<PAGE>
PROSPECTUS
PRIME INCOME TRUST
-----------
PRIME INCOME TRUST (THE "TRUST") IS A NON-DIVERSIFIED, CLOSED-END MANAGEMENT
INVESTMENT COMPANY WHICH SEEKS TO PROVIDE A HIGH LEVEL OF CURRENT INCOME
CONSISTENT WITH THE PRESERVATION OF CAPITAL. THE TRUST SEEKS TO ACHIEVE ITS
INVESTMENT OBJECTIVE THROUGH INVESTMENT PRIMARILY IN INTERESTS IN SENIOR
COLLATERALIZED LOANS ("SENIOR LOANS") TO CORPORATIONS, PARTNERSHIPS AND OTHER
ENTITIES ("BORROWERS"). AN INVESTMENT IN THE TRUST MAY NOT BE APPROPRIATE FOR
ALL INVESTORS, AND THERE IS NO ASSURANCE THAT THE TRUST WILL ACHIEVE ITS
INVESTMENT OBJECTIVE.
--------------------
SENIOR LOANS IN WHICH THE TRUST MAY INVEST GENERALLY WILL PAY INTEREST AT
RATES WHICH FLOAT OR ARE RESET AT A MARGIN ABOVE A GENERALLY RECOGNIZED BASE
LENDING RATE. THESE BASE LENDING RATES ARE GENERALLY THE PRIME RATE QUOTED BY A
MAJOR U.S. BANK, THE LONDON INTER-BANK OFFERED RATE, THE CERTIFICATE OF DEPOSIT
RATE OR OTHER BASE LENDING RATES USED BY COMMERCIAL LENDERS. THE INVESTMENT
ADVISER BELIEVES THAT OVER TIME THE EFFECTIVE YIELD OF THE TRUST WILL EXCEED
MONEY MARKET RATES AND WILL TRACK THE MOVEMENTS OF THE PUBLISHED PRIME RATE OF
MAJOR U.S. BANKS.
--------------------
THE BOARD OF TRUSTEES OF THE TRUST CURRENTLY INTENDS, EACH QUARTER, TO
CONSIDER AUTHORIZING THE TRUST TO MAKE TENDER OFFERS FOR ALL OR A PORTION OF ITS
OUTSTANDING SHARES OF BENEFICIAL INTEREST (THE "SHARES") AT THE THEN CURRENT NET
ASSET VALUE OF THE SHARES. AN EARLY WITHDRAWAL CHARGE PAYABLE TO DEAN WITTER
INTERCAPITAL INC. (THE "INVESTMENT ADVISER" OR "INTERCAPITAL") OF UP TO 3.0% OF
THE ORIGINAL PURCHASE PRICE OF SHARES WILL BE IMPOSED ON MOST SHARES HELD FOR
FOUR YEARS OR LESS WHICH ARE PURCHASED BY THE TRUST PURSUANT TO TENDER OFFERS.
SEE "SHARE REPURCHASES AND TENDERS." NEITHER THE TRUST NOR THE INVESTMENT
ADVISER INTENDS TO MAKE A SECONDARY MARKET IN THE SHARES AT ANY TIME.
ACCORDINGLY, THERE IS NOT EXPECTED TO BE ANY SECONDARY TRADING MARKET IN THE
SHARES, AND AN INVESTMENT IN THE SHARES SHOULD BE CONSIDERED ILLIQUID.
--------------------
THE TRUST CONTINUOUSLY OFFERS SHARES THROUGH DEAN WITTER DISTRIBUTORS INC.
(THE "DISTRIBUTOR"), AS PRINCIPAL UNDERWRITER OF THE SHARES, THROUGH CERTAIN
DEALERS, INCLUDING DEAN WITTER REYNOLDS INC. ("DWR"), WHO HAVE ENTERED INTO
SELECTED DEALER AGREEMENTS WITH THE DISTRIBUTOR, AT A PRICE EQUAL TO THE THEN
CURRENT NET ASSET VALUE PER SHARE. THERE IS NO INITIAL SALES CHARGE ON PURCHASES
OF THE SHARES. THE INVESTMENT ADVISER USES ITS OWN ASSETS, WHICH MAY INCLUDE
PROFITS FROM THE ADVISORY FEE PAYABLE UNDER ITS INVESTMENT ADVISORY AGREEMENT
WITH THE TRUST, AS WELL AS BORROWED FUNDS, TO COMPENSATE DEALERS PARTICIPATING
IN THE CONTINUOUS OFFERING. SEE "PURCHASE OF SHARES."
--------------------
DEAN WITTER INTERCAPITAL INC., AN AFFILIATE OF DEAN WITTER DISTRIBUTORS
INC., ACTS AS INVESTMENT ADVISER FOR THE TRUST. THE ADDRESS OF THE TRUST IS TWO
WORLD TRADE CENTER, NEW YORK, NEW YORK 10048, AND ITS TELEPHONE NUMBER IS (212)
392-1600. INVESTORS ARE ADVISED TO READ THIS PROSPECTUS CAREFULLY AND RETAIN IT
FOR FUTURE REFERENCE.
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO PROCEEDS TO
PUBLIC (1) SALES LOAD (1) THE TRUST (2)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------
PER SHARE $9.94 NONE $9.94
TOTAL (3) $1,921,066,485 NONE $1,921,066,485
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(SEE FOOTNOTES ON INSIDE FRONT COVER)
--------------------
DEAN WITTER DISTRIBUTORS INC.
JANUARY 23, 1997
<PAGE>
(FOOTNOTES TO TABLE ON FRONT COVER)
(1) THE SHARES ARE OFFERED ON A BEST EFFORTS BASIS AT A PRICE EQUAL TO THE NET
ASSET VALUE PER SHARE WHICH AS OF THE DATE OF THE PROSPECTUS IS $9.94.
(2) BEFORE DEDUCTION OF REGISTRATION FEES PAYABLE BY THE TRUST IN THE AMOUNT OF
$451,818, WHICH WILL BE AMORTIZED DURING THE PERIOD IN WHICH THE SHARES ARE
SUBSCRIBED AND CHARGED AS AN EXPENSE AGAINST THE INCOME OF THE TRUST.
(3) ASSUMING ALL SHARES CURRENTLY REGISTERED ARE SOLD PURSUANT TO THIS
CONTINUOUS OFFERING AT A PRICE OF $9.94 PER SHARE. THE TRUST COMMENCED
OPERATIONS ON NOVEMBER 30, 1989, FOLLOWING COMPLETION OF A FIRM COMMITMENT
UNDERWRITING FOR 10,921,751 SHARES, WITH NET PROCEEDS TO THE TRUST OF
$109,217,510. THE TRUST COMMENCED THE CONTINUOUS OFFERING OF ITS SHARES ON
DECEMBER 4, 1989.
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE TRUST OR THE PRINCIPAL UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Summary of Trust Expenses............................................... 3
Financial Highlights.................................................... 4
Prospectus Summary...................................................... 5
The Trust and its Adviser............................................... 12
Investment Objective and Policies....................................... 14
Special Risk Factors.................................................. 19
Investment Practices.................................................... 22
Investment Restrictions................................................. 25
Trustees and Officers................................................... 28
Investment Advisory Agreement........................................... 35
Administrator and Administration Agreement.............................. 36
Portfolio Transactions.................................................. 38
Determination of Net Asset Value........................................ 39
Dividends and Distributions............................................. 40
Taxation................................................................ 40
Description of Shares................................................... 42
Share Repurchases and Tenders........................................... 44
Purchase of Shares...................................................... 46
Yield Information....................................................... 48
Custodian, Dividend Disbursing and Transfer Agent....................... 48
Reports to Shareholders................................................. 48
Legal Counsel........................................................... 49
Experts................................................................. 49
Additional Information.................................................. 49
Report of Independent Accountants....................................... 50
Financial Statements--September 30, 1996................................ 51
Appendix A.............................................................. 67
</TABLE>
------------------------
2
<PAGE>
SUMMARY OF TRUST EXPENSES
- --------------------------------------------------------------------------------
The expenses and fees set forth in the table are for the fiscal year ended
September 30, 1996.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
- ------------------------------------------------------------
<S> <C>
Sales Load Imposed on Purchases............................. None
Sales Load Imposed on Reinvested Dividends.................. None
Early Withdrawal Charge..................................... 3.0%
An early withdrawal charge is imposed on tenders at the
following declining rates:
EARLY WITHDRAWAL
YEAR AFTER PURCHASE CHARGE
- ------------------------------------------------------------ ----------------
First..................................................... 3.0%
Second.................................................... 2.5%
Third..................................................... 2.0%
Fourth.................................................... 1.0%
Fifth and thereafter...................................... None
ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS)
Investment Advisory Fees.................................... 0.89%
Interest Payments on Borrowed Funds......................... None
Sum of Other Expenses....................................... 0.57%
Total Annual Expenses....................................... 1.46%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on
a $1,000 investment, assuming (1) 5%
annual return and (2) tender at the end
of each time period:................... $45 $66 $80 $175
You would pay the following expenses on
the same investment, assuming no
tender:................................ $15 $46 $80 $175
</TABLE>
- ------------------------
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES OF THE TRUST MAY BE GREATER OR
LESS THAN THOSE SHOWN.
The purpose of this table is to assist the investor in understanding the
various costs and expenses that an investor in the Trust will bear directly or
indirectly. For a more complete description of these costs and expenses, see the
cover page of this Prospectus and "Investment Advisory Agreement,"
"Administrator and Administration Agreement" and "Share Repurchases and
Tenders--Early Withdrawal Charge" in this Prospectus.
3
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following ratios and per share data for a share of beneficial interest
outstanding throughout each period have been audited by Price Waterhouse LLP,
independent accountants. This data should be read in conjunction with the
financial statements, and notes thereto, and the unqualified report of
independent accountants which are contained in this Prospectus commencing on
page 50. As noted in the financial statements and in the report of Price
Waterhouse LLP, the Trust invests primarily in senior collateralized loans which
values have been determined in accordance with the procedures adopted by the
Trustees in the absence of readily ascertainable market values.
<TABLE>
<CAPTION>
FOR THE PERIOD
NOVEMBER 30,
FOR THE YEAR ENDED SEPTEMBER 30, 1989* THROUGH
---------------------------------------------------------------- SEPTEMBER 30,
1996 1995 1994 1993 1992 1991 1990
<S> <C> <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 $ 10.00
--------- --------- --------- --------- --------- --------- -------
Net investment income.............. 0.74 0.82 0.62 0.55 0.62 0.84 0.74
Net realized and unrealized gain
(loss)............................ (0.04) 0.01 0.09 (0.08) (0.01) -- (0.01)
--------- --------- --------- --------- --------- --------- -------
Total from investment operations... 0.70 0.83 0.71 0.47 0.61 0.84 0.73
--------- --------- --------- --------- --------- --------- -------
Less dividends and distributions
from:
Net investment income............ (0.75) (0.81) (0.62) (0.55) (0.62) (0.84) (0.73)
Net realized gain................ -- (0.03) -- -- -- -- --
--------- --------- --------- --------- --------- --------- -------
Total dividends and
distributions..................... (0.75) (0.84) (0.62) (0.55) (0.62) (0.84) (0.73)
--------- --------- --------- --------- --------- --------- -------
Net asset value, end of period..... $ 9.94 $ 9.99 $ 10.00 $ 9.91 $ 9.99 $ 10.00 $ 10.00
--------- --------- --------- --------- --------- --------- -------
--------- --------- --------- --------- --------- --------- -------
TOTAL INVESTMENT RETURN+........... 7.25% 8.57% 7.32% 4.85% 6.23% 8.77% 7.57%(1)
Ratios to Average Net Assets:
Expenses......................... 1.46% 1.52% 1.60% 1.45% 1.47% 1.52% 1.48%(2)
Net investment income............ 7.50% 8.11% 6.14% 5.53% 6.14% 8.23% 8.95%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands......................... $939,471 $521,361 $305,034 $311,479 $413,497 $479,941 $328,189
Portfolio turnover rate............ 72% 102% 147% 92% 46% 42% 35%(1)
</TABLE>
- ------------------------
* COMMENCEMENT OF OPERATIONS.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. DIVIDENDS AND
DISTRIBUTIONS ARE ASSUMED TO BE REINVESTED AT THE PRICES OBTAINED UNDER THE
TRUST'S DIVIDEND REINVESTMENT PLAN.
(1)NOT ANNUALIZED.
(2)ANNUALIZED.
4
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
MORE DETAILED INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS.
<TABLE>
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THE TRUST................. Prime Income Trust (the "Trust") is a non-diversified,
closed-end management investment company, organized as a
Massachusetts business trust. The Trust commenced operations on
November 30, 1989 (under the name "Allstate Prime Income Trust")
following completion of a firm commitment initial underwriting
for 10,921,751 Shares, with net proceeds to the Trust of
$109,217,510. The Trust commenced the continuous offering of its
shares on December 4, 1989. See "The Trust and its Adviser."
PURCHASE OF SHARES........ The Trust is offering continuously its shares of beneficial
interest, par value $.01 (the "Shares"), through Dean Witter
Distributors Inc. (the "Distributor"), as principal underwriter
of the Shares, through certain dealers, including Dean Witter
Reynolds Inc. ("DWR"), a broker-dealer affiliate of the Trust's
Investment Adviser and Administrator, which have entered into
selected dealer agreements with the Distributor, at a price per
Share equal to the then current net asset value per Share. The
minimum investment in the Trust is $1,000 for initial
investments and $100 for subsequent investments. See "Purchase
of Shares."
INVESTMENT OBJECTIVE AND
POLICIES.................. The investment objective of the Trust is to provide a high level
of current income consistent with the preservation of capital.
The Trust seeks to achieve its objective through investment
primarily in interests in senior collateralized loans ("Senior
Loans") to corporations, partnerships and other entities
("Borrowers"). Senior Loans may take the form of syndicated
loans ("Syndicated Loans") or of debt obligations of Borrowers
issued directly to investors in the form of debt securities
("Senior Notes"). Senior Loans in which the Trust will invest
generally pay interest at rates which float or are reset at a
margin above a generally recognized base lending rate. These
base lending rates are generally the prime rate quoted by a
major U.S. bank ("Prime Rate"), the London Inter-Bank Offered
Rate ("LIBOR"), the Certificate of Deposit ("CD") rate or other
base lending rates used by commercial lenders. Under normal
market conditions, the Trust will invest at least 80% of its
total assets in Senior Loans. The remainder of its assets will
be invested in cash or in short-term, high quality money market
instruments. There is no restriction or percentage limitation
with respect to the Trust's investment in illiquid securities.
While the Trust is not subject to any restrictions with respect
to the maturity of Senior Loans held in its portfolio, it is
currently anticipated that at least 80% of the Trust's total
assets invested in Senior Loans will consist of Senior Loans
with stated maturities of between three and ten years. As a
result of prepayments and amortization, however, the actual
maturities of the Syndicated Loans in the Trust's portfolio are
expected to range between three and four years and the Senior
Notes are expected to have average maturities of approximately
</TABLE>
5
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<S> <C>
six to seven years. The Senior Loans in the Trust's portfolio
will at all times have a dollar-weighted average time until the
next interest rate determination of 90 days or less.
The Investment Adviser will perform its own credit analyses of
Borrowers and will consider, and may rely in part on, analyses
performed by lenders other than the Trust. The Trust will invest
only in Senior Loans where the Investment Adviser believes that
the Borrower can meet debt service requirements in a timely
manner and where the market value of the collateral at the time
of investment equals or exceeds the amount of the Senior Loan.
Among other factors, the Investment Adviser will also consider
the operating history, competitive position and management of
the Borrower; the business outlook of the Borrower's industry
and the terms of the loan agreement with the Borrower. The
Investment Adviser will monitor the qualifications of Borrowers
on an ongoing basis. Senior Loans presently are not rated by
nationally recognized statistical rating organizations. Since
the minimum debt rating of a Borrower may not have a meaningful
relation to the quality of such Borrower's senior collateralized
debt, the Trust does not impose any minimum standard regarding
the rating of other debt instruments of the Borrower.
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"). The Trust may invest in Senior Loans in
the following ways: it may purchase Participations, it may
purchase Assignments of a portion of a Senior Loan or it may act
as one of the group of Lenders originating a Senior Loan or
obtain from such a Lender (through a novation) all of the rights
of such Lender in a Senior Loan, including the ability to
enforce such rights directly against the Borrower. When the
Trust is a Lender, or obtains through a novation all of the
rights of a Lender, it will, as a party to the loan agreement
with the Borrower ("Loan Agreement"), have a direct contractual
relationship with the Borrower and may enforce directly
compliance by the Borrower with the terms of the Loan Agreement.
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. The Trust will only acquire
Participations if the Selling Participant, and each Intermediate
Participant, is a financial institution which meets certain
minimum creditworthiness standards. See "Investment Objective
and Policies." When the Trust purchases an Assignment, it will
acquire all or a portion of the rights of the Lender or
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
other third party whose interest is being assigned, but may not
be a party to the Loan Agreement and may be required to rely on
such Lender or other third party to demand payment and enforce
its rights against the Borrower. Assignments are arranged
through private negotiations between potential assignors and
potential assignees; consequently, the rights and obligations
acquired by the purchaser of an Assignment may differ from and
be more limited than those held by the assignor. The Trust may
pay a fee or forgo a portion of interest payments when acquiring
Participations and Assignments. See "Investment Objective and
Policies."
INVESTMENT ADVISER........ Dean Witter InterCapital Inc. ("InterCapital" or the "Investment
Adviser"), whose address is Two World Trade Center, New York,
New York 10048, is the Trust's Investment Adviser. The
Investment Adviser, which was incorporated in July, 1992, is a
wholly-owned subsidiary of Dean Witter, Discover & Co. ("DWDC"),
a balanced financial services organization providing a broad
range of nationally marketed credit and investment products.
The Investment Adviser and its wholly-owned subsidiary, Dean
Witter Services Company Inc., serve in various investment
management, advisory, management, and administrative capacities
to one hundred investment companies, thirty of which are listed
on the New York Stock Exchange, with combined assets of
approximately $88 billion as of November 30, 1996. The
Investment Adviser also manages and advises portfolios of
pension plans, other institutions and individuals which
aggregated approximately $3.1 billion at such date. The Trust's
Trustees approved a new investment advisory agreement with
InterCapital, on December 23, 1992, as a consequence of the
withdrawal of Allstate Investment Management Company ("AIMCO")
from its investment company advisory activities and its
concomitant resignation as the Trust's Investment Adviser. At a
Special Meeting of Shareholders held on February 25, 1993, the
shareholders approved a new Investment Advisory Agreement with
InterCapital. The name of the Trust was changed by the Trustees
to delete the name "Allstate" upon the effectiveness of the new
investment advisory agreement with InterCapital. The term
"Investment Adviser" refers to AIMCO prior to the Special
Meeting of Shareholders, and to InterCapital after the Special
Meeting. See "The Trust and its Adviser" and "Investment
Advisory Agreement."
ADVISORY FEE.............. The investment advisory fees paid to InterCapital pursuant to
the new investment advisory agreement is calculated at an annual
rate of 0.90% of average daily net assets on assets of the Trust
up to $500 million and at an annual rate of 0.85% of average
daily net assets on assets of the Trust exceeding $500 million.
These fees represent a reduction of the investment advisory fees
paid by the Trust to AIMCO which were calculated at the annual
rate of 1.0% of average daily net assets on assets of the Trust
up to $500 million and at the annual rate of 0.95% of
</TABLE>
7
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<TABLE>
<S> <C>
average daily net assets on assets of the Trust exceeding $500
million. The advisory fee is higher than that paid by most other
investment companies. See "Investment Advisory Agreement."
ADMINISTRATOR............. Dean Witter Services Company Inc. (the "Administrator" or
"DWSC"), a wholly-owned subsidiary of InterCapital, the
Investment Adviser of the Trust, is the Administrator of the
Trust. The term "Administrator" refers to InterCapital prior to
December 31, 1993 and to DWSC after that date. See
"Administrator and Administration Agreement" and "Purchase of
Shares."
ADMINISTRATION FEE........ The Trust pays the Administrator a monthly fee at an annual rate
of 0.25% of the Trust's average daily net assets. See
"Administrator and Administration Agreement."
DIVIDENDS AND
DISTRIBUTIONS............. Income dividends are declared daily and paid monthly. Dividends
and distributions to holders of Shares cannot be assured, and
the amount of each monthly payment may vary. Capital gains, if
any, will be distributed at least annually. All dividends and
capital gains distributions will be reinvested automatically in
additional Shares, unless the shareholder elects to receive cash
distributions. See "Dividends and Distributions" and "Taxation."
SHARE REPURCHASES AND
TENDERS................... The Board of Trustees of the Trust currently intends, each
quarter, to consider authorizing the Trust to make tender offers
for all or a portion of its outstanding Shares at the then
current net asset value of the Shares. An early withdrawal
charge payable to the Investment Adviser of up to 3.0% of the
original purchase price of such Shares will be imposed on most
Shares accepted for tender that have been held for four years or
less. There can be no assurance that the Trust will in fact
tender for any of its Shares. If a tender offer is not made or
Shares are not purchased pursuant to a tender offer,
Shareholders may not be able to sell their Shares. If the Trust
tenders for Shares, there is no guarantee that all or any Shares
tendered will be purchased. Subject to its borrowing
restrictions, the Trust may incur debt to finance repurchases of
its Shares pursuant to tender offers, which borrowings entail
additional risks. The ability of the Trust to tender for its
Shares may be limited by certain requirements of the Internal
Revenue Code of 1986 that must be satisfied in order for the
Trust to maintain its desired tax status as a regulated
investment company. See "The Trust and its Adviser," "Purchase
of Shares" and "Share Repurchases and Tenders."
CUSTODIAN................. The Bank of New York serves as Custodian of the Trust's assets.
See "Custodian, Dividend Disbursing and Transfer Agent."
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
SPECIAL CONSIDERATIONS AND
RISK FACTORS.............. There is not expected to be any secondary trading market in the
Shares and an investment in the Shares should be considered
illiquid. Moreover, the Distributor and other dealers who enter
into dealer agreements with the Distributor are prohibited under
applicable law from making a market in the Shares while the
Trust is continuously offering its Shares or engaged in a tender
offer for its Shares. To the extent that a secondary market does
develop, however, investors should be aware that the shares of
closed-end funds frequently trade in the secondary market at a
discount from their net asset values. Should there be a
secondary market for the Shares, it is expected that the Shares
will not trade at a premium because the Trust intends to engage
in a continuous offering at net asset value.
Due to the lack of a secondary market for the Shares and the
early withdrawal charge, the Trust should be viewed as a
long-term investment and not as a vehicle for short-term
trading.
Since the Trust invests primarily in floating and variable rate
obligations, the Trust's yield is likely to vary in accordance
with changes in prevailing short-term interest rates. This
policy should also result in a net asset value which fluctuates
less than would a portfolio consisting primarily of fixed rate
obligations; however, the Trust's net asset value may vary to
the extent that changes in prevailing interest rates are not
immediately reflected in the interest rates payable on Senior
Loans in the Trust's portfolio, particularly if there were a
sudden and extreme change in interest rates. Also, to the extent
Senior Loans in the Trust's portfolio are valued based on recent
pricings for similar Senior Loans, net asset value may fluctuate
due to changes in pricing parameters for newly issued Senior
Loans (e.g., interest rates are set at a higher or lower margin
above the base lending rate than were Senior Loans in the
Trust's portfolio).
In addition to fluctuations in net asset value which may be
caused by variations in prevailing interest rates and Senior
Loan pricing parameters, the Trust's net asset value would be
adversely affected in the event of a default on a Senior Loan
and could be affected by a substantial deterioration in the
creditworthiness of Borrowers or Selling Participants or
Intermediate Participants or a decline in value of the
collateral securing the Senior Loan. Also, if any such Borrower
or Selling Participant or Intermediate Participant fails to meet
in a timely manner its obligations to remit principal and
interest payments to the Trust, the Trust is likely to
experience a decline in its net asset value.
Although the Trust will generally have access to financial and
other information made available to the Lenders in connection
with Senior Loans, the amount of public information available
with respect to Senior Loans generally will be less extensive
than that available for rated, registered and exchange listed
securities. As a result, the performance
</TABLE>
9
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<TABLE>
<S> <C>
of the Trust and its ability to meet its investment objective is
more dependent on the analytical abilities of the Investment
Adviser than would be the case for an investment company that
invests primarily in rated, registered or exchange-listed
securities.
The Loan Agreement with the Borrower, which establishes the
relative terms and conditions of the Senior Loan and rights of
the Borrower and the Lenders, will typically vest the Agent with
broad discretion in enforcing and administering the Agreement.
Accordingly, the success of the Trust will depend in part on the
skill with which the Agent administers the terms of the Loan
Agreement, monitors Borrower compliance with covenants, collects
principal, interest and fee payments from Borrowers and, where
necessary, enforces creditor's remedies against Borrowers. See
"Investment Objective and Policies."
Interests in Senior Loans are not listed on any national
securities exchange or automated quotation system and no regular
market has developed in which interests in Senior Loans are
traded. The substantial portion of the Trust's assets invested
in relatively illiquid Senior Loan interests may restrict the
ability of the Trust to dispose of its investments in Senior
Loans in a timely fashion and at a fair price, and could result
in capital losses to the Trust and holders of Shares. To the
extent that the Trust's investments are illiquid, the Trust may
have difficulty disposing of portfolio securities in order to
purchase its Shares pursuant to tender offers, if any. The Board
of Trustees of the Trust will consider the liquidity of the
Trust's portfolio securities in determining whether a tender
offer should be made by the Trust and the number of Shares to be
tendered.
The Trust may invest in Senior Loans which are made to non-U.S.
Borrowers provided that the Senior Loans are dollar-denominated
and any such Borrower meets the credit standards established by
the Investment Adviser for U.S. Borrowers. Loans to non-U.S.
Borrowers may involve risks not typically involved in loans to
U.S. Borrowers.
The Trust's Declaration of Trust includes anti-takeover
provisions, including the requirement for a 66% shareholder vote
to remove Trustees and for certain mergers, issuances of Shares
and asset acquisitions that could have the effect of limiting
the ability of other persons or entities to acquire control of
the Trust and could have the effect of depriving holders of
Shares of an opportunity to sell their Shares at a premium above
prevailing market prices by discouraging a third party from
seeking to obtain control of the Trust. See "Description of
Shares--Anti-Takeover Provisions."
The Trust may be deemed to be concentrated in securities of
issuers in the industry group consisting of financial
institutions and their holding companies, including commercial
banks, thrift institutions, insurance companies and finance
companies. As a result, the Trust is subject to certain risks
associated with such institutions, including, among other
</TABLE>
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<TABLE>
<S> <C>
things, changes in governmental regulation, interest rate levels
and general economic conditions. See "Investment Objective and
Policies" and "Investment Restrictions."
The Trust has registered as a "non-diversified" investment
company so that it will be able to invest more than 5% of the
value of its total assets in the obligations of any single
issuer, including Senior Loans of a single Borrower or
Participations purchased from a single Lender. The Trust does
not intend to invest, however, more than 10% of the value of its
total assets in interests in Senior Loans of a single Borrower.
To the extent the Trust invests its assets in obligations of a
more limited number of issuers than a diversified investment
company, the Trust will be more susceptible than a diversified
investment company to any single corporate, economic, political
or regulatory occurrence. See "Investment Objective and
Policies."
</TABLE>
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THE TRUST AND ITS ADVISER
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Prime Income Trust (the "Trust") is a non-diversified, closed-end management
investment company whose investment objective is to provide a high level of
current income consistent with the preservation of capital. The Trust will seek
to achieve its objective through investment primarily in senior collateralized
loans ("Senior Loans") to corporations, partnerships and other entities
("Borrowers"). No assurance can be given that the Trust will achieve its
investment objective. The Trust is designed primarily for long-term investment
and not as a trading vehicle.
The Trust is a trust of a type commonly known as a "Massachusetts business
trust" and was organized under the laws of Massachusetts on August 17, 1989
under the name "Allstate Prime Income Trust." Effective March 1, 1993, the Trust
Agreement was amended to change the name of the Trust to "Prime Income Trust".
Such amendment was made upon the approval by the shareholders of a new
investment advisory agreement with InterCapital. The Trust commenced operations
on November 30, 1989, following completion of a firm commitment initial
underwriting for 10,921,751 Shares, with net proceeds to the Trust of
$109,217,510. The Trust commenced the continuous offering of its shares on
December 4, 1989. The Trust's principal office is located at Two World Trade
Center, New York, New York 10048 and its telephone number is (212) 392-1600. The
Trust is offering continuously its shares of beneficial interest, $.01 par value
(the "Shares"). See "Purchase of Shares."
An investment in Shares offers several benefits. The Trust offers investors
the opportunity to receive a high level of current income by investing in a
professionally managed portfolio comprised primarily of Senior Loans, a type of
investment typically not available to individual investors. In managing such a
portfolio, the Investment Adviser provides the Trust and its shareholders with
professional credit analysis and portfolio diversification. The Trust also
relieves the investor of burdensome administrative details involved in managing
a portfolio of Senior Loans, even if they were available to individual
investors. Such benefits are at least partially offset by the expenses involved
in operating an investment company, which consist primarily of management and
administrative fees and operational costs. See "Investment Advisory Agreement"
and "Administrator and Administration Agreement."
On December 23, 1992 the Trust's Trustees approved a new investment advisory
agreement with InterCapital as a consequence of the withdrawal of Allstate
Investment Management Company ("AIMCO") from its investment company advisory
activities and its concomitant resignation as the Trust's Investment Adviser.
InterCapital is a wholly-owned subsidiary of Dean Witter, Discover & Co.
("DWDC"). The Trust's shareholders voted to approve a new investment advisory
agreement with InterCapital at a Special Meeting of Shareholders held on
February 25, 1993. The shareholders also voted to approve the automatic
reinstatement of the new investment advisory agreement (to the extent that such
agreement would otherwise terminate as a consequence of the Sears, Roebuck and
Co. ("Sears") spin-off of DWDC stock [the "Spin-Off"]), which new investment
advisory agreement took effect on June 30, 1993, upon the Spin-Off by Sears of
its remaining shares of DWDC. Upon approval by the shareholders of the new
investment advisory agreement, InterCapital, which continued to serve at such
time as the Trust's Administrator, assumed the duties of Investment Adviser
which previously were performed by AIMCO and the name of the Trust was changed
by the Trustees to "Prime Income Trust." The term "Investment Adviser" refers to
AIMCO prior to the Special Meeting of Shareholders, and to InterCapital after
the Special Meeting.
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<PAGE>
InterCapital and its wholly-owned subsidiary, Dean Witter Services Company
Inc., serve in various investment management, advisory, management and
administrative capacities to one hundred investment companies, thirty of which
are listed on the New York Stock Exchange, with combined assets of approximately
$88 billion at October 31, 1996. InterCapital also manages and advises
portfolios of pension plans, other institutions and individuals which aggregated
approximately $3.1 billion at such date.
The Trust is managed within InterCapital's Taxable Fixed-Income Group, which
manages 25 funds and fund portfolios with approximately $13.2 billion in assets
as of October 31, 1996. Mr. Rafael Scolari, a member of the Taxable Fixed-Income
Group, is the Trust's primary portfolio manager. Mr. Scolari joined InterCapital
in March 1993. Prior thereto, he was the portfolio manager of the Trust's
portfolio while at AIMCO (from January, 1990 through February, 1993). During
this period, he was also portfolio manager of bank loans for Allstate Life
Insurance Company.
InterCapital is also the investment manager or investment adviser of the
following management investment companies: Active Assets Money Trust, Active
Assets Tax-Free Trust, Active Assets California Tax-Free Trust, Active Assets
Government Securities Trust, Dean Witter Liquid Asset Fund Inc., InterCapital
Income Securities Inc., Dean Witter Strategist Fund, Dean Witter Tax-Free Daily
Income Trust, Dean Witter Developing Growth Securities Trust, Dean Witter
Tax-Exempt Securities Trust, Dean Witter Natural Resource Development Securities
Inc., Dean Witter Dividend Growth Securities Inc., Dean Witter American Value
Fund, Dean Witter U.S. Government Money Market Trust, Dean Witter Variable
Investment Series, Dean Witter World Wide Investment Trust, Dean Witter Select
Municipal Reinvestment Fund, Dean Witter U.S. Government Securities Trust, Dean
Witter California Tax-Free Income Fund, Dean Witter New York Tax-Free Income
Fund, Dean Witter Convertible Securities Trust, Dean Witter Federal Securities
Trust, Dean Witter Value-Added Market Series, High Income Advantage Trust, High
Income Advantage Trust II, Dean Witter Government Income Trust, Dean Witter
Utilities Fund, Dean Witter California Tax-Free Daily Income Trust, Dean Witter
World Wide Income Trust, Dean Witter Intermediate Income Securities, High Income
Advantage Trust III, Dean Witter Capital Growth Securities, Dean Witter European
Growth Fund Inc., Dean Witter Precious Metals and Minerals Trust, Dean Witter
New York Municipal Money Market Trust, Dean Witter Global Short-Term Income Fund
Inc., Dean Witter Multi-State Municipal Series Trust, Dean Witter Premier Income
Trust, Dean Witter Short-Term U.S. Treasury Trust, Dean Witter Diversified
Income Trust, InterCapital Quality Municipal Investment Trust, InterCapital
Insured Municipal Bond Trust, Dean Witter Pacific Growth Fund Inc., Dean Witter
Health Sciences Trust, Dean Witter Retirement Series, InterCapital Insured
Municipal Trust, InterCapital California Quality Municipal Securities,
InterCapital California Insured Municipal Income Trust, InterCapital Quality
Municipal Income Trust, InterCapital Quality Municipal Securities, InterCapital
New York Quality Municipal Securities, InterCapital Insured Municipal
Securities, InterCapital Insured California Municipal Securities, Dean Witter
Global Dividend Growth Securities, Dean Witter Limited Term Municipal Trust,
Dean Witter Short-Term Bond Fund, Dean Witter Global Utilities Fund, Dean Witter
National Municipal Trust, Dean Witter High Income Securities, Dean Witter
International SmallCap Fund, Dean Witter Mid-Cap Growth Fund, Dean Witter Select
Dimensions Investment Series, Dean Witter Global Asset Allocation Fund, Dean
Witter Balanced Growth Fund, Dean Witter Balanced Income Fund, Dean Witter
Hawaii Municipal Trust, Dean Witter Capital Appreciation Fund, Dean Witter
Intermediate Term U.S. Treasury Trust, Dean Witter Information Fund, Dean Witter
Japan Fund, Dean Witter Income Builder Fund, Dean Witter Special Value Fund,
Dean Witter Financial Services Trust, InterCapital Insured Municipal Income
Trust, Municipal Income Trust, Municipal Income Trust II, Municipal Income Trust
III, Municipal Income Opportunities Trust, Municipal Income Opportunities Trust
II, Municipal Income Opportunities Trust III, Municipal
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<PAGE>
Premium Income Trust and Prime Income Trust. The foregoing investment companies,
together with the Fund, are collectively referred to as the Dean Witter Funds.
In addition, Dean Witter Services Company Inc. ("DWSC"), a wholly-owned
subsidiary of InterCapital, serves as manager for the following investment
companies for which TCW Funds Management, Inc. is the investment adviser: TCW/DW
Core Equity Trust, TCW/DW North American Government Income Trust, TCW/DW Latin
American Growth Fund, TCW/DW Income and Growth Fund, TCW/DW Small Cap Growth
Fund, TCW/DW Balanced Fund, TCW/DW Total Return Trust, TCW/DW Mid-Cap Equity
Trust, TCW/DW Global Telecom Trust, TCW/DW Strategic Income Trust, TCW/DW
Emerging Markets Opportunites Trust, TCW/DW Term Trust 2000, TCW/DW Term Trust
2002 and TCW/DW Term Trust 2003 (the "TCW/DW Funds"). InterCapital also serves
as: (i) sub-adviser to Templeton Global Opportunities Trust, an open-end
investment company; (ii) administrator of The BlackRock Strategic Term Trust
Inc., a closed-end investment company; and (iii) sub-administrator of MassMutual
Participation Investors and Templeton Global Governments Income Trust,
closed-end investment companies.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Trust's investment objective is to provide a high level of current
income consistent with the preservation of capital. The Trust will seek to
achieve its objective through investment primarily in Senior Loans. Senior Loans
in which the Trust will invest generally pay interest at rates which float or
are reset at a margin above a generally recognized base lending rate. These base
lending rates are the Prime Rate, LIBOR, the CD rate or other base lending rates
used by commercial lenders. The Prime Rate quoted by a major U.S. bank is the
interest rate at which such bank is willing to lend U.S. dollars to creditworthy
borrowers. LIBOR is an average of the interest rates quoted by several
designated banks as the rates at which such banks would offer to pay interest to
major financial institutional depositors in the London interbank market on U.S.
dollar-denominated deposits for a specified period of time. The CD rate is the
average rate paid on large certificates of deposit traded in the secondary
market. The Investment Adviser believes that over time the Trust's effective
yield will exceed money market rates and will track the movements in the
published Prime Rate of major U.S. banks, although it may not equal the Prime
Rate. An investment in the Trust may not be appropriate for all investors and is
not intended to be a complete investment program. No assurance can be given that
the Trust will achieve its investment objective.
Under normal market conditions, the Trust will invest at least 80% of its
total assets in Senior Loans. The Trust currently intends to limit its
investments in Senior Notes to no more than 20% of its total assets. The
remainder of the Trust's assets may be invested in cash or in high quality debt
securities with remaining maturities of one year or less, although it is
anticipated that the debt securities in which the Trust invests will have
remaining maturities of 60 days or less. Such securities may include commercial
paper rated at least in the top two rating categories of either Standard &
Poor's Corporation or Moody's Investors Service, Inc., or unrated commercial
paper considered by the Investment Adviser to be of similar quality,
certificates of deposit and bankers' acceptances and securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities. Such
securities may pay interest at rates which are periodically redetermined or may
pay interest at fixed rates. High quality debt securities and cash may comprise
up to 100% of the Trust's total assets during temporary defensive periods when,
in the opinion of the Investment Adviser, suitable Senior Loans are not
available for investment by the Trust or prevailing market or economic
conditions warrant.
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<PAGE>
The Trust is not subject to any restrictions with respect to the maturity of
Senior Loans held in its portfolio. It is currently anticipated that at least
80% of the Trust's total assets invested in Senior Loans will consist of Senior
Loans with stated maturities of between three and ten years, inclusive, and with
rates of interest which are redetermined either daily, monthly or quarterly. As
a result of prepayments and amortization, however, it is expected that the
actual maturities of Syndicated Loans will be approximately three to four years
and of Senior Notes approximately six to seven years. The Senior Loans in the
Trust's portfolio will at all times have a dollar-weighted average time until
the next interest rate redetermination of 90 days or less.
The value of fixed income obligations generally varies in response to
changes in interest rates. When interest rates decline, the value of a fixed
income obligation can be expected to rise; conversely, the value of the
obligation can be expected to decrease when interest rates rise. Accordingly,
the net asset value of an investment company which invests a substantial portion
of its total assets in fixed income securities can be expected to fluctuate
significantly with changes in interest rates. The Investment Adviser expects the
Trust's net asset value to be relatively stable during normal market conditions,
because the Trust's portfolio will consist primarily of Senior Loans on which
the interest rate is periodically adjusted in response to interest rate changes
on short-term investments. However, because the interest rate on a Senior Loan
may be reset only periodically, the Trust's net asset value may fluctuate from
time to time in the event of an imperfect correlation between the interest rates
on Senior Loans in the Trust's portfolio and prevailing short-term interest
rates. This would be particularly likely to occur in the event of a sudden and
extreme movement in interest rates. Also, to the extent that Senior Loans in the
Trust's portfolio are valued based on recent pricings for similar Senior Loans,
net asset value may fluctuate due to changes in pricing parameters for newly
issued Senior Loans (e.g., interest rates are set at a higher or lower margin
above the base lending rate than were Senior Loans in the Trust's portfolio). A
decline in the Trust's net asset value would also result from a default on a
Senior Loan in which the Trust has invested and could result from a substantial
deterioration in the creditworthiness of a Borrower or in the value of
collateral securing a Senior Loan. Also, if any Borrower or any Selling
Participant or Intermediate Participant fails to meet in a timely manner its
obligations to remit principal and interest payments to the Trust, the Trust is
likely to experience a decline in its net asset value.
The Senior Loans in which the Trust will invest will consist primarily of
direct obligations of a Borrower undertaken to finance the growth of the
Borrower's business or to finance a capital restructuring. Such loans may
include "leveraged buy-out" loans which are made to a Borrower for the purpose
of acquiring ownership control of another company, whether as a purchase of
equity or of assets or for a leveraged reorganization of the Borrower with no
change in ownership. The Trust may invest in Senior Loans which are made to
non-U.S. Borrowers, provided that the loans are dollar-denominated and any such
Borrower meets the credit standards established by the Investment Adviser for
U.S. Borrowers. Loans by non-U.S. Borrowers involve risks not typically involved
in domestic investment, including future foreign political and economic
developments and the possible imposition of exchange controls or other foreign
or U.S. governmental laws or restrictions applicable to such loans. In addition,
although loans to non-U.S. Borrowers will be dollar-denominated debt
obligations, such loans involve foreign currency exchange risks to the extent
that a decline in a non-U.S. Borrower's own currency relative to the dollar may
impair such Borrower's ability to meet debt service on a Senior Loan.
Senior Loans hold the most senior position in a Borrower's capital
structure, although some Senior Loans may hold an equal ranking with other
senior securities of the Borrower (i.e., have equal claims to
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the Borrower's assets). In order to borrow money pursuant to Senior Loans, a
Borrower will frequently pledge as collateral its assets, including, but not
limited to, trademarks, accounts receivable, inventory, buildings, real estate,
franchises and common and preferred stock in its subsidiaries. In addition, in
the case of some Senior Loans, there may be additional collateral pledged in the
form of guarantees by and/or securities of affiliates of the Borrowers. A Loan
Agreement may also require the Borrower to pledge additional collateral in the
event that the value of the collateral falls. In certain instances, a Senior
Loan may be secured only by stock in the Borrower or its subsidiaries. Each
Senior Loan in which the Trust will invest will be secured by collateral which
the Investment Adviser believes to have a market value, at the time of
acquisition of the Senior Loan, which equals or exceeds the principal amount of
the Senior Loan. The value of such collateral generally will be determined by an
independent appraisal and/or other information regarding the collateral
furnished by the Agent. Such information will generally include appraisals in
the case of assets such as real estate, buildings and equipment, audits in the
case of inventory and analyses (based upon, among other things, investment
bankers' opinions, fairness opinions and relevant transactions in the
marketplace) in the case of other kinds of collateral. Loan Agreements may also
include various restrictive covenants designed to limit the activities of the
Borrower in an effort to protect the right of the Lenders to receive timely
payments of interest on and repayment of principal of the Senior Loans.
Restrictive covenants contained in a Loan Agreement may include mandatory
prepayment provisions arising from excess cash flow and typically include
restrictions on dividend payments, specific mandatory minimum financial ratios,
limits on total debt and other financial tests. Breach of such covenants, if not
waived by the Lenders, is generally an event of default under the applicable
Loan Agreement and may give the Lenders the right to accelerate principal and
interest payments.
The Investment Adviser will perform its own credit analysis of the Borrower
and will consider, and may rely in part on, the analyses performed by Lenders
other than the Trust. The Trust will invest only in those Senior Loans with
respect to which the Borrower, in the opinion of the Investment Adviser,
demonstrates the ability to meet debt service in a timely manner (taking into
consideration the Borrower's capital structure, liquidity and historical and
projected cash flow) and where the Investment Adviser believes that the market
value of the collateral at the time of investment equals or exceeds the amount
of the Senior Loan. The Investment Adviser will also consider the following
characteristics: the operating history, competitive position and management of
the Borrower; the business outlook of the Borrower's industry; the terms of the
Loan Agreement (e.g., the nature of the covenants, interest rate and fees and
prepayment conditions); whether the Trust will purchase an Assignment,
Participation or act as a lender originating a Senior Loan; and the
creditworthiness of and quality of service provided by the Agent and any Selling
Participant or Intermediate Participants. Senior Loans presently are not rated
by nationally recognized statistical rating organizations. Because of the
collateralized nature and other credit enhancement features of Senior Loans,
such as third-party guarantees, as well as the fact that a Borrower's other debt
obligations are often subordinated to its Senior Loans, the Trust and the
Investment Adviser believe that ratings of other securities issued by a Borrower
do not necessarily reflect adequately the relative quality of a Borrower's
Senior Loans. Therefore, although the Investment Adviser may consider such
ratings in determining whether to invest in a particular Senior Loan, the
Investment Adviser is not required to consider such ratings and such ratings
will not be the determinative factor in its analysis.
Senior Loans typically are arranged through private negotiations between a
Borrower and several financial institutions ("Lenders") represented in each case
by one or more of such Lenders acting as
16
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agent ("Agent") of the several Lenders. On behalf of the several Lenders, the
Agent, which is frequently the commercial bank that originates the Senior Loan
and the person that invites other parties to join the lending syndicate,
typically will be primarily responsible for negotiating the loan agreement or
agreements ("Loan Agreement") that establish the relative terms, conditions and
rights of the Borrower and the several Lenders. In larger transactions it is
common to have several Agents; however, generally only one such Agent has
primary responsibility for documentation and administration of the Senior Loan.
Agents are typically paid a fee or fees by the Borrower for their services.
The Trust may invest in Senior Loans in the following ways: (i) it may
purchase Participations, (ii) it may purchase Assignments of a portion of a
Senior Loan, (iii) it may act as one of the group of Lenders originating a
Senior Loan or (iv) it may assume through a novation all of the rights of a
Lender in a Senior Loan, including the right to enforce its rights as a Lender
directly against the Borrower.
When the Trust is a Lender, or assumes all of the rights of a Lender through
an assignment or a novation, it will, as a party to the Loan Agreement, have a
direct contractual relationship with the Borrower and may enforce compliance by
the Borrower with the terms of the Loan Agreement. Lenders also have voting and
consent rights under the applicable Loan Agreement. Action subject to Lender
vote or consent generally requires the vote or consent of the holders of some
specified percentage of the outstanding principal amount of the Senior Loan,
which percentage varies depending on the relevant Loan Agreement. Certain
decisions, such as reducing the amount or increasing the time for payment of
interest on or repayment of principal of a Senior Loan, or releasing collateral
therefor, frequently require the unanimous vote or consent of all Lenders
affected.
A Participation may be acquired from an Agent, a Lender or any other holder
of a Participation ("Selling Participant"). Investment by the Trust in a
Participation typically will result in the Trust having a contractual
relationship only with the Selling Participant, not with the Borrower or any
other entities interpositioned between the Trust and the Borrower ("Intermediate
Participants"). The Trust will have the right to receive payments of principal,
interest and any fees to which it is entitled only from the Selling Participant
and only upon receipt by such Selling Participant of such payments from the
Borrower. In connection with purchasing Participations, the Trust generally will
have no right to enforce compliance by the Borrower with the terms of the Loan
Agreement, nor any rights with respect to funds acquired by other Lenders
through set-off against the Borrower and the Trust may not directly benefit from
the collateral supporting the Senior Loan in which it has purchased the
Participation. As a result, the Trust will assume the credit risk of the
Borrower, the Selling Participant and any Intermediate Participants. In the
event of the insolvency of the Selling Participant or any Intermediate
Participant, the Trust may be treated as a general creditor of such entity and
may be adversely affected by any set-off between such entity and the Borrower.
The Trust will acquire Participations only if the Selling Participant and any
Intermediate Participant is a commercial bank or other financial institution
with an investment grade long-term debt rating from either Standard and Poor's
Corporation ("S&P") (rated BBB or higher) or Moody's Investors Service, Inc.
("Moody's") (rated Baa or higher), or with outstanding commercial paper rated at
least in the top two rating categories of either of such rating agencies (at
least A-2 by S&P or at least Prime-2 by Moody's) or, if such long-term debt and
commercial paper are unrated, with long-term debt or commercial paper believed
by the Investment Adviser to be of comparable quality. Long-term debt rated BBB
by S&P is regarded by S&P as having adequate capacity to pay interest and repay
principal and debt rated Baa by Moody's is regarded by Moody's as a medium grade
obligation, i.e., it is neither highly protected nor poorly secured, although
debt rated Baa by Moody's is considered to have
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<PAGE>
speculative characteristics. Commercial paper rated A-2 by S&P indicates that
the degree of safety regarding timely payment is considered by S&P to be strong,
and issues of commercial paper rated Prime-2 by Moody's are considered by
Moody's to have a strong capacity for repayment of senior short-term debt
obligations. The Trust will purchase an Assignment or act as one of a group of
Lenders only where the Agent with respect to the Senior Loan is a bank, a member
of a national securities exchange or other entity designated in the Investment
Company Act of 1940, as amended (the "1940 Act"), as qualified to serve as a
custodian for a registered investment company such as the Trust (a "Designated
Custodian"). In addition, the Trust will purchase a Participation initially only
when the Lender selling such Participation, and any other person interpositioned
between such Lender and the Trust, are Designated Custodians. If the Trust
determines in the future to purchase interests in Senior Loans in instances in
which such Agent, Lender or interpositioned person is not a Designated
Custodian, the Trust will seek appropriate relief under the 1940 Act and if such
relief is granted the Trust will thereafter purchase Senior Loans in a manner
consistent with such relief.
The Trust may also purchase Assignments from Lenders and other third
parties. The purchaser of an Assignment typically succeeds to all the rights of
the Lender or other third party whose interest is being assigned, but it may not
be a party to the Loan Agreement and may be required to rely on such Lender or
other third party to demand payment and enforce its rights against the Borrower.
Assignments are arranged through private negotiations between potential
assignors and potential assignees; consequently, the rights and obligations
acquired by the purchaser of an Assignment may differ from and be more limited
than those held by the assignor.
In determining whether to purchase Participations or Assignments or act as
one of a group of Lenders, the Investment Adviser will consider the availability
of each of these forms of investments in Senior Loans, the terms of the Loan
Agreement, and in the case of Participations, the creditworthiness of the
Selling Participant and any Intermediate Participants.
In connection with the purchase of interests in Senior Loans, the Trust may
also acquire warrants and other equity securities of the Borrower or its
affiliates. The acquisition of such equity securities will only be incidental to
the Trust's purchase of interests in Senior Loans.
The Trust will limit its investments to those which could be acquired
directly by national banks for their own portfolios, as provided in 12 U.S.
Code, section 24, paragraph 7 and the implementing regulations and
interpretations of the Comptroller of the Currency. The conditions and
restrictions governing the purchase of Shares by national banks are set forth in
the U.S. Comptroller of the Currency's Banking Circular No. 220, dated November
21, 1986. Subject to such conditions and restrictions, national banks may
acquire Shares for their own investment portfolio.
The Trust is authorized to invest in Senior Notes. It is anticipated that
Senior Notes purchased by the Trust will generally bear a higher rate of
interest than Syndicated Loans. Such securities may, however, involve greater
risks than those associated with Syndicated Loans. The covenants and
restrictions to which the Borrower would be subject in the case of Senior Notes
may not be as rigorous in all respects as those to which the Borrower would be
subject in the case of a Syndicated Loan. Also, the scope of financial
information respecting the Borrower available to investors in Senior Notes may
be more limited than that available to Syndicated Loan Lenders. In addition, a
Syndicated Loan typically requires steady amortization of principal throughout
the life of the loan, whereas Senior Notes typically are structured to allow
Borrowers to repay principal later in the life of the loan.
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The investment objective of the Trust and its policy to invest, under normal
market conditions, at least 80% of its total assets in Senior Loans, are
fundamental policies of the Trust and may not be changed without the approval of
a majority of the outstanding voting securities of the Trust, as defined in the
1940 Act. Such a majority is defined as the lesser of (i) 67% or more of the
Trust's Shares present at a meeting of shareholders, if the holders of more than
50% of the outstanding Shares of the Trust are present or represented by proxy,
or (ii) more than 50% of the outstanding Shares of the Trust. Except as
otherwise specified, all other investment policies of the Trust are not
fundamental and may be changed by the Board of Trustees without shareholder
approval.
SPECIAL RISK FACTORS
The Trust may be required to pay and may receive various fees and
commissions in connection with purchasing, selling and holding interests in
Senior Loans. When the Trust buys an interest in a Senior Loan, it may receive a
facility fee, which is a fee paid to Lenders upon origination of a Senior Loan
and/or a commitment fee which is a fee paid to Lenders on an ongoing basis based
upon the undrawn portion committed by the Lenders of the underlying Senior Loan.
In certain circumstances, the Trust may receive a prepayment penalty on the
prepayment of a Senior Loan by a Borrower. 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. The extent to which the Trust will be entitled to receive or be
required to pay such fees will generally be a matter of negotiation between the
Trust and the party selling to or purchasing from the Trust. The Investment
Adviser currently anticipates that the Trust will continue to receive and/or pay
fees and commissions in a majority of the transactions involving Senior Loans.
Pursuant to the relevant Loan Agreement, a Borrower may be required in
certain circumstances, and may have the option at any time, to prepay the
principal amount of a Senior Loan, often without incurring a prepayment penalty.
The degree to which Borrowers prepay Senior Loans may be affected by such
factors as general business conditions, the financial condition of the Borrower
and competitive conditions among lenders. Accordingly, prepayment cannot be
predicted with accuracy. Because the interest rates on Senior Loans are
periodically redetermined at relatively short intervals, the Trust and the
Investment Adviser believe that the prepayment of, and subsequent reinvestment
by the Trust in, Senior Loans will not have a materially adverse impact on the
yield on the Trust's portfolio and may have a beneficial impact on income due to
receipt of prepayment penalties, if any, and any facility fees earned in
connection with reinvestment. However, yield could be adversely affected to the
extent that the Trust is unable to reinvest promptly prepayments in Senior
Loans, or, in a period of declining interest rates, to the extent that Borrowers
prepay Senior Loans whose interest rates have not yet been reset to reflect such
declines.
Lenders commonly have certain obligations pursuant to the Loan Agreement,
which may include the obligation to make additional loans or release collateral
in certain circumstances. The Trust will establish a segregated account with its
custodian bank in which it will maintain cash or high quality debt securities
equal in value to its commitments to make such additional loans. In no event
will such commitments exceed 20% of the Trust's total assets.
On behalf of the several Lenders, the Agent typically will be required to
administer and manage the Senior Loan and to service or monitor the collateral.
The Trust will rely on the Agent (where the Trust is a Lender or owns an
Assignment of a Lender's interest) or the Selling Participant (where the Trust
owns a Participation) to collect principal of and interest on a Senior Loan.
Furthermore, the Trust usually will rely
19
<PAGE>
on the Agent (where the Trust is a Lender or owns an Assignment of a Lender's
interest) and/or the Selling Participants (where the Trust owns a Participation)
to monitor compliance by the Borrower with restrictive covenants in the Loan
Agreement and notify the Trust of any adverse change in the Borrower's financial
condition or any declaration of insolvency. The Agent monitors the value of the
collateral on an ongoing basis and, if the value of the collateral declines, may
take certain action, including accelerating principal payments on the Senior
Loan, giving the Borrower an opportunity (or requiring the Borrower if the Loan
Agreement so provides) to provide additional collateral or seeking other
protection for the benefit of the participants in the Senior Loan, depending on
the terms of the Loan Agreement. Furthermore, unless the Trust's interest in a
Senior Loan affords it the right to direct recourse against the Borrower, the
Trust will rely on the Agent to use appropriate creditor remedies against the
Borrower. Typically, the Agent will have broad discretion in enforcing the terms
of a Loan Agreement.
Loan Agreements typically provide for the termination of the Agent's agency
status in the event that it fails to act as required under the relevant Loan
Agreement, becomes insolvent, or has a receiver, conservator or similar official
appointed for it by the appropriate bank regulatory authority or becomes a
debtor in a bankruptcy proceeding. Should such an Agent or a Selling
Participant, Intermediate Participant or assignor with respect to an Assignment
become insolvent or have a receiver, conservator or similar official appointed
for it by the appropriate bank regulatory authority or become a debtor in a
bankruptcy proceeding, the Trust believes that its interest in the Senior Loan
and any loan payment held by such person for the benefit of the Trust should not
be included in such person's estate. If, however, any such amount were included
in such person's estate, the Trust would incur certain costs and delays in
realizing payment or could suffer a loss of principal and/or interest. Even if
such amount is not included in such person's estate, the possibility exists that
the servicing of the Senior Loans may be temporarily disrupted and that there
could be delays in the receipt of principal and/or interest by the Trust which
would adversely affect income and net asset value.
Senior Loans, like other corporate debt obligations, are subject to the risk
of nonpayment of scheduled interest or principal. Such nonpayment would result
in a reduction of income to the Trust, a reduction in the value of the Senior
Loan experiencing nonpayment and a decrease in the net asset value of the Trust.
Although the Trust will invest only in Senior Loans that the Investment Adviser
believes are secured by collateral, the value of which equals or exceeds the
principal amount of the Senior Loan, the value of the collateral pledged by the
Borrower under a Senior Loan, including any additional collateral which the Loan
Agreement may require the Borrower to pledge, may decline below the amount of
the Senior Loan after the acquisition of the interest in the Senior Loan. If
this were to occur, the Trust would be exposed to the risk that the value of the
collateral will not at all times equal or exceed the amount of the Borrower's
obligations under the Senior Loan. Furthermore, there is no assurance that the
liquidation of the collateral would satisfy the Borrower's obligation in the
event of nonpayment of scheduled interest or principal, or that the collateral
could be readily liquidated. As a result, the Trust may not receive payments to
which it is entitled and thereby is likely to experience a decline in the value
of its investment and in its net asset value.
Senior Loans made in connection with leveraged buy-outs and other highly
leveraged transactions are subject to greater credit risks than loans made to
less leveraged Borrowers. These credit risks include the possibility of default
or bankruptcy of the Borrower, and the assertion that the pledging of collateral
to secure the loan constituted a fraudulent conveyance or preferential transfer
which can be
20
<PAGE>
nullified or subordinated to the rights of other creditors of the Borrower under
applicable law. The value of such Senior Loans also may be subject to a greater
degree of volatility in response to interest rate fluctuations and may be less
liquid than other Senior Loans.
Senior Loans in which the Trust will invest presently are not rated by a
nationally recognized statistical rating agency, will not be registered with the
Securities and Exchange Commission ("SEC") or any state securities commission
and will not be listed on any national securities exchange. Although the Trust
will generally have access to financial and other information made available to
the Lenders in connection with Senior Loans, the amount of public information
available with respect to Senior Loans will generally be less extensive than
that available for rated, registered and/or exchange listed securities. As a
result, the performance of the Trust and its ability to meet its investment
objective is more dependent on the analytical ability of the Investment Adviser
than would be the case for an investment company that invests primarily in
rated, registered and/or exchange listed securities.
Senior Loans are at present not readily marketable and are often subject to
restrictions on resale. For example, bank approval is often required for resale
of interests in Senior Loans. Although interests in Senior Loans may be
transferable among financial institutions, such interests do not at present have
the liquidity of conventional debt securities traded in the secondary market.
The substantial portion of the Trust's assets invested in interests in Senior
Loans may restrict the ability of the Trust to dispose of its investments in
Senior Loans in a timely fashion and at a fair price, and could result in
capital losses to the Trust and holders of Shares. Such risks are particularly
acute in situations where the Trust's operations require cash, such as when the
Trust tenders for its Shares, and may result in the Trust's borrowing to meet
short-term cash requirements. The Board of Trustees of the Trust will consider
the liquidity of the Trust's portfolio investments in determining whether a
tender offer should be made by the Trust and the number of Shares offered to be
purchased pursuant thereto.
The Trust has registered as a "non-diversified" investment company so that,
subject to its investment restrictions, it will be able to invest more than 5%
of the value of its total assets in the obligations of any single issuer,
including Senior Loans of a single Borrower or Participations purchased from a
single Lender or Selling Participant. However, the Trust does not intend to
invest more than 10% of the value of its total assets in interests in Senior
Loans of a single Borrower. To the extent the Trust invests its assets in
obligations of a more limited number of issuers than a diversified investment
company, the Trust will be more susceptible than a diversified investment
company to any single corporate, economic, political or regulatory occurrence.
In addition, the Trust may invest up to 100% of its assets in
Participations. Because the Trust will regard the Selling Participants and
Intermediate Participants as issuers, the Trust may be deemed to be concentrated
in securities of issuers in the industry group consisting of financial
institutions and their holding companies, including commercial banks, thrift
institutions, insurance companies and finance companies. As a result, the Trust
is subject to certain risks associated with such institutions. Banking and
thrift institutions are subject to extensive governmental regulations which may
limit both the amounts and types of loans and other financial commitments which
such institutions may make and the interest rates and fees which such
institutions may charge. The profitability of these institutions is largely
dependent on the availability and cost of capital funds, and has shown
significant recent fluctuation as a result of volatile interest rate levels. In
addition, general economic conditions are important to the operations of these
institutions, with exposure to credit losses resulting from possible financial
difficulties
21
<PAGE>
of borrowers potentially having an adverse effect. Insurance companies also are
affected by economic and financial conditions and are subject to extensive
government regulation, including rate regulation. The property and casualty
industry is cyclical, being subject to dramatic swings in profitability which
can be affected by natural catastrophes and other disasters. Individual
companies may be exposed to material risks, including reserve inadequacy, latent
health exposure, and inability to collect from their reinsurance carriers. The
financial services area is currently undergoing relatively rapid change as
existing distinctions between financial service segments become less clear. In
this regard, recent business combinations have included insurance, finance and
securities brokerage under single ownership. Moreover, the federal laws
generally separating commercial and investment banking are currently being
studied by Congress. Also, the Trust could be adversely affected if Selling
Participants and Intermediate Participants were to become overexposed to
leveraged buy-outs or other loans.
INVESTMENT PRACTICES
- --------------------------------------------------------------------------------
The following investment practices apply to the portfolio investments of the
Trust and may be changed by the Trustees of the Trust without shareholder
approval, following written notice to shareholders.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Trust may purchase and sell interests in Senior Loans and other
securities in which the Trust may invest or dispose of on a when-issued or
delayed delivery basis; i.e., delivery and payment can take place more than 30
days after the date of the transaction. The interests or securities so purchased
or sold are subject to market fluctuation during this period and no interest
accrues to the purchaser prior to the date of settlement. At the time the Trust
makes the commitment to enter into a when-issued or delayed delivery
transaction, it will record the transaction and thereafter reflect the value,
each day, of such interest or security in determining the net asset value of the
Trust. At the time of delivery, the value of the interest or security may be
more or less than the purchase price. Since the Trust is dependent on the party
issuing the when-issued or delayed delivery security to complete the
transaction, failure by the other party to deliver the interest or security as
arranged would result in the Trust losing an investment opportunity. The Trust
will also establish a segregated account with its custodian bank in which it
will maintain cash or high quality debt securities equal in value to commitments
for such when-issued or delayed delivery interests or other securities; subject
to this requirement, the Trust may enter into transactions on such basis without
limit. The Investment Adviser and the Trustees do not believe that the Trust's
net asset value or income will be adversely affected by its purchase or sale of
interests or other securities on such basis.
REPURCHASE AGREEMENTS
When cash may be available for only a few days, it may be invested by the
Trust in repurchase agreements until such time as it may otherwise be invested
or used for payments of obligations of the Trust. These agreements, which may be
viewed as a type of secured lending by the Trust, typically involve the
acquisition by the Trust of debt securities from a selling financial institution
such as a bank, savings and loan association or broker-dealer. The agreement
provides that the Trust will sell back to the institution, and that the
institution will repurchase, the underlying security ("collateral"), which is
held by the Trust's custodian, at a specified price and at a fixed time in the
future, usually not more than seven days from the date of purchase. The Trust
will receive interest from the institution until the time when the
22
<PAGE>
repurchase is to occur. Although such date is deemed by the Trust to be the
maturity date of a repurchase agreement, the maturities of securities subject to
repurchase agreements are not subject to any limits and may exceed one year.
While repurchase agreements involve certain risks not associated with direct
investments in debt securities, the Trust will follow procedures adopted by the
Trustees designed to minimize such risks. These procedures include effecting
repurchase transactions only with large, well-capitalized and well-established
financial institutions, whose financial condition will be continually monitored
by the Investment Adviser. In addition, the value of the collateral underlying
the repurchase agreement will be maintained at a level at least equal to the
repurchase price, including any accrued interest earned on the repurchase
agreement. In the event of a default or bankruptcy by a selling financial
institution, the Trust will seek to liquidate such collateral. However, the
exercising of the Trust's right to liquidate such collateral could involve
certain costs or delays and, to the extent that proceeds from any sale upon a
default of the obligation to repurchase were less than the repurchase price, the
Trust could suffer a loss. In addition, to the extent that the Trust's security
interest in the collateral may not be properly perfected, the Trust could suffer
a loss up to the entire amount of the collateral. It is the policy of the Trust
not to invest in repurchase agreements that do not mature within seven days if
any such investments amount to more than 10% of its total assets.
REVERSE REPURCHASE AGREEMENTS
The Trust may enter into reverse repurchase agreements with respect to debt
obligations which could otherwise be sold by the Trust. A reverse repurchase
agreement is an instrument under which the Trust may sell an underlying debt
instrument and simultaneously obtain the commitment of the purchaser (a
commercial bank or a broker or dealer) to sell the security back to the Trust at
an agreed upon price on an agreed upon date. The value of the underlying
securities will be at least equal at all times to the total amount of the resale
obligation, including the interest factor. Reverse repurchase agreements could
involve certain risks in the event of default or insolvency of the other party,
including possible delays or restrictions upon the Trust's ability to dispose of
the underlying securities. An additional risk is that the market value of
securities sold by the Trust under a reverse repurchase agreement could decline
below the price at which the Trust is obligated to repurchase them. Reverse
repurchase agreements will be considered borrowings by the Trust and as such
would be subject to the restrictions on borrowing described below under
"Investment Restrictions." The Trust will not hold more than 5% of the value of
its total assets in reverse repurchase agreements.
LENDING OF PORTFOLIO SECURITIES
Consistent with applicable regulatory requirements, the Trust may lend its
portfolio securities to brokers, dealers and financial institutions, provided
that such loans are callable at any time by the Trust (subject to notice
provisions described below), and are at all times secured by cash or cash
equivalents, which are maintained in a segregated account pursuant to applicable
regulations and that are equal to at least 102% of the market value, determined
daily, of the loaned securities. The advantage of such loans is that the Trust
continues to receive the income on collateral, which will be invested in
short-term obligations. The Trust will not lend its portfolio securities if such
loans are not permitted by the laws or regulations of any state in which its
shares are qualified for sale and will not lend more than 25% of the value of
its total assets.
A loan may be terminated by the borrower on one business day's notice, or by
the Trust on four business days' notice. If the borrower fails to deliver the
loaned securities within four days after receipt of notice, the Trust could use
the collateral to replace the securities while holding the borrower liable for
any
23
<PAGE>
excess of replacement cost over collateral. As with any extensions of credit,
there are risks of delay in recovery and in some cases even loss of rights in
the collateral should the borrower of the securities fail financially. However,
these loans of portfolio securities will be made only to firms deemed by the
Investment Adviser to be creditworthy and when the income which can be earned
from such loans justifies the attendant risks. Upon termination of the loan, the
borrower is required to return the securities to the Trust. Any gain or loss in
the market price during the loan period would inure to the Trust. The
creditworthiness of firms to which the Trust lends its portfolio securities will
be monitored on an ongoing basis by the Investment Adviser pursuant to
procedures adopted and reviewed, on an ongoing basis, by the Trustees of the
Trust.
When voting on consent rights which accompany loaned securities pass to the
borrower, the Trust will follow the policy of calling the loaned securities, to
be delivered within one day after notice, to permit the exercise of such rights
if the matters involved would have a material effect on the Trust's investment
in such loaned securities. The Trust will pay reasonable finder's,
administrative and custodial fees in connection with a loan of its securities.
BORROWING
The Trust may borrow money from a bank for temporary or emergency purposes
or to effect a tender offer for its Shares provided that immediately after such
borrowing the amount borrowed does not exceed 33 1/3% of the value of its total
assets (including the amount borrowed) less its liabilities (not including any
borrowings but including the fair market value at the time of computation of any
other senior securities then outstanding). If, due to market fluctuations or
other reasons, the value of the Trust's assets falls below the foregoing
required coverage requirement, the Trust, within three business days, will
reduce its bank debt to the extent necessary to comply with such requirement. To
achieve such reduction, it is possible that the Trust may be required to sell
portfolio securities at a time when it may be disadvantageous to do so.
Borrowings other than for temporary or emergency purposes would involve
additional risk to the Trust, since the interest expense may be greater than the
income from or appreciation of the interests carried by the borrowing. The Trust
may be required to maintain minimum average balances in connection with
borrowings or to pay a commitment or other fee to maintain a line of credit.
Either of these requirements will increase the cost of borrowing over the stated
interest rate. Investment activity will continue while the borrowing is
outstanding. The purchase of additional interests while any borrowing is
outstanding involves the speculative factor known as "leverage," which will
increase the Trust's exposure to capital risk.
HEDGING AND RISK MANAGEMENT TRANSACTIONS
The Trust is authorized to engage in various interest rate hedging
transactions and risk management transactions, including interest rate swaps and
the purchase and sale of interest rate caps and floors. These techniques are
described in Appendix A. The Trust does not, however, presently intend to engage
in such hedging and risk management transactions, and, if the Trust is offering
its Shares, will not do so unless and until the Trust's prospectus is revised to
reflect this change.
24
<PAGE>
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The investment restrictions listed below have been adopted by the Trust as
fundamental policies, which may not be changed without the vote of a majority,
as defined in the 1940 Act, of the outstanding voting securities of the Trust.
All other investment policies or practices, other than the Trust's investment
policy with respect to Senior Loans, are considered by the Trust not to be
fundamental and accordingly may be changed without shareholder approval. All
percentage limitations apply immediately after a purchase or initial investment,
and any subsequent change in any applicable percentage resulting from market
fluctuations or other changes in the amount of total or net assets does not
require elimination of any security from the portfolio.
The Trust may not:
1. Invest more than 25% of the Trust's total assets in the securities of
any one issuer or, with respect to 50% of the Trust's total assets, purchase any
securities (other than obligations issued or guaranteed by the United States
Government or by its agencies or instrumentalities), if as a result more than 5%
of the Trust's total assets would then be invested in securities of a single
issuer or if as a result the Trust would hold more than 10% of the outstanding
voting securities of any single issuer. For purposes of this restriction and
restriction number two, the Trust will consider a Borrower to be the issuer of a
Participation and, with respect to Participations under which the Trust does not
have privity with the Borrower or would not have a direct cause of action
against the Borrower in the event of its failure to pay scheduled principal or
interest, the Trust will also separately meet the requirements contained in this
investment restriction and consider each person interpositioned between the
Borrower and the Trust to be an issuer of the Participation.
2. Invest 25% or more of the value of its total assets in securities of
issuers in any one industry (the electric, gas, water and telephone utility
industries will be treated as separate industries for purposes of this
restriction); provided that this limitation shall not apply with respect to
obligations issued or guaranteed by the U.S. Government or by its agencies or
instrumentalities; and provided further that the Trust will (once at least 80%
of the Trust's assets are invested in Senior Loans) invest more than 25% and may
invest up to 100% of its total assets in securities of issuers in the industry
group consisting of financial institutions and their holding companies,
including commercial banks, thrift institutions, insurance companies and finance
companies. (See restriction number one for the definition of issuer for purposes
of this restriction.)
3. Invest in common stock, except that the Trust may acquire warrants or
other equity securities incidental to the purchase of an interest in a Senior
Loan.
4. Invest in securities of any issuer if, to the knowledge of the Trust,
any officer or trustee of the Trust or any officer or director of the Investment
Adviser or DWR owns more than 1/2 of 1% of the outstanding securities of such
issuer, and such officers, trustees and directors who own more than 1/2 of 1%
own in the aggregate more than 5% of the outstanding securities of such issuer.
5. Purchase or sell real estate or interests therein, commodities or
commodity contracts except pursuant to the exercise by the Trust of its rights
under Loan Agreements, except to the extent the
25
<PAGE>
interest in Senior Loans the Trust may invest in are considered to be interests
in real estate, commodities or commodities contracts and except to the extent
that hedging instruments the Trust may invest in are considered to be
commodities or commodities contracts.
6. Purchase oil, gas or other mineral leases, rights or royalty contracts,
or exploration or development programs, except pursuant to the exercise by the
Trust of its rights under Loan Agreements. In addition, the Trust may purchase
securities of issuers which deal in, represent interests in or are secured by
interests in such leases, rights or contracts.
7. Write, purchase or sell puts, calls or combinations thereof, except for
options on futures contracts or options on debt securities.
8. Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets or, by
purchase in the open market of securities of closed-end investment companies
where no underwriter's or dealer's commission or profit, other than customary
broker's commissions, is involved and only if immediately thereafter not more
than: (a) 5% of the Trust's total assets would be invested in any one such
company and (b) 10% of the Trust's total assets would be invested in such
securities. The Trust will rely on representations of Borrowers in Loan
Agreements in determining whether such Borrowers are investment companies.
9. Borrow money, except that the Trust may borrow from a bank for temporary
or emergency purposes or for the repurchase of Shares, provided that immediately
after such borrowing the amount borrowed does not exceed 33 1/3% of the value of
its total assets (including the amount borrowed) less its liabilities (not
including any borrowings but including the fair market value at the time of
computation of any other senior securities which are outstanding at the time).
10. Pledge, mortgage or hypothecate its assets or assign or otherwise
encumber them, except to secure borrowings effected within the limitations set
forth in Restriction 9 (and then only to the extent of 33 1/3% of the value of
the Trust's total assets) and except pursuant to reverse repurchase agreements
as provided in this Prospectus. However, for the purpose of this restriction,
collateral arrangements with respect to the writing of options and collateral
arrangements with respect to initial margin for futures are not deemed to be
pledges of assets.
11. Issue senior securities, as defined in the 1940 Act, except insofar as
the Trust may be deemed to have issued a senior security by reason of: (a)
entering into any repurchase agreement; (b) purchasing any securities on a
when-issued or delayed delivery basis; (c) entering into the hedging
transactions described in this prospectus, including Appendix A; (d) borrowing
money in accordance with restrictions described above; or (e) lending portfolio
securities.
12. Make loans of money or securities, except: (a) by acquiring interests in
Senior Loans and making other permitted investments in accordance with its
investment objective; (b) by entering into repurchase agreements (provided that
no more than 10% of the Trust's total assets will be invested in repurchase
agreements that do not mature within seven days) or reverse repurchase
agreements; and (c) by lending its portfolio securities (provided that the Trust
may not lend its portfolio securities in excess of 25% of its total assets).
13. Make short sales of securities.
26
<PAGE>
14. Purchase securities on margin. Neither the deposit of initial or
variation margin in connection with hedging transactions nor short-term credits
as may be necessary for the clearance of such transactions is considered the
purchase of a security on margin.
15. Engage in the underwriting of securities, except to the extent the Trust
may be deemed to be an underwriter in connection with the sale of or granting of
interests in Senior Loans or other securities acquired by the Trust.
16. Make investments for the purpose of exercising control or management of
any other issuer, except to the extent that exercise by the Trust of its rights
under Loan Agreements would be deemed to constitute such control or
participation.
The Trust generally will not engage in the trading of securities for the
purpose of realizing short-term profits, but it will adjust its portfolio as it
deems advisable in view of prevailing or anticipated market conditions to
accomplish the Trust's investment objective. For example, the Trust may sell
portfolio securities in anticipation of a movement in interest rates. Frequency
of portfolio turnover will not be a limiting factor if the Trust considers it
advantageous to purchase or sell securities. The Trust anticipates that the
annual portfolio turnover rate of the Trust will be less than 100%. A high rate
of portfolio turnover involves correspondingly greater expenses than a lower
rate, which expenses must be borne by the Trust and its shareholders. High
portfolio turnover also may result in the realization of substantial net
short-term capital gains. In order to continue to qualify as a regulated
investment company for federal income tax purposes, less than 30% of the annual
gross income of the Trust must be derived from the sale of securities held by
the Trust for less than three months. See "Taxation."
27
<PAGE>
TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
The Trustees and Executive Officers of the Trust and their principal
occupations for at least the last five years and their affiliations, if any,
with InterCapital and with the 82 Dean Witter Funds and the 14 TCW/DW Funds are
shown below.
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH THE TRUST
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Michael Bozic (55) ..................................... Chairman and Chief Executive Officer of Levitz Furniture
Trustee Corporation (since November, 1995); Director or Trustee
c/o Levitz Furniture Corporation of the Dean Witter Funds; formerly President and Chief
6111 Broken Sound Parkway, N.W. Executive Officer of Hills Department Stores (May,
Boca Raton, Florida 1991-July, 1995); formerly variously Chairman, Chief
Executive Officer, President and Chief Operating Officer
(1987-1991) of the Sears Merchandise Group of Sears,
Roebuck and Co.; Director of Eaglemark Financial
Services, Inc.; the United Negro College Fund and
Weirton Steel Corporation.
Charles A. Fiumefreddo* (63) ........................... Chairman, Chief Executive Officer and Director of
Chairman of the Board, InterCapital, Distributors and DWSC; Director and
President and Chief Executive Officer Executive Vice President of DWR; Chairman, Director or
Two World Trade Center Trustee, President and Chief Executive Officer of the
New York, New York Dean Witter Funds; Chairman, Chief Executive Officer and
Trustee of the TCW/DW Funds; Chairman and Director of
Dean Witter Trust Company ("DWTC"); Director and/or
officer of various DWDC subsidiaries; formerly Executive
Vice President and Director of DWDC (until February
1993).
Edwin J. Garn (64) ..................................... Director or Trustee of the Dean Witter Funds; formerly
Trustee United States Senator (R-Utah) (1974-1992) and Chairman,
c/o Huntsman Chemical Corporation Senate Banking Committee (1980-1986); formerly Mayor of
500 Huntsman Way Salt Lake City, Utah (1971-1974); formerly Astronaut,
Salt Lake City, Utah Space Shuttle Discovery (April 12-19, 1985); Vice
Chairman, Huntsman Chemical Corporation (since January,
1993); Director of Franklin Quest (time management
systems) and John Alden Financial Corp.; Member of the
board of various civic and charitable organizations.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH THE TRUST
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
John R. Haire (71) ..................................... Chairman of the Audit Committee and Chairman of the
Trustee Committee of the Independent Directors or Trustees and
Two World Trade Center Director or Trustee of the Dean Witter Funds; Chairman
New York, New York of the Audit Committee and Chairman of the Committee of
the Independent Trustees and Trustee of the TCW/DW
Funds; formerly President, Council for Aid to Education
(1978-1989) and Chairman and Chief Executive Officer of
Anchor Corporation, an investment adviser (1964-1978);
Director of Washington National Corporation (insurance).
Dr. Manuel H. Johnson (47) ............................. Senior Partner, Johnson Smick International, Inc., a
Trustee consulting firm; Koch Professor of International
c/o Johnson Smick International, Inc. Economics and Director of the Center for Global Market
1133 Connecticut Avenue, N.W. Studies at George Mason University; Co- Chairman and a
Washington, D.C. founder of the Group of Seven Council (G7C), an
international economic commission; Director or Trustee
of the Dean Witter Funds; Trustee of the TCW/DW Funds;
Director of NASDAQ (since June, 1995); Director of
Greenwich Capital Markets Inc. (broker-dealer); formerly
Vice Chairman of the Board of Governors of the Federal
Reserve System (1986-1990) and Assistant Secretary of
the U.S. Treasury (1982-1986).
Michael E. Nugent (60) ................................. General Partner, Triumph Capital, L.P., a private
Trustee investment partnership (since 1988); Director or Trustee
c/o Triumph Capital, L.P. of the Dean Witter Funds; Trustee of the TCW/DW Funds;
237 Park Avenue formerly Vice President, Bankers Trust Company and BT
New York, New York Capital Corporation (1984-1988); director of various
business organizations.
Philip J. Purcell* (53) ................................ Chairman of the Board of Directors and Chief Executive
Trustee Officer of DWDC, DWR and Novus Credit Services Inc.;
Two World Trade Center Director of InterCapital, DWSC and Distributors;
New York, New York Director or Trustee of the Dean Witter Funds; Director
and/or officer of various DWDC subsidiaries.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH THE TRUST
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
John L. Schroeder (66) ................................. Retired; Director or Trustee of the Dean Witter Funds;
Trustee Trustee of the TCW/DW Funds; Director of Citizens
c/o Gordon Altman Butowsky Weitzen Utilities Company; formerly, Executive Vice President
Shalov & Wein and Chief Investment Officer of the Home Insurance
Counsel to the Independent Trustees Company (August, 1991-September, 1995); and Chairman and
114 West 47th St. Chief Investment Officer of Axe-Houghton Management and
New York, New York the Axe-Houghton Funds (April, 1983-June, 1991).
Sheldon Curtis (64) .................................... Senior Vice President, Secretary and General Counsel of
Vice President, Secretary and General Counsel InterCapital and DWSC; Senior Vice President, Assistant
Two World Trade Center Secretary and Assistant General Counsel of Distributors;
New York, New York Senior Vice President and Secretary of DWTC; Assistant
Secretary of DWR and Vice President, Secretary and
General Counsel of the Dean Witter Funds and the TCW/DW
Funds.
Rafael Scolari (39) .................................... Vice President of InterCapital (since April, 1994);
Vice President formerly, a Portfolio Manager of AIMCO (January,
Two World Trade Center 1990-February, 1993).
New York, New York
Thomas F. Caloia (50) .................................. First Vice President and Assistant Treasurer of
Treasurer InterCapital and DWSC; Treasurer of the Dean Witter
Two World Trade Center Funds and the TCW/DW Funds.
New York, New York
</TABLE>
- ------------------------
* Denotes Trustees who are "interested persons" of the Trust, as defined in
the 1940 Act.
In addition, Robert M. Scanlan, President and Chief Operating Officer of
InterCapital and DWSC, Executive Vice President of Distributors and DWTC and
Director of DWTC, Robert S. Giambrone, Senior Vice President of InterCapital,
DWSC, Distributors and DWTC and Director of DWTC, Joseph J. McAlinden, Executive
Vice President and Chief Investment Officer of InterCapital and Director of
DWTC, are Vice Presidents of the Trust, and Marilyn K. Cranney and Barry Fink,
First Vice Presidents and Assistant General Counsels of InterCapital and DWSC,
Lou Anne D. McInnis and Ruth Rossi, Vice Presidents and Assistant General
Counsels of InterCapital and DWSC, and Carsten Otto and Frank Bruttomesso, Staff
Attorneys with InterCapital, are Assistant Secretaries of the Trust.
30
<PAGE>
COMPENSATION OF INDEPENDENT TRUSTEES
The Trust pays each Independent Trustee an annual fee of $1,000 plus a per
meeting fee of $50 for meetings of the Board of Trustees or committees of the
Board of Trustees attended by the Trustee (the Trust pays the Chairman of the
Audit Committee an annual fee of $750 and pays the Chairman of the Committee of
the Independent Trustees an additional annual fee of $1,200). The Trust also
reimburses such Trustees for travel and other out-of-pocket expenses incurred by
them in connection with attending such meetings. Trustees and officers of the
Trust who are or have been employed by the Investment Manager or an affiliated
company receive no compensation or expense reimbursement from the Trust.
The following table illustrates the compensation paid to the Trust's
Independent Trustees by the Trust for the fiscal year ended September 30, 1996.
TRUST COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME OF INDEPENDENT TRUSTEE FROM THE TRUST
- -------------------------------------------------------------- ---------------
<S> <C>
Michael Bozic................................................. $1,750
Edwin J. Garn................................................. 1,850
John R. Haire................................................. 3,850
Dr. Manuel H. Johnson......................................... 1,800
Michael E. Nugent............................................. 1,750
John L. Schroeder............................................. 1,800
</TABLE>
The following table illustrates the compensation paid to the Trust's
Independent Trustees for the calendar year ended December 31, 1996 for services
to the 82 Dean Witter Funds and, in the case of Messrs. Haire, Johnson, Nugent
and Schroeder, the 14 TCW/DW Funds that were in operation at December 31, 1996.
With respect to Messrs. Haire, Johnson, Nugent and Schroeder, the TCW/DW Funds
are included solely because of a limited exchange privilege between those Funds
and five Dean Witter Money Market Funds.
COMPENSATION FROM DEAN WITTER FUNDS AND TCW/DW FUNDS
<TABLE>
<CAPTION>
FOR SERVICE AS FOR SERVICE TOTAL
CHAIRMAN OF AS COMPENSATION
COMMITTEES OF CHAIRMAN OF PAID
FOR SERVICE INDEPENDENT COMMITTEES OF FOR SERVICES
AS DIRECTOR OR DIRECTORS/ INDEPENDENT TO
TRUSTEE AND FOR SERVICE AS TRUSTEES AND TRUSTEES AND 82 DEAN
COMMITTEE MEMBER TRUSTEE AND AUDIT AUDIT WITTER
OF 82 DEAN COMMITTEE MEMBER COMMITTEES OF COMMITTEES OF FUNDS AND
NAME OF WITTER OF 14 TCW/DW 82 DEAN WITTER 14 TCW/DW 14 TCW/DW
INDEPENDENT TRUSTEE FUNDS FUNDS FUNDS FUNDS FUNDS
- --------------------------- ---------------- ---------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Michael Bozic.............. $138,850 -- -- -- $138,850
Edwin J. Garn.............. 140,900 -- -- -- 140,900
John R. Haire.............. 106,400 $64,283 $195,450 $ 12,187 378,320
Dr. Manuel H. Johnson...... 137,100 66,483 -- -- 203,583
Michael E. Nugent.......... 138,850 64,283 -- -- 203,133
John L. Schroeder.......... 137,150 69,083 -- -- 206,233
</TABLE>
As of the date of this Prospectus, 57 of the Dean Witter Funds, including
the Trust, have adopted a retirement program under which an Independent Trustee
who retires after serving for at least five years
31
<PAGE>
(or such lesser period as may be determined by the Board) as an Independent
Director or Trustee of any Dean Witter Fund that has adopted the retirement
program (each such Fund referred to as an "Adopting Fund" and each such Trustee
referred to as an "Eligible Trustee") is entitled to retirement payments upon
reaching the eligible retirement age (normally, after attaining age 72). Annual
payments are based upon length of service. Currently, upon retirement, each
Eligible Trustee is entitled to receive from the Adopting Fund, commencing as of
his or her retirement date and continuing for the remainder of his or her life,
an annual retirement benefit (the "Regular Benefit") equal to 25.0% of his or
her Eligible Compensation plus 0.4166666% of such Eligible Compensation for each
full month of service as an Independent Director or Trustee of any Adopting Fund
in excess of five years up to a maximum of 50.0% after ten years of service. The
foregoing percentages may be changed by the Board.(1) "Eligible Compensation" is
one-fifth of the total compensation earned by such Eligible Trustee for service
to the Adopting Fund in the five year period prior to the date of the Eligible
Trustee's retirement. Benefits under the retirement program are not secured or
funded by the Adopting Funds.
The following table illustrates the retirement benefits accrued to the
Fund's Independent Trustees by the Trust for the fiscal year ended September 30,
1996 and by the 57 Dean Witter Funds (including the Fund) for the year ended
December 31, 1996, and the estimated retirement benefits for the Fund's
Independent Trustees, to commence upon their retirement, from the Trust as of
September 30, 1996 and from the 57 Dean Witter Funds as of December 31, 1996.
RETIREMENT BENEFITS FROM THE FUND AND ALL DEAN WITTER FUNDS
<TABLE>
<CAPTION>
RETIREMENT BENEFITS
FOR ALL ADOPTING FUNDS ESTIMATED ANNUAL
-------------------------------------- ACCRUED AS EXPENSES BENEFITS
ESTIMATED UPON RETIREMENT(2)
CREDITED YEARS ESTIMATED ---------------------- ----------------------
OF SERVICE AT PERCENTAGE OF BY ALL FROM FROM ALL
RETIREMENT ELIGIBLE BY THE ADOPTING THE ADOPTING
NAME OF INDEPENDENT TRUSTEE (MAXIMUM 10) COMPENSATION FUND FUNDS TRUST FUNDS
- ------------------------------------ ------------------- ----------------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Michael Bozic....................... 10 50.0% $ 399 $ 20,147 $ 950 $ 51,325
Edwin J. Garn....................... 10 50.0 601 27,772 950 51,325
John R. Haire....................... 10 50.0 702 46,952 2,339 129,550
Dr. Manuel H. Johnson............... 10 50.0 244 10,926 950 51,325
Michael E. Nugent................... 10 50.0 422 19,217 950 51,325
John L. Schroeder................... 8 41.7 776 38,700 792 42,771
</TABLE>
- ------------------------------
(1) An Eligible Trustee may elect alternate payments of his or her retirement
benefits based upon the combined life expectancy of such Eligible Trustee
and his or her spouse on the date of such Eligible Trustee's retirement. The
amount estimated to be payable under this method, through the remainder of
the later of the lives of such Eligible Trustee and spouse, will be the
actuarial equivalent of the Regular Benefit. In addition, the Eligible
Trustee may elect that the surviving spouse's periodic payment of benefits
will be equal to either 50% or 100% of the previous periodic amount, an
election that, respectively, increases or decreases the previous periodic
amount so that the resulting payments will be the actuarial equivalent of
the Regular Benefit.
(2) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1) above.
As of the date of this Prospectus, the aggregate number of shares of
beneficial interest of the Trust owned by the Fund's officers and Trustees as a
group was less than 1 percent of the Trust's shares of beneficial interest
outstanding.
32
<PAGE>
THE BOARD OF TRUSTEES, THE INDEPENDENT TRUSTEES, AND THE COMMITTEES
The Board of Trustees consists of eight (8) trustees. These same individuals
also serve as directors or trustees for all of the Dean Witter Funds, and are
referred to in this section as Trustees. As of the date of this Prospectus,
there are a total of 83 Dean Witter Funds, comprised of 126 portfolios. As of
December 31, 1996, the Dean Witter Funds had total net assets of approximately
$81.3 billion and more than five million shareholders.
Six Trustees (75% of the total number) have no affiliation or business
connection with InterCapital or any of its affiliated persons and do not own any
stock or other securities issued by InterCapital's parent company, DWDC. These
are the "disinterested" or "independent" Trustees. The other two Trustees (the
"management Trustees") are affiliated with InterCapital. Four of the six
independent Trustees are also Independent Trustees of the TCW/DW Funds.
Law and regulation establish both general guidelines and specific duties for
the Independent Trustees. The Dean Witter Funds seek as Independent Trustees
individuals of distinction and experience in business and finance, government
service or academia; these are people whose advice and counsel are in demand by
others and for whom there is often competition. To accept a position on the
Funds' Boards, such individuals may reject other attractive assignments because
the Funds make substantial demands on their time. Indeed, by serving on the
Funds' Boards, certain Trustees who would otherwise be qualified and in demand
to serve on bank boards would be prohibited by law from doing so.
All of the Independent Trustees serve as members of the Audit Committee and
the Committee of the Independent Trustees. Three of them also serve as members
of the Derivatives Committee. During the calendar year ended December 31, 1996,
the three Committees held a combined total of sixteen meetings. The Committees
hold some meetings at InterCapital's offices and some outside InterCapital.
Management Trustees or officers do not attend these meetings unless they are
invited for purposes of furnishing information or making a report.
The Committee of the Independent Trustees is charged with recommending to
the full Board approval of management, advisory and administration contracts,
Rule 12b-1 plans and distribution and underwriting agreements; continually
reviewing Fund performance; checking on the pricing of portfolio securities,
brokerage commissions, transfer agent costs and performance, and trading among
Funds in the same complex; and approving fidelity bond and related insurance
coverage and allocations, as well as other matters that arise from time to time.
The Independent Trustees are required to select and nominate individuals to fill
any Independent Trustee vacancy on the Board of any Fund that has a Rule 12b-1
plan of distribution. Most of the Dean Witter Funds have such a plan.
The Audit Committee is charged with recommending to the full Board the
engagement or discharge of the Fund's independent accountants; directing
investigations into matters within the scope of the independent accountants'
duties, including the power to retain outside specialists; reviewing with the
independent accountants the audit plan and results of the auditing engagement;
approving professional services provided by the independent accountants and
other accounting firms prior to the performance of such services; reviewing the
independence of the independent accountants; considering the range of audit and
non-audit fees; reviewing the adequacy of the Fund's system of internal
controls; and preparing and submitting Committee meeting minutes to the full
Board.
33
<PAGE>
Finally, the Board of each Fund has formed a Derivatives Committee to
establish parameters for and oversee the activities of the Fund with respect to
derivative investments, if any, made by the Fund.
DUTIES OF CHAIRMAN OF COMMITTEE OF THE INDEPENDENT TRUSTEES AND AUDIT COMMITTEE
The Chairman of the Committee of the Independent Trustees and the Audit
Committee maintains an office at the Funds' headquarters in New York. He is
responsible for keeping abreast of regulatory and industry developments and the
Funds' operations and management. He screens and/or prepares written materials
and identifies critical issues for the Independent Trustees to consider,
develops agendas for Committee meetings, determines the type and amount of
information that the Committees will need to form a judgment on various issues,
and arranges to have that information furnished to Committee members. He also
arranges for the services of independent experts and consults with them in
advance of meetings to help refine reports and to focus on critical issues.
Members of the Committees believe that the person who serves as Chairman of both
Committees and guides their efforts is pivotal to the effective functioning of
the Committees.
The Chairman of the Committees also maintains continuous contact with the
Funds' management, with independent counsel to the Independent Trustees and with
the Funds' independent auditors. He arranges for a series of special meetings
involving the annual review of investment advisory, management and other
operating contracts of the Funds and, on behalf of the Committees, conducts
negotiations with the Investment Manager and other service providers. In effect,
the Chairman of the Committees serves as a combination of chief executive and
support staff of the Independent Trustees.
The Chairman of the Committee of the Independent Trustees and the Audit
Committee is not employed by any other organization and devotes his time
primarily to the services he performs as Committee Chairman and Independent
Trustee of the Dean Witter Funds and as an Independent Trustee and, since July
1, 1996, as Chairman of the Committee of the Independent Trustees and the Audit
Committee of the TCW/DW Funds. The current Committee Chairman has had more than
35 years experience as a senior executive in the investment company industry.
ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT TRUSTEES FOR ALL DEAN
WITTER FUNDS
The Independent Trustees and the Funds' management believe that having the
same Independent Trustees for each of the Dean Witter Funds avoids the
duplication of effort that would arise from having different groups of
individuals serving as Independent Trustees for each of the Funds or even of
sub-groups of Funds. They believe that having the same individuals serve as
Independent Trustees of all the Funds tends to increase their knowledge and
expertise regarding matters which affect the Fund complex generally and enhances
their ability to negotiate on behalf of each Fund with the Fund's service
providers. This arrangement also precludes the possibility of separate groups of
Independent Trustees arriving at conflicting decisions regarding operations and
management of the Funds and avoids the cost and confusion that would likely
ensue. Finally, having the same Independent Trustees serve on all Fund Boards
enhances the ability of each Fund to obtain, at modest cost to each separate
Fund, the services of Independent Trustees, and a Chairman of their Committees,
of the caliber, experience and business acumen of the individuals who serve as
Independent Trustees of the Dean Witter Funds.
34
<PAGE>
INVESTMENT ADVISORY AGREEMENT
- --------------------------------------------------------------------------------
The Trust has retained the Investment Adviser to manage the Trust's assets,
including the placing of orders for the purchase and sale of portfolio
securities, pursuant to an Investment Advisory Agreement with InterCapital (the
"Advisory Agreement"). See "The Trust and Its Adviser" for a detailed
description of the Advisory Agreement.
The Investment Adviser obtains and evaluates such information and advice
relating to the economy, securities markets, and specific securities as it
considers necessary or useful to manage continuously the assets of the Trust in
a manner consistent with its investment objective and policies. The Trust's
Board of Trustees reviews the various services provided by the Investment
Adviser to ensure that the Trust's general investment policies and programs are
being properly carried out. Under the terms of the Advisory Agreement, the
Investment Adviser pays the salaries of all personnel, including officers of the
Trust, who are employees of the Investment Adviser.
Expenses not expressly assumed by the Investment Adviser under the Advisory
Agreement will be paid by the Trust. The expenses borne by the Trust include,
but are not limited to: charges and expenses of any registrar, custodian, stock
transfer and dividend disbursing agent; brokerage commissions; taxes; engraving
and printing of share certificates; registration costs of the Trust's Shares in
this continuous offering under federal and state securities laws; all expenses
of shareholders' and Trustees' meetings and of preparing, printing and mailing
proxy statements and reports to shareholders; fees and travel expenses of
Trustees or members of any advisory board or committee who are not employees or
retired employees of the Investment Adviser or any corporate affiliate thereof;
all expenses incident to any dividend or distribution program; charges and
expenses of any outside service used for pricing of the Trust's investments;
fees and expenses of legal counsel, including counsel to the Trustees who are
not interested persons of the Trust or of the Investment Adviser (not including
compensation or expenses of attorneys who are employees of the Investment
Adviser) and independent accountants; membership dues of industry associations;
interest on Trust borrowings; fees and expenses incident to Trust borrowings;
postage; insurance premiums on property or personnel (including officers and
trustees) of the Trust which inure to its benefit; extraordinary expenses
(including, but not limited to, legal claims and liabilities and litigation
costs and any indemnification relating thereto); and all other costs of the
Trust's operation.
As full compensation for the services furnished to the Trust, the Trust pays
InterCapital pursuant to the Advisory Agreement, monthly compensation calculated
daily at an annual rate of 0.90% of average daily net assets on assets of the
Trust up to $500 million and at an annual rate of 0.85% of average daily net
assets on assets of the Trust exceeding $500 million. The Trust paid AIMCO, the
former investment adviser under the previous advisory agreement, monthly
compensation calculated daily by applying the annual rate of 1.0% to the Trust's
average daily net assets up to $500 million and 0.95% on average daily net
assets over $500 million. The sum of this fee and the administration fee is
higher than that paid by most other investment companies. See "Administrator and
Administration Agreement." For the fiscal years ended September 30, 1994, 1995
and 1996, the Trust accrued to InterCapital total compensation of $2,586,181,
3,526,906 and $6,524,700, respectively. For the fiscal year ended September 30,
1993, the Trust accrued to AIMCO (for the period October 1, 1992 through
February 28, 1993) total compensation under the prior Advisory Agreement of
$1,683,031 and to InterCapital (for the period March 1, 1993 through September
30, 1993) total compensation under the new Advisory Agreement of $1,874,994 for
a total of $3,558,025.
35
<PAGE>
The Advisory Agreement provides that in the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard of its obligations thereunder,
the Investment Adviser is not liable to the Trust or any of its shareholders for
any act or omission by the Investment Adviser or for any losses sustained by the
Trust or its shareholders. The Advisory Agreement in no way restricts the
Investment Adviser from acting as investment manager or adviser to others.
The Advisory Agreement with AIMCO was initially approved by the Trustees on
October 10, 1989, by AIMCO as the then sole shareholder on November 20, 1989 and
by the Trust's shareholders at a Meeting of Shareholders on June 19, 1991. The
Advisory Agreement with AIMCO was terminated effective March 1, 1993.
The Advisory Agreement may be terminated at any time, without penalty, on 30
days notice by the Trustees of the Trust, by the holders of a majority, as
defined in the 1940 Act, of the outstanding Shares of the Trust, or by the
Investment Adviser. The Advisory Agreement will automatically terminate in the
event of its assignment (as defined in the 1940 Act).
Under its terms, the Advisory Agreement with InterCapital had an initial
term ending April 30, 1994, and provides that it will continue from year to year
thereafter, provided continuance of the Advisory Agreement is approved at least
annually by the vote of the holders of a majority (as defined in the 1940 Act)
of the outstanding voting securities of the Trust, or by the Trustees of the
Trust; provided that in either event such continuance is approved annually by
the vote of a majority of the Trustees of the Trust who are not parties to the
Advisory Agreement or "interested persons" (as defined in the 1940 Act) of any
such party (the "Independent Trustees"), which vote must be cast in person at a
meeting called for the purpose of voting on such approval. At their meeting held
on April 17, 1996, the Trust's Board of Trustees, including all the Independent
Trustees, approved continuation of the Investment Advisory Agreement until April
30, 1997.
ADMINISTRATOR AND ADMINISTRATION AGREEMENT
- --------------------------------------------------------------------------------
On December 31, 1993, InterCapital effected an internal reorganization
pursuant to which certain administrative activities previously performed by
InterCapital would instead be performed by Dean Witter Services Company Inc.
(the "Administrator" or "DWSC"), a wholly-owned subsidiary of InterCapital.
Accordingly, the Administration Agreement between InterCapital and the Trust was
terminated and a new Administration Agreement between the Administrator and the
Trust was entered into. The foregoing internal reorganization did not result in
any change of the management of the Trust's Administrator. The nature and scope
of the adminstrative services being provided to the Trust or any of the fees
being paid by the Trust under the new Administration Agreement are identical to
those of the previous Agreement. The term "Administrator" refers to InterCapital
prior to this reorganization and to DWSC after December 31, 1993. Dean Witter
Distributors Inc., the Distributor of the Trust's shares, is an affiliate of
InterCapital and DWSC and a wholly-owned subsidiary of DWDC.
In an earlier internal reorganization which took place in January, 1993,
DWR's investment company-related operations, pursuant to which the
administration activities that had been performed by DWR's InterCapital Division
were assumed by the then new company, Dean Witter InterCapital Inc., and the
36
<PAGE>
share distribution activities that had been performed by DWR were assumed by a
separate new company, Dean Witter Distributors Inc. InterCapital refers to the
InterCapital Division of DWR prior to the internal reorganization and to Dean
Witter InterCapital Inc. after the reorganization. This internal reorganization
did not result in a change of management of the Administrator or Distributor.
Under the terms of the Administration Agreement, the Administrator maintains
certain of the Trust's books and records and furnishes, at its own expense, such
office space, facilities, equipment, clerical help, and bookkeeping and certain
legal services as the Trust may reasonably require in the conduct of its
business, including the preparation of proxy statements and reports required to
be filed with federal and state securities commissions (except insofar as the
participation or assistance of independent accountants and attorneys is, in the
opinion of the Administrator, necessary or desirable). In addition, the
Administrator 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 service, heat, light, power and other utilities provided to
the Trust.
As full compensation for the services and facilities furnished to the Trust
and expenses of the Trust assumed by the Administrator, the Trust pays the
Administrator monthly compensation calculated daily by applying the annual rate
of 0.25% to the Trust's average daily net assets. The sum of this fee and the
investment advisory fee is higher than that paid by most other investment
companies. See "Investment Advisory Agreement." During the fiscal years ended
September 30, 1995 and 1996, total accrued compensation amounted to $979,775 and
$1,845,500, respectively. During the fiscal year ended September 30, 1994, total
accrued compensation amounted to $718,384, of which $523,831 was paid to DWSC
and $194,553 was paid to InterCapital.
The Administration Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Administrator is not liable to the Trust or any of
its shareholders for any act or omission by the Administrator or for any losses
sustained by the Trust or its shareholders. The Administration Agreement in no
way restricts the Administrator from acting as administrator or investment
manager or adviser to others.
The Administration Agreement was initially approved by the Trustees on
October 10, 1989, by the Investment Adviser as the sole shareholder on November
20, 1989 and by the Trust's shareholders at a Meeting of Shareholders on June
19, 1991. At their meeting held on October 30, 1992, the Trustees of the Trust
including all the Trustees of the Trust who are not parties to the
Administration Agreement or "interested persons" (as defined in the Act) of any
such party (the "Independent Trustees"), approved the assumption by InterCapital
of DWR's rights and duties under the Administration Agreement, which assumption
took place upon the reorganization described above. The Administration Agreement
may be terminated at any time, without penalty, on thirty days notice by the
Trustees of the Trust, by the holders of a majority, as defined in the 1940 Act,
of the outstanding Shares of the Trust, or by the Administrator. The
Administration Agreement will automatically terminate in the event of its
assignment (as defined in the 1940 Act).
Under its terms, the new Administration Agreement with DWSC, which took
effect on January 1, 1994, had an initial term ending April 30, 1994, and
provides that it will continue from year to year thereafter, provided
continuance of the Administration Agreement is approved at least annually by the
vote of the holders of a majority (as defined in the 1940 Act) of the
outstanding voting securities of the Trust, or by the Trustees of the Trust;
provided that in either event such continuance is approved annually
37
<PAGE>
by the vote of a majority of the Independent Trustees, which vote must be cast
in person at a meeting called for the purpose of voting on such approval. On
April 17, 1995, DWSC was reincorporated in the State of Delaware, necessitating
the entry into a new Administration Agreement with the Trust. At their meeting
held on April 17, 1996, the Trustees, including all of the Independent Trustees,
approved the continuation of the Administration Agreement until April 30, 1997.
PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------
Subject to the general supervision of the Board of Trustees, the Investment
Adviser is responsible for decisions to buy and sell interests in Senior Loans
and other securities and effect hedging transactions for the Trust, the
selection of brokers and dealers to effect the transactions, and the negotiation
of brokerage commissions, if any. With respect to interests in Senior Loans, the
Trust generally will engage in privately negotiated transactions for their
purchase or sale in which the Investment Adviser will negotiate on behalf of the
Trust. The Trust may be required to pay fees, or forgo a portion of interest and
any fees payable to the Trust, to the Selling Participant or the entity selling
an Assignment to the Trust. The Investment Adviser will determine the Lenders
and Selling Participants from whom the Trust will purchase Assignments and
Participations by considering their professional ability, level of service,
relationship with the Borrower, financial condition, credit standards and
quality of management. The secondary market for interests in Senior Loans is
relatively illiquid. Although the Trust intends generally to hold interests in
Senior Loans until maturity or prepayment of the Senior Loan, such illiquidity
may restrict the ability of the Investment Adviser to locate in a timely manner
persons willing to purchase the Trust's interests in Senior Loans at a fair
price should the Trust desire to sell such interests. See "Investment Objective
and Policies."
With respect to portfolio securities other than Senior Loans, the Trust
expects that the primary market for the securities in which it intends to invest
will generally be the over-the-counter market. Such securities are generally
traded in the over-the-counter market on a "net" basis with dealers acting as
principal for their own accounts without charging a stated commission, although
the price of the security usually includes a profit to the dealer. The Trust
also expects that securities will be purchased at times in underwritten
offerings, where the price includes a fixed amount of compensation, generally
referred to as the underwriter's concession or discount. On occasion, the Trust
may also purchase certain money market instruments directly from an issuer, in
which case no commissions or discounts are paid. During the fiscal years ended
September 30, 1994, 1995 and 1996, the Trust did not pay any brokerage
commissions.
The policy of the Trust regarding purchases and sales of Senior Loans and
securities and futures contracts for its portfolio is that primary consideration
will be given to obtaining the most favorable prices and efficient execution of
transactions. In seeking to implement the Trust's policies, the Investment
Adviser will effect transactions with those banks, brokers and dealers which the
Investment Adviser believes provide the most favorable prices and who are
capable of providing efficient executions. If the Investment Adviser believes
such price and execution are obtainable from more than one bank, broker or
dealer, it may give consideration to placing portfolio transactions with those
banks, brokers and dealers who also furnish research and other services to the
Trust or the Investment Adviser. Such services may include, but are not limited
to, any one or more of the following: information as to the availability of
securities for purchase or sale; statistical or factual information or opinions
pertaining to investment; wire services; and appraisals or evaluations of
portfolio securities.
38
<PAGE>
The information and services received by the Investment Adviser from banks,
brokers and dealers may be of benefit to the Investment Adviser and its
affiliates in the management of other accounts and may not in all cases benefit
the Trust directly. While the receipt of such information and services is useful
in varying degrees and would generally reduce the amount of research or services
otherwise performed by the Investment Adviser and thus reduce its expenses, it
is of indeterminable value and the advisory fee paid to the Investment Adviser
is not reduced by any amount that may be attributable to the value of such
services.
Consistent with the policy described above, brokerage transactions in
securities and futures contracts listed on exchanges or admitted to unlisted
trading privileges may be effected through DWR. In order for DWR to effect
portfolio transactions of the Trust, the commissions, fees or other remuneration
received by DWR must be reasonable and fair compared to the commissions, fees or
other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on an exchange
during a comparable period of time. This standard would allow DWR to receive no
more than the remuneration which would be expected to be received by an
unaffiliated broker in a commensurate arm's-length transaction. Furthermore, the
Trustees of the Trust, including a majority of the Independent Trustees, have
adopted procedures which are reasonably designed to provide that any
commissions, fees or other remuneration paid to DWR are consistent with the
foregoing standard.
DETERMINATION OF NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value per share of the Trust's Shares is determined by
calculating the total value of the Trust's assets, deducting its total
liabilities, and dividing the result by the number of Shares outstanding. The
net asset value will be computed as of 4:00 p.m. New York time on each business
day on which the New York Stock Exchange is open for trading (or, on days when
the New York Stock Exchange closes prior to 4:00 p.m., at such earlier time).
The Trust reserves the right to calculate the net asset value more frequently if
deemed desirable.
Interests in Senior Loans held by the Trust are currently valued at their
fair value in accordance with procedures established in good faith by the Board
of Trustees of the Trust. Under the procedures adopted by the Board of Trustees,
interests in Senior Loans will be priced in accordance with a matrix which takes
into account the relationship between the then current interest rate 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 next interest rate
determination or maturity of the Senior Loan. Adjustments in the matrix-
determined price of a Senior Loan are made in the event of a default on a Senior
Loan or a significant change in the creditworthiness of the Borrower and may
also be required in the event of changes in pricing parameters for newly issued
Senior Loans (e.g., interest rates are set at a higher or lower margin above the
base lending rate than were Senior Loans in the Trust's portfolio). Loans
purchased at a discount from par for reasons other than credit impairment are
valued at cost and the discount is amortized to maturity. In assessing the
creditworthiness of a Borrower, the primary focus is on the ability and intent
of the Borrower to continue to meet its principal and interest payment
obligations specified under the applicable Loan Agreement. Such factors as the
Borrower's current and projected cash flow relative to its debt service
requirements and liquidity are considered in this regard. S&P and Moody's
ratings of any outstanding commercial paper of a Borrower may also be
considered. The procedures are monitored by the Board of Trustees on an ongoing
basis to insure that the values arrived at continue to
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<PAGE>
represent fair value. Should the Board of Trustees determine that the market for
Senior Loans has developed to the point where market quotations provided by
banks, dealers or pricing services respecting interests in Senior Loans could
reliably serve as a basis for valuing the Trust's portfolio securities, such
quotations would be used as a basis for valuing interests in Senior Loans held
by the Trust. Other portfolio securities traded in the over-the-counter market
will be valued based upon closing bid prices; provided, however, that short-term
securities with remaining maturities of less than 60 days will be valued at
amortized cost. Other assets are valued at fair value in accordance with
procedures established in good faith by the Board of Trustees of the Trust.
DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
It is the Trust's present policy, which may be changed by the Board of
Trustees, to declare daily and pay monthly dividends to shareholders from net
investment income of the Trust. Distributions to holders of Shares cannot be
assured, and the amount of each monthly distribution is expected to vary. The
Trust intends to distribute all of the Trust's net investment income on an
annual basis. Net investment income of the Trust consists of all interest income
and fee and other ordinary income earned by the Trust on its portfolio assets,
less all expenses of the Trust. The Trust will distribute its capital gains
(after offset for any available loss carryovers), if any, at least once per
year, but it may make such distributions on a more frequent basis to comply with
the distribution requirements of the Tax Reform Act of 1986, as amended, but in
all events in a manner consistent with the 1940 Act.
All dividends and capital gains distributions are reinvested automatically
in full and fractional Shares at the net asset value per Share determined on the
payable date of such dividend or distribution. A shareholder may, at any time,
by written notification to the Transfer Agent, elect to have subsequent
dividends or capital gains distributions, or both, paid in cash rather than
reinvested, in which event payment will be mailed on or about the payment date.
TAXATION
- --------------------------------------------------------------------------------
Because the Trust intends to distribute all of its net investment income and
capital gains to shareholders and intends to otherwise comply with all the
provisions of Subchapter M of the Internal Revenue Code of 1986 (the "Code"), it
is not expected that the Trust will be required to pay any federal income tax on
such income and capital gains. If, however, any such capital gains are retained,
the Trust will pay federal income tax thereon. In such a case, the Trust may
make an election pursuant to which shareholders would have to include such
retained gains in their income but would be able to claim their share of the tax
paid by the Trust as a credit against their individual federal income tax.
Shareholders will normally have to pay federal income taxes, and any state
income taxes, on the dividends and distributions they receive from the Trust.
Such dividends and distributions derived from net investment income or
short-term capital gains are taxable to the shareholders as ordinary income
regardless of whether the shareholder receives such distributions in additional
Shares or in cash. It is not expected that any portion of such dividends and
distributions will be eligible for the corporate dividends received deduction.
Long-term or short-term capital gains may be generated by the sale of
portfolio securities and by certain transactions in options and futures
contracts engaged in by the Trust. Distributions of long-term capital gains, if
any, are taxable to shareholders as long-term capital gains regardless of how
long a
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shareholder has held the Trust's shares and regardless of whether the
distribution is received in additional Shares or in cash. Capital gains
distributions are not eligible for the dividends-received deduction.
Any distribution in excess of the Trust's earnings and profits will first
reduce a shareholder's adjusted basis in his Shares to zero and, after such
basis is reduced to zero, will constitute gain to the shareholder from the sale
of Shares.
A holder of Shares who either sells his Shares or, pursuant to a tender
offer, tenders all Shares owned by such shareholder and any Shares considered
owned by such shareholder under attribution rules contained in the Code will
realize a taxable gain or loss depending upon such shareholder's basis in the
Shares. Such gain or loss will generally be treated as capital gain or loss and
will be long-term capital gain or loss if the Shares are held for more than one
year. However, any loss on a sale or exchange of Shares held for six months or
less will be treated as long-term capital loss to the extent of any long-term
capital gain distribution with respect to such Shares.
If a tendering holder of Shares tenders less than all Shares owned by or
attributed to such shareholder, and if the distribution to such shareholder does
not otherwise qualify as a payment in exchange for stock, the proceeds received
will be treated as a taxable dividend, return of capital or capital gain
depending on the Trust's earnings and profits and the shareholder's basis in the
tendered Shares. Also, if some tendering holders of Shares receive taxable
dividends, there is a risk that non-tendering holders of Shares may be
considered to have received a deemed distribution which may be a taxable
dividend in whole or in part.
The Code requires each regulated investment company to pay a nondeductible
4% excise tax to the extent the company does not distribute, during each
calendar year, 98% of its ordinary income, determined on a calendar year basis,
and 98% of its capital gains, determined, in general, on an October 31 year end,
plus certain undistributed amounts from previous years. The Trust anticipates
that it will make sufficient timely distributions to avoid imposition of the
excise tax. If the Trust pays a dividend in January which was declared in the
previous calendar quarter to shareholders of record on a date in such calendar
quarter, then such dividend or distribution will be treated for tax purposes as
being paid in December and will be taxable to shareholders as if received in
December.
Any dividend or capital gains distribution received by a shareholder from an
investment company will have the effect of reducing the net asset value of the
shareholder's stock in that company by the exact amount of the dividend or
capital gains distribution. Furthermore, capital gains distributions and
dividends are subject to federal income taxes. If the net asset value of the
shares should be reduced below a shareholder's cost as a result of the
distribution of realized long-term capital gains, such distribution would be in
part a return of the shareholder's investment to the extent of such reduction
below the shareholder's cost, but nonetheless would be taxable to the
shareholder. Therefore, an investor should consider the tax implications of
purchasing Shares immediately prior to a distribution record date.
The tax treatment of listed put and call options written or purchased by the
Trust on debt securities and of futures contracts entered into by the Trust will
generally be governed by Section 1256 of the Code, pursuant to which each such
position held by the Trust will be marked-to-market (i.e., treated as if it were
sold for fair market value) on the last business day of each taxable year of the
Trust, and all gain or loss associated with transactions in such positions will
be treated as 60% long-term capital gain or loss and 40% short-term capital gain
or loss. Positions of the Trust which consist of at least one debt security and
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at least one option or futures contract which substantially diminishes the
Trust's risk of loss with respect to such debt security could be treated as
"mixed straddles" which are subject to the straddle rules of Section 1092 of the
Code, the operation of which may cause deferral of losses, adjustments in the
holding periods of debt securities and conversion of short-term capital losses
into long-term capital losses. Certain tax elections exist for mixed straddles
which reduce or eliminate the operation of the straddle rules. Furthermore, as a
regulated investment company, the Trust is subject to the requirement that less
than 30% of its gross income be derived from the sale or other disposition of
securities held for less than three months. This requirement may limit the
Trust's ability to engage in options and futures transactions. The Trust will
monitor its transactions in options and futures contracts and may make certain
tax elections in order to mitigate the effect of these rules and prevent
disqualification of the Trust as a regulated investment company under Subchapter
M of the Code. Such tax elections may result in an increase in distributions of
ordinary income (relative to long-term capital gain) to shareholders.
The federal income tax treatment of interest rate swaps is not entirely
clear. The Trust may be required to treat payments received under such
arrangements as ordinary income and to amortize such payments under certain
circumstances. The Trust will limit its activity in this regard in order to
maintain its qualification as a regulated investment company.
The Fund may at times make payments from sources other than income or net
capital gains. Payments from such sources will in effect, represent a return of
a portion of each shareholder's investment. All, or a portion, of such payments
will not be taxable to shareholders.
After the end of each calendar year, shareholders will receive full
information on their dividends and capital gains distributions for tax purposes.
Shareholders who receive distributions of Shares which are automatically
reinvested will generally be viewed as receiving a distribution equal to the
fair market value of such Shares.
To avoid being subject to a 31% federal backup withholding tax on taxable
dividends, capital gains distributions and the proceeds of redemptions and
repurchases, shareholders' taxpayer identification numbers must be furnished and
certified as to their accuracy.
Ordinary income dividends and distributions paid by the Trust to
shareholders who are non-resident aliens will be subject to a 30% United States
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law. Non-resident shareholders are
urged to consult their own tax advisers concerning the applicability of the
United States withholding tax.
The above discussion is only a brief summary of some of the significant tax
consequences of investing in the Trust. Shareholders should consult their tax
advisers regarding specific questions as to state or local taxes and as to the
applicability of the foregoing to their current federal tax situation.
DESCRIPTION OF SHARES
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GENERAL
The Trust's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest, of $.01 par value
("Shares"). Share certificates will be issued to
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the holder of record of Shares upon request. Currently, Shares will be required
to be held of record by the investor. The investor's broker may not be reflected
as the record holder; however, arrangements for Shares to be held in "street
name" may be implemented in the future.
Shareholders are entitled to one vote for each Share held and to vote on
matters submitted to meetings of shareholders. No material amendment may be made
to the Trust's Declaration of Trust without the affirmative vote of at least a
majority of its Shares represented in person or by proxy at a meeting at which a
quorum is present or by written consent without a meeting. Under certain
circumstances the Trustees may be removed by action of the Trustees. The
shareholders also have the right under certain circumstances to remove the
Trustees. Shares have no preemptive or conversion rights and when issued are
fully paid and non-assessable.
The Trust's Declaration of Trust permits the Trustees to divide or combine
the Shares into a greater or lesser number of Shares without thereby changing
the proportionate beneficial interests in the Trust. Each Share represents an
equal proportionate interest in the Trust with each other Share.
The Trust may be terminated (i) by the affirmative vote of the holders of
66% of its outstanding Shares or (ii) by an instrument signed by a majority of
the Trustees and consented to by the holders of two-thirds of the Trust's
outstanding Shares. Upon termination of the Trust, the Trustees will wind up the
affairs of the Trust, the Trust's business will be liquidated and the Trust's
net assets will be distributed to the Trust's shareholders on a pro rata basis.
If not so terminated, the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Trust, requires that Trust
documents include such disclaimer, and provides for indemnification and
reimbursement of expenses out of the Trust's property for any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations. Given the nature of the Trust's assets and operations, the
possibility of the Trust being unable to meet its obligations is remote. Given
the above limitations on shareholders' personal liability and the Trust's
ability to meet its indemnification obligations, in the opinion of Massachusetts
counsel to the Trust, the risk to Trust shareholders of personal liability is
remote.
The Declaration of Trust further provides that obligations of the Trust are
not binding upon the Trustees individually but only upon the property of the
Trust. Accordingly, the Trustees will not be liable for errors of judgment or
mistakes of fact or law, but nothing in the Declaration of Trust protects a
Trustee against any liability to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of his office.
ANTI-TAKEOVER PROVISIONS
The Trust presently has certain anti-takeover provisions in its Declaration
of Trust which could have the effect of limiting the ability of other entities
or persons to acquire control of the Trust, to cause it to engage in certain
transactions or to modify its structure. A Trustee may be removed from office by
a written instrument signed by at least two-thirds of the remaining trustees or
by a vote of the holders of at least 66% of the Shares. In addition, the
affirmative vote or consent of the holders of 66% of the Shares of the Trust (a
greater vote than that required by the 1940 Act and greater than the required
vote applicable
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to business corporations under state law) is required to authorize the
conversion of the Trust from a closed-end to an open-end investment company, or
generally to authorize any of the following transactions:
(i) merger or consolidation of the Trust with or into any other
corporation, association, trust or other organization;
(ii) issuance of any securities of the Trust to any person or entity for
cash;
(iii) sale, lease or exchange of all or any substantial part of the
assets of the Trust, to any entity or person (except assets having an
aggregate fair market value of less than $1,000,000, aggregating similar
transactions over a twelve-month period); or
(iv) sale, lease or exchange to the Trust, in exchange for securities of
the Trust, of any assets of any entity or person (except assets having an
aggregate fair market value of less than $1,000,000, aggregating similar
transactions over a twelve-month period)
if such corporation, person or entity is directly, or indirectly through
affiliates, the beneficial owner of 5% or more of the outstanding shares of the
Trust. However, such 66% vote or consent will not be required with respect to
the foregoing transactions where the Board of Trustees under certain conditions
approves the transaction, in which case, with respect to (i) and (iii) above, a
majority shareholder vote or consent will be required, and, with respect to (ii)
and (iv) above, a shareholder vote or consent would be required. Furthermore,
any amendment to the provisions in the Declaration of Trust requiring a 66%
shareholder vote or consent for the foregoing transactions similarly requires a
66% shareholder vote or consent.
The foregoing provisions will make more difficult a change in the Trust's
management, or consummation of the foregoing transactions without the Trustee's
approval, and would, in the event a secondary market were to develop in the
Shares, have the effect of depriving shareholders of an opportunity to sell
their shares at a premium over prevailing market prices by discouraging a third
party from seeking to obtain control of the Trust in a tender offer or similar
transaction. However, the Board of Trustees has considered these anti-takeover
provisions and believes that they are in the shareholders' best interests and
benefit shareholders by providing the advantage of potentially requiring persons
seeking control of the Trust to negotiate with its management regarding the
price to be paid and facilitating the continuity of the Trust's management.
Reference should be made to the Declaration of Trust on file with the SEC for
the full text of these provisions. See "Further Information."
SHARE REPURCHASES AND TENDERS
- --------------------------------------------------------------------------------
The Board of Trustees of the Trust currently intends, each quarter, to
consider authorizing the Trust to make tender offers for all or a portion of its
then outstanding Shares at the then current net asset value of the Shares.
Although such tender offers, if undertaken and completed, will provide some
liquidity for holders of the Shares, there can be no assurance that such tender
offers will in fact be undertaken, completed or, if completed, that they will
provide sufficient liquidity for all holders of Shares who may desire to sell
such Shares. As such, investment in the Shares should be considered illiquid.
Although the Board of Trustees believes that tender offers for the Shares
generally would increase the liquidity of the Shares, the acquisition of Shares
by the Trust will decrease the total assets of the Trust, and therefore, have
the effect of increasing the Trust's expense ratio. Because of the nature of the
Trust's
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investment objective and policies and the Trust's portfolio, the Investment
Adviser anticipates potential difficulty in disposing of portfolio securities in
order to consummate tender offers for the Shares. As a result, the Trust may be
required to borrow money in order to finance repurchases and tenders. The
Trust's Declaration of Trust authorizes the Trust to borrow money for such
purposes.
Even if a tender offer has been made, the Trustees' announced policy, which
may be changed by the Trustees, is that the Trust cannot accept tenders if (1)
such transactions, if consummated, would (a) impair the Trust's status as a
regulated investment company under the Code (which would make the Trust a
taxable entity, causing the Trust's taxable income to be taxed at the Trust
level) or (b) result in a failure to comply with applicable asset coverage
requirements or (2) there is, in the judgment of the Trustees, any (a) material
legal action or proceeding instituted or threatened challenging such
transactions or otherwise materially adversely affecting the Trust, (b)
suspension of or limitation on prices for trading securities generally on the
New York Stock Exchange, (c) declaration of a banking moratorium by federal or
state authorities or any suspension of payment by banks in the United States or
New York State, (d) limitation affecting the Trust or the issuers of its
portfolio securities imposed by federal or state authorities on the extension of
credit by lending institutions, (e) commencement of war, armed hostilities or
other international or national calamity directly or indirectly involving the
United States or (f) other event or condition which would have a material
adverse effect on the Trust or the holders of its Shares if Shares were
repurchased. The Trustees may modify these conditions in light of experience.
Any tender offer made by the Trust for its Shares will be at a price equal
to the net asset value of the Shares determined at the close of business on the
day the offer ends. During the pendency of any tender offer by the Trust, the
Trust will establish procedures which will be specified in the tender offer
documents to enable holders of Shares to ascertain readily such net asset value.
Each offer will be made and holders of Shares notified in accordance with the
requirements of the 1934 Act and the 1940 Act, either by publication or mailing
or both. Each offering document will contain such information as is prescribed
by such laws and the rules and regulations promulgated thereunder. If any tender
offer, after consideration and approval by the Trustees, is undertaken by the
Trust, the terms of such tender offer will set forth the maximum number of
Shares (if less than all) that the Trust is willing to purchase pursuant to the
tender offer. The Trust will purchase, subject to such maximum number of Shares
tendered in accordance with the terms of the offer, all Shares tendered unless
it determines to accept none of them. In the event that a number of Shares in
excess of such maximum number of outstanding Shares are tendered in accordance
with the Trust's tender offer, the Trust intends to purchase, on a pro rata
basis, an amount of tendered Shares equal to such maximum number of the
outstanding Shares or, alternatively, to extend the offering period and increase
the number of Shares that the Trust is offering to purchase. The Trust will pay
all costs and expenses associated with the making of any tender offer.
During the fiscal year October 1, 1995 through September 30, 1996, the Trust
completed four tender offers. The first tender offer commenced on November 13,
1995 and resulted in the tender of 1,129,316 Shares. The second tender offer
commenced on February 21, 1996 and resulted in the tender of 1,331,375 Shares.
The third tender offer commenced on May 15, 1996 and resulted in the tender of
1,486,625 Shares. The fourth tender offer commenced on August 14, 1996 and
resulted in the tender of 1,723,469 shares.
If the Trust must liquidate portfolio holdings in order to purchase Shares
tendered, the Trust may realize gains and losses. Such gains may be realized on
securities held for less than three months. Because of the limitation of 30% on
the portion of the Trust's annual gross income that may be derived
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from the sale or disposition of securities held less than three months (in order
to retain the Trust's tax status as a regulated investment company under the
Code), such gains would reduce the ability of the Trust to sell other portfolio
holdings held for less than three months that the Trust may wish to sell in the
ordinary course of its portfolio management, which may adversely affect the
Trust's yield.
EARLY WITHDRAWAL CHARGE
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, except as noted below. The early
withdrawal charge will be imposed on a number of Shares accepted for tender the
value of which exceeds the aggregate value at the time the tender is accepted of
(a) all Shares in the account purchased more than four years prior to such
acceptance, (b) all Shares in the account acquired through reinvestment of
dividends and distributions, and (c) the increase, if any, of value of all other
Shares in the account (namely those purchased within the four years preceding
the acceptance) over the purchase price of such Shares. Accordingly, the early
withdrawal charge is not imposed on Shares acquired through reinvestment of
dividends and distributions or on any increases in the net asset value of Shares
above the initial purchase price. The early withdrawal charge will be paid to
the Investment Adviser. In determining whether an early withdrawal charge is
payable, it is assumed that the acceptance of a repurchase offer would be made
from the earliest purchase of Shares. Any early withdrawal charge which is
required to be imposed will be made in accordance with the following schedule.
<TABLE>
<CAPTION>
YEAR OF REPURCHASE EARLY WITHDRAWAL
AFTER PURCHASE CHARGE
- ----------------------------------------- -----------------
<S> <C>
First.................................... 3.0%
Second................................... 2.5%
Third.................................... 2.0%
Fourth................................... 1.0%
Fifth and following...................... 0.0%
</TABLE>
The following example will illustrate the operation of the early withdrawal
charge. Assume that an investor purchases $1,000 of the Trust's Shares for cash
and that 21 months later the value of the account has grown through the
reinvestment of dividends and capital appreciation to $1,200. The investor then
may submit for repurchase pursuant to a tender offer up to $200 of Shares
without incurring an early withdrawal charge. If the investor should submit for
repurchase pursuant to a tender offer $500 of Shares, an early withdrawal charge
would be imposed on $300 of the Shares submitted. The charge would be imposed at
the rate of 2.5% because it is in the second year after the purchase was made,
and the charge would be $7.50. For the fiscal years ended September 30, 1994,
1995 and 1996, InterCapital informed the Trust that it received approximately
$541,000, $219,000 and $728,000, respectively, in withdrawal fees.
PURCHASE OF SHARES
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The Trust continuously offers Shares through Dean Witter Distributors Inc.,
which is acting as the distributor of the Shares, through certain
broker-dealers, including Dean Witter Reynolds Inc. ("DWR"), which have entered
into selected dealer agreements with the Distributor ("Selected
Broker-Dealers").
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The Trust or the Distributor may suspend the continuous offering of the Shares
to the general public at any time in response to conditions in the securities
markets or otherwise and may thereafter resume such offering from time to time.
Dean Witter Distributors Inc. serves as distributor of the Trust's shares
pursuant to a Distribution Agreement initially approved by the Trustees on
October 30, 1992. The Distribution Agreement had an initial term ending April
30, 1994, and provides under its terms that it will continue from year to year
thereafter if approved by the Board. At their meeting held on April 17, 1996,
the Trustees, including all of the Independent Trustees, approved the
continuation of the Distribution Agreement until April 30, 1997.
None of the Trust, the Distributor or the Investment Adviser intends to make
a secondary market in the Shares. Accordingly, there is not expected to be any
secondary trading market in the Shares, and an investment in the Shares should
be considered illiquid.
The minimum investment in the Trust is $1,000. Subsequent purchases of $100
or more may be made by sending a check, payable to Prime Income Trust, directly
to Dean Witter Trust Company, an affiliate of the Distributor (the "Transfer
Agent") at P.O. Box 1040, Jersey City, New Jersey 07303 or by contacting an
account executive of DWR or of a Selected Broker-Dealer. Certificates for Shares
purchased will not be issued unless a request is made by the shareholder in
writing to the Transfer Agent.
Shares of the Trust are sold through Dean Witter Distributors Inc. or a
Selected Broker-Dealer on a normal three business day settlement basis; that is,
payment generally is due on or before the third business day (settlement date)
after the order is placed with the Distributor. Shares of the Trust purchased
through the Distributor or a Selected Broker-Dealer are entitled to dividends
beginning on the next business day following settlement date. Since the
Distributor or a Selected Broker-Dealer forwards investors' funds on settlement
date, they may benefit from the temporary use of the funds where payment is made
prior thereto.
The Shares are offered by the Trust at the then current net asset value per
share next computed after the Distributor receives an order to purchase from an
investor's dealer or directly from the investor. See "Determination of Net Asset
Value." The Investment Adviser compensates the Distributor at a rate of 2.75% of
the purchase price of Shares purchased from the Trust. The Distributor may
reallow to dealers 2.5% of the purchase price of Shares of the Trust purchased
by such dealers. If such Shares remain outstanding after one year from the date
of their initial purchase, the Investment Adviser currently intends to
compensate the Distributor at an annual rate equal to 0.10% of the net asset
value of the Shares sold and remaining outstanding. Such 0.10% fee will begin
accruing after one year from the date of the initial purchase of the Shares. The
compensation to the Distributor described above is paid by the Investment
Adviser from its own assets, which may include profits from the advisory fee
payable under the Advisory Agreement, as well as borrowed funds. An early
withdrawal charge payable to the Investment Adviser of up to 3.0% of the
original purchase price of the Shares will be imposed on most Shares held for
four years or less that are accepted for repurchase pursuant to a tender offer
by the Trust. See "Share Repurchases and Tenders." The compensation paid to the
Distributor, including compensation paid in connection with the purchase of
Shares from the Trust, the annual payments referred to above and the early
withdrawal charge, if any, described above, will not in the aggregate exceed the
applicable limit (currently 7.25%) as determined from time to time by the
National Association of Securities Dealers, Inc.
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YIELD INFORMATION
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The Trust may, from time to time, publish its yield. The yield on Trust
Shares normally will fluctuate. Therefore, the yield for any given past period
is not an indication or representation by the Trust of future yields or rates of
return on its Shares. The Trust's yield is affected by changes in prevailing
interest rates, average portfolio maturity and operating expenses. Current yield
information may not provide a basis for comparison with bank deposits or other
investments which pay a fixed yield over a stated period of time.
The yield of the Trust is computed by dividing the Trust's net investment
income over a 30-day period by an average value (using the average number of
Shares entitled to receive dividends and the net asset value per Share at the
end of the period), all in accordance with the standardized yield formula
prescribed by the SEC for open-end investment companies. Such amount is
compounded for six months and then annualized for a twelve-month period to
derive the Trust's yield. For the 30-day period ended September 30, 1996, the
Trust's yield, calculated pursuant to this formula, was 7.04%.
On occasion, the Trust may compare its yield to (i) the Prime Rate, quoted
daily in THE WALL STREET JOURNAL as the base rate on corporate loans at large
U.S. money center commercial banks, (ii) one or more averages compiled by
DONOGHUE'S MONEY FUND REPORT, a widely recognized independent publication that
monitors the performance of money market mutual funds, (iii) the average yield
reported by the BANK RATE MONITOR NATIONAL INDEX for money market deposit
accounts offered by the 100 leading banks and thrift institutions in the ten
largest standard metropolitan statistical areas, (iv) yield data published by
Lipper Analytical Services, Inc., or (v) the yield on an investment in 90-day
Treasury bills on a rolling basis, assuming quarterly compounding. In addition,
the Trust may compare the Prime Rate, the DONOGHUE'S averages and the other
yield data described above to each other. As with yield quotations, yield
comparisons should not be considered representative of the Trust's yield or
relative performance for any future period.
CUSTODIAN, DIVIDEND DISBURSING AND TRANSFER AGENT
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The Bank of New York, 90 Washington Street, New York, New York 10286, is the
Trust's custodian and has custody of all securities and cash of the Trust. The
custodian, among other things, attends to the collection of principal and income
and payment for collection of proceeds of securities bought and sold by the
Trust. Any of the Trust's cash balances with the Custodian in excess of $100,000
are unprotected by federal deposit insurance. Such balances may, at times, be
substantial.
Dean Witter Trust Company, Harborside Financial Center, Plaza Two, Jersey
City, New Jersey 07311, an affiliate of Dean Witter InterCapital Inc., the
Trust's Investment Adviser, Dean Witter Services Company Inc., the Trust's
Administrator and Dean Witter Distributors Inc., the Trust's Distributor, is the
dividend disbursing and transfer agent of the Trust. Dean Witter Trust Company
charges the Trust an annual per shareholder account fee.
REPORTS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
The Trust will send to shareholders semi-annual reports showing the Trust's
portfolio and other information. An annual report, containing financial
statements audited by independent accountants, together with their report
thereon, will be sent to shareholders each year.
48
<PAGE>
LEGAL COUNSEL
- --------------------------------------------------------------------------------
Sheldon Curtis, Esq., who is an officer and the General Counsel of the
Investment Adviser, is an officer and the General Counsel of the Trust.
EXPERTS
- --------------------------------------------------------------------------------
The September 30, 1996 financial statements of the Trust, included herein,
have been so included in reliance upon the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
CODE OF ETHICS
Directors, officers and employees of InterCapital, Dean Witter Services
Company Inc. and the Distributor are subject to a strict Code of Ethics adopted
by those companies. The Code of Ethics is intended to ensure that the interests
of shareholders and other clients are placed ahead of any personal interest,
that no undue personal benefit is obtained from a person's employment activities
and that actual and potential conflicts of interest are avoided. To achieve
these goals and comply with regulatory requirements, the Code of Ethics
requires, among other things, that personal securities transactions by employees
of the companies be subject to an advance clearance process to monitor that no
Dean Witter Fund is engaged at the same time in a purchase or sale of the same
security. The Code of Ethics bans the purchase of securities in an initial
public offering, and also prohibits engaging in futures and options transactions
and profiting on short-term trading (that is, a purchase within sixty days of a
sale or a sales within sixty days of a purchase) of a security. In addition,
investment personnel may not purchase or sell a security for their personal
account within thirty days before or after any transaction in any Dean Witter
Fund managed by them. Any violations of the Code of Ethics are subject to
sanctions, including reprimand, demotion or suspension or termination of
employment. The Code of Ethics comports with regulatory requirements and the
recommendations in the 1994 report by the Investment Company Institute Advisory
Group on Personal Investing.
SHAREHOLDER INQUIRIES
All inquiries regarding the Trust should be directed to the Trust at the
telephone number or address set forth on the front cover of this Prospectus.
This Prospectus does not contain all of the information set forth in the
Registration Statement that the Trust has filed with the SEC. The complete
Registration Statement may be obtained from the SEC upon payment of the fee
prescribed by the Rules and Regulations of the SEC.
49
<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, 1996, 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 six
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 at September 30, 1996 by
correspondence with the custodian and, with respect to senior collateralized
loans, 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 $874,153,297 (93 percent of net assets), which values have been
estimated by the Trustees in the absence of readily ascertainable market values.
We have reviewed the procedures used by the Trustees in arriving at its
estimates of 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, those estimated
values 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 11, 1996
50
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN INTEREST MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SENIOR COLLATERALIZED TERM LOANS (a) (93.0%)
ADVERTISING (3.3%)
$ 7,250 Eller Media Co.......................... 8.69% 12/21/03 $ 7,249,637
5,844 Outdoor Systems, Inc.................... 9.03 12/31/02 5,844,101
5,844 Outdoor Systems, Inc.................... 9.03 12/31/03 5,844,101
12,000 Treasure Chest Advertising Co., Inc..... 7.94 12/31/02 12,000,000
---------------
30,937,839
---------------
AEROSPACE (1.3%)
561 Gulf Stream Aerospace Corp.............. 7.63 03/31/97 560,565
2,900 Gulf Stream Aerospace Corp.............. 8.69 03/31/98 2,899,043
5,608 Howmet Corp............................. 8.50 11/20/02 5,608,102
3,105 Howmet Corp............................. 8.75 05/20/03 3,104,820
---------------
12,172,530
---------------
AIR FREIGHT (1.1%)
5,000 Continental Micronesia, Inc.
(Participation: Bankers Trust Co.)
(b)..................................... 7.25 07/31/01 4,998,550
5,000 Continental Micronesia, Inc............. 7.25 07/31/01 4,998,550
---------------
9,997,100
---------------
APPAREL (1.9%)
866 Anvil Knitwear, Inc..................... 7.94 02/03/01 866,718
8,936 Anvil Knitwear, Inc..................... 8.94 to 10.25 02/02/02 8,934,967
4,525 Hosiery Corporation of America, Inc..... 8.75 to 9.06 07/31/01 4,525,043
277 London Fog Industries, Inc.*............ 0.00 05/31/02 263,580
2,823 London Fog Industries, Inc.............. 9.25 + 05/31/02 2,681,831
581 London Fog Industries, Inc. (c)......... 12.50 05/31/02 551,691
---------------
17,823,830
---------------
AUTO PARTS (1.8%)
9,444 Hayes Wheels International, Inc......... 8.47 to 8.60 07/31/03 9,444,603
7,555 Hayes Wheels International, Inc......... 8.97 to 9.10 07/31/04 7,555,580
---------------
17,000,183
---------------
BEVERAGES - SOFT DRINKS (1.1%)
3,960 Select Beverages, Inc................... 8.75 to 9.06 06/30/01 3,959,557
5,940 Select Beverages, Inc................... 9.00 to 9.19 06/30/02 5,939,403
---------------
9,898,960
---------------
BREWERS (1.6%)
15,000 The Stroh Brewery Co.................... 8.56 06/30/01 15,000,000
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
51
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN INTEREST MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
BROADCAST MEDIA (4.1%)
$ 3,500 Benedek Broadcasting Corp............... 8.50% 05/01/01 $ 3,500,070
3,500 Benedek Broadcasting Corp............... 9.00 11/01/02 3,500,070
4,971 Chancellor Broadcasting Co.............. 8.25 09/01/03 4,971,528
10,000 Citicasters, Inc........................ 8.19 09/18/04 9,999,900
9,587 River City Broadcasting, L.P............ 8.63 12/31/99 9,587,239
6,522 Silver King Communications, Inc......... 8.44 07/31/02 6,521,457
---------------
38,080,264
---------------
BUILDING MATERIALS (1.3%)
12,479 National Gypsum Co...................... 7.84 to 8.00 09/30/03 12,478,470
---------------
BUSINESS SERVICES (1.7%)
8,000 Experian Information Solutions, Inc..... 8.63 09/18/03 7,999,600
8,000 Experian Information Solutions, Inc..... 9.13 09/18/04 7,999,520
---------------
15,999,120
---------------
CABLE TELEVISION EQUIPMENT (1.1%)
10,000 Marcus Cable Operating Co. L.P.......... 8.22 to 8.44 04/30/04 10,000,347
---------------
CABLE/CELLULAR (5.9%)
10,000 Charter Communications Entertainment I,
L.P..................................... 8.25 12/31/04 10,000,100
25,000 Nextel Communications, Inc.............. 10.25 06/30/03 25,000,000
20,000 Western Wireless Corp................... 8.31 03/31/05 19,999,800
---------------
54,999,900
---------------
COAL (0.7%)
7,000 Alliance Coal Corp...................... 8.88 12/31/02 6,999,650
---------------
CONSUMER PRODUCTS (1.7%)
6,411 Chattem, Inc............................ 8.23 to 10.50 10/29/03 6,412,501
10,000 Revlon Consumer Products Corp........... 8.00 to 8.19 03/31/99 9,998,854
---------------
16,411,355
---------------
CONTAINERS (1.8%)
16,794 Silgan Corporations..................... 8.53 to 8.75 03/15/02 16,791,581
---------------
CONVENIENCE STORES (1.0%)
9,456 Cumberland Farms, Inc. (Participation:
Merrill Lynch & Co., Inc.) (b).......... 8.75 12/31/98 9,455,898
---------------
DRUG STORES (1.2%)
7,500 Duane Reade, Inc........................ 9.50 12/31/99 7,498,950
3,549 M & H Drugs, Inc........................ 9.63 12/31/96 3,548,835
---------------
11,047,785
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
52
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN INTEREST MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
ELECTRONICS (1.1%)
$ 6,000 Details, Inc............................ 8.50% 01/31/02 $ 5,997,300
3,975 Vernitron Corp.......................... 9.38 to 10.50 04/25/02 3,975,119
---------------
9,972,419
---------------
ENTERTAINMENT & LEISURE TIME (4.4%)
10,726 AMF Group, Inc.......................... 8.44 03/31/03 10,724,163
4,228 AMF Group, Inc.......................... 8.69 03/31/04 4,227,372
14,438 Orion Pictures Corp..................... 8.06 to 8.13 06/30/01 14,437,261
11,707 Six Flags Theme Parks, Inc.............. 8.44 06/23/03 11,706,800
---------------
41,095,596
---------------
EQUIPMENT (1.1%)
9,880 Primeco, Inc............................ 8.56 to 8.63 12/31/00 9,878,558
---------------
FOOD PROCESSING (3.2%)
10,973 American Italian Pasta Co............... 9.31 to 9.50 02/27/04 10,967,607
8,839 Keebler Holding Corp.................... 8.38 to 9.19 07/31/03 8,834,682
9,876 Keebler Holding Corp.................... 8.63 to 9.19 07/31/04 9,873,811
---------------
29,676,100
---------------
FOOD SERVICES (3.7%)
6,743 Rykoff-Sexton, Inc...................... 8.63 10/31/02 6,743,041
3,236 Rykoff-Sexton, Inc...................... 8.88 04/30/03 3,236,357
5,880 SC International Services, Inc. &
Caterair International Corp............. 8.50 to 8.63 09/15/01 5,879,651
7,333 SC International Services, Inc. &
Caterair International Corp............. 8.50 to 8.63 09/15/02 7,332,675
1,613 SC International Services, Inc. &
Caterair International Corp............. 8.75 to 8.88 09/15/03 1,612,535
6,652 Volume Services, Inc.................... 8.75 12/31/02 6,651,602
3,326 Volume Services, Inc.................... 9.25 12/31/03 3,325,734
---------------
34,781,595
---------------
FOODS & BEVERAGES (1.7%)
3,125 Restaurants Unlimited, Inc.............. 9.00 06/03/00 3,125,000
7,912 Van de Kamp's, Inc...................... 8.88 to 10.25 04/30/03 7,916,231
4,951 Van de Kamp's, Inc...................... 9.13 to 10.50 09/30/03 4,953,819
---------------
15,995,050
---------------
FUNERAL SERVICES (1.1%)
5,000 Prime Succession, Inc................... 8.49 to 8.68 08/01/03 4,998,455
5,000 Prime Succession, Inc. (Participation:
Goldman Sachs & Co.) (b)................ 8.49 to 8.68 08/01/03 4,999,800
---------------
9,998,255
---------------
GAS-TRUCK STOP (0.4%)
3,682 Petro PSC Properties, L.P............... 8.80 05/24/01 3,680,668
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
53
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN INTEREST MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
HEALTHCARE (2.1%)
$ 7,260 Community Health Systems, Inc........... 8.63% 12/31/03 $ 7,260,564
7,260 Community Health Systems, Inc........... 9.13 12/31/04 7,260,492
5,479 Community Health Systems, Inc........... 9.38 12/31/05 5,479,562
---------------
20,000,618
---------------
HOUSEHOLD FURNISHINGS & APPLIANCES (2.0%)
9,875 Graco Children's Products, Inc.......... 10.25 06/30/03 9,875,000
10,000 Lifestyle Furnishings International,
Ltd..................................... 8.50 08/05/04 10,000,100
---------------
19,875,100
---------------
INDUSTRIALS (0.8%)
7,714 UCAR International, Inc................. 7.63 12/31/02 7,714,826
---------------
MANUFACTURING (5.0%)
3,103 C.S. Brooks Canada, Inc................. 8.69 06/30/02 3,103,603
6,897 C.S. Brooks Canada, Inc................. 8.94 06/30/04 6,896,828
9,925 Desa International, Inc................. 7.94 to 8.13 08/31/01 9,925,106
9,980 Desa International, Inc................. 8.44 to 9.50 02/28/03 9,980,274
5,282 InterMetro Industries Corp.............. 8.50 to 8.56 06/30/03 5,282,417
4,108 InterMetro Industries Corp.............. 9.00 to 9.06 06/30/04 4,108,467
8,000 Panavision, Inc......................... 8.69 to 8.94 03/31/04 8,001,104
---------------
47,297,799
---------------
MANUFACTURING - DIVERSIFIED (0.6%)
5,200 Health O'Meter, Inc..................... 8.25 08/15/01 5,199,376
---------------
MEDIA GROUP (1.5%)
13,961 ADVO, Inc............................... 8.57 03/31/04 13,960,692
---------------
MEDICAL PRODUCTS & SUPPLIES (2.6%)
4,909 Dade International, Inc................. 8.75 12/31/02 4,908,845
4,909 Dade International, Inc................. 9.13 12/31/03 4,907,962
5,182 Dade International, Inc................. 9.38 12/31/04 5,180,523
2,727 Medical Specialties Group, Inc.......... 7.42 06/30/01 2,727,273
7,273 Medical Specialties Group, Inc.......... 8.17 06/30/04 7,272,655
---------------
24,997,258
---------------
METALS & MINING (1.0%)
9,000 U.S. Silica Corp........................ 8.88 12/31/03 9,000,270
---------------
MISCELLANEOUS (4.5%)
29,760 Borg-Warner Security Corp............... 8.75 12/31/98 29,758,849
12,865 Pinnacle Brands, Inc.................... 8.79 05/29/02 12,861,357
---------------
42,620,206
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
54
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN INTEREST MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
OFFICE EQUIPMENT (0.7%)
$ 6,892 Knoll, Inc.............................. 8.48 to 8.50% 08/31/03 $ 6,891,616
---------------
OIL (0.8%)
7,500 Calciner Industries, Inc................ 8.82 09/30/04 7,498,200
---------------
PAPER PRODUCTS (0.4%)
2,994 Mail-Well Corp.......................... 8.44 07/31/03 2,994,324
1,078 Supermex, Inc........................... 8.44 07/31/03 1,077,823
---------------
4,072,147
---------------
PUBLISHING - BUSINESS (1.6%)
15,000 Advanstar Communications, Inc........... 8.63 12/31/03 15,000,450
---------------
RAILROAD EQUIPMENT (1.0%)
9,750 Johnstown America Industries, Inc....... 8.50 to 9.00 03/31/03 9,752,277
---------------
RECORD & TAPE (0.3%)
4,876 Camelot Music, Inc...................... 9.75 02/28/01 3,022,500
---------------
RETAIL - DEPARTMENT STORES (3.7%)
14,689 Caldor Corp. (Revolver)................. 6.19 to 8.25 12/31/98 14,686,755
14,863 Kmart Corp.............................. 8.00 06/06/99 14,862,945
5,420 Kmart Corp. (Revolver).................. 7.94 to 9.75 06/06/99 5,420,044
---------------
34,969,744
---------------
RETAIL - SPECIALTY (2.5%)
13,400 AnnTaylor, Inc.......................... 8.13 07/29/98 13,400,804
10,000 Kirkland's, Inc......................... 9.31 to 11.00 06/30/02 10,000,598
---------------
23,401,402
---------------
SPECIALTY PACKAGING (1.1%)
5,940 Calmar, Inc............................. 8.63 to 10.25 09/15/03 5,939,705
4,455 Calmar, Inc............................. 8.88 to 10.50 03/15/04 4,454,778
---------------
10,394,483
---------------
SPORTING GOODS (2.1%)
4,278 E & S Holdings Corp..................... 10.00 09/30/04 4,277,778
4,278 E & S Holdings Corp..................... 10.50 09/30/05 4,277,778
2,444 E & S Holdings Corp..................... 11.00 03/30/06 2,444,444
1,503 Worldwide Sports & Recreation, Inc...... 8.50 to 8.56 04/26/00 1,502,392
7,318 Worldwide Sports & Recreation, Inc...... 9.06 04/26/01 7,316,717
---------------
19,819,109
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
55
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN INTEREST MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SUPERMARKETS (3.6%)
$ 7,716 Food 4 Less Supermarkets, Inc........... 8.50% 06/15/01 $ 7,716,232
2,594 Food 4 Less Supermarkets, Inc........... 9.75 02/15/04 2,594,634
3,227 Food 4 Less Supermarkets, Inc.
(Revolver).............................. 8.19 to 8.31 06/15/01 3,227,916
4,677 Smith's Food & Drug Centers, Inc........ 8.69 11/30/03 4,677,255
4,677 Smith's Food & Drug Centers, Inc........ 9.19 11/30/04 4,677,255
4,677 Smith's Food & Drug Centers, Inc........ 9.44 08/31/05 4,677,255
3,778 Star Markets Company, Inc............... 8.50 12/31/01 3,777,216
2,830 Star Markets Company, Inc............... 9.00 12/31/02 2,829,924
---------------
34,177,687
---------------
TEXTILES (1.1%)
5,000 Blackstone Capital Company II, L.L.C.... 9.00 01/13/97 5,000,100
5,000 Wasserstein/C&A Holdings, L.L.C......... 9.13 01/13/97 4,999,900
---------------
10,000,000
---------------
TOYS (1.5%)
7,241 Ritvik Toys, Inc........................ 8.94 02/08/03 7,240,943
7,241 Ritvik Toys, Inc........................ 9.44 02/08/04 7,240,943
---------------
14,481,886
---------------
WHOLESALE DISTRIBUTOR (1.6%)
14,912 American Marketing Industries, Inc...... 8.94 to 9.13 11/29/02 14,912,142
---------------
WIRE & CABLE (1.6%)
9,939 International Wire Group, Inc........... 8.54 09/30/02 9,938,798
4,981 International Wire Group, Inc........... 8.97 to 9.41 09/30/03 4,981,658
---------------
14,920,456
---------------
TOTAL SENIOR COLLATERALIZED TERM LOANS
(IDENTIFIED COST $873,583,456)....................................... 874,153,297
---------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------------------------------------
<C> <S> <C>
PREFERRED STOCK (0.1%)
APPAREL
1,722K London Fog Industries, Inc. 17.50% due 2/28/05 (Series A-1) (Restricted)
(c)
(IDENTIFIED COST $2,175,563)............................................ 1,222,422
---------------
COMMON STOCKS (0.0%)
APPAREL (0.0%)
1,291 London Fog Industries, Inc. (Restricted)................................ --
---------------
FOOD SERVICES (0.0%)
4,209 Flagstar Companies (Restricted)......................................... 8,681
---------------
TOTAL COMMON STOCKS
(IDENTIFIED COST $60,507)............................................... 8,681
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
56
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1996, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENTS (6.1%)
COMMERCIAL PAPER (d) (4.4%)
INSURANCE
$ 41,000 AIG Funding, Inc.**
(Amortized Cost $40,988,042)............ 5.25% 10/03/96 $ 40,988,042
---------------
REPURCHASE AGREEMENT (1.7%)
15,879 The Bank of New York (dated 09/30/96;
proceeds $15,881,039; collateralized by
$15,862,607 U.S. Treasury Note 5.625%
due 10/31/97 valued at $16,196,411)
(Identified Cost $15,878,834)........... 5.00 10/01/96 15,878,834
---------------
TOTAL SHORT-TERM INVESTMENTS
(IDENTIFIED COST $56,866,876)........................................ 56,866,876
---------------
TOTAL INVESTMENTS
(IDENTIFIED COST $932,686,402) (E)........... 99.2 932,251,276
CASH AND OTHER ASSETS IN EXCESS OF
LIABILITIES.................................. 0.8 7,219,269
----- ------------
NET ASSETS................................... 100.0% $939,470,545
----- ------------
----- ------------
<FN>
- ---------------------
K In thousands.
* Non-income producing security.
** All or a portion of these securities are segregated in connection with
unfunded loan commitments.
+ 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
September 30, 1996.
(b) Participation: participation interests were acquired through the financial
institutions indicated parenthetically.
(c) Payment-in-kind security.
(d) Security was purchased on a discount basis. The interest rate shown has
been adjusted to reflect a money market equivalent yield.
(e) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation was $2,769,458 and the
aggregate gross unrealized depreciation was $3,204,584, resulting in net
unrealized depreciation of $435,126.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
57
<PAGE>
PRIME INCOME TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1996
<TABLE>
<S> <C>
ASSETS:
Investments, at value
(identified cost $932,686,402)............................ $932,251,276
Cash........................................................ 3,709,177
Receivable for:
Interest................................................ 6,710,184
Shares of beneficial interest sold...................... 3,913,682
Prepaid expenses and other assets........................... 446,455
------------
TOTAL ASSETS........................................... 947,030,774
------------
LIABILITIES:
Payable for:
Dividends to shareholders............................... 832,133
Investment advisory fee................................. 689,001
Administration fee...................................... 196,420
Deferred loan fees.......................................... 5,635,444
Accrued expenses and other payables......................... 207,231
Commitments and contingencies (Note 7)...................... --
------------
TOTAL LIABILITIES...................................... 7,560,229
------------
NET ASSETS:
Paid-in-capital............................................. 944,540,145
Net unrealized depreciation................................. (435,126)
Accumulated undistributed net investment income............. 238,827
Accumulated net realized loss............................... (4,873,301)
------------
NET ASSETS............................................. $939,470,545
------------
------------
NET ASSET VALUE PER SHARE,
94,535,310 SHARES OUTSTANDING (UNLIMITED SHARES AUTHORIZED
OF $.01 PAR VALUE)........................................
$9.94
------------
------------
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INCOME
Interest.................................................... $62,118,753
Net facility, amendment and other fees...................... 3,749,154
Other income................................................ 223,914
-----------
TOTAL INCOME........................................... 66,091,821
-----------
EXPENSES
Investment advisory fee..................................... 6,524,700
Administration fee.......................................... 1,845,500
Professional fees........................................... 609,473
Transfer agent fees and expenses............................ 447,960
Registration fees........................................... 423,120
Shareholder reports and notices............................. 291,308
Custodian fees.............................................. 90,605
Trustees' fees and expenses................................. 22,462
Other....................................................... 499,224
-----------
TOTAL EXPENSES......................................... 10,754,352
-----------
NET INVESTMENT INCOME.................................. 55,337,469
-----------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss........................................... (1,507,802)
Net change in unrealized appreciation/ depreciation......... (2,222,920)
-----------
NET LOSS............................................... (3,730,722)
-----------
NET INCREASE................................................ $51,606,747
-----------
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
58
<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, 1996 SEPTEMBER 30, 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income....................................... $ 55,337,469 $ 31,803,245
Net realized loss........................................... (1,507,802) (2,551,571)
Net change in unrealized appreciation/depreciation.......... (2,222,920) 2,716,998
------------------ ------------------
NET INCREASE........................................... 51,606,747 31,968,672
------------------ ------------------
DIVIDENDS AND DISTRIBUTIONS FROM:
Net investment income....................................... (55,512,316) (31,409,897)
Net realized gain........................................... -- (957,304)
------------------ ------------------
TOTAL.................................................. (55,512,316) (32,367,201)
------------------ ------------------
Net increase from transactions in shares of beneficial
interest.................................................. 422,015,153 216,725,076
------------------ ------------------
TOTAL INCREASE......................................... 418,109,584 216,326,547
NET ASSETS:
Beginning of period......................................... 521,360,961 305,034,414
------------------ ------------------
END OF PERIOD
(INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF
$238,827 AND $413,674, RESPECTIVELY).................... $939,470,545 $521,360,961
------------------ ------------------
------------------ ------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
59
<PAGE>
PRIME INCOME TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
<TABLE>
<S> <C>
INCREASE (DECREASE) IN CASH:
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net investment income................................................................. $ 55,337,469
Adjustments to reconcile net investment income to net cash from operating activities:
Increase in receivables and other assets related to operations........................ (2,269,978)
Increase in payables related to operations............................................ 342,841
Net loan fees received................................................................ 5,812,854
Amortization of loan fees............................................................. (3,749,154)
Accretion of discounts................................................................ (1,045,950)
---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES........................................ 54,428,082
---------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Purchases of investments.............................................................. (853,386,468)
Principal repayments/sales of investments............................................. 466,386,119
Net sales/maturities of short-term investments........................................ (35,840,134)
---------------
NET CASH USED FOR INVESTING ACTIVITIES........................................... (422,840,483)
---------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Shares of beneficial interest sold.................................................... 452,558,801
Shares tendered....................................................................... (56,517,971)
Dividends from net investment income (net of reinvested dividends of $26,959,275)..... (27,941,451)
---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES........................................ 368,099,379
---------------
NET DECREASE IN CASH.................................................................. (313,022)
CASH AT BEGINNING OF YEAR............................................................. 4,022,199
---------------
CASH BALANCE AT END OF YEAR........................................................... $ 3,709,177
---------------
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
60
<PAGE>
PRIME INCOME TRUST PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996
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's investment objective is to provide a high level of current
income consistent with the preservation of capital. 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 preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates. 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 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. The
fair values determined in accordance with these procedures may differ
significantly from the market values that would have been used had a ready
market for the Senior Loans existed; (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
61
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996, CONTINUED
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 and accrues the commitment 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, 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
62
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996, CONTINUED
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 the Investment Adviser 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 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, 1996 aggregated
$852,805,805 and $465,950,751, 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
63
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996, CONTINUED
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 to the shareholder in connection with shares held for four years or less
which are accepted by the Trust for repurchase pursuant to tender offers. For
the year ended September 30, 1996, the Investment Adviser has informed the Trust
that it received approximately $728,000 in early withdrawal charges.
Dean Witter Trust Company, an affiliate of the Investment Adviser and
Administrator, is the Trust's transfer agent. At September 30, 1996, the Trust
had transfer agent fees and expenses payable of approximately $45,000.
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, 1996
included in Trustees' fees and expenses in the Statement of Operations amounted
to $3,907. At September 30, 1996, the Trust had an accrued pension liability of
$45,562 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...................................................... 45,304,780 451,573,849
Shares issued to shareholders for reinvestment of dividends...... 2,706,326 26,959,275
Shares tendered (four quarterly tender offers)................... (5,673,770) (56,517,971)
---------------- ----------------
Balance, September 30, 1996...................................... 94,535,310 $ 944,540,145
---------------- ----------------
---------------- ----------------
</TABLE>
On October 25, 1996, the Trustees approved a tender offer to purchase up to 4
million shares of beneficial interest to commence on November 20, 1996.
6. FEDERAL INCOME TAX STATUS
At September 30, 1996, the Trust had a net capital loss carryover of
approximately $4,140,000 of which $1,384,000 will be available through September
30, 2003 and $2,756,000 will be available through September 30, 2004 to offset
future capital gains to the extent provided by regulations.
64
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996, CONTINUED
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 $557,000 during fiscal 1996.
As of September 30, 1996, the Trust had temporary book/tax differences primarily
attributable to post-October losses and market discount on revolver loans.
7. COMMITMENTS AND CONTINGENCIES
As of September 30, 1996, the Trust had unfunded loan commitments pursuant to
the following loan agreements:
<TABLE>
<CAPTION>
UNFUNDED
BORROWER COMMITMENT
- ----------------------------------------------------------------- ----------------
<S> <C>
Caldor Corp...................................................... $ 6,320,287
Kmart Corp....................................................... 19,580,000
Food 4 Less Supermarkets, Inc.................................... 12,911,563
----------------
$ 38,811,850
----------------
----------------
</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
and brokerage industry. At September 30, 1996, such Participations had a fair
value of $19,454,248.
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.
65
<PAGE>
PRIME INCOME TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE PERIOD
NOVEMBER 30,
FOR THE YEAR ENDED SEPTEMBER 30 1989* THROUGH
---------------------------------------------------------------- SEPTEMBER 30,
1996 1995 1994 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <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 $ 10.00
--------- --------- --------- --------- --------- --------- ------
Net investment income.............. 0.74 0.82 0.62 0.55 0.62 0.84 0.74
Net realized and unrealized gain
(loss)............................ (0.04) 0.01 0.09 (0.08) (0.01) -- (0.01)
--------- --------- --------- --------- --------- --------- ------
Total from investment operations... 0.70 0.83 0.71 0.47 0.61 0.84 0.73
--------- --------- --------- --------- --------- --------- ------
Less dividends and distributions
from:
Net investment income........... (0.75) (0.81) (0.62) (0.55) (0.62) (0.84) (0.73)
Net realized gain............... -- (0.03) -- -- -- -- --
--------- --------- --------- --------- --------- --------- ------
Total dividends and
distributions..................... (0.75) (0.84) (0.62) (0.55) (0.62) (0.84) (0.73)
--------- --------- --------- --------- --------- --------- ------
Net asset value, end of period..... $ 9.94 $ 9.99 $ 10.00 $ 9.91 $ 9.99 $ 10.00 $ 10.00
--------- --------- --------- --------- --------- --------- ------
--------- --------- --------- --------- --------- --------- ------
TOTAL INVESTMENT RETURN+........... 7.25% 8.57% 7.32% 4.85% 6.23% 8.77% 7.57%(1)
RATIOS TO AVERAGE NET ASSETS:
Expenses........................... 1.46% 1.52% 1.60% 1.45% 1.47% 1.52% 1.48%(2)
Net investment income.............. 7.50% 8.11% 6.14% 5.53% 6.14% 8.23% 8.95%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands......................... $939,471 $521,361 $305,034 $311,479 $413,497 $479,941 $328,189
Portfolio turnover rate............ 72% 102% 147% 92% 46% 42% 35%(1)
<FN>
- ---------------------
* Commencement of operations.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
Dividends and distributions are assumed to be reinvested at the prices
obtained under the Trust's dividend reinvestment plan.
(1) Not annualized.
(2) Annualized.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
66
<PAGE>
APPENDIX A
HEDGING TRANSACTIONS
- --------------------------------------------------------------------------------
INTEREST RATE AND OTHER HEDGING TRANSACTIONS. The Trust may in the future
enter into various interest rate hedging and risk management transactions;
however, it does not presently intend to engage in such transactions and will do
so only after providing 30 days' written notice to shareholders. If in the
future the Trust were to engage in such transactions, it expects to do so
primarily to seek to preserve a return on a particular investment or portion of
its portfolio, and may also enter into such transactions to seek to protect
against decreases in the anticipated rate of return on floating or variable rate
financial instruments the Trust owns or anticipates purchasing at a later date,
or for other risk management strategies such as managing the effective
dollar-weighted average duration of the Trust's portfolio. In addition, with
respect to fixed-income securities in the Trust's portfolio or to the extent an
active secondary market develops in interests in Senior Loans in which the Trust
may invest, the Trust may also engage in hedging transactions to seek to protect
the value of its portfolio against declines in net asset value resulting from
changes in interest rates or other market changes. The Trust will not engage in
any of the transactions for speculative purposes and will use them only as a
means to hedge or manage the risks associated with assets held in, or
anticipated to be purchased for, the Trust's portfolio or obligations incurred
by the Trust. The successful utilization of hedging and risk management
transactions requires skills different from those needed in the selection of the
Trust's portfolio securities. The Investment Adviser currently actively utilizes
various hedging techniques in connection with its management of other fixed
income portfolios and the Trust believes that the Investment Adviser possesses
the skills necessary for the successful utilization of hedging and risk
management transactions. The Trust will incur brokerage and other costs in
connection with its hedging transactions.
The types of hedging transactions in which the Trust is most likely to
engage are interest rate swaps and the purchase or sale of interest rate caps or
floors. The Trust will not sell interest rate caps or floors that it does not
own. Interest rate swaps involve the exchange by the Trust with another party of
their respective obligations to pay or receive interest, e.g., an exchange of an
obligation to make floating rate payments for an obligation to make fixed rate
payments. The purchase of an interest rate cap entitles the Purchaser, to the
extent that a specified index exceeds a predetermined interest rate, to receive
payments of interest at the difference of the index and the predetermined rate
on a notional principal amount (the reference amount with respect to which
payment obligations are determined, although no actual exchange of principal
occurs) from the party selling such interest rate cap. The purchase of an
interest rate floor entitles the purchaser, to the extent that a specified index
falls below a predetermined interest rate, to receive payments of interest at
the difference of the index and the predetermined rate on a notional principal
amount from the party selling such interest rate floor.
In circumstances in which the Investment Adviser anticipates that interest
rates will decline, the Trust might, for example, enter into an interest rate
swap as the floating rate payor. In the case where the Trust purchases such an
interest rate swap, if the floating rate payments fell below the level of the
fixed rate payment set in the swap agreement, the Trust's counterparty would pay
the Trust amounts equal to interest computed at the difference between the fixed
and floating rates over the notional principal amount. Such payments would
offset or partially offset the decrease in the payments the Trust would receive
in respect of floating rate assets being hedged. In the case of purchasing an
interest rate floor, if interest rates declined below the floor rate, the Trust
would receive payments from its counterparty which would wholly or partially
offset the decrease in the payments it would receive in respect of the financial
instruments being hedged.
67
<PAGE>
The successful use of swaps, caps and floors to preserve the rate of return
on a portfolio of financial instruments depends on the Investment Adviser's
ability to predict correctly the direction and degree of movements in interest
rates. Although the Trust believes that use of the hedging and risk management
techniques described above will benefit the Trust, if the Investment Adviser's
judgment about the direction or extent of the movement in interest rates is
incorrect, the Trust's overall performance would be worse than if it had not
entered into any such transactions. For example, if the Trust had purchased an
interest rate swap or an interest rate floor to hedge against its expectation
that interest rates would decline but instead interest rates rose, the Trust
would lose part or all of the benefit of the increased payments it would receive
as a result of the rising interest rates because it would have to pay amounts to
its counterparty under the swap agreement or would have paid the purchase price
of the interest rate floor.
Any interest rate swaps entered into by the Trust would usually be done on a
net basis, i.e., where the two parties make net payments with the Trust
receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as any such hedging transactions entered into by the Trust
will be for good-faith risk management purposes, the Investment Adviser and the
Trust believe such obligations do not constitute senior securities and,
accordingly, will not treat them as being subject to its investment restrictions
on borrowing. The net amount of the excess, if any, of the Trust's obligations
over its entitlements with respect to each interest rate swap will be accrued
and an amount of cash or liquid high quality securities having an aggregate net
asset value at least equal to the accrued excess will be maintained in a
segregated account by the Trust's custodian.
The Trust will not enter into interest rate swaps, caps or floors if on a
net basis the aggregate notional principal amount with respect to such agreement
exceeds the net assets of the Trust. Thus, the Trust may enter into interest
rate swaps, caps or floors with respect to its entire portfolio.
There is no limit on the amount of interest rate swap transactions that may
be entered into by the Trust. These transactions do not involve the delivery of
securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to interest rate swaps is limited to the net amount of
interest payments that the Trust is contractually obligated to make. If the
other party to an interest rate swap defaults, the Trust's risk of loss consists
of the net amount of interest payments that the Trust contractually is entitled
to receive. The creditworthiness of firms with which the Trust enters into
interest rate swaps, caps or floors will be monitored on an ongoing basis by the
Investment Adviser pursuant to procedures adopted and reviewed, on an ongoing
basis, by the Board of Trustees of the Trust. If a default occurs by the other
party to such transaction, the Trust will have contractual remedies pursuant to
the agreements related to the transaction but such remedies may be subject to
bankruptcy and insolvency laws which could affect the Trust's rights as a
creditor. The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. As a result, the swap market
has become relatively liquid. Caps and floors are more recent innovations and
they are less liquid than swaps.
The Trust is also authorized to enter into hedging transactions involving
financial futures and options, but presently believes it is unlikely that it
would enter into such transactions. The Trust may also invest in any new
financial products which may be developed to the extent determined by the Board
of Trustees to be consistent with its investment objective and otherwise in the
best interests of the Trust and its shareholders. The Trust will engage in such
transactions only to the extent permitted under applicable law and after
providing 30 days' written notice to shareholders.
68
<PAGE>
Prime Income Trust
Two World Trade Center
New York, New York 10048
TRUSTEES
- ----------------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John H. Haire
Manuel H. Johnson
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
90 Washington Street
New York, New York 10286
TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT
- ----------------------------------------
Dean Witter Trust Company
Harborside Financial Center
Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
- ----------------------------------------
Price Waterhouse LLP
1177 Avenue of Americas
New York, New York 10036
INVESTMENT ADVISER
- ----------------------------------------
Dean Witter InterCapital Inc.
Two World Trade Center
New York, New York 10048
ADMINISTRATOR
- ----------------------------------------
Dean Witter Services Company Inc.
Two World Trade Center
New York, New York 10048
DISTRIBUTOR
- ----------------------------------------
Dean Witter Distributors Inc.
Two World Trade Center
New York, New York 10048
PRIME
INCOME
TRUST
Prospectus
January 23, 1997
