<PAGE>
PROSPECTUS
MORGAN STANLEY DEAN WITTER
PRIME INCOME TRUST
-----------
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST (THE "TRUST") IS AN INVESTMENT
COMPANY WHICH SEEKS 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 SENIOR LOANS. SENIOR LOANS ARE LOANS MADE TO
CORPORATIONS, PARTNERSHIPS AND OTHER ENTITIES, THAT HOLD THE MOST SENIOR
POSITIONS IN A BORROWER'S CAPITAL STRUCTURE. THE SENIOR LOANS IN WHICH THE TRUST
INVESTS ARE SECURED BY COLLATERAL THAT THE INVESTMENT ADVISOR BELIEVES TO HAVE A
MARKET VALUE AT THE TIME OF THE LOAN THAT EQUALS OR EXCEEDS THE AMOUNT OF THE
SENIOR LOAN.
----------------------
THE INTEREST RATE ON SENIOR LOANS GENERALLY WILL FLOAT OR RESET AT A
SPECIFIED LEVEL ABOVE A GENERALLY RECOGNIZED BASE LENDING RATE SUCH AS THE PRIME
RATE OR LIBOR.
----------------------
SHARES OF THE TRUST ARE CONTINUOUSLY OFFERED AT A PRICE EQUAL TO THE THEN
CURRENT NET ASSET VALUE PER SHARE WITHOUT AN INITIAL SALES CHARGE.
----------------------
SHARES ARE NOT REDEEMABLE AND THERE IS NO SECONDARY MARKET FOR THE SHARES.
THE BOARD OF TRUSTEES CURRENTLY INTENDS TO CONSIDER THE MAKING OF TENDER OFFERS
ON A QUARTERLY BASIS TO REPURCHASE ALL OR A PORTION OF THE SHARES FROM
SHAREHOLDERS AT THE THEN CURRENT NET ASSET VALUE PER SHARE. SHARES TENDERED THAT
WERE HELD FOR LESS THAN FOUR YEARS ARE GENERALLY SUBJECT TO AN EARLY WITHDRAWAL
CHARGE OF UP TO 3% OF THE ORIGINAL PURCHASE PRICE.
----------------------
INVESTMENT IN THE TRUST INVOLVES A VARIETY OF RISKS WHICH YOU SHOULD
CONSIDER PRIOR TO INVESTMENT. SEE "RISK FACTORS."
----------------------
THIS PROSPECTUS SETS FORTH THE INFORMATION YOU SHOULD KNOW BEFORE INVESTING
IN THE TRUST. IT SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE. ADDITIONAL
INFORMATION ABOUT THE TRUST IS CONTAINED IN THE STATEMENT OF ADDITIONAL
INFORMATION, DATED DECEMBER 27, 2000, WHICH HAS BEEN FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION, AND WHICH IS AVAILABLE AT NO CHARGE UPON REQUEST OF THE
TRUST AT THE ADDRESS OR TELEPHONE NUMBERS LISTED ON THIS PAGE. THE STATEMENT OF
ADDITIONAL INFORMATION IS INCORPORATED HEREIN BY REFERENCE.
----------------------
MORGAN STANLEY DEAN WITTER ADVISORS INC. IS THE INVESTMENT ADVISOR TO THE
TRUST. THE ADDRESS OF THE TRUST IS TWO WORLD TRADE CENTER, NEW YORK, NY 10048.
THE TRUST'S TELEPHONE NUMBER IS (212) 392-2550 OR (800) 869-NEWS. YOU SHOULD
READ THIS PROSPECTUS CAREFULLY BEFORE INVESTING.
----------------------
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR PASSED ON THE ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------
<TABLE>
==================================================================================================
PRICE TO PROCEEDS TO
PUBLIC (1) SALES LOAD (1) THE TRUST (2)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE $9.60 NONE $9.60
TOTAL (2) $2,592,521,116.80 NONE $2,592,521,116.80
==================================================================================================
</TABLE>
(SEE FOOTNOTES ON INSIDE FRONT COVER)
----------------------
MORGAN STANLEY DEAN WITTER DISTRIBUTORS INC.
DECEMBER 27, 2000
<PAGE>
(FOOTNOTES TO TABLE ON FRONT COVER)
(1) THE SHARES ARE OFFERED ON A BEST EFFORTS BASIS AT A PRICE EQUAL TO THE NET
ASSET VALUE PER SHARE WHICH AS OF THE DATE OF THE PROSPECTUS IS $9.60.
(2) ASSUMING ALL SHARES CURRENTLY REGISTERED ARE SOLD PURSUANT TO THIS
CONTINUOUS OFFERING AT A PRICE OF $9.60 PER SHARE. THE TRUST COMMENCED
OPERATIONS ON NOVEMBER 30, 1989, FOLLOWING COMPLETION OF A FIRM COMMITMENT
UNDERWRITING FOR 10,921,751 SHARES, WITH NET PROCEEDS TO THE TRUST OF
$109,217,510. THE TRUST COMMENCED THE CONTINUOUS OFFERING OF ITS SHARES ON
DECEMBER 4, 1989.
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE TRUST OR THE PRINCIPAL UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Summary of Trust Expenses................................... 3
Prospectus Summary.......................................... 4
Financial Highlights........................................ 7
The Trust and its Advisor................................... 8
Investment Objective and Policies........................... 8
Risk Factors................................................ 12
Investment Practices........................................ 16
Investment Advisory Agreement............................... 18
Administrator and Administration Agreement.................. 20
Share Repurchases and Tenders............................... 21
Purchase of Shares.......................................... 23
Description of Shares....................................... 24
Dividends and Distributions................................. 26
Tax Consequences............................................ 26
Legal Counsel............................................... 27
Custodian, Dividend Disbursing and Transfer Agent........... 27
Experts..................................................... 27
Additional Information...................................... 27
Table of Contents of the Statement of Additional
Information................................................ 29
Appendix A (Hedging Transactions)........................... 30
</TABLE>
2
<PAGE>
SUMMARY OF TRUST EXPENSES
--------------------------------------------------------------------------------
The expenses and fees set forth in the table are for the fiscal year ended
September 30, 2000.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
--------------------------------
<S> <C>
Sales Load Imposed on Purchases............................. None
Sales Load Imposed on Reinvested Dividends.................. None
Early Withdrawal Charge..................................... 3.0%
An early withdrawal charge is imposed on tenders at the
following declining rates:
EARLY
WITHDRAWAL
YEAR AFTER PURCHASE CHARGE
------------------------------------------------------------ -------------
First..................................................... 3.0%
Second.................................................... 2.5%
Third..................................................... 2.0%
Fourth.................................................... 1.0%
Fifth and thereafter...................................... None
ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS)
Investment Advisory Fees.................................... 0.85%
Interest Payments on Borrowed Funds......................... None
Sum of Other Expenses....................................... 0.36%
Total Annual Expenses....................................... 1.21%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) tender at the end of
each time period:.......................................... $42 $59 $67 $147
You would pay the following expenses on the same investment,
assuming no tender:........................................ $12 $39 $67 $147
</TABLE>
------------------------
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES OF THE TRUST MAY BE GREATER OR
LESS THAN THOSE SHOWN.
The purpose of this table is to assist the investor in understanding the
various costs and expenses that an investor in the Trust will bear directly or
indirectly. For a more complete description of these costs and expenses, see the
cover page of this Prospectus and "Investment Advisory Agreement,"
"Administrator and Administration Agreement" and "Share Repurchases and
Tenders--Early Withdrawal Charge" in this Prospectus.
3
<PAGE>
PROSPECTUS SUMMARY
KEY INFORMATION ABOUT THE TRUST IS SUMMARIZED BELOW. YOU SHOULD READ IT IN
LIGHT OF THE MORE DETAILED INFORMATION SET FORTH LATER IN THIS PROSPECTUS.
<TABLE>
<S> <C>
PURCHASE OF SHARES........... Shares of the Trust are continuously offered for sale at the
then net asset value per share without an initial sales
charge. The minimum initial investment in the Trust is
$1,000. Subsequent investments must be at least $100. Shares
may be purchased through Dean Witter Reynolds Inc. and other
selected broker-dealers.
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 Senior Loans. There is no assurance
that the Trust will achieve this objective.
Senior Loans are loans made to corporations, partnerships
and other entities which hold the most senior position in a
borrower's capital structure. The Senior Loans in which the
Trust invests are secured by collateral that the Investment
Advisor believes to have a market value at the time of the
loan which equals or exceeds the amount of the Senior Loan.
The interest rate on Senior Loans generally will float or
reset at a specified level above a generally recognized base
lending rate such as the prime rate quoted by a major U.S.
bank ("Prime Rate") or the London Inter-Bank Offered Rate
("LIBOR").
The Trust invests, under normal market conditions, at least
80% of its total assets in Senior Loans. The remainder of
its assets are invested in cash or short-term high quality
money market instruments. Senior Loans in which the Trust
may invest typically are originated, negotiated and
structured by a syndicate of lenders ("Lenders") and
administered on behalf of the Lenders by an agent bank
("Agent"). The terms of the loan are set forth in a loan
agreement (the "Loan Agreement"). The Trust may acquire such
syndicated Senior Loans ("Syndicated Loans") in one of three
ways: (i) it may act as a Lender; (ii) it may acquire an
Assignment; or (iii) it may acquire a Participation. Senior
Loans may also take the form of debt obligations of
Borrowers issued directly to investors in the form of debt
securities ("Senior Notes").
An Assignment is a sale by a Lender or other third party of
its rights in a Senior Loan. Generally, when the Trust
purchases an Assignment, it obtains all of the rights of a
Lender. In some cases, however, the Assignment may be of a
more limited nature and the Trust may have no contractual
relationship with the Borrower. In such instances, the Trust
would be required to rely on the Lender or other third party
from which it acquired the Assignment to demand payment and
enforce its rights under the Senior Loan.
A Participation is an interest in a Senior Loan acquired
from a Lender or other third party (the "Selling
Participant"). Payment of principal and interest received by
the Selling Participant are passed through to the holder of
the Participation. When the Trust acquires a Participation
it will
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
have a contractual relationship with the Selling Participant
but not the Borrower. As a result, the Trust assumes the
credit risk of the Borrower, the Selling Participant and any
other prior Selling Participant.
INVESTMENT ADVISOR........... Morgan Stanley Dean Witter Advisors Inc. ("MSDW Advisors" or
the "Investment Advisor") 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 and its wholly-owned subsidiary,
Morgan Stanley Dean Witter Services Company Inc., serve in
various investment management, advisory, management, and
administrative capacities to 97 investment companies, 24 of
which are listed on the New York Stock Exchange, with
combined assets of approximately $150 billion as of
November 30, 2000.
ADVISORY FEE................. The Trust pays the Investment Advisor an advisory fee
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, at
an annual rate of 0.825% of average daily net assets on
assets of the Trust exceeding $1.5 billion up to
$2.5 billion, at an annual rate of 0.80% of average daily
net assets on assets of the Trust exceeding $2.5 billion up
to $3.0 billion and at an annual rate of 0.775% of average
daily net assets on assets of the Trust exceeding $3.0
billion.
ADMINISTRATOR................ Morgan Stanley Dean Witter Services Company Inc. ("MSDW
Services" or the "Administrator"), 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 you
elect to receive cash distributions. See "Dividends and
Distributions" and "Tax Consequences."
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
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
most Shares accepted for tender that have been held for four
years or less. There is no guarantee that the Trust will in
fact make a tender offer for any of its Shares, or that if a
tender offer is made, all or any Shares tendered will be
purchased by the Trust. If a tender offer is not made or
Shares are not purchased pursuant to a tender offer you may
not be able to sell your Shares. The Trust may borrow to
finance tender offers.
CUSTODIAN.................... The Bank of New York serves as Custodian of the Trust's
assets. See "Custodian, Dividend Disbursing and Transfer
Agent."
RISK FACTORS................. An investment in the Trust involves a number of risks. The
Borrower, under a Senior Loan, may fail to make scheduled
payments of principal and interest, which could result in a
decline in net asset value and a reduction of the Trust's
yield. While each Senior Loan will be collateralized, there
is no guarantee that the collateral securing a Senior Loan
will be sufficient to protect the Trust against losses or a
decline in income in the event of a Borrower's non-payment
of principal and/or interest. The Trust may invest in Senior
Loans made in connection with leveraged buyout transactions,
recapitalizations, and other highly leveraged transactions.
These types of Senior Loans are subject to greater risks
than are other Senior Loans in which the Trust may invest.
Senior Loans are not traded on an exchange, nor is there any
regular secondary market. Due to the illiquidity of Senior
Loans, the Trust may not be able to dispose of its
investment in Senior Loans in a timely fashion and at a fair
price. The Trust may invest in Senior Loans made to non-U.S.
borrowers, provided the Senior Loans are U.S. dollar-
denominated. Loans to non-U.S. borrowers, involve a variety
of risks not present in the case of Senior Loans to U.S.
borrowers.
A substantial portion of the Senior Loans in which the Trust
invests may be rated by a national statistical rating
organization below investment grade. Debt securities rated
below investment grade are viewed by rating agencies as
having speculative characteristics and are commonly known as
"junk bonds."
An investment in the Shares should be considered illiquid.
There is no secondary market for the Shares and none is
expected to develop.
The above risks and others to which the Trust is subject,
are discussed in greater detail under the heading "Risk
Factors."
ANTI-TAKEOVER PROVISIONS..... The Trust's Declaration of Trust includes anti-takeover
provisions. These include the requirement for a 66%
shareholder vote to remove Trustees and for certain mergers,
issuances of Shares and asset acquisitions. These provisions
could have the effect of limiting the ability of other
persons or entities to acquire control of the Trust and 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."
</TABLE>
6
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the
Trust's financial performance for the periods indicated. Certain information
reflects financial results for a single Trust share throughout each year. The
total returns in the table represent the rate an investor would have earned or
lost on an investment in the Trust (assuming reinvestment of all dividends and
distributions).
The information for the fiscal year ended September 30, 2000 has been
audited by Deloitte & Touche LLP, independent auditors, whose report, along with
the Trust's financial statements, is included in the Statement of Additional
Information which is available upon request. The financial highlights for prior
fiscal periods have been audited by other independent accountants.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA:
Net asset value, beginning of
period............................ $ 9.87 $ 9.91 $ 9.95 $ 9.94 $ 9.99 $ 10.00
---------- ---------- ---------- ---------- -------- --------
Income (loss) from investment
operations:
Net investment income............ 0.82 0.70 0.71 0.75 0.74 0.82
Net realized and unrealized gain
(loss).......................... (0.16) (0.05) (0.03) -- (0.04) 0.01
---------- ---------- ---------- ---------- -------- --------
Total income from investment
operations........................ 0.66 0.65 0.68 0.75 0.70 0.83
---------- ---------- ---------- ---------- -------- --------
Less dividends and distributions
from:
Net investment income............ (0.81) (0.69) (0.72) (0.74) (0.75) (0.81)
Net realized gain................ -- -- -- -- -- (0.03)
---------- ---------- ---------- ---------- -------- --------
Total dividends and
distributions..................... (0.81) (0.69) (0.72) (0.74) (0.75) (0.84)
---------- ---------- ---------- ---------- -------- --------
Net asset value, end of period..... $ 9.72 $ 9.87 $ 9.91 $ 9.95 $ 9.94 $ 9.99
========== ========== ========== ========== ======== ========
TOTAL RETURN+...................... 6.87% 6.72% 7.14% 7.78% 7.25% 8.57%
RATIOS TO AVERAGE NET ASSETS:
Expenses......................... 1.21% 1.22% 1.29% 1.40% 1.46% 1.52%
Net investment income............ 8.26% 7.02% 7.17% 7.53% 7.50% 8.11%
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands....................... $2,884,330 $2,513,959 $1,996,709 $1,344,603 $939,471 $521,361
Portfolio turnover rate.......... 45% 44% 68% 86% 72% 102%
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------
1994 1993 1992 1991
-------- -------- -------- --------
<S> <C> <C> <C> <C>
SELECTED PER SHARE DATA:
Net asset value, beginning of
period............................ $ 9.91 $ 9.99 $ 10.00 $ 10.00
-------- -------- -------- --------
Income (loss) from investment
operations:
Net investment income............ 0.62 0.55 0.62 0.84
Net realized and unrealized gain
(loss).......................... 0.09 (0.08) (0.01) --
-------- -------- -------- --------
Total income from investment
operations........................ 0.71 0.47 0.61 0.84
-------- -------- -------- --------
Less dividends and distributions
from:
Net investment income............ (0.62) (0.55) (0.62) (0.84)
Net realized gain................ -- -- -- --
-------- -------- -------- --------
Total dividends and
distributions..................... (0.62) (0.55) (0.62) (0.84)
-------- -------- -------- --------
Net asset value, end of period..... $ 10.00 $ 9.91 $ 9.99 $ 10.00
======== ======== ======== ========
TOTAL RETURN+...................... 7.32% 4.85% 6.23% 8.77%
RATIOS TO AVERAGE NET ASSETS:
Expenses......................... 1.60% 1.45% 1.47% 1.52%
Net investment income............ 6.14% 5.53% 6.14% 8.23%
SUPPLEMENTAL DATA:
Net assets, end of period, in
thousands....................... $305,034 $311,479 $413,497 $479,941
Portfolio turnover rate.......... 147% 92% 46% 42%
</TABLE>
----------------------------------
+ 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.
7
<PAGE>
THE TRUST AND ITS ADVISOR
--------------------------------------------------------------------------------
Morgan Stanley Dean Witter Prime Income Trust (the "Trust") is a 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, NY 10048, and its telephone number is (212) 392-2550 or (800)
869-NEWS. 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."
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 97 investment companies, 24 of which
are listed on the New York Stock Exchange, with combined assets of approximately
$150 billion at November 30, 2000.
The Trust is managed within MSDW Advisors' Taxable Fixed-Income Group.
Sheila A. Finnerty, Senior Vice President of MSDW Advisors, and Peter Gewirtz,
Vice President of MSDW Advisors, have been the primary portfolio managers
primarily responsible for the management of the Trust's portfolio since
February, 1998. Ms. Finnerty has been a portfolio manager with MSDW Advisors for
over five years. Prior to joining MSDW Advisors in October 1996, Mr. Gewirtz was
an Assistant Vice President of Industrial Bank of Japan (February 1994-October
1996).
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
8
<PAGE>
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. 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 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.
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
9
<PAGE>
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 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.
Nationally recognized rating agencies have begun assigning ratings to an
increasing number of Senior Loans and a substantial portion of the Fund's
investments in Senior Loans may be rated below investment grade. Debt securities
rated below investment grade are viewed by the rating agencies as having
speculative characteristics and are commonly known as "junk bonds." While the
Investment Advisor may consider such ratings when determining whether to invest
in a Senior Loan, it does not view ratings as a determinative factor in its
investment decisions. Rather, 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 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.
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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, or (iii) it may act as one of the group of Lenders originating a
Senior Loan.
When the Trust is a Lender, or assumes all of the rights of a Lender through
an assignment it will, as a party to the Loan Agreement, have a direct
contractual relationship with the Borrower and may enforce compliance by the
Borrower with the terms of the Loan Agreement. Lenders also have voting and
consent rights under the applicable Loan Agreement. Action subject to Lender
vote or consent generally requires the vote or consent of the holders of some
specified percentage of the outstanding principal amount of the Senior Loan,
which percentage varies depending on the relevant Loan Agreement. Certain
decisions, such as reducing the amount or increasing the time for payment of
interest on or repayment of principal of a Senior Loan, or releasing collateral
therefor, frequently require the unanimous vote or consent of all Lenders
affected.
A Participation may be acquired from an Agent, a Lender or any other holder
of a Participation ("Selling Participant"). Investment by the Trust in a
Participation typically will result in the Trust having a contractual
relationship only with the Selling Participant, not with the Borrower or any
other entities interpositioned between the Trust and the Borrower ("Intermediate
Participants"). The Trust will have the right to receive payments of principal,
interest and any fees to which it is entitled only from the Selling Participant
and only upon receipt by such Selling Participant of such payments from the
Borrower. In connection with purchasing Participations, the Trust generally will
have no right to enforce compliance by the Borrower with the terms of the Loan
Agreement, nor any rights with respect to funds acquired by other Lenders
through set-off against the Borrower and the Trust may not directly benefit from
the collateral supporting the Senior Loan in which it has purchased the
Participation. As a result, the Trust will assume the credit risk of the
Borrower, the Selling Participant and any Intermediate Participants. In the
event of the insolvency of the Selling Participant or any Intermediate
Participant, the Trust may be treated as a general creditor of such entity and
may be adversely affected by any set-off between such entity and the Borrower.
The Trust will acquire Participations only if the Selling Participant and any
Intermediate Participant is a commercial bank or other financial institution
with an investment grade long-term debt rating from either Standard and Poor's
Corporation ("S&P") (rated BBB or higher) or Moody's Investors Service, Inc.
("Moody's") (rated Baa or higher), or with outstanding commercial paper rated at
least in the top two rating categories of either of such rating agencies (at
least A-2 by S&P or at least Prime-2 by Moody's) or, if such long-term debt and
commercial paper are unrated, with long-term debt or commercial paper believed
by the Investment 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 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
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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 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.
The Trust may be required to pay and may receive various fees and
commissions in connection with purchasing, selling and holding interests in
Senior Loans. When the Trust buys an interest in a Senior Loan, it may receive a
facility fee, which is a fee paid to Lenders upon origination of a Senior Loan
and/or a commitment fee which is a fee paid to Lenders on an ongoing basis based
upon the undrawn portion committed by the Lenders of the underlying Senior Loan.
In certain circumstances, the Trust may receive a prepayment penalty on the
prepayment of a Senior Loan by a Borrower. When the Trust sells an interest in a
Senior Loan it may be required to pay fees or commissions to the purchaser of
the interest. The extent to which the Trust will be entitled to receive or be
required to pay such fees will generally be a matter of negotiation between the
Trust and the party selling to or purchasing from the Trust. The Investment
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.
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 maintain on its books 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.
RISK FACTORS
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GENERAL
The Trust invests primarily in Senior Loans on which the interest rate is
periodically adjusted in response to interest rate changes on short-term
investments. This policy should result in a net asset value which fluctuates
less than would a portfolio consisting primarily of fixed rate obligations. A
number of factors may, however, cause a decline in net asset value, including a
default on a Senior Loan, a material deterioration of a Borrower's perceived or
actual credit worthiness, and/or an increase in
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interest rates not immediately reflected in the interest rate payable on Senior
Loans. A sudden and extreme increase in interest rates is particularly likely to
cause a decline in net asset value. Also, a change in the manner in which
interest rates on Senior Loans are set (E.G., interest rates are set at a higher
or lower margin above the Prime Rate, LIBOR, or other base lending rate) or
other changes in pricing parameters for Senior Loans, may also cause the Trust's
net asset value to fluctuate. In addition, at any time there may be a limited
supply of Senior Loans which may adversely affect the Trust's performance.
ILLIQUIDITY OF SHARES
An investment in the Shares should be considered illiquid. There is no
secondary market for the Shares and none is expected to develop.
CREDIT RISK
Senior Loans are subject to credit risks. Credit risk is the risk that the
Borrower will fail to make timely payments of principal and/or interest. The
non-receipt of scheduled payments of principal or interest, either because of a
default, bankruptcy or other reason, could result in a reduction of the Trust's
yield and a decline in net asset value.
The Trust may invest in Senior Loans made in connection with leveraged
buy-out transactions, recapitalizations and other highly leveraged transaction.
These types of Senior Loans are subject to greater risks than are other kinds of
Senior Loans in which the Trust may invest. The value of such loans may also be
subject to a greater degree of volatility in response to interest rate
fluctuations.
The Investment Advisor will invest only in Senior Loans secured by
collateral with a value (at the time of acquisition), in its view, of at least
equal to the amount of the Senior Loan. There is no guarantee, however, that the
collateral securing a Senior Loan will be sufficient to protect the Trust
against losses or a decline in income in the event of the Borrower's non-payment
of principal and/or interest. For example, the value of the collateral could,
subsequent to the Trust's investment in the Senior Loan, decline below the
amount of the Senior Loan. In addition, it may not be possible to liquidate the
collateral promptly. Also, in the event that a Borrower declares bankruptcy, a
court could invalidate the Trust's security interest in the loan collateral, or
subordinate the Trust's rights under the Senior Loan to other creditors of the
Borrower.
LOWER-RATED SECURITIES
A substantial portion of the Senior Loans in which the Trust invests may be
rated by a national statistical rating organization below investment grade, or
if unrated, of comparable quality. Debt securities rated below investment grade,
or if unrated, of comparable quality, are commonly referred to as "junk bonds."
Junk bonds are regarded by the rating agencies as having speculative
characteristics. The prices of junk bonds are more sensitive to negative
corporate developments such as a decline in profits or adverse economic
conditions such as a recession than are the prices of higher rated securities.
LIMITED PUBLIC INFORMATION
The amount of public information with respect to Senior Loans will generally
be less extensive than that available for securities registered with the
Securities and Exchange Commission and/or listed on a national securities
exchange. As a result, the performance of the Trust and its ability to meet its
investment objective is more dependent upon the analytical ability of the
Investment Advisor than would be the case for an investment company that invests
primarily in registered and/or exchange listed securities.
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ILLIQUIDITY OF SENIOR LOANS
Senior Loans may be transferable among financial institutions, however, they
do not, at present, have the liquidity of conventional debt securities and are
often subject to restrictions on resale. For example, bank approval is often
required for the resale of interests in Senior Loans. Due to the illiquidity of
Senior Loans the Trust may not be able to dispose of its investments in Senior
Loans in a timely fashion and at a fair price. The inability to do so could
result in losses to the Trust.
RELIANCE UPON AGENT
An Agent typically administers a Senior Loan and is responsible for the
collection of principal and interest payments from the Borrower. The Trust will
generally rely on the Agent to collect and to transmit to the Trust its portion
of the payments on the Senior Loan. The Trust also generally will rely on the
Agent to monitor compliance by the Borrower with the terms of the Loan Agreement
and to notify the Trust of any adverse change in the Borrower's financial
condition or any declaration of insolvency. In addition, the Trust will rely on
the Agent to use appropriate creditor remedies against the Borrower in the event
of a default. Accordingly, the Trust's success may be dependent in part upon the
skill of Agents in administering the terms of Loan Agreements, monitoring
Borrower compliance, collecting principal, interest and fee payments from
Borrowers, and where necessary, enforcing creditors remedies against Borrowers.
The Agent's appointment may be terminated if the Agent becomes insolvent,
goes into bankruptcy, or has a receiver, conservator, or similar official
appointed for it by the appropriate bank regulatory authority. In such event, a
successor agent would be appointed. Assets held by the Agent under the Loan
Agreement should remain available to holders of Loans. However, if assets held
by the Agent for the benefit of the Trust were determined by an appropriate
regulatory authority or court to be subject to the claims of the Agent's general
or secured creditors, the Trust might incur certain costs and delays in
realizing payment on a Senior Loan or suffer a loss of principal and/or
interest. Furthermore, in the event of the Borrower's bankruptcy or insolvency,
the Borrower's obligation to repay the Loan may be subject to certain defenses
that the Borrower can assert as a result of improper conduct by the Agent.
PARTICIPATIONS
The Trust may invest in Participations. Because the holder of a
Participation generally has no contractual relationship with the Borrower, the
Trust will have to rely upon a Selling Participant and/or Intermediate
Participant to pursue appropriate remedies against a Borrower in the event of a
default. As a result, the Trust may be subject to delays, expenses and risks
that are greater than those that would be involved if the Trust could enforce
its rights directly against the Borrower or through the Agent.
A Participation also involves the risks that the Trust may be regarded as a
creditor of a Selling Participant and/or Intermediate Participant rather than of
the Borrower. If so, the Trust would be subject to the risk that a Selling
Participant may become insolvent.
PREPAYMENTS
The Borrower of a Senior Loan, in some cases, may prepay the Senior Loan.
Prepayments could adversely affect the Trust's yield to the extent that the
Trust is unable to reinvest promptly payments in Senior Loans or if such
prepayments were made during a period of declining interest rates.
LOANS TO FOREIGN BORROWERS
The Trust may invest in U.S. dollar denominated Senior Loans made to non
U.S. Borrowers. These Senior Loans may involve additional risks. Foreign
companies are not generally subject to uniform accounting and financial
reporting standards comparable to those applicable to U.S. borrowers. It may
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be more difficult to value and monitor the value of collateral underlying Senior
Loans to non U.S. Borrowers. In addition, there is generally less government
supervision and regulation of financial markets and listed companies in foreign
countries than in the U.S. Investments in Senior Loans to non U.S. borrowers
also involves the risks of adverse political and economic developments. In
addition, such loans involve foreign currency 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 make timely payments of principal and/or interest on a
Senior Loan.
CONCENTRATION
The Trust will treat the Borrower and the Agent Bank, and, with respect to
Participations, each financial institution interposed between the Borrower and
the Trust, as an issuer of a Senior Loan or Participation for the purpose of
determining the Trust's concentration in a particular industry. As a result, 25%
or more of the Trust's assets will be invested in the industry group consisting
of financial institutions and their holding companies. 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.
The Trust may invest up to 10% of its assets in Senior Loans made to any
single Borrower. To the extent that the Trust invests a relatively high
percentage of its assets in the obligations of a limited number of issuers, the
value of the Trust's investments may be more affected by any single adverse
economic, political or regulatory event than will the value of the investments
of a more diversified investment company.
SENIOR NOTES
The Trust is authorized to invest in Senior Notes. It is anticipated that
Senior Notes purchased by the Trust will generally bear a higher rate of
interest than Syndicated Loans. Such securities may, however, involve greater
risks than those associated with Syndicated Loans. The covenants and
restrictions to which the Borrower would be subject in the case of Senior Notes
may not be as rigorous in all respects as those to which the Borrower would be
subject in the case of a Syndicated Loan. Also, the scope of financial
information respecting the Borrower available to investors in Senior Notes may
be more limited than that available to Syndicated Loan Lenders. In addition, a
Syndicated Loan typically requires steady amortization of principal throughout
the life of the loan whereas Senior Notes, typically, are structured to allow
Borrowers to repay principal later in the life of the loan.
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INVESTMENT PRACTICES
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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 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.
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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 in the "Investment
Restrictions" in the STATEMENT OF ADDITIONAL INFORMATION. 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 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
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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 ADVISORY AGREEMENT
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The Trust has retained the Investment Advisor to manage the Trust's assets,
subject to the overall supervision by the Trust's Board of Trustees, 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;
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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 auditors; 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, at an annual rate of 0.825% of average daily net assets on assets
of the Trust exceeding $1.5 billion up to $2.5 billion, at an annual rate of
0.80% of average daily net assets on assets of the Trust exceeding $2.5 billion
up to $3.0 billion and at an annual rate of 0.775% of average daily net assets
on assets exceeding $3.0 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, 1998,
1999 and 2000, the Trust accrued to MSDW Advisors total compensation of
$14,434,352, $19,568,322 and $22,919,576, 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.
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 Investment Company
Act of 1940 ("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. At their meeting held on
April 27, 2000, the Trust's Board of Trustees, including all of the Independent
Trustees, approved continuation of the Advisory Agreement until April 30, 2001.
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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 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." For the fiscal years ended
September 30, 1998, 1999 and 2000 the Trust accrued to the Administrator total
compensation of $4,183,528, $5,740,526, and $6,771,743, 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.
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<PAGE>
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 27, 2000, the Trust's Board of
Trustees, including all of the Independent Trustees, approved continuation of
the Administration Agreement until April 30, 2001.
SHARE REPURCHASES AND TENDERS
--------------------------------------------------------------------------------
The Board of Trustees of the Trust currently intends, each quarter, to
consider authorizing the Trust to make tender offers for all or a portion of its
then outstanding Shares at the then current net asset value of the Shares.
Although such tender offers, if undertaken and completed, will provide some
liquidity for holders of the Shares, there can be no assurance that such tender
offers will in fact be undertaken, completed or, if completed, that they will
provide sufficient liquidity for all holders of Shares who may desire to sell
such Shares. As such, investment in the Shares should be considered illiquid.
Although the Board of Trustees believes that tender offers for the Shares
generally would increase the liquidity of the Shares, the acquisition of Shares
by the Trust will decrease the total assets of the Trust, and therefore, have
the effect of increasing the Trust's expense ratio. Because of the nature of the
Trust's 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
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trading securities generally on the New York Stock Exchange, (c) declaration of
a banking moratorium by federal or state authorities or any suspension of
payment by banks in the United States or New York State, (d) limitation
affecting the Trust or the issuers of its portfolio securities imposed by
federal or state authorities on the extension of credit by lending institutions,
(e) commencement of war, armed hostilities or other international or national
calamity directly or indirectly involving the United States or (f) other event
or condition which would have a material adverse effect on the Trust or the
holders of its Shares if Shares were repurchased. The Trustees may modify these
conditions in light of experience.
Any tender offer made by the Trust for its Shares will be at a price equal
to the net asset value of the Shares determined at the close of business on the
day the offer ends. During the pendency of any tender offer by the Trust, the
Trust will establish procedures which will be specified in the tender offer
documents to enable holders of Shares to ascertain readily such net asset value.
Each offer will be made and holders of Shares notified in accordance with the
requirements of the 1934 Act and the 1940 Act, either by publication or mailing
or both. Each offering document will contain such information as is prescribed
by such laws and the rules and regulations promulgated thereunder. If any tender
offer, after consideration and approval by the Trustees, is undertaken by the
Trust, the terms of such tender offer will set forth the maximum number of
Shares (if less than all) that the Trust is willing to purchase pursuant to the
tender offer. The Trust will purchase, subject to such maximum number of Shares
tendered in accordance with the terms of the offer, all Shares tendered unless
it determines to accept none of them. In the event that a number of Shares in
excess of such maximum number of outstanding Shares are tendered in accordance
with the Trust's tender offer, the Trust intends to purchase, on a pro rata
basis, an amount of tendered Shares equal to such maximum number of the
outstanding Shares or, alternatively, to extend the offering period and increase
the number of Shares that the Trust is offering to purchase. The Trust will pay
all costs and expenses associated with the making of any tender offer.
During the fiscal year October 1, 1999 through September 30, 2000, the Trust
completed four tender offers. The first tender offer commenced on November 17,
1999 and resulted in the tender of 6,938,857.695 Shares. The second tender offer
commenced on February 16, 2000 and resulted in the tender of
7,679,827.129 Shares. The third tender offer commenced on May 17, 2000 and
resulted in the tender of 7,134,931.540 Shares. The fourth tender offer
commenced on August 16, 2000 and resulted in the tender of
6,777,986.753 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 (calculated from the last
day of the month in which the Shares were purchased) 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
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<PAGE>
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, 1998,
1999 and 2000, MSDW Advisors informed the Trust that it received approximately
$2,085,000, $2,651,000, and $3,361,000, respectively, in withdrawal fees.
PURCHASE OF SHARES
--------------------------------------------------------------------------------
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 27, 2000, the Trustees, including all of the Independent Trustees,
approved the continuation of the Distribution Agreement until April 30, 2001.
Neither the Trust, the Distributor nor 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.
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<PAGE>
Box 1040, Jersey City, NJ 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 in the Statement of Additional Information." 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 "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% of
shareholders' purchases of Shares of the Trust) as determined from time to time
by the National Association of Securities Dealers, Inc.
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.
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<PAGE>
The Trust's Declaration of Trust permits the Trustees to divide or combine
the Shares into a greater or lesser number of Shares without thereby changing
the proportionate beneficial interests in the Trust. Each Share represents an
equal proportionate interest in the Trust with each other Share.
The Trust may be terminated (i) by the affirmative vote of the holders of
66% of its outstanding Shares or (ii) by an instrument signed by a majority of
the Trustees and consented to by the holders of two-thirds of the Trust's
outstanding Shares. Upon termination of the Trust, the Trustees will wind up the
affairs of the Trust, the Trust's business will be liquidated and the Trust's
net assets will be distributed to the Trust's shareholders on a pro rata basis.
If not so terminated, the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Trust, requires that Trust
documents include such disclaimer, and provides for indemnification and
reimbursement of expenses out of the Trust's property for any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations. Given the nature of the Trust's assets and operations, the
possibility of the Trust being unable to meet its obligations is remote. Given
the above limitations on shareholders' personal liability and the Trust's
ability to meet its indemnification obligations, in the opinion of Massachusetts
counsel to the Trust, the risk to Trust shareholders of personal liability is
remote.
The Declaration of Trust further provides that obligations of the Trust are
not binding upon the Trustees individually but only upon the property of the
Trust. Accordingly, the Trustees will not be liable for errors of judgment or
mistakes of fact or law, but nothing in the Declaration of Trust protects a
Trustee against any liability to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of his office.
ANTI-TAKEOVER PROVISIONS
The Trust presently has certain anti-takeover provisions in its Declaration
of Trust which could have the effect of limiting the ability of other entities
or persons to acquire control of the Trust, to cause it to engage in certain
transactions or to modify its structure. A Trustee may be removed from office by
a written instrument signed by at least two-thirds of the remaining trustees or
by a vote of the holders of at least 66% of the Shares. In addition, the
affirmative vote or consent of the holders of 66% of the Shares of the Trust (a
greater vote than that required by the 1940 Act and greater than the required
vote applicable 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
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<PAGE>
(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.
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.
TAX CONSEQUENCES
--------------------------------------------------------------------------------
The Trust intends to qualify and remain qualified as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended. As
such, the Trust will not be subject to federal income tax on its net investment
income and capital gains, if any, to the extent that it distributes
26
<PAGE>
such income and capital gains to its shareholders. Shareholders will normally
have to pay federal income taxes, and any state and/or local income taxes on the
distributions they receive from the Trust. Distributions of net investment
income and short-term capital gains are taxable to the shareholders as ordinary
income. Distributions of long-term capital gains, if any, are taxable to the
shareholders as long-term capital gains. Tax issues relating to the Trust are
not generally a consideration for shareholders such as tax-exempt entitites and
tax-advantaged retirement vehicles such as an IRA or a 401(k) plan. Shareholders
are urged to consult their own tax professionals regarding specific questions as
to federal, state or local taxes.
At the end of each calendar year, shareholders will receive a statement
showing the taxable distributions paid to them in the preceding year. The
statement provides information on their dividends and capital gains for tax
purposes.
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.
CUSTODIAN, DIVIDEND DISBURSING AND TRANSFER AGENT
--------------------------------------------------------------------------------
The Bank of New York, 100 Church Street, New York, New York 10007, 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., 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 and is reimbursed for its
out-of-pocket expenses.
EXPERTS
--------------------------------------------------------------------------------
The September 30, 2000 financial statements of the Trust, included in the
STATEMENT OF ADDITIONAL INFORMATION and incorporated by reference herein, have
been so included in reliance upon the report of Deloitte & Touche LLP,
independent auditors, 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
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<PAGE>
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 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 seven 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. Reports and other
information about the Fund are available on the EDGAR Database on the SEC's
Internet site (www.sec.gov) and copies of this information may be obtained after
paying a duplicating fee, by electronic request at the following E-mail address:
[email protected], or writing the Public Reference Section of the SEC,
Washington, DC 20549-0102.
28
<PAGE>
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
The Trust and its Advisor................................... 4
Investment Restrictions..................................... 7
Trustees and Officers....................................... 10
Portfolio Transactions...................................... 17
Determination of Net Asset Value............................ 18
Dividends and Distributions................................. 19
Taxation.................................................... 19
Description of Shares....................................... 21
Performance Information..................................... 22
Custodian, Dividend Disbursing and Transfer Agent........... 23
Reports to Shareholders..................................... 23
Legal Counsel............................................... 23
Experts..................................................... 23
Additional Information...................................... 24
Financial Statements........................................ 40
</TABLE>
29
<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.
30
<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.
31
<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
Wayne E. Hedien
James F. Higgins
Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
Officers
---------------------------------------------
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Mitchell M. Merin
President
Barry Fink
Vice President, Secretary and
General Counsel
Sheila A. Finnerty
Vice President
Peter Gewirtz
Assistant Vice President
Thomas F. Caloia
Treasurer
Custodian
---------------------------------------------
The Bank of New York
100 Church Street
New York, New York 10007
Transfer Agent and
Dividend Disbursing Agent
---------------------------------------------
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center
Plaza Two
Jersey City, New Jersey 07311
Independent Auditors
---------------------------------------------
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
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
[PHOTO]
PROSPECTUS -- DECEMBER 27, 2000
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 27, 2000
MORGAN STANLEY DEAN
WITTER
PRIME INCOME
TRUST FUND
----------------------------------------------------------------------
This STATEMENT OF ADDITIONAL INFORMATION is not a PROSPECTUS. The PROSPECTUS
(dated December 27, 2000) for the Morgan Stanley Dean Witter Prime Income Trust
may be obtained without charge from the Fund at its address or telephone number
listed below or from Dean Witter Reynolds at any of its branch offices.
Morgan Stanley Dean Witter Prime Income Trust
Two World Trade Center
New York, NY 10048
(800) 869-NEWS
<PAGE>
TABLE OF CONTENTS
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
The Trust and its Advisor................................... 4
Investment Restrictions..................................... 7
Trustees and Officers....................................... 10
Portfolio Transactions...................................... 17
Determination of Net Asset Value............................ 18
Taxation.................................................... 19
Description of Shares....................................... 20
Performance Information..................................... 22
Reports to Shareholders..................................... 23
Legal Counsel............................................... 23
Experts..................................................... 23
Additional Information...................................... 23
Financial Statements........................................ 38
</TABLE>
2
<PAGE>
GLOSSARY OF SELECTED DEFINED TERMS
--------------------------------------------------------------------------------
The terms defined in this glossary are frequently used in this STATEMENT OF
ADDITIONAL INFORMATION (other terms used occasionally are defined in the text of
the document).
"CUSTODIAN"--The Bank of New York.
"DWR"--Dean Witter Reynolds Inc., a wholly-owned broker-dealer subsidiary of
MSDW.
"FINANCIAL ADVISORS"--Morgan Stanley Dean Witter authorized financial services
representatives.
"INDEPENDENT TRUSTEES"--Trustees who are not "interested persons" (as defined by
the Investment Company Act) of the Fund.
"MORGAN STANLEY & CO."--Morgan Stanley & Co. Incorporated, a wholly-owned
broker-dealer subsidiary of MSDW.
"MORGAN STANLEY DEAN WITTER FUNDS"--Registered investment companies (i) for
which the Investment Manager serves as the investment advisor and (ii) that hold
themselves out to investors as related companies for investment and investor
services.
"MSDW"--Morgan Stanley Dean Witter & Co., a preeminent global financial services
firm.
"MSDW ADVISORS"--Morgan Stanley Dean Witter Advisors Inc., a wholly-owned
investment advisor subsidiary of MSDW.
"MSDW DISTRIBUTORS"--Morgan Stanley Dean Witter Distributors Inc., a
wholly-owned broker-dealer subsidiary of MSDW.
"MSDW SERVICES"--Morgan Stanley Dean Witter Services Company Inc., a
wholly-owned fund services subsidiary of the Investment Manager.
"MSDW TRUST"--Morgan Stanley Dean Witter Trust FSB, a wholly-owned transfer
agent subsidiary of MSDW.
"TRUST"--Morgan Stanley Dean Witter Prime Income Trust, a registered closed-end
investment company.
"TRUSTEES"--The Board of Trustees of the Fund.
3
<PAGE>
THE TRUST AND ITS ADVISOR
--------------------------------------------------------------------------------
Morgan Stanley Dean Witter Prime Income Trust (the "Trust") is a 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 Fund is a "non-diversified" fund and, as such, its investments are not
required to meet certain diversification requirements under federal securities
law. Compared with "diversified" funds, the Fund may invest a greater percentage
of its assets in the Senior Loans of an individual corporation. Thus, the Fund's
assets may be concentrated in fewer loans than other funds. A decline in the
value of those investments would cause the Fund's overall value to decline to a
greater degree. The Fund's investments, however, are currently diversified and
may remain diversified in the future.
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) 392-2550 or
(800) 869-NEWS. 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 consummation 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 from its investment company advisory
activities and its concomitant resignation as the Trust's Investment Advisor.
4
<PAGE>
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 97 investment companies, 24 of which
are listed on the New York Stock Exchange, with combined assets of approximately
$150 billion at November 30, 2000.
The Trust is managed within MSDW Advisors' Taxable Fixed-Income Group.
Rajesh K. Gupta, Senior Vice President, Director of the Taxable Fixed-Income
Group and Chief Administrative Officer of Investments of MSDW Advisors,
Sheila A. Finnerty, Senior Vice President of MSDW Advisors, and Peter Gewirtz,
Vice President of MSDW Advisors, have been the primary portfolio managers
primarily responsible for the management of the Trust's portfolio since
February, 1998. Mr. Gupta and Ms. Finnerty have been portfolio managers with
MSDW Advisors for over five years. Prior to joining MSDW Advisors in October
1996, Mr. Gewirtz was an Assistant Vice President of Industrial Bank of Japan
(February 1994 - October 1996).
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 Institutional Money Trust
4 Active Assets Money Trust
5 Active Assets Premier Money Trust
6 Active Assets Tax-Free Trust
7 Morgan Stanley Dean Witter 21st Century Trend Fund
8 Morgan Stanley Dean Witter American Opportunities Fund
9 Morgan Stanley Dean Witter Aggressive Equity Fund
10 Morgan Stanley Dean Witter Balanced Growth Fund
11 Morgan Stanley Dean Witter Balanced Income Fund
Morgan Stanley Dean Witter California Tax-Free Daily Income
12 Trust
13 Morgan Stanley Dean Witter California Tax-Free Income Fund
14 Morgan Stanley Dean Witter Capital Growth Securities
Morgan Stanley Dean Witter Competitive Edge Fund, "BEST
15 IDEAS" Portfolio
16 Morgan Stanley Dean Witter Convertible Securities Trust
Morgan Stanley Dean Witter Developing Growth Securities
17 Trust
18 Morgan Stanley Dean Witter Diversified Income Trust
19 Morgan Stanley Dean Witter Dividend Growth Securities Inc.
20 Morgan Stanley Dean Witter Equity Fund
21 Morgan Stanley Dean Witter European Growth Fund Inc.
22 Morgan Stanley Dean Witter Federal Securities Trust
23 Morgan Stanley Dean Witter Financial Services Trust
24 Morgan Stanley Dean Witter Fund of Funds
25 Morgan Stanley Dean Witter Global Dividend Growth Securities
26 Morgan Stanley Dean Witter Global Utilities Fund
27 Morgan Stanley Dean Witter Growth Fund
28 Morgan Stanley Dean Witter Hawaii Municipal Trust
29 Morgan Stanley Dean Witter Health Sciences Trust
30 Morgan Stanley Dean Witter High Yield Securities Inc.
31 Morgan Stanley Dean Witter Income Builder Fund
32 Morgan Stanley Dean Witter Information Fund
33 Morgan Stanley Dean Witter Intermediate Income Securities
34 Morgan Stanley Dean Witter International Fund
35 Morgan Stanley Dean Witter International SmallCap Fund
</TABLE>
5
<PAGE>
<TABLE>
<C> <S>
36 Morgan Stanley Dean Witter Japan Fund
37 Morgan Stanley Dean Witter Latin American Growth Fund
38 Morgan Stanley Dean Witter Limited Term Municipal Trust
39 Morgan Stanley Dean Witter Liquid Asset Fund Inc.
40 Morgan Stanley Dean Witter Market Leader Trust
41 Morgan Stanley Dean Witter Mid-Cap Equity Trust
Morgan Stanley Dean Witter Multi-State Municipal
42 Series Trust
Morgan Stanley Dean Witter Natural Resource Development
43 Securities Inc.
44 Morgan Stanley Dean Witter New Discoveries Fund
Morgan Stanley Dean Witter New York Municipal Money Market
45 Trust
46 Morgan Stanley Dean Witter New York Tax-Free Income Fund
47 Morgan Stanley Dean Witter Next Generation Trust
Morgan Stanley Dean Witter North American Government Income
48 Trust
49 Morgan Stanley Dean Witter Pacific Growth Fund Inc.
50 Morgan Stanley Dean Witter Real Estate Fund
51 Morgan Stanley Dean Witter S&P 500 Index Fund
52 Morgan Stanley Dean Witter S&P 500 Select Fund
Morgan Stanley Dean Witter Select Dimensions Investment
53 Series
Morgan Stanley Dean Witter Select Municipal Reinvestment
54 Fund
55 Morgan Stanley Dean Witter Short-Term Bond Fund
56 Morgan Stanley Dean Witter Short-Term U.S. Treasury Trust
57 Morgan Stanley Dean Witter SmallCap Growth Fund
58 Morgan Stanley Dean Witter Special Value Fund
59 Morgan Stanley Dean Witter Strategist Fund
60 Morgan Stanley Dean Witter Tax-Exempt Securities Trust
61 Morgan Stanley Dean Witter Tax-Free Daily Income Trust
62 Morgan Stanley Dean Witter Tax-Managed Growth Fund
63 Morgan Stanley Dean Witter Technology Fund
64 Morgan Stanley Dean Witter Total Market Index Fund
65 Morgan Stanley Dean Witter Total Return Trust
Morgan Stanley Dean Witter U.S. Government Money Market
66 Trust
67 Morgan Stanley Dean Witter U.S. Government Securities Trust
68 Morgan Stanley Dean Witter Utilities Fund
69 Morgan Stanley Dean Witter Value-Added Market Series
70 Morgan Stanley Dean Witter Value Fund
71 Morgan Stanley Dean Witter Variable Investment Series
72 Morgan Stanley Dean Witter World Wide Income Trust
</TABLE>
<TABLE>
<CAPTION>
CLOSED-END FUNDS
<C> <S>
Morgan Stanley Dean Witter California Insured Municipal
1 Income Trust
Morgan Stanley Dean Witter California Quality Municipal
2 Securities
3 Morgan Stanley Dean Witter Government Income Trust
4 Morgan Stanley Dean Witter High Income Advantage Trust
5 Morgan Stanley Dean Witter High Income Advantage Trust II
6 Morgan Stanley Dean Witter High Income Advantage Trust III
7 Morgan Stanley Dean Witter Income Securities Inc.
Morgan Stanley Dean Witter Insured California Municipal
8 Securities
9 Morgan Stanley Dean Witter Insured Municipal Bond Trust
10 Morgan Stanley Dean Witter Insured Municipal Income Trust
11 Morgan Stanley Dean Witter Insured Municipal Securities
12 Morgan Stanley Dean Witter Insured Municipal Trust
</TABLE>
6
<PAGE>
<TABLE>
<C> <S>
Morgan Stanley Dean Witter Municipal Income Opportunities
13 Trust
Morgan Stanley Dean Witter Municipal Income Opportunities
14 Trust II
Morgan Stanley Dean Witter Municipal Income Opportunities
15 Trust III
16 Morgan Stanley Dean Witter Municipal Income Trust
17 Morgan Stanley Dean Witter Municipal Income Trust II
18 Morgan Stanley Dean Witter Municipal Income Trust III
19 Morgan Stanley Dean Witter Municipal Premium Income Trust
Morgan Stanley Dean Witter New York Quality Municipal
20 Securities
21 Morgan Stanley Dean Witter Prime Income Trust
22 Morgan Stanley Dean Witter Quality Municipal Income Trust
Morgan Stanley Dean Witter Quality Municipal Investment
23 Trust
24 Morgan Stanley Dean Witter Quality Municipal Securities
</TABLE>
In addition, 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 Term Trusts"):
<TABLE>
<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 and; (ii) sub-administrator of
Templeton Global Governments Income Trust, a closed-end investment company.
INVESTMENT OBJECTIVE AND INVESTMENT RESTRICTIONS
--------------------------------------------------------------------------------
The Trust seeks to provide a high level of current income consistent with
the preservation of capital. The Trust will seek to achieve its investment
objective through investment primarily in senior collateralized loans to
corporations, partnerships and other entities.
The investment restrictions listed below have been adopted by the Trust as
fundamental policies, which may not be changed without the vote of a majority,
as defined in the 1940 Act, of the outstanding voting securities of the Trust.
All other investment policies or practices, other than the Trust's investment
policy with respect to Senior Loans, are considered by the Trust not to be
fundamental and accordingly may be changed without shareholder approval. All
percentage limitations apply immediately after a purchase or initial investment,
and any subsequent change in any applicable percentage resulting from market
fluctuations or other changes in the amount of total or net assets does not
require elimination of any security from the portfolio.
The Trust may not:
1. Invest more than 25% of the Trust's total assets in the securities of
any one issuer or, with respect to 50% of the Trust's total assets, purchase any
securities (other than obligations issued or guaranteed by the United States
Government or by its agencies or instrumentalities), if as a result more than 5%
of the Trust's total assets would then be invested in securities of a single
issuer or if as a result the Trust would hold more than 10% of the outstanding
voting securities of any single issuer. For purposes of this restriction and
restriction number two, the Trust will consider a Borrower to be the issuer of a
Participation and, with respect to Participations under which the Trust does not
have privity with the Borrower or would not have a direct cause of action
against the Borrower in the event of its failure to pay
7
<PAGE>
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 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
8
<PAGE>
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 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, 2000 was 45%.
9
<PAGE>
TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
The Trustees and Executive Officers of the Trust and their principal
occupations for at least the last five years and their affiliations, if any,
with MSDW Advisors and with the Morgan Stanley Dean Witter Funds (there were 93
such funds as of the calendar year ended December 31, 1999), are shown below.
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH THE TRUST
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
--------------------------------------------- ---------------------------------------------
<S> <C>
Michael Bozic (59) .......................... Retired; Director or Trustee of the Morgan
Trustee Stanley Dean Witter Funds; formerly Vice
c/o Mayer, Brown & Platt Chairman of Kmart Corporation (December
Counsel to the Independent Trustees 1998-October 2000), formerly Chairman and
1675 Broadway Chief Executive Officer of Levitz Furniture
New York, New York Corporation (November 1995-November 1998) and
President and Chief Executive Officer of
Hills 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
Weirton Steel Corporation.
Charles A. Fiumefreddo* (67) ................ Chairman, Director or Trustee and Chief
Chairman of the Board, Executive Officer of the Morgan Stanley Dean
Chief Executive Officer and Trustee Witter Funds; formerly Chairman, Chief
Two World Trade Center Executive Officer and Director of MSDW
New York, New York Advisors, Morgan Stanley Dean Witter
Distributors Inc. ("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 1998).
Edwin J. Garn (68) .......................... Director or Trustee of the Morgan Stanley
Trustee Dean Witter Funds; formerly United States
c/o Summit Ventures LLC Senator (R- Utah) (1974-1992) and Chairman,
1 Utah Center Senate Banking Committee (1980-1986);
201 S. Main Street 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 (chemical
company); Director of Franklin Covey (time
management systems), BMW Bank of North
America, Inc. (industrial loan corporation),
United Space Alliance (joint venture between
Lockheed Martin and the Boeing Company) and
Nuskin Asia Pacific (multilevel marketing);
member of the Utah Regional Advisory Board of
Pacific Corp.; Member of the board of various
civic and charitable organizations.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH THE TRUST
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
--------------------------------------------- ---------------------------------------------
<S> <C>
Wayne E. Hedien (66) ........................ Retired; Director or Trustee of the Morgan
Trustee Stanley Dean Witter Funds; Director of the
c/o Mayer, Brown & Platt PMI Group, Inc. (private mortgage insurance);
Counsel to the Independent Trustees Trustee and Vice Chairman of the Field Museum
1675 Broadway of Natural History; formerly associated with
New York, New York the Allstate Companies (1966-1994), most
recently as Chairman of the Allstate
Corporation (March 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.
James F. Higgins* (52) ...................... Chairman of the Private Client Group of MSDW
Trustee (since August 2000); Director of the Transfer
Two World Trade Center Agent and Dean Witter Realty Inc.; Director
New York, New York or Trustee of the Morgan Stanley Dean Witter
Funds (since June 2000); previously President
and Chief Operating Officer of the Private
Client Group of MSDW (May 1999-August 2000),
President and Chief Operating Officer of
Individual Securities of MSDW (February
1997-May 1999), President and Chief Operating
Officer of Dean Witter Securities of MSDW
(1995-February 1997), and President and Chief
Operating Officer of Dean Witter Financial
(1989-1995) and Director (1985-1997) of Dean
Witter Reynolds.
Dr. Manuel H. Johnson (51) .................. Senior Partner, Johnson Smick International,
Trustee Inc., a consulting firm; Co-Chairman and a
c/o Johnson Smick International, Inc. founder of the Group of Seven Council (G7C),
1133 Connecticut Avenue, N.W. an international economic commission;
Washington, D.C. Chairman of the Audit Committee and Director
or Trustee of the Morgan Stanley Dean Witter
Funds; Director of Greenwich Capital Markets,
Inc. (broker-dealer), Independence Standards
Board (private sector organization governing
independence of auditors) 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 and Assistant Secretary of the U.S.
Treasury.
Michael E. Nugent (64) ...................... General Partner, Triumph Capital, L.P., a
Trustee private investment partnership; Chairman of
c/o Triumph Capital, L.P. the Insurance Committee and Director or
237 Park Avenue Trustee of the Morgan Stanley Dean Witter
New York, New York Funds; formerly Vice President, Bankers Trust
Company and BT Capital Corporation; director
of various business organizations.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH THE TRUST
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
--------------------------------------------- ---------------------------------------------
<S> <C>
Philip J. Purcell* (57) ..................... Chairman of the Board of Directors and Chief
Trustee Executive Officer of MSDW, DWR and Novus
1585 Broadway Credit Services Inc.; Director of MSDW
New York, New York Distributors; Director or Trustee of the
Morgan Stanley Dean Witter Funds; Director of
American Airlines, Inc. and its parent
company, AMR Corporation; Director and/or
officer of various MSDW subsidiaries.
John L. Schroeder (70) ...................... Retired; Chairman of the Derivatives
Trustee Committee and Director or Trustee of the
c/o Mayer, Brown & Platt Morgan Stanley Dean Witter Funds; Director of
Counsel to the Independent Trustees Citizens Communications Company
1675 Broadway (telecommunications company); formerly,
New York, New York Executive Vice President and Chief Investment
Officer of the Home Insurance Company (August
1991-September 1995).
Mitchell M. Merin (47) ...................... President and Chief Operating Officer of
President Asset Management of MSDW (since December
Two World Trade Center 1998); President and Director (since April
New York, New York 1997) and Chief Executive Officer (since June
1998) of the Investment Manager and MSDW
Services Company; Chairman, Chief Executive
Officer and Director of the Distributor
(since June 1998); Chairman and Chief
Executive Officer (since June 1998) and
Director (since January 1998) of MSDW Trust;
Director of various MSDW subsidiaries;
President of the Morgan Stanley Dean Witter
Funds (since May 1999); Trustee of various
Van Kampen investment companies (since
December 1999); previously Chief Strategic
Officer of the Investment Manager and MSDW
Services Company and Executive Vice President
of the Distributor (April 1997-June 1998),
Vice President of the Morgan Stanley Dean
Witter Funds (May 1997-April 1999), and
Executive Vice President of Dean Witter,
Discover & Co.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE, POSITION WITH THE TRUST
AND ADDRESS PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS
--------------------------------------------- ---------------------------------------------
<S> <C>
Barry Fink (45) ............................. General Counsel of Asset Management of MSDW
Vice President, Secretary and General Counsel (since May 2000); Executive Vice President
Two World Trade Center (since December 1999) and Secretary and
New York, New York General Counsel (since February 1997) and
Director (since July 1998) of the Investment
Manager and MSDW Services Company; Vice
President, Secretary and General Counsel of
the Morgan Stanley Dean Witter Funds (since
February 1997); Vice President and Secretary
of the Distributor; previously, Senior Vice
President (March 1997-December 1999), First
Vice President; Assistant Secretary and
Assistant General Counsel of the Investment
Manager and MSDW Services Company.
Rajesh K. Gupta (40) ........................ Senior Vice President of MSDW Advisors,
Vice President Director of the Taxable Fixed-Income Group
Two World Trade Center and Chief Administrative Officer of
New York, New York Investments of MSDW Advisors; Vice President
of various Morgan Stanley Dean Witter Funds.
Sheila A. Finnerty (35) ..................... Senior Vice President of MSDW Advisors (since
Vice President December 1999); previously Vice President
Two World Trade Center (May 1998-December 1999), Assistant Vice
New York, New York President (May 1995-May 1998) and Senior
Research Analyst (May 1993-May 1995) with
MSDW Advisors.
Peter Gewirtz (35) .......................... Vice President of MSDW Advisors (since
Assistant Vice President December 1999); previously Assistant Vice
Two World Trade Center President (May 1998-December 1999) and Senior
New York, New York Research Analyst (October 1996-May 1998) with
MSDW Advisors and prior thereto Assistant
Vice President of Industrial Bank of Japan
(February 1994-October 1996).
Thomas F. Caloia (54) ....................... First Vice President and Assistant Treasurer
Treasurer of MSDW Advisors, MSDW Distributors and MSDW
Two World Trade Center Services; Treasurer of the Morgan Stanley
New York, New York Dean Witter Funds.
</TABLE>
------------------------
* Denotes Trustees who are "interested persons" of the Trust, as defined in
the 1940 Act.
In addition, RONALD E. ROBISON, Executive Vice President, Chief
Administrative Officer and Director of MSDW Advisors and MSDW Services,
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.
13
<PAGE>
In addition, MARILYN K. CRANNEY, TODD LEBO, LOU ANNE D. MCINNIS, CARSTEN
OTTO, AND RUTH ROSSI, First Vice Presidents and Assistant General Counsels of
MSDW Advisors and MSDW Services, and NATASHA KASSIAN, Assistant Vice President
and Assistant General Counsel of 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 97 Morgan Stanley Dean
Witter Funds, comprised of 129 portfolios. As of November 30, 2000, the Morgan
Stanley Dean Witter Funds had total net assets of approximately $150 billion and
more than six million shareholders.
Six Trustees (67% 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.
Law and regulation establish both general guidelines and specific duties for
the independent directors/trustees. The Morgan Stanley Dean Witter Funds seek as
independent directors/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.
All of the Independent Trustees serve as members of the Audit Committee. In
addition, three of the Trustees, including two Independent Trustees, serve as
members of the Derivatives Committee and the Insurance Committee. During the
calendar year ended December 31, 1999, the Audit Committee, the Derivatives
Committee, the Insurance Committee and the independent directors/trustees held a
combined total of seventeen meetings.
The independent directors/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 directors/trustees are required to select and nominate individuals
to fill any independent directors/trustees 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.
The Audit Committee is charged with recommending to the full Board the
engagement or discharge of the Trust's independent auditors; directing
investigations into matters within the scope of the independent auditors'
duties, including the power to retain outside specialists; reviewing with the
independent auditors the audit plan and results of the auditing engagement;
approving professional services provided by the independent auditors and other
accounting firms prior to the performance of such services; reviewing the
independence of the independent auditors; considering the range of audit and
non-audit fees; and reviewing the adequacy of the Trust's system of internal
controls.
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.
Finally, the board of each fund has formed an Insurance Committee to review
and monitor the insurance coverage maintained by the Fund.
14
<PAGE>
ADVANTAGES OF HAVING SAME INDIVIDUALS AS INDEPENDENT DIRECTORS/TRUSTEES FOR ALL
MORGAN STANLEY DEAN WITTER FUNDS
The independent directors/trustees and the funds' management believe that
having the same independent directors/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 directors/ trustees for
each of the funds or even of sub-groups of funds. They believe that having the
same individuals serve as independent directors/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 directors/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 directors/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 directors/ trustees of the caliber, experience and business acumen
of the individuals who serve as independent directors/trustees of the Morgan
Stanley Dean Witter Funds.
TRUSTEE AND OFFICER INDEMNIFICATION.
The Fund's Declaration of Trust provides that no Trustee, officer, employee
or agent of the Fund is liable to the Fund or to a shareholder, nor is any
Trustee, officer, employee or agent liable to any third persons in connection
with the affairs of the Fund, except as such liability may arise from his/her or
its own bad faith, willful misfeasance, gross negligence or reckless disregard
of his/her or its duties. It also provides that all third persons shall look
solely to the Fund property for satisfaction of claims arising in connection
with the affairs of the Fund. With the exceptions stated, the Declaration of
Trust provides that a Trustee, officer, employee or agent is entitled to be
indemnified against all liability in connection with the affairs of the Fund.
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,
and the Chairmen of the Derivatives and Insurance Committees additional annual
fees of $500). 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.
The following table illustrates the compensation paid to the Trust's
Independent Trustees by the Fund for the fiscal year ended September 30, 2000.
TRUST COMPENSATION
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
NAME OF INDEPENDENT TRUSTEE FROM THE FUND
--------------------------- -------------
<S> <C>
Michael Bozic............................................... $1,500
Edwin J. Garn............................................... 1,550
Wayne E. Hedien............................................. 1,550
Dr. Manuel H. Johnson....................................... 2,300
Michael E. Nugent........................................... 2,050
John L. Schroeder........................................... 2,000
</TABLE>
15
<PAGE>
The following table illustrates the compensation paid to the Trust's
Independent Trustees for the calendar year ended December 31, 1999 for services
to the 93 Morgan Stanley Dean Witter Funds that were in operation at
December 31, 1999.
CASH COMPENSATION FROM MORGAN STANLEY DEAN WITTER FUNDS
<TABLE>
<CAPTION>
TOTAL CASH
COMPENSATION FOR
SERVICES TO 93
MORGAN STANLEY
DEAN WITTER
NAME OF INDEPENDENT TRUSTEE FUNDS
--------------------------- ----------------
<S> <C>
Michael Bozic............................................... $134,600
Edwin J. Garn............................................... 138,700
Wayne E. Hedien............................................. 138,700
Dr. Manuel H. Johnson....................................... 208,638
Michael E. Nugent........................................... 193,324
John L. Schroeder........................................... 193,324
</TABLE>
As of the date of this PROSPECTUS, 55 of the Morgan Stanley Dean Witter
Funds, including the Trust, have adopted a retirement program under which an
independent director/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/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
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
30.22% of his or her Eligible Compensation plus 0.5036667% 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 60.44%
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 accrued as expenses on the books of the Adopting
Funds. Such benefits 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, 2000 and by the 55 Morgan Stanley Dean Witter Funds (including the
Fund) for the year ended December 31, 1999, and the estimated retirement
benefits for the Fund's Independent Trustees, to commence upon their retirement,
from the Trust as of September 30, 2000 and from the 55 Morgan Stanley Dean
Witter Funds as of December 31, 1999.
------------------------
(1) An Eligible Trustee may elect alternative payments of his or her retirement
benefits based upon the combined life expectancy of the Eligible Trustee and
his or her spouse on the date of such Eligible Trustee's retirement. In
addition, the Eligible Trustee may elect that the surviving spouse's
periodic payment of benefits will be equal to a lower percentage of the
periodic amount when both spouses were alive. The amount estimated to be
payable under this method, through the remainder of the later of the lives
of the Eligible Trustee and spouse, will be the actuarial equivalent of the
Regular Benefit.
16
<PAGE>
RETIREMENT BENEFITS FROM THE TRUST AND ALL MORGAN STANLEY DEAN WITTER FUNDS
<TABLE>
<CAPTION>
FOR ALL ADOPTING FUNDS
----------------------------- RETIREMENT BENEFITS ESTIMATED ANNUAL
ESTIMATED ACCRUED AS BENEFITS
CREDITED EXPENSES UPON RETIREMENT(2)
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 60.44% $ 359 $20,933 $ 907 $50,588
Edwin J. Garn................ 10 60.44 505 31,737 909 50,675
Wayne E. Hedien.............. 9 51.37 682 39,566 771 43,000
Dr. Manuel H. Johnson........ 10 60.44 336 13,129 1,360 75,520
Michael E. Nugent............ 10 60.44 559 23,175 1,209 67,209
John L. Schroeder............ 8 50.37 1,060 41,558 960 52,994
</TABLE>
------------------------
(2) Based on current levels of compensation. Amount of annual benefits also
varies depending on the Trustee's elections described in Footnote (1) on
page 16.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
--------------------------------------------------------------------------------
No persons owned 5% or more of the Shares of the Fund as of December 8,
2000.
As of the date of this PROSPECTUS, 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.
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
17
<PAGE>
market instruments directly from an issuer, in which case no commissions or
discounts are paid. During the fiscal years ended September 30, 1998, 1999 and
2000 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 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. Eastern 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.
Senior Loans that meet certain pricing criteria are valued based on
quotations received from an independent pricing service. Senior Loans that do
not meet these pricing parameters generally are valued based on prices received
from an independent pricing service that are calculated pursuant to a derived
pricing methodology. The derived pricing methodology calculates a price for a
Senior Loan by incorporating certain market information, including a Senior
Loan's credit rating and interest rate, and
18
<PAGE>
comparing such information to Senior Loans in similar industries for which
market information is available. All other Senior Loans are valued at their fair
value in accordance with procedures established in good faith by the Board of
Trustees of the Trust.
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 (and possibly an excise 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
and/or local income taxes, on the dividends and distributions they receive from
the Trust. Such dividends and other 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.
Distributions of long-term capital gains, if any, are taxable to the
shareholders as long-term capital gains regardless of how long a shareholder has
held the Trust's shares and regardless of whether the distribution is received
in additional Shares or in cash. The maximum tax rate on long-term capital gains
realized by non-corporate Shareholders is 20%. A special lower tax rate of 18%
on long-term capital gains is available to non-corporate shareholders to the
extent the distributions of long-term capital gains are derived from securities
which the Trust purchased after December 31, 2000, and held for more than five
years. Capital gains distributions are not eligible for the dividends-received
deduction.
A holder of Shares who either sells his or her 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. Under current law, the maximum tax rate on long-term capital
gains realized by non-corporate shareholders is 20%. A special lower tax rate of
18% on long-term capital gains is available for non-corporate shareholders who
purchased Shares after December 31, 2000, and held such Shares for more than
five years. This special lower tax rate of 18% for five-year property does not
apply to non-corporate shareholders holding Shares which were purchased on or
prior to December 31, 2000, unless such shareholders make an election to treat
the Shares as being sold and re-acquired on January 1, 2000. A shareholder
making such election may realize capital gains or losses. However, any loss on a
sale of Shares held for six months or less will be treated as long-term capital
loss to the extent of any net long-term capital gain distribution with respect
to such Shares during the six-month period.
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 deemed to
have received a distribution which may be a taxable dividend in whole or in
part.
19
<PAGE>
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
basis, 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 as if received by the shareholders on
December 31.
Any dividend or capital gains distribution received by a shareholder from an
investment company will have the effect of reducing the net asset value of the
shareholder's stock in that company by the exact amount of the dividend or
capital gains distribution. Furthermore, capital gains distributions and
dividends are subject to federal income taxes. If the net asset value of the
shares should be reduced below a shareholder's cost as a result of the
distribution of realized long-term capital gains, such distribution would be in
part a return of the shareholder's investment to the extent of such reduction
below the shareholder's cost, but nonetheless would be taxable to the
shareholder. Therefore, an investor should consider the tax implications of
purchasing Shares immediately prior to a distribution record date.
Special tax rules may change the normal treatment of gains and losses
recognized by the Trust when the Trust invests options, futures transactions,
and interest rate swaps. Those special tax rules can, among other things, affect
the treatment of capital gain or loss as long-term or short-term and may result
in ordinary income or loss rather than capital gain or loss. The application of
these special rules would therefore also affect the character of distributions
made by the Trust.
After the end of each calendar year, shareholders will receive information
on their dividends and capital gains distributions for tax purposes.
Shareholders who receive distributions of Shares which are automatically
reinvested will generally be viewed as receiving a cash 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' social security or taxpayer identification numbers
must be furnished and certified as to their accuracy. Any withheld amount would
be sent to the IRS as an advance tax payment.
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.
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.
20
<PAGE>
Shareholders are entitled to one vote for each Share held and to vote on
matters submitted to meetings of shareholders. No material amendment may be made
to the Trust's Declaration of Trust without the affirmative vote of at least a
majority of its Shares represented in person or by proxy at a meeting at which a
quorum is present or by written consent without a meeting. Under certain
circumstances the Trustees may be removed by action of the Trustees. The
shareholders also have the right under certain circumstances to remove the
Trustees. Shares have no preemptive or conversion rights and when issued are
fully paid and non-assessable.
The Trust's Declaration of Trust permits the Trustees to divide or combine
the Shares into a greater or lesser number of Shares without thereby changing
the proportionate beneficial interests in the Trust. Each Share represents an
equal proportionate interest in the Trust with each other Share.
The Trust may be terminated (i) by the affirmative vote of the holders of
66% of its outstanding Shares or (ii) by an instrument signed by a majority of
the Trustees and consented to by the holders of two-thirds of the Trust's
outstanding Shares. Upon termination of the Trust, the Trustees will wind up the
affairs of the Trust, the Trust's business will be liquidated and the Trust's
net assets will be distributed to the Trust's shareholders on a pro rata basis.
If not so terminated, the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Trust, requires that Trust
documents include such disclaimer, and provides for indemnification and
reimbursement of expenses out of the Trust's property for any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations. Given the nature of the Trust's assets and operations, the
possibility of the Trust being unable to meet its obligations is remote. Given
the above limitations on shareholders' personal liability and the Trust's
ability to meet its indemnification obligations, in the opinion of Massachusetts
counsel to the Trust, the risk to Trust shareholders of personal liability is
remote.
The Declaration of Trust further provides that obligations of the Trust are
not binding upon the Trustees individually but only upon the property of the
Trust. Accordingly, the Trustees will not be liable for errors of judgment or
mistakes of fact or law, but nothing in the Declaration of Trust protects a
Trustee against any liability to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of his office.
ANTI-TAKEOVER PROVISIONS
The Trust presently has certain anti-takeover provisions in its Declaration
of Trust which could have the effect of limiting the ability of other entities
or persons to acquire control of the Trust, to cause it to engage in certain
transactions or to modify its structure. A Trustee may be removed from office by
a written instrument signed by at least two-thirds of the remaining trustees or
by a vote of the holders of at least 66% of the Shares. In addition, the
affirmative vote or consent of the holders of 66% of the Shares of the Trust (a
greater vote than that required by the 1940 Act and greater than the required
vote applicable 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;
21
<PAGE>
(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.
YIELD INFORMATION
--------------------------------------------------------------------------------
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, 2000, the
Trust's yield, calculated pursuant to this formula, was 8.49%.
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
22
<PAGE>
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.
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, 2000 financial statements of the Trust, included herein,
have been so included in reliance upon the report of Deloitte & Touche LLP,
independent auditors, 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 the Prospectus.
The 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. Reports and other
information about the Fund are available on the EDGAR Database on the SEC's
Internet site (www.sec.gov) and copies of this information may be obtained after
paying a duplicating fee, by electronic request at the following E-mail address:
[email protected], or writing the Public Reference Section of the SEC,
Washington, DC 20549-0102.
23
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SENIOR COLLATERALIZED TERM LOANS (a) (85.9%)
AEROSPACE & DEFENSE (1.2%)
$14,662 Avborne, Inc. (b)..................................................... 10.44-10.50% 06/30/05 $ 14,660,457
6,895 Decrane Aircraft Holdings,
Inc. (b)............................................................ 10.12 09/30/05 6,894,583
12,973 The Fairchild Corporation (b)......................................... 9.62-12.62 04/30/06 12,980,496
--------------
34,535,536
--------------
AIR FREIGHT/COURIERS (1.1%)
8,417 Erickson Air-Crane Co.,
L.L.C. (b).......................................................... 10.16 12/31/04 8,413,286
2,417 Evergreen International Aviation, Inc. (b)............................ 9.89-9.91 05/31/02 2,415,764
6,102 Evergreen International Aviation, Inc. (b)............................ 9.91 05/07/03 6,099,169
6,888 Evergreen International Aviation, Inc. (b)............................ 9.88 05/02/04 6,887,477
7,671 First Security Bank, National Association as Owner
Trustee (b)......................................................... 9.99 05/07/03 7,670,958
--------------
31,486,654
--------------
APPAREL/FOOTWEAR (1.9%)
14,311 American Marketing Industries, Inc. (b)............................... 10.44-10.50 11/29/02 14,308,935
3,860 American Marketing Industries, Inc. (b)............................... 10.44-10.50 11/30/03 3,859,444
2,681 American Marketing Industries, Inc. (b)............................... 10.44-10.50 11/30/04 2,680,706
4,144 American Marketing Industries, Inc. (b)............................... 10.44-10.50 11/30/05 4,142,999
6,427 Arena Brands, Inc. (b)................................................ 10.01-10.51 06/01/02 6,424,735
1,418 Arena Brands, Inc. (Revolver) (b)..................................... 9.87-11.75 06/01/02 1,418,633
16,094 St. John Knits International,
Inc. (b)............................................................ 9.63 07/31/07 16,088,125
5,859 The William Carter Co................................................. 8.69-8.94 10/30/03 5,856,539
--------------
54,780,116
--------------
AUTO PARTS - O.E.M. (2.2%)
9,600 Accuride Corp. (b).................................................... 8.25 01/21/06 9,360,000
7,275 Accuride Corp. (b).................................................... 8.94-9.00 01/21/07 7,274,957
9,975 Amcan Consolidated Technologies Corp. (b)............................. 10.69 03/28/07 9,879,739
6,266 J.L. French Automotive Castings, Inc.................................. 9.47 10/21/06 6,138,667
6,982 Polypore Inc. (b)..................................................... 10.13 12/31/06 6,982,430
2,638 Special Devices, Inc. (b)............................................. 10.19 12/15/05 2,637,015
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
24
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 2000, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 7,860 Stoneridge, Inc....................................................... 10.16% 12/31/05 $ 7,860,885
2,345 Tenneco, Inc. (b)..................................................... 9.97 11/04/07 2,345,074
2,345 Tenneco, Inc. (b)..................................................... 10.22 05/04/08 2,345,051
9,950 Transportation Technologies Industries, Inc. (b)...................... 10.41 03/31/07 9,946,465
--------------
64,770,283
--------------
AUTOMOTIVE AFTERMARKET (0.1%)
1,118 Safelite Glass Corp. (b).............................................. 11.14 09/30/07 1,118,128
1,118 Safelite Glass Corp. (b).............................................. 11.64 09/30/07 1,118,128
--------------
2,236,256
--------------
BEVERAGES - NON-ALCOHOLIC (0.3%)
9,405 The American Bottling Co.............................................. 9.63 10/07/07 9,406,317
--------------
BROADCAST/MEDIA (2.6%)
20,000 Benedek Broadcasting Corp. (b)........................................ 9.89-9.96 11/20/07 19,997,446
9,920 Black Entertainment Television, Inc................................... 8.38 06/30/06 9,800,166
2,850 Cumulus Media, Inc. (b)............................................... 9.66 09/30/07 2,849,145
1,900 Cumulus Media, Inc. (b)............................................... 9.66 02/28/08 1,899,430
2,500 Entravision Communications Corp. (b).................................. 9.94 12/31/08 2,492,975
5,000 Gray Communications Systems, Inc. (b)................................. 9.88 12/31/05 4,999,950
4,200 Nassau Broadcasting Partners I, LLC (b)............................... 10.39 12/04/07 4,199,202
17,167 Sinclair Broadcast Group, Inc. (b).................................... 7.91 09/15/05 17,161,517
10,000 Susquehanna Media Co.................................................. 9.13 06/30/08 10,025,000
--------------
73,424,831
--------------
CABLE/SATELLITE TV (2.7%)
15,000 Century Cable Holdings, LLC........................................... 9.66 12/31/09 14,995,350
28,000 Charter Communications Operating, LLC................................. 9.24 03/18/08 27,963,880
10,000 Charter Communications Operating, LLC................................. 9.24 09/18/08 9,993,800
3,474 Classic Cable, Inc.................................................... 9.44-9.56 01/31/08 3,460,658
5,862 Classic Cable, Inc. (b)............................................... 9.44-9.56 01/31/08 5,860,875
15,000 RCN Corp. (b)......................................................... 10.25 06/03/07 14,999,400
--------------
77,273,963
--------------
CASINO/GAMING (0.6%)
5,342 Alliance Gaming Corp. (b)............................................. 10.87 01/31/05 5,342,079
2,130 Alliance Gaming Corp. (b)............................................. 11.12 07/31/05 2,130,249
5,000 Harrah's Jazz Co. (b)................................................. 8.00 04/30/05 5,000,950
2,660 Isle of Capri Casinos, Inc............................................ 9.88-10.05 03/02/06 2,676,013
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
25
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 2000, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 2,328 Isle of Capri Casinos, Inc............................................ 10.02-10.45% 03/02/07 $ 2,341,512
--------------
17,490,803
--------------
CELLULAR TELEPHONE (4.3%)
8,400 American Cellular Corp................................................ 9.63 03/31/08 8,405,796
9,600 American Cellular Corp................................................ 9.88 03/31/09 9,606,624
16,476 Centennial Puerto Rico Operating Corp................................. 9.62 05/31/07 16,520,480
10,219 Centennial Puerto Rico Operating Corp................................. 9.87 11/30/07 10,249,505
4,962 Dobson Operating Co., L.L.C........................................... 9.64 12/31/07 4,960,713
14,925 Dobson Operating Co., L.L.C........................................... 9.63 03/31/08 14,939,925
35,602 Microcell Connexions, Inc. (b)........................................ 9.66-9.87 03/01/06 35,599,295
12,500 Rural Cellular Corp................................................... 9.63 10/03/08 12,503,875
12,500 Rural Cellular Corp................................................... 9.88 04/03/09 12,503,875
--------------
125,290,088
--------------
CHEMICALS: MAJOR DIVERSIFIED (0.7%)
9,925 Georgia Gulf Corp..................................................... 9.38 11/12/06 9,973,368
10,000 Huntsman Corp. (b).................................................... 9.75 12/31/05 9,999,600
--------------
19,972,968
--------------
CHEMICALS: SPECIALTY (1.6%)
7,425 Huntsman ICI Chemicals LLC............................................ 9.69 06/30/07 7,485,736
7,425 Huntsman ICI Chemicals LLC............................................ 9.94-10.00 06/30/08 7,485,736
9,435 Lyondell Chemical Company............................................. 10.37 06/30/05 9,558,549
6,773 Pioneer America Acqusitions Corp. (b)................................. 8.92-9.75 12/05/06 6,775,225
8,000 Pioneer Americas, Inc. (b)............................................ 9.18-9.79 12/05/06 7,998,992
7,999 Vining Industries, Inc. (b)........................................... 9.44 03/31/05 7,997,697
--------------
47,301,935
--------------
COAL (0.3%)
14,717 Quaker Coal Company,
Inc. (b) (d)........................................................ 13.00 06/30/06 7,838,419
--------------
COMPUTER COMMUNICATIONS (0.5%)
13,390 Acterna Corporation................................................... 9.89 09/30/07 13,400,254
--------------
COMPUTERS SOFTWARE AND SERVICES (0.2%)
7,044 DecisionOne Corp. (b)................................................. 10.09-11.75 04/18/05 6,691,339
--------------
CONSTRUCTION MATERIALS (0.5%)
6,562 Dayton Superior Corp. (b)............................................. 9.69-9.75 06/01/08 6,559,431
8,938 Onex ABCO Limited
Partnership (b)..................................................... 10.12 11/15/05 8,936,487
--------------
15,495,918
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
26
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 2000, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CONSUMER SUNDRIES (1.6%)
$ 2,357 American Safety Razor Co.............................................. 10.41-10.47% 04/30/07 $ 2,356,270
8,155 Amscan Holdings, Inc. (b)............................................. 9.06-9.16 12/31/04 8,152,591
17,000 Jostens, Inc.......................................................... 10.18 05/03/08 17,079,050
878 The Boyds Collection, Ltd. (b)........................................ 8.74-8.75 04/21/06 877,774
979 World Kitchen, Inc.
(Revolver) (b)...................................................... 9.01-11.00 04/09/05 979,170
15,680 World Kitchen, Inc. (b)............................................... 9.35-9.57 10/09/06 15,674,776
--------------
45,119,631
--------------
CONSUMER/BUSINESS SERVICES (2.9%)
11,435 Bridge Information Systems,
Inc. (b)............................................................ 10.44 05/29/03 11,432,465
2,360 Bridge Information Systems,
Inc. (Revolver) (b)................................................. 10.44 05/29/03 2,359,773
14,610 Bridge Information Systems,
Inc. (b)............................................................ 10.69 05/29/05 14,606,519
23,357 Buhrmann US Inc....................................................... 10.25 10/26/07 23,442,969
8,445 InfoUSA, Inc. (b)..................................................... 10.19 06/30/06 8,444,514
4,000 Iron Mountain, Inc.................................................... 9.44-9.59 09/15/00 4,032,160
9,444 Prime Succession, Inc. (b)............................................ 11.75 08/01/03 9,444,444
9,336 Rose Hills Co. (b).................................................... 8.94 12/01/03 9,333,557
--------------
83,096,401
--------------
CONTAINERS/PACKAGING (2.0%)
1,764 Graham Packaging Co................................................... 9.75 01/31/06 1,760,306
8,110 Graham Packaging Co................................................... 10.00-10.06 01/31/07 8,094,530
10,000 Huntsman Packaging Corp............................................... 9.69 05/31/08 9,776,400
9,000 Impress Metal Packaging Holdings B.V. (b)............................. 9.87 12/31/06 8,977,410
14,000 LLS Corp. (b)......................................................... 9.91-10.02 07/31/06 13,991,390
4,950 Nexpak Corp. (b)...................................................... 10.03 12/31/05 4,949,833
4,937 Nexpak Corp. (b)...................................................... 10.19 12/31/06 4,936,247
4,988 Tekni-Plex, Inc....................................................... 10.19 06/21/08 5,011,839
--------------
57,497,955
--------------
DISCOUNT STORES (0.5%)
15,164 Tuesday Morning Corp. (b)............................................. 9.62 12/29/04 15,163,942
--------------
DRUGSTORE CHAINS (0.6%)
9,750 Duane Reade, Inc. (b)................................................. 9.44-9.50 02/15/05 9,749,801
8,107 Duane Reade, Inc. (b)................................................. 9.69-9.75 02/15/06 8,107,393
--------------
17,857,194
--------------
EDUCATION (0.3%)
9,164 Children's Discovery Centers of America (b)........................... 9.81 06/30/05 9,160,957
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
27
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 2000, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
ELECTRIC UTILITIES (0.3%)
$10,000 Western Resources, Inc................................................ 9.38% 03/17/03 $ 10,058,300
--------------
ELECTRONIC COMPONENTS (0.8%)
7,329 Communications Instruments, Inc. (b).................................. 10.31-10.38 03/15/04 7,328,568
8,314 Dynamic Details, Inc. (b)............................................. 9.13 04/22/05 8,313,465
7,000 Knowles Electronics, Inc. (b)......................................... 9.81-10.00 06/29/07 6,998,693
--------------
22,640,726
--------------
ELECTRONIC PRODUCTION EQUIPMENT (0.2%)
5,661 Telex Communications, Inc. (b)........................................ 10.38 11/06/04 5,660,978
--------------
ENERGY (0.5%)
15,000 AES Texas Funding II, LLC............................................. 9.38 04/24/01 15,002,400
--------------
ENGINEERING & CONSTRUCTION (0.5%)
15,000 Washington Group International, Inc................................... 9.87 07/07/07 15,009,300
--------------
ENTERTAINMENT & LEISURE (0.6%)
7,500 MGM Studios, Inc...................................................... 9.44 03/31/06 7,443,750
10,000 Six Flags, Inc........................................................ 9.88-9.93 09/30/05 10,068,100
--------------
17,511,850
--------------
ENVIRONMENTAL SERVICES (2.2%)
27,727 Allied Waste Industries, Inc. (b)..................................... 9.44-9.75 07/30/06 26,905,714
27,273 Allied Waste Industries, Inc. (b)..................................... 9.69-9.75 07/30/07 26,464,636
12,804 Environmental Systems Products Holdings, Inc. (b)..................... 12.78 09/30/05 7,452,177
3,746 Stericycle, Inc....................................................... 10.13-12.00 11/10/06 3,768,310
--------------
64,590,837
--------------
FINANCE - COMMERCIAL (0.3%)
9,925 Outsourcing Solutions, Inc............................................ 10.73 06/10/06 9,898,103
--------------
FINANCE/RENTAL/LEASING (2.8%)
8,990 Blackstone Capital Company II, LLC (b)................................ 11.19 11/30/00 8,989,257
29,800 NationsRent, Inc...................................................... 10.06 07/20/06 29,601,234
5,531 Rent-A-Center, Inc.................................................... 8.62-8.63 01/31/06 5,501,407
6,770 Rent-A-Center, Inc.................................................... 8.87-8.88 01/31/07 6,733,196
14,813 United Rentals, Inc................................................... 9.31 06/30/05 14,590,313
6,000 United Rentals, Inc................................................... 9.12-10.13 06/30/06 5,933,760
8,830 Wasserstein/C & A Holdings, LLC (b)................................... 11.19 11/30/00 8,826,792
--------------
80,175,959
--------------
FINANCIAL PUBLISHING/SERVICES (0.3%)
7,925 Merrill Communications LLC (b)........................................ 10.37-10.39 11/23/07 7,922,265
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
28
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 2000, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FOOD CHAINS (0.6%)
$12,344 Big V Supermarkets, Inc. (b).......................................... 10.52-12.38% 08/10/03 $ 12,342,149
4,964 Big V Supermarkets, Inc. (b).......................................... 10.77 11/10/03 4,933,430
--------------
17,275,579
--------------
FOOD & BEVERAGES (1.5%)
8,724 Aurora Foods, Inc. (b)................................................ 9.87 06/30/05 7,797,223
4,915 Aurora Foods, Inc. (Revolver) (b)..................................... 9.87 06/30/05 4,914,456
6,930 Aurora Foods, Inc. (b)................................................ 10.37 09/30/06 6,929,861
9,250 B&G Foods, Inc. (b)................................................... 10.52 03/03/06 9,247,040
7,382 Eagle Family Foods, Inc. (b).......................................... 10.41-10.52 12/31/05 7,381,992
7,960 Merisant Company...................................................... 9.93 03/31/07 8,003,143
--------------
44,273,715
--------------
HOME BUILDING (0.7%)
10,945 Formica Corp. (b)..................................................... 10.16-10.56 04/30/06 10,943,453
9,950 Therma-Tru Holdings, Inc. (b)......................................... 10.19 05/09/07 9,946,517
--------------
20,889,970
--------------
HOME FURNISHINGS (0.2%)
6,769 Sleepmaster L.L.C. (b)................................................ 10.62 12/31/06 6,769,436
--------------
HOSPITAL/NURSING MANAGEMENT (3.1%)
5,928 Columbia - HealthOne, LLC (b)......................................... 10.13 06/30/05 5,927,527
6,904 Community Health Systems, Inc......................................... 9.63 12/31/03 6,835,759
6,904 Community Health Systems, Inc......................................... 10.13 12/31/04 6,840,109
5,123 Community Health Systems, Inc......................................... 10.38 12/31/05 5,080,047
8,064 FHC Health Systems, Inc. (b).......................................... 9.71 04/30/05 8,063,810
8,065 FHC Health Systems, Inc. (b).......................................... 9.96 04/30/06 8,063,730
4,150 GEAC/Multicare Co., Inc. (b).......................................... 11.75 09/30/04 3,668,744
1,376 GEAC/Multicare Co., Inc. (b).......................................... 12.00 06/01/05 1,216,659
4,268 Genesis Health Ventures, Inc. (b)..................................... 10.37 06/01/05 3,772,949
4,289 Genesis Health Ventures, Inc. (b)..................................... 10.12 09/30/04 3,791,544
17,194 Integrated Health Services,
Inc. (b) (d)........................................................ 11.06-13.25 09/30/04 4,814,250
9,468 Interim Healthcare, Inc. (b).......................................... 13.50 02/29/04 9,468,201
3,495 Interim Healthcare, Inc. (b).......................................... 14.00 02/28/05 3,494,893
3,435 Magellan Health Services,
Inc. (b)............................................................ 10.56 02/12/05 3,435,511
3,435 Magellan Health Services,
Inc. (b)............................................................ 10.81 02/12/06 3,435,511
7,938 Ventas Realty, Limited Partnership (b)................................ 9.37 12/31/02 7,936,468
3,969 Ventas Realty, Limited Partnership (b)................................ 10.37 12/31/05 3,968,115
--------------
89,813,827
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
29
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 2000, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
HOTELS/RESORTS (1.5%)
$ 5,315 Meristar Hospitality Operating Partnership, L.P....................... 8.63% 01/31/04 $ 5,312,085
12,406 Strategic Hotel Funding, L.L.C........................................ 10.37 11/16/04 12,457,984
10,000 Wyndham International, Inc............................................ 11.44 06/30/04 10,004,200
15,000 Wyndham International, Inc............................................ 10.44 06/30/06 14,861,250
--------------
42,635,519
--------------
INDUSTRIAL MACHINERY (1.5%)
10,000 Flowserve Corp........................................................ 10.25 06/30/08 10,030,000
9,016 Formax, Inc. (b)...................................................... 9.12-11.00 06/30/05 9,012,938
4,950 Mueller Group, Inc.................................................... 10.37-10.47 08/16/06 4,962,375
4,950 Mueller Group, Inc.................................................... 10.62-10.72 08/16/07 4,964,701
3,990 Mueller Group, Inc. (b)............................................... 10.62-10.68 08/16/07 3,988,864
9,950 SPX Corp.............................................................. 8.94 12/31/06 9,984,228
--------------
42,943,106
--------------
INDUSTRIAL SPECIALTIES (1.7%)
11,416 Advanced Glassfiber Yarns,
LLC (b)............................................................. 10.16 09/30/05 11,412,557
5,428 Jet Plastica Industries, Inc. (b)..................................... 9.38 12/31/02 5,428,216
8,891 Jet Plastica Industries, Inc. (b)..................................... 9.88 12/31/04 8,890,185
1,327 Jet Plastica Industries, Inc. (Revolver) (b).......................... 9.31-9.44 12/31/04 1,327,028
7,444 Metokote Corp. (b).................................................... 10.38-10.81 11/02/05 7,443,788
15,645 Panolam Industries International, Inc. and Panolam Industries, Ltd.
(b)................................................................. 9.94-11.75 11/24/06 15,663,556
--------------
50,165,330
--------------
INSURANCE BROKERS/SERVICES (0.5%)
7,196 Acordia, Inc. (b)..................................................... 9.19 12/31/04 7,195,543
2,880 Willis North America, Inc............................................. 9.19 11/19/07 2,881,210
2,880 Willis North America, Inc............................................. 9.44 02/19/08 2,881,210
--------------
12,957,963
--------------
MEDICAL SPECIALTIES (1.4%)
2,653 Alaris Medical Systems, Inc. (b)...................................... 10.19 11/01/03 2,652,500
2,653 Alaris Medical Systems, Inc. (b)...................................... 10.19 11/01/04 2,652,500
4,168 Alaris Medical Systems, Inc. (b)...................................... 10.19 05/01/05 4,167,958
6,172 Dade Behring, Inc. (b)................................................ 9.56-9.69 06/30/06 6,171,214
6,172 Dade Behring, Inc. (b)................................................ 9.81-9.94 06/30/07 6,171,121
8,935 Inamed Corp. (b)...................................................... 9.69 01/31/05 8,934,612
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
30
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 2000, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 2,455 Medical Specialties Group,
Inc. (b)............................................................ 10.16% 06/30/01 $ 2,453,809
7,136 Medical Specialties Group,
Inc. (b)............................................................ 10.91 06/30/04 7,134,223
--------------
40,337,937
--------------
MISCELLANEOUS COMMERCIAL SERVICES (0.3%)
9,950 Encompass Services Corp. (b).......................................... 9.87 05/10/07 9,949,743
--------------
MISCELLANEOUS MANUFACTURING (1.2%)
10,000 Citation Corp. (b).................................................... 10.44 12/01/07 9,996,400
2,550 Desa International, Inc. (b).......................................... 9.94 11/26/03 2,549,796
6,615 Desa International, Inc. (b).......................................... 10.08-12.00 11/26/04 6,614,869
6,365 Doskocil Manufacturing Co. (b)........................................ 10.64 09/30/04 6,363,890
8,000 Insilco Technologies, Inc. (b)........................................ 10.38 08/25/07 7,979,920
--------------
33,504,875
--------------
MOTOR VEHICLES (0.1%)
3,366 Asbury Automotive Texas Holdings L.L.C. (b)........................... 10.38 03/31/05 3,365,495
--------------
MOVIES/ENTERTAINMENT (1.0%)
9,472 Panavision, Inc. (b).................................................. 10.16-10.61 03/31/05 9,470,833
22,147 United Artists Theatre Co. (b)........................................ 10.87-12.75 04/21/05 18,669,617
--------------
28,140,450
--------------
MULTI-SECTOR COMPANIES (1.0%)
28,000 Mafco Finance Corp. (b)............................................... 11.68 06/15/01 27,799,520
--------------
OFFICE EQUIPMENT/SUPPLIES (1.0%)
14,813 Global Imaging Systems, Inc. (b)...................................... 9.87 06/30/06 14,812,204
17,608 US Office Products Co. (b)............................................ 10.13 06/09/06 13,258,458
--------------
28,070,662
--------------
OILFIELD SERVICES/EQUIPMENT (0.4%)
9,974 US Synthetic Corp. (b)................................................ 10.13-10.18 05/31/05 9,970,051
--------------
OIL & GAS PIPELINES (0.2%)
7,080 Transmontaigne, Inc. (b).............................................. 10.16 06/30/06 7,077,739
--------------
OTHER CONSUMER SERVICES (0.5%)
7,800 PCA International, Inc. (b)........................................... 9.63 08/25/05 7,800,000
7,823 Volume - Services, Inc. (b)........................................... 10.44-12.25 12/03/06 7,820,109
--------------
15,620,109
--------------
OTHER METALS/MINERALS (0.6%)
9,921 Better Minerals & Aggregates Company (b).............................. 10.31-12.00 09/30/07 9,920,657
7,561 CII Carbon, Inc. (b).................................................. 9.40-9.43 06/25/08 7,558,489
--------------
17,479,146
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
31
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 2000, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PHARMACEUTICALS: OTHER (0.0%)
$ 972 King Pharmaceuticals, Inc............................................. 10.37% 12/22/06 $ 973,017
--------------
PRINTING/PUBLISHING (1.8%)
6,304 Mail-Well I Corp. (b)................................................. 9.16 02/22/07 6,301,684
10,771 The Sheridan Group, Inc. (b).......................................... 9.94 01/30/05 10,770,974
19,854 Vertis, Inc........................................................... 10.38-10.44 12/07/08 19,852,633
3,255 Von Hoffman Press, Inc. (b)........................................... 8.91 05/30/04 3,254,381
10,582 Von Hoffman Press, Inc. (b)........................................... 8.91 05/30/05 10,578,946
--------------
50,758,618
--------------
PUBLISHING: BOOKS/MAGAZINES (1.5%)
18,648 Advanstar Communications, Inc......................................... 9.12 04/30/05 18,647,901
4,929 Advanstar Communications, Inc......................................... 9.62 06/30/07 4,928,994
10,000 American Media Operations, Inc........................................ 10.16-10.49 04/01/07 10,014,500
9,150 Ziff Davis Media, Inc................................................. 10.26 03/31/07 9,176,561
--------------
42,767,956
--------------
PUBLISHING: NEWSPAPERS (0.9%)
4,875 21st Century Newspapers,
Inc. (b)............................................................ 9.25 09/15/05 4,874,903
17,500 Hollinger International Publishing, Inc. (b).......................... 9.81 12/31/04 17,499,825
3,433 Hollinger International Publishing, Inc. (b).......................... 9.75 09/30/05 3,439,067
--------------
25,813,795
--------------
PULP & PAPER (1.1%)
7,511 Alabama Pine Pulp Co., Inc. (b)....................................... 10.62 06/30/03 7,135,259
3,679 Alabama Pine Pulp Co.,
Inc. (b) (e)........................................................ 10.62 06/30/05 1,246,515
4,927 Alabama Pine Pulp Co.,
Inc. (b) (e)........................................................ 10.75 12/31/08 203,474
7,786 Alabama River Newsprint Co. (Participation: Toronto Dominion Bank) (b)
(c)................................................................. 8.69-8.75 12/31/02 7,521,078
6,340 Crown Paper Co. (Revolver) (b)........................................ 13.00 08/22/02 6,340,045
8,082 Crown Paper Co. (b)................................................... 10.50 08/22/03 8,081,536
--------------
30,527,907
--------------
RECREATIONAL PRODUCTS/TOYS (0.8%)
7,187 Ritvik Toys, Inc. (b)................................................. 10.19 02/08/03 7,184,591
7,187 Ritvik Toys, Inc. (b)................................................. 10.69 02/08/04 7,184,447
365 Spalding Holdings Corp. (b)........................................... 9.21 09/30/03 364,919
4,007 Spalding Holdings Corp. (Revolver) (b)................................ 9.21-11.00 09/30/03 4,007,327
1,828 Spalding Holdings Corp. (b)........................................... 9.71 09/30/04 1,827,678
1,828 Spalding Holdings Corp. (b)........................................... 10.21 09/30/05 1,827,641
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
32
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 2000, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 1,052 Spalding Holdings Corp. (b)........................................... 10.71% 03/30/06 $ 1,052,218
--------------
23,448,821
--------------
RESTAURANTS (0.1%)
4,101 Captain D's Inc....................................................... 10.62 12/31/01 4,018,110
--------------
RETAIL-SPECIALTY (0.8%)
7,434 CSK Auto, Inc......................................................... 8.44 10/31/03 7,425,827
8,702 HMV Media Group PLC (b)............................................... 9.41 02/25/06 8,699,006
5,998 HMV Media Group PLC (b)............................................... 10.23 08/25/06 5,997,840
--------------
22,122,673
--------------
SEMICONDUCTORS (1.5%)
6,275 Semiconductor Components Industries, LLC.............................. 10.19 08/04/06 6,324,434
16,758 Semiconductor Components Industries, LLC.............................. 9.69-10.44 08/04/07 16,831,729
20,000 Viasystems, Inc....................................................... 9.64-9.66 03/31/07 19,980,000
--------------
43,136,163
--------------
SERVICES TO THE HEALTH INDUSTRY (2.1%)
11,194 Alliance Imaging, Inc................................................. 9.94 11/02/07 11,072,799
13,806 Alliance Imaging, Inc................................................. 10.19 11/02/08 13,656,451
19,367 Quest Diagnostics, Inc................................................ 9.69-10.48 06/15/06 19,430,475
17,261 Unilab Corp. (b)...................................................... 10.56 11/23/06 17,259,105
--------------
61,418,830
--------------
SPECIALTY INSURANCE (0.2%)
2,450 BRW Acquisition, Inc. (b)............................................. 9.19 07/10/06 2,449,682
2,450 BRW Acquisition, Inc. (b)............................................. 9.44 07/10/07 2,449,608
--------------
4,899,290
--------------
SPECIALTY STORES (1.0%)
4,850 Caribbean Petroleum, LP (b)........................................... 10.14 09/30/05 4,848,351
3,269 Cumberland Farms, Inc. (Participation Merrill Lynch & Co., Inc.) (b)
(c)................................................................. 11.00 12/31/00 3,268,491
7,453 Petro Stopping Centers, L.P. (b)...................................... 9.66 07/23/06 7,450,889
12,227 The Pantry, Inc....................................................... 10.13 01/31/06 12,227,346
1,519 The Pantry, Inc....................................................... 10.38 07/31/06 1,519,440
--------------
29,314,517
--------------
STEEL (0.9%)
12,181 ISPAT Inland, L.P..................................................... 8.87 07/16/05 12,180,529
12,243 ISPAT Inland, L.P..................................................... 9.37 07/16/06 12,243,189
--------------
24,423,718
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
33
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 2000, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TELECOMMUNICATION EQUIPMENT (2.4%)
$15,000 American Tower, L.P., American Towers, Inc. and ATC
Teleports, Inc...................................................... 9.98% 12/31/07 $ 15,095,400
4,214 Channel Master, Inc. (b).............................................. 9.14-11.00 10/10/05 4,213,768
7,000 Crown Castle Operating Co............................................. 9.38 03/15/08 7,022,820
21,000 Pinnacle Towers, Inc. (b)............................................. 9.41 06/30/07 20,991,810
21,674 Superior Telecom, Inc................................................. 10.44 11/27/05 21,521,315
--------------
68,845,113
--------------
TELECOMMUNICATIONS (6.8%)
22,000 360network holdings (USA) inc......................................... 13.00 12/31/07 21,890,000
10,526 Alaska Communications Systems Holdings, Inc........................... 9.63 11/14/07 10,521,053
9,474 Alaska Communications Systems Holdings, Inc........................... 9.88 05/14/08 9,468,947
7,406 Davel Financing Co., LLC (b).......................................... 10.87 06/23/05 1,185,000
7,452 Fairpoint Communications, Inc......................................... 9.25-9.44 03/31/06 7,451,688
9,750 Fairpoint Communications, Inc......................................... 9.69-11.25 03/31/07 9,750,137
20,000 Global Crossing Holdings, Ltd......................................... 9.38 06/30/06 20,135,800
25,000 KMC Telecom, Inc. (b)................................................. 12.00 07/01/07 24,998,000
10,000 Level 3 Communications, Inc. (b)...................................... 10.48 01/15/08 10,034,400
20,000 McleodUSA Inc......................................................... 9.63 05/30/08 20,045,400
17,000 XO Communications, Inc................................................ 9.94 06/30/07 16,962,770
4,058 Teligent, Inc. (b).................................................... 9.51 06/30/06 4,058,174
10,000 Teligent, Inc. (b).................................................... 9.57 06/30/06 9,998,300
30,000 WCI Capital Corp...................................................... 11.43 09/30/07 29,236,400
--------------
195,736,069
--------------
TEXTILES (1.0%)
7,960 Globe Manufacturing, Inc. (b)......................................... 12.25 07/31/06 6,161,040
4,198 Joan Fabrics Corp..................................................... 9.44 06/30/05 4,196,918
2,174 Joan Fabrics Corp..................................................... 9.44 06/30/06 2,173,888
10,802 Polymer Group, Inc. (b)............................................... 10.13 12/20/05 10,802,331
4,000 Polymer Group, Inc. (b)............................................... 10.38 12/30/06 3,999,960
--------------
27,334,137
--------------
TRANSPORTATION (0.7%)
9,925 Allied Worldwide, Inc. (b)............................................ 10.64 11/18/07 9,923,214
5,244 Quality Distribution, Inc. (b)........................................ 8.91 08/28/05 5,244,089
4,484 Quality Distribution, Inc. (b)........................................ 9.14 02/28/06 4,481,628
--------------
19,648,931
--------------
WIRELESS COMMUNICATIONS (6.1%)
13,547 Arch Paging, Inc. (b)................................................. 13.63 06/30/06 13,545,609
15,000 Cook Inlet/VoiceStream Operating Company, LLC......................... 10.63 12/31/08 15,157,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
34
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 2000, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$22,500 Nextel Finance Co..................................................... 10.13% 06/30/08 $ 22,695,975
22,500 Nextel Finance Co..................................................... 10.31 12/31/08 22,695,975
15,000 Nextel Partners Operating Corp........................................ 11.41 01/29/08 14,872,350
10,000 Nextel Partners Operating Corp........................................ 11.22 07/29/08 10,041,700
10,355 Powertel PCS, Inc. (b)................................................ 9.69 12/31/08 10,352,948
13,805 Powertel PCS, Inc. (Participation:
Goldman Sachs & Co.) (c) (b)........................................ 9.69 12/31/08 13,804,906
15,000 VoiceStream PCS Holding L.L.C. & Omnipoint Finance, LLC............... 9.66 02/25/09 14,963,700
25,000 VoiceStream PCS Holding L.L.C. & Omnipoint Finance, LLC............... 9.64 06/30/09 24,870,750
12,500 Western Wireless Corp................................................. 9.38-9.44 09/30/08 12,552,500
--------------
175,553,913
--------------
TOTAL SENIOR COLLATERALIZED TERM LOANS
(COST $2,523,383,252)........................................................................ 2,477,544,228
--------------
SENIOR NOTES (b) (f) (0.3%)
APPAREL/FOOTWEAR (0.0%)
1,613 London Fog Industries,
Inc................................................................. 10.00 02/27/03 629,121
--------------
CABLE/SATELLITE TV (0.3%)
9,563 Supercanal Holdings S.A. (Argentina).................................. 11.25 10/12/02 7,880,297
--------------
TOTAL SENIOR NOTES
(COST $11,452,484)........................................................................... 8,509,418
--------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES
---------
<C> <S> <C>
COMMON STOCKS (g) (0.1%)
APPAREL/FOOTWEAR (0.0%)
129,050 London Fog Industries, Inc. (Restricted)................................................. --
--------------
AUTOMOTIVE AFTERMARKET (0.0%)
100,632 Safelite Glass Corp. (b)................................................................. 58,636
6,793 Safelite Realty Corp. (b)................................................................ 3,958
--------------
62,594
--------------
DATA PROCESSING SERVICES (0.1%)
186,430 DecisionOne Corp. (b).................................................................... 1,414,286
--------------
TOTAL COMMON STOCKS
(COST $3,735,788)........................................................................ 1,476,880
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
35
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 2000, CONTINUED
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE VALUE
--------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
WARRANT (b) (g) (0.0%)
APPAREL/FOOTWEAR
7,931 London Fog Industries, Inc. (Restricted) (Cost $1,722,237)............................... 02/27/05 --
--------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
--------- ------ --------
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENTS (13.0%)
COMMERCIAL PAPER (h) (12.4%)
FINANCE -- AUTOMOTIVE (6.0%)
$ 40,000 Ford Motor Credit Co.............................................................. 6.49% 10/05/00 $ 39,963,944
52,000 Ford Motor Credit Co. (i)......................................................... 6.51 10/12/00 51,887,160
20,000 General Motors Acceptance Corp.................................................... 6.00 10/02/00 19,993,333
60,000 General Motors Acceptance Corp.................................................... 6.48 10/04/00 59,956,800
--------------
171,801,237
--------------
FINANCE -- CONSUMER (4.2%)
102,000 American Express Credit Corp...................................................... 6.50 10/03/00 101,944,750
18,000 American Express Credit Corp...................................................... 6.56 10/06/00 17,980,320
--------------
119,925,070
--------------
FINANCIAL PUBLISHING/SERVICES (2.2%)
65,000 General Electric Capital Corp..................................................... 6.49 10/04/00 64,953,128
--------------
TOTAL COMMERCIAL PAPER
(COST $356,743,598)................................................................................. 356,679,435
--------------
REPURCHASE AGREEMENT (0.6%)
18,718 The Bank of New York (dated 09/29/00; proceeds $18,727,472) (j)
(COST $18,717,723).............................................................. 6.25 10/02/00 18,717,723
--------------
TOTAL SHORT-TERM INVESTMENTS
(COST $375,461,321)................................................................................. 375,397,158
--------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
36
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
PORTFOLIO OF INVESTMENTS SEPTEMBER 30, 2000, CONTINUED
<TABLE>
<CAPTION>
VALUE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TOTAL INVESTMENTS
(COST $2,915,755,082) (k)............................................................... 99.3% $ 2,862,927,684
OTHER ASSETS IN EXCESS OF LIABILITIES................................................... 0.7 21,401,930
----- ---------------
NET ASSETS.............................................................................. 100.0% $ 2,884,329,614
----- ---------------
----- ---------------
</TABLE>
---------------------
(a) Floating rate securities. Interest rates shown are those in effect at
September 30, 2000.
(b) Valued using fair value procedures -- total aggregate value is
$1,395,330,385.
(c) Participation interests were acquired through the financial institutions
indicated parenthetically.
(d) Non-income producing security; loan in default.
(e) Payment-in-kind security.
(f) Non-income producing security; note in default.
(g) Non-income producing securities.
(h) Purchased on a discount basis. The interest rate shown has been adjusted to
reflect a money market equivalent yield.
(i) A portion of this security is segregated in connection with unfunded loan
commitments.
(j) Collateralized by $18,753,171 Federal Home Loan Mortgage Corp. 7.00% due
02/15/03 valued at $19,092,078.
(k) The aggregate cost for federal income tax purposes approximates the
aggregate cost for book purposes. The aggregate gross unrealized
appreciation is $5,376,816 and the aggregate gross unrealized depreciation
is $58,204,214, resulting in net unrealized depreciation of $52,827,398.
SEE NOTES TO FINANCIAL STATEMENTS
37
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 2000
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value (cost $2,915,755,082)... $2,862,927,684
Cash........................................................ 2,699,955
Receivable for:
Interest................................................ 24,803,642
Shares of beneficial interest sold...................... 5,410,414
Investments sold........................................ 124,478
Prepaid expenses and other assets........................... 1,066,150
--------------
TOTAL ASSETS........................................... 2,897,032,323
--------------
LIABILITIES:
Payable for:
Investment advisory fee................................. 2,002,816
Dividends to shareholders............................... 1,371,494
Administration fee...................................... 593,862
Accrued expenses and other payables......................... 433,401
Deferred loan fees.......................................... 8,301,136
Commitments and contingencies (Note 6)...................... --
--------------
TOTAL LIABILITIES...................................... 12,702,709
--------------
NET ASSETS............................................. $2,884,329,614
==============
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................. $2,948,052,125
Net unrealized depreciation................................. (52,827,398)
Accumulated undistributed net investment income............. 2,777,873
Accumulated net realized loss............................... (13,672,986)
--------------
NET ASSETS............................................. $2,884,329,614
==============
NET ASSET VALUE PER SHARE,
296,722,545 SHARES OUTSTANDING (UNLIMITED SHARES
AUTHORIZED OF $.01 PAR VALUE)............................. $9.72
==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
38
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 2000
<TABLE>
<S> <C>
NET INVESTMENT INCOME
INCOME
Interest.................................................... $251,170,051
Facility, amendment and other loan fees..................... 5,646,808
Other....................................................... 155,899
------------
TOTAL INCOME........................................... 256,972,758
------------
EXPENSES
Investment advisory fee..................................... 22,919,576
Administration fee.......................................... 6,771,743
Transfer agent fees and expenses............................ 1,049,805
Professional fees........................................... 896,208
Registration fees........................................... 368,280
Shareholder reports and notices............................. 357,746
Facility fees............................................... 162,005
Custodian fees.............................................. 126,096
Trustees' fees and expenses................................. 17,197
Other....................................................... 193,717
------------
TOTAL EXPENSES......................................... 32,862,373
Less: expense offset........................................ (122,585)
------------
NET EXPENSES........................................... 32,739,788
------------
NET INVESTMENT INCOME.................................. 224,232,970
------------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss........................................... (5,523,905)
Net change in unrealized depreciation....................... (38,361,789)
------------
NET LOSS............................................... (43,885,694)
------------
NET INCREASE................................................ $180,347,276
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
39
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
-----------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income......................... $ 224,232,970 $ 161,147,785
Net realized gain (loss)...................... (5,523,905) 1,067,708
Net change in unrealized depreciation......... (38,361,789) (13,449,451)
-------------- --------------
NET INCREASE............................. 180,347,276 148,766,042
Dividends from net investment income.......... (221,847,859) (159,065,743)
Net increase from transactions in shares of
beneficial interest......................... 411,871,174 527,549,296
-------------- --------------
NET INCREASE............................. 370,370,591 517,249,595
NET ASSETS:
Beginning of period........................... 2,513,959,023 1,996,709,428
-------------- --------------
END OF PERIOD
(INCLUDING UNDISTRIBUTED NET INVESTMENT
INCOME OF $2,777,873 AND $704,520,
RESPECTIVELY)............................. $2,884,329,614 $2,513,959,023
============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
40
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
FINANCIAL STATEMENTS, CONTINUED
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 2000
<TABLE>
<S> <C>
INCREASE (DECREASE) IN CASH:
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net investment income....................................... $ 224,232,970
Adjustments to reconcile net investment income to net cash
provided by operating activities:
Increase in receivables and other assets related to
operations................................................ (7,779,372)
Increase in payables related to operations.................. 451,183
Net loan fees received...................................... 6,014,732
Amortization of loan fees................................... (5,646,808)
Accretion of discounts...................................... (214,480)
---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.............. 217,058,225
---------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Purchases of investments.................................... (1,220,677,158)
Principal repayments/sales of investments................... 1,088,204,725
Net sales/maturities of short-term investments.............. (275,511,011)
---------------
NET CASH USED FOR INVESTING ACTIVITIES................. (407,983,444)
---------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Shares of beneficial interest sold.......................... 594,981,844
Shares tendered............................................. (280,275,046)
Dividends from net investment income (net of reinvested
dividends of $96,880,027)................................. (124,816,712)
---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES.............. 189,890,086
---------------
NET DECREASE IN CASH........................................ (1,035,133)
CASH BALANCE AT BEGINNING OF YEAR........................... 3,735,088
---------------
CASH BALANCE AT END OF YEAR................................. $ 2,699,955
===============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
41
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2000
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter 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) Certain senior collateralized loans ("Senior
Loans") are valued based on quotations received from an independent pricing
service; (2) all other Senior Loans 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
of the Senior Loan. 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 these Senior Loans existed; (3) portfolio securities
for which over-the-counter market quotations are readily available are valued at
the latest bid price; (4) all other securities and other assets are valued at
their fair value as determined in good faith under procedures established by and
under the general supervision of the Trustees; and (5) short-term debt
securities having a maturity date of more than sixty days at time of purchase
are valued on a mark-to-market basis until sixty days prior to maturity and
thereafter at amortized cost based on their value on the 61st day. Short-term
debt securities having a maturity date of sixty days or less at the time of
purchase are valued at amortized cost.
42
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2000, CONTINUED
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
distributions which exceed net investment income and net realized capital gains
for tax purposes are reported as distributions of paid-in-capital.
43
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2000, CONTINUED
2. INVESTMENT ADVISORY/ADMINISTRATION AGREEMENTS
Pursuant to an Investment Advisory Agreement with Morgan Stanley Dean Witter
Advisors 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; 0.85% to the
portion of the daily net assets exceeding $500 million but not exceeding
$1.5 billion; 0.825% to the portion of daily net assets exceeding $1.5 billion
but not exceeding $2.5 billion; and 0.80% to the portion of daily net assets
exceeding $2.5 billion, but not exceeding $3 billion. Effective May 1, 2000, the
Agreement was amended to reduce the annual rate to 0.775% of the portion of
daily net assets in excess of $3 billion.
Pursuant to an Administration Agreement with Morgan Stanley 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.
3. 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,
2000 aggregated $1,220,677,158 and $1,087,893,769, respectively.
Shares of the Trust are distributed by Morgan Stanley Dean Witter Distributors
Inc. (the "Distributor"), an affiliate of the Investment Advisor and
Administrator. Pursuant to a Distribution Agreement between the Trust, the
Investment Advisor and the Distributor, the Investment Advisor compensates the
Distributor at an annual 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. Any early
withdrawal charge to defray distribution expenses will be charged to the
shareholder in connection with shares held for four years or less which are
accepted by the Trust for repurchase pursuant to tender offers. For the year
ended September 30, 2000, the Investment Advisor has informed the Trust that it
received approximately $3,361,000 in early withdrawal charges.
44
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2000, CONTINUED
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Advisor,
Administrator and Distributor, is the Trust's transfer agent. At September 30,
2000, the Trust had transfer agent fees and expenses payable of approximately
$1,900.
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, 2000
included in Trustees' fees and expenses in the Statement of Operations amounted
to $5,863. At September 30, 2000, the Trust had an accrued pension liability of
$52,664 which is included in accrued expenses in the Statement of Assets and
Liabilities.
4. FEDERAL INCOME TAX STATUS
During the year ended September 30, 2000, the Trust utilized approximately
$63,000 of its net capital loss carryover. At September 30, 2000, the Trust had
a net capital loss carryover of approximately $7,660,000 which will be available
through September 30, 2007 to offset future capital gains to the extent provided
by regulations.
Capital losses incurred after October 31 ("post-October" losses) within the
taxable year are deemed to arise on the first business day of the Trust's next
taxable year. The Trust incurred and will elect to defer net capital loss of
approximately $5,362,000 during fiscal 2000.
As of September 30, 2000, the Trust had temporary book/tax differences primarily
attributable to post-October losses and tax adjustments on revolver loans held
by the Trust and permanent book/tax differences attributable to 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 $311,758.
45
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2000, CONTINUED
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
SHARES AMOUNT
----------- --------------
<S> <C> <C>
Balance, September 30, 1998................................. 201,526,077 $2,008,631,657
Shares sold................................................. 65,236,515 645,727,385
Shares issued to shareholders for reinvestment of
dividends.................................................. 7,070,460 69,946,361
Shares tendered (four quarterly tender offers).............. (19,019,056) (188,124,450)
----------- --------------
Balance, September 30, 1999................................. 254,813,996 2,536,180,953
Shares sold................................................. 60,576,915 595,266,193
Shares issued to shareholders for reinvestment of
dividends.................................................. 9,863,237 96,880,027
Shares tendered (four quarterly tender offers).............. (28,531,603) (280,275,046)
----------- --------------
Balance, September 30, 2000................................. 296,722,545 $2,948,052,127
=========== ==============
</TABLE>
On October 26, 2000, the Trustees approved a tender offer to purchase up to
20 million shares of beneficial interest to commence on November 15, 2000.
6. COMMITMENTS AND CONTINGENCIES
As of September 30, 2000, the Trust had unfunded loan commitments pursuant to
the following loan agreements:
<TABLE>
<CAPTION>
UNFUNDED
BORROWER COMMITMENT
-------- -----------
<S> <C>
Arena Brands, Inc........................................... $ 664,583
Aurora Foods, Inc........................................... 126,752
Bridge Information Systems, Inc............................. 417,437
Crown Paper Co.............................................. 413,042
Jet Plastica Industries, Inc................................ 1,375,633
Nassau Broadcasting Partners I, LLC (Term C)................ 2,800,000
Spalding Holdings Corp...................................... 1,842,353
Teligent, Inc. (Multi-Draw)................................. 2,608,696
Teligent, Inc. (Revolver)................................... 3,333,333
World Kitchen Consumer Products, Inc........................ 20,727
-----------
$13,602,556
===========
</TABLE>
The total value of securities segregated for unfunded loan commitments was
$19,956,600.
46
<PAGE>
MORGAN STANLEY DEAN WITTER 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 YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA:
Net asset value, beginning
of period................. $ 9.87 $ 9.91 $ 9.95 $ 9.94 $ 9.99
---------- ---------- ---------- ---------- --------
Income (loss) from
investment operations:
Net investment income... 0.82 0.70 0.71 0.75 0.74
Net realized and
unrealized gain
(loss).................. (0.16) (0.05) (0.03) -- (0.04)
---------- ---------- ---------- ---------- --------
Total income from
investment operations..... 0.66 0.65 0.68 0.75 0.70
---------- ---------- ---------- ---------- --------
Less dividends and
distributions from:
Net investment income... (0.81) (0.69) (0.72) (0.74) (0.75)
Net realized gain....... -- -- -- -- --
---------- ---------- ---------- ---------- --------
Total dividends and
distributions............. (0.81) (0.69) (0.72) (0.74) (0.75)
---------- ---------- ---------- ---------- --------
Net asset value, end of
period.................... $ 9.72 $ 9.87 $ 9.91 $ 9.95 $ 9.94
========== ========== ========== ========== ========
TOTAL RETURN+.............. 6.87% 6.72% 7.14% 7.78% 7.25%
RATIOS TO AVERAGE NET
ASSETS:
Expenses................... 1.21% 1.22% 1.29% 1.40% 1.46%
Net investment income...... 8.26% 7.02% 7.17% 7.53% 7.50%
SUPPLEMENTAL DATA:
Net assets, end of period,
in thousands.............. $2,884,330 $2,513,959 $1,996,709 $1,344,603 $939,471
Portfolio turnover rate.... 45% 44% 68% 86% 72%
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1995 1994 1993 1992 1991
--------------------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA:
Net asset value, beginning
of period................. $ 10.00 $ 9.91 $ 9.99 $ 10.00 $ 10.00
-------- -------- -------- -------- --------
Income (loss) from
investment operations:
Net investment income... 0.82 0.62 0.55 0.62 0.84
Net realized and
unrealized gain
(loss).................. 0.01 0.09 (0.08) (0.01) --
-------- -------- -------- -------- --------
Total income from
investment operations..... 0.83 0.71 0.47 0.61 0.84
-------- -------- -------- -------- --------
Less dividends and
distributions from:
Net investment income... (0.81) (0.62) (0.55) (0.62) (0.84)
Net realized gain....... (0.03) -- -- -- --
-------- -------- -------- -------- --------
Total dividends and
distributions............. (0.84) (0.62) (0.55) (0.62) (0.84)
-------- -------- -------- -------- --------
Net asset value, end of
period.................... $ 9.99 $ 10.00 $ 9.91 $ 9.99 $ 10.00
======== ======== ======== ======== ========
TOTAL RETURN+.............. 8.57% 7.32% 4.85% 6.23% 8.77%
RATIOS TO AVERAGE NET
ASSETS:
Expenses................... 1.52% 1.60% 1.45% 1.47% 1.52%
Net investment income...... 8.11% 6.14% 5.53% 6.14% 8.23%
SUPPLEMENTAL DATA:
Net assets, end of period,
in thousands.............. $521,361 $305,034 $311,479 $413,497 $479,941
Portfolio turnover rate.... 102% 147% 92% 46% 42%
</TABLE>
---------------------
<TABLE>
<C> <S>
+ 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.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
47
<PAGE>
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Dean Witter Prime Income Trust (the "Trust"), including the portfolio of
investments, as of September 30, 2000, and the related statements of operations
and cash flows, changes in net assets and the financial highlights for the year
then ended. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit. The statement of changes in net assets for the year ended September 30,
1999 and the financial highlights for each of the respective periods ended
September 30, 1999 were audited by other independent accountants whose report,
dated November 15, 1999, expressed an unqualified opinion on that statement and
the financial highlights.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of September 30, 2000, by correspondence with the custodian
and selling or agent banks. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Morgan
Stanley Dean Witter Prime Income Trust as of September 30, 2000, the results of
its operations, its cash flows, the changes in its net assets, and the financial
highlights for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
Deloitte & Touche LLP
NEW YORK, NEW YORK
NOVEMBER 13, 2000
48
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MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST
CHANGE IN INDEPENDENT ACCOUNTANTS
On July 1, 2000 PrincewaterhouseCoopers LLP resigned as independent accountants
of the Trust.
The reports of PricewaterhouseCoopers LLP in the financial statements of the
Trust for the past two fiscal years contained no adverse opinion or disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principle.
In connection with its audits for the two most recent fiscal years and through
July 1, 2000 there have been no disagreements with PricewaterhouseCoopers LLP on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of PricewaterhouseCoopers LLP would have caused them to make
reference thereto in their report on the financial statements for such years.
The Trust, with the approval of its Board of Trustees and its Audit Committee,
engaged Deloitte & Touche LLP as its new independent accountants as of July 1,
2000.
49
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Trustees of
Morgan Stanley Dean Witter Prime Income Trust
In our opinion, the statement of changes in net assets and the financial
highlights of Morgan Stanley Dean Witter Prime Income Trust (the "Trust") (not
presented separately herein) present fairly, in all material respects, the
changes in its net assets for the year ended September 30, 1999 and the
financial highlights for each of the years in the period ended September 30,
1999, in conformity with generally accepted accounting principles. This
financial statement 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 provide a reasonable basis for the opinion expressed
above. We have not audited the financial statements or financial highlights of
the Trust for any period subsequent to September 30, 1999.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
November 15, 1999
50
