SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
_________________
FORM N-1A
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
and
REGISTRATION STATEMENT
under
THE INVESTMENT COMPANY ACT OF 1940
_________________
PRINCIPAL SMALLCAP FUND, INC.
(Exact name of Registrant as specified in Charter)
The Principal Financial Group
Des Moines, Iowa 50392-0200
(Address of principal executive offices)
Telephone number (515) 248-3842
_________________
MICHAEL D. ROUGHTON copy to: JOHN W. BLOUCH, L.L.P.
The Principal Financial Group Suite 405 West
Des Moines, Iowa 50392 1025 Thomas Jefferson Street, N.W.
Washington, DC 20007-0805
(Name and address of agent for service)
_________________
CALCULATION OF REGISTRATION FEE
_________________
Proposed Proposed
Title of Amount maximum maximum Amount of
securities being offering price aggregate registration
being registered registered per unit offering price fee
Common Stock Indefinite N/A N/A $500
$.01 Par Value
Pursuant to the provisions of Rule 24f-2 under the Investment Company Act of
1940, Registrant declares that an indefinite number or amount of its securities
is being registered.
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 or until the registration statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a)
may determine.
<PAGE>
<TABLE>
<CAPTION>
Principal SmallCap Fund, Inc.
Registration Statement on Form N-1A
Cross Reference Sheet
Form N-1A Item Caption in Prospectus
Part A
<S> <C> <C>
1. Cover Page Principal SmallCap Fund, Inc.
2. Synopsis Overview
3. Condensed Financial Information Financial Highlights;
Performance Calculation
4. General Description of Registrant Overview; Investment Objectives, Policies
and Restrictions; Certain Investment Policies and
Restrictions; Additional Information; Risk Factors
5. Management of the Fund How the Funds are Managed
6. Capital Stock and Other Securities Shareholder Rights; Tax Treatment of the Funds, Dividends and
Distributions; Additional Information; Distribution of Income
and Realized Capital Gains
7. Purchase of Securities Being Offered How to Purchase Shares; Offering Price of Funds' Shares;
Determination of Net Asset Value of Fund Shares; Distribution
and Shareholder Servicing Plans and Fees; How to Exchange
Shares; How to Sell Shares
8. Redemption or Repurchase How to Sell Shares; General Information about a Fund Account;
Periodic Withdrawal Plan
9. Legal Proceedings *
Part B Statement of Additional Information Caption**
10. Cover Page
11. Table of Contents Table of Contents
12. General Information and History
13. Investment Objectives and Policies Investment Policies and Restrictions of the Funds;
Fund Investments
14. Management of the Registrant Directors and Officers of the Fund
15. Control Persons and Principal Holders Directors and Officers of the Fund
of Securities
16. Investment Advisory and Other Services Manager and Sub-Advisor; Cost of Manager's Services;
Distribution Plan; Additional Information (P)
17. Brokerage Allocation Brokerage on Purchases and Sales of Securities
18. Capital Stock and Other Securities Shareholder Rights (P)
19. Purchase, Redemption and Pricing of How to Purchase Shares; Offering Price of Fund Shares;
Determination of Net Asset Value of Funds' Shares;
20. Tax Status Tax Treatment of Funds, Dividends and Distributions
21. Underwriters Offering Price of Funds' Shares
22. Calculation of Performance Data Performance Calculation
23. Financial Statements Financial Statements
* Omitted because answer is negative or item is not applicable.
** Prospectus caption given where appropriate.
</TABLE>
<PAGE>
This Prospectus describes a family of investment companies ("Principal
Funds" formerly known as "Princor Funds") which has been organized by Principal
Mutual Life Insurance Company. Together the Funds provide the following range of
investment objectives:
GROWTH-ORIENTED FUNDS
Domestic
Principal Balanced Fund, Inc. (formerly known as Princor Balanced Fund, Inc.)
seeks to generate a total investment return consisting of current income and
capital appreciation while assuming reasonable risks in furtherance of the
investment objective.
Principal Blue Chip Fund, Inc. (formerly known as Princor Blue Chip Fund, Inc.)
seeks to achieve growth of capital and growth of income by investing primarily
in common stocks of well capitalized, established companies.
Principal Capital Value Fund, Inc. (formerly known as Princor Capital
Accumulation Fund, Inc.) seeks to achieve primarily long-term capital
appreciation and secondarily growth of investment income through the purchase
primarily of common stocks, but the Fund may invest in other securities.
Principal Growth Fund, Inc. (formerly known as Princor Growth Fund, Inc.) seeks
growth of capital through the purchase primarily of common stocks, but the Fund
may invest in other securities.
Principal MidCap Fund, Inc. (formerly known as Princor Emerging Growth Fund,
Inc.) seeks to achieve long-term capital appreciation by investing primarily in
securities of emerging and other growth-oriented companies.
Principal Real Estate Fund, Inc. seeks to generate total return by investing
primarily in equity securities of companies principally engaged in the real
estate industry.
Principal SmallCap Fund, Inc. seeks to achieve long-term growth of capital by
investing primarily in equity securities of companies with comparatively smaller
market capitalizations.
Principal Utilities Fund, Inc. (formerly known as Princor Utilities Fund, Inc.)
seeks to provide current income and long-term growth of income and capital by
investing primarily in equity and fixed income securities of companies in the
public utilities industry.
International
Principal International Emerging Markets Fund, Inc. seeks to achieve long-term
growth of capital by investing primarily in equity
securities of issuers in emerging market countries.
Principal International Fund, Inc. (formerly known as Princor World Fund, Inc.)
seeks long-term growth of capital by investing in a portfolio of equity
securities of companies domiciled in any of the nations of the world.
Principal International SmallCap Fund, Inc. seeks to achieve long-term growth of
capital by investing primarily in equity securities of non-United States
companies with comparatively smaller market capitalizations.
INCOME-ORIENTED FUNDS
Principal Bond Fund, Inc. (formerly known as Princor Bond Fund, Inc.) seeks to
provide as high a level of income as is consistent with preservation of capital
and prudent investment risk.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is ________________.
Principal Government Securities Income Fund, Inc. (formerly known as Princor
Government Securities Income Fund, Inc.) seeks a high level of current income,
liquidity and safety of principal by purchasing obligations issued or guaranteed
by the United States Government or its agencies, with emphasis on Government
National Mortgage Association Certificates ("GNMA Certificates"). The guarantee
by the United States Government extends only to principal and interest. There
are certain risks unique to GNMA Certificates.
Principal High Yield Fund, Inc. (formerly known as Princor High Yield Fund,
Inc.) seeks high current income primarily by purchasing high yielding, lower or
non-rated fixed income securities which are believed not to involve undue risk
to income or principal. Capital growth is a secondary objective when consistent
with the objective of high current income. Principal High Yield Fund, Inc.
invests predominantly in lower rated bonds, commonly referred to as "junk bonds"
and may invest 100% of its assets in such bonds. Bonds of this type are
considered to be speculative with regard to payment of interest and return of
principal. Purchasers should carefully assess the risks associated with an
investment in this fund. THESE ARE SPECULATIVE SECURITIES.
Principal Limited Term Bond Fund, Inc. (formerly known as Princor Limited Term
Bond Fund, Inc.) seeks a high level of current income consistent with a
relatively high level of principal stability by investing in a portfolio of
securities with a dollar weighted average maturity of five years or less.
Principal Tax-Exempt Bond Fund, Inc. (formerly known as Princor Tax-Exempt Bond
Fund, Inc.) seeks as high a level of current income exempt from federal income
tax as is consistent with preservation of capital. The Fund seeks to achieve its
objective primarily through the purchase of investment grade quality tax-exempt
fixed income obligations.
MONEY MARKET FUNDS
Principal Cash Management Fund, Inc. (formerly known as Princor Cash Management
Fund, Inc.) seeks as high a level of income available from short-term securities
as is considered consistent with preservation of principal and maintenance of
liquidity by investing in a portfolio of money market instruments.
Principal Tax-Exempt Cash Management Fund, Inc. (formerly known as Princor
Tax-Exempt Cash Management Fund, Inc.) seeks, through investment in a
professionally managed portfolio of high quality, short-term Municipal
Obligations, as high a level of current interest income exempt from federal
income tax as is consistent with stability of principal and maintenance of
liquidity.
Each of the Principal Funds, except the Tax-Exempt Bond Fund and Tax-Exempt Cash
Management Fund, offers three classes of shares: Class A, Class B and Class R
shares. Tax-Exempt Bond Fund offers Class A and Class R shares. Tax-Exempt Cash
Management Fund only offers Class A shares. Each class is sold under a different
sales arrangement and has different expenses. Only Class A and Class B shares
are offered through this Prospectus. For more information about the different
sales arrangements, see "How to Purchase Shares" and "Offering Price of Fund's
Shares." For information about various expenses borne by each class see
"Overview."
Shares of the Funds are not deposits or obligations of, or guaranteed or
endorsed by, any financial institution, nor are shares of the Funds federally
insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board,
or any other agency.
An investment in any of the Funds is neither insured nor guaranteed by the
U.S. Government. There can be no assurance the Money Market Funds will be able
to maintain a stable net asset value of $1.00 per share.
This Prospectus concisely states information about the Principal Funds that
an investor should know before investing. It should be read and retained for
future reference.
Additional information about the Funds has been filed with the Securities
and Exchange Commission, including a document called a Statement of Additional
Information dated ____________ which is incorporated by reference herein. The
Statement of Additional Information and a Prospectus for Class R shares can be
obtained free of charge by writing or telephoning the Funds' principal
underwriter: Princor Financial Services Corporation, P.O. Box 10423, Des Moines,
IA 50306. Telephone 1-800-247-4123.
TABLE OF CONTENTS
Page
Overview .............................................................. 4
Financial Highlights.................................................... 10
Investment Objectives, Policies and Restrictions........................ 23
Growth-Oriented Funds............................................... 23
Domestic........................................................ 23
International................................................... 27
Income-Oriented Funds............................................... 29
Money Market Funds.................................................. 35
Certain Investment Policies and Restrictions........................ 37
Risk Factors............................................................ 38
How the Funds are Managed............................................... 39
How to Purchase Shares.................................................. 42
Offering Price of Funds' Shares ........................................ 44
Distribution and Shareholder Servicing Plans and Fees................... 45
Determination of Net Asset Value of Funds' Shares....................... 46
Distribution of Income Dividends and Realized Capital Gains ............ 46
Tax Treatment of the Funds, Dividends and Distributions ................ 48
How to Exchange Shares.................................................. 49
How to Sell Shares...................................................... 50
Periodic Withdrawal Plan................................................ 51
Performance Calculation................................................. 52
General Information About a Fund Account................................ 53
Retirement Plans........................................................ 54
Shareholder Rights...................................................... 54
Additional Information.................................................. 55
This Prospectus does not constitute an offer to sell, or a solicitation of
an offer to buy, the securities of any of the Funds in any jurisdiction in which
such sale, offer to sell, or solicitation may not be lawfully made. Currently,
shares of the Funds are not available for sale in New Hampshire, in any U.S.
possession or in Canada or any other foreign country. No dealer, salesperson, or
other person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offer contained in this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the Funds or the Funds Manager. Because the Principal Funds use a combined
Prospectus there may be a possibility that one Fund might become liable for any
misstatements, inaccuracy, or incomplete disclosure in the Prospectus concerning
another Fund.
OVERVIEW
The following overview is provided for your convenience. Please read the
detailed information found in the prospectus.
The Principal Funds are separately incorporated, open-end diversified
management investment companies. Each of the Funds, except the Tax-Exempt Bond
Fund and Tax-Exempt Cash Management Fund, offers three classes of shares: Class
A, Class B and Class R shares. The Tax-Exempt Bond Fund offers only Class A and
Class B shares. The Tax-Exempt Cash Management Fund offers only Class A shares.
Only Class A and Class B Shares are offered through this Prospectus.
What it Costs to Invest
There are costs to acquire and own many types of investments. Shares of the
Principal Funds are no exception. The tables on the next pages show the fees and
expenses of buying and owning shares of each of the Funds. Except as noted, the
information for all of the Funds is based on the fiscal year ended October 31,
1997. The Examples are based on each Fund's Annual Operating Expenses described
in Tables A and B. Please remember that actual expenses and future expenses may
be more or less than those shown.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses
Class A Shares
Maximum Sales Load Imposed Contingent
on Purchases Redemption Exchange Deferred Sales
Fund (as a percentage of offering price) Fee* Fee Charge
---- ----------------------------------- ---------- -------- --------------
<S> <C> <C> <C> <C>
All Funds except Limited Term Bond Fund
and Money Market Funds 4.75% None None None
Limited Term Bond Fund 1.50% None None None
Money Market Funds None None None None
<FN>
* A wire charge of $6.00 will be deducted for all wire transfers.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Class B Shares
Maximum Sales Load Contingent Deferred Sales Charge
Imposed on Purchases (as a percentage of the lower of
(as a percentage of Redemption Exchange the original purchase price
Fund offering price) Fee* Fee or redemption proceeds
---- -------------------- ---------- -------- -------------------------------
<S> <C> <C> <C> <C>
All Funds except Limited Term Bond Fund 4.75% None None Redemptions During Year
-----------------------
1 2 3 4 5 6 7
- - - - - - -
4% 4% 3% 3% 2% 1% 0%
Limited Term Bond Fund 1.50% None None Redemptions During Year
-----------------------
1.25% 1.25% .75% .75% .50% .25% 0%
<FN>
* A wire charge of $6.00 will be deducted for all wire transfers.
</FN>
</TABLE>
<TABLE>
<CAPTION>
TABLE A CLASS A SHARES
Annual Fund Operating Expenses
(as a percentage of average net assets)
---------------------------------------------------------------------
Management 12b-1 Other Total Operating
Fund Fee Fee Expenses Expenses
---- ---------- ----- -------- ---------------
<S> <C> <C> <C> <C>
Balanced Fund % % % %
Blue Chip Fund
Bond Fund *
Capital Value Fund
Cash Management Fund None *
Government Securities Income Fund
Growth Fund
High Yield Fund
International Emerging Markets Fund **
International Fund
International SmallCap Fund **
Limited Term Bond Fund *
MidCap Fund
Real Estate Fund .90 .25 .55 1.70***
SmallCap Fund .85 .25 .55 1.65***
Tax-Exempt Bond Fund
Tax-Exempt Cash Management Fund None *
Utilities Fund *
<FN>
* After waiver.
** Annualized
*** Estimated expenses.
</FN>
</TABLE>
<TABLE>
<CAPTION>
TABLE B CLASS B SHARES
Annual Fund Operating Expenses
(as a percentage of average net assets)
---------------------------------------------------------------------
Management 12b-1 Other Total Operating
Fund Fee Fee Expenses Expenses
---- ---------- ----- -------- ---------------
<S> <C> <C> <C> <C>
Balanced Fund % % % %
Blue Chip Fund
Bond Fund *
Capital Value Fund
Cash Management Fund *
Government Securities Income Fund
Growth Fund
High Yield Fund
International Emerging Markets Fund **
International Fund
International SmallCap Fund **
Limited Term Bond Fund *
MidCap Fund
Real Estate Fund .90 .90 .55 2.35***
SmallCap Fund .85 .90 .55 2.30***
Tax-Exempt Bond Fund
Utilities Fund *
<FN>
* After waiver.
** Annualized
*** Estimated expenses.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Example A
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of
each time period:
1 Year 3 Years 5 Years 10 Years(a)
--------------- ----------------- ----------------- ----------------
Class A Class B Class A Class B Class A Class B Class A Class B
Fund Shares Shares Shares Shares Shares Shares Shares Shares
---- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balanced Fund $ $ $ $ $ $ $ $
Blue Chip Fund $ $ $ $ $ $ $ $
Bond Fund $ $ $ $ $ $ $ $
Capital Value Fund $ $ $ $ $ $ $ $
Cash Management Fund $ $ $ $ $ $ $ $
Government Securities Income Fund $ $ $ $ $ $ $ $
Growth Fund $ $ $ $ $ $ $ $
High Yield Fund $ $ $ $ $ $ $ $
International Emerging Markets Fund $ $ $ $ N/A N/A N/A N/A
International Fund $ $ $ $ $ $ $ $
International SmallCap Fund $ $ $ $ N/A N/A N/A N/A
Limited Term Bond Fund $ $ $ $ $ $ $
MidCap Fund $ $ $ $ $ $ $ $
Real Estate Fund $64 $65 $99 $106 N/A N/A N/A N/A
SmallCap Fund $63 $64 $97 $104 N/A N/A N/A N/A
Tax-Exempt Bond Fund $ $ $ $ $ $ $ $
Tax-Exempt Cash Management Fund $ $ $ $ $ $ $ $
Utilities Fund $ $ $ $ $ $ $ $
</TABLE>
<TABLE>
<CAPTION>
Example B
You would pay the following expenses on the same investment, assuming no
redemption:
1 Year 3 Years 5 Years 10 Years(a)
--------------- ----------------- ----------------- ----------------
Class A Class B Class A Class B Class A Class B Class A Class B
Fund Shares Shares Shares Shares Shares Shares Shares Shares
---- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balanced Fund$ $ $ $ $ $ $ $
Blue Chip Fund $ $ $ $ $ $ $ $
Bond Fund $ $ $ $ $ $ $ $
Capital Value Fund $ $ $ $ $ $ $ $
Cash Management Fund $ $ $ $ $ $ $ $
Government Securities Income Fund $ $ $ $ $ $ $ $
Growth Fund $ $ $ $ $ $ $ $
High Yield Fund $ $ $ $ $ $ $ $
International Emerging Markets Fund $ $ $ $ N/A N/A N/A N/A
International Fund $ $ $ $ $ $ $ $
International SmallCap Fund $ $ $ $ N/A N/A N/A N/A
Limited Term Bond Fund $ $ $ $ $ $ $ $
MidCap Fund $ $ $ $ $ $ $ $
Real Estate Fund $64 $24 $99 $73 N/A N/A N/A N/A
SmallCap Fund $63 $23 $97 $72 N/A N/A N/A N/A
Tax-Exempt Bond Fund $ $ $ $ $ $ $ $
Tax-Exempt Cash Management Fund $ $ $ $ $ $ $ $
Utilities Fund $ $ $ $ $ $ $ $
<FN>
(a) The amount in this column reflects the conversion of Class B shares to
Class A shares seven years after the initial purchase.
</FN>
</TABLE>
The purpose of these tables is to help you understand the expenses of the
Principal mutual funds. The Fund's Annual Fund Operating Expenses shown in Table
A for Class A shares are generally based on each Fund's actual expenses.
However, each of the Funds, except Money Market - Class A shares, have adopted a
12b-1 Plan. These Plans permit Princor Financial Services Corporation
("Princor") as underwriter of the Funds to collect an annual fee of up to .25%
of each Fund's average net assets. A portion of this annual fee is considered an
asset-based sales charge. It may then be possible that a long-term shareholder
of Class A shares may pay more than the maximum front-end sales charge permitted
by the National Association of Securities Dealers. See "Distribution and
Shareholder Servicing Plan and Fees", "How to Purchase Shares" and "How the
Funds are Managed."
For the fiscal year ended October 31, 1997, the Manager waived a portion of its
fees as shown below:
Total operating expenses
Before waiver After waiver
------------------------ ----------------
Fund Class A Class B Class A Class B
---- ------- ------- ------- -------
Bond Fund % %
Cash Management Fund % %
Limited Term Bond Fund % %
Tax-Exempt Cash Management Fund % N/A
Utilities Fund % %
What the Principal Funds Offer You
Your financial objectives may be investing for retirement or a child's
education, accumulating a vacation fund or generating current income. Your
purchase of Principal Funds may help you achieve your financial goals. The Funds
offer a choice of investment risks allowing you to choose different options
based on your willingness to assume risk. The Funds offer:
Professional Investment Management: Principal Management Corporation
(formerly known as Princor Management Corporation) is the Manager for each of
the Funds. The Manager employs experienced securities analysts to provide you
with professional investment management. The Manager decides how and where to
invest Fund assets. Investment decisions are based on research into the
financial performance of individual companies and specific securities issues,
taking into account general economic and market trends. See "How the Funds are
Managed."
Diversification: Principal Funds allow you to diversify your assets across
dozens of securities issued by a number of issuers. In addition, you may further
diversify by investing in several of the Funds. Diversification reduces
investment risk.
Economies of Scale: Pooling individual shareholders' money creates
administrative efficiencies and, in certain Funds, saves on brokerage
commissions through round-lot orders and quantity discounts. By pooling money
with other investors, you can invest indirectly in many more securities than you
could on your own.
Liquidity: Upon request, each Fund will redeem all or part of your shares
and promptly pay the current net asset value of the shares redeemed, less any
applicable contingent deferred sales charge. See "How to Sell Shares."
Dividends: Each Fund will normally declare a dividend payable to
shareholders from investment income in accordance with its distribution policy.
Dividends payable for Class B shares will be lower than dividends payable for
Class A shares. See "Distribution of Income Dividends and Realized Capital
Gains."
Convenient Investment and Recordkeeping Services: Generally, shareholders
of any of the Funds (except the Money Market Funds) will receive a statement of
account each time there is a transaction that effects the account. Shareholders
of the Money Market Funds will receive a monthly statement of account. However,
certain shareholders will receive quarterly statements in lieu of other
statements. See "General Information About a Fund Account." In addition,
shareholders may complete certain transactions and access account information by
telephoning 1-800-247-4123.
Investment Objectives of the Funds
GROWTH-ORIENTED FUNDS
Domestic
--------
Fund Investment Objectives
---- ---------------------
Principal Balanced Fund, Inc. Total investment return consisting of
current income and capital appreciation
while assuming reasonable risks in
furtherance of this objective.
Principal Blue Chip Fund, Inc. Growth of capital and growth of income.
In seeking to achieve its objective, the
Fund will invest primarily in common stocks
of well-capitalized, established companies
which the Fund's Manager believes to have
the potential for growth of capital,
earnings and dividends.
Principal Capital Value Fund, Inc. Long-term capital appreciation with a
secondary objective of growth of investment
income. The Fund seeks to achieve its
objectives primarily through the purchase
of common stocks, but the Fund may
invest in other securities.
Principal Growth Fund, Inc. Growth of capital. The Fund seeks to
achieve its objective through the
purchase primarily of common stocks, but
the Fund may invest in other securities.
Principal MidCap Fund, Inc. Long-term capital appreciation. The Fund
invests primarily in securities of emerging
and other growth-oriented companies.
Principal Real Estate Fund, Inc. Generate total return. In seeking to achieve
its objective, the Fund will primarily
invest in equity securities of companies
principally engaged in the real estate
industry.
Principal SmallCap Fund, Inc. Long-term growth of capital. The Fund seeks
to achieve its objective by investing
primarily in equity securities of companies
with comparatively smaller market
capitalizations.
Principal Utilities Fund, Inc. Current income and long-term growth of
income and capital. The Fund invests
primarily in equity and fixed-income
securities of companies engaged in the
public utilities industry.
International
-------------
Fund Investment Objectives
---- ---------------------
Principal International Emerging Long-term growth of capital. The Fund will
Markets Fund, Inc. invest primarily in equity securities of
issuers in emerging market countries.
Principal International Fund, Inc. Long-term growth of capital by investing
in a portfolio of equity securities of
companies domiciled in any of the nations
of the world.
Principal International
SmallCap Fund, Inc. Long-term growth of capital. The Fund will
invest primarily in equity securities of
non-United States companies with
comparatively smaller market
capitalizations.
INCOME-ORIENTED FUNDS
Fund Investment Objectives
---- ---------------------
Principal Bond Fund, Inc. As high a level of income as is consistent
with preservation of capital and prudent
investment risk. This Fund invests primarily
in investment-grade bonds.
Principal Government Securities A high level of current income, liquidity
Income Fund, Inc. and safety of principal. The Fund seeks to
achieve its objective through the purchase
of obligations issued or guaranteed by the
United States Government or its agencies,
with emphasis on Government National
Mortgage Association Certificates ("GNMA
Certificates"). Fund shares are not
guaranteed by the United States
Government.
Principal High Yield Fund, Inc. High current income.Capital growth is a
secondary objective when consistent with
the objective of high current-income.
The Fund will invest primarily in high
yielding, lower or non-rated fixed-income
securities (commonly known as "junk bonds").
Principal Limited Term Bond A high level of current income consistent
Fund, Inc. with a relatively high level of principal
stability by investing in a portfolio of
securities with a dollar weighted average
maturity of five years or less.
Principal Tax-Exempt Bond As high a level of current interest income
Fund, Inc. exempt from federal income tax as is
consistent with preservation of capital.
This Fund invests primarily in investment-
grade, tax-exempt, fixed-income obligations.
MONEY MARKET FUNDS
Fund Investment Objectives
---- ---------------------
Principal Cash Management As high a level of current income available
Fund, Inc. from short-term securities as is considered
consistent with preservation of principal
and maintenance of liquidity. The Fund
invests in money market instruments.
Principal Tax-Exempt Cash As high a level of current interest income
Management Fund, Inc. exempt from federal income tax as is
consistent with stability of principal
and the maintenance of liquidity. The
Fund invests in high-quality, short-term
municipal obligations.
There can be no assurance that the investment objectives of any of the
Funds will be realized. See "Investment Objectives, Policies and Restrictions."
The Risks of Investing
Because the Funds have different investment objectives, each Fund is
subject to varying degrees of financial and market risks and current income
volatility. Financial risk refers to the earnings stability and overall
financial soundness of an issuer of an equity security and to the ability of an
issuer of a debt security to pay interest and principal when due. Market risk
refers to the degree to which the price of a security reacts to changes in
conditions in securities markets in general and, with particular reference to
debt securities, to changes in the overall level of interest rates. Current
income volatility refers to the degree and rapidity which changes in the overall
level of interest rates are reflected in the level of current income of a Fund.
See "Risk Factors" and "Investment Objectives, Policies and Restrictions."
How to Buy Shares
You can become a shareholder by completing the application that accompanies
this Prospectus. Mail it, along with a check, to Princor. The initial investment
for the Funds must be at least $1,000 ($250 for an account established under the
Uniform Gifts to Minors Act or Uniform Transfers Act). An IRA may be established
with a minimum of $250. See "Retirement Plans." The minimum subsequent
investment is $100. Lower minimum initial and subsequent purchase amounts are
available to you if you make regular periodic investments under an Automatic
Investment Plan. Minimum investment amounts do not apply to certain Money Market
Fund accounts. See "How to Purchase Shares." Class B shares of the Cash
Management Fund may only be purchased by an exchange from other Class B shares.
See "How to Exchange Shares."
Each Fund, except Tax-Exempt Bond Fund and Tax-Exempt Cash Management Fund,
offers three classes of shares through Princor and other dealers which it
selects. Tax-Exempt Bond Fund offers Class A and Class B shares. Tax-Exempt Cash
Management Fund offers only Class A shares. Only two classes of shares are
offered through this Prospectus, Class A shares and Class B shares. The two
classes of shares bear sales charges in different forms and amounts and bear
different expense levels.
Class A shares. When you buy less than $1 million of Class A shares of any
of the Principal Funds (except the Money Market Funds), you pay a sales charge
at the time of purchase. The sales charge ranges from a high of 4.75% (1.50% for
Limited Term Bond Fund) on purchases of up to $50,000 to a low of 0% on
purchases of $1 million or more. Purchases of $1 million or more are subject to
a .75% (.25% of the Limited Term Bond Fund) contingent deferred sales charge on
redemptions within 18 months from the date of purchase. Certain purchases of
Class A shares qualify for reduced sales charges. See "How to Purchase Shares"
and "Offering Price of Funds' Shares." Class A shares for each of the Funds
(except the Money Market Funds) currently bear a 12b-1 fee at the annual rate of
up to 0.25% (.15% for the Limited Term Bond Fund) of the Fund's average net
assets attributable to Class A shares. See "Distribution and Shareholder
Servicing Plans and Fees."
Class A shares of the Money Market Funds are sold without a sales charge at
the net asset value next determined after receipt of an order. Under most
circumstances, the net asset value will remain constant at $1.00 per share;
however, there can be no assurance that the net asset value will not change.
Class B shares. Class B shares for each Fund are sold without an initial
sales charge, but are subject to a declining contingent deferred sales charge
which begins at 4% (1.25% for the Limited Term Bond Fund) and declines to zero
over a six-year schedule. Class B shares of the Cash Management Fund may be
purchased only by exchange from other Class B shares. Class B shares bear a
higher 12b-1 fee than Class A shares, currently at the annual rate of 1.00%
(.50% for the Limited Term Bond Fund) of the Fund's average net assets
attributable to Class B shares. Class B shares will automatically convert into
Class A shares, based on relative net asset value, approximately seven years
after purchase. Class B shares provide you the benefit of putting all your
dollars to work from the time the investment is made, but (until conversion)
will have a higher expense ratio and pay lower dividends than Class A shares due
to the higher 12b-1 fee. See "How to Purchase Shares" and "Offering Price of
Funds' Shares."
How to Exchange Shares
Shares of Principal Funds may be exchanged for shares of the same Class of
other Principal Funds without a sales charge or administrative fee under certain
conditions as described under "How to Exchange Shares." In addition, Class A
shares of the Money Market Funds acquired by direct purchase or reinvestment of
dividends on such shares may be exchanged for Class B shares of any
Growth-Oriented or Income-Oriented Fund. Shares may be exchanged by telephone or
written request. An exchange is a sale for tax purposes. Also, dividends and
capital gains distributions from shares of a Class of one Principal Fund may be
automatically "cross-reinvested" in shares of the same Class of another
Principal Fund. See "Distribution of Income Dividends and Realized Capital
Gains."
How to Sell Shares
You may sell (redeem) shares by mail or by telephone. Redemption proceeds
will generally be mailed to you on the next business day after the redemption
request is received in good order. Upon proper authorization certain redemptions
may be processed through a selected dealer. Automatic redemptions of a specified
amount may also be made through a Periodic Withdrawal Plan. In addition, Class A
shares of the Money Market Funds may be redeemed by writing a check against the
account balance or by establishing a preauthorized withdrawal service on the
account. Redemptions of Class A shares are generally made at net asset value
without charge. However, Class A share purchases of $1 million or more may be
subject to a .75% (.25% for the Limited Term Bond Fund) contingent deferred
sales charge if redeemed within 18 months of purchase. Redemptions of Class B
shares within six years of purchase will generally be subject to a contingent
deferred sales charge. See "Offering Price of Funds' Shares" and "How to Sell
Shares." If redemption proceeds are wired to a financial institution, a six
dollar ($6) wire fee will be charged.
FINANCIAL HIGHLIGHTS
The tables that follow are based on information included in the Funds'
annual financial statements which have been audited by Ernst & Young, LLP,
independent auditors. Their report on the financial statements and financial
highlights are incorporated by reference (legally made as part of) into this
prospectus. A free copy of the financial statements may be obtained by calling
1-800-451-5447.
This page left blank intentionally.
<PAGE>
<TABLE>
<CAPTION>
GROWTH-ORIENTED FUNDS
Selected data for a share of Capital Stock outstanding throughout each period:
Income from Investment Operations Less Distributions
Net Realized
and
Net Asset Net Unrealized Total Dividends Net Asset
Value at Invest- Gain from from Net Distributions Value at
Beginning ment (Loss) on Investment Investment from Total End
of Period Income Investments Operations Income Capital Gains Distributions of Period
Princor Balanced Fund, Inc.(b)
Class A
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended October 31,
1996 $13.74 $.38 $1.59 $1.97 $(.43) $(.67) $(1.10) $14.61
1995 12.43 .41 1.31 1.72 (.36) (.05) (.41) 13.74
1994 13.26 .32 (.20) .12 (.40) (.55) (.95) 12.43
1993 12.78 .35 1.14 1.49 (.37) (.64) (1.01) 13.26
1992 11.81 .41 .98 1.39 (.42) _ (.42) 12.78
1991 9.24 .46 2.61 3.07 (.50) _ (.50) 11.81
1990 11.54 .53 (1.70) (1.17) (.59) (.54) (1.13) 9.24
1989 11.09 .61 .56 1.17 (.56) (.16) (.72) 11.54
Period Ended October 31, 1988 (c) 9.96 .40 1.02 1.42 (.29) _ (.29) 11.09
Class B
Year Ended October 31, 1996 13.71 .29 1.55 1.84 (.32) (.67) (.99) 14.56
Period Ended October 31, 1995 (f) 11.80 .31 1.90 2.21 (.30) _ (.30) 13.71
Princor Blue Chip Fund, Inc.
Class A
Year Ended October 31,
1996 15.03 .23 2.45 2.68 (.26) (.35) (.61) 17.10
1995 12.45 .24 2.55 2.79 (.21) _ (.21) 15.03
1994 11.94 .20 .57 .77 (.26) _ (.26) 12.45
1993 11.51 .21 .43 .64 (.18) (.03) (.21) 11.94
1992 10.61 .17 .88 1.05 (.15) _ (.15) 11.51
Period Ended October 31, 1991(g) 10.02 .10 .57 .67 (.08) _ (.08) 10.61
Class B
Year Ended October 31, 1996 14.99 .11 2.41 2.52 (.13) (.35) (.48) 17.03
Period Ended October 31, 1995 (f) 11.89 .15 3.10 3.25 (.15) _ (.15) 14.99
Princor Capital Accumulation
Fund, Inc.
Class A
Year Ended October 31,
1996 23.69 .45 5.48 5.93 (.43) (1.47) (1.90) 27.72
1995 20.83 .45 3.15 3.60 (.39) (.35) (.74) 23.69
1994 21.41 .39 .93 1.32 (.41) (1.49) (1.90) 20.83
1993 21.34 .43 1.67 2.10 (.43) (1.60) (2.03) 21.41
1992 19.53 .45 1.82 2.27 (.46) _ (.46) 21.34
1991 14.31 .49 5.24 5.73 (.51) _ (.51) 19.53
1990 18.16 .52 (3.64) (3.12) (.40) (.33) (.73) 14.31
Four Months Ended October 31, 1989 (h) 19.11 .18 (.06) .12 (.29) (.78) (1.07) 18.16
Year Ended June 30,
1989 18.82 .53 1.10 1.63 (.51) (.83) (1.34) 19.11
1988 21.66 .44 (1.06) (.62) (.41) (1.81) (2.22) 18.82
1987 20.47 .31 3.33 3.64 (.30) (2.15) (2.45) 21.66
Class B
Year Ended October 31, 1996 23.61 .21 5.45 5.66 (.22) (1.47) (1.69) 27.58
Period Ended October 31, 1995 (f) 19.12 .33 4.46 4.79 (.30) _ (.30) 23.61
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ratios / Supplemental Data
-------------------------------------------------------------------------
Ratio of Net
Ratio of Investment
Net Assets at Expenses to Income to Portfolio Average
Total End of Period Average Average Turnover Commission
Return (a) (in thousands) Net Assets Net Assets Rate Rate Paid
Princor Balanced Fund, Inc.(b)
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1996 15.10% $ 70,820 1.28% 2.82% 32.6% $.0421
1995 14.18% 57,125 1.37% 3.21% 35.8% N/A
1994 .94% 53,366 1.51% 2.70% 14.4% N/A
1993 12.24% 39,952 1.35% 2.78% 27.5% N/A
1992 11.86% 31,339 1.29% 3.39% 30.6% N/A
1991 34.09% 23,372 1.30% 4.25% 23.6% N/A
1990 (11.28)% 18,122 1.32% 5.22% 33.7% N/A
1989 11.03% 20,144 1.25% 5.45% 30.2% N/A
Period Ended October 31, 1988 (c) 12.42%(d) 16,282 1.12%(e) 4.51%(e) 65.2%(e) N/A
Class B
Year Ended October 31, 1996 14.10% 5,964 2.13% 1.93% 32.6% .0421
Period Ended October 31, 1995 (f) 18.72%(d) 1,263 1.91%(e) 2.53%(e) 35.8%(e) N/A
Princor Blue Chip Fund, Inc.
Class A
Year Ended October 31,
1996 18.20% 44,389 1.33% 1.41% 13.3% .0456
1995 22.65% 35,212 1.38% 1.83% 26.1% N/A
1994 6.58% 27,246 1.46% 1.72% 5.5% N/A
1993 5.65% 23,759 1.25% 1.87% 11.2% N/A
1992 9.92% 19,926 1.56% 1.49% 13.5% N/A
Period Ended October 31, 1991(g) 6.37%(d) 12,670 1.71%(e) 1.67%(e) 0.4%(e) N/A
Class B
Year Ended October 31, 1996 17.18% 6,527 2.19% .49% 13.3% .0456
Period Ended October 31, 1995 (f) 26.20%(d) 1,732 1.90%(e) .97%(e) 26.1%(e) N/A
Princor Capital Accumulation
Fund, Inc.
Class A
Year Ended October 31,
1996 26.41% 435,617 .69% 1.82% 50.2% .0421
1995 17.94% 339,656 .75% 2.08% 46.0% N/A
1994 6.67% 285,965 .83% 2.02% 31.7% N/A
1993 10.42% 240,016 .82% 2.16% 24.8% N/A
1992 11.67% 190,301 .93% 2.17% 38.3% N/A
1991 40.63% 152,814 .99% 2.72% 19.7% N/A
1990 (17.82)% 109,507 1.10% 3.10% 27.7% N/A
Four Months Ended October 31, 1989 (h) .44%(d) 122,685 1.10%(e) 2.87%(e) 19.7%(e) N/A
Year Ended June 30,
1989 9.53% 117,473 1.00% 3.04% 28.1% N/A
1988 (2.30)% 97,147 .96% 2.40% 27.9% N/A
1987 20.93% 93,545 .98% 1.73% 20.0% N/A
Class B
Year Ended October 31, 1996 25.19% 9,832 1.70% .80% 50.2% .0421
Period Ended October 31, 1995 (f) 25.06%(d) 2,248 1.50%(e) 1.07%(e) 46.0%(e) N/A
<FN>
Notes to financial highlights
(a) Total Return is calculated without the front-end sales charge or contingent
deferred sales charge.
(b) Effective December 5, 1994, the name of Princor Managed Fund, Inc. was
changed to Princor Balanced Fund, Inc.
(c) Period from December 18, 1987, date shares first offered to public, through
October 31, 1988. Net investment income, aggregating $.08 per share for the
period from the initial purchase of shares on October 30, 1987 through
December 17, 1987, was recognized, none of which was distributed to its
sole stockholder, Principal Mutual Life Insurance Company, during the
period. Additionally, the Fund incurred net realized and unrealized losses
on investments of $.12 per share during this initial interim period. This
represented activities of the fund prior to the initial public offering of
fund shares.
(d) Total Return amounts have not been annualized.
(e) Computed on an annualized basis.
(f) Period from December 9,1994, date Class B shares first offered to the
public, through October 31, 1995. The Growth Funds Class B shares
recognized no net investment income for the period from the initial
purchase of Class B shares on December 5, 1994 through December 8, 1994.
The Growth Funds Class B shares incurred unrealized loss during the initial
interim period as follows. This represented Class B share activities of
each fund prior to the initial public offering of Class B shares: Per Share
Fund
Princor Balanced Fund, Inc. (0.19)
Princor Blue Chip Fund, Inc. (0.15)
Princor Capital Accumulation
Fund, Inc. (0.46)
(g) Period from March 1, 1991, date shares first offered to public, through
October 31, 1991. Net investment income, aggregating $.01 per share for the
period from the initial purchase of shares on February 11, 1991 through
February 28, 1991, was recognized, none of which was distributed to its
sole stockholder, Principal Mutual Life Insurance Company, during the
period. Additionally, the Fund incurred unrealized gains on investments of
$.01 per share during this initial interim period. This represented
activities of the fund prior to the initial public offering of fund shares.
(h) Effective July 1, 1989, the fund changed its fiscal year-end from June 30
to October 3l.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GROWTH-ORIENTED FUNDS
Selected data for a share of Capital Stock outstanding throughout each period:
Income from Investment Operations Less Distributions
Net Realized
and
Net Asset Net Unrealized Total Dividends Net Asset
Value at Invest- Gain from from Net Distributions Value at
Beginning ment (Loss) on Investment Investment from Total End
of Period Income Investments Operations Income Capital Gains Distributions of Period
Princor Emerging Growth Fund, Inc.
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $31.45 $.14 $5.05 $5.19 $(.14) $(.75) $(.89) $35.75
1995 25.08 .12 6.45 6.57 (.06) (.14) (.20) 31.45
1994 23.56 _ 1.61 1.61 _ (.09) (.09) 25.08
1993 19.79 .06 3.82 3.88 (.11) _ (.11) 23.56
1992 18.33 .14 1.92 2.06 (.15) (.45) (.60) 19.79
1991 11.35 .17 7.06 7.23 (.21) (.04) (.25) 18.33
1990 14.10 .31 (2.59) (2.28) (.37) (.10) (.47) 11.35
1989 12.77 .26 2.02 2.28 (.15) (.80) (.95) 14.10
Period Ended October 31, 1988 (b) 10.50 .06 2.26 2.32 (.05) _ (.05) 12.77
Class B
Year Ended October 31, 1996 31.31 (.04) 4.97 4.93 (.01) (.75) (.76) 35.48
Period Ended October 31,1995 (e) 23.15 _ 8.18 8.18 (.02) _ (.02) 31.31
Princor Growth Fund, Inc.
Class A
Year Ended October 31,
1996 37.22 .35 3.50 3.85 (.35) (1.18) (1.53) 39.54
1995 31.14 .35 6.67 7.02 (.31) (.63) (.94) 37.22
1994 30.41 .26 2.56 2.82 (.28) (1.81) (2.09) 31.14
1993 28.63 .40 2.36 2.76 (.42) (.56) (.98) 30.41
1992 25.92 .39 3.32 3.71 (.40) (.60) (1.00) 28.63
1991 16.57 .41 9.32 9.73 (.38) _ (.38) 25.92
1990 19.35 .35 (1.99) (1.64) (.34) (.80) (1.14) 16.57
Four Months Ended October 31, 1989(f) 18.35 .08 1.17 1.25 (.16) (.09) (.25) 19.35
Year Ended June 30,
1989 19.84 .32 .36 .68 (.29) (1.88) (2.17) 18.35
1988 23.27 .26 (2.08) (1.82) (.22) (1.39) (1.61) 19.84
1987 21.85 .21 3.72 3.93 (.27) (2.24) (2.51) 23.27
Class B
Year Ended October 31, 1996 37.10 .08 3.48 3.56 (.05) (1.18) (1.23) 39.43
Period Ended October 31, 1995 (e) 28.33 .21 8.76 8.97 (.20) _ (.20) 37.10
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ratios / Supplemental Data
-------------------------------------------------------------------------
Ratio of Net
Ratio of Investment
Net Assets at Expenses to Income to Portfolio Average
Total End of Period Average Average Turnover Commission
Return (a) (in thousands) Net Assets Net Assets Rate Rate Paid
Princor Emerging Growth Fund, Inc.
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1996 16.89% $229,465 1.32% .46% 12.3% $.0391
1995 26.41% 150,611 1.47% .47% 13.5% N/A
1994 6.86% 92,965 1.74% .02% 8.1% N/A
1993 19.66% 48,668 1.66% .26% 7.0% N/A
1992 11.63% 29,055 1.74% .80% 5.8% N/A
1991 64.56% 17,174 1.78% 1.14% 8.4% N/A
1990 (16.80)% 8,959 1.94% 2.43% 15.8% N/A
1989 19.65% 8,946 1.79% 2.09% 13.5% N/A
Period Ended October 31, 1988 (b) 19.72%(c) 6,076 1.52%(d) .84%(d) 19.5%(d) N/A
Class B
Year Ended October 31, 1996 16.07% 28,480 2.01% (.24)% 12.3% .0391
Period Ended October 31,1995 (e) 35.65%(c) 8,997 2.04%(d) (.17)%(d) 13.5%(d) N/A
Princor Growth Fund, Inc.
Class A
Year Ended October 31,
1996 10.60% 228,361 1.08% 0.95% 1.8% .0443
1995 23.29% 174,328 1.16% 1.12% 12.2% N/A
1994 9.82% 116,363 1.30% .95% 13.6% N/A
1993 9.83% 80,051 1.26% 1.40% 16.4% N/A
1992 14.76% 63,405 1.19% 1.46% 15.6% N/A
1991 59.30% 45,892 1.13% 1.85% 10.6% N/A
1990 (9.20)% 28,917 1.18% 1.88% 9.7% N/A
Four Months Ended October 31, 1989(f) 6.83%(c) 32,828 1.22%(d) 1.25%(d) 50.1%(d) N/A
Year Ended June 30,
1989 4.38% 31,770 1.08% 1.78% 9.7% N/A
1988 (7.19)% 34,316 1.00% 1.29% 24.9% N/A
1987 20.94% 37,006 1.01% 1.07% 4.0% N/A
Class B
Year Ended October 31, 1996 9.80% 24,019 1.79% .22% 1.8% .0443
Period Ended October 31, 1995 (e) 31.48%(c) 8,279 1.80%(d) .31%(d) 12.2%(d) N/A
<FN>
Notes to financial highlights
(a) Total Return is calculated without the front-end sales charge or the
contingent deferred sales charge.
(b) Period from December 18, 1987, date shares first offered to public, through
October 31, 1988. Net investment income, aggregating $.04 per share for the
period from the initial purchase of shares on October 30, 1987 through
December 17, 1987, was recognized, none of which was distributed to its
sole stockholder, Principal Mutual Life Insurance Company, during the
period. Additionally, the Fund incurred net realized and unrealized gains
on investments of $.46 per share during this initial interim period. This
represented activities of the fund prior to the initial public offering of
fund shares.
(c) Total Return amounts have not been annualized.
(d) Computed on an annualized basis.
(e) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995. The Growth Funds Class B shares
recognized no net investment income for the period from the initial
purchase of Class B shares on December 5, 1994 through December 8, 1994.
The Growth Funds Class B shares incurred unrealized loss during the initial
interim period as follows. This represented Class B share activities of
each fund prior to the initial public offering of Class B shares:
Fund
Princor Emerging Growth Fund, Inc. (0.77)
Princor Growth Fund, Inc. (0.86)
(f) Effective July 1, 1989, the fund changed its fiscal year-end from June 30
to October 3l.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GROWTH-ORIENTED FUNDS
Selected data for a share of Capital Stock outstanding throughout each period:
Income from Investment Operations Less Distributions
Net Realized
and
Net Asset Net Unrealized Total Dividends Net Asset
Value at Invest- Gain from from Net Distributions Value at
Beginning ment (Loss) on Investment Investment from Total End
of Period Income Investments Operations Income Capital Gains Distributions of Period
Princor Utilities Fund, Inc.
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $10.94 $.44 (b) $.45 $.89 $(.43) $ _ $(.43) $11.40
1995 9.25 .48 (b) 1.70 2.18 (.49) _ (.49) 10.94
1994 11.45 .46 (b) (2.19) (1.73) (.45) (.02) (.47) 9.25
Period Ended October 31, 1993 (d) 10.18 .35 (b) 1.27 1.62 (.35) _ (.35) 11.45
Class B
Year Ended October 31, 1996 10.93 .36 (b) 0.43 0.79 (.34) _ (.34) 11.38
Period Ended October 31, 1995 (f) 9.20 .40 (b) 1.77 2.17 (.44) _ (.44) 10.93
Princor World Fund, Inc.
Class A
Year Ended October 31,
1996 7.28 .10 1.17 1.27 (.08) (.33) (.41) 8.14
1995 7.44 .08 (.02) .06 (.03) (.19) (.22) 7.28
1994 6.85 .01 .64 .65 (.02) (.04) (.06) 7.44
1993 5.02 .03 1.98 2.01 (.05) (.13) (.18) 6.85
1992 5.24 .06 (.14) (.08) (.06) (.08) (.14) 5.02
1991 4.64 .05 .58 .63 (.03) _ (.03) 5.24
1990 4.66 .09 (.04) .05 (.07) _ (.07) 4.64
Ten Months Ended October 31, 1989(g) 4.58 .07 .07 .14 (.06) _ (.06) 4.66
Year Ended December 31,
1988 (h) 3.88 .12 .67 .79 (.09) _ (.09) 4.58
1987 (h) 8.55 .12 (.96) (.84) (.08) (3.75) (3.83) 3.88
1986 (h) 7.32 .45 2.17 2.62 (.44) (.95) (1.39) 8.55
Class B
Year Ended October 31, 1996 7.24 .03 1.15 1.18 (.02) (.33) (.35) 8.07
Period Ended October 31, 1995 (f) 6.71 .05 .51 .56 (.03) _ (.03) 7.24
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ratios / Supplemental Data
-------------------------------------------------------------------------
Ratio of Net
Ratio of Investment
Net Assets at Expenses to Income to Portfolio Average
Total End of Period Average Average Turnover Commission
Return (a) (in thousands) Net Assets Net Assets Rate Rate Paid
Princor Utilities Fund, Inc.
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C>
1996 8.13% $ 66,322 1.17% (b) 3.85% 34.2% $.0410
1995 24.36% 65,873 1.04% (b) 4.95% 13.0% N/A
1994 (15.20)% 56,747 1.00% (b) 4.89% 13.8% N/A
Period Ended October 31, 1993 (d) 15.92%(c) 50,372 1.00% (e)(b) 4.48% (e) 4.3% (e) N/A
Class B
Year Ended October 31, 1996 7.23%(c) 5,579 1.93% 3.07% 34.2% .0410
Period Ended October 31, 1995 (f) 24.18%(c) 3,952 1.72%(b)(e) 3.84% (e) 13.0% (e) N/A
Princor World Fund, Inc.
Class A
Year Ended October 31,
1996 18.36% 172,276 1.45% 1.43% 23.8% .0197
1995 1.03% 126,554 1.63% 1.10% 35.4% N/A
1994 9.60% 115,812 1.74% .10% 13.2% N/A
1993 41.39% 63,718 1.61% .59% 19.5% N/A
1992 (1.57)% 35,048 1.69% 1.23% 19.9% N/A
1991 13.82% 26,478 1.72% 1.36% 27.6% N/A
1990 .94% 16,044 1.79% 1.89% 37.9% N/A
Ten Months Ended October 31, 1989(g) 2.98%(c) 13,928 1.55%(e) 1.82%(e) 32.4%(e) N/A
Year Ended December 31,
1988 (h) 20.25% 13,262 1.55% 1.43% 56.9% N/A
1987 (h) (10.13)% 3,943 2.09% .83% 183.0% N/A
1986 (h) 36.40% 9,846 2.17% .73% 166.0% N/A
Class B
Year Ended October 31, 1996 17.16% 15,745 2.28% .64% 23.8% .0197
Period Ended October 31, 1995 (f) 9.77%(c) 3,908 2.19%(e) .58%(e) 35.4%(e) N/A
<FN>
Notes to financial highlights
(a) Total Return is calculated without the front-end sales charge or the
contingent deferred sales charge.
(b) Without the Manager's voluntary waiver of a portion of certain of its
expenses for the periods (year except as noted) ended October 31 of the
years indicated, the following funds would have had per share expenses and
the ratios of expenses to average net assets as shown:
Per Share Ratio of Expenses
Net Invest- to Average Net Amount
Fund Year ment Income Assets Waived
Princor Utilties
Fund, Inc.
Class A 1996 .43 1.25% 54,932
1995 .46 1.30% 151,145
1994 .41 1.50% 284,836
1993(d) .32 1.54(e) 139,439
Class B 1996 .34 2.06% 6,690
1995(f) .40 1.81%(e) 1,338
(c) Total Return amounts have not been annualized.
(d) Period from December 16, 1992, date shares first offered to public, through
October 31, 1993. Net investment income, aggregating $.05 per share for the
period from the initial purchase of shares on November 16, 1992 through
December 15, 1992, was recognized, none of which was distributed to its
sole stockholder, Principal Mutual Life Insurance Company, during the
period. Additionally, the fund incurred unrealized gains on investments of
$.13 per share during the initial interim period. This represented
activities of the fund prior to the initial public offering of fund shares.
(e) Computed on an annualized basis.
(f) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995. Certain of the Growth Funds Class B
shares recognized net investment income as follows, for the period from the
initial purchase of Class B shares on December 5, 1994 through December 8,
1994, none of which was distributed to the sole shareholder, Princor
Management Corporation. Additionally, the Growth Funds Class B shares
incurred unrealized loss during the initial interim period as follows. This
represented Class B share activities of each fund prior to the initial
public offering of Class B shares:
Per Share Per Share
Net Investment Unrealized
Fund Income (Loss)
Princor Utilities Fund, Inc. .01 (0.01)
Princor World Fund, Inc. __ (0.07)
(g) Effective January 1, 1989, the fund changed its fiscal year-end from
December 31 to October 31.
(h) The investment manager of Princor World Fund, Inc. was changed on August 1,
1988 to the current manager, Princor Management Corporation. The years 1983
through 1987 are not covered by the current independent auditor's report.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INCOME-ORIENTED AND MONEY MARKET FUNDS
Selected data for a share of Capital Stock outstanding throughout each period:
Income from Investment Operations Less Distributions
Net Realized
and
Net Asset Net Unrealized Total Dividends Net Asset
Value at Invest- Gain from from Net Distributions Value at
Beginning ment (Loss) on Investment Investment from Total End
of Period Income Investments Operations Income Capital Gains Distributions of Period
Princor Bond Fund, Inc.
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $11.42 $.76 (b) $(.25) $.51 $(.76) $ _ $(.76) $11.17
1995 10.27 .78 (b) 1.16 1.94 (.78) (.01) (.79) 11.42
1994 11.75 .78 (b) (1.47) (.69) (.78) (.01) (.79) 10.27
1993 10.97 .81 (b) .79 1.60 (.81) (.01) (.82) 11.75
1992 10.65 .85 (b) .32 1.17 (.85) _ (.85) 10.97
1991 9.99 .88 (b) .65 1.53 (.87) _ (.87) 10.65
1990 10.57 .86 (.55) .31 (.89) _ (.89) 9.99
1989 10.37 .87 .25 1.12 (.86) (.06) (.92) 10.57
Period Ended October 31, 1988 (c) 9.95 .80 (b) .38 1.18 (.76) _ (.76) 10.37
Class B
Year Ended October 31, 1996 11.41 .67 (b) (.25) 0.42 (.68) _ (.68) 11.15
Period Ended October 31, 1995 (f) 10.19 .63 (b) 1.19 1.82 (.60) _ (.60) 11.41
Princor Cash Management Fund, Inc.
Class A
Year Ended October 31,
1996 1.000 .049 (b) _ .049 (.049) _ (.049) 1.000
1995 1.000 .052 (b) _ .052 (.052) _ (.052) 1.000
1994 1.000 .033 (b) _ .033 (.033) _ (.033) 1.000
1993 1.000 .026 (b) _ .026 (.026) _ (.026) 1.000
1992 1.000 .036 (b) _ .036 (.036) _ (.036) 1.000
1991 1.000 .061 (b) _ .061 (.061) _ (.061) 1.000
1990 1.000 .074 (b) _ .074 (.074) _ (.074) 1.000
Four Months Ended
October 31, 1989 (g) 1.000 .027 (b) _ .027 (.027) _ (.027) 1.000
Year Ended June 30,
1989 1.000 .080 (b) _ .080 (.080) _ (.080) 1.000
1988 1.000 .060 _ .060 (.060) _ (.060) 1.000
1987 1.000 .053 _ .053 (.053) _ (.053) 1.000
Class B
Year Ended October 31, 1996 1.000 .041 (b) _ .041 (.041) _ (.041) 1.000
Period Ended October 31, 1995 (f) 1.000 .041 (b) _ .041 (.041) _ (.041) 1.000
Princor Government Securities
Income Fund, Inc.
Class A
Year Ended October 31,
1996 11.31 .70 (.05) .65 (.70) _ (.70) 11.26
1995 10.28 .71 1.02 1.73 (.70) (.70) 11.31
1994 11.79 .69 (1.40) (.71) (.68) (.12) (.80) 10.28
1993 11.44 .74 .55 1.29 (.74) (.20) (.94) 11.79
1992 11.36 .81 .12 .93 (.81) (.04) (.85) 11.44
1991 10.54 .85 .84 1.69 (.87) _ (.87) 11.36
1990 10.76 .85 (.22) .63 (.85) _ (.85) 10.54
Four Months Ended October 31, 1989(g) 10.66 .29 .09 .38 (.28) _ (.28) 10.76
Year Ended June 30,
1989 10.33 .87 .32 1.19 (.86) _ (.86) 10.66
1988 10.40 .89 (.05) .84 (.88) (.03) (.91) 10.33
1987 10.82 .86 (.13) .73 (.87) (.28) (1.15) 10.40
Class B
Year Ended October 31, 1996 11.29 .61 (.05) .56 (.62) _ (.62) 11.23
Period Ended October 31, 1995(f) 10.20 .56 1.07 1.63 (.54) _ (.54) 11.29
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ratios / Supplemental Data
-------------------------------------------------------------------------
Ratio of Net
Ratio of Investment
Net Assets at Expenses to Income to Portfolio
Total End of Period Average Average Turnover
Return (a) (in thousands) Net Assets Net Assets Rate
Princor Bond Fund, Inc.
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C>
1996 4.74% $113,437 .95% (b) 6.85% 3.4%
1995 19.73% 106,962 .94% (b) 7.26% 5.1%
1994 (6.01)% 88,801 .95% (b) 7.27% 8.9%
1993 15.22% 85,015 .92% (b) 7.19% 9.3%
1992 11.45% 62,534 .88% (b) 7.95% 8.4%
1991 16.04% 37,825 .80% (b) 8.66% .9%
1990 3.08% 22,719 1.22% 8.40% 3.6%
1989 11.54% 13,314 1.24% 8.59% 0.0%
Period Ended October 31, 1988 (c) 11.59% (d) 10,560 .70% (b)(e) 8.85%(e) 63.9%
Class B
Year Ended October 31, 1996 3.91% 7,976 1.69% (b) 6.14% 3.4%
Period Ended October 31, 1995 (f) 17.98% (d) 2,708 1.59% (b)(e) 6.30%(e) 5.1% (e)
Princor Cash Management Fund, Inc.
Class A
Year Ended October 31,
1996 5.00% 694,962 .66% (b) 4.88% N/A
1995 5.36% 623,864 .72% (b) 5.24% N/A
1994 3.40% 332,346 .70% (b) 3.27% N/A
1993 2.67% 284,739 .67% (b) 2.63% N/A
1992 3.71% 247,189 .65% (b) 3.66% N/A
1991 6.29% 262,543 .61% (b) 5.95% N/A
1990 7.65% 151,007 .93% (b) 7.36% N/A
Four Months Ended October 31, 1989 (g) 2.63% (d) 124,895 1.04% (b)(e) 7.86% (e) N/A
Year Ended June 30,
1989 8.15% 120,149 1.00% (b) 8.21% N/A
1988 6.18% 51,320 1.02% 6.06% N/A
1987 5.34% 45,015 1.02% 5.33% N/A
Class B
Year Ended October 31, 1996 4.13% 520 1.50% 4.08% N/A
Period Ended October 31, 1995 (f) 4.19% (d) 208 1.42% (b)(e) 4.50% (e) N/A
Princor Government Securities
Income Fund, Inc.
Class A
Year Ended October 31,
1996 6.06% 259,029 .81% 6.31% 25.9%
1995 17.46% 261,128 .87% 6.57% 10.1%
1994 (6.26)% 249,438 .95% 6.35% 24.8%
1993 11.80% 236,718 .93% 6.38% 52.6%
1992 8.49% 161,565 .95% 7.04% 54.3%
1991 16.78% 94,613 .98% 7.80% 14.9%
1990 6.17% 71,806 1.07% 8.15% 22.4%
Four Months Ended October 31, 1989(g) 3.63% (d) 55,702 1.07% (e) 8.18% (e) 5.2% (e)
Year Ended June 30,
1989 12.37% 56,848 .96% 8.58% _
1988 8.60% 59,884 .82% 8.65% _
1987 7.00% 65,961 .92% 7.93% 17.6%
Class B
Year Ended October 31, 1996 5.17% 11,586 1.60% 5.53% 25.9%
Period Ended October 31, 1995(f) 16.07%(d) 4,699 1.53% (e) 5.68% (e) 10.1% (e)
<FN>
Notes to financial highlights
(a) Total Return is calculated without the front-end sales charge or the
contingent deferred sales charge.
(b) Without the Manager's voluntary waiver of a portion of certain of its
expenses for the periods (year, except as noted in the financial
statements) ended October 31 of the years indicated, the following funds
would have had per share expenses and the ratios of expenses to average net
assets as shown:
<PAGE>
Per Share Ratio of Expenses
Net Invest- to Average Net Amount
Fund Year ment Income Assets Waived
Princor Bond Fund, Inc.
Class A 1996 $.76 .97% $22,536
1995 .77 1.02% 86,018
1994 .77 1.09% 120,999
1993 .79 1.07% 111,162
1992 .82 1.11% 110,868
1991 .84 1.15% 100,396
1988 (c) .76 1.12% (e) 31,187
Class B 1996 $.67 1.79% 5,874
1995 (f) .62 1.62% (e) 300
Princor Cash Management
Fund, Inc.
Class A 1996 .049 .67% 7,102
1995 .052 .78% 296,255
1994 .031 .90% 595,343
1993 .025 .84% 468,387
1992 .035 .80% 385,328
1991 .059 .79% 433,196
1990 .073 1.01% 106,841
1989** .026 1.06% (e) 101,625
1989* .079 1.11% 9,558
Class B 1996 .029 3.94% (e) 6,140
1995 (f) .041 1.63% (e) 104
* Year ended June 30, 1989
** Four months ended October 31, 1989
(c) Period from December 18, 1987, date shares first offered to public, through
October 31, 1988. Net investment income, aggregating $.10 per share for the
period from the initial purchase of shares on October 30, 1987 through
December 17, 1987, was recognized of which $.06 per share was distributed
to its sole stockholder, Principal Mutual Life Insurance Company, during
the period. Additionally, the Fund incurred net realized and unrealized
losses on investments of $.09 per share during this initial interim period.
This represented activities of the fund prior to the initial public
offering of fund shares.
(d) Total Return amounts have not been annualized.
(e) Computed on an annualized basis.
(f) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995. Certain of the Income Funds Class B
shares recognized net investment income as follows, for the period from the
initial purchase of Class B shares on December 5, 1994 through December 8,
1994, none of which was distributed to the sole shareholder, Princor
Management Corporation. Additionally, the Income Funds Class B shares
incurred unrealized loss during the initial interim period as follows. This
represented Class B share activities of each fund prior to the intitial
public offering of Class B shares:
Per Share Per Share
Net Investment Unrealized
Fund Income (Loss)
Princor Bond Fund, Inc. .01 _
Princor Government Securities
Income Fund, Inc. .01 (.02)
(g) Effective July 1, 1989, the fund changed its fiscal year-end from June 30
to October 3l.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INCOME-ORIENTED AND MONEY MARKET FUNDS
Selected data for a share of Capital Stock outstanding throughout each period:
Income from Investment Operations Less Distributions
Net Realized
and
Net Asset Net Unrealized Total Dividends Net Asset
Value at Invest- Gain from from Net Distributions Value at
Beginning ment (Loss) on Investment Investment from Total End
of Period Income Investments Operations Income Capital Gains Distributions of Period
Princor High Yield Fund, Inc.
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $ 8.06 $ .68 $ .23 $ .91 $ (.70) $ _ $ (.70) $8.27
1995 7.83 .68 .20 .88 (.65) _ (.65) 8.06
1994 8.36 .63 (.51) .12 (.65) _ (.65) 7.83
1993 8.15 .71 .21 .92 (.71) _ (.71) 8.36
1992 7.86 .79 .29 1.08 (.79) _ (.79) 8.15
1991 7.12 .88 .80 1.68 (.94) _ (.94) 7.86
1990 9.47 1.10 (2.35) (1.25) (1.09) (.01) (1.10) 7.12
1989 10.44 1.10 (.83) .27 (1.09) (.15) (1.24) 9.47
Period Ended October 31, 1988 (b) 9.97 .98 (c) .38 1.36 (.89) _ (.89) 10.44
Class B
Year Ended October 31, 1996 8.05 .60 .20 .80 (.63) _ (.63) 8.22
Period Ended October 31, 1995 (f) 7.64 .53 .38 .91 (.50) _ (.50) 8.05
Princor Limited Term Bond Fund, Inc.
Class A
Year Ended October 31, 1996 (h) 9.90 .38 (c) (.04) .34 (.35) _ (.35) 9.89
Class B
Year Ended October 31, 1996 (h) 9.90 .36 (c) (.05) .31 (.32) _ (.32) 9.89
Princor Tax-Exempt Bond Fund, Inc.
Class A
Year Ended October 31,
1996 11.98 .64 .07 .71 (.65) _ (.65) 12.04
1995 10.93 .65 1.05 1.70 (.65) _ (.65) 11.98
1994 12.62 .64 (1.54) (.90) (.63) (.16) (.79) 10.93
1993 11.62 .66 1.11 1.77 (.66) (.11) (.77) 12.62
1992 11.47 .68 .19 .87 (.69) (.03) (.72) 11.62
1991 10.82 .69 .68 1.37 (.70) (.02) (.72) 11.47
1990 11.06 .68 (.25) .43 (.67) _ (.67) 10.82
Four Months Ended
October 31, 1989(g) 11.18 .22 (.12) .10 (.22) _ (.22) 11.06
Year Ended June 30,
1989 10.40 .69 .77 1.46 (.68) _ (.68) 11.18
1988 10.51 .71 .06 .77 (.72) (.16) (.88) 10.40
1987 10.75 .72 (.11) .61 (.73) (.12) (.85) 10.51
Class B
Year Ended October 31, 1996 11.96 .55 0.06 0.61 (.55) _ (.55) 12.02
Period Ended October 31, 1995 (f) 10.56 .50 1.38 1.88 (.48) _ (.48) 11.96
Princor Tax-Exempt Cash
Management Fund, Inc.
Class A
Year Ended October 31,
1996 1.000 .029 (c) _ .029 (.029) _ (.029) 1.000
1995 1.000 .032 (c) _ .032 (.032) _ (.032) 1.000
1994 1.000 .021(c) _ .021 (.021) _ (.021) 1.000
1993 1.000 .020 (c) _ .020 (.020) _ (.020) 1.000
1992 1.000 .028 (c) _ .028 (.028) _ (.028) 1.000
1991 1.000 .043 (c) _ .043 (.043) _ (.043) 1.000
1990 1.000 .053 (c) _ .053 (.053) _ (.053) 1.000
1989 1.000 .058 (c) _ .058 (.058) _ (.058) 1.000
Period Ended October 31, 1988 (i) 1.000 .005 (c) _ .005 (.005) _ (.005) 1.000
Class B
Year Ended October 31, 1996 1.000 .021 (c) _ .021 (.021) _ (.021) 1.000
Period Ended October 31, 1995 (f) 1.000 .021 (c) _ .021 (.021) _ (.021) 1.000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ratios / Supplemental Data
-------------------------------------------------------------------------
Ratio of Net
Ratio of Investment
Net Assets at Expenses to Income to Portfolio
Total End of Period Average Average Turnover
Return (a) (in thousands) Net Assets Net Assets Rate
Princor High Yield Fund, Inc.
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C>
1996 11.88% $ 28,432 1.26% 8.49% 18.8%
1995 11.73% 23,396 1.45% 8.71% 40.3%
1994 1.45% 19,802 1.46% 7.82% 27.2%
1993 11.66% 19,154 1.35% 8.57% 23.4%
1992 14.35% 16,359 1.41% 9.69% 28.2%
1991 25.63% 13,195 1.50% 12.06% 14.2%
1990 (14.51)% 9,978 1.45% 12.99% 15.8%
1989 2.68% 12,562 1.43% 11.22% 19.9%
Period Ended October 31, 1988 (b) 14.15% (d) 10,059 .77%(c)(e) 10.55% (e) 73.2% (e)
Class B
Year Ended October 31, 1996 10.46% 2,113 2.38% 7.39% 18.8%
Period Ended October 31, 1995 (f) 12.20% (d) 633 2.10% (e) 7.78% (e) 40.3% (e)
Princor Limited Term Bond Fund, Inc.
Class A
Year Ended October 31, 1996 (h) 3.62% (d) 17,249 .89% (c)(e) 6.01% (e) 16.5% (e)
Class B
Year Ended October 31, 1996 (h) 3.32% (d) 112 1.15% (c)(e) 5.75% (e) 16.5% (e)
Princor Tax-Exempt Bond Fund, Inc.
Class A
Year Ended October 31,
1996 6.08% 187,180 .78% 5.34% 9.8%
1995 16.03% 179,715 .83% 5.67% 17.6%
1994 (7.41)% 171,425 .91% 5.49% 20.6%
1993 15.70% 177,480 .89% 5.45% 20.3%
1992 7.76% 106,661 .99% 5.96% 22.9%
1991 13.09% 62,755 1.01% 6.24% 13.1%
1990 4.06% 46,846 1.11% 6.31% 2.6%
Four Months Ended October 31, 1989(g) .90% (d) 36,877 1.24% (e) 6.18% (e) 5.1% (e)
Year Ended June 30,
1989 14.64% 31,278 1.07% 6.54% 2.1%
1988 7.76% 22,812 .95% 7.00% 11.0%
1987 5.60% 19,773 .70% 6.70% 40.8%
Class B
Year Ended October 31, 1996 5.23% 5,794 1.52% 4.59% 9.8%
Period Ended October 31, 1995 (f) 17.97% (d) 3,486 1.51% (e) 4.78% (e) 17.6% (e)
Princor Tax-Exempt Cash
Management Fund, Inc.
Class A
Year Ended October 31,
1996 2.92% 98,482 .71% (c) 2.87% N/A
1995 3.24% 99,887 .69% (c) 3.19% N/A
1994 2.11% 79,736 .67% (c) 2.08% N/A
1993 1.99% 79,223 .66% (c) 1.96% N/A
1992 2.86% 69,224 .65% (c) 2.84% N/A
1991 4.36% 71,469 .61% (c) 4.27% N/A
1990 5.40% 58,301 .71% (c) 5.26% N/A
1989 5.88% 42,639 .60% (c) 5.78% N/A
Period Ended October 31, 1988 (i) .47% (d) 6,000 .26% (c)(e) 5.24% (e) N/A
Class B
Year Ended October 31, 1996 2.13% 27 1.47% 2.11% N/A
Period Ended October 31, 1995 (f) 2.19% (d) 27 1.42% (c)(e) 2.40% (e) N/A
<FN>
Notes to financial highlights
(a) Total Return is calculated without the front-end sales charge or the
contingent deferred sales charge.
(b) Period from December 18, 1987, date shares first offered to public, through
October 31, 1988. Net investment income, aggregating $.10 per share for the
period from the initial purchase of shares on October 30, 1987 through
December 17, 1987, was recognized of which $.06 per share was distributed
to its sole stockholder, Principal Mutual Life Insurance Company, during
the period. Additionally, the Fund incurred net realized and unrealized
losses on investments of $.09 per share during this initial interim period.
This represented activities of the fund prior to the initial public
offering of Fund shares.
(c) Without the Manager's voluntary waiver of a portion of certain of its
expenses for the periods (year except as noted) ended October 31 of the
years indicated, the following funds would have had per share expenses and
the ratios of expenses to average net assets as shown:
Per Share Net Ratio of Expenses
Investment to Average Net
Fund Year Income Assets
Princor High Yield Fund, Inc. 1988(b) $.95 1.33%(e)
Princor Limited Term Bond Fund, Inc.
Class A 1996 .37 1.16%
Class B 1996 .34 1.94%(e)
Princor Tax-Exempt Cash Management Fund, Inc.
Class A 1996 .028 .77%
1995 .031 .84%
1994 .019 .85%
1993 .018 .83%
1992 .026 .82%
1991 .040 .83%
1990 .050 .96%
1989 .053 1.04%
1988(i) .004 .76%(e)
Class B 1996 (.243) 27.43%
1995(f) .018 1.89%(e)
(d) Total Return amounts have not been annualized.
(e) Computed on an annualized basis.
(f) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995. Certain of the Income Funds Class B
shares recognized net investment income as follows, for the period from the
initial purchase of Class B shares on December 5, 1994 through December 8,
1994, none of which was distributed to the sole shareholder, Princor
Management Corporation. Additionally, the Income Funds Class B shares
incurred unrealized loss during the initial interim period as follows. This
represented Class B share activities of each fund prior to the initial
public offering of Class B shares:
Per Share Per Share
Net Investment Unrealized
Fund Income (Loss)
Princor High Yield Fund, Inc. .01 (0.03)
Princor Tax-Exempt Bond Fund, Inc. _ (0.05)
(g) Effective July 1, 1989, the fund changed its fiscal year-end from June 30
to October 3l.
(h) Period from February 29, 1996, date shares first offered to the public,
through October 31, 1996. With respect to Class A shares, net investment
income, aggregating $.02 per share for the period from the initial purchase
of shares on February 13, 1996 through February 28,1996, was recognized,
none of which was distributed to its sole stockholder, Principal Mutual
Life Insurance Company during the period. Additionally, Class A shares
incurred unrealized losses on investments of $.12 per share during the
initial interim period. With respect ot Class B shares, no net investment
income was regognized for the period frominitial purchase of shares on
February 27, 1996 through February 28, 1996. Additionally, Class B shares
incurred unrealized losses on investments of $.02 per share during the
initial interim period. This represents Clas A share and Class B share
activities of the fund prior to the initial public offering of both classes
of shares.
(i) Period from September 30, 1988, date shares first offered to public,
through October 31, 1988. Net investment income, aggregating $.005 per
share, for the period from the initial purchase of shares on August 23,
1988 through September 29, 1988, was recognized and distributed to its sole
stockholder, Principal Mutual Life Insurance Company, during the period.
This represented activities of the Fund prior to the initial public
offering of Fund shares.
</FN>
</TABLE>
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The investment objectives and policies of each Fund are described below.
There can be no assurance that the objectives of the Funds will be realized.
GROWTH-ORIENTED FUNDS
The Growth-Oriented Funds have different investment objectives. They seek:
o capital appreciation through investments in equity securities of
corporations established in the United States ("U.S.") (Capital Value
Fund, Growth Fund, MidCap Fund and SmallCap Fund)
o capital appreciation primarily through investments in equity
securities of corporations located outside of the U.S. (International
Emerging Markets Fund, International Fund and International SmallCap
Fund)
o total investment return including both capital appreciation and income
through investments in equity and debt securities (Balanced Fund)
o growth of capital and growth of income primarily through investments
in common stocks of well-capitalized, established companies (Blue Chip
Fund)
o current income and long-term growth of income and capital through
investment in equity securities of real estate companies (Real Estate
Fund)
o current income and long-term growth of income and capital through
investment in equity and fixed-income securities of public utilities
companies (Utilities Fund)
The Growth-Oriented Funds may invest in the following equity securities:
common stocks; preferred stocks and debt securities that are convertible into
common stock, that carry rights or warrants to purchase common stock or that
carry rights to participate in earnings; rights or warrants to subscribe to or
purchase any of the foregoing securities; and sponsored and unsponsored American
Depository Receipts (ADRs) based on any of the foregoing securities. Unsponsored
ADRs are not created by the issuer of the underlying security, may be subject to
fees imposed by the issuing bank that, in the case of sponsored ADRs, would be
paid by the issuer of a sponsored ADR and may involve additional risks such as
reduced availability of information about the issuer of the underlying security.
The Blue Chip, Capital Value, Growth, International, International Emerging
Markets, International SmallCap, MidCap, and SmallCap Funds will seek to be
fully invested under normal conditions in equity securities. When in the opinion
of the Manager current market or economic conditions warrant, a Growth-Oriented
Fund may, for temporary defensive purposes, place all or a portion of its assets
in cash (on which the Fund would earn no income), cash equivalents, bank
certificates of deposit, bankers acceptances, repurchase agreements, commercial
paper, commercial paper master notes which are floating rate debt instruments
without a fixed maturity, United States Government securities, and preferred
stocks and debt securities, whether or not convertible into or carrying rights
for common stock. When investing for temporary defensive purposes a
Growth-Oriented Fund is not investing so as to achieve its investment objective.
A Growth-Oriented Fund may also maintain reasonable amounts in cash or
short-term debt securities for daily cash management purposes or pending
selection of particular long-term investments.
DOMESTIC
Principal Balanced Fund
The investment objective of Principal Balanced Fund is to generate a total
investment return consisting of current income and capital appreciation while
assuming reasonable risks in furtherance of the investment objective. The term
"reasonable risks" refers to investment decisions that in the Manager's judgment
do not present a greater than normal risk of loss in light of current or
anticipated future market and economic conditions, trends in yields and interest
rates, and fiscal and monetary policies.
In seeking to achieve the investment objective, the Fund invests primarily
in growth and income-oriented common stocks (including securities convertible
into common stocks), corporate bonds and debentures and short-term money market
instruments. The Fund may also invest in other equity securities and in debt
securities issued or guaranteed by the United States Government and its agencies
or instrumentalities. The Fund seeks to generate real (inflation plus) growth
during favorable investment periods and may emphasize income and capital
preservation strategies during uncertain investment periods. The Manager will
seek to minimize declines in the net asset value per share. However, there is no
guarantee that the Manager will be successful in achieving this goal.
The portions of the Fund's total assets invested in equity securities, debt
securities and short-term money market instruments are not fixed, although
ordinarily 40% to 70% of the Fund's portfolio will be invested in equity
securities with the balance of the portfolio invested in debt securities. The
investment mix will vary from time to time depending upon the judgment of the
Manager as to general market and economic conditions, trends in investment
yields and interest rates, and changes in fiscal or monetary policies. The Fund
may invest up to 20% of its assets in foreign securities. For a description of
certain investment risks associated with foreign securities, see "Risk Factors."
The Fund may invest in all types of common stocks and other equity
investments, without regard to any objective investment criteria such as size of
the issue or issuer, exchange listing or seasoning. The Fund may invest in both
exchange-listed and over-the-counter securities, in small or large companies,
and in well-established or unseasoned companies. Also, the Fund's investments in
corporate bonds and debentures and money market instruments are not restricted
by credit ratings or other objective investment criteria, except with respect to
bank certificates of deposit as set forth below. Some of the fixed income
securities in which the Fund may invest may be considered to include speculative
characteristics and the Fund may purchase such securities that are in default
but does not currently intend to invest more than 5% of its assets in securities
rated below BBB by Standard & Poor's or Baa by Moody's. The rating services'
descriptions of BBB or Baa securities are as follows: Moody's Investors Service,
Inc. Bond Ratings -- 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. Standard &
Poor's Corporation Bond Ratings -- BBB: Debt rated "BBB" is regarded as having
an adequate capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than for debt in higher-rated
categories. See the discussion of the Principal High Yield Fund for information
concerning risks associated with below-investment grade bonds. The Fund will not
concentrate its investments in any industry.
In selecting common stocks, the Manager seeks companies which the Manager
believes have predictable earnings increases and which, based on their future
growth prospects, may be currently undervalued in the market place. During
periods when the Manager determines that general economic conditions are
favorable, it will generally purchase common stocks with the objective of
long-term capital appreciation. From time to time, and in periods of economic
uncertainty, the Manager may purchase common stocks with the expectation of
price appreciation over a relatively short period of time.
To achieve its investment objective, the Fund may at times emphasize the
generation of interest income by investing in short, medium or long-term debt
securities. Investment in debt securities may also be made with a view to
realizing capital appreciation when the Manager believes that declining interest
rates may increase market values. The Fund may also purchase "deep discount
bonds," i.e., bonds which are selling at a substantial discount from their face
amount, with a view to realizing capital appreciation.
The Fund may invest in the following short-term money market investments:
U.S. Treasury bills, bank certificates of deposit, bankers' acceptances,
repurchase agreements, commercial paper and commercial paper master notes which
are floating rate debt instruments without a fixed maturity. The Fund will only
invest in domestic bank certificates of deposit issued by banks which are
members of the Federal Reserve System that have total deposits in excess of one
billion dollars.
The United States Government securities in which the Fund may invest
consist of U.S. Treasury obligations and obligations of certain agencies, such
as the Government National Mortgage Association, which are supported by the full
faith and credit of the United States, as well as obligations of certain other
Federal agencies or instrumentalities, such as the Federal National Mortgage
Association, Federal Land Banks and the Federal Farm Credit Administration,
which are backed only by the right of the issuer to borrow limited funds from
the U.S. Treasury, by the discretionary authority of the U.S. Government to
purchase such obligations or by the credit of the agency or instrumentality
itself.
Principal Blue Chip Fund
The objective of Principal Blue Chip Fund is growth of capital and growth
of income. Growth of income means increasing the Fund's investment income which
is primarily derived from dividends earned on portfolio securities. In seeking
to achieve its objective, the Fund will invest primarily in common stocks of
well capitalized, established companies which the Fund's manager believes to
have the potential for growth of capital, earnings and dividends. Under normal
market conditions, the Fund will invest at least 65%, and may invest up to 100%,
of its total assets in the common stocks of blue chip companies.
Blue chip companies are defined as those companies with market
capitalizations of at least $1 billion. Blue chip companies are generally
identified by their substantial capitalization, established history of earnings
and dividends, easy access to credit, good industry position and superior
management structure. In addition, the large market of publicly held shares for
such companies and the generally high trading volume in those shares results in
a relatively high degree of liquidity for such investments. The characteristics
of high quality and high liquidity of blue chip investments should make the
market for such stocks attractive to many investors.
Examples of blue chip companies currently eligible for investment by the
Fund include, but are not limited to, companies such as General Electric
Company, Ford Motor Company, Exxon Corporation, Merck & Company, Inc., Digital
Equipment Corporation, Capital Cities ABC, Inc., J.P. Morgan & Co. and Coca Cola
Company. In general, the Fund will seek to invest in those established, high
quality companies whose industries are experiencing favorable secular or
cyclical change.
The Fund's Manager may invest up to 35% of the Fund's total assets in
equity securities, other than common stock, issued by companies that meet the
investment criteria for blue chip companies and in equity securities issued by
companies that do not meet those criteria. The Manager does not intend to invest
regularly in speculative securities, which are those issued by new, unseasoned
companies or by companies that have limited product lines, markets, financial
resources or management, but it may from time to time invest not more than 5% of
the Fund's total assets in those kinds of securities. The Fund may invest up to
20% of its assets in securities of foreign issuers. The foreign securities in
which the Fund may invest need not be issued by companies that meet the
investment criteria for blue chip companies. For a description of certain
investment risks associated with foreign securities, see "Risk Factors."
Principal Capital Value Fund
The primary objective of Principal Capital Value Fund is long-term capital
appreciation. A secondary objective is growth of investment income.
The Fund will invest primarily in common stocks, but it may invest in other
equity securities. In making selections for the Fund's investment portfolio, the
Manager will use an approach described broadly as that of fundamental analysis,
which is discussed in the Statement of Additional Information. In pursuit of the
Fund's investment objectives, investments will be made in securities which as a
group appear to offer prospects for capital and income growth. Securities chosen
for investment may include those of companies which the Manager believes can
reasonably be expected to share in the growth of the nation's economy over the
long term.
Principal Growth Fund
The objective of Principal Growth Fund is growth of capital. Realization of
current income will be incidental to the objective of growth of capital.
The Fund will invest primarily in common stocks, but it may invest in other
equity securities. In making selections for the Fund's investment portfolio, the
Manager will use an approach described broadly as that of fundamental analysis,
which is discussed in the Statement of Additional Information. In pursuit of the
Fund's investment objective, investments will be made in securities which as a
group appear to possess potential for appreciation in market value. Common
stocks chosen for investment may include those of companies which have a record
of sales and earnings growth that exceeds the growth rate of corporate profits
of the S&P 500 or which offer new products or new services. The policy of
investing in securities which have a high potential for growth of capital can
mean that the assets of the Fund may be subject to greater risk than securities
which do not have such potential.
Principal MidCap Fund
The objective of Principal MidCap Fund is to achieve long-term capital
appreciation. The strategy of this Fund is to invest primarily in the common
stocks and securities (both debt and preferred stock) convertible into common
stocks of emerging and other growth-oriented companies that, in the judgment of
the Manager, are responsive to changes within the marketplace and have the
fundamental characteristics to support growth. In pursuing its objective of
capital appreciation, the Fund may invest, for any period of time, in any
industry and in any kind of growth-oriented company, whether new and unseasoned
or well known and established. Under normal market conditions, the Fund will
invest at least 65% of its assets in securities of companies with market
capitalizations in the $1 billion to $10 billion range. The Fund may invest up
to 20% of its assets in securities of foreign issuers. For a description of
certain investment risks associated with foreign securities, see "Risk Factors."
There can be, of course, no assurance that the Fund will attain its
objective. Investment in emerging and other growth-oriented companies may
involve greater risk than investment in other companies. The securities of
growth-oriented companies may be subject to more abrupt or erratic market
movements, and many of them may have limited product lines, markets, financial
resources or management. Because of these factors and of the length of time that
may be required for full development of the growth prospects of some of the
companies in which the Fund invests, the Fund believes that its shares are
suitable only for persons who are able to assume the risk of investing in
securities of emerging and growth-oriented companies and prepared to maintain
their investment during periods of adverse market conditions. Investors should
not rely on the Fund for their short-term financial needs. Since the Fund will
not be seeking current income, investors should not view a purchase of Fund
shares as a complete investment program.
Principal Real Estate Fund
The investment objective of Principal Real Estate Fund is to generate total
return by investing primarily in equity securities of companies principally
engaged in the real estate industry. The Fund will seek to achieve its objective
by seeking, with approximately equal emphasis, long-term capital growth and
current income through the purchase of equity securities.
Under normal circumstances the Fund will invest at least 65 percent of its
assets in the equity securities of real estate companies. Equity securities
include common stock (including shares in real estate investment trusts),
preferred stock, rights and warrants. A real estate investment trust ("REIT") is
a corporation, or a business trust which, in satisfying certain Internal Revenue
Code requirements, is permitted to effectively eliminate corporate level federal
income taxes. Qualifying REITs must, among other things, derive substantially
all of their income from real estate assets and annually distribute to
shareholders 95 percent or more of their otherwise taxable income.
REITs are characterized as equity REITs, mortgage REITs and hybrid REITs.
An equity REIT invests primarily in the fee ownership of real estate and revenue
is primarily derived from rental income. A mortgage REIT primarily invests in
real estate mortgages and hybrid REITs combine the characteristics of both an
equity REIT and a mortgage REIT.
For purposes of the Fund's investment policies, a real estate company is
one that has at least 50% of its assets, income or profits attributable to
products or services related to the real estate industry. Real estate companies
include REITs or other securitized real estate investments and companies with
substantial real estate holdings such as paper, lumber, hotel and entertainment
companies. Companies whose products and services relate to the real estate
industry include building supply manufacturers, mortgage lenders and mortgage
servicing companies. The Fund may invest up to 25% of its total assets in
securities of foreign real estate companies (see "Risk Factors").
Securities issued by real estate companies may be subject to risks similar
to those associated with the direct ownership of real estate (in addition to
securities market risks) because of its policy of concentration in the
securities of companies in the real estate industry. These include declines in
the value of real estate, risks related to general and local economic
conditions, dependency on management skills, heavy cash flow dependency,
possible lack of availability of mortgage funds, overbuilding, extended
vacancies in properties, increases in property taxes and operating expenses,
changes in zoning laws, losses due to costs resulting from the cleanup of
environmental problems, casualty or condemnation losses, changes in neighborhood
values and changes in interest rates.
In addition to these risks, equity REITS may be affected by changes in the
value of the underlying property owned by the trusts, while mortgage REITS may
be affected by the quality of any credit extended. Further, equity and mortgage
REITS are dependent upon management skills and generally may not be diversified.
Equity and mortgage REITS are also subject to heavy cash flow dependency,
defaults by borrowers and self-liquidation. In addition, equity or mortgage
REITS could possibly fail to qualify for tax free pass-through of income under
the Internal Revenue Code of 1986, as amended, or to maintain their exemptions
from registration under the Investment Company Act of 1940. The above factors
may also adversely affect a borrower's or lessee's ability to meet its
obligations to the REIT. In the event of a default by a borrower or lessee, the
REIT may experience delays in enforcing its rights as a mortgagee or lessor and
may incur substantial costs associated with protecting its investments.
Principal SmallCap Fund
The investment objective of Principal SmallCap Fund is long-term growth of
capital. The strategy of this Fund is to invest primarily in equity securities
of companies domiciled in the United States with comparatively smaller market
capitalizations. Under normal market conditions, the Fund invests at least 65%
of its assets in securities of companies having a total market capitalization of
$1 billion or less.
In selecting securities for investment, the Fund will look at stocks with
both "growth" and "value" characteristics, with no consistent preference between
the two categories. The growth orientation emphasizes buying stocks of companies
whose potential for growth of capital and earnings is expected to be above
average. The value orientation emphasizes buying stocks at less than their
intrinsic value and avoiding those whose price has been speculatively bid up.
Principal Utilities Fund
The investment objective of Principal Utilities Fund is to provide current
income and long-term growth of income and capital. The Fund seeks to achieve its
investment objective by investing primarily in equity and fixed-income
securities of companies engaged in the public utilities industry. The term
"public utilities industry" consists of companies engaged in the manufacture,
production, generation, transmission, sale and distribution of gas and electric
energy, as well as companies engaged in the communications field, including
telephone, telegraph, satellite, microwave and other companies providing
communication facilities for the public, but excluding public broadcasting
companies. For purposes of the Fund, a company will be considered to be in the
public utilities industry if, during the most recent twelve-month period, at
least 50% of the company's gross revenues, on a consolidated basis, is derived
from the public utilities industry. Under normal market conditions, the Fund, as
an investment policy, will invest at least 65%, and may invest up to 100%, of
its total assets in securities of companies in the public utilities industry,
and as a matter of fundamental policy will invest no less than 25% of its total
assets in those securities. As a non-fundamental policy, the Fund may not own
more than 5% of the outstanding voting securities of more than one public
utility company as defined by the Public Utility Holding Company Act of 1935.
The Fund invests in both equity securities (as defined previously under
"Growth-Oriented Funds") and fixed- income securities (bonds and preferred
stock) in the public utilities industry. The Fund does not have any set policies
to concentrate within any particular segment of the utilities industry. The Fund
will shift its asset allocation without restriction between types of utilities
and between equity and fixed-income securities based upon the Manager's
determination of how to achieve the Fund's investment objective in light of
prevailing market, economic and financial conditions. For example, at a
particular time the Manager may choose to allocate up to 100% of the Fund's
assets in a particular type of security (for example, equity securities) or in a
specific utility industry segment (for example, electric utilities).
Fixed-income securities in which the Fund may invest are debt securities
and preferred stocks, which are rated at the time of purchase Baa or better by
Moody's or BBB or better by S&P, or which, if unrated, are deemed to be of
comparable quality by the Fund's Manager. A description of corporate bond
ratings is contained in the Appendix to the Statement of Additional Information.
The rating services' descriptions of Baa or BBB securities are as follows:
Moody's Investors Service, Inc. Bond ratings -- 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. Standard and Poor's Corporation Bond Ratings -- BBB:
Debt rated "BBB" is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than for debt in higher-rated categories.
If a fixed-income security held by the Fund is rated BBB or Baa and is
subsequently down graded by a rating agency, the Fund will retain such security
in its portfolio until the Manager determines that it is practicable to sell the
security without undue market or tax consequences to the Fund.
While the Fund will invest primarily in the securities of public utility
companies, it may invest up to 35% of its total assets in those securities that
are permissible investments for the Balanced Fund. See "Principal Balanced Fund"
and "Certain Investment Policies and Restrictions." However the Fund will not
invest in fixed-income securities rated below Baa by Moody's or BBB by S&P.
The public utilities industry as a whole has certain characteristics and
risks particular to that industry. Unlike industrial companies, the rates which
utility companies may charge their customers generally are subject to review and
limitation by governmental regulatory commissions. Although rate changes of a
utility usually fluctuate in approximate correlation with financing costs, due
to political and regulatory factors rate changes ordinarily occur only following
a delay after the changes in financing costs. This factor will tend to favorably
affect a utility company's earnings and dividends in times of decreasing costs,
but conversely will tend to adversely affect earnings and dividends when costs
are rising. In addition, the value of public utility debt securities (and, to a
lesser extent, equity securities) tends to have an inverse relationship to the
movement of interest rates.
Among the risks affecting the utilities industry are the following: risks
of increases in fuel and other operating costs; the high cost of borrowing to
finance capital construction during inflationary periods; restrictions on
operations and increased costs and delays associated with compliance with
environmental and nuclear safety regulations; the difficulties involved in
obtaining natural gas for resale or fuel for generating electricity at
reasonable prices; the risks in connection with the construction and operation
of nuclear power plants; the effects of energy conservation and effects of
regulatory changes, such as the possible adverse effects on profits of recent
increased competition among telecommunications companies and the uncertainties
resulting from such companies' diversification into new domestic and
international businesses, as well as agreements by many such companies linking
future rate increases to inflation or other factors not directly related to the
actual operating profits of the enterprise.
INTERNATIONAL
Principal International Emerging Markets Fund
The investment objective of Principal International Emerging Markets Fund
is long-term growth of capital. The Fund seeks to achieve this objective by
investing primarily in equity securities of issuers in emerging market
countries. As used in this Prospectus, the term "emerging market country" means
any country which, in the opinion of the Manager, is generally considered to be
an emerging country by the international financial community, including the
International Bank for Reconstruction and Development (more commonly known as
the World Bank) and the International Financial Corporation. These countries
generally include every nation in the world except the United States, Canada,
Japan, Australia, New Zealand and most nations located in Western Europe.
Currently, investing in many emerging countries is not feasible or may involve
unacceptable political risks. The Fund focuses on those emerging market
countries in which it believes the economies are developing strongly and in
which the markets are becoming more sophisticated.
Investments in emerging market countries involve special risks. Certain
emerging market countries have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate
fluctuations, large amounts of debt, balance of payments and trade difficulties,
and extreme poverty and unemployment. In addition, there are certain risks
associated with investments in foreign securities (see "Risk Factors").
Under normal conditions at least 65% of the Fund's total assets will be
invested in emerging market country equity securities. The Fund invests in
securities of (1) issuers with their principal place of business or principal
office in emerging market countries, or (2) issuers for which the principal
securities trading market is an emerging market country, or (3) issuers,
regardless of where the security is traded, that derive 50% or more of their
total revenue from either goods or services produced in emerging market
countries or sales made in emerging market countries.
A small portion of the Fund assets may also be invested in closed end
country specific investment companies and sovereign debt of developing
countries. Closed end investment companies provide a way to gain exposure to
countries where the mechanics of trading securities are not cost effective.
Investment in sovereign debt may have the potential for returns that are higher
than returns on stocks within the country.
For temporary defensive purposes, the International Emerging Markets Fund
may invest in the same kinds of securities as the other Growth-Oriented Funds
whether issued by domestic or foreign corporations, governments, or governmental
agencies, instrumentalities or political subdivisions and whether denominated in
United States dollars or some other currency.
Principal International Fund
The investment objective of Principal International Fund is to seek
long-term growth of capital through investment in a portfolio of equity
securities of companies domiciled in any of the nations of the world. In
choosing investments in equity securities of foreign and United States
corporations, the Manager intends to pay particular attention to long-term
earnings prospects and the relationship of then-current prices to such
prospects. Short-term trading is not generally intended, but occasional
investments may be made for the purpose of seeking short-term or medium-term
gain. The Fund expects its investment objective to be met over long periods
which may include several market cycles. For a description of certain investment
risks associated with foreign securities, see "Risk Factors."
For temporary defensive purposes, the International Fund may invest in the
same kinds of securities as the other Growth-Oriented Funds whether issued by
domestic or foreign corporations, governments, or governmental agencies,
instrumentalities or political subdivisions and whether denominated in United
States dollars or some other currency.
The Fund intends that its investments normally will be allocated among
various countries. Although there is no limitation on the percentage of assets
that may be invested in any one country or denominated in any one currency, the
Fund intends under normal market conditions to have at least 65% of its assets
invested in securities issued by corporations of at least three countries, one
of which may be the United States. Investments may be made anywhere in the
world, but it is expected that primary consideration will be given to investing
in the securities issued by corporations of Western Europe, North America and
Australasia (Australia, Japan and Far East Asia) that have developed economies.
Changes in investments may be made as prospects change for particular countries,
industries or companies.
The Fund may invest in the securities of other investment companies but may
not invest more than 10% of its assets in securities of other investment
companies, invest more than 5% of its total assets in the securities of any one
investment company, or acquire more than 3% of the outstanding voting securities
of any one investment company except in connection with a merger, consolidation
or plan of reorganization. The Fund's Manager will waive its management fee on
the Fund's assets invested in securities of other open-end investment companies.
The Fund will generally invest only in those investment companies that have
investment policies requiring investment in securities comparable in quality to
those in which the Fund invests.
Principal International SmallCap Fund
The investment objective of Principal International SmallCap Fund is
long-term growth of capital. The strategy of this Fund is to invest primarily in
equity securities of non-United States companies with comparatively smaller
market capitalizations. Under normal market conditions, the Fund invests at
least 65% of its assets in securities of companies having a total market
capitalization of $1 billion or less.
The Fund diversifies its investments geographically. Although there is no
limitation on the percentage of assets that may be invested in any one country
or denominated in any one currency, the Fund intends, under normal market
conditions, to have at least 65% of its assets invested in securities issued by
corporations of at least three countries. For a description of certain
investment risks associated with foreign securities, see "Risk Factors."
For temporary defensive purposes, the International SmallCap Fund may
invest in the same kinds of securities as the other Growth-Oriented Funds
whether issued by domestic or foreign corporations, governments, or governmental
agencies, instrumentalities or political subdivisions and whether denominated in
United States dollars or some other currency.
INCOME-ORIENTED FUNDS
The Principal Funds currently include five Funds which seek a high level of
income through investments in fixed-income securities. These Funds are Principal
Bond Fund, Principal Government Securities Income Fund, Principal High Yield
Fund, Principal Limited Term Bond Fund and Principal Tax-Exempt Bond Fund,
collectively referred to as the "Income-Oriented Funds." Each Fund has rating
limitations with regard to the quality of securities that may be held in the
portfolio. The rating limitations apply at the time of acquisition of a security
and any subsequent change in a rating by a rating service will not require
elimination of a security from the Fund's portfolio. The Statement of Additional
Information contains descriptions of the ratings of Moody's Investors Service,
Inc. ("Moody's") and Standard and Poor's Corporation ("S&P").
Principal Bond Fund
The investment objective of Principal Bond Fund is to provide as high a
level of income as is consistent with preservation of capital and prudent
investment risk.
In seeking to achieve the investment objective, the Fund will predominantly
invest in marketable fixed-income securities. Investments will be made generally
on a long-term basis, but the Fund may make short-term investments from time to
time as deemed prudent by the Manager. Longer maturities typically provide
better yields but will subject the Fund to a greater possibility of substantial
changes in the values of its portfolio securities as interest rates change.
Under normal circumstances, the Fund will invest at least 65% of its assets
in bonds in one or more of the following categories: (i) corporate debt
securities and taxable municipal obligations, which at the time of purchase have
an investment grade rating within the four highest grades used by S&P (AAA, AA,
A or BBB) or by Moody's (Aaa, Aa, A or Baa) or which, if nonrated, are
comparable in quality in the opinion of the Fund's Manager; (ii) similar
Canadian corporate, Provincial and Federal Government securities payable in U.S.
funds; and (iii) securities issued or guaranteed by the United States Government
or its agencies or instrumentalities. The balance of the Fund's assets may be
invested in the following securities: domestic and foreign corporate debt
securities, preferred stocks, common stocks that provide returns that compare
favorably with the yields on fixed income investments, common stocks acquired
upon conversion of debt securities or preferred stocks or upon exercise of
warrants acquired with debt securities or otherwise and foreign government
securities. The debt securities and preferred stocks in which the Fund invests
may be convertible or nonconvertible. Securities rated below BBB or Baa are
commonly referred to as junk bonds. The Fund does not intend to purchase debt
securities rated lower than Ba3 by Moody's or BB- by S&P (bonds which are judged
to have speculative elements; their future cannot be considered as
well-assured). The rating services' descriptions of BBB or Baa securities are as
follows: Moody's Investors Service, Inc. Bond Ratings -- 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. Standard & Poor's Corporation Bond Ratings -- BBB: Debt
rated "BBB" is regarded as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than for debt in higher-rated categories. See the discussion of the Principal
High Yield Fund for information concerning risks associated with below
investment grade bonds.
During the fiscal year ended October 31, 1997, the percentage of the Fund's
portfolio securities invested in the various ratings established by Moody's,
based upon the weighted average ratings of the portfolio, was as follows:
Moody's Rating Portfolio Percentage
-------------- --------------------
Aa .__%
A __.__%
Baa __.__%
Ba _.__%
B _.__%
The preceding percentage for A rated securities includes .__% of unrated
securities which have been determined by the Manager to be of comparable
quality.
Cash equivalents in which the Fund invests include corporate commercial
paper rated A-1+, A-1 or A-2 by S&P or P-1 or P-2 by Moody's, unrated commercial
paper issued by corporations with outstanding debt securities rated in the four
highest grades by S&P and Moody's and bank certificates of deposit and bankers'
acceptances issued or guaranteed by national or state banks and repurchase
agreements considered by the Fund to have investment quality. Under unusual
market or economic conditions, the Fund for temporary defensive purposes may
invest up to 100% of its assets in cash or cash equivalents.
Principal Government Securities Income Fund
The objective of Principal Government Securities Income Fund is a high
level of current income, liquidity and safety of principal.
The Fund will invest in obligations issued or guaranteed by the United
States Government or by its agencies or instrumentalities and in repurchase
agreements collateralized by such obligations. Such securities include
Government National Mortgage Association ("GNMA") Certificates of the modified
pass-through type, Federal National Mortgage Association ("FNMA") Obligations,
Federal Home Loan Mortgage Corporation ("FHLMC") Certificates and Student Loan
Marketing Association ("SLMA") Certificates and other U.S. Government
Securities. GNMA is a wholly-owned corporate instrumentality of the United
States whose securities and guarantees are backed by the full faith and credit
of the United States. FNMA, a federally chartered and privately-owned
corporation, FHLMC, a federal corporation, and SLMA, a government sponsored
stockholder-owned organization, are instrumentalities of the United States. The
securities and guarantees of FNMA, FHLMC and SLMA are not backed, directly or
indirectly, by the full faith and credit of the United States. Although the
Secretary of the Treasury of the United States has discretionary authority to
lend FNMA up to $2.25 billion outstanding at any time, neither the United States
nor any agency thereof is obligated to finance FNMA's or FHLMC's operations or
to assist FNMA or FHLMC in any other manner. The Fund may maintain reasonable
amounts of cash or short-term debt securities not issued or guaranteed by the
U.S. Government or its agencies or instrumentalities for daily cash management
purposes or pending selection of long-term investments.
Depending on market conditions, a substantial portion of the assets may be
invested in GNMA Certificates of the modified pass-through type and in
repurchase agreements collateralized by such obligations. GNMA is a United
States Government corporation within the Department of Housing and Urban
Development. GNMA Certificates are mortgage-backed securities representing an
interest in a pool of mortgage loans. Such loans are made by lenders such as
mortgage bankers, insurance companies, commercial banks and savings and loan
associations. Then, they are either insured by the Federal Housing
Administration (FHA) or they are guaranteed by the Veterans Administration (VA)
or Farmers Home Administration (FmHA). The lender or other prospective issuer
creates a specific pool of such mortgages, which it submits to GNMA for
approval. After approval, a GNMA Certificate is typically offered by the issuer
to investors through securities dealers.
GNMA Certificates differ from bonds in that the principal is scheduled to
be paid back by the borrower on a monthly basis over the life of the loan rather
than returned in a lump sum at maturity. Modified pass-through GNMA
Certificates, which are the only kind in which the Fund intends to invest,
entitle the holder to receive all interest and principal payments owed on the
mortgages in the pool (net of the issuer and GNMA fee of .5% prescribed by
regulation), regardless of whether or not the mortgagor has made such payment.
The timely payment of interest and principal is guaranteed by the full faith and
credit of the United States Government.
Although the payment of interest and principal is guaranteed, the guarantee
does not extend to the value of a GNMA Certificate or the value of the shares of
the Fund. The market value of a GNMA Certificate typically will fluctuate to
reflect changes in prevailing interest rates. It falls when rates increase (as
does the market value of other debt securities) and it rises when rates decline
(but it may not rise on a comparable basis with other debt securities because of
its prepayment feature), and, therefore, may be more or less than the face
amount of the GNMA Certificate, which reflects the aggregate principal amount of
the underlying mortgages. As a result the net asset value of Fund shares will
fluctuate as interest rates change.
Mortgagors may pay off their mortgages at any time. Expected prepayments of
the mortgages can affect the market value of the GNMA Certificate, and actual
prepayments can affect the return ultimately received. Prepayments, like
scheduled payments of principal, are reinvested by the Fund at prevailing
interest rates which may be less than the rate on the GNMA Certificate.
Prepayments are likely to increase as the interest rate for new mortgages moves
lower than the rate on the GNMA Certificate. Moreover, if the GNMA Certificate
had been purchased at a premium above principal because its rate exceeded
prevailing rates, the premium is not guaranteed and a decline in value to par
may result in a loss of the premium especially in the event of prepayment.
The FNMA and FHLMC securities in which the Fund invests are very similar to
GNMA certificates as described above but are not guaranteed by the full faith
and credit of the United States but rather by the agency itself. FNMA and FHLMC
securities are rated Aaa by Moody's and AAA by Standard & Poor's. These ratings
reflect the status of FNMA and FHLMC as federal agencies as well as the
important role each plays in financing purchases of homes in the U.S.
Student Loan Marking Association is a government sponsored
stockholder-owned organization whose goal is to provide liquidity to financial
and educational institutions. SLMA provides liquidity by purchasing student
loans, which are principally government guaranteed loans issued under the
Federal Guaranteed Student Loan Program and the Health Education Assistance Loan
Program. SLMA securities are not guaranteed by the U.S. Government but are
obligations solely of the agency. SLMA senior debt issues in which the Fund
invests are rated AAA by Standard & Poor's and Aaa by Moody's.
There are other obligations issued or guaranteed by the United States
Government (such as U.S. Treasury securities) or by its agencies or
instrumentalities that are either supported by the full faith and credit of the
U.S. Treasury or the credit of a particular agency or instrumentality. Included
in the latter category are Federal Home Loan Bank and Farm Credit Banks.
Obligations not guaranteed by the United States Government are highly rated
because they are issued by indirect branches of government. Such paper is issued
as needs arise by an agency and is traded regularly in denominations similar to
those in which government obligations are traded.
The Fund will not engage in the trading of securities for the purpose of
realizing short-term profits, but it will adjust its portfolio as considered
advisable in view of prevailing or anticipated market conditions and the Fund's
investment objective. Accordingly, the Fund may sell portfolio securities in
anticipation of a rise in interest rates and purchase securities for inclusion
in its portfolio in anticipation of a decline in interest rates.
As a hedge against changes in interest rates, the Fund may enter into
contracts with dealers in GNMA Certificates whereby the Fund agrees to purchase
or sell an agreed-upon principal amount of GNMA Certificates at a specified
price on a certain date. The Fund may enter into similar purchase agreements
with issuers of GNMA Certificates other than Principal Mutual Life Insurance
Company. The Fund may also purchase optional delivery standby commitments which
give the Fund the right to sell particular GNMA Certificates at a specified
price on a specified date. Failure of the other party to such a contract or
commitment to abide by the terms thereof could result in a loss to the Fund. To
the extent the Fund engages in delayed delivery transactions it will do so for
the purpose of acquiring portfolio securities consistent with its investment
objective and policies and not for the purpose of investment leverage or to
speculate on interest rate changes. Liability accrues to the Fund at the time it
becomes obligated to purchase such securities, although delivery and payment
occur at a later date. From the time the Fund becomes obligated to purchase
securities on a delayed delivery basis, the Fund has all the rights and risks
attendant to the ownership of a security except that no interest accrues to the
purchaser until delivery. At the time the Fund enters into a binding obligation
to purchase such securities, Fund assets of a dollar amount sufficient to make
payment for the securities to be purchased will be segregated. The availability
of liquid assets for this purpose and the effect of asset segregation on the
Fund's ability to meet its current obligations, to honor requests for redemption
and to have its investment portfolio managed properly will limit the extent to
which the Fund may engage in forward commitment agreements. Except as may be
imposed by these factors, there is no limit on the percent of the Fund's total
assets that may be committed to transactions in such agreements.
Principal High Yield Fund
Principal High Yield Fund's primary investment objective is high current
income. Capital growth is a secondary objective when consistent with the
objective of high current income. This Fund is designed for investors willing to
assume additional risk in return for above average income.
In seeking to attain the Fund's objective of high current income, the Fund
invests primarily in high yielding, lower or nonrated fixed-income securities
(commonly known as "junk bonds"), constituting a diversified portfolio which the
Fund Manager believes does not involve undue risk to income or principal.
Normally, at least 80% of the Fund's assets will be invested in debt securities,
convertible securities (both debt and preferred stock) or preferred stocks that
are consistent with its primary investment objective of high current income. The
Fund's remaining assets may be invested in common stocks and other equity
securities in which the Growth-Oriented Funds may invest when these types of
investments are consistent with the objective of high current income.
The Fund seeks to invest its assets in securities rated Ba1 or lower by
Moody's or BB+ or lower by S&P or in unrated securities which the Fund's Manager
believes are of comparable quality. These securities are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and to repay principal in accordance with the terms of the obligation.
The Fund will not invest in securities rated below Caa by Moody's and below CCC
by S&P.
The rating services' descriptions of securities rating categories in which
the Fund may normally invest are as follows:
Moody's Investors Service, Inc. Bond Ratings - Ba: Bonds which are rated Ba
are judged to have speculative elements; their future cannot be considered as
well-assured. Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in this class. B:
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its 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 a modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Standard & Poor's Corporation Bond Ratings - BB, B, CCC, CC: Debt rated
"BB", "B", "CCC" and "CC" is regarded, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. "BB" indicates the lowest degree of speculation and
"CC" the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Plus (+) or Minus (-): The ratings from "AA" to "BB" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
The higher-yielding, lower-rated securities in which the High Yield Fund
invests present special risks to investors. The market value of lower-rated
securities may be more volatile than that of higher-rated securities and
generally tends to reflect the market's perception of the creditworthiness of
the issuer and short-term market developments to a greater extent than more
highly-rated securities, which reflect primarily fluctuations in general levels
of interest rates. Periods of economic uncertainty and change can be expected to
result in increased volatility in the market value of lower-rated securities.
Further, such securities may be subject to greater risks of loss of income and
principal, particularly in the event of adverse economic changes or increased
interest rates, because their issuers generally are not as financially secure or
as creditworthy as issuers of higher-rated securities. Additionally, to the
extent that there is not a national market system for secondary trading of
lower-rated securities, there may be a low volume of trading in such securities
which may make it more difficult to value or sell those securities than
higher-rated securities. Adverse publicity and investor perceptions, whether or
not based on fundamental analysis, may decrease the values and liquidity of high
yield securities, especially in a thinly traded market.
Investors should recognize that the market for higher-yielding, lower-rated
securities is a relatively recent development that has not been tested by an
economic recession. An economic downturn may severely disrupt the market for
such securities and cause financial stress to the issuers which may adversely
affect the value of the securities held by the High Yield Fund and the ability
of the issuers of the securities held by it to pay principal and interest. A
default by an issuer may result in the Fund incurring additional expenses to
seek recovery of the amounts due it.
Some of the securities in which the Fund invests contain call provisions.
If the issuer of such a security exercises a call provision in a declining
interest rate market, the Fund would have to replace the security with a
lower-yielding security, resulting in a decreased return for investors. Further,
a higher-yielding security's value will decrease in a rising interest rate
market, which will be reflected in the Fund's net asset value per share.
Investors should carefully consider their ability to assume the risks of
investing in lower-rated securities before making an investment in the Fund, and
should be prepared to maintain their investment during periods of adverse market
conditions. Investors should not rely on the Fund for their short-term financial
needs.
The Fund seeks to minimize the risks of investing in lower-rated securities
through diversification, investment analysis and attention to current
developments in interest rates and economic conditions. Because the Fund invests
primarily in securities in the lower rating categories, the achievement of the
Fund's goals is more dependent on the Manager's ability than would be the case
if the Fund were investing in securities in the higher rating categories.
Although the Fund's Manager considers security ratings when making investment
decisions, it performs its own investment analysis and does not rely principally
on the ratings assigned by the rating services. There are risks in applying
credit ratings as a method for evaluating high yield securities. For example,
credit ratings evaluate the safety of principal and interest payments, not the
market value risk of high yield securities, and credit rating agencies may fail
to make timely changes in credit ratings to reflect subsequent events. The
Manager's analysis includes traditional security analysis considerations such as
the issuer's experience and managerial strength, changing financial condition,
borrowing requirements or debt maturity schedules, and its responsiveness to
changes in business conditions and interest rates. It also considers relative
values based on anticipated cash flow, interest or dividend coverage, asset
coverage and earnings prospects. In addition, the Manager analyzes general
business conditions and other factors such as anticipated changes in economic
activity and interest rates, the availability of new investment opportunities,
and the economic outlook for specific industries. The Manager continuously
monitors the issuers of portfolio securities to determine if the issuers will
have sufficient cash flow and profits to meet required principal and interest
payments and to assure the securities' liquidity so the Fund can meet redemption
requests.
During the fiscal year ended October 31, 1997, the percentage of the Fund's
portfolio securities invested in the various ratings established by Moody's,
based upon the weighted average ratings of the portfolio, was as follows:
Moody's Rating Portfolio Percentage
-------------- --------------------
Baa _.__%
Ba __.__%
B __.__%
C _.__%
The above percentages for Ba and B rated securities include unrated
securities in the amount of .__%, and .__%, respectively, which have been
determined by the Manager to be of comparable quality.
There may be times when, in the Manager's judgment, unusual market or
economic conditions make pursuing the Fund's basic investment strategy
inconsistent with the best interests of its shareholders. At such times the
Manager may employ alternative strategies, primarily seeking to reduce
fluctuations in the value of the Fund's assets. In implementing these
"defensive" strategies, the Fund may temporarily invest in money-market
instruments of all types, higher-rated fixed-income securities or any other
fixed-income securities that the Fund considers consistent with such strategy.
The yield to maturity on these securities would generally be lower than the
yield to maturity on lower-rated fixed-income securities. It is impossible to
predict when, or for how long, such alternative strategies will be utilized.
The Fund's Manager buys and sells securities for the Fund principally in
response to its evaluation of an issuer's continuing ability to meet its
obligations, the availability of better investment opportunities, and its
assessment of changes in business conditions and interest rates. From time to
time, consistent with its investment objectives, the Fund may sell securities
that have appreciated in value because of declines in interest rates. It may
also trade securities for the purpose of seeking short-term profits. Securities
may be sold in anticipation of a market decline or bought in anticipation of a
market rise. They may also be traded for securities of comparable quality and
maturity to take advantage of perceived short-term disparities in market values
or yields.
Principal Limited Term Bond Fund
The objective of Principal Limited Term Bond Fund is to seek a high level
of current income consistent with a relatively high level of principal stability
by investing in a portfolio of securities with a dollar weighted average
maturity of five years or less. The Fund seeks to achieve its objective by
investing primarily in high grade, short-term debt securities.
The Fund will invest, under normal circumstances, at least 80% of its total
assets in securities issued or guaranteed by the United States ("U.S.")
Government or its agencies or instrumentalities (as described in the discussion
of Principal Government Securities Income Fund) and other debt securities of
U.S. issuers rated within the three highest grades used by Standard & Poor's
(AAA, AA or A) or by Moody's (Aaa, Aa, or A) or which, if nonrated, are
comparable in quality in the opinion of the Fund's Manager. The balance of the
Fund's assets may be invested in debt securities rated in the fourth highest
grade by the major rating services (i.e., at least "Baa" by Moody's Investors
Service or "BBB" by Standard & Poor's Corporation, or their equivalents) or, if
not rated, judged to be of comparable quality. Securities rated BBB or Baa are
considered investment grade securities having adequate capacity to pay interest
and repay principal. Such securities may have speculative characteristics,
however, and changes in economic and other conditions are more likely to lead to
a weakened capacity of the issuer of such securities to make principal and
interest payments than is the case with higher rated securities. Under normal
circumstances, the Fund will maintain a dollar weighted average maturity of not
more than five years. In determining the average maturity of the Fund's
portfolio, the Manager may adjust the maturity dates on callable or prepayable
securities to reflect the Manager's judgment regarding the likelihood of such
securities being called or prepaid.
The Fund may also invest in other debt securities including corporate debt
securities such as bonds, notes and debentures, mortgage-backed securities
including collateralized mortgage obligations and other asset-backed securities.
For a more complete description of asset-backed securities, see "Principal
Government Securities Income Fund" discussion.
Cash equivalents in which the Fund invests include corporate commercial
paper rated A-1+, A-1 or A-2 by S&P or P-1 or P-2 by Moody's, unrated commercial
paper issued by corporations with outstanding debt securities rated in the four
highest grades by S&P and Moody's and bank certificates of deposit and bankers'
acceptances issued or guaranteed by national or state banks and repurchase
agreements considered by the Fund to have investment quality. Under unusual
market or economic conditions, the Fund for temporary defensive purposes, may
invest up to 100% of its assets in cash or cash equivalents.
Principal Tax-Exempt Bond Fund
The objective of Principal Tax-Exempt Bond Fund is to seek as high a level
of current income exempt from federal income tax as is consistent with
preservation of capital. The Fund seeks to achieve its objective by investing
primarily in a diversified portfolio of securities issued by or on behalf of
state or local governments or other public authorities. Interest on these
obligations ("Municipal Obligations") is exempt from federal income tax in the
opinion of bond counsel to the issuer.
The Fund will invest, during normal market conditions, at least 80% of its
total assets in Municipal Obligations which, at the time of purchase, meet the
following standards: (a) Municipal Bonds rated within the four highest grades by
(i) Moody's, these ratings are: Aaa, Aa, A and Baa or (ii) S&P, these ratings
are: AAA, AA, A and BBB; (b) Municipal Notes rated within the highest grade by
Moody's (MIG-1) or S&P (SP-1); (c) Municipal Commercial Paper rated within the
highest grade by Moody's (Prime-1) or S&P (A-1); and (d) unrated Municipal
Obligations comparable in quality to those described above in the opinion of the
Fund's Manager.
The Fund may invest up to 20% of its total assets in Municipal Obligations
that do not meet the standards required for the balance of the portfolio as set
forth above. Securities rated below BBB or Baa are commonly referred to as junk
bonds. These investments normally will provide an opportunity for higher yield
but will be more speculative than Municipal Obligations that meet higher
standards. They typically will entail greater price volatility and a higher risk
of default, that is, the nonpayment of interest and principal by the issuer. The
Fund does not intend to purchase Municipal Obligations that would be in default
as to payment of either interest or principal at the time of purchase. As a
result, it will not purchase Municipal Bonds rated lower than B by Moody's or
S&P (bonds that are predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation) or
Municipal Notes or Municipal Commercial Paper which is unrated by either Moody's
or S&P and which in the opinion of the Fund's Manager is not comparable in
quality to rated obligations. See the discussion of the Principal High Yield
Fund for information concerning risks associated with below-investment grade
bonds.
The Fund may also invest from time to time in the following taxable
securities which mature one year or less from the time of purchase: Obligations
issued or guaranteed by the United States Government or its agencies or
instrumentalities ("U.S. Government securities"), domestic bank certificates of
deposit and bankers' acceptances, commercial paper, short-term corporate debt
securities and repurchase agreements ("Taxable Investments"). The Fund will make
Taxable Investments primarily for liquidity purposes or as a temporary
investment of cash pending its investment in Municipal Obligations. During
normal market conditions, the Fund will not invest more than 20% of its total
assets in Taxable Investments, the Municipal Obligations identified in the
preceding paragraph and Municipal Obligations the interest on which is treated
as a tax preference item for purposes of the federal alternative minimum tax.
The Fund, however, may temporarily invest more than 20% of its assets in Taxable
Investments when in the opinion of the Fund's Manager it is advisable to do so
for defensive purposes because of market conditions.
The Fund may not invest more than 5% of its total assets in the securities
of any one issuer (except for U.S. Government securities), but it may invest
without limit in debt obligations of issuers located in the same state and in
debt obligations which are repayable out of revenue sources generated from
economically related projects or facilities. Sizeable investments in such
obligations could involve an increased risk to the Fund since an economic,
business or political development or change affecting one security could also
affect others. The Fund may also invest without limit in industrial development
bonds, which are issued by industrial development authorities but may be backed
only by the assets and revenues of the non-governmental entities that use the
facilities financed by the bonds.
During the fiscal year ended October 31, 1997, the percentage of the Fund's
portfolio securities invested in the various ratings established by Moody's,
based upon the weighted average ratings of the portfolio, was as follows:
Moody's Rating Portfolio Percentage
-------------- --------------------
Aaa .__%
AA __.__%
A __.__%
Baa __.__%
Ba _.__%
The above percentages for AA, A and Baa rated securities include unrated
securities in the amount of _.__%, _.__% and __.__%, respectively, which have
been determined by the Manager to be of comparable quality.
The Fund will not engage in the trading of securities for the purpose of
realizing short-term profits, but it will adjust its portfolio as considered
advisable in view of prevailing or anticipated market conditions and the Fund's
investment objective. Accordingly, the Fund may sell portfolio securities in
anticipation of a rise in interest rates and purchase securities for inclusion
in its portfolio in anticipation of a decline in interest rates.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Obligations. It may be expected that similar proposals may
be introduced in the future. If such a proposal were enacted, the ability of the
Fund to pay "exempt interest" dividends may be adversely affected and the Fund
would reevaluate its investment objective and policies and consider changes in
its structure.
MONEY MARKET FUNDS
The Principal Funds currently include two Funds which seek a high level of
income through investments in short-term securities. These Funds are Principal
Cash Management Fund and Principal Tax-Exempt Cash Management Fund, together
referred to as the "Money Market Funds." Securities in which the Money Market
Funds will invest may not yield as high a level of current income as securities
of lower quality and longer maturities which generally have less liquidity,
greater market risk and more fluctuation.
Each of the Money Market Funds will limit its portfolio investments to
United States dollar denominated instruments that the Manager, subject to the
oversight of the Board of Directors, determines present minimal credit risks and
which at the time of acquisition are "Eligible Securities" as that term is
defined in regulations issued under the Investment Company Act of 1940.
Eligible Securities include:
(1) A security with a remaining maturity of 397 days or less that is rated
(or that has been issued by an issuer that is rated in respect to a
class of short-term debt obligations, or any security within that
class, that is comparable in priority and security with the security)
by a nationally recognized statistical rating organization in one of
the two highest rating categories for short-term debt obligations; or
(2) A security that at the time of issuance was a long-term security with
a remaining maturity of 397 calendar days or less, and whose issuer
has received from a nationally recognized statistical rating
organization a rating, with respect to a class of short-term debt
obligations (or any security within that class) that is now comparable
in priority and security with the security, in one of the two highest
rating categories for short-term debt obligations; or
(3) an unrated security that is of comparable quality to a security
meeting the requirements of (1) or (2) above, as determined by the
board of directors.
Principal Cash Management Fund will not invest more than 5% of its total
assets in the following securities:
(1) Securities which, when acquired by the Fund (either initially or upon
any subsequent rollover), are rated in the second highest rating
category for short-term debt obligations;
(2) Securities which at the time of issuance were long-term securities but
when acquired by the Fund have a remaining maturity of 397 calendar
days or less, if the issuer of such securities is rated, with respect
to a class of comparable short-term debt obligations, in the second
highest rating category for short-term obligations; and
(3) Securities which are unrated but are determined by the Fund's Board of
Directors to be of comparable quality to securities rated in the
second highest rating category for short-term debt obligations.
Each Fund will maintain a dollar-weighted average portfolio maturity of 90
days or less. Each Fund intends to hold its investments until maturity, but may
on occasion trade securities to take advantage of market variations. Also,
revised valuations of an issuer or redemptions may result in sales of portfolio
investments prior to maturity or at a time when such sales might otherwise not
be desirable. Each Fund's right to borrow to facilitate redemptions may reduce
the need for such sales. The sale of portfolio securities would be a taxable
event. See "Tax Treatment of the Funds, Dividends and Distributions." It is the
policy of the Money Market Funds to be as fully invested as reasonably practical
at all times to maximize current income.
Since portfolio assets of the Money Market Funds will consist of short-term
instruments, replacement of portfolio securities will occur frequently. However,
since these Funds expect to usually transact purchases and sales of portfolio
securities with issuers or dealers on a net basis, it is not anticipated that
the Funds will pay any significant brokerage commissions. The Funds are free to
dispose of portfolio securities at any time, when changes in circumstances or
conditions make such a move desirable in light of their investment objectives.
Principal Cash Management Fund
The objective of Principal Cash Management Fund is to seek as high a level
of current income available from short-term securities as is considered
consistent with preservation of principal and maintenance of liquidity by
investing its assets in a portfolio of money market instruments. These money
market instruments are U.S. Government Securities, U.S. Government Agency
Securities, Bank Obligations, Commercial Paper, Short-term Corporate Debt,
Repurchase Agreements and Taxable Municipal Obligations, which are described
briefly below and in more detail in the Statement of Additional Information.
U.S. Government Securities are securities issued or guaranteed by the U.S.
Government, including treasury bills, notes and bonds.
U.S. Government Agency Securities are obligations issued or guaranteed by
agencies or instrumentalities of the U.S. Government whether supported by the
full faith and credit of the U.S. Treasury or only by the credit of a particular
agency or instrumentality.
Bank Obligations consist of certificates of deposit which are generally
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return and bankers acceptances
which are time drafts drawn on a commercial bank by a borrower, usually in
connection with international commercial transactions.
Commercial Paper is short-term promissory notes issued by U.S. or foreign
corporations primarily to finance short-term credit needs.
Short-term Corporate Debt consists of notes, bonds or debentures which at
the time of purchase have one year or less remaining to maturity.
Repurchase Agreements are transactions under which securities are purchased
from a bank or securities dealer with an agreement by the seller to repurchase
the securities at the same price plus interest at a specified rate. Generally,
Repurchase Agreements are of short duration, usually less than a week but on
occasion for longer periods.
Taxable Municipal Obligations are short-term obligations issued or
guaranteed by state and municipal issuers which generate taxable income.
Principal Tax-Exempt Cash Management Fund
The objective of Principal Tax-Exempt Cash Management Fund is to provide as
high a level of current interest income exempt from federal income tax as is
consistent, in the view of the Fund's management, with stability of principal
and the maintenance of liquidity. The Fund seeks to achieve its objective
through investment in a professionally managed portfolio of high quality,
short-term obligations that have been issued by or on behalf of state or local
governments or other public authorities and that pay interest which is exempt
from federal income tax in the opinion of bond counsel to the issuer ("Municipal
Obligations").
The Fund may invest in Municipal Obligations with fixed, variable or
floating interest rates and may invest in participation interests in pools of
Municipal Obligations held by banks or other financial institutions. The Fund
may treat a variable or floating interest rate obligation as maturing before its
ultimate maturity date if the Fund has acquired a right to sell the obligation
that meets requirements established by the Securities and Exchange Commission.
The Fund expects to invest primarily in variable rate or floating rate
instruments. Typically such instruments carry demand features permitting the
Fund to redeem at par upon specified notice. The Fund's right to obtain payment
at par on a demand instrument upon demand could be affected by events occurring
between the date the Fund elects to redeem the instrument and the date
redemption proceeds are due which affect the ability of the issuer to pay the
instrument at par value. The Manager will monitor on an ongoing basis the
pricing, quality and liquidity of such instruments and will similarly monitor
the ability of an issuer of a demand instrument, including those supported by
bank letters of credit or guarantees, to pay principal and interest on demand.
Although the ultimate maturity of such variable rate obligations may exceed one
year, the Fund will treat the maturity of each variable rate demand obligation
as the longer of (i) the notice period required before the Fund is entitled to
payment of the principal amount through demand, or (ii) the period remaining
until the next interest rate adjustment. Floating rate instruments with demand
features are deemed to have a maturity equal to the period remaining until the
principal amount can be recovered through demand.
The Fund may also invest in bond anticipation notes, tax anticipation
notes, revenue anticipation notes, construction loan notes and bank notes issued
by governmental authorities to commercial banks as evidence of borrowings. Since
these short-term securities frequently serve as interim financing pending
receipt of anticipated funds from the issuance of long-term bonds, tax
collections or other anticipated future revenues, a weakness in an issuer's
ability to obtain such funds as anticipated could adversely affect the issuer's
ability to meet its obligations on these short-term securities.
The Fund may also invest from time to time on a temporary basis in the
following taxable securities which mature 397 days or less from the time of
purchase: Obligations issued or guaranteed by the United States Government or
its agencies or instrumentalities ("U.S. Government securities"), domestic bank
certificates of deposit and bankers' acceptances, United States dollar
denominated foreign bank certificates of deposit and bankers' acceptances,
commercial paper, short-term corporate debt securities and repurchase agreements
("Temporary Investments"). The Fund will make Temporary Investments primarily
for liquidity purposes or as a temporary investment of cash pending its
investment in Municipal Obligations. During normal market conditions, the Fund
will not invest more than 20% of its total assets in Temporary Investments. The
Fund, however, may temporarily invest more than 20% of its assets in Temporary
Investments when in the opinion of the Fund's Manager it is advisable to
maintain a temporary "defensive" posture.
The Fund may invest in the securities of other open-end investment
companies but may not invest more than 10% of its assets in securities of other
investment companies, invest more than 5% of its total assets in the securities
of any one investment company, or acquire more than 3% of the outstanding voting
securities of any one investment company except in connection with a merger,
consolidation or plan of reorganization. The Fund's Manager will waive its
management fee on the Fund's assets invested in securities of other open-end
investment companies. The Fund will generally invest in other investment
companies only for short-term cash management purposes when the advisor
anticipates the net return from the investment to be superior to alternatives
then available. The Fund will generally invest only in those investment
companies that have investment policies requiring investment in securities
comparable in quality to those in which the Fund invests.
The Fund may not invest more than 5% of its total assets in the securities
of any one issuer (except for U.S. Government securities), but it may invest
without limit in debt obligations of issuers located in the same state and in
debt obligations which are repayable out of revenue sources generated from
economically related projects or facilities. Sizeable investments in such
obligations could involve an increased risk to the Fund since an economic,
business or political development or change affecting one security could also
affect others. The Fund may also invest without limit in industrial development
bonds, which are issued by industrial development authorities but may be backed
only by the assets and revenues of the non-governmental entities that use the
facilities financed by the bonds. The Fund, however, will not invest more than
20% of its total assets in any Municipal Obligation the interest on which is
treated as a tax preference item for purposes of the federal alternative minimum
tax, and during normal market conditions, it will limit its investments in such
securities and in Temporary Investments to 20% of its total assets.
Municipal Obligations are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Act, and laws, if any, which may be enacted by
Congress or any state extending the time for payment of principal or interest,
or both, or imposing other constraints upon enforcement of such obligations or
upon municipalities to levy taxes. The power or ability of issuers to pay, when
due, principal of and interest on Municipal Obligations may also be materially
affected by the results of litigation or other conditions.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Obligations. It may be expected that similar proposals may
be introduced in the future. If such a proposal were enacted, the ability of the
Fund to pay "exempt interest" dividends may be adversely affected, and the Fund
would reevaluate its investment objective and policies and consider changes in
its structure.
CERTAIN INVESTMENT POLICIES AND RESTRICTIONS
Following is a discussion of certain investment practices that the Funds
may use in an effort to achieve their respective investment objectives.
Repurchase Agreements/Lending Portfolio Securities
Each of the Funds may enter into repurchase agreements with, and each of
the Funds, except the Capital Value Fund, Growth Fund and Cash Management Fund,
may lend its portfolio securities to, unaffiliated broker-dealers and other
unaffiliated qualified financial institutions. These transactions must be fully
collateralized at all times, but involve some credit risk to the Fund if the
other party should default on its obligations, and the Fund is delayed or
prevented from recovering on the collateral. See the Statement of Additional
Information for further information regarding the credit risks associated with
repurchase agreements and the standards adopted by each Fund's Board of
Directors to deal with those risks. None of the Funds intends either (i) to
enter into repurchase agreements that mature in more than seven days if any such
investment, together with any other illiquid securities held by the Fund, would
amount to more than 15% (10% for the Government Securities Income Fund) of its
total assets or (ii) to lend securities in excess of 30% of its total assets.
Forward Commitments
From time to time, each of the Income-Oriented Funds and the Balanced Fund
may enter into forward commitment agreements which call for the Fund to purchase
or sell a security on a future date and at a price fixed at the time the Fund
enters into the agreement. Each of these Funds may also acquire rights to sell
its investments to other parties, either on demand or at specific intervals.
Warrants
Each of the Funds, except the Cash Management Fund, Government Securities
Income Fund and Tax-Exempt Bond Fund, may invest in warrants up to 5% of its
assets, of which not more than 2% may be invested in warrants that are not
listed on the New York or American Stock Exchange. For the International,
International Emerging Markets and International SmallCap Funds, the 2%
limitation also applies to warrants not listed on the Toronto Stock Exchange.
Borrowing
As a matter of fundamental policy, each Fund may borrow money only for
temporary or emergency purposes. The Capital Value, Cash Management, Growth,
Tax-Exempt Bond and Tax-Exempt Cash Management Funds may borrow only from banks.
Further, each Fund may borrow only in an amount not exceeding 5% of its assets,
except:
(1) the Capital Value Fund and Growth Fund, each of which may borrow only
in an amount not exceeding the lesser of (i) 5% of the value of its
assets less liabilities other than such borrowings, or (ii) 10% of its
assets taken at cost at the time the borrowing is made;
(2) the Cash Management Fund which may borrow only in an amount not
exceeding the lesser of (i) 5% of the value of its assets, or (ii) 10%
of the value of its net assets taken at cost at the time the borrowing
is made; and
(3) the Tax-Exempt Cash Management Fund which may borrow in an amount
which permits it to maintain a 300% asset coverage and while any such
borrowing exceeds 5% of the Fund's total assets no additional
purchases of investment securities will be made. If due to market
fluctuations or other reasons the Fund's asset coverage falls below
300% of its borrowings, the Fund will reduce its borrowings within 3
business days. To do this, the Fund may have to sell a portion of its
investments at a time when it may be disadvantageous to do so.
Options
Each of the Funds (except Capital Value, Cash Management, Growth,
Tax-Exempt Bond and Tax-Exempt Cash Management Funds) may purchase covered
spread options, which would give the Fund the right to sell a security that it
owns at a fixed dollar spread or yield spread in relationship to another
security that the Fund does not own, but which is used as a benchmark. These
Funds may also purchase and sell financial futures contracts, options on
financial futures contracts and options on securities and securities indices,
but will not invest more than 5% of their assets in the purchase of options on
securities, securities indices and financial futures contracts or in initial
margin and premiums on financial futures contracts and options thereon. The
Funds may write options on securities and securities indices to generate
additional revenue and for hedging purposes and may enter into transactions in
financial futures contracts and options on those contracts for hedging purposes.
General
The Statement of Additional Information includes further information
concerning the Funds' investment policies and applicable investment
restrictions. The investment objectives of the Funds are fundamental and certain
investment restrictions designated as such in this Prospectus or in the
Statement of Additional Information are fundamental policies that may not be
changed without approval by the holders of the lesser of: (i) 67% of the Fund's
shares present or represented at a shareholders' meeting at which the holders of
more than 50% of such shares are present or represented by proxy; or (ii) more
than 50% of the outstanding shares of the Fund. All other investment policies
described in this Prospectus and the Statement of Additional Information are not
fundamental and may be changed by the Board of Directors of the appropriate Fund
without shareholder approval.
RISK FACTORS
An investment in any of the Growth-Oriented Funds involves the financial
and market risks that are inherent in any investment in equity securities. These
risks include changes in the financial condition of issuers, in economic
conditions generally and in the conditions in securities markets. They also
include the extent to which the prices of securities will react to those
changes.
An investment in any of the Income-Oriented Funds involves market risks
associated with movements in interest rates. The market value of the Funds'
investments will fluctuate in response to changes in interest rates and other
factors. During periods of falling interest rates, the values of outstanding
long-term fixed-income securities generally rise. Conversely, during periods of
rising interest rates, the values of such securities generally decline. Changes
by recognized rating agencies in their ratings of any fixed-income security and
in the ability of an issuer to make payments of interest and principal may also
affect the value of these investments. Changes in the value of portfolio
securities will affect the Funds' net asset values but will not affect cash
income derived from the securities unless a change results from a failure of an
issuer to pay interest or principal when due.
The yields on an investment in either of the Money Market Funds will vary
with changes in short-term interest rates. In addition, the investments of each
Money Market Fund are subject to the ability of the issuer to pay interest and
principal when due.
Each of the following Principal Funds may invest in foreign securities to
the indicated percentage of its assets: International, International Emerging
Markets and International SmallCap Funds - 100%; Real Estate - 25%; Balanced,
Blue Chip, Bond, Capital Value, Growth, High Yield, Limited Term Bond Fund,
MidCap, SmallCap and Utilities Funds - 20%. Neither the Government Securities
Income Fund nor the Tax-Exempt Bond Fund may invest in foreign securities. The
Cash Management and Tax Exempt Cash Management Funds do not invest in foreign
securities other than those that are United States dollar denominated. United
State dollar denominated means that all principal and interest payments for the
security are payable in U.S. dollars and that the interest rate of, the
principal amount to be repaid and the timing of payments related to the
securities do not vary or float with the value of a foreign currency, the rate
of interest on foreign currency borrowings or with any other interest rate or
index expressed in a currency other than U.S. dollars. Debt securities issued in
the United States pursuant to a registration statement filed with the Securities
and Exchange Commission are not treated as foreign securities for purposes of
these limitations. Investment in foreign securities presents certain risks which
may affect a Fund's net asset value. These risks include, but are not limited
to, those resulting from fluctuations in currency exchange rates, revaluation of
currencies, the imposition of foreign taxes, the withholding of taxes on
dividends at the source, political and economic developments including war,
expropriations, nationalization, the possible imposition of currency exchange
controls and other foreign governmental laws or restrictions, reduced
availability of public information concerning issuers, and the fact that foreign
issuers are not generally subject to uniform accounting, auditing and financial
reporting standards or to other regulatory practices and requirements comparable
to those applicable to domestic issuers. In addition, transactions in foreign
securities may be subject to higher costs, and the time for settlement of
transactions in foreign securities may be longer than the settlement period for
domestic issuers. A Fund's investment in foreign securities may also result in
higher custodial costs and the costs associated with currency conversions.
Securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. In particular, securities
markets in emerging market countries are known to experience long delays between
the trade and settlement dates of securities purchased and sold, potentially
resulting in a lack of liquidity and greater volatility in the price of
securities on those markets. In addition, investments in smaller companies may
present greater opportunities for capital appreciation, but may also involve
greater risks than large, mature issuers. Such companies may have limited
product lines and financial resources. Their securities may trade in more
limited volume than larger companies and may therefore experience significantly
more price volatility and less liquidity than securities of larger companies. As
a result of these factors, the Boards of Directors of the Funds have adopted
Daily Pricing and Valuation Procedures for the Funds which set forth the steps
to be followed by the Manager and Sub-Advisor to establish a reliable market or
fair value if a reliable market value is not available through normal market
quotations. Oversight of this process is provided by the Executive Committee of
the Boards of Directors.
HOW THE FUNDS ARE MANAGED
Under Maryland law, the business and affairs of each of the Funds are
managed under the direction of its Board of Directors. Investment services and
certain other services are furnished to the Funds under the terms of a
Management Agreement between each of the Funds and the Manager. The Manager for
the Funds is Principal Management Corporation (formerly known as Princor
Management Corporation) (the "Manager"), an indirectly wholly-owned subsidiary
of Principal Mutual Life Insurance Company, a mutual life insurance company
organized in 1879 under the laws of the State of Iowa. The address of the
Manager is The Principal Financial Group, Des Moines, Iowa 50392. The Manager
was organized on January 10, 1969, and since that time has managed various
mutual funds sponsored by Principal Mutual Life Insurance Company. As of October
31, 1997, the Manager served as investment advisor for 28 such funds with assets
totaling approximately $_._ billion.
The Manager is responsible for investment advisory, managerial and
administrative services for the Funds. However, under a Sub-Advisory Agreement
between Invista Capital Management, Inc. ("Invista") and the Manager, Invista
performs all the investment advisory responsibilities of the Manager for the
Growth-Oriented Funds, the Government Securities Income Fund, the Limited Term
Bond Fund and the Utilities Fund. The Manager will reimburse Invista for the
cost of providing these services. Invista, an indirectly wholly-owned subsidiary
of Principal Mutual Life Insurance Company and an affiliate of the Manager, was
founded in 1985 and manages investments for institutional investors, including
Principal Mutual Life. Assets under management at October 31, 1997 were
approximately $__._ billion. Invista's address is 1500 Hub Tower, 699 Walnut,
Des Moines, Iowa 50309.
The Manager or Invista advises the Funds on investment policies and on the
composition of the Funds' portfolios. In this connection, the Manager or Invista
furnishes to the Board of Directors of each Fund a recommended investment
program consistent with that Fund's investment objective and policies. The
Manager or Invista is authorized, within the scope of the approved investment
program, to determine which securities are to be bought or sold, and in what
amounts.
The Manager or Invista has assigned certain individuals the primary
responsibility for the day-to-day management of each Fund's portfolio. The
persons primarily responsible for the day-to-day management of each Fund are
identified in the table below:
<TABLE>
<CAPTION>
Primarily
Fund Responsible Since Person Primarily Responsible
<S> <C> <C>
Balanced Fund April, 1993 Judith A. Vogel, CFA (BA degree, Central College). Vice President, Invista
Capital Management, Inc., since 1987.
Blue Chip Fund March, 1991 Mark T. Williams, CFA (MBA degree, Drake University). Vice President,
(Fund's inception) Invista Capital Management, Inc., since 1995; Investment Officer, 92-95.
Prior thereto, Security Analyst.
Bond Fund November, 1996 Scott A. Bennett,CFA (MBA degree, University of Iowa) Assistant Director
Investment Securities, Principal Mutual Life Insurance Company, since 1996.
Prior thereto, Investment Manager.
Capital Value Fund October, 1969 David L. White, CFA (BBA degree, University of Iowa). Executive Vice
(Fund's inception) President, Invista Capital Management, Inc., since 1984. Co-Manager since
November 1996: Catherine A. Green, CFA, (MBA degree, Drake University).
Vice President, Invista Capital Management, Inc. since 1987.
Government Securities May, 1985 Martin J. Schafer (BBA degree, University of Iowa). Vice President, Invista
Income Fund (Fund's inception) Capital Management, Inc., since 1992. Director - Securities Trading,
Principal Mutual Life Insurance Company 1992; Prior thereto, Associate Director.
Growth and MidCap August, 1987 Michael R. Hamilton, (MBA degree, Bellarmine College). Vice President, Funds
and December, 1987 Invista Capital Management, Inc., since 1987.
(Fund's inception),
respectively
High Yield Fund December, 1987 James K. Hovey, CFA (MBA degree, University of Iowa). Director - Investment
(Fund's inception) Securities, Principal Mutual Life Insurance Company, since 1990; Prior thereto,
Assistant Director Investment Securities.
International Fund April, 1994 Scott D. Opsal, CFA (MBA degree, University of Minnesota). Executive Vice
President and Chief Investment Officer, Invista Capital Management, Inc.,
since 1997. Vice President, 1986-1997.
International Emerging May, 1997 Kurtis D. Spieler, CFA (MBA degree, Drake University). Vice President,
Markets Fund (Fund's inception) Invista Capital Management, Inc., since 1995; Investment Officer, 94-95.
Prior thereto, Investment Manager, Principal Mutual Life Insurance Company.
International SmallCap May, 1997 Darren K. Sleister, CFA (MBA degree, University of Iowa). Investment Officer,
Fund (Fund's inception) Invista Capital Management, Inc., since 1995; Prior thereto, Security
Analyst.
Limited Term Bond February, 1996 Martin J. Schafer (BBA degree, University of Iowa). Vice President, Invista
Fund (Fund's inception) Capital Management, Inc., since 1992. Director-Securities Trading,
Principal Mutual Life Insurance Company 1992; Prior thereto, Associate
Director.
Real Estate Fund _____________ Kelly D. Rush, CFA (MBA degree, University of Iowa). Assistant Director -
(Fund's inception) Investment - Commercial Real Estate, Principal Mutual Life Insurance
Company, since 1996; Prior thereto, Senior Administrator Investment -
Commercial Real Estate.
SmallCap Fund ____________ Co-Manager: Mark T. Williams, CFA (MBA degree, Drake University). Vice
(Fund's inception) President, Invista Capital Management, Inc., since 1995; Investment Officer,
1992-1995. Co-Manager: John F. McClain, (MBA degree, Indiana University).
Vice President, Invista Capital Management, Inc., since 1995; Investment
Officer, 1992-1995.
Tax-Exempt Bond July, 1991 Daniel J. Garrett, CFA (MBA degree, Drake University). Assistant Director -
Fund Investment Securities, Principal Mutual Life Insurance Company since 1989;
Prior thereto, Mortgage Banking Research Analyst.
Utilities Fund April, 1993 Catherine A. Green, CFA (MBA degree, Drake University). Vice President,
(Fund's inception) Invista Capital Management, Inc., since 1987.
</TABLE>
Until August 1, 1988 the International Fund's portfolio was managed by
Principal Management, Inc. of Edmonton, Canada and Scottsdale, Arizona, which
company has changed its name to Sea Investment Management, Inc. The Fund's
previous manager and the current manager are unaffiliated. This change in
managers should be kept in mind when reviewing historical investment results.
For a description of the investment and other services provided by the
Manager, see "Cost of Manager's Services" in the Statement of Additional
Information. The management fee and total Class A share expenses incurred by
each Fund for the period ended October 31, 1997 were equal to the following
percentages of each Fund's respective average net assets:
<TABLE>
<CAPTION>
Class A Shares Class B Shares
---------------------------- -----------------------------
Total Total
Manager's Annualized Manager's Annualized
Fund Fee Expenses Fee Expenses
---- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Balanced Fund % % % %
Blue Chip Fund % % % %
Bond Fund % %* % %*
Capital Value Fund % % % %
Cash Management Fund % %* % %*
Government Securities Income Fund % % % %
Growth Fund % % % %
International Emerging Markets Fund
International Fund % % % %
International SmallCap Fund
High Yield Fund % % % %
Limited Term Bond Fund % %* % %*
MidCap Fund % % % %
Tax-Exempt Bond Fund % % % %
Tax-Exempt Cash Management Fund % %* % %*
Utilities Fund % %* % %*
<FN>
* After waiver.
</FN>
</TABLE>
The Manager voluntarily waived a portion of its fee for the Bond, Cash
Management, Limited Term Bond Fund, Utilities and Tax-Exempt Cash Management
Funds throughout the fiscal year ended October 31, 1997. The Manager intends to
continue its voluntary waiver and, if necessary, pay expenses normally payable
by each of these Funds, through February 28, 1998 in an amount that will
maintain a total level of operating expenses which as a percentage of average
net assets attributable to a class on an annualized basis during that period
will not exceed, for the Class A shares, .95% for the Bond Fund, .90% for the
Limited Term Bond Fund, 1.15% for the Utilities Fund and .75% for the Money
Market Funds, and for the Class B shares, 1.70% for the Bond Fund, 1.25% for the
Limited Term Bond Fund, 1.95% for the Utilities Fund and 1.50% for the Money
Market Funds. The effect of the waivers is and will be to reduce each Fund's
annual operating expenses and increase each Fund's yield.
The Manager and Invista may purchase at their own expense statistical and
other information or services from outside sources, including Principal Mutual
Life Insurance Company. An Investment Service Agreement between each Fund, the
Manager, and Principal Mutual Life Insurance Company provides that Principal
Mutual Life Insurance Company will furnish certain personnel, services and
facilities required by the Manager in connection with its performance of the
Management Agreements, and that the Manager will reimburse Principal Mutual Life
Insurance Company for its costs incurred in this regard.
Among the expenses paid by each Fund are brokerage commissions on portfolio
transactions, the cost of stock issue and transfer and dividend disbursements,
administration of shareholder accounts, custodial fees, expenses of registering
and qualifying shares for sale after the initial registration, auditing and
legal expenses, fees and expenses of unaffiliated directors, the cost of
shareholder meetings and taxes and interest (if any).
The Funds may from time to time execute transactions for portfolio
securities with, and pay related brokerage commissions to, Principal Financial
Securities, Inc. ("PFS") and Morgan Stanley and Co., each a broker-dealer
affiliated with Princor and/or the Manager for each of the Funds. PFS also
provides distribution services for the Money Market Funds for which it is
compensated by the Manager. These services include, but are not limited to,
providing office space, equipment, telephone facilities and various personnel as
necessary or beneficial to establish and maintain shareholder accounts. PFS
receives a fee from the Manager calculated as a percentage of the average net
asset value of shares of each Fund held in PFS client accounts during the period
for which PFS provides the services. During the fiscal years ended October 31,
1995, 1996, and 1997, PFS received fees in the amount of $991,520, $1,650,714
and $_,___,___ respectively, in consideration of the services it rendered to the
Cash Management Fund. During the fiscal years ending October 31, 1995, 1996, and
1997 PFS received fees in the amount of $191,789, $254,083 and $___,___
respectively, in consideration of the services it rendered to the Tax-Exempt
Cash Management Fund.
The Manager serves as investment advisor, dividend disbursing agent and,
directly and through an affiliate, as transfer agent for each of the Funds
sponsored by Principal Mutual Life Insurance Company. The Funds reimburse the
Manager for the costs of providing these services.
HOW TO PURCHASE SHARES
Purchases are generally made through registered representatives of Princor
or other dealers it selects. If an order and check are properly submitted to
Princor, the shares will be issued at the offering price next computed after the
order and check are received at Princor's main office. If Fund shares are
purchased by telephone order or electronic means and thereafter settled by
delivery of a check or a payment by wire, the shares so purchased will be issued
at the offering price next computed after the telephone or electronic order is
received at Princor's main office. If an order and check are submitted through a
selected dealer, the shares will be issued in accordance with the following: An
order accepted by a dealer on any day before the close of the New York Stock
Exchange and received by Princor before the close of its business on that day
will be executed at the offering price computed as of the close of the Exchange
on that day. An order accepted by such dealer after the close of the Exchange
and received by Princor before its closing on the following business day will be
executed at the offering price computed as of the close of the Exchange on such
following business day. Dealers have the responsibility to transmit orders to
Princor promptly. After an open account has been established, purchases will be
executed at the price next computed after receipt of the investor's check at
Princor's main office.
All orders are subject to acceptance by the Fund or Funds and Princor.
Redemptions by shareholders investing by check will be effected only after
payment has been collected on the check, which may take up to eight days or
more. Investors considering redeeming or exchanging shares or transferring
shares to another person shortly after purchase should pay for those shares with
a certified check, bank cashier's check or money order to avoid any delay in
redemption, exchange or transfer.
Class B shares of the Cash Management Fund may be purchased only by an
exchange from Class B shares of the Principal Funds. Shares of each of the other
Principal Funds may be purchased by mail, by telephone or by exchange from other
Principal Funds.
Investments by Mail. Shares of the Funds may be purchased by submitting a
completed application and check made payable to Princor. An application is
attached to this Prospectus. A different application is necessary to establish
an IRA, TDA, SEP, SAR-SEP or certain employee benefit plans. See "Retirement
Plans.".
Investments by Telephone. Shares of the Funds may be purchased by placing a
telephone order with Princor. Princor's telephone number is 1-800-247-4123.
Investors must have a current Prospectus for the funds in order to place a
telephone order. An investor must provide Princor with the payment for the order
within three business days from the date the order is placed. The investor may
provide this payment by submitting a check payable to Princor within the time
period. In addition, investors may provide the purchase payment by wiring
Federal Funds directly to Norwest Bank Iowa, N.A., on a day on which the New
York Stock Exchange and Norwest Bank Iowa, N.A. are open for business. The
investor should instruct the bank to wire transfer Federal Funds to: Norwest
Bank Iowa, N.A., Des Moines, Iowa , ABA No. 073000228; for credit to: Princor
Financial Services Corporation, Account No. 073-330; for further credit to:
investor's name and account number. Payment for both initial purchases and
subsequent purchases may be made by wire.
Investors may make subsequent purchases by wire to existing accounts
without placing a telephone order. However, if a telephone order is not placed,
shares will be purchased at the offering price next computed after the wired
payment is received by Princor. To make subsequent purchases by wire, the
investor should instruct the bank to wire transfer Federal Funds to: Norwest
Bank Iowa, N.A., Des Moines, Iowa , ABA No. 073000228; for credit to: Principal
Management Corporation, Account No. 3000499968; for further credit to:
investor's name and account number. Wire transfers may take two hours or more to
complete. Investors may make special arrangements to transmit orders for Money
Market Fund shares to Princor prior to 3:00 p.m. (Central Time) on a day when
the Fund is open for business with the investor's assurance that payment for
such shares will be made by wiring Federal Funds directly to Norwest Bank Iowa,
N.A. prior to 10:00 a.m. the following regular business day. Such orders will be
effected at the Fund's offering price in effect on the date such purchase order
is received by Princor. Wire purchases through a selected dealer may involve
other procedures established by that dealer.
Minimum Purchase Amount. An investor may open an account with any of the
Funds with a minimum initial investment of $1,000. Accounts established under
the Uniform Gifts to Minors Act or Uniform Transfers Act may be funded with a
minimum initial investment of $250. IRAs may be established with a minimum
initial investment of $250. Additional investments of $100 or more may be made
at any time without completing a new application. The minimum initial and
subsequent investment amounts are not applicable to accounts used to fund
certain employee benefit plans, to accounts designated as receiving accounts in
a Dividend Relay Election, to Money Market Fund accounts used as sweep accounts,
to accounts used as part of an asset allocation service provided by Princor
Financial Services Corporation, to Money Market Fund accounts for which Delaware
Charter Guarantee & Trust Company acts as trustee or to Automatic Investment
Plans. Each Fund's Board of Directors reserves the right to change or waive
minimum investment requirements at any time, which would be applicable to all
investors alike.
Automatic Investment Plan. An investor may make regular monthly investments
through automatic deductions from the account of a bank or similar financial
institution. The minimum monthly purchase is $25 for all Funds except the Money
Market Funds, which have a $100 monthly minimum requirement. A $25 minimum
monthly purchase may be established for the Money Market Funds if the account
value is at least $1,000 at the time the plan is established. Plan forms and
preauthorized check agreements are available from Princor on request. There is
no obligation to continue the plan and it may be terminated by the investor at
any time.
Each Fund offers investors two classes of shares through this Prospectus
which bear sales charges in different forms and amounts:
Class A Shares. An investor who invests less than $1 million in Class A
shares (except Class A shares of the Money Market Funds) pays a sales charge at
the time of purchase. As a result, shares purchased are not subject to any
charges when they are redeemed. Certain purchases of Class A shares qualify for
reduced sales charges. Class A shares purchases of $1 million or more are not
subject to a sales charge at the time of purchase but may be subject to a
contingent deferred sales charge if redeemed within 18 months of purchase. See
"Offering Price of Funds' Shares." Class A shares of each of the Funds, except
the Money Market Funds, currently bear a 12b-1 fee at the annual rate of up to
0.25% (.15% for the Limited Term Bond Fund) of the Fund's average net assets
attributable to Class A shares. See "Distribution and Shareholder Servicing
Plans and Fees."
Class B Shares. Class B shares are purchased without an initial sales
charge, but are subject to a declining contingent deferred sales charge ("CDSC")
of up to 4% (1.25% for Limited Term Bond Fund) if redeemed within six years. See
"Offering Price of Funds Shares."
Class B shares bear a higher 12b-1 fee than Class A shares, currently at
the annual rate of up to 1.00% (.50% for the Limited Term Bond Fund) of the
Fund's average net assets attributable to Class B shares. See "Distribution and
Shareholder Servicing Plans and Fees." Class B shares provide an investor the
benefit of putting all of the investor's dollars to work from the time the
investment is made, but (until conversion to Class A shares) will have a higher
expense ratio and pay lower dividends than Class A shares due to the higher
12b-1 fee. Class B shares will automatically convert to Class A shares, based on
relative net asset value (without a sales charge), on the first business day of
the 85th month after the purchase date. Class B shares acquired by exchange from
Class B shares of another Principal fund will convert into Class A shares based
on the time of the initial purchase. (See "How to Exchange Shares".) At the same
time, a pro rata portion of all shares purchased through reinvestment of
dividends and distributions would convert into Class A shares, with that portion
determined by the ratio that the shareholder's Class B shares converting into
Class A shares bears to the shareholder's total Class B shares that were not
acquired through dividends and distributions. The conversion of Class B shares
to Class A shares is subject to the continuing availability of a ruling from the
Internal Revenue Service or an opinion of counsel that such conversions will not
constitute taxable events for Federal tax purposes. There can be no assurance
that such ruling or opinion will be available, and the conversion of Class B
shares to Class A shares will not occur if such ruling or opinion is not
available. In such event, Class B shares would continue to be subject to higher
expenses than Class A shares for an indefinite period.
Which arrangement is better for you? The decision as to which class of
shares provides a more suitable investment for an investor depends on a number
of factors, including the amount and intended length of the investment.
Investors making investments that qualify for reduced sales charges might
consider Class A shares. Investors who prefer not to pay an initial sales charge
and who plan to hold their investment for more than seven years might consider
Class B shares. Orders from individuals for Class B shares for $250,000 or more
will be treated as orders for Class A shares unless the shareholder provides
written acknowledgment that the order should be treated as an order for Class B
shares. Sales personnel may receive different compensation depending on which
class of shares are purchased.
OFFERING PRICE OF FUNDS' SHARES
The Funds offer their respective shares continuously through Princor, which
is the principal underwriter for the Funds and sells shares as agent on behalf
of the Funds. Princor may select other dealers through which shares of the Funds
may be sold. Certain dealers may not sell all classes of shares.
Class A shares. Class A shares of the Money Market Funds are sold to the
public at net asset value; no sales charge applies to purchases of the Money
Market Funds. Class A shares of the Growth-Oriented and Income-Oriented Funds
are sold to the public at the net asset value plus a sales charge which ranges
from a high 4.75% (1.50% for the Limited Term Bond Fund) to a low of 0% of the
offering price (equivalent to a range of 4.99% to 0% of the net amount invested)
according to the schedule below. Selected dealers are allowed a concession as
shown. At Princor's discretion, the entire sales charge may at times be
reallowed to dealers. In some situations, depending on the services provided by
the dealer, the concession may be less. Any dealer allowance on purchases not
involving a sales charge will be determined by Princor.
<TABLE>
<CAPTION>
Sales Charge for
All Funds Except Sales Charge for
Limited Term Bond Fund Limited Term Bond Fund Dealers Allowance as
Sales Charge as % of: Sales Charge as % of: % of Offering Price
----------------------- ------------------------ --------------------------------
Offering Net Amount Offering Net Amount All Funds Except Limited Term
Price Invested Price Invested Limited Term Bond Bond
-------- ---------- -------- ---------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Less than $50,000 4.75% 4.99% 1.50% 1.52% 4.00% 1.25%
$50,000 but less than $100,000 4.25% 4.44% 1.25% 1.27% 3.75% 1.00%
$100,000 but less than $250,000 3.75% 3.90% 1.00% 1.10% 3.25% 0.75%
$250,000 but less than $500,000 2.50% 2.56% 0.75% 0.76% 2.00% 0.50%
$500,000 but less than $1,000,000 1.50% 1.52% 0.50% 0.50% 1.25% 0.25%
$1,000,000 or more 0 0 0 0 0.75% 0.25%
</TABLE>
CDSC on Class A Shares. Purchases of Class A shares of $1,000,000 or more
may be subject to CDSC upon redemption. A CDSC is payable to Princor on these
investments in the event of a share redemption within 18 months following the
share purchase, at the rate of .75% (.25% for the Limited Term Bond Fund) of the
lesser of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares. Shares subject to
the CDSC which are exchanged into another Principal Fund will continue to be
subject to the CDSC until the original 18 month period expires. However, no CDSC
is payable with respect to redemptions of Class A shares used to fund a Princor
401 (a) or Princor 401 (k) retirement plan, except redemptions resulting from
the termination of the plan or transfer of plan assets.
The CDSC will be waived on redemptions of shares in connection with certain
withdrawals from certain retirement plans. See Statement of Additional
Information. Up to 10% of the value of Class A shares subject to a Periodic
Withdrawal Plan may also be redeemed each year without a CDSC. See "Periodic
Withdrawal Plan."
Investors may be eligible to buy Class A shares at reduced sales charges.
Consult your registered representative for details about Rights of Accumulation
and Statement of Intention as well as the reduced sales charge available for the
investment of certain life insurance and annuity contract death benefits and
various Employee Benefit Plans and other plans. Descriptions are also included
in the Statement of Additional Information.
Investors may be able to purchase Class A shares at net asset value. The
following persons may purchase Class A shares of the Growth-Oriented Funds and
Income-Oriented Funds at the net asset value (without a sales charge): (1)
Principal Mutual Life Insurance Company and its directly and indirectly owned
subsidiaries; (2) Active and retired directors, officers and employees of any of
the Funds, Principal Mutual Life Insurance Company, and directly and indirectly
owned subsidiaries of Principal Mutual Life Insurance Company (including
full-time insurance agents of, and persons who have entered into insurance
brokerage contracts with, Principal Mutual Life Insurance Company and its
directly and indirectly owned subsidiaries and employees of such persons); (3)
The Principal Financial Group Employees' Credit Union; (4) Non-ERISA investment
advisory clients of Invista Capital Management, Inc., an indirectly wholly-owned
subsidiary of Principal Mutual Life Insurance Company; (5) Sales representatives
and employees of sales representatives of Princor or other dealers through which
shares of the Funds are distributed; (6) Spouses, surviving spouses and
dependent children of the foregoing persons; (7) Trusts primarily for the
benefit of the foregoing individuals; (8) certain "wrap accounts" for the
benefit of clients of Princor and other broker-dealers or financial planners
selected by Princor; (9) clients of a registered representative of Princor or
other dealers through which shares of the Funds are distributed and who has
become affiliated with Princor or other dealer within 180 days of the date of
the purchase of Class A shares of the Funds, if the investment represents the
proceeds of a redemption within that 180 day period of shares of another
investment company the purchase of which included a front-end sales charge or
the redemption of which was subject to a contingent deferred sales charge; (10)
Unit Investment Trusts sponsored by Principal Mutual Life Insurance Company
and/or its directly or indirectly owned subsidiaries; (11) certain employee
welfare benefit plan customers of Principal Mutual Life Insurance Company for
whom Plan Deposit Accounts are established.
Each of the Funds, except Principal Tax-Exempt Bond Fund and Principal
Tax-Exempt Cash Management Fund, has obtained an exemptive order from the
Securities and Exchange Commission ("SEC") to permit each Fund to offer its
shares at net asset value to participants of certain annuity contracts issued by
Principal Mutual Life Insurance Company. In addition, shares of each of these
funds are available at net asset value to the extent the investment represents
the proceeds from a total surrender of certain unregistered annuity contracts
issued by Principal Mutual Life Insurance Company and for which Principal Mutual
Life Insurance Company waives any applicable contingent deferred sales charges
or other contract surrender charges.
The Funds reserve the right to discontinue offering shares at net asset
value and/or at a reduced sales charge at any time for new accounts and upon 60
days notice to shareholders of existing accounts.
Class B shares. Class B shares (including Class B shares of the Cash
Management Fund) are sold without an initial sales charge, although a CDSC will
be imposed if you redeem shares within six years of purchase. The following
types of shares may be redeemed without charge at any time: (i) shares acquired
by reinvestment of distributions and (ii) shares otherwise exempt from the CDSC,
as described below. Subject to the foregoing exclusions, the amount of the
charge is determined as a percentage of the lesser of the current market value
or the cost of the shares being redeemed. Therefore, when a share is redeemed,
any increase in its value above the initial purchase price is not subject to any
CDSC. The amount of the CDSC will depend on the number of years since you
invested and the dollar amount being redeemed, according to the following table:
Contingent Deferred Sales Charge
as a Percentage of
Dollar Amount Subject to Charge
-----------------------------------------
Years Since Purchase For all Funds Except For Limited Term
Payments Made Limited Term Bond Fund Bond Fund
-------------------- ---------------------- ----------------
2 years or less 4.0% 1.25%
more than 2 years, up to 4 years 3.0% 0.75%
more than 4 years, up to 5 years 2.0% 0.50%
more than 5 years, up to 6 years 1.0% 0.25%
more than 6 years None None
In determining how much, if any, a CDSC is payable on a redemption, the
Fund will first redeem shares not subject to any charge, and then shares held
longest during the six year period. For information on how sales charges are
calculated if shares are exchanged, see "How to Exchange Shares." Princor
receives the entire amount of any CDSC paid.
The CDSC will be waived on redemptions of shares arising out of death or
disability or in connection with certain withdrawals from certain retirement
plans. See the Statement of Additional Information. Up to 10% of the value of
Class B shares subject to a Periodic Withdrawal Plan may also be redeemed each
year without a CDSC. See "Periodic Withdrawal Plan."
Non-cash compensation. Princor may, at its expense, provide additional
promotional incentives or payments to dealers that sell shares of the Principal
Funds. In some instances, these incentives or payments may be offered only to
certain dealers who have sold or may sell significant amounts of shares. Princor
has established a non-cash compensation program for registered representatives
of Principal Financial Securities, Inc. ("PFS") based upon sales of shares of
the Principal funds during the year ending December 31, 1997. Registered
representatives of PFS will receive a choice of promotional items, or will be
invited to attend a professional development seminar, receive a subscription for
a financial newspaper and an allowance to be used to promote the Principal
Funds.
DISTRIBUTION AND SHAREHOLDER SERVICING PLANS AND FEES
Class A Distribution Plan. Each of the Funds, except the Money Market
Funds, has adopted a distribution plan for the Class A shares. The Fund will
make payments from its assets to Princor pursuant to this Plan after the end of
each month at an annual rate not to exceed 0.25% (.15% for the Limited Term Bond
Fund) of the average daily net asset value of the Fund. Princor will retain such
amounts as are appropriate to compensate for actual expenses incurred in
distributing and promoting the sale of the Fund shares but may remit on a
continuous basis up to .25% (.15% for the Limited Term Bond Fund) to Registered
Representatives and other selected Dealers (including, for this purpose, certain
financial institutions) as a trail fee in recognition of their services and
assistance.
Class B Distribution Plan. Each of the Funds, except Tax-Exempt Cash
Management Fund, has adopted a distribution plan for the Class B shares. Each
Class B Plan provides for payments by the Fund to Princor at the annual rate of
up to 1.00% (.50% for the Limited Term Bond Fund) of the Fund's average net
assets attributable to Class B shares. Princor also receives the proceeds of any
CDSC imposed on redemptions of such shares.
Although Class B shares are sold without an initial sales charge, Princor
pays a sales commission equal to 4.00% (1.25% for the Limited Term Bond Fund) of
the amount invested to dealers who sell such shares. These commissions are not
paid on exchanges from other Principal Funds. In addition, Princor may remit on
a continuous basis up to .25% (.15% for the Limited Term Bond Fund) to
Registered Representatives and other selected Dealers (including, for this
purpose, certain financial institutions) as a trail fee in recognition of their
ongoing services and assistance.
General. The purpose of the Plans is to permit the Fund to compensate
Princor for expenses incurred by it in promoting and distributing Fund shares
and providing services to Fund shareholders. If the aggregate payments received
by Princor under any of the Plans in any fiscal year exceed the expenditures
made by Princor in that year pursuant to that Plan, Princor will promptly
reimburse the Fund for the amount of the excess. If expenses under a Plan exceed
the amount for which Princor may be compensated in any one fiscal year, the Fund
will not carry over such expenses to the next fiscal year. The Funds have no
legal obligation to pay any amount pursuant to the Plans that exceeds the
compensation limit. The Funds will not pay, directly or indirectly, interest,
carrying charges, or other financing costs in connection with the Plans. The
Plans are further described in the Statement of Additional Information.
DETERMINATION OF NET ASSET VALUE OF FUNDS' SHARES
Each Fund calculates net asset value of a share of each class by dividing
the total value of the assets attributable to the class, less all liabilities
attributable to the class, by the number of shares outstanding of the class.
Shares are valued as of the close of trading on the New York Stock Exchange each
day the Exchange is open.
Growth-Oriented and Income-Oriented Funds
The following valuation information applies to the Growth-Oriented and
Income-Oriented Funds. Securities for which market quotations are readily
available are valued using those quotations. Securities with remaining
maturities of 60 days or less are valued at amortized cost when it is determined
by the Board of Directors that amortized cost reflects fair value. Other assets
are valued at fair value as determined in good faith through procedures
established by the Board.
As previously described, some of the Funds may purchase foreign securities,
whose trading is substantially completed each day at various times prior to the
close of the New York Stock Exchange. The values of such securities used in
computing net asset value per share are usually determined as of such times.
Occasionally, events which affect the values of such securities and foreign
currency exchange rates may occur between the times at which they are generally
determined and the close of the New York Stock Exchange and would therefore not
be reflected in the computation of the Fund's net asset value. If events
materially affecting the value of such securities occur during such period, then
these securities will be valued at their fair value as determined in good faith
by the Manager under procedures established and regularly reviewed by the Board
of Directors. To the extent the Fund invests in foreign securities listed on
foreign exchanges which trade on days on which the Fund does not determine its
net asset value, for example Saturdays and other customary national U.S.
holidays, the Fund's net asset value could be significantly affected on days
when shareholders have no access to the Fund.
Money Market Funds
Portfolio securities of the Money Market Funds are valued at amortized
cost. For a description of this calculation procedure see the Statement of
Additional Information. The Money Market Funds reserve the right to calculate or
estimate their net asset values more frequently than once a day if they deem it
desirable.
DISTRIBUTION OF INCOME DIVIDENDS AND REALIZED CAPITAL GAINS
Growth-Oriented and Income-Oriented Funds
Each of these Funds distributes substantially all of its net income to
shareholders each year according to the following schedule:
<TABLE>
<CAPTION>
Funds Record date Payable date
----- ----------- ------------
<S> <C> <C>
Growth
Balanced, Blue Chip, three business days before March 24, June 24,
Real Estate, and Utilities each payable date September 24 and December 24
Capital Value, Growth, three business days before June 24 and December 24
MidCap and SmallCap each payable date
International, International three business days before December 24
Emerging Markets and each payable date
International SmallCap
Income
Bond, Government Securities three business days before monthly on the 24th (or
Income, High Yield, Limited each payable date previous business day)
Term Bond and Tax-Exempt Bond
</TABLE>
Net realized capital gains for each of the Funds, if any, will be
distributed annually. Generally the distribution will be made on the fourth
business day of December, to shareholders of record on the third business day
prior to the record date.
On the Account Application, you can authorize income dividend and capital
gains distributions to be invested in additional Fund shares at net asset value
(without a sales charge), invested in shares of other Principal Funds or paid in
cash. You may change this instruction without charge at any time by giving ten
days written notice to the Fund.
Any dividends or distributions paid shortly after a purchase of shares will
have the effect of reducing the per share net asset value by the amount of the
dividends or distributions. These dividends or distributions are subject to
taxation like other dividends and distributions, even though they are in effect
a return of capital. A shareholder of the Tax-Exempt Bond Fund who redeems
shares when tax-exempt income has been accrued but not declared as a dividend by
that Fund may have the portion of the redemption proceeds which represents such
income taxed at capital gains rates.
Money Market Funds
The Money Market Funds declare dividends of all their daily net investment
income on each day the net asset value per share is determined. Dividends for
each Fund are payable daily and are automatically reinvested in full and
fractional shares of the Fund at the then current net asset value. Shareholders
may request to have their dividends paid out monthly in cash. For such
shareholders, the shares reinvested and credited to their account during the
month will be redeemed as of the close of business on the 20th day (or the
preceding business day if the 20th is not a business day) of each month and the
proceeds will be paid to them in cash.
Net investment income of the Money Market Funds, for dividend purposes,
consists of (1) accrued interest income plus or minus accrued discount or
amortized premium; plus or minus (2) all net short-term realized gains and
losses; minus (3) all accrued expenses of the Fund. Expenses of the Fund are
accrued each day. Net income will be calculated immediately prior to the
determination of net asset value per share of each Fund. Dividends payable on
Class B shares of the Cash Management Fund on a per share basis will be lower
than dividends payable on Class A shares of the Funds.
Since it is the policy of each Money Market Fund, under normal
circumstances, to hold portfolio securities to maturity and to value portfolio
securities at amortized cost, neither Fund expects any capital gains or losses.
If either Fund does experience gains, however, it could result in an increase in
dividends. Capital losses could result in a decrease in dividends. If, for some
extraordinary reason, either Fund realizes net long-term capital gains, it will
distribute them once every 12 months.
Since the net income of each Fund (including realized gains and losses on
the portfolio securities) is normally declared as a dividend each time the net
income of the Fund is determined, the net asset value per share of each Fund
normally remains at $1.00 immediately after each determination and dividend
declaration. Any increase in the value of a shareholder's investment in either
Fund, representing reinvestment of dividend income, is reflected by an increase
in the number of shares of that Fund in the account.
Normally each Fund will have a positive net income at the time of each
determination thereof. Net income may be negative if an unexpected liability
must be accrued or a loss is realized. If the net investment income of either
Fund determined at any time is a negative amount, the net asset value per share
will be reduced below $1.00. If this happens, the Fund may endeavor to restore
the net asset value per share to $1.00 by reducing the number of outstanding
shares by redeeming proportionately from shareholders without the payment of any
monetary consideration, such number of full and fractional shares as is
necessary to maintain a net asset value per share of $1.00. Each shareholder
will be deemed to have agreed to such a redemption in these circumstances by
investment in the Fund. The Fund may seek to achieve the same objective of
restoring the net asset value per share to $1.00 by not declaring dividends from
net income on subsequent days until restoration, with the result that the net
asset value per share would increase to the extent of positive net income which
is not declared as a dividend, or any other method approved by the Board of
Directors for the Fund.
The Board of Directors of each Fund may revise the above dividend policy,
or postpone the payment of dividends, if the Fund should have or anticipate any
large presently unexpected expense, loss or fluctuation in net assets which in
the opinion of the Board might have a significant adverse effect on the
shareholders.
Dividend Relay Election
Shareholders may elect to have dividends and capital gains distributions
from one of the Principal funds invested in shares of the same class of one of
the other Principal funds. This Dividend Relay Election can be made on the
application or at any time on 10 days written notice or, if telephone
transaction services apply to the account from which the dividends and
distributions originate, on 10 days notice by telephone to the Fund. A signature
guarantee may be required to make the Dividend Relay Election. See "General
Information About a Fund Account." There is no administrative charge for this
service. No sales charge will apply to the purchase of shares of the
Growth-Oriented or Income-Oriented Funds made pursuant to the election;
dividends and distributions are credited to the receiving Fund the day they are
paid at the receiving Fund's net asset value for that day. If the Dividend Relay
Election is made to direct dividends and distributions from a Fund used to fund
the shareholder's retirement plan (for example, an IRA) to a receiving Fund that
is not used to fund the shareholder's retirement plan, a taxable distribution
from the retirement plan will result. Shareholders should consult their tax
advisor prior to making such an election.
Dividends and distributions derived from shares of the Funds used to fund
certain employee benefit plans are not eligible for the Dividend Relay Election.
If the Dividend Relay Election privilege is discontinued with respect to a
particular receiving Fund, the value of the account in that Fund must equal or
exceed the Fund's minimum initial investment requirement or the Fund shall have
the right, if the shareholder fails to increase the value of the account to such
minimum within 90 days after being notified of the deficiency, to redeem the
account and send the proceeds to the shareholder.
Shareholders may discontinue the Dividend Relay Election at any time on 10
days written notice or, if telephone transaction services apply to the account
from which the dividends originate, on 10 days notice by telephone to the Fund.
The Funds reserve the right to discontinue or modify this service upon 60 days
written notice to shareholders.
TAX TREATMENT OF FUNDS, DIVIDENDS AND DISTRIBUTIONS
It is the policy of each of the Funds to distribute substantially all net
investment income and net realized gains. Through such distributions, and by
satisfying certain other requirements, the Funds intend to qualify for the tax
treatment applicable to regulated investment companies under the provisions of
the Internal Revenue Code. This means that in each year in which a Fund so
qualifies, it will be exempt from federal income tax upon the amounts so
distributed to investors. The Tax Reform Act of 1986 imposed an excise tax on
mutual funds which fail to distribute net investment income and capital gains by
the end of the calendar year in accordance with the provisions of the Act. The
Funds intend to comply with the Act's requirements and to avoid this excise tax.
The Funds record dividend income on the ex-dividend date, except dividend income
from foreign securities where the ex-dividend date may have passed, in which
case such dividends are recorded as soon as the Fund is informed of the
ex-dividend date. The Funds are required by law to withhold 31% of dividends
paid to investors who do not furnish the Fund their correct taxpayer
identification number, which in the case of most individuals is their social
security number.
The Tax-Exempt Bond Fund and Tax-Exempt Cash Management Fund also intend to
qualify to pay exempt-interest dividends to their shareholders. An
exempt-interest dividend is that part of dividend distributions made by the
Funds which consists of interest received by the Funds on tax-exempt Municipal
Obligations. Shareholders incur no federal income taxes on exempt-interest
dividends. However, these exempt-interest dividends may be taxable under state
or local law. Fund shareholders that are corporations must include
exempt-interest dividends when calculating the corporate alternative minimum
tax. Persons investing on behalf of a Subchapter S corporation should seek the
advice of a tax advisor prior to purchasing shares of the Tax-Exempt Bond Fund
or Tax-Exempt Cash Management Fund. Exempt-interest dividends that derive from
certain private activity bonds must be included by individuals as a preference
item to determine whether they are subject to the alternative minimum tax. These
Funds may also pay ordinary income dividends and distribute capital gains from
time to time. Ordinary income dividends and distributions of capital gains, if
any, are taxable for federal purposes.
In each fiscal year when, at the close of such year, more than 50% of the
value of the International, International Emerging Markets or International
SmallCap Fund's total assets are invested in securities of foreign corporations,
the Fund may elect pursuant to Section 853 of the Internal Revenue Code to
permit its shareholders to take a credit (or a deduction) for foreign income
taxes paid by the Fund. In that case, shareholders should include in gross
income for federal income tax purposes both cash dividends received from the
Fund and the amount which the Fund advises is their pro rata portion of foreign
income taxes paid with respect to, or withheld from, dividends and interest paid
to the Fund from its foreign investments. The shareholders would then be
entitled to subtract from their federal income taxes the amount of such taxes
withheld, or else treat such foreign taxes as a deduction from gross income, if
that should be more advantageous. As in the case of individuals receiving income
directly from foreign sources, the above-described tax credit for tax deduction
is subject to certain limitations.
Under the federal income tax law, dividends paid from investment income and
from realized short-term capital gains, if any, are generally taxable at
ordinary income rates whether received in cash or additional shares. The net
income of the Cash Management Fund for purposes of its financial reports and
determination of the amount of distributions to shareholders may exceed its net
income as determined for tax purposes because certain market discount income
will be currently included as income for book purposes but not for tax purposes.
Although all net income for book purposes will be distributed to shareholders,
such distributions are taxable to shareholders of the Fund as ordinary income
only to the extent that they do not exceed the shareholder's ratable share of
the Fund's investment income and any short-term capital gain as determined for
tax purposes. The balance, if any, will be applied against and will reduce the
shareholder's cost or other tax basis for the shares.
Dividends from net investment income of each of the Funds will be eligible
for a 70% dividends received deduction generally available to corporations to
the extent of the amount of qualifying dividends received by the Fund from
domestic corporations for the taxable year. Dividends from the Income-Oriented
Funds and the Money Market Funds are not expected to qualify for the 70%
dividend received deduction. Dividends and capital gains are taxable in the year
in which distributed, whether received in cash or reinvested in additional
shares. Dividends declared with a record date in December and paid in January
will be deemed to have been distributed to shareholders in December. The Funds
will inform shareholders of the amount and nature of their income dividends and
capital gains distributions. Dividends from net income and distributions of
capital gains may also be subject to state and local taxation.
Additional information regarding taxation is included in the Statement of
Additional Information. Shareholders should consult their own tax advisors as to
the federal, state and local tax consequences of ownership of shares of the
Funds in their particular circumstances.
HOW TO EXCHANGE SHARES
Class A shares for all of the Funds (except the Money Market Funds and the
Limited Term Bond Fund), or Class B shares for all of the Funds may be exchanged
at net asset value for shares of the same class of any other Principal Fund
described in the Prospectus, at any time. Class A shares of the Limited Term
Bond Fund may be exchanged at net asset value for Class A shares of any of the
other Principal Funds at any time 90 days after the purchase of such shares. The
CDSC that might apply if Class B shares, or certain Class A shares, are redeemed
will not apply if these shares are exchanged. However, for purposes of computing
the CDSC on the shares acquired through the exchange, the length of time the
acquired shares have been owned by a shareholder will be measured from the date
of original purchase of the exchanged shares and the amount of the CDSC will be
determined based upon the CDSC table to which the exchanged shares were subject.
Thus, when shares acquired through the exchange are redeemed, the redemption may
be subject to the CDSC, depending upon when the exchanged shares were originally
purchased.
Class A shares of Principal Cash Management Fund or Principal Tax-Exempt
Cash Management Fund acquired by direct purchase are not included in the net
asset value exchange privilege. However, Class A shares of these two Funds
acquired by exchange of any other Principal Fund shares, or by conversion of
Class B shares, and additional shares which have been purchased by reinvesting
dividends earned on Class A shares, may be exchanged for other Class A shares
without a sales charge. In addition, Class A shares of the Money Market Funds
acquired by direct purchase or reinvestment of dividends on such shares may be
exchanged for Class B shares of any Growth-Oriented or Income-Oriented Fund.
Shares of a Fund used to fund an employee benefit plan may be exchanged
only for shares of other Principal Funds made available to such plan. A request
for an exchange of shares used to fund an Employee Benefit Plan must be made in
accordance with the procedures provided in the Plan and the written service
agreement. All other shareholders may exchange shares by simply submitting a
written request or a completed Exchange Authorization Form to the Fund. Exchange
Authorization Forms are available by calling or writing the Fund. For federal
income tax purposes, an exchange is treated as a sale of shares and generally
results in a capital gain or loss. Income tax rules regarding the calculation of
cost basis may make it undesirable in certain circumstances to exchange shares
within 90 days of their purchase. A telephone exchange privilege is currently
available for amounts up to $500,000. Procedures for telephone transactions are
described under "How to Sell Shares." The telephone exchange privilege is not
available for accounts for which share certificates remain outstanding.
A shareholder may also make an Automatic Exchange Election. This election
authorizes an exchange as described above from one Principal Fund to any or all
of the other Principal Funds on a monthly, quarterly, semiannual or annual
basis. The minimum amount that may be exchanged into any Principal Fund must
equal or exceed $300 on an annual basis. The exchange will occur on the date of
the month specified by the shareholder in the election so long as the day is a
trading day. If the designated day is not a trading day, the exchange will occur
on the next trading day occurring during that month. If the next trading day
occurs in the following month, the exchange will occur on the trading day prior
to the designated day. The Automatic Exchange Election may be made on the open
account application, on 10 days written notice or, if telephone transaction
services apply to the account from which the exchange is made, on 10 days notice
by telephone to the Fund from which the exchange will be made. See "How to Sell
Shares" for an explanation of the applicability of telephone transaction
services. Exchanges from a Fund used to fund the shareholder's retirement plan
to a Principal Fund not used to fund the shareholder's retirement plan will
result in a taxable distribution from the retirement plan. Shareholders should
consult their tax adviser prior to making such an exchange. A shareholder may
modify or discontinue the election on 10 days written notice or notice by
telephone to the Fund from which exchanges are made.
General - An exchange, whether in writing, by telephone or other means, by
any joint owner shall be binding upon all joint owners. If the exchanging
shareholder does not have an account with the Fund in which shares are being
acquired, a new account will be established with the same registration, dividend
and capital gain options and dealer of record as the account from which shares
are exchanged. All exchanges are subject to the minimum investment and
eligibility requirements of the Fund being acquired. A shareholder may receive
shares in exchange only if they may be legally offered in the shareholder's
state of residence. If a certificate has been issued an exchange will be made
only upon receipt of the certificate of shares to be exchanged. In order to
establish a systematic accumulation plan or a periodic withdrawal plan for the
new account, an exchanging shareholder must file a specific written request.
The exchange privilege is not intended as a vehicle for short-term trading.
Excessive exchange activity may interfere with portfolio management and have an
adverse effect on all shareholders. In order to limit excessive exchange
activity and in other circumstances where the Directors or Principal Management
Corporation believes doing so would be in the best interest of the Fund, the
Fund reserves the right to revise or terminate the exchange privilege, limit the
amount or number of exchanges or reject any exchange. Shareholders would be
notified of any such action to the extent required by law. A shareholder may
modify or discontinue an election on 10 days written notice or notice by
telephone to the Fund from which exchanges are made.
HOW TO SELL SHARES
Each Fund will redeem its shares upon request. Shares are redeemed at the
net asset value calculated after the Fund receives the request in proper form,
less any applicable CDSC. There is no additional charge for redemptions.
Redemptions, whether in writing or by telephone or other means, by any joint
owner shall be binding upon all joint owners. The amount received for shares
upon redemption may be more or less than the cost of such shares depending upon
the net asset value at the time of redemption. The Funds generally send
redemption proceeds the business day after the request is received. Under
unusual circumstances, the Funds may suspend redemptions, or postpone payment
for more than three business days, as permitted by federal securities law. A
Fund will redeem only those shares for which it has received payment. To avoid
the inconvenience of a delay in obtaining redemption proceeds, shares may be
purchased with a certified check, bank cashiers check or money order.
A request for the redemption of shares used to fund certain employee
benefit plans must be made in accordance with the procedures provided in the
Plan and the written service agreement. Princor usually requires additional
documentation for the sale of shares by a corporation, partnership, agent or
fiduciary, or a surviving joint owner. Contact Princor for details. Shareholders
may redeem by mail, by telephone or, in the case of Class A shares of Money
Market Fund accounts, by a checkwriting service. The Fund reserves the right to
modify any of the methods of redemption or to charge a fee for providing these
services upon written notice to shareholders.
By Mail - A shareholder simply sends a letter to Princor, at P.O. Box
10423, Des Moines, Iowa 50306, requesting redemption of any part or all of the
shares owned by specifying the Fund account from which the redemption is to be
made and either a dollar or share amount. The letter must provide the account
number and be signed by a registered owner. If certificates have been issued,
they must be properly endorsed and forwarded with the redemption request. If
payment of less than $100,000 is to be mailed to the address of record, which
has not been changed within the three month period preceding the redemption
request, and is made payable to the registered shareholder or joint
shareholders, or to Principal Mutual Life Insurance Company or any of its
affiliated companies, the Fund will not require a signature guarantee as a part
of a proper endorsement; otherwise the shareholder's signature must be
guaranteed by either a commercial bank, trust company, credit union, savings and
loan association, national securities exchange member, or by a brokerage firm. A
signature guaranteed by a notary public or savings bank is not acceptable.
By Telephone - Shareholders may redeem shares valued at up to $100,000 from
any one Fund by telephone, unless the shareholder has notified the Fund of an
address change within the three month period preceding the date of the request.
Such redemption proceeds will be mailed to the shareholder's address of record.
Telephone redemption proceeds may also be sent by check or wire transfer to a
commercial bank account in the United States previously authorized in writing by
the shareholder. A wire charge of up to $6.00 will be deducted from the Fund
account from which the redemption is made for all wire transfers. If proceeds
are to be used to settle a securities transaction with a selected dealer,
telephone redemptions may be requested by the shareholder or upon appropriate
authorization from an authorized representative of the dealer, and the proceeds
will be wired to the dealer. The telephone redemption privilege is available
only if telephone transaction services apply to the account from which shares
are redeemed. Telephone transaction services apply to all accounts, except
accounts used to fund a Princor IRA or TDA or certain employee benefit plans,
unless the shareholder has specifically declined this service on the account
application or in writing to the Fund. The telephone redemption privilege will
not be allowed on shares for which certificates have been issued.
Shareholders may exercise the telephone redemption privilege by telephoning
1-800-247-4123. If all telephone lines are busy, shareholders might not be able
to request telephone redemptions and would have to submit written redemption
requests. Although the Funds and the transfer agent are not responsible for the
authenticity of redemption requests received by telephone, the right is reserved
to refuse telephone redemptions when in the opinion of the Fund from which the
redemption is requested or the transfer agent it seems prudent to do so. The
shareholder bears the risk of loss caused by a fraudulent telephone redemption
request the Fund reasonably believes to be genuine. Each Fund will employ
reasonable procedures to assure telephone instructions are genuine and if such
procedures are not followed, the Fund may be liable for losses due to
unauthorized or fraudulent transactions. Such procedures include recording all
telephone instructions, requesting personal identification information such as
the caller's name, daytime telephone number, social security number and/or birth
date and names of all owners listed on the account and sending a written
confirmation of the transaction to the shareholder's address of record. In
addition, the Fund directs redemption proceeds made payable to the owner or
owners of the account only to an address of record that has not been changed
within the three-month period prior to the date of the telephone request, or to
a previously authorized bank account.
By Checkwriting Service - Shareholders of Class A shares of the Money
Market Funds may redeem shares, other than shares subject to a CDSC or shares
used to fund a Princor IRA, TDA, SEP, SAR-SEP or certain employee benefit plans,
by writing checks on their accounts if this service is elected when completing
the Fund application. Upon receipt of the properly completed form and signature
card, the Fund will provide withdrawal checks drawn on Norwest Bank Iowa, N.A.
These checks may be payable to the order of any person in the amount of not less
than $100. Shareholders will continue to earn dividends until the check clears.
After a check is presented to Norwest Bank for payment, a sufficient number of
full or fractional shares will be redeemed from the account to cover the amount
of the check. Shareholders currently pay no fee for the checkwriting service,
but this may be changed in the future upon written notice to shareholders. The
checkwriting service is not available on shares for which certificates have been
issued.
Shareholders utilizing withdrawal checks will be subject to Norwest Bank's
rules governing checking accounts. Shareholders should make sure their accounts
have sufficient shares to cover the amount of any check drawn. If insufficient
shares are in the account, the check will be returned marked "Insufficient
Funds" and no shares will be redeemed. The checkwriting service may be revoked
on accounts on which "Insufficient Funds" checks are drawn. Accounts may not be
closed by a withdrawal check because the exact amount of the account will not be
known until after the check is received by Norwest Bank.
Moreover, following a purchase by check, redemptions from the Money Market
Funds pursuant to the checkwriting service or any of the Principal Funds
pursuant to the telephone withdrawal procedure will not be permitted until
payment has been collected on the check. During the period prior to the time the
redemption is effective, dividends on the Money Market Funds' shares will accrue
and be paid and the shareholder will be entitled to exercise all other rights of
beneficial ownership.
Reinvestment Privilege - Within 60 days after redemption, shareholders who
redeem all or part of their Class A shares for which a sales charge was paid or
which were acquired by the conversion of Class B shares, or Class B shares for
which a CDSC was paid, have a onetime privilege to reinvest the amount redeemed
in Class A shares of any of the Funds without a sales charge.
The reinvestment or exchange will be made at the net asset value next
computed after written notice of exercise of the privilege is received in proper
and correct form by Princor. All reinvestments or exchanges are subject to
acceptance by the Fund or Funds and Princor. The redemption which precedes such
reinvestment or exchange is regarded as a sale; therefore, if the shareholder
has realized a gain on the redemption, such gain may be taxable and exercising
the reinvestment privilege will not alter any tax payable. If a loss is realized
on the redemption of Fund shares, the reinvestment may be subject to the "wash
sale" rules, resulting in a postponement of the recognition of such loss for
federal income tax purposes. Accurate records should be kept for the duration of
the account for tax purposes.
PERIODIC WITHDRAWAL PLAN
A shareholder may request that a fixed number of Class A shares or Class B
shares ($25 initial minimum amount) or enough Class A shares or Class B shares
to produce a fixed amount of money ($25 initial minimum amount) be withdrawn
from an account monthly, quarterly, semiannually or annually. As described under
"Offering Price of the Funds' Shares," withdrawals from certain Class A shares
of the Funds other than the Money Market Funds, and Class B shares may be
subject to a CDSC. However, each year a shareholder may make periodic
withdrawals of up to 10% of the value of an account for Class B shares without
incurring a CDSC. The amount of the 10% free withdrawal privilege for an account
is initially determined based upon the value of the account as of the date of
the initial periodic withdrawal. If a periodic withdrawal plan is established at
the time Class B shares are purchased, the amount of the initial 10% free
withdrawal privilege may be increased by 10% of the amount of additional
purchases in that account made within 60 days after Class B shares were first
purchased. After a periodic withdrawal plan has been established the amount of
the 10% withdrawal privilege will be re-determined as of the last business day
of December each year. The Fund from which the periodic withdrawal is made makes
no recommendation as to either the number of shares or the fixed amount that the
investor may withdraw. Shareholders considering the implementation of a Plan
using shares of the Tax-Exempt Bond Fund are cautioned that the portion of
redemption proceeds which represents tax-exempt income which has been accrued
but not declared as a dividend by the Fund may be taxed at capital gains rates.
See "Distribution of Income Dividends and Realized Capital Gains." An investor
may initiate a Periodic Withdrawal Plan by signing an Agreement for Periodic
Withdrawal Form and depositing any share certificates that have been issued or,
if no certificates have been issued and telephone transaction services apply to
the account, by telephoning the Fund.
A shareholder of Class A shares of the Money Market Funds may establish a
Pre-Authorized Check (PAC) Withdrawal Service to enable a shareholder's creditor
to receive monthly installment payments from the shareholder's account if the
shareholder's creditor is capable of providing this service. The shareholder's
creditor will provide the necessary forms to establish a PAC Withdrawal Service.
Redemptions to pay insurance premiums - Upon completion of the necessary
authorization, shareholders of Class A shares of the Money Market Funds who pay
insurance or annuity premiums or deposits to Principal Mutual Life Insurance
Company or its affiliated companies may authorize automatic redemptions from
Class A shares of the Fund to pay such amounts. Details relative to this option
may be obtained from the Funds.
Cash withdrawals are made out of the proceeds of redemption on the day
designated by the shareholder, so long as the day is a trading day, and will
continue until cancelled. If no date is designated, redemptions will occur on
the fifteenth day of the month. If the designated day is not a trading day, the
redemption will occur on the next trading day occurring during that month. If
the next trading day occurs in the following month, the redemption will occur on
the trading day prior to the designated day. Withdrawal payments will be sent on
or before the third business day following such redemption. The redemption of
shares to make payments under this Plan will reduce and may eventually exhaust
the account. An investor will be disadvantaged by making additional purchases of
shares of any investment company on which there is a sales charge at the same
time that a Periodic Withdrawal Plan is in effect since a duplication of sales
charges will result. No purchase payments for shares of any Fund except
Principal Cash Management Fund or Principal Tax-Exempt Cash Management Fund will
be knowingly accepted by Princor Financial Services Corporation while periodic
withdrawals under this plan are being made, unless the purchase represents a
substantial addition to the shareholder's account.
Each redemption of shares may result in a gain or loss, which may be
reportable for income tax purposes. An investor should keep an accurate record
of any gain or loss on each withdrawal. Shareholders should consult their tax
advisors prior to establishing a periodic withdrawal plan from an Individual
Retirement Account. Any income dividends or capital gains distributions on
shares held under a Periodic Withdrawal Plan are reinvested in additional shares
at net asset value. Withdrawals may be stopped at any time without penalty,
subject to notice in writing which is received by the Fund.
PERFORMANCE CALCULATION
From time to time, the Funds may publish advertisements containing
information (including graphs, charts, tables and examples) about the
performance of one or more of the Funds and about a Fund's largest industry
holdings and largest five to ten specific securities holdings in its portfolio.
The funds may also quote rankings, yields or returns as published by independent
statistical services or publishers, and information regarding the performance of
certain market indices. The Funds' yield and total return figures described
below will vary depending upon market conditions, the composition of the Funds'
portfolios and operating expenses. These factors and possible differences in the
methods used in calculating yield and total return should be considered when
comparing the Funds' performance figures to performance figures published for
other investment vehicles. Any performance data quoted for the Funds represents
only historical performance and is not intended to indicate future performance
of the Funds. For further information on how the Funds calculate yield and total
return figures, see the Statement of Additional Information.
Growth-Oriented and Income-Oriented Funds
The Income-Oriented Funds may advertise their respective yields and average
annual total returns. The Growth-Oriented Funds may advertise their respective
average annual total returns. Yield is determined by annualizing each Fund's net
investment income per share for a specific, historical 30-day period and
dividing the result by the ending maximum public offering price for Class A
shares or the net asset value for Class B shares of the Fund for the same
period. Average annual total return for each Fund is computed by calculating the
average annual compounded rate of return over the stated period that would
equate an initial $1,000 investment to the ending redeemable value assuming the
reinvestment of all dividends and capital gains distributions at net asset
value. The same assumptions are made when computing cumulative total return by
dividing the ending redeemable value by the initial investment. These
calculations assume the payment of the maximum front-end load (in the case of
Class A shares) or the applicable CDSC (in the case of Class B shares). The
Funds may also calculate total return figures for a specified period that
reflect reduced sales charges available to certain classes of investors and
figures that do not take into account the maximum initial sales charge or
contingent deferred sales charge to illustrate changes in the Funds' net asset
values over time. A tax-equivalent yield may also be advertised by the
Tax-Exempt Bond Fund.
Money Market Funds
From time to time the Money Market Funds may advertise their respective
yield and effective yield. The yield of each Fund refers to the income generated
by an investment in that Fund over a seven-day period. This income is then
annualized. That is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The effective yield is calculated
similarly but, when annualized, the income earned by an investment in the Fund
is assumed to be reinvested. The effective yield will be slightly higher than
the yield because of the compounding effect of this assumed reinvestment. A
tax-equivalent yield may also be advertised by the Tax-Exempt Cash Management
Fund.
The yield for the Money Market Funds will fluctuate daily as the income
earned on the investments of the Funds fluctuates. Accordingly, there is no
assurance that the yield quoted on any given occasion will remain in effect for
any period of time. The Funds are open-end investment companies and there is no
guarantee that the net asset value or any stated rate of return will remain
constant. A shareholder's investment in the Funds is not insured. Investors
comparing results of the Funds with investment results and yields from other
sources such as banks or savings and loan associations should understand these
distinctions. Historical and comparative yield information may, from time to
time, be presented by the Fund.
GENERAL INFORMATION ABOUT A FUND ACCOUNT
Share certificates will be issued to shareholders only when requested.
Shareholders of the Funds will receive a statement of account for the Fund in
which they have invested. The Funds treat the statement of account as evidence
of ownership of Fund shares.
This is known as an open account system. Each Fund bears the cost of the open
account system.
A confirmation statement indicating the current transaction and the total
number of Fund shares owned will generally be provided each time a shareholder
invests in a Fund. However, there are certain exceptions, described below, when
quarterly or monthly confirmation statements will be provided.
Quarterly Statements. A quarterly statement disclosing information
regarding purchases, redemptions, and reinvested dividends or distributions
occurring during the quarter, as well as the balance of shares owned and account
values as of the statement date will be provided to shareholders for the
following types of accounts:
1. Accounts for which the only activity during a calendar quarter is the
purchase of shares due to the reinvestment of dividends and/or capital
gains distributions from the Fund or from another Principal Fund as a
result of a Dividend Relay Election;
2. Accounts from which redemptions are made pursuant to a Periodic
Withdrawal Plan;
3. Accounts for which purchases are made pursuant to a Systematic
Accumulation Plan; 4. Accounts from which purchases or redemptions are
made pursuant to an automatic exchange election;
5. Accounts used to fund certain individual retirement or individual
pensions plans qualified under the Internal Revenue Code; and
6. Accounts established through an arrangement involving a group of two
or more shareholders for whom purchases of shares are made through a
person (e.g. an employer ) designated by the group. A statement
indicating receipt of the total amount paid by the group will be sent
to the designated person at the time each purchase is made. If the
payment on behalf of the group is not received from the designated
person within 10 days of the date such payments are to be made, each
member will be notified and thereafter each member will receive a
statement at the time of each purchase for the three succeeding
payments. If a payment is not received in the current quarter on
behalf of a member for whom a payment had been received in the
previous quarter, a statement will be sent to such group member
reflecting that a payment was not received on the member's behalf.
Monthly Statements. Shareholders of the Money Market Funds for whom
quarterly statements are not available, will receive a monthly statement
disclosing the current balance of shares owned and a summary of transactions
through the last business day of the month.
Signature Guarantee. The Funds have adopted the policy of requiring
signature guarantees in certain circumstances to safeguard shareholder accounts.
A signature guarantee is necessary under the following circumstances:
1. If a redemption payment is to be made payable to a payee other than
the registered shareholder or joint shareholders, or Principal Mutual
Life Insurance Company or any of its affiliated companies or selected
administrators of qualified retirement plans;
2. To make a Dividend Relay Election directing dividends from a Fund
account which has joint owners to a Fund account which has only one
owner or different joint owners;
3. To change the ownership of the account;
4. To add telephone transaction services to an account established prior
to March 1, 1992 or to any account after the initial application is
processed;
5. When there is any change to a bank account designated under an
established telephone withdrawal plan; and
6. If a redemption payment is to be mailed to an address other than the
address of record or to an address of record that has been changed
within the preceding three months.
A shareholder's signature must be guaranteed by a commercial bank, trust
company, credit union, savings and loan association, national securities
exchange member, or brokerage firm. A signature guaranteed by a notary public is
not acceptable.
Minimum Account Balance. Although there currently is no minimum balance,
due to the disproportionately high cost of maintaining small accounts, the Funds
reserve the right to redeem all shares in an account with a value of less than
$300 and to mail the proceeds to the shareholder. Involuntary redemptions will
not be triggered solely by market activity. Shareholders will be notified before
these redemptions are to be made and will have thirty days to make an additional
investment to bring their accounts up to the required minimum. The Funds reserve
the right to increase the required minimum.
RETIREMENT PLANS
Shares of the Funds, except the Tax-Exempt Bond and Tax-Exempt Cash
Management Fund, are offered to fund certain retirement plans for which
Principal Mutual Life Insurance Company acts as custodian. These retirement
plans include Individual Retirement Accounts (IRAs), Simplified Employee Pension
and Salary Reduction Simplified Employee Pension Plans (SEPs and SAR/SEPs) all
of which are described in Section 408 of the Internal Revenue Code, and salary
deferral TDA plans as described in Section 403(b)(7) of the Internal Revenue
Code. The necessary forms to establish one of the Princor retirement plans,
including an application, may be obtained from a registered representative of
Princor or by calling 1-800-451-5447. DO NOT USE THE APPLICATION INCLUDED IN
THIS PROSPECTUS TO START A PRINCOR RETIREMENT PLAN. The Systematic Accumulation
Plan may be used to purchase shares of the Funds for a Princor retirement plan.
See "How to Purchase Shares." Telephone redemptions are not available on
accounts used to fund a Princor retirement plan. See "How to Sell Shares."
Investors should consult their tax counsel for retirement plan tax information.
SHAREHOLDER RIGHTS
The following information is applicable to each of the Principal Funds.
Each Fund's shares (except Tax-Exempt Bond Fund and Tax-Exempt Cash Management
Fund) are currently divided into three classes. Shares of the Tax-Exempt Bond
Fund are divided into two classes. The Tax-Exempt Cash Management Fund is only
offered in Class A shares. Each Fund share is entitled to one vote with
fractional shares voting proportionately. All classes of shares for each Fund
will vote together as a single class except where required by law or as
determined by the Fund's Board of Directors. Shares are freely transferable, are
entitled to dividends as declared by the Fund's Board of Directors and, if the
Fund were liquidated, would receive the net assets of the Fund. Shareholders of
a Fund may remove any director of that Fund with or without cause by the vote of
a majority of the votes entitled to be cast at a meeting of shareholders.
Shareholders will be assisted with shareholder communication in connection with
such matter.
The Board of Directors of each Fund may increase or decrease the aggregate
number of shares which the Fund has authority to issue and may issue two or more
classes of shares having such preferences and special or relative rights and
privileges as the Directors may determine, without shareholder approval.
The Funds are not required to hold an annual meeting of shareholders in any
year unless required to do so under the Investment Company Act of 1940. The
Funds intend to hold shareholder meetings only when required by law and at such
other times as may be deemed appropriate by their respective Boards of
Directors. However, each Fund will hold a meeting of shareholders when requested
to do so in writing by the holders of 10% or more of the outstanding shares of
that Fund.
Shareholder inquiries should be directed to the appropriate Fund at The
Principal Financial Group, Des Moines, Iowa 50392.
As of __________, Principal Mutual Life Insurance Company and its
subsidiaries and affiliates owned 25% or more of the outstanding voting shares
of each Fund as indicated:
Percentage of
Number of Outstanding Shares
Fund Shares Owned Owned
Capital Value Fund _,___,___ __.__%
International Emerging Markets Fund _,___,___ __.__%
International SmallCap Fund _,___,___ __.__%
Limited Term Bond Fund _,___,___ __.__%
ADDITIONAL INFORMATION
Organization: The Funds were incorporated in the state of Maryland on the
following dates: Balanced Fund - November 26, 1986; Blue Chip Fund - December
10, 1990; Bond Fund - December 2, 1986; Capital Value Fund - May 26, 1989
(effective November 1, 1989 succeeded to the business of a predecessor Fund that
had been incorporated in Delaware on February 6, 1969); Cash Management Fund -
June 10, 1982; International Emerging Markets Fund - May 27, 1997; Government
Securities Income Fund - September 5, 1984; Growth Fund - May 26, 1989
(effective November 1, 1989 succeeded to the business of a predecessor Fund that
had been incorporated in Delaware on February 6, 1969); High Yield Fund -
November 26, 1986; International Fund - May 12, 1981; International SmallCap
Fund - May 27, 1997; Limited Term Bond Fund - August 9, 1995; MidCap Fund -
February 20, 1987; Real Estate Fund - May 27, 1997; SmallCap Fund August 13,
1997; Tax-Exempt Bond Fund - June 7, 1985; Tax-Exempt Cash Management Fund -
August 17, 1987; Utilities Fund - September 3, 1992.
Custodian: Bank of New York, 48 Wall Street, New York, New York 10286, is
custodian of the portfolio securities and cash assets of each of the Funds
except the International Emerging Markets Fund, International Fund and
International SmallCap Fund. The custodian for the International Emerging
Markets Fund, International Fund and International SmallCap Fund is Chase
Manhattan Bank, Global Securities Services, Chase Metro Tech Center, Brooklyn,
New York 11245. The custodians perform no managerial or policymaking functions
for the Funds.
Capitalization: The authorized capital stock of each Fund consists of
100,000,000 shares of common stock (2,000,000,000 for Principal Cash Management
Fund and 1,000,000,000 Principal Tax-Exempt Cash Management Fund), $.01 par
value.
Financial Statements: Copies of the financial statements of each Fund will
be mailed to each shareholder semiannually. At the close of each fiscal year,
each Fund's financial statements will be audited by a firm of independent
auditors. The firm of Ernst & Young LLP has been appointed to audit the
financial statements of each Fund for their respective present fiscal years.
Registration Statement: This Prospectus omits some information contained in
the Statement of Additional Information (also known as Part B of the
Registration Statement) and Part C of the Registration Statements which the
Funds have filed with the Securities and Exchange Commission. The Funds'
Statement of Additional Information is hereby incorporated by reference into
this Prospectus. A copy of this Statement of Additional Information can be
obtained upon request, free of charge, by writing or telephoning Princor
Financial Services Corporation. You may obtain a copy of Part C of the
Registration Statements filed with the Securities and Exchange Commission,
Washington, D.C. from the Commission upon payment of the prescribed fees.
Principal Underwriter: Princor Financial Services Corporation, P.O. Box
10423, Des Moines, IA 50306, is the principal underwriter for each of the
Principal Funds.
Transfer Agent and Dividend Disbursing Agent: Principal Management
Corporation, The Principal Financial Group, Des Moines, Iowa, 50392, is the
transfer agent and dividend disbursing agent for each of the Principal Funds.
This Prospectus describes a family of investment companies ("Principal
Funds" formerly known as "Princor Funds") which has been organized by Principal
Mutual Life Insurance Company. Together the Funds provide the following range of
investment objectives:
GROWTH-ORIENTED FUNDS
Domestic
Principal Balanced Fund, Inc. (formerly known as Princor Balanced Fund, Inc.)
seeks to generate a total investment return consisting of current income and
capital appreciation while assuming reasonable risks in furtherance of the
investment objective.
Principal Blue Chip Fund, Inc. (formerly known as Princor Blue Chip Fund, Inc.)
seeks to achieve growth of capital and growth of income by investing primarily
in common stocks of well capitalized, established companies.
Principal Capital Value Fund, Inc. (formerly known as Princor Capital
Accumulation Fund, Inc.) seeks to achieve primarily long-term capital
appreciation and secondarily growth of investment income through the purchase
primarily of common stocks, but the Fund may invest in other securities.
Principal Growth Fund, Inc. (formerly known as Princor Growth Fund, Inc.) seeks
growth of capital through the purchase primarily of common stocks, but the Fund
may invest in other securities.
Principal MidCap Fund, Inc. (formerly known as Princor Emerging Growth Fund,
Inc.) seeks to achieve long-term capital appreciation by investing primarily in
securities of emerging and other growth-oriented companies.
Principal Real Estate Fund, Inc. seeks to generate total return by investing
primarily in equity securities of companies principally engaged in the real
estate industry.
Principal SmallCap Fund, Inc. seeks to achieve long-term growth of capital by
investing primarily in equity securities of companies with comparatively smaller
market capitalizations.
Principal Utilities Fund, Inc. (formerly known as Princor Utilities Fund, Inc.)
seeks to provide current income and long-term growth of income and capital by
investing primarily in equity and fixed income securities of companies in the
public utilities industry. International
Principal International Emerging Markets Fund, Inc. seeks to achieve long-term
growth of capital by investing primarily in equity securities of issuers in
emerging market countries.
Principal International Fund, Inc. (formerly known as Princor World Fund, Inc.)
seeks long-term growth of capital by investing in a portfolio of equity
securities of companies domiciled in any of the nations of the world.
Principal International SmallCap Fund, Inc. seeks to achieve long-term growth of
capital by investing primarily in equity securities of non-United States
companies with comparatively smaller market capitalizations.
INCOME-ORIENTED FUNDS
Principal Bond Fund, Inc. (formerly known as Princor Bond Fund, Inc.) seeks to
provide as high a level of income as is consistent with preservation of capital
and prudent investment risk.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is _______________.
Principal Government Securities Income Fund, Inc. (formerly known as Princor
Government Securities Income Fund, Inc.) seeks a high level of current income,
liquidity and safety of principal by purchasing obligations issued or guaranteed
by the United States Government or its agencies, with emphasis on Government
National Mortgage Association Certificates ("GNMA Certificates"). The guarantee
by the United States Government extends only to principal and interest. There
are certain risks unique to GNMA Certificates.
Principal High Yield Fund, Inc. (formerly known as Princor High Yield Fund,
Inc.) seeks high current income primarily by purchasing high yielding, lower or
non-rated fixed income securities which are believed not to involve undue risk
to income or principal. Capital growth is a secondary objective when consistent
with the objective of high current income. Principal High Yield Fund, Inc.
invests predominantly in lower rated bonds, commonly referred to as "junk bonds"
and may invest 100% of its assets in such bonds. Bonds of this type are
considered to be speculative with regard to payment of interest and return of
principal. Purchasers should carefully assess the risks associated with an
investment in this fund. THESE ARE SPECULATIVE SECURITIES.
Principal Limited Term Bond Fund, Inc. (formerly known as Princor Limited Term
Bond Fund, Inc.) seeks a high level of current income consistent with a
relatively high level of principal stability by investing in a portfolio of
securities with a dollar weighted average maturity of five years or less.
Money Market Funds
Principal Cash Management Fund, Inc. (formerly known as Princor Cash Management
Fund, Inc.) seeks as high a level of income available from short-term securities
as is considered consistent with preservation of principal and maintenance of
liquidity by investing in a portfolio of money market instruments.
Each of the Principal Funds described in this Prospectus offers three
classes of shares: Class A shares, Class B shares and Class R shares. Each class
is sold pursuant to different sales arrangements and bears different expenses.
Only Class R shares are offered through this Prospectus. Class A shares are
described herein only because Class R shares convert to Class A shares after a
period of time. For more information about the different sales arrangements, see
"How to Purchase Shares" and "Offering Price of Fund's Shares ." For information
about various expenses borne by Class R shares and Class A shares see
"Overview."
Shares of the Funds are not deposits or obligations of, or guaranteed or
endorsed by any financial institution, nor are shares of the Funds federally
insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board,
or any other agency.
An investment in any of the Funds is neither insured nor guaranteed by the
U.S. Government. There can be no assurance the Principal Cash Management Fund
will be able to maintain a stable net asset value of $1.00 per share.
This Prospectus concisely states information about the Principal Funds that
an investor should know before investing. It should be read and retained for
future reference.
Additional information about the Funds has been filed with the Securities
and Exchange Commission, including a document called a Statement of Additional
Information dated __________ which is incorporated by reference herein. The
Statement of Additional Information and a Prospectus describing Class A and
Class B shares can be obtained free of charge by writing or telephoning the
Funds' principal underwriter: Princor Financial Services Corporation, P.O. Box
10423, Des Moines, IA 50306. Telephone 1-800-247-4123.
TABLE OF CONTENTS Page
Overview................................................................ 3
Financial Highlights.................................................... 9
Investment Objectives, Policies and Restrictions........................ 18
Growth-Oriented Funds............................................... 18
Domestic........................................................ 18
International................................................... 23
Income-Oriented Funds............................................... 24
Money Market Fund................................................... 29
Certain Investment Policies and Restrictions........................ 30
Risk Factors............................................................ 31
How the Funds are Managed............................................... 32
How to Purchase Shares.................................................. 35
Offering Price of Funds' Shares ........................................ 36
Distribution and Shareholder Servicing Plans and Fees................... 37
Determination of Net Asset Value of Funds' Shares....................... 37
Distribution of Income Dividends and Realized Capital Gains ............ 38
Tax Treatment of the Funds, Dividends and Distributions ................ 40
How to Exchange Shares.................................................. 41
How to Sell Shares...................................................... 41
Periodic Withdrawal Plan................................................ 43
Performance Calculation................................................. 43
General Information About a Fund Account................................ 44
Shareholder Rights...................................................... 44
Additional Information.................................................. 45
This Prospectus does not constitute an offer to sell, or a solicitation of
an offer to buy, the securities of any of the Funds in any jurisdiction in which
such sale, offer to sell, or solicitation may not be lawfully made. Currently,
shares of the Funds are not available for sale in New Hampshire, in any U.S.
possession or in Canada or any other foreign country. No dealer, salesperson, or
other person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offer contained in this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the Funds or the Funds Manager. Because the Principal Funds use a combined
Prospectus there may be a possibility that one Fund might become liable for any
misstatements, inaccuracy, or incomplete disclosure in the Prospectus concerning
another Fund.
OVERVIEW
The following overview is provided for your convenience. Please read the
detailed information found in the prospectus.
The Principal Funds are separately incorporated, open-end diversified
management investment companies. Each of the Principal Funds described in this
Prospectus offers three classes of shares: Class A, Class B and Class R shares.
However, only Class R shares are offered through this Prospectus.
Who may Invest
Class R shares are offered only to the following: (1) people who receive
lump sum distributions (other than distributions received as a result of a plan
termination) from certain retirement plans administered by Principal Mutual Life
Insurance Company under the terms of a written service agreement ("Administered
Employee Benefit Plans") to fund individual retirement accounts and to
shareholders of Class R shares for any purpose; and (2) mortgagors of mortgages
serviced by Principal Mutual Life Insurance Company, its subsidiaries or
affiliates.
What it Costs to Invest
Class R shares are sold without a front-end sales charge or a contingent
deferred sales charge. Class R shares of each Fund are subject to a 12b-1 fee at
annual rate of .75% of the Fund's average net assets attributable to Class R
shares. Class R shares automatically convert into Class A shares, based on
relative net asset values (which means without a sales charge), approximately
four years after purchase. The tables on the next page depict the fees and
expenses applicable to the purchase and ownership of shares of each of the
Funds. Table A depicts Class R shares and is based on amounts incurred by the
Funds' Class A shares during the fiscal year ended October 31, 1997, and
assumptions regarding the level of expenses anticipated for Class R shares
during the current fiscal year. Table B depicts Class A shares and is based on
amounts incurred by the Funds during the fiscal year ended October 31, 1997,
except as otherwise indicated. While Table B depicts the maximum sales charge
applicable to shares sold to the public, no sales charge applies when Class R
shares convert to Class A shares. The table included as an Example indicates the
cumulative expenses an investor would pay on an initial $1,000 investment that
earns a 5% annual return, regardless of whether shares are redeemed. The
examples are based on each Fund's Annual Operating Expenses described in Tables
A and B. Please remember that the Examples should not be considered a
representation of future expenses and that actual expenses may be greater or
less than those shown.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses
Maximum Sales Load Imposed Contingent
on Purchases Redemption Exchange Deferred Sales
Fund (as a percentage of offering price) Fee* Fee Charge
---- ---------------------------------- ---- --- ------
Class A Shares
--------------
<S> <C> <C> <C> <C>
All Funds except Limited Term Bond Fund
and Money Market Funds 4.75% None None None
Limited Term Bond Fund 1.50% None None None
Money Market Funds None None None None
Class R Shares
--------------
All Funds None None None None
<FN>
* A wire charge of $6.00 will be deducted for all wire transfers.
</FN>
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
CLASS R SHARES
TABLE A Annual Fund Operating Expenses
(as a percentage of average net assets)
-------------------------------------------------
Management 12b-1 Other Total Operating
Fund Fee Fee Expenses Expenses
---- --- --- -------- --------
<S> <C> <C> <C> <C>
Balanced Fund % % % %
Blue Chip Fund
Bond Fund **
Capital Value Fund
Cash Management Fund *
Government Securities Income Fund
Growth Fund
High Yield Fund
International Emerging Markets Fund **
International Fund
International SmallCap Fund **
Limited Term Bond Fund *
MidCap Fund
Real Estate Fund .90 .75 .55 ***
SmallCap Fund .85 .75 .55 ***
Utilities Fund
<FN>
* After waiver.
** Annualized
*** Estimated expenses.
</FN>
----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
CLASS A SHARES
TABLE B Annual Fund Operating Expenses
(as a percentage of average net assets)
-------------------------------------------------
Management 12b-1 Other Total Operating
Fund Fee Fee Expenses Expenses
---- --- --- -------- --------
<S> <C> <C> <C> <C>
Balanced Fund % % % %
Blue Chip Fund
Bond Fund *
Capital Value Fund
Cash Management Fund None *
Government Securities Income Fund
Growth Fund
High Yield Fund
International Emerging Markets Fund ****
International Fund
International SmallCap Fund ****
Limited Term Bond Fund *
MidCap Fund
Real Estate Fund .90 .25 .55 1.70***
SmallCap Fund .85 .25 .55 1.65***
Utilities Fund *
<FN>
* After waiver.
** Annualized
****Estimated expenses.
</FN>
----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
1 Year 3 Years 5 Years (a) 10 Years (a)
----------------- ----------------- ----------------- -----------------
Class A Class R Class A Class R Class A Class R Class A Class R
Fund Shares Shares Shares Shares Shares Shares Shares Shares
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balanced Fund $ $ $ $ $ $ $ $
Blue Chip Fund $ $ $ $ $ $ $ $
Bond Fund $ $ $ $ $ $ $ $
Capital Value Fund $ $ $ $ $ $ $ $
Cash Management Fund $ $ $ $ $ $ $ $
Government Securities Income Fund $ $ $ $ $ $ $ $
Growth Fund $ $ $ $ $ $ $ $
High Yield Fund $ $ $ $ $ $ $ $
International Emerging Markets Fund $ $ $ $ N/A N/A N/A N/A
International Fund $ $ $ $ $ $ $ $
International SmallCap Fund $ $ $ $ N/A N/A N/A N/A
Limited Term Bond Fund $ $ $ $ $ $ $ $
MidCap Fund $ $ $ $ $ $ $ $
Real Estate Fund $64 $22 $99 $69 N/A N/A N/A N/A
SmallCap Fund $63 $22 $97 $67 N/A N/A N/A N/A
Utilities Fund $ $ $ $ $ $ $ $
<FN>
(a) The amount in this column reflects the conversion of Class R shares to Class A shares four years after the initial
purchase.
</FN>
</TABLE>
The purpose of the preceding tables is to help you understand the various
expenses that you will pay, either directly or indirectly. Although Annual Fund
Operating Expenses shown in the Expense Table for Class A shares are generally
based upon each Fund's actual expenses, the 12b-1 Plan adopted by each of the
Funds (except the Money Market Funds which have no such Plan for Class A shares)
permits Princor Financial Services Corporation ("Princor") as underwriter to
retain an annual fee of up to .25% of each Fund's average net assets. A portion
of this annual fee is considered an asset-based sales charge. Thus, it is
theoretically possible for a long-term shareholder of Class A shares, whether
acquired directly or by conversion of Class R shares, to pay more than the
economic equivalent of the maximum front-end sales charges permitted by the
National Association of Securities Dealers. See "Distribution and Shareholder
Servicing Plans and Fees", "How to Purchase Shares" and "How the Funds are
Managed."
The Manager voluntarily waived a portion of its fee for the Bond, Cash
Management, Limited Term Bond and Utilities Funds throughout the fiscal year
ended October 31, 1997. Without these waivers, total annualized operating
expenses as a percentage of average net assets actually incurred by the Funds
for the fiscal year ended October 31, 1997 for the Class A shares would have
amounted to .__% for the Bond Fund, .__% for the Cash Management Fund, _.__% for
the Limited Term Bond Fund and _.__% for the Utilities Fund, and for Class R
shares, _.__% for the Bond Fund, _.__% for the Limited Term Bond Fund and _.__%
for the Utilities Fund. The Manager intends to continue its voluntary waiver
and, if necessary, pay expenses normally payable by each of these Funds through
February 28, 1998 in an amount that will maintain a total level of operating
expenses which as a percent of average net assets attributable to a class on an
annualized basis during the period will not exceed, for the Class A shares, .95%
for the Bond Fund, .75% for the Cash Management Fund, .90% for the Limited Term
Bond Fund and 1.15% for the Utilities Fund, and for the Class R shares, 1.45%
for the Bond Fund, 1.25% for the Cash Management Fund, 1.50% for the Limited
Term Bond Fund and 1.65% for the Utilities Fund. The foregoing examples assume
the continuation of these waivers throughout the periods shown.
What the Funds Offer Investors
Investor objectives and risk tolerances vary. For example, some of you may
want growth to help accumulate assets prior to retirement or to generate current
income during retirement. Investors purchase shares of Funds that have
investment objectives that match their own financial objectives. The Funds also
offer a choice of varying levels of investment risks to assist you in to
choosing one or more Funds based on your willingness to assume various risks.
The Funds offer:
Professional Investment Management: Principal Management Corporation
(formerly known as Princor Management Corporation) is the Manager for each of
the Funds. The Manager employs experienced securities analysts to provide you
with professional investment management. The Manager decides how and where to
invest Fund assets. Investment decisions are based on research into the
financial performance of individual companies and specific securities issues,
taking into account general economic and market trends. See "How the Funds are
Managed."
Diversification: Principal Funds allow you to diversify your assets across
dozens of securities issued by a number of issuers. In addition, you may further
diversify by investing in several of the Funds. Diversification reduces
investment risk.
Economies of Scale: Pooling individual shareholders' money creates
administrative efficiencies and, in certain Funds, saves on brokerage
commissions through round-lot orders and quantity discounts. By pooling money
with other investors, you can invest indirectly in many more securities than you
could on your own.
Liquidity: Upon request, each Fund will redeem all or part of an your
shares and promptly pay the current net asset value of the shares redeemed, less
any applicable contingent deferred sales charge. See "How to Sell Shares."
Dividends: Each Fund will normally declare a dividend payable to
shareholders from investment income in accordance with its distribution policy.
Dividends payable for Class R shares will be lower than dividends payable for
Class A shares. See "Distribution of Income Dividends and Realized Capital
Gains."
Convenient Investment and Recordkeeping Services: You will receive
quarterly statements of account with information regarding purchases,
redemptions and reinvested dividends or distributions occurring during the
quarter, as well as the balance of shares owned and account values as of the
statement date. In addition, you may complete certain transactions and access
account information by telephoning 1-800-247-4123.
Investment Objectives of the Funds
GROWTH-ORIENTED FUNDS
Domestic
Fund Investment Objectives
Principal Balanced Fund, Inc. Total investment return consisting of
current income and capital appreciation
while assuming reasonable risks in
furtherance of this objective.
Principal Blue Chip Fund, Inc. Growth of capital and growth of income.
In seeking to achieve its objective, the
Fund will invest primarily in common stocks
of well-capitalized, established companies
which the Fund's Manager believes to have
the potential for growth of capital,
earnings and dividends.
Principal Capital Value Fund, Inc. Long-term capital appreciation with a
secondary objective of growth of investment
income. The Fund seeks to achieve its
objectives primarily through the purchase
of common stocks, but the Fund may
invest in other securities.
Principal Growth Fund, Inc. Growth of capital. The Fund seeks to
achieve its objective through the
purchase primarily of common stocks, but
the Fund may invest in other securities.
Principal MidCap Fund, Inc. Long-term capital appreciation. The Fund
invests primarily in securities of emerging
and other growth-oriented companies.
Principal Real Estate Fund, Inc. Generate total return. In seeking to achieve
its objective, the Fund will primarily
invest in equity securities of companies
principally engaged in the real estate
industry.
Principal SmallCap Fund, Inc. Long-term growth of capital. The Fund seeks
to achieve its objective by investing
primarily in equity securities of companies
with comparatively smaller market
capitalizations.
Principal Utilities Fund, Inc. Current income and long-term growth of
income and capital. The Fund invests
primarily in equity and fixed-income
securities of companies engaged in the
public utilities industry.
International
Fund Investment Objectives
Principal International Emerging Long-term growth of capital. The Fund will
Markets Fund, Inc. invest primarily in equity securities of
issuers in emerging market countries.
Principal International Fund, Inc. Long-term growth of capital by investing
in a portfolio of equity securities of
companies domiciled in any of the nations
of the world.
Principal International
SmallCap Fund, Inc. Long-term growth of capital. The Fund will
invest primarily in equity securities of
non-United States companies with
comparatively smaller market
capitalizations.
Income-Oriented Funds
Fund Investment Objectives
Principal Bond Fund, Inc. As high a level of income as is consistent
with preservation of capital and prudent
investment risk. This Fund invests primarily
in investment-grade bonds.
Principal Government Securities A high level of current income, liquidity
Income Fund, Inc. and safety of principal. The Fund seeks to
achieve its objective through the purchase
of obligations issued or guaranteed by the
United States Government or its agencies,
with emphasis on Government National
Mortgage Association Certificates ("GNMA
Certificates"). Fund shares are not
guaranteed by the United States
Government.
Principal High Yield Fund, Inc. High current income.Capital growth is a
secondary objective when consistent with
the objective of high current-income.
The Fund will invest primarily in high
yielding, lower or non-rated fixed-income
securities (commonly known as "junk bonds").
Principal Limited Term Bond A high level of current income consistent
Fund, Inc. with a relatively high level of principal
stability by investing in a portfolio of
securities with a dollar weighted average
maturity of five years or less.
Money Market Fund
Fund Investment Objectives
Principal Cash Management As high a level of current income available
Fund, Inc. from short-term securities as is considered
consistent with preservation of principal
and maintenance of liquidity. The Fund
invests in money market instruments.
There can be no assurance that the investment objectives of any of the
Funds will be realized. See "Investment Objectives, Policies and Restrictions."
The Risks of Investing
Because the Funds have different investment objectives, each Fund is
subject to varying degrees of financial and market risks and current income
volatility. Financial risk refers to the earnings stability and overall
financial soundness of an issuer of an equity security and to the ability of an
issuer of a debt security to pay interest and principal when due. Market risk
refers to the degree to which the price of a security reacts to changes in
conditions in securities markets in general and, with particular reference to
debt securities, to changes in the overall level of interest rates. Current
income volatility refers to the degree and rapidity which changes in the overall
level of interest rates are reflected in the level of current income of a Fund.
See "Risk Factors" and "Investment Objectives, Policies and Restrictions."
How to Buy Shares
You can buy shares by completing an Account Application or a Princor IRA or
SEP-IRA Application provided by Princor. Mail it, along with a check if
establishing an account that is not part of a direct rollover, to Princor. The
initial investment must be at least $1,000 ($250 for an IRA). The minimum
initial investment for an account established under the Uniform Gifts to Minors
Act or Uniform Transfers Act is $250. The minimum subsequent investment is $100.
See "How to Purchase Shares" and "How to Exchange Shares."
Each Fund described in the Prospectus offers three classes of shares
through Princor and other dealers which it selects. The three classes are Class
A shares, Class B shares and Class R shares. Only Class R shares are offered
through this Prospectus. Each class is sold in different sales arrangements and
bears different expense levels.
Class R shares for each Fund are sold without an initial sales charge or a
contingent deferred sales charge. Class R shares have a higher 12b-1 fee than
Class A shares, currently at the annual rate of .75% of the Fund's average net
assets attributable to Class R shares. Class R shares will automatically convert
into Class A shares, based on relative net asset value, approximately four years
after purchase. Class R shares provide the benefit of putting all of the
investor's dollars to work from the time the investment is made, but (until
conversion) will have a higher expense ratio and pay lower dividends than Class
A shares due to the higher 12b-1 fee. See "How to Purchase Shares" and "Offering
Price of Funds' Shares." Class R shares were first offered to the public on
February 29, 1996.
How to Exchange Shares
Shares of Principal Funds may be exchanged for shares of the same Class of
other Principal Funds without a sales charge or administrative fee under certain
conditions as described under "How to Exchange Shares." Shares may be exchanged
by telephone or written request. Also, dividends and capital gains distributions
from shares of a Class of one Principal Fund may be automatically
"cross-reinvested" in shares of the same Class of another Principal Fund. See
"Distribution of Income Dividends and Realized Capital Gains."
How to Sell Shares
You may sell (redeem) shares only by written request. The request form may
be obtained by telephoning 1-800-247-4123 or by writing to Princor, P.O. Box
10423, Des Moines, Iowa 50306. Redemption proceeds will generally be mailed to
you on the next business day after the redemption request is received in good
order. Redemptions are at net asset value, without charge. See "Offering Price
of Funds' Shares" and "How to Sell Shares."
FINANCIAL HIGHLIGHTS
The tables that follow are based on information included in the Funds'
annual financial statements which have been audited by Ernst & Young, LLP,
independent auditors. Their report on the financial statements and financial
highlights are incorporated by reference (legally made as part of) in this
Prospectus . A free copy of the financial statements may be obtained by calling
1-800-451-5447.
<PAGE>
<TABLE>
<CAPTION>
GROWTH-ORIENTED FUNDS
Selected data for a share of Capital Stock outstanding throughout each period:
Income from Investment Operations Less Distributions
--------------------------------- --------------------------------------
Net Realized
and
Net Asset Net Unrealized Total Dividends Net Asset
Value at Invest- Gain from from Net Distributions Value at
Beginning ment (Loss) on Investment Investment from Total End
of Period Income Investments Operations Income Capital Gains Distributions of Period
Princor Balanced Fund, Inc.
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $13.74 $.38 $1.59 $1.97 $(.43) $(.67) $(1.10) $14.61
1995 12.43 .41 1.31 1.72 (.36) (.05) (.41) 13.74
1994 13.26 .32 (.20) .12 (.40) (.55) (.95) 12.43
1993 12.78 .35 1.14 1.49 (.37) (.64) (1.01) 13.26
1992 11.81 .41 .98 1.39 (.42) -- (.42) 12.78
1991 9.24 .46 2.61 3.07 (.50) -- (.50) 11.81
1990 11.54 .53 (1.70) (1.17) (.59) (.54) (1.13) 9.24
1989 11.09 .61 .56 1.17 (.56) (.16) (.72) 11.54
Period Ended October 31, 1988(b) 9.96 .40 1.02 1.42 (.29) -- (.29) 11.09
Class R
Period Ended October 31, 1996(e) 13.81 .24 .73 .97 (.26) -- (.26) 14.52
Princor Blue Chip Fund, Inc.
Class A
Year Ended October 31,
1996 15.03 .23 2.45 2.68 (.26) (.35) (.61) 17.10
1995 12.45 .24 2.55 2.79 (.21) -- (.21) 15.03
1994 11.94 .20 .57 .77 (.26) -- (.26) 12.45
1993 11.51 .21 .43 .64 (.18) (.03) (.21) 11.94
1992 10.61 .17 .88 1.05 (.15) -- (.15) 11.51
Period Ended October 31, 1991(f) 10.02 .10 .57 .67 (.08) -- (.08) 10.61
Class R
Period Ended October 31, 1996(e) 16.21 .12 .90 1.02 (.15) -- (.15) 17.08
Princor Capital Accumulation
Fund, Inc.
Class A
Year Ended October 31,
1996 23.69 .45 5.48 5.93 (.43) (1.47) (1.90) 27.72
1995 20.83 .45 3.15 3.60 (.39) (.35) (.74) 23.69
1994 21.41 .39 .93 1.32 (.41) (1.49) (1.90) 20.83
1993 21.34 .43 1.67 2.10 (.43) (1.60) (2.03) 21.41
1992 19.53 .45 1.82 2.27 (.46) -- (.46) 21.34
1991 14.31 .49 5.24 5.73 (.51) -- (.51) 19.53
1990 18.16 .52 (3.64) (3.12) (.40) (.33) (.73) 14.31
Four Months Ended October 31,
1989(g) 19.11 .18 (.06) .12 (.29) (.78) (1.07) 18.16
Year Ended June 30,
1989 18.82 .53 1.10 1.63 (.51) (.83) (1.34) 19.11
1988 21.66 .44 (1.06) (.62) (.41) (1.81) (2.22) 18.82
1987 20.47 .31 3.33 3.64 (.30) (2.15) (2.45) 21.66
Class R
Period Ended October 31, 1996(e) 24.73 .19 2.81 3.00 (.16) -- (.16) 27.57
Princor Emerging Growth Fund, Inc.
Class A
Year Ended October 31,
1996 31.45 .14 5.05 5.19 (.14) (.75) (.89) 35.75
1995 25.08 .12 6.45 6.57 (.06) (.14) (.20) 31.45
1994 23.56 -- 1.61 1.61 -- (.09) (.09) 25.08
1993 19.79 .06 3.82 3.88 (.11) -- (.11) 23.56
1992 18.33 .14 1.92 2.06 (.15) (.45) (.60) 19.79
1991 11.35 .17 7.06 7.23 (.21) (.04) (.25) 18.33
1990 14.10 .31 (2.59) (2.28) (.37) (.10) (.47) 11.35
1989 12.77 .26 2.02 2.28 (.15) (.80) (.95) 14.10
Period Ended October 31, 1988(b) 10.50 .06 2.26 2.32 (.05) -- (.05) 12.77
Class R
Period Ended October 31, 1996(e) 33.77 .04 1.88 1.92 (.02) -- (.02) 35.67
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
-----------------------------------------------------------
Ratio of Net
Ratio of Investment
Net Assets at Expenses to Income to Portfolio Average
Total End of Period Average Average Turnover Commission
Return(a) (in thousands) Net Assets Net Assets Rate Rate Paid
Princor Balanced Fund, Inc.
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1996 15.10% $ 70,820 1.28% 2.82% 32.6% $.0421
1995 14.18% 57,125 1.37% 3.21% 35.8% N/A
1994 .94% 53,366 1.51% 2.70% 14.4 N/A
1993 12.24% 39,952 1.35% 2.78% 27.5% N/A
1992 11.86% 31,339 1.29% 3.39% 30.6% N/A
1991 34.09% 23,372 1.30% 4.25% 23.6% N/A
1990 (11.28)% 18,122 1.32% 5.22% 33.7% N/A
1989 11.03% 20,144 1.25% 5.45% 30.2% N/A
Period Ended October 31, 1988(b) 12.42%(c) 16,282 1.12%(d) 4.51%(d) 65.2%(d) N/A
Class R
Period Ended October 31, 1996(e) 7.52%(c) 875 1.49%(d) 2.26%(d) 32.6%(d) .0421(d)
Princor Blue Chip Fund, Inc.
Class A
Year Ended October 31,
1996 18.20% 44,389 1.33% 1.41% 13.3% .0456
1995 22.65% 35,212 1.38% 1.83% 26.1% N/A
1994 6.58% 27,246 1.46% 1.72% 5.5% N/A
1993 5.65% 23,759 1.25% 1.87% 11.2% N/A
1992 9.92% 19,926 1.56% 1.49% 13.5% N/A
Period Ended October 31, 1991(f) 6.37%(c) 12,670 1.71%(d) 1.67%(d) 0.4%(d) N/A
Class R
Period Ended October 31, 1996(e) 7.02%(c) 1,575 1.48%(d) .68%(d) 13.3%(d) .0456(d)
Princor Capital Accumulation
Fund, Inc.
Class A
Year Ended October 31,
1996 26.41% 435,617 .69% 1.82% 50.2% .0421
1995 17.94% 339,656 .75% 2.08% 46.0% N/A
1994 6.67% 285,965 .83% 2.02% 31.7% N/A
1993 10.42% 240,016 .82% 2.16% 24.8% N/A
1992 11.67% 190,301 .93% 2.17% 38.3% N/A
1991 40.63% 152,814 .99% 2.72% 19.7% N/A
1990 (17.82)% 109,507 1.10% 3.10% 27.7% N/A
Four Months Ended October 31,
1989(g) .44%(c) 122,685 1.10%(d) 2.87%(d) 19.7%(d) N/A
Year Ended June 30,
1989 9.53% 117,473 1.00% 3.04% 28.1% N/A
1988 (2.30)% 97,147 .96% 2.40% 27.9% N/A
1987 20.93% 93,545 .98% 1.73% 20.0% N/A
Class R
Period Ended October 31, 1996(e) 12.74%(c) 1,752 1.16%(d) 1.18%(d) 50.2%(d) .0421(d)
Princor Emerging Growth Fund, Inc.
Class A
Year Ended October 31,
1996 16.89% 229,465 1.32% .46% 12.3% .0391
1995 26.41% 150,611 1.47% .47% 13.5% N/A
1994 6.86% 92,965 1.74% .02% 8.1% N/A
1993 19.66% 48,668 1.66% .26% 7.0% N/A
1992 11.63% 29,055 1.74% .80% 5.8% N/A
1991 64.56% 17,174 1.78% 1.14% 8.4% N/A
1990 (16.80)% 8,959 1.94% 2.43% 15.8% N/A
1989 19.65% 8,946 1.79% 2.09% 13.5% N/A
Period Ended October 31, 1988(b) 19.72%(c) 6,076 1.52%(d) .84%(d) 19.5%(d) N/A
Class R
Period Ended October 31, 1996(e) 6.20%(c) 2,016 1.53%(d) .29%(d) 12.3%(d) .0391(d)
<FN>
Notes to financial highlights
(a) Total Return is calculated without the front-end sales charge.
(b) Period from December 18, 1987, date shares first offered to public, through
October 31, 1988. Certain of the Growth Funds recognized net investment
income as follows, for the period from the initial purchase of shares on
October 30, 1987 through December 17, 1987, was recognized, none of which
was distributed to its sole stockholder, Principal Mutual Life Insurance
Company, during the period. Additionally, the Growth Funds incurred net
realized and unrealized gains/losses on investments during this initial
interim period as follows. This represented activities of each fund prior
to the initial public offering of fund shares.
Per Share
Per Share Realized and
Net Investment Unrealized
Fund Income Gain/(Loss)
Princor Balanced Fund, Inc. $.08 $(.12)
Princor Emerging Growth Fund, Inc. .04 .46
(c) Total Return amounts have not been annualized.
(d) Computed on an annualized basis.
(e) Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through October 31, 1996. Certain of the Growth Funds
Class R shares recognized net investment income for the period from the
initial purchase of Class R shares on February 27, 1996 through February
28, 1996 as follows, none of which was distributed to the sole shareholder,
Princor Management Corporation. Additionally, the Growth Funds incurred
unrealized gains (losses) on investments during the initial period as
follows. This represents Class R share activities of each fund prior to the
initial offering of Class R shares:
Per Share Per Share
Net Investment Unrealized
Fund Income Gain/(Loss)
Princor Balanced Fund, Inc. $-- $(.03)
Princor Blue Chip Fund, Inc. .01 (.02)
Princor Capital Accumulation Fund, Inc. .01 (.11)
Princor Emerging Growth Fund, Inc. -- .19
(f) Period from March 1, 1991, date shares first offered to public, through
October 31, 1991. Net investment income, aggregating $.01 per share for the
period from the initial purchase of shares on February 11, 1991 through
February 28, 1991, was recognized, none of which was distributed to its
sole stockholder, Principal Mutual Life Insurance Company, during the
period. Additionally, the Fund incurred unrealized gains on investments of
$.01 per share during this initial interim period. This represented
activities of the fund prior to the initial public offering of fund shares.
(g) Effective July 1, 1989, the fund changed its fiscal year-end from June 30 to
October 3l.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GROWTH-ORIENTED FUNDS
Selected data for a share of Capital Stock outstanding throughout each period:
Income from Investment Operations Less Distributions
--------------------------------- --------------------------------------
Net Realized
and
Net Asset Net Unrealized Total Dividends Net Asset
Value at Invest- Gain from from Net Distributions Value at
Beginning ment (Loss) on Investment Investment from Total End
of Period Income Investments Operations Income Capital Gains Distributions of Period
Princor Growth Fund, Inc.
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $37.22 $.35 $3.50 $3.85 $(.35) $(1.18) $(1.53) $39.54
1995 31.14 .35 6.67 7.02 (.31) (.63) (.94) 37.22
1994 30.41 .26 2.56 2.82 (.28) (1.81) (2.09) 31.14
1993 28.63 .40 2.36 2.76 (.42) (.56) (.98) 30.41
1992 25.92 .39 3.32 3.71 (.40) (.60) (1.00) 28.63
1991 16.57 .41 9.32 9.73 (.38) -- (.38) 25.92
1990 19.35 .35 (1.99) (1.64) (.34) (.80) (1.14) 16.57
Four Months Ended October 31,
1989(b) 18.35 .08 1.17 1.25 (.16) (.09) (.25) 19.35
Year Ended June 30,
1989 19.84 .32 .36 .68 (.29) (1.88) (2.17) 18.35
1988 23.27 .26 (2.08) (1.82) (.22) (1.39) (1.61) 19.84
1987 21.85 .21 3.72 3.93 (.27) (2.24) (2.51) 23.27
Class R
Period Ended October 31, 1996(e) 39.27 .10 .13 .23 (.10) -- (.10) 39.40
Princor Utilities Fund, Inc.
Class A
Year Ended October 31,
1996 10.94 .44(f) .45 .89 (.43) -- (.43) 11.40
1995 9.25 .48(f) 1.70 2.18 (.49) -- (.49) 10.94
1994 11.45 .46(f) (2.19) (1.73) (.45) (.02) (.47) 9.25
Period Ended October 31, 1993(g) 10.18 .35(f) 1.27 1.62 (.35) -- (.35) 11.45
Class R
Period Ended October 31, 1996(e) 11.75 .28(f) (.41) (.13) (.29) -- (.29) 11.33
Princor World Fund, Inc.
Class A
Year Ended October 31,
1996 7.28 .10 1.17 1.27 (.08) (.33) (.41) 8.14
1995 7.44 .08 (.02) .06 (.03) (.19) (.22) 7.28
1994 6.85 .01 .64 .65 (.02) (.04) (.06) 7.44
1993 5.02 .03 1.98 2.01 (.05) (.13) (.18) 6.85
1992 5.24 .06 (.14) (.08) (.06) (.08) (.14) 5.02
1991 4.64 .05 .58 .63 (.03) -- (.03) 5.24
1990 4.66 .09 (.04) .05 (.07) -- (.07) 4.64
Ten Months Ended October 31, 1989(h) 4.58 .07 .07 .14 (.06) -- (.06) 4.66
Year Ended December 31,
1988(i) 3.88 .12 .67 .79 (.09) -- (.09) 4.58
1987(i) 8.55 .12 (.96) (.84) (.08) (3.75) (3.83) 3.88
1986(i) 7.32 .45 2.17 2.62 (.44) (.95) (1.39) 8.55
Class R
Period Ended October 31, 1996(e) 7.48 .01 .63 .64 -- -- -- 8.12
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
------------------------------------------------------------
Ratio of Net
Ratio of Investment
Net Assets at Expenses to Income to Portfolio Average
Total End of Period Average Average Turnover Commission
Return(a) (in thousands) Net Assets Net Assets Rate Rate Paid
Princor Growth Fund, Inc.
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1996 10.60% $228,361 1.08% .95% 1.8% $.0443
1995 23.29% 174,328 1.16% 1.12% 12.2% N/A
1994 9.82% 116,363 1.30% .95% 13.6% N/A
1993 9.83% 80,051 1.26% 1.40% 16.4% N/A
1992 14.76% 63,405 1.19% 1.46% 15.6% N/A
1991 59.30% 45,892 1.13% 1.85% 10.6% N/A
1990 (9.20)% 28,917 1.18% 1.88% 9.7% N/A
Four Months Ended October 31,
1989(b) 6.83%(c) 32,828 1.22%(d) 1.25%(d) 50.1%(d) N/A
Year Ended June 30,
1989 4.38% 31,770 1.08% 1.78% 9.7% N/A
1988 (7.19)% 34,316 1.00% 1.29% 24.9% N/A
1987 20.94% 37,006 1.01% 1.07% 4.0% N/A
Class R
Period Ended October 31, 1996(e) 1.12%(c) 2,014 1.42%(d) .14%(d) 1.8%(d) .0443(d)
Princor Utilities Fund, Inc.
Class A
Year Ended October 31,
1996 8.13% 66,322 1.17%(f) 3.85% 34.2% .0410
1995 24.36% 65,873 1.04%(f) 4.95% 13.0% N/A
1994 (15.20)% 56,747 1.00%(f) 4.89% 13.8% N/A
Period Ended October 31, 1993(g) 15.92%(c) 50,372 1.00%(f)(d) 4.48%(d) 4.3%(d) N/A
Class R
Period Ended October 31, 1996(e) (.31)%(c) 311 1.47%(f)(d) 3.77%(d) 34.2%(d) .0410(d)
Princor World Fund, Inc.
Class A
Year Ended October 31,
1996 18.36% 172,276 1.45% 1.43% 23.8% .0197
1995 1.03% 126,554 1.63% 1.10% 35.4% N/A
1994 9.60% 115,812 1.74% .10% 13.2% N/A
1993 41.39% 63,718 1.61% .59% 19.5% N/A
1992 (1.57)% 35,048 1.69% 1.23% 19.9% N/A
1991 13.82% 26,478 1.72% 1.36% 27.6% N/A
1990 .94% 16,044 1.79% 1.89% 37.9% N/A
Ten Months Ended October 31, 1989(h) 2.98%(c) 13,928 1.55%(d) 1.82%(d) 32.4%(d) N/A
Year Ended December 31,
1988(i) 20.25% 13,262 1.55% 1.43% 56.9% N/A
1987(i) (10.13)% 3,943 2.09% .83% 183.0% N/A
1986(i) 36.40% 9,846 2.17% .73% 166.0% N/A
Class R
Period Ended October 31, 1996(e) 9.29%(c) 1,057 1.59%(d) .78%(d) 23.8%(d) .0197(d)
<FN>
Notes to financial highlights
(a) Total Return is calculated without the front-end sales charge.
(b) Effective July 1, 1989, the fund changed its fiscal year-end from June 30 to
October 3l.
(c) Total Return amounts have not been annualized.
(d) Computed on an annualized basis.
(e) Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through October 31, 1996. Certain of the Growth Funds
Class R shares recognized net investment income for the period from the
initial purchase of Class R shares on February 27, 1996 through February
28, 1996 as follows, none of which was distributed to the sole shareholder,
Princor Management Corporation. Additionally, the Growth Funds incurred
unrealized losses on investments during the initial period as follows. This
represents Class R share activities of each fund prior to the initial
offering of Class R shares:
Per Share Per Share
Net Investment Unrealized
Fund Income Gain/(Loss)
Princor Growth Fund, Inc. $.01 $(.10)
Princor World Fund, Inc. -- (.02)
(f) Without the Manager's voluntary waiver of a portion of certain of its
expenses for the periods (year except as noted) ended October 31 of the
years indicated, the following fund would have had per share expenses and
the ratios of expenses to average net assets as shown:
Per Share Ratio of Expenses
Net Invest- to Average Net Amount
Fund Year ment Income Assets Waived
Princor Utilities
Fund, Inc.
Class A 1996 $.43 1.25% $ 54,932
1995 .46 1.30% 151,145
1994 .41 1.50% 284,836
1993(g) .32 1.54%(d) 139,439
Class R 1996 .17 1.47%(d) --
(g) Period from December 16, 1992, date shares first offered to public, through
October 31, 1993. Net investment income, aggregating $.05 per share for the
period from the initial purchase of shares on November 16, 1992 through
December 15, 1992, was recognized, none of which was distributed to its
sole stockholder, Principal Mutual Life Insurance Company, during the
period. Additionally, the fund incurred unrealized gains on investments of
$.13 per share during the initial interim period. This represented
activities of the fund prior to the initial public offering of fund shares.
(h) Effective January 1, 1989, the fund changed its fiscal year-end from
December 31 to October 31.
(i) The investment manager of Princor World Fund, Inc. was changed on August 1,
1988 to the current manager, Princor Management Corporation. The years 1983
through 1987 are not covered by the current independent auditor's report.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INCOME-ORIENTED AND MONEY MARKET FUNDS
Selected data for a share of Capital Stock outstanding throughout each period:
Income from Investment Operations Less Distributions
--------------------------------- -------------------------------------
Net Realized
and
Net Asset Net Unrealized Total Dividends Net Asset
Value at Invest- Gain from from Net Distributions Value at
Beginning ment (Loss) on Investment Investment from Total End
of Period Income Investments Operations Income Capital Gains Distributions of Period
Princor Bond Fund, Inc.
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $11.42 $.76(b) $(.25) $ .51 $(.76) $-- $(.76) $11.17
1995 10.27 .78(b) 1.16 1.94 (.78) (.01) (.79) 11.42
1994 11.75 .78(b) (1.47) (.69) (.78) (.01) (.79) 10.27
1993 10.97 .81(b) .79 1.60 (.81) (.01) (.82) 11.75
1992 10.65 .85(b) .32 1.17 (.85) -- (.85) 10.97
1991 9.99 .88(b) .65 1.53 (.87) -- (.87) 10.65
1990 10.57 .86 (.55) .31 (.89) -- (.89) 9.99
1989 10.37 .87 .25 1.12 (.86) (.06) (.92) 10.57
Period Ended October 31, 1988 (c) 9.95 .80(b) .38 1.18 (.76) -- (.76) 10.37
Class R
Period Ended October 31, 1996(f) 11.27 .51(b) (.13) .38 (.49) -- (.49) 11.16
Princor Cash Management Fund, Inc.
Class A
Year Ended October 31,
1996 1.000 .049(b) -- .049 (.049) -- (.049) 1.000
1995 1.000 .052(b) -- .052 (.052) -- (.052) 1.000
1994 1.000 .033(b) -- .033 (.033) -- (.033) 1.000
1993 1.000 .026(b) -- .026 (.026) -- (.026) 1.000
1992 1.000 .036(b) -- .036 (.036) -- (.036) 1.000
1991 1.000 .061(b) -- .061 (.061) -- (.061) 1.000
1990 1.000 .074(b) -- .074 (.074) -- (.074) 1.000
Four Months Ended October 31,
1989(g) 1.000 .027(b) -- .027 (.027) -- (.027) 1.000
Year Ended June 30,
1989 1.000 .080(b) -- .080 (.080) -- (.080) 1.000
1988 1.000 .060 -- .060 (.060) -- (.060) 1.000
1987 1.000 .053 -- .053 (.053) -- (.053) 1.000
Class R
Period Ended October 31, 1996(f) 1.000 .030 -- .030 (.030) -- (.030) 1.000
Princor Government Securities
Income Fund, Inc.
Class A
Year Ended October 31,
1996 11.31 .70 (.05) .65 (.70) -- (.70) 11.26
1995 10.28 .71 1.02 1.73 (.70) -- (.70) 11.31
1994 11.79 .69 (1.40) (.71) (.68) (.12) (.80) 10.28
1993 11.44 .74 .55 1.29 (.74) (.20) (.94) 11.79
1992 11.36 .81 .12 .93 (.81) (.04) (.85) 11.44
1991 10.54 .85 .84 1.69 (.87) -- (.87) 11.36
1990 10.76 .85 (.22) .63 (.85) -- (.85) 10.54
Four Months Ended October 31,
1989(g) 10.66 .29 .09 .38 (.28) -- (.28) 10.76
Year Ended June 30,
1989 10.33 .87 .32 1.19 (.86) -- (.86) 10.66
1988 10.40 .89 (.05) .84 (.88) (.03) (.91) 10.33
1987 10.82 .86 (.13) .73 (.87) (.28) (1.15) 10.40
Class R
Period Ended October 31, 1996(f) 11.27 .47 (.08) .39 (.45) -- (.45) 11.21
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
---------------------------------------------------
Ratio of Net
Ratio of Investment
Net Assets at Expenses to Income to Portfolio
Total End of Period Average Average Turnover
Return(a) (in thousands) Net Assets Net Assets Rate
Princor Bond Fund, Inc.
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C>
1996 4.74% $113,437 .95%(b) 6.85% 3.4%
1995 19.73% 106,962 .94%(b) 7.26% 5.1%
1994 (6.01)% 88,801 .95%(b) 7.27% 8.9%
1993 15.22% 85,015 .92%(b) 7.19% 9.3%
1992 11.45% 62,534 .88%(b) 7.95% 8.4%
1991 16.04% 37,825 .80%(b) 8.66% .9%
1990 3.08% 22,719 1.22% 8.40% 3.6%
1989 11.54% 13,314 1.24% 8.59% 0.0%
Period Ended October 31, 1988 (c) 11.59%(d) 10,560 .70%(b)(e) 8.85%(e) 63.9%(e)
Class R
Period Ended October 31, 1996(f) 3.75%(d) 525 1.28%(b)(e) 6.51%(e) 3.4%(e)
Princor Cash Management Fund, Inc.
Class A
Year Ended October 31,
1996 5.00% 694,962 .66%(b) 4.88% N/A
1995 5.36% 623,864 .72%(b) 5.24% N/A
1994 3.40% 332,346 .70%(b) 3.27% N/A
1993 2.67% 284,739 .67%(b) 2.63% N/A
1992 3.71% 247,189 .65%(b) 3.66% N/A
1991 6.29% 262,543 .61%(b) 5.95% N/A
1990 7.65% 151,007 .93%(b) 7.36% N/A
Four Months Ended October 31,
1989(g) 2.63%(d) 124,895 1.04%(b)(e) 7.86%(e) N/A
Year Ended June 30,
1989 8.15% 120,149 1.00%(b) 8.21% N/A
1988 6.18% 51,320 1.02% 6.06% N/A
1987 5.34% 45,015 1.02% 5.33% N/A
Class R
Period Ended October 31, 1996(f) 2.97%(d) 1,639 .99%(e) 4.41%(e) N/A
Princor Government Securities
Income Fund, Inc.
Class A
Year Ended October 31,
1996 6.06% 259,029 .81% 6.31% 25.9%
1995 17.46% 261,128 .87% 6.57% 10.1%
1994 (6.26)% 249,438 .95% 6.35% 24.8%
1993 11.80% 236,718 .93% 6.38% 52.6%
1992 8.49% 161,565 .95% 7.04% 54.3%
1991 16.78% 94,613 .98% 7.80% 14.9%
1990 6.17% 71,806 1.07% 8.15% 22.4%
Four Months Ended October 31,
1989(g) 3.63%(d) 55,702 1.07%(e) 8.18%(e) 5.2%(e)
Year Ended June 30,
1989 12.37% 56,848 .96% 8.58% --
1988 8.60% 59,884 .82% 8.65% --
1987 7.00% 65,961 .92% 7.93% 17.6%
Class R
Period Ended October 31, 1996(f) 3.76%(d) 481 1.18%(e) 5.84%(e) 25.9%(e)
<FN>
Notes to financial highlights
(a) Total Return is calculated without the front-end sales charge.
(b) Without the Manager's voluntary waiver of a portion of certain of its
expenses for the periods (year, except as noted in the financial
statements) ended October 31 of the years indicated, the following funds
would have had per share expenses and the ratios of expenses to average net
assets as shown:
Per Share Ratio of Expenses
Net Invest- to Average Net Amount
Fund Year ment Income Assets Waived
Princor Bond Fund, Inc.
Class A 1996 $.76 .97% $ 22,536
1995 .77 1.02% 86,018
1994 .77 1.09% 120,999
1993 .79 1.07% 111,162
1992 .82 1.11% 110,868
1991 .84 1.15% 100,396
1988(c) .76 1.12%(e) 31,187
Class R 1996(f) .51 1.28%(e) 3
Princor Cash Management
Fund, Inc.
Class A 1996 .049 .67% 7,102
1995 .052 .78% 296,255
1994 .031 .90% 595,343
1993 .025 .84% 468,387
1992 .035 .80% 385,328
1991 .059 .79% 433,196
1990 .073 1.01% 106,841
1989** .026 1.06%(e) 101,625
1989* .079 1.11% 9,558
* Year ended June 30, 1989
** Four months ended October 31, 1989
(c) Period from December 18, 1987, date shares first offered to public, through
October 31, 1988. Net investment income, aggregating $.10 per share for the
period from the initial purchase of shares on October 30, 1987 through
December 17, 1987, was recognized of which $.06 per share was distributed
to its sole stockholder, Principal Mutual Life Insurance Company, during
the period. Additionally, the Fund incurred net realized and unrealized
losses on investments of $.09 per share during this initial interim period.
This represented activities of the fund prior to the initial public
offering of fund shares.
(d) Total Return amounts have not been annualized.
(e) Computed on an annualized basis.
(f) Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through October 31, 1996. The Income Funds Class R
shares recognized no net investment income for the period from the initial
purchase by Princor Management Corporation of Class R shares on February
27, 1996 through February 28, 1996. Certain of the Income Funds Class R
shares incurred unrealized losses on investments during the initial interim
period as follows. This represents Class R share activities of each fund
prior to the initiial public offering of Class R shares:
Per Share
Fund Unrealized (Loss)
Princor Bond Fund, Inc. $(.03)
Princor Government Securities
Income Fund, Inc. (.03)
(g) Effective July 1, 1989, the fund changed its fiscal year-end from June 30
to October 3l.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INCOME-ORIENTED AND MONEY MARKET FUNDS
Selected data for a share of Capital Stock outstanding throughout each period:
Income from Investment Operations Less Distributions
Net Realized
and
Net Asset Net Unrealized Total Dividends Net Asset
Value at Invest- Gain from from Net Distributions Value at
Beginning ment (Loss) on Investment Investment from Total End
of Period Income Investments Operations Income Capital Gains Distributions of Period
Princor High Yield Fund, Inc.
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $8.06 $ .68 $ .23 $ .91 $ (.70) $ -- $(.70) $ 8.27
1995 7.83 .68 .20 .88 (.65) -- (.65) 8.06
1994 8.36 .63 (.51) .12 (.65) -- (.65) 7.83
1993 8.15 .71 .21 .92 (.71) -- (.71) 8.36
1992 7.86 .79 .29 1.08 (.79) -- (.79) 8.15
1991 7.12 .88 .80 1.68 (.94) -- (.94) 7.86
1990 9.47 1.10 (2.35) (1.25) (1.09) (.01) (1.10) 7.12
1989 10.44 1.10 (.83) .27 (1.09) (.15) (1.24) 9.47
Period Ended October 31, 1988 (b) 9.97 .98(c) .38 1.36 (.89) -- (.89) 10.44
Class R
Period Ended October 31, 1996 (f) 8.21 .46 (.03) .43 (.44) -- (.44) 8.20
Princor Limited Term Bond Fund, Inc.
Class A
Period Ended October 31, 1996 (g) 9.90 .38(c) (.04) .34 (.35) -- (.35) 9.89
Class R
Period Ended October 31, 1996 (f) 9.90 .36(c) (.06) .30 (.32) -- (.32) 9.88
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Ratio of Investment
Net Assets at Expenses to Income to Portfolio
Total End of Period Average Average Turnover
Return(a) (in thousands) Net Assets Net Assets Rate
Princor High Yield Fund, Inc.
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C>
1996 11.88% $28,432 1.26% 8.49% 18.8%
1995 11.73% 23,396 1.45% 8.71% 40.3%
1994 1.45% 19,802 1.46% 7.82% 27.2%
1993 11.66% 19,154 1.35% 8.57% 23.4%
1992 14.35% 16,359 1.41% 9.69% 28.2%
1991 25.63% 13,195 1.50% 12.06% 14.2%
1990 (14.51)% 9,978 1.45% 12.99% 15.8%
1989 2.68% 12,562 1.43% 11.22% 19.9%
Period Ended October 31, 1988 (b) 14.15%(d) 10,059 .77%(c)(e) 10.55%(e) 73.2%(e)
Class R
Period Ended October 31, 1996 (f) 5.60%(d) 124 1.59% (e) 7.84%(e) 18.8%(e)
Princor Limited Term Bond Fund, Inc.
Class A
Period Ended October 31, 1996 (g) 3.62%(d) 17,249 .89% (c)(e) 6.01%(e) 16.5%(e)
Class R
Period Ended October 31, 1996 (f) 3.24%(d) 83 1.40% (c)(e) 5.64%(e) 16.5%(e)
<FN>
Notes to financial highlights
(a) Total Return is calculated without the front-end sales charge.
(b) Period from December 18, 1987, date shares first offered to public, through
October 31, 1988. Net investment income, aggregating $.10 per share for the
period from the initial purchase of shares on October 30, 1987 through
December 17, 1987, was recognized of which $.06 per share was distributed
to its sole stockholder, Principal Mutual Life Insurance Company, during
the period. Additionally, the Fund incurred net realized and unrealized
losses on investments of $.09 per share during this initial interim period.
This represented activities of the fund prior to the initial public
offering of Fund shares.
(c) Without the Manager's voluntary waiver of a portion of certain of its
expenses for the periods (year except as noted) ended October 31 of the
years indicated, the following funds would have had per share expenses and
the ratios of expenses to average net assets as shown:
Per Share Ratio of Expenses
Net Invest- to Average Net Amount
Fund Year ment Income Assets Waived
Princor High Yield
Fund, Inc.
Class A 1988(b) $.95 1.33%(e) $32,609
Princor Limited Term
Bond Fund, Inc.
Class A 1996 .37 1.16%(e) 22,716
Class R 1996 .35 1.79%(e) 60
(d) Total Return amounts have not been annualized.
(e) Computed on an annualized basis.
(f) Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through October 31, 1996. Princor Limited Term Bond
Fund, Inc. Class R shares recognized no net investment income for the
period from the initial purchase by Princor Management Corporation of Class
R shares on February 27, 1996 through February 28, 1996. Additionally,
Class R shares incurred unrealized losses on investments of $.02 per share
during the initial interim period. This represents Class R share activities
of the fund prior to the initiial public offering of Class R shares.
(g) Period from February 29, 1996, date shares first offered to the public,
through October 31, 1996. With respect to Class A shares, net investment
income, aggregating $.02 per share for the period from the initial purchase
of shares on February 13, 1996 through February 28, 1996, was recognized,
none of which was distributed to its sole stockholder, Principal Mutual
Life Insurance Company during the period. Additionally, Class A shares
incurred unrealized losses on investments of $.12 per share during the
initial interim period. This represents Class A share activities of the
fund prior to the initial public offering of Class A shares.
</FN>
</TABLE>
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The investment objectives and policies of each Fund are described below.
There can be no assurance that the objectives of the Funds will be realized.
GROWTH-ORIENTED FUNDS
The Growth-Oriented Funds have different investment objectives. They seek:
o capital appreciation through investments in equity securities of
corporations established in the United States ("U.S.") (Capital Value
Fund, Growth Fund, MidCap Fund and SmallCap Fund)
o capital appreciation primarily through investments in equity securities
of corporations located outside of the U.S. (International Emerging
Markets Fund, International Fund and International SmallCap Fund)
o total investment return including both capital appreciation and income
through investments in equity and debt securities (Balanced Fund)
o growth of capital and growth of income primarily through investments in
common stocks of well-capitalized, established companies (Blue Chip
Fund)
o current income and long-term growth of income and capital through
investment in equity securities of real estate companies (Real Estate
Fund)
o current income and long-term growth of income and capital through
investment in equity and fixed-income securities of public utilities
companies (Utilities Fund)
The Growth-Oriented Funds may invest in the following equity securities:
common stocks; preferred stocks and debt securities that are convertible into
common stock, that carry rights or warrants to purchase common stock or that
carry rights to participate in earnings; rights or warrants to subscribe to or
purchase any of the foregoing securities; and sponsored and unsponsored American
Depository Receipts (ADRs) based on any of the foregoing securities. Unsponsored
ADRs are not created by the issuer of the underlying security, may be subject to
fees imposed by the issuing bank that, in the case of sponsored ADRs, would be
paid by the issuer of a sponsored ADR and may involve additional risks such as
reduced availability of information about the issuer of the underlying security.
The Blue Chip, Capital Value, Growth, International, International Emerging
Markets, International SmallCap, MidCap and SmallCap Funds will seek to be fully
invested under normal conditions in equity securities. When in the opinion of
the Manager current market or economic conditions warrant, a Growth-Oriented
Fund may, for temporary defensive purposes, place all or a portion of its assets
in cash (on which the Fund would earn no income), cash equivalents, bank
certificates of deposit, bankers acceptances, repurchase agreements, commercial
paper, commercial paper master notes which are floating rate debt instruments
without a fixed maturity, United States Government securities, and preferred
stocks and debt securities, whether or not convertible into or carrying rights
for common stock. When investing for temporary defensive purposes a
Growth-Oriented Fund is not investing so as to achieve its investment objective.
A Growth-Oriented Fund may also maintain reasonable amounts in cash or
short-term debt securities for daily cash management purposes or pending
selection of particular long-term investments.
DOMESTIC
Principal Balanced Fund
The investment objective of Principal Balanced Fund is to generate a total
investment return consisting of current income and capital appreciation while
assuming reasonable risks in furtherance of the investment objective. The term
"reasonable risks" refers to investment decisions that in the Manager's judgment
do not present a greater than normal risk of loss in light of current or
anticipated future market and economic conditions, trends in yields and interest
rates, and fiscal and monetary policies.
In seeking to achieve the investment objective, the Fund invests primarily
in growth and income-oriented common stocks (including securities convertible
into common stocks), corporate bonds and debentures and short-term money market
instruments. The Fund may also invest in other equity securities and in debt
securities issued or guaranteed by the United States Government and its agencies
or instrumentalities. The Fund seeks to generate real (inflation plus) growth
during favorable investment periods and may emphasize income and capital
preservation strategies during uncertain investment periods. The Manager will
seek to minimize declines in the net asset value per share. However, there is no
guarantee that the Manager will be successful in achieving this goal.
The portions of the Fund's total assets invested in equity securities, debt
securities and short-term money market instruments are not fixed, although
ordinarily 40% to 70% of the Fund's portfolio will be invested in equity
securities with the balance of the portfolio invested in debt securities. The
investment mix will vary from time to time depending upon the judgment of the
Manager as to general market and economic conditions, trends in investment
yields and interest rates, and changes in fiscal or monetary policies. The Fund
may invest up to 20% of its assets in foreign securities. For a description of
certain investment risks associated with foreign securities, see "Risk Factors."
The Fund may invest in all types of common stocks and other equity
investments, without regard to any objective investment criteria such as size of
the issue or issuer, exchange listing or seasoning. The Fund may invest in both
exchange-listed and over-the-counter securities, in small or large companies,
and in well-established or unseasoned companies. Also, the Fund's investments in
corporate bonds and debentures and money market instruments are not restricted
by credit ratings or other objective investment criteria, except with respect to
bank certificates of deposit as set forth below. Some of the fixed income
securities in which the Fund may invest may be considered to include speculative
characteristics and the Fund may purchase such securities that are in default
but does not currently intend to invest more than 5% of its assets in securities
rated below BBB by Standard & Poor's or Baa by Moody's. The rating services'
descriptions of BBB or Baa securities are as follows: Moody's Investors Service,
Inc. Bond Ratings -- 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. Standard &
Poor's Corporation Bond Ratings -- BBB: Debt rated "BBB" is regarded as having
an adequate capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than for debt in higher-rated
categories. See the discussion of the Princor High Yield Fund for information
concerning risks associated with below-investment grade bonds. The Fund will not
concentrate its investments in any industry.
In selecting common stocks, the Manager seeks companies which the Manager
believes have predictable earnings increases and which, based on their future
growth prospects, may be currently undervalued in the market place. During
periods when the Manager determines that general economic conditions are
favorable, it will generally purchase common stocks with the objective of
long-term capital appreciation. From time to time, and in periods of economic
uncertainty, the Manager may purchase common stocks with the expectation of
price appreciation over a relatively short period of time.
To achieve its investment objective, the Fund may at times emphasize the
generation of interest income by investing in short, medium or long-term debt
securities. Investment in debt securities may also be made with a view to
realizing capital appreciation when the Manager believes that declining interest
rates may increase market values. The Fund may also purchase "deep discount
bonds," i.e., bonds which are selling at a substantial discount from their face
amount, with a view to realizing capital appreciation.
The Fund may invest in the following short-term money market investments:
U.S. Treasury bills, bank certificates of deposit, bankers' acceptances,
repurchase agreements, commercial paper and commercial paper master notes which
are floating rate debt instruments without a fixed maturity. The Fund will only
invest in domestic bank certificates of deposit issued by banks which are
members of the Federal Reserve System that have total deposits in excess of one
billion dollars.
The United States Government securities in which the Fund may invest
consist of U.S. Treasury obligations and obligations of certain agencies, such
as the Government National Mortgage Association, which are supported by the full
faith and credit of the United States, as well as obligations of certain other
Federal agencies or instrumentalities, such as the Federal National Mortgage
Association, Federal Land Banks and the Federal Farm Credit Administration,
which are backed only by the right of the issuer to borrow limited funds from
the U.S. Treasury, by the discretionary authority of the U.S. Government to
purchase such obligations or by the credit of the agency or instrumentality
itself.
Principal Blue Chip Fund
The objective of Principal Blue Chip Fund is growth of capital and growth
of income. Growth of income means increasing the Fund's investment income which
is primarily derived from dividends earned on portfolio securities. In seeking
to achieve its objective, the Fund will invest primarily in common stocks of
well capitalized, established companies which the Fund's manager believes to
have the potential for growth of capital, earnings and dividends. Under normal
market conditions, the Fund will invest at least 65%, and may invest up to 100%,
of its total assets in the common stocks of blue chip companies.
Blue chip companies are defined as those companies with market
capitalizations of at least $1 billion. Blue chip companies are generally
identified by their substantial capitalization, established history of earnings
and dividends, easy access to credit, good industry position and superior
management structure. In addition, the large market of publicly held shares for
such companies and the generally high trading volume in those shares results in
a relatively high degree of liquidity for such investments. The characteristics
of high quality and high liquidity of blue chip investments should make the
market for such stocks attractive to many investors.
Examples of blue chip companies currently eligible for investment by the
Fund include, but are not limited to, companies such as General Electric
Company, Ford Motor Company, Exxon Corporation, Merck & Company, Inc., Digital
Equipment Corporation, Capital Cities ABC, Inc., J.P. Morgan & Co. and Coca Cola
Company. In general, the Fund will seek to invest in those established, high
quality companies whose industries are experiencing favorable secular or
cyclical change.
The Fund's Manager may invest up to 35% of the Fund's total assets in
equity securities, other than common stock, issued by companies that meet the
investment criteria for blue chip companies and in equity securities issued by
companies that do not meet those criteria. The Manager does not intend to invest
regularly in speculative securities, which are those issued by new, unseasoned
companies or by companies that have limited product lines, markets, financial
resources or management, but it may from time to time invest not more than 5% of
the Fund's total assets in those kinds of securities. The Fund may invest up to
20% of its assets in securities of foreign issuers. The foreign securities in
which the Fund may invest need not be issued by companies that meet the
investment criteria for blue chip companies. For a description of certain
investment risks associated with foreign securities, see "Risk Factors."
Principal Capital Value Fund
The primary objective of Principal Capital Value Fund is long-term capital
appreciation. A secondary objective is growth of investment income.
The Fund will invest primarily in common stocks, but it may invest in other
equity securities. In making selections for the Fund's investment portfolio, the
Manager will use an approach described broadly as that of fundamental analysis,
which is discussed in the Statement of Additional Information. In pursuit of the
Fund's investment objectives, investments will be made in securities which as a
group appear to offer prospects for capital and income growth. Securities chosen
for investment may include those of companies which the Manager believes can
reasonably be expected to share in the growth of the nation's economy over the
long term.
Principal Growth Fund
The objective of Principal Growth Fund is growth of capital. Realization of
current income will be incidental to the objective of growth of capital.
The Fund will invest primarily in common stocks, but it may invest in other
equity securities. In making selections for the Fund's investment portfolio, the
Manager will use an approach described broadly as that of fundamental analysis,
which is discussed in the Statement of Additional Information. In pursuit of the
Fund's investment objective, investments will be made in securities which as a
group appear to possess potential for appreciation in market value. Common
stocks chosen for investment may include those of companies which have a record
of sales and earnings growth that exceeds the growth rate of corporate profits
of the S&P 500 or which offer new products or new services. The policy of
investing in securities which have a high potential for growth of capital can
mean that the assets of the Fund may be subject to greater risk than securities
which do not have such potential.
Principal MidCap Fund
The objective of Principal MidCap Fund is to achieve long-term capital
appreciation. The strategy of this Fund is to invest primarily in the common
stocks and securities (both debt and preferred stock) convertible into common
stocks of emerging and other growth-oriented companies that, in the judgment of
the Manager, are responsive to changes within the marketplace and have the
fundamental characteristics to support growth. In pursuing its objective of
capital appreciation, the Fund may invest, for any period of time, in any
industry and in any kind of growth-oriented company, whether new and unseasoned
or well known and established. Under normal market conditions, the Fund will
invest at least 65% of its assets in securities of companies with market
capitalizations in the $1 billion to $10 billion range. The Fund may invest up
to 20% of its assets in securities of foreign issuers. For a description of
certain investment risks associated with foreign securities, see "Risk Factors."
There can be, of course, no assurance that the Fund will attain its
objective. Investment in emerging and other growth-oriented companies may
involve greater risk than investment in other companies. The securities of
growth-oriented companies may be subject to more abrupt or erratic market
movements, and many of them may have limited product lines, markets, financial
resources or management. Because of these factors and of the length of time that
may be required for full development of the growth prospects of some of the
companies in which the Fund invests, the Fund believes that its shares are
suitable only for persons who are able to assume the risk of investing in
securities of emerging and growth-oriented companies and prepared to maintain
their investment during periods of adverse market conditions. Investors should
not rely on the Fund for their short-term financial needs. Since the Fund will
not be seeking current income, investors should not view a purchase of Fund
shares as a complete investment program.
Principal Real Estate Fund
The investment objective of Principal Real Estate Fund is to generate total
return by investing primarily in equity securities of companies principally
engaged in the real estate industry. The Fund will seek to achieve its objective
by seeking, with approximately equal emphasis, long-term capital growth and
current income through the purchase of equity securities.
Under normal circumstances the Fund will invest at least 65 percent of its
assets in the equity securities of real estate companies. Equity securities
include common stock (including shares in real estate investment trusts),
preferred stock, rights and warrants. A real estate investment trust ("REIT") is
a corporation, or a business trust which, in satisfying certain Internal Revenue
Code requirements, is permitted to effectively eliminate corporate level federal
income taxes. Qualifying REITs must, among other things, derive substantially
all of their income from real estate assets and annually distribute to
shareholders 95 percent or more of their otherwise taxable income.
REITs are characterized as equity REITs, mortgage REITs and hybrid REITs.
An equity REIT invests primarily in the fee ownership of real estate and revenue
is primarily derived from rental income. A mortgage REIT primarily invests in
real estate mortgages and hybrid REITs combine the characteristics of both an
equity REIT and a mortgage REIT.
For purposes of the Fund's investment policies, a real estate company is
one that has at least 50% of its assets, income or profits attributable to
products or services related to the real estate industry. Real estate companies
include REITs or other securitized real estate investments and companies with
substantial real estate holdings such as paper, lumber, hotel and entertainment
companies. Companies whose products and services relate to the real estate
industry include building supply manufacturers, mortgage lenders and mortgage
servicing companies. The Fund may invest up to 25% of its total assets in
securities of foreign real estate companies (see "Risk Factors").
Securities issued by real estate companies may be subject to risks similar
to those associated with the direct ownership of real estate (in addition to
securities market risks) because of its policy of concentration in the
securities of companies in the real estate industry. These include declines in
the value of real estate, risks related to general and local economic
conditions, dependency on management skills, heavy cash flow dependency,
possible lack of availability of mortgage funds, overbuilding, extended
vacancies in properties, increases in property taxes and operating expenses,
changes in zoning laws, losses due to costs resulting from the cleanup of
environmental problems, casualty or condemnation losses, changes in neighborhood
values and changes in interest rates.
In addition to these risks, equity REITS may be affected by changes in the
value of the underlying property owned by the trusts, while mortgage REITS may
be affected by the quality of any credit extended. Further, equity and mortgage
REITS are dependent upon management skills and generally may not be diversified.
Equity and mortgage REITS are also subject to heavy cash flow dependency,
defaults by borrowers and self-liquidation. In addition, equity or mortgage
REITS could possibly fail to qualify for tax free pass-through of income under
the Internal Revenue Code of 1986, as amended, or to maintain their exemptions
from registration under the Investment Company Act of 1940. The above factors
may also adversely affect a borrower's or lessee's ability to meet its
obligations to the REIT. In the event of a default by a borrower or lessee, the
REIT may experience delays in enforcing its rights as a mortgagee or lessor and
may incur substantial costs associated with protecting its investments.
Principal SmallCap Fund
The investment objective of Principal SmallCap Fund is long-term growth of
capital. The strategy of this Fund is to invest primarily in equity securities
of companies domiciled in the United States with comparatively smaller market
capitalizations. Under normal market conditions, the Fund invests at least 65%
of its assets in securities of companies having a total market capitalization of
$1 billion or less.
In selecting securities for investment, the Fund will look at stocks with
both "growth" and "value" characteristics, with no consistent preference between
the two categories. The growth orientation emphasizes buying stocks of companies
whose potential for growth of capital and earnings is expected to be above
average. The value orientation emphasizes buying stocks at less than their
intrinsic value and avoiding those whose price has been speculatively bid up.
Principal Utilities Fund
The investment objective of Principal Utilities Fund is to provide current
income and long-term growth of income and capital. The Fund seeks to achieve its
investment objective by investing primarily in equity and fixed-income
securities of companies engaged in the public utilities industry. The term
"public utilities industry" consists of companies engaged in the manufacture,
production, generation, transmission, sale and distribution of gas and electric
energy, as well as companies engaged in the communications field, including
telephone, telegraph, satellite, microwave and other companies providing
communication facilities for the public, but excluding public broadcasting
companies. For purposes of the Fund, a company will be considered to be in the
public utilities industry if, during the most recent twelve-month period, at
least 50% of the company's gross revenues, on a consolidated basis, is derived
from the public utilities industry. Under normal market conditions, the Fund, as
an investment policy, will invest at least 65%, and may invest up to 100%, of
its total assets in securities of companies in the public utilities industry,
and as a matter of fundamental policy will invest no less than 25% of its total
assets in those securities. As a non-fundamental policy, the Fund may not own
more than 5% of the outstanding voting securities of more than one public
utility company as defined by the Public Utility Holding Company Act of 1935.
The Fund invests in both equity securities (as defined previously under
"Growth-Oriented Funds") and fixed- income securities (bonds and preferred
stock) in the public utilities industry. The Fund does not have any set policies
to concentrate within any particular segment of the utilities industry. The Fund
will shift its asset allocation without restriction between types of utilities
and between equity and fixed-income securities based upon the Manager's
determination of how to achieve the Fund's investment objective in light of
prevailing market, economic and financial conditions. For example, at a
particular time the Manager may choose to allocate up to 100% of the Fund's
assets in a particular type of security (for example, equity securities) or in a
specific utility industry segment (for example, electric utilities).
Fixed-income securities in which the Fund may invest are debt securities
and preferred stocks, which are rated at the time of purchase Baa or better by
Moody's or BBB or better by S&P, or which, if unrated, are deemed to be of
comparable quality by the Fund's Manager. A description of corporate bond
ratings is contained in the Appendix to the Statement of Additional Information.
The rating services' descriptions of Baa or BBB securities are as follows:
Moody's Investors Service, Inc. Bond ratings -- 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. Standard and Poor's Corporation Bond Ratings -- BBB:
Debt rated "BBB" is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than for debt in higher-rated categories.
If a fixed-income security held by the Fund is rated BBB or Baa and is
subsequently down graded by a rating agency, the Fund will retain such security
in its portfolio until the Manager determines that it is practicable to sell the
security without undue market or tax consequences to the Fund.
While the Fund will invest primarily in the securities of public utility
companies, it may invest up to 35% of its total assets in those securities that
are permissible investments for the Balanced Fund. See "Princor Balanced Fund"
and "Certain Investment Policies and Restrictions." However the Fund will not
invest in fixed-income securities rated below Baa by Moody's or BBB by S&P.
The public utilities industry as a whole has certain characteristics and
risks particular to that industry. Unlike industrial companies, the rates which
utility companies may charge their customers generally are subject to review and
limitation by governmental regulatory commissions. Although rate changes of a
utility usually fluctuate in approximate correlation with financing costs, due
to political and regulatory factors rate changes ordinarily occur only following
a delay after the changes in financing costs. This factor will tend to favorably
affect a utility company's earnings and dividends in times of decreasing costs,
but conversely will tend to adversely affect earnings and dividends when costs
are rising. In addition, the value of public utility debt securities (and, to a
lesser extent, equity securities) tends to have an inverse relationship to the
movement of interest rates.
Among the risks affecting the utilities industry are the following: risks
of increases in fuel and other operating costs; the high cost of borrowing to
finance capital construction during inflationary periods; restrictions on
operations and increased costs and delays associated with compliance with
environmental and nuclear safety regulations; the difficulties involved in
obtaining natural gas for resale or fuel for generating electricity at
reasonable prices; the risks in connection with the construction and operation
of nuclear power plants; the effects of energy conservation and effects of
regulatory changes, such as the possible adverse effects on profits of recent
increased competition among telecommunications companies and the uncertainties
resulting from such companies' diversification into new domestic and
international businesses, as well as agreements by many such companies linking
future rate increases to inflation or other factors not directly related to the
actual operating profits of the enterprise.
INTERNATIONAL
Principal International Emerging Markets Fund
The investment objective of Principal International Emerging Markets Fund
is long-term growth of capital. The Fund seeks to achieve this objective by
investing primarily in equity securities of issuers in emerging market
countries. As used in this Prospectus, the term "emerging market country" means
any country which, in the opinion of the Manager, is generally considered to be
an emerging country by the international financial community, including the
International Bank for Reconstruction and Development (more commonly known as
the World Bank) and the International Financial Corporation. These countries
generally include every nation in the world except the United States, Canada,
Japan, Australia, New Zealand and most nations located in Western Europe.
Currently, investing in many emerging countries is not feasible or may involve
unacceptable political risks. The Fund focuses on those emerging market
countries in which it believes the economies are developing strongly and in
which the markets are becoming more sophisticated.
Investments in emerging market countries involve special risks. Certain
emerging market countries have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate
fluctuations, large amounts of debt, balance of payments and trade difficulties,
and extreme poverty and unemployment. In addition, there are certain risks
associated with investments in foreign securities (see "Risk Factors").
Under normal conditions at least 65% of the Fund's total assets will be
invested in emerging market country equity securities. The Fund invests in
securities of (1) issuers with their principal place of business or principal
office in emerging market countries, or (2) issuers for which the principal
securities trading market is an emerging market country, or (3) issuers,
regardless of where the security is traded, that derive 50% or more of their
total revenue from either goods or services produced in emerging market
countries or sales made in emerging market countries.
A small portion of the Fund assets may also be invested in closed end
country specific investment companies and sovereign debt of developing
countries. Closed end investment companies provide a way to gain exposure to
countries where the mechanics of trading securities are not cost effective.
Investment in sovereign debt may have the potential for returns that are higher
than returns on stocks within the country.
For temporary defensive purposes, the International Emerging Markets Fund
may invest in the same kinds of securities as the other Growth-Oriented Funds
whether issued by domestic or foreign corporations, governments, or governmental
agencies, instrumentalities or political subdivisions and whether denominated in
United States dollars or some other currency.
Principal International Fund
The investment objective of Principal International Fund is to seek
long-term growth of capital through investment in a portfolio of equity
securities of companies domiciled in any of the nations of the world. In
choosing investments in equity securities of foreign and United States
corporations, the Manager intends to pay particular attention to long-term
earnings prospects and the relationship of then-current prices to such
prospects. Short-term trading is not generally intended, but occasional
investments may be made for the purpose of seeking short-term or medium-term
gain. The Fund expects its investment objective to be met over long periods
which may include several market cycles. For a description of certain investment
risks associated with foreign securities, see "Risk Factors."
For temporary defensive purposes, the International Fund may invest in the
same kinds of securities as the other Growth-Oriented Funds whether issued by
domestic or foreign corporations, governments, or governmental agencies,
instrumentalities or political subdivisions and whether denominated in United
States dollars or some other currency.
The Fund intends that its investments normally will be allocated among
various countries. Although there is no limitation on the percentage of assets
that may be invested in any one country or denominated in any one currency, the
Fund intends under normal market conditions to have at least 65% of its assets
invested in securities issued by corporations of at least three countries, one
of which may be the United States. Investments may be made anywhere in the
world, but it is expected that primary consideration will be given to investing
in the securities issued by corporations of Western Europe, North America and
Australasia (Australia, Japan and Far East Asia) that have developed economies.
Changes in investments may be made as prospects change for particular countries,
industries or companies.
The Fund may invest in the securities of other investment companies but may
not invest more than 10% of its assets in securities of other investment
companies, invest more than 5% of its total assets in the securities of any one
investment company, or acquire more than 3% of the outstanding voting securities
of any one investment company except in connection with a merger, consolidation
or plan of reorganization. The Fund's Manager will waive its management fee on
the Fund's assets invested in securities of other open-end investment companies.
The Fund will generally invest only in those investment companies that have
investment policies requiring investment in securities comparable in quality to
those in which the Fund invests.
Principal International SmallCap Fund
The investment objective of Principal International SmallCap Fund is
long-term growth of capital. The strategy of this Fund is to invest primarily in
equity securities of non-United States companies with comparatively smaller
market capitalizations. Under normal market conditions, the Fund invests at
least 65% of its assets in securities of companies having a total market
capitalization of $1 billion or less.
The Fund diversifies its investments geographically. Although there is no
limitation on the percentage of assets that may be invested in any one country
or denominated in any one currency, the Fund intends, under normal market
conditions, to have at least 65% of its assets invested in securities issued by
corporations of at least three countries. For a description of certain
investment risks associated with foreign securities, see "Risk Factors."
For temporary defensive purposes, the International SmallCap Fund may
invest in the same kinds of securities as the other Growth-Oriented Funds
whether issued by domestic or foreign corporations, governments, or governmental
agencies, instrumentalities or political subdivisions and whether denominated in
United States dollars or some other currency.
INCOME-ORIENTED FUNDS
The Principal Funds that offer Class R shares currently include four Funds
which seek a high level of income through investments in fixed-income
securities. These Funds are Principal Bond Fund, Principal Government Securities
Income Fund, Principal High Yield Fund and Principal Limited Term Bond Fund,
collectively referred to as the "Income-Oriented Funds." Each Fund has rating
limitations with regard to the quality of securities that may be held in the
portfolio. The rating limitations apply at the time of acquisition of a security
and any subsequent change in a rating by a rating service will not require
elimination of a security from the Fund's portfolio. The Statement of Additional
Information contains descriptions of the ratings of Moody's Investors Service,
Inc. ("Moody's") and Standard and Poor's Corporation ("S&P").
Principal Bond Fund
The investment objective of Principal Bond Fund is to provide as high a
level of income as is consistent with preservation of capital and prudent
investment risk.
In seeking to achieve the investment objective, the Fund will predominantly
invest in marketable fixed-income securities. Investments will be made generally
on a long-term basis, but the Fund may make short-term investments from time to
time as deemed prudent by the Manager. Longer maturities typically provide
better yields but will subject the Fund to a greater possibility of substantial
changes in the values of its portfolio securities as interest rates change.
Under normal circumstances, the Fund will invest at least 65% of its assets
in bonds in one or more of the following categories: (i) corporate debt
securities and taxable municipal obligations, which at the time of purchase have
an investment grade rating within the four highest grades used by S&P (AAA, AA,
A or BBB) or by Moody's (Aaa, Aa, A or Baa) or which, if nonrated, are
comparable in quality in the opinion of the Fund's Manager; (ii) similar
Canadian corporate, Provincial and Federal Government securities payable in U.S.
funds; and (iii) securities issued or guaranteed by the United States Government
or its agencies or instrumentalities. The balance of the Fund's assets may be
invested in the following securities: domestic and foreign corporate debt
securities, preferred stocks, common stocks that provide returns that compare
favorably with the yields on fixed income investments, common stocks acquired
upon conversion of debt securities or preferred stocks or upon exercise of
warrants acquired with debt securities or otherwise and foreign government
securities. The debt securities and preferred stocks in which the Fund invests
may be convertible or nonconvertible. Securities rated below BBB or Baa are
commonly referred to as junk bonds. The Fund does not intend to purchase debt
securities rated lower than Ba3 by Moody's or BB- by S&P (bonds which are judged
to have speculative elements; their future cannot be considered as
well-assured). The rating services' descriptions of BBB or Baa securities are as
follows: Moody's Investors Service, Inc. Bond Ratings -- 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. Standard & Poor's Corporation Bond Ratings -- BBB: Debt
rated "BBB" is regarded as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than for debt in higher-rated categories. See the discussion of the Principal
High Yield Fund for information concerning risks associated with below
investment grade bonds.
During the fiscal year ended October 31, 1997, the percentage of the Fund's
portfolio securities invested in the various ratings established by Moody's,
based upon the weighted average ratings of the portfolio, was as follows:
Moody's Rating Portfolio Percentage
--------------- --------------------
Aa .__%
A __.__
Baa __.__
Ba _.__
B _.__
The preceding percentage for A rated securities includes .__% of unrated
securities which have been determined by the Manager to be of comparable
quality.
Cash equivalents in which the Fund invests include corporate commercial
paper rated A-1+, A-1 or A-2 by S&P or P-1 or P-2 by Moody's, unrated commercial
paper issued by corporations with outstanding debt securities rated in the four
highest grades by S&P and Moody's and bank certificates of deposit and bankers'
acceptances issued or guaranteed by national or state banks and repurchase
agreements considered by the Fund to have investment quality. Under unusual
market or economic conditions, the Fund for temporary defensive purposes may
invest up to 100% of its assets in cash or cash equivalents.
Principal Government Securities Income Fund
The objective of Principal Government Securities Income Fund is a high
level of current income, liquidity and safety of principal.
The Fund will invest in obligations issued or guaranteed by the United
States Government or by its agencies or instrumentalities and in repurchase
agreements collateralized by such obligations. Such securities include
Government National Mortgage Association ("GNMA") Certificates of the modified
pass-through type, Federal National Mortgage Association ("FNMA") Obligations,
Federal Home Loan Mortgage Corporation ("FHLMC") Certificates and Student Loan
Marketing Association ("SLMA") Certificates and other U.S. Government
Securities. GNMA is a wholly-owned corporate instrumentality of the United
States whose securities and guarantees are backed by the full faith and credit
of the United States. FNMA, a federally chartered and privately-owned
corporation, FHLMC, a federal corporation, and SLMA, a government sponsored
stockholder-owned organization, are instrumentalities of the United States. The
securities and guarantees of FNMA, FHLMC and SLMA are not backed, directly or
indirectly, by the full faith and credit of the United States. Although the
Secretary of the Treasury of the United States has discretionary authority to
lend FNMA up to $2.25 billion outstanding at any time, neither the United States
nor any agency thereof is obligated to finance FNMA's or FHLMC's operations or
to assist FNMA or FHLMC in any other manner. The Fund may maintain reasonable
amounts of cash or short-term debt securities not issued or guaranteed by the
U.S. Government or its agencies or instrumentalities for daily cash management
purposes or pending selection of long-term investments.
Depending on market conditions, a substantial portion of the assets may be
invested in GNMA Certificates of the modified pass-through type and in
repurchase agreements collateralized by such obligations. GNMA is a United
States Government corporation within the Department of Housing and Urban
Development. GNMA Certificates are mortgage-backed securities representing an
interest in a pool of mortgage loans. Such loans are made by lenders such as
mortgage bankers, insurance companies, commercial banks and savings and loan
associations. Then, they are either insured by the Federal Housing
Administration (FHA) or they are guaranteed by the Veterans Administration (VA)
or Farmers Home Administration (FmHA). The lender or other prospective issuer
creates a specific pool of such mortgages, which it submits to GNMA for
approval. After approval, a GNMA Certificate is typically offered by the issuer
to investors through securities dealers.
GNMA Certificates differ from bonds in that the principal is scheduled to
be paid back by the borrower on a monthly basis over the life of the loan rather
than returned in a lump sum at maturity. Modified pass-through GNMA
Certificates, which are the only kind in which the Fund intends to invest,
entitle the holder to receive all interest and principal payments owed on the
mortgages in the pool (net of the issuer and GNMA fee of .5% prescribed by
regulation), regardless of whether or not the mortgagor has made such payment.
The timely payment of interest and principal is guaranteed by the full faith and
credit of the United States Government.
Although the payment of interest and principal is guaranteed, the guarantee
does not extend to the value of a GNMA Certificate or the value of the shares of
the Fund. The market value of a GNMA Certificate typically will fluctuate to
reflect changes in prevailing interest rates. It falls when rates increase (as
does the market value of other debt securities) and it rises when rates decline
(but it may not rise on a comparable basis with other debt securities because of
its prepayment feature), and, therefore, may be more or less than the face
amount of the GNMA Certificate, which reflects the aggregate principal amount of
the underlying mortgages. As a result the net asset value of Fund shares will
fluctuate as interest rates change.
Mortgagors may pay off their mortgages at any time. Expected prepayments of
the mortgages can affect the market value of the GNMA Certificate, and actual
prepayments can affect the return ultimately received. Prepayments, like
scheduled payments of principal, are reinvested by the Fund at prevailing
interest rates which may be less than the rate on the GNMA Certificate.
Prepayments are likely to increase as the interest rate for new mortgages moves
lower than the rate on the GNMA Certificate. Moreover, if the GNMA Certificate
had been purchased at a premium above principal because its rate exceeded
prevailing rates, the premium is not guaranteed and a decline in value to par
may result in a loss of the premium especially in the event of prepayment.
The FNMA and FHLMC securities in which the Fund invests are very similar to
GNMA certificates as described above but are not guaranteed by the full faith
and credit of the United States but rather by the agency itself. FNMA and FHLMC
securities are rated Aaa by Moody's and AAA by Standard & Poor's. These ratings
reflect the status of FNMA and FHLMC as federal agencies as well as the
important role each plays in financing purchases of homes in the U.S.
Student Loan Marking Association is a government sponsored
stockholder-owned organization whose goal is to provide liquidity to financial
and educational institutions. SLMA provides liquidity by purchasing student
loans, which are principally government guaranteed loans issued under the
Federal Guaranteed Student Loan Program and the Health Education Assistance Loan
Program. SLMA securities are not guaranteed by the U.S. Government but are
obligations solely of the agency. SLMA senior debt issues in which the Fund
invests are rated AAA by Standard & Poor's and Aaa by Moody's.
There are other obligations issued or guaranteed by the United States
Government (such as U.S. Treasury securities) or by its agencies or
instrumentalities that are either supported by the full faith and credit of the
U.S. Treasury or the credit of a particular agency or instrumentality. Included
in the latter category are Federal Home Loan Bank and Farm Credit Banks.
Obligations not guaranteed by the United States Government are highly rated
because they are issued by indirect branches of government. Such paper is issued
as needs arise by an agency and is traded regularly in denominations similar to
those in which government obligations are traded.
The Fund will not engage in the trading of securities for the purpose of
realizing short-term profits, but it will adjust its portfolio as considered
advisable in view of prevailing or anticipated market conditions and the Fund's
investment objective. Accordingly, the Fund may sell portfolio securities in
anticipation of a rise in interest rates and purchase securities for inclusion
in its portfolio in anticipation of a decline in interest rates.
As a hedge against changes in interest rates, the Fund may enter into
contracts with dealers in GNMA Certificates whereby the Fund agrees to purchase
or sell an agreed-upon principal amount of GNMA Certificates at a specified
price on a certain date. The Fund may enter into similar purchase agreements
with issuers of GNMA Certificates other than Principal Mutual Life Insurance
Company. The Fund may also purchase optional delivery standby commitments which
give the Fund the right to sell particular GNMA Certificates at a specified
price on a specified date. Failure of the other party to such a contract or
commitment to abide by the terms thereof could result in a loss to the Fund. To
the extent the Fund engages in delayed delivery transactions it will do so for
the purpose of acquiring portfolio securities consistent with its investment
objective and policies and not for the purpose of investment leverage or to
speculate on interest rate changes. Liability accrues to the Fund at the time it
becomes obligated to purchase such securities, although delivery and payment
occur at a later date. From the time the Fund becomes obligated to purchase
securities on a delayed delivery basis, the Fund has all the rights and risks
attendant to the ownership of a security except that no interest accrues to the
purchaser until delivery. At the time the Fund enters into a binding obligation
to purchase such securities, Fund assets of a dollar amount sufficient to make
payment for the securities to be purchased will be segregated. The availability
of liquid assets for this purpose and the effect of asset segregation on the
Fund's ability to meet its current obligations, to honor requests for redemption
and to have its investment portfolio managed properly will limit the extent to
which the Fund may engage in forward commitment agreements. Except as may be
imposed by these factors, there is no limit on the percent of the Fund's total
assets that may be committed to transactions in such agreements.
Principal High Yield Fund
Principal High Yield Fund's primary investment objective is high current
income. Capital growth is a secondary objective when consistent with the
objective of high current income. This Fund is designed for investors willing to
assume additional risk in return for above average income.
In seeking to attain the Fund's objective of high current income, the Fund
invests primarily in high yielding, lower or nonrated fixed-income securities
(commonly known as "junk bonds"), constituting a diversified portfolio which the
Fund Manager believes does not involve undue risk to income or principal.
Normally, at least 80% of the Fund's assets will be invested in debt securities,
convertible securities (both debt and preferred stock) or preferred stocks that
are consistent with its primary investment objective of high current income. The
Fund's remaining assets may be invested in common stocks and other equity
securities in which the Growth-Oriented Funds may invest when these types of
investments are consistent with the objective of high current income.
The Fund seeks to invest its assets in securities rated Ba1 or lower by
Moody's or BB+ or lower by S&P or in unrated securities which the Fund's Manager
believes are of comparable quality. These securities are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and to repay principal in accordance with the terms of the obligation.
The Fund will not invest in securities rated below Caa by Moody's and below CCC
by S&P.
The rating services' descriptions of securities rating categories in which
the Fund may normally invest are as follows:
Moody's Investors Service, Inc. Bond Ratings - Ba: Bonds which are rated Ba
are judged to have speculative elements; their future cannot be considered as
well-assured. Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in this class. B:
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its 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 a modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Standard & Poor's Corporation Bond Ratings - BB, B, CCC, CC: Debt rated
"BB", "B", "CCC" and "CC" is regarded, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. "BB" indicates the lowest degree of speculation and
"CC" the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Plus (+) or Minus (-): The ratings from "AA" to "BB" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
The higher-yielding, lower-rated securities in which the High Yield Fund
invests present special risks to investors. The market value of lower-rated
securities may be more volatile than that of higher-rated securities and
generally tends to reflect the market's perception of the creditworthiness of
the issuer and short-term market developments to a greater extent than more
highly-rated securities, which reflect primarily fluctuations in general levels
of interest rates. Periods of economic uncertainty and change can be expected to
result in increased volatility in the market value of lower-rated securities.
Further, such securities may be subject to greater risks of loss of income and
principal, particularly in the event of adverse economic changes or increased
interest rates, because their issuers generally are not as financially secure or
as creditworthy as issuers of higher-rated securities. Additionally, to the
extent that there is not a national market system for secondary trading of
lower-rated securities, there may be a low volume of trading in such securities
which may make it more difficult to value or sell those securities than
higher-rated securities. Adverse publicity and investor perceptions, whether or
not based on fundamental analysis, may decrease the values and liquidity of high
yield securities, especially in a thinly traded market.
Investors should recognize that the market for higher-yielding, lower-rated
securities is a relatively recent development that has not been tested by an
economic recession. An economic downturn may severely disrupt the market for
such securities and cause financial stress to the issuers which may adversely
affect the value of the securities held by the High Yield Fund and the ability
of the issuers of the securities held by it to pay principal and interest. A
default by an issuer may result in the Fund incurring additional expenses to
seek recovery of the amounts due it.
Some of the securities in which the Fund invests contain call provisions.
If the issuer of such a security exercises a call provision in a declining
interest rate market, the Fund would have to replace the security with a
lower-yielding security, resulting in a decreased return for investors. Further,
a higher-yielding security's value will decrease in a rising interest rate
market, which will be reflected in the Fund's net asset value per share.
Investors should carefully consider their ability to assume the risks of
investing in lower-rated securities before making an investment in the Fund, and
should be prepared to maintain their investment during periods of adverse market
conditions. Investors should not rely on the Fund for their short-term financial
needs.
The Fund seeks to minimize the risks of investing in lower-rated securities
through diversification, investment analysis and attention to current
developments in interest rates and economic conditions. Because the Fund invests
primarily in securities in the lower rating categories, the achievement of the
Fund's goals is more dependent on the Manager's ability than would be the case
if the Fund were investing in securities in the higher rating categories.
Although the Fund's Manager considers security ratings when making investment
decisions, it performs its own investment analysis and does not rely principally
on the ratings assigned by the rating services. There are risks in applying
credit ratings as a method for evaluating high yield securities. For example,
credit ratings evaluate the safety of principal and interest payments, not the
market value risk of high yield securities, and credit rating agencies may fail
to make timely changes in credit ratings to reflect subsequent events. The
Manager's analysis includes traditional security analysis considerations such as
the issuer's experience and managerial strength, changing financial condition,
borrowing requirements or debt maturity schedules, and its responsiveness to
changes in business conditions and interest rates. It also considers relative
values based on anticipated cash flow, interest or dividend coverage, asset
coverage and earnings prospects. In addition, the Manager analyzes general
business conditions and other factors such as anticipated changes in economic
activity and interest rates, the availability of new investment opportunities,
and the economic outlook for specific industries. The Manager continuously
monitors the issuers of portfolio securities to determine if the issuers will
have sufficient cash flow and profits to meet required principal and interest
payments and to assure the securities' liquidity so the Fund can meet redemption
requests.
During the fiscal year ended October 31, 1997, the percentage of the Fund's
portfolio securities invested in the various ratings established by Moody's,
based upon the weighted average ratings of the portfolio, was as follows:
Moody's Rating Portfolio Percentage
Baa _.__%
Ba __.__
B __.__
C _.__
The above percentages for Ba and B rated securities include unrated
securities in the amount of .__% and .__%, respectively, which have been
determined by the Manager to be of comparable quality.
There may be times when, in the Manager's judgment, unusual market or
economic conditions make pursuing the Fund's basic investment strategy
inconsistent with the best interests of its shareholders. At such times the
Manager may employ alternative strategies, primarily seeking to reduce
fluctuations in the value of the Fund's assets. In implementing these
"defensive" strategies, the Fund may temporarily invest in money-market
instruments of all types, higher-rated fixed-income securities or any other
fixed-income securities that the Fund considers consistent with such strategy.
The yield to maturity on these securities would generally be lower than the
yield to maturity on lower-rated fixed-income securities. It is impossible to
predict when, or for how long, such alternative strategies will be utilized.
The Fund's Manager buys and sells securities for the Fund principally in
response to its evaluation of an issuer's continuing ability to meet its
obligations, the availability of better investment opportunities, and its
assessment of changes in business conditions and interest rates. From time to
time, consistent with its investment objectives, the Fund may sell securities
that have appreciated in value because of declines in interest rates. It may
also trade securities for the purpose of seeking short-term profits. Securities
may be sold in anticipation of a market decline or bought in anticipation of a
market rise. They may also be traded for securities of comparable quality and
maturity to take advantage of perceived short-term disparities in market values
or yields.
Principal Limited Term Bond Fund
The objective of Principal Limited Term Bond Fund is to seek a high level
of current income consistent with a relatively high level of principal stability
by investing in a portfolio of securities with a dollar weighted average
maturity of five years or less. The Fund seeks to achieve its objective by
investing primarily in high grade, short-term debt securities.
The Fund will invest, under normal circumstances, at least 80% of its total
assets in securities issued or guaranteed by the United States ("U.S.")
Government or its agencies or instrumentalities (as described in the discussion
of Principal Government Securities Income Fund) and other debt securities of
U.S. issuers rated within the three highest grades used by Standard & Poor's
(AAA, AA or A) or by Moody's (Aaa, Aa, or A) or which, if nonrated, are
comparable in quality in the opinion of the Fund's Manager. The balance of the
Fund's assets may be invested in debt securities rated in the fourth highest
grade by the major rating services (i.e., at least "Baa" by Moody's Investors
Service or "BBB" by Standard & Poor's Corporation, or their equivalents) or, if
not rated, judged to be of comparable quality. Securities rated BBB or Baa are
considered investment grade securities having adequate capacity to pay interest
and repay principal. Such securities may have speculative characteristics,
however, and changes in economic and other conditions are more likely to lead to
a weakened capacity of the issuer of such securities to make principal and
interest payments than is the case with higher rated securities. Under normal
circumstances, the Fund will maintain a dollar weighted average maturity of not
more than five years. In determining the average maturity of the Fund's
portfolio, the Manager may adjust the maturity dates on callable or prepayable
securities to reflect the Manager's judgment regarding the likelihood of such
securities being called or prepaid.
The Fund may also invest in other debt securities including corporate debt
securities such as bonds, notes and debentures, mortgage-backed securities
including collateralized mortgage obligations and other asset-backed securities.
For a more complete description of asset-backed securities, see "Principal
Government Securities Income Fund" discussion.
Cash equivalents in which the Fund invests include corporate commercial
paper rated A-1+, A-1 or A-2 by S&P or P-1 or P-2 by Moody's, unrated commercial
paper issued by corporations with outstanding debt securities rated in the four
highest grades by S&P and Moody's and bank certificates of deposit and bankers'
acceptances issued or guaranteed by national or state banks and repurchase
agreements considered by the Fund to have investment quality. Under unusual
market or economic conditions, the Fund for temporary defensive purposes may
invest up to 100% of its assets in cash or cash equivalents.
MONEY MARKET FUND
The Principal Funds currently include one Fund offering Class R shares
which seeks a high level of income through investments in short-term securities.
This Fund is Principal Cash Management Fund referred to as the "Money Market
Fund." Securities in which the Principal Cash Management Fund will invest may
not yield as high a level of current income as securities of lower quality and
longer maturities which generally have less liquidity, greater market risk and
more fluctuation.
The Fund will limit its portfolio investments to United States dollar
denominated instruments that the Manager, subject to the oversight of the Board
of Directors, determines present minimal credit risks and which at the time of
acquisition are "Eligible Securities" as that term is defined in regulations
issued under the Investment Company Act of 1940. Eligible Securities include:
(1) A security with a remaining maturity of 397 days or less that is rated
(or that has been issued by an issuer that is rated in respect to a
class of short-term debt obligations, or any security within that
class, that is comparable in priority and security with the security)
by a nationally recognized statistical rating organization in one of
the two highest rating categories for short-term debt obligations; or
(2) A security that at the time of issuance was a long-term security with
a remaining maturity of 397 calendar days or less, and whose issuer
has received from a nationally recognized statistical rating
organization a rating, with respect to a class of short-term debt
obligations (or any security within that class) that is now comparable
in priority and security with the security, in one of the two highest
rating categories for short-term debt obligations; or
(3) an unrated security that is of comparable quality to a security
meeting the requirements of (1) or (2) above, as determined by the
board of directors.
Principal Cash Management Fund will not invest more than 5% of its total
assets in the following securities:
(1) Securities which, when acquired by the Fund (either initially or upon
any subsequent rollover), are rated in the second highest rating
category for short-term debt obligations;
(2) Securities which at the time of issuance were long-term securities but
when acquired by the Fund have a remaining maturity of 397 calendar
days or less, if the issuer of such securities is rated, with respect
to a class of comparable short-term debt obligations, in the second
highest rating category for short-term obligations; and
(3) Securities which are unrated but are determined by the Fund's Board of
Directors to be of comparable quality to securities rated in the
second highest rating category for short-term debt obligations.
The Fund will maintain a dollar-weighted average portfolio maturity of 90
days or less. The Fund intends to hold its investments until maturity, but may
on occasion trade securities to take advantage of market variations. Also,
revised valuations of an issuer or redemptions may result in sales of portfolio
investments prior to maturity or at a time when such sales might otherwise not
be desirable. The Fund's right to borrow to facilitate redemptions may reduce
the need for such sales. The sale of portfolio securities would be a taxable
event. See "Tax Treatment of the Funds, Dividends and Distributions." It is the
policy of the Fund to be as fully invested as reasonably practical at all times
to maximize current income.
Since portfolio assets of the Fund will consist of short-term instruments,
replacement of portfolio securities will occur frequently. However, since this
Fund expects to usually transact purchases and sales of portfolio securities
with issuers or dealers on a net basis, it is not anticipated that the Fund will
pay any significant brokerage commissions. The Fund is free to dispose of
portfolio securities at any time, when changes in circumstances or conditions
make such a move desirable in light of its investment objective.
The objective of Principal Cash Management Fund is to seek as high a level
of current income available from short-term securities as is considered
consistent with preservation of principal and maintenance of liquidity by
investing its assets in a portfolio of money market instruments. These money
market instruments are U.S. Government Securities, U.S. Government Agency
Securities, Bank Obligations, Commercial Paper, Short-term Corporate Debt,
Taxable Municipal Obligations and Repurchase Agreements, which are described
briefly below and in more detail in the Statement of Additional Information.
U.S. Government Securities are securities issued or guaranteed by the U.S.
Government, including treasury bills, notes and bonds.
U.S. Government Agency Securities are obligations issued or guaranteed by
agencies or instrumentalities of the U.S. Government whether supported by the
full faith and credit of the U.S. Treasury or only by the credit of a particular
agency or instrumentality.
Bank Obligations consist of certificates of deposit which are generally
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return and bankers acceptances
which are time drafts drawn on a commercial bank by a borrower, usually in
connection with international commercial transactions.
Commercial Paper is short-term promissory notes issued by corporations
primarily to finance short-term credit needs.
Short-term Corporate Debt consists of notes, bonds or debentures which at
the time of purchase have one year or less remaining to maturity.
Taxable Municipal Obligations are short-term obligations issued or
guaranteed by state and municipal issuers which generate taxable income.
Repurchase Agreements are transactions under which securities are purchased
from a bank or securities dealer with an agreement by the seller to repurchase
the securities at the same price plus interest at a specified rate. Generally,
Repurchase Agreements are of short duration, usually less than a week but on
occasion for longer periods.
CERTAIN INVESTMENT POLICIES AND RESTRICTIONS
Following is a discussion of certain investment practices that the Funds
may use in an effort to achieve their respective investment objectives.
Repurchase Agreements/Lending Portfolio Securities
Each of the Funds may enter into repurchase agreements with, and each of
the Funds, except the Capital Value Fund, Growth Fund and Cash Management Fund,
may lend its portfolio securities to, unaffiliated broker-dealers and other
unaffiliated qualified financial institutions. These transactions must be fully
collateralized at all times, but involve some credit risk to the Fund if the
other party should default on its obligations, and the Fund is delayed or
prevented from recovering on the collateral. See the Statement of Additional
Information for further information regarding the credit risks associated with
repurchase agreements and the standards adopted by each Fund's Board of
Directors to deal with those risks. None of the Funds intends either (i) to
enter into repurchase agreements that mature in more than seven days if any such
investment, together with any other illiquid securities held by the Fund, would
amount to more than 15% (10% for the Government Securities Income Fund) of its
total assets or (ii) to lend securities in excess of 30% of its total assets.
Forward Commitments
From time to time, each of the Income-Oriented Funds and the Balanced Fund
may enter into forward commitment agreements which call for the Fund to purchase
or sell a security on a future date and at a price fixed at the time the Fund
enters into the agreement. Each of these Funds may also acquire rights to sell
its investments to other parties, either on demand or at specific intervals.
Warrants
Each of the Funds, except the Cash Management Fund and Government
Securities Income Fund, may invest in warrants up to 5% of its assets, of which
not more than 2% may be invested in warrants that are not listed on the New York
or American Stock Exchange. For the International Emerging Markets Fund,
International Fund and International SmallCap Fund, the 2% limitation also
applies to warrants not listed on the Toronto Stock Exchange.
Borrowing
As a matter of fundamental policy, each Fund may borrow money only for
temporary or emergency purposes the Capital Value, Cash Management, Growth,
Tax-Exempt Bond and Tax-Exempt Cash Management Funds may borrow only from banks.
Further, each Fund may borrow only in an amount not exceeding 5% of its assets,
except:
(1) the Capital Value Fund and Growth Fund, each of which may borrow only
in an amount not exceeding the lesser of (i) 5% of the value of its
assets less liabilities other than such borrowings, or (ii) 10% of its
assets taken at cost at the time the borrowing is made; and
(2) the Cash Management Fund which may borrow only in an amount not
exceeding the lesser of (i) 5% of the value of its assets, or (ii) 10%
of the value of its net assets taken at cost at the time the borrowing
is made.
Options
Each of the Funds (except Capital Value, Cash Management, Growth,
Tax-Exempt Bond and Tax-Exempt Cash Management Funds) may purchase covered
spread options, which would give the Fund the right to sell a security that it
owns at a fixed dollar spread or yield spread in relationship to another
security that the Fund does not own, but which is used as a benchmark. These
same Funds may also purchase and sell financial futures contracts, options on
financial futures contracts and options on securities and securities indices,
but will not invest more than 5% of their assets in the purchase of options on
securities, securities indices and financial futures contracts or in initial
margin and premiums on financial futures contracts and options thereon. The
Funds may write options on securities and securities indices to generate
additional revenue and for hedging purposes and may enter into transactions in
financial futures contracts and options on those contracts for hedging purposes.
General
The Statement of Additional Information includes further information
concerning the Funds' investment policies and applicable investment
restrictions. The investment objectives of the Funds are fundamental and certain
investment restrictions designated as such in this Prospectus or in the
Statement of Additional Information are fundamental policies that may not be
changed without approval by the holders of the lesser of: (i) 67% of the Fund's
shares present or represented at a shareholders' meeting at which the holders of
more than 50% of such shares are present or represented by proxy; or (ii) more
than 50% of the outstanding shares of the Fund. All other investment policies
described in this Prospectus and the Statement of Additional Information are not
fundamental and may be changed by the Board of Directors of the appropriate Fund
without shareholder approval.
RISK FACTORS
An investment in any of the Growth-Oriented Funds involves the financial
and market risks that are inherent in any investment in equity securities. These
risks include changes in the financial condition of issuers, in economic
conditions generally and in the conditions in securities markets. They also
include the extent to which the prices of securities will react to those
changes.
An investment in any of the Income-Oriented Funds involves market risks
associated with movements in interest rates. The market value of the Funds'
investments will fluctuate in response to changes in interest rates and other
factors. During periods of falling interest rates, the values of outstanding
long-term fixed-income securities generally rise. Conversely, during periods of
rising interest rates, the values of such securities generally decline. Changes
by recognized rating agencies in their ratings of any fixed-income security and
in the ability of an issuer to make payments of interest and principal may also
affect the value of these investments. Changes in the value of portfolio
securities will affect the Funds' net asset values but will not affect cash
income derived from the securities unless a change results from a failure of an
issuer to pay interest or principal when due.
The yields on an investment in the Cash Management Fund will vary with
changes in short-term interest rates. In addition, the investments of the Cash
Management Fund are subject to the ability of the issuer to pay interest and
principal when due.
Each of the following Principal Funds may invest in foreign securities to
the indicated percentage of its assets: International, International Emerging
Markets and International SmallCap Funds - 100%; Real Estate - 25%; Balanced,
Blue Chip, Bond, Capital Value, High Yield, Limited Term Bond Fund, MidCap,
SmallCap and Utilities Funds - 20%. The Government Securities Income Fund may
not invest in foreign securities. The Cash Management and Tax-Exempt Cash
Management Funds do not invest in foreign securities other than those that are
United States dollar denominated. United States dollar denominated means that
all principal and interest payments for the security are payable in U.S. dollars
and that the interest rate of, the principal amount to be repaid and the timing
of payments related to the securities do not vary or float with the value of a
foreign currency, the rate of interest on foreign currency borrowings or with
any other interest rate or index expressed in a currency other than U.S.
dollars. Debt securities issued in the United States pursuant to a registration
statement filed with the Securities and Exchange Commission are not treated as
foreign securities for purposes of these limitations. Investment in foreign
securities presents certain risks which may affect a Fund's net asset value.
These risks include, but are not limited to, those resulting from fluctuations
in currency exchange rates, revaluation of currencies, the imposition of foreign
taxes, the withholding of taxes on dividends at the source, political and
economic developments including war, expropriations, nationalization, the
possible imposition of currency exchange controls and other foreign governmental
laws or restrictions, reduced availability of public information concerning
issuers, and the fact that foreign issuers are not generally subject to uniform
accounting, auditing and financial reporting standards or to other regulatory
practices and requirements comparable to those applicable to domestic issuers.
In addition, transactions in foreign securities may be subject to higher costs,
and the time for settlement of transactions in foreign securities may be longer
than the settlement period for domestic issuers. A Fund's investment in foreign
securities may also result in higher custodial costs and the costs associated
with currency conversions.
Securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. In particular, securities
markets in emerging market countries are known to experience long delays between
the trade and settlement dates of securities purchased and sold, potentially
resulting in a lack of liquidity and greater volatility in the price of
securities on those markets. In addition, investments in smaller companies may
present greater opportunities for capital appreciation, but may also involve
greater risks than large, mature issuers. Such companies may have limited
product lines and financial resources. Their securities may trade in more
limited volume than larger companies and may therefore experience significantly
more price volatility and less liquidity than securities of larger companies. As
a result of these factors, the Boards of Directors of the Funds have adopted
Daily Pricing and Valuation Procedures for the Funds which set forth the steps
to be followed by the Manager and Sub-Advisor to establish a reliable market or
fair value if a reliable market value is not available through normal market
quotations. Oversight of this process is provided by the Executive Committee of
the Boards of Directors.
HOW THE FUNDS ARE MANAGED
Under Maryland law, the business and affairs of each of the Funds are
managed under the direction of its Board of Directors. Investment services and
certain other services are furnished to the Funds under the terms of a
Management Agreement between each of the Funds and the Manager. The Manager for
the Funds is Principal Management Corporation (the "Manager") (formerly known as
Princor Management Corporation), an indirectly wholly-owned subsidiary of
Principal Mutual Life Insurance Company, a mutual life insurance company
organized in 1879 under the laws of the State of Iowa. The address of the
Manager is The Principal Financial Group, Des Moines, Iowa 50392. The Manager
was organized on January 10, 1969, and since that time has managed various
mutual funds sponsored by Principal Mutual Life Insurance Company. As of October
31, 1997, the Manager served as investment advisor for 28 such funds with assets
totaling approximately $_._ billion.
The Manager is responsible for investment advisory, managerial and
administrative services for the Funds. However, under a Sub-Advisory Agreement
between Invista Capital Management, Inc. ("Invista") and the Manager, Invista
performs all the investment advisory responsibilities of the Manager for the
Growth-Oriented Funds, the Government Securities Income Fund, the Limited Term
Bond Fund and the Utilities Fund. The Manager will reimburse Invista for the
cost of providing these services. Invista, an indirectly wholly-owned subsidiary
of Principal Mutual Life Insurance Company and an affiliate of the Manager, was
founded in 1985 and manages investments for institutional investors, including
Principal Mutual Life. Assets under management at October 31, 1997 were
approximately $__._ billion. Invista's address is 1500 Hub Tower, 699 Walnut,
Des Moines, Iowa 50309.
The Manager or Invista advises the Funds on investment policies and on the
composition of the Funds' portfolios. In this connection, the Manager or Invista
furnishes to the Board of Directors of each Fund a recommended investment
program consistent with that Fund's investment objective and policies. The
Manager or Invista is authorized, within the scope of the approved investment
program, to determine which securities are to be bought or sold, and in what
amounts.
The Manager or Invista has assigned certain individuals the primary
responsibility for the day-to-day management of each Fund's portfolio. The
persons primarily responsible for the day-to-day management of each Fund are
identified in the table below:
<TABLE>
<CAPTION>
Primarily
Fund Responsible Since Person Primarily Responsible
---- ----------------- ----------------------------
<S> <C> <C>
Balanced Fund April, 1993 Judith A. Vogel, CFA (BA degree, Central College). Vice President, Invista
Capital Management, Inc., since 1987.
Blue Chip Fund March, 1991 Mark T. Williams, CFA (MBA degree, Drake University). Vice President,
(Fund's inception) Invista Capital Management, Inc., since 1995; Investment Officer, 92-95.
Prior thereto, Security Analyst.
Bond Fund November, 1996 Scott A. Bennett,CFA (MBA degree, University of Iowa) Assistant Director
Investment Securities, Principal Mutual Life Insurance Company, since 1996;
Prior thereto, Investment Manager.
Capital Value Fund October, 1969 David L. White, CFA (BBA degree, University of Iowa). Executive Vice
(Fund's inception) President, Invista Capital Management, Inc., since 1984. Co-Manager since
November 1996: Catherine A. Green, CFA, (MBA degree, Drake University).
Vice President, Invista Capital Management, Inc. since 1987.
Government Securities May, 1985 Martin J. Schafer (BBA degree, University of Iowa). Vice President, Invista
Income Fund Fund's inception) Capital Management, Inc., since 1992. Director - Securities Trading,
Principal Mutual Life Insurance Company 1992; Prior thereto, Associate Director.
Growth and MidCap August, 1987 Michael R. Hamilton, (MBA degree, Bellarmine College). Vice President, Funds
and December, 1987 Invista Capital Management, Inc., since 1987.
(Fund's inception),
respectively
High Yield Fund December, 1987 James K. Hovey, CFA (MBA degree, University of Iowa). Director - Investment
(Fund's inception) Securities, Principal Mutual Life Insurance Company, since 1990; Prior thereto,
Assistant Director Investment Securities.
International Fund April, 1994 Scott D. Opsal, CFA (MBA degree, University of Minnesota). Executive Vice
President and Chief Investment Officer, Invista Capital Management, Inc.,
since 1997. Vice President, 1986-1997.
International Emerging May, 1997 Kurtis D. Spieler, CFA (MBA degree, Drake University). Vice President,
Markets Fund (Fund's inception) Invista Capital Management, Inc., since 1995; Investment Officer, 94-95.
Prior thereto, Investment Manager, Principal Mutual Life Insurance Company.
International SmallCap May, 1997 Darren K. Sleister, CFA (MBA degree, University of Iowa). Investment Fund
(Fund's inception) Officer, Invista Capital Management, Inc., since 1995; Prior thereto, Security
Analyst.
Limited Term Bond February, 1996 Martin J. Schafer (BBA degree, University of Iowa). Vice President, Invista
Fund (Fund's inception) Capital Management, Inc., since 1992. Director-Securities Trading,
Principal Mutual Life Insurance Company 1992; Prior thereto, Associate
Director.
Real Estate Fund _____________ Kelly D. Rush, CFA (MBA degree, University of Iowa). Assistant Director -
(Fund's inception) Investment - Commercial Real Estate, Principal Mutual Life Insurance Company,
since 1996; Prior thereto, Senior Administrator Investment -
Commercial Real Estate.
SmallCap Fund ______________ Co-Manager: Mark T. Williams, CFA (MBA degree, Drake University). Vice
(Fund's inception) President, Invista Capital Management, Inc., since 1995;
Investment Officer, 1992-1995. Co-Manager: John F. McClain, (MBA degree Indiana
University). Vice President, Invista Capital Management, Inc., since 1995;
Investment Officer, 1992-1995.
Utilities Fund April, 1993 Catherine A. Green, CFA (MBA degree, Drake University). Vice President,
(Fund's inception) Invista Capital Management, Inc., since 1987.
</TABLE>
Until August 1, 1988 the World Fund's portfolio was managed by Principal
Management, Inc. of Edmonton, Canada and Scottsdale, Arizona, which company has
changed its name to Sea Investment Management, Inc. The Fund's previous manager
and the current manager are unaffiliated. This change in managers should be kept
in mind when reviewing historical investment results.
For a description of the investment and other services provided by the
Manager, see "Cost of Manager's Services" in the Statement of Additional
Information. The management fee and total Class A share expenses incurred by
each Fund for the period ended October 31, 1997 were equal to the following
percentages of each Fund's respective average net assets:
Class A Shares Class R Shares
-------------------- --------------------
Total Total
Manager's Annualized Manager's Annualized
Fund Fee Expenses Fee Expenses
---- --------- ---------- --------- ----------
Balanced Fund .60% 1.28% .60% 1.49%
Blue Chip Fund .50% 1.33% .50% 1.48%
Bond Fund .47% .95%* .50% 1.28%*
Capital Value Fund .43% .69% .45% 1.16%
Cash Management Fund .37% .66%* .38% .99%*
Government Securities Income Fund .46% .81% .46% 1.18%
Growth Fund .46% 1.08% .46% 1.42%
High Yield Fund .60% 1.26% .60% 1.59%
International Fund .73% 1.45% .73% 1.59%
International Emerging Markets Fund
International SmallCap Fund
Limited Term Bond Fund .23% .89%* .11% 1.40%*
MidCap Fund .62% 1.32% .62% 1.53%
Utilities Fund .52% 1.17%* .60% 1.47%*
*After waiver.
The Manager voluntarily waived a portion of its fee for the Bond, Cash
Management, Limited Term Bond and Utilities Funds throughout the fiscal year
ended October 31, 1997. The Manager intends to continue its voluntary waiver
and, if necessary, pay expenses normally payable by each of these Funds through
February 28, 1998 in an amount that will maintain a total level of operating
expenses which as a percentage of average net assets attributable to a class on
an annualized basis during that period will not exceed, for the Class A shares,
.95% for the Bond Fund, .75% for the Cash Management Fund, .90% for the Limited
Term Bond Fund and 1.15% for the Utilities Fund, and for the Class R shares,
1.45% for the Bond Fund, 1.25% for the Cash Management Fund, 1.50% for the
Limited Term Bond Fund and 1.65% for the Utilities Fund. The effect of the
waivers is and will be to reduce each Fund's annual operating expenses and
increase each Fund's yield.
The Manager and Invista may purchase at their own expense statistical and
other information or services from outside sources, including Principal Mutual
Life Insurance Company. An Investment Service Agreement between each Fund, the
Manager, and Principal Mutual Life Insurance Company provides that Principal
Mutual Life Insurance Company will furnish certain personnel, services and
facilities required by the Manager in connection with its performance of the
Management Agreements, and that the Manager will reimburse Principal Mutual Life
Insurance Company for its costs incurred in this regard.
Among the expenses paid by each Fund are brokerage commissions on portfolio
transactions, the cost of stock issue and transfer and dividend disbursements,
administration of shareholder accounts, custodial fees, expenses of registering
and qualifying shares for sale after the initial registration, auditing and
legal expenses, fees and expenses of unaffiliated directors, the cost of
shareholder meetings and taxes and interest (if any).
The Funds may from time to time execute transactions for portfolio
securities with, and pay related brokerage commissions to, Principal Financial
Securities, Inc. ("PFS") and Morgan Stanley and Co., each a broker-dealer
affiliated with Princor and/or the Manager for each of the Funds. PFS also
provides distribution services for Princor Cash Management Fund for which it is
compensated by the Manager. These services include, but are not limited to,
providing office space, equipment, telephone facilities and various personnel as
necessary or beneficial to establish and maintain shareholder accounts. PFS
receives a fee from the Manager calculated as a percentage of the average net
asset value of shares of the Fund held in PFS client accounts during the period
for which PFS provides the services. During the fiscal years ended October 31,
1995, 1996, and 1997, PFS received fees in the amount of $991,520, $1,650,714
and $__________ respectively, in consideration of the services it rendered to
the Cash Management Fund.
The Manager serves as investment advisor, dividend disbursing agent and,
directly and through an affiliate, as transfer agent for each of the Funds
sponsored by Principal Mutual Life Insurance Company. The Funds reimburse the
Manager for the costs of providing these services.
HOW TO PURCHASE SHARES
Purchases are generally made by completing an Account Application or a
Princor IRA Application and mailing it to Princor. You may obtain either of
these applications by calling Princor at 1-800-774-6267. Shares will be issued
at the offering price next computed after the application is received at
Princor's main office and Princor receives the amount to be invested. Generally,
the initial amount to be invested in a Princor IRA will be directly transferred
to Princor from the retirement plan in which the investor participates. However,
in some cases the investor will purchase shares by check. If investing by check,
shares will be issued at the offering price next computed after the completed
application and check are received at Princor's main office. Subsequent
purchases will be executed at the price next computed after receipt of the
investor's check at Princor's main office. All orders are subject to acceptance
by the Fund or Funds and Princor.
Redemptions by shareholders investing by check will be effected only after
payment has been collected on the check, which may take up to eight days or
more. Investors considering redeeming or exchanging shares or transferring
shares to another person shortly after purchase should pay for those shares with
a certified check, bank cashier's check or money order to avoid any delay in
redemption, exchange or transfer.
Minimum Purchase Amount. You may open an account with any of the Funds with
a minimum initial investment of $1,000 ($250 for an IRA or account established
under the Uniform Gifts to Minors Act or Uniform Transfers Act). Additional
investments of $100 or more may be made at any time without completing a new
application. The minimum initial and subsequent investment amounts are not
applicable to accounts designated as receiving accounts in a Dividend Relay
Election. Each Fund's Board of Directors reserves the right to change or waive
minimum investment requirements at any time, which would be applicable to all
investors alike.
Automatic Investment Plan. You may make regular monthly investments through
automatic deductions from the account of a bank or similar financial
institution. The minimum monthly purchase is $25 for all Funds except the Money
Market Funds, which have a $100 monthly minimum requirement. A $25 minimum
monthly purchase may be established for the Money Market Funds if the account
value is at least $1,000 at the time the plan is established. Plan forms and
preauthorized check agreements are available from Princor on request. There is
no obligation to continue the plan and it may be terminated by the investor at
any time.
Each Fund described in this Prospectus offers investors three classes of
shares which bear sales charges in different forms and amounts, Class A shares,
Class B shares and Class R shares. Only Class R shares are offered through this
Prospectus. Class A shares are described herein only because Class R shares
convert to Class A shares as described below.
Class R Shares. Class R shares are purchased without an initial sales
charge or a contingent deferred sales charge ("CDSC"). Class R shares bear a
higher 12b-1 fee than Class A shares, currently at the annual rate of up to .75%
of the Fund's average net assets attributable to Class R shares. See
"Distribution and Shareholder Servicing Plans and Fees." Class R shares provide
you the benefit of putting all of your dollars to work from the time the
investment is made, but (until conversion to Class A shares) will have a higher
expense ratio and pay lower dividends than Class A shares due to the higher
12b-1 fee. Class R shares will automatically convert to Class A shares, based on
relative net asset value (without a sales charge), on the first business day of
the 49th month after the purchase date. Class R shares acquired by exchange from
Class R shares of another Principal fund will convert into Class A shares based
on the time of the initial purchase. (See "How to Exchange Shares".) At the same
time, a pro rata portion of all shares purchased through reinvestment of
dividends and distributions would convert into Class A shares, with that portion
determined by the ratio that the shareholder's Class R shares converting into
Class A shares bears to your total Class R shares that were not acquired through
dividends and distributions. The conversion of Class R shares to Class A shares
is subject to the continuing availability of a ruling from the Internal Revenue
Service or an opinion of counsel that such conversions will not constitute
taxable events for Federal tax purposes. There can be no assurance that such
ruling or opinion will be available, and the conversion of Class R shares to
Class A shares will not occur if such ruling or opinion is not available. In
such event, Class R shares would continue to be subject to higher expenses than
Class A shares for an indefinite period.
Class A Shares. If you invest less than $1 million in Class A shares
(except Class A shares of the Cash Management Fund), you pay a sales charge at
the time of purchase. Certain purchases of Class A shares qualify for reduced
sales charges. Class A share purchases of $1 million or more are not subject to
a sales charge at the time of purchase, but may be subject to a contingent
deferred sales charge if redeemed within 18 months of purchase. See "Offering
Price of Funds' Shares." Class A shares of each of the Funds, except the Cash
Management Fund, currently bear a 12b-1 fee at the annual rate of up to 0.25%
(0.15% for the Limited Term Bond Fund) of the Fund's average net assets
attributable to Class A shares. See "Distribution and Shareholder Servicing
Plans and Fees."
Which arrangement is better for you? The decision as to which class of
shares provides a more suitable investment for you depends on a number of
factors, including the amount and intended length of the investment. Orders for
Class R shares for $1 million or more will be treated as orders for Class A.
They are not subject to a sales charge at the time of purchase, but are subject
to a contingent deferred sales charge if redeemed within 18 months of purchase.
OFFERING PRICE OF FUNDS' SHARES
The Funds offer their respective shares continuously through Princor, which
is the principal underwriter for the Funds and sells shares as agent on behalf
of the Funds. Princor may select other dealers through which shares of the Funds
may be sold. Certain dealers may not sell all classes of shares.
Class R shares. Class R shares are sold to eligible purchasers at net asset
value; no front-end load or contingent deferred sales charge applies to the
purchase of Class R shares. Class R shares are offered only through Princor and
other dealers it selects.
Class A shares. Class A shares of Principal Cash Management Fund are sold
to the public at net asset value; no sales charge applies to such purchases.
Class R shares convert to Class A shares at NAV, without a sales charge, as
previously described. Class A shares of the Growth-Oriented and Income-Oriented
Funds are sold to the public at the net asset value plus a sales charge which
ranges from a high 4.75% (1.50% for the Limited Term Bond Fund) to a low of 0%
of the offering price (equivalent to a range of 4.99% to 0% of the net amount
invested) according to the schedule below. Selected dealers are allowed a
concession as shown. At Princor's discretion, the entire sales charge may at
times be reallowed to dealers. In some situations, depending on the services
provided by the dealer, the concession may be less. Any dealer allowance on
purchases not involving a sales charge will be determined by Princor.
<TABLE>
<CAPTION>
Sales Charge for
All Funds Except Sales Charge for
Limited Term Bond Fund Limited Term Bond Fund Dealers Allowance as
Sales Charge as % of: Sales Charge as % of: % of Offering Price
------------------------ ------------------------ --------------------------------
Offering Net Amount Offering Net Amount All Funds Except Limited Term
Price Invested Price Invested Limited Term Bond Bond
-------- ---------- -------- ---------- ----------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Less than $50,000 4.75% 4.99% 1.50% 1.52% 4.00% 1.25%
$50,000 but less than $100,000 4.25% 4.44% 1.25% 1.27% 3.75% 1.00%
$100,000 but less than $250,000 3.75% 3.90% 1.00% 1.10% 3.25% .75%
$250,000 but less than $500,000 2.50% 2.56% 0.75% 0.76% 2.00% .50%
$500,000 but less than $1,000,000 1.50% 1.52% 0.50% 0.50% 1.25% .25%
$1,000,000 or more 0 0 0 0 .75% .25%
</TABLE>
CDSC on Class A Shares. Purchases of Class A shares of $1,000,000 or more
may be subject to CDSC upon redemption. A CDSC is payable to Princor on these
investments in the event of a share redemption within 18 months following the
share purchase, at the rate of .75% (.25% for the Limited Term Bond Fund) of the
lesser of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares. Shares subject to
the CDSC which are exchanged into another Principal mutual fund will continue to
be subject to the CDSC until the original 18 month period expires. However, no
CDSC is payable with respect to redemptions of Class A shares used to fund a
Princor 401 (a) or Princor 401 (k) retirement plan, except redemptions resulting
from the termination of the plan or transfer of plan assets.
The CDSC on Class A shares will be waived on redemptions of shares in
connection with certain withdrawals from certain retirement plans. See Statement
of Additional Information. Up to 10% of the value of Class A shares subject to a
Periodic Withdrawal Plan may also be redeemed each year without a CDSC. See
"Periodic Withdrawal Plan."
Investors may be eligible to buy Class A shares at reduced sales charges.
Purchasers of Class A shares may benefit from Rights of Accumulation and
Statement of Intention as well as the reduced sales charge available for the
investment of certain life insurance and annuity contract death benefits and
various Employee Benefit Plans and other plans. Descriptions are included in the
Statement of Additional Information.
Investors may be able to purchase Class A shares at net asset value. The
following persons may purchase Class A shares of the Growth-Oriented Funds and
Income-Oriented Funds at the net asset value (without a sales charge): (1)
Principal Mutual Life Insurance Company and its directly and indirectly owned
subsidiaries; (2) Active and retired directors, officers and employees of any of
the Funds, Principal Mutual Life Insurance Company, and directly and indirectly
owned subsidiaries of Principal Mutual Life Insurance Company (including
full-time insurance agents of, and persons who have entered into insurance
brokerage contracts with, Principal Mutual Life Insurance Company and its
directly and indirectly owned subsidiaries, and employees of such persons); (3)
The Principal Financial Group Employees' Credit Union; (4) Non-ERISA investment
advisory clients of Invista Capital Management, Inc., an indirectly wholly-owned
subsidiary of Principal Mutual Life Insurance Company; (5) Sales representatives
and employees of sales representatives of Princor or other dealers through which
shares of the Funds are distributed; (6) Spouses, surviving spouses and
dependent children of the foregoing persons; (7) Trusts primarily for the
benefit of the foregoing individuals; (8) certain "wrap accounts" for the
benefit of clients of Princor and other broker-dealers or financial planners
selected by Princor; and (9) clients of a registered representative of Princor
or other dealers through which shares of the Funds are distributed and who has
become affiliated with Princor or other dealer within 180 days of the date of
the purchase of Class A shares of the Funds, if the investment represents the
proceeds of a redemption within that 180 day period of shares of another
investment company the purchase of which included a front-end sales charge or
the redemption of which was subject to a contingent deferred sales charge; (10)
Unit Investment Trust sponsored by Principal Mutual Life Insurance Company
and/or its directly or indirectly owned subsidiaries; and (11) certain employee
welfare benefit plan customers of Principal Mutual Life Insurance Company for
whom Plan Deposit Accounts are established.
Each of the Funds has obtained an exemptive order from the Securities and
Exchange Commission ("SEC") to permit each Fund to offer its shares at net asset
value to participants of certain annuity contracts issued by Principal Mutual
Life Insurance Company. In addition, each of these Funds are available at net
asset value to the extent the investment represents the proceeds from a total
surrender of certain unregistered annuity contracts issued by Principal Mutual
Life Insurance Company, and for which Principal Mutual Life Insurance Company
waives any applicable contingent deferred sales charges or other contract
surrender charges.
The Funds reserve the right to discontinue offering shares at net asset
value and/or at a reduced sales charge at any time for new accounts and upon 60
days notice to shareholders of existing accounts.
DISTRIBUTION AND SHAREHOLDER SERVICING PLANS AND FEES
Class R Distribution Plan. Each of the Funds described in this Prospectus
has adopted a distribution plan for the Class R shares. Each Class R Plan
provides for payments by the Fund to Princor at the annual rate of up to .75% of
the Fund's average net assets attributable to Class R shares.
Although Class R shares are sold without an initial sales charge, Princor
incurs certain distribution expenses. In addition, Princor may remit on a
continuous basis up to .25% to Registered Representatives and other selected
Dealers (including, for this purpose, certain financial institutions) as a trail
fee in recognition of their ongoing services and assistance.
Class A Distribution Plan. Each of the Funds, except the Cash Management
Fund, has adopted a distribution plan for the Class A shares. The Fund will make
payments from its assets to Princor pursuant to this Plan after the end of each
month at an annual rate not to exceed 0.25% (0.15% for the Limited Term Bond
Fund) of the average daily net asset value of the Fund. Princor will retain such
amounts as are appropriate to compensate for actual expenses incurred in
distributing and promoting the sale of the Fund shares but may remit on a
continuous basis up to .25% (0.15% for the Limited Term Bond Fund) to Registered
Representatives and other selected Dealers (including, for this purpose, certain
financial institutions) as a trail fee in recognition of their services and
assistance.
General. The purpose of the Plans is to permit the Fund to compensate
Princor for expenses incurred by it in promoting and distributing Fund shares
and providing services to Fund shareholders. If the aggregate payments received
by Princor under any of the Plans in any fiscal year exceed the expenditures
made by Princor in that year pursuant to that Plan, Princor will promptly
reimburse the Fund for the amount of the excess. If expenses under a Plan exceed
the amount for which Princor may be compensated in any one fiscal year, the Fund
will not carry over such expenses to the next fiscal year. The Funds have no
legal obligation to pay any amount pursuant to the Plans that exceeds the
compensation limit. The Funds will not pay, directly or indirectly, interest,
carrying charges, or other financing costs in connection with the Plans. The
Plans are further described in the Statement of Additional Information.
DETERMINATION OF NET ASSET VALUE OF FUNDS' SHARES
Each Fund calculates net asset value of a share of each class by dividing
the total value of the assets attributable to the class, less all liabilities
attributable to the class, by the number of shares outstanding of the class.
Shares are valued as of the close of trading on the New York Stock Exchange each
day the Exchange is open.
Growth-Oriented and Income-Oriented Funds
The following valuation information applies to the Growth-Oriented and
Income-Oriented Funds. Securities for which market quotations are readily
available are valued using those quotations. Securities with remaining
maturities of 60 days or less are valued at amortized cost when it is determined
by the Board of Directors that amortized cost reflects fair value. Other assets
are valued at fair value as determined in good faith through procedures
established by the Board.
As previously described, some of the Funds may purchase foreign securities,
whose trading is substantially completed each day at various times prior to the
close of the New York Stock Exchange. The values of such securities used in
computing net asset value per share are usually determined as of such times.
Occasionally, events which affect the values of such securities and foreign
currency exchange rates may occur between the times at which they are generally
determined and the close of the New York Stock Exchange and would therefore not
be reflected in the computation of the Fund's net asset value. If events
materially affecting the value of such securities occur during such period, then
these securities will be valued at their fair value as determined in good faith
by the Manager under procedures established and regularly reviewed by the Board
of Directors. To the extent the Fund invests in foreign securities listed on
foreign exchanges which trade on days on which the Fund does not determine its
net asset value, for example Saturdays and other customary national U.S.
holidays, the Fund's net asset value could be significantly affected on days
when shareholders have no access to the Fund.
Money Market Fund
Portfolio securities of the Cash Management Fund are valued at amortized
cost. For a description of this calculation procedure see the Statement of
Additional Information. The Cash Management Fund reserves the right to calculate
or estimate its net asset value more frequently than once a day if it deems it
desirable.
DISTRIBUTION OF INCOME DIVIDENDS AND REALIZED CAPITAL GAINS
Growth-Oriented and Income-Oriented Funds
Each of these Funds distributes substantially all of its net income to
shareholders each year according to the following schedule:
<TABLE>
<CAPTION>
Funds Record date Payable date
----- ----------- ------------
<S> <C> <C>
Growth
Balanced, Blue Chip, three business days before March 24, June 24,
Real Estate, and Utilities each payable date September 24 and December 24
Capital Value, Growth, three business days before June 24 and December 24
MidCap and SmallCap each payable date
International, International three business days before December 24
Emerging Markets and each payable date
International SmallCap
Income
Bond, Government Securities three business days before monthly on the 24th (or
Income, High Yield, Limited each payable date previous business day)
Term Bond and Tax-Exempt Bond
</TABLE>
Net realized capital gains for each of the Funds, if any, will be
distributed annually. Generally the distribution will be made on the fourth
business day of December, to shareholders of record on the third business day
prior to the record date.
On the Account Application, you can authorize income dividend and capital
gains distributions to be invested in additional Fund shares at net asset value
(without a sales charge), invested in shares of other Principal Funds or paid in
cash. You may change this instruction without charge at any time by giving ten
days written notice to the Fund.
Any dividends or distributions paid shortly after a purchase of shares will
have the effect of reducing the per share net asset value by the amount of the
dividends or distributions. These dividends or distributions are subject to
taxation like other dividends and distributions, even though they are in effect
a return of capital. A shareholder of the Tax-Exempt Bond Fund who redeems
shares when tax-exempt income has been accrued but not declared as a dividend by
that Fund may have the portion of the redemption proceeds which represents such
income taxed at capital gains rates.
Money Market Fund
The Cash Management Fund declares dividends of all its daily net investment
income on each day the net asset value per share is determined. Dividends for
the Fund are payable daily and are automatically reinvested in full and
fractional shares of the Fund at the then current net asset value.
Net investment income of the Cash Management Fund, for dividend purposes,
consists of (1) accrued interest income plus or minus accrued discount or
amortized premium; plus or minus (2) all net short-term realized gains and
losses; minus (3) all accrued expenses of the Fund. Expenses of the Fund are
accrued each day. Net income will be calculated immediately prior to the
determination of net asset value per share of each Fund. Dividends payable on
Class R shares of the Cash Management Fund on a per share basis will be lower
than dividends payable on Class A shares of the Fund.
Since it is the policy of the Cash Management Fund, under normal
circumstances, to hold portfolio securities to maturity and to value portfolio
securities at amortized cost, the Fund does not expect any capital gains or
losses. If the Fund does experience gains, however, it could result in an
increase in dividends. Capital losses could result in a decrease in dividends.
If, for some extraordinary reason, the Fund realizes net long-term capital
gains, it will distribute them once every 12 months.
Since the net income of the Fund (including realized gains and losses on
the portfolio securities) is normally declared as a dividend each time the net
income of the Fund is determined, the net asset value per share of the Fund
normally remains at $1.00 immediately after each determination and dividend
declaration. Any increase in the value of a shareholder's investment in the
Fund, representing reinvestment of dividend income, is reflected by an increase
in the number of shares of the Fund in the account.
Normally the Fund will have a positive net income at the time of each
determination thereof. Net income may be negative if an unexpected liability
must be accrued or a loss is realized. If the net investment income of the Fund
determined at any time is a negative amount, the net asset value per share will
be reduced below $1.00. If this happens, the Fund may endeavor to restore the
net asset value per share to $1.00 by reducing the number of outstanding shares
by redeeming proportionately from shareholders without the payment of any
monetary consideration, such number of full and fractional shares as is
necessary to maintain a net asset value per share of $1.00. Each shareholder
will be deemed to have agreed to such a redemption in these circumstances by
investment in the Fund. The Fund may seek to achieve the same objective of
restoring the net asset value per share to $1.00 by not declaring dividends from
net income on subsequent days until restoration, with the result that the net
asset value per share would increase to the extent of positive net income which
is not declared as a dividend, or any other method approved by the Board of
Directors for the Fund.
The Board of Directors of the Fund may revise the above dividend policy, or
postpone the payment of dividends, if the Fund should have or anticipate any
large presently unexpected expense, loss or fluctuation in net assets which in
the opinion of the Board might have a significant adverse effect on the
shareholders.
Dividend Relay Election
Shareholders may elect to have dividends and capital gains distributions
from one of the Principal funds invested in shares of the same class of one of
the other Principal funds. This Dividend Relay Election can be made on the
application or at any time on 10 days written notice or, if telephone
transaction services apply to the account from which the dividends and
distributions originate, on 10 days notice by telephone to the Fund. A signature
guarantee may be required to make the Dividend Relay Election. See "General
Information About a Fund Account." There is no administrative charge for this
service. Dividends and distributions are credited to the receiving Fund the day
such dividends are paid at the receiving Fund's net asset value for that day.
If the Dividend Relay Election privilege is discontinued with respect to a
particular receiving Fund, the value of the account in that Fund must equal or
exceed the Fund's minimum initial investment requirement or the Fund shall have
the right, if the shareholder fails to increase the value of the account to such
minimum within 90 days after being notified of the deficiency, to redeem the
account and send the proceeds to the shareholder.
Shareholders may discontinue the Dividend Relay Election at any time on 10
days written notice or, if telephone transaction services apply to the account
from which the dividends originate, on 10 days notice by telephone to the Fund.
The Funds reserve the right to discontinue or modify this service upon 60 days
written notice to shareholders.
TAX TREATMENT OF FUNDS, DIVIDENDS AND DISTRIBUTIONS
It is the policy of each of the Funds to distribute substantially all net
investment income and net realized gains. Through such distributions, and by
satisfying certain other requirements, the Funds intend to qualify for the tax
treatment applicable to regulated investment companies under the provisions of
the Internal Revenue Code. This means that in each year in which a Fund so
qualifies, it will be exempt from federal income tax upon the amounts so
distributed to investors. The Tax Reform Act of 1986 imposed an excise tax on
mutual funds which fail to distribute net investment income and capital gains by
the end of the calendar year in accordance with the provisions of the Act. The
Funds intend to comply with the Act's requirements and to avoid this excise tax.
The Funds record dividend income on the ex-dividend date, except dividend income
from foreign securities where the ex-dividend date may have passed in which case
such dividends are recorded as soon as the Fund is informed of the ex-dividend
date.
Individual Retirement Accounts
Distributions from IRAs are taxed as ordinary income to the recipient,
although special rules exist for the tax-free return of non-deductible
contributions. In addition, taxable distributions received from an IRA prior to
age 59 1/2 are subject to a 10% penalty tax in addition to regular income tax.
Certain distributions are exempted from this penalty tax, including
distributions following the participant's death or disability; distributions
paid as part of a series of substantially equal periodic payments made for the
life (or life expectancy) of the participant or the joint lives (or joint life
expectancies) of the participant and the participant's designated beneficiary;
distributions for medical expenses; distributions for certain unemployment
expenses and distributions after 1997 for first home purchases (up to $10,000)
and higher education expenses.
Generally, distributions from IRAs must commence not later than April 1 of
the calendar year following the calendar year in which the participant attains
age 70 1/2, and such distributions must be made over a period that does not
exceed the life expectancy of the participant (or the participant and
beneficiary). A penalty tax of 50% would be imposed on any amount by which the
minimum required distribution in any year exceeded the amount actually
distributed in that year. In addition, in the event that the participant dies
before his or her entire interest in the IRA has been distributed, the
participant's entire interest must be distributed at least as rapidly as under
the method of distribution being used as of the date of that person's death. If
the participant dies prior to beginning any distributions from the IRA, the
entire interest in the IRA will be distributed (1) within five years after the
date of the participant's death or (2) as periodic payments which will begin
within one year of the participant's death and which will be made over the life
expectancy of the participant's designated beneficiary. However, if the
participant's designated beneficiary is the surviving spouse, the IRA may be
continued with the surviving spouse deemed to be the new IRA participant.
The Code permits the taxable portion of funds to be transferred in a
tax-free rollover from a qualified employer pension, profit-sharing, annuity,
bond purchase or tax-deferred annuity plan to an IRA if certain conditions are
met, and if the rollover of assets is completed within 60 days after the
distribution from the qualified plan is received. A direct rollover of funds may
avoid a 20% federal tax withholding generally applicable to qualified plans or
tax -deferred annuity plan distributions. In addition, not more frequently than
once every twelve months, amounts may be rolled over tax-free from one IRA to
another, subject to the 60-day limitation and other requirements. The
once-per-year limitation on rollovers does not apply to direct transfers of
funds between IRA custodians or trustees.
Non-IRA Accounts
In each fiscal year when, at the close of such year, more than 50% of the
value of the International, International Emerging Markets or International
SmallCap Fund's total assets are invested in securities of foreign corporations,
the Fund may elect pursuant to Section 853 of the Internal Revenue Code to
permit its shareholders to take a credit (or a deduction) for foreign income
taxes paid by the Fund. In that case, shareholders should include in gross
income for federal income tax purposes both cash dividends received from the
Fund and the amount which the Fund advises is their pro rata portion of foreign
income taxes paid with respect to, or withheld from, dividends and interest paid
to the Fund from its foreign investments. The shareholders would then be
entitled to subtract from their federal income taxes the amount of such taxes
withheld, or else treat such foreign taxes as a deduction from gross income, if
that should be more advantageous. As in the case of individuals receiving income
directly from foreign sources, the above-described tax credit for tax deduction
is subject to certain limitations.
Under the federal income tax law, dividends paid from investment income and
from realized short-term capital gains, if any, are generally taxable at
ordinary income rates whether received in cash or additional shares. The net
income of the Cash Management Fund for purposes of its financial reports and
determination of the amount of distributions to shareholders may exceed its net
income as determined for tax purposes because certain market discount income
will be currently included as income for book purposes but not for tax purposes.
Although all net income for book purposes will be distributed to shareholders,
such distributions are taxable to shareholders of the Fund as ordinary income
only to the extent that they do not exceed the shareholder's ratable share of
the Fund's investment income and any short-term capital gain as determined for
tax purposes. The balance, if any, will be applied against and will reduce the
shareholder's cost or other tax basis for the shares.
Withholding
The Funds are required by law to withhold 10% of IRA distributions unless
the shareholder elects not to have withholding apply. The Funds are required by
law to withhold 31% of dividends paid from accounts other than IRA accounts, to
investors who do not furnish the Fund their correct taxpayer identification
number, which in the case of most individuals is their social security number.
Shareholders should consult their own tax advisors as to the federal, state
and local tax consequences of ownership of shares of the Funds in their
particular circumstances.
HOW TO EXCHANGE SHARES
Class R shares and Class A shares acquired by the conversion of Class R
shares may be exchanged at net asset value for shares of the same class of any
other Principal Fund described in the Prospectus, at any time. For purposes of
computing the length of time Class R shares acquired by the exchange are held
prior to conversion to Class A shares, the length of time the acquired shares
have been owned by a shareholder will be measured from the date of original
purchase of the exchanged shares.
A shareholder may also make an Automatic Exchange Election. This election
authorizes an exchange as described above from one Principal Fund to any or all
of the other Principal Funds on a monthly, quarterly, semiannual or annual
basis. The minimum amount that may be exchanged into any Principal Fund must
equal or exceed $300 on an annual basis. The exchange will occur on the date of
the month specified by the shareholder in the election so long as the day is a
trading day. If the designated day is not a trading day, the exchange will occur
on the next trading day occurring during that month. If the next trading day
occurs in the following month, the exchange will occur on the trading day prior
to the designated day. The Automatic Exchange Election may be made on the open
account application, on 10 days written notice or, if telephone transaction
services apply to the account from which the exchange is made, on 10 days notice
by telephone to the Fund from which the exchange will be made.
You may exercise the telephone exchange privilege by telephoning
1-800-247-4123. If all telephone lines are busy, you might not be able to
request telephone exchanges and would have to submit written exchange requests.
Although the Funds and the transfer agent are not responsible for the
authenticity of exchange requests received by telephone, the right is reserved
to refuse telephone exchanges when in the opinion of the Fund from which the
exchange is requested or the transfer agent it seems prudent to do so. You bear
the risk of loss caused by a fraudulent telephone exchange request the Fund
reasonably believes to be genuine. Each Fund will employ reasonable procedures
to assure telephone instructions are genuine and if such procedures are not
followed, the Fund may be liable for losses due to unauthorized or fraudulent
transactions. Such procedures include recording all telephone instructions,
requesting personal identification information such as the caller's name,
daytime telephone number, social security number and/or birthdate and sending a
written confirmation of the transaction to the shareholder's address of record.
In addition, the Fund directs exchange proceeds only to another Principal fund
account used to fund the shareholder's IRA.
General - If you do not have an account with the Fund in which shares are
being acquired, a new account will be established with the same registration as
the account from which shares are exchanged. All exchanges are subject to the
minimum investment and eligibility requirements of the Fund being acquired. You
may receive shares in exchange only if they may be legally offered in your state
of residence.
The exchange privilege is not intended as a vehicle for short-term trading.
Excessive exchange activity may interfere with portfolio management and have an
adverse effect on all shareholders. In order to limit excessive exchange
activity and in other circumstances where the Directors or Principal Management
Corporation believes doing so would be in the best interest of the Fund, the
Fund reserves the right to revise or terminate the exchange privilege, limit the
amount or number of exchanges or reject any exchange. You would be notified of
any such action to the extent required by law. You may modify or discontinue an
election on 10 days written notice or notice by telephone to the Fund from which
exchanges are made.
HOW TO SELL SHARES
Each Fund will redeem its shares upon request. Shares are redeemed at the
net asset value calculated after the Fund receives the written request in proper
form. There is no charge for redemptions. The amount received for shares upon
redemption may be more or less than the cost of such shares depending upon the
net asset value at the time of redemption. The Funds generally send redemption
proceeds the business day after the request is received. Under unusual
circumstances, the Funds may suspend redemptions, or postpone payment for more
than three business days, as permitted by federal securities law. A Fund will
redeem only those shares for which it has received payment. To avoid the
inconvenience of a delay in obtaining redemption proceeds, shares may be
purchased with a certified check, bank cashiers check or money order.
A request for a distribution from an IRA must be made in writing. You may
obtain a distribution form by telephoning 1-800-247-4123 or writing to Princor,
at P.O. Box 10423, Des Moines, Iowa 50306. Distributions from an IRA may be
taken as a lump sum of the entire interest in the IRA, a partial interest in the
IRA, or in periodic payments of either a fixed amount or amounts based upon
certain life expectancy calculations. Tax penalties may apply to distributions
taken before the IRA participant attains age 59 1/2. See "Tax Treatment of Fund
Dividends and Distributions." A redemption request made payable to someone other
than the plan participant requires a signature guarantee as a part of a proper
endorsement. The signature must be guaranteed by either a commercial bank, trust
company, credit union, savings and loan association, national securities
exchange member, or by a brokerage firm. A signature guaranteed by a notary
public or savings bank is not acceptable.
A shareholder may redeem shares from an account, other than an IRA account,
by mail or by telephone. Each Fund reserves the right to modify any of the
methods of redemption or to charge a fee for providing these services upon
written notice to shareholders.
By Mail - A shareholder of a non-IRA account simply sends a letter to
Princor, at P.O. Box 10423, Des Moines, Iowa 50306, requesting redemption of any
part or all of the shares owned by specifying the Fund account from which the
redemption is to be made and either a dollar or share amount. The letter must
provide the account number and be signed by a registered owner. If certificates
have been issued, they must be properly endorsed and forwarded with the
redemption request. If payment of less than $100,000 is to be mailed to the
address of record, which has not been changed within the three month period
preceding the redemption request, and is made payable to the registered
shareholder or joint shareholders, or to Principal Mutual Life Insurance Company
or any of its affiliated companies, the Fund will not require a signature
guarantee as a part of a proper endorsement; otherwise the shareholder's
signature must be guaranteed by either a commercial bank, trust company, credit
union, savings and loan association, national securities exchange member, or by
a brokerage firm. A signature guaranteed by a notary public or savings bank is
not acceptable.
By Telephone - Shareholders of non-IRA accounts may redeem shares valued at
up to $100,000 from any one Fund by telephone, unless the shareholder has
notified the Fund of an address change within the three month period preceding
the date of the request. Such redemption proceeds will be mailed to the
shareholder's address of record. Telephone redemption proceeds may also be sent
by check or wire transfer to a commercial bank account in the United States
previously authorized in writing by the shareholder. A wire charge of up to
$6.00 will be deducted from the Fund account from which the redemption is made
for all wire transfers. If proceeds are to be used to settle a securities
transaction with a selected dealer, telephone redemptions may be requested by
the shareholder or upon appropriate authorization from an authorized
representative of the dealer, and the proceeds will be wired to the dealer. The
telephone redemption privilege is available only if telephone transaction
services apply to the account from which shares are redeemed. Telephone
transaction services apply to all accounts, except accounts used to fund a
Princor IRA, unless the shareholder has specifically declined this service on
the account application or in writing to the Fund. The telephone redemption
privilege will not be allowed on shares for which certificates have been issued.
You may exercise the telephone redemption privilege by telephoning
1-800-247-4123. If all telephone lines are busy, you might not be able to
request telephone redemptions and would have to submit written redemption
requests. Although the Funds and the transfer agent are not responsible for the
authenticity of redemption requests received by telephone, the right is reserved
to refuse telephone redemptions when in the opinion of the Fund from which the
redemption is requested or the transfer agent it seems prudent to do so. You
bear the risk of loss caused by a fraudulent telephone redemption request the
Fund reasonably believes to be genuine. Each Fund will employ reasonable
procedures to assure telephone instructions are genuine and if such procedures
are not followed, the Fund may be liable for losses due to unauthorized or
fraudulent transactions. Such procedures include recording all telephone
instructions, requesting personal identification information such as the
caller's name, daytime telephone number, social security number and/or birth
date and names of all owners listed on the account and sending a written
confirmation of the transaction to your address of record. In addition, the Fund
directs redemption proceeds made payable to the owner or owners of the account
only to an address of record that has not been changed within the three-month
period prior to the date of the telephone request, or to a previously authorized
bank account.
Reinvestment Privilege - Within 60 days after redemption, shareholders who
redeem all or part of their Class R shares or Class A shares which were acquired
by conversion of Class R shares have a onetime privilege to reinvest the amount
redeemed in shares of the same class of any of the Funds without a sales charge.
The reinvestment will be made at the net asset value next computed after
written notice of exercise of the privilege is received in proper and correct
form by Princor. All reinvestments are subject to acceptance by the Fund or
Funds and Princor.
PERIODIC WITHDRAWAL PLAN
You may request that a fixed number of Class A shares or Class R shares
($25 initial minimum amount) or enough Class A shares or Class R shares to
produce a fixed amount of money ($25 initial minimum amount) be withdrawn from
an account monthly, quarterly, semiannually or annually. Periodic withdrawals
from non-Money Market Fund Class A share accounts opened with purchases of Class
A shares of $1,000,000 or more, may be subject to a CDSC. However, each year you
may make periodic withdrawals of up to 10% of the value of a Class A share
account without incurring a CDSC. The amount of the 10% free withdrawal
privilege for an account is initially determined based upon the value of the
account as of the date of the initial periodic withdrawal. If a periodic
withdrawal plan is established at the time the Class A shares are purchased, the
amount of the initial 10% free withdrawal privilege may be increased by 10% of
the amount of additional purchases in that account made within 60 days after the
shares were first purchased. After a periodic withdrawal plan has been
established the amount of the 10% withdrawal privilege will be re-determined as
of the last business day of December each year. The Fund from which the periodic
withdrawal is made makes no recommendation as to either the number of shares or
the fixed amount that the investor may withdraw. An investor may initiate a
Periodic Withdrawal Plan by signing an Agreement for Periodic Withdrawal Form
and depositing any share certificate that has been issued, or if no certificate
has been issued and telephone transaction services apply to the account, by
telephoning the Fund.
PERFORMANCE CALCULATION
From time to time, the Funds may publish advertisements containing
information (including graphs, charts, tables and examples) about the
performance of one or more of the Funds and about a Fund's largest industry
holdings and largest specific securities holdings in its portfolio. The Funds
may also quote rankings, yields or returns as published by independent
statistical services or publishers, and information regarding the performance of
certain market indices. The Funds' yield and total return figures described
below will vary depending upon market conditions, the composition of the Funds'
portfolios and operating expenses. These factors and possible differences in the
methods used in calculating yield and total return should be considered when
comparing the Funds' performance figures to performance figures published for
other investment vehicles. Any performance data quoted for the Funds represents
only historical performance and is not intended to indicate future performance
of the Funds. For further information on how the Funds calculate yield and total
return figures, see the Statement of Additional Information.
Growth-Oriented and Income-Oriented Funds
The Income-Oriented Funds may advertise their respective yields and average
annual total returns. The Growth-Oriented Funds may advertise their respective
average annual total returns. Yield is determined by annualizing each Fund's net
investment income per share for a specific, historical 30-day period and
dividing the result by the ending maximum public offering price for Class A
shares or the net asset value for Class R shares of the Fund for the same
period. Average annual total return for each Fund is computed by calculating the
average annual compounded rate of return over the stated period that would
equate an initial $1,000 investment to the ending redeemable value assuming the
reinvestment of all dividends and capital gains distributions at net asset
value. The same assumptions are made when computing cumulative total return by
dividing the ending redeemable value by the initial investment. These
calculations assume the payment of the maximum front-end load in the case of
Class A shares, although shareholders who acquire such shares by conversion from
Class R shares do not pay a front-end load. The Funds may also calculate total
return figures for a specified period that do not take into account the maximum
initial sales charge to illustrate changes in the Funds' net asset values over
time.
Money Market Fund
From time to time the Cash Management Fund may advertise its yield and
effective yield. The yield of the Fund refers to the income generated by an
investment in the Fund over a seven-day period. This income is then annualized.
That is, the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. The effective yield is calculated similarly but,
when annualized, the income earned by an investment in the Fund is assumed to be
reinvested. The effective yield will be slightly higher than the yield because
of the compounding effect of this assumed reinvestment.
The yield for the Cash Management Fund will fluctuate daily as the income
earned on the investments of the Fund fluctuates. Accordingly, there is no
assurance that the yield quoted on any given occasion will remain in effect for
any period of time. The Fund is an open-end investment company and there is no
guarantee that the net asset value or any stated rate of return will remain
constant. Your investment in the Fund is not insured. Investors comparing
results of the Fund with investment results and yields from other sources such
as banks or savings and loan associations should understand these distinctions.
Historical and comparative yield information may, from time to time, be
presented by the Fund.
GENERAL INFORMATION ABOUT A FUND ACCOUNT
Share certificates will be issued only when requested. You will receive a
quarterly statement of account for the Fund(s) in which you have invested. The
statement contains information regarding purchases, redemptions, and reinvested
dividends or distributions occurring during the quarter, as well as the balance
of shares owned and account values as of the statement date . The Funds treat
the statement of account as evidence of ownership of Fund shares. This is known
as an open account system. Each Fund bears the cost of the open account system.
Signature Guarantee. The Funds have adopted the policy of requiring
signature guarantees in certain circumstances to safeguard your accounts. A
signature guarantee is necessary under the following circumstances:
1. If a redemption payment is to be made payable to a payee other than the
registered shareholder or Principal Mutual Life Insurance Company or
any of its affiliated companies or selected administrators of qualified
retirement plans;
2. To add telephone transaction services to an account after the initial
application is processed;
3. When there is any change to a bank account designated to receive
distributions; and
4. If a redemption payment is to be mailed to an address other than the
address of record or to an address of record that has been changed
within the preceding three months.
Your signature must be guaranteed by a commercial bank, trust company,
credit union, savings and loan association, national securities exchange member,
or brokerage firm. A signature guaranteed by a notary public is not acceptable.
Minimum Account Balance. Although there currently is no minimum balance,
due to the disproportionately high cost of maintaining small accounts, the Funds
reserve the right to redeem all shares in an account with a value of less than
$250 and to mail the proceeds to you. Involuntary redemptions will not be
triggered solely by market activity. You will be notified before these
redemptions are to be made and will have thirty days to make an additional
investment to bring their accounts up to the required minimum. The Funds reserve
the right to increase the required minimum.
SHAREHOLDER RIGHTS
The following information is applicable to each of the Principal Funds
described in this prospectus. Except for Tax-Exempt Cash Management Fund (Class
A shares only) and Tax-Exempt Bond Fund (Class A and Class B shares only), each
Fund's shares are currently divided into three classes. Each Fund share is
entitled to one vote with fractional shares voting proportionately. The classes
of shares for each Fund will vote together as a single class except where
required by law or as determined by the Fund's Board of Directors. Shares are
freely transferable, are entitled to dividends as declared by the Fund's Board
of Directors and, if the Fund were liquidated, would receive the net assets of
the Fund. Shareholders of a Fund may remove any director of that Fund with or
without cause by the vote of a majority of the votes entitled to be cast at a
meeting of shareholders. Shareholders will be assisted with shareholder
communication in connection with such matter.
The Board of Directors of each Fund may increase or decrease the aggregate
number of shares which the Fund has authority to issue and may issue two or more
classes of shares having such preferences and special or relative rights and
privileges as the Directors may determine, without shareholder approval.
The Funds are not required to hold an annual meeting of shareholders in any
year unless required to do so under the Investment Company Act of 1940. The
Funds intend to hold shareholder meetings only when required by law and at such
other times as may be deemed appropriate by their respective Boards of
Directors. However, each Fund will hold a meeting of shareholders when requested
to do so in writing by the holders of 10% or more of the outstanding shares of
that Fund.
Shareholder inquiries should be directed to the appropriate Fund at The
Principal Financial Group, Des Moines, Iowa 50392.
As of _______________, Principal Mutual Life Insurance Company and its
subsidiaries and affiliates owned 25% or more of the outstanding voting shares
of each Fund as indicated:
Percentage of
Number of Outstanding Shares
Fund Shares Owned Owned
----------------------------------- ------------ ------------------
Capital Value Fund
International Emerging Markets Fund
International SmallCap Fund
Limited Term Bond Fund
ADDITIONAL INFORMATION
Organization: The Funds were incorporated in the state of Maryland on the
following dates: Balanced Fund - November 26, 1986; Blue Chip Fund - December
10, 1990; Bond Fund - December 2, 1986; Capital Value Fund - May 26, 1989
(effective November 1, 1989 succeeded to the business of a predecessor Fund that
had been incorporated in Delaware on February 6, 1969); Cash Management Fund -
June 10, 1982; Government Securities Income Fund - September 5, 1984; Growth
Fund - May 26, 1989 (effective November 1, 1989 succeeded to the business of a
predecessor Fund that had been incorporated in Delaware on February 6, 1969);
High Yield Fund - November 26, 1986; International Emerging Markets Fund - May
27, 1997; International Fund - May 12, 1981; International SmallCap Fund - May
27, 1997; Limited Term Bond Fund - August 9, 1995; MidCap Fund - February 20,
1987; Real Estate Fund - May 27, 1997; SmallCap Fund - August 13, 1997;
Utilities Fund - September 3, 1992.
Custodian: Bank of New York, 48 Wall Street, New York, New York 10286, is
custodian of the portfolio securities and cash assets of each of the Funds
except the International, International Emerging Markets and International
SmallCap Funds. The custodian for the International Emerging Markets Fund,
International Fund and International SmallCap Fund is Chase Manhattan Bank,
Global Securities Services, Chase Metro Tech Center, Brooklyn, New York 11245.
The custodians perform no managerial or policymaking functions for the Funds.
Capitalization: The authorized capital stock of each Fund consists of
100,000,000 shares of common stock (2,000,000,000 for Princor Cash Management
Fund), $.01 par value.
Financial Statements: Copies of the financial statements of each Fund will
be mailed to each shareholder semiannually. At the close of each fiscal year,
each Fund's financial statements will be audited by a firm of independent
auditors. The firm of Ernst & Young LLP has been appointed to audit the
financial statements of each Fund for their respective present fiscal years.
Registration Statement: This Prospectus omits some information contained in
the Statement of Additional Information (also known as Part B of the
Registration Statement) and Part C of the Registration Statements which the
Funds have filed with the Securities and Exchange Commission. The Funds'
Statement of Additional Information is hereby incorporated by reference into
this Prospectus. A copy of this Statement of Additional Information can be
obtained upon request, free of charge, by writing or telephoning Princor
Financial Services Corporation. You may obtain a copy of Part C of the
Registration Statements filed with the Securities and Exchange Commission,
Washington, D.C. from the Commission upon payment of the prescribed fees.
Principal Underwriter: Princor Financial Services Corporation, P.O. Box
10423, Des Moines, IA 50306, is the principal underwriter for each of the
Principal Funds.
Transfer Agent and Dividend Disbursing Agent: Principal Management
Corporation, The Principal Financial Group, Des Moines, Iowa, 50392, is the
transfer agent and dividend disbursing agent for each of the Principal Funds.
PRINCIPAL BALANCED FUND, INC.
PRINCIPAL BLUE CHIP FUND, INC.
PRINCIPAL BOND FUND, INC.
PRINCIPAL CAPITAL VALUE FUND, INC.
PRINCIPAL CASH MANAGEMENT FUND, INC.
PRINCIPAL GOVERNMENT SECURITIES INCOME FUND, INC.
PRINCIPAL GROWTH FUND, INC.
PRINCIPAL HIGH YIELD FUND, INC.
PRINCIPAL INTERNATIONAL EMERGING MARKETS FUND, INC.
PRINCIPAL INTERNATIONAL FUND, INC.
PRINCIPAL INTERNATIONAL SMALLCAP FUND, INC.
PRINCIPAL LIMITED TERM BOND FUND, INC.
PRINCIPAL MIDCAP FUND, INC.
PRINCIPAL REAL ESTATE FUND, INC.
PRINCIPAL SMALLCAP FUND, INC.
PRINCIPAL TAX-EXEMPT BOND FUND, INC.
PRINCIPAL TAX-EXEMPT CASH MANAGEMENT FUND, INC.
PRINCIPAL UTILITIES FUND, INC.
Statement of Additional Information
dated ___________________
This Statement of Additional Information provides information about each of
the above Funds in addition to the information that is contained in the Funds'
Prospectus, dated ______________________.
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Funds' Prospectus, a copy of which can be obtained
free of charge by writing or telephoning:
Princor Financial Services Corporation
A Member of The Principal Financial Group
Des Moines, Iowa 50392-0200
Telephone: 1-800-247-4123
MM 625 B-9
TABLE OF CONTENTS
Investment Policies and Restrictions of the Funds.......................... 2
Growth-Oriented Funds................................................... 3
Income-Oriented Funds .................................................. 8
Money Market Funds...................................................... 14
Funds' Investments......................................................... 17
Directors and Officers of the Funds........................................ 32
Manager and Sub-Advisor.................................................... 34
Cost of Manager's Services................................................. 35
Brokerage on Purchases and Sales of Securities............................. 39
How to Purchase Shares..................................................... 41
Offering Price of Funds' Shares............................................ 44
Distribution Plan.......................................................... 50
Determination of Net Asset Value of Funds' Shares ......................... 53
Performance Calculation.................................................... 54
Tax Treatment of Funds, Dividends and Distributions ...................... 59
General Information and History............................................ 62
Financial Statements ...................................................... 63
Appendix A................................................................. 64
INVESTMENT POLICIES AND RESTRICTIONS OF THE FUNDS
The following information about the Principal Funds, a family of separately
incorporated, diversified, open-end management investment companies, commonly
called mutual funds, supplements the information provided in the Prospectus
under the caption "Investment Objectives, Policies and Restrictions."
There are three categories of Principal Funds: Growth-Oriented Funds, which
include seven Funds which seek primarily capital appreciation through
investments in equity securities (Capital Value Fund, Growth Fund, International
Emerging Markets Fund, International Fund, International SmallCap Fund, MidCap
Fund and SmallCap Fund), one Fund which seeks a total investment return
including both capital appreciation and income through investments in equity and
debt securities (Balanced Fund), one Fund which seeks growth of capital and
growth of income primarily through investments in common stocks of
well-capitalized, established companies (Blue Chip Fund), one Fund which seeks
to generate total return by investing primarily in equity securities of
companies principally engaged in the real estate industry (Real Estate Fund),
and one Fund which seeks current income and long-term growth of income and
capital by investing primarily in equity and fixed-income securities of
companies in the public utilities industry (Utilities Fund); Income-Oriented
Funds, which include five funds which seek primarily a high level of income
through investments in debt securities (Bond Fund, Government Securities Income
Fund, High Yield Fund, Limited Term Bond Fund and Tax-Exempt Bond Fund); and
Money Market Funds, which include two funds which seek primarily a high level of
income through investments in short-term debt securities (Cash Management Fund
and Tax-Exempt Cash Management Fund).
In seeking to achieve its investment objective, each Fund has adopted as
matters of fundamental policy certain investment restrictions which cannot be
changed without approval by the holders of the lesser of: (i) 67% of the Fund's
shares present or represented at a shareholders' meeting at which the holders of
more than 50% of such shares are present or represented by proxy; or (ii) more
than 50% of the outstanding shares of the Fund. Similar shareholder approval is
required to change the investment objective of each of the Funds. The following
discussion provides for each Fund a statement of its investment objective, a
description of its investment restrictions that are matters of fundamental
policy and a description of any investment restrictions it may have adopted that
are not matters of fundamental policy and may be changed without shareholder
approval. For purposes of the investment restrictions, all percentage and rating
limitations apply at the time of acquisition of a security, and any subsequent
change in any applicable percentage resulting from market fluctuations or in a
rating by a rating service will not require elimination of any security from the
portfolio. Unless specifically identified as a matter of fundamental policy,
each investment policy discussed in the Prospectus or the Statement of
Additional Information is not fundamental and may be changed by the respective
Fund's Board of Directors.
The Table on the next page graphically illustrates each Fund's emphasis on
producing current income and capital growth and the stability of the market
value of the Fund's portfolio. These illustrations represent comparative
relationships only with regard to the investment objectives sought by the Funds.
Relative income, stability and growth may vary among the Funds with certain
market conditions. The illustrations are not intended and should not be
construed as projected relative performances of the Principal Funds.
GROWTH-ORIENTED FUNDS
INVESTMENT OBJECTIVES
Principal Balanced Fund, Inc. ("Balanced Fund") seeks to generate a total
investment return consisting of current income and capital appreciation
while assuming reasonable risks in furtherance of the investment objective.
Principal Blue Chip Fund, Inc. ("Blue Chip Fund") seeks to achieve growth
of capital and growth of income by investing primarily in common stocks of
well capitalized, established companies.
Principal Capital Value Fund, Inc. ("Capital Value Fund") seeks to achieve
primarily long-term capital appreciation and secondarily growth of
investment income through the purchase primarily of common stocks, but the
Fund may invest in other securities.
Principal Growth Fund, Inc. ("Growth Fund") seeks growth of capital through
the purchase primarily of common stocks, but the Fund may invest in other
securities.
Principal International Emerging Markets Fund, Inc. ("International
Emerging Markets Fund") seeks to achieve long-term growth of capital by
investing primarily in equity securities of issuers in emerging market
countries.
Principal International Fund, Inc. ("International Fund") seeks long-term
growth of capital by investing in a portfolio of equity securities of
companies domiciled in any of the nations of the world.
Principal International SmallCap Fund, Inc. ("International SmallCap Fund")
seeks to achieve long-term growth of capital by investing primarily in
equity securities of non-United States companies with comparatively smaller
market capitalizations.
Principal MidCap Fund, Inc. ("MidCap Fund") seeks to achieve capital
appreciation by investing primarily in securities of emerging and other
growth-oriented companies.
Principal Real Estate Fund, Inc. ("Real Estate Fund") seeks to generate
total return by investing primarily in equity securities of companies
principally engaged in the real estate industry.
Principal SmallCap Fund, Inc. ("SmallCap Fund") seeks to achieve long-term
growth of capital by investing primarily in equity securities of companies
with comparatively smaller market capitalizations.
Principal Utilities Fund, Inc. ("Utilities Fund") seeks to provide high
current income and long-term growth of income and capital. The Fund seeks
to achieve its objective by investing primarily in equity and fixed income
securities of companies in the public utilities industry.
INVESTMENT RESTRICTIONS
Balanced Fund, Blue Chip Fund, International Emerging Markets Fund,
International Fund, International SmallCap Fund, MidCap Fund, Real Estate,
SmallCap and Utilities Fund
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Balanced Fund,
Blue Chip Fund, International Fund, International Emerging Markets Fund,
International SmallCap Fund, MidCap Fund, Real Estate, SmallCap and Utilities
Fund each may not:
(1) Issue any senior securities as defined in the Investment Company Act
of 1940. Purchasing and selling securities and futures contracts and
options thereon and borrowing money in accordance with restrictions
described below do not involve the issuance of a senior security.
(2) Purchase or retain in its portfolio securities of any issuer if those
officers or directors of the Fund or its Manager owning beneficially
more than one-half of 1% (0.5%) of the securities of the issuer
together own beneficially more than 5% of such securities.
(3) Invest in commodities or commodity contracts, but it may purchase and
sell financial futures contracts and options on such contracts.
(4) Invest in real estate, although it may invest in securities which are
secured by real estate and securities of issuers which invest or deal
in real estate.
(5) Borrow money, except for temporary or emergency purposes, in an amount
not to exceed 5% of the value of the Fund's total assets at the time
of the borrowing.
(6) Make loans, except that the Fund may (i) purchase and hold debt
obligations in accordance with its investment objective and policies,
(ii) enter into repurchase agreements, and (iii) lend its portfolio
securities without limitation against collateral (consisting of cash
or securities issued or guaranteed by the United States Government or
its agencies or instrumentalities) equal at all times to not less than
100% of the value of the securities loaned.
(7) Invest more than 5% of its total assets in the securities of any one
issuer (other than obligations issued or guaranteed by the United
States Government or its agencies or instrumentalities) except that
this limitation shall apply only with respect to 75% of the total
assets of the International Emerging Markets Fund and the
International SmallCap Fund; or purchase more than 10% of the
outstanding voting securities of any one issuer.
(8) Act as an underwriter of securities, except to the extent the Fund may
be deemed to be an underwriter in connection with the sale of
securities held in its portfolio.
(9) Concentrate its investments in any particular industry or industries,
except that:
(a) the Utilities Fund may not invest less than 25% of its total
assets in securities of companies in the public utilities
industry,
(b) the Balanced Fund, Blue Chip Fund, International Emerging Markets
Fund, International Fund, International SmallCap Fund, MidCap
Fund and SmallCap Fund each may invest not more than 25% of the
value of its total assets in a single industry, and
(c) the Real Estate Fund may not invest less than 25% of its total
assets in securities of companies in the real estate industry.
(10) Sell securities short (except where the Fund holds or has the right to
obtain at no added cost a long position in the securities sold that
equals or exceeds the securities sold short) or purchase any
securities on margin, except it may obtain such short-term credits as
are necessary for the clearance of transactions. The deposit or
payment of margin in connection with transactions in options and
financial futures contracts is not considered the purchase of
securities on margin.
(11) Invest in interests in oil, gas or other mineral exploration or
development programs, although the Fund may invest in securities of
issuers which invest in or sponsor such programs.
Each of these Funds has also adopted the following restrictions which are
not fundamental policies and may be changed without shareholder approval. It is
contrary to each Fund's present policy to:
(1) Invest more than 15% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven
days. The value of any options purchased in the Over-the-Counter
market are included as part of this 15% limitation.
(2) Purchase warrants in excess of 5% of its total assets, of which 2% may
be invested in warrants that are not listed on the New York or
American Stock Exchange. The 2% limitation for the International Fund
also includes warrants not listed on the Toronto Stock Exchange. The
2% limitation for the International Emerging Markets Fund and
International SmallCap Fund also includes warrants not listed on the
Toronto Stock Exchange and the Chicago Board Options Exchange.
(3) Purchase securities of any issuer having less than three years'
continuous operation (including operations of any predecessors) if
such purchase would cause the value of the Fund's investments in all
such issuers to exceed 5% of the value of its total assets.
(4) Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings. The deposit of underlying securities and other assets in
escrow and other collateral arrangements in connection with
transactions in put and call options, futures contracts and options on
futures contracts are not deemed to be pledges or other encumbrances.
(5) Invest in companies for the purpose of exercising control or
management.
(6) Invest more than 5% of its total assets in the purchase of covered
spread options and the purchase of put and call options on securities,
securities indices and financial futures contracts. Options on
financial futures contracts and options on securities indices will be
used solely for hedging purposes; not for speculation.
(7) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
(8) Invest in arbitrage transactions.
(9) Invest in real estate limited partnership interests except that this
restriction shall not apply to the Real Estate Fund.
(10) Invest in mineral leases.
The Balanced Fund, Blue Chip Fund, MidCap Fund, SmallCap Fund and Utilities
Fund have also adopted a restriction, which is not a fundamental policy and may
be changed without shareholder approval, that each such Fund may not invest more
than 20% of its total assets in securities of foreign issuers.
The Real Estate Fund has adopted a restriction, which is not a fundamental
policy and may be changed without shareholder approval, that the Fund may not
invest more than 25% of its total assets in securities of foreign issuers.
The Balanced Fund, Blue Chip Fund, International Emerging Markets Fund,
International Fund, International SmallCap Fund, MidCap Fund, SmallCap Fund and
Utilities Fund have also adopted a restriction, which is not a fundamental
policy and may be changed without shareholder approval, that each Fund may not
invest more than 10% of its assets in securities of other investment companies,
invest more than 5% of its total assets in the securities of any one investment
company or acquire more than 3% of the outstanding voting securities of any one
investment company except in connection with a merger, consolidation or plan of
reorganization and the Funds may purchase securities of closed-end companies in
the open market where no underwriter or dealer's commission or profit, other
than a customary broker's commission, is involved.
The Utilities Fund has also adopted a restriction, which is not a
fundamental policy and may be changed without shareholder approval, that the
Fund may not own more than 5% of the outstanding voting securities of more than
one public utility company as defined by the Public Utility Holding Company Act
of 1935.
Capital Value Fund and Growth Fund
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Capital Value
Fund and Growth Fund each may not:
(1) Concentrate its investments in any one industry. No more than 25% of
the value of its total assets will be invested in any one industry.
(2) Purchase the securities of any issuer if the purchase will cause more
than 5% of the value of its total assets to be invested in the
securities of any one issuer (except U. S. Government securities).
(3) Purchase the securities of any issuer if the purchase will cause more
than 10% of the voting securities, or any other class of securities of
the issuer, to be held by the Fund.
(4) Underwrite securities of other issuers, except that the Fund may
acquire portfolio securities under circumstances where if sold the
Fund might be deemed an underwriter for purposes of the Securities Act
of 1933.
(5) Purchase securities of any company with a record of less than three
years' continuous operation (including that of predecessors) if the
purchase would cause the value of the Fund's aggregate investments in
all such companies to exceed 5% of the Fund's total assets.
(6) Engage in the purchase and sale of illiquid interests in real estate.
For this purpose, readily marketable interests in real estate
investment trusts are not interests in real estate.
(7) Engage in the purchase and sale of commodities or commodity contracts.
(8) Purchase or retain in its portfolio securities of any issuer if those
officers and directors of the Fund or its Manager owning beneficially
more than one-half of one percent (0.5%) of the securities of the
issuer together own beneficially more than 5% of such securities.
(9) Purchase securities on margin, except it may obtain such short-term
credits as are necessary for the clearance of transactions. The Fund
will not effect a short sale of a security. The Fund will not issue or
acquire put and call options. (10) Invest more than 5% of its assets
at the time of purchase in rights and warrants (other than those that
have been acquired in units or attached to other securities).
(11) Invest more than 20% of its total assets in securities of foreign
issuers.
In addition:
(12) The Fund may not make loans except that the Fund may (i) purchase and
hold debt obligations in accordance with its investment objective and
policies, and (ii) enter into repurchase agreements.
(13) The Fund does not propose to borrow money except for temporary or
emergency purposes from banks in an amount not to exceed the lesser of
(i) 5% of the value of the Fund's assets, less liabilities other than
such borrowings, or (ii) 10% of the Fund's assets taken at cost at the
time such borrowing is made. The Fund may not pledge, mortgage, or
hypothecate its assets (at value) to an extent greater than 15% of the
gross assets taken at cost.
Each of these Funds has also adopted the following restrictions which are
not fundamental policies and may be changed without shareholder approval, each
Fund may not:
(1) Invest in companies for the purpose of exercising control or
management.
(2) Purchase warrants in excess of 5% of its total assets, of which 2% may
be invested in warrants that are not listed on the New York or
American Stock Exchange.
(3) Invest more than 15% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven
days.
(4) Invest in real estate limited partnership interests.
(5) Invest in interests in oil, gas, or other mineral exploration or
development programs, but the Fund may purchase and sell securities of
companies which invest or deal in such interests.
(6) Invest more than 10% of its assets in securities of other investment
companies, invest more than 5% of its total assets in the securities
of any one investment company, or acquire more than 3% of the
outstanding voting securities of any one investment company except in
connect with a merger, consolidation or plan of reorganization.
INCOME-ORIENTED FUNDS
INVESTMENT OBJECTIVES
Principal Bond Fund, Inc. ("Bond Fund") seeks to provide as high a level of
income as is consistent with preservation of capital and prudent investment
risk.
Principal Government Securities Income Fund, Inc. ("Government Securities
Income Fund") seeks a high level of current income, liquidity and safety of
principal by purchasing obligations issued or guaranteed by the United
States Government or its agencies, with emphasis on Government National
Mortgage Association Certificates ("GNMA Certificates"). The guarantee by
the United States Government extends only to principal and interest. There
are certain risks unique to GNMA Certificates.
Principal High Yield Fund, Inc. ("High Yield Fund") seeks high current
income primarily by purchasing high yielding, lower or non-rated fixed
income securities which are believed to not involve undue risk to income or
principal. Capital growth is a secondary objective when consistent with the
objective of high current income.
Principal Limited Term Bond Fund, Inc. ("Limited Term Bond Fund") seeks a
high level of current income consistent with a relatively high level of
principal stability by investing in a portfolio of securities with a dollar
weighted average maturity of five years or less.
Principal Tax-Exempt Bond Fund, Inc. ("Tax-Exempt Bond Fund") seeks as high
a level of current income exempt from federal income tax as is consistent
with preservation of capital. The Fund seeks to achieve its objective
primarily through the purchase of investment grade quality, tax-exempt
fixed income obligations. INVESTMENT RESTRICTIONS
Bond Fund, High Yield Fund and Limited Term Bond Fund
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Bond Fund, High
Yield Fund and Limited Term Bond Fund each may not:
(1) Issue any senior securities as defined in the Investment Company Act
of 1940. Purchasing and selling securities and futures contracts and
options thereon and borrowing money in accordance with restrictions
described below do not involve the issuance of a senior security.
(2) Purchase or retain in its portfolio securities of any issuer if those
officers or directors of the fund or its Manager owning beneficially
more than one-half of 1% (0.5%) of the securities of the issuer
together own beneficially more than 5% of such securities.
(3) Invest in commodities or commodity contracts, but it may purchase and
sell financial futures contracts and options on such contracts.
(4) Invest in real estate, although it may invest in securities which are
secured by real estate and securities of issuers which invest or deal
in real estate.
(5) Borrow money, except for temporary or emergency purposes, in an amount
not to exceed 5% of the value of the Fund's total assets at the time
of the borrowing.
(6) Make loans, except that the Fund may (i) purchase and hold debt
obligations in accordance with its investment objective and policies,
(ii) enter into repurchase agreements, and (iii) lend its portfolio
securities without limitation against collateral (consisting of cash
or securities issued or guaranteed by the United States Government or
its agencies or instrumentalities) equal at all times to not less than
100% of the value of the securities loaned.
(7) Invest more than 5% of its total assets in the securities of any one
issuer (other than obligations issued or guaranteed by the United
States Government or its agencies or instrumentalities); or purchase
more than 10% of the outstanding voting securities of any one issuer.
(8) Act as an underwriter of securities, except to the extent the Fund may
be deemed to be an underwriter in connection with the sale of
securities held in its portfolio.
(9) Concentrate its investments in any particular industry or industries,
except that the Fund may invest not more than 25% of the value of its
total assets in a single industry.
(10) Sell securities short (except where the Fund holds or has the right to
obtain at no added cost a long position in the securities sold that
equals or exceeds the securities sold short) or purchase any
securities on margin, except it may obtain such short-term credits as
are necessary for the clearance of transactions. The deposit or
payment of margin in connection with transactions in options and
financial futures contracts is not considered the purchase of
securities on margin.
(11) Invest in interests in oil, gas or other mineral exploration or
development programs, although the Fund may invest in securities of
issuers which invest in or sponsor such programs.
Each of these Funds has also adopted the following restrictions which are
not fundamental policies and may be changed without shareholder approval. It is
contrary to each Fund's present policy to:
(1) Invest more than 15% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven
days. The value of any options purchased in the Over-the-Counter
market are included as part of this 15% limitation.
(2) Purchase warrants in excess of 5% of its total assets, of which 2% may
be invested in warrants that are not listed on the New York or
American Stock Exchange.
(3) Purchase securities of any issuer having less than three years'
continuous operation (including operations of any predecessors) if
such purchase would cause the value of the Fund's investments in all
such issuers to exceed 5% of the value of its total assets.
(4) Purchase securities of other investment companies except in connection
with a merger, consolidation, or plan of reorganization or by purchase
in the open market of securities of closed-end companies where no
underwriter or dealer's commission or profit, other than a customary
broker's commission, is involved, and if immediately thereafter not
more than 10% of the value of the Fund's total assets would be
invested in such securities.
(5) Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings. The deposit of underlying securities and other assets in
escrow and other collateral arrangements in connection with
transactions in put and call options, futures contracts and options on
futures contracts are not deemed to be pledges or other encumbrances.
(6) Invest in companies for the purpose of exercising control or
management.
(7) Invest more than 20% of its total assets in securities of foreign
issuers.
(8) Invest more than 5% of its total assets in the purchase of covered
spread options and the purchase of put and call options on securities,
securities indices and financial futures contracts. Options on
financial futures contracts and options on securities indices will be
used solely for hedging purposes; not for speculation.
(9) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
(10) Invest in arbitrage transactions.
(11) Invest in real estate limited partnership interests.
Government Securities Income Fund
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Government
Securities Income Fund may not:
(1) Issue any senior securities.
(2) Purchase any securities other than obligations issued or guaranteed by
the United States Government or its agencies or instrumentalities,
except that the Fund may maintain reasonable amounts in cash or
purchase short-term debt securities not issued or guaranteed by the
United States Government or its agencies or instrumentalities for
daily cash management purposes or pending selection of particular
long-term investments. There is no limit on the amount of its assets
which may be invested in the securities of any one issuer of
obligations issued by the United States Government or its agencies or
instrumentalities.
(3) Act as an underwriter of securities, except to the extent the Fund may
be deemed to be an underwriter in connection with the sale of GNMA
certificates held in its portfolio.
(4) Engage in the purchase and sale of interests in real estate, including
interests in real estate investment trusts (although it will invest in
securities secured by real estate or interests therein, such as
mortgage-backed securities) or invest in commodities or commodity
contracts, oil and gas interests, or mineral exploration or
development programs.
(5) Purchase or retain in its portfolio securities of any issuer if those
officers and directors of the Fund or its Manager owning beneficially
more than one-half of 1% (0.5%) of the securities of the issuer
together own beneficially more than 5% of such securities.
(6) Sell securities short or purchase any securities on margin, except it
may obtain such short-term credits as are necessary for the clearance
of transactions. The deposit or payment of margin in connection with
transactions in options and financial futures contracts is not
considered the purchase of securities on margin.
(7) Invest in companies for the purpose of exercising control or
management.
(8) Make loans, except that the Fund may purchase or hold debt obligations
in accordance with the investment restrictions set forth in paragraph
(2) and may enter into repurchase agreements for such securities, and
may lend its portfolio securities without limitation against
collateral consisting of cash, or securities issued or guaranteed by
the United States Government or its agencies or instrumentalities,
which is equal at all times to 100% of the value of the securities
loaned.
(9) Borrow money, except for temporary or emergency purposes, in an amount
not to exceed 5% of the value of the Fund's total assets.
(10) Enter into repurchase agreements maturing in more than seven days if,
as a result, thereof, more than 10% of the Fund's total assets would
be invested in such repurchase agreements and other assets without
readily available market quotations.
(11) Invest more than 5% of its total assets in the purchase of covered
spread options and the purchase of put and call options on securities,
securities indices and financial futures contracts.
(12) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
The Fund has also adopted the following restrictions which are not
fundamental policies and may be changed without shareholder approval. It is
contrary to the Fund's current policy to:
(1) Invest more than 15% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven
days. The value of any options purchased in the Over-the-Counter
market are included as part of this 15% limitation.
(2) Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings. The deposit of underlying securities and other assets in
escrow and other collateral arrangements in connection with
transactions in put and call options, futures contracts and options on
futures contracts are not deemed to be pledges or other encumbrances.
(3) Invest in real estate limited partnership interests.
(4) Invest more than 10% of its assets in securities of other investment
companies, invest more than 5% of its total assets in the securities
of any one investment company, or acquire more than 3% of the
outstanding voting securities of any one investment company except in
connection with a merger, consolidation or plan of reorganization.
Tax-Exempt Bond Fund
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Tax-Exempt Bond
Fund may not:
(1) Issue any senior securities as defined in the Act except insofar as
the Fund may be deemed to have issued a senior security by reason of:
(a) purchasing any securities on a when-issued or delayed delivery
basis; or (b) borrowing money in accordance with restrictions
described below.
(2) Purchase any securities other than Municipal Obligations and Taxable
Investments as defined in the Prospectus and Statement of Additional
Information.
(3) Act as an underwriter of securities, except to the extent the Fund may
be deemed to be an underwriter in connection with the sale of
securities held in its portfolio.
(4) Invest more than 10% of its assets in securities of other investment
companies, invest more than 5% of its total assets in the securities
of any one investment company, or acquire more than 3% of the
outstanding voting securities of any one investment company except in
connection with a merger, consolidation or plan of reorganization.
(5) Purchase or retain in its portfolio securities of any issuer if those
officers and directors of the Fund or its Manager owning more than
one-half of 1% (0.5%) of the securities of the issuer together own
beneficially more than 5% of such securities.
(6) Invest in companies for the purpose of exercising control or
management.
(7) Invest more than:
(a) 5% of its total assets in the securities of any one issuer (other
than obligations issued or guaranteed by the United States
Government or its agencies or instrumentalities).
(b) 15% of its total assets in securities that are not readily
marketable and in repurchase agreements maturing in more than
seven days.
(8) Invest in real estate, although it may invest in securities which are
secured by real estate and securities of issuers which invest or deal
in real estate.
(9) Invest in commodities or commodity futures contracts.
(10) Write, purchase or sell puts, calls or combinations thereof.
(11) Invest in interests in oil, gas or other mineral exploration or
development programs, although it may invest in securities of issuers
which invest in or sponsor such programs.
(12) Make short sales of securities.
(13) Purchase any securities on margin, except it may obtain such
short-term credits as are necessary for the clearance of transactions.
(14) Make loans, except that the Fund may purchase and hold debt
obligations in accordance with its investment objective and policies,
enter into repurchase agreements, and may lend its portfolio
securities without limitation against collateral, consisting of cash
or securities issued or guaranteed by the United States Government or
its agencies or instrumentalities, which is equal at all times to 100%
of the value of the securities loaned.
(15) Borrow money, except for temporary or emergency purposes from banks in
an amount not to exceed 5% of the value of the Fund's total assets at
the time the loan is made.
(16) Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings.
The Fund has also adopted the following restriction which is not
fundamental and may be changed without shareholder approval. It is contrary to
the Fund's current policy to:
(1) Invest in real estate limited partnership interests.
The identification of the issuer of a Municipal Obligation depends on the
terms and conditions of the security. When the assets and revenues of an agency,
authority, instrumentality or other political subdivision are separate from
those of the government creating the subdivision and the security is backed only
by the assets and revenues of the subdivision, such subdivision would be deemed
to be the sole issuer. Similarly, in the case of an industrial development bond,
if that bond is backed only by the assets and revenues of the non-governmental
user, then such non-governmental user would be deemed to be the sole issuer. If,
however, in either case, the creating government or some other entity guarantees
a security, such a guarantee would be considered a separate security and will be
treated as an issue of such government or other entity provided that guarantee
is not deemed to be a security issued by the guarantor if the value of all
securities issued or guaranteed by the guarantor and owned by the Fund does not
exceed 10% of the value of the Fund's total assets.
The Fund may invest without limit in debt obligations of issuers located in
the same state and in debt obligations which are repayable out of revenue
sources generated from economically related projects or facilities. Sizable
investments in such obligations could involve an increased risk to the Fund
since an economic, business or political development or change affecting one
security could also affect others. The Fund may also invest without limit in
industrial development bonds, but it will not invest more than 20% of its total
assets in any Municipal Obligation the interest on which is treated as a tax
preference item for purposes of the federal alternative minimum tax.
MONEY MARKET FUNDS
INVESTMENT OBJECTIVES
Principal Cash Management Fund, Inc. ("Cash Management Fund") seeks as high
a level of income available from short-term securities as is considered
consistent with preservation of principal and maintenance of liquidity by
investing in a portfolio of money market instruments.
Principal Tax-Exempt Cash Management Fund, Inc. ("Tax-Exempt Cash
Management Fund") seeks, through investment in a professionally managed
portfolio of high quality short-term Municipal Obligations, as high a level
of interest income exempt from federal income tax as is consistent with
stability of principal and maintenance of liquidity.
INVESTMENT RESTRICTIONS
Cash Management Fund
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Cash Management
Fund may not:
(1) Concentrate its investments in any one industry. No more than 25% of
the value of its total assets will be invested in securities of
issuers having their principal activities in any one industry, other
than securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, or obligations of domestic branches of
U.S. banks and savings institutions. (See "Bank Obligations").
(2) Purchase the securities of any issuer if the purchase will cause more
than 5% of the value of its total assets to be invested in the
securities of any one issuer (except securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities).
(3) Purchase the securities of any issuer if the purchase will cause more
than 10% of the outstanding voting securities of the issuer to be held
by the Fund (other than securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities).
(4) Act as an underwriter except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be an
underwriter under the federal securities laws.
(5) Purchase securities of any company with a record of less than 3 years
continuous operation (including that of predecessors) if the purchase
would cause the value of the Fund's aggregate investments in all such
companies to exceed 5% of the value of the Fund's total assets.
(6) Engage in the purchase and sale of illiquid interests in real estate,
including interests in real estate investment trusts (although it may
invest in securities secured by real estate or interests therein) or
invest in commodities or commodity contracts, oil and gas interests,
or mineral exploration or development programs.
(7) Purchase securities of other investment companies except in connection
with a merger, consolidation, or plan of reorganization.
(8) Purchase or retain in its portfolio securities of any issuer if those
officers and directors of the Fund or its Manager owning beneficially
more than one-half of 1% (0.5%) of the securities of the issuer
together own beneficially more than 5% of such securities.
(9) Purchase securities on margin, except it may obtain such short-term
credits as are necessary for the clearance of transactions. The Fund
will not effect a short sale of any security. The Fund will not issue
or acquire put and call options, straddles or spreads or any
combination thereof.
(10) Invest in companies for the purpose of exercising control or
management.
(11) Make loans to others except through the purchase of debt obligations
in which the Fund is authorized to invest and by entering into
repurchase agreements (see "Fund Investments").
(12) Borrow money except from banks for temporary or emergency purposes,
including the meeting of redemption requests which might otherwise
require the untimely disposition of securities, in an amount not to
exceed the lesser of (1) 5% of the value of the Fund's assets, or (ii)
10% of the value of the Fund's net assets taken at cost at the time
such borrowing is made. The Fund will not issue senior securities
except in connection with such borrowings. The Fund may not pledge,
mortgage, or hypothecate its assets (at value) to an extent greater
than 10% of the net assets.
(13) Invest in time deposits maturing in more than seven days; time
deposits maturing from two business days through seven calendar days
may not exceed 10% of the value of the Fund's total assets.
(14) Invest more than 10% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven
days.
The Fund has also adopted the following restriction which is not
fundamental and may be changed without shareholder approval. It is contrary to
the Fund's current policy to:
(1) Invest in real estate limited partnership interests.
Tax-Exempt Cash Management Fund
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Tax-Exempt Cash
Management Fund may not:
(1) Invest in securities other than Municipal Obligations and Temporary
Investments as those terms are defined in the Prospectus and the
Statement of Additional Information.
(2) Issue any senior securities as defined in the Investment Company Act
of 1940. Purchasing and selling securities and borrowing money in
accordance with restrictions described below do not involve the
issuance of a senior security.
(3) Purchase or retain in its portfolio securities of any issuer if those
officers or directors of the Fund or its Manager owning beneficially
more than one-half of 1% (0.5%) of the securities of the issuer
together own beneficially more than 5% of such securities.
(4) Invest in commodities or commodity contracts.
(5) Invest in real estate, although it may invest in securities which are
secured by real estate and securities of issuers which invest or deal
in real estate.
(6) Borrow money, except from banks for temporary or emergency purposes,
including the purpose of meeting redemption requests which might
otherwise require the untimely disposition of securities, in an amount
not to exceed one-third of the sum of (a) the value of the Fund's net
assets at the time of the borrowing and (b) the amount borrowed. While
any such borrowings exceed 5% of total assets, no additional purchases
of investment securities will be made by the Fund. If due to market
fluctuations or other reasons the Fund's asset coverage falls below
300% of its borrowings, the Fund will reduce its borrowings within 3
business days.
(7) Make loans, except that the Fund may (i) purchase and hold debt
obligations in accordance with its investment objective and policies,
(ii) enter into repurchase agreements, and (iii) lend its portfolio
securities without limitation against collateral (consisting of cash
or securities issued or guaranteed by the United States Government or
its agencies or instrumentalities) equal at all times to not less than
100% of the value of the securities loaned.
(8) Invest more than 5% of its total assets in the securities of any one
issuer (other than obligations issued or guaranteed by the United
States Government or its agencies or instrumentalities); or purchase
more than 10% of the outstanding voting securities of any one issuer.
(9) Act as an underwriter of securities, except to the extent the Fund may
be deemed to be an underwriter in connection with the sale of
securities held in its portfolio.
(10) Concentrate its investments in any particular industry or industries,
except that the Fund may invest not more than 25% of the value of its
total assets in a single industry; provided, however, that this
limitation shall not be applicable to the purchase of Municipal
Obligations issued by governments or political subdivisions of
governments, obligations issued or guaranteed by the United States
Government or its agencies or instrumentalities, or obligations of
domestic banks (excluding foreign branches of domestic banks).
(11) Sell securities short (except where the Fund holds or has the right to
obtain at no added cost a long position in the securities sold that
equals or exceeds the securities sold short) or purchase any
securities on margin, except it may obtain such short-term credits as
are necessary for the clearance of transactions.
(12) Invest in interests in oil, gas or other mineral exploration or
development programs, although the Fund may invest in securities of
issuers which invest in or sponsor such programs.
The Fund has also adopted the following restrictions which are not
fundamental policies and may be changed without shareholder approval. It is
contrary to the Fund's present policy to:
(1) Invest more than 10% of its total assets in securities not readily
marketable, in repurchase agreements maturing in more than seven days,
and in other illiquid securities.
(2) Purchase securities of any issuer having less than three years'
continuous operation (including operations of any predecessors) if
such purchase would cause the value of the Fund's investments in all
such issuers to exceed 5% of the value of its total assets; provided
that this limitation shall not apply to obligations issued or
guaranteed by the United States Government or its agencies or
instrumentalities or to Municipal Obligations other than industrial
development bonds issued by non-governmental issuers.
(3) Invest more than 10% of its assets in securities of other investment
companies, invest more than 5% of its total assets in the securities
of any one investment company, or acquire more than 3% of the
outstanding voting securities of any one investment company except in
connection with a merger, consolidation or plan of reorganization.
(4) Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings.
(5) Invest in companies for the purpose of exercising control or
management.
(6) Write or purchase put or call options.
(7) Invest more than 20% of its total assets in industrial development
bonds the interest on which is treated as a tax preference item for
purposes of the federal alternative minimum tax.
(8) Purchase warrants in excess of 5% of its total assets, of which 2% may
be invested in warrants that are not listed on the New York or
American Stock Exchange.
(9) Invest in real estate limited partnership interests.
The identification of the issuer of a Municipal Obligation depends on the
terms and conditions of the security. When the assets and revenues of an agency,
authority, instrumentality or other political subdivision are separate from
those of the government creating the subdivision and the security is backed only
by the assets and revenues of the subdivision, such subdivision would be deemed
to be the sole issuer. Similarly, in the case of an industrial development bond,
if that bond is backed only by the assets and revenues of the non-governmental
user, then such non-governmental user would be deemed to be the sole issuer. If,
however, in either case, the creating government or some other entity guarantees
a security, such a guarantee would be considered a separate security and will be
treated as an issue of such government or other entity.
The Fund may invest without limit in debt obligations of issuers located in
the same state and in debt obligations which are repayable out of revenue
sources generated from economically related projects or facilities. Sizable
investments in such obligations could involve an increased risk to the Fund
since an economic, business or political development or change affecting one
security could also affect others. The Fund may also invest without limit in
industrial development bonds, but it will not invest more than 20% of its total
assets in any municipal obligations the interest on which is treated as a tax
preference item for purposes of the federal alternative minimum tax.
The Fund's Manager will waive its management fee on the Fund's assets
invested in securities of other investment companies. The Fund will generally
invest in other investment companies only for short-term cash management
purposes when the advisor anticipates the net return from the investment to be
superior to alternatives then available. The Fund will generally invest only in
those investment companies that have investment policies requiring investment in
securities comparable in quality to those in which the Fund invests.
FUNDS' INVESTMENTS
The following information further supplements the discussion of the Funds'
investment objectives and policies in the Prospectus under the caption
"INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS."
In making selections of equity securities for the Funds, the Manager will
use an approach described broadly as that of fundamental analysis. Three basic
steps are involved in this analysis. First is the continuing study of basic
economic factors in an effort to conclude what the future general economic
climate is likely to be over the next one to two years. Second, given some
conviction as to the likely economic climate, the Manager attempts to identify
the prospects for the major industrial, commercial and financial segments of the
economy, by looking at such factors as demand for products, capacity to produce,
operating costs, pricing structure, marketing techniques, adequacy of raw
materials and components, domestic and foreign competition, and research
productivity, to ascertain prospects for each industry for the near and
intermediate term. Finally, determinations are made regarding earnings prospects
for individual companies within each industry by considering the same types of
factors described above. These earnings prospects are then evaluated in relation
to the current price of the securities of each company.
Although the Funds may pursue the investment practices described under the
captions Restricted Securities, Foreign Securities, Spread Transactions, Options
on Securities and Securities Indices, and Futures Contracts and Options on
Futures Contracts, Forward Foreign Currency Exchange Contracts, Repurchase
Agreements, Lending of Portfolio Securities and When-Issued and Delayed of
Delivery Securities, none of the Funds either committed during the last fiscal
year or currently intends to commit during the present fiscal year more than 5%
of its net assets to any of the practices, with the following exceptions: (1)
The High Yield Fund's investments in restricted securities are expected to
exceed 5% of the fund's net assets; and (2) The Bond, High Yield, International,
International Emerging Markets and International SmallCap Funds' investments in
foreign securities are expected to continue to exceed 5% of each Fund's net
assets.
Restricted Securities
Each of the Funds has adopted investment restrictions that limit its
investments in restricted securities or other illiquid securities to 15% (10%
for the Government Securities Income Fund and the Money Market Funds and not
more than 5% in equity securities) of its assets. The Board of Directors of each
of the Growth-Oriented and Income-Oriented Funds has adopted procedures to
determine the liquidity of Rule 4(2) short-term paper and of restricted
securities under Rule 144A. Securities determined to be liquid pursuant to such
procedures are excluded from other restricted securities when applying the
preceding investment restrictions.
Generally, restricted securities are not readily marketable because they
are subject to legal or contractual restrictions upon resale. They may be sold
only in a public offering with respect to which a registration statement is in
effect under the Securities Act of 1933 or in a transaction which is exempt from
the registration requirements of that act. When registration is required, a Fund
may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the Fund might obtain a less favorable price than prevailed when it
decided to sell. Restricted securities and other securities not readily
marketable will be priced at fair value as determined in good faith by or under
the direction of the Board of Directors.
Foreign Securities
Each of the following Principal Funds may invest in foreign securities to
the indicated percentage of its assets: International, International Emerging
Markets and International SmallCap Funds - 100%; Real Estate Fund - 25%;
Balanced, Blue Chip, Bond, Capital Value, Growth, High Yield, Limited Term Bond,
MidCap, SmallCap and Utilities Funds - 20%. The Cash Management and Tax-Exempt
Cash Management Funds do not invest in foreign securities other than those that
are United States dollar denominated. United State dollar denominated means that
all principal and interest payments for the security are payable in U.S. dollars
and that the interest rate of, the principal amount to be repaid and the timing
of payments related to the securities do not vary or float with the value of a
foreign currency, the rate of interest on foreign currency borrowings or with
any other interest rate or index expressed in a currency other than U.S.
dollars. Debt securities issued in the United States pursuant to a registration
statement filed with the Securities and Exchange Commission are not treated as
foreign securities for purposes of these limitations.
Investment in foreign securities presents certain risks, including those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, the imposition of foreign taxes, future political and economic
developments including war, expropriations, nationalization, the possible
imposition of currency exchange controls and other foreign governmental laws or
restrictions, reduced availability of public information concerning issuers, and
the fact that foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements comparable to those applicable to domestic issuers. In addition,
transactions in foreign securities may be subject to higher costs, and the time
for settlement of transactions in foreign securities may be longer than the
settlement period for domestic issuers. Each Fund's investment in foreign
securities may also result in higher custodial costs and the costs associated
with currency conversions.
Securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. In particular, securities
markets in emerging market countries are known to experience long delays between
the trade and settlement dates of securities purchased and sold, potentially
resulting in a lack of liquidity and greater volatility in the price of
securities on those markets. In addition, investments in smaller companies may
present greater opportunities for capital appreciation, but may also involve
greater risks than large, mature issuers. Such companies may have limited
product lines and financial resources. Their securities may trade in more
limited volume than larger companies and may therefore experience significantly
more price volatility and less liquidity than securities of larger companies. As
a result of these factors, the Boards of Directors of the Funds have adopted
Daily Pricing and Valuation Procedures for the Funds which set forth the steps
to be followed by the Manager and Sub-Advisor to establish a reliable market or
fair value if a reliable market value is not available through normal market
quotations. Oversight of this process is provided by the Executive Committee of
the Boards of Directors.
Spread Transactions, Options on Securities and Securities Indices, and Futures
Contracts and Options on Futures Contracts
The Balanced, Blue Chip, Bond, Government Securities Income, High Yield,
International, International Emerging Markets, International SmallCap, Limited
Term Bond, MidCap, Real Estate, SmallCap and Utilities Funds may each engage in
the practices described under this heading. The Tax-Exempt Bond Fund may invest
in financial futures contracts as described under this heading. In the following
discussion, the terms "the Fund," "each Fund" or "the Funds" refer to each of
these Funds.
Spread Transactions
Each Fund may purchase from securities dealers covered spread options. Such
covered spread options are not presently exchange listed or traded. The purchase
of a spread option gives the Fund the right to put, or sell, a security that it
owns at a fixed dollar spread or fixed yield spread in relationship to another
security that the Fund does not own, but which is used as a benchmark. The risk
to the Fund in purchasing covered spread options is the cost of the premium paid
for the spread option and any transaction costs. In addition, there is no
assurance that closing transactions will be available. The purchase of spread
options can be used to protect each Fund against adverse changes in prevailing
credit quality spreads, i.e., the yield spread between high quality and lower
quality securities. The security covering the spread option will be maintained
in a segregated account by each Fund's custodian. The Funds do not consider a
security covered by a spread option to be "pledged" as that term is used in the
Funds' policy limiting the pledging or mortgaging of assets.
Options on Securities and Securities Indices
Each Fund may write (sell) and purchase call and put options on securities
in which it may invest and on securities indices based on securities in which
the Fund may invest. The World Fund may only write covered call options on its
portfolio securities; it may not write or purchase put options. The Funds may
write call and put options to generate additional revenue, and may write and
purchase call and put options in seeking to hedge against a decline in the value
of securities owned or an increase in the price of securities which the Fund
plans to purchase.
Writing Covered Call and Put Options. When a Fund writes a call option, it
gives the purchaser of the option, in return for the premium it receives, the
right to buy from the Fund the underlying security at a specified price at any
time before the option expires. When a Fund writes a put option, it gives the
purchaser of the option, in return for the premium it receives, the right to
sell to the Fund the underlying security at a specified price at any time before
the option expires.
The premium received by a Fund, when it writes a put or call option,
reflects, among other factors, the current market price of the underlying
security, the relationship of the exercise price to the market price, the time
period until the expiration of the option and interest rates. The premium will
generate additional income for the Fund if the option expires unexercised or is
closed out at a profit. By writing a call, a Fund limits its opportunity to
profit from any increase in the market value of the underlying security above
the exercise price of the option, but it retains the risk of loss if the price
of the security should decline. By writing a put, a Fund assumes the risk that
it may have to purchase the underlying security at a price that may be higher
than its market value at time of exercise.
The Funds write only covered options and will comply with applicable
regulatory and exchange cover requirements. The Funds usually will (and the
World Fund must) own the underlying security covered by any outstanding call
option that it has written. With respect to an outstanding put option that it
has written, each Fund will deposit and maintain with its custodian cash, U.S.
Government securities or other liquid securities with a value at least equal to
the exercise price of the option.
Once a Fund has written an option, it may terminate its obligation, before
the option is exercised, by effecting a closing transaction, which is
accomplished by the Fund's purchasing an option of the same series as the option
previously written. The Funds will have a gain or loss depending on whether the
premium received when the option was written exceeds the closing purchase price
plus related transaction costs.
Purchasing Call and Put Options. When a Fund purchases a call option, it
receives, in return for the premium it pays, the right to buy from the writer of
the option the underlying security at a specified price at any time before the
option expires. The Fund may purchase call options in anticipation of an
increase in the market value of securities that it intends ultimately to buy.
During the life of the call option, the Fund would be able to buy the underlying
security at the exercise price regardless of any increase in the market price of
the underlying security. In order for a call option to result in a gain, the
market price of the underlying security must rise to a level that exceeds the
sum of the exercise price, the premium paid and transaction costs.
When a Fund purchases a put option, it receives, in return for the premium
it pays, the right to sell to the writer of the option the underlying security
at a specified price at any time before the option expires. The Fund may
purchase put options in anticipation of a decline in the market value of the
underlying security. During the life of the put option, the Fund would be able
to sell the underlying security at the exercise price regardless of any decline
in the market price of the underlying security. In order for a put option to
result in a gain, the market price of the underlying security must decline,
during the option period, below the exercise price sufficiently to cover the
premium and transaction costs.
Once a Fund has purchased an option, it may close out its position by
selling an option of the same series as the option previously purchased. The
Fund will have a gain or loss depending on whether the closing sale price
exceeds the initial purchase price plus related transaction costs.
None of the Funds will invest more than 5% of its assets in the purchase of
call and put options on individual securities, securities indices and futures
contracts.
Options on Securities Indices. Each Fund may purchase and sell put and call
options on any securities index based on securities in which the Fund may
invest. Securities index options are designed to reflect price fluctuations in a
group of securities or segment of the securities market rather than price
fluctuations in a single security. Options on securities indices are similar to
options on securities, except that the exercise of securities index options
requires cash payments and does not involve the actual purchase or sale of
securities. The Funds would engage in transactions in put and call options on
securities indices for the same purposes as they would engage in transactions in
options on securities. When a Fund writes call options on securities indices, it
will hold in its portfolio underlying securities which, in the judgment of the
Manager, correlate closely with the securities index and which have a value at
least equal to the aggregate amount of the securities index options.
Risks Associated with Options Transactions. An options position may be
closed out only on an exchange which provides a secondary market for an option
of the same series. Although the Funds will generally purchase or write only
those options for which there appears to be an active secondary market, there is
no assurance that a liquid secondary market on an exchange will exist for any
particular option, or at any particular time. For some options, no secondary
market on an exchange or elsewhere may exist. If a Fund is unable to effect
closing sale transactions in options it has purchased, the Fund would have to
exercise its options in order to realize any profit and may incur transaction
costs upon the purchase or sale of underlying securities pursuant thereto. If a
Fund is unable to effect a closing purchase transaction for a covered option
that it has written, it will not be able to sell the underlying securities, or
dispose of the assets held in a segregated account, until the option expires or
is exercised. A Fund's ability to terminate option positions established in the
over-the-counter market may be more limited than for exchange-traded options and
may also involve the risk that broker-dealers participating in such transactions
might fail to meet their obligations.
Futures Contracts and Options on Futures
Each Fund may purchase and sell financial futures contracts and options on
those contracts. Financial futures contracts are commodities contracts based on
financial instruments such as U.S. Treasury bonds or bills or on securities
indices such as the S&P 500 Index. Futures contracts, options on futures
contracts and the commodity exchanges on which they are traded are regulated by
the Commodity Futures Trading Commission ("CFTC"). Through the purchase and sale
of futures contracts and related options, a Fund may seek to hedge against a
decline in securities owned by the Fund or an increase in the price of
securities which the Fund plans to purchase.
Futures Contracts. When a Fund sells a futures contract based on a
financial instrument, the Fund becomes obligated to deliver that kind of
instrument at a specified future time for a specified price. When a Fund
purchases that kind of contract, it becomes obligated to take delivery of the
instrument at a specified time and to pay the specified price. In most
instances, these contracts are closed out by entering into an offsetting
transaction before the settlement date, thereby canceling the obligation to make
or take delivery of specific securities. The Fund realizes a gain or loss
depending on whether the price of an offsetting purchase plus transaction costs
are less or more than the price of the initial sale or on whether the price of
an offsetting sale is more or less than the price of the initial purchase plus
transaction costs. Although the Funds will usually liquidate futures contracts
on financial instruments in this manner, they may instead make or take delivery
of the underlying securities whenever it appears economically advantageous to do
so.
A futures contract based on a securities index provides for the purchase or
sale of a group of securities at a specified future time for a specified price.
These contracts do not require actual delivery of securities, but result in a
cash settlement based upon the difference in value of the index between the time
the contract was entered into and the time it is liquidated, which may be at its
expiration or earlier if it is closed out by entering into an offsetting
transaction.
When a futures contract is purchased or sold a brokerage commission is
paid, but unlike the purchase or sale of a security or option, no price or
premium is paid or received. Instead, an amount of cash or U.S. Government
securities, which varies, but is generally about 5% of the contract amount, is
deposited by the Fund with its custodian for the benefit of the futures
commission merchant through which the Fund engages in the transaction. This
amount is known as "initial margin." It does not involve the borrowing of funds
by the Fund to finance the transaction, but instead represents a "good faith"
deposit assuring the performance of both the purchaser and the seller under the
futures contract. It is returned to the Fund upon termination of the futures
contract, if all the Fund's contractual obligations have been satisfied.
Subsequent payments to and from the broker, known as "variation margin,"
are required to be made on a daily basis as the price of the futures contract
fluctuates, making the long or short positions in the futures contract more or
less valuable, a process known as "marking to market." If the position is closed
out by taking an opposite position prior to the settlement date of the futures
contract, a final determination of variation margin is made, additional cash is
required to be paid to or released by the broker, and the Fund realizes a loss
or gain.
In using futures contracts, the Funds will seek to establish more certainly
than would otherwise be possible the effective price of or rate of return on
portfolio securities or securities that the Fund proposes to acquire. A Fund,
for example, may sell futures contracts in anticipation of a rise in interest
rates which would cause a decline in the value of its debt investments. When
this kind of hedging is successful, the futures contracts should increase in
value when the Fund's debt securities decline in value and thereby keep the
Fund's net asset value from declining as much as it otherwise would. A Fund may
also sell futures contracts on securities indices in anticipation of or during a
stock market decline in an endeavor to offset a decrease in the market value of
its equity investments. When a Fund is not fully invested and anticipates an
increase in the cost of securities it intends to purchase, it may purchase
financial futures contracts. When increases in the prices of equities are
expected, a Fund may purchase futures contracts on securities indices in order
to gain rapid market exposure that may partially or entirely offset increases in
the cost of the equity securities it intends to purchase.
Options on Futures. The Funds may also purchase and write call and put
options on futures contracts. A call option on a futures contract gives the
purchaser the right, in return for the premium paid, to purchase a futures
contract (assume a long position) at a specified exercise price at any time
before the option expires. A put option gives the purchaser the right, in return
for the premium paid, to sell a futures contract (assume a short position), for
a specified exercise price, at any time before the option expires.
Upon the exercise of a call, the writer of the option is obligated to sell
the futures contract (to deliver a long position to the option holder) at the
option exercise price, which will presumably be lower than the current market
price of the contract in the futures market. Upon exercise of a put, the writer
of the option is obligated to purchase the futures contract (deliver a short
position to the option holder) at the option exercise price, which will
presumably be higher than the current market price of the contract in the
futures market. However, as with the trading of futures, most options are closed
out prior to their expiration by the purchase or sale of an offsetting option at
a market price that will reflect an increase or a decrease from the premium
originally paid.
Options on futures can be used to hedge substantially the same risks as
might be addressed by the direct purchase or sale of the underlying futures
contracts. For example, if a Fund anticipated a rise in interest rates and a
decline in the market value of the debt securities in its portfolio, it might
purchase put options or write call options on futures contracts instead of
selling futures contracts.
If a Fund purchases an option on a futures contract, it may obtain benefits
similar to those that would result if it held the futures position itself. But
in contrast to a futures transaction, the purchase of an option involves the
payment of a premium in addition to transaction costs. In the event of an
adverse market movement, however, the Fund will not be subject to a risk of loss
on the option transaction beyond the price of the premium it paid plus its
transaction costs.
When a Fund writes an option on a futures contract, the premium paid by the
purchaser is deposited with the Fund's custodian, and the Fund must maintain
with its custodian all or a portion of the initial margin requirement on the
underlying futures contract. The Fund assumes a risk of adverse movement in the
price of the underlying futures contract comparable to that involved in holding
a futures position. Subsequent payments to and from the broker, similar to
variation margin payments, are made as the premium and the initial margin
requirement are marked to market daily. The premium may partially offset an
unfavorable change in the value of portfolio securities, if the option is not
exercised, or it may reduce the amount of any loss incurred by the Fund if the
option is exercised.
Risks Associated with Futures Transactions. There are a number of risks
associated with transactions in futures contracts and related options. A Fund's
successful use of futures contracts is subject to the Manager's ability to
predict correctly the factors affecting the market values of the Fund's
portfolio securities. For example, if a Fund was hedged against the possibility
of an increase in interest rates which would adversely affect debt securities
held by the Fund and the prices of those debt securities instead increased, the
Fund would lose part or all of the benefit of the increased value of its
securities which it hedged because it would have offsetting losses in its
futures positions. Other risks include imperfect correlation between price
movements in the financial instrument or securities index underlying the futures
contract, on the one hand, and the price movements of either the futures
contract itself or the securities held by the Fund, on the other hand. If the
prices do not move in the same direction or to the same extent, the transaction
may result in trading losses.
Prior to exercise or expiration, a position in futures may be terminated
only by entering into a closing purchase or sale transaction. This requires a
secondary market on the relevant contract market. The Fund will enter into a
futures contract or related option only if there appears to be a liquid
secondary market therefor. There can be no assurance, however, that such a
liquid secondary market will exist for any particular futures contract or
related option at any specific time. Thus, it may not be possible to close out a
futures position once it has been established. Under such circumstances, the
Fund would continue to be required to make daily cash payments of variation
margin in the event of adverse price movements. In such situations, if the Fund
has insufficient cash, it may be required to sell portfolio securities to meet
daily variation margin requirements at a time when it may be disadvantageous to
do so. In addition, the Fund may be required to perform under the terms of the
futures contracts it holds. The inability to close out futures positions also
could have an adverse impact on the Fund's ability effectively to hedge its
portfolio.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. This daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
Limitations on the Use of Futures and Options on Futures. Each Fund intends
to come within an exclusion from the definition of "commodity pool operator"
provided by CFTC regulations by complying with certain limitations on the use of
futures and related options prescribed by those regulations.
None of the Funds will purchase or sell futures contracts or options
thereon if immediately thereafter the aggregate initial margin and premiums
exceed 5% of the fair market value of the Fund's assets, after taking into
account unrealized profits and unrealized losses on any such contracts it has
entered into (except that in the case of an option that is in-the-money at the
time of purchase, the in-the-money amount generally may be excluded in computing
the 5%).
The Funds will enter into futures contracts and related options
transactions only for bona fide hedging purposes as permitted by the CFTC and
for other appropriate risk management purposes, if any, which the CFTC may deem
appropriate for mutual funds excluded from the regulations governing commodity
pool operators. The Funds are not permitted to engage in speculative futures
trading. Each Fund will determine that the price fluctuations in the futures
contracts and options on futures used for hedging or risk management purposes
are substantially related to price fluctuations in securities held by the Fund
or which it expects to purchase. In pursuing traditional hedging activities,
each Fund will sell futures contracts or acquire puts to protect against a
decline in the price of securities that the Fund owns, and each Fund will
purchase futures contracts or calls on futures contracts to protect the Fund
against an increase in the price of securities the Fund intends to purchase
before it is in a position to do so.
When a Fund purchases a futures contract, or purchases a call option on a
futures contract, it will maintain an amount of cash, cash equivalents or
short-term high-grade fixed-income securities in a segregated account with the
Fund's custodian, so that the amount so segregated plus the amount of initial
margin held for the account of its broker equals the market value of the futures
contract.
The Funds will not maintain open short positions in futures contracts, call
options written on futures contracts, and call options written on securities
indices if, in the aggregate, the value of the open positions (marked to market)
exceeds the current market value of that portion of its securities portfolio
being hedged by those futures and options plus or minus the unrealized gain or
loss on those open positions, adjusted for the historical volatility
relationship between that portion of the portfolio and the contracts (i.e., the
Beta volatility factor). To the extent a Fund has written call options on
specific securities in that portion of its portfolio, the value of those
securities will be deducted from the current market value of that portion of the
securities portfolio. If this limitation should be exceeded at any time, the
Fund will take prompt action to close out the appropriate number of open short
positions to bring its open futures and options positions within this
limitation.
Forward Foreign Currency Exchange Contracts
The International, International Emerging Markets and International
SmallCap Funds may, but are not obligated to, enter into forward foreign
currency exchange contracts but may do so only under two circumstances. First,
when a Fund is entering into a contract for the purchase or sale of a security
denominated in a foreign currency and wants to "lock-in" the U.S. dollar price
of the security. Second, when the Manager believes that the currency of a
particular foreign country in which a portion of a Fund's securities are
denominated may suffer a substantial decline against the U.S. dollar. A Fund
generally will not enter into a forward contract with a term of greater than one
year.
The International, International Emerging Markets and International
SmallCap Funds will enter into forward foreign currency exchange contracts only
for the purpose of "hedging," that is limiting the risks associated with changes
in the relative rates of exchange between the U.S. dollar and foreign currencies
in which securities owned by a Fund are denominated. They will not enter into
such forward contracts for speculative purposes. A Fund will set up a separate
account with the Custodian to place foreign securities denominated in the
currency for which the Fund has entered into forward contracts under the second
circumstance, as set forth above, for the term of the forward contract. It
should be noted that the use of forward foreign currency exchange contracts does
not eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange between the currencies which can be achieved at
some future point in time. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they also tend to limit any potential gain which might result if the value of
the currency increases.
Repurchase Agreements
All Principal Funds may invest in repurchase agreements. None of the
Growth-Oriented or Income-Oriented Funds will enter into repurchase agreements
that do not mature within seven days if any such investment, together with other
illiquid securities held by the Fund, would amount to more than 15% of its
assets. Neither of the Money Market Funds will enter into repurchase agreements
that do not mature within seven days of such investment together with other
illiquid securities held by the Fund, would amount to more than 10% of its
assets. Repurchase agreements will typically involve the acquisition by the Fund
of debt securities from a selling financial institution such as a bank, savings
and loan association or broker-dealer. A repurchase agreement provides that the
Fund will sell back to the seller and that the seller will repurchase the
underlying securities at a specified price and at a fixed time in the future.
Repurchase agreements may be viewed as loans by a Fund collateralized by the
underlying securities ("collateral"). This arrangement results in a fixed rate
of return that is not subject to market fluctuation during the Fund's holding
period. Although repurchase agreements involve certain risks not associated with
direct investments in debt securities, each of the Funds follows procedures
established by its Board of Directors which are designed to minimize such risks.
These procedures include entering into repurchase agreements only with large,
well-capitalized and well-established financial institutions which the Fund's
Manager believes present minimum credit risks. In addition, the value of the
collateral underlying the repurchase agreement will always be at least equal to
the repurchase price, including accrued interest. In the event of a default or
bankruptcy by a selling financial institution, the affected Fund bears a risk of
loss. In seeking to liquidate the collateral, a Fund may be delayed in or
prevented from exercising its rights and may incur certain costs. Further to the
extent that proceeds from any sale upon a default of the obligation to
repurchase were less than the repurchase price, the Fund could suffer a loss.
Lending of Portfolio Securities
All Principal Funds, except the Capital Value, Growth and Cash Management
Funds, may lend their portfolio securities. None of the Principal Funds intends
to lend its portfolio securities if as a result the aggregate of such loans made
by the Fund would exceed 30% of its total assets. Portfolio securities may be
lent to unaffiliated broker-dealers and other unaffiliated qualified financial
institutions provided that such loans are callable at any time on not more than
five business days' notice and that cash or government securities equal to at
least 100% of the market value of the securities loaned, determined daily, is
deposited by the borrower with the Fund and is maintained each business day in a
segregated account. While such securities are on loan, the borrower will pay the
Fund any income accruing thereon, and the Fund may invest any cash collateral,
thereby earning additional income, or may receive an agreed-upon fee from the
borrower. Borrowed securities must be returned when the loan is terminated. Any
gain or loss in the market price of the borrowed securities which occurs during
the term of the loan inures to the Fund and its shareholders. A Fund may pay
reasonable administrative, custodial and other fees in connection with such
loans and may pay a negotiated portion of the interest earned on the cash or
government securities pledged as collateral to the borrower or placing broker. A
Fund does not vote securities that have been loaned, but it will call a loan of
securities in anticipation of an important vote.
When-Issued and Delayed Delivery Securities
Each of the Principal Funds may from time to time purchase securities on a
when-issued basis and may purchase or sell securities on a delayed delivery
basis. The price of such a transaction is fixed at the time of the commitment,
but delivery and payment take place on a later settlement date, which may be a
month or more after the date of the commitment. No interest accrues to the
purchaser during this period, and the securities are subject to market
fluctuation, which involves the risk for the purchaser that yields available in
the market at the time of delivery may be higher than those obtained in the
transaction. Each Fund will only purchase securities on a when-issued or delayed
delivery basis with the intention of acquiring the securities, but a Fund may
sell the securities before the settlement date, if such action is deemed
advisable. At the time a Fund makes the commitment to purchase securities on a
when-issued or delayed delivery basis, it will record the transaction and
thereafter reflect the value, each day, of the securities in determining its net
asset value. Each Fund will also establish a segregated account with its
custodian bank in which it will maintain cash or cash equivalents, United States
Government securities and other high grade debt obligations equal in value to
the Fund's commitments for such when-issued or delayed delivery securities. The
availability of liquid assets for this purpose and the effect of asset
segregation on a Fund's ability to meet its current obligations, to honor
requests for redemption and to have its investment portfolio managed properly
will limit the extent to which the Fund may engage in forward commitment
agreements. Except as may be imposed by these factors, there is no limit on the
percent of a Fund's total assets that may be committed to transactions in such
agreements.
Money Market Instruments
The Cash Management Fund will invest all of its available assets in money
market instruments maturing in 397 days or less. The types of instruments which
this Fund may purchase are described in the Prospectus and below.
(1) U.S. Government Securities -- Securities issued or guaranteed by the
U.S. Government, including treasury bills, notes and bonds.
(2) U.S. Government Agency Securities -- Obligations issued or guaranteed
by agencies or instrumentalities of the U.S. Government. U.S. agency
obligations include, but are not limited to, the Bank for
Co-operatives, Federal Home Loan Banks, Federal Intermediate Credit
Banks, and the Federal National Mortgage Association. U.S.
instrumentality obligations include, but are not limited to, the
Export-Import Bank and Farmers Home Administration. Some obligations
issued or guaranteed by U.S. Government agencies and instrumentalities
are supported by the full faith and credit of the U.S. Treasury,
others such as those issued by the Federal National Mortgage
Association, by discretionary authority of the U.S. Government to
purchase certain obligations of the agency or instrumentality, and
others, such as those issued by the Student Loan Marketing
Association, only by the credit of the agency or instrumentality.
(3) Bank Obligations -- Certificates of deposit, time deposits and
bankers' acceptances of U.S. commercial banks having total assets of
at least one billion dollars, and of the overseas branches of U.S.
commercial banks and foreign banks, which in the Manager's opinion,
are of comparable quality, provided each such bank with its branches
has total assets of at least five billion dollars, and certificates,
including time deposits of domestic savings and loan associations
having at least one billion dollars in assets which are insured by the
Federal Savings and Loan Insurance Corporation. The Fund may acquire
obligations of U.S. banks which are not members of the Federal Reserve
System or of the Federal Deposit Insurance Corporation. Any
obligations of foreign banks shall be denominated in U.S. dollars.
Obligations of foreign banks and obligations of overseas branches of
U.S. banks are subject to somewhat different regulations and risks
than those of U.S. domestic banks. For example, an issuing bank may be
able to maintain that the liability for an investment is solely that
of the overseas branch which could expose the Fund to a greater risk
of loss. In addition, obligations of foreign banks or of overseas
branches of U.S. banks may be affected by governmental action in the
country of domicile of the branch or parent bank. Examples of adverse
foreign governmental actions include the imposition of currency
controls, the imposition of withholding taxes on interest income
payable on such obligations, interest limitations, seizure or
nationalization of assets, or the declaration of a moratorium.
Deposits in foreign banks or foreign branches of U.S. banks are not
covered by the Federal Deposit Insurance Corporation. The Fund will
only buy short-term instruments where the risks of adverse
governmental action are believed by the Manager to be minimal. The
Fund will consider these factors along with other appropriate factors
in making an investment decision to acquire such obligations and will
only acquire those which, in the opinion of management, are of an
investment quality comparable to other debt securities bought by the
Fund. The Fund may invest in certificates of deposit of selected banks
having less than one billion dollars of assets providing the
certificates do not exceed the level of insurance (currently $100,000)
provided by the applicable government agency.
A certificate of deposit is issued against funds deposited in a bank
or savings and loan association for a definite period of time, at a
specified rate of return. Normally they are negotiable. However, the
Fund may occasionally invest in certificates of deposit which are not
negotiable. Such certificates may provide for interest penalties in
the event of withdrawal prior to their maturity. A bankers' acceptance
is a short-term credit instrument issued by corporations to finance
the import, export, transfer or storage of goods. They are termed
"accepted" when a bank guarantees their payment at maturity and
reflect the obligation of both the bank and drawer to pay the face
amount of the instrument at maturity.
(4) Commercial Paper -- Short-term promissory notes issued by U.S. or
foreign corporations.
(5) Short-term Corporate Debt -- Corporate notes, bonds and debentures
which at the time of purchase have 397 days or less remaining to
maturity.
(6) Repurchase Agreements -- Instruments under which securities are
purchased from a bank or securities dealer with an agreement by the
seller to repurchase the securities at the same price plus interest at
a specified rate. (See "FUND INVESTMENTS - Repurchase Agreements.")
(7) Taxable Municipal Obligations -- Short-term obligations issued or
guaranteed by state and municipal issuers which generate taxable
income.
The ratings of nationally recognized statistical rating organization
(NRSRO's), such as Moody's Investor Services, Inc. ("Moody's") and Standard and
Poor's ("S&P"), which are described in Appendix A, represent their opinions as
to the quality of the money market instruments which they undertake to rate. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality. These ratings, including ratings of NRSRO's other than
Moody's and S&P, are the initial criteria for selection of portfolio
investments, but the Manager will further evaluate these securities.
Municipal Obligations
The Tax-Exempt Bond Fund and Tax-Exempt Cash Management Fund can each
invest in "Municipal Obligations." Municipal Obligations are obligations issued
by or on behalf of states, territories, and possessions of the United States and
the District of Columbia and their political subdivisions, agencies and
instrumentalities, including municipal utilities, or multi-state agencies or
authorities, the interest from which is exempt from federal income tax in the
opinion of bond counsel to the issuer. Three major classifications of Municipal
Obligations are Municipal Bonds, which generally have a maturity at the time of
issue of one year or more, Municipal Notes, which generally have a maturity at
the time of issue of six months to three years, and Municipal Commercial Paper,
which generally has a maturity at the time of issue of 30 to 270 days. The
Tax-Exempt Cash Management Fund will only purchase Municipal Obligations that,
at the time of purchase, have 397 days or less remaining to maturity or have a
variable or floating rate of interest.
The term "Municipal Obligations" includes debt obligations issued to obtain
funds for various public purposes, including the construction of a wide range of
public facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works and electric
utilities. Other public purposes for which Municipal Obligations may be issued
include refunding outstanding obligations, obtaining funds for general operating
expenses and lending such funds to other public institutions and facilities.
Industrial development bonds issued by or on behalf of public authorities
to obtain funds to provide for the construction, equipment, repair or
improvement of privately operated housing facilities, sports facilities,
convention or trade show facilities, airport, mass transit, industrial, port or
parking facilities, air or water pollution control facilities and certain local
facilities for water supply, gas, electricity or sewage or solid waste disposal
are considered to be Municipal Obligations if the interest paid thereon
qualifies as exempt from federal income tax in the opinion of bond counsel to
the issuer, even though the interest may be subject to the federal alternative
minimum tax.
Municipal Bonds. Municipal Bonds may be either "general obligation" or
"revenue" issues. General obligation bonds are secured by the issuer's pledge of
its faith, credit and taxing power for the payment of principal and interest.
Revenue bonds are payable from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source (e.g., the user of the facilities being
financed), but not from the general taxing power. Industrial development bonds
and pollution control bonds in most cases are revenue bonds and generally do not
carry the pledge of the credit of the issuing municipality. The payment of the
principal and interest on industrial revenue bonds depends solely on the ability
of the user of the facilities financed by the bonds to meet its financial
obligations and the pledge, if any, of real and personal property so financed as
security for such payment. The Fund may also invest in "moral obligation" bonds
which are normally issued by special purpose public authorities. If an issuer of
moral obligation bonds is unable to meet its obligations, the repayment of the
bonds becomes a moral commitment but not a legal obligation of the state or
municipality in question.
Municipal Notes. Municipal Notes usually are general obligations of the
issuer and are sold in anticipation of a bond sale, collection of taxes or
receipt of other revenues. Payment of these notes is primarily dependent upon
the issuer's receipt of the anticipated revenues. Other notes include
"Construction Loan Notes" issued to provide construction financing for specific
projects, and "Bank Notes" issued by local governmental bodies and agencies to
commercial banks as evidence of borrowings. Some notes ("Project Notes") are
issued by local agencies under a program administered by the United States
Department of Housing and Urban Development. Project Notes are secured by the
full faith and credit of the United States.
Bond Anticipation Notes (BANs) are usually general obligations of state and
local governmental issuers which are sold to obtain interim financing for
projects that will eventually be funded through the sale of long-term debt
obligations or bonds. The ability of an issuer to meet its obligations on its
BANs is primarily dependent on the issuer's access to the long-term municipal
bond market and the likelihood that the proceeds of such bond sales will be used
to pay the principal and interest on the BANs.
Tax Anticipation Notes (TANs) are issued by state and local governments to
finance the current operations of such governments. Repayment is generally to be
derived from specific future tax revenues. TANs are usually general obligations
of the issuer. A weakness in an issuer's capacity to raise taxes due to, among
other things, a decline in its tax base or a rise in delinquencies, could
adversely affect the issuer's ability to meet its obligations on outstanding
TANs.
Revenue Anticipation Notes (RANs) are issued by governments or governmental
bodies with the expectation that future revenues from a designated source will
be used to repay the notes. In general they also constitute general obligations
of the issuer. A decline in the receipt of projected revenues, such as
anticipated revenues from another level of government, could adversely affect an
issuer's ability to meet its obligations on outstanding RANs. In addition, the
possibility that the revenues would, when received, be used to meet other
obligations could affect the ability of the issuer to pay the principal and
interest on RANs.
Construction Loan Notes are issued to provide construction financing for
specific projects. Frequently, these notes are redeemed with funds obtained from
the Federal Housing Administration.
Bank Notes are notes issued by local governmental bodies and agencies such
as those described above to commercial banks as evidence of borrowings. The
purpose for which the notes are issued are varied but they are frequently issued
to meet short-term working-capital or capital-project needs. These notes may
have risks similar to the risks associated with TANs and RANs.
Municipal Commercial Paper. Municipal Commercial Paper refers to short-term
obligations of municipalities which may be issued at a discount and may be
referred to as Short-Term Discount Notes. Municipal Commercial Paper is likely
to be used to meet seasonal working capital needs of a municipality or interim
construction financing and to be paid from general revenues of the municipality
or refinanced with long-term debt. In most cases Municipal Commercial Paper is
backed by letters of credit, lending agreements, note repurchase agreements or
other credit facility agreements offered by banks or other institutions.
Variable and Floating Rate Obligations. Certain Municipal Obligations,
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities and debt instruments issued by domestic banks or corporations
may carry variable or floating rates of interest. Such instruments bear interest
at rates which are not fixed, but which vary with changes in specified market
rates or indices, such as a bank prime rate or tax-exempt money market index.
Variable rate notes are adjusted to current interest rate levels at certain
specified times, such as every 30 days, as set forth in the instrument. A
floating rate note adjusts automatically whenever there is a change in its base
interest rate adjustor, e.g., a change in the prime lending rate or specified
interest rate indices. Typically such instruments carry demand features
permitting the Fund to redeem at par upon specified notice.
A Fund's right to obtain payment at par on a demand instrument upon demand
could be affected by events occurring between the date the Fund elects to redeem
the instrument and the date redemption proceeds are due which affects the
ability of the issuer to pay the instrument at par value. The Manager will
monitor on an ongoing basis the pricing, quality and liquidity of such
instruments and will similarly monitor the ability of an issuer of a demand
instrument, including those supported by bank letters of credit or guarantees,
to pay principal and interest on demand. Although the ultimate maturity of such
variable rate obligations may exceed one year, the Funds will treat the maturity
of each variable rate demand obligation as the longer of (i) the notice period
required before the Fund is entitled to payment of the principal amount through
demand, or (ii) the period remaining until the next interest rate adjustment.
Floating rate instruments with demand features are deemed to have a maturity
equal to the period remaining until the principal amount can be recovered
through demand.
The Funds may purchase from financial institutions participation interests
in variable rate Municipal Obligations (such as industrial development bonds). A
participation interest gives the purchaser an undivided interest in the
Municipal Obligation in the proportion that its participation interest bears to
the total principal amount of the Municipal Obligation. A Fund has the right to
demand payment on seven days' notice, for all or any part of the Fund's
participation interest in the Municipal Obligation, plus accrued interest. Each
participation interest is backed by an irrevocable letter of credit or guarantee
of a bank. Banks will retain a service and letter of credit fee and a fee for
issuing repurchase commitments in an amount equal to the excess of the interest
paid on the Municipal Obligations over the negotiated yield at which the
instruments were purchased by the Funds. No Fund committed during the last
fiscal year or currently intends to commit during the present fiscal year more
than 5% of its net assets to participation interests.
Other Municipal Obligations. Other kinds of Municipal Obligations are
occasionally available in the marketplace, and a Fund may invest in such other
kinds of obligations to the extent consistent with its investment objective and
limitations. Such obligations may be issued for different purposes and with
different security than those mentioned above.
Risks of Municipal Obligations. The yields on Municipal Obligations are
dependent on a variety of factors, including general economic and monetary
conditions, money market factors, conditions in the Municipal Obligations
market, size of a particular offering, maturity of the obligation, and rating of
the issue. Each Fund's ability to achieve its investment objective is also
dependent on the continuing ability of the issuers of the Municipal Obligations
in which it invests to meet their obligation for the payment of interest and
principal when due.
Municipal Obligations are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Act, and laws, if any, which may be enacted by
Congress or any state extending the time for payment of principal or interest,
or both, or imposing other constraints upon enforcement of such obligations or
upon municipalities to levy taxes. The power or ability of issuers to pay, when
due, principal of and interest on Municipal Obligations may also be materially
affected by the results of litigation or other conditions.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Obligations. It may be expected that similar proposals may
be introduced in the future. If such a proposal were enacted, the ability of the
Funds to pay "exempt interest" dividends may be adversely affected and each Fund
would re-evaluate its investment objective and policies and consider changes in
its structure.
Taxable Investments of the Tax-Exempt Bond Fund
The Tax-Exempt Bond Fund may invest up to 20% of its assets in taxable
short-term investments consisting of: Obligations issued or guaranteed by the
United States Government or its agencies or instrumentalities; domestic bank
certificates of deposit and bankers' acceptances; short-term corporate debt
securities such as commercial paper; and repurchase agreements ("Taxable
Investments"). These investments must have a stated maturity of one year or less
at the time of purchase and must meet the following standards: banks must have
assets of at least $1 billion; commercial paper must be rated at least "A" by
S&P or "Prime" by Moody's or, if not rated, must be issued by companies having
an outstanding debt issue rated at least "A" by S&P or Moody's; corporate bonds
and debentures must be rated at least "A" by S&P or Moody's. Interest earned
from Taxable Investments will be taxable to investors. When, in the opinion of
the Fund's Manager, it is advisable to maintain a temporary "defensive" posture,
the Fund may invest more than 20% of its total assets in Taxable Investments. At
other times, Taxable Investments, Municipal Obligations that do not meet the
quality standards required for the 80% portion of the portfolio and Municipal
Obligations the interest on which is treated as a tax preference item for
purposes of the federal alternative minimum tax will not exceed 20% of the
Fund's total assets.
Temporary Investments for the Tax-Exempt Cash Management Fund
The Tax-Exempt Cash Management Fund may invest, on a temporary basis, up to
20% of its net assets in taxable short-term investments consisting of:
Obligations issued or guaranteed by the United States Government or its agencies
or instrumentalities; U.S. dollar denominated certificates of deposit issued by
U.S. banks and bankers' acceptances; commercial paper of U.S. corporations;
short-term corporate debt securities; and repurchase agreements ("Temporary
Investments"). These investments must have a stated maturity of 397 days or less
at the time of purchase and must meet the same standards that apply to
securities in which the Cash Management Fund may invest. Interest earned from
Temporary Investments will be taxable to investors. When, in the opinion of the
Fund's Manager, it is advisable to maintain a temporary "defensive" posture, the
Fund may invest more than 20% of its total assets in Temporary Investments.
Portfolio Turnover
Portfolio turnover will normally differ for each Fund, may vary from year
to year, as well as within a year, and may be affected by portfolio sales
necessary to meet cash requirements for redemptions of Fund shares. The
portfolio turnover rate for a Fund is calculated by dividing the lesser of
purchases or sales of its portfolio securities during the fiscal year by the
monthly average of the value of its portfolio securities (excluding from the
computation all securities, including options, with maturities at the time of
acquisition of one year or less). A high rate of portfolio turnover generally
involves correspondingly greater brokerage commission expenses, which must be
borne directly by the Fund. This requirement may in some cases limit the ability
of a Fund to effect certain portfolio transactions. No portfolio turnover rate
can be calculated for the Money Market Funds because of the short maturities of
the securities in which they invest. The portfolio turnover rates for each of
the other Funds for its most recent and immediately preceding fiscal periods
were as follows (annualized when reporting period is less than one year):
Balanced Fund - 35.8% and __._%; Blue Chip Fund - __._% and 13.3%; Bond Fund -
_._% and 3.4%; Capital Value Fund - __._% and 50.2%; Government Securities
Income Fund - __._% and 25.9%; Growth Fund - _._% and 1.8%; High Yield Fund -
__._% and 18.8%; International Emerging Markets Fund - __._%; International Fund
- - __._ and 23.8%; International SmallCap Fund - __._%; Limited Term Bond Fund -
__._% and 16.5%; MidCap Fund - __._% and 12.3%; Tax-Exempt Bond Fund - __._% and
9.8%; Utilities Fund - __._% and 34.2%. In view of the investment objectives and
management policies of the Real Estate and SmallCap, it is anticipated that
their annual portfolio turnover rates should generally not exceed 75-100%, but
in any particular year market conditions could result in portfolio activity
greater than anticipated.
DIRECTORS AND OFFICERS OF THE FUNDS
The following listing discloses the principal occupations and other
principal business affiliations of the Funds' Officers and Directors during the
past five years. All Directors and Officers listed here also hold similar
positions with each of the other mutual funds sponsored by Principal Mutual Life
Insurance Company, except Principal Special Markets Fund, Inc. All mailing
addresses are The Principal Financial Group, Des Moines, Iowa 50392, unless
otherwise indicated.
@James D. Davis, 63, Director. 4940 Center Court, Bettendorf, Iowa.
Attorney. Vice President, Deere and Company, Retired.
*Roy W. Ehrle, 69, Director. 2424 Jordan Trail, West Des Moines, Iowa.
Retired. Prior thereto, Vice Chairman, Principal Mutual Life Insurance Company.
Vice Chairman of the Board and Director, Principal Management Corporation.
Chairman of the Board and Director, Invista Capital Management, Inc. Director,
Iowa Business Development Credit Corporation.
Pamela A. Ferguson, 54, Director. P.O. Box 805, Grinnell, Iowa. President
and Professor of Mathematics, Grinnell College since 1991.
@Richard W. Gilbert, 57, Director. 1357 Asbury Avenue, Winnetka, Illinois.
President, Gilbert Communications, Inc. since 1993. Prior thereto, President and
Publisher, Pioneer Press.
*&J. Barry Griswell, 48, Director and Chairman of the Board. Executive Vice
President, Principal Mutual Life Insurance Company, since 1996; Senior Vice
President, 1991-1996. Director and Chairman of the Board, Principal Management
Corporation and Princor Financial Services Corporation.
*&Stephan L. Jones, 62, Director and President. Vice President, Principal
Mutual Life Insurance Company since 1986. Director and President, Princor
Financial Services Corporation and Principal Management Corporation.
*Ronald E. Keller, 61, Director. Executive Vice President, Principal Mutual
Life Insurance Company since 1992. Prior thereto, Senior Vice President.
Director, Princor Financial Services Corporation and Principal Management
Corporation. Director and Chairman, Invista Capital Management, Inc.
@Barbara A. Lukavsky, 57, Director. 3930 Grand Avenue, Des Moines, Iowa.
President and CEO, Lu San ELITE USA, L.C.
&Richard G. Peebler, 68, Director. 1916 79th Street, Des Moines, Iowa. Dean
and Professor Emeritus, Drake University, College of Business and Public
Administration, since 1996. Prior thereto, Professor, Drake University, College
of Business and Public Administration.
*Craig L. Bassett, 45, Treasurer. Treasurer, Principal Mutual Life
Insurance Company since 1996. Prior thereto, Associate Treasurer.
*Michael J. Beer , 36, Financial Officer. Senior Vice President and Chief
Operating Officer, Princor Financial Services Corporation and Principal
Management Corporation, since 1997. Prior thereto, Vice President and Chief
Operating Officer.
David J. Brown, 37, Assistant Counsel. Counsel, Principal Mutual Life
Insurance Company since 1995; Attorney, 1994-1995. Prior thereto,
Attorney-at-Law, Dickinson, Mackaman, Tyler & Hagen, P.C.
Michael W. Cumings, 46, Assistant Counsel. Counsel, Principal Mutual Life
Insurance Company since 1989.
*Arthur S. Filean, 59, Vice President and Secretary. Vice President,
Princor Financial Services Corporation, since 1990. Vice President, Principal
Management Corporation, since 1996.
*Ernest H. Gillum, 42, Assistant Secretary. Assistant Vice President,
Registered Products, Princor Financial Services Corporation and Principal
Management Corporation, since 1995. Prior thereto, Product Development and
Compliance Officer.
Jane E. Karli, 40, Assistant Treasurer. Senior Accounting and Custody
Administrator, Principal Mutual Life Insurance Company since 1994; Senior
Investment Cost Accountant 1993-1994; Senior Investment Accountant 1992-1993.
Prior thereto, Manager-Investment Accounting and Treasury.
*Michael D. Roughton, 46, Counsel. Counsel, Principal Mutual Life Insurance
Company since 1994. Prior thereto, Assistant Counsel. Counsel, Invista Capital
Management, Inc., Princor Financial Services Corporation, Principal Investors
Corporation and Principal Management Corporation.
@ Member of Audit and Nominating Committee.
* Affiliated with the Manager of the Fund or its parent and considered an
"Interested Person," as defined in the Investment Company Act of 1940, as
amended.
& Member of the Executive Committee. The Executive Committee is elected by
the Board of Directors and may exercise all the powers of the Board of
Directors, with certain exceptions, when the Board is not in session and shall
report its actions to the Board.
The following information relates to compensation paid by each fund during
the fiscal year ended October 31, 1997.
Each Princor Fund Princor
except Princor Limited Limited Term
Director Term Bond Fund Bond Fund
-------- -------------- ---------
James D. Davis $_,___ $_,___
Roy W. Ehrle $_,___ $_,___
Pamela A. Ferguson $_,___ $_,___
Richard W. Gilbert $_,___ $_,___
Barbara A. Lukavsky $_,___ $_,___
Richard G. Peebler $_,___* $_,___
* Richard G. Peebler received $1,350 from each of the Principal funds. He
received an additional $150 from Princor Emerging Growth Fund, Princor
Capital Accumulation Fund and Princor Growth Fund and $75 from Princor World
Fund due to his participation in the executive committee of each of those
funds.
None of the mutual funds provide retirement benefits for any of the
directors. Total compensation from the 30 investment companies included in the
fund complex for the fiscal year ended October 31, 1997 was as follows:
James D. Davis $__,___ Richard W. Gilbert $__,___
Roy W. Ehrle $__,___ Barbara A. Lukavsky $__,___
Pamela A. Ferguson $__,___ Richard G. Peebler $__,___
As of October 31, 1997, Principal Mutual Life Insurance Company, a mutual
life insurance company organized in 1879 under the laws of Iowa, its
subsidiaries and affiliates owned of record and beneficially the following
number of voting shares or percentage of the outstanding voting shares of each
Fund:
------------------------------------------------------------------------
No. of Shares % of Outstanding
Fund Owned Shares Owned
---- ----- ------------
Balanced Fund
Blue Chip Fund
Bond Fund
Capital Value Fund
Cash Management Fund
Government Securities Income Fund
Growth Fund
International
Emerging Markets Fund
International Fund
International SmallCap Fund
High Yield Fund
Limited Term Bond Fund
MidCap Fund
Tax-Exempt Bond Fund
Tax-Exempt Cash Management Fund
Utilities Fund
------------------------------------------------------------------------
As of November 30, 1997, the Officers and Directors of each Fund as a group
owned less than 1% of the outstanding shares of any of the Funds. Other than as
noted in the above table, the Funds knew of no person who owned 5% or more of
the shares of any one Fund.
MANAGER AND SUB-ADVISOR
The Manager of each of the Funds is Principal Management Corporation
(formerly known as Princor Management Corporation), a wholly-owned subsidiary of
Princor Financial Services Corporation which is a wholly-owned subsidiary of
Principal Holding Company. Principal Holding Company is a holding company which
is a wholly-owned subsidiary of Principal Mutual Life Insurance Company, a
mutual life insurance company organized in 1879 under the laws of the state of
Iowa. The address of the Manager is The Principal Financial Group, Des Moines,
Iowa 50392-0200. The Manager was organized on January 10, 1969 and since that
time has managed various mutual funds sponsored by Principal Mutual Life
Insurance Company.
The Manager has executed an agreement with Invista Capital Management, Inc.
("Invista") under which Invista has agreed to assume the obligations of the
Manager to provide investment advisory services for each of the Growth-Oriented
Funds, the Government Securities Income Fund, the Limited Term Bond Fund and the
Utilities Fund. The Manager will reimburse Invista for the cost of providing
these services. Invista, an indirectly wholly-owned subsidiary of Principal
Mutual Life Insurance Company and an affiliate of the Manager, was founded in
1985 and manages investments for institutional investors, including Principal
Mutual Life Insurance Company. Assets under management at November 30, 1997 were
approximately $__._ billion. Invista's address is 1500 Hub Tower, 699 Walnut,
Des Moines, Iowa 50309.
The Manager, Invista and each of the Funds have adopted a Code of Ethics
designed to prevent persons with access to information regarding the portfolio
trading activity of the Funds from using that information for their personal
benefit. In certain circumstances personal securities trading is permitted in
accordance with procedures established by the Code of Ethics. The Board of
Directors for the Manager, Invista and each of the Funds periodically reviews
the Code of Ethics.
Each of the persons affiliated with a Fund who is also an affiliated person
of the Manager or Sub-Advisor is named below, together with the capacities in
which such person is affiliated:
<TABLE>
<CAPTION>
Office Held With Office Held With
Name Each Fund The Manager/Invista
---- ---------------------- ----------------------
<S> <C> <C>
Michael J. Beer Financial Officer Vice President and Chief Operating Officer (Manager)
Arthur S. Filean Vice President and Secretary Vice President (Manager)
Ernest H. Gillum Assistant Secretary Assistant Vice President, Registered Products
(Manager)
J. Barry Griswell Director and Chairman Director and Chairman of
of the Board the Board (Manager)
Stephan L. Jones Director and President Director and President (Manager)
Ronald E. Keller Director Director (Manager)
Director and Chairman of
the Board (Invista)
Michael D. Roughton Counsel Counsel (Manager; Invista)
</TABLE>
COST OF MANAGER'S SERVICES
For providing the investment advisory services, and specified other
services, the Manager, under the terms of the Management Agreement for each
Fund, is entitled to receive a fee computed and accrued daily and payable
monthly, at the following annual rates:
<TABLE>
<CAPTION>
Net Asset Value of Fund
First Next Next Next Over
$100,000,000 $100,000,000 $100,000,000 $100,000,000 $400,000,000
<S> <C> <C> <C> <C> <C>
Balanced, High Yield,
and Utilities Funds .60% .55% .50% .45% .40%
International Emerging Markets Fund 1.25% 1.20% 1.15% 1.10% 1.05%
International Fund .75% .70% .65% .60% .55%
International SmallCap Fund 1.20% 1.15% 1.10% 1.05% 1.00%
MidCap Fund .65% .60% .55% .50% .45%
Real Estate Fund .90% .85% .80% .75% .70%
SmallCap Fund .85% .80% .75% .70% .65%
All Other Funds .50% .45% .40% .35% .30%
</TABLE>
There is no assurance that any of the Funds' net assets will reach
sufficient amounts to be able to take advantage of the rate decreases. The net
asset value of each Fund on October 31, 1997 and the rate of the fee for each
Fund for investment management services as provided in the Management Agreement
for the fiscal year then ended were as follows:
------------------------------------------------------------------------------
Management Fee
Net Assets as of For Fiscal Year Ended
Fund October 31, 1997 October 31, 1997
---- ---------------- ----------------
Balanced Fund $ %
Blue Chip
Fund
Bond Fund
Capital Value Fund
Cash Management Fund
Government Securities Income Fund
Growth Fund
High Yield Fund
International Fund
International Emerging Markets Fund
International SmallCap Fund
Limited Term Bond Fund
MidCap Fund
Tax-Exempt Bond Fund
Tax-Exempt Cash Management Fund
Utilities Fund
* Before waiver.
------------------------------------------------------------------------------
Under a Sub-Advisory Agreement between Invista and the Manager, Invista
performs all the investment advisory responsibilities of the Manager under the
Management Agreement for the Growth-Oriented Funds, the Government Securities
Income Fund, the Limited Term Bond Fund and the Utilities Fund and is reimbursed
by the Manager for the cost of providing such services.
The Manager pays for office space, facilities and simple business equipment
and the costs of keeping the books of the Fund. The Manager also compensates all
personnel who are officers and directors, if such officers and directors are
also affiliated with the Manager.
Each Fund pays all its other corporate expenses incurred in the operation
of the Fund and the continuous public offering of its shares, but not selling
expenses. Among other expenses, the Fund pays its taxes (if any), brokerage
commissions on portfolio transactions, interest, the cost of stock issue and
transfer and dividend disbursement, administration of shareholder accounts,
custodial fees, expenses of registering and qualifying shares for sale after the
initial registration, auditing and legal expenses, fees and expenses of
unaffiliated directors, and costs of shareholder meetings. The Manager pays most
of these expenses in the first instance, and is reimbursed for them by the Fund
as provided in the Management Agreement. The Manager also is responsible for the
performance of certain of the functions described above, such as transfer and
dividend disbursement and administration of shareholder accounts, the cost of
which the Manager is reimbursed by the Fund.
Fees paid for investment management services during the periods indicated
were as follows:
- --------------------------------------------------------------------------------
Management Fees For
Fiscal Years Ended October 31,
Fund 1997 1996 1995
---- ---- ---- ----
Balanced Fund $ $ 404,461 $ 330,469
Blue Chip Fund 212,845 154,603
Bond Fund 534,366* 489,133*
Capital Value Fund 1,671,502 1,380,466
Cash Management 2,555,687* 1,980,472*
Government Securities Income Fund 1,223,631 1,165,241
Growth Fund 1,040,897 701,276
High Yield Fund 159,773 129,542
International Emerging Markets Fund
International Fund 1,154,783 881,227
International SmallCap Fund
Limited Term Bond Fund 18,619***
MidCap Fund 1,293,848 772,512
Tax-Exempt Bond Fund 888,967 828,825
Tax-Exempt Cash Management Fund 451,467* 471,994*
Utilities Fund 375,780* 367,403*
*Before waiver.
**Period from February 29, 1996 (Date Operations Commenced) through
October 31, 1996.
- --------------------------------------------------------------------------------
The Manager waived $__________ and $25,970 of its fee for the Limited Term
Bond Fund for the year ended October 31, 1997 and the period ended October 31,
1996, respectively. The Manager waived $_________, $28,413 and $86,318 of its
fee for the Bond Fund for the years ended October 31, 1997, 1996 and 1995,
respectively. The Manager also waived $__________, $76,266 and $138,673 of its
fee for the Tax-Exempt Cash Management Fund for the years ended October 31,
1997, 1996 and 1995, respectively. The Manager also waived $__________, $13,242
and $296,359 of its fee for the Cash Management Fund for the years ended October
31, 1997, 1996 and 1995, respectively. The Manager also waived $________,
$61,622 and $152,483 of its fee for the Utilities Fund for the years ended
October 31, 1997, 1996 and 1995, respectively.
Costs reimbursed to the Manager during the periods indicated for providing
other services pursuant to the Management Agreement were as follows:
- ------------------------------------------------------------------------------
Reimbursement by Fund
of Certain Costs For
Fiscal Years Ended October 31,
Fund 1997 1996 1995
---- ---- ---- ----
Balanced Fund $ $ 251,542 $ 220,147
Blue Chip Fund 206,942 146,409
Bond Fund 221,648 213,198
Capital Value Fund 567,786 510,906
Cash Management Fund 1,762,455 1,494,200
Government Securities Income Fund 394,360 435,625
Growth Fund 837,917 584,133
High Yield Fund 66,305 86,915
International Emerging Markets Fund
International Fund 598,305 525,897
International SmallCap Fund
Limited Term Bond Fund 32,982*
MidCap Fund 942,986 612,488
Tax-Exempt Bond Fund 145,931 193,662
Tax-Exempt Cash Management Fund 205,099 214,963
Utilities Fund 288,489 211,232
*Period from February 29, 1996 (Date Operations Commenced) through
October 31, 1996.
- ------------------------------------------------------------------------------
NOTE: The Manager voluntarily waived a portion of its fee for the Limited Term
Bond Fund from the date operations commenced and intends to continue such waiver
and, if necessary, pay expenses normally payable by the Limited Term Bond Fund
through the period ending February 28, 1998 in an amount that will maintain a
total level of operating expenses, which as a percent of average net assets
attributable to a class on an annualized basis will not exceed .90% for the
Class A shares, 1.25% for the Class B shares and 1.50% for the Class R shares.
The effect of the waiver was and will be to reduce the Fund's annual operating
expenses and increase the Fund's yield and effective yield.
NOTE: The Manager voluntarily waived a portion of its management fees for
Principal Cash Management Fund, Inc. and Principal Tax-Exempt Cash Management
Fund, Inc. throughout the fiscal years ended October 31, 1997, 1996 and 1995.
The Manager intends to continue its voluntary waiver and, if necessary, pay
expenses normally payable by each of these Funds through February 28, 1998 in an
amount that will maintain a total level of operating expenses which as a
percentage of average net assets attributable to a class on an annualized basis
during such periods will not exceed 0.75% of each Fund's Class A shares, 1.50%
of each Fund's Class B shares and 1.25% of Principal Cash Management Fund,
Inc.'s Class R shares. The effect of the waiver was and will be to reduce each
Fund's annual operating expenses and increase each Fund's yield and effective
yield.
NOTE: The Manager voluntary waived a portion of its fee for Principal Bond Fund
through February 28, 1993 in an amount that maintained a total level of
operating expenses for the Fund that did not exceed .90% of the Fund's average
net assets on an annualized basis during such period. The Manager waived a
portion of its fee for the period beginning March 1, 1993 and intends to
continue such waiver through February 28, 1998 in an amount that will maintain a
total level of operating expenses which as a percentage of the Fund's average
net assets attributable to a class on an annualized basis during such period did
not and will not exceed 0.95% of the Fund's Class A shares, 1.70% of the Fund's
Class B shares and 1.45% of the Fund's Class R shares. The effect of the waiver
was and will be to reduce the Fund's annual operating expenses and increase the
Fund's yield.
NOTE: The Manager voluntarily waived a portion of its fee for the Utilities Fund
from the date operations commenced and continued such waiver through the period
ending February 28, 1995 in an amount that maintained a total level of operating
expenses which as a percentage of the Fund's average net assets attributable to
a class on an annualized basis did not exceed 1.00% of the Fund's Class A shares
and did not exceed 1.75% of the Fund's Class B shares. The Manager continued its
voluntary waiver for the period beginning March 1, 1995 and ended February 29,
1996 in an amount that maintained a total level of operating expenses which as a
percentage of the Fund's average net assets attributable to a class on an
annualized basis did not exceed 1.10% of the Fund's Class A shares and 1.85% of
the Fund's Class B shares. The Manager continued its voluntary waiver for the
period beginning March 1, 1996 and intends to continue such waiver and, if
necessary, pay expenses normally payable by the Fund through February 28, 1998
in an amount that will maintain a total level of operating expenses which as a
percentage of the Fund's average net assets attributable to a class on an
annualized basis did not and will not exceed 1.15% of the Fund's Class A shares,
1.90% of the Fund's Class B shares and 1.65% for the Fund's Class R shares.
The Management Agreements and the Investment Service Agreements, pursuant
to which Principal Mutual Life Insurance Company has agreed to furnish certain
personnel, services and facilities required by the Manager, and the Sub-Advisory
Agreements for each of the Growth-Oriented Funds (except Real Estate and
SmallCap Funds), the Government Securities Income Fund and the Limited Term Bond
Fund were last approved by the Board of Directors for each of the Funds on
September 8, 1997. Each of these agreements for the Real Estate Fund, which are
dated June 9, 1997, and for the SmallCap Fund, which are dated September 8,
1997, provide for continuation in effect until the conclusion of the first
meeting of shareholders of the Funds, and if approved by a vote of the
outstanding voting securities of the Funds, shall continue in effect in the same
manner as such agreements for the other Principal Funds. Each of these
agreements provides for continuation in effect from year to year only so long as
such continuation is specifically approved at least annually either by the Board
of Directors of the Fund or by vote of a majority of the outstanding voting
securities of the Fund, provided that in either event such continuation shall be
approved by vote of a majority of the Directors who are not "interested persons"
(as defined in the Investment Company Act of 1940) of the Manager, Principal
Mutual Life Insurance Company or its subsidiaries or the Fund, cast in person at
a meeting called for the purpose of voting on such approval. The Agreements may
be terminated at any time on 60 days written notice to the Manager by the Board
of Directors of the Fund or by a vote of a majority of the outstanding
securities of the Fund and by the Manager, Invista or Principal Mutual Life
Insurance Company, as the case may be, on 60 days written notice to the Fund.
The Agreements will automatically terminate in the event of their assignment.
The Manager assumed management of the International Fund's portfolio on
August 1, 1988. Prior to that time, the previous Investment Advisor for the
World Fund, as compensation for its services to the Fund, had been receiving
monthly compensation in the form of an advisory fee at an annual rate of 1/2 of
1% of the average daily net assets of the Fund. In addition, the Investment
Advisor received an annual fee, paid monthly, for the administrative services at
an annual rate of 1.5% of the first $10,000,000 of the Fund's average net assets
during the month preceding each payment, decreasing to 1% on assets in excess of
$10,000,000 and 1/2 of 1% of the Fund's assets in excess of $30,000,000.
Overall, the Fund's aggregate expenses for any fiscal year other than taxes,
brokerage fees, Directors' fees, commissions, and extraordinary expenses, such
as litigation, could not exceed 2% of the first $10,000,000 of the Fund's total
net assets, 1.5% of the next $20,000,000 and 1% of the Fund's total net assets
in excess of $30,000,000. The aggregate of these two fees could have amounted to
a maximum of 2.0% of net assets, which is higher than most funds pay as an
advisory fee; however, the administrative services fee included payment for
certain expenses most other funds are required to pay themselves. Under the
prior agreement, when the accrued amount of such expenses exceeded the 2% limit
the monthly payment to the Advisor was reduced by the amount of such excess. For
the seven-month period ended July 31, 1988, the Fund paid the previous
Investment Advisor $9,811 for investment advisory services and $29,433 for
administrative services and other expenses.
BROKERAGE ON PURCHASES AND SALES OF SECURITIES
In distributing brokerage business arising out of the placement of orders
for the purchase and sale of securities for any Fund, the objective of the
Fund's Manager or Sub-Advisor is to obtain the best overall terms. In pursuing
this objective, the Manager or Sub-Advisor considers all matters it deems
relevant, including the breadth of the market in the security, the price of the
security, the financial condition and executing capability of the broker or
dealer and the reasonableness of the commission, if any (for the specific
transaction and on a continuing basis). This may mean in some instances that the
Manager or Sub-Advisor will pay a broker commissions that are in excess of the
amount of commission another broker might have charged for executing the same
transaction when the Manager or Sub-Advisor believes that such commissions are
reasonable in light of (a) the size and difficulty of transactions (b) the
quality of the execution provided and (c) the level of commissions paid relative
to commissions paid by other institutional investors. (Such factors are viewed
both in terms of that particular transaction and in terms of all transactions
that broker executes for accounts over which the Manager or Sub-Advisor
exercises investment discretion. The Manager or Sub-Advisor may purchase
securities in the over-the-counter market, utilizing the services of principal
market makers, unless better terms can be obtained by purchases through brokers
or dealers, and may purchase securities listed on the New York Stock Exchange
from non-Exchange members in transactions off the Exchange.) The Manager or
Sub-Advisor gives consideration in the allocation of business to services
performed by a broker (e.g. the furnishing of statistical data and research
generally consisting of information of the following types: analyses and reports
concerning issuers, industries, economic factors and trends, portfolio strategy
and performance of client accounts). If any such allocation is made, the primary
criteria used will be to obtain the best overall terms for such transactions.
The Manager or Sub-Advisor may pay additional commission amounts for research
services. Such ees and the Manager or Sub-Advisor may use it in servicing some
or all of the accounts it manages. Some statistical data and research
information may not be useful to the Manager or Sub-Advisor in managing the
client account, brokerage for which resulted in the Manager's or Sub-Advisor's
receipt of the statistical data and research information. However, in the
Manager's or Sub-Advisor's opinion, the value thereof is not determinable and it
is not expected that the Manager's or Sub-Advisor's expenses will be
significantly reduced since the receipt of such statistical data and research
information is only supplementary to the Manager's or Sub-Advisor's own research
efforts. The Manager or Sub-Advisor allocated portfolio transactions for the
Funds indicated in the following table to certain brokers during the fiscal year
ended October 31, 1997 due to research services provided by such brokers. The
table also indicates the commissions paid to such brokers as a result of these
portfolio transactions.
--------------------------------------------
Fund Commissions Paid
---- ----------------
Balanced $
Blue Chip
Capital Accumulation
Emerging Growth
Growth
High Yield
World
--------------------------------------------
Purchases and sales of debt securities and money market instruments usually
will be principal transactions; portfolio securities will normally be purchased
directly from the issuer or from an underwriter or marketmaker for the
securities. Such transactions are usually conducted on a net basis with the Fund
paying no brokerage commissions. Purchases from underwriters will include a
commission or concession paid by the issuer to the underwriter, and the
purchases from dealers serving as marketmakers will include the spread between
the bid and asked prices.
The following table shows the brokerage commissions paid during the periods
indicated. In each year, 100% of the commissions paid by each Fund went to
broker-dealers which provided research, statistical or other factual
information.
- -------------------------------------------------------------------------------
Total Brokerage Commissions Paid
During Fiscal Years Ended
October 31,
Fund 1997 1996 1995
---- ---- ---- ----
Balanced Fund $ $ 41,537 $ 34,622
Blue Chip Fund 17,198 21,040
Capital Value Fund 375,742 335,720
Growth Fund 64,704 56,733
International Emerging Markets Fund*
International Fund 338,670 360,682
International SmallCap Fund* N/A N/A
MidCap Fund 99,466 59,471
Utilities Fund 70,140 27,861
* Period from August 14, 1997 (date operations commenced) through
October 31, 1997.
- -------------------------------------------------------------------------------
Brokerage commissions paid to affiliates during the year ended October 31,
1997 were as follows:
Commissions Paid to Principal Financial Securities, Inc.
- -------------------------------------------------------------------------------
Total Dollar As Percent of As Percent of Dollar Amount
Fund Amount Total Commissions of Commissionable Transactions
---- ------ ----------------- ------------------------------
Capital Value Fund $ % %
Utilities Fund % %
Commissions Paid to Morgan Stanley and Co.
- -------------------------------------------------------------------------------
Total Dollar As Percent of As Percent of Dollar Amount
Fund Amount Total Commissions of Commissionable Transactions
---- ------ ----------------- ------------------------------
Balanced Fund $ % %
Blue Chip Fund % %
Capital Value Fund % %
International Fund % %
MidCap Fund % %
Morgan Stanley and Co. is affiliated with Morgan Stanley Asset Management,
Inc., which acts as sub-advisor to two mutual funds included in the Fund
complex.
The Manager acts as investment advisor for each of the funds sponsored by
Principal Mutual Life Insurance Company and it, or Invista where Invista acts as
sub-advisor, places orders to trade portfolio securities for each of these
Funds. If, in carrying out the investment objectives of the funds, occasions
arise when purchases or sales of the same equity securities are to be made for
two or more of the funds at the same time, a computer program will randomly
order the instructions to purchase and, whenever possible, to sell securities.
Securities purchased or proceeds of sales received on each trading day with
respect to such orders shall be allocated to the various funds placing orders on
that trading day by filling each fund's order for that day, in the sequence
arrived at by the random ordering. If purchases or sales of the same debt
securities are to be made for two or more of the Funds at the same time, the
securities will be purchased or sold proportionately in accordance with the
amount of such security sought to be purchased or sold at that time for each
Fund.
HOW TO PURCHASE SHARES
Each Fund, except the Tax-Exempt Bond Fund and Tax-Exempt Cash Management
Fund, offers investors three classes of shares which bear sales charges in
different forms and amounts: Class A, Class B and Class R shares. The Tax-Exempt
Bond Fund offers only Class A and Class B shares. The Tax-Exempt Cash Management
Fund offers only Class A shares. Class A Shares. An investor who purchases less
than $1 million of Class A shares (except Class A shares of the Money Market
Funds) pays a sales charge at the time of purchase. As a result, such shares are
not subject to any charges when they are redeemed. An investor who purchases $1
million or more of Class A shares does not pay a sales charge at thetime of
purchase. However, a redemption of such shares occurring within 18 months from
the date of purchase will be subject to a contingent deferred sales charge
("CDSC") at the rate of .75% (.25% for the Limited Term Bond Fund) the lesser of
the value of the shares redeemed (exclusive of reinvested dividend and capital
gain distributions) or the total cost of such shares. Shares subject to the CDSC
which are exchanged into another Principal Fund will continue to be subject to
the CDSC until the original 18 month period expires. However no CDSC is payable
with respect to redemption of Class A shares used to fund a Princor 401(a) or
Princor 401(k) retirement plan, except redemptions resulting from the
termination of the plan or transfer of plan assets. In addition, the CDSC will
be waived in connection with 1) redemption of shares from retirement plans to
satisfy minimum distribution rules under the Code or 2) shares redeemed through
a systematic withdrawal plan that permits up to 10% of the value of a
shareholder's Class A shares of a particular Fund on the last business day of
December of each year to be withdrawn automatically in equal monthly
installments throughout the year. Certain purchases of Class A shares qualify
for reduced sales charges. Class A shares for each Fund, except the Money Market
Funds, currently bear a 12b-1 fee at the annual rate of up to 0.25% (0.15% for
the Limited Term Bond Fund) of the Fund's average net assets attributable to
Class A shares. See "Distribution Plan."
Class B Shares. Class B shares are purchased without an initial sales
charge, but are subject to a declining CDSC of up to 4% (1.25% for the Limited
Term Bond Fund) if redeemed within six years. See "Offering Price of Funds'
Shares." Class B shares bear a higher 12b-1 fee than Class A shares, currently
at the annual rate of up to 1.00% (.50% for the Limited Term Bond Fund) of the
Fund's average net assets attributable to Class B shares. See "Distribution
Plan." Class B shares provide an investor the benefit of putting all of the
investor's dollars to work from the time the investment is made, but (until
conversion to Class A shares) will have a higher expense ratio and pay lower
dividends than Class A sharesdue to the higher 12b-1 fee. Class B shares will
automatically convert into Class A shares, based on relative net asset value
(without a sales charge), on the first business day of the 85th month after the
purchase date. Class B shares acquired by exchange from Class B shares of
another Principal Fund will convert into Class A shares based on the time of the
initial purchase. At the same time, a pro rata portion of all shares purchased
through reinvestment of dividends and distributions would convert into Class A
shares, with that portion determined by the ratio that the shareholder's Class B
shares converting into Class A shares bears to the shareholder's total Class B
shares that were not acquired through dividends and distributions. The
conversion of Class B shares to Class A shares is subject to the continuing
availability of a ruling from the Internal Revenue Service or an opinion of
counsel that such conversions will not constitute taxable events for Federal tax
purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not occur
if such ruling or opinion is not available. In such event, Class B shares would
continue to be subject to higher expenses than Class A shares for an indefinite
period.
Purchasing Class A and Class B shares. Purchases are generally made through
registered representatives of Princor or other dealers it selects. If an order
and check are properly submitted to Princor, the shares will be offered at the
offering price next computed after the order and check are received at Princor's
main office. If fund shares are purchased by telephone order or electronic means
and thereafter settled by delivery of a check or a payment by wire, the shares
so purchased will be issued at the offering price next computed after the
telephone or electronic order are received at Princor's main office. If an order
and check are submitted through a selected dealer, the shares will be issued in
accordance with the following: An order accepted by a dealer on any day before
the close of the New York Stock Exchange and received by Princor before the
close of its business on that day will be executed at the offering price
computed of the close of the Exchange on that day. An order accepted by such
dealer after the close of the Exchange and received by Princor before its
closing on the following business day will be executed at the offering price
computed as of the close of the Exchange on such following business day. Dealers
have the responsibility to transmit orders to Princor promptly. After an open
account has been established, purchases will be executed at the price next
computed after receipt of the investor's check at Princor's main office. All
orders are subject to acceptance by the Fund or Funds and Princor.
Redemptions by shareholders investing by check will be effected only after
payment has been collected on the check, which may take up to eight days or
more. Investors considering redeeming or exchanging shares or transferring
shares to another person shortly after purchase should pay for those shares with
a certified check, bank cashier's check or money order to avoid any delay in
redemption, exchange or transfer.
Which arrangement between Class A and Class B Shares is better for an
investor? The decision as to which class of shares provides a more suitable
investment for an investor depends on a number of factors, including the amount
and intended length of the investment. Investors making investments that qualify
for reduced sales charges might consider Class A shares. Investors who prefer
not to pay an initial sales charge and who plan to hold their investment for
more than seven years might consider Class B shares. Orders from individuals for
Class B shares for $250,000 or more will be treated as orders for Class A shares
unless the shareholder provides written acknowledgment that the order should be
treated as an order for Class B shares. Sales personnel may receive different
compensation depending on which class of shares are purchased.
Class R Shares. Class R shares are purchased without an initial sales
charge or a contingent deferred sales charge ("CDSC"). Class R shares bear a
higher 12b-1 fee than Class A shares, currently at the annual rate of up to .75%
of the Fund's average net assets attributable to Class R shares. See
"Distribution and Shareholder Servicing Plans and Fees." Class R shares provide
an investor the benefit of putting all of the investor's dollars to work from
the time the investment is made, but (until conversion to Class A shares) will
have a higher expense ratio and pay lower dividends than Class A shares due to
the higher 12b-1 fee. Class R shares will automatically convert to Class A
shares, based on relative net asset value (without a sales charge), on the first
business day of the 49th month after the purchase date. Class R shares acquired
by exchange from Class R shares of another Principal Fund will convert into
Class A shares based on the time of the initial purchase. (See "How to Exchange
Shares".) At the same time, a pro rata portion of all shares purchased through
reinvestment of dividends and distributions would convert into Class A shares,
with that portion determined by the ratio that the shareholder's Class R shares
converting into Class A shares bears to the shareholder's total Class R shares
that were not acquired through dividends and distributions. The conversion of
Class R shares to Class A shares is subject to the continuing availability of a
ruling from the Internal Revenue Service or an opinion of counsel that such
conversions will not constitute taxable events for Federal tax purposes. There
can be no assurance that such ruling or opinion will be available, and the
conversion of Class R shares to Class A shares will not occur if such ruling or
opinion is not available. In such event, Class R shares would continue to be
subject to higher expenses that Class A shares for an indefinite period.
Purchasing Class R Shares. Class R shares are offered only to: (1) people
who receive lump sum distributions (other than distributions received as a
result of a plan termination) from certain retirement plans administered by
Principal Mutual Life Insurance Company under the terms of a written service
agreement ("Administered Employee Benefit Plans" or "AEBP") to fund Individual
Retirement Accounts ("IRA's") and to shareholders of Class R shares for any
purpose; and (2) mortgagors of mortgages serviced by Principal Mutual Life
Insurance Company, its subsidiaries or affiliates. Purchases are generally made
by completing an Account Application or a Princor IRA Application and mailing it
to Princor. Shares will be issued at the offering price next computed after the
application is received at Princor's main office and Princor receives the amount
to be invested. Generally, the initial amount to be invested in a Princor IRA
will be directly transferred to Princor from the AEBP. However, in some cases
the investor will purchase shares by check. If investing by check, shares will
be issued at the offering price next computed after the completed application
and check are received at Princor's main office. Subsequent purchases will be
executed at the price next computed after receipt of the investor's check at
Princor's main office. All orders are subject to acceptance by the Fund or Funds
and Princor.
Redemptions by shareholders investing by check will be effected only after
payment has been collected on the check, which may take up to 15 days or more.
Investors considering redeeming or exchanging shares shortly after purchase
should pay for those shares with a certified check, bank cashier's check or
money order to avoid any delay in redemption, exchange or transfer.
OFFERING PRICE OF FUNDS' SHARES
The Funds offer their respective shares continuously through Princor, which
is the principal underwriter for the Funds and sells shares as agent on behalf
of the Funds. Princor may select other dealers through which shares of the Funds
may be sold. Certain dealers may not sell all classes of shares.
Class A shares
Class A shares of the Money Market Funds are sold to the public at net
asset value; no sales charge applies to purchases of the Money Market Funds.
Class A shares of the Growth-Oriented and Income-Oriented Funds, except the
Limited Term Bond Fund, are sold to the public at the net asset value plus a
sales charge which ranges from a high 4.75% to a low of 0% of the offering price
(equivalent to a range of 4.99% to 0% of the net amount invested) according to
the schedule below. Class A shares of the Limited Term Bond Fund are sold to the
public at the net asset value plus a sales charge which ranges from a high of
1.50% to a low of 0% of the offering price according to the schedule below.
Selected dealers are allowed a concession as shown. At Princor's discretion, the
entire sales charge may at times be reallowed to dealers. In some situations,
depending on the services provided by the dealer, the concession may be less.
Any dealer allowance on purchases not involving a sales charge will be
determined by Princor. Upon notice to all broker-dealers with whom it has a
selling agreement, Princor may allow to broker-dealers electing to participate
up to the full applicable sales charge, as shown in the table below, during
periods and for transactions specified in such notice, and such reallowances may
be based in whole or in part upon attainment of minimum sales levels. Certain
commercial banks may make shares of the Funds available to their customers on an
agency basis. Pursuant to the agreements between Princor and such banks all or a
portion of the sales charge paid by a bank customer in connection with a
purchase of Fund shares may be retained by or remitted to the bank. The
Glass-Steagall Act prohibits banks from underwriting securities, including fund
shares; the Act does, however, permit certain agency transactions and banking
regulators have ruled that these particular agency transactions are not
prohibited under the Act. The Fund will obtain a representation from the banks
doing business in Texas or dealing with Texas residents that they will be
licensed as dealers as required by the Texas Securities Act, or that they will
not engage in activities which would constitute acting as a "dealer" as defined
under the Act.
<TABLE>
<CAPTION>
Sales Charge for
All Funds Except Sales Charge for Dealer Allowance as
Limited Term Bond Fund Limited Term Bond Fund % of Offering Price
Sales Charge as % of: Sales Charge as % of: All Funds Limited
Offering Amount Offering Amount Except Limited Term
Amount of Purchase Price Invested Price Invested Term Bond Fund Bond Fund
------------------ ----- -------- ----- -------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Less than $50,000 4.75% 4.99% 1.50% 1.52% 4.00% 1.25%
$50,000 but less than $100,000 4.25% 4.44% 1.25% 1.27% 3.75% 1.00%
$100,000 but less than $250,000 3.75% 3.90% 1.00% 1.01% 3.25% 0.75%
$250,000 but less than $500,000 2.50% 2.56% 0.75% 0.76% 2.00% 0.50%
$500,000 but less than $1,000,000 1.50% 1.52% 0.50% 0.50% 1.25% 0.25%
$1,000,000 or more No Sales Charge 0% No Sales Charge 0% .75% 0.25%
</TABLE>
Rights of Accumulation. The applicable sales charge is determined by adding
the current net asset value of any Class A shares and Class B shares already
owned by the investor to the amount of the new purchase. The corresponding
percentage factor in the schedule is then applied to the entire amount of the
new purchase. For example, if an investor currently owns Class A or Class B
shares with a value of $5,000 and makes an additional investment of $45,000 in
Class A shares of a Growth-Oriented Fund (the total of which equals $50,000),
the charge applicable to the $45,000 investment would be 4.25% of the offering
price. If the investor purchases shares of more than one Principal Fund at the
same time, those purchases are aggregated and added to the net asset value of
the shares of Principal Funds already owned by the investor to determine the
sales charge for the new purchase. Class A shares of the Money Market Funds are
not counted in determining either the amount of a new purchase or the current
net asset value of shares already owned, unless the shares of the Money Market
Funds were acquired in exchange for shares of other Principal Funds. If the
investor purchases shares from a broker/dealer other than Princor, the dealer
should be advised of any shares already owned.
Investments made by an individual, or by an individual's spouse and
dependent children purchasing shares for their own account or by a trust
primarily for the benefit of such persons, or by a trustee or other fiduciary
purchasing for a single trust estate or single fiduciary account (including a
pension, profit-sharing, or other employee-benefit trust created pursuant to a
plan qualified under Section 401 of the Internal Revenue Code) will be treated
as investments made by a single investor in calculating the sales charge. Other
groups (as allowed by rules of the Securities and Exchange Commission) may be
considered for a reduced sales charge. An investor whose new account qualifies
for a reduced charge on the basis of other accounts owned by the individual,
spouse or children, should be certain to identify those accounts at the time of
the new application.
Statement of Intention. Another method is available by which a purchaser
may qualify for a reduced sales charge on the purchase of Class A shares of the
Funds. A purchaser may execute a Statement of Intention indicating the total
amount (excluding reinvested dividends and capital gains distributions) intended
to be invested (including all investments for the account of the spouse and
dependent children or trusts for the benefit of such persons) in Class A shares
(except Class A shares of the Money Market Funds) and Class B shares of the
Funds within a thirteen-month period (two-year period if the intended investment
is made by a trustee of a Section 401(a) plan or is equal to or greater than $1
million). The Statement of Intention may be submitted by a shareholder other
than a trustee of a 401(a) plan, within 90 days after the date of the first
purchase to be included within the Statement of Intention period. A trustee of a
401(a) plan must submit the Statement of Intention at the time the first plan
purchase is made; the Statement of Intention may not be submitted after the
initial plan purchase and the 90 day backdating is not available. The Statement
of Intention period will begin on the date of the first purchase included for
purposes of satisfying the statement. When an existing shareholder submits a
Statement of Intention, the net asset value of all Class A shares (except Class
A shares of the Money Market Funds) and Class B shares in that shareholder's
account or accounts combined for rights of accumulation purposes, is added to
the amount that has been indicated will be invested during the applicable
period, and the sales charge applicable to all purchases of Class A shares made
under the Statement of Intention is the sales charge which will apply to a
single purchase of this total amount.
A Statement of Intention may be entered into for any amount provided such
amount, when added to the net asset value of any shares already held, equals or
is in excess of the amount needed to qualify for a reduced sales charge. In the
event a shareholder invests an amount in excess of the indicated amount, such
excess will be allowed any further reduced sales charge for which it qualifies.
The Statement of Intention provides for a price adjustment if the amount
actually invested is less than the amount specified therein. Sufficient Class A
shares belonging to the shareholder, other than a shareholder that is 401(a)
qualified plan trustee, will be held in escrow in the shareholder's account by
Princor to make up any difference in sales charges based on the amount actually
purchased. If the intended investment is completed within the thirteen-month
period (or two-year period), such shares will be released to the shareholder. If
the total intended investment is not completed within that period shares will,
to the extent necessary, be redeemed and the proceeds used to pay the additional
sales charge due. A shareholder that is 401(a) qualified plan trustee will be
billed by Princor Financial Services Corporation for any additional sales charge
due at the end of the two-year period. In any event, the sales charge applicable
to these purchases will be no more than the applicable sales charge had the
shareholder made all of such purchases at one time. The Statement of Intention
does not constitute an obligation on the shareholder to purchase, nor the Funds
to sell, the amount indicated.
Purchases at Net Asset Value. The following may purchase Class A shares of
the Growth-Oriented Funds and Income-Oriented Funds at the net asset value,
without a sales charge: (1) Principal Mutual Life Insurance Company and its
directly and indirectly owned subsidiaries; (2) Active and retired directors,
officers and employees of the Fund, Principal Mutual Life Insurance Company, and
directly and indirectly owned subsidiaries of Principal Mutual Life Insurance
Company (including full-time insurance agents of, and persons who have entered
into insurance brokerage contracts with, Principal Mutual Life Insurance Company
and its directly and indirectly owned subsidiaries and employees of such
persons); (3) The Principal Financial Group Employee's Credit Union; (4)
Non-ERISA investment advisory clients of Invista Capital Management, Inc., an
indirectly wholly-owned subsidiary of Principal Mutual Life Insurance Company;
(5) Sales representatives and employees of sales representatives of the
Distributor or other dealers through which shares of the Fund are distributed;
(6) Spouses, surviving spouses and dependent children of the foregoing persons;
and (7) Trusts primarily for the benefit of the foregoing individuals; (8)
certain "wrap accounts" for the benefit of clients of Princor and other Broker
dealers or financial planners selected by Princor; (9) Unit Investment Trusts
sponsored by Principal Mutual Life Insurance Company, and/or its directly or
indirectly owned subsidiaries; and (10) certain employee welfare benefit plan
customers of Principal Mutual Life Insurance Company for whom Plan Deposit
Accounts are established.
Each of the Funds, except Principal Tax-Exempt Bond Fund and Principal
Tax-Exempt Cash Management Fund, have obtained an exemptive order from the
Securities and Exchange Commission ("SEC") to permit each Fund to offer its
shares at net asset value to participants of certain annuity contracts issued by
Principal Mutual Life Insurance Company. In addition, each of these Funds are
available at net asset value to the extent the investment represents the
proceeds from a total surrender of certain unregistered annuity contracts issued
by Principal Mutual Life Insurance Company and for which Principal Mutual Life
Insurance Company waives any applicable contingent deferred sales charges or
other contract surrender charges.
In addition, investors who are clients of a registered representative of
Princor or other dealers through which shares of the Funds are distributed and
who has become affiliated with Princor or such other dealer within 180 days of
the date of the purchase of Class A shares of the Funds may purchase such shares
at net asset value provided that (i) the purchase is made within the first 180
days of the registered representative's affiliation with the firm involved (as
certified by an officer or partner of the firm); and (ii) the investment
represents the proceeds of a redemption within that 180 day period of shares of
another investment company the purchase of which included a front-end sales
charge or the redemption of which included a contingent deferred sales charge;
and (iii) the investor indicates on the account application that the purchase
qualifies for a net asset value purchase and forwards to Princor either (a) the
redemption check representing the proceeds of the shares redeemed, endorsed to
the order of Princor, or (b) a copy of the confirmation from the other
investment company showing the redemption transaction. In the case of a wire
purchase pursuant to this provision, a copy of the confirmation from the other
investment company showing the redemption must be forwarded to and received by
Princor within 21 days following the date of purchase. If the confirmation is
not provided within the 21-day period, a sufficient number of shares will be
redeemed from the shareholder's account to pay the otherwise applicable sales
charge. Investors availing themselves of this option should be aware that a
redemption from another mutual fund will be a taxable event and may be subject
to a surrender charge imposed by that fund.
Also during the period beginning December 1, 1997 and ending January 31,
1998, investors may purchase Class A shares of the Funds at net asset value to
the extent that this investment represents the proceeds of a redemption, within
the preceding 60 days, of shares (the purchase price of which shares included a
front-end sales charge on the redemption of which was subject to a contingent
deferred sales charge) of another investment company. This provision does not
apply to purchase of Class A shares used to fund a defined contribution plan.
When making a purchase at net asset value pursuant to this provision, the
investor must indicate on the account application that the purchase qualifies
for a net asset value purchase and must forward to Princor either (i) the
redemption check representing the proceeds of the shares redeemed, endorsed to
the order of Princor Financial Services Corporation, or (ii) a copy of the
confirmation from the other investment company showing the redemption
transactions. In the case of a wire purchase pursuant to this provision, a copy
of the confirmation from the other investment company showing the redemption
must be forwarded to and received by Princor within 21 days following the date
of purchase. If the confirmation is not provided within the 21-day period, a
sufficient number of shares will be redeemed from the shareholder's account to
pay the otherwise applicable sales charge.
Purchases at a Reduced Sales Charge. A reduced sales charge is also
available for purchases of Class A shares of the Funds, except the Limited Term
Bond Fund, to the extent that the investment represents either the proceeds from
a total surrender of a Pension Builder Annuity Contract ( an unregistered fixed
annuity contract issued by Principal Mutual Life Insurance Company) or the death
benefit proceeds of one or more life insurance policies or annuity contracts
(other than an annuity contract issued to fund an employer-sponsored retirement
plan that is not a SEP, salary deferral 403(b) plan or HR-10 plan) of which the
shareholder is a beneficiary if one or more of such policies or contracts is
issued by Principal Mutual Life Insurance Company, or any directly or indirectly
owned subsidiary of Principal Mutual Life Insurance Company, and such investment
is made in any Principal Fund within one year after the date of death of the
insured. (Shareholders should seek advice from their tax advisors regarding the
tax consequences of distributions from annuity contracts.) Such shares may be
purchased at net asset value plus a sales charge which ranges from a high of
2.50% to a low of 0% of the offering price (equivalent to a range of 2.56% to 0%
of the net amount invested) according to the schedule below:
- --------------------------------------------------------------------------------
Sales Charge as a % of:
Net Dealer Allowance as %
Offering Amount of Offering
Amount of Purchase Price Invested Price
------------------ ----- -------- -----
Less than $500,000 2.50% 2.56% 2.10%
$500,000 but less than $1,000,000 1.50% 1.52% 1.25%
$1,000,000 or more No Sales Charge 0% .75%
- --------------------------------------------------------------------------------
Sales Charges for Employer-Sponsored Plans
Administered Employee Benefit Plans. Class A shares of the Growth-Oriented
Funds and Income-Oriented Funds, except Principal Limited Term Bond Fund and, in
certain circumstances, Principal Tax-Exempt Bond Fund which is not available for
certain retirement plans, are sold at net asset value to stock bonus, pension or
profit sharing plans that meet the requirements for qualification under Section
401 of the Internal Revenue Code of 1986, as amended, certain Section 403(b)
Plans, Section 457 Plans and other Non-qualified Plans administered by Principal
Mutual Life Insurance Company pursuant to a written service agreement
("Administered Employee Benefit Plans"). The service agreement between Principal
Mutual Life Insurance Company and the employer relating to the administration of
the plan includes a charge payable by the employer for any commissions which
Princor is authorized to pay in connection with such sales. Principal Mutual
Life Insurance Company in turn pays the amount of these charges to Princor. The
commission payable by Princor in connection with any such sale will be
determined in accordance with one of the following schedules:
---------------------------------------------------------------------------
Schedule 1
----------
---------------------------------------------------------------------------
Amount of Plain Contributions* Amount Payable by Employer as
In each year a Percent of Plan Contributions
------------------------------ -------------------------------
The first $5,000 4.50%
The next $5,000 3.00%
The next $5,000 1.70%
The next $35,000 1.40%
The next $50,000 0.90%
The next $400,000 0.60%
Excess over $500,000 0.25%
---------------------------------------------------------------------------
Schedule 2
----------
---------------------------------------------------------------------------
The first $50,000 3.00%
The next $50,000 2.00%
The next $400,000 1.00%
The next $2,500,000 0.50%
Excess over $3,000,000 0.25%
---------------------------------------------------------------------------
* Plan contributions directed to an annuity contract issued by Principal
Mutual Life Insurance Company to fund the plan are combined with
contributions directed to the Funds to determine the applicable
commission charge.
---------------------------------------------------------------------------
Generally, the commission level described in Schedule 2 will apply for
salary deferral Plans and the commission level described in Schedule 1 will
apply to other plans. No commission will be payable by the employer if shares of
the Funds used to fund an Administered Employee Benefit Plan are purchased
through a registered representative of Princor Financial Services Corporation
who is also a Group Insurance Representative employee of Principal Mutual Life
Insurance Company.
Plans Other than Administered Employee Benefit Plans. Shares of the Funds
are offered to fund certain sponsored Princor plans. These plans currently
include certain qualified retirement plans (stock bonus, pension or profit
sharing plans that meet the requirements for qualification under Section 401 of
the Internal Revenue Code of 1986, as amended), SIMPLE IRA Plans, Simplified
Employee Pension Plans ("SEPs"), Salary Reduction Simplified Employee Pension
Plans ("SAR/SEPs"), Non-Qualified Deferred Compensation Plans, Payroll Deduction
Plans ("PDPs"), Plan Term PDP and certain Association Plans. A PDP is an
arrangement whereby an employer, or a trustee of a terminating qualified
retirement plan enters into a written agreement with Princor permitting the
solicitation of its employees or the plan participants. A PDP is not available
for 403(b) plans. PDP investments are made by or through an employer/trustee on
behalf of the employees/participants by means of periodic payroll deductions, or
otherwise. An Association Plan is an arrangement whereby an association enters
into a written agreement with Princor permitting the solicitation of the
association's members. Other types of sponsored plans may be added in the
future.
When establishing an employer-sponsored plan, the employer chooses whether
to fund the plan with either Class A shares or Class B shares. If Class A shares
are used to fund the plan, all plan investments will be treated as made by a
single investor to determine whether a reduced sales charge is available. The
sales charge for purchases of less than $250,000 is 3.75% as a percentage of the
offering price and 3.90% of the net amount invested. The regular sales charge
table for Class A shares applies to purchases of $250,000 or more. Plan assets
will not be combined with investments made outside of the plan by an employee,
the employee's spouse and dependent children, or trusts primarily for the
benefit of such persons, to determine the sales charge applicable to such
investments. Investments made by plan participants outside of the plan will not
be included with plan assets to determine the sales charge applicable to the
plan.
If Class B shares are used to fund the plan and a plan participant has
$250,000 or more invested in Class B shares, Class A shares will be purchased
with plan contributions attributable to the plan participant, unless the plan
participant elects otherwise.
The Funds reserve the right to discontinue offering shares at net asset
value and/or at a reduced sales charge at any time for new accounts and upon
60-days notice to shareholders of existing accounts.
Class B shares
Class B shares are sold without an initial sales charge, although a CDSC
will be imposed if you redeem shares within six years of purchase. The following
types of shares may be redeemed without charge at any time: (i) shares acquired
by reinvestment of distributions and (ii) shares otherwise exempt from the CDSC,
as described below. Subject to the foregoing exclusions, the amount of the
charge is determined as a percentage of the lesser of the current market value
or the cost of the shares being redeemed. Therefore, when a share is redeemed,
any increase in its value above the initial purchase price is not subject to any
CDSC. The amount of the CDSC will depend on the number of years since you
invested and the dollar amount being redeemed, according to the following table:
Contingent Deferred Sales Charge as a
Percentage of Dollar Amount Subject to Charge
---------------------------------------------
Years Since Purchase All Funds Except
Payments Made Limited Term Bond Fund Limited Term Bond Fund
-------------------- ---------------------- ----------------------
2 years or less 4.0% 1.25%
more than 2 years, up to 4 years 3.0% 0.75%
more than 4 years, up to 5 years 2.0% 0.50%
more than 5 years, up to 6 years 1.0% 0.25%
more than 6 years None None
In determining whether a CDSC is payable on any redemption, the Fund will
first redeem shares not subject to any charge, and then shares held longest
during the six-year period. For information on how sales charges are calculated
if shares are exchanged, see "How to Exchanges Shares" in the Prospectus.
The CDSC will be waived on redemptions of Class B shares in connection with
the following types of transactions:
a. Shares redeemed due to a shareholder's death;
b. Shares redeemed due to the shareholder's disability, as defined in the
Internal Revenue Code of 1986 (the "Code"), as amended;
c. Shares redeemed from retirement plans to satisfy minimum distribution
rules under the Code;
d. Shares redeemed to pay surrender charges;
e. Shares redeemed to pay retirement plan fees;
f. Shares redeemed involuntarily from small balance accounts (values of
less than $300);
g. Shares redeemed through a systematic withdrawal plan that permits up
to 10% of the value of a shareholder's Class B shares of a particular
Fund on the last business day of December of each year to be withdrawn
automatically in equal monthly installments throughout the year;
h. Shares redeemed from a retirement plan to assure the plan complies
with Sections 401(k), 401(m), 408(k) and 415 of the Code; or
i. Shares redeemed from retirement plans qualified under Section 401(a)
of the Code due to the plan participant's death, disability,
retirement or separation from service after attaining age 55.
Underwriting fees from the sale of shares for the periods indicated were as
follows:
- -------------------------------------------------------------------------------
Underwriting Fees for
Fiscal Years Ended October 31,
1997 1996 1995
---- ---- ----
Balanced Fund $ $ 448,584 $ 266,479
Blue Chip Fund 469,388 168,419
Bond Fund 637,949 476,813
Capital Value Fund 988,680 611,180
Cash Management Fund 1,013
Government Securities Income Fund 1,233,811 835,393
Growth Fund 1,813,439 1,237,015
High Yield Fund 164,687 93,608
International Emerging Markets Fund**
International Fund 951,553 739,560
International SmallCap Fund**
Limited Term Bond Fund* 56,766
MidCap Fund 2,112,480 1,293,597
Tax-Exempt Bond Fund 698,730 584,221
Tax-Exempt Cash Management Fund 1,631
Utilities Fund 370,724 288,533
* Period from February 29, 1996 (Date Operations Commenced) through
October 31, 1996.
** Period from August 29, 1997 (Date Operations Commenced) through
October 31, 1997
- -------------------------------------------------------------------------------
DISTRIBUTION PLAN
Rule 12b-1 of the Investment Company Act of 1940 (the "Act"), as amended,
permits a mutual fund to finance distribution activities and bear expenses
associated with the distribution of its shares provided that any payments made
by the Fund are made pursuant to a written plan adopted in accordance with the
Rule. A majority of the Board of Directors of each Fund, including a majority of
the Directors who have no direct or indirect financial interest in the operation
of the Plan or any agreements related to the Plan and who are not "interested
persons" as defined in the Act, adopted the Distribution Plans as described
below. No such Plan was adopted for Class A shares of the Money Market Funds.
Shareholders of each class of shares of each Fund approved the adoption of the
Plan for their respective class of shares.
Class A Distribution Plan. Each of the Funds, except the Money Market
Funds, has adopted a distribution plan for the Class A shares. The Class A Plan
provides that the Fund will make payments from its assets to Princor pursuant to
this Plan to compensate Princor and other selling Dealers for providing
shareholder services to existing Fund shareholders and rendering assistance in
the distribution and promotion of the Fund Class A shares to the public. The
Fund will pay Princor a fee after the end of each month at an annual rate no
greater than 0.25% (.15% for the Limited Term Bond Fund) of the daily net asset
value of the Fund. Princor will retain such amounts as are appropriate to
compensate for actual expenses incurred in distributing and promoting the sale
of the Fund shares to the public but may remit on a continuous basis up to .25%
(.15% for the Limited Term Bond Fund) to Registered Representatives and other
selected Dealers (including for this purpose, certain financial institutions) as
a trail fee in recognition of their services and assistance.
Class B Distribution Plan. Each Class B Plan provides for payments by the
Fund to Princor at the annual rate of up to 1.00% (.50% for the Limited Term
Bond Fund) of the Fund's average net asset attributable to Class B shares.
Princor also receives the proceeds of any CDSC imposed on redemptions of such
shares.
Although Class B shares are sold without an initial sales charge, Princor
pays a sales commission equal to 4.00% (1.25% for the Limited Term Bond Fund) of
the amount invested to dealers who sell such shares. These commissions are not
paid on exchanges from other Principal Funds. In addition, Princor may remit on
a continuous basis up to .25% (.15% for the Limited Term Bond Fund) to the
Registered Representatives and other selected Dealers (including for this
purpose, certain financial institutions) as a trail fee in recognition of their
services and assistance.
Class R Distribution Plan. Each of the Funds, except the Tax-Exempt Bond
Fund and Tax-Exempt Cash Management Fund, have adopted a distribution plan for
the Class R shares. Each Class R Plan provides for payments by the Fund to
Princor at the annual rate of up to .75% of the Fund's average net assets
attributable to Class R shares.
Although Class R shares are sold without an initial sales charge, Princor
incurs certain distribution expenses. In addition, Princor may remit on a
continuous basis up to .25% to Registered Representatives and other selected
Dealers (including, for this purpose, certain financial institutions) as a trail
fee in recognition of their ongoing services and assistance.
General Information Regarding Distribution Plans. A representative of
Princor will provide to the Fund's Board of Directors, and the Board will
review, at least quarterly, a written report of the amounts expended pursuant to
the Plans and the purposes for which such expenditures were made.
Whether any expenditure under the Plans is subject to a state expense limit
will depend upon the nature of the expenditure and the terms of the state law,
regulation or order imposing the limit. Any expenditure subject to such a limit
will be included in the Fund's total operating expenses for purposes of
determining compliance with the expense limit.
If expenses under a Plan exceed the compensation limit for Princor
described in the Plan in any one fiscal year, the Fund will not carry over such
expenses to the next fiscal year. The Funds have no legal obligation to pay any
amount pursuant to this Plan that exceeds the compensation limit. The Funds will
not pay, directly or indirectly, interest, carrying charges, or other financing
costs in connection with the Plans. If the aggregate payments received by
Princor under a Plan in any fiscal year exceed the expenditures made by Princor
in that year pursuant to the Plan, Princor will promptly reimburse the Fund for
the amount of the excess.
The amount received from each Fund and retained by Princor during the year
ended October 31, 1997 and the manner in which such amounts were spent pursuant
to the Class A Distribution Plan for the last fiscal period of each of the Funds
were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
EXPENDITURES
Prospectus and
Shareholder Registered Underwriter's
Amount Report Sales Representative Salaries and Total
Fund Retained Printing Brochures Sales Materials Service Fees Overhead Expenditures
- ----------------------------- -------- -------- --------- --------------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balanced Fund
Blue Chip Fund
Bond Fund
Capital Accumulation Fund
Emerging Growth Fund
Government Securities Income
Fund
Growth Fund
High Yield Fund
Limited Term Bond Fund
Tax-Exempt Bond Fund
Utilities Fund
World Fund
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The amount received from each Fund and retained by Princor during the
period ended October 31, 1997 and the manner in which such amounts were spent
pursuant to the Class B Distribution Plan for the last fiscal period of each of
the Funds were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
EXPENDITURES
Prospectus and Registered Underwriter's
Amount Shareholder Sales Representative Salaries and Total
Fund Retained Report Printing Brochures Sales Materials Service Fees Overhead Commissions Expenditures
--------------------- -------- --------------- --------- --------------- ------------ -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balanced
Blue Chip
Bond
Capital Accumulation
Cash Management
Emerging Growth
Government Securities
Income
Growth
High Yield
Limited Term Bond
Tax-Exempt Bond
Tax-Exempt Cash Management
Utilities
World
- --------------------------------------------------------------------------------
</TABLE>
The amount received from each Fund and retained by Princor during the
period ended October 31, 1997 and the manner in which such amounts were spent
pursuant to the Class R Distribution Plan for the last fiscal period of each of
the Funds were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
EXPENDITURES
Prospectus and Registered Underwriter's
Amount Shareholder Sales Representative Salaries and Total
Fund Retained Report Printing Brochures Sales Materials Service Fees Overhead Expenditures
--------------------- -------- --------------- --------- --------------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balanced
Blue Chip
Bond
Capital Accumulation
Cash Management
Emerging Growth
Government Securities Income
Growth
High Yield
Limited Term Bond
Utilities
World
------------------------------------------------------------------------------
</TABLE>
A Plan may be terminated at any time by vote of a majority of the Directors
who are not interested persons (as defined in the Act), or by vote of a majority
of the outstanding voting securities of the class of shares of a Fund to which
the Plan relates. Any change in a Plan that would materially increase the
distribution expenses of a class of shares of a Fund provided for in the Plan
requires approval of the shareholders of the class of shares to which such
increase would relate.
While a Distribution Plan is in effect for a Fund, the selection and
nomination of Directors who are not interested persons of that Fund will be
committed to the discretion of the Directors who are not interested persons.
Each Plan will continue in effect from year to year as long as its
continuance is specifically approved at least annually by a majority vote of the
directors of the Fund including a majority of the non-interested directors. The
Plans for all Classes of shares were last approved by each Fund's Board of
Directors, including a majority of the non-interested directors, on September 8,
1997.
DETERMINATION OF NET ASSET VALUE OF FUNDS' SHARES
Growth-Oriented and Income-Oriented Funds
The net asset values of the shares of each of the Growth-Oriented and
Income-Oriented Funds are determined daily, Monday through Friday, as of the
close of trading on the New York Stock Exchange, except on days on which changes
in the value of a Fund's portfolio securities will not materially affect the
current net asset value of that Fund's redeemable securities, on days during
which a Fund receives no order for the purchase or sale of its redeemable
securities and no tender of such a security for redemption, and on customary
national business holidays. The Funds treat as customary national business
holidays those days on which the New York Stock Exchange is closed for New
Year's Day (January 1), Washington's Birthday (third Monday in February), Good
Friday (variable date between March 20 and April 23, inclusive), Memorial Day
(last Monday in May), Independence Day (July 4), Labor Day (first Monday in
September), Thanksgiving Day (fourth Thursday in November) and Christmas Day
(December 25). The net asset value per share for each class of shares for each
Fund is determined by dividing the value of securities in the Fund's investment
portfolio plus all other assets attributable to that class, less all liabilities
attributable to that class, by the number of Fund shares of that class
outstanding. Securities for which market quotations are readily available,
including options and futures traded on an exchange, are valued at market value,
which is for exchanged-listed securities, the closing price; for United
Kingdom-listed securities, the market-maker provided price; and for non-listed
equity securities, the bid price. Non-listed corporate debt securities,
government securities and municipal securities are usually valued using an
evaluated bid price provided by a pricing service. If closing prices are
unavailable for exchange-listed securities, generally the bid price, or in the
case of debt securities an evaluated bid price, is used to value such
securities. When reliable market quotations are not considered to be readily
available, which may be the case, for example, with respect to certain debt
securities, preferred stocks, foreign securities and over-the-counter options,
the investments are valued by using market quotations, prices provided by market
makers, which may include dealers with which the Fund has executed transactions,
or estimates of market values obtained from yield data and other factors
relating to instruments or securities with similar characteristics in accordance
with procedures established in good faith by the Board of Directors. Securities
with remaining maturities of 60 days or less are valued at amortized cost. Other
assets are valued at fair value as determined in good faith through procedures
established by the Board of Directors of the Fund.
Generally, trading in foreign securities is substantially completed each
day at various times prior to the close of the New York Stock Exchange. The
values of such securities used in computing net asset value per share are
usually determined as of such times. Occasionally, events which affect the
values of such securities and foreign currency exchange rates may occur between
the times at which they are generally determined and the close of the New York
Stock Exchange and would therefore not be reflected in the computation of the
Fund's net asset value. If events materially affecting the value of such
securities occur during such period, then these securities will be valued at
their fair value as determined in good faith by the Manager under procedures
established and regularly reviewed by the Board of Directors. To the extent the
Fund invests in foreign securities listed on foreign exchanges which trade on
days on which the Fund does not determine its net asset value, for example
Saturdays and other customary national U.S. holidays, the Fund's net asset value
could be significantly affected on days when shareholders have no access to the
Fund.
Certain securities issued by companies in emerging market countries may
have more than one quoted valuation at any given point in time, sometimes
referred to as a "local" price and a "premium" price. The premium price is often
a negotiated price which may not consistently represent a price at which a
specific transaction can be effected. It is the policy of the International
Emerging Markets Fund, International Fund and International SmallCap Fund to
value such securities at prices at which it is expected those shares may be
sold, and the Manager or any sub-adviser is authorized to make such
determinations subject to such oversight by the Fund's Board of Directors as may
from time to time be necessary.
Money Market Funds
The net asset value of each class of shares of each of the Money Market
Funds is determined at the same time and on the same days as each of the
Growth-Oriented Funds and Income-Oriented Funds as described above. The net
asset value per share for each class of shares of each Fund is computed by
dividing the total value of the Fund's securities and other assets, less
liabilities, by the number of Fund shares outstanding.
All securities held by the Money Market Funds will be valued on an
amortized cost basis. Under this method of valuation, a security is initially
valued at cost; thereafter, the Fund assumes a constant proportionate
amortization in value until maturity of any discount or premium, regardless of
the impact of fluctuating interest rates on the market value of the security.
While this method provides certainty in valuation, it may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price that would be received upon sale of the security.
Use of the amortized cost valuation method by the Money Market Funds
requires each Fund to maintain a dollar weighted average maturity of 90 days or
less and to purchase only obligations that have remaining maturities of 397 days
or less or have a variable or floating rate of interest. In addition, each Fund
can invest only in obligations determined by its Board of Directors to be of
high quality with minimal credit risks.
The Board of Directors for each of the Money Market Funds has established
procedures designed to stabilize, to the extent reasonably possible, the Fund's
price per share as computed for the purpose of sales and redemptions at $1.00.
Such procedures include a directive to the Manager to test price the portfolio
or specific securities thereof on a weekly basis using a mark-to-market method
of valuation to determine possible deviations in the net asset value from $1.00
per share. If such deviation exceeds 1/2 of 1%, the Board of Directors will
promptly consider what action, if any, will be initiated. In the event the Board
of Directors determines that a deviation exists which may result in material
dilution or other unfair results to shareholders, the Board will take such
corrective action as it regards as appropriate, including: the sale of portfolio
instruments prior to maturity; the withholding of dividends; redemptions of
shares in kind; the establishment of a net asset value per share based upon
available market quotations; or splitting, combining or otherwise recapitalizing
outstanding shares. The Fund may also reduce the number of shares outstanding by
redeeming proportionately from shareholders, without the payment of any monetary
compensation, such number of full and fractional shares as is necessary to
maintain the net asset value at $1.00 per share.
PERFORMANCE CALCULATION
Each of the Principal Funds may from time to time advertise its performance
in terms of total return or yield for each class of shares. The figures used for
total return and yield are based on the historical performance of a Fund, show
the performance of a hypothetical investment and are not intended to indicate
future performance. Total return and yield will vary from time to time depending
upon market conditions, the composition of a Fund's portfolio and operating
expenses. These factors and possible differences in the methods used in
calculating performance figures should be considered when comparing a Fund's
performance to the performance of some other kind of investment.
A Fund may also include in its advertisements performance rankings and
other performance-related information published by independent statistical
services or publishers, such as Lipper Analytical Services, Weisenberger
Investment Companies Services, Money Magazine, Forbes, The Wall Street Journal,
Baron's, Changing Times, Fortune, U.S. News, W. R. Kipplinger's Personal
Finance, USA Today, Investment Advisor and Stanger's Investment Advisor and
comparisons of the performance of a Fund to that of various market indices, such
as the S&P 500 Index, Valueline, Dow Jones Industrials Index, Morgan Stanley
Capital International EAFE (Europe, Australia and Far East) Index and World
Index, Dow Jones Utility Index with Income, Lehman Brothers GNMA Index, Salomon
Brothers Investment Grade Bond Index and Bond Buyer Municipal Index, Lehman
Brothers BAA Corporate Index, Lehman Brothers High Yield Index, Lehman Brothers
Municipal Bond Index, Lehman Brothers Revenue Bond Index, Merrill Lynch
Corporate Government Bond Index, Lehman Brothers Mutual Fund Short
Government/Corporate Index and the Lehman Brothers Government Corporate
Intermediate Index.
Total Return
When advertising total return figures, each of the Growth-Oriented Funds
and Income-Oriented Funds will include its average annual total return for each
of the one-, five- and ten-year periods (or for such shorter periods as the
registration statement for the relevant class has been in effect) that end on
the last day of the most recent calendar quarter. Average annual total return is
computed by calculating the average annual compounded rate of return over the
stated period that would equate an initial $1,000 investment to the ending
redeemable value assuming the reinvestment of all dividends and capital gains
distributions at net asset value. In its advertising, a Fund may also include
average annual total return for some other period or cumulative total return for
a specified period. Cumulative total return is computed by dividing the
difference between the ending redeemable value (assuming the reinvestment of all
dividends and capital gains distributions at net asset value) and the initial
investment by the initial investment. Total return calculations assume the
payment of the maximum front-end load (in the case of Class A shares) or the
applicable CDSC (in the case of Class B shares). Average annual total return and
cumulative total return may also be calculated for a specified period which
reflect reduced sales charges or which reflect no sales charge or CDSC in order
to illustrate the change in a Fund's net asset value over time.
The following table shows as of October 31, 1997 average annual return for
Class A shares for each of the Funds for the periods indicated:
------------------------------------------------------------------------
Fund 1-Year 5-Year 10-Year
---- ------ ------ -------
Balanced Fund
Blue Chip Fund
Bond Fund
Capital Accumulation Fund
Emerging Growth Fund
Government Securities Income Fund
Growth Fund
High Yield Fund
International Emerging Markets Fund
International SmallCap Fund
Limited Term Bond Fund
Tax-Exempt Bond Fund
Utilities Fund
World Fund
(1) Period beginning December 18, 1987 and ending October 31, 1997.
(2) Period beginning March 1, 1991 and ending October 31, 1997.
(3) Period beginning February 29, 1996 and ending October 31, 1997.
(4) Period beginning December 16, 1992 and ending October 31, 1997.
(5) Period beginning August 29, 1997 and ending October 31, 1997.
------------------------------------------------------------------------
The following table shows as of October 31, 1997 average annual return for
Class B shares for each of the Funds for the period indicated:
-------------------------------------------------------------------
Fund 1-Year 5-Year(1)
---- ------ --------
Balanced Fund
Blue Chip Fund
Bond Fund
Capital Accumulation Fund
Emerging Growth Fund
Government Securities Income Fund
Growth Fund
High Yield Fund
International Emerging Markets Fund
International SmallCap Fund
Limited Term Bond Fund
Tax-Exempt Bond Fund
Utilities Fund
World Fund
(1) Period beginning December 9, 1994 and ending October 31, 1997.
(2) Period beginning February 29, 1996 and ending October 31, 1997.
(3) Period beginning August 29, 1997 and ending October 31, 1997.
--------------------------------------------------------------------
The following table shows as of October 31, 1997 average annual return for
Class R shares for each of the Funds for the period indicated:
--------------------------------------------------------------------
Fund 1-Year 5-Year(1)
---- ------ ---------
Balanced Fund
Blue Chip Fund
Bond Fund
Capital Accumulation Fund
Emerging Growth Fund
Government Securities Income Fund
Growth Fund
High Yield Fund
International Emerging Markets Fund
International SmallCap Fund
Limited Term Bond Fund
Tax-Exempt Bond Fund
Utilities Fund
World Fund
(1) Period beginning February 29, 1996 and ending October 31, 1997.
(2) Period beginning August 29, 1997 and ending October 31, 1997.
---------------------------------------------------------------------
Yield
Income-Oriented Funds
Each of the Income-Oriented Funds calculates its yield by determining its
net investment income per share for a 30-day (or one month) period, annualizing
that figure (assuming semi-annual compounding) and dividing the result by the
maximum public offering price for Class A shares or the net asset value for
Class B and Class R shares for the last day of the same period. The following
table shows as of October 31, 1997 the yield for each class of shares for each
of the Income-Oriented Funds:
---------------------------------------------------------------------------
Yield As of October 31, 1997
--------------------------------------
Fund Class A Class B Class R
---- ------- ------- -------
Bond Fund
Government Securities Income Fund
High Yield Fund
Limited Term Bond Fund
Tax-Exempt Bond Fund
---------------------------------------------------------------------------
The Tax-Exempt Bond Fund may advertise a tax-equivalent yield, which is
calculated by dividing that portion of the yield which is tax-exempt by one
minus a stated income tax rate and adding the product to that portion, if any,
of the yield which is not tax-exempt. As of October 31, 1997 the Fund's
tax-equivalent yields for Class A and Class B shares were as follows:
Tax-Equivalent Yield
-------------------- Assumed
Class A Class B Tax Rate
------- ------- --------
28.0%
36.0%
39.6%
Money Market Funds
Each of the Money Market Funds may advertise its yield and its effective
yield and the Tax-Exempt Cash Management Fund may also advertise its
tax-equivalent yield.
Yield is computed by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account having a balance of
one share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return, and then multiplying the base period return by (365/7) with the
resulting yield figure carried to at least the nearest hundredth of one percent.
As of October 31, 1997, the Cash Management Fund's yield for Class A shares,
Class B shares and Class R shares was ____%, ____% and ____%, respectively, and
the Tax-Exempt Cash Management Fund's yield for Class A shares and Class B
shares was ____% and ____%, respectively. Because realized capital gains or
losses in a Fund's portfolio are not included in the calculation, the Fund's net
investment income per share for yield purposes may be different from the net
investment income per share for dividend purposes, which includes net short-term
realized gains or losses on the Fund's portfolio.
Effective yield is computed by determining the net change, exclusive of
capital changes, in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period, subtracting a hypothetical
charge reflecting deductions from shareholder accounts, and dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return, and then compounding the base period return by
adding 1, raising the sum to a power equal to 365 divided by 7, and subtracting
1 from the result. The resulting effective yield figure is carried to at least
the nearest hundredth of one percent. As of October 31, 1997, the Cash
Management Fund's effective yield for Class A shares, Class B shares and Class R
shares was ____%, ____% and ____%, respectively, and the Tax-Exempt Cash
Management Fund's effective yield for Class A shares and Class B shares was
____% and ____%, respectively.
Tax equivalent yield for the Tax-Exempt Cash Management Fund is computed by
dividing that portion of the yield or effective yield which is tax-exempt by one
minus a stated income tax rate and adding the product to that portion, if any,
of the yield or effective yield which is not tax-exempt. As of October 31, 1997
the Fund's tax-equivalent yield and tax-equivalent effective yield for Class A
shares and Class B shares were as follows:
Tax-Equivalent Yield Tax-Equivalent Effective Yield
-------------------- ------------------------------ Assumed
Class A Class B Class A Class B Tax-Rate
------- ------- ------- ------- --------
28.0%
36.0%
39.6%
The yield quoted at any time for one of the Money Market Funds represents
the amount that was earned during a specific, recent seven-day period and is a
function of the quality, types and length of maturity of instruments in the
Fund's portfolio and the Fund's operating expenses. The length of maturity for
the portfolio is the average dollar weighted maturity of the portfolio. This
means that the portfolio has an average maturity of a stated number of days for
its issues. The calculation is weighted by the relative value of each
investment.
The yield for either of the Money Market Funds will fluctuate daily as the
income earned on the investments of the Fund fluctuates. Accordingly, there is
no assurance that the yield quoted on any given occasion will remain in effect
for any period of time. It should also be emphasized that the Funds are open-end
investment companies and that there is no guarantee that the net asset value or
any stated rate of return will remain constant. A shareholder's investment in
either Fund is not insured. Investors comparing results of the Money Market
Funds with investment results and yields from other sources such as banks or
savings and loan associations should understand these distinctions. Historical
and comparative yield information may, from time to time, be presented by the
Funds.
A Fund may include in its advertisements the compounding effect of
reinvested dividends over an extended period of time as illustrated below.
The Power of Compounding
Fund shareholders who choose to reinvest their distributions get the
advantage of compounding. Here's what happens to a $10,000 investment with
monthly income reinvested at 6 percent, 8 percent and 10 percent over 20 years.
These figures assume no fluctuation in the value of principal. This chart
is for illustration purposes only and is not intended as an indication of the
results a shareholder may receive as a shareholder of a specific Fund. The
return and capital value of an investment in a Fund will fluctuate so that the
value, when redeemed, may be worth more or less than the original cost.
(chart)
Year 6% 8% 10%
0 $10,000 $10,000 $10,000
20 $32,071 $46,610 $67,275
A Fund may also include in its advertisements an illustration of the impact
of income taxes and inflation on earnings from bank certificates of deposit
("CD's"). The interest rate on the hypothetical CD will be based upon average CD
rates for a stated period as reported in the Federal Reserve Bulletin. The
illustrated annual rate of inflation will be the core inflation rate as measured
by the Consumer Price Index for the 12-month period ended as of the most recent
month prior to the advertisement's publication. The illustrated income tax rate
may include any federal income tax rate applicable to individuals at the time
the advertisement is published. Any such advertisement will indicate that,
unlike bank CD's, an investment in the Fund is not insured nor is there any
guarantee that the Fund's net asset value or any stated rate of return will
remain constant.
An example of a typical calculation included in such advertisements is as
follows: the after-tax and inflation-adjusted earnings on a bank CD, assuming a
$10,000 investment in a six-month bank CD with an annual interest rate of 5.51%
(monthly average six-month CD rate for the month of October, 1996, as reported
in the Federal Reserve Bulletin) and an inflation rate of 3.00% (rate of
inflation for the 12-month period ended October 31, 1996 as measured by the
Consumer Price Index) and an income tax bracket of 28% would be $(49).
($10,000 x 5.51%) / 2 = $276 Interest for six-month period
- 77 Federal income taxes (28%)
-150 Inflation's impact on invested principal
($10,000 x 3.0%) / 2
($ 49)After-tax, inflation-adjusted earnings
A Fund may also include in its advertisements an illustration of
tax-deferred accumulation versus currently taxable accumulation in conjunction
with the Fund's use as a funding vehicle for 403(b) plans, IRAs or other
retirement plans. The illustration set forth below assumes a monthly investment
of $200, an annual return of 8% compounded monthly, and a 28% tax bracket.
The information is for illustrative purposes only and is not meant to
represent the performance of any of the Principal Funds. An investment in the
Principal Funds is not guaranteed; values and returns generally vary with
changes in market conditions.
Tax-deferred vs. taxable savings plan
_______________________________________ $300,059
---------------------------------------
_______________________________________ $192,844
---------------------------------------
---------------------------------------
---------------------------------------
---------------------------------------
Years: 5 10 15 20 25 30
--- With a tax-deferred savings plan
--- Without a tax-deferred savings plan
TAX TREATMENT OF FUNDS, DIVIDENDS AND DISTRIBUTIONS
It is the policy of each Fund to distribute substantially all net
investment income and net realized gains. Through such distributions, and by
satisfying certain other requirements, each Fund intends to qualify for the tax
treatment accorded to regulated investment companies under the applicable
provisions of the Internal Revenue Code. This means that in each year in which a
Fund so qualifies, it will be exempt from federal income tax upon the amount so
distributed to investors. The Tax Reform Act of 1986 imposed an excise tax on
mutual funds which fail to distribute net investment income and capital gains by
the end of the calendar year in accordance with the provisions of the Act. Each
Fund intends to comply with the Act's requirements and to avoid this excise tax.
Dividends from net investment income will be eligible for a 70% dividends
received deduction generally available to corporations to the extent of the
amount of qualifying dividends received by the Funds from domestic corporations
for the taxable year. Distributions from the Money Market Funds and
Income-Oriented Funds are generally not eligible for the corporate dividend
received deduction.
All taxable dividends and capital gains are taxable in the year in which
distributed, whether received in cash or reinvested in additional shares.
Dividends declared with a record date in December and paid in January will be
deemed to have been distributed to shareholders in December. Each Fund will
inform its shareholders of the amount and nature of their taxable income
dividends and capital gain distributions. Dividends from a Fund's net income and
distributions of capital gains, if any, may also be subject to state and local
taxation.
The Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of ordinary income dividends and capital gain dividends, and
the proceeds of redemption of shares, paid to any shareholder (1) who has
provided either an incorrect tax identification number or no number at all, (2)
who is subject to backup withholding by the Internal Revenue Service for failure
to report the receipt of interest or dividend income properly, or (3) who has
failed to certify to the Fund that it is not subject to backup withholding or
that it is a corporation or other "exempt recipient."
A shareholder will recognize gain or loss on the sale or redemption of
shares of the Fund in an amount equal to the difference between the proceeds of
the sales or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the Fund within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of the Fund will be considered capital
gain or loss and will be long-term capital gain or loss if the shares were held
for longer than one year. However, any capital loss arising from the sales or
redemption of shares held for six months or less will be disallowed to the
extent of the amount of exempt-interest dividends received on such shares and
(to the extent not disallowed) will be treated as a long-term capital loss to
the extent of the amount of capital gain dividends received on such shares.
Capital losses in any year are deductible only to the extent of capital gains
plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income.
If a shareholder (i) incurs a sales load in acquiring shares of the Fund,
(ii) disposes of such shares less than 91 days after they are acquired and (iii)
subsequently acquires shares of the Fund or another fund at a reduced sales load
pursuant to a right to reinvest at such reduced sales load acquired in
connection with the acquisition of the shares disposed of, then the sales load
on the shares disposed of (to the extent of the reduction in the sales load on
the shares subsequently acquired) shall not be taken into account in determining
gain or loss on the shares disposed of but shall be treated as incurred on the
acquisition of the shares subsequently acquired.
Shareholders should consult their own tax advisors as to the federal, state
and local tax consequences of ownership of shares of the Funds in their
particular circumstances.
Special Tax Considerations
Tax-Exempt Bond Fund and Tax-Exempt Cash Management Fund
The Tax-Exempt Bond Fund and Tax-Exempt Cash Management Fund also intend to
qualify to pay "exempt-interest dividends" to their respective shareholders. An
exempt-interest dividend is that part of dividend distributions made by either
Fund which consist of interest received by that Fund on tax-exempt Municipal
Obligations. Shareholders incur no federal income taxes on exempt-interest
dividends. However, these exempt-interest dividends may be taxable under state
or local law. Fund shareholders that are corporations must include
exempt-interest dividends in determining whether they are subject to the
corporate alternative minimum tax. Exempt-interest dividends that derive from
certain private activity bonds must be included by individuals as a preference
item in determining whether they are subject to the alternative minimum tax.
Each Fund may also pay ordinary income dividends and distribute capital gains
from time to time. Ordinary income dividends and distributions of capital gains,
if any, are taxable for federal purposes.
If a shareholder receives an exempt-interest dividend with respect to
shares of the Funds held for six months or less, then any loss on the sale or
exchange of such shares, to the extent of the amount of such dividend, is
disallowed. If a shareholder receives a capital gain dividend with respect to
shares held for six months or less, then any loss on the sale or exchange of
such shares will be treated as a long term capital loss to the extent such loss
exceeds any exempt-interest dividend received with respect to such shares, and
will be disallowed to the extent of such exempt-interest dividend.
Interest on indebtedness incurred or continued by a shareholder to purchase
or carry shares of either of these Funds is not deductible. Furthermore,
entities or persons who are "substantial users" (or related persons) under
Section 147(a) of the Code of facilities financed by private activity bonds
should consult their tax advisors before purchasing shares of the Funds.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Obligations. If any such legislation as enacted would
eliminate or significantly reduce the availability of Municipal Obligations, it
could adversely affect the ability of the Funds to continue to pursue their
respective investment objectives and policies. In such event, the Funds would
reevaluate their investment objectives and policies.
International Emerging Markets Fund, International Fund and International
SmallCap Fund
In each fiscal year when, at the close of such year, more than 50% of the
value of the total assets of the International Emerging Market Fund,
International Fund or the International SmallCap Fund are invested in securities
of foreign corporations, such Fund may elect pursuant to Section 853 of the Code
to permit its Shareholders to take a credit (or a deduction) for foreign income
taxes paid by the Fund. In that case, Shareholders should include in their
report of gross income in their federal income tax returns both cash dividends
received from the Fund and also the amount which the Fund advises is their pro
rata portion of foreign income taxes paid with respect to, or withheld from,
dividends and interest paid to the Fund from its foreign investments.
Shareholders would then be entitled to subtract from their federal income taxes
the amount of such taxes withheld, or treat such foreign taxes as a deduction
from gross income, if that should be more advantageous. As in the case of
individuals receiving income directly from foreign sources, the above-described
tax credit or tax deduction is subject to certain limitations. Shareholders or
prospective shareholders should consult their tax advisors on how these
provisions apply to them.
Futures Contracts and Options
As previously discussed, some of the Principal Funds may invest in futures
contracts or options thereon, index options or options traded on qualified
exchanges.For federal income tax purposes, capital gains and losses on futures
contracts or options thereon, index options or options traded on qualified
exchanges are generally treated as 60% long-term and 40% short-term. In
addition, the Funds must recognize any unrealized gains and losses on such
positions held at the end of the fiscal year. A Fund may elect out of such tax
treatment, however, for a futures or options position that is part of an
"identified mixed straddle" such as a put option purchased with respect to a
portfolio security. Gains and losses on futures and options included in an
identified mixed straddle will be considered 100% short-term and unrealized gain
or loss on such positions will not be realized at year end. The straddle
provisions of the Code may require the deferral of realized losses to the extent
that a Fund has unrealized gains in certain offsetting positions at the end of
the fiscal year, and may also require recharacterization of all or a part of
losses on certain offsetting positions from short-term to long-term, as well as
adjustment of the holding periods of straddle positions.
GENERAL INFORMATION AND HISTORY
Effective January 1, 1998, the following changes were made to the names of
the Funds:
Old Fund Name New Fund Name
------------- -------------
Princor Balanced Fund, Inc. Principal Balanced Fund, Inc.
Princor Blue Chip Fund, Inc. Principal Blue Chip Fund, Inc.
Princor Bond Fund, Inc. Principal Bond Fund, Inc.
Princor Capital Accumulation Fund, Inc. Principal Capital Value Fund, Inc.
Princor Cash Management Fund, Inc. Principal Cash Management Fund, Inc.
Princor Emerging Growth Fund, Inc. Principal MidCap Fund, Inc.
Princor Government Securities Income Principal Government Securities
Fund, Inc. Income Fund, Inc.
Princor Growth Fund, Inc. Principal Growth Fund, Inc.
Princor High Yield Fund, Inc. Principal High Yield Fund, Inc.
Princor Limited Term Bond Fund, Inc. Principal Limited Term Bond
Fund, Inc.
Princor Tax-Exempt Bond Fund, Inc. Principal Tax-Exempt Bond Fund, Inc.
Princor Tax-Exempt Cash Management Principal Tax-Exempt Cash
Fund, Inc. Management Fund, Inc.
Princor Utilities Fund, Inc. Principal Utilities Fund, Inc.
Princor World Fund, Inc. Principal International Fund, Inc.
FINANCIAL STATEMENTS
The financial statements for each of the Principal Funds for the year ended
October 31, 1997 appearing in the Annual Reports to Shareholders and the reports
thereon of Ernst & Young LLP, independent auditors, will be added by amendment.
APPENDIX A
Description of Bond Ratings:
Moody's Investors Service, Inc. Bond Ratings
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.
Ba:
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B:
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa:
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca:
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C:
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
CONDITIONAL RATING: Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
RATING REFINEMENTS: Moody's may apply numerical modifiers, 1, 2 and 3 in
each generic rating classification from Aa through B in its 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 a
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
SHORT-TERM NOTES: The four ratings of Moody's for short-term notes are
MIG 1, MIG 2, MIG 3 and MIG 4; MIG 1 denotes "best quality, enjoying strong
protection from established cash flows"; MIG 2 denotes "high quality" with
"ample margins of protection"; MIG 3 notes are of "favorable quality...but
lacking the undeniable strength of the preceding grades"; MIG 4 notes are of
"adequate quality, carrying specific risk for having protection...and not
distinctly or predominantly speculative."
Description of Moody's Commercial Paper Ratings
Moody's Commercial Paper ratings are opinions of the ability to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Issuers rated Prime-1 (or related
supporting institutions) have a superior capacity for repayment of
short-term promissory obligations.
Issuers rated Prime-2 (or related
supporting institutions) have a strong capacity for repayment of
short-term promissory obligations.
Issuers rated Prime-3 (or related
supporting institutions) have an acceptable capacity for repayment of
short-term promissory obligations.
Issuers rated Not Prime do not fall
within any of the Prime rating categories.
Description of Standard & Poor's Corporation's Debt Ratings:
A Standard & Poor's debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default -- capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the
laws of bankruptcy and other laws affecting creditor's rights.
AAA:
Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA:
Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small
degree.
A:
Debt rated "A" has a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher-rated categories.
BBB:
Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt
in higher-rated categories.
BB, B, CCC, CC:
Debt rated "BB", "B", "CCC" and "CC" is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "CC" the highest degree
of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
C:
The rating "C" is reserved for income bonds on which no interest is
being paid.
D:
Debt rated "D" is in default, and payment of interest and/or repayment
of principal is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by
the addition of a plus or minus sign to show relative standing within
the major rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of
the project being financed by the bonds being rated and indicates that
payment of debt service requirements is largely or entirely dependent
upon the successful and timely completion of the project. This rating,
however, while addressing credit quality subsequent to completion of
the project, makes no comment on the likelihood of, or the risk of
default upon failure of, such completion. The investor should exercise
his own judgment with respect to such likelihood and risk.
NR:
Indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
Standard & Poor's, Commercial Paper Ratings
A Standard & Poor's Commercial Paper Rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. Ratings are applicable to
both taxable and tax-exempt commercial paper. The four categories are as
follows:
A:
Issues assigned the highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1 This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Issues that
possess overwhelming safety characteristics will be given a "+"
designation.
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as
for issues designated "A-1".
A-3 Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to
the adverse effects of changes in circumstances than obligations
carrying the highest designations.
B:
Issues rated "B" are regarded as having only an adequate capacity for
timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
C:
This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D:
This rating indicates that the issue is either in default or is
expected to be in default upon maturity.
The Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in or unavailability of, such information.
Standard & Poor's rates notes with a maturity of less than three years as
follows:
SP-1 A very strong, or strong, capacity to pay principal and interest.
Issues that possess overwhelming safety characteristics will be
given a "+" designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements included in the Registration Statement
(1) Part A:
None
(2) Part B:
None
(3) Part C:
None
(b) Exhibits
(1) Articles of Incorporation
(2) By-Laws
(5a) Management Agreement
(5b) Investment Service Agreement
(6a) Distribution Agreement
(6b) Account Application*
(6c) Account Application-R Shares*
(8a) Custody Agreement
(9a) Dealer Selling Agreement
(9b) Dealer Selling Agreement-R Shares
(10) Opinion of Counsel*
(13) Investment Letter*
(14a) Principal Mutual IRA Plan
(14b) Principal Mutual SEP Plan
(14c) Principal Mutual 403(b) Plan
(15a) 12b-1 Plan - Class A Shares
(15b) 12b-1 Plan - Class B Shares
(15r) 12b-1 Plan - Class R Shares
(18) Multiple Class Distribution Plan
* To be filed by amendment.
Item 25. Persons Controlled by or Under Common Control with Depositor
Principal Mutual Life Insurance Company (incorporated as a mutual
life insurance company under the laws of Iowa); sponsored the
organization of the following mutual funds, some of which it
controls by virtue of owning voting securities:
Principal Asset Allocation Fund, Inc. (a Maryland
Corporation) 100.0% of shares outstanding owned by Principal
Mutual Life Insurance Company and its separate accounts on
August 11, 1997.
Principal Aggressive Growth Fund, Inc. (a Maryland Corporation)
100.0% of shares outstanding owned by Principal Mutual Life
Insurance Company and its separate accounts on August 11, 1997.
Princor Balanced Fund, Inc. (a Maryland Corporation) 1.86% of
shares outstanding owned by Principal Mutual Life Insurance
Company on August 11, 1997.
Principal Balanced Fund, Inc. (a Maryland Corporation) 100.0% of
shares outstanding owned by Principal Mutual Life Insurance
Company and its separate accounts on August 11, 1997.
Princor Blue Chip Fund, Inc. (a Maryland Corporation) 1.42% of
shares outstanding owned by Principal Mutual Life Insurance
Company on August 11, 1997.
Princor Bond Fund, Inc. (a Maryland Corporation) 1.49% of shares
outstanding owned by Principal Mutual Life Insurance Company on
August 11, 1997.
Principal Bond Fund, Inc. (a Maryland Corporation) 100.0% of
shares outstanding owned by Principal Mutual Life Insurance
Company and its separate accounts on August 11, 1997.
Princor Capital Accumulation Fund, Inc. (a Maryland
Corporation) 31.35% of outstanding shares owned by Principal
Mutual Life Insurance Company on August 11, 1997.
Principal Capital Accumulation Fund, Inc. (a Maryland
Corporation) 100.0% of outstanding shares owned by Principal
Mutual Life Insurance Company and its Separate Accounts on
August 11, 1997.
Princor Cash Management Fund, Inc. (a Maryland Corporation) 1.35%
of outstanding shares owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on August 11,
1997.
Princor Emerging Growth Fund, Inc. (a Maryland Corporation) 0.62%
of shares outstanding owned by Principal Mutual Life Insurance
Company on August 11, 1997.
Principal Emerging Growth Fund, Inc. (a Maryland Corporation)
100.0% of shares outstanding owned by Principal Mutual Life
Insurance Company and its Separate Accounts on August 11, 1997.
Princor Government Securities Income Fund, Inc. (a Maryland
Corporation) 0.40% of shares outstanding owned by Principal
Mutual Life Insurance Company on August 11, 1997.
Principal Government Securities Fund, Inc. (a Maryland
Corporation) 100.0% of shares outstanding owned by Principal
Mutual Life Insurance Company and its Separate Accounts on
August 11, 1997.
Princor Growth Fund, Inc. (a Maryland Corporation) 0.52% of
outstanding shares owned by Principal Mutual Life Insurance
Company on August 11, 1997.
Principal Growth Fund, Inc. (a Maryland Corporation) 100.0% of
outstanding shares are owned by Principal Mutual Life Insurance
Company and its Separate Accounts on August 11, 1997.
Princor High Yield Fund, Inc. (a Maryland Corporation) 22.70% of
shares outstanding owned by Principal Mutual Life Insurance
Company on August 11, 1997.
Principal High Yield Fund, Inc. (a Maryland Corporation) 100.0%
of shares outstanding owned by Principal Mutual Life Insurance
Company and its Separate Accounts on August 11, 1997.
Principal International Emerging Markets Fund, Inc. (a Maryland
Corporation) 100.0% of shares outstanding owned by Principal
Mutual Life Insurance Company on August 15, 1997.
Principal International SmallCap Fund, Inc. (a Maryland
Corporation) 100.0% of shares outstanding owned by Principal
Mutual Life Insurance Company on August 15, 1997.
Princor Limited Term Bond Fund, Inc. (a Maryland Corporation)
53.17% of shares outstanding owned by Principal Mutual Life
Insurance Company on August 11, 1997.
Principal Money Market Fund, Inc. (a Maryland Corporation) 100.0%
of shares outstanding owned by Principal Mutual Life Insurance
Company and its Separate Accounts on August 11, 1997.
Principal Special Markets Fund, Inc. (a Maryland Corporation)
51.39% of the shares outstanding of the International Securities
Portfolio and 84.13% of the shares outstanding of the
Mortgage-Backed Securities Portfolio were owned by Principal
Mutual Life Insurance Company on August 11, 1997.
Princor Tax-Exempt Bond Fund, Inc. (a Maryland Corporation) 0.56%
of shares outstanding owned by Principal Mutual Life Insurance
Company on August 11, 1997.
Princor Tax-Exempt Cash Management Fund, Inc. (a Maryland
Corporation) 1.00% of shares outstanding owned by Principal
Mutual Life Insurance Company on August 11, 1997.
Princor Utilities Fund, Inc. (a Maryland Corporation) 1.54% of
shares outstanding owned by Principal Mutual Life Insurance
Company on August 11, 1997.
Princor World Fund, Inc. (a Maryland Corporation) 22.96% of
shares outstanding owned by Principal Mutual Life Insurance
Company on August 11, 1997.
Principal World Fund, Inc. (a Maryland Corporation) 100.0% of
shares outstanding owned by Principal Mutual Life Insurance
Company on August 11, 1997.
Subsidiaries organized and wholly-owned by Principal Mutual Life
Insurance Company:
a. Principal Holding Company (an Iowa Corporation) A holding
company wholly-owned by Principal Mutual Life Insurance
Company.
b. PT Asuransi Jiwa Principal Egalita Indonesia (an Indonesia
Corporation)
Subsidiaries wholly-owned by Principal Holding Company:
a. Petula Associates, Ltd. (an Iowa Corporation) a real
estate development company.
b. Patrician Associates, Inc. (a California Corporation) a real
estate development company.
c. Principal Development Associates, Inc. (a California
Corporation) a real estate development company.
d. Princor Financial Services Corporation (an Iowa Corporation)
a registered broker-dealer.
e. Invista Capital Management, Inc. (an Iowa Corporation) a
registered investment adviser.
f. Principal Marketing Services, Inc. (a Delaware Corporation) a
corporation formed to serve as an interface between marketers
and manufacturers of financial services products.
g. The Principal Financial Group, Inc. (a Delaware corporation)
a general business corporation established in connection with
the new corporate identity. It is not currently active.
h. Delaware Charter Guarantee & Trust Company (a Delaware
Corporation) a nondepository trust company.
i. Principal Securities Holding Corporation (a Delaware
Corporation) a holding company.
j. Principal Health Care, Inc. (an Iowa Corporation) a developer
and administrator of managed care systems.
k. Principal Financial Advisors, Inc. (an Iowa Corporation) a
registered investment advisor.
l. Principal Asset Markets, Inc. (an Iowa Corporation) a
residential mortgage loan broker.
m. Principal Portfolio Services, Inc. (an Iowa Corporation) a
mortgage due diligence company.
n. Principal International, Inc. (an Iowa Corporation) a company
formed for the purpose of international business development.
o. Principal Spectrum Associates, Inc. (a California
Corporation) a real estate development company.
p. Principal Commercial Advisors, Inc. (an Iowa Corporation) a
company that purchases, manages and sells commercial real
estate assets.
q. Principal FC, Ltd. (an Iowa Corporation) a limited purpose
investment corporation.
r. Principal Residential Mortgage, Inc. (an Iowa Corporation) a
residential mortgage loan broker.
s. Equity FC, Ltd. (an Iowa Corporation) engaged in investment
transactions including limited partnership and limited
liability companies.
Subsidiaries organized and wholly-owned by Princor Financial Services
Corporation:
a. Princor Management Corporation (an Iowa Corporation) a
registered investment advisor.
b. Principal Investors Corporation (a New Jersey Corporation) a
registered broker-dealer with the Securities Exchange
Commission. It is not currently active.
Subsidiary wholly owned by Principal Securities Holding Corporation:
a. Principal Financial Securities, Inc. (a Delaware
Corporation) an investment banking and securities brokerage
firm.
Subsidiary wholly owned by Delaware Charter Guarantee & Trust Company:
a. Trust Consultants, Inc. (a California Corporation) a
Consulting and Administration of Employee Benefit Plans.
Subsidiaries organized and wholly-owned by Principal Health Care,
Inc.:
a. The Admar Group, Inc. (a Florida Corporation) a national
managed care service organization that develops and manages
preferred provider organizations.
b. America's Health Plan, Inc. (a Maryland Corporation) a
developer of discount provider networks.
c. Principal Health Care Management Corporation (an Iowa
Corporation) provide management services to health
maintenance organizations.
d. Principal Behavioral Health Care, Inc. (an Iowa Corporation)
a mental and nervous/substance abuse preferred provider
organization.
e. Principal Health Care of the Carolinas, Inc. (a North
Carolina Corporation) a health maintenance organization.
f. Principal Health Care of Delaware, Inc. (a Delaware
Corporation) a health maintenance organization.
g. Principal Health Care of Florida, Inc. (a Florida
Corporation) a health maintenance organization.
h. Principal Health Care of Georgia, Inc. (a Georgia
Corporation) a health maintenance organization.
i. Principal Health Care of Illinois, Inc. (an Illinois
Corporation) a health maintenance organization.
j. Principal Health Care of Indiana, Inc. (a Delaware
Corporation) a health maintenance organization.
k. Principal Health Care of Iowa, Inc. (an Iowa Corporation) a
health maintenance organization.
l. Principal Health Care of Kansas City, Inc. (a Missouri
Corporation) a health maintenance organization.
m. Principal Health Care of Louisiana, Inc. (a Louisiana
Corporation) a health maintenance organization.
n. Principal Health Care of the Mid-Atlantic, Inc. (a Virginia
Corporation) a health maintenance organization.
o. Principal Health Care of Nebraska, Inc. (a Nebraska
Corporation) a health maintenance organization.
p. Principal Health Care of Pennsylvania, Inc. (a Pennsylvania
Corporation) a health maintenance organization.
q. Principal Health Care of St. Louis, Inc. (a Delaware
Corporation) a health maintenance organization.
r. Principal Health Care of South Carolina, Inc. (A South
Carolina Corporation) a health maintenance organization.
s. Principal Health Care of Tennessee, Inc. (a Tennessee
Corporation) a health maintenance organization.
t. Principal Health Care of Texas, Inc. ( a Texas Corporation)
a health maintenance organization.
u. United Health Care Services of Iowa, Inc. (an Iowa
Corporation) a health maintenance organization.
Subsidiary owned by The Admar Group, Inc.:
a. Admar Corporation (a California Corporation) a managed care
services organization.
b. Admar Insurance Marketing, Inc. (a California Corporation) a
managed care services organization.
c. SelectCare Management Co., Inc. (a California Corporation) a
managed care services organization.
d. Image Financial & Insurance Services, Inc. (a California
Corporation) a managed care services organization.
e. WM. G. Hofgard & Co., Inc. (a California Corporation) a
managed care services organization.
f. Benefit Plan Administrators, Inc. (a Colorado Corporation) a
managed care services organization.
Subsidiaries owned by Principal International, Inc.:
a. Principal International Espana, S.A. de Seguros de Vida (a
Spain Corporation).
b. Zao Principal International (a Russia Corporation) inactive.
c. Principal International Argentina, S.A. (an Argentina
services corporation).
d. Principal International Asia Limited (a Hong Kong
Corporation).
e. Principal Insurance Company (Hong Kong) Limited (a Hong Kong
Corporation).
f. Principal International de Chile, S.A. (a Chile
Corporation) a holding company.
g. Principal Mexico Compania de Seguros, S.A. de C.V. (a Mexico
Corporation) a life insurance company.
h. Afore Confia-Principal, S.A. de C.V. (a Mexico Corporation).
i. Qualitas Medica, S.A. (an Argentina Corporation).
Subsidiary owned by Principal International Espana, S.A. de Seguros de
Vida:
a. Princor International Espana S.A. de Agencia de Seguros
(a Spain Corporation).
Subsidiaries owned by Principal International Argentina, S.A.:
a. Ethika-S.A. Administradora de Fondos de Jubilaciones y
Pensiones (an Argentina company)
b. Princor Compania de Seguros de Retiro, S.A. (an Argentina
Corporation).
c. Prinlife Compania de Seguros de Vida, S.A. (an Argentina
Corporation).
Subsidiary owned by Principal International de Chile, S.A.:
a. BanRenta Compania de Seguros de Vida, S.A. (a Chile
Corporation) a life insurance company.
Subsidiary owned by Afore Confia-Principal, S.A. de C.V.:
a. Siefore Confia-Principal, S.A. de C.V.
(a Mexico Corporation)
Item 26. Number of Holders of Securities - As of: September 1, 1997
(1) (2)
Title of Class Number of Holders
Principal SmallCap Fund, Inc.
Common-Class A N/A
Principal SmallCap Fund, Inc.
Common-Class B N/A
Principal SmallCap Fund, Inc.
Common-Class R N/A
Item 27. Indemnification
Under Section 2-418 of the Maryland General Corporation Law, with respect
to any proceedings against a present or former director, officer, agent or
employee (a "corporate representative") of the Registrant, the Registrant may
indemnify the corporate representative against judgments, fines, penalties, and
amounts paid in settlement, and against expenses, including attorneys' fees, if
such expenses were actually incurred by the corporate representative in
connection with the proceeding, unless it is established that:
(i) The act or omission of the corporate representative was
material to the matter giving rise to the proceeding; and
1. Was committed in bad faith; or
2. Was the result of active and deliberate dishonesty; or
(ii) The corporate representative actually received an improper
personal benefit in money, property, or services; or
(iii) In the case of any criminal proceeding, the corporate
representative had reasonable cause to believe that the act or
omission was unlawful.
If a proceeding is brought by or on behalf of the Registrant, however, the
Registrant may not indemnify a corporate representative who has been adjudged to
be liable to the Registrant. Under the Registrant's Articles of Incorporation
and Bylaws, directors and officers of Registrant are entitled to indemnification
by the Registrant to the fullest extent permitted under Maryland law and the
Investment Company Act of 1940. Reference is made to Article VI, Section 7 of
the Registrant's Articles of Incorporation, Article 12 of Registrant's Bylaws
and Section 2-418 of the Maryland General Corporation Law.
The Registrant has agreed to indemnify, defend and hold the Distributor,
its officers and directors, and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act of 1933, free and harmless from
and against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers, directors or any such controlling person may incur under the
Securities Act of 1933, or under common law or otherwise, arising out of or
based upon any untrue statement of a material fact contained in the Registrant's
registration statement or prospectus or arising out of or based upon any alleged
omission to state a material fact required to be stated in either thereof or
necessary to make the statements in either thereof not misleading, except
insofar as such claims, demands, liabilities or expenses arise out of or are
based upon any such untrue statement or omission made in conformity with
information furnished in writing by the Distributor to the Registrant for use in
the Registrant's registration statement or prospectus: provided, however, that
this indemnity agreement, to the extent that it might require indemnity of any
person who is also an officer or director of the Registrant or who controls the
Registrant within the meaning of Section 15 of the Securities Act of 1933, shall
not inure to the benefit of such officer, director or controlling person unless
a court of competent jurisdiction shall determine, or it shall have been
determined by controlling precedent that such result would not be against public
policy as expressed in the Securities Act of 1933, and further provided, that in
no event shall anything contained herein be so construed as to protect the
Distributor against any liability to the Registrant or to its security holders
to which the Distributor would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence, in the performance of its duties,
or by reason of its reckless disregard of its obligations under this Agreement.
The Registrant's agreement to indemnify the Distributor, its officers and
directors and any such controlling person as aforesaid is expressly conditioned
upon the Registrant being promptly notified of any action brought against the
Distributor, its officers or directors, or any such controlling person, such
notification to be given by letter or telegram addressed to the Registrant.
Item 28. Business or Other Connection of Investment Adviser
A complete list of the officers and directors of the investment adviser,
Princor Management Corporation, are set out below. This list includes some of
the same people (designated by an *), who are serving as officers and directors
of the Registrant. For these people the information as set out in the Statement
of Additional Information (See Part B) under the caption "Directors and Officers
of the Fund" is incorporated by reference.
Craig R. Barnes The Principal President
Vice President Financial Group Invista Capital
Des Moines, IA Management, Inc.
50392
*Craig L. Bassett Same See Part B
Treasurer
*Michael J. Beer Same See Part B
Senior Vice President
and Chief Operating
Officer
Mary L. Bricker Same Counsel and Assistant
Assistant Corporate Corporate Secretary
Secretary Principal Mutual Life
Insurance Company
Ray S. Crabtree Same Executive Vice President
Director Principal Mutual Life
Insurance Company
David J. Drury Same Chief Executive Officer
Director and Chairman of the Board
Principal Mutual Life
Insurance Company
*Arthur S. Filean Same See Part B
Vice President
Paul N. Germain Same Assistant Vice President -
Assistant Vice President - Operations
Operations Princor Financial Services
Corporation
Michael H. Gersie Same Senior Vice President
Director Principal Mutual Life
Insurance Company
*Ernest H. Gillum Same See Part B
Assistant Vice President -
Registered Products
Thomas J. Graf Same Senior Vice President
Director Principal Mutual Life
Insurance Company
*J. Barry Griswell Same See Part B
Chairman of the Board
and Director
Joyce N. Hoffman Same Vice President and
Vice President and Corporate Secretary
Corporate Secretary Principal Mutual Life
Insurance Company
*Stephan L. Jones Same See Part B
President and Director
Ronald E. Keller Same Executive Vice President
Director Principal Mutual Life
Insurance Company
Gregg R. Narber Same Senior Vice President and
Director General Counsel
Principal Mutual Life
Insurance Company
Layne A. Rasmussen Same Controller
Controller - Princor Financial Services
Mutual Funds Corporation
Elizabeth R. Ring Same Controller
Controller Princor Financial Services
Corporation
*Michael D. Roughton Same See Part B
Counsel
Charles E. Rohm Same Executive Vice President
Director Principal Mutual Life
Insurance Company
Jean B Schustek Same Product Compliance Officer -
Product Compliance Officer - Princor Financial Services
Registered Products Corporation
Dewain A. Sparrgrove Same Vice President -
Vice President Investment Securities
Principal Mutual Life
Insurance Company
Princor Management Corporation serves as investment adviser and dividend
disbursing and transfer agent for, Principal Aggressive Growth Fund, Inc.,
Principal Asset Allocation Fund, Inc., Principal Balanced Fund, Inc., Principal
Bond Fund, Inc., Principal Capital Accumulation Fund, Inc., Principal Emerging
Growth Fund, Inc., Principal Government Securities Fund, Inc., Principal Growth
Fund, Inc., Principal High Yield Fund, Inc., Principal Money Market Fund, Inc.,
Principal Special Markets Fund, Inc., Principal World Fund, Inc., Princor
Balanced Fund, Inc., Princor Blue Chip Fund, Inc., Princor Bond Fund, Inc.,
Princor Capital Accumulation Fund, Inc., Princor Cash Management Fund, Inc.,
Princor Emerging Growth Fund, Inc., Princor Government Securities Income Fund,
Inc., Princor Growth Fund, Inc., Princor High Yield Fund, Inc., Principal
International Emerging Markets, Inc., Principal International SmallCap Fund,
Inc., Princor Limited Term Bond Fund, Inc., Princor Tax-Exempt Bond Fund, Inc.,
Princor Tax-Exempt Cash Management Fund, Inc., Princor Utilities Fund, Inc. and
Princor World Fund, Inc. - funds sponsored by Principal Mutual Life Insurance
Company.
Item 29. Principal Underwriters
(a) Princor Financial Services Corporation, principal underwriter for
Registrant, acts as principal underwriter for, Principal Aggressive Growth Fund,
Inc., Principal Asset Allocation Fund, Inc., Principal Balanced Fund, Inc.,
Principal Bond Fund, Inc., Principal Capital Accumulation Fund, Inc., Principal
Emerging Growth Fund, Inc., Principal Government Securities Fund, Inc.,
Principal Growth Fund, Inc., Principal High Yield Fund, Inc., Principal Money
Market Fund, Inc., Principal Special Markets Fund, Inc., Principal World Fund,
Inc., Princor Balanced Fund, Inc., Princor Blue Chip Fund, Inc., Princor Bond
Fund, Inc., Princor Capital Accumulation Fund, Inc., Princor Cash Management
Fund, Inc., Princor Emerging Growth Fund, Inc., Princor Government Securities
Income Fund, Inc., Princor Growth Fund, Inc., Princor High Yield Fund, Inc.,
Princor Limited Term Bond Fund, Inc., Principal International Emerging Markets
Fund, Inc., Principal International SmallCap Fund, Inc., Princor Tax-Exempt Bond
Fund, Inc., Princor Tax-Exempt Cash Management Fund, Inc., Princor Utilities
Fund, Inc., Princor World Fund, Inc. and for variable annuity contracts
participating in Principal Mutual Life Insurance Company Separate Account B, a
registered unit investment trust for retirement plans adopted by public school
systems or certain tax-exempt organizations pursuant to Section 403(b) of the
Internal Revenue Code, Section 457 retirement plans, Section 401(a) retirement
plans, certain non- qualified deferred compensation plans and Individual
Retirement Annuity Plans adopted pursuant to Section408 of the Internal Revenue
Code, and for variable life insurance contracts issued by Principal Mutual Life
Insurance Company Variable Life Separate Account, a registered unit investment
trust.
(b) (1) (2) (3)
Positions
and offices Positions and
Name and principal with principal offices with
business address underwriter registrant
Robert W. Baehr Marketing Services None
The Principal Officer
Financial Group
Des Moines, IA 50392
Craig L. Bassett Treasurer Treasurer
The Principal
Financial Group
Des Moines, IA 50392
Michael J. Beer Senior Vice President and Vice President
The Principal Chief Operating Officer
Financial Group
Des Moines, IA 50392
Mary L. Bricker Assistant Corporate None
The Principal Secretary
Financial Group
Des Moines, IA 50392
Ray S. Crabtree Director None
The Principal
Financial Group
Des Moines, IA 50392
David J. Drury Director None
The Principal
Financial Group
Des Moines, IA 50392
Arthur S. Filean Vice President Vice President
The Principal and Secretary
Financial Group
Des Moines, IA 50392
Paul N. Germain Assistant Vice President- None
The Principal Operations
Financial Group
Des Moines, IA 50392
Michael H. Gersie Director None
The Principal
Financial Group
Des Moines, IA 50392
Ernest H. Gillum Assistant Vice President- Assistant
The Principal Registered Products Secretary
Financial Group
Des Moines, IA 50392
William C. Gordon Insurance License Officer None
The Principal
Financial Group
Des Moines, IA 50392
Thomas J. Graf Director None
The Principal
Financial Group
Des Moines, IA 50392
J. Barry Griswell Director and Director and
The Principal Chairman of the Chairman of the
Financial Group Board Board
Des Moines, IA 50392
Joyce N. Hoffman Vice President and None
The Principal Corporate Secretary
Financial Group
Des Moines, IA 50392
Stephan L. Jones Director and Director and
The Principal President President
Financial Group
Des Moines, IA 50392
Ronald E. Keller Director Director
The Principal
Financial Group
Des Moines, IA 50392
John R. Lepley Senior Vice None
The Principal President - Marketing
Financial Group and Distribution
Des Moines, IA 50392
Gregg R. Narber Director None
The Principal
Financial Group
Des Moines, IA 50392
Mark M. Oswald Compliance Officer None
The Principal
Financial Group
Des Moines, IA 50392
Layne A. Rasmussen Controller-Mutual Funds None
The Principal
Financial Group
Des Moines, IA 50392
Elizabeth R. Ring Controller None
The Principal
Financial Group
Des Moines, IA 50392
Charles E. Rohm Director None
The Principal
Financial Group
Des Moines, IA 50392
Michael D. Roughton Counsel Counsel
The Principal
Financial Group
Des Moines, IA 50392
Jean B. Schustek Product Compliance Officer- None
The Principal Registered Products
Financial Group
Des Moines, IA 50392
Kyle R. Selberg Vice President- None
The Principal Marketing
Financial Group
Des Moines, IA 50392
Susan R. Sorensen Marketing Officer None
The Principal
Financial Group
Des Moines, IA 50392
Roger C. Stroud Assistant Director- None
The Principal Marketing
Financial Group
Des Moines, IA 50392
(c) Inapplicable.
Item 30. Location of Accounts and Records
All accounts, books or other documents of the Registrant are located at the
offices of the Registrant and its Investment Adviser in the Principal Mutual
Life Insurance Company home office building, The Principal Financial Group, Des
Moines, Iowa 50392.
Item 31. Management Services
Inapplicable.
Item 32. Undertakings
Indemnification
Reference is made to Item 27 above, which discusses circumstances under
which directors and officers of the Registrant shall be indemnified by the
Registrant against certain liabilities and expenses incurred by them by reason
of being a director or officer of the Registrant.
Notwithstanding the provisions of Registrant's Articles of Incorporation
and Bylaws, the Registrant hereby makes the following undertaking:
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, 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 director, officer or controlling person of the Registrant, in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person of the Registrant, 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 question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue
Shareholder Communications
Registrant hereby undertakes to call a meeting of shareholders for the
purpose of voting upon the question of removal of a director or directors when
requested in writing to do so by the holders of at least 10% of the Registrant's
outstanding shares of common stock and in connection with such meeting to comply
with the provisions of Section 16(c) of the Investment Company Act of 1940
relating to shareholder communications
Delivery of Annual Report to Shareholders
The registrant hereby undertakes to furnish each person to whom a
prospectus is delivered a copy of the registrant's latest annual report to
shareholders, upon request and without charge.
Post-Effective Amendment Filing
Registrant hereby undertakes to file a post-effective amendment using
financial statements which need not be certified, with four months to six months
from the effective of Registrant's 1933 Act Registration Statement.
<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 Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Des Moines and State of Iowa, on the 22nd day of September, 1997.
Principal SmallCap Fund, Inc.
(Registrant)
By /s/ S. L. Jones
______________________________________
S. L. Jones
President and Director
Attest:
/s/ E. H. Gillum
______________________________________
E. H. Gillum
Assistant Secretary
<PAGE>
Pursuant to the requirement of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
Signature Title Date
/s/ S. L. Jones
_____________________________ President and Director 9/22/97
S. L. Jones (Principal Executive Officer) __________
/s/ J. B. Griswell
_____________________________ Director and 9/22/97
J. B. Griswell Chairman of the Board __________
/s/ M. J. Beer
_____________________________ Financial Officer (Principal 9/22/97
M. J. Beer Financial and Accounting Officer) __________
(J. D. Davis)*
_____________________________ Director 9/22/97
J. D. Davis __________
(R. W. Erhle)*
_____________________________ Director 9/22/97
R. W. Ehrle __________
(P. A. Ferguson)*
_____________________________ Director 9/22/97
P. A. Ferguson __________
(R. W. Gilbert)*
_____________________________ Director 9/22/97
R. W. Gilbert __________
(R. E. Keller)*
_____________________________ Director 9/22/97
R. E. Keller __________
(B. A. Lukavsky)*
_____________________________ Director 9/22/97
B. A. Lukavsky __________
(R. G. Peebler)*
_____________________________ Director 9/22/97
R. G. Peebler __________
*By /s/ S. L. Jones
_____________________________________
S. L. Jones
President and Director
Pursuant to Powers of Attorney
Previously Filed or Included
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones, J. B. Griswell, C.
L. Bassett, M. J. Beer and A. S. Filean and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, with full power of substitution to each, for and on behalf and in the
name of the undersigned, to execute and file any documents relating to
registration under the Securities Act of 1933 and the Investment Company Act of
1940 with respect to open end management investment companies currently
organized or to be organized in the future which are sponsored by Principal
Mutual Life Insurance Company, and any and all amendments thereto and reports
thereunder with all exhibits and all instruments necessary or appropriate in
connection therewith, each of said attorneys-in-fact and agents and his or their
substitutes being empowered to act with or without the others or other, and to
have full power and authority to do or cause to be done in the name and on
behalf of the undersigned each and every act and thing necessary or appropriate
to be done in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person; hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 15th day
of April, 1997.
/s/ J. D. Davis
_________________________
J. D. Davis
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones, J. B. Griswell, C.
L. Bassett, M. J. Beer and A. S. Filean and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, with full power of substitution to each, for and on behalf and in the
name of the undersigned, to execute and file any documents relating to
registration under the Securities Act of 1933 and the Investment Company Act of
1940 with respect to open end management investment companies currently
organized or to be organized in the future which are sponsored by Principal
Mutual Life Insurance Company, and any and all amendments thereto and reports
thereunder with all exhibits and all instruments necessary or appropriate in
connection therewith, each of said attorneys-in-fact and agents and his or their
substitutes being empowered to act with or without the others or other, and to
have full power and authority to do or cause to be done in the name and on
behalf of the undersigned each and every act and thing necessary or appropriate
to be done in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person; hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 15th day
of April, 1997.
/s/ R. W. Ehrle
_________________________
R. W. Ehrle
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones, J. B. Griswell, C.
L. Bassett, M. J. Beer and A. S. Filean and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, with full power of substitution to each, for and on behalf and in the
name of the undersigned, to execute and file any documents relating to
registration under the Securities Act of 1933 and the Investment Company Act of
1940 with respect to open end management investment companies currently
organized or to be organized in the future which are sponsored by Principal
Mutual Life Insurance Company, and any and all amendments thereto and reports
thereunder with all exhibits and all instruments necessary or appropriate in
connection therewith, each of said attorneys-in-fact and agents and his or their
substitutes being empowered to act with or without the others or other, and to
have full power and authority to do or cause to be done in the name and on
behalf of the undersigned each and every act and thing necessary or appropriate
to be done in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person; hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 15th day
of April, 1997.
/s/ P. A. Ferguson
_________________________
P. A. Ferguson
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones, J. B. Griswell, C.
L. Bassett, M. J. Beer and A. S. Filean and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, with full power of substitution to each, for and on behalf and in the
name of the undersigned, to execute and file any documents relating to
registration under the Securities Act of 1933 and the Investment Company Act of
1940 with respect to open end management investment companies currently
organized or to be organized in the future which are sponsored by Principal
Mutual Life Insurance Company, and any and all amendments thereto and reports
thereunder with all exhibits and all instruments necessary or appropriate in
connection therewith, each of said attorneys-in-fact and agents and his or their
substitutes being empowered to act with or without the others or other, and to
have full power and authority to do or cause to be done in the name and on
behalf of the undersigned each and every act and thing necessary or appropriate
to be done in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person; hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 15th day
of April, 1997.
/s/ R. W. Gilbert
_________________________
R. W. Gilbert
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones, J. B. Griswell, C.
L. Bassett, M. J. Beer and A. S. Filean and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, with full power of substitution to each, for and on behalf and in the
name of the undersigned, to execute and file any documents relating to
registration under the Securities Act of 1933 and the Investment Company Act of
1940 with respect to open end management investment companies currently
organized or to be organized in the future which are sponsored by Principal
Mutual Life Insurance Company, and any and all amendments thereto and reports
thereunder with all exhibits and all instruments necessary or appropriate in
connection therewith, each of said attorneys-in-fact and agents and his or their
substitutes being empowered to act with or without the others or other, and to
have full power and authority to do or cause to be done in the name and on
behalf of the undersigned each and every act and thing necessary or appropriate
to be done in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person; hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 15th day
of April, 1997.
/s/ J. B. Griswell
_________________________
J. B. Griswell
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones, J. B. Griswell, C.
L. Bassett, M. J. Beer and A. S. Filean and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, with full power of substitution to each, for and on behalf and in the
name of the undersigned, to execute and file any documents relating to
registration under the Securities Act of 1933 and the Investment Company Act of
1940 with respect to open end management investment companies currently
organized or to be organized in the future which are sponsored by Principal
Mutual Life Insurance Company, and any and all amendments thereto and reports
thereunder with all exhibits and all instruments necessary or appropriate in
connection therewith, each of said attorneys-in-fact and agents and his or their
substitutes being empowered to act with or without the others or other, and to
have full power and authority to do or cause to be done in the name and on
behalf of the undersigned each and every act and thing necessary or appropriate
to be done in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person; hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 15th day
of April, 1997.
/s/ R. E. Keller
_________________________
R. E. Keller
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones, J. B. Griswell, C.
L. Bassett, M. J. Beer and A. S. Filean and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, with full power of substitution to each, for and on behalf and in the
name of the undersigned, to execute and file any documents relating to
registration under the Securities Act of 1933 and the Investment Company Act of
1940 with respect to open end management investment companies currently
organized or to be organized in the future which are sponsored by Principal
Mutual Life Insurance Company, and any and all amendments thereto and reports
thereunder with all exhibits and all instruments necessary or appropriate in
connection therewith, each of said attorneys-in-fact and agents and his or their
substitutes being empowered to act with or without the others or other, and to
have full power and authority to do or cause to be done in the name and on
behalf of the undersigned each and every act and thing necessary or appropriate
to be done in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person; hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 15th day
of April, 1997.
/s/ S. L. Jones
_________________________
S. L. Jones
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones, J. B. Griswell, C.
L. Bassett, M. J. Beer and A. S. Filean and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, with full power of substitution to each, for and on behalf and in the
name of the undersigned, to execute and file any documents relating to
registration under the Securities Act of 1933 and the Investment Company Act of
1940 with respect to open end management investment companies currently
organized or to be organized in the future which are sponsored by Principal
Mutual Life Insurance Company, and any and all amendments thereto and reports
thereunder with all exhibits and all instruments necessary or appropriate in
connection therewith, each of said attorneys-in-fact and agents and his or their
substitutes being empowered to act with or without the others or other, and to
have full power and authority to do or cause to be done in the name and on
behalf of the undersigned each and every act and thing necessary or appropriate
to be done in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person; hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 15th day
of April, 1997.
/s/ B. A. Lukavsky
_________________________
B. A. Lukavsky
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones, J. B. Griswell, C.
L. Bassett, M. J. Beer and A. S. Filean and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, with full power of substitution to each, for and on behalf and in the
name of the undersigned, to execute and file any documents relating to
registration under the Securities Act of 1933 and the Investment Company Act of
1940 with respect to open end management investment companies currently
organized or to be organized in the future which are sponsored by Principal
Mutual Life Insurance Company, and any and all amendments thereto and reports
thereunder with all exhibits and all instruments necessary or appropriate in
connection therewith, each of said attorneys-in-fact and agents and his or their
substitutes being empowered to act with or without the others or other, and to
have full power and authority to do or cause to be done in the name and on
behalf of the undersigned each and every act and thing necessary or appropriate
to be done in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person; hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 15th day
of April, 1997.
/s/ R. G. Peebler
_________________________
R. G. Peebler
ARTICLES OF INCORPORATION
OF
PRINCIPAL SMALLCAP FUND, INC.
ARTICLE I
Incorporator
The undersigned Arthur S. Filean and Ernest H. Gillum, whose post office
address is The Principal Financial Group, Des Moines, Iowa 50392, being at least
18 years of age, incorporators, hereby form a corporation under and by virtue of
the laws of Maryland.
ARTICLE II
Name
The name of the corporation is Principal SmallCap Fund, Inc. hereinafter
called the "Corporation."
ARTICLE III
Corporate Purposes and Powers
The Corporation is formed for the following purposes:
(1) To conduct and carry on the business of an investment company.
(2) To hold, invest and reinvest its assets in securities and other
investments or to hold part or all of its assets in cash.
(3) To issue and sell shares of its capital stock in such amounts and on
such terms and conditions and for such purposes and for such amount or kind of
consideration as may now or hereafter be permitted by law.
(4) To redeem, purchase or acquire in any other manner, hold, dispose of,
resell, transfer, reissue or cancel (all without the vote or consent of the
stockholders of the Corporation) shares of its capital stock, in any manner and
to the extent now or hereafter permitted by law and by these Articles of
Incorporation.
(5) To do any and all additional acts and to exercise any and all
additional powers or rights as may be necessary, incidental, appropriate or
desirable for the accomplishment of all or any of the foregoing purposes.
To carry out all or any part of the foregoing objects as principal, factor,
agent, contractor, or otherwise, either alone or through or in conjunction with
any person, firm, association or corporation, and, in carrying on its business
and for the purpose of attaining or furnishing any of its objects and purposes,
to make and perform any contracts and to do any acts and things, and to exercise
any powers suitable, convenient or proper for the accomplishment of any of the
objects and purposes herein enumerated or incidental to the powers herein
specified, or which at any time may appear conducive to or expedient for the
accomplishment of any such objects and purposes.
To carry out all or any part of the aforesaid objects and purposes, and to
conduct its business in all or any of its branches, in any or all states,
territories, districts and possessions of the United States of America and in
foreign countries; and to maintain offices and agencies in any or all states,
territories, districts and possessions of the United States of America and in
foreign countries.
The foregoing objects and purposes shall, except when otherwise expressed,
be in no way limited or restricted by reference to or inference from the terms
of any other clause of this or any other article of these Articles of
Incorporation or of any amendment thereto, and shall each be regarded as
independent, and construed as powers as well as objects and purposes.
The Corporation shall be authorized to exercise and enjoy all of the
powers, rights and privileges granted to, or conferred upon, corporations of a
similar character by the Maryland General Corporation Law now or hereafter in
force, and the enumeration of the foregoing powers shall not be deemed to
exclude any powers, rights or privileges so granted or conferred.
ARTICLE IV
Principal Office and Resident Agent
The post office address of the principal office of the Corporation in this
State is c/o The Corporation Trust Incorporated, 32 South Street, Baltimore,
Maryland 21202. The name of the resident agent of the Corporation in this State
is The Corporation Trust Incorporated, a corporation of this State, and the post
office address of the resident agent is 32 South Street, Baltimore, Maryland
21202.
ARTICLE V
Capital Stock
Section 1. Authorized Shares: The total number of shares of stock which the
Corporation shall have authority to issue is one hundred million (100,000,000)
shares, of the par value of one cent ($.01) each and of the aggregate par value
of one million dollars ($1,000,000). The shares may be issued by the Board of
Directors in such separate and distinct series and classes of series as the
Board of Directors shall from time to time create and establish. The Board of
Directors shall have full power and authority, in its sole discretion, to
establish and designate series and classes of series, and to classify or
reclassify any unissued shares in separate series or classes having such
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption as shall be fixed and determined from time to time by the Board of
Directors. In the event of establishment of classes, each class of a series
shall represent interests in the assets belonging to that series and have
identical voting, dividend, liquidation and other rights and the same terms and
conditions as any other class of the series, except that expenses allocated to
the class of a series may be borne solely by such class as shall be determined
by the Board of Directors and may cause differences in rights as described in
the following sentence. The shares of a class may be converted into shares of
another class upon such terms and conditions as shall be determined by the Board
of Directors, and a class of a series may have exclusive voting rights with
respect to matters affecting only that class. Expenses related to the
distribution of, and other identified expenses that should properly be allocated
to, the shares of a particular series or class may be charged to and borne
solely by such series or class, and the bearing of expenses solely by a series
or class may be appropriately reflected (in a manner determined by the Board of
Directors) and cause differences in the net asset value attributable to, and the
dividend, redemption and liquidation rights of, the shares of each series or
class. Subject to the authority of the Board of Directors to increase and
decrease the number of, and to reclassify the shares of any series or class,
there are hereby established three classes of common stock, each comprising the
number of shares and having the designation indicated:
Class Number of Shares
Class A 25,000,000
Class B 25,000,000
Class R 25,000,000
In addition, the Board of Directors is hereby expressly granted authority to
change the designation of any series or class, to increase or decrease the
number of shares of any series or class, provided that the number of shares of
any series or class shall not be decreased by the Board of Directors below the
number of shares thereof then outstanding, and to reclassify any unissued shares
into one or more series or classes that may be established and designated from
time to time. Notwithstanding the designations herein of series and classes, the
Corporation may refer, in prospectuses and other documents furnished to
shareholders, filed with the Securities and Exchange Commission or used for
other purposes, to a series of shares as a "class" and to a class of shares of a
particular series as a "series."
(a) The Corporation may issue shares of stock in fractional
denominations to the same extent as its whole shares, and shares in
fractional denominations shall be shares of stock having proportionately,
to the respective fractions represented thereby, all the rights of whole
shares, including without limitation, the right to vote, the right to
receive dividends and distributions and the right to participate upon
liquidation of the Corporation, but excluding the right to receive a stock
certificate representing fractional shares.
(b) The holder of each share of stock of the Corporation shall be
entitled to one vote for each full share, and a fractional vote for each
fractional share, of stock, irrespective of the series or class, then
standing in the holder's name on the books of the Corporation. On any
matter submitted to a vote of stockholders, all shares of the Corporation
then issued and outstanding and entitled to vote shall be voted in the
aggregate and not by series or class except that (1) when otherwise
expressly required by the Maryland General Corporation Law or the
Investment Company Act of 1940, as amended, shares shall be voted by
individual series or class, and (2) if the Board of Directors, in its sole
discretion, determines that a matter affects the interests of only one or
more particular series or class or classes then only the holders of shares
of such affected series or class or classes shall be entitled to vote
thereon.
(c) Unless otherwise provided in the resolution of the Board of
Directors providing for the establishment and designation of any new series
or class or classes, each series of stock of the Corporation shall have the
following powers, preferences and rights, and qualifications, restrictions,
and limitations thereof:
(1) Assets Belonging to a Class. All consideration received by the
Corporation for the issue or sale of shares of a particular class,
together with all assets in which such consideration is invested or
reinvested, all income, earnings, profits and proceeds thereof,
including any proceeds derived from the sale, exchange or liquidation
of such assets, and any funds or payments derived from any reinvestment
of such proceeds in whatever form the same may be, shall irrevocably
belong to that class for all purposes, subject only to the rights of
creditors, and shall be so recorded upon the books and accounts of the
Corporation. Such consideration, assets, income, earnings, profits and
proceeds thereof, including any proceeds derived from the sale,
exchange or liquidation of such assets, and any funds or payments
derived from any reinvestment of such proceeds, in whatever form the
same may be, together with any General Items allocated to that class as
provided in the following sentence, are herein referred to as "assets
belonging to" that class. In the event that there are any assets,
income, earnings, profits, proceeds thereof, funds or payments which
are not readily identifiable as belonging to any particular class
(collectively "General Items"), such General Items shall be allocated
by or under the supervision of the Board of Directors to and among any
one or more of the classes established and designated from time to time
in such manner and on such basis as the Board of Directors, in its sole
discretion, deems fair and equitable, and any General Items so
allocated to a particular class shall belong to that class. Each such
allocation by the Board of Directors shall be conclusive and binding
for all purposes.
(2) Liabilities Belonging to a Class. The assets belonging to each
particular class shall be charged with the liabilities of the
Corporation in respect of that class and all expenses, costs, charges
and reserves attributable to that class, and any general liabilities,
expenses, costs, charges or reserves of the Corporation which are not
readily identifiable as belonging to any particular class shall be
allocated and charged by or under the supervision of the Board of
Directors to and among any one or more of the classes established and
designated from time to time in such manner and on such basis as the
Board of Directors, in its sole discretion, deems fair and equitable.
The liabilities, expenses, costs, charges and reserves allocated and so
charged to a class are herein referred to as "liabilities belonging to"
that class. Expenses related to the shares of a series may be borne
solely by that series (as determined by the Board of Directors). Each
allocation of liabilities, expenses, costs, charges and reserves by the
Board of Directors shall be conclusive and binding for all purposes.
(3) Dividends. The Board of Directors may from time to time
declare and pay dividends or distributions, in stock, property or cash,
on any or all series of stock or classes of series, the amount of such
dividends and property distributions and the payment of them being
wholly in the discretion of the Board of Directors. Dividends may be
declared daily or otherwise pursuant to a standing resolution or
resolutions adopted only once or with such frequency as the Board of
Directors may determine, after providing for actual and accrued
liabilities belonging to that class. All dividends or distributions on
shares of a particular class shall be paid only out of surplus or other
lawfully available assets determined by the Board of Directors as
belonging to such class. Dividends and distributions may vary between
the classes of a series to reflect differing allocations of the expense
of each class of that series to such extent and for such purposes as
the Boards of Directors may deem appropriate. The Board of Directors
shall have the power, in its sole discretion, to distribute in any
fiscal year as dividends, including dividends designated in whole or in
part as capital gains distributions, amounts sufficient, in the opinion
of the Board of Directors, to enable the Corporation, or where
applicable each series or class of a series of shares, to qualify as a
regulated investment company under the Internal Revenue Code of 1986,
as amended, or any successor or comparable statute thereto, and
regulations promulgated thereunder, and to avoid liability for the
Corporation, or each series of shares or class of a series, for Federal
income and excise taxes in respect of that or any other year.
(4) Liquidation. In the event of the liquidation of the
Corporation or of the assets attributable to a particular series or
class, the shareholders of each series or class that has been
established and designated and is being liquidated shall be entitled to
receive, as a series or class, when and as declared by the Board of
Directors, the excess of the assets belonging to that series or class
over the liabilities belonging to that series or class. The holders of
shares of any series or class shall not be entitled thereby to any
distribution upon liquidation of any other series or class. The assets
so distributable to the shareholder of any particular series or class
shall be distributed among such shareholders according to their
respective rights taking into account the proper allocation of expenses
being borne by that series or class. The liquidation of assets
attributable to any particular series or class in which there are
shares then outstanding may be authorized by vote of a majority of the
Board of Directors then in office, subject to the approval of a
majority of the outstanding voting securities of that series or class,
as defined in the Investment Company Act of 1940, as amended. In the
event that there are any general assets not belonging to any particular
series or class of stock and available for distribution, such
distribution shall be made to holders of stock of various series or
classes in such proportion as the Board of Directors determines to be
fair and equitable, and such determination by the Board of Directors
shall be conclusive and binding for all purposes.
(5) Redemption. All shares of stock of the Corporation shall have
the redemption rights provided for in Article V, Section 5.
(d) The Corporation's shares of stock are issued and sold, and all
persons who shall acquire stock of the Corporation shall do so, subject to
the condition and understanding that the provisions of the Corporation's
Articles of Incorporation, as from time to time amended, shall be binding
upon them.
Section 2. Quorum Requirements and Voting Rights: Except as otherwise
expressly provided by the Maryland General Corporation Law, the presence in
person or by proxy of the holders of one-third of the shares of capital stock of
the Corporation outstanding and entitled to vote thereat shall constitute a
quorum at any meeting of the stockholders, except that where the holders of any
series or class are required or permitted to vote as a series or class,
one-third of the aggregate number of shares of that series or class outstanding
and entitled to vote shall constitute a quorum.
Notwithstanding any provision of Maryland General Corporation Law requiring
a greater proportion than a majority of the votes of all series or classes or of
any series or class of the Corporation's stock entitled to be cast in order to
take or authorize any action, any such action may be taken or authorized upon
the concurrence of a majority of the aggregate number of votes entitled to be
cast thereon subject to the applicable laws and regulations as from time to time
in effect or rules or orders of the Securities and Exchange Commission or any
successor thereto. All shares of stock of this Corporation shall have the voting
rights provided for in Article V, Section 1, paragraph (b).
Section 3. No Preemptive Rights: No holder of shares of capital stock of
the Corporation shall, as such holder, have any right to purchase or subscribe
for any shares of the capital stock of the Corporation which the Corporation may
issue or sell (whether consisting of shares of capital stock authorized by these
Articles of Incorporation, or shares of capital stock of the Corporation
acquired by it after the issue thereof, or other shares) other than any right
which the Board of Directors of the Corporation, in its discretion, may
determine.
Section 4. Determination of Net Asset Value: The net asset value of each
share of each series or class of each series of the Corporation shall be the
quotient obtained by dividing the value of the net assets of the Corporation, or
if applicable of the series or class (being the value of the assets of the
Corporation or of the particular series or class or attributable to the
particular series or class less its actual and accrued liabilities exclusive of
capital stock and surplus), by the total number of outstanding shares of the
Corporation or the series or class, as applicable. Such determination may be
made on a series-by-series basis or made or adjusted on a class-by-class basis,
as appropriate, and shall include any expenses allocated to a specific series or
class thereof. The Board of Directors may adopt procedures for determination of
net asset value consistent with the requirements of applicable statutes and
regulations and, so far as accounting matters are concerned, with generally
accepted accounting principles. The procedures may include, without limitation,
procedures for valuation of the Corporation's portfolio securities and other
assets, for accrual of expenses or creation of reserves and for the
determination of the number of shares issued and outstanding at any given time.
Section 5. Redemption and Repurchase of Shares of Capital Stock: Any
shareholder may redeem shares of the Corporation for the net asset value of each
series or class thereof by presentation of an appropriate request, together with
the certificates, if any, for such shares, duly endorsed, at the office or
agency designated by the Corporation. Redemptions as aforesaid, or purchases by
the Corporation of its own stock, shall be made in the manner and subject to the
conditions contained in the bylaws or approved by the Board of Directors.
Section 6. Purchase of Shares: The Corporation shall be entitled to
purchase shares of any series or class of its capital stock, to the extent that
the Corporation may lawfully effect such purchase under Maryland General
Corporation Law, upon such terms and conditions and for such consideration as
the Board of Directors shall deem advisable, by agreement with the stockholder
at a price not exceeding the net asset value per share computed in accordance
with Section 4 of this Article.
Section 7. Redemption of Minimum Amounts:
(a) If after giving effect to a request for redemption by a
stockholder, the aggregate net asset value of his remaining shares of any
series or class will be less than the Minimum Amount then in effect, the
Corporation shall be entitled to require the redemption of the remaining
shares of such series or class owned by such stockholder, upon notice given
in accordance with paragraph (c) of this Section, to the extent that the
Corporation may lawfully effect such redemption under Maryland General
Corporation Law.
(b) The term "Minimum Amount" when used herein shall mean Three Hundred
Dollars ($300) unless otherwise fixed by the Board of Directors from time
to time, provided that the Minimum Amount may not in any event exceed Five
Thousand Dollars ($5,000).
(c) If any redemption under paragraph (a) of this Section is upon
notice, the notice shall be in writing personally delivered or deposited in
the mail, at least thirty days prior to such redemption. If mailed, the
notice shall be addressed to the stockholder at his post office address as
shown on the books of the Corporation, and sent by certified or registered
mail, postage prepaid. The price for shares redeemed by the Corporation
pursuant to paragraph (a) of this Section shall be paid in cash in an
amount equal to the net asset value of such shares, computed in accordance
with Section 4 of this Article.
Section 8. Mode of Payment: Payment by the Corporation for shares of any
series or class of the capital stock of the Corporation surrendered to it for
redemption shall be made by the Corporation within three business days of such
surrender out of the funds legally available therefor, provided that the
Corporation may suspend the right of the holders of capital stock of the
Corporation to redeem shares of capital stock and may postpone the right of such
holders to receive payment for any shares when permitted or required to do so by
law. Payment of the redemption or purchase price may be made in cash or, at the
option of the Corporation, wholly or partly in such portfolio securities of the
Corporation as the Corporation may select.
Section 9. Rights of Holders of Shares Purchased or Redeemed: The right of
any holder of any series or class of capital stock of the Corporation purchased
or redeemed by the Corporation as provided in this Article to receive dividends
thereon and all other rights of such holder with respect to such shares shall
terminate at the time as of which the purchase or redemption price of such
shares is determined, except the right of such holder to receive (i) the
purchase or redemption price of such shares from the Corporation or its
designated agent and (ii) any dividend or distribution or voting rights to which
such holder has previously become entitled as the record holder of such shares
on the record date for the determination of the stockholders entitled to receive
such dividend or distribution or to vote at the meeting of stockholders.
Section 10. Status of Shares Purchased or Redeemed: In the absence of any
specification as to the purpose for which such shares of any series or class of
capital stock of the Corporation are redeemed or purchased by it, all shares so
redeemed or purchased shall be deemed to be retired in the sense contemplated by
the laws of the State of Maryland and may be reissued. The number of authorized
shares of capital stock of the Corporation shall not be reduced by the number of
any shares redeemed or purchased by it.
Section 11. Additional Limitations and Powers: The following provisions are
inserted for the purpose of defining, limiting and regulating the powers of the
Corporation and of the Board of Directors and stockholders:
(a) Any determination made in good faith and, so far as accounting
matters are involved, in accordance with generally accepted accounting
principles by or pursuant to the direction of the Board of Directors, as to
the amount of the assets, debts, obligations or liabilities of the
Corporation, as to the amount of any reserves or charges set up and the
propriety thereof, as to the time of or purpose for creating such reserves
or charges, as to the use, alteration or cancellation of any reserves or
charges (whether or not any debt, obligation or liability for which such
reserves or charges shall have been created shall have been paid or
discharged or shall be then or thereafter required to be paid or
discharged), as to the establishment or designation of procedures or
methods to be employed for valuing any investment or other assets of the
Corporation and as to the value of any investment or other asset, as to the
allocation of any asset of the Corporation to a particular series or class
or classes of the Corporation's stock, as to the funds available for the
declaration of dividends and as to the declaration of dividends, as to the
charging of any liability of the Corporation to a particular series or
class or classes of the Corporation's stock, as to the number of shares of
any series or class or classes of the Corporation's outstanding stock, as
to the estimated expense to the Corporation in connection with purchases or
redemptions of its shares, as to the ability to liquidate investments in
orderly fashion, or as to any other matters relating to the issue, sale,
purchase or redemption or other acquisition or disposition of investments
or shares of the Corporation, or in the determination of the net asset
value per share of shares of any series or class of the Corporation's stock
shall be conclusive and binding for all purposes.
(b) Except to the extent prohibited by the Investment Company Act of
1940, as amended, or rules, regulations or orders thereunder promulgated by
the Securities and Exchange Commission or any successor thereto or by the
bylaws of the Corporation, a director, officer or employee of the
Corporation shall not be disqualified by his position from dealing or
contracting with the Corporation, nor shall any transaction or contract of
the Corporation be void or voidable by reason of the fact that any
director, officer or employee or any firm of which any director, officer or
employee is a member, or any corporation of which any director, officer or
employee is a stockholder, officer or director, is in any way interested in
such transaction or contract; provided that in case a director, or a firm
or corporation of which a director is a member, stockholder, officer or
director is so interested, such fact shall be disclosed to or shall have
been known by the Board of Directors or a majority thereof. Nor shall any
director or officer of the Corporation be liable to the Corporation or to
any stockholder or creditor thereof or to any person for any loss incurred
by it or him or for any profit realized by such director or officer under
or by reason of such contract or transaction; provided that nothing herein
shall protect any director or officer of the Corporation against any
liability to the Corporation or to its security holders to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of
his office; and provided always that such contract or transaction shall
have been on terms that were not unfair to the Corporation at the time at
which it was entered into. Any director of the Corporation who is so
interested, or who is a member, stockholder, officer or director of such
firm or corporation, may be counted in determining the existence of a
quorum at any meeting of the Board of Directors of the Corporation which
shall authorize any such transaction or contract, with like force and
effect as if he were not such director, or member, stockholder, officer or
director of such firm or corporation.
(c) Specifically and without limitation of the foregoing paragraph (b)
but subject to the exception therein prescribed, the Corporation may enter
into management or advisory, underwriting, distribution and administration
contracts, custodian contracts and such other contracts as may be
appropriate.
ARTICLE VI
Directors
Section 1. Initial Board of Directors: The number of directors of the
Corporation shall initially be nine. The names of the directors who shall hold
office until the first annual meeting of stockholders or until their successors
are duly chosen and qualified are:
James D. Davis Roy W. Ehrle Pamela A. Ferguson
Richard W. Gilbert J. Barry Griswell Stephan L. Jones
Ronald E. Keller Barbara A. Lukavsky Richard G. Peebler
Section 2. Number of Directors: The number of directors in office may be
changed from time to time in the manner specified in the bylaws of the
Corporation, but this number shall never be less than three.
Section 3. Certain Powers of Board of Directors: The business and affairs
of the Corporation shall be managed under the direction of the Board of
Directors, which shall have and may exercise all powers of the Corporation
except those powers which are by law, by these Articles of Incorporation or by
the bylaws of the Corporation conferred upon or reserved to the stockholders. In
addition to its other powers explicitly or implicitly granted under these
Articles of Incorporation, by law or otherwise, the Board of Directors of the
Corporation (a) is expressly authorized to make, alter, amend or repeal bylaws
for the Corporation, (b) is empowered to authorize, without stockholder
approval, the issuance and sale from time to time of shares of capital stock of
the Corporation, whether now or hereafter authorized, in such amounts, for such
amount and kind of consideration and on such terms and conditions as the Board
of Directors shall determine, (c) is empowered to classify or reclassify any
unissued stock, whether now or hereafter authorized, by setting or changing the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption of such stock, and (d) shall have the power from time to time to set
apart, out of any assets of the Corporation otherwise available for dividends, a
reserve or reserves for taxes or for any other proper purposes, and to reduce,
abolish or add to any such reserve or reserves from time to time as said Board
of Directors may deem to be in the best interests of the Corporation; and to
determine in its discretion what part of the assets of the Corporation available
for dividends in excess of such reserve or reserves shall be declared in
dividends and paid to the stockholders of the Corporation.
ARTICLE VII
Indemnification
The Corporation shall indemnify its directors, including any director who
serves another corporation, partnership, joint venture, trust or other
enterprise in any capacity at the request of the Corporation, to the maximum
extent permitted by the Maryland General Corporation Law and the Investment
Company Act of 1940. The Corporation shall indemnify its officers to the same
extent as its directors and to such further extent as is consistent with law.
The Corporation shall indemnify its employees and agents to the extent provided
by its Board of Directors.
ARTICLE VIII
Amendments
The Corporation reserves the right from time to time to make any amendment
of these Articles of Incorporation now or hereafter authorized by law, including
any amendment which alters the contract rights, as expressly set forth in these
Articles of Incorporation, of any outstanding capital stock. "Articles of
Incorporation" or "these Articles of Incorporation" as used herein and in the
bylaws of the Corporation shall be deemed to mean these Articles of
Incorporation as from time to time amended or restated.
ARTICLE IX
Duration
The duration of the Corporation shall be perpetual.
IN WITNESS WHEREOF, the undersigned incorporators of Principal SmallCap
Fund, Inc. have executed the foregoing Articles of Incorporation and hereby
acknowledge the same to be their voluntary act and deed.
Dated the 12th day of August, 1997
/s/ Arthur S. Filean
-----------------------------------
Arthur S. Filean
/s/ Ernest H. Gillum
-----------------------------------
Ernest H. Gillum
BYLAWS
OF
PRINCIPAL SMALLCAP FUND, INC.
ARTICLE 1
Name, Fiscal Year
1.01 The name of this corporation shall be Principal SmallCap Fund, Inc.,
Inc. Except as otherwise from time to time provided by the board of directors,
the fiscal year of the corporation shall begin November 1 and end October 31.
ARTICLE 2
Stockholders' Meetings
2.01 Place of Meetings. All meetings of the stockholders shall be held at
such place within or without the State of Maryland, as is stated in the notice
of meeting.
2.02 Annual Meetings. The Board of Directors of the Fund shall determine
whether or not an annual meeting of stockholders shall be held. In the event
that an annual meeting of stockholders is held, such meeting shall be held on
the first Tuesday after the first Monday of February in each year or on such
other day during the 31-day period following the first Tuesday after the first
Monday of February as the directors may determine.
2.03 Special Meetings. Special meetings of the stockholders shall be held
whenever called by the chairman of the board, the president or the board of
directors, or when requested in writing by 10% of the Fund's outstanding shares.
2.04 Notice of Stockholders' Meetings. Notice of each stockholders' meeting
stating the place, date and hour of the meeting and the purpose or purposes for
which the meeting is called shall be given by mailing such notice to each
stockholder of record at his address as it appears on the records of the
corporation not less than 10 nor more than 90 days prior to the date of the
meeting. Any meeting at which all stockholders entitled to vote are present
either in person or by proxy or of which those not present have waived notice in
writing shall be a legal meeting for the transaction of business notwithstanding
that notice has not been given as herein provided.
2.05 Quorum. Except as otherwise expressly required by law, these bylaws or
the Articles of Incorporation, as from time to time amended, at any meeting of
the stockholders the presence in person or by proxy of the holders of one-third
of the shares of capital stock of the Corporation issued and outstanding and
entitled to vote, shall constitute a quorum, but a lesser interest may adjourn
any meeting from time to time and the meeting may be held as adjourned without
further notice. When a quorum is present at any meeting a majority of the stock
represented thereat shall decide any question brought before such meeting unless
the question is one upon which by express provision of law or of these bylaws or
the Articles of Incorporation a larger or different vote is required, in which
case such express provision shall govern.
2.06 Proxies and Voting Stockholders of record may vote at any meeting
either in person or by written proxy signed by the stockholder or by the
stockholder's duly authorized attorney-in-fact dated not more than eleven months
before the date of exercise, which shall be filed with the Secretary of the
meeting before being voted. Each stockholder shall be entitled to one vote for
each share of stock held, and to a fraction of a vote equal to any fractional
share held.
2.07 Stock Ledger. The Corporation shall maintain at the office of the
stock transfer agent of the Corporation, or at the office of any successor
thereto as stock transfer agent of the Corporation, an original stock ledger
containing the names and addresses of all stockholders and the number of shares
of each class held by each stockholder. Such stock ledger may be in written form
or any other form capable of being converted into written form within a
reasonable time for visual inspection.
ARTICLE 3
Board of Directors
3.01 Number, Service. The Corporation shall have a Board of Directors
consisting of not less than three and no more than fifteen members. The number
of Directors to constitute the whole board within the limits above-stated shall
be fixed by the Board of Directors. The Directors may be chosen (i) by
stockholders at any annual meeting of stockholders held for the purpose of
electing directors or at any meeting held in lieu thereof, or at any special
meeting called for such purpose, or (ii) by the Directors at any regular or
special meeting of the Board to fill a vacancy on the Board as provided in these
bylaws and Maryland General Corporation Law. Each director should serve until
the next annual meeting of shareholders and until a successor is duly qualified
and elected, unless sooner displaced.
3.02 Powers. The board of directors shall be responsible for the entire
management of the business of the Corporation. In the management and control of
the property, business and affairs of the Corporation the board of directors is
hereby vested with all the powers possessed by the corporation itself so far as
this designation of authority is not inconsistent with the laws of the State of
Maryland, but subject to the limitations and qualifications contained in the
Articles of Incorporation and in these bylaws.
3.03 Executive Committee and Other Committees. The board of directors may
elect from its members an executive committee of not less than three which may
exercise certain powers of the board of directors when the board is not in
session pursuant to Maryland law. The executive committee may make rules for the
holding and conduct of its meetings and keeping the records thereof, and shall
report its action to the board of directors.
The board of directors may elect from its members such other committees
from time to time as it may desire. The number composing such committees and the
powers conferred upon them shall be determined by the board of directors at its
own discretion.
3.04 Meetings. Regular meetings of the board of directors may be held in
such places within or without the State of Maryland, and at such times as the
board may from time to time determine, and if so determined, notices thereof
need not be given. Special meetings of the board of directors may be held at any
time or place whenever called by the president or a majority of the directors,
notice thereof being given by the secretary or the president, or the directors
calling the meeting, to each director. Special meetings of the board of
directors may also be held without formal notice provided all directors are
present or those not present have waived notice thereof.
3.05 Quorum. A majority of the members of the board of directors from time
to time in office but in no event not less than one-third of the number
constituting the whole board shall constitute a quorum for the transaction of
business provided, however, that where the Investment Company Act of 1940
requires a different quorum to transact business of a specific nature, the
number of directors so required shall constitute a quorum for the transaction of
such business.
A lesser number may adjourn a meeting from time to time and the meeting may
be held without further notice. When a quorum is present at any meeting a
majority of the members present thereat shall decide any question brought before
such meeting except as otherwise expressly required by law, the Articles of
Incorporation or these bylaws.
3.06 Action by Directors Other than at a Meeting. Any action required or
permitted to be taken at any meeting of the Board of Directors, or of any
committee thereof, may be taken without a meeting, if a written consent to such
action is signed by all members of the Board of Directors or such committee, as
the case may be, and such written consent is filed with the minutes of
proceedings of the Board of Directors or committee.
3.07 Holding of Meetings by Conference Telephone Call. At any regular or
special meeting, members of the Board of Directors or any committee thereof may
participate by conference telephone or similar communications equipment by means
of which all persons participating in the meeting can hear each other.
Participation in a meeting pursuant to this Section shall constitute presence in
person at such meeting.
ARTICLE 4
Officers
4.01 Selection. The officers of the corporation shall be a president, one
or more vice presidents, a secretary and a treasurer. The board of directors
may, if it so determines, also elect a chairman of the board. All officers shall
be elected by the board of directors and shall serve at the pleasure of the
board. The same person may hold more than one office except the offices of
president and vice president.
4.02 Eligibility. The chairman of the board, if any, and the president
shall be directors of the corporation. Other officers need not be directors.
4.03 Additional Officers and Agents. The board of directors may appoint one
or more assistant treasurers, one or more assistant secretaries and such other
officers or agents as it may deem advisable, and may prescribe the duties
thereof.
4.04 Chairman of the Board of Directors. The chairman of the board, if any,
shall preside at all meetings of the board of directors at which he is present.
He shall have such other authority and duties as the board of directors shall
from time to time determine.
4.05 The President. The president shall be the chief executive officer of
the corporation; he shall have general and active management of the business,
affairs and property of the corporation, and shall see that all orders and
resolutions of the board of directors are carried into effect. He shall preside
at meetings of stockholders, and of the board of directors unless a chairman of
the board has been elected and is present.
4.06 The Vice Presidents. The vice presidents shall respectively have such
powers and perform such duties as may be assigned to them by the board of
directors or the president. In the absence or disability of the president, the
vice presidents, in the order determined by the board of directors, shall
perform the duties and exercise the powers of the president.
4.07 The Secretary. The secretary shall keep accurate minutes of all
meetings of the stockholders and directors, and shall perform all duties
commonly incident to his office and as provided by law and shall perform such
other duties and have such other powers as the board of directors shall from
time to time designate. In his absence an assistant secretary or secretary pro
tempore shall perform his duties.
4.08 The Treasurer. The treasurer shall, subject to the order of the board
of directors and in accordance with any arrangements for performance of services
as custodian, transfer agent or disbursing agent approved by the board, have the
care and custody of the money, funds, securities, valuable papers and documents
of the corporation, and shall have and exercise under the supervision of the
board of directors all powers and duties commonly incident to his office and as
provided by law. He shall keep or cause to be kept accurate books of account of
the corporation's transactions which shall be subject at all times to the
inspection and control of the board of directors. He shall deposit all funds of
the corporation in such bank or banks, trust company or trust companies or such
firm or firms doing a banking business as the board of directors shall
designate. In his absence, an assistant treasurer shall perform his duties.
ARTICLE 5
Vacancies
5.01 Removals. The stockholders may at any meeting called for the purpose,
by vote of the holders of a majority of the capital stock issued and outstanding
and entitled to vote, remove from office any director and, unless the number of
directors constituting the whole board is accordingly decreased, elect a
successor. To the extent consistent with the Investment Company Act of 1940, the
board of directors may by vote of not less than a majority of the directors then
in office remove from office any director, officer or agent elected or appointed
by them and may for misconduct remove any thereof elected by the stockholders.
5.02 Vacancies. If the office of any director becomes or is vacant by
reason of death, resignation, removal, disqualification, an increase in the
authorized number of directors or otherwise, the remaining directors may by vote
of a majority of said directors choose a successor or successors who shall hold
office for the unexpired term; provided that vacancies on the board of directors
may be so filled only if, after the filling of the same, at least two-thirds of
the directors then holding office would be directors elected to such office by
the stockholders at a meeting or meetings called for the purpose. In the event
that at any time less than a majority of the directors were so elected by the
stockholders, a special meeting of the stockholders shall be called forthwith
and held as promptly as possible and in any event within sixty days for the
purpose of electing an entire new board of directors.
ARTICLE 6
Certificates of Stock
6.01 Certificates. The board of directors may adopt a policy of not issuing
certificates except in extraordinary situations as may be authorized from time
to time by an officer of the Corporation. If such a policy is adopted, a
stockholder may obtain a certificate or certificates of the capital stock of the
Corporation owned by such stockholder only if the stockholder demonstrates a
specific reason for needing a certificate. If issued, the certificate shall be
in such form as shall, in conformity to law, be prescribed from time to time by
the board of directors. Such certificates shall be signed by the chairman of the
board of directors or the president or a vice president and by the treasurer or
an assistant treasurer or the secretary or an assistant secretary. If such
certificates are countersigned by a transfer agent or registrar other than the
Corporation or an employee of the Corporation, the signatures of the
aforementioned officers upon such certificates may be facsimile. In case any
officer or officers who have signed, or whose facsimile signature or signatures
have been used on, any such certificate or certificates shall cease to be such
officer or officers of the Corporation, whether because of death, resignation or
otherwise, before such certificate or certificates have been delivered by the
Corporation, such certificate or certificates may nevertheless be adopted by the
Corporation and be issued and delivered as though the person or persons who
signed such certificate or certificates or whose facsimile signature or
signatures have been used thereon had not ceased to be such officer or officers
of the Corporation.
6.02 Replacement of Certificates. The board of directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost or
destroyed. When authorizing such issue of a new certificate or certificates, the
board of directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost or destroyed certificate or
certificates, or its legal representative, to advertise the same in such manner
as it shall require and/or to give the corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the corporation
with respect to the certificate alleged to have been lost or destroyed.
6.03 Stockholder Open Accounts. The corporation may maintain or cause to be
maintained for each stockholder a stockholder open account in which shall be
recorded such stockholder's ownership of stock and all changes therein, and
certificates need not be issued for shares so recorded in a stockholder open
account unless requested by the stockholder and such request is approved by an
officer.
6.04 Transfers. Transfers of stock for which certificates have been issued
will be made only upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, whereupon the
Corporation will issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction on its books. Transfers of stock
evidenced by open account authorized by Section 6.03 will be made upon delivery
to the Corporation or the transfer agent of the Corporation of instructions for
transfer or evidence of assignment or succession, in each case executed in such
manner and with such supporting evidence as the Corporation or transfer agent
may reasonably require.
6.05 Closing Transfer Books. The transfer books of the stock of the
corporation may be closed for such period (not to exceed 20 days) from time to
time in anticipation of stockholders' meetings or the declaration of dividends
as the directors may from time to time determine.
6.06 Record Dates. The board of directors may fix in advance a date, not
exceeding ninety days preceding the date of any meeting of stockholders, or the
date for the payment of any dividend, or the date for the allotment of rights,
or the date when any change or conversion or exchange of capital stock shall go
into effect, or a date in connection with obtaining any consent or for any other
lawful purpose, as a record date for the determination of the stockholders
entitled to notice of, and to vote at, any such meeting, and any adjournment
thereof, or entitled to receive payment of any such dividend, or to any such
allotment of rights, or to exercise the rights in respect of any such change,
conversion or exchange of capital stock, or to give such consent, and in such
case such stockholders and only such stockholders as shall be stockholders of
record on the date as fixed shall be entitled to such notice of, and to vote at,
such meeting, and any adjournment thereof, or to receive payment of such
dividend, or to receive such allotment of rights, or to exercise such rights, or
to give such consent, as the case may be, notwithstanding any transfer of any
stock on the books of the Corporation after any such record date fixed as
aforesaid.
6.07 Registered Ownership. The Corporation shall be entitled to recognize
the exclusive right of a person registered on its books as the owner of shares
to receive dividends, and to vote as such owner and shall not be bound to
recognize any equitable or other claim to or interest in such share or shares on
the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of the State of
Maryland.
ARTICLE 7
Notices
7.01 Manner of Giving. Whenever under the provisions of the statutes or of
the Articles of Incorporation or of these bylaws notice is required to be given
to any director, committee member, officer or stockholder, it shall not be
construed to mean personal notice, but such notice may be given, in the case of
stockholders, in writing, by mail, by depositing the same in a United States
post office or letter box, in a postpaid sealed wrapper, addressed to each
stockholder at such address as it appears on the books of the corporation, or,
in default to other address, to such stockholder at the General Post Office in
the City of Baltimore, Maryland, and, in the case of directors, committee
members and officers, by telephone, or by mail or by telegram to the last
business address known to the secretary of the corporation, and such notice
shall be deemed to be given at the time when the same shall be thus mailed or
telegraphed or telephoned.
7.02 Waiver. Whenever any notice is required to be given under the
provisions of the statutes or of the Articles of Incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE 8
General Provisions
8.01 Disbursement of Funds. All checks, drafts, orders or instructions for
the payment of money and all notes of the corporation shall be signed by such
officer or officers or such other person or persons as the board of directors
may from time to time designate.
8.02 Voting Stock in Other Corporations. Unless otherwise ordered by the
board of directors, any officer shall have full power and authority to attend
and act and vote at any meeting of stockholders of any corporation in which this
corporation may hold stock, and at any such meeting may exercise any and all the
rights and powers incident to the ownership of such stock. Any officer of this
corporation may execute proxies to vote shares of stock of other corporations
standing in the name of this corporation.
8.03 Execution of Instruments. Except as otherwise provided in these
bylaws, all deeds, mortgages, bonds, contracts, stock powers and other
instruments of transfer, reports and other instruments may be executed on behalf
of the corporation by the president or any vice president or by any other
officer or agent authorized to act in such matters, whether by law, the Articles
of Incorporation, these bylaws, or any general or special authorization of the
board of directors. If the corporate seal is required, it shall be affixed by
the secretary or an assistant secretary.
8.04 Seal. The corporate seal shall have inscribed thereon the name of the
corporation, the year of its incorporation and the words "Corporate Seal,
Maryland." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
ARTICLE 9
Regulations
9.01 Investment and Related Matters. The Corporation shall not purchase or
hold securities in violation of the investment restrictions enumerated in its
then current prospectus and the registration statement or statements filed with
the Securities and Exchange Commission pursuant to the Securities Act of 1933
and the Investment Company Act of 1940, as amended, nor shall the Corporation
invest in securities the purchase of which would cause the Corporation to
forfeit its rights to continue to publicly offer its shares under the laws,
rules or regulations of any state in which it may become authorized to so offer
its shares unless, by specific resolution of the board of directors, the
Corporation shall elect to discontinue the sale of its shares in such state.
9.02 Other Matters. When used in this section the following words shall
have the following meanings: "Sponsor" shall mean any one or more corporations,
firms or associations which have distributor's contracts in effect with this
Corporation. "Manager" shall mean any corporation, firm or association which may
at the time have an investment advisory contract with this Corporation.
(a) Limitation of Holdings by this Corporation of Certain Securities and
of Dealings with Officers or Directors. This Corporation shall not
purchase or retain securities of any issuer if those officers and
directors of the Fund or its Manager owning beneficially more than
one-half of one per cent (0.5%) of the shares or securities of such
issuer together own beneficially more than five per cent (5%) of such
shares or securities; and each officer and director of this
Corporation shall keep the treasurer of this Corporation informed of
the names of all issuers (securities of which are held in the
portfolio of this Corporation) in which such officer or director owns
as much as one-half of one percent (1/2 of 1%) of the outstanding
shares or securities and (except in the case of a holding by the
treasurer) this Corporation shall not be charged with knowledge of any
such security holding in the absence of notice given if as aforesaid
if this Corporation has requested such information not less often than
quarterly. The Corporation will not lend any of its assets to the
Sponsor or Manager or to any officer or director of the Sponsor or
Manager or of this Corporation and shall not permit any officer or
director, and any officer or director of the Sponsor or Manager, to
deal for or on behalf of the Corporation with himself as principal
agent, or with any partnership, association or corporation in which he
has a financial interest. Nothing contained herein shall prevent (1)
officers and directors of the Corporation from buying, holding or
selling shares in the Corporation, or from being partners, officers or
directors of or otherwise financially interested in the Sponsor or the
Manager or any company controlling the Sponsor or the Manager; (2)
employment of legal counsel, registrar, transfer agent, dividend
disbursing agent or custodian who is, or has a partner shareholder,
officer or director who is, an officer or director of the Corporation,
if only customary fees are charged for services to the Corporation;
(3) sharing statistical and research expenses and office hire and
expenses with any other investment company in which an officer or
director of the Corporation is an officer or director or otherwise
financially interested.
(b) Limitation Concerning Participating by Interested Persons in
Investment Decisions. In any case where an officer or director of the
Corporation or of the Manager, or a member of an advisory committee or
portfolio committee of the Corporation, is also an officer or a
director of another corporation, and the purchase or sale of shares
issued by that other corporation is under consideration, the officer
or director or committee member concerned will abstain from
participating in any decision made on behalf of the Corporation to
purchase or sell any securities issued by such other corporation.
(c) Limitation on Dealing in Securities of this Corporation by Certain
Officers, Directors, Sponsor or Manager. Neither the Sponsor nor
Manager, nor any officer or director of this Corporation or of the
Sponsor or Manager shall take long or short positions in securities
issued by this Corporation, provided, however, that:
(1) The Sponsor may purchase from this Corporation shares issued by
this Corporation if the orders to purchase from this Corporation
are entered with this Corporation by the Sponsor upon receipt by
the Sponsor of purchase orders for shares of this Corporation and
such purchases are not in excess of purchase orders received by
the Sponsor.
(2) The Sponsor may in the capacity of agent for this Corporation buy
securities issued by this Corporation offered for sale by other
persons.
(3) Any officer or director of this Corporation or of the Sponsor or
Manager or any Company controlling the Sponsor or Manager may at
any time, or from time to time, purchase from this Corporation or
from the Sponsor shares issued by this Corporation at a price not
lower than the net asset value of the shares, no such purchase to
be in contravention of any applicable state or federal
requirement.
(d) Securities and Cash of this Corporation to be held by Custodian
subject to certain Terms and Conditions.
(1) All securities and cash owned by this Corporation shall as
hereinafter provided, be held by or deposited with a bank or
trust company having (according to its last published report) not
less than two million dollars ($2,000,000) aggregate capital,
surplus and undivided profits (which bank or trust company is
hereby designated as "Custodian"), provided such a Custodian can
be found ready and willing to act.
(2) This Corporation shall enter into a written contract with the
Custodian regarding the powers, duties and compensation of the
Custodian with respect to the cash and securities of this
Corporation held by the Custodian. Said contract and all
amendments thereto shall be approved by the board of directors of
this Corporation.
(3) This Corporation shall upon the resignation or inability to serve
of its Custodian or upon change of the Custodian:
(aa) in case of such resignation or inability to serve, use its
best efforts to obtain a successor Custodian;
(bb) require that the cash and securities owned by this
Corporation be delivered directly to the successor
Custodian; and
(cc) In the event that no successor Custodian can be found,
submit to the stockholders, before permitting delivery of
the cash and securities owned by this Corporation otherwise
than to a successor Custodian, the question whether or not
this Corporation shall be liquidated or shall function
without a Custodian.
(e) Amendment of Investment Advisory Contract. Any investment advisory
contract entered into by this Corporation shall not be subject to
amendment except by (1) affirmative vote at a shareholders meeting, of
the holders of a majority of the outstanding stock of this
Corporation, or (2) a majority of such Directors who are not
interested persons (as the term is defined in the Investment Company
Act of 1940) of the Parties to such agreements, cast in person at a
board meeting called for the purpose of voting on such amendment.
(f) Reports relating to Certain Dividends. Dividends paid from net profits
from the sale of securities shall be clearly revealed by this
Corporation to its shareholders and the basis of calculation shall be
set forth.
(g) Maximum Sales Commission. The Corporation shall, in any distribution
contract with respect to its shares of common stock entered into by
it, provide that the maximum sales commission to be charged upon any
sales of such shares shall not be more than nine per cent (9%) of the
offering price to the public of such shares. As used herein, "offering
price to the public" shall mean net asset value per share plus the
commission charged adjusted to the nearest cent.
ARTICLE 10
Purchases and Redemption of Shares:
Suspension of Sales
10.01 Purchase by Agreement. The Corporation may purchase its shares by
agreement with the owner at a price not exceeding the net asset value next
computed following the time when the purchase or contract to purchase is made.
10.02 Redemption. The Corporation shall redeem such shares as are offered
by any stockholder for redemption upon the presentation of a written request
therefor, duly executed by the record owner, to the office or agency designated
by the corporation. If the shareholder has received stock certificates, the
request must be accompanied by the certificates, duly endorsed for transfer, in
acceptable form; and the Corporation will pay therefor the net asset value of
the shares next effective following the time at which the request, in acceptable
form, is so presented. Payment for said shares shall ordinarily be made by the
Corporation to the stockholder within seven days after the date on which the
shares are presented.
10.03 Suspension of Redemption. The obligations set out in Section 10.02
may be suspended (i) for any period during which the New York Stock Exchange,
Inc. is closed other than customary week-end and holiday closings, or during
which trading on the New York Stock Exchange, Inc. is restricted, as determined
by the rules and regulations of the Securities and Exchange Commission or any
successor thereto; (ii) for any period during which an emergency, as determined
by the rules and regulations of the Securities and Exchange Commission or any
successor thereto, exists as a result of which disposal by the Corporation of
securities owned by it is not reasonably practicable or as a result of which it
is not reasonably practicable for the Corporation to fairly determine the value
of its net assets; or (iii) for such other periods as the Securities and
Exchange Commission or any successor thereto may by order permit for the
protection of security holders of the Corporation. Payment of the redemption or
purchase price may be made in cash or, at the option of the Corporation, wholly
or partly in such portfolio securities of the Corporation as the Corporation may
select.
10.04 Suspension of Sales. The Corporation reserves the right to suspend
sales of its shares if, in the judgment of the majority of the board of
directors or a majority of the executive committee of its Board, if such
committee exists, it is in the best interest of the Corporation to do so, such
suspension to continue for such period as may be determined by such majority.
ARTICLE 11
Fractional Shares
11.01 The board of directors may authorize the issue from time to time of
shares of the capital stock of the corporation in fractional denominations,
provided that the transactions in which and the terms upon which shares in
fractional denominations may be issued may from time to time be determined and
limited by or under authority of the board of directors.
ARTICLE 12
Indemnification
12.01(a) Every person who is or was a director, officer or employee of this
Corporation or of any other corporation which he served at the request of this
Corporation and in which this Corporation owns or owned shares of capital stock
or of which it is or was a creditor shall have a right to be indemnified by this
Corporation against all liability and reasonable expenses incurred by him in
connection with or resulting from a claim, action, suit or proceeding in which
he may become involved as a party or otherwise by reason of his being or having
been a director, officer or employee of this Corporation or such other
corporation, provided (1) said claim, action, suit or proceeding shall be
prosecuted to a final determination and he shall be vindicated on the merits, or
(2) in the absence of such a final determination vindicating him on the merits,
the board of directors shall determine that he acted in good faith and in a
manner he reasonably believed to be in the best interest of the Corporation in
the case of conduct in the director's official capacity with the Corporation and
in all other cases, that the conduct was at least not opposed to the best
interest of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful; said
determination to be made by the board of directors acting through a quorum of
disinterested directors, or in its absence on the opinion of counsel.
(b) For purposes of the preceding subsection: (1) "liability and
reasonable expenses" shall include hut not be limited to reasonable
counsel fees and disbursements, amounts of any judgment, fine or
penalty, and reasonable amounts paid in settlement; (2) "claim,
action, suit or proceeding" shall include every such claim, action,
suit or proceeding, whether civil or criminal, derivative or
otherwise, administrative, judicial or legislative, any appeal
relating thereto, and shall include any reasonable apprehension or
threat of such a claim, action, suit or proceeding; (3) the
termination of any proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent creates
a rebuttable presumption that the director did not meet the standard
of conduct set forth in subsection (a)(2), supra.
(c) Notwithstanding the foregoing, the following limitations shall apply
with respect to any action by or in the right of the Corporation: (1)
no indemnification shall be made in respect of claim, issue or matter
as to which the person seeking indemnification shall have been
adjudged to be liable for negligence or misconduct in the performance
of his duty to the Corporation unless and only to the extent that the
Court of Chancery of the State of Maryland or the court in which such
action or suit was brought shall determine upon application that
despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or
such other court shall deem proper; and (2) indemnification shall
extend only to reasonable expenses, including reasonable counsel's
fees and disbursements.
(d) The right of indemnification shall extend to any person otherwise
entitled to it under this bylaw whether or not that person continues
to be a director, officer or employee of this Corporation or such
other corporation at the time such liability or expense shall be
incurred. The right of indemnification shall extend to the legal
representative and heirs of any person otherwise entitled to
indemnification. If a person meets the requirements of this bylaw with
respect to some matters in a claim, action suit, or proceeding, but
not with respect to others, he shall be entitled to indemnification as
to the former. Advances against liability and expenses may be made by
the Corporation on terms fixed by the board of directors subject to an
obligation to repay if indemnification proves unwarranted.
(e) This bylaw shall not exclude any other rights of indemnification or
other rights to which any director, officer or employee may be
entitled to by contract, vote of the stockholders or as a matter of
law.
If any clause, provision or application of this section shall be
determined to be invalid, the other clauses, provisions or
applications of this section shall not be affected but shall remain in
full force and effect. The provisions of this bylaw shall be
applicable to claims, actions, suits or proceedings made or commenced
after the adoption hereof, whether arising from acts or omissions to
act occurring before or after the adoption hereof.
(f) Nothing contained in this bylaw shall be construed to protect any
director or officer of the Corporation against any liability to the
Corporation or its security holders to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of his
office.
ARTICLE 13
Amendments
13.01 These bylaws may be amended or added to, altered or repealed at any
annual or special meeting of the stockholders by the affirmative vote of the
holders of a majority of the shares of capital stock issued and outstanding and
entitled to vote, provided notice of the general purport of the proposed
amendment, addition, alteration or repeal is given in the notice of said
meeting, or, at any meeting of the board of directors by vote of a majority of
the directors then in office, except that the board of directors may not amend
Article 5 to permit removal by said board without cause of any director elected
by the stockholders.
MANAGEMENT AGREEMENT
AGREEMENT to be effective , by and between PRINCIPAL SMALLCAP FUND, INC., a
Maryland corporation (hereinafter called the "Fund") and PRINCOR MANAGEMENT
CORPORATION, an Iowa corporation (hereinafter called "the Manager").
W I T N E S S E T H:
WHEREAS, The Fund has furnished the Manager with copies properly certified
or authenticated of each of the following:
(a) Certificate of Incorporation of the Fund;
(b) Bylaws of the Fund as adopted by the Board of Directors;
(c) Resolutions of the Board of Directors of the Fund selecting the Manager
as investment adviser and approving the form of this Agreement.
NOW THEREFORE, in consideration of the premises and mutual agreements
herein contained, the Fund hereby appoints the Manager to act as investment
adviser and manager of the Fund, and the Manager agrees to act, perform or
assume the responsibility therefor in the manner and subject to the conditions
hereinafter set forth. The Fund will furnish the Manager from time to time with
copies, properly certified or authenticated, of all amendments of or supplements
to the foregoing, if any.
1. INVESTMENT ADVISORY SERVICES
The Manager will regularly perform the following services for the Fund:
(a) Provide investment research, advice and supervision;
(b) Provide investment advisory, research and statistical facilities and
all clerical services relating to research, statistical and investment
work;
(c) Furnish to the Board of Directors of the Fund (or any appropriate
committee of such Board), and revise from time to time as economic
conditions require, a recommended investment program for the Fund's
portfolio consistent with the Fund's investment objective and policies;
(d) Implement such of its recommended investment program as the Fund shall
approve, by placing orders for the purchase and sale of securities,
subject always to the provisions of the Fund's Certificate of
Incorporation and Bylaws and the requirements of the Investment Company
Act of 1940, as each of the same shall be from time to time in effect;
(e) Advise and assist the officers of the Fund in taking such steps as are
necessary or appropriate to carry out the decisions of its Board of
Directors and any appropriate committees of such Board regarding the
general conduct of the investment business of the Fund; and
(f) Report to the Board of Directors of the Fund at such times and in such
detail as the Board may deem appropriate in order to enable it to
determine that the investment policies of the Fund are being observed.
2. CORPORATE ADMINISTRATIVE SERVICES
In addition to the investment advisory services set forth in Section 1, the
Manager will perform the following corporate administrative services:
(a) Furnish the services of such of the Manager's officers and employees as
may be elected officers or directors of the Fund, subject to their
individual consent to serve and to any limitations imposed by law;
(b) Furnish office space, and all necessary office facilities and
equipment, for the general corporate functions of the Fund (i.e.,
functions other than (i) underwriting and distribution of Fund shares;
(ii) custody of Fund assets, and (iii) transfer and paying agency
services); and
(c) Furnish the services of the supervisory and clerical personnel
necessary to perform the general corporate functions of the Fund.
(d) Determine the net asset value of the shares of the Fund's Capital Stock
as frequently as the Fund shall request, or as shall be required by
applicable law or regulations.
3. RESERVED RIGHT TO DELEGATE DUTIES AND SERVICES TO OTHERS
The Manager in assuming responsibility for the various services as set
forth in this Agreement reserves the right to enter into agreements with others
for the performance of certain duties and services or to delegate the
performance of some or all of such duties and services to Principal Mutual Life
Insurance Company, or an affiliate thereof.
4. EXPENSES BORNE BY THE MANAGER
The Manager will pay:
(a) The compensation and expenses of all officers and executive employees
of the Fund;
(b) The compensation and expenses of all directors of the Fund who are
persons affiliated with the Manager; and
(c) The expenses of the organization of the Fund, including its
registration under the Investment Company Act of 1940, and the initial
registration and qualification of its Capital Stock for sale under the
Securities Act of 1933 and the Blue Sky laws of the states in which it
initially qualifies.
5. COMPENSATION OF THE MANAGER BY FUND
For all services to be rendered and payments made as provided in Sections
1, 2 and 4 hereof, the Fund will accrue daily and pay the Manager within five
days after the end of each calendar month a fee based on the average of the
values placed on the net assets of the Fund as of the time of determination of
the net asset value on each trading day throughout the month in accordance with
the following schedule.
Average Daily Net Fee as a Percentage of
Assets of the Fund Average Daily Net Assets
--------------------------- ------------------------
First $100,000,000 0.85%
Next 100,000,000 0.80%
Next 100,000,000 0.75%
Next 100,000,000 0.70%
Amount Over 400,000,000 0.65%
Net asset value shall be determined pursuant to applicable provisions of
the Certificate of Incorporation of the Fund. If pursuant to such provisions the
determination of net asset value is suspended, then for the purposes of this
Section 5 the value of the net assets of the Fund as last determined shall be
deemed to be the value of the net assets for each day the suspension continues.
The Manager may, at its option, waive all or part of its compensation
for such period of time as it deems necessary or appropriate.
6. SERVICES FURNISHED BY THE MANAGER
The Manager (in addition to the services to be performed by it pursuant
to Sections 1 and 2 hereof) will:
(a) Act as, and provide all services customarily performed by, the
transfer and paying agent of the Fund including, without
limitation, the following:
(i) preparation and distribution to shareholders of reports, tax
information, notices, proxy statements and proxies;
(ii) preparation and distribution of dividend and capital gain
payments to shareholders;
(iii) issuance, transfer and registry of shares, and maintenance
of open account system;
(iv) delivery, redemption and repurchase of shares, and
remittances to shareholders; and
(v) communication with shareholders concerning items (i), (ii),
(iii) and (iv) above.
In the carrying out of this function the Manager may contract
with others for data systems, processing services and other
administrative services.
(b) Use its best efforts to qualify the Capital Stock of the Fund for
sale in states and jurisdictions other than those in which
initially qualified, as directed by the Fund; and
(c) Prepare stock certificates, and distribute the same as requested
by shareholders of the Fund.
The Manager will maintain records in reasonable detail that will support the
amount it charges the Fund for performance of the services set forth in this
Section 6. At the end of each calendar month, the Fund will pay the Manager for
its performance of these services.
7. EXPENSES BORNE BY FUND
The Fund will pay:
(a) Taxes, including in case of redeemed shares any initial transfer
taxes, and governmental fees (except with respect to the Fund's
organization and the initial qualification and registration of
its Capital Stock);
(b) Portfolio brokerage fees and incidental brokerage expenses; and
(c) Interest.
(d) The fees of its independent auditor and its legal counsel,
incurred subsequent to the Fund's organization and the initial
qualification and registration of its Capital Stock;
(e) The fees and expenses of the Custodian of its assets;
(f) The fees and expenses of all directors of the Fund who are not
persons affiliated with the Manager; and
(g) The cost of meetings of shareholders.
8. AVOIDANCE OF INCONSISTENT POSITION
In connection with purchases or sales of portfolio securities for the
account of the Fund, neither the Manager nor any of the Manager's directors,
officers or employees will act as a principal or agent or receive any
commission.
9. LIMITATION OF LIABILITY OF THE MANAGER
The Manager shall not be liable for any error of judgment or mistake of
law or for any loss suffered by the Fund in connection with the matters to which
this Agreement relates, except a loss resulting from willful misfeasance, bad
faith or gross negligence on the Manager's part in the performance of its duties
or from reckless disregard by it of its obligations and duties under this
Agreement.
10. DURATION AND TERMINATION OF THIS AGREEMENT
This Agreement shall remain in force until the first meeting of the
shareholders of the Fund and if it is approved by a vote of a majority of the
outstanding voting securities of the Fund it shall continue in effect thereafter
from year to year provided that the continuance is specifically approved at
least annually either by the Board of Directors of the Fund or by a vote of a
majority of the outstanding voting securities of the Fund and in either event by
vote of a majority of the directors of the Fund who are not interested persons
of the Manager, Principal Mutual Life Insurance Company, or the Fund cast in
person at a meeting called for the purpose of voting on such approval. This
Agreement may, on sixty days written notice, be terminated at any time without
the payment of any penalty, by the Board of Directors of the Fund, by vote of a
majority of the outstanding voting securities of the Fund, or by the Manager.
This Agreement shall automatically terminate in the event of its assignment. In
interpreting the provisions of this Section 10, the definitions contained in
Section 2(a) of the Investment Company Act of 1940 (particularly the definitions
of "interested person," "assignment" and "voting security") shall be applied.
11. AMENDMENT OF THIS AGREEMENT
No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought, and no amendment of this Agreement shall be effective until approved by
vote of the holders of a majority of the Fund's outstanding voting securities
and by vote of a majority of the directors who are not interested persons of the
Manager, Principal Mutual Life Insurance Company or the Fund cast in person at a
meeting called for the purpose of voting on such approval.
12. ADDRESS FOR PURPOSE OF NOTICE
Any notice under this Agreement shall be in writing, addressed and
delivered or mailed, postage prepaid, to the other party at such address as such
other party may designate for the receipt of such notices. Until further notice
to the other party, it is agreed that the address of the Fund and that of the
Manager for this purpose shall be The Principal Financial Group, Des Moines,
Iowa 50392.
13. MISCELLANEOUS
The captions in this Agreement are included for convenience of reference
only, and in no way define or delimit any of the provisions hereof or otherwise
affect their construction or effect. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized.
PRINCIPAL SMALLCAP FUND, INC.
By _____________________________________
Arthur S. Filean, Vice President
PRINCOR MANAGEMENT CORPORATION
By _____________________________________
Stephan L. Jones, President
INVESTMENT SERVICE AGREEMENT
THIS INVESTMENT SERVICE AGREEMENT, to be effective the day of , 1997, by
and between PRINCIPAL SMALLCAP FUND, INC. (the "Fund"), an open-end investment
company formed under the laws of Maryland, PRINCOR MANAGEMENT CORPORATION
("Manager"), an Iowa corporation, and PRINCIPAL MUTUAL LIFE INSURANCE COMPANY, a
specially chartered Iowa life insurance company;
W I T N E S S E T H:
WHEREAS, Principal Mutual Life Insurance Company has organized the
Manager to serve as investment adviser and is the owner (through its
subsidiaries) of all of the outstanding stock of the Manager; and
WHEREAS, the Manager and the Fund have entered into a Management
Agreement effective as of whereby the Manager undertakes to furnish the Fund
with investment advisory services and certain other services; and
WHEREAS, the Manager has the right under the Management Agreement to
appoint one or more sub-advisors to furnish such services to the Fund; and
WHEREAS, Principal Mutual Life Insurance Company is willing to make
available to the Manager on a part-time basis certain employees and services of
Principal Mutual Life Insurance Company and its subsidiaries for the purpose of
better enabling the Manager to fulfill its investment advisory obligations under
the Management Agreement, provided that the Manager bears all costs allocable to
the time spent by them on the affairs of the Manager, and the Manager and the
Fund believe that such an arrangement will be for their mutual benefit:
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
1. The Manager shall have the right to use, on a part-time basis, and
Principal Mutual Life Insurance Company shall make available on such basis, such
employees of Principal Mutual Life Insurance Company and its subsidiaries and
for such periods as may be agreed upon by the Manager and Principal Mutual Life
Insurance Company and its subsidiaries, as reasonably needed by the Manager in
the performance of its investment advisory services (but not its administrative,
transfer and paying services) under the Management Agreement. It is anticipated
that such employees will be persons employed in the Investment Department of
Principal Mutual Life Insurance Company or its subsidiaries. Principal Mutual
Life Insurance Company will also make available to the Manager or the Fund such
clerical, stenographic and administrative services as the Manager may reasonably
request to facilitate its performance of such investment advisory services.
2. The employees of Principal Mutual Life Insurance Company and its
subsidiaries in performing services for the Manager hereunder may, to the full
extent that they deem appropriate, have access to and utilize statistical and
economic data, investment research reports and other material prepared for or
contained in the files of the Investment Department of Principal Mutual Life
Insurance Company or its subsidiaries which is relevant to making investments
for the Fund, and may make such materials available to the Manager, provided,
that any such materials prepared or obtained in connection with a private
placement or other non-public transaction need not be made available to the
Manager if Principal Mutual Life Insurance Company or its subsidiaries deem such
materials confidential.
3. Employees of Principal Mutual Life Insurance Company or its
subsidiaries performing services for the Manager pursuant hereto shall report
and be responsible solely to the officers and directors of the Manager or
persons designated by them. Principal Mutual Life Insurance Company or its
subsidiaries shall have no responsibility for investment recommendations and
decisions of the Manager based upon information or advice given or obtained by
or through such Principal Mutual Life Insurance Company employees or employees
of Principal Mutual Life Insurance Company subsidiaries.
4. Principal Mutual Life Insurance Company will, to the extent requested
by the Manager, supply to employees of the Manager (including part-time
employees of Principal Mutual Life Insurance Company or its subsidiaries serving
the Manager) such clerical, stenographic and administrative services and such
office supplies and equipment as may be reasonably required in order that they
may properly perform their respective functions on behalf of the Manager in
connection with its performance of its investment advisory services under the
Management Agreement.
5. The obligation of performance under the Management Agreement is solely
that of the Manager, and Principal Mutual Life Insurance Company and its
subsidiaries undertake no obligation in respect thereto, except as otherwise
expressly provided herein.
6. In consideration of the services to be rendered by Principal Mutual
Life Insurance Company or its subsidiaries and their employees pursuant to this
Investment Service Agreement, the Manager agrees to reimburse Principal Mutual
Life Insurance Company or its subsidiaries for such costs, direct and indirect,
as may be fairly attributable to the services performed for the Manager. Such
costs shall include, but not be limited to, an appropriate portion of:
(a) salaries;
(b) employee benefits;
(c) general overhead expense;
(d) supplies and equipment; and
(e) a charge in the nature of rent for the cost of space in
Principal Mutual Life Insurance Company offices fairly
allocable to activities of the Manager under the Management
Agreement.
In the event of disagreement between the Manager and Principal Mutual Life
Insurance Company and its subsidiaries as to a fair basis for allocating or
apportioning costs, such basis shall be fixed by the public accountants for the
Fund.
7. This Investment Service Agreement shall remain in force until the
conclusion of the first meeting of the shareholders of the Fund and if it is
approved by a vote of a majority of the outstanding voting securities of the
Fund, it shall continue from year to year provided that the continuance is
specifically approved at least annually either by the Board of Directors of the
Fund or by vote of a majority of the outstanding voting securities of the Fund
and in either event such continuance shall be approved by the vote of a majority
of the directors who are not interested persons of the Manager, Principal Mutual
Life Insurance Company or its subsidiaries or the Fund cast in person at a
meeting called for the purpose of voting on such approval. This Investment
Service Agreement may, on sixty days written notice, be terminated at any time
without the payment of any penalty, by the Board of Directors of the Fund, by
vote of a majority of the outstanding voting securities of the Fund, by the
Manager or Principal Mutual Life Insurance Company. This Investment Service
Agreement shall automatically terminate in the event of its assignment. In
interpreting the provisions of this Section 7, the definitions contained in
Section 2(a) of the Investment Company Act of 1940 (particularly the definitions
of "interested persons", "assignment" and "voting securities") shall be applied.
8. Any notice under this Investment Service Agreement shall be in
writing, addressed and delivered or mailed postage prepaid to the other parties
at such addresses as such other parties may designate for the receipt of such
notices. Until further notice it is agreed that the address of the fund, that of
the Manager and that of Principal Mutual Life Insurance Company and its
subsidiaries for this purpose shall be The Principal Financial Group, Des
Moines, Iowa 50392.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed in three counterparts by their duly authorized officers the day and
year first above written.
PRINCIPAL SMALLCAP FUND, INC.
By ______________________________________
A. S. Filean
PRINCOR MANAGEMENT CORPORATION
By ______________________________________
S. L. Jones
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
By ______________________________________
R. E. Keller
PRINCIPAL SMALLCAP FUND, INC.
SUB-ADVISORY AGREEMENT
AGREEMENT executed as of the day of , 1997, by and between PRINCOR
MANAGEMENT CORPORATION, an Iowa Corporation (hereinafter called "the Manager")
and INVISTA CAPITAL MANAGEMENT, INC. (hereinafter called "Invista").
W I T N E S S E T H:
WHEREAS, the Manager is the manager and investment adviser to Principal
SmallCap Fund, Inc., (the "Fund"), an open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"); and
WHEREAS, the Manager desires to retain Invista to furnish portfolio
selection and related research and statistical services in connection with the
investment advisory services which the Manager has agreed to provide to the
Fund, and Invista desires to furnish such services; and
WHEREAS, The Manager has furnished Invista with copies properly certified
or authenticated of each of the following:
(a) Management Agreement (the "Management Agreement") with the Fund;
(b) Copies of the registration statement of the Fund as filed pursuant to
the federal securities laws of the United States, including all
exhibits and amendments;
NOW, THEREFORE, in consideration of the premises and the terms and
conditions hereinafter set forth, it is agreed as follows:
1. Appointment of Invista
In accordance with and subject to the Management Agreement, the Manager
hereby appoints Invista to perform portfolio selection services described in
Section 2 below for investment and reinvestment of the securities and other
assets of the Fund, subject to the control and direction of the Fund's Board of
Directors, as well as to assume other obligations as specified in Section 2
below, for the period and on the terms hereinafter set forth. Invista accepts
such appointment and agrees to furnish the services hereinafter set forth for
the compensation herein provided. Invista shall for all purposes herein be
deemed to be an independent contractor and shall, except as expressly provided
or authorized, have no authority to act for or represent the Fund or the Manager
in any way or otherwise be deemed an agent of the Fund or the Manager.
2. Obligations of and Services to be Provided by Invista
(a) Invista shall provide with respect to the Fund all services and
obligations of the Manager described in Section 1, Investment Advisory Services,
of the Management Agreement.
(b) Invista shall use the same skill and care in providing services to the
Fund as it uses in providing services to fiduciary accounts for which it has
investment responsibility. Invista will conform with all applicable rules and
regulations of the Securities and Exchange Commission.
3. Compensation
As full compensation for all services rendered and obligations assumed by
Invista hereunder with respect to the Fund, the Manager shall pay Invista within
10 days after the end of each calendar month, or as otherwise agreed, an amount
representing Invista's actual cost of providing such services and assuming such
obligations.
4. Duration and Termination of This Agreement
This Agreement shall become effective on the latest of (i) the date of its
execution, (ii) the date of its approval by a majority of the directors of the
Fund, including approval by the vote of a majority of the directors of the Fund
who are not interested persons of the Manager, Principal Mutual Life Insurance
Company, Invista or the Fund cast in person at a meeting called for the purpose
of voting on such approval and (iii) the date of its approval by a majority of
the outstanding voting securities of the Fund. It shall continue in effect
thereafter from year to year provided that the continuance is specifically
approved at least annually either by the Board of Directors of the Fund or by a
vote of a majority of the outstanding voting securities of the Fund and in
either event by vote of a majority of the directors of the Fund who are not
interested persons of the Manager, Principal Mutual Life Insurance Company,
Invista or the Fund cast in person at a meeting called for the purpose of voting
on such approval. This Agreement may, on sixty days written notice, be
terminated at any time without the payment of any penalty, by the Board of
Directors of the Fund, by vote of a majority of the outstanding voting
securities of the Fund, Invista or by the Manager. This Agreement shall
automatically terminate in the event of its assignment. In interpreting the
provisions of this Section 4, the definitions contained in Section 2(a) of the
Investment Company Act of 1940 (particularly the definitions of "interested
person," "assignment" and "voting security") shall be applied.
5. Amendment of this Agreement
No amendment of this Agreement shall be effective until approved by vote of
the holders of a majority of the outstanding voting securities and by vote of a
majority of the directors of the Fund who are not interested persons of the
Manager, Invista, Principal Mutual Life Insurance Company or the Fund cast in
person at a meeting called for the purpose of voting on such approval.
6. General Provisions
(a) Each party agrees to perform such further acts and execute such further
documents as are necessary to effectuate the purposes hereof. This Agreement
shall be construed and enforced in accordance with and governed by the laws of
the State of Iowa. The captions in this Agreement are included for convenience
only and in no way define or delimit any of the provisions hereof or otherwise
affect their construction or effect.
(b) Any notice under this Agreement shall be in writing, addressed and
delivered or mailed postage pre-paid to the other party at such address as such
other party may designate for the receipt of such notices. Until further notice
to the other party, it is agreed that the address of Invista and of the Manager
for this purpose shall be The Principal Financial Group, Des Moines, Iowa
50392-0200.
(c) Invista agrees to notify the Manager of any change in Invista's
officers and directors within a reasonable time after such change.
IN WITNESS WHEREOF, the parties have duly executed this Agreement on the
date first above written.
PRINCOR MANAGEMENT CORPORATION
By __________________________________________
Stephan L. Jones, President
INVISTA CAPITAL MANAGEMENT, INC.
By __________________________________________
C. R. Barnes, President
DISTRIBUTION AGREEMENT
Agreement to be effective , by and between PRINCIPAL SMALLCAP FUND, INC., a
Maryland corporation (hereinafter sometimes called the "Fund") and PRINCOR
FINANCIAL SERVICES CORPORATION, an Iowa corporation (Hereinafter sometimes
called the "Distributor").
W I T N E S S E T H:
WHEREAS, The Fund and the Distributor wish to enter into an agreement setting
forth the terms upon which the Distributor will act as underwriter and
distributor of the Fund.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the Fund hereby appoints the Distributor to act as principal
underwriter (as such term is defined in Section 2(a)(29) of the Investment
Company Act of 1940 (as amended) of the shares of Capital Stock of the Fund
(hereinafter sometimes call "shares"), and the distributor agrees to act and
perform the duties and functions of underwriter in the manner and subject to the
conditions hereinafter set forth.
1. SOLICITATION OF ORDERS
The Distributor will use its best efforts (but only in states where it
may lawfully do so) to obtain from investors unconditional orders for
shares authorized for issue by the Fund and registered under the
Securities Act of 1933, as amended, provided the Distributor may in its
own discretion refuse to accept orders for shares from any particular
applicant. The Distributor does not undertake to sell any specific
number of shares of the Fund.
2. SALE OF SHARES
The Distributor is authorized to sell as agent on behalf of the Fund
authorized shares of the Fund by accepting unconditional orders placed
with the Distributor by investors in states wherever sales may lawfully
be made.
3. PUBLIC OFFERING PRICE
Except as limited by paragraphs 6 and 7 hereof, all shares of the Fund
sold to investors by the Distributor as agent for the Fund will be sold
for the basic retail price, which basic retail price shall be the public
offering price applicable to each purchase as from time to time stated
in the current prospectus of the Fund.
4. COMMISSIONS
The Distributor shall receive a commission equal to the difference
between the basic retail price and the "net asset value" of the Fund's
shares sold through the Distributor subject to a sales charge at the
basic retail price. The term, "net asset value," as used herein, means
said value as determined either as of the close of trading of the New
York Stock Exchange on the day an order for purchase of shares is
accepted or as of such other time as may be in accordance with any
provision of the 1940 Investment Company Act, any rule or regulation
thereunder, or any rule or regulation made or adopted by any securities
association registered under the 1934 Securities Exchange Act (all as
the Distributor may determine) or as of such time as the Board of
Directors or duly authorized officers or agents of the Fund may
determine in the manner provided in the Fund's Certificate of
Incorporation or Bylaws as from time to time amended. If any such
commission is received by the Fund, it will pay such commission to the
Distributor. In addition, the Distributor will be paid the entire amount
of any contingent deferred sales charge imposed and paid by shareholders
upon the redemption or repurchase of the Fund's shares as set forth in
the Fund's prospectus, subject to any waivers or reductions in sales
charge that may be disclosed in the prospectus. The Distributor may pay
its agents and employees such compensation, allow to dealers such
concessions, and allow (and authorize dealers to re-allow) such
discounts to purchasers, as the Distributor may determine from time to
time. The Distributor may also purchase as principal shares of the Fund
at "net asset value" and sell such shares at the public offering price.
5. DELIVERY OF PAYMENTS AND ISSUANCE OF SHARES
The Distributor will deliver to the Fund all payments made pursuant to
orders accepted by the Distributor upon receipt thereof by the
Distributor in its principal place of business.
After payment the Fund will issue shares of Capital Stock by crediting
to a stockholder account in such names and such manner as specified in
the application or order relating to such shares. Certificates will be
issued only upon request by the shareholder.
6. SALES OF SHARES TO CERTAIN CLASSES OF INVESTORS OR TRANSACTIONS
The sale price of Class A shares of the Fund will reflect the scheduled
variations in, or elimination of, the sales load to particular classes
of investors or transactions as may be described in the Fund's current
prospectus or statement of additional information.
7. SALE OF SHARES TO INVESTORS BY THE FUND
Any right granted to the Distributor to accept orders for shares or make
sales on behalf of the Fund will not apply to shares issued in
connection with the merger or consolidation of any other investment
company with the Fund or its acquisition, purchase or otherwise, of all
or substantially all the assets of any investment company or
substantially all the outstanding shares of any such company. Also, any
such right shall not apply to shares issued, sold or transferred,
whether Treasury or newly issued shares, that may be offered by the Fund
to its shareholders as stock dividends or splits for not less than "net
asset value".
8. AGREEMENTS WITH DEALERS OR OTHERS
In making agreements with any dealers or others, the Distributor shall
act only in its own behalf and in no sense as agent for the Fund and
shall be agent for the Fund only in respect of sales and repurchases of
Fund shares.
9. COPIES OF CORPORATE DOCUMENTS
The Fund will furnish the Distributor promptly with properly certified
or authenticated copies of any registration statements filed by it with
the Securities and Exchange Commission under the Securities Act of 1933,
as amended, or the Investment Company Act of 1940, as amended, together
with any financial statements and exhibits included therein and all
amendments or supplements thereto hereafter filed. Also, the Fund shall
furnish the Distributor with a reasonable number of printed copies of
each semi-annual and annual report (quarterly if made) of the Fund as
the Distributor may request, and shall cooperate fully in the efforts of
the Distributor to sell and arrange for the sale of the Fund's shares of
Capital Stock and in the performance by the Distributor of all of its
duties under this Agreement.
10. RESPONSIBILITY FOR CONTINUED REGISTRATION INCLUDING INCREASE IN SHARES
The Fund will assume the continued responsibility for meeting the
requirements of registration under the Securities Act of 1933, as
amended, under the Investment Company Act of 1940, as amended, and under
the securities laws of the various states where the Distributor is
registered as a broker-dealer. The Fund, subject to the necessary
approval of its shareholders, will increase the number of authorized
shares from time to time as may be necessary to provide the Distributor
with such number of shares as the Distributor may reasonably be expected
to sell.
11. SUSPENSION OF SALES
If and whenever the determination of asset value is suspended pursuant
to applicable law, and such suspension has become effective, until such
suspension is terminated no further applications for shares shall be
accepted by the Distributor except unconditional orders placed with the
Distributor before the Distributor had knowledge of the suspension. In
addition, the Fund reserves the right to suspend sales and the
Distributor's authority to accept orders for shares on behalf of the
Fund, if in the judgment of the majority of its Board of Directors, if
such Committee exists, it is in the best interest of the Fund to do so,
suspension to continue for such period as may be determined by such
majority; and in that event no shares will be sold by the Fund or by the
Distributor on behalf of the Fund while such suspension remains in
effect except for shares necessary to cover unconditional orders
accepted by the Distributor before the Distributor had knowledge of the
suspension.
12. EXPENSES
The Fund will pay (or will enter into arrangements providing for the
payment of) all fees and expenses (1) in connection with the preparation
and filing of any registration statement or amendments thereto as
required under the Investment Company Act of 1940, as amended; (2) in
connection with the preparation and filing of any registration statement
and prospectus or amendments thereto under the Securities Act of 1933,
as amended, covering the issue and sale of the Fund's shares; and (3) in
connection with the registration of the Fund and qualification of shares
for sale in the various states and other jurisdictions. The Fund will
also pay the cost of (i) preparation and distribution to shareholders of
prospectuses, reports, tax information, notices, proxy statements and
proxies; (ii) preparation and distribution of dividend and capital gain
payments to shareholders; (iii) issuance, transfer, registry and
maintenance of open account charges; (iv) delivery, remittance,
redemption and repurchase charges; (v) communication with shareholders
concerning these items; and (vi) stock certificates. The Fund will pay
taxes including, in the case of redeemed shares, any initial transfer
taxes unpaid.
The Distributor shall assume responsibility for the expense of printing
prospectuses used for the solicitation of new accounts. The Distributor
will pay the expenses of other sales literature, all fees and expenses
in connection with the Distributor's qualification as a dealer under the
Securities Exchange Act of 1934, as amended, and in the various states,
and all other expenses in connection with the sale and offering for sale
of shares of the Fund which have not been herein specifically allocated
to or assumed by the Fund.
13. CONFORMITY WITH LAW
The Distributor agrees that in selling the shares of the Fund it will
duly conform in all respects with the laws of the United States and any
state or other jurisdiction in which such shares may be offered for sale
pursuant to this Agreement.
14. MEMBERSHIP IN NATIONAL ASSOCIATION OF SECURITIES DEALERS
The Fund recognizes that the Distributor is now a member of the National
Association of Securities Dealers, and in the conduct of its duties
under this Agreement the Distributor is subject to the various rules,
orders and regulations of such organization. The right to determine
whether such membership should or should not continue, or to join other
organizations, is reserved by the Distributor.
15. OTHER INTERESTS
It is understood that directors, officers, agents and stockholders of
the Fund are or may be interested in the Distributor as directors,
officers, stockholders, or otherwise; that directors, officers, agents,
and stockholders of the Distributor are or may be interested in the Fund
as directors, officers, stockholders or otherwise; that the Distributor
may be interested in the Fund as a stockholder or otherwise; and that
the existence of any dual interest shall not affect the validity hereof
or of any transaction hereunder except as otherwise provided in the
Certification of Incorporation of the Fund and the Distributor,
respectively, or by specific provision of applicable law.
16. INDEMNIFICATION
The Fund agrees to indemnify, defend and hold the Distributor, its
officers and directors, and any person who controls the Distributor
within the meaning of Section 15 of the Securities Act of 1933, free and
harmless from and against any and all claims, demands, liabilities and
expenses (including the cost of investigating or defending such claims,
demands or liabilities and any counsel fees incurred in connection
therewith) which the Distributor, its officers, directors or any such
controlling person may incur under the Securities Act of 1933, or under
common law or otherwise, arising out of or based upon any untrue
statement of a material fact contained in the Fund's registration
statement or prospectus or arising out of or based upon any alleged
omission to state a material fact required to be stated in either
thereof or necessary to make the statements in either thereof not
misleading, except insofar as such claims, demands, liabilities or
expenses arise out of or are based upon any such untrue statement or in
conformity with information furnished in writing by the Distributor to
the Fund for use in the Fund's registration statement or prospectus:
provided, however, that this indemnity agreement, to the extent that it
might require indemnity of any person who is also an officer or director
of the Fund or who controls the Fund within the meaning of Section 15 of
the Securities Act of 1933, shall not inure to the benefit of such
officer, director or controlling person unless a court of competent
jurisdiction shall determine, or it shall have been determined by
controlling precedent that such result would not be against public
policy as expressed in the Securities Act of 1933, and further provided,
that in no event shall anything contained herein be so construed as to
protect the Distributor against any liability to the Fund or to its
security holders to which the Distributor would otherwise be subject by
reason of willful misfeasance, bad faith, or gross negligence, in the
performance of its duties, or by reason of its reckless disregard of its
obligations under this Agreement. The Fund's agreement to indemnify the
Distributor, its officers and directors and any such controlling person
as aforesaid is expressly conditioned upon the Fund being promptly
notified of any action brought against the Distributor, its officers or
directors, or any such controlling person, such notification to be given
by letter or telegram addressed to the Fund. The Fund agrees promptly to
notify the Distributor of the commencement of any litigation or
proceedings against it or any of its directors in connection with the
issue and sale of any shares of it Capital Stock.
The Distributor agrees to indemnify, defend and hold the Fund, its
officers and directors and any person who controls the Fund, if any,
within the meaning of Section 15 of the Securities Act of 1933, free and
harmless from and against any and all claims, demands, liabilities and
expenses (including the cost of investigating or defending such claims,
demands liabilities and any counsel fees incurred in connection
therewith) which the Fund, its directors or officers or any such
controlling person may incur under the Securities Act of 1933 or under
common law or otherwise; but only to the extent that such liability or
expense incurred by the Fund, its directors or officers or such
controlling person resulting from such claims or demands shall arise out
of or be based upon any alleged untrue statement of a material fact
contained in information furnished in writing by the Distributor to the
Fund for use in the Fund's registration statement or prospectus or shall
arise out of or be based upon any alleged omission to state a material
fact in connection with such information required to be stated in the
registration statement or prospectus or necessary to make such
information not misleading. The Distributor's agreement to indemnify the
Fund, its directors and officers, and any such controlling person as
aforesaid is expressly conditioned upon the Distributor being promptly
notified of any action brought against the Fund, its officers or
directors or any such controlling person.
17. DURATION AND TERMINATION OF THIS AGREEMENT
This Agreement shall become effective upon the effective date of the
Fund's initial registration statement under the Securities Act of 1933
and will remain in effect from year to year thereafter, but only so long
as such continuance is specifically approved, at least annually, either
by the Board of Directors of the Fund, or by a vote of a majority of the
outstanding voting securities of the Fund, provided that in either event
such continuation shall be approved by the vote of a majority of the
directors who are not interested persons of the Distributor, Principal
Mutual Life Insurance Company, or the Fund cast in person at a meeting
called for the purpose of voting on such approval. This Agreement may on
60 days written notice be terminated at any time, without the payment of
any penalty, by the Fund, or by the Distributor. This Agreement shall
terminate automatically in the event of its assignment by the
Distributor and shall not be assignable by the Fund without the consent
of the Distributor.
In interpreting the provisions of this paragraph, the definitions
contained in section 2(a) of the Investment Company Act of 1940
(particularly the definitions of "interested person", "assignment" and
"voting security") shall be applied.
18. AMENDMENT OF THIS AGREEMENT
No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the
party against which enforcement of the change, waiver, discharge or
termination is sought. If the Fund should at any time deem it necessary
or advisable in the best interests of the Fund that any amendment of
this Agreement be made in order to comply with the recommendations or
requirements of the Securities and Exchange Commission or other
governmental authority or to obtain any advantage under state or federal
tax laws and should notify the Distributor of the form of such
amendment, and the reasons therefor, and if the Distributor should
decline to assent to such amendment, the Fund may terminate this
Agreement forthwith. If the Distributor should at any time request that
a change be made in the Fund's Certificate of Incorporation or By-laws,
or in its method of doing business, in order to comply with any
requirements of federal law or regulations of the Securities and
Exchange Commission or of a national securities association of which the
Distributor is or may be a member, relating to the sale of shares of the
Fund, and the Fund should not make such necessary change within a
reasonable time, the Distributor may terminate this Agreement forthwith.
19. ADDRESS FOR PURPOSES OF NOTICE
Any notice under this Agreement shall be in writing, addressed and
delivered or mailed, postage prepaid, to the other party at such address
as such other party may designate for the receipt of such notices. Until
further notice to the other party, it is agreed that the address of the
Fund and that of the Distributor for this purpose shall be The Principal
Financial Group, Des Moines, Iowa 50392.
IN WITNESS WHEREOF, the parties hereof have caused this Agreement to be
executed in duplicate on the day and year first above written.
PRINCIPAL SMALLCAP FUND, INC. PRINCOR FINANCIAL SERVICES CORPORATION
By ___________________________________ By ___________________________________
A. S. Filean, Vice President S. L. Jones, President
CUSTODY AGREEMENT
Agreement made as of this day of ,
_____________________________________________1997, between PRINCIPAL SMALLCAP
FUND, INC., a corporation organized and existing under the laws of the State of
Maryland having its principal office and place of business at 711 High Street,
Des Moines, Iowa 50392-0200 (hereinafter called the "Fund"), and THE BANK OF NEW
YORK, a New York corporation authorized to do a banking business, having its
principal office and place of business at 48 Wall Street, New York, New York
10286 (hereinafter called the "Custodian").
W I T N E S S E T H :
that for and in consideration of the mutual promises hereinafter set forth, the
Fund and the Custodian agree as follows:
ARTICLE I.
DEFINITIONS
Whenever used in this Agreement, the following words and phrases, unless
the context otherwise requires, shall have the following meanings:
1. "Book-Entry System" shall mean the Federal Reserve/Treasury book- entry
system for United States and federal agency securities, its successor or
successors and its nominee or nominees.
2. "Call Option" shall mean an exchange traded option with respect to
Securities other than Stock Index Options, Futures Contracts, and Futures
Contract Options entitling the holder, upon timely exercise and payment of the
exercise price, as specified therein, to purchase from the writer thereof the
specified underlying Securities.
3. "Certificate" shall mean any notice, instruction, or other instrument in
writing, authorized or required by this Agreement to be given to the Custodian
which is actually received by the Custodian and signed on behalf of the Fund by
any two Officers.
4. "Clearing Member" shall mean a registered broker-dealer which is a
clearing member under the rules of O.C.C. and a member of a national securities
exchange qualified to act as a custodian for an investment company, or any
broker-dealer reasonably believed by the Custodian to be such a clearing member.
5. "Collateral Account" shall mean a segregated account so denominated
which is specifically allocated to a Series and pledged to the Custodian as
security for, and in consideration of, the Custodian's issuance of (a) any Put
Option guarantee letter or similar document described in paragraph 8 of Article
V herein, or (b) any receipt described in Article V or VIII herein.
6. "Covered Call Option" shall mean an exchange traded option entitling the
holder, upon timely exercise and payment of the exercise price, as specified
therein, to purchase from the writer thereof the specified underlying Securities
(excluding Futures Contracts) which are owned by the writer thereof and subject
to appropriate restrictions.
7. "Depository" shall mean The Depository Trust Company ("DTC"), a clearing
agency registered with the Securities and Exchange Commission, its successor or
successors and its nominee or nominees. The term "Depository" shall further mean
and include any other person authorized to act as a depository under the
Investment Company Act of 1940, its successor or successors and its nominee or
nominees, specifically identified in a certified copy of a resolution of the
Fund's Board of Directors specifically approving deposits therein by the
Custodian.
8."Financial Futures Contract" shall mean the firm commitment to buy or
sell fixed income securities including, without limitation, U.S. Treasury Bills,
U.S. Treasury Notes, U.S. Treasury Bonds, domestic bank certificates of deposit,
and Eurodollar certificates of deposit, during a specified month at an agreed
upon price.
9. "Futures Contract" shall mean a Financial Futures Contract and/or Stock
Index Futures Contracts.
10. "Futures Contract Option" shall mean an option with respect to a
Futures Contract.
11. "Margin Account" shall mean a segregated account in the name of a
broker, dealer, futures commission merchant, or a Clearing Member, or in the
name of the Fund for the benefit of a broker, dealer, futures commission
merchant, or Clearing Member, or otherwise, in accordance with an agreement
between the Fund, the Custodian and a broker, dealer, futures commission
merchant or a Clearing Member (a "Margin Account Agreement"), separate and
distinct from the custody account, in which certain Securities and/or money of
the Fund shall be deposited and withdrawn from time to time in connection with
such transactions as the Fund may from time to time determine. Securities held
in the Book-Entry System or the Depository shall be deemed to have been
deposited in, or withdrawn from, a Margin Account upon the Custodian's effecting
an appropriate entry in its books and records.
12. "Money Market Security" shall be deemed to include, without limitation,
certain Reverse Repurchase Agreements, debt obligations issued or guaranteed as
to interest and principal by the government of the United States or agencies or
instrumentalities thereof, any tax, bond or revenue anticipation note issued by
any state or municipal government or public authority, commercial paper,
certificates of deposit and bankers' acceptances, repurchase agreements with
respect to the same and bank time deposits, where the purchase and sale of such
securities normally requires settlement in federal funds on the same day as such
purchase or sale.
13. "O.C.C." shall mean the Options Clearing Corporation, a clearing agency
registered under Section 17A of the Securities Exchange Act of 1934, its
successor or successors, and its nominee or nominees.
14. "Officers" shall be deemed to include the President, any Vice
President, the Secretary, the Treasurer, the Controller, any Assistant
Secretary, any Assistant Treasurer, and any other person or persons, whether or
not any such other person is an officer of the Fund, duly authorized by the
Board of Directors of the Fund to execute any Certificate, instruction, notice
or other instrument on behalf of the Fund and listed in the Certificate annexed
hereto as Appendix A or such other Certificate as may be received by the
Custodian from time to time.
15. "Option" shall mean a Call Option, Covered Call Option, Stock Index
Option and/or a Put Option.
16. "Oral Instructions" shall mean verbal instructions actually received by
the Custodian from an Officer or from a person reasonably believed by the
Custodian to be an Officer.
17. "Put Option" shall mean an exchange traded option with respect to
Securities other than Stock Index Options, Futures Contracts, and Futures
Contract Options entitling the holder, upon timely exercise and tender of the
specified underlying Securities, to sell such Securities to the writer thereof
for the exercise price.
18. "Reverse Repurchase Agreement" shall mean an agreement pursuant to
which the Fund sells Securities and agrees to repurchase such Securities at a
described or specified date and price.
19. "Security" shall be deemed to include, without limitation, Money Market
Securities, Call Options, Put Options, Stock Index Options, Stock Index Futures
Contracts, Stock Index Futures Contract Options, Financial Futures Contracts,
Financial Futures Contract Options, Reverse Repurchase Agreements, common stocks
and other securities having characteristics similar to common stocks, preferred
stocks, debt obligations issued by state or municipal governments and by public
authorities, (including, without limitation, general obligation bonds, revenue
bonds, industrial bonds and industrial development bonds), bonds, debentures,
notes, mortgages or other obligations, and any certificates, receipts, warrants
or other instruments representing rights to receive, purchase, sell or subscribe
for the same, or evidencing or representing any other rights or interest
therein, or any property or assets.
20. "Senior Security Account" shall mean an account maintained and
specifically allocated to a Series under the terms of this Agreement as a
segregated account, by recordation or otherwise, within the custody account in
which certain Securities and/or other assets of the Fund specifically al located
to such Series shall be deposited and withdrawn from time to time in accordance
with Certificates received by the Custodian in connection with such transactions
as the Fund may from time to time determine.
21. "Series" shall mean the various portfolios, if any, of the Fund as
described from time to time in the current and effective prospectus for the Fund
and listed on Appendix B hereto as amended from time to time.
22. "Shares" shall mean the shares of capital stock of the Fund, each of
which is, in the case of a Fund having Series, allocated to a particular Series.
23. "Stock Index Futures Contract" shall mean a bilateral agreement
pursuant to which the parties agree to take or make delivery of an amount of
cash equal to a specified dollar amount times the difference between the value
of a particular stock index at the close of the last business day of the
contract and the price at which the futures contract is originally struck.
24. "Stock Index Option" shall mean an exchange traded option entitling the
holder, upon timely exercise, to receive an amount of cash determined by
reference to the difference between the exercise price and the value of the
index on the date of exercise.
ARTICLE II.
APPOINTMENT OF CUSTODIAN
1. The Fund hereby constitutes and appoints the Custodian as custodian of
the Securities and moneys at any time owned by the Fund during the period of
this Agreement.
2. The Custodian hereby accepts appointment as such custodian and agrees to
perform the duties thereof as hereinafter set forth.
ARTICLE III.
CUSTODY OF CASH AND SECURITIES
1. Except as otherwise provided in paragraph 7 of this Article and in
Article VIII, the Fund will deliver or cause to be delivered to the Custodian
all Securities and all moneys owned by it, at any time during the period of this
Agreement, and shall specify with respect to such Securities and money the
Series to which the same are specifically allocated. The Custodian shall
segregate, keep and maintain the assets of the Series separate and apart. The
Custodian will not be responsible for any Securities and moneys not actually
received by it. The Custodian will be entitled to reverse any credits made on
the Fund's behalf where such credits have been previously made and moneys are
not finally collected. The Fund shall deliver to the Custodian a certified
resolution of the Board of Directors of the Fund approving the Custodian's use
of the Book-Entry System with respect to all Securities eligible for deposit
therein, regardless of the Series to which the same are specifically allocated
and utilization of the Book-Entry System to the extent possible in connection
with its performance hereunder, including, without limitation, in connection
with settlements of purchases and sales of Securities, loans of Securities and
deliveries and returns of Securities collateral. Prior to a deposit of
Securities specifically allocated to a Series in the Depository, the Fund shall
deliver to the Custodian a certified resolution of the Board of Directors of the
Fund approving the Custodian's use of the Depository with respect to all
Securities specifically allocated to such Series eligible for deposit therein
and utilization of the Depository to the extent possible with respect to such
Securities in connection with its performance hereunder, including, without
limitation, in connection with settlements of purchases and sales of Securities,
loans of Securities, and deliveries and returns of Securities collateral.
Securities and moneys deposited in either the Book-Entry System or the
Depository will be represented in accounts which include only assets held by the
Custodian for customers, including, but not limited to, accounts in which the
Custodian acts in a fiduciary or representative capacity and will be
specifically allocated on the Custodian's books to the separate account for the
applicable Series. Prior to the Custodian's accepting, utilizing and acting with
respect to Clearing Member confirmations for Options and transactions in Options
for a Series as provided in this Agreement, the Custodian shall have received a
certified resolution of the Fund's Board of Directors, substantially in the form
of Exhibit A hereto, approving, authorizing and instructing the Custodian on a
continuous and on-going basis, until instructed to the contrary by a Certificate
actually received by the Custodian, to accept, utilize and act in accordance
with such confirmations as provided in this Agreement with respect to such
Series.
2. The Custodian shall establish and maintain separate accounts, in the
name of each Series, and shall credit to the separate account for each Series
all moneys received by it for the account of the Fund with respect to such
Series. Money credited to a separate account for a Series shall be disbursed by
the Custodian only:
(a) As hereinafter provided;
(b) Pursuant to Certificates setting forth the name and address of the
person to whom the payment is to be made, the Series account from
which payment is to be made and the purpose for which payment is to be
made; or
(c) In payment of the fees and in reimbursement of the expenses and
liabilities of the Custodian attributable to such Series.
3. Promptly after the close of business on each day, the Custodian shall
furnish the Fund with confirmations and a summary, on a per Series basis, of all
transfers to or from the account of the Fund for a Series, either hereunder or
with any co-custodian or sub-custodian appointed in accordance with this
Agreement during said day. Where Securities are transferred to the account of
the Fund for a Series, the Custodian shall also by book-entry or otherwise
identify as belonging to such Series a quantity of Securities in a fungible bulk
of Securities registered in the name of the Custodian (or its nominee) or shown
on the Custodian's account on the books of the Book-Entry System or the
Depository. At least monthly and from time to time, the Custodian shall furnish
the Fund with a detailed statement, on a per Series basis, of the Securities and
moneys held by the Custodian for the Fund.
4. Except as otherwise provided in paragraph 7 of this Article and in
Article VIII, all Securities held by the Custodian hereunder, which are issued
or issuable only in bearer form, except such Securities as are held in the
Book-Entry System, shall be held by the Custodian in that form; all other
Securities held hereunder may be registered in the name of the Fund, in the name
of any duly appointed registered nominee of the Custodian as the Custodian may
from time to time determine, or in the name of the Book-Entry System or the
Depository or their successor or successors, or their nominee or nominees. The
Fund agrees to furnish to the Custodian appropriate instruments to enable the
Custodian to hold or deliver in proper form for transfer, or to register in the
name of its registered nominee or in the name of the Book-Entry System or the
Depository any Securities which it may hold hereunder and which may from time to
time be registered in the name of the Fund. The Custodian shall hold all such
Securities specifically allocated to a Series which are not held in the
Book-Entry System or in the Depository in a separate account in the name of such
Series physically segregated at all times from those of any other person or
persons.
5. Except as otherwise provided in this Agreement and unless otherwise
instructed to the contrary by a Certificate, the Custodian by itself, or through
the use of the Book-Entry System or the Depository with respect to Securities
held hereunder and therein deposited, shall with respect to all Securities held
for the Fund hereunder in accordance with preceding paragraph 4:
(a) Collect all income due or payable;
(b) Present for payment and collect the amount payable upon such
Securities which are called, but only if either (i) the Custodian
receives a written notice of such call, or (ii) notice of such call
appears in one or more of the publications listed in Appendix C
annexed hereto, which may be amended at any time by the Custodian
without the prior notification or consent of the Fund;
(c) Present for payment and collect the amount payable upon all Securities
which mature;
(d) Surrender Securities in temporary form for definitive Securities;
(e) Execute, as custodian, any necessary declarations or certificates of
ownership under the Federal Income Tax Laws or the laws or regulations
of any other taxing authority now or hereafter in effect; and
(f) Hold directly, or through the Book-Entry System or the Depository with
respect to Securities therein deposited, for the account of a Series,
all rights and similar securities issued with respect to any
Securities held by the Custodian for such Series hereunder.
6. Upon receipt of a Certificate and not otherwise, the Custodian, directly
or through the use of the Book-Entry System or the Depository, shall:
(a) Execute and deliver to such persons as may be designated in such
Certificate proxies, consents, authorizations, and any other
instruments whereby the authority of the Fund as owner of any
Securities held by the Custodian hereunder for the Series specified in
such Certificate may be exercised;
(b) Deliver any Securities held by the Custodian hereunder for the Series
specified in such Certificate in exchange for other Securities or cash
issued or paid in connection with the liquidation, reorganization,
refinancing, merger, consolidation or recapitalization of any
corporation, or the exercise of any conversion privilege and receive
and hold hereunder specifically allocated to such Series any cash or
other Securities received in exchange;
(c) Deliver any Securities held by the Custodian hereunder for the Series
specified in such Certificate to any protective committee,
reorganization committee or other person in connection with the
reorganization, refinancing, merger, consolidation, recapitalization
or sale of assets of any corporation, and receive and hold hereunder
specifically allocated to such Series such certificates of deposit,
interim receipts or other instruments or documents as may be issued to
it to evidence such delivery;
(d) Make such transfers or exchanges of the assets of the Series specified
in such Certificate, and take such other steps as shall be stated in
such Certificate to be for the purpose of effectuating any duly
authorized plan of liquidation, reorganization, merger, consolidation
or recapitalization of the Fund; and
(e) Present for payment and collect the amount payable upon Securities not
described in preceding paragraph 5(b) of this Article which may be
called as specified in the Certificate.
7. Notwithstanding any provision elsewhere contained herein, the Custodian
shall not be required to obtain possession of any instrument or certificate
representing any Futures Contract, any Option, or any Futures Contract Option
until after it shall have determined, or shall have received a Certificate from
the Fund stating, that any such instruments or certificates are available. The
Fund shall deliver to the Custodian such a Certificate no later than the
business day preceding the availability of any such instrument or certificate.
Prior to such availability, the Custodian shall comply with Section 17(f) of the
Investment Company Act of 1940, as amended, in connection with the purchase,
sale, settlement, closing out or writing of Futures Contracts, Options, or
Futures Contract Options by making payments or deliveries specified in
Certificates received by the Custodian in connection with any such purchase,
sale, writing, settlement or closing out upon its receipt from a broker, dealer,
or futures commission merchant of a statement or confirmation reasonably
believed by the Custodian to be in the form customarily used by brokers,
dealers, or future commission merchants with respect to such Futures Contracts,
Options, or Futures Contract Options, as the case may be, confirming that such
Security is held by such broker, dealer or futures commission merchant, in
book-entry form or otherwise, in the name of the Custodian (or any nominee of
the Custodian) as custodian for the Fund, provided, however, that
notwithstanding the foregoing, payments to or deliveries from the Margin
Account, and payments with respect to Securities to which a Margin Account
relates, shall be made in accordance with the terms and conditions of the Margin
Account Agreement. Whenever any such instruments or certificates are available,
the Custodian shall, notwithstanding any provision in this Agreement to the
contrary, make payment for any Futures Contract, Option, or Futures Contract
Option for which such instruments or such certificates are available only
against the delivery to the Custodian of such instrument or such certificate,
and deliver any Futures Contract, Option or Futures Contract Option for which
such instruments or such certificates are available only against receipt by the
Custodian of payment therefor. Any such instrument or certificate delivered to
the Custodian shall be held by the Custodian hereunder in accordance with, and
subject to, the provisions of this Agreement.
ARTICLE IV.
PURCHASE AND SALE OF INVESTMENTS OF THE FUND
OTHER THAN OPTIONS, FUTURES CONTRACTS AND
FUTURES CONTRACT OPTIONS
1. Promptly after each purchase of Securities by the Fund, other than a
purchase of an Option, a Futures Contract, or a Futures Contract Option, the
Fund shall deliver to the Custodian (I) with respect to each purchase of
Securities which are not Money Market Securities, a Certificate, and (ii) with
respect to each purchase of Money Market Securities, a Certificate or Oral
Instructions, specifying with respect to each such purchase: (a) the Series to
which such Securities are to be specifically allocated; (b) the name of the
issuer and the title of the Securities; (c) the number of shares or the
principal amount purchased and accrued interest, if any; (d) the date of
purchase and settlement; (e) the purchase price per unit; (f) the total amount
payable upon such purchase; (g) the name of the person from whom or the broker
through whom the purchase was made, and the name of the clearing broker, if any;
and (h) the name of the broker to whom payment is to be made. The Custodian
shall, upon receipt of Securities purchased by or for the Fund, pay to the
broker specified in the Certificate out of the moneys held for the account of
such Series the total amount payable upon such purchase, provided that the same
conforms to the total amount payable as set forth in such Certificate or Oral
Instructions.
2. Promptly after each sale of Securities by the Fund, other than a sale of
any Option, Futures Contract, Futures Contract Option, or any Reverse Repurchase
Agreement, the Fund shall deliver to the Custodian (I) with respect to each sale
of Securities which are not Money Market Securities, a Certificate, and (ii)
with respect to each sale of Money Market Securities, a Certificate or Oral
Instructions, specifying with respect to each such sale: (a) the Series to which
such Securities were specifically allocated; (b) the name of the issuer and the
title of the Security; (c) the number of shares or principal amount sold, and
accrued interest, if any; (d) the date of sale; (e) the sale price per unit; (f)
the total amount payable to the Fund upon such sale; (g) the name of the broker
through whom or the person to whom the sale was made, and the name of the
clearing broker, if any; and (h) the name of the broker to whom the Securities
are to be delivered. The Custodian shall deliver the Securities specifically
allocated to such Series to the broker specified in the Certificate against
payment of the total amount payable to the Fund upon such sale, provided that
the same conforms to the total amount payable as set forth in such Certificate
or Oral Instructions.
ARTICLE V.
OPTIONS
1. Promptly after the purchase of any Option by the Fund, the Fund shall
deliver to the Custodian a Certificate specifying with respect to each Option
purchased: (a) the Series to which such Option is specifically allocated; (b)
the type of Option (put or call); (c) the name of the issuer and the title and
number of shares subject to such Option or, in the case of a Stock Index Option,
the stock index to which such Option relates and the number of Stock Index
Options purchased; (d) the expiration date; (e) the exercise price; (f) the
dates of purchase and settlement; (g) the total amount payable by the Fund in
connection with such purchase; (h) the name of the Clearing Member through whom
such Option was purchased; and (I) the name of the broker to whom payment is to
be made. The Custodian shall pay, upon receipt of a Clearing Member's statement
confirming the purchase of such Option held by such Clearing Member for the
account of the Custodian (or any duly appointed and registered nominee of the
Custodian) as custodian for the Fund, out of moneys held for the account of the
Series to which such Option is to be specifically allocated, the total amount
payable upon such purchase to the Clearing Member through whom the purchase was
made, provided that the same conforms to the total amount payable as set forth
in such Certificate.
2. Promptly after the sale of any Option purchased by the Fund pursuant to
paragraph 1 hereof, the Fund shall deliver to the Custodian a Certificate
specifying with respect to each such sale: (a) the Series to which such Option
was specifically allocated; (b) the type of Option (put or call); (c) the name
of the issuer and the title and number of shares subject to such Option or, in
the case of a Stock Index Option, the stock index to which such Option relates
and the number of Stock Index Options sold; (d) the date of sale; (e) the sale
price; (f) the date of settlement; (g) the total amount payable to the Fund upon
such sale; and (h) the name of the Clearing Member through whom the sale was
made. The Custodian shall consent to the delivery of the Option sold by the
Clearing Member which previously supplied the confirmation described in
preceding paragraph 1 of this Article with respect to such Option against
payment to the Custodian of the total amount payable to the Fund, provided that
the same conforms to the total amount payable as set forth in such Certificate.
3. Promptly after the exercise by the Fund of any Call Option purchased by
the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to the Custodian
a Certificate specifying with respect to such Call Option: (a) the Series to
which such Call Option was specifically allocated; (b) the name of the issuer
and the title and number of shares subject to the Call Option; (c) the
expiration date; (d) the date of exercise and settlement; (e) the exercise price
per share; (f) the total amount to be paid by the Fund upon such exercise; and
(g) the name of the Clearing Member through whom such Call Option was exercised.
The Custodian shall, upon receipt of the Securities underlying the Call Option
which was exercised, pay out of the moneys held for the account of the Series to
which such Call Option was specifically allocated the total amount payable to
the Clearing Member through whom the Call Option was exercised, provided that
the same conforms to the total amount payable as set forth in such Certificate.
4. Promptly after the exercise by the Fund of any Put Option purchased by
the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to the Custodian
a Certificate specifying with respect to such Put Option: (a) the Series to
which such Put Option was specifically allocated; (b) the name of the issuer and
the title and number of shares subject to the Put Option; (c) the expiration
date; (d) the date of exercise and settlement; (e) the exercise price per share;
(f) the total amount to be paid to the Fund upon such exercise; and (g) the name
of the Clearing Member through whom such Put Option was exercised. The Custodian
shall, upon receipt of the amount payable upon the exercise of the Put Option,
deliver or direct the Depository to deliver the Securities specifically
allocated to such Series, provided the same conforms to the amount payable to
the Fund as set forth in such Certificate.
5. Promptly after the exercise by the Fund of any Stock Index Option
purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to
the Custodian a Certificate specifying with respect to such Stock Index Option:
(a) the Series to which such Stock Index Option was specifically allocated; (b)
the type of Stock Index Option (put or call); (c) the number of Options being
exercised; (d) the stock index to which such Option relates; (e) the expiration
date; (f) the exercise price; (g) the total amount to be received by the Fund in
connection with such exercise; and (h) the Clearing Member from whom such
payment is to be received.
6. Whenever the Fund writes a Covered Call Option, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to such Covered
Call Option: (a) the Series for which such Covered Call Option was written; (b)
the name of the issuer and the title and number of shares for which the Covered
Call Option was written and which underlie the same; (c) the expiration date;
(d) the exercise price; (e) the premium to be received by the Fund; (f) the date
such Covered Call Option was written; and (g) the name of the Clearing Member
through whom the premium is to be received. The Custodian shall deliver or cause
to be delivered, in exchange for receipt of the premium specified in the
Certificate with respect to such Covered Call Option, such receipts as are
required in accordance with the customs prevailing among Clearing Members
dealing in Covered Call Options and shall impose, or direct the Depository to
impose, upon the underlying Securities specified in the Certificate specifically
allocated to such Series such restrictions as may be required by such receipts.
Notwithstanding the foregoing, the Custodian has the right, upon prior written
notification to the Fund, at any time to refuse to issue any receipts for
Securities in the possession of the Custodian and not deposited with the
Depository underlying a Covered Call Option.
7. Whenever a Covered Call Option written by the Fund and described in the
preceding paragraph of this Article is exercised, the Fund shall promptly
deliver to the Custodian a Certificate instructing the Custodian to deliver, or
to direct the Depository to deliver, the Securities subject to such Covered Call
Option and specifying: (a) the Series for which such Covered Call Option was
written; (b) the name of the issuer and the title and number of shares subject
to the Covered Call Option; (c) the Clearing Member to whom the underlying
Securities are to be delivered; and (d) the total amount payable to the Fund
upon such delivery. Upon the return and/or cancellation of any receipts
delivered pursuant to paragraph 6 of this Article, the Custodian shall deliver,
or direct the Depository to deliver, the underlying Securities as specified in
the Certificate against payment of the amount to be received as set forth in
such Certificate.
8. Whenever the Fund writes a Put Option, the Fund shall promptly deliver
to the Custodian a Certificate specifying with respect to such Put Option: (a)
the Series for which such Put Option was written; (b) the name of the issuer and
the title and number of shares for which the Put Option is written and which
underlie the same; (c) the expiration date; (d) the exercise price; (e) the
premium to be received by the Fund; (f) the date such Put Option is written; (g)
the name of the Clearing Member through whom the premium is to be received and
to whom a Put Option guarantee letter is to be delivered; (h) the amount of
cash, and/or the amount and kind of Securities, if any, specifically allocated
to such Series to be deposited in the Senior Security Account for such Series;
and (i) the amount of cash and/or the amount and kind of Securities specifically
allocated to such Series to be deposited into the Collateral Account for such
Series. The Custodian shall, after making the deposits into the Collateral
Account specified in the Certificate, issue a Put Option guarantee letter
substantially in the form utilized by the Custodian on the date hereof, and
deliver the same to the Clearing Member specified in the Certificate against
receipt of the premium specified in said Certificate. Notwithstanding the
foregoing, the Custodian shall be under no obligation to issue any Put Option
guarantee letter or similar document if it is unable to make any of the
representations contained therein.
9. Whenever a Put Option written by the Fund and described in the preceding
paragraph is exercised, the Fund shall promptly deliver to the Custodian a
Certificate specifying: (a) the Series to which such Put Option was written; (b)
the name of the issuer and title and number of shares subject to the Put Option;
(c) the Clearing Member from whom the underlying Securities are to be received;
(d) the total amount payable by the Fund upon such delivery; (e) the amount of
cash and/or the amount and kind of Securities specifically allocated to such
Series to be withdrawn from the Collateral Account for such Series and (f) the
amount of cash and/or the amount and kind of Securities, specifically allocated
to such Series, if any, to be withdrawn from the Senior Security Account. Upon
the return and/or cancellation of any Put Option guarantee letter or similar
document issued by the Custodian in connection with such Put Option, the
Custodian shall pay out of the moneys held for the account of the Series to
which such Put Option was specifically allocated the total amount payable to the
Clearing Member specified in the Certificate as set forth in such Certificate
against delivery of such Securities, and shall make the withdrawals specified in
such Certificate.
10. Whenever the Fund writes a Stock Index Option, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to such Stock
Index Option: (a) the Series for which such Stock Index Option was written; (b)
whether such Stock Index Option is a put or a call; (c) the number of options
written; (d) the stock index to which such Option relates; (e) the expiration
date; (f) the exercise price; (g) the Clearing Member through whom such Option
was written; (h) the premium to be received by the Fund; (i) the amount of cash
and/or the amount and kind of Securities, if any, specifically allocated to such
Series to be deposited in the Senior Security Account for such Series; (j) the
amount of cash and/or the amount and kind of Securities, if any, specifically
allocated to such Series to be deposited in the Collateral Account for such
Series; and (k) the amount of cash and/or the amount and kind of Securities, if
any, specifically allocated to such Series to be deposited in a Margin Account,
and the name in which such account is to be or has been established. The
Custodian shall, upon receipt of the premium specified in the Certificate, make
the deposits, if any, into the Senior Security Account specified in the
Certificate, and either (1) deliver such receipts, if any, which the Custodian
has specifically agreed to issue, which are in accordance with the customs
prevailing among Clearing Members in Stock Index Options and make the deposits
into the Collateral Account specified in the Certificate, or (2) make the
deposits into the Margin Account specified in the Certificate.
11. Whenever a Stock Index Option written by the Fund and described in the
preceding paragraph of this Article is exercised, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to such Stock
Index Option: (a) the Series for which such Stock Index Option was written; (b)
such information as may be necessary to identify the Stock Index Option being
exercised; (c) the Clearing Member through whom such Stock Index Option is being
exercised; (d) the total amount payable upon such exercise, and whether such
amount is to be paid by or to the Fund; (e) the amount of cash and/or amount and
kind of Securities, if any, to be withdrawn from the Margin Account; and (f) the
amount of cash and/or amount and kind of Securities, if any, to be withdrawn
from the Senior Security Account for such Series; and the amount of cash and/or
the amount and kind of Securities, if any, to be withdrawn from the Collateral
Account for such Series. Upon the return and/or cancellation of the receipt, if
any, delivered pursuant to the preceding paragraph of this Article, the
Custodian shall pay out of the moneys held for the account of the Series to
which such Stock Index Option was specifically allocated to the Clearing Member
specified in the Certificate the total amount payable, if any, as specified
therein.
12. Whenever the Fund purchases any Option identical to a previously
written Option described in paragraphs, 6, 8 or 10 of this Article in a
transaction expressly designated as a "Closing Purchase Transaction" in order to
liquidate its position as a writer of an Option, the Fund shall promptly deliver
to the Custodian a Certificate specifying with respect to the Option being
purchased: (a) that the transaction is a Closing Purchase Transaction; (b) the
Series for which the Option was written; (c) the name of the issuer and the
title and number of shares subject to the Option, or, in the case of a Stock
Index Option, the stock index to which such Option relates and the number of
Options held; (d) the exercise price; (e) the premium to be paid by the Fund;
(f) the expiration date; (g) the type of Option (put or call); (h) the date of
such purchase; (i) the name of the Clearing Member to whom the premium is to be
paid; and (j) the amount of cash and/or the amount and kind of Securities, if
any, to be withdrawn from the Collateral Account, a specified Margin Account, or
the Senior Security Account for such Series. Upon the Custodian's payment of the
premium and the return and/or cancellation of any receipt issued pursuant to
paragraphs 6, 8 or 10 of this Article with respect to the Option being
liquidated through the Closing Purchase Transaction, the Custodian shall remove,
or direct the Depository to remove, the previously imposed restrictions on the
Securities underlying the Call Option.
13. Upon the expiration, exercise or consummation of a Closing Purchase
Transaction with respect to any Option purchased or written by the Fund and
described in this Article, the Custodian shall delete such Option from the
statements delivered to the Fund pursuant to paragraph 3 Article III herein, and
upon the return and/or cancellation of any receipts issued by the Custodian,
shall make such withdrawals from the Collateral Account, and the Margin Account
and/or the Senior Security Account as may be specified in a Certificate received
in connection with such expiration, exercise, or consummation.
ARTICLE VI.
FUTURES CONTRACTS
1. Whenever the Fund shall enter into a Futures Contract, the Fund shall
deliver to the Custodian a Certificate specifying with respect to such Futures
Contract, (or with respect to any number of identical Futures Contract(s)): (a)
the Series for which the Futures Contract is being entered; (b) the category of
Futures Contract (the name of the underlying stock index or financial
instrument); (c) the number of identi cal Futures Contracts entered into; (d)
the delivery or settle ment date of the Futures Contract(s); (e) the date the
Futures Contract(s) was (were) entered into and the maturity date; (f) whether
the Fund is buying (going long) or selling (going short) on such Futures
Contract(s); (g) the amount of cash and/or the amount and kind of Securities, if
any, to be deposited in the Senior Security Account for such Series; (h) the
name of the broker, dealer, or futures commission merchant through whom the
Futures Contract was entered into; and (i) the amount of fee or commission, if
any, to be paid and the name of the broker, dealer, or futures commission
merchant to whom such amount is to be paid. The Custodian shall make the
deposits, if any, to the Margin Account in accordance with the terms and
conditions of the Margin Account Agreement. The Custodian shall make payment out
of the moneys specifically allocated to such Series of the fee or commission, if
any, specified in the Certificate and deposit in the Senior Security Account for
such Series the amount of cash and/or the amount and kind of Securities
specified in said Certificate.
2. (a) Any variation margin payment or similar payment required to be made
by the Fund to a broker, dealer, or futures commission merchant with respect to
an outstanding Futures Contract, shall be made by the Custodian in accordance
with the terms and conditions of the Margin Account Agreement.
(b) Any variation margin payment or similar payment from a broker,
dealer, or futures commission merchant to the Fund with respect
to an outstanding Futures Contract, shall be received and dealt
with by the Custodian in accordance with the terms and conditions
of the Margin Account Agreement.
3. Whenever a Futures Contract held by the Custodian hereunder is retained
by the Fund until delivery or settlement is made on such Futures Contract, the
Fund shall deliver to the Custodian a Certificate specifying: (a) the Futures
Contract and the Series to which the same relates; (b) with respect to a Stock
Index Futures Contract, the total cash settlement amount to be paid or received,
and with respect to a Financial Futures Contract, the Securities and/or amount
of cash to be delivered or received; (c) the broker, dealer, or futures
commission merchant to or from whom payment or delivery is to be made or
received; and (d) the amount of cash and/or Securities to be withdrawn from the
Senior Security Account for such Series. The Custodian shall make the payment or
delivery specified in the Certificate, and delete such Futures Contract from the
statements delivered to the Fund pursuant to paragraph 3 of Article III herein.
4. Whenever the Fund shall enter into a Futures Contract to offset a
Futures Contract held by the Custodian hereunder, the Fund shall deliver to the
Custodian a Certificate specifying: (a) the items of information required in a
Certificate described in paragraph 1 of this Article, and (b) the Futures
Contract being offset. The Custodian shall make payment out of the money
specifically allocated to such Series of the fee or commission, if any,
specified in the Certificate and delete the Futures Contract being offset from
the statements delivered to the Fund pursuant to paragraph 3 of Article III
herein, and make such withdrawals from the Senior Security Account for such
Series as may be specified in such Certificate. The withdrawals, if any, to be
made from the Margin Account shall be made by the Custodian in accordance with
the terms and conditions of the Margin Account Agreement.
ARTICLE VII.
FUTURES CONTRACT OPTIONS
1. Promptly after the purchase of any Futures Contract Option by the Fund,
the Fund shall promptly deliver to the Custodian a Certificate specifying with
respect to such Futures Contract Option: (a) the Series to which such Option is
specifically allocated; (b) the type of Futures Contract Option (put or call);
(c) the type of Futures Contract and such other information as may be necessary
to identify the Futures Contract underlying the Futures Contract Option
purchased; (d) the expiration date; (e) the exercise price; (f) the dates of
purchase and settlement; (g) the amount of premium to be paid by the Fund upon
such purchase; (h) the name of the broker or futures commission merchant through
whom such option was purchased; and (i) the name of the broker, or futures
commission merchant, to whom payment is to be made. The Custodian shall pay out
of the moneys specifically allocated to such Series, the total amount to be paid
upon such purchase to the broker or futures commissions merchant through whom
the purchase was made, provided that the same conforms to the amount set forth
in such Certificate.
2. Promptly after the sale of any Futures Contract Option purchased by the
Fund pursuant to paragraph 1 hereof, the Fund shall promptly deliver to the
Custodian a Certificate specifying with respect to each such sale: (a) Series to
which such Futures Contract Option was specifically allocated; (b) the type of
Future Contract Option (put or call); (c) the type of Futures Contract and such
other information as may be necessary to identify the Futures Contract
underlying the Futures Contract Option; (d) the date of sale; (e) the sale
price; (f) the date of settlement; (g) the total amount payable to the Fund upon
such sale; and (h) the name of the broker of futures commission merchant through
whom the sale was made. The Custodian shall consent to the cancellation of the
Futures Contract Option being closed against payment to the Custodian of the
total amount payable to the Fund, provided the same conforms to the total amount
payable as set forth in such Certificate.
3. Whenever a Futures Contract Option purchased by the Fund pursuant to
paragraph 1 is exercised by the Fund, the Fund shall promptly deliver to the
Custodian a Certificate specify ing: (a) the Series to which such Futures
Contract Option was specifically allocated; (b) the particular Futures Contract
Option (put or call) being exercised; (c) the type of Futures Contract
underlying the Futures Contract Option; (d) the date of exercise; (e) the name
of the broker or futures commission merchant through whom the Futures Contract
Option is exercised; (f) the net total amount, if any, payable by the Fund; (g)
the amount, if any, to be received by the Fund; and (h) the amount of cash
and/or the amount and kind of Securities to be deposited in the Senior Security
Account for such Series. The Custodian shall make, out of the moneys and
Securities specifically allocated to such Series, the payments, if any, and the
deposits, if any, into the Senior Security Account as specified in the
Certificate. The deposits, if any, to be made to the Margin Account shall be
made by the Custodian in accordance with the terms and conditions of the Margin
Account Agreement.
4. Whenever the Fund writes a Futures Contract Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to such
Futures Contract Option: (a) the Series for which such Futures Contract Option
was written; (b) the type of Futures Contract Option (put or call); (c) the type
of Futures Contract and such other information as may be necessary to identify
the Futures Contract underlying the Futures Contract Option; (d) the expiration
date; (e) the exercise price; (f) the premium to be received by the Fund; (g)
the name of the broker or futures commission merchant through whom the premium
is to be received; and (h) the amount of cash and/or the amount and kind of
Securities, if any, to be deposited in the Senior Security Account for such
Series. The Custodian shall, upon receipt of the premium specified in the
Certificate, make out of the moneys and Securities specifically allocated to
such Series the deposits into the Senior Security Account, if any, as specified
in the Certificate. The deposits, if any, to be made to the Margin Account shall
be made by the Custodian in accordance with the terms and conditions of the
Margin Account Agreement.
5. Whenever a Futures Contract Option written by the Fund which is a call
is exercised, the Fund shall promptly deliver to the Custodian a Certificate
specifying: (a) the Series to which such Futures Contract Option was
specifically allocated; (b) the particular Futures Contract Option exercised;
(c) the type of Futures Contract underlying the Futures Contract Option; (d) the
name of the broker or futures commission merchant through whom such Futures
Contract Option was exercised; (e) the net total amount, if any, payable to the
Fund upon such exercise; (f) the net total amount, if any, payable by the Fund
upon such exercise; and (g) the amount of cash and/or the amount and kind of
Securities to be deposited in the Senior Security Account for such Series. The
Custodian shall, upon its receipt of the net total amount payable to the Fund,
if any, specified in such Certificate make the payments, if any, and the
deposits, if any, into the Senior Security Account as specified in the
Certificate. The deposits, if any, to be made to the Margin Account shall be
made by the Custodian in accordance with the terms and conditions of the Margin
Account Agreement.
6. Whenever a Futures Contract Option which is written by the Fund and
which is a put is exercised, the Fund shall promptly deliver to the Custodian a
Certificate specifying: (a) the Series to which such Option was specifically
allocated; (b) the particular Futures Contract Option exercised; (c) the type of
Futures Contract underlying such Futures Contract Option; (d) the name of the
broker or futures commission merchant through whom such Futures Contract Option
is exercised; (e) the net total amount, if any, payable to the Fund upon such
exercise; (f) the net total amount, if any, payable by the Fund upon such
exercise; and (g) the amount and kind of Securities and/or cash to be withdrawn
from or deposited in, the Senior Security Account for such Series, if any. The
Custodian shall, upon its receipt of the net total amount payable to the Fund,
if any, specified in the Certificate, make out of the moneys and Securities
specifically allocated to such Series, the payments, if any, and the deposits,
if any, into the Senior Security Account as specified in the Certificate. The
deposits to and/or withdrawals from the Margin Account, if any, shall be made by
the Custodian in accordance with the terms and conditions of the Margin Account
Agreement.
7. Whenever the Fund purchases any Futures Contract Option identical to a
previously written Futures Contract Option described in this Article in order to
liquidate its position as a writer of such Futures Contract Option, the Fund
shall promptly deliver to the Custodian a Certificate specifying with respect to
the Futures Contract Option being purchased: (a) the Series to which such Option
is specifically allocated; (b) that the transaction is a closing transaction;
(c) the type of Future Contract and such other information as may be necessary
to identify the Futures Contract underlying the Futures Option Contract; (d) the
exercise price; (e) the premium to be paid by the Fund; (f) the expiration date;
(g) the name of the broker or futures commission merchant to whom the premium is
to be paid; and (h) the amount of cash and/or the amount and kind of Securities,
if any, to be withdrawn from the Senior Security Account for such Series. The
Custodian shall effect the withdrawals from the Senior Security Account
specified in the Certificate. The withdrawals, if any, to be made from the
Margin Account shall be made by the Custodian in accordance with the terms and
conditions of the Margin Account Agreement.
8. Upon the expiration, exercise, or consummation of a closing transaction
with respect to, any Futures Contract Option written or purchased by the Fund
and described in this Article, the Custodian shall (a) delete such Futures
Contract Option from the statements delivered to the Fund pursuant to paragraph
3 of Article III herein and, (b) make such withdrawals from and/or in the case
of an exercise such deposits into the Senior Security Account as may be
specified in a Certificate. The deposits to and/or withdrawals from the Margin
Account, if any, shall be made by the Custodian in accordance with the terms and
conditions of the Margin Account Agreement.
9. Futures Contracts acquired by the Fund through the exercise of a Futures
Contract Option described in this Article shall be subject to Article VI hereof.
ARTICLE VIII.
SHORT SALES
1. Promptly after any short sales by any Series of the Fund, the Fund shall
promptly deliver to the Custodian a Certificate specifying: (a) the Series for
which such short sale was made; (b) the name of the issuer and the title of the
Security; (c) the number of shares or principal amount sold, and accrued
interest or dividends, if any; (d) the dates of the sale and settlement; (e) the
sale price per unit; (f) the total amount credited to the Fund upon such sale,
if any, (g) the amount of cash and/or the amount and kind of Securities, if any,
which are to be deposited in a Margin Account and the name in which such Margin
Account has been or is to be established; (h) the amount of cash and/or the
amount and kind of Securities, if any, to be deposited in a Senior Security
Account, and (i) the name of the broker through whom such short sale was made.
The Custodian shall upon its receipt of a statement from such broker confirming
such sale and that the total amount credited to the Fund upon such sale, if any,
as specified in the Certificate is held by such broker for the account of the
Custodian (or any nominee of the Custodian) as custodian of the Fund, issue a
receipt or make the deposits into the Margin Account and the Senior Security
Account specified in the Certificate.
2. In connection with the closing-out of any short sale, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to each
such closing out: (a) the Series for which such transaction is being made; (b)
the name of the issuer and the title of the Security; (c) the number of shares
or the principal amount, and accrued interest or dividends, if any, required to
effect such closing-out to be delivered to the broker; (d) the dates of
closing-out and settlement; (e) the purchase price per unit; (f) the net total
amount payable to the Fund upon such closing-out; (g) the net total amount
payable to the broker upon such closing-out; (h) the amount of cash and the
amount and kind of Securities to be withdrawn, if any, from the Margin Account;
(i) the amount of cash and/or the amount and kind of Securities, if any, to be
withdrawn from the Senior Security Account; and (j) the name of the broker
through whom the Fund is effecting such closing-out. The Custodian shall, upon
receipt of the net total amount payable to the Fund upon such closing-out, and
the return and/or cancellation of the receipts, if any, issued by the Custodian
with respect to the short sale being closed-out, pay out of the moneys held for
the account of the Fund to the broker the net total amount payable to the
broker, and make the withdrawals from the Margin Account and the Senior Security
Account, as the same are specified in the Certificate.
ARTICLE IX.
REVERSE REPURCHASE AGREEMENTS
1. Promptly after the Fund enters a Reverse Repurchase Agreement with
respect to Securities and money held by the Custodian hereunder, the Fund shall
deliver to the Custodian a Certificate, or in the event such Reverse Repurchase
Agreement is a Money Market Security, a Certificate or Oral Instructions
specifying: (a) the Series for which the Reverse Repurchase Agreement is
entered; (b) the total amount payable to the Fund in connection with such
Reverse Repurchase Agreement and specifically allocated to such Series; (c) the
broker or dealer through or with whom the Reverse Repurchase Agreement is
entered; (d) the amount and kind of Securities to be delivered by the Fund to
such broker or dealer; (e) the date of such Reverse Repurchase Agreement; and
(f) the amount of cash and/or the amount and kind of Securities, if any,
specifically allocated to such Series to be deposited in a Senior Security
Account for such Series in connection with such Reverse Repurchase Agreement.
The Custodian shall, upon receipt of the total amount payable to the Fund
specified in the Certificate, Oral Instructions, or Written Instructions make
the delivery to the broker or dealer, and the deposits, if any, to the Senior
Security Account, specified in such Certificate or Oral Instructions.
2. Upon the termination of a Reverse Repurchase Agreement described in
preceding paragraph 1 of this Article, the Fund shall promptly deliver a
Certificate or, in the event such Reverse Repurchase Agreement is a Money Market
Security, a Certificate or Oral Instructions to the Custodian specifying: (a)
the Reverse Repurchase Agreement being terminated and the Series for which same
was entered; (b) the total amount payable by the Fund in connection with such
termination; (c) the amount and kind of Securities to be received by the Fund
and specifically allocated to such Series in connection with such termination;
(d) the date of termination; (e) the name of the broker or dealer with or
through whom the Reverse Repurchase Agreement is to be terminated; and (f) the
amount of cash and/or the amount and kind of Securities to be withdrawn from the
Senior Securities Account for such Series. The Custodian shall, upon receipt of
the amount and kind of Securities to be received by the Fund specified in the
Certificate or Oral Instructions, make the payment to the broker or dealer, and
the withdrawals, if any, from the Senior Security Account, specified in such
Certificate or Oral Instructions.
ARTICLE X.
LOAN OF PORTFOLIO SECURITIES OF THE FUND
1. Promptly after each loan of portfolio Securities specifically allocated
to a Series held by the Custodian hereunder, the Fund shall deliver or cause to
be delivered to the Custodian a Certificate specifying with respect to each such
loan: (a) the Series to which the loaned Securities are specifically allocated;
(b) the name of the issuer and the title of the Securities, (c) the number of
shares or the principal amount loaned, (d) the date of loan and delivery, (e)
the total amount to be delivered to the Custodian against the loan of the
Securities, including the amount of cash collateral and the premium, if any,
separately identified, and (f) the name of the broker, dealer, or financial
institution to which the loan was made. The Custodian shall deliver the
Securities thus designated to the broker, dealer or financial institution to
which the loan was made upon receipt of the total amount designated as to be
delivered against the loan of Securities. The Custodian may accept payment in
connection with a delivery otherwise than through the Book-Entry System or
Depository only in the form of a certified or bank cashier's check payable to
the order of the Fund or the Custodian drawn on New York Clearing House funds
and may deliver Securities in accordance with the customs prevailing among
dealers in securities.
2. Promptly after each termination of the loan of Securities by the Fund,
the Fund shall deliver or cause to be delivered to the Custodian a Certificate
specifying with respect to each such loan termination and return of Securities:
(a) the Series to which the loaned Securities are specifically allocated; (b)
the name of the issuer and the title of the Securities to be returned, (c) the
number of shares or the principal amount to be returned, (d) the date of
termination, (e) the total amount to be delivered by the Custodian (including
the cash collateral for such Securities minus any offsetting credits as
described in said Certificate), and (f) the name of the broker, dealer, or
financial institution from which the Securities will be returned. The Custodian
shall receive all Securities returned from the broker, dealer, or financial
institution to which such Securities were loaned and upon receipt thereof shall
pay, out of the moneys held for the account of the Fund, the total amount
payable upon such return of Securities as set forth in the Certificate.
ARTICLE XI.
CONCERNING MARGIN ACCOUNTS, SENIOR SECURITY
ACCOUNTS, AND COLLATERAL ACCOUNTS
1. The Custodian shall, from time to time, make such deposits to, or
withdrawals from, a Senior Security Account as specified in a Certificate
received by the Custodian. Such Certificate shall specify the Series for which
such deposit or withdrawal is to be made and the amount of cash and/or the
amount and kind of Securities specifically allocated to such Series to be
deposited in, or withdrawn from, such Senior Security Account for such Series.
In the event that the Fund fails to specify in a Certificate the Series, the
name of the issuer, the title and the number of shares or the principal amount
of any particular Securities to be deposited by the Custodian into, or withdrawn
from, a Senior Securities Account, the Custodian shall be under no obligation to
make any such deposit or withdrawal and shall so notify the Fund.
2. The Custodian shall make deliveries or payments from a Margin Account to
the broker, dealer, futures commission merchant or Clearing Member in whose
name, or for whose benefit, the account was established as specified in the
Margin Account Agreement.
3. Amounts received by the Custodian as payments or distributions with
respect to Securities deposited in any Margin Account shall be dealt with in
accordance with the terms and conditions of the Margin Account Agreement.
4. The Custodian shall have a continuing lien and security interest in and
to any property at any time held by the Custodian in any Collateral Account
described herein. In accordance with applicable law the Custodian may enforce
its lien and realize on any such property whenever the Custodian has made
payment or delivery pursuant to any Put Option guarantee letter or similar
document or any receipt issued hereunder by the Custodian. In the event the
Custodian should realize on any such property net proceeds which are less than
the Custodian's obligations under any Put Option guarantee letter or similar
document or any receipt, such deficiency shall be a debt owed the Custodian by
the Fund within the scope of Article XII herein.
5. On each business day the Custodian shall furnish the Fund with a
statement with respect to each Margin Account in which money or Securities are
held specifying as of the close of business on the previous business day: (a)
the name of the Margin Account; (b) the amount and kind of Securities held
therein; and (c) the amount of money held therein. The Custodian shall make
available upon request to any broker, dealer, or futures commission merchant
specified in the name of a Margin Account a copy of the statement furnished the
Fund with respect to such Margin Account.
6. Promptly after the close of business on each business day in which cash
and/or Securities are maintained in a Collateral Account for any Series, the
Custodian shall furnish the Fund with a statement with respect to such
Collateral Account specifying the amount of cash and/or the amount and kind of
Securities held therein. No later than the close of business next succeeding the
delivery to the Fund of such state ment, the Fund shall furnish to the Custodian
a Certificate or Written Instructions specifying the then market value of the
Securities described in such statement. In the event such then market value is
indicated to be less than the Custodian's obligation with respect to any
outstanding Put Option guarantee letter or similar document, the Fund shall
promptly specify in a Certificate the additional cash and/or Securities to be
deposited in such Collateral Account to eliminate such deficiency.
ARTICLE XII.
OVERDRAFTS OR INDEBTEDNESS
1. If the Custodian, should in its sole discretion advance funds on behalf
of any Series which results in an overdraft because the moneys held by the
Custodian in the separate account for such Series shall be insufficient to pay
the total amount payable upon a purchase of Securities specifically allocated to
such Series, as set forth in a Certificate or Oral Instructions, or which
results in an overdraft in the separate account of such Series for some other
reason, or if the Fund is for any other reason indebted to the Custodian with
respect to a Series, including any indebtedness to The Bank of New York under
the Fund's Cash Management and Related Services Agreement, (except a borrowing
for investment or for temporary or emergency purposes using Securities as
collateral pursuant to a separate agreement and subject to the provisions of
paragraph 2 of this Article), such overdraft or indebtedness shall be deemed to
be a loan made by the Custodian to the Fund for such Series payable on demand
and shall bear interest from the date incurred at a rate per annum (based on a
360-day year for the actual number of days involved) equal to 1/2% over
Custodian's prime commercial lending rate in effect from time to time, such rate
to be adjusted on the effective date of any change in such prime commercial
lending rate but in no event to be less than 6% per annum. In addition, the Fund
hereby agrees that the Custodian shall have a continuing lien and security
interest in and to any property specifically allocated to such Series at any
time held by it for the benefit of such Series or in which the Fund may have an
interest which is then in the Custodian's possession or control or in possession
or control of any third party acting in the Custodian's behalf. The Fund
authorizes the Custodian, in its sole discretion, at any time to charge any such
overdraft or indebtedness together with interest due thereon against any balance
of account standing to such Series' credit on the Custodian's books. In
addition, the Fund hereby covenants that on each Business Day on which either it
intends to enter a Reverse Repurchase Agreement and/or otherwise borrow from a
third party, or which next succeeds a Business Day on which at the close of
business the Fund had outstanding a Reverse Repurchase Agreement or such a
borrowing, it shall prior to 9 a.m., New York City time, advise the Custodian,
in writing, of each such borrowing, shall specify the Series to which the same
relates, and shall not incur any indebtedness not so specified other than from
the Custodian.
2. The Fund will cause to be delivered to the Custodian by any bank
(including, if the borrowing is pursuant to a separate agreement, the Custodian)
from which it borrows money for investment or for temporary or emergency
purposes using Securities held by the Custodian hereunder as collateral for such
borrowings, a notice or undertaking in the form currently employed by any such
bank setting forth the amount which such bank will loan to the Fund against
delivery of a stated amount of collateral. The Fund shall promptly deliver to
the Custodian a Certificate specifying with respect to each such borrowing: (a)
the Series to which such borrowing relates; (b) the name of the bank, (c) the
amount and terms of the borrowing, which may be set forth by incorporating by
reference an attached promissory note, duly endorsed by the Fund, or other loan
agreement, (d) the time and date, if known, on which the loan is to be entered
into, (e) the date on which the loan becomes due and payable, (f) the total
amount payable to the Fund on the borrowing date, (g) the market value of
Securities to be delivered as collateral for such loan, including the name of
the issuer, the title and the number of shares or the principal amount of any
particular Securities, and (h) a statement specifying whether such loan is for
investment purposes or for temporary or emergency purposes and that such loan is
in conformance with the Investment Company Act of 1940 and the Fund's
prospectus. The Custodian shall deliver on the borrowing date specified in a
Certificate the specified collateral and the executed promissory note, if any,
against delivery by the lending bank of the total amount of the loan payable,
provided that the same conforms to the total amount payable as set forth in the
Certificate. The Custodian may, at the option of the lending bank, keep such
collateral in its possession, but such collateral shall be subject to all rights
therein given the lending bank by virtue of any promissory note or loan
agreement. The Custodian shall deliver such Securities as additional collateral
as may be specified in a Certificate to collateralize further any transaction
described in this paragraph. The Fund shall cause all Securities released from
collateral status to be returned directly to the Custodian, and the Custodian
shall receive from time to time such return of collateral as may be tendered to
it. In the event that the Fund fails to specify in a Certificate the Series, the
name of the issuer, the title and number of shares or the principal amount of
any particular Securities to be delivered as collateral by the Custodian, the
Custodian shall not be under any obligation to deliver any Securities.
ARTICLE XIII.
DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY
OF ANY SERIES HELD OUTSIDE OF THE UNITED STATES
1. The Custodian is authorized and instructed to employ, as sub-custodian
for each Series' Foreign Securities (as such term is defined in paragraph (c)(1)
of Rule 17f-5 under the Investment Company Act of 1940, as amended) and other
assets, the foreign banking institutions and foreign securities depositories and
clearing agencies designated on Schedule I hereto ("Foreign Sub-Custodians") to
carry out their respective responsibilities in accordance with the terms of the
sub-custodian agreement between each such Foreign Sub-Custodian and the
Custodian, copies of which have been previously delivered to the Fund and
receipt of which is hereby acknowledged (each such agreement, a "Foreign
Sub-Custodian Agreement"). Upon receipt of a Certificate, together with a
certified resolution substantially in the form attached as Exhibit B of the
Fund's Board of Directors, the Fund may designate any additional foreign
sub-custodian with which the Custodian has an agreement for such entity to act
as the Custodian's agent, as its sub-custodian and any such additional foreign
sub-custodian shall be deemed added to Schedule I. Upon receipt of a Certificate
from the Fund, the Custodian shall cease the employment of any one or more
Foreign Sub-Custodians for maintaining custody of the Fund's assets and such
Foreign Sub-Custodian shall be deemed deleted from Schedule I.
2. Each Foreign Sub-Custodian Agreement shall be substantially in the form
previously delivered to the Fund and will not be amended in a way that
materially adversely affects the Fund without the Fund's prior written consent.
3. The Custodian shall identify on its books as belonging to each Series of
the Fund the Foreign Securities of such Series held by each Foreign
Sub-Custodian. At the election of the Fund, it shall be entitled to be
subrogated to the rights of the Custodian with respect to any claims by the Fund
or any Series against a Foreign Sub-Custodian as a consequence of any loss,
damage, cost, expense, liability or claim sustained or incurred by the Fund or
any Series if and to the extent that the Fund or such Series has not been made
whole for any such loss, damage, cost, expense, liability or claim.
4. Upon request of the Fund, the Custodian will, consistent with the terms
of the applicable Foreign Sub-Custodian Agreement, use reasonable efforts to
arrange for the independent accountants of the Fund to be afforded access to the
books and records of any Foreign Sub-Custodian insofar as such books and records
relate to the performance of such Foreign Sub-Custodian under its agreement with
the Custodian on behalf of the Fund.
5. The Custodian will supply to the Fund from time to time, as mutually
agreed upon, statements in respect of the securities and other assets of each
Series held by Foreign Sub-Custodians, including but not limited to, an
identification of entities having possession of each Series' Foreign Securities
and other assets, and advices or notifications of any transfers of Foreign
Securities to or from each custodial account maintained by a Foreign
Sub-Custodian for the Custodian on behalf of the Series.
6. The Custodian shall furnish annually to the Fund, as mutually agreed
upon, information concerning the Foreign Sub-Custodians employed by the
Custodian. Such information shall be similar in kind and scope to that furnished
to the Fund in connection with the Fund's initial approval of such Foreign
Sub-Custodians and, in any event, shall include information pertaining to (i)
the Foreign Custodians' financial strength, general reputation and standing in
the countries in which they are located and their ability to provide the
custodial services required, and (ii) whether the Foreign Sub-Custodians would
provide a level of safeguards for safekeeping and custody of securities not
materially different from those prevailing in the United States. The Custodian
shall monitor the general operating performance of each Foreign Sub-Custodian.
The Custodian agrees that it will use reasonable care in monitoring compliance
by each Foreign Sub-Custodian with the terms of the relevant Foreign
Sub-Custodian Agreement and that if it learns of any breach of such Foreign
Sub-Custodian Agreement believed by the Custodian to have a material adverse
effect on the Fund or any Series it will promptly notify the Fund of such
breach. The Custodian also agrees to use reasonable and diligent efforts to
enforce its rights under the relevant Foreign Sub-Custodian Agreement.
7. The Custodian shall transmit promptly to the Fund all notices, reports
or other written information received pertaining to the Fund's Foreign
Securities, including without limitation, notices of corporate action, proxies
and proxy solicitation materials.
8. Notwithstanding any provision of this Agreement to the contrary,
settlement and payment for securities received for the account of any Series and
delivery of securities maintained for the account of such Series may be effected
in accordance with the customary or established securities trading or securities
processing practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivery of securities to the
purchaser thereof or to a dealer therefor (or an agent for such purchaser or
dealer) against a receipt with the expectation of receiving later payment for
such securities from such purchaser or dealer.
9. Notwithstanding any other provision in this Agreement to the contrary,
with respect to any losses or damages arising out of or relating to any actions
or omissions of any Foreign Sub-Custodian the sole responsibility and liability
of the Custodian shall be to take appropriate action at the Fund's expense to
recover such loss or damage from the Foreign Sub-Custodian. It is expressly
understood and agreed that the Custodian's sole responsibility and liability
shall be limited to amounts so recovered from the Foreign Sub-Custodian.
ARTICLE XIV.
CONCERNING THE CUSTODIAN
1. Except as hereinafter provided, or as provided in Article XIII neither
the Custodian nor its nominee shall be liable for any loss or damage, including
counsel fees, resulting from its action or omission to act or otherwise, either
hereunder or under any Margin Account Agreement, except for any such loss or
damage arising out of its own negligence or willful misconduct. In no event
shall the Custodian be liable to the Fund or any third party for special,
indirect or consequential damages or lost profits or loss of business, arising
under or in connection with this Agreement, even if previously informed of the
possibility of such damages and regardless of the form of action. The Custodian
may, with respect to questions of law arising hereunder or under any Margin
Account Agreement, apply for and obtain the advice and opinion of counsel to the
Fund or of its own counsel, at the expense of the Fund, and shall be fully
protected with respect to anything done or omitted by it in good faith in
conformity with such advice or opinion. The Custodian shall be liable to the
Fund for any loss or damage resulting from the use of the Book-Entry System or
any Depository arising by reason of any negligence or willful misconduct on the
part of the Custodian or any of its employees or agents.
2. Without limiting the generality of the foregoing, the Custodian shall be
under no obligation to inquire into, and shall not be liable for:
(a) The validity of the issue of any Securities purchased, sold, or
written by or for the Fund, the legality of the purchase, sale or
writing thereof, or the propriety of the amount paid or received
therefor;
(b) The legality of the sale or redemption of any Shares, or the
propriety of the amount to be received or paid therefor;
(c) The legality of the declaration or payment of any dividend by the
Fund;
(d) The legality of any borrowing by the Fund using Securities as
collateral;
(e) The legality of any loan of portfolio Securi ties, nor shall the
Custodian be under any duty or obligation to see to it that any
cash collateral delivered to it by a broker, dealer, or financial
institution or held by it at any time as a result of such loan of
portfolio Securities of the Fund is adequate collateral for the
Fund against any loss it might sustain as a result of such loan.
The Custodian specifically, but not by way of limitation, shall
not be under any duty or obligation periodically to check or
notify the Fund that the amount of such cash collateral held by
it for the Fund is sufficient collateral for the Fund, but such
duty or obligation shall be the sole responsibility of the Fund.
In addition, the Custodian shall be under no duty or obligation
to see that any broker, dealer or financial institution to which
portfolio Securities of the Fund are lent pursuant to Article X
of this Agreement makes payment to it of any dividends or
interest which are payable to or for the account of the Fund
during the period of such loan or at the termination of such
loan, provided, however, that the Custodian shall promptly notify
the Fund in the event that such dividends or interest are not
paid and received when due; or
(f) The sufficiency or value of any amounts of money and/or
Securities held in any Margin Account, Senior Security Account or
Collateral Account in connection with transactions by the Fund.
In addition, the Custodian shall be under no duty or obligation
to see that any broker, dealer, futures commission merchant or
Clearing Member makes payment to the Fund of any variation margin
payment or similar payment which the Fund may be entitled to
receive from such broker, dealer, futures commission merchant or
Clearing Member, to see that any payment received by the
Custodian from any broker, dealer, futures commission merchant or
Clearing Member is the amount the Fund is entitled to receive, or
to notify the Fund of the Custodian's receipt or non-receipt of
any such payment.
3. The Custodian shall not be liable for, or considered to be the Custodian
of, any money, whether or not represented by any check, draft, or other
instrument for the payment of money, received by it on behalf of the Fund until
the Custodian actually receives and collects such money directly or by the final
crediting of the account representing the Fund's interest at the Book-Entry
System or the Depository.
4. The Custodian shall have no responsibility and shall not be liable for
ascertaining or acting upon any calls, conversions, exchange offers, tenders,
interest rate changes or similar matters relating to Securities held in the
Depository, unless the Custodian shall have actually received timely notice from
the Depository. In no event shall the Custodian have any responsibility or
liability for the failure of the Depository to collect, or for the late
collection or late crediting by the Depository of any amount payable upon
Securities deposited in the Depository which may mature or be redeemed, retired,
called or otherwise become payable. However, upon receipt of a Certificate from
the Fund of an overdue amount on Securities held in the Depository the Custodian
shall make a claim against the Depository on behalf of the Fund, except that the
Custodian shall not be under any obligation to appear in, prosecute or defend
any action suit or proceeding in respect to any Securities held by the
Depository which in its opinion may involve it in expense or liability, unless
indemnity satisfactory to it against all expense and liability be furnished as
often as may be required.
5. The Custodian shall not be under any duty or obligation to take action
to effect collection of any amount due to the Fund from the Transfer Agent of
the Fund nor to take any action to effect payment or distribution by the
Transfer Agent of the Fund of any amount paid by the Custodian to the Transfer
Agent of the Fund in accordance with this Agreement.
6. The Custodian shall not be under any duty or obligation to take action
to effect collection of any amount, if the Securities upon which such amount is
payable are in default, or if payment is refused after due demand or
presentation, unless and until (i) it shall be directed to take such action by a
Certificate and (ii) it shall be assured to its satisfaction of reimbursement of
its costs and expenses in connection with any such action.
7. The Custodian may in addition to the employment of Foreign
Sub-Custodians pursuant to Article XIII appoint one or more banking institutions
as Depository or Depositories, as Sub-Custodian or Sub-Custodians, or as
Co-Custodian or Co-Custodians including, but not limited to, banking
institutions located in foreign countries, of Securities and moneys at any time
owned by the Fund, upon such terms and conditions as may be approved in a
Certificate or contained in an agreement executed by the Custodian, the Fund and
the appointed institution.
8. The Custodian shall not be under any duty or obligation (a) to ascertain
whether any Securities at any time delivered to, or held by it or by any Foreign
Sub-Custodian, for the account of the Fund and specifically allocated to a
Series are such as properly may be held by the Fund or such Series under the
provisions of its then current prospectus, or (b) to ascertain whether any
transactions by the Fund, whether or not involving the Custodian, are such
transactions as may properly be engaged in by the Fund.
9. The Custodian shall be entitled to receive and the Fund agrees to pay to
the Custodian all out-of-pocket expenses and such compensation as may be agreed
upon from time to time between the Custodian and the Fund. The Custodian may
charge such compensation and any expenses with respect to a Series incurred by
the Custodian in the performance of its duties pursuant to such agreement
against any money specifically allocated to such Series. Unless and until the
Fund instructs the Custodian by a Certificate to apportion any loss, damage,
liability or expense among the Series in a specified manner, the Custodian shall
also be entitled to charge against any money held by it for the account of a
Series such Series' pro rata share (based on such Series net asset value at the
time of the charge to the aggregate net asset value of all Series at that time)
of the amount of any loss, damage, liability or expense, including counsel fees,
for which it shall be entitled to reimbursement under the provisions of this
Agreement. The expenses for which the Custodian shall be entitled to
reimbursement hereunder shall include, but are not limited to, the expenses of
sub-custodians and foreign branches of the Custodian incurred in settling
outside of New York City transactions involving the purchase and sale of
Securities of the Fund.
10. The Custodian shall be entitled to rely upon any Certificate, notice or
other instrument in writing received by the Custodian and reasonably believed by
the Custodian to be a Certificate. The Custodian shall be entitled to rely upon
any Oral Instructions actually received by the Custodian hereinabove provided
for. The Fund agrees to forward to the Custodian a Certificate or facsimile
thereof confirming such Oral Instructions in such manner so that such
Certificate or facsimile thereof is received by the Custodian, whether by hand
delivery, telecopier or other similar device, or otherwise, by the close of
business of the same day that such Oral Instructions are given to the Custodian.
The Fund agrees that the fact that such confirming instructions are not
received, or that contrary instructions are received, by the Custodian shall in
no way affect the validity of the transactions or enforceability of the
transactions hereby authorized by the Fund. The Fund agrees that the Custodian
shall incur no liability to the Fund in acting upon Oral Instructions given to
the Custodian hereunder concerning such transactions provided such instructions
reasonably appear to have been received from an Officer.
11. The Custodian shall be entitled to rely upon any instrument,
instruction or notice received by the Custodian and reasonably believed by the
Custodian to be given in accordance with the terms and conditions of any Margin
Account Agreement. Without limiting the generality of the foregoing, the
Custodian shall be under no duty to inquire into, and shall not be liable for,
the accuracy of any statements or representations contained in any such
instrument or other notice including, without limitation, any specification of
any amount to be paid to a broker, dealer, futures commission merchant or
Clearing Member.
12. The books and records pertaining to the Fund which are in the
possession of the Custodian shall be the property of the Fund. Such books and
records shall be prepared and maintained as required by the Investment Company
Act of 1940, as amended, and other applicable securities laws and rules and
regulations. The Fund, or the Fund's authorized representatives, shall have
access to such books and records during the Custodian's normal business hours.
Upon the reasonable request of the Fund, copies of any such books and records
shall be provided by the Custodian to the Fund or the Fund's authorized
representative, and the Fund shall reimburse the Custodian its expenses of
providing such copies. Upon reasonable request of the Fund, the Custodian shall
provide in hard copy or on micro- film, whichever the Custodian elects, any
records included in any such delivery which are maintained by the Custodian on a
computer disc, or are similarly maintained, and the Fund shall reimburse the
Custodian for its expenses of providing such hard copy or micro-film.
13. The Custodian shall provide the Fund with any report obtained by the
Custodian on the system of internal accounting control of the Book-Entry System,
the Depository or O.C.C., and with such reports on its own systems of internal
accounting control as the Fund may reasonably request from time to time.
14. The Fund agrees to indemnify the Custodian against and save the
Custodian harmless from all liability, claims, losses and demands whatsoever,
including attorney's fees, howsoever arising or incurred because of or in
connection with this Agreement, including the Custodian's payment or non-payment
of checks pursuant to paragraph 6 of Article XIII as part of any check
redemption privilege program of the Fund, except for any such liability, claim,
loss and demand arising out of the Custodian's own negligence or willful
misconduct.
15. Subject to the foregoing provisions of this Agreement, including,
without limitation, those contained in Article XIII the Custodian may deliver
and receive Securities, and receipts with respect to such Securities, and
arrange for payments to be made and received by the Custodian in accordance with
the customs prevailing from time to time among brokers or dealers in such
Securities. When the Custodian is instructed to deliver Securities against
payment, delivery of such Securities and receipt of payment therefor may not be
completed simultaneously. The Fund assumes all responsibility and li ability for
all credit risks involved in connection with the Custodian's delivery of
Securities pursuant to instructions of the Fund, which responsibility and
liability shall continue until final payment in full has been received by the
Custodian.
16. The Custodian shall have no duties or responsibilities whatsoever
except such duties and responsibilities as are specifically set forth in this
Agreement, and no covenant or obligation shall be implied in this Agreement
against the Custodian.
ARTICLE XV.
TERMINATION
1. Either of the parties hereto may terminate this Agreement by giving to
the other party a notice in writing specifying the date of such termination,
which shall be not less than ninety (90) days after the date of giving of such
notice. In the event such notice is given by the Fund, it shall be accompanied
by a copy of a resolution of the Board of Directors of the Fund, certified by
the Secretary or any Assistant Secretary, electing to terminate this Agreement
and designating a successor custodian or custodians, each of which shall be a
bank or trust company having not less than $2,000,000 aggregate capital, surplus
and undivided profits. In the event such notice is given by the Custodian, the
Fund shall, on or before the termination date, deliver to the Custodian a copy
of a resolution of the Board of Directors of the Fund, certified by the
Secretary or any Assistant Secretary, designating a successor custodian or
custodians. In the absence of such designation by the Fund, the Custodian may
designate a successor custodian which shall be a bank or trust company having
not less than $2,000,000 aggregate capital, surplus and undivided profits. Upon
the date set forth in such notice this Agreement shall terminate, and the
Custodian shall upon receipt of a notice of acceptance by the successor
custodian on that date deliver directly to the successor custodian all
Securities and moneys then owned by the Fund and held by it as Custodian, after
deducting all fees, expenses and other amounts for the payment or reimbursement
of which it shall then be entitled.
2. If a successor custodian is not designated by the Fund or the Custodian
in accordance with the preceding paragraph, the Fund shall upon the date
specified in the notice of termination of this Agreement and upon the delivery
by the Custodian of all Securities (other than Securities held in the Book-Entry
System which cannot be delivered to the Fund) and moneys then owned by the Fund
be deemed to be its own custodian and the Custodian shall thereby be relieved of
all duties and responsibilities pursuant to this Agreement, other than the duty
with respect to Securities held in the Book Entry System which cannot be
delivered to the Fund to hold such Securities hereunder in accordance with this
Agreement.
ARTICLE XVI.
MISCELLANEOUS
1. Annexed hereto as Appendix A is a Certificate signed by two of the
present Officers of the Fund under its corporate seal, setting forth the names
and the signatures of the present Officers of the Fund. The Fund agrees to
furnish to the Custodian a new Certificate in similar form in the event any such
present Officer ceases to be an Officer of the Fund, or in the event that other
or additional Officers are elected or appointed. Until such new Certificate
shall be received, the Custodian shall be fully protected in acting under the
provisions of this Agreement upon the signatures of the Officers as set forth in
the last delivered Certificate.
2. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Custodian, shall be sufficiently given if
addressed to the Custodian and mailed or delivered to it at its offices at 90
Washington Street, New York, New York 10286, or at such other place as the
Custodian may from time to time designate in writing.
3. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Fund shall be sufficiently given if addressed
to the Fund and mailed or delivered to it at its office at the address for the
Fund first above written, or at such other place as the Fund may from time to
time designate in writing.
4. This Agreement may not be amended or modified in any manner except by a
written agreement executed by both parties with the same formality as this
Agreement and approved by a resolution of the Board of Directors of the Fund.
5. This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns; provided, however, that
this Agreement shall not be assignable by the Fund without the written consent
of the Custodian, or by the Custodian without the written consent of the Fund,
authorized or approved by a resolution of the Fund's Board of Directors.
6. This Agreement shall be construed in accordance with the laws of the
State of New York without giving effect to conflict of laws principles thereof.
Each party hereby consents to the jurisdiction of a state or federal court
situated in New York City, New York in connection with any dispute arising
hereunder and hereby waives its right to trial by jury.
7. This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but such counterparts shall, together,
constitute only one instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective corporate Officers, thereunto duly authorized and
their respective corporate seals to be hereunto affixed, as of the day and year
first above written.
PRINCIPAL _______________________ FUND, INC.
[SEAL] By: _______________________________
Attest:
- ----------------------------------
THE BANK OF NEW YORK
[SEAL] By: _______________________________
Name:
Title:
Attest:
- ----------------------------------
APPENDIX A
I, Stephan L. Jones, President and I, Arthur S. Filean, Vice President
and Secretary of _____________________________________, a Maryland corporation
(the "Fund"), do hereby certify that:
The following individuals serve in the following positions with the
Fund and each has been duly elected or appointed by the Board of Directors of
the Fund to each such position and qualified therefor in conformity with the
Fund's Articles of Incorporation and By-Laws, and the signatures set forth
opposite their respective names are their true and correct signatures:
Name Position Signature
- ----------------------------- --------------------- ----------------------
- ----------------------------- --------------------- ----------------------
- ----------------------------- --------------------- ----------------------
- ----------------------------- --------------------- ----------------------
- ----------------------------- --------------------- ----------------------
- ----------------------------- --------------------- ----------------------
- ----------------------------- --------------------- ----------------------
- ----------------------------- --------------------- ----------------------
APPENDIX B
SERIES
NONE
APPENDIX C
I, ________________________________________ , a Vice President with THE
BANK OF NEW YORK do hereby designate the following publications:
The Bond Buyer Depository Trust Company Notices Financial Daily Card Service JJ
Kenney Municipal Bond Service London Financial Times New York Times Standard &
Poor's Called Bond Record Wall Street Journal
EXHIBIT A
CERTIFICATION
The undersigned, ________________________________, hereby certifies
that he or she is the duly elected and acting _______________________ of
____________________________________, a Maryland corporation (the "Fund"), and
further certifies that the following resolution was adopted by the Board of
Directors of the Fund at a meeting duly held on ________________________,
19_____, at which a quorum was at all times present and that such resolution has
not been modified or rescinded and is in full force and effect as of the date
hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a Custody
Agreement between The Bank of New York and the Fund dated as of
__________________, 19_____, (the "Custody Agreement") is authorized and
instructed on a continuous and ongoing basis until such time as it receives a
Certificate, as defined in the Custody Agreement, to the contrary, to accept,
utilize and act with respect to Clearing Member confirmations for Options and
transaction in Options, regardless of the Series to which the same are
specifically allocated, as such terms are defined in the Custody Agreement, as
provided in the Custody Agreement.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of
____________________________________, as of the day of
_________________________, 19____.
------------------------------------
[SEAL]
EXHIBIT B
The undersigned, ________________, hereby certifies that he or she is
the duly elected and acting ____________________ of
_________________________________, a Maryland corporation (the "Fund"), and
further certifies that the following resolutions were adopted by the Board of
Directors of the Fund at a meeting duly held on ______________________________,
19___________, at which a quorum was at all times present and that such
resolutions have not been modified or rescinded and are in full force and effect
as of the date hereof.
RESOLVED, that the maintenance of the Fund's assets in each country
listed in Schedule I hereto be, and hereby is, approved by the Board of
Directors as consistent with the best interests of the Fund and its
shareholders; and further
RESOLVED, that the maintenance of the Fund's assets with the foreign
branches of The Bank of New York (the "Bank") listed in Schedule I located in
the countries specified therein, and with the foreign sub-custodians and
depositories listed in Schedule I located in the countries specified therein be,
and hereby is, approved by the Board of Directors as consistent with the best
interest of the Fund and its shareholders; and further
RESOLVED, that the Sub-Custodian Agreements presented to this meeting
between the Bank and each of the foreign sub-custodians and depositories listed
in Schedule I providing for the maintenance of the Fund's assets with the
applicable entity, be and hereby are, approved by the Board of Directors as
consistent with the best interests of the Fund and its shareholders; and further
RESOLVED, that the appropriate officers of the Fund are hereby
authorized to place assets of the Fund with the aforementioned foreign branches
and foreign sub-custodians and depositories as hereinabove provided; and further
RESOLVED, that the appropriate officers of the Fund, or any of them,
are authorized to do any and all other acts, in the name of the Fund and on its
behalf, as they, or any of them, may determine to be necessary or desirable and
proper in connection with or in furtherance of the foregoing resolutions.
IN WITNESS WHEREOF, I hereunto set my hand and the seal of
____________________________, as of the _________ day of ____________________,
19______.
-------------------------------------
[SEAL]
PRINCOR FINANCIAL SERVICES CORPORATION
The Principal Financial Group
Des Moines, Iowa 50392-0200
(515) 247-5711
DEALER
SELLING AGREEMENT
FOR SHARES OF
THE PRINCOR FAMILY OF MUTUAL FUNDS
Dealer Selling Agreement between Princor Financial Services Corporation
("Princor", "We" or "Us") and _________________________________________
("Dealer" or "You") dated as of _______________________________.
As Distributor and Principal Underwriter for the Princor Funds (hereinafter
collectively referred to as the "Funds" and individually as a "Fund"), each an
open-end investment company of which we are, or may become, Distributor and
whose shares are offered to the public at an offering price which may or may not
include a sales charge, we invite you to become a Selected Dealer to distribute
shares of the Funds.
1. Each Fund offers two classes of shares - one class which bears a front-end
load (the "Class A Shares) and one class which bears a deferred load (the
"Class B Shares"). (The Class A Shares and the Class B Shares are
collectively referred to as the "Shares"). Class A Shares of the Money
Market Funds are offered at net asset value, without any sales charge.
2. Orders for shares received from you and accepted by us will be at the
current public offering price applicable to each order as established by
the then current Prospectus of each Fund. The procedure relating to the
handling of orders shall be subject to instructions which we shall forward
from time to time to all Selected Dealers. Each Fund reserves the right to
withdraw shares from sale temporarily or permanently. All orders are
subject to acceptance or rejection by us and the Fund, each in its sole
discretion.
3. The sales charge applicable to any sale of Class A Shares by you and the
dealer discount applicable to any order from you for the purchase of Class
A Shares accepted by us shall be that percentage of the applicable public
offering price determined as set forth in the Funds' then current
Prospectus and/or Statement of Additional Information.
The rates of any sales charge and/or dealer discount for Class A Shares are
subject to change by us from time to time, and any orders placed after the
effective date of such change will be subject to the rate(s) in effect at
the time of receipt of the payment by us.
Any such sales charges and discounts to selected dealers are subject to
reductions under a variety of circumstances as may be described in the
Funds' then current Prospectus and/or Statement of Additional Information.
To obtain any such reductions, we must be notified when a sale takes place
which would qualify for the reduced charge. There is currently no sales
charge, selling concession or discount on purchases of Shares by the
reinvestment of dividends or capital gains distributions, or when there is
a transfer from one Fund to another Fund or from one account to another
account.
4. If you sell Class B Shares, we will pay you a sales commission equal to the
percentage of the aggregate net asset value of such Class B shares sold as
set forth in the Funds' then current Prospectus and/or Statement of
Additional Information.
We will pay such sales commissions to you bi-monthly on the 15th and last
day of each month.
The rates of any sales charge and/or dealer discount for Class B Shares are
subject to change by us from time to time, and any orders placed after the
effective date of such change will be subject to the rate(s) in effect at
the time of receipt of the payment by us.
We shall be entitled to any contingent deferred sales charges ("CDSC") on
any Shares sold. If, with respect to any Class B Shares sold by you, any
CDSC is waived as provided in the Funds' then current Prospectus and/or
Statement of Additional Information, then in any such case you shall remit
to us promptly upon notice an amount equal to the commissions or a portion
of the commission paid on such shares.
5. Redemption of Shares will be made at the net asset value of such Shares in
accordance with the then current Prospectus and Statement of Additional
Information of the Funds less, in the case of Class B Shares, any
applicable CDSC payable to us.
6. All of the Funds (the "Plan Funds") have adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940
(the "1940 Act"). No such Agreement has been adopted by Princor Cash
Management Fund or Princor Tax-Exempt Cash Management Fund for its Class A
shares. Each Agreement defines service to be provided by Selected Dealers
for which they will be compensated pursuant to the Plan.
(a) As a Selected Dealer, you agree to provide distribution assistance and
administrative support services in connection with the distribution of
shares of the Plan Funds to customers who may from time to time
directly or beneficially-owned Shares, including but not limited to
distributing sales literature, answering routine customer inquiries
regarding the Plan Funds, assisting in the establishment and
maintenance of accounts in the Plan Funds and in the processing of
purchases and redemptions of Shares, making the Plan Funds' investment
plans and dividend options available, and providing such other
information and services in connection with the distribution of Plan
Funds Shares as may be reasonably requested from time to time.
(b) For such services, you will be compensated in accordance with the then
current Prospectus of the Plan Funds.
(c) The Plan may be terminated at any time without payment of any penalty
by any Fund in accordance with the rules governing such plans
promulgated by the Securities and Exchange Commission.
(d) The provisions of the Plan are incorporated herein and made a part
hereof by reference, and will continue in full force and effect so
long as its continuance is approved at least annually pursuant to Rule
12b-1.
7. Each party to this Agreement represents that it currently is and, while
this Agreement is in effect, will continue to be a member in good standing
of the National Association of Securities Dealers, Inc. ("NASD") and agrees
to abide by all Rules and Regulations of that Association, including the
NASD Rules of Fair Practice. If you are a foreign dealer, not eligible for
membership in the Association, you still agree to abide by the Rules and
Regulations of the Association. We both agree to comply with all applicable
state and federal laws, rules and regulations of the Securities and
Exchange Commission and other authorized United States or foreign
regulatory agencies. You further agree that you will not sell, offer for
sale, or solicit shares of the Funds in any state where they have not been
qualified for sale. You will solicit applications and sell shares only in
accordance with the terms and on the basis of the representations contained
in the appropriate prospectus and any supplemental literature furnished by
us.
8. You must represent that you are currently a member of SIPC and, while this
agreement is in effect, will continue to be a member of SIPC. You agree to
notify us immediately if your SIPC membership status changes.
9. IT IS AGREED
(a) That neither of us shall withhold placing customers' orders for shares
so as to profit as a result of such withholding.
(b) We shall not purchase shares from the Funds except for the purpose of
covering purchase orders already received, and you shall not purchase
shares of the Funds except for the purpose of covering purchase orders
already received by you or for your own bona fide investment purposes,
provided, however, any shares purchased for your own bona fide
investment purposes will not be resold except through redemption of
the Funds. Delivery of certificates, if any, for Shares purchased
shall be made by a Fund only against receipt of the purchase price. If
payment for the Shares purchased and all necessary applications and
documents required by the Funds or us are not received within five
business days or such shorter time as may be required by law, the sale
may be cancelled forthwith without any responsibility or liability on
our part or on the part
of the Funds (in which case you will be responsible for any loss,
including loss of profit, suffered by a Fund resulting from your
failure to make payments or provide documents as aforesaid), or, at
our option, we may cause the Shares ordered to be redeemed by the
relevant Fund (in which case we may hold you responsible for any
loss).
(c) We shall accept only unconditional orders. Any right granted to you to
sell shares on behalf of the Funds will not apply to shares issued in
connection with the merger or consolidation of any other investment
company with a Fund or its acquisition, purchase or otherwise, of all
or substantially all the assets of any investment company or
substantially all the outstanding shares of any such company. Also,
any such right shall not apply to shares issued, sold, or transferred,
whether Treasury or newly issued shares, that may be offered by a Fund
to its shareholders as stock dividends or splits for not less than
"net asset value."
(d) We reserve the right to reject any order or application for shares or
to withdraw the offering of shares entirely, and to change any sales
charge and dealer concession, provided that no such change shall
affect concessions on orders accepted by us prior to notice of such
change, unless such change results from a reduction in sales charges
because of legal requirements.
(e) You shall not purchase shares of a Fund from a shareholder at a price
per share which is lower than the current net asset value per share
which is next computed after the receipt of the tender of such shares
by the shareholder.
(f) If shares of the Fund are tendered for redemption within seven
business days after confirmation by us of your original purchase order
for such shares, (i) you shall immediately refund to us the full
concession allowed to you on the original sale, and (ii) we shall pay
to the Fund our share of the "sales charge" on the original sale by
us, and shall also pay to the Fund the refund which we received under
(i) above. You shall be notified by us of such redemption within ten
days of the date on which proper request for redemption is delivered
to us or the Fund. Termination or cancellation of this Agreement shall
not relieve you or us from requirements of this subparagraph (f).
(g) This agreement may not be assigned or transferred in any manner
including by operation of law.
10. We will furnish you, without charge, reasonable quantities of Prospectuses
and sales material or supplemental literature relating to the sale of
shares of the Funds.
11. In all sales of shares, you act as principal and are not employed by us as
broker-agent or employee. You are not authorized to act for us nor to make
any representations in our behalf. In purchasing or selling shares
hereunder you are entitled to rely only upon the
current Prospectus and supplemental literature approved in writing by us.
In the offer and sale of shares of the Funds, you shall not use any
Prospectus or supplemental literature not approved in writing by us. No
person is authorized to make any representations concerning shares of the
Funds except those contained in a current Prospectus and supplemental
literature approved in writing by us. You will use your best efforts in the
promotion of sales of Shares and will be responsible for the proper
instruction and training of all sales personnel employed by you. In making
sales of Shares, you and your personnel will conform to the compliance
standards set forth in Exhibit A hereto.
12. You will indemnify, defend, and hold harmless our firm and all of its
affiliates, and their officers, directors, employees, agents, and assignees
against all losses, claims, demands, liabilities, and expenses, including
reasonable legal and other expenses incurred in defending such claims or
liabilities, whether or not resulting in any liability to any of them, or
which they or any of them may incur, including but not limited to alleged
violations of the Securities Act of 1933, as amended and/or to the
Securities Exchange Act of 1934, as amended, arising out of the offer or
sale of any securities pursuant to this Agreement, or arising out of the
breach of any of the terms and conditions of this Agreement, other than any
claim, demand, or liability arising from any untrue statement or alleged
untrue statement of a material fact contained in a prospectus for the
Funds, as filed and in effect with the SEC, or any amendment or supplement
thereto, or in any application prepared or approved in writing by our
counsel and filed with any state regulatory agency in order to register or
qualify under the securities laws thereof (the "blue sky applications"), or
which shall arise out of or be based upon any omission or alleged omission
to state therein a material fact required to be stated in the prospectus or
any of the blue sky applications or which is necessary to make the
statements or a part thereof not misleading, which indemnity provision
shall survive the termination of this Agreement.
13. No obligation not expressly assumed by us in this Agreement shall be
implied.
14. Either party to this Agreement may terminate this Agreement by written
notice to the other party. We may modify this Agreement at any time by
written notice to you. Any notice shall be deemed to have been given on the
date upon which it was either delivered personally or by fax transmission
to the other party or to any office or member thereof, or was mailed
post-paid or delivered to a telegraph office for transmission at his or its
address as shown herein.
15. All communications to us should be sent to the above address. Any notice to
you shall be duly given if mailed or telegraphed to you at the address
specified by you herein.
16. This Agreement shall be construed in accordance with the laws of the State
of Iowa and shall be binding upon both parties hereto when signed by both
of us in the spaces provided below. This Agreement shall not be applicable
to shares of the Funds in any state in which those shares are not qualified
for sale.
17. This Agreement shall be binding upon both parties hereto when executed by
both parties and supersedes any prior agreement or understanding between us
and you with respect to the sale of the Shares and any of the Funds.
18. This Agreement is in all respects subject to Section 26 of the Rules of
Fair Practice of the NASD which shall control any provisions to the
contrary in this Agreement.
19. If the foregoing represents your understanding, please so indicate by
signing in the proper space below.
PRINCOR FINANCIAL SERVICES CORPORATION
By: __________________________________
Title: _______________________________
We accept the offer set forth above, which constitutes a Selling Agreement with
us.
BY: _____________________________________________
_____________________________________________
Please type or print name
TITLE: __________________________________________
DEALER: _________________________________________
ADDRESS: ________________________________________
________________________________________
DATE: ___________________________________________
APPENDIX A
Compliance Standards
Princor Financial Services Corporation ("Princor"), as distributor for the
Princor Funds which offers their shares on both a front-end load and deferred
load basis, has established compliance standards setting forth the basis upon
which shares of the Princor Funds may be sold. These standards are designed for
each broker/dealer ("dealer") which distributes shares of the Princor Funds and
for such dealer's financial advisers.
As Princor Funds are offered with two different arrangements of sales and
distribution fees, it is important for an investor not only to choose a fund
that best suits his or her investment objectives, but also to choose the sales
financing method which best suits the investor's particular situation. To assist
clients of those firms which distribute shares of the Princor Funds in these
decisions and to ensure proper supervision of Princor Fund purchase
recommendations, Princor requires that such dealers adhere to the following
compliance standards when selling Princor Funds:
1. Any purchase that results in a shareholder having less than $250,000
invested in Princor accounts that are aggregated for rights of accumulation
purposes may be either front-end load (Class A) or subject to a contingent
deferred sales charge (Class B).
The dealer's branch office manager (or other appropriate reviewing officer)
must review for suitability the purchase order ticket for shares subject to
either a front-end or a contingent deferred sales charge, given the
relevant facts and circumstances, including but not limited to:
(a) the specific purchase order dollar amount;
(b) the length of time the investor expects to hold the shares purchased;
and
(c) any other relevant circumstances, such as the availability of
purchases under letters of intent or pursuant to rights of
accumulation.
2. Any mutual fund purchase order that results in a shareholder having
$250,000 or more invested in Princor accounts that are aggregated for
rights of accumulation purposes should be for shares which are subject to a
front-end sales load (Class A shares) because there are few circumstances
under which it is advantageous for an investor to place such an order for
Class B shares. Such an order placed for shares subject to a contingent
deferred sales charge must be approved by the dealer's regional director
(or a person of comparable status) and confirmed in writing by the
investor.
General Guidelines
There are instances where one financing method may be more advantageous to an
investor than the other. For example, investors who qualify for a significant
discount on a front-end sales load may determine that a front-end load purchase
is preferable to payment of the higher SEC Rule 12b-1 distribution fee and the
contingent deferred sales charge imposed upon Class B shares.
On the other hand, an investor whose order would not qualify for a discount may
wish to defer the sales load and have all funds invested in shares initially.
Responsibility of Branch Office Manager
(or other appropriate reviewing officer)
The dealer's branch office manager or other appropriate reviewing officer (the
"Reviewing Officer") must ensure that the registered representative has advised
the client of the available financing methods offered by the Princor Funds, and
the impact of choosing one method over another. In certain instances, it may be
appropriate for the branch office manager to discuss the purchase directly with
the client.
Effectiveness
These compliance guidelines are effective immediately upon execution of a dealer
agreement with Princor with respect to any order for shares of any Princor Fund
for which Princor acts as distributor.
Questions relating to these compliance guidelines should be directed by the
dealer to its national mutual fund sales and marketing group or its Legal
Department or Compliance Director. Princor will advise dealers of any changes in
these guidelines in the future.
PRINCOR FINANCIAL SERVICES CORPORATION
The Principal Financial Group
Des Moines, Iowa 50392-0200
(515) 247-5711
DEALER
SELLING AGREEMENT
FOR CLASS R SHARES OF
THE PRINCOR FAMILY OF MUTUAL FUNDS
Dealer Selling Agreement between Princor Financial Services Corporation
("Princor", "We" or "Us") and _________________________________________
("Dealer" or "You") dated as of __________________________.
As Distributor and Principal Underwriter for the Princor Funds (hereinafter
collectively referred to as the "Funds" and individually as a "Fund"), each an
open-end investment company whose Class R shares are offered at net asset value
to distributees of retirement plans administered by Principal Mutual Life
Insurance Company, (hereinafter "PML Administered Plan") we invite you to become
a Selected Dealer to distribute and provide administrative support services in
connection with the distribution of shares of the Funds.
1. We will offer Class R shares through telephone counselors to individual
participants of PML administered Plans who have or will receive a
distribution from the retirement plan. Each Fund reserves the right to
withdraw shares from sale temporarily or permanently and all orders are
subject to acceptance or rejection by us and the Fund, each in its sole
discretion. We will pay you a sales commission during each of the four
years following the date of purchase in an amount equal, on an annualized
basis, to .10% of the average net assets of each Class R share account
established for participants in a PLM Administered Plan the agent or
representative of record for which is one of your registered
representatives. We will pay such commissions to you bi- monthly on the
15th and last day of each month.
2. The amount of sales commissions for Class R Shares is subject to change by
us from time to time, and any orders placed after the effective date of
such change will be subject to the rate(s) in effect at the time of receipt
of the payment by us.
3. Redemption of Class R Shares will be made at the net asset value of such
Shares in accordance with the then current Prospectus and Statement of
Additional Information of the Funds.
4. All of the Funds have adopted a Distribution Plan (the "Plan") pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "1940 Act"). Each
Agreement defines service to be provided by Selected Dealers for which they
will be compensated pursuant to the Plan.
(a) As a Selected Dealer, you agree to provide distribution assistance and
administrative support services in connection with the distribution of
shares of the Funds to customers who may from time to time directly or
beneficially own Shares, including but not limited to distributing
sales literature, answering routine customer inquiries regarding the
Funds, assisting in the establishment and maintenance of accounts in
the Funds and in the processing of purchases and redemptions of
Shares, making the Plan Funds' investment plans and dividend options
available, and providing such other information and services in
connection with the distribution of Funds Shares as may be reasonably
requested from time to time.
(b) For such services, you will be compensated in accordance with the then
current Prospectus of the Funds.
(c) The Plan may be terminated at any time without payment of any penalty
by any Fund in accordance with the rules governing such plans
promulgated by the Securities and Exchange Commission.
(d) The provisions of the Plan are incorporated herein and made a part
hereof by reference, and will continue in full force and effect so
long as its continuance is approved at least annually pursuant to Rule
12b-1.
5. Each party to this Agreement represents that it currently is and, while
this Agreement is in effect, will continue to be a member in good standing
of the National Association of Securities Dealers, Inc. ("NASD") and agrees
to abide by all Rules and Regulations of that Association, including the
NASD Rules of Fair Practice. If you are a foreign dealer, not eligible for
membership in the Association, you still agree to abide by the Rules and
Regulations of the Association. We both agree to comply with all applicable
state and federal laws, rules and regulations of the Securities and
Exchange Commission and other authorized United States or foreign
regulatory agencies. You further agree that you will not sell, offer for
sale, or solicit shares of the Funds in any state where they have not been
qualified for sale. You will solicit applications and sell shares only in
accordance with the terms and on the basis of the representations contained
in the appropriate prospectus and any supplemental literature furnished by
us.
6. You must represent that you are currently a member of SIPC and, while this
agreement is in effect, will continue to be a member of SIPC. You agree to
notify us immediately if your SIPC membership status changes.
7. IT IS AGREED
(a) That neither of us shall withhold placing customers' orders for shares
so as to profit as a result of such withholding.
(b) We shall not purchase shares from the Funds except for the purpose of
covering purchase orders already received. Delivery of certificates,
if any, for shares shall be made by a Fund only against receipt of the
purchase price.
(c) No commission will be paid to you for shares issued in connection with
the merger or consolidation of any other investment company with a
Fund or its acquisition, purchase or otherwise, of all or
substantially all the assets of any investment company or
substantially all the outstanding shares of any such company. Also, no
commission will be paid to you for shares issued, sold, or
transferred, whether Treasury or newly issued shares, that may be
offered by a Fund to its shareholders as stock dividends or splits for
not less than "net asset value."
(d) We reserve the right to reject any order or application for shares or
to withdraw the offering of shares entirely, and to change any
commission, sales charge and dealer concession, provided that no such
change shall affect orders accepted by us prior to notice of such
change, unless such change results from a reduction required by law.
(e) You shall not purchase shares of a Fund from a shareholder at a price
per share which is lower than the current net asset value per share
which is next computed after the receipt of the tender of such shares
by the shareholder.
(f) If shares of the Fund are tendered for redemption within seven
business days after confirmation by us of the original purchase order
for such shares, (i) you shall immediately refund to us the full
commission or concession allowed to you on the original sale, if any,
and (ii) we shall pay to the Fund our share of the "sales charge" on
the original sale by us, and shall also pay to the Fund the refund
which we received under (i) above. You shall be notified by us of such
redemption within ten days of the date on which proper request for
redemption is delivered to us or the Fund. Termination or cancellation
of this Agreement shall not relieve you or us from requirements of
this subparagraph (f).
(g) This agreement may not be assigned or transferred in any manner
including by operation of law.
8. We will furnish you, without charge, reasonable quantities of Prospectuses
and sales material or supplemental literature relating to the sale or
servicing of shares of the Funds.
9. You are not employed by us as broker-agent or employee. You are not
authorized to act for us nor to make any representations in our behalf. In
purchasing or selling shares hereunder you are entitled to rely only upon
the current Prospectus and supplemental literature approved in writing by
us. In the offer and sale of shares of the Funds, you shall not use any
Prospectus or supplemental literature not approved in writing by us. No
person is authorized to make any representations concerning shares of the
Funds except those contained in a current Prospectus and supplemental
literature approved in writing by us. You will use your best efforts in the
promotion of sales of Shares and will be responsible for the proper
instruction and training of all sales personnel employed by you.
10. You will indemnify, defend, and hold harmless our firm and all of its
affiliates, and their officers, directors, employees, agents, and assignees
against all losses, claims, demands, liabilities, and expenses, including
reasonable legal and other expenses incurred in defending such claims or
liabilities, whether or not resulting in any liability to any of them, or
which they or any of them may incur, including but not limited to alleged
violations of the Securities Act of 1933, as amended and/or to the
Securities Exchange Act of 1934, as amended, arising out of the offer or
sale of any securities pursuant to this Agreement, or arising out of the
breach of any of the terms and conditions of this Agreement, other than any
claim, demand, or liability arising from any untrue statement or alleged
untrue statement of a material fact contained in a prospectus for the
Funds, as filed and in effect with the SEC, or any amendment or supplement
thereto, or in any application prepared or approved in writing by our
counsel and filed with any state regulatory agency in order to register or
qualify under the securities laws thereof (the "blue sky applications"), or
which shall arise out of or be based upon any omission or alleged omission
to state therein a material fact required to be stated in the prospectus or
any of the blue sky applications or which is necessary to make the
statements or a part thereof not misleading, which indemnity provision
shall survive the termination of this Agreement.
11. No obligation not expressly assumed by us in this Agreement shall be
implied.
12. Either party to this Agreement may terminate this Agreement by written
notice to the other party. We may modify this Agreement at any time by
written
notice to you. Any notice shall be deemed to have been given on the date
upon which it was either delivered personally or by fax transmission to the
other party or to any office or member thereof, or was mailed post-paid or
delivered to a telegraph office for transmission at his or its address as
shown herein.
13. All communications to us should be sent to the above address. Any notice to
you shall be duly given if mailed or telegraphed to you at the address
specified by you herein.
14. This Agreement shall be construed in accordance with the laws of the State
of Iowa and shall be binding upon both parties hereto when signed by both
of us in the spaces provided below. This Agreement shall not be applicable
to shares of the Funds in any state in which those shares are not qualified
for sale.
15. This Agreement shall be binding upon both parties hereto when executed by
both parties and supersedes any prior agreement or understanding between us
and you with respect to the sale of the Shares and any of the Funds.
16. This Agreement is in all respects subject to Section 26 of the Rules of
Fair Practice of the NASD which shall control any provisions to the
contrary in this Agreement.
17. If the foregoing represents your understanding, please so indicate by
signing in the proper space below.
Very truly yours,
PRINCOR FINANCIAL SERVICES CORPORATION
By: __________________________________________
Title: ________________________________________
We accept the offer set forth above, which constitutes a Selling Agreement with
us.
BY: ____________________________________________________
TITLE: _________________________________________________
DEALER: ______________________________________________
ADDRESS: _____________________________________________
DATE: _________________________________________________
Principal Mutual Life Insurance Company Master Individual
Retirement Account Plan and Custody Agreement
This is the Principal Mutual Life Insurance Company's Master Individual
Retirement Account Plan and Custody Agreement for use by individuals who desire
to establish an Individual Retirement Account (IRA), as described in Section
408(a) of the Internal Revenue Code (Code). Principal Mutual Life Insurance
Company hereby agrees to act as Custodian of any IRA established under the Plan
and this Agreement, subject to the following terms and conditions:
ARTICLE I - Limitations on Contributions
In addition to the initial contribution made at the time the Account is
established, the Custodian may accept additional cash contributions from, or on
behalf of, the Participant for a taxable year of the Participant except as
limited below.
Only cash contributions will be accepted, and such contribution shall not exceed
the lesser of $2,000 or 100% of compensation, except in the case of a Rollover
Contribution as that term is described in Code Sections 402(c), 403(a)(4),
403(b)(8) or 408(d)(3), or an employer contribution to a Simplified Employee
Pension as defined in Section 408(k).
Two applications are necessary if both spouses are establishing an IRA. The
maximum combined contribution in the event of a non-working spouse is the lesser
of 100% of compensation or $4,000. The maximum contribution must be split
between the two accounts so no more than $2000 is placed in either account.
Excess Contributions
A retirement savings deduction will not be allowed for contributions to an IRA
in excess of the 100%-$2,000/$4,000 limits, or in the case of a Simplified
Employee Pension, 15%-$30,000 limitation discussed above; nor will the deduction
be allowed for any contribution made during the year in which or after the
Participant reaches 70 1/2 (except in the case of a Simplified Employee
Pension), or in the case of a Participant who is a non-working spouse, the year
in which or after the working spouse reaches age 70 1/2. (A deductible spousal
contribution can be made to the IRA of the non-working spouse as long as the
non-working spouse is under age 70 1/2 and the working spouse has earned
income.) Additionally, a nondeductible federal excise tax penalty in the amount
of 6% of such excess contributions will be imposed on any Participant who has
excess contributions in his IRA. This penalty will be imposed each year until
the excess contributions are removed.
An excess contribution may be removed from an IRA by withdrawing the amount of
the excess or by applying the excess toward the retirement savings deduction of
the Participant in a subsequent year. If an excess contribution is withdrawn
from the Retirement Account, together with the net income of such excess
contribution, prior to the due date for filing the Participant's income tax
return for the year in which the excess contribution was made (including
extensions of time), the 6% nondeductible excise tax will not be imposed, the
contribution withdrawn will not be included in the Participant's gross income
for the year in which received, and the federal 10% tax on premature
distributions (see Distributions) will not be imposed on the excess withdrawn.
The net income on such excess contribution that is withdrawn will be deemed to
have been earned and is taxable in the taxable year in which such excess
contribution was made.
If an excess contribution is withdrawn after the due date for filing the
Participant's income tax return for the taxable year (including extensions of
time) and no deduction was taken for the excess portion of the contribution, the
excess withdrawn will not be included in the Participant's federal gross income
for the year in which received, and the 10% federal tax on premature
distributions will not be imposed on the excess withdrawn, provided that the
total contributions during the year, including the excess contribution, did not
exceed $4,000. Any earnings of such excess contributions withdrawn after the due
date for filing the Participant's income tax return (including extensions of
time) will be subject to the taxes on premature distributions and will be
included in federal gross income.
If an excess contribution is withdrawn after the due date for filing the
Participant's income tax return for the taxable year (including extensions of
time) and the total contribution for the taxable year exceeded $4,000, the
excess contribution that is withdrawn will be included in the Participant's
federal gross income for the year in which received, the 10% federal tax on
premature distributions will be imposed on the amount withdrawn, and the 6%
nondeductible excise tax will be imposed for each year until the excess
contribution is removed.
ARTICLE II - Nonforfeitability
The interest of the Participant in the balance in his or her Account shall at
all times be nonforfeitable.
The Account is established for the exclusive benefit of the Participant and his
or her beneficiaries.
ARTICLE III - Prohibited Investments
No part of the custodial funds shall be invested in life insurance contracts,
nor may the assets of any Participant's Account be commingled with other
property except in a common trust fund or common investment fund [within the
meaning of Code Section 408(a)(5)]. All funds shall be invested in shares of
such Mutual Funds as Participant shall designate.
ARTICLE IV - Distributions
The entire amount of any distribution from an IRA, other than a timely
withdrawal of excess contribution, including amounts deemed distributed as the
result of a prohibited transaction (see Prohibited Transactions) will be
includible in the gross income of the person receiving such distribution and
taxable as ordinary income. If the distribution occurs before the Participant is
age 59 1/2, the Participant will be charged with a nondeductible federal excise
tax of 10% of the amount of the premature distribution. The excise tax will not
be applied, however, if the distribution or withdrawal is due to the
Participant's death, disability as defined in the Plan, or if distributions are
made in substantially equal periodic payments (at least annually) for the life
expectancy of the individual or the joint life expectancies of the individual
and his or her own beneficiary.
The Participant may begin to take money out of an IRA without penalty after
the age of 59 1/2, but must begin receiving a distribution from his or her
Account not later than the April 1 following the calendar year in which the
Participant attains age 70 1/2 (required beginning date). At least 30 days prior
to that date the Participant must elect to have the balance in the Account
distributed in:
(a) a single sum payment,
(b) equal, or substantially equal, monthly, quarterly, semiannual or annual
payments (see "Minimum amounts to be distributed" below) commencing not
later than the above date and not extending beyond the life expectancy of
the Participant, or
(c) equal, or substantially equal, monthly, quarterly, semiannual or annual
payments (see "Minimum amounts to be distributed" below) commencing not
later than the above date and not extending beyond the joint and last
survivor expectancy of the lives of the Participant and the designated
Beneficiary.
Minimum amounts to be distributed. If the Participant's entire interest is to be
distributed in other than a lump sum, then the amount to be distributed each
year (commencing with the required beginning date and each year thereafter) must
be at least equal to the quotient obtained by dividing the Participant's benefit
by the applicable life expectancy.
The amount to be distributed each year, beginning with the first calendar year
for which distributions are required and then for each succeeding calendar year,
shall not be less than the quotient obtained by dividing the Participant's
benefit by the lesser of (1) the applicable life expectancy or (2) if the
Participant's spouse is not the designated beneficiary, the applicable divisor
determined from the table set forth in Q&A-4 of section 1.401(a)(9)-2 of the
Proposed Income Tax Regulations. Distributions after the death of the
Participant shall be distributed using the applicable life expectancy as the
relevant divisor without regard to proposed regulations section 1.401(a)(9)-2.
Life expectancy is computed by use of the expected return multiples in Tables V
and VI of section 1.72-9 of the Income Tax Regulations. Unless otherwise elected
by the Participant by the time distributions are required to begin, life
expectancies shall be recalculated annually. Such election shall be irrevocable
as to the Participant and shall apply to all subsequent years. The life
expectancy of a non-spouse beneficiary may not be recalculated; instead, life
expectancy will be calculated using the attained age of such beneficiary during
the calendar year in which distributions are required to begin pursuant to this
section, and payments for subsequent years shall be calculated based on such
life expectancy reduced by one for each calendar year which has elapsed since
the calendar year life expectancy was first calculated.
A 50% excise tax will be imposed on the difference between the minimum payout
required and the amount actually paid, unless the underdistribution was due to
reasonable cause.
Notwithstanding that distributions may have commenced pursuant to (b) or (c)
above, the Participant may receive a larger distribution from the Account upon
written request to the Custodian. If the Participant fails to elect any of the
methods described above on or before April 1 following the year in which the
Participant attains age 70 1/2, distribution will be made in a single sum
payment on or before that date.
Notwithstanding any other provision of this Plan, the Participant or a
Beneficiary may elect to receive distribution in any manner permitted by law
which satisfies the requirements of Section 401(a)(9) of the Code and
Regulations thereunder, and approved by the Custodian.
The duty to determine the amount of the distributions hereunder shall be the
Participant's or, when applicable, the designated Beneficiary. The Custodian
shall not be liable to the Participant or any other person for taxes or other
penalties incurred as a result of failure to distribute the minimum amount
required by law.
Any distributions before the age of 59 1/2 will result in an additional tax
equal to 10% of the taxable amount of the distribution, unless the participant
is disabled. The 10% penalty does not apply to amounts not exceeding the amount
allowable as a deduction for medical expenses, or to a series of substantially
equal periodic payments over the participant's life or life expectancy or the
joint lives or life expectancies of the participant and the beneficiary.
Distributions are generally taxed as ordinary income in the year they are
received, and are not eligible for capital gains treatment or the special
averaging rules that apply to lump sum distributions from qualified employee
plans. Distributions are nontaxable to the extent they represent a return of
certain nondeductible contributions made for years after 1986 (See Income Tax
Considerations). The nontaxable percentage of such a distribution is determined
by dividing (a) undistributed nondeductible contributions by (b) the total value
of all IRAs (including SEPs and Rollover IRAs).
Unless a special election is made by a taxpayer, any distributions from IRAs and
other qualified plans within one year in excess of $160,000 may be subject to a
15% excess distribution penalty.
ARTICLE V - Death Benefits
If the Participant dies before receiving full distribution from the Account, the
balance in the Account must be distributed in the following manner:
(a) Distributions beginning before death. If the owner dies after distribution
of his or her interest has begun, the remaining portion of such interest
will continue to be distributed at least as rapidly as under the method of
distribution being used prior to the owner's death.
(b) Distributions beginning after death. If the owner dies before distribution
of his or her interest begins, the owner's entire interest will be
distributed in accordance with one of the following four provisions:
(1) The owner's entire interest will be paid by December 31 of the
calendar year containing the fifth anniversary of the owner's death.
(2) If the owner's interest is payable to a Beneficiary designated by the
owner and the owner has not elected (1) above, then the entire
interest will be distributed over the life or over a period certain
not greater than the life expectancy of the designated Beneficiary
commencing on or before December 31 of the calendar year immediately
following the calendar year in which the owner died. The designated
Beneficiary may elect at any time to receive greater payments.
(3) If the designated Beneficiary of the owner is the owner's surviving
spouse, the spouse may elect to receive equal or substantially equal
payments over the life or life expectancy of the surviving spouse
commencing at any date prior to the later of (1) December 31 of the
calendar year immediately following the calendar year in which the
owner died and (2) December 31 of the calendar year in which the owner
would have attained age 70 1/2. Such election must be made no later
than the earlier of December 31 of the calendar year containing the
fifth anniversary of the owner's death or the date distributions are
required to begin pursuant to the preceding sentence. The surviving
spouse may increase the frequency or amount of such payments at any
time.
(4) If the designated Beneficiary is the owner's surviving spouse, the
spouse may treat the account as his or her own individual retirement
arrangement (IRA). This election will be deemed to have been made if
such surviving spouse makes a regular IRA contribution to the account,
makes a rollover to or from such account, or fails to elect any of the
above three provisions.
(c) Life expectancy is computed by use of the expected return multiples in
Tables V and VI of section 1.72-9 of the Income Tax Regulations. For
purposes of distributions beginning after the owner's death, unless
otherwise elected by the surviving spouse by the time distributions are
required to begin, life expectancies shall be recalculated annually. Such
election shall be irrevocable as to the surviving spouse and shall apply to
all subsequent years. In the case of any other designated Beneficiary, life
expectancies shall be calculated using the attained age of such beneficiary
during the calendar year in which distributions are required to begin
pursuant to this section, and payments for any subsequent calendar year
shall be calculated based on such life expectancy reduced by one for each
calendar year which has elapsed since the calendar year life expectancy was
first calculated.
(d) For purposes of this requirement, any amount paid to a child of the owner
will be treated as if it had been paid to the surviving spouse if the
remainder of the interest becomes payable to the surviving spouse when the
child reaches the age of majority.
ARTICLE VI - Declaration of Intention
Except in the case of the Participant's death, Disability [as defined in Section
72(m) of the Code] or attainment of age 59 1/2, the Custodian shall receive from
the Participant a declaration of the Participant's intention as to the
disposition of the amount distributed before distributing an amount from the
Participant's Account.
ARTICLE VII - Notices And Reports
The Participant agrees to provide information to the Custodian at such time and
in such manner and containing such information as may be necessary for the
Custodian to prepare any reports required pursuant to Section 408(i) of the Code
and the regulations thereunder.
The Custodian agrees to submit reports to the Internal Revenue Service and the
Participant at such time and in such manner and containing such information as
is prescribed by the Internal Revenue Service. Currently, calendar year reports
concerning the status of the account are required to be furnished annually.
ARTICLE VIII - Controlling Article
Notwithstanding any other articles which may be added or incorporated, the
provisions of Articles I through III and this sentence shall be controlling.
Furthermore, any such additional article shall be wholly invalid if it is
inconsistent, in whole or in part, with Section 408(a) of the Code and the
regulations thereunder.
ARTICLE IX
The Custodian shall have the authority to amend this Agreement from time to time
in order to comply with the provisions of the Code and regulations thereunder.
The Custodian shall have the right to amend its fee structure and amounts. Such
an amendment shall apply to current and/or future years only. The Custodian
shall also have the right to amend this agreement by adding additional
investment alternatives. Furthermore, other amendments may be made upon written
consent of the Custodian and the Participant.
ARTICLE X - Definitions
Account shall mean the Principal Mutual Life Insurance Company Individual
Retirement Account which has been established in accordance with Section 408 of
the Code and consists of the terms and conditions herein set forth together with
the provisions of the Application.
Beneficiary shall mean the person(s) or entity(ies) designated to receive the
balance in the Account upon the death of the Participant or upon the death of a
prior Beneficiary.
ERISA means the Employee Retirement Income Security Act of 1974, as it may be
amended from time to time.
Compensation means wages, salaries, professional fees, and other amounts derived
from or received for personal services actually rendered (including, but not
limited to, commissions-paid salespersons, remuneration for services on the
basis of a percentage of profits, commissions on insurance premiums, tips and
bonuses) and includes earned income, as defined in Section 401(c)(2) of the Code
(reduced by the deduction the self-employed individual takes for contributions
made to a self-employed retirement plan). For purposes of this definition,
Section 401(c)(2) shall be applied as if the term trade or business for purposes
of Section 1402 included service described in subsection (c)(6). Compensation
does not include amounts derived from or received as earnings or profits from
property (including, but not limited to, interest and dividends) or amounts not
includible in gross income. Compensation also does not include any amount
received as a pension or annuity or as deferred compensation. The term
compensation shall include any amount includible in the individual's gross
income under Section 71 with respect to a divorce or separation instrument
described in subparagraph (A) of Section 71(b)(2).
Custodian means Principal Mutual Life Insurance Company or any successor
thereto.
Investment Manager refers to Princor Management Corporation. This term shall
have the same meaning as that in Section 3(38) of ERISA. The Investment Managers
with respect to the Mutual Funds hereby acknowledge that they are fiduciaries
with respect to the Plan. The Investment Managers with respect to the individual
Participant's Account hereby acknowledge that they are fiduciaries with respect
to the funds of the Participant.
Princor Group of Funds, Mutual Fund, Fund, or The Princor Family of Mutual Funds
means the fund or funds managed by Princor Management Corporation which have
been made available for the investment of IRA contributions and in which all
contributions made under this Plan shall be invested.
Participant means any individual of legal age who shall execute the
Participation Agreement and make contributions to this Plan.
Participation Agreement means the written agreement executed by the Participant
and, where applicable, the Broker, whereby the Participant agrees to participate
in the Plan.
Plan means the terms and conditions of this Principal Mutual Life Insurance
Company IRA Plan and Custody Agreement including any amendments made pursuant to
Article XV of the Plan.
Spousal IRA means two contributory IRAs established by a working individual for
himself or herself and for the benefit of his or her non-employed spouse.
All other capitalized words, terms and phrases not specifically defined shall
have and carry the meaning given them under the Code.
ARTICLE XI - Investments
All contributions received by the Custodian shall be invested in such Mutual
Funds as the Participant may designate.
At the time the Participant executes the Participation Agreement, the
Participant shall specify the particular Mutual Fund or Funds in which
contributions shall be invested. After the initial contribution, the Participant
may, at any time, direct the Custodian to transfer contributions then invested
in any such Fund into any other such Funds. Transfers made pursuant to such
direction shall not be considered a distribution of any Account to the
Participant.
No party identified herein shall be required to comply with any direction of the
Participant which in the judgment of such party may subject it to liability or
expense unless such party shall be indemnified in manner and amount satisfactory
to it.
The Participant is 100% vested at all times in all funds attributed to his
Account.
The Participant may not borrow funds from his Account, nor may he use the funds
as security for any loan or extension of credit.
Except as provided in this Plan, no right, interest or claim in or to any funds
held in the Mutual Fund shall be transferable, assignable or subject to pledge
by the Participant or Beneficiary, and any attempt to transfer, assign or pledge
the same shall not be recognized except as required by law. The right, interest
or claim in or to any funds held in the Mutual Fund shall not be subject to
garnishment, attachment, execution or levy except as permitted by law.
Any Participant under the Plan may transfer his or her interest, in whole or in
part, to his or her spouse under a decree of divorce or dissolution of marriage
or a written instrument incident to such divorce or dissolution. At the time of
transfer, such interest shall be deemed an IRA of such spouse. The Participant
shall promptly notify Custodian of any such transfer by delivery to Custodian of
a certified copy of such decree or a true copy of such written instrument. Upon
receipt of the certified copy of such decree or a true copy of such written
instrument from any source, Custodian shall promptly adjust its books and
records to reflect that such Account is for the benefit of such former spouse.
Custodian shall not be required to accept contributions to or make distributions
from an Account established for a former spouse by reason of a transfer of
interest by a Participant to such former spouse hereunder until such former
spouse shall execute a Participation Agreement.
The Plan and the Accounts established hereunder shall be governed by all
applicable laws, rules and regulations of the United States of America and the
State of Iowa.
ARTICLE XII - Contributions
All initial contributions shall be paid to the Custodian at the time the
Participation Agreement is executed. Additional contributions may be paid to the
Custodian in such manner and in such amounts as the Custodian shall specify.
Contributions made by or on behalf of the Participant may be paid at any time
during the calendar year, but in no event later than the last day for the filing
of the Federal Income Tax Return for the calendar year to which they relate, not
to include any extensions thereof.
Except in the case of a Rollover IRA or Simplified Employee Pension,
contributions made by or on behalf of the Participant shall not be made during
or after the calendar year in which the Participant attains age 70 1/2 years.
All IRA contributions must be in cash.
If an Excess Contribution is made by or on behalf of the Participant for any
calendar year, upon written request for distribution from the Participant
stating the amount of the Excess Contribution to be distributed, Custodian will
distribute such amount of the Excess Contribution to the Participant, together
with the income attributable thereto. The Custodian shall not have any duty to
determine whether an Excess Contribution has been made by or on behalf of the
Participant, and the Custodian shall not be held liable by the Participant or
any other person for failing to determine whether an Excess Contribution was
made or for failing to make distribution of such Excess Contribution without
request of the Participant. The Custodian shall not be liable to the Participant
or any other person for taxes or other penalties incurred as a result of an
Excess Contribution and any income attributable thereto or as a result of a
distribution of an Excess Contribution and any income attributable thereto.
Before the Custodian shall accept a contribution by or on behalf of the
Participant as a Rollover Contribution, the Participant shall deliver to the
Custodian a written declaration, in a form acceptable to the Custodian, that
such contribution is eligible for treatment as a Rollover Contribution.
Notwithstanding anything to the contrary in the Plan, once the Custodian has
received a declaration from the Participant that a contribution is a Rollover
Contribution, the Custodian may conclusively rely on the Participant's
declaration and may accept and treat the contribution as a Rollover
Contribution. All Rollover Contributions from a qualified employer plan shall be
maintained in a separate Rollover IRA.
ARTICLE XIII - Designation of Beneficiary
The Participant may designate the Beneficiary of his or her Account by a written
form acceptable to and filed with Custodian. Community property states and
marital property states require spousal consent if someone other than the spouse
is to be named as Beneficiary.
If the Participant designates more than one Beneficiary, he or she shall
designate the percentage interest that each such Beneficiary shall receive from
his or her Account upon distribution. In the event no such percentage interest
is designated, the interest of each Beneficiary shall be equal.
If the Participant predeceases his or her spouse before his or her entire
Account is distributed in accordance with Article IV(c) of the Plan and the
Participant has designated no Beneficiary for the remaining interest or all such
Beneficiaries predecease the Participant's spouse, then the interest of the
Participant's spouse in the Account shall be fully vested and subject to the
terms and conditions of this Article and the Participant's spouse shall be
entitled to designate the Beneficiary of the Account in accordance with this
Article.
The Participant may, at any time, change or revoke any designation made under
this Article in a written form acceptable to and filed with the Custodian. Upon
the death of the Participant, the designation or designations made hereunder
shall be irrevocable. The designation shall be effective only if received by the
Custodian prior to the death of the Participant.
If the Participant fails to designate any Beneficiary or if the Participant
revokes the designation of Beneficiary or if all Beneficiaries designated
predecease the Participant, then the entire interest of the Participant in his
Account shall pass to the Participant's estate.
ARTICLE XIV - Administrative Duties
This Article shall delineate the responsibilities of the Custodian. The
Custodian shall maintain the Account in the name of the Participant and shall be
responsible only for the contributions of which it receives notice from the
Participant. The Custodian shall make distributions and transfers only in
accordance with the directions of the Participant. The Custodian shall keep
records of all receipts, investments and disbursements relating to the Account.
The Custodian shall furnish the Participant or the Beneficiary, where
applicable, with a written Statement of transactions relating to the Account.
Unless the Participant shall have filed with the Custodian Agent written
exceptions or objections to such Statement within thirty (30) days after it is
furnished, the custodian shall be forever released and discharged from liability
or accountability to the Participant or the Beneficiary, with respect to the
acts and transactions shown in the Statement. No Beneficiary shall be entitled
to Statements hereunder until the Participant is deceased and distribution shall
have commenced to such Beneficiary.
The duties and responsibilities of all parties to this Agreement are limited to
those specifically stated herein and no other or further duties or
responsibilities shall be implied.
ARTICLE XV - Amendments Or Revocation Of Participation in Plan
The Participant may terminate participation in the Plan at any time by notifying
the Custodian in writing of the intention to terminate and instructing the
Custodian in writing to whom and by what means the funds on deposit in his
Account shall be transferred. Withdrawal of all funds invested in the Mutual
Fund shall terminate participation in the Plan. Although termination of this
Account could have an adverse effect on a Simplified Employee Pension in which
the Participant is participating, the Custodian has no liability to the
Participant, the employer, or to any other employees of that employer with
respect to such termination.
The Participant may revoke participation in the Plan within seven (7) business
days from the date the Participant executes the Participation Agreement by
notice to the Custodian in writing.
The Custodian may be required to withhold 10% from any taxable distribution an
IRA unless the Participant elects no withholding at the time distributions
begin. Whether or not the Participant allows the Custodian to withhold, he or
she may be required to make quarterly estimated tax payments. In addition,
unless the Participant indicates at the time he or she closes an IRA account
that it is being transferred to another tax qualified plan, the Custodian will
be required to withhold at least 10% of the distribution.
ARTICLE XVI - Miscellaneous
All instructions to the Custodian shall be in writing. The Participant may
authorize an agent to give instructions hereunder. Any such agent, including any
Broker authorized to direct the investment of a Participant's Account, must be
authorized in writing by the Participant in such form which is approved by and
filed with the Custodian. Any instruction by an agent so authorized shall be
binding on the Participant. Any authorization hereunder shall remain in effect
until revoked by the Participant in writing filed with the Custodian.
Principal Mutual Life Insurance Company shall substitute another Trustee or
Custodian upon notification by the Internal Revenue Service that such
substitution is required because it has failed to comply with the requirements
of Section 1.401-12(n) of the Treasury Regulations, or is not keeping such
records, or mailing such returns or sending such statements as are required by
forms or regulations.
In no event shall the Custodian be liable or responsible for the payment of any
tax or any penalty attributable to Excess Contributions, retention of Excess
Contributions, failure to make the minimum distribution from the Account, or
withdrawals or distributions made from the Account. Custodian shall not be
required to make any distribution which, in the judgment of Custodian, will
render Custodian directly liable for any such tax or penalty.
In the event Custodian shall receive any claim to the funds held under the Plan
which claim is adverse to the interest of the Participant or the Beneficiary and
which claim Custodian, in its absolute discretion, deems meritorious, Custodian
may withhold distribution under the Plan until the claim is resolved or until
instructed by a court of competent jurisdiction or Custodian may pay all or any
portion of the funds then invested in the Mutual Fund into such court. Payment
to a court under the Plan shall relieve Custodian of any further obligation to
anyone for the amount so paid.
In the event any question arises or ambiguity exists as to the meaning,
interpretation or construction of any provisions of the Plan, the Custodian is
authorized to construe or interpret any such provision and such construction and
interpretation shall be binding upon the Participant and the Beneficiary.
As compensation for its service hereunder, the Custodian shall be paid an annual
maintenance fee of $15 per IRA Plan Participant Account on the first business
day of December each year. Such fees shall be deducted from the Accounts as
applicable and paid to the Custodian unless the participant elects, in a writing
filed with the Custodian, to pay such fee directly. Any fee not paid directly
when due may be deducted from theAccount and paid to the Custodian.
Any notices required or permitted to be given to Custodian under the Plan shall
be given to Custodian at the office of Custodian or any of its offices, and any
notices required or permitted to be given to the Participant under the Plan
shall be given to the Participant at the address for notice the Participant may
file with Custodian from time to time. Notices hereunder may be personally
served or sent by United States mail, first class, with postage prepaid and
properly addressed.
Any provision of the Plan which disqualifies it as an IRA shall be disregarded
to the extent necessary to continue to qualify it as an IRA under the code.
Titles to Articles in this Plan are for convenience only and, in the event of
any conflict, the text of the Plan rather than the titles shall control.
<PAGE>
Individual Retirement Custody
Account Disclosure Statement
Right To Revoke AN INDIVIDUAL MAY REVOKE HIS OR HER INDIVIDUAL RETIREMENT
ACCOUNT (IRA) AND HIS OR HER PARTICIPATION IN THE PLAN AT ANY TIME WITHIN SEVEN
(7) BUSINESS DAYS AFTER HIS OR HER ADOPTION OF THE PLAN. In the event of such a
revocation, the entire amount contributed by the individual will be returned.
Individuals wishing to revoke their Individual Retirement Accounts are required
to mail or deliver a written notice of revocation to the custodian not later
than the seventh business day after the establishment of his Retirement Account.
The notice shall be deemed delivered on the date of the postmark.
Custodian: Principal Mutual Life Insurance Company
Princor Financial Services Corporation
Attn: IRA Section
PO Box 10423
Des Moines, Iowa 50306
Telephone Number: 1-800-247-4123
Sponsor: Princor Group of Funds
General Description Of The Plan
Except in the case of Rollover Contributions and Simplified Employee Pension
Contributions, an Individual Retirement Account may be established under the
Plan by any working individual who will not reach the age of 70 1/2 before the
end of the year. See the Plan for a more detailed description of the
restrictions on participation.
Contributions may be invested in any of the Mutual Funds named in the
application. All dividends, capital gains distributions and interest will be
reinvested in the Funds selected and will accumulate in the account on a
tax-deferred basis. The individual (or the named beneficiary who survives the
individual) may request the Custodian to exchange shares of one fund for any
other eligible fund. Investments may be split among any of the funds named in
the application.
The Participant may begin receiving distributions from their Individual
Retirement Account without incurring a 10% penalty tax on premature
distributions at any time after a Participant reaches age 59 1/2. (Please note
the exceptions to distributions prior to the age of 59 1/2 in Article IV -
Distributions.) The Participant must begin receiving distributions before April
1 following the year in which he or she attains age 70 1/2. He or she may elect
to receive their distribution in a lump sum or in installments over any number
of years selected by the Participant, but not exceeding their life expectancy or
the joint and survivor expectancy of the Participant and his or her designated
Beneficiary. Each payment is calculated by dividing the net asset value of the
shares in the account, and any dividends held, by the number of payments
remaining until the end of the period selected. A Participant may begin
distributions before age 59 1/2 without incurring a 10% tax applicable to
premature distributions if he or she proves that he or she is disabled, as
defined in the Plan.
Income Tax Considerations
Persons who are not covered by an employer retirement plan can deduct amounts
contributed to an IRA up to the lesser of $2,000 or 100% of compensation.
Persons who are covered by an employer retirement plan will only be able to make
tax-deductible contributions to IRAs if their incomes are below certain levels.
For married persons filing separate tax returns, the fact that the spouse is
covered by an employer retirement plan does not affect the non-covered spouses
ability to make deductible contributions. For married persons filing jointly
where either spouse has an employer retirement plan, the full IRA deduction may
be taken if adjusted gross income (AGI) is $40,000 or less ($25,000 or less for
single taxpayers.) However, as the joint AGI exceeds $40,000 ($25,000 for
singles), the IRA deduction is phased down at 20 cents (22.5 cents for spousal
IRAs) per dollar of AGI and is eventually phased-out when joint AGI reaches
$50,000 ($35,000 for singles). The phaseout is based on AGI before it is reduced
for deductible IRA contributions. The deduction is rounded down to the next
lowest multiple of $10 when not already a multiple of $10. There is a $200
minimum deduction for anyone without phaseout limits. The amount of a
contribution that is deductible is determined by the Participant and must be
reported to the Custodian.
Employer retirement plans include pension and profit sharing plans, 401(k)
plans, 403(b) plans, government plans and just about every other type of
employer-maintained retirement plan. One exception: unfunded deferred
compensation plans of state and local government and tax-exempt organizations. A
person will be considered a participant in an employer retirement plan even if
not vested. However, a person who works for an employer that has a plan, but who
has not yet met the plan's eligibility requirements, can make deductible IRA
contributions. A person's Form W-2 for the year should indicate whether that
person is covered by an employer retirement plan.
The $2,000 annual contribution limit is reduced by any voluntary employee
contributions to a qualified retirement plan maintained by an employer which are
deductible from AGI.
Set-up charges and annual fees are considered miscellaneous deductions and,
therefore, are not deductible unless miscellaneous deductions are in excess of
2% of the Participant's adjusted gross income.
Rollover Contributions
Certain distributions from qualified employee benefit plans and 403(b) plans
(tax-sheltered annuities) are eligible to be paid to an individual retirement
account or to another employee benefit plan or 403(b) plan. Such a payment is
referred to as a rollover of an eligible rollover distribution. The
administrator or custodian for the employee benefit plan or 403(b) plan from
which the distribution is made can indicate which portion of a distribution is
an eligible rollover distribution. Non-taxable distributions, distributions that
are part of a series of substantially equal payments made at least once a year
over long periods of time and distributions that are required after a
participant attains age 70 1/2 are not eligible rollover distributions.
A rollover can be completed as a direct rollover to an individual retirement
account (which avoids the application of a 20% income tax withholding
requirement) or by reinvesting distribution proceeds paid to the plan
participant in an individual retirement account within 60 days of the date the
participant receives the distribution. If the distribution is not reinvested
within 60 days of its receipt, the payment is taxed in the year in which the
participant received it. Distributions from a qualified employee benefit plan
may be eligible for special tax treatment such as 5-year averaging, 10-year
averaging and capital gain tax treatment. This special tax treatment is not
available if an individual previously rolled over a payment from the employee
benefit plan or certain other similar plans of the employer. The special tax
treatment is also not available for distributions rolled over to an IRA when
distributions are subsequently made from that IRA. Also, if only part of a
distribution from an employee benefit plan is rolled over to an IRA, this
special tax treatment is not available for the part of the distribution that was
not so rolled over. Additional restrictions are described in IRS Form 4972,
which has more information on lump sum distributions and how an individual may
elect the special tax treatment. The Plan provides that Rollover contributions
from a qualified employer plan shall be held in a separate IRA at all times.
Amounts distributed from another IRA may be rolled over to the Princor IRA.
Rollovers between IRAs may occur no more than once a year; however, direct
transfers of IRA assets to another IRA may occur at any time.
Under the Plan, Rollover Contributions may only be made in cash. If an
individual receives a distribution from a qualified employee benefit plan of
property other than cash, the individual may sell such property and invest the
proceeds of the sale in a Rollover IRA under the Plan within 60 days after
distribution.
Simplified Employee Pension Contribution
If an Individual Retirement Account is being used as a receptacle for employer
contributions made under a Simplified Employee Pension (SEP) Plan, the limit on
employer contributions in a taxable year is the lesser of $30,000 or 15% of a
Participant's compensation.
Contributions must bear a uniform relationship to the total compensation (not in
excess of the first $150,000 beginning in 1994) of each employee maintaining a
SEP.
The employer's contribution is excluded from the Participant's taxable income.
Please see your Registered Representative for additional information about
Simplified Employee Pension plans.
Excess Contributions
Contributions for an individual during a taxable year are considered excess
contributions if they exceed 100% of compensation or $2,000, or such other limit
as may be prescribed by law. Contributions to individual accounts for a person
and that person's spouse are considered excess contributions if contributions
exceed the lesser of: (1) $2,250; (b) 100% of the compensation includable in
gross income for the taxable year; or (c) more than $2,000 paid to a single
individual retirement account for the individual or the individual's spouse. If
excess contributions are made, the individual must pay a cumulative,
non-deductible 6% excise tax on the portion of the contribution that exceeds the
amounts permitted by law. An individual can avoid this excise tax by withdrawing
the excess contribution prior to filing the tax return. Any income earned by the
excess contribution must also be withdrawn at the time the excess contribution
is withdrawn. Since the excess contribution was not deductible when made, it is
not included in the individual's income when returned, nor is it subject to the
10% tax on premature distributions. Income earned by the excess contribution,
however, must be included in the individual's income tax return for the tax year
in which it was earned. The foregoing is inapplicable if: (a) a deduction was
allowed for the excess contribution or (b) full contributions (including excess
contributions) for the year exceeded $2,250. If the 6% excise tax is imposed for
the taxable year, its cumulative effect can be avoided by making reduced
contributions in a future year. Excess rollover contributions can also be
corrected (with regard to dollar limitations) if the excess contribution was due
to reasonable cause.
Form 5329
Form 5329 (Return for Individual Retirement Savings Arrangement) must accompany
an individual's tax return (Form 1040) only if the individual owes excess
contribution taxes, premature distribution taxes, or taxes on certain
accumulations.
Distributions/Transfers
Distributions are taxed as ordinary income when received. Ten-year and/or
five-year averaging is not permissible.
If nondeductible contributions are made, the portion of the IRA contribution
consisting of non-deductible contributions will not be taxed again when
distributed. A distribution of a non-deductible IRA contribution will generally
consist of a non-taxable portion (the return of non-deductible contributions)
and a taxable portion (the return deductible contributions, if any, and account
earnings).
Thus, an individual may not take a distribution which is entirely tax free. The
following formula is used to determine the nontaxable portion of distributions
for a taxable year:
[Remaining NonDeductible Contributions Year-End / Total IRA Account
Balances] X Total Distributions (for the year) = NonTaxable Distributions
(for the year)
All of an individual's IRAs are treated as a single IRA to figure the year-end
total IRA account balance. This includes all regular IRAs, as well as Simplified
Employer Pension (SEP) IRAs, and Rollover IRAs. Distributions taken during the
year must also be added back in.
Financial Disclosure
Information about the Funds and the method by which the annual earnings are
computed and allocated to each shareholder's account is described in the
prospectus accompanying this disclosure statement.
An annual administration fee of $15.00 is also required. This fee will be
deducted from the account as a separate item on the first business day of
December each year. You will be notified of this fee by invoice and may pay by
separate check before November 15. There is also a sales charge deducted on the
purchase of Class A shares of most of the Funds amounting to 4.75% or less of
the amount of the transaction at offering price. The sales charges are reduced
under various circumstances described in detail in the Fund's prospectus. A
contingent deferred sales charge of up to 4% applies to Class B shares of each
of the Funds. A complete description of the Fund's shares is provided in the
prospectus. You must have received a prospectus prior to submitting your
application to create an IRA. The annual earnings on your IRA will depend upon
the investment income received by the Fund or Funds which you select. Growth in
value of this account is neither guaranteed nor projected. All certificates
shall be held by the Custodian. The Custodian has the right to change its fees
in the current and/or future years.
Prohibited Transactions
If Participant borrows money by use of their IRA or uses any portion of his or
her IRA as security for a loan (which the Plan prohibits), the portion so used
will be treated for tax purposes as having been distributed to them. In
addition, if a Participant or his or her Beneficiary engages in a prohibited
transaction (as defined in Section 4975 of the Internal Revenue Code) with
respect to his or her IRA, the Account will be disqualified and the entire
amount in the IRA Account will be treated as having been distributed to him or
her. Examples of prohibited transactions are the borrowing of the income or
principal from an IRA, selling property to or buying property from an IRA, or
receiving more than reasonable compensation for services performed for an IRA.
When all or a portion of an IRA is treated as having been distributed, such
amounts will be includable in the Participant's gross income for that taxable
year and will generally be subject to the 10% federal tax on premature
distributions (unless the Participant is disabled or has reached the age of 59
1/2).
Estate And Gift Tax Considerations
Transfers of IRAs are generally subject to taxation under federal estate and
gift tax laws. To the extent that benefits are distributed to the spouse of the
Participant, the amount of the benefits may be eligible for the estate tax
marital deduction
The excise tax on excess retirement distributions does not apply to such
distributions after the death of the Plan Participant, but a federal estate tax
is imposed amounting to 15% of any excess retirement accumulation. This estate
tax is imposed regardless of whether the decedent had a taxable estate and
cannot be reduced or offset by any estate tax credits or deductions. However, a
surviving spouse beneficiary of essentially all of the decedent's aggregate
retirement plans may elect out of the estate tax treatment and have the
decedent's aggregate retirement plans be treated as those of the surviving
spouse for income and estate tax purposes.
An irrevocable beneficiary designation may result in a taxable gift of a future
interest which would not qualify for the gift tax annual inclusion. However, if
a spouse is the beneficiary, the gift will generally qualify for the marital
deduction. In community property states, if a person other than a spouse is
designated as the plan beneficiary, the spouse might be considered to have made
a gift on one-half of the value of the benefit conveyed when the conveyance is
complete.
IRA Approval Letter
The IRS approval letter provided in this booklet is a determination only as to
the form of the IRA and does not represent a determination of the merits of the
IRA investment plan.
Further Information
Further information regarding Individual Retirement Accounts and the retirement
savings deduction may be obtained from any district office of the Internal
Revenue Service.
BECAUSE LEGAL AND TAX CONSEQUENCES OF THE USE OF THE PLAN MAY VARY IN PARTICULAR
CASES, INDEPENDENT ADVICE SHOULD BE SOUGHT FROM YOUR ATTORNEY OR TAX ADVISOR.
<PAGE>
IRS OPINION LETTER
Below is the Internal Revenue Service opinion letter approving the form of the
custodian agreement for the Princor IRA.
Internal Revenue Service Department of Treasury
Plan Name: IRA Custodial Account Washington, DC 20224
FFN: 50107440000-016 Case: 9170139
EIN: 42-0127290 Person to Contact: Mr. Welty
Letter Serial No: D112912a
Telephone Number: (202)566-4111
PRINCIPAL MUTUAL LIFE INSURANCE CO.
THE PRINCIPAL FINANCIAL GROUP Refer Reply to: E:EP:Q:2
DES MOINES IA 50392 Date: 08/29/91
Dear Applicant:
In our opinion, the form of the prototype trust, custodial account or annuity
contract identified above is acceptable under section 408 of the Internal
Revenue Code, as amended by the Tax Reform Act of 1986.
Each individual who adopts this approved plan will be considered to have a
retirement savings program that satisfies the requirements of Code section 408,
provided they follow the terms of the program and do not engage in certain
transactions specified in Code section 408(e). Please provide a copy of this
letter to each person affected.
The Internal Revenue Service has not evaluated the merits of this savings
program and does not guarantee contributions or investments made under the
savings program. Furthermore, this letter does not express any opinion as to
the applicability of Code section 4975, regarding prohibited transactions.
Code section 408(i) and related regulations require that the trustee, custodian
or issuer of a contract provide a disclosure statement to each participant in
this program as specified in the regulations. Publication 590, Tax Information
on Individual Retirement Arrangements, gives information about the items to be
disclosed.
The trustee, custodian or issuer of a contract is also required to provide each
adopting individual with annual reports of savings program transactions.
Your program may have to be amended to include or revise provisions in order to
comply with future changes in the law or regulations.
If you have any questions concerning IRS processing of this case, call us at the
above telephone number. Please refer to the Letter Serial Number and File
Folder Number shown in the heading of this letter. Please provide those
adopting this plan with your phone number, and advise them to contact your
office if they have any questions about the operation of this plan.
You should keep this letter as a permanent record. Please notify us if you
terminate the form of this plan.
Sincerely yours,
JOHN SWIECA
John Swieca
Chief, Employee Plans
Qualifications Branch
Principal Mutual Life Insurance Company's
Master Simplified Employee Pension Plan
This is the Principal Mutual Life Insurance Company's Master Simplified Employee
Pension Plan for use by individuals who desire to establish a Simplified
Employee Pension Plan (SEP) as described in Section 408(k) of the Internal
Revenue Code ("Code"). Principal Mutual Life Insurance Company hereby agrees to
act as sponsor of any SEP established under the Plan and this Agreement, subject
to the following terms and conditions.
ARTICLE I -- PURPOSE
It is the intention of the Employer to adopt this SEP agreement which satisfies
the requirements of Code Section 408(k), and any amendments thereto.
Under this SEP agreement, the Employer may agree to permit Elective Deferrals to
be made in each Plan Year to the Individual Retirement Account or Individual
Retirement Annuity (IRA) as described in Code Section 408(a) or (b)
respectively, established by or on behalf of each of the Employees who are
eligible to participate in the SEP. The Employer may also make a non-elective
Employer Contribution for or on behalf of each Eligible Employee covered under
this plan. If Elective Deferrals are allowed, this Plan is intended to qualify
as a salary reduction simplified employee pension ("SARSEP") under Code Section
408(k) (6) and the regulations thereunder.
This SEP agreement is effective upon adoption. No Elective Deferrals may be made
by an Employee on the basis of Compensation that the Employee received or had a
right to receive before adoption of this agreement and execution by the Employee
of the deferral election.
The Employer may deduct, subject to the otherwise applicable limits, those
contributions made to a SEP. Contributions to the SEP are deductible for the
Employer's taxable year with or within which the Plan Year of the SEP ends.
Contributions made for a particular taxable year and contributed by the due date
of the Employer's income tax return, including extensions, are deemed made in
that taxable year.
ARTICLE II -- PARTICIPATION
Any Employee who meets the participation requirements of Section II of the
Adoption Agreement must be permitted to participate in this SEP.
Elective Deferrals shall be permitted for a Plan Year only if:
(A) Not less than 50% of the Employees that are eligible to make Elective
Deferrals elect, or have an election in effect, to have Elective
Deferrals made to the SEP. See Article VII for further information; and
(B) The Employer had no more than 25 Employees eligible to participate in
the SEP at any time during the prior Plan Year.
A new Employer who had no Employees during the prior Plan Year will meet the
limitation in Code Section 408(k)(6)(B) (regarding no more than 25 eligible
employees during the preceding year) if it had 25 or fewer Employees throughout
the first 30 days of its existence.
ARTICLE III -- CONTRIBUTIONS
Employer
The Employer agrees that an Individual Retirement Account (IRA) will be
established for each Eligible Employee. When a Participant first becomes
eligible for a Contribution from the Employer, the Employer shall arrange for
the participant to apply for a SEP. Such application shall be made prior to the
date the first Employer Contribution is made.
For each Plan Year, the Employer will contribute a non-elective Employer
Contribution to the SEP of each Participant in an amount determined by the
Employer and allocated as determined in the Adoption Agreement. The Employer
must make a Contribution for each Eligible Employee whether or not they are
still employed at the time a Contribution is made. The Contribution made must be
the same percentage of each Employee's total Compensation.
The Employer Contribution for any Plan Year shall be due on the last day of the
Plan Year and shall be payable then or not later than the due date (as extended)
of the Employer's federal income tax return for the taxable year with or within
which the Plan Year ends.
The Employer Contribution shall be paid directly to the Employee's IRA insurer,
trustee, or custodian and applied to each Participant's Account.
Employer Contributions to this SEP, in combination with any other qualified plan
the Employer maintains for the Plan Year, may not exceed the lesser of $30,000
or 15% of Compensation for any Employee. If these limits are exceeded on behalf
of any Employee for a particular plan year, that Employee's Elective Deferrals
(if any) for that year must be reduced to the extent of the excess.
Employee Elective Deferral
An Employee may elect to have Elective Deferrals made under this SEP pursuant to
a salary reduction agreement. An Employee may elect to have Compensation reduced
by a percentage or amount per pay period or for a specified pay period or
periods, as designated in writing to the Employer.
No deferral election may be based on Compensation an Employee received, before
adoption of this elective SEP. This elective SEP shall be effective upon
adoption.
Under no circumstances may an Employee's Elective Deferrals in any Plan Year
exceed the lesser of fifteen percent of his or her Compensation (determined
without including the SEP-IRA contributions), or the limitation under Code
Section 402(g) based on all of the plans of the Employer. This amount may be
computed using the following formula:
Compensation (before subtracting employer SEP-IRA contributions) x
13.0435%.
If the Employer maintains any other SEP to which non-elective SEP Employer
Contributions are made for a Plan Year, or any qualified plan to which
contributions are made for such Plan Year, then an Employee's Elective Deferrals
may be limited to the extent necessary to satisfy the maximum contribution
limitations under Code Section 415(c)(1)(A).
In addition to the dollar limitation of Code Section 415(C)(1)(A), which is
$30,000 in 1991, contributions to this SEP when aggregated with contributions to
all other SEPs and qualified plans of the Employer generally may not exceed 15%
of Compensation or $30,000 for any Employee. If these limits are exceeded on
behalf of any Employee for a particular plan year, that Employee's Elective
Deferrals for that year must be reduced to the extent of the excess.
Each Employee's Elective Deferrals to this SEP may be based only on the first
$150,000 of Compensation (as adjusted annually in accordance with Code Section
408(k)(8)).
In addition to other applicable limitations set forth in the plan, and
notwithstanding any other provision of the plan to the contrary, for plan years
beginning on or after January 1, 1994, the annual compensation of each employee
taken into account under the plan shall not exceed the OBRA '93 annual
compensation limit. The OBRA '93 annual compensation limit is $150,000, as
adjusted by the Commissioner for increases in the cost of living in accordance
with section 401(a)(17)(B) of the Internal Revenue Code. The cost-of-living
adjustment in effect for a calendar year applies to any period, not exceed 12
months, over which compensation is determined (determination period) beginning
in such calendar year. If a determination period consists of fewer than 12
months, the OBRA '93 annual compensation limit will be multiplied by a fraction,
the numerator of which is the number of months in the determination period, and
the denominator of which is 12.
For plan years beginning on or after January 1, 1994, any reference in this plan
to the limitation under section 401(a)(17) of the Code shall mean the OBRA '93
annual compensation limit set forth in this provision.
The Employer shall contribute and allocate to each Employee's IRA an amount
equal to the amount of the Employee's Elective Deferrals. Elective Deferrals
will be paid by the Employer to the Employee's IRA trustee, custodian, or
insurer (in the case of a retirement annuity contract) or an IRA established on
behalf of an Employee by the Employer.
ARTICLE IV -- EXCESS ELECTIVE DEFERRALS (402(g) LIMIT)
Code Section 402(g) limits the maximum amount of Compensation an Employee may
elect to defer under a SEP (and certain other arrangements) during the Plan
Year. This limit, which originally was $7,000, is indexed according to the cost
of living. In addition, the limit may be increased if the Employee makes
Elective Deferrals to a salary reduction arrangement under Code Section 403(b).
The Code Section 402(g) limit applies to the total Elective Deferrals the
Employee makes for the Plan Year, from all Employers, under the following
arrangements:
(A) Elective SEPs under Code Section 408(k)(6); (B) Cash or deferred
arrangements under Code Section 401(k); and (C) Salary Reduction
arrangements under Code Section 403(b).
Thus, an Employee may have excess elective deferrals even if the amount deferred
under this SEP alone does not exceed the Code Section 402(g) limit.
If an Employee who elects to defer Compensation under this SEP and any other SEP
or arrangement has made excess elective deferrals for a Plan Year, the
Participant must withdraw those excess elective deferrals by April 15 following
the calendar year to which the deferrals relate. Those excess elective deferrals
not withdrawn by such date will be subject to the IRA contribution limitations
of Code Section 219 and 408 and thus may be considered an excess contribution to
the Employee's IRA. Such excess elective deferrals, therefore, may be subject to
the six percent tax on excess contributions under Code Section 4973.
Income on excess elective deferrals is includible in gross income in the year
withdrawn from the IRA and must be withdrawn by the Participant's tax return
following the calendar year to which the deferrals relate. Income withdrawn from
the IRA after that date may be subject to the ten percent tax on early
distributions under Code Section 72(t) if the recipient is not age 59 1/2.
ARTICLE V -- EXCESS SEP CONTRIBUTIONS -- DEFERRAL PERCENTAGE LIMITATION
Elective Deferrals by a Highly Compensated Employee must satisfy the Deferral
Percentage Limitation under Code Section 408(k)(6). Amounts in excess of the
Deferral Percentage Limitation will be deemed excess SEP contributions on behalf
of the affected Highly Compensated Employee or Employees. These excess SEP
contributions must be removed from the Employee's IRA. The Employer shall notify
each Highly Compensated Employee as outlined in Article VI - Excess SEP
Contributions.
The Deferral Percentage Limitation for Highly Compensated Employees is computed
by first averaging the Deferral Percentages for each eligible non-highly
compensated employee for the Plan Year and then multiplying this result by 1.25.
The deferral percentage for a Plan Year of any Highly Compensated Employee
eligible to participate in this SEP may not be more than the resulting product,
the Deferral Percentage Limitation.
Only Elective Deferrals are included in this computation. Non-elective Employer
Contributions may not be included. The determination of the Deferral Percentage
for any Employee is to be made in accordance with Code Section 408(k)(6) and
should satisfy such other requirements as may be provided by the Secretary of
the Treasury.
For purposes of making this computation, the calculation of the number and
identity of Highly Compensated Employees, and their deferral percentages, is
made on the basis of the entire Affiliated Employer.
In addition, for purposes of determining the Deferral Percentage of a Highly
Compensated Employee, the Elective Deferrals and Compensation of the Employee
will also include the Elective Deferrals and Compensation of any Family Member.
This special rule applies, however, only if the Highly Compensated Employee is a
5% owner or is one of a group of the ten most Highly Compensated Employees. The
Elective Deferrals and Compensation of Family Members used in this special rule
do not count in computing the average of the deferral percentages of non-highly
compensated employees.
ARTICLE VI -- EXCESS SEP CONTRIBUTIONS -- TAX CONSEQUENCES AND NOTIFICATION
OF EMPLOYEES
Elective Deferrals
The Employer is responsible for notifying each affected Employee, if any, within
2 1/2 months following the end of the Plan Year, of the amount of excess SEP
contributions to that Employee's SEP-IRA. Such excess SEP contributions are
includible in the Employee's gross income in the calendar year as of the
earliest date that any Elective Deferrals by the Employee during the Plan Year
would have been received by the Employee had he or she originally elected to
receive the amounts in cash. Income allocable to the excess SEP contributions is
includible in gross income in the year of withdrawal from the IRA. However, if
the excess SEP contributions (not including allocable income) total less than
$100, then the excess contributions are includible in the Employee's gross
income in the calendar year of notification. Income allocable to the excess SEP
contributions is includible in gross income in the year of notification. Income
allocable to the excess SEP contributions is includible in gross income in the
year of withdrawal from the IRA.
If the Employer fails to notify any affected Employees within 2 1/2 months
following the end of the Plan Year of an excess SEP contribution, the Employer
must pay a tax equal to 10% of the excess SEP contribution. If the Employer
fails to notify Employees by the end of the Plan Year following the Plan Year in
which the excess SEP contributions arose, the SEP will no longer be considered
to meet the requirements of Code Section 408(k)(6). If the SEP no longer meets
the requirements of Code Section 408(k)(6), then any contribution to an
Employee's IRA will be subject to the IRA contribution limitations of Code
Sections 219 and 408 and thus may be considered an excess contribution to the
Employee's IRA.
The Employer's notification to each affected Employee of the excess SEP
contributions must specifically state in a manner calculated to be understood by
the average Employee:
(A) The amount of the excess SEP contributions attributable to that
Employee's Elective Deferrals (B) The calendar year in which the excess
SEP contributions are includible in gross income; and (C) That the
Employee must withdraw the excess SEP contributions (and allocable
income) from the SEP-IRA by the due date (including extensions) for
filing the income tax return following the calendar year of
notification by the Employer. Those excess contributions not withdrawn
by April 15 following the year of notification will be subject to the
IRA contribution limitations of Code Sections 219 and 408 for the
preceding calendar year and thus may be considered an excess
contribution to the Employee's IRA. Such excess contributions may be
subject to the six percent tax on excess contributions under Section
4973. If income allocable to an excess SEP contribution is not
withdrawn by April 15 following the calendar year of notification by
the Employer, the income may be subject to the ten percent tax on early
distributions under Code Section 72(t) when withdrawn.
For information on reporting excess SEP contributions, see Notice 87-77, 1987-2
C.B. 385, and Notice 88-33, 1988-1 C.B. 513, as modified by Notice 89-32, 1989-1
C.B. 671. The Employer shall notify each Employee who makes an Elective Deferral
for a Plan Year that, notwithstanding the prohibition on withdrawal restrictions
contained in the SEP, any amount attributable to such Elective Deferrals which
is withdrawn or transferred before the earlier of 2 1/2 months after the end of
the particular Plan Year and the date the Employer notifies its Employees that
the Deferral Percentage Limitations have been calculated, will be includible in
income for purposes of Code Sections 72(t) and 408(d)(1).
Employer Contribution
Any Employer Contribution that is more than the yearly limitation may be
withdrawn without penalty by April 15 for the Employee's tax return, but is
includible in income. Excess SEP contributions left in the Employee's SEP-IRA
after that time may have adverse tax consequences. Withdrawals of those
contributions may be taxed as premature withdrawals.
ARTICLE VII -- FAILURE TO SATISFY THE 50% TEST
If the Employer determines, as of the end of the Plan Year, that more than half
of the eligible Employees have chosen not to make Elective Deferrals for that
Plan Year, then all Elective Deferrals made by Employees for that Plan Year
shall be considered "disallowed deferrals", i.e. IRA contributions that are not
SEP-IRA contributions.
The Employer must notify each affected Employee, within 2 1/2 months following
the end of the Plan Year to which the disallowed deferrals relate, that the
Participant's deferrals are no longer considered SEP-IRA contributions. Such
disallowed deferrals are includible in the Employee's gross income in the
calendar year as of the earliest date that any Elective Deferrals by the
Employee during the Plan Year would have been received by the Employee had the
Participant originally elected to receive the amounts in cash. Income allocable
to the disallowed deferrals is includible in the Employee's gross income in the
year of withdrawal from the IRA.
The notification to each affected Employee of the disallowed deferrals must
specifically state in a manner calculated to be understood by the average
Employee:
(A) The amount of the disallowed deferrals;
(B) The calendar year in which the disallowed deferrals are includible in
gross income; and
(C) That the Employee must withdraw the disallowed deferrals (and allocable
income) from the SEP-IRA by April 15 for filing the Employee's tax
return following the calendar year of notification by the Employer.
Those disallowed deferrals not withdrawn by such tax filing deadline
will be subject to the IRA contribution limitations of Code Sections
219 and 408 and thus may be considered an excess contribution to the
Employee's IRA. These disallowed deferrals thus may be subject to the
six percent tax on excess contributions under Section 4973. If income
allocable to a disallowed deferral is not withdrawn by April 15 for
filing the Employee's tax return, the income may be subject to the ten
percent tax on early distributions under Code Section 72(t) when
withdrawn.
Disallowed deferrals should be reported in the same manner as are excess SEP
contributions.
ARTICLE VIII -- TOP HEAVY REQUIREMENTS
This SEP is "top-heavy" for a plan year if, as of the last day of the previous
plan year (or current plan year if this is the first year of the SEP) the total
of elective and non-elective contributions made on behalf of key employees for
all the years this SEP has been in existence exceeds 60% of such contributions
for all employees. If the employer maintains (or maintained within the prior
five years) any other SEP or defined contribution plan in which a key employee
participates (or participated), the contributions or account balances, whichever
is applicable, must be aggregated with the contributions made to this SEP. The
employee who ceases to be a key employee or an individual who has not been in
the employ of the employer for the previous five years shall be disregarded.
During any Plan Year in which this Plan is a Top-heavy Plan, the Employer shall
make a minimum contribution or allocation on the last day of the Plan Year for
each person who is an Employee on that day and who either was or could have been
an Active Participant during the Year. The minimum contribution and allocation
for such persons shall be equal to the lesser of (A) or (B) below:
(A) Three percent of such person's Compensation
(B) If the contribution rate for all Key Employees is less than three
percent of Compensation, then the highest contribution rate that
applies to any Key Employee.
If the Employer Contributions and allocations otherwise required under the
defined contribution plans are at least equal to the minimum above, no
additional contribution or allocation shall be required. If the Employer
Contributions and allocations are less than the minimum above and the Employer
Contributions under this Plan are allocated to Participants, the Employer
Contributions (other than Elective Deferral Contributions) shall be reallocated
to provide the minimum. The remaining Contributions shall be allocated as
provided in the preceding articles of this Plan. If total Contributions and
allocations are less than the minimum above and the Employer's Contributions
under this Plan are not allocated, the Employer shall contribute the difference
for the year. The minimum contribution or allocation applies to all of the
defined contribution plans in the aggregate which are Top-heavy Plans. A minimum
allocation under a profit sharing plan shall be made without regard to whether
or not the Employer has profits.
If an Employer has more than one Top-heavy Plan, the minimum top-heavy
contribution does not need to be duplicated under each Plan. For Employees who
are Participants under both Top-heavy Plans, one of the Plans may provide the
minimum benefit required. For Employees who are Participants under only one
Top-heavy Plan, that Plan in which they are Participants shall provide the
top-heavy minimum contribution.
If the Employer has more than one Plan, all of the Plans of the Employer may be
required to be aggregated when testing to see if the Plans are top-heavy. This
"required aggregation group" consists of each Plan of the Employer
(A) in which a Key Employee is a Participant and
(B) any other Plan which causes a Plan covering Key Employees to meet the
requirements of Code Sections 401(a)(4) or 410.
If the "required aggregation group" is top-heavy, each Plan in the group is a
Top-heavy Plan.
The Employer is permitted to include other Plans when testing to see if the
group as a whole is top-heavy. This group as a whole is considered as
"permissive aggregation group". If this group is not top-heavy, none of the
Plans in the group is a Top-heavy Plan.
Calculations to determine if this Plan is a Top-heavy Plan and the
identification of Key Employee's shall be determined according to the provisions
of Code Section 416 and regulations thereunder. Compensation for determining the
top-heavy minimum excludes Elective Deferrals.
For purposes of satisfying the minimum contribution requirement under Code
Section 416, all non-elective Employer Contributions under the SEP shall be
taken into account, but Elective Deferrals shall not be taken into account.
The requirements of this section shall be met without regard to contributions
under Chapter 2 of the Code (relating to tax on self-employment), Chapter 21 of
the Code (relating to Federal Insurance Contributions Act), Title II of the
Social Security Act or any other Federal or state law.
ARTICLE IX -- DEFINITIONS
10.1 Adoption Agreement means the attached document which contains
the selections and specifications for the Plan.
10.2 Affiliated Employer means any corporation that is a member of a
controlled group of corporations (as described in Code Section 414(b))
that includes the employer; any trade or business (whether or not
incorporated) that is under common control (as defined in Code Section
414(c)) with the employer; any organization (whether or not
incorporated) which is a member of an affiliated service group (as
defined in Code Section 414(m)) that includes the employer; and any
other entity required to be aggregated with the employer pursuant to
regulations under Code Section 414(o).
10.3 Code means the Internal Revenue Code of 1986, as amended.
10.4 Compensation means information required to be reported under Code
Section 6041 and 6051 (Wages, Tips and Other Compensation Box on Form
W-2). Compensation is defined as a Participant's wages within the
meaning of Code Section 3401(a) and all other payments of compensation
to an Employee by the Employer (in the course of the Employer's trade
or business), for which the Employer is required to furnish the
Employee a written statement under Code Section 6041(d) and 6051(a)(3),
which is actually paid by the Employer for a specified period.
Compensation is determined without regard to any rules under Code
Section 3401(a) that limit the remuneration included in wages based on
the nature or location of the employment or services performed (such as
the exception for agricultural labor in Code Section 3401(a)(2)).
Compensation shall include elective contributions but shall exclude
contributions made to this SEP-IRA by the Employer. Elective
contributions are amounts excludable from the gross income of the
Employee under Code Sections 125, 402(a)(8), 402(h) or 403(b), and
contributed to the Employer at the Employee's election, to a Code
Section 401(k) arrangement, a simplified employee pension, cafeteria
plan or tax-sheltered annuity. Elective contributions also include pay
deferred under a Code Section 457 plan maintained by the Employer and
Employee contributions "picked up" by a governmental entity and,
pursuant to Code Section 414(b)(2), treated as the Employer's
contributions. Compensation shall include amounts received for personal
services actually performed (see Reg. 1.219-1(c)).
For purposes of Elective Deferral Contributions only, Compensation
shall not include reimbursements or other expense allowances, fringe
benefits (cash or non-cash), moving expenses, deferred compensation,
and welfare benefits, unless otherwise specified.
For any self-employed individual covered under the plan, Compensation
will mean earned income defined by Code Section 401(C)(2). Compensation
shall include only that Compensation which is actually paid to the
participant during the Plan Year.
The annual Compensation of each Participant taken into account under
the plan for any year shall not exceed $150,000. This limitation shall
be adjusted by the Secretary at the same time and in the same manner as
under Code Section 415(d), except the dollar increase in effect on
January 1 of any calendar year is effective for years beginning in such
calendar year and the first adjustment to the $150,000 limitation is
effected on January 1, 1990. If this plan determines Compensation on a
period of time that contains fewer than 12 months, then the annual
Compensation limit is an amount equal to the annual Compensation limit
for the calendar year in which the compensation period begins
multiplied by the ratio obtained by dividing the number of full months
in the period by 12.
In determining the Compensation of a Participant the rules of Code
Section 414(q)(6) shall apply, except in applying such rules, the term
Family Member shall include only the spouse of the Participant and any
lineal descendants of the Participant who have not attained age 19
before the close of the year. If, as a result of the application of
such rules the adjusted $150,000 is exceeded, then (except for purposes
of determining the portion of Compensation up to the Integration Level
if this plan provides for permitted disparity), the limitation shall be
prorated among the affected individuals in proportion to each such
individual's Compensation as determined under this section prior to the
application of this limitation.
Compensation for the purposes of the $300 limit of Code Section
408(k)(2)(C) shall be defined as Code Section 414(q)(7) compensation.
10.5 Contribution means Employer, Elective Deferrals, or Rollover
Contributions unless the text clearly indicates only one, or certain of
these are meant.
10.6 Deferral Percentage means the ratio (expressed as a percentage) of an
Employee's Elective Deferrals for a year to the Employee's Compensation
for that year. The Deferral Percentage of an Employee who is eligible
to make an Elective Deferral, but who does not make a deferral during
that year, is zero.
10.7 Deferral Percentage Limitation means the maximum amount of Elective
Deferrals, as expressed as a percentage of Compensation, that can be
contributed on behalf of any Highly Compensated Employee for a
particular plan year and it equals the product of (i) the average of
the amounts Elective Deferrals (expressed as a percentage of each such
Employee's Compensation) made on behalf of all the non-highly
compensated employees for the same Plan Year, and(ii) 1.25. In
calculating this average, the percentage for an eligible non-highly
compensated employee who chooses not to have Elective Deferrals made on
his or her behalf for a Plan Year, is zero.
10.8 Elective Deferrals means Contributions made to a Participant's
Simplified Employee Pension during the Plan Year by the Employer, at
the election of a Participant, in lieu of cash Compensation and
pursuant to a salary reduction agreement.
10.9 Eligible Employee means an Employee who meets the requirements
specified in section 2.1 of the Adoption Agreement.
10.10 Employee means an individual who is employed by the Employer, including
an employee within the meaning of Code Section 401(c)(1). For purposes
of a SARSEP plan, the term Employee shall not include a leased employee
within the meaning of Code Section 414(n)(2). The term Employee shall
include a leased employee within the meaning of Code Section 414(n)(2)
who is deemed an employee under the provisions of Code Section
414(n)(1)(A), but not earlier than the time prescribed by Code Section
414(n)(4). The term Employee shall not mean an independent contractor.
10.11 Employer means the person named in Section 1 of the Adoption Agreement.
The term shall also include any other person who has obtained the
written consent of the person named in section 1.1, and adopts this
Plan in writing; provided, however, that such person(s) is under common
control, within the meaning of Code Section 414(b) or (c), or forms
part of an affiliated service group within the meaning of Section
414(m) of the code with the person named in section 1.1.
10.12 Excess Elective Deferrals means amounts deferred for the year in excess
of the limit on Elective Deferrals of Code Section 402(g).
10.13 Family Member means an individual who is related to a Highly
Compensated Employee as a spouse, or as a lineal ascendant (such as a
parent or grandparent) or descendant (such as a child or grandchild) or
spouse of either of those, in accordance with Code Section 414(q) and
the regulations thereunder.
10.14 Fiscal Year means the Employer's taxable year as identified in Section
1 of the Adoption Agreement.
10.15 Highly Compensated Employee means any Employee described in code
Section 414(q) who, during the current Plan Year or the preceding Plan
Year--(a) was at any time a 5-percent owner (as defined in Code Section
416(i)(1)(B)(i));
(b) received Compensation from the Employer in excess of $75,000 (as
adjusted pursuant to Code Section 415(d)
)
(c) received Compensation from the Employer in excess of $50,000 (as
adjusted pursuant to Code Section 415(d)) and was a member of the
top-paid group for such year (the top 20% of Employees, by
compensation)
(d) was at any time an officer of the Employer and received
compensation during such year that is greater than 50 percent of
the dollar limitation in effect under Code Section 415 for defined
benefit plans. No more than three Employees shall be treated as
officers and at least one (the highest paid officer) shall be
treated as Highly Compensated regardless of compensation.
Compensation includes the Participant's Elective Deferrals and any
elective contributions to a Section 125 cafeteria plan, Section
401(k) cash or deferred arrangement or Section 403(b)
tax-sheltered annuity.
10.16 Individual Retirement Account (IRA) means a personal retirement savings
program as set out in Code Section 408.
10.17 Integration Level means the Integration Level defined in section III of
the Adoption Agreement.
10.18 Key Employee means any Employee or former Employee (including
beneficiaries of deceased Employees) who at any time during the
determination period was
(a) one of the officers (subject to the maximum below) whose
Compensation for the Year exceeds 50 percent of the dollar
limitation under Code Section 415(b)(1)(A),
(b) one of the ten Employees who owns (or is considered to own, under
Code Section 318) more than a half percent ownership interest and
one of the largest interests in the Employer during any year of
the determination period if such person's Compensation for the
year exceeds the dollar limitation under Code Section
415(c)(1)(A).
(c) a five-percent owner of the Employer as defined in Code Section
416(i)(1)(B)(i), or (d) a one-percent owner whose Compensation for
the Year is more than $150,000.
Each Affiliated Employer shall be treated as a separate employer for
purposes of determining ownership. Compensation for determining which
Employees are key Employees includes Elective Deferrals.
The determination period is the current Plan Year and the four
preceding Plan Years. If there are fewer than 30 Employees, no more
than three Employees shall be treated as Key Employees because they are
officers. If there are over 30 Employees, no more than 10 percent of
the Employees shall be treated as Key Employees because they are
officers. The determination of who is a Key Employee shall be made
according to Code section 416(i)(1) and the regulations thereunder.
10.19 Leased Employee means any person (other than an employee of the
recipient) who pursuant to an agreement between the recipient and any
other person ("leasing organization") has performed services for the
recipient (or for the recipient and related persons determined in
accordance with Code Section 414(n)(6)).
10.20 Maximum Integration Rate is equal to the lesser of (a) 5.7% or (b) the
applicable % determined according to the following schedule:
MAXIMUM
INTEGRATION INTEGRATION
LEVEL RATE
100% of TWB 5.7%
Less than 100%, but more
than 80% of TWB 5.4%
More than greater of $10,000
or 20% of TWB, but not
more than 80% of TWB 4.3%
Not more than greater of
$10,000 or 20% of TWB 5.7%
TWB means the Taxable Wage Base as defined in Section 10.26. On any
date the portion of the rate of tax under Code Section 3121(a)(1) (in
effect on the latest Yearly Date) which is attributable to old age
insurance exceeds 5.7%, such rate shall be substituted for 5.7% and
5.4% and 4.3% shall be increased proportionately.
10.21 Participant means an Eligible Employee who meets the participation
requirements of Section 2 of the Adoption Agreement and is included in
this Plan.
10.22 Plan Year means the plan year elected in section 1.3 of the Adoption
Agreement.
10.23 Service means employment with the Employer, including self-employment.
For purposes of determining whether an Employee has satisfied the
service requirement in section 2.1, service with any entity which is
controlled by the Employer, is controlling the Employer, or forms part
of an affiliated service group, within the meaning of Code Section
414(b), (c), or (m), shall be treated as Service with the Employer.
Service for a leased employee shall include the entire period for which
the leased employee performed services for the Employer, or a related
person within the meaning of Code Section 144(a)(3), issued by the
Insurer.
10.24 Simplified Employee Pension (SEP) means an approved Individual
Retirement Account described in Code Section 408(a), issued by the
Sponsor or an approved Individual Retirement Annuity contract described
in Code Section 408(b).
10.25 Sponsor means Principal Mutual Life Insurance Company.
10.26 Taxable Wage Base means the contribution and benefit base in effect
under Section 230 of the Social Security Act at the beginning of the
Plan Year.
10.27 Top-heavy Plan means a Plan considered top heavy within the meaning of
Code Section 416 and regulations thereunder.
The Principal Financial Group
Princor Funds Custodial Agreement For Use With 403(b) Arrangements
Article I - Introduction
1.1 Intent of Agreement. This parties intend that this Agreement establish a
Custodial Account in accordance with section ("ss.") 403(b)(7) of the
Internal Revenue Code of 1986 and the regulations issued by the Internal
Revenue Service.
1.2 Effective Date. This Agreement shall take effect upon the execution by
the Employee named on the Application.
---------------
Article II - Definitions
As used in this Agreement, the following terms shall have the meaning set forth
below, unless the context plainly requires the use of a different meaning.
2.1 Agreement means The Principal Financial Group Princor Funds Custodial
Agreement.
2.2 Alternate Funding Agent means a custodian designated by the Employee and
authorized to receive any assets transferred under
Paragraph 4.8.
2.3 Application means the 403(b)(7) Plan Application executed by the
Employee. The Application is incorporated into this Agreement.
2.4 Beneficiary shall mean the beneficiary designated by the Employee in a
manner acceptable to the Custodian.
2.5 Code means the Internal Revenue Code of 1986, as amended.
2.6 Custodial Account means the account established under Article III of this
Agreement.
2.7 Custodian means Principal Mutual Life Insurance Company, or any successor
appointed to act as custodian under Article VIII of this Agreement.
2.8 Early Retirement means separation from service after the Employee reaches
age 55.
2.9 Employee means a person who performs services, directly or indirectly,
for an Employer, and who has entered into a salary reduction agreement
with the Employer under which the Employer shall reduce the Employee's
salary by the amount specified in the agreement and send it to the
Custodian for investment in accordance with this Agreement.
2.10 Employer means an Employer named in the Application and described in
ss.403(b)(1)(A) of the Code.
2.11 Excess Contributions means the amount of any contribution made by an
Employer on behalf of an Employee for any Plan Year which is an "excess
contributions" as defined in ss.4973(c) of the Code.
2.12 Exclusion Allowance means the maximum contributions made by an Employee
under 403(b)(2) of the Code or, for Employees making an election under
ss.403(b)(2)(B) of the Code, the limits described in ss.415(c)(4) of the
Code.
2.13 Plan Year means a calendar year.
2.14 Princor Funds means one or more of the regulated investment companies
for which Princor Management Corporation serves as investment advisor and
Princor Financial Services Corporation serves as the principal
underwriter. The Custodian and Sponsor shall determine which Princor
Funds are available under this Agreement.
2.15 Princor Fund Shares meaning whole or fractional shares of one or more of
the Princor Funds.
2.16 Sponsor means Princor Financial Services Corporation.
Article III - Establishment of Custodial Account
3.1 Establishing a Custodial Account. Upon receiving execution of the
Application by an Employee, the Custodian shall open and maintain a
Custodial Account for the Employee. The Custodial Account shall hold
title only to Princor Fund Shares or cash, or both. The Custodial shall
satisfy the requirement of ss.401(f)(2) of the Code.
3.2 Limitations On Custodial Account. The Custodian shall not pay or make
available any amounts from a Custodial Account, except as provided in
Paragraph 6.1. The Custodian shall not have any responsibility under this
Agreement for any assets not held in a Custodial Account.
Article IV - Contributions and Transfers
4.1 Contributions. The Custodian shall accept and hold in the Custodial
Account the contributions made on behalf of the Employee by an Employer.
The Custodian shall have no responsibility for determining the amount of
any contribution nor for the collection of contributions from an
Employer. Any reports or instructions prepared by or on behalf of the
Custodian for the Employer shall be solely for the benefit of the
Employer. The Employee shall be solely responsible for determining that
the correct amount of a contribution is remitted to the Custodian.
4.2 Rollovers, Direct Rollovers and Transfers From an Existing 403(b)
Arrangement. The Custodian shall accept contributions to a Custodial
Account which result from rollovers, direct rollovers and transfers from
an existing 403(b) annuity or custodial account. The Custodian shall have
no liability to verify that the prior 403(b) annuity or custodial account
complied with the requirements of the Code prior to the transfer of
funds. The employee shall inform the custodian about the identity of any
rollover or transfer contributions.
4.3 Rollovers From Individual Retirement Accounts. The Custodian shall accept
and hold in the Account rollovers from Individual Retirement Accounts as
described in ss.408 of the Code, if the Individual Retirement Accounts
resulted solely from the rollover of funds from an Existing 403(b)
Arrangement as described in ss.403(b)(8) of the Code. In accordance with
ss.408, the Employee shall inform the Custodian about the identity of any
rollover contributions.
4.4 Restrictions on Employee Contributions.
(a) Employee contributions cannot exceed the maximum contribution amounts
specified in the Code or any regulations issued by the Internal Revenue
Service. It shall be the Employee's responsibility to ensure that those
limits are not exceeded. The Custodian shall have no liability if an
Employee exceeds the contribution limits specified in the Code or any
regulations. The remaining subparagraphs of this Paragraph 4.4 describe,
in general, the limitations. However they are meant only to aid Employees
to determine the actual limitations that apply to them, they are not
meant to list all limitations which may apply to each Employee. (b) For
each Plan Year, the total Employer contributions for any taxable year of
the Employee made by salary reduction qualifying as elective deferrals
when added to all other elective deferrals made on behalf of the employee
to another plan described in ss.401(k), ss.408(k)(6), or ss.403(b) of the
Code and when added to other contributions made on behalf of the Employee
under any other plan described in ss.457(b) or ss.501(c)(18) shall not
exceed the lesser of--
(i) the limit described in ss.402(g)(4) of the Code; or
(ii) the Employee's Exclusion Allowance described in ss.403(b)(2) of the Code,
as modified by ss.415(1)(2) and ss.457(c)(2) of the Code. (c) Certain
qualified employees of certain qualified organizations may elect under
ss.402(g)(8)(A) to increase the elective deferrals by certain specified
amounts. Under ss.402(g)(8)(A) the term "qualified employee" means any
employee who has completed 15 years of service with the qualified
organization. The term "qualified organization" means any educational
organization, hospital, home health service agency, health and welfare
service agency, church or convention or association of churches.
4.5 Liabilities of Custodian. The Employee has the sole responsibility to
determine whether any contributions made on the Employee's behalf meet
the limitations specified in the Code. The Custodian shall have no
liability for losses that may arise if any contributions made on behalf
of an Employee exceed the contribution limitations of the Code.
4.6 Vesting. Each Employee's interest in the amounts credited to a Custodial
Account is fully vested and nonforfeitable.
4.7 Transfers To Alternate Funding Agent. At the direction of the Employee,
the Custodian shall transfer, in cash, such assets held in the Custodial
Account less the amount of any taxes, fees, charges, or other expenses
chargeable to the Custodial Account, to an Alternate Funding Agent
designated by the Employee, provided that such transfer occurs in
accordance with Paragraph 6.2(b). The Custodian may require that the
Employee use a form acceptable to the Custodian to request a transfer.
A transfer to an Alternate Funding Agent must comply with the purposes
described in paragraph 6.2(b). When the Custodian transfers assets to an
Alternate Funding Agent, the Custodian shall have no further obligation
to the Employee or Beneficiary.
4.8 Liabilities for Transfer. The Custodian shall have no liability for
losses that may arise from the acts, omissions, or delays or other
inaction of any other person involved with the transfer of assets either
to or from the Custodial Account. The Custodian shall have no
responsibility to the Employee for the tax treatment of any transfer from
the Custodial Account.
Article V - Investment of the Custodial Account
5.1 In General. The Custodian shall invest the cash it receives for the
Custodial Account in the Princor Fund Shares designated by the Employee.
The Custodian shall not be liable for payment of interest on any portion
of the Custodial Account that it may hold in cash from time to time. The
Custodian shall not have any duty to question the investment direction of
the Employee nor shall it have any duty to suggest that any other
investment direction would be more appropriate for the Employee.
5.2 Investment Direction Of Employee. The Application contains the initial
investment instructions given to the Custodian by the Employee. Those
instructions shall stay in effect until the Employee modifies them in a
manner acceptable to the Custodian. The Custodian may request
clarifications from an Employee if it receives incomplete, conflicting,
or unacceptable investment instructions from the employee. Until the
Custodian receives any required clarification or further instructions,
the Custodian shall invest the contribution using the last acceptable
investment instructions delivered to the Custodian. The Custodian may
rely upon the latest acceptable instructions of the Employee with respect
to investment of contributions.
5.3 Exchanges. The Employee may instruct the Custodian in a manner acceptable
to the Custodian to exchange all or any portion of the Princor Fund
Shares held in the Custodial Account for other Princor Fund Shares if
both this Agreement and the current prospectuses of the relevant Princor
Funds permit such an exchange. By giving any direction to exchange
Princor Fund Shares, the Employee acknowledges that the Employee has
received the current prospectuses for the Princor Funds in which the
Employee has directed investment.
5.4 Reinvestment. Unless otherwise directed by the employee on a form
acceptable to the Custodian, the Custodian shall invest all cash
dividends and capital gain distributions received by the Custodian with
respect to any Princor Fund Shares held in the Custodial Account in like
Princor Fund Shares. If the Custodian has the right to receive any
dividend or other distribution in cash or in shares it shall elect to
receive the dividend or other distribution in Princor Fund Shares.
5.5 Ownership Of Princor Fund Shares. The Custodian shall register the title
of all Princor Fund Shares purchased in accordance with this Article V in
the name of the Custodian (or its nominee) as custodian for the account
of the Employee. The Custodian shall send all proxy and other materials
that relate to the Princor Fund Shares to the Employee and shall follow
the Employee's instructions with respect to voting such Princor Fund
Shares. The Employee's voting instructions must use a form acceptable to
the Custodian. If the Custodian does not receive timely instructions from
the Employee, it shall not cote the Princor Fund Shares held for the
Employee.
Article VI - Distributions
6.1 General Rule. The Custodian shall not pay any amounts from the Custodial
Account, or otherwise make those amounts available to the Employee (or
Employee's Beneficiary) before:
(i) The Employee has separated from the service of the employer; or (ii)
The Employee has reached the age of 59 1/2; or (iii)The Employee has
become disabled (within the meaning of ss.72(m)(7) of the Code); or (iv)
the Employee has died; or (v) The Employee has encountered financial
hardship; or
(vi) Any other event that complies with Internal Revenue Service
regulations or rulings relating to distributions from ss.403(b)
Custodial Accounts.
6.2 Limitations on Distributions.
(a) The Custodian has no duty to make any distributions or make any
distributions otherwise available until it receives written notice and
proof of one of the above events from the Employee (or Beneficiary in
event of the Employee's death). The Employee (or Beneficiary when
applicable) must provide acceptable documentation to the Custodian. The
Custodian shall be able to conclusively rely upon any such documentation
(including any doctor's certification of disability) submitted by an
Employee or a Beneficiary, providing that it is in a form acceptable to
the Custodian. The Custodian shall not make any distributions until the
expenses described in Paragraph 7.1 are deducted from the Custodial
Account. (b) For purposes of determining whether an Employee has
encountered a financial hardship which would allow a distribution from the
Custodial Account, the Employee's condition must meet the requirements of
any regulations or proposed regulations issued by the Internal Revenue
Service. If no regulations or proposed regulations exist regarding the
meaning of the term "financial hardship" as used in ss.403(b), then the
Employee shall demonstrate that the Employee meets the requirements for a
financial hardship distribution established for ss.401(k) plans. An
employee requesting a hardship distribution shall submit an affidavit to
the Custodian which shall describe the facts supporting the Employee's
claim of financial hardship. The Custodian shall be able to conclusively
rely upon such an affidavit and shall have no obligation to independently
confirm any of the facts or statements contained in the affidavit. In
addition, the Custodian shall have no liability for any distribution to an
Employee based on a financial hardship affidavit. (c) The Custodian shall
have the power to ensure that the limitation on distributions contained in
Paragraph 6.1 are fully implemented and enforced.
6.3 Method of Distribution.
(a) Subject to the minimum distribution requirements described in
paragraph 6.7, the Custodian shall make distributions (other than
distributions for financial hardship which the Custodian shall pay with a
single payment) in cash or in kind in any one or more of the following
ways in accordance with the written directions of the Employee (or
Beneficiary if applicable): (i) in a single payment; or (ii) in a director
rollover of an eligible rollover distribution as defined in ss.402(c)(4)
of the Code to a ss.402(c)(4) plan or to an Individual retirement account
or individual retirement annuity provided that:
(a) a direct rollover distribution option is not available for a
distribution if the aggregate eligible rollover distributions during
a plan year are reasonably expected to total less than $200
(b) in the case of an eligible rollover distribution a portion of which
is distributed to the employee, a direct rollover distribution may
not be directed to an eligible retirement plan unless the portion of
the distribution so directed is equal to at least $200; and
(c) an election to make or not to make a direct rollover with respect to
one payment in a series of periodic payments will apply to all
subsequent payments in the series provided that such election with
regard to subsequent payments may be changed in writing by the
employee at any time
(iii)in equal, or substantially equal, installments not extending beyond
the life expectancy of the Employee; or (iv) in equal, or substantially
equal, installments not extending beyond the life expectancy of the joint
survivor
expectancy of the Employee and the Employee's spouse; or
(v) any combination of the above.
(b) The Employee may request that the Custodian make the payments
monthly, quarterly, semiannually, or annually. At the request of an
Employee, the Custodian may institute a program to automatically make
distributions over the period selected by the Employee, provided that
the request meets the guidelines established by the Custodian for
such periodic distributions. The Custodian shall reinvest any
dividends or capital gains distributions on the shares remaining in
the Account in the Princor Fund Shares in the Account. In the absence
of such direction, the Custodian may distribute the assets under any
method in accordance with the minimum distribution requirements
described in paragraph 6.7.(c) If the assets of the Custodial Account
are invested in more than one Princor Fund, any request for a
distribution must specify which Princor Fund Shares are to be
redeemed in order to make the distribution. For distributions
described in paragraph 6.7., if no prior designation has been made,
the distribution shall be made by redeeming the Princor Fund Shares
in a pro rata manner.
6.4 Distribution of Excess Contributions. In the event that the Employee
notifies the Custodian in writing that the Employer has made an excess
contribution on behalf of the Employee (as defined in ss.4973 of the
Code), the Custodian shall distribute, as soon as possible after receiving
the notice, an amount in cash or in kind, as the Employee shall elect,
equal to the excess contribution (with earnings received on those excess
contributions to the date of distribution) less any reasonable
administrative charges attributable to those amounts or to the
distribution.
6.5 Timing of Distributions. Unless otherwise specified in this Agreement,
distributions will normally commence within 30 days after the employee
notifies the Custodian in a form acceptable to the Custodian, that the
Employee is entitled to distributions pursuant to Paragraph 6.1. Prior to
the commencement of distributions the Employee may, if agreed to by the
Custodian, make an irrevocable election to have the commencement of
distributions deferred to a fixed future date.
6.6 Early Distributions. The Internal Revenue Service may assess a premature
penalty tax under ss.72(t) of the Code equal to 10% of the taxable amount
distributed to an Employee, except for the following types of
distributions:
(i) a distribution eligible for rollover treatment, if the Employee
rolls the money over to an Individual Retirement Account within 60
days of receipt; or
(ii) distributions on account of the death, or permanent disability as
defined in ss.72(m)(7) of the Code of the participant; or
(iii)distributions used to pay certain tax deductible medical expenses,
to the extent allowed under ss.72(t)(2)(B) and ss.213 of the Code; or
(iv) distributions after termination of service taken in a series of
similar periodic payments over the life expectancy of the Employee,
or joint life expectancy of the Employee and spouse, to the extent
allowed by ss.72(t)(2)(A)(iv) and ss.72(t)(3)(B) of the Code; or
(v) distributions made after the Employee attains age 55 and separates
from service on account of Early Retirement to the extent permitted
under ss.72(t)(2)(A)(v) of the Code; or
(vi) a distribution taken after the employee attains age 59 1/2.
6.7 Required Distributions.
(a) Distributions from the Account must comply with the minimum
distribution requirements of ss.403(b)(10) and ss.401(a)(9) of the Code
and the regulations thereunder. Failure to commence distributions, or to
satisfy the annual minimum distribution rules of ss.403(b)(10) of the Code
will result in an annual penalty tax equal to 50% of the amount produced
by subtracting the amount distributed, if any, from the required minimum
distribution. (b) Distributions shall commence not later than April 1,
following the calendar year in which the Employee attains age 70 1/2 (the
"Required Beginning Date"). The minimum amount to be distributed each year
(commencing with the Required Beginning Date and each subsequent year)
must be at least an amount equal to the quotient obtained by dividing the
entire amount of the Custodial Account at the time the distribution is
made (expressed in either dollars or shares) by the life expectancy and
last survivor expectancy of the Employee and the Employee's designated
Beneficiary (whichever is applicable). For determining such life
expectancy periods, the expected return multiples in ss.1.72-9 of the
regulations or the Internal Revenue Service, as amended, shall be used.
Such period shall be determined either (i) only once, at the time the
Employee first requests such distribution, or (ii) periodically, in a
consistent manner, provided, however, that the life expectancy of a
nonspouse beneficiary may not be recalculated.
6.8 Payments Upon Death of Employee. In the event an Employee dies before the
distribution of the Employee's benefits has commenced or before such
distribution has been completed, then the amount credited to the Custodial
Account shall be distributed to the Employee's Beneficiaries. Upon the
death of the Employee, the following distribution provisions shall take
effect: (a) If the Employee dies after distribution of his interest has
commenced, the remaining portion of such interest will
continue to be distributed at least as rapidly as under the method of
distribution being used prior to the Employee's death.
(b) If the Employee dies before distribution of the Custodial Account
commences, the Employee's interest will be distributed no later than
5 years after the Employee's death except to the extent that an
election is made to receive distributions in accordance with (i) or
(ii) below:
(i) If any portion of the Employee's interest is payable to a
Beneficiary, distribution may be made in substantially equal
installments over the life or life expectancy of the designated
Beneficiary commencing no later than 1 year after the Employee's
death;
(ii) If the Beneficiary is the Employee's surviving spouse, the date
distribution are required to begin in accordance with (i) above shall
not be earlier than the date on which the Employee would have
attained age 70 1/2, and, if the spouse dies before payments begin,
subsequent distributions shall be made as if the spouse had been the
Employee.
(c) For purposes of (b) above, payments will be calculated by use of the
return multiples specified in ss.1.72-9 of the regulations of the
Internal Revenue Service. Life expectancy of a surviving spouse may
be recalculated annually. In the case of any other Beneficiary, such
life expectancy will be calculated at the time payment first
commences without further recalculation.
(d) For purposes of this Paragraph 6.8, any amount paid to a child of the
Employee will be treated as if it had been paid to the surviving
spouse if the amount becomes payable to the surviving spouse when the
child reaches the age of majority.
(e) The Employee may change the designation of a Beneficiary at any time
by executing a form acceptable to the Custodian. If the Employee
fails to execute and file such form or if the Beneficiary or
Beneficiaries designated in such form fail to survive the Employee,
such amounts shall be paid to the Employee's estate.
(f) If the Employee's Beneficiary dies while receiving payments from the
Account, the Custodian shall pay any remaining payments to the estate
of the Employee's Beneficiary.
(g) Before making any distribution in the event of the Employee's death,
or the death of the Employee's Beneficiary, the Beneficiary shall
furnish the Custodian with any and all certificates, tax waivers,
proof of death and other documents requested by it in its discretion.
6.9 Inalienability of Benefits.
(a) The Employee shall not have the right to assign, transfer, or pledge
any interest in the Custodial Account and the Employee's interest in
the Custodial Account shall not be subject to the claims of the
Employee's creditors.
(b) No benefit payment or other interest in the Custodial Account will be
subject to assignment or alienation, either voluntary or involuntary.
This subparagraph shall also apply to the creation, assignment, or
recognition of a right to any benefit payable with respect to an
Employee pursuant to a domestic relations order, unless such order is
in a form acceptable to the Custodian.
Article VII - Rights and Duties Of The Custodian
7.1 Expenses. The Custodian shall use the assets in the Custodial Account to
pay any income taxes or other taxes of any kind whatsoever directly or
indirectly levied or assessed upon the Custodial Account, any
administrative expenses incurred by the Custodian in the performance of
its duties, including the cost of submitting reports which may be required
under Paragraphs 7.4 and 7.5, and any fees for legal services rendered to
the Custodian. When such expenses apply to more than one Custodial Account
(including Custodial Accounts established for other Employees or other
Employers), the Custodian shall apportion the expenses between the
Custodial Accounts in proportion to the assets in each Custodial Account.
7.2 Limitations On Custodian's Duties. The Custodian has no duty to take any
action other than those specified in this Agreement with respect to the
Custodial Account unless the Employee furnishes the Custodian with
instructions in proper form and the Custodian specifically agrees to take
such action. The Employee cannot require the Custodian to defend or engage
in any suit with respect to the Custodial Account unless the Custodian
shall have first agreed in writing to do so and the Employee fully
indemnifies the Custodian for that action. The Custodian may conclusively
rely upon and shall be protected in following any order from the Employee,
or an Employer, or any other notice, request, consent, certificate, or
other instrument or paper which appear genuine, so long as the Custodian
acts in good faith, in taking or omitting to take any other action. The
Custodian may retain assets in cash or cash balances pending receipt of
proper investment instructions and shall not be liable for interest on any
such cash or cash balance. The Custodian shall have no obligation to
demand or require that the Employer make any contributions on behalf of an
Employee to a Custodial Account.
7.3 Enforcement Of Agreement. The Employee shall have the sole authority to
enforce this Agreement on his or her own behalf and on behalf of any other
persons having or claiming any interest in the Custodial Account by virtue
of this Agreement.
7.4 Records and Reports. The Custodian shall keep accurate and detailed
records of all receipts, investments, disbursements, and other
transactions it performs under the terms of this Agreement. The Custodian
shall file with the Employee statements reflecting the receipts,
disbursements, and other transactions affecting the Custodial Account.
Upon the expiration of forty-five days after furnishing such statement to
the Employee, the Employee constructively releases and discharges the
Custodian from all liability and accountability to anyone with respect to
its acts, actions, duties, obligations, or responsibilities as shown in or
reflected by the statement, except with respect to any such acts or
transactions as to which the Employee shall have filed written objections
with the Custodian within the forty five day period.
7.5 Government Reports. The Employer, the Employee, the Custodian, and the
Sponsor shall furnish to one another such information relevant to the
Agreement and Custodial Account required by the Code or governmental
regulations. The Custodian shall file with the Internal Revenue Service
such returns and other information concerning the Custodial Account which
the Code requires it to file, but the Custodian has no obligation to
prepare, file, or provide any other reports except those expressly
required by this Agreement.
7.6 Administration of the Plan. The Custodian has no obligation to administer
any or all of the Employer's retirement plan, or to take any actions on
behalf of that plan.
7.7 Delegation Of Duties. The Custodian may delegate any of its duties
under this Agreement to any of it's subsidiaries, including the Sponsor.
Any delegation of duties shall not relieve the Custodian of its
obligations under this Agreement.
Article VIII - Resignation Or Removal Of Custodian
8.1 Resignation Or Removal Of Custodian. The Custodian may resign at any time
upon 30 days notice in writing to the Employee. The Sponsor may remove the
Custodian upon 30 days notice to the Custodian and the Employee. In
addition, the Employee shall remove the Custodian and substitute a
successor custodian if the Employee receives notification from the
Commissioner of the Internal Revenue Service that it requires the
substitution because (i) the Custodian has failed to comply with
ss.1.401-12(n) of the regulations of the Internal Revenue Service or (ii)
has not kept the records or made the returns or rendered the statements
required by the forms and regulations issued by the Internal Revenue
Service. Upon such resignation or removal, the Employee or the Sponsor
shall appoint a successor Custodian which shall meet the requirements of
the Code. Upon receipt by the Custodian of written acceptance of such
appointment by the successor Custodian, the Custodian shall transfer and
pay over to such successor Custodian the assets of the Custodial Account
and all records or copies thereof pertaining to the Custodial Account. The
Custodian may reserve such sum of money as it may deem advisable for
payment of all its fees, compensation, costs and expenses, or for payment
of any other liabilities consisting of a charge on or against the assets
of the Custodial Account. The Custodian shall have a lien on the assets of
the Custodial Account to the extent of any such charges.
8.2 Failure To Appoint Successor Custodian. If within 30 days after the
effective date of the Custodian's resignation or removal a qualified
successor to the Custodian has not been appointed or has not accepted such
appointment, the Custodian shall either appoint such successor itself or
terminate this Agreement. Upon termination the Custodian shall distribute
all assets in the Custodial Account in a manner that meets the
requirements of Paragraph 6.2(b). The Custodian has no obligations arising
from the performance of any successor to its duties under this Agreement.
Article IX - Miscellaneous
9.1 Notices and Instructions. For a notice to the Employee or other party to
take effect. the Custodian must send it by first-class mail to the last
address on the Custodian's records. The Employee shall also send any
notice to the Custodian pursuant to this Agreement by first-class mail.
The Employee must send all instructions under this Agreement in writing to
the Custodian using a form acceptable to the Custodian. unless the
Custodian indicates that instructions using some other Tom of
communications will be acceptable to give certain notices. The Custodian
shall have no obligation to act upon an instruction not in an acceptable
form.
9.2 Necessity of Qualification. The parties establish this Agreement with the
intent that it shall meet the requirements of 403(b)(7) of the Code, as
amended. Notwithstanding any other provisions contained in this Agreement,
if the Internal Revenue Service determines that because of some inadequacy
in the provisions of this Agreement it initially fails to meet those
requirements, the Custodian shall distribute all of the assets of the
Custodial Account to the Employee or shall transfer them in accordance
with Paragraph 4.7 and this Agreement shall terminate unless the parties
can remove the inadequacy by a retroactive amendment. The Sponsor shall
notify the Custodian in writing of any determination made with respect to
the status of the Agreement. The Employee understands the necessity of
seeking independent legal counsel with respect to the effect of
establishing this Agreement and further understands that the Internal
Revenue Service has not approved this Agreement and that therefore neither
the Custodian nor the Sponsor, nor anyone acting on behalf of the
Custodian or Sponsor. makes any representations as to the tax
qualification or effect of the Agreement.
9.3 Custodian's Fee Schedule. The Custodian may charge a setup fee in the
Custodial Account's first year and a fee for the maintenance of the
Custodial Account. The Custodian shall charge all fees with respect to an
Employee' s Custodial Account to that Custodial Account. The Employee
authorizes the Custodian to redeem sufficient Princor Fund Shares held in
the Custodial Account to pay any fees and to transfer the proceeds to
itself. Unless otherwise specified by the Employee, if the Account has
shares of more than one Princor Fund, they shall be redeemed pro rat a.
The Custodian may amend that fee schedule after 30 days written notice to
the Employee. The Custodian may assess additional charges for other
nonstandard services performed by the Custodian.
9.4 Assignability. The Employee may not assign any rights under this Agreement
without the prior written consent of the Custodian and the Sponsor.
9.5 Governing Law. This Agreement shall be construed in accordance with the
laws of the State of lowa.
9.6 Interpretation. This Agreement shall be interpreted in manner so that it
meets the requirements of ss.403(b)(7) of the Code. It the terms of this
Agreement and the requirements of ss.403(b)(7) of the Code conflict, the
requirements of ss.403(b)(7) of the Code shall be deemed to be part of
this Agreement and shall supersede any other provision in this Agreement.
Article X - Amendment And Termination
10.1 Amendment. The Employee by the establishment of the Custodial Account
delegates to the Custodian the power to make any retroactive or
prospective amendment to this Agreement necessary to conform the Agreement
to the requirements of any law regulating the Custodian, the Sponsor, the
Employer, the Employer' splay, or the Employee. The Employee shall be
deemed to have consented to such amendments. For other proposed
amendments, the Custodian and the Employee must agree to the amendment.
The Custodian shall notify the Employee of the proposed amendment in
writing. If the Employee does not object to the amendment within 30 days,
the amendment shall become effective. No amendment may allow any part of
the Custodial Account to be distributed except as described in Paragraph
6.2(b) of this Agreement nor shall any amendment increase the duties of
the Custodian without its consent. Neither the Custodian nor the Sponsor
shall have any affirmative obligation lo amend the Agreement for any
purpose. The Sponsor shall receive written notice of any amendments to
this Agreement.
10.2 Termination. This Agreement shall terminate upon the complete distribution
of the Custodial Account to the Employee or an Alternate Funding Agent.
The Custodian shall have the right to terminate this Agreement upon 30
days prior written notice to the Employee. In such event, the Custodian
shall transfer the assets of the Custodial Account in accordance with
Paragraph 4.7. However, if the Employee does not designate an appropriate
person to receive such a transfer within 30 days after a notice, then the
Custodian shall distribute the assets in the Custodial Account in any
manner that meets the requirements of Paragraph 6.2(b).
PRINCIPAL SMALLCAP FUND, INC.
DISTRIBUTION AND SHAREHOLDER SERVICING
PLAN AND AGREEMENT
CLASS A SHARES
PLAN AND AGREEMENT made as of the day of , 1997, by and between PRINCIPAL
SMALLCAP FUND, INC., a Maryland corporation (the "Fund"), and PRINCOR FINANCIAL
SERVICES CORPORATION, an Iowa corporation (the "Underwriter").
WHEREAS, Rule 12b-1 under the Investment Company Act of 1940 (the "Act"),
provides that a registered open-end management investment company may
participate in financing the distribution of securities of which it is the
issuer; and
WHEREAS, any payments made by the Fund in accordance with Rule 12b-1 must
be made pursuant to a written plan describing all material aspects of the
proposed financing of distribution; and
WHEREAS, the Underwriter acts as the underwriter for the Fund; and various
broker-dealers (the "Dealers"), including the Underwriter, sell shares of the
Fund and provide services to existing shareholders; and
WHEREAS, the Board of Directors of the Fund has determined that the Fund
should make direct payments to the Underwriter for transmission to Dealers
(including the Underwriter) in connection with selling Class R shares of the
Fund and the rendering of services to Class R shareholders and that such payment
should be separate from the investment advisory and management fee paid to
Princor Management Corporation; and
WHEREAS, the Board of Directors of the Fund has determined that there is a
reasonable likelihood that the adoption of the Plan will benefit the Fund and
its Class R shareholders;
NOW, THEREFORE, the following shall constitute the written Plan pursuant
to which the Fund shall participate in financing the distribution of its Class R
shares.
Section 1. The Fund is hereby authorized to make payments to the
Underwriter from that portion of its assets attributable to its Class R shares
for the purpose of reimbursing the Underwriter for expenses it incurs in
connection with sales of the Class R shares and to compensate the Underwriter
and other selling Dealers for (i) providing shareholder services to existing
Class R shareholders, including without limitation, furnishing information as to
the status of shareholder accounts, requests, responding to telephone and
written inquiries, and assisting shareholders with tax information and (ii)
rendering assistance in the distribution and promotion of the sale of Class R
shares to the public.
In consideration of the activities described above, the Fund shall pay the
Underwriter a fee after the end of each month at the annual rate of 0.75% of the
daily net asset value of the Fund's Class R shares. The Underwriter shall (A)
retain such amounts as are appropriate to (i) reimburse the Underwriter for
expenses it incurs in connection with sales of Class R shares, and (ii)
compensate the Underwriter for providing services and rendering assistance in
the distribution and promotion of the sale of Class R shares to the public, and
(B) remit such amounts as are appropriate to other Dealers in recognition of
their services and assistance as described above in the first paragraph of this
Section 1; provided however, the Underwriter shall not retain for itself or
remit to selling Dealers in recognition of the services provided to shareholders
an amount in excess of 0.25% annually of the daily net asset value of the Fund's
Class R shares. If the aggregate payments received by the Underwriter under this
Plan in any fiscal year exceed the expenditures made by the Underwriter in such
fiscal year for these purposes, the Underwriter shall promptly reimburse the
Fund for the amount of such excess.
Section 2. This Plan shall not take effect until it has been approved (1)
by a vote of at least a majority (as defined in the Act) of the outstanding
Class R shares of the Fund and (2) by votes of the majority of both (i) the
Board of Directors of the Fund, and (ii) those Directors of the Fund who, except
for their positions as Directors of the Fund, are not "interested persons" (as
defined in the Act) of the Fund and who have no direct or indirect financial
interest in the operation of this Plan or any agreements related to this Plan
(the "Disinterested Directors"), cast in person at a meeting called for the
purpose of voting on this Plan or such agreements.
Section 3. Unless sooner terminated pursuant to Section 5, this Plan shall
continue in effect for a period of twelve months from the date it takes effect
and thereafter shall continue in effect so long as such continuance is
specifically approved at least annually in the manner provided for approval of
this Plan in Section 2(2).
Section 4. A representative of the Underwriter shall provide to the Board
and the Board shall review at least quarterly a written report of the amounts so
expended and the purposes for which such expenditures were made.
Section 5. This Plan may be terminated at any time by vote of a majority
of the Disinterested Directors, or by vote of a majority (as defined in the Act)
of the Fund's outstanding Class R shares.
Section 6. Any agreement of the Fund related to this Plan shall be in
writing and shall provide:
A. That such agreement may be terminated at any time, without payment of
any penalty, by vote of a majority of the members of the Board of
Directors of the Fund who are not interested persons of the Fund and
have no direct or indirect financial interest in the operation of the
Plan or in any agreements related to the Plan or by a vote of a
majority (as defined in the Investment Company Act of 1940) of the
Fund's outstanding Class R shares on not more than sixty days'
written notice to any other party to the agreement; and
B. That such agreement shall terminate automatically in the event of its
assignment.
Section 7. While the Plan is in effect, the selection and nomination of
Directors who are not interested persons (as defined in the Act) of the Fund
shall be committed to the discretion of the Directors who are not interested
persons.
Section 8. The Fund shall preserve copies of this Plan and any related
agreements and all reports made pursuant to Paragraph 4, for a period of not
less than six years from the date of the Plan, or the agreements or such report,
as the case may be, the first two years in an easily accessible place.
Section 9. This Plan may not be amended to increase materially the amount
of distribution expenses provided for in Section 1 hereof unless such amendment
is approved in the manner provided for initial approval in Section 2 hereof and
no other material amendment to this Plan shall be made unless approved in the
manner provided for initial approval in Section 2(2) hereof.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Plan as of the first date written above.
PRINCIPAL SMALLCAP FUND, INC.
By: _________________________________________
A. S. Filean, Vice President
PRINCOR FINANCIAL SERVICES
CORPORATION
By: _________________________________________
S. L. Jones, President
PRINCIPAL SMALLCAP FUND, INC.
DISTRIBUTION AND SHAREHOLDER SERVICING
PLAN AND AGREEMENT
CLASS B SHARES
PLAN AND AGREEMENT made as of the day of , 1997, by and between PRINCIPAL
SMALLCAP FUND, INC., a Maryland corporation (the "Fund"), and PRINCOR FINANCIAL
SERVICES CORPORATION, an Iowa corporation (the "Underwriter").
WHEREAS, Rule 12b-1 under the Investment Company Act of 1940 (the "Act"),
provides that a registered open-end management investment company may
participate in financing the distribution of securities of which it is the
issuer; and
WHEREAS, any payments made by the Fund in accordance with Rule 12b-1 must
be made pursuant to a written plan describing all material aspects of the
proposed financing of distribution; and
WHEREAS, the Underwriter acts as the underwriter for the Fund; and various
broker-dealers (the "Dealers"), including the Underwriter, sell shares of the
Fund and provide services to existing shareholders; and
WHEREAS, the Board of Directors of the Fund has determined that the Fund
should make direct payments to the Underwriter for transmission to Dealers
(including the Underwriter) in connection with selling Class R shares of the
Fund and the rendering of services to Class R shareholders and that such payment
should be separate from the investment advisory and management fee paid to
Princor Management Corporation; and
WHEREAS, the Board of Directors of the Fund has determined that there is a
reasonable likelihood that the adoption of the Plan will benefit the Fund and
its Class R shareholders;
NOW, THEREFORE, the following shall constitute the written Plan pursuant
to which the Fund shall participate in financing the distribution of its Class R
shares.
Section 1. The Fund is hereby authorized to make payments to the
Underwriter from that portion of its assets attributable to its Class R shares
for the purpose of reimbursing the Underwriter for expenses it incurs in
connection with sales of the Class R shares and to compensate the Underwriter
and other selling Dealers for (i) providing shareholder services to existing
Class R shareholders, including without limitation, furnishing information as to
the status of shareholder accounts, requests, responding to telephone and
written inquiries, and assisting shareholders with tax information and (ii)
rendering assistance in the distribution and promotion of the sale of Class R
shares to the public.
In consideration of the activities described above, the Fund shall pay the
Underwriter a fee after the end of each month at the annual rate of 0.75% of the
daily net asset value of the Fund's Class R shares. The Underwriter shall (A)
retain such amounts as are appropriate to (i) reimburse the Underwriter for
expenses it incurs in connection with sales of Class R shares, and (ii)
compensate the Underwriter for providing services and rendering assistance in
the distribution and promotion of the sale of Class R shares to the public, and
(B) remit such amounts as are appropriate to other Dealers in recognition of
their services and assistance as described above in the first paragraph of this
Section 1; provided however, the Underwriter shall not retain for itself or
remit to selling Dealers in recognition of the services provided to shareholders
an amount in excess of 0.25% annually of the daily net asset value of the Fund's
Class R shares. If the aggregate payments received by the Underwriter under this
Plan in any fiscal year exceed the expenditures made by the Underwriter in such
fiscal year for these purposes, the Underwriter shall promptly reimburse the
Fund for the amount of such excess.
Section 2. This Plan shall not take effect until it has been approved (1)
by a vote of at least a majority (as defined in the Act) of the outstanding
Class R shares of the Fund and (2) by votes of the majority of both (i) the
Board of Directors of the Fund, and (ii) those Directors of the Fund who, except
for their positions as Directors of the Fund, are not "interested persons" (as
defined in the Act) of the Fund and who have no direct or indirect financial
interest in the operation of this Plan or any agreements related to this Plan
(the "Disinterested Directors"), cast in person at a meeting called for the
purpose of voting on this Plan or such agreements.
Section 3. Unless sooner terminated pursuant to Section 5, this Plan shall
continue in effect for a period of twelve months from the date it takes effect
and thereafter shall continue in effect so long as such continuance is
specifically approved at least annually in the manner provided for approval of
this Plan in Section 2(2).
Section 4. A representative of the Underwriter shall provide to the Board
and the Board shall review at least quarterly a written report of the amounts so
expended and the purposes for which such expenditures were made.
Section 5. This Plan may be terminated at any time by vote of a majority
of the Disinterested Directors, or by vote of a majority (as defined in the Act)
of the Fund's outstanding Class R shares.
Section 6. Any agreement of the Fund related to this Plan shall be in
writing and shall provide:
A. That such agreement may be terminated at any time, without payment of
any penalty, by vote of a majority of the members of the Board of
Directors of the Fund who are not interested persons of the Fund and
have no direct or indirect financial interest in the operation of the
Plan or in any agreements related to the Plan or by a vote of a
majority (as defined in the Investment Company Act of 1940) of the
Fund's outstanding Class R shares on not more than sixty days'
written notice to any other party to the agreement; and
B. That such agreement shall terminate automatically in the event of its
assignment.
Section 7. While the Plan is in effect, the selection and nomination of
Directors who are not interested persons (as defined in the Act) of the Fund
shall be committed to the discretion of the Directors who are not interested
persons.
Section 8. The Fund shall preserve copies of this Plan and any related
agreements and all reports made pursuant to Paragraph 4, for a period of not
less than six years from the date of the Plan, or the agreements or such report,
as the case may be, the first two years in an easily accessible place.
Section 9. This Plan may not be amended to increase materially the amount
of distribution expenses provided for in Section 1 hereof unless such amendment
is approved in the manner provided for initial approval in Section 2 hereof and
no other material amendment to this Plan shall be made unless approved in the
manner provided for initial approval in Section 2(2) hereof.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Plan as of the first date written above.
PRINCIPAL SMALLCAP FUND, INC.
By: _________________________________________
A. S. Filean, Vice President
PRINCOR FINANCIAL SERVICES
CORPORATION
By: _________________________________________
S. L. Jones, President
PRINCIPAL SMALLCAP FUND, INC.
DISTRIBUTION AND SHAREHOLDER SERVICING
PLAN AND AGREEMENT
CLASS R SHARES
PLAN AND AGREEMENT made as of the day of , 1997, by and between PRINCIPAL
SMALLCAP FUND, INC., a Maryland corporation (the "Fund"), and PRINCOR FINANCIAL
SERVICES CORPORATION, an Iowa corporation (the "Underwriter").
WHEREAS, Rule 12b-1 under the Investment Company Act of 1940 (the "Act"),
provides that a registered open-end management investment company may
participate in financing the distribution of securities of which it is the
issuer; and
WHEREAS, any payments made by the Fund in accordance with Rule 12b-1 must
be made pursuant to a written plan describing all material aspects of the
proposed financing of distribution; and
WHEREAS, the Underwriter acts as the underwriter for the Fund; and various
broker-dealers (the "Dealers"), including the Underwriter, sell shares of the
Fund and provide services to existing shareholders; and
WHEREAS, the Board of Directors of the Fund has determined that the Fund
should make direct payments to the Underwriter for transmission to Dealers
(including the Underwriter) in connection with selling Class R shares of the
Fund and the rendering of services to Class R shareholders and that such payment
should be separate from the investment advisory and management fee paid to
Princor Management Corporation; and
WHEREAS, the Board of Directors of the Fund has determined that there is a
reasonable likelihood that the adoption of the Plan will benefit the Fund and
its Class R shareholders;
NOW, THEREFORE, the following shall constitute the written Plan pursuant
to which the Fund shall participate in financing the distribution of its Class R
shares.
Section 1. The Fund is hereby authorized to make payments to the
Underwriter from that portion of its assets attributable to its Class R shares
for the purpose of reimbursing the Underwriter for expenses it incurs in
connection with sales of the Class R shares and to compensate the Underwriter
and other selling Dealers for (i) providing shareholder services to existing
Class R shareholders, including without limitation, furnishing information as to
the status of shareholder accounts, requests, responding to telephone and
written inquiries, and assisting shareholders with tax information and (ii)
rendering assistance in the distribution and promotion of the sale of Class R
shares to the public.
In consideration of the activities described above, the Fund shall pay the
Underwriter a fee after the end of each month at the annual rate of 0.75% of the
daily net asset value of the Fund's Class R shares. The Underwriter shall (A)
retain such amounts as are appropriate to (i) reimburse the Underwriter for
expenses it incurs in connection with sales of Class R shares, and (ii)
compensate the Underwriter for providing services and rendering assistance in
the distribution and promotion of the sale of Class R shares to the public, and
(B) remit such amounts as are appropriate to other Dealers in recognition of
their services and assistance as described above in the first paragraph of this
Section 1; provided however, the Underwriter shall not retain for itself or
remit to selling Dealers in recognition of the services provided to shareholders
an amount in excess of 0.25% annually of the daily net asset value of the Fund's
Class R shares. If the aggregate payments received by the Underwriter under this
Plan in any fiscal year exceed the expenditures made by the Underwriter in such
fiscal year for these purposes, the Underwriter shall promptly reimburse the
Fund for the amount of such excess.
Section 2. This Plan shall not take effect until it has been approved (1)
by a vote of at least a majority (as defined in the Act) of the outstanding
Class R shares of the Fund and (2) by votes of the majority of both (i) the
Board of Directors of the Fund, and (ii) those Directors of the Fund who, except
for their positions as Directors of the Fund, are not "interested persons" (as
defined in the Act) of the Fund and who have no direct or indirect financial
interest in the operation of this Plan or any agreements related to this Plan
(the "Disinterested Directors"), cast in person at a meeting called for the
purpose of voting on this Plan or such agreements.
Section 3. Unless sooner terminated pursuant to Section 5, this Plan shall
continue in effect for a period of twelve months from the date it takes effect
and thereafter shall continue in effect so long as such continuance is
specifically approved at least annually in the manner provided for approval of
this Plan in Section 2(2).
Section 4. A representative of the Underwriter shall provide to the Board
and the Board shall review at least quarterly a written report of the amounts so
expended and the purposes for which such expenditures were made.
Section 5. This Plan may be terminated at any time by vote of a majority
of the Disinterested Directors, or by vote of a majority (as defined in the Act)
of the Fund's outstanding Class R shares.
Section 6. Any agreement of the Fund related to this Plan shall be in
writing and shall provide:
A. That such agreement may be terminated at any time, without payment of
any penalty, by vote of a majority of the members of the Board of
Directors of the Fund who are not interested persons of the Fund and
have no direct or indirect financial interest in the operation of the
Plan or in any agreements related to the Plan or by a vote of a
majority (as defined in the Investment Company Act of 1940) of the
Fund's outstanding Class R shares on not more than sixty days'
written notice to any other party to the agreement; and
B. That such agreement shall terminate automatically in the event of its
assignment.
Section 7. While the Plan is in effect, the selection and nomination of
Directors who are not interested persons (as defined in the Act) of the Fund
shall be committed to the discretion of the Directors who are not interested
persons.
Section 8. The Fund shall preserve copies of this Plan and any related
agreements and all reports made pursuant to Paragraph 4, for a period of not
less than six years from the date of the Plan, or the agreements or such report,
as the case may be, the first two years in an easily accessible place.
Section 9. This Plan may not be amended to increase materially the amount
of distribution expenses provided for in Section 1 hereof unless such amendment
is approved in the manner provided for initial approval in Section 2 hereof and
no other material amendment to this Plan shall be made unless approved in the
manner provided for initial approval in Section 2(2) hereof.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Plan as of the first date written above.
PRINCIPAL SMALLCAP FUND, INC.
By: _________________________________
A. S. Filean, Vice President
PRINCOR FINANCIAL SERVICES
CORPORATION
By: _________________________________
S. L. Jones, President
PRINCOR FAMILY OF MUTUAL FUNDS
MULTIPLE CLASS DISTRIBUTION PLAN
Princor Financial Services Corporation ("The Distributor"), Princor Management
Corporation ("Adviser") and each of the funds listed on Exhibit 1 (the "Fund or
Funds") seek to allow each of the Funds to issue multiple separate classes of
shares under this Multiple Class Distribution Plan (the "Plan") in reliance upon
Rule 18f-3 of the Investment Company Act of 1940.
This Plan enables each Fund to offer certain investors the option of purchasing
shares subject to: (i) a conventional front-end sales charge ("Class A shares")
or (ii) a contingent deferred sales charge ("Class B shares"). The Plan also
permits each Fund, except Princor Tax-Exempt Bond Fund, Inc. and Princor Tax
Exempt Cash Management Fund, Inc., to offer distributees of retirement plans
administered by Principal Mutual Life Insurance Company a class of shares that
is not subject to either a front-end or contingent deferred sales charge ("Class
R shares"). Each Class represents an interest in the same portfolio of
investments of a Fund.
SALES CHARGES
Class A shares
Class A shares of the Money Market Funds are sold to the public at net
asset value; no sales charge applies to purchases of the Money Market Funds.
Class A shares of the Growth-Oriented and Income-Oriented Funds, except the
Limited Term Bond Fund, are sold to the public at the net asset value plus a
sales charge which ranges from a high 4.75% to a low of 0% of the offering price
(equivalent to a range of 4.99% to 0% of the net amount invested) according to
the schedule below. Class A shares of the Limited Term Bond Fund are sold to the
public at the net asset value plus a sales charge which ranges from a high of
1.50% to a low of 0% of the offering price according to the schedule below. An
investor who purchases $1 million or more of Class A shares does not pay a sales
charge at the time of purchase. However, a redemption of such shares occurring
within 18 months from the date of purchase will be subject to a contingent
deferred sales charge ("CDSC") at the rate of .75% (.25% for the Limited Term
Bond Fund) of the lesser of the value of the shares redeemed (exclusive of
reinvested dividend and capital gain distributions) or the total cost of such
shares. Shares subject to the CDSC which are exchanged into another Princor Fund
will continue to be subject to the CDSC until the original 18 month period
expires. However, no CDSC is payable with respect to the redemptions of Class A
shares to fund a Princor 401(a) or Princor 401(k) retirement plan, except
redemptions resulting from the termination of the plan or transfer of plan
assets. Certain purchases of Class A shares qualify for reduced sales charges.
<TABLE>
<CAPTION>
Sales Charge for
All Funds Except Sales Charge for Dealer Allowance as
Limited Term Bond Fund Limited Term Bond Fund % of Offering Price
Sales Charge as % of: Sales Charge as % of: All Funds
Offering Amount Offering Amount Except Limited Term Limited Term
Amount of Purchase Price Invested Price Invested Bond Fund Bond Fund
<S> <C> <C> <C> <C> <C> <C>
Less than $50,000 4.75% 4.99% 1.50% 1.52% 4.00% 1.25%
$50,000 but less than $100,000 4.25% 4.44% 1.25% 1.27% 3.75% 1.00%
$100,000 but less than $250,000 3.75% 3.90% 1.00% 1.01% 3.25% .75%
$250,000 but less than $500,000 2.50% 2.56% 0.75% 0.76% 2.00% .50%
$500,000 but less than $1,000,000 1.50% 1.52% 0.50% 0.50% 1.25% .25%
$1,000,000 or more No Sales Charge 0% No Sales Charge 0% .75% .25%
</TABLE>
Class B shares
Class B shares are sold without an initial sales charge, although a CDSC
will be imposed on shares redeemed within six years of purchase. The following
types of shares may be redeemed without charge at any time: (i) shares acquired
by reinvestment of distributions and (ii) shares otherwise exempt from the CDSC,
as described below. Subject to the foregoing exclusions, the amount of the
charge is determined as a percentage of the lesser of the current market value
or the cost of the shares being redeemed. Therefore, when a share is redeemed,
any increase in its value above the initial purchase price is not subject to any
CDSC. The amount of the CDSC will depend on the number of years shares have been
owned and the dollar amount being redeemed, according to the following table:
<TABLE>
<CAPTION>
Contingent Deferred Sales Charge as a
Percentage of Dollar Amount Subject to Charge
Years Since Purchase All Funds Except
Payments Made Limited Term Bond Fund Limited Term Bond Fund
<S> <C> <C>
2 years or less 4.0% 1.25%
more than 2 years, up to 4 years 3.0% 0.75%
more than 4 years, up to 5 years 2.0% 0.50%
more than 5 years, up to 6 years 1.0% 0.25%
more than 6 years None None
</TABLE>
In determining whether a CDSC is payable on any redemption, the Fund will
first redeem shares not subject to any charge, and then shares held longest
during the six-year period.
The CDSC will be waived on redemptions of Class B shares in connection
with the following types of transactions:
a. Shares redeemed due to a shareholder's death;
b. Shares redeemed due to the shareholder's disability, as defined in
the Internal Revenue Code of 1986 (the "Code"), as amended;
c. Shares redeemed from retirement plans to satisfy minimum
distribution rules under the Code;
d. Shares redeemed to pay surrender charges;
e. Shares redeemed to pay retirement plan fees;
f. Shares redeemed involuntarily from small balance accounts (values
of less than $300);
g. Shares redeemed through a systematic withdrawal plan that permits
up to 10% of the value of a shareholder's Class B shares of a
particular Fund on the last business day of December of each year
to be withdrawn automatically in equal monthly installments
throughout the year;
h. Shares redeemed from a retirement plan to assure the plan complies
with Sections 401(k), 401(m), 408(k) and 415 of the Code; or
i. Shares redeemed from retirement plans qualified under Section
401(a) of the Code due to the plan participant's death, disability,
retirement or separation from service after attaining age 55.
Class R shares
Class R shares are purchased without an initial sales charge or a
contingent deferred sales charge.
EXPENSE ALLOCATION
The Fund will pay to the distributor a distribution fee pursuant to the Fund's
Rule 12b-1 distribution plan at an annual rate of (i) up to .25% (.15% for
Princor Limited Term Bond Fund, Inc.) of the average daily net asset value of
the Class A shares; (ii) up to 1.00% (.50% for Princor Limited Term Bond Fund,
Inc.) of the average daily net asset value of the Class B shares; and (iii) up
to .75% of the average daily net asset value of Class R shares. For accounting
purposes, the classes of a Fund are identical except that the net asset value
and expenses each class will reflect the Distribution Plan expenses (if any) and
any Class Expenses, as defined below, attributable to the class. "Class
Expenses" are limited to: (i) transfer agency fees, as identified by the Funds'
transfer agent as being attributable to a specific class; (ii) blue sky
registration fees incurred with respect to a class of shares; (iii) Commission
registration fees incurred with respect to a class of shares; (iv) the expenses
of administrative personnel and services as required to provide services to the
shareholders of a specific class (depending on the type of service provided
administrative expenses are allocated to specific classes based on the relative
percentage of shareholder transactions and net asset values compared to the
total of both share classes); (v) litigation or other legal expenses or audit or
other accounting expenses relating solely to one class of shares (vi) Directors'
fees incurred as a result of issues relating to one class of shares; and (vii)
printing and postage expenses related to preparing and distributing materials
such as shareholder reports, prospectuses and proxies to current shareholders of
a given class.
Any additional incremental expenses not specifically identified above that are
subsequently identified and determined to be properly allocated to one class of
shares will not be so allocated unless and until approved by the Funds'
directors. Certain expenses may be allocated differently if their method of
imposition changes; thus, if a Class Expense of a Fund can no longer be
attributed to a class it will be allocated to the Fund as a whole.
The net asset value of all outstanding shares of each class is determined by
dividing the ending total net assets applicable to a specific class by the
number of shares outstanding relating to the class. Expenses are attributable to
each class of shares depending on the nature of the expenditure and are accrued
on a daily basis. These fall into two categories: (1) fund level expenses that
are attributable to each class that are allocated based on net assets at the
beginning of the day (i.e., legal, audit, etc.) and (2) certain class level
expenses that may have a different cost for one class versus the other (i.e.,
12b-1 fees). Because of the additional expenses that will be borne by the Class
B shares and Class R shares, the net income attributable to and the dividends
payable on Class B shares and Class R shares will be lower than the net income
attributable to and the dividends payable on Class A shares.
CONVERSION FEATURES
Class A shares. Class A shares do not convert into any other class of shares at
any time.
Class B shares. Class B shares will automatically convert to Class A shares,
based on relative net asset value on the first business day of the 85th month
after the purchase date. Class B shares acquired by exchange from Class B shares
of another Princor fund will convert into Class A shares based on the time of
the initial purchase. At the same time, a pro rata portion of all shares
purchased through reinvestment of dividends and distributions would convert into
Class A shares, with that portion determined by the ratio that the shareholder's
Class B shares converting into Class A shares bears to the shareholder's total
Class B shares that were not acquired through dividends and distributions. The
conversion of Class B to Class A shares is subject to the continuing
availability of a ruling from the Internal Revenue Service or an opinion of
counsel that such conversions will not constitute taxable events for Federal tax
purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not occur
if such ruling or opinion is not available. In such event, Class B shares would
continue to be subject to higher expenses than Class A shares for an indefinite
period.
Class R shares. Class R shares will automatically convert to Class A shares,
based on relative net asset value, on the first business day of the 49th month
after the purchase date. Class R shares acquired by exchange from Class R shares
of another Princor fund will convert into Class A shares based on the time of
the initial purchase. At the same time, a pro rata portion of all shares
purchased through reinvestment of dividends and distributions would convert into
Class A shares, with that portion determined by the ratio that the shareholder's
Class R shares converting into Class A shares bears to the shareholder's total
Class R shares that were not acquired through dividends and distributions. The
conversion of Class R shares to Class A shares is subject to the continuing
availability of a ruling from the Internal Revenue Service or an opinion of
counsel that such conversions will not constitute taxable events for Federal tax
purposes. There can be no assurance that such ruling or opinion is not
available. In such event, Class R shares would continue to be subject to higher
expenses than Class A shares for an indefinite period.
EXCHANGE FEATURES
Class A shares. Class A shares of any Fund (except the Money Market Funds and
the Short Term Bond Fund) may be exchanged at the net asset value for Class A
shares of any other Princor Fund at any time.
Class A shares of the Limited Term Bond Fund may be exchanged at net asset value
for Class A shares of any Fund at any time three months after the purchase of
such shares.
The CDSC that might apply to certain Class A shares upon redemption will not
apply if these shares are exchanged for shares of another Fund. However, for
purposes of computing the CDSC on the shares acquired through this exchange, the
length of time the acquired shares have been owned by a shareholder will be
measured from the date the exchanged shares were purchased. The amount of the
CDSC will be determined by reference to the CDSC table to which the exchanged
shares were subject.
Class A shares of Princor Cash Management Fund or Princor Tax-Exempt Cash
Management Fund acquired by direct purchase may not be exchanged for other Class
A shares. However, Class A shares of these two Funds acquired by exchange of any
other Princor Fund shares, or by conversion of Class B or Class R shares, and
additional shares which have been purchased by reinvesting dividends earned on
such shares, may be exchanged for other Class A shares without a sales charge.
In addition, Class A shares of the Money Market Funds acquired by direct
purchase or reinvestment of dividends on such shares may be exchanged for Class
B shares of any Growth-Oriented or Income-Oriented Fund.
Class B shares. Class B shares for all Funds may be exchanged at net asset value
at any time for Class B shares of any Fund.
The CDSC that might apply to Class B shares upon redemption will not apply if
these shares are exchanged for shares of another Fund. However, for purposes of
computing the CDSC on the shares acquired through this exchange, the length of
time the acquired shares have been owned by a shareholder will be measured from
the date the exchanged shares were purchased. The amount of the CDSC will be
determined by reference to the CDSC table to which the exchanged shares were
subject.
Class R shares. Class R shares for all Funds may be exchanged at net asset value
at any time for Class R shares of any Fund. For purposes of computing the length
of time Class R shares acquired by the exchange are held prior to conversion to
Class A shares, the length of time the acquired shares have been owned by a
shareholder will be measured from the date the exchanged shares were purchased.
Exhibit 1
Principal International Emerging Markets Fund, Inc.
Principal International SmallCap Fund, Inc.
Principal Real Estate Fund, Inc.
Principal SmallCap Fund, Inc.
Princor Balanced Fund, Inc.
Princor Blue Chip Fund, Inc.
Princor Bond Fund, Inc.
Princor Capital Accumulation Fund, Inc.
Princor Cash Management Fund, Inc.
Princor Emerging Growth Fund, Inc.
Princor Government Securities Income Fund, Inc.
Princor Growth Fund, Inc.
Princor High Yield Fund, Inc.
Princor Limited Term Bond Fund, Inc.
Princor Tax-Exempt Bond Fund, Inc.
Princor Tax-Exempt Cash Management Fund, Inc.
Princor Utilities Fund, Inc.
Princor World Fund, Inc
