<PAGE>
PRIME INCOME TRUST TWO WORLD TRADE CENTER, NEW YORK, NEW YORK 10048
LETTER TO THE SHAREHOLDERS MARCH 31, 1996
DEAR SHAREHOLDER:
During the six-months ended March 31, 1996, interest rates on short-and
intermediate-term U.S. Treasury securities were highly volatile. In late 1995,
interest rates declined to levels last seen before the Federal Reserve Board
raised interest rates in February 1994. Subsequently, interest rates rose
sharply during the first three months of 1996, retracing all the decline of the
previous three months. Much of the U.S. Treasury market's strength at first was
attributed to economic data supporting the perception that the economy had
indeed slowed, but by early 1996, the market's perception had changed. The
combined effect of the government shut-down and the severe winter weather of
January 1996 created pent-up demand by the consumer sector. Reinvigorated by low
mortgage rates, rebate-incentives by the auto dealers and extraordinary sale
prices at local retailers, retail sales and housing starts soared. Meanwhile,
the unemployment rate declined, signaling a stronger-than-anticipated rebounding
economy and possibly a surge in inflation. On March 31, 1996, the 5-year U.S.
Treasury note was yielding 6.09 percent compared to 6.02 percent six-months ago.
During the same six-month period, the prime rate declined from 8.75 percent on
September 30, 1995 to 8.25 percent on March 31, 1996, while the London
Inter-Bank Rate (LIBOR), which was 6.00 percent on September 30, 1995, declined
to 5.50 percent on March 31, 1996.
PERFORMANCE AND PORTFOLIO
Against this backdrop, Prime Income Trust produced a total return of 3.86
percent for the six-month period ended March 31, 1996. Asset growth continues to
be strong. Since September 30, 1995, the Trust's net assets have increased from
$521 million to $762 million. The Trust's portfolio remains well diversified,
with over 85 committed loans spread out over 46 industry groups.
The Trust, which seeks current income consistent with the preservation of
capital, paid distributions totaling $0.38 per share during the reporting
period. The Trust continues to provide shareholders with high
<PAGE>
PRIME INCOME TRUST
LETTER TO THE SHAREHOLDERS MARCH 31, 1996, CONTINUED
current income -- 200 to 300 basis points above money market investments --
while minimizing net asset value fluctuations. The Trust 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. The
Trust's net asset value ended the period at $9.99 per share, unchanged from its
level on September 30, 1995 despite the sharp rise in interest rates during the
first three months of 1996.
LOOKING AHEAD
We expect the U.S. economy to maintain a slow-to-moderate pace during 1996, and
believe that the Federal Reserve Board will continue to make modest adjustments
to monetary policy if evidence of a weak economy re-emerges. Inflation should
continue to remain subdued albeit at a slightly higher level in the year ahead.
We appreciate your support of Prime Income Trust and look forward to continuing
to serve your financial needs and objectives.
Very truly yours,
[SIGNATURE]
CHARLES A. FIUMEFREDDO
CHAIRMAN OF THE BOARD
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN INTEREST MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SENIOR COLLATERALIZED TERM LOANS (a) (78.5%)
ADVERTISING (0.9%)
$ 7,250 Eller Media Co.......................... 9.13% 12/21/03 $ 7,250,507
---------------
AEROSPACE (2.1%)
1,121 Gulfstream Aerospace Corp............... 7.63 03/31/97 1,121,141
2,900 Gulfstream Aerospace Corp............... 8.32 03/31/98 2,898,898
7,723 Howmet Corp............................. 8.25 to 8.41 11/20/02 7,720,606
4,247 Howmet Corp............................. 8.50 to 8.66 05/20/03 4,246,248
---------------
15,986,893
---------------
APPAREL (2.4%)
920 Anvil Knitwear, Inc..................... 7.56 to 9.50 02/03/01 919,831
8,965 Anvil Knitwear, Inc..................... 8.88 to 10.25 02/02/02 8,963,475
4,675 Hosiery Corporation of America, Inc..... 8.63 to 10.50 07/31/01 4,672,501
188 London Fog Industries, Inc. *........... 0.00 05/31/02 178,857
2,823 London Fog Industries, Inc.............. 9.25+ 05/31/02 2,681,831
580 London Fog Industries, Inc. (b)......... 12.50 05/31/02 551,691
---------------
17,968,186
---------------
BEVERAGES (1.3%)
4,000 Select Beverages, Inc................... 8.56 to 8.75 06/30/01 3,998,550
6,000 Select Beverages, Inc................... 8.81 06/30/02 5,994,340
---------------
9,992,890
---------------
BREWERS (2.6%)
4,961 G. Heileman Brewing Company, Inc........ 8.13 to 8.38 12/31/98 4,959,739
4,961 G. Heileman Brewing Company, Inc.
(Participation: Bankers Trust) (c)...... 9.19 12/31/00 4,961,019
9,900 Labatt Brewing Company, Ltd............. 7.88 to 8.13 10/01/03 9,899,884
---------------
19,820,642
---------------
BROADCAST MEDIA (4.0%)
5,000 Chancellor Broadcasting Co.............. 10.00 09/01/03 5,000,000
10,000 Heftel Broadcasting Corp................ 8.69 09/30/03 9,998,800
6,708 Silver King Communications, Inc......... 8.44 07/31/02 6,707,003
3,745 U.S. Radio Holdings, Inc................ 8.44 to 8.88 12/31/01 3,745,132
4,983 U.S. Radio Holdings, Inc................ 9.44 to 9.88 09/20/03 4,983,613
---------------
30,434,548
---------------
BUILDING MATERIALS (1.3%)
9,991 National Gypsum Co...................... 8.25 to 10.00 09/30/03 9,990,170
---------------
CABLE TELEVISION EQUIPMENT (1.3%)
10,000 Marcus Cable Operating Co. L.P.......... 8.07 to 8.13 04/30/04 9,999,123
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED) CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN INTEREST MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CABLE/CELLULAR (2.6%)
$ 10,000 Charter Communications Entertainment I,
L.P..................................... 8.06% 12/31/04 $ 9,990,200
3,333 MobileMedia Communications, Inc......... 7.82 to 8.00 06/30/02 3,332,735
6,667 MobileMedia Communications, Inc......... 8.32 06/30/03 6,666,434
---------------
19,989,369
---------------
CONGLOMERATE (1.7%)
12,821 Marvel IV Holdings, Inc................. 10.75 09/01/97 12,814,272
---------------
CONSUMER PRODUCTS (1.3%)
10,000 Revlon Consumer Products Corp........... 8.00 to 8.06 03/31/99 9,993,850
---------------
CONTAINERS (2.2%)
16,794 Silgan Corporations..................... 8.18 to 8.63 03/15/02 16,783,225
---------------
CONVENIENCE STORES (1.3%)
10,028 Cumberland Farms, Inc. (Participation:
Merrill Lynch & Co., Inc.) (c).......... 8.75 12/31/98 10,028,028
---------------
COSMETICS (0.6%)
4,960 Mary Kay Cosmetics, Inc................. 8.81 12/06/02 4,958,016
---------------
DRUG STORES (1.4%)
7,500 Duane Reade, Inc........................ 9.38 12/31/99 7,497,975
3,549 M & H Drugs, Inc........................ 9.88 09/01/96 3,548,835
---------------
11,046,810
---------------
ELECTRONICS (1.6%)
6,000 Details, Inc............................ 8.13 01/31/02 5,990,160
5,972 Sperry Marine, Inc...................... 8.56 to 9.19 11/12/00 5,970,695
---------------
11,960,855
---------------
ENTERTAINMENT & LEISURE TIME (2.6%)
7,911 Orion Pictures Corp..................... 8.31 12/31/00 7,909,687
11,730 Six Flags Theme Parks, Inc.............. 8.50 to 8.51 06/23/03 11,729,692
---------------
19,639,379
---------------
EQUIPMENT (1.3%)
9,920 Primeco, Inc............................ 8.31 to 8.63 12/31/00 9,918,031
---------------
FOOD & BEVERAGES (1.0%)
7,500 Restaurants Unlimited, Inc.............. 8.88 06/03/00 7,497,975
---------------
FOOD PROCESSING (3.3%)
11,000 American Italian Pasta Co............... 9.13 02/27/04 10,999,450
8,400 Keebler Holding Corp.................... 8.38 to 8.63 07/31/03 8,395,598
5,600 Keebler Holding Corp.................... 8.63 to 8.88 07/31/04 5,597,060
---------------
24,992,108
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED) CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN INTEREST MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FOOD SERVICES (3.3%)
$ 5,924 SC International Services, Inc. &
Caterair International Corp............. 8.38 to 8.56% 09/15/01 $ 5,923,055
7,384 SC International Services, Inc. &
Caterair International Corp............. 8.38 to 8.56 09/15/02 7,383,244
1,627 SC International Services, Inc. &
Caterair International Corp............. 8.63 to 8.81 09/15/03 1,627,149
6,667 Volume Services, Inc.................... 8.81 12/31/02 6,666,600
3,333 Volume Services, Inc.................... 9.31 12/31/03 3,333,267
---------------
24,933,315
---------------
GAS-TRUCK STOP (0.5%)
3,761 Petro PSC Properties, L.P............... 8.70 05/24/01 3,760,461
---------------
HOUSEHOLD FURNISHINGS & APPLIANCES (1.3%)
9,950 Graco Children's Products, Inc.......... 8.44 to 10.25 06/30/03 9,950,000
---------------
HOUSING & HOME FURNISHINGS (1.2%)
7,500 INTERCO, Inc............................ 7.94 03/29/03 7,497,150
1,425 INTERCO, Inc............................ 8.44 03/29/04 1,424,444
---------------
8,921,594
---------------
INDUSTRIALS (1.1%)
8,571 UCAR International, Inc................. 7.44 12/31/02 8,571,429
---------------
MANUFACTURING (2.1%)
10,000 Desa International, Inc................. 8.44 02/28/03 9,999,900
2,530 Intermetro Industries Corp.............. 8.31 06/30/01 2,529,822
3,796 Intermetro Industries Corp.............. 8.81 12/31/02 3,795,864
---------------
16,325,586
---------------
MANUFACTURING - DIVERSIFIED (0.7%)
5,400 Health O' Meter, Inc.................... 8.06 to 9.25 08/15/01 5,398,542
---------------
MEDIA GROUP (1.8%)
14,000 ADVO, Inc............................... 8.32 03/31/04 13,999,440
---------------
MEDICAL PRODUCTS & SUPPLIES (0.7%)
5,000 Deknatel Holdings, Inc.................. 9.38 04/20/01 5,000,300
---------------
MISCELLANEOUS (1.2%)
9,000 Borg-Warner Security Corp............... 8.50 12/31/98 8,996,490
---------------
OFFICE EQUIPMENT (1.0%)
8,000 Knoll, Inc.............................. 10.25 08/31/03 8,000,000
---------------
PACKAGING & BOTTLING (2.0%)
10,714 Riverwood International Corp............ 10.25 03/31/04 10,714,286
4,286 Riverwood International Corp............ 10.75 09/30/04 4,285,715
---------------
15,000,001
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED) CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN INTEREST MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PAPER PRODUCTS (1.5%)
$ 2,203 Mail Well Corp.......................... 8.44% 07/31/03 $ 2,202,831
1,096 Supermex, Inc........................... 8.44 07/31/03 1,096,351
3,467 WilliamHouse Regency of Delaware,
Inc..................................... 8.63 to 9.00 10/31/02 3,465,627
2,400 WilliamHouse Regency of Delaware,
Inc..................................... 9.00 to 9.19 10/31/03 2,399,256
2,133 WilliamHouse Regency of Delaware,
Inc..................................... 9.25 to 9.44 04/30/04 2,132,661
---------------
11,296,726
---------------
RAILROAD EQUIPMENT (1.3%)
9,917 Johnstown America Industries, Inc....... 8.25 to 8.31 03/31/03 9,910,254
---------------
RECORD & TAPE (1.6%)
4,875 Camelot Music, Inc...................... 9.75 02/28/01 4,875,000
7,400 The Wherehouse Entertainment, Inc. *.... 9.75 01/31/98 7,030,000
---------------
11,905,000
---------------
RETAIL - DEPARTMENT STORES (2.3%)
1,812 Saks & Co............................... 8.25 06/30/98 1,812,547
15,469 Saks & Co............................... 8.25 to 8.94 06/30/00 15,466,796
---------------
17,279,343
---------------
RETAIL - SPECIALTY (3.1%)
8,500 AnnTaylor, Inc.......................... 8.88 07/29/98 8,494,480
15,000 QVC, Inc................................ 8.31 01/31/04 14,994,150
---------------
23,488,630
---------------
SPECIALTY PACKAGING (1.4%)
5,970 Calmar, Inc............................. 8.41 to 10.25 09/15/03 5,968,870
4,478 Calmar, Inc............................. 8.66 to 10.50 03/15/04 4,476,966
---------------
10,445,836
---------------
SPORTING GOODS (2.2%)
7,361 Spalding & Evenflo Companies, Inc....... 8.38 10/17/02 7,360,936
1,720 Worldwide Sports & Recreation, Inc...... 8.44 04/26/00 1,719,865
8,000 Worldwide Sports & Recreation, Inc...... 8.94 04/26/01 7,999,280
---------------
17,080,081
---------------
SUPERMARKETS (2.6%)
2,138 Food 4 Less Supermarkets, Inc........... 8.56 06/15/02 2,137,670
2,138 Food 4 Less Supermarkets, Inc........... 9.06 06/15/03 2,137,670
4,632 Food 4 Less Supermarkets, Inc........... 9.31 02/15/04 4,631,018
4,530 Pathmark Stores, Inc.................... 8.44 01/28/00 4,529,358
3,778 Star Markets Company, Inc............... 8.38 12/31/01 3,777,480
2,830 Star Markets Company, Inc............... 8.88 12/31/02 2,830,122
---------------
20,043,318
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED) CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN INTEREST MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TELECOMMUNICATION EQUIPMENT (1.0%)
$ 3,486 K-Tec Holdings, Inc..................... 8.13% 01/31/03 $ 3,485,460
3,984 K-Tec Holdings, Inc..................... 8.63 01/31/04 3,983,624
---------------
7,469,084
---------------
TEXTILES (1.3%)
5,000 Blackstone Capital Company II, L.L.C.... 8.32 01/13/97 4,999,700
5,000 Wasserstein / C&A Holdings, L.L.C....... 8.38 01/13/97 4,999,450
---------------
9,999,150
---------------
TEXTILES - APPAREL MANUFACTURERS (1.3%)
9,900 Chicopee, Inc........................... 8.69 03/31/03 9,900,000
---------------
TOYS (1.9%)
7,250 Ritvik Toys, Inc........................ 8.69 02/08/03 7,247,100
7,250 Ritvik Toys, Inc........................ 9.19 02/08/04 7,247,100
---------------
14,494,200
---------------
WHOLESALE DISTRIBUTOR (1.3%)
9,975 American Marketing Industries, Inc...... 8.81 to 8.88 11/29/02 9,967,582
---------------
WIRE & CABLE (2.0%)
9,985 International Wire Group, Inc........... 8.32 to 10.25 09/30/02 9,982,356
5,000 International Wire Group, Inc........... 8.75 to 10.75 09/30/03 4,993,567
---------------
14,975,923
---------------
TOTAL SENIOR COLLATERALIZED TERM LOANS
(IDENTIFIED COST $597,150,590)....................................... 598,177,162
---------------
SENIOR COLLATERALIZED NOTE (0.5%)
AIRLINES
4,326 AeroMexico 1994-I U.S. Receivables Trust
(Mexico) (Identified Cost $4,326,613)... 9.44 07/31/99 4,326,051
---------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
------------------------------------------------------------------------------------------------------
<C> <S> <C>
PREFERRED STOCK (0.2%)
APPAREL
1,722K London Fog Industries, Inc. (Series A-1) (Restricted) (b) (Identified
Cost $2,024,455)........................................................ 1,222,422
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED) CONTINUED
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
------------------------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (0.0%)
APPAREL (0.0%)
1,291K London Fog Industries, Inc. (Restricted)................................ $ --
---------------
FOOD SERVICES (0.0%)
4,209 Flagstar Companies (Restricted)......................................... 13,154
---------------
TOTAL COMMON STOCKS
(IDENTIFIED COST $60,507)............................................... 13,154
---------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENTS (19.4%)
COMMERCIAL PAPER (d) (7.9%)
AUTOMOTIVE - FINANCE
$ 30,000 AT&T Credit Corp........................ 5.29% 04/08/96 29,969,142
10,000 Ford Motor Credit Co.................... 5.35 04/08/96 9,989,597
20,000 General Electric Capital Corp........... 5.39 04/08/96 19,979,039
---------------
TOTAL COMMERCIAL PAPER
(AMORTIZED COST $59,937,778)......................................... 59,937,778
---------------
U.S. GOVERNMENT AGENCIES (d)(e) (10.0%)
04/01/96 -
56,000 Federal Home Loan Mortgage Corp......... 5.26 to 5.35 04/04/96 55,989,233
20,000 Federal National Mortgage Assoc......... 5.30 04/02/96 19,997,056
---------------
TOTAL U.S. GOVERNMENT AGENCIES
(AMORTIZED COST $75,986,289)......................................... 75,986,289
---------------
REPURCHASE AGREEMENT (1.5%)
11,782 The Bank of New York (dated 03/29/96;
proceeds 11,785,941; collateralized by
$11,242,332 U.S. Treasury Bill 7.25% due
05/15/16 valued at 12,017,154)
(Identified Cost $11,781,523)........... 4.50 04/01/96 11,781,523
---------------
TOTAL SHORT-TERM INVESTMENTS
(IDENTIFIED COST $147,705,590)....................................... 147,705,590
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED) CONTINUED
<TABLE>
<CAPTION>
VALUE
---------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TOTAL INVESTMENTS
(IDENTIFIED COST $751,267,755) (f)........... 98.6% $751,444,379
CASH AND OTHER ASSETS IN EXCESS OF
LIABILITIES.................................. 1.4 10,428,634
----- ------------
NET ASSETS................................... 100.0% $761,873,013
----- ------------
----- ------------
<FN>
---------------------
K In thousands.
* Non-income producing security.
+ 3 percent paid in cash, 6.25 percent payment-in-kind; converts to prime
plus 1 percent cash payment on May 31, 1997.
(a) Floating rate securities. Interest rates shown are those in effect at
March 31, 1996.
(b) Payment-in-kind security.
(c) Participation: participation interests were acquired through the financial
institutions indicated parenthetically.
(d) Securities were purchased on a discount basis. The interest rates shown
have been adjusted to reflect a money market equivalent yield.
(e) All or a portion of these securities are segregated in connection with
unfunded loan commitments.
(f) The aggregate cost for federal income tax purposes approximates identified
cost.
The aggregate gross unrealized appreciation was $1,784,563 and the
aggregate gross unrealized depreciation was $1,607,939, resulting in net
unrealized appreciation of $176,624.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1996 (UNAUDITED)
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $751,267,755)............................ $751,444,379
Cash........................................................ 177,344
Receivable for:
Shares of beneficial interest sold...................... 10,434,195
Interest................................................ 4,808,798
Prepaid expenses and other assets........................... 90,510
------------
TOTAL ASSETS........................................... 766,955,226
------------
LIABILITIES:
Payable for:
Investment advisory fee................................. 545,683
Dividends............................................... 279,146
Administration fee...................................... 154,267
Deferred facility fees...................................... 3,820,358
Accrued expenses and other payables......................... 282,759
Commitments and contingencies (Note 7)...................... --
------------
TOTAL LIABILITIES...................................... 5,082,213
------------
NET ASSETS:
Paid-in-capital............................................. 762,574,011
Net unrealized appreciation................................. 176,624
Accumulated undistributed net investment income............. 863,575
Accumulated net realized loss............................... (1,741,197)
------------
NET ASSETS............................................. $761,873,013
------------
------------
NET ASSET VALUE PER SHARE,
76,228,205 SHARES OUTSTANDING (UNLIMITED SHARES AUTHORIZED
OF $.01 PAR VALUE)........................................
$9.99
------------
------------
</TABLE>
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INCOME
Interest.................................................... $26,122,478
Net facility and amendment fees............................. 1,390,403
Other income................................................ 672,511
-----------
TOTAL INCOME........................................... 28,185,392
-----------
EXPENSES
Investment advisory fee..................................... 2,746,540
Administration fee.......................................... 771,041
Professional fees........................................... 264,935
Registration fees........................................... 242,758
Transfer agent fees and expenses............................ 187,390
Shareholder reports and notices............................. 151,516
Custodian fees.............................................. 60,555
Trustees' fees and expenses................................. 16,636
Other....................................................... 143,786
-----------
TOTAL EXPENSES......................................... 4,585,157
-----------
NET INVESTMENT INCOME.................................. 23,600,235
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain........................................... 1,624,302
Net change in unrealized appreciation....................... (1,611,170)
-----------
NET GAIN............................................... 13,132
-----------
NET INCREASE................................................ $23,613,367
-----------
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED
MARCH 31, 1996 FOR THE YEAR ENDED
(UNAUDITED) SEPTEMBER 30, 1995
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income....................................... $ 23,600,235 $ 31,803,245
Net realized gain (loss).................................... 1,624,302 (2,551,571)
Net change in unrealized appreciation/depreciation.......... (1,611,170) 2,716,998
------------------ ------------------
NET INCREASE........................................... 23,613,367 31,968,672
------------------ ------------------
DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income....................................... (23,150,334) (31,409,897)
Net realized gain........................................... -- (957,304)
------------------ ------------------
TOTAL.................................................. (23,150,334) (32,367,201)
------------------ ------------------
Net increase from transactions in shares of beneficial
interest.................................................. 240,049,019 216,725,076
------------------ ------------------
TOTAL INCREASE......................................... 240,512,052 216,326,547
NET ASSETS:
Beginning of period......................................... 521,360,961 305,034,414
------------------ ------------------
END OF PERIOD
(INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF
$863,575 AND $413,674, RESPECTIVELY).................... $761,873,013 $521,360,961
------------------ ------------------
------------------ ------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
<TABLE>
<S> <C>
INCREASE (DECREASE) IN CASH:
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net investment income................................................................. $ 23,600,235
Adjustments to reconcile net investment income
to net cash from operating activities:
Increase in receivables and other assets related to operations........................ (12,646)
Increase in payables related to operations............................................ 481,512
Accretion of discounts................................................................ (822,726)
---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES........................................ 23,246,375
---------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Purchases of investments.............................................................. (298,416,386)
Principal repayments/sales of investments............................................. 186,582,278
Net sales/maturities of short-term investments........................................ (126,678,847)
---------------
NET CASH USED FOR INVESTING ACTIVITIES........................................... (238,512,955)
---------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Shares of beneficial interest sold.................................................... 247,583,870
Shares tendered....................................................................... (24,592,730)
Dividends from net investment income (net of reinvested dividends of $11,522,317)..... (11,569,415)
---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES........................................ 211,421,725
---------------
NET DECREASE IN CASH.................................................................. (3,844,855)
CASH AT BEGINNING OF YEAR............................................................. 4,022,199
---------------
CASH BALANCE AT END OF YEAR........................................................... $ 177,344
---------------
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 (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 for senior collateralized loans ("Senior
Loans") provided by banks, dealers or pricing services 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 such procedures, interests in
Senior Loans are priced using 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) 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
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 (UNAUDITED) CONTINUED
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, Senior Loans 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.
2. INVESTMENT ADVISORY AGREEMENT
Pursuant to an Investment Advisory Agreement with Dean Witter InterCapital Inc.
(the "Investment Adviser"), the Trust 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.
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 (UNAUDITED) CONTINUED
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 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, 1996 aggregated
$297,835,723 and $186,146,910, 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 six months ended March 31, 1996, the Investment Adviser
has informed the Trust that it received approximately $239,000 in early
withdrawal charges.
Dean Witter Trust Company, an affiliate of the Investment Adviser and
Administrator, is the Trust's transfer agent. At March 31, 1996, the Trust had
transfer agent fees and expenses payable of approximately $26,000.
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
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 (UNAUDITED) CONTINUED
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, 1996 included in Trustees' fees and expenses in
the Statement of Operations amounted to $6,006. At March 31, 1996, the Trust had
an accrued pension liability of $56,465 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, 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
Shares sold...................................................... 25,338,417 253,119,432
Shares issued to shareholders for reinvestment of dividends and
distributions................................................... 1,153,549 11,522,317
Shares tendered (two quarterly tender offers).................... (2,461,735) (24,592,730)
----------- --------------
Balance, March 31, 1996.......................................... 76,228,205 $ 762,574,011
----------- --------------
----------- --------------
</TABLE>
On April 17, 1996, the Trustees approved a tender offer to purchase up to 4
million shares of beneficial interest to commence on May 15, 1996.
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. Any net
capital losses incurred after October 31 ("post-October" losses) within the
taxable year are deemed to arise on the first business day of the Trust's next
taxable year. The Trust incurred and will elect to defer net capital losses 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 March 31, 1996, the Trust had an unfunded loan commitment pursuant to the
following loan agreement:
<TABLE>
<CAPTION>
UNFUNDED
BORROWER COMMITMENT
------------------------------ --------------
<S> <C>
Borg-Warner Security Corp..... $ 6,000,000
--------------
--------------
</TABLE>
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 (UNAUDITED) CONTINUED
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 positioned 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,
1996, such Participations had a fair value of $14,989,047.
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
SIX MONTHS
ENDED
MARCH 31, FOR THE YEAR ENDED SEPTEMBER 30
1996 -----------------------------------------------------
(UNAUDITED) 1995 1994 1993 1992 1991
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 9.99 $ 10.00 $ 9.91 $ 9.99 $ 10.00 $ 10.00
---------- --------- --------- --------- --------- ---------
Net investment income.............. 0.38 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... 0.38 0.83 0.71 0.47 0.61 0.84
---------- --------- --------- --------- --------- ---------
Less dividends and distributions
from:
Net investment income........... (0.38) (0.81) (0.62) (0.55) (0.62) (0.84)
Net realized gain............... -- (0.03) -- -- -- --
---------- --------- --------- --------- --------- ---------
Total dividends and
distributions..................... (0.38) (0.84) (0.62) (0.55) (0.62) (0.84)
---------- --------- --------- --------- --------- ---------
Net asset value, end of period..... $ 9.99 $ 9.99 $ 10.00 $ 9.91 $ 9.99 $ 10.00
---------- --------- --------- --------- --------- ---------
---------- --------- --------- --------- --------- ---------
TOTAL INVESTMENT RETURN+........... 3.86%(1) 8.57% 7.32% 4.85% 6.23% 8.77%
RATIOS TO AVERAGE NET ASSETS:
Expenses........................... 1.48%(2) 1.52% 1.60% 1.45% 1.47% 1.52%
Net investment income.............. 7.63%(2) 8.11% 6.14% 5.53% 6.14% 8.23%
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands......................... $761,873 $521,361 $305,034 $311,479 $413,497 $479,941
Portfolio turnover rate............ 34%(1) 102% 147% 92% 46% 42%
<FN>
---------------------
+ Does not reflect the deduction of sales charge.
(1) Not annualized.
(2) Annualized.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
TRUSTEES
--------------------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Dr. Manuel H. Johnson PRIME
Paul Kolton INCOME
Michael E. Nugent TRUST
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 SEMIANNUAL REPORT
or accompanied by an effective prospectus. MARCH 31, 1996
