(THE PRIMARY TREND FUNDS LOGO)
ANNUAL REPORT
THE PRIMARY
TREND FUND
THE PRIMARY
INCOME FUND
THE PRIMARY U.S.
GOVERNMENT FUND
MILWAUKEE, WISCONSIN
JUNE 30, 1997
LETTER TO SHAREHOLDERS
The bull market in 1995 and 1996, while extremely rewarding to equity
investors, seems to pale in comparison to 1997's first-half blistering pace. In
our semiannual report to shareholders of only six months ago, we were
highlighting the market's all-time record high of 7000 on the Dow Jones
Industrial Average. Now, one record after another seems to fall victim in
today's celebrated romp to over 8000 on the venerable Dow -- a rally which has
squeezed a full year's return (at least) into just the last three months.
Shareholders in The Primary Trend Funds have capitalized on the bullish
environment as well, with solid gains being posted for the fiscal year ended
June 30, 1997:
THE PRIMARY TREND FUND +26.2%
THE PRIMARY INCOME FUND +24.1%
THE PRIMARY U.S. GOVERNMENT FUND + 6.7%
THE PRIMARY TREND FUND'S concentration in the energy sector, while helping it
to outpace the S&P 500 Composite in the first half of fiscal 1997, has muted
performance somewhat in the latter half. We continue to emphasize natural gas
stocks, citing the industry's recent merger and acquisition activity --
including Union Pacific Resources' hostile bid for Pennzoil, both of which are
long-term portfolio holdings. Our selective emphasis in telecommunications
equipment, financials and retail have all contributed tremendously to the Fund's
gains over the past year as well. Top portfolio performers for the 12 months
ended June 30, 1997 were: GreenPoint Financial (+136%), Nokia Corporation
(+99%), Snyder Oil (+84%), Ericsson Telephone (+83%), Sallie Mae (+72%) and
Pennzoil (+65%). Underachievers included Union Pacific Resources (-7%), Newmont
Mining (-21%) and Enron Oil and Gas (-32%). Distributions during the Fund's
fiscal year totaled $0.87 per share: $0.14 of ordinary income, $0.18 in short-
term capital gains and $0.55 in long-term capital gains.
THE PRIMARY INCOME FUND continued its steady string of solid performance
despite its heavy exposure (29%) to the underperforming utility sector. We
continue to shift more assets into real estate investment trusts (REITs) in
order to recapture the high dividend yield plus growth component which has been
absent from utility securities over the past few years. Top portfolio
contributors for the year ended June 30, 1997 include: Angeles Mortgage REIT
(+97%), Ericsson (+83%), Pennzoil (+65%), Long Island Lighting 4.35% Preferred E
(+61%) and Long Island Lighting 5% Preferred B (+49%). Underperformers include
Wisconsin Energy (-14%) and Mylan Labs (-15%). Distributions from the Income
Fund during the fiscal year totaled $1.18 per share: $0.42 of ordinary income,
$0.15 in short-term capital gains and $0.61 in long-term capital gains.
THE PRIMARY U.S. GOVERNMENT FUND performed in line with its fixed-income
counterparts over the last year, while avoiding the gyrations of a volatile bond
market in search of monetary direction. We continue to emphasize high-quality
U.S. government and agency notes with short-to-intermediate maturities at this
time and anticipate an interest-rate environment that will be challenging over
the latter half of 1997. Distributions from the Fund totaled $0.63 per share of
ordinary income during the 1997 fiscal year.
Although the stock market has been a trailblazer over the last 2 1/2 years,
it shows no signs of weariness. Recent momentum thrusts, new 52-week highs by
the largest number of New York Stock Exchange stocks since 1982, and bullish
breadth statistics all point to further gains in the short term.
Economically: The highly-touted "Goldilocks Economy" (not too hot and not too
cold) continues to serve investors well. Politically: A bi-partisan tax package
to include a capital gains tax cut seems to be "when", not "if". Monetarily: The
Federal Reserve, after tightening a bit in the first quarter, has kept its hands
off the interest-rate lever. And Financially: Money flows into mutual funds
continue to fuel this bull market. Utopia truly does seem to have an address --
and it resides at Broad and Wall.
Unfortunately, valuations are not as Utopian as a prudent investor would
like. We continue to find pockets of undervaluation in a market that can be
broadly defined as fully valued. Additional profit-taking can be expected and
the proceeds redeployed as low-risk, value-oriented opportunities present
themselves.
Our ongoing thoughts and analyses of the financial markets and relevant
investment themes come to you monthly via The Primary Trend investment letter.
We hope to continue to make The Primary Trend Funds not only solid investments,
but also the Fund Family that communicates, informs and educates -- and, in so
doing, provides a unique and extra value over and above that which is normally
found in the swelling ranks of the mutual fund industry.
All of us at Arnold Investment Counsel value you as a shareholder in The
Primary Trend Funds, and we thank each of you for your support. The energies of
our entire staff are dedicated to serving your investment needs, which we know
includes the generation of consistent above-average investment returns
commensurate with minimal risk. You have our pledge that we will work diligently
on your behalf to accomplish those objectives.
Sincerely,
/s/ Lilli Gust /s/ Barry S. Arnold
Lilli Gust, President Barry S. Arnold, Vice President
July 22, 1997
PORTFOLIOS OF INVESTMENTS
June 30, 1997
THE PRIMARY TREND FUND
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT COST VALUE
---------- ----- -------
<S> <C> <C> <C>
COMMON STOCKS 90.4%
16,000 Albertson's, Inc. (Retail stores) $593,600 $584,000
6,000 Amoco Corporation (Integrated oil company) 325,950 521,625
10,500 Angeles Mortgage Investment Trust (Real estate investment trust) 159,443 165,375
25,200 Beverly Bancorporation, Inc. (Financial services) 414,563 485,100
65,000 Beverly Enterprises, Inc.*<F1> (Healthcare services) 841,930 1,056,250
10,000 Browning-Ferris Industries, Inc. (Waste management services) 299,250 332,500
10,000 CVS Corporation (Retail stores) 329,933 512,500
10,000 Eastman Kodak Company (Photographic equipment) 398,415 767,500
25,000 Enron Oil & Gas Company
(Domestic oil and gas exploration and production) 671,500 453,125
20,000 L.M. Ericsson Telephone ADR
(Telecommunications equipment) 446,525 787,500
10,000 W.R. Grace & Co. (Specialty chemicals) 445,754 551,250
13,000 GreenPoint Financial Corp. (Financial services) 374,862 865,313
52,500 Juno Lighting, Inc. (Commercial and residential lighting) 900,937 853,125
35,000 Mylan Laboratories, Inc. (Pharmaceutical products) 462,825 516,250
15,000 Newmont Mining Corporation (Gold mining) 595,940 585,000
10,000 Nokia Corporation ADR (Telecommunications equipment) 384,350 737,500
25,000 Occidental Petroleum Corporation (Integrated oil company) 467,085 626,562
20,000 PartnerRe Ltd. ADR (Insurance) 662,325 762,500
10,000 J.C. Penney Company, Inc. (Retail stores) 436,225 521,875
17,000 Pennzoil Company
(Domestic oil and gas exploration and production) 975,275 1,304,750
70,000 Snyder Oil Corporation
(Domestic oil and gas exploration and production) 657,207 1,286,250
7,000 Student Loan Marketing Association (Financial services) 309,079 889,000
12,000 Sundstrand Corporation (Aerospace and industrial) 272,560 669,750
15,000 Tandy Corporation (Retail stores) 842,775 840,000
30,000 Titan Exploration, Inc.*<F1>
(Domestic oil and gas exploration and production) 343,584 363,750
30,000 USF&G Corporation (Insurance) 583,350 720,000
20,000 UST, Inc. (Tobacco) 561,925 555,000
30,000 Union Pacific Resources Group, Inc.
(Domestic oil and gas exploration and production) 656,588 746,250
56,500 Western Gas Resources, Inc.
(Natural gas gathering, transporting and marketing) 1,043,730 1,101,750
17,600 York International Corp. (Heating and cooling systems) 776,088 809,600
----------- -----------
Total Common Stocks 16,233,573 20,970,950
----------- -----------
PREFERRED STOCKS 1.6%
3,700 Long Island Lighting Co. 5.00% Series B preferred 309,690 314,500
700 Long Island Lighting Co. 4.35% Series E preferred 56,105 56,175
----------- -----------
Total Preferred Stocks 365,795 370,675
----------- -----------
Total Long-Term Investments 16,599,368 21,341,625
----------- -----------
SHORT-TERM INVESTMENTS 9.9%
U.S. GOVERNMENT AGENCY NOTES
$500,000 Federal Farm Credit Bank note,
5.69%, due 10/1/97 500,000 499,945
VARIABLE RATE DEMAND NOTES
5,890 American Family Financial Services, Inc., 5.26% 5,890 5,890
55,864 General Mills, Inc., 5.25% 55,864 55,864
109,167 Johnson Controls, Inc., 5.28% 109,167 109,167
23,943 Pitney Bowes Credit Corp., 5.25% 23,943 23,943
351,918 Warner-Lambert, Inc., 5.23% 351,918 351,918
1,264,432 Wisconsin Electric Power Co., 5.30% 1,264,432 1,264,432
----------- -----------
Total Variable Rate Demand Notes 1,811,214 1,811,214
----------- -----------
Total Short-Term Investments 2,311,214 2,311,159
----------- -----------
TOTAL INVESTMENTS 101.9% $18,910,582 23,652,784
===========
Liabilities, less Other Assets (1.9%) (447,141)
------------
NET ASSETS (Equivalent to $14.82 per share
based on 1,566,337 shares outstanding) 100.0% $23,205,643
============
*<F1>Non-income producing security.
See notes to financial statements.
</TABLE>
THE PRIMARY INCOME FUND
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL MARKET
AMOUNT COST VALUE
---------- ------ -------
<S> <C> <C> <C>
COMMON STOCKS 79.0%
2,000 Albertson's, Inc. (Retail stores) $74,200 $73,000
1,000 Amoco Corporation (Integrated oil company) 55,720 86,937
10,600 Angeles Mortgage Investment Trust (Real estate investment trust) 86,117 166,950
4,000 The Brooklyn Union Gas Company (Natural gas utility) 99,715 114,500
3,500 Browning-Ferris Industries, Inc. (Waste management services) 98,008 116,375
3,000 Cable & Wireless plc ADR (Telecommunication services) 62,010 83,813
4,000 CarrAmerica Realty Corp. (Real estate investment trust) 105,500 115,000
2,000 CINergy Corp. (Electric utility) 39,641 69,625
2,000 Consolidated Natural Gas Co. (Integrated natural gas system) 87,325 107,625
1,000 Consolidated Papers, Inc. (Paper and forest products) 47,455 54,000
1,500 CVS Corporation (Retail stores) 44,235 76,875
3,000 DPL, Inc. (Electric and gas utility) 45,124 73,875
2,000 L.M. Ericsson Telephone ADR
(Telecommunications equipment) 39,575 78,750
2,000 GTE Corporation (Telephone utility) 62,995 87,750
2,000 W.R. Grace & Co. (Specialty chemicals) 89,150 110,250
8,000 Great Lakes REIT, Inc. (Real estate investment trust) 126,907 131,500
8,000 Juno Lighting, Inc.(Commercial and residential lighting) 139,225 130,000
4,000 Longview Fibre Company (Paper and forest products) 68,185 66,500
8,000 Mylan Laboratories Inc. (Pharmaceutical products) 124,489 118,000
2,000 Northern States Power Company (Electric utility) 74,513 103,500
4,000 Occidental Petroleum Corporation (Integrated oil company) 87,705 100,250
3,000 Pacific Enterprises (Natural gas utility) 70,335 100,875
3,000 J.C. Penney Company, Inc. (Retail stores) 130,610 156,563
2,500 Pennzoil Company (Domestic oil and gas exploration and production) 124,400 191,875
2,000 Simon DeBartolo Group, Inc. (Real estate investment trust) 39,144 64,000
2,500 Tandy Corporation (Retail stores) 104,127 140,000
6,000 USF&G Corporation (Insurance) 123,975 144,000
4,000 UST, Inc. (Tobacco) 111,240 111,000
5,200 Union Pacific Resources Group, Inc.
(Domestic oil and gas exploration and production) 110,510 129,350
3,000 Wisconsin Energy Corporation(Electric and gas utility) 73,280 74,250
7,000 Western Gas Resources, Inc.
(Natural gas gathering, transporting and marketing) 113,750 136,500
1,900 York International Corp.(Heating and cooling systems) 83,695 87,400
----------- -----------
Total Common Stocks 2,742,860 3,400,888
----------- -----------
PREFERRED STOCKS 6.6%
2,000 Battle Mountain Gold Company $3.25 convertible preferred 107,183 95,625
340 Long Island Lighting Co. 5.00% Series B preferred 19,920 28,900
2,000 Long Island Lighting Co. 4.35% Series E preferred 117,040 160,500
----------- -----------
Total Preferred Stocks 244,143 285,025
----------- -----------
BONDS AND NOTES 7.0%
CONVERTIBLE DEBENTURES
$ 50,000 Data General Corporation convertible subordinated debenture,
7.75%, due 6/1/01 48,320 69,000
125,000 Snyder Oil Corp. convertible subordinated debenture,
7.00%, due 5/15/01 126,729 129,375
----------- -----------
Total Convertible Debentures 175,049 198,375
CORPORATE OBLIGATIONS
100,000 Wisconsin Gas Company note, 7.50%, due 11/15/98 99,961 101,785
----------- -----------
Total Bonds and Notes 275,010 300,160
----------- -----------
Total Long-Term Investments 3,262,013 3,986,073
----------- -----------
SHORT-TERM INVESTMENTS 12.8%
U.S. GOVERNMENT AGENCY NOTES
200,000 Federal Farm Credit Bank note, 5.69%, due 10/1/97 200,000 199,978
VARIABLE RATE DEMAND NOTES
9,196 American Family Financial Services, Inc., 5.26% 9,196 9,196
25,057 General Mills, Inc., 5.25% 25,057 25,057
104,545 Johnson Controls, Inc., 5.28% 104,545 104,545
212,395 Wisconsin Electric Power Co., 5.30% 212,395 212,395
----------- -----------
Total Variable Rate Demand Notes 351,193 351,193
----------- -----------
Total Short-Term Investments 551,193 551,171
----------- -----------
TOTAL INVESTMENTS 105.4% $3,813,206 4,537,244
===========
Liabilities, less Other Assets (5.4%) (230,665)
-----------
NET ASSETS (Equivalent to $14.45 per share
based on 297,996 shares outstanding) 100.0% $4,306,579
===========
Note to Portfolio of Investments -- As required by the Fund's investment
policies, the Fund has invested $1,235,580 (29% of its net assets) in
securities issued by utilities.
See notes to financial statements.
</TABLE>
THE PRIMARY U.S. GOVERNMENT FUND
PRINCIPAL MARKET
AMOUNT COST VALUE
--------- ------ -------
U.S. GOVERNMENT NOTES 78.7%
U.S. TREASURY NOTES
$75,000 U.S. Treasury note, 6.375%, due 7/15/99 $74,907 $75,443
U.S. Government Agency Notes
200,000 Federal Home Loan Bank note,
6.53%, due 11/20/00 199,901 198,786
100,000 Federal National Mortgage Association note,
8.50%, due 2/1/05 99,583 104,243
100,000 Federal Home Loan Mortgage Corporation note,
8.15%, due 3/2/05 100,000 101,029
100,000 Federal Home Loan Bank note,
7.00%, due 11/21/05 99,634 98,254
--------- ---------
Total U.S. Government Agency Notes 499,118 502,312
--------- ---------
Total U.S. Government Notes 574,025 577,755
--------- ---------
SHORT-TERM INVESTMENTS 27.1%
99,011 Wisconsin Electric Power Co. variable rate
demand note, 5.30% 99,011 99,011
50,000 U.S. Treasury bill, 5.03%, due 7/10/97 49,937 49,933
50,000 Federal Farm Credit Bank note,
5.69%, due 10/1/97 50,000 49,995
--------- ---------
Total Short-Term Investments 198,948 198,939
--------- ---------
TOTAL INVESTMENTS 105.8% $772,973 776,694
=========
Liabilities, less Other Assets (5.8%) (42,493)
--------
NET ASSETS (Equivalent to $9.88 per share
based on 74,302 shares outstanding) 100.0% $734,201
========
See notes to financial statements.
<TABLE>
STATEMENTS OF ASSETS AND LIABILITIES
June 30, 1997
<CAPTION>
THE PRIMARY
THE PRIMARY THE PRIMARY U.S. GOVERNMENT
TREND FUND INCOME FUND FUND
------------ ------------ -------------
<S> <C> <C> <C>
Assets:
Investments, at Value (Note 2a):
Common Stocks $20,970,950 $3,400,888 $--
Preferred Stocks 370,675 285,025 --
Bonds and Notes -- 300,160 577,755
Short-Term Investments 2,311,159 551,171 198,939
------------ ----------- ----------
Total Investments (Cost -- $18,910,582;
$3,813,206 and $772,973, respectively) 23,652,784 4,537,244 776,694
Receivable from Brokers for Securities Sold 54,823 -- --
Dividends Receivable 35,211 11,450 --
Interest Receivable 8,218 3,721 11,550
Due from Adviser -- -- 2,799
Prepaid Expenses 3,402 1,273 456
------------ ----------- ----------
Total Assets 23,754,438 4,553,688 791,499
------------ ----------- ----------
Liabilities:
Payable to Brokers for Securities Purchased 500,000 200,000 50,000
Accrued Investment Advisory Fees (Note 3) 13,960 28,454 --
Cash Overdraft 24,230 13,521 3,368
Other 10,605 5,134 3,930
------------ ----------- ----------
Total Liabilities 548,795 247,109 57,298
------------ ----------- ----------
Net Assets $23,205,643 $4,306,579 $734,201
============ =========== ==========
Shares outstanding 1,566,337 297,996 74,302
Net Assets Per Share $14.82 $14.45 $9.88
============ =========== ==========
Net Assets Consist of:
Capital Stock (30,000,000 shares authorized each) $15,526,513 $3,083,037 $762,697
Net Unrealized Appreciation of Investments 4,742,202 724,038 3,721
Undistributed Net Realized Gains (Accumulated Losses) 2,936,928 499,504 (32,217)
------------ ----------- ----------
Net Assets $23,205,643 $4,306,579 $734,201
============ =========== ==========
See notes to financial statements.
</TABLE>
<TABLE>
STATEMENTS OF OPERATIONS
For the year ended June 30, 1997
<CAPTION>
THE PRIMARY
THE PRIMARY THE PRIMARY U.S. GOVERNMENT
TREND FUND INCOME FUND FUND
----------- ------------ ---------------
<S> <C> <C> <C>
Income (Note 2b):
Interest $95,118 $41,558 $54,812
Dividends 355,140(a)<F2> 137,654(b)<F3> --
----------- ---------- ---------
Total Income 450,258 179,212 54,812
----------- ---------- ---------
Expenses:
Investment Advisory Fees (Note 3) 166,935 32,899 4,977
Shareholder Servicing Costs 29,030 10,968 9,431
Fund Administration and Accounting Fees 21,461 13,323 7,363
Professional Fees 18,558 9,356 9,221
Custodial Fees 6,346 2,376 211
Registration Fees 6,303 2,619 2,553
Postage 5,156 903 289
Printing 4,414 1,264 371
Insurance 3,970 751 134
Other 3,466 949 605
----------- ---------- ---------
Total Expenses Before Reimbursement 265,639 75,408 35,155
Less Expenses Reimbursed By Adviser (Note 3) -- (38,053) (29,412)
----------- ---------- ---------
Net Expenses 265,639 37,355 5,743
----------- ---------- ---------
Net Investment Income 184,619 141,857 49,069
----------- ---------- ---------
Net Realized Gain (Loss) on Investments 3,131,721 574,471 (2,965)
Change in Net Unrealized Appreciation of Investments 1,891,832 264,822 4,600
----------- ---------- ---------
Net Realized and Unrealized Gain on Investments 5,023,553 839,293 1,635
----------- ---------- ---------
Net Increase in Net Assets from Operations $5,208,172 $981,150 $50,704
=========== ========== =========
(a)<F2>Net of $2,549 in foreign withholding taxes.
(b)<F3>Net of $310 in foreign withholding taxes.
See notes to financial statements.
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended June 30, 1997 and 1996
<CAPTION>
THE PRIMARY
THE PRIMARY THE PRIMARY U.S. GOVERNMENT
TREND FUND INCOME FUND FUND
--------------------- --------------------- --------------------
1997 1996 1997 1996 1997 1996
--------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net Investment Income $184,619 $355,627 $141,857 $142,076 $49,069 $69,802
Net Realized Gain (Loss)
on Investments 3,131,721 1,960,593 574,471 351,686 (2,965) 10,927
Change in Net Unrealized
Appreciation (Depreciation)
of Investments 1,891,832 340,566 264,822 83,924 4,600 (27,959)
---------- ---------- ---------- ---------- --------- ---------
Net Increase in Net
Assets from Operations 5,208,172 2,656,786 981,150 577,686 50,704 52,770
---------- ---------- ---------- ---------- --------- ---------
Distributions to Shareholders:
From Net Investment Income (233,063) (405,673) (141,857) (142,076) (49,069) (69,802)
From Net Realized Gains (1,224,581) (1,358,826) (270,274) (183,159) -- --
---------- ---------- ---------- ---------- --------- ---------
Decrease in Net Assets from
Distributions (1,457,644) (1,764,499) (412,131) (325,235) (49,069) (69,802)
---------- ---------- ---------- ---------- --------- ---------
Fund Share Transactions (Note 6):
Proceeds from Shares Sold 1,000,973 782,640 357,717 1,054,434 31,529 103,650
Reinvested Distributions 1,394,574 1,687,297 401,280 311,175 40,850 60,464
Cost of Shares Redeemed (4,063,507) (3,582,045) (1,531,820) (1,329,123) (138,587) (693,626)
---------- ---------- ---------- ---------- --------- ---------
Net Increase (Decrease) in
Net Assets from Fund
Share Transactions (1,667,960) (1,112,108) (772,823) 36,486 (66,208) (529,512)
---------- ---------- ---------- ---------- --------- ---------
Total Increase (Decrease) in
Net Assets 2,082,568 (219,821) (203,804) 288,937 (64,573) (546,544)
Net Assets:
Beginning of Year 21,123,075 21,342,896 4,510,383 4,221,446 798,774 1,345,318
---------- ---------- ---------- ---------- --------- ---------
End of Year $23,205,643 $21,123,075 $4,306,579 $4,510,383 $734,201 $798,774
=========== =========== ========== ========== ========= ==========
Undistributed Net Investment
Income at End of Year -- $361,557 -- -- -- --
=========== =========== ========== ========== ========= ==========
See notes to financial statements.
</TABLE>
FINANCIAL HIGHLIGHTS
The following table shows per share operating performance data, total investment
return, ratios and supplemental data for each of the years ended June 30
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
THE PRIMARY TREND FUND
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Year $12.59 $12.10 $10.98 $11.22 $11.50
-------- ------- ------- ------- -------
Net Investment Income 0.12 0.21 0.23 0.25 0.22
Net Realized and Unrealized Gain (Loss) on Investments 2.98 1.30 1.55 (0.28) 0.64
-------- ------- ------- ------- -------
Total from Investment Operations 3.10 1.51 1.78 (0.03) 0.86
-------- ------- ------- ------- -------
Less Distributions:
From Net Investment Income (0.14) (0.23) (0.26) (0.08) (0.28)
From Net Realized Gains (0.73) (0.79) (0.40) (0.13) (0.86)
-------- ------- ------- ------- -------
Total Distributions (0.87) (1.02) (0.66) (0.21) (1.14)
-------- ------- ------- ------- -------
Net Increase (Decrease) 2.23 0.49 1.12 (0.24) (0.28)
-------- ------- ------- ------- -------
Net Asset Value, End of Year $14.82 $12.59 $12.10 $10.98 $11.22
======== ======= ======== ======= =======
TOTAL INVESTMENT RETURN +26.2% +11.7% +17.0% -0.3% +8.2%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Year (in thousands) $23,206 $21,123 $21,343 $20,873 $24,966
Ratio of Net Expenses to Average Net Assets 1.18% 1.19% 1.24% 1.27% 1.20%
Ratio of Net Investment Income to Average Net Assets 0.82% 1.68% 1.88% 1.91% 1.90%
Portfolio Turnover 63.5% 46.5% 37.1% 77.2% 40.0%
Average Commission Rate Paid per Share $0.0587 N/A N/A N/A N/A
THE PRIMARY INCOME FUND
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Year $12.77 $12.07 $11.04 $11.68 $11.02
-------- ------- ------- ------- -------
Net Investment Income 0.42 0.43 0.50 0.49 0.51
Net Realized and Unrealized Gain (Loss) on Investments 2.44 1.28 1.10 (0.54) 0.84
-------- ------- ------- ------- -------
Total from Investment Operations 2.86 1.71 1.60 (0.05) 1.35
-------- ------- ------- ------- -------
Less Distributions:
From Net Investment Income (0.42) (0.43) (0.50) (0.49) (0.51)
From Net Realized Gains (0.76) (0.58) (0.07) (0.10) (0.18)
-------- ------- ------- ------- -------
Total Distributions (1.18) (1.01) (0.57) (0.59) (0.69)
-------- ------- ------- ------- -------
Net Increase (Decrease) 1.68 0.70 1.03 (0.64) 0.66
-------- ------- ------- ------- -------
Net Asset Value, End of Year $14.45 $12.77 $12.07 $11.04 $11.68
======== ======= ======= ======== =======
TOTAL INVESTMENT RETURN +24.1% +14.8% +14.8% -0.6% +12.7%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Year (in thousands) $4,307 $4,510 $4,221 $3,677 $2,800
Ratio of Net Expenses to Average Net Assets 0.84% 0.84% 0.84% 0.84% 0.84%
Ratio of Net Investment Income to Average Net Assets 3.19% 3.43% 4.35% 4.20% 4.50%
Ratio of Expenses Reimbursed to Average Net Assets 0.86% 0.73% 0.76% 1.19% 1.55%
Portfolio Turnover 48.4% 41.5% 40.9% 39.7% 43.8%
Average Commission Rate Paid per Share $0.0898 N/A N/A N/A N/A
THE PRIMARY U.S. GOVERNMENT FUND
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Year $9.87 $10.09 $9.74 $10.60 $10.43
------- ------- ------- ------- -------
Net Investment Income 0.63 0.63 0.57 0.51 0.56
Net Realized and Unrealized Gain (Loss) on Investments 0.01 (0.22) 0.38 (0.67) 0.35
------- ------- ------- ------- -------
Total from Investment Operations 0.64 0.41 0.95 (0.16) 0.91
------- ------- ------- ------- -------
Less Distributions:
From Net Investment Income (0.63) (0.63) (0.57) (0.51) (0.56)
From Net Realized Gains -- -- (0.03) (0.19) (0.18)
------- ------- ------- ------- -------
Total Distributions (0.63) (0.63) (0.60) (0.70) (0.74)
------- ------- ------- ------- -------
Net Increase (Decrease) 0.01 (0.22) 0.35 (0.86) 0.17
------- ------- ------- ------- -------
Net Asset Value, End of Year $9.88 $9.87 $10.09 $9.74 $10.60
======= ======= ======= ======= =======
TOTAL INVESTMENT RETURN +6.7% +4.1% +10.2% -1.7% +9.1%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Year (in thousands) $734 $799 $1,345 $1,295 $1,354
Ratio of Net Expenses to Average Net Assets 0.75% 0.75% 0.75% 0.75% 0.75%
Ratio of Net Investment Income to Average Net Assets 6.41% 6.24% 5.85% 4.91% 5.29%
Ratio of Expenses Reimbursed to Average Net Assets 3.84% 2.20% 1.92% 2.44% 2.75%
Portfolio Turnover 29.3% 46.6% 63.0% 94.4% 64.5%
See notes to financial statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
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.
a. Each security, excluding securities with 60 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 60 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. The Government Fund's accumulated net realized loss on sales of
investments for federal income tax purposes at June 30, 1997, is $32,217. This
loss carryover is available to offset future taxable gains in the Government
Fund and, if not applied, $29,252 will expire in 2003 and $2,965 will expire in
2005.
d. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
e. Dividends from net investment income are declared and paid at least
annually by the Trend Fund and are declared daily and paid monthly by the
Income Fund and the Government Fund. Distributions of net realized capital
gains, if any, are declared and paid at least annually. Distributions to
shareholders are recorded on the ex-dividend date. The character of
distributions made during the year from net investment income or net realized
gains may differ from the characterization for federal income tax purposes due
to differences in the recognition of income, expense and gain items for
financial statement and tax purposes. Where appropriate, reclassifications
between net asset accounts are made for such differences. Accordingly, at June
30, 1997, a reclassification was made to decrease undistributed net investment
income and to increase undistributed net realized gains by $313,113 for the
Trend Fund.
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 year ended June 30, 1997. As of June 30, 1997, 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 year ended June 30,
1997. For the year ended June 30, 1997, the Funds incurred investment advisory
fees, net of expense reimbursements, totalling $137,346. 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 year ended June
30, 1997.
4. PURCHASES AND SALES OF SECURITIES
For the year ended June 30, 1997, total purchases and proceeds from sales of
securities, other than short-term investments, for the Trend Fund were
$13,154,572 and $17,132,607, respectively; for the Income Fund, $1,980,321 and
$2,805,852, respectively; and for the Government Fund, $199,900 and $395,325,
respectively.
5. FUND SHARE TRANSACTIONS
Transactions in shares of the Funds were as follows:
<TABLE>
<CAPTION> THE PRIMARY
THE PRIMARY THE PRIMARY U.S. GOVERNMENT
TREND FUND INCOME FUND FUND
----------------- ----------------- ------------------
1997 1996 1997 1996 1997 1996
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Sales 73,343 64,755 27,338 84,762 3,193 10,332
Reinvested Distributions 114,514 147,550 31,924 25,475 4,125 5,995
Redemptions (298,834) (298,837) (114,337) (106,883) (13,977) (68,763)
-------- -------- -------- -------- -------- --------
Net Increase (Decrease) (110,977) (86,532) (55,075) 3,354 (6,659) (52,436)
========= ========= ======== ======== ======== ========
</TABLE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders,
The Primary Trend Fund, Inc.
The Primary Income Funds, Inc.
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of The Primary Trend Fund, Inc. and The
Primary Income Funds, Inc. (comprised of The Primary Income Fund and The Primary
U.S. Government Fund) as of June 30, 1997, and the related statements of
operations for the year then ended and changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 June
30, 1997, by correspondence with the custodian and brokers. 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 audits provide 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 positions of The
Primary Trend Fund, Inc. and The Primary Income Funds, Inc. at June 30, 1997,
the results of their operations for the year then ended, the changes in their
net assets for each of the two years in the period then ended, and their
financial highlights for each of the five years in the period then ended, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
July 25, 1997
FUND PERFORMANCE COMPARISON
Primary Trend Fund S&P 500 Composite
9/15/86 10000.00 10000.00
12/31/86 9940.15 10562.09
3/31/87 11009.23 12806.73
6/30/87 11504.58 13449.73
9/30/87 11774.46 14337.72
12/31/87 10301.89 11109.38
3/31/88 11607.94 11740.24
6/30/88 12152.02 12521.82
9/30/88 11815.32 12563.88
12/31/88 12194.64 12947.87
3/31/89 12958.08 13864.06
6/30/89 13471.28 15095.34
9/30/89 13728.98 16708.09
12/31/89 13280.64 17050.24
3/31/90 13338.30 16526.43
6/30/90 13281.72 17556.32
9/30/90 12215.54 15152.88
12/31/90 13052.61 16525.45
3/31/91 14803.96 18924.43
6/30/91 14701.49 18881.18
9/30/91 15501.53 19891.55
12/31/91 15603.23 21558.88
3/31/92 15506.10 21012.92
6/30/92 15766.31 21410.73
9/30/92 16033.68 22085.03
12/31/92 15635.34 23195.40
3/31/93 16593.21 24208.59
6/30/93 17049.47 24323.81
9/30/93 17265.82 24951.08
12/31/93 17419.16 25530.86
3/31/94 16908.22 24563.70
6/30/94 17001.07 24666.60
9/30/94 17914.60 25870.42
12/31/94 17396.33 25866.88
3/31/95 18401.45 28371.48
6/30/95 19900.00 31078.50
9/30/95 20062.04 33545.78
12/31/95 20217.06 35562.39
3/31/96 21922.32 37469.77
6/30/96 22586.54 39145.90
9/30/96 23360.17 40340.39
12/31/96 26276.95 43680.48
3/31/97 25930.92 44855.06
6/30/97 28510.04 52676.89
FUND'S TOTAL RETURN PERFORMANCE
1997 Year to Date + 8.5%
12 Months Ended June 30, 1997 +26.2%
5 Years (Annualized) +12.6%
10 Years (Annualized) + 9.5%
Annualized Since Inception (9/30/86) +10.3%
Initial Investment of $10,000 on 9/30/86
Primary Income S&P 500 S&P Utilities
Fund Composite Index
9/1/89 10000.00 10000.00 10000.00
9/30/89 10051.00 9962.00 10374.00
12/31/89 10474.76 10166.00 11211.03
3/31/90 10226.95 9853.69 10283.01
6/30/90 10421.22 10467.75 10285.01
9/30/90 9915.58 9034.72 9781.23
12/31/90 10869.61 9853.10 11036.15
3/31/91 11467.60 11283.47 11189.42
6/30/91 11377.55 11257.68 10693.38
9/30/91 12590.33 11860.10 11537.75
12/31/91 13205.91 12854.22 12513.96
3/31/92 12617.35 12528.70 11347.28
6/30/92 13263.20 12765.89 12241.79
9/30/92 13753.22 13167.93 13207.17
12/31/92 13507.97 13829.98 13532.36
3/31/93 14632.48 14434.08 15004.10
6/30/93 14951.12 14502.78 15349.34
9/30/93 15671.30 14876.78 16423.18
12/31/93 15591.35 15222.47 15492.96
3/31/94 14985.09 14645.81 14212.86
6/30/94 14864.52 14707.17 14203.19
9/30/94 15512.73 15424.93 14275.99
12/31/94 15189.85 15422.82 14273.87
3/31/95 16251.81 16916.16 15259.71
6/30/95 17070.58 18530.18 16392.94
9/30/95 17622.29 20001.27 18233.01
12/31/95 18322.15 21203.65 20145.72
3/31/96 19092.45 22340.90 19187.97
6/30/96 19604.75 23340.27 20148.53
9/30/96 20035.27 24052.48 19440.34
12/31/96 22005.00 26043.96 20737.69
3/31/97 22456.01 26744.30 20038.13
6/30/97 24330.28 31407.96 21216.10
FUND'S TOTAL RETURN PERFORMANCE
1997 Year to Date +10.6%
12 Months Ended June 30, 1997 +24.1%
5 Years (Annualized) +12.9%
Annualized Since Inception (9/1/89) +12.0%
Initial Investment of $10,000 on 9/1/89
Primary U.S. Lehman Intermediate
Government Fund Treasury Composite
9/1/89 10000.00 10000.00
9/30/89 10026.00 10046.00
12/31/89 10336.37 10388.53
3/31/90 10276.34 10368.52
6/30/90 10623.74 10691.59
9/30/90 10581.55 10896.21
12/31/90 11190.57 11370.37
3/31/91 11449.86 11615.35
6/30/91 11525.33 11808.97
9/30/91 12181.27 12371.30
12/31/91 12837.12 12973.93
3/31/92 12519.94 12831.19
6/30/92 12911.74 13330.10
9/30/92 13418.70 13924.98
12/31/92 13293.04 13873.96
3/31/93 13775.18 14397.05
6/30/93 14080.96 14681.39
9/30/93 14465.99 14992.61
12/31/93 14418.84 15014.76
3/31/94 14037.93 14734.33
6/30/94 13841.96 14653.21
9/30/94 13917.69 14764.68
12/31/94 13966.28 14749.68
3/31/95 14600.10 15358.92
6/30/95 15254.17 16076.27
9/30/95 15545.67 16319.98
12/31/95 15924.90 16871.14
3/31/96 15964.28 16751.67
6/30/96 15887.39 16860.02
9/30/96 16196.67 17149.32
12/31/96 16525.06 17544.48
3/31/97 16540.91 17531.76
6/30/97 16954.01 18018.26
FUND'S TOTAL RETURN PERFORMANCE
1997 Year to Date +2.6%
12 Months Ended June 30, 1997 +6.7%
5 Years (Annualized) +5.6%
Annualized Since Inception (9/1/89) +7.0%
Initial Investment of $10,000 on 9/1/89
Past performance is not predictive of future performance. (You already know
that...but we are required to say it anyway.)
(THE PRIMARY TREND FUNDS LOG0)
INVESTMENT ADVISER
Arnold Investment Counsel
Incorporated
First Financial Centre
700 North Water Street
Milwaukee, Wisconsin 53202
1-800-443-6544
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
ADMINISTRATOR
Sunstone Financial Group, Inc.
207 East Buffalo Street, Suite 400
Milwaukee, Wisconsin 53202
CUSTODIAN, TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Firstar Trust Company
615 East Michigan Street
Milwaukee, Wisconsin 53202
1-800-968-2122
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
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