<PAGE> 1
S I E R R A
-----------
P R I M E I N C O M E
F U N D
SEMI-ANNUAL REPORT
FOR THE PERIOD ENDED
MARCH 31, 1997
-----------
SIERRA
P R I M E
-----------
INCOME FUND
<PAGE> 2
SIERRA PRIME INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1997 (UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Investments, at value (Cost $11,595,690) (Note 2)
See portfolio of investments......................................................... $ 11,597,497
Cash.................................................................................... 2,988
Receivable for Fund shares sold......................................................... 3,448
Interest receivable..................................................................... 60,222
Unamortized organization costs (Note 7)................................................. 189,428
Receivable from investment advisor (Note 3)............................................. 60,112
Other assets............................................................................ 163
---------------
Total Assets......................................................................... 11,913,858
---------------
LIABILITIES
Deferred facility fees (Note 2)......................................................... 3,139
Dividends payable....................................................................... 30,079
Administration fee payable (Note 3)..................................................... 2,488
Accrued legal........................................................................... 36,486
Accrued audit fees...................................................................... 14,960
Accrued Trustees' fees and expenses..................................................... 13,277
Accrued expenses and other payables (Note 3)............................................ 53,133
---------------
Total Liabilities.................................................................... 153,562
---------------
NET ASSETS.............................................................................. $ 11,760,296
===============
NET ASSETS CONSIST OF:
Paid in capital......................................................................... 11,757,644
Undistributed net investment income..................................................... 845
Net unrealized appreciation of investments.............................................. 1,807
---------------
NET ASSETS........................................................................... $ 11,760,296
===============
Class A Common Shares Outstanding....................................................... 1,175,823
===============
Net asset value per share of beneficial
interest outstanding*................................................................ $ 10.00
===============
Maximum sales charge.................................................................... 4.5%
Maximum offering price per share of
beneficial interest outstanding ($10.00/0.955)....................................... $ 10.47
===============
</TABLE>
- ----------------------------
* Redemption price per share is equal to Net Asset Value less any applicable
contingent deferred sales charge.
See Notes to Financial Statements.
- 1 -
<PAGE> 3
SIERRA PRIME INCOME FUND
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest................................................................................ $ 423,212
Fees.................................................................................... 7,292
---------------
Total Investment Income.............................................................. 430,504
---------------
EXPENSES:
Investment advisory fee (Note 3)........................................................ 57,865
Administration fee (Note 3)............................................................. 15,228
Audit fees.............................................................................. 14,961
Legal fees.............................................................................. 60,076
Tender offer expenses................................................................... 25,000
Trustees' fees and expenses (Note 3).................................................... 39,930
Registration and filing fees............................................................ 14,959
Amortization of organization costs...................................................... 24,353
Printing and Postage.................................................................... 14,534
Other................................................................................... 4,504
---------------
Subtotal............................................................................. 271,410
Fees waived and expenses absorbed
by investment advisor (Note 3)....................................................... (271,410)
---------------
Total expenses....................................................................... 0
---------------
NET INVESTMENT INCOME................................................................... 430,504
---------------
NET UNREALIZED LOSS
ON INVESTMENTS (NOTES 2 AND 4):
Net change in unrealized depreciation of securities..................................... (4,510)
---------------
Net unrealized loss on investments...................................................... (4,510)
---------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS............................................................ $ 425,994
===============
</TABLE>
See Notes to Financial Statements.
- 2 -
<PAGE> 4
SIERRA PRIME INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED PERIOD
MARCH 31, 1997 ENDED
(UNAUDITED) SEPTEMBER 30, 1996*
-------------- -------------------
<S> <C> <C>
Net investment income............................................... $ 430,504 $ 416,342
Net unrealized appreciation/(depreciation) of investments
during the period................................................ (4,510) 6,317
------------- -------------
Net increase in net assets resulting from operations................ 425,994 422,659
------------- -------------
Distributions to shareholders from net investment income:
Class A Common Shares............................................ (430,504) (416,342)
Net increase/(decrease) in net assets from Fund share transactions:
Class A Common Shares............................................ (768,729) 12,427,218
------------- -------------
Net increase/(decrease) in net assets............................... (773,239) 12,433,535
------------- -------------
NET ASSETS:
Beginning of year................................................... 12,533,535 100,000
------------- -------------
End of year......................................................... $ 11,760,296 $ 12,533,535
============= =============
(includes undistributed net investment income of $845 and $845, respectively)
AMOUNT
Sold........................................................... $ 438,635 $ 12,610,620
Issued as reinvestment of dividends............................ 246,805 255,107
Repurchased.................................................... (1,454,169) (438,509)
------------- -------------
Net increase/(decrease)........................................ $ (768,729) $ 12,427,218
============= =============
SHARES
Sold........................................................... 43,824 1,261,061
Issued as reinvestment of dividends............................ 24,672 25,490
Repurchased.................................................... (145,373) (43,851)
------------- -------------
Net increase/(decrease)........................................ (76,877) 1,242,700
============= =============
</TABLE>
- ----------------------------
* Sierra Prime Income Fund commenced operations on February 16, 1996.
See Notes to Financial Statements.
- 3 -
<PAGE> 5
SIERRA PRIME INCOME FUND
STATEMENT OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
Cash flows from operating activities:
Investment income received.......................................... $ 286,948
Fee income received................................................. 3,827
Payment of operating expenses....................................... 37,176
Proceeds from sales of long-term securities......................... 1,135,489
Purchases of long-term securities................................... (1,025,000)
Net proceeds from short-term investments............................ 765,980
---------------
CASH USED FOR OPERATING ACTIVITIES....................................... $ 1,204,420
Cash flows from financing activities:
Proceeds from shares sold........................................... 438,060
Payments on shares repurchased...................................... (1,454,169)
Distributions paid*................................................. (181,853)
Due to custodian.................................................... (3,470)
---------------
CASH PROVIDED BY FINANCING ACTIVITIES.................................... (1,201,432)
----------------
Increase in cash......................................................... 2,988
Cash at beginning of period.............................................. 0
---------------
Cash at end of period.................................................... $ 2,988
===============
RECONCILIATION OF NET INCREASE IN NET ASSETS FROM OPERATIONS
TO CASH USED FOR OPERATING ACTIVITIES:
Net increase in net assets resulting from operations................ $ 425,994
Decrease in investments**........................................ $ 747,612
Increase in interest receivable.................................. (5,284)
Decrease in receivable for investment securities sold............ 2,387
Decrease in unamortized organization costs....................... 24,353
Increase in other assets......................................... (30,904)
Increase in accrued expenses..................................... 43,727
Decrease in deferred facility fees............................... (3,465)
---------------
Total adjustments........................................ 778,426
---------------
CASH PROVIDED BY OPERATING ACTIVITIES.................................... $ 1,204,420
===============
</TABLE>
- ----------------------------
* Non cash activities include reinvestment of dividends of $246,805
** Includes unrealized appreciation of $1,807.
See Notes to Financial Statements.
- 4 -
<PAGE> 6
SIERRA PRIME INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A FUND SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
SIX MONTHS
ENDED PERIOD
MARCH 31, 1997 ENDED
(UNAUDITED) SEPTEMBER 30, 1996*
-------------- -------------------
<S> <C> <C>
Net asset value, beginning of period................................... $ 10.01 $ 10.00
------------ ------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................................................. .35 .40
Net realized and unrealized gain/(loss) on investments................. (.01) .01
------------ ------------
Total from investment operations....................................... .34 .41
------------ ------------
LESS DISTRIBUTIONS:
Dividends from net investment income................................... (.35) (.40)
------------ ------------
Total distributions.................................................... (.35) (.40)
------------ ------------
Net asset value, end of period......................................... $ 10.00 $ 10.01
============ ============
Total return +......................................................... 3.47% 4.19%
============ ============
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)................................... $ 11,760 $ 12,534
Ratio of operating expenses to average net assets...................... 0.00% ** 0.00% **
Ratio of net investment income to average net assets................... 7.07% ** 6.72% **
Portfolio turnover rate................................................ 15% 44%
Ratio of operating expenses to average net assets without fees
waived and expenses absorbed by investment advisor.................. 4.46% ** 4.75% **
Net investment income per share without fees waived
and expenses absorbed by investment advisor......................... $ 0.13 $ 0.12
</TABLE>
- ----------
* Sierra Prime Income Fund commenced operations on February 16, 1996.
** Annualized.
Total return represents aggregate total return for the period indicated.
The total return would have been lower if certain fees and expenses had not
been waived and absorbed by the investment advisor.
- 5 -
<PAGE> 7
SIERRA PRIME INCOME FUND
PORTFOLIO OF INVESTMENTS
MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
Principal Loan Stated
Amount Borrower Rate* Type Maturity** Value
------ -------- ----- ---- ---------- -----
<S> <C> <C> <C> <C>
SENIOR LOAN INTERESTS--54.6%
BROADCASTING--8.0%
$ 867,857 Benedek Broadcasting Corporation........ 8.813% Term 05/01/2001 $ 867,578
71,879 SKTV, Inc............................... 7.660 Term 07/31/2000 71,877
--------------
939,455
--------------
CABLE--2.9%
344,000 Marcus Cable Operating Company, L.P. 6.735 Term 12/31/2002 343,945
--------------
ENTERTAINMENT--6.5%
342,187 AMF Group, Inc. ........................ 8.125 Term 03/31/2001 342,186
427,358 AMF Group, Inc. ........................ 8.500 Term 03/31/2003 427,357
--------------
769,543
--------------
FOOD & BEVERAGES--14.8%
550,799 Keebler Holding Corporation............. 7.651 Term 01/31/2002 550,783
258,120 SC International Services, Inc.......... 8.569 Term 09/30/2001 258,009
322,027 SC International Services, Inc.......... 8.569 Term 09/30/2002 321,889
70,706 SC International Services, Inc. ........ 8.819 Term 09/30/2003 70,676
532,902 Stroh Brewery Company................... 8.063 Term 06/30/2001 533,894
--------------
1,735,251
--------------
FOOD STORES--5.9%
104,125 Bruno's, Inc............................ 7.769 Term 02/18/2002 104,091
593,632 Carr-Gottstein Foods.................... 8.438 Term 12/31/2002 593,555
--------------
697,646
--------------
HEALTHCARE--3.0%
355,410 Merit Behavioral Care Corporation....... 8.375 Term 10/06/2003 355,307
--------------
MANUFACTURING--3.0%
357,184 International Wire Group, Inc........... 8.524 Term 09/30/2002 357,077
--------------
PAPER--7.1%
84,933 Fort Howard Corporation................. 7.253 Term 03/31/2002 84,913
153,265 Jefferson Smurfit Corporation........... 7.163 Term 04/30/2001 153,237
118,370 Stone Container Corporation............. 8.562 Term 04/01/2000 118,344
472,613 Stone Container Corporation............. 8.812 Term 10/01/2003 473,157
--------------
829,651
--------------
RETAIL--3.4%
393,323 Federated Department Stores, Inc........ 6.375 Term 03/31/2000 394,622
--------------
Total Senior Loan Interests (cost $6,420,690)........................... 6,422,497
--------------
</TABLE>
See Notes to Financial Statements.
- 6 -
<PAGE> 8
SIERRA PRIME INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
Principal
Amount Value
------ -----
<S> <C> <C>
U.S. GOVERNMENT AGENCY DISCOUNT NOTES--44.0% (cost $5,175,000)
5,175,000 Federal Home Loan Discount Note (FHLB)
6.450%, due 04/01/1997.............. $ 5,175,000
--------------
TOTAL INVESTMENTS (Cost $11,595,690+)....................... 98.6% 11,597,497
OTHER ASSETS AND LIABILITIES (Net).......................... 1.4 162,799
------ --------------
NET ASSETS.................................................. 100.0% $ 11,760,296
====== ==============
</TABLE>
- ----------------------------
* Senior loans in which the Sierra Prime Income Fund invests generally pay
interest at rates which are periodically redetermined by reference to a base
lending rate plus a premium. These base lending rates are generally (i) the
prime rate offered by one or more major United States banks; (ii) the lending
rate offered by one or more major European banks, such as the London Inter-Bank
Offered Rate (LIBOR); or (iii) the certificate of deposit ratio. Senior loans
are generally considered to be restricted in that the Fund ordinarily is
contractually obligated to receive approval from the Agent Bank and/or borrower
prior to the disposition of a senior loan. Within each loan there may be
different rates due to different reset dates. The rates disclosed for each loan
are the weighted average coupon rates as of March 31, 1997.
** Senior loans in the Sierra Prime Income Fund's portfolio generally are
subject to mandatory and/or optional prepayment. Because of these mandatory
prepayment conditions and because there may be significant economic incentives
for a Borrower to prepay, prepayments of senior loans in the Fund's portfolio
may occur. As a result, the actual remaining maturity of senior loans held in
the Fund's portfolio may be substantially less than the stated maturities shown.
Although the Fund is unable to accurately estimate the actual remaining maturity
of individual senior loans, the Fund estimates that the actual average maturity
of the senior loans held in its portfolio will be approximately 18-24 months.
+ At March 31, 1997, the aggregate cost for federal tax purposes was
$11,595,690. The gross unrealized appreciation for all securities in which there
is an excess of value over tax cost and aggregate gross unrealized depreciation
for all securities in which there is an excess of tax cost over value were
$2,866 and $1,059, respectively.
See Notes to Financial Statements.
- 7 -
<PAGE> 9
SIERRA PRIME INCOME FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND BUSINESS
Sierra Prime Income Fund (the "Fund") is registered under the Investment Company
Act of 1940, as amended ("1940 Act"), as a non-diversified, closed-end
management investment company. The Fund was organized as a Massachusetts
business trust on October 4, 1995. During the period October 4, 1995 to February
15, 1996, the Fund had no operations other than those related to organizational
matters, including the initial capital contribution of $100,000 and the issuance
of 10,000 shares of beneficial interest to Sierra Fund Administration
Corporation.
The Trustees of the Fund authorized an unlimited number of Common Shares with
separate classes of beneficial interest. Currently there are only Class A Common
Shares. Shares are continuously offered at a price equal to the next determined
net asset value ("NAV") per share plus a maximum sales charge based on a
determined schedule.
2. SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates. The following is a summary of
significant accounting policies consistently followed by the Sierra Prime Income
Fund in the preparation of its financial statements.
Portfolio Valuation:
Senior Loans are not actively traded in a public market. Sierra Investment
Advisors Corporation (the "Advisor"), and Van Kampen American Capital Management
Inc. (the "Sub-Advisor"), following procedures established by the Fund's Board
of Trustees, value the Senior Loan interests held by the Fund at fair value. In
valuing a Senior Loan interest, the Advisor and Sub-Advisor consider relevant
factors, data and information, including: (i) the characteristics of and
fundamental analytical data relating to the Senior Loan, including the cost,
size, current interest rate, period until next interest rate reset, maturity and
base lending rate of the Senior Loan interest, the terms and conditions of the
Senior Loan and any related agreements, and the position of the Senior Loan in
the Borrower's debt structure; (ii) the nature, adequacy and value of the
collateral, including the Fund's rights, remedies and interests with respect to
the collateral; (iii) the creditworthiness of the Borrower's business, cash
flows, capital structure and future prospects; (iv) information relating to the
market for Senior Loans, including price quotations for (if considered reliable)
and trading in Senior Loans and interests in similar Loans; (v) the reputation
and financial condition of the Agent and any Intermediate Participants in the
Senior Loans; and (vi) general economic and market conditions affecting the fair
value of Senior Loans.
Other Fund holdings (other than short term obligations, but including listed
issues) are valued on the basis of prices furnished by one or more pricing
services which determine prices for normal, institutional-size trading units of
such securities using market information, transactions for comparable securities
and various relationships between securities which are generally recognized by
institutional traders. In certain circumstances, portfolio securities will be
valued at the last sale price on the exchange that is the primary market for
such securities, or the average of the last quoted bid price and asked price for
those securities for which the over-the-counter market is the primary market or
for listed securities in which there were no sales during the day. The value of
interest rate swaps is determined in accordance with a discounted present value
formula and then confirmed by obtaining a bank quotation. As of March 31, 1997
there were no interest rate swaps.
- 8 -
<PAGE> 10
SIERRA PRIME INCOME FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Short-term obligations which mature in 60 days or less are valued at amortized
cost, if their original term to maturity when acquired by the Fund was 60 days
or less, or are valued at amortized cost using their value on the 61st day prior
to maturity, if their original term to maturity when acquired by the Fund was
more than 60 days, unless in each case this is determined not to represent fair
value. Repurchase agreements will be valued by the Fund at cost plus accrued
interest. Securities for which there exist no price quotations or valuations and
all other assets are valued at fair value as determined in good faith by or on
behalf of the Board of Trustees.
Illiquid Investments:
Senior Loans in which the Fund will invest presently are not readily marketable
and may be subject to restrictions on resale. Interests in Senior Loans
generally are not listed on any national securities exchange or automated
quotation system and no regular market has developed for such interests.
Although interests in Senior Loans are traded among certain financial
institutions in private transactions between buyers and sellers these loans
continue to be considered illiquid. Senior Loans' illiquidity may impair the
Fund's ability to realize the full value of its assets in the event of a
voluntary or involuntary liquidation of such assets. Liquidity relates to the
ability of the Fund to sell an investment in a timely manner. The market for
relatively illiquid securities tends to be more volatile than the market for
more liquid securities. The Fund has no limitation on the amount of its assets
which may be invested in securities which are not readily marketable or are
subject to restriction on resale. The substantial portion of the Fund's assets
invested in relatively illiquid Senior Loan interests may restrict the ability
of the Fund to dispose of its investments in Senior Loans in a timely fashion
and at a fair price, and could result in capital losses to the Fund and holders
of Common Shares. However, many of the Senior Loans in which the Fund invests
are of a relatively large principal amount and are held by a relatively large
number of owners which should, in the Advisor's opinion, enhance the relative
liquidity of such interests. The risks associated with illiquidity are
particularly acute in situations where the Fund's operations require cash, such
as when the Fund tenders (Note 5) for its Common Shares and may result in the
Fund borrowing to meet short-term cash requirements.
Cash Flow Information:
The cash amount in the Statement of Cash Flows is the amount reported in the
Statement of Assets and Liabilities and does not include any short-term
investments at March 31, 1997. The Fund issues its shares, invests in
securities, and makes distributions from net investment income and net capital
gains (which are either paid in cash or reinvested at the discretion of
shareholders). These activities are reported in the Statement of Changes in Net
Assets. Information on cash receipts and payments is presented in the Statement
of Cash Flows.
Repurchase Agreements:
The Fund may enter into repurchase agreements (a purchase of, and a simultaneous
commitment to resell, a financial instrument at an agreed upon price on an
agreed upon date) only with member banks of the Federal Reserve System and
member firms of the New York Stock Exchange. When participating in repurchase
agreements, the Fund buys securities from a vendor (e.g., a bank or brokerage
firm) with the agreement that the vendor will repurchase the securities at a
higher price at a later date. Such transactions afford an opportunity for the
Fund to earn a return on available cash at minimal market risk, although the
Fund may be subject to various delays and risks of loss if the vendor is unable
to meet its obligation to repurchase. Under the 1940 Act, repurchase agreements
are deemed to be collateralized loans of money by the Fund to the seller. In
evaluating whether to enter into a repurchase agreement, the Advisor will
consider carefully the creditworthiness of the vendor. If the member bank or
member firm that is the party to the repurchase agreement petitions for
bankruptcy or otherwise becomes subject to the U.S. Bankruptcy Code, the law
regarding the rights of the Fund is unsettled. The securities underlying a
- 9 -
<PAGE> 11
SIERRA PRIME INCOME FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
repurchase agreement will be marked to market every business day so that the
value of the collateral is at least equal to the value of the loan, including
the accrued interest thereon, and the Advisor will monitor the value or the
collateral. No specific limitations exists as to the percentage of the Fund's
assets which may be used to participate in repurchase agreements.
Securities Transactions and Investment Income:
Securities transactions are recorded on trade date (the date the order to buy or
sell is executed). Realized gains and losses from securities sold are recorded
on the identified cost basis. Income is recorded on the accrual basis and
consists of interest accrued and discount earned less premiums amortized.
Facility fees are received upon the purchase of a new loan and are recognized as
income ratably over the expected life of the loan. The deferred facility fees
are the "unearned" portion of these facility fees. The Fund may purchase and
sell interest in Senior Loans and other portfolio securities on a "when issued"
and "delayed delivery" basis. No income accrues to the Fund on such interests or
securities in connection with such purchase transactions prior to the date the
Fund actually takes delivery of such interest or securities. When the Fund is
the buyer in such a transaction, however, it will maintain, in a segregated
account with its custodian, cash or high-grade portfolio securities having an
aggregate value equal to the amount of such purchase commitments until payment
is made.
Dividends and Distributions to Shareholders:
The Fund's policy is to declare daily and pay monthly distributions to holders
of Class A Common Shares of substantially all net investment income of the Fund.
Distributions of any net long-term capital gains earned by the Fund are made
annually. Distributions of any net short-term capital gains earned by the Fund
are distributed no less frequently than annually at the discretion of the Board
of Trustees. Additional distributions of net investment income and capital gains
for the Fund may be made at the discretion of the Board of Trustees in order to
avoid the application of a 4% non-deductible excise tax on certain undistributed
amounts of ordinary income and capital gains. Income distributions and capital
gain distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
differences are primarily due to differing treatments of income and gains on
various investment securities held by the Fund, timing differences and differing
characterization of distributions made by the Fund.
Federal Income Taxes:
It is the Fund's policy to qualify as a regulated investment company by
complying with the requirements of the Internal Revenue Code of 1986, as
amended, applicable to regulated investment companies and by, among other
things, distributing substantially all of its taxable earnings to its
shareholders. Therefore, no Federal income tax provision is required.
3. INVESTMENT ADVISORY, SUB-ADVISORY, ADMINISTRATION FEES AND OTHER
TRANSACTIONS
Sierra Advisors, an indirect wholly-owned subsidiary of Great Western Financial
Corporation ("GWFC"), is the Fund's investment advisor. Sierra Advisors is
entitled to a monthly fee at an annual rate of 0.95% of the average daily net
assets of the Fund. These fees were $57,865 for the six months ended March 31,
1997 and have been voluntarily waived by Sierra Advisors. Sierra Advisors pays a
monthly fee at an annual rate of 0.475% to Van Kampen American Capital
Management Inc. for services rendered as the Sub-Advisor.
Sierra Fund Administration Corporation ("Sierra Administration") is the Fund's
administrator. Sierra Administration receives a monthly fee at an annual rate of
0.25% of the Fund's average daily net assets and the Fund pays First Data
Investor Services Group, Inc. ("First Data") directly for all transfer agent
- 10 -
<PAGE> 12
SIERRA PRIME INCOME FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
services. The Administration fees for the six months ended March 31, 1997 were
$15,228. Sierra Administration pays State Street Bank and Trust Company ("State
Street") for certain administrative and custodial services. The Fund pays for
the sub-administrator and custodial out-of pocket expenses.
Sierra Advisors has agreed to voluntarily reimburse the Fund's total operating
expenses. For the six months ended March 31, 1997 the total reimbursement to the
Fund was $213,545.
The compensation of the officers and Trustees who are interested persons (as
defined in the 1940 Act) of the Advisor is paid by the Advisor or by its parent,
GWFC. The Fund pays the compensation of all other officers and Trustees of the
Fund. Trustees who are not interested persons are paid an annual fee of $5,000,
a fee of $1,000 per meeting of the Board of Trustees and a fee of $750 per
committee meeting of the Fund, plus expenses.
As of March 31, 1997 there was one shareholder who owned greater than five
percent of Class A Common Shares, representing 18.27% of the Fund at this date.
For the six months ended March 31, 1997, Great Western Financial Securities
Corporation and Sierra Investment Services Corporation ("SISC"), both registered
broker-dealers, have received $5,090 and $653, respectively, representing
commissions (front-end sales charges).
4. PURCHASE AND SALES OF SECURITIES
The aggregate cost of purchases and proceeds from sales of securities, excluding
U.S. Government and short-term investments, for the six months ended March 31,
1997 was $1,025,000 and $1,133,102, respectively.
5. TENDER OF SHARES
The Board of Trustees of the Fund currently intends, each quarter, to consider
authorizing the Fund to make tender offers for a portion of its outstanding
Class A Common Shares at the then current net asset value of these Common
Shares. The Fund does not intend to list its Common Shares on any national
securities exchange and none of the Fund, the Advisor or SISC intends to make a
secondary trading market in the classes of the Common Shares at any time.
Accordingly, there is not expected to be any secondary trading market in the
Common Shares and an investment in such Common Shares should be considered
illiquid. There can be no assurance that the Fund will in fact tender for any of
its Common Shares. If the Fund tenders for Common Shares there is no guarantee
that all, or any, Common Shares tendered will be purchased. An early withdrawal
charge may be charged by SISC on those repurchases or tenders done during the
first or second year after purchase. For the six months ended March 31, 1997,
145,373 shares were tendered and repurchased by the Fund with no early
withdrawal charge.
6. SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Fund to issue an unlimited number of full
and fractional Common Shares of beneficial interest with no par value. The Fund
initially is offering 5,000,000 Class A Common Shares in a continuous offering
pursuant to Rule 415 under the Securities Act of 1933, as amended.
7. ORGANIZATION COSTS
Expenses incurred in connection with the organization of the Fund, including the
fees and expenses of registering and qualifying its shares for distribution
under Federal and state securities regulations, are being amortized on a
straight-line basis over a period of five years from commencement of operations
of the Fund. In the event any of the initial shares of the Fund are redeemed by
any holder thereof during the
- 11 -
<PAGE> 13
SIERRA PRIME INCOME FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
amortization period, the proceeds of such redemptions will be reduced by an
amount equal to the pro-rata portion of unamortized deferred organizational
expenses in the same proportion as the number of shares being redeemed bears to
the number of initial shares of such Fund outstanding at the time of such
redemption. To the extent that proceeds of the redemptions are less than such
pro-rata portion of any unamortized organizational expenses, Sierra
Administration has agreed to reimburse the Fund.
8. SENIOR LOAN PARTICIPATIONS
The Fund invests primarily in participations, assignments, or acts as a party to
the primary lending syndicate of a Variable Rate Senior Loan interest to United
States corporations, partnerships, and other entities. When the Fund purchases a
participation of a Senior Loan interest, the Fund typically enters into a
contractual agreement with the lender or other third party selling the
participation, but not with the borrower directly. As such, the Fund assumes the
credit risk of the Borrower, Selling Participant or other persons
interpositioned between the Fund and the Borrower.
At March 31, 1997, the following sets forth the selling participants with
respect to interests in Senior Loans purchased by the Fund on a participation
basis.
Principal
Selling Participant Amount Value
- ------------------- ----------- -----------
Goldman Sachs Credit Partners $ 2,839,055 $ 2,838,478
Chase Securities Inc. 1,711,506 1,711,121
Bankers Trust 678,564 678,467
Morgan Guaranty 532,902 533,894
Lehman Commercial Paper, Inc. 472,613 473,156
NationsBank 186,050 187,381
----------- -----------
$ 6,420,690 $ 6,422,497
=========== ===========
9. LINE OF CREDIT
Sierra Prime Income Fund and the Sierra Trust Funds participate in a $40 million
line of credit provided by Deutsche Bank AG, New York Branch (the "Bank") under
a Credit Agreement (the "Agreement") dated May 22, 1996, primarily for temporary
or emergency purposes, including the meeting of redemption requests that
otherwise might require the untimely disposition of securities. Under the
Agreement, Sierra Prime Income Fund may borrow up to $433,000 plus its pro rata
portion of any unused base commitment allocation of the other borrowers under
the Agreement. Interest is payable at one of the following rates depending on
the type of loan designated by the borrower: (i) the higher of 0.50% in excess
of the Federal Funds Rate and the prime lending rate announced by the Bank; (ii)
the New York Interbank Offered Rate (NIBOR) plus 0.35% on an annualized basis;
or (iii) the London Interbank Offered Rate (LIBOR) plus 0.35% on an annualized
basis. The Fund is charged an aggregate commitment fee computed at a rate equal
to 0.05% on an annual basis of the daily average unutilized credit balance. The
Agreement requires that the aggregate outstanding principal amount of the loan
made shall not exceed 33 1/3 % of the value of the total assets of the fund less
all liabilities and indebtedness not represented by senior securities. The Fund
currently expects, however, to limit its borrowing to an amount sufficient to
meet its tender offer purchases or 10% of its assets, whichever is greater.
During the six months ended March 31, 1997, the Fund had not borrowed under the
Agreement.
10. MISCELLANEOUS
On March 6, 1997, Great Western Financial Corporation ("Great Western"), the
indirect parent of the Advisor, and Washington Mutual, Inc. ("Washington
Mutual"), a financial services company, announced that they had entered into an
Agreement and Plan of Merger providing for the merger of Great Western
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<PAGE> 14
SIERRA PRIME INCOME FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
with and into a wholly-owned subsidiary of Washington Mutual (the "Merger").
Subject to satisfaction or waiver of certain conditions, including the receipt
of necessary shareholder and regulatory approvals, it is anticipated that the
Merger would close in the third quarter of 1997. Following the Merger, the
Advisor would be an indirect subsidiary of Washington Mutual. The Merger was
announced following the announcement by H.F. Ahmanson ("Ahmanson") of an
unsolicited proposal for the merger of Great Western and Ahmanson, which
proposal was subsequently revised and remains outstanding.
On February 5, 1997, Morgan Stanley Group Inc. ("Morgan Stanley") and Dean
Witter, Discover & Co. ("DWD") announced that they had entered into an Agreement
and Plan of Merger (the "Merger Agreement") pursuant to which Morgan Stanley
will be merged with and into DWD, with DWD as the surviving entity. The name of
the surviving corporation will be Morgan Stanley, Dean Witter, Discover & Co.
("MSDWD"). Morgan Stanley is the parent company of the Sub-Advisor. The Merger
is expected to be consummated in mid-1997 and is subject to certain closing
conditions, including certain regulatory approvals and the approval of
shareholders of both companies.
11. SUBSEQUENT EVENTS
The fourth tender offer of the Sierra Prime Income Fund commenced on March 12,
1997 to expire on April 11, 1997, whereby the Fund offered to purchase from
shareholders 117,068 Class A Common Shares or 10% of the outstanding Class A
Common Shares. Subsequently, the Fund extended this tender offer in order to
increase the original offer by 10% or 117,068 Class A Common Shares so that the
total offer to purchase amounted to 234,136 Class A Common Shares or 20% of the
outstanding shares of the Fund. The tender offer extension expired on May 9,
1997. A total of 201,483 shares were tendered to the Fund for repurchase.
- 13 -
<PAGE> 15
-----------
SIERRA
P R I M E
-----------
INCOME FUND
SIERRA PRIME INCOME FUND
9301 CORBIN AVENUE, SUITE 333
NORTHRIDGE, CALIFORNIA 91324
800-222-5852
THE SIERRA PRIME INCOME FUND is advised
by SIERRA INVESTMENT ADVISORS CORPORATION (SIAC)
distributed by SIERRA INVESTMENT SERVICES CORPORATION (SISC)
and sold through Great Western Financial Securities Corporation (GWFSC)
SIAC, SISC and GWFSC are independent affiliates of Great Western Bank.
