<PAGE> 1
PRIME INCOME TRUST
Two World Trade Center
New York, New York 10048
DEAR SHAREHOLDER:
- --------------------------------------------------------------------------------
We are pleased to present the semiannual report to shareholders on the
operations of Prime Income Trust for the six-month period ended March 31, 1995.
Prime Income Trust continues to meet its investment objective of high
current income consistent with the preservation of capital. As you know, Prime
Income 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 per share in both increasing and decreasing
interest rate scenarios. To achieve its objective, the Trust invests in loan
participations with floating rates, which are usually reset every three months.
Thus, the Trust truly reflects current rates, enabling the Trust to maintain a
relatively stable net asset value.
PERFORMANCE AND PORTFOLIO STRUCTURE
At the end of the reporting period, the prime rate was 9.0 percent compared
to 6.25 percent, a year ago. During the same period, the three-month LIBOR rate
climbed to 6.25 percent, up from 4.0 percent a year ago. This increase in
short-term interest rates is reflected in the performance of Prime Income Trust.
For the six-month period ended March 31, 1995, the Trust provided a total return
of 4.11 percent. As of March 31, 1995, the Trust's distribution rate was 9.00
percent, approximately 200 basis points higher than a year ago.
Although the economic outlook for short-term interest rates looks stable,
any increase in rates would continue to benefit the Trust in the form of
increased dividends. Despite the record moves in interest rates during the last
year, the floating-rate reset features of the loans held in the portfolio
protected our shareholders from loss of principal due to rising interest rates.
The net asset value (NAV) at March 31, 1995 was $9.98.
Over the last six months, the Trust has experienced strong asset growth. As
of March 31, 1995, the Trust's net assets totaled $371 million, an increase of
22 percent. We believe the growth in assets to be a direct result of the Trust's
strong performance during 1994 and into this year. We expect this trend to
continue through the year with increased money flows into the Trust.
New transaction flow has slowed down since the end of 1994. Activity in the
Trust has focused on new issues since the secondary market has had limited
supply. Portfolio diversification remains good with over 44 credits,
representing 31 industries. Our strategy will continue to focus on new market
transactions, with institutions such as Chemical Bank among others, as well as
with secondary market activities.
LOOKING AHEAD
As of the end of the reporting period, the Federal Reserve Board's policy
of slowing economic growth and restraining inflation appears to be working. This
makes it less likely for further monetary tightening, although one additional
increase during the second or third quarter remains a possibility should the
economy strengthen or if inflation again poses a threat. As had been the case
throughout 1994, the Trust will continue to benefit from any additional
increases in interest rates.
We appreciate your support of Prime Income Trust and look forward to
continuing to serve your investment needs.
Very truly yours,
/s/ C. FIUMEFREDDO
----------------------
Charles A. Fiumefreddo
Chairman of the Board
<PAGE> 2
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS March 31, 1995 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(in Interest
thousands) Description and Maturity Date Rates Value
-------- ------------------------------------------------------- --------------- -------------
<C> <S> <C> <C>
SENIOR COLLATERALIZED LOANS (A) (90.8%)
AEROSPACE (1.3%)
$ 2,074 Gulfstream Aerospace Corp.
Term Loan, due 3/31/97................................. 8.88 to 10.00% $ 2,075,794
2,900 Gulfstream Aerospace Corp.
Term Loan, due 3/31/98................................. 9.88 2,901,885
-------------
4,977,679
-------------
AIRLINES (3.9%)
6,052 AeroMexico 1994 - I U.S. Receivables Trust (Mexico) +
Term Loan, due 7/31/99................................. 10.31 6,052,098
2,377 Northwest Airlines, Inc.
(Participation: First National Bank of Chicago)(b)
Term Loan, due 9/15/97................................. 8.56 2,376,217
6,073 Northwest Airlines, Inc.
Term Loan, due 9/15/97................................. 8.56 6,071,907
-------------
14,500,222
-------------
APPAREL (5.3%)
1,000 Avil Knitwear, Inc.
Term Loan, due 2/3/01.................................. 9.06 to 10.50 1,000,273
4,000 Avil Knitwear, Inc.
Term Loan, due 2/2/02.................................. 9.56 to 11.00 4,000,039
10,000 Hosiery Corporation of America, Inc.
Term Loan, due 7/31/01................................. 9.44 9,998,800
5,000 London Fog Industries, Inc.
Term Loan, due 6/30/02 (c)............................. 11.75 4,750,000
-------------
19,749,112
-------------
BREWERS (1.4%)
5,000 G. Heileman Brewing Company, Inc.
(Participation: Bankers Trust)(b)
Term Loan, due 12/31/00................................ 9.13 4,998,850
-------------
BROADCAST MEDIA (5.5%)
6,965 Silver King Communications, Inc.
Term Loan, due 7/31/02................................. 9.31 6,965,348
3,997 U.S. Radio Holdings, Inc.
Term Loan, due 12/31/01................................ 9.31 to 9.44 3,996,441
5,003 U.S. Radio Holdings, Inc.
Term Loan, due 9/20/03................................. 10.31 to 10.44 5,002,207
4,500 Young Broadcasting, Inc.
(Participation: Bankers Trust) (b)
Term Loan, due 12/31/01................................ 9.44 4,499,505
-------------
20,463,501
-------------
CONSUMER PRODUCTS (2.7%)
10,000 Revlon Consumer Products Corporation
Term Loan, due 6/30/97................................. 9.81 10,000,000
-------------
</TABLE>
<PAGE> 3
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS March 31, 1995 (unaudited) (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(in Interest
thousands) Description and Maturity Date Rates Value
-------- ------------------------------------------------------- --------------- -------------
<C> <S> <C> <C>
CONTAINERS (3.8%)
$ 4,481 Gaylord Container Corporation
Term Loan, due 9/30/97................................. 9.13 to 9.88% $ 4,480,327
9,757 Silgan Corporations
Term Loan, due 9/15/96................................. 9.44 to 11.25 9,758,465
-------------
14,238,792
-------------
CONTAINERS-PAPERS (1.3%)
5,000 Stone Container Corp.
Term Loan, due 4/1/00.................................. 9.31 4,999,900
-------------
COSMETICS (1.4%)
5,000 Mary Kay Cosmetics, Inc.
Term Loan, due 12/6/02................................. 9.63 4,999,950
-------------
DRUG STORES (1.0%)
3,643 M & H Drugs, Inc.
Term Loan, due 9/1/96.................................. 9.01 3,642,820
-------------
ELECTRONICS (1.1%)
4,151 Sperry Marine, Inc.
Term Loan, due 12/31/00................................ 9.50 to 10.06 4,151,242
-------------
ENTERTAINMENT (2.7%)
10,000 Harrah's Jazz Co. & Finance Corp.
Term Loan, due 9/30/99................................. 9.25 9,993,900
-------------
EQUIPMENT (2.7%)
10,000 Primeco, Inc.
Term Loan, due 12/31/00................................ 9.25 to 9.50 9,999,948
-------------
FOOD & BEVERAGES (2.0%)
7,500 Restaurants Unlimited, Inc.
Term Loan, due 6/3/00.................................. 9.63 7,499,925
-------------
FOOD PROCESSING (2.9%)
5,000 American Italian Pasta Company
Term Loan, due 12/30/00................................ 10.00 4,999,650
5,709 Del Monte Corp.
Term Loan, due 12/15/97................................ 9.81 5,709,516
-------------
10,709,166
-------------
FOOD WHOLESALERS (3.5%)
13,000 Kraft Foodservice, Inc.
Term Loan, due 3/31/02................................. 9.57 13,003,380
-------------
</TABLE>
<PAGE> 4
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS March 31, 1995 (unaudited) (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(in Interest
thousands) Description and Maturity Date Rates Value
-------- ------------------------------------------------------- --------------- -------------
<C> <S> <C> <C>
GAS-TRUCK STOP (1.1%)
$ 4,000 Petro PSC Properties, L.P.
Term Loan, due 5/24/01................................. 9.56 % $ 4,000,600
-------------
INDUSTRIALS (3.4%)
6,094 UCAR International, Inc.
Term Loan, due 1/31/03................................. 9.31 6,093,750
3,203 UCAR International, Inc.
Term Loan, due 7/31/03................................. 9.81 3,203,093
3,203 UCAR International, Inc.
Term Loan, due 1/31/04................................. 10.06 3,203,061
-------------
12,499,904
-------------
LEASING (4.2%)
16,021 GPA Group PLC (Ireland) +
(Participation: First National Bank of Chicago)(b)
Revolver, due 9/30/96.................................. 7.38 to 8.00 15,701,736
-------------
MANUFACTURING (3.2%)
5,000 Desa International, Inc.
Term Loan, due 11/30/00................................ 10.06 5,003,750
2,701 Intermetro Industries Corporation
Term Loan, due 6/30/01................................. 10.00 2,704,086
4,053 Intermetro Industries Corporation
Term Loan, due 12/31/02................................ 10.50 4,057,094
-------------
11,764,930
-------------
MEDICAL PRODUCTS & SUPPLIES (1.3%)
5,000 Deknatel Holdings, Inc.
Term Loan, due 4/20/01................................. 9.81 5,000,050
-------------
PAPER PRODUCTS (4.0%)
15,000 Fort Howard Corp.
Term Loan, due 12/31/02................................ 9.13 14,999,850
-------------
PERSONAL PRODUCTS (1.3%)
4,921 Playtex Family Products Corporation
Term Loan, due 6/1/02.................................. 9.63 4,921,143
-------------
PUBLISHING (4.0%)
7,721 Ziff Davis Publishing Co.
Term Loan, due 12/31/01................................ 9.44 7,717,963
7,279 Ziff Davis Publishing Co.
Term Loan, due 12/31/02................................ 9.94 7,276,937
-------------
14,994,900
-------------
</TABLE>
<PAGE> 5
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS March 31, 1995 (unaudited) (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(in Interest
thousands) Description and Maturity Date Rates Value
-------- ------------------------------------------------------- --------------- -------------
<C> <S> <C> <C>
RECORD & TAPE (3.4%)
$ 4,938 Camelot Music, Inc.
Term Loan, due 2/28/01................................. 8.88 to 9.56% $ 4,936,844
7,538 The Wherehouse Entertainment, Inc.
Term Loan, due 1/31/98................................. 9.13 7,538,347
-------------
12,475,191
-------------
RETAIL DEPARTMENT STORES (1.3%)
2,417 Saks & Company
Term Loan, due 6/30/98................................. 8.63 2,415,666
2,469 Saks & Company
Term Loan, due 6/30/00................................. 9.13 2,467,535
-------------
4,883,201
-------------
SCIENTIFIC INSTRUMENTS (0.9%)
1,779 Waters Corporation
Term Loan, due 11/30/02................................ 9.94 to 10.06 1,779,674
1,431 Waters Corporation
Term Loan, due 5/31/03................................. 10.31 to 10.44 1,431,018
-------------
3,210,692
-------------
SPORTING GOODS (2.0%)
7,444 Spalding & Evenflo Companies, Inc.
Term Loan, due 10/17/02................................ 9.38 7,444,409
-------------
SUPERMARKETS (9.9%)
4,105 Dominicks, Finer Foods, Inc.
Term Loan, due 3/31/02................................. 11.00 4,105,263
4,447 Dominicks, Finer Foods, Inc.
Term Loan, due 3/31/03................................. 11.50 4,447,368
4,447 Dominicks, Finer Foods, Inc.
Term Loan, due 9/30/03................................. 11.75 4,447,368
9,786 The Grand Union Company
Term Loan, due 7/30/98 (c)............................. 11.00 9,541,440
1,469 Mayfair Supermarkets, Inc.
Term Loan, due 2/28/98................................. 9.06 1,469,057
969 Mayfair Supermarkets, Inc.
Term Loan, due 11/30/99................................ 9.00 to 9.06 968,671
4,950 Pathmark Stores Inc.
Term Loan, due 1/28/00................................. 9.25 4,949,901
3,789 Star Markets Company, Inc.
Term Loan, due 12/31/01................................ 9.13 3,789,398
2,842 Star Markets Company, Inc.
Term Loan, due 12/31/02................................ 9.63 2,842,048
-------------
36,560,514
-------------
TEXTILES (2.7%)
3,840 Blackstone Capital Company II, L.L.C.
Purchase Term Loan, due 1/13/97........................ 9.00 3,840,078
1,160 Blackstone Capital Company II, L.L.C.
Reserve Term Loan, due 1/13/97......................... 9.00 1,160,023
</TABLE>
<PAGE> 6
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS March 31, 1995 (unaudited) (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(in Interest
thousands) Description and Maturity Date Rates Value
-------- ------------------------------------------------------- --------------- -------------
<C> <S> <C> <C>
$ 3,840 Wasserstein / C&A Holdings, L.L.C.
Purchase Term Loan, due 1/13/97........................ 8.38% $ 3,838,925
1,160 Wasserstein / C&A Holdings, L.L.C.
Reserve Term Loan, due 1/13/97......................... 8.38 1,159,675
-------------
9,998,701
-------------
TEXTILES-APPAREL MANUFACTURERS (5.6%)
194 Bidermann Industries Corp.
Revolver, due 3/31/97.................................. 10.50 193,785
10,412 Bidermann Industries Corp.
Term Loan, due 3/31/97................................. 11.00 10,411,889
10,000 Chicopee, Inc.
Term Loan, due 3/31/03................................. 11.00 10,000,000
-------------
20,605,674
-------------
TOTAL SENIOR COLLATERALIZED LOANS
(IDENTIFIED COST $337,647,553)............................................ 336,989,882
-------------
<CAPTION>
Number
of
Shares
--------
<C> <S> <C> <C>
COMMON STOCK (0.0%)
FOOD SERVICES (0.0%)
4,209 Flagstar Companies (d) (Identified Cost $60,507).......................... 23,151
-------------
<CAPTION>
Principal
Amount
(in
thousands)
--------
<C> <S> <C> <C>
SHORT-TERM INVESTMENTS (8.6%)
COMMERCIAL PAPER (E) (0.3%)
Finance-Diversified (0.3%)
$ 1,000 General Electric Credit Corp.
due 4/20/95 ++ (Amortized Cost $996,876)............... 5.92 996,876
-------------
U.S. GOVERNMENT AGENCIES (E) (6.3%)
4,000 Federal Home Loan Mortgage Corporation
due 4/20/95 ++......................................... 5.92 3,987,502
1,400 Federal Home Loan Mortgage Corporation
due 4/28/95 ++......................................... 5.94 1,393,763
18,000 Tennessee Valley Authority
due 4/03/95............................................ 6.00 17,994,000
-------------
TOTAL U.S. GOVERNMENT AGENCIES
(AMORTIZED COST $23,375,265).............................................. 23,375,265
-------------
</TABLE>
<PAGE> 7
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS March 31, 1995 (unaudited) (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(in
thousands) Value
-------- -------------
<S> <C> <C>
REPURCHASE AGREEMENT (2.0%)
$ 7,554 The Bank of New York 5.875% due 4/03/95 (dated 3/31/95; proceeds
$7,557,343, collateralized by $7,808,086 U.S. Treasury Bill 5.76% due
9/07/95, valued at $7,610,297) (Identified Cost $7,553,645)............... $ 7,553,645
-------------
TOTAL SHORT-TERM INVESTMENTS
(IDENTIFIED COST $31,925,786)............................................. 31,925,786
-------------
TOTAL INVESTMENTS
(IDENTIFIED COST $369,633,846) (F)..................... 99.4% 368,938,819
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES......... 0.6 2,027,976
----- -------------
NET ASSETS............................................. 100.0% $ 370,966,795
===== =============
</TABLE>
- ---------------
+ 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 March 31, 1995.
(b) Participation; participation interests were acquired through the financial
institutions indicated parenthetically.
(c) Non-Income producing security.
(d) Non-income producing security. 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 money market equivalent yield.
(f) The aggregate cost for federal income tax purposes is $369,633,846; the
aggregate gross unrealized appreciation is $180,681 and the aggregate gross
unrealized depreciation is $875,708, resulting in net unrealized
depreciation of $695,027.
See Notes to Financial Statements
<PAGE> 8
PRIME INCOME TRUST
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1995 (unaudited)
- -------------------------------------------
ASSETS:
Investments in securities, at value
(identified cost $369,633,846)........... $ 368,938,819
Cash....................................... 128,284
Receivable for:
Shares of beneficial interest sold....... 2,879,565
Interest................................. 2,732,540
Investments sold......................... 433,096
Prepaid expenses and other assets.......... 83,463
-------------
TOTAL ASSETS....................... 375,195,767
-------------
LIABILITIES:
Payable for:
Investment advisory fee.................. 281,214
Dividends to shareholders................ 165,875
Investments purchased.................... 161,406
Administration fee....................... 78,115
Accrued expenses and other payables........ 263,973
Deferred facility fees..................... 3,278,389
Commitments and contingencies (Note 7).....
-------------
TOTAL LIABILITIES.................. 4,228,972
-------------
NET ASSETS:
Paid-in-capital............................ 372,458,065
Accumulated undistributed net investment
income................................... 59,714
Net unrealized depreciation................ (695,027)
Accumulated net realized loss.............. (855,957)
-------------
NET ASSETS......................... $ 370,966,795
=============
NET ASSET VALUE PER SHARE,
37,158,902 shares outstanding (unlimited
shares authorized of $.01 par value)..... $9.98
=====
STATEMENT OF OPERATIONS For the six months
ended March 31, 1995 (unaudited)
- -------------------------------------------
NET INVESTMENT INCOME:
INCOME
Interest................................. $ 14,898,648
Facility fees earned..................... 1,182,462
Other.................................... 102,582
-------------
TOTAL INCOME........................... 16,183,692
-------------
EXPENSES
Investment advisory fee.................. 1,536,910
Administration fee....................... 426,919
Professional fees........................ 265,547
Shareholder reports and notices.......... 137,319
Transfer agent fees and expenses......... 120,130
Custodian fees........................... 38,940
Registration fees........................ 37,360
Trustees' fees and expenses.............. 14,279
Organizational expenses.................. 8,018
Other.................................... 12,738
-------------
TOTAL EXPENSES......................... 2,598,160
-------------
NET INVESTMENT INCOME................ 13,585,532
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss........................ (61,785)
Net change in unrealized depreciation.... 234,177
-------------
NET GAIN............................... 172,392
-------------
NET INCREASE......................... $ 13,757,924
=============
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the six
months ended For the
March 31, year ended
1995 September 30,
(unaudited) 1994
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income..................................................... $ 13,585,532 $ 17,647,052
Net realized gain (loss).................................................. (61,785) 596,754
Net change in unrealized depreciation..................................... 234,177 2,033,215
------------- -------------
Net increase.......................................................... 13,757,924 20,277,021
------------- -------------
Dividends and distributions to shareholders from:
Net investment income..................................................... (13,526,408) (17,652,279)
Net realized gain......................................................... (957,284) --
------------- -------------
Total................................................................. (14,483,692) (17,652,279)
------------- -------------
Net increase (decrease) from transactions in shares of beneficial
interest.................................................................. 66,658,149 (9,069,554)
------------- -------------
Total increase (decrease)............................................. 65,932,381 (6,444,812)
NET ASSETS:
Beginning of period......................................................... 305,034,414 311,479,226
------------- -------------
END OF PERIOD (including undistributed net investment income of
$59,714 and $590, respectively)........................................... $ 370,966,795 $ 305,034,414
============= =============
</TABLE>
See Notes to Financial Statements
<PAGE> 9
PRIME INCOME TRUST
FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
For the six months ended March 31, 1995 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INCREASE (DECREASE) IN CASH:
CASH FLOWS FROM OPERATING ACTIVITIES:
Net investment income.............................................................. $ 13,585,532
Adjustments to reconcile net investment income to net cash
provided by operating activities:
Increase in receivables and other assets related to operations................... (789,926)
Increase in payables related to operations....................................... 1,180,671
--------------
Net cash from operating activities............................................. 13,976,277
--------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments............................................................ (232,998,621)
Principal repayments/sales of investments.......................................... 172,944,762
Net sales/maturities of short-term investments..................................... (7,007,289)
--------------
Net cash used in investing activities.......................................... (67,061,148)
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Shares of beneficial interest sold................................................. 80,823,149
Shares tendered.................................................................... (20,494,472)
Dividends to shareholders (net of reinvested dividends of $6,983,471).............. (7,424,140)
--------------
Net cash from financing activities............................................. 52,904,537
--------------
Net decrease in cash............................................................... (180,334)
Cash at beginning of period........................................................ 308,618
--------------
CASH AT END OF PERIOD.............................................................. $ 128,284
============
</TABLE>
See Notes to Financial Statements
<PAGE> 10
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS (unaudited)
- --------------------------------------------------------------------------------
1. ORGANIZATION AND ACCOUNTING POLICIES -- Prime Income Trust (the "Trust") is
registered under the Investment Company Act of 1940, as amended, 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. 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 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.
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.
<PAGE> 11
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
- --------------------------------------------------------------------------------
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 were fully amortized as of November 29, 1994.
2. INVESTMENT ADVISORY AGREEMENT -- Pursuant to an Investment Advisory
Agreement, the Trust pays its Investment Adviser an advisory fee, calculated
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 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 its
Administrator 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 six months ended March 31, 1995 aggregated $232,998,621 and
$173,377,858, 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
<PAGE> 12
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
- --------------------------------------------------------------------------------
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 six months ended March
31, 1995, the Investment Adviser has informed the Trust that it received
approximately $103,220 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 March 31, 1995, the Trust had
transfer agent fees and expenses payable of approximately $37,000.
The Trust established an unfunded noncontributory defined benefit pension
plan covering all independent Trustees of the Trust who will have served as
independent Trustees for at least five years at the time of retirement. Benefits
under this plan are based on years of service and compensation during the last
five years of service. Aggregate pension costs for the six months ended March
31, 1995 included in Trustees' fees and expenses in the Statement of Operations
amounted to $3,793. At March 31, 1995, the Trust had an accrued pension
liability of $48,135 which is included in accrued expenses in the Statement of
Assets and Liabilities.
5. SHARES OF BENEFICIAL INTEREST -- Transactions in shares of beneficial
interest were as follows:
<TABLE>
<CAPTION>
Shares Amount
------------ --------------
<S> <C> <C>
Balance, September 30, 1992................................. 41,390,032 $ 414,061,124
Shares sold................................................. 1,735,717 17,314,978
Shares issued to shareholders for reinvestment of
dividends................................................. 1,113,636 11,101,773
Shares tendered (four quarterly tender offers).............. (12,811,288) (127,608,405)
------------ --------------
Balance, September 30, 1993................................. 31,428,097 314,869,470
Shares sold................................................. 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................................................. 8,019,626 80,169,150
Shares issued to shareholders for reinvestment of
dividends................................................. 698,892 6,983,471
Shares tendered (two quarterly tender offers)............... (2,049,210) (20,494,472)
------------ --------------
Balance, March 31, 1995..................................... 37,158,902 $ 372,458,065
============ ==============
</TABLE>
On April 20, 1995, the Trustees approved a tender offer to purchase up to 4
million shares of beneficial interest to commence on May 17, 1995.
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.
<PAGE> 13
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
- --------------------------------------------------------------------------------
7. COMMITMENTS AND CONTINGENCIES -- As of March 31, 1995, the Trust had
unfunded loan commitments pursuant to the following loan agreements:
<TABLE>
<CAPTION>
Unfunded
Borrower Commitment
----------------------------------------------------------------------- -----------
<S> <C>
Bidermann Industries Corp.............................................. $ 1,039,393
GPA Group PLC.......................................................... 4,388,383
-----------
$ 5,427,776
==========
</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 March 31, 1995, such
Participations had a fair value of $27,576,308.
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> 14
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
For the period
six November
months 30, 1989*
ended through
March 31, For the year ended September 30, September
1995 --------------------------------------------------- 30,
(unaudited) 1994 1993 1992 1991 1990
--------- --------- --------- --------- --------- ---------
<S> <C> <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 $ 10.00
--------- --------- --------- --------- --------- ---------
Net investment income........ 0.40 0.62 0.55 0.62 0.84 0.74
Net realized and unrealized
gain (loss)................ 0.01 0.09 (0.08) (0.01) -- (0.01)
--------- --------- --------- --------- --------- ---------
Total from investment
operations................. 0.41 0.71 0.47 0.61 0.84 0.73
--------- --------- --------- --------- --------- ---------
Less dividends and
distributions from:
Net investment income...... (0.40) (0.62) (0.55) (0.62) (0.84) (0.73)
Net realized gain.......... (0.03) -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total dividends and
distributions.............. (0.43) (0.62) (0.55) (0.62) (0.84) (0.73)
--------- --------- --------- --------- --------- ---------
Net asset value, end of
period..................... $ 9.98 $ 10.00 $ 9.91 $ 9.99 $ 10.00 $ 10.00
========= ========= ========= ========= ========= =========
TOTAL INVESTMENT RETURN+..... 4.11%(1) 7.32% 4.85% 6.23% 8.77% 7.57%(1)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands)............. $ 370,967 $ 305,034 $ 311,479 $ 413,497 $ 479,941 $ 328,189
Ratios to average net assets:
Expenses................... 1.52%(2) 1.60% 1.45% 1.47% 1.52% 1.48%(2)
Net investment income...... 7.96%(2) 6.14% 5.53% 6.14% 8.23% 8.95%(2)
Portfolio turnover rate...... 57%(1) 147% 92% 46% 42% 35%(1)
</TABLE>
- ---------------
* Commencement of operations.
+ Does not reflect the deduction of sales charge.
(1) Not annualized.
(2) Annualized.
See Notes to Financial Statements
<PAGE> 15
(This Page Intentionally Left Blank)
<PAGE> 16
BOARD OF DIRECTORS
- ------------------------------------------- [PRIME INCOME TRUST LOGO]
Jack F. Bennett
Michael Bozic Semiannual Report
Charles A. Fiumefreddo March 31, 1995
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
The financial statements included herein have been taken from the
records of the Fund without examination by the independent accountants
and accordingly they do not express an opinion thereon.
This report is submitted for the general information of shareholders of
the 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.
