(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, 1997
MESSAGE TO SHAREHOLDERS. . .
"We feel that the direction of interest rates will be the key
determinant of the longevity of this bull market...and Alan Greenspan
a key player."
THE PRIMARY TREND FUNDS
12/31/96 Semiannual Report
While the full year of 1997 was yet another banner year for the stock market,
the last few months provided some anxious moments for investors. With
disinflationary forces prevalent and Federal Reserve Chairman Alan Greenspan
taking a "hands-off" approach, bonds rallied sharply in the final six months,
providing strong support for equities despite the chaos unfolding in Southeast
Asia. The benchmark Standard & Poor's 500 Composite posted a strong total
return of +10.6% in the latter half of 1997, while the blue chip Dow Jones
Industrial Average lagged with a total return of +4.0% in the similar period.
The Primary Trend Funds generated the following returns for the six months
ended 12/31/97:
THE PRIMARY TREND FUND +8.9%
THE PRIMARY INCOME FUND +13.5%
THE PRIMARY U.S. GOVERNMENT FUND +3.5%
THE PRIMARY TREND FUND'S current diversification of value-oriented securities
helped the portfolio achieve a respectable, albeit underperforming, return in
the final six months of 1997. Company-specific restructurings and overall
strength in the retail sector translated into solid gains for the Fund's
holdings in Tandy Corp. (+38%), CVS Corp. (+25%) and J.C. Penney (+16%). More
importantly, new purchases in 1997 contributed nicely to the portfolio in the
final six-month period: Mylan Labs (+42%), Darden Restaurants (+38%), UST
Inc. (+32%) and Albertson's (+29%). However, the 22% decline in crude oil late
in the year, coupled with the El Nino effect on the natural gas sector,
presented some obstacles for the energy component of the Fund's portfolio.
THE PRIMARY INCOME FUND, aided by falling interest rates and its exposure to
utilities, performed exceedingly well in the six-month period. The Dow Jones
Utility Average, which had been struggling since it peaked in 1993, finally made
a new all-time high. The Fund's utility holdings (28% of the portfolio)
participated as well: GTE Corp. (+19%), DPL Inc. (+17%), and Wisconsin Energy
(+16%), to name a few. The portfolio's 14% concentration in real estate
investment trusts (REITs) also provided a steady stream of income and solid
price gains. Other top performers for the six months include: Mylan Labs
(+42%), Tandy Corp. (+38%) and UST Inc. (+32%).
THE PRIMARY U.S. GOVERNMENT FUND trailed its fixed-income benchmark in the
final half of 1997. The progress made on the inflation and budget-deficit
fronts, combined with the "flight to quality" during the Asian turmoil, fueled a
strong rally in long-term bonds. Yields on the 30-year U.S. Treasury bond fell
to new all-time lows of 5.7%, creating a very flat yield curve. The Fund's
focus on the short-to-intermediate maturities ensured stable income streams, but
provided only modest capital gains as long-term bonds rallied.
As we enter 1998, the equity markets continue to display the volatile
characteristics that punctuated 1997. We do not foresee those wild swings
subsiding in the near future. The flat performance in the month of January, as
measured by the majority of broad-based indices, has set the stage for a strong
rally in early February. Even the venerable Dow Jones Industrial Average
recorded a new all-time high above 8300 ... a milestone that has proven elusive
since August of last year. Dow Theorists have comfort in the fact that the Dow
Jones Transportation Average has led this latest move to new all-time highs.
It is difficult to argue the endurance of this seven-year old bull market,
and its latest heroics in climbing the proverbial "wall of worry", which include
the monetary and economic meltdown in Asia, the sequel to Desert Storm currently
brewing, and the distractions surrounding our Commander in Chief. All of these
were dismissed by Wall Street in 1997, but continue to linger in 1998.
Resolution of any or all would be extremely positive, but a worsening will truly
test the mettle of this bull.
In the near term, the stock market is technically in gear and 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. We doubt that the global hiccup from the
Asian debacle has been completely discounted in today's prices ... which is why
individual stock selection will be key. The warm winds of a slow-growth
economy, disinflation and low interest rates are not permanent fixtures in the
financial markets historically -- any shift in this investor-friendly backdrop
could prove problematic.
Our focus in 1998 is to provide our shareholders with above-average returns
while minimizing risk. While many sectors, in general, are trading at full
valuations, we intend to capitalize on selected undervalued situations as they
are presented.
All of us at Arnold Investment Counsel value you as shareholders in the The
Primary Trend Funds and thank you for your continued support. As always, we are
diligently working on behalf of each and every one of you toward the fulfillment
of your individual investment goals.
Sincerely,
/S/ Lilli Gust /s/ Barry S. Arnold
Lilli Gust Barry S. Arnold
President Vice President
February 17, 1998
PORTFOLIOS OF INVESTMENTS
December 31, 1997 (unaudited)
THE PRIMARY TREND FUND
SHARES OR
PRINCIPAL MARKET
AMOUNT COST VALUE
--------- ----- ------
COMMON STOCKS 81.5%
16,000 Albertson's, Inc. (Retail stores) $593,600 $758,000
6,000 Amoco Corporation (Integrated
oil company) 325,950 510,750
10,500 Angeles Mortgage Investment Trust
(Real estate investment trust) 159,443 200,813
30,200 Beverly Bancorporation, Inc.
(Financial services) 517,688 690,825
60,000 Beverly Enterprises, Inc.*<F1>
(Healthcare services) 552,748 780,000
10,000 Browning-Ferris Industries, Inc.
(Waste management services) 299,250 370,000
8,000 CVS Corporation (Retail stores) 263,946 512,500
60,000 Darden Restaurants, Inc.
(Restaurant chains) 587,922 750,000
10,000 Eastman Kodak Company
(Photographic equipment) 398,415 608,125
25,000 Enron Oil & Gas Company
(Domestic oil and gas exploration
and production) 671,500 529,688
16,000 L.M. Ericsson Telephone ADR
(Telecommunication equipment) 359,785 597,000
10,000 GreenPoint Financial Corp.
(Financial services) 288,425 725,625
52,500 Juno Lighting, Inc. (Commercial and
residential lighting) 900,937 918,750
25,000 La Quinta Inns, Inc. (Motels) 455,231 482,812
30,000 Mylan Laboratories, Inc.
(Pharmaceutical products) 396,900 628,125
23,000 Newmont Mining Corporation (Gold mining) 844,052 675,625
25,000 Occidental Petroleum Corporation
(Integrated oil company) 467,085 732,813
20,000 PartnerRe Ltd. ADR (Insurance) 662,325 927,500
10,000 J.C. Penney Company, Inc. (Retail stores) 436,225 603,125
12,000 Pennzoil Company
(Domestic oil and gas exploration
and production) 663,055 801,750
27,306 PharMerica, Inc. (Institutional pharmacy
services) 223,752 283,300
5,000 SLM Holding Corporation
(Financial services) 220,771 695,625
40,000 Snyder Oil Corporation
(Domestic oil and gas exploration
and production) 396,887 730,000
12,000 Sundstrand Corporation (Aerospace
and industrial) 272,560 604,500
15,000 Tandy Corporation (Retail stores) 382,950 578,437
30,000 USF&G Corporation (Insurance) 583,350 661,875
20,000 UST, Inc. (Tobacco) 561,925 738,750
35,000 Union Pacific Resources Group Inc.
(Domestic oil and gas exploration
and production) 779,176 848,750
56,500 Western Gas Resources, Inc.
(Natural gas gathering, transporting,
and marketing) 1,043,730 1,250,062
17,600 York International Corp. (Heating
and cooling systems) 776,088 696,300
----------- -----------
Total Common Stocks 15,085,671 19,891,425
----------- -----------
PREFERRED STOCKS 1.9%
3,700 Long Island Lighting Co. 5.00% Series B 309,690 323,750
1,700 Long Island Lighting Co. 4.35% Series E 146,105 147,050
----------- -----------
Total Preferred Stocks 455,795 470,800
----------- -----------
BONDS AND NOTES 1.6%
CORPORATE NOTES
$400,000 GTE Northwest, Inc. note, 6.125%,
due 2/15/99 400,016 400,072
----------- -----------
Total Bonds and Notes 400,016 400,072
----------- -----------
Total Long-Term Investments 15,941,482 20,762,297
----------- -----------
SHORT-TERM INVESTMENTS 14.8%
VARIABLE RATE DEMAND NOTES
1,191,128 Johnson Controls, Inc., 5.33% 1,191,128 1,191,128
1,189,658 Warner-Lambert, Inc., 5.49% 1,189,658 1,189,658
1,231,195 Wisconsin Electric Power Co., 5.49% 1,231,195 1,231,195
----------- -----------
Total Variable Rate Demand Notes 3,611,981 3,611,981
----------- -----------
Total Short-Term Investments 3,611,981 3,611,981
----------- -----------
TOTAL INVESTMENTS 99.8% $19,553,463 24,374,278
===========
Other Assets, less Liabilities 0.2% 50,094
-----------
NET ASSETS (Equivalent to $13.47 per share
based on 1,813,732 shares outstanding) 100.0% $24,424,372
===========
*<F1>Non-income producing security.
See notes to financial statements.
THE PRIMARY INCOME FUND
SHARES OR
PRINCIPAL MARKET
AMOUNT COST VALUE
---------- ----- -------
COMMON STOCKS 72.2%
2,000 Albertson's, Inc. (Retail stores) $74,200 $94,750
1,000 Amoco Corporation (Integrated oil company) 55,720 85,125
10,600 Angeles Mortgage Investment Trust
(Real estate investment trust) 86,117 202,725
3,500 Browning-Ferris Industries, Inc.
(Waste management services) 98,007 129,500
4,000 CarrAmerica Realty Corporation
(Real estate investment trust) 105,500 126,750
1,500 CCA Prison Realty Trust (Real estate
investment trust) 31,500 66,937
1,500 CVS Corporation (Retail stores) 44,235 96,094
2,000 CINergy Corp. (Electric utility) 39,641 76,625
2,000 Consolidated Natural Gas Co.
(Integrated natural gas system) 87,325 121,000
3,000 DPL, Inc. (Electric and gas utility) 45,124 86,250
2,000 L.M. Ericsson Telephone ADR
(Telecommunications equipment) 39,575 74,625
2,000 GTECorporation (Telephone utility) 62,995 104,500
8,000 Great Lakes REIT, Inc.
(Real estate investment trust) 126,907 155,500
8,000 Juno Lighting, Inc.(Commercial
and residential lighting) 139,225 140,000
4,000 Keyspan Energy Corporation
(Natural gas utility) 99,715 147,250
2,000 La Quinta Inns, Inc. (Motels) 37,575 38,625
4,000 Longview Fibre Company (Paper
and forest products) 68,184 60,750
5,000 Mid-Atlantic Realty Trust
(Real estate investment trust) 65,000 73,437
5,000 Mylan Laboratories Inc.
(Pharmaceutical products) 66,025 104,687
2,000 Northern States Power Company
(Electric utility) 74,513 116,500
4,000 Occidental Petroleum Corporation
(Integrated oil company) 87,705 117,250
3,000 Pacific Enterprises (Natural gas utility) 70,335 112,875
3,000 J.C. Penney Company, Inc. (Retail stores) 130,610 180,938
1,500 Pennzoil Company (Domestic oil and
gas exploration and production) 72,200 100,219
2,000 Simon DeBartolo Group, Inc.
(Real estate investment trust) 39,144 65,375
3,000 Tandy Corporation (Retail stores) 59,932 115,687
6,000 USF&G Corporation (Insurance) 123,975 132,375
4,000 UST, Inc. (Tobacco) 111,240 147,750
5,200 Union Pacific Resources Group Inc.
(Domestic oil and gas exploration
and production) 110,510 126,100
7,000 Western Gas Resources, Inc.
(Natural gas gathering, transporting,
and marketing) 113,750 154,875
3,000 Wisconsin Energy Corporation
(Electric and gas utility) 73,280 86,250
1,900 York International Corp.
(Heating and cooling systems) 83,695 75,169
----------- -----------
Total Common Stocks 2,523,459 3,516,493
----------- -----------
PREFERRED STOCKS 7.9%
2,000 Battle Mountain Gold Company
$3.25 convertible 107,183 90,000
340 Long Island Lighting Co. 5.00% Series B 19,920 29,750
2,000 Long Island Lighting Co. 4.35% Series E 117,040 173,000
2,000 SunAmerica, Inc. $3.1875 PERCS 88,160 93,125
----------- -----------
Total Preferred Stocks 332,303 385,875
----------- -----------
BONDS AND NOTES 9.1%
CONVERTIBLE DEBENTURES
$ 50,000 Couer d'Alene Mines Corp., 6.375%,
due 1/31/04 45,600 39,125
----------- -----------
CORPORATE NOTES
100,000 Wisconsin Gas Company note, 7.50%,
due 11/15/98 99,835 101,300
100,000 Wisconsin Gas Company note, 6.375%,
due 11/01/05 100,999 101,060
100,000 GTE Northwest Inc., 6.125%, due 2/15/99 100,004 100,018
----------- -----------
Total Corporate Obligations 300,838 302,378
----------- -----------
U.S. GOVERNMENT AGENCY NOTES
50,000 Federal Home Loan Bank, 7.01%,
due 8/20/07 50,000 50,070
50,000 Federal Home Loan Mortgage, 7.14%,
due 7/31/02 50,360 50,291
----------- -----------
Total U.S. Government Agency Notes 100,360 100,361
----------- -----------
Total Bonds and Notes 446,798 441,864
----------- -----------
Total Long-Term Investments 3,302,560 4,344,232
----------- -----------
SHORT-TERM INVESTMENTS 10.8%
VARIABLE RATE DEMAND NOTES
142,048 General Mills, Inc., 5.33% 142,048 142,048
239,384 Johnson Controls, Inc., 5.33% 239,384 239,384
145,317 Pitney Bowes Credit Corp., 5.33% 145,317 145,317
----------- -----------
Total Variable Rate Demand Notes 526,749 526,749
----------- -----------
Total Short-Term Investments 526,749 526,749
----------- -----------
TOTAL INVESTMENTS 100.0% $3,829,309 4,870,981
==========
Liabilities, less Other Assets (0.0)% (1,781)
---------
NET ASSETS (Equivalent to $13.93 per share
based on 349,565 shares outstanding) 100.0% $4,869,200
===========
Note to Portfolio of Investments - As required by the Fund's
investment policies, the Fund has invested $1,356,378 (28% of
its net assets) in securities issued by utilities.
See notes to financial statements.
THE PRIMARY U.S. GOVERNMENT FUND
PRINCIPAL MARKET
AMOUNT COST VALUE
---------- ------ --------
U.S. GOVERNMENT SECURITIES 87.3%
U.S. TREASURY NOTES
$75,000 U.S. Treasury note, 6.375%, due 7/15/99 $74,859 $75,853
--------- --------
U.S. GOVERNMENT AGENCY NOTES
25,000 Federal Home Loan Bank, 5.24%, due 11/30/98 24,880 24,856
100,000 Federal Farm Credit Bank, 6.49%, due 1/20/00 101,250 101,250
100,000 Federal Home Loan Bank, 6.53%, due 11/20/00 99,950 100,047
100,000 Federal National Mortgage Association,
8.50%, due 2/01/05 99,531 104,833
100,000 Federal Home Loan Mortgage Corporation,
8.15%, due 3/02/05 100,000 100,351
100,000 Federal Home Loan Bank,
7.00%, due 11/21/05 99,563 99,977
50,000 Federal Home Loan Bank,
7.01%, due 8/20/07 50,000 50,070
--------- --------
Total U.S. Government Agency Notes 575,174 581,384
--------- --------
Total U.S. Government Securities 650,033 657,237
--------- --------
SHORT-TERM INVESTMENTS 24.4%
VARIABLE RATE DEMAND NOTES
37,253 American Family Financial Services, Inc.,
5.49% 37,253 37,253
36,953 General Mills, Inc., 5.33% 36,953 36,953
36,583 Johnson Controls, Inc., 5.33% 36,583 36,583
35,974 Pitney Bowes Credit Corp., 5.33% 35,974 35,974
36,545 Warner-Lambert, Inc., 5.49% 36,545 36,545
--------- --------
Total Variable Rate Demand Notes 183,308 183,308
--------- --------
Total Short-Term Investments 183,308 183,308
--------- --------
TOTAL INVESTMENTS 111.7% $833,341 840,545
=========
Liabilities, less Other Assets (11.7)% (87,916)
--------
NET ASSETS (Equivalent to $9.93 per share
based on 75,802 shares outstanding) 100.0% $752,629
=========
See notes to financial statements.
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1997 (unaudited)
<TABLE>
<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 $19,891,425 $3,516,493 $--
Preferred Stocks 470,800 385,875 --
Bonds and Notes 400,072 441,864 657,237
Short-Term Investments 3,611,981 526,749 183,308
------------ ----------- ----------
Total Investments (Cost $19,553,463;
$3,829,309 and $833,341, respectively) 24,374,278 4,870,981 840,545
Dividends Receivable 33,742 9,723 --
Interest Receivable 26,458 11,005 15,089
Due from Adviser -- 2,145 4,464
Prepaid Expenses 7,376 3,905 2,600
------------ ----------- ----------
Total Assets 24,441,854 4,897,759 862,698
------------ ----------- ----------
Liabilities:
Accrued Investment Advisory Fees 15,261 26,599 5,085
Payable to Custodian -- -- 104,152
Other 2,221 1,960 832
------------ ----------- -----------
Total Liabilities 17,482 28,559 110,069
------------ ----------- -----------
Net Assets $24,424,372 $4,869,200 $752,629
============ =========== ==========
Shares Outstanding 1,813,732 349,565 75,802
Net Assets Per Share $13.47 $13.93 $9.93
============ =========== ==========
Net Assets Consist of:
Capital Stock (30,000,000 shares
authorized each) $18,802,128 $3,782,064 $777,590
Net Unrealized Appreciation of Investments 4,820,815 1,041,672 7,204
Undistributed Net Investment Income 78 21 2
Undistributed Net Realized Gains
(Accumulated Losses) 801,351 45,443 (32,167)
------------ ----------- -----------
Net Assets $24,424,372 $4,869,200 $752,629
============ =========== ==========
See notes to financial statements.
</TABLE>
STATEMENTS OF OPERATIONS
For the six months ended December 31, 1997 (unaudited)
<TABLE>
<CAPTION>
THE PRIMARY
THE PRIMARY THE PRIMARY U.S. GOVERNMENT
TREND FUND INCOME FUND FUND
------------ ------------ ----------------
<S> <C> <C> <C>
Income:
Interest $76,856 $24,223 $25,085
Dividends 168,118 69,184 --
---------- --------- ---------
Total Income 244,974 93,407 25,085
---------- --------- ---------
Expenses:
Investment Advisory Fees (Note 3) 91,029 17,224 2,447
Administration and Accounting Fees 18,316 13,509 7,964
Shareholder Servicing Costs 14,602 5,592 5,068
Professional Fees 9,323 4,474 4,462
Registration Fees 3,510 1,285 1,317
Custodial Fees 3,170 1,212 128
Postage 2,617 457 151
Printing 2,257 657 203
Insurance 2,009 357 121
Other 1,615 363 302
---------- --------- ---------
Total Expenses Before Reimbursement 148,448 45,130 22,163
Less Expenses Reimbursed By Adviser (Note 3) -- (23,150) (18,713)
---------- --------- ---------
Net Expenses 148,448 21,980 3,450
---------- --------- ---------
Net Investment Income 96,526 71,427 21,635
---------- --------- ---------
Net Realized Gain on Investments 1,888,624 188,680 50
Change in Net Unrealized Appreciation of Investments 78,613 317,634 3,483
---------- --------- ---------
Net Realized and Unrealized Gain on Investments 1,967,237 506,314 3,533
---------- --------- ---------
Net Increase in Net Assets From Operations $2,063,763 $577,741 $25,168
========== ========= =========
See notes to financial statements.
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
(unaudited)
<TABLE>
<CAPTION>
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, 1997 1997 DEC. 31, 1997 1997 DEC. 31, 1997 1997
-------------- --------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net Investment Income $96,526 $184,619 $71,427 $141,857 $21,635 $49,069
Net Realized Gain (Loss)
on investments 1,888,624 3,131,721 188,680 574,471 50 (2,965)
Change in Net Unrealized
Appreciation of Investments 78,613 1,891,832 317,634 264,822 3,483 4,600
----------- ----------- ---------- --------- --------- ---------
Net Increase in Net
Assets from Operations 2,063,763 5,208,172 577,741 981,150 25,168 50,704
----------- ----------- ---------- --------- --------- ---------
Distributions to Shareholders:
From Net Investment Income (97,038) (233,063) (71,406) (141,857) (21,633) (49,069)
From Net Realized Gains (4,023,611) (1,224,581) (642,741) (270,274) -- --
----------- ----------- ---------- --------- --------- ---------
Decrease in Net Assets from
Distributions (4,120,649) (1,457,644) (714,147) (412,131) (21,633) (49,069)
----------- ----------- ---------- --------- --------- ---------
Fund Share Transactions:
Proceeds from Shares Sold 392,948 1,000,973 66,750 357,717 12,094 31,529
Reinvested Distributions 3,955,375 1,394,574 681,810 401,280 16,175 40,850
Cost of Shares Redeemed (1,072,708) (4,063,507) (49,533) (1,531,820) (13,376) (138,587)
----------- ----------- ---------- --------- --------- ---------
Net Increase (Decrease) in
Net Assets from Fund
Share Transactions 3,275,615 (1,667,960) 699,027 (772,823) 14,893 (66,208)
----------- ----------- ---------- --------- --------- ---------
Total Increase (Decrease) in
Net Assets 1,218,729 2,082,568 562,621 (203,804) 18,428 (64,573)
Net Assets:
Beginning of Period 23,205,643 21,123,075 4,306,579 4,510,383 734,201 798,774
----------- ----------- ---------- --------- --------- ---------
End of Period $24,424,372 $23,205,643 $4,869,200 $4,306,579 $752,629 $734,201
=========== ========== ========== ========== ========= =========
Undistributed Net Investment
Income at End of Period $78 -- $21 -- $2 --
=========== ========== ========== ========== ========= =========
Transactions in Shares:
Sales 27,352 73,343 4,732 27,338 1,215 3,193
Reinvested Distributions 295,432 114,514 50,249 31,924 1,630 4,125
Redemptions (75,389) (298,834) (3,412) (114,337) (1,345) (13,977)
----------- --------- --------- --------- --------- ----------
Net Increase (Decrease) 247,395 (110,977) 51,569 (55,075) 1,500 (6,659)
=========== ========== ========== ========== ========= =========
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 period (unaudited)
<TABLE>
<CAPTION>
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, 1997 1997 DEC. 31, 1997 1997 DEC. 31, 1997 1997
------------- --------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PREFORMANCE
Net Asset Value, Beginning of Period $14.82 $12.59 $14.45 $12.77 $9.88 $9.87
------- ------- ------- ------- ------ ------
Income from Investment Operations:
Net Investment Income 0.06 0.12 0.22 0.42 0.29 0.63
Net Realized and Unrealized Gain
on Investments 1.15 2.98 1.58 2.44 0.05 0.01
------- ------- ------- ------- ------ ------
Total from Investment Operations 1.21 3.10 1.80 2.86 0.34 0.64
------- ------- ------- ------- ------ ------
Less Distributions:
From Net Investment Income (0.06) (0.14) (0.22) (0.42) (0.29) (0.63)
From Net Realized Gains (2.50) (0.73) (2.10) (0.76) -- --
------- ------- ------- ------- ------ ------
Total Distributions (2.57) (0.87) (2.32) (1.18) (0.29) (0.63)
------- ------- ------- ------- ------ ------
Net Increase (Decrease) (1.35) 2.23 (0.52) 1.68 0.05 0.01
------- ------- ------- ------- ------ ------
Net Asset Value, End of Period $13.47 $14.82 $13.93 $14.45 $9.93 $9.88
======= ======= ======= ======= ====== ======
TOTAL INVESTMENT RETURN +8.9% +26.2% +13.5% +24.1% +3.5% +6.7%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(in thousands) $24,424 $23,206 $4,869 $4,307 $753 $734
Ratio of Expenses to
Average Net Assets 1.21%*<F2> 1.18%<F2> 0.94%*<F2> 0.84% 0.92%*<F2> 0.75%
Ratio of Net Investment
Income to Average Net Assets 0.79%*<F2> 0.82% 3.07%*<F2> 3.19% 5.75%*<F2> 6.41%
Ratio of Expenses Reimbursed
to Average Net Assets -- -- 1.00%*<F2> 0.86% 4.97%*<F2> 3.84%
Portfolio Turnover 10.2% 63.5% 14.0% 48.4% 16.2% 29.3%
Average Commission Rate
Paid per Share $0.0882 $0.0587 $0.0975 $0.0898 N/A N/A
*<F2>Annualized
See notes to financial statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 (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. 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 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.
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, 1997. As of December
31, 1997, 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, 1997. For the six
months ended December 31, 1997, the Funds incurred investment advisory fees, net
of expense reimbursements, totalling $68,837. The Trend Fund paid total
directors fees of $500 to its outside director and the Income Funds paid total
directors fees of $500 to its outside director during the six months ended
December 31, 1997.
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, 1997 were as follows:
THE PRIMARY
THE PRIMARY THE PRIMARY U.S. GOVERNMENT
TREND FUND INCOME FUND FUND
----------- ----------- ---------------
Purchases
U.S. Government -- $100,375 $176,094
Other $2,193,627 468,494 --
Sales
U.S. Government -- -- 100,000
Other 4,740,129 717,220 --
THE PRIMARY TREND FUNDS
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
100% No-Load TM
Mutual Fund Council
