SUNSTONE FINANCIAL GROUP, INC.
207 East Buffalo Street, Suite 400
Milwaukee, Wisconsin 53202
(414) 271-5885
Fax: (414) 271-5910
February 27, 1997
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, DC 20549
Re: Primary Trend Fund, Inc.
(33-6343; 811-4704)
Primary Income Funds, Inc.
(33-29468; 811-5831)
Filing Pursuant to Rule 30b2-1 and Section 24(b) under the
Investment Company Act of 1940
Ladies and Gentlemen:
On behalf of the above-referenced registered investment company,
transmitted herewith for filing pursuant to Rule 30b2-1 and Section
24(b) under the Investment Company Act of 1940, as amended, is the
Funds' Semi-Annual Report for the period ended December 31, 1996.
Questions regarding this filing may be directed to the undersigned at
(414) 271-5885.
Sincerely,
/s/ Constance Dye Shannon
- -------------------------
Constance Dye Shannon
Legal and Compliance Manager
encl.
(THE PRIMARY TREND FUNDS LOGO)
SEMIANNUAL REPORT
THE PRIMARY
TREND FUND
THE PRIMARY
INCOME FUND
THE PRIMARY U.S.
GOVERNMENT FUND
MILWAUKEE, WISCONSIN
DECEMBER 31, 1996
MESSAGE TO SHAREHOLDERS
" we believe 1996 will continue to belong to the bulls."
THE PRIMARY TREND FUNDS
12/31/95 Semiannual Report
Phenomenal! That is the only word to describe the stock market action of
1996. After the superb performance in 1995, the current 15-year old bull market
(which we date back to the liftoff in August 1982) made a curtain call in 1996 -
- - with the Dow Jones Industrial Average (DJIA) putting in its best back-to-back
annual gains since 1954-55. As of this writing, the stock market is continuing
its high-spirited ways in 1997, with the DJIA crossing into the unchartered
waters above the 7000 mark another milestone.
Our value-oriented investment philosophy proved that aggressive strategies
and above-average risk were NOT needed in order to beat the markets in
1996*<F1>:
THE PRIMARY TREND FUND............. +30.0%
THE PRIMARY INCOME FUND............ +20.1%
THE PRIMARY U.S. GOVERNMENT FUND... +3.8%
THE PRIMARY TREND FUND benefited handsomely in 1996 from a number of
industries that outperformed the overall market (the S&P 500 Composite returned
22.9%). The substantial weighting in energy reaped many rewards for shareholders
as the underlying commodities of both crude oil and natural gas helped to buoy
the entire energy complex. In addition, the portfolio's long-term holding in
Global Natural Resources (+100%) was acquired by Seagull Energy; and Pennzoil
(+34%) continued to make huge strides in its turnaround efforts. The stock
market leadership of the financial sector in 1996 certainly ignited huge moves
made by two of our larger financial holdings GreenPoint Financial (+78%) and
Sallie Mae (+41%). Also, our timely entry into the cellular telecommunications
industry via Nokia and Ericsson, and renewed interest in the blue-chips such as
IBM and Eastman Kodak, all contributed greatly to the Fund's overall
performance.
THE PRIMARY INCOME FUND had an exceptional year as well. By keeping the
portfolio's exposure to utility securities at its minimum of 25%, we were able
to diminish the poor performance that this sector had in 1996 (the S&P Utilities
Index returned only 3.3%). However, the portfolio's overweighting in real estate
investment trusts (REITs) and the energy sector, as well as telecommunications,
allowed the Fund to post back-to-back gains of over 20% for 1995 and 1996. Some
of the Fund's better performers in 1996 included Angeles Mortgage REIT (+80%),
Ericsson Telephone (+55%) and Sallie Mae (+41%).
THE PRIMARY U.S. GOVERNMENT FUND, by keeping its fixed-income holdings on the
shorter end of the maturity curve, was able to avoid the potholes experienced by
long-term bonds in 1996 (30-year U.S. Treasury bonds declined -2.6% for the
year). We envision that an opportunity to extend maturities will present itself
during 1997.
How does Wall Street improve upon the gains registered in 1995 and 1996?
Today's market is being fueled by low interest rates and benign inflation,
coupled with huge sums of dollars being thrown into the coffers of mutual funds.
In a bull market of this magnitude, investors fear missing the boat. We have
taken some profits and pared back some positions in the portfolios thus far in
1997. The market's "vital signs" are extremely healthy and in gear, with the
majority of indices making new all-time highs. However, in general, the current
euphoria and levels of overvaluation give us reason to pause. We feel that the
direction of interest rates will be the key determinant of the longevity of this
bull market and Alan Greenspan a key player.
For 1997, investors should continue to focus on the wealth-building effects
of investing in sound, well-established, undervalued common stocks while
avoiding the overvalued fads of the moment. This is, and always will be, our
disciplined investment strategy at the The Primary Trend Funds.
Each of us at Arnold Investment Counsel values you as shareholders in The
Primary Trends Funds you are important to us. Our entire staff is keenly aware
of the responsibility you have given us through your investment in the Funds,
and we pledge to work diligently on your behalf to earn your continued trust and
support.
Sincerely,
/s/ Lilli Gust /s/ Barry S. Arnold
Lilli Gust, President Barry S. Arnold, Vice President
February 13, 1997
*<F1>The Trend Fund's 5- and 10-year average annual returns through 12/31/96
were 11.0% and 10.2%, respectively. The average annual returns for the 5 years
ended 12/31/96 and since inception (9/1/89) for the Income Fund were 10.7% and
11.3%, respectively; and for the Government Fund, 5.2% and 7.1%, respectively.
PORTFOLIOS OF INVESTMENTS
December 31, 1996 (unaudited)
<TABLE>
<CAPTION>
THE PRIMARY TREND FUND
MARKET
SHARES OR PRINCIPAL AMOUNT COST VALUE
- -------------------------- ---------- ----------
<S> <C> <C> <C>
COMMON STOCKS 83.4%
6,000 American International Group, Inc. (Insurance) $417,500 $649,500
8,000 Amoco Corporation (Integrated oil company) 434,600 644,000
18,500 Beverly Bancorporation, Inc. (Financial services) 312,187 334,156
30,000 Beverly Enterprises, Inc.*<F2> (Healthcare services) 392,580 382,500
10,000 Browning-Ferris Industries, Inc. (Waste management services) 299,250 262,500
10,000 CVS Corporation (Retail stores) 329,933 413,750
10,000 Eastman Kodak Company (Photographic equipment) 398,415 802,500
25,000 Enron Oil & Gas Company
(Domestic oil and gas exploration and production) 671,500 631,250
20,000 L.M. Ericsson Telephone AB
(Telecommunication equipment and services) 446,525 603,750
10,000 General Motors Corporation (Automobiles and trucks) 397,540 557,500
15,000 W.R. Grace & Co. (Chemicals) 709,129 776,250
20,000 GreenPoint Financial Corp. (Financial services) 576,550 945,000
52,500 Juno Lighting, Inc. (Commercial and residential lighting) 900,937 840,000
10,000 Newmont Mining Corporation (Gold mining) 375,015 447,500
15,000 Nokia Corporation (Telecommunication equipment and services) 565,900 862,500
25,000 Occidental Petroleum Corporation (Integrated oil company) 467,085 584,375
15,000 J.C. Penney Company, Inc. (Retail stores) 696,275 731,250
25,000 Pennzoil Company
(Domestic oil and gas exploration and production) 1,489,275 1,412,500
10,000 Petroleum Geo-Services ASA*<F2> (Oilfield services) 268,100 390,000
75,000 Snyder Oil Corporation
(Domestic oil and gas exploration and production) 697,592 1,303,125
10,000 Student Loan Marketing Association (Financial services) 441,542 931,250
20,000 Sundstrand Corporation (Aerospace and industrial) 436,700 850,000
18,000 Tandy Corporation (Retail stores) 1,026,705 792,000
30,000 Titan Exploration, Inc.*<F2>
(Domestic oil and gas exploration and production) 343,584 360,000
12,000 Triton Energy Limited*<F2>
(International oil and gas exploration and production) 708,720 582,000
30,000 Union Pacific Resources Group Inc.
(Domestic oil and gas exploration and production) 656,588 877,500
30,000 USF&G Corporation (Insurance) 583,350 626,250
55,000 Western Gas Resources, Inc.
(Natural gas gathering, transporting, and marketing) 1,013,655 1,058,750
----------- -----------
Total Common Stocks 16,056,732 19,651,656
----------- -----------
SHORT-TERM INVESTMENTS 16.5%
$979,320 American Family Financial Services, Inc. variable rate
demand note, 5.51% $979,320 $979,320
2,488,801 Johnson Controls, Inc. variable rate
demand note, 5.53% 2,488,801 2,488,801
427,641 Wisconsin Electric Power Co. variable rate
demand note, 5.55% 427,641 427,641
----------- -----------
Total Short-Term Investments 3,895,762 3,895,762
----------- -----------
TOTAL INVESTMENTS 99.9% $19,952,494 23,547,418
===========
Other Assets, less Liabilities 0.1% 27,940
------------
NET ASSETS (Equivalent to $13.66 per share
based on 1,725,696 shares outstanding) 100.0% $23,575,358
===========
*<F2>Non-income producing security.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
THE PRIMARY INCOME FUND
MARKET
SHARES OR PRINCIPAL AMOUNT COST VALUE
- -------------------------- ---------- ----------
<S> <C> <C> <C>
COMMON STOCKS 78.2%
1,000 Amoco Corporation (Integrated oil company) $55,720 $80,500
20,000 Angeles Mortgage Investment Trust (Real estate investment trust) 148,166 265,000
5,000 The Brooklyn Union Gas Company (Natural gas utility) 124,545 150,625
4,500 Browning-Ferris Industries, Inc. (Waste management services) 127,982 118,125
6,000 Cable & Wireless plc (Telecommunication services) 124,560 147,750
2,000 CINergy Corp. (Electric utility) 39,641 66,750
1,000 Connecticut Natural Gas Corporation (Natural gas utility) 24,705 25,500
2,000 Consolidated Natural Gas Co. (Integrated natural gas system) 87,325 110,500
3,000 CVS Corporation (Retail stores) 93,773 124,125
3,000 DPL, Inc. (Electric and gas utility) 45,124 73,500
5,000 L.M. Ericsson Telephone AB
(Telecommunications equipment and services) 108,500 150,937
1,500 General Motors Corporation (Automobiles and trucks) 58,912 83,625
2,000 W.R. Grace & Co. (Chemicals) 89,151 103,500
2,000 GTECorporation (Telephone utility) 62,995 91,000
8,000 Juno Lighting, Inc.(Commercial and residential lighting) 139,225 128,000
4,000 Longview Fibre Company (Paper and forest products) 68,185 73,500
5,000 Mylan Laboratories Inc. (Pharmaceutical products) 99,764 83,750
1,000 Nokia Corporation (Telecommunication equipment and services) 44,475 57,500
2,000 Northern States Power Company (Electric utility) 74,513 91,750
6,000 Occidental Petroleum Corporation (Integrated oil company) 126,589 140,250
3,000 Pacific Enterprises (Natural gas utility) 70,335 91,125
3,000 J.C. Penney Company, Inc. (Retail stores) 130,610 146,250
3,500 Pennzoil Company (Domestic oil and gas exploration and production) 179,137 197,750
1,000 Royal Dutch Petroleum Co., NV (Integrated oil company) 84,625 170,750
6,000 Security Capital Industrial Trust (Real estate investment trust) 103,046 128,250
5,000 Simon DeBartolo Group, Inc. (Real estate investment trust) 100,129 155,000
1,200 Student Loan Marketing Association (Financial services) 52,866 111,750
2,000 Sundstrand Corporation (Aerospace and industrial) 42,920 85,000
3,500 Tandy Corporation (Retail stores) 161,072 154,000
5,200 Union Pacific Resources Group Inc.
(Domestic oil and gas exploration and production) 110,510 152,100
3,000 USF&G Corporation (Insurance) 59,550 62,625
8,000 Western Gas Resources, Inc.
(Natural gas gathering, transporting, and marketing) 130,000 154,000
3,000 Wisconsin Energy Corporation(Electric and gas utility) 73,280 80,625
----------- ----------
Total Common Stocks 3,041,930 3,855,412
----------- ----------
PREFERRED STOCKS 8.3%
3,000 Airtouch Communications, Inc. $1.74 Series B
convertible preferred $83,925 $81,750
2,000 Battle Mountain Gold Company $3.25 convertible preferred 107,183 100,000
340 Long Island Lighting Co. 5.00% Series B preferred 19,920 23,460
2,000 Long Island Lighting Co. 4.35% Series E preferred 117,040 127,000
2,000 WHX Corporation $3.25 convertible preferred 102,875 78,000
----------- ----------
Total Preferred Stocks 430,943 410,210
----------- ----------
BONDS AND NOTES 5.7%
CONVERTIBLE DEBENTURES
$175,000 Data General Corporation convertible subordinated debenture,
7.75%, due 6/1/01 168,172 180,250
CORPORATE OBLIGATIONS
100,000 Wisconsin Gas Company note, 7.50%, due 11/15/98 99,950 102,375
----------- ----------
Total Bonds and Notes 268,122 282,625
----------- ----------
Total Long-Term Investments 3,740,995 4,548,247
----------- ----------
SHORT-TERM INVESTMENTS 8.6%
423,220 Wisconsin Electric Power Co. variable rate
demand note, 5.55% 423,220 423,220
----------- ----------
TOTAL INVESTMENTS 100.8% $4,164,215 4,971,467
==========
Liabilities, less Other Assets (0.8)% (38,669)
----------
NETASSETS (Equivalent to $13.28 per share
based on 371,481 shares outstanding)100.0% $4,932,798
==========
Note to Portfolio of Investments - As required by the Fund's investment
policies, the
Fund has invested $1,605,180 (33% of its net assets) in securities issued by
utilities.
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
THE PRIMARY U.S. GOVERNMENT FUND
PRINCIPAL MARKET
AMOUNT COST VALUE
- ---------- ---------- ----------
<S> <C> <C> <C>
U.S. GOVERNMENT NOTES 90.8%
U.S. TREASURY NOTES
$75,000 U.S. Treasury note, 6.375%, due 7/15/99 $74,884 $75,755
U.S. GOVERNMENT AGENCY NOTES
200,000 Federal National Mortgage Association note,
7.65%, due 4/29/04 199,112 198,864
100,000 Federal National Mortgage Association note,
8.50%, due 2/1/05 99,556 105,209
100,000 Federal Home Loan Mortgage Corporation note,
8.15%, due 3/2/05 100,000 101,285
200,000 Federal Home Loan Bank note,
7.00%, due 11/21/05 199,222 197,000
--------- ----------
Total U.S. Government Agency Notes 597,890 602,358
--------- ----------
Total U.S. Government Notes 672,774 678,113
--------- ----------
SHORT-TERM INVESTMENTS 7.8%
58,131 Wisconsin Electric Power Co. variable rate
demand note, 5.55% 58,131 58,131
--------- ----------
TOTAL INVESTMENTS 98.6% $730,905 736,244
==========
Other Assets, less Liabilities 1.4% 10,775
----------
NETASSETS (Equivalent to $9.94 per share
based on 75,164 shares outstanding)100.0% $747,019
==========
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1996 (unaudited)
THE PRIMARY
THE PRIMARY THE PRIMARYU.S. GOVERNMENT
TREND FUND INCOME FUND FUND
----------- ------------- ------------
<S> <C> <C> <C>
Assets:
Investments, at Value (Note 2a):
Common Stocks $19,651,656 $3,855,412 $--
Preferred Stocks -- 410,210 --
Bonds and Notes -- 282,625 678,113
Short-Term Investments 3,895,762 423,220 58,131
------------ ----------- -----------
Total Investments (Cost -- $19,952,494;
$4,164,215 and $730,905, respectively) 23,547,418 4,971,467 736,244
Dividends Receivable 40,110 17,234 --
Interest Receivable 11,704 4,129 13,004
Cash -- 186 43
------------ ----------- -----------
Total Assets 23,599,232 4,993,016 749,291
------------ ----------- -----------
Liabilities:
Payable to Brokers for Securities Purchased -- 39,190 --
Accrued Investment Advisory Fees (Note 3) 14,888 18,704 260
Cash Overdraft 1,237 2,324 2,012
Other 7,749 -- --
------------ ----------- -----------
Total Liabilities 23,874 60,218 2,272
------------ ----------- -----------
Net Assets $23,575,358 $4,932,798 $747,019
=========== =========== ===========
Net Assets Per Share (Based on 1,725,696; 371,481
and 75,164 shares outstanding, respectively) $13.66 $13.28 $9.94
=========== ========== ==========
Net Assets Consist of:
Capital Stock (30,000,000 shares authorized each) $17,747,305 $4,076,215 $771,234
Net Unrealized Appreciation of Investments 3,594,924 807,252 5,339
Undistributed Net Investment Income 213,108 -- --
Undistributed Net Realized Gains (Accumulated Losses) 2,020,021 49,331 (29,554)
----------- ----------- ----------
Net Assets $23,575,358 $4,932,798 $747,019
=========== =========== ==========
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
For the six months ended December 31, 1996 (unaudited)
THE PRIMARY
THE PRIMARY THE PRIMARY U.S. GOVERNMENT
TREND FUND INCOME FUND FUND
------------ ------------ ----------------
<S> <C> <C> <C>
Income (Note 2b):
Interest $23,880 $22,397 $28,582
Dividends 190,973 70,480 --
---------- --------- ---------
Total Income 214,853 92,877 28,582
---------- --------- ---------
Expenses:
Investment Advisory Fees (Note 3) 81,387 17,229 2,599
Shareholder Servicing Costs 14,405 5,270 4,700
Professional Fees 10,779 6,258 6,258
Fund Accounting 5,244 1,669 613
Registration Fees 4,147 3,382 2,965
Custodial Fees 3,456 1,233 101
Postage 2,858 459 148
Printing 2,845 835 269
Insurance 2,434 952 170
Other 2,093 590 304
---------- --------- ---------
Total Expenses Before Reimbursement 129,648 37,877 18,127
Less Expenses Reimbursed By Adviser (Note 3) -- (18,320) (15,128)
---------- --------- ---------
Net Expenses 129,648 19,557 2,999
---------- --------- ---------
Net Investment Income 85,205 73,320 25,583
---------- --------- ---------
Net Realized Gain (Loss) on Investments 2,529,355 124,298 (302)
Net Change in Unrealized Appreciation of Investments 744,554 348,036 6,218
---------- --------- ---------
Net Realized and Unrealized Gain on Investments 3,273,909 472,334 5,916
---------- --------- ---------
Net Increase in Net Assets From Operations $3,359,114 $545,654 $31,499
========== ========= =========
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
(unaudited)
THE PRIMARY
THE PRIMARY THE PRIMARY U.S. GOVERNMENT
TREND FUND INCOME FUND FUND
------------------------- ------------------------- -------------------------
SIX MONTHS YEAR ENDED SIX MONTHS YEAR ENDED SIX MONTHS YEAR ENDED
ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30,
DEC. 31, 1996 1996 DEC. 31, 1996 1996 DEC. 31, 1996 1996
------------- ----------- ------------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net Investment Income $85,205 $355,627 $73,320 $142,076 $25,583 $69,802
Net Realized Gain (Loss)
on Investments 2,529,355 1,960,593 124,298 351,686 (302) 10,927
Net Change in Unrealized
Appreciation (Depreciation)
of Investments 744,554 340,566 348,036 83,924 6,218 (27,959)
----------- ---------- ---------- --------- ---------- ----------
Net Increase in Net
Assets from Operations 3,359,114 2,656,786 545,654 577,686 31,499 52,770
----------- ---------- ---------- --------- ---------- ----------
Distributions to Shareholders:
From Net Investment Income (233,654) (405,673) (73,320) (142,076) (25,583) (69,802)
From Net Realized Gains (1,226,009) (1,358,826) (270,274) (183,159) -- --
----------- ---------- ---------- --------- ---------- ----------
Decrease in Net Assets from
Distributions (1,459,663) (1,764,499) (343,594) (325,235) (25,583) (69,802)
----------- ---------- ---------- --------- ---------- ----------
Fund Share Transactions:
Proceeds from Shares Sold 340,223 782,640 132,483 1,054,434 20,585 103,650
Reinvested Distributions 1,394,574 1,687,297 335,393 311,175 22,217 60,464
Cost of Shares Redeemed (1,181,965) (3,582,045) (247,521) (1,329,123) (100,473) (693,626)
----------- ---------- ---------- --------- ---------- ----------
Net Increase (Decrease) in
Net Assets from Fund
Share Transactions 552,832 (1,112,108) 220,355 36,486 (57,671) (529,512)
----------- ---------- ---------- --------- ---------- ----------
Total Increase (Decrease) in
Net Assets 2,452,283 (219,821) 422,415 288,937 (51,755) (546,544)
Net Assets:
Beginning of Period 21,123,075 21,342,896 4,510,383 4,221,446 798,774 1,345,318
----------- ---------- ---------- --------- ---------- ----------
End of Period $23,575,358 $21,123,075 $4,932,798 $4,510,383 $747,019 $798,774
=========== =========== ========== ========== ========== ==========
Undistributed Net Investment
Income at End of Period $213,108 $361,557 -- -- -- --
=========== =========== ========== ========== ========== ==========
Transactions in Shares:
Sales 25,960 64,755 10,680 84,762 2,085 10,332
Reinvested Distributions 114,513 147,550 27,114 25,475 2,239 5,995
Redemptions (92,091) (298,837) (19,384) (106,883) (10,121) (68,763)
----------- ---------- ---------- --------- ---------- ----------
Net Increase (Decrease) 48,382 (86,532) 18,410 3,354 (5,797) (52,436)
=========== =========== ========== ========== ========== ==========
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
The following table shows per share operating performance data, total investment
return, ratios and supplemental data for each period (unaudited)
THE PRIMARY
THE PRIMARY THE PRIMARY U.S. GOVERNMENT
TREND FUND INCOME FUND FUND
------------------------- -------------------------- -------------------------
SIX MONTHS YEAR ENDED SIX MONTHS YEAR ENDED SIX MONTHS YEAR ENDED
ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30,
DEC. 31, 1996 1996 DEC. 31, 1996 1996 DEC. 31, 1996 1996
------------- ---------- ------------ ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net Asset Value, Beginning of Period $12.59 $12.10 $12.77 $12.07 $9.87 $10.09
------- -------- ------- ------- ------- -------
Net Investment Income 0.05 0.21 0.20 0.43 0.32 0.63
Net Realized and Unrealized Gain
(Loss) on Investments 1.89 1.30 1.27 1.28 0.07 (0.22)
------- -------- ------- ------- ------- -------
Total from Investment Operations 1.94 1.51 1.47 1.71 0.39 0.41
------- -------- ------- ------- ------- -------
Less Distributions:
From Net Investment Income (0.14) (0.23) (0.20) (0.43) (0.32) (0.63)
From Net Realized Gains (0.73) (0.79) (0.76) (0.58) -- --
------- -------- ------- ------- ------- -------
Total Distributions (0.87) (1.02) (0.96) (1.01) (0.32) (0.63)
------- -------- ------- ------- ------- -------
Net Increase (Decrease) 1.07 0.49 0.51 0.70 0.07 (0.22)
------- -------- ------- ------- ------- -------
Net Asset Value, End of Period $13.66 $12.59 $13.28 $12.77 $9.94 $9.87
======= ======== ======= ======= ======= =======
Total Investment Return +16.4% +11.7% +12.2% +14.8% +4.0% +4.1%
Ratios and Supplemental Data
Net Assets, End of Period
(in thousands) $23,575 $21,123 $4,933 $4,510 $747 $799
Ratio of Expenses to
Average Net Assets 1.18%*<F3> 1.19% 0.84%*<F3> 0.84% 0.75%*<F3> 0.75%
Ratio of Net Investment
Income to Average Net Assets 0.77%*<F3> 1.68% 3.15%*<F3> 3.43% 6.40%*<F3> 6.24%
Ratio of Expenses Reimbursed
to Average Net Assets -- -- 0.79%*<F3> 0.73% 3.79%*<F3> 2.20%
Portfolio Turnover 37.0% 46.5% 24.2% 41.5% NONE 46.6%
Average Commission Rate
Paid per Share $0.0548 N/A $0.0949 N/A N/A N/A
*<F3>Annualized
See notes to financial statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 (unaudited)
1. ORGANIZATION
The Primary Trend Fund, Inc. ("Trend Fund") began operations on September 15,
1986. The Primary Income Funds, Inc. ("Income Funds") began operations on
September 1, 1989. The Trend Fund and the Income Funds, collectively, the
"Funds", are registered under the Investment Company Act of 1940 as open-end
investment management companies. The Income Funds is a "series" fund which
consists of two portfolios: The Primary Income Fund ("Income Fund") and The
Primary U.S. Government Fund ("Government Fund").
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Funds. The financial statements have been prepared in conformity with generally
accepted accounting principles which require management to make certain
estimates and assumptions at the date of the financial statements. Actual
results could differ from those estimates.
a. Each security, excluding securities with sixty days or less remaining
to maturity, is valued at the last sale price, or if no sale is reported, the
average of the latest bid and asked prices. Other securities for which market
quotations are not readily available are valued under procedures approved by the
Boards of Directors. Securities with sixty days or less remaining to maturity
are valued at amortized cost, which approximates market value.
b. Security transactions are recorded on the trade date. Dividend income
is recorded on the ex-dividend date. Interest income is recorded as earned, and
includes amortization of premiums and discounts. Securities gains and losses are
determined on the basis of identified cost, which is the same basis used for
federal income tax purposes.
c. No provision for federal income taxes has been made since the Funds
have elected to be taxed as regulated investment companies and intend to
distribute their net investment income and net realized gains to shareholders
and otherwise comply with the provisions of the Internal Revenue Code applicable
to regulated investment companies. The cost basis of investments for federal
income tax purposes is the same as that for financial statement purposes.
3. INVESTMENT ADVISORY FEES AND MANAGEMENT AGREEMENTS
The Funds have agreements with Arnold Investment Counsel, Inc. (the
"Adviser"), with whom certain officers and directors of the Funds are
affiliated, to serve as investment adviser. Under the terms of the agreements,
the Adviser receives from both the Trend Fund and the Income Fund a monthly fee
at an annual rate of 0.74% of their respective average daily net assets; and
from the Government Fund a monthly fee at an annual rate of 0.65% of its average
daily net assets. The agreements further stipulate that the Adviser will
reimburse the Funds for annual expenses exceeding certain specified levels. In
addition to the reimbursements required under the agreements, the Adviser has
voluntarily reimbursed the Income Fund and the Government Fund for additional
expenses incurred during the six months ended December 31, 1996. As of December
31, 1996, the Adviser was reimbursing the Income Fund for all expenses exceeding
0.84% of its average daily net assets; and the Government Fund for all expenses
exceeding 0.75% of its average daily net assets. These additional voluntary
reimbursements to the Funds may be modified or discontinued at any time by the
Adviser. The Adviser was not required to reimburse the Trend Fund for the six
months ended December 31, 1996. For the six months ended December 31, 1996, the
Funds incurred investment advisory fees, net of expense reimbursements,
totalling $67,767. The Trend Fund paid total directors fees of $500 to its
outside director and the Income Funds paid total directors fees of $500 to its
outside director during the six months ended December 31, 1996.
4. PURCHASES AND SALES OF SECURITIES
For the six months ended December 31, 1996, total purchases and proceeds from
sales of securities, other than short-term investments, for the Trend Fund were
$7,658,947 and $11,577,252, respectively; for the Income Fund, $1,124,112 and
$1,014,360, respectively; and for the Government Fund, $0 and $99,200,
respectively.
(THE PRIMARY TREND FUNDS LOGO)
INVESTMENT ADVISER
Arnold Investment Counsel
Incorporated
First Financial Centre
700 North Water Street
Milwaukee, Wisconsin 53202
(800) 443-6544
OFFICERS
Lilli Gust, President
Barry S. Arnold, Vice President and Assistant Secretary
James R. Arnold, Jr., Secretary-Treasurer
DIRECTORS
Barry S. Arnold
Joseph L. Cook
Lilli Gust
CUSTODIAN, TRANSFER AGENT and
DIVIDEND DISBURSING AGENT
Firstar Trust Company
615 East Michigan Street
Milwaukee, Wisconsin 53202
(800) 338-1579
INDEPENDENT AUDITORS
Ernst & Young LLP
111 East Kilbourn Avenue
Milwaukee, Wisconsin 53202
LEGAL COUNSEL
Foley & Lardner
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Founding member of
100%NO-LOAD TM
MUTUAL FUND
COUNCIL
