UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act File Number 811-04704
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The Primary Trend Fund, Inc.
700 N. Water Street
Milwaukee, WI 53202
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(Address of principal executive offices)
Arnold Investment Counsel Incorporated
700 N. Water Street
Milwaukee, WI 53202
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(Name and address of agent for service)
Registrant's telephone number, including area code: (414) 271-2726
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Date of fiscal year end: June 30
-------
Date of reporting period: June 30, 2003
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ITEM 1. REPORTS TO STOCKHOLDERS
The following is a copy of the report transmitted to shareholders pursuant to
Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1)
(THE PRIMARY TREND FUNDS LOGO)
ANNUAL REPORT
THE PRIMARY
TREND FUND
THE PRIMARY
INCOME FUND
MILWAUKEE, WISCONSIN
JUNE 30, 2003
MESSAGE TO SHAREHOLDERS...
"We have always agreed with Warren Buffett's perverse view of bear
markets -- they allow long-term investors to buy good companies on the
cheap. The key is to filter out the short-term noise and daily bad news
and focus on the long-term opportunities that present themselves to equity
investors. We again emphasize that today is quite the opposite of the
speculative fervor of 1999-2000 -- to buy into weakness now may be as
prescient as selling into strength then."
THE PRIMARY TREND FUNDS
December 31, 2002 - Semiannual Report
Just a few short months ago, the bear market that ravaged Wall Street from
2000-2002 seemed like it was about to do an encore performance in 2003. Corrupt
CEOs were making the front page news, auditing practices were being questioned,
investment bankers were being sued, earnings were in the tank, global health
scares were spreading in epidemic proportions and the Iraqi showdown was about
to erupt into a full-scale war.
This plethora of bad news was certainly not ignored by the stock market.
After a very brief New Year's rally, the stock market, as measured by the Dow
Jones Industrial Average, proceeded to drop 1300 points to its March low of 7500
- -- a mere 4% above its October bear market low of 7300.
"Here we go again" was echoed up and down Wall Street and the short sellers
were licking their chops. As simplistic and rudimentary as it sounds, our
advice for long-term investors at the time was that "it is always darkest before
the dawn." In effect, the stock market had already absorbed all of the negative
economic, financial and political punches that had been thrown at it - and it
was still standing - and at even higher levels than in October 2002. To us,
that was a very strong signal that the bearish forces had been exhausted and any
good news that surfaced would surely be bullish.
Today, four months from the March low, the daily barrage of "bad news" seems
like a distant memory. Many believe the bull market is back. We, however,
believe that THE bull market that propelled stocks to new all-time highs during
---
the 1990s is over. It culminated in the frenzied buying spree during the tech
bubble and has since been expunged during this multi-year bear market.
But we do believe a new cyclical bull market was born during the October-
March bottoming process, and this has resulted in better one-year performance
for stocks. For the year ended June 30, 2003, the Dow Jones Industrial Average
posted a total return loss of -0.48%, while the S&P 500 Composite eked out a
total return gain of +0.25%.
Due to our conservative investment philosophy, the Funds generally play great
defense and average offense. But over the last few years, your Funds have been
playing solidly on both sides of the ball. The Primary Trend Funds have smartly
outperformed the S&P 500 Composite during this three-year bear market and are
currently keeping pace during the 2003 rally. For the 12 months ended 6/30/03,
The Primary Trend Funds generated the following total returns for its
shareholders:
THE PRIMARY TREND FUND + 0.34%
THE PRIMARY INCOME FUND - 3.20%
THE PRIMARY TREND FUND
- ----------------------
After a grueling three-year bear market, the mettle of every investor has
been tested. As shareholders in The Primary Trend Fund, escaping this difficult
period with solid gains is only half the battle -- it is now up to us, as
portfolio managers, to continue to outperform during up markets as well.
Thus far in 2003, our value-oriented style has kept pace with a stock market
that seems to have rekindled its love affair with tech stocks. We continue to
underown technology equities for two reasons: 1) Tech stocks were the Wall
Street darlings during the last bull market and a change in market leadership
tends to emerge as a new cyclical bull market gets underway; 2) Valuations in
the tech sector are still not compelling enough for dyed-in-the-wool value
investors such as us -- especially when considering the speculative risk that is
inherent in many of these names. We continue to limit our tech exposure (8.0%)
to AT&T Wireless, Hewlett-Packard and Intel.
While the Fund's overweighted cyclical exposure was a bit premature, it has
paid huge dividends during the latest stock market rally off of the March lows.
Long-term holdings such as Carnival Corp., COX Communications, Disney, Du Pont,
General Electric, McDonald's and Wendy's all rallied nicely off of their
respective lows -- with the majority outpacing the S&P 500 by a wide margin.
More importantly, additional purchases in Ford common, as well as new timely
buys in Home Depot, Nucor and Sears, helped The Primary Trend Fund achieve
respectable gains in the last few months. With cyclical exposure already at 38%
of the portfolio, we anticipate new money to be directed into other sectors of
the market.
As anticipated, we have reduced our consumer staple exposure to a market
weighting of 10%. We eliminated Unilever, N.V. after it reached our price
objective, and purchased a smaller position in Del Monte Foods. Holdings such
as Anheuser-Busch, Archer-Daniels-Midland, General Mills and Newell Rubbermaid
are still attractive as long-term positions in the portfolio, but their
performance tends to lag during bullish phases of the market.
Our commitment to the Healthcare sector (11% of the portfolio) as been met
with mixed results. While Abbott Laboratories, Johnson & Johnson and Bristol-
Myers Squibb have made solid upside progress, Schering-Plough continues to
languish near its lows. We still believe the potential value in Schering-Plough
common is being ignored by Wall Street in the short term.
With the recent stock market rally, we have taken some chips off the table.
Cash in the portfolio now stands at 11%, with only 2% devoted to bonds (due to
our bearish outlook for the bond market). We will take advantage of individual
opportunities on both the buy and sell side as the stock market winds its way
through 2003.
THE PRIMARY INCOME FUND
- -----------------------
While The Primary Income Fund underperformed the S&P 500 Composite over the
past year, it did outpace its other benchmark, the S&P Utilities Index (-4.18%).
President Bush's tax cut package, which included preferential tax treatment
on corporate dividends, helped ignite a rally in the utility sector. The
Primary Income Fund's 31% weighting in the Utility sector (28% in utility common
stocks and another 3% in utility bonds) was aided by the strong rally in the
group. We continue to emphasize stable and conservative electric, natural gas
and water utilities that are led by management teams committed to dividend
sustainability and growth. Long-term holdings in Cinergy, KeySpan, Sempra
Energy and Wisconsin Energies fit this profile. We have also initiated new
positions in American States Water, Otter Tail, The Southern Co. and Vectren
Corp.
As with The Primary Trend Fund, we have increased The Primary Income Fund's
exposure to the cyclical sector (20% of the portfolio) as well. We anticipate
further investments in above-average, dividend paying cyclical stocks as 2003
unfolds.
Our bond exposure has been reduced from 16% on 12/31/02 to just 10% on
6/30/03. The Federal Reserve's aggressive interest rate cuts (13 cuts in 18
months) have reduced interest rates to 45-year lows. We believe the bond market
is peaking and have limited our maturities to five years or less.
The decrease in our bond exposure has temporarily inflated our cash position
to 19% as of 6/30/03; however, we expect to put some of that cash to work in the
equity market over the next several weeks.
THE GLASS IS HALF FULL
- ----------------------
"The primary trend is the most powerful force underlying the movement of
the markets. Knowing its direction is the most valuable information an
investor can possess."
James R. Arnold, Sr.
Founder of Arnold Investment Counsel, Inc.
To many investors, whether we are in a secular bull market or a cyclical bull
market makes no difference -- as long as stocks are going up. Which is why
recent bullish action has numbed much of the pain inflicted over the last four
years.
We believe we are now in an environment where strong cyclical bull markets
will be interrupted by periods of bearish stock market action. In other words,
a new bullish primary trend has yet to emerge; therefore, investors will be
required to be more flexible and fluid going forward.
Currently, market history is on the side of the bulls. The stock market has
experienced three years in a row of negative performance -- a losing streak that
hasn't occurred since 1939-41. That was followed by a 74% upside move over the
next four years. Additionally, the "Decennial 3" pattern (years ending in "3")
has averaged +4.6% over the last 11 decades, and presidential pre-election years
(such as 2003) have an above-average gain of +11.1% since 1887.
More importantly, however, both the fundamental valuations on individual
stocks and the underlying strength of the stock market's recent rally (vis-a-vis
the bullish Advance/Decline Indicator and various thrust momentum measures)
point to continued upside surprises.
Interest rates are at 45-year lows. This offers little incentive to fixed-
income investors to stick with bonds and could provide additional fuel for the
stock market as capital flows from bonds to stocks. In addition, nearly $4
trillion is sitting on the sidelines in money market and savings accounts. It
would be foolhardy to believe that all of that is earmarked for the stock market
- -- but even a small portion of this cash would keep the bullish fire burning.
Both corporate earnings and economic growth, while not robust, are moderate
enough to positively surprise Wall Street (which has ratcheted down earnings-
per-share expectations to pessimistic levels). Couple that with President
Bush's recent tax cut package that includes dividend and capital expenditure
incentives, and the fundamental foundation for this stock market is much
stronger now than at any time during the last five years.
The Dow Jones Industrial Average has rallied by 25% from its March low and
now trades above 9000 for the first time since last August. The S&P 500
Composite has gained 27% and the Nasdaq Composite has jumped 39% from those same
March lows. This is a stock market that is in gear. After those powerful
moves, it is also a stock market that is overbought. But a healthy market can
stay overbought for extended periods of time.
Some negatives do exist: investor sentiment is abnormally bullish (which is
bearish from a contrarian standpoint); insiders have flipped to the sell side;
and the technology-laden Nasdaq Composite has resumed its speculative role as a
market leader. However, we believe the corrections in the stock market will be
mild and that we will look back on the October 2002 and March 2003 lows as the
---
bear market lows.
Our glass is half full and we expect to build upon our recent successes as we
structure your Funds' portfolios to take advantage of the vagaries of the stock
market. All of us at Arnold Investment Counsel value you as a fellow
shareholder in The Primary Trend Funds. We are committed to rewarding that
confidence and trust that you have placed in us.
Sincerely,
/s/Lilli Gust /s/Barry S. Arnold
Lilli Gust Barry S. Arnold
President Vice President
Chief Investment Officer
PORTFOLIOS OF INVESTMENTS
June 30, 2003
THE PRIMARY TREND FUND
MARKET
SHARES COST VALUE
------ ---- ------
COMMON STOCKS 85.1%
49,999 AT&T Wireless Services, Inc.*<F1>
(Telecommunications) $ 343,104 $ 410,492
6,000 Abbott Laboratories
(Pharmaceutical products) 178,980 262,560
20,000 Allstate Corp. (Insurance) 679,308 713,000
10,000 Anheuser-Busch Companies, Inc.
(Beverages) 295,400 510,500
39,728 Archer-Daniels-Midland Co.
(Food processing) 557,830 511,299
6,998 BP plc (Integrated oil company) 143,640 294,056
14,000 Bristol-Myers Squibb Co.
(Pharmaceuticals) 378,155 380,100
18,000 Carnival Corp. (Cruise lines) 458,319 585,180
45,000 Cendant Corp.*<F1>
(Diversified consumer services) 611,830 824,400
6,000 Chubb Corp. (Insurance) 327,730 360,000
18,000 COX Communications, Inc.*<F1>
(Cable T.V.) 518,230 574,200
10,000 Del Monte Foods Co.*<F1>
(Diversified food) 89,475 88,400
12,000 Du Pont (E.I.) de Nemours & Co.
(Diversified chemicals) 545,260 499,680
27,000 Ford Motor Co.
(Automotive manufacturing) 248,490 296,730
20,000 General Electric Co.
(Diversified manufacturing) 579,820 573,600
5,000 General Mills, Inc.
(Diversified food) 224,300 237,050
23,812 Hewlett-Packard Co. (Computers) 401,711 507,196
6,000 The Home Depot, Inc.
(Retail-building products) 136,080 198,720
16,000 Intel Corp. (Semiconductors) 382,968 332,544
7,000 Johnson & Johnson (Medical products) 299,250 361,900
25,000 McDonald's Corp. (Restaurant chains) 614,128 551,500
7,000 Newell Rubbermaid, Inc.
(Consumer products) 183,618 196,000
5,000 Nucor Corp. (Steel-producers) 191,175 244,250
13,000 Occidental Petroleum Corp.
(Integrated oil company) 242,127 436,150
8,000 PartnerRe Ltd. (Insurance) 266,855 408,880
30,000 Schering-Plough Corp.
(Pharmaceuticals) 760,660 558,000
8,000 Schlumberger Ltd.
(Oil field services) 316,800 380,560
7,000 Sears Roebuck & Co. (Retail) 166,460 235,480
5,580 United Technologies Corp. (Aerospace) 231,525 395,231
20,000 Walt Disney Co.
(Entertainment and media) 365,300 395,000
12,000 Wendy's International, Inc.
(Restaurant chains) 264,397 347,640
----------- -----------
Total Common Stocks 11,002,925 12,670,298
----------- -----------
PRINCIPAL
AMOUNT
- ---------
BONDS AND NOTES 2.1%
CONVERTIBLE BOND
$300,000 Analog Devices, Inc.,
4.75%, due 10/1/05 285,190 306,750
----------- -----------
Total Bonds and Notes 285,190 306,750
----------- -----------
Total Long-Term Investments 11,288,115 12,977,048
----------- -----------
SHORT-TERM INVESTMENTS 10.9%
VARIABLE RATE DEMAND NOTES
404,945 American Family Insurance Co., 0.71% 404,945 404,945
782,024 US Bank, N.A., 0.78% 782,024 782,024
439,353 Wisconsin Corporate
Central Credit Union, 0.70% 439,353 439,353
----------- -----------
Total Short-Term Investments 1,626,322 1,626,322
----------- -----------
TOTAL INVESTMENTS 98.1% $12,914,437 14,603,370
-----------
-----------
Other Assets less Liabilities 1.9% 288,988
-----------
NET ASSETS 100.0% $14,892,358
-----------
-----------
SUMMARY OF INVESTMENTS BY SECTOR
PERCENT OF
SECTOR INVESTMENT SECURITIES
------ ---------------------
Consumer, Non-cyclical 25.6%
Consumer, Cyclical 16.5%
Short-Term Investments 11.1%
Financial 10.1%
Communications 9.5%
Technology 7.9%
Energy 7.6%
Industrial 6.6%
Basic Materials 5.1%
------
Total Investments 100.0%
*<F1> Non-income producing
See notes to financial statements.
THE PRIMARY INCOME FUND
MARKET
SHARES COST VALUE
------ ---- ------
COMMON STOCKS 75.7%
1,000 Abbott Laboratories
(Pharmaceutical products) $ 29,830 $ 43,760
2,000 Alliant Energy Corp.
(Electric and gas utility) 61,700 38,060
3,000 Allstate Corp. (Insurance) 116,528 106,950
3,000 American States Water Co.
(Water utility) 82,662 81,900
2,000 Anheuser-Busch Companies, Inc.
(Beverages) 59,080 102,100
1,637 Apartment Investment & Management Co.
(Real estate investment trust) 23,363 56,640
1,600 BP plc (Integrated oil company) 33,685 67,232
3,000 Bristol-Myers Squibb Co.
(Pharmaceuticals) 85,922 81,450
3,000 Carnival Corp. (Cruise lines) 76,734 97,530
1,000 Chubb Corp. (Insurance) 54,455 60,000
2,000 Cinergy Corp.
(Electric and gas utility) 39,641 73,580
4,000 DPL, Inc. (Electric and gas utility) 40,678 63,760
1,191 DTE Energy Co. (Electric utility) 56,834 46,020
2,500 Du Pont (E.I.) de Nemours & Co.
(Diversified chemicals) 114,000 104,100
7,000 Ford Motor Co.
(Automotive manufacturing) 59,350 76,930
5,000 General Electric Co.
(Diversified manufacturing) 146,280 143,400
3,000 Hewlett-Packard Co. (Computers) 52,530 63,900
2,000 Intel Corp. (Semiconductors) 50,375 41,568
3,000 KeySpan Corp. (Natural gas utility) 74,815 106,350
7,000 McDonald's Corp. (Restaurant chains) 173,577 154,420
3,000 Newell Rubbermaid, Inc.
(Consumer products) 78,694 84,000
3,000 Occidental Petroleum Corp.
(Integrated oil company) 62,250 100,650
3,000 Otter Tail Corp. (Electric utility) 82,316 80,940
7,000 Schering-Plough Corp. (Pharmaceuticals) 174,380 130,200
1,000 Schlumberger Ltd. (Oil field services) 39,600 47,570
2,000 Sears Roebuck & Co. (Retail) 47,820 67,280
4,000 Sempra Energy (Natural gas utility) 62,362 114,120
3,000 The Southern Company (Electric utility) 85,890 93,480
3,000 Vectren Corp. (Natural gas utility) 64,302 75,150
2,000 Verizon Communications, Inc.
(Telecommunications) 90,364 78,900
1,000 Walt Disney Co. (Entertainment and media) 22,360 19,750
2,000 Wendy's International, Inc.
(Restaurant chains) 45,441 57,940
4,000 Wisconsin Energy Corp.
(Electric and gas utility) 98,278 116,000
---------- ----------
Total Common Stocks 2,386,096 2,675,630
---------- ----------
PRINCIPAL
AMOUNT
- ---------
BONDS AND NOTES 10.2%
CORPORATE BONDS
$150,000 General Electric Capital Corp.,
1.733%, due 6/11/08 150,000 149,995
100,000 Wisconsin Gas Co., 6.375%, due 11/1/05 100,341 108,712
---------- ----------
Total Corporate Notes 250,341 258,707
---------- ----------
CONVERTIBLE BOND
100,000 Analog Devices, Inc., 4.75%, due 10/1/05 95,066 102,250
---------- ----------
Total Bonds and Notes 345,407 360,957
---------- ----------
Total Long-Term Investments 2,731,503 3,036,587
---------- ----------
SHORT-TERM INVESTMENTS 19.2%
VARIABLE RATE DEMAND NOTES
335,729 American Family Insurance Co., 0.71% 335,729 335,729
227,811 US Bank, N.A., 0.78% 227,811 227,811
114,513 Wisconsin Corporate
Central Credit Union, 0.70% 114,513 114,513
---------- ----------
Total Short-Term Investments 678,053 678,053
---------- ----------
TOTAL INVESTMENTS 105.1% $3,409,556 3,714,640
---------- ----------
---------- ----------
Liabilities less Other Assets (5.1%) (180,222)
----------
NET ASSETS 100.0% $3,534,418
----------
----------
SUMMARY OF INVESTMENTS BY SECTOR
PERCENT OF
SECTOR INVESTMENT SECURITIES
------ ---------------------
Utilities 26.9%
Short-Term Investments 18.2%
Consumer, Cyclical 14.5%
Financial 10.0%
Consumer, Non-cyclical 9.6%
Energy 5.8%
Technology 5.6%
Industrial 3.9%
Basic Materials 2.8%
Communications 2.7%
------
Total Investments 100.0%
See notes to financial statements.
STATEMENTS OF ASSETS AND LIABILITIES
June 30, 2003
THE PRIMARY THE PRIMARY
TREND FUND INCOME FUND
---------- -----------
Assets:
Investments, at Value (Note 2a):
Common Stocks $12,670,298 $2,675,630
Bonds and Notes 306,750 360,957
Short-Term Investments 1,626,322 678,053
----------- ----------
Total Investments (Cost $12,914,437
and $3,409,556, respectively) 14,603,370 3,714,640
Receivable for Investments Sold 290,867 --
Dividends Receivable 19,955 5,281
Interest Receivable 4,560 2,883
Capital Shares Receivable 189 289
Prepaid Expenses and Other Assets 3,020 1,616
----------- ----------
Total Assets 14,921,961 3,724,709
----------- ----------
Liabilities
Payable for Investments Purchased -- 164,978
Accrued Investment Advisory Fees 9,081 10,905
Other 20,522 14,408
----------- ----------
Total Liabilities 29,603 190,291
----------- ----------
Net Assets $14,892,358 $3,534,418
----------- ----------
----------- ----------
Shares Outstanding 1,317,518 314,122
Net Asset Value Per Share $ 11.30 $ 11.25
----------- ----------
----------- ----------
Net Assets Consist of:
Capital Stock
(30,000,000 shares authorized each) $13,201,135 $3,366,344
Undistributed Net Investment Income 14,982 --
Undistributed Net Realized Losses (12,692) (137,010)
Net Unrealized Appreciation of Investments 1,688,933 305,084
----------- ----------
Net Assets $14,892,358 $3,534,418
----------- ----------
----------- ----------
See notes to financial statements.
STATEMENTS OF OPERATIONS
For the year ended June 30, 2003
THE PRIMARY THE PRIMARY
TREND FUND INCOME FUND
---------- -----------
Income:
Interest $ 44,701 $ 33,959
Dividends 235,545(a) 77,849(b)
<F2> <F3>
--------- ---------
Total Income 280,246 111,808
--------- ---------
Expenses:
Investment Advisory Fees (Note 3) 103,033 24,653
Administration and Accounting Fees 35,742 25,531
Shareholder Servicing Costs 29,941 11,829
Professional Fees 22,832 20,426
Registration Fees 11,939 8,244
Printing 7,190 2,462
Custodial Fees 3,349 3,362
Postage 2,635 646
Insurance 2,373 546
Pricing 1,556 2,129
Other 2,244 2,054
--------- ---------
Total Expenses Before Reimbursement 222,834 101,882
Less Expenses Reimbursed By Adviser (Note 3) -- (68,567)
--------- ---------
Net Expenses 222,834 33,315
--------- ---------
Net Investment Income 57,412 78,493
--------- ---------
Net Realized Gain (Loss) on Investments 114,534 (42,122)
Change in Net Unrealized
Appreciation of Investments (144,605) (155,240)
--------- ---------
Net Realized and Unrealized Loss on Investments (30,071) (197,362)
--------- ---------
Net Increase (Decrease) in
Net Assets From Operations $ 27,341 $(118,869)
--------- ---------
--------- ---------
(a)<F2> Net of $1,815 in foreign withholding taxes.
(b)<F3> Net of $429 in foreign withholding taxes.
See notes to financial statements.
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended June 30, 2003 and 2002
THE PRIMARY THE PRIMARY
TREND FUND INCOME FUND
------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Operations:
Net Investment Income $ 57,412 $ 69,262 $ 78,493 $ 84,545
Net Realized Gain (Loss)
on Investments 114,534 546,706 (42,122) 18,353
Change in Net Unrealized Appreciation
of Investments (144,605) (1,093,178) (155,240) (116,484)
----------- ----------- ---------- ----------
Net Increase (Decrease) in Net
Assets from Operations 27,341 (477,210) (118,869) (13,586)
----------- ----------- ---------- ----------
Distributions to Shareholders:
From Net Investment Income (61,692) (169,847) (78,690) (84,635)
From Net Realized Gains (673,924) (124,759) -- --
----------- ----------- ---------- ----------
Decrease in Net Assets
from Distributions (735,616) (294,606) (78,690) (84,635)
----------- ----------- ---------- ----------
Fund Share Transactions:
Proceeds from Shares Sold 1,907,777 753,979 88,730 159,451
Reinvested Distributions 690,580 276,186 68,709 74,547
Cost of Shares Redeemed (2,961,022) (1,945,327) (105,104) (181,914)
----------- ----------- ---------- ----------
Net Increase (Decrease) in Net Assets
from Fund Share Transactions (362,665) (915,162) 52,335 52,084
----------- ----------- ---------- ----------
Total Decrease in
Net Assets (1,070,940) (1,686,978) (145,224) (46,137)
Net Assets:
Beginning of Year 15,963,298 17,650,276 3,679,642 3,725,779
----------- ----------- ---------- ----------
End of Year $14,892,358 $15,963,298 $3,534,418 $3,679,642
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Undistributed Net Investment
Income at End of Year $ 14,982 $ 19,262 $ -- $ 49
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Transactions in Shares:
Sales 187,369 62,456 8,309 13,188
Reinvested Distributions 64,375 22,632 6,414 6,171
Redemptions (282,056) (161,693) (9,781) (14,989)
----------- ----------- ---------- ----------
Net Increase (Decrease) (30,312) (76,605) 4,942 4,370
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
See notes to financial statements.
FINANCIAL HIGHLIGHTS
The following table shows per share operating performance data, total investment
return, ratios and supplemental data for each of the years ended June 30:
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
THE PRIMARY TREND FUND
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Year $11.84 $12.39 $10.55 $12.64 $13.98
------ ------ ------ ------ ------
Net Investment Income 0.04 0.05 0.16 0.20 0.19
Net Realized and Unrealized Gain (Loss) on Investments (0.03) (0.39) 2.19 (1.53) 0.23
------ ------ ------ ------ ------
Total from Investment Operations 0.01 (0.34) 2.35 (1.33) 0.42
------ ------ ------ ------ ------
Less Distributions:
From Net Investment Income (0.05) (0.12) (0.20) (0.17) (0.16)
From Net Realized Gains (0.50) (0.09) (0.31) (0.59) (1.60)
------ ------ ------ ------ ------
Total Distributions (0.55) (0.21) (0.51) (0.76) (1.76)
------ ------ ------ ------ ------
Net Increase (Decrease) (0.54) (0.55) 1.84 (2.09) (1.34)
------ ------ ------ ------ ------
Net Asset Value, End of Year $11.30 $11.84 $12.39 $10.55 $12.64
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL INVESTMENT RETURN 0.34% (2.77%) 22.54% (11.13%) 4.68%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Year (in thousands) $14,892 $15,963 $17,650 $14,787 $21,351
Ratio of Net Expenses to Average Net Assets 1.60% 1.44% 1.38% 1.40% 1.27%
Ratio of Net Investment Income to Average Net Assets 0.41% 0.41% 1.36% 1.69% 1.53%
Portfolio Turnover 27.5% 34.4% 44.7% 32.6% 47.9%
See notes to financial statements.
FINANCIAL HIGHLIGHTS
The following table shows per share operating performance data, total investment
return, ratios and supplemental data for each of the years ended June 30:
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
THE PRIMARY INCOME FUND
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Year $11.90 $12.22 $10.40 $12.24 $13.86
------ ------ ------ ------ ------
Net Investment Income 0.25 0.28 0.35 0.44 0.42
Net Realized and Unrealized Gain (Loss) on Investments (0.65) (0.32) 1.82 (1.60) (0.14)
------ ------ ------ ------ ------
Total from Investment Operations (0.40) (0.04) 2.17 (1.16) 0.28
------ ------ ------ ------ ------
Less Distributions:
From Net Investment Income (0.25) (0.28) (0.35) (0.44) (0.43)
From Net Realized Gains -- -- -- (0.24) (1.47)
------ ------ ------ ------ ------
Total Distributions (0.25) (0.28) (0.35) (0.68) (1.90)
------ ------ ------ ------ ------
Net Increase (Decrease) (0.65) (0.32) 1.82 (1.84) (1.62)
------ ------ ------ ------ ------
Net Asset Value, End of Year $11.25 $11.90 $12.22 $10.40 $12.24
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL INVESTMENT RETURN (3.20%) (0.37%) 21.09% (9.66%) 2.97%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Year (in thousands) $3,534 $3,680 $3,726 $3,372 $4,276
Ratio of Net Expenses to Average Net Assets 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of Net Investment Income to Average Net Assets 2.36% 2.27% 3.02% 4.04% 3.46%
Ratio of Total Expenses to Average Net Assets 3.06% 2.78% 2.44% 2.43% 2.12%
Portfolio Turnover 30.5% 21.5% 36.6% 33.4% 46.9%
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
June 30, 2003
1. ORGANIZATION
The Primary Trend Fund, Inc. ("Trend Fund") began operations on September
15, 1986. The Primary Income Funds, Inc. ("Income Fund") began operations
on September 1, 1989. The Trend Fund and the Income Fund, collectively, the
"Funds," are registered under the Investment Company Act of 1940 as open-
end investment management companies.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Funds.
a. Each security, excluding securities with 60 days or less remaining to
maturity, is valued at the last sale price, or if no sale is reported,
the average of the latest bid and asked prices. Price information on
listed stocks is taken from the exchange where the security is
primarily traded. Other securities for which market quotations are not
readily available are valued under procedures approved by the Boards
of Directors. Securities with 60 days or less remaining to maturity
are valued at amortized cost, which approximates market value.
b. Security transactions are recorded on the trade date. Dividend income
is recorded on the ex-dividend date. Interest income is recorded as
earned, and includes amortization of premiums and discounts.
Securities gains and losses are determined on the basis of identified
cost, which is the same basis used for federal income tax purposes.
c. No provision for federal income taxes has been made since the Funds
have elected to be taxed as regulated investment companies and intend
to distribute their net investment income and net realized gains to
shareholders and otherwise comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies. At June
30, 2003, the Income Fund had a federal income tax capital loss
carryforward of $123,581 which $54,512 expires in 2009 and $69,069
expires in 2011. To the extent that the Income Fund realizes future
net capital gains, those gains will be offset by any unused capital
loss carryforward. As of June 30, 2003 the Income Fund had $13,429 of
post-October capital losses which are deferred, for tax purposes, to
the fiscal year ending June 30, 2004. Net capital losses incurred
after October 31, and within the taxable year are deemed to arise on
the first day of the Fund's next taxable year.
d. Dividends from net investment income are declared and paid at least
annually by the Trend Fund and are declared and paid monthly by the
Income Fund. Distributions of net realized capital gains, if any, are
declared and paid at least annually. Distributions to shareholders are
recorded on the ex-dividend date. The character of distributions made
during the year from net investment income or net realized gains may
differ from the characterization for federal income tax purposes due
to differences in the recognition of income, expense and gain items
for financial statement and tax purposes. Where appropriate,
reclassifications between net asset accounts are made for such
differences.
TREND FUND INCOME FUND
------------------ -------------------
FISCAL YEAR ENDING JUNE 30, 2003 2002 2003 2002
---- ---- ---- ----
Distributions paid from:
Ordinary Income $ 61,692 $261,678 $78,690 $84,635
Net long term capital gains 673,924 32,928 -- --
-------- -------- ------- -------
Total taxable distributions 735,616 294,606 78,690 84,635
Tax return of capital -- -- -- --
-------- -------- ------- -------
Total distributions paid $735,616 $294,606 $78,690 $84,635
-------- -------- ------- -------
-------- -------- ------- -------
For the year ended June 30, 2003, the Trend Fund designated $673,924
as a long-term capital gain distribution for purposes of the dividends
paid deduction.
e. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States ("GAAP") requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the
reporting period. Actual results could differ from those estimates.
3. INVESTMENT ADVISORY FEES AND MANAGEMENT AGREEMENTS
The Funds have agreements with Arnold Investment Counsel, Inc. (the
"Adviser"), with whom certain officers and directors of the Funds are
affiliated, to serve as investment adviser. Under the terms of the
agreements, the Adviser receives from both the Trend Fund and the Income
Fund a monthly fee at an annual rate of 0.74% of their respective average
daily net assets. The agreements further stipulate that the Adviser will
reimburse the Income Fund for annual expenses exceeding certain specified
levels. In addition to the reimbursements required under the agreements,
the Adviser has voluntarily reimbursed the Income Fund for additional
expenses incurred during the year ended June 30, 2003. For the year ended
June 30, 2003, the Adviser reimbursed the Income Fund for all expenses
exceeding 1.00% of its respective average daily net assets. This additional
voluntary reimbursement to the Fund may be modified or discontinued at any
time by the Adviser. The Adviser did not reimburse the Trend Fund for any
expenses during the year ended June 30, 2003. For the year ended June 30,
2003, the Funds incurred investment advisory fees, net of expense
reimbursements, totaling $59,119. The Trend Fund paid total directors fees
of $1,500 to its outside directors and the Income Fund paid total
directors' fees of $1,500 to its outside directors' during the year ended
June 30, 2003.
4. PURCHASES AND SALES OF SECURITIES
Total purchases and sales of securities, other than short-term investments,
for the Funds for the year ended June 30, 2003 were as follows:
TREND FUND INCOME FUND
---------- -----------
Purchases $3,405,783 $887,692
Sales $3,579,322 $869,040
5. TAX INFORMATION
At June 30, 2003, gross unrealized appreciation and depreciation of
investments, based on aggregate cost for federal income tax purposes of
$13,041,451 and $3,409,556 for the Trend Fund and Income Fund,
respectively, were as follows:
TREND FUND INCOME FUND
---------- -----------
Appreciation $2,265,690 $477,778
Depreciation (703,791) (172,694)
---------- --------
Net Appreciation on Investments $1,561,899 $305,084
---------- --------
---------- --------
The book basis and tax basis of net unrealized appreciation (depreciation)
on investments differs primarily as a result of the tax deferral of losses
on wash sales.
As of June 30, 2003, the components of accumulated earnings/(deficit) on a
tax basis were as follows:
TREND FUND INCOME FUND
---------- -----------
Undistributed ordinary income $ 14,982 $ --
Undistributed long-term capital gains 114,342 --
---------- ---------
Accumulated earnings 129,324 --
Accumulated capital and other losses -- (137,010)
Unrealized appreciation 1,561,899 305,084
---------- ---------
Total accumulated earnings $1,691,223 $ 168,074
---------- ---------
---------- ---------
Certain dividends paid by the Trend Fund and the Income Fund may be subject
to a maximum tax rate of 15%, as provided by the Jobs and Growth Tax Relief
Reconciliation Act of 2003. For the fiscal year ended June 30, 2003, the
Trend Fund and the Income Fund designated up to $61,692 and $78,690,
respectively, as taxed at a maximum rate of 15%. Information will be
reported in conjunction with your 2003 Form 1099-DIV.
For the year ended June 30, 2003, 100% and 88.18% of the dividends paid
from net investment income, including short-term gains, qualifies for the
dividends received deduction available to corporate shareholders of the
Trend Fund and Income Fund, respectively.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders,
The Primary Trend Fund, Inc.
The Primary Income Funds, Inc.
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of The Primary Trend Fund and The
Primary Income Fund as of June 30, 2003, and the related statements of
operations for the year then ended and changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of June 30, 2003, by correspondence with the custodian and broker or by
other appropriate auditing procedures where replies from brokers were not
received. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial positions of The
Primary Trend Fund and The Primary Income Fund at June 30, 2003, the results of
their operations for the year then ended, the changes in their net assets for
each of the two years in the period then ended, and their financial highlights
for each of the five years in the period then ended, in conformity with
accounting principles generally accepted in the United States.
/s/Ernst & Young
Milwaukee, Wisconsin
July 24, 2003
DIRECTORS AND OFFICERS
NUMBER OF
TERM OF PRINCIPAL FUNDS OTHER
POSITION(S) OFFICE AND OCCUPATION(S) IN COMPLEX DIRECTORSHIPS
NAME, ADDRESS HELD WITH LENGTH OF DURING PAST OVERSEEN HELD
AND AGE THE FUND TIME SERVED 5 YEARS BY DIRECTOR BY DIRECTOR
- ------------- ----------- ----------- ------------- ----------- -------------
INDEPENDENT DIRECTORS:
Harold L. Holtz Director Indefinite, until Retired 2 Sharon Foundry, Inc.
700 N. Water Street successor elected Previously practiced as a CPA,
Milwaukee, WI 53202 both private & public for over
Age: 79 5 years 40 years
Clark Hillery Director Indefinite, until Director of Team Services for 2 None
700 N. Water Street successor elected the Milwaukee Bucks
Milwaukee, WI 53202
Age: 53 5 years
William J. Rack Director Indefinite, until Commercial Real Estate 2 None
700 N. Water Street successor elected Development and Leasing
Milwaukee, WI 53202
Age: 57 1 Year
INTERESTED DIRECTORS:
Barry S. Arnold Director, Indefinite, until Portfolio Manager 2 Arnold Investment
700 N. Water Street Vice President successor elected Counsel
Milwaukee, WI 53202 and Secretary
Age: 38 6 years
Lilli Gust Director, Indefinite, until Investment Adviser 2 Arnold Investment
700 N. Water Street President successor elected Counsel
Milwaukee, WI 53202 and Treasurer
Age: 57 17 years
Additional information about the Funds' Directors is available in the Statement
of Additional Information and is available, without charge, upon request, by
calling 1-800-443-6544.
FUND PERFORMANCE COMPARISON
Date Primary Trend Fund S&P 500 Composite*<F4>
---- ------------------ ----------------------
6/30/93 $10,000 $10,000
9/30/93 $10,127 $10,258
12/31/93 $10,217 $10,496
3/31/94 $9,918 $10,098
6/30/94 $9,972 $10,141
9/30/94 $10,508 $10,636
12/31/94 $10,204 $10,634
3/31/95 $10,793 $11,670
6/30/95 $11,670 $12,784
9/30/95 $11,766 $13,800
12/31/95 $11,857 $14,630
3/31/96 $12,857 $15,416
6/30/96 $13,246 $16,108
9/30/96 $13,701 $16,605
12/31/96 $15,412 $17,990
3/31/97 $15,209 $18,472
6/30/97 $16,721 $21,697
9/30/97 $18,385 $23,322
12/31/97 $18,215 $23,992
3/31/98 $19,460 $27,338
6/30/98 $18,905 $28,241
9/30/98 $16,956 $25,432
12/31/98 $17,849 $30,848
3/31/99 $18,052 $32,385
6/30/99 $19,790 $34,668
9/30/99 $18,259 $32,503
12/31/99 $17,372 $37,339
3/31/00 $17,272 $38,196
6/30/00 $17,589 $37,181
9/30/00 $19,413 $36,821
12/31/00 $21,101 $33,939
3/31/01 $20,666 $29,916
6/30/01 $21,553 $31,667
9/30/01 $19,410 $27,019
12/31/01 $21,469 $29,906
3/31/02 $22,743 $29,988
6/30/02 $20,955 $25,970
9/30/02 $18,454 $21,484
12/31/02 $18,756 $23,297
3/31/03 $18,086 $22,563
6/30/03 $21,026 $26,038
INITIAL INVESTMENT OF $10,000 ON 6/30/93
FUND PERFORMANCE THROUGH JUNE 30, 2003
- --------------------------------------
2003 Year to Date +12.10%
One Year +0.34%
5 Years (annualized) +2.15%
10 Years (annualized) +7.72%
Since Inception +7.97%
9/15/86 (annualized)
Date Primary Income Fund S&P 500 Composite*<F4>
---- ------------------- ----------------------
6/30/93 $10,000 $10,000
9/30/93 $10,482 $10,258
12/31/93 $10,429 $10,496
3/31/94 $10,023 $10,098
6/30/94 $9,942 $10,141
9/30/94 $10,376 $10,636
12/31/94 $10,159 $10,634
3/31/95 $10,870 $11,670
6/30/95 $11,418 $12,784
9/30/95 $11,786 $13,800
12/31/95 $12,254 $14,630
3/31/96 $12,769 $15,416
6/30/96 $13,111 $16,108
9/30/96 $13,399 $16,605
12/31/96 $14,716 $17,990
3/31/97 $15,017 $18,472
6/30/97 $16,270 $21,697
9/30/97 $17,887 $23,322
12/31/97 $18,470 $23,992
3/31/98 $19,170 $27,338
6/30/98 $18,666 $28,241
9/30/98 $17,953 $25,432
12/31/98 $18,567 $30,848
3/31/99 $17,828 $32,385
6/30/99 $19,220 $34,668
9/30/99 $17,878 $32,503
12/31/99 $16,991 $37,339
3/31/00 $17,098 $38,196
6/30/00 $17,364 $37,181
9/30/00 $19,360 $36,821
12/31/00 $20,446 $33,939
3/31/01 $20,215 $29,916
6/30/01 $21,027 $31,667
9/30/01 $20,028 $27,019
12/31/01 $21,087 $29,906
3/31/02 $22,353 $29,988
6/30/02 $20,948 $25,970
9/30/02 $18,576 $21,484
12/31/02 $18,883 $23,297
3/31/03 $18,073 $22,563
6/30/03 $20,277 $26,038
INITIAL INVESTMENT OF $10,000 ON 6/30/93
FUND PERFORMANCE THROUGH JUNE 30, 2003
- --------------------------------------
2003 Year to Date +7.38%
One Year -3.20%
5 Years (annualized) +1.67%
10 Years (annualized) +7.32%
Since Inception +8.35%
9/1/89 (annualized)
Past performance is not predictive of future performance. (You already know
that...but we are required to say it anyway.)
Returns shown include the reinvestment of all dividends, but do not reflect the
deduction of taxes that a shareholder would pay on Fund distributions or the
redemption of Fund shares. The investment return and principal value of the
Funds will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
*<F4> The S&P 500(R) is an unmanaged but commonly used measure of common stock
total return performance.
(THE PRIMARY TREND FUNDS LOGO)
WWW.PRIMARYTRENDFUNDS.COM
INVESTMENT ADVISER
Arnold Investment Counsel Incorporated
700 North Water Street
Milwaukee, Wisconsin 53202
1-800-443-6544
OFFICERS
Lilli Gust, President and Treasurer
Barry S. Arnold, Vice President and Secretary
DIRECTORS
Barry S. Arnold
Lilli Gust
Clark J. Hillery
Harold L. Holtz
William J. Rack
ADMINISTRATOR
UMB Fund Services, Inc.
803 West Michigan Street
Milwaukee, Wisconsin 53233
CUSTODIAN
U.S. Bank, N.A.
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
U.S. Bancorp Fund Services, LLC
615 East Michigan Street
Milwaukee, Wisconsin 53202
1-800-968-2122
INDEPENDENT AUDITORS
Ernst & Young LLP
111 East Kilbourn Avenue
Milwaukee, Wisconsin 53202
LEGAL COUNSEL
Foley & Lardner
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Founding member of
100%
NO-LOAD TM
MUTUAL FUND
COUNCIL
ITEM 2. CODE OF ETHICS
Not applicable to semi-annual reports for the period ended June 30, 2003.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT
Not applicable to semi-annual reports for the period ended June 30, 2003.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Not applicable to semi-annual reports for the period ended June 30, 2003.
ITEMS 5-6. RESERVED
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES
Not applicable.
ITEM 8. RESERVED
ITEM 9. CONTROLS AND PROCEDURES
(a) The Principal Executive and Financial Officer concluded that the
Registrant's Disclosure Controls and Procedures are effective based on
their evaluation of the Disclosure Controls and Procedures as of a date
within 90 days of the filing date of this report.
(b) There were no significant changes in Registrant's internal controls or in
other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
ITEM 10. EXHIBITS
(a) Code of Ethics. Not applicable to semi-annual reports for the period ended
June 30, 2003.
(b) Certifications required pursuant to Sections 302 and 906 of the Sarbanes-
Oxley Act of 2002 are filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
The Primary Trend Fund, Inc.
- ----------------------------
/s/ Lilli Gust
- --------------
Lilli Gust
Principal Executive Officer
August 29, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
/s/ Lilli Gust
- --------------
Lilli Gust
Principal Executive Officer
August 29, 2003
/s/ Lilli Gust
- --------------
Lilli Gust
Principal Financial Officer
August 29, 2003