STATEMENT OF ADDITIONAL INFORMATION October 31, 1999
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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.
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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................................................. 24
Allocation of Portfolio Brokerage................................. 25
Custodian......................................................... 26
Taxes............................................................. 26
Independent Auditors.............................................. 27
Shareholder Meetings.............................................. 27
Capital Structure................................................. 29
Description of Securities Ratings................................. 30
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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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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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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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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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
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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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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.
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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.
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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,
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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.
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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:
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<TABLE>
<CAPTION>
Aggregate Pension or Retirement Estimated Annual Total Compensation
Compensation Benefits Accrued As Part of Benefits Upon from Company Paid
Name of Person from Company Company Expenses Retirement to 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)
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The Primary Income 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
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<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,
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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
resulting in the fee waivers and expense reimbursements set forth below:
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Reimbursements
Fiscal Year in Addition
Fund Ended June 30 Fees Waived to Fee Waivers
---- ------------- ----------- --------------
The Primary Income Fund 1999 $31,894 $16,408
1998 $34,852 $14,525
1997 $32,899 $ 5,154
The Primary U.S. Government Fund 1999 $ 5,022 $33,391
1998 $ 4,930 $33,679
1997 $ 4,977 $24,435
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
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<PAGE>
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.
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
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<PAGE>
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.
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
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<PAGE>
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. 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 $10,000
T = average annual total return
n = number of year
ERV = ending value of a hypothetical $10,000 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
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<PAGE>
Value of
$10,000 Cumulative
June 30 Investment % Change
------- ---------- --------
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
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.
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<PAGE>
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.
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
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<PAGE>
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 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.
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<PAGE>
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 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
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<PAGE>
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 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
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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. 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
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corporations may apply to such dividends and distributions, subject to
proportionate reductions if the aggregate dividends received by a Fund from
domestic corporations in any year are less than 100% of such Fund's net
investment company income taxable distributions.
Any dividend or capital gains distribution paid shortly after a
purchase of shares will have the effect of reducing the per share net asset
value of such shares by the amount of the dividend or distribution. Furthermore,
if the net asset value of the shares immediately after a dividend or
distribution is less than the cost of such shares to the shareholder, the
dividend or distribution will be taxable to the shareholder even though it
results in a return of capital.
Shareholders may realize a capital gain or capital loss in any year in
which they redeem shares. The gain or loss is the difference between the
shareholder's basis (cost) and the redemption price of the shares redeemed.
Each Fund may be required to withhold federal income tax at a rate of
31% ("backup withholding") from dividend payments and redemption proceeds if a
shareholder fails to furnish such Fund with his Social Security or other tax
identification number and certify under penalty of perjury that such number is
correct and that he is not subject to backup withholding due to the
underreporting of income. The certification form is included as part of the
account application and should be completed when the account is opened.
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.
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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 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.
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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
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.
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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 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;
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AAA - Debt rated AAA has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in the higher rated
categories.
BBB - Debt rated BBB has an adequate capacity to pay interest and
repay principal. Whereas such debt normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC - Debt rated BB, B, CCC or CC is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and 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
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be characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
Moody's applies numerical modifiers 1, 2 and 3 in each of the
foregoing generic rating classifications. The modifier 1 indicates that the
company ranks in the higher end of its 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:
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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:
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.
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