PRINCIPAL PRESERVATION PORTFOLIOS, INC.
Six portfolios (the "Portfolios") of the Principal Preservation Portfolios,
Inc. ("Principal Preservation") family of mutual funds are offered by this
Prospectus:
TAX-EXEMPT PORTFOLIO
GOVERNMENT PORTFOLIO
S&P 100 PLUS PORTFOLIO
DIVIDEND ACHIEVERS PORTFOLIO
SELECT VALUE PORTFOLIO
PSE TECH 100 INDEX PORTFOLIO
The risks and special characteristics of investing in each of the Portfolios
are highlighted in the sections of this Prospectus titled "Questions and
Answers" and "Special Considerations." Each Portfolio is managed by Ziegler
Asset Management, Inc. (the "Advisor"). Skyline Asset Management, L.P.
("Skyline"; together with the Advisor, the "Advisors") serves as sub-advisor to
the Select Value Portfolio. Shareholder inquiries should be directed to
Principal Preservation at 215 North Main Street, West Bend, WI 53095; telephone
800-826-4600.
This Prospectus sets forth concisely the information that an investor should
know before investing in shares of any of the Portfolios. Investors should read
and retain this Prospectus for future reference. A Statement of Additional
Information dated May 1, 1997, containing additional information about Principal
Preservation and the Portfolios has been filed with the Securities and Exchange
Commission and is incorporated by reference into this Prospectus. A copy of the
Statement of Additional Information can be obtained without charge upon request
to Principal Preservation's distributor, B.C. Ziegler and Company ("Ziegler"),
215 North Main Street, West Bend, WI 53095 (telephone 800-826-4600) or from
Selected Dealers that have agreements with respect to the distribution of shares
of the Portfolios.
SHARES OF THE PORTFOLIOS 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 PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1997.
QUESTIONS AND ANSWERS
WHAT ARE THE PRINCIPAL PRESERVATION PORTFOLIOS?
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. Two additional series of Principal Preservation, the
Cash Reserve Portfolio and the Wisconsin Tax-Exempt Portfolio, are offered by
separate Prospectuses.
WHAT ARE THE BENEFITS FROM INVESTING IN THE PORTFOLIOS?
Economy of Size. The Portfolios are designed to provide investors with an
opportunity to pool their money to achieve economies of size and
diversification. This permits investors, whose own securities' portfolios may
not be large enough to obtain individual investment management services on a
cost-effective basis, to take advantage of the professional investment
management expertise of the Advisors.
A Choice of Portfolios. Principal Preservation offers investors six distinct
portfolio choices through this Prospectus:
Tax-Exempt Portfolio
Government Portfolio
S&P 100 Plus Portfolio
Dividend Achievers Portfolio
Select Value Portfolio
PSE Tech 100 Index Portfolio
Professional Management. Each Portfolio provides professional management of
your investment. Maintaining records of your investments is made timely and
convenient with detailed statements of your investment activity and account
status.
Portfolio Diversification. Mutual funds combine the funds of many investors
to obtain a diversified portfolio. The burden of selecting securities is eased
and the high cost investors would otherwise incur through smaller purchases is
trimmed.
Liquidity. Shares of any Portfolio may be redeemed at any time at their
current net asset value. See "Redemptions."
Retirement Plans. The tax-deferred advantages of tax-qualified retirement
plans are open to investors in Principal Preservation. You can invest, with a
$500 minimum investment, through an IRA. Principal Preservation makes certain
prototype plans available to investors. See "Shareholder Services - Tax
Sheltered Retirement Plans." Because most of the interest income from the Tax-
Exempt Portfolio is exempt from federal income tax, shares of those Portfolios
are not recommended for purchase by a tax sheltered retirement plan.
WHAT ARE THE PORTFOLIOS' INVESTMENT OBJECTIVES?
Each Portfolio has its own investment objectives and policies. See
"Investment Objectives" and "Investment Program" in this Prospectus and
"Investment Program" in the Statement of Additional Information. There can be
no assurance that a Portfolio's investment objective will be achieved.
TAX-EXEMPT PORTFOLIO: to obtain the highest total return consistent with
preservation of principal through investing in high quality municipal bonds with
remaining maturities of two to 20 years.
GOVERNMENT PORTFOLIO: to obtain the highest total return consistent with
preservation of principal through investing in a portfolio of instruments and
obligations issued by the U.S. Treasury, or which are backed by the
unconditional full faith and credit of the United States government, its
agencies or instrumentalities ("U.S. Government Securities").
S&P 100 PLUS PORTFOLIO: to obtain a total return from dividends and capital
gains which, before deducting the operating expenses of the Portfolio, exceeds
the total return of the S&P 100 Index. The S&P 100 Index is designed to be
representative of the stock market as a whole, and consists of 100 common stocks
of many large U.S. corporations across a broad spectrum of industries. The
Portfolio attempts to achieve its objective by investing in a portfolio of
common stocks that approximately parallels the composition of the S&P 100 Index,
but it does not intend to replicate the Index at all times.
DIVIDEND ACHIEVERS PORTFOLIO: to obtain capital appreciation and income
through investing in a portfolio of common stocks of companies that have
achieved a superior record of dividend growth.
SELECT VALUE PORTFOLIO: to obtain maximum capital appreciation primarily
through investment in common stocks that the Advisors consider undervalued
relative to earnings, book value, or potential earnings growth. The Select
Value Portfolio pursues its investment objective generally by emphasizing
investments in smaller to medium-sized companies, although the Portfolio is not
restricted to investments in companies of any particular size.
PSE TECH 100 INDEX PORTFOLIO: to obtain a total return, before operating
expenses of the Portfolio, that replicates the total return of the Pacific
Exchange, Inc.-Technology Stock Index (the "PSE Technology Index"). The PSE
Technology Index is widely recognized as a benchmark for the technology sector
of the United States stock market. The PSE Technology Index consists of 100
common stocks of companies which have or likely will develop products, processes
or services that will provide or benefit significantly from technological
advances and improvements. Industries represented within the Index range from
biotechnology firms to semiconductor capital equipment manufacturers and include
a cross-section of 15 technology subsectors. The Portfolio attempts to achieve
its objective by investing in all 100 common stocks included in the PSE
Technology Index in approximately the same proportions as they are represented
on the Index.
ARE THERE ANY RISKS TO CONSIDER?
Certain securities in which the Portfolios may invest and activities in which
they may engage involve special considerations and risks. For example, the
cyclical nature of the stock market may affect the value of equity securities,
changes in interest rates and average maturities may affect the value of debt
securities, and changes in general economic conditions and in the financial
positions and credit ratings of issuers may affect the value of all types of
securities in which the Portfolios invest.
The Select Value Portfolio is designed for long term investors willing to
accept more investment risk and volatility than the stock market in general, but
with less investment risk and volatility than aggressive capital appreciation
funds. The Select Value Portfolio's net asset value may be subject to above-
average fluctuations than the net asset values of other equity-based investment
companies because greater than average risk will be assumed in investing in
smaller to medium-sized companies for the purpose of seeking to maximize capital
appreciation. See "Investment Program - Select Value Portfolio."
The PSE Technology Index and, thus, the PSE Tech 100 Index Portfolio are
subject to volatility and price fluctuations as
the technology market sector increases and decreases in favor with the investing
public. Notwithstanding its focus on technology, the PSE Technology Index
includes companies in a wide range of industries. This broad industry
representation serves to reduce the volatility of the PSE Technology Index. An
investment in the PSE Tech 100 Index Portfolio may involve an above average
degree of risk because of the significant representation on the Index of common
stocks of smaller- and medium-sized companies, which tend to be more volatile
and less liquid than stocks of larger companies. In addition, the PSE
Technology Index is price weighted, which means that its component stocks are
given a percentage weighting based on their price. Although this indexing
method allows the PSE Technology Index to accurately measure a broad
representation of technology stocks without being dominated by a few large
companies, it may cause the PSE Tech 100 Index Portfolio to experience higher
turnover and brokerage expenses than if the Index's component stock were not
indexed in this fashion.
Certain hedging strategies and related option transactions in which the S&P
100 Plus, Dividend Achievers and PSE Tech 100 Index Portfolios may engage, and
futures transactions in which the S&P 100 Plus and PSE Tech 100 Index Portfolios
may engage, expose those Portfolios to special risks. See "Investment Program -
Options and Futures Activities - Risks Associated With Options and Futures."
WHAT ARE THE ADVANTAGES OF STOCK INDEXING?
Stock indexing allows investors to purchase a package of common stocks, the
value of which moves with the value of the market index it is designed to
follow, such as the Standard & Poor's 100 Index, the Standard & Poor's 500
Index, the New York Stock Exchange Composite Index and the PSE Technology Index.
Frequently, the performance of individual investment managers does not match the
performance of such stock indices.
HOW DO THE PORTFOLIOS DISTRIBUTE INCOME?
Dividends will be declared daily and paid monthly in the Tax-Exempt and
Government Portfolios, and will be declared and paid quarterly in the S&P 100
Plus, Dividend Achievers, Select Value and PSE Tech 100 Index Portfolios. Any
net realized capital gains will be declared and paid annually. Investors may
receive their income dividends and capital gain distributions in additional
shares of the Portfolio, in additional shares in another Principal Preservation
portfolio or in cash. See "Dividends, Capital Gains Distributions And
Reinvestments."
WHO MANAGES THE PORTFOLIOS?
Ziegler Asset Management, Inc. is the investment advisor for each of the
Portfolios. Skyline Asset Management, L.P. is the sub-advisor for the Select
Value Portfolio. See "Management."
HOW CAN SHARES BE PURCHASED?
Shares may be purchased at the public offering price next determined after
receipt of an order to purchase. The offering price is the net asset value per
share plus a sales charge. Shares may be purchased from Ziegler in its capacity
as distributor (the "Distributor") of each Portfolio's shares, or from broker-
dealers and other financial institutions or firms that have entered into
agreements with the Distributor with respect to their assistance in distributing
shares of the Portfolios ("Selected Dealers"). See "Purchase of Shares."
Ziegler's principal office is at 215 North Main Street, West Bend, WI 53095;
telephone 800-826-4600. The minimum initial investment in a Portfolio is
$1,000. The minimum subsequent investment is $50. The minimum initial
investment for IRA accounts is $500, and the minimum subsequent investment is
$25.
HOW CAN YOU REDEEM OR EXCHANGE YOUR SHARES?
Shares may be redeemed by mail or telephone. The redemption value of the
shares is the net asset value per share as of the close of business on the day
the redemption request is received in proper form. Subject to a service charge
(currently $5.00), shares of any Portfolio may be exchanged for shares of any
other Principal Preservation portfolio on the basis of their relative net asset
value after the shares to be exchanged have been held for more than six months.
See "Redemptions" and "Shareholder Services." Information as to Principal
Preservation portfolios other than the seven Portfolios offered by this
Prospectus is provided by separate prospectuses, copies of which can be obtained
from the Distributor.
EXPENSES
S&P 100 DIVIDEND SELECT PSE TECH
TAX-EXEMPT GOVERNMENT PLUS ACHIEVERS VALUE 100 INDEX
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- --------- --------- --------- ---------
SHAREHOLDER
TRANSACTION
EXPENSES
Maximum Sales
Load
Imposed on
Purchases
(as a percentage
of offering
price)(1)<F1> 3.5% 3.5% 4.5% 4.5% 4.5% 4.5%
Maximum Sales Load
Imposed on Reinvested
Dividends (as a
percentage of
offering price) 0% 0% 0% 0% 0% 0%
Deferred Sales Load
(as a percentage of
original
purchase price or
redemption
proceeds) 0% 0% 0% 0% 0% 0%
Redemption Fees (as a
percentage of amount
redeemed)(2)<F2> 0% 0% 0% 0% 0% 0%
Exchange Fee $5.00 $5.00 $5.00 $5.00 $5.00 $5.00
ANNUAL FUND OPERATING
EXPENSES -
AFTER WAIVERS AND
REIMBURSEMENTS
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)(3)<F3>
Management Fees
(After Waivers) 0.58% 0.60% 0.35% 0.70% 0.37% 0.00%
12b-1 Fees (4)<F4>0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses:
Custodian Fees 0.04% 0.04% 0.03% 0.03% 0.09% 0.10%
Transfer Agent
Fees 0.07% 0.09% 0.09% 0.07% 0.09% 0.18%
Other Fees (After
Reimbursement)(5) 0.17% 0.19% 0.15% 0.20% 0.35% 0.07%
<F5> ----- ----- ----- ----- ----- -----
Total Other
Expenses 0.28% 0.32% 0.27% 0.30% 0.53% 0.35%(6)
Total Fund
Operating
Expenses 1.11% 1.17% 0.87% 1.25% 1.25% 0.60%
(After
Reimbursements)(5)<F5>
(1)<F1>Investors may be able to qualify for a lower sales load. See
"Purchase of Shares" and "Shareholder Services."
(2)<F2>Ziegler, in its capacity as transfer agent, charges a fee (presently
$7.50) for redemptions by wire transfer.
(3)<F3>The percentages expressing annual operating expenses are based on
amounts actually incurred during the year ended December 31, 1996, net
of applicable fee waivers and expense reimbursements in effect for the
current year. See note (5). Fees paid by all of 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."
(4)<F4>Because the Rule 12b-1 distribution fee is paid quarterly throughout
the life of the investment rather than as a one-time fee, long term
shareholders may pay more than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of
Securities Dealers ("NASD"), which is generally 6.25% of new sales
plus an interest factor.
(5) The Advisor has committed to waive advisory fees with respect to the
following Portfolios so that for fiscal year 1997 the total operating
expenses of such Portfolios will not exceed the following percentages
of their respective average daily net assets: Tax-Exempt Portfolio -
1.20%; Government Portfolio - 1.20%; Dividend Achievers Portfolio -
1.25%; Select Value Portfolio - 1.25%; and PSE Tech 100 Index
Portfolio - 0.60%. The Advisor has also committed to waive advisory
fees and/or reimburse expenses with respect to the S&P 100 Plus
Portfolio, commencing on May 1, 1997, so that for the 12 months
ending May 1, 1998 the total operating expenses of that Portfolio
will not exceed 0.80% of its average daily net assets. Without giving
effect to such waivers and reimbursements, "Management Fees,"
"Other Fees," and "Total Fund Operating Expenses" as a percentage
of the respective Portfolio's average daily net assets would be:
0.49%, 0.17% and 1.03% for the S&P 100 Plus Portfolio; 0.75%, 0.24%
and 1.29% for the Dividend Achievers Portfolio; 0.75%, 1.22% and
2.40% for the Select Value Portfolio; and 0.50%, 2.28% and 3.31%
for the PSE Tech 100 Index Portfolio. The Advisor's commitment to
waive fees and/or reimburse expenses would not affect the
"Management Fees," "Other Fees" or "Total Fund Operating Expenses"
for the Tax-Exempt and Government Portfolios.
(6)<F6>"Total Other Expenses" for the PSE Tech 100 Index Portfolio are based
on estimated amounts for the current fiscal year.
EXAMPLE
You 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:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Tax-Exempt Portfolio $46 $69 $93 $164
Government Portfolio 46 70 95 168
S&P 100 Plus Portfolio 53 71 91 147
Dividend Achievers Portfolio 57 83 111 189
Select Value Portfolio 57 83 111 189
PSE Tech 100 Index Portfolio 51 63 --- ---
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." THE ABOVE EXAMPLES SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN SHOWN.
FINANCIAL HIGHLIGHTS
The following Financial Highlights tables present information relating to a
share of capital stock of each Portfolio outstanding for the periods presented.
This information should be read in conjunction with the financial statements and
related notes thereto contained in Principal Preservation's 1996 Annual Report
to Shareholders, which financial statements are incorporated herein by
reference. The information has been audited by Arthur Andersen LLP, independent
public accountants, whose report thereon is contained in the 1996 Annual Report
to Shareholders, copies of which are available without charge from the
Distributor.
<TABLE>
<CAPTION>
TAX-EXEMPT PORTFOLIO
----------------------------------------------------------------------
For the years ended December 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
NET ASSET VALUE,
BEGINNING OF PERIOD $9.39 $8.36 $9.41 $8.67 $8.46 $8.19
INCOME FROM
INVESTMENT OPERATIONS:
Net investment income .43 .45 .45 .48 .50 .53
Net realized and
unrealized gains (losses)
on investments (.09) 1.03 (1.05) .74 .21 .27
------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS .34 1.48 (.60) 1.22 .71 .80
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net
investment income (.43) (.45) (.45) (.48) (.50) (.53)
------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS (.43) (.45) (.45) (.48) (.50) (.53)
------ ------ ------ ------ ------ ------
NET ASSET VALUE,
END OF PERIOD $9.30 $9.39 $8.36 $9.41 $8.67 $8.46
====== ====== ====== ====== ====== ======
TOTAL RETURN*<F7> 3.8% 18.1% (6.4)% 14.3% 8.6% 10.0%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of period
(to nearest thousand) $66,310 $56,443 $55,492 $68,102 $60,171 $63,932
Ratio of net expenses to
average net assets 1.1%+<F8> 1.0%+<F8> 1.0% 0.9% 0.9% 0.9%
Ratio of net investment
income to average net assets 4.7%+<F8> 4.9%+<F8> 5.2% 5.2% 5.9% 6.3%
Portfolio turnover rate 163.1% 105.9% 36.1% 56.3% 48.5% 38.3%
*<F7>The Fund's sales charge is not reflected in total return as set forth in
the table.
+<F8>Reflects a voluntary reimbursement of fund expenses of 0.1% in 1996 and
0.01% in 1995, respectively.
</TABLE>
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------------------
1990 1989 1988 1987
------ ------ ------ -----
<S> <C> <C> <C> <C>
PER SHARE DATA:
NET ASSET VALUE,
BEGINNING OF PERIOD $8.23 $8.06 $8.14 $8.81
INCOME FROM
INVESTMENT OPERATIONS:
Net investment income .53 .55 .55 .60
Net realized and
unrealized gains (losses)
on investments (.04) .17 (.08) (.67)
------ ------ ------ -----
TOTAL FROM INVESTMENT
OPERATIONS .49 .72 .47 (.07)
------ ------ ------ -----
LESS DISTRIBUTIONS:
Dividends from net
investment income (.53) (.55) (.55) (.60)
------ ------ ------ -----
TOTAL DISTRIBUTIONS (.53) (.55) (.55) (.60)
------ ------ ------ -----
NET ASSET VALUE,
END OF PERIOD $8.19 $8.23 $8.06 $8.14
====== ====== ====== ======
TOTAL RETURN*<F7> 6.2% 9.2% 6.0% (0.9)%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of period
(to nearest thousand) $65,265 $73,333 $85,469 $107,471
Ratio of net expenses to
average net assets 0.9% 1.0% 1.2% 1.1%
Ratio of net investment
income to average net assets 6.6% 6.7% 6.9% 7.1%
Portfolio turnover rate 40.3% 21.5% 38.8% 18.0%
*<F7>The Fund's sales charge is not reflected in total return as set forth in
the table.
+<F8>Reflects a voluntary reimbursement of fund expenses of 0.1% in 1996 and
0.01% in 1995, respectively.
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT PORTFOLIO
------------------------------------------------------------------------
For the years ended December 31,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
NET ASSET VALUE,
BEGINNING OF PERIOD $9.64 $8.84 $9.98 $9.64 $9.68 $9.10
INCOME FROM
INVESTMENT OPERATIONS:
Net investment income .64 .61 .61 .63 .67 .73
Net realized and
unrealized gains (losses)
on investments (.44) .80 (1.14) .35 (.04) .58
------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS .20 1.41 (.53) .98 .63 1.31
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net
investment income (.64) (.61) (.61) (.64) (.67) (.73)
Distributions from net
realized gains
on investments -- -- -- -- -- --
Distribution of capital -- -- -- -- -- --
------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS (.64) (.61) (.61) (.64) (.67) (.73)
------ ------ ------ ------ ------ ------
NET ASSET VALUE,
END OF PERIOD $9.20 $9.64 $8.84 $9.98 $9.64 $9.68
====== ====== ====== ====== ====== ======
TOTAL RETURN*<F9> 2.3% 16.3% (5.4)% 10.3% 6.8% 15.1%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of period
(to nearest thousand) $44,920 $49,319 $47,324 $54,327 $37,634 $32,737
Ratio of net expenses to
average net assets 1.1%+<F10> 1.1%+<F10> 1.1% 1.0% 1.0% 1.1%
Ratio of net investment
income to average net assets 7.0%+<F10> 6.5%+<F10> 6.6% 6.2% 7.0% 8.0%
Portfolio turnover rate 36.9% 68.2% 106.1% 8.7% 10.0% 62.2%
*<F9>The Fund's sales charge is not reflected in total return as set forth in
the table.
+<F10>Reflects a voluntary reimbursement of fund expenses of 0.04% in 1996,
0.02% in 1995, 0.1% in 1989, 0.5% in 1988 and 0.3% in 1987, respectively.
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT PORTFOLIO
-----------------------------------------------
For the years ended December 31,
-------------------------------------------------
1990 1989 1988 1987
------ ------ ------ ------
<S> <C> <C> <C> <C>
PER SHARE DATA:
NET ASSET VALUE,
BEGINNING OF PERIOD $9.11 $8.88 $9.11 $9.71
INCOME FROM
INVESTMENT OPERATIONS:
Net investment income .76 .75 .75 .73
Net realized and
unrealized gains (losses)
on investments (.01) .23 (.17) (.42)
------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS .75 .98 .58 .31
------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net
investment income (.76) (.75) (.75) (.73)
Distributions from net
realized gains
on investments -- -- (.06) (.13)
Distribution of capital -- -- -- (.05)
------ ------ ------ ------
TOTAL DISTRIBUTIONS (.76) (.75) (.81) (.91)
------ ------ ------ ------
NET ASSET VALUE,
END OF PERIOD $9.10 $9.11 $8.88 $9.11
====== ======= ====== ======
TOTAL RETURN*<F9> 8.7% 11.5% 6.5% 3.4%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of period
(to nearest thousand) $29,351 $30,631 $32,950 $31,036
Ratio of net expenses to
average net assets 1.2% 1.2%+<F10> 1.2%+<F10> 1.3%+<F10>
Ratio of net investment
income to average net assets 8.5% 8.4%+<F10> 8.3%+<F10> 7.8%+<F10>
Portfolio turnover rate 57.1% 141.8% 36.7% 80.2%
*<F9>The Fund's sales charge is not reflected in total return as set forth in
the table.
+<F10>Reflects a voluntary reimbursement of fund expenses of 0.04% in 1996,
0.02% in 1995, 0.1% in 1989, 0.5% in 1988 and 0.3% in 1987, respectively.
</TABLE>
<TABLE>
<CAPTION>
S&P 100 PLUS PORTFOLIO
----------------------------------------------------------------------
For the years ended December 31,
------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
NET ASSET VALUE,
BEGINNING OF PERIOD $19.53 $14.95 $15.04 $14.01 $14.22 $11.60
INCOME FROM
INVESTMENT OPERATIONS:
Net investment income .29 .25 .25 .21 .24 .27
Net realized and
unrealized gains (losses)
on investments 4.07 5.21 (.09) 1.14 .48 2.93
------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS 4.36 5.46 .16 1.35 .72 3.20
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net
investment income (.29) (.25) (.25) (.21) (.24) (.27)
Distributions from
net realized gains
on investments (1.52) (.63) -- (.11) (.69) (.31)
------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS (1.81) (.88) (.25) (.32) (.93) (.58)
------ ------ ------ ------ ------ ------
NET ASSET VALUE,
END OF PERIOD $22.08 $19.53 $14.95 $15.04 $14.01 $14.22
======= ======= ======= ======= ======= =======
TOTAL RETURN*<F11> 22.4% 36.7% 1.1% 9.7% 5.2% 27.8%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of period
(to nearest thousand) $77,517 $57,062 $40,034 $38,944 $30,025 $27,420
Ratio of net expenses to
average net assets 1.0%+<F12> 1.2% 1.2% 1.2% 1.3% 1.3%
Ratio of net investment
income to average net assets 1.4%+<F12> 1.4% 1.7% 1.4% 1.7% 2.0%
Portfolio turnover rate 8.0% 3.5% 1.0% 2.2% 8.5% 3.1%
Average commission paid
per share+<F13> $0.0348 -- -- -- -- --
*<F11>The Fund's sales charge is not reflected in total return as set forth in
the table.
+<F12>Reflects a voluntary reimbursement of fund expenses of 0.01% in 1996,
0.2% in 1990, 0.4% in 1989, 0.8% in 1988 and 1.7% in 1987, respectively.
+<F13>Average commission rate paid per share for security purchases and sales
during the period. Presentation of the rate is only required for fiscal years
beginning after September 1, 1995.
</TABLE>
<TABLE>
<CAPTION>
S&P 100 PLUS PORTFOLIO
----------------------------------------------
For the years ended December 31,
------------------------------------------------
1990 1989 1988 1987
------ ------ ------ ------
<S> <C> <C> <C> <C>
PER SHARE DATA:
NET ASSET VALUE,
BEGINNING OF PERIOD $12.27 $10.11 $9.62 $10.43
INCOME FROM
INVESTMENT OPERATIONS:
Net investment income .28 .26 .26 .33
Net realized and
unrealized gains (losses)
on investments (.67) 2.17 1.37 .14
------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS (.39) 2.43 1.63 .47
------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net
investment income (.28) (.26) (.26) (.33)
Distributions from
net realized gains
on investments -- (.01) (.88) (.95)
------ ------ ------ ------
TOTAL DISTRIBUTIONS (.28) (.27) (1.14) (1.28)
NET ASSET VALUE,
END OF PERIOD $11.60 $12.27 $10.11 $9.62
======= ====== ====== ======
TOTAL RETURN*<F11> (3.2)% 24.3% 17.1% 4.1%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of period
(to nearest thousand) $20,413 $20,811 $16,960 $18,752
Ratio of net expenses to
average net assets 1.3%+<F12> 1.3%+<F12> 1.4%+<F12> 0.6%+<F12>
Ratio of net investment
income to average net assets 2.4%+<F12> 2.3%+<F12> 2.5%+<F12> 2.7%+<F12>
Portfolio turnover rate 1.9% 3.0% 37.5% 54.3%
Average commission paid
per share+<F13> -- -- -- --
*<F11>The Fund's sales charge is not reflected in total return as set forth in
the table.
+<F12>Reflects a voluntary reimbursement of fund expenses of 0.01% in 1996,
0.2% in 1990, 0.4% in 1989, 0.8% in 1988 and 1.7% in 1987, respectively.
+<F13>Average commission rate paid per share for security purchases and sales
during the period. Presentation of the rate is only required for fiscal years
beginning after September 1, 1995.
</TABLE>
<TABLE>
<CAPTION>
DIVIDEND ACHIEVERS PORTFOLIO
------------------------------------------------------------------------
For the years ended December 31,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
NET ASSET VALUE,
BEGINNING OF PERIOD $16.97 $13.24 $13.40 $14.25 $14.84 $11.50
INVESTMENT OPERATIONS:
Net investment income .14 .18 .18 .14 .14 .25
Net realized and
unrealized gains (losses)
on investments 3.54 3.99 (.02) (.85) .31 4.14
------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS 3.68 4.17 .16 (.71) .45 4.39
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net
investment income (.14) (.18) (.18) (.14) (.14) (.25)
Distributions from
net realized gains
on investments (.50) (.26) (.14) -- (.90) (.80)
------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS (.64) (.44) (.32) (.14) (1.04) (1.05)
------ ------ ------ ------ ------ ------
NET ASSET VALUE,
END OF PERIOD $20.01 $16.97 $13.24 $13.40 $14.25 $14.84
====== ====== ====== ======= ======= =======
TOTAL RETURN*<F14> 21.8% 31.7% 1.2% (5.0)% 3.1% 38.5%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of period
(to nearest thousand) $30,504 $25,393 $20,231 $24,928 $27,020 $18,202
Ratio of net expenses to
average net assets 1.2%+<F15> 1.3%+<F15> 1.5% 1.3%+<F15> 1.2%+<F15> 1.2%+<F15>
Ratio of net investment
income to average net assets 0.8%+<F15> 1.2%+<F15> 1.3% 1.0%+<F15> 1.0%+<F15> 1.8%+<F15>
Portfolio turnover rate 13.1% 28.2% 36.5% 92.7% 83.0% 96.5%
Average commission paid
per share+<F16> $0.0609 -- -- -- -- --
*<F14>The Fund's sales charge is not reflected in total return as set forth in
the table.
+<F15>Reflects a voluntary reimbursement of fund expenses of 0.1% in 1996,
0.2% in 1995, 0.1% in 1993, 0.1% in 1992, 0.2% in 1991, 0.5% in 1990, 0.7% in
1989, 1.7% in 1988 and 2.3% in 1987, respectively.
+<F16>Average commission rate paid per share for security purchases and sales
during the period. Presentation of the rate is only required for fiscal years
beginning after September 1, 1995.
</TABLE>
<TABLE>
<CAPTION>
DIVIDEND ACHIEVERS PORTFOLIO
------------------------------------------------
For the years ended December 31,
-------------------------------------------------
1990 1989 1988 1987
------ ------ ------ ------
<S> <C> <C> <C> <C>
PER SHARE DATA:
NET ASSET VALUE,
BEGINNING OF PERIOD $11.65 $10.00 $8.99 $9.55
INCOME FROM
INVESTMENT OPERATIONS:
Net investment income .25 .28 .28 .28
Net realized and
unrealized gains (losses)
on investments (.15) 1.65 1.06 (.56)
------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS .10 1.93 1.34 (.28)
------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net
investment income (.25) (.28) (.27) (.28)
Distributions from
net realized gains
on investments -- -- (.06) --
------ ------ ------ ------
TOTAL DISTRIBUTIONS (.25) (.28) (.33) (.28)
------ ------ ------ ------
NET ASSET VALUE,
END OF PERIOD $11.50 $11.65 $10.00 $8.99
======= ====== ======= =======
TOTAL RETURN*<F14> 1.0% 19.5% 15.0% (3.2)%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of period
(to nearest thousand) $11,468 $12,750 $6,854 $6,796
Ratio of net expenses to
average net assets 1.2%+<F15> 1.2%+<F15> 1.2%+<F15> 0.6%+<F15>
Ratio of net investment
income to average net assets 2.3%+<F15> 2.6%+<F15> 2.9%+<F15> 2.7%+<F15>
Portfolio turnover rate 47.7% 30.9% 10.1% 10.5%
Average commission paid
per share+<F16> -- -- -- --
*<F14>The Fund's sales charge is not reflected in total return as set forth in
the table.
+<F15>Reflects a voluntary reimbursement of fund expenses of 0.1% in 1996,
0.2% in 1995, 0.1% in 1993, 0.1% in 1992, 0.2% in 1991, 0.5% in 1990, 0.7% in
1989, 1.7% in 1988 and 2.3% in 1987, respectively.
+<F16>Average commission rate paid per share for security purchases and sales
during the period. Presentation of the rate is only required for fiscal years
beginning after September 1, 1995.
</TABLE>
SELECT VALUE PORTFOLIO
------------------------------------
For the
period from
August 23, 1994
For the years ended (commencement
December 31, of operations) to
------ ---------
1996 1995 December 31, 1994
------ ----- ------------------
PER SHARE DATA:
NET ASSET VALUE,
BEGINNING OF PERIOD $10.21 $9.03 $9.55
INCOME FROM
INVESTMENT OPERATIONS:
Net investment income .04 .14 .04
Net realized and
unrealized gains (losses)
on investments 2.68 1.73 (.51)
------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS 2.72 1.87 (.47)
------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net
investment income (.04) (.14) (.03)
Distributions from
net realized gains
on investments (1.92) (.43) (.01)
Distributions in excess of net
realized gains on investments -- (.12) --
Book return of capital -- -- (.01)
------ ------ ------
TOTAL DISTRIBUTIONS (1.96) (.69) (.05)
------ ------ ------
NET ASSET VALUE,
END OF PERIOD $10.97 $10.21 $9.03
====== ======= ======
TOTAL RETURN**<F18> 26.7% 20.8% (5.0)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(to nearest thousand) $4,829 $3,445 $1,935
Ratio of net expenses to
average net assets 1.0%+<F19>0.8%+<F19> 0.8%*<F17>+
Ratio of net investment <F19>
income to average net assets 0.3%+<F19>1.4%+<F19> 1.1%*<F17>+
<F19>
Portfolio turnover rate 122.2% 124.3% 20.2%
Average commission paid
per share+<F20> $0.0611 -- --
*<F17>Annualized.
**<F18>The Fund's sales charge is not reflected in total return as set forth in
the table.
+<F19>Reflects a voluntary reimbursement of expenses of 2.5% in 1995 and 0.4%
in 1994.
+<F20>Average commission rate paid per share for purchases and sales of
securities during this period. Presentation of the rate is required only
for fiscal years beginning after September 1, 1995.
PSE TECH 100 INDEX PORTFOLIO
---------------------------
For the period from
June 10, 1996
(commencement
of operations) to
December 31, 1996
------------------
PER SHARE DATA:
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .03
Net realized and unrealized
gains on investments 1.03
-----
TOTAL FROM INVESTMENT OPERATIONS 1.06
-----
LESS DISTRIBUTIONS:
Dividends from net investment
income (.03)
Distributions from net realized
gains on investments (.24)
Distributions in excess of net
realized gains (.03)
-----
TOTAL DISTRIBUTIONS (.30)
-----
NET ASSET VALUE, END OF PERIOD $10.76
======
TOTAL RETURN**<F22> 10.7%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (to
nearest thousand) $6,004
Ratio of net expenses to average
net assets 0.0%*<F21>+
Ratio of net investment income to <F23>
average net assets 0.7%*<F21>+
<F23>
Portfolio turnover rate 3.0%
Average commission paid per share+<F24> $0.0634
*<F21>Annualized.
**<F22>The Fund's sales charge is not reflected in total return as set forth in
the table.
+<F23>Reflects a voluntary reimbursement of fund expenses of 3.3% in 1996.
+<F24>Average commission rate paid per share for purchases and sales of
securities during the period. Presentation of the rate is required only
for fiscal years beginning after September 1, 1995.
INVESTMENT OBJECTIVES
The following is a brief description of the investment objectives and
policies of each Portfolio. Certain instruments and techniques discussed in
this summary are described in greater detail under "Investment Program" in this
Prospectus and in the Statement of Additional Information. There can be no
assurance that the investment objective of any Portfolio will be achieved.
The Statement of Additional Information contains specific investment
restrictions which govern the investments of each Portfolio. Certain of these
restrictions and each Portfolio's investment objective are fundamental policies,
which means that they may not be changed without a majority vote of shareholders
of that Portfolio. All other investment policies and practices may be changed
without shareholder approval. The fundamental restrictions applicable to the
Portfolios include a prohibition on purchasing a security, other than a "U.S.
Government Security" (as defined below) or a security necessary to approximate
the composition of an index, if as a result more than 5% of the total assets of
the Portfolio would be invested in the securities of the issuer, or if the
Portfolio would own more than 10% of the outstanding voting securities of the
issuer.
Each Portfolio is subject to a number of additional investment restrictions
which are described in the section of the Statement of Additional Information
entitled "Investment Restrictions." Among these restrictions are that no
Portfolio may borrow money or property except for temporary or emergency
purposes. If a Portfolio borrows money it will only borrow from banks and in an
amount not exceeding 10% of the market value of its total assets (not including
the amount borrowed). No Portfolio will pledge more than 15% of its net assets
to secure such borrowings. In the event a Portfolio's borrowing exceeds 5% of
the market value of its total assets, the Portfolio will not invest in any
additional securities until its borrowings are reduced to less than 5% of total
assets. For purposes of these restrictions, collateral arrangements for premium
and margin payments in connection with the hedging activities of a Portfolio are
not deemed to be a pledge of assets.
TAX-EXEMPT PORTFOLIO
The investment objective of this Portfolio is to obtain the highest total
return, consistent with the preservation of principal, through investment in
high quality municipal bonds with remaining maturities of two to 20 years. It
is a fundamental policy of the Portfolio to invest at least 90% of its total
assets in tax-exempt municipal securities, under ordinary circumstances.
Substantially all of the Portfolio's 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. See "Tax Status."
GOVERNMENT PORTFOLIO
The investment objective of this Portfolio is to obtain the highest total
return consistent with preservation of principal through investments in U.S.
Government Securities.
S&P 100 PLUS PORTFOLIO
The investment objective of this Portfolio is to obtain a total return from
dividends and capital gains which, before deducting the operating expenses of
the Portfolio, exceeds that of the S&P 100 Index. To achieve this objective,
the Portfolio invests in a portfolio of common stocks which approximately
parallels the composition of the S&P 100 Index, and engages in various portfolio
strategies from time to time to attempt to enhance total return and hedge
protectively against adverse changes in stock market values, including
overweighting and underweighting the Portfolio's investments in certain common
stocks or categories of common stocks relative to their representation on the
Index. It is not the Portfolio's intention to replicate the S&P 100 Index at
all times.
DIVIDEND ACHIEVERS PORTFOLIO
The investment objective of this Portfolio is to obtain capital appreciation
and income through investment in a portfolio of common stocks of companies that
have achieved a superior record of dividend growth. Because stocks with a
record of superior dividend growth are frequently accorded a market premium,
they will generally not carry a high yield.
SELECT VALUE PORTFOLIO
The investment objective of this Portfolio is to obtain maximum capital
appreciation primarily through investments in common stocks that the Advisors
consider undervalued relative to earnings, book value or potential earnings
growth. The Portfolio pursues its investment objective generally by investing
in smaller and medium-sized companies, although the Portfolio is not restricted
to investments in companies of any particular size. The Portfolio emphasizes
investments in companies whose outstanding shares have aggregate market
capitalizations ranging from $400 million to $2 billion. Market capitalization
is calculated by multiplying the total number of a company's outstanding common
shares by the per share market price of such shares.
PSE TECH 100 INDEX PORTFOLIO
The investment objective of this Portfolio is to obtain a total return,
before operating expenses of the Portfolio, that replicates the total return of
the PSE Technology Index. The Portfolio seeks to achieve this objective by
investing in all 100 common stocks included in the PSE Technology Index in
approximately the same proportions as they are represented in the Index. The
PSE Technology Index is widely recognized as a benchmark for the technology
sector of the United States stock market and consists of 100 common stocks of
companies representing 15 different technology subsectors.
INVESTMENT PROGRAM
OVERVIEW
This section contains a general description of the investment program and
other investment practices of each Portfolio. Further information is contained
in the Statement of Additional Information. Shareholders will be notified prior
to implementation of any material change in a Portfolio's investment program.
TAX-EXEMPT PORTFOLIO
This Portfolio will invest primarily in municipal securities rated at the
time of purchase in an "A" category or higher by Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Rating Services ("S&P"), or Fitch Investors
Service, Inc. For a description of such ratings, see "Description of Ratings
of Certain Fixed Income Securities" in the Statement of Additional Information.
The Portfolio's bonds will generally consist of municipal securities with
remaining maturities of two to 20 years. The Portfolio may also 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. See "Lending
of Portfolio Securities" and "Other Investment Practices" below.
GOVERNMENT PORTFOLIO
To achieve its objective of obtaining the highest total return consistent
with preservation of principal, this Portfolio will invest in U.S. Government
Securities. These securities are issued with original maturities of from a few
days to 30 years or more, and with varying coupon rates. Although the Portfolio
is not limited as to the average maturity of its bonds, the Advisors believe
that an average maturity of five to ten years is most consistent with the
Portfolio's investment objective. The Advisors have indicated that the
Portfolio's average maturity will be maintained in this range unless and until
market conditions warrant a change and advance notice has been provided to
shareholders. Under normal conditions, the Portfolio does not intend to
purchase zero coupon bonds. However, to the extent such bonds may be utilized,
they would involve greater price volatility than interest bearing bonds of
comparable maturities and would result in taxable income without actual cash
distributions. Under normal market conditions at least 65% of the Portfolio's
assets will be invested in U.S. Government Securities. This Portfolio may also
enter into forward commitments for the purchase of U.S. Government Securities,
may make short sales of securities already owned to defer realization of a gain
for Federal income tax purposes and may lend its portfolio securities. See
"Lending of Portfolio Securities" and "Other Investment Practices" below.
S&P 100 PLUS PORTFOLIO
The S&P 100 Index was designed to track closely the S&P 500 Index, which is
designed to be representative of the stock market as a whole. There have been
some significant variances in the correlation between the S&P 100 and S&P 500
Indices and between the S&P 500 Index and the broad market for large
capitalization common stocks. There can be no assurance that any index will
correlate precisely to the stock market as a whole over any specific period of
time, or that the S&P 100 Plus Portfolio's performance will parallel that of
either of these indices or the stock market generally.
The S&P 100 Index was created by the Chicago Board Options Exchange (CBOE) in
1983 with stocks selected from the optionable equities traded on that exchange.
These 100 stocks include many large U.S. corporations. General Electric
Company, American Telephone and Telegraph Company, Exxon Corporation, Coca-Cola
Company, and Merck & Co., Inc. are five of the largest components of the Index.
A complete list of the stocks currently comprising the S&P 100 Index is included
as Appendix A to this Prospectus. The total market value of the stocks which
comprise the S&P 100 Index was approximately 33% of the market value of the
securities traded on the New York Stock Exchange as of December 31, 1996.
The S&P 100 Plus Portfolio invests in the common stocks which make up the S&P
100 Index, in approximately the same relative proportion as the stocks in the
Index comprise the Index. For example, at December 31, 1996, Exxon Corporation
comprised approximately 5.1% of the S&P 100 Index, and it is the intention of
this Portfolio generally to invest the same percentage of its common stock
interests in Exxon. The Advisor generally will attempt to match the S&P 100
Index as closely as is economically feasible, given the higher transaction costs
of trading common stocks in less than 100 share lots. Portfolio purchases in
$4.5 to 5.0 million increments will allow the companies with the lowest
Index weighting to be bought in 100 share lots. The Portfolio does not select
the stocks in the Index, and as the composition of the Index changes, so will
the underlying portfolio of common stocks in the Portfolio. As soon as
practicable after receipt of notification of changes in the S&P 100 Index
(either as to the securities comprising the Index or the percentage of total
composition represented by particular securities), the Advisor will attempt to
adjust the composition of the Portfolio in a similar manner. Under normal
market conditions, at least 65% of this Portfolio's total assets will be
invested in the common stocks which make up the S&P 100 Index.
In the event the Advisor's research and analysis leads them to believe that
certain S&P 100 Index stocks or groups of stocks within related industries or
market sectors likely will underperform and outperform the Index, the Advisors
may overweight or underweight the Portfolio's investments in such common stocks
to take advantage of the anticipated overperformance or protect against the
anticipated underperformance. This strategy relies on the ability of the
Advisor to identify correctly those stocks which will underperform or outperform
the S&P 100 Index. To the extent the Advisor's judgment proves correct, the
performance of the Portfolio will be enhanced as compared to that of the S&P 100
Index. Conversely, if the Advisor's judgment proves incorrect, this
overweighting/underweighting strategy will detract from the performance of the
Portfolio as compared to the S&P 100 Index.
At times, the Portfolio may hold uncommitted cash, either to meet anticipated
liquidity needs or pending investment of proceeds derived from sales of the
Portfolio's shares. In order to achieve a return on such uncommitted cash which
approximates the investment performance of the S&P 100 Index, the Advisor may
elect to invest such cash in exchange-traded futures contracts and options on
the S&P 500 Index and/or the S&P 100 Index. This practice is commonly referred
to as "equitizing cash."
While the Portfolio has open index option positions, it will maintain in a
segregated account with its depository cash or cash equivalents sufficient to
cover the market value of its open positions in accordance with the practices of
the exchanges on which the options are traded. Futures transactions require the
Portfolio to deposit with its custodian a specified amount of cash or cash
equivalents, commonly referred to as initial margin. While the futures position
remains open, the futures contract held by the Portfolio is valued daily at the
official settlement price of the exchange on which it is traded, and the
Portfolio pays or receives variation margin equal to the daily change in value
of the contract. Those practices generally will require that the value of the
open positions be determined daily and that the amount of the segregated account
be adjusted accordingly.
Although it has no present intention to do so, the S&P 100 Plus Portfolio may
also write (sell) covered call options and put options and may purchase call
options and put options on individual stocks and stock indices to enhance total
return and for hedging purposes. See "Options and Futures Activities" below and
"Investment Program" in the Statement of Additional Information.
This Portfolio also may make short sales of securities already owned and may
lend its portfolio securities. See "Lending of Portfolio Securities" and "Other
Investment Practices" below.
Price movements in the S&P 100 Plus Portfolio likely will not correlate
perfectly with movements in the level of the S&P 100 Index because of the
potential inability of the Portfolio to match the weightings of its securities
precisely to the Index, because the Portfolio's securities may at times vary
substantially in terms of issuers and/or weightings from those reflected in the
Index, and because of the transaction costs which accompany purchases and sales
of actual stock positions.
The S&P 100 Plus Portfolio is not sponsored, endorsed, sold or promoted by
Standard & Poor's, a division of The McGraw-Hill Companies, Inc.("S&P").
S&P makes no representation or warranty, implied or expressed, to the
shareholders of the Portfolio, or any member of the public regarding the
advisability of investing in index funds generally, or in this Portfolio
particularly, or the ability of the S&P Index to track general stock market
performance. S&P's only relationship to this Portfolio is the licensing of the
S&P trademarks and S&P 100 which is determined, composed and calculated by S&P
without regard to this Portfolio. "Standard & Poor's," "Standard & Poor's 100,"
"S&P," "S&P 100" and "100" in connection with the S&P 100 are trademarks of S&P.
DIVIDEND ACHIEVERS PORTFOLIO
The Portfolio invests primarily in common stocks of companies with a superior
record of dividend growth. Such companies typically have strong balance sheets.
In addition to providing an income stream from dividend payments, the Advisor
believes that the market values of these stocks will increase over time because
anticipated future dividend growth is typically reflected in increased market
prices. Generally, the Portfolio limits its investments to the common stocks of
companies that have increased their payment of cash dividends annually for at
least eight of the past ten calendar years, and which have a compound annual
dividend growth of at least 10% per year over a five-year period. As of
December 31, 1996, approximately 250 companies traded on the New York or
American Stock Exchange or listed on the Nasdaq Stock Market met these
criteria. Depending on the availability of stocks meeting these criteria,
market conditions or portfolio diversification, the Portfolio may invest in the
common stocks of other companies with either a superior record of dividend
growth or that have a demonstrated earnings growth and potential to pay
dividends at a superior rate.
The Portfolio also intends to invest a portion of its assets in liquid
reserves to meet cash flow requirements. Under normal conditions, the Portfolio
anticipates that such reserves will not exceed 20% of total assets. The
Portfolio may increase its reserves for temporary defensive purposes or to
enable it to take advantage of buying opportunities. The Portfolio's reserves
will be invested in money market instruments, including U.S. Government
Securities, certificates of deposit, banker's acceptances, commercial paper and
short-term corporate debt securities.
The Portfolio may seek to enhance income by writing covered call options or
purchasing put options with respect to some or all of its portfolio of common
stocks, but has no present intention to do so. See "Options and Futures
Activities" below and "Investment Program" in the Statement of Additional
Information. This Portfolio may also make short sales of securities already
owned and lend its portfolio securities. See "Lending of Portfolio Securities"
and "Other Investment Practices" below.
SELECT VALUE PORTFOLIO
The Portfolio pursues its investment objective generally by investing in
smaller sized companies having market capitalizations ranging from $400 million
to $2 billion. Although the Portfolio is not restricted to any particular
investments, companies in which the Portfolio invests do business in a cross-
section of industries and generally fall into one of the following three
categories:
1. A company that the Advisors believe will achieve above average growth in
revenues and earnings, but that is selling at a price/earnings ratio at or below
the average for the S&P 500 Index.
2. A company that has experienced problems leading to a depressed stock
price where the Advisors believe that there is a reasonable likelihood that the
company's operations will improve.
3. A company that does not fall into the above categories, but because of
special circumstances appears undervalued and consequently offers potential for
appreciation.
The Portfolio is ordinarily substantially fully invested and, under normal
market conditions, at least 65% of the Portfolio's total assets will be invested
in common stocks of domestic issuers. The Portfolio may also invest up to 5% of
its total assets directly in securities of foreign issuers not publicly traded
in the United States, and may invest without regard to this restriction in
securities of foreign issuers represented by American Depository Receipts
(ADRs), which are receipts issued by an American bank or trust company and
traded on national securities exchange evidencing ownership of the underlying
foreign securities, and equity securities issued by Canadian issuers. The
Portfolio may invest up to 35% of its total assets in high-quality, fixed-income
securities and short-term investments. The Portfolio also may invest up to 5%
of its net assets in warrants for the purchase of equity securities in which the
Portfolio may invest.
The Portfolio employs a value-oriented style of investing, which from time to
time is more or less favored by investors compared to a strategy focusing on
investment in growth-oriented stocks. Although value investing has been less
favored over the past several years, in the Advisors' judgment the advantage of
value-oriented stocks over growth-oriented stocks is greater than usual during
periods of economic recovery. During periods of economic weakness, growth-
oriented stocks may provide solid earnings growth despite the difficult economic
environment, but as the economy improves, many investors are reluctant to pay a
premium for high-priced growth stocks when lower-priced stocks that are also
showing good earnings growth are available.
Smaller and medium-sized company stocks as a group may outperform or
underperform larger capitalization stocks as a group over various periods. The
performance cycle of medium capitalization stocks tends to mirror that of
smaller capitalization stocks, but with less pronounced peaks and troughs
(meaning somewhat lower gains, but also reduced volatility.) The performance
advantage of smaller capitalization stocks has historically been greatest in
periods of recovery after economic weakness. Comparing stock performance during
and immediately after the last six economic recessions, smaller capitalization
stocks have outperformed larger capitalization stocks by a margin of nearly two
to one. When coupled with a value-oriented investment strategy, the advantage
has historically been even greater.
High-quality, fixed-income securities in which the Portfolio may invest are
limited to those securities which are rated at the time of purchase within the
two highest rating categories assigned by Moody's or S&P, or securities which
are unrated, provided that such securities are judged by the Advisors, at the
time of purchase, to be of comparable quality to securities rated within such
two highest categories. See the Statement of Additional Information for a
description of these securities ratings. General characteristics of fixed-
income securities are described under "Special Considerations - Debt or Other
Fixed Income Securities" in this Prospectus.
The Portfolio may invest in short-term investments in management of cash
receipts, for liquidity for anticipated redemptions, to meet its cash flow needs
to enable the Portfolio to take advantage of buying opportunities or during
periods when, in the opinion of the Advisors, attractive equity investments are
unavailable. The Portfolio may increase its position in short-term investments
for temporary defensive purposes, such as when the securities markets or
economic conditions are expected to enter a period of decline, but will not
invest more than 35% of its total assets in short-term investments at any one
time. Short-term investments in which the Portfolio may invest are discussed in
more detail under "Investment Program - Other Investment Practices" below. The
Portfolio will only invest in short-term investments which, in the opinion of
the Advisors, present minimal credit and interest rate risk, especially when it
is investing in such securities for temporary defensive purposes.
Other instruments in which the Select Value Portfolio may invest, including
foreign securities, repurchase agreements, loans of portfolio securities and
short sales of securities, as well as, special considerations associated with
those investments, are discussed below. See "Investment Program - Other
Investment Practices" and "Special Considerations."
PSE TECH 100 INDEX PORTFOLIO
The Portfolio seeks to achieve its objective by investing in all 100 common
stocks included in the PSE Technology Index in approximately the same
proportions as they are represented in the Index. The Portfolio attempts to
remain fully invested in common stocks. Under normal circumstances, the
Portfolio will invest at least 95% of its assets in the common stocks included
in the PSE Technology Index and futures contracts and options. The Portfolio
may invest in certain short-term, fixed-income securities as cash reserves,
although cash or cash equivalents are normally expected to represent 5% or less
of the Portfolio's assets. See "Investment Program - Other Investment
Practices" below. The Portfolio may invest up to 20% of its assets in exchange-
traded index futures contracts and index options in order to invest uncommitted
cash balances, to maintain liquidity to meet shareholder redemptions, or to
minimize trading costs, while still tracking the PSE Technology Index. See
"Options and Futures Activities." The Portfolio intends to remain fully
invested, to the extent practicable, in a pool of securities that duplicates the
investment characteristics of the PSE Technology Index. In this regard, as a
matter of policy the Portfolio will maintain at least 90% of its assets in
common stocks traded on the PSE Technology Index, except that the percentage of
its assets so invested temporarily (and in any event for a period of not more
than five trading days) may fall below the 90% mark if the Portfolio receives
cash inflows that cannot practically be invested immediately in units of common
stocks that replicate the Index. There can be no assurance that the investment
objective of the Portfolio will be achieved.
The Portfolio attempts to replicate the investment results of the PSE
Technology Index by investing in and holding all 100 common stocks included in
the Index in approximately the same proportions as they are represented on the
Index. This indexing technique is known as "complete replication." The
correlation between the performance of the Portfolio's investments and the PSE
Technology Index that the Portfolio attempts to match is expected to be at least
0.95. The Advisor will monitor the correlation between the Portfolio's
investments and the PSE Technology Index daily. Because the Index is price
weighted, the Advisor will be able to replicate the Index by maintaining in the
Portfolio an equal number of shares of each of the 100 common stocks included in
the Index. The Advisor will attempt to achieve correlation between the Index
and the portion of the Portfolio's assets which from time to time are not
invested in common stocks (which generally will consist of cash and short-term
investments) by utilizing equitizing strategies involving the use of index
futures and options. Should the correlation coefficient fall below 0.95, the
Advisor promptly will adjust the Portfolio's investments to more closely
replicate the Index.
In attempting to replicate the performance of the PSE Technology Index, the
Portfolio will incur operating expenses, including management fees, transfer and
dividend disbursing agent fees, depository fees, accounting/pricing agent fees,
distribution fees, operating and brokerage fees, and other transactional fees
incurred in connection with adjusting the composition of the Portfolio to
replicate the composition of the PSE Technology Index, and other administrative
expenses. The total return of the PSE Technology Index does not include any
such operating expense and, accordingly, the total return of the Portfolio is
expected to be somewhat less than the total return of the PSE Technology Index.
Additionally, unlike the Index, the Portfolio retains, from time to time,
certain liquid reserves. The Portfolio will attempt to utilize exchange-traded
index futures contracts and options in connection with such reserves in order to
more closely replicate the Index's performance.
PSE Technology Index. The PSE Technology Index comprises 100 common stocks,
which are chosen by Pacific Exchange, Inc. based on its assessment that the
issuer thereof is a company which has, or likely will develop, products,
processes, or services that will provide or will benefit significantly from
technological advances and improvements. The PSE Index offers a broad basket of
stocks spanning the full spectrum of high tech industry groups. Diversity
within the Index ranges from biotechnology firms to semiconductor capital
equipment manufacturers and includes a cross-section of U.S. companies that are
leaders in 15 technology subsectors, including biotechnology, CAD/CAM, data
communications, data storage and processing, diversified computer manufacturing,
electronic equipment, information processing, medical technology, micro-computer
manufacturers, semi-conductor manufacturers, software products, test, analysis
and instrumentation equipment, mini and mainframe computer manufacturing, office
automation equipment and semi-conductor capital equipment manufacturing. Of the
100 stocks on the Index, 52 are listed on the Nasdaq Stock Market, 46 on the New
York Stock Exchange, and two on the American Stock Exchange. A full listing of
the companies included in the PSE Technology Index is attached as Appendix B to
this Prospectus. As soon as practicable after receipt of notification of
changes in the PSE Technology Index (as to the securities comprising the Index),
the Advisor will attempt to adjust the composition of the Portfolio in a similar
manner.
Similar to the Dow Jones Industrial Average, the PSE Technology Index is
price weighted, meaning the component stocks are given a percentage weighting
based on their price. The PSE Technology Index is calculated by adding the
closing prices of the component stocks and using a divisor that is adjusted for
splits and stock dividends equal to 10% or more of the market value of an issue.
Although this indexing method allows the PSE Technology Index to accurately
measure a broad representation of technology stocks without being dominated by a
few large companies, it results in smaller- and mid-sized companies representing
a more significant portion of the Index than is the case for indices such as the
S&P 500 Index, which are weighted by the market value of the companies
represented on the index. This factor may result in the Portfolio experiencing
more price fluctuation, less liquidity, and higher brokerage fees than certain
other index funds. See "Special Considerations."
Bridge Data Corporation performs both the calculation and dissemination of
the Index. As the composition of the PSE Technology Index changes, so will the
underlying portfolio of common stocks in the Portfolio. The PSE Technology
Index Portfolio is not sponsored, endorsed, sold, or promoted by Pacific
Exchange, Inc. (PSEsm, Pacific Exchange sm, PSE Technology Index sm, and
PSE Tech 100sm are servicemarks of Pacific Exchange Inc.).
OPTIONS AND FUTURES ACTIVITIES
General. The S&P 100 Plus and PSE Tech 100 Index Portfolios may utilize
exchange-traded index futures contracts and options on stock indices to a
limited extent, to equitize cash, facilitate trading, reduce transactions or
enhance total return. The S&P 100 Plus and Dividend Achievers Portfolios may
also utilize options on individual stocks, but the Advisor has no plans to do so
at this time.
Index Futures and Options. The S&P 100 Plus and PSE Tech 100 Index
Portfolios may write (sell) and purchase covered call options and put options on
stock indices. Put and call options for various stock indices are
traded on registered securities exchanges. The S&P 100 Plus Portfolio will
generally use futures contracts on the S&P 500 Index and index options on the
S&P 100 Index or the S&P 500 Index, but may use other index options if the
exchange on which the S&P options are traded is closed, there is insufficient
liquidity in the options, or if the Portfolio or the Advisor reaches exchange
position limits. The PSE Tech 100 Index Portfolio plans to utilize options and
futures on the PSE Technology Index and the S&P 500 Index. Since the S&P 500
Index cannot be expected, at all times, to move in parallel with the PSE
Technology Index, the PSE Tech 100 Index Portfolio's utilization of futures and
options on the S&P 500 Index may reduce the correlation between the performance
of the Portfolio and the performance of the PSE Technology Index.
Put and call options on a securities index are similar to options on an
individual stock. The principal difference is that an option on a securities
index is settled only in cash. The exercising holder of an index option,
instead of receiving a security, receives the difference between the closing
price of the securities index and the exercise price of the option times a
specified multiple ($100 in the case of the S&P 100 Index).
An index futures contract is an agreement by which one party agrees to make,
and another to take, delivery of an amount of cash equal to the difference
between the value of the underlying index at the close of the last trading day
of the contract and the price at which the index contract is originally written
(which typically is the value of the index on the date the contract is entered
into). Although the value of the index underlying the futures contract will be
a function of the value of the securities comprising the index, no physical
delivery of those securities is made.
Risks Associated with Options and Futures. Options and futures activities
involve certain risks described below. To minimize these risks, each relevant
Portfolio will limit such activities so that no more than 5% of its net assets
will be invested at any time in premiums and margins associated with its open
option and futures positions, and provided further that not more than 20% of the
Portfolio's assets are invested in futures and options at any one time.
Additionally, whenever a Portfolio does not own securities underlying an open
option position sufficient to cover the position, the Portfolio will maintain in
a segregated account with its depository cash or cash equivalents sufficient to
cover the market value of its open option positions.
The risk of loss associated with index futures contracts and index options in
some strategies can be substantial due both to the low margin deposits required
and the extremely high degree of leverage involved in options and futures
pricing. As a result, a relatively small price movement in an index option or
an index futures contract may result in an immediate and substantial loss or
gain. Also, options transactions by a Portfolio involve the risk that the
market will move in a direction that makes the option positions unprofitable.
The risk of loss from investing in futures is potentially unlimited, because
there is no limit on the amount that the value of the underlying index
potentially may fluctuate between the date on which a futures contract is first
entered into and the settlement date for that contract.However, no Portfolio
will use options and futures contracts for speculative purposes or to leverage
its net assets.
Additional risks associated with the intended use by the S&P 100 Plus and PSE
Tech 100 Index Portfolios of index futures contracts and index options include
an imperfect correlation between the change in market value of the relevant
stock index and the prices of the futures contracts and options; an imperfect
correlation between the price movement in the index underlying the futures
contract or option agreement, such as the S&P 500 Index, and the index which the
respective Portfolio seeks to match; and a possible lack of a liquid secondary
market for a futures contract or option and the resulting inability to close a
position prior to its maturity date. A Portfolio will seek to minimize the risk
of imperfect correlation by investing only in those futures contracts and
options whose behavior is expected to resemble that of the Portfolio's
underlying securities. A Portfolio will also seek to reduce the risk of being
unable to close out a futures position by entering into such transactions on
registered securities exchanges with an active and liquid secondary market.
LENDING OF PORTFOLIO SECURITIES
Each Portfolio may lend its portfolio securities to brokers, dealers and
other institutional investors, provided the Portfolio receives cash collateral
which at all times is maintained in an amount equal to at least 100% of the
current market value of the securities loaned. For the purposes of this policy,
a Portfolio considers collateral consisting of U.S. Government Securities or
irrevocable letters of credit issued by banks whose securities meet the
standards for investment by the Portfolio to be the equivalent of cash. During
the term of the loan, the Portfolio is entitled to receive interest and other
distributions paid on the loaned securities, as well as any appreciation in the
market value. The Portfolio is also entitled to receive interest from the
institutional borrower based on the value of the securities loaned. The
Portfolio seeks to increase its income by investing the cash collateral received
on the loan. From time to time, a Portfolio may return to the borrower, and/or
a third party which is unaffiliated with Principal Preservation and which is
acting as a "placing broker," a part of the interest earned from the investment
of the collateral received for securities loaned.
A lending Portfolio does not have the right to vote the securities loaned
during the existence of the loan, but can call the loan to permit voting of the
securities if, in the Advisors' judgment, a material event requiring a
shareholder vote would otherwise occur before the loan is repaid. In the event
of bankruptcy or other default of the borrowing institution, the lending
Portfolio could experience delays in liquidating the loan collateral or
recovering the loaned securities, and incur risk of loss including: (1) possible
decline in the value of the collateral or in the value of the securities loaned
during the period while the lending Portfolio seeks to enforce its rights
thereto; (2) possible subnormal levels of income and lack of access to income
during this period; and (3) expenses of enforcing its rights. To minimize these
risks, the Advisors evaluate and continually monitor the creditworthiness of the
institutional borrowers to which the lending Portfolio lends its securities.
To minimize the foregoing risks, each Portfolio's securities lending
practices are subject to the following conditions and restrictions: (1) no
Portfolio may make such loans in excess of 33% of the value of its total assets;
(2) the lending Portfolio must receive cash collateral in an amount at least
equal to 100% of the value of the securities loaned; (3) the institutional
borrower must be required to increase the amount of the cash collateral whenever
the market value of the loaned securities rises above the amount of the
collateral; (4) the lending Portfolio must have the right to terminate the loan
at any time; (5) the lending Portfolio must receive reasonable interest on the
loan, as well as any interest or other distributions on the loaned securities
and any increase in the market value of the loaned securities; and (6) the
lending Portfolio may not pay any more than reasonable custodian fees in
connection with the loan.
OTHER INVESTMENT PRACTICES
In addition to the investment policies and programs described above, any of
the Portfolios may make short sales of already owned securities, the Select
Value and PSE Tech 100 Index Portfolios may invest temporarily in short-term,
fixed-income securities, the Tax-Exempt and Government Portfolios may enter into
forward commitments, and the Select Value Portfolio may enter into repurchase
agreements.
Short Sales "Against-the-Box." The Portfolios may make short sales of
securities or maintain a short position, provided that at all times when a short
position is open the Portfolio owns an equal amount of such securities of the
same issue as, and equal in amount to, the securities sold short, and that not
more than 10% of the Portfolio's net assets (determined at the time of short
sale) may be held as collateral for such sales.
Short-Term Instruments. The Select Value and PSE Tech 100 Index Portfolios
may invest temporarily in certain short-term, fixed-income securities, in
management of uncommitted cash receipts, for liquidity to meet redemptions and,
in the case of the Select Value Portfolio, to meet its cash flow needs to enable
the Portfolio to take advantage of buying opportunities or during periods when,
in the opinion of the Advisors, attractive equity investments are unavailable.
Such short-term, fixed-income securities include: U.S. Treasury bills or other
U.S. Government or Governmental agency or instrumentality obligations;
certificates of deposit; banker's acceptances and time deposits; high quality
commercial paper, variable rate demand notes, repurchase agreements and other
short-term high grade corporate obligations; and shares of money market mutual
funds.
A variable rate demand note is issued pursuant to a written agreement between
the issuer and the holder, its amount may from time to time be increased by the
holder (subject to an agreed maximum), or decreased by the holder or the issuer,
the rate of interest payable on the security varies with an agreed formula and
the security is typically rated by a rating agency. Transfer of such notes is
usually restricted by the issuer, and there is no secondary trading market for
such notes. Neither Portfolio will purchase such variable rate demand notes
unless, at the time of purchase, the issuer has unsecured debt securities
outstanding that are ranked within the two highest categories by a Nationally
Recognized Statistical Rating Organization or, if rated, the notes fall within
such categories.
To the extent a Portfolio invests in shares of money market mutual funds,
investment management and administrative fees, distribution costs and other
operating expenses incurred by those funds would be duplicative of those
incurred by the Portfolio, and would reduce the return received by the Portfolio
on assets so invested. No Portfolio may invest more than 10% of its total
assets in securities of other investment companies. See "Investment Program -
Investments in Other Investment Companies" in the Statement of Additional
Information.
Forward Commitments. The Tax-Exempt and Government Portfolios may purchase
securities for future delivery, which may increase the Portfolio's overall
investment exposure if the value of the securities declines. The Portfolios
plan not to engage in forward commitment transactions if, after such purchase,
more than 5% of the Portfolio's net assets would consist of such securities.
See "When-Issued and Delayed Delivery Transactions" in the Statement of
Additional Information.
Repurchase Agreements. The Select Value Portfolio may enter into repurchase
agreements, however the Advisors do not intend to invest more than 5% of the
total assets of the Portfolio in such instruments. Repurchase agreements
involve the acquisition by the Portfolio of an underlying debt instrument,
subject to the obligation of the seller (a bank or securities dealer) to
repurchase, and the Portfolio to sell, the security at the same price plus an
amount equal to an agreed upon interest rate within a specified time, usually
less than one week. The Select Value Portfolio may, on occasion, invest in
repurchase agreements with maturities in excess of seven days. The Portfolio
could suffer a loss and increased expense in connection with the sale of the
underlying security if the seller does not repurchase the security in accordance
with the terms of the repurchase agreement. To minimize the risk of loss, the
Select Value Portfolio will require continual maintenance of collateral (in cash
or U.S. Government Securities) held by the Portfolio's depository in an amount
equal to, or in excess of, the market value of the securities which are subject
to the repurchase agreement.
SPECIAL CONSIDERATIONS
COMMON STOCKS
As discussed above, some of the Portfolios will invest a portion of their
assets in common stock and securities convertible into common stocks. The
market for such securities tends to be cyclical, with alternating periods of
rising and falling market prices.
An investment in the Select Value Portfolio may involve an above average
degree of risk because of its concentration in common stocks of smaller and
medium-sized companies, which tend to be more volatile and less liquid than
stocks of large companies. An investment in the PSE Tech 100 Index Portfolio
involves similar risk because of the significant representation on the PSE
Technology Index of common stocks of such companies. Smaller and medium-sized
companies, as compared to larger companies, may have shorter histories of
operations, may not have as great an ability to raise additional capital, may
have a less diversified product line making them susceptible to market pressure,
and may have a smaller public market for their shares. However, an attempt is
made by the Select Value Portfolio to minimize the risk through portfolio
diversification and the use of a stock selection strategy that emphasizes
undervalued stocks, many of which have already declined in price.
Because the PSE Tech 100 Index Portfolio's investments will tend to mirror
the PSE Technology Index, the Portfolio can be expected to experience some
volatility and, with respect to certain issues, reduced liquidity that could
make it more difficult to purchase and sell such common stocks at favorable
prices. Also, because of the price weighted aspect of the Index, the stocks
comprising the Index may change with some frequency, which would tend to
increase the Portfolio's turnover rate and increase brokerage commissions,
thereby reducing the Portfolio's total return when compared with the Index.
Securities owned by the Select Value Portfolio may be traded in the over-the-
counter market or on a regional securities exchange and may not be traded every
day or in the volume typical of securities traded on a national securities
exchange. As a result, disposition by the Select Value Portfolio of portfolio
securities to meet redemptions by shareholders or otherwise may require the
Portfolio to sell these securities at a discount from market prices, to sell
during periods when such disposition is not desirable, or to make many small
sales over a lengthy period of time.
CONCENTRATIONS
A significant portion of the PSE Tech 100 Index Portfolio's investments will
consist of technology-based issues, which exposes the Portfolio to risks
associated with economic conditions in that market sector. Due to competition,
a less diversified product line, and other factors, companies that develop
and/or rely on technology could become increasingly sensitive to downswings in
the economy. However, the companies whose common stocks are included in the PSE
Technology Index comprise a fairly broad range of industries. This broad
industry representation likely will soften volatility associated with economic
and political developments that disproportionately affect specific industries
represented within the Index. Nonetheless, the PSE Tech 100 Index Portfolio
intends to maintain a complete replication investment philosophy even during
periods when one or more industries may be over-represented on the PSE
Technology Index, which may expose the Portfolio during such periods to risks
associated with industry concentration. See "Industry Concentration Factors" in
the Statement of Additional Information.
DEBT OR OTHER FIXED INCOME SECURITIES
The total return earned on a Portfolio's debt or other fixed income
securities will consist of the change in the net asset value per share of the
Portfolio attributable to changes in the market value of such securities,
together with the per share income generated by those securities. The net asset
value of fixed income securities will be affected primarily by changes in
interest rates, average maturities and the investment and credit quality of the
securities in the Portfolio.
A bond's yield reflects the fixed annual interest as a percent of its current
price (the same concept is true for other debt and fixed income securities).
This price (the bond's market value) must increase or decrease in order to
adjust the bond's yield to current interest rate levels. Therefore, bond prices
generally move in the opposite direction of interest rates. As a result,
interest rate fluctuations will affect the net asset value of the fixed income
securities held by a Portfolio, but will not affect the income received by the
Portfolio from its existing fixed income securities. However, changes in
prevailing interest rates will affect the yield on shares subsequently issued by
the Portfolio. In addition, such fluctuations would affect the income received
on any variable rate demand notes or other variable rate securities held by the
Portfolio.
Movements in interest rates typically have a greater effect on the prices of
longer term bonds than those with shorter maturities. The following table
illustrates the effect of a 1% change in interest rates on a $1,000 bond with a
7% coupon.
PRINCIPAL VALUE IF RATES:
----------------------------------
MATURITY INCREASE 1% DECREASE 1%
-------- ----------- -----------
Intermediate Bond 5 years $959 $1,043
Long-Term Bond 20 years $901 $1,116
The Advisors will manage the debt securities in each Portfolio according to
their assessment of the interest rate outlook. During periods of rising
interest rates, the Advisors will likely attempt to shorten the average maturity
of the Portfolio to cushion the effect of falling bond prices on the Portfolio's
share prices. When interest rates are falling and bond prices are increasing,
on the other hand, the Advisors will likely seek to lengthen the average
maturity.
FOREIGN SECURITIES
The Select Value Portfolio may invest a portion of its assets in securities
of foreign issuers not publicly traded in the United States, as well as ADRs and
securities of Canadian issuers. Investments in foreign securities involve
certain inherent risks, such as exchange rate fluctuations, political, social or
economic instability of the country of issue, adverse diplomatic developments,
the possible imposition of exchange controls, confiscatory taxes or
expropriation, decreased liquidity, greater price volatility, less publicly
available information and lack of uniformity in accounting, auditing and
financial reporting standards. Currency fluctuations will affect the net asset
value of foreign securities held by the Select Value Portfolio irrespective of
the performance of the underlying asset or investment.
PORTFOLIO TURNOVER
The Portfolios have not established a limit to their portfolio turnover rate.
Although no Portfolio can predict its portfolio turnover rate, it is not
expected that any of the Portfolios, other than the Government and Select Value
Portfolios, will have a portfolio turnover rate in excess of 100%. The
portfolio turnover rate for the PSE Tech 100 Index Portfolio is expected to be
under 50% because of its passive investment management approach.
Notwithstanding such approach, the fact that the PSE Technology Index is "price
weighted" may cause higher turnover and brokerage expenses than if the Index's
component stocks were not given a percentage weighting based on price.
Ordinarily, the PSE Tech 100 Index Portfolio will sell securities only to
reflect certain administrative changes in the PSE Technology Index (including
mergers or changes in the composition of the Index) or to accommodate cash flows
into and out of the Portfolio while maintaining the similarity of the Portfolio
to the PSE Technology Index. Upon notice of a change in the composition of the
Index, the Portfolio intends to adjust its investments as soon as reasonably
practicable to more closely replicate the Index.
The portfolio turnover rates for the Government and Select Value Portfolios
are not expected to exceed 200%. A high rate of portfolio turnover (in excess
of 100%) involves correspondingly greater brokerage expenses or other trading
costs as compared to a lower turnover rate, which expense must be borne by the
trading Portfolio and its shareholders. High portfolio turnover rates also may
result in the realization of substantial net short-term gains, and any
distributions resulting from such gains will be ordinary income for federal
income tax purposes. The portfolio turnover rates for each Portfolio are
included in the tables under the section of this Prospectus captioned "Financial
Highlights."
OPTION AND FUTURES ACTIVITIES
For a description of certain risks associated with option activities in which
certain of the Portfolios may engage, see "Investment Program - Options and
Futures Activities - Risks Associated With Options and Futures."
MANAGEMENT
DIRECTORS AND OFFICERS
The Board of Directors of Principal Preservation is responsible for
management of Principal Preservation and provides broad supervision over its
affairs. The Advisors are responsible for each Portfolio's investment
management, and Principal Preservation's officers are responsible for each
Portfolio's and Principal Preservation's overall operations.
THE ADVISORS
Each Portfolio is managed by Ziegler Asset Management, Inc., 215 North Main
Street, West Bend, Wisconsin 53095, as investment advisor, pursuant to the terms
of two Investment Advisory Agreements (together the "Advisory Agreements"),
one relating to the Government, Tax-Exempt, S&P 100 Plus, Select Value and PSE
Tech 100 Index Portfolios, and another relating to the Dividend Achievers
Portfolio. Skyline Asset Management, L.P., 311 South Wacker Drive, Suite 4500,
Chicago, Illinois 60606, assists, as sub-advisor, with the management of the
Select Value Portfolio pursuant to the terms of a sub-advisory agreement ("Sub-
Advisory Agreement") by and among Principal Preservation, Ziegler Asset
Management and Skyline.
Ziegler Asset Management is registered with the Securities and Exchange
Commission ("SEC") as an investment advisor and is a member of the National
Association of Securities Dealers, Inc. On December 31, 1996, it had
approximately $900 million under discretionary management. Ziegler Asset
Management serves as investment advisor to all eight mutual fund series of
Principal Preservation and privately manages numerous customer advisory
accounts. Ziegler Asset Management is a wholly-owned subsidiary of The Ziegler
Companies, Inc., a publicly-owned financial services holding company.
Skyline, a Delaware limited partnership, is registered with the SEC as an
investment advisor and its principal offices are located at 311 South Wacker
Drive, Suite 4500, Chicago, Illinois 60606. Skyline's general partner is
Affiliated Managers Group, Inc. ("AMG") and its limited partners are
corporations owned by four former management employees of Mesirow Asset
Management, Inc. (the predecessor sub-advisor to the Select Value Portfolio),
Messrs. Dutton, Kailin, Lutz and Maloney. AMG is a Boston-based private holding
company that makes equity investments in investment management firms.
AMG is a Delaware corporation with principal executive offices located at One
International Place, Boston, Massachusetts 02110. AMG may be deemed to be
controlled by Advent VII, L.P., a Delaware limited partnership, because Advent
VII, L.P. owns more than fifty percent of the voting stock of AMG. Advent VII,
L.P. in turn may be deemed to be controlled by its sole general partner, TA
Associates VII, L.P., a Delaware limited partnership, which in turn may be
deemed to be controlled by its sole general partner, TA Associates, Inc., a
Delaware corporation. The address of each Advent VII, L.P., TA Associates VII,
L.P. and TA Associates, Inc., is c/o TA Associates, Inc., High Street Tower,
Suite 2500, 125 High Street, Boston, Massachusetts 02110.
Registration with the SEC does not constitute an approval or recommendation
of any of the foregoing firms.
Pursuant to the terms of the Advisory Agreements, the Advisors provide the
Portfolios with overall investment advisory and administrative services.
Subject to such policies as the Board of Directors may determine, the Advisors
make investment decisions on behalf of each Portfolio, make available research
and statistical data in connection therewith, and supervise the acquisition and
disposition of investments by each Portfolio, including the selection of broker-
dealers to carry out portfolio transactions. The Advisors bear all of their own
expenses of providing services under the Advisory Agreement and Sub-Advisory
Agreement and pays all salaries, fees and expenses of the officers and Directors
of Principal Preservation who are affiliated with them. The Portfolios bear all
other expenses including, but not limited to, necessary office space, telephone
and other communications facilities and personnel competent to perform
administrative, clerical and shareholder relations functions; salary, fees and
expenses (including legal fees) of those Directors, officers and employees of
Principal Preservation who are not officers, directors or employees of the
Advisors; interest expenses; fees and expenses of the Distributor, Depository,
Transfer Agent and Dividend Disbursing Agent; administrative expenses; taxes and
governmental fees; brokerage commissions and other expenses incurred in
acquiring or disposing of portfolio securities, expenses of registering and
qualifying shares for sale with the SEC and with various state securities
commissions; accounting and legal costs; insurance premiums; expenses of
maintaining Principal Preservation's legal existence and of shareholders'
meetings; expenses of preparation and distribution to existing shareholders of
reports, proxies and prospectuses; and fees and expenses of membership in
industry organizations. Fees common to more than one Portfolio are prorated
among them based on their total assets.
Under the Advisory Agreements, each Portfolio pays Ziegler Asset Management
an annual fee, in monthly installments, based on the average daily net assets of
the Portfolio. Pursuant to the terms of the Sub-Advisory Agreement, Ziegler
Asset Management pays Skyline a portion of the advisory fee it receives from the
Select Value Portfolio. The Select Value Portfolio is not responsible for
making any payments to Skyline. While the advisory fees of the Select Value and
Dividend Achievers Portfolios are higher than the fees paid by most mutual
funds, Principal Preservation's Board of Directors believes they are consistent
with the fees paid by funds with investment characteristics and objectives
similar to those Portfolios. The chart below sets forth the rates of the
advisory fees.
ADVISORY FEES PAID
BY THE PORTFOLIO TO
ZIEGLER ASSET
PORTFOLIO AND NET ASSETS MANAGEMENT
- ------------------------ --------------------
Government and Tax-Exempt
Portfolios:
a. First $50 million in net
assets 0.60 of 1%
b. Next $200 million in net
assets 0.50 of 1%
c. Net assets in excess of
$250 million 0.40 of 1%
S&P 100 Plus Portfolio:
a. First $20 million in net
assets 0.575 of 1%
b. Next $30 million in net
assets 0.450 of 1%
c. Next $50 million in net
assets 0.400 of 1%
d. Next $400 millin in net
assets 0.350 of 1%
e. Net assets in excess of
$500 million 0.300 of 1%
Select Value Portfolio(1)<F25>:
a. First $250 millin in net
assets 0.75 of 1%
b. Net assets in excess of
$250 million 0.65 of 1%
Dividend Achievers Portfolio:
a. First $250 millin in net
assets 0.75 of 1%
b. Second $250 million in net
assets 0.70 of 1%
c. Net assets in excess of
$500 million 0.65 of 1%
PSE Tech 100 Index Portfolio:
a. First $50 million in net
assets 0.50 of 1%
b. Next $200 million in net
assets 0.30 of 1%
c. Next $250 million in net
assets 0.25 of 1%
d. Net assets in excess of
$500 million 0.20 of 1%
(1)<F25>Sub-Advisory fees relating to the Select Value Portfolio are paid
by the Advisor to Skyline at the following rates: 0.375 of 1% of
the first $250 million of the Portfolio's average daily net
assets, and 0.325 of 1% of net assets in excess of $250 million.
THE DISTRIBUTOR, CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
B.C. Ziegler and Company ("Ziegler") serves as the Distributor of the shares
of each Portfolio pursuant to a Distribution Agreement; provides accounting and
other administrative services, including daily valuation of the shares of each
Portfolio, pursuant to an Accounting/Pricing Agreement; provides depository and
custodial services with respect to the portfolio securities of each Portfolio
pursuant to a Depository Contract; and provides transfer agent services pursuant
to a Transfer and Dividend Disbursing Agency Agreement. Ziegler is registered
with the SEC as a securities broker-dealer and is a member of the National
Association of Securities Dealers. Ziegler has been engaged in the underwriting
of debt securities for more than 75 years. Like Ziegler Asset Management,
Ziegler is a wholly-owned subsidiary of The Ziegler Companies, Inc., and its
principal executive offices are located at 215 North Main Street, West Bend,
Wisconsin 53095. Ziegler Thrift Trading, Inc., another affiliate of Ziegler
Asset Management which is a registered broker-dealer, may effect portfolio
securities transactions as agent for the Portfolios and in that capacity
receives brokerage commissions from the Portfolio. See "Portfolio Transactions
and Brokerage."
The Distribution Agreement appointing Ziegler as Principal Preservation's
Distributor provides that Ziegler is entitled to receive a commission on its
sales of the shares of each Portfolio at the rate disclosed in Principal
Preservation's current Prospectus (see "Purchase of Shares"). Out of these
commissions, Ziegler allows Selected Dealer discounts (which are alike for all
Selected Dealers) from the applicable public offering price. The Distribution
Agreement continues from year to year if it is approved annually by Principal
Preservation's Board of Directors, including a majority of those Directors who
are not interested persons of Principal Preservation, or by a vote of the
holders of a majority of the outstanding shares. The Distribution Agreement may
be terminated at any time by either party on 60 days written notice and will
automatically terminate if assigned. Principal Preservation also reimburses
Ziegler for certain expenditures incurred by it in connection with the
distribution of Principal Preservation's shares pursuant to a Distribution Plan
adopted under Rule 12b-1 of the 1940 Act. See "Distribution Expenses."
The Accounting/Pricing Agreement provides that Ziegler is entitled to receive
a fee for accounting services provided thereunder at an annual rate of .03 of 1%
of a Portfolio's total assets of $30 million but less than $100 million, .02 of
1% of a Portfolio's total assets of $100 million but less than $250 million and
.01 of 1% of a Portfolio's total assets of $250 million or more, with a minimum
fee of $19,000 per Portfolio per year, plus expenses. The Depository Contract
provides that Ziegler is entitled to receive compensation deemed reasonable by
the Board of Directors of Principal Preservation for services provided
thereunder. The rate of compensation is currently set at .055 of 1% of the
first $10 million of Principal Preservation's assets, .03 of 1% of the next $40
million of Principal Preservation's assets, .016 of 1% of the next $200 million
of assets, and .015 of 1% of assets in excess of $250 million. The Transfer and
Dividend Disbursing Agency Agreement provides that Ziegler is entitled to
receive compensation deemed reasonable by the Board of Directors of Principal
Preservation for services provided thereunder. The rate of compensation is
currently set at $13.50 per account for the Tax-Exempt, Government and PSE Tech
100 Index Portfolios and $8.50 per account for the S&P 100 Plus, Select Value
and Dividend Achievers Portfolios. Principal Preservation also reimburses
Ziegler for all out-of-pocket expenses incurred in providing such services. As
Transfer and Dividend Disbursing Agent, Ziegler may also collect certain fees
from shareholders as disclosed in this Prospectus.
THE PORTFOLIO MANAGERS
Thomas P. Sancomb has been portfolio manager for the Tax-Exempt Portfolio
since April 1996. Mr. Sancomb has served with Ziegler and Ziegler Asset
Management in various capacities since March 1975 and has been a member of
Ziegler's Investment Committee since July 1984. He is a Vice President of both
Ziegler and Ziegler Asset Management.
An investment team consisting of advisory personnel of Ziegler Asset
Management has been responsible for managing the assets of the Government
Portfolio since April 1996. The investment team has been led by Brian K. Andrew
since May 1997. Mr. Andrew joined Ziegler Asset Management in September 1994 and
is a portfolio manager and member of its Investment Committee. Mr. Andrew
previously served as Executive Vice President of GSC Capital Corp., an
investment advisor, and Assistant Vice President of Bank One Wisconsin Trust
Company. Mr. Andrew is a certified financial analyst and received a B.S. in
Finance from the University of Minnesota in 1991. The investment team also
includes Thomas P. Sancomb (described above) and Craig Vanucci, a certified
financial analyst, portfolio manager and member of the Investment Committee
of Ziegler Asset Management since August 1994. Mr. Vanucci is also the
portfolio manager for the Cash Reserve Portfolio of Principal Preservation.
An investment team led by Jay Ferrara manages the assets of the S&P 100
Plus Portfolio, following the decision by Principal Preservation to terminate
the sub-advisory agreement with PanAgora Asset Management, Inc. effective as of
May 1997. Mr. Ferrara is Vice President-Portfolio Manager and Analyst for the
Advisor and Assistant Vice President of Ziegler and has more than 12 years of
experience in the mutual fund industry. Prior to joining Principal Preservation,
Mr. Ferrara served as Senior Portfolio Accountant for Wells Fargo Nikko
Investment Advisors and, from 1993 to 1994, as Controller of the California
Investment Trust. Mr. Ferrara's investment team for the S&P 100
Plus Portfolio includes Marc Dion, a certified financial analyst
and Vice President and Chief Investment Officer of the Advisor, with more than
10 years of investment experience, and Ralph Patek, also a certified financial
analyst and Vice President of the Advisor with more than 30 years of investment
experience.
Since January, 1992 R. Douglas Ziegler has managed the investment of the
assets of the Dividend Achievers Portfolio. Mr. Ziegler is the Chairman of the
Board of both Ziegler and Ziegler Asset Management, and also is Chairman and a
director of Principal Preservation. Mr. Ziegler is supported by an investment
team consisting of Marc Dion and Ralph Patek (each as described above).
Investment decisions for the Select Value Portfolio are made by a team of
investment professionals and analysts employed by Skyline. Skyline and its
predecessor, Mesirow, have served as sub-advisor to the Portfolio since the
commencement of its operations in August, 1994. The team responsible for the
Select Value Portfolio is headed by Mr. Kenneth S. Kailin, the portfolio
manager. Mr. Kailin is an officer of Skyline, having joined the firm's
predecessor in 1987. Mr. Kailin also serves as portfolio manager of another
registered investment company which has an investment objective, policies and
restrictions similar to those of the Select Value Portfolio. Mr. Kailin's
investment team includes Mr. William M. Dutton, President and Chief Executive
Officer of Skyline.
Jay Ferrara also has been portfolio manager for the PSE Tech
100 Index Portfolio since commencement of its operations in June 1996.
DETERMINATION OF NET ASSET VALUE PER SHARE
Net asset value per share of each Portfolio is determined by subtracting the
Portfolio's liabilities (including accrued expenses and dividends payable) from
the Portfolio's total assets (the value of the securities the Portfolio holds
plus cash or other assets, including interest accrued but not yet received) and
dividing the result by the total number of shares outstanding. The net asset
value per share will be calculated every week day, Monday through Friday, except
on customary national business holidays which result in closing of the New York
Stock Exchange (the "Exchange"). The calculation is as of the close of trading
on the Exchange (4:00 p.m. New York time) for the S&P 100 Plus, Dividend
Achievers, Select Value and PSE Tech 100 Index Portfolios, 2:30 p.m. New York
time for the Tax-Exempt Portfolio, and 3:00 p.m. New York time for the
Government Portfolio.
PURCHASE OF SHARES
Orders received by the Distributor or a Selected Dealer prior to the close of
business on the Exchange will be invested at the net asset value computed on
that day. Orders received after the close of trading on the Exchange will be
invested at the net asset value determined as of the close of trading on the
Exchange on the next business day. Except as described below, the minimum
initial investment is $1,000, and the minimum additional investment is $50.
Exchanges between Portfolios, reinvestments of distributions from a Portfolio or
distributions from various unit investment trusts sponsored by Ziegler,
reinvestments of interest and/or principal payments on bonds issued by Ziegler
Mortgage Securities, Inc. II and reinvestments of interest payments on bonds
underwritten by Ziegler are not subject to the $50 minimum additional investment
requirement. The minimum initial investment for individual retirement accounts
(IRAs), Keogh plans, self-directed retirement plan accounts and custodial
accounts under the Uniform Gifts/Transfers to Minors Act is $500 and the minimum
additional investment is $25. For minimum requirements for investments made
through an automatic investment plan, see "Shareholder Services - Systematic
Purchase Plan."
Shares may be purchased by investors at net asset value plus a sales charge
as set forth below. None of the Portfolios will issue shares for consideration
other than cash except in the case of a bona fide reorganization or statutory
merger or in certain other acquisitions of portfolio securities which meet
certain criteria in accordance with state securities laws. See "Purchase of
Shares" in the Statement of Additional Information. Shares may be purchased by
sending a check payable to Principal Preservation Portfolios, Inc., 215 North
Main Street, West Bend, Wisconsin 53095, along with a completed account
application, or through a Selected Dealer.
Shares may be purchased by investors at net asset value plus a sales charge
(expressed as a percentage of the offering price and of the net amount invested)
as follows:
PUBLIC OFFERING NET AMOUNT SELECTED DEALER
SIZE OF INVESTMENT PRICE INVESTED REALLOWANCE*<F26>
- ------------------ --------------- ---------- ---------------
FOR THE S&P 100 PLUS, SELECT
VALUE, DIVIDEND ACHIEVERS AND
PSE TECH 100 INDEX PORTFOLIOS:
Less than $50,000 4.50% 4.71% 4.00%
$50,000 but less than $100,000 4.00% 4.17% 3.50%
$100,000 but less than $250,000 3.50% 3.63% 3.00%
$250,000 but less than $500,000 3.00% 3.09% 2.60%
$500,000 but less than $1,000,000 2.50% 2.56% 2.20%
$1,000,000 or more 0.00% 0.00% 0.00%
FOR THE GOVERNMENT AND
TAX-EXEMPT PORTFOLIOS:
Less than $25,000 3.50% 3.63% 3.00%
$25,000 but less than $50,000 3.00% 3.09% 2.75%
$50,000 but less than $100,000 2.50% 2.56% 2.25%
$100,000 but less than $250,000 2.00% 2.04% 1.75%
$250,000 but less than $500,000 1.50% 1.52% 1.25%
$500,000 but less than $1,000,000 1.00% 1.01% 1.00%
$1,000,000 or more 0.00% 0.00% 0.00%
*<F26>In addition to the Selected Dealer Reallowance shown above, the
Distributor may pay an additional commission to participating dealers and
participating financial institutions acting as agent for their customers in an
amount up to the difference between the sales charge and the Selected Dealer
Reallowance in respect of the shares sold. No reallowance applies to purchases
of $1 million or more. The Distributor may offer additional compensation in
the form of trips, merchandise or entertainment as sales incentives to
Selected Dealers. The Distributor's sales representatives may not qualify to
participate in some of these incentive compensation programs and the
Distributor may offer similar incentive compensation programs in which only
its own sales representatives qualify to participate. In addition to the
amount paid to Selected Dealers, the Distributor may from time to time
pay an additional concession to a Selected Dealer which employs a
registered representative who sells, during a specific period, a minimum
dollar amount of shares, or may pay an additional concession to Selected
Dealers on such terms and conditions as the Distributor determines. In no
event will such additional concession paid by the Distributor to the
Selected Dealer exceed the difference between the sales charge and the
Selected Dealer Reallowance in respect of shares sold by the qualifying
registered representatives of the Selected Dealer. Selected
Dealers who receive a concession may be deemed to be "underwriters" in
connection with sales by them of such shares and in that capacity they may be
subject to the applicable provisions of the Securities Act of 1933.
Banks, acting as agents for their customers and not for any Portfolio or the
Distributor, from time to time may purchase Portfolio shares for the accounts of
such customers. Generally, the Glass-Steagall Act prohibits banks from engaging
in the business of underwriting, selling or distributing securities. Should the
activities of any bank, acting as agent for its customers in connection with the
purchase of the shares of any Portfolio, be deemed to violate the Glass-Steagall
Act, management will take whatever action, if any, is appropriate in order to
provide efficient services for the Portfolio. Management does not believe that
a termination in the relationship with a bank would result in any material
adverse consequences to the Portfolio. In addition, state securities laws on
this issue may differ, and banks and financial institutions may be required to
register as dealers pursuant to state law. Investors should be aware that the
shares of the Portfolios are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not insured or guaranteed by the U.S. Government,
the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other federal agency.
Reduced Sales Charges. There are several ways to pay a lower sales charge.
One is to increase the initial investment to reach a higher discount level. The
above scale is applicable to initial purchases of Principal Preservation shares
by any "purchaser." The term "purchaser" includes (1) an individual, (2) an
individual, his or her spouse and their children under the age of 21 purchasing
shares for his or her own accounts, (3) a trustee or other fiduciary purchasing
shares for a single trust estate or single fiduciary account, (4) a pension,
profit-sharing, or other employee benefit plan qualified or non-qualified under
Section 401 of the Internal Revenue Code, (5) tax-exempt organizations
enumerated in Section 501(c)(3) or (13) of the Code, (6) employee benefit plans
qualified under Section 401 of the Code of a single employer or employers who
are "affiliated persons" of each other within the meaning of Section 2(a)(3)(c)
of the Act, or (7) any other organized group of persons, whether incorporated or
not, provided the organization has been in existence for at least six months and
has some purpose other than the purchase of redeemable securities of a
registered investment company at a discount.
Another way to pay a lower sales charge is for a "purchaser" to add to his
investment so that the current offering price value of his shares plus the new
investment, reach a higher discount level. For example, if the current offering
price value of the shares held by a shareholder in the Portfolios equals
$100,000, the shareholder will pay a reduced sales charge on additional
purchases of shares. If the shareholder invested an additional $100,000, the
sales charge would be 3.5% on that additional investment in the S&P 100 Plus,
Select Value and Dividend Achievers Portfolios, and 2.00% in the Government and
Tax-Exempt Portfolios. A shareholder's holdings in all Portfolios which have a
sales charge will be aggregated in determining the break-point at which he is
entitled to purchase in any Portfolio.
A third way is for a "purchaser" to sign a non-binding statement of intention
to invest $50,000 or more over a 13 month period in any one or combination of
Principal Preservation Portfolios which have a sales charge. If the purchases
are completed during that period, each purchase will be at a sales charge
applicable to the aggregate of the shareholder's intended purchases. Under
terms set forth in the statement of intention, shares valued at 5% of the amount
of intended purchase are escrowed and will be redeemed to cover the additional
sales charge payable if the statement is not completed. Any remaining shares
held in escrow will be released to the purchaser. A purchaser will continue to
earn dividends and capital gains distributions declared by a Portfolio with
respect to shares held in escrow.
Group Purchases. A reduced sales charge is also available to members of a
qualified group. The sales charge for such persons is calculated by taking into
account the aggregate dollar value of shares of all Principal Preservation
shares sold subject to a sales charge being purchased or currently held by all
members of the group. Further information on group purchases is contained in
"Purchase of Shares" in the Statement of Additional Information.
To receive the benefit of the reduced sales charge, the shareholder must
inform Principal Preservation, Ziegler or the Selected Dealer that the
shareholder qualifies for such a discount.
PURCHASES AT NET ASSET VALUE
Shares may be purchased at net asset value (that is, without a sales charge)
by a purchaser purchasing at least $1 million of shares or the value of whose
account at the time of purchase is at least $1 million if the purchase is made
through a Selected Dealer who has executed a dealer agreement with the
Distributor. The term "purchaser" has the meaning described in "Reduced Sales
Charges," above. The Distributor may make a payment or payments, out of its own
funds, to the Selected Dealer in an amount not to exceed 0.75 of 1% of the
amount invested. All or a part of such payment may be conditioned on the monies
remaining invested with Principal Preservation for a minimum period of time.
Any pension, profit sharing or other employee benefit plan qualified under
Section 401 of the Internal Revenue Code may also purchase shares at net asset
value. If such a plan purchases shares of any of the Portfolios through a
Selected Dealer, the Distributor may make a payment or payments, out of its own
funds, to the Selected Dealer in an amount not to exceed 0.75 of 1% of the
amount invested.
Shares of the Portfolios also may be purchased at net asset value without a
sales charge by any state, county or city, or any instrumentality, department,
authority or agency thereof, and by any nonprofit organization operated for
religious, charitable, scientific, literary, educational or other benevolent
purpose which is exempt from federal income tax pursuant to Section 501(c)(3) of
the Internal Revenue Code; provided that any such purchaser must purchase at
least $500,000 of shares, or the value of such purchaser's account at the time
of purchase must be at least $500,000.
Shares may also be purchased at net asset value when payment for those shares
represents the proceeds from the redemption of shares of another mutual fund
which charges a sales charge and which is not part of Principal Preservation. A
purchase of shares of Principal Preservation may be made at net asset value
under this provision regardless of whether the sales charge was paid on the
shares redeemed in the unrelated fund, but the redemption of those shares must
have occurred no more than 60 days prior to the purchase of shares of Principal
Preservation. The Distributor may make a payment or payments, out of its own
funds, to Selected Dealers effecting such exchanges, in an amount not to exceed
0.50 of 1% of the amount invested. All or a part of such payment may be
conditioned upon the monies remaining invested with Principal Preservation for a
minimum period of time. Shares of Principal Preservation in addition to those
qualifying for purchase at net asset value under this provision may be purchased
at net asset value plus the normal sales charge.
Shares may also be purchased at net asset value by: Directors and officers
of Principal Preservation (including shares purchased jointly with or
individually by any such person's spouse and shares purchased by any such
person's children or grandchildren under age 21); employees of Ziegler, Selected
Dealers and Skyline, and the trustee or custodian under any pension or profit-
sharing plan established for the benefit of the employees of any of the
foregoing. The term "employee" includes an employee's spouse (including the
surviving spouse of a deceased employee), parents (including step-parents and
in-laws), children, grandchildren under age 21 and siblings, and retired
employees. Shares may also be purchased with a reduced sales charge of 0.50 of
1% by directors of The Ziegler Companies, Inc. who are not also employees of
Ziegler.
Shares may also be purchased without a sales charge upon the reinvestment of
distributions from any Principal Preservation portfolio, or investment of
distributions from various unit investment trusts sponsored by Ziegler; the
reinvestment of principal or interest payments on bonds issued by Ziegler
Mortgage Securities, Inc. II; or the reinvestment of interest payments on bonds
underwritten by Ziegler.
Shares may also be purchased without a sales charge by certain authorized
brokers, dealers, registered investment advisors and other financial
institutions that have entered into an agreement with Ziegler in accordance with
certain standards approved by Ziegler, providing specifically for the use of
Principal Preservation shares in particular investment products made available
for a fee to clients of such brokers, dealers, registered investment advisors
and other financial institutions.
REDEMPTIONS
You may have any or all of your shares redeemed as described below on any day
Principal Preservation is open for business at the net asset value next
determined. See "Determination Of Net Asset Value Per Share." If the order is
received prior to the close of the Exchange the redemption will be at the net
asset value calculated that day. If not, you will receive the net asset value
calculated as of the close of trading on the next business day.
By Telephone. If you have completed the Telephone Redemption Authorization
and signature guarantee sections of the account application, you may redeem
shares by calling Principal Preservation at 800-826-4600. This authorization
must be on file at least five days prior to the first telephone redemption.
This authorization requires a signature guarantee. At your request, redemption
will be made by wire to the bank account designated on the account application
or a check will be sent to you at the registered address for your account on the
business day following the redemption. See "Redemptions - Sending Redemption
Proceeds - By Wire."
You cannot redeem shares by telephone if you hold stock certificates for
those shares. Additionally, shares paid for by personal, corporate, or
government check cannot normally be redeemed before the 15th day after the
purchase date or until the check clears.
By establishing the telephone redemption service, you authorize Ziegler, as
Principal Preservation's transfer agent (the "Transfer Agent"), to: (1) act upon
the instruction of any person by telephone to redeem shares from the account for
which such services have been authorized; and (2) honor any written instructions
for a change of address if accompanied by a signature guarantee. You assume
some risk for unauthorized transactions by establishing the telephone redemption
services. The Transfer Agent has implemented procedures designed to reasonably
assure that telephone instructions are genuine. These procedures include
recording telephone conversations, requesting verification of various pieces of
personal information and providing written confirmation of such transactions.
If the Transfer Agent, Principal Preservation, or any of their employees fails
to abide by these procedures, Principal Preservation may be liable to a
shareholder for losses the shareholder suffers from any resulting unauthorized
transaction(s). However, none of the Transfer Agent, Principal Preservation or
any of their employees will be liable for losses suffered by a shareholder which
result from following telephone instructions reasonably believed to be genuine
after verification pursuant to these procedures. This service may be changed,
modified or terminated at any time. There is currently no charge for telephone
redemptions, although a charge may be imposed in the future.
By Mail. To redeem shares by mail, send the following information to the
Transfer Agent: (1) a written request for redemption signed by the registered
owner(s) of the shares, exactly as the account is registered, together with the
shareholder's account number; (2) the stock certificates for the shares being
redeemed, if the certificates are held by the shareholders; (3) any required
signature guarantees (see "Signature Guarantees" below); and (4) any additional
documents which might be required for redemptions by corporations, executors,
administrators, trustees, guardians, or other similar entities.
The Transfer Agent will redeem shares when it has received all necessary
documents. You will be notified promptly by the Transfer Agent if your
redemption request cannot be accepted. The Transfer Agent cannot accept
redemption requests which specify a particular date for redemption or which
specify any special conditions. Questions concerning redemption procedures
should be directed to the Transfer Agent at 800-826-4600.
Signature Guarantees. To protect you, the Transfer Agent and Principal
Preservation from fraud, signature guarantees are required for certain
redemptions. Signature guarantees enable the Transfer Agent to be sure that you
are the person who has authorized a redemption from your account. Signature
guarantees are required for: (1) any redemptions by mail if the proceeds are to
be paid to someone else or are to be sent to an address other than your address
as shown on Principal Preservation's records; (2) any redemptions by mail which
request that the proceeds be wired to a bank, unless you designated the bank as
an authorized recipient of the wire on your account application or subsequent
authorization form and such application or authorization includes a signature
guarantee; (3) any redemptions by mail if the proceeds are to be sent to an
address for the shareholder that has been changed within the past thirty (30)
days; (4) authorizations to redeem by telephone; and (5) requests to transfer
the registration of shares to another owner. These requirements may be waived
by Principal Preservation in certain instances.
The Transfer Agent will accept signature guarantees from all institutions
which are eligible to provide them under federal or state law. Institutions
which typically are eligible to provide signature guarantees include commercial
banks, trust companies, brokers, dealers, national securities exchanges, savings
and loan associations and credit unions. A signature guarantee is not the same
as a notarized signature.
Sending Redemption Proceeds. The Transfer Agent will not send redemption
proceeds until all payments for the shares being redeemed have cleared, which
may take up to 15 days from the purchase date of the shares.
By Mail. The Transfer Agent mails checks for redemption proceeds typically
within one or two days, but not later than seven days, after it receives the
request and all necessary documents.
By Wire. The Transfer Agent will normally wire redemption proceeds to your
bank the next business day after receiving the redemption request and all
necessary documents. The signatures on any written request for a wire
redemption must be guaranteed. The Transfer Agent currently deducts a $7.50
wire charge from the redemption proceeds. This charge is subject to change.
You will be responsible for any charges which your bank may make for receiving
wires.
Redemption through Securities Brokers. Shares can also be redeemed through a
securities dealer, who may charge a fee.
Conditions on Redemptions. If, due to redemption, your account in a
Portfolio drops below $500 for three months or more, the Portfolio has the right
to redeem your account, after giving 60 days' written notice, unless you make
additional investments to bring the account value to $1,000 or more.
Principal Preservation may suspend the right to redeem shares of one or more
of the Portfolios for any period during which: (1) the Exchange is closed or the
Securities and Exchange Commission determines that trading on the Exchange is
restricted; (2) there is an emergency as a result of which it is not reasonably
practical for the Portfolio(s) to sell its securities or to calculate the fair
value of its net assets; or (3) the Securities and Exchange Commission may
permit for the protection of the shareholders of the Portfolio(s).
It is possible that conditions may arise in the future which would, in the
opinion of the Board of Directors of Principal Preservation, make it undesirable
for a Portfolio to pay for all redemptions in cash. In such cases, the Board
may authorize payment to be made in securities or other property of a Portfolio.
However, the Portfolios have obligated themselves under the 1940 Act to redeem
for cash all shares presented for redemption by any one shareholder up to
$250,000 (or 1% of a Portfolio's net assets if that is less) in any 90-day
period. Securities delivered in payment of redemptions would be valued at the
same value assigned to them in computing the net asset value per share. Persons
receiving such securities would incur brokerage costs when these securities are
sold.
SHAREHOLDER SERVICES
Principal Preservation offers a number of shareholder services designed to
facilitate investment in Portfolio shares. Full details of each of the
services, copies of the various plans described below and instructions as to how
to participate in the various services or plans can be obtained from Principal
Preservation, or the Distributor.
Systematic Purchase Plan. A Systematic Purchase Plan ("SPP") may be
established at any time with a minimum initial investment of $100 and minimum
subsequent monthly investments of $100. The minimum subsequent monthly
investment is reduced to $50 for IRAs, Keogh plans, self-directed retirement
plan accounts and custodial accounts under the Uniform Gifts/Transfers to Minors
Act until your account balance reaches $500, after which the minimum is further
reduced to $25. The minimum subsequent investment is also reduced to $50 for
all other accounts with balances of $1,000 or more. By participating in the
SPP, you may automatically make purchases of Principal Preservation shares on a
regular, convenient basis. Under the SPP, your bank or other financial
institution honors preauthorized debits of a selected amount drawn on your
account each month and applied to the purchase of Principal Preservation shares.
The SPP can be implemented with any financial institution that will accept the
debits. There is no service fee for participating in the SPP. An application
and instructions on establishing the SPP are available from your registered
representative, the Distributor or Principal Preservation.
Systematic Withdrawal Plan. You may establish a systematic withdrawal plan
if you own or purchase shares having a current offering price value of at least
$10,000 in a single Portfolio (except no such minimum applies for distributions
from an IRA). The systematic withdrawal plan involves the planned redemption of
shares on a periodic basis by receiving either fixed or variable amounts at
periodic intervals. The minimum amount you may receive under a systematic
withdrawal plan is $150 per month. Normally, you would not make regular
investments at the same time you are receiving systematic withdrawal payments
because it is not in your interest to pay a sales charge on new investments
when, in effect, a portion of your new investment is soon withdrawn. The
minimum investment accepted while a withdrawal plan is in effect is $1,000. You
may terminate your systematic withdrawal plan at any time by written notice to
Principal Preservation or the Transfer Agent.
Reinvestment Privilege. If you redeem shares, you may reinvest all or part
of the redemption proceeds in the same Portfolio, without a sales charge, if you
send written notice to Principal Preservation or the Transfer Agent not more
than 30 days after the shares are redeemed. Your redemption proceeds will be
reinvested on the basis of net asset value of the shares in effect immediately
after receipt of the written request. You may exercise this reinvestment
privilege only once upon redemption of your shares. Any capital gains tax you
incur on the redemption of your shares is not altered by your subsequent
exercise of this privilege. If the redemption resulted in a loss and
reinvestment is made in shares, the loss will not be recognized.
Exchange Privilege. Subject to compliance with applicable minimum investment
requirements, shares of any Principal Preservation portfolio may be exchanged
for shares of any other Principal Preservation portfolio in any state where the
exchange legally may be made. The standard sales commission applicable to
purchases of shares of the Principal Preservation portfolio into which the
exchange is being made (as disclosed in the then current prospectus for that
Principal Preservation portfolio) will be charged in connection with the
exchange, less any sales commission previously paid by the shareholder with
respect to the shares being exchanged. However, if a front-end sales commission
was previously paid with respect to the shares being exchanged and the
investment represented by such shares has been held in one or more Principal
Preservation portfolios continuously for at least six months prior to the
proposed exchange, then no additional sales commission will be charged in
connection with the exchange. Before engaging in any such exchange, a
shareholder should obtain from the Distributor and carefully read the current
prospectus relating to the Principal Preservation portfolio into which he or she
intends to exchange. Such exchanges may be subject to a service charge by the
Transfer Agent (currently $5.00).
In order to effect an exchange on a particular business day, the Transfer
Agent must receive a completed exchange authorization form or other written
instructions, signed by all account holders, no later than 3:00 p.m. Eastern
Time. Exchange authorization forms may be obtained from, and should be returned
to, the Transfer Agent at 215 North Main Street, West Bend, Wisconsin 53095.
The Transfer Agent may accept instructions from Selected Dealers, subject to
certain conditions and requirements, by wire or telephone, for the exchange of
shares held in an investor's account. Principal Preservation may amend, suspend
or revoke this exchange privilege at any time, but will provide shareholders at
least 60 days' prior notice of any change that adversely affects their rights
under this exchange privilege. Exchanges are subject to the conditions
described above under "Redemptions - Conditions on Redemptions."
An exchange of shares is considered a sale for tax purposes and you will
realize a gain or loss for federal income tax purposes.
An excessive number of exchanges may be disadvantageous to Principal
Preservation. Therefore, Principal Preservation, in addition to its right to
reject any exchange, reserves the right to terminate the exchange privilege of
any shareholder who makes more than three exchanges of shares in 12 months or
more than one exchange per calendar quarter.
Reinvestment of Distributions or Interest Payments. Unit holders of Ziegler
sponsored unit investment trusts, holders of Ziegler Mortgage Securities, Inc.
II bonds and holders of bonds underwritten by Ziegler may purchase shares of
Principal Preservation by automatically reinvesting distributions from their
unit investment trust, reinvesting principal or interest from their Ziegler
Mortgage Securities, Inc. II bonds, or reinvesting interest from the bonds
underwritten by Ziegler, as the case may be. Unit holders and bondholders
desiring to participate in this plan should contact the Distributor for further
information.
Tax Sheltered Retirement Plans. Shares of the Portfolios are available for
purchase in connection with the following tax-sheltered plans: (1) Individual
Retirement Accounts; (2) Keogh plans; (3) 401(k) Plans; and (4) 403(b) Plans for
employees of most nonprofit organizations. Detailed information concerning
these plans and prototypes of these plans and other information are available
from the Distributor. They should be carefully reviewed and considered with
your tax or financial adviser. IRA investors do not receive the benefits of
long-term capital gains treatment when funds are distributed from their account.
For further information regarding plan administration, custodial fees and
other details, investors should contact the Distributor.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND REINVESTMENTS
Dividends from net investment income will be declared daily and paid monthly
in the Government and Tax-Exempt Portfolios, and will be declared and paid
quarterly in the S&P 100 Plus, Select Value, Dividend Achievers and PSE Tech 100
Index Portfolios. Dividends may be taken in cash or additional shares at net
asset value (without a sales charge). You may also direct the Transfer Agent to
invest the dividends in shares of any other Principal Preservation portfolio for
which you have an account. The investment occurs on the same day as the
dividend distribution date. Unless you have elected in writing to the Transfer
Agent to receive dividends and capital gain distributions in cash, they will be
automatically reinvested in additional shares of the relevant Portfolio.
Capital gains distributions, if any, in all Portfolios will be declared
annually and normally will be paid within 45 days after the end of the fiscal
year.
TAX STATUS
Each Portfolio intends to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986 (the "Code"). In order to so
qualify, each Portfolio must satisfy a number of requirements, including the
requirement that at least 90% of the Portfolio's gross income be derived from
dividends, interest and gains from the sale or other disposition of stock or
other securities. Another requirement is that less than 30% of a Portfolio's
gross income be derived from the sale or other disposition of securities held
for less than three months (netting gains and losses which are parts of
designated hedges). In determining these gross income requirements, a loss from
the sale or other disposition of securities does not enter into the computation.
Each Portfolio will distribute substantially all of its net income and
capital gains. Regulated investment companies, in most instances, pay a
nondeductible four percent excise tax on the amount, if any, by which actual
distributions of investment income and capital gains are less than distributions
required by the Code. Principal Preservation intends to make distributions in a
manner which will avoid the excise tax. The federal income tax status of all
distributions will be reported to shareholders annually. That part of the Tax-
Exempt Portfolio's net investment income which is attributable to interest from
tax-exempt securities and which is distributed to shareholders will be
designated as an "exempt-interest dividend" under the Code. A Portfolio's
distributions are taxable when they are paid, whether a shareholder takes them
in cash or reinvests them in additional shares, except that distributions
declared in December and paid in January each year are taxable as if paid on
December 31 of the earlier year.
The exemption of exempt-interest dividends for federal income tax purposes
does not necessarily result in exemption under the tax laws of any state or
local taxing authority which vary with respect to the taxation of such dividend
income. It is possible that some states will exempt from tax that portion of
the exempt-interest dividend which represents interest received by the Tax-
Exempt Portfolio on that state's securities. Therefore, the Tax-Exempt
Portfolio will report annually to its shareholders the percentage of interest
income received on a state-by-state basis. You should consult with your tax
adviser regarding the extent, if any, to which exempt-interest dividends are
exempt under state laws applicable to your dividend distributions.
A portion of the net investment income of the Government, S&P 100 Plus,
Dividend Achievers and PSE Tech 100 Index Portfolios will qualify for the 70%
dividends received deduction for corporations.
Each series of a series company, such as Principal Preservation, is treated
as a separate entity for federal income tax purposes so that the net realized
capital gains and losses of Principal Preservation's separate portfolios are not
combined.
The foregoing is only a summary of some of the more important tax
considerations generally affecting the Portfolios and their shareholders. This
discussion is not intended as a substitute for careful tax planning. You are
urged to consult your tax advisor with specific reference to your own tax
situation.
DESCRIPTION OF SHARES
The authorized common stock of Principal Preservation consists of one billion
shares, par value of $0.001 per share. The shares of Principal Preservation are
presently divided into eight series: Tax-Exempt Portfolio, Government
Portfolio, S&P 100 Plus Portfolio, Dividend Achievers Portfolio, Select Value
Portfolio, PSE Tech 100 Index Portfolio, Wisconsin Tax-Exempt Portfolio and Cash
Reserve Portfolio, consisting of 50 million shares in each of the first six
Portfolios and 400 million in the Cash Reserve Portfolio. Shares of the Cash
Reserve Portfolio are further divided into two separate classes, Class X Common
Stock (the Retail Class) and Class Y Common Stock (the Institutional Class),
consisting of 200 million shares each. The Board of Directors of Principal
Preservation may authorize the issuance of additional series and, within each
series, individual classes, and may increase or decrease the number of shares in
each series or class.
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 plan 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 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
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.
As used in the Prospectus, the phrase "majority vote" of the outstanding
shares of a series (or of Principal Preservation) means the vote of the lesser
of: (1) 67% of the shares of the Portfolio (or Principal Preservation) present
at the meeting if the holders of more than 50% of the outstanding shares are
present in person or by proxy; or (2) more than 50% of the outstanding shares of
the Portfolio (or Principal Preservation).
PORTFOLIO TRANSACTIONS AND BROKERAGE
Purchase and sale orders for portfolio securities may be effected through
brokers, although it is expected that transactions in debt securities will
generally be conducted with dealers acting as principals. Purchases and sales
of securities on a stock exchange are effected through brokers who charge a
commission for their services. Purchases and sales of securities traded over-
the-counter may be effected through brokers or dealers. Brokerage commissions
on securities and options are subject to negotiation between Principal
Preservation and the broker.
Principal Preservation will not deal with Ziegler or its affiliates in any
transaction in which they act as a principal, but to the extent and in the
manner permitted by the 1940 Act may effect brokerage transactions through them.
The Advisors may utilize the services of Ziegler or an affiliate as a broker if
the commissions, fees or other remuneration received by them are reasonable and
fair compared to the commissions, fees and other remuneration paid to other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable period of
time. See "Portfolio Transactions and Brokerage" in the Statement of Additional
Information.
Allocation of transactions, including their frequency, to various dealers is
determined by the Advisors in their best judgment and in a manner deemed fair
and reasonable to shareholders. The primary consideration is prompt and
efficient execution of orders in an effective manner at the most favorable
price. Principal Preservation may also consider sales of shares of its various
series as a factor in the selection of broker-dealers, subject to the policy of
obtaining best price and execution.
DISTRIBUTION EXPENSES
In addition to the sales charge deducted at the time of purchase, each
Portfolio is authorized under a Distribution Plan (the "Plan") pursuant to Rule
12b-1 under the 1940 Act to use a portion of its assets to finance certain
activities relating to the distribution of its shares to investors. The Plan
permits payments to be made by each Portfolio to the Distributor to reimburse it
for expenditures incurred by it in connection with the distribution of each
Portfolio's shares to investors. These payments include, but are not limited
to, payments to selling representatives or brokers as a service fee,
advertising, preparation and distribution of sales literature and prospectuses
to prospective investors, implementing and operating the Plan and performing
other promotional or administrative activities on behalf of each of the
Portfolios. Plan payments may also be made to reimburse the Distributor for its
overhead expenses related to distribution of the Portfolio's shares. No
reimbursement may be made under the Plan for expenses of the past fiscal years
or in contemplation of expenses for future fiscal years.
Under the Plan, payments may not exceed an amount computed at an annual rate
of 0.25 of 1% of the average daily net assets of any Portfolio. The Plan
continues in effect, if not sooner terminated, for successive one-year periods,
provided that its continuance is specifically approved by the vote of the
Directors, including a majority of the Directors who are not interested persons
of any of the Advisors. For further information regarding the Plan, see
"Distribution Expenses" in the Statement of Additional Information.
OTHER INFORMATION
Transfer and Dividend Disbursing Agent. B.C. Ziegler and Company, 215 North
Main Street, West Bend, Wisconsin 53095, acts as Transfer and Dividend
Disbursing Agent.
Shareholder Statements and Reports. Shareholders receive confirmations at
least quarterly regarding their transactions and reports at least semiannually
setting forth various financial and other information related to the Portfolios.
Shareholder Inquiries. Shareholder inquiries may be directed to Principal
Preservation at 215 North Main Street, West Bend, Wisconsin 53095; or by
telephone at (800) 826-4600.
Performance Information. From time to time the Portfolios may advertise
their "yield" and "total return." Yield is based on historical earnings and
total return is based on historical distributions; neither is intended to
indicate future performance. The "yield" of a Portfolio refers to the income
generated by an investment in that Portfolio over a one month period (which
period will be stated in the advertisement). This income is then "annualized."
That is, the amount of income generated by the investment during the month is
assumed to be generated each month over a 12-month period and is shown as a
percentage of the investment. "Total return" of a Portfolio refers to the
average annual total return for one, five and ten year periods (or so much
thereof as a Portfolio has been in existence). Total return is the change in
redemption value of shares purchased with an initial $10,000 investment,
assuming the reinvestment of dividends and capital gains distributions, after
giving effect to the maximum applicable sales charge. In addition, the Tax-
Exempt Portfolio may advertise its "tax equivalent yield," which is computed by
dividing that portion of the Portfolio's yield which is tax-exempt by one minus
a stated income tax rate and adding the product to that portion, if any, of the
yield of the Portfolio which is not tax-exempt. Performance information should
be considered in light of the Portfolios' investment objectives and policies,
characteristics and quality of the Portfolios and the market conditions during
the time period, and should not be considered as a representation of what may be
achieved in the future. Further information is contained in the Statement of
Additional Information.
Portfolio Rating. From time to time the Portfolios may obtain and use a
rating from a nationally recognized statistical rating organization. For a
description of such ratings, see "Portfolio Ratings" in the Statement of
Additional Information.
PRINCIPAL PRESERVATION PORTFOLIOS, INC.
TERMS AND CONDITIONS OF GENERAL APPLICATION FORM
ADDITIONAL INVESTMENTS
After a Shareholder account is established, additional investments in the
amount of $50 or more ($25 or more for IRAs, Keogh Plans, Self-Directed
Retirement Plan Accounts, and Custodial Accounts under the Uniform
Gifts/Transfers to Minors Act) may be made to that existing account at any time.
Additional investments will be applied to the purchase of full and fractional
shares of the specified Portfolio at the public offering price. These
investments should be accompanied by an investment transmittal stub (attached to
any previously received shareholder confirmation) and mailed directly to B.C.
Ziegler and Company, 215 North Main Street, West Bend, Wisconsin 53095 (the
Transfer Agent). Additional investments can also be made through your dealer.
INFORMATION PERTAINING TO THE
STATEMENT OF INTENTION
Subject to conditions specified below, each purchase during the 13-month
period subsequent to the effective date of this application will be made at the
public offering price applicable to a single transaction of the dollar amount
indicated, as described in the then effective prospectus. The offering price
may be further reduced under the Combined Purchase and Cumulative Investment
Privilege if the Transfer Agent is advised of any shares previously purchased
and still owned. You understand that you may, at any time during the period,
revise upward your stated intention by submitting a written request to that
effect. Such revision shall provide for the escrowing of additional shares.
The original period of the Statement, however, shall remain unchanged. Each
separate purchase made pursuant to the Statement is subject to the terms and
conditions contained in the prospectus in effect at the time of that particular
purchase. It is understood that you make no commitment to purchase shares, but
that if purchases so made within 13 months from this date do not aggregate the
amount specified, you will pay the increased amounts of sales charge prescribed
in the terms of escrow. You or your dealer must refer to this Statement of
Intention in placing each future order for shares while this Statement is in
effect. It is understood that when remitting funds directly to the Transfer
Agent for investment in your account, specific reference must be made to this
Statement. This cancels and supersedes any previous instructions which you may
have given inconsistent with the above. You have received a copy of the current
prospectus to which this application relates.
Terms of Escrow to the Statement of Intention
1. To assure compliance with provisions of the Investment Company Act of
1940, out of the initial purchase (or subsequent purchase if necessary) 5% of
the dollar amount indicated on the reverse side hereof will be held in escrow in
the form of shares (computed to the nearest full share at the applicable public
offering price) registered in your name. These shares will be held by the
Transfer Agent and be subject to the terms of escrow.
2. If total purchases pursuant to this Statement equal the amount of the
specified expected aggregate purchase, escrow shares will be released from
restriction and be deposited to your account.
3. If the total purchases pursuant to this Statement are less than the amount
specified, you shall remit to the Dealer an amount equal to the difference
between the dollar amount of sales charge actually paid and the amount of sales
charge which would have been paid on the total purchases if all such purchases
had been made at a single time. If the Distributor or the dealer, within 10
business days after request, does not receive this amount, they will instruct
the Transfer Agent to redeem an appropriate number of escrow shares to realize
such difference. If the proceeds from this redemption are inadequate, you will
be liable to the Distributor or the dealer for the difference. The remaining
shares after the redemption will be deposited to your account unless otherwise
instructed.
4. You hereby irrevocably constitute and appoint the Transfer Agent as
attorney to surrender for redemption any or all shares on the books of Principal
Preservation, under the conditions previously outlined, with full power of
substitutions in the premises.
5. Any dividends and capital gain distributions declared by Principal
Preservation with respect to escrowed shares will be added to the escrow
account.
COMBINED PURCHASE AND
CUMULATIVE INVESTMENT PRIVILEGE
Shares may be purchased at the offering price applicable to the total of (a)
dollar amount then being purchased plus (b) an amount equal to the value of the
combined holdings of all series of Principal Preservation that have a sales
charge of (1) an individual; (2) an individual, his spouse and their children
under the age of 21 purchasing securities for his or their own account; (3) a
trustee or other fiduciary purchasing for a single trust, estate or single
fiduciary account; (4) a pension, profit sharing or other employee benefit plan
qualified or non-qualified under Section 401 of the Internal Revenue Code (the
"Code"); (5) tax-exempt organizations enumerated in Section 501(c)(3) or (13) of
the Code; (6) employee benefit plans qualified under Section 401 of the Code of
a single employer or of employers who are "affiliated persons" of each other
within the meaning of Section 2(a)(3)(c) of the Securities Act of 1933, as
amended; or (7) any other organized group of persons, whether incorporated or
not, provided the organization has been in existence for at least six months and
has some purpose other than the purchase of redeemable securities of a
registered investment company at a discount. In order for this cumulative
quantity discount to be made available, the shareholder or his securities dealer
must notify B.C. Ziegler and Company of the total holdings in all series of
Principal Preservation each time an order is placed.
TELEPHONE REDEMPTIONS
If you elect to redeem by telephone, a signature guarantee must be included
with the application. This authorizes and directs Principal Preservation and
the Transfer Agent, acting as your attorneys-in-fact, to redeem any or all
shares of Principal Preservation pursuant to instructions received by telephone
from you or any other person and to wire the proceeds to the bank account
designated in your application. You agree that any telephone instructions may
be recorded.
DEALER AUTHORIZATION
The dealer, in signing the Authorization, authorizes B.C. Ziegler and
Company, as its agent and on its behalf, to purchase from time to time shares of
Principal Preservation necessary for the shareholder who has signed the
Authorization. B.C. Ziegler and Company is authorized and directed where
necessary to cause the shares to be transferred to the name of the shareholder
on the books of Principal Preservation to retain and to account to the dealer
for the dealer's sales charge due on each purchase, to confirm each direct sale
to the shareholder on behalf of the dealer, and to transmit to the shareholder
each new prospectus of Principal Preservation or supplement thereto delivered to
it for that purpose. The dealer guarantees the genuineness of the signature(s)
on the Authorization and represents that each person who has signed the
Authorization is of legal age and not under legal disability. The dealer also
represents that it is a duly licensed and registered dealer and that it may
lawfully sell the specified securities in the state designated as the investor's
mailing address. It further represents, if the sale has been made within the
United States, that it is a member of the NASD and has entered into a soliciting
dealer agreement with B.C. Ziegler and Company with respect to such shares.
TERMS AND CONDITIONS FOR ESTABLISHING SYSTEMATIC PURCHASE PLAN
1. OPENING A SYSTEMATIC PURCHASE PLAN ("SPP"). An SPP may be established
at any time by submitting the information requested above to the Transfer Agent.
Depending on the date you elect to have automatic investments made, the SPP may
take up to 30 days to commence after receipt of the SPP request by the Transfer
Agent. There is a minimum initial investment of $100.00 for accounts opened
under the SPP, and for subsequent investments ($50 or more for IRAs, Keogh
Plans, Self-Directed Retirement Plan Accounts, and Custodial Accounts under the
Uniform Gifts/Transfers to Minors Act, until your account balance reaches $500,
after which investments can be made in increments of $25 or more). The
additional investment amount drops to $50 for SPP participants whose accounts
exceed $1,000.
2. INVESTMENTS. Principal Preservation shall collect the amount
specified from your account at the designated financial institution as hereby
authorized, debiting such account to its own order. Other than the sales
charge, there are no service fees for participation in the SPP. Principal
Preservation shall treat each deposit as if it were made by you directly.
3. TERMINATION. The privilege of making deposits under this service may
be revoked by Principal Preservation without prior notice if any debit is not
paid upon presentation. Principal Preservation shall be under no obligation to
notify you of the non-payment and Principal Preservation shall have no liability
whatsoever with respect thereto. You may discontinue the SPP by written notice
to the Transfer Agent which is received at least ten business days prior to the
collection date or the SPP may be discontinued at any time by Principal
Preservation upon 30 days written notice prior to any collection date.
4. CHANGES IN ACCOUNT. In order to continue participation in the
SPP, you must notify the Transfer Agent in writing of changes in your
account. A "Voided" check reflecting the change of account must be
attached to the written notification.
5. AVAILABILITY. The SPP is available only through financial
institutions that have agreed to participate in such plans and may not be
available to residents of certain states.
TABLE OF CONTENTS
PAGE
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QUESTIONS AND ANSWERS 2
EXPENSES 6
FINANCIAL HIGHLIGHTS 8
INVESTMENT OBJECTIVES 14
INVESTMENT PROGRAM 16
SPECIAL CONSIDERATIONS 27
MANAGEMENT 30
DETERMINATION OF NET ASSET VALUE PER SHARE 34
PURCHASE OF SHARES 35
REDEMPTIONS 39
SHAREHOLDER SERVICES 41
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND REINVESTMENTS 44
TAX STATUS 44
DESCRIPTION OF SHARES 45
PORTFOLIO TRANSACTIONS AND BROKERAGE 46
DISTRIBUTION EXPENSES 46
OTHER INFORMATION 47
PRINCIPAL PRESERVATION
PORTFOLIOS, INC.
215 North Main Street
West Bend, Wisconsin 53095
INVESTMENT ADVISORS
Ziegler Asset Management, Inc.
215 North Main Street
West Bend, Wisconsin 53095
Skyline Asset Management, L.P.
(Sub-Advisor to Select Value Portfolio)
311 South Wacker Drive
Suite 4500
Chicago, Illinois 60606
DISTRIBUTOR, DEPOSITORY, ACCOUNTING/PRICING AGENT,
AND TRANSFER AND DIVIDEND DISBURSING AGENT
B.C. Ziegler and Company
215 North Main Street
West Bend, Wisconsin 53095
COUNSEL
Quarles & Brady
411 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP
100 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
PRINCIPAL PRESERVATION PORTFOLIOS, INC.
ACCOUNT APPLICATION FORM
MAKE CHECK OR MAIL TO: Principal Preservation
215 North Main Street
West Bend, WI 53095
MONEY ORDER PAYABLE TO: Principal Preservation Portfolios, Inc.
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ACCOUNT REGISTRATION
Individual
- ------------------------------------------------------------------------------
First Middle Initial Last Name
Joint Owner
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First Middle Initial Last Name
(In case of joint registration, a joint tenancy with right of survivorship will
be presumed, unless otherwise indicated.)
Uniform Gift To Minor
- ------------------------------------------------------------------------------
Custodian's Name
Other
- ------------------------------------------------------------------------------
Name of corporation, other organization or fiduciary; if trust, state trustee,
maker and date of trust
- ------------------------------------------------------------------------------
Print - Street Address (Area code) Telephone No. (optional)
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City State Zip Code
Citizen of: United States Other
----------------------------------------
(please specify)
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PORTFOLIO SELECTION
Choose the Portfolio(s) in which you wish to open an account and indicate the
amount you wish to invest in each. Minimum initial investment is $1,000 ($500
for IRAs, Keogh Plans, Self-Directed Retirement Plan Accounts and Custodial
Accounts under the Uniform Gifts/Transfers to Minors Act).
Tax-Exempt Portfolio ----- I'm interested in the Cash Reserve
------- Portfolio. Please send me a Prospectus.
Government Portfolio
-------
S&P 100 Plus Portfolio ----- I'm interested in the Wisconsin
------- Tax-Exempt Portfolio.
Please send me a Prospectus.
Dividend Achievers Portfolio
-------
Select Value Portfolio
-------
PSE Tech 100 Index Portfolio ----------
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METHOD OF PAYMENT
Shares purchased by personal or corporate check may not be
redeemed by telephone or otherwise until 15 days after invest-
ment date or until the check clears.
Personal Check or Other (specify)
-----------------
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DIVIDEND AND DISTRIBUTION OPTIONS
Until I advise you to the contrary, I elect to:
Reinvest all dividends and capital Receive dividends in cash and
gain distributions. reinvest capital gains.
(If no box is checked, all dividends and
capital gainb distributions will be Receive all distributions in cash.
reinvested in additional shares.)
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STATEMENT OF INTENTION
Effective Date
-----------------------------------
(Not more than 90 days prior to date of signature)
The investor intends, but shall be under no obligation, to invest over a 13-
month period from the date of purchase an aggregate amount in any of the
Portfolios having a sales charge equal to at least:
$25,000-$49,999 $250,000-$499,999
$50,000-$99,999 $500,000-$999,999
$100,000-$249,999 $1,000,000 or more
Each purchase will be made at the public offering price applicable to a single
purchase of the dollar amount designated above, as described in the Prospectus
(see ''PURCHASE OF SHARES'').
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RIGHTS OF ACCUMULATION
I qualify for Rights of Accumulation as described in the Prospectus. Listed
below are all the accounts from the different Portfolios of Principal
Preservation sold subject to a sales charge which should be credited toward the
reduced sales charge.
Account Number Account Number
----------------------- --------------------
Account Number Account Number
----------------------- --------------------
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TELEPHONE EXCHANGE
I authorize telephone exchange privileges.
If you request the telephone exchange option, you must obtain a Signature
Guarantee on back.
- ------------------------------------------------------------------------------
SYSTEMATIC PURCHASE PLAN (''SPP'')
If you select this option please review the terms and conditions in the
Prospectus. New accounts please fill in information in account registration and
select one Portfolio under Portfolio Selection. I hereby authorize Principal
Preservation to withdraw from my checking account: $ (see Terms and
--------
Conditions) on or about the 5th or 20th of each month.
An account must be previously established or a check in the amount of at least
must accompany application to be used to purchase shares of the
- ---------
following Portfolio:
-------------------------------------------------------
Through the financial institution as follows:
- ------------------------------------------------------------------------------
Name of Financial Institution Branch Name and Number
- ------------------------------------------------------------------------------
Address of Financial Institution
Please attach an unsigned and voided check from the checking account you wish to
use for the Systematic Purchase Plan. Write ''Void'' across the face of the
check. Your check must be imprinted with all name(s) on your bank account and
carry your financial institution's magnetic ink coding numbers across the
bottom.
Signature Signature Date
- ------------------------------------------------------------------------------
(If your checking account is held by more than one person, all account holders
must sign this application.)
- ------------------------------------------------------------------------------
TELEPHONE REDEMPTIONS - By wire to: or By mail to registered owner's
address of record.
- ------------------------------------------------------------------------------
Bank Name and Your Bank ABA Routing Number
- ------------------------------------------------------------------------------
Bank Address - Street Name of Bank Account
- ------------------------------------------------------------------------------
City State Zip Your Bank Account Number
If you request Telephone Redemptions, you must obtain a Signature Guarantee
(below).
- ------------------------------------------------------------------------------
STEMATIC WITHDRAWAL PAYMENT
Beginning , 19 please send checks in
------------ ----
the amount of $ .
-----------------
($150 minimum)
Monthly Quarterly
----------- --------------
Please allow 30 days to start a program. Checks will be sent on the 26th day of
each month (the next business day if a holiday).
Payment to be made to registered owner's address of record.
Payment to be made to other than registered shareholders, identified at
right:
- ------------------------------------------------------------------------------
Bank or Payee's Name
- ------------------------------------------------------------------------------
Account Number
- ------------------------------------------------------------------------------
Name
- ------------------------------------------------------------------------------
Street Address
- ------------------------------------------------------------------------------
City State Zip
If you request payments to be made other than to the registered shareholder, you
must obtain a Signature Guarantee (below).
- ------------------------------------------------------------------------------
SIGNATURE (This section must be filled out by new accounts.)
By the execution of this Application the investor represents and warrants that
he has full right, power and authority, and, if a natural person is of legal age
in his state of residence, to make the investment applied for pursuant to this
Application, and the person or persons, if any, signing on behalf of the
investor represent and warrant that they are duly authorized to sign this
Application, and to purchase or redeem shares of Principal Preservation on
behalf of the investor. The investor hereby affirms that he has received a
current Prospectus.
''Under penalties of perjury, I certify (1) that the number shown on this form
is my correct taxpayer identification number and (2) that I am not subject to
backup withholding either because I have not been notified that I am subject to
backup withholding as a result of a failure to report all interest or dividends,
or the Internal Revenue Service has notified me that I am no longer subject to
backup withholding.''
ONLY INDIVIDUALS FILL IN
X X
-----------------------------------------------------------------------------
Signature of Applicant Date Signature of Joint Registrant, if any
- ------------------------------------------------------------------------------
Social Security Number Print Name of Taxpayer Whose Number Appears at Left
OR
ONLY CORPORATIONS, PARTNERSHIPS, TRUSTS INSTITUTIONS FILL IN
- ------------------------------------------------------------------------------
Firm Name
- ------------------------------------------------------------------------------
Date Signature and Title
- ------------------------------------------------------------------------------
Taxpayer Identification Number Date Signature and Title
- ------------------------------------------------------------------------------
SIGNATURE GUARANTEE (Required for Telephone Redemptions or Systematic Withdrawal
Payment options, if chosen above.) Signature(s) Guaranteed by commercial bank,
trust company, savings and loan association, credit union or member firm of a
national stock exchange.
By:
- ------------------------------------------------------------------------------
(Authorized Signature) Name of bank, association or firm
- ------------------------------------------------------------------------------
DEALER IDENTIFICATION
B.C. Ziegler and Company (the ''Distributor''), acts as agent in all purchases
by the investor of Principal Preservation shares. The Distributor and the
authorized dealer, if any, named below each authorizes and appoints B.C. Ziegler
and Company to act as its agent to execute the purchase of Principal
Preservation shares by the investor, whether the payment is received from the
Distributor, the authorized dealer or directly from the investor, and to confirm
such purchases on their behalf.
- ------------------------------------------------------------------------------
Dealer's Name
- ------------------------------------------------------------------------------
Home Office Address City State Zip Code
By
- ------------------------------------------------------------------------------
Authorized Signature of Dealer Address of Office Servicing Account
- ------------------------------------------------------------------------------
Branch No. Salesman's No. Salesman's Last Name Dealer No.
APPENDIX A
COMPOSITION OF THE S&P 100 INDEX*<F1>
(As of March 31, 1997)
PERCENT OF
TOTAL
COMPANY NAME COMPOSITION
- ------------ -----------
Allegheny Teledyne Inc. 0.20
Aluminum Company of America 0.48
American Electric Power Company, Inc. 0.32
American Express Company 1.16
American General Corporation 0.34
American International Group, Inc. 2.25
American Telephone and Telegraph Company 2.30
Ameritech Corporation 1.38
Amoco Corporation 1.76
AMP Incorporated 0.31
Atlantic Richfield Company 0.89
Avon Products, Inc. 0.28
Baker-Hughes Incorporated 0.23
BankAmerica Corporation 1.48
Baxter International Inc. 0.48
Bell Atlantic Corporation 1.09
Bethlehem Steel Corporation 0.04
Black & Decker Corporation 0.12
The Boeing Company 1.44
Boise Cascade Corporation 0.06
Bristol-Meyers Squibb Company 2.41
Brunswick Corporation 0.11
Burlington Northern Santa Fe Corporation 0.46
Ceridian Corporation 0.10
Champion International 0.18
Chrysler Corporation 0.86
CIGNA Corporation 0.45
Citicorp 2.05
Cisco Systems 1.29
Coastal Corporation 0.21
Coca-Cola Company 5.68
Colgate-Palmolive Company 0.60
Columbia/HCA Healthcare Corp. 0.92
Computer Sciences Corporation 0.19
Delta Air Lines, Inc. 0.25
Digital Equipment Corporation 0.18
Walt Disney Company 2.01
Dow Chemical Company 0.79
DuPont (E.I.) de Nemours and Company 2.44
Eastman Kodak Company 1.03
Entergy Corporation 0.23
Exxon Corporation 5.46
Federal Express Corporation 0.24
First Chicago NBD Corporation 0.70
Fluor Corporation 0.18
Ford Motor Company 1.52
General Dynamics Corporation 0.17
General Electric Company 6.67
General Motors Corporation 1.71
Great Western Financial Corporation 0.23
Halliburton Company 0.35
Harrah's Entertainment, Inc. 0.07
Harris Corporation 0.12
Heinz (H.J.) Company 0.59
Hewlett-Packard Company 2.21
Homestake Mining Company 0.09
Honeywell Inc. 0.35
Intel Corporation 4.66
International Business Machines Corporation 2.90
International Flavors & Fragrances Inc. 0.20
International Paper Company 0.48
ITT Hartford Group, Inc. 0.35
Johnson & Johnson 2.88
Kmart Corporation 0.24
Limited (The), Inc. 0.20
Mallinckrodt Group Inc. 0.12
May Department Stores Company 0.46
McDonald's Corporation 1.35
MCI Communications Corporation 1.00
Merck & Co., Inc. 4.15
Merrill Lynch & Co., Inc. 0.58
Minnesota Mining & Manufacturing Company 1.44
Mobil Corporation 2.10
Monsanto Company 0.92
National Semiconductor Corporation 0.16
Norfolk Southern Corporation 0.44
Northern Telecom Limited 0.69
NYNEX Corporation 0.82
Occidental Petroleum Corporation 0.33
Oracle Corp. 1.06
PepsiCo, Inc. 2.07
Pharmacia &Upjohn, Inc. 0.76
Polaroid Corporation 0.07
Ralston Purina Group 0.34
Raytheon Company 0.43
Rockwell International Corporation 0.58
Schlumberger Limited 1.08
Sears, Roebuck & Co. 0.80
Southern Company 0.58
Tandy Corporation 0.12
Tektronix, Inc. 0.07
Texas Instruments Inc. 0.58
Toys "R" Us, Inc. 0.33
Unicom Corporation 0.17
Unisys Corporation 0.05
United Technologies Corporation 0.73
Wal-Mart Stores, Inc. 2.61
Weyerhaeuser Company 0.36
Williams Companies, Inc. 0.29
Xerox Corporation 0.75
*<F1>"Standard & Poor's", "Standard & Poor's 100", "S&P", "S&P 100" and "100"
are registered trademarks of Standard & Poor's, a division of The McGraw-Hill
Companies, Inc.
APPENDIX B
COMPOSITION OF THE PACIFIC EXCHANGE, INC. - TECHNOLOGY STOCK INDEX
(AS OF MARCH 31, 1997)
TICKER SYMBOL COMPANY NAME
- ------------- ------------
COMS 3Com Corp
ACN Acuson Corp
ADPT Adaptec Inc
ADCT ADC Telecom Inc
ADBE Adobe Systems Inc
AMD Advanced Micro Devices
AMH Amdahl Corp
AOL America Online
AMGN Amgen Inc
AMP AMP Inc
ADI Analog Devices
AAPL Apple Computer Inc
APM Applied Magnetic
AMAT Applied Material
ASTA AST Research Inc
ADSK Autodesk Inc
AUD Automatic Data
BAY Bay Networks Inc
BGEN Biogen Inc
BMET Biomet Inc
BMCS BMC Software Inc
BORL Borland International
BSX Boston Scientific
CS Cabletron Systems
CDN Cadence Design
CNTO Centocor Inc
CEN Ceridian Corp
CHPS Chips & Tech Inc
CHIR Chiron Corp
CSCO Cisco Systems
COHR Coherent Inc
CPQ Compaq Computer
CA Computer Associates
CSC Computer Science
CQ Comsat Corp
CU CUC International Inc
CY Cypress Semiconductor
DGN Data General
DELL Dell Computer
DEC Digital Equipment
DIGI DSC Communications Corp
EDS Electronic Data Systems
EMC EMC Corp
ESCC Evans & Suther
EXBT Exabyte Corp
GATE Gateway 2000 Inc
GSX General Signal Corp
GNE Genentech Inc
GENZ Genzyme Corp
HRS Harris Corp
HWP Hewlett-Packard
HON Honeywell Inc
IMNX Immunex Corp
IFMX Informix Corp
INTC Intel Corp
INGR Intergraph Corp
IBM International Business Machines
KLAC KLA Instruments
KMAG Komag, Inc
KLIC Kulicke & Soffa
MDT Medtronic Inc
MENT Mentor Graphics
MU Micron Technology
MSFT Microsoft Corp
MIL Millipore Corp
MOT Motorola Inc
NSM National Semiconductor
NN Newbridge Network
NOVL Novell Inc
NVLS Novellus Systems
OCTL Octel Communications Corp
ORCL Oracle Corp
PKN Perkin-Elmer
AQM QMS Inc
QNTM Quantum Corp
SFA Scientific Atlanta
SEG Seagate Technology Inc
SRM Sensormatic Electronics Corp
SMED Shared Medical Systems
SGI Silicon Graphics
STJ St Jude Medical
SMSC Standard Microsystems
STK Storage Technology Corp
SRA Stratus Computer
SUNW Sun Microsystems
SYBS Sybase Inc
SYMC Symantec Corp
SBL Symbol Tech Inc
SSAX System Software
TDM Tandem Computers
TEK Tektronix Inc
TLAB Tellabs Inc
TER Teradyne Inc
TXN Texas Instruments
THI Thermo Instrument Systems
UIS Unisys Corp
VAR Varian Associates Inc
XRX Xerox Corp
XLNX Xilinx Inc
XOMA Xoma Corp
STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 1, 1997
PRINCIPAL PRESERVATION PORTFOLIOS, INC.
215 North Main Street
West Bend, Wisconsin 53095
800-826-4600
Six portfolios (the "Portfolios") of the Principal Preservation Portfolios,
Inc. ("Principal Preservation") family of funds are described in this Statement
of Additional Information and the Prospectus to which it relates: the Tax-
Exempt Portfolio, Government Portfolio, S&P 100 Plus Portfolio, Divided
Achievers Portfolio, Select Value Portfolio, and PSE Tech 100 Index Portfolio.
Each Portfolio has distinct investment objectives and policies, and there can
be no assurance that these investment objectives will be achieved. Each
shareholder's interest is limited to the particular Portfolio in which their
shares are owned.
Statement of Additional Information
Shares may be purchased, and a prospectus may be obtained, directly from the
Distributor, 215 North Main Street, West Bend, Wisconsin 53095, telephone 800-
826-4600, or from Selected Dealers (see the Prospectus dated May 1, 1997 for
more complete information, including an account application.) This Statement of
Additional Information is not a prospectus, and should be read in conjunction
with the Prospectus. Capitalized terms not otherwise defined in this Statement
Of Additional Information have the meanings ascribed thereto in the Prospectus.
TABLE OF CONTENTS
STATEMENT OF ADDITIONAL INFORMATION 1
INVESTMENT PROGRAM 2
INVESTMENT RESTRICTIONS 18
INDUSTRY CONCENTRATION FACTORS 25
PERFORMANCE INFORMATION 31
DETERMINATION OF NET ASSET VALUE PER SHARE 37
PURCHASE OF SHARES 37
TAX STATUS 39
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES 40
PORTFOLIO TRANSACTIONS AND BROKERAGE 40
DISTRIBUTION EXPENSES 41
CUSTODIAN 45
COUNSEL AND INDEPENDENT PUBLIC ACCOUNTANTS 45
EXPERTS 45
PORTFOLIO RATINGS 45
DESCRIPTION OF RATINGS OF CERTAIN SECURITIES 46
FINANCIAL STATEMENTS 53
INVESTMENT PROGRAM
The Prospectus describes the investment objectives and policies of each
Portfolio. Certain instruments and techniques discussed in the Prospectus are
described in greater detail below.
Information Regarding Tax-Exempt Investments
- --------------------------------------------
Before investing in a particular Portfolio, an investor may wish to determine
which investment -- tax-free or taxable -- will provide a higher after-tax
return. To make such a comparison, the yields should be viewed on a comparable
basis. The table below illustrates, at the tax brackets provided in the
Internal Revenue Code of 1986, as amended, the yield an investor would have to
obtain from taxable investments to equal tax-free yields ranging from 6% to 9%.
An investor can determine from the following table the taxable return necessary
to match the yield from a tax-free investment by locating the tax bracket
applicable to the investor, and then reading across to the yield column which is
closest to the yield applicable to the investor's investment. This presentation
illustrates current tax rates, and will be modified to reflect any changes in
such tax rates.
TAX-FREE V. TAXABLE INCOME
Assumed Tax-Free Yields
Taxable Income 6.00% 6.50% 7.00% 7.50% 8.00%
- --------------------- -------------------------------------
Federal
Single Joint Tax
Return Return Rate Equivalent Taxable Yields*<F28>
- ------------------------------------------------------------------------------
Up to $22,100 Up to $38,000 15.00% 7.06% 7.65% 8.24% 8.82% 9.41%
$22,100-55,100 $38,000-91,850 28.00% 8.33% 9.03% 9.72% 10.42% 11.11%
$55,100-115,000 $91,850-140,000 1.00% 8.70% 9.42% 10.14% 10.87% 11.59%
$115,000-250,000 $140,000-250,000 36.00% 9.38% 10.16 10.94% 11.72% 12.50%
over $250,000 over $250,000 39.60% 9.93% 10.76 11.59% 12.42% 13.25%
*<F28>The Equivalent taxable yields are calculated based on the maximum
marginal tax rate at each tax bracket. These rates and brackets are
subject to change. The table is based on tax rates in effect as of
March 31, 1997. You should consult your tax advisor regarding more
recent tax legislation and how tax laws affect your personal financial
circumstances.
The Tax-Exempt Portfolio seeks to attain its objective by investing primarily
in municipal securities, such as general obligation, revenue and industrial
development bonds, rated at the time of purchase in an "A" category or higher by
Moody's Investors Service, Inc., Standard & Poor's Corporation or by Fitch
Investors Service, Inc. This Portfolio may also invest in certain temporary
short-term investments, money market fund investments, U.S. Government
Securities, or securities collateralized by U.S. Government Securities. A
description of the ratings is included in this Statement of Additional
Information under the caption "Description of Ratings of Certain Fixed Income
Securities."
For illustrative purposes, the Tax-Exempt Portfolio may include in its
supplemental sales literature from time to time a Bond Buyer Index line graph
which shows the yield obtained on twenty (20) long-term municipal bonds from
December 1980 through December 1996. The presentation consists of a line graph
with yield (presented as a percentage) reflected along a vertical axis and the
relevant time of inquiry reflected along a horizontal axis. This line graph is
for illustrative purposes only and is not meant to be indicative of any
Portfolio's total return. Information as to actual yield and total return is
set forth under "Performance Information."
The Tax-Exempt Portfolio also sometimes presents in supplemental sales
literature a line graph that displays the difference in the growth in $10,000
placed in a tax-free investment as compared to the growth of the same amount
placed in a taxable investment. This graph assumes $10,000 of principal is
invested at a nominal annual rate of 6% compounded monthly (6.17% equivalent
effective yield). The value of the investment is shown on the vertical axis
with the time period (0-20 years) over which the investment has been held being
reflected along the horizontal axis. This graph is for illustrative purposes
only and is not meant to be indicative of the Tax-Exempt Portfolio's actual
return. An investor is assumed to pay annual federal income tax at a 33% rate
on the total amount of interest credited to the account. The presentation
illustrates current tax rates, and will be modified to reflect any changes in
such tax rates.
Municipal Securities
- --------------------
Municipal securities include obligations issued by or on behalf of states,
territories, and possessions of the United States and the District of Columbia,
and their political subdivisions, agencies, and instrumentalities, the interest
of which is exempt from Federal income tax. The tax-exempt status of the
municipal security is determined under Federal tax laws and is usually opined
upon by the issuer's bond counsel at the time of the issuance of the security.
The two principal classifications of municipal securities are notes and
bonds. Municipal notes are generally used to provide short-term working capital
needs and typically have maturities of one year or less. Municipal notes
include Project Notes, Tax Anticipation Notes, Bond Anticipation Notes and Tax-
Exempt Commercial Paper, and other similar short-term obligations.
Municipal bonds are issued to obtain funds for various public purposes,
including the construction of a wide range of public facilities such as
airports, bridges, highways, housing, hospitals, mass transportation, schools,
streets, water and sewer works, and gas and electric utilities. Municipal bonds
may also be issued in connection with the refunding of similar outstanding
obligations, or obtaining funds to lend to other public institutions, or for
general operating expenses. Industrial development bonds, which are considered
municipal bonds if the interest paid thereon is exempt from Federal income tax,
are issued by or on behalf of public authorities to obtain funds to provide
various privately- operated facilities for business and manufacturing, housing,
sports, pollution control, and for airport, mass transit, port, and parking
facilities.
The two principal classifications of municipal bonds are "general obligation"
and "revenue." General obligation bonds are secured by the issuer's pledge of
its full faith, credit, and taxing power for the payment of principal and
interest. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases from the proceeds
of a special tax or other specific revenue source. Although industrial
development bonds are issued by municipal authorities, they are generally
secured by specific facilities financed by the proceeds and, payable only from
the revenues derived from the industrial user of those facilities. Payment of
principal and interest on industrial revenue bonds generally depends on the
ability of such user to meet its financial obligations, or, in case of default,
upon the amount realizable upon the disposition of property pledged as security
for payment of the user's obligation.
Obligations of issuers of municipal securities are subject to the provisions
of bankruptcy, insolvency, and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Reform Act of 1978. In addition, the
obligations of such issuers may become subject to laws enacted in the future by
Congress, state legislatures, or referenda extending the time for payment of
principal and/or interest, or imposing other constraints upon enforcement of
such obligations or upon the issuer's ability to generate tax revenues. There
is also the possibility that, as a result of litigation or other conditions, the
authority or ability of an issuer to pay, when due, the principal of and
interest on its municipal securities may be materially affected.
Government Securities
- ---------------------
Direct obligations issued by the U.S. Treasury include bills, notes and bonds
which differ from each other only as to interest rate, maturity and time of
issuance. Treasury Bills have a maturity of one year or less, Treasury Notes
have maturities of one to ten years and Treasury Bonds generally have maturities
of greater than ten years.
In addition to direct obligations issued by the U.S. Treasury, the Portfolios
may also invest in obligations issued by agencies or instrumentalities of the
U.S. Government; provided that with respect to the Government Portfolio, such
obligations are backed by the unconditional full faith and credit of the U.S.
government, its agencies or instrumentalities.
Options
- -------
To the extent consistent with their investment objectives, the S&P 100 Plus
and PSE Tech 100 Index Portfolios will employ options strategies designed to
hedge protectively against any anticipated adverse movements in the market
values of its portfolio securities or securities it intends to purchase and to
enhance return.
Listed options are traded on each of the stocks in the S&P 100 Index, and the
S&P 100 Plus Portfolio may write (sell) covered call options and put options,
and may purchase call options and put options on individual stocks as well as on
stock indices (including the S&P 500 Index and S&P 100 Index) for the purposes
and subject to the limitations stated herein and as outlined in "Investment
Program -- S&P 100 Plus Portfolio" in the Prospectus. The S&P 100 Plus
Portfolio may seek to enhance its return by writing covered call options for
purchasing put options with respect to some or all of the individual stocks held
in its portfolio. Through the purchase of call and put options with respect to
individual stocks, the Portfolio may at times protectively hedge against an
increase in the price of securities which the Portfolio plans to purchase or
against a decline in the value of securities owned by the Portfolio. Whenever
the Portfolio does not own securities underlying an open option position
sufficient to cover the position, the Portfolio will maintain in a segregated
account with its depository cash or cash equivalents sufficient to cover the
market value of the open position. The S&P 100 Plus Portfolio may also engage
in option transactions on securities indices as a strategy to hedge against
anticipated declines in the S&P 100 Index (and thereby to hedge against a
similar decline in its portfolio) and to enhance the Portfolio's return through
premium income.
The PSE Tech 100 Index Portfolio may write (sell) covered call options and
put options, and may purchase call options and put options on stock indices for
the purposes and subject to the limitations outlined in "Investment Program -
PSE Tech 100 Index Portfolio" in the Prospectus. See generally "Investment
Program -- Options and Futures Activities" in the Prospectus.
Options on individual stocks may also be utilized by the Dividend Achievers
Portfolio to enhance income and for hedging purposes, but the Advisor has no
plans to do so at this time.
A call option on a security gives the purchaser of the option the right to
buy, and the writer (seller) of the option the obligation to sell, the
underlying security at the exercise price at any time during the option period.
The premium paid to the writer is the consideration for undertaking the
obligations under the option contract. A call option written (sold) by a
Portfolio exposes the Portfolio during the term of the option to possible loss
of an opportunity to realize appreciation in the market price of the related
portfolio security, or to possible continued holding of a security which might
otherwise have been sold to protect against depreciation in the market price of
the security.
A call option is considered to be covered if: (i) the writer (seller)
thereof owns the security underlying the call or has an absolute and immediate
right to acquire that security without payment of additional cash consideration
(or for additional cash consideration held in a segregated account by its
custodian or depository) upon conversion or exchange of other securities; (ii)
the writer holds on a unit-for-unit basis a call on the same security as the
call written, and the exercise price of the call purchased is equal to or less
than the exercise price of the call written, or greater than the exercise price
of the call written if the difference is maintained by the Portfolio in cash or
cash equivalents in a segregated account with its custodian or depository; or
(iii) the writer maintains in a segregated account with its custodian or
depository cash or cash equivalents sufficient to cover the market value of the
open position.
An option on an index is a contract that gives the holder of the option, in
return for payment of a premium, the right to demand from the seller (call)
delivery of cash in an amount equal to the value of the index at a specified
exercise price at any time during the term of the option. Upon exercise, the
writer of an option on an index is obligated to pay the difference between the
cash value of the index and the exercise price multiplied by the specified
multiplier for the index option. A call option on an index is considered to be
covered if the writer (seller) maintains with its custodian or depository cash
or cash equivalents equal to the contract value. A call option is also covered
if the writer holds a call on the same index as the call written where the
exercise price of the call purchased is equal to or less than the exercise price
of the call written.
A put option on a security gives the purchaser of the option the right to
sell, and the writer (seller) of the option the obligation to buy, the
underlying security at the exercise price at any time during the option period.
A put option on a securities index gives the purchaser of the option the right
to sell, and the writer (seller) of the option the obligation buy, the cash
value of the index at any time during the option.
A put option on an index is covered if a writer holds a put on the same index
as the put written where the exercise price of the put held is (i) equal to or
greater than the exercise price of the put written, or (ii) less than the
exercise price of the put written provided the difference is maintained by the
writer in cash or cash equivalents in a segregated account with its custodian or
depository.
A Portfolio will only purchase put options on individual securities held by
the Portfolio, or, in the case of the S&P 100 Plus Portfolio and the PSE Tech
100 Index Portfolio, on securities indices which, in the opinion of the Advisor,
have investment characteristics similar to those of securities in the Portfolio
or an index on the securities.
Whenever a Portfolio does not own securities underlying an open option
position sufficient to cover the position, or whenever a Portfolio has written
(sold) a put, the Portfolio will maintain in a segregated account with its
Depository cash or cash equivalents sufficient to cover the exercise price or,
with respect to index options, the market value of the open position. The
purchase of a put option may be intended to protect the Portfolio from the risk
of a decline in the value of a security below the exercise price of the option.
The Portfolio may ultimately sell the option in a closing sale transaction,
exercise it or permit it to expire.
Futures
- -------
The S&P 100 Plus Portfolio and PSE Tech 100 Index Portfolio may purchase and
sell exchange-traded index futures contracts on the S&P 500 Index (and on the
PSE Technology Index, in the case of the PSE Tech 100 Index Portfolio) for the
purposes and strategies described in the Prospectus. A futures contract on an
index is an agreement by which one party agrees to accept delivery of, and the
other party agrees to make delivery of, an amount of cash equal to the
difference between the value of the underlying index at the close of the last
trading day of the futures contract and the price at which the contract
originally was written. Although the value of an index might be a function of
the value of certain specified securities, no physical delivery of those
securities is made.
Futures contracts covering the S&P 500 Index and PSE Technology Index
presently are traded on the Chicago Mercantile Exchange and the New York Futures
Exchange, respectively. The S&P 100 Plus Portfolio and PSE Tech 100 Index
Portfolio also may engage in transactions involving futures contracts on other
indices presently traded or in the future created and traded on national stock
exchanges if, in the opinion of the Board of Directors of Principal
Preservation, such futures contracts are appropriate instruments to help the
Advisor achieve the respective Portfolio's objective.
Each of the S&P 100 Plus and PSE Tech 100 Index Portfolios generally will
limit its use of futures contracts to hedging transactions. For example, the
S&P 100 Plus Portfolio or PSE Tech 100 Index Portfolio might use futures
contracts to equitize uncommitted cash or to hedge against anticipated declines
in the cash value of the S&P 100 Index or the PSE Technology Index, as the case
may be. Each such Portfolio also may sell futures contracts to hedge against
anticipated declines in common stocks presently owned and may purchase futures
contracts to hedge against anticipated increases in common stocks the Portfolio
intends to purchase. The success of any hedging technique depends on the
ability of the Advisor correctly to predict changes in the level and direction
of movement in the underlying index. Should these predictions prove incorrect,
each such Portfolio's return might have been better had hedging not been
attempted; however, in the absence of the ability to hedge, the Advisor might
have taken portfolio actions in anticipation of the same market movements with
similar investment results but, presumably, at greater transaction costs. The
Portfolios will only enter into futures contracts which are standardized and
traded on a U.S. exchange, board of trade, or similar entity, or quoted on an
automated quotation system.
When a purchase or sale of a futures contract is made by a Portfolio, the
Portfolio is required to deposit with the Depository (or broker, if legally
permitted) a specified amount of cash or U.S. Government Securities ("initial
margin"). The margin required for a futures contract is set by the exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Portfolio upon
termination of the contract, assuming all contractural obligations have been
satisfied. Each of the S&P 100 Plus Portfolio and PSE Tech 100 Index Portfolio
expects to earn interest income on its initial margin deposits. A futures
contract held by the Portfolio is valued daily at the official settlement price
of the exchange on which it is traded. Each day the Portfolio pays or receives
cash, called "variation margin," equal to the daily change in value of the
futures contract. This process is known as "marking to market." Variation
margin does not represent a borrowing or loan by the Portfolio, but is instead a
settlement between the Portfolio and the broker of the amount one would owe the
other if the futures contract expired. In computing daily net asset value, each
of the S&P 100 Plus Portfolio and PSE Tech 100 Index Portfolio will mark to
market all of its open futures positions.
While a Portfolio maintains an open futures position, the Portfolio must
maintain with the Depository, in a segregated account, assets with a market
value sufficient to cover the Portfolio's exposure on the position (less the
amount of the margin deposit associated with the position). A Portfolio's
exposure on a futures contract is equal to the amount paid for the contract by
the Portfolio.
Index futures contracts in which the S&P 100 Plus Portfolio or PSE Tech 100
Index Portfolio will invest are closed out prior to delivery by offsetting
purchases or sales of matching futures contracts (same exchange, underlying
index, and delivery month), or in cash. If an offsetting purchase price is less
than the original sale price, the Portfolio would realize a capital gain, or if
it is more, the Portfolio would realize a capital loss. Conversely, if an
offsetting sale price is more than the original purchase price, the Portfolio
would realize a capital gain, or if it is less, the Portfolio would realize a
capital loss. The transaction costs must also be included in these
calculations.
There are several risks associated with the use of futures contracts in the
manner intended by the S&P 100 Plus Portfolio and PSE Tech 100 Index Portfolio.
A purchase or sale of a futures contract may result in losses in excess of the
amount invested in the futures contract. There can be no guarantee that there
will be a correlation between the price movements in the underlying index and in
the portfolio securities being hedged or the index being simulated, as the case
may be. In addition, there are significant differences between the securities
and futures markets that could result in an imperfect correlation between the
markets, causing a given strategy not to achieve its objective. The degree of
imperfection of correlation depends on circumstances such as: variations in
speculative market demand for futures and differences between the financial
instruments being hedged or replicated and the instruments underlying the
standard contracts available for trading.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of the futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day,
and therefore does not limit potential losses because the limit may work to
prevent the liquidation of unfavorable positions. For example, futures prices
have occasionally moved to the daily limit for several consecutive trading days
with little or no trading, thereby preventing prompt liquidation of positions
and subjecting some holders of futures contracts to substantial losses. There
can be no assurance that a liquid market will exist at a time when a Portfolio
seeks to close out a futures position and the Portfolio would continue to be
required to meet margin requirements until the position is closed.
To minimize such risks, neither the S&P 100 Plus Portfolio nor the PSE Tech
100 Index Portfolio will enter into a futures contract if, immediately after
such transaction, the initial margin deposits for futures contracts held by the
Portfolio would exceed 5% of the Portfolio's total assets. Additionally, the
Portfolio may not maintain open short positions in futures contracts or call
options written on indices if, in the aggregate, the market value of all such
open positions exceeds the current value of the securities in the Portfolio's
investment portfolio, plus or minus unrealized gains and losses on the open
positions, adjusted for the historical relative volatility of the relationship
between the portfolio and the positions. For this purpose, to the extent a
Portfolio has written call options on specific securities in its investment
portfolio, the value of those securities will be deducted from the current
market value of the securities portfolio.
Taxation of Options and Futures
- -------------------------------
If a Portfolio exercises a call or put option it owns, the premium paid for
the option is added to the cost of the security purchased (call) or deducted
from the proceeds of the sale (put). For cash settlement options, the
difference between the cash received at exercise and the premium paid is a
capital gain or loss. If a call or put option written by a Portfolio is
exercised, the premium is included in the proceeds of the sale of the underlying
security (call) or reduces the cost of the security purchased (put). For cash
settlement options, the difference between the cash paid at exercise and the
premium received is a capital gain or loss. Entry into a closing purchase
transaction will result in capital gain or loss. If an option was "in the
money" at the time it was written and the security covering the option was held
for more than one year prior to the writing of the option, any loss realized as
a result of a closing purchase transaction will be long-term for federal tax
purposes. The holding period of the securities covering an "in the money"
option will not include the period of time the option was outstanding.
A futures contract held until delivery results in capital gain or loss equal
to the difference between the price at which the futures contract was entered
into and the settlement price on the earlier of the delivery notice date or the
expiration date. Should a Portfolio ever deliver securities under a futures
contract (which is not expected to occur), the Portfolio will realize a capital
gain or loss on those securities.
For federal income tax purposes, a Portfolio generally is required to
recognize as income for each taxable year its net unrealized gains and losses as
of the end of the year on options and futures positions ("year-end mark to
market"). Generally any gain or loss recognized with respect to such positions
(either by year-end mark to market or by actually closing of the positions) is
considered to be 60% long term and 40% short term, without regard to the holding
periods of the contracts. However, in the case of positions classified as part
of a "mixed straddle," the recognition of losses on certain positions (including
options and futures positions, the related securities positions and certain
successor positions thereto) may be deferred to a later taxable year. Sales of
futures contracts or writing of call options or buying put options which are
intended to hedge against a change in the value of securities held by a
Portfolio may affect the holding period of the hedged securities.
Each Portfolio distributes to shareholders annually any net capital gains
which have been recognized for federal income tax purposes (including year-end
mark to market gains) on options and futures transactions. Such distributions
are combined with distributions of capital gains realized on the Portfolio's
other investments and shareholders are advised of the nature of the payments.
S&P 100 Index and PSE Technology Index
- --------------------------------------
For illustrative purposes, the S&P 100 Plus Portfolio and the PSE Tech 100
Index Portfolio sometimes includes in their supplemental sales literature a line
graph showing the similarity of the price patterns of the S&P 100 and the S&P
500 stock indices (in the case of the S&P 100 Plus Portfolio), and the PSE
Technology Index (in the case of the PSE Tech 100 Index Portfolio), over the
past decade. The presentation displays superimposed line graphs of annual
prices of the S&P 100 and the S&P 500 stock indices or the PSE Technology Index,
as the case may be, over approximately a 10-year period, with prices reflected
on the vertical axis and years reflected on the horizontal axis.
The S&P 100 Index is based upon stocks which are all listed on the NYSE and
all have equity options trading on the CBOE. The S&P 100 Index was also the
first stock index listed for options trading. The S&P 100 Index was designed to
track closely the S&P 500 Index, which is designed to be representative of the
stock market as a whole. The S&P 100 stocks are all included in the S&P 500
Index. The graph indicates that there have been some modest discrepancies
between the stock prices in the S&P 100 Index and the S&P 500 Index in recent
years, as compared to the very high price correlation observed between those
indices in earlier years. Historical prices are not necessarily indicative of
the future prices of either of these indices, or of the performance of the S&P
100 Plus Portfolio or the ability of that Portfolio to match the performance of
either of those indices or of the broad stock market generally.
The S&P 100 Plus Portfolio also sometimes presents in its supplemental sales
materials charts that compare the growth in value of a share of the S&P 100 Plus
Portfolio from commencement of its operations through December 31, 1996 to the
growth of the S&P 100 Index over the same period. One chart presents the
comparison on a total yield basis, and another on a gross dollar basis. Each
presentation assumes the reinvestment of all dividends.
Historical prices are not necessarily indicative of the future prices of an
index, or of the performance of a Portfolio or the ability of a Portfolio to
match the performance of an index or of the stock market generally.
The S&P 100 Plus Portfolio is not sponsored, endorsed, sold or promoted by
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P").
S&P makes no representation or warranty, implied or expressed, to the
purchasers of the Portfolio or any member of the public regarding the
advisability of investing in index funds generally, or in this Portfolio
particularly, or the ability of the S&P Index to track general stock market
performance. S&P's only relationship to this Portfolio is the licensing of
the S&P trademarks and S&P 100 which is determined, composed and calculated
by S&P without regard to this Portfolio. "Standard & Poor's", "Standard &
Poor's 100", "S&P", "S&P 100" and "100" in connection with the S&P 100 are
trademarks of S&P.
The PSE Tech 100 Index Portfolio is not sponsored, endorsed, sold or promoted
by the Pacific Stock Exchange Incorporated. The Pacific Stock Exchange
Incorporated makes no representation or warranty, implied or expressed to the
purchasers of the PSE Tech 100 Index Portfolio or any member of the public
regarding the advisability of investing in index funds generally, or in that
Portfolio particularly, or the ability of the PSE Technology Index to track
stock market performance.
Repurchase Agreements
- ---------------------
The Select Value Portfolio may from time to time enter into repurchase
agreements. Repurchase agreements involve the sale of securities to the Select
Value Portfolio with the concurrent agreement of the seller to repurchase the
securities at the same price plus an amount equal to an agreed upon interest
rate within a specified time, usually less than one week, but on occasion for a
longer period. The Portfolio may enter into repurchase agreements with broker-
dealers and with banks. At the time the Portfolio enters into a repurchase
agreement, the value of the underlying security, including accrued interest,
will be equal to or exceed the value of the repurchase agreement and, in the
case of repurchase agreements exceeding one day, the seller will agree that the
value of the underlying security, including accrued interest, will at all times
be equal to or exceed the value of the repurchase agreement. The Portfolio will
require continual maintenance of cash or cash equivalents held by its depository
in an amount equal to, or in excess of, the market value of the securities which
are subject to the agreement.
In the event the seller of the repurchase agreement becomes the subject of a
bankruptcy or insolvency proceeding, or in the event of the failure of the
seller to repurchase the underlying security as agreed, the Select Value
Portfolio could experience losses that include: (1) possible decline in the
value of the underlying security during the period that the Portfolio seeks to
enforce its rights with respect thereto, and possible delay in the enforcement
of such rights; (2) possible loss of all or a part of the income or proceeds of
the repurchase; (3) additional expenses to the Portfolio in connection with
enforcing those rights; and (4) possible delay in the disposition of the
underlying security pending court action or possible loss of rights in such
securities. The Advisors intend to cause the Select Value Portfolio to invest
in repurchase agreements only when they determine that the Portfolio should
invest in short-term money market instruments and that the rates available on
repurchase agreements are favorable as compared to the rates available on other
short-term money market instruments or money market mutual funds. The Advisors
do not currently intend to invest the assets of the Select Value Portfolio in
repurchase agreements if, after doing so, more than 5% of the Portfolio's net
assets would be invested in repurchase agreements.
When-Issued and Delayed Delivery Transactions
- ---------------------------------------------
The Tax-Exempt Portfolio and the Government Portfolio may purchase or sell
securities in when-issued or delayed delivery transactions. In such
transactions, instruments are bought or sold with payment and delivery taking
place in the future in order to secure what is considered to be an advantageous
yield or price to the purchasing Portfolio at the time of entering into the
transactions. The payment obligations and the interest rate are fixed at the
time the buyer enters into the commitment, although no interest accrues to the
purchaser prior to settlement of the transaction. Consistent with the
requirements of the 1940 Act, securities purchased on a when-issued basis are
recorded as an asset (with the purchase price being recorded as a liability) and
are subject to changes in value based upon changes in the general level of
interest rates. At the time of delivery of the security, the value may be more
or less than the transaction price. At the time a purchasing Portfolio enters
into a binding obligation to purchase securities on a when-issued basis, liquid
assets of the Portfolio having a value at least as great as the purchase price
of the securities to be purchased are identified on the books of the Portfolio
and held by the Portfolio's depository throughout the period of the obligation.
The use of these investment strategies may increase net asset value
fluctuations.
The purchasing Portfolio will only make commitments to purchase securities on
a when-issued basis with the intention of actually acquiring the securities, and
not for the purpose of investment leverage, but the Portfolio reserves the right
to sell the securities before the settlement date if it is deemed advisable.
Any gains from such sales will be subject to federal income tax to the extent
not offset by losses on other transactions. The above Portfolios do not
currently intend to purchase securities in when-issued transactions if, after
such purchase, more than 5% of the Portfolio's net assets would consist of when-
issued securities.
Short-Term Investments
- ----------------------
The Select Value Portfolio and PSE Tech 100 Index Portfolio may invest in any
of the following securities and instruments in management of cash receipts, for
liquidity for anticipated redemptions, to meet cash flow needs to enable each
such Portfolio to take advantage of buying opportunities, during periods when
attractive investments are unavailable and for temporary defensive purposes.
BANK CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS. Each
such Portfolio may acquire certificates of deposit, bankers' acceptances and
time deposits. Certificates of deposit are negotiable certificates issued
against funds deposited in a commercial bank for a definite period of time and
earn a specified return. Bankers' acceptances are negotiable drafts or bills of
exchange normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by the Portfolio will
be dollar-denominated obligations of domestic banks or financial institutions
which at the time of purchase have capital, surplus and undivided profits in
excess of $100 million, based on latest published reports, or less than $100
million if the principal amount of such bank obligations are fully insured by
the U.S. Government.
In addition to purchasing certificates of deposit and bankers' acceptances,
to the extent permitted under its investment objective and policies, each such
Portfolio may make interest-bearing time or other interest-bearing deposits in
commercial or savings banks. Time deposits are non-negotiable deposits
maintained at a banking institution for a specified period of time at a
specified interest rate.
SAVINGS ASSOCIATION OBLIGATIONS. Each such Portfolio may invest in
certificates of deposit (interest-bearing time deposits) issued by savings banks
or savings and loan associations that have capital and undivided profits in
excess of $100 million, based on latest published reports, or less than $100
million if the principal amount of such obligations is fully insured by the U.S.
Government.
COMMERCIAL PAPER, SHORT-TERM NOTES, VARIABLE RATE DEMAND NOTES, REPURCHASE
AGREEMENTS AND OTHER CORPORATE OBLIGATIONS. Each such Portfolio may invest a
portion of its assets in commercial paper and short-term notes, including
variable rate demand notes. Commercial paper consists of unsecured promissory
notes issued by corporations. Issues of commercial paper and short-term notes
will normally have maturities of less than nine months and fixed rates of
return, although such instruments may have maturities of up to one year.
Commercial paper and short-term notes will consist of issues rated at the
time of purchase "A-2" or higher by S&P, "Prime-1" or "Prime-2" by Moody's, or
similarly rated by another organization or, if unrated, will be determined by
the Advisors to be of comparable quality. These rating symbols are described
below under "Description of Ratings of Certain Securities."
Corporate obligations include bonds and notes issued by corporations to
finance longer-term credit needs than supported by commercial paper. While such
obligations generally have maturities of ten years or more, each such Portfolio
may purchase corporate obligations which have remaining maturities of one year
or less from the date of purchase and which are rated "AA" or higher by S&P or
"Aa" or higher by Moody's.
Each such Portfolio also may purchase corporate obligations known as variable
rate demand notes. Variable rate demand notes are unsecured instruments that
permit the indebtedness thereunder to vary and provide for periodic adjustments
in the interest rate. Although the notes are not normally traded and there may
be no secondary market in the notes, the Portfolio may demand payment of
principal and accrued interest at any time. The investment policies of the
Select Value Portfolio permit the purchase of variable rate demand notes only
if, at the time of purchase, the notes are rated in the two highest rating
categories by a Nationally Recognized Statistical Rating Organization, or, if
unrated, the issuer has unsecured debt securities outstanding of an equivalent
rating.
The Select Value Portfolio also may invest in repurchase agreements as short-
term instruments. See "Investment Program - Repurchase Agreements" above.
Investments in Other Investment Companies
- -----------------------------------------
An investment by a Portfolio in another investment company may cause the
investing Portfolio to incur duplicate and/or increased administration and
distribution expenses. Such investments are limited under the 1940 Act and by
applicable investment restrictions. See "Investment Restrictions" in this
Statement of Additional Information.
Foreign Investments
- --------------------
The Select Value Portfolio may invest up to 5% of its assets in securities of
foreign issuers that are not publicly traded in the United States, excluding
American Depository Receipts ("ADRs") in which the Portfolio also may invest.
ADRs are receipts issued by an American bank or trust company evidencing
ownership of underlying securities issued by a foreign issuer. ADRs may be
listed on a national securities exchange or may trade in the over-the-counter
market. ADR prices are denominated in United States dollars; the underlying
security may be denominated in a foreign currency, although the underlying
security may be subject to foreign government taxes which would reduce the yield
on such securities.
RISKS OF INVESTING IN FOREIGN SECURITIES. Investments in foreign securities
involve certain inherent risks, including the following:
Political and Economic Factors. Individual foreign economies of certain
countries may differ favorably or unfavorably from the United States' economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, diversification and balance of payments
position. Governments in certain foreign countries also continue to participate
to a significant degree, through ownership interest or regulation, in their
respective economies. Action by these governments could include restrictions on
foreign investment, nationalization, expropriation of goods or imposition of
taxes, and could have a significant effect on market prices of securities and
payment of interest. The economies of many foreign countries are heavily
dependent upon international trade and are accordingly affected by the trade
policies and economic conditions of their trading partners. Enactment by these
trading partners of protectionist trade legislation could have a significant
adverse effect upon the securities markets of such countries.
Currency Fluctuations. The Select Value Portfolio may invest in securities
denominated in foreign currencies. Accordingly, a change in the value of any
such currency against the U.S. dollar will result in a corresponding change in
the U.S. dollar value of the Portfolio's assets denominated in that foreign
currency. The value of the Portfolio's assets may also be affected
significantly by currency restrictions and exchange control regulations enacted
from time to time.
Market Characteristics. The Advisors expect that most foreign securities in
which the Select Value Portfolio may invest will be purchased in over-the-
counter markets or on exchanges located in the countries in which the principal
offices of the issuers of the various securities are located, if that is the
best available market. Foreign exchanges and markets may be more volatile than
those in the United States, and foreign securities may be less liquid than
domestic securities. Moreover, settlement practices for transactions in foreign
markets may differ from those in United States markets, and may include delays
beyond periods customary in the United States.
Legal and Regulatory Matters. Certain foreign countries may have less
supervision of securities markets, brokers and issuers of securities, and less
financial information available to issuers, than is available in the United
States.
Taxes. Dividends and interest payable on the Select Value Portfolio's
foreign portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to the Portfolio's
shareholders.
In considering whether to invest in the securities of a foreign company, the
Advisors consider such factors as the characteristics of the particular company,
differences between economic trends and the performance of securities markets
within the U.S. and those within other countries, and also factors relating to
the general economic, governmental and social conditions of the country or
countries where the company is located. The extent to which the Select Value
Portfolio will be invested in foreign companies and countries and ADRs will
fluctuate from time to time within the limitations imposed above, depending on
the Advisors' assessment of prevailing market, economic and other conditions.
Industry Concentration
- ----------------------
There may be periods of time during which the issuers represented in the PSE
Technology Index are concentrated in one or more industries. Notwithstanding
the occurrence of such industry concentrations, the PSE Tech 100 Index Portfolio
intends to maintain its investments so as to replicate that Index. As a result,
a relatively high percentage of the Portfolio's assets may be concentrated from
time to time in stocks of issuers within a single industry. Such issuers may be
subject to the same economic trends. Securities held by the Portfolio may
therefore be more susceptible to any single economic, political, or regulatory
occurrence than the portfolio securities of many other investment companies.
Portfolio Turnover
- ------------------
Principal Preservation has not established a limit to its portfolio turnover
rates, nor will it attempt to achieve or be limited to predetermined rates of
portfolio turnover. The portfolio turnover rates of the various Portfolios are
presented in the tables included in the section of the Portfolios' combined
Prospectus captioned "Financial Highlights."
INVESTMENT RESTRICTIONS
Restrictions for All Portfolios Other Than Select Value and PSE Tech 100
- ---------------------------------------------------------------------------
Index Portfolios
- ----------------
Each Portfolio, other than the Select Value Portfolio and PSE Tech 100 Index
Portfolio, has adopted the following fundamental investment restrictions and
policies which cannot be changed without a majority vote of shareholders of that
Portfolio, except that the restriction set forth in paragraph 16 is not
fundamental. Policies that are not "fundamental policies" are subject to change
by the Board of Directors without shareholder approval. A Portfolio may not:
(1) Invest more than 5% of the fair market value of its assets in
securities of any one issuer, except for U.S. Government Securities, which may
be purchased without limitation; and, with respect to the S&P 100 Plus
Portfolio, except as necessary to parallel the composition of the S&P 100 Stock
Index. For the purposes of this limitation, the Tax-Exempt Portfolio will
regard the entity which has the ultimate responsibility for payment of principal
and interest as the issuer.
(2) Purchase more than 10% of the outstanding voting securities of an
issuer, or invest in a company to get control or manage it.
(3) Invest 25% or more of its total assets, based on current market value
at the time of purchase, in securities of issuers in any single industry;
provided that there shall be no limitation on the purchase of U.S. Government
securities or on municipal securities.
(4) Invest more than 5% of its total assets in securities of companies
which, including any predecessors, have a record of less than three years of
continuous operations.
(5) Invest in securities of other investment companies, except by
purchases as a result of which not more than 10% of the Portfolio's total assets
(taken at current value) would be invested in such securities, or except as they
may be acquired as part of a merger, consolidation, reorganization or
acquisition of assets.
(6) Buy or sell real estate, real estate investment trusts, interests in
real estate limited partnerships, oil, gas and mineral interests, or oil, gas
and mineral leases, but this shall not prevent the Tax-Exempt Portfolio from
investing in municipal securities secured by real estate or interests therein.
(7) Borrow money or property except for temporary or emergency purposes.
If a Portfolio ever should borrow money it would only borrow from banks and in
an amount not exceeding 10% of the market value of its total assets (not
including the amount borrowed). The Portfolio will not pledge more than 15% of
its net assets to secure such borrowings. In the event a Portfolio's borrowing
exceeds 5% of the market value of its total assets the Portfolio will not invest
in any additional portfolio securities until its borrowings are reduced to below
5% of its total assets. For purposes of these restrictions, collateral
arrangements for premium and margin payments in connection with a Portfolio's
hedging activities are not to be deemed to be a pledge of assets.
(8) Make loans, except that a Portfolio may lend its portfolio securities,
subject to the conditions and limitations established in the Prospectus. See
"Investment Program -- Lending of Portfolio Securities" in the Prospectus. For
the purposes of this restriction, investments in publicly-traded debt securities
or debt securities of the type customarily purchased by institutional investors
and investments in repurchase agreements are not considered loans.
(9) Underwrite the securities of other issuers, except that the Tax-Exempt
Portfolio may bid, separately or as part of a group, for the purchase of
municipal securities directly from an issuer for its own portfolio in order to
take advantage of the lower purchase price available.
(10) Purchase securities with legal or contractual restrictions on resale.
(11) Issue senior securities.
(12) Purchase securities on margin, make short sales or write or purchase
put and call options, except for the purposes and subject to the conditions and
limitations described in the Prospectus. See "Investment Program" in the
Prospectus.
(13) Buy or sell commodities or commodity contracts.
(14) Invest in illiquid securities.
(15) Purchase warrants, valued at lower of cost or market, in excess of 5%
of the value of the Portfolio's net assets; included within the 5%, but not to
exceed 2% of the Portfolio's net assets, may be warrants which are not listed on
the New York or American Stock Exchange.
(16) Purchase or retain the securities of an issuer if those officers or
Directors of Principal Preservation or the Advisors (as defined under the
caption "Management of Principal Preservation -- The Investment Advisors" in
this Statement of Additional Information) who individually own beneficially more
than 0.5 of 1% of the outstanding securities of such issuer together own
beneficially more than 5% of such outstanding securities.
In addition to the investment restrictions above, the Tax-Exempt Portfolio
also is subject to a fundamental investment restriction that it will invest at
least 90% of its total assets in tax-exempt municipal securities, under normal
circumstances.
Each Portfolio also is subject to certain nonfundamental investment
restrictions described below. See "Investment Restrictions - Nonfundamental
Investment Restrictions Common to All Portfolios" below.
Restrictions for Select Value Portfolio
- ---------------------------------------
The Select Value Portfolio has adopted the following fundamental investment
restrictions:
(1) Invest more than 5% of the fair market value of its assets in
securities of any one issuer, except for U.S. Government securities or bank
certificates of deposit and bankers' acceptances, which may be purchased without
such limitation.
(2) Acquire securities of any one issuer which at the time of investment
(i) represent more than 10% of the outstanding voting securities of such issuer,
or (ii) have a value greater than 10% of the value of the outstanding voting
securities of such issuer.
(3)Invest 25% or more of its total assets, based on current market
value at the time of purchase, in securities of issuers in any single industry;
provided that there shall be no limitation on the purchase of securities issued
or guaranteed by the U.S. Government or its agencies or instrumentalities.
(4)Invest more than 5% of its total assets in securities of companies
which, including any predecessors, have a record of less than three years of
continuous operations.
(5)Purchase securities on margin or effect short sales of securities
(but the Portfolio may obtain such short-term credits as may be necessary for
the clearance of transactions and may make margin payments in connection with
transactions in options, futures and options on futures).
(6)Buy or sell real estate (although it may purchase securities
secured by real estate or interests therein, or securities issued by companies
which invest in real estate or interests therein, except that it may not invest
over 10% of the value of its assets in real estate investment trusts).
(7)Borrow money or property except for temporary or emergency
purposes and in connection with transactions in options, futures or futures
options. If the Portfolio ever should borrow money it would only borrow from
banks and in an amount not exceeding 10% of the market value of its total assets
(not including the amount borrowed). The Portfolio will not pledge more than
15% of its net assets to secure such borrowings. In the event the Portfolio's
borrowing exceeds 5% of the market value of its total assets, the Portfolio will
not invest in any portfolio securities until its borrowings are reduced to below
5% of its total assets.
(8) Make loans to other persons. For the purposes of this restriction,
investments in publicly-traded debt securities or debt securities of the type
customarily purchased by institutional investors and investments in repurchase
agreements are not considered loans.
(9) Underwrite the securities of other issuers except where it might
technically be deemed to be an underwriter for purposes of the Securities Act of
1933 upon the disposition of certain securities.
(10) Issue senior securities (other than the borrowings permitted above).
In accordance with the following non-fundamental policies, which may be
changed without shareholder approval, the Select Value Portfolio may not:
(A) Invest in companies for the purpose of exercising control or
management.
(B) Invest in securities of other open-end investment companies (other
than money market funds which are subject to restrictions described below. See
"Investment Restrictions - Non-fundamental Investment Restrictions Common to All
Portfolios").
(C) Mortgage, hypothecate, or in any manner transfer as security for any
indebtedness, any securities owned or held by the Portfolio, except that this
restriction does not apply to borrowings permitted above.
(D) Purchase or retain the securities of an issuer if those officers or
Directors of Principal Preservation or the Advisors (as defined under the
caption "Management of Principal Preservation --The Investment Advisors" in this
Statement of Additional Information) who individually own beneficially more than
0.5 of 1% of the outstanding securities of such issuer together own beneficially
more than 5% of such outstanding securities.
(E) Invest more than 5% of its assets (valued at the time of investment)
in restricted securities or securities which are not readily marketable,
including (i) securities subject to legal or contractual restrictions on resale;
(ii) securities for which market quotations are not readily available; or (iii)
repurchase agreements which expire in excess of seven days.
(F) Purchase warrants, valued at lower of cost or market, in excess of 5%
of the value of the Portfolio's net assets. Included within the 5%, but not to
exceed 2% of the Portfolio's net assets, may be warrants which are not listed on
the New York or American Stock Exchange, or on the National Market.
Warrants acquired by the Portfolio in units or attached to securities
shall be deemed to be without value for the purposes of this restriction.
(G) Buy or sell commodities or commodity contracts or invest in financial
futures, options or options on financial futures.
(H) Invest less than 65% of its total assets in common stocks.
(I) Invest over 5% of its total assets in repurchase agreements.
(K) Invest in oil, gas or other mineral exploration or development
programs, except that the Portfolio may invest in marketable securities of
enterprises engaged in oil, gas or mineral exploration.
Restrictions for PSE Tech 100 Index Portfolio
- ---------------------------------------------
The PSE Tech 100 Index Portfolio has adopted the following fundamental
investment restrictions:
(1) Purchase more than 10% of the outstanding voting securities of an
issuer or invest in a company to get control or manage it.
(2) Borrow money or property except for temporary or emergency purposes.
If the Portfolio ever should borrow money it would only borrow from banks and in
an amount not exceeding 10% of the market value of its total assets (not
including the amount borrowed). The Portfolio will not pledge more than 15% of
its net assets to secure such borrowings. In the event the Portfolio's
borrowing exceeds 5% of the market value of its total assets, the Portfolio will
not invest in any portfolio securities until its borrowings are reduced to below
5% of its total assets. For purposes of these restrictions, collateral
arrangements for premium and margin payments in connection with hedging
activities, if any, are not to be deemed to be a pledge of assets.
(3) Make loans, except that it may lend its portfolio securities. For the
purposes of this restriction, investments in publicly-traded debt securities or
debt securities of the type customarily purchased by institutional investors and
investments in repurchase agreements are not considered loans.
(4) Underwrite the securities of other issuers, except where it might
technically be deemed to be an underwriter for purposes of the Securities Act of
1933 upon the disposition of certain securities.
(5) Issue senior securities.
(6) Purchase a security if, as a result, more than 10% of the value of the
Portfolio's net assets would be invested in: (i) securities with legal or
contractual restrictions on resale (other than investments and repurchase
agreements); (ii) securities for which market quotations are not readily
available; and (iii) repurchase agreements which do not provide for payment
within 7 days.
(7) Invest in commodities, but the Portfolio may invest in futures
contracts and options.
(8) Purchase securities on margin or effect short sales of securities,
except short sales "against the box" (but the Portfolio may obtain such short-
term credits as may be necessary for the clearance of transactions and may make
margin payments in connection with transactions in options and futures
transactions).
(9) Buy or sell real estate, real estate investment trusts, real estate
limited partnerships, or oil and gas interests or leases.
In accordance with the following non-fundamental policies, which may be
changed without shareholder approval, the PSE Tech 100 Index Portfolio may not:
(A) Invest more than 5% of its total assets in securities of companies
which, including any predecessors, have a record of less than three years of
continuous operations.
(B) Purchase warrants, except that the Portfolio may purchase warrants
which, when valued at lower of cost or market, do not exceed 5% of the value of
the Portfolio's net assets; included within the 5%, but not to exceed 2% of the
Portfolio's net assets, may be warrants which are not listed on the New York or
American Stock Exchange.
(C) Purchase or retain the securities of an issuer if those officers or
Directors of Principal Preservation or the Advisor (as defined under the caption
"Management of Principal Preservation-The Investment Advisors" in this Statement
of Additional Information) who individually own beneficially more than 0.5 of 1%
of the outstanding securities of such issuer together own beneficially more than
5% of such outstanding securities; provided that no officer or director shall be
deemed to own beneficially securities held in other accounts managed by such
person or held in employee or similar plans for which such person acts as
trustee.
(D) Purchase securities of other investment companies if the purchase
would cause more than 10% of the value of the total assets of the Portfolio to
be invested in investment company securities, provided that: (i) no investment
will be made in the securities of any single investment company if, immediately
after such investment, more than 3% of the outstanding voting securities of such
investment company would be owned by the Portfolio or more than 5% of the value
of the total assets of the Portfolio would be invested in such investment
company; and (ii) no such restrictions shall apply to a purchase of investment
company securities as a part of a merger, consolidation, reorganization or
acquisition of assets.
With respect to fundamental investment restriction (6) above for the PSE Tech
100 Index Portfolio, portfolio securities are classified by the Advisor as
liquid or illiquid under the supervision of, and pursuant to guidelines
established by, the Board of Directors of Principal Preservation. It is
possible that the 10% limitation on illiquid securities could be exceeded as a
result of a security which, although liquid at the time of purchase, later is
classified by the Advisor as illiquid as a result of market conditions or
developments with respect to the issuer. Under such circumstances the Board of
Directors would investigate and consider all of the surrounding circumstances,
would evaluate all available alternatives to bring the PSE Tech 100 Index
Portfolio back into compliance with the 10% limitation as soon as reasonably
practicable, and would take appropriate action. However, the Portfolio would
not necessarily be required immediately to dispose of illiquid securities until
the 10% limitation is met if, in the judgment of the Board of Directors, it
would not be in the best interests of the shareholders to do so. Disposing of
illiquid investments potentially may involve time-consuming negotiation and
legal expenses, and it may be difficult or impossible for the Portfolio to sell
an illiquid security promptly at an acceptable price. The absence of a trading
market can make it difficult to ascertain the market value for illiquid
investments, and could require the Portfolio to employ special pricing
procedures. Because the stocks included in the PSE Technology Index are listed
on the Stock Market, the New York Stock Exchange or the American Stock Exchange,
the Portfolio does not anticipate any difficulty in maintaining adequate
liquidity under normal market conditions. See "Investment Program - PSE
Technology Index" in the Prospectus.
Non-Fundamental Investment Restrictions Common to All Portfolios
- ----------------------------------------------------------------
Also, the 1940 Act currently places further restrictions on certain of each
Portfolio's investments, including: (i) subject to certain exceptions, the 1940
Act currently prohibits a Portfolio from investing more than 5% of its total
assets in securities of another investment company or purchasing more than 3% of
the total outstanding voting stock of another investment company, except that
this restriction does not apply to a purchase of investment company securities
as a part of a merger, consolidation, reorganization or acquisition of assets;
and (ii) the 1940 Act's limit on aggregate holdings of illiquid securities or
securities with restrictions on resale is 15% of a Portfolio's net assets.
A fundamental investment restriction or policy cannot be changed without a
majority vote of shareholders of the Affected Portfolio, which means the
approval of the holders of the lesser of (i) a majority of the outstanding
shares of the Portfolio or (ii) 67% of the shares represented at a meeting of
shareholders at which the holders of 50% or more of the outstanding shares of
the Portfolio are represented. Policies that are not "fundamental policies" are
subject to change by the Board of Directors without shareholder approval. Any
investment restriction which involves a maximum of securities or assets will not
be considered to be violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition of securities or assets of,
or borrowing by, a Portfolio.
INDUSTRY CONCENTRATION FACTORS
As discussed in the Prospectus (see "Special Considerations - Concentrations"
in the Prospectus), a significant portion of the PSE Tech 100 Index Portfolio's
investments will consist of technology-based issues, which exposes the Portfolio
to risks associated with economic conditions in that industry.
Due to competition, a more concentrated and interrelated product line, and
other factors, companies that develop and/or rely on technology could become
increasingly sensitive to down swings in the economy and competitive factors.
However, the companies whose common stocks are included in the PSE Technology
Index comprise a fairly broad range of industries. This broad industry
representation likely will soften volatility associated with economic political
developments that disproportionately affect specific industries. The PSE Tech
100 Index Portfolio intends to maintain its investments in a manner designed to
replicate the PSE Technology Index even during periods of industry concentration
in the Index, should they occur.
MANAGEMENT OF PRINCIPAL PRESERVATION
Directors and Officers
- ----------------------
Under applicable law, the Board of Directors is responsible for management of
Principal Preservation, and provides broad supervision over its affairs. The
Advisors are responsible for each Portfolio's investment management, and
Principal Preservation's officers are responsible for each Portfolio's
operations.
The directors and officers of Principal Preservation and their principal
occupations during the past five years are set forth below. Their titles may
have varied during that period. Unless otherwise indicated, the address of each
director and officer of Principal Preservation is 215 North Main Street, West
Bend, Wisconsin, 53095. Asterisks indicate those Directors of Principal
Preservation who are "interested persons" (as defined in the 1940 Act) of any of
the Advisors or an affiliate of any of the Advisors.
POSITION WITH PRINCIPAL
PRINCIPAL OCCUPATION DURING
NAME, AGE AND ADDRESS PRESERVATION PAST FIVE YEARS
- --------------------- ------------ ---------------
R. D. Ziegler,*<F1> Chairman and Director Chairman, Director and
70 Vice President, Ziegler Asset
Management, Inc.; from 1973
to 1997, Chairman and
Director and, prior to
1990, Chief Executive
Officer, and prior to 1986,
President, The Ziegler
Companies, Inc. and B.C.
Ziegler and Company;
Director, Johnson
Controls, Inc.
(manufacturing).
Robert J. Tuszynski,*<F1>President and Director Senior Vice President, B.C.
38 Ziegler and Company, since
1996; prior thereto, Vice
President, Director of Mutual
Funds, B.C. Ziegler and
Company from 1987 to 1996;
Trustee, Chairman of
the Board and President,
Prospect Hill Trust and The
Prime Portfolios
(registered investment com-
panies) from 1994 to 1996.
Richard H. Aster, M.D., 66 Director Since June, 1996, Senior
8727 W. Watertown Plank Rd. Investigator and Professor of
Milwaukee, WI 53226 Medicine, Medical College of
Wisconsin; prior thereto,
President and Director of
Research, The Blood Center
of Southeastern Wisconsin,
Inc.
Augustine J. English, 67 Director Retired; President,
1724 Lake Roberts Court Tupperware North America
Windermere, FL 34786 from 1990 to 1994 (manufac-
turing); prior to 1990,
President, The West Bend
Company (manufacturing), a
division of Dart
Industries, a subsidiary of
Premark International,
Inc., of which Mr. English
was a Group Vice President.
Ralph J. Eckert, 68 Director Chairman, Trustmark
2059 Keystone Ranch Road Insurance Cos. (Mutual Life
Dillon, CO 80435 Insurance Company); Prior
to 1991, Chairman,
President and Chief
Executive Officer Trustmark
Insurance Cos. since 1971;
Trustee of the Board of
Pensions of the Evangelical
Lutheran Church of America
since 1989; Trustee of the
Board of Pensions for the
Lutheran Church of America
from 1987-1989; and Trustee
of The Prime Portfolios
(registered investment
company) from 1993-1996.
John H. Lauderdale, 31 Vice President - Wholesaler, B.C. Ziegler
Director of Marketing and Company since 1991;
prior thereto, Marketing
Account Executive, The
Patten Company.
Franklin P. Ciano, 45 Chief Financial Manager of Principal
Officer and Treasurer Preservation Operations,
B.C. Ziegler and Company
since 1996; prior thereto,
Vice President, Fixed
Income Department, Firstar
Bank.
Marc J. Dion, 39 Vice President Vice President - Portfolio
Manager and Chief
Investment Officer, Ziegler
Asset Management, Inc.
since 1993; prior thereto,
Vice President, Ziegler
Asset Management, Inc.
S. Charles O'Meara, 47 Secretary Senior Vice President and
General Counsel, B.C.
Ziegler and Company since
1993; prior thereto,
Partner, O'Meara, Eckert,
Pourus & Gonring (law
firm).
Principal Preservation pays the compensation of the three Directors who are
not officers, directors or employees of the Advisors. Principal Preservation
will pay each of these Directors an annual fee of $12,000 and an additional $450
for each Board or committee meeting he attends. Principal Preservation may also
retain consultants, who will be paid a fee, to provide the Board with advice and
research on investment matters. Each Portfolio, together with Principal
Preservation's other series, pays a proportionate amount of these expenses based
on its total assets.
The table below shows fees paid to Directors of Principal Preservation for
the year ended December 31, 1996. Each series of Principal Preservation pays a
proportionate share of these expenses based on the ratio such series' total
assets bear to the aggregate of the total assets of all nine series of Principal
Preservation. Principal Preservation made no payments to its officers or
directors who are affiliated with any investment advisor to Principal
Preservation.
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Accrued Compensation
Name of Person and Aggregate As Part of From Principal
Position with Compensation Principal Estimated Annual Preservation and
Principal from Principal Preservation's Benefits Upon Fund Complex
Preservation Preservation Expenses Retirement Paid to Directors
- ------------ ------------ -------------- ---------------- -----------------
<S> <C> <C> <C> <C>
R. D. Ziegler, -0- -0- -0- -0-
President and Director
Robert J. Tuszynski, -0- -0- -0- -0-
President and Director
Richard H. Aster, 13,800 -0- -0- 13,800
Director
Augustine J. English, 13,800 -0- -0- 13,800
Director
Ralph J. Eckert 13,800 -0- -0- 13,800
Director
</TABLE>
The executive officers and Directors as a group (9 persons) owned
beneficially, as of January 31, 1997, a total of 58,985 shares of the Dividend
Achievers Portfolio, 4,900 shares of the Select Value Portfolio, and 11,498
shares of the PSE Tech 100 Index Portfolio representing 3.8%, 1.3% and 1.5%,
respectively, of the total outstanding shares of those Portfolios. This
management group's beneficial ownership of shares of each of the remaining
Portfolio's and of Principal Preservation as a whole amounted to less than 1%
of the outstanding shares. See also "Control Persons and Principal Holders of
Securities."
The Investment Advisors
- -----------------------
Basic information as to Ziegler Asset Management, Inc. and Skyline Asset
Management, L.P. and the Advisory and Sub-Advisory Agreements (the "Agreements")
is set forth in the Prospectus under "Management."
For the years ended December 31, 1996, 1995 and 1994, Principal Preservation
made the following payments under the Agreements:
Fees Paid Pursuant to Advisory Agreements
----------------------------------------------
Portfolio 1996 1995 1994
- --------- ---- ---- ----
Government $275,693(2)<F31> $295,379(2)<F31> $300,862
Tax-Exempt $365,939(2)<F31> 332,888(2)<F31> 355,869
S&P 100 Plus(1) $335,560(2)<F31> 292,466 251,235
<F30>
Select Value $31,295(2)<F31> 21,143(2)<F31> 3,122(2)<F31>(3)
<F32>
Dividend Achievers $206,154(2)<F31> 168,713(3)<F32> 163,222
PSE Tech 100 Index $11,180(2)<F31>(4)<F33> -- --
(1)<F30>Effective May 1, 1996, the advisory fees for the S&P 100 Plus
Portfolio were reduced from 0.75 of 1% to 0.575 of 1% on the first $20
million in average daily net assets, and from 0.50 of 1% to 0.45 of 1% on
the next $30 million in average daily net assets. Advisory fees for net
assets over $50 million remained unchanged.
(2)<F31>Does not reflect Ziegler's reimbursements (a) to the Select Value
Portfolio in the amounts of $57,688, $72,971 and $27,513 for the years
ended December 31, 1996 and 1995 and the period from August 23, 1994
(commencement of operations) through December 31, 1994, respectively;
(b) to the Dividend Achievers Portfolio in the amounts of $34,553, $49,439
for the years ended December 31, 1996 and 1995, respectively; (c) to the
Tax-Exempt Portfolio in the amounts of $3,708 and $3,699 for the years
ended December 31, 1996 and 1995; (d) to the Government Portfolio in the
amounts of $19,260 and $10,105 for the years ended December 31, 1996 and
1995, respectively; (e) to the S&P 100 Plus Portfolio in the amount of
$10,411 for the year ended December 31, 1996; or (f) to PSE Tech 100 Index
Portfolio in the amount of $77,978 for the period from June 10, 1996
(commencement of operations through December 31, 1996).
(3)<F32>Reflects fees for the period from August 23, 1994 (commencement
of operations) through December 31, 1994.
(4)<F33>Reflects fees for the period from June 10, 1996 (commencement
of operations) through December 31, 1996.
Administrative Services
- -----------------------
B.C. Ziegler and Company ("Ziegler") provides certain administrative,
accounting and pricing services to Principal Preservation, including calculating
daily net asset value per share; maintaining original entry documents and books
of record and general ledgers; posting cash receipts and disbursements;
reconciling bank account balances monthly; recording purchases and sales based
upon portfolio manager communications; and preparing monthly and annual
summaries to assist in the preparation of financial statements of, and
regulatory reports for, Principal Preservation. Ziegler has agreed to provide
these services pursuant to the terms of an Accounting/ Pricing Agreement (the
"Accounting/Pricing Agreement") at rates found by the Board of Directors to be
fair and reasonable in light of the usual and customary charges made by
unaffiliated vendors for similar services. The current rate of payment for
these services per Portfolio per year is .03 of 1% of a Portfolio's total assets
of $30 million but less than $100 million, .02 of 1% of a Portfolio's total
assets of $100 million but less than $250 million and .01 of 1% of a Portfolio's
total assets of $250 million or more, with a minimum fee of $19,000 per
portfolio per year, plus expenses. The Accounting/Pricing Agreement will
continue in effect from year to year, as long as it is approved at least
annually by Principal Preservation's Board of Directors or by a vote of the
outstanding voting securities of Principal Preservation and in either case by a
majority of the Directors who are not parties to the Accounting/Pricing
Agreement or interested persons of any such party. The Accounting/Pricing
Agreement terminates automatically if assigned and may be terminated without
penalty by either party on 60 days notice. The Accounting/Pricing Agreement
provides that neither Ziegler nor their personnel shall be liable for any error
of judgment or mistake of law or for any loss arising out of any act or omission
in the execution and the discharge of its obligations under the
Accounting/Pricing Agreement, except for willful misfeasance, bad faith or gross
negligence in the performance of their duties or by reason of reckless disregard
of their obligations and duties under the Accounting/Pricing Agreement, and in
no case shall their liability exceed one year's fee income received by them
under such Agreement.
Depository Services
- -------------------
Each Portfolio's portfolio securities are held by Ziegler as depository
pursuant to the terms of a Depository Contract. Ziegler also provides certain
administrative, clearing and record keeping functions for each Portfolio
pursuant to the Depository Contract. Under the terms of the Depository
Contract, Ziegler is entitled to reasonable compensation for its services and
expenses as Depository, as agreed upon from time to time between it and the
Board of Directors of Principal Preservation. The current rate of compensation
for these services is .055 of 1% of the first $10 million of each Portfolio's
assets, .03 of 1% of the next $40 million of assets, .016 of 1% of the next $200
million of assets, and 0.015 of 1% of assets in excess of $250 million. The
Depository Contract will continue in effect until terminated, and may be
terminated by either party without cause on 30 days' prior written notice. The
Depository Contract provides that Ziegler shall not be liable to Principal
Preservation or any Portfolio for any action taken or omitted by it in good
faith without negligence.
Transfer Agent Services
- -----------------------
Ziegler provides transfer agent and dividend disbursing services to each
Portfolio pursuant to the terms of a Transfer and Dividend Disbursing Agency
Agreement. Under the terms of the Transfer and Dividend Disbursing Agency
Agreement, Ziegler is entitled to reasonable compensation for its services and
expenses as agreed upon from time to time between it and the Board of Directors
of Principal Preservation. The annual rate of compensation agreed upon for
these services is $13.50 per account for the Government, Tax-Exempt and PSE Tech
100 Index Portfolios and $8.50 per account for the S&P 100 Plus, Select Value,
and Dividend Achievers Portfolios. Ziegler is also entitled to reimbursement
for all out of pocket expenses incurred in providing such services. Ziegler
also has the right to retain certain service charges as described from time to
time in the current Prospectus of the Portfolios. The Transfer and Dividend
Disbursing Agency Agreement will continue in effect until terminated, and may be
terminated by either party without cause on thirty (30) days' prior written
notice. The Transfer and Dividend Disbursing Agency Agreement provides that
Ziegler shall be indemnified by and not be liable to Principal Preservation or
any Portfolio for any action taken or omitted by Ziegler under such agreement,
except for liability for breach of Ziegler's obligation to maintain all
Principal Preservation records in absolute confidence.
Other Services
- --------------
In addition to the foregoing, Ziegler also serves as the principal
Distributor of each Portfolio's shares and receives commissions on sales of
Portfolio shares. See "Purchase of Shares." Ziegler also receives
reimbursement from each Portfolio for certain expenses Ziegler incurs in
connection with distributing the Portfolio's shares pursuant to the Distribution
Plan adopted by each Portfolio under Rule 12b-1 of the 1940 Act. See
"Distribution Expenses." Fees paid to Ziegler for services provided in all of
these capacities for the year (or portion thereof during which the particular
Portfolio engaged in operations) ended December 31, 1996 are shown in the
following table.
Commissions on
Portfolio Shares Transfer and
and Rule 12b-1 Accounting/ Dividend
Distribution Pricing Depository Disbursing
Fees Fees Fees Agent Fees
-------------- ----------- ---------- ------------
Government $117,555 $23,920 $19,050 $48,096
Tax-Exempt 116,620 28,760 21,679 45,023
S&P 100 Plus 338,856 29,932 21,759 66,427
Select Value 17,964 18,900 2,996 4,272
Dividend 86,901 19,014 11,297 31,425
Achievers
PSE Tech 100 9,435 9,025 1,844 3,050
Index --------- -------- -------- --------
TOTAL $687,331 $129,551 $78,625 $198,293
PERFORMANCE INFORMATION
From time to time the Portfolios may advertise their "yield" and "total
return." Yield is based on historical earnings and total return is based on
------------------------------------------------------------------
historical distributions; neither is intended to indicate future performance.
- ----------------------------------------------------------------------------
The "yield" of a Portfolio refers to the income generated by an investment in
that Portfolio over a one-month period (which period will be stated in the
advertisement). This income is then "annualized." That is, the amount of
income generated by the investment during the month is assumed to be generated
each month over a 12 month period and is shown as a percentage of the
investment. "Total return" of the Portfolio refers to the average annual total
return for one, five and ten year periods (or so much thereof as a Portfolio has
been in existence). Total return is the change in redemption value of shares
purchased with an initial $1,000 investment, assuming the reinvestment of
dividends and capital gain distributions, after giving effect to the maximum
applicable sales charge. In addition, the Tax-Exempt Portfolio may advertise
its "tax equivalent yield," which is computed by dividing that portion of the
Portfolio's yield which is tax-exempt by one minus a stated income tax rate and
adding the product to that portion, if any, of the yield of the Portfolio which
is not tax-exempt. Performance information should be considered in light of the
Portfolio's investment objectives and policies, characteristics and quality of
the portfolios and the market conditions during the time period, and should not
be considered as a representation of what may be achieved in the future.
Investors should consider these factors and possible differences in the methods
used in calculating performance information when comparing a Portfolio's
performance to performance figures published for other investment vehicles.
Average annual total return is computed by finding the average annual
compounded rates of return over the 1, 5, and 10 year periods (or so much
thereof as a Portfolio has been in existence) ended on the date of the balance
sheet of the respective Portfolio, each of which has been incorporated by
reference into this Statement of Additional Information, that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
n
P(1 + T) = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5, or 10 year periods at the end of the
1, 5, or 10 year periods (or fractional portion thereof).
In some circumstances a Portfolio may advertise its total return for a 1, 2
or 3-year period, or the total return since the Portfolio commenced operations.
In such circumstances the Portfolio will adjust the values used in computing
return to correspond to the time period for which the information is provided.
The average annual total returns for each Portfolio for the 1, 5 and 10-year
periods ended December 31, 1996 are set forth in the table below. The total
returns for the Government and Tax-Exempt Portfolios have been restated to
reflect the May 1, 1995 reduction in the maximum sales loads for those
Portfolios from 4.5% to 3.5%.
From
Commencement
1 Year 5 Year 10 Year of Operation
------ ------ ------- ------------
Government Portfolio (1.31)% 5.04% 6.98% 7.62%
Tax-Exempt Portfolio 0.13% 6.54% 6.29% 5.94%
S&P 100 Plus Portfolio 16.91% 13.24% 13.31% 13.51%
Dividend Achievers
Portfolio 16.28% 8.69% NA 10.93%
Select Value Portfolio 20.95% NA NA 14.93%
PSE Tech 100 Index
Portfolio NA NA NA 5.72%
For illustrative purposes, each Portfolio may include in its supplemental
sales literature from time to time a mountain graph that advertises the
Portfolio's total return by depicting the growth in the value of an initial
investment of $10,000 that a shareholder would have experienced in the relevant
Portfolio since the commencement of the Portfolio's operations to the present.
The presentation consists of a line graph shaded underneath with the value of
the amount invested reflected along a vertical axis and the time period from the
commencement of the Portfolio's operations through December 31, 1996 reflected
along a horizontal axis.
In some circumstances a Portfolio may advertise its total return for a 1, 2
or 3-year period, or the total return since the Portfolio commenced operations.
In such circumstances, the Portfolio will adjust the values used in computing
return to correspond to the time period for which the information is provided.
Yield quotations are based on a 30-day (or one-month) period, and are
computed by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the period,
according to the following formula:
6
Yield = 2 [(a-b + 1) - 1]
cd
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
The yields for certain of the Portfolios for the month ended December 31,
1996 were: 4.47% for the Tax-Exempt Portfolio, and 4.74% for the Government
Portfolio. When advertising yield, a Portfolio will not advertise a one-month
or 30-day period which ends more than 45 days before the date the advertisement
is published.
A tax equivalent yield is based on a 30-day (or one-month) period, and is
computed by dividing that portion of the yield of the Tax-Exempt Portfolio (as
computed in accordance with the description above) by one minus a stated income
tax rate and adding the products to that portion, if any, of the yield of the
Portfolio that is not tax-exempt.
The tax equivalent yield, assuming a 33% marginal tax rate, for the month
ended December 31, 1996 was 6.67% for the Tax-Exempt Portfolio.
Performance information for the Portfolios may be compared to various
unmanaged indices, such as the S&P 500 (or in the case of the PSE Tech 100 Index
Portfolio, the PSE Technology Index), as well as indices of similar mutual
funds. The Portfolio's advertising may also quote rankings published by other
recognized statistical services or publishers such as Lipper Analytical
Services, Inc., or Weisenberger Investment Companies Service.
An illustration may be used comparing the growth in value of an initial
investment in a Portfolio compared to a fixed rate of return compounded on a
monthly basis. This illustration will reflect the effect of the Portfolio's
sales charge and fluctuations in net asset value, and will assume all income and
capital gain distributions are reinvested. The fixed rate of return will be
clearly stated and presented as a monthly compounded figure, and therefore will
not reflect any market fluctuation.
In advertising and sales literature, the performance of a Portfolio may be
compared with that of other mutual funds, indexes or averages of other mutual
funds, indexes of related financial assets or data (and in particular the PSE
Technology Index and the S&P 100 Stock Index for the PSE Tech 100 Index
Portfolio and S&P 100 Plus Portfolio, respectively), and other competing
investment and deposit products available from or through other financial
institutions. The composition of these indexes, averages or accounts differs
from that of a Portfolio. Comparison of a Portfolio to an alternative
investment will consider differences in features and expected performance.
All of the indexes and averages noted below will be obtained from the
indicated sources or reporting services, which Principal Preservation generally
believes to be accurate. A Portfolio may also note its mention (including
performance or other comparative rankings) in newspapers, magazines, or other
media from time to time. However, Principal Preservation assumes no
responsibility for the accuracy of such data. Newspapers and magazines which
might mention a Portfolio or Principal Preservation include, but are not limited
to, the following:
The Business Journal
Business Week
Changing Times
Chicago Tribune
Chicago Sun-Times
Crain's Chicago
Business
Consumer Reports
Consumer Digest
Financial World
Forbes
Fortune
Investor's Daily
Los Angeles Times
Milwaukee Journal Sentinel
Money
Mutual Fund Letter
Mutual Fund Values
(Morningstar)
Newsweek
The New York Times
Pension and Investments
Personal Investor
Stanger Reports
Time
USA Today
U.S. News and World Reports
The Wall Street Journal
When a newspaper, magazine or other publication mentions Principal
Preservation or a Portfolio, such mention may include: (i) listings of some or
all of the Portfolio's holdings; (ii) descriptions of characteristics of some or
all of the securities held by the Portfolio, including price-earnings ratios,
earnings, growth rates and other statistical information, and comparisons of
that information or similar statistics for the securities comprising any of the
indexes or averages listed above; and (iii) descriptions of Principal
Preservation or the Portfolio manager's economic and market outlook, general and
for the Portfolio.
A Portfolio may compare its performance to the Consumer Price Index (All
Urban), a widely recognized measure of inflation.
The performance of the Select Value Portfolio may be compared to any or all
of the following indexes or averages:
Dow-Jones Industrial Average
Russell 2000 Small Stock Index
Russell Mid-Cap Stock Index
Russell 2500 Index
Standard & Poor's 500 Stock Index
Standard & Poor's 400 Industrials
Standard & Poor's Mid-Cap 400 Index
Wilshire 5000
Wilshire 4500
Wilshire 4000
(These indexes are widely recognized indicators of general U.S. stock
market results.)
New York Stock Exchange Composite Index
American Stock Exchange Composite Index
NASDAQ Composite
NASDAQ Industrials
(These indexes generally reflect the performance of stock traded in the
indicated markets.)
The performance of the Select Value Portfolio may also be compared to the
following mutual fund industry indexes or averages: Value Line Index; Lipper
Capital Appreciation Fund Average; Lipper Growth Funds Average; Lipper Small
Company Growth Funds Average; Lipper General Equity Funds Average; Lipper Equity
Funds Average; Lipper Small Company Growth Fund Index; Morningstar Growth
Average; Morningstar Aggressive Growth Average; Morningstar U.S. Diversified
Average; Morningstar Equity Fund Average; Morningstar Hybrid Average;
Morningstar All Equity Funds Average; and Morningstar General Equity Average.
Lipper Small Growth Fund Index reflects the net asset value weighted total
return of the largest thirty growth funds as calculated and published by Lipper
Analytical Services, Inc. ("Lipper"), an independent service that monitors the
performance of more than 1,000 funds.
The Lipper and Morningstar averages are unweighted averages of total return
performance of mutual funds as classified, calculated and published by Lipper
and by Morningstar, Inc. ("Morningstar"), respectively. The Select Value
Portfolio may also use comparative performance as computed in a ranking by
Lipper or category averages and rankings provided by another independent
service. Should Lipper or another service reclassify the Select Value Portfolio
to a different category or develop (and place the Portfolio into) a new
category, the Portfolio may compare its performance or ranking against other
funds in the newly assigned category, as published by the service. Moreover,
the Select Portfolio may compare its performance or ranking against all funds
tracked by Lipper or another independent service, and may cite its rating,
recognition or other mention by Morningstar or any other entity. Morningstar's
rating system is based on risk-adjusted total return performance and is
expressed in a star-rating format. The risk-adjusted number is computed by
subtracting the Portfolio's risk score (which is a function of the Portfolio's
monthly returns less the 3-month Treasury bill return) from the Portfolio's
load-adjusted total return score. This numerical score is then translated into
rating categories, with the top 10% labeled five star, the next 22.5% labeled
four star, the next 35% labeled three star, the next 22.5% labeled two star and
the bottom 10% one star. A high rating reflects either above-average returns or
below-average risks, or both.
To illustrate the historical returns on various types of financial assets,
the Select Value Portfolio may use historical data provided by Ibbotson
Associates, Inc. ("Ibbotson"), a Chicago-based investment firm. Ibbotson
constructs (or obtains) very long-term (since 1926) total return data
(including, for example, total return indexes, total return percentages, average
annual total returns and standard deviations of such returns) for the following
asset types: common stocks, small company stocks, long-term corporate bonds,
long-term government bonds, intermediate-term government bonds, U.S. Treasury
bills and Consumer Price Index. The Portfolio may also use historical data
compiled by Prudential Securities, Inc., or by other similar sources believed by
Principal Preservation to be accurate, illustrating the past performance of
small-capitalization stocks, large-capitalization stocks, common stocks, equity
securities, growth stocks (small-capitalization, large-capitalization, or both)
and value stock (small-capitalization, large-capitalization, or both).
DETERMINATION OF NET ASSET VALUE PER SHARE
Shares are sold at their net asset value per share plus the applicable sales
charge. See "Purchase of Shares." Net asset value per share of each Portfolio
is determined by subtracting the Portfolio's liabilities (including accrued
expenses and dividends payable) from the Portfolio's total assets (the value of
the securities the portfolio holds plus cash or other assets, including interest
accrued but not yet received) and dividing the result by the total number of
shares outstanding.
The net asset value per share will be calculated as of the close of trading
on the New York Stock Exchange (the "Exchange") at least once every weekday,
Monday through Friday, except on customary national business holidays which
result in the closing of the Exchange (including New Year's Day, President's
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day). The calculation is as of the close of trading on the
Exchange for the S&P 100 Plus, Select Value, Dividend Achievers and PSE Tech 100
Index Portfolios, 2:30 p.m. New York time for the Tax-Exempt Portfolio, and 3:00
p.m. New York time for the Government Portfolio.
Hedging instruments will be valued at their last sale price prior to the
close of the Exchange, unless there have been no trades on that day and the last
sale price is below the bid, or above the asked, price. If the last prior sale
price is below the bid, instruments will be valued at the bid price at the close
of the Exchange; if the last prior sale price is above the asked, the instrument
will be valued at the asked price at the close of the Exchange. The municipal
securities in which the Portfolios will invest are traded primarily in the over-
the-counter market. Securities for which market quotations are readily
available will be valued in the same manner as for hedging instruments.
Securities and other assets for which quotations are not readily available will
be valued at their fair value on a consistent basis using valuation methods
determined by the Board of Directors. Each Portfolio intends to determine fair
value for such securities based in part upon the information supplied by pricing
services approved by the Board of Directors. Valuations of portfolio securities
furnished by the pricing service will be based upon a computerized matrix system
and/or appraisals by the pricing service in each case in reliance upon
information concerning market transactions and quotations from recognized
securities dealers.
PURCHASE OF SHARES
Ziegler acts as the principal Distributor for each of the Portfolios.
Ziegler will allow Selected Dealer discounts (which are alike for all Selected
Dealers) from the applicable public offering price. Neither Ziegler nor
Selected Dealers are permitted to withhold placing orders to benefit themselves
by a price change. The Distribution Agreement between Principal Preservation
and Ziegler will continue from year to year if it is approved annually by
Principal Preservation's Board of Directors, including a majority of those
Directors who are not interested persons, or by a vote of the holders of a
majority of the outstanding shares. The Agreement may be terminated at any time
by either party on 60 days notice and will automatically terminate if assigned.
For the fiscal years ended December 31, 1996, 1995 and 1994 (or the portion
of such year during which the relevant Portfolio was in operation), commissions
earned on sales of shares of all of the Portfolios aggregated $575,000, $503,000
and $533,000, respectively.
Commissions and Rule 12b-1 Fees Earned by
Ziegler on Sales of Portfolio Shares for
Year Ended December 31,
-----------------------------------------
Portfolio 1996 1995 1994
- --------- ---- ---- ----
Government $117,555 $76,633 $166,452
Tax-Exempt 116,620 46,341 84,955
S&P 100 Plus 338,856 177,540 49,291
Select Value 17,964 18,676 26,161(1)<F35>
Dividend Achievers 86,901 35,089 37,309
PSE Tech 100 Index 9,435(1)<F35> -- --
-------- -------- --------
TOTAL $687,331 $354,279 $519,799
======== ======== ========
(1)<F35>Reflects commissions earned on sales of shares of (a) the Select Value
Portfolio for the period from August 31, 1994 (commencement of
operations) through December 31, 1994, and (b) the PSE Tech 100 Index
Portfolio for the period from June 10, 1996 (commencement of
operations) through December 31, 1996.
Shares of a Portfolio may be purchased by certain classes of persons without
a sales charge, or a reduced sales charge, as described in the Prospectus. The
Board of Directors believes this is appropriate because of the minimal sales
effort needed to accommodate these classes of persons.
Because sales to members of qualified groups result in economies of sales
efforts and sales related expenses, the Distributor is able to offer a reduced
sales charge to such persons. A "qualified group" is one which: (1) has been
in existence for more than six months; (2) has a purpose other than acquiring
shares of one or more of the Portfolios at a discount; and (3) has more than ten
members, is available to arrange for group meetings between representatives of
the Distributor or Selected Dealers distributing shares of the Portfolios, and
agrees to include sales and other materials related to Principal Preservation in
its mailings to members at reduced or no cost to the Distributor or Selected
Dealers. See "Purchase of Shares -- Group Purchases" in the Prospectus.
TAX STATUS
Each series of a series company, such as Principal Preservation, is treated
as a single entity for Federal income tax purposes so that the net realized
capital gains and losses of the various portfolios in one fund are not combined.
Each Portfolio intends to qualify as a "regulated investment company" under
the Internal Revenue Code of 1986 (the "Code"). In order to qualify as a
regulated investment company, each Portfolio must satisfy a number of
requirements. Among such requirements is the requirement that at least 90
percent of a Portfolio's gross income must be derived from dividends, interest
and gains from the sale or other disposition of stock or other securities.
Another requirement is that less than 30 percent of a Portfolio's gross income
be derived from the sale or other disposition of securities (net of losses on
designated hedges) held for less than three months. In determining these gross
income requirements, a loss from the sale or other disposition of securities
does not enter into the computation.
Gain or loss on the sale of U.S. Government securities held by a Portfolio
for more than six months will generally be long-term capital gain or loss. Gain
or loss on the sale of U.S. Government securities held for six months or less
will be short-term capital gain or loss. Gain or loss on the sale, exchange,
lapse, or termination of an option on securities will generally be treated as a
gain or loss from the sale of securities.
For information on federal taxation of options and futures, see "Investment
Program - Federal Taxation of Options and Futures."
A portion of each Portfolio's (other than the Tax-Exempt Portfolio) net
investment income will qualify for the 70% dividends received deduction for
corporations. The aggregate amount eligible for the dividends received
deduction may not exceed the aggregate qualifying dividends received by the
Portfolio for the year. If less than 100% of the Portfolio's gross income
constitutes dividend income, then only a portion of distributions by the
Portfolio will be treated as dividend income for purposes of computing the
dividends received deduction for corporations.
Dividends and other distributions paid to individuals and other non-exempt
payees are subject to a 31% backup Federal withholding tax if the Transfer Agent
is not provided with the shareholder's correct taxpayer identification number or
certification that the shareholder is not subject to such backup withholding or
if one of the Portfolios is notified that the shareholder has underreported
income in the past. In addition, such backup withholding tax will apply to the
proceeds of redemption or repurchase of shares from a shareholder account for
which the correct taxpayer identification number has not been furnished. For
most individual taxpayers, the taxpayer identification number is the social
security number. An investor may furnish the Transfer Agent with such number
and the required certifications by completing and sending the Transfer Agent
either the Account Application form attached to the Prospectus or IRS Form W-9.
Interest on indebtedness incurred (directly or indirectly) by shareholders to
purchase or carry shares will not be deductible for Federal income tax purposes.
Further, persons who are "substantial users" (or persons related thereto) of
facilities financed by industrial development bonds should consult their own tax
advisor before purchasing a Portfolio's shares.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of January 31, 1996, no person was known to the Fund to be the "beneficial
owner" (determined in accordance with Rule 13d-3 under the Securities Exchange
Act of 1934) of more than 5% of the outstanding shares of the Fund's common
stock, or of any of the Portfolios, except that: (i) Ottawa County, #28, P.O.
Box 705, 414 Washington, Grand Haven, Michigan owns beneficially 392,569 shares
of the Government Portfolio, or approximately 8.22% of all outstanding shares of
that Portfolio; (ii) Washtenah Community College, P.O. Box D1, Ann Arbor,
Michigan owns beneficially 241,163.901 shares of the Government Portfolio, or
approximately 5.05% of all outstanding shares of that Portfolio; (iii) Barbara
Wilson, 700 San Antonio Street, Ojai, California owns beneficially 107,647.372
shares of the Dividend Achievers Portfolio, or approximately 7.12% of all
outstanding shares of that Portfolio; (iv) Ziegler Growth Retirement Plan, 215
North Main Street, West Bend, Wisconsin owns beneficially 121,479.409 shares of
Select Value Portfolio, or approximately 26.66% of all outstanding shares of
that Portfolio; (v) B. C. Ziegler and Company, 215 North Main Street, West Bend,
Wisconsin owns beneficially 52,359.845 shares of the Select Value Portfolio, or
approximately 11.49% of all outstanding shares of that Portfolio; and (vi) Hamac
& Co., P.O. Box 26246, Richmond, Virginia owns beneficially 36,120.015 shares of
the PSE Tech 100 Index Portfolio, or approximately 5.70% of all outstanding
shares of that Portfolio. Information as to beneficial ownership was obtained
from information on file with the Securities and Exchange Commission or
furnished by the specified person or the transfer agent.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Basic information with respect to portfolio transactions and brokerage is set
forth in the Prospectus under "Portfolio Transactions and Brokerage." In
addition to the conditions and limitations there described, in the event Ziegler
or another affiliate of an Advisor is utilized as a broker by Principal
Preservation, and other clients of such Advisor are considering the same types
of transactions simultaneously, the Advisor will allocate the transactions and
securities in which they are made in a manner deemed by it to be equitable,
taking into account size, timing and amounts. This may affect the price and
availability of securities to a Portfolio.
During the fiscal years ended December 31, 1996, 1995 and 1994 (or the
portion of such year during which the relevant Portfolio was in operation), the
aggregate brokerage commissions paid by each Portfolio to Ziegler or an
affiliate of Ziegler were as follows:
Brokerage Commissions Paid to Ziegler or
Its Affiliates for Year Ended December 31,
------------------------------------------
Portfolio 1996 1995 1994
- --------- ---- ---- ----
Government $ -0- $ -0- $ -0-
Tax-Exempt -0- -0- -0-
S&P 100 Plus -0- -0- -0-
Select Value -0- -0- --
Dividend Achievers 10,458 17,596 28,505
PSE Tech 100 Index -0- -0- -0-
------- ------- -------
TOTAL $10,458 $17,596 $28,505
======= ======= =======
The amount received by Ziegler or other affiliates of an Advisor during the
year ended December 31, 1996 constituted 21.3% of the aggregate brokerage
commissions paid by Principal Preservation during that year, and the brokerage
commissions earned by Ziegler or other affiliates of an Advisor during that year
were earned on approximately 10.3% of the total dollar amount of portfolio
transactions of Principal Preservation which involved the payment of
commissions. The difference in these percentages is attributable to the fact
that commissions on equity and index options in which the S&P 100 Plus Portfolio
and PSE Tech 100 Index Portfolio invest, the trading of which is not directed to
an affiliate of any Advisor, are based upon the number of contracts rather than
the underlying value of the contracts. Therefore, there is an artificial
difference between the percentage of brokerage commissions paid to such
affiliates compared to the percentage of aggregate dollar amount of portfolio
transactions.
DISTRIBUTION EXPENSES
Principal Preservation's Distribution Plan (the "Plan") is its written plan
contemplated by Rule 12b-1 (the "Rule") under the 1940 Act.
The Plan authorizes the Distributor to make certain payments to any qualified
recipient, as defined in the Plan, that has rendered assistance in the
distribution of Principal Preservation's shares (such as sale or placement of
Principal Preservation's shares, or administrative assistance, such as
maintenance of sub-accounting or other records). Qualified recipients include
banks and other financial institutions. The Plan also authorizes the
Distributor to purchase advertising for shares of the Portfolios, to pay for
sales literature and other promotional material, and to make payments to its
sales personnel. The Plan also entitles the Distributor to receive a fee of .25
of 1% on an annual basis of the average daily net assets of Portfolio shares
that are owned of record by the Distributor as nominee for the Distributor's
customers or which are owned by those customers of the Distributor whose
records, as maintained by Principal Preservation or its agent, designate the
Distributor as the customer's dealer of record. Any such payments to qualified
recipients or expenses will be reimbursed or paid by Principal Preservation, up
to maximum annual amounts established under the terms of the Plan.
The maximum amount of fees payable under the Plan by any Portfolio during any
calendar year may not exceed an amount equal to 0.25 of 1% of the average daily
net assets of the Portfolio over the relevant year. Prior to July 1, 1995, Rule
12b-1 distribution fees for the Government Portfolio, Tax-Exempt Portfolio, S&P
100 Plus Portfolio and Dividend Achievers Portfolio, were not assessed on net
assets of those Portfolios allocated to accounts opened prior to March 1, 1991
(and net assets allocated to accounts in any of those Portfolios opened on or
after March 1, 1991, provided the account was opened in connection with an
exchange from another one of those Portfolios). Pursuant to an amendment to the
Plan (the "Plan Amendment") approved by the shareholders of each of those
Portfolios on April 27, 1995, effective July 1, 1995, net assets allocated to
such accounts no longer are excluded from the calculation of the fee payable by
those Portfolios under the Plan. Rather, like all of the other Portfolios, the
maximum fees payable under the Plan by each of those Portfolios during any
fiscal year is equal to 0.25 of 1% of the Portfolio's total average daily net
assets. -----
As a phase-in measure in connection with implementation of the Plan
Amendment, the Advisor committed that it would reimburse expenses to each of the
Government, Tax-Exempt, S&P 100 Plus and Dividend Achievers Portfolios as
necessary so that, for the period commencing July 1, 1995 and continuing through
December 31, 1996, the annualized operating expenses of those Portfolios will
not exceed the following amounts, stated as a percentage of the relevant
Portfolio's average daily net assets: Government Portfolio - 1.15%; Tax-Exempt
Portfolio - 1.15%; S&P 100 Plus Portfolio - 1.25%; and Dividend Achievers
Portfolio - 1.30%.
The Distributor bears its expenses of distribution above the foregoing
amounts. No reimbursement or payment may be made for expenses of past fiscal
years or in contemplation of expenses for future fiscal years under the Plan.
Payments under the Plan to the Distributor for the year ended December 31, 1996
for each Portfolio are shown in the table under "Management of Principal
Preservation -- Other Services" above.
The Plan states that if and to the extent that any of the payments by
Principal Preservation listed below are considered to be "primarily intended to
result in the sale of shares" issued by a Portfolio within the meaning of the
Rule, such payments by Principal Preservation are authorized without limit under
the Plan and shall not be included in the limitations contained in the Plan:
(1) the costs of the preparation, printing and mailing of all required reports
and notices to shareholders, irrespective of whether such reports or notices
contain or are accompanied by material intended to result in the sale of shares
of Principal Preservation or other funds or other investments; (2) the costs of
preparing, printing and mailing of all prospectuses to shareholders; (3) the
costs of preparing, printing and mailing of any proxy statements and proxies,
irrespective of whether any such proxy statement includes any item relating to,
or directed toward, the sale of Principal Preservation's shares; (4) all legal
and accounting fees relating to the preparation of any such reports,
prospectuses, proxies and proxy statements; (5) all fees and expenses relating
to the qualification of Principal Preservation and or their shares under the
securities or "Blue Sky" laws of any jurisdiction; (6) all fees under the 1940
Act and the Securities Act of 1933, including fees in connection with any
application for exemption relating to or directed toward the sale of Principal
Preservation's shares; (7) all fees and assessments of the Investment Company
Institute or any successor organization or industry association irrespective of
whether some of its activities are designed to provide sales assistance; (8) all
costs of preparing and mailing confirmations of shares sold or redeemed or share
certificates and reports of share balances; and (9) all costs of responding to
telephone or mail inquiries of shareholders.
The Plan also states that it is recognized that the costs of distribution of
Principal Preservation's shares are expected to exceed the sum of permitted
payments, permitted expenses, and the portion of the sales charge retained by
the Distributor, and that the profits, if any, of the Advisors are dependent
primarily on the advisory fees paid by Principal Preservation to Ziegler. If
and to the extent that any investment advisory fees paid by Principal
Preservation might, in view of any excess distribution costs, be considered as
indirectly financing any activity which is primarily intended to result in the
sale of shares issued by Principal Preservation, the payment of such fees is
nonetheless authorized under the Plan. The Plan states that in taking any
action contemplated by Section 15 of the 1940 Act as to any investment advisory
contract to which Principal Preservation is a party, the Board of Directors
including its Directors who are not "interested persons" as defined in the 1940
Act, and who have no direct or indirect financial interest in the operation of
the Plan or any agreements related to the Plan ("Qualified Directors"), shall,
in acting on the terms of any such contract, apply the "fiduciary duty" standard
contained in Sections 36(a) and (b) of the 1940 Act.
Under the Plan, Principal Preservation is obligated to pay distribution fees
only to the extent of expenses actually incurred by the Distributor for the
current year, and thus there will be no carry-over expenses from the previous
years. The Plan permits the Distributor to pay a portion of the distribution
fee to authorized broker dealers, which may include banks or other financial
institutions, and to make payments to such persons based on either or both of
the following: (1) as reimbursement for direct expenses incurred in the course
of distributing Principal Preservation's shares or providing administrative
assistance to Principal Preservation or its shareholders, including, but not
limited to, advertising, printing and mailing promotional material, telephone
calls and lines, computer terminals and personnel (including commissions and
other compensation paid to such personnel); and/or (2) at a specified percentage
of the average value of certain qualifying accounts of customers of such
persons.
The Plan requires that while it is in effect the Distributor shall report in
writing at least quarterly to the Directors, and the Directors shall review, the
following: (1) the amounts of all payments, the identity of recipients of each
such payment, the basis on which each such recipient was chosen and the basis on
which the amount of the payment was made; (2) the amounts of expenses and the
purpose of each such expense; and (3) all costs of the other payments specified
in the Plan (making estimates of such costs where necessary or desirable) in
each case during the preceding calendar or fiscal quarter.
The Plan will continue in effect from year to year only so long as such
continuance is specifically approved at least annually by the Board of Directors
and its Qualified Directors cast in person at a meeting called for the purpose
of voting on such continuance. The Plan may be terminated any time without
penalty by a vote of a majority of the Qualified Directors or by the vote of the
holders of a majority of the outstanding voting securities of Principal
Preservation (or with respect to any Portfolio, by the vote of a majority of the
outstanding shares of such Portfolio). The Plan may not be amended to increase
materially the amount of payments to be made without shareholder approval.
While the Plan is in effect, the selection and nomination of those Directors who
are not interested persons of Principal Preservation is committed to the
discretion of such disinterested Directors. Nothing in the Plan will prevent
the involvement of others in such selection and nomination if the final decision
on any such selection and nomination is approved by a majority of such
disinterested Directors.
CUSTODIAN
Principal Preservation serves as its own Custodian. The securities of each
Portfolio are held by Ziegler, an affiliated person of Principal Preservation,
as Depository. In addition Ziegler performs certain administrative, clearing
and record keeping functions for each Portfolio. For such services, Ziegler is
compensated at the rate of .055 of 1% of the first $10 million of each
Portfolio's assets, .03 of 1% of the next $40 million of assets, .016 of 1% of
the next $200 million of assets, and 0.015 of 1% of assets in excess of $250
million. Fees paid to Ziegler for providing these services to each Portfolio
for the year ended December 31, 1996 are shown in the table under the section of
this Statement of Additional Information entitled "Management of Principal
Preservation -- Other Services."
COUNSEL AND INDEPENDENT PUBLIC ACCOUNTANTS
Quarles & Brady, as counsel to Principal Preservation, has rendered its
opinion as to certain legal matters regarding the due authorization and valid
issuance of the shares of common stock being sold pursuant to the Prospectus.
Arthur Andersen LLP, independent public accountants, are the auditors of
Principal Preservation.
EXPERTS
The audited financial statements of the Portfolios incorporated by reference
into the Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto and incorporated
by reference into the Prospectus in reliance upon the authority of said firm as
experts in accounting and auditing in giving said report.
PORTFOLIO RATINGS
A Portfolio may obtain and use a rating from a nationally recognized
statistical rating organization. A rating on the shares of an investment
company is a current assessment of creditworthiness with respect to the
investments held by such fund. This assessment takes into consideration the
financial capacity of the issuers and of any guarantors, insurers, lessees, or
mortgagors with respect to such investments. The assessment, however, does not
take into account the extent to which a Portfolio's expenses or portfolio asset
sales for less than the Portfolio's purchase price will reduce yield or return.
In addition, the rating is not a recommendation to purchase, sell, or hold
units, inasmuch as the rating does not comment as to market price of the shares
or suitability for a particular investor.
DESCRIPTION OF RATINGS OF CERTAIN SECURITIES
As set forth in the Prospectus under the captions "Investment Objectives" and
"Investment Program," generally, each Portfolio will limit its investment in
debt securities to those which are rated in one of certain specified categories
by a Nationally Recognized Statistical Rating Organization or are U.S.
Government Securities. The following is a brief description of the rating
systems used by three of these organizations.
CORPORATE AND MUNICIPAL BOND RATINGS
Standard & Poor's Ratings Services
- ----------------------------------
An S&P corporate debt rating is a current assessment of the creditworthiness
of an obligor with respect to a specific obligation. This assessment may take
into consideration obligers such as guarantors, insurers or lessees.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default - capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
II. Nature of and provisions of the obligation; and
III. Protection afforded by, and relative position of the obligation in the
event of bankruptcy, reorganization or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
S&P's four highest rating categories are as follows:
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small
degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in the
higher rated categories.
BBB. Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protective parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than for bonds
in the higher-rated categories.
Moody's Investors Service, Inc.
- -------------------------------
The purpose of Moody's Ratings is to provide investors with a simple system
of gradation by which the relative investment qualities of bonds may be noted.
Moody's four highest rating categories are as follows:
Aaa. Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa. Bonds which are Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long term risks
appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa. Bonds which are rated Baa are considered as medium grade obligations:
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Fitch Investors Service, Inc.
- ----------------------------
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner. Fitch's four highest
rating categories are:
AAA. Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA. Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because
bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of
these issuers is generally rated F-1+.
A. Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher
ratings.
BBB. Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on
these bonds and therefore impair timely payment. The likelihood that
the ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
General
- ------
The S&P and Fitch "AA", "A" and "BBB" ratings may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
The letter "p" following an S&P rating indicates the rating is provisional.
A provisional rating assumes the successful completion of the project being
financed by the issuance of the bonds being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion, makes no comment on the likelihood of,
or the risk of default upon failure of, such completion. Accordingly, the
investor should exercise his or her own judgment with respect to such likelihood
and risk.
The word "Conditional" following a Fitch rating indicates the rating is
conditional and is premised on the successful completion of a project or the
occurrence of a specific event.
Moody's security rating symbols may contain numerical modifiers of a generic
rating classification. The modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
The symbol "Con" in a rating by Moody's indicates a provisional rating given
to bonds for which the security depends upon the completion of some act of the
fulfillment of some condition. These are bonds secured by: (1) earnings of
projects under construction; (2) earnings of projects unseasoned in operating
experience; (3) rentals which begin when facilities are completed; or (4)
payments to which some other limiting condition attaches. A parenthetical
rating denotes probable credit stature upon completion of construction or
elimination of basis of condition.
MUNICIPAL NOTE RATINGS
Moody's Investors Service, Inc.
- ------------------------------
MIG 1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2. This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3. This designation denotes favorable quality. All security elements are
accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow
and market access for refinancing is likely to be less well
established.
MIG 4. This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
Standard & Poor's Rating Services
- ---------------------------------
SP-1. Notes rated SP-1 have very strong or strong capacity to pay principal
and interest. Those issues determined to possess overwhelming safety
characteristics are designated as SP-1+.
SP-2. Notes rated SP-2 have satisfactory capacity to pay principal and
interest.
Notes due in three years or less normally receive a note rating. Notes
maturing beyond three years normally receive a bond rating, although the
following criteria are used in making that assessment:
-Amortization schedule (the larger the final maturity relative to other
maturities, the more likely the issue will be rated as a note.)
-Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be rated as a note.)
Fitch Investors Service, Inc.
- -----------------------------
Fitch short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+.Exceptionally Strong Credit Quality. Issues assigned this rating are
-----------------------------------
regarded as having the strongest degree of assurance for timely
payment.
F-1.Very Strong Credit Quality. Issues assigned this rating reflect an
--------------------------
assurance of timely payment only slightly less in degree than issues
rated "F-1+."
F-2.Good Credit Quality. Issues assigned this rating have a satisfactory
-------------------
degree of assurance for timely payment, but the margin of safety is
not as great as for issues assigned "F-1+" and "F-1" ratings.
F-3.Fair Credit Quality. Issues assigned this rating have characteristics
-------------------
suggesting that the degree of assurance for timely payment is
adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
Fitch also uses the symbol "LOC" which indicates that the rating is based on
a letter of credit issued by a commercial bank.
RATINGS OF COMMERCIAL PAPER
Standard & Poor's Rating Services
- ---------------------------------
S&P ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. The ratings are
based on current information furnished to S&P by the issuer and obtained by S&P
from other sources it considers reliable. Ratings are graded into four
categories, ranging from "A" for the highest quality obligations to "D" for the
lowest. Issues within the "A" category are delineated with the numbers 1, 2,
and 3 to indicate the relative degree of safety, as follows:
A-1. This designation indicates the degree of safety regarding timely
payment is overwhelming or very strong. Those issuers determined to
possess overwhelming safety characteristics are denoted with a "plus"
(+) designation.
A-2. Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for
issues designated A-1.
A-3. Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying
the higher designations.
B. Issues rated "B" are regarded as having only an adequate capacity for
timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
C. Issues rated "C" are regarded as having a doubtful capacity for payment.
D. Issues rated "D" are in payment default.
Moody's Investors Service, Inc.
- ------------------------------
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged
to be investment grade, to indicate the relative repayment capacity of rated
issuers:
Prime-1. Issuers (or related supporting institutions) rated Prime-1 have a
superior capacity for repayment or short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: (a) leading market positions in well-established
industries; (b) high rates of return on funds employed; (c)
conservative capitalization structures with moderate reliance on debt
and ample asset protection; (d) broad margins in earnings coverage of
fixed financial charges and high internal cash generation; and (e)
well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2. Issuers (or related supporting institutions) rated Prime-2 have a
strong capacity for repayment of short- term promissory obligations.
This will normally be evidenced by many of the characteristics cited
above in the Prime-1 category but to a lesser degree. Earning trends
and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is
maintained.
Prime-3. Issuers (or related supporting institutions) rated Prime-3 have an
acceptable capacity for repayment of short-term promissory
obligations. The effect of industry characteristics and market
composition may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protection
measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
The ratings of S&P, Moody's and Fitch represent their opinions as to the
quality of the instruments rated by them. It should be emphasized that such
ratings, which are subject to revision or withdrawal, are general and are not
absolute standards of quality.
FINANCIAL STATEMENTS
PRINCIPAL PRESERVATION PORTFOLIOS, INC.
The following audited financial statements and footnotes thereto of Principal
Preservation Portfolios, Inc., including the Government, Tax-Exempt, S&P 100
Plus, Select Value, Dividend Achievers and PSE Tech 100 Index Portfolios, and
the Report of the Independent Public Accountants thereon, are incorporated
herein by reference from Principal Preservation's 1996 Annual Report to
Shareholders.
(1) Balance Sheets of each Portfolio dated December 31, 1996.
(2) Statements of Changes in Net Assets of each Portfolio for the years
ended December 31, 1996 and 1995 (except that this Statement for the
PSE Tech 100 Index Portfolio only covers the period from June 10, 1996
(commencement of operations) through December 31, 1996)
(3) Statements of Operations of each Portfolio for the year ended December
31, 1996 (except that this Statement for the PSE Tech 100 Index
Portfolio only covers the period from June 10, 1996 (commencement of
operations) through December 31, 1996)
A copy of the Annual Report may be obtained free of charge by writing to
Principal Preservation, 215 North Main Street, West Bend, Wisconsin 53095.
Principal Preservation Portfolios, Inc.
215 North Main Street
West Bend, Wisconsin 53095
INVESTMENT ADVISORS
Ziegler Asset Management, Inc.
215 North Main Street
West Bend, Wisconsin 53095
Skyline Asset Management, Inc.
(Sub-Advisor to Select Value Portfolio)
311 South Wacker Drive
Suite 4500
Chicago, Illinois 60606
DISTRIBUTOR, DEPOSITORY, ACCOUNTING/PRICING
AGENT AND TRANSFER AND DIVIDEND DISBURSING AGENT
B.C. Ziegler and Company
215 North Main Street
West Bend, Wisconsin 53095
COUNSEL
Quarles & Brady
411 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP
100 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
PRINCIPAL PRESERVATION PORTFOLIOS, INC.
MAY 1, 1997
STATEMENT OF ADDITIONAL INFORMATION
PRINCIPAL PRESERVATION PORTFOLIOS, INC.
