securities or foreign currencies and other income (including, but not limited to, gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, securities or currencies. In general, gain or loss recognized by the Trust on the disposition of an asset will be a capital gain or loss. However, gain recognized on the disposition of a debt obligation purchased by the Trust at a market discount (generally, at a price less than its principal amount) other than at original issue will be treated as ordinary income to the extent of the portion of the market discount which accrued during the period of time the Trust held the debt obligation. In general, investments by the Trust in zero coupon or other original issue discount securities will result in income to the Trust equal to a portion of the excess of the face value of the securities over their issue price (the "original issue discount") each year that the Trust holds the securities, even though the Trust receives no cash interest payments. This income is included in determining the amount of income which the Trust must distribute to maintain its status as a regulated investment company and to avoid federal income and excise taxes. In addition to satisfying the requirements described above, the Trust must satisfy an asset diversification test in order to qualify as a regulated investment company. Under this test, at the close of each quarter of the Trust's taxable year, at least 50% of the value of the Trust's assets must consist of cash and cash items (including receivables), U.S. Government securities, 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. -17- Excise Tax on Regulated Investment Companies A 4% non-deductible excise tax is imposed on a regulated investment company that fails to distribute in each calendar year an amount equal to at least 98% of ordinary taxable income for the calendar year, at least 98% of capital gain net income (i.e., capital gains in excess of capital losses) for the one-year period ended on October 31 of such calendar year and any ordinary taxable income and capital gain net income for previous years that was not distributed during those years. A distribution will be treated as paid on December 31 of the current calendar year if it is declared by the Trust in October, November or December with a record date in such a month and paid by the Trust during January of the following calendar year. Such distributions will be taxable to shareholders in the calendar year in which the distributions are declared, rather than the calendar year in which the distributions are received. The Trust intends to make sufficient distributions or deemed distributions (discussed below) of its ordinary taxable income and capital gain net income to avoid liability for the excise tax. Hedging Transactions The Trust has the ability, pursuant to its investment objectives and policies, to hedge its investments in a variety of transactions, including interest rate swaps and the purchase or sale of interest rate caps and floors. The treatment of these transactions for federal income tax purposes may in some instances be unclear, and the regulated investment company qualification requirements may limit the extent to which the Trust can engage in hedging transactions. In addition, recently enacted rules may affect the timing and character of gain if the Trust engages in transactions that reduce or eliminate its risk of loss with respect to appreciated financial positions. If the Trust enters into certain transactions in property while holding substantially identical property, the Trust would be treated as if it had sold and immediately repurchased the property and would be taxed on any gain (but not loss) from the constructive sale. The character of gain from a constructive sale would depend upon the Trust's holding period in the property. Loss from a constructive sale would be recognized when the property was subsequently disposed of, and its character would depend on the Trust's holding period and the application of various loss deferral provisions in the Code. Distributions The Trust anticipates distributing substantially all of its investment company taxable income for each taxable year. Such distributions will be taxable to shareholders as ordinary income. If a portion of the Trust's income consists of dividends paid by U.S. corporations, a portion of the dividends paid by the Trust may be eligible for the corporate dividends received deduction. The Trust may either retain or distribute to shareholders its net capital gain for each taxable year. The Trust currently intends to distribute any such amounts. If net capital gain is distributed and designated as a capital gain dividend, it will generally be taxable to shareholders at a maximum federal tax rate of 20%. Distributions are subject to these capital gains rates regardless of the length of time the shareholder has held his shares. Conversely, if the Trust elects to retain its net capital gain, the Trust will be taxed thereon (except to the extent of any available capital loss carryovers) at the 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 -18- the Trust on the gain, and will increase the tax basis for his shares by an amount equal to the deemed distribution less the tax credit. Distributions by the Trust in excess of the Trust's earnings and profits will be treated as a return of capital to the extent of (and in reduction of) the shareholder's tax basis in his shares; any such return of capital distributions in excess of the shareholder's tax basis will be treated as gain from the sale of his shares, as discussed below. Distributions by the Trust will be treated in the manner described above regardless of whether such distributions are paid in cash or reinvested in additional shares of the Trust. If the NAV at the time a shareholder purchases shares of the Trust reflects undistributed income or gain, distributions of such amounts will be taxable to the shareholder in the manner described above, even though such distributions economically constitute a return of capital to the shareholder. The Trust will be required in certain cases to withhold and remit to the U.S. Treasury 31% of all taxable distributions payable to any shareholder (1) who fails to provide the Trust with a certified, correct tax identification number or other required certifications, or (2) if the Internal Revenue Service notifies the Trust that the shareholder is subject to backup withholding. Sale of Shares A shareholder will recognize gain or loss on the sale or exchange of shares of the Trust in an amount generally equal to the difference between the proceeds of the sale and the shareholder's adjusted tax basis in the shares. In general, any such gain or loss will be considered capital gain or loss if the shares are held as capital assets, and gain or loss will be long-term or short-term, depending upon the shareholder's holding period for the shares. However, any capital loss arising from the sale of shares held for six months or less will be treated as a long-term capital loss to the extent of any long-term capital gains distributed (or deemed distributed) with respect to such shares. Also, any loss realized on a sale or exchange of shares will be disallowed to the extent the shares disposed of are replaced (including shares acquired through the Shareholder Investment Program within a period of 61 days beginning 30 days before and ending 30 days after the shares are disposed of. In such case, the tax basis of the acquired shares will be adjusted to reflect the disallowed loss. Tender Offers to Purchase Shares As described earlier, the Trust will consider making tender offers for its shares on a quarterly basis. Under current law, a shareholder, who pursuant to a tender offer, tenders all of his shares and any shares considered owned by such shareholder under attribution rules contained in the Code, will recognize gain or loss, taxable as described above (see "Sale of Shares"). Different tax consequences may apply to shareholders who tender less than all their shares in connection with a tender offer and possibly to non-tendering shareholders. The tax consequences to shareholders of a tender offer will be more fully described in offering documents related to the tender offer. Foreign Shareholders U.S. taxation of a shareholder who, as to the United States, is a nonresident alien individual, foreign trust or estate, foreign corporation, or foreign partnership ("foreign shareholder") depends on whether the income from the Trust is "effectively connected" with a U.S. trade or business carried on by such shareholder. If the income from the Trust is not effectively connected with a U.S. trade or business carried on by a foreign shareholder, distributions of investment company taxable income will be subject to U.S. withholding tax at the rate of 30% (or lower treaty rate). Such a foreign shareholder would generally be exempt from U.S. federal income tax on gains realized on the sale or exchange of shares of the Trust, capital gain dividends, and amounts retained by the Trust that are designated as undistributed capital gains. -19- If the income from the Trust is effectively connected with a U.S. trade or business carried on by a foreign shareholder, then distributions of investment company taxable income, capital gain dividends, amounts retained by the Trust that are designated as undistributed capital gains and any gains realized upon the sale or exchange of shares of the Trust will be subject to U.S. federal income tax at the rates applicable to U.S. citizens or domestic corporations. Such shareholders that are classified as corporations for U.S. tax purposes also may be subject to a branch profits tax. In the case of foreign noncorporate shareholders, the Trust may be required to withhold U.S. federal income tax at a rate of 31% on distributions that are otherwise exempt from withholding tax (or taxable at a reduced treaty rate) unless such shareholders furnish the Trust with proper notification of their foreign status. The tax consequences to a foreign shareholder entitled to claim the benefits of an applicable tax treaty may be different from those described herein. Foreign shareholders are urged to consult their own tax advisers with respect to the particular tax consequences to them of an investment in the Trust, including the applicability of foreign taxes. Effect of Future Legislation; Other Tax Considerations The foregoing general discussion of U.S. federal income tax consequences is based on the Code and the Treasury Regulations issued thereunder as in effect on the date of this SAI. Future legislative or administrative changes or court decisions may significantly change the conclusions expressed herein, and any such changes or decisions may have a retroactive effect with respect to the transactions contemplated herein. Income received by the Trust from foreign sources may be subject to withholding and other taxes imposed by such foreign jurisdictions, absent treaty relief. Distributions to shareholders also may be subject to state, local and foreign taxes, depending upon each shareholder's particular situation. Shareholders are urged to consult their tax advisers as to the particular consequences to them of an investment in the Trust. ADVERTISING AND PERFORMANCE DATA Advertising From time to time, advertisements and other sales materials for the Trust may include information concerning the historical performance of the Trust. Any such information may include trading volume of the Trust's shares, the number of Senior Loan investments, annual total return, aggregate total return, distribution rate, average compounded distribution rate and yield of the Trust for specified periods of time, and diversification statistics. Such information may also include performance and risk rankings and similar information from independent organizations such as Lipper Analytical Services, Inc. ("Lipper"), Morningstar, Value Line, Inc., CDA Technology, Inc. or other industry publications. These rankings will typically compare the Trust to all closed-end funds, to other Senior Loan funds, and/or also to taxable closed-end fixed income funds. Any such use of rankings and ratings in advertisements and sales literature will conform with the guidelines of the NASD and subsequently approved by the Commission on July 13, 1994. Ranking comparisons and ratings should not be considered representative of the Trust's relative performance for any future period. Reports and promotional literature may also contain the following information: (i) number of shareholders; (ii) average account size; (iii) identification of street and registered account holdings; (iv) lists or statistics of certain of the Trust's holdings including, but not limited to, portfolio composition, sector weightings, portfolio turnover rates, number of holdings, average market capitalization and modern portfolio theory statistics alone or in comparison with itself (over time) and with its peers and industry group; (v) public information about the asset class; and (vi) discussions concerning coverage of the Trust by analysts. In addition, reports and promotional literature may contain information concerning the Investment Manager, Pilgrim America, the Portfolio Managers, Pilgrim America Group, Inc. or affiliates of the Trust, the Investment Manager, Pilgrim America or Pilgrim America Group, Inc. including (i) performance rankings of other funds -20- 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 America Funds by Pilgrim America; (iv) the past performance of Pilgrim America and Pilgrim America Group, Inc.; (v) the past performance of other funds managed by the Investment Manager; (vi) quotes from a portfolio manager of the Trust or industry specialists; and (vii) information regarding rights offerings conducted by closed-end funds managed by the Investment Manager. The Trust may compare the frequency of its reset period to the frequency with which the London Inter-Bank Offered Rate ("LIBOR") changes. Further, the Trust may compare its yield to (i) LIBOR, (ii) the federal funds rate, (iii) the prime rate, quoted daily in The Wall Street Journal as the base rate on corporate loans at large U.S. money center commercial banks, (iv) one or more averages compiled by Donoghue's Money Fund Report, a widely recognized independent publication that monitors the performance of money market mutual funds, (v) the average yield reported by the Bank Rate Monitor National Index for money market deposit accounts offered by the 100 leading banks and thrift institutions in the ten largest standard metropolitan statistical areas, (vi) yield data published by Lipper, or (vii) the yield on an investment in 90-day Treasury bills on a rolling basis, assuming quarterly compounding. Further, the Trust may compare such other yield data described above to each other. The Trust may also compare its total return, NAV stability and yield to other fixed income investments (such as Certificates of Deposit), open-end mutual funds and Unit Investments Trusts. As with yield and total return calculations, yield comparisons should not be considered representative of the Trust's yield or relative performance for any future period. The Trust may provide information designed to help individuals understand their investment goals and explore various financial strategies. Such information may include information about current economic, market and political conditions; materials that describe general principles of investing, such as asset allocation, diversification, risk tolerance, and goal setting; worksheets used to project savings needs based on assumed rates of inflation and hypothetical rates of return; and action plans offering investment alternatives. Materials may also include discussions of other investment companies in the Pilgrim America Group of Funds, products and services, and descriptions of the benefits of working with investment professionals in selecting investments. Performance Data The Trust may quote annual total return and aggregate total return performance data. Total return quotations for the specified periods will be computed by finding the rate of return (based on net investment income and any capital gains or losses on portfolio investments over such periods) that would equate the initial amount invested to the value of such investment at the end of the period. On occasion, the Trust may quote total return calculations published by Lipper, a widely recognized independent publication that monitors the performance of both open-end and closed-end investment companies. The Trust's distribution rate is calculated on a monthly basis by annualizing the dividend declared in the month and dividing the resulting annualized dividend amount by the Trust's corresponding month-end net asset value (in the case of NAV) or the last reported market price (in the case of Market). The distribution rate is based solely on the actual dividends and distributions, which are made at the discretion of management. The distribution rate may or may not include all investment income, and ordinarily will not include capital gains or losses, if any. Total return and distribution rate and compounded distribution rate figures utilized by the Trust are based on historical performance and are not intended to indicate future performance. Distribution rate, compounded distribution rate and NAV per share can be expected to fluctuate over time. Total return will vary depending on market conditions, the Senior Loans, and other securities comprising the Trust's portfolio, the Trust's operating expenses and the amount of net realized and unrealized capital gains or losses during the period. FINANCIAL STATEMENTS -21- The financial statements contained in the Trust's February 28, 1998 Annual Report to Shareholders are incorporated herein by reference. -22- PART C OTHER INFORMATION Item 24. Financial Statements and Exhibits 1. Financial Statements Contained in Part A: Financial Highlights for the years ended February 28, 1998, 1997; February 29, 1996; February 28, 1995, 1994, 1993; February 29, 1992; February 28, 1991, 1990 and 1989 Incorporated in Part B by reference to Registrant's February 28, 1998 Annual Report: (a) Portfolio of Investments as of February 28, 1998 (b) Statement of Assets and Liabilities as of February 28, 1998 (c) Statement of Operations for the year ended February 28, 1998 (d) Statements of Changes in Net Assets for the years ended February 28, 1997 and February 28, 1998 (e) Statement of Cash Flows for the year ended February 28, 1998 (f) Notes to Financial Statements (g) Report of Independent Auditors dated April 10, 1998 2. Exhibits (a) (i) Agreement and Declaration of Trust1/ (ii) Amendment to the Agreement and Declaration of Trust dated March 26, 1996 and effective April 12, 19961/ (b) (i) By-Laws2/ (ii) Amendment to By-Laws2/ (c) Not Applicable (d) Not Applicable (e) Form of Shareholder Investment Program5/ (f) Not Applicable C-1 (g) (i) Form of Amended and Restated Investment Management Agreement3/ (ii) Form of Amendment to Investment Management Agreement (h) Form of Distribution Agreement5/ (i) Not Applicable (j) Form of Custody Agreement3/ (k) (i) Form of Amended and Restated Administration Agreement3/ (ii) Form of Recordkeeping Agreement3/ (iii) Form of Revolving Loan Agreement (l) Opinion of Dechert Price & Rhoads (m) Not Applicable (n) Consent of KPMG Peat Marwick LLP (o) Not Applicable (p) Certificate of Initial Capital4/ (q) Not Applicable (r) Financial Data Schedule - --------------------------------------- 1/ Incorporated herein by reference to Amendment No. 20 to Registrant's Registration Statement under the Investment Company Act of 1940 (the "1940 Act") on Form N-2 (File No. 811-5410), filed on September 16, 1996. 2/ Incorporated herein by reference to Amendment No. 24 to Registrant's Registration Statement under the 1940 Act on Form N-2 (File No. 811-5410), filed on November 7, 1997. 3/ Incorporated herein by reference to Amendment No. 22 to Registrant's Registration Statement under the 1940 Act on Form N-2 (File No. 811-5410), filed on June 23, 1997. 4/ Incorporated herein by reference to Pre-Effective Amendment No. 1 to Registrant's initial registration statement on form N-2 (File No. 33-18886), filed on January 22, 1988. 5/ Incorporated herein by reference to Amendment No. 27 to Registrant's Registration Statement under the 1940 Act on Form N-2 (File No. 811-5410), filed on May 15, 1998. C-2 Item 25. Marketing Agreements Not Applicable. Item 26. Other Expenses of Issuance and Distribution The following table sets forth estimated expenses to be incurred in connection with the offering described in the registration statement. Registration Fees....................................................$ 73,980.84 Trustee Fees.........................................................$ 250.00 Transfer Agent's Fees................................................$ 10,000.00 Printing Expenses....................................................$ 10,000.00 Legal Fees...........................................................$ 25,000.00 New York Stock Exchange Listing Fees.................................$ 62,450.00 National Association of Securities Dealers, Inc. Fees................$ 25,578.25 Accounting Fees and Expenses.........................................$ 5,000.00 Miscellaneous Expenses...............................................$ 2,000.00 Total.......................................................$214,248.59 Item 27. Persons Controlled by or Under Common Control Not Applicable. Item 28. Number of Holders of Securities As of July 31, 1998: (1) Title of Class (2) Number of Record Holders -------------- ------------------------ Shares of Beneficial 59,781 Interest Item 29. Indemnification Registrant's Agreement and Declaration of Trust generally provides that the Trust shall indemnify each of its Trustees and officers (including persons who serve at the Trust's request as directors, officers or trustees of another organization in which the Trust has any interest as a shareholder, creditor or otherwise) ("Covered Persons") against all liabilities and expenses, including amounts paid in C-3 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 Manager also serve as officers and/or directors for other registered investment companies in the Pilgrim America family of funds and with Pilgrim America Group, Inc. and its subsidiaries. Information as to the directors and officers of the Adviser is included in the Investment Manager's Form ADV and amendments thereto filed with the Commission and is incorporated herein by reference thereto. For additional information, see "Investment Management and Other Services" in the Prospectus. Item 31. Location of Accounts and Records The amounts and records of the Registrant will be maintained at its office at 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004 and at the office of its custodian, Investors Fiduciary Trust Company, 801 Pennsylvania, Kansas City, Missouri 64105. Item 32. Management Services Not Applicable. Item 33. Undertakings 1. The Registrant undertakes to suspend the Offer until the prospectus is amended if (1) subsequent to the effective date of this registration statement, the net asset value declines more than ten percent from its net asset value as of the effective date of this registration statement or (2) the net asset value increases to an amount greater than the net proceeds as stated in the prospectus included in this registration statement. C-4 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. (3) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. b. that, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and c. to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. 5. Not Applicable. 6. The Registrant undertakes to send by first class mail or other means designed to ensure equally prompt delivery, within two business days of receipt of a written or oral request, any Statement of Additional Information. C-5 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 17th day of August, 1998. PILGRIM AMERICA PRIME RATE TRUST By: /s/ James M. Hennessy ------------------------------ James M. Hennessy Executive Vice President Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated: Signatures Title Date - ---------- ----- ---- Chief Executive Officer August 17, 1998 - ----------------------- and Trustee Robert W. Stallings* Chief Financial Officer August 17, 1998 - ----------------------- Michael A. Roland* Trustee August 17, 1998 - ----------------------- Mary A. Baldwin* Trustee August 17, 1998 - ----------------------- John P. Burke* Trustee August 17, 1998 - ----------------------- Al Burton* Trustee August 17, 1998 - ----------------------- Bruce S. Foerster* Trustee August 17, 1998 - ----------------------- Jock Patton* *By: /s/ James M. Hennessy ----------------------------- James M. Hennessy Attorney-in-Fact** - ------------------------------ ** Powers of attorney are included herein. POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being a duly elected Trustee of Pilgrim America Prime Rate Trust (the "Trust"), constitutes and appoints Robert W. Stallings, James R. Reis, James M. Hennessy, Daniel A. Norman, Jeffrey S. Puretz and Jeffrey L. Steele and each of them, his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution for his in his name, place and stead, in any and all capacities, to sign the Trust's registration statement on Form N-2 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and conforming all that said attorneys-in-fact and agents, or any of them, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Dated: August 3, 1998 /s/ Robert W. Stallings --------------------------------- Robert W. Stallings POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being a duly elected Trustee of Pilgrim America Prime Rate Trust (the "Trust"), constitutes and appoints Robert W. Stallings, James R. Reis, James M. Hennessy, Daniel A. Norman, Jeffrey S. Puretz and Jeffrey L. Steele and each of them, her true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution for her in her name, place and stead, in any and all capacities, to sign the Trust's registration statement on Form N-2 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as she might or could do in person, hereby ratifying and conforming all that said attorneys-in-fact and agents, or any of them, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Dated: August 3, 1998 /s/ Mary A. Baldwin --------------------------------- Mary A. Baldwin POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being a duly elected Trustee of Pilgrim America Prime Rate Trust (the "Trust"), constitutes and appoints Robert W. Stallings, James R. Reis, James M. Hennessy, Daniel A. Norman, Jeffrey S. Puretz and Jeffrey L. Steele and each of them, his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution for his in his name, place and stead, in any and all capacities, to sign the Trust's registration statement on Form N-2 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and conforming all that said attorneys-in-fact and agents, or any of them, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Dated: August 3, 1998 /s/ John P. Burke --------------------------------- John P. Burke POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being a duly elected Trustee of Pilgrim America Prime Rate Trust (the "Trust"), constitutes and appoints Robert W. Stallings, James R. Reis, James M. Hennessy, Daniel A. Norman, Jeffrey S. Puretz and Jeffrey L. Steele and each of them, his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution for his in his name, place and stead, in any and all capacities, to sign the Trust's registration statement on Form N-2 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and conforming all that said attorneys-in-fact and agents, or any of them, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Dated: August 3, 1998 /s/ Al Burton --------------------------------- Al Burton POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being a duly elected Trustee of Pilgrim America Prime Rate Trust (the "Trust"), constitutes and appoints Robert W. Stallings, James R. Reis, James M. Hennessy, Daniel A. Norman, Jeffrey S. Puretz and Jeffrey L. Steele and each of them, his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution for his in his name, place and stead, in any and all capacities, to sign the Trust's registration statement on Form N-2 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and conforming all that said attorneys-in-fact and agents, or any of them, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Dated: August 3, 1998 /s/ Bruce S. Foerster --------------------------------- Bruce S. Foerster POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being a duly elected Trustee of Pilgrim America Prime Rate Trust (the "Trust"), constitutes and appoints Robert W. Stallings, James R. Reis, James M. Hennessy, Daniel A. Norman, Jeffrey S. Puretz and Jeffrey L. Steele and each of them, his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution for his in his name, place and stead, in any and all capacities, to sign the Trust's registration statement on Form N-2 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and conforming all that said attorneys-in-fact and agents, or any of them, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Dated: August 3, 1998 /s/ Jock Patton --------------------------------- Jock Patton POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being Senior Vice President and Chief Financial Officer of Pilgrim America Prime Rate Trust (the "Trust"), constitutes and appoints Robert W. Stallings, James R. Reis, James M. Hennessy, Daniel A. Norman, Jeffrey S. Puretz and Jeffrey L. Steele and each of them, his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution for his in his name, place and stead, in any and all capacities, to sign the Trust's registration statement on Form N-2 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and conforming all that said attorneys-in-fact and agents, or any of them, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Dated: August 10, 1998 /s/ Michael J. Roland --------------------------------- Michael J. Roland EXHIBIT INDEX Exhibit Number Name of Exhibit - -------------- --------------- 2(g)(ii) Form of Amendment to Investment Management Agreement 2(k)(iii) Form of Revolving Loan Agreement 2(l) Opinion of Dechert Price & Rhoads 2(n) Consent of KPMG Peat Marwick 2(r)[EDGAR Exhibit 27] Financial Data Schedule EX-2.G.II 2 AMEND. TO RESTATED INVESTMENT MANAGEMENT AGREE. AMENDMENT TO 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 and restated on the 7th day of April, 1997, by and between PILGRIM AMERICA PRIME RATE TRUST (formerly Pilgrim Prime Rate Trust), a business trust organized and existing under the laws of the Commonwealth of Massachusetts (hereinafter called the "Trust"), and PILGRIM AMERICA 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 __________, 1998. 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 Manager is registered as an investment adviser under the Investment Advisers Act of 1940, 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 average daily net assets of the Trust, plus the proceeds of any outstanding borrowings. 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. 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 AMERICA PRIME RATE TRUST Attest:_________________________ By:_________________________________ Title: _________________________ Title: _____________________________ PILGRIM AMERICA INVESTMENTS, INC. Attest:_________________________ By:_________________________________ Title: _________________________ Title: _____________________________ -2- EX-2.K.III 3 FORM OF REVOLVING LOAN AGREEMENT REVOLVING LOAN AGREEMENT Dated as of July 16, 1998 by and among PILGRIM AMERICA PRIME RATE TRUST, as Borrower, PILGRIM AMERICA INVESTMENTS, INC., as Servicer, EDISON ASSET SECURITIZATION, L.L.C., as a Lender, and GENERAL ELECTRIC CAPITAL CORPORATION, as a Lender, Lender Agent, Operating Agent and Collateral Agent TABLE OF CONTENTS -----------------
ARTICLE I. DEFINITIONS AND INTERPRETATION.................................................................2 Section 1.01. Definitions.....................................................................2 Section 1.02. Rules of Construction...........................................................2 ARTICLE II. AMOUNTS AND TERMS OF CREDIT....................................................................2 Section 2.01. Revolving Credit Facility.......................................................2 Section 2.02. Prepayments; Reduction and Termination of Maximum Facility Amount...................................................4 Section 2.03. Interest........................................................................5 Section 2.04. Fees............................................................................6 Section 2.05. Receipt of Payments.............................................................7 Section 2.06. Establishment of Accounts.......................................................7 (a) Master Collection Account....................................................7 (b) Collection Accounts..........................................................8 (c) Retention Account............................................................9 (d) Collateral Account...........................................................9 (e) Investment of Funds in Accounts..............................................9 Section 2.07. Settlement Procedures...........................................................9 Section 2.08. Indemnity......................................................................15 Section 2.09. Capital Requirements; Additional Costs.........................................16 Section 2.10. Breakage Costs.................................................................17 Section 2.11. Single Loan....................................................................17 ARTICLE III. CONDITIONS PRECEDENT..........................................................................17 Section 3.01. Conditions to Effectiveness of Agreement.......................................17 (a) Revolving Loan Agreement; Other Related Documents...........................17 (b) Governmental Approvals......................................................17 (c) Compliance with Laws........................................................18 (d) Payment of Fees.............................................................18 (e) Representations and Warranties..............................................18 (f) No Default..................................................................18 (g) Confirmation of Commercial Paper Ratings....................................18 (h) Credit Facility Conditions..................................................18 Section 3.02. Conditions Precedent to All Revolving Credit Advances..........................18
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ARTICLE IV. REPRESENTATIONS AND WARRANTIES................................................................19 Section 4.01. Representations and Warranties of the Borrower.................................19 (a) Trust Existence; Compliance with Law........................................19 (b) Executive Offices; Collateral Locations; Corporate or Other Names; FEIN..............................................20 (c) Trust Power, Authorization, Enforceable Obligations.........................20 (d) No Litigation...............................................................20 (e) Solvency....................................................................21 (f) Material Adverse Effect.....................................................21 (g) Ownership of Property; Liens................................................21 (h) Ventures, Subsidiaries and Affiliates; Outstanding Indebtedness.............21 (i) Taxes.......................................................................22 (j) Full Disclosure.............................................................22 (k) ERISA.......................................................................22 (l) Brokers.....................................................................23 (m) Margin Regulations..........................................................23 (n) Nonapplicability of Bulk Sales Laws.........................................23 (o) Securities Act Exemption....................................................23 (p) Investment Company Act......................................................23 (q) Deposit and Securities Accounts.............................................24 (r) Eligible Assets.............................................................24 (s) Representations and Warranties in Other Related Documents...................24 (t) Nonconsolidation............................................................24 Section 4.02. Representations and Warranties of the Servicer.................................26 ARTICLE V. GENERAL COVENANTS OF THE BORROWER.............................................................26 Section 5.01. Affirmative Covenants of the Borrower..........................................26 (a) Compliance with Agreements and Applicable Laws..............................26 (b) Maintenance of Existence and Conduct of Business............................26 (c) Cash Management Systems.....................................................27 (d) Use of Proceeds.............................................................27 (e) Payment, Performance and Discharge of Obligations...........................27 (f) ERISA.......................................................................27 (g) Securities Accounts.........................................................27 (h) Missouri Matters............................................................27 Section 5.02. Reporting Requirements of the Borrower.........................................28 Section 5.03. Negative Covenants of the Borrower.............................................28 (a) Deposit and Securities Accounts.............................................28 (b) Liens.......................................................................28 (c) Modifications of Trust Investments or Collateral Documentation; Investment and Valuation Policies...........................................28
ii (d) Capital Structure and Business..............................................29 (e) Mergers, Subsidiaries, Etc..................................................29 (f) Restricted Payments.........................................................29 (g) Indebtedness................................................................29 (h) Investments.................................................................30 (i) Commingling.................................................................30 (j) ERISA.......................................................................30 (k) Investment Company Act Asset Coverage.......................................30 ARTICLE VI. SERVICER PROVISIONS...........................................................................30 Section 6.01. Appointment of the Servicer....................................................30 Section 6.02. Duties and Responsibilities of the Servicer....................................31 Section 6.03. Collections on Financings......................................................31 Section 6.04. Authorization of the Servicer..................................................32 Section 6.05. Servicing Fees.................................................................32 Section 6.06. Covenants of the Servicer......................................................32 (a) Ownership of Borrower Collateral............................................33 (b) Compliance with Investment and Valuation Policies...........................33 (c) Covenants in Other Related Documents........................................33 Section 6.07. Reporting Requirements of the Servicer.........................................33 Section 6.08. Amendments to Servicing Agreements.............................................33 ARTICLE VII. GRANT OF SECURITY INTERESTS...................................................................33 Section 7.01. Borrower's Grant of Security Interest..........................................33 Section 7.02. Consent to Assignment..........................................................34 Section 7.03. Delivery of Collateral.........................................................35 Section 7.04. Borrower Remains Liable........................................................35 Section 7.05. Covenants of the Borrower and the Servicer Regarding the Borrower Collateral.....................................................35 (a) Offices and Records.........................................................35 (b) Access......................................................................36 (c) Communication with Accountants..............................................37 (d) Collection of Trust Investments.............................................37 (e) Performance of Borrower Pledged Agreements..................................38 ARTICLE VIII. EVENTS OF DEFAULT; EVENTS OF SERVICER TERMINATION.............................................38 Section 8.01. Events of Default..............................................................38 Section 8.02. Events of Servicer Termination.................................................41 Section 8.03. Commitment Termination Events..................................................42
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ARTICLE IX. REMEDIES......................................................................................43 Section 9.01. Actions Upon Event of Default..................................................43 Section 9.02. Exercise of Remedies...........................................................44 Section 9.03. Power of Attorney..............................................................44 Section 9.04. Continuing Security Interest...................................................45 ARTICLE X. SUCCESSOR SERVICER PROVISIONS.................................................................45 Section 10.01. Servicer Not to Resign........................................................45 Section 10.02. Appointment of the Successor Servicer.........................................45 Section 10.03. Duties of the Servicer........................................................45 Section 10.04. Effect of Termination or Resignation..........................................46 ARTICLE XI. AGENTS........................................................................................46 Section 11.01. Authorization and Action......................................................46 Section 11.02. Reliance......................................................................46 Section 11.03. GE Capital and Affiliates.....................................................47 ARTICLE XII. MISCELLANEOUS.................................................................................48 Section 12.01. Notices.......................................................................48 Section 12.02. Binding Effect; Assignability.................................................48 Section 12.03. Termination; Survival of Borrower Obligations Upon Facility Termination Date...................................................49 Section 12.04. Costs, Expenses and Taxes.....................................................49 Section 12.05. Confidentiality...............................................................51 Section 12.06. No Proceedings................................................................52 Section 12.07. Complete Agreement; Modification of Agreement.................................52 Section 12.08. Amendments and Waivers........................................................52 Section 12.09. No Waiver; Remedies...........................................................52 Section 12.10. GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL........................................................53 Section 12.11. Counterparts..................................................................54 Section 12.12. Severability..................................................................54 Section 12.13. Section Titles................................................................55 Section 12.14. Limited Recourse..............................................................55 Section 12.15. Further Assurances............................................................55
iv APPENDICES Exhibit 2.01(a) - Form of Notice of Revolving Credit Advance Exhibit 2.01(b) - Form of Revolving Note Exhibit 2.02(a)(i) - Form of Repayment Notice Exhibit 2.02(a)(ii) - Form of Facility Reduction Notice Exhibit 2.02(a)(iii) - Form of Facility Termination Notice Exhibit 3.01(a)-A - Form of Solvency Certificate Exhibit 3.01(a)-B - Form of Bringdown Certificate (Closing) Exhibit 3.01(a)-C - Form of Bringdown Certificate (Post-Closing) Exhibit 3.01(a)-D - Form of Servicer's Certificate (Closing) Exhibit 3.01(a)-E - Form of Servicer's Certificate (Post-Closing) Exhibit 3.01(a)-F - Form of Monthly Report Exhibit 5.02(b) - Form of Borrowing Base Certificate Exhibit 9.03 - Form of Power of Attorney Annex 1 - Determination of "Loan Interest" Annex 5.01(c) - Cash Management Systems Annex 5.02(a) - Reporting Requirements of the Borrower Annex 5.02(b) - Investment Reports Annex 6.07 - Reporting Requirements of the Servicer Annex W - Investment and Valuation Policies Annex X - Definitions Annex Y - Schedule of Documents Schedule 4.01(b) Executive Offices; Collateral Locations; Corporate or Other Names; FEIN Schedule 4.01(d) Litigation Schedule 4.01(h) Ventures, Subsidiaries and Affiliates; Outstanding Stock and Indebtedness Schedule 4.01(i) Tax Matters Schedule 4.01(k) ERISA Plans Schedule 4.01(q) Deposit and Securities Accounts Schedule 5.01(b) Trade Names Schedule 5.03(b) Existing Liens v This REVOLVING LOAN AGREEMENT (this "Loan Agreement") is entered into as of July 16, 1998, by and among PILGRIM AMERICA PRIME RATE TRUST, a Massachusetts business trust (the "Borrower"), PILGRIM AMERICA INVESTMENTS, INC., a Delaware corporation (the "Servicer"), EDISON ASSET SECURITIZATION, L.L.C., a Delaware limited liability company ("Edison"), and GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation ("GE Capital"), as lenders (in such capacities, the "Lenders"), and GE Capital, in its separate capacities as agent for the Lenders hereunder (in such capacity, the "Lender Agent"), as operating agent for Edison hereunder (in such capacity, the "Operating Agent") and as collateral agent for Edison and the Edison Secured Parties (in such capacity, the "Collateral Agent"). RECITALS -------- A. The Borrower is a closed-end management investment company registered under the Investment Company Act (as defined herein). B. Under its investment objectives and policies, the Borrower normally invests primarily in senior secured floating rate loans and other investments. C. In order to finance the acquisition and holding of such loans and other investments and to refinance certain existing indebtedness, the Borrower has requested the Lenders, and the Lenders are willing, to extend revolving credit to the Borrower in an aggregate principal amount of up to Four Hundred Fifty Million Dollars ($450,000,000) from time to time in accordance with the terms of this Loan Agreement. D. In order to secure the obligations of the Borrower to the Lenders, the Borrower has agreed to grant to the Lenders (for their benefit and, to the extent applicable, for the benefit of the Edison Secured Parties) a security interest and lien upon such loans and other investments and certain related assets. E. The Lender Agent has been requested and is willing to act as agent on behalf of the Lenders in connection with the making and financing of such revolving credit. F. In order to effectuate the purposes of this Loan Agreement, the Borrower and the Lenders desire to appoint PAII (as defined herein) to service, administer and collect the loans and other investments owned by the Borrower, and PAII is willing to act in such capacity as the Servicer hereunder on the terms and conditions set forth herein. AGREEMENT --------- NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1 ARTICLE I. DEFINITIONS AND INTERPRETATION Section 1.01. Definitions. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in Annex X. Section 1.02. Rules of Construction. For purposes of this Loan Agreement, the rules of construction set forth in Annex X shall govern. All Appendices hereto, or expressly identified to this Loan Agreement, are incorporated herein by reference and, taken together with this Loan Agreement, shall constitute but a single agreement. ARTICLE II. AMOUNTS AND TERMS OF CREDIT Section 2.01. Revolving Credit Facility. (a) Subject to the terms and conditions hereof, Edison agrees to make Revolving Credit Advances available from time to time from and after the Closing Date until the Liquidation Date, provided that if in the determination of Edison or the Operating Agent the aggregate amount of Revolving Credit Advances, after giving effect to any new Revolving Credit Advance, would exceed the maximum amount of credit extendable by Edison under its policies as administered by the Operating Agent concerning maximum borrower concentrations, then, subject to the terms and conditions hereof, GE Capital agrees to make all or such portion of such Revolving Credit Advance as may be necessary to avoid exceeding such maximum amount. The aggregate amount of Revolving Credit Advances outstanding shall not exceed at any time the least of (i) the Maximum Facility Amount, (ii) the Cap Amount and (iii) an amount equal to (x) the Borrowing Base multiplied by the Maximum Advance Rate minus (y) the sum of the Credit Facility Outstandings plus the Interest Discount Amount plus the Custodial Overadvance Amount (such least amount, the "Borrowing Availability"). Until the Liquidation Date, the Borrower may from time to time borrow, repay and reborrow under this Section 2.01(a). Each Revolving Credit Advance shall be made on notice by the Borrower to the Lenders and the Lender Agent, which notice is to be received no later than 4:00 p.m. (New York time) on the Business Day immediately preceding the Business Day of the proposed Revolving Credit Advance. Each such notice (a "Notice of Revolving Credit Advance") must be given in writing (by telecopy or overnight courier) substantially in the form of Exhibit 2.01(a), shall include the information required in such Exhibit and shall be accompanied by a completed Borrowing Base Certificate as of the date of delivery, after giving effect to the Revolving Credit Advance requested thereby. Following receipt of any Notice of Revolving Credit Advance, and subject to the satisfaction of the conditions set forth in Section 3.02, Edison or GE Capital, as determined pursuant to this Section, shall make available to or on behalf of the Borrower on the Borrowing Date specified therein the lesser of the amount specified in such Notice of Revolving Credit Advance and the Borrowing Availability by depositing such amount in same day funds to such Deposit Account as the Borrower shall have identified in such Notice of Revolving Credit Advance. 2 (b) The Borrower shall execute and deliver to each Lender a note to evidence its Revolving Loans. Each such note shall be in the principal amount of the Maximum Facility Amount, dated the Closing Date and substantially in the form of Exhibit 2.01(b) (each such note, a "Revolving Note"). Each Revolving Note shall represent the obligation of the Borrower to pay the amount of the Maximum Facility Amount or, if less, the aggregate unpaid principal amount of all Revolving Loans made by the applicable Lender to the Borrower together with interest thereon as prescribed in Section 2.03. The entire unpaid balance of the Revolving Loans and all other accrued and unpaid Borrower Obligations shall be immediately due and payable in full in immediately available funds on the Facility Termination Date. (c) The Lenders and the Agents shall be entitled to rely upon, and shall be fully protected in relying upon, any Notice of Revolving Credit Advance or similar notice reasonably believed by an Agent to be genuine. At the Closing and periodically thereafter, the Borrower shall provide to the Lenders and the Lender Agent a list of Authorized Officers who are authorized to submit such a notice. The Lenders and the Agents may each assume that each Person executing and delivering such a notice whose name appears on such list was duly authorized, unless the responsible individual acting thereon for the Lenders or the Agents has actual knowledge to the contrary. (d) The Lender Agent is authorized to, and at its sole election may, on one (1) Business Day's notice, charge to the Revolving Loan balance on behalf of Borrower and cause to be paid all fees, expenses, charges, costs and interest owing by Borrower under this Loan Agreement or any of the other Related Documents if and to the extent Borrower fails to pay any such amounts as and when due, even if such charges would cause the aggregate balance of the Revolving Loans to exceed Borrowing Availability. At the Lender Agent's option and to the extent permitted by law, any charges so made shall constitute part of the Revolving Loans hereunder. (e) If at any time, in the determination of Edison or the Operating Agent, the aggregate amount of outstanding Revolving Credit Advances exceeds the maximum amount of credit extendable by Edison under its policies as administered by the Operating Agent concerning maximum borrower concentrations, then, upon written notice by Edison or the Operating Agent to GE Capital, the Lender Agent and the Borrower, the Borrower shall be automatically deemed to have requested a Revolving Credit Advance under this Section 2.01 to be made by GE Capital in an amount equal to such excess. Subject to the terms and conditions of this Loan Agreement, GE Capital shall make such Revolving Credit Advance for the benefit of the Borrower by depositing the amount of such Revolving Credit Advance into the Collateral Account, in immediate prepayment of an equivalent portion of the outstanding principal balance of the Revolving Credit Advances made by Edison. In no event shall any Breakage Costs be payable in connection with any such prepayment. Interest with respect to any Revolving Credit Advances made or prepaid in accordance with this Section 2.01(e) shall be due and payable on the Settlement Date following the Settlement Period in which such Revolving Credit Advances were made or prepaid. 3 Section 2.02. Prepayments; Reduction and Termination of Maximum Facility Amount. (a) Voluntary Prepayments and Terminations. (i) The Borrower may, at any time on at least one Business Day's prior written notice to the Lenders and the Lender Agent, voluntarily prepay all or part of the Revolving Loans. Any such prepayment must be accompanied by the payment of all Daily Interest accrued on the principal amount of such prepayment through but excluding the date of such prepayment, together with any Breakage Costs in accordance with Section 2.10. Each notice given under this Section 2.02(a)(i) (each, a "Repayment Notice") must be given in writing (by telecopy or overnight courier) substantially in the form of Exhibit 2.02(a)(i), and shall include the information required in such Exhibit. (ii) So long as no Default or Event of Default shall have occurred and be continuing, the Borrower may, not more than twice during each calendar year, reduce the Maximum Facility Amount permanently; provided, that (A) the Borrower shall give ten Business Days' prior written notice of any such reduction to the Lenders and the Lender Agent, (B) any partial reduction of the Maximum Facility Amount shall be in a minimum amount of $5,000,000 or an integral multiple thereof, (C) the Maximum Facility Amount shall not be reduced in part to an amount less than $100,000,000, (D) if any Revolving Loans are being prepaid in connection with such reduction, such reduction must be accompanied by payment of all Daily Interest accrued on the principal amount of such prepayment through but excluding the date of such prepayment, together with any Breakage Costs in accordance with Section 2.10, and (E) in no event may the Maximum Facility Amount be reduced below the then outstanding principal amount of the Revolving Loans. Each notice given under this Section 2.02(a)(ii) (each, a "Facility Reduction Notice") must be given in writing (by telecopy or overnight courier) substantially in the form of Exhibit 2.02(a)(ii) and shall include the information required in such Exhibit. Upon any such reduction of the Maximum Facility Amount, Borrower's right to request Revolving Credit Advances shall simultaneously be irrevocably and permanently reduced. (iii) The Borrower may at any time on at least 90 days' prior written notice to the Lenders and the Lender Agent irrevocably reduce the Maximum Facility Amount to zero, provided that upon such reduction all Revolving Credit Advances and other accrued and unpaid Borrower Obligations shall be immediately due and payable in full. Any such reduction of the Maximum Facility Amount must be accompanied, if any Revolving Loans are being prepaid in connection with such reduction, by payment of any Breakage Costs in accordance with Section 2.10. Each notice given under this Section 2.02(a)(iii) (each, a "Facility Termination Notice") must be given in writing (by telecopy or overnight courier) substantially in the form of Exhibit 2.02(a)(iii) and shall include the information required in such Exhibit. Upon any such termination of the Maximum Facility Amount, Borrower's right to request Revolving Credit Advances shall simultaneously be irrevocably and permanently terminated. 4 (iv) Each written notice required to be delivered pursuant to Sections 2.02(a)(i), (ii) and (iii) shall be irrevocable and shall be effective (1) on the day of receipt if received by the Lenders and the Lender Agent not later than 1:00 p.m. (New York time) on any Business Day and (2) on the immediately succeeding Business Day if received by the Lenders or the Lender Agent after such time on such Business Day or if any such notice is received on a day other than a Business Day (regardless of the time of day such notice is received). Each such notice shall specify the amount of such prepayment or reduction of the Maximum Facility Amount, as applicable. (b) Mandatory Prepayments. (i) If at any time the outstanding balance of the Revolving Loans exceeds the Borrowing Availability, the Borrower shall immediately repay the aggregate outstanding Revolving Credit Advances to the extent required to eliminate such excess, together with any accrued and unpaid Daily Interest (including Margin) on the amount of principal so repaid. (ii) On each Business Day on and after the Commitment Termination Date and before the date on which all Obligations are paid in full, the Borrower shall repay the aggregate outstanding Revolving Credit Advances in an amount equal to the Pro Rata Share (as defined in the Intercreditor Agreement) with respect to this Loan Agreement of the aggregate amount of such Collections (other than Collections constituting interest on Trust Investments) which have not been either repaid pursuant to this Section 2.02(b)(ii) or deposited into the Master Collection Account in accordance with Section 3.4(b) of the Intercreditor Agreement. (c) Any payments to be made under this Section 2.02 to the Lenders in respect of their Revolving Loans shall, unless otherwise provided in Section 2.07, be allocated between Edison and GE Capital in their capacities as Lenders as the Lender Agent may determine. Section 2.03. Interest. (a) The Borrower shall pay interest to the Lender Agent, for the ratable benefit of the Lenders, in arrears on each applicable Settlement Date, in an amount equal to the sum of the Daily Interest for each day in the immediately preceding Settlement Period. (b) If any payment on any Revolving Loan becomes due and payable on a day other than a Business Day, the maturity thereof will be extended to the next succeeding Business Day and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. (c) All computations of fees calculated on a per annum basis and interest shall be made by the Lender Agent on the basis of a three hundred and sixty (360) day year, in each case for the actual number of days occurring in the period for which such interest and fees are 5 payable. Each determination by the Lender Agent of an interest rate hereunder shall be conclusive, absent manifest error. (d) So long as any Event of Default shall have occurred and be continuing, and at the election of the Lender Agent, the Operating Agent or either Lender confirmed by written notice from the Lender Agent, the Operating Agent or such Lender to the Borrower, the rate used in calculating the Margin for the Daily Interest otherwise applicable to each Revolving Credit Advance shall be increased by two percentage points (2%) per annum in accordance with the terms and provisions of Annex 1 and Article IX. (e) Notwithstanding anything to the contrary set forth in this Section 2.03, if a court of competent jurisdiction determines in a final order that the rate of interest payable hereunder exceeds the highest rate of interest permissible under law (the "Maximum Lawful Rate"), then so long as the Maximum Lawful Rate would be so exceeded, the rate of interest payable hereunder shall be equal to the Maximum Lawful Rate; provided, however, that if at any time thereafter the rate of interest payable hereunder is less than the Maximum Lawful Rate, the Borrower shall, to the extent permitted by applicable law, continue to pay interest hereunder at the Maximum Lawful Rate until such time as the total interest received by the Lender Agent, on behalf of the Lenders, is equal to the total interest which would have been received had the interest rate payable hereunder been (but for the operation of this paragraph) the interest rate payable since the Closing Date as otherwise provided in this Loan Agreement. Thereafter, interest hereunder shall be paid at the rate(s) of interest and in the manner provided in Sections 2.03(a) through (d) above, unless and until the rate of interest again exceeds the Maximum Lawful Rate, and at that time this paragraph shall again apply. In no event shall the total interest received by the Lenders pursuant to the terms hereof exceed the amount which the Lenders could lawfully have received had the interest due hereunder been calculated for the full term hereof at the Maximum Lawful Rate. If the Maximum Lawful Rate is calculated pursuant to this paragraph, such interest shall be calculated at a daily rate equal to the Maximum Lawful Rate divided by the number of days in the year in which such calculation is made. If, notwithstanding the provisions of this Section 2.03(e), a court of competent jurisdiction shall finally determine that the Lenders have received interest hereunder in excess of the Maximum Lawful Rate, the Lender Agent shall, to the extent permitted by applicable law, promptly apply such excess in the order specified in Section 2.07 and thereafter shall refund any excess to Borrower or as a court of competent jurisdiction may otherwise order. Section 2.04. Fees. (a) The Borrower shall pay to the Lender Agent, for the benefit of the Lenders, the fees specified in the Fee Letters, at the times specified for payment therein. (b) As additional compensation for the Lenders, the Borrower agrees to pay to the Lender Agent, for the benefit of the Lenders, monthly in arrears, on each Settlement Date prior to the Liquidation Date and on the Liquidation Date, the Unused Facility Fee for the prior Settlement Period (and, in the case of the Liquidation Date, for the period from the end of the prior Settlement Period to the Liquidation Date). 6 Section 2.05. Receipt of Payments. (a) The Borrower shall make each payment under this Loan Agreement not later than 12:00 noon (New York time) on the day when due in immediately available funds in Dollars to the Master Collection Account. For purposes of computing interest and fees and determining Borrowing Availability as of any date, all payments shall be deemed received on the day of receipt of immediately available funds therefor in the Master Collection Account prior to 12:00 noon New York time. Payments received on any day that is not a Business Day or after 12:00 noon New York time on any Business Day shall be deemed to have been received on the following Business Day. (b) Any and all payments by Borrower hereunder shall be made in accordance with this Section 2.05 without setoff or counterclaim and free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, excluding taxes imposed on or measured by the net income of any Affected Party by the jurisdictions under the laws of which any such Affected Party is organized or by any political subdivisions thereof. If the Borrower shall be required by law to deduct any taxes from or in respect of any sum payable hereunder, (i) the sum payable shall be increased as much as shall be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.05) the Affected Party entitled to receive any such payment receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, and (iii) the Borrower shall pay the full amount deducted to the relevant taxing or other authority in accordance with applicable law. Within 30 days after the date of any payment of taxes required pursuant to this Section 2.05, the Borrower shall furnish to the Lender Agent the original or a certified copy of a receipt evidencing payment thereof. The Borrower shall indemnify any Affected Party from and against, and, within ten days of demand therefor, pay any Affected Party for, the full amount of taxes on or required to be deducted from any amount payable hereunder (including any taxes imposed by any jurisdiction on amounts payable under this Section 2.05, but excluding taxes imposed on or measured by the net income of the Affected Party by the jurisdictions (including, where applicable, the federal income taxes of the United States of America) under the laws of which the Affected Party is organized or any political subdivision thereof) paid by such Affected Party and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such taxes were correctly or legally asserted. Section 2.06. Establishment of Accounts. (a) Master Collection Account. (i) The Lender Agent has established and shall maintain the Master Collection Account with the Depositary. The Borrower and each of the Lenders agree that the Lender Agent shall have exclusive dominion and control of the Master Collection Account and all monies, instruments and other property from time to time on deposit therein. 7 (ii) On each Business Day on which any funds on deposit in any Custodial Account are to be transferred or allocated to the Lender Agent pursuant to the terms of the Intercreditor Agreement, the Borrower and the Servicer shall instruct the applicable Custodian to transfer such funds to the Master Collection Account in same day funds. The Lenders, the Lender Agent, the Operating Agent and the Collateral Agent may deposit into the Master Collection Account from time to time all monies, instruments and other property received by any of them as proceeds of the Borrower Collateral. On each Business Day prior to the Liquidation Date, the Lender Agent shall instruct and cause the Depositary (which instruction may be in writing or by telephone confirmed promptly thereafter in writing) to release funds on deposit in the Master Collection Account in the order of priority set forth in Section 2.07. On each Business Day from and after the Liquidation Date, the Lender Agent shall apply all amounts when received in the Master Collection Account in the order of priority set forth in Section 2.07(d). (b) Collection Accounts. (i) Each Lender has established and shall maintain a separate Collection Account for its benefit with the Depositary. The Borrower and Edison agree that prior to the Liquidation Date the Operating Agent, and from and after the Liquidation Date the Collateral Agent, shall have exclusive dominion and control of the Edison Collection Account and all monies, instruments and other property from time to time on deposit therein. The Borrower and GE Capital agree that the Lender Agent shall have exclusive dominion and control of the GE Capital Collection Account and all monies, instruments and other property from time to time on deposit therein. (ii) All funds to be withdrawn from the Master Collection Account for payment to or otherwise for the benefit of Edison, and all other funds to be paid to or for the benefit of Edison, shall be deposited into the Edison Collection Account. All funds to be withdrawn from the Master Collection Account for payment to or otherwise for the benefit of GE Capital (as a Lender), and all other funds to be paid to or for the benefit of GE Capital (as a Lender), shall be deposited into the GE Capital Collection Account. On each Business Day prior to the Liquidation Date, the Operating Agent or the Lender Agent, as the case may be, shall instruct and cause the Depositary (which instruction may be in writing or by telephone confirmed promptly thereafter in writing) to release funds on deposit in the Collection Accounts in the order of priority set forth in Section 2.07. On each Business Day from and after the Liquidation Date, the Collateral Agent or the Lender Agent, as the case may be, shall apply all amounts when received in the Collection Accounts in the order of priority set forth in Section 2.07(d). (iii) If, for any reason, the Depositary wishes to resign as depositary of the Edison Collection Account or fails to carry out the instructions of the Operating Agent or the Collateral Agent, then the Operating Agent or the Collateral Agent shall promptly notify the Edison Secured Parties. Edison shall not close the Edison Collection Account unless it shall have (A) received the prior written consent of the Operating Agent and the Collateral Agent, (B) established a new deposit account with the Depositary or 8 with a new depositary institution satisfactory to the Operating Agent and the Collateral Agent, (C) entered into an agreement covering such new account with such new depositary institution satisfactory in all respects to the Operating Agent and the Collateral Agent (whereupon such new account shall become the Edison Collection Account for all purposes of this Loan Agreement and the other Related Documents), and (D) taken all such action as the Collateral Agent shall require to grant and perfect a first priority Lien in such new Edison Collection Account to the Collateral Agent under the Collateral Agent Agreement. (c) Retention Account. Each Lender has established and shall maintain a separate Retention Account for its benefit with the Depositary. The Borrower and Edison agree that prior to the Liquidation Date the Operating Agent, and from and after the Liquidation Date the Collateral Agent, shall have exclusive dominion and control of the Edison Retention Account and all monies, instruments and other property from time to time on deposit therein. The Borrower and GE Capital agree that the Lender Agent shall have exclusive dominion and control of the GE Capital Retention Account and all monies, instruments and other property from time to time on deposit therein. (d) Collateral Account. Edison has established and shall maintain the Collateral Account with the Depositary. The Borrower and Edison agree that the Operating Agent shall have exclusive dominion and control of the Collateral Account and all monies, instruments and other property from time to time on deposit therein. (e) Investment of Funds in Accounts. To the extent uninvested amounts are on deposit in the Collateral Account or either Retention Account on any given day during the Revolving Period, the Operating Agent or the Lender Agent, as the case may be, shall invest all such amounts in Permitted Investments selected by such Agent that mature no later than (a) the immediately succeeding Business Day, in the case of the Collateral Account, and (b) the immediately succeeding Settlement Date, in the case of either Retention Account. From and after the Liquidation Date, any investment of such amounts shall be solely at the discretion of the applicable Agent, subject to the restrictions described above. Section 2.07. Settlement Procedures. (a) Funding of Master Collection Account and Collection Accounts. (i) As soon as practicable, and in any event no later than 12:00 noon (New York time) on each Business Day: (1) if the Business Day is a day on which any funds are to be withdrawn from a Custodial Account to be paid to or for the benefit of the Lender Agent or the Lenders pursuant to the Intercreditor Agreement, the Borrower and the Servicer shall instruct the Custodians to transfer such funds to the Master Collection Account, and shall notify the Lender Agent of the amount of such funds; 9 (2) the Borrower shall deposit cash in the Master Collection Account in the amount required, if any, to be paid by the Borrower on or prior to such Business Day under Section 2.02; (3) if on such Business Day the Borrower is required to make other payments under this Loan Agreement not previously retained out of Collections (including Additional Amounts and Indemnified Amounts not previously paid), then the Borrower shall deposit an amount equal to such payments in the Master Collection Account; (4) the Borrower shall deposit in the Master Collection Account the Outstanding Balance of any Trust Investment it elects to pay pursuant to Section 7.05(d); (5) if any funds have been deposited into the Master Collection Account, the Lender Agent shall transfer such funds to the Edison Collection Account or the GE Capital Collection Account, as such funds may be allocated by the Lender Agent in its discretion; and (6) Edison or the Operating Agent shall, or shall cause the Collateral Agent to, deposit in the Edison Collection Account any Borrower LOC Draws made on such Business Day. (ii) If an Event of Default has occurred and is continuing, and on or before the second Business Day immediately preceding any Settlement Date any Agent shall have notified the Borrower of any Retention Account Deficiency pursuant to Section 2.07(c)(ii), then the Borrower shall deposit cash in the amount of such deficiency in the Master Collection Account no later than 12:00 noon (New York time) on such Settlement Date. (iii) From and after the Liquidation Date, the Collateral Agent shall transfer all amounts on deposit in the Edison Retention Account as of that date to the Edison Collection Account and the Lender Agent shall transfer all amounts on deposit in the GE Capital Retention Account as of that date to the GE Capital Collection Account. (b) Daily Disbursements From the Collection Accounts Prior to Liquidation Date. On each Business Day prior to the Liquidation Date, and following the transfers made pursuant to Section 2.07(a), the Operating Agent shall disburse all amounts then on deposit in the Edison Collection Account and the Lender Agent shall disburse all amounts then on deposit in the GE Capital Collection Account in the following priority: (i) if an Event of Default has occurred and is continuing, to the Retention Accounts for the respective accounts of the Lenders, such Lender's allocable share of the amount of any Retention Account Deficiency deposited pursuant to Section 2.07(a)(ii); 10 (ii) if an Event of Default has occurred and is continuing, to the Retention Accounts for the respective accounts of the Lenders, such Lender's allocable share of an amount equal to the sum of: (A) Daily Interest with respect to the immediately preceding Business Day; (B) the Interest Shortfall as of the immediately preceding Business Day; (C) the Unused Facility Fee with respect to the immediately preceding Business Day; and (D) the Unused Facility Fee Shortfall as of the immediately preceding Business Day; (iii) to GE Capital for its own account and to the Collateral Account for the account of Edison, such Lender's allocable share of an amount equal to the amounts, if any, deposited by the Borrower in the Master Collection Account pursuant to Section 2.02(a) and (b) and Section 2.07(a)(i)(2), which amounts shall be applied to the repayment of the outstanding principal of the Revolving Loans; (iv) to GE Capital for its own account or to the Collateral Account for the account of Edison (or, in the case of Indemnified Amounts or Additional Amounts for the account of the applicable Indemnified Person or Affected Party, respectively), such Person's allocable share of an amount equal to the deposits made in the Master Collection Account pursuant to Section 2.07(a)(i)(3); and (v) the balance of any amounts remaining after making the foregoing disbursements, (A) if no Event of Default has occurred and is continuing, then to such Custodial Account as the Borrower may from time to time designate, or (B) if an Event of Default has occurred and is continuing, then to repay outstanding Revolving Credit Advances and/or to such Custodial Account, as the Lender Agent may direct. (c) Disbursements From the Retention Accounts and Settlement Date Procedures Prior to Liquidation Date. (i) On each Settlement Date prior to the Liquidation Date, amounts on deposit in the Retention Accounts shall be disbursed or retained by the Operating Agent (in the case of the Edison Retention Account) or the Lender Agent (in the case of the GE Capital Retention Account) in the following priority: (A) disbursed to GE Capital for its own account and the Collateral Account for the account of Edison (or, if applicable, any Indemnified Person), such Person's allocable share of an amount equal to: 11 (1) the accrued and unpaid Daily Interest as of the end of the immediately preceding Settlement Period; (2) the accrued and unpaid Unused Facility Fee as of the end of the immediately preceding Settlement Period; (3) all Additional Amounts incurred and payable to any Affected Party as of the end of the immediately preceding Settlement Period to the extent not already transferred pursuant to Section 2.07(b)(iv); (4) all other amounts accrued and payable under this Loan Agreement and the Fee Letters (including Indemnified Amounts incurred and payable to any Indemnified Person) as of the end of the immediately preceding Settlement Period to the extent not already transferred pursuant to Section 2.07(b); and (5) an amount equal to the excess, if any, of the outstanding balance of the Revolving Loans over the Borrowing Availability; (B) retained in the Retention Accounts, such Lender's allocable share of an amount equal to the Accrued Monthly Interest and Accrued Unused Facility Fee; and (C) disbursed to such Custodial Account as the Borrower may designate from time to time, the balance remaining after retaining or disbursing the foregoing amounts. (ii) Upon the occurrence and during the continuance of an Event of Default, the Lender Agent shall determine and notify the Borrower of any Retention Account Deficiency for the preceding Settlement Period no later than 5:00 p.m. (New York time) on the second Business Day immediately preceding each Settlement Date, and the Borrower shall deposit cash in the amount of such Retention Account Deficiency to the Master Collection Account pursuant to Section 2.07(a)(ii). (d) Settlement Procedures From and After the Liquidation Date. On each Business Day from and after the Liquidation Date until the Termination Date, the Collateral Agent and the Lender Agent shall: (i) as soon as practicable, transfer all amounts then on deposit in each Retention Account to the related Collection Account; 12 (ii) transfer all amounts in the Collection Accounts (including amounts transferred from the Retention Accounts pursuant to Section 2.07(a)(iii)) in the following priority: (A) if on such Business Day outstanding principal of Revolving Loans made by Edison is being maintained through the issuance of Commercial Paper (to the extent such Revolving Loans exceed Liquidity Loans then outstanding), to the Collateral Account for the account of Edison, an amount equal to the accrued and unpaid CP Interest Amount through and including the date of maturity of the Commercial Paper maintaining such Revolving Loans; (B) to the Collateral Account for the account of Edison, an amount equal to, if on such Business Day outstanding principal of Revolving Loans made by Edison is being maintained through the issuance of Commercial Paper (to the extent such Revolving Loans exceed Liquidity Loans then outstanding), the principal of all such Revolving Loans in excess of such Liquidity Loans; (C) if Revolving Loans made by GE Capital are then outstanding, to GE Capital, an amount equal to the accrued and unpaid GE Capital Interest Amount through and including the next Settlement Date; (D) if Revolving Loans made by GE Capital are then outstanding, to GE Capital, an amount equal to the outstanding principal of such Revolving Loans; (E) if Liquidity Loans are then outstanding, to the Liquidity Agent on behalf of the Liquidity Lenders, an amount equal to: (1) the Liquidity Interest Amount as defined in Annex 1 through and including the next Settlement Date; (2) the principal of outstanding Liquidity Loans; and (3) any other unpaid amounts (other than Additional Amounts and Indemnified Amounts), including any fees, owing to the Liquidity Agent or Liquidity Lenders in connection with the Liquidity Loans; (F) to GE Capital for its own account and the Collateral Account for the account of Edison, such Lender's allocable share of an amount equal to: (1) all accrued and unpaid Unused Facility Fees; 13 (2) all Additional Amounts incurred and payable to any Affected Party; and (3) all Indemnified Amounts incurred and payable to any Indemnified Person; and (G) to the Letter of Credit Agent, if there are any outstanding Borrower LOC Draws, an amount equal to: (1) accrued and unpaid interest on such outstanding Borrower LOC Draws; (2) the principal of such outstanding Borrower LOC Draws; and (3) any other amounts, including fees, owing to the Letter of Credit Agent in connection with such outstanding Borrower LOC Draws; (H) to GE Capital for its own account or to the Collateral Account for the account of Edison, such Lender's allocable share of an amount equal to (1) accrued and unpaid Daily Interest minus (2) the aggregate amounts paid pursuant to Sections 2.07(d)(ii)(A), 2.07(d)(ii)(E)(1) and 2.07(d)(ii)(G)(1); and (I) to an account previously designated by the Borrower, the balance of any funds remaining after payment in full of all amounts set forth in Sections 2.07(d)(ii)(A) through (ii)(H). (e) Any payments to be made under this Section 2.07 to the Lenders shall, except as expressly provided above, be allocated between Edison and GE Capital as the Lender Agent may determine in its discretion. (f) Accounting by Lender Agent. The Lender Agent will, upon the Borrower's written request, promptly give an accounting as to any applications of funds made pursuant to this Section 2.07. (g) Termination Procedures. On the earlier of (i) the first Business Day after the Facility Termination Date on which the outstanding principal balance of the Revolving Loans has been reduced to zero or (ii) the Scheduled Maturity Date, if the obligations to be paid pursuant to this Section 2.07 have not been paid in full, the Borrower shall immediately deposit in the Master Collection Account an amount sufficient to make such payments in full. On the Termination Date, all amounts on deposit in the Master Collection Account, the Collection Accounts and the Retention Accounts shall be disbursed to the Borrower and all Liens of each of the Lenders in and to the Borrower Collateral shall be released by each of the Lenders. Such disbursement shall 14 constitute the final payment to which the Borrower is entitled pursuant to the terms of this Loan Agreement. Section 2.08. Indemnity. (a) The Borrower shall indemnify and hold harmless each of the Lender Agent, the Operating Agent, the Collateral Agent, the Lenders, the Liquidity Agent, the Liquidity Lenders, the Letter of Credit Agent, the Letter of Credit Providers and their respective Affiliates, and each such Person's respective officers, directors, employees, attorneys, agents and representatives (each, an "Indemnified Person"), from and against any and all suits, actions, proceedings, claims, damages, losses, liabilities and expenses (including attorneys' fees and disbursements and other costs of investigation or defense, including those incurred upon any appeal) which may be instituted or asserted against or incurred by any such Indemnified Person as the result of credit having been extended, suspended or terminated under this Loan Agreement and the other Related Documents, and in connection with or arising out of the transactions contemplated hereunder and thereunder and any actions or failures to act in connection therewith, including any and all Environmental Liabilities and legal costs and expenses arising out of or incurred in connection with disputes between or among any parties to any of the Related Documents (collectively, "Indemnified Amounts"); provided, that the Borrower shall not be liable for any indemnification (i) to an Indemnified Person other than the Lenders, to the extent that any such suit, action, proceeding, claim, damage, loss, liability or expense results solely from that Indemnified Person's gross negligence, as finally determined by a court of competent jurisdiction, or (ii) to an Indemnified Person to the extent that any such suit, action, proceeding, claim, damage, loss, liability or expense results solely from that Indemnified Person's willful misconduct, as finally determined by a court of competent jurisdiction. (b) NO INDEMNIFIED PERSON SHALL BE RESPONSIBLE OR LIABLE TO ANY OTHER PARTY TO ANY RELATED DOCUMENT, ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OF SUCH PERSON OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF CREDIT HAVING BEEN EXTENDED, SUSPENDED OR TERMINATED UNDER ANY RELATED DOCUMENT OR AS A RESULT OF ANY OTHER TRANSACTION CONTEMPLATED HEREUNDER OR THEREUNDER. Section 2.09. Capital Requirements; Additional Costs. (a) If the Lender Agent on behalf of any Affected Party shall have determined that the adoption after the date hereof of any law, treaty, governmental (or quasi-governmental) rule, regulation, guideline or order regarding capital adequacy, reserve requirements or similar requirements or compliance by such Affected Party with any request or directive regarding capital adequacy, reserve requirements or similar requirements (whether or not having the force of law) from any central bank or other Governmental Authority increases or would have the effect of increasing the amount of capital, reserves or other funds required to be maintained by such Affected Party against commitments made by it under this Loan Agreement, any other Related 15 Document or any Program Document and thereby reducing the rate of return on such Affected Party's capital as a consequence of its commitments hereunder or thereunder, then the Borrower shall from time to time upon demand by the Lender Agent pay to the Lender Agent on behalf of such Affected Party additional amounts sufficient to compensate such Affected Party for such reduction together with interest thereon from the date of any such demand until payment in full at the Daily Interest Rate. A certificate as to the amount of that reduction and showing the basis of the computation thereof submitted by the Lender Agent to the Borrower shall be final, binding and conclusive on the parties hereto (absent manifest error) for all purposes. (b) If, due to any Regulatory Change, there shall be any increase in the cost to any Affected Party of agreeing to make or making, funding or maintaining any commitment hereunder, under any other Related Document or under any Program Document, including with respect to any Revolving Credit Advances, Borrower LOC Draws or Liquidity Loans, or any reduction in any amount receivable by such Affected Party hereunder or thereunder, including with respect to any Revolving Credit Advances, Borrower LOC Draws or Liquidity Loans (any such increase in cost or reduction in amounts receivable are hereinafter referred to as "Additional Costs"), then the Borrower shall, from time to time upon demand by the Lender Agent, pay to the Lender Agent on behalf of such Affected Party additional amounts sufficient to compensate such Affected Party for such Additional Costs together with interest thereon from the date demanded until payment in full thereof at the Daily Interest Rate. Such Affected Party agrees that, as promptly as practicable after it becomes aware of any circumstance referred to above that would result in any such Additional Costs, it shall, to the extent not inconsistent with its internal policies of general application, use reasonable commercial efforts to minimize costs and expenses incurred by it and payable to it by the Borrower pursuant to this Section 2.09(b). (c) Determinations by any Affected Party for purposes of this Section 2.09 of the effect of any Regulatory Change on its costs of making, funding or maintaining any commitments hereunder, under any other Related Document or under any Program Document or on amounts receivable by it hereunder or thereunder or of the additional amounts required to compensate such Affected Party in respect of any Additional Costs shall be set forth in a written notice to the Borrower in reasonable detail (which shall include an explanation of the pertinent Regulatory Change) and shall be final, binding and conclusive on the Borrower (absent manifest error) for all purposes. Section 2.10. Breakage Costs. The Borrower shall pay to the Lender Agent for the account of the Lenders, upon request of a Lender, such amount or amounts as shall compensate the Lenders for any loss, cost or expense incurred by the Lenders (as determined by either of the Lenders) as a result of any reduction by the Borrower in the outstanding principal of the Revolving Loans (and accompanying loss of Daily Interest thereon) other than on the maturity date of the Commercial Paper (or other financing source) funding such Revolving Loans, which compensation shall include an amount equal to any loss or expense incurred by the Lenders during the period from the date of such reduction to (but excluding) the maturity date of such Commercial Paper (or other financing source) if the rate of interest obtainable by either of the Lenders upon the redeployment of funds in an amount equal to such reduction is less than the interest rate applicable to such Commercial Paper (or other financing source) (any such loss, cost 16 or expense referred to collectively herein as "Breakage Costs"). The determination by a Lender of the amount of any such loss or expense shall be set forth in a written notice to the Borrower in reasonable detail and shall be final, binding and conclusive on the Borrower (absent manifest error) for all purposes. Section 2.11. Single Loan. All Revolving Loans to the Borrower and all of the other Borrower Obligations shall constitute one general obligation of the Borrower secured, until the Termination Date, by the Borrower Collateral. ARTICLE III. CONDITIONS PRECEDENT Section 3.01. Conditions to Effectiveness of Agreement. Neither of the Lenders shall be obligated to make any Revolving Credit Advance under this Loan Agreement, nor shall either of the Lenders, the Lender Agent, the Operating Agent or the Collateral Agent be obligated to take, fulfill or perform any other action hereunder, until the following conditions have been satisfied, in the sole discretion of, or waived in writing by, the Lenders, the Lender Agent, the Operating Agent and the Collateral Agent: (a) Revolving Loan Agreement; Other Related Documents. This Loan Agreement or counterparts hereof shall have been duly executed by, and delivered to, the parties hereto and each of the Lenders and the Lender Agent shall have received such other documents, instruments, agreements and legal opinions as the Lenders and the Lender Agent shall request in connection with the transactions contemplated by this Loan Agreement, including all those listed in the Schedule of Documents, each in form and substance satisfactory to each of the Lenders and the Lender Agent. (b) Governmental Approvals. Each of the Lenders and the Lender Agent shall have received satisfactory evidence that the Borrower and the Service Providers have obtained all required consents and approvals of all Persons, including all requisite Governmental Authorities, to the execution, delivery and performance of this Loan Agreement and the other Related Documents and the consummation of the transactions contemplated hereby or thereby. (c) Compliance with Laws. The Borrower and the Service Providers shall be in compliance in all material respects with all applicable foreign, federal, state and local laws and regulations, including those specifically referenced in Section 5.01(a). (d) Payment of Fees. The Borrower shall have paid all fees required to be paid by it on the Closing Date, including all fees required hereunder and under the Fee Letters. (e) Representations and Warranties. Each representation and warranty by the Borrower contained herein and in each other Related Document shall be true and correct as of the Closing Date, except to the extent that such representation or warranty expressly relates solely to an earlier date. 17 (f) No Default. No Default or Event of Default shall have occurred and be continuing or would result after giving effect to any of the transactions contemplated on the Closing Date. (g) Confirmation of Commercial Paper Ratings. The Operating Agent shall have received written confirmation from each Rating Agency that the then current rating of the Commercial Paper shall not be withdrawn or downgraded after giving effect to this Loan Agreement and the transactions contemplated hereby. (h) Credit Facility Conditions. The Lender Agent shall have received written confirmation from the Credit Facility Agent that each of those conditions precedent to the closing of the transactions contemplated by the Credit Facility shall have been satisfied or waived in writing as provided therein. Section 3.02. Conditions Precedent to All Revolving Credit Advances. Neither of the Lenders shall be obligated to make any Revolving Credit Advance hereunder on any Borrowing Date (including any Revolving Credit Advance to be made on the Closing Date) if, as of the date thereof: (a) any representation or warranty of the Borrower or any Service Provider contained herein or in any of the other Related Documents shall be untrue or incorrect as of such date, either before or after giving effect to the Revolving Credit Advance to be made on such date and to the application of the proceeds therefrom, except to the extent that such representation or warranty expressly relates to an earlier date and except for changes therein expressly permitted by this Loan Agreement; (b) any Default, Event of Default, Commitment Termination Event or Event of Servicer Termination shall have occurred and be continuing, or would result from the Revolving Credit Advance to be made on such Borrowing Date or from the application of the proceeds therefrom; (c) the Borrower shall not be in compliance with any of its covenants or other agreements set forth herein; (d) the Commitment Termination Date or the Facility Termination Date shall have occurred; (e) after giving effect to such Revolving Credit Advance and to the application of the proceeds therefrom, the aggregate outstanding principal amount of Revolving Credit Advances would exceed Borrowing Availability; (f) the Borrower or a Service Provider shall fail to have taken such other action, including delivery of approvals, consents, opinions, documents and instruments to each of the Lenders and the Lender Agent, as either of the Lenders or the Lender Agent may reasonably request or a Rating Agency may request; or 18 (g) the Lender Agent, the Operating Agent or the Collateral Agent shall have determined that any event or condition has occurred that has had, or could reasonably be expected to have or result in, a Material Adverse Effect. The delivery by the Borrower of a Notice of Revolving Credit Advance and the acceptance by the Borrower of the proceeds of the Revolving Credit Advance on any Borrowing Date shall be deemed to constitute, as of any such Borrowing Date, a representation and warranty by the Borrower that the conditions in this Section 3.02 have been satisfied. ARTICLE IV. REPRESENTATIONS AND WARRANTIES Section 4.01. Representations and Warranties of the Borrower. To induce the Lenders to make the Revolving Loans and each of the Lender Agent, the Operating Agent and the Collateral Agent to take any action hereunder, the Borrower makes the following representations and warranties to the Lenders, the Lender Agent, the Operating Agent and the Collateral Agent as of the Closing Date and as of the date of each Revolving Credit Advance, each and all of which shall survive the execution and delivery of this Loan Agreement. (a) Trust Existence; Compliance with Law. The Borrower (i) is a Massachusetts business trust duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts; (ii) is duly qualified to conduct business and is in good standing in each other jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification; (iii) has the requisite power and authority and the legal right to own, pledge, mortgage or otherwise encumber and operate its properties, to lease the property it operates under lease, and to conduct its business as now, heretofore and proposed to be conducted; (iv) has all licenses, permits, consents or approvals from or by, and has made all filings with, and has given all notices to, all Governmental Authorities having jurisdiction, to the extent required for such ownership, operation and conduct; (v) is in compliance with the Trust Documents in all material respects; and (vi) subject to specific representations set forth herein regarding ERISA, tax and other laws, is in compliance with all applicable provisions of law, except where the failure to comply, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. (b) Executive Offices; Collateral Locations; Corporate or Other Names; FEIN. As of the Closing Date, the current location of the Borrower's chief executive office, principal place of business, other offices, the warehouses and premises within which any Borrower Collateral is stored or located, and the locations of its records concerning the Borrower Collateral (including originals of the Collateral Documentation) are set forth in Schedule 4.01(b). None of such locations has changed within the past 12 months. During the prior five years, the Borrower has not been known as or used any corporate, fictitious or trade name. In addition, Schedule 4.01(b) lists the federal employer identification number of the Borrower. 19 (c) Trust Power, Authorization, Enforceable Obligations. The execution, delivery and performance by the Borrower of this Loan Agreement and the other Related Documents to which it is a party, the creation and perfection of all Liens and ownership interests provided for therein and, solely with respect to clause (viii) below, the exercise by each of the Borrower, the Lenders, the Lender Agent, the Operating Agent or the Collateral Agent of any of its rights and remedies under any Related Document to which it is a party: (i) are within the Borrower's trust powers; (ii) have been duly authorized by all necessary or proper trust action; (iii) do not contravene any provision of the Trust Documents; (iv) do not violate any law or regulation, or any order or decree of any court or Governmental Authority; (v) do not conflict with or result in the breach or termination of, constitute a default under or accelerate or permit the acceleration of any performance required by, any Trust Investment, any Collateral Documentation or any indenture, mortgage, deed of trust, lease, agreement or other instrument to which the Borrower is a party or by which the Borrower or any of the property of the Borrower is bound; (vi) in light of the confidentiality requirements of Section 12.05(c), do not prohibit administering the Revolving Loans, monitoring the Borrower Collateral, and sharing confidential information with the Lenders, the Lender Agent, the Operating Agent, and the Collateral Agent for purposes of exercising rights and remedies of each of the Lenders under this Loan Agreement; (vii) do not result in the creation or imposition of any Adverse Claim upon any of the property of the Borrower; and (viii) do not require the consent or approval of any Governmental Authority or any other Person, except (A) those referred to in Section 3.01(b) all of which will have been duly obtained, made or complied with prior to the Closing Date, and (B) consents to the sale of an assignment of or participation in Trust Investments, to the extent required by the Collateral Documentation applicable thereto. On or prior to the Closing Date, each of the Related Documents to which the Borrower is a party shall have been duly executed and delivered by the Borrower and each such Related Document shall then constitute a legal, valid and binding obligation of the Borrower enforceable against it in accordance with its terms. (d) No Litigation. No Litigation is now pending or, to the knowledge of the Borrower, threatened against the Borrower that (i) challenges the Borrower's right or power to enter into or perform any of its obligations under the Related Documents to which it is a party, or the validity or enforceability of any Related Document or any action taken thereunder, (ii) seeks to prevent the grant of the security interest contemplated by this Loan Agreement or the consummation of any of the other transactions contemplated under this Loan Agreement or the other Related Documents, or (iii) has a reasonable risk of being determined adversely to the Borrower and that, if so determined, could have a Material Adverse Effect. Except as set forth on Schedule 4.01(d), as of the Closing Date there is no Litigation pending or threatened that seeks damages or injunctive relief against, or alleges criminal misconduct by, the Borrower. (e) Solvency. Both before and after giving effect to (i) the transactions contemplated by this Loan Agreement and the other Related Documents and (ii) the payment and accrual of all transaction costs in connection with the foregoing, the Borrower is and will be Solvent. (f) Material Adverse Effect. Between February 28, 1998 and the Closing Date, (i) the Borrower has not incurred any obligations, contingent or non-contingent liabilities, 20 liabilities for charges, long-term leases or unusual forward or long-term commitments that, alone or in the aggregate, could reasonably be expected to have a Material Adverse Effect, (ii) no contract, lease or other agreement or instrument has been entered into by the Borrower or has become binding upon the Borrower's assets and no law or regulation applicable to the Borrower has been adopted that has had or could reasonably be expected to have a Material Adverse Effect and (iii) the Borrower is not in default and no third party is in default under any material contract, lease or other agreement or instrument to which the Borrower is a party that alone or in the aggregate could reasonably be expected to have a Material Adverse Effect. Between February 28, 1998 and the Closing Date no event has occurred that alone or together with other events could reasonably be expected to have a Material Adverse Effect. (g) Ownership of Property; Liens. As of the Closing Date, none of the Borrower Collateral is subject to any Adverse Claim, other than Permitted Encumbrances described in clause (f) of the definition thereof, and there are no facts, circumstances or conditions known to the Borrower that may result in (i) with respect to Trust Investments, any Adverse Claims (including Adverse Claims arising under Environmental Laws) and (ii) with respect to its other properties and assets, any Adverse Claims (including Adverse Claims arising under Environmental Laws) other than Permitted Encumbrances. The Borrower has used reasonable efforts to obtain all assignments, promissory notes and other documents (and has duly effected all recordings, filings and other actions) necessary to establish, protect and perfect the Borrower's right, title and interest in and to the Trust Investments and its other properties and assets. The Liens granted to each of the Lenders pursuant to Section 7.01 will at all times be fully perfected first priority Liens in and to the Borrower Collateral, subject only to Custodial Liens which have priority under the UCC. (h) Ventures, Subsidiaries and Affiliates; Outstanding Indebtedness. Except as set forth in Schedule 4.01(h), the Borrower has no Subsidiaries, is not engaged in any joint venture or partnership with any other Person, and is not an Affiliate of any other Person. (For purposes of this Section 4.01(h), the Servicer shall not be considered an Affiliate of the Borrower solely because of the services rendered by the Servicer pursuant to the Servicing Agreements.) Set forth on Schedule 4.01(h) is a description of Borrower's capital structure. All outstanding Debt of the Borrower as of the Closing Date is described in Section 5.03(g). (i) Taxes. All tax returns, reports and statements, including information returns, required by any Governmental Authority to be filed by the Borrower have been filed with the appropriate Governmental Authority and all charges have been paid prior to the date on which any fine, penalty, interest or late charge may be added thereto for nonpayment thereof (or any such fine, penalty, interest, late charge or loss has been paid), excluding charges or other amounts being contested in accordance with Section 5.01(e). Proper and accurate amounts have been withheld by the Borrower from its respective employees for all periods in full and complete compliance with all applicable federal, state, local and foreign laws and such withholdings have been timely paid to the respective Governmental Authorities. Schedule 4.01(i) sets forth as of the Closing Date (i) those taxable years for which the Borrower's tax returns are currently being audited by the IRS or any other applicable Governmental Authority and (ii) any assessments or threatened assessments in connection with any such audit or otherwise currently outstanding. 21 Except as described on Schedule 4.01(i), the Borrower has not executed or filed with the IRS or any other Governmental Authority any agreement or other document extending, or having the effect of extending, the period for assessment or collection of any charges. The Borrower is not liable for any charges under any agreement (including any tax sharing agreements). As of the Closing Date, the Borrower has not agreed or been requested to make any adjustment under IRC Section 481(a), by reason of a change in accounting method or otherwise, that would have a Material Adverse Effect. (j) Full Disclosure. No information contained in this Loan Agreement, any Borrowing Base Certificate or any of the other Related Documents, or any written statement furnished by or on behalf of the Borrower to either of the Lenders, the Lender Agent, the Operating Agent or the Collateral Agent pursuant to the terms of this Loan Agreement or any of the other Related Documents contains any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained herein or therein not misleading in light of the circumstances under which they were made. (k) ERISA. The Borrower is in compliance with ERISA and has not incurred and does not expect to incur any liabilities (except for premium payments arising in the ordinary course of business) payable to the PBGC under ERISA. Schedule 4.01(k) lists and separately identifies all Title IV Plans, Multiemployer Plans, ESOPs and Retiree Welfare Plans. Copies of all such listed Plans, together with a copy of the latest form 5500 for each such Plan, have been delivered to the Lender Agent. Except with respect to Multiemployer Plans, each Qualified Plan has been determined by the IRS to qualify under Section 401 of the IRC, and the trusts created thereunder have been determined to be exempt from tax under the provisions of Section 501 of the IRC, and nothing has occurred which would cause the loss of such qualification or tax-exempt status. Each Plan is in compliance with the applicable provisions of ERISA and the IRC, including the filing of reports required under the IRC or ERISA. Neither the Borrower nor any ERISA Affiliate has failed to make any contribution or pay any amount due as required by either Section 412 of the IRC or Section 302 of ERISA or the terms of any such Plan. Neither the Borrower nor any ERISA Affiliate has engaged in a prohibited transaction, as defined in Section 4975 of the IRC, in connection with any Plan, which would subject the Borrower or any ERISA Affiliate to a material tax on prohibited transactions imposed by Section 4975 of the IRC. Except as set forth in Schedule 4.01(k): (i) no Title IV Plan has any Unfunded Pension Liability; (ii) no ERISA Event or event described in Section 4062(e) of ERISA with respect to any Title IV Plan has occurred or is reasonably expected to occur; (iii) there are no pending, or to the knowledge of the Borrower, threatened claims (other than claims for benefits in the normal course), sanctions, actions or lawsuits, asserted or instituted against any Plan or any Person as fiduciary or sponsor of any Plan; (iv) neither the Borrower nor any ERISA Affiliate has incurred or reasonably expects to incur any liability as a result of a complete or partial withdrawal from a Multiemployer Plan; (v) within the last five years no Title IV Plan with Unfunded Pension Liabilities has been transferred outside of the "controlled group" (within the meaning of Section 4001(a)(14) of ERISA) of the Borrower or any ERISA Affiliate; and (vi) no liability under any Title IV Plan has been satisfied with the purchase of a contract from an insurance company that is not rated AAA by the Standard & Poor's Corporation or the equivalent by another nationally recognized rating agency 22 (l) Brokers. No broker or finder acting on behalf of the Borrower was employed or utilized in connection with this Loan Agreement or the other Related Documents or the transactions contemplated hereby or thereby and the Borrower has no obligation to any Person in respect of any finder's or brokerage fees in connection therewith. (m) Margin Regulations. The Borrower is not engaged in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin security," as such terms are defined in Regulations G or U of the Federal Reserve Board as now and from time to time hereafter in effect (such securities being referred to herein as "Margin Stock"). The Borrower owns no Margin Stock, and no portion of the proceeds of any Revolving Credit Advance hereunder will be used, directly or indirectly, for the purpose of purchasing or carrying any Margin Stock, for the purpose of reducing or retiring any Debt that was originally incurred to purchase or carry any Margin Stock or for any other purpose that might cause any portion of such proceeds to be considered a "purpose credit" within the meaning of Regulations G, T, U or X of the Federal Reserve Board. The Borrower will not take or permit to be taken any action that might cause any Related Document to violate any regulation of the Federal Reserve Board. (n) Nonapplicability of Bulk Sales Laws. No transaction contemplated by this Loan Agreement or any of the Related Documents requires compliance with any bulk sales act or similar law. (o) Securities Act Exemption. The making of each Revolving Credit Advance under this Loan Agreement will be exempt from the registration requirements of Section 5 of the Securities Act. (p) Investment Company Act. The Borrower is registered under the Investment Company Act as a diversified, closed-end management investment company and is in compliance in all material respects with all applicable provisions of the Investment Company Act and the rules and regulations promulgated thereunder. The making of the Revolving Loans by each of the Lenders hereunder, the application of the proceeds thereof and the consummation of the transactions contemplated by this Loan Agreement and the other Related Documents will not violate in any material respect any provision of any such statute or any rule, regulation or order issued by the Securities and Exchange Commission. The Borrower is in compliance with the Investment and Valuation Policies. The Servicer is registered as an "investment adviser" under the Investment Advisers Act of 1940, as amended, and is the Investment Advisor appointed pursuant to the Investment Management Agreement. (q) Deposit and Securities Accounts. The Borrower does not maintain any deposit or other bank accounts or securities accounts as of the Closing Date other than the Deposit Accounts and the Securities Accounts set forth on Schedule 4.01(q). The Borrower holds all of its financial assets in the Securities Accounts in accordance with Section 17(f) of the Investment Company Act. 23 (r) Eligible Assets. (i) Eligibility. Each interest in a Trust Investment designated as an Eligible Asset in each Borrowing Base Certificate constitutes an Eligible Asset as of the date of such Borrowing Base Certificate. (ii) No Material Adverse Effect. The Borrower has no knowledge of any fact (including any defaults by the Obligor thereunder or on any other Trust Investment) that would cause it or should have caused it to expect that any payments on each Trust Investment designated as an Eligible Asset in any Borrowing Base Certificate will not be paid in full when due or to expect any other Material Adverse Effect. (iii) Nonavoidability of Transfers. The Borrower shall have purchased each interest in or assignment of a Trust Investment for cash consideration and in an amount that constitutes fair consideration and reasonably equivalent value therefor and not on account of an antecedent debt owed to the Borrower, and no such purchase is or may be avoidable or subject to avoidance under any bankruptcy laws, rules or regulations. (s) Representations and Warranties in Other Related Documents. Each of the representations and warranties of the Borrower contained in the Related Documents (other than this Loan Agreement) is true and correct in all respects and the Borrower hereby makes each such representation and warranty to, and for the benefit of, each of the Lenders, the Lender Agent, the Operating Agent and the Collateral Agent as if the same were set forth in full herein. (t) Nonconsolidation. The Borrower is operated in such a manner that the separate existence of the Borrower and each member of the Servicer Group would not be disregarded in the event of the bankruptcy or insolvency of any member of the Servicer Group and, without limiting the generality of the foregoing: (i) the Borrower is a limited purpose Massachusetts business trust whose activities are restricted in the Trust Documents, in the Prospectus, and in the Investment and Valuation Policies to those activities expressly permitted therein and hereunder and under the other Related Documents, and the Borrower has not engaged, and does not presently engage, in any activity other than those activities expressly permitted hereunder, in the Prospectus, and under the other Related Documents; (ii) the Borrower maintains records and books of account separate from that of each member of the Servicer Group, holds regular trustee meetings and otherwise observes trust formalities; (iii) the financial statements and books and records of the Borrower and each member of the Servicer Group reflect the separate existence of the Borrower; (iv) (A) the Borrower maintains its assets separately from the assets of each member of the Servicer Group (including through the maintenance of separate bank 24 accounts and except for any Records to the extent necessary to assist the Servicer in connection with the servicing of the Trust Investments), (B) the Borrower's funds (including all money, checks and other cash proceeds) and assets, and records relating thereto, have not been and are not commingled with those of any member of the Servicer Group and (C) the separate creditors of the Borrower will be entitled to be satisfied out of the Borrower's assets prior to any value in the Borrower becoming available to the Borrower's Stockholders (other than pursuant to tenders conducted in accordance with Section 23(c)(2) of the Investment Company Act); (v) except as otherwise expressly permitted hereunder, under the other Related Documents, under the Servicing Agreements and under the Borrower's organizational documents, no member of the Servicer Group (A) pays the Borrower's expenses (other than by reason of a waiver of the fees to which the member is entitled), (B) guarantees the Borrower's obligations, or (C) advances funds on other than a short-term basis to the Borrower for the payment of expenses or otherwise; (vi) all business correspondence and other communications of the Borrower are conducted by the Servicer or another member of the Servicer Group on behalf of the Borrower separate and apart from any other investment company or other Person for which the Servicer (or other member of the Servicer Group) acts as servicer or investment adviser; (vii) the Borrower does not act as agent for any member of the Servicer Group, but instead presents itself to the public as a trust separate from each such member and engaged in the business of investing in accordance with its Prospectus and the Investment and Valuation Policies; (viii) the Borrower maintains at least two independent directors each of whom is not an "interested person" (as that term is defined in Section 2(a)(19) of the Investment Company Act) of the Borrower or the Servicer; and (ix) the Trust Documents require the Borrower to maintain (A) correct and complete books and records of account and (B) minutes of the meetings and other proceedings of its Stockholders and board of trustees. (u) Year 2000 Compliance. Borrower has taken reasonable steps to insure that each of the Custodians will have eliminated all Year 2000 Problems by February 28, 1999, except where the failure to correct the same could not reasonably be expected to have a Material Adverse Effect, individually or in the aggregate. (v) Compelling Business Reason. Borrower has determined that the credit facilities extended under this Loan Agreement and the terms hereof are a compelling business reason for granting a security interest in the Borrower Collateral. 25 Section 4.02. Representations and Warranties of the Servicer. To induce each of the Lenders to make Revolving Credit Advances and each of the Lender Agent, the Operating Agent and the Collateral Agent to take any action required to be performed by it hereunder, the Servicer represents and warrants to each of the Lenders, the Lender Agent, the Operating Agent and the Collateral Agent, which representation and warranty shall survive the execution and delivery of this Loan Agreement, that each of the representations and warranties of the Servicer contained in any Related Document is true and correct, and the Servicer hereby makes each such representation and warranty to, and for the benefit of, each of the Lenders, the Lender Agent, the Operating Agent and the Collateral Agent as if the same were set forth in full herein. ARTICLE V. GENERAL COVENANTS OF THE BORROWER Section 5.01. Affirmative Covenants of the Borrower. The Borrower covenants and agrees that from and after the Closing Date and until the Termination Date: (a) Compliance with Agreements and Applicable Laws. The Borrower shall perform each of its obligations under this Loan Agreement and the other Related Documents and comply in all material respects with all federal, state and local laws and regulations applicable to it and the Borrower Collateral, including those relating to truth in lending, fair credit reporting, equal credit opportunity, fair debt collection practices, privacy, licensing, taxation, ERISA and labor matters and Environmental Laws and Environmental Permits, except to the extent that the failure to so comply, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. The Borrower shall comply with the Investment and Valuation Policies with respect to each Trust Investment and the Collateral Documentation therefor. (b) Maintenance of Existence and Conduct of Business. The Borrower shall: (i) do or cause to be done all things necessary to preserve and keep in full force and effect its trust existence and its rights and franchises; (ii) continue to conduct its business substantially as now conducted or as otherwise permitted hereunder and in accordance with the terms of the Trust Documents and Section 4.01(t); (iii) comply with its Investment and Valuation Policies, and (iv) transact business only in such names as are set forth in Schedule 5.01(b). (c) Cash Management Systems. On or prior to the Closing Date, the Borrower will establish and will maintain until the Termination Date the cash management systems described on Annex 5.01(c) (the "Cash Management Systems"). (d) Use of Proceeds. The Borrower shall utilize the proceeds of the Revolving Credit Advances made hereunder solely for (i) the purchase of interests in or assignments of Trust Investments, (ii) other purposes permitted by the terms of the Trust Documents and the Investment Company Act and (iii) the payment of administrative fees or Servicing Fees or expenses to the Servicer or routine administrative or operating expenses, in each case only as expressly permitted by and in accordance with the terms of this Loan Agreement and the other Related Documents. 26 (e) Payment, Performance and Discharge of Obligations. (i) Subject to Section 5.01(e)(ii), the Borrower shall pay, perform and discharge or cause to be paid, performed and discharged promptly all charges payable by it, including (A) charges imposed upon it, its income and profits, or any of its property (real, personal or mixed) and all charges with respect to tax, social security and unemployment withholding with respect to its employees, and (B) lawful claims for labor, materials, supplies and services or otherwise before any thereof shall become past due. (ii) The Borrower may in good faith contest, by appropriate proceedings, the validity or amount of any charges or claims described in Section 5.01(e)(i); provided, that (A) adequate reserves with respect to such contest are maintained on the books of the Borrower, in accordance with GAAP, (B) such contest is maintained and prosecuted continuously and with diligence, (C) none of the Borrower Collateral becomes subject to forfeiture or loss as a result of such contest, (D) no Lien shall be imposed to secure payment of such charges or claims other than inchoate tax liens and (E) none of the Lenders, the Lender Agent, the Operating Agent or the Collateral Agent have advised the Borrower in writing that such Affected Party reasonably believes that nonpayment or nondischarge thereof could have or result in a Material Adverse Effect. (f) ERISA. The Borrower shall give the Lender Agent prompt written notice of any event that could result in the imposition of a Lien under Section 412 of the IRC or Section 302 or 4068 of ERISA. (g) Securities Accounts. The Borrower shall hold all of its financial assets only in the Securities Accounts, in accordance with Section 17(f) of the Investment Company Act. (h) Missouri Matters. The Borrower shall, within thirty (30) days following the Closing Date, cause its counsel to deliver to the Lenders a legal opinion with respect to the perfection of security interests in the Borrower's assets located or deemed located in the State of Missouri. Section 5.02. Reporting Requirements of the Borrower. (a) The Borrower hereby agrees that, from and after the Closing Date and until the Termination Date, it shall deliver or cause to be delivered to each of the Lenders, the Lender Agent, the Operating Agent, the Collateral Agent and, in the case of paragraphs (b)(ii) and (f) therein only, to the Rating Agencies, the financial statements, notices and other information at the times, to the Persons and in the manner set forth in Annex 5.02(a). (b) The Borrower hereby agrees that, from and after the Closing Date and until the Termination Date, it shall deliver or cause to be delivered to each of the Lenders, the Lender Agent, the Operating Agent and the Collateral Agent the Investment Reports (including Borrowing Base Certificates) at the times, to the Persons and in the manner set forth in Annex 5.02(b). 27 Section 5.03. Negative Covenants of the Borrower. The Borrower covenants and agrees that, without the prior written consent of each of the Lenders, the Lender Agent, the Operating Agent and the Collateral Agent, from and after the Closing Date until the Termination Date: (a) Deposit and Securities Accounts. The Borrower shall not terminate, sell, transfer, convey, assign or otherwise dispose of, or assign any right to receive income in respect of, any of its rights with respect to any Custodial Account, either Collection Account, either Retention Account or any other deposit account in which any Collections of any Trust Investments are deposited except as otherwise expressly permitted by this Loan Agreement or any of the other Related Documents. (b) Liens. The Borrower shall not create, incur, assume or permit to exist (i) any Adverse Claim on or with respect to its interests in Trust Investments or (ii) any Adverse Claim on or with respect to its other properties or assets (whether now owned or hereafter acquired) except for the Custodial Liens, the Liens set forth in Schedule 5.03(b) and other Permitted Encumbrances. In addition, the Borrower shall not become a party to any agreement, note, indenture or instrument or take any other action that would prohibit the creation of a Lien on any of its properties or other assets in favor of either of the Lenders as additional collateral for the Borrower Obligations, except as otherwise expressly permitted by this Loan Agreement or any of the other Related Documents or by the Credit Facility. (c) Modifications of Trust Investments or Collateral Documentation; Investment and Valuation Policies. The Borrower shall extend, amend, forgive, discharge, compromise, waive, cancel or otherwise modify the terms of any Trust Investments or amend, modify or waive any term or condition of any Collateral Documentation related thereto only in accordance with the Investment and Valuation Policies. The Borrower shall not amend, waive or modify any term of the Investment and Valuation Policies without the prior written consent of the Lender Agent, provided that consent to any change in valuation policies which satisfies the Rating Agency Condition shall not be unreasonably withheld. (d) Capital Structure and Business. The Borrower shall not (i) make any changes in any of its business objectives, purposes or operations that could have or result in a Material Adverse Effect, (ii) make any change in its capital structure as described on Schedule 4.01(h), including (A) the issuance of any shares of any class or series ranking senior to its shares of beneficial interest outstanding on the date hereof with respect to the payment of dividends or the distribution of assets, (B) the reclassification of any authorized shares of the Borrower into any shares ranking senior to such shares of beneficial interest with respect to the payment of dividends or the distribution of assets, or (C) the creation, authorization or issuance of any securities convertible into, or warrants, options or similar rights to purchase, acquire or receive, shares ranking senior to such shares of beneficial interest with respect to the payment of dividends or the distribution of assets or (iii) amend the Trust Documents in a manner which could adversely affect the rights, interests or obligations of either of the Lenders, the Lender Agent, the Operating Agent or the Collateral Agent. The Borrower shall not engage in any business other than the businesses 28 currently engaged in by it and shall not convert from a closed-end investment company to an open-end investment company. (e) Mergers, Subsidiaries, Etc. The Borrower shall not directly or indirectly, by operation of law or otherwise, (i) form or acquire any Subsidiary, or (ii) merge with, consolidate with, acquire all or substantially all of the assets or capital Stock of, or otherwise combine with or acquire, any Person. (f) Restricted Payments. The Borrower shall not make any Restricted Payments; provided that so long as a Default or an Event of Default shall not have occurred and be continuing and would not occur as a result thereof, the Borrower (i) may make Restricted Payments described in clause (b) of the definition thereof to the extent required by the Servicing Agreements and (ii) may make Restricted Payments described in clause (a) of the definition thereof (other than in connection with tenders or other redemptions of shares of beneficial interest described in Section 23(c) of the Investment Company Act) in accordance with its policy to allocate investment income and capital gains as set forth in the Investment and Valuation Policies and make distributions to the extent necessary to retain its qualification as a regulated investment company under Subchapter M of the IRC, and in order not to be subject to federal income tax or the federal excise tax imposed on certain undistributed income. (g) Indebtedness. The Borrower shall not create, incur, assume or permit to exist any Debt, except (i) the Borrower Obligations, (ii) Debt under the Credit Facility, provided that the Credit Facility shall not contain any restrictions on the terms of this Loan Agreement and the Related Documents, (iii) deferred taxes, (iv) unfunded pension fund and other employee benefit plan obligations and liabilities to the extent they are permitted to remain unfunded under applicable law, (v) indorser liability in connection with the indorsement of negotiable instruments for deposit or collection in the ordinary course of business and (vi) obligations to Persons who provide services to the Borrower in the ordinary course of its business as an investment company and similar trade obligations incurred in the ordinary course of business. (h) Investments. The Borrower shall not make any investment in, or make or accrue loans or advances of money to, any Person, including any Stockholder, director, officer or employee of the Borrower, through the direct or indirect lending of money, holding of securities or otherwise, except investments in Trust Investments and Permitted Investments in accordance with its Investment and Valuation Policies. (i) Commingling. The Borrower shall not deposit or permit the deposit of any funds that do not constitute Collections of Trust Investments, other Borrower Collateral or proceeds from the offering of the Borrower's securities into any Deposit Account or Securities Account. (j) ERISA. The Borrower shall not, and shall not cause or permit any of its ERISA Affiliates to, cause or permit to occur an event that could result in the imposition of a Lien under Section 412 of the IRC or Section 302 or 4068 of ERISA. 29 (k) Investment Company Act Asset Coverage. The Borrower shall not declare any dividend or any other distribution upon its shares of beneficial interest or repurchase such shares unless in every such case the Borrower's "senior securities representing indebtedness" (as defined in Section 18 of the Investment Company Act) have at the time of such declaration or purchase, as the case may be, "asset coverage" (as defined in and determined pursuant to Section 18 of the Investment Company Act) of at least 300% (or such other percentage as may in the future be specified in Section 18 of Investment Company Act as the minimum asset coverage for senior securities representing indebtedness of a closed-end investment company as a condition of paying dividends on common stock) after deducting the amount of such dividend, distribution or purchase price, as the case may be. (l) Portfolio Diversification. The Borrower shall not permit the number of industries (using the categories provided by Moody's) in which Obligors, with respect to Eligible Assets, do business to be fewer than ten. (m) Custodial Overadvances. The Borrower shall not permit intraday overadvances provided by either Custodian (together with related overdraft charges) to exceed the sum of (i) 10% of Total Assets and (ii) amounts available for borrowing on that day under the Credit Facility. The Borrower shall not permit overnight overadvances provided by either Custodian (together with related overdraft charges) to exceed 5% of Total Assets. ARTICLE VI. SERVICER PROVISIONS Section 6.01. Appointment of the Servicer. Each of the Borrower and the Lenders hereby appoints the Servicer as its agent to service the Borrower Collateral and enforce its rights and interests in and under each Trust Investment and Collateral Documentation therefor and each other item of Borrower Collateral and to serve in such capacity until the termination of its responsibilities pursuant to Sections 8.02 or 10.01. In connection therewith, the Servicer hereby accepts such appointment and agrees to perform the duties and obligations set forth herein. The Servicer may, with the prior written consent of each of the Lenders, the Lender Agent, the Operating Agent and the Collateral Agent, subcontract with a Sub-Servicer for the collection, servicing or administration of the Borrower Collateral; provided, that (a) the Servicer shall remain liable for the performance of the duties and obligations of the Sub-Servicer pursuant to the terms hereof and (b) any Sub-Servicing Agreement that may be entered into and any other transactions or services relating to the Borrower Collateral involving a Sub-Servicer shall be consistent with the requirements of this Loan Agreement and shall be deemed to be between the Sub-Servicer and the Servicer alone, and the Lenders, the Lender Agent, the Operating Agent and the Collateral Agent shall not be deemed parties thereto and shall have no obligations, duties or liabilities with respect to the Sub-Servicer. Until the Servicer's responsibilities are terminated or the Servicer resigns pursuant to Section 8.02 or 10.01 of this Loan Agreement, the Servicer shall also serve as Investment Advisor to the Borrower pursuant to the Investment Management Agreement. Each of the Lenders, the Lender Agent, the Operating Agent and the Collateral Agent acknowledge 30 that the Administrator, which is an Affiliate of the Servicer, has been appointed as a Sub-Servicer pursuant to the Administration Agreement. Section 6.02. Duties and Responsibilities of the Servicer. Subject to the provisions of this Loan Agreement, the Servicer shall conduct or supervise the servicing, administration and collection of the Borrower Collateral and shall take, or cause to be taken, all actions that (i) may be necessary or advisable to service, administer and collect all amounts due to the Borrower under each Trust Investment and each other item of Borrower Collateral from time to time, (ii) the Servicer would take if the Borrower's interests in the Borrower Collateral were owned by the Servicer, and (iii) are consistent with industry practice for the servicing of such Borrower Collateral. Section 6.03. Collections on Financings. (a) In the event that the Servicer is unable to determine the specific Borrower Collateral on which Collections have been received from the Obligor thereunder, the parties agree for purposes of this Loan Agreement only that such Collections shall be deemed to have been received on such financings in the order in which they were originated with respect to such Obligor. In the event that the Servicer is unable to determine the specific Borrower Collateral on which discounts, offsets or other non-cash reductions have been granted or made with respect to the Obligor thereunder, the parties agree for purposes of this Loan Agreement only that such reductions shall be deemed to have been granted or made on such Borrower Collateral (i) prior to the occurrence of an Event of Default, as determined by the Servicer and (ii) from and after the occurrence of an Event of Default, in the reverse order in which they were originated with respect to such Obligor. (b) If the Servicer determines that amounts unrelated to the Borrower Collateral (the "Unrelated Amounts") have been deposited in a Deposit Account or Collection Account, then the Servicer shall provide written evidence thereof to each of the Lenders, the Lender Agent, the Operating Agent and the Collateral Agent no later than the first Business Day following the day on which the Servicer had actual knowledge thereof, which evidence shall be provided in writing and shall be otherwise satisfactory to each such Affected Party. Upon receipt of any such notice, the applicable Agents shall segregate the Unrelated Amounts in the Collection Accounts and the same shall not be deemed to constitute Collections on Borrower Collateral and shall not be subject to the provisions of Section 2.07. Section 6.04. Authorization of the Servicer. Each of the Borrower and each of the Lenders hereby authorizes the Servicer to take any and all reasonable steps in the name of the Borrower and on its behalf necessary or desirable and not inconsistent with the pledge of the Borrower Collateral by the Borrower to each of the Lenders hereunder and the subsequent pledge thereof by Edison to the Collateral Agent pursuant to the Collateral Agent Agreement, in the determination of the Servicer, to (a) collect or supervise the collection of all amounts due under any Borrower Collateral and deliver any and all instruments of satisfaction or cancellation or of partial or full release or discharge and all other comparable instruments with respect to any such Trust Investment and (b) after any Trust Investment becomes a Defaulted Financing and to the 31 extent permitted under and in compliance with applicable law and regulations, assist the Borrower in commencing proceedings with respect to the enforcement of payment of any such Trust Investment and the Collateral Documentation therefor and assist the Borrower in adjusting, settling or compromising any payments due thereunder. The Borrower and the Lenders shall furnish the Servicer with any powers of attorney and other documents necessary or appropriate to enable the Servicer to carry out its servicing and administrative duties hereunder, and shall cooperate with the Servicer to the fullest extent to collect all amounts due to the Borrower under or in connection with the Borrower Collateral and to assist the Servicer in the discharge of its duties hereunder and under the other Related Documents. Notwithstanding anything to the contrary contained herein, upon the occurrence and during the continuance of a Default or an Event of Default, each of the Lenders, the Lender Agent, the Operating Agent and the Collateral Agent shall have the absolute and unlimited right to direct the Servicer (whether the Servicer is PAII or otherwise), at the Borrower's expense, to commence or settle any legal action to enforce collection of all amounts due to the Borrower under or in connection with any Trust Investment or to foreclose upon, repossess or take any other action that the Lender Agent, the Operating Agent or the Collateral Agent deems necessary or advisable with respect thereto. In no event shall the Servicer be entitled to make any Affected Party a party to any Litigation without such Affected Party's express prior written consent. Section 6.05. Servicing Fees. As compensation for its servicing activities and as reimbursement for its reasonable expenses in connection therewith, the parties hereto agree that the Servicer shall be entitled to receive the fees provided for in the Investment Management Agreement for so long as the Investment Management Agreement is in effect and shall not be entitled to receive any other compensation. The Servicer shall be required to pay for all expenses incurred by it in connection with its activities hereunder (including any payments to accountants, counsel or any other Person) and shall not be entitled to any payment therefor other than the Servicing Fees. Section 6.06. Covenants of the Servicer. The Servicer covenants and agrees that from and after the Closing Date and until the Termination Date: (a) Ownership of Borrower Collateral. The Servicer shall, and shall cause the Custodians to, identify the Borrower Collateral clearly and unambiguously in its Servicing Records to reflect that such Borrower Collateral has been pledged pursuant to this Loan Agreement. (b) Compliance with Investment and Valuation Policies. The Servicer shall comply in all material respects with the Investment and Valuation Policies with respect to each Trust Investment and the Collateral Documentation therefor and all other Borrower Collateral. The Servicer shall not amend, waive or modify any term of the Investment and Valuation Policies without the prior written consent of the Lender Agent, provided that consent to any change in valuation policies which satisfies the Rating Agency Condition shall not be unreasonably withheld. (c) Covenants in Other Related Documents. The Servicer shall, and shall cause the Servicer Group to, perform, keep and observe all covenants applicable to any of them under 32 the Related Documents and the Servicing Agreements, and the Servicer hereby agrees to be bound by such covenants (to the extent applicable to it) in its capacity as the Servicer hereunder for the benefit of the Lenders, the Lender Agent, the Operating Agent and the Collateral Agent as if the same were set forth in full herein. Section 6.07. Reporting Requirements of the Servicer. The Servicer hereby agrees that, from and after the Closing Date and until the Termination Date, it shall deliver or cause to be delivered to each of the Lenders, the Lender Agent, the Operating Agent and the Collateral Agent the financial statements, notices and other information at the times, to the Persons and in the manner set forth in Annex 6.07. Section 6.08. Amendments to Servicing Agreements. The Servicer and the Borrower hereby agree that, from and after the Closing Date and until the Termination Date and except with the prior written consent of each of the Lenders and the Lender Agent, the Servicing Agreements shall not be terminated, amended, modified or supplemented in any respect which may adversely affect (a) the rights and obligations of each of the Lenders, the Lender Agent, the Operating Agent or the Collateral Agent or (b) the ability of the Borrower and the Servicer to perform their respective obligations under this Loan Agreement and the other Related Documents. ARTICLE VII. GRANT OF SECURITY INTERESTS Section 7.01. Borrower's Grant of Security Interest. To secure the prompt and complete payment, performance and observance of all Borrower Obligations, and to induce each of the Lenders to enter into this Loan Agreement and perform the obligations required to be performed by it hereunder in accordance with the terms and conditions thereof, the Borrower hereby grants, assigns, conveys, pledges, hypothecates and transfers to each of the Lenders a Lien upon all of its right, title and interest in, to and under the following property, whether now owned by or owing to, or hereafter acquired by or arising in favor of, the Borrower (including under any trade names, styles or derivations of the Borrower), and regardless of where located (all of which being hereinafter collectively referred to as the "Borrower Collateral"): (a) all Accounts; (b) all Chattel Paper; (c) all Contracts; (d) all Documents; (e) all Equipment; (f) all Fixtures; 33 (g) all General Intangibles; (h) all goods; (i) all Instruments; (j) all Inventory; (k) all Investment Property; (l) all Deposit Accounts, Securities Accounts and other deposit and bank accounts and all deposits therein; (m) all money, cash or cash equivalents of the Borrower; and (n) to the extent not otherwise included, all proceeds and products of the foregoing and all accessions to, substitutions and replacements for, and rents and profits of, each of the foregoing. Section 7.02. Consent to Assignment. Each of the Borrower and the Servicer acknowledges and consents to the grant by Edison to the Collateral Agent pursuant to the Collateral Agent Agreement of a Lien upon all of Edison's right, title and interest in, to and under the Borrower Collateral and acknowledges the rights of the Collateral Agent thereunder and the covenants made by Edison in favor of the Collateral Agent set forth therein, and further acknowledges and consents that, upon the occurrence and during the continuance of a Default or an Event of Default, the Collateral Agent shall be entitled to all the rights and remedies of Edison thereunder. In addition, each of the Borrower and the Servicer hereby authorizes the Collateral Agent to rely on the representations and warranties made by it in the Borrower Pledged Agreements to which it is a party and in any other certificates or documents furnished by it to any party in connection therewith. Section 7.03. Delivery of Collateral. All certificates or instruments representing or evidencing the Borrower Collateral shall be delivered to and held by or on behalf of the Custodians under the terms of the Custody Agreement and shall be in suitable form for transfer by delivery or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to the Lender Agent. The Lender Agent shall have the right, at any time in its discretion following the occurrence and during the continuation of an Event of Default and without notice to the Borrower or the Lenders, to transfer to or to register in the name of the Lender Agent or any of its nominees any or all of the Borrower Collateral. In addition, the Lender Agent shall have the right at any time to exchange certificates or instruments representing or evidencing Borrower Collateral for certificates or instruments of smaller or larger denominations. Section 7.04. Borrower Remains Liable. It is expressly agreed by the Borrower that, anything herein to the contrary notwithstanding, the Borrower shall remain liable under any 34 and all of the Trust Investments, the Collateral Documentation therefor, the Borrower Pledged Agreements and any other agreements constituting the Borrower Collateral to which it is a party to observe and perform all the conditions and obligations to be observed and performed by it thereunder. The Lenders, the Lender Agent, the Operating Agent, the Collateral Agent and the other Edison Secured Parties shall not have any obligation or liability under any such Trust Investments, Collateral Documentation or agreements by reason of or arising out of this Loan Agreement or the Collateral Agent Agreement or the granting herein or therein of a Lien thereon or the receipt by either of the Lenders, the Lender Agent, the Collateral Agent or any Edison Secured Party of any payment relating thereto pursuant hereto or thereto. The exercise by either of the Lenders, the Lender Agent or the Collateral Agent of any of its respective rights under this Loan Agreement or the Collateral Agent Agreement shall not release the Borrower or the Servicer from any of their respective duties or obligations under any such Trust Investments, Collateral Documentation or agreements. None of the Lenders, the Lender Agent, the Operating Agent, the Collateral Agent or any of the Edison Secured Parties shall be required or obligated in any manner to perform or fulfill any of the obligations of the Borrower or any Service Provider under or pursuant to any such Trust Investment, Collateral Documentation or agreement, or to make any payment, or to make any inquiry as to the nature or the sufficiency of any payment received by it or the sufficiency of any performance by any party under any such Trust Investment, Collateral Documentation or agreement, or to present or file any claims, or to take any action to collect or enforce any performance or the payment of any amounts that may have been assigned to it or to which it may be entitled at any time or times. Section 7.05. Covenants of the Borrower and the Servicer Regarding the Borrower Collateral. (a) Offices and Records. The Borrower shall maintain its principal place of business and chief executive office and the office at which it stores its Records at the location specified in Schedule 4.01(b) or, upon 30 days' prior written notice to each of the Lenders, the Lender Agent, the Operating Agent and the Collateral Agent, at such other location in a jurisdiction where all action requested by each of the Lenders, the Lender Agent, the Operating Agent or the Collateral Agent pursuant to Section 12.15 shall have been taken with respect to the Borrower Collateral. The Borrower and the Servicer shall, at the Borrower's own cost and expense (except to the extent that such expense is borne by the Administrator pursuant to the Administration Agreement), maintain adequate and complete records of the Trust Investments and the Borrower Collateral, including records of any and all payments received, credits granted with respect thereto and all other dealings therewith. Upon the request of either of the Lenders, the Lender Agent, the Operating Agent or the Collateral Agent, the Borrower and the appropriate Service Provider shall mark conspicuously with a legend, in form and substance satisfactory to the Lender Agent, its books and records, computer tapes, computer disks and credit files pertaining to the Borrower Collateral, and its file cabinets or other storage facilities where it maintains information pertaining thereto, to evidence this Loan Agreement and the assignment and Liens granted pursuant to this Article VII. Upon the occurrence and during the continuance of an Event of Default, the Borrower and the Servicer shall, and shall cause the other Service Providers to, deliver and turn over such books and records to the Lender Agent or its representatives (including, without limitation, the Custodians) at any time on demand of the Lender Agent. Prior 35 to the occurrence of an Event of Default and upon notice from the Lender Agent, the Borrower and the Servicer shall, and shall cause the other Service Providers to, permit any representative of the Lender Agent, the Operating Agent or the Collateral Agent to inspect such books and records and shall provide photocopies thereof to the Lender Agent, the Operating Agent and the Collateral Agent as more specifically set forth in Section 7.05(b). (b) Access. The Borrower and the Servicer shall, during normal business hours, from time to time upon one Business Day's prior notice as frequently as the Lender Agent, the Operating Agent or the Collateral Agent reasonably determines to be appropriate: (i) provide each of the Lenders, the Lender Agent, the Operating Agent or the Collateral Agent and any of their respective officers, employees and agents access to its properties (including properties utilized in connection with the collection, processing or servicing of the Trust Investments), facilities, advisors and employees (including officers) and to the Borrower Collateral, (ii) permit each of the Lenders, the Lender Agent, the Operating Agent or the Collateral Agent and any of their respective officers, employees and agents to inspect, audit and make extracts from its books and records, including all Records, (iii) permit each of the Lenders, the Lender Agent, the Operating Agent or the Collateral Agent and their respective officers, employees and agents to inspect, review and evaluate the Trust Investments and the Borrower Collateral and (iv) permit each of the Lenders, the Lender Agent, the Operating Agent or the Collateral Agent and their respective officers, employees and agents to discuss matters relating to the Trust Investments or its performance under this Loan Agreement or the other Related Documents or its affairs, finances and accounts with any of its officers, directors, employees, representatives or agents (in each case, with those persons having knowledge of such matters) and with its independent certified public accountants. If (A) a Default or an Event of Default shall have occurred and be continuing or (B) the Lender Agent, in good faith, believes that a Default or an Event of Default is imminent or deems either of the Lender's rights or interests in the Trust Investments, the Borrower Pledged Agreements or any other Borrower Collateral insecure, then the Borrower and the Servicer shall provide such access at all times and without advance notice and provide each of the Lenders, the Lender Agent, the Operating Agent or the Collateral Agent with access to the Borrower's suppliers and customers. The Borrower and the Servicer shall make available to the Lender Agent, the Operating Agent or the Collateral Agent and their respective counsel, as quickly as is possible under the circumstances, originals or copies of all books and records, including Records, that the Lender Agent, the Operating Agent or the Collateral Agent may request. The Borrower and the Servicer shall deliver any document or instrument necessary for the Lender Agent, the Operating Agent or the Collateral Agent, as they may from time to time request, to obtain records from any service bureau or other Person that maintains records for the Borrower or the Servicer, and shall maintain duplicate records or supporting documentation on media, including computer tapes and discs owned by the Borrower or the Servicer. (c) Communication with Accountants. The Borrower and the Servicer authorize each of the Lenders, the Lender Agent, the Operating Agent and the Collateral Agent, upon at least two Business Days' prior notice (unless a Default or Event of Default shall have occurred and be continuing, in which case, no notice shall be required), to communicate directly with its independent certified public accountants and authorizes and shall instruct those accountants and advisors to disclose and make available to each of the Lenders, the Lender Agent, the Operating 36 Agent and the Collateral Agent any and all financial statements and other supporting financial documents, schedules and information relating to the Borrower or the Servicer (including copies of any issued management letters) with respect to its business, financial condition and other affairs. (d) Collection of Trust Investments. Except as otherwise provided in this Section 7.05(d), the Borrower shall continue to collect or cause to be collected, at its sole cost and expense, all amounts due or to become due to the Borrower under the Trust Investments, the Borrower Pledged Agreements and any other Borrower Collateral. In connection therewith, the Borrower shall take such action as it and, from and after the occurrence and during the continuance of an Event of Default, the Lender Agent, may deem necessary or desirable to enforce collection of the Trust Investments, the Borrower Pledged Agreements and the other Borrower Collateral; provided, that the Borrower may, rather than commencing any such action or taking any other enforcement action, at its option, elect to pay to the Lenders the Outstanding Balance of any such Trust Investment; provided further, that if (i) an Event of Default shall have occurred and be continuing or (ii) the Lender Agent, in good faith, believes that a Default or an Event of Default is imminent or deems the Lenders' rights or interests in the Trust Investments, the Borrower Pledged Agreements or any other Borrower Collateral insecure and has so notified the Borrower and the Servicer at least fifteen days prior to the taking of any action or giving of further notice pursuant to this proviso, then the Lender Agent may, without prior notice to the Borrower or the Servicer (and subject to any applicable requirements in the Collateral Documentation for consent from the Obligor and or the Transaction Agent, other than as specified in clause (ii)), notify any Obligor under any Trust Investment or obligors under the Borrower Pledged Agreements of the pledge of such Trust Investments or Borrower Pledged Agreements, as the case may be, to the Lenders hereunder and direct that payments of all amounts due or to become due to the Borrower thereunder be made directly to the Lender Agent or any servicer, collection agent or lockbox or other account designated by the Lender Agent and, upon such notification and at the sole cost and expense of the Borrower, the Lender Agent may enforce collection of any such Trust Investment or the Borrower Pledged Agreements and adjust, settle or compromise the amount or payment thereof. (e) Performance of Borrower Pledged Agreements. The Borrower and the Servicer shall (i) perform and observe all the terms and provisions of the Borrower Pledged Agreements to be performed or observed by it, maintain the Borrower Pledged Agreements in full force and effect, enforce the Borrower Pledged Agreements in accordance with their terms and take all action as may from time to time be requested by the Lender Agent in order to accomplish the foregoing, and (ii) upon the request of and as directed by the Lender Agent, the Operating Agent or the Collateral Agent, make such demands and requests to any other party to the Borrower Pledged Agreements as are permitted to be made by the Borrower or the Servicer thereunder. 37 ARTICLE VIII. EVENTS OF DEFAULT; EVENTS OF SERVICER TERMINATION Section 8.01. Events of Default. If any of the following events (each, an "Event of Default") shall occur (regardless of the reason therefor): (a) the Borrower shall (i) fail to make any payment of any Borrower Obligation when due and payable and the same shall remain unremedied for one Business Day or more, (ii) fail or neglect to perform, keep or observe any other provision of this Loan Agreement or the other Related Documents (other than any provision embodied in or covered by any other clause of this Section 8.01) and the same shall remain unremedied for five Business Days or more after written notice thereof shall have been given by the Lender Agent, the Operating Agent or the Collateral Agent to the Borrower, or (iii) fail or neglect to perform, keep or observe Section 5.03(m) and the same shall remain unremedied for one Business Day or more; (b) a default or breach shall occur under any other agreement, document or instrument to which the Investment Advisor, the Administrator, the Borrower or the Servicer is a party or by which any such Person or its property is bound that is not cured within any applicable grace period therefor, and such default or breach (i) involves the failure to make any payment when due in respect of any Debt (other than the Borrower Obligations) of any such Person which is in excess of $1,000,000 in the aggregate, or (ii) causes, or permits any holder of such Debt or a trustee or agent to cause, Debt or a portion thereof which is in excess of $1,000,000 in the aggregate, to become due prior to its stated maturity or prior to its regularly scheduled dates of payment, regardless of whether such right is exercised, by such holder, trustee or agent; (c) a case or proceeding shall have been commenced against any Service Provider or the Borrower seeking a decree or order in respect of any such Person (i) under the Bankruptcy Code or any other applicable federal, state or foreign bankruptcy or other similar law, (ii) appointing a custodian, receiver, liquidator, assignee, trustee or sequestrator (or similar official) for any such Person or for any substantial part of such Person's assets, or (iii) ordering the winding-up or liquidation of the affairs of any such Person; (d) the Borrower or any Service Provider shall (i) file a petition seeking relief under the Bankruptcy Code or any other applicable federal, state or foreign bankruptcy or other similar law, (ii) consent or fail to object in a timely and appropriate manner to the institution of proceedings thereunder or to the filing of any such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee or sequestrator (or similar official) for any such Person or for any substantial part of such Person's assets, (iii) make an assignment for the benefit of creditors, or (iv) take any corporate or trustee (as the case may be) action in furtherance of any of the foregoing; (e) the Borrower or any Service Provider admits in writing its inability to, or is generally unable to, pay its Debts as such Debts become due; or the aggregate outstanding 38 amount of the liabilities of the Borrower or any Service Provider shall exceed the fair market value of its assets; (f) a final judgment or judgments for the payment of money in excess of $1,000,000 in the aggregate at any time outstanding shall be rendered against the Borrower or any member of the Servicer Group and the same shall not, within 30 days after the entry thereof, have been discharged or execution thereof stayed or bonded pending appeal, or shall not have been discharged prior to the expiration of any such stay; (g) any information contained in any Borrowing Base Certificate is untrue or incorrect in any respect or any representation or warranty of any Service Provider or the Borrower herein or in any other Related Document or in any written statement, report, financial statement or certificate (other than a Borrowing Base Certificate) made or delivered by any Service Provider or the Borrower to any Affected Party hereto or thereto is untrue or incorrect in any material respect as of the date when made or deemed made; (h) any Governmental Authority (including the IRS or the PBGC) shall file notice of a Lien with regard to any assets of any Service Provider (other than a Lien (i) limited by its terms to assets other than interests in Trust Investments and (ii) not materially adversely affecting the financial condition of the Service Provider or its ability to perform its obligations under the Related Documents and the Servicing Agreements); (i) any Governmental Authority (including the IRS or the PBGC) shall file notice of a Lien with regard to any assets of the Borrower with an aggregate value in excess of $1,000,000; (j) the Lender Agent, the Operating Agent or the Collateral Agent shall have determined that any event or condition that has had or could reasonably be expected to have or result in a Material Adverse Effect has occurred; (k) this Loan Agreement shall for any reason cease to evidence the first priority perfected security interest of the Lenders and the Edison Secured Parties in the Borrower Collateral, subject only to Permitted Encumbrances; (l) except as otherwise expressly provided herein, any Servicing Agreement shall have been modified, amended or terminated without the prior written consent of each of the Lenders, the Lender Agent, the Operating Agent and the Collateral Agent; (m) an Event of Servicer Termination shall have occurred; (n) the Control Agreement or the Custody Agreement shall cease to be in full force or effect, or any Custodian shall repudiate the terms of the Control Agreement or the Custody Agreement or any portion thereof, and there shall not be in effect at that time one or more Control Agreements or Custody Agreements (as the case may be) which have been approved in writing by the Lenders and the Lender Agent and which govern the Borrower 39 Collateral previously subject to the Control Agreement or Custody Agreement which has ceased to be in effect or which has been repudiated; (o) the Servicer or any Custodian shall resign or shall be replaced by the Borrower prior to the time at which a Person approved in writing by the Lenders and the Lender Agent has accepted its appointment as replacement Servicer or Custodian (as the case may be) in accordance with the terms of this Loan Agreement and the Related Documents; (p) the aggregate Outstanding Balance of Defaulted Financings plus Trust Investments as to which the Outstanding Balance has been reduced by reason of any revaluation, write-off, setoff or counterclaim shall exceed 15% of the aggregate Outstanding Balance of all Trust Investments; (q) the Borrower shall, without the express prior written consent of each of the Lenders, the Lender Agent, the Operating Agent and the Collateral Agent, amend the Trust Documents in a manner which could adversely affect the rights, interests or obligations of either of the Lenders, the Lender Agent, the Operating Agent or the Collateral Agent; (r) a default or breach shall occur under the Credit Facility, and such default or breach (i) involves the failure to make any payment when due in respect of the Credit Facility or (ii) causes, or permits the Credit Facility Agent or any Credit Facility Lender to cause, Debt, under or with respect to the Credit Facility, to become due prior to its stated maturity or prior to its regularly scheduled dates of payment, regardless of whether such right is exercised; (s) as of the last Business Day of each of 24 consecutive calendar months, "asset coverage" (as defined in and determined pursuant to Section 18 of the Investment Company Act) shall have been less than 100%; or (t) Custodial Overadvances exceed $15,000,000 for any fifteen consecutive Business Days; then, and in any such event, the Lender Agent shall, at the request of, or may, with the consent of, either of the Lenders or the Collateral Agent, by notice to the Borrower, declare the Facility Termination Date to have occurred without demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided, that the Facility Termination Date shall automatically occur (i) upon the occurrence of any of the Events of Default described in Sections 8.01(c), (d), (e), (n) or (o) or (ii) four days after the occurrence of the Event of Default described in Section 8.01(a)(i) if the same shall not have been remedied by such time, in each case without demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower. Section 8.02. Events of Servicer Termination. If any of the following events (each, an "Event of Servicer Termination") shall occur (regardless of the reason therefor): 40 (a) the Servicer shall fail or neglect to perform, keep or observe any material provision of this Loan Agreement or the other Related Documents or the Servicing Agreements (whether in its capacity as the Servicer or in any other capacity as a Service Provider) and the same shall remain unremedied for five Business Days or more after written notice thereof shall have been given by either of the Lenders, the Lender Agent, the Operating Agent or the Collateral Agent to the Servicer; (b) any representation or warranty of the Servicer herein or in any other Related Document or Servicing Agreement or in any written statement, report, financial statement or certificate made or delivered by the Servicer to either of the Lenders, the Lender Agent, the Operating Agent or the Collateral Agent hereto or thereto is untrue or incorrect in any material respect as of the date when made or deemed made; (c) the Lender Agent, the Operating Agent or the Collateral Agent shall have determined that any event or condition that materially adversely affects the ability of the Servicer to collect the Trust Investments or to otherwise perform hereunder has occurred; (d) an Event of Default shall have occurred or this Loan Agreement shall have been terminated; (e) a deterioration has taken place in the quality of servicing of Trust Investments or other Borrower Collateral serviced by the Servicer that either the Lender Agent, the Operating Agent or the Collateral Agent, each in its reasonable discretion, determines to be material, and such material deterioration has not been eliminated within 30 days after written notice thereof shall have been given by the Lender Agent, the Operating Agent or the Collateral Agent to the Servicer; (f) the Servicer shall assign or purport to assign any of its obligations hereunder or under any other Related Document or the Servicing Agreements without the prior written consent of the Lender Agent, the Operating Agent and the Collateral Agent; (g) a Change of Control or Change of Management shall have occurred; or (h) the Borrower's board of trustees shall have determined that it is in the best interests of the Borrower to terminate the duties of the Servicer hereunder and shall have given the Servicer, each of the Lenders, the Lender Agent, the Operating Agent and the Collateral Agent written notice thereof; then, and in any such event, the Lender Agent shall, at the request of, or may, with the consent of, either of the Lenders or the Collateral Agent, by delivery of a Servicer Termination Notice to the Borrower and the Servicer, require the Borrower to use all reasonable efforts, and thereupon the Borrower shall use all reasonable efforts, to terminate the servicing responsibilities of the Servicer hereunder, without demand, protest or further notice of any kind, all of which are hereby waived by the Servicer, provided that (i) such termination is not inconsistent with the fiduciary obligations of the trustees of the Borrower and (ii) upon such termination, the Servicer shall also cease to 41 serve in any capacity as a Service Provider. Upon the delivery of any such notice and termination of the Servicer's servicing responsibilities, all authority and power of the Servicer under this Agreement and the Servicing Agreements shall pass to and be vested in the Successor Servicer acting pursuant to Section 10.02; provided, that notwithstanding anything to the contrary herein, the Servicer agrees to continue to follow the procedures set forth in Section 6.02 with respect to Collections on the Trust Investments until a Successor Servicer has assumed the responsibilities and obligations of the Servicer in accordance with Section 10.02. Section 8.03. Commitment Termination Events. If any of the following events (each, a "Commitment Termination Event") shall occur: (a) the Operating Agent shall have determined that the funding of Revolving Credit Advances hereunder is impracticable for any reason whatsoever, including as a result of (i) a drop in or withdrawal of any of the ratings assigned to the Commercial Paper, (ii) the imposition of Additional Amounts, (iii) restrictions on the amount of Trust Investments either of the Lenders may finance or (iv) the inability of Edison to issue Commercial Paper; (b) the short term debt rating of a Liquidity Lender shall have been withdrawn or downgraded by a Rating Agency and such Liquidity Lender shall not have been replaced in accordance with the terms of the Liquidity Loan Agreement within 30 days thereafter; (c) a Borrower LOC Draw shall have occurred; (d) the obligations of any or all of the Liquidity Lenders to make Liquidity Loans under the Liquidity Loan Agreement shall have terminated and not otherwise been replaced; or (e) an event of default under the Collateral Agent Agreement or any other Program Document shall have occurred; then, and in any such event, the Operating Agent shall, at the request of, or may, with the consent of, either of the Lenders or the Collateral Agent, by notice to the Borrower, declare the Commitment Termination Date to have occurred without demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided, that the Commitment Termination Date shall automatically occur upon the occurrence of any of the Commitment Termination Events described in Section 8.03(b), (c) or (d). ARTICLE IX. REMEDIES Section 9.01. Actions Upon Event of Default. If any Event of Default shall have occurred and be continuing and the Lender Agent shall have declared the Facility Termination Date to have occurred or the Facility Termination Date shall be deemed to have occurred pursuant to Section 8.01, then the Lender Agent may exercise in respect of the Borrower Collateral, in addition to any and all other rights and remedies granted to it hereunder, under any 42 other Related Document or under any other instrument or agreement securing, evidencing or relating to the Borrower Obligations or otherwise available to it, all of the rights and remedies of a secured party upon default under the UCC (such rights and remedies to be cumulative and nonexclusive), and, in addition, may take the following actions: (a) The Lender Agent may (and, pursuant to the terms of the Control Agreement, may instruct the Custodians to), without notice to the Borrower except as required by law and at any time or from time to time, charge, offset or otherwise apply amounts payable to the Borrower from any Custodial Account, either Collection Account, either Retention Account or any part of such accounts in accordance with the priorities set forth in Section 2.07 against all or any part of the Borrower Obligations. (b) The Lender Agent may, without notice except as specified below, solicit and accept bids for and sell the Borrower Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or any of the Lender's, Lender Agent's, Operating Agent's or Collateral Agent's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Lender Agent may deem commercially reasonable. The Lender Agent shall have the right to conduct such sales on the Borrower's premises or elsewhere and shall have the right to use any of the Borrower's premises without charge for such sales at such time or times as the Lender Agent deems necessary or advisable. The Borrower agrees that, to the extent notice of sale shall be required by law, at least ten Business Days' notice to the Borrower of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Lender Agent shall not be obligated to make any sale of Borrower Collateral regardless of notice of sale having been given. The Lender Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed for such sale, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Every such sale shall operate to divest all right, title, interest, claim and demand whatsoever of the Borrower in and to the Borrower Collateral so sold, and shall be a perpetual bar, both at law and in equity, against any Service Provider, the Borrower, any Person claiming the Borrower Collateral sold through a Service Provider or the Borrower, and their respective successors or assigns. The Lender Agent shall deposit the net proceeds of any such sale in the Master Collection Account and such proceeds shall be disbursed in accordance with Section 2.07. (c) Upon the completion of any sale under Section 9.01(b), the Borrower and the Servicer shall, and shall cause the other Service Providers to, deliver or cause to be delivered to the purchaser or purchasers at such sale on the date thereof, or within a reasonable time thereafter if it shall be impracticable to make immediate delivery, all of the Borrower Collateral sold on such date, but in any event full title and right of possession to such property shall vest in such purchaser or purchasers upon the completion of such sale. Nevertheless, if so requested by the Lender Agent or by any such Lender, the Borrower shall confirm any such sale or transfer by executing and delivering to such Lender all proper instruments of conveyance and transfer and releases as may be designated in any such request. 43 (d) At any sale under Section 9.01(b), each of the Lenders, the Lender Agent, the Operating Agent, the Collateral Agent or any other Edison Secured Party may bid for and purchase the property offered for sale and, upon compliance with the terms of sale, may hold, retain and dispose of such property without further accountability therefor. (e) The Lender Agent may exercise, at the sole cost and expense of the Borrower, any and all rights and remedies of the Borrower under or in connection with the Borrower Pledged Agreements or the other Borrower Collateral, including any and all rights of the Borrower to demand or otherwise require payment of any amount under, or performance of any provisions of, the Borrower Pledged Agreements. Section 9.02. Exercise of Remedies. No failure or delay on the part of any Agent in exercising any right, power or privilege under this Loan Agreement and no course of dealing between a Service Provider, the Borrower or any Agent, on the one hand, and any other Agent, on the other hand, shall operate as a waiver of such right, power or privilege, nor shall any single or partial exercise of any right, power or privilege under this Loan Agreement preclude any other or further exercise of such right, power or privilege or the exercise of any other right, power or privilege. The rights and remedies under this Loan Agreement are cumulative, may be exercised singly or concurrently, and are not exclusive of any rights or remedies that the Agents would otherwise have at law or in equity. No notice to or demand on any party hereto shall entitle such party to any other or further notice or demand in similar or other circumstances, or constitute a waiver of the right of the party providing such notice or making such demand to any other or further action in any circumstances without notice or demand. Section 9.03. Power of Attorney. On the Closing Date, the Borrower and the Servicer shall execute and deliver a power of attorney substantially in the form attached hereto as Exhibit 9.03 (each, a "Power of Attorney"). The power of attorney granted pursuant to each Power of Attorney is a power coupled with an interest and shall be irrevocable until all of the Borrower Obligations are indefeasibly paid or otherwise satisfied in full. The powers conferred on the Lender Agent under each Power of Attorney are solely to protect the Lenders' Liens upon and interests in the Borrower Collateral and shall not impose any duty upon the Lender Agent to exercise any such powers. The Lender Agent shall not be accountable for any amount other than amounts that it actually receives as a result of the exercise of such powers and none of the Lender Agent's officers, directors, employees, agents or representatives shall be responsible to the Borrower or the Servicer for any act or failure to act, except in respect of damages attributable solely to their own gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. Section 9.04. Continuing Security Interest. This Loan Agreement shall create a continuing Lien in the Borrower Collateral until the conditions to the release of the Liens of each of the Lenders and the Lender Agent thereon set forth in Section 2.07(f) have been satisfied. 44 ARTICLE X. SUCCESSOR SERVICER PROVISIONS Section 10.01. Servicer Not to Resign. The Servicer shall not resign from the obligations and duties hereby imposed on it except upon 60 days' prior written notice to the Borrower, each of the Lenders, the Lender Agent, the Operating Agent and the Collateral Agent. No such resignation shall become effective until a Successor Servicer shall have assumed the responsibilities and obligations of the Servicer in accordance with Section 10.02. Any Successor Servicer appointed pursuant to this Section 10.01 shall be registered as an "investment adviser" under the Investment Advisers Act of 1940, as amended, and shall replace PAII (or the then acting Investment Advisor) as Investment Advisor under an investment management agreement that is identical to the Investment Management Agreement (except for the identity of the Investment Advisor party thereto and except as approved by the Lender Agent, the Operating Agent and the Collateral Agent). Section 10.02. Appointment of the Successor Servicer. In connection with the termination of the Servicer's responsibilities or the resignation by the Servicer under this Loan Agreement pursuant to Sections 8.02 or 10.01, the Borrower shall use all reasonable efforts (to the extent not inconsistent with the fiduciary obligations of its trustees) to appoint a successor servicer to the Servicer that shall be acceptable to the Lender Agent, the Operating Agent and the Collateral Agent and shall succeed to all rights and assume all of the responsibilities, duties and liabilities of the Servicer under this Loan Agreement (such successor servicer being referred to as the "Successor Servicer"); provided, that the Successor Servicer shall have no responsibility for any actions of the Servicer prior to the date of its appointment or assumption of duties as Successor Servicer. The Successor Servicer shall accept its appointment by executing, acknowledging and delivering to the Lender Agent, the Operating Agent and the Collateral Agent an instrument in form and substance acceptable to the Lender Agent, the Operating Agent and the Collateral Agent. Section 10.03. Duties of the Servicer. The Servicer covenants and agrees that, following the appointment of, or assumption of duties by, a Successor Servicer: (a) The Servicer being replaced by the Successor Servicer shall terminate its activities as Servicer hereunder in a manner that facilitates the transfer of servicing duties to the Successor Servicer and is otherwise acceptable to each of the Lenders, the Lender Agent and the Collateral Agent and, without limiting the generality of the foregoing, shall timely deliver all Servicing Records and other information with respect to the Trust Investments to the Successor Servicer at a place selected by the Successor Servicer. The Servicer shall account for all funds and shall execute and deliver such instruments and do such other things as may be required to vest and confirm in the Successor Servicer all rights, powers, duties, responsibilities, obligations and liabilities of the Servicer. 45 (b) The Servicer being replaced by the Successor Servicer shall terminate each existing Sub-Servicing Agreement and the Successor Servicer shall not be deemed to have assumed any of the Servicer's interests therein or to have replaced the Servicer as a party thereto. Section 10.04. Effect of Termination or Resignation. Any termination of or resignation by the Servicer hereunder shall not affect any claims that the Borrower, the Lenders, the Lender Agent, the Operating Agent or the Collateral Agent may have against the Servicer for events or actions taken or not taken by the Servicer arising prior to any such termination or resignation. ARTICLE XI. AGENTS Section 11.01. Authorization and Action. (a) The Lender Agent may take such action and carry out such functions under this Loan Agreement as are authorized to be performed by it pursuant to the terms of this Loan Agreement or any other Related Document or otherwise contemplated hereby or thereby or are reasonably incidental thereto; provided, that the duties of the Lender Agent hereunder shall be determined solely by the express provisions of this Loan Agreement, and, other than the duties set forth in Section 11.02, any permissive right of the Lender Agent hereunder shall not be construed as a duty. (b) The Operating Agent may take such action and carry out such functions under this Loan Agreement as are authorized to be performed by it pursuant to the terms of this Loan Agreement, any other Related Document or the Administrative Services Agreement or otherwise contemplated hereby or thereby or are reasonably incidental thereto; provided, that the duties of the Operating Agent hereunder shall be determined solely by the express provisions of this Loan Agreement, and, other than the duties set forth in Section 11.02, any permissive right of the Operating Agent hereunder shall not be construed as a duty. (c) The Collateral Agent may take such action and carry out such functions under this Loan Agreement as are authorized to be performed by it pursuant to the terms of this Loan Agreement, any other Related Document or the Collateral Agent Agreement or otherwise contemplated hereby or thereby or are reasonably incidental thereto; provided, that the duties of the Collateral Agent hereunder shall be determined solely by the express provisions of this Loan Agreement, and, other than the duties set forth in Section 11.02, any permissive right of the Collateral Agent hereunder shall not be construed as a duty. Section 11.02. Reliance. None of the Lender Agent, the Operating Agent, the Collateral Agent, any of their respective Affiliates or any of their respective directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by any of them under or in connection with this Loan Agreement, the other Related Documents or the Program Documents, except for damages solely caused by its or their own gross negligence or willful 46 misconduct as finally determined by a court of competent jurisdiction. Without limiting the generality of the foregoing, and notwithstanding any term or provision hereof to the contrary, the Borrower, the Servicer and each of the Lenders hereby acknowledge and agree that each of the Lender Agent, the Operating Agent and the Collateral Agent (a) acts as agent hereunder for one or more of the Lenders and Affected Parties and has no duties or obligations to, shall incur no liabilities or obligations to, and does not act as an agent in any capacity for, the Borrower (other than, with respect to the Lender Agent, under the Power of Attorney with respect to remedial actions) or any Service Provider, (b) may consult with legal counsel, independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts, (c) makes no representation or warranty hereunder to any Affected Party and shall not be responsible to any such Person for any statements, representations or warranties made in or in connection with this Loan Agreement, the other Related Documents or the Program Documents, (d) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Loan Agreement, the other Related Documents or the Program Documents on the part of the Borrower, the Servicer or either Lender or to inspect the property (including the books and records) of the Borrower, the Servicer or either Lender, (e) shall not be responsible to the Borrower, the Servicer or either of the Lenders for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Loan Agreement or the other Related Documents or any other instrument or document furnished pursuant hereto or thereto, (f) shall incur no liability under or in respect of this Loan Agreement, the other Related Documents or the Program Documents by acting upon any notice, consent, certificate or other instrument or writing believed by it to be genuine and signed, sent or communicated by the proper party or parties and (g) shall not be bound to make any investigation into the facts or matters stated in any notice or other communication hereunder and may rely on the accuracy of such facts or matters. Notwithstanding the foregoing, each of the Lender Agent, the Operating Agent and the Collateral Agent acknowledges that it has a duty to make investments of funds on deposit in the Retention Accounts and the Collateral Account, in accordance with Section 2.06 and the instructions of the Servicer. Section 11.03. GE Capital and Affiliates. GE Capital and its Affiliates may generally engage in any kind of business with any Obligor, any Service Provider, the Borrower or either of the Lenders, any of their respective Affiliates and any Person who may do business with or own securities of such Persons or any of their respective Affiliates, all as if GE Capital were not the Lender Agent, the Operating Agent or the Collateral Agent and without the duty to account therefor to any Obligor, any Service Provider, the Borrower, any Lender or any other Person. ARTICLE XII. MISCELLANEOUS Section 12.01. Notices. Except as otherwise provided herein, whenever it is provided herein that any notice, demand, request, consent, approval, declaration or other communication shall or may be given to or served upon any of the parties by any other parties, or 47 whenever any of the parties desires to give or serve upon any other parties any communication with respect to this Loan Agreement, each such notice, demand, request, consent, approval, declaration or other communication shall be in writing and shall be deemed to have been validly served, given or delivered (a) upon the earlier of actual receipt and three Business Days after deposit in the United States Mail, registered or certified mail, return receipt requested, with proper postage prepaid, (b) upon confirmation of receipt by the transmitting machine and telephonic advice of the transmission, when sent by telecopy or other similar facsimile transmission, (c) one Business Day after deposit with a reputable overnight courier with all charges prepaid or (d) when delivered, if hand-delivered by messenger, all of which shall be addressed to the party to be notified and sent to the address or facsimile number set forth under its name on the signature page hereof or to such other address (or facsimile number) as may be substituted by notice given as herein provided; provided, that each such declaration or other communication shall be deemed to have been validly delivered to the Collateral Agent and the Operating Agent hereunder upon delivery to the Lender Agent in accordance with the terms of this Section 12.01. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. Failure or delay in delivering copies of any notice, demand, request, consent, approval, declaration or other communication to any Person (other than the Lenders, the Lender Agent, the Operating Agent and the Collateral Agent) designated in any written notice provided hereunder to receive copies shall in no way adversely affect the effectiveness of such notice, demand, request, consent, approval, declaration or other communication. Notwithstanding the foregoing, whenever it is provided herein that a notice is to be given to any other party hereto by a specific time, such notice shall only be effective if actually received by such party prior to such time, and if such notice is received after such time or on a day other than a Business Day, such notice shall only be effective on the immediately succeeding Business Day. Section 12.02. Binding Effect; Assignability. This Loan Agreement shall be binding upon and inure to the benefit of the Borrower, the Servicer, each of the Lenders, the Lender Agent, the Operating Agent and the Collateral Agent and their respective successors and permitted assigns. Neither the Borrower nor the Servicer may assign, transfer, hypothecate or otherwise convey any of their respective rights or obligations hereunder or interests herein without the express prior written consent of each of the Lenders, the Lender Agent, the Operating Agent and the Collateral Agent and unless the Rating Agency Condition shall have been satisfied with respect to any such assignment. Any such purported assignment, transfer, hypothecation or other conveyance by the Borrower or the Servicer without the prior express written consent of each of the Lenders, the Lender Agent, the Operating Agent and the Collateral Agent shall be void. Either of the Lenders, the Lender Agent, the Operating Agent or the Collateral Agent may, with the consent of the Borrower, assign any of its rights and obligations hereunder or interests herein to any Person and any such assignee may further assign at any time its rights and obligations hereunder or interests herein (including any rights it may have in and to the Trust Investments and the Borrower Collateral and any rights it may have to exercise remedies hereunder), provided that the consent of the Borrower is not required with respect to an assignment to an affiliate of either of the Lenders or the Lender Agent, or to a special purpose investment vehicle managed by the Lender Agent or an affiliate thereof, so long as such assignment does not have a material adverse effect on the Borrower. The Borrower 48 acknowledges and agrees that, upon any such assignment by a Lender, the assignee thereof may enforce directly, without joinder of such Lender, all of the obligations of the Borrower hereunder. Section 12.03. Termination; Survival of Borrower Obligations Upon Facility Termination Date. (a) This Loan Agreement shall create and constitute the continuing obligations of the parties hereto in accordance with its terms, and shall remain in full force and effect until the Termination Date. (b) Except as otherwise expressly provided herein or in any other Related Document, no termination or cancellation (regardless of cause or procedure) of any commitment made by any Affected Party under this Loan Agreement shall in any way affect or impair the obligations, duties and liabilities of the Borrower or the rights of any Affected Party relating to any unpaid portion of the Borrower Obligations, due or not due, liquidated, contingent or unliquidated or any transaction or event occurring prior to such termination, or any transaction or event, the performance of which is required after the Facility Termination Date. Except as otherwise expressly provided herein or in any other Related Document, all undertakings, agreements, covenants, warranties and representations of or binding upon the Borrower or the Servicer, and all rights of any Affected Party hereunder, all as contained in the Related Documents, shall not terminate or expire, but rather shall survive any such termination or cancellation and shall continue in full force and effect until the Termination Date; provided, that the rights and remedies provided for herein with respect to any breach of any representation or warranty made by the Borrower or the Servicer pursuant to Article IV, the indemnification and payment provisions of Section 2.08 and Sections 12.04, 12.05 and 12.06 shall be continuing and shall survive the Termination Date. Section 12.04. Costs, Expenses and Taxes. (a) The Borrower shall reimburse each of the Lenders, the Lender Agent, the Operating Agent and the Collateral Agent for all out-of-pocket expenses incurred in connection with (i) the negotiation and preparation of this Loan Agreement and the other Related Documents, (ii) efforts to monitor the Revolving Loans, or any of the Borrower Obligations, (iii) efforts to evaluate, observe or assess any Service Provider or the Borrower or their respective affairs, and (iv) efforts to verify, protect, evaluate, assess or appraise any of the Borrower Collateral (including, in each case, the reasonable fees and expenses of all of its special counsel, advisors, consultants retained in connection with the transactions contemplated thereby and advice in connection therewith). (b) The Borrower shall reimburse each of the Lenders, the Lender Agent, the Operating Agent and the Collateral Agent for all fees, costs and expenses, including the fees, costs and expenses of counsel or other advisors (including management consultants and appraisers) for advice, assistance, or other representation in connection with: 49 (i) any amendment, modification or waiver of, consent with respect to, or termination of this Loan Agreement or any of the other Related Documents or advice in connection with the administration thereof or their respective rights hereunder or thereunder; (ii) any Litigation, contest or dispute (whether instituted by the Borrower, either of the Lenders, the Lender Agent, the Operating Agent, the Collateral Agent or any other Person as a party, witness, or otherwise) in any way relating to the Borrower Collateral, any of the Related Documents or any other agreement to be executed or delivered in connection herewith or therewith, including any Litigation, contest, dispute, suit, case, proceeding or action, and any appeal or review thereof, in connection with a case commenced by or against the Borrower or any other Person that may be obligated to either of the Lenders, the Lender Agent, the Operating Agent or the Collateral Agent by virtue of the Related Documents, including any such Litigation, contest, dispute, suit, proceeding or action arising in connection with any work-out or restructuring of the transactions contemplated hereby during the pendency of one or more Events of Default; (iii) any attempt to enforce any remedies of either of the Lenders, the Lender Agent, the Operating Agent or the Collateral Agent against the Borrower or any other Person that may be obligated to them by virtue of any of the Related Documents, including any such attempt to enforce any such remedies in the course of any work-out or restructuring of the transactions contemplated hereby during the pendency of one or more Events of Default; (iv) any work-out or restructuring of the transactions contemplated hereby during the pendency of one or more Events of Default; and (v) efforts to collect, sell, liquidate or otherwise dispose of any of the Borrower Collateral; including all attorneys' and other professional and service providers' fees arising from such services, including those in connection with any appellate proceedings, and all expenses, costs, charges and other fees incurred by such counsel and others in connection with or relating to any of the events or actions described in this Section 12.04, all of which shall be payable, on demand, by the Borrower to the Lenders, the Lender Agent, the Operating Agent or the Collateral Agent, as applicable. Without limiting the generality of the foregoing, such expenses, costs, charges and fees may include: fees, costs and expenses of accountants, environmental advisors, appraisers, investment bankers, management and other consultants and paralegals; court costs and expenses; photocopying and duplication expenses; court reporter fees, costs and expenses; long distance telephone charges; air express charges; telegram or telecopy charges; secretarial overtime charges; and expenses for travel, lodging and food paid or incurred in connection with the performance of such legal or other advisory services. (c) In addition, the Borrower shall pay on demand any and all stamp, sales, excise and other taxes (excluding income taxes) and fees payable or determined to be payable in 50 connection with the execution, delivery, filing or recording of this Loan Agreement or any other Related Document, and the Borrower agrees to indemnify and save each Indemnified Person harmless from and against any and all liabilities with respect to or resulting from any delay or failure to pay such taxes and fees. Section 12.05. Confidentiality. (a) Except to the extent otherwise required by applicable law, as required to be filed publicly with the Securities and Exchange Commission or distributed to shareholders, or unless the Lender Agent shall otherwise consent in writing, the Borrower and the Servicer agree to maintain the confidentiality of this Loan Agreement (and all drafts hereof and documents ancillary hereto) in its communications with third parties other than any Affected Party or any Indemnified Person and otherwise and not to disclose, deliver or otherwise make available to any third party (other than its directors, officers, employees, accountants or counsel) the original or any copy of all or any part of this Loan Agreement (or any draft hereof and documents ancillary hereto) except to an Affected Party or an Indemnified Person. (b) The Borrower and the Servicer each agree that it shall not (and shall not permit any of its Subsidiaries to) issue any news release or make any public announcement pertaining to the transactions contemplated by this Loan Agreement and the other Related Documents without the prior written consent of each of the Lenders and the Lender Agent (which consent shall not be unreasonably withheld) unless such news release or public announcement is required by law, in which case the Borrower or the Servicer, as applicable, shall consult with each of the Lenders and the Lender Agent prior to the issuance of such news release or public announcement. The Borrower may, however, disclose the general terms of the transactions contemplated by this Loan Agreement and the other Related Documents to trade creditors, suppliers and other similarly-situated Persons so long as such disclosure is not in the form of a news release or public announcement. (c) Each of the Lenders, the Lender Agent, the Operating Agent and the Collateral Agent (i) agree to use reasonable efforts (equivalent to the efforts each of the Lenders, the Lender Agent, the Operating Agent or the Collateral Agent (as the case may be) apply to maintaining the confidentiality of its own confidential information) to maintain as confidential all confidential information provided to it by or on the behalf of the Borrower and the Servicer and designated as confidential (which shall be deemed to include any non-public information about an Obligor of a Trust Investment) for a period of two (2) years following receipt thereof, except that either of the Lenders, the Lender Agent, the Operating Agent or the Collateral Agent may disclose such information (A) to Persons employed or engaged by it in evaluating, approving, structuring or administering the Revolving Loans and the credit facility provided hereunder; (B) to any independent attorneys, consultants, and auditors acting on behalf of any of the Lenders or any of the Agents; (C) to any bona fide assignee or participant or potential assignee or participant that has agreed to comply with the covenant contained in this Section (and any such bona fide assignee or participant or potential assignee or participant may disclose such information to Persons employed or engaged by them); (D) as required or requested by any Governmental Authority or reasonably believed by it to be compelled by any court decree, subpoena or legal or administrative 51 order or process; (E) as, on the advice of its' counsel, required by law; (F) in connection with the exercise of any right or remedy under the Transaction Documents or in connection with any Litigation to which it is a party; (G) which ceases to be confidential through no fault of either of the Lenders, the Lender Agent, the Operating Agent, or the Collateral Agent; (H) to any Rating Agency rating the indebtedness of a Lender or considering the issuance of such a rating; or (I) to any provider of liquidity or credit enhancement to a Lender, and (ii) agree to be bound to reasonable requirements to preserve confidentiality of information that is contained in Collateral Documentation and about which notice is provided to the Lender Agent by or on behalf of the Borrower. Section 12.06. No Proceedings. The Borrower and the Servicer hereby agree that, from and after the Closing Date and until the date one year plus one day following the date on which the Commercial Paper with the latest maturity has been indefeasibly paid in full in cash, it will not, directly or indirectly, institute or cause to be instituted against either of the Lenders any proceeding of the type referred to in Sections 8.01(c) and 8.01(d). Section 12.07. Complete Agreement; Modification of Agreement. This Loan Agreement and the other Related Documents constitute the complete agreement among the parties hereto with respect to the subject matter hereof and thereof, supersede all prior agreements and understandings relating to the subject matter hereof and thereof, and may not be modified, altered or amended except as set forth in Section 12.08. Section 12.08. Amendments and Waivers. No amendment, modification, termination or waiver of any provision of this Loan Agreement or any of the other Related Documents, or any consent to any departure by the Borrower or the Servicer therefrom, shall in any event be effective unless the same shall be in writing and signed by each of the parties hereto or thereto, provided, that (i) the Operating Agent shall notify each of the Rating Agencies concurrently with the execution of any amendment to any provision of this Loan Agreement or any of the other Related Documents, and (ii) it shall be a condition precedent to the effectiveness of any material amendment to any provision of this Loan Agreement or any of the other Related Documents that the Rating Agency Condition shall have been satisfied in respect thereof. Section 12.09. No Waiver; Remedies. The failure by either of the Lenders, the Lender Agent, the Operating Agent or the Collateral Agent, at any time or times, to require strict performance by the Borrower or the Servicer of any provision of this Loan Agreement or the Revolving Note shall not waive, affect or diminish any right of either of the Lenders, the Lender Agent, the Operating Agent or the Collateral Agent thereafter to demand strict compliance and performance herewith or therewith. Any suspension or waiver of any breach or default hereunder shall not suspend, waive or affect any other breach or default whether the same is prior or subsequent thereto and whether the same or of a different type. None of the undertakings, agreements, warranties, covenants and representations of the Borrower or the Servicer contained in this Loan Agreement or the Revolving Note, and no breach or default by the Borrower or the Servicer hereunder or thereunder, shall be deemed to have been suspended or waived by either of the Lenders, the Lender Agent, the Operating Agent or the Collateral Agent unless such waiver or suspension is by an instrument in writing signed by an officer of or other duly authorized signatory 52 of each of the Lenders, the Lender Agent, the Operating Agent and the Collateral Agent and directed to the Borrower or the Servicer, as applicable, specifying such suspension or waiver. The rights and remedies of each of the Lenders, the Lender Agent, the Operating Agent and the Collateral Agent under this Loan Agreement shall be cumulative and nonexclusive of any other rights and remedies that each of the Lenders, the Lender Agent, the Operating Agent and the Collateral Agent may have under any other agreement, including the other Related Documents, by operation of law or otherwise. Recourse to the Borrower Collateral shall not be required. SECTION 12.10. GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL. (A) THIS LOAN AGREEMENT AND EACH OTHER RELATED DOCUMENT (EXCEPT TO THE EXTENT THAT ANY RELATED DOCUMENT EXPRESSLY PROVIDES TO THE CONTRARY) AND THE OBLIGATIONS ARISING HEREUNDER AND THEREUNDER SHALL IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAWS OF THE STATE OF NEW YORK, BUT OTHERWISE WITHOUT REGARD TO CONFLICT OF LAWS PROVISIONS) AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. (B) EACH PARTY HERETO HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN THE BOROUGH OF MANHATTAN IN NEW YORK CITY SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THEM PERTAINING TO THIS LOAN AGREEMENT OR TO ANY MATTER ARISING OUT OF OR RELATING TO THIS LOAN AGREEMENT OR ANY OTHER RELATED DOCUMENT; PROVIDED, THAT EACH PARTY HERETO ACKNOWLEDGES THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF THE BOROUGH OF MANHATTAN IN NEW YORK CITY; PROVIDED FURTHER, THAT NOTHING IN THIS LOAN AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE EITHER OF THE LENDERS, THE LENDER AGENT, THE OPERATING AGENT OR THE COLLATERAL AGENT FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO REALIZE ON THE BORROWER COLLATERAL OR ANY OTHER SECURITY FOR THE BORROWER SECURED OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF EITHER OF THE LENDERS, THE LENDER AGENT, THE OPERATING AGENT OR THE COLLATERAL AGENT. EACH PARTY HERETO SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND EACH PARTY HERETO HEREBY WAIVES ANY OBJECTION THAT SUCH PARTY MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS 53 DEEMED APPROPRIATE BY SUCH COURT. EACH PARTY HERETO HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO SUCH PARTY AT THE ADDRESS SET FORTH BENEATH ITS NAME ON THE SIGNATURE PAGES HEREOF AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF SUCH PARTY'S ACTUAL RECEIPT THEREOF OR THREE DAYS AFTER DEPOSIT IN THE UNITED STATES MAIL, PROPER POSTAGE PREPAID. NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT OF ANY PARTY HERETO TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. (C) BECAUSE DISPUTES ARISING IN CONNECTION WITH COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE, ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH THIS LOAN AGREEMENT OR ANY OTHER RELATED DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. Section 12.11. Counterparts. This Loan Agreement may be executed in any number of separate counterparts, each of which shall collectively and separately constitute one agreement. Section 12.12. Severability. Wherever possible, each provision of this Loan Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Loan Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Loan Agreement. Section 12.13. Section Titles. The section titles and table of contents contained in this Loan Agreement are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. 54 Section 12.14. Limited Recourse. (a) The obligations of each of the Lenders under this Loan Agreement and all Related Documents are solely the corporate and company obligations of each respective Lender. No recourse shall be had for the payment of any amount owing in respect of Revolving Loans or for the payment of any fee hereunder or any other obligation or claim arising out of or based upon this Loan Agreement or any other Related Document against any Stockholder, employee, officer, director, agent or incorporator of each of the Lenders. Any accrued obligations owing by each of the Lenders under this Loan Agreement shall be payable by it solely to the extent that funds are available therefor from time to time in accordance with the provisions of the Collateral Agent Agreement and Section 2.07 of this Loan Agreement (and such accrued obligations shall not be extinguished until paid in full). (b) A copy of the Borrower's agreement and declaration of trust (the "Trust Agreement") is on file with the Secretary of the Commonwealth of Massachusetts, and notice is hereby given that the Trust Agreement has been executed on behalf of the Borrower by each trustee or officer of the Borrower in his or her capacity as trustee or officer, and not individually. The obligations of the Borrower under this Loan Agreement and the Related Documents shall only be binding upon the assets and property of the Borrower, and none of the officers of the Borrower shall be personally liable thereon. Section 12.15. Further Assurances. (a) The Borrower and the Servicer shall, at the Borrower's sole cost and expense, upon request of either of the Lenders, the Lender Agent, the Operating Agent or the Collateral Agent, promptly and duly execute and deliver any and all further instruments and documents and take such further action that may be necessary or desirable or that either of the Lenders, the Lender Agent, the Operating Agent or the Collateral Agent may request to (i) perfect, protect, preserve, continue and maintain fully the right, title and interests (including Liens) granted to each of the Lenders under this Loan Agreement, (ii) enable either of the Lenders, the Lender Agent, the Operating Agent or the Collateral Agent to exercise and enforce its rights under this Loan Agreement, any of the other Related Documents or the Collateral Agent Agreement or (iii) otherwise carry out more effectively the provisions and purposes of this Loan Agreement or any other Related Document. Without limiting the generality of the foregoing, the Borrower shall, upon request of either of the Lenders, the Lender Agent, the Operating Agent or the Collateral Agent, (A) execute and file such financing or continuation statements, or amendments thereto or assignments thereof, and such other instruments or notices that may be necessary or desirable or that either of the Lenders, the Lender Agent, the Operating Agent or the Collateral Agent may request to perfect, protect and preserve the Liens granted pursuant to this Loan Agreement, free and clear of all Adverse Claims, (B) mark, or cause the Service Providers to mark, each Collateral Documentation evidencing each Trust Investment with a legend, acceptable to each of the Lenders, the Lender Agent, the Operating Agent and the Collateral Agent evidencing that the Borrower has pledged to each of the Lenders all right and title thereto and interest therein as provided herein, (C) mark, or cause the Service Providers to mark, its master data processing records evidencing such Trust Investments with such a legend and (D) notify or cause the Service 55 Providers to notify Obligors of the Lien of each of the Lenders in the Trust Investments effected hereunder. (b) Without limiting the generality of the foregoing, the Borrower hereby authorizes each of the Lenders, the Lender Agent and the Collateral Agent, and each of the Lenders hereby authorizes the Collateral Agent and the Lender Agent, to file one or more financing or continuation statements, or amendments thereto or assignments thereof, relating to all or any part of the Trust Investments, including Collections with respect thereto, or the Borrower Collateral without the signature of the Borrower or, as applicable, either of the Lenders to the extent permitted by applicable law. A carbon, photographic or other reproduction of this Loan Agreement or of any notice or financing statement covering the Trust Investments, the Borrower Collateral or any part thereof shall be sufficient as a notice or financing statement where permitted by law. 56 IN WITNESS WHEREOF, the parties have caused this Revolving Loan Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. PILGRIM AMERICA PRIME RATE TRUST, as Borrower By: _____________________________ Name: Daniel A. Norman Title: Senior Vice President and Treasurer Address: -------- 40 North Central, Suite 1200 Phoenix, Arizona 85004 Attention: Daniel A. Norman Telephone: (602) 417-8112 Facsimile: (602) 417-8327 PILGRIM AMERICA INVESTMENTS, INC., as Servicer By _____________________________ Name: James M. Hennessy Title: Executive Vice President and Secretary Address: -------- 40 North Central, Suite 1200 Phoenix, Arizona 85004 Attention: James M. Hennessy Telephone: (602) 417-8115 Facsimile: (602) 417-8301 57 EDISON ASSET SECURITIZATION, L.L.C. as a Lender By: _____________________________ Name: Steve A. Poulin Title: Assistant Secretary Address: -------- c/o General Electric Capital Corporation 3001 Summer Street, 2nd Floor Stamford, Connecticut 06927 Attention: Manager, Conduit Administration Telephone: (203) 961-5488 Facsimile: (203) 961-2953 GENERAL ELECTRIC CAPITAL CORPORATION, as a Lender By _____________________________ Name: Denis M. Creeden Title: Duly Authorized Signatory Address: -------- 3001 Summer Street, 2nd Floor Stamford, Connecticut 06927 Attention: Manager, Conduit Administration Telephone: (203) 961-5488 Facsimile: (203) 961-2953 with copies to: 201 High Ridge Road Stamford, Connecticut 06927 Attention: Vice President - Portfolio/Pilgrim America Prime Rate Trust Telephone: (203) 316-7608 Facsimile: (203) 316-7821 58 GENERAL ELECTRIC CAPITAL CORPORATION, as Collateral Agent By _____________________________ Name: Joan B. Makara Title: Duly Authorized Signatory Address: -------- 3001 Summer Street, 2nd Floor Stamford, Connecticut 06927 Attention: Manager, Conduit Administration Telephone: (203) 961-5488 Facsimile: (203) 961-2953 with copies to: 201 High Ridge Road Stamford, Connecticut 06927 Attention: Vice President - Portfolio/Pilgrim America Prime Rate Trust Telephone: (203) 316-7608 Facsimile: (203) 316-7821 GENERAL ELECTRIC CAPITAL CORPORATION, as Lender Agent By _____________________________ Name: Joan B. Makara Title: Duly Authorized Signatory Address: -------- 3001 Summer Street, 2nd Floor Stamford, Connecticut 06927 Attention: Manager, Conduit Administration Telephone: (203) 961-5488 Facsimile: (203) 961-2953 with copies to: 201 High Ridge Road Stamford, Connecticut 06927 Attention: Vice President - Portfolio/Pilgrim America Prime Rate Trust Telephone: (203) 316-7608 Facsimile: (203) 316-7821 59 GENERAL ELECTRIC CAPITAL CORPORATION, as Operating Agent By _____________________________ Name: Joan B. Makara Title: Duly Authorized Signatory Address: 3001 Summer Street, 2nd Floor Stamford, Connecticut 06927 Attention: Manager, Conduit Administration Telephone: (203) 961-5488 Facsimile: (203) 961-2953 with copies to: 201 High Ridge Road Stamford, Connecticut 06927 Attention: Vice President - Portfolio/Pilgrim America Prime Rate Trust Telephone: (203) 316-7608 Facsimile: (203) 316-7821 60 EX-2.L 4 OPINION OF LEGAL COUNSEL DECHERT PRICE & RHOADS 1775 Eye Street, N.W. Washington, D.C. Telephone: 202-261-3300 Fax: 202-261-3333 August 13, 1998 Pilgrim America Prime Rate Trust 40 North Central Avenue, Suite 1200 Phoenix, Arizona 85004-4424 Re: Pilgrim America Prime Rate Trust (File No. 811-5410) ------------------- Dear Sirs: In connection with the registration under the Securities Act of 1933, as amended, of 25,000,000 shares of beneficial interest of Pilgrim America Prime Rate Trust (the "Trust"), we have examined such matters as we have deemed necessary to give this opinion. On the basis of the foregoing, it is our opinion that the shares of the Trust have been duly authorized and, when paid for as contemplated by the Trust's Registration Statement, will be validly issued, fully paid and non-assessable by the Trust. We hereby consent to the use of this opinion as an exhibit to the Registration Statement and to all references to our firm therein. Very truly yours, /s/ Dechert Price & Rhoads EX-2.N 5 INDEPENDENT AUDITORS' CONSENT INDEPENDENT AUDITORS' CONSENT The Board of Trustees Pilgrim America Prime Rate Trust: We consent to the use of our report incorporated herein by reference and to the references to our firm under the headings "Financial Highlights and Investment Performance" and "Experts" in the Prospectus. /s/ KPMG Peat Marwick LLP Los Angeles, California August 18, 1998 EX-27 6 FINANCIAL DATA SCHEDULE
6 826020 Pilgrim America Prime Rate Trust 1,000 U.S. DOLLARS 12-MOS FEB-28-1998 MAR-01-1997 FEB-28-1998 1 1,365,685 1,367,265 20,027 825 0 1,388,117 0 0 353,714 353,714 0 1,051,266 110,764 109,140 11,927 0 (30,370) 0 1,580 1,034,403 0 122,361 9,379 36,523 95,217 (18,935) 5,319 81,601 0 93,880 0 0 0 0 15,592 3,313 10,418 (11,434) 0 0 10,370 21,267 36,535 1,031,632 9.45 0.87 (0.13) 0 0.85 0 9.34 2.65 346,110 3.15
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