-----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, DKw0mqujWq4TBD+T9NoA1nYztqXh3oiAHDJfnBDsCe+XmqZJc7vKO+FRwPmThaEZ UUjmfv2f47QJmyA5GcidCQ== 0000950147-99-000431.txt : 19990510 0000950147-99-000431.hdr.sgml : 19990510 ACCESSION NUMBER: 0000950147-99-000431 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990507 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: 99613586 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 ANNUAL REPORT FOR THE YEAR ENDED 2/28/99 Pilgrim(SM) - ------- THE VALUE OF INVESTING(R) P r i m e R a t e T r u s t Annual Report - -------------------------------------------------------------------------------- February 28, 1999 Annual Report Pilgrim Prime Rate Trust ANNUAL REPORT February 28, 1999 -------- 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 ...... 20 Statement of Operations .................. 21 Statements of Changes in Net Assets ...... 22 Statement of Cash Flows .................. 23 Financial Highlights ..................... 24 Notes to Financial Statements ............ 26 Report of Independent Auditors ............ 31 Tax Information ........................... 32 Fund Advisors and Agents .................. 33 -------- 1 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- CHAIRMAN'S MESSAGE - -------------------------------------------------------------------------------- Dear Shareholder: We are pleased to present the 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 twelve month results a reflection of the Pilgrim Investment, 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 Pilgrim Group, Inc. April 23, 1999 2 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- LETTER TO SHAREHOLDERS - -------------------------------------------------------------------------------- Dear Fellow Shareholders, The objective of Pilgrim Prime Rate Trust is to provide a high level of current income consistent with the preservation of capital. During the fiscal year, which ended on February 28, 1999, the Trust declared distributions to shareholders totaling $0.813 per share. Based on the average month-end net asset value ("NAV") per share, this distribution rate is equivalent to 8.74%(1) per anum. If compared with average closing prices for the Trust's stock at the end of each month, the distribution rate, based on market was equivalent to 8.26%(1) per anum. Interest rates generally fell in the second half of the fiscal year. The Trust's distribution rates for the period from January 1, 1991 through February 28, 1999 in relation to the Prime Rate and LIBOR, an index of the rate of interest at which banks lend to one another, is shown in Chart I. Comparative Performance -- Trailing 12 Month Average Prime Rate Trust (2) Prime Rate (3) 60-Day LIBOR (4) -------------------- -------------- ---------------- Jan-91 9.675% 9.917% 8.063% Jan-92 7.739 8.125 5.574 Jan-93 6.203 6.208 3.677 Jan-94 5.955 6.000 3.214 Jan-95 7.288 7.458 4.927 Jan-96 8.886 8.813 5.812 Jan-97 8.569 8.250 5.422 Jan-98 8.780 8.479 5.639 Jan-99 8.764 8.250 5.420 Chart I Past performance is no guarantee of future results. The Trust's month-end net asset value ranged between $9.36 and $9.23. Financial assets generally experienced a relatively high degree of volatility in the second half of the fiscal year. Senior floating rate loans experienced less volatility, but were not immune to the gyrations seen in the bond and equity markets. Some of the market changes, which led to the relatively lower degree of stability in the third and fourth fiscal quarters, may continue. Nevertheless, the stability of the senior floating rate loan asset class relative to the bond and equity markets, has remained fundamentally undisturbed as shown in Chart II which illustrates volatility in the S&P 500, Merrill Lynch High Yield Corporate Bond Domestic Cash Pay Index and the Trust's net asset value(5). WEEKLY VALUE VARIANCES WEEKLY VALUE VARIANCES ---------------------- ---------------------- 3/6/98 0.0000% 0.0000% 0.0000% 9/4/98 0.1073% -5.1843% -1.1530% 3/13/98 0.2153% 1.2238% 0.4876% 9/11/98 -0.6431% 3.6113% -0.4323% 3/20/98 0.2148% 2.8589% 0.3571% 9/18/98 0.2157% 1.0931% 0.0561% 3/27/98 0.1072% -0.3384% 0.1385% 9/25/98 0.2153% 2.4174% 0.8161% 4/3/98 0.2141% 2.4885% 0.5362% 10/2/98 -0.1074% -4.0345% 0.2125% 4/9/98 -0.6410% -1.0715% -0.0018% 10/9/98 -0.6452% -1.8163% -2.8874% 4/17/98 0.2151% 1.0849% 0.1884% 10/16/98 0.2165% 7.3172% -0.3787% 4/24/98 0.1073% -1.3200% 0.0377% 10/23/98 0.1080% 1.3489% 0.8413% 5/1/98 0.1072% 1.1824% -0.0914% 10/30/98 0.1079% 2.6152% 0.8191% 5/8/98 -0.5353% -1.1472% 0.1388% 11/6/98 -0.5388% 3.8538% 0.7345% 5/15/98 0.2153% 0.0532% -0.0334% 11/13/98 0.1083% -1.3400% 1.5101% 5/22/98 0.2148% 0.1569% 0.1955% 11/20/98 0.2165% 3.3605% 1.1347% 5/29/98 0.3215% -1.7695% 0.2833% 11/27/98 0.1080% 2.4700% 0.7656% 6/5/98 0.1068% 2.1122% 0.2530% 12/4/98 0.2157% -1.3042% 0.4305% 6/12/98 -0.6403% -1.3485% 0.2915% 12/11/98 -0.5382% -0.8736% -0.0799% 6/19/98 0.1074% 0.1647% -0.1842% 12/18/98 0.1082% 1.8492% -0.2256% 6/26/98 0.2146% 2.9573% 0.1998% 12/24/98 0.2162% 3.2188% -0.1022% 7/2/98 0.1071% 1.1666% 0.1199% 12/31/98 -0.4315% 0.2414% 0.3704% 7/10/98 -0.5348% 1.5623% 0.2812% 1/8/99 0.2167% 3.7308% 0.3596% 7/17/98 0.0000% 1.9256% 0.0592% 1/15/99 0.1081% -2.4963% -0.1022% 7/24/98 0.2151% -3.8719% 0.2412% 1/22/99 0.1080% -1.4534% 0.3956% 7/31/98 0.1073% -1.7646% -0.1480% 1/29/99 0.0000% 4.4442% 0.2850% 8/7/98 -0.5359% -2.7858% -0.1317% 2/5/99 0.1079% -3.1446% -0.1497% 8/14/98 0.1078% -2.4508% -0.6916% 2/12/99 -0.5388% -0.7479% 0.0036% 8/21/98 0.2153% 1.7342% -0.6880% 2/19/99 0.0000% 0.7365% 0.0000% 8/28/98 0.1074% -4.9982% -2.1861% Chart II Past performance is no guarantee of future results. 3 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- LETTER TO SHAREHOLDERS - -------------------------------------------------------------------------------- MARKET PERFORMANCE The Trust's shares have continued to trade at a premium to NAV although the premium recently declined. During 1998, new higher yielding, New York Stock Exchange listed closed-end funds were launched raising more than $5.5 billion. Four of these funds, with over $2 billion in net assets, invest primarily in senior floating rate loans. This increase in competitive investment alternatives probably reduced demand for the Trust's shares. In October, the Trust's share price dipped to as low as $8.50, most likely because of hedge fund panic selling. By the end of February, the price had returned to $9.56. Chart III depicts the Trust's market price performance. DATE PRICE NAV % PREM ---- ----- --- ------ 7/31/98 10.000 9.330 7.18 7/24/98 9.938 9.320 6.63 7/17/98 10.000 9.300 7.53 7/10/98 10.000 9.300 7.62 6/26/98 9.938 9.340 6.40 6/19/98 9.938 9.320 6.63 6/12/98 10.000 9.310 7.41 6/5/98 10.125 9.370 8.06 5/29/98 10.250 9.360 9.51 5/22/98 10.188 9.330 9.19 5/15/98 10.188 9.310 9.43 5/8/98 10.063 9.290 8.32 5/1/98 10.125 9.340 8.40 4/24/98 10.000 9.330 7.18 4/17/98 10.063 9.320 7.97 4/10/98 9.938 9.300 6.85 4/3/98 10.063 9.360 7.51 3/27/98 9.875 9.340 5.73 3/20/98 10.000 9.330 7.18 3/13/98 10.125 9.310 8.75 3/6/98 10.250 9.290 10.33 2/26/99 9.563 9.240 3.49 2/19/99 9.500 9.230 2.93 2/12/99 9.500 9.230 2.93 2/5/99 9.438 9.280 1.70 1/29/99 9.563 9.270 3.16 1/22/99 9.438 9.270 1.81 1/15/99 9.313 9.260 .57 1/8/99 9.313 9.250 .68 1/1/99 9.313 9.230 .89 12/25/98 9.313 9.270 .46 12/18/98 9.250 9.250 .00 12/11/98 9.375 9.240 1.46 12/4/98 9.563 9.290 2.93 11/27/98 9.563 9.270 3.16 11/20/98 9.563 9.260 3.27 11/13/98 9.625 9.240 4.17 11/6/98 9.688 9.230 4.96 10/30/98 9.688 9.280 4.39 10/23/98 9.625 9.270 3.83 10/16/98 9.375 9.260 1.24 10/9/98 9.125 9.240 -1.24 10/2/98 9.938 9.300 6.85 9/25/98 9.938 9.310 6.74 9/18/98 9.938 9.290 6.97 9/11/98 10.000 9.270 7.87 9/4/98 10.016 9.330 7.35 8/28/98 10.000 9.320 7.30 8/21/98 10.000 9.310 7.41 8/14/98 10.063 9.290 8.32 8/7/98 10.000 9.280 7.76 In June 1998, the Trust introduced programs to allow existing shareholders and qualified institutional investors to acquire newly issued shares of the Trust at prices at or below market, but above NAV. Nearly 20 million new shares have been issued under these and other programs; increasing NAV by $0.03 per share. ASSET QUALITY In last year's letter to shareholders, we commented on the need to minimize non-performing assets towards the end of a period of economic expansion. The expansion is now twelve months older, but in some parts of the market there are scattered signs of financial stress. Some of these stresses have caused the percentage of non-performing loans in the portfolio to increase although poor quality assets remain within normal limits. As measured by number of loans, problems remain few and causes seem to be peculiar to each case rather than systemic. 4 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- LETTER TO SHAREHOLDERS - -------------------------------------------------------------------------------- As we continue our initial credit analysis and systematic review of portfolio investments, we find few signs of stress among credits arising from weak business models. Disappointments are nearly always connected to poor management or weak sponsorship by equity investors. Sometimes, previously strong management or equity sponsors have become ineffectual. We also have experienced the adverse consequences of poor diligence on the part of acquirers. In response to such events, we place higher emphasis on the quality, strength and depth of management and the goals of equity sponsors. Where equity sponsors have failed to meet our expectations and do not appear to have taken appropriate action in response to problems, we will not invest in transactions led by them until we have clear evidence that they intend to act more responsibly. In addition to our focus on the strength of management and equity sponsors, we also focus on the integrity of the credit monitoring and management function of lead lenders. We give lead lenders active support in their efforts to manage the loans in which the Trust invests. Our goal is to help lead lenders to optimize the quality of the Trust's investments and to offer ideas on how processes and practices might be improved to enhance credit management practices. Diversification remains our principal defense against defaults. Defaults are an inevitable consequence of investing in this asset class. Diversification seeks to ensure that the impact of failure to pay interest or suffer losses in the event of default is minimized. THE FOURTH QUARTER AND OUTLOOK The market dislocations which occurred during the summer and fall of 1998 resulted in a reduced supply of new deals and a lower but still favorable yield margin over LIBOR and the Prime Rate. Although the Trust's yield has declined, the Trust has outperformed its peer group(6). Of course, there can be no guarantees, however, we expect the yield based on the Trust's NAV to maintain its close historical relationship to Prime (currently 7.75%) and LIBOR + 2.75% (also approximately 7.75%) provided there are no material changes in defaults, interest rate levels or in the margins earned on investments. We look forward to receiving your comments and questions. /s/ Howard Tiffen Howard Tiffen President, COO, and Senior Portfolio Manager Pilgrim Prime Rate Trust April 23, 1999 5 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- SHAREHOLDER LETTER FOOTNOTES - -------------------------------------------------------------------------------- (1) Distribution rate is calculated by dividing the total distributions of $0.813 per share by the average month-end net asset value (in the case of NAV) or the average month-end NYSE Composite closing price (in the case of Market). The distribution rate is based solely on the actual dividends and distributions, which are made at the discretion of management. The distribution rate may or may not include all investment income, and ordinarily will not include capital gains or losses, if any. (2) The distribution rate in chart I is the average of the distribution rates for the preceding twelve months. Distribution rates are calculated by annualizing each monthly dividend and dividing the resulting annualized dividend amount by the Trust's net asset value at the end of that month. (3) Source: Bloomberg Financial Markets. (4) Source: IDD/Tradeline. The LIBOR rate is the London Inter-Bank Offered Rate and is the benchmark for determining the interest paid on more than 90% of the senior loans in the Trust's portfolio. (5) The Merrill Lynch High Yield Corporate Bond Domestic Cash Pay Index and the Standard and Poor's Index are unmanaged indexes. The Standard & Poor's Index is generally representative of the U.S. stock market. All returns reflect reinvestment of dividends and capital gains, if any. An investor cannot invest directly in an index. (6) Lipper ranked the Trust #1 for the 1, 3, 5 and 10 year periods among 8, 6, 5, and 1 loan participation funds for the periods ending February 28, 1999. Lipper ranked the Trust #2, #1, #1 and #1 among 10, 6, 5 and 1 loan participation funds for the 1, 3, 5 and 10 year periods ended March 31, 1999, respectively. Lipper ranked the Trust for total return through the periods, excluding sales charges and not reflecting the 1995 and 1996 rights offerings. Rankings reflect partial waiver of fees for some of the periods shown. Without such waivers, rankings may have been lower. 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 February 28, 1999 - -------------------------------------------------------------------------------- PORTFOLIO CHARACTERISTICS Net Assets $1,202,565,343 ----------------------------------------------------------------------- Assets Invested in Senior Loans* $1,700,208,675 ----------------------------------------------------------------------- Total Number of Senior Loans 164 ----------------------------------------------------------------------- Average Amount Outstanding per Loan $10,367,126 ----------------------------------------------------------------------- Total Number of Industries 30 ----------------------------------------------------------------------- Average Loan Amount per Industry $56,673,623 ----------------------------------------------------------------------- Portfolio Turnover Rate 68% ----------------------------------------------------------------------- Weighted Average Days to Interest Rate Reset 53 days ----------------------------------------------------------------------- Average Loan Maturity 65 months ----------------------------------------------------------------------- Average Age of Loans Held in Portfolio 11 months ----------------------------------------------------------------------- * Includes loans and other debt received through restructures TOP 10 INDUSTRIES AS A % OF NET ASSETS TOTAL ASSETS ---------- ------------ Healthcare, Education and Childcare 17.3% 11.9% Telecommunications 12.9% 8.9% Containers, Packaging and Glass 7.9% 5.4% Buildings and Real Estate 7.7% 5.3% Chemicals, Plastics and Rubber 7.5% 5.2% Broadcasting 6.9% 4.8% Personal, Food and Miscellaneous Services 6.9% 4.7% Aerospace and Defense 6.2% 4.2% Leisure, Amusement, Motion Pictures and Entertainment 6.1% 4.2% Beverage, Food and Tobacco 5.6% 3.9% TOP 10 SENIOR LOANS AS A % OF NET ASSETS TOTAL ASSETS ---------- ------------ Patriot American Hospitality 2.5% 1.7% Nextel Finance Co. 2.4% 1.6% Lyondell Petrochemical Company 2.2% 1.5% MAFCO Finance Corp. 2.1% 1.5% Community Health Systems, Inc. 2.0% 1.4% Jefferson Smurfit 2.0% 1.4% Omnipoint Corp. 1.9% 1.3% Ventas, Inc. 1.8% 1.2% Gaylord Container Corporation 1.7% 1.2% Florida Panthers Holdings, Inc. 1.7% 1.1% 7 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- STATISTICS AND PERFORMANCE as of February 28, 1999 - -------------------------------------------------------------------------------- YIELDS AND DISTRIBUTION RATES
(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 - ------------------------------------------------------------------------------------ February 28, 1999 7.75% 8.28% 7.99% 8.56% 8.27% - ------------------------------------------------------------------------------------ November 30, 1998 7.75% 9.02% 8.68% 8.74% 8.42% - ------------------------------------------------------------------------------------ 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% - ------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS NAV MKT - -------------------------------------------------------------------------------- 1 Year 7.86% 1.11% - -------------------------------------------------------------------------------- 3 Years 7.98% 9.44% - -------------------------------------------------------------------------------- 5 Years 8.29% 9.99% - -------------------------------------------------------------------------------- 10 Years 8.34% N/A - -------------------------------------------------------------------------------- Since Trust Inception F,H 8.41% N/A - -------------------------------------------------------------------------------- Since Initial Trading on NYSE G N/A 10.10% - -------------------------------------------------------------------------------- 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 each monthly dividend, then averaging the annualized dividends declared for each month during the quarter and dividing the resulting average 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 February 28, 1999 were 1.11% and 9.99% 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 February 28, 1999, was 9.58% 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. 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 1999 DIVIDENDS: DECLARATION DATE EX-DATE PAYABLE DATE ---------------- ------- ------------ January 29 February 8 February 23 February 26 March 8 March 22 March 31 April 8 April 22 April 30 May 6 May 24 May 28 June 8 June 22 June 30 July 8 July 22 July 30 August 6 August 23 August 31 September 8 September 22 September 30 October 6 October 22 October 28 November 8 November 22 November 30 December 8 December 22 December 20 December 28 January 13, 2000 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 February 28, 1999 - -------------------------------------------------------------------------------- SENIOR LOANS* (Dollar weighted portfolio interest reset period is 53 days)
Principal Amount Loan Stated (000's) Industry/Borrower Type Maturity Value - ------- ----------------- ---- -------- ----- AEROSPACE AND DEFENSE: 6.2% $8,843 Erickson Air-Crane Co. (heavy lift helicopters) Term B 12/31/04 $ 8,400,375 8,816 New Piper Aircraft, Inc. (aircraft manufacturer) Term 04/15/05 8,816,484 14,925 Nortek Aviation Support, Inc. (aviation services company) Term B 06/30/03 14,925,000 6,390 Piedmont Aviation Services (airport facility operator) Term B 07/23/06 6,389,830 6,390 Piedmont Aviation Services Term C 07/23/07 6,389,830 4,899 Technetics Corp. (aircraft engine components) Term 06/20/02 4,899,082 15,000 TRANSTAR (aluminum distribution) Term B 01/20/06 15,000,000 9,261 Tri Star/Odessy, Inc. (aerospace hardware distributor) Term 09/30/03 9,260,505 ------------ 74,081,106 ------------ AUTOMOBILE: 5.6% 4,963 Autosystems manufacturing, Inc. (automotive lighting) Term B 05/31/04 4,863,250 4,963 Autosystems manufacturing, Inc. Term C 05/31/05 4,863,250 14,438 Breed Technologies, Inc. (airbags/seatbelts) Term B 04/27/06 14,437,870 9,900 Cambridge Industries, Inc. (automotive plastics) Term B 06/30/06 9,900,000 9,380 Capital Tool & Design, Ltd. (brake backing plates) Term B 07/19/03 9,379,829 3,000 Federal Mogul Corp. (automotive parts) Term B 12/31/05 3,000,000 8,767 Global Metal Technologies, Inc. (automotive parts) Term B 03/12/05 8,767,420 5,978 Safelite Glass Corp. (automobile windshield replacement) Term B 12/23/04 5,978,143 5,978 Safelite Glass Corp. Term C 12/23/05 5,978,143 ------------ 67,167,905 ------------ BANKING: 0.8% 10,000 Alliance Data Systems (financial data processing) Term B 07/25/05 10,000,000 ------------ 10,000,000 ------------ BEVERAGE, FOOD AND TOBACCO: 5.6% 2,359 Edward's Baking Co. (food service bakery) Term A 09/30/03 2,241,280 3,292 Edward's Baking Co. Term B 09/30/05 3,127,083 3,292 Edward's Baking Co. Term C 09/30/05 3,127,083 13,790 Empire Kosher Poultry (kosher chicken and poultry) Term B 07/31/04 13,790,000 12,417 Favorite Brands International (confectionary manufacturer) Term B 05/19/05 12,416,667 15,000 General Nutrition Corp. (nutritional product retail and manufacturer) Term 12/18/05 15,000,000 9,214 Imperial Holly Corp. (sugar producer) Term A 12/31/05 9,213,617 8,274 Imperial Holly Corp. Term B 12/31/05 8,274,164 ------------ 67,189,894 ------------
See Accompanying Notes to Financial Statements. 11 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS as of February 28, 1999 - --------------------------------------------------------------------------------
Principal Amount Loan Stated (000's) Industry/Borrower Type Maturity Value - ------- ----------------- ---- -------- ----- BROADCASTING: 6.9% $10,000 American Cable Entertainment (cable television) Term B 09/30/07 $ 10,000,000 9,899 Benedek Broadcasting Corp. (television broadcasting) Axel A (A) 12/31/04 9,898,713 4,689 Benedek Broadcasting Corp. Axel B (A) 12/31/04 4,688,941 2,368 Capstar Radio Broadcasting (radio broadcasting) Term A 09/24/99 2,368,421 4,963 Capstar Radio Broadcasting Term B 07/01/07 4,962,500 326 Capstar Radio Broadcasting Revolver 09/24/99 326,316 5,000 Classic Cable, Inc. (cable television) Term B 10/31/07 5,000,000 9,977 Intermedia Partners IV (cable television) Term 01/01/05 9,977,273 1,728 Liberman Broadcasting, Inc. (spanish radio/tv) Revolver 03/31/05 1,728,000 8,000 Liberman Broadcasting, Inc. Term B 09/30/05 8,000,000 9,204 Retlaw Broadcasting, LLC (television broadcasting) Term B 04/30/06 9,203,750 17,000 Telemundo (television broadcasting) Term B 12/28/06 17,000,000 ------------- 83,153,914 ------------- BUILDINGS AND REAL ESTATE: 7.7% 5,000 Alliance National, Inc. (temporary offices) Term B 09/04/05 5,000,000 6,000 Dayton Superior Corp. (concrete/masonry accessories) Term 09/29/05 6,000,000 5,422 Falcon Building Products (building products) Term B 06/30/05 5,421,519 6,600 Imperial Home Decor Group (home accessories) Term B 03/13/05 6,600,000 3,400 Imperial Home Decor Group Term C 03/13/06 3,400,000 7,920 Kevco, Inc. (manufactured home components) Term B 02/02/05 7,920,000 1,500 Meditrust Corp. (real estate investment trust) Term D 07/15/01 1,500,000 15,000 Prison Realty (owner/operator of prison facilities) Term B 01/01/03 15,000,000 13,050 Tree Island Industries (nail and wire products) Term B 03/31/03 13,050,000 9 United Building Materials, Inc. (stone and concrete products)(1) Term 03/31/06 8,658 7,800 US Aggregates (aggregate, asphalt, concrete manufacturer) Term B 03/31/06 7,800,000 21,154 Ventas, Inc. (real estate investment trust) Term D 05/05/03 21,153,789 ------------- 92,853,966 ------------- CARGO TRANSPORT: 2.9% 10,922 Atlas Freighter Leasing (air cargo carrier) Term 05/29/04 10,922,074 3,094 Evergreen International Aviation, Inc. (air cargo carrier) Term A 05/07/03 3,094,266 1,569 Evergreen International Aviation, Inc. Term B 05/31/02 1,569,128 8,800 Gemini Air Cargo, Inc. (air cargo carrier) Term A 12/12/02 8,800,000 9,955 Omnitrax, Inc. (rail operator) Term 05/12/05 9,954,545 ------------- 34,340,013 -------------
See Accompanying Notes to Financial Statements. 12 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS as of February 28, 1999 - --------------------------------------------------------------------------------
Principal Amount Loan Stated (000's) Industry/Borrower Type Maturity Value - ------- ----------------- ---- -------- ----- CHEMICALS, PLASTICS AND RUBBER: 7.5% $9,891 Acadia Elastomers Corp. (specialty chemicals) Term 03/31/04 $ 9,890,510 11,227 Cedar Chemical Corp. (specialty chemicals) Term B 10/30/03 11,226,596 15,000 Euro United Corp. (plastic products) Term B 05/31/01 15,000,000 3,545 Foamex, L.P. (polyurethane foam) Term B 06/30/05 3,544,874 3,223 Foamex, L.P. Term C 06/30/06 3,222,613 1,640 Huntsman Corp. (industrial chemicals) Revolver 12/31/02 1,639,526 476 Huntsman Corp. Term A 12/31/02 475,560 3,442 Huntsman Corp. Term B 06/30/04 3,442,437 1,880 Huntsman Specialty Chemicals Corp. (specialty chemicals) Term B 03/15/04 1,880,484 1,880 Huntsman Specialty Chemicals Corp. Term C 12/31/05 1,880,484 14,804 Lyondell Petrochemical Company (petrochemicals) Term A 07/23/03 14,803,889 11,379 Lyondell Petrochemical Company Term B 06/30/05 11,378,677 5,102 NEN Life Science Products (biochemicals) Term B 12/31/04 5,102,041 1,131 Paint Sundry Brands, LLC (paint supply manufacturer) Term B 08/06/05 1,130,500 1,108 Paint Sundry Brands, LLC Term C 08/06/06 1,107,778 4,722 Texas Petrochemical Corp. (industrial chemicals) Term B 06/30/04 4,722,222 ------------ 90,448,191 ------------ CONTAINERS, PACKAGING AND GLASS: 7.9% 9,796 Crown Paper Co. (paper and pulp manufacturer) Term B 08/22/03 9,796,250 18,125 Eastern Pulp & Paper Co. (specialty paper) Term 08/31/04 18,124,995 19,897 Gaylord Container Corporation (corrugated containers) Term 07/30/04 19,896,552 728 Gaylord Container Corporation Revolver 07/30/03 728,276 24,000 Jefferson Smurfit (paperboard and packaging producer) Term B 03/31/06 24,000,000 9,950 Pretium Packaging, LLC (plastic packaging) Term B 07/29/06 9,950,020 12,056 Stone Container (pulp and paper products) Term D 10/01/03 12,055,910 ------------ 94,552,003 ------------ DIVERSIFIED/CONGLOMERATE MANUFACTURING: 2.8% 4,986 Allied Digital Technologies Corp. (multimedia manufacturer) Term B 12/31/05 4,986,250 4,000 Holmes Products Corp. (consumer products manufacturer) Term B 02/28/07 4,000,000 9,977 Private Business, Inc. (banking services & software) Term B 08/19/06 9,977,273 9,975 SPX Corporation (industrial components) Term B 09/30/06 9,975,000 4,500 Superior Telecom Inc. (copper cable manufacturing) Term B 11/27/05 4,500,000 ------------ 33,438,523 ------------ DIVERSIFIED/CONGLOMERATE SERVICES: 3.4% 25,442 MAFCO Finance Corp. (diversified services and entertainment) Term A 04/16/00 25,442,308 315 MAFCO Finance Corp. Revolver 04/16/00 315,000 8,719 Outsourcing Solutions, Inc. (accounts receivable management) Term B 11/06/03 8,718,530 6,895 Outsourcing Solutions, Inc. Term C 10/15/04 6,894,999 ------------ 41,370,837 ------------ ECOLOGICAL: 0.6% 2,361 Clean Harbors, Inc. (environmental services) Term 05/08/00 2,360,698 4,688 Rumpke (waste management) Term A 09/25/02 4,687,500 ------------ 7,048,198 ------------
See Accompanying Notes to Financial Statements. 13 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS as of February 28, 1999 - --------------------------------------------------------------------------------
Principal Amount Loan Stated (000's) Industry/Borrower Type Maturity Value - ------- ----------------- ---- -------- ----- ELECTRONICS: 5.2% $4,500 Dynamic Details, Inc. (circuit board manufacturer) Term B 04/22/05 $ 4,500,000 10,085 Fairchild Semiconductor Corp. (electronic equipment) Term C 03/11/03 10,085,123 5,348 Intri-Plex Technologies, Inc. (disk drive component manufacturer) Term 09/30/02 5,347,826 9,492 Mitel Corporation (semiconductor manufacturing) Term B 06/02/04 9,492,030 8,714 OK Industries, Inc. (circuit board manufacturing systems) Term 10/31/02 8,714,286 9,603 Sarcom, Inc. (systems integration) Term 11/20/02 9,603,175 10,000 Stonebridge Technologies, Inc. (enterprise computing) Term 07/27/05 10,000,000 5,000 Stratus Computer, Inc. (continuous availability computing) Term B 02/26/06 5,000,000 ------------ 62,742,440 ------------ FINANCE: 3.4% 18,000 Bridge Information Systems (news services) Term B 05/29/05 18,000,000 5,852 National Partnership Investments Corp. (asset management) Term 06/30/01 5,852,078 5,325 Rent -A-Center, Inc. (home appliances rental company) Term B 01/31/06 5,325,191 7,129 Rent -A-Center, Inc. Term C 01/31/07 7,129,434 5,000 Value Asset Management, Inc. (money management) Term B 04/28/03 5,000,000 ------------ 41,306,703 ------------ GROCERY: 3.5% 846 Pathmark Stores, Inc. (mid atlantic supermarkets) Revolver 06/15/01 846,281 1,501 Pathmark Stores, Inc. Term A 06/15/01 1,500,682 9,043 Pathmark Stores, Inc. Term B 12/15/01 9,042,707 17,767 Schwegmann Giant Supermarket (Louisiana supermarkets)(2) Term B 07/30/06 17,766,610 273 Schwegmann Giant Supermarket(2) Revolver 01/31/04 273,133 9,287 Star Markets Co., Inc. (Boston area supermarkets) Term B 12/31/02 9,286,651 2,880 Star Markets Co., Inc. Term C 12/31/03 2,880,472 ------------ 41,596,536 ------------ HEALTHCARE, EDUCATION AND CHILDCARE: 17.3% 3,934 Alaris Medical Systems, Inc. (infusion pumps) Term B 11/30/03 3,933,963 3,934 Alaris Medical Systems, Inc. Term C 11/30/04 3,933,963 3,693 Alaris Medical Systems, Inc. Term D 05/31/05 3,692,879 1,110 Alliance Imaging, Inc. (diagnostic services) Term A 12/18/03 1,110,435 5,275 Alliance Imaging, Inc. Term B 08/09/04 5,274,565 9,305 Children's Discovery Centers (daycare and education) Term 08/10/04 9,304,688 8,870 Community Health Systems, Inc. (hospitals) Term B 12/31/03 8,869,863 8,870 Community Health Systems, Inc. Term C 12/31/04 8,869,863 6,644 Community Health Systems, Inc. Term D 12/31/05 6,643,836 6,000 Covenant Care California, Inc. (long-term healthcare facilities) Term 06/30/99 6,000,000
See Accompanying Notes to Financial Statements. 14 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS as of February 28, 1999 - --------------------------------------------------------------------------------
Principal Amount Loan Stated (000's) Industry/Borrower Type Maturity Value - ------- ----------------- ---- -------- ----- Healthcare, Education and Childcare (continued) $4,938 Doshi Diagnostics Imaging Service (radiology and medical testing) Term 05/15/05 $ 4,937,500 15,000 Fountain View, Inc. (long-term healthcare facilities) Term B 03/31/04 15,000,000 4,416 Genesis Eldercare Acquisition (long-term healthcare facilities) Term 09/30/04 4,415,726 3,788 Healthcare Direct, Inc. (medical device retailer) Term A 08/01/04 3,787,500 4,080 Healthcare Direct, Inc. Term B 08/01/06 4,079,500 6,250 Magellan Health Services (managed behavioral care) Term B 02/12/05 6,250,000 6,250 Magellan Health Services Term C 02/12/06 6,250,000 10,570 Mariner Health Group, Inc. (long-term care) Term B 03/31/05 10,570,417 9,310 Mariner Health Group, Inc. Term C 03/31/06 9,309,583 9,379 Med Partners Inc. (physician practice management) Term A 06/30/99 9,379,361 4,193 Med Partners Inc. Term B 06/30/01 4,193,365 5,280 Paracelsus Healthcare Corporation (for profit hospital chain) Term A 05/15/03 5,280,000 8,000 Paracelsus Healthcare Corporation Term B 06/15/04 8,000,000 4,975 Roberts Pharmaceutical Corp. (pharmaceutical) Term A 06/30/03 4,975,000 9,875 SMT Health (mobile MRI systems) Term 08/31/03 9,875,000 1,085 Stryker Corporation (orthopedic supplies manufacturing) Term B 12/04/05 1,084,507 4,415 Stryker Corporation Term C 12/04/06 4,415,493 12,500 The Brown Schools (healthcare America) Term B 06/30/04 12,500,000 5,000 The Brown Schools Term C 06/30/05 5,000,000 15,405 Vencor, Inc. (long term care facility operator) Term B 05/05/05 15,405,376 5,000 Vision Twenty-One, Inc. (eye care PPM) Term C 06/30/05 5,000,000 ------------- 207,342,383 ------------- HOME AND OFFICE FURNISHINGS, HOUSEWARES AND DURABLE CONSUMER PRODUCTS: 3.0% 4,500 All Clad (pots and pans) Term A 03/18/04 4,500,000 3,000 All Clad Term C 03/18/05 3,000,000 804 American Blind and Wallpaper (furniture and home furnishings) Term 12/29/05 804,171 8,825 Desa International (heaters and fireplaces) Term 11/26/04 8,825,000 15,614 ICON Health & Fitness, Inc. (exercise equipment) Term B 11/14/01 15,614,374 3,625 Panolam (design and manufacture wood paneling) Term B 01/31/03 3,625,000 ------------- 36,368,545 ------------- HOTELS, MOTELS, INNS AND GAMING: 2.5% 4,706 Patriot American Hospitality (hotels & resorts) Bridge II 03/31/99 4,705,882 5,294 Patriot American Hospitality Bridge III 03/31/00 5,294,118 19,988 Patriot American Hospitality Term B 03/31/03 19,987,500 ------------- 29,987,500 ------------- INSURANCE: 0.7% 4,935 TRG Holdings Corp. (insurance run-off) Term 01/07/03 4,935,000 1,591 Willis Carroon Corporation (insurance brokerage) Term B 11/30/07 1,590,909 955 Willis Carroon Corporation Term C 11/30/08 954,545 955 Willis Carroon Corporation Term D 05/30/09 954,545 ------------- 8,434,999 -------------
See Accompanying Notes to Financial Statements. 15 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS as of February 28, 1999 - --------------------------------------------------------------------------------
Principal Amount Loan Stated (000's) Industry/Borrower Type Maturity Value - ------- ----------------- ---- -------- ----- LEISURE, AMUSEMENT, MOTION PICTURES AND ENTERTAINMENT: 6.1% $3,713 AMFAC Parks and Resorts (park services operator) Term B 09/04/04 $ 3,712,500 3,713 AMFAC Parks and Resorts Term C 09/30/04 3,712,500 20,000 Florida Panthers Holdings, Inc. (investment holding) Bridge 03/30/05 20,000,000 9,900 Four Media Co. (film services) Term B 09/10/04 9,900,000 10,000 Metro-Goldwyn-Mayer (media and broadcast) Term A 03/31/05 10,000,000 4,000 Metro-Goldwyn-Mayer Term B 03/31/06 4,000,000 15,000 Panavision, Inc. (movie cameras) Term B 03/31/05 15,000,000 7,157 Worldwide Sports & Recreation Corp. (optics, sports products) Term B 03/31/01 6,977,665 ------------ 73,302,665 ------------ MACHINERY (NONAGRICULTURE, NONCONSTRUCTION, NONELECTRONIC): 0.6% 7,920 Clearing -- Niagara (metal stamping press manufacturer) Term 10/18/04 7,524,208 ------------ 7,524,208 ------------ MINING, STEEL, IRON AND NONPRECIOUS METALS: 3.6% 5,880 Cable Systems International (cable wire manufacturer) Term B 10/04/02 5,880,000 3,269 Centennial Resources (coal mining)(2)(3) Term A 03/31/02 1,536,539 8,510 Centennial Resources(2)(3) Term B 03/31/04 3,999,519 1,722 Centennial Resources(3) DIP Loan (B) 06/30/99 1,721,676 9,825 Ispat Sidbec, Inc. (steel producer) Term B 07/16/04 9,825,345 9,825 Ispat Sidbec, Inc. Term C 01/16/05 9,825,345 3,270 National Refractories Co. (kiln lining materials) Term C 09/30/99 3,269,726 7,385 P & L Coal Holdings (coal producer) Term B 06/30/06 7,384,615 ------------ 43,442,765 ------------ OIL AND GAS: 2.6% 11,426 Cardinal Services, Inc. (marine liftboats and wireline services) Term B 03/10/05 11,426,283 5,000 Key Energy Group, Inc. (oil field services) Term B 10/26/04 5,000,000 6,397 Kinder Morgan, Inc. (pipeline operator) Term 05/31/00 6,397,059 1,485 Perf-O-Log (oil field services) Term 08/11/03 1,485,000 3,950 Perf-O-Log Term B 08/11/03 3,950,000 2,481 Perf-O-Log Term C 08/11/04 2,481,250 ------------ 30,739,592 ------------ PERSONAL, FOOD AND MISCELLANEOUS SERVICES: 6.9% 14,605 Boston Chicken, Inc. (quick service restaurant)(3) Term C 12/09/01 13,874,590 4,831 Brickman Group, Ltd. (landscaping) Term B 12/31/05 4,830,933 8,870 Coinmach Laundry Corp. (laundry) Term B 06/30/05 8,870,063 5,000 Otis Spunkmeyer (food, beverage, tobacco) Term B 12/31/05 5,000,000 5,098 Papa Gino's, Inc. (quick service restaurants) Term A 02/19/02 5,097,714 14,765 Papa Gino's, Inc. Term B 02/19/04 14,765,231 9,937 SC International Services (airline catering) Term 06/01/05 9,937,303 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 ------------ 82,375,834 ------------
See Accompanying Notes to Financial Statements. 16 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS as of February 28, 1999 - --------------------------------------------------------------------------------
Principal Amount Loan Stated (000's) Industry/Borrower Type Maturity Value - ------- ----------------- ---- -------- ----- PERSONAL AND NONDURABLE CONSUMER PRODUCTS (MANUFACTURING ONLY): 1.3% $1,186 AM Cosmetics (cosmetics and skin care products)(2) Term A 06/30/03 $ 830,128 8,687 AM Cosmetics(2) Term B 12/31/04 6,081,239 9,154 Medtech Products, Inc. (non-prescription consumer medications) Term B 10/15/02 9,153,661 ------------ 16,065,028 ------------ PERSONAL TRANSPORTATION: 0.8% 9,949 Neoplan USA Corporation (personal transportation) Term B 05/29/05 9,948,561 ------------ 9,948,561 ------------ PRINTING AND PUBLISHING: 4.6% 6,650 Bankers Systems, Inc. (banking industry compliance services) Term B 11/01/02 6,650,000 8,978 Norwood Promotional Productions (licensed products) Term B 08/31/04 8,977,500 8,000 Reiman Publications Term B 12/01/05 8,000,000 3,318 Von Hoffman Press, Inc. (textbook manufacturer) Term B 05/29/04 3,317,857 10,773 Von Hoffman Press, Inc. Term C 05/29/05 10,773,214 9,950 Weider Publications, Inc. (magazine publications) Term 09/18/05 9,950,000 3,989 20th Century Plastics, Inc. (album manufacturing) Term B 09/30/05 3,988,889 3,491 20th Century Plastics, Inc. Term C 09/30/06 3,491,250 ------------ 55,148,710 ------------ RETAIL STORES: 3.8% 9,950 Amscan Holdings, Inc. (party goods) Axel (A) 12/31/04 9,949,749 13,840 Murray's Discount Auto Parts (auto parts retailer) Term 06/30/03 13,147,756 468 Murray's Discount Auto Parts Revolver 01/26/06 467,500 4,942 Nebraska Book Co. (wholesale and retail textbooks) Term B 04/30/04 4,942,308 4,546 Peebles, Inc. (department store chain) Term A 04/30/01 4,545,554 12,904 Peebles, Inc. Term B 04/30/02 12,904,486 ------------ 45,957,353 ------------ TELECOMMUNICATIONS: 12.9% 10,000 American Wireless Corporation (rural cellular phone operator) Term B 06/04/07 10,000,000 10,000 American Wireless Corporation Term C 12/04/07 10,000,000 8,803 Claricom Holdings, Inc. (communication systems) Term B 07/01/03 8,362,585 10,620 Commnet (PCS services) Term A 09/30/05 10,620,000 1,481 Commnet Term B 09/18/06 1,480,830 1,433 Commnet Term C 03/18/07 1,432,676 4,586 Commnet Term D 09/18/07 4,586,494 8,000 Dobson Communications Corp. (cellular communications) Term C 12/23/07 8,000,000 10,000 Nextel Finance Co. (cellular phones) Lease 03/15/06 10,000,000 7,000 Nextel Finance Co. Term A 03/10/06 7,000,000 11,500 Nextel Finance Co. Term B 09/10/06 11,500,000
See Accompanying Notes to Financial Statements. 17 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS as of February 28, 1999 - --------------------------------------------------------------------------------
Principal Amount Loan Stated (000's) Industry/Borrower Type Maturity Value - ------- ----------------- ---- -------- ----- TELECOMMUNICATIONS (CONTINUED) $11,967 Omnipoint Corp. (PCS services) Term A 02/17/06 $ 11,966,749 3,415 Omnipoint Corp. Term B 02/17/06 3,415,172 7,997 Omnipoint Corp. Term C 02/17/06 7,997,050 2,496 Pacific Coin (private pay phone operator) Term A 12/31/02 2,495,902 6,666 Pacific Coin Term B 12/31/04 6,665,625 8,069 Prodelin Holding Corporation (satellite antenna manufacturer) Term B 05/28/06 8,068,693 10,000 Teletouch Communications (rural paging services) Term B 11/30/04 10,000,000 12,000 TSR Wireless, LLC (paging) Term 06/30/05 12,000,000 10,000 Western PCS Corporation (cellular phones) Term B 07/09/05 10,000,000 --------------- 155,591,776 --------------- TEXTILES AND LEATHER: 4.7% 9,466 Accessory Network Group (personal clothing accessories) Term B 08/13/05 9,465,909 5,435 Harriet & Henderson (yarn manufacturer) Term A 06/12/00 5,434,825 527 Harriet & Henderson Term C 01/20/04 526,673 6,650 Humphrey's, Inc. (belts and personal leather goods) Term B 11/15/03 6,650,000 9,920 Polymer Group (manufacturer of woven/unwoven polyolefin products) Term B 01/31/06 9,920,000 4,821 Scovill Fasteners, Inc. (metal/plastic fasteners) Term A 11/26/03 4,821,429 8,492 Targus Group International, Inc. (computer luggage) Term B 01/05/05 8,492,397 1,427 Targus Group International, Inc. Term C 01/05/05 1,427,294 9,950 Tartan Textile Services (commercial linen supply) Term B 05/13/05 9,950,000 --------------- 56,688,527 --------------- Total Senior Loans -- 141.4% 1,700,208,675 --------------- (Cost $1,711,502,974) OTHER CORPORATE DEBT FINANCE: 0.8% 10,000 Value Asset Management, Inc. (money management) Sr. Sub. Bridge 04/28/99 10,000,000 --------------- 10,000,000 --------------- CHEMICALS, PLASTICS AND RUBBER: 0.2% 2,875 Paint Sundry Brands, LLC (paint brushes & accessories) Sub. Credit 08/11/08 2,875,000 --------------- 2,875,000 --------------- DIVERSIFIED/CONGLOMERATE MANUFACTURING: 0.5% 6,000 Capital Tool & Design, Ltd. (brake backing plates) Sub. Note 07/26/03 6,000,000 --------------- 6,000,000 --------------- Total Other Corporate Debt -- 1.5% 18,875,000 --------------- (Cost $18,875,000)
See Accompanying Notes to Financial Statements. 18 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS as of February 28, 1999 - -------------------------------------------------------------------------------- COMMON STOCK
Shares Value - --------- --------------- APPAREL PRODUCTS: 0.0% 13,294 @ Butterick Company, Inc. (sewing aids) (R) $ 17,645 -------------- DIVERSIFIED/CONGLOMERATE SERVICES: 0.0% 60,056 @ Staff Leasing, Inc. (employee leasing) 675,630 -------------- HOME AND OFFICE FURNISHINGS: 0.1% 714,000 @ American Blind and Wallpaper (R) 714,000 -------------- RESTAURANTS: 0.3% 413,980 @ America's Favorite Chicken Co. (quick service restaurant chain) (R) 3,645,508 -------------- TEXTILES AND LEATHER: 0.1% 127,306 @ Dan River, Inc. (diversified textiles) 835,446 -------------- Total Common Stock -- 0.5% 5,888,229 -------------- (Cost $1,251,586) STOCK PURCHASE WARRANTS AND OTHER SECURITIES 48,930 @ Autotote Systems, Inc., Warrants representing 48,930 common shares (designer and manufacturer of wagering equipment), Expires 10/30/03 (R) 6,042 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) 256,658 10,000 @ Casden Properties Operation, 10,000 shares of Junior Cumulative Preferred Partnership Units (Asset Management) (R) 250,000 19,000 @ Covenant Care, Inc., Warrants representing 19,000 common shares (long-term healthcare facilities) (R) 177,270 1 @ CT Recovery Liquidating Trust, Inc. (home improvement retailer) (R)(3) 79,102 449 @ Murray's Discount, Warrants representing 5% equity stakes on a fully diluted basis (retail stores) (R) 5 --------------- Total Stock Purchase Warrants and Other Securities -- 0.1% 769,077 --------------- (Cost $79,102) TOTAL INVESTMENTS (COST $1,731,708,662)(4) 143.5% $ 1,725,740,981 LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS-NET (43.5) (523,175,638) ------ --------------- NET ASSETS 100.0% $ 1,202,565,343 ====== ===============
- ---------------- @ Non-income producing security (A) Axel describes an amortizing extended term loan with limited call protection (B) DIP loan describes debtor in possession loan. (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) Loan is on non-accrual status. (3) The borrower filed for protection under Chapter 11 of the U.S. Federal bankruptcy code and is in the process of developing a plan of reorganization. (4) For Federal income tax purposes, the cost of investments is $1,732,047,599 and net unrealized depreciation consists of the following: Gross Unrealized Appreciation $ 5,489,693 Gross Unrealized Depreciation (11,796,311) ------------- Net Unrealized Depreciation $ (6,306,618) ============= See Accompanying Notes to Financial Statements. 19 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES as of February 28, 1999 - -------------------------------------------------------------------------------- ASSETS: Investments in securities at value (Cost $1,731,708,662) $ 1,725,740,981 Receivables: Interest 16,308,355 Investment securities sold 977,084 Other 100,347 Prepaid expenses 816,660 Prepaid arrangement fees on notes payable 341,252 --------------- Total assets 1,744,284,679 --------------- LIABILITIES: Notes payable 534,000,000 Overdraft payable to custodian 887,065 Deferred arrangement fees on senior loans 3,081,010 Accrued interest payable 2,524,874 Accrued expenses 1,226,387 --------------- Total liabilities 541,719,336 --------------- NET ASSETS (equivalent to $9.24 per share, based on 130,206,151 shares of beneficial interest authorized and outstanding, no par value) $ 1,202,565,343 =============== Net Assets Consist of: Paid in capital $ 1,235,061,394 Undistributed net investment income 9,887,931 Accumulated net realized loss on investments (36,416,301) Net unrealized depreciation of investments (5,967,681) --------------- Net assets $ 1,202,565,343 =============== See Accompanying Notes to Financial Statements. 20 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- STATEMENT OF OPERATIONS for the Year Ended February 28, 1999 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Interest $ 136,459,573 Arrangement fees earned 4,778,633 Other 2,289,858 ------------- Total investment income 143,528,064 ------------- EXPENSES: Interest 28,753,583 Investment management fees 11,973,819 Administration fees 2,022,051 Shareholder communications 1,112,498 Revolving credit facility fees 634,761 Custodian fees 495,623 Miscellaneous expense 494,991 Transfer agent and registrar fees 424,819 Recordkeeping and pricing fees 200,515 Professional fees 169,893 Insurance expense 75,954 Trustees' fees 60,000 ------------- Total expenses 46,418,507 Less: Earnings credits (271,716) ------------- Net expenses 46,146,791 ------------- Net investment income 97,381,273 ------------- REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENTS: Net realized loss on investments (6,313,758) Change in unrealized depreciation of investments (7,547,808) ------------- Net loss on investments (13,861,566) ------------- Net increase in net assets resulting from operations $ 83,519,707 ============= See Accompanying Notes to Financial Statements. 21 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
Year Year Ended Ended February 28, February 28, 1999 1998 ---------------- --------------- INCREASE IN NET ASSETS FROM OPERATIONS: Net investment income $ 97,381,273 $ 95,217,224 Net realized loss on investments (6,313,758) (18,935,269) Change in unrealized appreciation/(depreciation) on investments (7,547,808) 5,319,483 --------------- --------------- Net increase in net assets resulting from operations 83,519,707 81,601,438 DISTRIBUTIONS TO SHAREHOLDERS: Distributions from net investment income (99,153,106) (93,879,672) CAPITAL SHARE TRANSACTIONS: Issuance from dividend reinvestment 14,460,902 15,591,705 Net increase in net assets derived from the sale of shares in connection with share offerings 169,335,030 -- --------------- --------------- Net increase from capital share transactions 183,795,932 15,591,705 --------------- --------------- Total increase in net assets 168,162,533 3,313,471 NET ASSETS: Beginning of year 1,034,402,810 1,031,089,339 --------------- --------------- End of year (including undistributed net investment income of $9,887,931 and $11,926,714 respectively) $ 1,202,565,343 $ 1,034,402,810 =============== =============== SUMMARY OF CAPITAL SHARE TRANSACTIONS: Shares issued from dividend reinvestment 1,537,475 1,624,659 Shares sold in connection with share offerings 17,904,188 -- --------------- --------------- Net increase in shares outstanding 19,441,663 1,624,659 =============== ===============
See Accompanying Notes to Financial Statements. 22 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- STATEMENT OF CASH FLOWS for the Year Ended February 28, 1999 - -------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Interest received $ 133,166,698 Arrangement fees received 4,189,856 Commitment fees received 200,615 Other income received 2,397,452 Interest paid (27,742,538) Facility fees paid (564,667) Other operating expenses paid (16,728,159) Purchases of portfolio securities (1,473,315,732) Proceeds from disposition of portfolio securities 1,106,883,957 --------------- Net cash used for operating activities (271,512,518) --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid (84,692,204) Overdraft financing (5,130,308) Proceeds from share offerings 169,335,030 Loan advance 192,000,000 --------------- Net cash provided by financing activities 271,512,518 --------------- Net change in cash -- Cash at beginning of year -- --------------- Cash at end of year $ -- =============== RECONCILIATION OF NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net increase in net assets resulting from operations $ 83,519,707 --------------- Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities: Increase in investments in securities (352,570,209) Increase in dividends and interest receivable (3,292,875) Decrease in other assets 28,142 Decrease in prepaid arrangement fees on notes payable 70,094 Increase in prepaid expenses (403,233) Decrease in deferred arrangement fees on senior loans (308,710) Increase in accrued interest payable 1,011,045 Increase in accrued expenses 433,521 --------------- Total adjustments (355,032,225) --------------- Net cash used for operating activities $ (271,512,518) =============== See Accompanying Notes to Financial Statements. 23 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS - --------------------------------------------------------------------------------
Years Ended February 28 or February 29, ------------------------------------------------------------------------------------- 1999 (7) 1998 (7) 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 0.79 0.87 0.82 0.89 0.74 0.60 Net realized and unrealized gain (loss) on investments (0.10) (0.13) (0.02) (0.08) 0.07 (0.05) ----------- ----------- ----------- --------- --------- --------- Increase in net asset value from investment operations 0.69 0.74 0.80 0.81 0.81 0.55 Distributions from net investment income (0.82) (0.85) (0.82) (0.86) (0.73) (0.60) 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 -- -- -- -- -- 0.02 ----------- ----------- ----------- --------- --------- --------- Net asset value, end of period $ 9.24 $ 9.34 $ 9.45 $ 9.61 $ 9.66 $ 10.02 =========== =========== =========== ========= ========= ========= Closing market price at end of period $ 9.56 $ 10.31 $ 10.00 $ 9.50 $ 8.75 $ 9.25 TOTAL RETURN Total investment return at closing market price(3) 1.11% 12.70% 15.04%(5) 19.19% 3.27%(5) 8.06% Total investment return at net asset value(4) 7.86% 8.01% 8.06%(5) 9.21% 5.24%(5) 6.28% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (000's) $ 1,202,565 $ 1,034,403 $ 1,031,089 $ 862,938 $ 867,083 $ 719,979 Average borrowings (000's) $ 490,978 $ 346,110 $ 131,773 $ -- $ -- $ -- Ratios to average net assets plus borrowings: Expenses (before interest and other fees related to revolving credit facility) 1.05%(8) 1.04% 1.13% -- -- -- Expenses 2.86%(8) 2.65% 1.92% -- -- -- Net investment income 6.00% 6.91% 7.59% -- -- -- Ratios to average net assets: Expenses (before interest and other fees related to revolving credit facility) 1.50%(8) 1.39% 1.29% -- -- -- Expenses 4.10%(8) 3.54% 2.20% 1.23% 1.30% 1.31% Net investment income 8.60% 9.23% 8.67% 9.23% 7.59% 6.04% Portfolio turnover rate 68% 90% 82% 88% 108% 87% Shares outstanding at end of period (000's) 130,206 110,764 109,140 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 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. (8) Calculated on total expenses before impact of earnings credits. See Accompanying Notes to Financial Statements. 25 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS as of February 28, 1999 - -------------------------------------------------------------------------------- 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. SENIOR LOAN AND OTHER 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, 1999, the Trust had capital loss carryforwards for federal income tax purposes of approximately $30,223,359 which are scheduled to expire through February 28, 2007. 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 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 February 28, 1999 - -------------------------------------------------------------------------------- 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, 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 year ended February 28, 1999, the cost of purchases and the proceeds from principal repayment and sales of investments, excluding short-term notes, totaled $1,473,315,732 and $1,100,978,465, respectively. At February 28, 1999, the Trust held senior loans valued at $1,700,208,675 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 February 28, 1999 - -------------------------------------------------------------------------------- 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 11/05/92 $ 1 Autotote Systems, Inc. -- Option 11/11/92 -- 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 -- CT Recovery Liquidating Trust 01/12/99 79,102 Murray's Discount -- Warrants 02/16/99 -- -------- Total restricted securities excluding senior loans (market value of $5,146,230 was 0.43% of net assets at February 28, 1999) $ 79,103 ======== 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, collateralized by assets of the Trust, to borrow up to $650 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 February 28, 1999, was $534 million, at a weighted average interest rate of 5.3%, which represented 30.7% of net assets plus borrowings. Average borrowings for the year ended February 28, 1999 were $490,978,082 and the average annualized interest rate was 5.9%. 28 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS as of February 28, 1999 - -------------------------------------------------------------------------------- As of February 28, 1999, the Trust had unfunded loan commitments pursuant to the terms of the following loan agreements: Capstar Radio Broadcasting $ 2,305,263 Huntsman Corporation $ 2,243,453 Centennial Resources Inc. 612,646 Liberman Broadcasting, Inc. 272,000 Clarity Telecom, Inc. 244,367 Mafco Finance Co. 5,451,923 Edwards Baking Co. 674,090 Murray's Discount Auto Stores 1,532,500 Gaylord Container Corp. 8,375,172 Pathmark Stores Inc. 4,442,975 Genesis Eldercare Acquisition 84,274 ----------- $26,238,663 ===========
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 February 28, 1999, share offerings pursuant to shelf registrations were drawn down 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 22,365,012 During the year ended February 28, 1999, expenses related to the offerings, in the amount of $800,373, were charged against the proceeds received upon issuance of the shares. NOTE 6 -- CUSTODIAL EARNINGS CREDITS Investors Fiduciary Trust Company ("IFTC") serves as the Trust's custodian and recordkeeper. Custody fees paid to IFTC are reduced by earnings credits based on the cash balances held by IFTC for the Trust. For the year ended February 28, 1999, the Trust received $271,716 in earnings credits from IFTC. NOTE 7 -- AFFILIATED TRANSACTIONS During the year ended February 28, 1999, the Trust purchased and sold certain holdings in senior loans from/to an affiliated fund managed by the Manager at prices determined by the Manager to represent market prices. The cost of purchased loans was $53,365,698 and the proceeds and cost of sold loans were $40,001,830 and $40,000,000, respectively, excluding any benefit to the Trust from the recognition of deferred arrangement fees. 29 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS as of February 28, 1999 - -------------------------------------------------------------------------------- NOTE 8 -- SUBSEQUENT EVENTS The Trust has filed a shelf registration statement for an additional 5,000,000 shares, effective March 4, 1999. In addition, subsequent to February 28, 1999, the Trust paid the following dividends from net investment income: Per Share Amount Declaration Date Record Date Payable Date - ---------------- ---------------- ----------- ------------ $0.0590 02/26/99 03/10/99 03/22/99 $0.0660 03/31/99 04/12/99 04/22/99 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 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT AUDITORS - -------------------------------------------------------------------------------- To the Shareholders and Board of Trustees Pilgrim Prime Rate Trust: We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of Pilgrim Prime Rate Trust (the "Trust") (formerly Pilgrim America Prime Rate Trust) as of February 28, 1999, and the related statements of operations and cash flows for the year then ended, and the statements of changes in net assets for each of the years in the two-year period ended February 28, 1999 and the financial highlights for each of the years in the four-year period ended February 28, 1999. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. For all periods ending prior to March 1, 1995, the financial highlights were audited by other auditors whose report thereon dated March 16, 1995, expressed an unqualified opinion on those financial highlights. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of February 28, 1999, by examination and other procedures we considered necessary. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 1999 through 1996 financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Pilgrim Prime Rate Trust as of February 28, 1999, and the results of its operations and its cash flows for the year then ended, and the changes in its net assets for each of the years in the two-year period ended February 28, 1999 and the financial highlights for each of the years in the four-year period ended February 28, 1999, in conformity with generally accepted accounting principles. KPMG LLP Los Angeles, California April 10, 1999 31 Pilgrim Prime Rate Trust - -------------------------------------------------------------------------------- TAX INFORMATION - -------------------------------------------------------------------------------- The Trust is required by Subchapter M of the Internal Revenue Code of 1986, as amended, to advise within 60 days of the Trust's fiscal year end (February 28, 1999) as to the federal tax status of distributions received by the Trust's shareholders. Accordingly, the Trust is hereby advising you that the following dividends were paid during the fiscal year ended February 28, 1999: Per Share Type of Dividend Amount Ex-Dividend Date Payable Date ---------------- --------- ---------------- ------------ Ordinary Income $ 0.0620 03/06/98 03/23/98 $ 0.0700 04/08/98 04/22/98 $ 0.0680 05/07/98 05/22/98 $ 0.0710 06/08/98 06/22/98 $ 0.0680 07/08/98 07/22/98 $ 0.0700 08/06/98 08/24/98 $ 0.0690 09/08/98 09/22/98 $ 0.0680 10/08/98 10/22/98 $ 0.0670 11/06/98 11/23/98 $ 0.0670 12/08/98 12/22/98 $ 0.0690 12/29/98 01/13/99 $ 0.0670 02/08/99 02/23/99 -------- Total $ 0.8160 ======== Corporate shareholders are generally entitled to take the dividend received deduction on the portion of the Trust's dividend distributions that qualify under tax law. The percentage of the Trust's fiscal year 1999 net investment income dividends that qualify for the corporate dividends received deductions is 0%. Shareholders are strongly advised to consult their own tax advisers with respect to the tax consequences of their investment in the Trust. In January 1999, you should have received an IRS Form 1099 DIV regarding the federal tax status of the dividends and distributions received by you in calendar year 1998. 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 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) U.S. EQUITY FUNDS ----------------- Pilgrim MagnaCap Fund Pilgrim LargeCap Leaders Fund Pilgrim Large Cap Growth Fund Pilgrim MidCap Value Fund Pilgrim Mid Cap Growth Fund Pilgrim Small Cap Growth Fund Pilgrim Bank and Thrift Fund INTERNATIONAL EQUITY FUNDS -------------------------- Pilgrim Worldwide Growth Fund Pilgrim International Core Growth Fund Pilgrim International Small Cap Growth Fund Pilgrim Emerging Countries Fund Pilgrim Asia-Pacific Equity Fund INCOME FUNDS ------------ Pilgrim Government Securities Income Fund Pilgrim High Quality Bond Fund Pilgrim High Yield Fund Pilgrim High Yield II Fund OTHER FUNDS ----------- Pilgrim Balanced Fund Pilgrim Convertible Fund Prospectuses containing more complete information regarding the funds, including charges and expenses, may be obtained by calling Pilgrim Securities, Inc., Distributor at 1-800-334-3444. Please read the prospectuses carefully before you invest or send money. PRANN0299-042999 -----END PRIVACY-ENHANCED MESSAGE-----