<PAGE>
Pilgrim America Prime Rate Trust
[PHOTO: New York Stock Exchange]
Semi-Annual Report
August 31, 1997
<PAGE>
Pilgrim America Prime Rate Trust
Semi-Annual Report
August 31, 1997
-----
Table of Contents
Letter to Shareholders ..................... 2
Shareholder Letter Footnotes ............... 5
Statistics and Performance ................. 6
Performance Footnotes ...................... 8
Annual Shareholder Meeting ................. 9
Additional Notes and Information ........... 10
Portfolio of Investments ................... 11
Statement of Assets and Liabilities ........ 20
Statement of Operations .................... 21
Statements of Changes in Net Assets ........ 22
Statement of Cash Flows .................... 23
Financial Highlights ....................... 24
Notes to Financial Statements .............. 26
Fund Advisor and Agents .................... 32
1
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Pilgrim America Prime Rate Trust
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Letter to Shareholders
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Dear Fellow Shareholders,
We are pleased to report that Pilgrim America Prime Rate Trust (the "Trust") has
continued to meet its objective of providing a high current yield consistent
with the preservation of capital during the quarter ended August 31, 1997. Based
on the period-end net asset value ("NAV"), the Trust's distribution rate was
8.82% per annum, compared to the Prime Rate which was unchanged at 8.50%
throughout the quarter, and 60-day LIBOR which averaged 5.65%(1)(2). Adjusted
for dividends, month-end NAV's during the quarter were $9.35, $9.36 and $9.33,
respectively. Changes in NAV's were attributable to active management of
non-performing assets and adjustments to asset valuations.
Market Place
The primary market for syndicated corporate floating rate loans was extremely
busy during the period. Preliminary data indicates that overall volume was up 6%
and the number of transactions nearly doubled in the Trust's relevant market.
Financing in Media and Communications again led the market with Healthcare
playing an increasingly important role as the period progressed. Generally, deal
sponsors and lead-lending institutions maintained discipline on transaction
structures. We are not yet being asked to consider financing business on the
terms typical of the late 1980s. The main difference in the capital structures
that we see today compared to the late 1980s is the amount of equity being
contributed. Earlier, equity constituted as little as 8% of a company's total
capitalization. In 1997, equity contributed by sponsors has averaged 26% of
capital. This provides senior loans with significantly greater strength.
However, there is a tendency for equity investors to pay greater multiples of
earnings when they acquire businesses than was the case two or three years ago.
Their confidence has been bolstered by the length and resilience of the present
economic recovery. For them to achieve a satisfactory return on their
investments they need to see the trends of the last few years continue. An
assumption of growth is embedded in every transaction. The key issue for us is
the reasonableness of growth assumptions required to service our investments. As
senior lenders, we are less concerned with achieving high rates of growth than
we are with stability and predictability. Overall, we believe these latter
qualities exist in all but a handful of transactions comprising the Trust's
portfolio.
Recently, we have observed a dramatic increase in the number of new
transactions. This positive trend has been offset, however, as more
institutional investors are attempting to purchase senior floating rate loans.
This has put downward pressure on pricing which will result in lower absolute
returns to Trust
2
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Pilgrim America Prime Rate Trust
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Letter to Shareholders
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shareholders and increased competition for allocations in new
transactions. The Trust generally receives favorable treatment when allocations
are made due to its large size, and the large and growing commitment of the
Trust's portfolio manager, Pilgrim America Investments, Inc. ("PAI") to this
asset category. We believe that continued growth in asset size by the Trust and
PAI will enable the Trust to maintain its leading position in this market.
During the current phase of the market's development, the Trust's size and
access to assets has enabled the Trust to remain reasonably fully invested. In
the past we have pointed to higher fees as being a benefit of larger size. Today
it is more important than ever to obtain consistent and large allocations in
order to remain fully invested and to ensure opportunities for optimal
investment results.
Asset Quality
On May 31, 1997, non-performing loans represented 1.84% and 1.39% of net assets
and total assets, respectively. On August 31, 1997, these percentages were 1.43%
and 1.11%. By September 30th, non-performing loans were 1.27% and 0.96% of net
assets and total assets, respectively. The percentage of non-performing loans is
primarily due to the repayment and sales of certain non-performing loans. The
percentage improvement also resulted from the write-downs of two loans to
companies operating in bankruptcy. Although we were disappointed to have to
write-down these two loans further, such actions are part of our normal
operations. While it's impossible to predict the future, in general, we expect
our non-performing loan ratio to continue to improve through more repayments
and, where appropriate, through sales of investments.
We review the quality of our investments continuously. Generally, we find
companies meeting or exceeding plans for 1997. When they are not meeting plan,
they are usually performing better than they did in 1996. Since many investments
arise from changes in control, if performance is going to disappoint, it often
happens early in the life of a transaction. This is when management is trying to
implement the plans of new equity investors, which can have a short-term
disruptive influence on a business. The signs of a troubled investment can
usually be discerned in the early days of an ownership change. We use the
information made available to us to judge whether disruption is temporary or
secular. By acting on these judgments and selling assets, we hope to avoid
predictable losses.
Portfolio Changes
During the quarter, new investments included Key Energy Corp., Foamex L.P.,
Carson Products Co., Falcon Building Products , Empire Kosher Poultry,
Ameriserve Food Distribution, Healthcare America Inc., Tree Island Industries
and Snapple Beverage Co. Investments repaid or sold have included Staff
3
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Pilgrim America Prime Rate Trust
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Letter to Shareholders
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Capital, L.P., Bumble Bee Seafoods Inc., Ralph's Grocery Co., Grimes Aerospace
Corp., Lifestyle Furnishings International, RCTR Holdings, Inc. and Sky Chef's
International, Inc.
Outlook
Our market outlook has changed little since we wrote to you in the May quarterly
report. Inflation is benign, the economy's growth rate seems to be sustainable,
unemployment has not fallen further and labor is generally collaborating with
management to produce working conditions that allow continued competitiveness.
Instability among the economies of South East Asia is unlikely to have a
significant effect on companies in which we invest.
With each quarter that passes without a "Goldilocks Economy" disruption, we get
closer to the one in which we will report on the results from it having become
either too hot or too cold. In that event, we believe that our diversified,
mature portfolio will still offer the potential for continued relative NAV
stability and a relatively high current return consistent with capital
preservation.
As always, we welcome your questions and comments, and thank you on behalf of
the entire Pilgrim America team for your interest.
Sincerely,
/s/ Howard Tiffen /s/ Robert W. Stallings
- ------------------------------ -------------------------------
Howard Tiffen Robert W. Stallings
President, COO, and Chairman and CEO
Senior Portfolio Manager Pilgrim America Investments, Inc.
Pilgrim America Prime Rate Trust October 22, 1997
October 22, 1997
4
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Pilgrim America Prime Rate Trust
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Shareholder Letter Footnotes
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(1) The distribution rate is calculated by annualizing the dividends declared in
each month and dividing the resulting annualized dividend amount by the Trust's
net asset value or NYSE Compositie closing price, as applicable at the end of
the period. The distribution rate is based solely on the actual dividends and
distributions, which are made at the discretion of management.
(2) Source: Bloomberg Financial Markets. LIBOR 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.
Performance data represents past performance and is no guarantee of future
results. Investment return and principal value of an investment in the Trust
will fluctuate. Shares, when sold, may be worth more or less than their original
cost.
The views expressed in this letter reflect those of the portfolio manager, 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.
5
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Pilgrim America Prime Rate Trust
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Statistics and Performance as of August 31, 1997
- --------------------------------------------------------------------------------
Portfolio Characteristics
Net Assets $1,033,293,975
Assets Invested in Senior Loans $1,300,430,519
Total Number of Senior Loans 130
Average Amount Outstanding per Loan $ 10,003,312
Total Number of Industries 27
Year to Date Portfolio Turnover Rate 43%
Average Loan Amount per Industry $ 48,164,093
Weighted Average Days to Interest Rate Reset 42 days
Average Loan Maturity 65 months
Average Age of Loans Held in Portfolio 11 months
*Includes loans and other debt received through restructures
Top 10
Industries as a
% of Net Assets
Health, Education & Childcare 11.5%
Beverage, Food & Tobacco 9.8%
Chemicals, Plastics & Rubber 8.9%
Electronics 8.1%
Retail Stores 7.1%
Aerospace and Defense 6.8%
Broadcasting 6.3%
Personal, Food and Misc. Services 6.3%
Mining, Steel, Iron and
Nonprecious Metals 5.8%
Leisure, Amusement, Motion
Pictures and Entertainment 5.8%
Top 10
Senior Loans
as a % of Net Assets
MAFCO Financial Corp. 3.1%
RIC Holdings, Inc. 2.4%
Boston Chicken, Inc. 2.4%
Community Health Systems 2.4%
Favorite Brands Int'l 2.3%
Hurtsman Chemical 2.2%
Dade International 2.2%
International Home Foods 2.0%
24-Hour Fitness, Inc. 2.0%
Atlas Freighter Leasing 1.9%
6
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Pilgrim America Prime Rate Trust
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Statistics and Performance as of August 31, 1997
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Distribution Rates
<TABLE>
<CAPTION>
30-Day 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>
November 30, 1996 8.25% 9.64% 9.72% 8.78% 8.85%
February 28, 1997 8.25% 8.44% 7.97% 8.69% 8.22%
May 31, 1997 8.50% 9.72% 9.15% 8.74% 8.23%
August 31, 1997 8.50% 8.58% 7.95% 8.82% 8.19%
</TABLE>
This table sets forth the Trust's monthly dividend performance which is
summarized quarterly.
Average Annual Total Returns
NAV MKT
- --------------------------------------------------------------------------------
Year to Date .................................... 5.41% 9.23%
1 Year .......................................... 7.73% 12.19%
3 Years ......................................... 8.44% 10.57%
5 Years ......................................... 7.90% 10.18%
Since Trust Inception(G,I) ...................... 8.49% N/A
Since Initial Trading on NYSE(H) ................ N/A 11.50%
Assumes rights were exercised and excludes sales charges and
commissions.(C,D,E,F)
See performance footnotes on page 8
7
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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 dividends
declared in each month and dividing the resulting annualized dividend
amount by the Trust's net asset value (in the case of NAV) or the NYSE
Composite closing price (in the case of Market) at the end of the
period.
(C) Calculation of total returns 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 August 31, 1997 were 7.25% and
8.14% for the five-year and since inception periods, respectively. The
average annual total returns based on market price assuming rights were
exercised with a brokerage commission are not presented.
(D) As part of the 1996 rights offering (see F), the Investment Manager has
voluntarily reduced its management fee for the period from November
1996 through November 1999.
(E) On December 27, 1994, the Trust issued to its shareholders transferable
rights which entitled the holders to subscribe for 17,958,766 shares of
the Trust's common stock at the rate of one share of common stock for
each four rights held. On January 27, 1995, the offering expired and
was fully subscribed. The Trust issued 17,958,766 shares of its common
stock to exercising rights holders at a subscription price of $8.12.
Offering costs of $4,470,955 were charges against the offering
proceeds.
(F) On October 18, 1996, the Trust issued to its shareholders
non-transferable rights which entitled the holders to subscribe for
18,122,963 shares of the Trust's common stock at the rate of one share
of common stock for each five rights held. On November 12, 1996, the
offering expired and was fully subscribed. The Trust issued 18,122,963
shares of its common stock to exercising rights holders at a
subscription price of $9.09. Offering costs of $6,972,203 were charged
against the offering proceeds.
(G) Inception date - May 12, 1988.
(H) Initial trading on NYSE - March 9, 1992.
(I) Reflects a partial waiver of fees.
Performance data represents past performance and is no guarantee of
future results. Investment return and principal value of an investment
in the Trust will fluctuate. Shares, when sold, may be worth more or
less than their original cost.
8
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Pilgrim America Prime Rate Trust
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Annual Shareholder Meeting
- --------------------------------------------------------------------------------
A meeting of shareholders was held at the offices of the Trust on June 24, 1997.
A brief description of each matter voted upon as well as the voting results are
outlined below:
Shares
Shares voted against Shares Broker
voted for or withheld abstained non-vote Total
--------- ----------- --------- -------- -----
I. Proposal for the election of Directors:
Mary A. Baldwin ....... 89,399,881 636,727 -- -- 90,036,608
John P. Burke ......... 89,407,828 628,780 -- -- 90,036,608
Al Burton ............. 89,357,710 678,898 -- -- 90,036,608
Bruce S. Foerster ..... 89,419,962 616,646 -- -- 90,036,608
Jock Patton ........... 89,412,980 623,628 -- -- 90,036,608
Robert W. Stallings ... 89,410,188 626,420 -- -- 90,036,608
II. Ratification of KPMG Peat Marwick LLP as independent auditors for the
Trust for the year ending February 28, 1998:
88,130,372 369,029 1,537,206 -- 90,036,607
III. Approval to transact such other business as may properly come before
the annual meeting of shareholders or any adjournments thereof:
86,481,453 1,027,399 2,527,754 -- 90,036,606
9
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Pilgrim America Prime Rate Trust
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Additional Notes And Information
- --------------------------------------------------------------------------------
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Trust shareholders are paid distributions in cash unless they elect to reinvest
the payments in additional shares of the Trust, at reduced brokerage
commissions, pursuant to the Dividend Reinvestment and Cash Purchase Plan. This
Plan also allows shareholders to make periodic cash purchases. For a copy of the
Plan, or for more information, contact our Shareholder Service Department at
1-800-331-1080.
KEY FINANCIAL DATES - Calendar 1997 Dividends:
DECLARATION DATE EX-DATE PAYABLE DATE
January 31 February 6 February 21
February 28 March 6 March 20
March 31 April 8 April 22
April 30 May 8 May 22
May 30 June 5 June 19
June 30 July 8 July 22
July 31 August 7 August 21
August 29 September 4 September 18
September 30 October 8 October 23
October 31 November 6 November 20
November 28 December 4 December 18
December 19 December 29 January 13, 1998
Record date will be two business days after each Ex-Date.
These dates are subject to change.
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.
10
<PAGE>
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PORTFOLIO OF INVESTMENTS as of August 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
SENIOR LOANS*
(DOLLAR WEIGHTED PORTFOLIO INTEREST RESET PERIOD IS 42 DAYS)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT LOAN STATED
(000'S) INDUSTRY/BORROWER TYPE MATURITY VALUE
- --------- ---------------------------------------------------------- ------------- -------- --------------
<S> <C> <C> <C> <C>
AEROSPACE AND DEFENSE: 6.8%
$ 5,060 Aerostructures Corp. (airframe and component manufacturer) Term B 09/30/03 $ 5,060,000
1,840 Aerostructures Corp. Term C 09/30/04 1,840,000
14,850 Banner Aerospace (aerospace fasteners) Term B 07/01/03 14,850,000
9,361 Continental Airlines (airline) Term 12/31/06 9,360,974
8,978 Erickson Air-Crane Co. (heavy lift helicopters) Term B 12/31/04 8,977,500
3,885 Fairchild Holdings Corp. (aerospace fasteners) Term 07/28/00 3,884,921
4,975 Mag Aerospace Industries (aircraft component supplier) Term B 06/15/03 4,975,000
6,788 Technetics Corp. (aircraft engine components) Term 06/20/02 6,787,879
14,500 Tri Star/Odyssey, Inc. (aerospace hardware distributor) Term 09/30/03 14,500,000
--------------
70,236,274
--------------
AUTOMOBILE: 4.6%
15,000 Cambridge Industries, Inc. (automotive plastics) Term B 05/17/02 15,000,000
9,953 Capital Tool & Design (brake backing plates) Term B 07/19/03 9,953,125
4,904 Hayes Wheels International (automotive wheels) Term B 07/31/03 4,903,556
3,974 Hayes Wheels International Term C 07/31/04 3,974,222
4,000 Safelite Glass Corp. (automobile windshield replacement) Term B 12/20/04 4,000,000
9,793 Schrader, Inc. (fluid/air control valve manufacturer) Term B 11/30/02 9,793,489
--------------
47,624,392
--------------
BEVERAGE, FOOD AND TOBACCO: 9.8%
2,000 Ameriserve Food Distribution (food distribution) Term B 06/30/04 2,000,000
2,000 Ameriserve Food Distribution Term C 06/30/05 2,000,000
2,000 Ameriserve Food Distribution Term D 06/30/06 2,000,000
8,100 Del Monte Corp. (food manufacturing and distribution) Term B 03/31/05 8,100,000
4,433 Edward's Baking Co. (food service bakery) Term B 09/30/02 4,432,500
14,000 Empire Kosher Poultry (kosher chicken and poultry) Term B 07/31/04 14,000,000
20,802 Favorite Brands International (confectionary manufacturer) Term B 08/01/04 20,801,679
3,411 Favorite Brands International Term C 02/01/05 3,410,906
20,986 International Home Foods (foods product manufacturer) Term B 10/30/04 20,986,487
6,250 Snapple Beverage Co. (soft drink manufacturer) Term B 06/01/04 6,250,000
6,250 Snapple Beverage Co. Term C 06/01/05 6,250,000
7,074 Van De Kamp's (frozen foods) Term B 04/30/03 7,074,464
4,433 Van De Kamp's Term C 09/30/03 4,432,990
--------------
101,739,026
--------------
</TABLE>
See Accompanying Notes to Financial Statements.
11
<PAGE>
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PORTFOLIO OF INVESTMENTS as of August 31, 1997 (Unaudited)
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<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT LOAN STATED
(000'S) INDUSTRY/BORROWER TYPE MATURITY VALUE
- --------- ---------------------------------------------------------- ------------- -------- --------------
<S> <C> <C> <C> <C>
BROADCASTING: 6.3%
$ 3,905 Benedek Broadcasting Television Corp. (broadcasting) Axel A (A) 12/05/02 $ 3,905,478
4,200 Benedek Broadcasting Television Corp. Axel B (A) 12/05/02 4,200,193
889 Classic Cable (rural cable system operator) Revolver 06/30/03 889,042
5,124 Classic Cable Term B 06/30/05 5,124,179
7,500 Entravision (Spanish broadcast television) Term B 12/31/04 7,500,000
10,000 FrontierVision (cable television) Term B 06/30/05 10,000,000
10,000 Intermedia Partners IV (cable television) Term 01/01/05 10,000,000
13,840 Jacor Communications (radio broadcasting) Term B 06/15/04 13,840,050
9,833 Phoenix Associates, Inc. (cable television) Term B 12/31/99 9,833,333
--------------
65,292,275
--------------
BUILDINGS AND REAL ESTATE: 1.6%
11,000 Falcon Building Products (building products) Term B 06/30/05 11,000,000
4,000 The Presley Companies (homebuilder) Revolver 05/20/98 4,000,000
1,455 United Building Materials, Inc. (stone and concrete
products)(4) Term 04/30/96 1,418,271
--------------
16,418,271
--------------
CARGO TRANSPORT: 4.1%
20,000 Atlas Freighter Leasing (air cargo carrier) Term 05/29/04 20,000,000
14,988 Evergreen International (air cargo carrier) Term B 05/07/03 14,987,500
7,469 International Logistics (logistics/freight forwarding) Term B 12/31/03 7,468,750
--------------
42,456,250
--------------
CHEMICALS, PLASTICS AND RUBBER: 8.9%
4,788 Behr Process Corp. (paint manufacturer) Term B 03/31/04 4,788,000
3,192 Behr Process Corp. Term C 03/31/05 3,192,000
11,396 Cedar Chemical Corp. (specialty chemicals) Term B 10/30/03 11,396,235
4,714 Foamex, L.P. (polyurethane foam) Term B 06/30/05 4,714,286
4,286 Foamex, L.P. Term C 06/30/06 4,285,714
4,896 GEO Specialty Chemicals (specialty chemicals) Term A 09/25/02 4,895,833
10,000 GEO Specialty Chemicals Term B 03/25/04 10,000,000
15,000 Huntsman Chemical (specialty chemicals) Term 03/15/07 15,000,000
3,929 Huntsman Chemical Term B 03/15/04 3,928,571
3,929 Huntsman Chemical Term C 03/15/05 3,928,571
5,000 Huntsman Corp. (industrial chemicals) 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
7,143 NEN Life Sciences Products (biochemicals) Term B 12/31/04 7,142,857
4,889 Texas Petrochemical Corp. (industrial chemicals) Term B 06/30/04 4,888,889
--------------
91,941,444
--------------
</TABLE>
See Accompanying Notes to Financial Statements.
12
<PAGE>
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PORTFOLIO OF INVESTMENTS as of August 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT LOAN STATED
(000'S) INDUSTRY/BORROWER TYPE MATURITY VALUE
- --------- ---------------------------------------------------------- ------------- -------- --------------
<S> <C> <C> <C> <C>
CONTAINERS, PACKAGING AND GLASS: 3.6%
$ 2,807 Calmar, Inc. (non-aerosol fluid dispensing systems) Axel A (A) 09/15/03 $ 2,807,143
2,105 Calmar, Inc. Axel B (A) 03/15/04 2,105,357
15,190 RIC Holdings, Inc. (packaging and paper products) Term A 02/28/03 15,189,803
5,713 RIC Holdings, Inc. Term B 02/27/04 5,712,580
4,263 RIC Holdings, Inc. Term C 08/31/04 4,262,697
3,634 St. Laurent Paper Products (linerboard manufacturer) Term B 05/31/03 3,634,021
3,866 St. Laurent Paper Products Term C 05/31/04 3,865,979
--------------
37,577,580
--------------
DIVERSIFIED/CONGLOMERATE MANUFACTURING: 2.4%
6,685 Desa International (specialty equipment manufacturing) Term A 08/31/01 6,685,279
7,145 Desa International Term B 02/28/03 7,145,427
4,909 Jackson Products, Inc. (industrial safety equipment
manufacturer) Term B 09/01/02 4,908,696
4,913 Jackson Products, Inc. Term C 09/01/03 4,912,500
1,340 Jackson Products, Inc. Term D 09/01/03 1,339,875
276@ KDI Corp. (defense and leisure products)(2) Term A 12/31/96 16,791
13@ KDI Corp.(2) Term B 12/31/96 13,187
--------------
25,021,755
--------------
DIVERSIFIED/CONGLOMERATE SERVICES: 4.3%
30,000 MAFCO Financial Corp. (diversified services and
entertainment) Term 03/20/99 30,000,000
1,600 MAFCO Financial Corp. Revolver 03/20/99 1,600,000
12,863 Outsourcing Solutions (accounts receivable management) Term B 11/06/03 12,862,676
--------------
44,462,676
--------------
ECOLOGICAL: 1.7%
7,246 Clean Harbors (environmental services) Term 05/08/00 7,246,411
5,000 Laidlaw Environmental Services, Inc. (waste management) Term B 05/15/04 5,000,000
5,000 Laidlaw Environmental Services, Inc. Term C 05/15/05 5,000,000
--------------
17,246,411
--------------
</TABLE>
See Accompanying Notes to Financial Statements.
13
<PAGE>
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PORTFOLIO OF INVESTMENTS as of August 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT LOAN STATED
(000'S) INDUSTRY/BORROWER TYPE MATURITY VALUE
- --------- ---------------------------------------------------------- ------------- -------- --------------
<S> <C> <C> <C> <C>
ELECTRONICS: 8.1%
$ 6,100 Anacomp, Inc. (document storage and imaging) Term 02/28/01 $ 6,100,000
7,475 Celestica (diversified electronic device manufacturer) Term B 06/30/03 7,475,000
5,725 Details, Inc. (circuit board manufacturer) Term 02/13/01 5,724,576
12,375 Dictaphone Acquisition, Inc. (dictation and recording
equipment) Term 06/30/02 12,375,000
4,034 Elgar Electronics (electronic testing equipment) Term B 03/31/03 4,034,467
7,417 Fairchild Semiconductor Corp. (electronic equipment) Term B 03/11/03 7,416,667
9,786 OK Industries (circuit board manufacturing systems) Term 10/31/02 9,785,714
9,950 Phase Metrics, Inc. (computer testing equipment) Term A 11/30/01 9,950,000
14,700 PSC Incorporated (scanning equipment) Term B 06/28/02 14,700,000
6,000 Telex Communications Group (electronic equipment) Term B 11/06/04 6,000,000
--------------
83,561,424
--------------
FINANCE: 0.8%
8,000 National Partnership Investments Corp. (asset management) Term 06/30/01 8,000,000
--------------
GROCERY: 4.1%
7,500 Pathmark Stores, Inc. (northeastern states supermarkets) Term A 07/31/98 7,500,000
15,000 Schwegmann Giant Supermarket (Louisiana supermarkets) Term B 01/31/04 15,000,000
16,282 Star Markets Co., Inc. (Boston area supermarkets) Term B 12/31/01 16,281,694
3,500 Star Markets Co., Inc. Term C 12/31/03 3,500,000
--------------
42,281,694
--------------
HEALTHCARE, EDUCATION AND CHILDCARE: 11.5%
4,134 Alaris Medical Systems (infusion pumps) Term B 11/30/03 4,133,763
4,134 Alaris Medical Systems Term C 11/30/04 4,133,763
3,891 Alaris Medical Systems Term D 05/31/05 3,890,600
9,007 Community Health Systems (hospitals) Term B 12/31/03 9,006,849
9,007 Community Health Systems Term C 12/31/04 9,006,849
6,781 Community Health Systems Term D 12/31/05 6,780,822
6,000 Covenant Care, Inc. (long-term healthcare facilities) Term 06/30/99 6,000,000
5,123 Dade International (medical testing equipment
manufacturer) Term B 12/31/02 5,123,363
5,123 Dade International Term C 12/31/03 5,123,363
12,358 Dade International Term D 12/31/04 12,357,818
9,842 Graphic Controls Corp. (industrial and medical charts) Term B 09/28/03 9,842,403
2,831 Hanger Orthopedics Group (orthopedic and prosthetic
services) Term B 12/31/01 2,830,973
12,500 Healthcare America, Inc. (youth psychiatric care) Term B 06/30/04 12,500,000
9,905 Mediq/PRN Life Support, Inc. (hospital equipment leasing) Term 09/28/98 9,904,525
5,000 Packard Bioscience Co. (analytical instrument
manufacturer) Term B 03/13/03 5,000,000
5,000 Prime Medical Supplies (lithotripter services) Term B 04/30/03 5,000,000
7,805 SMT Health (mobile MRI systems) Term 08/31/03 7,805,123
--------------
118,440,214
--------------
</TABLE>
See Accompanying Notes to Financial Statements.
14
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of August 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT LOAN STATED
(000'S) INDUSTRY/BORROWER TYPE MATURITY VALUE
- --------- ---------------------------------------------------------- ------------- -------- --------------
<S> <C> <C> <C> <C>
HOME AND OFFICE FURNISHINGS, HOUSEWARES
AND DURABLE CONSUMER PRODUCTS: 2.3%
$ 17,005 ICON Health & Fitness Co. (exercise equipment) Term B 11/14/01 $ 17,004,935
6,957 Simmons Company (mattress manufacturer) Term B 03/31/03 6,956,774
--------------
23,961,709
--------------
HOTELS, MOTELS, INNS AND GAMING: 3.2%
3,125 Capstar Hotel Co. (hotel management and ownership) Term 06/30/04 3,125,000
5,985 Doubletree Corp. (hotel management) Term B 05/08/04 5,984,759
7,000 Interstate Hotels Corp. (hotel management and ownership) Term C 06/25/04 7,000,000
17,359 Sunset Station Hotel and Casino, Inc. (gaming) Term 09/30/00 17,358,637
--------------
33,468,396
--------------
LEISURE, AMUSEMENT, MOTION PICTURES AND
ENTERTAINMENT: 5.8%
7,085 AMF Group (bowling centers and equipment) Axel A (A) 05/01/03 7,155,755
4,425 AMF Group Axel B (A) 05/01/04 4,469,475
9,925 Metro-Goldwyn-Mayer, Inc. (film library) Term B 10/10/03 9,925,000
10,000 Town Sports International (health club operator) Term 11/30/02 10,000,000
1,959 24-Hour Fitness, Inc. (health club operator) Revolver 05/31/00 1,959,204
19,000 24-Hour Fitness, Inc. Term 05/31/00 19,000,000
7,157 Worldwide Sports & Recreation Corp. (optics, sports
products) Term B 03/31/01 6,977,665
--------------
59,487,099
--------------
MACHINERY (NONAGRICULTURE, NONCONSTRUCTION,
NONELECTRONIC): 2.3%
8,000 CNB International (metal stamping press manufacturer) Term 10/18/04 8,000,000
9,877 Columbus McKinnon (industrial lifts and hoists) Term B 03/01/04 9,876,983
5,700 Mettler-Toledo (weigh scale manufacturer) Term B 12/31/04 5,700,000
--------------
23,576,983
--------------
MINING, STEEL, IRON AND NONPRECIOUS METALS: 5.8%
5,970 Cable Systems International (cable wire manufacturer) Term B 10/04/02 5,970,000
3,654 Centennial Resources (coal mining) Term A 03/31/02 3,653,846
8,606 Centennial Resources Term B 03/31/04 8,605,769
9,825 GS Technologies (metal products) Term 09/30/02 9,825,000
1,164 National Refractories, Inc. (kiln lining materials) Term B 09/30/99 1,163,742
4,980 National Refractories, Inc. Term C 09/30/99 4,979,726
7,105 Scovill Fasteners (metal fasteners for apparel products) Term B 01/24/03 7,104,932
4,702 Scovill Fasteners Lease 10/15/02 4,702,410
14,000 Tree Island Industries (nail and wire products) Term B 03/31/03 14,000,000
--------------
60,005,425
--------------
</TABLE>
See Accompanying Notes to Financial Statements.
15
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of August 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT LOAN STATED
(000'S) INDUSTRY/BORROWER TYPE MATURITY VALUE
- --------- ---------------------------------------------------------- ------------- -------- --------------
<S> <C> <C> <C> <C>
OIL AND GAS: 1.7%
$ 9,923 IRI International Co. (oil field services) Term A 03/31/02 $ 9,923,077
8,000 Key Energy Corp. (oil field services) Term 06/30/04 8,000,000
--------------
17,923,077
--------------
PERSONAL, FOOD AND MISCELLANEOUS SERVICES: 6.3%
24,875 Boston Chicken, Inc. (quick service restaurant chain) Lease/Term C 12/12/01 24,875,000
17,459 Coinmach Corp. (commercial laundry operator) Term B 06/08/04 17,459,375
7,366 Denamerica Corp. (quick service restaurant franchisee) Term 12/31/01 7,365,902
2,576 Long John Silvers, Inc. (quick service seafood restaurant
chain) Term B 09/30/02 2,447,548
4,743 Papa Gino's, Inc. (quick service restaurants) Term A 02/19/02 4,742,647
4,969 Papa Gino's, Inc. Term B 02/19/04 4,968,750
5,000@ Softworld Services (software fulfillment services)(3) Term A 06/30/00 1,650,000
5,000@ Softworld Services(3) Term B 06/30/01 1,650,000
--------------
65,159,222
--------------
PERSONAL AND NONDURABLE CONSUMER PRODUCTS (MANUFACTURING
ONLY): 5.5%
7,500 AM Cosmetics (cosmetics and skin care products) Term B 12/31/04 7,500,000
4,875 Carson Products Co. (ethnic hair care products) Term A 03/31/02 4,875,000
9,975 Carson Products Co. Term B 03/31/04 9,975,000
4,414 Duo-Tang, Inc. (report cover manufacturer) Term A 12/31/02 4,414,030
5,360 Duo-Tang, Inc. Term B 12/31/02 5,360,408
9,125 Eye Care Centers, Inc. (retail eye care products and
services) Term 09/26/02 9,125,000
10,000 Medtech Products, Inc. (non-prescription consumer
medications) Term B 10/15/02 10,000,000
2,757 Rayovac Corp. (battery manufacturer) Term B 09/30/03 2,756,944
2,757 Rayovac Corp. Term C 09/30/04 2,756,944
--------------
56,763,326
--------------
PRINTING AND PUBLISHING: 1.3%
6,825 Bankers Systems, Inc. (compliance services to banking
industry) Term B 11/01/02 6,825,000
3,571 Von Hoffman Press, Inc. (textbook manufacturer) Term B 05/29/04 3,571,429
3,571 Von Hoffman Press, Inc. Term C 05/29/05 3,571,429
--------------
13,967,858
--------------
</TABLE>
See Accompanying Notes to Financial Statements.
16
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of August 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT LOAN STATED
(000'S) INDUSTRY/BORROWER TYPE MATURITY VALUE
- --------- ---------------------------------------------------------- ------------- -------- --------------
<S> <C> <C> <C> <C>
RETAIL STORES: 7.1%
$ 7,834@ Color Tile, Inc. (home improvement retailer)(3) Term C 12/31/98 $ 3,133,505
6,916@ Color Tile, Inc.(3) Term D 12/31/98 2,766,311
5,597 Color Tile, Inc. (D.I.P.)(3) Revolver 12/30/97 5,596,906
19,100 Liberty House, Inc. (Hawaii department store chain) Term B 06/30/02 19,100,000
2,371 M & H Drugs, Inc. (midwestern retail drugstores)(4) Term 12/31/96 2,311,380
12,500 Murray's Discount Auto Parts (auto parts retailer) Term 06/30/03 12,500,000
7,420 NBC Acquisition (wholesale and retail textbooks) Term 08/31/03 7,420,000
6,444 Peebles, Inc. (department store chain) Term A 04/30/01 6,444,250
7,836 Peebles, Inc. Term B 04/30/02 7,836,385
5,991 TravelCenters of America (road transport service centers) Term B 03/27/05 5,990,625
--------------
73,099,362
--------------
TELECOMMUNICATIONS: 3.0%
7,920 Clarity Telecommunications (telecommunications service) Term B 07/01/03 7,920,000
9,643 Shared Technologies, Inc. (communication services) Term B 03/31/03 9,642,857
3,500 Sprint Spectrum L.P. (wireless telephone operator) Term 02/10/06 3,500,000
10,000 Teletouch Communications (rural paging services) Term A 11/30/03 10,000,000
--------------
31,062,857
--------------
TEXTILES AND LEATHER: 2.9%
6,884 Harriet & Henderson (yarn manufacturer) Term A 06/12/00 6,884,483
6,860 Humphreys, Inc. (belts and personal leather goods) Term B 11/15/03 6,860,000
5,590 Targus Group, Int'l. (computer luggage manufacturer) Term A 01/18/02 5,590,109
4,084 Targus Group, Int'l. Term B 01/18/03 4,083,927
6,237 The William Carter Co. (children's clothing) Term B 10/31/03 6,237,000
--------------
29,655,519
--------------
Total Senior Loans--125.8% 1,300,430,519
(Cost $1,316,257,515) --------------
<CAPTION>
OTHER CORPORATE DEBT
<S> <C> <C> <C> <C>
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.
17
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of August 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK AND PREFERRED STOCK
SHARES VALUE
- -------- --------------
<S> <C> <C>
APPAREL PRODUCTS: 0.0%
13,924@ Butterick Company, Inc. (sewing aids) $ 13,000
--------------
DIVERSIFIED/CONGLOMERATE MANUFACTURING: 0.0%
2,633@ KDI Corp.--common (defense and leisure products)(2) --
--------------
RESTAURANTS: 0.4%
413,980@ America's Favorite Chicken Co.--common (quick service restaurant chain) (R) 3,645,645
17,664@ Flagstar, Inc.--common (family restaurants, institutional food service companies) 6,072
--------------
3,651,717
--------------
TEXTILES AND LEATHER: 0.2%
12,764@ Dan River (Braelan) Corp.--common (diversified textiles) (R) 2,288,044
--------------
Total Common Stock and Preferred Stock--0.6% 5,952,761
(Cost $1,784,115) --------------
<CAPTION>
STOCK PURCHASE WARRANTS AND OTHER SECURITIES
<S> <C> <C>
1@ Autotote Systems, Inc., Warrant representing 48,930 common shares (designer and 37,627
manufacturer of wagering equipment), Expires 10/30/03 (R)
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 143,529
backing plates) (R)
19,000@ Covenant Care, Inc., Warrants representing 19,000 common shares (long-term 285,000
healthcare facilities) (R)
26,606@ KDI Corp. Units of Trust (defense and leisure products) (R)(2) --
1@ Medtech Products, Warrants (R) --
106,902@ Staff Leasing, Inc. (employee leasing) 1,900,183
--------------
Total Stock Purchase Warrants and Other Securities--0.2% 2,366,339
(Cost $61,100) --------------
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENTS
PRINCIPAL
AMOUNT
(000'S)
- ---------
<S> <C> <C> <C>
COMMERCIAL PAPER: 0.8%
$ 8,000 State Street Bank & Trust Co., 5.50% due 09/02/97 8,000,000
---------------
Total Short-term Investments--0.8% 8,000,000
(Cost $8,000,000) ---------------
TOTAL INVESTMENTS (COST $1,332,102,730)(5) 128.0% $ 1,322,749,619
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS-NET (28.0) (289,455,644)
------ ---------------
NET ASSETS 100.0% $ 1,033,293,975
------ ---------------
------ ---------------
</TABLE>
See Accompanying Notes to Financial Statements.
18
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS as of August 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
- ------------------
@ Non-income producing security
(A) Axel describes an amortizing extended term loan with limited call
protection.
(R) Restricted security
* Senior loans, while exempt from registration under the Securities Act of
1933, contain certain restrictions on resale and cannot be sold publicly.
These senior loans bear interest (unless otherwise noted) at rates that
float periodically at a margin above the Prime Rate of a U.S. bank specified
in the credit agreement, LIBOR, the certificate of deposit rate, or in some
cases another base lending rate.
(1) The borrower is restructuring and interest is being recognized as cash
payments are received.
(2) The borrower filed for protection under Chapter 7 of the U.S. Federal
bankruptcy code and is in the process of developing a plan of liquidation.
(3) The borrower filed for protection under Chapter 11 of the U.S. Federal
bankruptcy code and is in the process of developing a plan 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 $1,332,102,730 and net unrealized
depreciation consists of the following:
GROSS UNREALIZED APPRECIATION $ 6,837,276
GROSS UNREALIZED DEPRECIATION (16,190,387)
-------------
NET UNREALIZED DEPRECIATION $ (9,353,111)
-------------
-------------
See Accompanying Notes to Financial Statements.
19
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES as of August 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments in securities at value (Cost $1,332,102,730) $ 1,322,749,619
Receivables:
Dividends and interest 13,916,431
Other 10,176,106
Prepaid arrangement fees on notes payable 562,977
Prepaid expenses 221,839
------------------
Total assets 1,347,626,972
------------------
LIABILITIES:
Notes payable 300,000,000
Deferred arrangement fees on senior loans 4,980,921
Accrued interest payable 688,356
Overdraft payable to custodian 8,242,828
Accrued expenses 420,892
------------------
Total liabilities 314,332,997
------------------
NET ASSETS (equivalent to $9.40 per share, based on 109,929,020 shares of
beneficial interest authorized and outstanding, no par value) $ 1,033,293,975
------------------
------------------
Net Assets Consist of:
Paid-in capital $ 1,043,309,776
Undistributed net investment income 14,009,716
Accumulated net realized loss on investments (14,672,406)
Net unrealized depreciation of investments (9,353,111)
------------------
Net assets $ 1,033,293,975
------------------
------------------
</TABLE>
See Accompanying Notes to Financial Statements.
20
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS for the Six Months Ended August 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $60,001,219
Arrangement fees earned 3,541,249
Other 2,013,498
-----------
Total investment income 65,555,966
-----------
EXPENSES:
Interest 9,761,457
Investment management fees 5,104,715
Administration fees 880,735
Revolving credit facility fees 448,561
Transfer agent and registrar fees 350,000
Recordkeeping and pricing fees 147,830
Reports to shareholders 129,504
Miscellaneous expense 77,250
Custodian fees 64,268
Professional fees 58,394
Trustees' fees 38,185
Insurance expense 18,697
-----------
Total expenses 17,079,596
Less: Earnings credits (1,182)
-----------
Net expenses 17,078,414
-----------
Net investment income 48,477,552
-----------
REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENTS:
Net realized loss on investments (3,238,118)
Change in unrealized depreciation of investments (5,613,754)
-----------
Net loss on investments (8,851,872)
-----------
Net increase in net assets resulting from operations $39,625,680
-----------
-----------
</TABLE>
See Accompanying Notes to Financial Statements.
21
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
AUGUST 31, 1997 FEBRUARY 28,
(UNAUDITED) 1997
---------------- --------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income $ 48,477,552 $ 78,947,910
Net realized loss on investments (3,238,118) (3,523,769)
Change in unrealized appreciation
(depreciation) of investments (5,613,754) 974,085
---------------- --------------
Net increase in net assets resulting from operations 39,625,680 76,398,226
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income (44,885,362) (77,640,968)
CAPITAL SHARE TRANSACTIONS:
Issuance from dividend reinvestment 7,464,318 11,628,959
Net increase in net assets derived from the sale
of shares in connection with rights offering -- 157,765,531
---------------- --------------
Net increase in capital share transactions 7,464,318 169,394,490
Total increase in net assets 2,204,636 168,151,748
NET ASSETS:
Beginning of period 1,031,089,339 862,937,591
---------------- --------------
End of period (including undistributed net investment
income of $14,009,716 and $10,417,526, respectively) $1,033,293,975 $1,031,089,339
---------------- --------------
---------------- --------------
SUMMARY OF CAPITAL SHARE TRANSACTIONS:
Shares issued in payment of distributions from net
investment income 789,191 1,011,738
Shares sold in connection with Rights Offering -- 18,122,963
---------------- --------------
Net increase in shares outstanding 789,191 19,134,701
---------------- --------------
---------------- --------------
</TABLE>
See Accompanying Notes to Financial Statements.
22
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS for the Six Months Ended August 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INCREASE (DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 58,419,076
Facility fees received 2,083,830
Commitment fees received 144,136
Other income received 2,231,485
Interest paid (10,130,602)
Other operating expenses paid (7,690,967)
Purchases of short-term investments (8,000,000)
Purchases of portfolio securities (612,883,084)
Proceeds from disposition of portfolio securities 572,345,128
------------
Net cash used for operating activities (3,480,998)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (37,421,044)
Overdraft financing 7,902,042
Loan advance 33,000,000
------------
Net cash provided by financing activities 3,480,998
------------
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 39,625,680
------------
Adjustments to reconcile net increase in net assets resulting
from operations to net cash provided by operating activities:
Increase in investments in securities (29,117,008)
Increase in dividends and interest receivable (2,171,325)
Increase in other assets (9,952,682)
Decrease in prepaid arrangement fees on notes payable 138,594
Increase in prepaid expenses (176,421)
Decrease in deferred arrangement fees on senior loans (1,094,599)
Decrease in accrued interest payable (369,145)
Decrease in accrued expenses (364,092)
------------
Total adjustments (43,106,678)
------------
Net cash used for operating activities $ (3,480,998)
------------
------------
</TABLE>
See Accompanying Notes to Financial Statements.
23
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
AUGUST 31, YEARS ENDED FEBRUARY 28 OR FEBRUARY 29,
1997 ----------------------------------------------------
(UNAUDITED) 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 0.44 0.82 0.89 0.74 0.60
Net realized and unrealized gain (loss)
on investments (0.08) (0.02) (0.08) 0.07 (0.05)
----------- ---------- -------- -------- --------
Increase in net asset value from investment
operations 0.36 0.80 0.81 0.81 0.55
Distributions from net investment income (0.41) (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 $ 9.40 $ 9.45 $ 9.61 $ 9.66 $ 10.02
----------- ---------- -------- -------- --------
----------- ---------- -------- -------- --------
Closing market price at end of period $ 10.13 $ 10.00 $ 9.50 $ 8.75 $ 9.25
TOTAL RETURN
Total investment return at closing market
price (3) 5.73% 15.04%(5) 19.19% 3.27%(5) 8.06%
Total investment return at closing net asset
value (4) 3.86% 8.06%(5) 9.21% 5.24%(5) 6.28%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $1,033,294 $1,031,089 $862,938 $867,083 $719,979
Average borrowings (000's) $ 317,169 $ 131,773 $ -- $ -- $ --
Ratios to average net assets plus
borrowings:
Expenses (before interest and other fees
related to revolving credit facility) 1.01%(1) 1.13% -- -- --
Expenses 2.51%(1) 1.92% 1.23% 1.30% 1.31%
Net investment income 7.14%(1) 7.59% 9.23% 7.59% 6.04%
Portfolio turnover rate 43% 82% 88% 108% 87%
Shares outstanding at end of period (000's) 109,929 109,140 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.
24
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 28 OR FEBRUARY 29,
----------------------------------------------------------------
1993 1992 1991 1990 1989
-------- -------- ---------- ---------- --------
<S> <C> <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.
25
<PAGE>
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NOTES TO FINANCIAL STATEMENTS as of August 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
Pilgrim America Prime Rate Trust (the 'Trust', formerly Pilgrim Prime Rate
Trust) is registered under the Investment Company Act of 1940, as amended, as a
diversified, closed-end, management investment company. The Trust invests in
senior loans which are exempt from registration under the Securities Act of 1933
(the ' '33 Act') but contain certain restrictions on resale and cannot be sold
publicly. These loans bear interest (unless otherwise noted) at rates that float
periodically at a margin above the Prime Rate of a U.S. bank specified in the
credit agreement, the London Inter-Bank Offered Rate ('LIBOR'), the certificate
of deposit rate, or in some cases another base lending rate. The following is a
summary of the significant accounting policies consistently followed by the
Trust in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles.
A. Security Valuation. Senior loans are valued at fair value in the absence of
readily ascertainable market values. Fair value is determined by Pilgrim
America Investments, Inc. (the 'Manager') under procedures established and
monitored by the Trust's Board of Trustees. In valuing a loan, the Manager
will consider, among other factors: (i) the creditworthiness of the corporate
issuer and any interpositioned bank; (ii) the current interest rate, period
until next interest rate reset and maturity date of the senior corporate
loan; (iii) recent market prices for similar loans, if any; and (iv) recent
prices in the market for instruments with similar quality, rate, period until
next interest rate reset, maturity, terms and conditions. The Manager may
also consider prices or quotations, if any, provided by banks, dealers or
pricing services which may represent the prices at which secondary market
transactions in the loans held by the Trust have or could have occurred.
However, because the secondary market in senior loans has not yet fully
developed, the Manager will not rely solely on such prices or quotations.
Securities for which the primary market is a national securities exchange or
the NASDAQ National Market System are stated at the last reported sale price
on the day of valuation. Debt and equity securities traded in the
over-the-counter market and listed securities for which no sale was reported
on that date are valued at the mean between the last reported bid and asked
price. Securities other than senior loans for which reliable quotations are
not readily available and all other assets will be valued at their respective
fair values as determined in good faith by, or under procedures established
by, the Board of Trustees of the Trust. Investments in securities maturing in
less than 60 days are valued at amortized cost, which when combined with
accrued interest, approximates market value.
B. Federal Income Taxes. It is the Trust's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no federal income tax provision is required. Due to
the timing of dividend distributions and the differences in accounting for
income and realized gains (losses) for financial statement and federal income
tax purposes, the fiscal year in which amounts are distributed may differ
from the year in which the income and realized gains (losses) were recorded
by the Trust. The differences between the income or gains distributed on a
book versus tax basis, if any, are shown as excess distributions of net
investment income and
26
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS as of August 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
net realized gain on sales of investments in the accompanying Statements of
Changes in Net Assets.
At February 28, 1997, the Trust had a capital loss carryforward for federal
income tax purposes of approximately $7,196,156 which is scheduled to expire
through February 28, 2005.
The Board of Trustees intends to offset net capital gains with each capital
loss carryforward until each carryforward has been fully utilized or
expires. In addition, no capital gain distributions shall be made until the
capital loss carryforward has been fully utilized or expires.
C. Security Transactions and Revenue Recognition. Security transactions are
accounted for on trade date. Realized gains or losses are reported on the
basis of identified cost of securities delivered. Interest income is
recorded on an accrual basis at the then current loan rate, and dividend
income is recorded on the ex-dividend date. The accrual of interest on loans
is discontinued when, in the opinion of management, there is an indication
that the borrower may be unable to meet payments as they become due. Upon
such discontinuance, all unpaid accrued interest is reversed. Cash
collections on nonaccrual senior loans are generally applied as a reduction
to the recorded investment of the loan. Senior loans are returned to accrual
status only after all past due amounts have been received and the borrower
has demonstrated sustained performance. Arrangement fees, which represent
non-refundable fees associated with the acquisition of loans, are deferred
and recognized ratably over the shorter of 2.5 years or the actual term of
the loan.
D. Distributions to Shareholders. The Trust records distributions to its
shareholders on the ex-date. Distributions from income are declared by the
Trust on a monthly basis. Distributions from capital gains, if any, are
declared on at least an annual basis. The amount of distributions from net
investment income and net realized capital gains are determined in
accordance with federal income tax regulations, which may differ from
generally accepted accounting principles. These 'book/tax' differences are
either considered temporary or permanent in nature. Key differences are the
treatment of short-term capital gains and other temporary differences. To
the extent that these differences are permanent in nature, such amounts are
reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassifications.
Distributions which exceed net investment income and net realized capital
gains for financial reporting purposes but not for tax purposes are reported
as distributions in excess of net investment income and/or realized capital
gains. To the extent they exceed net investment income and net realized
capital gains for tax purposes, they are reported as a tax return of
capital.
E. Dividend Reinvestments. Pursuant to the Automatic Dividend Reinvestment
Plan, Investors Fiduciary Trust Co., the Plan Agent, may purchase, from time
to time, shares of beneficial interest of the Trust on the open market to
satisfy dividend reinvestments. Such shares will be purchased only when the
closing sale or bid price plus commission is less than the net asset value
per share of the stock. If the market price plus commissions is equal to or
exceeds the net asset value, new shares valued at the net asset value most
recently calculated will be issued.
27
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS as of August 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
F. Use of Estimates. Management of the Trust has made certain estimates and
assumptions relating to the reporting of assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. Actual results could differ from these estimates.
NOTE 2--INVESTMENTS
For the six months ended August 31, 1997, the cost of purchases and the proceeds
from principal repayment and sales of investments, excluding short-term notes,
totaled $612,883,084 and $572,345,128 respectively. At August 31, 1997, the
Trust held senior loans valued at $1,300,430,519 representing 98.3% of its total
investments. The market value of these securities can only be established by
negotiation between parties in a sales transaction. Due to the uncertainty
inherent in the valuation process, the fair values as determined may materially
differ from the market values that would have been used had a ready market for
these securities existed.
The senior loans acquired by the Trust may take the form of a direct co-lending
relationship with the corporate issuer, an assignment of a co-lender's interest
in a loan, or a participation interest in a co-lender's interest in a loan. The
lead lender in a typical corporate loan syndicate administers the loan and
monitors collateral. In the event that the lead lender becomes insolvent, enters
FDIC receivership or, if not 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 (Braelen) Corp.--Common 09/15/91 1,529,753
</TABLE>
28
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS as of August 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DATE OF COST OR
ACQUISITION ASSIGNED BASIS
----------- --------------
<S> <C> <C>
KDI Corp. Units of Trust 09/19/95 --
Medtech Products, Warrants 11/19/96 --
Staff Leasing, Inc. 09/01/95 61,000
--------------
Total restricted securities excluding senior loans (market value of
$8,300,028 was 0.80% of net assets at August 31, 1997) $1,590,754
--------------
--------------
</TABLE>
NOTE--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 from $700 to $800 million; and 0.65% of the average
daily net assets plus borrowings in excess of $800 million.
The Manager has agreed to reduce its fee for a period of three years from the
Expiration Date of the November 12, 1996 Rights Offering (See Note 5) to 0.60%
of the average daily net assets, plus the proceeds of any outstanding
borrowings, over $1.15 billion.
The Trust has also entered into an Administration Agreement with PAG to provide
administrative services and also to furnish facilities. The Administration
Agreement compensates the Administrator with a fee, computed daily and payable
monthly, at an annual rate of 0.15% of the Trust's average daily net assets plus
borrowings up to $800 million; and 0.10% of the average daily net assets plus
borrowings in excess of $800 million.
NOTE 4--COMMITMENTS
The Trust has entered into both a 364 day and a four year revolving credit
agreement to borrow up to $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 August 31, 1997, was
$300.0 million at a weighted average interest rate of 6.1%, which represented
22.5% of net assets plus borrowings. Average borrowings for the six months ended
August 31, 1997, were $317,168,901 and the average annualized interest rate was
6.1%.
29
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS as of August 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
As of August 31, 1997, the Trust had unfunded loan commitments pursuant to the
terms of the following loan participation agreements:
<TABLE>
<S> <C> <C> <C>
Capstar Hotel $ 3,000,000 The Presley Companies $ 2,000,000
Classic Cable 39,702 Sunset Station 1,351,136
Color Tile, Inc. 518,346 Titanium Metals, Inc. 5,000,000
Edward's Baking Co. 1,011,250 Viasystems 7,500,000
Fairchild Holdings 4,365,079 24-Hour Fitness, Inc. 920,746
-------------
MAFCO Financial Corp. 8,400,000
$ 34,106,259
-------------
-------------
</TABLE>
NOTE 5--RIGHTS OFFERINGS
On October 18, 1996, the Trust issued to its shareholders non-transferable
rights which entitled the holders to subscribe for 18,122,963 shares of the
Trust's common stock at the rate of one share of common stock for each five
rights held. On November 12, 1996, the offering expired and was fully
subscribed. The Trust issued 18,122,963 shares of its common stock to exercising
rights holders at a subscription price of $9.09. Offering costs of $6,972,203
were charged against the offering proceeds.
On December 27, 1994, the Trust issued to its shareholders transferable rights
which entitled the holders to subscribe for 17,958,766 shares of the Trust's
common stock at the rate of one share of common stock for each four rights held.
On January 27, 1995, the offering expired and was fully subscribed. The Trust
issued 17,958,766 shares of its common stock to exercising rights holders at a
subscription price of $8.12. Offering costs of $4,470,955 were charged against
the offering proceeds.
NOTE 6--CUSTODIAL AGREEMENT
Investors Fiduciary Trust Company ('IFTC') serves as the Trust's custodian and
recordkeeper. Custody fees paid to IFTC are reduced by earnings credits based on
the cash balances held by IFTC for the Trust. For the six months ended August
31, 1997, the Trust received earnings credits of $1,182.
NOTE 7--SUBSEQUENT EVENT
Subsequent to August 31, 1997, the Trust declared a dividend from net investment
income of $0.0695 payable on September 15, 1997 to shareholders of record on
September 8, 1997.
MANAGEMENT'S ADDITIONAL OPERATING INFORMATION
APPROVAL OF CHANGES IN INVESTMENT POLICIES
At the Annual Meeting of Trust Shareholders, held August 30, 1994, shareholders
approved changes in the Trust's fundamental investment policies which make
available certain additional investment 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
30
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS as of August 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
certain limitations, loans in excess of 10% of an issue of senior bank debt of a
corporate borrower; and (iii) with up to 5% of the Trust's assets, loans in
tranches of senior collateralized corporate loans that are subordinated in some
manner as to the payment of interest and/or principal. At a special meeting held
May 2, 1996, Trust Shareholders approved an amendment to the Trust's fundamental
investment policies to expand its ability to engage in borrowing transactions up
to 33.33% of net assets including borrowings, primarily to acquire additional
income producing investments.
The Trust's Manager believes that these changes in the Trust's investment
policies will increase the number of loan offerings which the Trust may consider
acquiring. Furthermore, the Manager also believes that these changes are fully
consistent with the Trust's overall investment philosophy of purchasing senior
collateralized corporate loans.
REPURCHASE OF SECURITIES BY CLOSED-END COMPANIES
In accordance with Section 23(c) of the Investment Company Act of 1940, and Rule
23c-1 under the Investment Company Act of 1940, the Trust may from time to time
purchase shares of beneficial interest of the Trust in the open market, in
privately negotiated transactions and/or purchase shares to correct erroneous
transactions.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
The Trust offers a Dividend Reinvestment and Cash Purchase Plan (the 'Plan')
which enables investors to conveniently add to their holdings at reduced costs.
Should you desire further information concerning this Plan, please contact the
Shareholder Servicing Agent at (800) 331-1080.
31
<PAGE>
Pilgrim America Prime Rate Trust
- --------------------------------------------------------------------------------
Fund Advisors and Agents
- --------------------------------------------------------------------------------
INVESTMENT MANAGER INSTITUTIONAL INVESTORS AND ANALYSTS
Pilgrim America Investments, Inc. Call Pilgrim America Prime Rate Trust
Two Renaissance Square 1-800-336-3436, Extension 8256
40 North Central Avenue
Suite 1200
Phoenix, AZ 85004-4424
SHAREHOLDER SERVICING AGENT TRANSFER AGENT
Pilgrim America Group, Inc. DST Systems, Inc.
Two Renaissance Square P.O. Box 419368
40 North Central Avenue Kansas City, Missouri 64141
Suite 1200
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, AZ 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.
32
<PAGE>
[BACK COVER]
Pilgrim America Funds
Masters Series
-----
Pilgrim America Masters
Asia-Pacific Equity Fund
Pilgrim America Masters
MidCap Value Fund
Pilgrim America Masters
LargeCap Value Fund
Elite Series
-----
Pilgrim America
MagnaCap Fund
Pilgrim America
High Yield Fund
Pilgrim Government
Securities Income Fund
Pilgrim America
Funds
"Our goal is for every investor to have a successful investment experience"
Prospectuses containing more complete information regarding the funds, including
charges and expenses, may be obtained by calling Pilgrim America Securities,
Inc. Distributor at 1-800-334-3444. Please read the prospectuses carefully
before you invest or send money.
13-SS-091597 102397
