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PRINCIPAL PRESERVATION PORTFOLIOS, INC.
INSURED TAX-EXEMPT PORTFOLIO
215 North Main Street
West Bend, Wisconsin 53095-3348
(414) 334-5521
NOTICE OF A SPECIAL MEETING OF SHAREHOLDERS
ON APRIL 24, 1996
To the Shareholders of THE INSURED TAX-EXEMPT PORTFOLIO
OF PRINCIPAL PRESERVATION PORTFOLIOS, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the
"Meeting") of the Insured Tax-Exempt Portfolio (the "Insured Portfolio"), a
series of Principal Preservation Portfolios, Inc. ("Principal Preservation"),
will be held on Wednesday, April 24, 1996 at 3:00 p.m., Central Time, at The
Bacchus Restaurant (located in the West Bend Inn building), 2520 West Washington
Street, West Bend, Wisconsin. The purpose of the Meeting is to consider and to
act upon the following proposals:
1. To approve a Plan of Reorganization and Liquidation (the "Plan") under
which the net assets of the Insured Portfolio would be transferred to
the Tax-Exempt Portfolio (the "Tax-Exempt Portfolio"), an existing
series of Principal Preservation. Pursuant to the Plan, the Tax-Exempt
Portfolio would issue to the Insured Portfolio, in exchange for such
assets of the Insured Portfolio, shares of Common Stock of the
Tax-Exempt Portfolio with an aggregate net asset value equal to the
value of the Insured Portfolio's assets so transferred. The Insured
Portfolio would make a pro rata distribution to its shareholders of such
shares of the Tax-Exempt Portfolio, and the Insured Portfolio
shareholders would thereby become shareholders of the Tax-Exempt
Portfolio. It is expected that the value of each Insured Portfolio
shareholder's account with the Tax-Exempt Portfolio after the exchange
would be the same as the value of such shareholder's account in the
Insured Portfolio immediately prior to the exchange.
2. To transact such other business as may properly come before the Meeting
or any adjournments thereof.
The Board of Directors of Principal Preservation has fixed the close of
business on March 15, 1996 as the record date for the determination of
shareholders of the Insured Portfolio entitled to notice of, and to vote at,
such Meeting and any adjournments thereof.
By Order of the Board of Directors
S. CHARLES O'MEARA
Secretary
West Bend, Wisconsin
March 26, 1996
YOUR VOTE IS IMPORTANT -- PLEASE RETURN YOUR PROXY CARD PROMPTLY
SHAREHOLDERS ARE INVITED TO ATTEND THE MEETING IN PERSON. ANY SHAREHOLDER WHO
DOES NOT EXPECT TO ATTEND THE MEETING IS URGED TO INDICATE VOTING INSTRUCTIONS
ON THE ENCLOSED PROXY CARD, DATE AND SIGN IT, AND RETURN IT IN THE ENCLOSED
POSTPAID ENVELOPE. IN ORDER TO AVOID THE ADDITIONAL EXPENSE OF A SECOND
SOLICITATION, WE ASK YOUR COOPERATION IN MAILING YOUR PROXY PROMPTLY, NO MATTER
HOW LARGE OR SMALL YOUR HOLDINGS MAY BE.
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Rule 497(b)
1933 Act Reg. No. 333-01125
1940 Act File No. 811-4401
PRINCIPAL PRESERVATION PORTFOLIOS, INC.
215 North Main Street
West Bend, Wisconsin 53095-3348
(414) 334-5521
------------------------
PROXY STATEMENT/PROSPECTUS
Acquisition of the Assets of the Insured Tax-Exempt Portfolio,
a series of Principal Preservation Portfolios, Inc.,
By, and In Exchange for Shares of Common Stock of, the
Tax-Exempt Portfolio, another series of Principal Preservation Portfolios, Inc.
------------------------
This Proxy Statement/Prospectus is being furnished in connection with the
solicitation of proxies by the Board of Directors of Principal Preservation
Portfolios, Inc. ("Principal Preservation"), for use at a Special Meeting of
Shareholders of the Insured Tax-Exempt Portfolio (the "Insured Portfolio"), a
series of Principal Preservation, to be held at 3:00 p.m., Central Time, on
Wednesday, April 24, 1996, at The Bacchus Restaurant (located in the West Bend
Inn building), 2520 West Washington Street, West Bend, Wisconsin (the
"Meeting").
The purpose of the Meeting is to consider and vote on the Plan of
Reorganization and Liquidation (the "Plan") involving the Insured Portfolio and
the Tax-Exempt Portfolio (collectively, the "Portfolios" and individually, a
"Portfolio"), another series of Principal Preservation. The Plan provides for
the reorganization of the Insured Portfolio into the Tax-Exempt Portfolio.
Pursuant to the Plan, all of the assets of the Insured Portfolio (net of its
liabilities) would be acquired by the Tax-Exempt Portfolio in exchange for
shares of common stock, par value $.001 per share ("Common Stock"), of the
Tax-Exempt Portfolio. Shares of Common Stock of the Tax-Exempt Portfolio
received by the Insured Portfolio would then be distributed pro rata to
shareholders of the Insured Portfolio, and the Insured Portfolio would be
liquidated and discontinued. It is expected that the value of each Insured
Portfolio shareholder's account in the Tax-Exempt Portfolio after these proposed
transactions (the "Reorganization") would be the same as the value of such
shareholder's account in the Insured Portfolio immediately prior to the
Reorganization. See "The Proposed Reorganization." The investment objective of
the Tax-Exempt Portfolio is to obtain the highest total return consistent with
preservation of principal through investing in high grade municipal bonds with
remaining maturities of two to 20 years.
This Proxy Statement/Prospectus sets forth concisely the information about
the Insured Portfolio, the Tax-Exempt Portfolio, Principal Preservation and the
Reorganization that shareholders of the Insured Portfolio should know before
voting on the Reorganization. It constitutes an offering of shares of the Tax-
Exempt Portfolio only. Please read this Proxy Statement/Prospectus carefully and
retain it for future reference. (Continued on next page)
THESE SECURITIES ARE NOT OBLIGATIONS, DEPOSITS OR ACCOUNTS OF, OR ENDORSED OR
GUARANTEED BY, ANY BANKING INSTITUTION, ARE NOT INSURED OR GUARANTEED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC) OR ANY OTHER GOVERNMENTAL AGENCY
AND INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATIVE TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is March 22, 1996.
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(Continued from previous page)
The Statement of Additional Information, dated March 22, 1996, relating to
this Proxy Statement/Prospectus has been filed with the Securities and Exchange
Commission (the "Commission") and is incorporated herein by reference. Copies of
the Statement of Additional Information may be obtained without charge by
writing to B.C. Ziegler and Company ("Ziegler"), distributor for Principal
Preservation, at 215 North Main Street, West Bend, Wisconsin 53095, or by
calling Ziegler at (800) 826-4600. Shareholders wishing to request the Statement
of Additional Information should ask for the "Insured Tax-Exempt Portfolio
Reorganization SAI." In addition, the Prospectus, as supplemented, and the
Statement of Additional Information, as supplemented, of Principal Preservation
(covering both the Insured Portfolio and the Tax-Exempt Portfolio), each dated
May 1, 1995 (the "May 1, 1995 Prospectus" and the "May 1, 1995 SAI,"
respectively), and Principal Preservation's 1995 Annual Report to Shareholders
(the "Annual Report") have been filed with the Commission and are incorporated
by reference herein. Copies of the May 1, 1995 Prospectus and the Annual Report
accompany this Proxy Statement/Prospectus, and copies of the May 1, 1995 SAI may
be obtained without charge by writing to or calling Ziegler at the above address
or telephone number.
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TABLE OF CONTENTS
<TABLE>
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PAGE
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AVAILABLE INFORMATION................................................................... 2
INTRODUCTION, VOTING INFORMATION AND REQUIREMENTS....................................... 3
SYNOPSIS................................................................................ 4
Introduction.......................................................................... 4
Proposed Reorganization............................................................... 4
Reasons for the Reorganization........................................................ 5
COMPARISON OF THE PORTFOLIOS............................................................ 6
Investment Objectives and Policies.................................................... 6
Expenses.............................................................................. 8
Other Information About the Insured Portfolio,
the Tax-Exempt Portfolio and Principal Preservation................................ 9
THE PROPOSED REORGANIZATION............................................................. 9
Description of the Plan............................................................... 10
Reasons for the Proposed Reorganization............................................... 11
Description of Securities To Be Issued................................................ 13
Tax Considerations.................................................................... 13
Capitalization........................................................................ 15
MISCELLANEOUS........................................................................... 15
Principal Shareholders................................................................ 15
Auditors.............................................................................. 15
Interests of Experts and Counsel...................................................... 15
Cost of Solicitation.................................................................. 15
Other Matters......................................................................... 16
Shareholder Meetings.................................................................. 16
</TABLE>
AVAILABLE INFORMATION
Principal Preservation has filed with the Commission a Registration
Statement on Form N-14 (the "Registration Statement") under the Securities Act
of 1933, as amended (the "Securities Act"), with respect to the shares of the
Tax-Exempt Portfolio offered hereby. As permitted by the rules and regulations
of the Commission, this Proxy Statement/Prospectus omits certain information,
exhibits and undertakings contained in the Registration Statement. Such
additional information can be inspected at the principal offices of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, as well as the
following regional offices: Seven World Trade Center, 13th Floor, New York, New
York 10048; and CitiCorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60621. Copies of the Registration Statement can be obtained from the
Commission at prescribed rates by writing to the Commission at any such address.
For further information, reference is made to the Registration Statement and to
the exhibits thereto.
No person has been authorized to give any information or to make any
representations other than those contained in this Proxy Statement/Prospectus in
connection with the offer contained in this Proxy Statement/Prospectus and, if
given or made, such other information or representations must not be relied upon
as having been authorized by Principal Preservation. This Proxy
Statement/Prospectus does not constitute an offer to sell securities in any
state or other jurisdiction to any person to whom it would be unlawful to make
such offer in such state or jurisdiction. Neither the delivery of this Proxy
Statement/Prospectus nor any sale made hereunder shall under any circumstances
create any implication that there have been no changes in the affairs of
Principal Preservation subsequent to the date of this Proxy
Statement/Prospectus.
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INTRODUCTION, VOTING INFORMATION AND REQUIREMENTS
This Proxy Statement/Prospectus is being furnished to the shareholders of
the Insured Portfolio in connection with the solicitation of proxies by the
Board of Directors of Principal Preservation to be used at a Special Meeting of
Shareholders of the Insured Portfolio to be held on Wednesday, April 24, 1996 at
3:00 p.m., Central Time, at The Bacchus Restaurant (located in the West Bend Inn
building), 2520 West Washington Street, West Bend, Wisconsin. The purpose of the
Meeting is to consider and vote on the Plan, pursuant to which the Tax-Exempt
Portfolio would acquire substantially all of the assets of the Insured Portfolio
in exchange for shares of Common Stock of the Tax-Exempt Portfolio, which shares
would be distributed, pro rata, to the shareholders of the Insured Portfolio,
and the Insured Portfolio would be liquidated and discontinued.
Any proxy which is properly executed and returned in time to be voted at
the Meeting will be voted in accordance with the instructions marked thereon. In
the absence of such instructions, the proxy will be voted "FOR" approval of the
Plan under Proposal 1. The duly appointed proxies may, in their discretion, vote
upon such other matters as may come before the Meeting or any adjournments
thereof. A shareholder may revoke his or her proxy at any time prior to its
exercise by delivering written notice of revocation to the Secretary of
Principal Preservation or by executing and delivering a later dated proxy to
Principal Preservation or by attending the Meeting in person to vote the shares
of the Insured Portfolio held by such shareholder. Proxy materials are expected
to be mailed to shareholders of the Insured Portfolio on or about March 26,
1996.
The Board of Directors has determined that the shares of the Insured
Portfolio are to be voted as a separate series on the proposal to approve the
Plan and that holders of shares of the other series of Principal Preservation,
including the Tax-Exempt Portfolio, are not entitled to vote on the proposal to
approve the Plan.
The presence at the Meeting, in person or by proxy, of shareholders
representing one-third of all shares outstanding and entitled to vote on the
Plan constitutes a quorum for the transaction of business. Abstentions and
broker non-votes (i.e., proxies from brokers or other nominee owners indicating
that such persons have not received instructions from the beneficial owners or
other persons entitled to vote the shares as to a matter with respect to which
the brokers or other nominee owners do not have discretionary power to vote)
will be treated as present for purposes of determining the presence or absence
of a quorum.
Approval of the Plan and the Reorganization contemplated thereby will
require the affirmative vote of "a majority of the outstanding voting
securities" of the Insured Portfolio, as defined in the Investment Company Act
of 1940, as amended (the "1940 Act"). A majority of the outstanding voting
securities means the lesser of (1) 67% or more of the Insured Portfolio's shares
present at the Meeting, if shareholders who are the owners of more than 50% of
the Insured Portfolio's shares then outstanding are present in person or by
proxy, or (2) more than 50% of the Insured Portfolio's outstanding shares.
Accordingly, abstentions and broker non-votes will have the same effect as votes
cast against approval of the Plan.
In the event that sufficient votes in favor of the proposal to approve the
Plan are not received by the scheduled time of the Meeting, the persons named as
proxies in the enclosed proxy may propose and vote in favor of one or more
adjournments of the Meeting to permit further solicitation of proxies without
the necessity of further notice. Any such adjournment will require the
affirmative vote of a majority of the shares voted at the session of the Meeting
to be adjourned.
Shareholders of record of the Insured Portfolio at the close of business on
March 15, 1996 (the "Record Date") will be entitled to notice of and to vote at
the Meeting or any adjournment thereof. Each such shareholder will be entitled
to one vote for each share (and a fractional vote for each fractional share)
held by
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such shareholder on each matter presented at the Meeting. As of the Record Date,
there were 1,791,931 shares of the Insured Portfolio outstanding.
Under Maryland law, shareholders of the Insured Portfolio will not be
entitled to any appraisal or similar rights in connection with the
Reorganization contemplated by the Plan. However, shareholders may redeem their
shares of the Insured Portfolio at net asset value prior to the closing date of
the proposed Reorganization in the manner specified in the May 1, 1995
Prospectus.
SYNOPSIS
The following is a summary of certain information contained elsewhere in
this Proxy Statement/Prospectus (including a copy of the Plan attached hereto as
Exhibit A), as well as the May 1, 1995 Prospectus and the Annual Report, which
are incorporated by reference herein and copies of which accompany this Proxy
Statement/Prospectus. This summary is not intended to be complete and is
qualified in all respects by reference to the more detailed information
appearing elsewhere in this Proxy Statement/Prospectus, the Plan and the May 1,
1995 Prospectus.
INTRODUCTION
Shareholders of the Insured Portfolio will be asked at the Meeting to vote
upon and approve the Plan and the Reorganization contemplated thereby. If
approved by the shareholders of the Insured Portfolio, the Reorganization is
expected to be consummated immediately prior to the opening of business on May
1, 1996, or such later date as Principal Preservation may determine (the
"Closing Date").
The Portfolios currently are two of nine series offered by the Principal
Preservation. The other series of Principal Preservation are not involved in the
transactions contemplated by the Plan. Ziegler Asset Management, Inc. ("Ziegler
Asset Management" or the "Adviser") is the investment adviser for both
Portfolios. B.C. Ziegler and Company serves as distributor ("Distributor"),
depository, accounting/pricing agent, and transfer and dividend disbursing agent
("Transfer Agent") to the Portfolios.
If the Plan is consummated, shareholders of the Insured Portfolio will
continue to enjoy the privileges of the Principal Preservation family of funds
as shareholders of the Tax-Exempt Portfolio. Insured Portfolio shareholders will
not pay any front-end load or sales commission on the shares of the Tax-Exempt
Portfolio they receive in the Reorganization. Additionally, it is a condition of
the Reorganization that Principal Preservation must receive a legal opinion to
the effect that the Reorganization will qualify as a tax-free reorganization.
Assuming that the Reorganization so qualifies, shareholders of the Insured
Portfolio will not realize any capital gain or loss as a result of the exchange
in the Reorganization of their shares of the Insured Portfolio for shares of the
Tax-Exempt Portfolio.
PROPOSED REORGANIZATION
The Plan describes the essential terms of the proposed Reorganization and
is set forth in full as Appendix A to this Proxy Statement/Prospectus. Pursuant
to the Plan, all of the assets of the Insured Portfolio (net of its liabilities)
would be transferred to the Tax-Exempt Portfolio in exchange for the Tax-Exempt
Portfolio's issuance to the Insured Portfolio of shares of Common Stock of the
Tax-Exempt Portfolio. Liabilities of the Insured Portfolio which potentially
could reduce the amount of the assets transferred to the Tax-Exempt Portfolio
include without limitation: (a) amounts owed to shareholders of the Insured
Portfolio for capital gains distributions and/or dividends that have been
declared but not paid as of the Closing Date;
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and (b) accounts payable, taxes and other accrued and unpaid expenses, if any,
incurred in the normal operation of the business of the Insured Portfolio up to
and including the Closing Date and expected to be incurred following the Closing
Date in connection with winding up and liquidating the Insured Portfolio. The
costs and expenses incurred by the Insured Portfolio in carrying out the
transactions contemplated by the Plan, including costs and expenses incurred in
connection with the Meeting and the solicitation of proxies in connection
therewith, will be paid by Ziegler.
The aggregate net asset value of the Tax-Exempt Portfolio shares issued in
the Reorganization would be equal to the aggregate value of the assets of the
Insured Portfolio transferred in the Reorganization. It is expected that the
value of each Tax-Exempt Portfolio Shareholder's account in the Tax-Exempt
Portfolio immediately after the Reorganization would be the same as the value of
such shareholder's account in the Insured Portfolio immediately prior to the
Reorganization. As soon as reasonably practicable after the closing of the
Reorganization, the Insured Portfolio would pay or make provision for the
payment of all of its liabilities, and it would distribute all remaining assets,
including the shares of the Tax-Exempt Portfolio received by it in the
Reorganization, to its shareholders on a pro rata basis. Thereafter, the status
of the Insured Portfolio as a designated series of shares of Principal
Preservation would be discontinued, and the shareholders of the Insured
Portfolio would become shareholders of the Tax-Exempt Portfolio.
REASONS FOR THE REORGANIZATION
The Board of Directors believes that the lack of growth experienced by in
the Insured Portfolio may suggest limited interest in the Portfolio as an
alternative to other tax-exempt funds. The Board of Directors further believes
that the small size of the Insured Portfolio places it at a distinct
disadvantage in attempting to achieve its investment objective and to compete
with larger mutual funds having similar investment objectives and programs. The
Board of Directors believes that the lack of growth of the Insured Portfolio
also demonstrates that the benefits to the Insured Portfolio of maintaining
insurance on each municipal security in its portfolio are not perceived by the
investing public as outweighing the costs of such insurance and the resulting
reduction in the total return and yield of the Insured Portfolio. Moreover, the
Reorganization would combine Portfolios with similar investment objectives,
policies and fee structures, and identical advisers and other service providers,
on a tax-free basis, and enable shareholders to remain in the Principal
Preservation family of funds. In addition, although the municipal securities
owned by the Insured Portfolio are insured against default in payment of
principal and interest and those owned by the Tax-Exempt Portfolio generally are
not so insured, the municipal securities in which the Tax-Exempt Portfolio may
invest are rated in one of the three highest rating categories (i.e., "A" or
above) by Standard & Poor's Corporation ("S&P"), Moody's Investors Service, Inc.
("Moody's") or Fitch Investors Service, Inc. ("Fitch"), which involve little
risk of non-payment, reducing the need for portfolio insurance. The Board also
believes that the combination of the Portfolios will result in cost savings and
economies of scale and enhanced investment diversification.
For these and additional reasons set forth below under "The Proposed
Reorganization -- Reasons for the Proposed Reorganization," the Board of
Directors of Principal Preservation, including directors who are not "interested
persons" of Principal Preservation as defined in the 1940 Act (the
"Non-Interested Directors"), has unanimously concluded that: (i) the proposed
Reorganization is fair to, and in the best interests of, the shareholders of the
Insured Portfolio; and (ii) the interests of the shareholders of the Insured
Portfolio would not be diluted as a result of the proposed Reorganization.
Accordingly, the Board of Directors unanimously recommends that the Insured
Portfolio shareholders approve the Plan and the Reorganization contemplated
thereby. If the Plan is not so approved, the Insured Portfolio will continue to
operate, at least temporarily,
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without change as a separate series of Principal Preservation, until the Board
of Directors determines to take alternative measures, including possible
liquidation of the Insured Portfolio, with shareholder approval.
COMPARISON OF THE PORTFOLIOS
INVESTMENT OBJECTIVES AND POLICIES
Each of the Portfolios is a separate mutual fund having its own investment
objective and policies. The investment objectives and policies of the Portfolios
are similar. The investment objective of the Tax-Exempt Portfolio is to obtain
the highest total return consistent with preservation of principal through
investing in high grade municipal bonds with remaining maturities of two to 20
years. It is a fundamental policy of the Tax-Exempt Portfolio to invest at least
90% of its total assets in tax-exempt municipal securities, under ordinary
circumstances. The investment objective of the Insured Portfolio is to obtain
the highest total return consistent with preservation of principal through
investing in a diversified portfolio of municipal securities, each of which is
covered by insurance which provides for the timely payment of principal at
maturity and interest. It is a fundamental policy of the Insured Portfolio to
have at least 80% of its net assets invested in tax-exempt securities and at
least 80% of its total assets in securities covered by insurance, under normal
conditions. Substantially all of both Portfolios' interest income is intended to
be exempt from Federal income taxes, but may be subject to state and local
taxes. Any capital gain will be subject to Federal income tax and may be subject
to state and local taxes.
The Tax-Exempt Portfolio seeks to obtain its objective by investing
primarily in "high grade" municipal securities which are rated at the time of
purchase in an "A" category or higher by Moody's, S&P or Fitch. The Tax-Exempt
Portfolio's bonds will generally consist of municipal securities with remaining
maturities of two to 20 years.
The Insured Portfolio seeks to obtain its objective by investing primarily
in municipal securities, such as general obligation, revenue and industrial
development bonds. The timely payment of principal and interest of each
municipal security in the Insured Portfolio is either insured under a policy
obtained for such securities prior to their purchase by the Insured Portfolio or
is insured under one or more policies obtained by the Insured Portfolio, except
for certain temporary short-term investments, money market fund investments,
U.S. Government securities or securities collateralized by U.S. Government
securities.
Each municipal security in which the Insured Portfolio invests is covered
by one of the insurance policies described below. Although each insurer's
quality standards may vary from time to time, generally such insurers insure
only those municipal securities that are rated at the date of purchase: (1) in
the case of long-term debt, in the four highest ratings of S&P (AAA, AA, A and
BBB) or Moody's (Aaa, Aa, A and Baa); (2) in the case of short-term notes, SP-1
through SP-2 by S&P or MIG 1 through MIG 4 by Moody's; or (3) in the case of
tax-exempt commercial paper, A-1 through A-2 by S&P or Prime-1 through Prime-2
by Moody's. Any insurer may also insure lower rated or unrated municipal
securities that meet the insurer's standards. The Insured Portfolio may invest,
without any limitation as to rating category, in any securities for which it
obtains insurance coverage. The cost of insurance on the Insured Portfolio will
reduce the Insured Portfolio's yield. The insurance obtained by the Insured
Portfolio does not, of course, insure against fluctuations in the net asset
value of the Portfolio.
Timely payment of all principal and interest of each municipal security in
the Insured Portfolio is either insured under a policy obtained for such
securities prior to their purchase by the Portfolio or under one or more
policies obtained by the Portfolio to cover otherwise uninsured securities. The
Insured Portfolio expects
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to limit its purchases of preinsured securities to those insured by Financial
Guaranty Insurance Company ("Financial Guaranty"), Municipal Bond Insurance
Association or Bond Investors Guaranty Insurance Company or another insurer
whose claims-paying ability is rated "AAA" by both S&P and Moody's at the time
of purchase. In addition, the Insured Portfolio has obtained a policy (the
"Portfolio Policy") from Financial Guaranty to insure all of the Portfolio's
otherwise uninsured municipal securities (except for certain temporary
short-term investments, money market fund investments, U.S. Government
securities or securities collateralized by U.S. Government securities). No
representation is made as to any insurer's ability to meet its commitments. Each
policy provides, in general, that in the event of nonpayment of interest or
principal, when due, in respect of any insured municipal security, the insurer
is obligated to make such payment on the date when the payment is due, after it
has been notified by the Insured Portfolio that such nonpayment has occurred.
Insurance on preinsured securities is generally obtained by the issuer of
the municipal securities at the time of issuance and all premiums respecting
such securities for their lives are paid in advance by the issuer. Such
insurance is noncancelable and will continue in force so long as the municipal
securities are outstanding and the insurer remains in business. The insurance
will generally have a positive effect on the resale value of the insured
securities, although its exact effect, if any, cannot be estimated. The transfer
of pre-insured securities from the Insured Portfolio to the Tax-Exempt Portfolio
in the Reorganization will not affect the insurance on such securities.
The Portfolio Policy obtained by the Insured Portfolio from Financial
Guaranty on non-preinsured securities is effective only so long as the Insured
Portfolio is in existence, the insurer is still in business and the municipal
securities described in the policy continue to be held by the Insured Portfolio.
However, the Portfolio Policy grants the Insured Portfolio a noncancelable
option to insure any security covered by the Portfolio Policy to maturity, upon
sale of the security from the Insured Portfolio. As of the date hereof, all of
the municipal securities owned by the Insured Portfolio are preinsured and at
the time of the Reorganization are expected to be preinsured, so that no
Portfolio Policy will be necessary or in effect from the date hereof through the
Closing Date. As a consequence, the value of the securities held by the Insured
Portfolio will not be adversely affected by the transfer to the Tax-Exempt
Portfolio in the Reorganization.
Both Portfolios may enter into forward commitments for the purchase of
municipal securities, may make short sales of securities already owned to defer
realization of a gain or loss for Federal income tax purposes and may lend its
portfolio securities.
There can be no assurance that the Portfolios will achieve their respective
investment objectives. Additional information regarding the Portfolios'
investment objectives and policies is included in the accompanying May 1, 1995
Prospectus and the May 1, 1995 SAI, each of which has been incorporated herein
by reference.
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EXPENSES
The following table sets forth the shareholder transaction expenses and
annual operating expenses for the Portfolios, including pro forma expenses
(giving effect to the Reorganization as though it had occurred on January 1,
1995), for the fiscal year ended December 31, 1995:
<TABLE>
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INSURED PRO FORMA
TAX-EXEMPT TAX-EXEMPT COMBINED
PORTFOLIO PORTFOLIO PORTFOLIO
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SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)(1).................... 3.5% 3.5% 3.5%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)....................... 0% 0% 0%
Deferred Sales Load (as a percentage of original purchase
price or redemption proceeds)............................. 0% 0% 0%
Redemption Fees (as a percentage of amount redeemed)(2)..... 0% 0% 0%
Exchange Fee................................................ $5.00 $5.00 $5.00
ANNUAL OPERATING EXPENSES -- BEFORE WAIVERS AND
REIMBURSEMENTS (AS A PERCENTAGE OF AVERAGE NET ASSETS)(3)
Management Fees (Before Waivers)............................ 0.60% 0.59% 0.57%
12b-1 Fees(4)............................................... 0.25% 0.25% 0.25%
Other Expenses:
Custodian Fees............................................ 0.05% 0.03% 0.03%
Transfer Agent Fees....................................... 0.11% 0.09% 0.10%
Other Fees (Before Reimbursement)(5)...................... 0.34% 0.20% 0.20%
----- ----- -----
Total Other Expenses........................................ 0.50% 0.32% 0.33%
Total Operating Expenses (Before Reimbursement)(5).......... 1.35% 1.16% 1.15%
</TABLE>
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(1) Investors may qualify for a lower sales load. See "Purchase of Shares" and
"Shareholder Services" in the accompanying May 1, 1995 Prospectus. Insured
Portfolio shareholders will not pay any sales load on the shares of the
Tax-Exempt Portfolio they receive in the Reorganization.
(2) Ziegler, in its capacity as Transfer Agent, charges a fee (presently $7.50)
for redemptions by wire transfer.
(3) The percentages expressing annual operating expenses are based on amounts
actually incurred during the year ended December 31, 1995. Fees paid by the
Portfolios for custodian and transfer agent services are determined on a
basis other than a straight percentage of average net assets. For a
discussion of fees associated with these services, see "Management -- The
Advisors" in the accompanying May 1, 1995 Prospectus.
(4) Prior to July 1, 1995, fees paid under Principal Preservation's Rule 12b-1
Distribution Plan by the Portfolios were assessed only on assets held in
accounts opened on or after March 1, 1991. Principal Preservation's Rule
12b-1 Distribution Plan was amended effective July 1, 1995 (the "Rule 12b-1
Distribution Plan Amendment") so that, from and after that date, Rule 12b-1
fees have been assessed on all assets of each Portfolio. The "12b-1 Fees"
reported in the table have been restated to reflect the increased fees as
though the Rule 12b-1 Distribution Plan Amendment had been in effect for the
entire year ended December 31, 1995. The "12b-1 Fees" actually paid by the
Insured and Tax-Exempt Portfolios for the year ended December 31, 1995
amounted to 0.15% and 0.14%, respectively, of their average net assets.
(5) In connection with the implementation of the Rule 12b-1 Distribution Plan
Amendment, the Adviser committed to reimburse expenses to the Insured and
Tax-Exempt Portfolios so that, for 1995, their "Total Operating Expenses"
would not exceed 1.20% and 1.15%, respectively, of their average daily net
assets. After giving effect to these expense reimbursement commitments, for
the year ended December 31, 1995, "Other Fees" for the Insured Portfolio
were 0.19% and its "Total Operating Expenses" were 1.20%, and "Other Fees"
for the Tax-Exempt Portfolio were 0.19% and its "Total Operating Expenses"
were 1.15%.
8
<PAGE> 11
Example
Investors would pay the following expenses on a $1,000 investment in each
Portfolio, assuming 5% annual return and redemption at the end of each time
period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Insured Tax-Exempt Portfolio................... $47 $72 $99 $176
Tax-Exempt Portfolio........................... $46 $70 $96 $170
Pro Forma Combined Portfolio................... $46 $70 $96 $170
</TABLE>
The purpose of the table is to assist investors in understanding the various
costs and expenses they will bear directly or indirectly. For more complete
descriptions of the various costs and expenses, see "Management," "Purchase of
Shares," "Redemptions" and "Shareholder Services" in the accompanying May 1,
1995 Prospectus. THE ABOVE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN SHOWN.
OTHER INFORMATION ABOUT THE INSURED PORTFOLIO, THE TAX-EXEMPT PORTFOLIO AND
PRINCIPAL PRESERVATION
In addition to the similarities in investment objectives and programs
between the Insured Portfolio and the TaxExempt Portfolio described above, the
management and operation of the two Portfolios also are nearly identical. Each
Portfolio is a separate series of Principal Preservation and is managed by
Ziegler Asset Management under the same Investment Advisory Agreement. Ziegler
serves as the Distributor of the shares of both Portfolios pursuant to the same
Distribution Agreement, provides fund accounting and pricing services for both
Portfolios pursuant to the same Accounting/Pricing Agreement, serves as Transfer
and Dividend Disbursing Agent for both Portfolios pursuant to the same Transfer
and Dividend Disbursing Agent Agreement, and serves as Depository of both
Portfolios (the Portfolios each function as custodian of their own assets)
pursuant to the same Depository Contract. Provisions with respect to the
purchase and redemption of shares and available shareholder services in the
Insured Portfolio are the same as those in the Tax-Exempt Portfolio. The
Reorganization will result in no changes to any of the foregoing agreements and
services.
For additional information about the Insured Portfolio, Tax-Exempt
Portfolio and Principal Preservation, including the organization and operation
of Principal Preservation, condensed historical financial information of the two
Portfolios, the principal risk factors associated with investments in the
Portfolios, management of Principal Preservation (including information about
the Adviser and other service providers providing services to the two Portfolios
and to Principal Preservation), the capital stock of Principal Preservation, and
purchases and redemptions of shares of Principal Preservation, see the sections
of the accompanying May 1, 1995 Prospectus captioned: "Financial Highlights";
"Special Considerations"; "Management"; "Determination of Net Asset Value Per
Share"; "Purchase of Shares"; "Redemptions"; "Shareholder Services"; "Dividends,
Capital Gains Distributions and Reinvestments"; "Tax Status"; and "Description
of Shares." For management's discussion and analysis of the factors affecting
the Portfolios recent performance, see the accompanying Annual Report.
THE PROPOSED REORGANIZATION
The Board of Directors of Principal Preservation unanimously recommends
that the shareholders of the Insured Portfolio vote to approve the Plan and the
Reorganization contemplated thereby. The Board of Directors, including the
Non-Interested Directors, approved the Plan out of the belief that the Plan is
fair to, and in the best interests of, the shareholders of the Insured
Portfolio.
9
<PAGE> 12
DESCRIPTION OF THE PLAN
The terms and conditions under which the proposed Reorganization may be
consummated are set forth in the Plan. Significant provisions of the Plan are
summarized below; however, this summary is qualified in its entirety by
reference to the Plan, a copy of which is attached as Appendix A to this Proxy
Statement/Prospectus.
The Plan contemplates the transfer of all of the assets of the Insured
Portfolio (net of its liabilities) to the Tax-Exempt Portfolio in exchange for
shares of Common Stock of the Tax-Exempt Portfolio, and the pro rata
distribution, on the Closing Date of such shares of the Tax-Exempt Portfolio to
the shareholders of the Insured Portfolio.
The Tax-Exempt Portfolio would acquire all of the assets of the Insured
Portfolio (net of its liabilities), including without limitation all cash
(except for cash retained to pay liabilities as described below), cash
equivalents, securities, receivables and other property owned by the Insured
Portfolio, but excluding cash assets of the Insured Portfolio sufficient to pay
all of its accrued but unpaid liabilities as of the Closing Date. The Tax-Exempt
Portfolio would not assume any debts, liabilities, obligations or duties of the
Insured Portfolio. Rather, cash assets of the Insured Portfolio would be set
aside to pay, as they come due, all such liabilities. Such liabilities
potentially may include without limitation: (a) amounts owed to shareholders of
the Insured Portfolio with respect to capital gains distributions and/or
dividends declared but remaining unpaid as of the Closing Date; and (b) accounts
payable, taxes and other accrued and unpaid expenses, if any, incurred in the
normal operation of the business of the Insured Portfolio up to and including
the Closing Date and/or expected to be incurred following the Closing Date in
connection with the winding up and liquidation of the Insured Portfolio. The
costs and expenses incurred by the Insured Portfolio in connection with carrying
out the transactions contemplated by the Plan, including legal and accounting
fees and costs relating to the calling and holding of the Meeting and the
solicitation of proxies in connection therewith, would be paid by Ziegler.
In consideration for the assets of the Insured Portfolio transferred in the
Reorganization, the Tax-Exempt Portfolio would issue to the Insured Portfolio
shares of Tax-Exempt Portfolio Common Stock having an aggregate net asset value
equal to the value of the assets so transferred by the Insured Portfolio. The
assets of the Insured Portfolio and the per share net asset value of the shares
of Tax-Exempt Portfolio Common Stock would be valued as of the close of business
on the New York Stock Exchange on the business day immediately preceding the
consummation of the Reorganization. All such valuations would be conducted in
accordance with the policies and procedures of the Tax-Exempt Portfolio or the
Insured Portfolio, as the case may be, as described under "Determination of Net
Asset Value Per Share" in the accompanying May 1, 1995 Prospectus and under
"Determination of Net Asset Value Per Share" in the May 1, 1995 SAI incorporated
by reference herein.
As soon as practicable after the Closing Date, the Insured Portfolio would
liquidate and distribute pro rata to its shareholders of record the shares of
Common Stock of the Tax-Exempt Portfolio received by the Insured Portfolio. Such
liquidation and distribution would be accomplished by opening accounts on the
books of the Tax-Exempt Portfolio in the names of shareholders of the Insured
Portfolio and by transferring the shares credited to the account of the Insured
Portfolio on the books of the Tax-Exempt Portfolio. Each account opened would
represent the respective pro rata number of Tax-Exempt Portfolio shares due to
each Insured Portfolio shareholder. Fractional shares of the Tax-Exempt
Portfolio would be rounded to the nearest thousandth of a share.
Accordingly, every shareholder of the Insured Portfolio would own shares of
the Tax-Exempt Portfolio immediately after the Reorganization, the net asset
value of which is expected to be equal to the aggregate net
10
<PAGE> 13
asset value of such shareholder's Insured Portfolio shares immediately prior to
the Reorganization. Moreover, because the Tax-Exempt Portfolio shares would be
issued at net asset value in exchange for the net assets of the Insured
Portfolio, and the aggregate value of those assets would equal the aggregate
value of the Tax-Exempt Portfolio shares issued in exchange therefor, the net
asset value per share of the Tax-Exempt Portfolio would not change as a result
of the Reorganization. Thus, the Reorganization would not result in economic
dilution to any Insured Portfolio shareholder.
Any transfer taxes payable upon issuance of shares of the Tax-Exempt
Portfolio in a name other than the registered holder of the shares on the books
of the Insured Portfolio as of that time would be paid by the person to whom
such shares are to be issued as a condition of such transfer. Any reporting
responsibility of the Insured Portfolio would continue to be the responsibility
of the Insured Portfolio up to and including the Closing Date and such later
date on which the Insured Portfolio is liquidated.
The Insured Portfolio's assets on the Closing Date would be invested in a
manner consistent with the investment objectives and policies of both the
Insured Portfolio and the Tax-Exempt Portfolio. To the extent that any portfolio
asset of the Insured Portfolio is inconsistent with the investment requirements
of the Tax-Exempt Portfolio on the Closing Date, the Insured Portfolio would
bear the transaction costs associated with replacement of that asset, including
any adverse tax consequences if losses are incurred in replacing such asset. The
Insured Portfolio, however, intends to conform its securities portfolio to meet
the investment objective and policies of the Tax-Exempt Portfolio prior to the
Closing Date. The costs and tax consequences of so conforming the securities
portfolio of the Insured Portfolio are not expected to have a material effect on
the Insured Portfolio shareholders.
On or prior to the Closing Date, the Insured Portfolio would declare a
dividend to its shareholders, so that for the short taxable year of the Insured
Portfolio that ends on the date of its dissolution, the Insured Portfolio would
have declared an aggregate amount of dividends that: (a) is equal to at least
the sum of its net capital gain and 90% of its investment company taxable income
for such year, and (b) is sufficient to avoid any excise tax on the Insured
Portfolio for the calendar year in which the Closing Date occurs. The Tax-Exempt
Portfolio would use its best efforts to pay, as soon after the Closing Date as
practicable, the dividends to the shareholders of the Insured Portfolio that
have been so declared that have not been paid on or before the Closing Date.
Prior to the Closing Date, Principal Preservation may terminate the Plan
and abandon the Reorganization at any time, before or after approval by the
shareholders of the Insured Portfolio. In addition, Principal Preservation may
amend the Plan in any manner, except that no amendment may be made subsequent to
the Meeting of shareholders of the Insured Portfolio which would detrimentally
affect the value of the Tax-Exempt Portfolio shares to be issued.
REASONS FOR THE PROPOSED REORGANIZATION
The Board of Directors of Principal Preservation, including all of the
Non-Interested Directors, has unanimously determined that the interests of the
shareholders of the Insured Portfolio will not be diluted as a result of the
proposed transaction, and that the proposed transaction is fair to, and in the
best interests of, the
11
<PAGE> 14
shareholders of the Insured Portfolio. In reaching such conclusion, the Board of
Directors considered a number of issues, including the following:
(1) the compatibility of the objectives, policies and restrictions of
the Portfolios;
(2) the Portfolios' identical shareholder transaction expenses,
advisory and other fee structures, purchase and redemption features, and
other shareholder services, and the fact that the Portfolios have the same
investment Adviser and other service providers.
(3) the cost savings that potentially can be achieved by combining the
assets of the Insured Portfolio with those of the Tax-Exempt Portfolio
through greater economies of scale (especially through achievement of
advisory fee breakpoints);
(4) the cost of insurance policies maintained by the Insured Portfolio
on the municipal securities held by the Portfolio, the marginal benefits of
such insurance apparently perceived by the investing public, and the
adverse effects of such insurance on the Insured Portfolio's total return
and yield;
(5) the greater diversification of investments potentially achievable
by the combination of assets of the Portfolios in the Reorganization;
(6) the opportunity provided by the Reorganization for the Insured
Portfolio shareholders to continue as members of the Principal Preservation
family of funds;
(7) the tax-free nature of the Reorganization for Federal income tax
purposes (see "-- Tax Considerations" below); and
(8) the benefits and detriments to the Insured Portfolio shareholders
of alternatives to the Reorganization, including continued operation of the
Portfolio or possible liquidation.
The unanimous decision by the Board of Directors to recommend that the
shareholders of the Insured Portfolio vote to approve the Reorganization was
made primarily because the Reorganization would be a means of combining similar
Portfolios with comparable investment objectives and policies and would permit
the shareholders of the Insured Portfolio to pursue substantially the same
investment goals in a larger combined Portfolio. The Board of Directors believes
that the lack of growth of the Insured Portfolio may suggest limited interest in
the Portfolio as an alternative to other taxexempt funds and may evidence the
limited value placed on the insurance aspect by the investing public. Moreover,
the municipal securities in which the Insured Portfolio invests have generally
been eligible for investment by the Tax-Exempt Portfolio, and have not required
the Insured Portfolio to obtain a portfolio insurance policy thereon. All of the
municipal securities in which the Tax-Exempt Portfolio invests are rated "A" or
above by S&P, Moody's or Fitch, which involve little risk of non-payment.
The Board further considered that the Reorganization should result in the
reduction or elimination of certain duplicative costs and expenses presently
incurred for services that are separately performed for both the Insured
Portfolio and the Tax-Exempt Portfolio. The Board also anticipates that the
larger aggregate net assets of the combined Portfolio resulting from the
Reorganization should enable the shareholders of the Tax-Exempt Portfolio
(including the former shareholders of the Insured Portfolio) to obtain economies
of scale by spreading certain fixed expenses (such as printing costs and fees
for professional services) over a larger asset base and by eliminating certain
audit and state registration fees. Expenses that are based on the value of
assets, such as advisory fees, or the number of shareholder accounts, such as
custody and transfer agent fees, would also likely be reduced by the
Reorganization. For example, the advisory fees paid by the combined Portfolio as
a percentage of net assets would be less than those paid currently by the
Insured Portfolio because of the
12
<PAGE> 15
increased size of the combined Portfolio. The former shareholders of the Insured
Portfolio who become shareholders of the Tax-Exempt Portfolio, as well as
present shareholders of the Tax-Exempt Portfolio, may expect to enjoy a lower
overall expense ratio. There can be no assurance, however, that those economies
of scale and a lower overall expense ratio will be obtained. See "Comparison of
the Portfolios -- Expenses."
DESCRIPTION OF SECURITIES TO BE ISSUED
Principal Preservation is a Maryland corporation organized in 1984 as an
open-end, diversified investment company. Principal Preservation is a series
company, which means that its Board of Directors may establish additional
portfolios at any time.
The authorized Common Stock of Principal Preservation consists of one
billion shares, par value $0.001 per share. The shares of Principal Preservation
are presently divided into nine separate series: Government Portfolio, Insured
Tax-Exempt Portfolio, Tax-Exempt Portfolio, S&P 100 Plus Portfolio, Select Value
Portfolio, Dividend Achievers Portfolio, Balanced Portfolio, Wisconsin
Tax-Exempt Portfolio and Cash Reserve Portfolio, consisting of 50 million shares
in each of the first eight Portfolios and 400 million in the Cash Reserve
Portfolio. The Cash Reserve Portfolio's shares are further subdivided into
separate series of 200 million shares each, Class X Common Stock (Retail Class)
and Class Y Common Stock (Institutional Class). There presently is pending
another reorganization, similar to the Reorganization, which would consolidate
the Balanced Portfolio with and into the S&P 100 Plus Portfolio. That
transaction is subject to approval by shareholders of the Balanced Portfolio.
The Board of Directors of Principal Preservation may authorize the issuance of
additional series and, within a series, additional classes of stock, and may
increase or decrease the number of shares in each series.
Each share of Principal Preservation has one vote, and when issued and paid
for in accordance with the terms of the offering will be fully paid and
nonassessable. Each share of a series is entitled to participate pro rata in any
dividends or other distributions declared by the Board of Directors of Principal
Preservation with respect to that series, and all shares of a series have equal
rights in the event of liquidation of that series. Shares of stock are
redeemable at net asset value, at the option of the shareholder. Shares have no
preemptive, subscription or conversion rights and are freely transferable.
Shares can be issued as full shares or fractions of shares. A fraction of a
share has the same kind of rights and privileges as a full share.
Each share of each series of Principal Preservation (including each share
of each of the Portfolios) is entitled to one vote on each matter presented to
shareholders of that series. As a Maryland corporation, Principal Preservation
is not required to hold, and in the future does not intend to hold, annual
shareholder meetings unless required by law or deemed appropriate by the Board
of Directors. However, special meetings may be called for purposes such as
electing or removing directors, changing fundamental investment policies or
approving an investment advisory contract. On matters affecting an individual
series (such as approval of advisory or sub-advisory contracts and changes in
fundamental investment policies of a series) a separate vote of the shares of
that series is required. Shares of a series are not entitled to vote on any
matter not affecting that series. All shares of each series vote together in the
election of directors. Shares do not have cumulative voting rights.
TAX CONSIDERATIONS
It is a condition to the Reorganization that Principal Preservation must
receive an opinion from Quarles & Brady, counsel to Principal Preservation, to
the effect that, for Federal income tax purposes: (a) the Reorganization will
constitute a reorganization within the meaning of Section 368(a)(1)(C) of the
13
<PAGE> 16
Internal Revenue Code of 1986, as amended; (b) no gain or loss will be
recognized by either Portfolio upon the transfer of assets of the Insured
Portfolio in exchange for shares of the Tax-Exempt Portfolio; (c) no gain or
loss will be recognized by shareholders of the Insured Portfolio upon the
exchange of their shares of the Insured Portfolio for shares of the Tax-Exempt
Portfolio; (d) the Tax-Exempt Portfolio's basis in the assets acquired from the
Insured Portfolio will be same as the basis of those assets in the hands of the
Insured Portfolio immediately prior to the exchange; (e) the holding period of
the assets of the Insured Portfolio in the hands of the Tax-Exempt Portfolio
will include the holding period of the Insured Portfolio; (f) the basis of
shares of the Tax-Exempt Portfolio received by each shareholder of the Insured
Portfolio pursuant to the Reorganization will be the same as the shareholder's
basis in shares of the Insured Portfolio surrendered in the exchange; and (g)
the holding period of shares of the Tax-Exempt Portfolio received by each
shareholder of the Insured Portfolio pursuant to the Reorganization will include
the shareholder's holding period of shares of the Insured Portfolio surrendered
in the exchange, provided that the latter shares were held as capital assets on
the Closing Date.
Such opinion will not be binding on the Internal Revenue Service, and the
Principal Preservation does not intend to seek a private letter ruling with
respect to the tax impacts of the Reorganization. If for any reason the
Reorganization does not qualify as a tax-free reorganization for Federal income
tax purposes, the Reorganization would be treated as a taxable asset sale and
purchase. The Insured Portfolio would recognize gain or loss on the transaction
measured by the difference between the consideration received by the Insured
Portfolio and the tax basis of the Insured Portfolio assets. The tax basis of
the assets acquired by the Tax-Exempt Portfolio would equal the purchase price
plus the amount of any liabilities transferred to the Tax-Exempt Portfolio. Upon
distribution of shares of the Tax-Exempt Portfolio in the dissolution of the
Insured Portfolio, the shareholders of the Insured Portfolio would recognize
gain or loss on the disposition of their Insured Portfolio shares measured by
the difference between the fair market value of the Tax-Exempt Portfolio shares
received by them and the basis of the Insured Portfolio shares surrendered in
the exchange.
Any shareholder of the Insured Portfolio who elects to redeem shares of the
Tax-Exempt Portfolio received in the Reorganization, or who elects to exchange
those shares for shares in another Principal Preservation mutual fund, or who
elects to redeem his or her shares of the Insured Portfolio in advance of the
Reorganization so as to reinvest the proceeds in another investment vehicle,
will recognize gain or loss for Federal income tax purposes in an amount equal
to difference between the amount of the cash proceeds received in such
redemption or the value of the shares received in such exchange, as the case may
be, and the shareholder's tax basis in the shares so redeemed or exchanged. In
the event of an exchange, the shareholders' tax basis in the substitute shares
will be increased or decreased in an amount equal to the amount of the gain or
loss so realized. For a more detailed description of tax consequences associated
with redemption and exchange of shares, please refer to the accompanying May 1,
1995 Prospectus.
The foregoing discussion of Federal tax consequences is included herein for
general information only. Each shareholder should consult with his or her own
tax adviser as to the specific tax consequences of the Reorganization, including
the application and effect of state and local tax laws. Because of special or
unique circumstances applicable to any given shareholder, the tax consequences
of the Reorganization and/or investment alternatives could be significantly
different.
14
<PAGE> 17
CAPITALIZATION
The following table shows the unaudited capitalization of the Insured
Portfolio and the Tax-Exempt Portfolio, respectively, as of December 31, 1995,
and the unaudited pro forma capitalization of the Tax-Exempt Portfolio as of
that date giving effect to the Reorganization:
<TABLE>
<CAPTION>
PRO FORMA
INSURED TAX-EXEMPT COMBINED
PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- -----------
<S> <C> <C> <C>
Net Assets.............................. $18,830,303 $56,442,570 $75,272,873
Net Asset Value Per Share............... $10.32 $9.39 $9.39
Shares Outstanding...................... 1,823,623 6,010,621 8,015,978
</TABLE>
THE BOARD OF DIRECTORS OF PRINCIPAL PRESERVATION UNANIMOUSLY RECOMMENDS
THAT SHAREHOLDERS OF THE INSURED PORTFOLIO VOTE FOR APPROVAL OF THE PLAN AND THE
REORGANIZATION.
MISCELLANEOUS
PRINCIPAL SHAREHOLDERS
As of the Record Date, no person was known to own of record or beneficially
5% or more of the outstanding shares of either Portfolio. The directors and
officers of Principal Preservation as a group own less than 1% of the
outstanding shares of each Portfolio. Neither Principal Preservation nor either
Portfolio is "controlled" (as that term is defined in the 1940 Act) by any
person.
AUDITORS
The firm of Arthur Andersen LLP has served Principal Preservation as
independent accountants and auditors since its inception in 1985. Arthur
Andersen LLP has no direct or indirect financial interest in Principal
Preservation or the Portfolios except as auditors and independent public
accountants. No representative of Arthur Andersen LLP is expected to be present
at the Meeting.
INTERESTS OF EXPERTS AND COUNSEL
No expert or counsel named herein has a substantial interest in Principal
Preservation, either Portfolio, the Reorganization, or any other transaction
contemplated by this Proxy Statement/Prospectus.
COST OF SOLICITATION
Expenses in connection with the solicitation of proxies will be borne by
Ziegler. Upon request, Ziegler will reimburse brokers, dealers, banks and voting
trustees, or their nominees, for reasonable expenses incurred in forwarding
copies of the proxy materials to the beneficial owners of shares which such
persons hold of record. Solicitation of proxies will be principally by mail.
Proxies also may be solicited in person, or by telephone or telegraph, by
officers of Principal Preservation or by officers and employees of Ziegler or by
dealers and their representatives, without special compensation. Proxies may
also be solicited by a professional proxy solicitation service if management of
Principal Preservation should determine that solicitation by such means is
advisable.
15
<PAGE> 18
OTHER MATTERS
The Board of Directors has not been informed and is not aware that any
other matter will be brought before the Meeting. However, unless expressly
indicated otherwise on the enclosed form of proxy, proxies may be voted with
discretionary authority with respect to any other matter that may properly be
presented at the meeting or any adjournment thereof.
SHAREHOLDER MEETINGS
Principal Preservation is organized as a Maryland corporation, and as such
is not required to hold annual meetings of shareholders. Principal
Preservation's Bylaws provide that Principal Preservation is not required to
hold a shareholder meeting in any year in which the election of directors,
approval of an investment advisory agreement (or any sub-advisory agreement) or
ratification of the selection of independent public accountants is not required
to be acted upon by shareholders of Principal Preservation or any of its
portfolio series, including the Portfolios, under the 1940 Act. Meetings of
shareholders of any portfolio series will be held when and as determined
necessary by the Board of Directors of Principal Preservation and in accordance
with the 1940 Act. However, shareholders of any portfolio series wishing to
submit proposals for inclusion in a proxy statement for any future shareholder
meetings should send their written proposals to the Secretary of Principal
Preservation at 215 North Main Street, West Bend, Wisconsin 53095-3348.
16
<PAGE> 19
APPENDIX A
PRINCIPAL PRESERVATION INSURED TAX-EXEMPT PORTFOLIO
PLAN OF REORGANIZATION AND LIQUIDATION
This Plan of Reorganization and Liquidation is made as of this 20th day of
February, 1996, by Principal Preservation Portfolios, Inc. ("Principal
Preservation"), on behalf of its two series known as the Insured Tax-Exempt
Portfolio and the Tax-Exempt Portfolio.
RECITALS
WHEREAS, Principal Preservation: (a) is a Maryland corporation duly
organized, validly existing and in good standing under the laws of the State of
Maryland; (b) is registered as an open-end, series, management investment
company under the Investment Company Act; and (c) presently has designated nine
separate series or investment portfolios including the Insured Portfolio and the
Tax-Exempt Portfolio;
WHEREAS, this Plan is intended to be, and is adopted as, a plan of
reorganization and liquidation within the meaning of Section 368(a)(1)(C) of the
Code. The Reorganization will comprise the transfer of all of the assets of the
Insured Portfolio (net of its liabilities) to the Tax-Exempt Portfolio in
exchange solely for shares of Tax-Exempt Portfolio Common Stock, and the
constructive distribution at the Effective Time of such shares to the
shareholders of the Insured Portfolio in liquidation of the Insured Portfolio,
all upon the terms and conditions hereinafter set forth in this Plan; and
WHEREAS, the adoption and performance of this Plan has been authorized by
Principal Preservation's Board of Directors and, prior to the Closing Date will
have been duly authorized by all other necessary corporate action on the part of
Principal Preservation, including approval by the shareholders of the Insured
Portfolio.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
1. DEFINITIONS
For purposes of this Plan, the following terms shall have the respective
meanings set forth below:
1.1 "CLOSING" means the transfer to the Tax-Exempt Portfolio of the assets
of the Insured Portfolio (net of its liabilities) against delivery to the
Insured Portfolio of the Tax-Exempt Portfolio Shares as described in Section 2.1
of this Plan.
1.2 "CLOSING DATE" means May 1, 1996, or such other date as the parties may
mutually determine.
1.3 "CODE" means the Internal Revenue Code of 1986, as amended.
1.4 "DEPOSITORY" means B.C. Ziegler & Company, acting in its capacity as
depository with respect to the assets of the Insured Portfolio and the
Tax-Exempt Portfolio.
1.5 "EFFECTIVE TIME" means 8:00 a.m. Central Time on the Closing Date.
A-1
<PAGE> 20
1.6 "EXCLUDED ASSETS" shall have the meaning set forth in Section 2.3 of
this Plan.
1.7 "INSURED PORTFOLIO" means the Insured Portfolio, a designated series or
investment portfolio of Principal Preservation.
1.8 "INSURED PORTFOLIO SHAREHOLDERS" means the holders of record of the
issued and outstanding shares of Common Stock of the Insured Portfolio as of the
Closing Date.
1.9 "INSURED PORTFOLIO SHAREHOLDER MEETING" means a special meeting of the
shareholders of the Insured Portfolio to be convened in accordance with
applicable law and the Articles of Incorporation of Principal Preservation to
consider and vote upon the approval of this Plan and the transactions
contemplated hereby.
1.10 "INSURED PORTFOLIO SHARES" means the issued and outstanding shares of
Common Stock of the Insured Portfolio.
1.11 "INVESTMENT COMPANY ACT" means the Investment Company Act of 1940, as
amended, and all of the rules and regulations adopted thereunder by the SEC.
1.12 "PERSON" means an individual or a corporation, partnership, limited
liability company, joint venture, association, trust, unincorporated
organization, or other entity, as the context requires.
1.13 "PLAN" means this Plan of Reorganization and Liquidation, together
with all schedules and exhibits attached hereto, as the same may be amended from
time to time in accordance with the terms hereof.
1.14 "PRINCIPAL PRESERVATION" means Principal Preservation Portfolios,
Inc., a corporation which: (a) is duly organized, validly existing and in good
standing under the laws of the State of Maryland; (b) is registered as an
openend, series, management investment company under the Investment Company Act;
and (c) presently his designated nine separate series of its Common Stock, par
value $.001 per share, including the Insured Portfolio and the Tax-Exempt
Portfolio.
1.15 "PRINCIPAL PRESERVATION PROSPECTUS" means the Prospectus, dated May 1,
1995, as supplemented on September 1, 1995 and January 31, 1996, of Principal
Preservation relating to the Insured and Tax-Exempt Portfolios, among other
series of Principal Preservation, included in Post-Effective Amendment No. 26 to
Principal Preservation's Registration Statement on Form N-1A (Securities Act
Reg. No. 33-12), as filed with the SEC on March 2, 1995 pursuant to Rule 485(a)
under the Securities Act.
1.16 "REORGANIZATION" means the transactions described in and contemplated
by this Plan.
1.17 "REQUIRED INSURED PORTFOLIO SHAREHOLDER VOTE" shall have the meaning
specified in Section 3.1 of this Plan.
1.18 "SEC" means the United States Securities and Exchange Commission.
1.19 "SECURITIES ACT" means the Securities Act of 1933, as amended, and all
rules and regulations adopted by the SEC pursuant thereto.
1.20 "TAX-EXEMPT PORTFOLIO" means the Tax-Exempt Portfolio, a designated
series or investment portfolio of Principal Preservation.
1.21 "TAX-EXEMPT PORTFOLIO SHARES" means the shares of Common Stock of the
Tax-Exempt Portfolio to be issued pursuant to this Plan, as described in Section
2.1 hereof.
1.22 "VALUATION DATE" shall have the meaning set forth in Section 2.4 of
this Plan.
A-2
<PAGE> 21
2. REORGANIZATION AND LIQUIDATION OF THE INSURED PORTFOLIO.
2.1 TRANSFER OF INSURED PORTFOLIO ASSETS; ISSUANCE OF TAX-EXEMPT PORTFOLIO
SHARES. At or prior to the Effective Time, all of the assets of the Insured
Portfolio, except the Excluded Assets, shall be delivered to the Depository for
the account of the Tax-Exempt Portfolio, in exchange for, and against delivery
to the Tax-Exempt Portfolio at the Effective Time of, that number of Tax-Exempt
Portfolio Shares (including, if applicable, fractional shares rounded to the
nearest thousandth of one whole share) having an aggregate net asset value equal
to the value of the assets of the Tax-Exempt Portfolio so delivered, all
determined and adjusted as provided in Section 2.2 of this Plan. As of the
Effective Time and following delivery of such assets to the Depository, the
Tax-Exempt Portfolio shall receive good and marketable title to such assets free
and clear of all liens, security interests, pledges, charges, claims or
encumbrances of any and every kind.
2.2 COMPUTATION OF NET ASSET VALUE.
(a) The net asset value of the Tax-Exempt Portfolio Shares and the net
value of the assets of the Insured Portfolio transferred pursuant to this Plan
shall, in each case, be determined as of the close of business on the New York
Stock Exchange on the Valuation Date.
(b) The net asset value of the Tax-Exempt Portfolio Shares shall be
computed in accordance with the practices and procedures of the Tax-Exempt
Portfolio described in the Principal Preservation Prospectus. Likewise, the
value of the assets of the Insured Portfolio to be transferred pursuant to this
Plan shall be computed in accordance with the practices and procedures of the
Insured Portfolio described in the Principal Preservation Prospectus.
2.3 EXCLUDED ASSETS. There shall be deducted from the assets of the Insured
Portfolio described in Section 2.1 all organizational expenses and other assets
of the Insured Portfolio that would not have value to the Tax-Exempt Portfolio,
as well as cash in an amount estimated by Principal Preservation to be
sufficient to pay all liabilities of the Insured Portfolio accrued and unpaid as
of the Effective Time, including without limitation: (a) amounts owed or to be
owed to any Insured Portfolio Shareholder, including declared but unpaid
dividends and capital gains distributions; and (b) accounts payable, taxes and
other accrued and unpaid expenses, if any, incurred in the normal operation of
the business of the Insured Portfolio up to and including the Closing Date and
estimated to be incurred after the Closing Date in connection with winding up
the affairs of, and liquidating, the Insured Portfolio (together the "Excluded
Assets").
2.4 VALUATION DATE. The assets of the Insured Portfolio and the per share
net asset value of the Tax-Exempt Portfolio Shares shall be valued as of the
close of business on the New York Stock Exchange on the business day next
preceding the Closing Date (the "Valuation Date"). The stock transfer books of
the Insured Portfolio shall be permanently closed as of the close of business on
the Valuation Date, and only requests for the redemption of shares of the
Insured Portfolio received in proper form prior to the close of trading on the
New York Stock Exchange on the Valuation Date shall be accepted by the Insured
Portfolio. Redemption requests thereafter received by the Insured Portfolio
shall be deemed to be redemption requests for Tax-Exempt Portfolio Shares
(assuming that the transactions contemplated by this Plan have been consummated)
to be distributed to the Insured Portfolio Shareholders pursuant to this Plan.
2.5 DECLARATION OF DIVIDENDS AND DISTRIBUTIONS BY THE INSURED PORTFOLIO. On
or prior to the Closing Date, the Insured Portfolio will declare a dividend to
shareholders of record of the Insured Portfolio as of the date of such dividend
declaration so that, for the short taxable year of the insured Portfolio ending
on the date on which the Insured Portfolio is completely liquidated and
discontinued, the Insured Portfolio will have declared an aggregate amount of
dividends which: (a) is equal to at least the sum of its net capital gain
A-3
<PAGE> 22
(within the meaning of Section 852(b)(3) of the Code) and ninety percent (90%)
of its investment company taxable income (determined under Section 852(b)(2) of
the Code, but without regard to Section 852(b)(2)(D) of the Code) for such
taxable year; and (b) is sufficient to avoid any excise tax on the Insured
Portfolio under Section 4982 of the Code for the calendar year in which the
Closing Date occurs, provided that the dividends that have been so declared but
have not been paid on or before such Closing Date are in fact paid by the
Insured Portfolio prior to the end of such calendar year to the shareholders of
the Insured Portfolio as of the record date for determining shareholders
entitled to receive payment of such dividend.
2.6 LIQUIDATION. As soon as reasonably practicable after the Closing Date,
the Insured Portfolio shall pay or make provisions for all of its debts,
liabilities and taxes, and distribute all remaining assets, including the
TaxExempt Portfolio Shares received by it in the Reorganization and the balance,
if any, of the Excluded Assets, to the Insured Portfolio Shareholders, and the
Insured Portfolio's status as a designated series of shares of Principal
Preservation shall be terminated.
2.7 ISSUANCE OF TAX-EXEMPT PORTFOLIO SHARES. On the Closing Date, Principal
Preservation shall instruct its transfer agent to record on Principal
Preservation's books and records the pro rata interest of each of the Insured
Portfolio Shareholders in the Tax-Exempt Portfolio Shares in the name of such
Insured Portfolio Shareholder. All Insured Portfolio Shares then issued and
outstanding shall thereupon be canceled on the books of Principal Preservation.
Principal Preservation shall forward a confirmation of such ownership to each of
the Insured Portfolio Shareholders. No redemption or repurchase of such
Tax-Exempt Portfolio Shares credited to any Insured Portfolio Shareholder in
respect of his or her Insured Portfolio Shares which are represented by an
unsurrendered stock certificate shall be permitted until such certificate has
been surrendered to Principal Preservation for cancellation, or if such
certificate is lost or misplaced, until a lost certificate affidavit has been
executed and delivered to Principal Preservation.
2.8 LIABILITIES AND EXPENSES. The Tax-Exempt Portfolio shall not assume any
liability of the Insured Portfolio and the Insured Portfolio shall use its best
efforts to discharge all known liabilities, so far as may be possible, prior to
the Closing Date.
3. CONDITIONS PRECEDENT TO CLOSING
The Closing of the Reorganization is subject to the conditions that on or
before the Closing Date:
3.1 APPROVAL OF PLAN BY SHAREHOLDERS OF THE INSURED PORTFOLIO. The Insured
Portfolio Shareholder Meeting shall have been duly called and held in accordance
with the provisions of the Investment Company Act, the Maryland General
Corporate Laws and the Articles of Incorporation and Bylaws of Principal
Preservation, including compliance with the notice and quorum requirements
thereunder, and at such meeting the Plan shall have been approved by the
affirmative vote of the lesser of (a) 67% or more of the Insured Portfolio
Shares present at the Insured Portfolio Shareholder Meeting, if shareholders who
are the owners of more than 50% of the Insured Portfolio Shares outstanding and
entitled to vote on the Plan at the Insured Portfolio Shareholder Meeting are
present at such Meeting in person or by proxy; or (b) more than 50% of the
Insured Portfolio Shares outstanding and entitled to vote on approval of the
Plan at the Insured Portfolio Shareholder Meeting (the "Required Balanced
Portfolio Shareholder Vote").
3.2 NO ADVERSE ACTIONS. On the Closing Date, no action, suit or other
proceeding shall be pending before any court or governmental agency in which it
is sought to restrain or prohibit or obtain damages or other relief in
connection with this Plan or the transactions contemplated hereby.
A-4
<PAGE> 23
3.3 CONSENTS AND APPROVALS. All consents of other parties and all other
consents, orders and permits of federal, state and local regulatory authorities
(including those of the SEC and of state Blue Sky or securities authorities)
deemed necessary by Principal Preservation to permit consummation, in all
material respects, of the transactions contemplated hereby, shall have been
obtained, except where failure to obtain any such consent, order or permit would
not involve a risk of a material adverse effect on the assets or properties of
the Insured Portfolio.
3.4 EFFECTIVENESS OF REGISTRATION STATEMENT ON FORM N-14. Principal
Preservation's Registration Statement on Form N-14 to be prepared and filed with
the SEC with respect to the Tax-Exempt Portfolio Shares, including the Proxy
Statement of the Insured Portfolio soliciting approval of the Plan at the
Insured Portfolio Shareholder Meeting constituting a part thereof, shall have
become effective under the Securities Act and no stop order suspending the
effectiveness thereof shall have been issued and, to the best knowledge of
Principal Preservation, no investigation or proceeding for that purpose shall
have been instituted or be pending, threatened or contemplated under the
Securities Act.
3.5 TAX OPINION. Principal Preservation shall have obtained an opinion of
Quarles & Brady, legal counsel to Principal Preservation, in form and substance
reasonably satisfactory to its Board of Directors, to the effect that the
Reorganization will constitute a tax-free reorganization pursuant to Section
368(a)(1)(C) of the Code and that, accordingly, for Federal income tax purposes:
(i) no gain or loss will be recognized by either the Insured Portfolio or the
Tax-Exempt Portfolio upon the transfer of assets of the Insured Portfolio in
exchange for the Tax-Exempt Portfolio Shares; (ii) no gain or loss will be
recognized by the Insured Portfolio Shareholders upon the liquidation of the
Insured Portfolio and the related surrender of their shares of the Insured
Portfolio in exchange for the Tax-Exempt Portfolio Shares; (iii) the Tax-Exempt
Portfolio's basis in the assets acquired from the Insured Portfolio will be the
same as the basis of those assets in the hands of the Insured Portfolio
immediately prior to the exchange; (iv) the holding period of the assets of the
Insured Portfolio in the hands of the Tax-Exempt Portfolio will include the
holding period of the Insured Portfolio; (v) the basis of the Tax-Exempt
Portfolio Shares received by each Insured Portfolio Shareholder in connection
with the reorganization will be the same as the Insured Portfolio Shareholder's
basis in his or her Insured Portfolio Shares immediately prior to the
Reorganization; and (vi) the holding period of the Tax-Exempt Portfolio Shares
received by each Insured Portfolio Shareholder in connection with the
Reorganization will include such Insured Portfolio Shareholder's holding period
of his or her Insured Portfolio Shares held immediately prior to the
Reorganization, provided that such Insured Portfolio Shares were held by such
Insured Portfolio Shareholder as capital assets as of the Effective Time.
3.6 DECLARATION OF DIVIDENDS BY THE INSURED PORTFOLIO. Prior to or on the
Closing Date, the Insured Portfolio shall have declared a dividend or dividends
which, together with all previous such dividends, shall have the effect of
distributing to its shareholders all of the Insured Portfolio's investment
company taxable income for taxable years ending on or prior to the Closing Date
(computed without regard to any deduction for dividends paid) and all of its net
capital gain realized in taxable years ending on or prior to the Closing Date
(after reduction for any capital loss carried forward).
4. EXPENSES
B.C. Ziegler and Company, the distributor of the shares for each of the
Insured Portfolio and the Tax-Exempt Portfolio, will bear the expenses incurred
by the Portfolios in connection with the entering into and carrying out the
provisions of this Plan.
A-5
<PAGE> 24
5. TERMINATION
5.1 MUTUAL AGREEMENT. This Plan may be terminated at any time by Principal
Preservation, and will be terminated by Principal Preservation if any of the
conditions precedent to the Reorganization or set forth in Article 3 has not
been satisfied as of the Closing Date.
5.2 EFFECTS OF TERMINATION. In the event of any such termination, there
shall be no liability for damage on the part of either the Insured Portfolio or
the Tax-Exempt Portfolio.
6. AMENDMENT
This Plan may be amended, modified or supplemented in such manner as
Principal Preservation determines; provided, however, that following approval of
the Plan by the Required Balanced Portfolio Shareholder Vote, no such amendment
may have the effect of changing the provisions for determining the number of
Tax-Exempt Portfolio Shares to be issued to the Insured Portfolio Shareholders
pursuant to this Plan to the detriment of the Insured Portfolio Shareholders
without their further approval.
7. MISCELLANEOUS
7.1 HEADINGS. The Article and Section headings contained in this Plan will
have reference purposes only and shall not affect in any way the meaning or
interpretation of this Plan.
7.2 GOVERNING LAW. This Plan shall be governed by and construed in
accordance with the laws of the State of Maryland, Principal Preservation's
Articles of Incorporation and Bylaws, and the Principal Preservation Prospectus.
IN WITNESS WHEREOF, on the authority of the Board of Directors of Principal
Preservation, this Plan has been executed by its authorized officer as of the
day and year first written above.
BY ORDER OF THE BOARD OF DIRECTORS OF
PRINCIPAL PRESERVATION PORTFOLIOS,
INC. (ON BEHALF OF THE INSURED
TAX-EXEMPT AND TAX-EXEMPT PORTFOLIOS)
By: /s/ R.D. ZIEGLER
------------------------------------
R.D. Ziegler, Chairman of the Board
and President
B.C. ZIEGLER AND COMPANY (SOLELY FOR
THE PURPOSE OF INDICATING ITS
AGREEMENT TO BE BOUND BY ARTICLE 4
HEREOF)
By: /s/ PETER D. ZIEGLER
------------------------------------
Peter D. Ziegler, President and
Chief Executive Officer
A-6
<PAGE> 25
Rule 497(b)
1933 Act Reg. No. 333-01125
1940 Act File No. 811-4401
STATEMENT OF ADDITIONAL INFORMATION
DATED MARCH 22, 1996
PRINCIPAL PRESERVATION PORTFOLIOS, INC.
215 North Main Street
West Bend, Wisconsin 53095
800-826-4600
This Statement of Additional Information is not a prospectus, and
should be read in conjunction with the Proxy Statement/Prospectus dated March
22, 1996, relating to the reorganization of the Insured Tax-Exempt Portfolio
(the "Insured Portfolio"), a series of Principal Preservation Portfolios, Inc.
("Principal Preservation"), into the Tax-Exempt Portfolio, another series of
Principal Preservation. In connection with the Reorganization, the Tax-Exempt
Portfolio would acquire all of the assets (net of liabilities) of the Insured
Portfolio. In consideration for the Insured Portfolio's transfer of assets to
the Tax-Exempt Portfolio, the Tax-Exempt Portfolio would issue to the Insured
Portfolio shares of Tax-Exempt Portfolio Common Stock with an aggregate net
asset value equal to the aggregate value of the assets transferred by the
Insured Portfolio. The Insured Portfolio would thereafter distribute the
shares of the Tax-Exempt Portfolio so received to its shareholders on a pro
rata basis, and the Insured Portfolio subsequently would be liquidated and
discontinued. As a result of the Reorganization, shareholders of the Insured
Portfolio would become shareholders of the Tax-Exempt Portfolio. It is
expected that the aggregate net asset value of the shares of the Tax-Exempt
Portfolio received by each shareholders of the Insured Portfolio in the
Reorganization would be equal, immediately following the Reorganization, to the
aggregate net asset value of the shares of the Insured Portfolio held by such
shareholder immediately prior to the Reorganization.
The information otherwise required to be set forth in this Statement
of Additional Information is included in: (i) the Prospectus of Principal
Preservation (relating to both the Insured Portfolio and the Tax-Exempt
Portfolio), dated May 1, 1995, as supplemented (the "May 1, 1995 Prospectus");
(ii) the Statement of Additional Information of Principal Preservation
(relating to both the Insured Portfolio and the Tax-Exempt Portfolio), dated
May 1, 1995, as supplemented (the "May 1, 1995 SAI"); and (iii) Principal
Preservation's 1995 Annual Report to Shareholders (the "Annual Report"). The
May 1, 1995 Prospectus, the May 1, 1995 SAI and the Annual Report are
incorporated by reference herein.
A copy of the Proxy Statement/Prospectus, the May 1, 1995 Prospectus,
the May 1, 1995 SAI and the Annual Report may be obtained free of charge by
writing to B.C. Ziegler and Company, the distributor for Principal Preservation
(the "Distributor"), at 215 North Main Street, West Bend, Wisconsin 53095, or
by calling the Distributor at (800) 826-4600.
EXPERTS
The audited financial statements of the Insured Portfolio and the
Tax-Exempt Portfolio incorporated by reference into this Statement of
Additional Information have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, which
also is incorporated by reference into this Statement of Additional
Information, in reliance upon the authority of said firm as experts in
accounting and auditing in giving said report.
HISTORICAL FINANCIAL STATEMENTS
The following audited historical financial statements and footnotes
thereto of the Insured Portfolio and the Tax-Exempt Portfolio, together with
the Report of the Independent Accountants thereon, are incorporated herein by
reference from the Annual Report:
(1) Balance Sheets for each of the Insured Portfolio and the
Tax-Exempt Portfolio as of December 31, 1995;
B-1
<PAGE> 26
(2) Statements of Operations for each of the Insured Portfolio and
the Tax-Exempt Portfolio for the year ended December 31, 1995;
(3) Statements of Changes in Net Assets for each of the Insured
Portfolio and the Tax-Exempt Portfolio for the years ended
December 31, 1995 and 1994;
(4) Schedule of Investments of each of the Insured Portfolio and
the Tax-Exempt Portfolio as of December 31, 1995;
(5) Financial Highlights for each of the Insured Portfolio and the
Tax-Exempt Portfolio; and
(6) Notes to Financial Statements.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Set forth below are the following unaudited pro forma financial
statements: (a) unaudited Pro Forma Combining Statement of Assets and
Liabilities for the Insured Portfolio and the Tax-Exempt Portfolio as of
December 31, 1995, assuming the Reorganization had been consummated on that
date; (b) unaudited Pro Forma Combining Statement of Operations for the Insured
Portfolio and the Tax-Exempt Portfolio for the year ended December 31, 1995,
giving effect to the Reorganization as if it had been consummated on January 1,
1995; and (c) unaudited Pro Forma Combining Schedule of Investments of the
Insured Portfolio and the Tax-Exempt Portfolio as of December 31, 1995,
assuming the Reorganization had been consummated on that date.
This unaudited pro forma financial information should be read in
conjunction with, and is qualified in its entirety by, the audited historical
financial statements and accompanying notes of the Insured Portfolio and the
Tax-Exempt Portfolio included in the Annual Report and incorporated by
reference into this Statement of Additional Information. These unaudited pro
forma combining financial statements are intended for information purposes
only, and are not necessarily indicative of the future financial position or
future results of the Tax-Exempt Portfolio.
B-2
<PAGE> 27
PRINCIPAL PRESERVATION PORTFOLIOS, INC.- TAX-EXEMPT AND INSURED TAX-EXEMPT
PORTFOLIOS
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
INSURED PRO FORMA
TAX-EXEMPT TAX-EXEMPT COMBINED ADJUSTMENTS EFFECT
---------- ---------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments:
Long-term investments
in securities, (See
Schedule of Investments) ............. $55,427,133 $18,548,131 $73,975,264 $73,975,264
Short-term investments ............... 113,452 32,185 145,637 145,637
----------- ----------- ----------- --------- -----------
Total Investments .............. 55,540,585 18,580,316 74,120,901 0.00 74,120,901
Cash ....................................... 799 422 1,221 1,221
Receivables:
Capital shares sold ................. 6,827 5,251 12,078 12,078
Dividends and interest .............. 1,103,463 341,605 1,445,068 1,445,068
----------- ----------- ----------- --------- -----------
Total receivables .............. 1,110,290 346,856 1,457,146 0 1,457,146
Other assets ............................... 2,690 879 3,569 0 3,569
----------- ----------- ----------- --------- -----------
Total Assets ................... $56,654,364 $18,928,473 $75,582,837 0 $75,582,837
=========== =========== =========== ========= ===========
LIABILITIES:
Payables:
Capital shares redeemed ............. 66 1,076 1,142 1,142
Distributions to shareholders ....... 102,910 52,880 155,790 54,455 (c) 210,245
Expenses ............................ 108,818 44,214 153,032 (54,455)(g) 98,577
----------- ----------- ----------- --------- -----------
Total Liabilities .............. 211,794 98,170 309,964 0 309,964
----------- ----------- ----------- --------- -----------
NET ASSETS
Capital stock .............................. 56,285,533 17,937,660 74,223,193 74,223,193
Undistributed(overdistributed) net
investment income ..................... (24,415) 2,452 (21,963) (21,963)
Undistributed net realized gains
(losses) on investments ............... (2,646,336) 454 (2,645,882) (2,645,882)
Net unrealized appreciation
on investments ........................ 2,827,788 889,737 3,717,525 3,717,525
----------- ----------- ----------- --------- -----------
Total net assets ............... 56,442,570 18,830,303 75,272,873 0 75,272,873
----------- ----------- ----------- --------- -----------
Total liabilities
and net assets .............. $56,654,364 $18,928,473 $75,582,837 0 $75,582,837
=========== =========== =========== ========= ===========
NET ASSET VALUE AND
REDEMPTION PRICE
PER SHARE ............................. $9.39 $10.32 $9.39
=========== =========== ===========
MAXIMUM OFFERING PRICE
PER SHARE ............................. $9.73 $10.69 $9.73
=========== =========== ===========
Shares Outstanding Reconciliation CONVERSION PRO FORMA
ADJUSTMENT SHARES
Net Assets.................................. 56,442,570 18,830,303 75,272,873
Shares Authorized 50,000,000 50,000,000 50,000,000
Shares Issued and Outstanding............... 6,010,621 1,821,963 183,293 (h) 8,015,877
Net Asset Value and
Redemption Price.......................... 9.39 10.34 9.39
</TABLE>
The accompanying notes to the combining pro forma financial statements are an
integral part of these statements.
B-3
<PAGE> 28
PRINCIPAL PRESERVATION PORTFOLIOS, INC.- TAX-EXEMPT AND INSURED TAX-EXEMPT
PORTFOLIOS
PRO FORMA COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
INSURED PRO FORMA
TAX-EXEMPT TAX-EXEMPT COMBINED ADJUSTMENTS EFFECT
---------- ---------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest ................................... 3,386,999 1,110,406 4,497,405 4,497,405
---------- ---------- ----------- ------- -----------
Total investment
income ...................... 3,386,999 1,110,406 4,497,405 0 4,497,405
EXPENSES:
Investment advisory fees ................... 332,888 110,521 443,409 (18,477)(d) 424,932
Custodian fees ............................. 19,465 9,855 29,320 (3,685)(g) 25,635
Transfer agent fees ........................ 51,465 20,805 72,270 72,270
Broker service fees ........................ 81,288 26,750 108,038 108,038
Professional fees .......................... 53,617 31,025 84,642 (28,473)(e)(g) 56,169
Registration ............................... 17,193 13,140 30,333 (13,140)(g) 17,193
Communication .............................. 5,032 2,255 7,287 7,287
Director fees .............................. 17,364 5,687 23,051 23,051
Pricing of investments ..................... 8,165 3,640 11,805 11,805
Other ...................................... 9,015 4,087 13,102 (4,067)(g) 9,035
---------- ---------- ----------- ------- -----------
Total expenses ................. 595,492 227,765 823,257 (67,842) 755,415
Less expenses absorbed
by advisor ............................ (3,699) (9,688) (13,387) 13,387 (i) 0
---------- ---------- ----------- ------- -----------
Net expenses ................... 591,793 218,077 809,870 (54,455) 755,415
---------- ---------- ----------- ------- -----------
NET INVESTMENT INCOME ...................... 2,795,206 892,329 3,687,535 54,455 3,741,990
---------- ---------- ----------- ------- -----------
NET REALIZED GAINS
ON INVESTMENTS ........................ 1,105,058 111,976 1,217,034 1,217,034
NET UNREALIZED APPRECIATION
ON INVESTMENTS ........................ 5,538,312 2,004,622 7,542,934 7,542,934
---------- ---------- ----------- ------- -----------
Net gains
on investments .............. 6,643,370 2,116,598 8,759,968 8,759,968
---------- ---------- ----------- ------- -----------
NET INCREASE
IN NET ASSETS RESULTING
FROM OPERATIONS ....................... $9,438,576 $3,008,927 $12,447,503 $54,455 $12,501,958
========== ========== =========== ======= ===========
</TABLE>
The accompanying notes to the combining pro forma financial statements are an
integral part of these statements.
B-4
<PAGE> 29
<TABLE>
<CAPTION>
PRINCIPAL PRESERVATION PORTFOLIOS, INC. PLEASE NOTE: THE PRESENTATION OF THE SCHEDULE OF
TAX-EXEMPT AND INSURED TAX-EXEMPT PORTFOLIO INVESTMENTS ASSUMES THAT THE MANAGER WILL NOT
COMBINING SCHEDULE OF INVESTMENTS SELL ANY OF THE INSURED TAX-EXEMPT SECURITIES.
DECEMBER 31, 1995 THEREFORE, NO ADJUSTMENT COLUMN IS NEEDED.
(UNAUDITED)
INSURED
TAX-EXEMPT TAX-EXEMPT
PRINCIPAL RATINGS PORTFOLIO PORTFOLIO COMBINED
AMOUNT DESCRIPTION S&P MOODY'S VALUE VALUE VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LONG-TERM TAX-EXEMPT SECURITIES - 98.3%
ALASKA - 6.1%
1,000,000 Alaska Energy Authority, Power Revenue Bonds, First Series (Bradley AAA Aaa 1,086,250 1,086,250
Lake Hydroelectric Project), 7.25%, due 07-01-2009
1,500,000 Municipality of Anchorage, Alaska, 1995 General Obligation, General AAA Aaa 1,550,625 1,550,625
Purpose and General Obligation Refunding General Purpose Bonds,
Series A, 6.00%, due 02-01-2015
1,000,000 Municipality of Anchorage, Alaska, Hospital Revenue Refunding AA- A1 1,125,000 1,125,000
Bonds (Sisters of Providence Project), 7.125%, due 10-01-2005
800,000 Municipality of Anchorage, Alaska, 1993 General Obligation School AAA Aaa 804,000 804,000
Bonds, 5.60%, due 01-01-2014 (AMBAC)
CALIFORNIA-1.5%
1,095,000 The City of Los Angeles, Wastewater System Revenue Bonds, AAA Aaa 1,153,856 1,153,856
Refunding Series 1993-D, 6.00%, due 11-01-2014
DISTRICT OF COLUMBIA - 0.3%
200,000 District of Columbia, (Washington, D.C.) General Obligation Bonds, AAA Aaa 209,750 209,750
Series 1992B, 6.30%, due 06-01-2012 (MBIA)
FLORIDA - 1.4%
1,000,000 City of Cape Coral, Florida, Wastewater Assessment Refunding and AAA Aaa 1,083,750 1,083,750
Improvement Bonds, Series 1992 (Green Area), 6.25%, due 07-01-2008
HAWAII - 1.3%
1,000,000 City and County of Honolulu, Hawaii, General Obligation Bonds, AAA Aaa 998,750 998,750
Series 1995A, 5.25%, due 11-01-2013
ILLINOIS - 11.7%
1,000,000 City of Chicago, General Obligation Bonds, Project Series A of 1992, AAA Aaa 1,055,000 1,055,000
6.25%, due 01-01-2012
1,000,000 Public Building Commission of Chicago, Building Revenue Bonds AAA Aaa 1,028,750 1,028,750
(Chicago Part District) Series C of 1993, 5.80%, due 01-01-2013
1,515,000 Illinois Educational Facilities Authority, Revenue Bonds, Illinois A A1 1,537,725 1,537,725
Wesleyan University, Series 1993, 5.60%, due 09-01-2013
1,000,000 State of Illinois, Build Illinois Bonds (Sales Tax Revenue Refunding AAA A1 1,022,500 1,022,500
Bonds) Series Q, 5.75%, due 06-15-2014
1,000,000 Metropolitan Fair and Exposition Authority (Illinois)Dedicated State AAA Aaa 1,002,070 1,002,070
Tax Revenue Bonds, Series 1986, 6.00%, due 06-01-2014
900,000 City of Chicago, General Obligation Bonds, (Emergency Telephone AAA Aaa 904,500 904,500
System) Series 1993, 5.625%, due 01-01-2023 (FGIC)
700,000 Public Building Commission of Chicago, Building Revenue Bonds, AAA Aaa 797,125 797,125
(Board of Education of the City of Chicago) Series A of 1990, 6.50%,
due 01-01-2018 (MBIA)
550,000 Illinois Health Facilities Authority, Revenue Bonds, Series 1992B, AAA Aaa 591,250 591,250
(Franciscan Sisters Health Care Corp. Project), 6.625%,
due 09-01-2013 (MBIA)
900,000 Illinois Municipal Electric Agency, Power Supply System Revenue AAA Aaa 905,625 905,625
Bonds, Series 1991A, 5.75%, due 02-01-2021 (AMBAC)
INDIANA - 11.8%
1,400,000 Ball State University Board of Trustees, Ball State University Student AAA Aaa 1,463,000 1,463,000
Fee Bonds, Series G, 6.125%, due 07-01-2014
</TABLE>
Percentages shown are a percent of combined net assets.
The accompanying notes to combined financial statements are an intergral part of
this schedule
B-5
<PAGE> 30
<TABLE>
<CAPTION>
PRINCIPAL PRESERVATION PORTFOLIOS, INC. PLEASE NOTE: THE PRESENTATION OF THE SCHEDULE OF
TAX-EXEMPT AND INSURED TAX-EXEMPT PORTFOLIO INVESTMENTS ASSUMES THAT THE MANAGER WILL NOT
COMBINING SCHEDULE OF INVESTMENTS SELL ANY OF THE INSURED TAX-EXEMPT SECURITIES.
DECEMBER 31, 1995 THEREFORE, NO ADJUSTMENT COLUMN IS NEEDED.
(UNAUDITED)
INSURED
TAX-EXEMPT TAX-EXEMPT
PRINCIPAL RATINGS PORTFOLIO PORTFOLIO COMBINED
AMOUNT DESCRIPTION S&P MOODY'S VALUE VALUE VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INDIANA - (continued)
1,000,000 Hammond Multi-School Building Corporation (Lake County, Indiana) AAA Aaa 1,027,500 1,027,500
First Mortgage Bonds, Series 1995, 5.80%, due 01-15-2015
1,000,000 Indiana State Office Building Commission Capitol Complex Revenue AAA Aaa 1,241,250 1,241,250
Bonds, Series 1990A (Senate Avenue Parking Facility), 7.40%,
due 07-01-2015
1,170,000 Hospital Authority of Marion County (Indiana) Hospital Revenue AA- AA2 1,212,413 1,212,413
Refunding Bonds, Series 1989 (Methodist Hospital of Indiana, Inc.),
6.50%, due 09-01-2013
1,110,000 Hospital Authority of Monroe County, Hospital Revenue Refunding AAA Aaa 1,180,762 1,180,762
Bonds, Series 1989 (Bloomington Hospital Project), 7.125%,
due 05-01-2011
1,500,000 School Building Corporation of Warren Township, (Marion County, NR A2 1,556,250 1,556,250
Indiana)First Mortgage Bonds, Series 1992A, 6.00%, due 07-15-2012
600,000 Hospital Authority of Richmond (Indiana) Hospital Refunding Revenue AAA Aaa 633,000 633,000
Bonds, Series 1992 (Reid Hospital & Health Care Services, Inc.),
6.25%, due 01-01-2012 (FGIC)
500,000 Hospital Authority of St. Joseph County (Indiana) Fixed Rate AAA Aaa 550,625 550,625
Hospital Revenue Refunding Bonds, Series 1991A, 7.00%,
due 08-15-2011 (MBIA)
IOWA - 2.1%
1,000,000 State of Iowa, Certificates of Participation, Series 1992, 6.500%, AAA Aaa 1,087,500 1,087,500
due 07-01-2006
510,000 City of Waterloo, Black Hawk County, Iowa, General Obligation AAA Aaa 524,662 524,662
Bonds, Series 1994A, 6.00%, due 06-01-2014 (FSA)
LOUISIANA - 1.0%
700,000 Public Improvement Bonds, Issue of 1995, City of New Orleans, AAA Aaa 717,500 717,500
Louisiana, 5.85%, due 11-01-2013 (FGIC)
MASSACHUSETTS - 2.2%
1,040,000 Town of Franklin, Massachusetts, General Obligation Bonds, 5.25%, AAA Aaa 1,036,100 1,036,100
due 11-15-2012
600,000 Boston Water and Sewer Commission, General Revenue Bonds, 1991 AAA Aaa 616,500 616,500
Series A (Senior Series) 6.00%, due 11-01-2021 (FGIC)
due 11-15-2012
MICHIGAN -12.7%
1,210,000 Berkley School District, Oakland County, Michigan, 1995 School AAA Aaa 1,229,663 1,229,663
Building and Site Bonds (General Obligation - Unlimited Tax),
5.625%, due 01-01-2015
1,000,000 Clarkston Community Schools, County of Oakland, Michigan, 1993 AA AA2 1,028,750 1,028,750
School Building & Site & Refunding Bonds (GO-Unlimited Tax),
5.90%, due 05-01-2016
1,750,000 City of Detroit, Michigan, Sewage Disposal System Revenue and AAA Aaa 1,789,375 1,789,375
Revenue Refunding Bonds, Series 1993-A, 5.70%, due 07-01-2013
1,000,000 City of Kalamazoo, Kalamazoo County, Michigan, Downtown AA- A1 1,010,000 1,010,000
Development Refunding Bonds, Series 1993 (General Obligation
Limited Tax), 5.50%, due 04-01-2013
</TABLE>
Percentages shown are a percent of combined net assets.
The accompanying notes to combined financial statements are an integral part
of this schedule
B-6
<PAGE> 31
<TABLE>
<CAPTION>
PRINCIPAL PRESERVATION PORTFOLIOS, INC. PLEASE NOTE: THE PRESENTATION OF THE SCHEDULE OF
TAX-EXEMPT AND INSURED TAX-EXEMPT PORTFOLIO INVESTMENTS ASSUMES THAT THE MANAGER WILL NOT
COMBINING SCHEDULE OF INVESTMENTS SELL ANY OF THE INSURED TAX-EXEMPT SECURITIES.
DECEMBER 31, 1995 THEREFORE, NO ADJUSTMENT COLUMN IS NEEDED.
(UNAUDITED)
INSURED
TAX-EXEMPT TAX-EXEMPT
PRINCIPAL RATINGS PORTFOLIO PORTFOLIO COMBINED
AMOUNT DESCRIPTION S&P MOODY'S VALUE VALUE VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MICHIGAN (continued)
1,500,000 Michigan Municipal Bond Authority, Local Government Loan Program AAA Aaa 1,586,250 1,586,250
Revenue Bonds, Series 1994A (Wayne County Building Authority
Bonds), 6.00%, due 12-01-2013
1,000,000 State of Michigan, Comprehensive Transportation Refunding Bonds, AA- A1 1,015,000 1,015,000
Series 1992B, 5.75%, due 05-15-2011
1,000,000 Economic Development Corporation of the County of Gratiot, AAA Aaa 973,750 973,750
Michigan, Limited Obligation Revenue Refunding Bonds Series 1993
(Michigan Masonic Home Project), 5.20%, due 11-15-2012 (AMBAC)
400,000 School District of the City of River Rouge, County of Wayne, State of AAA Aaa 406,500 406,500
Michigan, 1993 School Building and Site Bonds (General Obligation-
Unlimited Tax), 5.60%, due 05-01-2014 (FSA)
500,000 Shelby Public School, Oceana County, Michigan, 1995 School Building AAA Aaa 507,500 507,500
and Site Bonds (General Obligation-Unlimited Tax), 5.60%,
due 05-01-2013 (MBIA)
MINNESOTA - 1.4%
1,000,000 Independent School District 196 (Rosemount - Apple Valley - Eagan), AA AA2 1,035,000 1,035,000
Minnesota, General Obligation School Building Bonds, Series 1994A,
5.875%, due 06-01-2014
NEVADA - 1.4%
1,000,000 Washoe County, Nevada, Gas and Water Facility Revenue Refunding AAA Aaa 1,053,750 1,053,750
Bonds, Variable Rate Demand, 6.30%, due 12-01-2014
NEW YORK - 4.8%
1,650,000 Dutchess County Resource Recovery Agency, New York Solid AAA Aaa 1,831,500 1,831,500
Waste Management System Revenue Bonds, Series 1990A, 7.50%,
due 01-01-2009
1,700,000 Dormitory Authority of the State of New York, New York University AAA Aaa 1,780,750 1,780,750
Insured Revenue Bonds, Series 1991, 6.00%, due 07-01-2015
NORTH CAROLINA - 1.7%
900,000 North Carolina Municipal Power Agency Number 1, Catawba Electric AAA Aaa 911,250 911,250
Revenue Bonds, Series 1992, 5.75%, due 01-01-2015 (MBIA)
400,000 North Carolina Eastern Municipal Power Agency, Power System AAA Aaa 398,000 398,000
Revenue Bonds, Refunding Series 1993 B, 5.50%, due 01-01-2017
(FGIC)
OKLAHOMA - 5.2%
1,000,000 Norman Regional Hospital Authority, (Norman, Oklahoma) Hospital AAA Aaa 1,090,000 1,090,000
Revenue Bonds, Series 1991, 6.75%, due 09-01-2011
1,000,000 City of Oklahoma City, Oklahoma, General Obligation Bonds, Series AA AA2 1,026,250 1,026,250
1994, 5.625%, due 03-01-2013
1,800,000 Pottawatomie County Development Authority, Water Revenue AAA Aaa 1,831,500 1,831,500
Bonds, Series 1993 (North Deer Creek Reservoir Project), 5.80%,
due 07-01-2015
PENNSYLVANIA - 1.0%
700,000 Greater Johnstown Water Authority, Cambria County, Pennsylvania AAA Aaa 740,250 740,250
Water Revenue Bonds, Series of 1992, 6.40%, due 01-01-2012 (FSA)
RHODE ISLAND - 1.5%
1,150,000 Rhode Island Convention Center Authority, Revenue Bonds, 1993 AAA Aaa 1,157,188 1,157,188
Series A, 5.50%, due 05-15-2013
</TABLE>
Percentages shown are a percent of combined net assets.
The accompanying notes to combined financial statements are an integral part
of this schedule
B-7
<PAGE> 32
<TABLE>
<CAPTION>
PRINCIPAL PRESERVATION PORTFOLIOS, INC. PLEASE NOTE: THE PRESENTATION OF THE SCHEDULE OF
TAX-EXEMPT AND INSURED TAX-EXEMPT PORTFOLIO INVESTMENTS ASSUMES THAT THE MANAGER WILL NOT
COMBINING SCHEDULE OF INVESTMENTS SELL ANY OF THE INSURED TAX-EXEMPT SECURITIES.
DECEMBER 31, 1995 THEREFORE, NO ADJUSTMENT COLUMN IS NEEDED.
(UNAUDITED)
INSURED
TAX-EXEMPT TAX-EXEMPT
PRINCIPAL RATINGS PORTFOLIO PORTFOLIO COMBINED
AMOUNT DESCRIPTION S&P MOODY'S VALUE VALUE VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SOUTH CAROLINA - 0.6%
400,000 Piedmont Municipal Power Agency (South Carolina) Electric Revenue AAA Aaa 441,000 441,000
Bonds, 1991 Refunding Series A, 6.125%, due 01-01-2007 (FGIC)
TENNESSEE - 1.4%
1,000,000 Shelby County, Tennessee, General Obligation Refunding Bonds, 1995 AA+ AA2 1,028,750 1,028,750
Series A, 5.625%, due 04-01-2015
TEXAS - 5.7%
1,300,000 Brazos River Authority (Texas), Collateralized Revenue Refunding AAA Aaa 1,327,625 1,327,625
Bonds (Houston Lighting & Power Company Project), Series 1995,
5.80%, due 08-01-2015
1,000,000 Dallas - Fort Worth Regional Airport Joint Revenue Refunding Bonds, AAA Aaa 1,165,000 1,165,000
Series 1992A, 7.375%, due 11-01-2011
1,000,000 Texas Water Development Board, State Revolving Fund, Senior Lien AAA AA2 1,057,500 1,057,500
Revenue Bonds, Series 1992, 6.00%, due 07-15-2013
700,000 City of Houston, Texas, Water and Sewer System, Junior Lien Revenue AAA Aaa 750,750 750,750
Bonds, Series 1991A, 6.50%, due 12-01-2021 (AMBAC)
UTAH - 5.0%
1,185,000 State of Utah, State Building Ownership Authority, Lease Revenue AA AA2 1,216,106 1,216,106
Refunding Bonds, Series 1992A, (Department of Employment Security
Project), 5.75%, due 08-15-2011
1,000,000 State of Utah, State Building Ownership Authority Lease Revenue AAA Aaa 1,023,750 1,023,750
Bonds (State Facilities Master Lease Program), Series 1995A, 5.70%,
due 05-15-2015
675,000 Central Utah Water Conservancy District, State of Utah, General AAA Aaa 652,219 652,219
Obligation (Limited Tax) Refunding Bonds, Series 1993, 5.25%,
due 04-01-2018 (MBIA)
900,000 Salt Lake County Water Conservancy District, Water Conservancy AAA Aaa 886,500 886,500
Revenue Bonds, Series 1993A, 5.35%, due 10-01-2018 (AMBAC)
VERMONT - 1.4%
1,000,000 Vermont Educational & Health Buildings Financing Agency, Hospital AAA Aaa 1,036,250 1,036,250
Revenue Bonds (Medical Center Hospital of Vermont)Series 1993,
6.20%, due 09-01-2016 (FGIC)
VIRGINIA - 5.1%
1,000,000 Chesapeake, Virginia, Industrial Development Authority, Public AAA Aaa 1,020,000 1,020,000
Facility Lease Revenue Bonds (City Jail Project), Series of 1994,
5.625%, due 06-01-2014
1,750,000 Fairfax County Water Authority, Water Refunding Revenue Bonds, AA- AA2 1,785,000 1,785,000
Series 1992, 5.75%, due 04-01-2014
1,000,000 Southeastern Public Service Authority of Virginia, Senior Revenue & AAA Aaa 1,016,250 1,016,250
Revenue Refunding Bonds, Series 1989 (Regional Solid Waste
System), 6.00%, due 07-01-2015
WASHINGTON - 2.4%
1,000,000 State of Washington, General Obligation Bonds, Series 1994B, 5.75%, AAA Aaa 1,013,750 1,013,750
due 05-01-2013
350,000 Everett School District No. 2, Snohomish County, Unlimited Tax AAA Aaa 371,875 371,875
General Obligation and Refunding Bonds, Series 1993, 6.20%,
due 12-01-2012 (MBIA)
</TABLE>
Percentages shown are a percent of combined net assets.
The accompanying notes to combined financial statements are an integral part
of this schedule
B-8
<PAGE> 33
<TABLE>
<CAPTION>
PRINCIPAL PRESERVATION PORTFOLIOS, INC. PLEASE NOTE: THE PRESENTATION OF THE SCHEDULE OF
TAX-EXEMPT AND INSURED TAX-EXEMPT PORTFOLIO INVESTMENTS ASSUMES THAT THE MANAGER WILL NOT
COMBINING SCHEDULE OF INVESTMENTS SELL ANY OF THE INSURED TAX-EXEMPT SECURITIES.
DECEMBER 31, 1995 THEREFORE, NO ADJUSTMENT COLUMN IS NEEDED.
(UNAUDITED)
INSURED
TAX-EXEMPT TAX-EXEMPT
PRINCIPAL RATINGS PORTFOLIO PORTFOLIO COMBINED
AMOUNT DESCRIPTION S&P MOODY'S VALUE VALUE VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
WASHINGTON (continued)
400,000 Snohomish County, Washington, Solid Waste Revenue Bonds, 7.00%, AAA Aaa 437,000 437,000
due 12-01-2010 (MBIA)
WISCONSIN - 6.3%
1,000,000 Wisconsin Health and Educational Facilities Authority, Revenue AA2 NR 1,043,750 1,043,750
Bonds, Series 1995, (Franciscan Skemp Medical Center, Inc.),
6.125%, due 11-15-2015
1,750,000 Wisconsin Health Facility Authority, Revenue Bonds, Series 1987 A NR 1,815,625 1,815,625
(Good Samaritan Medical Center, Inc. Refinancing), St. Luke's
Hospital, Inc., Milwaukee, Wisconsin, 7.00%, due 03-01-2009
700,000 Unified School District of Antigo, Langlade, Marathon and AAA Aaa 742,875 742,875
Shawano Counties, Wisconsin, Certificates of Participation, 6.60%,
due 07-15-2008 (FSA)
400,000 Wisconsin Health and Educational Facilities Authority, Revenue Bonds, AAA Aaa 433,000 433,000
Series 1992, (Children's Hospital of Wisconsin, Inc. Project), 6.50%,
due 08-15-2010 (FGIC)
700,000 Wisconsin Health Facilities Authority Revenue Bonds Series 1987 A NR 728,875 728,875
(Good Samaritan Medical Center Refinancing) St. Luke's Hospital Inc.,
Milwaukee, Wisconsin, 7.25%, due 03-01-2014 (FGIC)
WYOMING - 1.2%
800,000 Trustees of the University of Wyoming, Facilities Revenue Bonds, AAA Aaa 876,000 876,000
----------- ----------- -----------
Series 1991, 7.10%, due 06-01-2010 (MBIA)
Total Long Term Tax-Exempt Securities (Cost $52,599,345,$17,358,695 and 55,427,133 18,548,131 73,975,264
($70,257,740, respectively)
SHORT TERM TAX-EXEMPT SECURITIES - 0.2%
MONEY MARKET
140,524 Federated Tax-Free Trust 113,452 27,072 140,524
5,113 Portico Tax-Exempt 5,113 5,113
----------- ----------- -----------
Total Short-Term Investments 113,452 32,185 145,637
----------- ----------- -----------
Total Investments $55,540,585 $18,580,316 $74,120,901
=========== =========== ===========
</TABLE>
AMBAC: American Municipal Bond Assurance Corporation
MBIA: Municipal Bond Insurance Association
FGIC: Financial Guaranty Insurance Corporation
FSA: Financial Security Assurance
Percentages shown are a percent of combined net assets.
The accompanying notes to combined financial statements are an integral part
of this schedule
B-9
<PAGE> 34
PRINCIPAL PRESERVATION PORTFOLIOS INC-TAX-EXEMPT AND INSURED TAX-EXEMPT
PORTFOLIOS
NOTES TO COMBINING PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
The pro forma adjustments to the foregoing pro forma combing financial
statements consist of:
a. The Reorganization involves the transfer of all assets of the
Insured Tax-Exempt Portfolio (net of its liabilities) to the
Tax-Exempt Portfolio, in exchange for shares of common stock of
the Tax-Exempt Portfolio, and the pro rata distribution,
on the Closing Date, of such shares of the Tax-Exempt
Portfolios to the Insured Tax-Exempt Portfolio as provided in
the plan.
All of the expenses of the Reorganization associated with the
Reorganization (which are estimated at $15,000) will be paid
by B.C. Ziegler and Company or one of its affiliates.
b. The foregoing unaudited Pro Forma Financial Statements consist
of: (i) Pro Forma Combining Statements of Assets and
Liabilities as of December 31, 1995, assuming the
Reorganization had been consummated on that date; (ii) the Pro
Forma Combining Statement of Operations the year ended
December 31,1995, giving effect to the Reorganization as if it
had been consummated on January 1, 1995; and (iii) Pro Forma
Combining Schedules of Investments as of December 31, 1995,
assuming the Reorganization had been consummated on that date.
The presentation of the Pro Forma Combining Schedule of
Investments assumes that the investment manager will not sell
any of the Insured Tax-Exempt securities in connection with
the Reorganization. Therefore, no adjustment column is
presented.
c. Assumes the $54,455 reduction in pro forma expenses is
distributed to the shareholders of the combined Portfolio.
d. A reduction in the advisory fee reflects a lower fee due to the
fact that the resulting increase in assets of the combined
Portfolio will cross a breakpoint in the advisory fee schedule.
e. The reduction in fund accounting fees reflects the elimination
of the minimum fee presently incurred by the Insured
Tax-Exempt Portfolio.
f. The reduction in the custodian fees reflects application of the
custodian fee schedule to the increased asset size of the
combined Portfolio.
g. Reduction in professional services, registration and other fees
reflects the elimination of duplicative costs. No pro forma
reductions or adjustments in transfer agent, broker service,
communication, director or pricing fees would result from the
Reorganization because such fees are based on asset size,
the number of shareholder accounts or the number of portfolio
securities, as the case may be, which would not be affected by
the Reorganization.
h. The share reconciliation includes an increase of 183,293 in the
combined shares outstanding due to the lower net asset value
per share of the Tax-Exempt Portfolio.
i. The reversal of combined expenses absorbed by the
advisor reflects the fact that the expense ratio of 1.15% for
the pro forma combined Portfolio would be the same as the
voluntary expense cap of 1.15% agreed to by the advisor for the
Tax-Exempt Portfolio. Therefore, there would be no need for
the advisor to absorb any operating expenses of the combined
Portfolio.
B-10
<PAGE> 35
PRINCIPAL PRESERVATION PORTFOLIOS, INC.
INSURED TAX-EXEMPT PORTFOLIO
REVOCABLE PROXY FOR SPECIAL MEETING OF SHAREHOLDERS OF THE INSURED TAX-EXEMPT
PORTFOLIO TO BE HELD ON APRIL 24, 1996
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Robert J. Tuszynski, S. Charles
O'Meara, and Jay Ferrara and each of them individually, as proxy,
with full power of substitution, to represent and vote, as
designated below, all shares of the Insured Tax-Exempt Portfolio
("Insured Portfolio"), a series of Principal Preservation
Portfolios, Inc. ("Principal Preservation"), that the undersigned is
entitled to vote at the Special Meeting of Shareholders of the
Insured Portfolio, to be held at The Bacchus Restaurant (located in
the West Bend Inn building), 2520 West Washington Street, West Bend,
Wisconsin, at 3:00 p.m., Central Time, on April 24, 1996, or at any
adjournment thereof, with respect to the matters set forth below and
described in the accompanying Notice of Special Meeting and Proxy
Statement/Prospectus, receipt of which is hereby acknowledged.
Please place an "X" in the desired box for each item. Shares
represented by this Proxy will be voted as directed by the
shareholder. IF NO DIRECTION IS SUPPLIED, THE PROXY WILL BE VOTED
"FOR" PROPOSAL 1.
1. PROPOSAL TO APPROVE a Plan of Reorganization and Liquidation (the
"Plan") involving the Insured Portfolio and the Tax-Exempt
Portfolio, another series of Principal Preservation, and the
consummation of the transactions contemplated therein (the
"Transaction"). The Plan provides for the reorganization of the
Insured Portfolio into the Tax-Exempt Portfolio. Pursuant to the
Plan, all of the assets of the Insured Portfolio (net of its
liabilities) would be acquired by the Tax-Exempt Portfolio in
exchange for shares of Common Stock of the Tax-Exempt Portfolio.
Shares of the Common Stock of the Tax-Exempt Portfolio received
by the Insured Portfolio would then be distributed, pro rata, to
shareholders of the Insured Portfolio, and the Insured Portfolio
would be liquidated and discontinued. It is expected that the
value of each Insured Portfolio shareholder's account in the
Tax-Exempt Portfolio immediately after the Transaction would be
the same as the value of such shareholder's account in the
Insured Portfolio immediately prior to the Transaction.
/ / FOR / / AGAINST / / ABSTAIN
2. In their discretion, on such other matters as may properly come
before the meeting or any adjournment thereof.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE
"FOR" PROPOSAL 1.
(TO BE DATED AND SIGNED ON THE REVERSE SIDE)
<PAGE> 36
DATE: , 1996
-------------------------------
Please sign exactly as name
appears at left
-------------------------------
(If this account is owned by
more than one person, all
owners should sign. Persons
signing as executors,
administrators, trustees or in
similar capacities should so
indicate.)
PLEASE MARK, DATE, SIGN AND RETURN THIS PROXY BALLOT PROMPTLY, USING THE
ENCLOSED ENVELOPE.
