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Pilgrim America Prime Rate Trust
[PHOTO OF FLAG AND STOCK EXCHANGE BUILDING]
ANNUAL REPORT
FEBRUARY 29, 1996
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Pilgrim America Prime Rate Trust
ANNUAL REPORT
February 29, 1996
Table of Contents
Letter to Shareholders ....................................... 2
The Business of Pilgrim America Prime Rate Trust ............. 7
Footnotes .................................................... 13
Statistics and Performance ................................... 14
Additional Notes and Information ............................. 17
Portfolio of Investments ..................................... 19
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 ................................ 29
Report of Independent Auditors ............................... 34
Tax Information .............................................. 35
Pilgrim America Funds
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Pilgrim America Prime Rate Trust
LETTER TO SHAREHOLDERS
Dear Fellow Shareholders:
We are pleased to report that Pilgrim America Prime Rate Trust, formerly Pilgrim
Prime Rate Trust, (the "Trust") continues to provide the highest level of total
return performance of its peer group according to Lipper Analytical Services,
Inc. The Trust has been ranked first, second and first as measured by net asset
value ("NAV") total return for the one, three and five year measurement periods
ended March 31, 1996.(1) The Trust was rated among seven, six and five funds for
the one, three and five year periods respectively.
Morningstar measures the Trust's performance against other closed-end corporate
bond funds. On Morningstar's star ranking system, funds falling into the top 10%
of all funds within their peer group are awarded five stars and funds in the
next 22.5% receive four stars.(2) The Trust has a four star overall ranking from
Morningstar as of March 31, 1996. The Trust was rated among 27 and 25 funds for
the three and five year periods respectively.
The Trust has made uninterrupted dividend payments since May 1988. Although past
performance cannot guarantee future results, we are pleased to report that in
February 1996 shareholders received the 93rd consecutive monthly dividend. The
Trust distributed a total of $0.86 per share during the year ended February 29,
1996 providing a distribution rate(3)of 8.95% based on the average dividend
adjusted month-end NAV.(4)
The Trust continued to manage its portfolio to generate the highest possible
current yield consistent with capital preservation. The following chart shows
the relationship of the Trust's monthly distribution rate
[COMPARATIVE PERFORMANCE CHART]
<TABLE>
<CAPTION>
P.A. 3 Mo. Fed
Date Prime CD Fund
---- ----- ----- ----
<S> <C> <C> <C>
1/31/90 9.838 8.287 8.230
9.743 8.270 8.240
9.792 8.344 8.280
9.875 8.578 8.260
9.674 8.240 8.180
9.753 8.265 8.290
9.674 7.806 8.150
9.438 7.950 8.130
9.875 8.149 8.200
9.674 8.175 8.110
9.753 8.253 7.810
12/31/90 9.556 7.700 7.310
9.320 7.070 6.910
9.152 7.010 6.250
8.267 6.345 6.120
8.420 5.924 5.910
7.558 5.950 5.780
7.940 6.150 5.900
7.802 5.900 5.820
7.696 5.417 5.660
7.451 5.580 5.450
7.802 5.300 5.210
7.207 5.000 4.810
12/31/91 7.204 4.280 4.430
6.632 4.283 4.030
6.824 4.175 4.060
6.526 4.319 3.980
6.222 4.087 3.730
6.027 3.906 3.820
6.338 3.818 3.760
6.015 3.450 3.250
6.009 3.150 3.300
6.331 3.250 3.220
6.834 3.530 3.100
5.978 3.850 3.090
12/31/92 5.803 3.600 2.920
5.741 3.250 3.020
5.967 3.100 3.030
5.852 3.150 3.070
5.938 3.070 2.960
5.864 3.070 3.000
5.944 3.200 3.040
5.746 3.160 3.060
6.035 3.130 3.030
5.992 3.170 3.090
5.911 3.215 2.990
6.096 3.340 3.020
12/31/93 6.035 3.400 2.960
5.999 3.300 3.050
6.245 3.650 3.250
6.339 3.820 3.340
6.550 4.200 3.560
6.926 4.530 4.010
7.136 4.720 4.250
7.132 4.750 4.260
7.242 4.890 4.470
7.536 5.400 4.730
7.512 5.580 4.760
7.717 6.100 5.290
12/31/94 8.452 6.400 5.450
8.541 6.230 5.530
8.636 6.140 5.920
9.010 6.160 5.980
9.005 6.120 6.050
9.010 5.950 6.010
9.078 5.970 6.000
8.898 5.780 5.850
8.898 5.770 5.740
8.942 5.830 5.800
8.715 5.800 5.760
8.996 5.730 5.800
12/31/95 8.726 5.490 5.600
8.696 5.260 5.560
2/29/96 8.471 5.190 5.220
</TABLE>
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Pilgrim America Prime Rate Trust
(based on NAV), the 90 day bank CD rate(5) and the monthly average federal funds
rate. The Trust maintained a relatively stable NAV per share during fiscal year
1996. The Trust's month-end NAV, when adjusted for the February 1996 dividend of
$0.0645 cents per share is $9.55 which represents a $0.05 decline from the
February 1995 dividend adjusted month-end NAV. During the year, the NAV was
positively affected by higher secondary market prices but eroded by
deteriorating credit quality of certain credits held by the Trust. Prices rose
in part because new institutional investors entered the growing secondary
market.
PORTFOLIO MANAGEMENT TECHNIQUES AND THE RETAIL SECTOR
The retail sector is discussed below to illustrate some of the portfolio
management techniques used by the Trust. As of February 29, 1996, 10.3% of the
Trust's net assets were held in the retail sector. During fiscal 1996 the retail
sector underwent both cyclical and structural changes. These changes have
created an environment in which some retailers have prospered while others have
been forced to restructure.
SPECIALTY RETAILING
The trend in specialty retailing has been toward larger volume distribution
retailers offering a broad product array within specialized segments. Specialty
retailers seek to have lower operating costs and higher sales volumes which
afford considerable buying power. As a result, these retailers are able to
provide consumers with attractive, low-priced products. While these retailers
frequently operate at low gross margins, they attempt to be positioned to
produce solid returns by maintaining low costs. Only some of the large volume
retailers such as Staples, Circuit City, CompUSA and Home Depot have
successfully implemented these strategies.
This specialty retailing trend has led other retailers to rethink their
strategies. Frequently, the result is a reduction in the number of stores,
lowering of overhead, re-imaging, and reorganizing the company's capital
structure. Those management groups which have responded to changes have done
well. Those which have not, such as Color Tile, Inc., are paying the price.
Color Tile, Inc., held since 1992, is a specialty retailer in the floor covering
business and accounts for 1.38% of the Trust's net assets. During 1996, the
company filed for bankruptcy protection. While we presently believe that the
Trust's investment in Color Tile is properly valued, we continue to closely
monitor the company's performance and loan trading values in the secondary
market. We believe that new management and a new business plan will allow us to
achieve a higher return than we would by selling the investment in today's
depressed secondary market.
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GENERAL MERCHANDISE RETAILING
The general merchandise retail sector was weak throughout the year. The Trust
limited its investment in this sector to two companies, Saks and Company and
Liberty House, Inc., because they have strong management, defensible market
niches and proper customer segmentation. Saks and Company, which operates
high-end department stores, proves that well managed strongly capitalized
general merchandisers can compete effectively. Liberty House, Inc. is the
dominant department store chain in Hawaii. High barriers to entry and aggressive
purchasing habits among tourists have propelled Liberty House, Inc.'s revenue
and margin growth.
FOOD STORES
Supermarkets must make capital improvements continuously and control costs to
protect paper-thin operating margins. The key to a successful investment is to
select chains that have leading market positions, strong capital structures and
management which is unrelenting in its focus on cost reduction. The Trust holds
two examples of such food retailers. Dominicks Finer Foods, Inc. holds the
number two market position in the Chicago area and Star Markets Co, Inc. holds
the number two position in the Boston area. Both of these retailers have held
competitors at bay while maintaining the bottom line.
The portfolio management techniques illustrated by this brief description of the
Trust's retail investments show how the Trust is able to invest successfully
even in a difficult sector.
DIVERSIFICATION
The key to a stable NAV is a well-diversified portfolio. The Trust is
diversified by borrower, industry, lead lending institution and equity source.
BORROWER
The Trust has diversified its borrower base by committing less than $10 million
to 56 borrowers and by committing more than $30 million to only one borrower; as
illustrated by the following chart.
[COMMITMENT SIZE BY BORROWER CHART]
As of 2/29/96
<TABLE>
<CAPTION>
Number of Borrowers ($ in Millions)
- -------------------- ---------------
<S> <C>
1 Over $30 million
4 $20 - 30 million
26 $10 - 20 million
56 under $10 million
</TABLE>
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INDUSTRY
The portfolio manager manages risk by diversifying investments across many
industries as illustrated below. The investment manager periodically alters
industry allocations based on its assessment of macroeconomic conditions and
market cycles. For example, during the past six months the Trust has benefited
from de-emphasizing the pulp and paper sector and increasing its holdings in the
aerospace sector.
<TABLE>
<CAPTION>
TOP 10 INDUSTRIES
As of 2/29/96
(% of Net Assets)
<S> <C> <C> <C>
- Diversified Manufacturing 11.9% - Industrial Equipment 4.2%
- Aerospace Products & Services 6.7% - General Merchandise Retailing 4.1%
- Media/Broadcast 6.2% - Industrial Services 4.0%
- Metal Products 4.5% - Health & Beauty Products 3.9%
- Electronic Equipment 4.3% - Paper Products 3.9%
</TABLE>
LEAD LENDING INSTITUTIONS
The Trust has diversified its investments by lead lending institutions as well.
As of February 29, 1996, the Trust's portfolio was originated by 23 different
lead lenders. We believe that this diversification reduces risk and ensures the
Trust will participate in new deal flow from a wide variety of sources.
EQUITY SOURCE
The Trust invested in loans of borrowers who have 67 different principle equity
sources with the largest equity source accounting for no more than 7% of net
assets. A diligent equity source performs the important task of keeping
management focused and on track.
SHAREHOLDER VALUE
We believe that the stability of our NAV and a growing interest in loan
participation funds have contributed to reducing the market discount of Trust
shares. The following chart shows the difference between NAV and the closing
market price during the periods indicated:
MARKET PRICE & DISCOUNT
<TABLE>
<CAPTION>
Full Quarter Market Quarter-End
High-Low Closing Price NAV Market Discount
Quarter-Ended ($) ($) ($) to NAV (%)
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
May 31, 1995 9.00 -8.675 9.000 9.67 6.93
-----------------------------------------------------------------------------------
August 31, 1995 9.25 -8.875 9.125 9.66 5.54
-----------------------------------------------------------------------------------
November 30, 1995 9.50 -9.000 9.250 9.67 4.34
-----------------------------------------------------------------------------------
February 29, 1996 9.50 -9.125 9.500 9.61 1.14
-----------------------------------------------------------------------------------
</TABLE>
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Pilgrim America Prime Rate Trust
OUTLOOK
The Trust now has eight fiscal years of solid performance. We believe the Trust
is well situated to continue providing its shareholders with attractive returns.
The portfolio manager believes the economic outlook for fiscal 1997 should be
positive. Inflation appears to be under control and interest rates should
remain relatively stable. The supply of loan interests should remain constant
although increasing competition created by new investors in the secondary market
may reduce yields. These factors could result in a slight decrease in dividends.
We are very excited about the proposals sent to the Trust's shareholders in the
proxy dated March 25, 1996. These proposals, if approved by shareholders, will
permit the Trust to: (i) increase the amount the Trust invests in loans by
allowing the Trust to borrow, (ii) eliminate the need to invest in lower
yielding commercial paper to cover funding commitments and (iii) assist the
Trust in continuing to maintain a high dividend rate relative to its
competitors.
We enthusiastically endorse these proposals as a way to increase assets under
management with the expectation of enhancing shareholder return.
On behalf of the entire team of Pilgrim America professionals, I thank you for
your continued support. As always, I welcome your comments and questions.
Sincerely,
/s/ Howard Tiffen
-----------------
Howard Tiffen
Senior Vice President and
Senior Portfolio Manager
Pilgrim America Investments, Inc.
April 12,1996
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Pilgrim America Prime Rate Trust
THE BUSINESS OF PILGRIM AMERICA PRIME RATE TRUST
The Trust is a closed-end mutual fund that began operations in May 1988. It was
the first mutual fund to invest in a portfolio of senior collateralized floating
rate corporate loans. On March 9, 1992, Trust shares began trading on the New
York Stock Exchange under the symbol PPR. The Trust is managed by Pilgrim
America Investments, Inc., (the "Investment Manager").
OBJECTIVE
Achieve a high level of current monthly income while preserving capital. The
Trust also attempts to maintain a relatively stable NAV.
PRIMARY INVESTMENT POLICY
The Trust seeks to generate current income equal to or exceeding the prevailing
rate of interest which U.S. banks charge their most creditworthy customers,
typically called the Prime Rate.
STRATEGY
Invest in senior collateralized floating rate corporate loans arranged by major
banks and other sophisticated lenders. These loans closely track major
short-term interest rate indices, such as the Prime, LIBOR and Federal Funds
rates.
INVESTOR BENEFITS
- Provide attractive returns compared to many short-term alternatives
- Provide less NAV fluctuation than fixed-rate investment portfolios
Also see "Other Important Issues"
- Monthly dividends are payable in cash or reinvested in Trust shares
- Daily liquidity through the New York Stock Exchange
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Pilgrim America Prime Rate Trust
LENDING POLICIES
- Maximum 25% of total assets in any industry
- Maximum 5% of total assets to any one borrower (however, individual
senior collateralized loans may exceed 5% of total assets provided
not more than 25% of the total assets is comprised of concentrations
exceeding 5%)
- U.S. Dollar denominated loans granted to U.S. or Canadian
headquartered companies
FOCUS ON SENIOR COLLATERALIZED LOANS
Senior collateralized loans are direct obligations of corporations made
generally to finance internal growth, mergers, acquisitions, stock repurchases,
and leveraged buyouts. These loans differ from other types of debt in that they
hold the most senior position in the capital structure of a company and
therefore are generally repaid prior to unsecured bank loans, corporate bonds,
subordinated debt, trade creditors, and preferred and common shareholders.
In the early 1980's, bankers began to focus on return on assets rather than on
asset size alone. This caused banks to begin selling portions of their large
corporate loans in order to increase loan origination fees as well as to
diversify the risks associated with holding too much of any single loan or group
of loans in any single industry.
Over the years, an investment market has developed in which the underwriter and
seller of the loan usually retain a direct interest. This feature provides loan
market investors with an advantage which, to a major extent, explains the
relative consistency of loan market returns.
The market for senior collateralized corporate loans grew dramatically in 1995.
Additionally, the secondary market for senior collateralized loans has become
robust with many large dealers actively making a market. This liquidity has
created better opportunities to diversify and change portfolio holdings
consistent with market cycles.
INVESTMENT PROCESS
The Trust maintains asset quality by continuously engaging in a rigorous process
of risk management. The following illustrations summarize the Trust's investment
process and the typical structure of senior collateralized loans.
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[THE TRUST'S INVESTMENT PROCESS CHART]
<TABLE>
<S> <C> <C>
ECONOMIC ANALYSIS
- Cycle Identification
- Interest Rate Trends
- Policy and Regulation
PORTFOLIO MANAGEMENT
- Identification and Sale of Under-
performing Assets SECTOR ANALYSIS
- Secondary Transactions to - Market Prospects
Realign Portfolio - Cycle Position
- Potential Investment in
Improving Credits
OFFERING EVALUATION
- Price and Terms
- Senior Secured Collateral INVESTMENT TARGETS
- Lead Lender - Industry Allocation
- Equity Sponsor - Diversification Considerations
- Transaction Size - Concentrations and Exclusions
- Risk Adjusted Value - Price and Structure
BORROWER ANALYSIS
- Management
- Debt Service Coverage
- Business Fundamentals
- Market and Product Leadership
- Barriers to Entry
- Capital Structure
- Senior Collateral Coverage
</TABLE>
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Pilgrim America Prime Rate Trust
[CAPITAL STRUCTURE
OF TYPICAL BORROWER CHART]
Senior
Collateral Position
- Assets
- Cash
SENIOR - Accounts Receivable
COLLATERALIZED - Inventory
LOANS - Property, Plant & Equipment
- Stock of Subsidiaries
- Contractually Paid First
SUBORDINATED Investment Protection
LOANS Through Operating
Covenants
- Maximum Indebtedness Limitation
- Minimum Cash Flow Requirement
- Debt Service Requirement
PREFERRED & - Capital Expenditure Restrictions
COMMON EQUITY
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Pilgrim America Prime Rate Trust
LOAN VALUATION
The value of a senior collateralized loan is determined by obtaining market
quotations. However, because the secondary market in senior collateralized
loans has not yet fully developed, the Investment Manager may not rely solely
on such parties quotations. When market quotations are not readily available,
or when the Investment Manager believes the market price does not represent
fair value, as is often the case given the non-public nature of most Trust
investments, the Investment Manager will establish value based on fundamental
analysis, which is expected to approximate fair value. In establishing fair
value, the Investment Manager will consider (i) the creditworthiness of the
corporate issuer, (ii) the current interest rate, and the time period until
the next interest rate reset and maturity, (iii) recent prices in the market
for the same loans, and (iv) recent prices in the market for instruments with
similar quality, coupon, time period until the next interest rate reset,
maturity and other loan terms and conditions.
While the Trust does not purchase equity securities, it may acquire and
subsequently sell, equity interests, such as stocks or warrants, received as
part of the purchase of an interest in a senior collateralized loan or in
connection with a borrower reorganization.
OTHER IMPORTANT ISSUES
INTEREST RATE FLUCTUATION
Most of the Trust's investments have interest rates which reset on a periodic
basis. Since the inception of the Trust, the portfolio reset period, which is
a measure of how quickly the portfolio's yield should adjust to changes in the
general level of interest rates, has averaged between 30 and 90 days. As a
result, the dividend yield to Trust shareholders should increase during
periods of higher interest rates. Similarly, during periods of lower interest
rates, dividend yields should decrease.
Furthermore, the Trust's NAV has historically remained relatively constant
during market interest rate changes. This has occurred primarily because of
the floating interest rate nature of most of the Trust's investments. We
anticipate that during periods on normal market interest rate changes, the
Trust's NAV will continue to remain constant. Of course, the Trust's NAV may
be affected by factors other than market interest rates.
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Pilgrim America Prime Rate Trust
DAILY LIQUIDITY
Shareholders buy and sell Trust shares on the NYSE. In addition, the Board of
Trustees reviews the possibility of share tenders on a quarterly basis. No
tender has occurred since May 1, 1992.
The Trust's NAV and market price per share vary with the NAV usually exceeding
the market price. NAV represents the per share value of the Trust's investments
and other assets minus liabilities calculated on a daily basis. Market price, on
the other hand, is determined by such market factors as investor expectations
for future performance and the supply of the Trust's shares in the marketplace.
As of February 29,1996 the Trust's shares traded at a narrow 1.14% discount to
NAV.
MONTHLY DIVIDEND POLICY
The dividend has historically tracked the general level of interest rates, most
specifically the prime rate as posted by major banks. Dividends for the Trust
are declared and paid on a monthly basis. Dividends are normally paid on or
about the 20th day of each month to shareholders who owned shares as of record
on the 10th day of the month. Dividends may be received in cash or reinvested in
additional shares purchased at the lower of the market price or NAV. Dividends
consist of substantially all of the net investment income of the Trust.
As of February 29, 1996, the Trust had declared its 93rd consecutive dividend
since its inception in May 1988(4).
MANAGER
The Trust is managed by a portfolio manager and analysts with experience in
corporate loans, corporate restructuring, asset backed lending, asset
securitization, and the U.S. and international capital markets. The team is led
by Howard Tiffen, Senior Vice President and Senior Portfolio Manager.
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Pilgrim America Prime Rate Trust
FOOTNOTES
(1) The Trust has been ranked first as measured by NAV total return for the
one, three and five year measurement periods ended February 29, 1996.
Lipper Analytical Services, Inc. ranked Pilgrim America Prime Rate Trust
for total return, without deducting sales charges and assuming
reinvestment of all dividends and capital gains distributions.
(2) The Trust has been awarded a four star ranking by Morningstar for the
periods of three and five years ended February 29, 1996. Morningstar
proprietary ratings reflect historical risk-adjusted performance which are
subject to change monthly and are calculated from the Trust's three and
five year average annual total returns in excess of the 90 day T-bill
returns.
(3) The distribution rate is calculated by annualizing the dividends declared
in each month and dividing the resulting annualized dividend amount by the
Trust's net asset value (in the case of NAV) or the NYSE closing price (in
the case of Market) at the end of the period.
(4) 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.
(5) The Trust is not insured nor does it offer a fixed rate of return like
bank certificates of deposit.
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STATISTICS AND PERFORMANCE (Unaudited)
PORTFOLIO CHARACTERISTICS
As of February 29, 1996
<TABLE>
<S> <C>
Net Assets $862,937,591
Assets Invested in Senior Collateralized Loans $808,468,350*
Total Number of Senior Collateralized Loans 87
Average Amount Outstanding per Loan $9,292,740
Total Number of Industries 26
Portfolio Turnover Rate 88%
Average Loan Amount per Industry $31,094,937
Weighted Average Days to Interest Rate Reset 36 days
Average Loan Maturity 60 months
Average Age of Loans Held in Portfolio 12 months
Average Collateral to Debt Ratio When Made 1.5 to 1
</TABLE>
*Now includes loans and other debt received through restructures
TOP 10 INDUSTRIES Top 10 SENIOR
% OF NET ASSETS COLLATERALIZED LOAN HOLDINGS
As of February 29, 1996 As of February 29, 1996
Diversified Manufacturing 11.9% Marvel IV Holdings, Inc.
Aerospace Products & Services 6.7% Pullman Company
Media/Broadcast 6.2% Liberty House, Inc.
Metal Products 4.5% MGM, Inc.
Electronic Equipment 4.3% Sky Chefs International, Inc.
Industrial Equipment 4.2% Graco Children's Products, Inc.
General Merchandise Retailing 4.1% MTF Acquisition Corp.
Industrial Services 4.0% Titanium Metals, Inc.
Health & Beauty Products 3.9% America's Favorite Chicken Co.
Paper Products 3.9% ICON Health & Fitness Co.
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Pilgrim America Prime Rate Trust
STATISTICS AND PERFORMANCE (Unaudited)
DISTRIBUTION RATES
As of February 29, 1996
The following table reviews the Trust's monthly dividend performance which is
summarized quarterly.
<TABLE>
<CAPTION>
SEC 30-Day SEC 30-Day Annualized Annualized
Prime Yield at Yield at Distribution Distribution
Quarter-ended Rate NAV(A) MKT(A) Rate at NAV(B) Rate at MKT(B)
<S> <C> <C> <C> <C> <C>
May 31, 1995 9.00% 9.84% 10.59% 9.03% 9.71%
August 31, 1995 8.75% 10.01% 10.61% 8.92% 9.45%
November 30, 1995 8.75% 9.17% 9.59% 9.02% 9.43%
February 29, 1996 8.25% 8.08% 8.17% 8.47% 8.57%
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
As of February 29, 1996
(assuming rights were Exercised, and without sales charge and commission) (C,D)
<TABLE>
<CAPTION>
NAV MKT
<S> <C> <C>
Year to Date 1.07% 2.10%
1 Year 9.21% 19.19%
3 Years 7.93% 9.89%
5 Years 7.74%*** N/A
Since Trust Inception* 8.58%*** N/A
Since Initial Trading on NYSE** N/A 10.59%
</TABLE>
See performance footnotes on page 18
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Pilgrim America Prime Rate Trust
PERFORMANCE FOOTNOTES
(A) Yield is calculated by dividing the Trust's net investment income per
share for the most recent thirty days by the net asset value (in the case
of NAV) or the closing price on the NYSE (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
standardization yield formula for open-end investment companies.
(B) The distribution rate is calculated by annualizing the dividends declared
in each month and dividing the resulting annualized dividend amount by the
Trust's net asset value (in the case of NAV) or the NYSE closing price (in
the case of Market) at the end of the period.
(C) Calculation of total return assumes a hypothetical initial investment at
the net asset value (in the case of the NAV) or the NYSE closing price (in
the case of Market) on the last business day before the first day of the
stated period, with all dividends and distributions reinvested at the
actual reinvestment price. The Trust's shares began trading on the New
York Stock Exchange on March 9, 1992. The Trust's average annual total
returns on a net asset value basis assuming rights were exercised with a
3% sales charge through February 29, 1996 were 7.10% and 8.16% for the
five-year and since inception periods, respectively. The average annual
total returns based on market price assuming rights were exercised with a
brokerage commission are not presented.
(D) On December 27,1994, the Trust issued to its shareholders transferable
rights which entitled the holders to subscribe for 17,958,766 shares of
the Trust's common stock at the rate of one share of common stock for each
four rights held. On January 27, 1995, the offering was successfully
completed.
*Inception Date- May 12,1988.
**Initial Trading on NYSE- March 9,1992.
***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.
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Pilgrim America Prime Rate Trust
ADDITIONAL NOTES AND INFORMATION
ANNUAL MEETING
A special meeting of shareholders will be held at the executive offices of
Pilgrim America Group, Inc. on May 2,1996.
KEY FINANCIAL DATES - CALENDAR 1996 DIVIDENDS:
DECLARATION DATE EX-DATE PAYABLE DATE
January 31 February 8 February 23
February 29 March 7 March 21
March 29 April 3 April 18
April 30 May 8 May 22
May 31 June 6 June 20
June 28 July 3 July 18
July 31 August 8 August 22
August 30 September 5 September 19
September 30 October 8 October 23
October 31 November 7 November 22
November 29 December 5 December 19
December 20 December 27 January 13, 1997
Record date will be two business days after each Ex-Date.
These dates are subject to change.
INSTITUTIONAL INVESTOR CONTACTS
Institutional investor and analyst comments should be directed to:
Pilgrim America Prime Rate Trust
Investor Relations Department
c/o Pilgrim America Group, Inc.
Two Renaissance Square
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004-4424
or
Call us at (602) 417-8256 between 9:00 am. to 7:00 p.m. eastern time on
any business day for account information or call 1-800-331-1080 for
special account services.
Pilgrim America Funds
17
<PAGE> 19
Pilgrim America Prime Rate Trust
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
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.
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.
Pilgrim America Funds
18
<PAGE> 20
PORTFOLIO OF INVESTMENTS
February 29, 1996
SENIOR COLLATERALIZED LOANS: 93.7%*
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (DOLLAR WEIGHTED PORTFOLIO INTEREST RESET PERIOD IS 36 DAYS) VALUE
------ -----
<S> <C> <C>
AEROSPACE PRODUCTS & SERVICES: 6.7%
$14,608,232 Aviall, Inc. (aircraft engine maintenance), 8.92% due November 2000 ............................... $14,608,232
8,000,000 Dallas Airmotive, Inc. (aircraft engine maintenance), 9.47% due March 2001 ........................ 8,000,000
15,945,321 Grimes Aerospace Corp. (aerospace products), 9.01% due December 1999 .............................. 15,148,055
5,000,000 Gulfstream Delaware Corp. (aircraft manufacturer), 8.82% due March 1998 ........................... 5,000,000
15,219,172 VSI Corp. (aerospace products), 9.10% due March 1997 .............................................. 15,219,172
-----------
57,975,459
-----------
APPAREL PRODUCTS: 3.3%
1,077,706 (1) Butterick Pattern Co. (sewing aids) May 1996 ...................................................... 646,624
10,907,550 Chicopee, Inc. (specialty fabrics), 8.57% due March 2003 .......................................... 10,907,550
6,965,000 Humphreys, Inc. (belts and personal leather goods), 9.52% due January 2003 ........................ 6,965,000
10,000,000 Scovill Fasteners (metal fasteners for apparel products), 10.25% due January 2003 ................. 10,000,000
-----------
28,519,174
-----------
CONSTRUCTION PRODUCTS AND SERVICES: 3.0%
19,600,000 MTF Acquisition Corp. (paint and coating products), 8.69% due November 2002 ....................... 19,600,000
4,000,000 The Presley Companies (homebuilder), 10.25% due May 1997 .......................................... 4,000,000
2,442,741 United Building Materials, Inc. (stone and concrete products), 9.75% due March 1996 ............... 2,381,673
-----------
25,981,673
-----------
CONTAINER PRODUCTS: 2.5%
10,000,000 Reid Plastics, Inc. (plastic bottle manufacturer), 10.50% due January 2002 ........................ 10,000,000
11,854,563 Silgan Corp. (metal and plastic containers), 8.55% due September 1996 ............................. 11,884,199
-----------
21,884,199
-----------
DIVERSIFIED MANUFACTURING: 11.9%
15,000,000 Cambridge Industries, Inc. (automotive plastics), 8.86% due May 2004 .............................. 15,000,000
19,900,000 Graco Children's Products, Inc. (juvenile products), 8.53% due June 2003 .......................... 19,900,000
14,029,500 The Hawk Group of Companies (friction materials, metal stampings and powder metal),
9.13% due June 2002 ............................................................................. 14,029,500
534,229 @(2) KDI Corp. (defense and leisure products), 9.76% due March 1998 .................................... 338,839
26,451,514 Pullman Company (transportation, industrial products), 8.81% due December 1999 .................... 26,451,514
8,275,000 Rowe International, Inc. (vending machine, jukebox and currency changer manufacturer),
10.78% due December 1996 ......................................................................... 7,168,750
7,977,528 Spalding & Evenflo Companies, Inc. (sporting goods, juvenile products), 8.31%
due October 2002 ................................................................................. 7,977,528
12,000,000 Worldwide Sports & Recreation Corp. (optics, airguns & sports products), 9.19%
due March 2001 ................................................................................... 12,000,000
-----------
102,866,131
-----------
DIVERSIFIED SERVICE/ENTERTAINMENT: 3.8%
33,000,000 Marvel IV Holdings, Inc. (diversified services & entertainment), 11.32% due September 1997 ........ 33,000,000
-----------
ELECTRICAL EQUIPMENT: 1.2%
9,953,704 Merkle-Korff Industries (custom industrial electric motors), 8.51% due March 2003 ................. 9,953,704
-----------
ELECTRONIC EQUIPMENT: 4.3%
7,000,000 Details, Inc. (prototype circuit boards), 8.22% due February 2002 ................................. 7,000,000
</TABLE>
See Notes to Financial Statements
19
<PAGE> 21
<TABLE>
PRINCIPAL
AMOUNT VALUE
------ -----
<S> <C> <C>
ELECTRONIC EQUIPMENT (CONTINUED)
$12,500,000 Dictaphone Acquisition, Inc. (dictation and recording equipment), 8.50% due June 2002 ............. $12,500,000
10,000,000 Intesys Technologies, Inc. (contract engineering and manufacturing), 9.44%
due December 2001 ............................................................................... 10,000,000
7,469,458 K-Tec Holdings (telephone and communications equipment), 8.33% due March 2004 ..................... 7,469,458
-----------
36,969,458
-----------
FOOD/TOBACCO PRODUCTS AND SERVICES: 1.7%
6,593,750 Bumble Bee Seafoods, Inc. (canned seafood), 10.85% due May 1996 ................................... 6,593,750
4,500,000 Edward's Baking Co. (food and tobacco products), 8.56% due September 2002 ......................... 4,500,000
2,500,000 Liggett Group Inc. (tobacco products), 10.00% due March 1997 ...................................... 2,500,000
2,162,262 (1) Tom's Foods, Inc. (snack foods) December 1998 ..................................................... 864,905
-----------
14,458,655
-----------
FOOD DISTRIBUTION: 2.0%
16,918,923 U.S. Foodservice, Inc. (food wholesaler), 8.69% due November 2000 ................................. 16,918,923
-----------
FOOD STORES: 2.8%
12,467,552 Dominick's Finer Foods, Inc. (Chicago supermarkets), 9.74% due September 2003 ..................... 12,498,721
1,040,313 @(3) New Almac's Inc. (formerly Almac's, Rhode Island supermarkets) December 2001 ...................... 405,722
11,332,895 Star Markets Co., Inc. (New England supermarket chain), 8.32% due December 2001 ................... 11,332,895
-----------
24,237,338
-----------
FURNITURE & GARDEN PRODUCTS: 0.6%
5,000,000 Interco (furniture), 8.25% due June 2003 .......................................................... 5,000,000
-----------
GENERAL MERCHANDISE RETAILING: 4.1%
20,000,000 Liberty House, Inc. (Hawaiian department store chain), 9.00% due June 2002 ........................ 20,000,000
15,381,563 Saks and Company (general merchandise retailer), 8.36% due June 2000 .............................. 15,381,563
-----------
35,381,563
-----------
HEALTH CARE SERVICES: 2.9%
5,645,903 Covenant Care, Inc. (operator of long-term health care facilities), 9.04% due June 1999 ........... 5,645,903
7,000,000 H.E.C. Investments, Inc. (health club operator), 8.72% due December 2000 .......................... 7,000,000
8,500,000 Medical Specialties (home healthcare equipment leasing), 10.07% due December 2001 ................. 8,500,000
3,774,189 Mediq/PRN Life Support Inc. (hospital equipment leasing), 10.25% due September 1998 ............... 3,774,189
-----------
24,920,092
-----------
HEALTH & BEAUTY PRODUCTS: 3.9%
17,500,000 ICON Health & Fitness Co. (exercise equipment), 8.83% due November 2001 ........................... 17,500,000
1,625,000 IVAC Corporation (manufacturer of intravenous and vital sign measurement instruments),
8.31% due December 1999 ......................................................................... 1,625,000
9,920,000 Mary Kay Cosmetics, Inc. (client sale cosmetics), 9.31% due December 2002 ......................... 9,920,000
5,000,000 Revlon Inc. (cosmetics manufacturer), 8.38% due June 1997 ......................................... 5,000,000
-----------
34,045,000
-----------
INDUSTRIAL CHEMICALS: 3.3%
9,250,000 Cedar Chemical Corp. (specialized chemicals), 8.89% due October 2003 .............................. 9,250,000
9,000,000 Fiberite, Inc. (plastic composite manufacturer), 8.56% due December 2001 .......................... 9,000,000
9,916,667 National Propane Inc. (propane distribution), 8.23% due June 2002 ................................. 9,916,667
-----------
28,166,667
-----------
INDUSTRIAL EQUIPMENT: 4.2%
4,987,500 Calmar (non-aerosol fluid dispensing systems), 9.40% due March 2003 ............................... 4,987,500
9,987,500 Graphic Controls Corp. (industrial and medical charts), 8.32% due September 1999 .................. 9,987,500
4,518,498 Intermetro Industries Inc. (storage and material transport products), 8.73% due December 2002 ..... 4,518,498
</TABLE>
See Notes to Financial Statements
20
<PAGE> 22
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- -----------
<S> <C> <C>
INDUSTRIAL EQUIPMENT (CONTINUED)
$ 9,974,457 Jackson Products, Inc. (industrial safety equipment manufacturer), 9.40% due September 2003 ......... $ 9,974,457
962,817 Newflo Corporation (pump and valve manufacturer), 7.83% due February 1998............................ 962,817
6,034,553 Sperry Marine, Inc. (manufacturer of navigation products), 8.89% due November 2000 .................. 6,034,553
-----------
36,465,325
-----------
INDUSTRIAL SERVICES: 4.0%
6,912,500 Bankers Systems, Inc. (compliance services to banking industry), 9.04% due November 2002 ............ 6,912,500
8,527,579 Clean Harbors (industrial cleaning), 7.89% due May 2000.............................................. 8,527,579
9,920,000 Primeco, Inc. (equipment rental), 8.60% due December 2000............................................ 9,920,000
9,580,000 Staff Capital, L.P. (payroll and human resource services), 9.31% due December 1999 .................. 9,580,000
-----------
34,940,079
-----------
MEDIA/BROADCAST: 6.2%
7,250,000 Eller Media Company (outdoor advertising), 9.13% due December 2003................................... 7,250,000
20,000,000 Metro-Goldwyn-Mayer, Inc. (motion picture distribution), 7.63% due April 1997........................ 20,000,000
7,911,111 Orion Pictures Corp. (theatrical motion pictures), 8.38% due December 2000........................... 7,911,111
9,933,333 Phoenix Associates Inc. (cable television company), 8.97% due December 1999.......................... 9,933,333
8,530,352 U. S. Radio Holdings (independent radio stations), 9.57% due September 2003.......................... 8,530,352
-----------
53,624,796
-----------
METAL PRODUCTS: 4.5%
9,975,000 GS Technologies (metal products fabricator), 8.70% due September 2002................................ 9,975,000
5,800,000 National Refractories Inc. (kiln lining materials), 10.25% due September 1999........................ 5,800,000
19,500,000 Titanium Metals, Inc. (metal smelter), 10.75% due April 1996......................................... 19,500,000
3,250,000 Triangle Wire and Cable Inc. (metal products fabricator), 10.25% due April 1997...................... 3,250,000
-----------
38,525,000
-----------
MISCELLANEOUS COMPANIES: 1.2%
9,957,514 Cobblestone Golf Group, Inc. (golf course owner/operator), 9.84% due September 2001 ................. 9,957,514
263,292 General Acquatics, Inc. (swimming pool manufacturer), 12.75% due June 2000........................... 263,292
-----------
10,220,806
-----------
PAPER PRODUCTS: 3.9%
15,000,000 Ampad Corp. (office supplies), 9.00% due April 2004.................................................. 15,000,000
9,975,000 Crown Paper Co. (coated paper products), 8.78% due August 2003....................................... 9,999,937
5,776,244 Mail-Well Corp. (envelopes and specialty printing), 8.81% due July 2003.............................. 5,776,244
2,874,842 Supremex, Inc. (Canadian envelope manufacturer), 8.81% due July 2003................................. 2,874,842
-----------
33,651,023
-----------
PUBLISHING AND INFORMATION SERVICES: 2.0%
7,485,000 NBC Acquisition (wholesale and retail textbooks), 8.94% due August 2003.............................. 7,485,000
10,000,000 Pierce Leahy Corp. (document storage), 8.93% due October 2003........................................ 10,000,000
-----------
17,485,000
-----------
RESTAURANTS: 3.3%
19,166,072 America's Favorite Chicken Co. (quick service restaurant chain), 8.75% due November 1998 ............ 19,166,072
5,900,615 Friendly's Ice Cream Company (Northeastern restaurant chain), 15.00% due March 1996 ................. 5,133,534
4,411,867 Long John Silvers Inc. (quick service seafood restaurant chain), 7.74% due December 1998 ............ 4,411,867
-----------
28,711,473
-----------
SPECIALTY RETAILING: 3.4%
1,021,228 American Blind & Wallpaper (home furnishings retailer), 10.25% due June 1996......................... 1,021,228
4,844,340 Camelot Music, Inc. (music stores), 9.40% due February 2002.......................................... 4,723,231
15,409,056(3) Color Tile, Inc. (home improvement retailer), 9.77% due December 1998................................ 11,914,589
2,484,184 M & H Drugs, Inc. (Midwestern retail drugstores), 9.63% due March 1996............................... 2,422,080
</TABLE>
See Notes to Financial Statements
21
<PAGE> 23
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ------------
<S> <C> <C>
SPECIALTY RETAILING (CONTINUED)
$ 9,000,000 Murray's Discount Auto Parts (auto parts retailer), 9.06% due September 2001...................... $ 9,000,000
------------
29,081,128
------------
TRANSPORTATION: 3.0%
5,500,000 Cruise Ship L.L.C. (cruise ship operator), 12.16% due July 2001................................... 5,500,000
19,985,684 Sky Chef's International, Inc. (airline food service), 8.71% due September 2003 .................. 19,985,684
------------
25,485,684
------------
Total Senior Collateralized Loans (Cost $816,488,148)........................................ 808,468,350
------------
OTHER CORPORATE DEBT: 0.0%
FOOD STORES: 0.0%
1,110,798 @(3) New Almac's Inc. (formerly Almac's, Rhode Island supermarkets) Senior Subordinated Note,
December 2004 ................................................................................... --
------------
Total Other Corporate Debt (Cost $848,197) .................................................. --
------------
COMMON STOCK AND PREFERRED STOCK: 0.9%
SHARES
------
DIVERSIFIED MANUFACTURING: 0.0%
2,633 @(2) KDI Corp.--common (defense and leisure products).................................................. --
------------
ELECTRONIC EQUIPMENT: 0.1%
174,951 @(R) MICOM Communications Corp.--common (wide area networking products)................................ 1,319,131
------------
MISCELLANEOUS COMPANIES: 0.0%
26,121 @(R) General Acquatics, Inc.--common (swimming pool manufacturer)...................................... 156,700
------------
RESTAURANTS: 0.5%
413,980 @(R) America's Favorite Chicken Co.--common (quick service restaurant chain)........................... 1,373,100
24,848 (R) America's Favorite Chicken Co.--preferred (quick service restaurant chain) ....................... 2,484,800
17,664 @ Flagstar, Inc.--common (family restaurants and institutional food service companies) ............. 61,824
------------
3,919,724
------------
TEXTILES: 0.3%
12,764 @(R) Dan River (Braelan) Corp.--common (diversified textiles).......................................... 2,288,045
------------
Total Common Stock and Preferred Stock (Cost $4,462,495)..................................... 7,683,600
------------
STOCK PURCHASE WARRANTS AND OTHER SECURITIES: 0.1%
1 @(R) Autotote Systems, Inc., Warrant representing 48,930 common shares (designer and
manufacturer of wagering equipment), Exercise price $3.835, Expires 10/30/03..................... 99,866
19,000 @(R) Covenant Care, Inc., Warrants representing 19,000 common shares (operator of long-term
health care facilities).......................................................................... 17,000
1 @(R) Cruise Ship, L.L.C., Warrant representing 4,105 voting shares (cruise ship operator) ............. 129,446
1 @(R) Cruise Ship, L.L.C., Warrant representing 4,666 non-voting shares (cruise ship operator) ......... 147,136
26,606 @(R)(2) KDI Corp. Units of Trust (defense and leisure products)........................................... --
1 @(R) Staff Capital, L.P., Warrant to purchase 0.5% of the Common Limited Partnership Interest
(payroll and human resource services), Expires 11/05/03.......................................... 540,000
45,000 @(R)(3) Victory Holding Corp., Warrants representing 45,000 common shares (Rhode Island
supermarkets) Exercise Price $10, Expires 12/01/01............................................... --
------------
Total Stock Purchase Warrants and Other Securities (Cost $O)................................. 933,448
------------
</TABLE>
See Notes to Financial Statements
22
<PAGE> 24
SHORT-TERM INVESTMENTS: 4.4%
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ------------
<S> <C> <C> <C>
COMMERCIAL PAPER: 4.4%
$ 37,866,000 GE Capital, Inc., 5.44%, Due 03/01/96 ....................................... $ 37,866,000
------------
Total Short-Term Investments (Cost $37,866,000) .......................... 37,866,000
------------
TOTAL INVESTMENTS (COST $859,664,840)(4) .......................... 99.1% 854,951,398
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES-NET ................ 0.9 7,986,193
----- -------------
TOTAL NET ASSETS ............................................... 100.0% $ 862,937,591
===== =============
</TABLE>
- ----------
@ Non-income producing security
(R) Restricted security
* Senior Collaterized loans, while exempt from registration under the
Securities Act of 1933, contain certain restrictions on resale and cannot
be sold publicly. These senior collaterized 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.
Interest rates shown represent a weighted average rate on the total
current outstanding balance.
(1) The borrower is in the process of developing a plan of debt and/or
corporate restructure and is in a non-accrual status as of February 29,
1996.
(2) The borrower filed for protection under Chapter 7 of the U.S. Federal
bankruptcy code and is in the process of developing a plan of liquidation.
(3) The borrower filed for protection under Chapter 11 of the U.S. Federal
bankruptcy code and is in the process of developing a plan of
reorganization.
(4) For Federal income tax purposes, which is the same for financial reporting
purposes, cost of investments is $859,664,840 and net unrealized
depreciation consists of the following:
<TABLE>
<S> <C>
Gross Unrealized Appreciation............. $ 4,894,207
Gross Unrealized Depreciation............. (9,607,649)
------------
Net Unrealized Depreciation............ $ (4,713,442)
============
</TABLE>
See Notes to Financial Statements
23
<PAGE> 25
STATEMENT OF ASSETS AND LIABILITIES
February 29, 1996
- -----------------------------
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value (Cost $859,664,840) ................................ $ 854,951,398
Cash ................................................................................... 5,485,454
Interest receivable .................................................................... 8,935,841
Prepaid expenses ....................................................................... 91,535
-------------
Total assets .............................................................. 869,464,228
-------------
LIABILITIES:
Deferred facility fees ................................................................. 5,080,840
Accrued management fees ................................................................ 563,218
Accrued administration fees ............................................................ 100,040
Accrued expenses ....................................................................... 782,539
-------------
Total liabilities ......................................................... 6,526,637
-------------
NET ASSETS (equivalent to $9.61 per share based on 89,793,828 shares outstanding,
unlimited number of shares of beneficial interest authorized, no par value) ........ $ 862,937,591
=============
Net Assets Consist of:
Paid-in capital .................................................................... $ 866,450,968
Undistributed net investment income ................................................ 9,110,584
Accumulated net realized loss on investments ....................................... (7,910,519)
Net unrealized depreciation of investments ......................................... (4,713,442)
-------------
Net assets ................................................................ $ 862,937,591
=============
</TABLE>
See Notes to Financial Statements
24
<PAGE> 26
STATEMENT OF OPERATIONS
For the Year Ended February 29, 1996
- --------------------------
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
INCOME:
Interest ...................................................... $ 81,256,012
Facility fees earned .......................................... 7,762,148
Other ......................................................... 1,272,516
Dividends ..................................................... 198,781
------------
Total investment income ................................... 90,489,457
------------
EXPENSES:
Investment management fees .................................... 7,122,089
Administration fees ........................................... 1,264,932
Transfer agent and registrar fees ............................. 664,582
Miscellaneous expense ......................................... 539,799
Recordkeeping and pricing fees ................................ 390,108
Reports to shareholders ....................................... 281,470
Professional fees ............................................. 141,710
Trustees fees ................................................. 76,246
Filing fees ................................................... 74,481
Custodian fees ................................................ 57,089
Security loan fees ............................................ 36,892
Insurance expense ............................................. 24,267
------------
Total expenses ............................................ 10,673,665
------------
Less: Earnings credits .................................... (8,868)
------------
Net expenses .............................................. 10,664,797
------------
Net investment income .................................. 79,824,660
------------
REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENTS:
Net realized loss on investments .............................. (3,827,587)
Change in unrealized depreciation of investments .............. (3,260,231)
------------
Net loss on investments ....................................... (7,087,818)
------------
Net increase in net assets resulting from operations....... $ 72,736,842
============
</TABLE>
See Notes to Financial Statements
25
<PAGE> 27
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------- -------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income ....................................................... $ 79,824,660 $ 55,619,187
Net realized gain (loss) on investments ..................................... (3,827,587) 537,906
Change in unrealized appreciation (depreciation) of investments ............. (3,260,231) 3,316,328
------------- -------------
Net increase in net assets resulting from operations ........................ 72,736,842 59,473,421
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income .................................... (76,983,896) (53,723,370)
CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from the sale of shares in connection with
rights offering ......................................................... 101,482 141,354,225
------------- -------------
Total increase (decrease) in net assets ................................. (4,145,572) 147,104,276
NET ASSETS:
Beginning of period ......................................................... 867,083,163 719,978,887
------------- -------------
End of period (including undistributed net investment income of
$9,110,584 and $1,071,809, respectively) ................................ $ 862,937,591 $ 867,083,163
============= =============
</TABLE>
See Notes to Financial Statements
26
<PAGE> 28
STATEMENT OF CASH FLOWS
For the Year Ended February 29, 1996
- -------------------------------
<TABLE>
<S> <C>
INCREASE (DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received ................................................................................ $ 80,595,192
Dividends received ............................................................................... 198,781
Facility fees received ........................................................................... 5,242,347
Commitment fees received ......................................................................... 464,182
Other income received ............................................................................ 808,334
Operating expenses paid .......................................................................... (10,907,634)
Net proceeds of short-term investments ........................................................... 61,765,459
Purchases of portfolio securities ................................................................ (770,185,459)
Proceeds from disposition of portfolio securities ................................................ 713,214,998
-------------
Net cash provided by operating activities .................................................... 81,196,200
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid ................................................................................... (76,983,896)
Proceeds received from rights offering ........................................................... 301,187
-------------
Net cash used for financing activities ....................................................... (76,682,709)
-------------
Net increase in cash ............................................................................. 4,513,491
Cash at beginning of period ...................................................................... 971,963
-------------
Cash at end of period............................................................................. $ 5,485,454
=============
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 ............................................. $ 72,736,842
-------------
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided
by operating activities:
Decrease in investments in securities ............................................................ 11,871,675
Increase in dividends and interest receivable .................................................... (660,820)
Decrease in prepaid expenses ..................................................................... 81,121
Decrease in deferred facility fees ............................................................... (2,519,801)
Decrease in accrued expenses ..................................................................... (312,817)
-------------
Total adjustments .............................................................................. 8,459,358
-------------
Net cash provided by operating activities ................................................... $ 81,196,200
=============
</TABLE>
See Notes to Financial Statements
27
<PAGE> 29
FINANCIAL HIGHLIGHTS
For a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, YEAR ENDED FEBRUARY 28, FEBRUARY 29,
1996(6) 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, beginning of period...... $ 9.66 $ 10.02 $ 10.05 $ 9.96 $ 9.97
--------- --------- --------- --------- ---------
Net investment income .................... 0.89 0.74 0.60 0.60 0.76
Net realized and unrealized
gain (loss) on investments ............. (0.08) 0.07 (0.05) 0.01 (0.02)
--------- --------- --------- --------- ---------
Increase in net asset value from
investment operations .................. 0.81 0.81 0.55 0.61 0.74
--------- --------- --------- --------- ---------
Distributions from net
investment income ...................... (0.86) (0.73) (0.60) (0.57) (0.75)
--------- --------- --------- --------- ---------
Reduction in net asset value from
rights offering ........................ -- (0.44) -- -- --
--------- --------- --------- --------- ---------
Increase in net asset value from
repurchase of capital stock ............ -- -- 0.02 0.05 --
--------- --------- --------- --------- ---------
Net asset value, end of period ........... $ 9.61 $ 9.66 $ 10.02 $ 10.05 $ 9.96
========= ========= ========= ========= =========
Closing market price at end of period..... $ 9.50 $ 8.75 $ 9.25 $ 9.13 $ --
TOTAL RETURN
Total investment return at
closing market price (3) ............... 19.19% 3.27%(5) 8.06% 10.89% --
Total investment return at
net asset value (4) .................... 9.21% 5.24%(5) 6.28% 7.29% 7.71%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (thousands)..... $ 862,938 $ 867,083 $ 719,979 $ 738,810 $ 874,104
Ratios to average net assets:
Expenses ............................... 1.23% 1.30% 1.31% 1.42% 1.42%(2)
Net investment income .................. 9.23% 7.59% 6.04% 5.88% 7.62%(2)
Portfolio turnover rate .................. 88% 108% 87% 81% 53%
Shares outstanding at end of period
(thousands) ............................ 89,794 89,794 71,835 73,544 87,782
Average daily bank loans outstanding
during the period (thousands)........... $ -- $ 2,811 $ -- $ 636 $ 8,011
Average monthly shares outstanding
during the period (thousands) .......... 89,794 74,598 -- 79,394 102,267
Average daily bank loans per share
during the period ...................... $ -- $ 0.04 $ -- $ 0.01 $ 0.08
</TABLE>
<TABLE>
<CAPTION>
MAY 12,
YEAR ENDED 1988* TO
FEBRUARY 28, FEBRUARY 28,
1991 1990 1989
----------- ----------- ----------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, beginning of period..... $ 10.00 $ 10.00 $ 10.00
----------- ----------- ---------
Net investment income ................... 0.98 1.06 0.72
Net realized and unrealized
gain (loss) on investments ............ (0.05) -- --
----------- ----------- ---------
Increase in net asset value from
investment operations ................. 0.93 1.06 0.72
----------- ----------- ---------
Distributions from net
investment income ..................... (0.96) (1.06) (0.72)
----------- ----------- ---------
Reduction in net asset value from
rights offering ....................... -- -- --
----------- ----------- ---------
Increase in net asset value from
repurchase of capital stock ........... -- -- --
----------- ----------- ---------
Net asset value, end of period .......... $ 9.97 $ 10.00 $ 10.00
=========== =========== =========
Closing market price at end of period.... $ -- $ -- $ --
TOTAL RETURN
Total investment return at
closing market price (3)............... -- -- --
Total investment return at
net asset value (4) ................... 9.74% 11.13% 7.35%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (thousands).... $ 1,158,224 $ 1,036,470 $ 252,998
Ratios to average net assets:
Expenses .............................. 1.38% 1.46%(2) 1.18%(1)(2)
Net investment income ................. 9.71% 10.32%(2) 9.68%(1)(2)
Portfolio turnover rate ................. 55% 100% 49%(1)
Shares outstanding at end of period
(thousands) ........................... 116,022 103,660 25,294
Average daily bank loans outstanding
during the period (thousands).......... $ 2,241 $ -- $ --
Average monthly shares outstanding
during the period (thousands) ......... 114,350 -- --
Average daily bank loans per share
during the period ..................... $ 0.02 $ -- $ --
</TABLE>
- -----------------
* Commencement of operations.
(1) Annualized.
(2) Prior to the waiver of expenses, the ratio of expenses to average net
assets was 1.95%(l), 1.48% and 1.44% for the period from May 12,1988 to
February 28, 1989, and for the fiscal years ended February 28, 1990 and
February 29, 1992, respectively, and the ratio of net investment income to
average net assets was 8.91%(1), 10.30% and 7.60% for the period from May
12, 1988 to February 28, 1989 and for the fiscal years ended February 28,
1990 and February 29, 1992, respectively.
(3) Total investment return measures the change in the market value of your
investment assuming reinvestment of dividends and capital gain
distributions, if any, in accordance with the provisions of the dividend
reinvestment plan. On March 9, 1992, the shares of the Trust were initially
listed for trading on the New York Stock Exchange. Accordingly, the total
investment return for the year ended February 28, 1993 covers only the
period from March 9, 1992 to February 28, 1993. Total investment return for
periods prior to the year ended February 28, 1993 are not presented since
market values for the Trust's shares were not available.
(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.
(5) Calculation of total return excludes the effect of the per share dilution
resulting from the rights offering as the total account value of a fully
subscribed shareholder was minimally impacted.
(6) Pilgrim America Investments, Inc., the Trust's investment manager, acquired
assets of Pilgrim Management Corporation, the Trust's former investment
manager, in a transaction that closed on April 7, 1995.
See Notes to Financial Statements
28
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS
February 29, 1996
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, collateralized loans which are exempt from registration under the
Securities Act of 1933 but contain certain restrictions on resale and cannot be
sold publicly. These loans bear interest (unless otherwise noted) at rates that
float periodically at a margin above the Prime Rate of a U.S. bank specified in
the credit agreement, LIBOR (London Inter-Bank Offered Rate), 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 collateralized 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, if any. 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 collateralized loans has
not yet fully developed, the Manager will not currently rely solely on such
prices or quotations. Securities for which the primary market is a national
securities exchange or the NASDAQ National Market System are stated at the
last reported sale price on the day of valuation. Debt and equity
securities traded in the over-the-counter market and listed securities for
which no sale was reported on that date are valued at the mean between the
last reported bid and asked price. Securities other than senior
collateralized loans for which reliable quotations are not readily
available and all other assets will be valued at their respective fair
values as determined in good faith by, or under procedures established by,
the Board of Trustees of the Trust. Investments in securities maturing in
less than 60 days are valued at amortized cost, which when combined with
accrued interest, approximates market value.
B. Federal Income Taxes. It is the Trust's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its taxable
income to its shareholders. Therefore, no Federal income tax provision is
required. Due to the timing of dividend distributions and the differences
in accounting for income and realized gains (losses) for financial
statement and Federal income tax purposes, the fiscal year in which amounts
are distributed may differ from the year in which the income and realized
gains (losses) were recorded by the Trust. The differences between the
income or gains distributed on a book versus tax basis, if any, are shown
as excess distributions of net investment income and net realized gain on
sales of investments in the accompanying Statements of Changes in Net
Assets.
29
<PAGE> 31
C. Security Transactions and Revenue Recognition. Security transactions are
accounted for on trade date. Realized gains or losses are reported on the
basis of identified cost of securities delivered. Interest income is
recorded on an accrual basis at the then current loan rate, and dividend
income is recorded on the ex-dividend date. Facility fees, which represent
non-refundable fees associated with the acquisition of loans, are deferred
and recognized ratably over the shorter of 2 1/2 years or the actual term
of the loan.
D. Distributions to Shareholders. The Trust records distributions to its
shareholders on the ex-date. The amount of distributions from net
investment income and net realized capital gains are determined in
accordance with federal income tax regulations, which may differ from
generally accepted accounting principles. These "book/tax" differences are
either considered temporary or permanent in nature. Key differences are the
treatment of short-term capital gains and other timing differences. To the
extent that these differences are permanent in nature, such amounts are
reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassifications.
Distributions which exceed net investment income and net realized capital
gains for financial reporting purposes but not for tax purposes are
reported as distributions in excess of net investment income and/or
realized capital gains. To the extent they exceed net investment income and
net realized capital gains for tax purposes, they are reported as a tax
return of capital. Accordingly, amounts as of February 29, 1996 have been
reclassified to reflect an increase in paid in capital and a decrease in
undistributed net investment income of $801,989.
E. Dividend Reinvestments. Pursuant to the Automatic Dividend Reinvestment
Plan, Investors Fiduciary Trust Co., the Plan Agent, may purchase, from
time to time, shares of beneficial interest of the Trust on the open market
to satisfy dividend reinvestments. Such shares will be purchased only when
the closing sale of bid price plus commission is less than the net asset
value per share of the stock. If the market price plus commissions is equal
to or exceeds the net asset value, new shares valued at the net asset
value most recently calculated will be issued.
F. Use of Estimates. Management of the Trust has made certain estimates and
assumptions relating to the reporting of assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. Actual results could differ from these estimates.
NOTE 2 - INVESTMENTS
For the year ended February 29, 1996, the cost of purchases and the
proceeds from principal repayment and sales of investments, excluding short-term
notes, aggregated $770,185,459 and $713,214,998, respectively.
At February 29, 1996 the Trust held senior collateralized loans valued at
$808,468,350 representing 93.7% of its net assets. 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 differ significantly from the market values that would
have been used had a ready market for these securities existed. These
differences could be material.
The senior collateralized 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
30
<PAGE> 32
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 collateralized 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>
COST OR
DATE(S) OF ASSIGNED
ACQUISITION BASIS
----------- -----
<S> <C> <C>
America's Favorite Chicken Co.-Common ... 11/5/92 1
America's Favorite Chicken Co.-Preferred 11/5/92 2,484,761
Autotote Systems, Inc.-Warrant .......... 11/11/92 --
Covenant Care, Inc.-Warrants ............ 12/22/95 --
Cruise Ship L.L.C.-Warrant, Voting Share 9/13/95 --
Cruise Ship L.L.C.-Warrant,
Non-Voting Share ...................... 9/13/95 --
Dan River (Braelen) Corp.-Common ........ 9/15/91 1,529,753
General Acquatics, Inc.-Common .......... 9/19/95 193,619
KDI Corp. Units of Trust ................ 9/19/95 --
MICOM Communications Corp.-Common ....... 2/26/93 --
Staff Capital, L.P., Warrant ........... 9/l/95 --
Victory Holding Corp.-Warrants .......... 11/18/94 --
----------
Total restricted, securities, excluding
senior collateralized loans
(market value of $ 8,555,224 was 0.99%
of net assets at February 29, 1996) ....... $4,208,134
==========
</TABLE>
Market quotations for unrestricted securities of the same class as of the
date(s) of acquisition and February 29, 1996, where available, were as follows:
<TABLE>
<CAPTION>
AS OF
DATE OF AS OF
ACQUISITION 2/29/96
----------- -------
<S> <C> <C>
MICOM Communications Corp.-Common $ - $8.38
</TABLE>
The Trust will not pay the costs of disposition of the above restricted
securities other than ordinary brokerage fees, if any.
At February 29, 1996, the Trust had a capital loss carryforward for Federal
income tax purposes of approximately $7,557,291 which is scheduled to expire
through February 28, 2004.
NOTE 3 - MANAGEMENT AND ADMINISTRATIVE SERVICES AGREEMENT
As of April 7, 1995, Express America Holdings Corporation ("Express
America") acquired the rights to manage Pilgrim America Prime Rate Trust and
Pilgrim Regional BankShares, and acquired the rights to manage and distribute
Pilgrim America MagnaCap Fund, Pilgrim America High Yield Fund and Pilgrim
Government Securities Income Fund (collectively the "Acquired Funds"). As a
result of this acquisition, the new investment organization is known as Pilgrim
America Group, Inc., ("PAG"), a wholly-owned, subsidiary of Express America.
On April 7, 1995 the Trust entered into a new Investment Management
Agreement with Pilgrim America Investments, Inc. (the "Manager") a wholly-owned
subsidiary of 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 up to $700 million; 0.75% of the average net assets of $700 to $800
million; and 0.65% of the average net assets in excess of $800 million. This fee
structure was instituted by Pilgrim Management Corporation (the "Former
Manager"). At February
31
<PAGE> 33
29, 1996, the Trust owed the Manager $563,218 in investment management fees.
The Trust had an investment management agreement with the Former Manager to
provide advisory and management services which expired on April 7, 1995. The fee
arrangements were identical to the investment management agreement currently in
effect with the Manager.
The Trust also entered into a new 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 up to $800 million; and 0.10% of the average net assets in
excess of $800 million. This fee structure was instituted by the Former
Administrator. At February 29, 1996, the Trust owed the Manager $100,040 in
administration fees.
The Trust had an administration agreement with the Former Administrator
which expired on April 7, 1995. The fee arrangements were identical to the
Administration Agreement currently in place.
Commencing April 7, 1995, certain officers and/or trustees of the Trust are
officers and/or trustees of the Manager. For the period prior to April 7, 1995,
certain officers and/or trustees of the Trust were also officers and/or trustees
of the Former Manager.
NOTE 4 - COMMITMENTS
The Trust entered into a Credit Agreement (the "Agreement") with a bank to
provide a revolving line of credit in the aggregate amount of $15,000,000
expiring on November 14, 1996. Borrowings under this Agreement may be used to
provide liquidity to the Trust in connection with periodic tender offers for its
shares or to fund revolving credit or unfunded loan commitments of the Trust.
Borrowings under the Agreement bear interest at the bank's prime rate or LIBOR
plus 1% at the Trust's option. A commitment fee of 2/10 of 1% per year is
charged on the unused portion of the revolving credit line. There was no balance
outstanding pursuant to this agreement during the year ended February 29, 1996.
Securities with an approximate market value of $38 million have been
segregated with the custodian to cover the unfunded loan commitments. As of
February 29, 1996 the Trust had unfunded loan commitments pursuant to the terms
of the following loan participation agreements:
<TABLE>
<S> <C>
Clean Harbors ...................... $ 330,629
Cobblestone Golf Group, Inc......... 1,042,486
Color Tile, Inc. ................... 101,516
Edwards Baking Co. ................. 1,000,000
Friendly's Ice Cream Company........ 180,575
Grimes Aerospace Corp. ............. 36,865
Liggett Group Inc. ................. 1,500,000
Mediq/PRN Life Support, Inc......... 69,439
The Presley Companies .............. 2,000,000
Pullman Company .................... 3,363,762
Rowe International, Inc. ........... 100,000
Staff Capital, L.P. ................ 1,257,692
Titanium Metals, Inc. .............. 2,500,000
Triangle Wire and Cable Inc......... 2,903,846
-----------
$16,386,810
===========
</TABLE>
At a meeting of the Board of Trustees held on July 16, 1992 the Trustees
authorized the Trust to institute a $75,000,000 Repurchase Program, whereby the
Trust would repurchase shares of its outstanding stock on the New York Stock
Exchange. At their April 21, 1993 meeting, the Board of Trustees authorized an
additional $25,000,000 Repurchase Program. As of February 29, 1996 the Trust
had repurchased 8,392,000 shares of its common stock at a total cost of
$78,788,625 pursuant to the Repurchase Programs. The weighted average discount
per share between the cost of the repurchases and the net asset value applicable
to such shares at the date of repurchase was 5.8%.
NOTE 5 - RIGHTS OFFERING
On December 27, 1994, the Trust issued to its shareholders transferable
rights which entitled the holders to subscribe for 17,958,766 shares of the
Trust's common stock at the rate of one share of
32
<PAGE> 34
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 29, 1996, the Trust received earnings credits of $8,868.
NOTE 7 - SUBSEQUENT EVENTS
Effective April 12, 1996, the Trust changed its name from Pilgrim Prime
Rate Trust to Pilgrim America Prime Rate Trust.
At a special meeting of shareholders on May 2, 1996, shareholders will be
asked to amend the Trust's investment policy to enable it to borrow no more than
33 1/3% of the Trust's total net assets plus borrowings for investment purposes.
The Trust has received a commitment from Bank of America National Trust and
Savings Association to lend the Trust up to $215 million under a four year
senior unsecured revolving line of credit for the purpose of financing the
purchase of additional income producing investments. Provided shareholder
approval is obtained, it is anticipated the credit agreement will close promptly
thereafter. A Notice and Proxy Statement dated March 25, 1996 has been sent to
shareholders.
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.
The Trust's Manager believes that these changes in the Trust's investment
policies will increase the number of loan offerings in 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.
33
<PAGE> 35
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees of
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, as of
February 29, 1996, and the related statements of operations, changes in net
assets and cash flows and financial highlights for the year 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 audit. For all
periods ending prior to March 1, 1995, the financial statements and financial
highlights were audited by other auditors whose report thereon dated March 16,
1995, expressed an unqualified opinion on those financial statements and
financial highlights.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. Our procedures included verification of securities owned
as of February 29, 1996, by examination and other necessary procedures. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 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 29, 1996, the results of its
operations, the changes in its net assets, its cash flows and its financial
highlights for the year then ended, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
April 12, 1996
34
<PAGE> 36
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 29,
1996) 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 29, 1996:
<TABLE>
<CAPTION>
PER SHARE
TYPE OF DIVIDEND AMOUNT EX-DIVIDEND DATE PAYABLE DATE
- ------------------------ ----------- ------------------ --------------
<S> <C> <C> <C>
Ordinary Income $0.0640 03/05/95 03/24/95
$0.0740 04/04/95 04/24/95
$0.0715 05/02/95 05/22/95
$0.0740 06/08/95 06/26/95
$0.0720 07/06/95 07/24/95
$0.0730 08/09/95 08/25/95
$0.0730 09/07/95 09/25/95
$0.0710 10/05/95 10/23/95
$0.0715 11/08/95 11/27/95
$0.0715 12/07/95 12/26/95
$0.0710 12/27/95 01/15/96
$0.0710 02/08/96 02/23/96
-------
TOTAL $0.8575
=======
</TABLE>
Corporate shareholders are generally entitled to take the dividend received
deduction on the portion of the Trust's dividend distribution that qualifies
under tax law. The percentage of the Trust's fiscal year 1996 net investment
income dividends that qualify for the corporate dividends received deductions is
100%.
Shareholders are strongly advised to consult their own tax advisers with respect
to the tax consequences of their investment in the Trust. In January 1996, 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 1995.
35
<PAGE> 37
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
[FLAG AND ENLARGED SECTION OF U.S. DOLLAR IN BACKGROUND]
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-020696 042296
