(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, 1998
MESSAGE TO SHAREHOLDERS . . .
"What used to be a broader-based, more homogeneous appetite for U.S.
equities has eroded into a very narrow and selective desire for the mega-
cap growth darlings that dominate the upper tier of the Standard & Poor's
500 Index. This dichotomy that has existed in the stock market since early
1998 has proven to be challenging for value managers and problematic for
the overall stock market."
THE PRIMARY TREND FUNDS
6/30/98 Annual Report
The latter half of 1998 had it all -- new highs in the major averages and new
----
lows; wicked volatility; a bear market in the average stock; global financial
unrest; the bailout of a major hedge fund; and a liquidity crunch that was
averted by Greenspan & Co.
The bungee-like action by the major averages in the final three months of the
year erased a lot of pain endured by investors during 1998. While we put some
of our cash to work during the decline, we certainly could not have envisioned
the launch to new all-time high ground that has since transpired. This is one
of the reasons why we consider the current market environment a continuation of
the old bull market (dating to 1990) rather than the birth of a new bull.
As we have conveyed in The Primary Trend investment letter, the financial
markets were a very mixed bag during 1998, with a narrow list of "mega-cap"
growth stocks stealing the show. For the final six months of 1998, the Dow
Jones Industrial Average gained 3.5%, and the Standard & Poor's 500 Composite
returned +9.2%. However, the unweighted Standard & Poor's lost 2.8%, the Value
Line Index lost 8.3%, the Russell 2000 declined 7.8%, and the average stock fell
by over 20% . . . truly less-than-bullish dynamics for a bull market.
The Primary Trend Funds generated the following returns for the six months
ended December 31, 1998:
THE PRIMARY TREND FUND - 5.6%
THE PRIMARY INCOME FUND - 0.5%
THE PRIMARY U.S. GOVERNMENT FUND +3.0%
THE PRIMARY TREND FUND'S current diversification of value-oriented securities
did not match up well against a market that craved growth -- especially
technology and Internet stocks. Our commitment to a disciplined value approach
led us to the energy patch -- one of the cheapest sectors (by many measures) in
this fully-valued market. Unfortunately, our enthusiasm for this group has been
premature. However, one bright spot in this theme was our investment in Amoco,
which was taken over by British Petroleum. Amoco gained 43% in the last six
months of the year and we continue to hold the new entity, BP Amoco. We
envision further consolidation in the oil and gas sector, as it becomes evident
that it is cheaper to buy whole companies as opposed to paying at the drill bit.
Some of the better performing stocks in the portfolio over the last six months
of 1998 are components of the consumer sector: Philip Morris (+36%); UST
(+29%); Albertson's (+23%); and Darden Restaurants (+13%).
THE PRIMARY INCOME FUND, with its exposure to the higher yielding energy
sector, also underperformed for the six months ended December 31, 1998. The
decline in interest rates during this period helped boost the portfolio's
utility holdings (comprising 33% of the Fund's assets), such as DPL, Inc. (+19%)
and GTE (+17%). However, lower interest rates did little to help its 10%
exposure to the Real Estate Investment Trust (REIT) sector where the higher
yielding income stream was more than offset by price declines. Other stellar
performers included Amoco (+43%); Philip Morris (+36%); UST (+29%); and
Albertson's (+23%).
THE PRIMARY U.S. GOVERNMENT FUND continues to keep its portfolio duration on
the shorter side with most of the bond holdings in the 2-7 year maturity
envelope. The Fed's orchestrated move to cut short-term interest rates and bail
out a prominent hedge fund propelled the bond market to historically low yields
of 4.72% on the 30-year U.S. Treasury bond. However, we continue to believe
that extending maturities at this point is not prudent. We expect long-term
bonds will present a better buying opportunity near the 6% yield level.
The stock market has climbed the proverbial "wall of worry" (impeachment
hearings, Iraq conflict, less- than-stellar earnings, and continued
international currency turmoil) as it rebounded off its October lows en route to
a new all-time high in early January, 1999, of 9600 for the Dow Jones Industrial
Average. However, the market continues to discount many positives as it trades
at an expensive 25-30 times 1999 earnings estimates. Much like the move to new
highs in the summer of 1998, the current rally has lacked broad sponsorship and
new leadership. And investor sentiment is as bullish today as it was in August
1987.
The current market environment seems to abhor value, yet reward "instant
gratification" . . . and hence, the Internet mania takes center stage. We
believe that this careless speculation run amuck is an overriding negative and
long-term investment rationale must return in order for a new bull market to be
born.
We continue to search for those situations that we deem undervalued and
appropriate for the Funds. While the overall market is not cheap, we are
finding company-specific investment situations. Recent purchases include CBS,
Chubb, Crown Cork & Seal, Minnesota Mining & Manufacturing, PNC Bank and Wendy's
International. Additionally, we have our first takeover of 1999, with our
holding in Sundstrand Corporation being bought by United Technologies. We
expect 1999 to be a transition year where new leadership takes hold and "value"
regains its lost luster.
All of us at Arnold Investment Counsel value you as shareholders in The
Primary Trend Funds and thank you for your continued support. As always, we are
diligently working on behalf of each one of you toward fulfilling your
individual investment goals. As significant shareholders in the Funds, our
goals are always aligned with yours.
Sincerely,
/s/ Lilli Gust /s/ Barry S. Arnold
Lilli Gust Barry S. Arnold
President Vice President
February 26, 1999
PORTFOLIOS OF INVESTMENTS
December 31, 1998 (unaudited)
THE PRIMARY TREND FUND
<TABLE>
SHARES OR
PRINCIPAL MARKET
AMOUNT COST VALUE
- ----------- ------------ ------------
<S> <C> <C> <C>
COMMON STOCKS 77.4%
10,000 Aetna, Inc. (Managed care/Insurance) $ 770,304 $ 786,250
14,000 Albertson's, Inc. (Retail food stores) 519,400 891,625
12,000 Amoco Corporation (Integrated oil company) 325,950 724,500
27,000 Archer-Daniels-Midland Co. (Food processing) 453,740 464,062
10,000 Browning-Ferris Industries, Inc. (Waste management services) 299,250 284,375
22,000 CBS Corporation*<F1> (Multimedia) 539,129 720,500
5,000 Citigroup, Inc. (Financial services) 158,313 247,500
21,000 Crown Cork & Seal Co., Inc. (Packaging products) 672,944 647,063
30,000 Darden Restaurants, Inc. (Restaurant chains) 298,703 540,000
12,000 Eastman Kodak Company (Photographic equipment) 536,365 864,000
25,000 Enron Oil & Gas Company (Domestic oil and gas exploration and production) 671,500 431,250
12,000 L.M. Ericsson Telephone ADR (Telecommunications) 142,935 287,250
15,000 GreenPoint Financial Corp. (Financial services) 216,550 526,875
8,641 Insignia Properties Trust (Real estate investment trust) 86,552 110,173
40,000 Juno Lighting, Inc. (Commercial and residential lighting) 672,187 935,000
10,000 Louisiana-Pacific Corporation (Building materials) 178,300 183,125
8,000 Mylan Laboratories, Inc. (Pharmaceutical products) 99,480 252,000
8,000 Newmont Mining Corporation (Gold mining) 248,112 144,500
25,000 Occidental Petroleum Corporation (Integrated oil company) 467,085 421,875
10,000 PNC Bank Corporation (Financial services) 499,550 541,250
10,000 Pall Corporation (Filtration products) 231,950 253,125
10,000 PartnerRe Ltd. ADR (Insurance) 332,975 457,500
10,000 J.C. Penney Company, Inc. (Retail stores) 436,225 468,750
15,000 PennzEnergy Company (International oil and gas exploration and production) 394,856 244,688
15,000 Pennzoil-Quaker State Co. (Automotive consumer products) 376,201 222,188
10,000 Philip Morris Companies, Inc. (Tobacco) 401,000 535,000
10,000 SLM Holding Corporation (Financial services) 126,155 480,000
23,000 Seagram Company Ltd. (Entertainment/Beverages) 785,490 874,000
35,000 Snyder Oil Corporation (Domestic oil and gas exploration and production) 345,388 465,937
10,000 Sundstrand Corporation (Aerospace and industrial) 231,525 518,750
22,000 UST, Inc. (Tobacco) 615,875 767,250
35,000 Union Pacific Resources Group Inc. (Domestic oil and gas exploration and production) 707,875 317,187
22,000 Wendy's International, Inc. (Restaurant chain) 493,848 479,875
43,200 Western Gas Resources, Inc. (Natural gas gathering, transportation and marketing) 792,582 248,400
----------- -----------
Total Common Stocks 14,128,294 16,335,823
----------- -----------
BONDS AND NOTES 2.5%
$ 150,000 Kimco Realty Corp., 6.83%, due 11/14/05 144,459 150,631
365,000 Federal Home Loan Bank, 6.35%, due 8/28/08 365,000 368,821
----------- -----------
Total Bonds and Notes 509,459 519,452
----------- -----------
Total Long-Term Investments 14,637,753 16,855,275
----------- -----------
SHORT-TERM INVESTMENTS 19.9%
VARIABLE RATE DEMAND NOTES
252,961 American Family Financial Services, Inc., 5.18% 252,961 252,961
763,315 Firstar Bank, 5.29% 763,315 763,315
814,740 General Mills, Inc., 5.15% 814,740 814,740
833,231 Pitney Bowes Credit Corp., 5.22% 833,231 833,231
259,832 Sara Lee Corp., 5.22% 259,832 259,832
593,135 Warner-Lambert, Inc., 5.19% 593,135 593,135
66,648 Wisconsin Corporate Central Credit Union, 5.29% 66,648 66,648
15,711 Wisconsin Electric Power Co., 5.18% 15,711 15,711
----------- -----------
Total Variable Rate Demand Notes 3,599,573 3,599,573
----------- -----------
CORPORATE NOTES
400,000 GTE Northwest, Inc., 6.125%, due 2/15/99 400,000 400,396
200,000 Richmond County, GA, 6%, due 6/1/20, put 6/1/99 200,699 201,674
----------- -----------
Total Corporate Notes 600,699 602,070
----------- -----------
Total Short-Term Investments 4,200,272 4,201,643
----------- -----------
TOTAL INVESTMENTS 99.8% $18,838,025 21,056,918
-----------
-----------
Other Assets, less Liabilities 0.2% 46,817
-----------
NET ASSETS (Equivalent to $11.40 per share
based on 1,850,498 shares outstanding) 100.0% $21,103,735
-----------
-----------
</TABLE>
* <F1> Non-income producing security.
See notes to financial statements.
THE PRIMARY INCOME FUND
<TABLE>
SHARES OR
PRINCIPAL MARKET
AMOUNT COST VALUE
- ----------- ------------ ------------
<S> <C> <C> <C>
COMMON STOCKS 68.0%
1,500 Aetna, Inc. (Managed care/Insurance) $ 117,377 $ 117,938
2,000 Albertson's, Inc. (Retail food stores) 74,200 127,375
2,000 Amoco Corporation (Integrated oil company) 55,720 120,750
5,000 Archer-Daniels-Midland Co. (Food processing) 83,793 85,938
3,000 Browning-Ferris Industries, Inc. (Waste management services) 83,020 85,313
2,000 CINergy Corp. (Electric utility) 39,641 68,750
2,000 Consolidated Natural Gas Co. (Integrated natural gas systems) 87,325 108,000
3,000 Crown Cork & Seal Co., Inc. (Packaging products) 92,928 92,437
4,500 DPL, Inc. (Electric and gas utility) 45,124 97,312
1,000 Eastman Kodak Company (Photographic equipment) 69,100 72,000
2,000 GTE Corporation (Telephone utility) 62,995 134,875
4,000 Great Lakes REIT, Inc. (Real estate investment trust) 63,377 62,750
4,548 Insignia Properties Trust (Real estate investment trust) 23,374 57,987
2,000 Interstate Energy Corporation (Electric utility) 61,700 64,500
5,000 Juno Lighting, Inc. (Commercial and residential lighting) 85,600 116,875
2,000 Kellogg Company (Cereal products) 67,950 68,250
4,000 KeySpan Energy (Natural gas utility) 99,715 124,000
3,000 Louisiana-Pacific Company (Building materials) 53,490 54,937
4,000 Mid-Atlantic Realty Trust (Real estate investment trust) 52,000 49,250
1,000 Mylan Laboratories, Inc. (Pharmaceutical products) 13,205 31,500
4,000 Northern States Power Company (Electric utility) 74,513 111,000
4,000 Occidental Petroleum Corporation (Integrated oil company) 87,705 67,500
2,000 PNC Bank Corporation (Financial services) 99,660 108,250
2,000 Pall Corporation (Filtration products) 46,785 50,625
2,000 J.C. Penney Company, Inc. (Retail stores) 87,073 93,750
1,500 PennzEnergy Company (International oil and gas exploration and production) 36,973 24,469
1,500 Pennzoil-Quaker State Co. (Automotive consumer products) 35,227 22,219
2,000 Philip Morris Companies, Inc. (Tobacco) 80,200 107,000
3,000 Seagram Company Ltd. (Entertainment/Beverages) 103,612 114,000
4,511 Sempra Energy (Natural gas utility) 70,329 114,467
2,000 Simon Property Group Inc. (Real estate investment trust) 39,144 57,000
4,000 UST, Inc. (Tobacco) 111,240 139,500
5,200 Union Pacific Resources Group Inc. (Domestic oil and gas
exploration and production) 110,510 47,125
4,000 Wendy's International, Inc. (Restaurant chain) 91,476 87,250
5,000 Western Gas Resources, Inc.
(Natural gas gathering, transportation and marketing) 81,250 28,750
3,000 Wisconsin Energy Corporation (Electric and gas utility) 73,280 94,312
----------- -----------
Total Common Stocks 2,560,611 3,007,954
----------- -----------
PREFERRED STOCKS 9.1%
1,500 Battle Mountain Gold Company $3.25 convertible 78,948 56,062
4,000 CNB Capital Trust I $1.50 convertible 100,000 112,250
1,000 Central Maine Power $3.50 55,250 55,000
2,000 Conseco Financing Trust $3.50 Series F convertible 77,256 77,125
4,000 Conseco Financing Trust $2.175 100,000 99,500
----------- -----------
Total Preferred Stocks 411,454 399,937
----------- -----------
BONDS AND NOTES 16.2%
CONVERTIBLE DEBENTURE
$ 50,000 Couer d'Alene Mines Corp., 6.375%, due 1/31/04 46,323 28,750
----------- -----------
CORPORATE NOTES
100,000 Ameritech Corp., 5.65%, due 1/15/01 100,654 101,120
100,000 Developers Diversified Realty Corp., 7.01%, due 2/7/03 98,067 103,897
99,000 Philadelphia Electric Co., 6.625%, due 3/1/03 101,249 104,237
50,000 Northern Illinois Gas Co., 5.75%, due 6/1/03 49,767 50,988
100,000 Wisconsin Gas Company, 6.375%, due 11/01/05 100,895 106,546
100,000 Kimco Realty Corp., 6.83%, due 11/14/05 96,306 100,421
----------- -----------
Total Corporate Notes 546,938 567,209
----------- -----------
U.S. GOVERNMENT AGENCY NOTES
70,000 Federal Home Loan Bank, 7.01%, due 8/20/07 50,000 50,418
50,000 Federal Home Loan Bank, 6.35%, due 8/28/08 70,000 70,733
----------- -----------
Total U.S. Government Agency Notes 120,000 121,151
----------- -----------
Total Bonds and Notes 713,261 717,110
----------- -----------
Total Long-Term Investments 3,685,326 4,125,001
----------- -----------
SHORT-TERM INVESTMENTS 6.2%
VARIABLE RATE DEMAND NOTES
40,363 General Mills, Inc., 5.15% 40,363 40,363
76,665 Pitney Bowes Credit Corp., 5.22% 76,665 76,665
50,779 Wisconsin Corporate Central Credit Union, 5.29% 50,779 50,779
6,269 Wisconsin Electric Power Co., 5.18% 6,269 6,269
----------- -----------
Total Variable Rate Demand Notes 174,076 174,076
----------- -----------
CORPORATE NOTE
100,000 GTE Northwest Inc., 6.125%, due 2/15/99 100,000 100,099
----------- -----------
Total Short-Term Investments 274,076 274,175
----------- -----------
TOTAL INVESTMENTS 99.5% $ 3,959,402 4,399,176
-----------
-----------
Other Assets, less Liabilities 0.5% 22,225
-----------
NET ASSETS (Equivalent to $12.03 per share
based on 367,677 shares outstanding) 100.0% $ 4,421,401
-----------
-----------
Note to Portfolio of Investments - As required by the Fund's investment policies, the Fund has invested $1,441,475 (33%
of its net assets) in securities issued by utilities.
</TABLE>
See notes to financial statements.
THE PRIMARY U.S. GOVERNMENT FUND
<TABLE>
PRINCIPAL MARKET
AMOUNT COST VALUE
- ----------- ------------ ------------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCY NOTES 71.3%
$100,000 Federal Farm Credit Bank, 6.49%, due 1/20/00 $ 100,654 $ 101,606
100,000 Student Loan Marketing Association, 5.56%, due 3/3/00 99,875 100,059
50,000 Federal National Mortgage Association, 6.59%, due 7/15/02 50,323 50,397
100,000 Federal Home Loan Bank, 5.84%, due 3/5/03 100,000 101,329
100,000 Federal National Mortgage Association, 8.50%, due 2/1/05 99,531 103,633
50,000 Federal Home Loan Bank, 7.01%, due 8/20/07 50,000 50,418
25,000 Federal Home Loan Bank, 6.35%, due 8/28/08 25,000 25,262
----------- -----------
Total U.S. Government Agency Notes 525,383 532,704
----------- -----------
BONDS AND NOTES 13.8%
50,000 Norwest Financial, 6.375%, due 11/15/01 51,206 51,618
50,000 Northern Illinois Gas, 5.75%, due 6/1/03 49,767 50,988
----------- -----------
Total Bonds and Notes 100,973 102,606
----------- -----------
Total Long-Term Investments 626,356 635,310
----------- -----------
SHORT-TERM INVESTMENTS 12.7%
VARIABLE RATE DEMAND NOTES
3,379 General Mills, Inc., 5.15% 3,379 3,379
16,031 Pitney Bowes Credit Corp., 5.22% 16,031 16,031
----------- -----------
Total Variable Rate Demand Notes 19,410 19,410
----------- -----------
U.S. TREASURY NOTE
75,000 U.S. Treasury note, 6.375%, due 7/15/99 74,859 75,715
----------- -----------
Total Short-Term Investments 94,269 95,125
----------- -----------
TOTAL INVESTMENTS 97.8% $ 720,625 730,435
-----------
-----------
Other Assets, less Liabilities 2.2% 16,587
-----------
NET ASSETS (Equivalent to $9.97 per share
based on 74,909 shares outstanding) 100.0% $ 747,022
-----------
-----------
</TABLE>
See notes to financial statments.
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1998 (unaudited)
<TABLE>
THE PRIMARY
U.S.
THE PRIMARY THE PRIMARY GOVERNMENT
TREND FUND INCOME FUND FUND
----------- ---------- --------
<S> <C> <C> <C>
Assets:
Investments, at Value (Note 2a):
Common Stocks $16,335,823 $3,007,954 $ --
Preferred Stocks -- 399,937 --
Bonds and Notes 519,452 717,110 635,310
Short-Term Investments 4,201,643 274,175 95,125
----------- ---------- --------
Total Investments (Cost
$18,838,025; $3,959,402 and
$720,625, respectively) 21,056,918 4,399,176 730,435
Cash -- 3,675 --
Dividends Receivable 26,060 8,069 --
Interest Receivable 36,749 15,990 16,510
Due from Adviser -- -- 752
Prepaid Expenses 6,799 2,515 1,714
----------- ---------- --------
Total Assets 21,126,526 4,429,425 749,411
----------- ---------- --------
Liabilities:
Accrued Investment Advisory Fees 13,236 3,676 --
Other 9,555 4,348 2,389
----------- ---------- --------
Total Liabilities 22,791 8,024 2,389
----------- ---------- --------
Net Assets $21,103,735 $4,421,401 $747,022
----------- ---------- --------
----------- ---------- --------
Shares Outstanding 1,850,498 367,677 74,909
Net Assets Per Share $ 11.40 $ 12.03 $ 9.97
----------- ---------- --------
----------- ---------- --------
Net Assets Consist of:
Capital Stock (30,000,000
shares authorized each) $18,862,762 $3,945,527 $768,889
Net Unrealized Appreciation
of Investments 2,218,893 439,775 9,810
Undistributed Net Investment Income 612 35 2
Undistributed Net Realized Gains
(Accumulated Losses) 21,468 36,064 (31,679)
----------- ---------- --------
Net Assets $21,103,735 $4,421,401 $747,022
----------- ---------- --------
----------- ---------- --------
</TABLE>
See notes to financial statments.
STATEMENTS OF OPERATIONS
For the six months ended December 31, 1998 (unaudited)
<TABLE>
THE PRIMARY
U.S.
THE PRIMARY THE PRIMARY GOVERNMENT
TREND FUND INCOME FUND FUND
----------- ---------- --------
<S> <C> <C> <C>
Income:
Interest $ 150,693 $33,107 $23,977
Dividends 155,299(a)<F2> 64,882(b)<F3> --
------------ -------- --------
Total Income 305,992 97,989 23,977
------------ -------- --------
Expenses:
Investment Advisory Fees (Note 3) 80,151 16,235 2,590
Administration and Accounting Fees 18,319 13,785 8,167
Shareholder Servicing Costs 15,838 5,769 4,453
Professional Fees 12,474 6,574 6,064
Registration Fees 3,261 1,645 1,240
Custodial Fees 3,049 818 162
Postage 2,490 417 134
Printing 2,319 677 196
Insurance 668 176 --
Other 1,521 486 305
------------ -------- --------
Total Expenses Before Reimbursement 140,090 46,582 23,311
Less Expenses Reimbursed By Adviser (Note 3) -- (24,647) (19,325)
------------ -------- --------
Net Expenses 140,090 21,935 3,986
------------ -------- --------
Net Investment Income 165,902 76,054 19,991
------------ -------- --------
Net Realized Gain on Investments 458,818 120,010 --
Change in Net Unrealized Appreciation of Investments (1,951,012) (224,861) 3,750
------------ -------- --------
Net Realized and Unrealized Gain (Loss) on Investments (1,492,194) (104,851) 3,750
------------ -------- --------
Net Increase (Decrease) in Net Assets From Operations $(1,326,292) $ (28,797) $ 23,741
------------ -------- --------
------------ -------- --------
(a)<F2> Net of $1,064 in foreign withholding taxes.
(b)<F3> Net of $148 in foreign withholding taxes.
See notes to financial statements.
STATEMENTS OF CHANGES IN NET ASSETS
(unaudited)
</TABLE>
<TABLE>
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, 1998 1998 DEC. 31, 1998 1998 DEC. 31, 1998 1998
------------- ------------ ------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net Investment Income $ 165,902 $ 216,633 $ 76,054 $ 148,954 $ 19,991 $ 42,090
Net Realized Gain
on Investments 458,818 3,350,856 120,010 543,724 -- 538
Change in Net Unrealized
Appreciation of Investments (1,951,012) (572,297) (224,861) (59,402) 3,750 2,339
---------- ---------- ---------- --------- -------- ---------
Net Increase (Decrease) in Net
Assets from Operations (1,326,292) 2,995,192 (28,797) 633,276 23,741 44,967
---------- ---------- ---------- --------- -------- ---------
Distributions to Shareholders:
From Net Investment Income (285,475) (96,448) (79,524) (145,449) (20,211) (41,868)
From Net Realized Gains (2,700,933) (4,024,201) (484,432) (642,742) -- --
---------- ---------- ---------- --------- -------- ---------
Decrease in Net Assets
from Distributions (2,986,408) (4,120,649) (563,956) (788,191) (20,211) (41,868)
---------- ---------- ---------- --------- -------- ---------
Fund Share Transactions:
Proceeds from Shares Sold 285,452 667,691 92,396 199,259 57,893 69,909
Reinvested Distributions 2,830,285 3,955,376 550,699 754,261 16,367 31,786
Cost of Shares Redeemed (1,413,107) (2,989,448) (200,990) (533,135) (104,722) (65,041)
---------- ---------- ---------- --------- -------- ---------
Net Increase (Decrease) in
Net Assets from Fund
Share Transactions 1,702,630 1,633,619 442,105 420,385 (30,462) 36,654
---------- ---------- ---------- --------- -------- ---------
Total Increase (Decrease) in
Net Assets (2,610,070) 508,162 (150,648) 265,470 (26,932) 39,753
Net Assets:
Beginning of Period 23,713,805 23,205,643 4,572,049 4,306,579 773,954 734,201
---------- ---------- ---------- --------- -------- ---------
End of Period $21,103,735 $23,713,805 $4,421,401 $4,572,049 $747,022 $773,954
---------- ---------- ---------- --------- -------- ---------
---------- ---------- ---------- --------- -------- ---------
Undistributed Net Investment
Income at End of Year $ 612 $ 120,185 $ 35 $ 3,505 $ 2 $ 222
---------- ---------- ---------- --------- -------- ---------
---------- ---------- ---------- --------- -------- ---------
Transactions in Shares:
Sales 24,323 47,010 7,590 14,295 5,780 7,013
Reinvested Distributions 247,034 295,431 45,960 55,430 1,639 3,203
Redemptions (117,097) (212,540) (15,826) (37,768) (10,480) (6,548)
---------- ---------- ---------- --------- -------- ---------
Net Increase (Decrease) 154,260 129,901 37,724 31,957 (3,061) 3,668
---------- ---------- ---------- --------- -------- ---------
---------- ---------- ---------- --------- -------- ---------
</TABLE>
See notes to financial statements.
FINANCIAL HIGHLIGHTS
The following table shows per share operating performance data, total investment
return, ratios and supplemental data for each period (unaudited)
<TABLE>
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, 1998 1998 DEC. 31, 1998 1998 DEC. 31, 1998 1998
------------- ------------ ------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net Asset Value, Beginning of Period $13.98 $14.82 $13.86 $14.45 $9.93 $9.88
------ ------ ------ ------ ------ ------
Income from Investment Operations:
Net Investment Income 0.09 0.13 0.21 0.45 0.26 0.55
Net Realized and Unrealized Gain
(Loss) on Investments (0.91) 1.60 (0.35) 1.50 0.04 0.05
------ ------ ------ ------ ------ ------
Total from Investment Operations (0.82) 1.73 (0.14) 1.95 0.30 0.60
------ ------ ------ ------ ------ ------
Less Distributions:
From Net Investment Income (0.16) (0.06) (0.22) (0.44) (0.26) (0.55)
From Net Realized Gains (1.60) (2.51) (1.47) (2.10) -- --
------ ------ ------ ------ ------ ------
Total Distributions (1.76) (2.57) (1.69) (2.54) (0.26) (0.55)
------ ------ ------ ------ ------ ------
Net Increase (Decrease) (2.58) (0.84) (1.83) (0.59) 0.04 0.05
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $11.40 $13.98 $12.03 $13.86 $9.97 $9.93
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL INVESTMENT RETURN -5.6% +13.1% -0.5% +14.7% +3.0% +6.2%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(in thousands) $21,104 $23,714 $4,421 $4,572 $747 $774
Ratio of Expenses to
Average Net Assets 1.29%*<F4> 1.24% 1.00%*<F4> 0.97% 1.00%*<F4> 0.95%
Ratio of Net Investment
Income to Average Net Assets 1.53%*<F4> 0.89% 3.47%*<F4> 3.16% 5.02%*<F4> 5.55%
Ratio of Expenses Reimbursed
to Average Net Assets -- -- 1.12%*<F4> 1.05% 4.85%*<F4> 5.09%
Portfolio Turnover 24.8% 24.4% 22.9% 33.5% 3.6% 62.6%
*<F4> Annualized
</TABLE>
See notes to finacial statements.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 (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.
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.
d. Dividends from net investment income are declared and paid at least
annually by the Trend Fund and are declared 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.
e. 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.
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, 1998. As of December 31, 1998, the Adviser was reimbursing the
Income Fund and the Government Fund for all expenses exceeding 1.00% of their
respective 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, 1998. For the six months ended December 31,
1998, the Funds incurred investment advisory fees, net of expense
reimbursements, totalling $55,004. The Trend Fund paid total directors fees
of $1,000 to its outside directors and the Income Funds paid total directors
fees of $1,000 to its outside directors during the six months ended December
31, 1998.
4. PURCHASES AND SALES OF SECURITIES
Total purchases and sales of securities, other than short-term investments,
for the Funds for the six months ended December 31, 1998 were as follows:
<TABLE> THE PRIMARY
THE PRIMARY THE PRIMARY U.S. GOVERNMENT
TREND FUND INCOME FUND FUND
----------- ----------- ---------------
<S> <C> <C> <C>
Purchases
U.S. Government $ 365,000 $ 70,000 $25,000
Other 3,744,290 1,063,539 51,313
Sales
U.S. Government -- 50,000 25,000
Other 4,827,948 845,748 --
</TABLE>
(THE PRIMARY TREND FUNDS LOGO)
WWW.PRIMARYTRENDFUNDS.COM
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 and Treasurer
DIRECTORS
Barry S. Arnold
Lilli Gust
Clark J. Hillery
Harold L. Holtz
ADMINISTRATOR
Sunstone Financial Group, Inc.
207 East Buffalo Street, Suite 400
Milwaukee, Wisconsin 53202
CUSTODIAN
Firstar Bank Milwaukee, N.A.
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Firstar Mutual Fund Services, LLC
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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