<PAGE>
PRIME INCOME TRUST TWO WORLD TRADE CENTER, NEW YORK, NEW YORK 10048
LETTER TO THE SHAREHOLDERS SEPTEMBER 30, 1997
DEAR SHAREHOLDER:
We are pleased to present the annual report to shareholders on the operations of
Prime Income Trust for the fiscal year ended September 30, 1997. During this
period, the Trust continued to meet its investment objective of a high level of
current income consistent with the preservation of capital. As designed, the
Trust's distribution rate has continued to track the movement of short-term
interest rates.
PERFORMANCE AND PORTFOLIO
For the twelve-month period ended September 30, 1997, Prime Income Trust
produced a total return of 7.78 percent. The Trust's distribution rate of 7.47
percent on September 30, 1997, shows that it has maintained a 200- to 300-
basis-point yield advantage over money market instruments. The Trust's net asset
value ended the period at $9.95 per share, up from $9.94 a year ago.
As designed, the Trust's automatic reset features have mitigated against much of
the price volatility caused by interest-rate movements. The rates of the Trust's
portfolio loans are reset approximately every 45 days, tracking the movement of
current short-term benchmark rates such as the prime rate of leading U.S. banks
and LIBOR (the London Inter-Bank Offered Rate). The prime rate increased to 8.50
percent, compared to 8.25 percent at year-end 1996, while the three-month LIBOR
increased from 5.50 percent to 5.75 percent during the same period.
Demand for the Trust continues to be strong, as evidenced by its asset growth.
Year-to-date subscriptions exceed $450 million, bringing the Trust's net assets
to $1.34 billion. Tenders for Trust shares have been averaging 1.6 to 2 percent
of net assets, with a year-to-date total of $86.0 million.
Asset diversification has remained good, with the number of credits remaining
stable at approximately 115. These credits are diversified over 65 industry
groups and are actively managed. During the period
<PAGE>
PRIME INCOME TRUST
LETTER TO THE SHAREHOLDERS SEPTEMBER 30, 1997, CONTINUED
under review, we sold several positions above par, realizing gains in the
portfolio. Transaction flow was strong, coming in waves in terms of both
industry sectors and volume. Multiple transactions were brought to market in
radio and television broadcasting, cellular and paging systems and health-care
services. We expect the transaction flow to remain sufficient for our investment
needs.
LOOKING AHEAD
Given the prevailing view that the U.S. economy is growing at an unsustainable
pace, the likelihood of future monetary tightening by the Federal Reserve Board
exists. Over the past several months, Federal Reserve Chairman Alan Greenspan
has issued several warnings to the financial markets, stating that the Fed is
poised to raise short-term interest rates at the first sign of inflation.
However, regardless of the frequency and magnitude of these moves, the Trust's
portfolio is designed to track them, thereby providing the Trust with a yield
that can remain competitive with current short-term interest rates.
We appreciate your support of Prime Income Trust and look forward to continuing
to serve your investment needs.
Very truly yours,
[SIGNATURE]
CHARLES A. FIUMEFREDDO
CHAIRMAN OF THE BOARD
<PAGE>
PRIME INCOME TRUST
RESULTS OF SPECIAL MEETING (UNAUDITED)
On May 20, 1997, a special meeting of the Trust's shareholders was held for the
purpose of voting on three separate matters, the results of which are as
follows:
1) APPROVAL OF A NEW INVESTMENT MANAGEMENT AGREEMENT BETWEEN THE TRUST AND DEAN
WITTER INTERCAPITAL INC, IN CONNECTION WITH THE MERGER OF MORGAN STANLEY
GROUP INC. WITH DEAN WITTER, DISCOVER & CO.:
<TABLE>
<S> <C>
For......................................................................... 59,130,684
Against..................................................................... 1,250,225
Abstain..................................................................... 5,289,980
</TABLE>
2) ELECTION OF TRUSTEES:
<TABLE>
<S> <C>
Michael Bozic
For................. 62,562,623
Withheld............ 3,108,266
Charles A. Fiumefreddo
For................. 62,564,653
Withheld............ 3,106,236
Edwin J. Garn
For................. 62,604,774
Withheld............ 3,066,115
John R. Haire
For................. 62,521,197
Withheld............ 3,149,692
Wayne E. Hedien
For................. 62,630,822
Withheld............ 3,040,067
Dr. Manuel H. Johnson
For................. 62,649,008
Withheld............ 3,021,881
Michael E. Nugent
For................. 62,647,116
Withheld............ 3,023,773
Philip J. Purcell
For................. 62,646,061
Withheld............ 3,024,828
John L. Schroeder
For................. 62,593,551
Withheld............ 3,077,338
</TABLE>
3) RATIFICATION OF THE SELECTION OF PRICE WATERHOUSE LLP AS THE TRUST'S
INDEPENDENT ACCOUNTANTS:
<TABLE>
<S> <C>
For......................................................................... 60,800,678
Against..................................................................... 582,813
Abstain..................................................................... 4,287,398
</TABLE>
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SENIOR COLLATERALIZED TERM LOANS (a) (84.8%)
ADVERTISING (0.9%)
$ 12,000 Outdoor Systems, Inc. ...................................... 7.53% 06/30/04 $ 11,999,880
---------------
AEROSPACE (1.5%)
3,885 Fairchild Holding Corp. .................................... 8.91 07/28/00 3,884,882
5,060 The Aerostructures Corp. ................................... 8.81 09/30/03 5,060,000
1,840 The Aerostructures Corp. ................................... 9.06 09/30/04 1,839,982
9,900 Tri-Star Aerospace Co. ..................................... 9.00 09/30/03 9,900,396
---------------
20,685,260
---------------
AIR FREIGHT (1.8%)
9,000 Atlas Freighter Leasing II, Inc. ........................... 7.97 05/29/04 8,999,820
5,213 Evergreen International Aviation, Inc. ..................... 8.66 05/31/02 5,212,448
9,775 First Security Bank, National Association as Owner
Trustee................................................... 8.72 05/07/03 9,774,120
---------------
23,986,388
---------------
AIRCRAFT & AEROSPACE (0.6%)
8,706 Erickson Air-Crane Co. L.L.C. .............................. 9.16 12/31/04 8,706,163
---------------
APPAREL (0.6%)
4,475 Hosiery Corporation of America, Inc. ....................... 8.94 to 9.13 07/31/01 4,472,328
457 London Fog Industries, Inc. (b) ............................ 0.00 05/31/02 434,531
2,823 London Fog Industries, Inc. ................................ 9.50+ 05/31/02 2,681,831
581 London Fog Industries, Inc.................................. 12.50++ 05/31/02 551,691
---------------
8,140,381
---------------
AUTO PARTS (0.7%)
4,903 Hayes Wheels International, Inc. ........................... 8.47 to 8.50 07/31/04 4,902,987
3,974 Hayes Wheels International, Inc. ........................... 8.72 to 8.75 07/31/05 3,973,751
---------------
8,876,738
---------------
AUTO PARTS - AFTER MARKET (1.6%)
20,895 CSK Auto, Inc. ............................................. 8.69 10/31/03 20,895,000
---------------
BEVERAGES - SOFT DRINKS (0.7%)
3,880 Select Beverages, Inc. ..................................... 8.94 to 9.19 06/30/01 3,880,200
5,820 Select Beverages, Inc. ..................................... 9.19 to 9.38 06/30/02 5,819,419
---------------
9,699,619
---------------
BREWERS (1.7%)
4,922 The Stroh Brewery, Co. ..................................... 8.25 06/30/01 4,922,039
3,200 The Stroh Brewery, Co. (Revolver)........................... 8.19 to 10.00 06/30/01 3,200,052
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1997, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 14,211 The Stroh Brewery, Co. ..................................... 8.69 to 8.75% 06/30/03 $ 14,210,630
---------------
22,332,721
---------------
BROADCAST MEDIA (1.7%)
2,972 Benedek Broadcasting Corp. ................................. 10.13 05/01/01 2,972,361
3,267 Benedek Broadcasting Corp. ................................. 10.63 11/01/02 3,267,568
6,400 Chancellor Media Corp. ..................................... 6.09 06/30/05 6,399,851
1,949 Chancellor Media Corp. (Revolver)........................... 6.09 to 8.50 06/30/05 1,949,483
8,614 River City Broadcasting, L.P. .............................. 10.25 12/31/99 8,614,433
---------------
23,203,696
---------------
BUILDING MATERIALS (1.7%)
10,000 Falcon Buildings Products, Inc. ............................ 8.66 06/30/05 9,999,900
12,437 National Gypsum Co. ........................................ 7.91 to 9.75 09/20/03 12,436,880
---------------
22,436,780
---------------
CABLE/CELLULAR (5.7%)
5,955 Cable Systems International, Inc. .......................... 8.79 12/31/02 5,954,939
10,000 Charter Communications Entertainment I, L.P. ............... 8.44 12/31/04 9,999,400
9,238 Mobilemedia Communication Corp. ............................ 8.22 06/30/02 8,221,808
1,821 Mobilemedia Communication Corp. (Revolver).................. 8.22 to 8.29 06/30/02 1,620,294
2,500 Mobilemedia Communication Corp. ............................ 8.72 06/30/03 2,274,824
5,000 Supercanal Holdings S.A. ................................... 11.69 12/30/97 5,000,100
11,000 Supercanal Holdings S.A. ................................... 10.69 08/09/98 11,000,220
20,000 Western Wireless Corp. ..................................... 8.41 to 8.47 03/31/05 19,999,100
13,200 UIH Latin America, Inc. .................................... 11.69 01/29/98 13,199,868
---------------
77,270,553
---------------
CHEMICALS - SPECIALTY (1.5%)
3,929 Huntsman Specialty Chemicals Corp. ......................... 8.25 03/15/04 3,928,571
3,929 Huntsman Specialty Chemicals Corp. ......................... 8.50 03/15/05 3,928,532
5,000 Huntsman Corp. ............................................. 8.00 06/30/04 5,000,050
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1997, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 6,983 Pioneer America Acquisitions, Corp. ........................ 8.38 to 8.47% 12/05/06 $ 6,981,873
---------------
19,839,026
---------------
COAL (1.0%)
6,631 Alliance Coal Corp. ........................................ 8.97 12/31/02 6,629,995
7,425 Calciner Industries, Inc. .................................. 8.98 09/30/04 7,424,035
---------------
14,054,030
---------------
COMMERCIAL SERVICES (1.1%)
14,925 Omni Services, Inc. ........................................ 9.06 10/30/05 14,917,985
---------------
COMMUNICATIONS -
EQUIPMENT & SOFTWARE (1.8%)
1,353 L - 3 Communications Corp. ................................. 7.94 to 8.13 03/31/03 1,353,087
2,489 L - 3 Communications Corp. ................................. 8.19 to 8.38 03/31/05 2,488,938
1,639 L - 3 Communications Corp. ................................. 8.44 to 8.63 03/31/06 1,639,049
12,391 Latin Communications, Inc. ................................. 8.66 to 8.69 02/28/04 12,390,418
6,000 Telex Communications, Inc. ................................. 8.66 11/06/04 5,999,940
---------------
23,871,432
---------------
COMPUTER SERVICES (1.1%)
15,000 DecisionOne Corp. .......................................... 8.47 08/07/04 14,997,750
---------------
COMPUTERS - SYSTEMS (0.5%)
6,100 Anacomp, Inc. .............................................. 8.66 03/31/01 6,100,000
---------------
CONSUMER PRODUCTS (1.4%)
9,476 Chattem, Inc. .............................................. 9.16 02/14/04 9,476,060
8,978 Playtex Products, Inc. ..................................... 7.19 09/15/03 8,976,872
---------------
18,452,932
---------------
CONVENIENCE STORE (1.0%)
5,000 Caribbean Petroleum, L.P. .................................. 8.97 09/30/05 5,035,650
8,467 Cumberland Farms, Inc. (Participation: Merrill Lynch & Co.,
Inc.) (d)................................................. 9.00 12/31/98 8,467,368
---------------
13,503,018
---------------
DRUG STORES (0.7%)
10,000 Duane Reade, Inc. .......................................... 10.50 06/15/02 10,000,000
---------------
ELECTRONIC & ELECTRICAL
EQUIPMENT (0.7%)
4,417 Amphenol Corp. ............................................. 8.44 to 8.78 05/19/05 4,417,126
4,536 Amphenol Corp. ............................................. 8.94 to 9.28 05/19/06 4,536,379
---------------
8,953,505
---------------
ELECTRONICS (0.6%)
2,258 Axsys Technologies, Inc. ................................... 9.44 04/25/02 2,258,386
6,000 Details, Inc. .............................................. 8.75 01/31/02 5,999,700
---------------
8,258,086
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1997, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
ENERGY TECHNOLOGY & EQUIPMENT (0.8%)
$ 11,249 IRI International Corp. .................................... 8.94% 03/31/02 $ 11,249,118
---------------
ENTERTAINMENT & LEISURE TIME (0.8%)
10,797 Six Flag Theme Parks, Inc. ................................. 8.69 06/23/03 10,797,216
---------------
FINANCE (1.9%)
13,000 Blackstone Capital Company II, L.L.C. ...................... 8.66 05/31/99 12,999,870
13,000 Wasserstein/C & A Holdings, L.L.C. ......................... 8.75 05/31/99 12,999,090
---------------
25,998,960
---------------
FOOD PROCESSING (1.1%)
10,808 American Italian Pasta Co. ................................. 9.44 02/27/04 10,807,716
4,000 Southern Foods Group, L.P. ................................. 8.69 to 8.88 03/04/06 3,999,964
---------------
14,807,680
---------------
FOOD SERVICES (2.6%)
1,667 Ameriserve Food Distribution, Inc. ......................... 8.69 06/30/04 1,666,667
1,667 Ameriserve Food Distribution, Inc. ......................... 8.94 06/30/05 1,666,667
1,667 Ameriserve Food Distribution, Inc. ......................... 9.19 06/30/06 1,666,667
6,689 Rykoff-Sexton, Inc. ........................................ 8.69 10/31/02 6,689,256
3,209 Rykoff-Sexton, Inc. ........................................ 8.94 04/30/03 3,209,492
10,000 SC International Services, Inc. & Caterair International
Corp. .................................................... 9.00 03/01/07 10,000,000
6,617 Volume - Services, Inc. .................................... 9.00 12/31/02 6,616,072
3,308 Volume - Services, Inc. .................................... 9.50 12/31/03 3,307,919
---------------
34,822,740
---------------
FOODS (0.4%)
4,460 Leon's Bakery, Inc. ........................................ 8.44 to 8.50 05/31/01 4,459,841
1,180 Leon's Bakery, Inc. (Participation: Bankers Trust) (d)...... 8.44 to 8.50 05/31/01 1,180,546
---------------
5,640,387
---------------
FOODS & BEVERAGES (1.6%)
9,487 International Home Foods, Inc. ............................. 7.91 to 9.75 09/30/04 9,487,050
7,615 Van de Kamps, Inc. ......................................... 8.72 to 10.50 04/30/03 7,614,278
4,778 Van de Kamps, Inc. ......................................... 8.97 to 10.75 09/30/03 4,777,353
---------------
21,878,681
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1997, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FUNERAL SERVICES (1.5%)
$ 4,944 Prime Succession, Inc. ..................................... 8.75% 08/01/03 $ 4,942,192
4,944 Prime Succession, Inc. (Participation: Goldman Sachs & Co.)
(d)....................................................... 8.75 08/01/03 4,942,192
9,867 Rose Hills Co. ............................................. 8.94 12/01/03 9,865,384
---------------
19,749,768
---------------
GAS - TRUCK STOP (0.5%)
6,667 Petro Stopping Centers, L.P. ............................... 9.03 09/30/03 6,666,667
---------------
HEALTHCARE (2.7%)
7,205 Community Health Systems, Inc. ............................. 9.00 12/31/03 7,205,479
7,205 Community Health Systems, Inc. ............................. 9.50 12/31/04 7,205,263
5,425 Community Health Systems, Inc. ............................. 9.75 12/31/05 5,424,441
5,091 Interim Healthcare, Inc. ................................... 10.00 02/29/04 5,090,909
1,909 Interim Healthcare, Inc. ................................... 10.50 02/28/05 1,909,091
9,500 PrimeCare International, Inc. .............................. 9.09 to 9.25 02/28/02 9,498,860
---------------
36,334,043
---------------
HEALTHCARE - DIVERSIFIED (1.3%)
17,500 Integrated Health Service, Inc. ............................ 7.44 12/31/04 17,500,175
---------------
HEATING & AIR CONDITIONING (1.9%)
12,500 Goodman Manufacturing Co., L.P. & Amana Company, L.P. ...... 7.75 09/30/04 12,500,250
12,500 Goodman Manufacturing Co., L.P. & Amana Company, L.P. ...... 8.00 09/30/05 12,500,250
---------------
25,000,500
---------------
HOTELS/MOTELS (1.4%)
3,125 Capstar Hotel Co. .......................................... 7.47 06/30/04 3,124,844
5,971 Doubletree Corp. ........................................... 7.94 05/15/04 5,970,694
9,981 Interstate Hotels Corp. .................................... 7.94 06/25/04 9,981,681
---------------
19,077,219
---------------
HOUSEHOLD APPLIANCES (1.0%)
12,959 Coinmach Corp. ............................................. 8.44 06/30/04 12,958,080
---------------
INSURANCE BROKERS (0.5%)
7,400 Acordia, Inc. .............................................. 8.47 12/31/04 7,398,742
---------------
MANUFACTURING (2.7%)
5,714 Alliance Gaming Corp. ...................................... 8.47 to 10.25 01/31/05 5,713,508
2,286 Alliance Gaming Corp. ...................................... 8.72 to10.50 07/31/05 2,285,437
4,610 Chatham Technologies, Inc. ................................. 8.50 08/18/03 4,609,576
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1997, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 5,200 Chatham Technologies........................................ 9.00% 08/18/05 $ 5,199,376
8,846 Desa International, Inc. ................................... 8.25 08/31/01 8,846,170
9,508 Desa International, Inc. ................................... 8.75 to 10.25 02/28/03 9,507,898
---------------
36,161,965
---------------
MANUFACTURING - CONSUMER &
INDUSTRIAL PRODUCTS (1.1%)
4,571 C.S. Brooks Canada, Inc. ................................... 9.00 06/30/02 4,570,365
10,156 C.S. Brooks Canada, Inc. ................................... 9.25 06/30/04 10,156,061
---------------
14,726,426
---------------
MANUFACTURING - DIVERSIFIED (2.7%)
8,123 Adience, Inc. and Refraco Holdings, Ltd. ................... 8.69 04/15/05 8,122,500
7,000 Doskocil Manufacturing Co. ................................. 8.41 09/30/04 6,999,930
5,636 Mettler-Toledo, Inc. ....................................... 7.91 12/31/04 5,635,675
10,857 Refraco, Inc. .............................................. 9.44 10/15/05 10,857,143
4,721 Signature Brands, Inc. ..................................... 8.38 08/15/01 4,719,656
---------------
36,334,904
---------------
MANUFACTURING - RENTAL
CAREER APPAREL (0.5%)
6,237 The William Carter Co. ..................................... 8.72 to 8.88 10/30/03 6,235,910
---------------
MEDICAL EQUIPMENT (0.9%)
869 Hanger Orthopedic Group, Inc. .............................. 8.50 12/31/03 869,031
1,003 JE Hanger, Inc. of Georgia.................................. 8.50 12/31/03 1,002,721
2,625 Medical Specialties Group, Inc. ............................ 8.84 to 10.50 06/30/01 2,624,845
7,205 Medical Specialties Group, Inc. ............................ 9.59 to 11.25 06/30/04 7,204,114
---------------
11,700,711
---------------
MEDICAL PRODUCTS & SUPPLIES (2.0%)
2,447 Alaris Medical Systems, Inc. ............................... 8.69 to 8.75 11/01/03 2,446,195
2,447 Alaris Medical Systems, Inc. ............................... 9.19 to 9.25 11/01/04 2,446,170
2,303 Alaris Medical Systems, Inc. ............................... 9.44 to 9.50 05/01/05 2,302,255
2,177 Dade International, Inc. ................................... 7.94 12/31/01 2,177,419
5,893 Dade International, Inc. ................................... 8.19 to 8.56 12/31/02 5,893,286
5,893 Dade International, Inc. ................................... 8.44 to 8.81 12/31/03 5,893,259
5,133 Dade International, Inc. ................................... 8.69 12/31/04 5,132,726
---------------
26,291,310
---------------
MEDICAL SERVICES (1.0%)
10,000 SMT Health Services, Inc. .................................. 8.94 08/31/03 10,000,044
4,000 Transportacion Ferroviaria Mexicana, S.A. de C.V............ 9.75 12/23/02 3,999,960
---------------
14,000,004
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1997, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
METALS & MINING (0.6%)
$ 8,705 U.S. Silica Corp. .......................................... 8.97% 12/31/03 $ 8,704,684
---------------
MISCELLANEOUS (2.2%)
16,000 Mafco Finance Corp. ........................................ 10.16 03/20/99 15,999,680
1,280 Mafco Finance Corp. (Revolver).............................. 10.16 03/20/99 1,279,971
12,594 Pinnacle Brands, Inc. ...................................... 8.97 05/29/02 12,591,735
---------------
29,871,386
---------------
PACKAGING & BOTTLING (0.4%)
4,975 MPC Packaging Corp. ........................................ 8.72 05/30/04 4,974,254
---------------
PAPER (3.0%)
12,405 Alabama Pine Pulp Co., Inc. ................................ 6.85 to 6.98 12/31/02 10,706,099
1,952 Crown Paper Co. ............................................ 8.19 08/22/02 1,951,822
2,468 Crown Paper Co. (Revolver).................................. 8.19 to 10.00 08/22/02 2,467,764
9,899 Crown Paper Co. ............................................ 9.00 to 9.25 08/22/03 9,899,267
7,268 St. Laurent Paper Products Corp. ........................... 9.00 to 9.25 05/31/03 7,267,412
7,732 St. Laurent Paper Products Corp. ........................... 9.25 to 9.50 05/31/04 7,731,147
---------------
40,023,511
---------------
PLASTICS (1.3%)
7,905 Jet Plastica Industries, Inc. .............................. 8.31 12/31/02 7,905,405
9,143 Jet Plastica Industries, Inc. .............................. 8.81 12/31/04 9,143,243
---------------
17,048,648
---------------
PRINTED CIRCUIT BOARDS (0.8%)
6,953 Celestica, Inc. ............................................ 8.75 04/22/03 6,952,777
2,489 Circo Craft Technologies, Inc. ............................. 8.66 06/30/04 2,488,611
1,500 Circo Craft Technologies, Inc. ............................. 9.16 06/30/05 1,499,985
---------------
10,941,373
---------------
PUBLISHING (1.3%)
11,000 Cygnus Publishing, Inc. .................................... 8.50 to 8.59 06/05/05 10,998,515
3,363 Von Hoffman Press, Inc. .................................... 8.47 05/30/04 3,361,962
3,363 Von Hoffman Press, Inc. .................................... 8.72 05/30/05 3,361,962
---------------
17,722,439
---------------
PUBLISHING - BUSINESS (1.1%)
14,375 Advanstar Communications, Inc. ............................. 8.66 12/31/03 14,374,425
---------------
PUBLISHING - NEWSPAPER (1.2%)
5,000 21st Century Newspapers, Inc. .............................. 8.44 09/15/05 5,000,000
11,000 Newsquest Media Group, Ltd. ................................ 8.16 12/31/04 11,000,000
---------------
16,000,000
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1997, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
RECORD & TAPE DISTRIBUTION (0.2%)
$ 4,876 Camelot Music, Inc. (c)..................................... 10.00% 02/28/01 $ 3,022,500
---------------
RESTAURANTS (0.6%)
8,645 Houlihan's Restaurants, Inc. ............................... 9.54 to 11.00 04/15/04 8,644,913
---------------
RETAIL - DEPARTMENT STORES (0.8%)
10,198 The Caldor Corp. (Revolver)................................. 6.69 to 8.75 12/31/98 10,198,312
---------------
SEMICONDUCTORS (0.5%)
7,417 Fairchild Semiconductor Corp. .............................. 8.75 to 9.04 03/11/03 7,416,695
---------------
SPECIALTY PACKAGING (0.8%)
5,880 Calmar, Inc. ............................................... 8.72 to 10.50 09/15/03 5,879,006
4,410 Calmar, Inc. ............................................... 8.97 to 10.75 03/15/04 4,409,208
---------------
10,288,214
---------------
SPORTING GOODS (2.1%)
4,117 E & S Holdings Corp. ....................................... 7.91 09/30/03 4,117,606
645 E & S Holdings Corp. (Revolver)............................. 7.91 to 9.75 09/30/03 644,706
7,000 E & S Holdings Corp. ....................................... 8.41 09/30/04 6,999,973
7,000 E & S Holdings Corp. ....................................... 8.91 09/30/05 6,999,930
4,000 E & S Holdings Corp. ....................................... 9.41 03/30/06 3,999,960
897 Worldwide Sports & Recreation, Inc. ........................ 8.81 04/26/00 897,215
4,903 Worldwide Sports & Recreation, Inc. ........................ 9.25 04/26/01 4,902,921
---------------
28,562,311
---------------
SUPERMARKETS (2.0%)
5,333 Itaperuna Participacoes S.A. ............................... 10.75 06/02/02 5,332,427
1,173 Ralph's Grocery Company..................................... 7.50 02/15/03 1,173,321
616 Ralph's Grocery Company (Revolver).......................... 7.44 to 7.50 02/15/03 615,981
3,973 Ralph's Grocery Company..................................... 8.00 02/15/04 3,972,439
6,903 Ralph's Grocery Company (Participation: Bankers Trust)
(d)....................................................... 8.00 02/15/04 6,902,726
3,766 Star Markets Company, Inc. ................................. 8.82 12/31/01 3,764,622
2,818 Star Markets Company, Inc. ................................. 9.32 12/31/02 2,817,463
2,500 Star Markets Company, Inc. ................................. 9.32 12/31/03 2,499,150
---------------
27,078,129
---------------
TEXTILES (0.5%)
4,605 Joan Fabrics Corp. ......................................... 8.84 06/30/05 4,604,158
2,395 Joan Fabrics Corp. ......................................... 9.34 06/30/06 2,394,114
---------------
6,998,272
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1997, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TOYS (1.1%)
$ 7,223 Ritvik Toys, Inc. .......................................... 9.19% 02/08/03 $ 7,223,045
7,223 Ritvik Toys, Inc. .......................................... 9.69 02/08/04 7,222,973
---------------
14,446,018
---------------
WASTE DISPOSAL (0.4%)
5,940 Allied Waste North America, Inc. ........................... 7.69 to 8.00 12/05/03 5,939,978
---------------
WHOLESALE DISTRIBUTOR (1.4%)
14,724 American Marketing Industries, Inc. ........................ 9.13 to 9.19 11/29/02 14,724,623
3,980 American Marketing Industries, Inc. ........................ 9.19 11/30/03 3,980,000
---------------
18,704,623
---------------
WIRE & CABLE (1.0%)
12,980 International Wire Group, Inc. ............................. 7.72 to 7.82 09/30/03 12,979,328
---------------
TOTAL SENIOR COLLATERIZED TERM LOANS
(IDENTIFIED COST $1,142,983,932)...................................................... 1,140,452,162
---------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES
- ----------
<C> <S> <C>
PREFERRED STOCK (b) (0.1%)
APPAREL
1,722K London Fog Industries, Inc. (Series A-1) (Restricted) ++
(IDENTIFIED COST $2,476,954)......................................................... 1,222,422
---------------
COMMON STOCKS (b) (0.0%)
APPAREL (0.0%)
1,291 London Fog Industries, Inc. (Restricted)............................................... --
---------------
FOOD SERVICES (0.0%)
4,209 Flagstar Companies, Inc. (Restricted).................................................. 1,431
---------------
TOTAL COMMON STOCKS
(IDENTIFIED COST $60,507).............................................................. 1,431
---------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
- ---------- -------------- --------
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENTS (13.8%)
COMMERCIAL PAPER (e) (5.9%)
FINANCE - CONSUMER (3.7%)
$ 50,000 American Express Credit Corp. (f)........................... 5.60% 10/01/97 50,000,000
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 1997, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FINANCE - DIVERSIFIED (2.2%)
$ 30,000 General Electric Capital Corp. ............................. 5.78% 10/03/97 $ 29,990,367
---------------
TOTAL COMMERICAL PAPER
(AMORTIZED COST $79,990,367)........................................................... 79,990,367
---------------
U.S. GOVERNMENT AGENCY (e) (f) (5.2%)
70,000 Federal National Mortgage Assoc. (AMORTIZED COST
$69,989,383).............................................. 5.46 10/02/97 69,989,383
---------------
REPURCHASE AGREEEMENT (2.7%)
35,607 The Bank of New York (dated 09/30/97; proceeds $35,612,669;)
(IDENTIFIED COST $35,607,476) (G)......................... 5.25 10/01/97 35,607,476
---------------
TOTAL SHORT-TERM INVESTMENTS
(IDENTIFIED COST $185,587,226)......................................................... 185,587,226
---------------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(IDENTIFIED COST $1,331,108,619) (H)..................................................... 98.7% 1,327,263,241
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES........................................... 1.3 17,339,981
-------- ---------------
NET ASSETS............................................................................... 100.0% $ 1,344,603,222
-------- ---------------
-------- ---------------
</TABLE>
- ---------------------
K In thousands.
+ Accrues interest at a rate of prime plus 1% with 3% paid in cash and the
remainder to be paid-in-kind; converts to prime plus 1 percent cash payment
on May 31, 2000.
++ Payment-in-kind security.
(a) Floating rate securities. Interest rates shown are those in effect at
September 30, 1997.
(b) Non-income producing securities.
(c) Non-income producing security; issuer in bankruptcy.
(d) Participation interests were acquired through the financial institutions
indicated parenthetically.
(e) Securities were purchased on a discount basis. The interest rates shown
have been adjusted to reflect a money market equivalent yield.
(f) All or a portion of these securities are segregated in connection with
unfunded loan commitments.
(g) Collateralized by $35,012,159 U.S. Treasury Note 6.75% due 05/31/99 valued
at $36,319,625 and $244 U.S. Treasury Bond 11.625% due 11/15/04 valued at
$331.
(h) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $779,103 and the
aggregate gross unrealized depreciation is $4,624,481, resulting in net
unrealized depreciation of $3,845,378.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $1,331,108,619).......................................................... $1,327,263,241
Cash........................................................................................ 12,028,239
Receivable for:
Interest................................................................................ 7,764,950
Shares of beneficial interest sold...................................................... 4,053,596
Investments sold........................................................................ 245,000
Prepaid expenses and other assets........................................................... 434,146
--------------
TOTAL ASSETS........................................................................... 1,351,789,172
--------------
LIABILITIES:
Payable for:
Dividends to shareholders............................................................... 1,225,158
Investment advisory fee................................................................. 1,022,134
Administration fee...................................................................... 294,181
Accrued expenses and other payables......................................................... 269,016
Deferred loan fees.......................................................................... 4,375,461
Commitment and contingencies (Note 7)....................................................... --
--------------
TOTAL LIABILITIES...................................................................... 7,185,950
--------------
NET ASSETS............................................................................. $1,344,603,222
--------------
--------------
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................................................. $1,348,358,142
Net unrealized depreciation................................................................. (3,845,378)
Accumulated undistributed net investment income............................................. 526,876
Accumulated net realized loss............................................................... (436,418)
--------------
NET ASSETS............................................................................. $1,344,603,222
--------------
--------------
NET ASSET VALUE PER SHARE,
135,154,983 SHARES OUTSTANDING (UNLIMITED SHARES AUTHORIZED OF $.01 PAR VALUE)............ $9.95
--------------
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INCOME
Interest...................................................................................... $ 97,732,391
Facility, amendment and other loan fees....................................................... 4,137,689
Other income.................................................................................. 441,233
------------
TOTAL INCOME............................................................................. 102,311,313
------------
EXPENSES
Investment advisory fee....................................................................... 9,981,012
Administration fee............................................................................ 2,862,062
Professional fees............................................................................. 978,890
Facility fees................................................................................. 971,755
Transfer agent fees and expenses.............................................................. 600,085
Shareholder reports and notices............................................................... 269,479
Registration fees............................................................................. 204,234
Custodian fees................................................................................ 76,302
Trustees' fees and expenses................................................................... 15,441
Other......................................................................................... 102,538
------------
TOTAL EXPENSES........................................................................... 16,061,798
------------
NET INVESTMENT INCOME.................................................................... 86,249,515
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain............................................................................. 3,073,930
Net change in unrealized depreciation......................................................... (3,410,252)
------------
NET LOSS................................................................................. (336,322)
------------
NET INCREASE.................................................................................. $ 85,913,193
------------
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income............................. $ 86,249,515 $ 55,337,469
Net realized gain (loss).......................... 3,073,930 (1,507,802)
Net change in unrealized depreciation............. (3,410,252) (2,222,920)
------------------ ------------------
NET INCREASE................................. 85,913,193 51,606,747
Dividends from net investment income.............. (84,598,513) (55,512,316)
Net increase from transactions in shares of
beneficial interest............................. 403,817,997 422,015,153
------------------ ------------------
NET INCREASE................................. 405,132,677 418,109,584
NET ASSETS:
Beginning of period............................... 939,470,545 521,360,961
------------------ ------------------
END OF PERIOD
(INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME
OF $526,876 AND $238,827, RESPECTIVELY)....... $1,344,603,222 $939,470,545
------------------ ------------------
------------------ ------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
<TABLE>
<S> <C>
INCREASE (DECREASE) IN CASH:
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net investment income.............................................................. $ 86,249,515
Adjustments to reconcile net investment income to net cash provided by operating
activities:
Increase in receivables and other assets related to operations..................... (1,042,457)
Increase in payables related to operations......................................... 492,678
Net loan fees received............................................................. 4,280,984
Amortization of loan fees.......................................................... (5,540,967)
Accretion of discounts............................................................. (1,146,844)
------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES..................................... 83,292,909
------------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Purchases of investments........................................................... (1,112,239,537)
Principal repayments/sales of investments.......................................... 846,513,445
Net purchases of short-term investments............................................ (128,720,350)
------------------
NET CASH USED FOR INVESTING ACTIVITIES........................................ (394,446,442)
------------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Shares of beneficial interest sold................................................. 450,036,220
Shares tendered.................................................................... (86,013,853)
Dividends from net investment income (net of reinvested dividends of
$39,655,716)...................................................................... (44,549,772)
------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES..................................... 319,472,595
------------------
NET INCREASE IN CASH............................................................... 8,319,062
CASH BALANCE AT BEGINNING OF YEAR.................................................. 3,709,177
------------------
CASH BALANCE AT END OF YEAR........................................................ $ 12,028,239
------------------
------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997
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) 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; and (4) 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
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997, CONTINUED
sixty days prior to maturity and thereafter at amortized cost based on their
value on the 61st day. Short-term debt securities having a maturity date of
sixty days or less at the time of purchase are valued at amortized cost.
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.
Some of the Trust's Senior Loans are "Revolver Loans." For these loans, the
Trust commits to provide funding up to the face amount of the loan. The amount
drawn down by the borrower may vary during the term of the loan.
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
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997, CONTINUED
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
2. INVESTMENT ADVISORY AGREEMENT
Pursuant to an Investment Advisory Agreement with Dean Witter InterCapital Inc.
(the "Investment Adviser"), the Trust pays an advisory fee, accrued daily and
payable monthly, by applying the following annual rates to the net assets of the
Trust determined as of the close of each business day: 0.90% to the portion of
the daily net assets not exceeding $500 million and 0.85% to the portion of the
daily net assets exceeding $500 million.
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"), an affiliate of the Investment Adviser, 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/principal repayments of portfolio
securities, excluding short-term investments, for the year ended September 30,
1997 aggregated $1,112,239,537 and $846,758,445, 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,
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997, CONTINUED
the Investment Adviser and the Distributor, the Investment Adviser compensates
the Distributor at a rate of 2.75% of the purchase price of shares purchased
from the Trust. The Investment Adviser will compensate the Distributor at an
annual rate of 0.10% of the value of shares sold for any shares that remain
outstanding after one year from the date of their initial purchase. An early
withdrawal charge payable to the Investment Adviser 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, 1997, the Investment Adviser has
informed the Trust that it received approximately $1,296,000 in early withdrawal
charges.
Dean Witter Trust FSB, an affiliate of the Investment Adviser and Administrator,
is the Trust's transfer agent. At September 30, 1997, the Trust had transfer
agent fees and expenses payable of approximately $7,000.
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, 1997
included in Trustees' fees and expenses in the Statement of Operations amounted
to $5,567. At September 30, 1997, the Trust had an accrued pension liability of
$48,094 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, 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
Shares sold................................................. 45,281,310 450,176,134
Shares issued to shareholders for reinvestment of
dividends.................................................. 3,988,872 39,655,716
Shares tendered (four quarterly tender offers).............. (8,650,509) (86,013,853)
------------- ---------------
Balance, September 30, 1997................................. 135,154,983 $ 1,348,358,142
------------- ---------------
------------- ---------------
</TABLE>
On October 23, 1997, the Trustees approved a tender offer to purchase up to 4
million shares of beneficial interest to commence on November 19, 1997.
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997, CONTINUED
6. FEDERAL INCOME TAX STATUS
During the year ended September 30, 1997, the Trust utilized approximately
$3,527,000 of its net capital loss carryover. At September 30, 1997, the Trust
had a net capital loss carryover of approximately $208,000 available through
September 30, 2004 to offset future capital gains to the extent provided by
regulations.
As of September 30, 1997, the Trust had temporary book/tax differences primarily
attributable to dividends payable and permanent book/tax differences
attributable to tax adjustments on revolver loans sold by the Trust. To reflect
reclassifications arising from the permanent differences, accumulated
undistributed net investment income was charged and accumulated net realized
loss was credited $1,362,953.
7. COMMITMENTS AND CONTINGENCIES
As of September 30, 1997, the Trust had unfunded loan commitments pursuant to
the following loan agreements:
<TABLE>
<CAPTION>
UNFUNDED
BORROWER COMMITMENT
- ----------------------------------------------------------------- --------------
<S> <C>
American Italian Pasta Co........................................ $ 6,000,000
Caldor Corp...................................................... 7,131,181
Capstar Hotels Company........................................... 3,125,000
Chancellor Media Corp............................................ 3,650,500
Chatham Technologies............................................. 5,189,917
ComNet Cellular.................................................. 15,000,000
Crown Paper Co................................................... 5,244,074
Dade International, Inc.......................................... 2,693,548
E & S Holdings Corp.............................................. 5,237,647
Fairchild Holding Corp........................................... 4,365,079
Hard Rock Hotel.................................................. 8,000,000
Jet Plastica Industries.......................................... 2,702,703
Leons Bakery, Inc................................................ 2,529,412
Mafco Finance Corp............................................... 2,720,000
Ralph's Grocery Company, Inc..................................... 1,290,667
Stroh Brewery, Inc............................................... 550,000
UIH Latin America................................................ 1,800,000
--------------
$ 77,229,728
--------------
--------------
</TABLE>
Total value of securities segregated for unfunded loan commitments were
$81,989,383.
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
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997, CONTINUED
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, 1997, such
Participations had a fair value of $21,492,832.
The Trust will only invest in Senior Loans where the Investment Adviser believes
that the Borrower can meet debt service requirements in a timely manner and
where the market value of the collateral at the time of investment equals or
exceeds the amount of the Senior Loan. In addition, the Trust will only acquire
Participations if the Selling Participant, and each Intermediate Participant, is
a financial institution which meets certain minimum creditworthiness standards.
<PAGE>
PRIME INCOME TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE
PERIOD
NOVEMBER 30,
FOR THE YEAR ENDED SEPTEMBER 30, 1989* THROUGH
------------------------------------------------------------------------------------ SEPTEMBER 30,
1997 1996 1995 1994 1993 1992 1991 1990
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value,
beginning of period..... $ 9.94 $ 9.99 $ 10.00 $ 9.91 $ 9.99 $ 10.00 $ 10.00 $ 10.00
---------- --------- --------- ---------- --------- --------- ---------- ------
Net investment income.... 0.75 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.............. 0.75 0.70 0.83 0.71 0.47 0.61 0.84 0.73
---------- --------- --------- ---------- --------- --------- ---------- ------
Less dividends and
distributions from:
Net investment
income................ (0.74) (0.75) (0.81) (0.62) (0.55) (0.62) (0.84) (0.73)
Net realized gain..... -- -- (0.03) -- -- -- -- --
---------- --------- --------- ---------- --------- --------- ---------- ------
Total dividends and
distributions........... (0.74) (0.75) (0.84) (0.62) (0.55) (0.62) (0.84) (0.73)
---------- --------- --------- ---------- --------- --------- ---------- ------
Net asset value, end of
period.................. $ 9.95 $ 9.94 $ 9.99 $ 10.00 $ 9.91 $ 9.99 $ 10.00 $ 10.00
---------- --------- --------- ---------- --------- --------- ---------- ------
---------- --------- --------- ---------- --------- --------- ---------- ------
TOTAL INVESTMENT
RETURN+................. 7.78% 7.25% 8.57% 7.32% 4.85% 6.23% 8.77% 7.57%(1)
RATIOS TO AVERAGE NET
ASSETS:
Expenses................. 1.40% 1.46% 1.52% 1.60% 1.45% 1.47% 1.52% 1.48%(2)
Net investment income.... 7.53% 7.50% 8.11% 6.14% 5.53% 6.14% 8.23% 8.95%(2)
SUPPLEMENTAL DATA:
Net assets, end of
period, in thousands.... $1,344,603 $939,471 $521,361 $305,034 $311,479 $413,497 $479,941 $328,189
Portfolio turnover
rate.................... 86% 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
<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, 1997, 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
seven 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, 1997 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 $1,140,452,162 (85 percent of net assets), which values have
been estimated by the Trustees in the absence of readily ascertainable market
values. 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 12, 1997
<PAGE>
TRUSTEES
- --------------------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
- --------------------------------------------
Charles A. Fiumefreddo
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Barry Fink
VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL
Rafael Scolari
VICE PRESIDENT
Thomas F. Caloia
TREASURER
CUSTODIAN
- --------------------------------------------
The Bank of New York
110 Washington Street
New York, New York 10286
TRANSFER AGENT
- --------------------------------------------
Dean Witter Trust FSB
Harborside Financial Center -- Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
- --------------------------------------------
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT ADVISER
- --------------------------------------------
Dean Witter InterCapital Inc.
Two World Trade Center
New York, New York 10048
This report is submitted for the general information of shareholders of the
Trust. For more detailed information about the Trust, its officers and
trustees, fees, expenses and other pertinent information, please see the
prospectus of the Trust.
This report is not authorized for distribution to prospective investors in
the Trust unless preceded or accompanied by an effective prospectus.
PRIME INCOME TRUST
[PHOTO]
ANNUAL REPORT
SEPTEMBER 30, 1997
