<PAGE>
PRIME INCOME TRUST
Two World Trade Center
New York, New York 10048
DEAR SHAREHOLDER:
- --------------------------------------------------------------------------------
The fiscal year ended September 30, 1994 began with interest rates declining
to their lowest level in two decades and the economy growing at an anemic pace.
However, by February, stronger-than-expected economic growth and renewed
inflationary fears prompted the Federal Reserve Board to reverse five years of
accommodative monetary policy by increasing the federal-funds rates by 25 basis
points to 3.25 percent. By mid-August, the Federal Reserve Board had raised the
federal-funds rate five times to 4.75 percent and the discount rate to 4.00
percent in an effort to slow the economy and keep inflation at bay. During the
same period, the prime rate and three-month London Interbank Offered Rate
(LIBOR) increased to 7.75 percent and 5.5 percent by September 30, 1994,--up
from 6.00 percent and 3.375 percent a year ago, respectively. While many
fixed-income investments posted losses during the reporting period, Prime Income
Trust, with its portfolio of senior, fully-secured floating rate loans, actually
benefited from higher interest rates.
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 net asset value (NAV) per share in both increasing and
decreasing interest rate scenarios. Since the interest rates on the loans in the
portfolio are reset usually every three months, the Trust truly reflects current
rates. For the fiscal year ended September 30, 1994, Prime Income Trust provided
a total return of 7.32 percent. The Trust was ranked #2 of 5 closed-end loan
participation funds for the 12 months ended September 30, 1994, as measured by
Lipper Analytical Services, Inc.
PORTFOLIO ACTIVITY
Over the last twelve months, the Trust's net assets decreased $6.5 million
to $305 million, net of tender offers made during the fiscal year. Loan
transaction flow has remained stable since our last report to shareholders on
March 31, 1994, in spite of increased volatility in the financial markets.
Activity in the Trust has been split evenly between new transactions and
secondary market transactions. Secondary market trades have been used to balance
the portfolio in terms of diversification and credit exposure. We have also been
able to maintain good portfolio diversification, with 37 credits representing 26
industries. Most of the Trust's assets have final maturities of six to eight
years, with a weighted average maturity of five years (this is attributable to
scheduled amortization payments of the loans). Before selecting loans for the
portfolio, the Trust's portfolio manager carefully researches the
creditworthiness of both the borrowers and lending institutions. Our strategy
continues to be focused on the availability of new market transactions,
originated by major money center banks and other institutions. The Trust
continued to reduce its exposure to some of its larger holdings during the
fiscal year, including its two largest credits, Northwest Airlines and Guiness
Pete Aviation (GPA). As of September 30, 1994, the average portfolio position
represented approximately 2.4 percent of total assets, with no single loan
representing more than 6.1 percent of total assets.
<PAGE>
LOOKING AHEAD
In the months ahead, further Federal Reserve Board action remains a
possibility if the economy does not exhibit signs of slowing down and if
inflation becomes a threat. Prime Income Trust should continue to benefit from
any increase in prevailing interest rates, which would be reflected to
shareholders in terms of higher monthly distributions.
We appreciate your support of Prime Income Trust and look forward to
continuing to serve your investment needs.
Very truly yours,
Charles A. Fiumefreddo
CHAIRMAN OF THE BOARD
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1994
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<TABLE>
<CAPTION>
DESCRIPTION
PRINCIPAL AND INTEREST
AMOUNT MATURITY DATE RATES VALUE
- ------------- --------------------------------------------------------------------- -------------------- ---------------
<C> <S> <C> <C>
SENIOR COLLATERALIZED LOANS (A) (90.9%)
AEROSPACE (1.6%)
$ 2,073,518 Gulfstream Aerospace Corp.
Term Loan, due 3/31/97............................................... 7.63% $ 2,071,610
2,900,000 Gulfstream Aerospace Corp.
Term Loan, due 3/3/98................................................ 8.00 2,897,042
---------------
4,968,652
---------------
AIRLINES (7.5%)
10,000,000 AeroMexico 1994-I U.S. Receivables Trust (Mexico)+
Term Loan, due 7/31/99............................................... 9.00 9,998,200
5,297,206 Northwest Airlines, Inc.
(Participation: First National Bank of Chicago)(b)
Term Loan, due 9/15/97............................................... 7.25 to 7.625 5,187,605
7,962,105 Northwest Airlines, Inc.
Term Loan, due 9/15/97............................................... 7.25 to 7.625 7,797,368
---------------
22,983,173
---------------
APPAREL (1.7%)
5,000,000 London Fog Industries, Inc.
(Participation: Bankers Trust)(b)
Term Loan, due 6/30/02............................................... 9.19 4,998,450
---------------
BREWERS (1.7%)
5,000,000 G. Heileman Brewing Company, Inc.
(Participation: Bankers Trust)(b)
Term Loan, due 12/31/00.............................................. 7.5625 4,998,150
---------------
BROADCAST MEDIA (5.2%)
7,000,000 Silver King Communications, Inc.
Term Loan, due 7/31/02............................................... 7.8125 6,996,850
3,997,020 U.S. Radio Holdings, Inc.
Term Loan, due 12/31/01.............................................. 8.25 to 8.69 3,995,202
5,002,980 U.S. Radio Holdings, Inc.
Term Loan, due 9/20/03............................................... 9.25 to 9.69 5,000,700
---------------
15,992,752
---------------
CONTAINERS (3.3%)
10,000,000 Silgan Corporations
Term Loan, due 9/15/96............................................... 8.125 to 8.188 9,984,550
---------------
CONTAINERS-PAPERS (6.2%)
9,159,529 Stone Container Corp.
Holdco Tender Offer Loan, due 3/1/97................................. 7.875 to 9.75 9,158,766
892,580 Stone Container Corp.
Holdco Term Loan, due 3/1/97......................................... 9.75 892,580
360,945 Stone Container Corp.
Revolver, due 3/1/97................................................. 7.875 to 9.75 360,934
8,464,779 Stone Container Corp.
Term Loan, due 3/1/97................................................ 7.875 to 9.75 8,464,039
---------------
18,876,319
---------------
DRUG STORES (1.3%)
3,830,790 M & H Drugs, Inc.
Term Loan, due 9/1/96................................................ 7.938 3,830,790
---------------
<PAGE>
</TABLE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1994 (CONTINUED)
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<TABLE>
<CAPTION>
DESCRIPTION
PRINCIPAL AND INTEREST
AMOUNT MATURITY DATE RATES VALUE
- ------------- --------------------------------------------------------------------- -------------------- ---------------
ELECTRONICS (1.4%)
<C> <S> <C> <C>
$ 4,384,147 Sperry Marine, Inc.
Term Loan, due 12/31/00.............................................. 8.1875 to 8.375 % $ 4,378,809
---------------
FOOD & BEVERAGES (2.5%)
7,500,000 Restaurant Unlimited, Inc.
Term Loan, due 6/3/00................................................ 8.25 7,495,800
---------------
FOOD PROCESSING (3.7%)
5,000,000 American Italian Pasta Company
Term Loan, due 12/30/00.............................................. 8.625 4,999,700
6,398,797 Del Monte Corp.
Term Loan, due 12/15/97.............................................. 8.0625 6,392,590
---------------
11,392,290
---------------
GAS-TRUCK STOP (1.3%)
4,000,000 Petro PSC Properties, L.P.
Term Loan, due 5/24/01............................................... 8.50 3,997,520
---------------
GLASS (0.8%)
2,691,535 HGP Industries, Inc.
Term Loan, due 12/31/99 (c).......................................... 0.00 2,341,635
---------------
LEASING (5.8%)
18,153,241 GPA Group PLC (Ireland)+
(Participation: First National Bank of Chicago)(b)
Revolver, due 9/30/96................................................ 6.00 to 6.8125 17,766,368
---------------
MANUFACTURING (3.9%)
5,000,000 Desa International, Inc.
Term Loan, due 11/30/00.............................................. 8.50 4,996,950
2,794,167 Intermetro Industries Corporation
Term Loan, due 6/30/01............................................... 8.32 2,791,065
4,192,500 Intermetro Industries Corporation
Term Loan, due 12/31/02.............................................. 8.82 4,187,637
---------------
11,975,652
---------------
MEDICAL PRODUCTS & SUPPLIES (1.6%)
5,000,000 Deknatel, Inc.
Term Loan, due 4/20/01............................................... 8.3125 4,998,700
---------------
PAPER PRODUCTS (4.7%)
1,257,574 Fort Howard Corp.
(Participation: Bank of Montreal)(b)
Term Loan, due 12/31/96.............................................. 7.00 to 9.00 1,256,949
891,358 Fort Howard Corp.
(Participation: National Bank of Canada)(b)
Term Loan, due 12/31/96.............................................. 7.00 to 9.00 890,914
1,489,969 Fort Howard Corp.
(Participation: National Bank of North Carolina)(b)
Term Loan, due 12/31/96.............................................. 7.00 to 9.00 1,489,228
1,796,535 Fort Howard Corp.
(Participation: The Royal Bank of Canada)(b)
Term Loan, due 12/31/96.............................................. 7.00 to 9.00 1,795,641
9,000,000 Jefferson Smurfit / Container Corporation of America
Term Loan, due 4/30/02............................................... 7.875 8,998,560
---------------
14,431,292
---------------
<PAGE>
</TABLE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DESCRIPTION
PRINCIPAL AND INTEREST
AMOUNT MATURITY DATE RATES VALUE
- ------------- --------------------------------------------------------------------- -------------------- ---------------
PERSONAL PRODUCTS (3.3%)
<C> <S> <C> <C>
$ 9,947,368 Playtex Family Products Corporation
Term Loan, due 6/1/02................................................ 8.38 % $ 9,946,375
---------------
RECORD & TAPE (4.4%)
4,968,750 Camelot Music, Inc.
Term Loan, due 2/28/01............................................... 7.875 to 8.375 4,965,685
8,400,000 The Wherehouse Entertainment, Inc.
Term Loan, due 1/31/98............................................... 7.875 to 9.25 8,398,112
---------------
13,363,797
---------------
RETAIL DEPARTMENT STORES (3.3%)
5,080,260 Saks & Company
Term Loan, due 6/30/98............................................... 7.38 5,080,209
4,980,700 Saks & Company
Term Loan, due 6/30/00............................................... 7.88 4,978,508
---------------
10,058,717
---------------
SCIENTIFIC INSTRUMENTS (3.1%)
6,287,154 Waters Corporation
Term Loan, due 11/30/01.............................................. 10.125 6,287,154
1,783,877 Waters Corporation
Term Loan, due 11/30/02.............................................. 10.50 1,783,877
1,434,403 Waters Corporation
Term Loan, due 5/31/03............................................... 10.875 1,434,403
---------------
9,505,434
---------------
SUPERMARKETS (10.3%)
9,786,093 The Grand Union Company
Term Loan, due 7/30/98............................................... 8.5 to 9.75 9,771,060
1,648,679 Mayfair Supermarkets, Inc.
Term Loan, due 2/28/98............................................... 7.3125 1,647,954
981,509 Mayfair Supermarkets, Inc.
Term Loan, due 11/30/99.............................................. 7.3125 to 7.4375 981,083
5,000,000 Pathmark Stores Inc.
Term Loan, due 7/31/98............................................... 7.375 4,999,950
5,000,000 Pathmark Stores Inc.
Term Loan, due 1/28/00............................................... 8.125 4,999,450
3,789,474 Star Markets Company, Inc.
Term Loan, due 12/31/01.............................................. 7.88 3,789,208
5,210,526 Star Markets Company, Inc.
Term Loan, due 12/31/02.............................................. 8.38 5,210,109
---------------
31,398,814
---------------
TEXTILES (4.6%)
3,840,000 Blackstone Capital Company II, L.L.C.
Purchase Term Loan, due 1/13/97...................................... 9.25 3,840,000
1,160,000 Blackstone Capital Company II, L.L.C.
Reserve Term Loan, due 1/13/97....................................... 9.25 1,160,000
4,105,263 New Street Capital Corporation
Term Loan, due 2/28/96............................................... 8.30 4,105,222
3,840,000 Wasserstein / C&A Holdings, L.L.C.
Purchase Loan, due 1/13/97........................................... 9.25 3,840,000
1,160,000 Wasserstein / C&A Holdings, L.L.C.
Reserve Term Loan, due 1/13/97....................................... 9.25 1,160,000
---------------
14,105,222
---------------
<PAGE>
</TABLE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DESCRIPTION
PRINCIPAL AND INTEREST
AMOUNT MATURITY DATE RATES VALUE
- ------------- --------------------------------------------------------------------- -------------------- ---------------
TEXTILES-APPAREL MANUFACTURERS (3.8%)
<C> <S> <C> <C>
$ 11,499,538 Bidermann Industries Corp.
Term Loan, due 3/31/97............................................... 9.75 % $ 11,499,538
21,829 Bidermann Industries Corp.
Revolver, due 3/31/97................................................ 9.25 21,829
---------------
11,521,367
---------------
VISION CARE & INSTRUMENTS (2.0%)
6,000,000 Sola Group Ltd.
Term Loan, due 12/1/00............................................... 7.82 5,998,561
---------------
WIRELESS COMMUNICATION (1.9%)
5,874,911 Maximum Protection Industries, Inc.
Term Loan, due 12/31/95.............................................. 9.75 5,874,911
---------------
TOTAL SENIOR COLLATERALIZED LOANS (IDENTIFIED COST $278,088,575)........................... 277,184,100
---------------
<CAPTION>
NUMBER OF
SHARES
- -------------
<C> <S> <C> <C>
COMMON STOCK (D) (0.0%)
FOOD SERVICES (0.0%)
4,209 Flagstar Companies (Identified Cost $60,507)............................................... 35,778
---------------
<CAPTION>
PRINCIPAL
AMOUNT
- -------------
<C> <S> <C> <C>
SHORT-TERM INVESTMENTS (8.2%)
COMMERCIAL PAPER (E) (1.2%)
FINANCE-DIVERSIFIED (1.2%)
$ 150,000 American Express Credit Corp.
due 11/9/94++........................................................ 4.81 149,225
2,500,000 American General Finance Corp.
due 11/9/94++........................................................ 4.81 2,487,081
940,000 General Electric Capital Corp.
due 10/7/94 to 11/9/94++............................................. 4.71 to 4.95 938,169
---------------
TOTAL COMMERCIAL PAPER (AMORTIZED COST $3,574,475)......................................... 3,574,475
---------------
U.S. GOVERNMENT AGENCIES (E) (6.3%)
12,000,000 Federal Home Loan Mortgage Corporation
due 10/3/94.......................................................... 4.80 11,996,800
1,600,000 Federal National Mortgage Association
due 10/7/94 to 11/1/94++............................................. 4.80 to 4.82 1,593,720
5,700,000 Student Loan Marketing Association
due 10/3/94.......................................................... 4.90 5,698,448
---------------
TOTAL U.S. GOVERNMENT AGENCIES (AMORTIZED COST $19,288,968)................................ 19,288,968
---------------
<PAGE>
</TABLE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1994 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------- ---------------
REPURCHASE AGREEMENT (0.7%)
<C> <S> <C> <C>
$ 2,055,054 The Bank of New York 5.00% due 10/3/94 (dated 9/30/94;
proceeds $2,055,910; collateralized by $2,149,659 U.S.
Treasury Bonds 7.50% due 11/15/16, valued at $2,096,155)
(Identified Cost $2,055,054)............................................................... $ 2,055,054
---------------
TOTAL SHORT-TERM INVESTMENTS
(IDENTIFIED COST $24,918,497).............................................................. 24,918,497.....
---------------
</TABLE>
<TABLE>
<C> <S> <C> <C>
TOTAL INVESTMENTS (IDENTIFIED COST $303,067,579) (F).................. 99.1% 302,138,375
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES........................ 0.9 2,896,039
----- ------------
NET ASSETS............................................................ 100.0% $ 305,034,414
----- ------------
----- ------------
<FN>
- ------------------------------
+ SENIOR NOTE.
++ ALL OR A PORTION OF THESE SECURITIES ARE SEGREGATED IN CONNECTION WITH
UNFUNDED LOAN COMMITMENTS.
(A) FLOATING RATE SECURITIES. INTEREST RATES RESET PERIODICALLY. INTEREST RATES
SHOWN ARE THOSE IN EFFECT AT SEPTEMBER 30, 1994. THE PRINCIPAL AMOUNT OF
EACH SENIOR COLLATERALIZED LOAN APPROXIMATES COST.
(B) PARTICIPATION; PARTICIPATION INTERESTS WERE ACQUIRED THROUGH THE FINANCIAL
INSTITUTIONS INDICATED PARENTHETICALLY.
(C) INTEREST RATE TO BE DETERMINED BASED ON ISSUER'S PERFORMANCE. INTEREST
INCOME IS RECORDED AS RECEIVED.
(D) NON-INCOME PRODUCING. RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL
INVESTORS.
(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 $303,067,579; THE
AGGREGATE GROSS UNREALIZED APPRECIATION IS $38,297 AND THE AGGREGATE GROSS
UNREALIZED DEPRECIATION IS $967,501, RESULTING IN NET UNREALIZED
DEPRECIATION OF $929,204.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (identified
cost $303,067,579) (Note 1)............ $ 302,138,375
Cash.................................... 308,618
Receivable for:
Interest.............................. 1,950,579
Shares of beneficial interest sold.... 3,533,564
Deferred organizational expenses
(Note 1)............................... 8,018
Prepaid expenses and other assets....... 67,480
--------------
TOTAL ASSETS...................... 308,006,634
--------------
LIABILITIES:
Payable for:
Investment advisory fee (Note 2)...... 221,999
Administration fee (Note 3)........... 61,666
Accrued expenses and other payables
(Note 4)............................... 264,923
Dividends to shareholders (Note 1)...... 89,795
Deferred facility fees.................. 2,333,837
Commitments and contingencies (Note 7)
--------------
TOTAL LIABILITIES................. 2,972,220
--------------
NET ASSETS:
Paid-in-capital......................... 305,799,916
Accumulated undistributed net realized
gain on investments.................... 163,112
Net unrealized depreciation on
investments............................ (929,204)
Accumulated undistributed net investment
income................................. 590
--------------
NET ASSETS........................ $ 305,034,414
--------------
--------------
NET ASSET VALUE PER SHARE, 30,489,594
shares outstanding (unlimited shares
authorized of $.01 par value).......... $10.00
--------------
--------------
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1993
<TABLE>
<S> <C>
INVESTMENT INCOME:
INCOME
Interest............................. $ 18,746,969
Net facility fees.................... 2,838,910
Other................................ 650,874
-------------
TOTAL INCOME....................... 22,236,753
-------------
EXPENSES
Investment advisory fee (Note 2)..... 2,586,181
Administration fee (Note 3).......... 718,384
Professional fees.................... 563,118
Shareholder reports and notices (Note
4)................................. 253,760
Transfer agent fees and expenses
(Note 4)........................... 222,440
Registration fees.................... 69,431
Organizational expenses (Note 1)..... 47,977
Trustees' fees and expenses (Note
4).................................. 29,261
Custodian fees....................... 23,835
Other................................ 75,314
-------------
TOTAL EXPENSES..................... 4,589,701
-------------
NET INVESTMENT INCOME............ 17,647,052
-------------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS (Note 1):
Net realized gain on investments....... 596,754
Net change in unrealized depreciation
on investments....................... 2,033,215
-------------
NET GAIN ON INVESTMENTS.............. 2,629,969
-------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS........ $ 20,277,021
-------------
-------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED YEAR ENDED
INCREASE (DECREASE) IN NET ASSETS: SEPTEMBER 30, 1994 SEPTEMBER 30, 1993
------------------ ------------------
<S> <C> <C>
Operations:
Net investment income................................................. $ 17,647,052 $ 20,819,704
Net realized gain (loss) on investments............................... 596,754 (433,642)
Net change in unrealized depreciation on investments.................. 2,033,215 (2,380,861)
------------------ ------------------
Net increase in net assets resulting from operations................ 20,277,021 18,005,201
Dividends to shareholders from net investment income.................... (17,652,279) (20,831,307)
Net decrease from transactions in shares of beneficial interest (Note
5)..................................................................... (9,069,554) (99,191,654)
------------------ ------------------
Total decrease...................................................... (6,444,812) (102,017,760)
NET ASSETS:
Beginning of period..................................................... 311,479,226 413,496,986
------------------ ------------------
END OF PERIOD (including undistributed net investment income of $590
and $5,817, respectively)............................................. $ 305,034,414 $ 311,479,226
------------------ ------------------
------------------ ------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INCREASE (DECREASE) IN CASH:
CASH FLOWS FROM OPERATING ACTIVITIES:
Net investment income.................................................................. $ 17,647,052
Adjustments to reconcile net investment income to net cash provided by operating
activities:
Increase in receivables and other assets related to operations....................... (178,456)
Decrease in payables and other liabilities related to operations..................... (1,303,071)
-----------------------
Net cash provided by operating activities.......................................... 16,165,525
-----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments............................................................... (382,439,993)
Principal repayments/sales of investments.............................................. 404,837,600
Net sales/maturities of short-term investments......................................... (8,574,742)
-----------------------
Net cash provided by investing activities.......................................... 13,822,865
-----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Shares of beneficial interest sold..................................................... 60,154,695
Shares tendered........................................................................ (82,091,097)
-----------------------
(21,936,402)
Dividends to shareholders (net of reinvested dividends of $9,461,997).................. (8,211,510)
-----------------------
Net cash used in financing activities.............................................. (30,147,912)
-----------------------
Net decrease in cash..................................................................... (159,522)
Cash at beginning of year................................................................ 468,140
-----------------------
CASH AT END OF YEAR...................................................................... $ 308,618
-----------------------
-----------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND ACCOUNTING POLICIES--Prime Income Trust (the "Trust") is
registered under the Investment Company Act of 1940, as amended, as a
non-diversified, closed-end management investment company. The Trust was
organized as a Massachusetts business trust on August 17, 1989 and commenced
operations on November 30, 1989.
The Trust offers and sells its shares to the public on a continuous basis at
the then net asset value of such shares. 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
such 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 collateralized loans
("Senior Loans") to corporations, partnerships and other entities
("Borrowers") to enable the Trust to value Senior Loans based on available
market quotations. 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; (3) short-term debt securities having a
maturity date of more than sixty days are valued on a "mark-to-market"
basis, that is, at prices based on market quotations for securities of a
similar type, yield, quality and maturity, until sixty days prior to
maturity and thereafter at amortized cost based on their value on the 61st
day. Short-term securities having a maturity date of sixty days or less at
the time of purchase are valued at amortized cost; and (4) all other
securities are valued at their fair value as determined in good faith under
procedures established by and under the general supervision of the Trustees.
B. ACCOUNTING FOR INVESTMENTS--Security transactions are accounted for on
the trade date (date the order to buy or sell is executed). 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. 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 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 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.
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
("Agents"). 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>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS (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 reclassification.
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--Dean Witter InterCapital (the "Investment
Adviser") paid the organizational expenses of the Trust in the amount of
$248,312 which have been fully reimbursed by the Trust. Such 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.
2. INVESTMENT ADVISORY AGREEMENT--Pursuant to an Investment Advisory Agreement,
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% to the average daily net
assets in excess of $500 million.
Under the terms of the Investment Advisory Agreement, in addition to
managing the Trust's investments, 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, accrued 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 was terminated and a new Administration Agreement
entered into between Dean Witter Services Company Inc. (the "Administrator"), a
wholly-owned subsidiary of the Former Administrator, 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.
Under the terms of the Administration Agreement, the Administrator maintains
certain of the Trust's books and records and furnishes, at its own expense,
office space, facilities, equipment, clerical, bookkeeping and certain legal
services and pays the salaries of all personnel, including officers of the
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Trust who are employees of the Administrator. The Administrator also bears the
cost of telephone services, heat, light, power and other utilities provided to
the Trust.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES--The cost of
purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended September 30, 1994 aggregated
$382,439,993 and $404,837,600, respectively.
Shares of the Trust are distributed by Dean Witter Distributors Inc. (the
"Distributor"), an affiliate of the Investment Adviser. Pursuant to a
Distribution Agreement between the Trust, the Investment Adviser and the
Distributor, the Investment Adviser compensates the Distributor at annual rate
of 2.75% of the purchase price of shares purchased from the Trust. The
Investment Adviser will compensate the Distributor at an annual rate of 0.10% of
the value of shares sold for any shares that remain outstanding after one year
from the date of their initial purchase. Any early withdrawal charge to defray
distribution expenses will be charged in connection with shares held for four
years or less which are accepted by the Trust for repurchase pursuant to tender
offers. For the year ended September 30, 1994, the Investment Adviser has
informed the Trust that it received approximately $541,000 in early withdrawal
charges. The Trust's shareholders pay such withdrawal charges, which are not an
expense of the Trust.
Dean Witter Trust Company, an affiliate of the Investment Adviser and
Administrator, is the Trust's transfer agent. At September 30, 1994, the Trust
had transfer agent fees and expenses payable of approximately $32,000.
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 an independent Trustee 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 year ended September 30, 1994, included in Trustees' fees and expenses in
the Statement of Operations, amounted to $9,179. At September 30, 1994, the
Trust had an accrued pension liability of $45,083 which is included in accrued
expenses in the Statement of Assets and Liabilities.
Bowne & Co., Inc. is an affiliate of the Trust by virtue of a common Trustee
and Director of Bowne & Co., Inc. During the year ended September 30, 1994, the
Trust paid Bowne & Co., Inc. $4,105 for printing of shareholder reports.
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.................................................................... 6,355,963 63,559,546
Shares issued to shareholders for reinvestment of dividends.................... 948,118 9,461,997
Shares tendered (four quarterly tender offers)................................. (8,242,584) (82,091,097)
-------------- ----------------
Balance, September 30, 1994.................................................... 30,489,594 $ 305,799,916
-------------- ----------------
-------------- ----------------
</TABLE>
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
On October 20, 1994, the Trustees approved a tender offer to purchase up to
4 million shares of beneficial interest to commence on November 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 $1,083,000.
As of September 30, 1994, the Trust had temporary book/tax differences
primarily attributable to Post-October losses.
7. COMMITMENTS AND CONTINGENCIES--As of September 30, 1994, the Trust had
unfunded loan commitments pursuant to the following loan agreements:
<TABLE>
<CAPTION>
UNFUNDED
BORROWER COMMITMENT
-------------
<S> <C>
Bidermann Industries Corp...................................................... $ 123,699
GPA Group PLC.................................................................. 2,814,119
Stone Container Corp........................................................... 704,851
-------------
$ 3,642,669
-------------
-------------
</TABLE>
8. FINANCIAL INSTRUMENTS WITH CONCENTRATION 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 September 30, 1994,
such Participations had a fair value of $38,383,305.
The Trust will only invest 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.
<PAGE>
PRIME INCOME TRUST
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE
PERIOD
NOVEMBER 30,
1989*
FOR THE YEAR ENDED SEPTEMBER 30, THROUGH
--------------------------------------------------------- SEPTEMBER
1994 1993 1992 1991 30, 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......... 0.62 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................... 0.71 0.47 0.61 0.84 0.73
------------ ------------ ------------ ------------ ------------
Dividends from net investment
income....................... (0.62) (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+...... 7.32% 4.85% 6.23% 8.77% 7.57%(1)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)................... $305,034 $311,479 $413,497 $479,941 $328,189
Ratios:
Expenses to average net
assets..................... 1.60% 1.45% 1.47% 1.52% 1.48%(2)
Net investment income to
average net assets......... 6.14% 5.53% 6.14% 8.23% 8.95%(2)
Portfolio turnover rate....... 147 % 92 % 46 % 42 % 35 %
<FN>
- ------------------------------
* COMMENCEMENT OF OPERATIONS.
+ DOES NOT REFLECT THE DEDUCTION OF SALES LOAD.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Trustees of Prime Income Trust
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations, of
changes in net assets and of cash flows and the financial highlights present
fairly, in all material respects, the financial position of Prime Income Trust
(the "Trust") at September 30, 1994, the results of its operations and its cash
flows for the year then ended, the changes in its net assets for each of the two
years in the period then ended and the financial highlights for each of the four
years in the period then ended and for the period November 30, 1989
(commencement of operations) through September 30, 1990, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities owned at September 30, 1994 by
correspondence with the custodian, and with respect to senior collateralized
loans by correspondence with the selling participants and agent banks, provide a
reasonable basis for the opinion expressed above.
As explained in Note 1, the financial statements include senior collateralized
loans valued at $277,184,100 (91 percent of net assets), whose values have been
determined in accordance with procedures established by the Trustees in the
absence of readily ascertainable market values. We have reviewed the procedures
which were established by the Trustees in determining the fair values of such
senior collateralized loans and have inspected underlying documentation, and, in
the circumstances, we believe the procedures are reasonable and the
documentation appropriate. However, because of the inherent uncertainty of
valuation, those values determined in accordance with procedures established by
the Trustees may differ significantly from the values that would have been used
had a ready market for the senior collateralized loans existed, and the
differences could be material.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
November 10, 1994
<PAGE>
TRUSTEES
Jack F. Bennett
Michael Bozic Prime
Charles A. Fiumefreddo Income
Edwin J. Garn Trust
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 LLP
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
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 Annual Report
by an effective prospectus. September 30, 1994
