<PAGE>
PRIME INCOME TRUST TWO WORLD TRADE CENTER, NEW YORK, NEW YORK 10048
LETTER TO THE SHAREHOLDERS
DEAR SHAREHOLDER:
After suffering sharp price declines during most of 1994, the fixed-income
markets began to show signs of life in the fourth quarter of 1994. The bond
market rally which started during the first quarter of 1995, continued through
the second quarter, before pulling up for a breather in July and August. The
bond markets retraced more than a quarter of its earlier gains during July and
August as the economy picked up steam. This up-tick in interest rates came
despite an easing move by the Federal Reserve Board, which cut the federal-funds
rate by 25 basis points on July 6, 1995. By mid-August, however, the economy was
again giving off mixed signals: a drop in retail sales, followed by an upward
revision in second quarter GDP and a strong employment report. The bond markets
looked favorably upon evidence of slow, but moderate, growth in the economy and
the lack of any substantial inflationary pressure. With good news in hand, the
bond market rally resumed in September, as yields continued their decline. On
September 30, 1995, the 30-year U.S. Treasury bond was yielding 6.51 percent,
down from 7.82 percent on September 30, 1994. The 2-year U.S. Treasury note was
yielding 5.86 percent on September 30, 1995, down from 6.58 percent a year ago.
At the end of the reporting period, the three-month London Inter-Bank Offered
Rate (LIBOR) was 5.95 percent, while the prime rate was 8.75 percent.
PERFORMANCE AND PORTFOLIO
Against this backdrop, Prime Income Trust produced a total return of 8.57
percent for the twelve months ended September 30, 1995. The Trust continues to
provide shareholders with high current income -- 200 to 300 basis points above
money market investments -- while minimizing net asset value fluctuations.
On September 30, the Trust's net asset value was $9.99 per share. The Trust's
portfolio is designed to track movements of current interest rates. This is
achieved through the automatic reset features of the interest rates on the loans
in the Trust's portfolio. During the third
<PAGE>
PRIME INCOME TRUST
LETTER TO THE SHAREHOLDERS, CONTINUED
quarter of 1995, however, the Trust experienced a drop in its net asset value as
a result of the sale of its Bidermann exposure (Bidermann is the manufacturer of
Goldtoe socks, Arrow shirts and the distributor of Ralph Lauren Womenswear in
the U.S.) The Trust recovered most of this principal loss from investments that
were purchased at a discount and then appreciated during the quarter. The
Trust's net assets exceeded $520 million on September 30, 1995. The portfolio
was diversified among 56 credits, spread among 44 industry groups.
LOOKING AHEAD
Although transaction flow has remained sluggish during the second half of the
fiscal year, it has not impacted the Trust's ability to deploy assets. Given the
availability of monies from equity sponsor groups and the supply of credit from
lending institutions, we expect an increase in transactions over the next six
months. On the economic front, an improving, but somewhat lackluster economy
with relatively moderate inflation implies that interest rates will remain in a
trading range around current levels for the time being.
We appreciate your support of Prime Income Trust and look forward to continuing
to serve your investment needs.
Very truly yours,
[SIGNATURE]
CHARLES A. FIUMEFREDDO
CHAIRMAN OF THE BOARD
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN INTEREST MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SENIOR COLLATERALIZED LOANS (a) (94.0%)
ADVERTISING (1.4%)
$ 7,250 Eller Media Company
Term Loan............................. 9.07 % 12/21/03 $ 7,249,637
---------------
AEROSPACE (0.9%)
1,682 Gulfstream Aerospace Corp. Term
Loan.................................. 7.88 03/31/97 1,681,561
2,900 Gulfstream Aerospace Corp. Term
Loan.................................. 8.80 03/31/98 2,899,333
---------------
4,580,894
---------------
AIRLINES (2.8%)
5,213 AeroMexico 1994-I U.S. Receivables
Trust Term Loan (Mexico)+............. 9.94 07/31/99 5,212,297
2,365 Northwest Airlines, Inc. Term Loan
(Participation: First National Bank of
Chicago) (b).......................... 9.13 09/15/97 2,364,819
6,805 Northwest Airlines, Inc.
Term Loan............................. 9.13 09/15/97 6,805,554
---------------
14,382,670
---------------
APPAREL (2.5%)
960 Anvil Knitwear, Inc. Term Loan........ 8.38 02/03/01 959,824
3,987 Anvil Knitwear, Inc. Term Loan........ 9.13 to 10.75 02/02/02 3,985,739
4,888 Hosiery Corporation of America, Inc.
Term Loan............................. 9.13 to 9.19 07/31/01 4,885,367
96 London Fog Industries, Inc. Term Loan
(d)................................... 05/31/02 91,550
2,823 London Fog Industries, Inc. Term
Loan.................................. 9.75++ 05/31/02 2,681,831
580 London Fog Industries, Inc. Term Loan
(c)................................... 12.50 05/31/02 551,691
---------------
13,156,002
---------------
BEVERAGES (1.9%)
4,000 Select Beverages, Inc.
Term Loan............................. 9.13 06/30/01 3,999,480
6,000 Select Beverages, Inc.
Term Loan............................. 9.38 06/30/02 5,999,220
---------------
9,998,700
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1995, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN INTEREST MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
BREWERS (1.9%)
$ 5,000 G. Heileman Brewing Company, Inc. Term
Loan.................................. 8.50 to 8.63% 12/31/98 $ 4,996,354
5,000 G. Heileman Brewing Company, Inc. Term
Loan (Participation: Bankers Trust)
(b)................................... 9.69 12/31/00 5,000,300
---------------
9,996,654
---------------
BROADCAST MEDIA (3.0%)
6,930 Silver King Communications, Inc.
Term Loan............................. 8.88 07/31/02 6,929,168
3,897 U.S. Radio Holdings, Inc.
Term Loan............................. 8.88 to 9.00 12/31/01 3,897,387
5,003 U.S. Radio Holdings, Inc.
Term Loan............................. 9.88 to 11.75 09/20/03 5,003,271
---------------
15,829,826
---------------
BUILDING MATERIALS (2.9%)
15,000 National Gypsum Company Term Loan..... 8.84 09/30/03 14,999,550
---------------
CABLE TELEVISION EQUIPMENT (1.0%)
5,000 Marcus Cable Operating Co. L.P. Term
Loan.................................. 8.69 04/30/04 4,999,450
---------------
CABLE/CELLULAR (1.7%)
8,750 Paging Network, Inc. Term Loan........ 9.45 03/31/02 8,750,875
---------------
CONSUMER PRODUCTS (1.9%)
10,000 Revlon Consumer Products Corp.
Term Loan............................. 9.31 06/30/97 9,992,000
---------------
CONTAINERS (3.3%)
17,000 Silgan Corporation Term Loan.......... 8.88 to 8.94 03/15/02 16,996,979
---------------
CONTAINERS - PAPERS (1.2%)
6,500 Stone Container Corp.
Term Loan............................. 9.25 10/01/03 6,500,000
---------------
CONVENIENCE STORES (2.0%)
10,333 Cumberland Farms, Inc.
Term Loan (Participation:
Merrill Lynch) (b).................... 9.25 12/31/98 10,332,710
---------------
COSMETICS (1.0%)
5,000 Mary Kay Cosmetics, Inc.
Term Loan............................. 9.38 to 9.88 12/06/02 4,999,432
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1995, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN INTEREST MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
DRUG STORES (2.1%)
$ 7,500 Duane Reade, Inc. Term Loan........... 9.88 % 12/31/99 $ 7,497,975
3,549 M & H Drugs, Inc. Term Loan........... 10.13 09/01/96 3,548,835
---------------
11,046,810
---------------
ELECTRONICS (0.8%)
4,026 Sperry Marine, Inc. Term Loan......... 9.13 to 9.69 11/12/00 4,023,371
---------------
ENTERTAINMENT (1.9%)
10,000 Harrah's Jazz Co. & Finance Corp. Term
Loan.................................. 9.13 to 9.19 09/30/99 9,996,167
---------------
ENTERTAINMENT & LEISURE (2.3%)
12,010 Six Flags Theme Parks, Inc. Term
Loan.................................. 8.88 to 9.00 06/23/03 12,002,899
---------------
EQUIPMENT (1.9%)
9,960 Primeco, Inc. Term Loan............... 8.88 to 9.03 12/31/00 9,958,816
---------------
FOOD & BEVERAGES (1.4%)
7,500 Restaurants Unlimited, Inc. Term
Loan.................................. 9.34 06/03/00 7,498,200
---------------
FOOD PROCESSING (1.0%)
5,000 American Italian Pasta Co.
Term Loan............................. 9.94 12/30/00 4,999,650
---------------
FOOD SERVICES (5.2%)
10,702 SC International Services, Inc. &
Caterair International Corp. Term
Loan.................................. 10.75 09/15/01 10,701,818
13,353 SC International Services, Inc. &
Caterair International Corp. Term
Loan.................................. 10.75 09/15/02 13,352,727
2,945 SC International Services, Inc. &
Caterair International Corp. Term
Loan.................................. 11.00 09/15/03 2,945,455
---------------
27,000,000
---------------
GAS - TRUCK STOP (0.7%)
3,848 Petro PSC Properties, L.P.
Term Loan............................. 9.13 05/24/01 3,847,276
---------------
HOUSEHOLD FURNISHINGS & APPLIANCES (1.9%)
9,975 Graco Children's Products, Inc. Term
Loan.................................. 8.81 to 10.75 06/30/03 9,970,309
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1995, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN INTEREST MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
INDUSTRIALS (2.4%)
$ 6,079 UCAR International, Inc.
Term Loan............................. 8.88 % 01/31/03 $ 6,079,180
3,195 UCAR International, Inc.
Term Loan............................. 9.38 07/31/03 3,195,467
3,195 UCAR International, Inc.
Term Loan............................. 10.06 01/31/04 3,195,658
---------------
12,470,305
---------------
LEASING (8.5%)
44,216 GPA Group PLC Revolver (Ireland)+
(Participation: First National Bank of
Chicago) (b).......................... 7.00 to 7.88 09/30/97 44,219,100
---------------
MANUFACTURING (2.2%)
4,516 Desa International, Inc.
Term Loan............................. 9.06 11/30/00 4,512,071
2,701 Intermetro Industries Corp. Term
Loan.................................. 8.88 06/30/01 2,699,462
4,053 Intermetro Industries Corp. Term
Loan.................................. 9.38 12/31/02 4,050,211
---------------
11,261,744
---------------
MEDICAL PRODUCTS & SUPPLIES (1.0%)
5,000 Deknatel Holdings, Inc.
Term Loan............................. 9.81 04/20/01 5,000,150
---------------
MEDICAL SERVICES (0.8%)
4,305 Unilab Corporation Term Loan.......... 9.38 05/16/02 4,304,059
---------------
PAPER PRODUCTS (1.0%)
3,750 Mail Well Corp. Term Loan............. 8.88 07/31/03 3,749,100
1,250 Supermex, Inc. Term Loan.............. 8.88 07/31/03 1,249,700
---------------
4,998,800
---------------
PUBLISHING (2.8%)
7,490 Ziff Davis Publishing Co.
Term Loan............................. 8.88 12/31/01 7,487,653
7,055 Ziff Davis Publishing Co.
Term Loan............................. 9.38 12/31/02 7,052,707
---------------
14,540,360
---------------
RAILROAD EQUIPMENT (1.9%)
10,000 Johnstown America Industries, Inc.
Term Loan............................. 9.00 03/31/03 9,999,000
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1995, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN INTEREST MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
RECORD & TAPE (2.3%)
$ 4,875 Camelot Music, Inc. Term Loan......... 8.81 to 8.88% 02/28/01 $ 4,874,829
7,400 The Wherehouse Entertainment, Inc.
Term Loan (d)......................... 10.25 01/31/98 7,030,000
---------------
11,904,829
---------------
RETAIL DEPARTMENT STORES (1.8%)
2,114 Saks & Company Term Loan.............. 8.75 to 10.25 06/30/98 2,114,701
7,469 Saks & Company Term Loan.............. 9.25 to 9.50 06/30/00 7,468,896
---------------
9,583,597
---------------
RETAIL - SPECIALTY (2.9%)
15,000 QVC, Inc. Term Loan................... 8.94 01/31/04 14,996,100
---------------
SCIENTIFIC INSTRUMENTS (0.6%)
1,705 Waters Corporation Term Loan.......... 9.63 11/30/02 1,704,558
1,371 Waters Corporation Term Loan.......... 10.00 05/31/03 1,370,610
---------------
3,075,168
---------------
SPECIALTY PACKAGING (2.0%)
6,000 Calmar, Inc. Term Loan................ 8.88 09/15/03 5,999,940
4,500 Calmar, Inc. Term Loan................ 9.13 03/15/04 4,499,955
---------------
10,499,895
---------------
SPORTING GOODS (3.3%)
7,403 Spalding & Evenflo Companies, Inc.
Term Loan............................. 9.06 10/17/02 7,402,524
2,000 Worldwide Sports & Recreation, Inc.
Term Loan............................. 8.94 04/26/00 2,000,000
8,000 Worldwide Sports & Recreation, Inc.
Term Loan............................. 9.44 04/26/01 8,000,000
---------------
17,402,524
---------------
SUPERMARKETS (4.8%)
4,655 Food 4 Less Supermarkets, Inc. Term
Loan.................................. 9.13 06/15/02 4,654,585
4,655 Food 4 Less Supermarkets, Inc. Term
Loan.................................. 9.63 06/15/03 4,654,538
4,655 Food 4 Less Supermarkets, Inc. Term
Loan.................................. 9.88 02/15/04 4,654,492
4,576 Pathmark Stores Inc. Term Loan........ 8.94 01/28/00 4,575,210
3,789 Star Markets Company, Inc. Term
Loan.................................. 8.88 12/31/01 3,789,436
2,842 Star Markets Company, Inc. Term
Loan.................................. 9.38 12/31/02 2,842,077
---------------
25,170,338
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1995, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN INTEREST MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TELECOMMUNICATIONS EQUIPMENT (1.4%)
$ 3,500 K-Tec Holdings, Inc. Term Loan........ 8.63 % 01/31/03 $ 3,499,965
4,000 K-Tec Holdings, Inc. Term Loan........ 9.13 01/31/04 3,999,960
---------------
7,499,925
---------------
TEXTILES (1.9%)
3,840 Blackstone Capital Company II, L.L.C.
Purchase Term Loan.................... 8.88 01/13/97 3,839,962
1,160 Blackstone Capital Company II, L.L.C.
Reserve Term Loan..................... 8.88 01/13/97 1,159,988
3,840 Wasserstein/C&A Holdings, L.L.C.
Purchase Term Loan.................... 8.81 01/13/97 3,837,274
1,160 Wasserstein/C&A Holdings, L.L.C.
Reserve Term Loan..................... 8.81 01/13/97 1,159,176
---------------
9,996,400
---------------
TEXTILES - APPAREL MANUFACTURERS (1.9%)
9,950 Chicopee, Inc. Term Loan.............. 9.13 03/31/03 9,950,000
---------------
WIRE & CABLE (1.9%)
9,992 International Wire Group, Inc. Term
Loan.................................. 9.00 09/30/02 9,988,427
---------------
TOTAL SENIOR COLLATERALIZED LOANS
(IDENTIFIED COST $487,492,471)........................................ 489,969,598
---------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (d) (0.0%)
APPAREL (0.0%)
1,291K London Fog Industries, Inc. (Restricted)................................ --
---------------
FOOD SERVICES (0.0%)
4,209 Flagstar Companies (Restricted)......................................... 22,098
---------------
TOTAL COMMON STOCKS
(IDENTIFIED COST $60,507)............................................... 22,098
---------------
PREFERRED STOCK (0.2%)
APPAREL
1,722K London Fog Industries, Inc. 17.50% due 2/28/05 (Series A-1) (c)
(Restricted) (IDENTIFIED COST $1,873,346)............................... 1,222,422
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1995, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN INTEREST MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENTS (e) (4.0%)
COMMERCIAL PAPER (0.1%)
AUTOMOTIVE FINANCE
$ 595 Ford Motor Credit Co. (AMORTIZED COST
$592,529)............................. 5.75 % 10/27/95 $ 592,529
---------------
U.S. GOVERNMENT AGENCIES (3.9%)
4,700 Federal Home Loan Banks*.............. 5.65 10/12/95 4,691,886
10,000 Federal Home Loan Mortgage Corp.*..... 6.30 10/02/95 9,998,250
5,100 Federal Home Loan Mortgage Corp.*..... 5.66 10/06/95 5,095,992
650 Federal National Mortgage Assoc.*..... 5.58 10/20/95 648,085
---------------
TOTAL U.S. GOVERNMENT AGENCIES
(AMORTIZED COST $20,434,213).......................................... 20,434,213
---------------
TOTAL SHORT-TERM INVESTMENTS
(AMORTIZED COST $21,026,742).......................................... 21,026,742
---------------
TOTAL INVESTMENTS
(IDENTIFIED COST $510,453,066) (F)........... 98.2% 512,240,860
CASH AND OTHER ASSETS IN EXCESS OF
LIABILITIES.................................. 1.8 9,120,101
----- ------------
NET ASSETS................................... 100.0% $521,360,961
----- ------------
----- ------------
<FN>
- ---------------------
K In thousands.
+ Senior Note.
++ 3 percent paid in cash, 6.75 percent payment in kind; converts to prime
plus 1 percent cash payment on May 31, 1997.
* 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, 1995.
(b) Participation; participation interests were acquired through the financial
institutions indicated parenthetically.
(c) Payment in kind security.
(d) Non income producing security.
(e) Securities were purchased on a discount basis. The interest rates shown
have been adjusted to reflect a money market equivalent yield.
(f) The aggregate cost for federal income tax purposes is $510,453,066; the
aggregate gross unrealized appreciation is $3,134,546 and the aggregate
gross unrealized depreciation is $1,346,752, resulting in net unrealized
appreciation of $1,787,794.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1995
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $510,453,066)............................ $512,240,860
Cash........................................................ 4,022,199
Receivable for:
Shares of beneficial interest sold...................... 4,898,633
Interest................................................ 4,496,892
Principal prepayments................................... 435,368
Prepaid expenses and other assets........................... 389,771
------------
TOTAL ASSETS........................................... 526,483,723
------------
LIABILITIES:
Payable for:
Investments purchased................................... 580,663
Investment advisory fee................................. 374,551
Dividends to shareholders............................... 220,544
Administration fee...................................... 104,121
Accrued expenses and other payables......................... 271,139
Deferred facility fees...................................... 3,571,744
Commitments and contingencies (Note 7)......................
------------
TOTAL LIABILITIES...................................... 5,122,762
------------
NET ASSETS:
Paid-in-capital............................................. 522,524,992
Net unrealized appreciation................................. 1,787,794
Accumulated undistributed net investment income............. 413,674
Accumulated net realized loss............................... (3,365,499)
------------
NET ASSETS............................................. $521,360,961
------------
------------
NET ASSET VALUE PER SHARE,
52,197,974 SHARES OUTSTANDING (UNLIMITED SHARES AUTHORIZED
OF $.01 PAR VALUE)........................................
$9.99
------------
------------
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INCOME
Interest.................................................... $34,988,644
Net facility and amendment fees............................. 2,232,672
Other income................................................ 549,221
-----------
TOTAL INCOME........................................... 37,770,537
-----------
EXPENSES
Investment advisory fee..................................... 3,526,906
Administration fee.......................................... 979,775
Professional fees........................................... 546,641
Shareholder reports and notices............................. 281,710
Transfer agent fees and expenses............................ 253,583
Registration fees........................................... 117,505
Custodian fees.............................................. 94,161
Trustees' fees and expenses................................. 29,004
Organizational expenses..................................... 8,018
Other....................................................... 129,989
-----------
TOTAL EXPENSES......................................... 5,967,292
-----------
NET INVESTMENT INCOME.................................. 31,803,245
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss........................................... (2,551,571)
Net change in unrealized depreciation....................... 2,716,998
-----------
NET GAIN............................................... 165,427
-----------
NET INCREASE................................................ $31,968,672
-----------
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
SEPTEMBER 30, 1995 SEPTEMBER 30, 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income....................................... $ 31,803,245 $ 17,647,052
Net realized gain (loss).................................... (2,551,571) 596,754
Net change in unrealized depreciation....................... 2,716,998 2,033,215
------------------ ------------------
NET INCREASE........................................... 31,968,672 20,277,021
------------------ ------------------
DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income....................................... (31,409,897) (17,652,279)
Net realized gain........................................... (957,304) --
------------------ ------------------
TOTAL.................................................. (32,367,201) (17,652,279)
------------------ ------------------
Net increase (decrease) from transactions in shares of
beneficial interest....................................... 216,725,076 (9,069,554)
------------------ ------------------
TOTAL INCREASE (DECREASE).............................. 216,326,547 (6,444,812)
NET ASSETS:
Beginning of period......................................... 305,034,414 311,479,226
------------------ ------------------
END OF PERIOD
(INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF
$413,674 AND $590, RESPECTIVELY)........................ $521,360,961 $305,034,414
------------------ ------------------
------------------ ------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<S> <C>
INCREASE (DECREASE) IN CASH:
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net investment income................................................................. $ 31,803,245
---------------
Adjustments to reconcile net investment income
to net cash from operating activities:
Increase in receivables and other assets related to operations........................ (2,860,585)
Increase in payables related to operations............................................ 1,439,130
Accretion of discounts................................................................ (477,143)
---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES........................................ 29,904,647
---------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Purchases of investments.............................................................. (563,680,131)
Principal repayments/sales of investments............................................. 350,474,058
Net sales/maturities of short-term investments........................................ 3,891,453
---------------
NET CASH USED FOR INVESTING ACTIVITIES........................................... (209,314,620)
---------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Shares of beneficial interest sold.................................................... 241,897,744
Shares tendered....................................................................... (42,566,808)
Dividends and distributions from:
Net investment income (net of reinvested dividends of $16,029,070).................... (15,250,078)
Net realized gain..................................................................... (957,304)
---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES........................................ 183,123,554
---------------
NET INCREASE IN CASH.................................................................. 3,713,581
CASH AT BEGINNING OF YEAR............................................................. 308,618
---------------
CASH AT END OF YEAR................................................................... $ 4,022,199
---------------
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1995
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. 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 ("Borrower") to enable the Trust
to properly 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 at time of
purchase are valued on a mark-to-market basis until sixty days prior to maturity
and thereafter at amortized cost based on their value on the 61st day.
Short-term debt 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 and
other assets 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 by the identified cost method.
Discounts are accreted over the life of the respective securities. Interest
income is accrued daily except where collection is not expected. When the Trust
buys an
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1995, CONTINUED
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 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. Fees received in connection with loan amendments are amortized over
the expected term of the loan.
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
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 Inc. (the "Investment
Adviser") paid the organizational expenses of the Trust in the amount of
$248,312 which have been fully reimbursed by the Trust and were fully amortized
as of November 29, 1994.
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1995, CONTINUED
2. INVESTMENT ADVISORY AGREEMENT
Pursuant to an Investment Advisory Agreement, the Fund pays an advisory fee,
accrued daily and payable monthly, by applying the following annual rates to the
net assets of the Trust determined as of the close of each business day: 0.90%
to the portion of the daily net assets not exceeding $500 million and 0.85% to
the portion of the daily net assets exceeding $500 million.
Under the terms of the 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
Pursuant to an Administration Agreement with Dean Witter Services Company Inc.
(the "Administrator"), the Trust pays an administration fee, calculated daily
and payable monthly, by applying the annual rate of 0.25% to the Trust's average
daily net assets.
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 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, 1995 aggregated
$564,260,794 and $350,909,426, respectively.
Shares of the Trust are distributed by Dean Witter Distributors Inc. (the
"Distributor"), an affiliate of the Investment Adviser and Administrator.
Pursuant to a Distribution Agreement between the Trust, the Investment Adviser
and the Distributor, the Investment Adviser compensates the Distributor at an
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
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1995, CONTINUED
year ended September 30, 1995, the Investment Adviser has informed the Trust
that it received approximately $219,000 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, 1995, the Trust
had transfer agent fees and expenses payable of approximately $28,000.
The Trust has 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 year ended September 30, 1995
included in Trustees' fees and expenses in the Statement of Operations amounted
to $7,596. At September 30, 1995, the Trust had an accrued pension liability of
$51,200 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, 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
Shares sold...................................................... 24,363,027 243,262,814
Shares issued to shareholders for reinvestment of dividends and
distributions................................................... 1,605,098 16,029,070
Shares tendered (four quarterly tender offers)................... (4,259,745) (42,566,808)
----------- --------------
Balance, September 30, 1995...................................... 52,197,974 $ 522,524,992
----------- --------------
----------- --------------
</TABLE>
On October 26, 1995, the Trustees approved a tender offer to purchase up to 4
million shares of beneficial interest to commence on November 15, 1995.
6. FEDERAL INCOME TAX STATUS
At September 30, 1995, the Trust had a net capital loss carryover of
approximately $1,384,000 which will be available through September 30, 2003 to
offset future capital gains to the extent provided by regulations.
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1995, CONTINUED
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 $2,390,000 during fiscal 1995.
As of September 30, 1995, the Trust had temporary book/tax differences primarily
attributable to post-October losses.
7. COMMITMENTS AND CONTINGENCIES
As of September 30, 1995, the Trust had unfunded loan commitments pursuant to
the following loan agreements:
<TABLE>
<CAPTION>
UNFUNDED
BORROWER COMMITMENT
- ----------------------------------------------------------------- -----------
<S> <C>
GPA Group PLC. .................................................. $ 6,018,926
Marcus Cable Co. ................................................ 5,000,000
-----------
$11,018,926
-----------
-----------
</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, 1995, such Participations had a fair value of
$61,916,929.
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 YEAR ENDED SEPTEMBER 30
--------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 10.00 $ 9.91 $ 9.99 $ 10.00 $ 10.00
------ ------ ------ ------ ------
Net investment income.............. 0.82 0.62 0.55 0.62 0.84
Net realized and unrealized gain
(loss)............................ 0.01 0.09 (0.08) (0.01) --
------ ------ ------ ------ ------
Total from investment operations... 0.83 0.71 0.47 0.61 0.84
------ ------ ------ ------ ------
Less dividends and distributions
from:
Net investment income........... (0.81) (0.62) (0.55) (0.62) (0.84)
Net realized gain............... (0.03) -- -- -- --
------ ------ ------ ------ ------
Total dividends and
distributions..................... (0.84) (0.62) (0.55) (0.62) (0.84)
------ ------ ------ ------ ------
Net asset value, end of period..... $ 9.99 $ 10.00 $ 9.91 $ 9.99 $ 10.00
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL INVESTMENT RETURN+........... %8.57 %7.32 %4.85 %6.23 %8.77
RATIOS TO AVERAGE NET ASSETS:
Expenses........................... %1.52 %1.60 %1.45 %1.47 %1.52
Net investment income.............. %8.11 %6.14 %5.53 %6.14 %8.23
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands......................... $521,361 $305,034 $311,479 $413,497 $479,941
Portfolio turnover rate............ % 102 % 147 % 92 % 46 % 42
<CAPTION>
FOR THE PERIOD
SEPTEMBER 30,
1990
- ----------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 10.00
------
Net investment income.............. 0.74
Net realized and unrealized gain
(loss)............................ (0.01)
------
Total from investment operations... 0.73
------
Less dividends and distributions
from:
Net investment income........... (0.73)
Net realized gain............... --
------
Total dividends and
distributions..................... (0.73)
------
Net asset value, end of period..... $ 10.00
------
------
TOTAL INVESTMENT RETURN+........... 7.57%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses........................... 1.48%(2)
Net investment income.............. 8.95%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands......................... $328,189
Portfolio turnover rate............ 35%(1)
<FN>
- ---------------------
* Commencement of operations.
+ Does not reflect the deduction of sales charge.
(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, 1995, 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 five
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, 1995 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 $489,969,598 (94 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 10036
NOVEMBER 8, 1995
<PAGE>
TRUSTEES
- ---------------------------------------------------
Jack F. Bennett
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Dr. Manuel H. Johnson
Paul Kolton
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
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
Fund. For more detailed information about the Fund, its officers and trustees,
fees, expenses and other pertinent information, please see the prospectus of the
Fund.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective prospectus.
PRIME
INCOME
TRUST
Annual Report
September 30, 1995
