<PAGE>
Pilgrim America Prime Rate Trust
[PHOTO OF NEW YORK STOCK EXCHANGE BUILDING APPEARS HERE]
SEMI-ANNUAL REPORT
AUGUST 31, 1996
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Dear Fellow Shareholders:
During the second quarter ended August 31, 1996, Pilgrim America Prime Rate
Trust (the "Trust") continued to meet its objective of generating a high level
of current income while preserving capital.
PERFORMANCE
Distributions to shareholders during the quarter totaled $0.21 per share,
providing a distribution rate of 8.55% based on the average dividend adjusted
month end net asset value ("NAV") and 8.35% based on the average month end
market price of the Trust's common stock./1/ This compares favorably with the
prime lending rate of large commercial banks for their best customers which was
8.25% during the quarter.
The Trust maintained its strong performance position in the loan participation
funds category as measured by Lipper Analytical Services, Inc. We are pleased
to report that the Trust ranks first as measured by NAV total return for the
one, three, and five year measurement periods ended August 31, 1996. The Trust
was ranked among a total of seven, six and five funds for the one, three, and
five year periods, respectively./2/
For the three and five year periods ended August 31, 1996, the Trust had a five
star and a four star Morningstar risk-adjusted performance rating, respectively,
when rated among 92 and 63 taxable bond funds. The Trust's overall rating
through August 31, 1996 is four stars. For the three and five year periods
ended August 31, 1996, the Trust's risk scores placed the Trust first out of 30
and 25 Corporate Bond - General funds, respectively. For the three and five year
periods ended August 31, 1996, the Trust's risk scores placed the Trust third
out of the entire universe of 416 and 230 closed-end funds, respectively./3/
SECOND QUARTER HIGHLIGHTS
During June the Trust began to borrow under its new revolving credit facility.
On August 31, 1996 $197 million was outstanding. During the quarter, the
average outstanding borrowings under the facility was $79.8 million. This four
year floating rate facility is designed to provide a positive spread on
borrowings and to provide maximum flexibility in managing the Trust's portfolio.
1
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Pilgrim America Prime Rate Trust
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LETTER TO SHAREHOLDERS
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The borrowing rate under the facility is 0.50% over LIBOR or if lower, the
federal funds rate. The Trust also pays a 0.125% fee on any unborrowed amount.
Management of the Trust does not intend to borrow unless it believes the
investment being purchased yields a return that exceeds both the cost of
borrowing and management fees. Another benefit of the credit facility has been
the additional investment income generated by substituting unused borrowing
capacity under the facility for short term lower yielding investments previously
used to satisfy unfunded credit commitments.
During the second quarter, declines and increases in the value of portfolio
investments combined to result in a $0.01 decline in the Trust's NAV. While NAV
remained relatively stable, the market price of the Trust's shares increased.
At the beginning of the quarter, NAV was $9.61 and the Trust's share price was
$9.625, a market premium of 0.16%. On August 31, 1996, NAV was $9.60 and the
Trust's shares closed at $9.875, a premium of 2.86%. The average market price
premium compared to NAV was 1.65% during the quarter. We believe the premium to
NAV is attributable, in part, to the high level of confidence of financial
planners, brokers and shareholders in the stable credit quality of senior loans.
The Trust has committed to more than twenty new senior loans during the period
including Kmart Corp., Smith's Food & Drug Co., Technetics Corp., Hayes Wheels
International, Continental Micronesia, Capital Tool and Design, Banner
Aerospace, Panavision International, Inc. and Outdoor Systems, Inc. During the
quarter, sales or repayments included Pullman Company, Orion Pictures Corp.,
Pierce Leahy Corp., National Propane Inc. and Cobblestone Golf Group, Inc.
Non-performing senior loans amounted to 2.50% of net assets on August 31, 1996,
compared to 1.93% on May 31, 1996 and 1.58% on February 29, 1996. Management
will continue to work vigorously to reduce non-performing senior loans.
OUTLOOK
Our outlook for interest rates continues to be relatively stable. Based on the
continued strength of the economy, it is our belief that any movement in
interest rates over the next few months will likely be upward. Interest rates
on the Trust's senior loans will adjust as short term rates change. Although
the Trust's yield will change periodically, the value of the Trust's assets
generally will be unaffected as a result of moderate interest rate changes
2
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Pilgrim America Prime Rate Trust
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LETTER TO SHAREHOLDERS
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The Trust announced a proposed 1-for-5 non-transferable rights offer on
September 16, 1996. We believe that increasing the Trust's assets through the
offer will improve the Trust's competitive position within the senior loan
market. While there can be no assurance that potential benefits will be
realized, improving the Trust's competitive position is intended to: increase
income from investments over time; allow the Trust to increase its average
investment size while maintaining portfolio diversification; and enhance the
Trust's ability to seek opportunities in the secondary senior loan market to
generate cash for new investments and to sell senior loans at a profit. We also
believe the offer will reduce the Trust's operating costs per share.
This rights offer will afford shareholders the opportunity to purchase
additional shares of the Trust at a price that will be below market value and
NAV.
The net proceeds from the Offer will be used to pay down the Trust's outstanding
borrowings which finance a portion of the senior loan portfolio. This will allow
the proceeds to be invested immediately in senior loans owned by the Trust.
Following the Offer, we will reborrow for the purpose of investing in new senior
loans as long as we believe a profit can be earned. We believe, therefore, that
the Trust's monthly dividend will not be reduced as a result of the offer.
The entire Trust management team is grateful to you for your support. As
always, we look forward to your comments and questions.
Sincerely,
/s/ Howard Tiffen
Howard Tiffen
Senior Vice President and
Senior Portfolio Manger
Pilgrim America Investments, Inc.
October 17, 1996
3
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Pilgrim America Prime Rate Trust
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SHAREHOLDER LETTER FOOTNOTES
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(1) The distribution rate is calculated by annualizing the dividends declared
in each month and dividing the resulting annualized dividend amount by the
Trust's net asset value or the NYSE closing price, as applicable at the end
of the period.
(2) Lipper Analytical Services, Inc. ranked the Trust for total return, without
deducting sales charges and assuming reinvestment of all dividends and
capital gains distributions.
(3) 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. Morningstar ratings are
calculated from the fund's three, five and ten-year returns (with fee
adjustment) in excess of 90-day Treasury bill returns and a risk factor
that reflects fund 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.
Performance data represents past performance and is no guarantee of future
results. Investment return and principal value of an investment in the
Trust will fluctuate. Shares, when sold, may be worth more or less than
their original cost.
The views expressed in this letter reflect those of the portfolio manager.
The manager's views are subject to change at any time based on market and
other conditions.
4
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Pilgrim America Prime Rate Trust
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STATISTICS AND PERFORMANCE as of August 31, 1996
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<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Portfolio Characteristics
<S> <C>
Net Assets $ 867,305,590
--------------------------------------------------------------
Assets Invested in Senior Loan Interests $1,049,886,435*
--------------------------------------------------------------
Total Number of Senior Loan Interests 105
--------------------------------------------------------------
Average Amount Outstanding per Loan $ 9,998,918
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Total Number of Industries 28
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Year to Date Portfolio Turnover Rate 42%
--------------------------------------------------------------
Average Loan Amount per Industry $ 37,495,944
--------------------------------------------------------------
Weighted Average Days to Interest Rate Reset 38 days
--------------------------------------------------------------
Average Loan Maturity 67 months
--------------------------------------------------------------
Average Age of Loans Held in Portfolio 10 months
--------------------------------------------------------------
*Includes loans and other debt received through restructures
- --------------------------------------------------------------------------------
</TABLE>
- -------------------------------------
Top 10 Industries as a
% of Total Investments
Aerospace Products & Services 8.9%
General Merchandise Retailing 8.6%
Media/Broadcast 8.3%
Diversified Manufacturing 7.7%
Food Stores 7.0%
Electronic Equipment 5.7%
Food/Tobacco Products & Serv. 4.8%
Industrial Equipment 4.1%
Healthcare Services 3.9%
Paper Products 3.7%
- -------------------------------------
- ------------------------------------------
Top 10 Senior
Loan Interest Holdings
as a % of Total Investments
Kmart Corp 4.7%
Riverwood International Corp. 2.8%
Smith's Food & Drug Co. 2.5%
Favorite Brands International 2.3%
Community Health Systems 1.9%
Graco Children's Products, Inc. 1.9%
Liberty House, Inc. 1.9%
Ralph's Grocery Co. 1.7%
MTF Acquisition Corp. 1.7%
Lifestyle Furnishings International 1.6%
- ------------------------------------------
5
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Pilgrim America Prime Rate Trust
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STATISTICS AND PERFORMANCE as of August 31, 1996
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<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
DISTRIBUTION RATES
SEC 30-Day SEC 30-Day Annualized Annualized
Prime Yield at Yield at Distribution Distribution
Quarter-ended Rate NAV/A/ MKT/A/ Rate at NAV/B/ Rate at MKT/B/
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
November 30, 1995 8.75% 9.17% 9.59% 9.02% 9.43%
- ------------------------------------------------------------------------------------
February 29, 1996 8.25% 8.08% 8.17% 8.47% 8.57%
- ------------------------------------------------------------------------------------
May 31, 1996 8.25% 8.26% 8.24% 8.45% 8.44
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August 31, 1996 8.25% 8.41% 8.17% 8.56% 8.32%
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</TABLE>
This table sets forth the Trust's monthly dividend performance which is
summarized quarterly.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Average Annual Total Returns
NAV MKT
- -----------------------------------------------------------------------------
<S> <C> <C>
Year to Date 5.30% 10.68%
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1 Year 8.50% 18.14%
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3 Years 8.63% 10.22%
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5 Years 7.79%/G/ N/A
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Since Trust Inception/E/ 8.58%/G/ N/A
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Since Initial Trading on NYSE/F/ N/A 11.35%
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</TABLE>
Assumes rights were exercised and excludes sales charges and commissions/C,D/
- --------------------------------------------------------------------------------
See performance footnotes on page 7
6
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Pilgrim America Prime Rate Trust
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PERFORMANCE FOOTNOTES
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(A) Yield is calculated by dividing the Trust's net investment income per share
for the most recent thirty days by the net asset value (in the case of NAV)
or the NYSE closing price (in the case of Market) at quarter-end. Yield
calculations do not include any commissions or sales charges, and are
compounded for six months and annualized for a twelve month period to
derive the Trust's yield consistent with the SEC standardized yield formula
for open-end investment companies.
(B) The distribution rate is calculated by annualizing the dividends declared
in each month and dividing the resulting annualized dividend amount by the
Trust's net asset value (in the case of NAV) or the NYSE closing price (in
the case of Market) at the end of the period.
(C) Calculation of total return assumes a hypothetical initial investment at
the net asset value (in the case of NAV) or the NYSE closing price (in the
case of Market) on the last business day before the first day of the stated
period, with all dividends and distributions reinvested at the actual
reinvestment price. The Trust's average annual total returns on an NAV
basis with a 3% sales charge and assuming rights were exercised through
August 31, 1996 were 7.13% and 8.18% for the five-year and since inception
periods, respectively. The average annual total returns based on market
price assuming rights were exercised with a brokerage commission are not
presented.
(D) On December 27, 1994, the Trust issued to its shareholders transferable
rights which entitled the holders to subscribe for 17,958,766 shares of the
Trust's common stock at the rate of one share of common stock for each four
rights held. The offering was completed on January 27, 1995.
(E) Inception Date- May 12, 1988.
(F) Initial Trading on NYSE- March 9, 1992.
(G) Reflects Partial Waiver of Fees.
Performance data represents past performance and is no guarantee of future
results. Investment return and principal value of an investment in the
Trust will fluctuate. Shares, when sold, may be worth more or less than
their original cost.
7
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Pilgrim America Prime Rate Trust
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Additional Notes and Information
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DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Trust shareholders are paid distributions in cash unless they elect to reinvest
the payments in additional shares of the Trust, at reduced brokerage
commissions, pursuant to the Dividend Reinvestment and Cash Purchase Plan. This
Plan also allows shareholders to make periodic cash purchases. For a copy of
the Plan, or for more information, contact our Shareholder Service Department at
1-800-331-1080.
KEY FINANCIAL DATES - Calendar 1996 Dividends:
<TABLE>
<CAPTION>
DECLARATION DATE EX-DATE PAYABLE DATE
<S> <C> <C>
January 31 February 8 February 23
February 29 March 7 March 21
March 29 April 3 April 18
April 30 May 8 May 22
May 31 June 6 June 20
June 28 July 3 July 18
July 31 August 8 August 22
August 30 September 6 September 19
September 30 October 8 October 23
October 31 November 7 November 22
November 29 December 5 December 19
December 20 December 27 January 13, 1997
</TABLE>
Record date will be two business days after each Ex-Date.
These dates are subject to change.
STOCK DATA
The Trust's shares are traded on the New York Stock Exchange (Symbol: PPR). The
Trust's name changed to Pilgrim America Prime Rate Trust and its cusip number
changed to 720906 10 6 effective April 12, 1996. The Trust's NAV and market
price are published weekly under the "Closed-End Funds" feature in Barron's, The
New York Times, The Wall Street Journal and many other regional and national
publications.
8
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Pilgrim America Prime Rate Trust
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PORTFOLIO OF INVESTMENTS as of August 31, 1996 (Unaudited)
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SENIOR LOAN INTERESTS
(Dollar weighted portfolio interest reset period is 38 days)
<TABLE>
<CAPTION>
Principal
Amount Loan Stated
(000's) Industry/Borrower Type Maturity Value
------- ----------------- ---- -------- -----
<S> <C> <C> <C> <C>
Aerospace Products & Services: 8.9%
$ 4,528 Atlas Air (air cargo carrier) Revolver 06/30/98 $ 4,527,922
14,546 Aviall, Inc. (aircraft parts distributor) Term 11/30/00 14,546,287
15,000 Banner Aerospace (aerospace fasteners) Term B 07/01/03 15,000,000
15,000 Continental Micronesia (airline) Axel (A) 07/26/03 15,000,000
8,000 Dallas Airmotive, Inc. (aircraft engine maintenance) Term 03/15/01 8,000,000
8,936 Fiberite, Inc. (plastic composite manufacturer) Term B 12/31/01 8,935,714
2,329 Grimes Aerospace Corp. (aerospace products) Revolver 12/31/99 2,328,653
13,844 Grimes Aerospace Corp. Term 12/31/99 13,844,331
5,000 Gulfstream Delaware Corp. (aircraft manufacturer) Term B 03/31/98 5,000,000
8,000 Technetics Corp. (aircraft engine components) Term 06/20/02 8,000,000
---------------
95,182,907
---------------
Apparel Products: 1.6%
1,078 Butterick Pattern Co. (sewing aids) (1) Term 05/31/96 646,624
6,930 Humphreys, Inc. (belts and personal leather goods) Term B 11/15/03 6,930,000
9,696 Scovill Fasteners (metal fasteners for apparel products) Term B 01/24/03 9,695,596
---------------
17,272,220
---------------
Communications: 1.7%
8,000 Executone Business Solutions (telecommunication service) Term B 07/01/03 8,000,000
9,929 Shared Technologies, Inc. (communication services) Term B 03/31/03 9,928,571
---------------
17,928,571
---------------
Construction Products and Services: 2.3%
18,400 MTF Acquisition Corp. (paint and coating products) Term 11/30/02 18,400,000
4,000 The Presley Companies (homebuilder) Revolver 05/20/97 4,000,000
1,908 United Building Materials, Inc. (stone and concrete products) Term 04/30/96 1,860,362
---------------
24,260,362
---------------
Container Products: 0.9%
10,000 Reid Plastics, Inc. (plastic bottle manufacturer) Term B 03/31/02 10,000,000
---------------
Diversified Financial: 1.4%
15,000 Dollar Financial Group, Inc. (retail check cashing) Term B 06/30/01 15,000,000
---------------
Diversified Manufacturing: 7.7%
5,688 Cambridge Industries, Inc. (automotive plastics) Term B 05/17/02 5,687,742
6,399 Cambridge Industries, Inc. Term C 11/17/03 6,398,580
2,844 Cambridge Industries, Inc. Term D 05/17/04 2,843,842
10,000 Capital Tool & Design (brake backing plates) Term B 07/19/03 10,000,000
19,800 Graco Children's Products, Inc. (juvenile products) Term B 06/30/03 19,800,000
13,959 The Hawk Group (metal products and fabrication) Term B 06/30/02 13,959,000
</TABLE>
9
<PAGE>
Pilgrim America Prime Rate Trust
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PORTFOLIO OF INVESTMENTS as of August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Loan Stated
(000's) Industry/Borrower Type Maturity Value
------- ----------------- ---- -------- -----
<S> <C> <C> <C> <C>
Diversified Manufacturing (continued)
$ 276 @ KDI Corp. (defense and leisure products) (2) Term A 12/31/96 $ 16,791
13 @ KDI Corp. (2) Term B 12/31/96 13,187
900 Rowe International, Inc. (vending, jukebox, currency machines) (1) Revolver 12/31/96 900,000
7,375 Rowe International, Inc. (1) Term C 12/31/96 4,056,250
7,933 Spalding & Evenflo Companies, Inc. (sporting, juvenile products) Term B 10/17/02 7,932,584
10,978 Worldwide Sports & Recreation Corp. (optics, sports products) Term B 03/31/01 10,703,160
---------------
82,311,136
---------------
Diversified Services/Entertainment: 3.6%
7,160 AMF Group (bowling centers and equipment) Term A 05/01/04 7,231,981
2,825 AMF Group Term B 05/01/03 2,852,774
6,913 Bankers Systems, Inc. (compliance services to banking industry) Term B 11/01/02 6,912,500
13,080 Marvel IV Holdings, Inc. (diversified services and entertainment) Revolver 06/22/99 13,080,000
7,880 Staff Capital, L.P. (payroll and human resource services) Term 12/08/99 7,880,000
---------------
37,957,255
---------------
Electrical Equipment: 0.9%
9,905 Merkle-Korff Industries (custom industrial electric motors) Term B 03/15/03 9,905,232
---------------
Electronic Equipment: 5.7%
6,763 Details, Inc. (prototype circuit boards) Term 02/13/01 6,762,712
12,500 Dictaphone Acquisition, Inc. (dictation and recording equipment) Term 06/30/02 12,500,000
4,881 Elgar Electronics (electronic testing equipment) Term B 03/31/03 4,881,140
8,780 Intesys Technologies, Inc. (contract engineering and manufacturing) Term B 12/31/01 8,780,488
3,471 K-Tec Holdings (telephone and communications equipment) Term B 02/01/03 3,471,269
3,968 K-Tec Holdings Term C 02/01/04 3,967,647
5,360 Packard Bell Electronics, Inc. (personal computer manufacturer) Revolver 04/18/97 5,359,564
15,000 PSC Incorporated (scanning equipment) Term B 06/28/02 15,000,000
---------------
60,722,820
---------------
Food/Tobacco Products and Services: 4.8%
2,563 Bumble Bee Seafoods, Inc. (canned seafood) Term A 09/15/96 2,562,500
3,750 Bumble Bee Seafoods, Inc. Term B 09/15/96 3,750,000
4,478 Edward's Baking Co. (food service bakery) Term B 09/30/02 4,477,500
25,000 Favorite Brands International (confectionary manufacturer) Term B 08/01/04 25,000,000
2,500 Liggett Group Inc. (tobacco products) Revolver 09/15/97 2,500,000
2,162 Tom's Foods, Inc. (snack foods) (1) Term 12/31/98 864,905
7,385 Van De Kamp's (frozen foods) Term B 04/30/03 7,384,615
4,615 Van De Kamp's Term C 09/30/03 4,615,385
---------------
51,154,905
---------------
Food Stores: 7.0%
6,202 Dominick's Finer Foods, Inc. (Chicago area supermarkets) Term C 03/31/03 6,217,878
6,202 Dominick's Finer Foods, Inc. Term D 09/30/03 6,217,878
</TABLE>
10
<PAGE>
Pilgrim America Prime Rate Trust
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PORTFOLIO OF INVESTMENTS as of August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Loan Stated
(000's) Industry/Borrower Type Maturity Value
------- ----------------- ---- -------- -----
<S> <C> <C> <C> <C>
Food Stores (continued)
$ 1,000 @ New Almac's Inc. (Rhode Island supermarkets) (3) Sr. Note 11/18/01 $ 390,000
40 @ New Almac's Inc. (3) Sr. Note 11/18/04 15,722
6,723 Ralph's Grocery Co. (Southern California supermarkets) Term B 06/15/02 6,756,317
6,726 Ralph's Grocery Co. Term C 06/15/03 6,759,275
4,988 Ralph's Grocery Co. Term D 06/15/04 5,013,042
11,675 Smith's Food & Drug Co. (western states supermarkets) Term A 08/31/02 11,733,131
4,988 Smith's Food & Drug Co. Term B 08/31/02 5,012,438
4,988 Smith's Food & Drug Co. Term C 08/31/04 5,012,437
4,988 Smith's Food & Drug Co. Term D 08/31/04 5,012,437
16,333 Star Markets Co., Inc. (Boston area supermarkets) Term B 12/31/01 16,332,895
---------------
74,473,450
---------------
Furniture & Garden Products: 2.6%
2,472 Interco (furniture) Term B 03/29/03 2,472,429
460 Interco Term C 03/29/04 459,698
17,500 Lifestyle Furnishings International (furniture) Term B 06/20/04 17,500,000
6,957 Simmons Company (mattress manufacturer) Term B 03/31/03 6,956,774
---------------
27,388,901
---------------
General Merchandise Retailing: 8.6%
50,000 Kmart Corp. (general merchandise retailer) Term 12/19/99 50,000,000
19,700 Liberty House, Inc. (Hawaiian department store chain) Term B 06/30/02 19,700,000
6,919 Peebles, Inc. (department store chain) Term A 04/30/01 6,919,187
7,901 Peebles, Inc. Term B 04/30/02 7,900,750
3,504 Saks and Company (general merchandise retailer) Term A 06/30/00 3,504,428
1,413 Saks and Company Term B 06/30/98 1,413,481
2,183 Saks and Company Term B3 06/30/00 2,182,887
---------------
91,620,733
---------------
Health Care Services: 3.9%
7,260 Community Health Systems (hospitals) Term B 12/31/03 7,260,274
7,260 Community Health Systems Term C 12/31/04 7,260,274
5,479 Community Health Systems Term D 12/31/05 5,479,452
6,000 Covenant Care, Inc. (long-term healthcare facilities) Term 06/30/99 6,000,000
4,853 H.E.C. Investments, Inc. (health club operator) Term A 12/31/00 4,852,941
7,000 H.E.C. Investments, Inc. Term B 12/31/99 7,000,000
3,261 Mediq/PRN Life Support Inc. (hospital equipment leasing) Term 09/28/98 3,260,799
---------------
41,113,740
---------------
Health & Beauty Products: 2.6%
17,375 ICON Health & Fitness Co. (exercise equipment) Term B 11/14/01 17,375,000
10,000 Revlon Inc. (cosmetics manufacturer) Term 12/31/00 10,000,000
---------------
27,375,000
---------------
</TABLE>
11
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Loan Stated
(000's) Industry/Borrower Type Maturity Value
------- ----------------- ---- -------- -----
<S> <C> <C> <C> <C>
Industrial Chemicals: 2.3%
$ 9,250 Cedar Chemical Corp. (specialized chemicals) Term B 10/30/03 $ 9,250,000
10,000 Sterling Chemicals (industrial chemicals) Term B 09/30/04 10,000,000
5,000 Texas Petrochemicals (industrial chemicals) Term B 06/30/04 5,000,000
---------------
24,250,000
---------------
Industrial Equipment: 4.1%
2,836 Calmar (non-aerosol fluid dispensing systems) Term A 09/15/03 2,835,714
2,127 Calmar Term B 03/15/04 2,126,786
9,947 Graphic Controls Corp. (industrial and medical charts) Term B 09/28/03 9,947,195
5,063 Intermetro Industries Inc. (storage and material transport products) Term B 06/30/03 5,062,500
3,938 Intermetro Industries Inc. Term C 06/30/04 3,937,500
4,961 Jackson Products, Inc. (industrial safety equipment manufacturer) Term B 09/01/03 4,960,870
4,963 Jackson Products, Inc. Term C 09/01/02 4,962,500
9,929 Schrader, Inc. (fluid/air control valve manufacturer) Term B 11/30/02 9,928,572
---------------
43,761,637
---------------
Industrial Services: 2.2%
13,750 Clean Harbors (environmental services) Term 05/08/00 13,750,000
9,880 Primeco, Inc. (equipment rental) Term 12/31/00 9,880,000
---------------
23,630,000
---------------
Media/Broadcast: 8.3%
4,600 Benedek Broadcasting Corp. (broadcasting) Axel A (A) 12/05/02 4,600,000
4,500 Benedek Broadcasting Corp. Axel B (A) 12/05/02 4,500,000
7,250 Eller Media Company (outdoor advertising) Term 12/31/03 7,250,000
10,000 FrontierVision (cable television) Term B 06/30/05 10,000,000
10,000 Intermedia Partners IV (cable television) Term 01/01/05 10,000,000
4,866 Maryland Cable (cable television) Term A 12/31/02 4,866,495
7,788 Maryland Cable Term B 12/31/02 7,788,206
10,000 Metro-Goldwyn-Mayer, Inc. (film library) Term 04/15/97 10,000,000
5,844 Outdoor Systems, Inc. (outdoor advertising) Term B 12/31/02 5,843,750
5,844 Outdoor Systems, Inc. Term C 12/31/03 5,843,750
8,000 Panavision International, Inc. (motion picture cameras) Term B 03/31/04 8,000,000
9,900 Phoenix Associates, Inc. (cable television) Term B 12/31/99 9,900,000
---------------
88,592,201
---------------
Metal Products: 3.4%
9,925 GS Technologies (metal products fabricator) Term 09/30/02 9,925,000
9,444 Hayes Wheels International (automotive wheels) Term B 07/31/04 9,444,444
7,556 Hayes Wheels International Term C 07/31/04 7,555,556
800 National Refractories Inc. (kiln lining materials) Term B 09/30/99 800,000
5,000 National Refractories Inc. Term C 09/30/99 5,000,000
3,250 Triangle Wire and Cable Inc. (metal products fabricator) Revolver 03/28/97 3,250,000
---------------
35,975,000
---------------
</TABLE>
12
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Loan Stated
(000's) Industry/Borrower Type Maturity Value
------- ----------------- ---- -------- -----
<S> <C> <C> <C> <C>
Miscellaneous Companies: 1.3%
$ 4,255 Dade International (medical testing equipment manufacturer) Term B 12/31/04 $ 4,254,545
4,255 Dade International Term C 12/31/04 4,254,545
4,491 Dade International Term D 12/31/04 4,490,910
263 General Aquatics, Inc. (swimming pool manufacturer) Term 06/30/00 263,292
---------------
13,263,292
---------------
Paper Products: 3.7%
6,979 Mail-Well Corp. (envelopes and specialty printing) Term B 07/31/03 6,979,164
5,000 RIC Holdings, Inc. (packaging and paper products) Term A 02/28/03 5,000,000
17,857 RIC Holdings, Inc. Term B 02/27/04 17,857,143
7,143 RIC Holdings, Inc. Term C 08/31/04 7,142,857
2,827 Supremex, Inc. (Canadian envelope manufacturer) Term B 07/31/03 2,826,525
---------------
39,805,689
---------------
Publishing and Information Services: 1.6%
7,470 NBC Acquisition (wholesale and retail textbooks) Term 08/31/03 7,470,000
5,000 Softworld Services (software fulfillment services) Term A 06/30/00 5,000,000
5,000 Softworld Services Term B 06/30/01 5,000,000
---------------
17,470,000
---------------
Restaurants: 1.6%
12,761 America's Favorite Chicken Co. (food service franchisor) Term A 10/31/01 12,760,614
4,028 Long John Silvers Inc. (quick service seafood restaurant chain) Bridge 09/30/97 4,027,554
177 Long John Silvers Inc. Term-PIK 09/30/97 176,694
---------------
16,964,862
---------------
Specialty Retailing: 2.6%
340 American Blind & Wallpaper (home furnishings retailer) Term 10/31/96 340,409
4,844 Camelot Music, Inc. (music stores) (3) Term B 02/28/02 3,148,821
7,093 Color Tile, Inc. (home improvement retailer) (3) Term A 12/31/96 5,461,867
8,035 Color Tile, Inc. (3) Term C 12/31/98 6,186,861
1,244 Color Tile, Inc. (D.I.P.) (3) Revolver 12/31/98 1,243,577
2,484 M & H Drugs, Inc. (Midwestern retail drugstores) Term 12/31/96 2,422,080
8,825 Murray's Discount Auto Parts (auto parts retailer) Term 09/30/01 8,824,745
---------------
27,628,360
---------------
Textile & Leather Products: 1.4%
1,920 Blackstone Capital (carpet manufacturer) Term 01/13/97 1,920,000
580 Blackstone Capital Term 01/13/97 580,000
10,000 Glenoit Mills, Inc. (specialty and decorative fabrics) Term 03/31/00 10,000,000
2,500 Wasserstein (carpet manufacturer) Term 01/13/97 2,500,000
---------------
15,000,000
---------------
Transportation: 1.9%
5,000 Cruise Ship L.L.C. (cruise ship operator) Term 07/01/01 5,000,000
7,339 Sky Chef's International, Inc. (airline food service) Term B 09/15/01 7,347,830
</TABLE>
13
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Loan Stated
(000's) Industry/Borrower Type Maturity Value
------- ----------------- ---- -------- -----
<S> <C> <C> <C> <C>
Transportation (continued)
$1,616 Sky Chef's International, Inc. Term C 09/15/03 $ 1,619,971
5,886 Sky Chef's International, Inc. Term B 09/15/01 5,910,361
---------------
19,878,162
---------------
Total Senior Loan Interests - 98.6% 1,049,886,435
(Cost $1,059,970,525) ---------------
</TABLE>
OTHER CORPORATE DEBT
<TABLE>
<S> <C> <C> <C> <C>
Diversified Manufacturing: 0.6%
6,000 Capital Tool & Design (brake backing plates) Sub. Note 07/26/03 6,000,000
---------------
Food Stores: 0.0%
1,111 @ New Almac's Inc. (formerly Almac's, Rhode Island
supermarkets) (3) Sub. Note 12/01/04 --
---------------
Total Other Corporate Debt - 0.6% 6,000,000
(Cost $6,848,197) ---------------
</TABLE>
COMMON STOCK AND PREFERRED STOCK
<TABLE>
<CAPTION>
Shares
------
<S> <C> <C>
Diversified Manufacturing: 0.0%
2,633 @ KDI Corp.--common (defense and leisure products) (2) --
---------------
Miscellaneous Companies: 0.0%
26,121 @ General Aquatics, Inc.--common (swimming pool manufacturer) (R) 156,700
---------------
Restaurants: 0.4%
413,980 @ America's Favorite Chicken Co.--common (quick service restaurant chain) (R) 1,373,141
24,848 America's Favorite Chicken Co.--preferred (quick service restaurant chain) (R) 2,484,800
17,664 @ Flagstar, Inc.---common (family restaurants, institutional food service companies) 46,368
---------------
3,904,309
---------------
Textiles: 0.2%
12,764 @ Dan River (Braelan) Corp.--common (diversified textiles) (R) 2,288,045
Total Common Stock and Preferred Stock - 0.6% ---------------
(Cost $4,462,495) 6,349,054
---------------
</TABLE>
STOCK PURCHASE WARRANTS AND OTHER SECURITIES
<TABLE>
<S> <C>
1 @ Autotote Systems, Inc., Warrant representing 48,930 common shares (designer and
manufacturer of wagering equipment), Expires 10/30/03 (R) 57,494
80,634 @ Capital Tool & Design, Warrants representing 80,634 common shares (brake
backing plates) (R) 143,530
19,000 @ Covenant Care, Inc., Warrants representing 19,000 common shares (long-term
healthcare facilities) (R) 285,000
</TABLE>
14
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value
------ -----
<S> <C> <C>
1 @ Cruise Ship, L.L.C., Warrant representing 4,105 voting shares (cruise ship operator) (R) $ 129,446
1 @ Cruise Ship, L.L.C., Warrant representing 4,666 non-voting shares (R) 147,136
26,606 @ KDI Corp. Units of Trust (defense and leisure products) (R)(2) --
1 @ Staff Capital, L.P., Warrant to purchase 0.5% of the Common Limited Partnership
Units (payroll and human resource services), Expires 11/05/03 (R) 614,789
1 @ Staff Capital, L.P., Warrant to purchase 0.5% of the Preferred Limited Partnership
Units, Expires 11/05/03 (R) 61,000
45,000 @ Victory Holding Corp., Warrants representing 45,000 common shares (Rhode Island
supermarkets), Expires 12/01/01 (R)(3) --
Total Stock Purchase Warrants and Other Securities - 0.1% ---------------
(Cost $60,987) 1,438,395
---------------
SHORT-TERM INVESTMENTS
Principal
Amount
(000's)
Commercial Paper: 0.1%
$800 GE Capital Corp., 5.10% Due 09/03/96 799,773
Total Short-Term Investments - 0.1% ---------------
(Cost $799,773) 799,773
---------------
Total Investments - 100.0% $ 1,064,473,657
(Cost $1,072,141,977) ===============
</TABLE>
- -------------------
@ Non-income producing security
(/\) Axel describes an amortizing extended term loan with limited call
protection.
(R) Restricted security
\/ Senior loan interests, while exempt from registration under the Securities
Act of 1933, contain certain restrictions on resale and cannot be sold
publicly. These senior loan interests bear interest (unless otherwise
noted) at rates that float periodically at a margin above the Prime Rate of
a U.S. bank specified in the credit agreement, LIBOR, the certificate of
deposit rate, or in some cases another base lending rate.
(1) The borrower is restructuring and interest is being recognized as cash
payments are received.
(2) The borrower filed for protection under Chapter 7 of the U.S. Federal
bankruptcy code and is in the process of developing a plan of liquidation.
(3) The borrower filed for protection under Chapter 11 of the U.S. Federal
bankruptcy code and is in the process of developing a plan of
reorganization.
(4) For Federal income tax purposes, which is the same for financial reporting
purposes, cost of investments is $1,072,141,977 and net unrealized
depreciation consists of the following:
<TABLE>
<S> <C>
Gross Unrealized Appreciation $4,990,929
Gross Unrealized Depreciation (12,659,249)
-------------
Net Unrealized Depreciation ($7,668,320)
=============
</TABLE>
See Accompanying Notes to Financial Statements
15
<PAGE>
Pilgrim America Prime Rate Trust
- ------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES as of August 31, 1996 (Unaudited)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments in securities at value (Cost $1,072,141,977) $1,064,473,657
Dividends and interest receivable 8,591,980
Prepaid facility fees 422,017
Prepaid expenses 120,650
---------------
Total assets 1,073,608,304
---------------
LIABILITIES:
Notes payable 197,000,000
Deferred facility fees 5,776,486
Accrued interest payable 1,190,194
Accrued management fees 699,275
Overdraft payable to custodian 892,452
Accrued administration fees 121,954
Accrued expenses 622,353
---------------
Total liabilities 206,302,714
---------------
NET ASSETS (equivalent to $9.60 per share, based on 90,355,152 shares
outstanding, unlimited number of shares of beneficial interest authorized,
no par value) $ 867,305,590
==============
Net Assets Consist of:
Paid-in capital $ 871,819,408
Undistributed net investment income 9,481,619
Accumulated net realized loss on investments (6,327,117)
Net unrealized depreciation of investments (7,668,320)
--------------
Net assets $ 867,305,590
==============
</TABLE>
See Accompanying Notes to Financial Statements
16
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS for the Six Months Ended August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $ 39,168,095
Facility fees earned 3,295,607
Other 921,866
Dividends 36,443
-------------
Total investment income 43,422,011
-------------
EXPENSES:
Investment management fees 3,713,854
Interest expense 1,194,898
Administration fees 656,673
Transfer agent and registrar fees 391,336
Miscellaneous expense 320,076
Recordkeeping and pricing fees 173,927
Security loan fees 147,751
Professional fees 92,592
Reports to shareholders 86,964
Custodian fees 61,095
Trustees' fees 43,482
Insurance expense 18,703
-------------
Total expenses 6,901,351
-------------
Less: Earnings credits (17,613)
Net expenses 6,883,738
-------------
Net investment income 36,538,273
-------------
REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENTS:
Net realized gain on investments 1,583,402
Change in unrealized depreciation of investments (2,954,878)
-------------
Net loss on investments (1,371,476)
-------------
Net increase in net assets resulting from operations $ 35,166,797
=============
</TABLE>
See Accompanying Notes to Financial Statements
17
<PAGE>
Pilgrim America Prime Rate Trust
<TABLE>
- -----------------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- -----------------------------------------------------------------------------------------------------------------
Six Months Ended
August 31, Year Ended
1996 February 29,
(Unaudited) 1996
---------------- --------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income $ 36,538,273 $ 79,824,660
Net realized gain (loss) on investments 1,583,402 (3,827,587)
Change in unrealized depreciation of investments (2,954,878) (3,260,231)
---------------- --------------
Net increase in net assets resulting from operations 35,166,797 72,736,842
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income (36,167,238) (76,983,896)
CAPITAL SHARE TRANSACTIONS:
Issuance from dividend reinvestment 5,368,440 --
Net increase in net assets derived from the sale of shares in
connection with rights offering -- 101,482
---------------- --------------
Total increase (decrease) in net assets 4,367,999 (4,145,572)
NET ASSETS:
Beginning of period 862,937,591 867,083,163
---------------- --------------
End of period (including undistributed net investment
income of $9,481,619 and $9,110,584, respectively) $ 867,305,590 $ 862,937,591
=============== =============
</TABLE>
See accompanying Notes to Financial Statements.
18
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS for the Six Months Ended August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH
<S> <C>
Cash Flows From Operating Activities:
Interest received $40,884,855
Dividends received 36,443
Facility fees received 3,991,253
Commitment fees received 64,724
Other income received 947,998
Operating expenses paid (6,077,871)
Net proceeds of short-term investments 37,577,689
Purchases of portfolio securities (618,873,393)
Proceeds from disposition of portfolio securities 368,869,194
-------------
Net cash used for operating activities (172,579,108)
-------------
Cash Flows From Financing Activities:
Dividends paid (30,798,798)
Loan advance 197,000,000
-------------
Net cash provided by financing activities 166,201,202
-------------
Net increase in cash (6,377,906)
Cash at beginning of period 5,485,454
-------------
Cash at end of period $ (892,452)
=============
Reconciliation Of Net Increase In Net Assets Resulting From
Operations To Net Cash Provided By Operating Activities:
Net increase in net assets resulting from operations 35,166,797
-------------
Adjustments to reconcile net increase in net assets resulting
from operations to net cash provided by operating activities:
Increase in investments in securities (209,522,259)
Decrease in dividends and interest receivable 343,861
Increase in prepaid facility fees (422,017)
Increase in prepaid expenses (29,115)
Increase in deferred facility fees 695,646
Increase in accrued interest payable 1,190,194
Decrease in accrued expenses (2,215)
-------------
Total adjustments (207,745,905)
-------------
Net cash used for operating activities $(172,579,108)
=============
</TABLE>
See Accompanying Notes to Financial Statements
19
<PAGE>
Pilgrim America Prime Rate Trust
- -------------------------------------------------------------------
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended
August 31, Year Ended Years Ended February 28,
1996 February 29, ------------------------
(Unaudited) 1996(6) 1995 1994
----------- ------------ -------- --------
<S> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $9.61 $9.66 $10.02 $10.05
--------- --------- ---------- ----------
Net investment income 0.40 0.89 0.74 0.60
Net realized and unrealized gain (loss)
on investments (0.01) (0.08) 0.07 (0.05)
--------- --------- ---------- ----------
Increase in net asset value from investment
operations 0.39 0.81 0.81 0.55
--------- --------- ---------- ----------
Distributions from net investment income (0.40) (0.86) (0.73) (0.60)
--------- --------- ---------- ----------
Reduction in net asset value from rights
offering --- --- (0.44) ---
Increase in net asset value from repurchase
of capital stock --- --- --- 0.02
--------- --------- ---------- ----------
Net asset value, end of period $9.60 $9.61 $9.66 $10.02
========= ========= ========== ==========
Closing market price at end of period $9.88 $9.50 $8.75 $9.25
Total Return
Total investment return at closing
market price (3) 8.40% 19.19% 3.27%(5) 8.06%
Total investment return at closing
net asset value (4) 4.18% 9.21% 5.24%(5) 6.28%
Ratios/Supplemental Data
Net assets, end of period (000's) $867,306 $862,938 $867,083 $719,979
Ratios to average net assets:
Expenses 1.58%(1) 1.23% 1.30% 1.31%
Net investment income 8.41%(1) 9.23% 7.59% 6.04%
Portfolio turnover rate 42% 88% 108% 87%
Shares outstanding at end of period (000's) 90,355 89,794 89,794 71,835
Average daily bank loans outstanding
during the period (000's) $40,054 $ --- $2,811 $ ---
Average monthly shares outstanding
during the period (000's) 90,010 89,794 74,598
Average daily bank loans per share
during the period $0.45 $ --- $0.04 $ ---
</TABLE>
- --------------------------
* Commencement of operations.
(1) Annualized.
(2) Prior to the waiver of expenses, the ratio of expenses to average net
assets was 1.95%(1), 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 ratio of net investment income
to average net assets was 8.91%(1), 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 New York Stock Exchange. 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 periods prior to the year ended February 28, 1993, are not
presented since market values for the Trust's shares were not available.
Total returns for less than one year are not annualized.
20
<PAGE>
Pilgrim America Prime Rate Trust
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS For a Share Outstanding Throughout Each Period (Continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Years Ended February 28, May 12, 1988*
February 28, February 29, --------------------------- to February 28,
1993 1992 1991 1990 1989
------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 9.96 $ 9.97 $ 10.00 $ 10.00 $ 10.00
------------ ------------ ----------- ----------- -----------
Net investment income 0.60 0.76 0.98 1.06 0.72
Net realized and unrealized gain (loss)
on investments 0.01 (0.02) (0.05) --- ---
------------ ------------ ----------- ----------- -----------
Increase in net asset value from investment
operations 0.61 0.74 0.93 1.06 0.72
------------ ------------ ----------- ----------- -----------
Distributions from net investment income (0.57) (0.75) (0.96) (1.06) (0.72)
------------ ------------ ----------- ----------- -----------
Reduction in net asset value from rights
offering --- --- --- --- ---
Increase in net asset value from repurchase
of capital stock 0.05 --- --- --- ---
------------ ------------ ----------- ----------- -----------
Net asset value, end of period $ 10.05 $ 9.96 $ 9.97 $ 10.00 $ 10.00
============ ============ =========== =========== ===========
Closing market price at end of period $ 9.13 --- --- --- ---
Total Return
Total investment return at closing
market price (3) 10.89% --- --- --- ---
Total investment return at closing
net asset value (4) 7.29% 7.71% 9.74% 11.13% 7.35%
Ratios/Supplemental Data
Net assets, end of period (000's) $ 738,810 $ 874,104 $1,158,224 $1,036,470 $ 252,998
Ratios to average net assets:
Expenses 1.42% 1.42%(2) 1.38% 1.46%(2) 1.18%(1)(2)
Net investment income 5.88% 7.62%(2) 9.71% 10.32%(2) 9.68%(1)(2)
Portfolio turnover rate 81% 53% 55% 100% 49%(1)
Shares outstanding at end of period (000's) 73,544 87,782 116,022 103,660 25,294
Average daily bank loans outstanding
during the period (000's) $ 636 $ 8,011 $ 2,241 $ --- $ ---
Average monthly shares outstanding
during the period (000's) 79,394 102,267 114,350 --- ---
Average daily bank loans per share
during the period $ 0.01 $ 0.08 $ 0.02 $ --- $ ---
</TABLE>
(4) Total investment return at net asset value has been calculated assuming a
purchase at net asset value at the beginning of each period and a sale at
net asset value 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 effects of the per share dilution
resulting from the rights offering as the total account value of a fully
subscribed shareholder was minimally impacted.
(6) Pilgrim America Investments, Inc., the Trust's investment manager, acquired
assets of Pilgrim Management Corporation, the Trust's former investment
manager, in a transaction that closed on April 7, 1995.
See Accompanying Notes to Financial Statements
21
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS as of August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES
Pilgrim America Prime Rate Trust (the "Trust", formerly Pilgrim Prime Rate
Trust) is registered under the Investment Company Act of 1940, as amended, as a
diversified, closed-end, management investment company. The Trust invests in
senior loan interests which are exempt from registration under the Securities
Act of 1933 but contain certain restrictions on resale and cannot be sold
publicly. These loans bear interest (unless otherwise noted) at rates that float
periodically at a margin above the Prime Rate of a U.S. bank specified in the
credit agreement, the London Inter-Bank Offered Rate ("LIBOR"), the certificate
of deposit rate, or in some cases another base lending rate. The following is a
summary of the significant accounting policies consistently followed by the
Trust in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles.
A. Security Valuation. Senior loan interests are valued at fair value in the
absence of readily ascertainable market values. Fair value is determined by
Pilgrim America Investments, Inc. (the "Manager") under procedures
established and monitored by the Trust's Board of Trustees. In valuing a
loan, the Manager will consider, among other factors: (i) the
creditworthiness of the corporate issuer and any interpositioned bank; (ii)
the current interest rate, period until next interest rate reset and
maturity date of the senior corporate 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. The Manager 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
loan interests has not yet fully developed, the Manager will not 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 loan
interests 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.
B. Federal Income Taxes. It is the Trust's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no federal income tax provision is required. Due to
the timing of dividend distributions and the differences in accounting for
income and realized gains (losses) for financial statement and federal
income tax purposes, the fiscal year in which amounts are distributed may
differ from the year in which the income and realized gains (losses) were
recorded by the Trust. The differences between the income or gains
distributed on a book versus
22
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS as of August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
tax basis, if any, are shown as excess distributions of net investment
income and net realized gain on sales of investments in the accompanying
Statements of Changes in Net Assets.
C. Security Transactions and Revenue Recognition. Security transactions are
accounted for on trade date. Realized gains or losses are reported on the
basis of identified cost of securities delivered. Interest income is
recorded on an accrual basis at the then current loan rate, and dividend
income is recorded on the ex-dividend date. Facility fees, which represent
non-refundable fees associated with the acquisition of loans, are deferred
and recognized ratably over the shorter of 2.5 years or the actual term of
the loan.
D. Distributions to Shareholders. The Trust records distributions to its
shareholders on the ex-date. The amount of distributions from net investment
income and net realized capital gains are determined in accordance with
federal income tax regulations, which may differ from generally accepted
accounting principles. These "book/tax" differences are either considered
temporary or permanent in nature. Key differences are the treatment of
short-term capital gains and other timing differences. To the extent that
these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassifications. Distributions which
exceed net investment income and net realized capital gains for financial
reporting purposes but not for tax purposes are reported as distributions in
excess of net investment income and/or realized capital gains. To the extent
they exceed net investment income and net realized capital gains for tax
purposes, they are reported as a tax return of capital.
E. Dividend Reinvestments. Pursuant to the Automatic Dividend Reinvestment
Plan, Investors Fiduciary Trust Co., the Plan Agent, may purchase, from time
to time, shares of beneficial interest of the Trust on the open market to
satisfy dividend reinvestments. Such shares will be purchased only when the
closing sale of bid price plus commission is less than the net asset value
per share of the stock. If the market price plus commissions is equal to or
exceeds the net asset value, new shares valued at the net asset value most
recently calculated will be issued.
F. Use of Estimates. Management of the Trust has made certain estimates and
assumptions relating to the reporting of assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. Actual results could differ from these estimates.
NOTE 2-INVESTMENTS
For the six-months ended August 31, 1996, the cost of purchases and the proceeds
from principal repayment and sales of investments, excluding short-term notes,
totaled $618,873,393 and $368,869,194, respectively. At August 31, 1996, the
Trust held senior loans valued at $1,049,886,435 representing 98.6% of its total
investments. The Trust had $197.0 million outstanding under its revolving credit
facility on August 31, 1996. The market value of these securities can only be
established by negotiation between parties in a sales transaction. Due to the
uncertainty inherent in the valuation process, the fair
23
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS as of August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
values as determined may materially differ from the market values that would
have been used had a ready market for these securities existed.
The senior loan interests acquired by the Trust may take the form of a direct
co-lending relationship with the corporate issuer, an assignment of a
co-lender's interest in a loan, or a participation interest in a co-lender's
interest in a loan. The lead lender in a typical corporate loan syndicate
administers the loan and monitors collateral. In the event that the lead lender
becomes insolvent, enters FDIC receivership or, if not FDIC insured, enters into
bankruptcy, the Trust may incur certain costs and delays in realizing payment,
or may suffer a loss of principal and/or interest. Additionally, certain
situations may arise where the Trust acquires a participation in a co-lender's
interest in a loan and the Trust does not have privity with or direct recourse
against the corporate issuer. Accordingly, the Trust may incur additional credit
risk as a participant because it must assume the risk of insolvency or
bankruptcy of the co-lender from which the participation was acquired. Common
and preferred stocks, and stock purchase warrants held in the portfolio were
acquired in conjunction with senior loan interests held by the Trust. Certain of
these stocks and warrants are restricted and may not be publicly sold without
registration under the '33 Act, or without an exemption under the '33 Act. In
some cases, these restrictions expire after a designated period of time after
issuance of the stock or warrant. These restricted securities are valued at fair
value as determined by the Board of Trustees by considering quality, dividend
rate, and marketability of the securities compared to similar issues. In order
to assist in the determination of fair value, the Trust will obtain quotes from
dealers who periodically trade in such securities where such quotes are
available. Dates of acquisition and cost or assigned basis of restricted
securities are as follows:
<TABLE>
<CAPTION>
Dates of Cost or
Acquisition Assigned Basis
----------- ----------------
<S> <C> <C>
America's Favorite Chicken Co.-Common 11/05/92 $ 1
America's Favorite Chicken Co.-Preferred 11/05/92 2,484,761
Autotote Systems, Inc.-Warrant 11/11/92 -
Capital Tool & Design-Warrant 07/26/96 -
Covenant Care, Inc.-Warrants 12/22/95 -
Cruise Ship, LLC-Warrant, Voting Share 09/13/95 -
Cruise Ship, LLC-Warrant, Non-Voting Share 09/13/95 -
Dan River (Braelen) Corp.-Common 09/15/91 1,529,753
General Acquatics, Inc.-Common 09/19/95 193,619
KDI Corp. Units of Trust 09/19/95 -
Staff Capital, L.P., Common Warrant 09/01/95 100
Staff Capital, L.P., Preferred Warrant 09/01/95 61,000
Victory Holding Corp.-Warrants 11/18/94 -
----------
Total restricted securities excluding senior loans
(market value of $5,453,036 was 0.63% of net assets
at August 31, 1996) $4,269,234
==========
</TABLE>
24
<PAGE>
Pilgrim America Prime Rate Trust
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NOTES TO FINANCIAL STATEMENTS as of August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
At February 29, 1996, the Trust had a capital loss carryforward for federal
income tax purposes of approximately $7,557,291 which is scheduled to expire
through February 28, 2004.
NOTE 3-MANAGEMENT AND ADMINISTRATIVE SERVICES AGREEMENT
The Trust has entered into an Investment Management Agreement with Pilgrim
America Investments, Inc. (the "Manager") a wholly-owned subsidiary of Pilgrim
America Group, Inc. ("PAG"), to provide advisory and management services. The
Investment Management Agreement compensates the Manager with a fee, computed
daily and payable monthly, at an annual rate of 0.85% of the Trust's average
daily net assets plus borrowings up to $700 million; 0.75% of the average daily
net assets plus borrowings of $700 to $800 million; and 0.65% of the average
daily net assets plus borrowings in excess of $800 million. At August 31, 1996,
the Trust owed the Manager $699,275 in investment management fees.
The Manager has agreed to reduce its fee for a period of three years from the
Expiration Date of the Rights Offering (See Note 7) to 0.60% of the average
daily net assets, plus the proceeds of any outstanding borrowings, over $1.15
billion.
The Trust has also entered into an Administration Agreement with PAG to provide
administrative services and also to furnish facilities. The Administration
Agreement compensates the Administrator with a fee, computed daily and payable
monthly, at an annual rate of 0.15% of the Trust's average daily net assets plus
borrowings up to $800 million; and 0.10% of the average daily net assets plus
borrowings in excess of $800 million. At August 31, 1996, the Trust owed the
Manager $121,954 in administration fees.
NOTE 4-COMMITMENTS
The Trust has entered into a four year revolving credit agreement to borrow up
to $285 million from a syndicate of major banks. The borrowing rate under this
loan agreement is 0.50% over LIBOR, or if lower, the federal funds rate. The
Trust will also pay a 0.125% fee for any unborrowed amount. The amount of
borrowings outstanding at August 31, 1996, was $197 million.
As of August 31, 1996, the Trust had unfunded loan commitments pursuant to the
terms of the following loan participation agreements:
<TABLE>
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Atlas Air $10,472,078 Packard Bell
Color Tile, Inc. 659,857 Electronics, Inc. $ 9,640,436
Edward's Baking Co. 1,011,250 Presley Companies 2,000,000
Grimes Aerospace Corp. 1,442,947 Rowe International, Inc. 100,000
Liggett Group, Inc. 1,500,000 Smith's Food & Drug Co. 6,825,193
Marvel IV Holdings 16,920,000 Titanium Metals, Inc. 5,000,000
Triangle Wire and
Cable, Inc. 2,903,846
-----------
$58,475,607
===========
</TABLE>
25
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS as of August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
At a meeting of the Board of Trustees held on July 16, 1992, the Trustees
authorized the Trust to institute a $75,000,000 Repurchase Program, whereby the
Trust would repurchase shares of its outstanding stock on the New York Stock
Exchange. At their April 21, 1993 meeting, the Board of Trustees authorized an
additional $25,000,000 Repurchase Program. As of August 31, 1996, the Trust had
repurchased 8,392,000 shares of its common stock at a total cost of $78,788,625
pursuant to the Repurchase Programs. The weighted average discount per share
between the cost of the repurchases and the net asset value applicable to such
shares at the date of repurchase was 5.8%.
NOTE 5-RIGHTS OFFERING
On December 27, 1994, the Trust issued to its shareholders transferable rights
which entitled the holders to subscribe for 17,958,766 shares of the Trust's
common stock at the rate of one share of common stock for each four rights held.
On January 27, 1995, the offering expired and was fully subscribed. The Trust
issued 17,958,766 shares of its common stock to exercising rights holders at a
subscription price of $8.12. Offering costs of $4,470,955 were charged against
the offering proceeds.
NOTE 6-CUSTODIAL AGREEMENT
Investors Fiduciary Trust Company ("IFTC") serves as the Trust's custodian and
recordkeeper. Custody fees paid to IFTC are reduced by earnings credits based on
the cash balances held by IFTC for the Trust. For the six months ended August
31, 1996, the Trust received earnings credits of $17,613.
NOTE 7-SUBSEQUENT EVENT
On September 16, 1996, the Trust's Board of Trustees approved the filing of a
Form N-2 registration statement (the "Registration Statement") with the
Securities and Exchange Commission (the "SEC") regarding the proposed offering
of additional shares of beneficial interest of the Trust pursuant to a non-
transferable rights offering. The Registration Statement contemplates that the
Trust will issue to shareholders one non-transferable right for each full share
of the Trust's Common Shares owned. Shareholders would be entitled to acquire
one common share for every five rights exercised at a price equal to 97.5% of
the lower of (i) the average of the last reported sales price of a share of the
Trust's Common Shares on the New York Stock Exchange on the pricing date and the
four preceding business days or (ii) the net asset value of a share of the
Trust's Common Shares on the pricing date. The Trust will not issue any rights
until the Registration Statement becomes effective by the SEC.
Management's Additional Operating Information
---------------------------------------------
APPROVAL OF CHANGES IN INVESTMENT POLICIES
At the Annual Meeting of Trust Shareholders, held August 30, 1994, shareholders
approved changes in the Trust's fundamental investment policies which make
available certain additional investment
26
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS as of August 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
opportunities to the Trust, including the purchase (i) of U.S. dollar
denominated senior corporate loans made to companies headquartered in Canada or
U.S. Territories or Possessions; (ii) subject to certain limitations, loans in
excess of 10% of an issue of senior bank debt of a corporate borrower; and (iii)
with up to 5% of the Trust's assets, loans in tranches of senior collateralized
corporate loans that are subordinated in some manner as to the payment of
interest and/or principal. At a special meeting held May 2, 1996, Trust
Shareholders approved an amendment to the Trust's fundamental investment
policies to expand its ability to engage in borrowing transactions up to 33.33%
of net assets including borrowings, primarily to acquire additional income
producing investments.
The Trust's Manager believes that these changes in the Trust's investment
policies will increase the number of loan offerings which the Trust may consider
acquiring. Furthermore, the Manager also believes that these changes are fully
consistent with the Trust's overall investment philosophy of purchasing senior
collateralized corporate loans.
REPURCHASE OF SECURITIES BY CLOSED-END COMPANIES
In accordance with Section 23(c) of the Investment Company Act of 1940, and Rule
23c-1 under the Investment Company Act of 1940, the Trust may from time to time
purchase shares of beneficial interest of the Trust in the open market, in
privately negotiated transactions and/or purchase shares to correct erroneous
transactions.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
The Trust offers a Dividend Reinvestment and Cash Purchase Plan (the "Plan")
which enables investors to conveniently add to their holdings at reduced costs.
Should you desire further information concerning this Plan, please contact the
Shareholder Servicing Agent at (800) 331-1080.
27
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
Fund Advisors and Agents
- --------------------------------------------------------------------------------
Investment Manager Institutional Investors and Analysts
Pilgrim America Investments, Inc. Call Pilgrim America Prime Rate Trust
Two Renaissance Square 1-800-336-3436, Extension 8256
40 North Central Avenue
Suite 1200
Phoenix, AZ85004-4424
Shareholder Servicing Agent Transfer Agent
Pilgrim America Group, Inc. Investors Fiduciary Trust Company
Two Renaissance Square c/o DST Systems, Inc.
40 North Central Avenue P.O. Box 419368
Suite 1200 Kansas City, Missouri 64141
Phoenix, AZ85004-4424
1-800-331-1080
WRITTEN REQUESTS
Please mail all account inquiries and other comments to:
Pilgrim America Prime Rate Trust Account Services
c/o Pilgrim America Group, Inc.
Two Renaissance Square
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004-4424
Toll-Free Shareholder Information
Call us from 9:00 a.m. to 7:00 p.m. Eastern time on any business day for account
or other information, at 1-800-331-1080.
28
<PAGE>
Pilgrim America Funds
MASTER SERIES
-------------
Pilgrim America Masters
Asia-Pacific Equity Fund
Pilgrim America Masters
MidCap Value Fund
Pilgrim America Masters
LargeCap Value Fund
ELITE SERIES
------------
Pilgrim America
MagnaCap Fund
Pilgrim America
High Yield Fund
Pilgrim Government
Securities Income Fund
Pilgrim America
Funds
"Our goal is for every investor to have a successful investment experience."
Prospectuses containing more complete information regarding the funds, including
charges and expenses, may be obtained by calling Pilgrim America Securities,
Inc. Distributor at 1-800-334-3444. Please read the prospectuses carefully
before you invest or send money.
13-SS-090596 102396
