Registration No. 33-78256
Investment Company Act File No. 811-8492
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-2
|X| REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
|_| Pre-Effective Amendment No.
|X| Post-Effective Amendment No. 1
and
|X| REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
|X| Amendment No. 4
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THE PRINCIPLED EQUITY MARKET FUND
(Exact name of registrant as specified in charter)
Langley Place, 10 Langley Road, Newton Centre, Massachusetts 02459
(Address of Principal Executive Offices)
617-964-7600
(Registrant's Telephone Number, including Area Code)
DAVID W. C. PUTNAM, Secretary
The Principled Equity Market Fund
Langley Place, 10 Langley Road
Newton Centre, Massachusetts 02459
(Name and Address of Agent for Service)
Copies of all correspondence to:
BRYAN G. TYSON, ESQ.
Sullivan & Worcester LLP
One Post Office Square
Boston, Massachusetts 02109
If any of the securities being registered on this form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. |X|
It is proposed that this filing will become effective when declared effective
pursuant to section 8(c).
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FORM N-2
THE PRINCIPLED EQUITY MARKET FUND
Cross-Reference Sheet
Part A of
Form N-2
Item No. Item Description Prospectus Heading
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1 Outside Front Cover Cover Page
2 Cover Pages; Other Offering Information Cover Page
3 Fee Table and Synopsis Prospectus Summary
4 Financial Highlights Financial Highlights
5 Plan of Distribution Cover Page; Prospectus Summary;
Purchase of Shares
6 Selling Shareholders *
7 Use of Proceeds Prospectus Summary; Use of
Proceeds; Investment Objective and
Policies
8 General Description of the Registrant Cover Page; Prospectus Summary;
Investment Objective and Policies;
Investment Restrictions; The Fund
and Its Shares
9 Management Prospectus Summary; Management;
Custodian, Transfer and Dividend
Disbursing Agent; The Fund and Its
Shares
10 Capital Stock, Long-Term Debt, and Other Cover Page; Prospectus Summary;
Securities Distributions and Taxes; Share
Repurchases and Tender Offers; Net
Asset Value; The Fund and Its Shares
11 Defaults and Arrears on Senior Securities *
12 Legal Proceedings *
13 Table of Contents of the Statement of Additional Table of Contents of the Statement of
Information Additional Information
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Part B of
Form N-2 Heading in Statement of
Item No. Item Description Additional Information
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14 Cover Page Cover Page
15 Table of Contents Table of Contents
16 General Information and History *
17 Investment Objectives and Policies Cover Page (Prospectus); Prospectus
Summary; Investment Objective and
Policies (Prospectus); Investment
Policies and Techniques
18 Management
19 Control Persons and Principal Holders of Securities Trustees and Officers
20 Investment Advisory and Other Services Management; The Administrator
(Prospectus); Custodian, Transfer
Agent and Dividend Disbursing Agent
(Prospectus); Purchase of Shares
(Prospectus); Auditors (Prospectus)
21 Brokerage Allocation and Other Practices
22 Tax Status Taxation
23 Financial Statements Financial Statements
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* Not applicable or negative answer
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PROSPECTUS _____________, 1998
THE PRINCIPLED EQUITY MARKET FUND
Langley Place, 10 Langley Road
Newton Centre, MA 02459
(617) 964-7600
2,000,000 Shares of Beneficial Interest, no par value
The Principled Equity Market Fund (the "Fund") is a closed-end,
diversified management investment company organized as a Massachusetts business
trust. The Fund's investment object is long-term capital appreciation.
The Fund invests principally in equity and debt securities that the
Fund's management believes will contribute to the achievement of the Fund's
objective and that do not possess characteristics (i.e., products, services,
geopolitical areas of operation or other similar nonfinancial aspects) that
management believes are unacceptable to substantial constituencies of investors
concerned with the ethical and/or social justice characteristics of their
investments (hereinafter sometimes called "concerned investors"). Such
securities, and/or their characteristics, are herein sometimes referred to as
being "Acceptable". A list of security characteristics that the Fund believes to
be of interest to concerned investors as of the date of this Prospectus is
included in Appendix I. For the information of investors the Fund will from time
to time compare its investments results to those of major equity and debt market
indices, such as the Standard and Poor's Corporation 500 Stock Index.
The Shares of the Fund are offered on a monthly basis at net asset
value. There is no minimum purchase as of the date of this Prospectus.
As a closed-end investment company, the Fund does not maintain a
continuous offer to repurchase or redeem its outstanding Shares. The Fund may
offer to repurchase outstanding Shares at the option of the Trustees from time
to time (but no more frequently than quarterly). There can be no assurance that
any such repurchase offers will be made.
The Shares have a limited public market and are relatively illiquid,
and Shareholders may experience difficulty in selling their Shares otherwise
than pursuant to repurchase offers, which will be made only if and when the
Trustees determine, in their discretion, that any such offer would be in the
best interests of the Fund and the Shareholders.
This Prospectus is intended to set forth concisely the information
about the Fund that a prospective investor should know before investing.
Investors are encouraged to read this Prospectus and retain it for future
reference. Additional information is contained in a Statement of Additional
Information which has been filed with the Securities and Exchange Commission. It
is available upon request and without charge by calling or writing the Fund. The
Statement of Additional Information bears the same date as this Prospectus and
is incorporated by reference in this Prospectus. The table of contents of the
Statement of Additional Information appears at the end of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
PROSPECTUS SUMMARY..........................................................1
USE OF PROCEEDS.............................................................3
INVESTMENT OBJECTIVE AND POLICIES...........................................3
INVESTMENT RESTRICTIONS.....................................................5
MANAGEMENT..................................................................7
DISTRIBUTIONS AND TAXES.....................................................8
SHARE REPURCHASES AND TENDER OFFERS.........................................9
PURCHASE OF SHARES..........................................................9
NET ASSET VALUE............................................................10
THE FUND AND ITS SHARES....................................................10
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT....................11
REPORTS TO SHAREHOLDERS....................................................11
LEGAL COUNSEL..............................................................12
AUDITORS...................................................................12
ADDITIONAL INFORMATION.....................................................12
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION...................13
Appendix A-Description of Ratings and Certain Securities .................A-1
Appendix I-Certain Characteristics of Investments of Interest
to Concerned Investors ...............................................I-1
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PROSPECTUS SUMMARY
This summary does not purport to be complete and is qualified in its
entirety by reference to the detailed information appearing elsewhere in this
Prospectus, in the related Statement of Additional Information which is
incorporated herein by reference, in the Registration Statement, of which this
Prospectus and said Statement of Additional Information are parts, and in
amendments thereto, all filed with the Securities and Exchange Commission. Terms
not defined in this summary are defined elsewhere herein and in the appendices.
Summary of Fund Expenses
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An investor should consider the Fund's investment objective, the
expense information in the table below and other important information in this
Prospectus.
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A. Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases (as a percentage of offering price).....................None
B. Annual Fund Operating Expenses (as a percentage of average net assets)1
Management Fees (including investment advisory fees) (after waivers and reimbursements)2.......0.15%
Administration Fees............................................................................0.10%
Other Expenses.................................................................................0.48%
Total Annual Fund Operating Expenses 1,2....................................................0.73%
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1 The percentages assume average annual net assets of $18,000,000.
2 Reflects current year waiver by the Manager of its 0.10% portion of this fee (see "Management" herein)
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Example: 1 year 3 years 5 years 10 years
You would pay the following $7.00 $23.00 $40.00 $88.00
expenses on a $1,000 investment,
assuming a 5% annual return
The purpose of the above table is to assist you in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly.
A. Shareholder Transaction Expenses are charges, if any, that you would
pay when you buy or sell Shares of the Fund.
B. Annual Fund Operating Expenses include management fees paid by the Fund
to F. L. Putnam Investment Management Company (the "Manager") for
managing its investments and business affairs. From that fee an
advisory fee is paid by the Manager to PanAgora Asset Management, Inc.
("PanAgora" or the "Sub- Adviser") for managing the Fund's investments
in equity securities identified by the Manager as "Acceptable"
securities. The Fund incurs other expenses for maintaining shareholder
records, furnishing shareholder statements and reports and for other
services. Management fees and other expenses are reflected in the
Fund's share price or dividends and are not charged directly to
individual shareholder accounts. See "Management".
C. Example of Expenses: The hypothetical example illustrates the expenses
associated with a $1,000 investment in the Fund over periods of one,
three, five and ten years, based on the expenses in the table above and
an assumed annual rate of return of 5%. The return of 5% and expenses
should not be considered indications of actual or expected Fund returns
or expenses, both of which may vary.
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Financial Highlights
The following per share data and ratios with respect a share of
beneficial interest of the Fund outstanding throughout the fiscal year ended
December 31, 1997 and the period from October 28, 1996 to December 31, 1996 have
been audited by Livingston & Haynes, independent auditors, as indicated in their
report included with the Fund's audited financial statements herein and should
be read in conjunction with the audited financial statements and the notes
thereto.
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(Unaudited) Period from inception
Three months ended Year ended December (October 28, 1996)
March 31, 1998 31, 1997 to December 31, 1996
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Net asset value, beginning of period............. $12.90 $10.00 $10.00
Net investment income......................... 0.04 0.14 --
Net realized and unrealized gain on
investments.............................. 1.84 2.96 --
Total from investment operations................. 1.88 3.10 --
Distributions to shareholders:
From net investment income.................... -- 0.14 --
From net realized gain on investments......... -- 0.06 --
Total Distributions.............................. -- 0.20 --
Net asset value, end of period................... $14.78 $12.90 $10.00
Market value, end of period...................... -- -- --
Total investment return.......................... 1.88 3.10
Net increase in net asset value.................. 1.88 2.90 --
Net assets, end of period........................ $25,484,236 $22,006,749 $8,940,260
Ratio of expenses to average net assets.......... 0.06% 0.48% --
Ratio of net investment income to
average net assets............................ 0.29% 1.40% --
Portfolio turnover rate.......................... -- 0.07 --
Average commission rate paid..................... -- 0.02 --
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Investment Objective and Policies
The Fund's investment objective of long-term capital appreciation is
summarized on the cover page of this Prospectus and this and the Fund's
investment policies are discussed herein under "Investment Objective and
Policies".
The Manager, the Sub-Adviser and the Administrator
The Manager identifies "Acceptable" securities. The Sub-Adviser selects
which of the "Acceptable" securities identified by the Manager the Fund should
invest in. The Sub-Adviser is staffed by personnel with extensive investment
advisory experience. In addition to identifying Acceptable securities, the
Manager serves as investment and business manager of the Fund. The Manager and
its principal officers have provided investment advisory services to individual,
corporate and other institutional clients for many years, including investment
companies, and the Manager has numerous clients concerned with the ethical,
social justice, environmental and other nonfinancial aspects of their
investments. The Manager will be entitled to retain a monthly fee at the rate of
.10% per annum of the Fund's average monthly net assets from its total fee of
.25% of such net assets, after paying a fee at the rate of .15% per annum of
such net assets to the Sub-Adviser. The Manager has agreed to waive its portion
of the fee for the current year of the Fund's operations. See "Management"
herein.
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The Administrator, which is also the Transfer Agent and Dividend
Disbursing Agent, will receive a fee of $12,000 per year for performing these
services, including computing the Fund's net asset value as required.
Distributions and Taxes
The Fund intends to pay dividends on the Shares annually out of net
investment income and short-term capital gains. Distributions of "net capital
gains", if any, will generally be made annually and will be taxable as long-term
capital gains to the extent that they are designated by the Fund as capital
gains dividends. See "Distributions and Taxes" within.
Share Repurchases and Tender Offers
It is expected that there will be at most a limited market for the
Shares and, accordingly, the Shares will be relatively illiquid. From time to
time, but no more frequently than quarterly, the Board of Trustees may consider
making a tender offer for the Shares. In deciding whether to repurchase or to
tender for Shares, the Board will consider both whether a tender or repurchase
is in the best interests of the Fund and its shareholders and also the effect of
certain tax considerations, including maintenance of the Fund's tax status as a
regulated investment company. See "Share Repurchases and Tender Offers" within.
USE OF PROCEEDS
The net proceeds to the Fund from any sale of the Shares offered hereby
will be invested in accordance with the Fund's investment objective and
policies. Pending such investment, the proceeds will be invested in short-term
interest-bearing securities.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is long-term capital appreciation. The
Fund invests principally in equity and debt securities that the Fund's
management believes will contribute to the achievement of these objectives and
that do not possess characteristics (i.e., products, services, geopolitical
areas of operation or other similar nonfinancial aspects) that management
believes are unacceptable to substantial constituencies of investors concerned
with the ethical and/or social justice characteristics of their investments
(hereinafter sometimes called "concerned investors"). Such securities, and/or
their characteristics, are herein sometimes referred to as being "Acceptable". A
list of security characteristics which the Fund believes are of interest to
concerned investors as of the date of this Prospectus is included in Appendix I.
For the information of investors the Fund will from time to time compare its
investment results to those of major market indices, such as the Standard and
Poor's Corporation 500 Stock Index.
The Fund's investment objective may be changed by the Trustees without
shareholder approval upon 30 days notice.
"Acceptable" Criteria. While it is not possible to determine in advance
all of such characteristics and/or issuers which are not Acceptable to the Fund,
some of the characteristics of issuers whose securities reasonably can be
expected to be excluded are issuers who directly derive substantial revenues
from or who have substantial assets which involve):
o Nuclear, chemical, and biological weapons;
o Toxic waste emission;
o Discriminatory and otherwise unfair employment
practices; and
o Operations which support oppressive governments.
In seeking to achieve its investment objective, the Fund will purchase
Acceptable securities, identified as such by the Manager, that will, in the
Sub-Adviser's opinion, contribute to this goal. The Fund will hold both
dividend-paying and non-dividend-paying common stocks. The Fund will attempt to
keep transaction costs low and maintain a portfolio turnover rate of not more
than 50% per year. If the Fund were to replace all of its securities,
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other than government securities, in one year, it would have a 100% annual
turnover rate. For the year ended December 31, 1997, the Fund's turnover rate
was 7%.
Changes may be made in the Fund's holdings as the result of changes in
the securities markets in which the Fund invests or in the activities of issuers
whose securities are held as Acceptable securities or in the desirability of
individual securities as Fund investments from a financial standpoint. Since
brokerage and other transaction costs reduce the Fund's return, each investment
for the Fund is chosen on the basis of its ability to comply with the Fund's
investment objective, policies and restrictions. In selecting investments for
the Fund, all investments are first evaluated for investment potential and then
screened for their compliance with the Fund's ethical and social justice
criteria. Such criteria limit the Fund's universe as compared to that of funds
having no such criteria. Ethical and social justice investment criteria are not
expressions of fundamental policies and may be changed without shareholder
approval.
The Manager will depend principally upon its experience in identifying
and monitoring companies that meet the Acceptable investment criteria of the
Fund.
While the Manager has primary responsibility for the selection of
securities to meet the Fund's particular investment criteria for Acceptable
securities, it will rely upon the Board of Trustees with respect to the specific
criteria used by the Fund from time to time.
If, after an initial purchase by the Fund of a company's securities, it
is determined that such company's activities change or the Fund adopts new
Acceptable investment criteria with the result that such company's activities
contravene the Fund's criteria, then the securities of such company will be
eliminated from the Fund's portfolio within a reasonable time. This requirement
may cause the Fund to dispose of the securities at a time when it may be
economically disadvantageous to do so.
To provide for daily recurring expenses and to provide for any share
repurchases authorized by the Trustees, the Fund may hold cash, high quality
corporate obligations, money market instruments and U.S. government securities.
When the Adviser determines that market conditions warrant, the Fund may adopt a
temporary defensive posture and hold such securities without limit. (See "United
States Government Securities" in Appendix A to this Prospectus for information
concerning U.S. government securities).
Futures Contracts. The Fund may purchase and sell exchange-traded stock
index and other financial futures contracts, although it is expected that this
activity will be minimal, and in no event will the Fund maintain futures
positions which at any time expose more than 20% of the Fund's assets to risk of
loss without seeking to close out sufficient positions to reduce such exposure
to such 20%. The Fund may engage in such futures transactions in an attempt to
protect against possible changes in the market value of securities held in or to
be purchased for the Fund's portfolio resulting from securities market
fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, or to establish a position in the derivatives markets as a temporary
substitute for a particular transaction in a particular security. The ability of
the Fund to utilize futures successfully will depend on the Sub-Adviser's
ability to predict pertinent market movements, which cannot be assured. (See
"Futures Transactions" in the Statement of Additional Information for more
information about these practices and their risks.)
Utilizing the foregoing practices is commonly known as investing in
derivatives, which may expose the Fund to significant risks. The extent of such
utilization is not formally limited, but the Fund anticipates that under normal
circumstances such utilization will not be permitted to subject more than 10% of
the Fund's total assets to risk of loss without the Fund seeking to close out
sufficient positions to reduce such risk to such 10%.
Other Investment Policies. The Fund may employ certain other investment
strategies and techniques in pursuing the Fund's investment objective, which
together with their related risks are summarized below. These investment
techniques and the related risks are described further in the Statement of
Additional Information. Inclusion of such descriptions in this Prospectus and in
the Statement of Additional Information should not be construed by investors as
a representation that these techniques will generally be extensively employed by
the Fund or that the Fund
4
<PAGE>
will be generally "hedged" to any particular degree against market risks or
operated in any sense whatsoever as a "hedge fund".
When-Issued and Delayed Delivery Purchases. The Fund may make contracts
to purchase securities on a "when-issued" or "delayed delivery" basis. Pursuant
to such contracts, delivery and payment for the securities occurs at a later
date than the customary settlement date. The payment obligation and the interest
rate on the securities will be fixed at the time the Fund enters into the
commitment, but interest will not accrue to the Fund until delivery of and
payment for the securities. An amount of cash or short-term U.S. Government
securities equal to the Fund's commitment would be deposited in a segregated
account at the Fund's custodian bank to secure the Fund's obligation. Although
the Fund would generally purchase securities on a when-issued or delayed
delivery basis with the intention of actually acquiring the securities for its
portfolio (or for delivery pursuant to options contracts it has entered into),
the Fund could dispose of a security prior to settlement if the Adviser deemed
it advisable. The Fund may realize short-term gains or losses in connection with
such sales. Purchasing securities on a when-issued or delayed delivery basis
involves a risk of loss if the value of the security to be purchased declines
prior to the settlement date. This risk is in addition to the risk of a decline
in value of the Fund's other assets. Furthermore, when such purchases are made
through a dealer, the dealer's failure to consummate the sale may result in the
loss to the Fund of an advantageous yield or price.
Repurchase Agreements. The Fund may enter into repurchase agreements
with broker-dealers, banks and other financial institutions. A repurchase
agreement is a contract pursuant to which the Fund, against receipt of
securities of at least equal value, agrees to advance a specified sum to the
financial institution which agrees to reacquire the securities at a mutually
agreed upon time and price. Repurchase agreements, which are usually for periods
of one week or less, enable the Fund to invest its cash reserves at fixed rates
of return. The Fund may enter into repurchase agreements, provided that the
Fund's custodian bank always has possession of securities serving as collateral
whose market value at least equals the amount of the repurchase obligation. To
minimize the risk of loss, the Fund will enter into repurchase agreements only
with financial institutions considered by the Adviser to be creditworthy under
guidelines adopted by the Board of Trustees. If an institution enters an
insolvency proceeding, the resulting delay in liquidation of the securities
serving as collateral could cause the Fund some loss, as well as legal expense,
should the value of the securities decline prior to liquidation.
Securities Loans. The Fund may seek to obtain additional income by
making secured loans of its portfolio securities. In such transactions, the
borrower pays to the Fund an amount equal to any dividends or interest received
on loaned securities. The Fund retains all or a portion of the interest received
on investment of cash collateral or receives a fee from the borrower. All
securities loans will be made pursuant to agreements requiring that the loans be
continuously secured by collateral in cash or short-term debt obligations at
least equal at all times to the market value of the loaned securities. The Fund
may pay reasonable finders', administrative and custodial fees in connection
with loans of its portfolio securities. Although voting rights or rights to
consent accompanying loaned securities pass to the borrower, the Fund retains
the right to call the loans at any time on reasonable notice, and it will do so
in order that the securities may be voted by the Fund with respect to matters
materially affecting the Fund's investment. The Fund may also call a loan in
order to sell the securities involved. Lending portfolio securities involves
risks of delay in recovery of the loaned securities or in some cases loss of
rights in the collateral should the borrower commence an action relating to
bankruptcy, insolvency or reorganization. Accordingly, loans of portfolio
securities will be made only to borrowers considered by the Adviser to be
creditworthy under guidelines adopted by the Board of Trustees.
INVESTMENT RESTRICTIONS
The Fund has adopted certain fundamental policies which may not be
changed without the vote of a majority of the outstanding voting securities, as
defined in the 1940 Act, of the Fund. Such vote means the affirmative vote of
the lesser of (i) the holders of more than 50% of the outstanding Shares, or
(ii) the holders of 67% or more of the outstanding Shares present at a meeting
if more than 50% of the holders of the outstanding Shares are represented at the
meeting in person or by proxy.
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The Fund may not:
1. Borrow money or issue senior securities, provided that the
Fund may borrow amounts not exceeding 331/3% of the value of its total
assets (not including the amount borrowed) for temporary purposes, and
may not make additional investments while such borrowed amounts exceed
5% of the Fund's total assets.
2. Pledge, hypothecate, mortgage or otherwise encumber its
assets, except to secure borrowing permitted by the preceding
paragraph. Collateral arrangements with respect to margin on forward
currency contracts, futures contracts and options thereon and on
securities are not deemed to be pledges or other encumbrances for
purposes of this restriction.
3. Purchase securities on margin, except that the Fund may
obtain such short-term credits as may be necessary for the clearance of
security transactions and may make margin deposits in connection with
forward currency contracts, option contracts on securities, equity
indices and other financial instruments as well as financial futures
contracts and options thereon.
4. Make short sales of securities or maintain a short position
for the account of the Fund, unless at all times when a short position
is open the Fund owns an equal amount of such securities or owns
securities which, without payment of any further consideration, are
convertible into or exchangeable for securities of the same issue as,
and in equal amounts to, the securities sold short.
5. Underwrite securities issued by other persons, except to
the extent that in connection with the disposition of its portfolio
investments it may be deemed to be an underwriter under the federal
securities laws.
6. Purchase or sell real estate, although the Fund may
purchase or sell securities of issuers which deal in real estate,
securities which are secured by interests in real estate and securities
representing interests in real estate.
7. Purchase or sell commodities or commodity contracts, except
that the Fund may purchase or sell financial futures contracts and
options on financial futures contracts and engage in foreign currency
transactions.
8. Make loans, except by purchase of debt obligations in which
the Fund may invest consistent with its investment policies, by
entering into repurchase agreements or through the lending of its
portfolio securities.
9. Purchase or retain the securities of any issuer if, to the
knowledge of the Fund, those officers and Trustees of the Fund and
officers and Directors of the Manager or the Sub-Adviser who each own
beneficially more than 1/2 of 1% of the securities of that issuer
together own more than 5% of such issuer.
10. Invest in securities of any issuer if, immediately after
such investment, more than 5% of the total assets of the Fund (taken at
current value) would be invested in the securities of such issuer or
acquire more than 10% of the outstanding voting securities of any
issuer, provided that this limitation does not apply to obligations
issued or guaranteed as to interest and principal by the U.S.
Government or its agencies or instrumentalities or to repurchase
agreements secured by such obligations and that up to 25% of the Fund's
total assets (at current value) may be invested without regard to this
limitation.
11. Concentrate its investments in the securities of issuers
primarily engaged in any one industry or group of industries, provided
that this limitation does not apply to obligations issued or guaranteed
as to interest and principal by the U.S. Government or its agencies or
instrumentalities or to repurchase agreements secured by such
obligations.
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12. Buy or sell oil, gas or other mineral leases, rights or
royalty contracts although it may purchase securities of issuers which
deal in, represent interests in or are secured by interests in such
leases, rights or contracts.
13. Purchase securities of any issuer for the purpose of
exercising control or management, except in connection with a merger,
consolidation, acquisition or reorganization.
All percentage limitations on investments will apply at the time of the
making of an investment and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of such
investment. Except for the investment restrictions listed above, other
investment policies described in this Prospectus are not fundamental and may be
changed by approval of the Board of Trustees.
As non-fundamental policies the Fund intends to follow the policies of
the Securities and Exchange Commission as they are adopted from time to time
with respect to illiquid securities, including (1) treating as illiquid
securities that may not be disposed of in the ordinary course of business within
seven days at approximately the value at which the Fund has valued the
investment on its books; and (2) limiting its holdings of such securities to 15%
of its net assets. The purchase of restricted securities is not to be deemed
engaging in underwriting.
In order to permit the sale of Fund shares in certain states or foreign
countries, the Fund may make commitments more restrictive than the investment
restrictions described above. Should the Fund determine that any such commitment
is no longer in the best interests of the Fund, it may revoke the commitment by
terminating sales of its shares in the state or country involved.
MANAGEMENT
The Manager
F. L. Putnam Investment Management Company, Langley Place, 10 Langley
Road, Newton Centre, Massachusetts 02459, serves as the general investment and
business manager ("Manager") of the Fund pursuant to a written management
agreement (the "Management Agreement"). The Manager and its principal officers
have provided investment advisory services to individual, corporate and other
institutional clients for many years.
The Manager is a Maine corporation registered with the Securities and
Exchange Commission as an investment adviser, and is wholly-owned by F. L.
Putnam Securities Company, Incorporated, a Delaware corporation, Two City
Center, Portland, Maine 04101, which is a financial services holding company,
substantially all of the outstanding voting stock of which is held by David W.
C. Putnam, a Trustee of the Fund, and members of his family.
Subject to the direction and control of the Trustees, the Manager is
responsible for supervising the overall management of the Fund's investments and
business affairs. The Management Agreement permits the Manager, with the
approval of the Fund's Shareholders and Trustees, to delegate all or any part of
its duties and obligations to one or more sub-investment advisers. PanAgora
Asset Management, Inc. is such a sub-investment adviser pursuant to a written
investment advisory agreement (the "Sub-Advisory Agreement") providing for
PanAgora to manage the Acceptable securities identified by the Manager. For its
services, the Fund pays the Manager a monthly fee equal to .25% per annum of the
Fund's average monthly net assets. From this fee the Manager pays a monthly fee
at the annual rate of .15% of such average net assets to the Sub-Adviser and
retains a fee of .10% of such net assets. The Manager has agreed to waive its
portion of the fee for the current year of the Fund's operations.
The Fund pays all expenses incurred in its operation not assumed by the
Manager, including such investment advisory fee, expenses for legal,
bookkeeping, accounting and auditing services, interest, taxes, costs of
printing and distributing reports to shareholders, proxy materials,
prospectuses, statements of additional information and share certificates,
charges of its custodian bank, fees of the Administrator for administration,
transfer agency and dividend disbursing services, registration fees, fees and
expenses of the Trustees who are not interested persons of the Manager,
insurance, brokerage costs, litigation and other extraordinary or nonrecurring
expenses. Under the Management Agreement, the Manager will reduce its fee to the
extent that expenses payable by the Fund would exceed the limit on expenses
applicable to the Fund in any state in which Shares are then qualified for sale.
7
<PAGE>
The Sub-Adviser
PanAgora Asset Management, Inc. ("PanAgora" or the "Sub-Adviser") is a
registered investment adviser organized in 1989, with offices at 260 Franklin
Street, Boston, Massachusetts, 02110, and affiliated offices in London, England.
It is wholly-owned, directly or indirectly, by its ultimate parents, Nippon Life
Insurance Company and Putnam Investments. PanAgora specializes in quantitative
investment techniques and will as a sub-adviser employed by the Manager with the
Fund's approval, manage the Fund's Acceptable securities (identified by the
Manager). PanAgora is staffed by personnel substantially experienced in various
techniques of investment management.
Portfolio Managers
David W. C. Putnam, President of the Manager, will be primarily
responsible for selecting Acceptable securities. Mr. Putnam has been in the
investment management business for many years and, together with the staff of
the Adviser, has had substantial experience in selecting such securities.
The Portfolio Manager primarily responsible for the Fund's investment
management by PanAgora is John Capeci. Before joining PanAgora, Mr. Capeci
taught in the Lemberg Program at Brandeis University's Graduate School of
International Economics and Finance.
The Administrator
Anchor Investment Management Corporation, 579 Pleasant Street, Paxton,
Massachusetts 01612, is Administrator, Transfer Agent and Dividend Disbursing
Agent of the Fund. As Administrator it will oversee or provide bookkeeping,
securities transactions, net asset value computations and other operational
matters for the Fund.
Its fees from the Fund currently total $12,000 per year.
Portfolio Brokerage Transactions
Subject to the supervision of the Trustees, the Sub-Adviser and/or the
Manager selects the brokers and dealers which execute orders to purchase and
sell portfolio securities for the Fund. They seek to obtain the best available
price and most favorable execution with respect to all transactions for the
Fund.
Subject to the consideration of best price and execution and to
applicable regulations, the receipt of research services and, if and when
applicable, sales of Fund shares may also be considered factors in the selection
of brokers and dealers that execute orders to purchase and sell portfolio
securities for the Fund.
Consistent with the Fund's policy of obtaining best price and execution
on portfolio transactions, the Trustees have determined that portfolio
transactions for the Fund may be executed through a broker that may be
considered an affiliated person of the Fund or the Manager or the Sub-Adviser,
if in the judgment of the Manager or the Sub- Adviser, the use of such
affiliated broker is likely to result in prices and executions at least as
favorable to the Fund as those available from other qualified brokers and if, in
such transactions, such affiliated broker charges the Fund commission rates
consistent with those charged by the broker to comparable unaffiliated customers
in similar transactions.
During the year ended December 31, 1997, the Fund paid $10,945 in
brokerage commissions. Portfolio brokerage transactions are further described in
the Statement of Additional Information.
DISTRIBUTIONS AND TAXES
Distributions
The Fund intends to pay dividends on the Shares annually out of net
investment income and short-term capital gains. The Fund's net investment income
is all of its income (other than net capital gains) reduced by its
8
<PAGE>
expenses. In addition, the Fund intends to distribute annually to shareholders
all of "net capital gains". The Fund's net capital gains equals the excess of
its net long-term capital gains over its net short-term capital losses.
The Fund expects for the presently foreseeable future to declare all
dividends and distributions in additional Shares of the Fund taken at their net
asset value on the record date, provided that Shareholders may elect in advance
to have dividends and distributions paid to them in cash.
Federal Taxes
The Fund intends to qualify as a regulated investment company under the
Internal Revenue Code. As a regulated investment company, the Fund will not be
subject to federal income tax on net investment income and capital gains (short-
and long-term), if any, that it distributes to its shareholders if at least 90%
of its net investment income and net short-term capital gains for the taxable
year are distributed, but will be subject to tax at regular corporate rates on
any income or gains that are not distributed. In addition, dividends and
distributions paid to shareholders are taxable as ordinary income or capital
gains. Shareholders may be proportionately liable for taxes on income and gains
of the Fund but shareholders not subject to tax on their income will not be
required to pay tax on amounts distributed to them. The Fund will inform
shareholders of the amount and nature of the income or gains.
Capital Gains
Shareholders may realize a capital gain or loss when Shares are sold.
Other Tax Information
In addition to federal taxes, investors may be subject to state or
local taxes on their investment, depending on the laws in the investor's area.
For a further discussion of the tax treatment of distributions, see the
Statement of Additional Information.
SHARE REPURCHASES AND TENDER OFFERS
Shares of the Fund are expected to have only a limited public market
and will, therefore, be relatively illiquid. The Board of Trustees of the Fund
currently contemplates that from time to time, but not more frequently than
quarterly, the Board may, in its discretion, consider repurchasing Shares
through tender offers to all Shareholders, if the Board determines that such
action would be in the best interests of the Fund and its Shareholders.
There can be no assurance that the Board will authorize any such
repurchases.
If the Fund must liquidate portfolio securities in order to effect
repurchases of Shares, the Fund may realize gains and losses. Such gains may be
realized on securities held for less than three months. Because of the
limitation of 30% on the portion of the Fund's gross income that may be derived
from the sale or disposition of stocks and securities held less than three
months (in order to retain the Fund's tax status as a regulated investment
company accorded special tax treatment under the Code), such gains would reduce
the ability of the Fund to sell other securities held for less than three months
that the Fund may wish to sell in the ordinary course of its portfolio
management. Such liquidation of portfolio securities may also result in the
realization of long-term gains by the Fund.
Before any repurchases of Shares are authorized, the Trustees will
consider the effect of such repurchases on the Fund's expense ratio, portfolio
turnover, its ability to achieve its investment objective and the maintenance of
its status as a regulated investment company. It is the policy of the Board of
Trustees, which may be changed by the Board, to effect repurchases of Shares
only if they are in the best interests of the Shareholders and the Fund and
would not have a material adverse effect, including adverse tax consequences, on
the Fund or its Shareholders.
If any such a tender offer is made, notice will be provided which will
describe the tender offer and contain information that shareholders should
consider in deciding whether to tender their Shares to the Fund as well as
detailed instructions on how to tender Shares.
9
<PAGE>
PURCHASE OF SHARES
Investors may purchase Shares from the Fund at net asset value from
time to time on a monthly basis. There is no minimum purchase as of the date of
this Prospectus.
Orders for the purchase of shares received by the Fund by the close of
regular trading (normally 4:00 p.m. New York time) on the New York Stock
Exchange (the "Exchange") on any business day on which shares are offered
(normally the last business day of each month) will be effected at the net asset
value per share determined as of the close of trading on the Exchange on that
day. The Fund reserves the right in its sole discretion (i) to suspend the
offering of the Shares at any time, (ii) to reject purchase orders for any
reason and (iii) to institute a minimum initial investment amount.
To eliminate the need for safekeeping, the Fund generally will not
issue share certificates. The Fund's transfer agent maintains records of the
number of Shares held in each Shareholder's account, and issues confirmation
statements to each Shareholder of record showing that Shareholder's purchases
and sales of Shares of the Fund.
NET ASSET VALUE
The net asset value of the Shares will be determined at least once each
month on the last business day thereof by dividing the value of all assets of
the Fund less all liabilities by the total number of Shares outstanding, and
adjusting to the nearest cent per share.
Short-term obligations with remaining maturities of 60 days or less are
valued by the Fund at amortized cost when amortized cost is fair value. All
other investments are valued at market value or, where market quotations are not
readily available, at fair value as determined in good faith by or under the
direction of the Trustees of the Fund. Additional information concerning the
Fund's valuation policies is contained in the Statement of Additional
Information.
THE FUND AND ITS SHARES
The Fund is a closed-end diversified management investment company,
newly established as an unincorporated business trust organized under the laws
of The Commonwealth of Massachusetts pursuant to an Agreement and Declaration of
Trust dated April 26, 1994 (the "Declaration of Trust"). Under the Declaration
of Trust, the Trustees have authority to issue an unlimited number of shares of
beneficial interest of the Fund. When issued, each share of the Fund will be
fully paid and nonassessable by the Fund, except as set forth in the following
paragraph. Shares of the Fund have no preemptive, conversion, exchange or
redemption rights. Each share has one vote, with fractional shares voting
proportionately. Shares are freely transferable. If the Fund were liquidated,
shareholders would receive the net assets of the Fund. Each share represents an
equal proportionate interest in the Fund with each other share of the Fund and
is entitled to share pro rata in the net assets of the Fund available for
distribution.
The Trustees may authorize separate series and classes of shares of
beneficial interest at any time. Currently, the Trustees have authorized the
issuance only of the Shares offered pursuant to this Prospectus.
As a Massachusetts business trust, the Fund is not required to hold
annual shareholders meetings, although special meetings may be called for
purposes such as electing or removing Trustees, changing fundamental policies or
approving an investment advisory agreement. In addition, a special meeting of
shareholders of the Fund will be held if, at any time, less than a majority of
the Trustees then in office have been elected by shareholders of the Fund.
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fund.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Fund and requires that a contractual notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Fund or the Trustees. The Declaration of Trust provides for
indemnification out of the Fund's property for all loss and expense of any
shareholder held personally liable for the obligations of the Fund. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances
10
<PAGE>
where the contract notice is inapplicable, absent or ineffective and the Fund is
unable to meet its obligations. The likelihood of such circumstances is remote.
Shareholders may elect to have all distributions of dividends and
capital gains automatically reinvested by Anchor Investment Management
Corporation (the "Dividend Disbursing Agent") as plan agent under the Automatic
Dividend and Distribution Investment Plan (the "Plan"). Shareholders who do not
elect to participate in the Plan will receive all distributions from the Fund in
cash, which will be paid by check and mailed directly to the shareholder by the
Dividend Disbursing Agent. Shareholders may elect to participate in the Plan and
to have all distributions of dividends and capital gains automatically
reinvested by sending written instructions to the Dividend Disbursing Agent at
the address set forth below.
If the Trustees of the Fund declare a dividend or determine to make a
capital gains distribution payable either in shares of the Fund or in cash, as
shareholders may have elected, non-participants in the Plan will receive cash
and participants in the Plan will receive the equivalent in shares.
Participants in the Plan may withdraw from the Plan upon written notice
to the Dividend Disbursing Agent. When a participant withdraws from the Plan or
upon termination of the Plan as provided below, certificates for whole Common
Shares credited to his account under the Plan will be issued and a cash payment
will be made for any fraction of a Common Share credited to such account.
The Dividend Disbursing Agent will maintain all shareholders' accounts
in the Plan and will furnish written confirmation of all transactions in the
account, including information needed by shareholders for tax records. Common
Shares in the account of each Plan participant (other than participants whose
Common Shares are registered in the name of banks, brokers, nominees or other
third parties) will be held by the Dividend Disbursing Agent in non-
certificated form in the name of the participant, and each shareholder's proxy
will include those Common Shares purchased pursuant to the Plan.
In the case of shareholders such as banks, brokers or nominees which
hold Common Shares for others who are the beneficial owners, the Dividend
Disbursing Agent administers the Plan on the basis of the number of Common
Shares certified from time to time by the record shareholders as representing
the total amount registered in the record shareholder's name and held for the
account of beneficial owners who are to participate in the Plan. Investors whose
Common Shares are held in the name of banks, brokers or nominees must confirm
with such entities that participation in the Plan is possible. Those who
participate in the Plan may subsequently elect not to participate by notifying
such entities.
There is no charge to participants for reinvesting dividends or
distributions, except for certain brokerage commissions, as described below. The
Dividend Disbursing Agent's fees for the handling of the reinvestment of
dividends and distributions will be paid by the Fund. There will be no brokerage
commissions charged with respect to shares issued directly by the Fund. However,
each participant will pay a pro rata share of brokerage commissions incurred
with respect to the Dividend Disbursing Agent's open market purchases in
connection with the reinvestment of dividends or distributions.
Participants in the Plan should be aware that they will realize capital
gains and income for tax purposes upon dividends and distributions although they
will not receive any payment of cash. Experience under the Plan may indicate
that changes are desirable. Accordingly, the Fund reserves the right to amend or
terminate the Plan as applied to any dividend or distribution paid subsequent to
written notice of the change sent to the participants in the Plan at lease 90
days before the record date for such dividend or distribution. The Plan also may
be amended or terminated by the Dividend Disbursing Agent on at least 90 days'
written notice to participants in the Plan. All correspondence or inquiries
concerning the Plan should be directed to Anchor Investment Management
Corporation, 579 Pleasant Street, Paxton, Massachusetts 01612 or by telephone to
508-831-1171.
As of April 30, 1998, the Fund had outstanding 1,725,850 Shares of
beneficial interest, none of which were held by the Fund.
11
<PAGE>
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
All cash and securities of the Fund are held by Investors Bank and
Trust Company, 1 Lincoln Plaza, Boston, Massachusetts 02205, as custodian.
Anchor Investment Management Corporation, 579 Pleasant Street, Paxton,
Massachusetts 01612, serves as the Transfer Agent and Dividend Disbursing Agent
for the Shares.
REPORTS TO SHAREHOLDERS
The Fund will send unaudited semiannual and audited annual reports to
its Shareholders, including a list of investments held.
LEGAL COUNSEL
Sullivan & Worcester LLP, One Post Office Square, Boston, Massachusetts
02109, is legal counsel to the Fund and the Manager.
AUDITORS
Livingston & Haynes, P.C., 40 Grove Street, Wellesley, Massachusetts
02181, serves as independent auditors for the Fund and will audit its financial
statements annually.
ADDITIONAL INFORMATION
Further information concerning these securities may be found in the
Registration Statement, of which this Prospectus and the Statement of Additional
Information constitute a part, on file with the Securities and Exchange
Commission. The table of contents of the Statement of Additional Information is
set forth below.
12
<PAGE>
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
Table of Contents
Page
INVESTMENT POLICIES AND TECHNIQUES.........................................2
SPECIAL CONSIDERATIONS.....................................................6
TRUSTEES AND OFFICERS......................................................6
MANAGEMENT.................................................................8
PORTFOLIO TRANSACTIONS.....................................................9
DETERMINATION OF NET ASSET VALUE..........................................10
TAXATION .................................................................10
ADDITIONAL INFORMATION....................................................12
FINANCIAL STATEMENTS.....................................................F-1
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Statement of Additional Information or in the Prospectus, and, if given or made,
such other information or representations must not be relied upon as having been
authorized by the Fund. This Statement of Additional Information does not
constitute an offering in any jurisdiction in which such offering may not be
lawfully made.
13
<PAGE>
APPENDIX A
This Appendix provides additional information about various of the
securities in which the Fund may invest.
I. RATINGS OF CORPORATE SECURITIES
A. CORPORATE BONDS
Standard & Poor's Corporation describes classifications of corporate
bonds as follows:
AAA - This is the highest rating assigned by Standard & Poor's to a
debt obligation and indicates an extremely strong capacity to pay principal and
interest.
AA - Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from the AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
To provide more detailed indications of corporate bond quality, the
ratings of AA, A and BBB may be modified by the addition of a plus (+) or a
minus (-) sign to show the relative standing within the major rating categories.
Moody's Investors Service, Inc. describes classifications of corporate
bonds as follows:
Aaa - Bonds which are rated Aaa are judged to be of 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 rated 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.
Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification of Aa, A and Baa in its corporate bond rating system. 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.
A-1
<PAGE>
B. PREFERRED STOCK
Standard & Poor's Corporation describes classifications of preferred
stock as follows:
AAA - This is the highest rating that may be assigned to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred
stock obligations.
AA - A preferred stock issue rated AA also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated AAA.
A - An issue rated A is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB - An issue rated BBB is regarded as backed by an adequate capacity
to pay the preferred stock obligations. Although it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for preferred stock
in this category than for issues in the A category.
To provide more detailed indications of preferred stock quality, the
ratings of AA, A and BBB may be modified by the addition of a plus (+) or a
minus (-) sign to show the relative standing within the major rating categories.
Moody's Investors Service, Inc. describes classifications of preferred
stock as follows:
aaa - Preferred stocks which are rated aaa are considered to be top-
quality. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
aa - Preferred stocks which are rated aa are considered to be
high-grade. This rating indicates that there is reasonable assurance that
earnings and asset protection will remain relatively well maintained in the
foreseeable future.
a - Preferred stocks which are rated a are considered to be
upper-medium grade. While risks are judged to be somewhat greater than in the
Aaa and Aa classifications, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
baa - Preferred stocks which are rated baa are judged lower-medium
grade, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification of aa, a and baa in its preferred stock rating system. 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. Preferred stock ratings are based on the following considerations:
(i) Likelihood of payment - capacity and willingness of the issuer to
meet the timely payment of preferred stock dividends and any applicable sinking
Trust requirements in accordance with the terms of the obligations.
(ii) Nature of and provisions of the issue.
(iii) Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangements affecting creditors' rights.
A-2
<PAGE>
C. COMMERCIAL PAPER RATINGS
Standard & Poor's Corporation describes commercial paper ratings as follows:
The A-1+ rating is the highest, A-1 the second highest, and A-2 the
third highest commercial paper rating assigned by Standard & Poor's. Paper rated
A- 1+ must possess overwhelming safety characteristics regarding timely payment.
Commercial paper rated A-1 must have a degree of safety that is overwhelming or
very strong. Commercial paper rated A-2 must have a degree of safety that is
strong. Moody's describes commercial paper ratings as follows:
Issuers rated P-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. P-1 repayment
capacity will normally be evidenced by the following characteristics:
- Leading market positions in well established industries.
- High rates of return on Trusts employed.
- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well established access to a range of financial markets and
assured sources of alternative liquidity
Issuers rated P-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
II. UNITED STATES GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. government include a
variety of Treasury debt securities having various interest rates and maturities
and securities issued by the Government National Mortgage Association ("GNMA").
Treasury bills have maturities 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 at the date of issuance. GNMA securities include GNMA
mortgage pass-through certificates. Such securities are supported by the full
faith and credit of the U.S.
Securities issued or guaranteed by U.S. government agencies or
instrumentalities include securities issued or guaranteed by the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, General Services Administration, Central
Bank for Cooperatives, Federal Home Loan Banks, Federal Loan Mortgage
Corporation, Federal Intermediate Credit Banks, Federal Land Banks, Maritime
Administration, The Tennessee Valley Authority, District of Columbia Armory
Board and Federal National Mortgage Association.
Some obligations of U.S. government agencies and instrumentalities,
such as securities of Federal Home Loan Banks, are supported by the right of the
issuer to borrow from the Treasury. Others, such as bonds issued by the Federal
National Mortgage Association, a private corporation, are supported only by the
credit of the instrumentality. Because the U.S. government is not obligated by
law to provide support to an instrumentality it sponsors, the Fund will invest
in the securities issued by such an instrumentality only when Management
determines under standards established by the Board of Trustees that the credit
risk with respect to the instrumentality does not make its securities unsuitable
investments. While the Fund may invest in such instruments, U.S. government
securities do not include international agencies or instrumentalities in which
the U.S. government, its agencies or instrumentalities participate, such as the
World Bank, Asian Development Bank or the Interamerican Development Bank, or
issues insured by the Federal Deposit Insurance Corporation.
A-3
<PAGE>
APPENDIX I
Certain Characteristics of Interest to Various Investors
Concerned with Ethical, Social Justice, Environmental,
and other Nonfinancial Aspects of their Investments
Alcohol - Production and Distribution
Animals - Use in Testing
Biotechnology - Fetal Tissue Research
Biotechnology - Genetic Engineering
Board of Directors - Composition
Community Involvement (Support)
Community Reinvestment Act Rating
Employment Practices - AIDS
Employment Practices - Equal Opportunity
Employment Practices - Family Benefits
Energy Sources - Coal
Energy Sources - Nuclear
Energy Sources - Oil
Energy Sources - Solar and Alternative
Equal Employment Policies & Programs
Environment - Recycler
Environment - Produces Recyclable Products
Environment - Uses Recycled Products
Environment - CERES Principle Signatory
Environment - Energy Conservation
Environment - Major Polluter (USA)
Environment - Major Polluter (World)
Human Life Issues - Abortion: Products, Services, Ownership of Facilities
Human Life Issues - Contraception Products: Production and Distribution
Management Composition
Maquiladoras - Environment
Maquiladoras - Labor Practices
Military - Department of Defense Prime Contractor
Military - Weapons Producer
Military - Nuclear Weapons Research
Military - Nuclear Weapons Producer
Military - Chemical Weapons
Military - Biological Weapons
Northern Ireland - Presence
Northern Ireland - MacBride Principles Signatory
Product Safety
Shareholder Resolutions
South Africa - Direct Involvement
South Africa - Indirect Involvement
South Africa - Presence
South Africa - Principles for South Africa Signatory
Tobacco - Production and Distribution
I-1
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION __________________, 1998
THE PRINCIPLED EQUITY MARKET FUND
Langley Place, 10 Langley Road
Newton Centre, Massachusetts 02459
(617) 964-7600
This Statement of Additional Information is not a prospectus, but
expands upon and supplements the information contained in the Prospectus of The
Principled Equity Market Fund (the "Fund") which bears the same date as this
Statement of Additional Information and should be read in conjunction with it.
The Fund's Prospectus may be obtained from the Fund.
Table of Contents
Page
INVESTMENT POLICIES AND TECHNIQUES........................................2
SPECIAL CONSIDERATIONS....................................................6
TRUSTEES AND OFFICERS.....................................................6
MANAGEMENT................................................................8
PORTFOLIO TRANSACTIONS....................................................9
DETERMINATION OF NET ASSET VALUE.........................................10
TAXATION ................................................................10
ADDITIONAL INFORMATION...................................................12
FINANCIAL STATEMENTS....................................................F-1
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Statement of Additional Information or in the Prospectus, and, if given or made,
such other information or representations must not be relied upon as having been
authorized by the Fund. This Statement of Additional Information does not
constitute an offering in any jurisdiction in which such offering may not be
lawfully made.
<PAGE>
INVESTMENT POLICIES AND TECHNIQUES
The Prospectus describes the investment objective of the Fund and
summarizes certain investment policies and techniques the Fund expects to
employ. The following discussion supplements the description of the Fund's
investment policies and techniques in the Prospectus.
FUTURES STRATEGIES
The Fund may at times seek to hedge against a decline in the value of
securities included in the Fund's portfolio or an increase in the price of
securities which the Fund plans to purchase through the purchase and sale of
financial futures contracts. Expenses and losses incurred as a result of such
hedging strategies will reduce the current return of the Fund.
The ability of the Fund to engage in the futures strategies described
below will depend on the availability of liquid markets in such instruments.
Accordingly, no assurance can be given that the Fund will be able to use these
instruments effectively for the purposes stated below. Futures transactions
involve certain risks which are described below under "Risks of Futures
Strategies."
Futures Contracts. A financial futures contract sale creates an
obligation by the seller to deliver the type of financial instrument called for
in the contract in a specified delivery month for a stated price. A financial
futures contract purchase creates an obligation by the purchaser to take
delivery of the type of financial instrument called for in the contract in a
specified delivery month at a stated price. The specific instruments delivered
or taken, respectively, at settlement date are not determined until on or near
that date. The determination is made in accordance with the rules of the
exchange on which the futures contract sale or purchase was made. Futures
contracts are traded in the United States only on commodity exchanges or boards
of trade-known as "contract markets" approved for such trading by the Commodity
Futures Trading Commission (the "CFTC"), and must be executed through a futures
commission merchant or brokerage firm which is a member of the relevant contract
market.
Although futures contracts by their terms call for actual delivery or
acceptance of commodities or securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out a futures contract sale is effected by purchasing a futures contract for the
same aggregate amount of the specific type of financial instrument or commodity
with the same delivery date. If the price of the initial sale of the futures
contract exceeds the price of the offsetting purchase, the seller is paid the
difference and realizes a gain. Conversely, if the price of the offsetting
purchase exceeds the price of the initial sale, the seller realizes a loss.
Similarly, the closing out of a futures contract purchase is effected by the
purchaser's entering into a futures contract sale. If the offsetting sale price
exceeds the purchase price, the purchaser realizes a gain, and if the purchase
price exceeds the offsetting sale price, he realizes a loss. In general, 40% of
the gain or loss arising from the closing out of a futures contract traded on an
exchange approved by the CFTC is treated as short-term gain or loss, and 60% is
treated as long-term gain or loss.
The Fund may sell financial futures contracts in anticipation of an
increase in the general level of interest rates. Generally, as interest rates
rise, the market value of the securities held by the Fund will fall, thus
reducing its net asset value. This interest rate risk can be reduced without
employing futures as a hedge by selling such securities and either reinvesting
the proceeds in securities with shorter maturities or by holding assets in cash.
However, this strategy entails increased transaction costs in the form of dealer
spreads and brokerage commissions and would typically reduce the Fund's average
yield as a result of the shortening of maturities.
The sale of financial futures contracts provides a means of hedging
against rising interest rates. As rates increase, the value of the Fund's short
position in the futures contracts will also tend to increase, thus offsetting
all or a portion of the depreciation in the market value of the Fund's
investments which are being hedged. While the Fund will incur commission
expenses in selling and closing out futures positions (which is done by taking
an opposite position in the futures contract), commissions on futures
transactions tend to be lower than transaction costs incurred in the purchase
and sale of portfolio securities.
<PAGE>
The Fund may purchase interest rate futures contracts in anticipation
of a decline in interest rates when it is not fully invested. As such purchases
are made, the Fund intends that an equivalent amount of futures contracts will
be closed out.
Unlike cases where the Fund purchases or sells a security, no price is
paid or received by the Fund when it purchases or sells a futures contract. Upon
entering into a contract, the Fund is required to deposit with its custodian in
a segregated account in the name of the futures broker an amount of cash and/or
U.S. Governments Securities. This amount is known as "initial margin." The
nature of initial margin in futures transactions is different from that of
margin in securities transactions in that futures contract margin does not
involve the borrowing of funds to finance the transactions. Rather, initial
margin is similar to a performance bond or good faith deposit which is returned
to the Fund upon termination of the futures contract, assuming all contractual
obligations have been satisfied. Futures contracts also involve brokerage costs.
Subsequent payments, called "variation margin" or "maintenance margin",
to and from the broker (or the custodian) are made on a daily basis as the price
of the underlying security or commodity fluctuates, making the long and short
positions in the futures contract more or less valuable. This is known as
"marking to the market." For example, when the Fund has purchased a futures
contract on a security and the price of the underlying security has risen, that
position will have increased in value and the Fund will receive from the broker
a variation margin payment based on that increase in value. Conversely, when the
Fund has purchased a security futures contract and the price of the underlying
security has declined, the position would be less valuable and the Fund would be
required to make a variation margin payment to the broker.
The Fund may elect to close some or all of its futures positions at any
time prior to their expiration in order to reduce or eliminate a hedge position
then currently held by the fund. The Fund may close its positions by taking
opposite positions which will operate to terminate the Fund's position in the
futures contracts. Final determinations of variation margin are then made,
additional cash is required to be paid by or released to the Fund, and the Fund
realizes a loss or a gain. Such closing transactions involve additional
commission costs.
Limitations. The Fund will not purchase or sell futures contracts if,
as a result, the sum of the margin deposits on its existing futures contracts
would exceed 5% of the Fund's total assets or if more than 20% of the Fund's
total assets would be exposed to risk of loss by futures contracts. Nor will the
Fund maintain a futures position which exposes the Fund to such risk of loss
without seeking to close out such position. The Fund anticipates that under
normal circumstances not more than 10% of the Fund's total assets will be
maintained subject to such risk without the Fund seeking to close out sufficient
positions to reduce such risk to such 10%. In addition, with respect to each
futures contract purchased the Fund will set aside in a segregated account at
its custodian bank an amount of cash or short-term U.S. Government Securities
equal to the total market value of such contracts less the initial margin
deposited therefor.
Risks of Transactions in Futures Contracts. Successful use of futures
contracts by the Fund is subject to the ability of its investment advisers to
predict movements in the direction of interest rates and other factors affecting
securities markets. For example, if the Fund has hedged against the possibility
of decline in the values of its investment and the values of its investments
increase instead, the Fund will lost part or all of the benefit of the increase
through payments of daily maintenance margin. The Fund may have to sell
investments at a time when it may be disadvantageous to do so in order to meet
margin requirements.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain market clearing
facilities inadequate, and thereby result in the institution by exchanges of
special procedures which may interfere with the timely execution of customer
orders.
To reduce or eliminate a hedge position held by the Fund, the Fund may
seek to close out a position. The ability to establish and close out positions
will be subject to the development and maintenance of a liquid secondary market.
It is not certain that this market will develop or continue to exist for
particular futures contracts. Reasons for the absence of a liquid secondary
market on an exchange include the following: (i) there may be insufficient
trading interest in certain contracts; (ii) restrictions may be imposed by an
exchange on opening transactions or closing
2
<PAGE>
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of contracts, or
underlying securities; (iv) unusual or unforeseen circumstances may interrupt
normal operations on an exchange; (v) the facilities of an exchange or a
clearing corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of
contracts (or a particular class or series of contracts), in which event the
secondary market on that exchange for such contracts (or in the class or series
of contracts) would cease to exist, although outstanding contracts on the
exchange that had been issued by a clearing corporation as a result of trades on
that exchange would continue to be exercisable in accordance with their terms.
Index Futures Contracts. An index futures contract is a contract to buy
or sell units of an index at a specified future date at a price agreed upon when
the contract is made. Entering into a contract to buy units of an index is
commonly referred to as buying or purchasing a contract or holding a long
position in the index. Entering into a contract to sell units of an index is
commonly referred to as selling a contract or holding a short position. A unit
is the current value of the index. The Fund may enter into stock index futures
contracts, debt index futures contracts, or other index futures contracts
appropriate to its objective.
For example, the Standard & Poor's Composite 500 Stock Price Index
("S&P 500") is composed of 500 selected common stocks, most of which are listed
on the New York Stock Exchange. The S&P 500 assigns relative weightings to the
common stocks included in the Index, and the value fluctuates with changes in
the market values of those common stocks. In the case of the S&P 500, contracts
are to buy or sell 500 units. Thus, if the value of the S&P 500 were $150, one
contract would be worth $75,000 (500 units x $150). The stock index futures
contract specifies that no delivery of the actual stocks making up the index
will take place. Instead, settlement in cash must occur upon the termination of
the contract, with the settlement being the difference between the contract
price and the actual level of the stock index at the expiration of the contract.
For example, if the Fund enters into a futures contract to buy 500 units of the
S&P 500 at a specified future date at a contract price of $150 and the S&P 500
is at $154 on that future date, the Fund will gain $2,000 (500 units x gain of
$4). If the Fund enters into a futures contract to sell 500 units of the stock
index at a specified future date at a contract price of $150 and the S&P 500 is
at $152 on that future date, the Fund will lose $1,000 (500 units x loss of $2).
There are several risks in connection with the use by the Fund of index
futures as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the index futures and movements
in the prices of securities which are the subject of the hedge. The Sub-Adviser
will, however, attempt to reduce this risk by buying or selling, to the extent
possible, futures on indices the movements of which will, in its judgment, have
a significant correlation with movements in the prices of the securities sought
to be hedged.
The successful use of index futures by the Fund for hedging purposes is
also subject to the Sub-Adviser's ability to predict movements in the direction
of the market. It is possible that, where the Fund has sold futures to hedge its
portfolio against a decline in the market, the index on which the futures are
written may advance and the value of securities held in the Fund's portfolio may
decline. If this occurred, the Fund would lose money on the futures and also
experience a decline in value in its portfolio securities. It is also possible
that, if the Fund has hedged against the possibility of a decline in the market
adversely affecting securities held in its portfolio and securities prices
increase instead, the Fund will lose part of all of the benefit of the increased
value of those securities it has hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if the fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements at a time when it is disadvantageous to do so.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the index futures
and the portion of the portfolio being hedged, the prices of index futures may
not correlate perfectly with movements in the underlying index due to certain
market distortions. First, all participants in the futures market are subject to
margin deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close futures contracts through
offsetting transactions which could distort the normal relationship between the
index and futures markets. Second, margin requirements in the futures markets
are less onerous than margin requirements in the securities market, and as a
result the futures market may attract more speculators than the securities
market does. Increased participation by speculators in the futures market may
also
3
<PAGE>
cause temporary price distortions. Due to the possibility of price distortions
in the futures market and also because of the imperfect correlation between
movements in the index and movements in the prices of index futures, even a
correct forecast of general market trends by the Sub-Adviser may still not
result in a successful hedging transaction over a short time period.
REPURCHASE AGREEMENTS
A repurchase agreement is an agreement under which the Fund acquires a
money market instrument (generally a security issued by the U.S. Government or
an agency or instrumentality thereof, a banker's acceptance or a certificate of
deposit) from a commercial bank, broker or dealer, subject to resale to the
seller at an agreed upon price and date (normally the next business day). The
resale price reflects an agreed upon interest rate effective for the period the
instrument is held by the Fund and is unrelated to the interest rate on the
underlying instrument. In these transactions, the instruments acquired by the
Fund (including accrued interest) must have a total value in excess of the value
of the repurchase agreement and will be held by the Fund's custodian until
repurchased. The Manager will use standards set by the Fund's Trustees in
reviewing the creditworthiness of parties to repurchase agreements with the
Fund. In addition, no more than an aggregate of 15% of the Fund's net assets, at
the time of investment, will be invested in illiquid investments including
repurchase agreements having maturities longer than seven days.
The use of repurchase agreements by the Fund involves certain risks.
For example, if the seller under a repurchase agreement defaults on its
obligation to repurchase the underlying instrument at a time when the value of
the instrument has declined, the Fund may incur a loss upon its disposition. If
the seller becomes insolvent and subject to liquidation or reorganization under
bankruptcy or other laws, a bankruptcy court may determine that the underlying
instrument is collateral for a loan by the Fund and therefore is subject to sale
by the trustee in bankruptcy. Finally, the Fund's right to liquidate its
collateral in the event of a default could involve certain costs, losses or
delays and, to the extent that proceeds from any sale upon default of the
obligation to repurchases are less than the repurchase price, the Fund could
suffer a loss.
As an alternative to using repurchase agreements, the Fund may from
time to time invest up to 5% of its assets in money market investment companies
sponsored by a third party for short-term liquidity purposes.
SHORT-TERM TRADING
In seeking the Fund's objective, the Sub-Adviser will buy or sell
portfolio securities whenever the Manager believes it appropriate to do so. In
deciding whether to sell a portfolio security, the Manager will not consider how
long the Fund has owned the security. From time to time the Fund will buy
securities intending to seek short-term trading profits. A change in the
securities held by the Fund is known as "portfolio turnover" and generally
involves expense to the Fund. These expenses may include brokerage commissions
or dealer mark-ups and other transaction costs on both the sale of securities
and the reinvestment of the proceeds in other securities. If sales of portfolio
securities cause the Fund to realize net short-term capital gains, such gains
will be taxable as ordinary income. As a result of the Fund's investment
policies, under certain market conditions the Fund's portfolio turnover rate may
be higher than that of other mutual funds. Portfolio turnover rate for a fiscal
year is the ratio of the lesser of purchases or sales of portfolio securities to
the monthly average of the value of portfolio securities-excluding securities
whose maturities at acquisition were one year or less. The Fund's portfolio
turnover rate is not a limiting factor when the Manager considers a change in
the Fund's portfolio.
WHEN-ISSUED SECURITIES
The Fund may purchase securities on a "when-issued" or delayed delivery
basis. In such transactions, the price is fixed at the time the commitment to
purchase is made, but delivery and payment for the securities take place at a
later date, normally within one month. At the time the Fund makes the commitment
to purchase a security on a when-issued or delayed delivery basis, it will
record the transaction and reflect the value of the security less the liability
to pay the purchase price in determining the Fund's net asset value. The value
of the security on the settlement date may be more or less than the price paid
as a result of, among other things, changes in the level of interest rates or
other market factors. Accordingly, there is a risk of loss which is in addition
to the risk of decline in the value of the Fund's other assets. No interest
accrues on the security between the time the Fund enters into the
4
<PAGE>
commitment and the time the security is delivered. The Fund may establish a
segregated account with its custodian in which it will maintain cash and
marketable securities equal in value to commitments for when-issued or delayed
delivery securities. Such segregated securities either will mature or, if
necessary, be sold on or before the settlement date. While when-issued or
delayed delivery securities may be sold prior to the settlement date, it is
intended that the Fund will purchase such securities with the purpose of
actually acquiring them unless a sale appears desirable for investment reasons.
SPECIAL CONSIDERATIONS
The Fund is not intended to be a complete investment program and, due
to the uncertainty inherent in all investments, there can be no assurance that
the Fund will achieve its investment objective.
Shares of the Fund are not expected to have a public market and will,
therefore, be illiquid. Although tender offers may be considered by the Trustees
quarterly, there can be no assurance that any such tender offers will be made.
Accordingly, the Fund should not be considered as a short-term investment or
trading vehicle. The value of the Shares as well as the opportunities for gains
will fluctuate depending upon market factors.
The Fund may enter into financial futures contracts and enter into
various currency transactions, including forward currency contracts. The Fund
may invest a portion of its assets in restricted securities, purchase securities
on a "when-issued" or delayed delivery basis, enter into repurchase agreements
and lend its portfolio securities. These investment strategies and policies
involve certain special risks. See "Investment Objective and Policies-Other
Investment Policies", "Investment Restrictions" and "Distributions and Taxes".
Given the risks described above, an investment in the Shares may not be
appropriate for all investors. Investors should carefully consider their ability
to assume these risks before making an investment in the Fund.
TRUSTEES AND OFFICERS
The Board of Trustees of the Fund is responsible for the overall
management and operations of the Fund. The Trustees and executive officers of
the Fund and their principal occupations during the last five years are set
forth below. David W.C. Putnam, President and Secretary of the Fund, is
President, a director and a principal stockholder (indirectly) of F. L. Putnam
Investment Management Company, the Fund's Manager.
<TABLE>
<CAPTION>
Position(s) Held
Name and Address* with the Fund Principal Occupation(s) During Past Five Years
----------------- ------------- ----------------------------------------------
<S> <C> <C>
Howard R. Buckley Trustee President, Chief Executive Officer and Trustee,
Mercy Hospital Mercy Hospital, Portland, Maine; President, Chief
144 State Street Executive Officer and Director, Mercy Health
Portland, ME 04101 Systems of Maine, 1993-present.
Sister Anne Mary Donovan, SNBD Trustee Treasurer, Emmanuel College, Boston; General
447 Chestnut Hill Ave. Treasurer of the Sisters of Notre Dame de Namur,
Brookline, MA 02146 Rome, Italy until 1997
Sister June Ketterer, SGM Trustee Provincial Superior, St. Joseph Province, Sisters of
Grey Nuns Provincial House Charity of Montreal, Grey Nuns, Lexington,
10 Pelham Road Massachusetts, 1995-present; Vice President for
Lexington, MA 02173 Mission Effectiveness, Youville Hospital,
Cambridge, Massachusetts, 1987-1995
5
<PAGE>
<CAPTION>
Position(s) Held
Name and Address* with the Fund Principal Occupation(s) During Past Five Years
----------------- ------------- ----------------------------------------------
<S> <C> <C>
Sister Mary Laboure Morin, RSM Trustee President, Portland (Maine) Regional Community,
St. Joseph's Convent Sisters of Mercy of the Americas, 1989-present;
605 Stevens Avenue Assistant to the Superior General and Ministry
Portland, ME 04103 Director, Sisters of Mercy of Portland, 1984-1989;
Member, Eastern Mercy Health System, Radnor,
Pennsylvania
David W. C. Putnam** Trustee, President President and Director, F. L. Putnam Securities
F. L. Putnam Investment and Secretary Company, Incorporated, F. L. Putnam
Management Company Investment Management Company; Trustee, The
Langley Place Northstar Funds, Stamford, Connecticut; Trustee
Ten Langley Road and Chairman, Board of Trustees, The Anchor
Newton Centre, MA 02459 Funds, Worcester, Massachusetts and Paris,
France; Director and Treasurer, The Asian
American Bank & Trust Company, Boston,
Massachusetts
Daniel F. Russell Trustee President, Chief Executive
Catholic Health East Officer and Director, Eastern Mercy Health System
100 Matsonford Road
Radnor, PA 19087
Edward T. Sullivan, Jr. Trustee Business Manager and Secretary-Treasurer, Service
Service Employees' International Employees' International Union; Business Manager
Union-Local 254 and Secretary-Treasurer, Service Employees'
11 Beacon Street, Suite 200 International Union; Member, Board of Higher
Boston, MA 02108 Education, Commonwealth of Massachusetts;
Trustee, Massachusetts Public Employees' Health
and Welfare Fund, Boston Building Service
Employees' Fund, and Massachusetts Service
Employees' Pension Trust
George A. Violin, M.D. Trustee Physician; Principal, Medical Eye Care Associates
Main Street
Dover, MA 02030
The Reverend Mr. Joel M. Ziff, CPA Trustee Partner (retired) of Arthur Andersen & Co.,
344 Cambridge Road accountants; Director, Catholic Health East
Norristown, Pennsylvania 19401
<FN>
*The address of each of the Trustees for correspondence is the address of the Fund.
**Mr. Putnam is an "interested person" of the Fund as defined in the Investment
Company Act of 1940 by reason of his affiliation with the Fund and the Adviser.
</FN>
</TABLE>
After the Fund's first year of operation, each Trustee who is not an
interested person of the Fund may be compensated by the Fund at annual rates and
in amounts for attendance at Trustees' meetings and for reimbursement for
out-of-pocket expenses, all as may be determined by the Trustees from time to
time.
6
<PAGE>
The Declaration of Trust and the By-Laws of the Fund provide that the
Fund will indemnify its Trustees and officers against liabilities and expenses
incurred in connection with litigation in which they may be involved because of
their offices with the Fund, unless it is determined in the manner specified in
the Declaration of Trust and the By-Laws that they have not acted in good faith
in the reasonable belief that their actions were in the best interests of the
Fund or that such indemnification would relieve any officer or Trustee of any
liability to the Fund or its shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of his duties. The Fund, at its
expense, provides liability insurance for the benefit of its Trustees and
officers.
Although nominee holders of the Shares may at times be the record
holders of 5% of more of the outstanding Shares, to the knowledge of the Fund no
person owns beneficially 5% or more of the Shares, except (i) Mercy Health
Corporation of Pennsylvania, (ii) Mercy Hospital of Pittsburgh, Pennsylvania,
(iii) Sisters of Mercy, Pennsylvania and (iv) St. Joseph's Hospital, Atlanta,
Georgia. Otherwise, as of the date hereof, the Trustees and officers of the Fund
as a group owned less than 1% of the outstanding Shares of the Fund.
MANAGEMENT
The Manager, serves as general investment and business manager of the
Fund pursuant to a written management agreement (the "Management Agreement").
Pursuant to a Sub-Advisory Agreement with the Manager and approval of
the Fund, the Sub-Adviser is employed by the Manager as a sub-investment adviser
to manage the Acceptable securities selected by the Manager.
The Sub-Adviser and the Manager are responsible for investment of the
Fund's assets in accordance with the Fund's investment objective and policies
and the directions of the Trustees. They make investment decisions for the Fund
and place orders for the purchase and sale of its portfolio securities. The
Manager supervises the administration of the business affairs of the Fund. In
addition, the Manager provides the Fund with certain office space and facilities
for managing the Fund's business affairs, with the services of required
executive personnel and with certain clerical services and facilities. These
services are provided without reimbursement by the Fund for any costs incurred.
As compensation for these services, the Fund pays the Manager a fee at the rate
of .25% per annum of the Fund's average monthly net assets, subject to voluntary
waiver or reimbursement by the Manager. From this fee the Manager pays the
Sub-Adviser a fee at the rate of .15% per annum of such average net assets. The
Fund's average monthly net assets are determined for the purpose of calculating
these fees by taking the average of all the monthly determinations of net assets
(total assets, less all liabilities) on the last business day of each calendar
month. The fees are payable for each calendar month as soon as practicable after
the end of that month. The Manager has agreed to waive its portion of the fee
for the current year of the Fund's operations.
The Fund pays its own expenses as described in the Prospectus under
"Management-The Manager." However, the Management Agreement provides that if the
total expenses of the Fund in any fiscal year exceed the permissible limits
applicable to the Fund in any state in which shares of the Fund are then
qualified for sale (no such limits are currently so applicable), the
compensation due the Manager for such fiscal year shall be reduced by the amount
of such excess by a reduction or refund thereof at the time such compensation is
payable after the end of each calendar month during such fiscal year of the
Fund, subject to readjustment during the Fund's fiscal year. Taxes, brokerage
costs, interest expenses and extraordinary expenses, are not included as
expenses for the purpose of this expense limitation.
Unless earlier terminated pursuant to its terms, each of the Management
Agreement and the Sub-Advisory Agreement will continue in effect for two years
from its date of execution and may be continued from year to year thereafter if
such continuation is specifically approved at least annually (i) by the Board of
Trustees or by the vote of a majority, as defined in the 1940 Act, of the Fund's
outstanding Shares, and (ii) by the vote of a majority of the Trustees who are
not parties to such agreement or interested persons, as defined in the 1940 Act,
of any such party, by votes cast in person at a meeting called for the purpose
of voting on such approval. Each such agreement provides that it shall terminate
automatically if assigned, and that it may be terminated without penalty by vote
of the Trustees or the shareholders of the Fund and, in the case of the
Sub-Advisory Agreement, also by the Manager, or by the Manager or the
Sub-Adviser, as appropriate, upon not more than 60 nor less than 30 days'
written notice, or upon such shorter notice as may be mutually agreed upon.
7
<PAGE>
David W. C. Putnam, Secretary and a Trustee of the Fund, is the
President and a Director of the Manager.
PORTFOLIO TRANSACTIONS
Subject to the supervision of the Trustees, the Manager and the
Sub-Adviser are responsible for decisions to buy and sell securities for the
Fund and for the placement of its portfolio business and the negotiation of
commissions, if any, paid on such transactions. Over-the-counter stocks and
bonds are generally traded on a net basis with dealers acting as principal for
their own account without a stated commission, although prices of such
securities usually include a profit to the dealer. Orders are placed directly
with a principal market maker unless equal or better price and execution can be
obtained by using a broker. In underwritten offerings, securities are usually
purchased at a fixed price which includes an amount of compensation to the
underwriter generally referred to as the underwriter's concession or discount.
Certain money market instruments may be purchased directly from an issuer, in
which case no commissions or discounts are paid. Brokerage commissions are paid
on transactions in listed securities, options, futures contracts and options
thereon.
The Fund may, from time to time, place brokerage transactions with a
broker that may be considered an affiliated person of the Fund or the Manager or
the Sub-Adviser. When such transactions are made, in accordance with Rule 17e-1
under the 1940 Act, commissions paid must be "reasonable and fair compared to
the commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
during a comparable period of time."
The Manager and the Sub-Adviser are responsible for effecting portfolio
transactions and will do so in a manner deemed fair and reasonable to the Fund
and not according to any formula. The primary consideration in all portfolio
transactions will be prompt execution of orders in an efficient manner at the
most favorable price. In selecting broker-dealers and negotiating commissions,
the Manager or the Sub-Adviser consider the firm's reliability, the quality of
its execution services on a continuing basis and its financial condition. When
more than one firm is believed to meet these criteria, preference may be given
to brokers that provide research or statistical material or other services to
the Fund or to the Manager or the Sub-Adviser. The Manager and the Sub-Adviser
are of the opinion that, because this material must be analyzed and reviewed,
its receipt and use does not reduce expenses but may benefit the Fund by
supplementing the research of the Manager and the Sub-Adviser.
The Manager and the Sub-Adviser may effect portfolio transactions for
other investment companies and advisory accounts. Research services furnished by
broker-dealers through which the Fund effects its securities transactions may be
used by them in servicing all of their accounts. In their opinion, it is not
possible to measure separately the benefits from research services to each of
its accounts, including the Fund. They will attempt to allocate equitably
portfolio transactions among the Fund and other accounts whenever concurrent
decisions are made to purchase or sell securities by the Fund and another
account. In making such allocations between the Fund and other accounts, the
main factors to be considered are the respective investment objectives, the
relative size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held and the opinions of the persons responsible for recommending
investments to the Fund and the other accounts. In some cases this procedure
could have an adverse effect on the Fund. In the opinion of the Manager and the
Sub-Adviser, however, the results of such procedures will, on the whole, be in
the best interest of the Fund.
DETERMINATION OF NET ASSET VALUE
The following discussion supplements the discussion of the
determination of the net asset value of Shares contained in the Prospectus.
In valuing the Fund's assets, securities listed on an exchange or
traded over-the-counter and quoted on the Nasdaq System will be valued at the
last sale price on the day of valuation (using prices as of the close of
trading) or, if there has been no sale that day, at the last bid price reported
on the day of valuation or the last bid price reported as of the close of
business on the preceding business day. Over-the-counter securities not quoted
on the
8
<PAGE>
Nasdaq System will be valued at the current bid price as obtained from two
dealers which make markets in such securities or from a pricing service.
Securities for which reliable quotations are not readily available and other
assets will be valued at their fair value as determined in good faith by or
under the direction of the Board of Trustees. Money market instruments with
remaining maturities of 60 days or less will be valued at amortized cost when
amortized cost is fair value.
TAXATION
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). In order to so qualify, the Fund must, among other things, (i) derive
at least 90% of its gross income from dividends, interest, payments with respect
to certain securities loans, gains from the sale of securities or foreign
currencies, or other income (including but not limited to gains from options,
futures or forward contracts) derived with respect to its business of investing
in stock, securities or currencies; (ii) derive less than 30% of its gross
income from gains from the sale or other disposition of securities held for less
than three months; (iii) distribute at least 90% of its dividend, interest and
certain other taxable income each year; and (iv) at the end of each fiscal
quarter maintain at least 50% of the value of its total assets in cash,
government securities, securities of other regulated investment companies, and
other securities of issuers which represent, with respect to each issuer, no
more than 5% of the value of the Fund's total assets and 10% of the outstanding
voting securities of such issuer, and with no more than 25% of its assets
invested in the securities (other than those of the U.S. Government or other
regulated investment companies) of any one issuer or of two or more issuers
which the Fund controls and which are engaged in the same, similar or related
trades and businesses. To the extent it qualifies for treatment as a regulated
investment company, the Fund will not be subject to federal income tax on income
paid to its shareholders in the form of dividends or capital gains
distributions.
An excise tax at the rate of 4% will be imposed on the excess, if any,
of the Fund's "required distribution" over actual distributions in any calendar
year. Generally, the "required distribution" is 98% of the Fund's ordinary
income for the calendar year plus 98% of its capital gain net income recognized
during the one-year period ending on October 31 plus undistributed amounts from
prior years. The Fund intends to make distributions sufficient to avoid
imposition of the excise tax. For a distribution to qualify as such with respect
to a calendar year under the foregoing rules, it must be declared by the Fund
during October, November or December and paid by the Fund before the following
February 1. Such distributions will be taxable as if received on December 31 in
the year they are declared by the Fund, rather than the year in which they are
received.
Under current federal tax law, the Fund will receive net investment
income in the form of interest by virtue of holding Treasury bills, notes and
bonds, and will recognize interest attributable to it from holding zero coupon
Treasury securities. Current federal tax law requires that a holder of a zero
coupon security accrue a portion of the discount at which the security was
purchased as income each year even though the Fund receives no interest payment
in cash on the security during the year. As an investment company, the Fund must
pay out substantially all of its net investment income each year. Accordingly,
the Fund may be required to pay out as an income distribution each year an
amount which is greater than the total amount of cash interest the Fund actually
received. Such distributions will be made from the cash assets of the Fund or by
liquidation of portfolio securities, if necessary. If a distribution of cash
necessitates the liquidation of portfolio securities, the Manager will select
which securities to sell. The Fund may realize a gain or loss from such sales.
In the event the Fund realizes net capital gains from such transactions,
shareholders may receive a larger capital gain distribution, if any, than they
would in the absence of such transactions.
Certain options, futures contracts, and options on futures contracts
are "section 1256 contracts." Any gains or losses on section 1256 contracts are
generally considered 60% long-term and 40% short-term capital gains or losses
("60/40 gains or losses"). Also, section 1256 contracts held by the Fund at the
end of each taxable year are treated for federal income tax purposes as being
sold on such date for their fair market value. The resultant gains or losses are
treated as 60/40 gains or losses. When the section 1256 contract is subsequently
disposed of, the actual gain or loss will be adjusted by the amount of the
year-end gain or loss. The use of section 1256 contracts may increase the amount
of short-term capital gain realized by the Fund and taxed as ordinary income
when distributed to shareholders.
9
<PAGE>
Hedging transactions in options, futures contracts and straddles or
other similar transactions will subject the Fund to special tax rules (including
mark-to-market, straddle, wash sale and short sale rules). The effect of these
rules may be to accelerate income to the Fund, defer losses to the Fund, cause
adjustments in the holding periods of the Fund's securities or convert
short-term capital losses into long-term capital losses. Hedging transactions
may increase the amount of short-term capital gain realized by the Fund which is
taxed as ordinary income when distributed to shareholders. The Fund may make one
or more of the various elections available under the Code with respect to
hedging transactions. If the Fund makes any of the elections, the amount,
character and timing of the recognition of gains or losses from the affected
positions will be determined under rules that vary according to the elections
made. The Fund will use its best efforts to make any available elections
pertaining to the foregoing transactions in a manner believed to be in the best
interests of the Fund. The 30% limit on gains from the sale of securities held
for less than three months and the diversification requirements applicable to
the Fund's assets may limit the extent to which the Fund will be able to engage
in transactions in options, futures contracts, or options on futures contracts.
Shareholders of the Fund will be subject to federal income taxes on
distributions made by the Fund whether received in cash or additional shares of
the Fund. Distributions by the Fund of net income and short-term capital gains,
if any, will be taxable to shareholders as ordinary income. Distributions of
long-term capital gains, if any, will be taxable to the shareholders as
long-term capital gains, without regard to how long a shareholder has held
shares of the Fund. A loss on the sale of shares held for 6 months or less will
be treated as a long-term capital loss to the extent of any long-term capital
gain dividend paid to the shareholder with respect to such shares. Corporate
shareholders should not anticipate that dividends and distributions by the Fund
will qualify for the dividends received deduction, since dividends paid by the
Fund are not expected to be derived from dividend income.
There are differences between federal income tax rules and the
accounting principles adopted by the Fund. To the extent that current net
realized capital gains are distributed during the course of a fiscal year, the
subsequent realization of capital losses at or before the end of the fiscal year
could offset such gains for federal income tax purposes. If the amount of
distributions paid by the Fund for any fiscal year exceeds its investment
company taxable income plus net realized capital gains for the year, the excess
is treated as a return of capital. Each distribution paid for that year could be
treated, in the same proportion, in part as a distribution of taxable income and
in part as a return of capital. Shareholders are not subject to current federal
income tax on the part which is treated as a return of capital, but their basis
in shares of the Fund would be reduced by that amount. This reduction of basis
would operate to increase capital gain (or decrease capital loss) upon
subsequent sale of shares.
The Fund's investment in securities issued at a discount and certain
other obligations will (and investments in securities purchased at a discount
may) require the Fund to accrue and distribute income not yet received. In order
to generate sufficient cash to make the requisite distributions, the Fund may be
required to sell securities in its portfolio that it otherwise would have
continued to hold.
The Fund's transactions in foreign currency-denominated debt
securities, certain foreign currency options, futures contracts, and forward
contracts may give rise to ordinary income or loss to the extent such income or
loss results from fluctuations in the value of the foreign currency concerned.
If more than 50% of the Fund's assets at year end consist of the debt
and equity securities of foreign corporations, the Fund may elect to permit
shareholders to claim a credit or deduction on their income tax returns for
their pro rata portion of qualified taxes paid by the Fund to foreign countries.
In such a case, shareholders will include in gross income from foreign sources
their pro rata shares of such taxes. A shareholder's ability to claim a foreign
tax credit or deduction in respect of foreign taxes paid by the Fund may be
subject to certain limitations imposed by the Code, as a result of which a
shareholder may not get a full credit or deduction for the amount of such taxes.
Shareholders who do not itemize on their federal income tax returns may claim a
credit (but no deduction) for such foreign taxes.
Investment by the Fund in certain "passive foreign investment
companies" could subject the Fund to a U.S. federal income tax or other charge
on the proceeds from the sale of its investment in such a company; however, this
tax can be avoided by the Fund's making an election to mark such investments to
market annually or to treat the passive foreign investment company as a
"qualified electing fund."
10
<PAGE>
The Fund will notify shareholders each year of the amount of dividends
and distributions, including the portion of dividends, if any, that may qualify
for the dividends received deduction and the amount of any distribution of
long-term capital gains or return of capital.
Redemptions and exchanges of Fund shares are taxable events and,
accordingly, shareholders may realize gains and losses on these transactions. If
shares have been held for more than one year, gain or loss realized will be
long-term capital gain or loss unless the shareholder is a dealer in securities.
However, if a shareholder sells Fund shares at a loss within six months after
purchasing the shares, the loss will be treated as a long-term capital loss to
the extent of any long-term capital gain distributions received by the
shareholder. Furthermore, no loss will be allowed on the sale of Fund shares to
the extent the shareholder acquired other Fund shares within 30 days prior to
the sale of the shares or 30 days after such sale.
As discussed above, there may be a difference between the Fund's book
income and its taxable income. This difference may cause a portion of the Fund's
income distributions to constitute return of capital for tax purposes or require
the Fund to make distributions exceeding book income to qualify as a regulated
investment company.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations currently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
regulations. The Code and regulations are subject to change by legislative or
administrative action.
Dividends and distributions also may be subject to state and local
taxes. Dividends paid by the Fund from income attributable to interest on
obligations of the U.S. Government and certain of its agencies and
instrumentalities may be exempt from state and local taxes in certain states.
The Fund will advise shareholders of the proportion of its dividends consisting
of such governmental interest. Shareholders should consult their tax advisers
regarding the possible exclusion of this portion of their dividends for state
and local tax purposes.
The foregoing discussion relates solely to U.S. federal income tax law.
Non-U.S. investors should consult their tax advisers concerning the tax
consequences of ownership of shares of the Fund, including the possibility that
distributions may be subject to a 30% United States withholding tax (or a
reduced rate of withholding provided by treaty).
SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISERS REGARDING SPECIFIC
QUESTIONS AS TO FEDERAL, STATE, LOCAL OR FOREIGN TAXES.
ADDITIONAL INFORMATION
Further information concerning the Fund and its Shares may be found in
the Registration Statement, of which the Prospectus and Statement of Additional
Information constitute a part, on file with the Securities and Exchange
Commission.
11
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS
PRINCIPLED EQUITY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<S> <C>
Assets:
Investments at quoted market value (cost $17,687,286; see Schedule of Investments,
Notes 1, 2, & 7) ........................................................................ $21,796,213
Cash ...................................................................................... 348,105
Dividends and interest receivable ......................................................... 23,663
Organizational costs (Note 1) ............................................................. 36,403
-----------
Total assets ..................................................................... 22,204,384
===========
Liabilities:
Dividend distribution payable ............................................................. 176,872
Accrued expenses and other liabilities (Note 3) ........................................... 20,763
-----------
Total liabilities ................................................................ 197,635
Net Assets:
Capital stock (unlimited shares authorized at no par value, amount paid on 1,706,087 shares
outstanding) (Note 1) ..................................................................... 17,897,822
Net unrealized appreciation in value of investments (Note 2) .............................. 4,108,927
-----------
Net assets (equivalent to $12.90 per share, based on 1,706,087 capital shares
outstanding) ..................................................................... $22,006,749
===========
</TABLE>
F-1
<PAGE>
PRINCIPLED EQUITY MARKET FUND
STATEMENT OF OPERATIONS
DECEMBER 31, 1997
Income:
Dividends .................................................... $ 301,302
Interest ..................................................... 6,669
-----------
Total income ......................................... 307,971
-----------
Expenses:
Management fees, net (Note 3) ................................ 25,835
Custodian fees ............................................... 13,618
Audit and accounting fees .................................... 7,500
Administration fees (Note 4) ................................. 6,000
Transfer fees (Note 4) ....................................... 6,000
Trustees' fees and expenses .................................. 4,000
Legal fees ................................................... 1,500
Organizational expenses ...................................... 9,597
Other expenses ............................................... 6,251
Total expenses ....................................... 80,301
Fees paid indirectly (Note 6) ............... (8,118)
-----------
Net expenses ................................ 72,183
-----------
Net investment income ......................................... 235,788
-----------
Realized and unrealized gain on investments:
Realized gain on investments-net ..................... 102,865
Increase in net unrealized appreciation in investments 4,108,927
-----------
Net gain on investments .............................. 4,211,792
-----------
Net increase in net assets resulting from operations .......... $ 4,447,580
===========
F-2
<PAGE>
<TABLE>
<CAPTION>
PRINCIPLED EQUITY MARKET FUND
STATEMENT OF CHANGES IN NET ASSETS
Period from
Year Ended October 28, 1996 to
December 31, 1997 December 31, 1996
-------------------------------------------------
<S> <C> <C>
From operations:
Net investment income ................................... $ 235,788 --
Realized gain on investments, net ....................... 102,865 --
Increase in net unrealized appreciation in investments .. 4,108,927 --
----------- --
Net increase in net assets resulting from operations 4,447,580 --
----------- --
Distributions to shareholders:
From net investment income ($0.14 per share in 1997) .... (235,788) --
From net realized gain of investments
($0.06 per share in 1997) ............................ (102,865) --
----------- --
Total distributions to shareholders ................ (338,653) --
----------- --
<CAPTION>
From capital share transactions:
Number of Shares
1997 1996
---- ----
<S> <C> <C> <C> <C>
Proceeds from sale of shares............ 799,491 894,026 8,795,782 8,940,260
Shares issued to shareholders in
distributions reinvested............ 12,570 -- 161,780 --
Cost of shares redeemed................. -- -- -- --
Increase in net assets resulting from
capital share transactions.......... 812,061 894,026 8,957,562 8,940,260
======= =======
Net increase in net assets.............. 13,066,489 8,940,260
Net assets:
Beginning of period................................. 8,940,260 --
=========== ==========
End of period....................................... $22,006,749 $8,940,260
=========== ==========
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
PRINCIPLED EQUITY MARKET FUND
SELECTED PER SHARE DATA AND RATIOS
(for a share outstanding throughout each period)
Year Ended Period Ended October 28, 1996
December 31, 1997 to December 31, 1996
----------------- --------------------
<S> <C> <C>
Investment income.......................................... $ 0.18 $ --
Expenses, Net.............................................. 0.04 --
------- -------
Net investment income...................................... 0.14 --
Net realized and unrealized gain on investments............ 2.96 --
Distributions to shareholders:
From net investment income.......................... 0.14 --
From net realized gain on investments............... 0.06 --
------- -------
Net increase in net asset value............................ 2.90 --
Net asset value:
Beginning of period............................... 10.00 10.00
======= =======
End of period..................................... $12.90 $10.00
======= =======
Ratio of expenses to average net assets.................... 0.%8 --
Ratio of net investment income to average net assets....... 1.40% --
Portfolio turnover......................................... 0.07 --
Average commission rate paid............................... 0.02 --
Number of shares out-standing at end of period............. 1,706,087 894,026
Per share data and ratios
assuming no waiver of advisory fees:
Expenses................................................ 0.06 --
Net investment income................................... 0.13 --
Ratio of expenses to average net assets................. 0.58% --
Ratio of net investment income to average net assets.... 1.30% --
Total Common Stocks (cost $17,687,286)................................. 21,796,213
-----------
Total investments (cost $17,687,286)................................... 21,796,213
-----------
CASH & OTHER ASSETS, LESS LIABILITIES-- 0.96%................................... 210,536
-----------
Total Net Assets....................................................... $22,006,749
===========
</TABLE>
F-4
<PAGE>
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997
COMMON STOCKS-99.04%
Aerospace/Defense Industry-0.51%
1,800 Gulfstream Aerospace................................ $ 52,650
1,000 Precision Castparts Corporation..................... 60,312
-------------
112,962
Air Transport Industry-0.42%
400 Amr Corporation....................................... 51,400
200 Federal Express Corporation........................... 12,212
1,200 Southwest Airlines Company.......................... 29,550
-------------
93,162
Auto & Truck Industry-0.24%
1,000 Paccar Incorporated................................. 52,500
-------------
Auto Parts (OEM) Industry-0.28%
600 Dana Corporation...................................... 28,500
600 Oea Incorporated...................................... 17,362
600 Superior Industries International..................... 16,087
-------------
61,949
Auto Parts (Replacement) Industry-0.19%
200 Echlin Incorporated................................... 7,237
1,050 Genuine Parts Company............................... 35,634
-------------
42,871
Bank Industry-6.39%
1,000 Bank Of New York Company Incorporated............... 57,812
2,500 Bankamerica Corporation............................. 182,500
500 Bankboston Corporation................................ 46,969
1,400 Citicorp............................................ 176,662
1,700 First Union Corporation............................. 87,125
900 JP Morgan and Company Incorporated.................... 101,587
300 Keycorp............................................... 21,244
9,060 Nationsbank Corporation............................. 550,961
1,100 PNC Bank Corporation................................ 62,631
200 Wachovia Corporation.................................. 16,225
300 Wells Fargo and Company............................... 101,831
-------------
1,405,547
Bank (Midwest) Industry-2.15%
1,500 First Chicago Nbd Corporation....................... 125,250
2,700 Mellon Bank Corporation............................. 163,687
1,100 National City Corporation........................... 72,325
2,600 Norwest Corporation................................. 100,750
100 US Bancorp............................................ 11,194
-------------
473,206
F-5
<PAGE>
Beverage (Soft Drink) Industry-4.77%
8,600 Coca Cola Company................................... 573,512
2,500 Coca Cola Enterprises Incorporated.................. 88,906
10,700 Pepsico Incorporated............................... 387,875
-------------
1,050,293
Building Materials Industry-0.03%
100 Armstrong World Industries Incorporated............... 7,475
-------------
Chemical (Basic) Industry-1.80%
8,500 Arco Chemical Company............................... 395,250
-------------
Chemical (Diversified) Industry-0.45%
1,400 Millipore Corporation............................... 47,512
2,500 Pall Corporation.................................... 51,719
-------------
99,231
Chemical (Specialty) Industry-0.81%
900 Ecolab Incorporated................................... 49,894
600 International Flavors and Fragrances.................. 30,900
1,300 Praxair Incorporated................................ 58,500
800 Sherwin Williams Company.............................. 22,200
400 Sigma Aldrich Corporation............................. 15,900
-------------
177,394
Coal/Alternate Energy Industry-0.08%
400 AES Corporation....................................... 18,650
-------------
Computer & Peripherals Industry-4.64%
200 Apple Computer Incorporated........................... 2,625
600 Cabletron Systems Incorporated........................ 9,000
3,750 Cisco Systems Incorporated.......................... 209,062
2,967 Compaq Computer Corporation......................... 167,635
1,300 Dell Computer Corporation........................... 109,200
3,600 EMC Corporation..................................... 98,775
5,400 Hewlett Packard Company............................. 336,825
1,100 Seagate Technology Incorporated..................... 21,175
900 Silicon Graphics Incorporated......................... 11,362
1,400 Sun Microsystems Incorporated....................... 55,825
-------------
1,021,484
Computer Software & Services Industry-4.14%
500 Automatic Data Processing Incorporated................ 30,687
3,750 Computer Associates International................... 198,750
400 Electronic Data Systems Corporation................... 17,575
1,800 First Data Corporation.............................. 52,650
4,300 Microsoft Corporation............................... 555,775
2,500 Oracle Corporation.................................. 55,781
-------------
911,218
F-6
<PAGE>
Diversified Company Industry-0.79%
100 Crane Company......................................... 4,337
200 National Service Industries Incorporated.............. 9,912
400 Raychem Corporation................................... 17,225
800 Thermo Electron Corporation........................... 35,200
2,400 Tyco International Limited.......................... 108,150
-------------
174,824
Drug Industry-2.38%
8,000 Amgen Incorporated.................................. 433,000
300 Biogen Incorporated................................... 10,912
800 Chiron Corporation.................................... 13,600
27 Genzyme Corp-Tissue Repair............................. 186
900 Genzyme Corporation General Division.................. 24,975
200 Interneuron Pharmaceuticals Incorporated.............. 1,900
400 Quintiles Transnational Corporation................... 15,300
400 RP Scherer Corporation................................ 24,400
-------------
524,273
Drugstore Industry-0.46%
400 Rite Aid Corporation.................................. 23,500
2,500 Walgreen Company.................................... 78,437
-------------
101,937
Electric Utility (Central) Industry-0.92%
800 Cinergy Corporation................................... 30,650
3,200 Dte Energy Holding Company.......................... 111,000
2,000 Unicom Corporation.................................. 61,500
-------------
203,150
Electric Utility (East) Industry-0.97%
1,800 Carolina Power and Light Company.................... 76,275
800 Northeast Utilities................................... 9,450
800 P P and L Resources Holding Company................... 19,150
4,500 Peco Energy Company................................. 109,125
-------------
214,000
Electric Utility (West) Industry-4.09%
10,700 Edison International Incorporated.................. 290,906
2,100 Nevada Power Company................................ 55,781
20,300 Pacificorp......................................... 554,444
-------------
901,131
Electrical Equipment Industry-0.32%
233 Commscope, Incorporated............................... 3,176
1,300 Corning Incorporated................................ 48,262
200 W W Grainger Incorporated............................. 19,437
-------------
70,875
Electronics Industry-0.27%
1,100 Amp Incorporated.................................... 46,200
700 NextLevel Systems, Incorporated....................... 12,515
-------------
58,712
F-7
<PAGE>
Entertainment Industry-1.08%
1,000 Safety Kleen Corporation............................ 27,437
3,400 Time Warner Incorporated Holding Company............ 210,800
-------------
238,237
Environmental Industry-0.29%
1,700 Republic Industries Incorporated.................... 39,631
600 USA Waste Services Incorporated....................... 23,550
-------------
63,181
Financial Services Industry-4.60%
2,600 American Express Company............................ 232,050
2,000 Cendant Corporation................................. 68,750
400 Deluxe Corporation.................................... 13,800
700 Green Tree Financial Corporation...................... 18,331
400 Household International Incorporated.................. 51,050
2,400 Mbna Corporation.................................... 65,550
3,020 Morgan Stanley Dean Witter Discover................. 178,558
8,900 Schwab (Chas) Corporation........................... 373,244
100 Transamerica Corporation.............................. 10,650
-------------
1,011,983
Food Processing Industry-5.34%
2,200 General Mills Incorporated.......................... 157,575
200 Hershey Foods Corporation............................. 12,388
3,800 HJ Heinz Company.................................... 193,088
1,700 Kellogg Company..................................... 84,363
400 Pioneer Hi Bred International Incorporated............ 42,900
700 Quaker Oats Company................................... 36,925
9,600 Unilever NV......................................... 599,400
600 Wm Wrigley Jr Company................................. 47,78
-------------
1,174,377
Food Wholesalers Industry-0.19%
900 Sysco Corporation..................................... 41,006
-------------
Foreign Telecommunications Industry-0.52%
1,300 Northern Telecom Limited............................ 115,375
-------------
Gold/Silver Mining Industry-0.39%
3,200 Barrick Gold Corporation............................ 59,600
700 Newmont Mining Corporation............................ 20,563
400 Placer Dome Incorporated.............................. 5,075
-------------
85,238
Grocery Industry-0.55%
1,400 Albertsons Incorporated............................. 66,150
400 American Stores Company............................... 8,225
200 Safeway Incorporated.................................. 12,650
800 Winn Dixie Stores Incorporated........................ 34,950
-------------
121,975
Home Appliance Industry-0.10%
400 Whirlpool Corporation................................. 22,000
-------------
F-8
<PAGE>
Hotel/Gaming Industry-0.19%
600 Marriott International Incorporated................... 41,550
-------------
Household Products Industry-1.52%
400 Clorox Company........................................ 31,750
2,400 Colgate Palmolive Company........................... 176,400
800 Newell Company........................................ 34,000
600 Ralston Ralston Purina Group.......................... 55,763
1,500 Rubbermaid Incorporated............................. 37,500
-------------
335,413
Industrial Services Industry-0.11%
1,700 Laidlaw Incorporated................................ 23,163
-------------
Insurance (Diversified) Industry-2.54%
1,100 American General Corporation........................ 59,469
5,900 Equitable Companies, Incorporated................... 293,525
600 Lincoln National Corporation Incorporated............. 46,875
800 Marsh and Mclennan Companies Incorporated............. 59,650
1,500 MGIC Investment Corporation......................... 99,750
-------------
559,269
Insurance (Life) Industry-0.33%
900 Conseco Incorporated.................................. 40,894
400 Jefferson Pilot Corporation........................... 31,150
-------------
72,044
Insurance (Prop/Casualty) Industry-2.81%
2,200 Allstate Corporation................................ 199,100
900 Chubb Corporation..................................... 68,063
1,000 General Re Corporation.............................. 212,000
700 Safeco Corporation.................................... 34,125
1,100 St Paul Companies Incorporated...................... 90,269
700 USF and G Corporation................................. 15,444
-------------
619,001
Machinery Industry-0.75%
1,100 Aeroquip Vickers Incorporated....................... 53,969
700 Donaldson Company Incorporated........................ 31,544
200 Snap On Incorporated.................................. 8,725
1,500 Stanley Works....................................... 70,781
-------------
165,019
Machinery (Construction & Mining) Industry-0.94%
200 Case Corporation...................................... 12,088
2,300 Caterpillar Incorporated............................ 111,550
800 Deere and Company..................................... 46,600
900 Ingersoll Rand Company................................ 36,450
-------------
206,688
Medical Services Industry-0.14%
700 Health Care and Retirement Corporation................ 28,175
200 Idexx Laboratories Incorporated....................... 3,188
-------------
31,363
F-9
<PAGE>
Medical Supplies Industry-2.26%
1,300 Allergan Incorporated............................... 43,631
1,700 Becton Dickinson and Company........................ 85,000
2,100 Boston Scientific Corporation....................... 96,338
100 Centocor Incorporated................................. 3,325
1,100 Guidant Corporation................................. 68,475
3,800 Medtronic Incorporated.............................. 199,500
-------------
496,269
Metals & Mining (Div.) Industry-0.61%
7,900 Inco Limited........................................ 134,300
-------------
Natural Gas (Distribution.) Industry-0.34%
1,300 Pacific Enterprises................................. 48,913
800 Washington Gas Light Company.......................... 24,750
-------------
73,663
Natural Gas (Diversified) Industry-1.59%
852 Burlington Resources Incorporated..................... 38,180
200 Columbia Energy Group................................. 15,713
600 Consolidated Natural Gas Company...................... 36,300
5,000 Enron Corporation................................... 207,813
400 Sonat Incorporated.................................... 18,300
1,200 Williams Companies Incorporated..................... 34,200
-------------
350,506
Newspaper Industry-0.56%
1,400 Gannett Incorporated................................ 86,538
200 Times Mirror Company.................................. 12,300
400 Tribune Company....................................... 24,900
-------------
123,738
Office Equip & Supplies Industry-1.11%
700 Ikon Office Solutions Incorporated.................... 19,688
2,500 Pitney Bowes Incorporated........................... 224,844
-------------
244,532
Oilfield Services/Equip. Industry-1.74%
1,400 Baker Hughes Incorporated........................... 61,075
200 Cooper Cameron Corporation............................ 12,200
1,700 Diamond Offshore Drilling Incorporated.............. 81,813
1,400 Dresser Industries Incorporated..................... 58,713
400 Ensco International Incorporated...................... 13,400
400 Global Marine Incorporated............................ 9,825
200 Helmerich and Payne Incorporated...................... 13,575
200 Noble Drilling Corporation............................ 6,125
400 Reading and Bates Corporation......................... 16,750
700 Rowan Companies Incorporated.......................... 21,350
200 Smith International Incorporated...................... 12,275
800 Transocean Offshore Incorporated...................... 38,550
1,000 Varco International Incorporated.................... 21,438
200 Western Atlas Incorporated............................ 14,800
-------------
381,889
F-10
<PAGE>
Packaging & Container Industry-0.20%
600 Bemis Company Incorporated............................ 26,438
500 Sonoco Products Company............................... 17,344
-------------
43,782
Paper & Forest Products Industry-0.56%
200 Chesapeake Corporation................................ 6,875
1,900 Rayonier Incorporated............................... 80,869
-------------
1,800 Wausau - Mosinee Paper Corporation.................. 36,225
-------------
Petroleum (Integrated) Industry-1.55%
3,200 Fina Incorporated................................... 204,800
600 Murphy Oil Corporation................................ 32,513
800 Pennzoil Company...................................... 53,450
800 Quaker State Corporation.............................. 11,300
400 Sun Company Incorporated.............................. 16,825
600 Tosco Corporation..................................... 22,688
-------------
341,576
Petroleum (Producing) Industry-0.24%
200 Pogo Producing Company................................ 5,900
1,900 Union Pacific Resources Group Incorporated.......... 46,075
-------------
51,975
Publishing Industry-0.26%
900 Harcourt General Incorporated......................... 49,275
100 Mcgraw Hill Company Incorporated...................... 7,400
--------------
56,675
Railroad Industry-3.03%
5,800 Burlington Northern Santa Fe Corporation............ 539,038
4,200 Norfolk Southern Corporation........................ 128,100
-------------
667,138
Restaurant Industry-1.73%
7,300 McDonalds Corporation............................... 348,575
1,070 Tricon Global Restaurants........................... 31,097
-------------
379,672
Retail (Special Lines) Industry-0.43%
2,250 Gap Incorporated.................................... 79,734
400 TJX Companies Incorporated............................ 13,750
-------------
93,484
Retail Building Supply Industry-1.02%
3,800 Home Depot Incorporated............................. 223,725
-------------
F-11
<PAGE>
Retail Store Industry-2.82%
4,300 Borders Group, Incorporated......................... 134,644
800 Dayton Hudson Corporation............................. 54,000
200 Dillards Incorporated Class A......................... 7,050
500 Federated Department Stores Incorporated.............. 21,531
1,300 JC Penney Company Incorporated...................... 78,406
1,000 K Mart Corporation.................................. 11,500
300 May Department Stores Company......................... 15,806
7,500 Wal Mart Stores Incorporated........................ 295,781
100 Woolworth Corporation................................. 2,038
-------------
620,756
Securities Brokerage Industry-0.70%
2,100 Merrill Lynch and Company Incorporated.............. 153,169
-------------
Semiconductor Industry-2.32%
300 Advanced Micro Devices Incorporated................... 5,325
175 General Semiconductor, Incorporated................... 2,023
7,100 Intel Corporation................................... 498,775
200 Micron Technology Incorporated........................ 5,188
-------------
511,311
Semiconductor Cap Equip Industry-0.11%
800 Applied Materials Incorporated........................ 24,100
-------------
Shoe Industry-0.25%
1,400 Nike Incorporated................................... 54,688
-------------
Steel (General) Industry-0.12%
400 Nucor Corporation..................................... 19,325
400 Worthington Industries Incorporated................... 6,600
--------------
25,925
Telecomunication Equipment Industry-2.68%
300 Andrew Corporation.................................... 7,200
6,600 Lucent Technologies Incorporated.................... 527,175
700 Tellabs Incorporated.................................. 37,012
600 US West Media Group................................... 17,325
-------------
588,712
Telecomunication Services Industry-8.80%
2,600 Airtouch Communications............................. 108,062
900 Alltel Corporation.................................... 36,956
2,800 Ameritech Corporation............................... 225,400
4,759 Bell Atlantic Corporation........................... 433,069
5,300 Bellsouth Corporation............................... 298,456
2,300 MCI Communications Corporation...................... 98,469
3,689 SBC Communications Incorporated..................... 270,219
4,000 Sprint Corporation.................................. 234,500
655 TCI Ventures A........................................ 18,545
1,145 Tele Communications Inc New......................... 31,988
2,600 US West Communications Group........................ 117,325
2,100 Worldcom Incorporated............................... 63,525
-------------
1,936,514
F-12
<PAGE>
Thrift Industry-3.42%
2,500 Federal Home Loan Mortgage Association.............. 104,844
11,100 Federal National Mortgage Association.............. 633,394
200 HF Ahmanson and Company............................... 13,387
-------------
751,625
Tire & Rubber Industry-0.04%
400 Cooper Tire and Rubber Company........................ 9,750
-------------
Toiletries/Cosmetics Industry-1.06%
700 Avon Products Incorporated............................ 42,963
1,900 Gillette Company.................................... 190,831
-------------
233,794
Total common stocks (cost $17,687,286)....................... 21,796,213
-------------
Total investments (cost $17,687,286)......................... 21,796,213
-------------
CASH & OTHER ASSETS, LESS LIABILITIES -- 0.96%............... 210,536
-------------
Total Net Assets.......................................... $ 22,006,749
=============
F-13
<PAGE>
PRINCIPLED EQUITY MARKET FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. Significant accounting policies:
Principled Equity Market Fund, a Massachusetts business trust (the
"Trust"), is registered under the Investment Company Act of 1940, as
amended, as a diversified, closed-end investment management company.
The following is a summary of significant accounting policies followed
by the Trust which are in conformity with those generally accepted in
the investment company industry. 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 the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
A. Investment securities - Security transactions are recorded on the
date the investments are purchased or sold. Each day securities traded on
national security exchanges are valued at the last sale price on the primary
exchange on which they are listed, or if there has been no sale, at the current
bid price. Other securities for which market quotations are readily available
are valued at the last known sales price, or, if unavailable, the known current
bid price which most nearly represents current market value. Temporary cash
investments are stated at cost, which approximates market value. Dividend income
is recorded on the ex-dividend date and interest income is recorded on the
accrual basis. Gains and losses from sales of investments are calculated using
the "identified cost" method for both financial reporting and federal income tax
purposes.
B. Income Taxes - The Trust has elected to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute each year all of its taxable income to its shareholders. No provision
for federal income taxes is necessary since the Fund intends to qualify for and
elect the special tax treatment afforded a "regulated investment company" under
subchapter M of the Internal Revenue Code. Income and capital gains
distributions are determined in accordance with federal tax regulations and may
differ from those determined in accordance with generally accepted accounting
principles. To the extent these differences are permanent, such amounts are
reclassified within the capital accounts based on their federal tax basis
treatment; temporary differences do not require such reclassification.
C. Capital Stock - The Trust records the sales and redemptions of its
capital stock on trade date.
D. Organizational Costs - Costs incurred in connection with
organization and registration are deferred and amortized over a period of 60
months from the date upon which the Trust commenced operations.
2. Tax basis of investments:
At December 31, 1997, the total cost of investments for federal income
tax purposes was identical to the total cost on a financial reporting
basis. Aggregate gross unrealized appreciation in investments in which
there was an excess of market value over tax cost was $4,620,428.
Aggregate gross unrealized depreciation in investments in which there
was an excess of tax cost over market value was $511,501. Net
unrealized appreciation in investments at December 31, 1997 was
$4,108,927.
3. Investment advisory and sub-advisory agreements:
The Trust has entered into an Investment Advisory Agreement with F.L.
Putnam Investment Management Company ("F.L. Putnam" or the "Adviser")
and a Sub-Advisory Agreement with PanAgora Asset Management, Inc.
("PanAgora" or the "Sub-Adviser").
F-14
<PAGE>
The Advisory Agreement provides that F.L. Putnam will be responsible
for overall management of the Trust's activities, will supervise the
provision of administrative and professional services to the Trust,
will provide all necessary facilities, equipment, personnel and office
space to the Trust, and will provide the Sub- Adviser with a list of
acceptable securities from which to select and effect investments for
the Trust's portfolio. The Sub-Advisory Agreement provides that
PanAgora will be responsible for investment and management of the
Trust's securities portfolio using the list of securities provided by
F.L. Putnam. The agreements provide that the Trust will pay F.L. Putnam
1/4 of 1 percent (0.25%) of the Trust's average monthly net assets per
year, of which F.L. Putnam will pay 60 percent or 15/100 of 1 percent
(0.15%) to PanAgora, leaving F.L. Putnam with a net fee of 1/10 of 1
percent (0.10%). At the Trust's inception, F.L. Putnam elected to waive
its total management fee of $17,213 for at least the first year of the
Trust's operation, and is receiving no compensation for its services.
PanAgora has received its portion of the fee, in an amount equal to
$25,835 of which $2,766 is included in "Accrued expenses and other
liabilities" in the accompanying Statement of Assets and Liabilities.
4. Administration and transfer agent services:
The Trust has entered into an agreement with Anchor Investment
Management Corporation for administrative, transfer agent and dividend
disbursing agent services. Annual fees for these services are $12,000.
At December 31, 1997, administrative, transfer agent and dividend
disbursing agent fees of $2,000 were due which were included in
"Accrued expenses and other liabilities" in the accompanying Statement
of Assets and Liabilities.
5. Related parties:
The President and Secretary of the Trust is also a director and
principal stockholder of the Trust's investment adviser.
6. Certain Transactions:
For the year ended December 31, 1997 the total expense increase, as
shown in the statement of operations, is $8,118 as a result of an
expense offset arrangement with its custodian, Investors Bank & Trust
Company. The Trust could have invested the assets used by the custodian
in an income producing asset if it had not agreed to a reduction in
fees under the expense offset arrangement. In addition, the expense
ratios in the Selected Per Share Data and Ratios are based on the total
expenses, which include amounts that would have been paid in lieu of an
expense offset arrangement.
7. Purchase and sales:
Aggregate cost of purchases and the proceeds from sales and maturities
on investments for the year ended December 31, 1997 were:
Cost of securities acquired:
U.S. Government and investments backed
by such securities .......................... $ 130,723
Other investments .............................. 18,756,628
$18,887,351
===========
Proceeds from sales and maturities:
U.S. Government and investments backed
by such securities .......................... $ 130,723
Other investments .............................. 1,172,207
$ 1,302,930
===========
F-15
<PAGE>
Independent Auditors' Report
To the Shareholders and Trustees of The Principled Equity Market Fund:
We have audited the accompanying statement of assets and liabilities of
The Principled Equity Market Fund (formerly "The Principled Equity Index Fund"),
a Massachusetts business trust (the "Trust"), as of December 31, 1997, the
related statement of operations for the year then ended, the statement of
changes in net assets and the selected per share data and ratios for the year
ended December 31, 1997 and for the period from inception (October 28, 1996) to
December 31, 1996. These financial statements and per share data and ratios are
the responsibility of the Trust's management. Our responsibility is to express
an opinion on these financial statements and per share data and ratios based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and per share data
and ratios 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 custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and selected per share data
and ratios referred to above present fairly, in all material respects, the
financial position of The Principled Equity Market Fund as of December 31, 1997,
the results of its operations for the year then ended, and the changes in its
net assets and the selected per share data and ratios for the year ended
December 31, 1997 and for the initial period ended December 31, 1996, in
conformity with generally accepted accounting principles.
LIVINGSTON & HAYNES, P.C.
Wellesley, Massachusetts
January 14, 1998
F-16
<PAGE>
Part C
OTHER INFORMATION
<TABLE>
<CAPTION>
Item 24. Financial Statements and Exhibits
<S> <C> <C>
(1) Financial Statements
Statement of Assets and Liabilities at December 31, 1997
Statement of Operations for the Year ended December 31, 1997
Statement of Changes in Net Assets for the Year ended December 31, 1997
Selected per Share Data and Ratios Notes to Financial Statements
Independent Auditors' Report
(2) Exhibits
(a) Amended Agreement and Declaration of Trust*
(b) Amended By-Laws*
(c) Not Applicable
(d) Not Applicable
(e) Not Applicable
(f) Not Applicable
(g) Investment Advisory Agreement
(i) Management Agreement (revised)*
(ii) Sub-Advisory Agreement (revised)*
(h) Not Applicable
(i) Not Applicable
(j) Custodian Contract (revised)*
(k) Transfer Agency and Services Agreement
(i) Transfer Agency and Services Agreement (revised)*
(ii) Administration Agreement (revised)*
(l) Opinion and Consent of Sullivan & Worcester LLP*
(m) Not Applicable
(n) Consent of Livingston & Haynes, P.C. Attached as Exhibit 99.24(2)(n)
Power of Attorney of Edward T. Sullivan, Jr. Attached as Exhibit 99.24(2)(n)(2)
Power of Attorney of George A. Violin Attached as Exhibit 99.24(2)(n)(3)
(o) Not Applicable
(p) Subscription Agreement*
(q) Not Applicable
(r) Financial Data Schedule Attached as Exhibit 99.24(2)(r)
<FN>
* Previously filed
</FN>
</TABLE>
C-1
<PAGE>
Item 25. Marketing Arrangements
See the "Cover Page," "Prospectus Summary" and "Purchase of Shares" in
the Prospectus.
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses expected to be
incurred in connection with the offering described in this Registration
Statement.
Registration fees............................................ $ 6,060
Printing (other than stock certificates)..................... 2,000
Fees and expenses of qualification under state
securities laws (including fees of counsel)................ 7,000
Accounting fees and expenses................................. 1,000
Legal fees and expenses...................................... 25,000
Fees and expenses of Custodian............................... 2,000
Miscellaneous................................................ 2,940
Total............................................... $46,000
Item 27. Persons Controlled by or Under Common Control with Registrant
None
Item 28. Number of Holders of Securities (as of April 30, 1998)
Title of Class Number of Record Holders
Shares of beneficial interest, no par value 16
Item 29. Indemnification
Under the Registrant's Declaration of Trust and Bylaws, any past or
present Trustee or officer of the Registrant is indemnified to the fullest
extent permitted by law against liability and all expenses reasonably incurred
by him in connection with any action, suit or proceeding to which he may be a
party or is otherwise involved by reason of his being or having been a Trustee
or officer of the Registrant. The Declaration of Trust and Bylaws of the
Registrant do not authorize indemnification where it is determined, in the
manner specified in the Declaration of Trust and the Bylaws of the Registrant,
that such Trustee or officer has not acted in good faith in the reasonable
belief that his actions were in the best interest of the Registrant. Moreover,
the Declaration of Trust and Bylaws of the Registrant do not authorize
indemnification where such Trustee or officer is liable to the Registrant or its
shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of his duties.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to Trustees, officers and controlling persons of
the Registrant pursuant to the foregoing provisions or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a Trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
C-2
<PAGE>
jurisdiction the questions of whether such indemnification is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The Registrant, its Trustees and officers, its Manager and investment
adviser, and persons affiliated with them are insured under a policy of
insurance maintained by the Registrant and its investment adviser, within the
limits and subject to the limitations of the policy, against certain expenses in
connection with the defense of actions, suits or proceedings, and certain
liabilities that might be imposed as a result of such actions, suits or
proceedings, to which they are parties by reason of being or having been such
Trustees or officers. The policy expressly excludes coverage for any Trustee or
officer whose personal dishonesty, fraudulent breach of trust, lack of good
faith, or intention to deceive or defraud has been finally adjudicated or may be
established or who willfully fails to act prudently.
Item 30. Business and Other Connections of the Investment Adviser
Set forth below is a description of each of the Manager and the
Sub-Adviser and of each of their officers and directors and any other business
profession, vocation or employment of a substantial nature engaged in by each of
such officers or directors during the past two years.
F. L. Putnam Investment Management Company (the "Manager") is a
registered investment adviser offering investment advisory services to
individuals, corporations and other institutional accounts. Frederic L. Putnam,
a director of the Manager, is Chairman and President of Colonial Gas, a
distributor of natural gas, and of F.L. Putnam Securities Company, Incorporated.
Alan L. Gosule, a director of the Manager, is a partner of the law firm
of Rogers & Wells, and a trustee of the Northstar investment trusts.
David Y. Williams, a director of the Manager, is president and a
director of Anchor Investment Management Corp. and Anchor & Co., Inc., a
securities broker/dealer, and a trustee and president of the Anchor investment
trusts.
Maurice Aloysius Donahue, a director of the Manager, is a director of
Vanguard Savings Bank and a director and trustee of the Institute for
Governmental Services.
J. Stephen Putnam, a director of the Manager, is a director of F. L.
Putnam Securities Company Incorporated, President and a director of Robert
Thomas Securities, Inc., a securities broker-dealer, and a trustee of the Anchor
investment trusts.
David W. C. Putnam; President and a director of the Fund and the
Manager, is also Clerk and a director of F. L. Putnam Securities Company
Incorporated, Interstate Power Company, Inc., Trust Realty Corp. and Bow Ridge
Mining Co., and a trustee of the Anchor and the Northstar investment trusts.
PanAgora Asset Management, Inc. (the "Sub-Adviser") is a Delaware
corporation, a registered investment adviser under the Investment Adviser's Act
of 1940, a registered commodity trading adviser (effective date January 17,
1990) and a member of the National Futures Association. The business office
address and telephone number are: 260 Franklin Street, Boston, Massachusetts
02110 and (617) 439-6300. The Sub-Adviser is a joint venture of Putnam
Investments, Inc. (an investment company/mutual fund company) and Nippon Life
Insurance Company (a mutual life insurance company). Bruce E. Clarke, President
and Director of the Sub-Adviser oversees the management of all commodity trading
accounts. Employees who manage commodity trading accounts are Edgar E. Peters,
Richard T. Wilk, Paul R. Samuelson.
C-3
<PAGE>
PanAgora Asset Management, Inc. was incorporated in Delaware in
September 1989 as a wholly-owned subsidiary of The Boston Company, Inc. On April
27, 1990 The Boston Company sold 50% of its interest in PanAgora Asset
Management, Inc. to Nippon Life Insurance Company and 25% to Shearson Lehman
Brothers, Inc. Upon the acquisition of The Boston Company by Mellon Bank
Corporation on May 21, 1993, The Boston Company's 25% interest in PanAgora was
transferred to Shearson, making Shearson's ownership 50%. On August 2,1993,
Shearson changed its name to Lehman Brothers, Inc. On August 24, 1997 Putnam
Investments purchased the 50% stake in PanAgora Asset Management held by Lehman
Brothers. The ownership today is 50% Putnam Investments and 50% Nippon Life
Insurance Company. Prior to the incorporation of PanAgora Asset Management,
Inc., all commodity trading was performed by Dr. Richard A. Crowell and Mr.
Edgar E. Peters as officers of Boston Safe Deposit and Trust Company, a
subsidiary of The Boston Company, Inc. and a Massachusetts bank.
Principals of the Sub-Adviser (in addition to Putnam Investments and
Nippon Life) are as follows:
Bruce E. Clarke
Mr. Clarke is President and Managing Director of PanAgora Asset
Management, Inc. He is responsible for overseeing all investment activities of
PanAgora. Prior to becoming President in September 1994, Mr. Clarke was
responsible for all global investments as the Director of Global Investments for
the Sub-Adviser. He was also Vice President of Boston Safe Deposit and Trust
Company (a Massachusetts bank) until July of 1995. Mr. Clarke joined The Boston
Company in October 1988. Previous to that, Mr. Clarke was Vice-Director of SIGE
S.p.A. (a financial services firm) in Milan, Italy from August 1987 to October
1988 where he developed SIGE's international corporate finance business. From
August 1984 to July 1987, Mr. Clarke was a Portfolio manager at Shearson Lehman
Global Asset Management (an investment advisory firm) in London. Mr. Clarke
currently oversees all investment activities of the Trading Adviser.
Edgar E. Peters
Mr. Peters is the Director of Tactical Asset Allocation for PanAgora
Asset Management, Inc. He was elected to the Board of Directors of the
Sub-Adviser on March 13, 1995. He is responsible for overseeing all tactical
asset allocation investments. He was Vice President of Boston Safe Deposit and
Trust Company (a Massachusetts bank) until July of 1995. Mr. Peters, who joined
The Boston Company in August 1985, directed investment of commodity trading
accounts as Vice President of Boston Safe Deposit and Trust Company, a
subsidiary of The Boston Company, Inc. Previous to that, Mr. Peters was Manager
of Investment Technology at Interactive Data Corporation (a computer services
company) where he assisted clients in using passive investment services from
March 1983 to August 1985. Mr. Peters currently oversees the management of
tactical asset allocation commodity trading accounts for the Sub- Adviser.
Richard T. Wilk
Mr. Wilk is a Senior Investment Manager of PanAgora Asset Management,
Inc. responsible for managing global and asset allocation investments. He was
Vice President of Boston Safe Deposit and Trust Company (a Massachusetts bank)
until July of 1995. Mr. Wilk joined The Boston Company in January 1980. From
1982 to 1985, Mr. Wilk was Product Manager of Boston Safe's Analytical
Time-Sharing Service. Mr. Wilk currently manages global and asset allocation
commodity trading accounts for the Sub-Adviser.
William G. Zink
Mr. Zink was general manager of PanAgora Asset Management, Inc. from
January 1990 until September 1993. He is now a Senior Investment Manager of
PanAgora responsible for managing equity investments. He was Vice President of
Boston Safe Deposit and Trust Company (a Massachusetts bank) from November 1988
until July of 1995. Prior to that, he was Vice President of The Boston Company
Advisors, Inc. (a registered investment adviser) from June 1989 to June 1991,
Vice President of The Boston Company Institutional Investors, Inc. (a registered
investment adviser) from June 1989 to June 1991. Mr. Zink was Vice President of
Interactive Data Corporation (a financial services company) from April 1975 to
September 1988. Mr. Zink currently manages equity commodity trading accounts for
the Sub-Adviser.
C-4
<PAGE>
Paul R. Samuelson
Dr. Samuelson is Director of Equity and Fixed Income Investments for
PanAgora Asset Management, Inc. He joined PanAgora in September 1993 and was
elected to the Board of Directors on March 15, 1995. Dr. Samuelson was a partner
with Hagler, Mastrovita and Hewitt (an investment management firm) from
September 1991 to August 1993. Prior to that he was Vice President of Colonial
Management Association (an investment management firm) from December 1986 to
August 1991, and a consultant at Acadian Asset Management, Inc. (an investment
management firm) from October 1981 to November 1986. Dr. Samuelson currently
oversees equity and fixed income trading accounts for the Sub-Adviser.
Richard A. Crowell
Dr. Crowell is Vice Chairman of PanAgora Asset Management, Inc., a
registered investment adviser and commodity trading adviser. Dr. Crowell was
President of PanAgora until September 1994 and was Senior Vice President of
Boston Safe Deposit and Trust Company (a Massachusetts bank) until February
1993. Dr. Crowell, who joined The Boston Company, Inc. in 1964, held numerous
positions there including Director of Investment Research and Technology. Dr.
Crowell managed and directed investment activities for all PanAgora accounts
until September 1994. Prior to staring PanAgora, Dr. Crowell directed investment
of commodity trading accounts as Senior Vice President of Boston Safe Deposit
and Trust Company, a subsidiary of The Boston Company, Inc.
Haruaki Deguchi
Mr. Deguchi has been a director of PanAgora Asset Management, Inc.
since May 9, 1995. He is also general manager of Nippon Life Insurance Company
(a mutual life insurance company) since March 1995 and a director of PanAgora
Asset Management Limited (a London investment management firm) since May 9,
1995. Mr. Deguchi was managing director of NLI International Ltd. (a subsidiary
of Nippon Life Insurance Company) in London, England from April 1992 to March
1995. Prior to that, he was deputy general manager of Nippon Life Insurance
company in Tokyo, Japan from April 1972 to March 1992.
Kathleen DeVivo
Ms. DeVivo has been secretary of PanAgora Asset Management, Inc. since
September 1991. She is also compliance officer since April 1990 and was vice
president of Boston Safe Deposit and Trust Company (a Massachusetts bank) until
June 1991. Prior to that, she was senior operations officer at The Boston
Company Institutional Investors, Inc. (a registered investment adviser) from
June 1985 to February 1987.
Richard S. Fuld, Jr.
Mr. Fuld has been a director of PanAgora Asset Management, Inc. since
November 12, 1993. He is also a director of Lehman Brothers, Inc. (a registered
broker/dealer) and predecessor companies in New York since March 1978 and a
director of PanAgora Asset Management Limited (a London investment management
firm) since 1993.
Bruce R. Lakefield
Mr. Lakefield has been a director of PanAgora Asset Management, Inc.
since April 8, 1994. He is also a managing director of Lehman Brothers, Inc. (a
registered broker/dealer) and predecessor companies since May 1974 and a
director of PanAgora Asset Management Limited (a London investment management
firm) since 1994.
Toru Morishige
Mr. Morishige has been a director of PanAgora Asset Management, Inc.
since May 9, 1995. He is also a director and vice chairman of PanAgora Asset
Management Limited (a London investment management firm) since May 9, 1995.
Prior to that, Mr. Morishige was the president of NLI International Canada, Inc.
(a Canadian subsidiary of Nippon Life Insurance Company) in Toronto form April
1992 to April 1995. He was general manager of Japan Center for International
Finance (a subsidiary of Nippon Life Insurance Company) located in Tokyo, Japan
from April
C-5
<PAGE>
1989 to March 1992. From April 1972 to March 1989, he was deputy general manager
of Nippon Life Insurance Company (a mutual life insurance company) in Tokyo,
Japan.
Randolph S. Petralia
Mr. Petralia has been a director of PanAgora Asset Management, Inc.
since July 17, 1995. He is also a director of PanAgora Asset Management Limited
(a London investment management firm) since July 17, 1995. Mr. Petralia is also
a manager at Lehman Brothers, Inc. (a registered broker/dealer) in New York
since August 1987. Prior to that, Mr. Petralia was director of the Japan Society
in New York from March 1983 to July 1987.
Masataka Shimasaki
Mr. Shimasaki has been a director of PanAgora Asset Management, Inc.
since November 12, 1993. He is also general manager of Nippon Life Insurance
Company (a mutual life insurance company) since March 1967 and a director of
PanAgora Asset Management Limited (a London investment management firm) since
November 12, 1993.
Makoto Toda
Mr. Toda has been a director of PanAgora Asset Management, Inc. since
May 9, 1995 and was a director of PanAgora from April 1990 to June 1992. He is
also a director of PanAgora Asset Management Limited (a London investment
management firm) since May 1995 and was previously a director of that firm from
May 1989 to June 1992. Mr. Toda is also managing director of Nippon Life
Insurance Company (a Mutual life insurance company) in Tokyo, Japan since April
1964.
Michael H. Turpin
Mr. Turpin has been treasurer of PanAgora Asset Management, Inc. since
September 1991. He has been controller of PanAgora since April 1991. Mr. Turpin
was vice president of Northeast Saw and Supply Company (a Massachusetts
corporation) in Northboro, Massachusetts.
Item 31. Location of Accounts and Records
Persons maintaining physical possession of accounts, books and other
documents required to be maintained by Section 31(a) of the Investment Company
Act of 1940 and the Rules promulgated thereunder, include Registrant,
Registrant's custodian, Investors Bank and Trust Company, 1 Lincoln Plaza,
Boston, Massachusetts 02205 and its transfer agent, Anchor Investment Management
Corporation, 579 Pleasant Street, Paxton, Massachusetts 01612.
Item 32. Management Services
Not applicable
Item 33. Undertakings
The undersigned Registrant undertakes to suspend offering of the shares
covered hereby until it amends its Prospectus contained herein if (1) subsequent
to the effective date of this Registration Statement, its net asset value per
share declines more than 10% from its net asset value per share as of the
effective date of this Registration Statement or (2) its net asset value
increases to an amount greater than its net proceeds as stated in the
Prospectus.
(2) Not applicable.
(3) Not applicable.
C-6
<PAGE>
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in this registration
statement;
(iii) To include any material information with respect
to the plan of distribution not previously disclosed in this
registration statement or any material change to such
information in this registration statement.
(2) That for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the Securities
offered herein, and the offering of such Securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the Securities being registered which remain unsold at
the termination of the offering.
The undersigned Registrant hereby undertakes that:
(1) That for purposes of determining any liability under the
Act, the information omitted from the form of prospectus filed as part
of this registration in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) That for the purpose of determining any liability under
the Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To send by first class mail or other means designed to
ensure equally prompt delivery, within two business days of receipt of
a written or oral request, any Statement of Additional Information.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this amendment to
its registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the Town of Newton, Commonwealth of Massachusetts,
on July 21, 1998.
By: /s/ David W.C. Putnam
David W.C. Putnam, President
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the Registrant's registration statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ David W.C. Putnam President and Trustee (principal July 21, 1998
David W.C. Putnam executive officer)
/s/ C. Kent Russell Treasurer (principal financial and
C. Kent Russell accounting officer) July 21, 1998
/s/ Howard R. Buckley Trustee July 21, 1998
Howard R. Buckley
/s/ Sister Anne Mary Donovan, SNBD Trustee July 21, 1998
Sister Anne Mary Donovan, SNBD
Trustee July 21, 1998
Ronald P. Hogan
Trustee July 21, 1998
William H. Izlar, Jr.
/s/ Sister Mary Laboure Morin Trustee July 21, 1998
Sister Mary Laboure Morin, RSM
/s/ Daniel F. Russell Trustee July 21, 1998
Daniel F. Russell
<PAGE>
/s/ Edward T. Sullivan, Jr. Trustee July 21, 1998
Edward T. Sullivan, Jr.
/s/ George A. Violin Trustee July 21, 1998
George A. Violin
/s/ Joel M. Ziff Trustee July 21, 1998
The Reverend Mr. Joel M. Ziff
</TABLE>
EXHIBIT 99.24(2)(N)(1)
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of The Principled Equity
Market Fund on the amended Form N-2, our report dated January 14, 1998 appearing
in the Prospectus, which is part of such Registration Statement, and to the
reference to us under the captions, "Financial Highlights" and "Auditors".
/s/LIVINGSTON & HAYNES P.C.
Wellesley, Massachusetts
July 27, 1998
Exhibit 99.24(2)(n)(2)
Power of Attorney
The undersigned hereby constitutes and appoints David W.C. Putnam to
sign for him, and in his name in his capacity as a Trustee of The Principled
Equity Market Fund, the Fund's registration statement on Form N-2 for the
purposes of registering the Fund under the Investment Company Act of 1940, as
amended, and registering shares of beneficial interest of the Fund under the
Securities Act of 1933, as amended, and any and all amendments thereto,
including without limitation any registration statement or post-effective
amendment thereof filed under and meeting the requirements of Rule 462(b) under
the Securities Act, hereby ratifying and confirming his signature as it may be
signed by said attorney to such registration statement and any and all
amendments thereto.
Dated: _________________, 1998 __________________________________
George A. Violin
Exhibit 99.24(2)(n)(3)
Power of Attorney
The undersigned hereby constitutes and appoints David W.C. Putnam to
sign for him, and in his name in his capacity as a Trustee of The Principled
Equity Market Fund, the Fund's registration statement on Form N-2 for the
purposes of registering the Fund under the Investment Company Act of 1940, as
amended, and registering shares of beneficial interest of the Fund under the
Securities Act of 1933, as amended, and any and all amendments thereto,
including without limitation any registration statement or post-effective
amendment thereof filed under and meeting the requirements of Rule 462(b) under
the Securities Act, hereby ratifying and confirming his signature as it may be
signed by said attorney to such registration statement and any and all
amendments thereto.
Dated: _________________, 1998 __________________________________
Edward T. Sullivan, Jr.
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 17,687,286
<INVESTMENTS-AT-VALUE> 21,796,213
<RECEIVABLES> 23,663
<ASSETS-OTHER> 36,403
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 22,204,384
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 197,635
<TOTAL-LIABILITIES> 197,635
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 17,897,822
<SHARES-COMMON-STOCK> 1,706,087
<SHARES-COMMON-PRIOR> 894,026
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 22,006,749
<DIVIDEND-INCOME> 301,302
<INTEREST-INCOME> 6,669
<OTHER-INCOME> 0
<EXPENSES-NET> 72,183
<NET-INVESTMENT-INCOME> 235,778
<REALIZED-GAINS-CURRENT> 102,865
<APPREC-INCREASE-CURRENT> 4,108,927
<NET-CHANGE-FROM-OPS> 4,447,580
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 235,788
<DISTRIBUTIONS-OF-GAINS> 102,865
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 779,491
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 12,570
<NET-CHANGE-IN-ASSETS> 812,061
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 25,835
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 80,301
<AVERAGE-NET-ASSETS> 22,006,749
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.14
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 2.96
<PER-SHARE-DISTRIBUTIONS> 0.06
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.90
<EXPENSE-RATIO> 0.48
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
