<PAGE>
Pilgrim America Prime Rate Trust
[GRAPHIC]
Annual Report
February 28, 1997
Pilgrim America Prime Rate Trust
<PAGE>
Pilgrim America Prime Rate Trust
ANNUAL REPORT
February 28, 1997
------------
Table of Contents
Letter to Shareholders............... 2
Shareholder Letter Footnotes......... 12
Statistics and Performance........... 13
Performance Footnotes................ 15
Additional Notes and Information..... 16
Portfolio of Investments............. 18
Statement of Assets and Liabilities.. 26
Statement of Operations.............. 27
Statement of Changes in Net Assets... 28
Statement of Cash Flows.............. 29
Financial Highlights................. 30
Notes to Financial Statements........ 32
Report of Independent Auditors....... 38
Tax Information...................... 39
Fund Advisors and Agents............. 40
-----------
1
<PAGE>
Pilgrim America Prime Rate Trust
LETTER TO SHAREHOLDERS
Dear Fellow Shareholders:
We are pleased to report on another year in which total distributions to
shareholders combined with the Trust's overall performance have continued to
rank our Trust first in the Loan Participation Fund category established by
Lipper Analytical Services among seven, five and five funds for the one, three
and five-year periods ended February 28, 1997, respectively(1). During the year,
distributions to shareholders totaled $0.82 which based on average month-end net
asset value was equivalent to 8.56% (Chart One). Based on the average of the
common stock's NYSE closing prices, the equivalent yield was 8.42% per annum.
During this period, the average Prime Rate was 8.25% and the average 60-day
LIBOR was 5.49%.
FISCAL 1997 PERFORMANCE
[GRAPH]
The Trust's investment objective is to obtain as high a level of current income
as is consistent with the preservation of capital. Excluding the $0.14 effect to
net asset value ("NAV") as a result of the November 1996 rights offering, the
Trust's month-end NAV ranged from $9.58 to $9.61 during the last fiscal year.
2
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Pilgrim America Prime Rate Trust
LETTER TO SHAREHOLDERS
SIGNIFICANT EVENTS
The past fiscal year witnessed several important events in the evolution of the
Trust.
BORROWING FOR INVESTMENT PURPOSES
At the Annual Meeting of Shareholders held in May 1996, shareholders approved
the use of leverage in the Trust. The Trust is able to borrow up to 33-1/3 % of
total assets (including the amount borrowed) less all liabilities other than
borrowings. Management will borrow only when it can find profitable and
appropriate investments and, currently, only to the extent of 25% of total net
assets plus borrowings (Chart Two).
BORROWING FOR INVESTMENT
[BAR CHART]
3
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Pilgrim America Prime Rate Trust
LETTER TO SHAREHOLDERS
MARKET PRICE PERFORMANCE
[GRAPH]
Market Price Performance
Chart Three shows (1) the closing price of the Trust's shares on the NYSE, (2)
the NAV of the shares, and (3) the discount or premium to NAV. Since May 1996
(other than during the rights offering period), the shares have traded at prices
generally above NAV.
This market price premium may have several causes:
. The senior loan asset class has received growing support from an increasing
number of retail and institutional investors.
. When shareholders authorized the Trust to borrow for investment purposes,
the expectation of an incremental increase in yield seemed to fuel some
demand for our stock. While there has been some increase in dividends, we
believe that the decision to use leverage also drew attention to the Trust's
existing unleveraged yield.
4
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Pilgrim America Prime Rate Trust
LETTER TO SHAREHOLDERS
. Some analysts have begun to monitor the Trust's yield relative to other
members of its peer group, and other short term, stable value investment
strategies. This has also drawn attention to the relatively high yield
available from the Trust and led investors to consider purchases at premiums
to NAV.
RIGHTS ISSUE
On September 16, 1996, the Trust announced that it would conduct a rights
offering which would allow shareholders to acquire at a discount an additional
share for every five rights held. The offering began on October 18, 1996 and
closed on November 12, 1996 with 18,122,963 new shares issued at $9.09 per
share.
Chart Three demonstrates that the Trust's stock price recovered close to pre-
offering levels within a few weeks of the closing. This is unusual and
illustrates the broad support which existed for the Trust's stock during and
after the offering.
Several shareholder friendly factors contributed to relatively low stock price
volatility, very low NAV dilution and no dividend dilution.
The factors included:
. lower than normal pricing discount (97-1/2 % of the lower of NAV or market
price rather than the normal 95% or 90%)
. a relatively low ratio of rights to existing shares held (5 to 1 instead
of 4 or 3 to 1)
. immediate investment of rights proceeds by temporarily reducing leverage
. carefully managed issue expenses
. three year reduction of part of the investment management fee
. non-transferable rights attractive to serious, long term shareholders
The offering was conducted, in part, because a larger Trust can compete more
effectively with other lenders for assets. Some analysts have observed that the
benefits of size may well lead to further rights offerings by the Trust. If
conditions warrant another rights offering, the Trust will again attempt to
minimize the adverse consequences commonly associated with closed-end fund
rights offerings.
5
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Pilgrim America Prime Rate Trust
LETTER TO SHAREHOLDERS
BENCHMARK YIELDS
Pricing and the structure of assets in our market place and in certain sectors
have undergone changes during the year which are highlighted below.
Chart Four shows the trailing average of distribution rates of the Trust as
compared with similar funds in the Loan Participation Fund category as
calculated by Lipper Analytical Services, the Prime Rate and the London Inter-
Bank Offered Rate (LIBOR).
COMPARATIVE PERFORMANCE
Trailing 12 Month Average
[GRAPH]
The Trust's distribution rate has continued to closely track the Prime Rate
while the composite return of the Lipper Loan Participation Fund category (which
excludes the Trust) has not. There are three main reasons for this relative
decline in performance by the peer group.
. First, during the past 12 months, yields from senior loans have been falling
for the Trust and all members of the peer group and this has caused the
distribution rate to decline. This decline has been partially offset by the
Trust through the beneficial effect of leverage.
6
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Pilgrim America Prime Rate Trust
LETTER TO SHAREHOLDERS
. Second, the Trust is able, through its closed-end structure, to invest in
smaller and less liquid senior loans. Larger senior loans tend to carry
lower returns. Other members of the peer group offer periodic opportunities
to redeem at NAV. A greater proportion of assets must be liquid to allow for
these redemptions.
. Third, other than the Trust, all members of the peer group continuously
offer new shares to investors at NAV. New money has been invested in these
funds faster than portfolio managers have been able to locate suitable
investments. These managers most likely have been forced to invest in lower
yielding alternative investments which have adversely affected the yields of
the other prime funds.
The Trust, which has over 90% of its assets pegged to LIBOR, will continue to
report its distribution rate in relation to LIBOR as well as in relation to the
Prime Rate. We believe it is important to monitor investments against the most
relevant benchmark.
ASSET QUALITY
Asset quality has generally remained acceptable during the last fiscal year. As
we discussed in our February 1996 Annual Report, the key to NAV stability rests
in broad diversification. Chart Five illustrates the diversity in the Trust
portfolio.
BORROWER DIVERSIFICATION
[BAR CHART]
7
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Pilgrim America Prime Rate Trust
LETTER TO SHAREHOLDERS
On February 28, 1997, the Trust held 124 senior loans, with an average
outstanding of $10,306,914. A year ago, the comparable numbers were 87 senior
loans with an average outstanding balance of $9,292,740.
While the overall percentage of non-performing assets has varied within a narrow
range during the year, its constituents have undergone some changes. We
completed workouts on some senior loans, sold others and one major investment
became delinquent. This expected loss already has been reflected in the Trust's
results. Generally the percentage recovery of defaulted senior loans is higher
than other high yield securities, but there is credit risk that results in
losses from time to time.
Current credit quality is stable and we expect to reduce non-performing assets
in the new fiscal year. New issues appear to have a higher risk profile and we
must work hard in order to maintain our credit quality. The investor must
understand that credit risk exists in this asset class and it is the most
important factor affecting the Trust.
The Trust invests in a manner designed to avoid unacceptably high levels of
credit risk. Strong demand for senior loans recently has driven yields down
regardless of credit quality and the Trust has attempted to maintain credit
quality by accepting slightly lower returns. Although this trend toward reduced
yields may cause a decline in the Trust's performance, we will strive to
maintain the Trust's credit quality and its relative yield advantage.
STRUCTURE AND CREDIT RISK
Generally, our analysis of potential investments focuses first on an issuer's
cash flow coverage for both principal and interest, then on available
alternative sources of repayment. Over the last few months, cash flow coverage
for both interest and principal of new issues has weakened and as a result we
have become increasingly selective in investing.
Sector Concentration
It is very difficult for even the most thoughtful and committed investor to
judge with accuracy the timing and scale of change occurring in different
economic sectors. This has become a matter of increasing concern in the
electronic media sector.
As depicted in Chart Six, media and telecommunications represented 33% of the
total debt provided by the syndicated loan market in 1996, compared to 12% of
the Trust's assets. At the same time, TCI, the nation's largest cable operator
announced a major retrenchment in its ambitions in telecommun-
8
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Pilgrim American Prime Rate Trust
LETTER TO SHAREHOLDERS
ications beyond its core business. Mobile Media, the country's largest paging
company filed for bankruptcy protection in January 1997; Motorola has shown
itself fallible in predicting future trends in wireless telecommunications; and
Viacom, one of the largest integrated media enterprises, has been under pressure
to dispose of under-performing assets (such as Blockbuster Video) that a few
months ago were "high fliers". Each of these companies has highly regarded
senior management, yet all have suffered as their chosen markets have not
developed in ways and at speeds anticipated.
SECTOR CONCENTRATION
[PIE CHART]
---------------------------------------------------------------------
[PIE CHART]
The media and telecommunications industries continue to attract significant
amounts of equity and subordinated debt. These sectors have grown and continue
to grow at phenomenal rates. In this
9
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Pilgrim America Prime Rate Trust
LETTER TO SHAREHOLDERS
environment, it is difficult to determine "predictable cash flow". It is equally
challenging to establish, from a senior creditor's perspective, the value of the
assets used in the business. For example: What is the value of radio spectrum
and analog switches? Are local broadcast properties threatened by satellite
broadcasting? Can satellite broadcasters provide access to local broadcast
signals? Should these businesses be funded by equity or debt? If debt is used,
is senior secured debt viable? We grapple with these issues constantly.
We are watching our exposure to this segment very carefully. We cannot guarantee
that we will avoid all pitfalls, but we will try to avoid as many as possible.
Fortunately, the Trust has avoided exposure to some notable media problems such
as Mobile Media, Marvel Entertainment and Musicland.
THE FOURTH QUARTER
The first month of the quarter exhibited strong deal flow with several major
senior loans being syndicated during the period. These included Outdoor Systems,
Boston Chicken, Allied Waste Industries and Celestica, (which are in the
portfolio), Sprint Spectrum (Sprint's PCS joint venture), Nextel and KinderCare
which we chose not to purchase. Other smaller transactions acquired during the
fourth quarter included MAG Aerospace Industries, Safelite Glass, Entravision
and Schweggmans Supermarkets. Repayments and sales included MTF, Kmart and
Sterling Chemicals. The last 8 weeks of the quarter were relatively quiet.
Continued strong bond and equity markets limited the extent to which companies
chose to use the senior loan market. Since the end of February, several
attractive transactions have surfaced although the pace at which new deals are
coming to market has fallen behind last year's rate. During the quarter, short
term interest rates have remained relatively stable. Prime has been 8.25%
throughout the period and 30-day Libor has varied between 5.313% and 5.625%.
OUTLOOK
We believe the Trust is well positioned to continue to offer a high level of
returns to shareholders. The Trust enjoys a strong reputation with the
institutions which arrange senior loans and as a result the Trust is offered a
wide choice of investments in our asset class.
With the general deterioration of returns and credit quality of senior loans, it
has become increasingly important for us to remain cautious and selective. We
are doing this.
Since the end of the fiscal year, on March 25th, the Federal Reserve increased
the target Fed Funds rate to 5.50%. On March 26th, most leading banks raised
their Prime Rates to 8.50%. Since the
10
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Pilgrim America Prime Rate Trust
LETTER TO SHAREHOLDERS
beginning of March, 60-day LIBOR has risen from 5.426% at March 1, 1997 to
5.688% through April 2, 1997. We believe that short-term interest rates will
continue to move upward modestly.
Last year we expressed optimism at the year ahead. Our hopes were borne out.
This year, we are equally optimistic, but ever more selective.
On behalf of the entire team of Pilgrim America professionals, we thank you for
your continued support. We appreciate your comments and questions.
Sincerely,
/s/ Robert W. Stallings
Robert W. Stallings
Chairman and Chief Executive Officer
Pilgrim America Group, Inc.
/s/ Howard Tiffen
Howard Tiffen
Senior Vice President and
Senior Portfolio Manager
Pilgrim America Investments, Inc.
April 29, 1997
11
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Pilgrim America Prime Rate Trust
SHAREHOLDER LETTER FOOTNOTES
(1) Lipper ranked the Trust for total return, without deducting sales charges
and assuming reinvestment of all dividends and capital gains 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 rights offering, the Investment Manager has
voluntarily reduced its management fee for the period from November 1996
through November 1999.
(2) The distribution rate is the annualization of the Trust's distributions per
share, divided by the NAV of the Trust at month-end. 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. For the one-year, five-year and since inception
periods ended February 28, 1997, the Trust's average annual total returns,
based on NAV and assuming all rights were exercised, were 8.06%, 7.81%, and
8.52%, respectively. The Trust's 30-day standardized SEC yields as of
February 28, 1997 were 8.44% at NAV and 7.97% at market. The Trust's
expenses were partially waived for the fiscal year ended February 29, 1992.
As part of the rights offer, the Investment Manager has voluntarily reduced
its management fee for the period from November 1996 through November 1999.
(3) Source: BLOOMBERG Financial Markets.
(4) The composite represents an unweighted average for investment companies
included in the Lipper Loan Participation Fund category of closed-end funds
(for funds excluding the Trust in existence for the entire period shown).
The distribution rate is a composite based on the annualization of each
investment company's distributions per share, divided by the NAV of that
investment company at month-end. 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 effected the distributions of
these companies.
(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.
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.
12
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Pilgrim America Prime Rate Trust
STATISTICS AND PERFORMANCE as of February 28, 1997
PORTFOLIO CHARACTERISTICS
Net Assets.................................... $1,031,089,339
- ---------------------------------------------------------------
Assets Invested in Senior Loans............... $1,278,057,350*
- ---------------------------------------------------------------
Total Number of Senior Loans.................. 124
- ---------------------------------------------------------------
Average Amount Outstanding per Loan........... $ 10,306,914
- ---------------------------------------------------------------
Total Number of Industries.................... 26
- ---------------------------------------------------------------
Annual Portfolio Turnover Rate................ 82%
- ---------------------------------------------------------------
Average Loan Amount per Industry.............. $ 49,156,052
- ---------------------------------------------------------------
Weighted Average Days to Interest Rate Reset.. 42 days
- ---------------------------------------------------------------
Average Loan Maturity 66 months
- ---------------------------------------------------------------
Average Age of Loans Held in Portfolio 11 months
- ---------------------------------------------------------------
*Includes loans and other debt received through restructures
TOP 10 INDUSTRIES AS A
% OF NET ASSETS
Aerospace Products & Services 12.3%
Media / Broadcast 10.0%
Electronic Equipment 8.7%
Food Stores 8.4%
Health & Beauty Products 7.8%
Restaurants 7.1%
Industrial Equipment 6.8%
Food/Tobacco Products & Serv. 6.4%
Diversified Services/
Entertainment 6.3%
Diversified Manufacturing 5.5%
TOP 10 SENIOR
LOAN HOLDINGS
AS A % OF NET ASSETS
Ralph's Grocery Co. 4.2%
Favorite Brands International 3.0%
MAFCO Financial Corp. 2.9%
RIC Holdings, Inc. 2.7%
America's Favorite Chicken 2.7%
Silgan Corp. 2.5%
Boston Chicken, Inc. 2.4%
Community Health Systems 2.4%
Continental Micronesia 2.2%
Allied Waste Industries, Inc. 1.9%
13
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Pilgrim America Prime Rate Trust
STATISTICS AND PERFORMANCE as of February 28, 1997
DISTRIBUTION RATES
<TABLE>
<CAPTION>
SEC 30-Day SEC 30-Day Annualized Annualized
Prime Yield at Yield at Distribution Distribution
Quarter-ended Rate NAV a,d MKT a,d Rate at NAV b,d Rate at MKT b,d
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
May 31, 1996........ 8.25% 8.26% 8.24% 8.45% 8.44%
- ----------------------------------------------------------------------------------------
August 31, 1996..... 8.25% 8.41% 8.17% 8.56% 8.32%
- ----------------------------------------------------------------------------------------
November 30, 1996... 8.25% 9.64% 9.72% 8.78% 8.85%
- ----------------------------------------------------------------------------------------
February 28, 1997... 8.25% 8.44% 7.97% 8.69% 8.22%
- ----------------------------------------------------------------------------------------
</TABLE>
This table sets forth the Trust's monthly dividend performance which is
summarized quarterly.
AVERAGE ANNUAL TOTAL RETURNS
NAV MKT
1 Year.......................... 8.06% 15.04%
3 Years......................... 8.52% 12.21%
5 Years......................... 7.81% N/A
Since Trust InceptionG, I....... 8.52% N/A
Since Initial Trading on NYSEH.. N/A 11.47%
Assumes rights were exercised and excludes sales charges and commissions c, d,
e, f
See performance footnotes on page 15
14
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Pilgrim America Prime Rate Trust
PERFORMANCE FOOTNOTES
(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 dividend declared in
the 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 returns assume 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
February 28, 1997, were 7.15% and 8.14% 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) As part of the 1996 rights offering (see F), the Investment Manager has
voluntarily reduced its management fee for the period from November 1996
through November 1999.
(E) 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.
(F) On October 18, 1996, the Trust issued to its shareholders non-transferable
rights which entitled the holders to subscribe for 18,122,963 shares of the
Trust's common stock at the rate of one share of common stock for each five
rights held. On November 12, 1996, the offering expired and was fully
subscribed. The Trust issued 18,122,963 shares of its common stock to
exercising rights holders at a subscription price of $9.09. Offering costs
of $6,972,203 were charged against the offering proceeds.
(G) Inception date - May 12, 1988.
(H) Initial trading on NYSE - March 9, 1992.
(I) Reflects a 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.
15
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Pilgrim America Prime Rate Trust
ADDITIONAL NOTES AND INFORMATION
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
The Trust offers a Dividend Reinvestment and Cash Purchase Plan ("Plan") which
allows shareholders a simple way to reinvest dividends and capital gain
distributions, if any, in additional shares of the Trust. The Plan also offers
Trust shareholders the ability to purchase additional shares in any amount from
$100 to $5,000 on a monthly basis.
For dividend reinvestment purposes, shareholders will acquire shares at the
lower of NAV or market price. The tax treatment for dividends and capital gain
distributions will be the same whether taken in cash or additional shares
through the Plan.
For cash purchase purposes, shares will be acquired at the same time as the
monthly dividend reinvestments, however, such shares will always be purchased in
the open market at the market price.
There is no charge to participate in the Plan. Plan participants may elect to
discontinue participation in the Plan at any time. Participants will share, on a
pro-rata basis, in the fees or expenses of any shares acquired in the open
market.
Participation in the Plan is not automatic. If you would like to receive more
information about the Plan or if you desire to participate in the Plan, please
contact your broker or our Shareholder Services Department at (800) 331-1080.
KEY FINANCIAL DATES - Calendar 1997 Dividends:
DECLARATION DATE EX-DATE PAYABLE DATE
January 31 February 6 February 21
February 28 March 6 March 20
March 31 April 8 April 22
April 30 May 8 May 22
May 30 June 5 June 19
June 30 July 8 July 22
July 31 August 7 August 21
August 29 September 4 September 18
September 30 October 8 October 23
October 31 November 6 November 20
November 28 December 4 December 18
December 19 December 29 January 13, 1998
Record date will be two business days after each Ex-Date.
These dates are subject to change,
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Pilgrim America Prime Rate Trust
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.
17
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Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of February 28, 1997
- --------------------------------------------------------------------------------
SENIOR LOANS*
(Dollar weighted portfolio interest reset period is 42 days)
<TABLE>
<CAPTION>
Principal
Amount Loan Stated
(000's) Industry/Borrower Type Maturity Value
------- ----------------- ---- -------- -----
<C> <S> <C> <C> <C>
Aerospace Products & Services: 12.3%
$5,060 Aerostructures Corp. (airframe and component manufacturer) Term B 9/30/03 $ 5,060,000
1,840 Aerostructures Corp. Term C 9/30/04 1,840,000
7,389 Atlas Air (air cargo carrier) Revolver 6/30/98 7,389,230
14,925 Banner Aerospace(aerospacefasteners) Term B 7/1/03 14,925,000
10,000 Continental Airlines (airline) Term 12/31/06 10,000,000
22,922 Continental Micronesia (airline) Axel (A) 7/26/03 22,921,875
9,000 Erickson Air-Crane Co. (heavy lift helicopters) Term B 12/31/04 9,000,000
8,871 Fiberite,lnc.(plastic composite manufacturer) Term B 12/31/01 8,871,429
3,079 Grimes Aerospace Corp.(aerospace products) Revolver 12/31/99 3,078,872
16,455 Grimes Aerospace Corp. Term 12/31/99 16,454,761
5,000 Mag Aerospace Industries (aircraft component supplier) Term B 6/15/03 5,000,000
7,515 TechneticsCorp.(aircraft engine components) Term 6/20/02 7,515,152
14,500 Tri Star/Odyssey, Inc. (aerospace hardware distributor) Term 9/30/03 14,500,000
--------------
126,556,319
--------------
Apparel Products: 2.5%
1,078 @ Butterick Pattern Co. (sewing aids) (1) Term 5/31/96 269,427
6,895 Humphreys, Inc. (belts and personal leather goods) Term B 11/15/03 6,895,000
7,169 Scovill Fasteners(metal fasteners for apparel products) Term B 1/24/03 7,168,864
4,903 Scovill Fasteners Lease 10/15/02 4,902,882
6,300 The William Carter Co. (children'sclothing) Term B 10/31/03 6,300,000
--------------
25,536,173
--------------
Communications: 2.7%
8,000 Executone Business Solutions (telecommunication service) Term B 7/1/03 8,000,000
9,786 Shared Technologies, Inc. (communication services) Term B 3/31/03 9,785,714
10,000 Teletouch Communications (rural paging services) Term A 11/30/03 10,000,000
--------------
27,785,714
--------------
Construction Products and Services: 0.6%
4,000 The Presley Companies (homebuilder) Revolver 5/20/97 4,000,000
1,803 United Building Materials, Inc. (stone and concrete products)(4) Term 4/30/96 1,758,145
--------------
5,758,145
--------------
Container Products: 2.5%
1,172 Silgan Corp.(metal and plastic containers) Term A 3/15/01 1,175,085
24,373 Silgan Corp. Term B 3/15/02 24,499,411
--------------
25,674,496
--------------
Diversified Manufacturing: 5.5%
5,659 Cambridge Industries, Inc. (automotive plastics) Term B 5/17/02 5,659,232
6,366 Cambridge Industries, Inc. Term C 11/17/03 6,366,375
2,830 Cambridge Industries, Inc. Term D 5/17/04 2,829,557
</TABLE>
See Accompanying Notes to Financial Statements
18
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Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of February 28, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Loan Stated
(000's) Industry/Borrower Type Maturity Value
------- ----------------- ---- -------- -----
<C> <S> <C> <C> <C>
Diversified Manufacturing (continued)
$ 9,984 Capital Tool & Design (brake backing plates) Term B 7/19/03 $ 9,984,375
7,043 Desa International (specialty equipment manufacturing) Term A 8/31/01 7,043,147
7,440 Desa International Term B 2/28/03 7,439,880
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
2,771 Rayovac Corp. (battery manufacturer) Term B 9/30/03 2,770,833
2,771 Rayovac Corp. Term C 9/30/04 2,770,833
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
7,157 Worldwide Sports & Recreation Corp. (optics, sports products) Term B 3/31/01 6,977,665
--------------
56,828,125
--------------
Diversified Services/Entertainment: 6.3%
7,123 AMF Group (bowling centers and equipment) Axel A (A) 5/1/03 7,193,868
4,461 AMF Group Axel B (A) 5/1/04 4,505,886
6,825 Bankers Systems, Inc. (compliance services to banking industry) Term B 11/1/02 6,825,000
6,587 Doubletree Corp. (hotel management) Term B 5/8/04 6,586,550
29,402 MAFCO Financial Corp. (diversified services and entertainment) Revolver 6/22/99 29,402,000
10,570 Sunset Station Hotel and Casino, Inc. (gaming) Term 9/30/00 10,570,000
--------------
65,083,304
--------------
Electronic Equipment: 8.7%
7,500 Celestica (diversified electronic device manufacturer) Term B 6/30/03 7,500,000
4,000 Circo Technologies Group (printed circuit board manufacturer) Term B 6/30/04 4,030,000
4,000 Circo Technologies Group Term C 6/30/05 4,030,000
6,288 Details, Inc. (circuit board manufacturer) Term 2/13/01 6,288,136
12,375 Dictaphone Acquisition,lnc.(dictation and recording equipment) Term 6/30/02 12,375,000
4,190 Elgar Electronics(electronic testing equipment) Term B 3/31/03 4,189,516
8,000 HCC industries (electronic connection device manufacturer) Term B 8/14/03 8,000,000
8,780 Intesys Technologies, Inc. (contract engineering and manufacturing) Term B 12/31/01 8,780,488
9,929 OK Industries (circuit board soldering systems) Term 10/31/02 9,928,571
10,000 Phase Metrics,Inc.(computer testing equipment) Term A 11/30/01 10,000,000
15,000 PSC Incorporated (scanning equipment) Term B 6/28/02 15,000,000
--------------
90,121,711
--------------
Food/Tobacco Products and Services: 6.4%
2,563 Bumble Bee Seafoods, Inc. (canned seafood)(4) Term A 9/15/96 2,562,500
3,750 Bumble Bee Seafoods, Inc.(4) Term B 9/15/96 3,750,000
4,455 Edward's Baking Co. (food service bakery) Term B 9/30/02 4,455,000
30,583 Favorite Brands International (confectionary manufacturer) Term B 8/1/04 30,582,661
5,405 International Home Foods (food product manufacturer) Term B 10/30/04 5,405,405
4,595 International Home Foods Term C 10/30/05 4,594,595
</TABLE>
See Accompanying Notes to Financial Statements
19
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of February 28, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Loan Stated
(000's) Industry/Borrower Type Maturity Value
------- ----------------- ---- -------- -----
<C> <S> <C> <C> <C>
Food/Tobacco Products and Services (continued)
$3,232 Liggett Group, Inc. (tobacco products) Revolver 9/15/97 $ 3,232,429
7,120 Van De Kamp's (frozen foods) Term B 4/30/03 7,119,607
4,455 Van De Kamp's Term C 9/30/03 4,455,382
--------------
66,157,579
--------------
Food Stores: 8.4%
1,028 Pathmark Stores, Inc. (northeastern states supermarkets) Revolver 7/31/98 1,026,840
2,181 Pathmark Stores, Inc. Term A 7/31/98 2,178,298
1,878 Ralph's Grocery Co.(Southern California supermarkets) Revolver 6/15/02 1,887,756
1,596 Ralph's Grocery Co. Term A 6/15/02 1,604,381
8,428 Ralph's Grocery Co. Term B 6/15/02 8,469,803
12,776 Ralph's Grocery Co. Term C 6/15/03 12,839,229
9,305 Ralph's GroceryCo. Term D 2/15/04 9,351,021
5,387 Ralph's Grocery Co. Term E 6/15/02 5,413,433
1,796 Ralph's GroceryCo. Term F 6/15/03 1,804,478
1,796 Ralph's GroceryCo. Term G 2/15/04 1,804,478
15,000 Schwegmann Giant Supermarket(Louisiana supermarkets) Term B 1/31/04 15,000,000
3,897 Smith's Food & Drug Co. (western states supermarkets) Term B 8/31/02 3,916,907
1,120 Smith's Food & Drug Co. Term C 8/31/04 1,125,450
3,897 Smith's Food & Drug Co. Term D 8/31/04 3,916,907
16,282 Star Markets Co.,Inc.(Boston area supermarkets) Term B 12/31/01 16,281,694
--------------
86,620,675
--------------
Furniture & Garden Products: 2.0%
14,032 Lifestyle Furnishings International (furniture) Term B 6/20/04 14,031,556
6,957 Simmons Company (mattress manufacturer) Term B 3/31/03 6,956,774
--------------
20,988,330
--------------
General Merchandise Retailing: 3.3%
19,400 Liberty House, Inc. (Hawaii department store chain) Term B 6/30/02 19,400,000
6,603 Peebles, Inc. (department store chain) Term A 4/30/01 6,602,563
7,858 Peebles, Inc. Term B 4/30/02 7,857,850
--------------
33,860,413
--------------
Healthcare Services: 5.1%
9,007 Community Health Systems (hospitals) Term B 12/31/03 9,006,849
9,007 Community Health Systems Term C 12/31/04 9,006,849
6,781 Community Health Systems Term D 12/31/05 6,780,822
6,000 Covenant Care, Inc. (long-term healthcare facilities) Term 6/30/99 6,000,000
4,559 H.E.C. Investments, Inc. (health club operator) Term A 12/31/99 4,558,824
7,000 H.E.C. Investments, Inc. Term B 12/31/00 7,000,000
9,975 Mediq/PRN Life Support, Inc. (hospital equipment leasing) Term 9/28/98 9,975,000
--------------
52,328,344
--------------
</TABLE>
See Accompanying Notes to Financial Statements
20
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of February 28, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Loan Stated
(000's) Industry/Borrower Type Maturity Value
------- ----------------- ---- -------- -----
<C> <S> <C> <C> <C>
Health & Beauty Products: 7.8%
$4,255 Dade lnternational(medical testing equipment manufacturer) Term B 12/31/02 $ 4,254,545
4,255 Dade International Term C 12/31/03 4,254,545
4,491 Dade International Term D 12/31/04 4,490,909
9,563 Eye Care Centers, Inc. (retail eye care products and services) Term 9/26/02 9,562,500
9,000 Hanger Orthopedics Group(orthopedic and prosthetic services) Term B 12/31/01 9,000,000
17,250 ICON Health & Fitness Co. (exercise equipment) Term B 11/14/01 17,250,000
4,155 IMED/IVAC Corp.(infusion pumps) Term B 11/30/03 4,154,587
4,155 IMED/IVAC Corp. Term C 11/30/04 4,154,587
3,910 IMED/IVAC Corp. Term D 5/31/05 3,910,200
10,000 Medtech Products, Inc. (non-prescription consumer medications) Term B 10/15/02 10,000,000
9,923 Revlon, Inc. (cosmetics manufacturer) Term 12/31/00 9,923,077
--------------
80,954,950
--------------
Industrial Chemicals: 1.4%
9,134 Cedar Chemical Corp. (specialized chemicals) Term B 10/30/03 9,134,375
4,944 Texas Petrochemical Corp. (industrial chemicals) Term B 6/30/04 4,944,444
--------------
14,078,819
--------------
Industrial Equipment: 6.8%
2,821 Calmar,lnc.(non-aerosol fluid dispensing systems) Axel A (A) 9/15/03 2,821,429
2,116 Calmar, Inc. Axel B (A) 3/15/04 2,116,071
8,000 CNB International (metal stamping press manufacturer) Term 10/18/04 8,000,000
10,000 Columbus McKinnon (industrial lifts and hoists) Term B 3/1/04 10,000,000
9,891 Graphic Controls Corp. (industrial and medical charts) Term B 9/28/03 9,890,769
4,270 Intermetro Industries, Inc. (storage and material transport products)Term B 6/30/03 4,270,109
3,321 Intermetro Industries, Inc. Term C 6/30/04 3,321,196
4,935 Jackson Products, Inc. (industrial safety equipment manufacturer) Term B 9/1/02 4,934,783
4,938 Jackson Products, Inc. Term C 9/1/03 4,937,500
1,347 Jackson Products, Inc. Term D 9/1/03 1,346,625
4,800 Mettler-Toledo (weigh scale manufacturer) Term B 12/31/03 4,800,000
3,600 Mettler-Toledo Term C 12/31/04 3,600,000
9,861 Schrader, Inc. (fluid/air control valve manufacturer) Term B 11/30/02 9,861,030
--------------
69,899,512
--------------
Industrial Services: 3.7%
4,000 Allied Waste Industries, Inc. (waste management) Axel A (A) 6/23/03 4,000,000
8,000 Allied Waste Industries, Inc. Axel B (A) 6/23/04 8,000,000
8,000 Allied Waste Industries, Inc. Axel C (A) 6/23/05 8,000,000
9,250 Clean Harbors (environmental services) Term 5/8/00 9,250,000
9,000 Coinmach Corp. (commercial laundry operator) Term B 6/8/04 9,000,000
--------------
38,250,000
--------------
</TABLE>
See Accompanying Notes to Financial Statements
21
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of February 28, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Loan Stated
(000's) Industry/Borrower Type Maturity Value
------- ----------------- ---- -------- -----
<C> <S> <C> <C> <C>
Media/Broadcast: 10.0%
$4,436 Benedek Broadcasting Television Corp.(broadcasting) Axel A (A) 12/5/02 $4,435,714
4,461 Benedek Broadcasting Television Corp. Axel B (A) 12/5/02 4,461,207
933 Classic Cable(rural cable system operator) Revolver 6/30/03 885,912
5,238 Classic Cable Term B 6/30/05 4,975,765
10,000 Eller Media Company (outdoor advertising) Term B 12/31/04 10,000,000
7,500 Entravision (Spanish broadcast television) Term B 12/31/04 7,500,000
10,000 FrontierVision (cable television) Term B 6/30/05 10,000,000
10,000 Intermedia Partners IV(cable television) Term 1/1/05 10,000,000
15,000 Jacor Communications (radio broadcasting) Term B 6/15/04 15,000,000
9,975 Metro-Goldwyn-Mayer, Inc. (film library) Term B 10/10/03 9,975,000
11,688 Outdoor Systems, Inc. (outdoor advertising) Term A 12/31/02 11,687,500
3,896 Outdoor Systems, Inc. Term B 12/31/03 3,895,833
9,867 Phoenix Associates, Inc. (cable television) Term B 12/31/99 9,866,667
--------------
102,683,598
--------------
Metal Products: 3.7%
6,000 Cable Systems International (cable wire manufacturer) Term B 10/4/02 6,000,000
9,875 GS Technologies (metal products) Term 9/30/02 9,875,000
9,444 Hayes Wheels International (automotive wheels) Term B 7/31/03 9,444,444
7,556 Hayes Wheels International Term C 7/31/04 7,555,556
411 National Refractories, Inc. (kiln lining materials) Term B 9/30/99 411,279
5,000 National Refractories, Inc. Term C 9/30/99 5,000,000
--------------
38,286,279
--------------
Miscellaneous Companies: 2.4%
2,500 Blackstone Capital (financial holding company) Term 5/31/99 2,500,000
12,954 Outsourcing Solutions (accounts receivable management) Term B 11/6/03 12,954,225
7,080 Staff Capital, L.P. (employee leasing) Term 12/8/99 7,080,000
2,500 Wasserstein (financial holding company) Term 5/31/99 2,500,000
--------------
25,034,225
--------------
Paper Products: 2.7%
2,414 RIC Holdings, Inc.(packaging and paper products) Term A 2/28/03 2,413,884
17,857 RIC Holdings, Inc. Term B 2/27/04 17,857,143
7,143 RIC Holdings, Inc. Term C 8/31/04 7,142,857
--------------
27,413,884
--------------
Publishing and Information Services: 2.2%
6,100 Anacomp, Inc. (document storaging and imaging) Term 2/28/01 6,100,000
7,435 NBC Acquisition (wholesale and retail textbooks) Term 8/31/03 7,435,000
5,000 @ Softworld Sevices (software fulfillment services) Term A 6/30/00 4,500,000
5,000 @ Softworld Services Term B 6/30/01 4,500,000
--------------
22,535,000
--------------
</TABLE>
See Accompanying Notes to Financial Statements
22
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of February 28, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Loan Stated
(000's) Industry/Borrower Type Maturity Value
------- ----------------- ---- -------- -----
<C> <S> <C> <C> <C>
Restaurants: 7.1 %
$27,365 America's Favorite Chicken Co. (food service franchisor) Term A 10/31/01 $ 27,364,661
25,000 Boston Chicken,lnc.(quick service restaurant chain) Lease/ 12/12/01 25,000,000
Term C
8,338 Denamerica Corp. (quick service restaurant franchisee) Term 12/31/01 8,337,657
2,599 Long John Silvers, Inc. (quick service seafood restaurant chain) Term B 9/30/02 2,598,599
5,000 Papa Gino's, Inc. (quick service restaurants) Term A 2/19/02 5,000,000
5,000 Papa Gino's, Inc. Term B 9/30/02 5,000,000
--------------
73,300,917
--------------
Specialty Retailing: 3.5%
340 American Blind & Wallpaper (home furnishings retailer) Term 3/7/97 340,409
11,000 CSK Auto, Inc.(auto part retailer) Term 10/31/03 11,000,000
7,093 @ Color Tile, Inc. (home improvement retailer) (3) Term C 12/31/98 5,107,200
8,035 @ Color Tile, Inc. (3) Term D 12/31/98 5,785,117
2,972 Color Tile, Inc. (D.l.P.) (3) Revolver 12/30/97 2,972,433
2,484 M & H Drugs, Inc. (Midwestern retail drugstores)(4) Term 12/31/96 2,422,080
8 780 Murray's Discount Auto Parts (auto parts retailer) Term 9/30/01 8,780,400
--------------
36,407,639
--------------
Textile & Leather Products: 1.9%
10,000 Glenoit Mills, Inc.(specialty and decorative fabrics) Term 3/31/00 10,000,000
5,815 Targus Group, Int'l.(computer luggage manufacturer) Term A 1/18/02 5,814,912
4,121 Targus Group, Int'l. Term B 1/18/03 4,121,394
--------------
19,936,306
--------------
Transportation Services: 4.5%
4,779 Cruise Ship L.L.C. (cruise ship operator) Sr. Note 7/1/01 4,778,947
7,500 International Logistics(logistics/freight forwarding) Term B 12/31/03 7,500,000
16,057 RCTR Holdings, Inc.(truck rental) Term A 10/16/01 16,057,143
4,000 Safelite Glass Corp. (automobile windshield replacement) Term B 12/20/04 4,000,000
3,839 Sky Chef's International, Inc. (airline food service) Term A 9/15/00 3,838,742
8,715 Sky Chef's International, Inc. Term B 9/15/01 8,736,532
1,063 Sky Chef's International, Inc. Term C 9/15/03 1,065,529
--------------
45,976,893
--------------
Total Senior Loans- 124.0% 1,278,057,350
(Cost $1,287,041,991) --------------
</TABLE>
See Accompanying Notes to Financial Statements
23
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of February 28, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OTHER CORPORATE DEBT
Principal
Amount Loan Stated
(000's) Industry/Borrower Type Maturity Value
------- ----------------- ---- -------- -----
<C> <S> <C> <C> <C>
Diversified Manufacturing: 0.6%
$6,000 Capital Tool & Design (brake backing plates) Sub. Note 7/26/03 $6,000,000
--------------
Total Other Corporate Debt - 0.6% 6,000,000
(Cost $6,000,000) --------------
COMMON STOCK AND PREFERRED STOCK
Shares
------
Diversified Manufacturing: 0.0%
2,633 @ KDI Corp.--common (defense and leisure products) (2) --
--------------
Restaurants: 0.6%
413,980 @ America's Favorite Chicken Co.--common
(quick service restaurant chain) (R) 3,645,645
24,848 America's Favorite Chicken Co.--preferred (R) 2,484,800
17,664 @ Flagstar, Inc.--common (family restaurants,
institutional food service companies) 17,664
--------------
6,148,109
--------------
Textiles: 0.2%
12,764 @ Dan River (Braelan) Corp.--common (diversified textiles) (R) 2,288,045
--------------
Total Common Stock and Preferred Stock - 0.8% 8,436,154
(Cost $ 4,268,877) --------------
STOCK PURCHASE WARRANTS AND OTHER SECURITIES
1 @ Autotote Systems, Inc., Warrant representing 48,930 common shares
(designer and manufacturer of wagering equipment), Expires 10/30/03 (R) 34,789
1 @ Autotote Systems, Inc., Option representing 0.248% common shares issued
and outstanding (R) --
80,634 @ Capital Tool & Design, Warrants representing 80,634 common shares (brake
backing plates) (R) 143,529
19,000 @ Covenant Care, Inc., Warrants representing 19,000 common shares (long-term
healthcare facilities) (R) 285,000
1 @ Cruise Ship, L.L.C., Warrant representing 4,105 voting shares (cruise ship operator) (R) --
1 @ Cruise Ship, L.L.C., Warrant representing 4,666 non-voting shares (R) --
26,606 @ KDI Corp. Units of Trust (defense and leisure products) (R)(2) --
1 @ Medtech Products, Warrants (R) --
1 @ Staff Capital, L.P., Common Limited Partnership Unit (employee leasing) (R) 614,789
1 @ Staff Capital, L.P., Preferred Limited Partnership Unit (R) 61,000
--------------
Total Stock Purchase Warrants and Other Securities - 0.1 % 1,139,107
(Cost $61,100) --------------
Total Investments (Cost $1,297,371,968) (5) 125.5% $1,293,632,611
Liabilities in Excess of Cash and Other Assets-Net (25.5) (262,543,272)
------ --------------
Net Assets (6) 100.0% $1,031,089,339
====== ==============
</TABLE>
See Accompanying Notes to Financial Statements.
24
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of February 28, 1997
- --------------------------------------------------------------------------------
- ---------------
@ Non-income producing security
(A) Axel describes an amortizing extended term loan with limited call
protection.
(R) Restricted security
* Senior loans, while exempt from registration under the Securities Act of
1933, contain certain restrictions on resale and cannot be sold publicly.
These senior 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, 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 ofreorganization
(4) The borrower has entered into a forebearance agreement pending sale of the
company or refinance of this debt.
(5) For Federal income tax purposes, which is the same for financial reporting
purposes, cost of investments is $1,297,371,968 and net unrealized
depreciation consists of the following:
Gross Unrealized Appreciation $ 6,837,265
Gross Unrealized Depreciation (10,576,622)
-----------
Net Unrealized Depreciation $(3,739,357)
===========
(6) The Investment Manager informed the Board in April, 1996, that initially
and for the foreseeable future, the Trust will borrow no more than 25% of
the Trust's total net assets plus borrowings. If the Trust had borrowed at
this level on February 28, 1997, its total borrowings would have been
approximately $343,696,445.
See Accompanying Notes to Financial Statements.
25
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES as of February 28, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities at value (Cost $1,297,371,968) $ 1,293,632,611
Receivables:
Dividends and interest 11,745,106
Other 223,424
Prepaid arrangement fees on notes payable 701,571
Prepaid expenses 45,418
---------------
Total assets 1,306,348,130
---------------
LIABILITIES:
Notes payable 267,000,000
Deferred arrangement fees on senior loans 6,075,520
Accrued interest payable 1,057,501
Overdraft payable to custodian 340,786
Accrued expenses 784,984
---------------
Total liabilities 275,258,791
---------------
NET ASSETS (equivalent to $9.45 per share, based on 109,139,829
shares of beneficial interest authorized and outstanding, no
par value) $ 1,031,089,339
===============
Net Assets Consist of:
Paid-in capital $ 1,035,845,458
Undistributed net investment income 10,417,526
Accumulated net realized loss on investments (11,434,288)
Net unrealized depreciation of investments (3,739,357)
---------------
Net assets $ 1,031,089,339
===============
</TABLE>
See Accompanying Notes to Financial Statements.
26
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS for the Year Ended February 28, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Interest $ 89,942,687
Arrangement fees earned 6,840,086
Other 2,162,193
Dividends 36,443
------------
Total investment income 98,981,409
------------
EXPENSES:
Investment management fees 8,268,263
Interest 7,841,126
Administration fees 1,441,271
Transfer agent and registrar fees 581,531
Revolving credit facility fees 470,471
Recordkeeping and pricing fees 402,563
Reports to shareholders 358,462
Professional fees 201,792
Custodian fees 172,248
Miscellaneous expense 130,443
Insurance expense 114,507
Trustees' fees 76,246
------------
Total expenses 20,058,923
Less: Earnings credits (25,424)
------------
Net expenses 20,033,499
------------
Net investment income 78,947,910
------------
REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENTS:
Net realized loss on investments (3,523,769)
Change in unrealized appreciation of investments 974,085
------------
Net loss on investments (2,549,684)
------------
Net increase in net assets resulting from operations $ 76,398,226
============
</TABLE>
See Accompanying Notes to Financial Statements.
27
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, February 29,
1997 1996
--------------- -------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income $ 78,947,910 $ 79,824,660
Net realized loss on investments (3,523,769) (3,827,587)
Change in unrealized appreciation
(depreciation) of investments 974,085 (3,260,231)
--------------- -------------
Net increase in net assets resulting from operations 76,398,226 72,736,842
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income (77,640,968) (76,983,896)
CAPITAL SHARE TRANSACTIONS:
Issuance from dividend reinvestment 11,628,959 --
Net increase in net assets derived from the sale
of shares in connection with rights offering 157,765,531 101,482
--------------- -------------
Net increase in capital share transactions 169,394,490 101,482
Total increase (decrease) in net assets 168,151,748 (4,145,572)
NET ASSETS:
Beginning of period 862,937,591 867,083,163
--------------- -------------
End of period (including undistributed net investment
income of $10,417,526 and $9,110,584, respectively) $ 1,031,089,339 $ 862,937,591
=============== =============
SUMMARY OF CAPITAL SHARE TRANSACTIONS:
Shares issued in payment of distributions from net
investment income 1,011,738 --
Shares sold in connection with Rights Offering 18,122,963 --
--------------- -------------
Net increase in shares outstanding 19,134,701 --
=============== =============
</TABLE>
See Accompanying Notes to Financial Statements.
28
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS for the Year Ended February 28, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
INCREASE (DECREASE) IN CASH
Cash Flows From Operating Activities:
Interest received $ 87,133,422
Dividends received 36,443
Facility fees received 7,834,766
Commitment fees received 199,251
Other income received 1,739,518
Interest paid (6,783,625)
Other operating expenses paid (13,508,640)
Net proceeds of short-term investments 37,866,000
Purchases of portfolio securities (1,327,884,353)
Proceeds from disposition of portfolio securities 848,787,456
---------------
Net cash used for operating activities (364,579,762)
---------------
Cash Flows From Financing Activities:
Dividends paid (66,012,009)
Proceeds from rights offering 157,765,531
Overdraft financing 340,786
Loan advance 267,000,000
---------------
Net cash provided by financing activities 359,094,308
---------------
Net decrease in cash (5,485,454)
Cash at beginning of year 5,485,454
---------------
Cash at end of year $ --
===============
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 76,398,226
---------------
Adjustments to reconcile net increase in net assets resulting
from operations to net cash provided by operating activities:
Increase in investments in securities (438,681,213)
Increase in dividends and interest receivable (2,708,709)
Increase in other assets (223,424)
Increase in prepaid arrangement fees on notes payable (701,571)
Decrease in prepaid expenses 46,117
Increase in deferred arrangement fees on senior loans 994,680
Increase in accrued interest payable 956,945
Decrease in accrued expenses (660,813)
---------------
Total adjustments (440,977,988)
---------------
Net cash used for operating activities $ (364,579,762)
===============
</TABLE>
See Accompanying Notes to Financial Statements.
29
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended February 28 or February 29,
------------------------------------------------------------------------
1997(7) 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 0.82 0.89 0.74 0.60
Net realized and unrealized gain (loss)
on investments (0.02) (0.08) 0.07 (0.05)
-------------- -------------- -------------- --------------
Increase in net asset value from investment
operations 0.80 0.81 0.81 0.55
Distributions from net investment income (0.82) (0.86) (0.73) (0.60)
Reduction in net asset value from rights
offering (0.14) -- (0.44) --
Increase in net asset value from repurchase
of capital stock -- -- -- 0.02
-------------- -------------- -------------- --------------
Net asset value, end of period $ 9.45 $ 9.61 $ 9.66 $ 10.02
============== ============== ============== ==============
Closing market price at end of period $ 10.00 $ 9.50 $ 8.75 $ 9.25
Total Return
Total investment return at closing
market price(3) 15.04%(5) 19.19% 3.27%(5) 8.06
Total investment return at closing
net asses value(4) 8.06%(5) 9.21% 5.24%(5) 6.28
Ratios/Supplemental Data
Net assets, end of period (000's) $ 1,031,089 $ 862,938 $ 867,083 $ 719,979
Average borrowings (000's) $ 131.773 $ -- $ -- $ --
Ratios to average net assets:
Expenses (before interest and other fees
related to revolving credit facility) 1.13% -- -- --
Expenses 1.92% 1.23% 1.30% 1.31%
Net investment income 7.59% 9.23% 7.59% 6.04%
Portfolio turnover rate 82% 88% 108% 87%
Shares outstanding at end of period (000's) 109,140 89,794 89,794 71,835
</TABLE>
- ----------
* 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 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.
See Accompanying Notes to Financial Statements.
30
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended February 28 or February 29,
- -------------------------------------------------------------------------------------
1993 1992 1991 1990 1989
- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
$ 9.96 $ 9.97 $ 10.00 $ 10.00 $ 10.00
0.60 0.76 0.98 1.06 0.72
0.01 (0.02) (0.05) -- --
- ------------- ------------- ------------- --------------- -------------
0.61 0.74 0.93 1.06 0.72
(0.57) (0.75) (0.96) (1.06) (0.72)
-- -- -- -- --
0.05 -- -- -- --
- ------------- ------------- ------------- ------------- -------------
$ 10.05 $ 9.96 $ 9.97 $ 10.00 $ 10.00
============= ============= ============= ============= =============
$ 9.13 -- -- -- --
10.89% -- -- -- --
7.29% 7.71% 9.74% 11.13% 7.35%
$ 738,810 $ 874,104 $ 1,158,224 $ 1,036,470 $ 252,998
$ -- $ -- $ -- $ -- $ --
-- -- -- -- --
1.42% 1.42%(2) 1.38% 1.46%(2) 1.18%(1)(2)
5.88% 7.62%(2) 9.71% 10.32%(2) 9.68%(1)(2)
81% 53% 55% 100% 49%(1)
73,544 87,782 116,022 103,660 25,294
</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
certain assets of Pilgrim Management Corporation, the Trust's former
investment manager, in a transaction that closed on April 7,1995.
(7) The Manager has agreed to reduce its fee for a period of three years from
the Expiration Date of the November 12,1996 Rights Offering to 0.60% of the
average daily net assets, plus the proceeds of any outstanding borrowings,
over $1.15 billion.
See Accompanying Notes to Financial Statements.
31
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS as of February 28, 1997
- --------------------------------------------------------------------------------
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 loans which are exempt from registration under the Securities Act of 1933
(the "'33 Act") 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 loans 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 loans 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 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.
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 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.
32
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS as of February 28, 1997
- --------------------------------------------------------------------------------
At February 28,1997, the Trust had a capital loss carryforward for federal
income tax purposes of approximately $7,196,156 which is scheduled to expire
through February 28, 2005.
The Board of Trustees intends to offset net capital gains with each capital loss
carryforward until each carryforward has been fully utilized or expires. In
addition, no capital gain distributions shall be made until the capital loss
carryforward has been fully utilized or expires.
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. The accrual of interest on
loans is discontinued when, in the opinion of management, there is an
indication that the borrower may be unable to meet payments as they become
due. Upon such discontinuance, all unpaid accrued interest is reversed.
Cash collections on nonaccrual senior loans are generally applied as a
reduction to the recorded investment of the loan. Senior loans are returned
to accrual status only after all past due amounts have been received and
the borrower has demonstrated sustained performance. Arrangement 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. Distributions from income are declared by the
Trust on a monthly basis. Distributions from capital gains, if any, are
declared on at least an annual basis. 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 temporary 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 or 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.
33
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS as of February 28 1997
- --------------------------------------------------------------------------------
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 year ended February 28, 1997, the cost of purchases and the proceeds
from principal repayment and sales of investments, excluding short-term notes,
totaled $1,327,884,353 and $848,787,456, respectively. At February 28, 1997, the
Trust held senior loans valued at $1,278,057,350 representing 98.8% of its total
investments. 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 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 loans 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 FDlC 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 loans
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>
Date 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.-Option 11/11/92 --
Autotote Systems, Inc.-Warrant 11/11/92 --
Capital Tool & Design-Warrants 07/26/96 --
Covenant Care, Inc.-Warrants 12/22/95 --
Cruise Ship, LLC-Warrant, Voting Share 09/13/95 --
</TABLE>
34
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS as of February 28, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Date of Cost or
(Continued) Acquisition Assigned Basis
---------- ----------
<S> <C> <C>
Cruise Ship, LLC-Warrant, Non-Voting Share 09/13/95 --
Dan River (Braelen) Corp.-Common 09/15/91 1,529,753
KDI Corp. Units of Trust 09/19/95 --
Medtech Products, Warrants 11/19/96 --
Staff Capital, L.P., Unit Common Limited Partnership 09/01/95 100
Staff Capital, L.P., Unit Preferred Limited Partnership 09/01/95 61,000
---------
Total restricted securities excluding senior loans (market value of
$9,557,597 was 0.93% of net assets at February 28, 1997) $ 4,075,615
===========
</TABLE>
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.
The Manager has agreed to reduce its fee for a period of three years from the
Expiration Date of the November 12, 1996 Rights Offering (See Note 5) 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.
NOTE 4 - COMMITMENTS
The Trust has entered into both a 364 day and a four year revolving credit
agreement to borrow up to $400 million from a syndicate of major banks maturing
May 2, 2000. Borrowing rates under these agreements are based on a fixed spread
over LIBOR or the federal funds rate. The Trust also pays an unused arrangement
fee for any unborrowed amount amortized over 364 days and four years,
respectively. The amount of borrowings outstanding at February 28, 1997, was
$267.0 million at a weighted average interest rate of 5.83%, which represented
20.6% of net assets plus borrowings.
35
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS as of February 28, 1997
- --------------------------------------------------------------------------------
Average borrowings for the year ended February 28, 1997, were $131,772,603 and
the average interest rate was 5.95%.
As of February 28, 1997, the Trust had unfunded loan commitments pursuant to the
terms of the following loan participation agreements:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Atlas Air $ 7,610,770 MAFCO Financial Corp. $20,598,000
Classic Cable 37,321 Pathmark 3,346,875
Color Tile, Inc. 1,395,830 The Presley Companies 2,000,000
Edward's Baking Co. 1,011,250 Ralph's Grocery Co. 3,722,263
Grimes Aerospace Co 2,371,704 Rowe International, Inc. 100,000
Liggett Group, Inc. 767,571 Titanium Metals, Inc. 5,000,000
-----------
$47,961,584
-----------
</TABLE>
NOTE 5 - RIGHTS OFFERINGS
On October 18,1996, the Trust issued to its shareholders non-transferable rights
which entitled the holders to subscribe for 18,122,963 shares of the Trust's
common stock at the rate of one share of common stock for each five rights held.
On November 12, 1996, the offering expired and was fully subscribed. The Trust
issued 18,122,963 shares of its common stock to exercising rights holders at a
subscription price of $9.09. Offering costs of $6,972,203 were charged against
the offering proceeds.
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 year ended February 28,
1997, the Trust received earnings credits of $25,424.
NOTE 7- SUBSEQUENT EVENT
Subsequent to February 28, 1997, the Trust declared a dividend from net
investment income of $0.0630 payable on March 20, 1997 to shareholders of record
on March 10, 1997.
36
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS as of February 28, 1997
- --------------------------------------------------------------------------------
Management's Additional Operating Information (Unaudited)
--------------------------------------------------------
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 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.
37
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees
Pilgrim America Prime Rate Trust:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Pilgrim America Prime Rate Trust (the "Trust")
as of February 28, 1997, and the related statements of operations and cash flows
for the year then ended, and the changes in net assets and financial highlights
for each of the years in the two-year period ended February 28, 1997. These
financial statements and financial highlights are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. For all
periods ending prior to March 1, 1995, the financial highlights were audited by
other auditors whose report thereon dated March 16, 1995, expressed an
unqualified opinion on those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. Our procedures included verification of
securities owned as of February 28, 1997, by examination and other procedures we
considered necessary. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the 1997 and 1996 financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Pilgrim America Prime Rate Trust as of February 28, 1997, and the
results of its operations and its cash flows for the year then ended, and the
changes in its net assets and its financial highlights for each of the years in
the two-year period ended February 28, 1997, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
April 18,1997
38
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
TAX INFORMATION (Unaudited)
- --------------------------------------------------------------------------------
The Trust is required by Subchapter M of the Internal Revenue Code of 1986, as
amended, to advise within 60 days of the Trust's fiscal year end (February 28,
1997) as to the federal tax status of distributions received by the Trust's
shareholders. Accordingly, the Trust is hereby advising you that the following
dividends were paid during the fiscal year ended February 28, 1997:
<TABLE>
<CAPTION>
Per Share
Type of Dividend Amount Ex-Dividend Date Payable Date
- ---------------- ------- ---------------- ------------
<S> <C> <C> <C>
Ordinary Income $0.0645 03/07/96 03/21/96
$0.0678 04/03/96 04/18/96
$0.0650 05/08/96 05/22/96
$0.0690 06/06/96 06/20/96
$0.0663 07/03/96 07/18/96
$0.0695 08/08/96 08/22/96
$0.0698 09/06/96 09/19/96
$0.0685 10/08/96 10/23/96
$0.0698 11/07/96 11/22/96
$0.0685 12/05/96 12/19/96
$0.0698 12/27/96 01/13/97
$0.0698 02/06/97 02/21/97
--------
Total $0.8183
--------
</TABLE>
Corporate shareholders are generally entitled to take the dividend received
deduction on the portion of the Trust's dividend distributions that qualify
under tax law. The percentage of the Trust's fiscal year 1997 net investment
income dividends that qualify for the corporate dividends received deductions is
100%.
Shareholders are strongly advised to consult their own tax advisers with respect
to the tax consequences of their investment in the Trust. In January 1997, you
should have received an IRS Form 1099 DIV regarding the federal tax status of
the dividends and distributions received by you in calendar year 1996.
39
<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 DST Systems, Inc
Two Renaissance Square P O Box 41936840
40 North Central Avenue Kansas City, Missouri 64141
Suite 1200
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.
40
<PAGE>
Pilgrim America Funds
Masters 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-040197 042997
