Registration No. 33-29468
811-05831
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. 13 (x)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 (X)
Amendment No. 15 (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)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
|X| on October 31, 1999 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule
<PAGE>
P R O S P E C T U S
October 31, 1999
The Primary Trend Funds
The Primary Trend Funds are a family of three 100% no load mutual funds
offering various investment choices.
The Primary Trend Funds are:
* The Primary Trend Fund * The Primary U.S. Government Fund
(invests mainly in common stocks) (invests mainly in U.S. government
securities)
* The Primary Income Fund
(invests mainly in dividend-paying common and
preferred stocks and fixed-income securities)
Please read this Prospectus and keep it for future reference. It contains
important information, including information on how The Primary Trend Funds
invest and the services they offer to shareholders.
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THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
The Primary Trend Fund, Inc.
The Primary Income Funds, Inc. Questions Every Investor Should Ask Before
700 North Water Street Investing in The Primary Trend Funds.......
Milwaukee, WI 53202 Who Manages the Funds?.....................
How Are The Funds' Share Prices
1-800-443-6544 Determined?................................
(Fund Information Provided by How Do I Open An Account and Purchase
Arnold Investment Counsel Shares?....................................
(Incorporated) How Do I Sell My Shares?...................
May Shareholders Make Exchanges Between
1-800-968-2122 Funds?.....................................
(Account Information Provided by What About Dividends, Capital Gains
Firstar Mutual Fund Services, LLC) Distributions and Taxes?...................
What About the Year 2000 Issue?............
www.primarytrendfunds.com Financial Highlights.......................
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QUESTIONS EVERY INVESTOR SHOULD ASK BEFORE
INVESTING IN THE PRIMARY TREND FUNDS
1. What are the Goals of The Primary Trend Funds?
The Primary Trend Fund
The Primary Trend Fund seeks capital growth and income.
The Primary Income Fund
The Primary Income Fund seeks current income with an opportunity for
capital growth.
The Primary U.S. Government Fund
The Primary U.S. Government Fund seeks current income.
Although they have no intention of doing so, each Fund may change its
investment objective without obtaining shareholder approval.
2. What are the Principal Investment Strategies of The Primary Trend Funds?
The Primary Trend Fund invests primarily in common stocks of United States
companies. The Primary Income Fund invests primarily in dividend paying common
stocks of United States companies and to a lesser extent in investment grade
corporate bonds, U.S. government securities and preferred stocks of United
States companies. The Primary Income Fund normally has at least 25% of its
assets invested in the utilities industry. The Primary U.S. Government Fund
invests primarily in U.S. government securities.
Each of the Funds, in response to adverse market, economic, political or
other conditions, may take temporary defensive positions. This means a Fund will
invest some or all of its assets in money market instruments (like U.S. Treasury
Bills, commercial paper or commercial paper master notes). The Primary Trend
Fund and The Primary Income Fund will not be able to achieve their investment
objective of capital growth to the extent that they invest in money market
instruments since these securities earn interest but do not appreciate in value.
Also these investments will usually have a lower yield than the longer term debt
securities in which The Primary Income Fund and The Primary U.S. Government Fund
may invest. When a Fund is not taking a temporary defensive position, it still
may hold some cash and money market instruments in order to take advantage of
investment opportunities, or so it can pay expenses and satisfy redemption
requests.
None of the Funds attempt to achieve their investment objectives by
frequent trading of securities. None of the Funds use options, futures and other
derivative instruments to enhance yield or to hedge against loss. The Funds
believe such instruments are highly
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speculative and not in the best interest of the conservative investor for whom
the Funds are designed.
The Primary Trend Fund
The Primary Trend Fund invests primarily in common stocks of U.S.
companies. Most, but not all, of its common stock investments pay dividends.
Typically The Primary Trend Fund invests in well-established mid- to
large-capitalization companies (market capitalizations of $1 billion or more)
having an operating history of ten or more years. The Fund's investment adviser
favors "value" stocks and shuns stocks where the price reflects a premium
because of their popularity. The Fund's investment adviser considers a number of
financial characteristics such as earnings growth, book value, dividends, asset
value and liquidation value in determining whether or not a company's stock is
undervalued.
The Primary Income Fund
The Primary Income Fund also invests primarily in common stocks of United
States companies. Its investment adviser follows the same investment strategy in
making common stock investments for The Primary Income Fund as it does for The
Primary Trend Fund except that it places greater emphasis on the dividends paid
on the common stock. The Primary Income Fund also invests in preferred stocks,
which may or may not be convertible into common stock. When the Fund invests in
non-convertible preferred stock, the investment adviser considers the amount of
the dividend payment and the capacity and the willingness of the issuer to
continue to make dividend payments. When the Fund invests in convertible
preferred stocks (as well as other convertible securities) the investment
adviser also considers whether the underlying common stock investment is a
suitable investment for the Fund.
The Primary Income Fund also invests in investment-grade corporate bonds
and U.S. Government securities. In purchasing debt securities, the investment
adviser considers the maturity of the security as well as the credit quality of
the issuer. It will lengthen or shorten the maturity of the Fund's portfolio of
debt securities depending on its view of the direction of interest rates. It
will increase or decrease the percentage of debt securities invested in
corporate bonds as compared to U.S. Government securities depending on the
relative attractiveness of these classes of debt securities.
The Primary U.S. Government Fund
The Primary U.S. Government Fund invests 80% or more of its assets in U.S.
government securities. The securities may include direct obligations of the U.S.
Treasury as well as securities of agencies or instrumentalities of the U.S.
government. Securities of U.S. agencies or instrumentalities may or may not be
backed by the full faith and credit of the United States. The balance of the
Primary U.S. Government Fund's investments may be invested in investment-grade
corporate bonds or money market instruments.
The Primary U.S. Government Fund's weighted average maturity of the
portfolio may be as short as two years or as long as thirty years. The Primary
U.S.
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Government Fund considers interest rate trends as well as economic and market
information before determining its desired weighted average maturity. The
Primary U.S. Government Fund will invest in investment-grade corporate bonds
instead of U.S. government securities when the yield differential between U.S.
government securities and investment-grade corporate bonds widens sufficiently
to justify the increased credit risk associated with investment grade corporate
bonds.
3. What are the Principal Risks of Investing in the Primary Trend Funds?
Investors in the Primary Trend Funds may lose money. There are risks
associated with investments in the types of securities in which the Primary
Trend Funds invest. These risks include:
o Market Risk: The prices of the securities in which the Primary Trend
Funds invest may decline for a number of reasons. The price declines
of common stocks and bonds may be steep, sudden and/or prolonged.
o Value Investing Risk: The Primary Trend Fund and The Primary Income
Fund primarily invest in "value" stocks. Our investment adviser may be
wrong in its assessment of a company's value and the stocks these
Funds hold may not reach what the investment adviser believes are
their full values. From time to time, "value" investing falls out of
favor with investors. During these periods, these Funds' relative
performance may lag.
o Industry Concentration Risk: The Primary Income Fund's policy of
normally investing at least 25% of its assets in the utilities
industry means that this Fund may be adversely affected by
developments affecting this industry. Utility companies are sensitive
to changes in interest rates and other economic conditions,
governmental regulation, the price and availability of fuel,
environmental protection or energy conservation practices, the level
and demand for services, increased competition in deregulated sectors,
and the cost and delay of technological developments. The value of
shares of The Primary Income Fund may fluctuate more than if it
invested in a broader variety of industries.
o Interest Rate Risk: The Primary U.S. Government Fund will invest only
in debt securities and each of The Primary Trend Fund and The Primary
Income Fund may invest in debt securities. In general, the value of
bonds and other debt securities rises when interest rates fall and
falls when interest rates rise. Longer term obligations are usually
more sensitive to interest rate changes than shorter term obligations.
While bonds and other debt securities normally fluctuate less in price
than common stocks, there have been extended periods of increases in
interest rates that have caused significant declines in bond prices.
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o Credit Risk: Each of the Funds may invest in debt securities not
backed by the full faith and credit of the United States. The issuers
of such bonds and other debt securities may not be able to make
interest or principal payments. Even if these issuers are able to make
interest or principal payments, they may suffer adverse changes in
financial condition that would lower the credit quality of the issuer,
leading to greater volatility in the price of the security.
o Prepayment Risk: The issuers of bonds and other debt securities held
by the Funds may prepay principal due on securities, particularly
during periods of declining interest rates. Securities subject to
prepayment risk generally offer less potential for gain when interest
rates decline, and may offer a greater potential for loss when
interest rates rise. Rising interest rates may cause prepayments to
occur at a slower than expected rate thereby increasing the average
life of the security and making the security more sensitive to
interest rate changes.
Because of these risks the Funds are a suitable investment only for those
investors who have long-term investment goals. Prospective investors who
are uncomfortable with an investment that will increase and decrease in
value should not invest in the Funds.
4. How have the Primary Trend Funds Performed?
The bar charts and tables that follow provide some indication of the risks
of investing in the Primary Trend Funds by showing changes in their
performance from year to year and how their average annual returns over
various periods compare to the performance of various broad-based
securities indexes. Please remember that each Fund's past performance is
not necessarily an indication of its future performance. It may perform
better or worse in the future.
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<TABLE>
<CAPTION>
The Primary Trend Fund
(Total return per calendar year)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-------
30% 29.98% -------
18.19%
------- -------
20% 19.55% 16.20%
-------
11.41%
10% -------
8.91%
-------
0% 0.23%
- -------------------------------------------------------------------------------------------------
-1.73% -0.13%
------- -------
-10% -2.01%
-------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
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Note:During the ten year period shown on the bar chart, the Fund's highest total
return for a quarter was 13.43% (quarter ended March 31, 1991) and the lowest
total return for a quarter was -10.31% (quarter ended September 30, 1998).
The Fund's 1999 year to date total return is ____% (January 1, 1999 through the
quarter ended September 30, 1999).
</TABLE>
Average Annual Total Returns
(for the periods ending December Past Five
31, 1998) Past Year Years Past Ten Years
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The Primary Trend Fund -2.01% 11.80% 9.58%
S&P 500* 28.58% 24.06% 19.21%
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*The S&P 500 is the Standard & Poor's Composite Index of 500 Stocks, a widely
recognized unmanaged index of common stock prices.
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<PAGE>
<TABLE>
<CAPTION>
The Primary Trend Fund
(Total return per calendar year)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30%
------ ------
21.49% 25.51%
------ ------
20.62% 20.09%
20%
------
15.43%
10%
-----
3.77%
-----
2.28% -----
0.53%
0%
- -------------------------------------------------------------------------------------------
-2.59%
------
-10%
1990 1991 1992 1993 1994 1995 1996 1997 1998
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Note:During the nine year period shown on the bar chart, the Fund's highest total
return for a quarter was 10.67% (quarter ended September 30, 1991) and the
lowest total return for a quarter was -4.85% (quarter ended September 30, 1990).
The Fund's 1999 year to date total return is ____% (January 1, 1999 through the
quarter ended September 30, 1999).
</TABLE>
Average Annual Total Returns Since the inception of
(for the periods ending December the Fund
31, 1998) Past Year Past Five Years (September 1, 1989)
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The Primary Income Fund 0.53% 12.23% 11.55%
S&P 500 28.58% 24.06% 17.41%
S&P Utilities Index* 14.79% 13.89% 12.36%
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* The S&P Utilities Index is a market capitalization weighted composite of the
electric, natural gas and telephone utility companies in the S&P 500.
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<TABLE>
<CAPTION>
The Primary Trend Fund
(Total return per calendar year)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
15% ------ ------
14.71% 14.03%
10% ----- -----
8.27% 8.46% -----
6.13% -----
5.74%
5% ----- -----
3.56% 3.76%
0%
- -------------------------------------------------------------------------------------------
-3.14%
------
-5%
1990 1991 1992 1993 1994 1995 1996 1997 1998
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Note:During the nine year period shown on the bar chart, the Fund's highest total
return for a quarter was 5.76% (quarter ended December 31, 1990) and the lowest
total return for a quarter was -2.63% (quarter ended March 31, 1994).
The Fund's 1999 year to date total return is ____% (January 1, 1999 through the
quarter ended September 30, 1999).
</TABLE>
Average Annual Total Returns Since the inception of
(for the periods ending December Past the Fund
31, 1998) Past Year Five Years (September 1, 1989)
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The Primary U.S. Government Fund 5.74% 5.16% 6.84%
Lehman Intermediate U.S.
Government Bond Index* 8.47% 6.45% 8.01%
-------------------------
*The Lehman Intermediate U.S. Government Bond Index is an unmanaged index
consisting of all U.S. Treasury and agency bonds having an effective maturity of
not less than one year or more than ten years weighted according to market
capitalization.
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FEES AND EXPENSES
The table below describes the fees and expenses that you may pay if
you buy and hold shares of the Primary Trend Funds.
<TABLE>
<CAPTION>
SHAREHOLDER FEES (fees paid directly from your investment)
The Primary Trend The Primary The Primary U.S.
Fund Income Fund Government Fund
---- ----------- ---------------
<S> <C> <C> <C>
Maximum Sales Charge (Load)
Imposed on Purchases (as a
Percentage of offering price)..................No Sales Charge No Sales Charge No Sales Charge
Maximum Deferred Sales Charge (Load).............No Deferred Sales No Deferred Sales No Deferred Sales Charge
Charge Charge
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends
And Distributions..............................No Sales Charge No Sales Charge No Sales Charge
Redemption Fee...................................None* None * None*
Exchange Fee.....................................None** None** None**
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*Our transfer agent charges a fee of $12.00 for each wire redemption.
**Our transfer agent charges a fee of $5.00 for each telephone exchange.
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
Management Fees..................................0.74% 0.74% 0.65%
Distribution and/or Service (12b-1) Fees.........0.00% 0.00% 0.00%
Other Expenses...................................0.53%(1) 1.38%(1) 5.32%(1)
Total Annual Fund Operating Expenses.............1.27% 2.12% 5.97%
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(1) Both The Primary Income Fund and The Primary U.S. Government Fund had actual Total Annual Fund Operating
Expenses for the most recent fiscal year that were less than the amounts shown. Our investment adviser
reimbursed each Fund to the extent necessary to ensure that Total Annual Fund Operating Expenses did not
exceed the amounts set forth below.
The Primary Income Fund 1.00%
The Primary U.S. Government Fund 1.00%
</TABLE>
Our investment adviser may discontinue these reimbursements at any time, but
will not do so prior to June 30, 2000.
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Primary Trend Funds with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in a Fund for the time periods
indicated and then redeem all of your shares at the end of these periods. The
Example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions, your costs would be:
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1 Year 3 Years 5 Years 10 Years
The Primary Trend Fund $129 $403 $697 $1,534
The Primary Income Fund(1) $215 $664 $1,139 $2,452
The Primary U.S. Government Fund(1) $594 $1,765 $2,913 $5,688
- ----------
(1) During the most recent fiscal year, our investment adviser reimbursed each
of The Primary Income Fund and The Primary U.S. Government Fund in amounts such
that Total Annual Fund Operating Expenses equaled 1.00%. Assuming Total Annual
Fund Operating Expenses of 1.00%, your costs, based on an assumed $10,000
investment and 5% annual return, would be:
1 Year 3 Years 5 Years 10 Years
$102 $318 $552 $1,225
WHO MANAGES THE FUNDS?
Arnold Investment Counsel Incorporated (the "Adviser") is the investment
adviser to each of the Funds. The Adviser's address is:
First Financial Centre
700 North Water Street
Milwaukee, Wisconsin 53202
The Adviser has been in business since 1978 and has been the Funds' only
investment adviser. As the investment adviser to the Funds, the Adviser manages
the investment portfolio of each Fund. All of the decisions it makes concerning
the securities to buy and sell for the Funds are made by the Funds' portfolio
managers, Lilli Gust and Barry Arnold. Ms. Gust has been an officer of the
Adviser since 1978 and Mr. Arnold has been an officer or employee of the Adviser
since 1987. During the last fiscal year, each Fund paid the Adviser an annual
investment advisory fee equal to the following percentages of average net
assets:
The Primary Trend Fund 0.74%
The Primary Income Fund 0.74%
The Primary U.S. Government Fund 0.65%
HOW ARE THE FUNDS' SHARE PRICES DETERMINED?
The price at which investors purchase shares of each Fund and at which
shareholders redeem shares of each Fund is called its net asset value. The
Primary Trend Fund and The Primary Income Fund calculate their net asset values
as of the close of regular trading on the New York Stock Exchange (normally 4:00
p.m. Eastern Time) on each day the New York Stock Exchange is open for trading.
The Primary U.S. Government Fund also
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calculates its net asset value as of the close of regular trading on the New
York Stock Exchange but only on days when both the Exchange is open for trading
and the Federal Reserve Banks' Fedline System is open. The New York Stock
Exchange and the Federal Reserve Banks' Fedline System are closed on holidays
and weekends. Each Fund calculates its net asset value based on the market
prices of the securities (other than money market instruments) it holds. Each
Fund values most money market instruments it holds at their amortized cost. Each
Fund will process purchase orders that it receives and accepts and redemption
orders that it receives prior to the close of regular trading on a day that the
New York Stock Exchange is open at the net asset value determined later that
day. It will process purchase orders that it receives and accepts and redemption
orders that it receives after the close of regular trading at the net asset
value determined at the close of regular trading on the next day the New York
Stock Exchange is open.
HOW DO I OPEN AN ACCOUNT AND PURCHASE SHARES?
How to Purchase Shares from the Funds
1. Read this Prospectus carefully.
2. Determine how much you want to invest keeping in mind the following
minimums:
* New accounts $500
* Automatic Investment Plan $ 50
* Dividend reinvestment No Minimum
* Additional investments:
(by mail) $100
(by wire transfer) $500
3. Complete an Account Application, carefully following the instructions.
For additional investments, complete the remittance form attached to
your individual account statements. If you have any questions or need
applications or forms, please call 1-800-968-2122.
4. Make your check payable to The Primary Trend Funds. All checks must be
drawn on U.S. banks. The Funds will not accept cash or third party
checks. Firstar Mutual Fund Services, LLC, the Funds' transfer agent,
will charge a $20 fee against a shareholder's account for any payment
check returned for insufficient funds. The shareholder will also be
responsible for any losses suffered by a Fund as a result.
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<PAGE>
5. Send the application and check to:
BY FIRST CLASS MAIL
The Primary Trend Funds
c/o Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, WI 53201-0701
BY OVERNIGHT DELIVERY SERVICE
OR EXPRESS MAIL
The Primary Trend Funds
c/o Firstar Mutual Fund Services, LLC
3rd Floor
615 East Michigan Street
Milwaukee, WI 53202-5207
Please do not send letters by overnight delivery service or express mail to the
Post Office Box address.
If you wish to open an account by wire, please call 1-800-968-2122 prior to
wiring funds in order to obtain a confirmation number and to ensure prompt and
accurate handling of funds. You should wire Funds to:
Firstar Bank Milwaukee, N.A.
777 East Wisconsin Avenue
Milwaukee, WI 53202
ABA #075000022
Credit:
Firstar Mutual Fund Services, LLC
Account #112-952-137
Further Credit:
(name of Fund to be purchased)
(shareholder registration)
(shareholder account number, if known)
You should then send a properly signed Account Application marked
"FOLLOW-UP" to either of the addresses listed above. Please remember that
Firstar Bank Milwaukee, N.A. must receive your wired funds prior to the close of
regular trading on the New York Stock Exchange for you to receive same day
pricing. The Funds and Firstar Bank Milwaukee, N.A. are not responsible for the
consequences of delays
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<PAGE>
resulting from the banking or Federal Reserve Wire system, or from incomplete
wiring instructions.
Purchasing Shares from Broker-dealers, Financial Institutions and Others
Some broker-dealers may sell shares of the Funds. These broker-dealers may
charge investors a fee either at the time of purchase or redemption. The fee, if
charged, is retained by the broker-dealer and not remitted to the Funds or the
Adviser. Some broker-dealers may purchase and redeem shares on a three day
settlement basis.
The Funds may enter into agreements with broker-dealers, financial
institutions or other service providers ("Servicing Agents") that may include
the Funds as investment alternatives in the programs they offer or administer.
Servicing agents may:
* Become shareholders of record of the Funds. This means all requests to
purchase additional shares and all redemption requests must be sent
through the Servicing Agent. This also means that purchases made
through Servicing Agents are not subject to the Funds' minimum
purchase requirements.
* Use procedures and impose restrictions that may be in addition to, or
different from, those applicable to investors purchasing shares
directly from the Funds.
* Charge fees to their customers for the services they provide them.
Also, the Funds and/or the Adviser may pay fees to Servicing Agents to
compensate them for the services they provide their customers.
* Be allowed to purchase shares by telephone with payment to follow the
next day. If the telephone purchase is made prior to the close of
regular trading on the New York Stock Exchange, it will receive same
day pricing.
* Be authorized to accept purchase orders on behalf of the Funds. This
means that a Fund will process the purchase order at the net asset
value which is determined following the Servicing Agent's acceptance
of the customer's order.
If you decide to purchase shares through Servicing Agents, please carefully
review the program materials provided to you by the Servicing Agent. When you
purchase shares of the Funds through a Servicing Agent, it is the responsibility
of the Servicing Agent to place your order with the Fund on a timely basis. If
the Servicing Agent does not, or if it does not pay the purchase price to the
Funds within the period specified in its agreement with the Funds, it may be
held liable for any resulting fees or losses.
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<PAGE>
Other Information about Purchasing Shares of the Funds
The Funds may reject any Account Application for any reason. The Funds will
not accept purchase orders made by telephone unless they are from a Servicing
Agent which has an agreement with the Funds.
The Funds will not issue certificates evidencing shares purchased unless
the investor makes a written request for a certificate. The Funds will send
investors a written confirmation for all purchases of shares, whether or not
evidenced by certificates.
The Funds offer an automatic investment plan allowing shareholders to make
purchases on a regular and convenient basis. The Funds also offer the following
retirement plans:
o Traditional IRA
o Roth IRA
o SEP-IRA
o Simple IRA
o Defined Contribution Retirement Plans
o 401(k) Plan
o 403 (b)(7) Custodial Accounts
Investors can obtain further information about the automatic investment
plan and the retirement plans by calling the Funds at 1-800-968-2122. The Funds
recommend that investors consult with a competent financial and tax advisor
regarding the retirement plans before investing through them.
HOW DO I SELL MY SHARES?
How to Redeem (Sell) Shares Directly With the Fund
1. Complete a redemption form that may be obtained by calling the Funds
at 1-800-443-6544 or prepare a letter of instruction containing:
o the name of the Fund(s)
o account number(s)
o the amount of money or number of shares being redeemed
o the name(s) on the account
o daytime phone number
o additional information that the Funds may require for redemptions
by corporations, executors, administrators,
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<PAGE>
trustees, guardians, or others who hold shares in a fiduciary or
representative capacity. Please contact the Funds' transfer
agent, Firstar Mutual Fund Services, LLC, in advance, at
1-800-968-2122 if you have any questions.
2. Sign the redemption form or letter of instruction exactly as the
shares are registered. Joint ownership accounts must be signed by all
owners.
3. If there are certificates representing your shares, enclose the
certificates or execute a stock power exactly as your shares are
registered.
4. Have the signatures guaranteed by a commercial bank or trust company
in the United States, a member firm of the New York Stock Exchange or
other eligible guarantor institution in the following situations:
o The redemption proceeds will be in excess of $10,000
o The redemption request is made within 15 days of a change of
address
o The redemption proceeds are to be sent to a person other than the
person in whose name the shares are registered
o The redemption proceeds are to be sent to an address other than
the address of record
A notarized signature is not an acceptable substitute for a signature
guarantee.
5. Send the redemption form or letter of instruction to:
BY FIRST CLASS MAIL
The Primary Trend Funds
c/o Firstar Mutual Fund Services, LLC
Shareholder Services Center
P. O. Box 701
Milwaukee, WI 53201-0701
BY OVERNIGHT DELIVERY SERVICE
OR EXPRESS MAIL
The Primary Trend Funds
c/o Firstar Mutual Fund Services, LLC
3rd Floor
615 East Michigan Street
Milwaukee, WI 53202-5207
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<PAGE>
Please do not send redemption forms or letters of instruction by overnight
delivery service or express mail to the Post Office Box address.
How to Redeem (Sell) Shares through Servicing Agents
If your shares are held by a Servicing Agent, you must redeem your shares
through the Servicing Agent. Contact the Servicing Agent for instructions on how
to do so.
Redemption Price
The redemption price per share you receive for redemption requests is the
next determined net asset value after:
* Firstar Mutual Fund Services, LLC receives your written request in
proper form with all required information.
* A Servicing Agent that has been authorized to accept redemption
requests on behalf of the Funds receives your request in accordance
with its procedures.
Payment of Redemption Proceeds
* For those shareholders who redeem shares by mail, Firstar Mutual Fund
Services, LLC will mail a check in the amount of the redemption
proceeds no later than the seventh day after it receives the
redemption request in proper form with all required information.
* For those shareholders who redeem shares through Servicing Agents, the
Servicing Agent will transmit the redemption proceeds in accordance
with its redemption procedures.
Other Redemption Considerations
When redeeming shares of the Funds, shareholders should consider the
following:
* The redemption may result in a taxable gain.
* Shareholders who redeem shares held in an IRA must indicate on their
redemption request whether or not to withhold federal income taxes. If
not, 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 Funds may delay the payment of redemption proceeds for up to seven
days in all cases.
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<PAGE>
* If you purchased shares by check, the Funds may delay the payment of
redemption proceeds until they are reasonably satisfied the check has
cleared (which may take up to 15 days from the date of purchase).
* Firstar Mutual Fund Services, LLC currently charges a fee of $12 when
transferring redemption proceeds to your designated bank account by
wire.
* If your account balance falls below $500 because you redeem shares,
you will be given 60 days to make additional investments so that your
account balance is $500 or more. If you do not, the Funds may close
your account and mail the redemption proceeds to you.
* While highly unlikely, the Funds may pay redemption requests "in
kind." This means that the Funds may pay redemption requests entirely
or partially with securities rather than with cash.
MAY SHAREHOLDERS MAKE EXCHANGES BETWEEN FUNDS?
Shares of any of the Primary Trend Funds may be exchanged for shares of any
other Primary Trend Fund or the Firstar Money Market Fund at their relative net
asset values. (An affiliate of Firstar Mutual Fund Services, LLC advises the
Firstar Money Market Fund. Please call 1-800-968-2122 for a prospectus
describing Firstar Money Market Fund.) You may have a taxable gain or loss as a
result of an exchange because the Internal Revenue Code treats an exchange as a
sale of shares.
How to Exchange Shares
1. Read carefully this Prospectus and, if applicable, the prospectus for
Firstar Money Market Fund.
2. Determine the number of shares you want to exchange keeping in mind
that telephone exchanges are subject to a $1,000 minimum.
3. Write to The Primary Trend Funds, c/o Firstar Mutual Fund Services,
LLC, 3rd Floor, P. O. Box 701, Milwaukee, Wisconsin 53201-0701 or call
Firstar Mutual Fund Services, LLC at 1-800-968-2122. Firstar Mutual
Fund Services, LLC charges a fee of $5.00 for each telephone exchange.
There is no charge for a written exchange.
WHAT ABOUT DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES?
The Primary Trend Fund distributes substantially all of its net investment
income and substantially all of its capital gains annually. The Primary Income
Fund and the Primary U.S. Government Fund distribute substantially all of their
net investment income
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<PAGE>
monthly and substantially all of their capital gains annually. You have two
distribution options:
o Automatic Reinvestment - Both dividend and capital gains distributions
will be reinvested in additional Fund shares.
o All Cash Option - Both dividend and capital gains distributions will
be paid in cash.
You may make this election on the Account Application. You may change your
election by writing to Firstar Mutual Fund Services, LLC or by calling
1-800-968-2122.
Each Fund's distributions, whether received in cash or additional shares of
the Fund, may be subject to federal and state income tax. These distributions
may be taxed as ordinary income and capital gains (which may be taxed at
different rates depending on the length of time the Fund holds the assets
generating the capital gains). The Primary Trend Fund and The Primary Income
Fund expect that their distributions will consist of both ordinary income and
long-term capital gains. The Primary U.S. Government Fund expects that its
distributions will consist primarily of ordinary income.
WHAT ABOUT THE YEAR 2000 ISSUE?
The Funds' operations depend on the seamless functioning of computer
systems in the financial service industry, including those of the Adviser, and
the Funds' 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 Funds have also been
informed that comparable steps are being taken by their 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 its duties as
investment adviser to the Funds. However, the Funds cannot guarantee that all
Year 2000 Issues will be identified and remedied, and the failure to
successfully identify and remedy all Year 2000 Issues could result in an adverse
impact on the Funds. The Year 2000 Issue could also have a negative impact on
the companies in which the Funds invest, which could hurt the Funds' investment
returns.
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand each
Fund's financial performance for the past five fiscal years of operations.
Certain information reflects financial results for a single Fund share. The
total returns in the tables represent the rate that an investor would have
earned on an investment in a Fund (assuming reinvestment of all
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<PAGE>
dividends and distributions). This information has been audited by Ernst & Young
LLP, whose report, along with the Funds' financial statements, are included in
the Annual Report which is available upon request.
-19-
<PAGE>
<TABLE>
The Primary Trend Fund
<CAPTION>
For the Years Ended June 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year.......... $13.98 $14.82 $12.59 $12.10 $10.98
------ ------ ------ ------ ------
Net investment income....................... 0.19 0.13 0.21 0.21 0.23
Net realized and unrealized gain
on investments ............................ 0.23 1.60 2.98 1.30 1.55
---- ---- ---- ---- ----
Total from investment operations............ 0.42 1.73 3.10 1.51 1.78
---- ---- ---- ---- ----
Less distributions:
From net investment income.................. (0.16) (0.06) (0.14) (0.23) (0.26)
----
From net realized gains .................... (1.60) (2.51) (0.73) (0.79) (0.40)
------ ------ ------ ------- ------
Total distributions......................... (1.76) (2.57) (0.87) (1.02) (0.66)
------ ------ ------ ------ ------
Net increase (decrease)..................... (1.34) (0.84) 2.23 0.49 1.12
------ ------ ---- ---- ----
Net asset value, end of year ............... $12.64 $13.98 $14.82 $12.59 $12.10
====== ====== ====== ====== ======
Total investment return .................... 4.7% 13.1% 26.2% 11.7% 17.0%
Ratios and supplemental data:
Net assets, end of year (000s).............. $21,351 $23,714 $23,206 $21,123 $21,343
Ratio of expenses to average net assets..... 1.27% 1.24% 1.18% 1.19% 1.24%
Ratio of net investment income
to average net assets...................... 1.53% 0.89% 0.82% 1.68% 1.88%
Portfolio turnover.......................... 47.9% 24.4% 63.5% 46.5% 37.1%
</TABLE>
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<PAGE>
<TABLE>
The Primary Income Fund
<CAPTION>
For the Years Ended June 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year.......... $13.86 $14.45 $12.77 $12.07 $11.04
------ ------ ------ ------ ------
Net investment income....................... 0.42 0.45 0.42 0.43 0.50
Net realized and unrealized gain (loss)
on investments ............................ (0.14) 1.50 2.44 1.28 1.10
---- ---- ---- ---- ----
Total from investment operations............ 0.28 1.95 2.86 1.71 1.60
---- ---- ---- ---- ----
Less distributions:
From net investment income................. (0.43) (0.44) (0.42) (0.43) (0.50)
From net realized gains .................... (1.47) (2.10) (0.76) (0.58) (0.07)
------ ------ ------ ------ ------
Total distributions......................... (1.90) (2.54) (1.18) (1.01) (0.57)
------ ------ ------ ------ ------
Net increase (decrease)..................... (1.62) (0.59) 1.68 0.70 1.03
------ ------ ---- ---- ----
Net asset value, end of year ............... $12.24 $13.86 $14.45 $12.77 $12.07
====== ====== ====== ====== ======
Total investment return..................... 3.0% 14.7% 24.1% 14.8% 14.8%
Ratios and supplemental data:
Net assets, end of year (000s).............. $4,276 $4,572 $4,307 $4,510 $4,221
Ratio of net expenses to average net assets. 1.00% 0.97% 0.84% 0.84% 0.84%
Ratio of net investment income
to average net assets...................... 3.46% 3.16% 3.19% 3.43% 4.35%
Ratio of expenses reimbursed to average net 1.12% 1.05% 0.86% 0.73% 0.76%
assets......................................
Portfolio turnover.......................... 46.9% 33.5% 48.4% 41.5% 40.9%
</TABLE>
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<PAGE>
<TABLE>
The Primary U.S. Government Fund
<CAPTION>
For the Years Ended June 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of year.......... $9.93 $9.88 $9.87 $10.09 $9.74
----- ----- ----- ------ -----
Net investment income....................... 0.51 0.55 0.63 0.63 0.57
Net realized and unrealized gain (loss)
on investments ............................ (0.14) 0.05 0.01 (0.22) 0.38
------ ---- ---- ------ ----
Total from investment operations............ 0.37 0.60 0.64 0.41 0.95
---- ---- ---- ---- ----
Less distributions:
From net investment income.................. (0.51) (0.55) (0.63) (0.63) (0.57)
From net realized gains .................... ----- ----- ----- ----- (0.03)
----- ----- ----- ----- ------
Total distributions......................... (0.51) (0.55) (0.63) (0.63) (0.60)
------ ------ ------ ------ ------
Net increase (decrease)..................... (0.14) 0.05 0.01 (0.22) 0.35
------ ---- ---- ------ ----
Net asset value, end of year................ $9.79 $9.93 $9.88 $9.87 $10.09
===== ===== ===== ===== ======
Total investment return..................... 3.8% 6.2% 6.7% 4.1% 10.2%
Ratios and supplemental data:
Net assets, end of year (000s).............. $768 $744 $734 $799 $1,345
Ratio of net expenses to average net assets. 1.00% 0.95% 0.75% 0.75% 0.75%
Ratio of net investment income
to average net assets...................... 5.13% 5.55% 6.41% 6.24% 5.85%
Ratio of expenses reimbursed to average net 4.97% 5.09% 3.84% 2.20% 1.92%
assets......................................
Portfolio turnover.......................... 21.3% 62.6% 29.3% 46.6% 63.0%
</TABLE>
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<PAGE>
To learn more about the Primary Trend Funds you may want to read the
Primary Trend Funds' Statement of Additional Information (or "SAI") which
contains additional information about the Funds. The Primary Trend Funds have
incorporated the SAI into the Prospectus by reference. This means that you
should consider the contents of the SAI to be part of the Prospectus.
You also may learn more about the Primary Trend Funds' investments by
reading the Primary Trend Funds' annual and semi-annual reports to shareholders.
The annual report includes a discussion of the market conditions and investment
strategies that significantly affected the performance of the Funds during their
last fiscal year.
The SAI and the annual and semi-annual reports are all available to
shareholders and prospective investors without charge, simply by calling
1-800-443-6544.
Prospective investors and shareholders who have questions about the Primary
Trend Funds may call the above number, write to the address below, or visit our
Web site also shown below:
The Primary Trend Funds, Inc.
First Financial Centre
700 North Water Street
Milwaukee, WI 53202
www.primarytrendfunds.com
The general public can review and copy information about the Primary Trend
Funds (including the SAI) at the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. (Please call 1-800-SEC-0330 for information
on the operations of the Public Reference Room.) Reports and other information
about the Primary Trend Funds are also available at the Securities and Exchange
Commission's Internet site at http://www.sec.gov and copies of this information
may be obtained, upon payment of a duplicating fee, by writing to:
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
Please refer to the Primary Trend Funds' Investment Company Act File No.
811-04704 for The Primary Trend Fund and 811-05831 for The Primary Income Fund
and The Primary U.S. Government Fund, when seeking information about the Primary
Trend Funds from the Securities and Exchange Commission.
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<PAGE>
STATEMENT OF ADDITIONAL INFORMATION October 31, 1999
- -----------------------------------
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, 1999. 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 1-800-443-6544.
The following financial statements are incorporated by reference to the
Annual Report, dated June 30, 1999, of The Primary Trend Funds (File Nos.
811-04704 and 811-05831), as filed with the Securities and Exchange Commission
on August 25, 1999:
The Primary Trend Fund, Inc.
Portfolio of Investments
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Financial Highlights
Notes to Financial Statements
Report of Independent Auditors
The Primary Income Funds, Inc.
Portfolio 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
Shareholders may obtain a copy of the Annual Report, without charge, by calling
1-800-443-6544.
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.
General Information and History.................................. 3
Investment Restrictions.......................................... 3
Investment Considerations........................................ 5
Directors and Officers of the Companies.......................... 11
Ownership of Management and Principal Shareholders............... 13
Investment Adviser and Administrator............................. 15
Determination of Net Asset Value................................. 18
Performance and Yield Information................................ 19
Purchase of Shares............................................... 22
Redemption of Shares ........................................ 23
Exchanging Shares................................................ 23
Allocation of Portfolio Brokerage................................ 25
Custodian........................................................ 26
Taxes............................................................ 26
Independent Auditors............................................. 27
Shareholder Meetings............................................. 27
Capital Structure................................................ 28
Description of Securities Ratings................................ 29
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, 1999 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>
GENERAL INFORMATION AND HISTORY
The Primary Trend Fund, Inc. and The Primary Income Funds, Inc.
(collectively the "Companies") are open-end, diversified management companies
registered under the Investment Company Act of 1940. 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. The Primary
Trend Fund, Inc. was incorporated on June 3, 1986 and The Primary Income Funds,
Inc. was incorporated on April 5, 1989. (The Primary Trend Fund, The Primary
Income Fund and the Primary U.S. Government Fund are hereinafter individually
referred to as a "Fund" and collectively as the "Funds").
INVESTMENT RESTRICTIONS
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 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
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<PAGE>
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.
13. None of the Funds will purchase or sell commodities or commodities
contracts.
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<PAGE>
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
Money Market Instruments
Each of the Funds may invest in cash and money market instruments. The
Funds may do so when taking a temporary defensive position or to have assets
available to pay expenses, satisfy redemption requests or take advantage of
investment opportunities. The money market instruments in which they invest
include U.S. Treasury Bills, commercial paper and commercial paper master notes.
The Funds may invest in commercial paper or commercial paper master notes
rated, at the time of purchase, within the highest two rating categories by a
nationally recognized statistical rating organization (NRSRO); or unrated
commercial paper and commercial paper master notes which the Funds' investment
adviser believes to be of comparable quality. Commercial paper master notes are
demand instruments without a fixed maturity bearing interest at rates that are
fixed to known lending rates and automatically adjusted when such lending rates
change.
Investment Grade Investments
Each of the Funds may invest in U.S. government securities and publicly
distributed corporate bonds and debentures to generate current income and
possible capital gains at those times when its investment adviser believes such
securities offer opportunities for growth of capital, such as during periods of
declining interest rates when the market value of such securities generally
rises. Except as set forth below, the Funds will limit their investments in
non-convertible bonds and debentures to those which have been assigned one of
the four highest ratings of either Standard & Poor's Corporation ("S&P") (AAA,
AA, A and BBB) or Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa, A and
Baa), or unrated bonds which the Funds' investment adviser believes to be of
comparable quality. 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 such issuers to make principal and interest payments than in the case of the
issuers of higher rated obligations. Unrated securities, while not necessarily
of lower quality than rated securities, may not have as broad a market as rated
securities. If a non-convertible bond or debenture is downgraded below
investment grade by both S&P and Moody's, the Funds' investment adviser will
review such investment on an independent basis to determine whether the security
should be sold or retained.
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<PAGE>
Low-Rated Securities
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 its investment adviser, such lesser rating is due to a
special situation or other extenuating circumstances. 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. 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
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.
The value of a low-rated security generally will decrease in a rising
interest rate market. If either The Primary Trend Fund or The Primary Income
Fund 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
-6-
<PAGE>
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.
Payment Expectations
Low-rated securities typically contain redemption, call or prepayment
provisions which permit the issuers of 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 could result in less income
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
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<PAGE>
firm bids of such dealers or prices for actual sales. During periods of thin
trading, the spread 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.
Government Obligations
Each of the Funds may invest in a variety of U.S. Treasury obligations,
including bills, notes and bonds. These obligations differ only in terms of
their interest rates, maturities and time of issuance. The Funds may also invest
in other securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities.
-8-
<PAGE>
Obligations of certain agencies and instrumentalities, such as the
Government National Mortgage Association ("GNMA"), are supported by the full
faith and credit of the U.S. Treasury. Others, such as those of the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; and others, such as those of the Federal
National Mortgage Association ("FNMA"), are supported by the discretionary
authority of the U.S. government to purchase the agency's obligations; still
others, such as those of the Student Loan Marketing Association are supported
only by the credit of the agency or instrumentality that issues them. There is
no guarantee that the U.S. Government will provide financial support to its
agencies or instrumentalities, now or in the future, if it is not obligated to
do so by law.
Preferred Stocks
The Primary Trend Fund and The Primary Income Fund may invest in preferred
stocks. Preferred stocks have a preference over common stocks in liquidation
(and generally dividends as well) but are subordinated to the liabilities of the
issuer in all respects. As a general rule, the market value of preferred stocks
with a fixed dividend rate and no conversion element varies inversely with
interest rates and perceived credit risks while the market price of convertible
preferred stock generally also reflects some element of conversion value.
Because preferred stock is junior to debt securities and other obligations of
the issuer, deterioration in the credit qualify of the issuer will cause greater
changes in the value of a preferred stock than in a more senior debt security
with similarly stated yield characteristics. Unlike interest payments on debt
securities, preferred stock dividends are payable only if declared by the
issuer's board of directors. Preferred stock also may be subject to optional or
mandatory redemption provisions.
American Depository Receipts
The Primary Trend Fund and The Primary Income Fund may invest in American
Depository Receipts ("ADRs"). ADRs are receipts issued by an American bank or
trust company evidencing ownership of underlying securities issued by a foreign
issuer. ADRs may be listed on a national securities exchange or may trade in the
over-the-counter market. ADR prices are denominated in United States dollars;
the underlying security may be denominated in a foreign currency. The underlying
security may be subject to foreign government taxes which would reduce the yield
on such securities. Investments in such securities also involve certain inherent
risks, such as political or economic instability of the issuer or the country of
issue, the difficulty of predicting international trade patterns and the
possibility of imposition of exchange controls. Such securities may also be
subject to greater fluctuations in price than securities of domestic
corporations. In addition, there may be less publicly available information
about a foreign company than about a domestic company. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to domestic companies. With
respect to certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, or diplomatic developments which could affect investment
in those countries.
-9-
<PAGE>
Both The Primary Trend Fund and The Primary Income Fund may invest in ADRs
which are "sponsored" or "unsponsored". While similar, distinctions exist
relating to the rights and duties of ADR holders and market practices. A
depository may establish an unsponsored facility without the participation by,
or consent of, the issuer of the deposited securities, although a letter of
non-objection from the issuer is often requested. Holders of unsponsored ADRs
generally bear all the costs of such facility, which can include deposit and
withdrawal fees, currency conversion fees and other service fees. The depository
of an unsponsored facility may be under no duty to distribute shareholder
communications from the issuer or to pass through voting rights. Issuers of
unsponsored ADRs are not obligated to disclose material information in the U.S.
and, therefore, there may not be a correlation between such information and the
market value of the ADR. Sponsored facilities enter into an agreement with the
issuer that sets out rights and duties of the issuer, the depository and the ADR
holder. This agreement also allocates fees among the parties. Most sponsored
agreements also provide that the depository will distribute shareholder notices,
voting instruments and other communications.
Portfolio Turnover
The Funds do not trade actively for short-term profits. However, if the
objectives of the Funds would be better served, short-term profits or losses may
be realized from time to time. The annual portfolio turnover rate indicates
changes in a Fund's portfolio and is calculated by dividing the lesser of
purchases or sales of portfolio securities (excluding securities having
maturities at acquisition of one year or less) for the fiscal year by the
monthly average of the value of the portfolio securities (excluding securities
having maturities at acquisition of one year or less) owned by the Fund during
the fiscal year. The annual portfolio turnover rate may vary widely from year to
year depending upon market conditions and prospects. Increased portfolio
turnover necessarily results in correspondingly heavier transaction costs (such
as brokerage commissions or mark-ups or mark-downs) which the Fund must pay and
increased realized gains (or losses) to investors. Distributions to shareholders
of realized gains, to the extent that they consist of net short-term capital
gains, will be considered ordinary income for federal income tax purposes.
Utilities Industries Concentration
The Primary Income Fund will invest at least 25% of the value of its assets
in securities issued by companies primarily engaged in the utility industries.
Public utilities, whether state, municipal or investor-owned, often experience
certain general problems associated with these industries, 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 power generation
facilities. Various governmental bodies are conducting, and may be expected to
conduct in the future,
-10-
<PAGE>
reviews relating to nuclear power 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. Finally,
utilities can be expected to experience increased competitive pressures as a
consequence of deregulation efforts.
DIRECTORS AND OFFICERS OF THE COMPANIES
As Wisconsin corporations, the business and affairs of each Company are
managed by its officers under the direction of its Board of Directors. The same
persons currently serve as directors and officers of both The Primary Trend
Fund, Inc. and The Primary Income Funds, Inc. The name, age, address, principal
occupations during the past five years and other information with respect to
each of the directors of the Companies are as follows:
LILLI GUST*
- ----------
700 North Water Street
Milwaukee, Wisconsin
(PRESIDENT AND A DIRECTOR OF EACH COMPANY)
Ms. Gust, 53, is President, 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, 34, 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, Secretary and a
director of the Adviser. He joined the Adviser in September, 1987.
- ---------------
* Ms. Gust and Mr. Barry S. Arnold are directors who are "interested persons" of
the Companies as that term is defined in the Investment Company Act of 1940.
-11-
<PAGE>
CLARK J. HILLERY
- ----------------
700 North Water Street
Milwaukee, Wisconsin
(A DIRECTOR OF EACH COMPANY)
Mr. Hillery, 49, was General Manager of Meta Graphix from August, 1998
through July, 1999. He was President and owner of Ink Printing Corporation from
August, 1979 until August, 1998, when Meta Graphix acquired Ink Printing
Corporation.
HAROLD L. HOLTZ
- ---------------
700 North Water Street
Milwaukee, Wisconsin
(A DIRECTOR OF EACH COMPANY)
Mr. Holtz, 75, is retired. He was employed as a certified public accountant
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.
The name, address, principal occupation during the past five years and
other information with respect to the officer of the Company who is not a
director is as follows:
JAMES R. ARNOLD
- ---------------
700 North Water Street
Milwaukee, Wisconsin
(SECRETARY-TREASURER OF EACH COMPANY)
Mr. Arnold, 42, 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 are brothers.
During the fiscal year ended June 30, 1999, each Company paid $1,000 in
aggregate remuneration to its disinterested directors. 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, 1999:
-12-
<PAGE>
<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
Lilli Gust $0 $0 $0 $0
Clark J. Hillery $500 $0 $0 $500
Harold L. Holtz $500 $0 $0 $500
The Primary Income Funds, Inc.
Barry S. Arnold $0 $0 $0 $0
Lilli Gust $0 $0 $0 $0
Clark J. Hillery $500 $0 $0 $500
Harold L. Holtz $500 $0 $0 $500
</TABLE>
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 July 31, 1999, 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.
The Primary Trend Fund
Amount of
Name and Address Beneficial Percent
of Beneficial Owner Ownership of Class
------------------- ---------- --------
Ruth L. Leef 208,320 12.4%
Elm Grove, Wisconsin 53122
George L. & Ruth L. Leef 84,347 5.0%
Elm Grove, Wisconsin 53122
Directors and Officers as 141,920(1)(2) 8.4%
a Group (5 persons)
-13-
<PAGE>
The Primary Trend Fund
Amount of
Name and Address Beneficial Percent
of Beneficial Owner Ownership of Class
------------------- ---------- --------
Steven Mayer 27,077 7.7%
Crystal Lake, Illinois 60039
Barry S. Arnold 25,328 7.2%
New Berlin, Wisconsin 53146
James R. Arnold 24,361 7.0%
Big Bend, Wisconsin 53013
Carolyn M. Gross Beneficiary IRA 24,331 7.0%
New Berlin, Wisconsin 53146
Arnold Investment Counsel, Inc. 401(k) Plan 21,631 6.2%
Milwaukee, Wisconsin 53202
Directors and Officers as 105,713(1) 30.2%
a Group (5 persons)
The Primary U.S. Government Fund
Amount of
Name and Address Beneficial Percent
of Beneficial Owner Ownership of Class
------------------- ---------- --------
Arnold Investment Counsel 19,038 24.1%
Incorporated
Milwaukee, Wisconsin 53202
Lilli Gust(3) 8,256 10.4%
Milwaukee, Wisconsin 53202)
Patricia Frey IRA Rollover 6,055 7.7%
Brookfield, Wisconsin 53005
Pro Safety Inc. 401(k) Profit Sharing Plan 6,011 7.6%
Milwaukee, Wisconsin 53202
Holger A. Olsson IRA 4,814 6.1%
Presque Isle, Wisconsin 54557
-14-
<PAGE>
Amount of
Name and Address Beneficial Percent
of Beneficial Owner Ownership of Class
------------------- ---------- --------
Bruce A. Struckman 4,146 5.2%
Western Springs, Illinois 60558
Barry S. Arnold 4,118 5.2%
New Berlin, Wisconsin 53146
Carolyn M. Gross Beneficiary IRA 3,961 5.0%
New Berlin, Wisconsin 53146
Directors and Officers as a 35,849 (1) 45.3%
Group (5 persons)
- ---------------------
(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 serves as trustee.
(3) Arnold Investment Counsel Incorporated is controlled by Lilli Gust. See
"INVESTMENT ADVISER."
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 15.5% 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 Primary Income Funds, Inc. 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
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. 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. The Adviser, at its own expense and without separate
reimbursement from any of the Funds,
-15-
<PAGE>
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 directors who are not
"interested persons" of the Companies). 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.
For the fiscal years ended June 30, 1999, 1998 and 1997, The Primary Trend
Fund paid the Adviser fees of $156,169 $180,773 and $166,935, respectively,
pursuant to its Advisory Agreement. For the fiscal years ended June 30, 1999,
1998 and 1997, the Adviser effectively waived 100% of its advisory fees for The
Primary Income Fund and 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 Investment Company Act of 1940 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 Companies; director and officer liability insurance, if any; salaries of
administrative and clerical personnel; association membership dues; auditing and
accounting 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 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 year ended June 30, 1997 and the period from July 1,
1997 to August 31, 1997 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 each of the last three
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
-16-
<PAGE>
U.S. Government Fund were reduced by $48,302 (including $31,894 of advisory
fees) and $38,413 (including $5,022 of advisory fees), respectively, for the
fiscal year ended June 30, 1999; $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; and $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.
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, 1999, 1998 and 1997.
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.
The administrator to the Funds is Sunstone Financial Group, Inc., 207 East
Buffalo Street, Suite 400, Milwaukee, Wisconsin 53202 (the "Administrator").
Each of the Companies and the Administrator entered into administration and fund
accounting agreements on January 27, 1997 (the "Administration Agreements") that
will remain in effect unless terminated as provided below.
-17-
<PAGE>
Pursuant to the Administration Agreements the Administrator 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.
For the fiscal year ended June 30, 1999 The Primary Trend Fund, The Primary
Income Fund and The Primary U.S. Government Fund paid the Administrator $36,776,
$27,821 and $16,416, respectively, pursuant to the Administration Agreements.
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 Agreements.
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
The net asset value of each Fund is 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 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.
-18-
<PAGE>
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.
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.
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.
PERFORMANCE AND YIELD 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.
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. 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.
-19-
<PAGE>
The calculation assumes reinvestment of all dividends and distributions
and reflects the effect of all recurring fees.
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, 1999 were 4.68%, 14.69% and 9.62%,
respectively, and for the period from September 15, 1986 (beginning of
operations) through June 30, 1999 was 10.06%. The Primary Income Fund's annual
compounded rate of return for the one and five year periods ended June 30, 1999
were 2.97% and 14.09%, respectively, and for the period from September 1, 1989
(beginning of operations) through June 30, 1999 was 11.33%. The Primary U.S.
Government Fund's annual compounded rate of return for the one and five year
periods ended June 30, 1999 were 3.79% and 6.18%, respectively, and for the
period from September 1, 1989 (beginning of operations) through June 30, 1999,
was 6.57%.
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, 1999,
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
1999 34,089 +240.89
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The foregoing results are based on historical performance 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 years ended June 30, 1999 and 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. A
quotation of a yield reflects a Fund's income over a stated period expressed as
a percentage of the Fund's share price. 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:
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.
Capital gains and losses are not included in the yield calculation.
The yield for the thirty days ended June 30, 1999 was 3.79% for The Primary
Income Fund and 5.09% 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.
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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.
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.
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 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 the Nasdaq Stock
Market. 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.
Each Fund offers an automatic investment plan. Pursuant to this 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. 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 the Funds to transfer funds
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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.
REDEMPTION OF SHARES
A shareholder's right to redeem shares of any Fund will be suspended and
the shareholder's 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.
Shareholders owning Fund shares worth at least $25,000 may withdraw a fixed
amount at regular monthly or quarterly intervals through the Funds' systematic
withdrawal plan. Shareholders participating in the systematic withdrawal plan
cannot hold shares in certificate form. The systematic withdrawal plan is not
available for IRA accounts or other retirement plans. To establish a systematic
withdrawal plan, shareholders should 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 the
shareholder's account. Redemptions can be made monthly or quarterly on any day
the shareholder chooses. 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 the shareholder's account be reinvested in additional shares.
Shareholders may deposit additional Fund shares in their account at any time.
Withdrawal payments cannot be considered as yield or income on a
shareholder's 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 a Fund's portfolio, redemptions for the purpose
of making such withdrawals may reduce or even exhaust the account.
Shareholders 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 the Funds. Certain changes may be made by
telephone.
EXCHANGING SHARES
Shareholders may exchange shares of any Fund for shares of the Firstar
Money Market Fund at their net asset value and at a later date exchange such
shares and shares purchased with reinvested dividends for shares of the Funds at
net asset value. The exchange
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<PAGE>
privilege does not in any way constitute an offering of, or recommendation on
the part of the Funds or the Adviser of, an investment in the Firstar Money
Market Fund. Any shareholder who considers making such an investment through the
exchange privilege should obtain and review the prospectus of the Firstar Money
Market Fund before exercising the exchange privilege. The exchange privilege
will not be available if (i) the proceeds from a redemption of shares are paid
directly to the shareholder or at his or her discretion to any person other than
the Funds or (ii) the proceeds from redemption in the shares of the Firstar
Money Market Fund are not immediately reinvested in shares of the Funds through
a subsequent exercise of the exchange privilege. Shareholders may exchange
shares only for shares that have been registered in their state.
Exchanges may only be made between identically registered accounts. If
certificates are held, they must first be properly delivered with the
shareholder's 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 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.
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. 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 Mutual Fund Services, LLC. Neither the Funds,
Firstar Mutual Fund Services, LLC 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. Only two (2) telephone exchanges per account are
allowed during any twelve-month period.
Shareholders 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 the Funds' automatic exchange plan. The automatic
exchange transaction can be made on any day the shareholder chooses. If that day
is a weekend or holiday, the exchange will be made the following business day.
The minimum exchange per transaction is $50. Shareholders may also automatically
exchange dividend and capital gain distributions
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<PAGE>
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. Shareholders should call the Funds at 1-800-443-6544 to obtain the
forms necessary to establish the automatic exchange plan.
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
most favorable price to the Funds means the best net price without regard to the
mix between the purchase or sale price and commission, if any. Over-the-counter
securities are generally purchased and sold directly with principal market
makers who retain the difference in their cost in the security and its selling
price (i.e. "markups" when the market maker sells a security and "markdowns"
when the market maker purchases a security). In some instances the Adviser feels
that better prices are available from non-principal market makers who are paid
commissions directly. 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 by the executing broker viewed in terms of either
the particular transaction or the Adviser's overall responsibilities with
respect to the Funds and the other accounts as to which it exercises investment
discretion.
Brokerage commissions paid by The Primary Trend Fund during its fiscal
years ended June 30, 1999, 1998 and 1997 totaled $46,707 on transactions of
$14,810,022; $43,058 on transactions of $14,401,904; and $52,134 on transactions
of $27,964,127, respectively.
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<PAGE>
During the fiscal year ended June 30, 1999, The Primary Trend Fund paid
commissions of $39,192 on transactions of $13,376,683 to brokers who provided
research services to the Adviser. Brokerage commissions paid by The Primary
Income Fund during its fiscal years ended June 30, 1999, 1998 and 1997 totaled
$8,386 on transactions of $2,637,803; $5,619 on transactions of $2,244,644; and
$11,316 on transactions of $4,314,992, respectively. During the fiscal year
ended June 30, 1999, The Primary Income Fund paid commissions of $7,856 on
transactions of $2,494,378 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, 1999, 1998 and 1997.
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
Each of the Funds intends to qualify annually for and elect tax treatment
applicable to a regulated investment company under Subchapter M of the Code Each
Fund has so qualified in each of its fiscal years. If a Fund fails to qualify as
a regulated investment company under Subchapter M in any fiscal year, it will be
treated as a corporation for federal income tax purposes. As such, the Fund
would be required to pay income taxes on its net investment income and net
realized capital gains, if any, at the rates generally applicable to
corporations. Shareholders of a Fund that did not qualify as a regulated
investment company under Subchapter M would not be liable for income tax on the
Fund's net investment income or net realized capital gains in their individual
capacities. Distributions to shareholders, whether from the Fund's net
investment income or net realized capital gains, would be treated as taxable
dividends to the extent of accumulated earnings and profits of the Fund.
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.
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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.
This section is not intended to be a complete discussion of present or
proposed federal income tax laws and the effect of such laws on an investor.
Investors are urged to consult with their respective tax advisers for a complete
review of the tax ramifications of an investment in the Funds.
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.
SHAREHOLDER MEETINGS
The Wisconsin Business Corporation Law permits registered investment
companies, such as the Companies, to operate without an annual meeting of
shareholders under specified circumstances if an annual meeting is not required
by the Investment Company Act of 1940. Each of the Companies has adopted the
appropriate provisions in its bylaws and, at its discretion, may not hold an
annual meeting in any year in which none of the following matters is required to
be acted upon by the shareholders under the Investment Company Act of 1940: (i)
election of directors; (ii) approval of an investment advisory agreement; (iii)
ratification of the selection of auditors; and (iv) approval of a distribution
agreement.
Each Company's bylaws also contain procedures for the removal of directors
by its shareholders. At any meeting of shareholders, duly called and at which a
quorum is present, the shareholders may, by the affirmative vote of the holders
of a majority of the votes entitled to be cast thereon, remove any director or
directors from office and may elect a successor or successors to fill any
resulting vacancies for the unexpired terms of removed directors.
With respect to each Company, upon the written request of the holders of
shares entitled to not less than ten percent (10%) of all the votes entitled to
be cast at such meeting, the Secretary of the Company shall promptly call a
special meeting of shareholders for the purpose of voting upon the question of
removal of any director. Whenever ten or more
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shareholders of record who have been such for at least six months preceding the
date of application, and who hold in the aggregate either shares having a net
asset value of at least $25,000 or at least one percent (1%) of the total
outstanding shares, whichever is less, shall apply to a Company's Secretary in
writing, stating that they wish to communicate with other shareholders with a
view to obtaining signatures to a request for a meeting as described above and
accompanied by a form of communication and request which they wish to transmit,
the Secretary shall within five business days after such application either: (1)
afford to such applicants access to a list of the names and addresses of all
shareholders as recorded on the books of the Company; or (2) inform such
applicants as to the approximate number of shareholders of record and the
approximate cost of mailing to them the proposed communication and form of
request.
If the Secretary elects to follow the course specified in clause (2) of the
last sentence of the preceding paragraph, the Secretary, upon the written
request of such applicants, accompanied by a tender of the material to be mailed
and of the reasonable expenses of mailing, shall, with reasonable promptness,
mail such material to all shareholders of record at their addresses as recorded
on the books unless within five business days after such tender the Secretary
shall mail to such applicants and file with the Securities and Exchange
Commission, together with a copy of the material to be mailed, a written
statement signed by at least a majority of the Board of Directors to the effect
that in their opinion either such material contains untrue statements of fact or
omits to state facts necessary to make the statements contained therein not
misleading, or would be in violation of applicable law, and specifying the basis
of such opinion.
After opportunity for hearing upon the objections specified in the written
statement so filed, the Securities and Exchange Commission may, and if demanded
by the Board of Directors or by such applicants shall, enter an order either
sustaining one or more of such objections or refusing to sustain any of them. If
the Securities and Exchange Commission shall enter an order refusing to sustain
any of such objections, or if, after the entry of an order sustaining one or
more of such objections, the Securities and Exchange Commission shall find,
after notice and opportunity for hearing, that all objections so sustained have
been met, and shall enter an order so declaring, the Secretary shall mail copies
of such material to all shareholders with reasonable promptness after the entry
of such order and the renewal of such tender.
CAPITAL STRUCTURE
The Primary Trend Fund, Inc.
The Primary Trend Fund's 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
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event, the holders of the remaining shares voting will not be able to elect any
person or persons to the Board of Directors.
The Primary Income Funds, Inc.
The authorized capital of The Primary Income Funds, Inc. consists of
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.
Miscellaneous
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 to 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
the Prospectus and the Statement of Additional Information in order to help
investors understand the similarities and differences among the Funds. Because
the Funds share a Prospectus and Statement of Additional Information, there is a
possibility that one Fund might become liable for a misstatement, inaccuracy or
disclosure in a Prospectus or Statement of Additional Information concerning
another Fund.
DESCRIPTION OF SECURITIES RATINGS
Each of 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.). Additionally, The Primary Trend Fund
and The Primary
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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. Finally each of
the Funds may invest in commercial paper rated in the highest two rating
categories of Standard & Poor's Corporation or Moody's Investors Service, Inc. A
brief description of the ratings symbols and their meanings follows.
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
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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 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.
-31-
<PAGE>
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 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.
Standard & Poor's Commercial Paper Ratings. A Standard & Poor's commercial
paper rating is a current assessment of the likelihood of timely payment of debt
considered short-term in the relevant market. Ratings are graded into several
categories, ranging from A-1 for the highest quality obligations to D for the
lowest. These categories are as follows:
A-1. This highest category indicates that the degree of safety regarding
timely payment is strong. Those issuers determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However the relative degree of safety is not as high as for
issuers designated "A-1".
A-3. Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying a higher designation.
Moody's Short-Term Debt Ratings. Moody's short-term debt ratings are
opinions of the ability of issuers to repay punctually senior debt obligations
which have an original maturity not exceeding one year. Obligations relying upon
support mechanisms such as letters-of-credit and bonds of indemnity are excluded
unless explicitly rated.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
-32-
<PAGE>
o Leading market positions in well-established industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
o Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
o Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
<PAGE>
PART C
OTHER INFORMATION
Item 23. Exhibits
--------
(a) Registrant's Articles of Incorporation. (1)
(b) Registrant's By-Laws, as amended. (1)
(c) None
(d)(i) Investment Advisory Agreement for The Primary Income Fund. (1)
(d)(ii) Investment Advisory Agreement for The Primary U.S. Government
Fund. (1)
(e) None
(f) None
(g) Custodian Agreement with Firstar Bank Milwaukee, N.A.
(successor to First Wisconsin Trust Company).(1)
(h) Administration and Fund Accounting Agreement with Sunstone
Financial Group, Inc. (1)
(i) Opinion of Foley & Lardner, counsel for Registrant.
(j) Consent of Ernst & Young LLP, independent auditors.
(k) None
(l) Subscription Agreement. (1)
(m) None
(n) None
- -----------------------
(1) 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.
S-1
<PAGE>
Item 24. Persons Controlled by or under Common Control with Registrant
The Primary U.S. Government Fund is controlled by Lilli Gust, who owned
or controlled 34.6% of such Fund's voting securities as of July 31, 1999.
Neither the Registrant nor The Primary Income Fund is controlled by any person.
Registrant does not control any person.
Item 25. 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 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
S-2
<PAGE>
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 26. Business and Other Connections of Investment Adviser
Information with respect to Ms. Gust and Mr. Barry S. Arnold is
incorporated by reference to pages 11 through 13 of the Statement of Additional
Information pursuant to Rule 411 under the Securities Act of 1933.
Item 27. Principal Underwriters
Registrant has no principal underwriters.
Item 28. 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 of Sunstone Financial Group, Inc., 207
East Buffalo Street, Suite 400, Milwaukee, Wisconsin 53202.
Item 29. Management Services
All management-related service contracts entered into by Registrant are
discussed in Parts A and B of this Registration Statement.
S-3
<PAGE>
Item 30. 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-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant 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 29th
day of July, 1999.
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
- ------------------------
Lilli Gust Officer and Director July 29, 1999
/s/ James R. Arnold Principal Financial and July 29, 1999
- ------------------------
James R. Arnold Accounting Officer
/s/ Barry S. Arnold Director July 29, 1999
- ------------------------
Barry S. Arnold
/s/ Clark J. Hillery Director July 29, 1999
- ------------------------
Clark J. Hillery
/s/ Harold L. Holtz Director July 29, 1999
- ------------------------
Harold L. Holtz
S-5
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit Page No.
----------- ------- --------
(a) Registrant's Articles of Incorporation*
(b) Registrant's By-Laws, as amended*
(c) None
(d)(i) Investment Advisory Agreement for The
Primary Income Fund*
(d)(ii) Investment Advisory Agreement for The
Primary U.S. Government Fund*
(e) None
(f) None
(g) Custodian Agreement with Firstar Bank
Milwaukee, N.A. (successor to First
Wisconsin Trust Company)*
(h) Administration and Fund Accounting Agreement
with Sunstone Financial Group, Inc.*
(i) Opinion of Foley & Lardner Counsel for Registrant
(j) Consent of Ernst & Young LLP, independent auditors
(k) None
(l) Subscription Agreement*
(m) None
(n) None
FOLEY & LARDNER
ATTORNEYS AT LAW
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] 012156/0103
August 27, 1999
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,
/s/Foley & Lardner
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
23, 1999 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. 13 to the Registration Statement under the
Securities Act of 1933 (File No. 33-29468) and in this Amendment No. 15 to the
Registration Statement under the Investment Company Act of 1940 (File No.
811-05831 ).
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
August 26, 1999
