<PAGE>
PROSPECTUS
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
-----------
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST (THE "TRUST") (FORMERLY NAMED
PRIME INCOME 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
ADVISOR 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 MORGAN STANLEY
DEAN WITTER ADVISORS INC. (THE "INVESTMENT ADVISOR" OR "MSDW ADVISORS") 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 ADVISOR 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 MORGAN STANLEY 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 ADVISOR 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."
--------------------
MORGAN STANLEY DEAN WITTER ADVISORS INC., AN AFFILIATE OF MORGAN STANLEY
DEAN WITTER DISTRIBUTORS INC., ACTS AS INVESTMENT ADVISOR 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.
--------------------
MORGAN STANLEY DEAN WITTER DISTRIBUTORS INC.
JANUARY 23, 1998
REVISED JULY 28, 1998
<PAGE>
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
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PAGE
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Summary of Trust Expenses............................................... 3
Financial Highlights.................................................... 4
Prospectus Summary...................................................... 5
The Trust and its Advisor............................................... 12
Investment Objective and Policies....................................... 16
Special Risk Factors.................................................. 20
Investment Practices.................................................... 24
Investment Restrictions................................................. 26
Trustees and Officers................................................... 29
Investment Advisory Agreement........................................... 37
Administrator and Administration Agreement.............................. 38
Portfolio Transactions.................................................. 40
Determination of Net Asset Value........................................ 41
Dividends and Distributions............................................. 42
Taxation................................................................ 42
Description of Shares................................................... 45
Share Repurchases and Tenders........................................... 47
Purchase of Shares...................................................... 49
Yield Information....................................................... 50
Custodian, Dividend Disbursing and Transfer Agent....................... 50
Reports to Shareholders................................................. 51
Legal Counsel........................................................... 51
Experts................................................................. 51
Additional Information.................................................. 51
Report of Independent Accountants....................................... 52
Financial Statements--September 30, 1997................................ 53
Appendix A.............................................................. 74
</TABLE>
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2
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SUMMARY OF TRUST EXPENSES
- --------------------------------------------------------------------------------
The expenses and fees set forth in the table are for the fiscal year ended
September 30, 1997.
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SHAREHOLDER TRANSACTION EXPENSES
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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.................................... 0.87%
Interest Payments on Borrowed Funds......................... None
Sum of Other Expenses....................................... 0.53%
Total Annual Expenses....................................... 1.40%
</TABLE>
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EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
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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:................... $44 $64 $77 $168
You would pay the following expenses on
the same investment, assuming no
tender:................................ $14 $44 $77 $168
</TABLE>
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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
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FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following ratios and per share data for a share of beneficial interest
outstanding throughout each period have been audited by PricewaterhouseCoopers
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 52. As noted in the financial statements and in the report of
PricewaterhouseCoopers 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, 1989*
FOR THE YEAR ENDED SEPTEMBER 30, THROUGH
------------------------------------------------------------------------------ SEPTEMBER
1997 1996 1995 1994 1993 1992 1991 30, 1990
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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)
</TABLE>
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* 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.
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THE TRUST................. Morgan Stanley Dean Witter 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 Advisor."
PURCHASE OF SHARES........ The Trust is offering continuously its shares of beneficial
interest, par value $.01 (the "Shares"), through Morgan Stanley
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 Advisor 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
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5
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portfolio are expected to range between three and four years and
the Senior Notes are expected to have average maturities of
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 determination of 90
days or less.
The Investment Advisor 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 Advisor 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 Advisor 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 Advisor 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.
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6
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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 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 ADVISOR........ Morgan Stanley Dean Witter Advisors Inc. ("MSDW Advisors" or the
"Investment Advisor"), whose address is Two World Trade Center,
New York, New York 10048, is the Trust's Investment Advisor. The
Investment Advisor is a wholly-owned subsidiary of Morgan
Stanley Dean Witter & Co., a preeminent global financial
services firm that maintains leading market positions in each of
its three primary businesses--securities, asset management and
credit services. The Investment Advisor, which was incorporated
in July, 1992 under the name Dean Witter Intercapital Inc.,
changed its name to Morgan Stanley Dean Witter Advisors Inc. on
June 22, 1998.
The Investment Advisor and its wholly-owned subsidiary, Morgan
Stanley Dean Witter Services Company Inc., serve in various
investment management, advisory, management, and administrative
capacities to 101 investment companies, 28 of which are listed
on the New York Stock Exchange, with combined assets of
approximately $110.8 billion as of June 30, 1998. The Investment
Advisor also manages and advises portfolios of pension plans,
other institutions and individuals which aggregated
approximately $4.4 billion at such date. The Trust's Trustees
approved a new investment advisory agreement with MSDW Advisors,
on February 21, 1997 in connection with the merger of Dean
Witter, Discover & Co. with Morgan Stanley Group Inc. (the
"Merger"). At a Special Meeting of Shareholders held on May 20,
1997, the shareholders approved the new investment advisory
agreement with MSDW Advisors. The investment advisory agreement
took effect on May 31, 1997 upon the consumation of the Merger.
See "The Trust and its Advisor" and "Investment Advisory
Agreement."
ADVISORY FEE.............. The investment advisory fees paid to MSDW Advisors pursuant to
the 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, at an annual rate of 0.85% of average daily
net assets on assets of the Trust exceeding $500 million up to
$1.5 billion and at an annual rate of 0.825%
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7
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of the average daily net assets of the Trust exceeding $1.5
billion. The advisory fee is higher than that paid by most other
investment companies. See "Investment Advisory Agreement."
ADMINISTRATOR............. Morgan Stanley Dean Witter Services Company Inc. (the
"Administrator" or "MSDW Services"), a wholly-owned subsidiary
of MSDW Advisors, the Investment Advisor of the Trust, is the
Administrator of the Trust. 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 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 Advisor 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 Advisor," "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
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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.
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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 of the Trust and its
ability to meet its investment objective is more dependent on
the analytical abilities of the Investment Advisor 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 Advisor 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."
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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
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>
11
<PAGE>
THE TRUST AND ITS ADVISOR
- --------------------------------------------------------------------------------
Morgan Stanley Dean Witter Prime Income Trust (the "Trust") (formerly named
Prime Income 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 an investment
advisory agreement with MSDW Advisors. On June 22, 1998, the Trustees of the
Trust adopted an Amendment to the Trust's Declaration of Trust changing its name
to "Morgan Stanley Dean Witter Prime Income Trust." 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 Advisor 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 February 21, 1997 the Trust's Trustees approved a new investment advisory
agreement (the "Advisory Agreement") with MSDW Advisors in connection with the
merger of Dean Witter, Discover & Co. with Morgan Stanley Group Inc. (the
"Merger"). The Trust's shareholders voted to approve the Advisory Agreement with
MSDW Advisors at a Special Meeting of Shareholders held on May 20, 1997. The
Advisory Agreement took effect on May 31, 1997 upon the consumation of the
Merger. MSDW Advisors is a wholly-owned subsidiary of Morgan Stanley Dean Witter
& Co. ("MSDW"). The Advisory Agreement is substantially identical to a prior
investment advisory agreement which was initially approved by the Trust's
Trustees on December 23, 1992 and by the Trust's shareholders on February 25,
1993, entered into with MSDW Advisors 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
Advisor.
MSDW Advisors and its wholly-owned subsidiary, Morgan Stanley Dean Witter
Services Company Inc., serve in various investment management, advisory,
management and administrative capacities to
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<PAGE>
101 investment companies, 28 of which are listed on the New York Stock Exchange,
with combined assets of approximately $110.8 billion at June 30, 1998. MSDW
Advisors also manages and advises portfolios of pension plans, other
institutions and individuals which aggregated approximately $4.4 billion at such
date.
The Trust is managed within MSDW Advisors' Taxable Fixed-Income Group, which
manages 23 funds and fund portfolios with approximately $13.8 billion in assets
as of June 30, 1998. Rajesh K. Gupta, Senior Vice President of MSDW Advisors,
Sheila A. Finnerty, Vice President of MSDW Advisors, and Peter Gewirtz, an
Assistant Vice President of MSDW Advisors, have been the primary portfolio
managers primarily responsible for the management of the Trust's portfolio since
February, 1998.
MSDW Advisors is the investment manager or investment advisor of the
following investment companies, which are collectively referred to as the
"Morgan Stanley Dean Witter Funds":
<TABLE>
<CAPTION>
OPEN-END FUNDS
<C> <S>
1 Active Assets California Tax-Free Trust
2 Active Assets Government Securities Trust
3 Active Assets Money Trust
4 Active Assets Tax-Free Trust
5 Morgan Stanley Dean Witter American Value Fund
6 Morgan Stanley Dean Witter Balanced Growth Fund
7 Morgan Stanley Dean Witter Balanced Income Fund
8 Morgan Stanley Dean Witter California Tax-Free Daily Income Trust
9 Morgan Stanley Dean Witter California Tax-Free Income Fund
10 Morgan Stanley Dean Witter Capital Appreciation Fund
11 Morgan Stanley Dean Witter Capital Growth Securities
12 Morgan Stanley Dean Witter Competitive Edge Fund, "BEST IDEAS" Portfolio
13 Morgan Stanley Dean Witter Convertible Securities Trust
14 Morgan Stanley Dean Witter Developing Growth Securities Trust
15 Morgan Stanley Dean Witter Diversified Income Trust
16 Morgan Stanley Dean Witter Dividend Growth Securities Inc.
17 Morgan Stanley Dean Witter Equity Fund
18 Morgan Stanley Dean Witter European Growth Fund Inc.
19 Morgan Stanley Dean Witter Federal Securities Trust
20 Morgan Stanley Dean Witter Financial Services Trust
21 Morgan Stanley Dean Witter Fund of Funds
22 Dean Witter Global Asset Allocation Fund
23 Morgan Stanley Dean Witter Global Dividend Growth Securities
24 Morgan Stanley Dean Witter Global Short-Term Income Fund Inc.
25 Morgan Stanley Dean Witter Global Utilities Fund
26 Morgan Stanley Dean Witter Growth Fund
27 Morgan Stanley Dean Witter Hawaii Municipal Trust
28 Morgan Stanley Dean Witter Health Sciences Trust
29 Morgan Stanley Dean Witter High Yield Securities Inc.
</TABLE>
13
<PAGE>
<TABLE>
<C> <S>
30 Morgan Stanley Dean Witter Income Builder Fund
31 Morgan Stanley Dean Witter Information Fund
32 Morgan Stanley Dean Witter Intermediate Income Securities
33 Morgan Stanley Dean Witter Intermediate Term U.S. Treasury Trust
34 Morgan Stanley Dean Witter International SmallCap Fund
35 Morgan Stanley Dean Witter Japan Fund
36 Morgan Stanley Dean Witter Limited Term Municipal Trust
37 Morgan Stanley Dean Witter Liquid Asset Fund Inc.
38 Morgan Stanley Dean Witter Market Leader Trust
39 Morgan Stanley Dean Witter Mid-Cap Dividend Growth Securities
40 Morgan Stanley Dean Witter Mid-Cap Growth Fund
41 Morgan Stanley Dean Witter Multi-State Municipal Series Trust
42 Morgan Stanley Dean Witter Natural Resource Development Securities Inc.
43 Morgan Stanley Dean Witter New York Municipal Money Market Trust
44 Morgan Stanley Dean Witter New York Tax-Free Income Fund
45 Morgan Stanley Dean Witter Pacific Growth Fund Inc.
46 Morgan Stanley Dean Witter Precious Metals and Minerals Trust
47 Dean Witter Retirement Series
48 Morgan Stanley Dean Witter Select Dimensions Investment Series
49 Morgan Stanley Dean Witter Select Municipal Reinvestment Fund
50 Morgan Stanley Dean Witter Short-Term Bond Fund
51 Morgan Stanley Dean Witter Short-Term U.S. Treasury Trust
52 Morgan Stanley Dean Witter Special Value Fund
53 Morgan Stanley Dean Witter S&P 500 Index Fund
54 Morgan Stanley Dean Witter Strategist Fund
55 Morgan Stanley Dean Witter Tax-Exempt Securities Trust
56 Morgan Stanley Dean Witter Tax-Free Daily Income Trust
57 Morgan Stanley Dean Witter U.S. Government Money Market Trust
58 Morgan Stanley Dean Witter U.S. Government Securities Trust
59 Morgan Stanley Dean Witter Utilities Fund
60 Morgan Stanley Dean Witter Value-Added Market Series
61 Morgan Stanley Dean Witter Variable Investment Series
62 Morgan Stanley Dean Witter World Wide Income Trust
<CAPTION>
CLOSED-END FUNDS
<C> <S>
1 InterCapital California Insured Municipal Income Trust
2 InterCapital California Quality Municipal Securities
3 Dean Witter Government Income Trust
4 High Income Advantage Trust
5 High Income Advantage Trust II
6 High Income Advantage Trust III
7 InterCapital Income Securities Inc.
8 InterCapital Insured California Municipal Securities
9 InterCapital Insured Municipal Bond Trust
</TABLE>
14
<PAGE>
<TABLE>
<C> <S>
10 InterCapital Insured Municipal Income Trust
11 InterCapital Insured Municipal Securities
12 InterCapital Insured Municipal Trust
13 Municipal Income Opportunities Trust
14 Municipal Income Opportunities Trust II
15 Municipal Income Opportunities Trust III
16 Municipal Income Trust
17 Municipal Income Trust II
18 Municipal Income Trust III
19 Municipal Premium Income Trust
20 InterCapital New York Quality Municipal Securities
21 Morgan Stanley Dean Witter Prime Income Trust
22 InterCapital Quality Municipal Income Trust
23 InterCapital Quality Municipal Investment Trust
24 InterCapital Quality Municipal Securities
</TABLE>
In addition, Morgan Stanley Dean Witter Services Company Inc. ("MSDW
Services"), a wholly-owned subsidiary of MSDW Advisors, serves as manager for
the following investment companies for which TCW Funds Management, Inc. is the
investment advisor (the "TCW/DW Funds"):
<TABLE>
<CAPTION>
OPEN-END FUNDS
<C> <S>
1 TCW/DW Emerging Markets Opportunities Trust
2 TCW/DW Global Telecom Trust
3 TCW/DW Income and Growth Fund
4 TCW/DW Latin American Growth Fund
5 TCW/DW Mid-Cap Equity Trust
6 TCW/DW North American Government Income Trust
7 TCW/DW Small Cap Growth Fund
8 TCW/DW Total Return Trust
<CAPTION>
CLOSED-END FUNDS
<C> <S>
1 TCW/DW Term Trust 2000
2 TCW/DW Term Trust 2002
3 TCW/DW Term Trust 2003
</TABLE>
MSDW Advisors also serves as: (i) administrator of The BlackRock Strategic
Term Trust Inc., a closed-end investment company; (ii) sub-administrator of
Templeton Global Governments Income Trust, a closed-end investment company; and
(iii) investment advisor of Offshore Dividend Growth Fund and Offshore Money
Market Fund, mutual funds established under the laws of the Cayman Islands and
available only to investors who are participants in International Active Assets
Account program and are neither citizens nor residents of the United States.
15
<PAGE>
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 Advisor 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 Advisor 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 Advisor, suitable Senior Loans are not
available for investment by the Trust or prevailing market or economic
conditions warrant.
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 Advisor expects the
Trust's net asset value to be relatively stable during normal market conditions,
16
<PAGE>
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 Advisor 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 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
Advisor 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
17
<PAGE>
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 Advisor 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 Advisor,
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 Advisor believes that the market
value of the collateral at the time of investment equals or exceeds the amount
of the Senior Loan. The Investment Advisor 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 Advisor 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 Advisor may consider such
ratings in determining whether to invest in a particular Senior Loan, the
Investment Advisor 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 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
18
<PAGE>
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 Advisor 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 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.
19
<PAGE>
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 Advisor 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.
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
20
<PAGE>
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
Advisor 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 Advisor 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 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,
21
<PAGE>
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 Advisor
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 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 Advisor
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
22
<PAGE>
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 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.
23
<PAGE>
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.
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 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 Advisor. 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
24
<PAGE>
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 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 Advisor 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 Advisor 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
25
<PAGE>
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.
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
26
<PAGE>
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
Advisor 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 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
27
<PAGE>
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.
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
28
<PAGE>
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." The Trust's portfolio
turnover rate for the fiscal year ended September 30, 1997 was 86%.
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 MSDW Advisors and with the 86 Dean Witter Funds and the 11 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 (57) ..................................... Chairman and Chief Executive Officer of Levitz Furniture
Trustee Corporation (since November, 1995); Director or Trustee
c/o Levitz Furniture Corporation of the Morgan Stanley Dean Witter Funds; formerly
7887 N. Federal Highway President and Chief Executive Officer of Hills
Boca Raton, Florida Department Stores (May, 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. and Weirton Steel
Corporation.
Charles A. Fiumefreddo* (65) ........................... Chairman, Director or Trustee, President and Chief
Chairman, Executive Officer of the Morgan Stanley Dean Witter
President, Chief Executive Officer and Trustee Funds; Chairman, Chief Executive Officer and Trustee of
Two World Trade Center the TCW/DW Funds; formerly Chairman, Chief Executive
New York, New York Officer and Director of MSDW Advisors, MSDW Distributors
and MSDW Services, Executive Vice President and Director
of Dean Witter Reynolds Inc. ("DWR"), Chairman and
Director of Morgan Stanley Dean Witter Trust FSB ("MSDW
Trust"), and Director and/or officer of various MSDW
subsidiaries (until June 1, 1998).
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH THE TRUST
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Edwin J. Garn (65) ..................................... Director or Trustee of the Morgan Stanley Dean Witter
Trustee Funds; formerly United States Senator (R- Utah)
c/o Huntsman Corporation (1974-1992) and Chairman, Senate Banking Committee
500 Huntsman Way (1980-1986); formerly Mayor of Salt Lake City, Utah
Salt Lake City, Utah (1971-1974); formerly Astronaut, Space Shuttle Discovery
(April 12-19, 1985); Vice Chairman, Huntsman Corporation
(since January, 1993); Director of Franklin Covey (time
management systems) and John Alden Financial Corp.
(health insurance), United Space Alliance (joint venture
between Lockheed Martin and the Boeing Company) and
Nuskin Asia Pacific (multilevel marketing); Member of
the board of various civic and charitable organizations.
John R. Haire (73) ..................................... Chairman of the Audit Committee and Director or Trustee
Trustee of the Morgan Stanley Dean Witter Funds; Chairman of the
Two World Trade Center Audit Committee and Trustee of the TCW/DW Funds;
New York, New York formerly Chairman of the Independent Directors or
Trustees of the Morgan Stanley Dean Witter Funds and the
TCW/DW Funds (until June, 1998); formerly President,
Council for Aid to Education (1978-1989) and Chairman
and Chief Executive Officer of Anchor Corporation, an
Investment Advisor (1964-1978).
Wayne E. Hedien (64) ................................... Retired; Director or Trustee of the Morgan Stanley Dean
Trustee Witter Funds; Director of the PMI Group, Inc. (Private
c/o Gordon Altman Butowsky Weitzen mortgage insurance); Trustee and Vice Chairman of the
Shalov & Wein Field Museum of Natural History; formerly associated
Counsel to the Independent Trustees with the Allstate Companies (1966-1994), most recently
114 West 47th Street as Chairman of the Allstate Corporation (March,
New York, New York 1993-December, 1994) and Chairman and Chief Executive
Officer of its wholly-owned subsidiary, Allstate
Insurance Company (July, 1989-December, 1994); director
of various other business and charitable organizations.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH THE TRUST
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Dr. Manuel H. Johnson (49) ............................. Senior Partner, Johnson Smick International, Inc., a
Trustee consulting firm; Co-Chairman and a founder of the Group
c/o Johnson Smick International, Inc. of Seven Council (G7C), an international economic
1133 Connecticut Avenue, N.W. commission; Director or Trustee of the Morgan Stanley
Washington, D.C. Dean Witter Funds; Trustee of the TCW/DW Funds; Director
of NASDAQ (since June, 1995); Director of Greenwich
Capital Markets, Inc. (broker-dealer) and NVR, Inc.
(home construction); Chairman and Trustee of the
Financial Accounting Foundation (oversight organization
of the Financial Accounting Standards Board); 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 (62) ................................. General Partner, Triumph Capital, L.P., a private
Trustee investment partnership; Director or Trustee of the
c/o Triumph Capital, L.P. Morgan Stanley Dean Witter Funds; Trustee of the TCW/DW
237 Park Avenue Funds; formerly Vice President, Bankers Trust Company
New York, New York and BT Capital Corporation (1984-1988); director of
various business organizations.
Philip J. Purcell* (54) ................................ Chairman of the Board of Directors and Chief Executive
Trustee Officer of MSDW, DWR and Novus Credit Services Inc.;
Two World Trade Center Director of MSDW Distributors; Director or Trustee of
New York, New York the Morgan Stanley Dean Witter Funds; Director and/or
officer of various MSDW subsidiaries.
John L. Schroeder (67) ................................. Retired; Director or Trustee of the Morgan Stanley Dean
Trustee Witter Funds; Trustee of the TCW/DW Funds; Director of
c/o Gordon Altman Butowsky Weitzen Citizens Utilities Company; formerly, Executive Vice
Shalov & Wein President and Chief Investment Officer of the Home
Counsel to the Independent Trustees Insurance Company (August, 1991-September, 1995).
114 West 47th St.
New York, New York
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH THE TRUST
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Barry Fink (43) ........................................ Senior Vice President (since March, 1997), Secretary and
Vice President, Secretary and General Counsel General Counsel (since February, 1997) and Director
Two World Trade Center (since July, 1998) of MSDW Advisors and MSDW Services;
New York, New York Senior Vice President (since March, 1997) and Assistant
Secretary and Assistant General Counsel (since February,
1997) of MSDW Distributors; Assistant Secretary of DWR
(since August, 1996); Vice President, Secretary and
General Counsel of the Dean Witter Funds and the TCW/DW
Funds (since February, 1997); previously First Vice
President (June, 1993-February, 1997), Vice President
(until June, 1993) and Assistant Secretary and Assistant
General Counsel of MSDW Advisors and MSDW Services and
Assistant Secretary of the Morgan Stanley Dean Witter
Funds and the TCW/DW Funds.
Rajesh K. Gupta (38) ................................... Senior Vice President of MSDW Advisors; Vice President
Vice President of various Morgan Stanley Dean Witter Funds.
Two World Trade Center
New York, New York
Sheila A. Finnerty (32) ................................ Vice President of MSDW Advisors (since May, 1998);
Assistant Vice President previously Assistant Vice President (May, 1995-May,
Two World Trade Center 1998) and Senior Research Analyst (May, 1993-May, 1995)
New York, New York with MSDW Advisors and prior thereto an investment
analyst with Presidential Life Insurance Company (April,
1990-May, 1993).
Peter Gewirtz (32) ..................................... Assistant Vice President of MSDW Advisors (since May,
Assistant Vice President 1998); previously Senior Research Analyst with MSDW
Two World Trade Center Advisors (October, 1996-May, 1998) and prior thereto
New York, New York Assistant Vice President of Industrial Bank of Japan
(February, 1994-October, 1996) and an Associate of
Toronto-Dominion Bank (July, 1991-February, 1994).
Thomas F. Caloia (52) .................................. First Vice President and Assistant Treasurer of MSDW
Treasurer Advisors and MSDW Services; Treasurer of the Morgan
Two World Trade Center Stanley Dean Witter 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.
32
<PAGE>
In addition, Mitchell M. Merin, President, Chief Executive Officer and
Director of MSDW Advisors and MSDW Services, Chairman and Director of MSDW
Distributors and MSDW Trust, Executive Vice President of DWR, and Director of
SPS Transaction Services, Inc. and various other MSDW subsidiaries, Robert M.
Scanlan, President, Chief Operating Officer and Director of MSDW Advisors and
MSDW Services, Executive Vice President of MSDW Distributors and MSDW Trust and
Director of MSDW Trust, Robert S. Giambrone, Senior Vice President of MSDW
Advisors, MSDW Services, MSDW Distributors and MSDW Trust and Director of MSDW
Trust, and Joseph J. McAlinden, Executive Vice President and Chief Investment
Officer of MSDW Advisors and Director of MSDW Trust are Vice Presidents of the
Fund, and Marilyn K. Cranney and Carsten Otto, First Vice Presidents and
Assistant General Counsels of MSDW Advisors and MSDW Services, Frank
Bruttomesso, LouAnne D. McInnis and Ruth Rossi, Vice Presidents and Assistant
General Counsels of MSDW Advisors and MSDW Services, and Todd Lebo, a staff
attorney with MSDW Advisors, are Assistant Secretaries of the Fund.
THE BOARD OF TRUSTEES, THE INDEPENDENT TRUSTEES, AND THE COMMITTEES
The Board of Trustees consists of nine (9) trustees. These same individuals
also serve as directors or trustees for all of the Morgan Stanley Dean Witter
Funds, and are referred to in this section as Trustees. As of the date of this
Statement of Additional Information, there are a total of 86 Morgan Stanley Dean
Witter Funds, comprised of 130 portfolios. As of June 30, 1998, the Morgan
Stanley Dean Witter Funds had total net assets of approximately $106 billion and
more than six million shareholders.
Seven Trustees (77% of the total number) have no affiliation or business
connection with MSDW Advisors or any of its affiliated persons and do not own
any stock or other securities issued by MSDW Advisors' parent company, MSDW.
These are the "disinterested" or "independent" Trustees. Four of the seven
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 Morgan Stanley 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, 1997,
the Audit Committee, the Derivatives Committee and the Independent Trustees held
a combined total of seventeen meetings.
The Independent Trustees are 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 Morgan Stanley Dean Witter Funds have such a plan.
33
<PAGE>
The Audit Committee is charged with recommending to the full Board the
engagement or discharge of the Trust'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; and reviewing the adequacy of the Trust's system of internal
controls.
Finally, the Board of each Fund has formed a Derivatives Committee to
approve parameters for and monitor the activities of the Trust with respect to
derivative investments, if any, made by the Trust.
ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT TRUSTEES FOR ALL MORGAN
STANLEY DEAN WITTER FUNDS
The Independent Trustees and the Funds' management believe that having the
same Independent Trustees for each of the Morgan Stanley 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 of the caliber, experience and
business acumen of the individuals who serve as Independent Trustees of the
Morgan Stanley Dean Witter Funds.
COMPENSATION OF INDEPENDENT TRUSTEES
The Trust pays each Independent Trustee an annual fee of $800 plus a per
meeting fee of $50 for meetings of the Board of Trustees, the Independent
Trustees or Committees of the Board of Trustees attended by the Trustee (the
Fund pays the Chairman of the Audit Committee an additional annual fee of $750).
If a Board meeting and a meeting of the Independent Trustees or a Committee
meeting, or a meeting of the Independent Trustees and/or more than one Committee
meeting, take place on a single day, the Trustees are paid a single meeting fee
by the Trust. 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 for their services as Trustee. Mr. Haire
currently serves as Chairman of the Audit Committee. Prior to June 1, 1998, Mr.
Haire also served as Chairman of the Independent Trustees, for which services
the Trust paid him an additional annual fee of $1,200.
34
<PAGE>
The following table illustrates the compensation paid to the Trust's
Independent Trustees by the Fund for the fiscal year ended September 30, 1997.
TRUST COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME OF INDEPENDENT TRUSTEE FROM THE FUND
- -------------------------------------------------------------- ---------------
<S> <C>
Michael Bozic................................................. $1,650
Edwin J. Garn................................................. 1,850
John R. Haire................................................. 3,800
Wayne E. Hedien............................................... 250
Dr. Manuel H. Johnson......................................... 1,800
Michael E. Nugent............................................. 1,850
John L. Schroeder............................................. 1,850
</TABLE>
The following table illustrates the compensation paid to the Trust's
Independent Trustees for the calendar year ended December 31, 1997 for services
to the 84 Morgan Stanley 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, 1997. Mr. Haire serves as Chairman of the Audit Committee of each
Morgan Stanley Dean Witter Fund and each TCW/DW Fund and, prior to June 1, 1998,
also served as Chairman of the Independent Directors or Trustees of those Funds.
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 Morgan Stanley Dean Witter Money Market Funds. Mr. Hedien's term as
Director or Trustee of each Morgan Stanley Dean Witter Fund commenced on
September 1, 1997.
CASH COMPENSATION FROM MORGAN STANLEY DEAN WITTER FUNDS AND TCW/DW FUNDS
<TABLE>
<CAPTION>
FOR SERVICE AS TOTAL CASH
CHAIRMAN OF FOR SERVICE COMPENSATION
FOR SERVICE INDEPENDENT AS FOR
AS DIRECTOR OR DIRECTORS/TRUSTEES CHAIRMAN OF SERVICES TO
TRUSTEE AND AND AUDIT INDEPENDENT 84
COMMITTEE FOR SERVICE AS COMMITTEES OF TRUSTEES MORGAN
MEMBER OF 84 TRUSTEE AND 84 AND AUDIT STANLEY
MORGAN STANLEY COMMITTEE MORGAN STANLEY COMMITTEES OF DEAN WITTER
NAME OF DEAN WITTER MEMBER OF 14 DEAN WITTER 14 FUNDS AND 14
INDEPENDENT TRUSTEE FUNDS TCW/DW FUNDS FUNDS TCW/DW FUNDS TCW/DW FUNDS
- --------------------------- ---------------- ---------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Michael Bozic.............. $133,602 -- -- -- $133,602
Edwin J. Garn.............. 149,702 -- -- -- 149,702
John R. Haire.............. 149,702 $73,725 $157,463 $ 25,350 406,240
Wayne E. Hedien............ 39,010 -- -- -- 39,010
Dr. Manuel H. Johnson...... 145,702 71,125 -- -- 216,827
Michael E. Nugent.......... 149,702 73,725 -- -- 223,427
John L. Schroeder.......... 149,702 73,725 -- -- 223,427
</TABLE>
As of the date of this Statement of Additional Information, 57 of the Morgan
Stanley 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 (or such lesser period as may be determined by the Board) as an
Independent Director or Trustee of any Morgan Stanley 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
35
<PAGE>
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
29.41% of his or her Eligible Compensation plus 0.4901667% 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 58.82%
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
Trust's Independent Trustees by the Fund for the fiscal year ended September 30,
1997 and by the 57 Morgan Stanley Dean Witter Funds (including the Fund) for the
year ended December 31, 1998, and the estimated retirement benefits for the
Fund's Independent Trustees, to commence upon their retirement, from the Trust
as of September 30, 1997 and from the 57 Morgan Stanley Dean Witter Funds as of
December 31, 1997.
RETIREMENT BENEFITS FROM THE TRUST AND ALL MORGAN STANLEY DEAN WITTER FUNDS
<TABLE>
<CAPTION>
FOR ALL ADOPTING FUNDS RETIREMENT BENEFITS 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 TRUST FUNDS TRUST FUNDS
- ----------------------------------- ------------------- --------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Michael Bozic...................... 10 58.82% $ 372 $ 20,499 $ 925 $ 55,026
Edwin J. Garn...................... 10 58.82 548 30,878 925 55,026
John R. Haire...................... 10 58.82 (744) (19,823)(3) 2,241 132,002
Wayne E. Hedien.................... 9 50.00 0 0 794 46,772
Dr. Manuel H. Johnson.............. 10 58.82 226 12,832 925 55,026
Michael E. Nugent.................. 10 58.82 384 22,546 925 55,026
John L. Schroeder.................. 8 49.02 716 39,350 771 46,123
</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.
(3) This number reflects the effect of the extension of Mr. Haire's term as
Director or Trustee until May 1, 1999.
As of the date of this Statement of Additional Information, the aggregate
number of shares of beneficial interest of the Trust owned by the Trust's
officers and Trustees as a group was less than 1 percent of the Trust's shares
of beneficial interest outstanding.
36
<PAGE>
INVESTMENT ADVISORY AGREEMENT
- --------------------------------------------------------------------------------
The Trust has retained the Investment Advisor 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 MSDW Advisors (the
"Advisory Agreement"). See "The Trust and Its Advisor" for a detailed
description of the Advisory Agreement.
The Investment Advisor 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
Advisor 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 Advisor pays the salaries of all personnel, including officers of the
Trust, who are employees of the Investment Advisor.
Expenses not expressly assumed by the Investment Advisor 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 Advisor 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 Advisor (not including
compensation or expenses of attorneys who are employees of the Investment
Advisor) 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
MSDW Advisors 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, at an annual rate of 0.85% of average
daily net assets on assets of the Trust exceeding $500 million up to $1.5
billion and at an annual rate of 0.825% of average daily net assets on assets of
the Trust exceeding $1.5 billion. 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, 1995,
1996 and 1997, the Trust accrued to MSDW Advisors total compensation of
$3,526,906, $6,524,700 and $9,981,012, respectively.
The Advisory Agreement provides that in the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard of its obligations thereunder,
the Investment Advisor is not liable to the Trust or any of its shareholders for
any act or omission by the Investment Advisor or for any losses sustained by the
Trust or its shareholders. The Advisory Agreement in no way restricts the
Investment Advisor from acting as investment manager or advisor to others.
37
<PAGE>
The Advisory Agreement was initially approved by the Trustees on February
21, 1997 and by the shareholders of the Fund at a Special Meeting of
Shareholders held on May 20, 1997. The Advisory Agreement is substantially
identical to a prior investment advisory agreement which was initially approved
by the Trustees on December 23, 1992 and by the Trust's shareholders on February
25, 1993 (the "Prior Advisory Agreement"). The Advisory Agreement took effect on
May 31, 1997 upon the consummation of the merger of Dean Witter, Discover & Co.
with Morgan Stanley Group Inc. 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 Advisor. 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 MSDW Advisors had an initial
term ending April 30, 1999, and 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.
ADMINISTRATOR AND ADMINISTRATION AGREEMENT
- --------------------------------------------------------------------------------
On December 31, 1993, MSDW Advisors effected an internal reorganization
pursuant to which certain administrative activities previously performed by MSDW
Advisors would instead be performed by Morgan Stanley Dean Witter Services
Company Inc. (the "Administrator" or "MSDW Services"), a wholly-owned subsidiary
of MSDW Advisors. Accordingly, the Administration Agreement between MSDW
Advisors 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 administrative 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 MSDW Advisors prior to this reorganization and to
MSDW Services after December 31, 1993. Morgan Stanley Dean Witter Distributors
Inc., the Distributor of the Trust's shares, is an affiliate of MSDW Advisors
and MSDW Services and a wholly-owned subsidiary of MSDW.
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, Morgan Stanley Dean Witter Advisors Inc.,
and the share distribution activities that had been performed by DWR were
assumed by a separate new company, Morgan Stanley Dean Witter Distributors Inc.
MSDW Advisors refers to the InterCapital Division of DWR prior to the internal
reorganization and to Morgan Stanley Dean Witter Advisors 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
38
<PAGE>
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, 1996 and 1997, total accrued compensation amounted to
$979,775, $1,845,500 and $2,862,062, respectively.
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 advisor to others.
The Administration Agreement was initially approved by the Trustees on April
17, 1996, in connection with the reincorporation of MSDW Services in the State
of Delaware. The Administration Agreement is substantially identical to the
prior administration agreement, initially approved by the Trustees on October
10, 1989, by the Investment Advisor as the sole shareholder on November 20, 1989
and by the Trust's shareholders at a Meeting of Shareholders on June 19, 1991
(the "Prior Administration Agreement"). 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 MSDW Advisors of DWR's rights and duties under the Prior
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 MSDW Services had an
initial term ending April 30, 1997, 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 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. At their meeting held on April 30, 1998, the Trust's Board of
Trustees, including all of the Independent Trustees, approved continuation of
the Administration Agreement until April 30, 1999.
39
<PAGE>
PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------
Subject to the general supervision of the Board of Trustees, the Investment
Advisor 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 Advisor 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 Advisor 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 Advisor 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, 1995, 1996 and 1997, 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
Advisor will effect transactions with those banks, brokers and dealers which the
Investment Advisor believes provide the most favorable prices and who are
capable of providing efficient executions. If the Investment Advisor 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 Advisor. 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.
The information and services received by the Investment Advisor from banks,
brokers and dealers may be of benefit to the Investment Advisor 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
40
<PAGE>
by the Investment Advisor and thus reduce its expenses, it is of indeterminable
value and the advisory fee paid to the Investment Advisor 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 listed on exchanges or admitted to unlisted trading privileges may be
effected through DWR, Morgan Stanley & Co. Incorporated ("MS & Co.") and other
affiliated brokers and dealers. In order for an affiliated broker or dealer to
effect any portfolio transactions for the Fund, the commissions, fees or other
remuneration received by the affiliated broker or dealer 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 the affiliated broker or dealer 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 Board of Trustees of
the Fund, including a majority of the Trustees who are not "interested" persons
of the Fund, as defined in the Act, have adopted procedures which are reasonably
designed to provide that any commissions, fees or other remuneration paid to an
affiliated broker or dealer 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 represent fair value.
Should the Board of Trustees determine that the market for Senior Loans has
41
<PAGE>
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
42
<PAGE>
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.
Treasury intends to issue regulations to permit shareholders to take into
account their proportionate share of the Fund's capital gains distributions that
will be subject to a reduced rate under the Taxpayer Relief Act of 1997. The
Taxpayer Relief Act reduced the maximum tax rate on long-term capital gains from
28% to 20%; it also lengthened the required holding period to obtain this lower
rate from more than 12 months to more than 18 months. However, the IRS
Restructuring and Reform Act of 1998 reduces the holding period requirement for
the lower capital gain rate to mature 12 months for transactions occuring afer
January 1, 1998. These lower rates do not apply to collectibles and certain
other assets. Additionally, the maximum capital gain rate for assets that are
held more than 5 years and that are acquired after December 31, 2000 is 18%.
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
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<PAGE>
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
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. 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 will also be notified of their proportionate share of long-term
capital gains distributions that are eligible for a reduced rate of tax under
the Taxpayer Relief Act of 1997. 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 advisors concerning the applicability of the
United States withholding tax.
44
<PAGE>
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
advisors 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
- --------------------------------------------------------------------------------
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 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
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<PAGE>
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 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."
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<PAGE>
SHARE REPURCHASES AND TENDERS
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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 investment objective and policies and the Trust's portfolio, the
Investment Advisor 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
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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, 1996 through September 30, 1997, the Trust
completed four tender offers. The first tender offer commenced on December 20,
1996 and resulted in the tender of 1,890,054 Shares. The second tender offer
commenced on March 14, 1997 and resulted in the tender of 2,035,269 Shares. The
third tender offer commenced on May 12, 1997 and resulted in the tender of
1,946,138 Shares. The fourth tender offer commenced on August 20, 1997 and
resulted in the tender of 2,779,048 shares.
If the Trust must liquidate portfolio holdings in order to purchase Shares
tendered, the Trust may realize gains and losses.
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 Advisor. 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, 1995,
1996 and 1997, InterCapital informed the Trust that it received approximately
$219,000, $728,000 and $1,296,000, respectively, in withdrawal fees.
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PURCHASE OF SHARES
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The Trust continuously offers Shares through Morgan Stanley 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"). 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.
Morgan Stanley 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
30, 1998, the Trustees, including all of the Independent Trustees, approved the
continuation of the Distribution Agreement until April 30, 1999.
None of the Trust, the Distributor or the Investment Advisor 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 Morgan Stanley Dean Witter
Prime Income Trust, directly to Morgan Stanley Dean Witter Trust FSB, an
affiliate of the Distributor (the "Transfer Agent") at P.O. Box 1040, Jersey
City, New Jersey 07303 or by contacting a Financial Advisor of DWR or other
Selected Broker-Dealer representative. 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 Morgan Stanley 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 Advisor 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 Advisor 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
Advisor 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 Advisor 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
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"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.
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, 1997, the
Trust's yield, calculated pursuant to this formula, was 6.99%.
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
- --------------------------------------------------------------------------------
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.
Morgan Stanley Dean Witter Trust FSB, Harborside Financial Center, Plaza
Two, Jersey City, New Jersey 07311, an affiliate of Morgan Stanley Dean Witter
Advisors Inc., the Trust's Investment Advisor, Morgan Stanley Dean Witter
Services Company Inc., the Trust's Administrator and Morgan Stanley Dean Witter
Distributors Inc. ("MSDW Distributors"), the Trust's Distributor, is the
dividend disbursing and transfer agent of the Trust. Morgan Stanley Dean Witter
Trust FSB charges the Trust an annual per shareholder account fee.
50
<PAGE>
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.
LEGAL COUNSEL
- --------------------------------------------------------------------------------
Barry Fink, Esq., who is an officer and the General Counsel of the
Investment Advisor, is an officer and the General Counsel of the Trust.
EXPERTS
- --------------------------------------------------------------------------------
The September 30, 1997 financial statements of the Trust, included herein,
have been so included in reliance upon the report of PricewaterhouseCoopers 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 MSDW Advisors, MSDW Services and MSDW
Distributors 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 Morgan Stanley 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 Morgan Stanley 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.
51
<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
52
<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
53
<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
54
<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
55
<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
56
<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 to 10.50 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
57
<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
58
<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
59
<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
60
<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
61
<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
62
<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
63
<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
64
<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
65
<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
66
<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
67
<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
68
<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 Advisor"), 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 Advisor pays the salaries of all personnel,
including officers of the Trust, who are employees of the Investment Advisor.
3. ADMINISTRATION AGREEMENT
Pursuant to an Administration Agreement with Dean Witter Services Company Inc.
(the "Administrator"), an affiliate of the Investment Advisor, 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 Advisor and Administrator.
Pursuant to a Distribution Agreement between the Trust,
69
<PAGE>
PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997, CONTINUED
the Investment Advisor and the Distributor, the Investment Advisor compensates
the Distributor at a rate of 2.75% of the purchase price of shares purchased
from the Trust. The Investment Advisor 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 Advisor 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 Advisor has
informed the Trust that it received approximately $1,296,000 in early withdrawal
charges.
Dean Witter Trust FSB, an affiliate of the Investment Advisor 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.
70
<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
71
<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 Advisor 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.
72
<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, 1989*
FOR THE YEAR ENDED SEPTEMBER 30, THROUGH
------------------------------------------------------------------------------ SEPTEMBER
1997 1996 1995 1994 1993 1992 1991 30, 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
73
<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 Advisor currently actively utilizes
various hedging techniques in connection with its management of other fixed
income portfolios and the Trust believes that the Investment Advisor 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 Advisor 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.
74
<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 Advisor'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 Advisor'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 Advisor 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 portfolio 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 Advisor 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.
75
<PAGE>
Morgan Stanley Dean Witter Prime Income Trust
Two World Trade Center
New York, New York 10048
TRUSTEES
- ----------------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John H. Haire
Wayne E. Hedien
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
Rajesh K. Gupta
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
- ----------------------------------------
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center
Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
- ----------------------------------------
PricewaterhouseCoopers LLP
1177 Avenue of Americas
New York, New York 10036
INVESTMENT ADVISOR
- ----------------------------------------
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
ADMINISTRATOR
- ----------------------------------------
Morgan Stanley Dean Witter Services Company Inc.
Two World Trade Center
New York, New York 10048
DISTRIBUTOR
- ----------------------------------------
Morgan Stanley Dean Witter Distributors Inc.
Two World Trade Center
New York, New York 10048
MORGAN
STANLEY
DEAN
WITTER
PRIME
INCOME
TRUST
Prospectus
January 23, 1998
Revised July 28, 1998
