Registration Nos. 33-78256
Investment Company Act File No.811-8492
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No. |_|
Post Effective Amendment No. 3 |X|
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 6 |X|
THE PRINCIPLED EQUITY MARKET FUND
(Exact Name of Registrant as Specified in Charter)
Langley Place, 10 Langley Road, Newton Centre, Massachusetts 02459
(Address of Principle 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:
Peter K. Blume, Esq.
Thorp Reed & Armstrong
One Riverfront Center
Pittsburgh, PA 15222
(412) 394-7762
Approximate date of the proposed public offering: As soon as practicable after
the effective date of this Registration Statement.
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).
Pursuant to Rule 429, this Registration Statement relates to shares previously
registered on Form N-2 (Registration No. 33-78256). The Registrant hereby amends
this Registration Statement on such date or dates as may be necessary to delay
its effective date until the Registrant shall file a further amendment which
specifically states that this registration statement shall thereafter become
effective in accordance with Section 8 (a) of the Securities Act of 1933, as
amended, or until the Registration Statement shall become effective on such date
as the Commission acting pursuant to said Section 8 (a) may determine.
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PROSPECTUS
THE PRINCIPLED EQUITY MARKET FUND
The Principled Equity Market Fund (the "Fund") is a closed-end, diversified
management investment company organized as a Massachusetts business trust. The
Fund seeks to provide long-term capital appreciation by investing in equity
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, geographical 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"). 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.
Fund Shares are not bank deposits, federally insured, or guaranteed, and may
lose value.
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
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.
Shares of the Principled Equity Market Fund are listed and traded on the Chicago
Stock Exchange. 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.
CONTENTS
Risk/Return Summary
Fees and Expenses of the Fund
What are the Fund's Investment Objectives
and Policies?
What are the Fund's Investment Restrictions?
What are the Specific Risks of Investing
in the Fund?
Management and Organization
Shareholder Information
Other Information
Financial Information
PROSPECTUS DATED MAY 1, 2000
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RISK/RETURN SUMMARY
What is the Fund's Investment Objective?
The principal investment objective of the Fund is long-term capital
appreciation. The Fund invests principally in equity 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, geographical
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.
While there is no assurance that the Fund will achieve its investment objective,
it will attempt to do so through the strategies and policies described in this
Prospectus.
What are the Fund's Main Investment Strategies?
The Fund invests principally in equity securities that the Fund's management
believes will contribute to the achievement of its objective of long term
capital appreciation and that do not possess characteristics (i.e., products,
services, geographical 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
Manager's or the Sub-Adviser's opinion, contribute to this goal. The Fund will
hold both dividend-paying and non-dividend-paying common stocks.
What are the Main Risks of Investing in the Trust?
The Fund is intended for investors who seek long-term capital appreciation.
Therefore, investors in the Fund should have a long-term view and should
recognize that the value of securities in the Fund's portfolio will fluctuate.
An investment in the Fund is subject to risks, and it is possible to lose money
by investing in the Fund. Changes in the value of the Fund's portfolio may
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result from general changes in the market or the economy. Events affecting
individual issuers of the securities in the Fund's portfolio may also cause
fluctuations in the Fund's share price.
The principal risks of investing in the Fund are:
o Market Risk: This is the risk that the price of a security will rise or fall
due to changing economic, political or market conditions, or due to a
company's individual situation.
o Smaller companies: The securities of smaller companies may have more risks
than those of larger companies - they may be more susceptible to market
downturns and their prices may be more volatile.
For a more detailed discussion of these and other risks, see "What are the
Specific Risks of Investing in the Fund."
Bar Chart and Performance Table
The bar chart and performance table below indicate the risks of investing in the
Fund. The chart shows the annual total returns of the Fund on a calendar year
basis for the life of the Fund.
[OBJECT OMITTED]
For the information of investors the Fund will from time to time compare its
investments results to those of major equity market indices, such as the
Standard and Poor's Corporation 500 Stock Index.
Within the period shown in the chart, the Fund's highest quarterly return was
22.43% for the quarter ended December 31, 1998. Its lowest quarterly return was
(11.53%) for the quarter ended September 30, 1998.
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Average Annual Total Return
for the periods ended December 31, 1999
1 Year Life of Fund(1)
- --------------------------------------------------
The Fund 21.16% 26.73%
S&P 500 Index 19.53% 25.64%
(1) Initial Public Offering of shares was December 20, 1996.
The table shows the Fund's total returns averaged over a period of years as
compared to the S&P 500 Index, a broad-based market index.
The bar chart and the performance table provide you with historical performance
information so that you can analyze the potential fluctuations in the Fund's
returns and analyze the risks of investing in the Fund. Past results of the
Fund, however, do not necessarily indicate how the Fund will perform in the
future.
FEES AND EXPENSES OF THE FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
Shareholder Fees
(fees paid directly from your investment)
Maximum sales charge (load) imposed on
purchases (as a percentage of
offering price) None
Annual Fund Operating Expenses
(as a percentage of average net
assets)(Note 1)
Management fees (Note 2) 0.25%
Other expenses 0.40%
Total annual Fund operating expenses 0.65%
Note 1: The percentages assume average annual net assets of $25,000,000.
Note 2: The Manager is currently waiving its 0.10% portion of this
fee. The actual Fund operating expense for 1999 was 0.55% (see
"Management and Organization" herein)
Example: 1 year 3 years 5 years 10 years
You would pay the following $66 $208 $362 $810
expenses on a $10,000 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.
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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 and Organization".
C. Example of Expenses: The hypothetical example illustrates the expenses
associated with a $10,000 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.
WHAT ARE THE FUND'S INVESTMENT OBJECTIVES AND POLICIES?
The Fund's investment objective is long-term capital appreciation. The Fund
invests principally in equity 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, geographical 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, other than
government securities, in one year, it would have a 100% annual turnover rate.
For the year ended December 31, 1999, the Fund's turnover rate was 15%.
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.
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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 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
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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.
WHAT ARE THE FUND'S 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.
The Fund may not:
1. Borrow money or issue senior securities, provided that the Fund may
borrow amounts not exceeding 33 1/3% 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.
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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 l% 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.
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 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. The purchase of restricted securities is not to be deemed engaging in
underwriting.
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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.
WHAT ARE THE SPECIFIC RISKS OF INVESTING IN THE FUND?
Equity Securities
While stocks have historically outperformed other asset classes over the long
term, they tend to go up and down more dramatically over the shorter term. These
price movements may result from factors affecting individual companies or
industries or the securities market or the economy as a whole. Because the
stocks the Fund holds fluctuate in price, the value of your investment in the
Fund will go up and down. This means you could lose money over short or even
extended periods of time.
Fixed Income Securities
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
Manager 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). The values of fixed income investments,
including some of the debt instruments in which the Fund may invest, rise and
fall in response to changes in interest rates. Declining interest rates raise
the value of investments in debt instruments, while rising interest rates lower
the value of investments in debt instruments. Changes in the values of the
Fund's investments will affect the value of the Fund's shares. Accordingly, the
primary risk factors that effect the Fund include:
Market Risk. The values of fixed income investments, including the debt
instruments in which the Fund may invest, rise and fall in response to changes
in interest rates. Declining interest rates raise the value of debt instruments,
while rising interest rates lower the value of debt instruments. Debt
instruments with longer maturities are usually subject to a greater risk of an
adverse movement in interest rates and a decline in the price of the instrument.
Changes in the values of the Trust's investments will affect the value of the
Fund's shares.
Credit Risk. Credit risk is the possibility that an issuer will default (the
issuer fails to repay interest and principal when due). If an issuer defaults,
the Trust will lose money. Many fixed income securities receive credit ratings
from companies such as Standard & Poor's and Moody's Investor Services. Fixed
income securities receive different credit ratings depending on the rating
company's assessment of the likelihood of default by the issuer. The lower the
rating of the fixed income security, the greater the credit risk. Fixed income
securities generally compensate for greater credit risk by paying interest at a
higher rate. The difference between the yield of the security and the yield of a
U.S. Treasury security with a comparable maturity (the "spread") measures the
additional interest received for taking risk. Spreads may increase generally in
response to adverse economic or market conditions. A security's spread may also
increase if the security rating is lowered, or the security is perceived to have
an increased credit risk. An increase in the spread will cause the price of the
security to decline
Other principal risks of investing in the Fund are:
Derivatives
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
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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%.
Derivatives are volatile and involve significant risks, including the following:
Credit Risk. There is the risk that the other party on a derivative
transaction will be unable to honor its financial obligation to the Fund.
Currency Risk. There is the risk that changes in the exchange rate
between two currencies will adversely affect the value (in U.S. dollar
terms) of the investment.
Leverage Risk. Certain investments or trading strategies that involve
leverage can result in losses that greatly exceed the amount originally
invested because relatively small market movements may result in large
changes in the value of an investment.
Liquidity Risk. There is the risk that derivative securities may be
difficult or impossible to sell at the time the seller would like or at
the price that the seller believes the security is currently worth.
Index Risk. If the derivative is linked to the performance of an index, it
will be subject to the risks associated with changes in that index. If the
index changes, the Fund could receive lower interest payments (in the case
of a debt-related derivative) or experience a reduction in the value of
the derivative to below what the Fund paid. Certain indexed securities may
create leverage, to the extent that they increase or decrease in value at
a rate that is a multiple of the changes in the applicable index.
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 Manager's or 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.)
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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%.
Loans of Portfolio Securities and Repurchase Agreements
If the Fund makes loans of portfolio securities or uses repurchase agreements,
there is a risk that the other party to the transaction may not be able to
fulfill its obligations to the Fund. In the event of a default by the borrower
in a loan of portfolio securities, the Fund may not be able to recover its
securities. In the event of a default by the other party to a repurchase
agreement, the Fund may lose its interest in the underlying security.
When-Issued and Delayed Delivery Purchases
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.
MANAGEMENT AND ORGANIZATION
Trustees
Under the terms of the Declaration of Trust establishing the Fund, which is
governed by the laws of the Commonwealth of Massachusetts, the Trustees of the
Fund are ultimately responsible for the management of its business and affairs.
The Statement of Additional Information contains background information
regarding each Trustee and executive officer of the Trust.
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. From the Fund's inception
until February 13, 1998, PanAgora Asset Management, Inc. ("PanAgora"), served as
a sub-investment adviser pursuant to a written investment advisory agreement
(the "Former Sub-Advisory Agreement") providing for PanAgora to manage the
Acceptable securities identified by the Manager. As required by the Investment
Company Act of 1940 (the "1940 Act"), the Former Sub-Advisory Agreement
terminated when PanAgora underwent a "change in control" as identified by the
1940 Act. From February 13, 1998 to June 9, 1999, PanAgora provided consulting
services to the Fund at no charge. On June 10, 1999, the shareholders approved
the New Sub-Advisory Agreement, and PanAgora resumed as Sub-Adviser. 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 expects to pay 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.
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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.
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.
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 Bill Zink. Mr. Zink is 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.
The Administrator
Cardinal Investment Services, Inc., 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. For the current year, the Administrator, which is also the Transfer Agent
and Dividend Disbursing Agent, will receive a fee of $40,000 for performing
these services, including computing the Fund's net asset value as required.
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SHAREHOLDER 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.
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.
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.
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The Fund And Its Shares
The Fund is a closed-end diversified management investment company, 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 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 Cardinal Investment Services, Inc. (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 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. Shares in the
account of each Plan participant (other than participants whose Shares are
registered in the name of banks, brokers, nominees or other third parties) will
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be held by the Dividend Disbursing Agent in noncertificated form in the name of
the participant, and each shareholder's proxy will include those Shares
purchased pursuant to the Plan.
In the case of shareholders such as banks, brokers or nominees which hold Shares
for others who are the beneficial owners, the Dividend Disbursing Agent
administers the Plan on the basis of the number of 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 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 least 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 Cardinal Investment Services, Inc.,
579 Pleasant Street, Paxton, Massachusetts 01612 or by telephone to
508-831-1171.
As of December 31, 1999, the Fund had outstanding 1,873,574 shares of beneficial
interest, none of which were held by the fund.
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.
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
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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, 1999, the Fund paid $6,698 in brokerage
commissions. Portfolio brokerage transactions are further described in the
Statement of Additional Information.
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 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.
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.
OTHER INFORMATION
Custodian, Transfer Agent And Dividend Disbursing Agent
All cash and securities of the Fund are held by Investors Bank and Trust
Company, 200 Clarendon Street, 18th Floor, Boston, Massachusetts 02116, as
custodian. Cardinal Investment Services, Inc., 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.
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Legal Counsel
The Fund enlists the services of both Sullivan & Worcester LLP, 1025 Connecticut
Avenue, N.W., Washington, D.C. 20036, and Thorp Reed & Armstrong, One Riverfront
Center, Pittsburgh, PA 15222, as legal counsel to the Fund and the Manager.
Auditors
Livingston & Haynes, P.C., 40 Grove Street, Wellesley, Massachusetts 02482,
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.
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FINANCIAL INFORMATION
Financial Highlights
The following per share data and ratios with respect a share of beneficial
interest of the Fund outstanding for the three years ended December 31, 1999
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.
Year ended Year ended Year Ended
December December December
31, 1999 31, 1998 31, 1997
Net asset value, beginning of period $15.30 $12.90 $10.00
Net investment income 0.14 0.15 0.14
Net realized and unrealized gain on
investments 3.19 3.49 2.96
Total from investment operations 3.33 3.64 3.10
Distributions to shareholders:
From net investment income 0.14 0.15 0.14
From net realized gain on
investments 0.68 1.09 0.06
Total Distributions 0.82 1.24 0.20
Net asset value, end of period $17.81 $15.30 $12.90
Total Return 21.16% 28.22% 31.55%
Net increase in net asset value 2.51 2.40 2.90
Net assets, end of period $33,359,369 $27,437,685 $22,006,749
Ratio of expenses to average net assets 0.55% 0.48% 0.48%
Ratio of net investment income to
average net assets 0.82% 1.06% 1.40%
Portfolio turnover rate 0.15 0.29 0.07
Average commission rate paid 0.03 0.03 0.02
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The Principled Equity Market Fund
For investors who want more information about the Fund, the following documents
are available free upon request:
Annual Reports: Additional information about the Fund's investments is available
in the Fund's annual report to shareholders. The Fund's annual report includes a
discussion of the market conditions and investment strategies that significantly
affected the Fund's performance during its last fiscal year.
Statement of Additional Information (SAI): The SAI provides more detailed
information and is incorporated into this Prospectus by reference.
You can get free copies of the Fund's annual reports and SAIs by
writing or calling the Fund collect at:
The Principled Equity Market Fund
c/o Cardinal Investment Services, Inc.
579 Pleasant Street, Suite 4
Paxton, Massachusetts 01612
Telephone (collect):(508) 831-1171
Fax: (508) 831-1191
You can also review the Fund's reports and SAIs at the Public Reference Room of
the Securities and Exchange Commission.
You can obtain copies from the Securities and Exchange Commission as follows:
For a fee, by writing to or calling the Commission's
Public Reference Room, Washington, D.C. 20549
Telephone: 1-800-SEC-0330
Free from the Commission's Internet website at
http://www.sec.gov.
Investment Company Act
File no. 811-8492
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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
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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
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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
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I-1
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
24
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
May 1, 2000
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
INVESTMENT POLICIES AND TECHNIQUES ....................................2
SPECIAL CONSIDERATIONS ................................................6
TRUSTEES AND OFFICERS .................................................6
MANAGEMENT ............................................................8
PORTFOLIO TRANSACTIONS ................................................9
DETERMINATION OF NET ASSET VALUE ......................................9
TAXATION .............................................................10
ADDITIONAL INFORMATION ...............................................12
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.
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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.
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<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 lot 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 lot. 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
27
<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; M 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
is 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 Manager or
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 Manager or 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 markets, and as a result the
futures market may attract
28
<PAGE>
more speculators than the securities market does. Increased participation by
speculators in the futures market may also 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 Manager 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 Manager or Sub-Adviser will buy or
sell portfolio securities whenever it believes it appropriate to do so. In
deciding whether to sell a portfolio security, the Manager or Sub-Adviser 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
29
<PAGE>
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 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.
Position(s) Held
Name and Address* with the Fund Principal Occupation(s) During
Past Five Years
- ----------------- -------------------- -------------------------------
Howard R. Buckley Trustee President, Mercy Health Systems
144 State Street of Maine, 1993-present.
Portland, ME 04101
Sister Anne Mary Donovan Trustee Treasurer, Emmanuel College,
447 Chestnut Hill Ave. Boston; General Treasurer of
Brookline, MA 02146 Sisters of Notre Dame de Namur,
Rome, Italy until 1997
Sister Joan Gibbons, RSM Trustee Treasurer, Mercy Health System
Mercy Health System of Southeastern Pennsylvania,
One Bala Plaza, Suite 402 1997 - present;
Bala Cynwyd, PA 10004
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Position(s) Held
Name and Address* with the Fund Principal Occupation(s) During
Past Five Years
- ----------------- -------------------- -------------------------------
Dr. Loring E. Hart Trustee President, St. Joseph's
806 North Road College (Retired)
North Yarmouth, ME 04097
Sister Mary Laboure Morin Trustee Former President, Portland
605 Stevens Avenue (Maine) Regional Community,
Portland, ME 04103 Sisters of Mercy of the
Americas, 1989-present;
Assistant to the Superior
General and Ministry 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.
10 Lamgley Road, Ste 400 and Secretary Putnam Securities Company,
Newton Centre, MA 02459 Inc., F. L. Putnam Investment
Management Company; Trustee,
The Northstar Funds, Stamford,
Connecticut; Trustee and
Chairman, Board of Trustees,
The Anchor Funds, Worcester,
Massachusetts; Director and
Treasurer, The Asian American
Bank & Trust Company, Boston,
Massachusetts
Daniel F. Russell Trustee President, Chief Executive
Catholic Health East Officer, Catholic Health East
14 Campus Blvd., Suite 300
Newtown Square, PA 19073
Edward T. Sullivan, Jr. Trustee Business Manager and Secretary
Union - Local 254 -Treasurer, Service Service
11 Beacon St., Ste 200 Employees,International
Boston, MA 02108 Union; Member, Board of Higher
Education, Commonwealth of
Massachusetts; Trustee,
Massachusetts Public
Employees' Health and Welfare
Fund, Boston Building Service
Employees' Fund, and
Massachusetts Service
Employees' Pension Trust
Monseignor Vincent Tatarczuk Trustee Chancellor, Diocese of Maine
35 Jordan Bay Way (Retired)
Raymond, ME 04071
George A. Violin, M.D. Trustee Physician; Principal,
16 Main Street Mediacal Eye Care Associates
Dover, MA 02030
Reverend Mr. Joel M. Ziff Trustee Partner (retired)of Arthur
344 Cambridge Road Anderson & Co., accountants;
Norristown, Pennsylvania 19401 Director, Catholic Health East
* 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.
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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.
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"). Under
the Management Agreement, the Manager is authorized to hire a sub-adviser,
subsequent to the approval of the Fund.
From the Fund's inception until February 13, 1998, PanAgora Asset
Management, Inc. ("PanAgora"), served as a sub-investment adviser pursuant to a
written investment advisory agreement (the "Former Sub-Advisory Agreement")
providing for PanAgora to manage the Acceptable securities identified by the
Manager. As required by the Investment Company Act of 1940 (the "1940 Act"), the
Former Sub-Advisory Agreement terminated when PanAgora underwent a "change in
control" as identified by the 1940 Act. From the Fund's inception until February
13, 1998, PanAgora Asset Management, Inc. ("PanAgora"), served as a
sub-investment adviser pursuant to a written investment advisory agreement (the
"Former Sub-Advisory Agreement") providing for PanAgora to manage the Acceptable
securities identified by the Manager. As required by the Investment Company Act
of 1940 (the "1940 Act"), the Former Sub-Advisory Agreement terminated when
PanAgora underwent a "change in control" as identified by the 1940 Act. From
February 13, 1998 to June 9, 1999, PanAgora provided consulting services to the
Fund at no charge. On June 10, 1999, the shareholders approved the New
Sub-Advisory Agreement, and PanAgora resumed as Sub-Adviser. 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 expects to pay 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 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 expects to pay
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.
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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 new 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 new 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.
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.
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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 discussionof 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 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) distribute at least 90% of its
dividend, interest and certain other taxable income each year; and (iii) 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.
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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. 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.
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<PAGE>
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."
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.
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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.
37
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Part C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements Attached as Exhibit 12
Statement of Assets and Liabilities at December 31, 1999
Statement of Operations for the Year ended December 31, 1999
Statement of Changes in Net Assets for the Year ended December 31, 1999
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 Attached as Exhibit 9
Agreement (revised)
(ii) Administration Agreement (revised) Attached as Exhibit 9
(l) Opinion and Consent of Sullivan & Worcester LLP*
(m) Not Applicable
(n) Consent of Livingston & Haynes, P.C. Attached as Exhibit 11
Power of Attorney of Edward T. Sullivan, Jr. Attached as Exhibit 17
Power of Attorney of George A. Violin Attached as Exhibit 17
(o) Not Applicable
(p) Subscription Agreement
(q) Not Applicable
(r) Financial Data Schedule Attached as Exhibit 27
* Previously filed
Item 25. Marketing Arrangements
See the "Cover Page," "Prospectus Summary" and "Purchase of Shares" in
the Prospectus.
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Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the organizational expenses incurred in
connection with the initial 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 December 31, 1999)
Title of Class Number of Record Holders
Shares of beneficial interest, no par value 18
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
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
39
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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, president and secretary of the
Anchor investment trusts.
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 an officer 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.
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 50t of its interest in PanAgora Asset Management, Inc.
to Nippon Life Insurance Company and 25V to Shearson Lehman Brothers, Inc. Upon
the acquisition of The Boston Company by Mellon Bank Corporation on May 21,
1993, The Boston Company's 25t interest in PanAgora was transferred to Shearson,
making Shearson's ownership 50k. on August 2,1993, Shearson changed its name to
Lehman Brothers, Inc. On August 24, 1997 Putnam Investments purchased the 50k
stake in PanAgora Asset Management held by Lehman Brothers. The ownership today
is 50k Putnam Investments and 50k 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.
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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 198S. 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.
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
SubAdviser.
41
<PAGE>
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 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.
42
<PAGE>
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, 200 Clarendon Street,
18th Floor, Boston, Massachusetts 02116 and its andministrator and transfer
agent, Cardinal Investment Services, Inc., 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 10k 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.
The undersigned Registrant hereby undertakes:
43
<PAGE>
(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 posteffective 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.
44
<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 Post-Effective
Amendment No. 3 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of Newton, Commonwealth of
Massachusetts on the 24th day of March, 2000.
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 date indicated.
Signature Title Date
/s/DAVID W.C. PUTNAM President and Trustee March 24, 2000
David W. C. Putnam (principal executive
officer)
/s/C. KENT RUSSELL Treasurer (principal March 24, 2000
C. Kent Russell financial and
accounting officer)
/s/HOWARD R. BUCKLEY Trustee March 24, 2000
Howard R. Buckley
/s/SR. ANNE MARY Trustee March 24, 2000
DONOVAN
Sr. Anne Mary Donovan
/s/SR. JOAN GIBBONS Trustee March 24, 2000
Sr. Joan Gibbons
/s/DR. LORING E. HART March 24, 2000
Dr. Loring E. Hart
/s/SR. MARY LABOURE Trustee March 24, 2000
MORIN Sr. Mary Laboure
Morin
/s/REV. VINCENT Trustee March 24, 2000
TATARCZUK
Rev. Vincent A.
Tatarczuk
/s/DANIEL F. RUSSELL Trustee March 24, 2000
Daniel F. Russell
/s/EDWARD T. SULLIVAN Trustee March 24, 2000
Edward T. Sullivan
/s/GEORGE A. VIOLIN Trustee March 24, 2000
. George A Violin
/s/JOEL M. ZIFF Trustee March 24, 2000
Rev. Mr. Joel M.
Ziff
45
<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM N-2A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /x/
Pre-Effective Amendment No. / /
Post-Effective Amendment No. 3 /x/
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /x/
Amendment No. 6 /x/
===============================================================================
THE PRINCIPLED EQUITY MARKET FUND
===============================================================================
46
<PAGE>
Livingston & Haynes, P.C.
Certified Public Accountants
40 Grove Street
Wellesley, MA 02181
(617) 237-3339
Member AICPA Division for CPA Firms
Private Companies Practice Section
SEC Practice Section
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Principled Equity
Market Fund on the amended Form N-2 our report dated January 7, 2000,
appearing in the prospectus, which is part of such Registration Statement, and
to the reference to us under the captions, "Condensed Financial Information and
Selected Per Share Data and Ratios".
LIVINGSTON & HAYNES
Wellesley, Massachusetts
April 25, 2000
<PAGE>
===============================================================================
PRINCIPLED
EQUITY
MARKET
FUND
===============================================================================
INVESTMENT ADVISER
F.L. PUTNAM INVESTMENT
MANAGEMENT COMPANY
10 Langley Road, Suite 400
Newton Centre, Massachusetts 02459
- -------------------------------------------------------------------------------
ANNUAL REPORT
DECEMBER 31, 1999
===============================================================================
<PAGE>
PRINCIPLED EQUITY MARKET FUND
The purpose of the Fund is to provide all major constituencies of investors
concerned with the application of philosophical, ethical, religious, and social
justice criteria to their investment portfolios with the opportunity to achieve
the overall unmanaged equity market returns through a strategy of passive index
replication ("indexing").
The investment objective of the Fund is long-term capital appreciation. For the
information of investors the Fund will compare its investment results to those
of the Standard and Poor's Corporation 500 Stock Index and other major market
indices which the Fund considers appropriate.
Comparison of the Change in Value of a $10,000 Investment in the Principled
Equity Market Fund, the Standard & Poors 500 Index and the Wilshire 5000 Index
[GRAPHIC OMITTED]
===============================================================================
Principled Equity Market Fund
Average Annual Total Return
- -------------------------------------------------------------------------------
From
1 Year 2 Years Inception
21.16% 24.64% 26.73%
===============================================================================
2.
<PAGE>
PRINCIPLED EQUITY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
Assets:
Investments at quoted market value(cost $20,515,106;
see Schedule of Investments, Notes 1, 2, & 6)....... $ 33,328,047
Cash ................................................ 198,396
Dividends and interest receivable.................... 34,579
Organizational costs (Note 1)........................ 17,202
-----------
Total assets..................................... 33,578,224
-----------
Liabilities:
Accrued expenses and other liabilities (Note 3 )..... 218,855
-----------
Total liabilities................................ 218,855
-----------
Net Assets:
Capital stock (2,750,000 shares authorized at no par
value, amount paid in on 1,873,574 shares
outstanding) (Note 1).............................. 20,560,391
Accumulated undistributed net investment income
(Note 1)........................................... 4,312
Accumulated realized gain from security transactions
(Note 1)............................................. (18,275)
Net unrealized appreciation in value of investments
(Note 2)............................................. 12,812,941
-----------
Net assets (equivalent to $17.81 per share, based
on 1,873,574 capital shares outstanding)....... $ 33,359,369
===========
The accompanying notes are an integral part of these financial statements.
3.
<PAGE>
PRINCIPLED EQUITY MARKET FUND
STATEMENT OF OPERATIONS
DECEMBER 31, 1999
Income:
Dividends........................................... $ 393,719
Interest............................................ 10,118
-----------
Total income..................................... 403,837
-----------
Expenses:
Management fees, net (Note 3)....................... 58,745
Legal fees.......................................... 43,000
Administration fees (Note 4)........................ 24,333
Insurance........................................... 17,220
Organizational expenses (Note 1).................... 9,601
Custodian fees...................................... 8,000
Audit and accounting fees........................... 7,500
Printing............................................ 7,000
Transfer fees (Note 4).............................. 6,000
Trustees' fees and expenses......................... 1,000
Other expenses...................................... 8,840
-----------
Total expenses................................... 191,239
-----------
Less: waiver of management fee (Note 3).......... 29,628
-----------
Total expenses, net.............................. 161,611
-----------
Net investment income................................ 242,226
-----------
Realized and unrealized gain on investments:
Realized gain on investments-net................... 1,054,926
Increase in net unrealized appreciation in
investments....................................... 4,751,239
-----------
Net gain on investments.......................... 5,806,165
-----------
Net increase in net assets resulting from operations. $ 6,048,391
===========
The accompanying notes are an integral part of these financial statements.
4.
<PAGE>
PRINCIPLED EQUITY MARKET FUND
STATEMENTS OF CHANGES IN NET ASSETS
Year Ended Year Ended
December 31, December 31,
1999 1998
----------------------------
From operations:
Net investment income................... $ 242,226 $ 263,674
Realized gain on investments, net....... 1,054,926 2,070,836
Increase in net unrealized
appreciation in investments............ 4,751,239 3,952,775
--------- ----------
Net increase in net assets resulting
from operations..................... 6,048,391 6,287,285
------------ -----------
Distributions to shareholders:
From net investment income
($0.14 per share in 1999 and $0.15 per
share in 1998).......................... (270,898) (256,438)
From net realized gain on investments
($0.68 per share in 1999 and $1.09 per
share in 1998).......................... (1,232,566) (1,885,723)
------------ -----------
Total distributions to shareholders.. (1,503,464) (2,142,161)
------------ -----------
From capital share transactions:
Number of Shares
1999 1998
--------- ---------
Proceeds from sale of
shares.............. 12,888 20,766 197,218 273,995
Shares issued to
shareholders in
distributions
reinvested.......... 67,701 66,132 1,179,539 1,011,817
Cost of shares
redeemed............ -- -- -- --
------- ------ --------- ----------
Increase in net
assets resulting
from capital
share transactions.. 80,589 86,898 1,376,757 1,285,812
========= ====== ---------- ---------
Net increase in net assets............... 5,921,684 5,430,936
Net assets:
Beginning of period.................... 27,437,685 22,006,749
----------- ----------
End of period ( including undistributed
net investment income of $4,312 and
$7,236, respectively................ $33,359,369 $27,437,685
============ ===========
The accompanying notes are an integral part of these financial statements.
5.
<PAGE>
PRINCIPLED EQUITY MARKET FUND
SELECTED PER SHARE DATA AND RATIOS
(for a share outstanding throughout each period)
Year Ended Year Ended Year Ended
December December December
31, 1999 31, 1998 31, 1997
Investment income ................ $ 0.24 $ 0.22 $ 0.18
Expenses, net..................... 0.10 0.07 0.04
---------------------------------------
Net investment income ............ 0.14 0.15 0.14
Net realized and unrealized
gain on investments............ 3.19 3.49 2.96
Distributions to shareholders:
From net investment income...... 0.14 0.15 0.14
From net realized gain on
investment..................... 0.68 1.09 0.06
---------------------------------------
Net increase in net asset value... 2.51 2.40 2.90
Net asset value:
Beginning of period............. 15.30 12.90 10.00
---------------------------------------
End of period................... $17.81 $15.30 $12.90
=======================================
Total Return...................... 21.16% 28.22% 31.00%
Ratio of expenses
to average net assets.......... 0.55% 0.48% 0.48%
Ratio of net investment
income to average net assets... 0.82% 1.06% 1.40%
Portfolio turnover................ 0.15 0.29 0.07
Average commission rate paid...... 0.0314 0.0292 0.0253
Number of shares outstanding at
end of period..................... 1,873,574 1,792,985 1,706,087
Per share data and ratios assuming no waiver of advisory fees:
Expenses....................... 0.12 0.14 0.06
Net investment income.......... 0.09 0.08 0.13
Ratio of expenses to average
net assets.................... 0.65% 0.73% 0.58%
Ratio of net investment income
to average net assets......... 0.72% 0.81% 1.30%
The accompanying notes are an integral part of these financial statements.
6.
<PAGE>
PRINCIPLED EQUITY MARKET FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
Value
Quantity (Note 1)
- -------- --------
COMMON STOCKS - 99.69%
Advertising Industry -- 0.64%
1,600 Interpublic Group Of Companies Incorporated.... 92,300
1,200 Omnicom Group.................................. 120,000
---------
212,300
Aerospace/Defense Industry -- 0.53%
6,700 Precision Castparts Corporation................ 175,875
---------
Air Transport Industry -- 0.90%
800 Amr Corporation*............................... 53,600
600 FDX Corporation................................ 24,562
2,200 Gateway, Incorporated*......................... 158,537
2,700 Southwest Airlines Company..................... 43,538
600 US Airways Group Incorporated*................. 19,238
---------
299,475
Auto & Truck Industry -- 0.13%
1,000 Paccar Incorporated............................ 44,312
---------
Auto Parts (OEM) Industry -- 0.13%
600 Oea Incorporated............................... 2,925
600 Superior Industries International.............. 16,087
1,300 Synovus Financial Corporation.................. 25,838
---------
44,850
Auto Parts (Replacement) Industry -- 1.25%
16,850 Genuine Parts Company.......................... 418,091
---------
*Non income producing security.
The accompanying notes are an integral part of these financial statements.
7.
<PAGE>
PRINCIPLED EQUITY MARKET FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
(Continued)
Value
Quantity (Note 1)
- -------- --------
Bank Industry -- 6.51%
1,700 BB&T Corporation............................... 46,537
2,430 Bank One Corporation........................... 77,760
2,000 Bank of New York Company Incorporated.......... 80,000
11,889 BankAmerica Corporation (New) ................. 596,679
900 Capital One Financial.......................... 43,369
3,400 Chase Manhattan Corporation.................... 264,137
12,650 Citigroup Incorporated......................... 704,447
2,700 First Union Corporation........................ 88,931
1,184 Fleetboston Financial Corporation.............. 41,218
900 JP Morgan and Company Incorporated............. 113,962
600 Keycorp*....................................... 13,275
1,100 Pnc Bank Corporation........................... 48,950
600 Wachovia Corporation........................... 40,800
436 Washington Mutual Incorporated................. 11,281
---------
2,171,346
Bank (Midwest) Industry -- 1.75%
1,100 Comerica Incorporated.......................... 51,356
1,800 Fifth Third Bankcorp........................... 132,075
5,400 Mellon Bank Corporation........................ 183,937
2,200 National City Corporation...................... 52,112
6,900 US Bankcorp (New) ............................. 164,306
---------
583,786
Beverage (Soft Drink) Industry -- 1.28%
2,500 Coca Cola Enterprises Incorporated............. 50,312
10,700 Pepsico Incorporated........................... 377,175
---------
427,487
Building Materials Industry -- 0.01%
100 Armstrong World Industries Incorporated........ 3,337
---------
*Non income producing security.
The accompanying notes are an integral part of these financial statements.
8.
<PAGE>
PRINCIPLED EQUITY MARKET FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
(Continued)
Value
Quantity (Note 1)
- -------- --------
Chemical (Basic) Industry -- 0.07%
1,100 Millennium Chemicals........................... 21,725
---------
Chemical (Diversified) Industry -- 0.32%
1,400 Millipore Corporation.......................... 54,075
2,500 Pall Corporation............................... 53,906
---------
107,981
Chemical (Specialty) Industry -- 0.35%
600 International Flavors and Fragrances........... 22,575
1,300 Praxair Incorporated........................... 65,406
800 Sherwin Williams Company....................... 16,800
400 Sigma Aldrich Corporation...................... 12,025
---------
116,806
Coal/Alternate Energy Industry -- 0.09%
400 Aes Corporation*............................... 29,900
---------
Computer & Peripherals Industry -- 3.88%
3,200 3Com Corporation*.............................. 150,400
1,000 Apple Computer Incorporated.................... 102,812
600 Cabletron Systems Incorporated................. 15,600
10,400 Dell Computer Corporation*..................... 530,400
1,100 Seagate Technology Incorporated*............... 51,219
900 Silicon Graphics Incorporated*................. 8,719
5,600 Sun Microsystems Incorporated*................. 433,650
---------
1,292,800
Computer Software & Services Industry -- 13.56%
7,600 America Online, Incorporated*.................. 576,650
2,400 Automatic Data Processing Incorporated......... 129,300
3,750 Computer Associates International.............. 262,266
17,200 Microsoft Corporation*......................... 2,008,100
13,800 Oracle Corporation*............................ 1,546,463
---------
4,522,779
*Non income producing security.
The accompanying notes are an integral part of these financial statements.
9.
<PAGE>
PRINCIPLED EQUITY MARKET FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
(Continued)
Value
Quantity (Note 1)
- -------- --------
Diversified Company Industry -- 1.60%
105 Berkshire Hathaway Class B*.................... 192,150
300 Danaher Corporation............................ 14,475
1,000 Hillenbrand Industries......................... 31,687
200 National Service Industries.................... 5,900
2,500 Service Corporation International.............. 17,344
800 Thermo Electron Corporation.................... 12,000
6,634 Tyco International Limited..................... 258,726
---------
532,282
Drug Industry -- 0.03%
200 Interneuron Pharmaceuticals*................... 1,144
400 Quintiles Transnational Corporation*........... 7,475
---------
8,619
Drugstore Industry -- 0.47%
800 Rite Aid Corporation........................... 8,900
5,000 Walgreen Company............................... 146,250
---------
155,150
Electric Utility (Central) Industry -- 0.76%
800 Cinergy Corporation............................ 19,150
10,400 FirstEnergy Corporation........................ 235,950
---------
255,100
Electric Utility (East) Industry -- 0.05%
800 P P and L Resources Holding.................... 18,300
---------
Electric Utility (West) Industry -- 0.89%
10,700 Edison International Incorporated.............. 280,206
400 El Paso Energy................................. 15,525
---------
295,731
*Non income producing security.
The accompanying notes are an integral part of these financial statements.
10.
<PAGE>
PRINCIPLED EQUITY MARKET FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
(Continued)
Value
Quantity (Note 1)
- -------- --------
Electric and Other Utility Services Combined -- 1.10%
11,774 Scottish Power, Incorporated................... 329,672
2,100 Sierra Pacific Resources, Incorporated......... 36,487
---------
366,159
Electrical Equipment Industry -- 0.06%
400 W W Grainger Incorporated...................... 19,125
---------
Electronic Manufacturing -- 0.71%
3,300 Symbol Technical*.............................. 209,756
900 Thomas and Betts Corporation................... 28,688
---------
238,444
Entertainment Industry -- 3.42%
7,200 CBS Corporation................................ 460,350
700 Safety Kleen Corporation....................... 7,919
6,800 Time Warner Incorporated....................... 491,725
3,000 Viacom Inc. Class B............................ 181,312
---------
1,141,306
Environmental Industry -- 0.05%
1,700 AutoNation Incorporated*....................... 15,725
---------
*Non income producing security.
The accompanying notes are an integral part of these financial statements.
11.
<PAGE>
PRINCIPLED EQUITY MARKET FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
(Continued)
Value
Quantity (Note 1)
- -------- --------
Financial Services Industry -- 6.12%
11,600 AXA Financial, Incorporated. .................. 394,400
2,600 American Express Company....................... 432,250
2,200 Associates First Capital Corporation........... 60,363
400 Deluxe Corporation............................. 10,975
3,400 Franklin Resources Incorporated................ 109,013
338 Gartner Group, Incorporated Class B*........... 4,669
1,200 Household International Incorporated........... 44,700
100 Lehman Brothers Holdings Incorporated.......... 8,469
3,600 Mbna Corporation............................... 98,100
3,020 Morgan Stanley, Dean Witter.................... 431,105
11,700 Schwab (Chas) Corporation...................... 447,525
---------
2,041,569
Food Processing Industry -- 1.46%
2,300 Bestfoods...................................... 120,894
4,400 General Mills Incorporated..................... 157,300
1,300 Hershey Foods Corporation...................... 61,669
1,700 Kellogg Company................................ 52,381
700 Quaker Oats Company............................ 45,937
600 Wm Wrigley Jr Company.......................... 49,762
---------
487,943
Food Wholesalers Industry -- 0.21%
1,800 Sysco Corporation.............................. 71,213
---------
Foreign Telecommunication Industry -- 2.54%
5,200 Nortel Networks Corporation.................... 525,200
6,500 Vodafone Airtouch Plc.......................... 321,750
---------
846,950
Furniture/Home Furnishings Industry -- 0.09%
1,400 Leggett & Platt................................ 30,013
---------
*Non income producing security.
The accompanying notes are an integral part of these financial statements.
12.
<PAGE>
PRINCIPLED EQUITY MARKET FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
(Continued)
Value
Quantity (Note 1)
- -------- --------
Gold/Silver Mining Industry -- 0.30%
4,600 Barrick Gold Corporation....................... 81,363
700 Newmont Mining Corporation..................... 17,150
---------
98,513
Grocery Industry -- 0.55%
1,652 Albertsons Incorporated........................ 53,277
3,100 Safeway Incorporated*.......................... 110,825
800 Winn Dixie Stores Incorporated................. 19,150
---------
183,252
Home Appliance Industry -- 0.15%
500 Maytag Corporation............................. 24,000
400 Whirlpool Corporation.......................... 26,025
---------
50,025
Hotel/Gaming Industry -- 0.11%
1,200 Marriott International Incorporated............ 37,875
---------
Household Products Industry -- 0.17%
1,982 Newell Rubbermaid Incorporated................. 57,478
---------
Industrial Services Industry -- 0.03%
1,700 Laidlaw Incorporated........................... 8,925
---------
Insurance Carriers -- 0.04%
143 Aegon N.V. .................................... 13,656
---------
*Non income producing security.
The accompanying notes are an integral part of these financial statements.
13.
<PAGE>
PRINCIPLED EQUITY MARKET FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
(Continued)
Value
Quantity (Note 1)
- -------- --------
Insurance (Diversified) Industry -- 4.00%
1,100 American General Corporation................... 83,463
7,000 American International Group................... 756,875
1,500 Cigna Corporation.............................. 120,844
1,200 Lincoln National Corporation................... 48,000
2,000 Lowe's Companies Incorporated.................. 119,500
1,200 Marsh and Mclennan Companies................... 114,825
1,500 Mgic Investment Corporation.................... 90,281
---------
1,333,788
Insurance (Life) Industry -- 0.37%
200 Aflac Incorporated............................. 9,438
1,541 Conseco Incorporated........................... 27,449
600 Jefferson Pilot Corporation.................... 40,950
500 Providian Corporation.......................... 45,531
---------
123,368
Insurance (Property/Casualty Industry -- 1.11%
4,400 Allstate Corporation........................... 105,875
900 Chubb Corporation.............................. 50,681
600 Cincinnati Financial........................... 18,713
1,100 Hartford Financial Services Group.............. 52,113
500 Progressive Corp., Ohio........................ 36,563
700 Safeco Corporation............................. 17,413
2,594 St Paul Companies Incorporated................. 87,385
---------
368,743
Manufacturing, Electronics, General -- 0.59%
2,100 American Power Conversion*..................... 55,388
2,500 Molex.......................................... 141,719
---------
197,107
*Non income producing security.
The accompanying notes are an integral part of these financial statements.
14.
<PAGE>
PRINCIPLED EQUITY MARKET FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
(Continued)
Value
Quantity (Note 1)
- -------- --------
Machinery Industry -- 0.25%
1,400 Donaldson Company Incorporated................. 33,688
200 Snap On Incorporated........................... 5,313
1,500 Stanley Works.................................. 45,188
---------
84,189
Machinery (Construction & Mining) Industry -- 0.25%
800 Deere and Company.............................. 34,700
900 Ingersoll Rand Company......................... 49,556
---------
84,256
Medical Services Industry -- 0.30%
2,600 IMS Health..................................... 70,688
200 Idexx Laboratories Incorporated*............... 3,225
500 United Healthcare Corporation*................. 26,563
---------
100,476
Management Services -- 0.16%
500 KLA-Tencorp Corporation*....................... 55,687
---------
Manufacturing, General -- 0.37%
1,800 Diebold........................................ 42,300
900 Lexmark International*......................... 81,450
---------
123,750
Medical Supplies Industry -- 2.20%
700 Biomet, Incorporated........................... 28,000
4,200 Boston Scientific Corporation*................. 91,875
4,600 Cardinal Health Incorporated................... 220,225
7,600 Medtronic Incorporated......................... 276,925
1,700 Stryker Corporation............................ 118,363
---------
735,388
Metals & Mining (Div.) Industry -- 0.56%
7,900 Inco Limited................................... 185,650
---------
*Non income producing security.
The accompanying notes are an integral part of these financial statements.
15.
<PAGE>
PRINCIPLED EQUITY MARKET FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
(Continued)
Value
Quantity (Note 1)
- -------- --------
Natural Gas (Distribution) Industry -- 0.07%
800 Washington Gas Light Company................... 22,000
---------
Natural Gas (Diversified) Industry -- 1.81%
1,952 Burlington Resources Incorporated.............. 64,538
300 Columbia Energy Group.......................... 18,975
600 Consolidated Natural Gas Company............... 38,963
10,000 Enron Corporation.............................. 443,750
1,200 Williams Companies Incorporated................ 36,675
---------
602,901
Newspaper Industry -- 0.37%
800 Gannett Incorporated........................... 65,250
200 Times Mirror Company........................... 13,400
800 Tribune Company................................ 44,050
---------
122,700
Office Equipment & Supplies Industry -- 0.74%
700 Ikon Office Solutions Incorporated............. 4,769
5,000 Pitney Bowes Incorporated...................... 241,563
---------
246,332
Oil Exploration Industry -- 0.23%
1,300 Vastar Resources............................... 76,700
---------
*Non income producing security.
The accompanying notes are an integral part of these financial statements.
16.
<PAGE>
PRINCIPLED EQUITY MARKET FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
(Continued)
Value
Quantity (Note 1)
- -------- --------
Oilfield Services/Equipment Industry -- 0.44%
1,940 Baker Hughes Incorporated...................... 40,861
200 Cooper Cameron Corporation*.................... 9,788
400 Ensco International Incorporated............... 9,150
400 Global Marine Incorporated*.................... 6,650
400 Helmerich and Payne Incorporated............... 8,700
800 McDermott International........................ 7,250
200 Noble Drilling Corporation..................... 6,550
472 R&B Falcon Corporation*........................ 6,254
700 Rowan Companies Incorporated*.................. 15,181
800 Transocean Offshore Incorporated............... 26,950
1,000 Varco International Incorporated*.............. 10,188
---------
147,522
Other Business Services -- 0.51%
1,800 Solectron*..................................... 171,225
---------
Packaging & Container Industry -- 0.13%
900 Bemis Company Incorporated..................... 31,388
550 Sonoco Products Company........................ 12,512
---------
43,900
Paper & Forest Products Industry -- 0.32%
200 Chesapeake Corporation......................... 6,100
300 Fort James Corporation......................... 8,212
1,900 Rayonier Incorporated.......................... 91,794
---------
106,106
Petroleum (Integrated) Industry -- 2.13%
358 Devon Energy Corporation....................... 11,769
600 Murphy Oil Corporation......................... 34,425
10,700 Royal Dutch Petroleum.......................... 648,019
600 Tosco Corporation.............................. 16,312
---------
710,525
*Non income producing security.
The accompanying notes are an integral part of these financial statements.
17.
<PAGE>
PRINCIPLED EQUITY MARKET FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
(Continued)
Value
Quantity (Note 1)
- -------- --------
Petroleum (Producing) Industry -- 0.26%
1,700 Anadarko Petroleum Corporation................. 58,013
200 Pogo Producing Company......................... 4,075
1,900 Union Pacific Resources Group.................. 24,225
---------
86,313
Publishing Industry -- 0.15%
900 Harcourt General Incorporated.................. 36,225
200 Mcgraw Hill Company Incorporated............... 12,325
---------
48,550
Railroad Industry -- 1.52%
17,400 Burlington Northern Santa Fe................... 421,950
4,200 Norfolk Southern Corporation................... 86,100
---------
508,050
Real Estate, Other -- 0.60%
10,000 AMB Property................................... 199,375
---------
Restaurant Industry -- 1.76%
14,600 McDonalds Corporation.......................... 588,563
---------
Retail (Special Lines) Industry -- 0.75%
5,062 Gap Incorporated............................... 232,852
800 Tjx Companies Incorporated..................... 16,350
---------
249,202
Retail Building Supply Industry -- 2.35%
11,400 Home Depot Incorporated........................ 783,750
---------
Retail Sales - Televisions, Radios, and
Electronics -- 0.13%
700 Best Buy*...................................... 35,175
200 Tandy Corporation.............................. 9,837
---------
45,012
*Non income producing security.
The accompanying notes are an integral part of these financial statements.
18.
<PAGE>
PRINCIPLED EQUITY MARKET FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
(Continued)
Value
Quantity (Note 1)
- -------- --------
Retail Store Industry - 0.99%
4,300 Borders Group, Incorporated*................... 69,875
1,600 CVS Corporation................................ 63,800
600 Clear Channel Communications*.................. 53,550
400 Costco Companies Incorporated*................. 36,500
781 Dollar General................................. 17,768
500 Federated Department Stores.................... 25,281
1,300 JC Penney Company Incorporated................. 25,919
271 Nieman Marcus Class B*......................... 7,300
1,000 Sears Roebuck and Company...................... 30,375
100 Venator Group Incorporated..................... 700
---------
331,068
Securities Brokerage Industry -- 0.52%
2,100 Merrill Lynch and Company Incorporated......... 174,956
---------
Semiconductor Industry -- 0.86%
300 Advanced Micro Devices Incorporated*........... 8,681
1,400 Conexant Systems, Incorporated*................ 92,925
900 LSI Logic*..................................... 60,750
1,100 Micron Technology Incorporated*................ 85,937
900 National Semiconductor Company*................ 38,531
---------
286,824
Steel (General) Industry -- 0.09%
400 Nucor Corporation.............................. 21,925
400 Worthington Industries Incorporated............ 6,625
---------
28,550
*Non income producing security.
The accompanying notes are an integral part of these financial statements.
19.
<PAGE>
PRINCIPLED EQUITY MARKET FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
(Continued)
Value
Quantity (Note 1)
- -------- --------
Telecommunication Equipment Industry -- 4.77%
300 Andrew Corporation*............................ 5,681
11,250 Cisco Systems Incorporated*.................... 1,205,156
700 General Instrument Corporation*................ 59,500
3,000 MediaOne Group*................................ 230,438
1,400 Tellabs Incorporated*.......................... 89,862
---------
1,590,637
Telecommunication Services Industry -- 13.13%
900 Alltel Corporation............................. 74,419
10,600 Bellsouth Corporation.......................... 496,212
3,400 Comcast Corporation Class A.................... 171,912
8,700 MCI Worldcom Incorporated*..................... 461,644
900 Nextel Communication*.......................... 92,812
2,800 Qualcomm*...................................... 493,150
14,747 SBC Communications Incorporated................ 718,916
8,000 Sprint Corporation (FON Group) ................ 538,500
2,000 Sprint PCS..................................... 205,000
15,681 US West Incorporated........................... 1,129,032
---------
4,381,597
Thrift Industry -- 2.43%
2,500 Federal Home Loan Mortgage Association......... 117,656
11,100 Federal National Mortgage Association.......... 693,056
---------
810,712
Tire & Rubber Industry -- 0.02%
400 Cooper Tire and Rubber Company................. 6,300
---------
Toiletries/Cosmetics Industry -- 0.14%
1,400 Avon Products Incorporated..................... 46,200
---------
Total common stocks (cost $20,499,099)..........33,254,175
----------
*Non income producing security.
The accompanying notes are an integral part of these financial statements.
20.
<PAGE>
PRINCIPLED EQUITY MARKET FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
(Continued)
Value
Quantity (Note 1)
- -------- --------
RIGHTS & WARRANTS -- 0.22%
2,592 PetroFina S.A. Warrants* (cost 16,007) ......... 73,872
----------
Total investments (cost $20,515,106)............ 33,328,047
----------
CASH & OTHER ASSETS, LESS LIABILITIES - 0.09%............ 31,322
----------
Total Net Assets................................$33,359,369
==========
*Non income producing security.
The accompanying notes are an integral part of these financial statements.
21.
<PAGE>
PRINCIPLED EQUITY MARKET FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
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. During the current fiscal year, permanent
differences, primarily due to short term capital gains offset by net
investment income, resulted in an increase in undistributed net investment
income and a decrease in accumulated realized gain from security
transactions. This reclassification had no effect on net assets.
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, 1999, 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 $14,776,778. Aggregate gross
unrealized depreciation in investments in which there was an excess of tax
cost over market value was $1,963,837. Net unrealized appreciation in
investments at December 31, 999 was $12,812,941.
22.
<PAGE>
PRINCIPLED EQUITY MARKET FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
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-Advisor").
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-Advisor 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 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%). Pursuant to
a change in ownership of PanAgora Asset Management, Inc. the Sub-Advisory
Agreement with PanAgora was terminated as of February 12, 1998. The Trust
entered into a consulting services agreement with PanAgora Asset Management,
Inc. for the period February 12, 1998 to June 10, 1999. PanAgora received no
compensation for its services under the consulting services agreement.
F.L. Putnam, which provided the necessary capital to establish the Trust,
waived its total management fees of $29,628 for the year ended December 31,
1999, and $24,990 for the year ended December 31, 1998; it has received no
compensation for its services since the inception of the Trust.
4. Administration and transfer agent services:
On March 1, 1999, the Trust entered into an agreement with Cardinal
Investment Services Inc. for administrative, transfer agent and dividend
disbursing agent services replacing Anchor Investment Management Corporation.
Annual fees for these services are $34,000.
5. Related parties:
The President and Secretary of the Trust is also a director and an indirect
beneficial owner of the parent of the Trust's investment adviser.
23.
<PAGE>
PRINCIPLED EQUITY MARKET FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
6. Purchases and sales:
Aggregate cost of purchases and the proceeds from sales and maturities on
investments for year ended December 31, 1999 were:
Cost of securities acquired:
U.S. Government and investments backed by
such securities........................ $ --
Other investments....................... 4,558,278
-------------
$ 4,558,278
=============
Proceeds from sales and maturities:
U.S. Government and investments backed by
such securities........................ $ --
Other investments....................... 4,524,928
-------------
$ 4,524,928
=============
24.
<PAGE>
PRINCIPLED EQUITY MARKET FUND
Independent Auditors' Report
To the Shareholders and Trustees of Principled Equity Market Fund:
We have audited the accompanying statement of assets and liabilities of
Principled Equity Market Fund (a Massachusetts business trust), including the
schedule of investments, as of December 31, 1999, the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended and the selected per share data
and ratios for each of the three years in the period then ended. 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 audit 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, 1999 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 Principled Equity Market Fund as of December 31, 1999, the results
of its operations for the year then ended, and the changes in its net assets for
each of the two years in the period then ended and the selected per share data
and ratios for each of the three years in the period then ended in conformity
with generally accepted accounting principles.
LIVINGSTON & HAYNES, P.C.
Wellesley, Massachusetts,
January 7, 2000
25.
<PAGE>
PRINCIPLED EQUITY MARKET FUND
OFFICERS & TRUSTEES
HOWARD R. BUCKLEY Trustee
President, Chief Executive Officer and
Director,
Mercy Health System of Maine
SISTER ANNE MARY DONOVAN Trustee
Treasurer, Emmanuel College
SISTER JOAN GIBBONS, RSM Trustee
Treasurer, Mercy Health System of
Southeastern Pennsylvania
DR. LORING E. HART Trustee
President (Retired), St. Joseph's College
SISTER MARY LABOURE MORIN Trustee
Former President, Regional Community of
Portland, Sisters of
Mercy of the Americas
DAVID W.C. PUTNAM President, Secretary
President and Director and Trustee
F.L. Putnam Investment Management Company
C. KENT RUSSELL Treasurer
Chief Financial Officer, Catholic Health
East
DANIEL F. RUSSELL Trustee
President and Chief Executive Officer,
Catholic Health East
EDWARD T. SULLIVAN, JR. Trustee
Business Manager, Secretary and
Treasurer, Service Employees'
International Union - Local 254
MONSEIGNOR VINCENT TATARCZUK Trustee
Chancellor (Retired), Diocese of Maine
GEORGE A. VIOLIN, M.D., F.A.C.S. Trustee
Physician; Principal, Medical Eye Care
Associates
REVEREND JOEL M. ZIFF Trustee
Director of Finance, Sisters of Mercy
Regional Community of Merion
26.
<PAGE>
PRINCIPLED EQUITY MARKET FUND
INVESTMENT ADVISER
F.L. Putnam Investment Management Company
10 Langley Road, Suite 400, Newton Centre, Massachusetts 02459
(617) 964-7600
SUB-ADVISER
PanAgora Asset Management, Inc.
260 Franklin St., 22nd Floor, Boston, Massachusetts 02110
CUSTODIAN
Investors Bank & Trust Company
200 Clarendon Street, Boston, Massachusetts 02116
INDEPENDENT PUBLIC ACCOUNTANTS
Livingston & Haynes, P.C.
40 Grove St., Wellesley, Massachusetts 02482
ADMINISTRATOR AND TRANSFER AGENT
Cardinal Investment Services Inc.
579 Pleasant St., Suite 4, Paxton, MA 01612
(508) 831-1171
LEGAL COUNSEL
Sullivan & Worcester
One Post Office Square, Boston, Massachusetts 02109
This report is not authorized for distribution to prospective investors in the
Trust unless preceded or accompanied by an effective prospectus which includes
information concerning the Trust's record or other pertinent information.
27.
<PAGE>
POWER OF ATTORNEY
I, the undersigned Trustee of the Principled Equity Market Fund, hereby
severally constitute David W.C. Putnam, David Mahaffey, and Peter K. Blume, and
each of them singly, our true and lawful attorneys, with full power to them and
each of them singly to sign for us, and in our names and in the capacity
mentioned below, any and all Registration Statements and/or Amendments to the
Registration Statements, filed with the Securities and Exchange Commission,
hereby ratifying and confirming our signatures as they may be signed by our said
attorneys to any and all amendments to said Registration Statement, and all
additional Registration Statements and Amendments thereto.
Witness my hand and common seal on the date set forth below*
Signature Title Date
/S/EDWARD T. SILLIVAN Trustee March 24, 2000
Edward T. Sullivan, Jr.
This Power of Attorney may be executed in several counterparts, each of which
shall be regarded as an original and all of which taken together shall
constitute one and the same Power of Attorney, and any of the parties hereto may
execute this Power of Attorney by signing any such counterpart.
<PAGE>
POWER OF ATTORNEY
I, the undersigned Trustee of the Principled Equity Market Fund, hereby
severally constitute David W.C. Putnam, David Mahaffey, and Peter K. Blume, and
each of them singly, our true and lawful attorneys, with full power to them and
each of them singly to sign for us, and in our names and in the capacity
mentioned below, any and all Registration Statements and/or Amendments to the
Registration Statements, filed with the Securities and Exchange Commission,
hereby ratifying and confirming our signatures as they may be signed by our said
attorneys to any and all amendments to said Registration Statement, and all
additional Registration Statements and Amendments thereto.
Witness my hand and common seal on the date set forth below*
Signature Title Date
/S/GEORGE A. VIOLIN Trustee March 24,
George A. Violin
This Power of Attorney may be executed in several counterparts, each of which
shall be regarded as an original and all of which taken together shall
constitute one and the same Power of Attorney, and any of the parties hereto may
execute this Power of Attorney by signing any such counterpart.
<PAGE>
CERTIFIED RESOLUTIONS
The undersigned, Christopher Y. Williams, Assistant Secretary of
Principled Equity Market Fund, DOES HEREBY CERTIFY that the following
resolutions were duly adopted by the Trustees of the Trust, and that such
resolutions have not been amended, modified or rescinded and remain in full
force and effect on the date hereof.
RESOLVED: That Peter K. Blume, Esquire, attorney for the
Trust, be and hereby is named and constituted agent for service
with respect to the aforesaid Registration Statement to receive
notices and communication with respect to the 1993
Act and the 1940 Act, with all power consequent upon
such designation of and under the rules and
regulations of the Commission.
RESOLVED: That the signature of any officer of the Trust required by law to be
affixed to the Registration Statement, or to any amendment thereof, may be
affixed by said officer personally or by an attorney-in-fact duly constituted in
writing by said officer to sign his name thereto.
IN WITNESS WHEREOF, I have executed this Certificate as of April 14, 2000.
/s/CHRISTOPHER Y.WILLIAMS
Christopher Y. Williams
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
PRINCIPLED EQUITY MARKET FUND DECEMBER 31, 1999 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE ANNUAL REPORT.
Item Item Description
Number
1999
3(a) Net asset value:
Beginning of year $15.30
3(a) Net investment income 0.14
3(a) Net realized and
unrealized gain
on investments 3.19
3(a) Distributions to
shareholders:
3(a) From net
investment income
(loss)........... 0.14
3(a) From net realized
gains on investments .... 0.68
------
3(a) Net asset value:
End of year.... $17.81
======
3(a) Ratio of expenses to
average net
assets........... 0.55%
<PAGE>
</TABLE>
TRANSFER AGENCY AND SERVICE AGREEMENT
BETWEEN
THE PRINCIPLED EQUITY MARKET FUND
AND
CARDINAL INVESTMENT SERVICES, INC.
<PAGE>
TABLE OF CONTENTS
Page
1. Article 1 Terms of Appointment; Duties of the Company 1
2. Article 2 Fees and Expenses.......................... 2
3. Article 3 Representations and Warranties of the 2
Company.................................... 2
4. Article 4 Representations and Warranties of the Trust 3
5. Article 5 Indemnification............................ 3
6. Article 6 Covenants of the Trust and the Company..... 5
7. Article 7 Termination of Agreement................... 5
8. Article 8 Assignment................................. 5
9. Article 9 Amendment.................................. 6
10. Article 10 Massachusetts Law to Apply................. 6
11. Article 11 Merger of Agreement........................ 6
12. Article 12 Limitation of Liability.................... 6
APPENDICES
Appendix ........................... Fee Schedule A-1
A
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
......AGREEMENT made as of the 1st day of April, 1999 by and between THE
PRINCIPLED EQUITY MARKET FUND, a Massachusetts business trust having its
principal office and place of business at Langley Place, 10 Langley Road, Newton
Centre, Massachusetts ("the Trust"), and CARDINAL INVESTMENT SERVICES, INC., an
Illinois corporation having its principal office and place of business at 579
Pleasant Street, Suite 4, Paxton, Massachusetts ("the Company"),
W I T N E S S E T H:
......WHEREAS, the Trust desires to appoint the Company as its transfer agent,
dividend disbursing agent and agent in connection with certain other activities,
and the Company desires to accept such appointment;
......NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
Article 1. Terms of Appointment; Duties of the Company
......1.01 Subject to the terms and conditions set forth in this Agreement, the
Trust hereby employs and appoints the Company to act as, and the Company agrees
to act as, transfer agent for the Trust's authorized and issued shares of
beneficial interest without par value ("Shares"), and dividend disbursing agent
in connection with any accumulation, open-account or similar plans provided to
the shareholders of the Trust ("Shareholders") and set out in the prospectus and
statement of additional information of the Trust corresponding to the date of
this Agreement.
......1.02 The Company agrees that it will perform the
following services:
......(a) In accordance with procedures established from time to time by
agreement between the Trust and the Company, the Company shall:
...........(i) receive for acceptance and processing, order for
the purchase of Shares, and promptly deliver payment and
appropriate documentation therefor to the custodian of the Trust
authorized pursuant to the Trust's governing documents (the
"Custodian");
...........(ii) pursuant to purchase orders or other appropriate
instructions, issue the appropriate number of Shares and hold
such Shares in the appropriate Shareholder account, and, if
requested and properly authorized, issue appropriate certificates
therefor;
...........(iii) receive for acceptance and processing, redemption
requests and redemption directions, and deliver the appropriate
documentation therefor to the Custodian;
...........(iv) at the appropriate time as and when it receives
moneys paid to it by the Custodian with respect to any
redemption, pay over or cause to be paid over in the appropriate
manner such moneys as instructed by the redeeming Shareholders;
...........(v) effect transfer of Shares by the registered owners
thereof upon receipt of appropriate documentation;
<PAGE>
........... (vi) prepare and transmit payments for dividends and
distributions declared by the Trust; and
...........(vii) maintain records of account for and advise the
Trust and its Shareholders as to the foregoing.
......(b) In addition to and not in lieu of the services set forth in paragraph
(a) above, the Company shall perform all of the customary services of a transfer
agent, dividend disbursing agent and, as relevant, agent in connection with
accumulation, open-account or similar plans (including without limitation any
periodic investment plan or periodic withdrawal program), including but not
limited to: (i) maintaining all Shareholder accounts, (ii) preparing Shareholder
mailing lists, (iii) mailing proxies, (iv) receiving and tabulating proxies, (v)
mailing of additional information to current Shareholders, (vi) withholding
taxes on U.S. residents and non-resident alien accounts where applicable, (vii)
preparing and filing U.S. Treasury Department Forms 1099 and other appropriate
forms required with respect to dividends and distributions by federal
authorities for all registered Shareholders, (viii) preparing and mailing
confirmation forms and statements of account to Shareholders for all purchases
and redemptions of Shares and other confirmable transactions in Shareholder
accounts, (ix) preparing and mailing activity statements for Shareholders, and
(x) providing Shareholder account information. The Trust shall provide the
Company with any information required in connection with the furnishing of the
foregoing services.
......(c) Procedures applicable to the service provided under this Agreement may
be established from time to time by agreement between the Trust and the Company.
Article 2. Fees and Expenses
......2.01 For performance by the Company pursuant to this Agreement, the Trust
agrees to pay the Company monthly a fee at the annual rate disclosed in Appendix
A of this Agreement as Transfer Agent for the Trust. Such fees and out-of-pocket
expenses and advances identified under Section 2.02 below may be changed from
time to time subject to mutual written agreement between the Trust and the
Company.
......2.02 In addition to the fee paid under Appendix A of this Agreement, the
Trust agrees to reimburse the Company for all out-of-pocket expenses or advances
incurred by the Company in performing its duties as Transfer Agent hereunder. In
addition, any other expenses incurred by the Company at the request or with the
consent of the Trust will be reimbursed by the Trust.
......2.03 The Trust agrees to pay all fees and reimbursable expenses promptly.
Postage and cost of materials for mailing of dividends, proxies, Trust reports
and other mailings to all Shareholder accounts shall be advanced to the Company
by the Trust in immediately available funds prior to the mailing date of such
materials.
Article 3. Representations and Warranties of the Company
......The Company represents and warrants to the Trust that:
......3.01 It is a corporation duly organized and existing and in good standing
under the laws of State of Illinois.
<PAGE>
......3.02 It is duly qualified to carry on its business in The
Commonwealth of Massachusetts.
......3.03 It is empowered under applicable laws and by its charter and bylaws
to enter into and perform this Agreement.
......3.04 All requisite corporate proceedings have been taken to authorize it
to enter into and perform this Agreement.
......3.05 It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under this
Agreement.
Article 4. Representations and Warranties of the Trust
......The Trust represents and warrants to the Company that:
......4.01 It is an unincorporated business trust duly organized and existing
and in good standing under the laws of The Commonwealth of Massachusetts.
......4.02 It is empowered under applicable laws and by its governing documents
to enter into and perform this Agreement.
......4.03 All proceedings required by said governing documents have been taken
to authorize it to enter into and perform this Agreement.
......4.04 It is an investment company registered under the Investment Company
Act of 1940.
......4.05 A registration statement under the Securities Act of 1933 is
currently effective and will remain effective, and appropriate state securities
law filings have been made and will continue to be made with respect to all
Shares of each of the Trust being offered for sale; information to the contrary
will result in immediate notification to the Company.
Article 5. Indemnification
......5.01 The Company shall not be responsible for, and the Trust shall
indemnify and hold the Company, its officers, directors, employees and agents
harmless from and against, any and all losses, damages, costs, charges, counsel
fees, payments, expenses and liabilities arising out of or attributable to:
......(a) all actions of the Company or its agents or subcontractors required to
be taken pursuant to this Agreement, provided that such actions are taken in
good faith and without negligence or willful misconduct;
......(b) the Trust's refusal or failure to comply with the terms of this
Agreement, or the Trust's lack of good faith, negligence or willful misconduct,
or the breach of any representation or warranty of the Trust hereunder;
<PAGE>
......(c) the reliance on or use by the Company or its agents or subcontractors
of information, records or documents which (i) are received by the Company or
its agents or subcontractors and furnished to it by or on behalf of the Trust,
and (ii) have been prepared and/or maintained by the Trust or any other person
or firm (other than the Company or its agents or subcontractors) on behalf of
the Trust;
......(d) the reliance on, or the carrying out by the Company or
its agents or subcontractors of, any instructions or requests of
the Trust's representatives; or
......(e) the offer or sale of Shares in violation of any requirement under the
federal securities laws or regulations or the securities laws or regulations of
any state including, without limitation, any requirement that such Shares be
registered in such state, or in violation of any stop order or other
determination or ruling by any federal agency or any state with respect to the
offer or sale of such Shares in such state.
......5.02 The Company shall indemnify and hold the Trust harmless from and
against any and all losses, damages, costs, charges, counsel fees, payments,
expenses and liabilities arising out of or attributable to the Company's refusal
or failure to comply with the terms of this Agreement, or the Company's lack of
good faith, negligence or willful misconduct, or the breach of any
representation or warranty of the Company hereunder.
......5.03 At any time the Company may apply to any officer of the Trust for
instructions, and may consult with the Trust's legal counsel with respect to any
matter arising in connection with the services to be performed by the Company
under this Agreement, and the Company and its agents or subcontractors shall not
be liable and shall be indemnified by the Trust for any action taken or omitted
by it in reliance upon such instructions or upon the opinion of such counsel.
The Company, its agents and subcontractors shall be protected and indemnified in
acting upon any papers or documents furnished by or on behalf of the Trusts,
reasonably believed to be genuine and to have been signed by the proper person
or persons, or upon any instructions, information, data, records or documents
provided the Company or its agents or subcontractors by telephone, in person, or
by machine readable input, facsimile, CRT data entry or other similar means
authorized by the Trust, and the Company, its officers, directors, employees,
agents and subcontractors shall not be held to have notice of any change of
authority of any person until receipt of written notice thereof from the Trust.
The Company, its officers, directors, employees, agents and subcontractors shall
also be protected and indemnified in recognizing Share certificates which are
reasonably believed to bear the proper manual or facsimile signatures of the
officers of the Trust, and the proper countersignature of any former transfer
agent or registrar, or of a co-transfer agent or co-registrar.
......5.04 In the event either party is unable to perform its obligations under
this Agreement because of acts of God, strikes, equipment or transmission
failure or damage reasonably beyond its control, or other causes reasonably
beyond its control, such party shall not be liable to the other for any damages
resulting from such failure to perform or otherwise from such causes.
......5.05 Neither party to this Agreement shall be liable to the other party
for consequential damages under any provision of this Agreement or for any act
or failure to act hereunder.
......5.06 In order that the indemnification provisions contained in this
Article 5 shall apply, upon the assertion of a claim for which either party may
be required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
<PAGE>
party seeking indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any compromise in any
case in which the other party may be required to indemnify it except with the
other party's prior written consent.
Article 6. Covenants of the Trust and the Company
......6.01 The Trust shall promptly furnish to the Company the
following:
......(a) a certified copy of the resolution of the Board of Trustees of the
Trust authorizing the appointment of the Company and the execution and delivery
of this Agreement.
......(b) A copy of the Declaration of Trust and Bylaws of the
Trusts and all amendments thereto.
......6.02 The Company hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Trust for safekeeping of Share
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such certificates,
forms and devices.
......6.03 The Company shall keep records relating to the services to be
performed hereunder in the form and manner as it may deem advisable. To the
extent required by Section 31 of the Investment Company Act of 1940, as amended,
and the rules and regulations promulgated thereunder, the Company agrees that
all such records prepared or maintained by the Company relating to the services
to be performed by the Company hereunder are the property of the Trust and will
be preserved, maintained at the expense of the Trust and made available in
accordance with such section, rules and regulations, and will be surrendered
promptly to the Trust at its request.
......6.04 The Company and the Trust agree that all books, records, information
and data pertaining to the business of the other party which are exchanged or
received pursuant to the negotiation or the carrying out of this Agreement shall
remain confidential, and shall not be voluntarily disclosed to any other person,
except as may be required by law.
......6.05 In case of any requests or demands for the inspection of the
Shareholder records of the Trust, the Company will endeavor to notify the Trust
and to secure instructions from an authorized officer of the Trusts as to such
inspection. The Company reserves the right, however, to exhibit the Shareholder
records to any person whenever it is advised by its counsel that it may be held
liable for the failure to exhibit the Shareholder records to such person, unless
the Trust indemnify the Company to its reasonable satisfaction against such
liability.
Article 7. Termination of Agreement
......7.01 This Agreement may be terminated by either party upon at least ninty
(90) days written notice to the other.
......7.02 Should the Trust exercise its right to terminate, all out-of-pocket
expenses associated with the movement of records and material will be borne by
the Trust. Additionally, the Company reserves the right to charge for any other
reasonable expenses associated with such termination, but not more than an
amount equivalent to the average of the most recent three (3) months' fees.
<PAGE>
Article 8. Assignment
......8.01 Neither this Agreement nor any rights or obligations hereunder may be
assigned by either party without the written consent of the other party.
......8.02 This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
Article 9. Amendment
......9.01 This Agreement may be amended or modified by a written agreement
executed by both parties.
Article 10 Massachusetts Law to Apply
......10.01 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of The Commonwealth of
Massachusetts.
Article 11 Merger of Agreement
......11.01 This Agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement with respect to the subject hereof
whether oral or written.
Article 12. Limitation of Liability
......12.01 A copy of the Declaration of Trust of the Trust is on file with the
Secretary of State of The Commonwealth of Massachusetts and notice is hereby
given that this Agreement is executed on behalf of the Trustees of the Trust as
trustees and not individually and that the obligations of this Agreement are not
binding upon the Trustees or holders of Shares individually but are binding only
upon the assets or property of the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and year first above written.
THE PRINCIPLED EQUITY MARKET FUND
By:/s/ DAVID W.C. PUTNAM
President
CARDINAL INVESTMENT SERVICES, INC.
By:/S/ CHRISTOPHER Y. WILLIAMS
President
<PAGE>
A-1
Appendix A
Transfer Agent and Service Fee $6,000 annual rate, paid monthly for
the calendar year 1999.
$12,000 annual rate, paid monthly for
the calendar year 2000 and thereafter
A-1
<PAGE>
ADMINISTRATION AGREEMENT
BETWEEN
THE PRINCIPLED EQUITY MARKET FUND
AND
CARDINAL INVESTMENT SERVICES, INC.
<PAGE>
ADMINISTRATION AGREEMENT
AGREEMENT made as of the 1st day of March, 1999, by and between THE PRINCIPLED
EQUITY MARKET FUND, a Massachusetts BUSINESS TRUST (the "Trust"), and Cardinal
Investment Services, Incorporated, an Illinois corporation (the
"Administrator").
WHEREAS, the Trust is registered under the Investment Company Act of 1940,
as amended (the "1940 Act"), as a closed-end investment management company; and
WHEREAS, the Trust desires that the Administrator perform certain
administrative services for the Trust and the Administrator is willing to
provide those services on the terms and conditions set forth in this Agreement;
NOW THEREFORE, for and in consideration of the mutual covenants and
agreements contained herein, the Trust and the Administrator hereby agree as
follows:
SECTION 1. APPOINTMENT; DELIVERY OF DOCUMENTS
The Trust hereby appoints the Administrator, and the Administrator hereby
agrees, to act as administrator of the Trust for the period and on the terms
set forth in this Agreement.
SECTION 2. DUTIES OF THE ADMINISTRATOR AND THE TRUST
(a) Subject to the direction and control of the Board of Trustees (the
"Board") and the officers of the Trust, the Administrator shall manage all
aspects of the Trust's operations with respect to the Trust except those that
are the responsibility of F. L. Putnam Investment Management Corporation, any
other investment adviser or investment subadviser to the Trust (collectively,
the "Adviser") or any other service provider hired by the Trust, all in such
manner and to such extent as may be authorized by the Board.
(b) With respect to the Trust, the Administrator shall:
(i) at the Trust's expense, provide the Trust with, or arrange for the
provision of, the services of persons competent to perform such legal,
administrative and clerical functions not otherwise described in this
Section 2(b) as are necessary to provide effective operation of the Trust;
(ii) oversee (A) the preparation and maintenance by the Adviser and the
Trust's custodian, transfer agent, dividend disbursing agent and fund
accountant in such form, for such periods and in such locations as may be
required by applicable United States law, of all documents and records
relating to the operation of the Trust required to be prepared or
<PAGE>
maintained by the Trust or its agents pursuant to applicable law; (B) the
reconciliation of account information and balances among the Adviser and
the Trust's custodian, transfer agent, dividend disbursing agent and fund
accountant; (C) the transmission of purchase and redemption orders for
shares of stock of the Trust ("Shares"); (D) the notification to the
Adviser of available funds for investment; and (E) the performance of fund
accounting, including the calculation of the net asset value of the
Shares;
(iii) oversee the performance of administrative and professional services
rendered to the Trust by others, including its custodian, transfer agent
and dividend disbursing agent as well as legal, auditing, shareholder
servicing and other services performed for the Trust;
(iv) file or oversee the filing of each document required to be filed by
the Trust in either written or, if required, electronic format (e.g.,
electronic data gathering analysis and retrieval system or "EDGAR") with
the SEC;
(v) assist in and oversee the preparation, filing and
printing and the periodic updating of the Registration
Statement and Prospectus;
(vi) oversee the preparation and filing of the Trust's
tax returns;
(vii) oversee the preparation of financial statements
and related reports to the Trust's shareholders, the SEC and
state and other securities administrators;
(viii) assist in and oversee the preparation and printing
of proxy and information statements and any other
communications to shareholders;
(ix) provide the Trust with adequate general office space and facilities
and provide persons suitable to the Board to serve as officers of the
Trust;
(x) assist in the preparation, filing and maintenance of
the Trust's Organic Documents and Minutes of Meetings of
Trustees, Board Committees and Shareholders;
(xi) with the cooperation of the Trust's counsel, Advisers, the officers
of the Trust and other relevant parties, prepare and disseminate materials
for meetings of the Board;
(xii)assist the Trust in maintaining its existence and good
standing under applicable state law;
(xiii) oversee the determination of the amount of and supervise the
declaration of dividends and other distributions to shareholders as
<PAGE>
necessary to, among other things, maintain the qualification of each Fund
as a regulated investment company under the Internal Revenue Code of 1986,
as amended (the "Code"), and prepare and distribute to appropriate parties
notices announcing the declaration of dividends and other distributions to
shareholders;
(xiv) calculate, review and account for Trust expenses
and report on Trust expenses on a periodic basis;
(xv) authorize the payment of Trust expenses and pay, from
Trust assets, all bills of the Trust;
(xvi) prepare Trust budgets, pro-forma financial
statements, expense and profit/loss projections and fee
waiver/expense reimbursement projections on a periodic basis;
(xvii) prepare financial statement expense information;
(xviii) assist the Trust in the selection of other service
providers, such as independent accountants, law firms and
proxy solicitors;
(xix) perform such other recordkeeping, reporting and other tasks as may
be specified from time to time in the procedures adopted by the Board;
provided, that the Administrator need not begin performing any such task
except upon 65 days' notice and pursuant to mutually acceptable
compensation agreements;
(xx) calculate the net asset value per share with the
frequency prescribed in the Trust's then-current Prospectus;
(xxi) calculate each item of income, expense, deduction, credit, gain and
loss, if any, as required by the Trust and in conformance with generally
accepted accounting practice ("GAAP"), the SEC's Regulation S-X (or any
successor regulation) and the Internal Revenue Code of 1986, as amended
(or any successor laws)(the "Code");
(xxii) maintain the Trust's general ledger and record all income,
expenses, capital share activity and security transactions of the Trust;
(xxiii) calculate the total return for the Trust and such other measure of
performance as may be agreed upon between the parties hereto;
(xxiv) provide the Trust and such other persons as the Trust may direct
with the following reports (A) a current security position report, (B) a
summary report of transactions and pending maturities (including the
principal, cost, and accrued interest on each portfolio security in
maturity date order), and (C) a current cash position report;
<PAGE>
(xxv) prepare and record, as of each time when the net asset value of the
Trust is calculated or as otherwise directed by the Trust, a valuation of
the assets of the Trust (unless otherwise specified in or in accordance
with this Agreement, based upon the use of outside services normally used
and contracted for this purpose by the Administrator in the case of
securities for which information and market price or yield quotations are
readily available and based upon evaluations conducted in accordance with
the Trust's instructions in the case of all other assets) ;
(xxvi) make such adjustments over such periods as the Advisor deems
necessary to reflect over-accruals or under-accruals of estimated expenses
or income;
(xxvii) request any necessary information from the Advisor and the Trust's
transfer agent and distributor in order to prepare, and prepare, the
Trust's Form N-SAR;
(xxviii) provide appropriate records to assist the Trust's independent
accountants and, upon approval of the Trust or the Advisor, any regulatory
body in any requested review of the Trust's books and records maintained
by the Administrator ;
(xxix) prepare semi-annual financial statements and oversee the production
of the semiannual financial statements and any related report to the
Trust's shareholders prepared by the Trust or its investment advisers;
(xxx)file the Trust's semi-annual financial statements with the SEC or
ensure that the Trust's semi-annual financial statements are filed with
the SEC;
(xxxi) provide information typically supplied in the investment company
industry to companies that track or report price, performance or other
information with respect to investment companies;
(xxxii) assist in preparing the data required to update the
Trust's registration statement;
(xxxiii) provide the Trust or independent accountants with all information
requested with respect to the preparation of the Trust's income, excise
and other tax returns;
(xxxiv) transmit to and receive from the Trust's transfer agent
appropriate data to reconcile Shares outstanding on a daily basis and
other data with the transfer agent;
(xxxv) periodically reconcile all appropriate data with the
Trust's custodian;
(xxxvi) verify investment trade tickets when received from an investment
adviser and maintain individual ledgers and historical tax lots for each
security; and
<PAGE>
(xxxvii) perform such other recordkeeping, reporting and other tasks as
may be specified from time to time in the procedures adopted by the Board;
provided, that the Administrator need not begin performing any such task
except upon 65 days' notice and pursuant to mutually acceptable
compensation agreements.
(c) The Administrator shall prepare and maintain on behalf of the Trust
the following books and records of the Trust, and each Class thereof, pursuant
to Rule 3la-1 under the 1940 Act (the "Rule"):
(i) Journals containing an itemized daily record in detail of all
purchases and sales of securities, all receipts and disbursements of cash
and all other debits and credits, as required by subsection (b)(1) of the
Rule;
(ii) Journals and auxiliary ledgers reflecting all asset, liability,
reserve, capital, income and expense accounts, as required by subsection
(b)(2) of the Rule (but not including the ledgers required by subsection
(b)(2)(iv);
(iii) A record of each brokerage order given by or on behalf of the Trust
for, or in connection with, the purchase or sale of securities, and all
other portfolio purchases or sales, as required by subsections (b)(5) and
(b)(6) of the Rule;
(iv) A record of all options, if any, in which the Trust has any direct or
indirect interest or which the Trust has granted or guaranteed and a
record of any contractual commitments to purchase, sell, receive or
deliver any property as required by subsection (b)(7) of the Rule;
(v) A monthly trial balance of all ledger accounts (except
shareholder accounts) as required by subsection (b)(8) of
the Rule; and
(vi) Other records required by the Rule or any successor rule or pursuant
to interpretations thereof to be kept by closed-end management investment
companies, but limited to those provisions of the Rule applicable to
portfolio transactions and as agreed upon between the parties hereto.
(d) The Administrator shall provide such other services and assistance
relating to the affairs of the Trust as the Trust or an Adviser may, from time
to time, reasonably request pursuant to mutually acceptable compensation
agreements.
(e) The Administrator shall maintain records relating to its services,
such as journals, ledger accounts and other records, as are required to be
maintained under the 1940 Act and Rule 31a-1 thereunder. The books and records
pertaining to the Trust that are in possession of the Administrator shall be
the property of the Trust. The Trust, or the Trust's authorized
representatives, shall have access to such books and records at all times
during the Administrator's normal business hours. Upon the reasonable request
<PAGE>
of the Trust, copies of any such books and records shall be provided promptly
by the Administrator to the Trust or the Trust's authorized representatives. In
the event the Trust designates a successor that assumes any of the
Administrator's obligations hereunder, the Administrator shall, at the expense
and direction of the Trust, transfer to such successor all relevant books,
records and other data established or maintained by the Administrator under
this Agreement.
(f) Nothing contained herein shall be construed to require the
Administrator to perform any service that could cause the Administrator to be
deemed an investment adviser for purposes of the 1940 Act or the Investment
Advisers Act of 1940, as amended, or that could cause a Trust to act in
contravention of the Trust's Prospectus or any provision of the 1940 Act. All
references to any law in this Agreement shall be deemed to include reference to
the applicable rules and regulations promulgated under authority of the law and
all official interpretations of such law or rules or regulations.
(g) In order for the Administrator to perform the services required by
this Section 2, the Trust (i) shall cause all service providers to the Trust to
furnish any and all information to the Administrator, and assist the
Administrator as may be required and (ii) shall ensure that the Administrator
has access to all records and documents maintained by the Trust or any service
provider to the Trust.
SECTION 3. STANDARD OF CARE AND RELIANCE
(a) The Administrator shall be under no duty to take any action except as
specifically set forth herein or as may be specifically agreed to by the
Administrator in writing. The Administrator shall use its best judgment and
efforts in rendering the services described in this Agreement. The
Administrator shall not be liable to the Trust or any of the Trust's
shareholders for any action or inaction of the Administrator relating to any
event whatsoever in the absence of bad faith, willful misfeasance or gross
negligence in the performance of the Administrator's duties or obligations
under this Agreement or by reason of the Administrator's reckless disregard of
its duties and obligations under this Agreement.
(b) The Trust agrees to indemnify and hold harmless the Administrator, its
employees, agents, directors, officers and managers and any person who controls
the Administrator within the meaning of section 15 of the Securities Act or
section 20 of the Securities Exchange Act of 1934, as amended, ("The
Administrator Indemnitees") against and from any and all claims, demands,
actions, suits, judgments, liabilities, losses, damages, costs, charges,
reasonable counsel fees and other expenses of every nature and character
arising out of or in any way related to the Administrator's actions taken or
failures to act with respect to the Trust that are consistent with the standard
<PAGE>
of care set forth in Section 3(a) or based, if applicable, on good faith
reliance upon an item described in Section 3(d)(a "Claim"). The Trust shall not
be required to indemnify any Administrator Indemnitee if, prior to confessing
any Claim against the the Administrator Indemnitee, the Administrator or the
the Administrator Indemnitee does not give the Trust written notice of and
reasonable opportunity to defend against the Claim in its own name or in the
name of the the Administrator Indemnitee.
(c) The Administrator agrees to indemnify and hold harmless the Trust, its
employees, agents, trustees and officers against and from any and all claims,
demands, actions, suits, judgments, liabilities, losses, damages, costs,
charges, reasonable counsel fees and other expenses of every nature and
character arising out of the Administrator's actions taken or failures to act
with respect to the Trust that are not consistent with the standard of care set
forth in Section 3(a). The Administrator shall not be required to indemnify the
Trust if, prior to confessing any Claim against the Trust, the Trust does not
give the Administrator written notice of and reasonable opportunity to defend
against the Claim in its own name or in the name of the Trust.
(d) An Administrator Indemnitee shall not be liable for any action taken
or failure to act in good faith reliance upon:
(i) the advice of the Trust or of counsel, who may be counsel to the Trust
or counsel to the Administrator, and upon statements of accountants,
brokers and other persons reasonably believed in good faith by the
Administrator to be expert in the matters upon which they are consulted;
(ii) any oral instruction which it receives and which it reasonably
believes in good faith was transmitted by the person or persons authorized
by the Board to give such oral instruction. The Administrator shall have
no duty or obligation to make any inquiry or effort of certification of
such oral instruction;
(iii) any written instruction or certified copy of any resolution of the
Board, and the Administrator may rely upon the genuineness of any such
document or copy thereof reasonably believed in good faith by the
Administrator to have been validly executed; or
(iv) any signature, instruction, request, letter of transmittal,
certificate, opinion of counsel, statement, instrument, report, notice,
consent, order, or other document reasonably believed in good faith by the
Administrator to be genuine and to have been signed or presented by the
Trust or other proper party or parties; and no Administrator Indemnitee
shall be under any duty or obligation to inquire into the validity or
invalidity or authority or lack thereof of any statement, oral or written
instruction, resolution, signature, request, letter of transmittal,
certificate, opinion of counsel, instrument, report, notice, consent,
order, or any other document or instrument which the Administrator
reasonably believes in good faith to be genuine.
(e) The Administrator shall not be liable for the errors of other service
providers to the Trust, including the errors of pricing services (other than to
pursue all reasonable claims against the pricing service based on the pricing
<PAGE>
services' standard contracts entered into by the Administrator ) and errors in
information provided by an investment adviser (including prices and pricing
formulas and the untimely transmission of trade information), custodian or
transfer agent to the Trust.
SECTION 4. COMPENSATION AND EXPENSES
(a) In consideration of the administrative services provided by the
Administrator pursuant to this Agreement, the Trust shall pay the
Administrator, with respect to each Class of the Trust, the fees set forth in
Appendix A hereto. These fees shall be accrued by the Trust daily and shall be
payable monthly in arrears on the first day of each calendar month for services
performed under this Agreement during the prior calendar month.
If fees begin to accrue in the middle of a month or if this Agreement
terminates before the end of any month, all fees for the period from that date
to the end of that month or from the beginning of that month to the date of
termination, as the case may be, shall be prorated according to the proportion
that the period bears to the full month in which the effectiveness or
termination occurs. Upon the termination of this Agreement the Trust shall pay
to the Administrator such compensation as shall be payable prior to the
effective date of termination.
(b) Notwithstanding anything in this Agreement to the contrary, the
Administrator and its affiliated persons may receive compensation or
reimbursement from the Trust with respect to (i) the provision of services on
behalf of the Trust in accordance with any Plan or Service Plan, (ii) the
provision of shareholder support or other services, and (iii) service as a
trustee or officer of the Trust.
(c) The Trust shall be responsible for and assumes the obligation for
payment of all of its expenses, including: (a) the fee payable under this
Agreement; (b) the fees payable to each Adviser under an agreement between the
Adviser and the Trust; (c) expenses of issue, repurchase and redemption of
Shares; (d) interest charges, taxes and brokerage fees and commissions; (e)
premiums of insurance for the Trust, its trustees and officers and fidelity
bond premiums; (f) fees, interest charges and expenses of third parties,
including the Trust's independent accountant, legal counsel, custodian,
transfer agent, dividend disbursing agent and fund accountant; (g) fees of
pricing, interest, dividend, credit and other reporting services; (h) costs of
membership in trade associations; (i) telecommunications expenses; (j) funds
transmission expenses; (k) auditing, legal and compliance expenses; (l) costs
of forming the Trust and maintaining its existence; (m) costs of preparing,
filing and printing the Trust's Prospectuses, subscription application forms
and shareholder reports and other communications and delivering them to
existing shareholders, whether of record or beneficial; (n) expenses of
meetings of shareholders and proxy solicitations therefor; (o) costs of
maintaining books of original entry for portfolio and fund accounting and other
<PAGE>
required books and accounts, of calculating the net asset value of Shares and
of preparing tax returns; (p) costs of reproduction, stationery, supplies and
postage; (q) fees and expenses of the Trust's trustees; (r) compensation of the
Trust's officers and employees and costs of other personnel (who may be
employees of the Adviser, the Administrator or their respective affiliated
persons) performing services for the Trust; (s) costs of Board, Board
committee, shareholder and other corporate meetings; (t) SEC registration fees
and related expenses; (u) state, territory or foreign securities laws
registration fees and related expenses; and (v) all fees and expenses paid by
the Trust in accordance with any Plan or Service Plan or agreement related to
similar manners.
(d) Should the Trust exercise its right to terminate this Agreement, the
Trust shall reimburse the Administrator for all out-of-pocket expenses and
employee time (at 150% of salary) associated with the copying and movement of
records and material to any successor person and providing assistance to any
successor person in the establishment of the accounts and records necessary to
carry out the successor's responsibilities.
SECTION 5. EFFECTIVENESS, DURATION, TERMINATION AND ASSIGNMENT
(a) This Agreement shall become effective on the date hereof, shall remain
in full force and effect for one year from the date hereof and shall continue
in full force and effect for successive periods of one year thereafter,
provided that continuance is approved at least annually by a vote of a majority
of Trustees of the Trust.
(b) This Agreement may be terminated at any time, without the payment of
any penalty (i) by the vote of the Board of Trustees of the Trust or by the
Administrator, upon at least ninty (90) days written notice to the other party,
or upon such shorter notice as may be mutually agreed upon.
(c) This Agreement and the rights and duties under this Agreement
otherwise shall not be assignable by either the Administrator or the Trust
except by the specific written consent of the other party. All terms and
provisions of this Agreement shall be binding upon, inure to the benefit of and
be enforceable by the respective successors and assigns of the parties hereto.
SECTION 6. CONFIDENTIALITY.
The Administrator agrees to treat all records and other information
related to the Trust as proprietary information of the Trust and, on behalf of
itself and its employees, to keep confidential all such information, except
that the Administrator may:
(a) prepare or assist in the preparation of periodic
reports to shareholders and regulatory bodies such as the SEC;
(b) provide information typically supplied in the investment company
industry to companies that track or report price, performance or other
information regarding investment companies; and
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(c) release such other information as approved in writing by the Trust,
which approval shall not be unreasonably withheld and may not be withheld where
the Administrator may be exposed to civil or criminal contempt proceedings for
failure to release the information, when requested to divulge such information
by duly constituted authorities or when so requested by the Trust.
SECTIONS 7. FORCE MAJEURE
The Administrator shall not be responsible or liable for any failure or
delay in performance of its obligations under this Agreement arising out of or
caused, directly or indirectly, by circumstances beyond its reasonable control
including, without limitation, acts of civil or military authority, national
emergencies, labor difficulties, fire, mechanical breakdowns, flood or
catastrophe, acts of God, insurrection, war, riots or failure of the mails,
transportation, communication or power supply. In addition, to the extent the
Administrator's obligations hereunder are to oversee or monitor the activities
of third parties, the Administrator shall not be liable for any failure or
delay in the performance of the Administrator's duties caused, directly or
indirectly, by the failure or delay of such third parties in performing their
respective duties or cooperating reasonably and in a timely manner with the
Administrator .
SECTION 8. ACTIVITIES OF THE ADMINISTRATOR
(a) Except to the extent necessary to perform the Administrator's
obligations under this Agreement, nothing herein shall be deemed to limit or
restrict the Administrator's right, or the right of any of the Administrator's
managers, officers or employees who also may be a trustee, officer or employee
of the Trust, or persons who are otherwise affiliated persons of the Trust, to
engage in any other business or to devote time and attention to the management
or other aspects of any other business, whether of a similar or dissimilar
nature, or to render services of any kind to any other corporation, trust,
firm, individual or association.
(b) The Administrator may subcontract any or all of its responsibilities
pursuant to this Agreement to one or more corporations, trusts, firms,
individuals or associations, which may be affiliated persons of the
Administrator, who agree to comply with the terms of this Agreement; provided,
that any such subcontracting shall not relieve the Administrator of its
responsibilities hereunder. The Administrator may pay those persons for their
services, but no such payment will increase the Administrator's compensation
from the Trust.
SECTION 9. COOPERATION WITH INDEPENDENT ACCOUNTANTS
The Administrator shall cooperate with the Trust's independent public
accountants and shall take reasonable action to make all necessary information
available to the accountants for the performance of the accountants' duties.
<PAGE>
SECTION 10. LIMITATION OF SHAREHOLDER AND TRUSTEE LIABILITY
The trustees of the Trust and the shareholders of the Trust shall not be
liable for any obligations of the Trust under this Agreement, and the
Administrator agrees that, in asserting any rights or claims under this
Agreement, it shall look only to the assets and property of the Trust to which
the Administrator's rights or claims relate in settlement of such rights or
claims, and not to the trustees of the Trust or the shareholders of the Trust.
<PAGE>
SECTION 11. MISCELLANEOUS
(a) Neither party to this Agreement shall be liable to the other party for
consequential damages under any provision of this Agreement.
(b) No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by both
parties hereto.
(c) This Agreement shall be governed by, and the provisions of this
Agreement shall be construed and interpreted under and in accordance with, the
laws of the Commonwealth of Massachusetts.
(d) This Agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement with respect to the subject matter
hereof, whether oral or written.
(e) This Agreement may be executed by the parties hereto on any number of
counterparts, and all of the counterparts taken together shall be deemed to
constitute one and the same instrument.
(f) If any part, term or provision of this Agreement is held to be
illegal, in conflict with any law or otherwise invalid, the remaining portion or
portions shall be considered severable and not be affected, and the rights and
obligations of the parties shall be construed and enforced as if the Agreement
did not contain the particular part, term or provision held to be illegal or
invalid.
(g) Section headings in this Agreement are included for convenience only
and are not to be used to construe or interpret this Agreement.
(h) Notices, requests, instructions and communications received by the
parties at their respective principal places of business, or at such other
address as a party may have designated in writing, shall be deemed to have been
properly given.
(i) Notwithstanding any other provision of this Agreement, the parties
agree that the assets and liabilities of each Fund of the Trust are separate and
distinct from the assets and liabilities of each other Fund and that no Fund
shall be liable or shall be charged for any debt, obligation or liability of any
other Fund, whether arising under this Agreement or otherwise.
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(j) No affiliated person, employee, agent, director, officer or manager of
the Administrator shall be liable at law or in equity for the Administrator's
obligations under this Agreement.
(k) Each of the undersigned warrants and represents that they have full
power and authority to sign this Agreement on behalf of the party indicated and
that their signature will bind.
IN WITNESS WHEREOF the parties hereto have caused this Agreement to
be duly executed as of the date first written above .
THE PRINCIPLED EQUITY MARKET FUND
By:/S/DAVID W.C. PUTNAM
President
CARDINAL INVESTMENT SERVICES, INC.
By:/S/CHRISTOPHER Y. WILLIAMS
President
<PAGE>
Appendix A
Administration Fee $28,000 annual rate, paid monthly
for the calendar year 1999
and thereafter.
A-1
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