Pilgrim America Prime Rate Trust
ANNUAL REPORT
FEBRUARY 28, 1998
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Pilgrim America Prime Rate Trust
ANNUAL REPORT
February 28, 1998
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Table of Contents
Letter to Shareholders .................... 2
Shareholder Letter Footnotes .............. 11
Statistics and Performance ................ 13
Performance Footnotes ..................... 15
Additional Notes and Information .......... 16
Portfolio of Investments .................. 17
Statement of Assets and Liabilities........ 24
Statement of Operations ................... 25
Statements of Changes in Net Assets ....... 26
Statement of Cash Flows ................... 27
Financial Highlights ...................... 28
Notes to Financial Statements ............. 30
Report of Independent Auditors ............ 35
Tax Information ........................... 36
Fund Advisor and Agents ................... 37
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1
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Pilgrim America Prime Rate Trust
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LETTER TO SHAREHOLDERS
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Dear Fellow Shareholders:
The objective of the Trust is to provide shareholders with a high level of
current income consistent with the preservation of capital. Lipper Analytical
Services, Inc. ("Lipper") calculates and ranks total returns by examining these
objectives in relation to other funds which invest in senior floating rate
loans. Once again, Lipper has ranked the Trust first in the Loan Participation
Funds category among seven, six and five funds for the respective one, three and
five-year periods ended February 28, 1998.(1)
During the fiscal year, the Trust declared distributions to shareholders
totaling $0.8533 per share. In relation to the average month-end net asset value
("NAV") per share, this is equivalent to 9.08% per annum (Chart One). Based on
the average of the closing prices of the Trust's stock at each month-end, the
yield was equivalent to 8.41% per annum. By comparison, the Prime Rate was 8.50%
throughout the year, and 60-day LIBOR averaged 5.66%.
FISCAL 1998 PERFORMANCE
PRIME
MONTH RATE PRIME 60-DAY
ENDED TRUST(2) RATE(3) LIBOR(4)
----- -------- ------- --------
03/31/97 8.678% 8.500% 5.660%
04/30/97 8.857% 8.500% 5.688%
05/31/97 8.687% 8.500% 5.688%
06/30/97 8.976% 8.500% 5.653%
07/31/97 8.740% 8.500% 5.594%
08/31/97 8.705% 8.500% 5.625%
09/30/97 8.866% 8.500% 5.625%
10/31/97 8.705% 8.500% 5.688%
11/30/97 8.876% 8.500% 5.840%
12/31/97 8.852% 8.500% 5.691%
01/31/98 8.724% 8.500% 5.508%
02/28/98 8.653% 8.500% 5.605%
CHART ONE
The Trust's month-end NAV ranged between $9.43 and $9.31 during the year. The
variation, which is greater than normal, is attributable in part to our efforts
to reduce the level of non-performing assets in the portfolio. On February 28,
1997, non-performing assets were 1.86% of total assets compared to 0.97% on
February 28, 1998. The manager believes that this reduction in non-performing
assets is, in general, beneficial to shareholders. The present composition of
non-performing assets will be discussed later in this letter.
2
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Pilgrim America Prime Rate Trust
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LETTER TO SHAREHOLDERS
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MARKET PERFORMANCE
Of particular note this year has been the stock price performance of the Trust.
The Trust's shares have traded above NAV during fiscal 1998. Chart Two
illustrates market price in relation to NAV during the past year and the
discount or premium to NAV.
MARKET PRICE PERFORMANCE
Price Net Asset Value % Premium/Discount
----- --------------- ------------------
21 Mar 97 9.750 9.410 3.61
11 Apr 97 10.125 9.380 7.94
02 May 97 10.000 9.420 6.16
23 May 97 10.125 9.400 7.71
13 Jun 97 10.125 9.390 7.83
04 Jul 97 10.000 9.430 6.04
25 Jul 97 10.125 9.410 7.60
15 Aug 97 10.188 9.370 8.72
05 Sep 97 10.125 9.330 8.52
26 Sep 97 10.188 9.390 8.49
17 Oct 97 10.188 9.380 8.61
07 Nov 97 10.250 9.350 9.63
28 Nov 97 10.250 9.390 9.16
19 Dec 97 10.375 9.380 10.61
09 Jan 98 10.313 9.330 10.53
30 Jan 98 10.250 9.380 9.28
20 Feb 98 10.313 9.340 10.41
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% PREM/DISC DATA
Curr 10.41
High 12.18 on 01/23/98
Avg 8.18
Low 3.61 on 03/21/97
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Source: BLOOMBERG Financial Markets
Past performance is no guarantee of future results.
CHART TWO
The percentage difference of the market price over the NAV is known as the
"premium". In a fixed income closed-end fund, the premium represents the price
an incoming shareholder is prepared to pay to capture a particular yield. Trust
investors also are willing to pay a premium because: (a) Trust asset values have
been stable and largely unaffected by interest rate changes; (b) Trust shares
are highly liquid trading on the New York Stock Exchange; and (c) the Trust
yield fluctuates with short-term interest rates. Investors do not buy fixed
income closed-end funds to generate capital gains. As the prominent portfolio
manager of another fixed income closed-end fund put it, "Premiums exist for
three reasons: Yield, Yield, and Yield."
3
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Pilgrim America Prime Rate Trust
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LETTER TO SHAREHOLDERS
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Chart Three shows the Trust's distribution rates in comparison to its peer group
as calculated by Lipper, and in relation again to the Prime Rate and the London
Inter-Bank Offered Rate (LIBOR).
COMPARATIVE PERFORMANCE
TRAILING 12 MONTH AVERAGE
PRIME RATE COMPOSITE OF
TRUST COMPARABLE FUNDS(5) PRIME RATE 60 DAY LIBOR
% % % %
---------- ------------------- ---------- ------------
1/91 9.675% 9.537% 9.917% 8.063%
1/92 7.739% 7.587% 8.125% 5.574%
1/93 6.203% 5.725% 6.208% 3.677%
1/94 5.955% 5.496% 6.000% 3.214%
1/95 7.288% 6.551% 7.458% 4.927%
1/96 8.886% 7.853% 8.813% 5.812%
1/97 8.569% 6.814% 8.250% 5.422%
2/28/98 8.787% 7.081% 8.500% 5.655%
Past performance is no guarantee of future results.
CHART THREE
As of February 28, 1998, the Trust's NAV based yield advantage over its peer
group was 1.67%(6). The yield advantage experienced by the Trust seems to be
generally attributable to four factors:
1. Borrowing for Investment Purposes
The Trust is alone in its peer group in being able to borrow consistently for
investment purposes. The structure of the other funds does not make continuous
leverage feasible. We believe this has contributed approximately 0.58% per annum
to the Trust's annual yield. It is interesting to note that the Trust's premium
has persisted virtually uninterrupted since shareholders approved the use of
borrowing for investment purposes in May, 1996.
2. Full Investment
It is difficult for our peers to match our ability to remain fully invested in
senior loans because: (1) they maintain a relatively large cash position based
on daily share sales to meet redemption requirements; and (2) they maintain cash
to be able to acquire assets which become available on an irregular and
unpredictable schedule. At times during the last year, the Trust's peers have
had as much as 30% of their portfolios invested in commercial paper or other
investments generating yields 2-3% below the gross yield generated at the margin
by the Trust. If one assumes that this phenomenon produced an advantage of 2% in
relation to, say, 25% of the assets of our peers, the benefit to the Trust's
shareholders would have been 0.50% per annum.
4
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Pilgrim America Prime Rate Trust
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LETTER TO SHAREHOLDERS
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3. Lower Expense Ratio
The cost of administering by our peers is relatively high. Leaving aside the
cost of leverage (which the Trust only incurs when the proceeds of borrowing can
be invested profitably in senior loans), the
expenses incurred in running the Trust were 1.04% for the year. The average
expense ratio for our peers is estimated to be 1.38% as of February 28, 1998, a
peer group variance of 0.34%.(7)
4. Investment Selection
The Trust's investment policy contributes the remaining incremental yield. The
Trust is able to generate some yield advantage because it acquires a proportion
of its assets from smaller companies which management believes pay somewhat
greater returns without disproportionately increasing the risk. We believe this
investment selection contributes an additional 0.25% on average as compared to
our peers.
In summary, we believe the difference that has existed in yield may be
illustrated as follows:
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Total
Estimate
--------
1. Borrowing for Investment 0.58%
2. Full Investment 0.50%
3. Lower Expense Ratio 0.34%
4. Investment Selection 0.25%
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1.67%
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Management believes that the Trust's ability to provide this higher yield
without substantially increasing risk is an important reason shareholders have
paid a premium for the Trust's shares.
ASSET QUALITY
Asset quality generally has remained within acceptable ranges. Recently, we have
reduced poorer quality assets by disposing of old non-performing assets.
Just prior to the end of February, the Trust's investment in a senior loan to
Liberty House, Inc. became non-performing. Liberty House, a Hawaiian department
store chain, defaulted on an interest payment in an effort to preserve cash for
operations. Like many Hawaiian businesses, Liberty House has suffered from the
Asian economic crisis. The Trust and other lenders are working with the company
to reconfigure the balance sheet to realize in due course the underlying value
of the business. This is an example, management believes, of the type of
investment which although currently non-performing, justifies patient handling
while the company works through the impact of exogenous circumstances. We do not
want to be pressured to sell non- or weak-performing assets in which recovery
prospects are good. Even so, we have reduced, through sales, the Trust's
exposure to Liberty House from a high of over $20 million to present
outstandings of about $11 million.
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Pilgrim America Prime Rate Trust
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LETTER TO SHAREHOLDERS
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The longer the economy performs so well, the more closely we approach the
inevitable decline in its fortunes. We have worked hard to keep non-performing
assets as low as possible as we try to limit the strain that will be placed on
the Trust's earnings when the volume of non-performing loans increases in line
with a deteriorating economy.
Elsewhere in the portfolio, quality remains acceptable. We try to maintain this
quality with a systematic credit review process. In particular, management
reviews in detail each new investment which typically involves meetings with
management and inspections of plant and other facilities. Our analysts may also
review third party information on the potential borrower and analyze the
material provided by the lead lender and borrower. Overall, our analysis focuses
on issues likely to support liquidity in the secondary market or recoveries in
the event of a sale or liquidation. Our continuing review of investments focuses
on the same general factors that we consider when making an initial commitment.
We use the data gathered in our review as we decide which transactions to sell
or buy. Our continuing analysis also ensures that we maintain awareness of
industry concentrations and trends.
Shareholders must always keep in mind that the Trust actively manages credit
risk but there will almost always be some level of non-performing loans in the
portfolio. This is normal for a portfolio of this type.
DIVERSIFICATION
We continue to use diversification of investments as our principal defense
against deterioration in credit quality. One of our principal tenets for running
the portfolio is to spread risk widely. Diversification seeks to help assure
shareholders that defaults or significant changes in value of the portfolio do
not affect the ability of the Trust to pay competitive dividends or have a
material effect on NAV. From time to time, we will seek to eliminate risk to
certain industry segments or to increase exposure in areas we deem to be
particularly attractive.
In past letters to shareholders, we have addressed diversification from four
different perspectives: individual borrower concentration, industry
diversification, equity sponsor and lead lender diversification.
6
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Pilgrim America Prime Rate Trust
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LETTER TO SHAREHOLDERS
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BORROWER CONCENTRATION
FISCAL 1997 VS. 1998
1997 1998
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Number of borrowers
Under $10 73 77
$10-$20 40 48
$20-$30 8 8
$30 & Over 3 1
PRINCIPAL BALANCE OUTSTANDING ($ IN MILLIONS)
CHART FOUR
INDUSTRY DIVERSIFICATION - PRIME RATE TRUST
FISCAL 1997 VS. 1998(8)
1997 1998
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General Industry 53% 47%
Healthcare, Education & Childcare 8% 13%
Broadcasting 8% 4%
Electronics 7% 8%
Beverage, Food and Tobacco 4% 8%
Chemicals, Plastics & Rubber 1% 7%
Retail Stores 12% 4%
Diversified & Conglomerate 4% 4%
Telecommunications 2% 4%
Leisure, Amusement, Motion Picture, Entertainment 1% 1%
---- ----
100% 100%
(% OF TOTAL SENIOR LOAN INVESTMENTS)
CHART FIVE
7
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Pilgrim America Prime Rate Trust
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LETTER TO SHAREHOLDERS
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Compared with the portfolio a year ago, the Trust now has higher exposures to
Healthcare, Electronics, Beverage, Chemicals and Telecommunications, and lower
exposure to Retail Stores.
Healthcare, our largest concentration, includes nursing homes, laboratory
equipment suppliers, acute care hospitals and medical practice supplies
manufacturers. Many industry segments exhibit similar ranges of diversity. We
look for ways in which the risks in businesses within a segment may be
correlated. For example, within Healthcare we monitor, among other things,
whether we have disproportionately high exposure to acute care hospitals and
whether there are risks in nursing homes connected in any way to managed care or
medical laboratories.
We prefer equity sponsors who, when buying businesses, conduct high levels of
diligence and who have clear, well communicated plans for their investment. We
also look for them to have the resources to be able to stay close to their
investments on a continuing basis.
1998 1997
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# of # of
Sponsored $ in Sponsored $ in
Investments Millions Investments Millions
Sponsor #1 5 71 5 63
Sponsor #2 6 67 6 60
Sponsor #3 3 35 2 60
Sponsor #4 2 34 2 56
Sponsor #5 3 32 2 47
Other Sponsors 115 1,134 108 1,057
CHART SIX
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Pilgrim America Prime Rate Trust
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LETTER TO SHAREHOLDERS
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Lead lenders may develop discrete credit cultures or credit management practices
which could lead to risk concentrations. To avoid this risk, the Trust acquires
its assets from a wide range of sources.
Chart Seven illustrates the Trust's exposure in its lead lending groups as
compared to February 28, 1997.
1998 1997
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# of % Total # of % Total
Investments Commitment Investments Commitment
Bank #1 29 20.2% 34 24.8%
Bank #2 17 15.6% 19 19.5%
Bank #3 8 6.1% 6 6.3%
Bank #4 7 5.8% 10 6.2%
Bank #5 5 4.9% 4 6.2%
Other Banks 68 47.4% 52 37.0%
CHART SEVEN
THE FOURTH QUARTER
The flow of new transactions was exceptionally strong during the last quarter of
fiscal year 1998. New investments included Werner Holding Co., Imperial Holly
Corporation, Koppers Industries Inc., Arrowhead Mills, Inc. and Omnipoint
Communications, Inc.
We continue to be concerned by the high multiples being paid to acquire
businesses. In some circumstances this leads to unacceptably high levels of debt
but in any event, over-paying for a business leaves investors at all levels of
the capital structure with much less flexibility. We believe we have been able
to select assets from those offered to us which in our view exhibit more
conservative capital structures or credit quality.
Repayments or sales during the quarter have included Doubletree Corporation,
Rayovac Corporation, Mag Aerospace Industries, Inc., Extendicare Health Services
and St. Laurent Paper Products.
Interest rates have remained benign. During the quarter, the Prime Rate has
remained constant at 8.50% and 60-day LIBOR ranged between 5.875% and 5.523%.
9
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Pilgrim America Prime Rate Trust
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LETTER TO SHAREHOLDERS
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OUTLOOK
Credit quality remains our single most important area of attention. Many of our
investments arise from changes of ownership where we finance the buyer of a
business. In addition to all the usual good habits associated with investing in
this asset class, we focus on two points:
1. What was the acquisition process? How thorough was the buyer's due diligence?
Does the overall price paid and the capital structure of the enterprise leave
sufficient flexibility to absorb business surprises?
2. Is the borrower's information technology ready for the turn of the century?
We look forward to another year in which the Trust will provide the
opportunities to help you achieve a successful investment experience.
Yours sincerely,
/s/ Robert W. Stallings
Robert W. Stallings
Chairman and Chief Executive Officer
Pilgrim America Group, Inc.
/s/ Howard Tiffen
Howard Tiffen
President
Chief Operating Officer
Senior Portfolio Manager
Pilgrim America Prime Rate Trust
10
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Pilgrim America Prime Rate Trust
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SHAREHOLDER LETTER FOOTNOTES
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(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, 1998, the Trust's average annual total returns,
based on NAV and assuming all rights were exercised, were 8.01%, 7.97%, and
8.47%, respectively. The Trust's 30-day standardized SEC yields as of
February 28, 1998 were 8.60% at NAV and 7.77% at market. 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.
(3) Source: BLOOMBERG Financial Markets.
(4) Source: IDD/Tradeline. The LIBOR rate is the London Inter-Bank Offered Rate
and is the benchmark for determining the interest paid on more than 90% of
the senior loans in the Trust's portfolio.
(5) 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 affected the distributions of
these companies.
(6) Yield advantage is the difference between the Trust's NAV yield and the
average NAV yield of those funds included in the Lipper Loan Participation
Fund Category (excluding the Trust) as of February 28, 1998. Those funds
who do not have 12 months continuous operations or whose expenses have been
100% reimbursed are excluded from the average.
(7) The average expense ratio is calculated by averaging the expense ratios of
those funds included in the Lipper Loan Participation Fund Category
(excluding the Trust) as of each fund's most recent annual or semi-annual
period-end. Those funds who do not have 12 months continuous operations or
whose expenses have been 100% reimbursed are excluded from the average.
(8) During the fiscal year ended February 28, 1998, the Trust reclassified the
portfolio industry categories to generally accepted Moody's categories.
Therefore the Trust reclassified industries as of the fiscal year ended
February 28, 1997 industries for the purpose of this comparison.
11
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Pilgrim America Prime Rate Trust
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SHAREHOLDER LETTER FOOTNOTES
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The views expressed in this letter reflect those of the portfolio manager
only through the end of the period of the report as stated on the cover.
The manager's views are subject to change at any time based on market and
other conditions.
This letter contains statements that may be "forward-looking statements."
Actual results could differ materially from those projected in the "forward
looking statements."
Performance data represents past performance which does not guarantee 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.
12
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Pilgrim America Prime Rate Trust
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STATISTICS AND PERFORMANCE as of February 28, 1998
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PORTFOLIO CHARACTERISTICS
Net Assets $1,034,402,810
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Assets Invested in Senior Loans $1,352,588,772*
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Total Number of Senior Loans 132
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Average Amount Outstanding per Loan $10,246,885
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Total Number of Industries 28
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Portfolio Turnover Rate 90%
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Average Loan Amount per Industry $48,306,742
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Weighted Average Days to Interest Rate Reset 46 days
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Average Loan Maturity 68 months
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Average Age of Loans Held in Portfolio 12 months
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*Includes loans and other debt received through restructures
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TOP 10 INDUSTRIES AS A % OF
NET ASSETS TOTAL ASSETS
Healthcare, Education and Childcare 17.3% 12.9%
Beverage, Food and Tobacco 10.5% 7.8%
Electronics 9.9% 7.4%
Chemicals, Plastics and Rubber 8.8% 6.5%
Automobiles 7.7% 5.7%
Buildings and Real Estate 6.3% 4.7%
Personal, Food and Misc. Services 5.9% 4.4%
Broadcasting 5.6% 4.2%
Printing and Publishing 5.2% 3.9%
Telecommunications 5.1% 3.8%
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TOP 10 SENIOR LOANS AS A % OF
NET ASSETS TOTAL ASSETS
MAFCO Financial Corp. 2.9% 2.2%
Community Health Systems 2.4% 1.8%
Favorite Brands International 2.3% 1.7%
Outsourcing Solutions 2.0% 1.5%
Papa Gino's, Inc. 2.0% 1.5%
Fairchild Semiconductor Corp. 2.0% 1.5%
Integrated Health Services 1.9% 1.4%
Sun Healthcare 1.9% 1.4%
24-Hour Fitness, Inc. 1.9% 1.4%
Atlas Freighter Leasing 1.9% 1.4%
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13
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Pilgrim America Prime Rate Trust
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STATISTICS AND PERFORMANCE as of February 28, 1998
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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>
February 28, 1998* 8.50% 8.60% 7.77% 8.75% 7.92%
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November 30, 1997 8.50% 9.72% 9.15% 8.74% 8.08%
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August 31, 1997 8.50% 8.58% 7.95% 8.82% 8.19%
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May 31, 1997 8.50% 9.72% 9.15% 8.47% 8.23%
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</TABLE>
This table sets forth the Trust's monthly dividend performance which is
summarized quarterly.
*Distribution Rates exclude the special dividend of $0.02875/share declared
December 19, 1997.
Including the special dividend results in a distribution rate @ NAV of 10.00%,
and a distribution rate @ MKT of 9.05%.
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AVERAGE ANNUAL TOTAL RETURNS
NAV MKT
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1 Year 8.01% 12.70%
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3 Years 8.42% 15.61%
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5 Years 7.97% 11.46%
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Since Trust Inception(G,I) 8.47% N/A
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Since Initial Trading on NYSE(H) N/A 11.68%
------------------------------------------------------
Assumes rights were exercised and excludes sales charges and commissions
(C,D,E,F)
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Performance data represents past performance and is no guarantee of future
results.
See performance footnotes on page 15.
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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 Composite 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 Composite 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 Composite 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, 1998, were 7.36% and 8.15% 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 rights offer, 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. The offering was completed on January 27, 1995.
(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 $5,926,209 were charged against the offering proceeds.
(G) Inception Date - May 12, 1988.
(H) Initial Trading on NYSE - March 9, 1992.
(I) 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.
Registration statements covering securities to be issued pursuant to a Cash
Purchase Plan and a Shelf Offering have been filed with the Securities and
Exchange Commission. These securities may not be sold nor may offers to buy be
accepted prior to the time a registration statement becomes effective. The
prospectus shall not constitute an offer to sell, or the solicitation of an
offer to buy, nor shall there be any sale of these securities in any state in
which such offer, solicitation or sale would be unlawful prior to registration
or qualification under the securities laws of any such state. Pilgrim America
Securities, Inc. will provide administrative or distribution services under
certain offerings. For more complete information about the offerings, once
effective, contact Pilgrim America Prime Rate Trust at 40 N. Central Ave., Suite
1200, Phoenix, AZ 85004 to request a free prospectus which contains more
complete information on all charges, fees and expenses. Please read the
prospectus carefully before you invest or send money.
15
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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
The Trust offers a Dividend Reinvestment and Cash Purchase Plan ("Plan") which
allows shareholders a simple way to reinvest dividends and capital gains
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.
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, new shares will be issued at the greater of
(i) net asset value, at the close of business on the valuation date or (ii) at
95% of average market price.
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 1998 Dividends:
DECLARATION DATE EX-DATE PAYABLE DATE
January 30 February 6 February 24
February 27 March 6 March 23
March 31 April 8 April 22
April 30 May 7 May 22
May 29 June 8 June 22
June 30 July 8 July 22
July 31 August 6 August 24
August 31 September 8 September 22
September 30 October 8 October 22
October 30 November 6 November 23
November 30 December 8 December 22
December 21 December 29 January 13, 1999
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.
16
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of February 28, 1998
- --------------------------------------------------------------------------------
SENIOR LOANS*
(Dollar weighted portfolio interest reset period is 46 days)
<TABLE>
<CAPTION>
Principal
Amount Loan Stated
(000's) Industry/Borrower Type Maturity Value
- ------- ----------------- ---- -------- -----
<S> <C> <C> <C> <C>
Aerospace and Defense: 3.2%
$ 8,933 Erickson Air-Crane Co. (heavy lift helicopters) Term B 12/31/04 $ 8,932,500
6,273 Technetics Corp. (aircraft engine components) Term 06/20/02 6,272,727
9,355 Tri Star/Odyssey, Inc. (aerospace hardware distributor) Term 09/30/03 9,355,000
4,486 United Defense (defense contractor) Term B 10/02/05 4,485,738
4,357 United Defense Term C 10/08/05 4,356,972
-----------
33,402,937
-----------
Automobile: 7.7%
15,000 American Axel and Manufacturing (car/truck axel
manufacturing) Term B 04/30/06 15,000,000
17,000 Breed Technologies, Inc. (airbags/seatbelts) Term 10/30/98 17,000,000
10,000 Cambridge Industries, Inc. (automotive plastics) Term B 06/30/05 10,000,000
9,442 Capital Tool & Design (brake backing plates) Term B 07/19/03 9,441,569
3,068 Hayes Wheels International (automotive wheels) Term B 07/31/04 3,067,556
2,486 Hayes Wheels International Term C 07/31/05 2,485,778
6,250 Safelite Glass Corp. (automobile windshield replacement) Term B 12/23/04 6,250,000
6,250 Safelite Glass Corp. Term C 12/23/05 6,250,000
9,726 Schrader, Inc. (fluid/air control valve manufacturer) Term B 11/30/02 9,725,948
-----------
79,220,851
-----------
Beverage, Food and Tobacco: 10.5%
7,000 Arrowhead Mills, Inc. (natural foods) Term B 10/31/04 7,000,000
3,625 Aurora Foods (pancake mixes, syrups) Term B 12/31/05 3,625,000
3,625 Aurora Foods Term C 06/30/06 3,625,000
10,125 Del Monte Corp. (food manufacturing and distribution) Term B 03/31/05 10,125,000
2,659 Edward's Baking Co. (food service bakery) Term A 09/30/03 2,659,244
3,325 Edward's Baking Co. Term B 09/30/05 3,325,000
3,325 Edward's Baking Co. Term C 09/30/05 3,325,000
13,930 Empire Kosher Poultry (kosher chicken and poultry) Term B 07/31/04 13,930,000
20,697 Favorite Brands International (confectionary manufacturer) Term B 08/01/04 20,696,885
3,397 Favorite Brands International Term C 02/01/05 3,396,664
8,282 Imperial Holly Corp. (sugar producer) Term B 12/31/05 8,282,051
8,706 Snapple Beverage Co. (soft drink manufacturer) Term B 06/01/04 8,706,250
8,706 Snapple Beverage Co. Term C 06/01/05 8,706,250
7,030 Van De Kamp's (frozen foods) Term B 04/30/03 7,029,687
4,411 Van De Kamp's Term C 09/30/03 4,410,601
-----------
108,842,632
-----------
Broadcasting: 5.6%
10,368 Benedek Broadcasting Television Corp. (broadcasting) Axel A (A) 12/31/04 10,368,383
4,554 Benedek Broadcasting Television Corp. Axel B (A) 12/31/04 4,553,605
903 Classic Cable (rural cable system operator) Revolver 06/30/05 902,534
10,124 Classic Cable Term B 06/30/03 10,124,179
7,463 Entravision (Spanish broadcast television) Term B 12/31/04 7,462,500
15,000 FrontierVision (cable television) Term B 03/31/06 15,000,000
10,000 Intermedia Partners IV (cable television) Term 01/01/05 10,000,000
-----------
58,411,201
-----------
</TABLE>
See Accompanying Notes to Financial Statements.
17
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Loan Stated
(000's) Industry/Borrower Type Maturity Value
- ------- ----------------- ---- -------- -----
<S> <C> <C> <C> <C>
Buildings and Real Estate: 6.3%
$ 6,000 Dayton Superior (concrete/masonry accessories) Term 09/29/05 $6,000,000
10,969 Falcon Building Products (building products) Term B 06/30/05 10,968,571
3,584 Goodman Manufacturing Co., L.P. (air conditioning
manufacturer) Term B 09/30/04 3,583,630
3,584 Goodman Manufacturing Co., L.P. Term C 09/30/05 3,583,631
8,000 Kevco, Inc. (manufactured home components) Term B 02/02/05 8,000,000
4,000 The Presley Companies (homebuilder) Revolver 05/30/98 4,000,000
5,500 Reliant Building Products, Inc. (vinyl windows) Term B 03/31/04 5,500,000
13,930 Tree Island Industries (nail and wire products) Term B 03/31/03 13,930,000
870 United Building Materials, Inc. (stone and concrete
products)(4) Term 12/31/99 870,161
4,050 Werner Holding Co. (ladders) Term B 11/30/04 4,050,000
4,950 Werner Holding Co. Term C 11/30/05 4,950,000
----------
65,435,993
----------
Cargo Transport: 4.4%
19,727 Atlas Freighter Leasing (air cargo carrier) Term 05/29/04 19,727,027
14,765 Evergreen International (air cargo carrier) Term B 05/07/03 14,764,502
5,500 Oshkosh Trucking (specialized truck manufacturer) Term B 03/31/05 5,500,000
5,500 Oshkosh Trucking Term C 03/31/06 5,500,000
----------
45,491,529
----------
Chemicals, Plastics and Rubber: 8.8%
4,764 Behr Process Corp. (paint manufacturer) Term B 03/31/04 4,764,000
3,176 Behr Process Corp. Term C 03/31/05 3,176,000
11,340 Cedar Chemical Corp. (specialty chemicals) Term B 10/30/03 11,339,688
3,581 Foamex, L.P. (polyurethane foam) Term B 06/30/05 3,580,863
3,255 Foamex, L.P. Term C 06/30/06 3,255,329
5,000 Foamex, L.P. Term D 12/31/06 5,000,000
4,687 GEO Specialty Chemicals (specialty chemicals) Term A 09/25/02 4,687,500
9,950 GEO Specialty Chemicals Term B 03/25/04 9,950,000
7,000 Huntsman Chemical (specialty chemicals) Term 03/15/07 7,000,000
1,944 Huntsman Chemical Term B 03/15/04 1,944,286
1,944 Huntsman Chemical Term C 03/15/04 1,944,286
2,179 Huntsman Corp. (industrial chemicals) Revolver 12/31/02 2,179,116
684 Huntsman Corp. Term A 12/31/02 683,823
5,000 Huntsman Corp. Term B 12/31/05 5,000,000
8,780 Intesys Technologies, Inc. (contract engineering and
manufacturing) Term B 12/31/01 8,780,488
6,122 NEN Life Sciences Products (biochemicals) Term B 12/31/04 6,122,449
6,500 Sunbelt Manufacturing LLC (plastics manufacturer) Term B 09/30/04 6,500,000
4,834 Texas Petrochemical Corp. (industrial chemicals) Term B 06/30/04 4,834,118
----------
90,741,946
----------
Containers, Packaging and Glass: 1.4%
2,793 Calmar, Inc. (non-aerosol fluid dispensing systems) Term A 09/15/03 2,792,857
2,095 Calmar, Inc. Term B 03/15/04 2,094,643
5,698 RIC Holdings, Inc. (packaging and paper products) Term B 02/27/04 5,698,452
4,252 RIC Holdings, Inc. Term C 08/31/04 4,252,102
----------
14,838,054
----------
</TABLE>
See Accompanying Notes to Financial Statements.
18
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Loan Stated
(000's) Industry/Borrower Type Maturity Value
- ------- ----------------- ---- -------- -----
<S> <C> <C> <C> <C>
Diversified/Conglomerate Manufacturing: 1.1%
$ 4,883 Jackson Products, Inc. (industrial safety equipment
manufacturer) Term B 09/01/02 $ 4,882,609
4,888 Jackson Products, Inc. Term C 09/01/03 4,887,500
1,333 Jackson Products, Inc. Term D 09/01/03 1,333,125
276 @ KDI Corp. (defense and leisure products) (2) Term A N/A 16,791
13 @ KDI Corp. (2) Term B N/A 13,187
-----------
11,133,212
-----------
Diversified/Conglomerate Services: 4.9%
30,000 MAFCO Financial Corp. (diversified services and
entertainment) Term 03/20/99 30,000,000
12,771 Outsourcing Solutions (accounts receivable management) Term B 11/06/03 12,771,127
8,331 Outsourcing Solutions Term C 10/15/04 8,331,323
-----------
51,102,450
-----------
Ecological: 2.0%
5,611 Clean Harbors (environmental services) Term 05/08/00 5,610,698
4,975 Laidlaw Environmental Services, Inc. (waste management) Term B 05/15/04 4,975,000
4,975 Laidlaw Environmental Services, Inc. Term C 05/15/05 4,975,000
4,938 Rumpke (waste management) Term 09/25/02 4,937,500
-----------
20,498,198
-----------
Electronics: 9.9%
5,676 Anacomp, Inc. (document storage and imaging) Term 02/28/01 5,676,466
7,425 Celestica (diversified electronic device manufacturer) Term B 06/30/03 7,425,000
7,000 Details, Inc. (circuit board manufacturer) Term B 10/27/04 7,000,000
11,875 Dictaphone Acquisition, Inc. (dictation and recording
equipment) Term B 06/30/02 11,875,000
5,000 Dictaphone Acquisition, Inc. Term C 06/30/03 5,000,000
20,363 Fairchild Semiconductor Corp. (electronic equipment) Term C 03/11/03 20,363,333
5,804 Intri-Plex Technologies, Inc. (disk drive component
manufacturer) Term 09/30/02 5,804,348
9,536 OK Industries, Inc. (circuit board manufacturing systems) Term 10/31/02 9,535,714
14,400 PSC Incorporated (scanning equipment) Term B 06/28/02 14,400,000
9,921 Sarcom, Inc. (systems integration) Term 11/20/02 9,920,635
6,000 Telex Communications Group (electronic equipment) Term B 11/06/04 6,000,000
-----------
103,000,496
-----------
Finance: 0.7%
7,467 National Partnership Investments Corp. (asset management) Term 06/30/01 7,466,667
-----------
Grocery: 4.1%
1,677 Pathmark Stores, Inc. (northeastern states supermarkets) Term A 06/15/01 1,677,232
9,083 Pathmark Stores, Inc. Term B 12/15/01 9,083,167
16,840 Schwegmann Giant Supermarket (Louisiana supermarkets) Term B 01/31/04 16,839,698
11,246 Star Markets Co., Inc. (Boston area supermarkets) Term B 12/31/02 11,246,217
3,489 Star Markets Co., Inc. Term C 12/31/03 3,488,636
-----------
42,334,950
-----------
</TABLE>
See Accompanying Notes to Financial Statements.
19
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Loan Stated
(000's) Industry/Borrower Type Maturity Value
- ------- ----------------- ---- -------- -----
<S> <C> <C> <C> <C>
Healthcare, Education and Childcare: 17.3%
$ 4,113 Alaris Medical Systems (infusion pumps) Term B 11/30/03 $ 4,112,938
4,113 Alaris Medical Systems Term C 11/30/04 4,112,938
3,871 Alaris Medical Systems Term D 05/31/05 3,871,000
8,973 Community Health Systems (hospitals) Term B 12/31/03 8,972,603
8,973 Community Health Systems Term C 12/31/04 8,972,603
6,747 Community Health Systems Term D 12/31/05 6,746,575
6,000 Covenant Care, Inc. (long-term healthcare facilities) Term 06/30/99 6,000,000
2,934 Dade International (medical testing equipment manufacturer) Term B 12/31/04 2,934,335
2,934 Dade International Term C 12/31/04 2,934,335
10,039 Dade International Term D 12/31/04 10,038,747
7,463 Fountain View (nursing homes) Term B 09/30/04 7,462,500
9,794 Graphic Controls Corp. (industrial and medical charts) Term B 09/28/03 9,794,038
2,785 Hanger Orthopedics Group (orthopedic and prosthetic
services) Term B 12/31/01 2,784,732
12,500 Healthcare America, Inc. (youth psychiatric care) Term B 06/30/04 12,500,000
20,000 Integrated Health Services (long-term subacute care) Term C 12/31/05 20,000,000
6,250 Magellan Health Services (managed behavioral care) Term B 02/28/05 6,250,000
6,250 Magellan Health Services Term C 02/28/06 6,250,000
9,855 Mediq/PRN Life Support, Inc. (hospital equipment leasing) Term 09/28/98 9,854,628
5,000 Paragon Health Network, Inc. (nursing homes) Term B 03/31/05 5,000,000
5,000 Paragon Health Network, Inc. Term C 03/31/06 5,000,000
5,000 Prime Medical Supplies (lithotripter services) Term B 04/30/03 5,000,000
9,975 SMT Health (mobile MRI systems) Term 08/31/03 9,975,000
10,000 Sun Healthcare (nursing homes) Term B 10/01/04 10,000,000
10,000 Sun Healthcare Term C 10/01/05 10,000,000
-----------
178,566,972
-----------
Home and Office Furnishings, Housewares and Durable
Consumer Products: 3.8%
6,965 Desa International Term 11/26/04 6,965,000
15,864 ICON Health & Fitness Co. (exercise equipment) Term B 11/14/01 15,864,374
1,494 Panolam (design and manufacture wood paneling) Term A 01/31/03 1,494,281
8,536 Panolam Term B 01/31/03 8,536,106
4,878 Panolam Term C 01/31/03 4,877,775
2,000 Panolam Term D 01/31/03 2,000,000
-----------
39,737,536
-----------
Hotels, Motels, Inns and Gaming: 3.1%
6,974 Interstate Hotels Corp. (hotel management and ownership) Term C 06/25/04 6,974,074
8,241 Palace Station (gaming) Revolver 09/30/00 8,241,162
17,181 Sunset Station Hotel and Casino, Inc. (gaming) Term 09/30/00 17,181,362
-----------
32,396,598
-----------
Insurance: 0.7%
6,863 TRG Holdings Corp. (insurance run-off) Term 01/31/03 6,862,500
-----------
</TABLE>
See Accompnaying Notes to Financial Statements.
20
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Loan Stated
(000's) Industry/Borrower Type Maturity Value
- ------- ----------------- ---- -------- -----
<S> <C> <C> <C> <C>
Leisure, Amusement, Motion Pictures and
Entertainment: 1.9%
$ 3,750 AMFAC Parks and Resorts (park services operator) Term B 09/04/04 $3,750,000
3,750 AMFAC Parks and Resorts Term C 09/30/04 3,750,000
5,000 SFX Entertainment (live entertainment management) Term 05/31/00 5,000,000
7,157 Worldwide Sports & Recreation Corp. (optics, sports
products) Term B 03/31/01 6,977,665
----------
19,477,665
----------
Machinery (Nonagriculture, Nonconstruction,
Nonelectronic): 1.7%
7,579 Clearing - Niagara (metal stamping press manufacturer) Term 10/18/04 7,578,947
9,558 Columbus McKinnon (industrial lifts and hoists) Term B 03/31/04 9,558,474
----------
17,137,421
----------
Mining, Steel, Iron and Nonprecious Metals: 4.0%
5,940 Cable Systems International (cable wire manufacturer) Term B 10/04/02 5,940,000
3,269 Centennial Resources (coal mining) Term A 03/31/02 3,269,231
8,510 Centennial Resources Term B 03/31/04 8,509,615
9,775 GS Technologies (metal products) Term 09/30/02 9,775,000
10,000 Koppers Industries, Inc. (carbon products manufacturer) Term B 11/30/04 10,000,000
548 National Refractories, Inc. (kiln lining materials) Term B 09/30/99 548,287
3,270 National Refractories, Inc. Term C 09/30/99 3,269,726
----------
41,311,859
----------
Oil and Gas: 0.4%
1,091 Perf-O-Log (oil field services) Term 08/11/03 1,090,909
2,902 Perf-O-Log Term B 08/11/03 2,901,817
----------
3,992,726
----------
Personal, Food and Miscellaneous Services: 5.9%
14,716 Boston Chicken, Inc. (home meal replacement) Lease/ 12/12/01 14,715,572
Term C
2,604 Denamerica Corp. (quick service restaurant franchisee) Term 12/31/01 2,604,303
2,551 Long John Silvers, Inc. (quick service seafood restaurant
chain) Term B 09/30/02 2,296,204
6,036 Papa Gino's, Inc. (quick service restaurants) Term A 02/19/02 6,035,525
15,064 Papa Gino's, Inc. Term B 02/19/04 15,064,474
6,500 24-Hour Fitness, Inc. (health club operator) Term A 12/31/02 6,500,000
13,500 24-Hour Fitness, Inc. Term B 12/31/04 13,500,000
----------
60,716,078
----------
Personal and Nondurable Consumer Products
(Manufacturing Only): 3.9%
1,218 AM Cosmetics (cosmetics and skin care products) Term A 06/30/03 1,217,949
8,709 AM Cosmetics Term B 12/31/04 8,709,367
4,173 Duo-Tang, Inc. (report cover manufacturer) Term A 12/31/02 4,173,265
5,323 Duo-Tang, Inc. Term B 12/31/02 5,322,923
10,911 Eye Care Centers, Inc. (retail eye care products and services) Term 09/26/02 10,911,348
9,875 Medtech Products, Inc. (non-prescription consumer
medications) Term B 10/15/02 9,875,000
----------
40,209,852
----------
</TABLE>
See Accompanying Notes to Financial Statements.
21
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Loan Stated
(000's) Industry/Borrower Type Maturity Value
- ------- ----------------- ---- -------- -----
<S> <C> <C> <C> <C>
Printing and Publishing: 5.2%
$ 8,455 Amscan Holdings (party goods manufacturer) Axel (A) 12/31/04 $ 8,454,545
6,738 Bankers Systems, Inc. (banking industry compliance services) Term B 11/01/02 6,737,500
19,583 Eastern Pulp and Paper (specialty paper) Term 08/31/04 19,583,332
12,313 Stone Container (pulp and paper products) Term D 10/01/03 12,312,500
3,354 Von Hoffman Press, Inc. (textbook manufacturer) Term B 05/29/04 3,353,572
3,354 Von Hoffman Press, Inc. Term C 05/29/05 3,353,571
-------------
53,795,020
-------------
Retail Stores: 4.9%
6,916 @ Color Tile, Inc. (home improvement retailer)(3) Term D 12/31/98 2,766,311
11,898 Liberty House, Inc. (Hawaii department store chain)(1) Term B 06/30/02 10,708,291
12,404 Murray's Discount Auto Parts (auto parts retailer) Term 06/30/03 12,403,846
5,000 Nebraska Book Co. (wholesale and retail textbooks) Term B 04/30/04 5,000,000
5,690 Peebles, Inc. (department store chain) Term A 04/30/01 5,689,938
7,772 Peebles, Inc. Term B 04/30/02 7,772,269
5,972 TravelCenters of America (road transport service centers) Term B 03/27/05 5,971,875
-------------
50,312,530
-------------
Telecommunications: 5.1%
8,920 Clarity Telecommunications (telecommunications service) Term B 07/01/03 8,920,000
1,173 Commnet (PCS services) Term B 09/30/06 1,172,903
2,323 Commnet Term C 03/31/07 2,322,920
6,504 Commnet Term D 09/30/07 6,504,177
1,873 Nextel Finance Co. (personal communications services) Term C 06/30/03 1,872,659
9,725 Omnipoint Communications, Inc. (PCS services) Term A 02/28/06 9,724,576
2,775 Omnipoint Communications, Inc. Term B 02/28/06 2,775,424
9,500 Shared Technologies, Inc. (communication services) Term B 03/31/03 9,500,000
10,000 Teletouch Communications (rural paging services) Term B 11/30/04 10,000,000
-------------
52,792,659
-------------
Textiles and Leather: 2.3%
6,533 Harriet & Henderson (yarn manufacturer) Term A 06/12/00 6,533,240
6,825 Humphreys, Inc. (belts and personal leather goods) Term B 11/15/03 6,825,000
10,000 Polymer Group Term B 01/31/06 10,000,000
-------------
23,358,240
-------------
Total Senior Loans - 130.8% 1,352,588,772
-------------
(Cost $1,358,406,793)
OTHER CORPORATE DEBT
Diversified/Conglomerate Manufacturing: 0.6%
6,000 Capital Tool & Design (brake backing plates) Sub. Note 07/26/03 6,000,000
-------------
Total Other Corporate Debt - 0.6% 6,000,000
-------------
(Cost $6,000,000)
</TABLE>
See Accompanying Notes to Financial Statements.
22
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of February 28, 1998
- --------------------------------------------------------------------------------
COMMON STOCK AND PREFERRED STOCK
<TABLE>
<CAPTION>
Shares Value
------ -----
<S> <C> <C>
Apparel Products: 0.0%
13,294 @ Butterick Company, Inc. (sewing aids) $ 12,557
--------------
Diversified/Conglomerate Manufacturing: 0.0%
2,633 @ KDI Corp. -- common (defense and leisure products)(2) --
--------------
Diversified/Conglomerate Services: 0.3%
106,902 @ Staff Leasing, Inc. (employee leasing)(R) 2,669,877
--------------
Restaurants: 0.3%
413,980 @ America's Favorite Chicken Co. -- common (quick service restaurant chain)(R) 3,645,645
--------------
Textiles and Leather: 0.2%
127,306 @ Dan River, Inc. -- common (diversified textiles)(R) 1,890,494
--------------
Total Common Stock and Preferred Stock - 0.8% 8,218,573
--------------
(Cost $1,278,361)
</TABLE>
STOCK PURCHASE WARRANTS AND OTHER SECURITIES
<TABLE>
<S> <C> <C> <C>
1 @ Autotote Systems, Inc., Warrant representing 48,930 common
shares (designer and manufacturer of wagering equipment),
Expires 10/30/03(R) 29,406
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
26,606 @ KDI Corp. Units of Trust (defense and leisure products)(R)(2) --
--------------
Total Stock Purchase Warrants and Other Securities - 0.1% 457,935
(Cost $0) --------------
Total Investments (Cost $1,365,685,154) (5) 132.3% $1,367,265,280
Liabilities in Excess of Cash and Other Assets-Net (32.3) (332,862,470)
----- --------------
Net Assets 100.0% $1,034,402,810
===== ==============
</TABLE>
- ----------------
@ 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 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) 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 $1,365,685,154 and net unrealized
appreciation consists of the following:
Gross Unrealized Appreciation $ 7,621,244
Gross Unrealized Depreciation (6,041,118)
------------
Net Unrealized Appreciation $ 1,580,126
============
See Accompanying Notes to Financial Statements.
23
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES as of February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments in securities at value (Cost $1,365,685,154) $1,367,265,280
Receivables:
Interest 13,015,480
Other 7,011,065
Prepaid expenses 413,427
Prepaid arrangement fees on notes payable 411,346
--------------
Total assets 1,388,116,598
--------------
LIABILITIES:
Notes payable 342,000,000
Overdraft payable to custodian 6,017,373
Deferred arrangement fees on senior loans 3,389,720
Accrued interest payable 1,513,829
Accrued expenses 792,866
--------------
Total liabilities 353,713,788
--------------
NET ASSETS (equivalent to $9.34 per share, based on 110,764,488 shares
of beneficial interest authorized and outstanding, no par value) $1,034,402,810
==============
Net Assets Consist of:
Paid-in capital $1,051,265,527
Undistributed net investment income 11,926,714
Accumulated net realized loss on investments (30,369,557)
Net unrealized appreciation of investments 1,580,126
--------------
Net assets $1,034,402,810
==============
</TABLE>
See Accompanying Notes to Financial Statements.
24
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS for the Year Ended February 28, 1998
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $122,361,463
Arrangement fees earned 6,555,836
Other 2,822,904
------------
Total investment income 131,740,203
------------
EXPENSES:
Interest 21,267,359
Investment management fees 10,369,772
Administration fees 1,778,473
Revolving credit facility fees 897,642
Reports to shareholders 528,723
Transfer agent and registrar fees 528,559
Custodian fees 317,152
Miscellaneous expense 274,810
Recordkeeping and pricing fees 265,898
Professional fees 163,524
Trustees' fees 79,120
Insurance expense 64,189
------------
Total expenses 36,535,221
Less: Earnings credits (12,242)
------------
Net expenses 36,522,979
------------
Net investment income 95,217,224
------------
REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENTS:
Net realized loss on investments (18,935,269)
Change in unrealized appreciation of investments 5,319,483
------------
Net loss on investments (13,615,786)
------------
Net increase in net assets resulting from operations $81,601,438
============
See Accompanying Notes to Financial Statements.
25
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, February 28,
1998 1997
-------------- --------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income $ 95,217,224 $ 78,947,910
Net realized loss on investments (18,935,269) (3,523,769)
Change in unrealized appreciation on investments 5,319,483 974,085
-------------- --------------
Net increase in net assets resulting from operations 81,601,438 76,398,226
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income (93,879,672) (77,640,968)
CAPITAL SHARE TRANSACTIONS:
Issuance from dividend reinvestment 15,591,705 11,628,959
Net increase in net assets derived from the sale of shares in
connection with rights offering -- 157,765,531
-------------- --------------
Net increase from capital share transactions 15,591,705 169,394,490
Total increase in net assets 3,313,471 168,151,748
NET ASSETS:
Beginning of period 1,031,089,339 862,937,591
-------------- --------------
End of period (including undistributed net investment
income of $11,926,714 and $10,417,526, respectively) $1,034,402,810 $1,031,089,339
============== ==============
SUMMARY OF CAPITAL SHARE TRANSACTIONS:
Shares issued in payment of distributions from net
investment income 1,624,659 1,011,738
Shares sold in connection with rights offering -- 18,122,963
-------------- --------------
Net increase in shares outstanding 1,624,659 19,134,701
============== ==============
</TABLE>
See Accompanying Notes to Financial Statements.
26
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS for the Year Ended February 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INCREASE (DECREASE) IN CASH
Cash Flows From Operating Activities:
Interest received $ 121,091,089
Facility fees received 3,565,374
Commitment fees received 284,631
Other income received 2,937,870
Interest paid (20,811,031)
Facility fees paid (14,718,105)
Other operating expenses paid (607,417)
Purchases of portfolio securities (1,323,740,402)
Proceeds from disposition of portfolio securities 1,229,609,371
--------------
Net cash used for operating activities (2,388,620)
--------------
Cash Flows From Financing Activities:
Dividends paid (78,287,967)
Overdraft financing 5,676,587
Loan advance 75,000,000
--------------
Net cash provided by financing activities 2,388,620
--------------
Net decrease in cash --
Cash at beginning of year --
--------------
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 81,601,438
--------------
Adjustments to reconcile net increase in net assets resulting from
operations to net cash provided by operating activities:
Increase in investments in securities (80,515,245)
Increase in dividends and interest receivable (1,270,374)
Decrease in other assets 114,966
Decrease in prepaid arrangement fees on notes payable 290,225
Increase in prepaid expenses (368,009)
Decrease in deferred arrangement fees on senior loans (2,705,831)
Increase in accrued interest payable 456,328
Increase in accrued expenses 7,882
--------------
Total adjustments (83,990,058)
--------------
Net cash used for operating activities $ (2,388,620)
==============
</TABLE>
See Accompanying Notes to Financial Statements.
27
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended February 28 or February 29,
----------------------------------------------------------------------
1998 1997(7) 1996(6) 1995 1994
---------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 9.45 $ 9.61 $ 9.66 $ 10.02 $ 10.05
Net investment income 0.87 0.82 0.89 0.74 0.60
Net realized and unrealized gain (loss) on
investments (0.13) (0.02) (0.08) 0.07 (0.05)
---------- ----------- -------- --------- --------
Increase in net asset value from investment
operations 0.74 0.80 0.81 0.81 0.55
Distributions from net investment income (0.85) (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 $ 9.34 $ 9.45 $ 9.61 $ 9.66 $ 10.02
========== =========== ======== ========= ========
Closing market price at end of period $ 10.31 $ 10.00 $ 9.50 $ 8.75 $ 9.25
Total Return
Total investment return at closing market
price(3) 12.70% 15.04%(5) 19.19% 3.27%(5) 8.06%
Total investment return at net asset value(4) 8.01% 8.06%(5) 9.21% 5.24%(5) 6.28%
Ratios/Supplemental Data
Net assets, end of period (000's) $1,034,403 $1,031,089 $862,938 $867,083 $719,979
Average borrowings (000's) $ 346,110 $ 131,773 $ -- $ -- $ --
Ratios to average net assets plus borrowings:
Expenses (before interest and other fees
related to revolving credit facility) 1.04% 1.13% -- -- --
Expenses 2.65% 1.92% -- -- --
Net investment income 6.91% 7.59% -- -- --
Ratios to average net assets:
Expenses (before interest and other fees
related to revolving credit facility) 1.39% 1.29% -- -- --
Expenses 3.54% 2.20% 1.23% 1.30% 1.31%
Net investment income 9.23% 8.67% 9.23% 7.59% 6.04%
Portfolio turnover rate 90% 82% 88% 108% 87%
Shares outstanding at end of period (000's) 110,764 109,140 89,794 89,794 71,835
</TABLE>
- ------------
(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.
28
<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.
29
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS as of February 28, 1998
- --------------------------------------------------------------------------------
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.
At February 28, 1998, the Trust had capital loss carryforwards for federal
income tax purposes of approximately $19,738,326 which are scheduled to
expire through February 28, 2006.
The Board of Trustees intends to offset any future net capital gains with
each capital loss carryforward until each carryforward has been fully
utilized or expires.
30
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS as of February 28, 1998
- --------------------------------------------------------------------------------
C. Security Transactions and Revenue Recognition. Security transactions are
accounted for on the 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.
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, 1998, the cost of purchases and the proceeds
from principal repayment and sales of investments, excluding short-term notes,
totaled $1,323,740,402 and $1,229,609,371, respectively. At February 28, 1998,
the Trust held senior loans valued at $1,352,588,772 representing 98.9% 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.
31
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS as of February 28, 1998
- --------------------------------------------------------------------------------
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 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 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
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 --
Dan River, Inc. -- Common 09/15/91 1,217,260
KDI Corp. Units of Trust 09/19/95 --
Staff Leasing, Inc. 09/01/95 61,100
----------
Total restricted securities excluding senior loans (market value
of $8,663,951 was 0.84% of net assets at February 28, 1998) $1,278,361
==========
</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.
32
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS as of February 28, 1998
- --------------------------------------------------------------------------------
NOTE 4 -- COMMITMENTS
The Trust has entered into both a 364 day and a four year revolving credit
agreement to borrow up to $515 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, 1998, was
$342.0 million at a weighted average interest rate of 6.0%, which represented
24.8% of net assets plus borrowings. Average borrowings for the year ended
February 28, 1998, were $346,109,802 and the weighted average interest rate
was 6.1%.
As of February 28, 1998, the Trust had unfunded loan commitments pursuant to
the terms of the following loan participation agreements:
Classic Cable $ 3,352 Palace Stations $3,350,212
Edward's Baking Co. 607,423 Papa Gino's, Inc. 3,178,808
Huntsman Corp. 2,430,923 Pathmark Stores 5,024,793
MAFCO Financial Corp. 10,000,000 The Presley Companies 2,000,000
Nextel Finance Co. 4,397,004 Viasystems 7,500,000
Outsourcing Solutions 1,668,677 -----------
$40,161,192
===========
NOTE 5 -- RIGHTS OFFERINGS
On October 18, 1996, the Trust issued to its shareholders 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 non-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, 1998, the Trust received earnings credits of $12,242.
NOTE 7 -- AFFILIATED TRANSACTIONS
During the year ended February 28, 1998, the Trust sold certain holdings in
senior loans to an affiliated fund managed by the Manager at prices determined
by the Manager to represent market prices. The proceeds and cost of such loans
were $28,157,102 and $28,177,000, respectively, excluding any benefit to the
Trust from the recognition of deferred arrangement fees.
33
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS as of February 28, 1998
- --------------------------------------------------------------------------------
NOTE 8 -- SUBSEQUENT EVENT
Subsequent to February 28, 1998, the Trust declared the following dividends
from net investment income:
Per Share Amount Payable Date Record Date
---------------- ------------ -----------
$0.0620 03/23/98 03/10/98
$0.0700 04/22/98 04/13/98
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.
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.
34
<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, 1998, and the related statements of operations and cash
flows for the year then ended, and the changes in net assets for each of the
years in the two-year period then ended and the financial highlights for each
of the years in the three year period then ended. 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 confirmation of
securities owned as of February 28, 1998, by examination and other procedures
we considered necessary. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the 1998, 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, 1998,
and the results of its operations and its cash flows for the year then ended,
and the changes in its net assets for each of the years in the two-year period
then ended and the financial highlights for each of the years in the three-year
period then ended, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
April 10, 1998
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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,
1998) 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, 1998:
Per Share
Type of Dividend Amount Ex-Dividend Date Payable Date
---------------- --------- ---------------- ------------
Ordinary Income $ 0.0630 03/06/97 03/20/97
$ 0.0695 04/08/97 04/22/97
$ 0.0685 05/08/97 05/22/97
$ 0.0695 06/05/97 06/19/97
$ 0.0695 07/08/97 07/22/97
$ 0.0700 08/07/97 08/21/97
$ 0.0695 09/04/97 09/18/97
$ 0.0685 10/08/97 10/23/97
$ 0.0695 11/06/97 11/20/97
$ 0.0685 12/04/97 12/18/97
$ 0.0988 12/19/97 01/13/98
$ 0.0695 02/06/98 02/24/98
---------
Total $ 0.8543
=========
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 1998 net investment
income dividends that qualify for the corporate dividends received deductions
is 0%.
Shareholders are strongly advised to consult their own tax advisers with
respect to the tax consequences of their investment in the Trust. In January
1998, 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
1997.
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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, AZ 85004-4424
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.
37
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Pilgrim America Funds
Pilgrim America Masters
Asia-Pacific Equity Fund
Pilgrim America Masters
MidCap Value Fund
Pilgrim America Masters
LargeCap Value Fund
Pilgrim America
Bank and Thrift Fund
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.
