(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, 1998
MESSAGE TO SHAREHOLDERS
"...it will be important to witness broad-based participation if the
market continues to make new highs. For 1998, equity valuations will
become increasingly critical to the direction of the major stock averages."
THE PRIMARY TREND FUNDS
12/31/97 Semiannual Report
The cyclical bull market which began in 1994 and ended 1997 in volatile
fashion has slowly transformed itself in the first half of 1998. What used to
be a broader-based, more homogenous 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 market.
For the twelve months ended June 30, 1998, The Primary Trend Funds generated
the following returns for shareholders:
THE PRIMARY TREND FUND +13.1%
THE PRIMARY INCOME FUND +14.7%
THE PRIMARY U.S. GOVERNMENT FUND + 6.2%
THE PRIMARY TREND FUND'S current diversified portfolio of value-oriented
stocks kept pace with the broader blue-chip averages in the final half of 1997,
but has lagged those same averages in the first six months of 1998. Our
unwillingness to chase popularity has contributed to this underperformance in
the short run, but has served us well over the long haul. Selected emphasis in
the healthcare, retail and restaurant industries contributed nicely to the
portfolio. Some of the top performers for the 12 months ended June 30, 1998,
include: Mylan Labs (+105%), Darden Restaurants (+75%), L.M. Ericsson Telephone
(+45%), Juno Lighting (+45%), Albertson's (+42%) and J.C. Penney (+39%).
However, the continued collapse in crude oil prices to 12-year lows (at $12 per
barrel) has been a nemesis for both the oil and natural gas holdings in the
Fund. Recent merger and acquisition activity in the energy stocks endorses our
thesis that these securities are extremely undervalued at today's prices.
THE PRIMARY INCOME FUND had a respectable fiscal year with much of its
performance coming in the latter half of 1997 when interest rates were in a
steady decline. The portfolio's 32% exposure to the utility sector and 11%
weighting in real estate investment trusts (REITs) accounts for the Fund's
steady income stream and superior performance in the final six months of 1997.
However, these interest-sensitive sectors have lagged the broader market thus
far in 1998. Top portfolio performers for the fiscal year ended June 30, 1998,
include: Mylan Labs (+105%), L.M. Ericsson Telephone (+45%), Juno Lighting
(+45%), Albertson's (+42%), J.C. Penney (+39%), GTE (+27%) and Wisconsin Energy
(+22%). Our commitment to the energy sector (10% of the portfolio), with its
attractive dividend yields, has been poorly timed in the short term, but should
prove profitable in the long term.
THE PRIMARY U. S. GOVERNMENT FUND, with its shorter duration portfolio, did
not participate fully in the interest rate decline for long-term bonds in 1997,
but has proven competitive in 1998. We have kept maturities short in this Fund
to reduce volatility and in anticipation of a rise in interest rates. With 30-
year yields near all-time lows of 5.6% we believe the risks of extending
maturities far outweigh the potential rewards at this time.
"A MARKET OF STOCKS ... NOT A STOCK MARKET" - This Wall Street axiom seems
more appropriate today than at any other time in this bull market. While the
popular blue-chip averages reached all-time highs in mid-July, the majority of
stocks did not follow suit. It was a very narrow affair. In fact, the average
stock (as measured by advance/decline breadth statistics) peaked in early April
and has declined precipitously from its high.
As we mentioned early in 1998, the continued strength of this bull was
predicated on broad-based participation. This has not transpired - the generals
(big blue chips) marched, but the troops (secondary issues) stayed behind. This
divergence has now evolved into a full-fledged market correction. The Dow Jones
Industrial Average, which made its all-time high of 9337 on July 17, 1998, has
now declined almost 10% from its peak. Lower-tier and mid-to-smaller cap stocks
have fared dramatically worse. In fact, according to CNN, 35% of the stocks
traded on the New York Stock Exchange are already down 30% or more from their
highs, while a startling 75% of those on the NASDAQ are down 30% or more.
A number of events have contributed to the current market malaise: the Asian
crisis (to include Japan's economic turmoil) has resurfaced in spades in 1998,
with a continued fear of currency devaluation; earnings estimates have been too
optimistic; the scandal surrounding President Clinton has been a distraction to
Wall Street; but most importantly, valuations and investor sentiment have both
been treading at high altitudes. This was especially evident early in the
summer when many pundits were claiming that Dow 10,000 was a fait accompli. We
believe we are in the process of wringing out some of these excesses and
deflating these expectations ... two ingredients to forming a healthy market
bottom.
We have taken profits and weeded out underperformers during the past year and
have a cushion of cash at hand. In the near term, the stock market continues to
exhibit weakness and is vulnerable to further declines in the major averages.
However, the "bear" has already left his foot prints in many sectors and
individual securities. Therein lies the opportunity. We envision much of those
cash reserves being put to work as 1998 unfolds and better undervalued
opportunities surface ... and momentum investors pass the lead baton to value
investors.
Each of us at Arnold Investment Counsel values you as shareholders in The
Primary Trend Funds ... you are important to us. 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
below-average 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
August 14, 1998
PORTFOLIOS OF INVESTMENTS
June 30, 1998
THE PRIMARY TREND FUND
SHARES OR MARKET
PRINCIPAL AMOUNT COST VALUE
- ---------------- ------- -------
COMMON STOCKS 80.4%
9,000 Aetna, Inc. (Managed care/Insurance) $704,266 $685,125
16,000 Albertson's, Inc. (Retail food stores) 593,600 829,000
17,000 AMP, Inc. (Electronic connectors) 734,200 584,375
12,000 Amoco Corporation
(Integrated oil company) 325,950 499,500
7,700 Angeles Mortgage Investment Trust
(Real estate investment trust) 116,925 140,525
21,910 Beverly Bancorporation, Inc.
(Banking services) 374,354 523,101
60,000 Beverly Enterprises, Inc.*<F1>
(Healthcare services) 552,748 828,750
10,000 Browning-Ferris Industries, Inc.
(Waste management services) 299,250 347,500
50,000 Darden Restaurants, Inc.
(Restaurant chains) 496,597 793,750
12,000 Eastman Kodak Company
(Photographic equipment) 536,365 876,750
25,000 Enron Oil & Gas Company
(Domestic oil and gas
exploration and production) 671,500 506,250
12,000 L.M. Ericsson Telephone ADR
(Telecommunications equipment) 142,935 343,500
20,000 GreenPoint Financial Corp.
(Banking services) 288,425 752,500
45,000 Juno Lighting, Inc.
(Commercial and residential lighting) 765,937 1,063,125
25,000 Mylan Laboratories, Inc.
(Pharmaceutical products) 330,975 751,563
18,000 Newmont Mining Corporation
(Gold mining) 643,437 425,250
25,000 Occidental Petroleum Corporation
(Integrated oil company) 467,085 675,000
15,000 PartnerRe Ltd. ADR (Insurance) 497,650 765,000
10,000 J.C. Penney Company, Inc.
(Retail stores) 436,225 723,125
12,000 Pennzoil Company
(Domestic oil and gas
exploration and production) 663,055 607,500
27,306 PharMerica, Inc.*<F1>
(Institutional pharmacy services) 223,752 329,379
10,000 Philip Morris Companies, Inc. (Tobacco) 401,000 393,750
20,000 Seagram Company Ltd.
(Entertainment/Beverages) 692,625 818,750
12,500 SLM Holding Corporation
(Financial services) 157,694 612,500
40,000 Snyder Oil Corporation
(Domestic oil and gas
exploration and production) 396,887 797,500
12,000 Sundstrand Corporation
(Aerospace and industrial) 272,560 687,000
22,000 UST, Inc. (Tobacco) 632,625 594,000
35,000 Union Pacific Resources Group Inc.
(Domestic oil and gas
exploration and production) 779,176 614,687
50,000 Western Gas Resources, Inc.
(Natural gas gathering,
transporting, and marketing) 923,622 731,250
17,600 York International Corp.
(Heating and cooling systems) 776,088 766,700
---------- ----------
Total Common Stocks 14,897,508 19,066,705
---------- ----------
SHORT-TERM INVESTMENTS 19.5%
VARIABLE RATE DEMAND NOTES
$ 27,930 American Family Financial
Services, Inc., 5.25% 27,930 27,930
26,228 Firstar Bank, 5.33% 26,228 26,228
915,384 General Mills, Inc., 5.26% 915,384 915,384
1,170,636 Johnson Controls, Inc., 5.26% 1,170,636 1,170,636
1,142,808 Pitney Bowes Credit Corp., 5.26% 1,142,808 1,142,808
939,086 Warner-Lambert, Inc., 5.25% 939,086 939,086
---------- ----------
Total Variable Rate Demand Notes 4,222,072 4,222,072
CORPORATE NOTE
400,000 GTE Northwest, Inc. note,
6.125%, due 2/15/99 400,000 400,708
---------- ----------
Total Short-Term Investments 4,622,072 4,622,780
---------- ----------
TOTAL INVESTMENTS 99.9% $19,519,580 23,689,485
----------
----------
Other Assets, less Liabilities 0.1% 24,320
----------
NET ASSETS (Equivalent to $13.98
per share based on 1,696,238
shares outstanding) 100.0% $23,713,805
----------
----------
*<F1>Non-income producing security.
See notes to financial statements.
THE PRIMARY INCOME FUND
SHARES OR MARKET
PRINCIPAL AMOUNT COST VALUE
- ---------------- ------- -------
COMMON STOCKS 70.1%
1,500 Aetna, Inc.
(Managed care/Insurance) $ 117,377 $ 114,187
2,000 Albertson's, Inc.
(Retail food stores) 74,200 103,625
3,000 AMP, Inc. (Electronic connectors) 129,675 103,125
2,000 Amoco Corporation
(Integrated oil company) 55,720 83,250
8,600 Angeles Mortgage Investment Trust
(Real estate investment trust) 65,283 156,950
3,500 Browning-Ferris Industries, Inc.
(Waste management services) 98,007 121,625
3,000 CarrAmerica Realty Corporation
(Real estate investment trust) 79,125 85,125
1,500 CCA Prison Realty Trust
(Real estate investment trust) 31,500 45,938
2,000 CINergy Corp. (Electric utility) 39,641 70,000
2,000 Consolidated Natural Gas Co.
(Integrated natural gas system) 87,325 117,750
4,500 DPL, Inc. (Electric and gas utility) 45,124 81,563
1,000 Eastman Kodak Company
(Photographic equipment) 69,100 73,063
2,000 L.M. Ericsson Telephone ADR
(Telecommunications equipment) 18,975 57,250
2,000 GTE Corporation (Telephone utility) 62,995 111,250
6,000 Great Lakes REIT, Inc.
(Real estate investment trust) 95,907 104,625
2,000 Interstate Energy Corporation
(Electric utility) 61,700 65,000
6,000 Juno Lighting, Inc.
(Commercial and residential lighting) 103,475 141,750
4,000 Marketspan Corporation
(Natural gas utility) 99,715 119,750
4,000 Mid-Atlantic Realty Trust
(Real estate investment trust) 52,000 49,250
3,000 Mylan Laboratories, Inc.
(Pharmaceutical products) 39,615 90,188
4,000 Northern States Power Company
(Electric utility) 74,513 114,500
4,000 Occidental Petroleum Corporation
(Integrated oil company) 87,705 108,000
2,000 J.C. Penney Company, Inc.
(Retail stores) 87,073 144,625
1,500 Pennzoil Company (Domestic oil and
gas exploration and production) 72,200 75,937
2,000 Philip Morris Companies, Inc. (Tobacco) 80,200 78,750
3,000 Seagram Company Ltd.
(Entertainment/Beverages) 103,612 122,812
4,511 Sempra Enterprises
(Natural gas utility) 70,335 125,191
2,000 Simon DeBartolo Group, Inc.
(Real estate investment trust) 39,144 65,000
4,000 UST, Inc. (Tobacco) 111,240 108,000
5,200 Union Pacific Resources Group Inc.
(Domestic oil and gas
exploration and production) 110,510 91,325
7,000 Western Gas Resources, Inc.
(Natural gas gathering,
transporting, and marketing) 113,750 102,375
3,000 Wisconsin Energy Corporation
(Electric and gas utility) 73,280 91,125
1,900 York International Corp.
(Heating and cooling systems) 83,695 82,769
---------- ----------
Total Common Stocks 2,533,716 3,205,673
---------- ----------
PREFERRED STOCKS 6.4%
2,000 Battle Mountain Gold Company
$3.25 convertible 107,183 91,625
4,000 CNB Capital Trust I $1.50 convertible 100,000 105,000
2,000 SunAmerica, Inc. $3.1875 PERCS 88,160 96,000
---------- ----------
Total Preferred Stocks 295,343 292,625
---------- ----------
BONDS AND NOTES 8.6%
CONVERTIBLE DEBENTURE
$ 50,000 Couer d'Alene Mines Corp.,
6.375%, due 1/31/04 45,959 37,875
---------- ----------
CORPORATE NOTES
99,000 Philadelphia Electric,
6.625%, due 3/1/03 101,489 101,954
50,000 Northern Illinois Gas,
5.75%, due 6/1/03 49,767 49,997
100,000 Wisconsin Gas Company,
6.375%, due 11/01/05 100,948 102,899
---------- ----------
Total Corporate Obligations 252,204 254,850
---------- ----------
U.S. GOVERNMENT AGENCY NOTES
50,000 Federal Home Loan Mortgage
Corporation, 7.14%, due 7/31/02 50,326 50,111
50,000 Federal Home Loan Bank, 7.01%,
due 8/20/07 50,000 50,383
---------- ----------
Total U.S. Government Agency Notes 100,326 100,494
---------- ----------
Total Bonds and Notes 398,489 393,219
---------- ----------
Total Long-Term Investments 3,227,548 3,891,517
---------- ----------
SHORT-TERM INVESTMENTS 14.7%
VARIABLE RATE DEMAND NOTES
147,698 General Mills, Inc., 5.26% 147,698 147,698
96,344 Johnson Controls, Inc., 5.26% 96,344 96,344
108,556 Pitney Bowes Credit Corp., 5.26% 108,556 108,556
---------- ----------
Total Variable Rate Demand Notes 352,598 352,598
---------- ----------
CORPORATE NOTES
100,000 Wisconsin Gas Company, 7.50%,
due 11/15/98 99,835 100,514
120,000 Southern California Edison, 5.60%,
due 12/15/98 120,091 119,902
100,000 GTE Northwest Inc., 6.125%,
due 2/15/99 100,000 100,177
---------- ----------
Total Corporate Notes 319,926 320,593
---------- ----------
Total Short-Term Investments 672,524 673,191
---------- ----------
TOTAL INVESTMENTS 99.8% $3,900,072 4,564,708
----------
----------
Other Assets, less Liabilities 0.2% 7,341
----------
NET ASSETS (Equivalent to $13.86
per share based on 329,953
shares outstanding) 100.0% $4,572,049
----------
----------
Note to Portfolio of Investments -- As required by the Fund's investment
policies, the Fund has invested $1,471,572 (32% of its net assets) in securities
issued by utilities.
See notes to financial statements.
THE PRIMARY U.S. GOVERNMENT FUND
SHARES OR MARKET
PRINCIPAL AMOUNT COST VALUE
- ---------------- ------- -------
U.S. GOVERNMENT SECURITIES 75.1%
U.S. TREASURY NOTE
$ 75,000 U.S. Treasury Note, 6.375%,
due 7/15/99 $ 74,859 $ 75,666
--------- ---------
U.S. GOVERNMENT AGENCY NOTES
100,000 Federal Farm Credit Bank, 6.49%,
due 1/20/00 100,955 101,227
100,000 Student Loan Mortgage Association,
5.56%, due 3/3/00 99,875 99,645
50,000 Federal National Mortgage Association,
6.59%, due 7/15/02 50,364 50,391
100,000 Federal Home Loan Bank, 5.84%,
due 3/5/03 100,000 99,707
100,000 Federal National Mortgage Association,
8.50%, due 2/01/05 99,531 104,374
50,000 Federal Home Loan Bank,
7.01%, due 8/20/07 50,000 50,383
--------- ---------
Total U.S. Government
Agency Notes 500,725 505,727
--------- ---------
Total U.S. Government Securites 575,584 581,393
--------- ---------
BONDS AND NOTES 6.5%
50,000 Northern Illinois Gas, 5.75%,
due 6/01/03 49,767 49,997
--------- ---------
Total Long-Term Investments 625,351 631,390
SHORT-TERM INVESTMENTS 16.2%
VARIABLE RATE DEMAND NOTES
35,414 General Mills, Inc., 5.26% 35,414 35,414
35,785 Johnson Controls, Inc., 5.26% 35,785 35,785
29,057 Pitney Bowes Credit Corp., 5.26% 29,057 29,057
--------- ---------
Total Variable Rate Demand Notes 100,256 100,256
U.S. GOVERNMENT AGENCY NOTE
25,000 Federal Home Loan Bank, 5.24%,
due 11/30/98 24,945 24,966
--------- ---------
Total Short-Term Investments 125,201 125,222
--------- ---------
TOTAL INVESTMENTS 97.8% $750,552 756,612
--------- ---------
---------
Other Assets, less Liabilities 2.2% 17,342
---------
NET ASSETS (Equivalent to $9.93
per share based on 77,970 shares
outstanding) 100.0% $773,954
---------
---------
See notes to financial statements.
STATEMENTS OF ASSETS AND LIABILITIES
June 30, 1998
<TABLE>
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 $19,066,705 $3,205,673 $ --
Preferred Stocks -- 292,625 --
Bonds and Notes -- 393,219 631,390
Short-Term Investments 4,622,780 673,191 125,222
---------- ---------- -----------
Total Investments (Cost $19,519,580;
$3,900,072 and $750,552, respectively) 23,689,485 4,564,708 756,612
Dividends Receivable 29,194 10,605 --
Interest Receivable 25,872 12,767 15,977
Due from Adviser -- -- 7,269
Prepaid Expenses 2,129 840 739
---------- ---------- -----------
Total Assets 23,746,680 4,588,920 780,597
---------- ---------- -----------
Liabilities:
Accrued Investment Advisory Fees 14,406 8,484 --
Other 18,469 8,387 6,643
---------- ---------- -----------
Total Liabilities 32,875 16,871 6,643
---------- ---------- -----------
Net Assets $23,713,805 $4,572,049 $773,954
---------- ---------- -----------
---------- ---------- -----------
Shares Outstanding 1,696,238 329,953 77,970
Net Assets Per Share $ 13.98 $ 13.86 $ 9.93
---------- ---------- -----------
---------- ---------- -----------
Net Assets Consist of:
Capital Stock (30,000,000 shares authorized each) $17,160,132 $3,503,422 $799,351
Net Unrealized Appreciation of Investments 4,169,905 664,636 6,060
Undistributed Net Investment Income 120,185 3,505 222
Undistributed Net Realized Gains (Accumulated Losses) 2,263,583 400,486 (31,679)
---------- ---------- -----------
Net Assets $23,713,805 $4,572,049 $773,954
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See notes to financial statements.
STATEMENTS OF OPERATIONS
For the year ended June 30, 1998
<TABLE>
THE PRIMARY
THE PRIMARY THE PRIMARY U.S. GOVERNMENT
TREND FUND INCOME FUND FUND
----------- ------------ ----------------
<S> <C> <C> <C>
Income:
Interest $ 184,538 $ 56,339 $ 49,327
Dividends 335,890(a)<F2> 138,408(b)<F3> --
------------ ---------- ----------
Total Income 520,428 194,747 49,327
------------ ---------- ----------
Expenses:
Investment Advisory Fees (Note 3) 180,773 34,852 4,930
Administration and Accounting Fees 37,983 27,015 15,995
Shareholder Servicing Costs 31,766 11,564 8,876
Professional Fees 24,717 13,457 11,898
Registration Fees 6,956 3,311 2,394
Custodial Fees 5,688 1,304 353
Printing 5,172 1,511 417
Postage 5,059 845 260
Insurance 3,014 592 100
Other 2,667 719 623
------------ ---------- ----------
Total Expenses Before Reimbursement 303,795 95,170 45,846
Less Expenses Reimbursed By Adviser (Note 3) -- (49,377) (38,609)
------------ ---------- ----------
Net Expenses 303,795 45,793 7,237
------------ ---------- ----------
Net Investment Income 216,633 148,954 42,090
------------ ---------- ----------
Net Realized Gain on Investments 3,350,856 543,724 538
Change in Net Unrealized Appreciation of Investments (572,297) (59,402) 2,339
------------ ---------- ----------
Net Realized and Unrealized Gain on Investments 2,778,559 484,322 2,877
------------ ---------- ----------
Net Increase in Net Assets From Operations $ 2,995,192 $ 633,276 $ 44,967
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
(a)<F2> Net of $2,051 in foreign withholding taxes.
(b)<F3> Net of $281 in foreign withholding taxes.
See notes to financial statements.
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended June 30, 1998 and 1997
<TABLE>
THE PRIMARY
THE PRIMARY THE PRIMARY U.S. GOVERNMENT
TREND FUND INCOME FUND FUND
------------------------- ------------------------ ----------------------
1998 1997 1998 1997 1998 1997
---------- ---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net Investment Income $ 216,633 $ 184,619 $ 148,954 $ 141,857 $ 42,090 $ 49,069
Net Realized Gain (Loss)
on Investments 3,350,856 3,131,721 543,724 574,471 538 (2,965)
Change in Net Unrealized
Appreciation of Investments (572,297) 1,891,832 (59,402) 264,822 2,339 4,600
---------- ----------- ---------- ----------- ---------- ----------
Net Increase in Net
Assets from Operations 2,995,192 5,208,172 633,276 981,150 44,967 50,704
---------- ----------- ---------- ----------- ---------- ----------
Distributions to Shareholders:
From Net Investment Income (96,448) (233,063) (145,449) (141,857) (41,868) (49,069)
From Net Realized Gains (4,024,201) (1,224,581) (642,742) (270,274) -- --
---------- ----------- ---------- ----------- ---------- ----------
Decrease in Net Assets from
Distributions (4,120,649) (1,457,644) (788,191) (412,131) (41,868) (49,069)
---------- ----------- ---------- ----------- ---------- ----------
Fund Share Transactions:
Proceeds from Shares Sold 667,691 1,000,973 199,259 357,717 69,909 31,529
Reinvested Distributions 3,955,376 1,394,574 754,261 401,280 31,786 40,850
Cost of Shares Redeemed (2,989,448) (4,063,507) (533,135) (1,531,820) (65,041) (138,587)
---------- ----------- ---------- ----------- ---------- ----------
Net Increase (Decrease) in
Net Assets from Fund
Share Transactions 1,633,619 (1,667,960) 420,385 (772,823) 36,654 (66,208)
---------- ----------- ---------- ----------- ---------- ----------
Total Increase (Decrease) in
Net Assets 508,162 2,082,568 265,470 (203,804) 39,753 (64,573)
Net Assets:
Beginning of Year 23,205,643 21,123,075 4,306,579 4,510,383 734,201 798,774
---------- ----------- ---------- ----------- ---------- ----------
End of Year $23,713,805 $23,205,643 $4,572,049 $4,306,579 $773,954 $734,201
---------- ----------- ---------- ----------- ---------- ----------
---------- ----------- ---------- ----------- ---------- ----------
Undistributed Net Investment
Income at End of Year $ 120,185 $ -- $ 3,505 $ -- $ 222 $ --
---------- ----------- ---------- ----------- ---------- ----------
---------- ----------- ---------- ----------- ---------- ----------
Transactions in Shares:
Sales 47,010 73,343 14,295 27,338 7,013 3,193
Reinvested Distributions 295,431 114,514 55,430 31,924 3,203 4,125
Redemptions (212,540) (298,834) (37,768) (114,337) (6,548) (13,977)
---------- ----------- ---------- ----------- ---------- ----------
Net Increase (Decrease) 129,901 (110,977) 31,957 (55,075) 3,668 (6,659)
---------- ----------- ---------- ----------- ---------- ----------
---------- ----------- ---------- ----------- ---------- ----------
</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 of the years
ended June 30
<TABLE>
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
THE PRIMARY TREND FUND
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Year $ 14.82 $ 12.59 $ 12.10 $ 10.98 $ 11.22
-------- -------- -------- -------- --------
Net Investment Income 0.13 0.12 0.21 0.23 0.25
Net Realized and Unrealized Gain
(Loss) on Investments 1.60 2.98 1.30 1.55 (0.28)
-------- -------- -------- -------- --------
Total from Investment Operations 1.73 3.10 1.51 1.78 (0.03)
-------- -------- -------- -------- --------
Less Distributions:
From Net Investment Income (0.06) (0.14) (0.23) (0.26) (0.08)
From Net Realized Gains (2.51) (0.73) (0.79) (0.40) (0.13)
-------- -------- -------- -------- --------
Total Distributions (2.57) (0.87) (1.02) (0.66) (0.21)
-------- -------- -------- -------- --------
Net Increase (Decrease) (0.84) 2.23 0.49 1.12 (0.24)
-------- -------- -------- -------- --------
Net Asset Value, End of Year $ 13.98 $ 14.82 $ 12.59 $ 12.10 $ 10.98
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN +13.1% +26.2% +11.7% +17.0% -0.3%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Year (in thousands) $ 23,714 $ 23,206 $ 21,123 $ 21,343 $ 20,873
Ratio of Net Expenses to Average Net Assets 1.24% 1.18% 1.19% 1.24% 1.27%
Ratio of Net Investment Income
to Average Net Assets 0.89% 0.82% 1.68% 1.88% 1.91%
Portfolio Turnover 24.4% 63.5% 46.5% 37.1% 77.2%
THE PRIMARY INCOME FUND
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Year $ 14.45 $ 12.77 $ 12.07 $ 11.04 $ 11.68
-------- -------- -------- -------- --------
Net Investment Income 0.45 0.42 0.43 0.50 0.49
Net Realized and Unrealized Gain
(Loss) on Investments 1.50 2.44 1.28 1.10 (0.54)
-------- -------- -------- -------- --------
Total from Investment Operations 1.95 2.86 1.71 1.60 (0.05)
-------- -------- -------- -------- --------
Less Distributions:
From Net Investment Income (0.44) (0.42) (0.43) (0.50) (0.49)
From Net Realized Gains (2.10) (0.76) (0.58) (0.07) (0.10)
-------- -------- -------- -------- --------
Total Distributions (2.54) (1.18) (1.01) (0.57) (0.59)
-------- -------- -------- -------- --------
Net Increase (Decrease) (0.59) 1.68 0.70 1.03 (0.64)
-------- -------- -------- -------- --------
Net Asset Value, End of Year $ 13.86 $ 14.45 $ 12.77 $ 12.07 $ 11.04
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN +14.7% +24.1% +14.8% +14.8% -0.6%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Year (in thousands) $ 4,572 $ 4,307 $ 4,510 $ 4,221 $ 3,677
Ratio of Net Expenses to Average Net Assets 0.97% 0.84% 0.84% 0.84% 0.84%
Ratio of Net Investment
Income to Average Net Assets 3.16% 3.19% 3.43% 4.35% 4.20%
Ratio of Expenses Reimbursed
to Average Net Assets 1.05% 0.86% 0.73% 0.76% 1.19%
Portfolio Turnover 33.5% 48.4% 41.5% 40.9% 39.7%
</TABLE>
<TABLE>
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
THE PRIMARY U.S. GOVERNMENT FUND
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Year $ 9.88 $ 9.87 $ 10.09 $ 9.74 $ 10.60
-------- -------- -------- -------- --------
Net Investment Income 0.55 0.63 0.63 0.57 0.51
Net Realized and Unrealized Gain (Loss) on Investments 0.05 0.01 (0.22) 0.38 (0.67)
-------- -------- -------- -------- --------
Total from Investment Operations 0.60 0.64 0.41 0.95 (0.16)
-------- -------- -------- -------- --------
Less Distributions:
From Net Investment Income (0.55) (0.63) (0.63) (0.57) (0.51)
From Net Realized Gains -- -- -- (0.03) (0.19)
-------- -------- -------- -------- --------
Total Distributions (0.55) (0.63) (0.63) (0.60) (0.70)
-------- -------- -------- -------- --------
Net Increase (Decrease) 0.05 0.01 (0.22) 0.35 (0.86)
-------- -------- -------- -------- --------
Net Asset Value, End of Year $ 9.93 $ 9.88 $ 9.87 $ 10.09 $ 9.74
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL INVESTMENT RETURN +6.2% +6.7% +4.1% +10.2% -1.7%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Year (in thousands) $ 774 $ 734 $ 799 $ 1,345 $ 1,295
Ratio of Net Expenses to Average Net Assets 0.95% 0.75% 0.75% 0.75% 0.75%
Ratio of Net Investment Income
to Average Net Assets 5.55% 6.41% 6.24% 5.85% 4.91%
Ratio of Expenses Reimbursed
to Average Net Assets 5.09% 3.84% 2.20% 1.92% 2.44%
Portfolio Turnover 62.6% 29.3% 46.6% 63.0% 94.4%
</TABLE>
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
June 30, 1998
1. ORGANIZATION
The Primary Trend Fund, Inc. ("Trend Fund"), a growth and income 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, 1998, is $31,679. This
loss carryover is available to offset future taxable gains in the Government
Fund and, if not applied, $28,714 will expire in 2003 and $2,965 will expire in
2005.
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, reclassification between net asset accounts are
made for such differences. Accordingly, at June 30, 1998, a reclassification
was made to decrease undistributed net realized gains and to increase
undistributed net investment income by $590 for the Trend Fund.
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 year ended June 30, 1998. As of June 30, 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. Prior to September
1, 1997, the Adviser was reimbursing the Income Fund and the Government Fund for
all expenses exceeding 0.84% and 0.75%, respectively, of their 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, 1998. For the year ended
June 30, 1998, the Funds incurred investment advisory fees, net of expense
reimbursements, totalling $132,569. 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, 1998.
4. PURCHASES AND SALES OF SECURITIES
Total purchases and sales of securities, other than short-term investments,
for the Funds for the year ended June 30, 1998, were as follows:
THE PRIMARY
THE PRIMARY THE PRIMARY U.S. GOVERNMENT
TREND FUND INCOME FUND FUND
----------- ----------- ---------------
Purchases
U.S. Government $ -- $ 100,375 $476,110
Other 5,171,180 1,281,425 --
Sales
U.S. Government -- -- 400,000
Other 9,823,873 1,760,631 --
For the year ended June 30, 1998, 70.4% and 48.3% of dividends paid from net
investment income, including short-term capital gains, qualified for the
dividends received deduction available to corporate shareholders of the Trend
Fund and Income Fund, respectively.
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, 1998, 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, 1998, 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, 1998,
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 24, 1998
RESULTS OF SHAREHOLDER MEETING
A special meeting of shareholders of the Funds was held on April 29, 1998 for
the sole purpose of electing directors. Barry S. Arnold, Lilli Gust, Clark J.
Hillery and Harold L. Holtz were elected directors of the Funds by shareholders
of record as of March 25, 1998. The results of the vote were as follows:
FOR ALL DIRECTORS WITHHELD
------------------ --------
The Primary Trend Fund, Inc. 1,103,054 15,563
The Primary Income Funds, Inc. 312,083 485
FUND PERFORMANCE COMPARISON
FUND'S TOTAL RETURN PERFORMANCE
- ---------------------------------------
1998 Year to Date + 3.8%
12 Months Ended June 30, 1998 +13.1%
5 Years (Annualized) +13.6%
10 Years (Annualized) +10.3%
Annualized Since Inception (9/15/86) +10.6%
Initial Investment of $10,000 on 9/30/86
Value as of 6/30/98
S&P 500 COMPOSITE $68,555
PRIMARY TREND FUND $34,145
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
9/30/97 31346.47 56616.59
12/31/97 32901.16 58244.25
3/31/98 35148.65 66362.82
6/30/98 34144.83 68554.85
FUND'S TOTAL RETURN PERFORMANCE
- ---------------------------------------
1998 Year to Date + 1.1%
12 Months Ended June 30, 1998 +14.7%
5 Years (Annualized) +13.3%
Annualized Since Inception (9/1/89) +12.3%
Initial Investment of $10,000 on 9/1/89
Value as of 6/30/98
S&P 500 COMPOSITE $40,875
S&P UTILITES INDEX $27,911
PRIMARY INCOME FUND $27,640
Primary S&P 500 S&P
Income Fund Composite Utilities 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
9/30/97 26745 33756.96 22235.32
12/31/97 27615.7 34727.44 25856.86
3/31/98 28664.69 39568.04 27309.72
6/30/98 27910.98 40875.01 27640.05
FUND'S TOTAL RETURN PERFORMANCE
- ---------------------------------------
1998 Year to Date +2.7%
12 Months Ended June 30, 1998 +6.2%
5 Years (Annualized) +5.0%
Annualized Since Inception (9/1/89) +6.9%
Initial Investment of $10,000 on 9/1/89
Value as of 6/30/98
LEHMAN INTERMEDIATE TREASURY COMPOSITE $19,533
PRIMARY U.S. GOVERNMENT FUND $18,002
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
9/30/97 17273.99 18481.05
12/31/97 17537.83 18893.95
3/31/98 17738.36 19179.6
6/30/98 18002.17 19532.71
Past performance is not predictive of future performance. (You already know
that but we are required to say it anyway.)
(THE PRIMARY TREND FUNDS LOGO)
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
Lilli Gust
Clark J. Hillery
Harold L. Holtz
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
(100% Non-Load TM Mutual Fund Council logo)
