Registration No. 33-29468
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (X)
Pre-Effective Amendment No. ( )
Post-Effective Amendment No. 12 (x)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 (X)
Amendment No. 14 (x)
(Check appropriate box or boxes.)
-----------------------------------
THE PRIMARY INCOME FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
First Financial Centre
700 North Water Street
Milwaukee, Wisconsin 53202
(Address of Principal Executive Offices) (Zip Code)
(414) 271-7870
(Registrant's Telephone Number, including Area Code)
Lilli Gust Copy to:
Arnold Investment Counsel Incorporated Richard L. Teigen
First Financial Centre Foley & Lardner
700 North Water Street 777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202 Milwaukee, Wisconsin 53202
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as practicable after
the Registration Statement becomes effective.
It is proposed that this filing become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
|X| on October 30, 1998 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule
Page 1 of _____ pages
<PAGE>
THE PRIMARY INCOME FUNDS, INC.
CROSS REFERENCE SHEET
(Pursuant to Rule 481 showing the location in the Prospectus and the
Statement of Additional Information of the responses to the Items of Parts A and
B of Form N-1A.)
Caption or Subheading in Prospectus
Item No. on Form N-1A or Statement of Additional Information
Part A - INFORMATION REQUIRED IN PROSPECTUS
1. Cover Page Cover Page
2. Synopsis EXPENSE INFORMATION
3. Condensed Financial Information FINANCIAL HIGHLIGHTS; GENERAL
INFORMATION ABOUT THE COMPANIES AND
THE FUNDS
4. General Description of Registrant WHAT
ARE THE PRIMARY TREND FUNDS?; WHAT ARE
THE FUNDS' INVESTMENT OBJECTIVES?; WHAT
ARE THE FUNDS' INVESTMENT POLICIES?; DO
THE FUNDS HAVE ANY INVESTMENT
LIMITATIONS DESIGNED TO REDUCE RISKS?
5. Management of the Fund WHO MANAGES THE FUNDS?; WHAT ABOUT
BROKERAGE TRANSACTIONS?; GENERAL
INFORMATION ABOUT THE COMPANIES AND
THE FUNDS; WHO ARE THE DIRECTORS AND
OFFICERS OF THE COMPANIES?
5A. Management's Discussion of Fund INCLUDED IN ANNUAL REPORT TO
Performance SHAREHOLDERS
6. Capital Stock and Other WHAT REPORTS WILL I RECEIVE?; WHAT
Securities ABOUT DIVIDENDS, CAPITAL GAINS
DISTRIBUTIONS AND TAXES?; GENERAL
INFORMATION ABOUT THE COMPANIES AND
THE FUNDS
7. Purchase of Securities Being HOW IS EACH FUND'S SHARE PRICE
Offered DETERMINED?; HOW DO I OPEN AN ACCOUNT
AND PURCHASE SHARES?; MAY SHAREHOLDERS
<PAGE>
MAKE EXCHANGES BETWEEN FUNDS?; MAY
SHAREHOLDERS REINVEST DIVIDENDS?; WHAT
RETIREMENT PLANS DO THE FUNDS OFFER?
8. Redemption or Repurchase HOW DO I SELL MY SHARES?; MAY
SHAREHOLDERS MAKE EXCHANGES BETWEEN
FUNDS?; MAY SHAREHOLDERS
SYSTEMATICALLY WITHDRAW INVESTMENTS IN
FUND SHARES?
9. Legal Proceedings *
PART B - INFORMATION REQUIRED IN STATEMENT OF ADDITIONAL INFORMATION
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History *
13. Investment Objectives and Included in Prospectus under "WHAT ARE
Policies THE FUNDS' INVESTMENT POLICIES?";
INVESTMENT RESTRICTIONS; INVESTMENT
CONSIDERATIONS
14. Management of the Registrant Included in Prospectus under "WHO ARE
THE DIRECTORS AND OFFICERS OF THE
COMPANIES?"; DIRECTORS AND OFFICERS OF
THE COMPANIES
15. Control Persons and Principal OWNERSHIP OF MANAGEMENT AND PRINCIPAL
Holders of Securities SHAREHOLDERS
16. Investment Advisory and Other INVESTMENT ADVISER AND ADMINISTRATOR;
Services CUSTODIAN; INDEPENDENT AUDITORS
- ------------
*Answer negative or inapplicable
<PAGE>
17. Brokerage Allocation ALLOCATION OF PORTFOLIO BROKERAGE
18. Capital Stock and Other Included in Prospectus under "GENERAL
Securities INFORMATION ABOUT THE COMPANIES AND
THE FUNDS"
19. Purchase, Redemption and Pricing Included in Prospectus under "HOW IS
of Securities Being Offered EACH FUND'S SHARE PRICE DETERMINED?;
HOW DO I OPEN AN ACCOUNT AND PURCHASE
SHARES?; MAY SHAREHOLDERS MAKE EXCHANGES
BETWEEN FUNDS?; MAY SHAREHOLDERS
REINVEST DIVIDENDS?; WHAT RETIREMENT
PLANS DO THE FUNDS OFFER?; HOW DO I SELL
MY SHARES?; MAY SHAREHOLDERS
SYSTEMATICALLY WITHDRAW INVESTMENTS IN
FUND SHARES?"; DETERMINATION OF NET
ASSET VALUE; PURCHASE OF SHARES
20. Tax Status TAXES
21. Underwriters *
22. Calculations of Performance Data PERFORMANCE AND YIELD INFORMATION
23. Financial Statements FINANCIAL STATEMENTS
- ------------------
*Answers negative or inapplicable
<PAGE>
(THE PRIMARY TREND FUNDS LOGO)
PROSPECTUS
THE PRIMARY
TREND FUND
THE PRIMARY
INCOME FUND
THE PRIMARY U.S.
GOVERNMENT FUND
MILWAUKEE, WISCONSIN
OCTOBER 31, 1998
PROSPECTUS OCTOBER 31, 1998
(THE PRIMARY TREND FUNDS LOGO)
FIRST FINANCIAL CENTRE
700 NORTH WATER STREET
MILWAUKEE, WISCONSIN 53202
1-800-443-6544 (FUND INFORMATION)
1-800-968-2122 (ACCOUNT INFORMATION)
WWW.PRIMARYTRENDFUNDS.COM
The Primary Trend Funds (the "Funds") consist of three no-load funds offering
a variety of investment choices. The first of such Funds was The Primary Trend
Fund, Inc., a total return fund launched September 15, 1986. The Primary Trend
Fund, Inc. was followed on September 1, 1989 by The Primary Income Funds, Inc.
which is a separate investment company consisting of two separate portfolios --
The Primary Income Fund and The Primary U.S. Government Fund -- dedicated
primarily to the generation of income.
The investment objectives of the Funds are set forth below.
THE PRIMARY TREND FUND . . .
seeks to maximize total return (a combination of capital growth and current
income) without exposing capital to undue risk.
THE PRIMARY INCOME FUND . . .
seeks a high level of current income, with a reasonable opportunity for
capital appreciation, from investments in a diversified portfolio of fixed-
income securities and/or dividend-paying common and preferred stocks.
THE PRIMARY U.S. GOVERNMENT FUND . . .
seeks a high level of current income from investments in a diversified
portfolio of securities issued or guaranteed as to principal and interest by the
U.S. government and its agencies or instrumentalities.
No assurances can be given that the respective investment objectives of the
Funds will be realized.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus sets forth concisely the information about the Funds that you
should know before investing. Please read this Prospectus and retain it for
future reference. Additional information about the Funds has been filed with
the Securities and Exchange Commission in the form of a Statement of Additional
Information, dated October 31, 1998 which is incorporated by reference in this
Prospectus. Copies of the Statement of Additional Information will be provided
without charge upon request to the Funds at the above address or telephone
number. The Commission maintains a web site (http://www.sec.gov) that contains
------------------
the Statement of Additional Information, material incorporated by reference, and
other information regarding registrants that file electronically with the
Commission.
TABLE OF CONTENTS
PAGE NO.
--------
EXPENSE INFORMATION 1
FINANCIAL HIGHLIGHTS 2
WHAT ARE THE PRIMARY TREND FUNDS? 3
WHAT ARE THE FUNDS' INVESTMENT
OBJECTIVES? 4
WHAT ARE THE FUNDS' INVESTMENT
POLICIES? 5
DO THE FUNDS HAVE ANY INVESTMENT
LIMITATIONS DESIGNED TO REDUCE RISK? 9
WHAT REPORTS WILL I RECEIVE? 9
WHO MANAGES THE FUNDS? 10
HOW IS EACH FUND'S SHARE PRICE
DETERMINED? 10
HOW DO I OPEN AN ACCOUNT AND
PURCHASE SHARES? 11
HOW DO I SELL MY SHARES? 12
MAY SHAREHOLDERS MAKE EXCHANGES
BETWEEN FUNDS? 13
WHAT ABOUT DIVIDENDS, CAPITAL GAINS
DISTRIBUTIONS AND TAXES? 15
MAY SHAREHOLDERS REINVEST DIVIDENDS? 15
MAY SHAREHOLDERS SYSTEMATICALLY
WITHDRAW INVESTMENTS IN FUND SHARES? 15
WHAT RETIREMENT PLANS DO THE FUNDS
OFFER? 16
WHAT ABOUT BROKERAGE TRANSACTIONS? 17
GENERAL INFORMATION ABOUT THE COMPANIES
AND THE FUNDS 17
WHO ARE THE DIRECTORS AND OFFICERS OF THE
COMPANIES? 19
EXPENSE INFORMATION
THE PRIMARY
THE PRIMARY THE PRIMARY U.S. GOVERN-
TREND FUND INCOME FUND MENT FUND
----------- ------------ ------------
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load on Purchases
or Reinvested Dividends None None None
Deferred Sales Load None None None
Redemption Fee1<F1> None None None
Exchange Fee2<F2> None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.74% 0.74% 0.65%
12b-1 Fees None None None
Other Expenses (after fee waivers and
expense reimbursements)3<F3> 0.50% 0.26% 0.35%
------ ------ ------
TOTAL FUND OPERATING EXPENSES 1.24% 1.00% 1.00%
------ ------ ------
------ ------ ------
1<F1> A fee of $12 is charged by Firstar Mutual Fund Services, LLC for each
wire redemption.
2<F2> A fee of $5 is charged by Firstar Mutual Fund Services, LLC for each
telephone exchange.
3<F3> Without fee waivers and expense reimbursements, other expenses for The
Primary Income Fund and The Primary U.S. Government Fund for the fiscal
year ended June 30, 1998 would have been 1.28% and 5.39%, respectively.
EXAMPLE: An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of each time period:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- -------- ---------
The Primary Trend Fund $13 $39 $68 $150
The Primary Income Fund $10 $32 $55 $122
The Primary U.S. Government Fund $10 $32 $55 $122
The purpose of the preceding table is to assist investors in understanding
the various costs that an investor in a particular Fund will bear, directly or
indirectly. They should not be considered to be a representation of past or
future expenses. Actual expenses may be more or less than those shown. The
respective annual fund operating expenses for the Funds are based on the actual
amounts incurred for the fiscal year ended June 30, 1998, except for The Primary
Income Fund and The Primary U.S. Government Fund where expenses have been
restated to reflect expense reimbursement commitments in effect for the fiscal
year ending June 30, 1999. See "Financial Highlights." The example assumes a
5% annual rate of return pursuant to requirements of the Securities and Exchange
Commission. This hypothetical rate of return is not intended to be
representative of past or future performance of any of the Funds.
FINANCIAL HIGHLIGHTS
Per share operating data, total investment return, ratios and supplemental data
for each of the periods ended June 30
The following financial highlights of each Fund are derived from the Funds'
financial statements and should be read together with each Fund's financial
statements and related notes. The information for the last five years is covered
by the Report of Ernst & Young LLP, the Funds' Independent Auditors, which is
incorporated into this Prospectus by reference. The Funds' financial statements,
including the Report of Independent Auditors, and additional performance
information are contained in the Funds' Annual Report to Shareholders, copies of
which may be obtained, without charge, upon request.
<TABLE>
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <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 $11.50 $11.41 $11.60 $12.36 $11.82
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net Investment Income 0.13 0.21 0.21 0.23 0.25 0.22 0.29 0.45 0.52 0.21
Net Realized and Unrealized Gain
(Loss) on Investments 1.60 2.98 1.30 1.55 (0.28) 0.64 0.51 0.60 (0.67) 0.99
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from Investment Operations 1.73 3.10 1.51 1.78 (0.03) 0.86 0.80 1.05 (0.15) 1.20
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less Distributions:
From Net Investment Income (0.06) (0.14) (0.23) (0.26) (0.08) (0.28) (0.36) (0.68) (0.31) (0.56)
From Net Realized Gains (2.51) (0.73) (0.79) (0.40) (0.13) (0.86) (0.35) (0.56) (0.30) (0.10)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions (2.57) (0.87) (1.02) (0.66) (0.21) (1.14) (0.71) (1.24) (0.61) (0.66)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net Increase (Decrease) (0.84) 2.23 0.49 1.12 (0.24) (0.28) 0.09 (0.19) (0.76) 0.54
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net Asset Value, End of Year $13.98 $14.82 $12.59 $12.10 $10.98 $11.22 $11.50 $11.41 $11.60 $12.36
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
TOTAL INVESTMENT RETURN +13.1% +26.2% +11.7% +17.0% -0.3% +8.2% +7.3% +10.7% -1.4% +10.8%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Year
(in thousands) $23,714 $23,206 $21,123 $21,343 $20,873 $24,966 $31,680 $33,083 $38,492 $55,580
Ratio of Expenses to Average
Net Assets 1.24% 1.18% 1.19% 1.24% 1.27% 1.20% 1.10% 1.20% 1.10% 1.10%
Ratio of Net Investment Income
to Average Net Assets 0.89% 0.82% 1.68% 1.88% 1.91% 1.90% 2.50% 4.70% 3.80% 2.00%
Portfolio Turnover 24.4% 63.5% 46.5% 37.1% 77.2% 40.0% 65.5% 77.4% 32.4% 29.8%
1998 1997 1996 1995 1994 1993 1992 1991 1990
----- ----- ----- ----- ----- ----- ----- ----- -----
THE PRIMARY INCOME FUND
PER SHARE OPERATING PERFORMANCE
Net Asset Value,
Beginning of Year $14.45 $12.77 $12.07 $11.04 $11.68 $11.02 $10.00 $9.82 $10.00
------- ------- ------- ------- ------- ------- ------- ------- -------
Net Investment Income 0.45 0.42 0.43 0.50 0.49 0.51 0.61 0.69 0.59
Net Realized and Unrealized Gain
(Loss) on Investments 1.50 2.44 1.28 1.10 (0.54) 0.84 1.02 0.18 (0.18)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total from Investment Operations 1.95 2.86 1.71 1.60 (0.05) 1.35 1.63 0.87 0.41
------- ------- ------- ------- ------- ------- ------- ------- -------
Less Distributions:
From Net Investment Income (0.44) (0.42) (0.43) (0.50) (0.49) (0.51) (0.61) (0.69) (0.59)
From Net Realized Gains (2.10) (0.76) (0.58) (0.07) (0.10) (0.18) -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions (2.54) (1.18) (1.01) (0.57) (0.59) (0.69) (0.61) (0.69) (0.59)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net Increase (Decrease) (0.59) 1.68 0.70 1.03 (0.64) 0.66 1.02 0.18 (0.18)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net Asset Value, End of Year $13.86 $14.45 $12.77 $12.07 $11.04 $11.68 $11.02 $10.00 $9.82
------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- -------
TOTAL INVESTMENT RETURN +14.7% +24.1% +14.8% +14.8% -0.6% +12.7% +16.6% +9.2% +4.2%1<F4>
RATIOS AND SUPPLEMENTAL DATA
Net Assets,
End of Year (in thousands) $4,572 $ 4,307 $ 4,510 $ 4,221 $ 3,677 $ 2,800 $ 2,447 $ 1,203 $ 814
Ratio of Expenses
to Average Net Assets 0.97% 0.84% 0.84% 0.84% 0.84% 0.84% 0.84% 0.84% 0.84%2<F5>
Ratio of Net Investment
Income to Average Net Assets 3.16% 3.19% 3.43% 4.35% 4.20% 4.50% 5.53% 6.84% 7.38%2<F5>
Ratio of Expenses Reimbursed
to Average Net Assets 1.05% 0.86% 0.73% 0.76% 1.19% 1.55% 1.68% 3.35% 3.88%2<F5>
Portfolio Turnover 33.5% 48.4% 41.5% 40.9% 39.7% 43.8% 24.2% 32.5% None
1998 1997 1996 1995 1994 1993 1992 1991 1990
----- ----- ----- ----- ----- ----- ----- ----- -----
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 $10.43 $10.07 $9.99 $ 10.00
------- ------- ------- ------- ------- ------- ------- ------- -------
Net Investment Income 0.55 0.63 0.63 0.57 0.51 0.56 0.69 0.74 0.62
Net Realized and Unrealized Gain
(Loss) on Investments 0.05 0.01 (0.22) 0.38 (0.67) 0.35 0.49 0.08 (0.01)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total from Investment Operations 0.60 0.64 0.41 0.95 (0.16) 0.91 1.18 0.82 0.61
------- ------- ------- ------- ------- ------- ------- ------- -------
Less Distributions:
From Net Investment Income (0.55) (0.63) (0.63) (0.57) (0.51) (0.56) (0.69) (0.74) (0.62)
From Net Realized Gains -- -- -- (0.03) (0.19) (0.18) (0.13) -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions (0.55) (0.63) (0.63) (0.60) (0.70) (0.74) (0.82) (0.74) (0.62)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net Increase (Decrease) 0.05 0.01 (0.22) 0.35 (0.86) 0.17 0.36 0.08 (0.01)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net Asset Value, End of Year $9.93 $9.88 $9.87 $10.09 $9.74 $10.60 $10.43 $10.07 $9.99
------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- -------
TOTAL INVESTMENT RETURN +6.2% +6.7% +4.1% +10.2% -1.7% +9.1% +12.0% +8.5% +6.3%1<F4>
RATIOS AND SUPPLEMENTAL DATA
Net Assets,
End of Year (in thousands) $774 $ 734 $799 $1,345 $1,295 $1,354 $1,156 $898 $608
Ratio of Expenses to
Average Net Assets 0.95% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75%2<F5>
Ratio of Net Investment
Income to Average Net Assets 5.55% 6.41% 6.24% 5.85% 4.91% 5.29% 6.43% 7.24% 7.57%2<F5>
Ratio of Expenses Reimbursed
to Average Net Assets 5.09% 3.84% 2.20% 1.92% 2.44% 2.75% 2.87% 4.29% 5.44%2<F5>
Portfolio Turnover 62.6% 29.3% 46.6% 63.0% 94.4% 64.5% 108.5% 66.4% 92.8%
1<F4> Not Annualized
2<F5> Annualized
</TABLE>
WHAT ARE THE PRIMARY TREND FUNDS?
The Primary Trend Fund, Inc. and The Primary Income Funds, Inc.
(collectively, the "Companies") are no-load, open-end diversified investment
companies -- better known as mutual funds -- registered under the Investment
Company Act of 1940 (the "Act"). The Primary Income Funds, Inc. consists of a
series of two funds: The Primary Income Fund and The Primary U.S. Government
Fund. The Companies are Wisconsin corporations.
Each of The Primary Trend Fund, The Primary Income Fund and The Primary U.S.
Government Fund (the "Funds") obtains its assets by continuously selling its
shares to the public. Proceeds from such sales are invested by the particular
Fund in securities of other issuers. In this way, each Fund:
o Combines the resources of many investors, with each individual investor
having an interest in every one of the securities owned by the Fund;
o Provides each individual investor with diversification by investing in the
securities of many different issuers; and
o Furnishes experienced portfolio management to select and watch over
investments.
Each Fund will redeem any of its outstanding shares on demand of the owner at
its next determined net asset value. The Funds are 100% no-load funds there are
no sales commissions, redemption fees, or 12b-1 charges of any kind.
WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES?
The descriptions that follow are designed to help you choose the Fund that
best fits your investment objectives. You may want to pursue more than one
objective by investing in more than one of The Primary Trend Funds. No
assurances can be given that the respective investment objectives of the Funds
will be realized.
THE PRIMARY TREND FUND
The Primary Trend Fund seeks to maximize total return (a combination of
capital growth and current income) without exposing capital to undue risk. The
term "undue risk" refers to the judgement of Arnold Investment Counsel
Incorporated (the "Adviser") that the risk would present a greater than normal
risk of loss in light of current and reasonably anticipated future general
market and economic conditions, trends in yields and interest rates, and fiscal
and monetary policies. In maximizing total return without exposing capital to
undue risk, the Adviser will endeavor over the long- term and in rising and
falling markets to:
o Provide returns in excess of the inflation rate as measured by the
Consumer Price Index;
o Provide returns in excess of the rates of return available on 90-day U.S.
Treasury bills; and
o Provide returns in excess of the total returns produced by the popular
stock market averages such as the Dow Jones Industrial Average and the
Standard & Poor's 500 Stock Index.
The foregoing are goals of the Adviser and may be referred to by shareholders
of The Primary Trend Fund in measuring the success of the Adviser in achieving
this Fund's objective. This Fund is designed for long-term investors who desire
capital growth, together with a reasonable level of current income.
THE PRIMARY INCOME FUND
The Primary Income Fund seeks a high level of current income, with a
reasonable opportunity for capital appreciation, by actively managing a
portfolio of income-producing securities. This Fund is designed for long-term
investors who desire high current income coupled with reasonable capital
appreciation potential.
THE PRIMARY U.S. GOVERNMENT FUND
The Primary U.S. Government Fund seeks a high level of current income from
investments in a diversified portfolio of securities issued or guaranteed as to
principal by the U.S. government and its agencies or instrumentalities. This
Fund is designed for long-term investors desiring a combination of high income,
safety and quality.
WHAT ARE THE FUNDS' INVESTMENT POLICIES?
THE PRIMARY TREND FUND
To meet The Primary Trend Fund's investment objective of maximizing total
return, the Adviser has flexibility to allocate the Fund's assets among common
stocks, convertible securities, fixed-income securities and short-term cash
investments (money market instruments maturing in one year or less). No minimum
or maximum percentage of the Fund's assets is required to be invested in any of
these types of securities.
The Adviser will not use short-term market timing techniques in altering
portfolio composition and asset allocation. Instead, the Adviser attempts to
invest The Primary Trend Fund's assets in phase with what the Adviser refers to
as the "primary trends" of the markets so as to achieve the Fund's investment
objective of maximizing total return. The Adviser defines the primary trend as
a market trend that is in effect for several quarters to several years. By way
of contrast the Adviser defines a secular trend as a very long-term trend that
may last for many years, even decades, and an intermediate trend as a trend that
may last for several months to several quarters. In seeking to invest the
Fund's assets in phase with the primary trends of markets, the Adviser will
typically not alter the Fund's portfolio composition in response to short-term
market conditions. Because of the current volatility of markets, this investment
strategy may result in frequent fluctuations of The Primary Trend Fund's net
asset value. Additionally, because of the generally long-term, patient
investment orientation of the Adviser, an investment in the Fund may not be
suitable for investors intending to make only a short-term investment.
In determining the primary trend of the stock market, the Adviser will
consider a number of factors such as historic dividend yields as compared to
current dividend yields, historic book-value relationships, historic price-
earnings ratios as compared to current price-earnings ratios, market and
economic cycles, momentum models, supply-demand techniques, psychological
indicators, volume and breadth data and general economic factors. In
determining the primary trend of the bond market, the Adviser will consider a
number of factors such as inflationary expectations, interest rate trends and
general economic factors. When the primary trend of the stock market is deemed
by the Adviser to be positive (i.e., a bull market is in force) and the primary
trend of the bond market is negative (i.e., a bear market is in force), this
Fund can be expected to have substantially all of its assets invested in common
stocks. When the primary trend of the stock market is deemed by the Adviser to
be negative, this Fund can be expected to have minimal assets invested in common
stocks.
The Adviser will purchase common stocks which it believes to be undervalued,
rather than common stocks whose prices reflect a premium because of their
popularity. The Adviser will consider various financial characteristics of
issuers such as earnings growth, book value, dividends, net current asset value
per share and replacement cost, and will study the financial statements of the
issuer and other issuers in the same industry. The Adviser believes that
successful investing is more an art than it is a science, and that there is no
single magic formula for success. Typically The Primary Trend Fund's
investments in common stocks will be in well-established, large-capitalization
companies. The Adviser defines well-established, large-capitalization companies
as companies with an operating history of ten or more years and market
capitalization of $1 billion or more. Securities of such companies more often
than not trade on the New York Stock Exchange, but the Adviser will not
arbitrarily exclude any securities market. The Primary Trend Fund may also
invest in convertible securities (debt securities or preferred stocks of
corporations which are convertible into, or exchangeable for, common stocks).
The Adviser will select only those convertible securities for which it believes
(a) the underlying common stock is a suitable investment for the Fund using the
criteria described above and (b) the potential for greater total return exists
by purchasing the convertible security because of its higher yield.
When the primary trend of the bond market is deemed by the Adviser to be
positive, The Primary Trend Fund may invest in fixed-income securities such as
U.S. Treasury bonds and investment grade, nonconvertible corporate bonds and
debentures. Except as set forth below, the Fund will limit its investments in
nonconvertible corporate bonds and debentures to those which have been assigned
one of the highest four ratings ("investment grade") of either Standard & Poor's
Corporation ("S&P") or Moody's Investors Service, Inc. ("Moody's"), or unrated
bonds which the Adviser believes to be of comparable quality. If the rating of
a nonconvertible corporate bond or debenture held by the Fund is reduced such
that neither S&P nor Moody's rates the security as investment grade, or if the
quality of an unrated bond declines such that it can no longer be deemed of
investment grade, the Adviser will review such investment on an independent
basis to determine whether the security should be retained or sold. A
description of the foregoing ratings is set forth in the Statement of Additional
Information under the caption "Description of Bond Ratings." In addition, the
Fund may invest up to 5% of its net assets at the time of investment in
corporate obligations rated less than investment grade (including investment
grade securities which have been downgraded since the time of investment).
However, no investments in corporate obligations rated less than investment
grade will be made unless, in the opinion of the Adviser, such lesser rating is
due to a special situation or other extenuating circumstances. See "WHAT ARE
THE FUNDS' INVESTMENT POLICIES -- General Considerations."
If the primary trends of the stock market and bond market are both positive,
The Primary Trend Fund can be expected to have the majority of its assets
invested in that market (either stock or bond) which in the opinion of the
Adviser offers the greater total return potential. During periods of declining
interest rates when fixed-income securities may appreciate in value, the bond
market may offer a greater total return potential than the stock market. If the
primary trend of the stock market is negative and the primary trend of the bond
market is positive, the Fund may be expected to have a substantial amount of its
assets invested in fixed-income securities. If the primary trend of the bond
market is negative, little or no assets will be invested in fixed-income
securities.
If the primary trends of the stock market and bond market are both negative,
the Fund can be expected to have substantially all of its assets invested in
short-term cash investments such as U.S. Treasury bills; certificates of deposit
of U.S. banks, provided that the bank has capital, surplus, and undivided
profits (as of the date of its most recently published annual financial
statements) with a total value in excess of $100,000,000 at the date of
investment; commercial paper and commercial paper master notes (demand
instruments without a fixed maturity bearing interest at rates which are fixed
to known lending rates and automatically adjusted when such lending rates
change) rated A-2 or better by S&P; or unrated commercial paper or commercial
paper master notes which the Adviser believes to be of comparable quality. The
Fund will also invest in short-term cash investments amounts the Adviser
believes are reasonable to satisfy anticipated redemption requests or other cash
needs.
THE PRIMARY INCOME FUND
The primary investment objective of The Primary Income Fund is a high level
of current income. Its secondary objective is capital appreciation. To meet
these objectives, The Primary Income Fund has the flexibility to invest in a
diversified portfolio of fixed-income securities of any maturity, including
corporate, U.S. government and convertible securities, as well as dividend-
paying common and preferred stocks. Typically the Fund's investments in the
foregoing securities (other than government securities) will be in well-
established, large-capitalization companies.
As with The Primary Trend Fund, this Fund generally will invest in investment
grade obligations. The Fund may also purchase unrated securities which the
Adviser believes to be of comparable quality. In addition, the Fund may
invest up to 5% of its net assets at the time of investment in corporate
obligations rated less than investment grade (including investment grade
securities which have been downgraded since the time of investment). However,
no investments in corporate obligations rated less than investment grade will be
made unless, in the opinion of the Adviser, such lesser rating is due to a
special situation or other extenuating circumstances. See "WHAT ARE THE FUNDS'
INVESTMENT POLICIES -- General Considerations."
The Primary Income Fund's principal objective is to obtain a high level of
current income. However, unlike funds investing solely for income, this Fund
intends also to take advantage of opportunities for modest capital appreciation
and growth of investment income. The Primary Income Fund may purchase securities
which are convertible into, or exchangeable for, common stock when the Adviser
believes they offer the potential for higher total return than nonconvertible
securities. It may also purchase income securities that carry warrants or
common stock purchase rights attached as an added inducement to participate in
the potential growth of an issuer.
The Primary Income Fund will concentrate its investments in the utility
industry. It may invest up to 100% of the value of its assets in that industry.
However, in some future period or periods, due to adverse economic conditions,
this Fund may temporarily have less than 25% of its assets invested in the
utility industry. To avoid being subject to the Public Utility Holding Company
Act of 1935, The Primary Income Fund will not purchase or hold 5% or more of the
outstanding voting securities of any public utility company.
The electric utilities industry has been experiencing, and will continue to
experience, increased competitive pressures. Federal legislation in the past
several years will open transmission access to any electricity supplier,
although it is not presently known to what extent competition will evolve.
Moreover, public utilities, whether state, municipal or investor-owned, often
experience certain general problems associated with this industry, including the
difficulty in obtaining an adequate return on invested capital in spite of
frequent increases in rates which have been granted by the Public Service
Commissioners having jurisdiction, the difficulty in financing large
construction programs during an inflationary period, the restrictions on
operations and increased costs and delays attributable to environmental
considerations, the difficulty of the capital markets in absorbing utility debt
and equity securities, the difficulty in obtaining fuel for electric generation
at reasonable prices and the effects of energy conservation. In addition,
certain utilities may operate nuclear electric generation facilities which are
subject to extensive governmental regulation. Such facilities and the
applicable regulations are subject to continual review by various governmental
bodies. It is difficult to predict whether such regulations may be
significantly modified in the future and, if so, what effect such modifications
would have on utilities operating nuclear electric generation facilities. For a
further discussion of the risks associated with concentration in utility
securities, see "INVESTMENT CONSIDERATIONS" in the Statement of Additional
Information.
THE PRIMARY U.S. GOVERNMENT FUND
The Primary U.S. Government Fund will invest in a diversified portfolio of
securities issued or guaranteed as to principal by the U.S. government and its
agencies or instrumentalities. U.S. government securities include bills, notes
and bonds differing as to maturity and rates of interest, which are either
issued or guaranteed by the U.S. Treasury or some other U.S. government agency
or instrumentality. The Fund's average portfolio maturity may range from two to
30 years, depending on the Adviser's expectations regarding interest rates. See
"WHAT ARE THE FUNDS' INVESTMENT POLICIES -- General Considerations."
U.S. government agency securities include securities issued by (a) the
Federal Housing Administration, Farmers Home Administration, Export-Import Bank
of the United States, Small Business Administration and the Government National
Mortgage Association, whose securities are backed by the full faith and credit
of the United States; (b) the Federal Home Loan Banks, Federal Intermediate
Credit Banks and the Tennessee Valley Authority, whose securities are
supported by the right of the agency to borrow from the U.S. Treasury; (c) the
Federal National Mortgage Association, whose securities are supported by the
discretionary authority of the U.S. government to purchase certain obligations
of the agency or instrumentality; and (d) the Student Loan Marketing
Association, whose securities are supported only by the credit of such agency.
The U.S. government, its agencies and instrumentalities do not guarantee the
market value of their securities, and consequently the value of such securities
can be expected to fluctuate.
This Fund will invest at least 80% of its assets in securities issued or
guaranteed as to principal by the U.S. government and its agencies or
instrumentalities. The balance of the Fund's assets may be invested in non-
governmental securities, such as investment grade corporate debt obligations,
commercial paper and commercial paper master notes, at such times and in such
amounts as in the opinion of the Adviser seem appropriate to achieve this Fund's
investment objective.
GENERAL CONSIDERATIONS. Options, futures and other derivative instruments
will not be used by any of the Funds to enhance yield or to hedge the investment
portfolio. The Adviser believes such instruments are highly speculative and not
in the best interest of the conservative investor for whom the Funds are
designed.
The values of the fixed-income securities held by The Primary Trend Fund and
The Primary Income Fund are subject to price fluctuations resulting from various
factors, including rising or declining interest rates ("market risks") and the
ability of the issuers of such investments to make scheduled interest and
principal payments ("financial risks"). The Adviser attempts to minimize these
risks when selecting investments by taking into account interest rates, terms
and marketability of obligations, as well as the capitalization, earnings,
liquidity and other indicators of the issuer's financial condition. Obligations
rated BBB by S&P or Baa by Moody's, although investment grade, do exhibit
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity of issuers to make
principal and interest payments than is the case for higher-rated obligations.
Unrated securities, while not necessarily of lower quality than rated
securities, may not have as broad a market as rated securities. Investment in
lower-grade obligations (i.e., less than investment grade), while providing
greater income and opportunity for gain than investment in higher-rated
securities, entails relatively greater risk of loss of income or principal.
Lower-grade obligations are commonly referred to as "junk bonds." Market prices
of high-yield, lower-grade obligations may fluctuate more than market prices of
higher-rated securities. Lower-grade, fixed-income securities tend to reflect
short-term corporate and market developments to a greater extent than higher-
rated obligations which, assuming no change in their fundamental quality, react
primarily to fluctuations in the general level of interest rates. Changes in
the market value of fixed-income securities after their acquisition will not
affect interest income or purchased yield to maturity, but will be reflected in
such Funds' net asset values.
The values of The Primary U.S. Government Fund's portfolio securities are
subject to price fluctuations resulting from market risks, and the Adviser
attempts to minimize such risks when selecting investments by adjusting bond
maturities as described below.
When the Adviser believes bond values will rise (an expectation of declining
interest rates), the Funds will emphasize longer-term maturities. Conversely,
when bond values are expected to fall (an expectation of rising interest rates),
the Funds will shorten maturities and/or maintain a larger than normal position
in money market instruments.
Consistent with the investment objectives of the Funds, the Adviser will not
engage in short-term trading. However, when circumstances dictate, securities
may be sold without regard to the length of time held. The Adviser intends to
limit portfolio turnover to the extent practicable. Each of the Funds expects
to have a portfolio turnover rate of less than 100%, although the annual
portfolio turnover rate may vary widely from year to year, depending upon market
conditions.
The Funds' investment objectives, investment policies and techniques are not
fundamental and may be changed by the appropriate Company's Board of Directors
without shareholder approval. A change in any Fund's investment objective may
result in such Fund having an investment objective different from the objective
which the shareholder considered appropriate at the time of investment in such
Fund.
DO THE FUNDS HAVE ANY INVESTMENT LIMITATIONS DESIGNED TO REDUCE RISK?
The Funds have adopted certain limitations designed to reduce their exposure
to risk of loss of capital. None of the Funds will purchase securities on
margin; participate in a joint-trading account; sell securities short; buy, sell
or write put or call options; or engage in futures trading. In addition, none
of the Funds will do the following:
o Purchase more than 10% of the voting securities of any issuer;
o Invest more than 5% of its assets in securities of companies that have a
continuous operating history of less than three years;
o With respect to The Primary Income Fund and The Primary U.S. Government
Fund, invest in warrants which are unattached to fixed-income securities,
and with respect to The Primary Trend Fund, invest more than 5% of its net
assets in warrants;
o Invest more than 25% of its assets, exclusive of U.S. government
securities, in any one industry. This restriction does not apply to
investments by The Primary Income Fund in companies engaged primarily in
the utility industry (See "INVESTMENT CONSIDERATIONS" in the Statement of
Additional Information for a discussion of the industry risks associated
with such concentration.);
o Lend money (except by purchasing publicly distributed debt securities) or
lend their portfolio securities;
o Borrow money or issue senior securities, except for temporary bank
borrowings or for emergency or extraordinary purposes (but not for the
purpose of investments) and then only in an amount not in excess of 5% of
the value of its total assets; and
o Pledge any of its assets except to secure borrowings and then only to an
extent not greater than 10% of the value of such Fund's net assets.
The investment limitations described here and in the Statement of Additional
Information are fundamental policies and may be changed only with the approval
of the shareholders of the Funds as described in the Statement of Additional
Information.
WHAT REPORTS WILL I RECEIVE?
As a shareholder of the Funds, you will receive The Primary Trend investment
letter each month. This letter, published by the Adviser since 1979, is
designed to be educational and informative, to communicate the Adviser's
investment strategy, and to provide insights into the analytical and decision-
making techniques of the Adviser.
Shareholders of each Fund will be provided at least semi-annually with a
report showing such Fund's portfolio and other information. After the close of
the Funds' June 30 fiscal year, you will be provided an annual report containing
audited financial statements.
An individual account statement will be sent to you by Firstar Mutual Fund
Services, LLC ("Firstar") after each purchase, redemption or exchange of shares.
Shareholders of The Primary Trend Fund will also receive account statements
after each dividend payment. Shareholders of The Primary Income Fund and The
Primary U.S. Government Fund will not receive account statements for monthly
dividends, but instead will receive a statement after the end of each calendar
quarter listing all transactions (including dividend payments) during such
quarter. You will also receive an annual statement after the end of the
calendar year listing all transactions in Fund shares during the year.
Shareholders may request a statement of account activity at any time.
Questions about your account may be directed to Firstar at 1-800-968-2122.
If you have general questions about any of the Funds or want more information,
you may call our Shareholder Services Department at 1-800-443-6544 (toll free)
or 1-414-271-7870, write us at The Primary Trend Funds, First Financial Centre,
700 North Water Street, Milwaukee, Wisconsin 53202, or visit our web site at
www.primarytrendfunds.com.
WHO MANAGES THE FUNDS?
As Wisconsin corporations, the business and affairs of the Companies are
managed by their respective Boards of Directors. Each of the Funds has entered
into an investment advisory agreement (collectively the "Agreements") with
Arnold Investment Counsel Incorporated, First Financial Centre, 700 North Water
Street, Milwaukee, Wisconsin 53202. Under such Agreements the Adviser furnishes
continuous investment advisory services and management to each of the Funds.
The Adviser is the investment adviser to individuals and institutional clients
with investment portfolios aggregating approximately $80 million in assets. The
Adviser has managed funds for individuals and institutions since it was
organized in 1978 and has managed the assets of each of The Primary Trend Funds
since inception. The Adviser is controlled by Lilli Gust.
The Adviser supervises and manages the investment portfolio of each of the
Funds and, subject to such policies as the Boards of Directors of the respective
Companies may determine, directs the purchase or sale of investment securities
in the day-to-day management of the Funds. All investment decisions for the
Funds are made by an investment team and no one person is primarily responsible
for making investment recommendations to that team. The Adviser, at its own
expense and without separate reimbursement from any of the Funds, provides the
Funds with copies of The Primary Trend investment letter for distribution to
shareholders; furnishes office space and all necessary office facilities,
equipment, and executive personnel for managing each Fund and maintaining its
organization; bears all sales and promotional expenses of the Funds, other than
expenses incurred in complying with laws regulating the issuance or sale of
securities; and pays the salaries and fees of all officers and directors of the
Companies (except the fees paid to disinterested directors as such term is
defined under the Investment Company Act of 1940). For the foregoing, the
Adviser receives from each of The Primary Trend Fund and The Primary Income Fund
a monthly fee at the annual rate of .74% of such Fund's average daily net assets
and from The Primary U.S. Government Fund a monthly fee at the annual rate of
.65% of such Fund's average daily net assets.
HOW IS EACH FUND'S SHARE PRICE DETERMINED?
The net asset value (or "price") per share of each Fund is determined by
dividing the total value of that Fund's investments and other assets less any
liabilities, by its number of outstanding shares. Except as otherwise noted
below, each Fund's net asset value per share is determined once daily on each
day that the New York Stock Exchange is open, as of the close of regular trading
on the Exchange (3 p.m. Central Time). Purchase orders accepted and shares
tendered for redemption prior to the close of regular trading on a day the New
York Stock Exchange is open for trading will be valued as of the close of
trading, and purchase orders accepted and shares tendered for redemption after
that time will be valued as of the close of trading on the next trading day.
Notwithstanding the foregoing, the net asset value per share for The Primary
U.S. Government Fund also will not be determined on days when the Federal
Reserve is closed.
In calculating the net asset value of the Funds, portfolio securities listed
on a national securities exchange or quoted on the Nasdaq National Market System
are valued at the last sale price on the day the valuation is made. If no sale
is reported, the average of the latest bid and asked prices is used. Other
securities for which market quotations are readily available are valued at the
average of the latest bid and asked prices. Debt securities (other than short-
term instruments) are valued at prices furnished by a national pricing service,
subject to review by the Adviser and determination of the appropriate price
whenever a furnished price is significantly different from the previous day's
furnished price. Other assets and securities for which no quotations are
readily available are valued at fair value as determined in good faith by the
appropriate Company's Board of Directors. Securities with maturities of 60 days
or less are valued at amortized cost.
HOW DO I OPEN AN ACCOUNT AND PURCHASE SHARES?
BY MAIL. You may purchase shares of the Funds by completing an account
application (which can be obtained by calling the Funds at 1-800-443-6544) and
mailing it along with a check or money order payable to The Primary Trend Funds,
to: The Primary Trend Funds, c/o Firstar Mutual Fund Services, LLC, P.O. Box
701, Milwaukee, Wisconsin 53201-0701. The minimum initial investment is $500
for each Fund.
No cash or third party checks are accepted. Checks are subject to collection
at full face value in U.S. funds. If a shareholder's check is returned for
insufficient funds, the shareholder's account will be charged $20, in addition
to any loss sustained by the applicable Fund, or by Firstar.
To purchase shares by overnight or express mail, please use the following
street address: The Primary Trend Funds, c/o Firstar Mutual Fund Services, LLC,
615 East Michigan Street, Milwaukee, Wisconsin 53202. Please do not send
correspondence by overnight courier to the Post Office Box address.
The U.S. Postal Service and other independent delivery services are not
agents of the Funds. Therefore, deposit in the mail or with such services of
purchase applications does not constitute receipt by Firstar or the Funds.
BY WIRE. To establish a new account by wire transfer from your bank, please
first call Firstar at 1-800-968-2122 to advise it of the investment and to
receive an account number and other information necessary for setting up the
account. (Please note that your bank may impose a charge for providing wire
transfer services.) This will ensure prompt and accurate handling of your
investment. A completed account application must also be sent to Firstar at the
address above immediately after the investment is made so that the necessary
remaining information can be recorded to your account.
ADDITIONAL INVESTMENTS. You may add to your account at any time by
purchasing shares of the applicable Fund at the then current net asset value,
either by mail (minimum investment $100) or by wire (minimum investment $500).
It is very important that your account number be specified in the letter or wire
to insure proper crediting to your account.
AUTOMATIC INVESTMENT PLAN. Shareholders wishing to invest fixed dollar
amounts in a particular Fund every month can make automatic purchases of $50 or
more on any date of the month by using our Automatic Investment Plan. If that
day is a weekend or holiday, the purchase will be made the following business
day. There is no service fee for participating in this Plan. To use this
service, you must authorize Firstar to transfer funds from your bank checking or
savings account by completing an Automatic Investment Plan application. A
separate application is needed for each Fund, which may be obtained by calling
the Funds at 1-800-443-6544.
As no-load mutual funds, the Funds impose no sales charges or commissions, so
all of your investment is used to purchase shares. All shares purchased will be
credited to your account and confirmed by a statement mailed to your address.
The Funds do not issue stock certificates for shares purchased unless
specifically requested by you in writing. When certificates are not issued, the
shareholder is relieved of the responsibility for safekeeping of certificates
and the need to deliver them upon redemption. You may also invest in the Funds
by purchasing shares through a registered broker-dealer, who may charge you a
fee, either at the time of purchase or redemption. This fee, if charged, is
retained by the broker-dealer and not remitted to the Funds or the Adviser.
ALL APPLICATIONS ARE SUBJECT TO ACCEPTANCE BY THE APPLICABLE FUND AND ARE NOT
BINDING UNTIL SO ACCEPTED. THE FUNDS DO NOT ACCEPT TELEPHONE ORDERS FOR
PURCHASE OF SHARES AND RESERVE THE RIGHT TO REJECT APPLICATIONS. The minimum
purchase amounts for the Funds are subject to change at any time; shareholders
will be advised at least 30 days in advance of any increases in such minimum
amounts. Each Fund may waive the applicable minimum purchase amounts in its
sole discretion.
HOW DO I SELL MY SHARES?
REDEMPTION REQUESTS. Redemption requests for the Funds must be made in
writing. All redemption requests should be directed to The Primary Trend Funds,
c/o Firstar Mutual Fund Services, LLC, P.O. Box 701, Milwaukee, Wisconsin 53201-
0701. If a redemption request is inadvertently sent to the Funds at their
corporate address, the request will be forwarded to Firstar, but the effective
date of redemption will be delayed until the request is received by Firstar.
Requests for redemption by telephone, telegram or facsimile transmission (fax),
and requests which are subject to any special conditions or which specify an
effective date other than as provided herein, cannot be honored.
The U.S. Postal Service and other independent delivery services are not
agents of the Funds. Therefore, deposit in the mail or with such services of
redemption requests does not constitute receipt by Firstar or the Funds. Please
do not send correspondence by overnight courier to the Post Office Box address.
Correspondence mailed by overnight courier should be sent to Firstar Mutual Fund
Services, LLC, 615 East Michigan Street, Milwaukee, Wisconsin 53202.
A redemption request must be received in "Good Order" by Firstar for the
request to be processed. "Good Order" means the request for redemption must
include:
o Your share certificate, if issued, properly endorsed or accompanied by a
properly executed stock power.
o Your letter of instruction specifying the name of the Fund, your account
number, and either the number of shares or the dollar amount of shares to
be redeemed. The letter of instruction must be manually signed by all
owners exactly as the shares to be redeemed are registered.
o Signature guarantees for redemption requests over $10,000. Signature
guarantees are also required for any redemption made within 15 days of a
change of address by telephone, or if the proceeds of redemption
(regardless of amount) are to be sent to a person other than the registered
holder and/or to an address other than the address of record. Transfers of
shares also require signature guarantees. Signature guarantees may be
obtained from any commercial bank or trust company in the United States, a
member of the New York Stock Exchange and some savings and loan
associations. A notary public is not acceptable.
o Additional documentation, if required, for redemptions by estates, trusts,
guardianships, custodianships, corporations, partnerships and other
organizations.
Redemption request forms are available from the Funds.
OTHER INFORMATION ABOUT REDEMPTIONS. Shareholders who have an Individual
Retirement Account (IRA) must indicate on their redemption request whether or
not to withhold federal income tax. Unless otherwise indicated, these
redemptions, as well as redemptions of other retirement plans not involving a
direct rollover to an eligible plan, will be subject to federal income tax
withholding.
The redemption price per share for each Fund is the next determined net asset
value per share for such Fund after Firstar receives a redemption request in
"Good Order." The amount paid will depend on the market value of the investments
in the appropriate Fund's portfolio at the time of determination of its net
asset value per share, and may be more or less than the cost of the shares
redeemed. Payment for shares redeemed will be mailed to you typically within
one or two days, but no later than the seventh day after receipt by Firstar of a
redemption request in "Good Order."
When purchases have been made by check, the Funds reserve the right to delay
payment until satisfied that the purchase check has cleared. It may take up to
three days to clear local personal or corporate checks and up to seven days to
clear other personal or corporate checks.
Requests for wire transfers from any Fund must be in writing and must be made
before 3 p.m. (Central Time) on a business day in order for the wire transfer to
take place the next day. Firstar charges $12 for each wire transfer. If you
are uncertain about other redemption requirements, please contact Firstar in
advance.
The Funds reserve the right to redeem the shares held in any account if at
the time of any exchange or redemption of shares in the account, the value of
the remaining shares in the account falls below $500. You will be notified that
the value of your account is less than the minimum and allowed at least 60 days
to make an additional investment. The receipt of proceeds of the redemption of
shares held in an IRA will constitute a taxable distribution of benefits from
the IRA unless a qualifying rollover contribution is made.
Your right to redeem shares of any Fund will be suspended and your right to
payment postponed for more than seven days for any period during which the New
York Stock Exchange is closed because of financial conditions or any other
extraordinary reason and may be suspended for any period during which (a)
trading on the New York Stock Exchange is restricted pursuant to rules and
regulations of the Securities and Exchange Commission, (b) the Securities and
Exchange Commission has by order permitted such suspension or (c) such
emergency, as defined by rules and regulations of the Securities and Exchange
Commission, exists as a result of which it is not reasonably practicable for the
applicable Fund to dispose of such Fund's securities or to determine fairly the
value of its net assets.
MAY SHAREHOLDERS MAKE EXCHANGES BETWEEN FUNDS?
The Primary Trend Funds offer the flexibility of exchanging between any of
the Funds managed by the Adviser, as well as the Firstar Money Market Fund, a
money market mutual fund not affiliated with the Funds or the Adviser. The
Firstar Money Market Fund is described in a separate prospectus. You may obtain
a copy of the prospectus for the Firstar Money Market Fund from the Funds and
are advised to read it carefully before investing.
The exchange privilege is only available in states where the exchange may be
legally made. Furthermore, this exchange privilege is not available with
respect to shares of any Fund purchased by check until such time as the
applicable Fund is satisfied that the purchase check has cleared. It may take
up to three days to clear local personal or corporate checks and up to seven
days to clear other personal or corporate checks.
An exchange may be made in writing or by telephone (see below for more
details). Exchanges may only be made between identically registered accounts.
If certificates are held, they must first be properly delivered with your
exchange request. Exchanges with the Firstar Money Market Fund are subject to
its minimum purchase and redemption amounts. Once an exchange request is made,
it may not be modified or cancelled. The shares will be exchanged at the net
asset value next determined after your exchange request is received by Firstar.
An exchange transaction is a sale of shares for federal income tax purposes and
may result in a capital gain or loss.
THE EXCHANGE PRIVILEGE IS NOT DESIGNED TO AFFORD SHAREHOLDERS A WAY TO PLAY
SHORT-TERM SWINGS IN THE MARKET. THE PRIMARY TREND FUNDS ARE NOT SUITABLE FOR
THAT PURPOSE. THE FUNDS RESERVE THE RIGHT, AT ANY TIME WITHOUT PRIOR NOTICE, TO
SUSPEND, LIMIT, MODIFY OR TERMINATE THE EXCHANGE PRIVILEGE OR ITS USE IN ANY
MANNER BY ANY PERSON OR CLASS. IN PARTICULAR, SINCE AN EXCESSIVE NUMBER OF
EXCHANGES MAY BE DISADVANTAGEOUS TO OTHER SHAREHOLDERS, THE FUNDS RESERVE THE
RIGHT TO TERMINATE THE EXCHANGE PRIVILEGE OF ANY SHAREHOLDER WHO MAKES MORE THAN
FIVE EXCHANGES OF SHARES OF ANY ONE FUND DURING ANY TWELVE-MONTH PERIOD OR THREE
EXCHANGES DURING ANY THREE-MONTH PERIOD.
Exchange requests may be made in writing or by telephone as follows:
BY MAIL. A written request to exchange shares of one Fund for shares of
another (or shares of the Firstar Money Market Fund) may be made at no cost to
you. There is no minimum for written exchanges. Signatures required are the
same as previously explained under "HOW DO I SELL MY SHARES?"
BY TELEPHONE. You may exchange shares between Funds (or the Firstar Money
Market Fund) by telephone if you have completed the telephone exchange
authorization section of your account application. If you add the telephone
exchange option to your account after it is opened, you must have each owner's
signature guaranteed.
Only exchanges of $1,000 or more may be executed by telephone. Telephone
exchanges can only be made by calling Firstar at 1-800-968-2122. Firstar will
charge you a $5 fee for each telephone exchange.
In an effort to avoid the risks often associated with market timers and
short-term trading strategies, the Funds have set the maximum telephone exchange
per account per day at $100,000, with a maximum of $1,000,000 per day per
related accounts. Only two (2) telephone exchanges per account are allowed
during any twelve-month period. An exchange consists of a move from one Fund to
another.
Each Fund reserves the right to refuse a telephone exchange if it believes it
to be in the best interest of all shareholders to do so. Procedures for
exchanging shares by telephone may be modified or terminated at any time by the
Funds or Firstar. Neither the Funds, Firstar, nor their agents will be liable
for following instructions received by telephone that they reasonably believe to
be genuine, provided reasonable procedures are used to confirm the genuineness
of the telephone instructions, but may be liable for unauthorized transactions
if they fail to follow such procedures. These procedures include requiring some
form of personal identification prior to acting upon the telephone instructions
and recording all telephone calls.
AUTOMATIC EXCHANGE PLAN. You may exchange fixed dollar amounts between Funds
(including the Firstar Money Market Fund) and/or Fund accounts automatically
every month, every quarter or annually by using our Automatic Exchange Plan.
The automatic exchange transaction can be made on any day you choose. If that
day is a weekend or holiday, the exchange will be made the following business
day. The minimum exchange per transaction is $50. You may also automatically
exchange dividend and capital gain distributions between Funds on the dividend
payment date. The Automatic Exchange Plan is not available for exchanges from
regular accounts into IRA or other qualified plan accounts. No fee is currently
charged for this service. To establish the Automatic Exchange Plan, please call
the Funds at 1-800-443-6544 for the necessary forms.
WHAT ABOUT DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES?
Each Fund intends normally to distribute its net investment income and net
realized capital gains to its shareholders so as to avoid paying income tax or a
federal excise tax on undistributed net investment income or net realized
capital gains. The Primary Trend Fund will pay dividends of net investment
income and capital gains (after using any available capital loss carryovers) at
least annually. The Primary Income Fund and The Primary U.S. Government Fund
each will pay dividends of net investment income monthly and capital gains
(after using any available capital loss carryovers) at least annually. For the
purpose of calculating dividends, net investment income consists of income
accrued on portfolio assets, less accrued expenses.
For federal income tax purposes, distributions paid by the Funds will be
taxable as ordinary income or capital gains. The distributions are taxable
whether you receive them in cash or in additional shares. You will be advised
of the source or sources and tax status of all distributions.
Each Fund may be required to withhold federal income tax (backup withholding)
at a rate of 31% from dividend payments, distributions and redemption proceeds
if a shareholder fails to furnish such Fund his or her Social Security or other
tax identification number. The shareholder also must certify that the number is
correct and that he or she is not subject to backup withholding. The
certification is included as part of the account application.
In addition to federal taxes, you may also be subject to state and local
taxes, depending on the laws of your home state and locality.
MAY SHAREHOLDERS REINVEST DIVIDENDS?
You may elect to have all income dividends and capital gains distributions
reinvested or paid in cash. Please refer to the account application for further
information. If you do not specify an election, all income dividends and
capital gains distributions will automatically be reinvested in full and
fractional shares on the dividend payment date. Cash dividends also are paid on
such date. As in the case of normal purchases, stock certificates are not
issued unless requested.
You may also automatically exchange income dividends and capital gain
distributions from one Fund into any of the other Primary Trend Funds and/or the
Firstar Money Market Fund by using our Automatic Exchange Plan, previously
explained under "MAY SHAREHOLDERS MAKE EXCHANGES BETWEEN FUNDS?"
An election to reinvest, exchange or receive dividends and distributions in
cash will apply to all shares of a Fund registered in your name, including those
previously purchased. You may change an election at any time by notifying the
Fund in writing or, under certain circumstances, by telephone. If such a change
request is received between dividend payment dates, it will become effective the
next dividend payment date. The Funds may modify or terminate the dividend
reinvestment program at any time on 30 days notice to participants.
MAY SHAREHOLDERS SYSTEMATICALLY WITHDRAW INVESTMENTS IN FUND SHARES?
If you own Fund shares worth at least $25,000 as of the date the election is
made, the Systematic Withdrawal Plan will enable you to withdraw a fixed amount
at regular monthly or quarterly intervals. To utilize the Systematic Withdrawal
Plan, your shares cannot be held in certificate form. The Plan is not available
for IRA accounts or other retirement plans. To establish the Systematic
Withdrawal Plan, please call the Funds at 1-800-443-6544 for the necessary
forms.
The minimum amount of a withdrawal payment is $100. These payments will be
made from the proceeds of planned periodic redemption of shares in your account.
Redemptions can be made monthly or quarterly on any day you choose. If that day
is a weekend or holiday, the redemption will be made the following business day.
Participation in the Systematic Withdrawal Plan requires that all income and
capital gains distributions payable on shares held in your account be reinvested
in additional shares. You may deposit additional Fund shares in your account at
any time.
Withdrawal payments cannot be considered as yield or income on your
investment, since portions of each payment may consist of a return of capital.
Depending on the size or frequency of the withdrawals requested, and the
fluctuation in the value of the Fund's portfolio, redemptions for the purpose of
making such withdrawals may reduce or even exhaust your account.
You may vary the amount or frequency of withdrawal payments, temporarily
discontinue them, or change the designated payee or payee's address, by giving
two weeks advance notice to Firstar. Certain changes may be made by telephone.
WHAT RETIREMENT PLANS DO THE FUNDS OFFER?
Each of the Funds offers the following retirement plans that may fit your
needs and allow you to shelter some of your income from taxes:
o INDIVIDUAL RETIREMENT ACCOUNT (IRA). Individual shareholders may establish
their own tax-sheltered IRA. The Funds currently offer a traditional IRA
plan and a Roth IRA plan. There is currently no charge for establishing
an account, although there is an annual maintenance fee.
o SIMPLIFIED EMPLOYEE PENSION PLAN (SEP-IRA). The SEP-IRA is a pension plan
in which your employer may contribute to your IRA. The SEP-IRA is also
available to self-employed individuals.
o SIMPLE IRA. A "Savings and Incentive Match Plan for Employees of Small
Employers" (or SIMPLEIRA) allows employers, including self-employed
individuals, with less than 100 employees to make salary reduction
contributions to employee SIMPLEIRAs.
o RETIREMENT PLANS. The plans, including both a profit-sharing plan and a
money purchase pension plan, are available for use by sole proprietors,
partnerships and corporations.
o 401(K) PLAN. The 401(k) plan is a salary reduction profit-sharing plan
available to employers of all sizes to benefit their employees.
o 403(B) PLAN. The 403(b) plan is available for use by employees of certain
educational, non-profit hospital and charitable organizations.
Contact the Funds for complete information kits, including forms, concerning
the above plans, their benefits, provisions and fees. Consultation with a
competent financial and tax adviser regarding these plans is recommended.
WHAT ABOUT BROKERAGE TRANSACTIONS?
The Agreements authorize the Adviser to select the brokers or dealers that
will execute the purchases and sales of the Funds' portfolio securities. In
placing purchase and sale orders for the Funds, it is the policy of the Adviser
to seek the best execution of orders at the most favorable price in light of the
overall quality of brokerage and research services provided.
The Agreements permit the Adviser to cause each Fund to pay a broker which
provides brokerage and research services to the Adviser a commission for
effecting securities transactions in excess of the amount another broker would
have charged for executing the transaction, provided the Adviser believes this
to be in the best interests of the applicable Fund. Although the Funds do not
intend to market their shares through intermediary broker-dealers, they may
place portfolio orders with broker-dealers who recommend the purchase of, or
sell, their shares to clients and may allocate portfolio brokerage on that
basis, if the Adviser believes the commissions and transaction quality are
comparable to that available from other brokers.
GENERAL INFORMATION ABOUT THE COMPANIES AND THE FUNDS
Description of Shares and Voting Rights. THE PRIMARY TREND FUND, INC. was
incorporated in Wisconsin on June 3, 1986. Its authorized capital consists of
30,000,000 shares of common stock. Each share has one vote, and all shares
participate equally in dividends and other distributions by such Fund and in the
residual assets of the Fund in the event of liquidation. Shares of The Primary
Trend Fund, Inc. have no preemptive, conversion, subscription, or cumulative
voting rights. Consequently, the holders of more than 50% of the shares voting
for the election of directors can elect the entire Board of Directors, and in
such event, the holders of the remaining shares voting will not be able to elect
any person or persons to the Board of Directors. The Wisconsin Business
Corporation Law permits registered investment companies, such as The Primary
Trend Fund, Inc., to operate without an annual meeting of shareholders under
specified circumstances if an annual meeting is not required by the Act. The
Primary Trend Fund, Inc. has adopted the appropriate provisions in its Bylaws
and does not anticipate holding an annual meeting of shareholders to elect
directors unless otherwise required by the Act. The Primary Trend Fund, Inc.
has also adopted provisions in its Bylaws for the removal of directors by its
shareholders.
THE PRIMARY INCOME FUNDS, INC. was incorporated in Wisconsin on April 5,
1989. Its authorized capital includes 30,000,000 Primary Income Fund shares and
30,000,000 Primary U.S. Government Fund shares. Each share has one vote.
Generally, Primary Income Fund shares and Primary U.S. Government Fund shares
are voted in the aggregate and not by each Fund, except where class voting by
each Fund is required by Wisconsin law or the Investment Company Act of 1940
(e.g., change in investment policy or approval of an investment advisory
agreement). The shares of The Primary Income Fund and The Primary U.S.
Government Fund have the same preferences, limitations and rights, except that
all consideration received from the sale of shares of each Fund, together with
all income, earnings, profits and proceeds thereof, belong to that Fund and are
charged with the liabilities in respect of that Fund and of that Fund's share of
the general liabilities of The Primary Income Funds, Inc. in the proportion that
the total net assets of the Fund bears to the total net assets of both Funds.
The net asset value per share of each of The Primary Income Fund and The Primary
U.S. Government Fund is based on the assets belonging to that Fund less the
liabilities charged to that Fund, and dividends are paid on shares of each Fund
only out of lawfully available assets belonging to that Fund. Shares of each
Fund participate equally in the residual assets of the respective Fund in the
event of liquidation. Shares of the Funds have no preemptive, conversion,
subscription, or cumulative voting rights. Consequently, the holders of more
than 50% of the shares of The Primary Income Funds, Inc. voting for the election
of directors can elect the entire Board of Directors, and in such event, the
holders of the remaining shares voting will not be able to elect any person or
persons to the Board of Directors. As with The Primary Trend Fund, Inc., The
Primary Income Funds, Inc. has adopted the appropriate provisions in its Bylaws
such that it does not anticipate holding an annual meeting of shareholders to
elect directors unless otherwise required by the Act, and has adopted provisions
in its Bylaws for the removal of directors by its shareholders.
The shares of each Fund are redeemable and transferable. All shares issued
and sold by The Primary Trend Funds will be fully paid and nonassessable, except
as provided in Section 180.0622(2)(b) of the Wisconsin Business Corporation Law.
Fractional shares have the same rights proportionately as do full shares.
The Primary Trend Fund, Inc. and The Primary Income Funds, Inc. are
separately incorporated investment companies. Each of the Funds is described in
this Prospectus in order to help investors understand the similarities and
differences among the Funds. Because the Funds share this Prospectus there is a
possibility that one Fund might become liable for a misstatement, inaccuracy or
disclosure in this Prospectus concerning another Fund.
Administrator and Fund Accountant. Pursuant to an Administration and Fund
Accounting Agreement, Sunstone Financial Group, Inc. (the "Administrator"), 207
East Buffalo Street, Suite 400, Milwaukee, Wisconsin 53202, calculates the daily
net asset value of each Fund and provides administrative services (which include
clerical, compliance and regulatory services such as filing all federal income
and excise tax returns and state income tax returns, assisting with regulatory
filings, preparing financial statements and monitoring expense accruals). For
these services, the Administrator receives from each of the Funds a monthly fee
at the annual rate of .15% on the first $50,000,000 of each Fund's average net
assets, .12% on the next $50,000,000, and .07% on average net assets in excess
of $100,000,000, subject to an annual minimum of $35,000, $25,000 and $15,000
for The Primary Trend Fund, The Primary Income Fund and The Primary U.S.
Government Fund, respectively, plus out-of-pocket expenses.
Custodian and Transfer and Dividend Disbursing Agent. Firstar Bank
Milwaukee, N.A., 777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202, is the
custodian for all securities and cash of the Funds. Firstar Mutual Fund
Services, LLC, 615 East Michigan Street, Milwaukee, Wisconsin 53202, serves as
each Fund's transfer and dividend disbursing agent.
Year 2000 Issue. The Fund's operations depend on the seamless functioning of
computer systems in the financial service industry, including those of the
Adviser, administrator, custodian and transfer agent. Many computer systems in
use today cannot properly process date-related information after December 31,
1999 because of the method by which dates are encoded and calculated. This
failure, commonly referred to as the "Year 2000 Issue," could adversely affect
the handling of security trades, pricing and account servicing for the
Funds.
The Adviser has made compliance with the Year 2000 Issue a high priority
and is taking steps that it believes are reasonably designed to address the Year
2000 Issue with respect to its computer systems. The Adviser has also been
informed that comparable steps are being taken by the Funds' other major service
providers. The Adviser does not currently anticipate that the Year 2000 Issue
will have a material impact on its ability to continue to fulfill duties as
investment adviser to the Funds. However, there can be no assurance that the
Funds will achieve their objective.
Performance Information. From time to time the Funds may provide performance
information in advertisements, sales literature or information to shareholders.
Fund performance may be quoted numerically or may be represented in a table,
graph or other illustration by presenting one or more performance measurements,
including total return, average annual total return and yield.
The Funds may compare their performance to other mutual funds with similar
investment objectives and to the industry as a whole, as quoted by ranking
services and publications of general interest. For example, this may include
Morningstar, Inc. and Lipper Analytical Services, Inc. (independent fund ranking
services) and magazines, such as Money, Forbes, and Business Week. In addition,
the Funds may compare their performance to that of other selected mutual funds
or recognized market indicators, including the Standard & Poor's 500 Stock Index
and the Dow Jones Industrial Average. Such performance rankings or comparisons
may be made with mutual funds that may have different investment restrictions,
objectives, policies or techniques than the Funds, and such other funds or
market indicators may be comprised of securities that differ from those the
Funds hold or may purchase.
The total return of any Fund is calculated for any specified period of time
by assuming the purchase of shares of the Fund at the net asset value at the
beginning of the period. Each dividend or other distribution paid by the Fund
is assumed to have been reinvested in additional shares of the Fund at the net
asset value on the reinvestment date. The total number of shares then owned as
a result of this process is valued at the net asset value at the end of the
period. The percentage increase is determined by subtracting the initial value
of the investment from the ending value and dividing the difference by the
initial value.
The average annual total return of any Fund refers to the rate of return
which, if applied to an initial investment at the beginning of a stated period
and compounded over the period, would result in the value of the investment at
the end of the stated period assuming reinvestment of all dividends and
distributions.
A quotation of yield reflects a Fund's income over a stated period expressed
as a percentage of the Fund's share price. The yield of The Primary Income Fund
and The Primary U.S. Government Fund is determined by dividing the applicable
Fund's net investment income for a 30-day (or one month) period by the average
number of such Fund's shares outstanding during the period, and expressing the
result as a percentage of the Fund's share price on the last day of the 30-day
(or one month) period. This percentage is then annualized. Capital gains and
losses are not included in the yield calculation.
The Funds impose no sales or other charges which would impact their
performance computations. Investors should remember that all performance
figures are based on historical results and are not intended to indicate future
performance. The value of shares when redeemed may be more or less than their
original cost.
WHO ARE THE DIRECTORS AND OFFICERS OF THE COMPANIES?
The officers of The Primary Trend Fund, Inc. direct The Primary Trend Fund's
day-to-day operations and are directly responsible to that Company's Board of
Directors. Such Board of Directors is responsible for the overall management of
the business and affairs of The Primary Trend Fund. Similarly, the officers of
The Primary Income Funds, Inc. direct the day-to-day operations of The Primary
Income Fund and The Primary U.S. Government Fund and are directly responsible to
that Company's Board of Directors. The Board of Directors of The Primary Income
Funds, Inc. is responsible for the overall management of the business and
affairs of The Primary Income Fund and The Primary U.S. Government Fund. The
following are the directors and officers of both The Primary Trend Fund, Inc.
and The Primary Income Funds, Inc.:
Directors: Barry S. Arnold Vice President, Arnold Investment
Counsel Incorporated,
Milwaukee, Wisconsin
Lilli Gust Executive Vice President, Secretary-
Treasurer, Arnold Investment
Counsel Incorporated
Clark J. Hillery General Manager, MetaGraphix,
New Berlin, Wisconsin
Harold L. Holtz Retired, Milwaukee, Wisconsin
Officers: Lilli Gust President
Barry S. Arnold Vice President and Assistant Secretary
James R. Arnold, Jr. Secretary and Treasurer
(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
(100% NO-LOADTM MUTUAL FUND COUNCIL LOGO)
STATEMENT OF ADDITIONAL INFORMATION October 31, 1998
- -----------------------------------
THE PRIMARY TREND FUNDS
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the prospectus of The Primary Trend Funds dated
October 31, 1998. Requests for copies of the prospectus should be made in
writing to The Primary Trend Funds, First Financial Centre, 700 North Water
Street, Milwaukee, Wisconsin 53202, or by calling (800) 443-6544.
THE PRIMARY TREND FUND, INC.
THE PRIMARY INCOME FUNDS, INC.
First Financial Centre
700 North Water Street
Milwaukee, Wisconsin 53202
<PAGE>
THE PRIMARY TREND FUNDS
Table of Contents
Page No.
Investment Restrictions......................................... 3
Investment Considerations....................................... 5
Directors and Officers of the Companies......................... 8
Ownership of Management and Principal Shareholders.............. 11
Investment Adviser and Administrator............................ 13
Determination of Net Asset Value................................ 15
Performance and Yield Information............................... 16
Purchase of Shares.............................................. 18
Allocation of Portfolio Brokerage............................... 19
Custodian....................................................... 20
Taxes........................................................... 20
Independent Auditors............................................ 21
Financial Statements............................................ 21
Description of Securities Ratings............................... 21
No person has been authorized to give any information or to make any
representations other than those contained in this Statement of Additional
Information and the Prospectus dated October 31, 1998 and, if given or made,
such information or representations may not be relied upon as having been
authorized by The Primary Trend Funds.
This Statement of Additional Information does not constitute an offer
to sell securities.
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<PAGE>
INVESTMENT RESTRICTIONS
As set forth in the joint prospectus dated October 31, 1998 of The
Primary Trend Fund, Inc. and The Primary Income Funds, Inc. (collectively, the
"Companies") under the caption "WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES?", the
investment objective of The Primary Trend Fund is to maximize total return (a
combination of capital growth and current income) without exposing capital to
undue risk; the investment objective of The Primary Income Fund is to obtain a
high level of current income, with a reasonable opportunity for capital
appreciation, from investments in a diversified portfolio of fixed income
securities and/or dividend-paying common and preferred stocks; and the
investment objective of The Primary U.S. Government Fund is to obtain a high
level of current income from investments in a diversified portfolio of
securities issued or guaranteed as to principal by the U.S. Government and its
agencies or instrumentalities. (The Primary Trend Fund, The Primary Income Fund
and The Primary U.S. Government Fund are hereinafter referred to collectively as
the "Funds".) Consistent with these investment objectives, each of the Funds has
adopted the following investment restrictions which are matters of fundamental
policy. Each Fund's fundamental investment policies cannot be changed without
approval of the holders of the lesser of: (i) 67% of that Fund's shares present
or represented at a shareholders' meeting at which the holders of more than 50%
of such shares are present or represented; or (ii) more than 50% of the
outstanding shares of that Fund.
1. None of the Funds will purchase securities on margin, participate in
a joint-trading account, sell securities short, or write or invest in put or
call options. The Primary Income Fund and The Primary U.S. Government Fund will
not invest in warrants which are unattached to fixed income securities. The
Primary Trend Fund's investments in warrants, valued at the lower of cost or
market, will not exceed 5% of the value of such Fund's net assets and of such 5%
not more than 2% of the Fund's net assets at the time of purchase may be
invested in warrants that are not listed on the New York or American Stock
Exchanges. Warrants are options to purchase securities at a specified price,
valid for a specified period of time. Warrants are pure speculation in that they
have no voting rights, pay no dividends and have no rights with respect to the
assets of the corporation issuing them. If a Fund does not exercise a warrant,
its loss will be the purchase price of the warrant.
2. None of the Funds will borrow money or issue senior securities,
except for temporary bank borrowings or for emergency or extraordinary purposes
(but not for the purpose of purchase of investments) and then only in an amount
not in excess of 5% of the value of its total assets, and none of the Funds will
pledge any of its assets except to secure borrowings and then only to an extent
not greater than 10% of the value of such Fund's net assets.
3. None of the Funds will lend money (except by purchasing publicly
distributed debt securities) or lend its portfolio securities.
4. None of the Funds will purchase securities of other investment
companies except (a) as part of a plan of merger, consolidation or
reorganization approved by the shareholders of such Fund or (b) securities of
registered closed-end investment companies
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<PAGE>
on the open market where no commission or profit results, other than the usual
and customary broker's commission, and where as a result of such purchase such
Fund would hold less than 3% of any class of securities, including voting
securities, of any registered closed-end investment company and less than 5% of
such Fund's net assets, taken at current value, would be invested in securities
of registered closed-end investment companies. The Funds have no current
intention of investing in securities of closed-end investment companies.
5. None of the Funds will make investments for the purpose of
exercising control or management of any company.
6. Each of the Funds will limit its purchases of securities of any one
issuer (other than the United States or an agency or instrumentality of the
United States Government) in such a manner that it will satisfy the requirements
of Section 5(b)(1) of the Investment Company Act of 1940. Pursuant to Section
5(b)(1) of the Investment Company Act of 1940 at least 75% of the value of a
Fund's total assets must be represented by cash and cash items (including
receivables), U.S. Government securities, securities of other investment
companies, and other securities for the purpose of the foregoing limited in
respect of any one issuer to an amount not greater than 5% of the value of the
total assets of such Fund and to not more than 10% of the outstanding voting
securities of such issuer.
7. None of the Funds will concentrate 25% or more of the value of its
assets, determined at the time an investment is made, exclusive of U.S.
Government securities, in securities issued by companies primarily engaged in
the same industry, except that The Primary Income Fund will concentrate more
than 25% of the value of its assets in companies primarily engaged in the
utility industry.
8. None of the Funds will acquire or retain any security issued by a
company, an officer or director of which is an officer or director of either
Company or an officer, director or other affiliated person of such Fund's
investment adviser.
9. None of the Funds will acquire or retain any security issued by a
company if any of the directors or officers of either Company, or directors,
officers or other affiliated persons of such Fund's investment adviser,
beneficially own more than 1/2% of such company's securities and all of the
above persons owning more than 1/2% own together more than 5% of its securities.
10. None of the Funds will act as an underwriter or distributor of
securities other than shares of the applicable Company and will not purchase any
securities which are restricted from sale to the public without registration
under the Securities Act of 1933, as amended.
11. None of the Funds will purchase any interest in any oil, gas or any
other mineral exploration or development program.
12. None of the Funds will purchase or sell real estate or real estate
mortgage loans, but each of the Funds may purchase securities of issuers whose
assets consist primarily of real estate or real estate mortgage loans.
-4-
<PAGE>
13. None of the Funds will purchase or sell commodities or commodities
contracts.
14. None of the Funds will invest more than 5% of such Fund's total
assets in securities of issuers which have a record of less than three years of
continuous operation, including the operation of any predecessor business of a
company which came into existence as a result of any merger, consolidation,
reorganization or purchase of substantially all of the assets of such
predecessor business.
15. No Fund's investments in illiquid and/or not readily marketable
securities will exceed 10% of such Fund's total assets. The Funds have no
current intention of investing in illiquid and/or not readily marketable
securities.
INVESTMENT CONSIDERATIONS
As set forth above under the caption "INVESTMENT RESTRICTIONS," The
Primary Income Fund will concentrate more than 25% of the value of its assets in
securities issued by companies primarily engaged in the utility industry. Public
utilities, whether state, municipal or investor-owned, often experience certain
problems associated with this industry, including the difficulty in obtaining an
adequate return on invested capital in spite of frequent increases in rates
which have been granted by the Public Service Commissioners having jurisdiction,
the difficulty in financing large construction programs during an inflationary
period, the restrictions on operations and increased cost and delays
attributable to environmental considerations, the difficulty of the capital
markets in absorbing utility debt and equity securities, the difficulty in
obtaining fuel for electric generation at reasonable prices and the effects of
energy conservation. Certain utilities in which The Primary Income Fund may
invest may operate nuclear electric generation facilities. Various governmental
bodies are conducting, and may be expected to conduct in the future, reviews
relating to nuclear electric generation. It is difficult to predict with any
degree of certainty the findings, recommendations and other results of these or
any future studies and hearings, whether any recommended legislation will be
adopted, or whether governmental regulations affecting nuclear generation will
be significantly modified. While it is difficult to predict the effect of any of
the foregoing on such utilities or any of their products, facilities under
construction may be subjected to changes in regulatory requirements and to
closer regulatory scrutiny, which in turn may increase exposure to licensing
related impacts on schedules, design and operating requirements.
In seeking to achieve their respective investment objectives, each of
The Primary Trend Fund and The Primary Income Fund may invest up to 5% of its
total assets in corporate obligations rated less than investment grade if, in
the opinion of the Adviser, such lesser rating is due to a special situation or
other extenuating circumstances. See "WHAT ARE THE FUNDS' INVESTMENT POLICIES --
The Primary Trend Fund" and " -- The Primary Income Fund" in the Prospectus.
Corporate obligations rated less than investment grade (hereinafter referred to
as "low-rated securities") are commonly referred to as "junk bonds", and while
generally offering higher yields than investment grade securities with similar
maturities, involve greater risks, including the possibility of default or
bankruptcy.
-5-
<PAGE>
They are regarded as predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal. The special risk considerations in
connection with investments in low-rated securities are discussed below. See
"DESCRIPTION OF SECURITIES RATINGS."
Effect of Interest Rates and Economic Changes
Even though the exposure of The Primary Trend Fund and The Primary
Income Fund to the low-rated security market is limited to a maximum of 5% of
their respective total assets, the Funds are required to provide the following
discussion of such market.
The low-rated security market is relatively new and its growth
paralleled a long economic expansion. As a result, it is not clear how this
market may withstand a prolonged recession or economic downturn. Such a
prolonged economic downturn could severely disrupt the market for and adversely
affect the value of high-yield securities.
Interest-bearing securities typically experience appreciation when
interest rates decline and depreciation when interest rates rise. The market
values of low-rated securities tend to reflect individual corporate developments
to a greater extent than do higher rated securities, which react primarily to
fluctuations in the general level of interest rates. Low-rated securities also
tend to be more sensitive to economic conditions than are higher-rated
securities. As a result, they generally involve more credit risks than
securities in the higher-rated categories. During an economic downturn or a
sustained period of rising interest rates, highly leveraged issuers of low-rated
securities may experience financial stress and may not have sufficient revenues
to meet their payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific corporate developments,
or the issuer's inability to meet specific projected business forecasts or the
unavailability of additional financing. The risk of loss due to default by an
issuer of low-rated securities is significantly greater than issuers of
higher-rated securities because such securities are generally unsecured and are
often subordinated to other creditors. Further, if the issuer of a low-rated
security defaulted, The Primary Trend Fund and/or The Primary Income Fund might
incur additional expenses in seeking recovery. Periods of economic uncertainty
and changes would also generally result in increased volatility in the market
prices of low-rated securities and thus in either Fund's net asset value.
As previously stated, the value of a low-rated security generally will
decrease in a rising interest rate market, and accordingly, so normally will the
respective net asset values of The Primary Trend Fund and The Primary Income
Fund. If either of such Funds experiences unexpected net redemptions in such a
market, it may be forced to liquidate a portion of its portfolio securities
without regard to their investment merits. Due to the limited liquidity of
low-rated securities (discussed below), either The Primary Trend Fund or The
Primary Income Fund may be forced to liquidate these securities at a substantial
discount. Any such liquidation would reduce such Fund's asset base over which
expenses could be allocated and could result in a reduced rate of return for
such Fund.
-6-
<PAGE>
Payment Expectations
Low-rated securities typically contain redemption, call or prepayment
provisions which permit the issuer of such securities containing such provisions
to, at their discretion, redeem the securities. During periods of falling
interest rates, issuers of low-rated securities are likely to redeem or prepay
the securities and refinance them with debt securities with a lower interest
rate. To the extent an issuer is able to refinance the securities or otherwise
redeem them, The Primary Trend Fund and/or The Primary Income Fund may have to
replace the securities with a lower yielding security which would result in
lower returns for such Funds.
Credit Ratings
Credit ratings issued by credit rating agencies evaluate the safety of
principal and interest payments of rated securities. They do not, however,
evaluate the market value risk of low-rated securities and therefore may not
fully reflect the true risks of an investment. In addition, credit rating
agencies may or may not make timely changes in a rating to reflect changes in
the economy or in the condition of the issuer that affect the market value of
the security. Consequently, credit ratings are used only as a preliminary
indicator of investment quality. Investments in low-rated securities will be
more dependent on the Adviser's credit analysis than would be the case with
investments in investment grade debt securities. The Adviser employs its own
credit research and analysis which includes a study of existing debt, capital
structure, ability to service debt and to pay dividends, the issuer's
sensitivity to economic conditions, its operating history and the current trend
of earnings. The Adviser continually monitors the investments in The Primary
Trend Fund's and The Primary Income Fund's portfolios and carefully evaluates
whether to dispose of or to retain low-rated securities whose credit ratings or
credit quality may have changed.
Liquidity and Valuation
The Primary Trend Fund and The Primary Income Fund may have difficulty
disposing of certain low-rated securities because there may be a thin trading
market for such securities. Because not all dealers maintain markets in all
low-rated securities there is no established retail secondary market for many of
these securities. Such Funds anticipate that such securities could be sold only
to a limited number of dealers or institutional investors. To the extent a
secondary trading market does exist, it is generally not as liquid as the
secondary market for higher rated securities. The lack of a liquid secondary
market may have an adverse impact on the market price of the security, and
accordingly, the respective net asset values of The Primary Trend Fund and The
Primary Income Fund, and such Funds' ability to dispose of particular securities
when necessary to meet their liquidity needs or in response to a specific
economic event, or an event such as a deterioration in the creditworthiness of
the issuer. The lack of a liquid secondary market for certain securities may
also make it more difficult for The Primary Trend Fund and The Primary Income
Fund to obtain accurate market quotations for purposes of valuing their
respective portfolios. Market quotations are generally available on many
low-rated issues only from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales. During periods
of thin trading, the spread
-7-
<PAGE>
between bid and asked prices is likely to increase significantly. In addition,
adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of high-yield securities,
especially in a thinly-traded market.
Zero Coupon and Pay-In-Kind and Step Coupon Securities
The Primary Income Fund may invest in zero coupon, pay-in-kind and step
coupon securities. Zero coupon and step coupon bonds are issued and traded at a
discount from their face amounts. They do not entitle the holder to any periodic
payment of interest prior to maturity or prior to a specified date when the
securities begin paying current interest. The discount from the face amount or
par value depends on the time remaining until cash payments begin, prevailing
interest rates, liquidity of the security and the perceived credit quality of
the issuer.
Current federal income tax law requires holders of zero coupon
securities and step coupon securities to report as interest income each year the
portion of the original issue discount on such securities that accrues that
year, even though the holders receive no cash payments of interest during the
year. In order to qualify as a "regulated investment company" under Subchapter M
of the Internal Revenue Code of 1986, as amended (the "Code"), the Company must
distribute each Fund's investment company taxable income, including the original
issue discount accrued on zero coupon or step coupon bonds. Because The Primary
Income Fund will not receive on a current basis cash payments in respect of
accrued original issue discount on zero coupon bonds or step coupon bonds during
the period before interest payments commence, in some years The Primary Income
Fund may have to distribute cash obtained from other sources in order to satisfy
the distribution requirement under the Code. Such cash might be obtained from
selling other portfolio holdings of the Fund. These actions are likely to reduce
the assets to which Fund expenses could be allocated and to reduce the rate of
return for the Fund. In some circumstances, such sales might be necessary in
order to satisfy cash distribution requirements even though investment
considerations might otherwise make it undesirable for the Fund to sell the
securities at the time.
The market prices of zero coupon, step coupon and pay-in-kind
securities generally are more volatile than the prices of securities that pay
interest periodically and in cash and are likely to respond to changes in
interest rates to a greater degree than do other types of debt securities having
similar maturities and credit quality.
DIRECTORS AND OFFICERS OF THE COMPANIES
The same persons currently serve as directors and officers of both The
Primary Trend Fund, Inc. and The Primary Income Funds, Inc. The name, address,
principal occupations during the past five years and other information with
respect to each of the directors of the Companies are as follows:
-8-
<PAGE>
LILLI GUST*
700 North Water Street
Milwaukee, Wisconsin
(PRESIDENT AND A DIRECTOR OF EACH COMPANY)
Ms. Gust , 52, is Executive Vice President, Secretary-Treasurer and a
director of the Adviser and has been an officer of the Adviser since February,
1978. She is President and a director of The Primary Trend Fund, Inc. and has
been an officer and a director thereof since its inception in 1986. She is also
President and a director of The Primary Income Funds, Inc. and has been an
officer and a director thereof since its inception in 1989.
BARRY S. ARNOLD*
700 North Water Street
Milwaukee, Wisconsin
(VICE PRESIDENT, ASSISTANT SECRETARY AND DIRECTOR OF EACH COMPANY)
Mr. Arnold, 33, has served as the Vice President, Assistant Secretary
and a director of both The Primary Trend Fund, Inc. and The Primary Income
Funds, Inc. since January, 1997. Prior to that time, he served as Assistant
Secretary of each of the Companies. Mr. Arnold is also Vice President and a
director of the Adviser. He joined the Adviser in September, 1987.
CLARK J. HILLERY
5477 Westridge Court
New Berlin, Wisconsin
(A DIRECTOR OF EACH COMPANY)
Mr. Hillery, 48, has been General Manager of Meta Graphix since
August, 1998 when Meta Graphix acquired Ink Printing Corporation. He was
President and owner of Ink Printing Corporation from August, 1979 to August,
1998.
HAROLD L. HOLTZ
700 North Water Street
Milwaukee, Wisconsin
(A DIRECTOR OF EACH COMPANY)
Mr. Holtz, 74, is retired. He was employed as a CPA by Egan &
Associates, CPAs from January, 1996 to December, 1997. Prior to his employment
with Egan & Associates, CPAs, he was sole proprietor of Harold L. Holtz, CPA,
from November, 1987 to December, 1995.
- --------------------
*Ms. Gust and Mr. Barry S. Arnold are directors whor are "interested
persons" of the companies as that term is defined in the Investment Company Act
of 1940.
-9-
<PAGE>
The name, address, principal occupations during the past five years and
other information with respect to each of the officers of the Companies who are
not directors are as follows:
JAMES R. ARNOLD, JR.
700 North Water Street
Milwaukee, Wisconsin
(SECRETARY-TREASURER OF EACH COMPANY)
Mr. Arnold, 41, is the Secretary-Treasurer of both The Primary Trend
Fund, Inc. and The Primary Income Funds, Inc. Since January, 1997, Mr. Arnold
has served as Administration Services Manager of Sunstone Financial Group, Inc.,
the administrator of the Funds. Mr. Arnold was employed by the Adviser from
October, 1985 to January, 1997.
Barry S. Arnold and James R. Arnold, Jr. are brothers.
During the fiscal year ended June 30, 1998, each Company paid $500 in
aggregate remuneration to its disinterested director. Each Company's standard
method of compensating directors is to pay each disinterested director a fee of
$250 for each meeting of the Board of Directors of such Company attended. The
table below sets forth the compensation paid by each Company to each of the
current directors of the Companies during the fiscal year ended June 30, 1998:
<TABLE>
<CAPTION>
Aggregate Pension or Retirement Estimated Annual Total Compensation
Compensation Benefits Accrued As Part of Benefits Upon from Company Paid to
Name of Person from Company Company Expenses Retirement Directors
The Primary Trend Fund, Inc.
<S> <C> <C> <C> <C>
Barry S. Arnold $0 $0 $0 $0
Joseph L. Cook* $500 $0 $0 $500
Lilli Gust $0 $0 $0 $0
Clark J. Hillery $0 $0 $0 $0
Harold L. Holtz $0 $0 $0 $0
The Primary Income Funds, Inc.
Barry S. Arnold $0 $0 $0 $0
Joseph L. Cook* $500 $0 $0 $500
Lilli Gust $0 $0 $0 $0
Clark J. Hillery $0 $0 $0 $0
Harold L. Holtz $0 $0 $0 $0
- --------------------
* Mr. Cook resigned as a director of each Company on March 4, 1998.
Messrs. Hillery and Holtz became directors of each Company on April 29, 1998. No
meetings of the Board of Directors of either Company were held between April 29,
1998 and June 30, 1998.
</TABLE>
-10-
<PAGE>
OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
ownership of outstanding shares of each of The Primary Trend Fund, The Primary
Income Fund and The Primary U.S. Government Fund, as of September 30, 1998, by
(i) each person known by the Companies to own more than 5% of a Fund's
outstanding shares, and (ii) all directors and officers of the Companies as a
group. Unless otherwise indicated, each shareholder possesses both record and
beneficial ownership of the shares listed opposite his or her name.
<TABLE>
<CAPTION>
The Primary Trend Fund
Amount of
Name and Address Beneficial Percent
of Beneficial Owner Ownership of Class
<S> <C> <C>
Ruth L. Leef 202,336 10.9%
Elm Grove, Wisconsin 53122
Directors and Officers as 139,099 (1)(2) 7.5%
a Group (5 persons)
<CAPTION>
The Primary Income Fund
Amount of
Name and Address Beneficial Percent
of Beneficial Owner Ownership of Class
<S> <C> <C>
Steven Mayer 25,812 7.2%
Crystal Lake, Illinois 60039
Barry S. Arnold 24,117 6.4%
New Berlin, Wisconsin 53146
James R. Arnold, Jr. 23,223 6.4%
Big Bend, Wisconsin 53013
Carolyn M. Gross Beneficiary IRA 23,194 6.4%
New Berlin, Wisconsin 53146
-11-
<PAGE>
<S> <C> <C>
Arnold Investment Counsel, Inc. 401 (K) Plan 20,036 5.6%
Milwaukee, Wisconsin 53202
Robert Kastengren IRA 18,159 5.0%
Burlington, Wisconsin 53105
Directors and Officers as 99,997(1) 27.7%
a Group (5 persons)
<CAPTION>
The Primary U.S. Government Fund
Amount of
Name and Address Beneficial
of Beneficial Owner Ownership
<S> <C> <C>
Arnold Investment Counsel 18,235 22.1%
Incorporated
Milwaukee, Wisconsin 53202
Lilli Gust(3) 8,256 10.0%
Milwaukee, Wisconsin 53202)
Theodore H. & Mildred V. Braam 5,914 7.2%
Glendale, Wisconsin 53209
Sydney W. Frey, Jr. IRA Rollover 5,800 7.0%
Brookfield, Wisconsin 53005
Barry S. Arnold 4,619 5.6%
New Berlin, Wisconsin 53146
Holger A. Olsson IRA 4,611 5.6%
Presque Isle, Wisconsin 54557
Carolyn M. Gross Beneficiary IRA 4,542 5.5%
New Berlin, Wisconsin 53146
James R. Arnold, Jr. 4,510 5.5%
Big Bend, Wisconsin 53103
Bruce A. Struckman 4,146 5.0%
Western Springs, Illinois 60558
Directors and Officers as a 36,145 (1) 43.9%
Group (5 persons)
-12-
<PAGE>
- ---------------------
(1) The amount shown includes the shares of such Fund held of record by
Arnold Investment Counsel Incorporated. See note (3) below.
(2) The amount shown includes shares of such Fund held by a trust for which
James R. Arnold, Jr. serves as trustee.
(3) Arnold Investment Counsel Incorporated is controlled by Lilli Gust. See
"INVESTMENT ADVISER."
</TABLE>
By virtue of her stock ownership (including shares held by Arnold
Investment Counsel Incorporated, which she controls), Lilli Gust is deemed to
control The Primary U. S. Government Fund. In combination with the holders of
more than 17.9% of The Primary U.S. Government Fund's outstanding stock, she
owns sufficient shares to approve or disapprove all matters (other than the
election of directors of the Company or the approval of auditors) brought before
such Fund's shareholders. Ms. Gust does not control The Primary Income Fund, The
Primary Trend Fund or either of the Companies.
INVESTMENT ADVISER AND ADMINISTRATOR
As set forth in the Prospectus under the caption "WHO MANAGES THE
FUNDS?" the investment adviser to the Funds is Arnold Investment Counsel
Incorporated (the "Adviser"). The Adviser is controlled by Lilli Gust, by virtue
of her having voting control of a majority of the Adviser's outstanding shares.
Pursuant to investment advisory agreements between the respective Funds and the
Adviser (the "Advisory Agreements"), the Adviser furnishes continuous investment
advisory and management services to the Funds. For the fiscal years ended June
30, 1998, 1997 and 1996, The Primary Trend Fund paid the Adviser fees of
$180,773, $166,935 and $156,295, respectively, pursuant to its Advisory
Agreement. For the fiscal years ended June 30, 1998 and 1997, the Adviser
effectively waived 100% of its advisory fee for The Primary Income Fund as a
result of the expense reimbursements discussed below. For the fiscal year ended
June 30, 1996, the Adviser waived all but $556 of its advisory fees for The
Primary Income Fund as a result of such reimbursements. For the fiscal years
ended June 30, 1998, 1997 and 1996, the Adviser effectively waived 100% of its
advisory fee for The Primary U.S. Government Fund as a result of the expense
reimbursements discussed below.
The Funds will pay all of their expenses not assumed by the Adviser
pursuant to the Advisory Agreements, including, but not limited to: the costs of
preparing and printing their registration statements required under the
Securities Act of 1933 and the Act and any amendments thereto; the expense of
registering their shares with the Securities and Exchange Commission and the
various states; the printing and distribution cost of prospectuses mailed to
existing shareholders; interest charges; brokerage commissions; and expenses
incurred in connection with portfolio transactions. The Funds will also pay: the
fees of directors who are not interested persons of the Adviser; director and
officer liability insurance, if any; salaries of administrative and clerical
personnel; association membership dues; auditing and accounting
-13-
<PAGE>
services; legal fees and expenses; fees and expenses of any custodian or trustee
having custody of the Funds' assets; expenses of calculating the Funds' net
asset values and repurchasing and redeeming shares; and charges and expenses of
dividend disbursing agents, registrars and stock transfer agents, including the
cost of keeping all necessary shareholder records and accounts and handling any
related problems.
Effective September 1, 1997, the Adviser has agreed to reimburse each
of The Primary Income Fund and The Primary U.S. Government Fund for all expenses
exceeding an annual rate of 1.00% of its average daily net assets (for this
purpose "all expenses" include the investment advisory fee, but exclude
interest, taxes, brokerage commissions and extraordinary items). It is each of
such Funds' practice, if any expense reimbursement is necessary, to reduce the
investment advisory fee and any other amounts owed the Adviser, by the amount of
such excess. These voluntary reimbursements to The Primary Income Fund and The
Primary U.S. Government Fund may be modified or discontinued at any time by the
Adviser. During the fiscal years ended June 30, 1997 and 1996 the Adviser agreed
to reimburse The Primary Income Fund for all expenses exceeding an annual rate
of .84% of its average daily net assets and The Primary U.S. Government Fund for
all expenses exceeding an annual rate of .75% of its average daily net assets.
During such fiscal years, each of such Funds' expenses exceeded their respective
limits. Accordingly, the amounts owed the Adviser by The Primary Income Fund and
The Primary U.S. Government Fund were reduced by $49,377 (including $34,852 of
advisory fees) and $38,609 (including $4,930 of advisory fees), respectively,
for the fiscal year ended June 30, 1998; $38,053 (including $32,899 of advisory
fees) and ($29,412 including $4,977 of advisory fees), respectively, for the
fiscal year ended June 30, 1997; and $30,087 (including $30,087 of advisory
fees) and $24,644 (including $7,285 of advisory fees), respectively, for the
fiscal year ended June 30, 1996.
Under the Advisory Agreements, regardless of the voluntary expense
reimbursements discussed above, the Adviser must reimburse each Fund (including
The Primary Trend Fund) to the extent that its annual operating expenses,
including investment advisory fees (net of any reimbursements made by the
Adviser), but excluding interest, taxes, brokerage commissions and extraordinary
items, exceed that percentage of the average net assets of such Fund for such
year, as determined by valuations made as of the close of each business day of
the year, which is the most restrictive percentage provided by the state laws of
the various states in which the shares of such Fund are qualified for sale or,
if the states in which the shares of such Fund are qualified for sale impose no
such restrictions, 2%. As of the date of this Statement of Additional
Information, no such state law provision was applicable to the Funds. Each Fund
monitors its expense ratio on a monthly basis. If the accrued amount of the
expenses of a Fund exceeds the expense limitation, the Fund records an account
receivable from the Adviser for the amount of such excess. In such a situation,
the monthly payment of the Adviser's fee will be reduced by the amount of such
excess, subject to adjustment month by month during the balance of the Funds'
fiscal year if accrued expenses thereafter fall below this limit. The adjustment
will be reconciled at the end of the Fund's fiscal year and not carried forward.
Except as set forth in the preceding paragraph, no reimbursement was required
for the Funds during the fiscal years ended June 30, 1998, 1997 and 1996.
-14-
<PAGE>
Each of the Advisory Agreements will remain in effect as long as its
continuance is specifically approved at least annually by (i) the Board of
Directors of the applicable Company, or by the vote of a majority (as defined in
the Investment Company Act of 1940) of the outstanding shares of the applicable
Fund, and (ii) by the vote of a majority of the directors of the applicable
Company who are not parties to the Advisory Agreements or interested persons of
the Adviser, cast in person at a meeting called for the purpose of voting on
such approval. Each of the Advisory Agreements provides that it may be
terminated at any time without the payment of any penalty, by the Board of
Directors of the applicable Company or by vote of a majority of the shares of
the applicable Fund, on sixty (60) days' written notice to the Adviser, and by
the Adviser on the same notice to the applicable Fund, and that it shall be
automatically terminated if it is assigned.
As set forth in the Prospectus under the caption "WHO MANAGES THE
FUNDS?" the administrator to the Funds is Sunstone Financial Group, Inc. (the
"Administrator"). An administration and fund accounting agreement entered into
between each of the Companies and the Administrator (the "Administration
Agreements") will remain in effect unless terminated as provided below. For the
fiscal year ended June 30, 1998 The Primary Trend Fund, The Primary Income Fund
and The Primary U.S. Government Fund paid the Administrator $37,983, $27,015 and
$15,995, respectively, pursuant to the Administration Agreement. For the period
from January 27, 1997 through June 30, 1997, The Primary Trend Fund, The Primary
Income Fund and The Primary U.S. Government Fund paid the Administrator $21,461,
13,323 and $7,363, respectively, pursuant to the Administration Agreements. Each
of the Administration Agreements may be terminated on not less than 90 days'
notice, without the payment of any penalty, by the Board of Directors of the
applicable Company or by the Administrator. Pursuant to the Administration
Agreements, the Administrator also provides fund accounting services to each of
the Funds.
The Advisory Agreements and the Administration Agreements provide that
the Adviser and the Administrator, as the case may be, shall not be liable to
any of the Funds or their shareholders for anything other than willful
misfeasance, bad faith, negligence (gross negligence in the case of the Advisory
Agreements) or reckless disregard of its obligations or duties. The Advisory
Agreements and the Administration Agreements also provide that the Adviser and
the Administrator, as the case may be, and their officers, directors and
employees may engage in other businesses, devote time and attention to any other
business, whether of a similar or dissimilar nature, and render investment
advisory services to others.
DETERMINATION OF NET ASSET VALUE
As set forth in the Prospectus under the caption "HOW IS EACH FUND'S
SHARE PRICE DETERMINED?" the net asset value of each Fund will be determined
(except as otherwise noted in the succeeding paragraph) as of the close of
regular trading (currently 3:00 P.M. Central Time) on each day the New York
Stock Exchange is open for trading. The New York Stock Exchange is open for
trading Monday through Friday except New Year's Day, Martin Luther King, Jr.
Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Additionally, if any of the aforementioned
holidays falls on a Saturday, the New York Stock Exchange will not be
-15-
<PAGE>
open for trading on the preceding Friday, and when any such holiday falls on a
Sunday, the New York Stock Exchange will not be open for trading on the
succeeding Monday, unless unusual business conditions exist, such as the ending
of a monthly or the yearly accounting period.
Notwithstanding the preceding paragraph, the net asset value for The
Primary U.S. Government Fund also will not be determined on days when the
Federal Reserve is closed. In addition to the days on which the New York Stock
Exchange is not open for trading, the Federal Reserve is closed on Columbus Day
and Veterans Day.
PERFORMANCE AND YIELD INFORMATION
Any total return quotation for The Primary Trend Fund, The Primary
Income Fund or The Primary U.S. Government Fund will assume the reinvestment of
all dividends and capital gains distributions which were made by the applicable
Fund during that period. Any period total return quotation of a Fund will be
calculated by dividing the net change in value of a hypothetical shareholder
account established by an initial payment of $1,000 at the beginning of the
period by $1,000. The net change in the value of a shareholder account is
determined by subtracting $1,000 from the product obtained by multiplying the
net asset value per share at the end of the period by the sum obtained by adding
(A) the number of shares purchased at the beginning of the period plus (B) the
number of shares purchased during the period with reinvested dividends and
distributions. Any average annual total return quotation of a Fund will be
calculated by dividing the value at the end of the period (i.e., the product
referred to in the preceding sentence) by $1,000. A root equal to the period,
measured in years, in question is then determined and 1 is subtracted from such
root to determine the average annual total return.
The foregoing computation may also be expressed by the following
formula:
P(1+T)n = ERV
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of year
ERV = ending value of a hypothetical $1,000 payment made at
the beginning of the stated periods at the end of the
stated periods.
The Primary Trend Fund's annual compounded rate of return for the one,
five and ten year periods ended June 30, 1998 were +13.06%, +13.58% and +10.25%,
respectively, and for the period from September 15, 1986 (beginning of
operations) through June 30, 1998 was +10.60%. The Primary Income Fund's annual
compounded rate of return for the one and five year periods ended June 30, 1998
were +14.72% and +13.29%, respectively, and for the period from September 1,
1989 (beginning of operations) through June 30, 1998 was +12.32%. The Primary
U.S. Government Fund's annual compounded rate
-16-
<PAGE>
of return for the one and five year periods ended June 30, 1998 were +6.20% and
+5.04%, respectively, and for the period from September 1, 1989 (beginning of
operations) through June 30, 1998, was +6.88%. An average annual compounded rate
of return refers to the rate of return which, if applied to an initial
investment at the beginning of a stated period and compounded over the period,
would result in the redeemable value of the investment at the end of the stated
period. The calculation assumes reinvestment of all dividends and distributions
and reflects the effect of all recurring fees.
The results below show the value of an assumed initial investment in
The Primary Trend Fund of $10,000 made on September 15, 1986 through June 30,
1998, assuming reinvestment of all dividends and distributions.
Value of
$10,000 Cumulative
June 30 Investment % Change
------- ---------- --------
1987 $11,620 +16.20%
1988 12,276 +22.76
1989 13,606 +36.06
1990 13,415 +34.15
1991 14,850 +48.50
1992 15,927 +59.27
1993 17,225 +72.25
1994 17,178 +71.78
1995 20,102 +101.02
1996 22,817 +128.17
1997 28,803 +188.03
1998 32,565 +225.65
The foregoing performance results are based on historical earnings and
should not be considered as representative of the performance of The Primary
Trend Fund, The Primary Income Fund or The Primary U.S. Government Fund in the
future. Such performance results also reflect reimbursements made by the Adviser
during the fiscal year ended June 30, 1998 to keep The Primary Income Fund's and
The Primary U.S. Government Fund's total fund operating expenses at or below
1.00% of average daily net assets and during the fiscal years ended June 30,
1997, 1996, 1995, 1994, 1993, 1992 and 1991 and the ten-month period ended June
30, 1990 to keep The Primary Income Fund's and The Primary U.S. Government
Fund's total annual fund operating expenses at or below .84% and .75%,
respectively, of average daily net assets. An investment in any of the Funds
will fluctuate in value and at redemption its value may be more or less than the
initial investment.
The Primary Income Fund and The Primary U.S. Government Fund may cite
yields in advertisements, sales literature or information to shareholders. Each
Fund's yield is based on a 30-day period and is computed by dividing the net
investment income per share earned during the period by the net asset value per
share on the last day of the period, according to the following formula:
-17-
<PAGE>
a-b
YIELD = 2[(--- + 1)6-1]
cd
Where: a = dividends and interest earned during the
period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = the net asset value per share on the
last day of the period.
The yield for the thirty days ended June 30, 1998 was 3.84% for The
Primary Income Fund and 5.10% for The Primary U.S. Government Fund. Yield
fluctuations may reflect changes in the applicable Fund's net income, and
portfolio changes resulting from net purchases or net redemptions of the Fund's
shares may affect the yield. Accordingly, such Fund's yield may vary from day to
day, and the yield stated for a particular past period is not necessarily
representative of its future yield. Neither Fund's yield is guaranteed, nor is
its principal insured.
Yield information may be useful in reviewing the performance of each of
The Primary Income Fund and The Primary U.S. Government Fund and for providing a
basis for comparison with other investment alternatives. However, since net
investment income of each Fund changes in response to fluctuations in interest
rates and such Fund's expenses, any given yield quotation should not be
considered representative of its yield for any future period. An investor should
also be aware that there are differences in investments other than yield.
Furthermore, a particular Fund's yield will be affected if it
experiences a net inflow of new money which is invested at interest rates
different from those being earned on its then-current investments. An investor's
principal in a particular Fund and such Fund's return are not guaranteed.
PURCHASE OF SHARES
The Articles of Incorporation of The Primary Trend Fund, Inc. permit
the issuance of shares of The Primary Trend Fund in exchange for securities of a
character which are permitted investments of such Fund. The Articles of
Incorporation of The Primary Income Funds, Inc. permit the issuance of shares of
either The Primary Income Fund or The Primary U.S. Government Fund in exchange
for securities of a character which are permitted investments of the applicable
Fund. However, neither Company anticipates issuing Fund shares for investment
securities in the foreseeable future. Any such issuances will be limited
-18-
<PAGE>
to a bona fide reorganization, statutory merger, or other acquisitions of
portfolio securities which: (a) meet the investment objectives and policies of
the applicable Fund; (b) are acquired for investment and not for resale; (c) are
liquid securities which are not restricted as to transfer either by law or
liquidity of market; and (d) have a value which is readily ascertainable (and
not established only by evaluation procedures) as evidenced by a listing on the
American Stock Exchange, the New York Stock Exchange, or NASDAQ. For purposes of
determining the number of shares to be issued, the securities to be exchanged
will be valued in the same manner as the applicable Fund's portfolio securities.
ALLOCATION OF PORTFOLIO BROKERAGE
Decisions to buy and sell securities for the Funds are made by the
Adviser subject to review by the appropriate Company's Board of Directors. In
placing purchase and sale orders for portfolio securities for each Fund, it is
the policy of the Adviser to seek the best execution of orders at the most
favorable price in light of the overall quality of brokerage and research
services provided. In selecting brokers to effect portfolio transactions, the
determination of what is expected to result in best execution at the most
favorable price involves a number of largely judgmental considerations. Among
these are the Adviser's evaluation of the broker's efficiency in executing and
clearing transactions and the broker's financial strength and stability. The
Funds may also allocate portfolio brokerage on the basis of recommendations to
purchase shares of the applicable Fund made by brokers if the Adviser reasonably
believes the commissions and transaction quality are comparable to that
available from other brokers.
In allocating brokerage business for the Funds, the Adviser also takes
into consideration the research, analytical, statistical and other information
and services provided by the broker, such as general economic reports and
information, reports or analyses of particular companies or industry groups,
market timing and technical information, and the availability of the brokerage
firm's analysts for consultation. While the Adviser believes these services have
substantial value, they are considered supplemental to the Adviser's own efforts
in the performance of its duties under the Agreements. Other clients of the
Adviser may indirectly benefit from the availability of these services to the
Adviser, and the Funds may indirectly benefit from services available to the
Adviser as a result of transactions for other clients. The Adviser may cause the
Funds to pay a broker which provides brokerage and research services to the
Adviser a commission for effecting a securities transaction in excess of the
amount another broker would have charged for effecting the same transaction, if
the Adviser determines that such commission is reasonable in relation to the
value of the services provided.
Brokerage commissions paid by The Primary Trend Fund during its fiscal
years ended June 30, 1998, 1997 and 1996 totaled $43,058 on transactions of
$14,401,904; $52,134 on transactions of $27,964,127; and $41,306 on transactions
of $17,322,639, respectively. During the fiscal year ended June 30, 1998, The
Primary Trend Fund paid commissions of $41,458 on transactions of $13,715,155 to
brokers who provided research services to the Adviser. Brokerage commissions
paid by The Primary Income Fund during its fiscal years ended June 30, 1998,
1997 and 1996 totaled $5,619 on transactions of $2,244,644; $11,316 on
-19-
<PAGE>
transactions of $4,314,992; and $9,477 on transactions of $2,958,557,
respectively. During the fiscal year ended June 30, 1998, The Primary Income
Fund paid commissions of $5,309 on transactions of $2,085,257 to brokers who
provided research services to the Adviser. The Primary U.S. Government Fund paid
no brokerage commissions during its fiscal years ended June 30, 1998, 1997 and
1996.
CUSTODIAN
Firstar Bank Milwaukee, NA ("Firstar Bank"), 615 East Michigan Street,
Milwaukee, Wisconsin 53202, acts as custodian for the Funds. As such, Firstar
Bank holds all securities and cash of the Funds, delivers and receives payment
for securities sold, receives and pays for securities purchased, collects income
from investments and performs other duties, all as directed by officers of the
respective Companies. Firstar Bank does not exercise any supervisory function
over the management of the Funds, the purchase and sale of securities or the
payment of distributions to shareholders. An affiliate of Firstar Bank, Firstar
Mutual Fund Services, LLC, acts as the Funds' transfer agent and dividend
disbursing agent.
TAXES
As set forth in the Prospectus under the caption "WHAT ABOUT DIVIDENDS,
CAPITAL GAINS DISTRIBUTIONS AND TAXES?" each of the Companies intends to qualify
annually for and elect tax treatment applicable to a regulated investment
company under Subchapter M of the Code.
Dividends from each Fund's net investment income and distributions from
each Fund's net realized short-term capital gains are taxable to shareholders as
ordinary income, whether received in cash or in additional shares. The 70%
dividends-received deduction for corporations may apply to such dividends and
distributions, subject to proportionate reductions if the aggregate dividends
received by a Fund from domestic corporations in any year are less than 100% of
such Fund's net investment company income taxable distributions.
Any dividend or capital gains distribution paid shortly after a
purchase of shares will have the effect of reducing the per share net asset
value of such shares by the amount of the dividend or distribution. Furthermore,
if the net asset value of the shares immediately after a dividend or
distribution is less than the cost of such shares to the shareholder, the
dividend or distribution will be taxable to the shareholder even though it
results in a return of capital.
Shareholders may realize a capital gain or capital loss in any year in
which they redeem shares. The gain or loss is the difference between the
shareholder's basis (cost) and the redemption price of the shares redeemed.
Each Fund may be required to withhold federal income tax at a rate of
31% ("backup withholding") from dividend payments and redemption proceeds if a
shareholder fails to furnish such Fund with his Social Security or other tax
identification number and certify under penalty of perjury that such number is
correct and that he is not subject to backup withholding due to the
underreporting of income. The certification form is included as part of the
account application and should be completed when the account is opened.
-20-
<PAGE>
INDEPENDENT AUDITORS
The Funds' independent auditors, Ernst & Young LLP, 111 East Kilbourn
Avenue, Milwaukee, Wisconsin, audit and report on the Funds' annual financial
statements, review certain regulatory reports and the Funds' federal income tax
returns, and perform other professional accounting, auditing, tax and advisory
services when engaged to do so by the Funds. Shareholders will receive annual
audited financial statements and semiannual unaudited financial statements.
FINANCIAL STATEMENTS
The following financial statements are incorporated by reference to the
Annual Report, dated June 30, 1998, of The Primary Trend Funds (File Nos.
811-04704 and 811-05831), as filed with the Securities and Exchange Commission
on September 1, 1998:
The Primary Trend Fund, Inc.
Portfolios of Investments
Statement of Assets and Liabilities
Statement of Operations
Statements of Changes in Net Assets
Financial Highlights
Notes to Financial Statements
Report of Independent Auditors
The Primary Income Funds, Inc.
Portfolios of Investments
Statements of Assets and Liabilities
Statements of Operations
Statements of Changes in Net Assets
Financial Highlights
Notes to Financial Statements
Report of Independent Auditors
DESCRIPTION OF SECURITIES RATINGS
As set forth in the Prospectus under the caption "WHAT ARE THE FUNDS'
INVESTMENT POLICIES?" the Funds may invest in "investment grade" corporate
obligations (securities rated "BBB" or better by Standard & Poor's Corporation
or "Baa" or better by Moody's Investors Service, Inc.). However, The Primary
Trend Fund and The Primary Income Fund also may, from time to time, purchase
corporate obligations rated less than investment grade if, in the opinion of the
Adviser, such lesser rating is due to a special situation or other extenuating
circumstance. A brief description of the ratings symbols and their meanings
follows.
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<PAGE>
Standard & Poor's Corporation ("Standard & Poor's") Debt Ratings. A
Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers or
lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. Standard
& Poor's does not perform any audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default - capacity and willingness of the
obligor as to the timely payment of interest and
repayment of principal in accordance with the terms
of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of the
obligation in the event of bankruptcy, reorganization
or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights;
AAA - Debt rated AAA has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in the higher rated
categories.
BBB - Debt rated BBB has an adequate capacity to pay interest and repay
principal. Whereas such debt normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
BB, B, CCC, CC - Debt rated BB, B, CCC or CC is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and
-22-
<PAGE>
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
Moody's Investors Service, Inc. ("Moody's") Bond Ratings.
Aaa - Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large, or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds which are Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude, or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rate A possess many favorable investment attributes
and are to be considered as upper-medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
Moody's applies numerical modifiers 1, 2 and 3 in each of the foregoing
generic rating classifications. The modifier 1 indicates that the company ranks
in the higher end of its
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<PAGE>
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the company ranks in the lower end of its generic
rating category.
-24-
<PAGE>
<PAGE>
PART C
OTHER INFORMATION
1. Financial Statements and Exhibits
a. Financial Statements (Financial Highlights included in Part A and
all incorporated by reference to the Annual Report, dated June 30,
1998 (File No. 811-05831), of The Primary Income Funds, Inc. (as
filed with the Securities and Exchange Commission on September 1,
1998))
The Primary Income Funds, Inc.
Portfolios of Investments
Statements of Assets and Liabilities
Statements of Operations
Statements of Changes in Net Assets
Financial Highlights
Notes to Financial Statements
Report of Independent Auditors
b. Exhibits
(1) Registrant's Articles of Incorporation. (2)
(2) Registrant's By-Laws, as amended. (2)
(3) None
(4) None
(5.1) Investment Advisory Agreement for The Primary Income Fund.
(2)
(5.2) Investment Advisory Agreement for The Primary U.S.
Government Fund. (2)
(6) None
(7) None
(8) Custodian Agreement with Firstar Bank Milwaukee, N.A.
(successor to First Wisconsin Trust Company).(2)
S-1
<PAGE>
(9) Administration and Fund Accounting Agreement with Sunstone
Financial Group, Inc. (2)
(10) Opinion of Foley & Lardner, counsel for Registrant.
(11) Consent of Independent Auditors.
(12) None
(13) Subscription Agreement. (2)
(14.1) Individual Retirement Custodial Account. (2)
(14.2) Defined Contribution Retirement Plan. (2)
(14.3) Prototype 403(b) plan. (2)
(15) None
(16) Computation of Performance Quotations. (1)
(17) Financial Data Schedule.
(18) None
- -----------------------
(1) Previously filed as an exhibit to Post-Effective Amendment No. 8 to the
Registration Statement and incorporated by reference thereto.
Post-Effective Amendment No. 8 was filed on October 24, 1995 and its
accession number is 0000897069-95-000155.
(2) Previously filed as an exhibit to Post-Effective Amendment No. 11 to the
Registration Statement and incorporated by reference thereto.
Post-Effective Amendment No. 11 was filed on August 29, 1997 and its
accession number is 0000897069-97-000379.
Item 25. Persons Controlled by or under Common Control with Registrant
The Primary U.S. Government Fund is controlled by Lilli Gust, who owned
or controlled 32.1% of such Fund's voting securities as of September 30, 1998.
Neither the Registrant nor The Primary Income Fund is controlled by any person.
Registrant does not control any person.
S-2
<PAGE>
Item 26. Number of Holders of Securities
Title of Class Number of Record Holders
as of September 30, 1998
Class A Common Stock, $.0001 par 0
value (The Primary Money
Market Fund)
Class B Common Stock, $.0001 par 293
value (The Primary Income
Fund)
Class C Common Stock, $.0001 par 82
value (The Primary U.S.
Government Fund)
Item 27. Indemnification
The Wisconsin Business Corporation Law and Registrant's Bylaws provide
for the indemnification of Registrant's directors and officers in a variety of
circumstances, which may include liability under the Securities Act of 1933.
The Bylaws provide that any director, officer, agent or employee of
Registrant and any person similarly serving another enterprise at the request of
Registrant is entitled to indemnification against expenses, judgments, fines and
amounts paid in settlement reasonably incurred in any threatened, pending or
completed proceeding if such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of Registrant,
and with respect to any criminal proceeding, he had no reasonable cause to
believe his conduct was unlawful; provided that Registrant may not indemnify any
such person in relation to matters to which such person shall be adjudged in
such action, suit or proceeding to be liable for gross negligence, willful
misfeasance, bad faith or reckless disregard of the duties and obligations
involved in the conduct of his office. Unless ordered by a court, the
determination that indemnification of an individual is proper is to be made by
(i) the board of directors, by a majority vote of a quorum which consists of
directors who were not parties to the action, suit or proceeding nor interested
persons of Registrant as defined in Section 2(a)(19) of the Investment Company
Act of 1940; or (ii) if the required quorum is not obtainable or if a quorum of
disinterested directors so direct, by independent legal counsel in a written
opinion.
Expenses, including attorneys' fees, incurred in the preparation of
and/or presentation of the defense of a civil or criminal action, suit or
proceeding may be paid by Registrant in advance of the final disposition of such
action, suit or proceeding in accordance with the requirements of the Wisconsin
Business Corporation Law and the Securities and Exchange Commission. The current
requirements are: (i) the indemnitee must undertake to repay such amount unless
it shall ultimately be determined that the indemnitee is entitled to
indemnification; and (ii) any of the following is made a condition of the
advance: (A) the
S-3
<PAGE>
indemnitee shall provide a security for his undertaking; (B) Registrant shall be
insured against losses arising by reason of any lawful advances; or (C) a
majority of a quorum of the disinterested non-party directors of Registrant, or
an independent legal counsel in a written opinion, shall determine, based on a
review of readily available facts (as opposed to a full trial-type inquiry),
that there is reason to believe that the indemnitee will be found entitled to
indemnification.
Notwithstanding the foregoing, Section 180.0851 of the Wisconsin
Business Corporation Law provides for mandatory indemnification (a) if a
director, officer, employee or agent was successful on the merits or otherwise
in the defense of a proceeding, and (b) if the director, officer, employee or
agent was not successful on the merits or otherwise but the liability incurred
was not the result of a breach or failure to perform a duty which constituted
any of the following: (1) a willful failure to deal fairly with the corporation
or its shareholders in connection with a matter in which the director, officer,
employee or agent has a material conflict of interest; (2) a violation of
criminal law, unless the director, officer, employee or agent had reasonable
cause to believe his or her conduct was unlawful; (3) a transaction from which
the director, officer, employee or agent derived an improper personal benefit;
or (4) willful misconduct.
Insofar as indemnification for and with respect to liabilities arising
under the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of Registrant pursuant to the foregoing provisions or
otherwise, Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by Registrant
of expenses incurred or paid by a director, officer or controlling person or
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser
Information with respect to Ms. Gust and Messrs. James R. Arnold, Jr.
and Barry S. Arnold is incorporated by reference to pages 8 through 10 of the
Statement of Additional Information pursuant to Rule 411 under the Securities
Act of 1933.
Item 29. Principal Underwriters
Registrant has no principal underwriters.
Item 30 Location of Accounts and Records
All accounts, books, or other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are in the physical possession of Registrant's Treasurer, James R.
Arnold, Jr., at the corporate offices
S-4
<PAGE>
of Sunstone Financial Group, Inc., 207 East Buffalo Street, Suite 400,
Milwaukee, Wisconsin 53202.
Item 31. Management Services
All management-related service contracts entered into by Registrant are
discussed in Parts A and B of this Registration Statement.
Item 32. Undertakings
Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
S-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Amended Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Amended Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Milwaukee and the State
of Wisconsin on the 27th day of October, 1998.
THE PRIMARY INCOME FUNDS, INC.
(Registrant)
By: /s/ Lilli
Gust
Lilli Gust
President
Pursuant to the requirements of the Securities Act of 1933, this
Amended Registration Statement has been signed below by the following persons in
the capacities and on the date(s) indicated.
Name Title Date
/s/ Lilli Gust Principal Executive October 27, 1998
- ---------------------- Officer and Director
Lilli Gust
/s/ James R. Arnold, Jr. Principal Financial and October 27, 1998
- ------------------------ Accounting Officer
James R. Arnold, Jr.
/s/ Barry S. Arnold Director October 27, 1998
- -----------------------
Barry S. Arnold
/s/ Clark J.Hillery Director October 27, 1998
- ------------------------
Clark J. Hillery
_________________________ Director October __, 1998
Harold J. Holtz
S-6
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit Page No.
(1) Registrant's Articles of Incorporation*
(2) Registrant's By-Laws, as amended*
(3) None
(4) None
(5.1) Investment Advisory Agreement for The
Primary Income Fund*
(5.2) Investment Advisory Agreement for The
Primary U.S. Government Fund*
(6) None
(7) None
(8) Custodian Agreement with Firstar Bank
Milwaukee, N.A. (successor to First
Wisconsin Trust Company)*
(9) Administration and Fund Accounting
Agreement with Sunstone Financial Group,
Inc.*
(10) Opinion of Foley & Lardner Counsel for
Registrant
(11) Consent of Independent Auditors
(12) None
(13) Subscription Agreement*
(14.1) Individual Retirement Custodial Account*
(14.2) Defined Contribution Retirement Plan*
(14.3) Prototype 403(b) plan*
(15) None
<PAGE>
(16) Computation of Performance Quotations*
(17) Financial Data Schedule
(18) None
- ---------------
* Incorporated by reference
CHICAGO FIRSTAR CENTER SACRAMENTO
DENVER 777 EAST WISCONSIN AVENUE SAN DIEGO
JACKSONVILLE MILWAUKEE, WISCONSIN 53202-5367 SAN FRANCISCO
LOS ANGELES TELEPHONE (414) 271-2400 TALLAHASSEE
MADISON FACSIMILE (414) 297-4900 TAMPA
MILWAUKEE WASHINGTON, D.C.
ORLANDO WEST PALM BEACH
WRITER'S DIRECT LINE
414/297-5660
EMAIL ADDRESS CLIENT/MATTER NUMBER
[email protected] 012156/0101
October 30, 1998
The Primary Income Funds, Inc.
First Financial Centre
700 North Water Street
Milwaukee, Wisconsin 53202
Gentlemen:
We have acted as counsel for The Primary Income Funds, Inc. in
connection with the preparation of an amendment to your Registration Statement
on Form N-1A relating to the sale by you of an indefinite amount of The Primary
Income Funds, Inc. Common Stock (such Common Stock being hereinafter referred to
as the "Stock") in the manner set forth in the Amended Registration Statement to
which reference is made. In this connection we have examined: (a) the Amended
Registration Statement on Form N-1A; (b) your Articles of Incorporation and
Bylaws, as amended to date; (c) corporate proceedings relative to the
authorization for issuance of the Stock; and (d) such other proceedings,
documents and records as we have deemed necessary to enable us to render this
opinion.
Based upon the foregoing, we are of the opinion that the shares of
Stock when sold as contemplated in the Amended Registration Statement will be
legally issued, fully paid and nonassessable, except insofar as statutory
liability may be imposed under Section 180.0622(2)(b) of the Wisconsin Statutes.
We hereby consent to the use of this opinion as an exhibit to the Form
N-1A Registration Statement. In giving this consent, we do not admit that we are
experts within the meaning of Section 11 of the Securities Act of 1933, as
amended, or within the category of persons whose consent is required by Section
7 of said Act.
Very truly yours,
Foley & Lardner
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" and "Independent Auditors" and to the use of our report dated July
24, 1998, in the Registration Statement (Form N-1A) of The Primary Income Funds,
Inc. and its incorporation by reference in the related Prospectus of The Primary
Trend Funds, filed with the Securities and Exchange Commission in this
Post-Effective Amendment No. 12 to the Registration Statement under the
Securities Act of 1933 (File No. 33-6343) and in this Amendment No. 14 to the
Registration Statement under the Investment Company Act of 1940 (File No.
811-05831).
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
October 29, 1998
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</TABLE>
