PRIME INCOME TRUST, N-30D, 1994-05-19

PRIME INCOME TRUST
N-30D, 1994-05-19

Previous: LIVE ENTERTAINMENT INC, 10-Q/A, 1994-05-19

Next: SCHERER R P CORP /DE/, 8-K, 1994-05-19

<PAGE> 1

PRIME INCOME TRUST
Two World Trade Center
New York, New York 10048

DEAR SHAREHOLDER:
- - --------------------------------------------------------------------------------

With a total return of 3.82 percent, Prime Income Trust delivered
impressive performance over the last six months compared to other fixed-income
investments in general, and other prime-rate funds in particular. The Trust's
performance was even more attractive over the volatile first quarter of 1994,
when it produced a total return of 1.86 percent, outperforming both the Lehman
Brothers Government/Corporate Bond Index (-3.13 percent) and the First Boston
High Yield Index (-1.06 percent).

The Trust is designed to track short-term interest rates, such as the prime
rate or the three-month London Interbank Offered Rate (LIBOR), while maintaining
a relatively stable per share net asset value (NAV) in both increasing and
decreasing interest rate scenarios. The Trust's success is reflected in the
current NAV of $10.00 per share and the stable distribution of income dividends.
For the first quarter, the Trust was ranked #1 in the prime-rate fund category
by Lipper Analytical Services, Inc. The Trust continues to outperform
money-market securities and certificates of deposit (CDs) by more than 250 basis
points. Please bear in mind that an investment in the Trust may not be
appropriate for all investors and is not intended to be a complete investment
program. Also, while higher yields may be realized using certain vehicles, such
as the Trust, an investor's capital may be exposed to risk not present in CDs
and other insured investments.

Since the beginning of the year, the prime rate and the LIBOR -- the
primary rate on which the Trust's loans are based -- have moved up as the
Federal Reserve Board has increased the federal-funds rate. Both rates have
increased by approximately 50 basis points to 6.25 percent and 4.00 percent,
respectively. From all indications, further increases can be expected for
short-term rates, which would continue to benefit the Trust in the form of
increased dividends without impacting NAV (fluctuations in interest rates are
unlikely to materially affect the Trust's NAV because the positions held in the
portfolio have an automatic interest rate adjustment, or reset, interval,
usually not exceeding 90 days).

Over the last six months the Trust has experienced a net outflow of assets.
After two tenders in December of 1993 and March of this year, net assets
declined $45 million to approximately $266 million. Despite this decrease, new
fund sales have been rising as many investors have realized the benefits of a
prime-rate vehicle in a rising interest rate environment. We expect this trend
to continue throughout 1994.

Transaction flow has slowed since our last report to shareholders on
September 30, 1993, as a result of the volatility in the bond and equity
markets. However, overall activity remains stable, albeit at lower levels. New
transactions have been moderate but sufficient, and the ability to sell assets
in the secondary market, when needed, has been maintained. Activity in the Trust
has been split evenly between new transactions and secondary market
transactions. We have also been able to maintain good portfolio diversification,
with 30 credits representing 23 industries. Our strategy continues to be focused
on the availability of new market transactions, originated by Chemical Banking
Corp. and J.P. Morgan & Co. Incorporated, among others. Furthermore, the
porfolio is adjusted by secondary market transactions. Larger exposures in the
portfolio continue to be reduced, as evidenced by the 20 percent prepayment on
the Northwest Airlines, Inc. loan. During the period, the Trust exited its
position in the Almac Supermarkets loan. Most of the Trust's assets have final
maturities of three to six years, with an average maturity of five years (this
is attributable to scheduled amortization payments of the loans).

For the remainder of the year we anticipate further increases in short-term
interest rates. This scenario would benefit the Trust in the form of increased
dividends and preservation of capital.

We appreciate your support of Prime Income Trust and look forward to
continuing to serve your investment needs.
Very truly yours,

/s/ CHARLES A. FIUMEFREDDO
--------------------------
Charles A. Fiumefreddo
Chairman of the Board
<PAGE> 2

PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS March 31, 1994 (unaudited)
- - --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Description
Principal and Interest
Amount Maturity Date Rates Value
- - ----------- ------------------------------------------------------------------- ---------------- ------------
<C> <S> <C> <C>
SENIOR COLLATERALIZED LOANS (A)(88.5%)
AEROSPACE (1.9%)
$ 2,073,518 Gulfstream Aerospace Corp.
Term Loan, due 3/31/97............................................. 5.50 % $ 2,073,145
2,900,000 Gulfstream Aerospace Corp.
Term Loan, due 3/3/98.............................................. 6.82 2,899,188
------------
4,972,333
------------
AIRLINES (7.1%)
5,643,953 Northwest Airlines, Inc.
(Participation: First National Bank of Chicago)(b)
Term Loan, due 9/15/97............................................. 6.125 to 8.25 5,494,875
13,725,606 Northwest Airlines, Inc.
Term Loan, due 9/15/97............................................. 6.125 to 8.25 13,358,872
------------
18,853,747
------------
AUTOMOTIVE PARTS (1.9%)
3,667,953 Safelite Glass Corp.
Term Loan, due 6/30/96............................................. 6.57 3,667,770
1,332,047 Safelite Glass Corp.
Working Capital Loan, due 6/30/96.................................. 6.57 1,331,980
------------
4,999,750
------------
BREWERS (5.6%)
5,000,000 G. Heileman Brewing Company, Inc.
(Participation: Bankers Trust)(b)
Term Loan, due 12/31/00............................................ 8.25 5,000,000
10,000,000 G. Heileman Brewing Company, Inc.
Term Loan, due 12/31/00............................................ 8.25 10,000,000
------------
15,000,000
------------
COMPUTERS (2.1%)
5,516,876 Lexmark International, Inc.
Term Loan, due 3/27/98............................................. 5.875 to 6.375 5,505,407
------------
CONTAINERS (3.8%)
10,000,000 Silgan Corporation
Term Loan, due 9/15/96............................................. 6.63 to 6.81 9,997,250
------------
CONVENIENCE STORES (3.8%)
10,000,000 Circle K Corporation
Term Loan, due 4/30/00............................................. 6.4375 to 6.6875 9,997,947
------------
DRUG STORES (5.2%)
4,891,666 Hook Super Rx, Inc.
Term Loan, due 7/31/00............................................. 6.565 4,891,667
5,000,000 Jack Eckerd Corp.
Term Loan, due 6/15/00............................................. 6.75 4,999,150
4,018,759 M & H Drugs, Inc.
Term Loan, due 9/1/96.............................................. 6.565 4,018,759
------------
13,909,576
------------
ELECTRONICS (1.9%)
5,000,000 Sperry Marine, Inc.
Term Loan, due 12/31/00............................................ 7.1875 to 7.4375 4,999,030
------------
FOOD PROCESSING (4.7%)
6,000,000 American Italian Pasta Company
Term Loan, due 3/31/99............................................. 7.00 5,999,340
6,488,192 Del Monte Corp.
Term Loan, due 12/15/97............................................ 6.875 6,487,089
------------
12,486,429
------------
</TABLE>
<PAGE> 3

PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS March 31, 1994 (unaudited)(continued)
- - --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Description
Principal and Interest
Amount Maturity Date Rates Value
- - ----------- ------------------------------------------------------------------- ---------------- ------------
<C> <S> <C> <C>
GLASS (0.9%)
$ 2,691,535 HGP Industries, Inc.
Term Loan, due 12/31/99(c)......................................... 4.00 % $ 2,341,635
------------
LEASING CO. (6.9%)
18,823,358 GPA Group PLC
(Participation: First National Bank of Chicago)(b)
Revolver, due 9/30/96.............................................. 4.625 to 5.625 18,445,565
------------
MANUFACTURING (1.9%)
5,000,000 Desa International, Inc.
Term Loan, due 11/30/00............................................ 6.75 4,990,050
------------
MANUFACTURING CONSUMER AND INDUSTRY (1.6%)
4,338,787 Sealy Corporation, Inc.
Term Loan, due 11/30/00............................................ 6.5625 4,338,130
------------
PAPER PRODUCTS (5.2%)
1,257,574 Fort Howard Corp.
(Participation: Bank of Montreal)(b)
Term Loan, due 12/31/96............................................ 5.50 to 7.50 1,256,720
891,358 Fort Howard Corp.
(Participation: National Bank of Canada)(b)
Term Loan, due 12/31/96............................................ 5.50 to 7.50 890,752
1,489,969 Fort Howard Corp.
(Participation: National Bank of North Carolina)(b)
Term Loan, due 12/31/96............................................ 5.50 to 7.50 1,488,957
1,796,535 Fort Howard Corp.
(Participation: The Royal Bank of Canada)(b)
Term Loan, due 12/31/96............................................ 5.50 to 7.50 1,795,314
4,757,304 SIBV/MS Holdings Inc.
Term Loan, due 12/31/97............................................ 5.81 to 5.94 4,756,971
3,602,777 SIBV/MS Holdings II Inc.
Term Loan, due 12/31/97............................................ 6.6875 3,602,777
------------
13,791,491
------------
PERSONAL PRODUCTS (7.5%)
10,000,000 Playtex Family Products, Inc.
Tranche B Term Loan, due 6/1/01.................................... 6.44 9,995,300
10,000,000 Playtex Family Products, Inc.
Tranche C Term Loan, due 6/1/02.................................... 6.94 9,995,300
------------
19,990,600
------------
RECORD & TAPE (6.0%)
7,500,000 Camelot Music, Inc.
Term Loan, due 2/28/01............................................. 6.50 to 6.75 7,489,566
8,615,385 The Wherehouse Entertainment, Inc.
Term Loan, due 1/31/98............................................. 6.5625 to 6.625 8,614,983
------------
16,104,549
------------
RETAIL DEPARTMENT STORES (1.9%)
4,980,700 Saks & Company
Term Loan, due 6/30/00............................................. 6.69 4,970,739
------------
RETAIL SPECIALTY (2.6%)
4,741,601 General Nutrition, Inc.
Term Loan A, due 7/15/97........................................... 5.9375 4,741,599
2,291,067 General Nutrition, Inc.
Term Loan B, due 1/15/99........................................... 6.4375 2,291,067
------------
7,032,666
------------
</TABLE>
<PAGE> 4

PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS March 31, 1994 (unaudited)(continued)
- - --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Number of
Shares
- - -----------
<S> <C> <C> <C>
COMMON STOCK (D) (0.0%)
FOOD SERVICES (0.1%)
4,209 Flagstar Companies (Identified Cost $60,514)....................... 39,994
------------
</TABLE>

<TABLE>
<CAPTION>
Principal
Amount
- - -----------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS (11.4%)
COMMERCIAL PAPER (E) (2.2%)
ELECTRIC (0.9%)
$ 2,400,000 General Electric Credit Corp.
due 4/13/94........................................................ 3.456 2,397,248
------------
FINANCE ENERGY (1.3%)
3,400,000 Chevron Oil Finance Corp.
due 4/5/94......................................................... 3.352 3,398,734
------------
TOTAL COMMERCIAL PAPER (AMORTIZED COST $5,795,982)................. 5,795,982
------------
U.S. GOVERNMENT AGENCIES (E) (8.9%)
12,570,000 Federal Farm Credit Bank
due 4/4/94......................................................... 3.472 12,566,365
11,100,000 Federal National Mortgage Association
due 4/4/94......................................................... 3.472 11,096,790
------------
TOTAL U.S. GOVERNMENT AGENCIES
(AMORTIZED COST $23,663,155)....................................... 23,663,155
------------
</TABLE>
<PAGE> 5

PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS March 31, 1994 (unaudited)(continued)
- - --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Principal
Amount Value
- - ----------- ------------
<C> <S> <C> <C>
REPURCHASE AGREEMENT (0.3%)
$ 916,219 The Bank of New York 3.50% due 4/1/94 (dated 3/31/94; proceeds
$916,219; collateralized by $962,581 U.S. Treasury Notes 6.25% due
2/15/03, valued at $934,543) (Identified Cost $916,219)............ $ 916,219
------------
TOTAL SHORT-TERM INVESTMENTS
(IDENTIFIED COST $30,375,356)...................................... 30,375,356
------------
TOTAL INVESTMENTS (IDENTIFIED COST $265,524,009)(F)................ 99.9 % 265,946,562
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES..................... 0.1 291,505
----- ------------
NET ASSETS......................................................... 100.0% $266,238,067
----- ------------
----- ------------
<FN>
- - ---------------

(a) Floating rate securities. Interest rates reset periodically. Interest rates
shown are those in effect at March 31, 1994.
(b) Participation; participation interests were acquired through the financial
institutions indicated parenthetically.
(c) Partial interest paid. Interest income is recorded as received.
(d) Non-income producing. Resale is restricted.
(e) Securities were purchased on a discount basis. The interest rates shown have
been adjusted to reflect a bond equivalent yield.
(f) The aggregate cost for federal income tax purposes is $265,524,009; the
aggregate gross unrealized appreciation is $1,045,330 and the aggregate
gross unrealized depreciation is $622,777, resulting in net unrealized
appreciation of $422,553.

See Notes to Financial Statements
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
PRIME INCOME TRUST
FINANCIAL STATEMENTS
- - ----------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1994 (unaudited)
- - ----------------------------------------------------------
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $265,524,009)(Note 1)... $ 265,946,562
Cash....................................... 317,939
Receivable for:
Interest................................. 1,408,314
Shares of beneficial interest sold....... 1,146,048
Deferred organizational expenses (Note
1)....................................... 32,073
Prepaid expenses and other assets.......... 162,249
-------------
TOTAL ASSETS....................... 269,013,185
-------------
LIABILITIES:
Investment advisory fee payable (Note 2)... 212,111
Administration fee payable (Note 3)........ 58,920
Accrued expenses (Note 4).................. 168,660
Dividends to shareholders.................. 33,022
Deferred facility fees..................... 2,302,405
Commitments and contingencies (Note 7).....
-------------
TOTAL LIABILITIES.................. 2,775,118
-------------
NET ASSETS:
Paid-in-capital............................ 267,109,722
Accumulated net realized loss on
investments.............................. (1,299,923)
Net unrealized appreciation on
investments.............................. 422,553
Accumulated undistributed net investment
income................................... 5,715
-------------
NET ASSETS......................... $ 266,238,067
-------------
-------------
NET ASSET VALUE PER SHARE,
26,622,346 shares outstanding (unlimited
shares authorized of $.01 par value)..... $10.00
-----
-----

</TABLE>

<TABLE>
<CAPTION>
- - ----------------------------------------------------------
STATEMENT OF OPERATIONS For the six months
ended March 31, 1994 (unaudited)
- - ----------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
INCOME
Interest................................. $ 8,698,436
Facility fees earned..................... 1,510,664
Other.................................... 379,020
-------------
TOTAL INCOME........................... 10,588,120
-------------
EXPENSES
Investment advisory fee (Note 2)......... 1,320,178
Administration fee (Note 3).............. 366,716
Shareholder reports and notices.......... 173,936
Transfer agent fees and expenses (Note
4)..................................... 133,360
Professional fees........................ 107,167
Registration fees........................ 36,539
Organizational expenses (Note 1)......... 23,922
Trustees' fees and expenses (Note 4)..... 15,929
Custodian fees........................... 11,480
Other.................................... 70,094
-------------
TOTAL EXPENSES......................... 2,259,321
-------------
NET INVESTMENT INCOME................ 8,328,799
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTE 1):
Net realized loss on investments......... (866,281)
Net change in unrealized depreciation on
investments............................ 3,384,972
-------------
NET GAIN ON INVESTMENTS................ 2,518,691
-------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS............ $ 10,847,490
-------------
-------------
</TABLE>

<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
- - ----------------------------------------------------------------------------------------------------------------------
For the six For the
months ended year ended
March 31, 1994 September 30,
(unaudited) 1993
------------------- -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income................................................. $ 8,328,799 $ 20,819,704
Net realized loss on investments...................................... (866,281) (433,642)
Net change in unrealized depreciation on investments.................. 3,384,972 (2,380,861)
------------------- -------------------
Net increase in net assets resulting from operations.............. 10,847,490 18,005,201
Dividends to shareholders from net investment income.................... (8,328,901) (20,831,307)
Net decrease from transactions in shares of beneficial interest (Note
5).................................................................... (47,759,748) (99,191,654)
------------------- -------------------
Total decrease.................................................... (45,241,159) (102,017,760)
NET ASSETS:
Beginning of period..................................................... 311,479,226 413,496,986
------------------- -------------------
END OF PERIOD (including undistributed net investment income of $5,715
and $5,817, respectively).............................................. $ 266,238,067 $ 311,479,226
------------------- -------------------
------------------- -------------------
</TABLE>

See Notes to Financial Statements
<PAGE> 7

PRIME INCOME TRUST
FINANCIAL STATEMENTS (continued)
- - --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS For the Six Months Ended March 31, 1994 (unaudited)
- - --------------------------------------------------------------------------------

<TABLE>
<S> <C>
INCREASE (DECREASE) IN CASH:
Cash Flows from Operating Activities:
Net investment income......................................................................... $ 8,328,799
Adjustments to reconcile net investment income to net cash provided by
operating activities:
Decrease in receivables and other assets related to operations.............................. 244,985
Decrease in payables related to operations.................................................. (1,443,400)
-----------------
Net cash provided by operating activities................................................. 7,130,384
-----------------
Cash Flows from Investing Activities:
Purchases of investments...................................................................... (150,259,563)
Principal repayments/sales of investments..................................................... 214,194,571
Net sales/maturities of short-term investments................................................ (14,031,608)
-----------------
Net cash provided by investing activities................................................. 49,903,400
-----------------
Cash Flows from Financing Activities:
Shares of beneficial interest sold............................................................ 6,068,517
Shares tendered............................................................................... (59,292,676)
-----------------
(53,224,159)
Dividends to shareholders (net of reinvested dividends of $4,447,076)......................... (3,959,826)
-----------------
Net cash used in financing activities..................................................... (57,183,985)
-----------------
Net decrease in cash.............................................................................. (150,201)
Cash at beginning of period....................................................................... 468,140
-----------------
CASH AT END OF PERIOD............................................................................. $ 317,939
-----------------
-----------------
</TABLE>

See Notes to Financial Statements
<PAGE> 8

PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS (unaudited)
- - --------------------------------------------------------------------------------
1. ORGANIZATION AND ACCOUNTING POLICIES -- Prime Income Trust (the "Trust") is
registered under the Investment Company Act of 1940, as amended (the "Act"), as
a non-diversified, closed-end management investment company. It was organized on
August 17, 1989 as a Massachusetts business trust and commenced operations on
November 30, 1989.

The Trust offers and sells its shares to the public on a continuous basis.
The Trustees intend, each quarter, to consider authorizing the Trust to make
tender offers for all or a portion of its outstanding shares of beneficial
interest at the then current net asset value of the shares.

The following is a summary of significant accounting policies:

A. Valuation of Investments -- (1) The Trustees believe that, at present,
there are not sufficient market quotations provided by banks, dealers, or
pricing services respecting interests in senior collaterialized loans
("Senior Loans") to corporations, partnerships and other entities
("Borrower") to enable the Trust to properly value Senior Loans based on
available market quotations therefor. Accordingly, until the market for
Senior Loans develops, interests in Senior Loans held by the Trust are
valued at their fair value in accordance with procedures established in
good faith by the Trustees. Under the procedures adopted by the Trustees,
interests in Senior Loans are priced in accordance with a matrix which
takes into account the relationship between current interest rates and
interest rates payable on each Senior Loan, as well as the total number of
days in each interest period and the period remaining until the next
interest rate determination or maturity of the Senior Loan. Adjustments in
the matrix-determined price of a Senior Loan will be made in the event of a
default on a Senior Loan or a significant change in the creditworthiness of
the Borrower; (2) all portfolio securities for which over-the-counter
market quotations are readily available are valued at the latest bid price;
and (3) short-term instruments having a maturity date of more than 60 days
are valued on a "mark-to-market" basis, that is, at prices based on market
quotations for securities of similar type, yield, quality and maturity.
Discounted short-term instruments are similarly valued until 60 days prior
to maturity and thereafter at amortized value. Discounted short-term
instruments having a maturity date of 60 days or less at the time of
purchase are valued at amortized cost unless the Trustees determine this
does not represent fair market value. Other assets are valued at fair value
in accordance with procedures established in good faith by the Trustees.

B. Accounting for Investments -- Security transactions are accounted for on
the trade date (date the order to buy or sell is executed). When the Trust
buys an interest in a Senior Loan, it may receive a facility fee, which is
a fee paid to lenders upon origination of a Senior Loan and/or a commitment
fee which is a fee paid to lenders on an ongoing basis based upon the
undrawn portion committed by the lenders of the underlying Senior Loan. The
Trust amortizes the facility fee over the expected term of the loan. When
the Trust sells an interest in a Senior Loan it may be required to pay fees
or commissions to the purchaser of the interest. Realized gains and losses
on security transactions are determined on the identified cost method.
Interest income is accrued daily except where collection is not expected.

C. Senior Loans -- The Trust invests primarily in Senior Loans to
Borrowers. Senior Loans are typically structured by a syndicate of lenders
("Lenders"), one or more of which administers the Senior Loan on behalf of
the Lenders ("Agent"). Lenders may sell interests in Senior Loans to third
parties ("Participations") or may assign all or a portion of their interest
in a Senior Loan to third
<PAGE> 9

PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS (unaudited)(continued)
- - --------------------------------------------------------------------------------

parties ("Assignments"). Senior Loans are exempt from registration under
the Securities Act of 1933. Presently they are not readily marketable and
are often subject to restrictions on resale.

D. Federal Income Tax Status -- It is the Trust's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its taxable income to its
shareholders. Accordingly, no federal income tax provision is required.

E. Dividends and Distributions to Shareholders -- The Trust records
dividends and distributions to its shareholders on the record date. The
amount of dividends and 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. To the extent 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. Dividends and distributions which exceed net investment
income and net realized capital gains for financial reporting purposes but
not for tax purposes are reported as dividends in excess of net investment
income or distributions in excess of net realized capital gains. To the
extent they exceed net investment income and net realized capital gains for
tax purposes, they are reported as distributions of paid-in-capital.

F. Organizational Expenses -- The Trust's Former Administrator paid the
organizational expenses of the Trust in the amount of $248,312. The Trust
has reimbursed the Administrator for these cost. These reimbursed expenses
have been deferred and are being amortized by the straight-line method over
a period not to exceed five years from the commencement of operations.

G. Repurchase Agreements -- When the Trust enters into a repurchase
agreement, the Trust's custodian takes possession on behalf of the Trust of
the collateral pledged for investments in repurchase agreements. It is the
policy of the Trust to value the underlying collateral daily on a mark-
to-market basis to determine that the value, including accrued interest, is
at least equal to the repurchase price plus accrued interest. In the event
of default of the obligation to repurchase, the Trust has the right to
liquidate the collateral and apply the proceeds in satisfaction of the
obligation.

2. INVESTMENT ADVISORY AGREEMENT -- Pursuant to an Investment Advisory
Agreement (the "Advisory Agreement") with Dean Witter InterCapital Inc. (the
"Investment Adviser"), the Trust pays its Investment Adviser an advisory fee,
accrued daily and payable monthly, by applying the annual rate of 0.90% to the
first $500 million of the Trust's average daily net assets and 0.85% of average
daily net assets in excess of $500 million.

Under the terms of the Advisory Agreement, the Investment Adviser manages
the Trust's assets. Also, the Investment Adviser pays the salaries of all
personnel, including officers of the Trust, who are employees of the Investment
Adviser.

3. ADMINISTRATION AGREEMENT -- Through December 31, 1993, pursuant to an
Administration Agreement with Dean Witter InterCapital Inc. (the "Former
Administrator"), the Trust paid an administration fee, calulated daily and
payable monthly, by applying the annual rate of 0.25% to the Trust's average
daily net assets. On January 1, 1994, the Administration Agreement between the
Former Administrator and the Trust had been terminated and a new Administration
Agreement had been entered into between Dean Witter Services Company Inc. (the
"Administrator"), a wholly-owned subsidiary of the Former Adminstrator, and the
Trust. The nature and scope of the services being provided to the Trust or any
fees being paid by the Trust under the new Agreement are identical to those of
the previous Agreement.
<PAGE> 10

PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS (unaudited)(continued)
- - --------------------------------------------------------------------------------

Under the terms of the Administration Agreement, the Administrator
maintains certain of the Trust's books and records and furnishes, at its own
expense, such office space, facilities, equipment, clerical help, bookkeeping
and certain legal services as the Trust may reasonably require in the conduct of
its business. In addition, the Administrator pays the salaries of all personnel,
including officers of the Trust, who are employees of the Administrator.

4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES -- Purchases and
principal prepayments/sales of portfolio securities for the six months ended
March 31, 1994 excluding, short-term investments, aggregated $150,259,563 and
$214,194,571, respectively.

Dean Witter Distributors Inc., an affiliate of the Investment Adviser has
informed the Trust that for the six months ended March 31, 1994, they received
approximately $424,000 in early withdrawal charges from shares tendered. The
Trust's shareholders pay such charges, which are not an expense of the Trust.

Dean Witter Trust Company, an affiliate of the Investment Adviser,
Administrator and Distributor, is the Trust's transfer agent. At March 31, 1994,
the Trust had transfer agent fees and expenses payable of $43,078.

On April 1, 1991, the Trust established an unfunded noncontributory defined
benefit pension plan covering all independent Trustees of the Trust who will
have served as independent Trustees for at least five years at the time of
retirement. Benefits under this plan are based on years of service and
compensation during the last five years of service. Aggregate pension costs for
the six months ended March 31, 1994, included in Trustees' fees and expenses in
the Statement of Operations, amounted to $4,577. At March 31, 1994, the Trust
had an accrued pension liability of $40,707 which is included in accrued
expenses in the Statement of Assets and Liabilities.

5. SHARES OF BENEFICIAL INTEREST -- Transactions in shares of beneficial
interest were as follows:

<TABLE>
<CAPTION>
Shares Amount
----------- -------------
<S> <C> <C>
Balance, September 30, 1992.................................. 41,390,032 $ 414,061,124
Shares sold.................................................. 1,735,717 17,314,978
Shares issued to shareholders for reinvestment of
dividends.................................................. 1,113,636 11,101,773
Shares tendered (four quarterly tender offers)............... (12,811,288) (127,608,405)
----------- -------------
Balance, September 30, 1993.................................. 31,428,097 314,869,470
Shares sold.................................................. 711,175 7,085,852
Shares issued to shareholders for reinvestment of
dividends.................................................. 446,821 4,447,076
Shares tendered (two quarterly tender offers)................ (5,963,747) (59,292,676)
----------- -------------
Balance, March 31, 1994...................................... 26,622,346 $ 267,109,722
----------- -------------
----------- -------------
</TABLE>

On April 8, 1994, the Trustees approved a tender offer to purchase up to 4
million shares of beneficial interest to commence on May 18, 1994.

6. FEDERAL INCOME TAX STATUS -- Any net capital loss incurred after October 31
("Post-October losses") within the taxable year is deemed to arise on the first
business day of the Trust's next taxable year. The Trust incurred and will elect
to defer a net capital loss of approximately $434,000 during fiscal 1993. As of
September 30, 1993, the Trust had temporary book/tax differences which were
primarily attributable to Post-October losses. For the six months ended March
31, 1994, the Trust incurred approximately $866,000 of net capital losses.
<PAGE> 11

PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS (unaudited)(continued)
- - --------------------------------------------------------------------------------

7. COMMITMENTS AND CONTINGENCIES -- As of March 31, 1994 the Trust had an
unfunded loan commitment pursuant to the following loan agreement:

<TABLE>
<CAPTION>
Unfunded
Borrower Commitment
- - ----------------------------------------------------------------------------- ----------
<S> <C>
GPA Group PLC................................................................ $2,125,706
----------
----------
</TABLE>

8. FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK -- When the Trust
purchases a Participation, the Trust typically enters into a contractual
relationship with the Lender or third party selling such Participation ("Selling
Participant"), but not with the Borrower. As a result, the Trust assumes the
credit risk of the Borrower, the Selling Participant and any other persons
interpositioned between the Trust and the Borrower ("Intermediate Participants")
and the Trust may not directly benefit from the collateral supporting the Senior
Loan in which it has purchased the Participation. Because the Trust will only
acquire Participations if the Selling Participant and each Intermediate
Participant is a financial institution, the Trust may be considered to have a
concentration of credit risk in the banking industry. At March 31, 1994, such
Participations had a fair value of $34,372,183.

The Trust will invest only in Senior Loans where the Investment Adviser
believes that the Borrower can meet debt service requirements in a timely manner
and where the market value of the collateral at the time of investment equals or
exceeds the amount of the Senior Loan. In addition, the Trust will only acquire
Participations if the Selling Participant, and each Intermediate Participant, is
a financial institution which meets certain minimum creditworthiness standards.

FINANCIAL HIGHLIGHTS (unaudited)
- - --------------------------------------------------------------------------------
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:

<TABLE>
<CAPTION>
For the
period
November 30,
For the six For the year ended September 30, 1989* through
months ended ----------------------------------- September 30,
March 31, 1994 1993 1992 1991 1990
-------------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........... $ 9.91 $ 9.99 $ 10.00 $ 10.00 $ 10.00
-------------- --------- --------- --------- -------------
Net investment income.......................... 0.28 0.55 0.62 0.84 0.74
Net realized and unrealized gain (loss) on
investments.................................. 0.09 (0.08) (0.01) -0- (0.01)
-------------- --------- --------- --------- -------------
Total from investment operations................. 0.37 0.47 0.61 0.84 0.73
-------------- --------- --------- --------- -------------
Dividends from net investment income............. (0.28) (0.55) (0.62) (0.84) (0.73)
-------------- --------- --------- --------- -------------
Net asset value, end of period................... $ 10.00 $ 9.91 $ 9.99 $ 10.00 $ 10.00
-------------- --------- --------- --------- -------------
-------------- --------- --------- --------- -------------
TOTAL INVESTMENT RETURN+......................... 3.82%(1) 4.85% 6.23% 8.77% 7.57%(1)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)....... $266,238 $ 311,479 $ 413,497 $ 479,941 $ 328,189
Ratio of expenses to average net assets........ 1.54%(2) 1.45% 1.47% 1.52% 1.48%(2)
Ratio of net investment income to average net
assets....................................... 5.68%(2) 5.53% 6.14% 8.23% 8.95%(2)
Portfolio turnover rate........................ 56% 92% 46% 42% 35%

<FN>
- - ---------------

* Commencement of operations.

+ Does not reflect the deduction of sales load.

(1) Not annualized.

(2) Annualized.
See Notes to Financial Statements
</TABLE>
<PAGE> 12
TRUSTEES
Jack F. Bennett
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Dr. John E. Jeuck
Dr. Manuel H. Johnson
Paul Kolton
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
Edward R. Telling

OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer

Sheldon Curtis
Vice President, Secretary and General Counsel

Rafael Scolari
Vice President

Thomas F. Caloia
Treasurer

CUSTODIAN
The Bank of New York
110 Washington Street
New York, New York 10286

TRANSFER AGENT
Dean Witter Trust Company
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311

INDEPENDENT ACCOUNTANTS
Price Waterhouse
1177 Avenue of the Americas
New York, New York 10036

INVESTMENT ADVISER
Dean Witter InterCapital Inc.
Two World Trade Center
New York, New York 10048

The financial statements included herein have been taken from the
records of the Trust without examination by the independent accountants
and accordingly they do not express an opinion thereon.

This report is submitted for the general information of shareholders of
the Trust. For more detailed information about the Trust, its officers and
trustees, fees, expenses and other pertinent information, please see the
prospectus of the Trust.

This report is not authorized for distribution to prospective investors in
the Trust unless preceded or accompanied by an effective prospectus.

PRIME
INCOME
TRUST

Semiannual Report
March 31, 1994
<PAGE> 13

APPENDIX TO ELECTRONIC FORMAT DOCUMENT

The back cover of the Semiannual Report in the printed version contains a
picture of a long column from a building with a calendar beneath it.