(PRINCIPAL PRESERVATION LOGO)
Cash Reserve Portfolio
Class X Shares
(Retail Class)
------------
ANNUAL REPORT
TO SHAREHOLDERS
DECEMBER 31, 1997
------------
(PRINCIPAL PRESERVATION LOGO)
Cash Reserve Portfolio
Class Y Shares
(Institutional Class)
------------
ANNUAL REPORT
TO SHAREHOLDERS
DECEMBER 31, 1997
------------
CASH RESERVE PORTFOLIO
CLASS X SHARES (RETAIL CLASS)
ANNUAL REPORT TO SHAREHOLDERS
February 23, 1998
Dear Shareholder:
I am pleased to present the annual report to shareholders for the Retail
Class (Class X) shares of Principal Preservation Portfolios, Inc.'s Cash
Reserve Portfolio. Since December 31, 1996, the Cash Reserve Portfolio has
increased its assets from approximately $125,000,000 to $156,000,000. As of the
date of this report, the Cash Reserve Portfolio's assets have grown to over
$180,000,000. Total assets of the Principal Preservation mutual fund family have
grown from $411,000,000 at December 31, 1996 to a current level in excess of
$500,000,000 as of the date of this letter.
During the course of the year, broad based stock and bond market rallies kept
investor focus in longer term securities. As a result of a stable economy, and
the perception that little to no inflation was occurring, the yield on the 30
year U.S. Treasury Bond fell from 6.8% at the end 1996 to 5.92% at the end of
1997. Short term interest rates remained fairly constant moving from a yield of
5.2% at December 31, 1996 to 5.3% at December 31, 1997. Meanwhile, the Federal
Reserve Board did not change the Federal Funds rate during the last nine months
of 1997. The rapid decline of long term interest rates, coupled with stable
short rates, caused a flattening of the yield curve. As events unfolded
surrounding the severe downturn in the Asian financial markets, an added degree
of uncertainty developed in the U.S. capital markets. The uncertainty gave rise
to a fear that interest rates would rise in response to the developments abroad.
In response, the portfolio manager maintained a shorter average maturity as
compared to the typical money market fund. In the portfolio manager's judgement,
during virtually all of 1997, the risk associated with extending the weighted
number of days to maturity meaningful benefit to shareholders. At the same time
the portfolio manager adjusted the composition of the Cash Reserve Portfolio
from 31% to 28% in U.S. Government and Agency Obligations, 52% to 64% in A1/P1
rated commercial paper and 17% to 8% in overnight repurchase agreements.
The seven day annualized yield at December 31, 1997 for the Cash Reserve
Portfolio's Retail Class was 5.02%, as compared to Donoghues First Tier average
money market yield of 5.06%.
In November of 1997, the Advisor contributed capital in the amount of
$196,000 to the Cash Reserve Portfolio to remove prior years' realized losses on
investments. These losses were accumulated over a three year period. For tax
purposes, these losses could be carried forward and applied against any capital
gains generated from sales of investment securities for a period of 3-4 years.
If the loss carryforwards were not used to offset capital gains prior to that
time, the tax benefit would have been lost to the Portfolio, resulting in a
decline in net asset value. However, in the judgement of the Advisor, any
attempts to generate such capital gains would have exposed shareholders of the
Cash Reserve Portfolio to unnecessary market risks. The Advisor therefore
elected to make a capital contribution to the Cash Reserve Portfolio, out of the
advisor's own funds, in an amount equal to the loss carryforwards. This action
permitted the Cash Reserve Portfolio to eliminate the tax loss carryforwards
from its balance sheet.
We are grateful for your continued trust with us and look forward to the
years to come.
Sincerely,
/s/ Robert J. Tuszynski
Robert J. Tuszynski
President and CEO
The accompanying report is intended for the existing shareholders of Principal
Preservation. It does not constitute an offer to sell. Any investor wishing to
receive more information about the portfolios should obtain a prospectus which
includes a discussion of each investment objective and all sales charges and
expenses of the relevant portfolio(s).
CASH RESERVE PORTFOLIO
CLASS Y SHARES (INSTITUTIONAL CLASS)
ANNUAL REPORT TO SHAREHOLDERS
February 23, 1998
Dear Shareholder:
I am pleased to present the annual report to shareholders for the
Institutional Class (Class Y) shares of Principal Preservation Portfolios,
Inc.'s Cash Reserve Portfolio. Since December 31, 1996, the Cash Reserve
portfolio has increased its assets from approximately $125,000,000 to
$156,000,000. As of the date of this report, the assets of the Cash Reserve
Portfolio have grown to over $180,000,000. Total assets of the Principal
Preservation mutual fund family have grown from $411,000,000 at December 31,
1996 to a current level in excess of $500,000,000 as of the date of this
letter.
During the course of the year, broad based stock and bond market rallies kept
investor focus in longer term securities. As a result of a stable economy, and
the perception that little to no inflation was occurring, the yield on the 30
year U.S. Treasury Bond fell from 6.8% at the end 1996 to 5.92% at the end of
1997. Short term interest rates remained fairly constant moving from a yield of
5.2% at December 31, 1996 to 5.3% at December 31, 1997. Meanwhile, the Federal
Reserve Board did not change the Federal Funds rate during the last nine months
of 1997. The rapid decline of long term interest rates, coupled with stable
short rates, caused a flattening of the yield curve. As events unfolded
surrounding the severe downturn in the Asian financial markets, an added degree
of uncertainty developed in the U.S. capital markets. The uncertainty gave rise
to a fear that future interest rates may rise in response to the developments
abroad.
In response, the portfolio manager maintained a shorter average maturity as
compared to the typical money market fund. In portfolio manager's judgement,
during virtually all of 1997, the risk associated with extending the weighted
number of days to maturity was not justified by any meaningful benefit to
shareholders. At the same time, the portfolio manager adjusted the composition
of the Cash Reserve Portfolio from 31% to 28% in U.S. Government and Agency
Obligations, 52% to 64% in A1/P1 rated commercial paper and 17% to 8% in
overnight repurchase agreements.
The seven day annualized yield at December 31, 1997 for the Cash Reserve
Portfolio's Institutional Class was 5.33%, as compared to Donoghues
Institutional average money market yield of 5.31%.
In November of 1997, the Advisor contributed capital in the amount of
$196,000 to the Cash Reserve Portfolio to remove prior years' realized losses on
investments. These losses were accumulated over a three year period. For tax
purposes, these losses could be carried forward and applied against any capital
gains generated from sales of investment securities for a period of 3-4 years.
If the loss carryforwards were not used to offset capital gains prior to that
time, the tax benefit would have been lost to the Portfolio, resulting in a
decline in net asset value. However, in the judgement of the Advisor, any
attempts to generate such capital gains would have exposed shareholders of the
Cash Reserve Portfolio to unnecessary market risks. The Advisor therefore
elected to make a capital contribution to the Cash Reserve Portfolio, out of the
advisor's own funds, in an amount equal to the loss carryforwards. This action
permitted the Cash Reserve Portfolio to eliminate the tax loss carryforwards
from its balance sheet.
We are grateful for your continued trust with us and look forward to the
years to come.
Sincerely,
/s/ Robert J. Tuszynski
Robert J. Tuszynski
President and CEO
The accompanying report is intended for the existing shareholders of Principal
Preservation. It does not constitute an offer to sell. Any investor wishing to
receive more information about the portfolios should obtain a prospectus which
includes a discussion of each investment objective and all sales charges and
expenses of the relevant portfolio(s).
CLASS X SHARES (RETAIL CLASS)
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE PERIOD
APRIL 5, 1993
(COMMENCEMENT
FOR THE YEARS ENDED DECEMBER 31, OF OPERATIONS)
--------------------------------------- TO DECEMBER 31,
1997 1996 1995 1994 1993
------- ------ ------ ------ --------------
<S> <C> <C> <C> <C> <C>
(Selected data for each share of the Fund
outstanding throughout the periods)
Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00
------- ------- ------- ------- -------
Income from investment operations:
Net investment income 0.05 0.05 0.05 0.04 0.02
Less distributions:
Dividends from net investment income (0.05) (0.05) (0.05) (0.04) (0.02)
------- ------- ------- ------- -------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00
======== ======= ======= ======= =======
Total investment return (b)<F2> 4.80% 4.78% 5.32% 3.64% 2.99% (a)
Ratios/Supplemental Data:
Net assets, end of period (nearest thousand) $122,710 $89,946 $86,590 $52,593 $47,768
Ratio of expenses to average net assets (c)<F3> 0.86% 0.78% 0.79% 1.05% 1.03% (a)<F1>
Capital contributions (d)<F4> 0.13% -- 0.06% -- --
Ratio of net investment income
to average net assets (c)<F3> 4.71% 4.73% 5.23% 3.62% 2.73% (a)<F1>
</TABLE>
Prior to 1996, the assets of the Cash Reserve Portfolio were invested in the
Prime Money Market Portfolio ("Prime") of The Prime Portfolios. At the opening
of business on January 1, 1996, the assets of Prime were liquidated and
transferred to the Principal Preservation Cash Reserve Portfolio ("Fund"). At
that time, Classes were established for the Cash Reserve Portfolio, Class X
(Retail) and Class Y (Institutional). Assets of Prime which previously were
attributed to the Fund were allocated to the Fund's Class X(Retail) shares.
Information as of and results for periods ended prior to January 1, 1996 reflect
the Fund's investments in Prime. Results for the year ended December 31, 1996
reflect the new dual class structure.
(a)<F1>Annualized.
(b)<F2>In 1997 and prior to 1996, the advisers to Prime and the Fund's Class X
shareholders made capital contributions to offset losses in securities. Had the
advisers not made capital contributions, the adjusted annualized total returns
would have been 4.67%, 5.26% and 1.91% for 1997, 1995 and 1994, respectively.
(c)<F3>Prior to 1996, the ratio reflects the Fund's share of Prime's expenses as
well as voluntary waivers of fees and expense reimbursements by Prime's adviser.
For the years ended December 31, 1997 and 1996, the Fund's adviser and
administrator voluntarily waived a portion of their fees. Without these
voluntary waivers and expense reimbursements, the annualized ratios of net
investment income and expenses to average net assets would have been as follows:
<TABLE>
<CAPTION> FOR THE PERIOD
APRIL 5, 1993
(COMMENCEMENT
FOR THE YEARS ENDED DECEMBER 31, OF OPERATIONS)
-------------------------------------- TO DECEMBER 31,
1997 1996 1995 1994 1993
------- ------- ------ ------ --------------
<S> <C> <C> <C> <C> <C>
Ratio of expenses to average net assets 0.94% 0.99% 1.16% 1.32% 1.32%
Ratio of net investment income
to average net assets 4.63% 4.63% 4.86% 3.35% 2.44%
</TABLE>
(d)<F4>For the year ended December 31, 1995, the manner in which capital
contributions are presented changed from the prior year as a result of a
Securities and Exchange Commission Division of Investment Management letter
clarifying the presentation of capital contributions. For the year ended
December 31, 1995, capital contributions were presented in the financial
statements of both the Fund and Prime, whereas in 1994 capital contributions
were presented only in Prime's financial statements.
The accompanying notes are an integral part of the financial statements.
CLASS Y SHARES (INSTITUTIONAL CLASS)
FINANCIAL HIGHLIGHTS
FOR THE YEARS ENDED DECEMBER 31,
----------------------------
1997 1996
------ ------
(Selected data for each share of the Fund
outstanding throughout the periods)
Net asset value, beginning of period $1.00 $1.00
------- -------
Income from investment operations:
Net investment income 0.05 0.05
Less distributions:
Dividends from net investment income (0.05) (0.05)
------- -------
Net asset value, end of period $1.00 $1.00
======= =======
Total investment return (b)<F2> 5.21% 5.20%
Ratios/Supplemental Data:
Net assets, end of period (nearest thousand) $33,057 $35,120
Ratio of expenses to average net assets (a)<F1> 0.45% 0.34%
Capital contribution 0.17% --
Ratio of net investment income to average
net assets (a)<F1> 5.10% 4.95%
(a)<F1>For the years ended December 31, 1997 and 1996, respectively, the adviser
and administrator voluntarily waived a portion of their fees. Without these
voluntary waivers, the annualized ratios would have been as follows:
Ratio of expenses to average net assets 0.54% 0.54%
Ratio of net investment income to average
net assets 5.01% 4.75%
(b)<F2>During 1997, the adviser made capital contributions to offset losses in
securities. Had the adviser not made capital contributions, the adjusted
annualized total return would have been 5.04%.
The accompanying notes are an integral part of the financial statements.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS:
Investments in Securities, at amortized cost and value:
U.S. Government and Agency Obligations $43,197,846
Short-term investments 112,780,158
Cash 1,118
Interest receivable 16,833
Deferred organization expense 8,215
Other assets 12,352
<PAGE>
-----------
Total Assets 156,016,522
LIABILITIES:
Dividends payable (Institutional Class Y) $115,155
Management fees 26,338
Other accrued expenses 107,194
-----------
Total Liabilities 248,687
-----------
NET ASSETS $155,767,835
============
NET ASSETS CONSIST OF:
Capital Stock $155,766,782
Undistributed net investment income 1,053
-----------
Net Assets $155,767,835
============
INSTITUTIONAL CLASS Y
Net Assets (in 000's) $33,057
Shares Authorized 200,000
Shares Issued and Outstanding 33,057
Net asset value and redemption price per share $1.00
RETAIL CLASS X
Net Assets (in 000's) $122,710
Shares Authorized 200,000
Shares Issued and Outstanding 122,710
Net asset value and redemption price per share $1.00
The accompanying notes are an integral part of the financial statements.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
INVESTMENT INCOME:
Interest $7,713,575
----------
Total investment income 7,713,575
----------
EXPENSES:
Investment advisory fees 278,005
Administration fees 208,504
Shareholder service fees Class X 254,254
Distribution fees Class X 152,552
Professional fees 83,229
Depository fees 68,281
Directors fees 30,056
Registration fees 23,364
Transfer agent fees Class X 358
Transfer agent fees Class Y 2,622
Pricing 2,663
Printing and postage fees Class X 14,928
Printing and postage fees Class Y 1,092
Miscellaneous expenses 13,063
----------
Total expenses 1,132,971
Less: Waiver by the Adviser/Administrator (116,261)
---------
Net expenses 1,016,710
----------
NET INVESTMENT INCOME 6,696,865
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $6,696,865
==========
The accompanying notes are an integral part of the financial statements.
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
------------ -----------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $6,696,865 $6,181,887
Net realized loss on investments -- (53,333)
---------- ---------
Net increase in net assets resulting
from operations 6,696,865 6,128,554
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares issued 426,546,772 436,903,589
Net asset value of shares issued in distributions 5,339,583 4,890,666
Cost of shares redeemed (401,383,135) (403,263,856)
---------- -----------
Net increase in net assets from capital
share transactions 30,503,220 38,530,399
DISTRIBUTIONS TO SHAREHOLDERS:
Class X Shares (4,796,186) (4,204,427)
Class Y Shares (1,901,526) (1,975,562)
---------- ---------
Total distributions (6,697,712) (6,179,989)
CAPITAL CONTRIBUTIONS 196,962 --
---------- ---------
Total increase in net assets 30,699,335 38,478,964
NET ASSETS:
Balance at beginning of period 125,068,500 86,589,536
---------- ---------
Balance at end of period $155,767,835 $125,068,500
=========== ===========
The accompanying notes are an integral part of the financial statements.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - ORGANIZATION
Principal Preservation Cash Reserve Portfolio (the "Fund") is a separate series
of Principal Preservation Portfolios, Inc., (the "Company"), a Maryland
corporation organized in 1984. The Fund's investment objective is to seek high
current income to the extent consistent with stability of principal and the
maintenance of liquidity. The Company is registered under the Investment Company
Act of 1940, as amended, as an open-end management investment company. The Fund
commenced operations on April 5, 1993. Class Y shares were first offered on
January 1, 1996.
Through December 31, 1995, the Fund sought to achieve its investment objective
by investing all the investable assets in the Prime Money Market Portfolio (the
"Portfolio") a separate series of The Prime Portfolios, an open-end, diversified
management investment company. Prime had the same investment objectives as the
Fund.
Effective January 1, 1996, pursuant to an Agreement and Plan of Reorganization
and Liquidation dated December 8, 1995, this master/feeder fund structure was
unwound, and the Fund withdrew its investment in the Portfolio. The Fund was
restructured to increase its authorized capital from 300 million to 400 million
shares of the Company's authorized common stock, which were subdivided into two
separate classes of 200 million shares each: Class X Common Stock (Retail
Class) and Class Y Common Stock (Institutional Class). All shares of the Fund
outstanding immediately prior to this restructuring were redesignated (without
otherwise affecting their rights and preferences) as shares of the Retail Class.
Financial highlights presented herein as of and for periods ended prior to
January 1, 1996 reflect the performance of the Fund's investments through Prime.
Each class of shares has identical rights and privileges, except with respect to
service organization fees and distribution fees paid by Class X Shares, voting
rights on matters affecting a single Class of shares and the exchange privileges
of each Class of shares.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies of the Fund:
a) VALUATION OF INVESTMENTS - Money market instruments are valued at amortized
cost, which the Directors have determined in good faith constitutes fair value.
The Fund's use of amortized cost is subject to the Fund's compliance with
certain conditions as specified under Rule 2a-7 of the Investment Company Act of
1940.
b) INTEREST INCOME - Interest income consists of interest accrued and discount
earned (including both original issue and market discount) on the investments of
the Fund, accrued ratably to the date of expected maturity. Premiums are
amortized on the investments of the Fund, accrued ratably to the date of
expected maturity.
c) FEDERAL INCOME TAXES - The Fund intends to distribute substantially all of
its taxable income to its shareholders and otherwise comply with the provisions
of the Internal Revenue Code applicable to regulated investment companies.
Accordingly, no provision for federal income or excise taxes is necessary. As of
December 31, 1997 the Fund has Federal income tax capital loss carryforwards of
$53,333 and $140,095 expiring in 2003 and 2002, respectively. It is management's
intention to make no distribution of any future realized capital gains until its
Federal income tax capital loss carry forward is exhausted.
d) DEFERRED ORGANIZATION EXPENSES - Expenses incurred by Class X in connection
with its organization and the initial public offering of its shares are being
amortized by the Fund over the period of benefit, but not to exceed five years
from the commencement of operations. These expenses were advanced by B.C.
Ziegler and Company ("BCZ"), a wholly-owned subsidiary of The Ziegler Companies,
Inc., who was reimbursed by the Fund.
e) EXPENSE ALLOCATION - The Fund bears all costs of its operations other than
expenses specifically assumed by BCZ. Expenses incurred by the Company with
respect to any two or more funds in the series are allocated in proportion to
the average net assets of each fund, except where allocations of direct expenses
in each fund can otherwise be made fairly. Net investment income, including
expenses, other than class specific expenses and realized and unrealized gains
and losses are allocated daily to each class of shares based upon the relative
net asset value of outstanding shares of each class of shares at the beginning
of the day.
f) USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
g) OTHER - Investment transactions are accounted for on the date the security
is purchased or sold. The Fund has investments in repurchase agreements, which
are securities purchased from another party who agrees to repurchase the
security within a specified time period at a specified price. It is the policy
of the Fund to require the custodian bank to have legally segregated within the
Federal Reserve/Treasury book-entry system, all securities held as collateral in
support of the repurchase agreements. Procedures have been established by the
Fund to monitor the market value of the collateral to ensure the existence of a
proper level of collateral.
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less
than the repurchase price on the sale of the collateral securities.
NOTE 3 - TRANSACTIONS WITH AFFILIATES
a) ADMINISTRATION FEES - Pursuant to an Administrative Services Agreement,
Ziegler Asset Management, Inc. ("ZAMI"), a wholly-owned subsidiary of The
Ziegler Companies, Inc., provides the Fund general office facilities and
supervises the overall administration of the Fund. For these services, ZAMI
receives a fee computed daily and payable monthly totalling 0.15% of average
daily net assets up to $200 million, and 0.10% of such assets over $200 million.
For the year ended December 31, 1997, the Fund incurred administration fees of
$208,504. ZAMI voluntarily waived $116,261 of its collective advisory and
administrative fees during the year ended December 31, 1997. This waiver may be
discontinued at any time by ZAMI.
b) INVESTMENT ADVISORY FEES - ZAMI is also the Investment Adviser to the Fund.
For its services under the Investment Advisory Agreement, the advisor receives
from the Fund a fee accrued daily and paid monthly at an annual rate equal to
0.20% of the Portfolio's average daily net assets. For the year ended December
31, 1997, the Fund incurred total Advisory fees of $278,005.
c) DISTRIBUTION FEES - The Class X Retail Shares of the Fund has adopted a
Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment
Company Act of 1940. The Plan authorizes the Fund to make payments to BCZ to
reimburse BCZ for expenditures incurred in connection with the distribution of
Class X shares to investors. Under the Plan, payments made by the Fund may not
exceed 0.15% of average daily net assets of Class X shares. For the year ended
December 31, 1997, the Fund incurred distribution fees aggregating $152,552.
d) SHAREHOLDER SERVICING FEES - BCZ and certain other brokers and financial
institutions serve as shareholder servicing agents for shareholder accounts
opened and maintained through them by their customers in the Class X Retail
Shares. Under this agreement, BCZ receives a fee of up to 0.25% of the Retail
Class's average daily net assets representing shares owned by BCZ's customers
and held in accounts serviced by BCZ. BCZ also serves as transfer and dividend
disbursing agent for all shareholder accounts holding Class X shares which are
not serviced separately by a shareholder servicing agent and for all shareholder
accounts holding Class Y shares. Fees currently charged by BCZ to each class of
shares for this service are $16 per shareholder account. For the year ended
December 31, 1997, the Fund incurred shareholder servicing fees aggregating
$254,254.
e) DEPOSITORY FEES - The Fund has entered into an agreement with BCZ to
provide the Fund with depository services. For these services, the Fund
currently pays BCZ a fee based on average daily net assets, computed monthly, at
an annual rate of 0.055% on the first $50 million of net assets, 0.035% on the
next $150 million of such assets, 0.030% on the next $300 million and 0.025% on
amounts over $500 million of such assets. For the year ended December 31, 1997,
the Fund incurred total depository fees of $68,281.
f) FUND ACCOUNTING FEES - The Fund has entered into an agreement with BCZ to
provide the Fund with Accounting/Pricing services. For these services, the Fund
currently pays BCZ a base fee of $15,000 and a fee based on average daily net
assets, computed monthly at an annual rate of 0.04% on net assets between $50
million and $100 million, 0.03% on the next $100 million of such assets, and
0.01% on amounts over $200 million of such assets. For the year ended December
31, 1997, the Fund incurred total fund accounting fees of $45,625.
NOTE 4 - INVESTMENT TRANSACTIONS
Purchases and sales (including maturities) of U.S. Government securities,
excluding all short-term securities, aggregated $11,059,039 and $10,068,000,
respectively.
NOTE 5 - CAPITAL CONTRIBUTION
During the year ended December 31, 1997, the Ziegler Companies, Inc. contributed
capital to the Cash Reserve Portfolio to offset 1996 realized losses of $53,333
and 1995 realized losses of $140,095. Neither the Ziegler Companies, Inc. nor
any of its affiliates received any shares of common stock or any other
consideration in exchange for this contribution which further increased the
assets of the Fund.
NOTE 6 - CAPITAL SHARE TRANSACTIONS
In connection with the restructuring described in Note 1, effective at the open
of business on January 1, 1996 all previously outstanding shares of Cash Reserve
Portfolio were reclassified as Class X Retail Shares. At the same time, Class Y
Institutional Shares were issued in exchange for outstanding shares of Prospect
Hill Prime Money Market Fund, a series of Prospect Hill Trust, which, like the
Fund, prior to that time had invested all of its investable assets in Prime.
Transactions in capital shares for the Fund, in thousands, were as follows:
CLASS X CLASS Y
-------- --------
SHARES OUTSTANDING
AT DECEMBER 31, 1995 86,687 0
Shares sold 93,195 343,755
Shares reinvested 4,204 686
Shares redeemed (94,007) (309,257)
-------- ---------
SHARES OUTSTANDING
AT DECEMBER 31, 1996 90,079 35,184
Shares sold 134,735 291,812
Shares reinvested 4,795 545
Shares redeemed (106,899) (294,484)
---------- ---------
SHARES OUTSTANDING
AT DECEMBER 31, 1997 122,710 33,057
======== ========
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL MATURITY INTEREST VALUE
AMOUNT DATE RATE (NOTE 2A)
---------- --------- -------- ----------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- 27.6%
FEDERAL FARM CREDIT BANK ("FFCB")
$ 950,000 FFCB Discount Note 3/3/98 5.580% $941,018
1,005,000 FFCB Discount Note 2/24/98 5.530 996,663
2,588,000 FFCB Discount Note 1/9/98 5.770 2,584,682
903,000 FFCB Discount Note 1/2/98 5.480 902,863
-----------
Total Federal Farm Credit Bank 5,425,226
-----------
FEDERAL HOME LOAN BANK ("FHLB")
2,000,000 FHLB Note (a) 10/6/98 5.780 1,999,283
3,000,000 FHLB Note (b) 3/19/98 5.696 3,000,000
2,354,000 FHLB Discount Note 2/9/98 5.530 2,339,897
2,115,000 FHLB Discount Note 1/20/98 5.550 2,108,805
770,000 FHLB Discount Note 1/7/98 5.600 769,281
-----------
Total Federal Home Loan Bank 10,217,266
-----------
FEDERAL HOME LOAN MORTGAGE CORPORATION ("FHLMC")
5,000,000 FHLMC Discount Note 1/23/98 5.500 4,983,041
818,000 FHLMC Discount Note 1/16/98 5.540 816,112
2,000,000 FHLMC Discount Note 1/15/98 5.710 1,995,559
5,000,000 FHLMC Discount Note 1/14/98 5.630 4,989,835
-----------
Total Federal Home Loan Mortgage Corporation 12,784,547
-----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION ("FNMA")
3,000,000 FNMA Discount Note 2/25/98 5.520 2,974,700
850,000 FNMA Discount Note 2/20/98 5.530 843,472
3,000,000 FNMA Discount Note 1/30/98 5.490 2,986,733
3,000,000 FNMA Discount Note 1/26/98 5.540 2,988,458
----------
Total Federal National Mortgage Association 9,793,363
-----------
WORLD BANK
5,000,000 World Bank Discount Note 10/30/98 5.600 4,977,444
-----------
Total World Bank 4,977,444
-----------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS 43,197,846
-----------
SHORT TERM -- 72.4%
COMMERCIAL PAPER
$2,500,000 American General Finance Corporation 4/14/98 5.680% $2,459,344
2,000,000 American General Finance Corporation 1/18/98 5.700 1,991,450
2,500,000 American General Finance Corporation 1/16/98 5.690 2,494,073
3,500,000 American Express Credit Corporation 2/11/98 5.750 3,477,080
3,500,000 American Express Credit Corporation 1/23/98 5.850 3,487,487
1,000,000 Associates Corporation 4/16/98 5.700 983,375
3,000,000 Associates Corporation 1/6/98 5.580 2,997,675
3,000,000 Associates Corporation 1/5/98 5.600 2,998,133
4,000,000 Beneficial Corporation 1/23/98 5.650 3,986,119
3,000,000 Beneficial Corporation 1/8/98 5.650 2,996,704
2,000,000 The CITGroup Holdings Corporation 3/19/98 5.700 1,975,617
1,000,000 The CITGroup Holdings Corporation 2/4/98 5.800 994,522
2,000,000 The CITGroup Holdings Corporation 1/29/98 5.680 1,991,165
2,000,000 The CITGroup Holdings Corporation 1/13/98 5.600 1,996,267
3,500,000 Commercial Credit Corporation 1/20/98 5.850 3,489,194
3,500,000 Commercial Credit Corporation 1/5/98 5.600 3,497,822
3,500,000 E.I. du Pont de Nemours and Company 1/28/98 5.670 3,485,068
500,000 E.I. du Pont de Nemours and Compan 1/21/98 5.570 498,453
3,000,000 E.I. du Pont de Nemours and Company 1/15/98 5.680 2,993,373
3,000,000 Ford Motor Credit Corporation 2/26/98 5.700 2,973,400
500,000 Ford Motor Credit Corporation 1/12/98 5.690 499,131
3,500,000 Ford Motor Credit Corporation 1/8/98 5.720 3,496,085
3,000,000 General Electric Capital Corporation 1/27/98 5.710 2,987,628
4,000,000 General Electric Capital Corporation 1/22/98 5.710 3,986,636
3,500,000 Household Finance Corporation 2/2/98 5.750 3,482,111
3,000,000 Household Finance Corporation 1/15/98 5.700 2,993,350
500,000 Household Finance Corporation 1/2/98 5.900 499,918
3,000,000 IBM Credit Corporation 2/13/98 5.720 2,979,503
3,500,000 IBM Credit Corporation 2/3/98 5.730 3,481,616
4,000,000 Marshall &Ilsley Corporation 3/9/98 5.720 3,957,418
3,000,000 Marshall &Ilsley Corporation 1/7/98 5.700 2,997,150
3,000,000 Norwest Financial Corporation 2/18/98 5.670 2,977,320
500,000 Norwest Financial Corporation 1/26/98 5.680 498,028
3,000,000 Rabobank Nederland 3/20/98 5.690 2,963,015
3,500,000 Rabobank Nederland 1/2/98 5.630 3,499,452
6,000,000 Travelers Property Casualty Corporation 1/5/98 5.830 6,495,789
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Total Commercial Paper 99,560,471
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REPURCHASE AGREEMENT
13,219,687 First Boston Corporation 1/2/98 6.300 13,219,687
-----------
(Agreement dated 12/31/97, collateralized by
$13,128,000 par value in U.S. Treasury Notes
due 4/15/99, and 7/15/99, $13,552,838 market value)
TOTAL SHORT TERM 112,780,158
------------
Total Investments, at Amortized Cost $155,978,004
============
NOTES TO SCHEDULE OF INVESTMENTS
(a) The security has a floating/variable rate coupon payment tied to the one
month Libor lending rate.
(b) The security has a floating/variable rate coupon payment tied to the six
month Libor lending rate.
The accompanying notes to financial statements are an integral part of this
schedule.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Principal Preservation Portfolios, Inc. and the
Shareholders of the Cash Reserve Portfolio:
We have audited the accompanying balance sheet, including the schedule of
investments, of the PRINCIPAL PRESERVATION PORTFOLIOS, INC. (a Maryland
corporation) Cash Reserve Portfolio as of December 31, 1997, and the related
statement of operations for the year then ended, and the statements of changes
in net assets and financial highlights for the two years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit. The financial highlights for the year ended December 31, 1995 and all
prior periods presented were audited by other auditors whose report dated
February 26, 1996 expressed an unqualified opinion.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with the depositories, banks and brokers.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Principal Preservation Portfolios, Inc. Cash Reserve Portfolio as of December
31, 1997, the results of its operations, and the changes in its net assets and
financial highlights for the two years in the period then ended, in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin,
January 16, 1998.
PRINCIPAL PRESERVATION
PORTFOLIOS, INC.
215 North Main Street
West Bend, Wisconsin 53095
OFFICERS AND DIRECTORS
R.D. Ziegler, Chairman, Director
Richard H. Aster, M.D., Director
Augustine J. English, Director
Ralph J. Eckert, Director
Robert J. Tuszynski, President, Director
Frank Ciano, Chief Financial Officer and Treasurer
John Lauderdale, Vice President of Marketing
S. Charles O'Meara, Secretary
Marc Dion, Vice President
INVESTMENT ADVISOR AND ADMINISTRATOR
Ziegler Asset Management, Inc.
215 North Main Street
West Bend, Wisconsin 53095
DISTRIBUTOR, DEPOSITORY, TRANSFER AND DIVIDEND
DISBURSING AGENT, ACCOUNTING/PRICING 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
This report has been prepared for the information of shareholders of Principal
Preservation Portfolios, Inc. Cash Reserve Portfolio, and may not be used in
connection with the offering of securities unless preceded or accompanied by a
current Prospectus.
PP 178-2/98
PRINCIPAL PRESERVATION
PORTFOLIOS, INC.
215 North Main Street
West Bend, Wisconsin 53095
OFFICERS AND DIRECTORS
R.D. Ziegler, Chairman, Director
Richard H. Aster, M.D., Director
Augustine J. English, Director
Ralph J. Eckert, Director
Robert J. Tuszynski, President, Director
Frank Ciano, Chief Financial Officer and Treasurer
John Lauderdale, Vice President of Marketing
S. Charles O'Meara, Secretary
Marc Dion, Vice President
INVESTMENT ADVISOR AND ADMINISTRATOR
Ziegler Asset Management, Inc.
215 North Main Street
West Bend, Wisconsin 53095
DISTRIBUTOR, DEPOSITORY, TRANSFER AND DIVIDEND
DISBURSING AGENT, ACCOUNTING/PRICING 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
This report has been prepared for the information of shareholders of Principal
Preservation Portfolios, Inc. Cash Reserve Portfolio, and may not be used in
connection with the offering of securities unless preceded or accompanied by a
current Prospectus.
PP 809-2/98
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