-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UkFRNkMsp+TAPqYlqzGTgikW7fC3YjEnKQl5qBSJG/4Ebg0D+VV1TuCNul7LeIJE 5qlaheczs0TFnkiShfZ/Zg== /in/edgar/work/20001101/0000950147-00-001652/0000950147-00-001652.txt : 20001106 0000950147-00-001652.hdr.sgml : 20001106 ACCESSION NUMBER: 0000950147-00-001652 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000831 FILED AS OF DATE: 20001101 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PILGRIM PRIME RATE TRUST CENTRAL INDEX KEY: 0000826020 STANDARD INDUSTRIAL CLASSIFICATION: [0000 ] IRS NUMBER: 956874587 STATE OF INCORPORATION: MA FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-05410 FILM NUMBER: 750793 BUSINESS ADDRESS: STREET 1: TWO RENAISSANCE SQ STREET 2: 40 N CENTRAL STE 1200 CITY: PHOENIX STATE: AZ ZIP: 85004-4424 BUSINESS PHONE: 6024178100 MAIL ADDRESS: STREET 1: TWO RENAISSANCE SQ STREET 2: 40 N CENTRAL STE 1200 CITY: PHOENIX STATE: AZ ZIP: 85004-4424 FORMER COMPANY: FORMER CONFORMED NAME: PILGRIM PRIME RATE TRUST DATE OF NAME CHANGE: 19920703 N-30D 1 0001.txt SEMI-ANNUAL REPORT FOR THE QTR ENDED 8/31/00 PILGRIM(R) - --------------------------- FUNDS FOR SERIOUS INVESTORS PRIME RATE TRUST Semi-Annual Report - ------------------------------------------------------------------------------Q2 August 31, 2000 Semi-Annual Report Pilgrim Prime Rate Trust SEMI-ANNUAL REPORT August 31, 2000 -------- Table of Contents Chairman's Message ............................ 2 Letter to Shareholders ........................ 3 Statistics and Performance .................... 7 Performance Footnotes ......................... 9 Additional Notes and Information .............. 10 Portfolio of Investments ...................... 11 Statement of Assets and Liabilities ........... 26 Statement of Operations ....................... 27 Statements of Changes in Net Assets ........... 28 Statement of Cash Flows ....................... 29 Financial Highlights .......................... 30 Notes to Financial Statements ................. 32 Fund Advisors and Agents ...................... 38 -------- 1 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- CHAIRMAN'S MESSAGE - -------------------------------------------------------------------------------- Dear Shareholder: We are pleased to present the Semi-Annual Report for Fiscal 2001 for Pilgrim Prime Rate Trust (the "Trust"). On the following pages, the Portfolio Managers will discuss the Trust's milestones and performance, as well as recent market developments. A leader in its class, the Trust has continued to increase shareholder value through strong management and innovative approaches. We believe you will find the six months results a reflection of the ING Pilgrim Investments, Inc. philosophy to provide core holdings which seek to meet the three key needs of the serious investor: 1. Preservation of capital 2. Participation in rising markets 3. Outperformance in falling markets Thank you for selecting Pilgrim Prime Rate Trust. We appreciate the confidence you have placed in us in serving your investment needs. Sincerely, /s/ Robert W. Stallings Robert W. Stallings Chairman and Chief Executive Officer ING Pilgrim Group, Inc. October 20, 2000 2 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- LETTER TO SHAREHOLDERS - -------------------------------------------------------------------------------- Dear Shareholders: The objective of Pilgrim Prime Rate Trust (the "Trust") is to deliver a high current yield consistent with the preservation of capital. During the second quarter ended, August 31, 2000, the Trust paid its 148th consecutive dividend. Based on the $0.218 of dividends declared during the quarter, and the average month-end net asset value ("NAV") per share of $8.78, the annualized distribution rate was 9.85%.(1) THE TRUST The Trust invests in a diversified portfolio of leveraged senior loans made to U. S. and Canadian corporations. All of the investments are denominated in U. S. dollars. The Trust buys these loans from large corporate banks and other sophisticated financial institutions. The typical investment matures between seven and ten years but is generally repaid within three to five years. Interest rates on the loans are typically based on LIBOR and reset every thirty to ninety days. Consequently, the Trust's investments normally exhibit lower price volatility than fixed rate corporate bonds, whose prices fluctuate in response to changes in interest rates. Other factors which reduce the risk of the senior loan asset class May include: (i) priority status among all lenders; (ii) collateral coverage; and (iii) covenants granted by borrowers to adhere to certain operating and financial standards. Additionally, the Trust maintains a highly diversified portfolio, which seeks to limit the adverse effect of loan defaults on performance. THE LOAN MARKET During the second quarter of this year, loan market participants anxiously awaited a return to normalcy in terms of both consistency of new deal flow and price volatility. Unfortunately, neither materialized. Despite a relatively strong June, new issuance volume slipped during the quarter to approximately $43 billion, off some 39% as compared to the same period in 1999.(+) Virtual gridlock in the high yield bond market during the quarter was the primary catalyst of the slowdown, as the inability to raise sufficient amounts of junior capital generally precluded the launch of larger transactions. Even the Telecommunications sector, unquestionably the most prolific over the course of the last year in terms of new volume, showed signs of weakness as investors grew justifiably cautious in the face of the decline in the NASDAQ. In a marked reversal from earlier quarters, Telecommunications accounted for only 13% of new volume, outpaced by services (22%) and general industrial (21%).(+) While the pace of new issuance moderated during the quarter, the level of defaults did not. The number of defaulting transactions increased by one as compared to the first quarter 2000, while the dollar amount was down slightly. There are however, some positive trends emerging: the one-year default experience of institutional loans originated during the twelve month period ended June 30, 2000 fell to 3.5%, as compared to 5.3% for those originated during the twelve month period ending March 31, 2000.(+) Nonetheless, we remain cautious as several key factors point to the potential for defaults to remain relatively high throughout the balance of the year. Among these factors are: higher borrowing rates, coupled with the prospect of slowing economic growth; prevailing and developing industry sector pressures (e.g., theater exhibitors and auto parts suppliers, respectively); and the increasingly low level of credit tolerance by commercial banks. An important indicator, The Federal Reserve's May 2000 survey of senior bank loan officers indicated that nearly 25% of lenders were tightening their credit standards on large commercial & industrial loans, while virtually none were easing. 3 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- LETTER TO SHAREHOLDERS - -------------------------------------------------------------------------------- On the plus side, the continual focus on credit and structure has provided two noticeable benefits: (1) credit standards have undoubtedly gotten more conservative, and (2) interest spreads for all but the most creditworthy of borrowers remain wide relative to the historical norm. The average leverage multiple (debt/EBITDA) -- excluding media and Telecommunications issuers -- fell to 4.0x during the second quarter from 4.1x in first quarter 2000 (and as high as 5.7x in 1997). Although BB rated issuers that tapped the market during the quarter saw generally good demand and pricing relief, spreads for single B rated issuers remained relatively flat as compared to first quarter 2000. As noted in prior reports, the Trust uses market quotes to value its investments when the Trust believes that reliable market quotes are available and reflect current value. Under the Trust's valuation procedures, investments that cannot be valued based on market quotes will continue to be valued at their current value, which is ascertained through a fundamental analysis. The amount of the Trust's investments that are valued on the basis of market quotes has steadily increased through this year. As of this writing, approximately 80% of the portfolio was valued using daily market quotes. PERFORMANCE OF THE TRUST For the quarter ended August 31, 2000, the Trust: Reported attractive distribution rates. The annualized distribution rate, based on the August 2000 dividend and month-end NAV, was 9.88%, versus 9.96% at May 31st. The Trust's annualized market yield based on the August 2000 dividend was 9.82%, which continues to represent an attractive yield advantage over many other variable and fixed income investment products. Paid a relatively high level of current income. Based on the $0.218 of dividends declared for the quarter, the annualized quarterly distribution rate based on average NAV exceeded average 60 day LIBOR for the quarter by 3.19%. This yield also exceeded the average Prime Rate for the quarter by approximately 0.35%. Maintained a high level of diversification. At the end of the quarter, the Trust managed senior loans from 179 separate borrowers, with an average investment size of $9.02 million. These loans were diversified across 33 industry sectors, the largest of which was Cellular (wireless providers), which represented approximately 8.8% of total assets. The single largest issuer exposure within this sector (Voicestream Wireless) was roughly 4.9% of total assets. Utilized leverage to improve performance. As of August 31st, the Trust had $493 million outstanding on its leveraging facilities, representing 29.2% of total assets. The average cost of leverage during the quarter was 7.11%, versus the weighted average spread of portfolio investments for the quarter of 10.22%. 4 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- LETTER TO SHAREHOLDERS - -------------------------------------------------------------------------------- We encourage your questions and comments. /s/ James R. Reis James R. Reis Executive Vice President Director of Senior Lending /s/ Jeffrey A. Bakalar Jeffrey A. Bakalar Senior Vice President Co-Senior Portfolio Manager /s/ Daniel A. Norman Daniel A. Norman Senior Vice President Co-Senior Portfolio Manager Pilgrim Prime Rate Trust October 25, 2000 5 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- SHAREHOLDER LETTER FOOTNOTES - -------------------------------------------------------------------------------- (1) The distribution rate is calculated by annualizing dividends declared during the quarter (i.e. divided by days in the related quarter times days in the fiscal year) and then dividing the resulting annualized dividend by the average month-end net asset value ("NAV"). The distribution rates are based solely on the actual dividends and distributions, which are made at the discretion of management. The distribution rates may or may not include all investment income and ordinarily will not include capital gains or losses, if any. (+) Source: Standard & Poor's and Portfolio Management Data. 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. This letter contains statements that may be "forward-looking statements". Actual results could differ materially from those projected in the "forward-looking statements". 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. 6 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- STATISTICS AND PERFORMANCE as of August 31, 2000 - -------------------------------------------------------------------------------- PORTFOLIO CHARACTERISTICS Net Assets $1,187,650,175 Assets Invested in Senior Loans* $1,614,012,984 Total Number of Senior Loans 179 Average Amount Outstanding per Loan $ 9,016,832 Total Number of Industries 33 Average Loan Amount per Industry $ 48,909,484 Portfolio Turnover Rate (YTD) 28% Weighted Average Days to Interest Rate Reset 31 days Average Loan Maturity 60 months Average Age of Loans Held in Portfolio 11 months * Includes loans and other debt received through restructures TOP TEN SENIOR LOANS INDUSTRIES AS A % OF NET ASSETS TOTAL ASSETS ---------- ------------ Cellular 12.6% 8.8% Healthcare, Education & Childcare 10.0% 7.1% Containers, Packaging and Glass 9.4% 6.6% Buildings and Real Estate 7.2% 5.0% Hotels, Motels, Inns and Gaming 7.1% 5.0% Ecological 6.9% 4.9% Leisure, Amusement, Motion Pictures and Entertainment 6.9% 4.8% Finance 6.0% 4.3% Aerospace and Defense 5.4% 3.8% Electronics 5.1% 3.6% TOP 10 SENIOR LOANS AS A % OF NET ASSETS TOTAL ASSETS ---------- ------------ Voicestream Wireless 6.9% 4.9% Allied Waste Industries 5.8% 4.1% Stone Container Corp. 2.7% 1.9% Nextel Finance Corp. 2.4% 1.7% Riverwood International 2.3% 1.7% Ventas Realty Partnership, Inc. 2.1% 1.5% Wyndham International 1.9% 1.4% Charter Communications 1.9% 1.4% Pathmark Stores, Inc. 1.7% 1.2% Safelite Glass Corp. 1.7% 1.2% 7 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- STATISTICS AND PERFORMANCE as of August 31, 2000 - -------------------------------------------------------------------------------- YIELDS AND DISTRIBUTION RATES
Average Average (NAV) (MKT) Annualized Annualized Prime 30-Day SEC 30-Day SEC Distribution Distribution Quarter-ended Rate Yield A Yield A Rate at NAV B Rate at MKT B - ------------- ---- ------- ------- ------------- ------------- August 31, 2000 9.50% 10.00% 9.94% 9.85% 9.79% May 31, 2000 9.50% 7.28% 7.44% 9.94% 10.56% February 29, 2000 8.75% 8.90% 9.67% 9.13% 9.84% November 30, 1999 8.50% 8.11% 7.87% 8.68% 8.35%
AVERAGE ANNUAL TOTAL RETURNS NAV MKT --- --- 1 Year 5.08% 2.01% 3 Years 6.62% 4.22% 5 Years 7.20% 8.43% 10 Years 7.54% N/A Since Trust Inception F,H 8.03% N/A Since Initial Trading on NYSE G N/A 8.07% Assumes rights were exercised and excludes sales charges and commissions C,D,E Performance data represents past performance and is no guarantee of future results. See performance footnotes on page 9 8 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- PERFORMANCE FOOTNOTES - -------------------------------------------------------------------------------- (A) Yield is calculated by dividing the Trust's net investment income per share for the most recent thirty days by the net asset value (in the case of NAV) or the NYSE 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 dividends declared during the quarter (i.e. divided by days in the related quarter times days in the fiscal year) and then dividing the resulting annualized dividend by the average month-end net asset value (in the case of NAV) or the average NYSE Composite closing price (in the case of Market) at the end of the period. (C) Calculation of total return assumes a hypothetical initial investment at the net asset value (in the case of NAV) or the NYSE Composite closing price (in the case of Market) on the last business day before the first day of the stated period, with all dividends and distributions reinvested at the actual reinvestment price. (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 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. (E) 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. (F) Inception Date -- May 12, 1988. (G) Initial Trading on NYSE -- March 9, 1992. (H) 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. 9 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- ADDITIONAL NOTES AND INFORMATION - -------------------------------------------------------------------------------- SHAREHOLDER INVESTMENT PROGRAM The Trust offers a Shareholder Investment Program (the "Program", formerly known as the Dividend Reinvestment and Cash Purchase Plan) which allows shareholders a simple way to reinvest dividends and capital gains distributions, if any, in additional shares of the Trust. The Program also offers Trust shareholders the ability to make optional cash investments in any amount from $100 to $5,000 on a monthly basis. Amounts in excess of $5,000 require prior approval of the Trust. DST Systems, Inc., the Trust's Transfer Agent, is the Administrator for the Program. For dividend reinvestment purposes, the Administrator will purchase shares of the Trust on the open market when the market price plus estimated commissions is less than the net asset value on the valuation date. The Trust may issue new shares when the market price plus estimated commissions is equal to or exceeds the net asset value on the valuation date. New shares may be issued at the greater of (i) net asset value or (ii) the market price of the shares during the pricing period, minus a discount of 5%. For optional cash investments, shares will be purchased on the open market by the Administrator when the market price plus estimated commissions is less than the net asset value on the valuation date. New shares may be issued by the Trust when the market price plus estimated commissions is equal to or exceeds the net asset value on the valuation date. There is no charge to participate in the Program. Participants may elect to discontinue participation in the Program at any time. Participants will share, on a pro-rata basis, in the fees or expenses of any shares acquired in the open market. Participation in the Program is not automatic. If you would like to receive more information about the Program or if you desire to participate, please contact your broker or our Shareholder Services Department at (800) 992-0180. KEY FINANCIAL DATES -- Calendar 2000 Dividends: DECLARATION DATE EX-DATE PAYABLE DATE ---------------- ------- ------------ January 31 February 8 February 23 February 29 March 8 March 22 March 31 April 6 April 24 April 28 May 8 May 22 May 31 June 8 June 22 June 30 July 6 July 24 July 31 August 8 August 22 August 31 September 7 September 22 September 29 October 6 October 23 October 31 November 8 November 22 November 30 December 7 December 22 December 19 December 27 January 11, 2001 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). Effective November 16, 1998 the Trust's name changed to Pilgrim Prime Rate Trust and its cusip number became 72146W 10 3. Prior to November 16, 1998 the Trust's name was Pilgrim America Prime Rate Trust and its cusip number was 720906 10 6. The Trust's NAV and market price are published daily 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 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS as of August 31, 2000 (Unaudited) - -------------------------------------------------------------------------------- Senior Loans* (Dollar weighted portfolio interest reset period is 31 days) PRINCIPAL AMOUNT BORROWER/TRANCHE DESCRIPTION VALUE - ---------------- ---------------------------- ----- AEROSPACE AND DEFENSE: 5.4% Avborne $14,700,000 Term Loan, maturing June 30, 2003 $14,479,500 Erickson Air-Crane Company 8,679,628 Term Loan, maturing December 31, 2004 8,679,628 New Piper Aircraft 8,683,573 Term Loan, maturing April 15, 2005 8,575,028 Piedmont Aviation Services 6,329,849 Term Loan, maturing July 23, 2006 6,266,551 6,329,849 Term Loan, maturing July 23, 2007 6,266,551 Stellex 2,477,273 Term Loan, maturing September 30, 2006 2,018,977 Titan Corporation 3,500,000 Term Loan, maturing February 23, 2007 3,513,125 Transtar 14,919,643 Term Loan, maturing January 20, 2006 14,528,002 ----------- 64,327,362 ----------- AUTOMOBILE: 4.6% Autosystems Mfg. Inc.(4) 4,962,500 Term Loan, maturing May 31, 2004(3) 3,473,750 4,962,500 Term Loan, maturing May 31, 2005(3) 3,473,750 Breed Technologies(2) 2,865,207 Term Loan, maturing December 31, 2000 1,694,054 3,973,549 Revolver, maturing April 18, 2004(3) 2,349,361 2,974,922 Term Loan, maturing April 18, 2004(3) 1,758,923 Capital Tool & Design Ltd. 9,290,638 Term Loan, maturing July 26, 2003 9,290,638 Global Metal Technologies 8,767,420 Term Loan, maturing March 12, 2005 8,767,420 Safelite Glass Corp.(2) 13,435,082 Term Loan, maturing December 23, 2005(3) 10,076,311 13,435,082 Term Loan, maturing December 23, 2004(3) 10,076,311 Venture Holdings 3,300,001 Term Loan, maturing April 5, 2005 3,239,502 ----------- 54,200,020 ----------- See Accompanying Notes to Financial Statements 11 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS as of August 31, 2000 (Unaudited) - -------------------------------------------------------------------------------- PRINCIPAL AMOUNT BORROWER/TRANCHE DESCRIPTION VALUE - ---------------- ---------------------------- ----- BEVERAGE, FOOD AND TOBACCO: 4.0% Aurora Foods $ 5,246,761 Term Loan, maturing June 30, 2005 $ 4,923,209 2,981,250 Term Loan, maturing September 30, 2006 2,823,244 Edwards Baking Co. 2,833,333 Term Loan, maturing September 30, 2003 2,833,333 3,291,666 Term Loan, maturing September 30, 2005 3,291,666 3,291,666 Term Loan, maturing September 30, 2005 3,291,666 Empire Kosher Poultry 13,632,500 Term Loan, maturing December 31, 2004 13,632,500 Imperial Sugar Company 5,463,176 Term Loan, maturing December 31, 2003 5,463,176 5,223,311 Term Loan, maturing December 31, 2005 5,223,311 Nutrasweet Acquisition Corp. 1,500,000 Term Loan, maturing May 31, 2007 1,500,938 Pabst Brewing Company 5,000,000 Term Loan, maturing April 30, 2003 4,950,000 $47,933,043 ----------- BUILDING AND REAL ESTATE: 7.2% HQ Global Workplaces 7,458,275 Term Loan, maturing September 4, 2009 7,448,953 Kevco, Inc. 7,681,110 Term Loan, maturing February 2, 2005 7,681,110 Meditrust Corp. 7,055,652 Revolver, maturing July 15, 2001 6,355,964 6,500,000 Term Loan, maturing July 15, 2001 5,980,000 Prison Realty 4,950,000 Term Loan, maturing December 31, 2002 4,915,969 Tree Island Industries 11,148,753 Term Loan, maturing March 31, 2003 11,148,753 US Aggregates 6,187,143 Term Loan, maturing March 31, 2006 6,179,409 Ventas Realty Limited Partnership 1,043,142 Term Loan, maturing December 31, 2002 1,043,142 521,571 Term Loan, maturing December 31, 2005 521,571 23,620,873 Term Loan, maturing December 31, 2007 23,620,873 Washington Group 10,000,000 Term Loan, maturing July 7, 2007 9,996,880 ----------- 84,892,624 ----------- See Accompanying Notes to Financial Statements 12 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS as of August 31, 2000 (Unaudited) - -------------------------------------------------------------------------------- PRINCIPAL AMOUNT BORROWER/TRANCHE DESCRIPTION VALUE - ---------------- ---------------------------- ----- CARGO TRANSPORT: 2.8% American Commercial Lines $ 1,708,773 Term Loan, maturing June 30, 2006 $ 1,662,850 2,450,994 Term Loan, maturing June 30, 2007 2,385,123 Evergreen International Aviation, Inc. 2,460,144 Term Loan, maturing May 31, 2002 2,401,715 894,457 Term Loan, maturing May 31, 2002 873,214 379,062 Term Loan, maturing May 7, 2003 370,058 Gemini Air Cargo, Inc. 7,063,393 Term Loan, maturing August 12, 2005 7,052,360 Neoplan USA Corporation 9,794,276 Term Loan, maturing May 29, 2005 9,794,296 Omnitrax Inc. 8,909,091 Term Loan, maturing May 12, 2005 8,886,818 ----------- 33,426,436 ----------- CELLULAR: 12.6% American Cellular Corp. 4,433,333 Term Loan, maturing March 31, 2008 4,432,101 5,066,667 Term Loan, maturing March 31, 2009 5,065,258 Independent Wireless One 10,000,000 Term Loan, maturing June 20, 2008 10,000,000 Nextel Communications, Inc. 8,854,550 Lease, maturing March 15, 2006 8,832,414 Nextel Finance 28,500,000 Term Loan, maturing March 15, 2009 28,383,407 Rural Cellular Corp. 3,750,000 Term Loan, maturing October 3, 2008 3,748,830 3,750,000 Term Loan, maturing April 3, 2009 3,748,830 Voicestream Wireless 40,000,000 Term Loan, maturing February 25, 2008 39,688,880 20,000,000 Term Loan, maturing February 25, 2008 19,844,440 22,500,000 Term Loan, maturing February 25, 2009 22,425,008 Western Wireless 3,000,000 Term Loan, maturing September 30, 2008 3,013,125 ----------- 149,182,293 ----------- See Accompanying Notes to Financial Statements 13 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS as of August 31, 2000 (Unaudited) - -------------------------------------------------------------------------------- PRINCIPAL AMOUNT BORROWER/TRANCHE DESCRIPTION VALUE - ---------------- ---------------------------- ----- CHEMICALS, PLASTICS AND RUBBER: 4.0% Acadia Elastomers Corp $ 9,671,533 Term Loan, maturing February 17, 2004 $ 9,478,102 Cedar Chemical Corp 11,056,957 Term Loan, maturing October 30, 2003 9,951,261 Euro United Corp.(4) 14,887,500 Term Loan, maturing May 31, 2001(3) 7,443,750 Foam Fabrics Inc. 5,639,180 Term Loan, maturing March 5, 2005 5,639,180 Foamex L.P. 3,314,354 Term Loan, maturing June 30, 2005 3,268,781 3,013,059 Term Loan, maturing June 30, 2006 2,971,630 Huntsman Corporation 1,120,688 Term Loan, maturing December 31, 2002 1,087,068 260,155 Term Loan, maturing December 31, 2002 254,952 7,000,000 Term Loan, maturing December 31, 2005 6,956,250 Lyondell Chemical Company 828,339 Term Loan, maturing June 30, 2005 838,855 ----------- 47,889,829 ----------- CONTAINERS, PACKAGING AND GLASS: 9.4% Blue Ridge Paper Products 8,909,565 Term Loan, maturing May 14, 2006 8,909,565 Crown Paper Co.(2) 2,875,000 Debtor In Possession, maturing September 14, 2001 2,760,000 8,170,661 Term Loan, maturing August 22, 2003 7,833,621 Eastern Pulp & Paper 16,200,979 Term Loan, maturing August 31, 2004 16,200,979 352,697 Term Loan, maturing December 31, 2000 352,697 Huntsman Packaging Corp. 3,000,000 Term Loan, maturing May 15, 2008 2,947,032 Impaxx Inc. 4,900,000 Term Loan, maturing December 31, 2005 4,900,000 Nexpak Corp. 2,474,941 Term Loan, maturing December 31, 2005 2,474,941 2,474,941 Term Loan, maturing December 31, 2006 2,474,941 Riverwood International 22,812,289 Term Loan, maturing February 28, 2003 22,741,000 4,175,961 Term Loan, maturing February 28, 2004 4,190,752 1,495,216 Term Loan, maturing August 31, 2004 1,500,512 Stone Container Corp. 14,324,870 Term Loan, maturing December 31, 2006 14,364,034 17,083,889 Term Loan, maturing December 31, 2006 17,093,046 Tekni-Plex Inc. 3,000,000 Term Loan, maturing June 21, 2006 3,013,125 ----------- 111,756,245 ----------- See Accompanying Notes to Financial Statements 14 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS as of August 31, 2000 (Unaudited) - -------------------------------------------------------------------------------- PRINCIPAL AMOUNT BORROWER/TRANCHE DESCRIPTION VALUE - ---------------- ---------------------------- ----- DATA AND INTERNET SERVICES: 4.2% McLeod USA Corp $ 6,500,000 Term Loan, maturing May 31, 2008 $ 6,513,709 Paging Network 14,929,000 Revolver, maturing December 31, 2004 12,380,411 Teletouch Communications 9,958,333 Term Loan, maturing November 30, 2004 9,958,333 Teligent, Inc. 10,000,000 Term Loan, maturing July 1, 2002 9,483,330 TSR Wireless 11,970,000 Term Loan, maturing June 30, 2005 11,072,250 ----------- 49,408,033 ----------- DIVERSIFIED/CONGLOMERATE MANUFACTURING: 2.2% Allied Digital Technologies Corp. 9,900,000 Term Loan, Maturing December 31, 2005 4,950,000 Barjan Products 4,950,000 Term Loan, maturing May 31, 2006 4,950,000 General Cable Corporation 5,426,664 Term Loan, maturing May 24, 2007 5,400,378 Holmes Products Corp. 3,960,000 Term Loan, maturing February 15, 2007 3,905,550 United Pet Group 6,930,000 Term Loan, maturing March 31, 2006 6,930,000 ----------- 26,135,928 ----------- DIVERSIFIED/CONGLOMERATE SERVICE: 2.7% Enterprise Profit Solutions Corp. 2,147,923 Term Loan, maturing June 14, 2001 2,147,923 Mafco Finance Corp. 10,000,000 Term Loan, maturing August 29, 2001 9,956,250 Outsourcing Solutions, Inc. 12,418,719 Term Loan, maturing June 1, 2006 12,385,089 Private Business 5,124,549 Term Loan, maturing August 19, 2006 5,073,277 URS Corporation 1,237,500 Term Loan, maturing June 9, 2006 1,240,594 1,237,500 Term Loan, maturing June 9, 2007 1,240,594 ----------- 32,043,727 ----------- ECOLOGICAL: 6.9% Allied Waste NA 5,000,000 Term Loan, maturing July 12, 2005 4,731,730 30,454,545 Term Loan, maturing July 12, 2006 29,237,490 36,545,455 Term Loan, maturing July 12, 2007 35,087,656 Clean Harbors 4,500,000 Term Loan, maturing May 5, 2001 4,500,000 Rumpke 8,787,500 Term Loan, maturing September 26, 2002 8,787,500 ----------- 82,344,376 ----------- See Accompanying Notes to Financial Statements 15 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS as of August 31, 2000 (Unaudited) - -------------------------------------------------------------------------------- PRINCIPAL AMOUNT BORROWER/TRANCHE DESCRIPTION VALUE - ---------------- ---------------------------- ----- ELECTRONICS: 5.1% Decision One Corp. $ 3,465,094 Term Loan, maturing April 18, 2005 $ 3,031,958 2,188,647 Term Loan, maturing April 18, 2005 2,188,647 Dynamic Details, Inc. 5,658,718 Term Loan, maturing April 22, 2005 5,602,131 Dynatech Corporation 11,454,902 Term Loan, maturing September 30, 2007 11,456,334 Electro Mechanical Solutions 4,187,696 Term Loan, maturing June 30, 2004 3,978,311 Frontway Network Solutions, Inc. 1,505,505 Term Loan, maturing November 20, 2002 1,505,505 Intri-Plex Technologies, Inc. 5,347,826 Term Loan, maturing September 30, 2002 4,278,261 Knowles Electronics 7,000,000 Term Loan, maturing June 29, 2007 6,658,750 Mitel Corporation 8,999,972 Term Loan, maturing June 2, 2004 8,924,039 Sarcom Inc. 7,488,141 Term Loan, maturing November 20, 2002 7,488,141 Semiconductor Components, LLC 2,510,089 Term Loan, maturing August 4, 2006 2,530,744 2,703,340 Term Loan, maturing August 4, 2007 2,725,585 ----------- 60,368,406 ----------- FINANCE: 6.0% Alliance Data systems 982,143 Revolver, maturing March 4, 2006 933,036 781,250 Term Loan, maturing March 4, 2006 761,719 14,400,000 Term Loan, maturing October 31, 2005 14,148,000 1,659,107 Term Loan, March 4, 2006 1,617,629 Anthony Crane 14,850,000 Term Loan, maturing July 20, 2006 13,723,880 Bridge Information Systems 1,625,728 Lease, maturing April 1, 2001 1,625,728 3,167,369 Lease, maturing April 1, 2001 3,167,369 5,843,952 Term Loan, maturing May 29, 2005 5,843,952 National Partnership Investments Corp. 5,764,549 Term Loan, maturing June 30, 2001 5,764,549 Rent-A-Center, Inc. 5,215,229 Term Loan, maturing January 31, 2006 5,180,459 6,729,221 Term Loan, maturing January 31, 2007 6,684,357 4,000,000 Term Loan, maturing December 31, 2007 3,990,000 United Rentals, Inc. 5,000,000 Term Loan, maturing June 30, 2006 4,936,980 Value Asset Management, Inc. 3,333,333 Term Loan, maturing August 31, 2005 3,333,333 ----------- 71,710,991 ----------- See Accompanying Notes to Financial Statements 16 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS as of August 31, 2000 (Unaudited) - -------------------------------------------------------------------------------- PRINCIPAL AMOUNT BORROWER/TRANCHE DESCRIPTION VALUE - ---------------- ---------------------------- ----- GROCERY: 2.1% Grand Union Capital Corporation $ 4,976,273 Term Loan, maturing August 17, 2003 $ 3,732,204 Pathmark Stores, Inc.(2) 2,776,860 Revolver, maturing June 15, 2001 2,760,662 3,639,850 Term Loan, maturing June 15, 2001 3,618,619 13,953,070 Term Loan, maturing December 15, 2001 13,897,844 Schwegman Giant Super Markets(1) 506,114 Term Loan, maturing July 30, 2002(3) 303,668 ----------- 24,312,997 ----------- HEALTHCARE, EDUCATION AND CHILDCARE: 10.0% Caremark, RX 466,309 Term Loan, maturing June 9, 2001 443,285 394,829 Term Loan, maturing June 9, 2001 375,828 Children's Discovery Centers 9,164,063 Term Loan, maturing August 10, 2004 8,934,961 Community Health Systems 6,193,680 Term Loan, maturing December 31, 2003 6,132,388 6,193,680 Term Loan, maturing December 31, 2004 6,136,259 1,387,907 Term Loan, maturing December 31, 2005 1,375,330 Concentra Operating Corp. 3,300,000 Term Loan, maturing June 30, 2006 3,069,000 1,650,000 Term Loan, maturing June 30, 2007 1,534,500 Covenant Care California 6,000,000 Term Loan, maturing April 30, 2001 6,000,000 Dada Behring 3,205,063 Term Loan, maturing June 30, 2006 2,948,658 3,205,063 Term Loan, maturing June 30, 2007 2,948,658 Doshi Diagnostics 4,887,500 Term Loan, maturing May 15, 2005 4,887,500 Fountain View 13,676,471 Term Loan, maturing March 31, 2004 13,676,471 Genesis Health Ventures, Inc.(2) 2,766,313 Term Loan, maturing September 30, 2003 2,351,366 Healthcare Direct 3,243,300 Term Loan, maturing August 1, 2004 3,243,300 4,018,000 Term Loan, maturing August 1, 2006 4,018,000 Magellan Health Services 1,277,088 Term Loan, maturing February 28, 2005 1,117,452 1,277,088 Term Loan, maturing February 28, 2006 1,117,452 Mellon Financial Services Corp IV(2) 4,400,754 Lease, maturing September 30, 2004 3,740,641 Paragon Health Network, Inc.(2) 14,654,474 Term Loan, maturing April 30, 2005(3) 8,792,684 8,767,570 Term Loan, maturing March 31, 2006(3) 5,260,542 See Accompanying Notes to Financial Statements 17 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS as of August 31, 2000 (Unaudited) - -------------------------------------------------------------------------------- PRINCIPAL AMOUNT BORROWER/TRANCHE DESCRIPTION VALUE - ---------------- ---------------------------- ----- HEALTHCARE, EDUCATION AND CHILDCARE (CONTINUED) The Brown Schools (Healthcare America) $10,156,250 Term Loan, maturing June 30, 2004 $ 10,156,250 4,062,500 Term Loan, maturing June 30, 2005 4,062,500 The Multicare Companies, Inc.(2) 3,312,183 Term Loan, maturing September 30, 2003(3) 2,815,356 Vencor Inc.(2) 13,134,063 Term Loan, maturing May 5, 2005(3) 11,163,954 Vision Twenty-One 2,898,018 Term Loan, maturing June 30, 2005 2,898,018 ------------ 119,200,353 ------------ HOME AND OFFICE FURNISHINGS, HOUSEWARES, AND DURABLE CONSUMER PRODUCTS: 2.8% American Blind & Wallpaper 722,983 Term Loan, maturing December 29, 2005 722,983 Buhrmann NV 5,839,370 Term Loan, maturing December 26, 2007 5,858,138 Desa 8,315,000 Term Loan, maturing November 26, 2004 8,086,338 Identity Group, Inc. 4,950,000 Term Loan, maturing May 7, 2007 4,950,000 Imperial Home Decor Group(2) 2,490,579 Revolver, maturing March 13, 2005(3) 871,703 5,969,469 Term Loan, maturing March 13, 2005(3) 2,089,314 1,492,367 Term Loan, maturing March 13, 2006(3) 522,329 Juno Lighting 5,283,840 Term Loan, maturing November 30, 2006 5,272,284 U.S. Office Products 7,995,545 Term Loan, maturing June 9, 2006 5,045,189 ------------ 33,418,278 ------------ HOTELS, MOTELS, INNS AND GAMING: 7.1% Aladdin Gaming LLC 3,000,000 Term Loan, maturing August 26, 2006 2,873,751 4,500,000 Term Loan, maturing August 26, 2008 4,310,627 Extended Stay America, Inc. 9,950,000 Term Loan, maturing December 31, 2003 9,894,031 5,500,000 Term Loan, maturing June 30, 2007 5,522,347 Felcor Lodging Trust 2,992,000 Term Loan, maturing March 31, 2004 2,985,457 Horseshoe Gaming Holding Corporation 2,976,000 Term Loan, maturing September 30, 2006 2,985,300 Meristar Hospitality Corp. 11,491,000 Term Loan, maturing July 31, 2003 11,440,727 Starwood Hotels & Resorts 11,500,000 Term Loan, maturing February 23, 2003 11,528,750 Strategic Hotel Capital, Inc. 9,925,000 Term Loan, maturing November 9, 2004 9,966,357 See Accompanying Notes to Financial Statements 18 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS as of August 31, 2000 (Unaudited) - -------------------------------------------------------------------------------- PRINCIPAL AMOUNT BORROWER/TRANCHE DESCRIPTION VALUE - ---------------- ---------------------------- ----- HOTELS, MOTELS, INNS AND GAMING (CONTINUED) Wyndham International $ 5,000,000 IRL, maturing June 30, 2004 $ 4,990,625 18,500,000 Term Loan, maturing June 30, 2006 18,210,938 ------------ $ 84,708,910 ------------ INSURANCE: 0.9% TRG Holdings Corp. 967,500 Term Loan, maturing January 7, 2003 962,662 USI Holdings 9,700,000 Term Loan, maturing July 17, 2004 9,669,688 ------------ 10,632,350 ------------ LEISURE, AMUSEMENT, MOTION PICTURES AND ENTERTAINMENT: 6.9% AMFAC Parks & Resorts, Inc. 3,675,000 Term Loan, maturing September 4, 2004 3,626,766 3,675,000 Term Loan, maturing September 30, 2004 3,626,766 Fitness Holdings Worldwide 9,399,750 Term Loan, maturing November 1, 2006 9,242,304 8,403,750 Term Loan, maturing November 1, 2007 8,262,987 Four Media Co. 9,750,000 Term Loan, maturing September 10, 2004 9,725,625 Icon Health & Fitness, Inc. 5,146,563 Term Loan, maturing March 1, 2005 5,146,563 4,931,250 Term Loan, maturing November 29, 2004 4,931,250 4,000,000 Term Loan, maturing August 31, 2004 4,000,000 Metro-Goldwyn-Mayer 10,000,000 Term Loan, maturing March 31, 2005 9,795,830 9,000,000 Term Loan, maturing March 31, 2006 8,929,125 Panavision, Inc. 14,226,351 Term Loan, maturing March 10, 2005 14,226,351 ------------ 81,513,567 ------------ MACHINERY: 1.3% Alliance Laundry Systems 5,000,000 Term Loan, maturing May 1, 2005 4,987,500 Clearing Niagara(2) 8,312,732 Term Loan, maturing October 18, 2004(3) 6,234,549 Morris Material Handling(2) 4,658,193 Term Loan, maturing March 31, 2005 4,425,283 ----------- 15,647,332 ----------- MINING, STEEL, IRON AND NON-PRECIOUS METALS: 0.6% National Refractories Co. 2,916,667 Term Loan, maturing September 30, 2001 2,916,667 P&L Coal 5,000,000 Term Loan, maturing June 30, 2006 4,992,190 ------------ 7,908,857 ------------ See Accompanying Notes to Financial Statements 19 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS as of August 31, 2000 (Unaudited) - -------------------------------------------------------------------------------- PRINCIPAL AMOUNT BORROWER/TRANCHE DESCRIPTION VALUE - ---------------- ---------------------------- ----- NORTH AMERICAN CABLE: 3.2% CC VI Operating Co. LLC $ 5,000,000 Term Loan, maturing November 1, 2008 $ 4,998,750 CC VIII Operating LLC 2,500,000 Term Loan, maturing February 2, 2008 2,502,084 Century Cable Holdings LLC 8,000,000 Term Loan, maturing June 30, 2009 8,012,000 Charter Communications 16,500,000 Term Loan, maturing March 18, 2008 16,446,375 6,556,250 Term Loan, maturing March 17, 2008 6,533,028 ------------ 38,492,235 ------------ OIL AND GAS: 1.5% Key Energy Group, Inc. 1,640,667 Revolver, maturing October 26, 2004 1,585,294 5,410,926 Term Loan, maturing October 26, 2003 5,423,610 Perf-O-Log 1,462,500 Term Loan, maturing August 11, 2003 1,433,250 3,890,000 Term Loan, maturing August 11, 2003 3,812,200 2,443,750 Term Loan, maturing August 11, 2004 2,394,875 2,992,469 Term Loan, maturing June 30, 2005 2,947,582 ------------ 17,596,811 ------------ OTHER TELECOMMUNICATIONS: 1.4% Cincinnati Bell Inc. 10,000,000 Term Loan, maturing January 31, 2006 10,020,000 Pacific Coin 1,758,933 Term Loan, maturing December 31, 2002 1,319,199 6,492,153 Term Loan, maturing December 31, 2004 4,869,115 ------------ 16,208,314 ------------ PERSONAL AND NONDURABLE CONSUMER PRODUCTS: 3.2% AM Cosmetics 2,281,441 Revolver, maturing May 30, 2004 2,281,441 1,305,151 Term Loan, maturing June 30, 2003 1,305,151 2,610,303 Term Loan, maturing December 31, 2004 2,610,303 Amscan Holdings 9,718,613 Term Loan, maturing December 31, 2004 8,941,124 Centis, Inc. 3,922,222 Term Loan, maturing September 30, 2005 3,922,222 3,438,750 Term Loan, maturing September 30, 2006 3,438,750 Medtech Products, Inc. 7,375,468 Term Loan, maturing October 15, 2002 7,227,959 Norwood Promotional Products 3,152,205 Term Loan, maturing May 12, 2006 3,134,474 2,809,412 Term Loan, maturing November 30, 2006 2,793,609 Paint Sundry Brands 1,101,913 Term Loan, maturing August 11, 2005 1,085,384 1,079,199 Term Loan, maturing August 11, 2006 1,063,011 ------------ 37,803,428 ------------ See Accompanying Notes to Financial Statements 20 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS as of August 31, 2000 (Unaudited) - -------------------------------------------------------------------------------- PRINCIPAL AMOUNT BORROWER/TRANCHE DESCRIPTION VALUE - ---------------- ---------------------------- ----- PERSONAL, FOOD & Miscellaneous: 4.1% Boston Chicken Inc.(2) $25,617,308 Lease, maturing October 17, 1998(3) $ 8,517,755 2,946,126 Revolver, maturing October 17, 1998(3) 979,587 3,752,645 Revolver, maturing December 1, 1999(3) 1,247,755 Brickman Group Ltd. 4,729,762 Term Loan, maturing December 31, 2005 4,706,112 Coinmach Laundry Corp. 8,736,006 Term Loan, maturing June 30, 2005 8,693,689 Otis Spunkmeyer 4,590,051 Term Loan, maturing December 31, 2005 4,564,232 Papa Gino's Inc. 2,195,166 Term Loan, maturing August 31, 2004 2,195,166 2,983,817 Term Loan, maturing February 19, 2002 2,983,817 4,482,493 Term Loan, maturing February 19, 2004 14,482,493 ------------ 48,370,606 ------------ PRINTING AND PUBLISHING: 3.0% Big Flower Press, Inc. 4,000,000 Term Loan, maturing December 7, 2008 4,000,000 Mail-Well I Corp 5,000,000 Term Loan, maturing February 22, 2007 5,006,250 Von Hoffman Press, Inc. 3,264,286 Term Loan, maturing May 22, 2004 3,230,624 10,607,143 Term Loan, maturing May 22, 2005 10,497,763 Weider Publications, Inc. 9,800,000 Term Loan, maturing September 18, 2005 9,800,000 Ziff-Davis 2,911,314 Term Loan, maturing March 31, 2007 2,917,378 ------------ 35,452,015 ------------ RADIO AND TELEVISION BROADCASTING: 2.3% Benedek Broadcasting Corporation 6,000,000 Term Loan, maturing November 20, 2007 5,981,250 Susquehanna Media 5,000,000 Term Loan, maturing June 30, 2008 4,970,315 Telemundo 16,872,500 Term Loan, maturing December 28, 2006 16,745,956 ------------ 27,697,521 ------------ RETAIL STORES: 2.3% Murray's Discount Auto Stores, Inc. 13,553,924 Term Loan, maturing June 30, 2003 13,553,924 Peebles, Inc. 2,669,684 Term Loan, maturing April 30, 2001 2,649,662 11,630,657 Term Loan, maturing April 30, 2002 11,587,042 ------------ 27,790,628 ------------ SATELLITE: 0.2% Pegasus Media & Communications 2,000,000 Term Loan, maturing April 30, 2005 2,006,666 ------------ 2,006,666 ------------ See Accompanying Notes to Financial Statements 21 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS as of August 31, 2000 (Unaudited) - -------------------------------------------------------------------------------- PRINCIPAL AMOUNT BORROWER/TRANCHE DESCRIPTION VALUE - ---------------- ---------------------------- ----- TELECOMMUNICATION EQUIPMENT: 1.5% Crown Castle Operating Company $ 5,000,000 Term Loan, maturing March 18, 2008 $ 5,014,235 Pinnacle Towers, Inc. 6,000,000 Term Loan, maturing June 30, 2007 5,990,628 Tripoint Global Communications, Inc. 6,532,454 Term Loan, maturing May 28, 2006 6,450,799 -------------- 17,455,662 -------------- TEXTILES AND LEATHER: 4.4% Accessory Network 9,172,314 Term Loan, maturing August 13, 2005 9,103,522 Galey & Lord 8,318,537 Term Loan, maturing March 23, 2005 7,341,109 5,901,056 Term Loan, maturing March 23, 2006 5,207,682 Humphrey's Inc. 6,650,000 Term Loan, maturing November 15, 2003 6,317,500 Malden Mills 9,925,000 Term Loan, maturing October 28, 2006 9,925,000 Scovill Fastners Inc. 4,553,571 Term Loan, maturing November 26, 2003 4,553,570 Tartan Textile Services 9,802,275 Term Loan,maturing May 13, 2005 9,728,758 -------------- 52,177,141 -------------- Total Senior Loans--135.9% (Cost $1,674,205,868) $1,614,012,984 -------------- See Accompanying Notes to Financial Statements 22 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS as of August 31, 2000 (Unaudited) - -------------------------------------------------------------------------------- OTHER CORPORATE DEBT PRINCIPAL AMOUNT BORROWER/TRANCHE DESCRIPTION VALUE - ---------------- ---------------------------- ----- AUTOMOBILE: 0.5% Capital Tool & Design Ltg. $ 6,000,000 Subordinated Note, maturing July 19, 2003 $ 6,000,000 ----------- 6,000,000 ----------- BUILDING & Real Estate: 0.8% National Golf Operating Partnership 9,900,000 Term Loan, maturing July 22, 2004 9,825,750 ----------- 9,825,750 ----------- FINANCE: 0.9% Value Asset Management, Inc. 10,000,000 Sr. Sub Bridge, maturing April 28, 2003 10,000,000 ----------- 10,000,000 ----------- OIL AND GAS: 0.7% Premcor Refining Inc. 9,000,000 Floating Rate Note, maturing November 15, 2004 8,550,000 ----------- 8,550,000 ----------- PERSONAL & Nondurable Consumer Products: 0.5% AM Cosmetics 2,903,930 Senior Sub, maturing May 30, 2007(3) 2,903,930 Paint Sundry Brands 2,875,000 Subordinated Note, maturing August 11, 2008 2,645,000 ----------- 5,548,930 ----------- TOTAL OTHER CORPORATE DEBT-- 3.4% (COST $ 40,286,965) $39,924,680 ----------- See Accompanying Notes to Financial Statements 23 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS as of August 31, 2000 (Unaudited) - -------------------------------------------------------------------------------- EQUITY SECURITIES SHARES - ------ Apparel Products: 0.0% 13,294 Butterick Company, Inc.@(R)--Common $ 22,364 ----------- Electronics: 0.1% 149,645 Decision One Corporation@--Common 1,197,160 ----------- Diversified/Conglomerate Services: 0.0% 60,056 Staff Leasing, Inc.@--Common 240,224 ----------- Home and Office Furnishings: 0.1% 80,400 American Blind and Wallpaper, Inc.@(R)--Common 1,045,200 ----------- Personal and Nondurable Consumer Products: 0.00% 37,197 AM Cosmetics Corp.--Common@ -- ----------- Restaurants: 0.6% 413,980 America's Favorite Chicken Co.--Common@(R) 7,203,165 ----------- Textiles and Leather: 0.0% 127,306 Dan River, Inc.--Common@ 564,920 ----------- Total Equity Securities--0.8% (Cost $1,637,196) $10,273,033 ----------- STOCK PURCHASE WARRANTS AND OTHER SECURITIES SHARES - ------ 48,930 Autotote Systems, Inc., Warrant representing 48,930 Common shares, Expires 10/30/03@(R) $ 44,275 1 Autotote Systems, Inc., Option representing 0.248% Common shares issued and outstanding @(R) -- 10,000 Casden Properties Operation, 10,000 shares of junior Cumulative Preferred partnership Units(R) 250,000 80,634 Capital Tool & Design, Warrants reprsenting 19,000 Common shares@(R) 256,658 19,000 Covenant Care, Inc., Warrants representing 19,000 Common shares@(R) 37,452 2,564 Em Solutions, Warrant representing 2,564 Common shares, Expires 09/01/05@ -- 48,930 Murray's Discount, Warrants representing 5% equity stakes on a fully diluted basis@(R) 4 -------- TOTAL STOCK PURCHASED WARRANTS AND OTHER SECURITIES--0.1% (COST $0) $588,389 -------- TOTAL INVESTMENTS (COST $1,716,130,029)(5) 140.2% $1,664,799,086 LIABILITES IN EXCESS OF CASH AND OTHER ASSETS--NET (40.2)% (477,148,911) ----- -------------- NET ASSETS 100.0% $1,187,650,175 ===== ============== See Accompanying Notes to Financial Statements 24 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS as of August 31, 2000 (Unaudited) - -------------------------------------------------------------------------------- - ---------- @ Non-income producing security. (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 filed for protection under Chapter 7 of the U.S. Federal bankruptcy code. (2) The borrower filed for protection under Chapter 11 of the U.S. Federal bankruptcy code. (3) Loan is on non-accrual basis. (4) The borrower filed for protection under the Canadian Bankruptcy and Insolvency Act. (5) For federal income tax purposes, which is the same for financial reporting purposes, cost of investments is $1,716,130,029 and net unrealized depreciation consists of the following: Gross Unrealized Appreciation $ 14,466,201 Gross Unrealized Depreciation (65,797,144) ------------ Net Unrealized Depreciation $(51,330,943) ============ See Accompanying Notes to Financial Statements 25 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES as of August 31, 2000 (Unaudited) - -------------------------------------------------------------------------------- ASSETS: Cash $ 975,433 Investments in securities at value (Cost $1,716,130,029) 1,664,799,086 Receivables: Interest 21,051,099 Fund shares sold 245,703 Other 27,658 Prepaid expenses 454,141 Prepaid arrangement fees on notes payable 533,870 --------------- Total assets 1,688,086,990 --------------- LIABILITIES: Notes payable 493,000,000 Deferred arrangement fees on senior loans 1,606,619 Accrued interest payable 2,767,229 Accrued expenses 3,062,967 --------------- Total liabilities 500,436,815 --------------- NET ASSETS (equivalent to $8.70 per share, based on 136,510,787 shares of beneficial interest authorized and outstanding, no par value) $ 1,187,650,175 =============== Net Assets Consist of: Paid in capital $ 1,290,372,077 Undistributed net investment income 11,307,111 Accumulated net realized loss on investments (62,698,070) Net unrealized depreciation of investments (51,330,943) --------------- Net assets $ 1,187,650,175 =============== See Accompanying Notes to Financial Statements. 26 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- STATEMENT OF OPERATIONS for the Six Months Ended August 31, 2000 (Unaudited) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Interest $ 83,725,095 Arrangement fees earned 1,006,359 Dividends 22,500 Other 2,140,138 ------------ Total investment income 86,894,092 ------------ EXPENSES: Interest 17,919,283 Investment management fees 6,969,473 Administration fees 1,811,143 Miscellaneous expense 599,729 Transfer agent and registrar fees 277,753 Reports to shareholders 202,440 Revolving credit facility fees 176,818 Professional fees 148,424 Custodian fees 92,000 Recordkeeping and pricing fees 36,800 Insurance expense 20,307 Trustees' fees 15,088 ------------ Total expenses 28,269,258 ------------ Net investment income 58,624,834 ------------ REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENTS: Net realized gain on investments 9,801,537 Change in unrealized depreciation of investments (43,033,077) ------------ Net loss on investments (33,231,540) ------------ Net increase in net assets resulting from operations $ 25,393,294 ============ See Accompanying Notes to Financial Statements. 27 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
Six Months Ended August 31, Year Ended 2000 February 29, (Unaudited) 2000 --------------- --------------- INCREASE IN NET ASSETS FROM OPERATIONS: Net investment income $ 58,624,834 $ 106,494,015 Net realized gain (loss) on investments 9,801,537 (37,913,867) Change in unrealized depreciation on investments (43,033,077) (2,330,185) --------------- --------------- Net increase in net assets resulting from operations 25,393,294 66,249,963 DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment income (59,249,308) (104,450,361) CAPITAL SHARE TRANSACTIONS: Issuance from dividend reinvestment 3,501,132 9,369,771 Sales of shares in connection with shelf offerings 665,949 43,604,392 --------------- --------------- Net increase from capital share transactions 4,167,081 52,974,163 --------------- --------------- Net increase (decrease) in net assets (29,688,933) 14,773,765 NET ASSETS: Beginning of period 1,217,339,108 1,202,565,343 --------------- --------------- End of period (including undistributed net investment income of $11,307,111 and $11,931,585, respectively) $ 1,187,650,175 $ 1,217,339,108 =============== =============== SUMMARY OF CAPITAL SHARE TRANSACTIONS: Shares issued in payment of distributions from net investment income 399,173 1,031,864 Shares sold in connection with Shelf offerings 75,453 4,798,146 --------------- --------------- Net increase in shares outstanding 474,626 5,830,010 =============== ===============
See Accompanying Notes to Financial Statements. 28 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- STATEMENT OF CASH FLOWS for the Six Months Ended August 31, 2000 (Unaudited) - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH CASH FLOWS FROM OPERATING ACTIVITIES: Interest received $ 82,462,372 Dividends received 22,500 Facility fees paid (56,985) Arrangement fee received 613,153 Other income received 2,175,385 Interest paid (18,291,638) Other operating expenses paid (9,611,624) Purchases of portfolio securities (490,545,501) Proceeds from disposition of portfolio securities 482,462,482 ------------- Net cash provided by operating activities 49,230,144 ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid (55,748,176) Overdraft financing (1,926,781) Proceeds from share offerings 420,246 Loan advance 9,000,000 ------------- Net cash flows used for financing activities (48,254,711) ------------- Net change in cash 975,433 Cash at beginning of period -- ------------- Cash at end of period $ 975,433 ============= 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 $ 25,393,294 ------------- Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities: Decrease in investments in securities 25,291,374 Increase in dividends and interest receivable (1,262,723) Decrease in other assets 17,371 Decrease in prepaid arrangement fees on notes payable 119,833 Increase in prepaid expenses (124,977) Decrease in deferred arrangement fees on senior loans (393,206) Decrease in accrued interest payable (372,355) Increase in accrued expenses 561,533 ------------- Total adjustments 23,836,850 ------------- Net cash provided by operating activities $ 49,230,144 ============= See Accompanying Notes to Financial Statements. 29 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEARS ENDED FEBRUARY 28 OR FEBRUARY 29, AUGUST 31, 2000 ----------------------------------------------------------------------------- (UNAUDITED) 2000 1999 (7) 1998 (7) 1997(7) 1996(6) 1995 ----------- ---------- ---------- ---------- ---------- -------- ------- PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 8.95 $ 9.24 $ 9.34 $ 9.45 $ 9.61 $ 9.66 $ 10.02 Net investment income 0.43 0.79 0.79 0.87 0.82 0.89 0.74 Net realized and unrealized gain (loss) on investments (0.24) (0.30) (0.10) (0.13) (0.02) (0.08) 0.07 ---------- ---------- ---------- ---------- ---------- -------- ------- Increase in net asset value from investment operations 0.19 0.49 0.69 0.74 0.80 0.81 0.81 Distributions from net investment income (0.44) (0.78) (0.82) (0.85) (0.82) (0.86) (0.73) Increase in net asset value from share offerings -- -- 0.03 -- -- -- -- Reduction in net asset value from rights offering -- -- -- -- (0.14) -- (0.44) Increase in net asset value from repurchase of capital stock -- -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- -------- -------- Net asset value, end of period $ 8.70 $ 8.95 $ 9.24 $ 9.34 $ 9.45 $ 9.61 $ 9.66 ========== ========== ========== ========== ========== ======== ======== Closing market price at end of period $ 8.75 $ 8.25 $ 9.56 $ 10.31 $ 10.00 $ 9.50 $ 8.75 TOTAL RETURN Total investment return at closing market price(3) 11.58% (5.88)% 1.11% 12.70% 15.04%(5) 19.19% 3.27%(5) Total investment return at net asset value(4) 2.26% 5.67% 7.86% 8.01% 8.06%(5) 9.21% 5.24%(5) RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) $1,187,650 $1,217,339 $1,202,565 $1,034,403 $1,031,089 $862,938 $867,083 Average borrowings (000's) $ 529,326 $ 524,019 $ 490,978 $ 346,110 $ 131,773 $ -- $ -- Ratios to average net assets plus borrowings: Expenses (before interest and other fees related to revolving credit facility) 1.17%(1) 1.00%(8) 1.05%(8) 1.04% 1.13% -- -- Expenses 3.25%(1) 2.79%(8) 2.86%(8) 2.65% 1.92% -- -- Net investment income 6.72%(1) 6.12% 6.00% 6.91% 7.59% -- -- Ratios to average net assets: Expenses (before interest and other fees related to revolving credit facility) 1.69%(1) 1.43%(8) 1.50%(8) 1.39% 1.29% -- -- Expenses 4.68%(1) 4.00%(8) 4.10%(8) 3.54% 2.20% 1.23% 1.30% Net investment income 9.70%(1) 8.77% 8.60% 9.23% 8.67% 9.23% 7.59% Portfolio turnover rate 28% 71% 68% 90% 82% 88% 108% Shares outstanding at end of period (000's) 136,511 136,036 130,206 110,764 109,140 89,794 89,794
- ---------- (1) Annualized. (2) Prior to the waiver of expenses, the ratios of expenses to average net assets were 1.95% (annualized), 1.48% and 1.44% for the period from May 12, 1988 to February 28, 1989, and for the fiscal years ended February 28, 1990 and February 29, 1992, respectively, and the ratios of net investment income to average net assets were 8.91% (annualized), 10.30% and 7.60% for the period from May 12, 1988 to February 28, 1989, and for the fiscal years ended February 28, 1990 and February 29, 1992, respectively. (3) Total investment return measures the change in the market value of your investment assuming reinvestment of dividends and capital gain distributions, if any, in accordance with the provisions of the dividend reinvestment plan. On March 9, 1992, the shares of the Trust were initially listed for trading on the New York Stock Exchange. Accordingly, the total investment return for the year ended February 28, 1993, covers only the period from March 9, 1992, to February 28, 1993. Total investment return for periods prior to the year ended February 28, 1993, are not presented since market values for the Trust's shares were not available. Total returns for less than one year are not annualized. See Accompanying Notes to Financial Statements. 30 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Continued) - -------------------------------------------------------------------------------- YEARS ENDED FEBRUARY 28 OR FEBRUARY 29, - ------------------------------------------------------------------------- 1994 1993 1992 1991 1990 1989 - -------- -------- -------- -------- -------- -------- $ 10.05 $ 9.96 $ 9.97 $ 10.00 $ 10.00 $ 10.00 0.60 0.60 0.76 0.98 1.06 0.72 (0.05) 0.01 (0.02) (0.05) -- -- - -------- -------- -------- ---------- ---------- -------- 0.55 0.61 0.74 0.93 1.06 0.72 (0.60) (0.57) (0.75) (0.96) (1.06) (0.72) - -------- -------- -------- ---------- ---------- -------- - -------- -------- -------- ---------- ---------- -------- 0.02 0.05 -- -- -- -- - -------- -------- -------- ---------- ---------- -------- $ 10.02 $ 10.05 $ 9.96 $ 9.97 $ 10.00 $ 10.00 ======== ======== ======== ========== ========== ======== $ 9.25 $ 9.13 -- -- -- -- 8.06% 10.89% -- -- -- -- 6.28% 7.29% 7.71% 9.74% 11.13% 7.35% $719,979 $738,810 $874,104 $1,158,224 $1,036,470 $252,998 $ -- $ -- $ -- $ -- $ -- $ -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- 1.31% 1.42% 1.42%(2) 1.38% 1.46%(2) 1.18%(1)(2) 6.04% 5.88% 7.62%(2) 9.71% 10.32%(2) 9.68%(1)(2) 87% 81% 53% 55% 100% 49%(1) 71,835 73,544 87,782 116,022 103,660 25,294 - ---------- (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 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 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. (8) Calculated on total expenses before impact of earnings credits. See Accompanying Notes to Financial Statements. 31 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS as of August 31, 2000 (Unaudited) - -------------------------------------------------------------------------------- NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES Pilgrim Prime Rate Trust (the "Trust"), is registered under the Investment Company Act of 1940, as amended, as a diversified, closed-end, investment management 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. Senior Loan and Other Security Valuation. On a daily basis, the Trust uses market quotes to value its senior loans holdings when the Trust believes that multiple and reliable market quotes are available and reflect current value. Senior securities that cannot be valued based on market quotes, are valued using the Trust's valuation procedures, to ascertain the current value of a loan based on fundemental analysis. Fair value is determined by Pilgrim Investments, Inc. (the "Manager") under procedures established and monitored by the Trust's Board of Trustees. In valuing a loan, the Manager will consider, among other factors: (i) the creditworthiness of the corporate issuer and any interpositioned bank; (ii) the current interest rate, period until next interest rate reset and maturity date of the senior corporate loan; (iii) recent market prices for similar loans, if any; and (iv) recent prices in the market for instruments with similar quality, rate, period until next interest rate reset, maturity, terms and conditions. The Manager may also consider prices or quotations, if any, provided by banks, dealers or pricing services which may represent the prices at which secondary market transactions in the loans held by the Trust have or could have occurred. However, because the secondary market in senior loans has not yet fully developed, the Manager will not rely solely on such prices or quotations. Securities for which the primary market is a national securities exchange or the NASDAQ National Market System are stated at the last reported sale price on the day of valuation. Debt and equity securities traded in the over-the-counter market and listed securities for which no sale was reported on that date are valued at the mean between the last reported bid and asked price. Securities other than senior loans for which reliable quotations are not readily available and all other assets will be valued at their respective fair values as determined in good faith by, or under procedures established by, the Board of Trustees of the Trust. Investments in securities maturing in less than 60 days are valued at amortized cost, which, when combined with accrued interest, approximates market value. B. Federal Income Taxes. It is the Trust's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no federal income tax provision is required. At February 29, 2000, the Trust had capital loss carryforwards for federal income tax purposes of approximately $66,511,648 which are scheduled to expire through February 28, 2008. The Board of Trustees intends to offset any future net capital gains with the capital loss carryforwards until each carryforward has been fully utilized or expires. C. Security Transactions and Revenue Recognition. Security transactions are accounted for on trade date (date the order to buy or sell is executed). 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. 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 32 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS as of August 31, 2000 (Unaudited) - -------------------------------------------------------------------------------- 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. No such fees are recognized on loans which have been placed on non-accrual status. 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 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 for items such as the treatment of short term capital gains. These "book/tax" differences are either considered temporary or permanent in nature. 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. During the year ended February 29, 2000 the Fund reclassified $1,830,561 from paid in capital to accumulated net realized loss on investments, to reflect the treatment of permanent book/tax differences. E. Dividend Reinvestments. Pursuant to the Shareholder Investment Program (formerly known as the Automatic Dividend Reinvestment Plan), DST Systems, Inc., the Plan Agent, purchases, from time to time, shares of beneficial interest of the Trust on the open market to satisfy dividend reinvestments. Such shares are purchased only when the closing sale or bid price plus commission is less than the net asset value per share of the stock on the valuation date. If the market price plus commissions is equal to or exceeds the net asset value, new shares are issued at the greater of (i) net asset value or (ii) the market price of the shares during the pricing period, minus a discount of 5%. F. Use of Estimates. Management of the Trust has made certain estimates and assumptions relating to the reporting of assets, liabilities, revenues, expenses and contingencies to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates. G. Share Offerings. During the year ended February 28, 1999, the Trust began issuing shares under various shelf registration statements, whereby the net proceeds received by the Trust from share sales may not be less than the greater of (i) the NAV per share or (ii) 94% of the average daily market price over the relevant pricing period. NOTE 2 -- INVESTMENTS For the six months ended August 31, 2000, the cost of purchases and the proceeds from principal repayment and sales of investments, excluding short-term notes, totaled $490,545,501 and $482,462,482, respectively. At August 31, 2000, the Trust held senior loans valued at $1,614,012,984 representing 97.0% 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 33 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS as of August 31, 2000 (Unaudited) - -------------------------------------------------------------------------------- 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:
DATE OF COST OR ACQUISITION ASSIGNED BASIS ----------- -------------- American Blind and Wallpaper -- Common 01/12/99 -- America's Favorite Chicken Co. -- Common 11/06/92 $ 1 Autotote Systems, Inc. -- Option 02/26/97 -- Autotote Systems, Inc. -- Warrant 11/11/92 -- Butterick Company, Inc. -- Common 05/01/97 -- Capital Tool & Design -- Warrants 07/26/96 -- Casden Properties Operation -- Preferred Partnership Units 12/31/98 -- Covenant Care, Inc. -- Warrants 12/22/95 -- Murray's Discount -- Warrants 02/16/99 -- ---- Total restricted securities excluding senior loans (market value of $9,099,342 was 0.77% of net assets at August 31, 2000) $ 1 ====
NOTE 3 -- MANAGEMENT AND ADMINISTRATIVE SERVICES AGREEMENT On July 26, 2000, ReliaStar Financial Corp. (NYSE:RLR), the indirect parent company of Pilgrim Investments, Inc., Adviser to the Funds, and Pilgrim Securities, Inc., Distributor to the Funds, was acquired by ING Groep N.V. (NYSE:ING). ING Groep N.V. is a global financial institution active in the field of insurance, banking, and asset management in more than 60 countries, with almost 90,000 employees. The Trust has entered into an Investment Management Agreement with ING Pilgrim Investments, Inc. (the "Manager") a wholly-owned subsidiary of ING Pilgrim Group, Inc. ("PG"), 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 0.80% of the Trust's average daily net assets plus borrowings. The Trust has also entered into an Administration Agreement with ING Pilgrim Investments, Inc. to provide administrative services and also to furnish facilities. Prior to May 1, 2000 the Administration Agreement compensated 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. Effective May 1, 2000, the Administrator is compensated with a fee, computed daily and payable monthly, at an annual rate of 0.25% of the Trust's average daily net assets plus the proceeds of any outstanding borrowings. 34 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS as of August 31, 2000 (Unaudited) - -------------------------------------------------------------------------------- NOTE 4 -- COMMITMENTS The Trust has entered into both a 364 day and a five year revolving credit agreement, collateralized by assets of the Trust, to borrow up to $620 million from a syndicate of major financial institutions maturing July 15, 2003. Borrowing rates under these agreements are based on a fixed spread over LIBOR, the federal funds rate, or a commercial paper based rate. Prepaid arrangement fees for any unborrowed amounts are amortized over the term of the agreements. The amount of borrowings outstanding at August 31, 2000, was $493 million, at an average interest rate of 7.1%, which represented 29.2% of total assets. Average borrowings for the six months ended August 31, 2000 were $529,326,087 and the average annualized interest rate was 7.2%. As of August 31, 2000, the Trust had unfunded loan commitments pursuant to the terms of the following loan agreements: Alliance Data Systems $ 803,571 Key Energy Group $ 9,059,333 AM Cosmetics 11,248 Meditrust Corp. 7,679,642 Breed Technologies 42,611 Murray's Discount Auto Stores 1,700,000 Crown Paper Co. 2,125,000 Schwegmann Giant Super Market 1,488,400 Huntsman Corporation 985,104 ----------- $23,894,909 =========== NOTE 5 -- RIGHTS AND OTHER 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. As of August 31, 2000, share offerings pursuant to shelf registrations were as follows: REGISTRATION SHARES SHARES DATE REGISTERED REMAINING ------------ ---------- --------- 6/11/98 15,000,000 -- 6/19/98 10,000,000 9,730,800 9/15/98 25,000,000 19,258,212 3/04/99 5,000,000 3,241,644 NOTE 6 -- CUSTODIAL AGREEMENT State Street Bank, Kansas City ("SSBKC") (formerly known as IFTC) serves as the Trust's custodian and recordkeeper. Custody fees paid to SSBKC are reduced by earnings credits based on the cash balances held by SSBKC for the Trust. There were no earning credits for the six months ended August 31, 2000. 35 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS as of August 31, 2000 (Unaudited) - -------------------------------------------------------------------------------- NOTE 7 -- AFFILIATED TRANSACTIONS During the six months ended August 31, 2000, the Trust purchased and sold holdings in senior loans from/to affiliated funds managed by the Manager at prices determined by the Manager to represent market prices. The cost of purchased loans was $24,218,893 and the proceeds and cost of sold loans were $22,952,891 and $23,208,437, respectively, excluding any benefit to the Trust from the recognition of deferred arrangement fees. NOTE 8 -- SUBORDINATED AND UNCOLLATERALIZED LOANS The Trust may acquire a subordinated loan only if, at the time of acquisition, it acquires or holds a Senior Loan from the same borrower. The primary risk arising from a holder's subordination is the potential loss in the event of default by the issuer of the loans. The Trust may invest up to 5% of its total assets, measured at the time of investment, in subordinated and uncollateralized loans. As of August 31, 2000, the Trust held 2.2% of its total assets in subordinated and uncollateralized loans. NOTE 9 -- SUBSEQUENT EVENTS Subsequent to August 31, 2000, the Trust paid the following dividends from net investment income: PER SHARE AMOUNT DECLARATION DATE RECORD DATE PAYABLE DATE ---------------- ---------------- ----------- ------------ $0.073 08/31/2000 09/11/2000 09/22/2000 0.070 09/29/2000 10/10/2000 10/23/2000 Through August 31st and after that date, the Trust has increased the degree to which it uses market quotations to value its Senior Loan holdings. Senior Loans are normally valued on the basis of one or more quotations obtained from a pricing service or other sources believed to be reliable. Senior Loans for which reliable quotations are not available, which may include those deemed unreliable under criteria established by the Trust's Board of Trustees, may be valued with reference to another Senior Loan or a group of Senior Loans for which quotations are more readily available and whose characteristics are comparable to the Senior Loan being valued. Under this approach, the comparable Senior Loan or Loans serve as a"proxy" for changes in value. The Trust has engaged an independent pricing service to provide quotations from dealers in Senior Loans and to calculate values under the "proxy" procedure described above. Other senior loans may be valued on the basis of their "fair value" under the procedures described in Note 1(A). On October 23, 2000, the Trust filed a registration statement with the SEC pursuant to which the Trust expects to offer 3,600 Series M Preferred Shares, 3,600 Series W Preferred Shares and 3,600 Series F Preferred Shares, each at a purchase price of $25,000 per share. The Trust expects to sell such Preferred Shares on or about November 2, 2000. In addition, subject to market conditions, the Trust expects to offer within 30 days thereafter up to 3,600 shares each of Series T Preferred Shares and Series Th Preferred Shares, each at a purchase price of $25,000 per share. Management's Additional Operating Information (Unaudited) APPROVAL OF CHANGES IN INVESTMENT POLICIES At a Special Meeting of Trust Shareholders, held August 6, 1998, Shareholders approved changes in the Trust's fundamental investment policies which make available certain additional investment opportunities to the Trust, including (i) investing in loans in any form of business entity, as long as the loans otherwise meet the Trust's requirements regarding the quality of loans in which it may invest; (ii) the treatment of lease participations as Senior Loans which would constitute part of the 80% of the 36 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS as of August 31, 2000 (Unaudited) - -------------------------------------------------------------------------------- Trust's assets normally invested in Senior Loans; (iii) investing in all types of hybrid loans that meet credit standards established by the Investment Manager constituting part of the 20% of the Trust's assets that may be invested in Other Investments; (iv) the ability to invest up to 5% of its total assets in both subordinated and unsecured loans which would constitute part of the 20% of the Trust's assets that may be invested in Other Investments. Additionally, another policy change approved by the Board of Trustees of the Trust, which does not require shareholder approval, permits the Trust to accept guarantees and expanded forms of intangible assets as collateral, including copyrights, patent rights, franchise value, and trademarks. Another policy change approved by the Board, that does not require shareholder approval, provides that 80% of the Trust's gross assets, as opposed to 80% of its net assets, may normally be invested in Senior Loans. The Trust's Manager considered the evolving nature of the syndicated loan market and the potential benefits to the Trust and its shareholders of revising the restriction to permit the Trust to invest in loans other than Senior Loans and the increase in the number of attractive investment opportunities available to the Trust due to the change. 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. SHAREHOLDER INVESTMENT PROGRAM The Trust offers a Shareholder Investment Program (the "Program") which enables investors to conveniently add to their holdings at reduced costs. Should you desire further information concerning this Program, please contact the Shareholder Servicing Agent at (800) 992-0180. 37 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- FUND ADVISORS AND AGENTS - -------------------------------------------------------------------------------- INVESTMENT MANAGER INSTITUTIONAL INVESTORS AND ANALYSTS ING Pilgrim Investments, Inc. Call Pilgrim Prime Rate Trust 7337 E. Doubletree Ranch Road 1-800-336-3436, Extension 2214 Scottsdale, Arizona 85258-2034 ADMINISTRATOR TRANSFER AGENT ING Pilgrim Group, Inc. DST Systems, Inc. 7337 E. Doubletree Ranch Road P.O. Box 419368 Scottsdale, Arizona 85258-2034 Kansas City, Missouri 64141 1-800-992-0180 INDEPENDENT AUDITORS CUSTODIAN KPMG LLP State Street Bank Kansas City 355 South Grand Avenue 801 Pennsylvania Los Angeles, California 90071 Kansas City, Missouri 64105 WRITTEN REQUESTS Please mail all account inquiries and other comments to: Pilgrim Prime Rate Trust Account Services c/o ING Pilgrim Group, Inc. 7337 E. Doubletree Ranch Road Scottsdale, Arizona 85258-2034 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 1-800-992-0180. 38 PILGRIM(R) - --------------------------- FUNDS FOR SERIOUS INVESTORS U.S. EQUITY FUNDS Pilgrim MagnaCap Pilgrim Growth and Income Pilgrim LargeCap Leaders Pilgrim Research Enhanced Index Pilgrim Growth Opportunities Pilgrim LargeCap Growth Pilgrim MidCap Value Pilgrim MidCap Opportunities Pilgrim MidCap Growth Pilgrim Growth + Value Pilgrim SmallCap Opportunities Pilgrim SmallCap Growth Pilgrim Bank and Thrift INTERNATIONAL EQUITY FUNDS Pilgrim Worldwide Growth Pilgrim Global Corporate Growth Pilgrim International Value Pilgrim International Pilgrim International Core Growth Pilgrim International SmallCap Growth Pilgrim Emerging Markets Value Pilgrim Emerging Countries Pilgrim Worldwide Emerging Countries Pilgrim Global Technology Pilgrim Asia-Pacific Equity Pilgrim SmallCap Asia Growth Pilgrim Troika Dialog Russia PRECIOUS METAL FUNDS Pilgrim Gold Pilgrim Silver INTERNATIONAL INCOME FUND Pilgrim Global Income INCOME FUNDS Pilgrim Government Securities Income Pilgrim GNMA Income Pilgrim Strategic Income Pilgrim High Yield Pilgrim High Yield II Pilgrim High Total Return Pilgrim High Total Return II Pilgrim Money Market Lexington Money Market Trust EQUITY & INCOME FUNDS Pilgrim Balanced Pilgrim Convertible Q2------------------------------------------------------------------------------ Prospectuses containing more infomration regarding the funds, including charges and expenses, may be obtained by calling Pilgrim Securities, Inc., Distributor at 1-800-334-3444. Please read the prospectus carefully before you invest or send money. PRT2Q0800-102700 -----END PRIVACY-ENHANCED MESSAGE-----