-----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, Gg9fHyhpDIS/FO5su8clXb/eEp36qtuQsX8MZ+IjNMrD2ySa2D14MfN2Gv0kfLpi g8FMO+/4NyyhLLoDfNwGbg== 0000950147-98-000896.txt : 19981111 0000950147-98-000896.hdr.sgml : 19981111 ACCESSION NUMBER: 0000950147-98-000896 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19981110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PILGRIM AMERICA PRIME RATE TRUST CENTRAL INDEX KEY: 0000826020 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [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: 98741422 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 PRIME RATE TRUST SEMI-ANNUAL REPORT PILGRIM(sm) THE VALUE OF INVESTING(R) PILGRIM PRIME RATE TRUST SEMI-ANNUAL REPORT - -------------------------------------------------------------------------------- AUGUST 31, 1998 Q2 SEMI-ANNUAL Pilgrim Prime Rate Trust SEMI-ANNUAL REPORT AUGUST 31, 1998 -------- Table of Contents Chairman's Message ........................ 2 Letter to Shareholders .................... 3 Shareholder Meeting ....................... 6 Statistics and Performance ................ 7 Performance Footnotes ..................... 9 Additional Notes and Information .......... 10 Portfolio of Investments ................. 11 Statement of Assets and Liabilities ...... 20 Statement of Operations .................. 21 Statement of Changes in Net Assets ...... 22 Statement of Cash Flows .................. 23 Financial Highlights ..................... 24 Notes to Financial Statements ............ 26 Fund Advisors and Agents .................. 33 -------- PILGRIM PRIME RATE TRUST - -------------------------------------------------------------------------------- CHAIRMAN'S MESSAGE - -------------------------------------------------------------------------------- Dear Shareholder: We are pleased to present the Semi-Annual Report for Pilgrim Prime Rate Trust (the "Trust"). On the following pages, the Portfolio Manager 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 month results a reflection of Pilgrim's 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 Pilgrim Group, Inc. October 15, 1998 2 PILGRIM PRIME RATE TRUST - -------------------------------------------------------------------------------- LETTER TO SHAREHOLDERS - -------------------------------------------------------------------------------- Dear Fellow Shareholders, During the quarter ended August 31, 1998, Pilgrim Prime Rate Trust (the "Trust") again delivered a high current yield consistent with the preservation of capital value. Dividends declared during the quarter totaled $0.207 which based on quarter-end net asset value ("NAV") equated to a rate of 8.81% per annum. During the period, the prime rate was 8.50% and 60-day LIBOR averaged 5.68%. The Trust's dividend adjusted month-end NAV ranged between $9.25 and $9.28. MARKET PLACE Until the very end of the quarter (as discussed below) the volume of new transactions remained high. The Trust was able to select attractive risks from the wide variety of assets offered in the primary market. Healthcare and telecommunications transactions become relatively less prevalent, so from an industry standpoint, the market became more balanced. Continuing to counterbalance the attractive characteristics of the primary market has been the continued development of the institutional investor universe. In the long run, this will mean a more mature and liquid market place for corporate loans. The near term effect is demand outstripping supply and continued downward pressure on the returns available to the Trust. Since the beginning of the calendar year, the average yield on the portfolio has dropped by approximately 30 basis points. This decline in revenue is likely to result in marginally lower dividends in the near future. During the last two weeks of August, the equity and corporate bond markets began to reflect increasing nervousness as many economies outside the United States began to exhibit weakness. The effect to date of these weaknesses has largely been to the benefit of the US consumer. Import prices have continued to fall, commodity prices are generally lower than they have been for nearly 30 years, inflation has remained low and employment high. However, exports are weak as many traditional markets begin to deteriorate or remain poor. If the environment for international trade continues to be unattractive, eventually US corporations will have to scale back production or build inventories which they have worked hard to limit during the last ten years. Combined with increased competitive pressure from increasingly cheap imports, US companies are going to have to demonstrate that they have truly become more productive and low cost manufacturers of their products, good and services. In any event, US corporate profits are unlikely to grow at the attractive rates seen during the last five years. 3 PILGRIM PRIME RATE TRUST - -------------------------------------------------------------------------------- LETTER TO SHAREHOLDERS - -------------------------------------------------------------------------------- ASSET QUALITY On August 31, non-performing loans were 0.62% of total assets and 0.90% of net assets. On May 31, the corresponding percentages were 0.82% and 1.16%. AM Cosmetics did not make a scheduled interest payment in June and thus became non-performing. We continue to work with the lead lender and the borrower to restructure this transaction. As discussed in the May 31 Letter to Shareholders, credit risk is the critical risk factor for investors and defaults will occur in the portfolio from time to time. Ultimately, diversification tends to protect dividends to shareholders and the high recovery rates inherent in the asset class ensure minimal NAV impact. Of course, there can be no guarantees. BORROWER DIVERSIFICATION By Total Commitment (as of August 31, 1998) Commitment Size by Borrower in Millions Number of Borrowers --------------------------------------- ------------------- $30 and Over 2 $20-$30 8 $10-$20 67 Under $10 75 Portfolio Changes During the quarter new investments have included American Color Graphics, American Wireless Corporation, Gaylord Container Corporation, Ispat Sidbec, Inc., Lyondell Petrochemical Company, Mitel Corporation, Neoplan USA Corporation, Nortek Aviation Support, Inc., Paint Sundry Brands, LLC, and Western PCS Corporation. Repayments and sales included Arrowhead Mills, Inc., Aurora Foods, Calmar Inc, Celestica, DenAmerica Corp., GEO Specialty Chemicals, Goodman Manufacturing Co., Hanger Orthopedic Group, Liberty House, Inc., Long John Silvers, Inc., and Snapple Beverage Co. 4 PILGRIM PRIME RATE TRUST - -------------------------------------------------------------------------------- LETTER TO SHAREHOLDERS - -------------------------------------------------------------------------------- OUTLOOK As mentioned earlier, we expect a small decline in dividends in the near term reflective of the fall in returns in the portfolio during the last six months. We had hoped that this would have been counterbalanced in part by lower borrowing costs, but these arrived too late in the quarter and apply to a limited part of the portfolio only. While the weak equity and bond markets foreshadow somewhat more difficult credit conditions, they will also allow for higher fees and interest rate spreads on the senior floating rate loan asset class. This benefit is already emerging. Increases in spreads and fees on new deals will counterbalance to some extent the impact of lower interest rates and lower spreads on the existing portfolio. Since the end of August, the Federal Reserve has lowered short-term interest rates twice. Lower short-term interest rates will normally be directly reflected in comparably lower dividends. However, we expect the recent trend towards higher pricing to be sustained and thus to mitigate the impact of lower short-term rates. We appreciate and look forward to your comments and questions. Yours sincerely, /s/ Howard Tiffen Howard Tiffen President Chief Operating Officer Senior Portfolio Manager Pilgrim Prime Rate Trust The views expressed in this letter reflect those of the portfolio manager only through the end of the period of the report as stated on the cover. The manager's views are subject to change at any time based on market and other conditions. This letter contains statements that may be "forward-looking statements." Actual results could differ materially from those projected in the "forward-looking statements." PERFORMANCE DATA REPRESENTS PAST PERFORMANCE WHICH DOES NOT GUARANTEE FUTURE RESULTS. Investement 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 PILGRIM PRIME RATE TRUST - -------------------------------------------------------------------------------- SHAREHOLDER MEETING - -------------------------------------------------------------------------------- SPECIAL MEETING A special meeting of the shareholders of Pilgrim Prime Rate Trust was held at the offices of the trust on August 6, 1998. A brief description of each matter voted upon as well as the voting results are outlined below: SHARES SHARES VOTED AGAINST SHARES BROKER VOTED FOR OR WITHHELD ABSTAINED NON-VOTE TOTAL --------- ----------- --------- -------- ----- I. Vote on Trustees Mary A. Baldwin 64,790,447 3,869,221 68,659,668 John P. Burke 64,828,649 3,831,019 68,659,668 Al Burton 64,933,568 3,726,100 68,659,668 Bruce S. Foerster 64,980,639 3,679,029 68,659,668 Jock Patton 65,006,629 3,653,039 68,659,668 Robert W. Stallings 65,004,593 3,655,075 68,659,668 II. To approve a change to a fundamental investment restriction on the Trust that would expand the types of loans in which the Trust may invest. 56,538,407 5,452,613 3,094,382 3,574,266 68,659,668 III. To approve a proposed amendment to the Trust's investment management agreement with Pilgrim Investments, Inc. that increases the investment management fee paid by the Trust. 49,646,174 11,758,265 3,680,963 3,574,265 68,659,668 IV. To ratify the appointment of KPMG Peat Marwick LLP as the independent auditors for the Trust for the fiscal year ending February 28, 1999. 65,874,349 553,611 2,231,706 68,659,666 V. To transact such other business as may properly come before the Annual Meeting of Shareholders or any adjournments thereof. 62,641,403 2,029,029 3,989,234 68,659,666 6 PILGRIM PRIME RATE TRUST - -------------------------------------------------------------------------------- STATISTICS AND PERFORMANCE as of August 31, 1998 - -------------------------------------------------------------------------------- PORTFOLIO CHARACTERISTICS Net Assets $1,152,591,504 Assets Invested in Senior Loans* $1,626,434,169 Total Number of Senior Loans 152 Average Amount Outstanding per Loan $10,700,225 Total Number of Industries 30 Average Loan Amount per Industry $54,214,472 Portfolio Turnover Rate (YTD) 47% Weighted Average Days to Interest Rate Reset 43 days Average Loan Maturity 69 months Average Age of Loans Held in Portfolio 9 months * Includes loans and other debt received through restructures TOP 10 INDUSTRIES AS A % OF NET ASSETS TOTAL ASSETS Healthcare, Education and Childcare 16.0% 11.1% Telecommunications 12.7% 8.8% Personal, Food and Misc. Services 8.1% 5.6% Automobile 8.0% 5.5% Broadcasting 7.9% 5.4% Building and Real Estate 7.7% 5.3% Chemicals, Plastics and Rubber 6.9% 4.8% Printing and Publishing 6.0% 4.1% Electronics 5.5% 3.8% Beverage, Food and Tobacco 5.5% 3.8% TOP 10 SENIOR LOANS AS A % OF NET ASSETS TOTAL ASSETS MAFCO Financial Corp. 3.5% 2.4% Nextel Finance Co. 2.6% 1.8% Laidlaw Environmental Services 2.5% 1.7% Community Health Systems 2.1% 1.5% Ventas, Inc. 2.0% 1.4% Papa Gino's, Inc. 1.8% 1.2% 24-Hour Fitness, Inc. 1.7% 1.2% American Wireless Corporation 1.7% 1.2% Florida Panthers Holdings, Inc. 1.7% 1.2% Patriot American Hospitality 1.7% 1.2% 7 PILGRIM PRIME RATE TRUST - -------------------------------------------------------------------------------- STATISTICS AND PERFORMANCE as of August 31, 1998 - -------------------------------------------------------------------------------- DISTRIBUTION RATES* 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 C RATE AT MKT C - ------------- ---- ----- ----- ------------- ------------- August 31, 1998 8.50% 8.46% 7.88% 8.81% 8.21% May 31, 1998 8.50% 9.67% 8.82% 8.86% 8.09% February 28, 1998* 8.50% 8.60% 7.77% 8.75% 7.92% November 30, 1997 8.50% 9.72% 9.15% 8.82% 8.08% This table sets forth the Trust's monthly dividend performance which is summarized quarterly. * Distribution Rates exclude the special dividend of $0.02875/share declared December 19, 1997. Including the special dividend results in a distribution rate @ NAV of 10.00%, and a distribution rate @ MKT of 9.05%. AVERAGE ANNUAL TOTAL RETURNS NAV MKT --- --- 1 Year 8.30% 7.89% 3 Years 8.17% 12.66% 5 Years 8.38% 10.14% 10 Years 8.51% N/A Since Trust Inception F,H 8.47% N/A Since Initial Trading on NYSE G N/A 10.93% 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 the dividend declared each month and dividing the resulting annualized dividend amount by the Trust's net asset value (in the case of NAV) or the NYSE Composite closing price (in the case of Market) at the end of the period. (C) Calculation of total return assumes a hypothetical initial investment at the net asset value (in the case of NAV) or the NYSE Composite closing price (in the case of Market) on the last business day before the first day of the stated period, with all dividends and distributions reinvested at the actual reinvestment price. The Trust's average annual returns on a market basis and assuming rights were exercised through August 31, 1998 were 7.89% and 10.14% for the one and five year periods, respectively. The Trust's average annual total return assuming an initial investment at NAV with a 3% sales charge and assuming an ending value at market and assuming rights were exercised through August 31, 1998, was 10.14% for the ten-year period. 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. The offering was completed on January 27, 1995. (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 $5,926,209 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 1998 DIVIDENDS: DECLARATION DATE EX-DATE PAYABLE DATE ---------------- ------- ------------ January 30 February 6 February 24 February 27 March 6 March 23 March 26 April 8 April 22 April 30 May 7 May 22 May 29 June 8 June 22 June 30 July 8 July 22 July 31 August 6 August 24 August 31 September 8 September 22 September 30 October 8 October 22 October 30 November 6 November 23 November 30 December 8 December 22 December 21 December 29 January 13, 1999 RECORD DATE WILL BE TWO BUSINESS DAYS AFTER EACH EX-DATE. THESE DATES ARE SUBJECT TO CHANGE. STOCK DATA The Trust's shares are traded on the New York Stock Exchange (Symbol: PPR). Effective November 16, 1998 the Trust's name will change to Pilgrim Prime Rate Trust and its cusip number will be 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, 1998 (Unaudited) - -------------------------------------------------------------------------------- SENIOR LOANS* (DOLLAR WEIGHTED PORTFOLIO INTEREST RESET PERIOD IS 43 DAYS)
PRINCIPAL AMOUNT LOAN STATED (000'S) INDUSTRY/BORROWER TYPE MATURITY VALUE - --------- ----------------- ---- -------- ----- AEROSPACE AND DEFENSE: 5.3% $ 8,888 Erickson Air-Crane Co. (heavy lift helicopters) Term B 12/31/04 $ 8,443,125 10,000 New Piper Aircraft (aircraft manufacturer) Term 04/15/05 10,000,000 15,000 Nortek Aviation Support, Inc. (aviation services company) Term B 06/14/05 15,000,000 6,500 Piedmont Aviation Services (airport facility operator) Term B 07/24/07 6,500,000 6,500 Piedmont Aviation Services Term C 07/24/07 6,500,000 5,394 Technetics Corp. (aircraft engine components) Term 06/20/02 5,393,939 9,355 Tri Star/Odyssey, Inc. (aerospace hardware distributor) Term 09/30/03 9,355,000 ----------- 61,192,064 ----------- AUTOMOBILE: 8.0% 4,975 Autosystems Manufacturing Inc. (automotive lighting) Term B 05/31/04 4,975,000 4,975 Autosystems Manufacturing Inc. Term C 05/31/05 4,975,000 15,000 Breed Technologies (airbags/seatbelts) Term B 04/27/06 15,000,000 9,950 Cambridge Industries, Inc. (automotive plastics) Term B 06/30/05 9,950,000 9,410 Capital Tool & Design (brake backing plates) Term B 07/19/03 9,410,319 13,232 Federal Mogul (automotive parts) Term 12/31/05 13,231,844 9,993 Global Metal Technologies (automotive parts) Term B 03/12/05 9,993,333 12,461 Keystone Automotive (automotive aftermarket specialty parts) Term B 03/31/04 12,460,938 6,250 Safelite Glass Corp. (automobile windshield replacement) Term B 12/23/04 6,250,000 6,250 Safelite Glass Corp. Term C 12/23/05 6,250,000 ----------- 92,496,434 ----------- BEVERAGE, FOOD AND TOBACCO: 5.5% 10,085 Del Monte Corp. (food manufacturing and distribution) Term B 03/31/05 10,085,380 2,526 Edward's Baking Co. (food service bakery) Term A 09/30/03 2,525,910 3,308 Edward's Baking Co. Term B 09/30/05 3,308,333 3,308 Edward's Baking Co. Term C 09/30/05 3,308,334 13,860 Empire Kosher Poultry (kosher chicken and poultry) Term B 07/31/04 13,860,000 12,500 Favorite Brands International (confectionery manufacturer) Term B 05/19/05 12,500,000 9,389 Imperial Holly Corp. (sugar producer) Term A 12/31/05 9,388,962 8,278 Imperial Holly Corp. Term B 12/31/05 8,278,107 ----------- 63,255,026 -----------
See Accompanying Notes to Financial Statements. 11 PILGRIM PRIME RATE TRUST - -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS as of August 31, 1998 (Unaudited) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT LOAN STATED (000'S) INDUSTRY/BORROWER TYPE MATURITY VALUE - --------- ----------------- ---- -------- ----- BROADCASTING: 7.9% $10,163 Benedek Broadcasting Television Corp. (broadcasting) Axel A (A) 12/31/04 $10,162,679 4,759 Benedek Broadcasting Television Corp. Axel B (A) 12/31/04 4,759,310 2,561 Capstar Radio Broadcasting (radio broadcasting) Term A 09/24/99 2,561,053 4,961 Capstar Radio Broadcasting Term B 05/29/05 4,960,526 5 Capstar Radio Broadcasting Revolver 09/24/99 5,263 5,000 Classic Cable (cable television operator) Term B 10/28/07 5,000,000 7,444 Entravision (Spanish broadcast television) Term B 12/31/04 7,443,750 10,000 FrontierVision (cable television) Term B 03/31/06 10,000,000 10,000 Intermedia Partners IV (cable television) Term 01/01/05 10,000,000 5,000 Intermedia Partners IV Hybrid 03/23/08 5,000,000 1,776 Liberman Broadcasting, Inc. (broadcasting) Revolver 03/31/05 1,776,000 8,000 Liberman Broadcasting, Inc. Term B 09/30/05 8,000,000 9,250 Retlaw Broadcasting, LLC (television stations) Term B 04/30/06 9,250,000 12,000 Telemundo Group, Inc. (Spanish broadcast television) Term B 12/13/06 12,000,000 ----------- 90,918,581 ----------- BUILDINGS AND REAL ESTATE: 7.7% 6,000 Dayton Superior (concrete/masonry accessories) Term 09/29/05 6,000,000 10,937 Falcon Building Products (building products) Term B 06/30/05 10,937,143 6,600 Home Decor Group (home accessories) Term B 03/12/04 6,600,000 3,400 Home Decor Group Term C 03/12/05 3,400,000 7,960 Kevco, Inc. (manufactured home components) Term B 02/02/05 7,960,000 13,120 Tree Island Industries (nail and wire products) Term B 03/31/03 13,120,000 375 United Building Materials, Inc. (stone and concrete products)(1) Term 12/31/99 374,798 8,000 US Aggregates, Inc. (manufacturer of concrete products) Term B 03/31/06 8,000,000 23,121 Ventas, Inc. (real estate investment trust) Term D 05/05/03 23,121,212 4,030 Werner Holding Co. (ladders) Term B 11/30/04 4,029,750 4,925 Werner Holding Co. Term C 11/30/05 4,925,250 ----------- 88,468,153 ----------- CARGO TRANSPORT: 2.9% 11,679 Atlas Freighter Leasing (air cargo carrier) Term 05/29/04 11,679,248 3,094 Evergreen International (air cargo carrier) Term A 05/31/02 3,094,266 1,634 Evergreen International Term B 05/31/02 1,633,668 10,000 Omnitrax, Inc. (rail operator) Term 05/12/05 10,000,000 3,740 Oshkosh Trucking (specialized truck manufacturer) Term B 03/01/04 3,740,000 3,740 Oshkosh Trucking Term C 03/01/04 3,740,000 ----------- 33,887,182 -----------
See Accompanying Notes to Financial Statements. 12 PILGRIM PRIME RATE TRUST - -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS as of August 31, 1998 (Unaudited) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT LOAN STATED (000'S) INDUSTRY/BORROWER TYPE MATURITY VALUE - --------- ----------------- ---- -------- ----- CHEMICALS, PLASTICS AND RUBBER: 6.6% $ 9,964 Acadia Elastomers Corp. (specialty chemicals) Term 03/21/04 $ 9,963,504 11,283 Cedar Chemical Corp. (specialty chemicals) Term B 10/30/03 11,283,142 3,563 Foamex, L.P. (polyurethane foam) Term B 06/30/05 3,562,868 3,239 Foamex, L.P. Term C 06/30/06 3,238,971 1,944 Huntsman Chemical (specialty chemicals) Term B 03/15/04 1,944,286 1,944 Huntsman Chemical Term C 03/15/04 1,944,286 2,366 Huntsman Corp. (industrial chemicals) Revolver 12/31/02 2,365,898 684 Huntsman Corp. Term A 12/31/02 683,823 4,950 Huntsman Corp. Term B 12/31/05 4,950,000 6,000 Lyondell Petrochemical Company (petrochemicals) Term A 07/23/03 6,000,000 12,000 Lyondell Petrochemical Company Term B 07/23/03 12,000,000 5,102 NEN Life Sciences Products (biochemicals) Term B 12/31/04 5,102,041 1,133 Paint Sundry Brands (paint business & accessories) Term B 08/11/05 1,133,333 1,111 Paint Sundry Brands Term C 08/11/06 1,111,111 6,468 Sunbelt Manufacturing LLC (plastics manufacturer) Term B 09/30/04 6,467,500 4,779 Texas Petrochemical Corp. (industrial chemicals) Term B 06/30/04 4,779,347 ----------- 76,530,110 ----------- CONTAINERS, PACKAGING AND GLASS: 2.2% 14,897 Gaylord Container Corporation (corrugated containers) Term 07/30/07 14,896,552 10,000 Pretium Packaging LLC (plastic packaging) Term B 07/29/06 10,000,000 ----------- 24,896,552 ----------- DIVERSIFIED/CONGLOMERATE MANUFACTURING: 0.9% 276 @ KDI Corp. (defense and leisure products) (2) Term A N/A 16,791 13 @ KDI Corp. (2) Term B N/A 13,187 10,000 Private Business, Inc. (banking services & software) Term B 08/19/06 10,000,000 ----------- 10,029,978 ----------- DIVERSIFIED/CONGLOMERATE SERVICES: 4.8% 36,750 MAFCO Financial Corp. (diversified services and entertainment) Term A 04/16/00 36,750,000 3,150 MAFCO Financial Corp. Revolver 04/16/00 3,150,000 8,782 Outsourcing Solutions (accounts receivable management) Term B 11/06/03 8,781,937 6,910 Outsourcing Solutions Term C 10/15/04 6,910,390 ----------- 55,592,327 ----------- ECOLOGICAL: 3.3% 4,111 Clean Harbors (environmental services) Term 05/08/00 4,110,698 14,509 Laidlaw Environmental Services (waste management) Term B 04/03/05 14,509,091 14,509 Laidlaw Environmental Services Term C 04/03/06 14,509,091 4,813 Rumpke (waste management) Term 09/25/02 4,812,500 ----------- 37,941,380 -----------
See Accompanying Notes to Financial Statements. 13 PILGRIM PRIME RATE TRUST - -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS as of August 31, 1998 (Unaudited) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT LOAN STATED (000'S) INDUSTRY/BORROWER TYPE MATURITY VALUE - --------- ----------------- ---- -------- ----- ELECTRONICS: 5.5% $ 4,500 Details, Inc. (circuit board manufacturer) Term B 10/27/04 $ 4,500,000 5,000 Dictaphone Acquisition, Inc. (dictation and recording equipment) Term C 06/30/03 5,000,000 10,224 Fairchild Semiconductor Corp. (electronic equipment) Term C 03/11/03 10,224,228 5,543 Intri-Plex Technologies, Inc. (disk drive component manufacturer) Term 09/30/02 5,543,478 9,540 Mitel Corporation (semiconductor manufacturing) Term B 06/02/04 9,540,000 9,179 OK Industries, Inc. (circuit board manufacturing systems) Term 10/31/02 9,178,571 9,762 Sarcom, Inc. (systems integration) Term 11/20/02 9,761,905 10,000 Stonebridge Technologies, Inc. (enterprise computing) Term 07/27/05 10,000,000 ----------- 63,748,182 ----------- FARMING AND AGRICULTURE: 0.8% 8,993 Purina Mills, Inc. (food products) Term 03/10/07 8,993,250 ----------- 8,993,250 ----------- FINANCE: 2.6% 18,000 Bridge Information Systems (news services) Term B 05/29/05 18,000,000 6,400 National Partnership Investments Corp. (asset management) Term 06/30/01 6,400,000 5,000 Value Asset Management, Inc. (money management) Term B 04/28/03 5,000,000 ----------- 29,400,000 ----------- GROCERY: 3.7% 1,455 Pathmark Stores, Inc. (mid-atlantic supermarkets) Revolver 06/15/01 1,454,545 1,589 Pathmark Stores, Inc. Term A 06/15/01 1,588,957 9,063 Pathmark Stores, Inc. Term B 12/15/01 9,062,937 17,812 Schwegmann Giant Supermarket (Louisiana supermarkets) Term B 01/31/04 17,811,771 9,316 Star Markets Co., Inc. (Boston area supermarkets) Term B 12/31/02 9,316,040 2,890 Star Markets Co., Inc. Term C 12/31/03 2,889,885 ----------- 42,124,135 ----------- HEALTHCARE, EDUCATION AND CHILDCARE: 16.0% 4,092 Alaris Medical Systems (infusion pumps) Term B 11/30/03 4,092,113 4,092 Alaris Medical Systems Term C 11/30/04 4,092,113 3,851 Alaris Medical Systems Term D 05/31/05 3,851,464 1,990 Alliance Imaging, Inc. (diagnostic services) Term A 12/18/03 1,990,000 9,453 Alliance Imaging, Inc. Term C 08/09/04 9,452,500 8,938 Community Health Systems (hospitals) Term B 12/31/03 8,938,356 8,938 Community Health Systems Term C 12/31/04 8,938,356 6,712 Community Health Systems Term D 12/31/05 6,712,329 6,000 Covenant Care, Inc. (long-term healthcare facilities) Term 06/30/99 6,000,000 2,917 Dade International (medical testing equipment manufacturer) Term B 12/31/04 2,916,610 2,917 Dade International Term C 12/31/04 2,916,610 9,977 Dade International Term D 12/31/04 9,977,183 4,975 Doshi Diagnostics (radiology and medical testing) Term 05/15/05 4,975,000 15,000 Fountain View, Inc. (long-term healthcare facilities) Term B 03/31/04 15,000,000
See Accompanying Notes to Financial Statements. 14 PILGRIM PRIME RATE TRUST - -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS as of August 31, 1998 (Unaudited) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT LOAN STATED (000'S) INDUSTRY/BORROWER TYPE MATURITY VALUE - --------- ----------------- ---- -------- ----- HEALTHCARE, EDUCATION AND CHILDCARE (continued) $ 9,652 Graphic Controls Corp. (industrial and medical charts) Term B 09/28/03 $ 9,652,343 12,500 Healthcare America, Inc. (youth psychiatric care) Term B 06/30/04 12,500,000 10,000 Integrated Health Services (long-term subacute care) Term B 09/30/04 10,000,000 3,750 Magellan Health Services (managed behavioral care) Term B 02/12/05 3,750,000 3,750 Magellan Health Services Term C 02/12/06 3,750,000 5,000 Paragon Health Network, Inc. (nursing homes) Term B 03/31/05 5,000,000 5,000 Paragon Health Network, Inc. Term C 03/31/06 5,000,000 5,427 Paracelsus Healthcare Corporation (for profit hospital chain) Term A 05/15/03 5,426,667 8,000 Paracelsus Healthcare Corporation Term B 06/15/04 8,000,000 5,000 Roberts Pharmaceutical Corp (pharmaceutical post discovery) Term A 06/30/03 5,000,000 9,925 SMT Health (mobile MRI systems) Term 08/31/03 9,925,000 16,667 Vencor, Inc. (long-term care facility operator) Term A 05/05/05 16,666,667 ------------ 184,523,310 ------------ HOME AND OFFICE FURNISHINGS, HOUSEWARES AND DURABLE CONSUMER PRODUCTS: 4.2% 4,500 All Clad (pots and pans) Term A 03/18/04 4,500,000 3,000 All Clad Term C 03/18/05 3,000,000 8,930 Desa International (heaters and fireplaces) Term 11/26/04 8,930,000 15,739 ICON Health & Fitness Co. (exercise equipment) Term B 11/14/01 15,739,374 1,378 Panolam (design and manufacture wood paneling) Term A 01/31/03 1,377,844 8,493 Panolam Term B 01/31/03 8,493,319 4,853 Panolam Term C 01/31/03 4,853,325 2,000 Panolam Term D 01/31/03 2,000,000 ------------ 48,893,862 ------------ HOTELS, MOTELS, INNS AND GAMING: 2.7% 2,544 Palace Station (gaming) Revolver A 09/30/00 2,544,011 8,349 Palace Station Revolver B 09/30/00 8,348,655 4,706 Patriot American Hospitality (hotels & resorts) Term II 03/31/99 4,705,882 5,294 Patriot American Hospitality Term III 03/31/00 5,294,118 9,996 Patriot American Hospitality Term B 03/31/03 9,995,833 ------------ 30,888,499 ------------ INSURANCE: 0.5% 5,812 TRG Holdings Corp. (insurance run-off) Term 01/31/03 5,812,500 ------------ 5,812,500 ------------ LEISURE, AMUSEMENT, MOTION PICTURES AND ENTERTAINMENT: 4.7% 3,750 AMFAC Parks and Resorts (park services operator) Term B 09/04/04 3,750,000 3,750 AMFAC Parks and Resorts Term C 09/30/04 3,750,000 20,000 Florida Panthers Holdings, Inc. (investment holding) Term 12/15/98 20,000,000 9,950 Four Media Co. (film services) Term B 09/10/04 9,950,000 10,000 Panavision, Inc. (high precision file camera systems) Term B 03/10/05 10,000,000 7,157 Worldwide Sports & Recreation Corp. (optics, sports products) Term B 03/31/01 6,977,665 ------------ 54,427,665 ------------
See Accompanying Notes to Financial Statements. 15 PILGRIM PRIME RATE TRUST - -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS as of August 31, 1998 (Unaudited) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT LOAN STATED (000'S) INDUSTRY/BORROWER TYPE MATURITY VALUE - --------- ----------------- ---- -------- ----- MACHINERY (NONAGRICULTURE, NONCONSTRUCTION, NONELECTRONIC): 0.6% $ 7,474 Clearing - Niagara (metal stamping press manufacturer) Term 10/18/04 $ 7,473,571 ----------- 7,473,571 ----------- MINING, STEEL, IRON AND NONPRECIOUS METALS: 4.2% 5,910 Cable Systems International (cable wire manufacturer) Term B 10/04/02 5,910,000 3,269 Centennial Resources (coal mining) Term A 03/31/02 3,105,769 8,510 Centennial Resources Term B 03/31/04 8,084,134 2,500 Ispat Sidbec, Inc. (steel producer) Term B 07/17/05 2,500,000 2,500 Ispat Sidbec, Inc. Term C 07/17/06 2,500,000 9,725 GS Technologies (metal products) Term 09/30/02 9,725,000 361 National Refractories, Inc. (kiln lining materials) Term B 09/30/99 360,933 3,223 National Refractories, Inc. Term C 09/30/99 3,222,888 8,000 Peabody Holding Company (coal producer) Term B 06/12/05 8,000,000 5,000 Scovill Fasteners, Inc. (fasteners) Term A 11/26/03 5,000,000 ----------- 48,408,724 ----------- OIL AND GAS: 1.7% 11,475 Cardinal Services, Inc. (oil field services) Term B 03/10/05 11,475,428 1,492 Perf-O-Log (oil field services) Term 08/11/03 1,492,500 3,970 Perf-O-Log Term B 08/11/03 3,970,000 2,494 Perf-O-Log Term C 08/11/04 2,493,750 ----------- 19,431,678 ----------- PERSONAL, FOOD AND MISCELLANEOUS SERVICES: 8.1% 14,605 Boston Chicken, Inc. (home meal replacement) Lease/ 12/12/01 13,874,590 Term C 4,971 Brickman Group, Inc. (landscaping) Term B 12/31/05 4,970,881 18,983 Coinmach Laundry Corp. (laundry) Term B 06/30/05 18,952,500 5,618 Papa Gino's, Inc. (quick service restaurants) Term A 02/19/02 5,617,820 14,970 Papa Gino's, Inc. Term B 02/19/04 14,969,530 15,000 SC International Services (airline catering) Term 06/01/05 15,000,000 6,500 24-Hour Fitness, Inc. (health club operator) Term A 12/31/02 6,500,000 13,500 24-Hour Fitness, Inc. Term B 12/31/04 13,500,000 ----------- 93,385,321 ----------- PERSONAL AND NONDURABLE CONSUMER PRODUCTS (MANUFACTURING ONLY): 2.4% 1,186 @ AM Cosmetics (cosmetics and skin care products) Term A 06/30/03 1,008,013 8,687 @ AM Cosmetics Term B 12/31/04 7,384,362 4,013 Duo-Tang, Inc. (report cover manufacturer) Term A 12/31/02 4,012,755 5,285 Duo-Tang, Inc. Term B 12/31/02 5,285,437 9,404 Medtech Products, Inc. (non-prescription consumer medications) Term B 10/15/02 9,403,661 ----------- 27,094,228 ----------- PERSONAL TRANSPORTATION: 0.9% 10,000 Neoplan USA Corporation (personal transportation) Term B 05/29/05 10,000,000 ----------- 10,000,000 -----------
See Accompanying Notes to Financial Statements. 16 PILGRIM PRIME RATE TRUST - -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS as of August 31, 1998 (Unaudited) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT LOAN STATED (000'S) INDUSTRY/BORROWER TYPE MATURITY VALUE - --------- ----------------- ---- -------- ----- PRINTING AND PUBLISHING: 6.0% $8,978 American Color Graphics (commercial printing) Term B 06/04/05 $ 8,977,500 6,738 Bankers Systems, Inc. (banking industry compliance services) Term B 11/01/02 6,737,500 18,958 Eastern Pulp & Paper Corporation (specialty paper) Term 08/31/04 18,958,330 ,000 Jefferson Smurfit (pulp and paper products) Term B 03/23/06 8,000,000 12,250 Stone Container (pulp and paper products) Term D 10/01/03 12,250,000 3,336 Von Hoffman Press, Inc. (textbook manufacturer) Term B 05/29/04 3,335,714 10,829 Von Hoffman Press, Inc. Term C 05/29/05 10,828,571 ------------ 69,087,615 ------------ RETAIL STORES: 4.2% 6,916 Color Tile, Inc. (home improvement retailer) (3) Term D 12/31/98 2,005,576 12,308 Murray's Discount Auto Parts (auto parts retailer) Term 06/30/03 12,307,692 4,981 Nebraska Book Co. (wholesale and retail textbooks) Term B 04/30/04 4,980,769 5,080 Peebles, Inc. (department store chain) Term A 04/30/01 5,080,325 12,969 Peebles, Inc. Term B 04/30/02 12,969,496 2,240 Renters Choice, Inc. (consumer goods rent to own) Term B 01/31/06 2,239,688 2,746 Renters Choice, Inc. Term C 01/31/07 2,746,181 5,953 TravelCenters of America (road transport service centers) Term B 03/27/05 5,953,125 ------------ 48,282,852 ------------ TELECOMMUNICATIONS: 12.7% 10,000 American Wireless Corporation (rural cellular phone operator) Term B 06/04/07 10,000,000 10,000 American Wireless Corporation Term C 12/04/97 10,000,000 8,817 Claricom Holdings, Inc. (communication systems) Term B 07/01/03 8,816,531 8,120 Commnet (cellular phones) Term A 09/30/05 8,120,000 1,173 Commnet Term B 09/18/06 1,172,903 2,323 Commnet Term C 03/18/07 2,322,920 6,504 Commnet Term D 09/18/07 6,504,177 26,500 Nextel Finance Co. (cellular phones) Term B 09/30/06 26,500,000 1,750 Nextel Finance Co. Term A 06/30/03 1,750,000 1,862 Nextel Finance Co. Revolver 06/30/03 1,862,000 10,364 Omnipoint Communications, Inc. (cellular phones) Term A 02/17/06 10,363,695 5,084 Omnipoint Communications, Inc. Term B 02/17/06 5,083,886 302 Omnipoint Communications, Inc. Term C 02/23/06 3,024,776 2,582 Pacific Coin (private pay phone operator) Term A 12/31/02 2,581,967 6,728 Pacific Coin Term B 12/31/04 6,727,500 9,474 Prodelin Holding Corporation (satellite antenna manufacturer) Term B 05/28/06 9,473,684 10,000 Teletouch Communications (rural paging services) Term B 11/30/04 10,000,000 12,000 TSR Wireless, LLC (wireless messaging) Term 06/30/05 12,000,000 10,000 Western PCS Corporation (wireless digital comm. provider) Term B 07/09/05 10,000,000 ------------ 146,304,039 ------------
See Accompanying Notes to Financial Statements. 17 PILGRIM PRIME RATE TRUST - -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS as of August 31, 1998 (Unaudited) - --------------------------------------------------------------------------------
PRINCIPAL AMOUNT LOAN STATED (000'S) INDUSTRY/BORROWER TYPE MATURITY VALUE - --------- ----------------- ---- -------- ----- TEXTILES AND LEATHER: 4.6% $10,000 Accessory Network Group (personal clothing accessories) Term B 08/13/05 $ 10,000,000 6,242 Harriet & Henderson (yarn manufacturer) Term A 06/12/00 6,241,578 6,790 Humphreys, Inc. (belts and personal leather goods) Term B 11/15/03 6,790,000 9,960 Polymer Group (polyolefin products manufacturer) Term B 01/31/06 9,960,000 8,528 Targus Group International, Inc. (luggage) Term B 01/05/05 8,528,079 1,427 Targus Group International, Inc. Term C 01/05/05 1,427,294 10,000 Tartan Textile Services (linen rental services) Term B 05/13/05 10,000,000 -------------- 52,946,951 -------------- Total Senior Loans -- 141.2% 1,626,434,169 -------------- (Cost $1,635,368,441) OTHER CORPORATE DEBT FINANCE: 0.9% 10,000 Value Asset Management, Inc. (money management) Snr. Sub. 04/28/99 10,000,000 -------------- CHEMICALS, PLASTICS AND RUBBER: 0.2% 2,875 Paint Sundry Brands, LLC (paint brushes & accessories) Snr. Sub. 08/11/05 2,875,000 -------------- DIVERSIFIED/CONGLOMERATE MANUFACTURING: 0.5% 6,000 Capital Tool & Design (brake backing plates) Sub. Note 07/26/03 6,000,000 -------------- Total Other Corporate Debt -- 1.6% 18,875,000 -------------- (Cost $18,875,000) COMMON STOCK AND PREFERRED STOCK SHARES ------ APPAREL PRODUCTS: 0.0% 13,294 @ Butterick Company, Inc. (sewing aids) 12,557 ------------- DIVERSIFIED/CONGLOMERATE MANUFACTURING: 0.0% 2,633 @ KDI Corp. -- common (defense and leisure products) (2) -- ------------- DIVERSIFIED/CONGLOMERATE SERVICES: 0.1% 60,056 @ Staff Leasing, Inc. (employee leasing) (R) 810,756 ------------- RESTAURANTS: 0.3% 413,980 @ America's Favorite Chicken Co. -- common (quick service restaurant chain) (R) 3,645,508 ------------- TEXTILES AND LEATHER: 0.1% 127,306 @ Dan River, Inc. -- common (diversified textiles) (R) 1,489,480 ------------- Total Common Stock and Preferred Stock -- 0.5% 5,958,301 ------------- (Cost $1,247,811)
See Accompanying Notes to Financial Statements. 18 PILGRIM PRIME RATE TRUST - -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS as of August 31, 1998 (Unaudited) - -------------------------------------------------------------------------------- STOCK PURCHASE WARRANTS AND OTHER SECURITIES
SHARES VALUE ------ ----- 1 @ Autotote Systems, Inc., Warrant representing 48,930 common shares (designer and manufacturer of wagering equipment), Expires 10/30/03 (R) $ 56,025 1 @ Autotote Systems, Inc., Option representing 0.248% common shares issued and outstanding (R) -- 80,634 @ Capital Tool & Design, Warrants representing 80,634 common shares (brake backing plates) (R) 143,528 19,000 @ Covenant Care, Inc., Warrants representing 19,000 common shares (long-term healthcare facilities) (R) 285,000 26,606 @ KDI Corp. Units of Trust (defense and leisure products) (R)(2) -- -------------- Total Stock Purchase Warrants and Other Securities -- 0.0% 484,553 -------------- (Cost $0) TOTAL INVESTMENTS (COST $1,655,491,252) (5) 143.3% $1,651,752,023 LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS -- NET (43.3)% (499,160,519) ---------- -------------- Net Assets 100.0% $1,152,591,504 ========== ==============
- ---------------- @ Non-income producing security (A) Axel describes an amortizing extended term loan with limited call protection. (R) Restricted security * Senior loans, while exempt from registration under the Securities Act of 1933, contain certain restrictions on resale and cannot be sold publicly. These senior loans bear interest (unless otherwise noted) at rates that float periodically at a margin above the Prime Rate of a U.S. bank specified in the credit agreement, LIBOR, the certificate of deposit rate, or in some cases another base lending rate. (1) The borrower has entered into a forebearance agreement pending sale of the company or refinance of this debt. (2) The borrower filed for protection under Chapter 7 of the U.S. Federal bankruptcy code and is in the process of liquidation. (3) The borrower filed for protection under Chapter 11 of the U.S. Federal bankruptcy code and is in the process of developing a plan of reorganization. (4) The borrower is restructuring and interest is being recognized as cash payments are received. (5) For Federal income tax purposes, which is the same for financial reporting purposes, cost of investments is $1,655,491,252 and net unrealized depreciation consists of the following: Gross Unrealized Appreciation $ 5,274,235 Gross Unrealized Depreciation (9,013,464) ----------- Net Unrealized Depreciation $(3,739,229) =========== See Accompanying Notes to Financial Statements. 19 PILGRIM PRIME RATE TRUST - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILTIES as of August 31, 1998 (Unaudited) - -------------------------------------------------------------------------------- ASSETS: Cash $ 51,389 Investments in securities at value (Cost $1,655,491,252) 1,651,752,023 Receivables: Fund shares sold 488,014 Interest 16,032,214 Other 80,785 Prepaid expenses 938,625 Prepaid arrangement fees on notes payable 412,265 --------------- Total assets 1,669,755,315 --------------- LIABILITIES: Notes payable 509,000,000 Deferred arrangement fees on senior loans 3,477,789 Accrued interest payable 4,101,468 Accrued expenses 584,554 --------------- Total liabilities 517,163,811 --------------- NET ASSETS (equivalent to $9.32 per share, based on 123,649,679 shares of beneficial interest authorized and outstanding, no par value) $ 1,152,591,504 =============== Net Assets Consist of: Paid-in capital $ 1,174,282,745 Undistributed net investment income 12,475,716 Accumulated net realized loss on investments (30,427,728) Net unrealized depreciation of investments (3,739,229) --------------- Net assets $ 1,152,591,504 =============== See Accompanying Notes to Financial Statements. 20 PILGRIM PRIME RATE TRUST - -------------------------------------------------------------------------------- STATEMENT OF OPERATIONS for the Six Months Ended August 31, 1998 (Unaudited) - -------------------------------------------------------------------------------- INVESTMENT INCOME: Interest $ 66,503,413 Arrangement fees earned 2,481,784 Other 852,311 ------------ Total investment income 69,837,508 ------------ EXPENSES: Interest 13,813,335 Investment management fees 5,673,671 Administration fees 972,918 Revolving credit facility fees 375,356 Miscellaneous expense 352,798 Reports to shareholders 262,751 Custodian fees 278,958 Transfer agent and registrar fees 218,173 Recordkeeping and pricing fees 99,757 Professional fees 96,548 Insurance expense 39,343 Trustees' fees 27,726 ------------ Total expenses 22,211,334 Less: Earnings credits (26,596) ------------ Net expenses 22,184,738 ------------ Net investment income 47,652,770 ------------ REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENTS: Net realized loss on investments (58,171) Change in unrealized depreciation of investments (5,319,355) ------------ Net loss on investments (5,377,526) ------------ Net increase in net assets resulting from operations $ 42,275,244 ============ See Accompanying Notes to Financial Statements. 21 PILGRIM PRIME RATE TRUST - -------------------------------------------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- SIX MONTHS ENDED YEAR AUGUST 31, ENDED 1998 FEBRUARY 28, (UNAUDITED) 1998 ----------- ------------ INCREASE IN NET ASSETS FROM OPERATIONS: Net investment income $ 47,652,770 $ 95,217,224 Net realized loss on investments (58,171) (18,935,269) Change in unrealized appreciation (depreciation) on investments (5,319,355) 5,319,483 -------------- -------------- Net increase in net assets resulting from operations 42,275,244 81,601,438 DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment income (47,103,768) (93,879,672) CAPITAL SHARE TRANSACTIONS: Issuance from dividend reinvestment 7,481,037 15,591,705 Net increase in net assets derived from the sale of shares in connection with shelf offering 115,536,181 -- -------------- -------------- Net increase from capital share transactions 123,017,218 15,591,705 Total increase in net assets 118,188,694 3,313,471 NET ASSETS: Beginning of period 1,034,402,810 1,031,089,339 -------------- -------------- End of period (including undistributed net investment income of $12,475,716 and $11,926,714 respectively) $1,152,591,504 $1,034,402,810 ============== ============== SUMMARY OF CAPITAL SHARE TRANSACTIONS: Shares issued in payment of distributions from net investment income 785,537 1,624,659 Shares sold in connection with shelf offering 12,099,720 -- -------------- -------------- Net increase in shares outstanding 12,885,257 1,624,659 ============== ============== See Accompanying Notes to Financial Statements. 22 PILGRIM PRIME RATE TRUST - -------------------------------------------------------------------------------- STATEMENT OF CASH FLOWS for the Six Months Ended August 31, 1998 (Unaudited) - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH CASH FLOWS FROM OPERATING ACTIVITIES: Interest received $ 63,792,801 Facility fees received 2,384,326 Commitment fees received 141,047 Other income received 944,493 Interest paid (11,529,898) Other operating expenses paid (8,815,721) Purchases of portfolio securities (1,002,826,959) Proceeds from disposition of portfolio securities 719,065,223 --------------- Net cash used for operating activities (236,844,688) --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid (39,622,731) Overdraft financing (6,017,373) Proceeds from share offerings 115,536,181 Loan advance 167,000,000 --------------- Net cash provided by financing activities 236,896,077 --------------- Net change in cash 51,389 Cash at beginning of year -- --------------- Cash at end of year $ 51,389 =============== 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 $ 42,275,244 --------------- Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities: Increase in investments in securities (284,486,743) Increase in dividends and interest receivable (3,016,734) Increase in receivable for fund shares sold (488,014) Decrease in other assets 6,930,280 Increase in prepaid arrangement fees on notes payable (919) Increase in prepaid expenses (525,198) Increase in deferred arrangement fees on senior loans 88,069 Increase in accrued interest payable 2,587,639 Decrease in accrued expenses (208,312) --------------- Total adjustments (279,119,932) --------------- Net cash used for operating activities $ (236,844,688) =============== See Accompanying Notes to Financial Statements. 23 PILGRIM PRIME RATE TRUST - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS - --------------------------------------------------------------------------------
SIX MONTHS ENDED YEARS ENDED FEBRUARY 28 OR FEBRUARY 29, AUGUST 31, 1998 ----------------------------------------------------- (UNAUDITED) 1998 1997(7) 1996(6) 1995 1994 ----------- ---- ------- ------- ---- ---- PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $ 9.34 $ 9.45 $ 9.61 $ 9.66 $ 10.02 $ 10.05 Net investment income 0.40 0.87 0.82 0.89 0.74 0.60 Net realized and unrealized gain (loss) on investments (0.03) (0.13) (0.02) (0.08) 0.07 (0.05) ---------- ---------- ---------- -------- -------- -------- Increase in net asset value from investment operations 0.37 0.74 0.80 0.81 0.81 0.55 Distributions from net investment income (0.41) (0.85) (0.82) (0.86) (0.73) (0.60) Increase in net asset value from share offerings 0.02 -- -- -- -- -- Reduction in net asset value from rights offering -- -- (0.14) -- (0.44) -- Increase in net asset value from repurchase of capital stock -- -- -- -- -- 0.02 ---------- ---------- ---------- -------- -------- -------- Net asset value, end of period $ 9.32 $ 9.34 $ 9.45 $ 9.61 $ 9.66 $ 10.02 ========== ========== ========== ======== ======== ======== Closing market price at end of period $ 10.00 $ 10.31 $ 10.00 $ 9.50 $ 8.75 $ 9.25 TOTAL RETURN Total investment return at closing market price(3) 1.21% 12.70% 15.04% 19.19% 3.27% 8.06% Total investment return at net asset value(4) 4.15% 8.01% 8.06% 9.21% 5.24% 6.28% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) $1,152,592 $1,034,403 $1,031,089 $862,938 $867,083 $719,979 Average borrowings (000's) $ 452,049 $ 346,110 $ 131,773 $ -- $ -- $ -- Ratios to average net assets plus borrowings: Expenses (before interest and other fees related to revolving credit facility) 1.04% (1) 1.04% 1.13% -- -- -- Expenses 2.88% (1) 2.65% 1.92% -- -- -- Net investment income 6.18% (1) 6.91% 7.59% -- -- -- Ratios to average net assets: Expenses (before interest and other fees related to revolving credit facility) 1.47% (1) 1.39% 1.29% -- -- -- Expenses 4.08% (1) 3.54% 2.20% 1.23% 1.30% 1.31% Net investment income 8.77% (1) 9.23% 8.67% 9.23% 7.59% 6.04% Portfolio turnover rate 47% 90% 82% 88% 108% 87% Shares outstanding at end of period (000's) 123,650 110,764 109,140 89,794 89,794 71,835
- ------------ (1) Annualized. (2) Prior to the waiver of expenses, the ratios of expenses to average net assets were 1.95% (annualized), 1.48% and 1.44% for the period from May 12, 1988 to February 28, 1989, and for the fiscal years ended February 28, 1990 and February 29, 1992, respectively, and the ratios of net investment income to average net assets were 8.91% (annualized), 10.30% and 7.60% for the period from May 12, 1988 to February 28, 1989, and for the fiscal years ended February 28, 1990 and February 29, 1992, respectively. (3) Total investment return measures the change in the market value of your investment assuming reinvestment of dividends and capital gain distributions, if any, in accordance with the provisions of the dividend reinvestment plan. On March 9, 1992, the shares of the Trust were initially listed for trading on the New York Stock Exchange. Accordingly, the total investment return for the year ended February 28, 1993, covers only the period from March 9, 1992, to February 28, 1993. Total investment return for periods prior to the year ended February 28, 1993, are not presented since market values for the Trust's shares were not available. Total returns for less than one year are not annualized. See Accompanying Notes to Financial Statements. 24 PILGRIM PRIME RATE TRUST - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (Continued) - -------------------------------------------------------------------------------- YEARS ENDED FEBRUARY 28 OR FEBRUARY 29, ---------------------------------------------------------------- 1993 1992 1991 1990 1989 ---- ---- ---- ---- ---- $ 9.96 $ 9.97 $ 10.00 $ 10.00 $ 10.00 0.60 0.76 0.98 1.06 0.72 0.01 (0.02) (0.05) -- -- -------- ------- ---------- --------- -------- 0.61 0.74 0.93 1.06 0.72 (0.57) (0.75) (0.96) (1.06) (0.72) -- -- -- -- -- -- -- -- -- -- 0.05 -- -- -- -- -------- ------- ---------- --------- -------- $ 10.05 $ 9.96 $ 9.97 $ 10.00 $ 10.00 ======== ======= ========== ========= ======== $ 9.13 -- -- -- -- 10.89% -- -- -- -- 7.29% 7.71% 9.74% 11.13% 7.35% $738,810 $874,104 $1,158,224 $1,036,470 $252,998 $ -- $ -- $ -- $ -- $ -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- 1.42% 1.42% (2) 1.38% 1.46% (2) 1.18% (1)(2) 5.88% 7.62% (2) 9.71% 10.32% (2) 9.68% (1)(2) 81% 53% 55% 100% 49% (1) 73,544 87,782 116,022 103,660 25,294 - ------------ (4) Total investment return at net asset value has been calculated assuming a purchase at net asset value at the beginning of each period and a sale at net asset value at the end of each period and assumes reinvestment of dividends and capital gain distributions in accordance with the provisions of the dividend reinvestment plan. This calculation differs from total investment return because it excludes the effects of changes in the market values of the Trust's shares. Total returns for less than one year are not annualized. (5) Calculation of total return excludes the effects of the per share dilution resulting from the rights offering as the total account value of a fully subscribed shareholder was minimally impacted. (6) Pilgrim America Investments, Inc., the Trust's investment manager, acquired certain assets of Pilgrim Management Corporation, the Trust's former investment manager, in a transaction that closed on April 7, 1995. (7) The Manager has agreed to reduce its fee for a period of three years from the Expiration Date of the November 12, 1996 Rights Offering to 0.60% of the average daily net assets, plus the proceeds of any outstanding borrowings, over $1.15 billion. See Accompanying Notes to Financial Statements. 25 PILGRIM PRIME RATE TRUST - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS as of August 31, 1998 (Unaudited) - -------------------------------------------------------------------------------- NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES Pilgrim Prime Rate Trust (the "Trust", prior to November 16, 1998 Pilgrim America Prime Rate 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. Security Valuation. Senior loans are valued at fair value in the absence of readily ascertainable market values. 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 28, 1998, the Trust had capital loss carryforwards for federal income tax purposes of approximately $19,738,326 which are scheduled to expire through February 28, 2006. The Board of Trustees intends to offset any future net capital gains with 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. Realized gains or losses are reported on the basis of identified cost of securities delivered. Interest income is recorded on an accrual basis at the then current loan rate, and dividend income is recorded on the ex-dividend date. The accrual of interest on loans is discontinued when, in the opinion of management, there is an indication that the borrower may be unable to meet payments as they become due. Upon such discontinuance, all unpaid accrued interest is reversed. Cash collections on nonaccrual senior loans are generally applied as a reduction to the recorded investment of the loan. Senior loans are returned to accrual status only after all past due amounts have been received and the borrower has demonstrated sustained performance. Arrangement fees, which represent non-refundable fees associated with the acquisition of loans, are deferred and recognized ratably over the shorter of 2.5 years or the actual term of the loan. 26 PILGRIM PRIME RATE TRUST - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS as of August 31, 1998 (Unaudited) - -------------------------------------------------------------------------------- D. Distributions to Shareholders. The Trust records distributions to its shareholders on the ex-date. Distributions from income are declared by the Trust on a monthly basis. Distributions from capital gains, if any, are declared on at least an annual basis. The amount of distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations, which may differ from generally accepted accounting principles. These "book/tax" differences are either considered temporary or permanent in nature. Key differences are the treatment of short-term capital gains and other temporary differences. To the extent that these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment; temporary differences do not require reclassifications. Distributions which exceed net investment income and net realized capital gains for financial reporting purposes but not for tax purposes are reported as distributions in excess of net investment income and/or realized capital gains. To the extent they exceed net investment income and net realized capital gains for tax purposes, they are reported as a tax return of capital. E. Dividend Reinvestments. Pursuant to the Shareholder Investment Program (formerly known as the Automatic Dividend Reinvestment Plan), DST Systems, Inc., the Plan Agent, purchased, from time to time, shares of beneficial interest of the Trust on the open market to satisfy dividend reinvestments. Such shares were purchased only when the closing sale or bid price plus commission was less than the net asset value per share of the stock on the valuation date. If the market price plus commissions was equal to or exceeded the net asset value, 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%. 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. G. Share Offerings. Beginning May, 1998 the Trust began issuing shares under two separate 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, 1998, the cost of purchases and the proceeds from principal repayment and sales of investments, excluding short-term notes, totaled $1,002,826,959 and $719,065,223, respectively. At August 31, 1998, the Trust held senior loans valued at $1,626,434,169 representing 98.5% of its total investments. The market value of these securities can only be established by negotiation between parties in a sales transaction. Due to the uncertainty inherent in the valuation process, the fair values as determined may materially differ from the market values that would have been used had a ready market for these securities existed. The senior loans acquired by the Trust may take the form of a direct co-lending relationship with the corporate issuer, an assignment of a co-lender's interest in a loan, or a participation interest in a co-lender's interest in a loan. The lead lender in a typical corporate loan syndicate administers the loan and monitors collateral. In the event that the lead lender becomes insolvent, enters FDIC receivership or, if not FDIC insured, enters into bankruptcy, the Trust may incur certain costs and delays in realizing payment, or may suffer a loss of principal and/or interest. Additionally, certain situations may arise where the Trust acquires a participation in a co-lender's interest in a loan and the Trust does not have privity with or direct recourse against the corporate issuer. Accordingly, the Trust may incur additional credit risk as a participant because it must assume the risk of insolvency or bankruptcy of the co-lender from which the participation was acquired. Common and preferred stocks, and stock purchase warrants held in the portfolio were acquired in conjunction with senior loans held by the Trust. Certain of these stocks and warrants are restricted and may not be publicly sold without registration under the '33 Act, or without an exemption under the '33 Act. In some cases, these restrictions expire after a designated 27 PILGRIM PRIME RATE TRUST - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS as of August 31, 1998 (Unaudited) - -------------------------------------------------------------------------------- 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 ----------- -------------- America's Favorite Chicken Co. -- Common 11/05/92 $ 1 Autotote Systems, Inc. -- Option 11/11/92 -- Autotote Systems, Inc. -- Warrant 11/11/92 -- Capital Tool & Design -- Warrants 07/26/96 -- Covenant Care, Inc. -- Warrants 12/22/95 -- Dan River, Inc. -- Common 09/15/91 1,217,260 KDI Corp. Units of Trust 09/19/95 -- Staff Leasing, Inc. 09/01/95 30,550 ---------- Total restricted securities excluding senior loans (market value of $6,430,297 was 0.56% of net assets at August 31, 1998) $1,247,811 ========== NOTE 3 -- MANAGEMENT AND ADMINISTRATIVE SERVICES AGREEMENT The Trust has entered into an Investment Management Agreement with Pilgrim Investments, Inc. (the "Manager") a wholly-owned subsidiary of 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. Prior to August 6, 1998, the Investment Management Agreement compensated the Manager at an annual rate of 0.85% of the Trust's average daily net assets plus borrowings up to $700 million; 0.75% of the average daily net assets plus borrowings of $700 million to $800 million; and 0.65% of average daily net assets plus borrowings in excess of $800 million. The Manager has reduced its fee for a period of three years from the Expiration Date of the November 12, 1996 Rights Offering (See Note 5) to 0.60% of the average daily net assets, plus the proceeds of any outstanding borrowings, over $1.15 billion. The Trust has also entered into an Administration Agreement with PG to provide administrative services and also to furnish facilities. The Administration Agreement compensates the Administrator with a fee, computed daily and payable monthly, at an annual rate of 0.15% of the Trust's average daily net assets plus borrowings up to $800 million; and 0.10% of the average daily net assets plus borrowings in excess of $800 million. NOTE 4 -- COMMITMENTS The Trust has entered into both a 364 day and a five year revolving credit agreement to borrow up to $650 million from a syndicate of major financial institutions maturing July 16, 2003. Borrowing rates under these agreements are based on a fixed spread over LIBOR, the federal funds rate, or a commercial paper based rate. The Trust also pays an unused arrangement fee for any unborrowed amount amortized over 364 days and five years, respectively. The amount of borrowings outstanding at August 31, 1998, was $509 million at a weighted average interest rate of 5.9%, which represented 30.6% of net assets plus borrowings. Average borrowings for the six months ended August 31, 1998, were $452,049,180 and the average annualized interest rate was 6.1%. 28 PILGRIM PRIME RATE TRUST - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS as of August 31, 1998 (Unaudited) - -------------------------------------------------------------------------------- As of August 31, 1998, the Trust had unfunded loan commitments pursuant to the terms of the following loan agreements: Capstar Radio $ 2,433,684 Nextel Finance $ 3,388,000 Edward's Baking Co. 674,090 Palace Stations 35,831 Huntsman Corp. 954,660 Papa Gino's, Inc. 3,178,808 Liberman Broadcasting, Inc. 224,000 Stores Pathmark 3,834,711 Gaylord Container 9,103,448 ----------- $23,827,232 =========== NOTE 5 -- RIGHTS OFFERINGS On October 18, 1996, the Trust issued to its shareholders transferable rights which entitled the holders to subscribe for 18,122,963 shares of the Trust's common stock at the rate of one share of common stock for each five rights held. On November 12, 1996, the offering expired and was fully subscribed. The Trust issued 18,122,963 shares of its common stock to exercising rights holders at a subscription price of $9.09 . Offering costs of $6,972,203 were charged against the offering proceeds. On December 27, 1994, the Trust issued to its shareholders non-transferable rights which entitled the holders to subscribe for 17,958,766 shares of the Trust's common stock at the rate of one share of common stock for each four rights held. On January 27, 1995, the offering expired and was fully subscribed. The Trust issued 17,958,766 shares of its common stock to exercising rights holders at a subscription price of $8.12. Offering costs of $4,470,955 were charged against the offering proceeds. NOTE 6 -- CUSTODIAL AGREEMENT Investors Fiduciary Trust Company ("IFTC") serves as the Trust's custodian and recordkeeper. Custody fees paid to IFTC are reduced by earnings credits based on the cash balances held by IFTC for the Trust. For the six months ended August 31, 1998, the Trust received $26,596 in earnings credits from IFTC. NOTE 7 -- AFFILIATED TRANSACTIONS During the six months ended August 31, 1998, the Trust sold certain holdings in senior loans to an affiliated fund managed by the Manager at prices determined by the Manager to represent market prices. The proceeds and cost of such loans were $20,022,920 and $20,000,000, respectively, excluding any benefit to the Trust from the recognition of deferred arrangement fees. NOTE 8 -- SUBSEQUENT EVENTS Subsequent to August 31, 1998, the Trust declared the following dividends from net investment income: PER SHARE AMOUNT DECLARATION DATE RECORD DATE PAYABLE DATE - ---------------- ---------------- ----------- ------------ $0.0690 08/31/98 09/10/98 09/22/98 $0.0680 09/28/98 10/13/98 10/22/98 29 PILGRIM PRIME RATE TRUST - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS as of August 31, 1998 (Unaudited) - -------------------------------------------------------------------------------- MANAGEMENT'S ADDITIONAL OPERATING INFORMATION 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 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. 30 THIS PAGE INTENTIONALLY LEFT BLANK 31 THIS PAGE INTENTIONALLY LEFT BLANK 32 PILGRIM PRIME RATE TRUST - -------------------------------------------------------------------------------- FUND ADVISORS AND AGENTS - -------------------------------------------------------------------------------- INVESTMENT MANAGER INSTITUTIONAL INVESTORS AND ANALYSTS Pilgrim Investments, Inc. Call Pilgrim Prime Rate Trust Two Renaissance Square 1-800-336-3436, Extension 8256 40 North Central Avenue Suite 1200 Phoenix, Arizona 85004-4424 SHAREHOLDER SERVICING AGENT TRANSFER AGENT Pilgrim Group, Inc. DST Systems, Inc. Two Renaissance Square P.O. Box 419368 40 North Central Avenue Kansas City, Missouri 64141 Suite 1200 Phoenix, Arizona 85004-4424 1-800-992-0180 INDEPENDENT AUDITORS CUSTODIAN KPMG Peat Marwick LLP Investors Fiduciary Trust Company 725 South Figueroa Street 801 Pennsylvania Los Angeles, California 90017 Kansas City, Missouri 64105 WRITTEN REQUESTS Please mail all account inquiries and other comments to: Pilgrim Prime Rate Trust Account Services c/o Pilgrim Group, Inc. Two Renaissance Square 40 North Central Avenue, Suite 1200 Phoenix, Arizona 85004-4424 TOLL-FREE SHAREHOLDER INFORMATION Call us from 9:00 a.m. to 7:00 p.m. Eastern time on any business day for account or other information, at 1-800-992-0180. 33 PILGRIM(sm) THE VALUE OF INVESTING(R) MagnaCap Fund LargeCap Leaders Fund MidCap Value Fund Bank and Thrift Fund Asia-Pacific Equity Fund High Yield Fund Government Securities Income Fund --------------------------------------------------------------------------- Q2 Prospectuses containing more complete information regarding the funds, including charges and expenses, may be obtained by calling Pilgrim Securities, Inc., Distributor at 1-800-334-4444. Please read the prospectuses carefully before you invest or send money. 13-SS-093098 103098 -----END PRIVACY-ENHANCED MESSAGE-----