333-86149
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
--------
POST-EFFECTIVE AMENDMENT NO. 1 TO
FORM N-1A
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
and
REGISTRATION STATEMENT
under
THE INVESTMENT COMPANY ACT OF 1940
--------
PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND, INC.
Exact name of Registrant as specified in Charter)
The Principal Financial Group
Des Moines, Iowa 50392
(Address of principal executive offices)
--------
Telephone Number (515) 248-3842
--------
MICHAEL D. ROUGHTON Copy to:
The Principal Financial Group JOHN W. BLOUCH, L.L.P.
Des Moines, Iowa 50392 Suite 405 West
1025 Thomas Jefferson Street, N.W.
Washington, DC 20007-0805
(Name and address of agent for service)
----------
It is proposed that this filing will become effective (check appropriate box)
_____ immediately upon filing pursuant to paragraph (b) of Rule 485
_____ on (date) pursuant to paragraph (b) of Rule 485
__X__ 60 days after filing pursuant to paragraph (a)(1) of Rule 485
_____ on (date) pursuant to paragraph (a)(1) of Rule 485
_____ 75 days after filing pursuant to paragraph (a)(2) of Rule 485
_____ on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
_____ This post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
----------
PRINCIPAL MUTUAL FUNDS
DOMESTIC GROWTH-ORIENTED FUNDS
Principal Balanced Fund, Inc.
Principal Blue Chip Fund, Inc.
Principal Capital Value Fund, Inc.
Principal Growth Fund, Inc.
Principal LargeCap Stock Index Fund, Inc.
Principal MidCap Fund, Inc.
Principal Real Estate Fund, Inc.
Principal SmallCap Fund, Inc.
Principal Utilities Fund, Inc.
INTERNATIONAL GROWTH-ORIENTED FUNDS
Principal International Emerging Markets Fund, Inc.
Principal International Fund, Inc.
Principal International SmallCap Fund, Inc.
PARTNERS FUNDS
Principal Partners Aggressive Growth Fund, Inc.
Principal Partners LargeCap Growth Fund, Inc.
Principal Partners MidCap Growth Fund, Inc.
INCOME-ORIENTED FUNDS
Principal Bond Fund, Inc.
Principal Government Securities Income Fund, Inc.
Principal High Yield Fund, Inc.
Principal Limited Term Bond Fund, Inc.
Principal Tax-Exempt Bond Fund, Inc.
MONEY MARKET FUND
Principal Cash Management Fund, Inc.
This Prospectus describes mutual funds organized by Principal Life Insurance
Company. The Funds provide a choice of investment objectives through Domestic
Growth-Oriented Funds, International Growth-Oriented Funds, Income-Oriented
Funds and a Money Market Fund.
The date of this Prospectus is ____________.
Neither the Securities and Exchange Commission nor any State Securities
Commission has approved or disapproved of these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
TABLE OF CONTENTS
Fund Descriptions..............................................4
Domestic Growth-Oriented Funds..............................6
Balanced Fund.............................................6
Blue Chip Fund............................................8
Capital Value Fund.......................................10
Growth Fund .............................................12
LargeCap Stock Index Fund................................20
MidCap Fund..............................................14
Real Estate Fund.........................................16
SmallCap Fund............................................18
Utilities Fund...........................................20
International Growth-Oriented Funds........................22
International Emerging Markets Fund......................22
International Fund.......................................24
International SmallCap Fund..............................26
Income Funds...............................................28
Bond Fund................................................28
Government Securities Income Fund........................30
High Yield Fund..........................................32
Limited Term Bond Fund...................................34
Tax-Exempt Bond Fund.....................................36
Money Market Fund..........................................38
Cash Management Fund.....................................38
Partners Funds.............................................28
Partners Aggressive Growth Fund..........................16
Partners LargeCap Growth Fund............................16
Partners MidCap Growth Fund..............................16
The Costs of Investing.........................................7
Certain Investment Strategies and Related Risks...............13
Management, Organization and Capital Structure................15
Pricing of Fund Shares........................................16
Dividends and Distributions...................................16
How To Buy Shares.............................................17
How To Redeem (Sell) Shares...................................19
How To Exchange Shares Among Principal Mutual Funds...........21
General Information about a Fund Account......................22
Financial Highlights..........................................63
FUND DESCRIPTIONS.
The Principal Mutual Funds have four categories of funds: domestic
growth-oriented funds, international growth-oriented funds, income-oriented
funds and Partners Funds (sub-advised by investment professionals not affiliated
with the Principal Financial Group). Principal Management Corporation, the
Manager of each of the Funds, selects Sub-Advisors based on the advisor's
investment philosophy. The Manager seeks to provide a full range of investment
approaches through the Principal Mutual Funds.
Fund Sub-Advisor
Balanced, Blue Chip, Capital Value, Invista Capital
Government Securities Income, Growth, Management, LLC
International, International Emerging Markets, ("Invista")
International SmallCap, LargeCap Stock Index,
Limited Term Bond, MidCap, SmallCap and Utilities
Partners Aggressive Growth Morgan Stanley
Asset Management
("Morgan Stanley")
Partners LargeCap Growth Duncan-Hurst
Capital Management
Inc.("Duncan-Hurst")
Partners MidCap Growth Turner Investment
Partners, Inc.
("Turner")
Three classes of each of these Funds shares are available through this
Prospectus:
o Class A shares are generally sold with a sales charge that is a variable
percentage based on the amount of the purchase;
o Class B shares are not subject to a sales charge at the time of purchase
but are subject to a contingent deferred sales charge ("CDSC") on shares
redeemed within six years of purchase; and
o Class C shares are sold without a sales charge at the time of purchase but
are subject to a CDSC on shares redeemed within one year of purchase.
In the description for each Fund, you will find important information about the
Fund's:
Primary investment strategy
This section summarizes how the Fund intends to achieve its investment
objective. It identifies the Fund's primary investment strategy (including the
type or types of securities in which the Fund invests) and any policy to
concentrate in securities of issuers in a particular industry or group of
industries.
Annual operating expenses
Annual operating expenses for each Fund are deducted from Fund assets (stated as
a percentage of Fund assets) and are shown as of the end of the most recent
fiscal year (estimates of expenses are shown for the new Funds). Examples are
provided which are intended to help you compare the cost of investing in a
particular fund with the cost of investing in other mutual funds. The examples
assume you invest $10,000 in a Fund for the time periods indicated. The first
three lines of each example assume that you redeem all of your shares at the end
of those time periods. The second three assume that you do not redeem your
shares at the end of the periods. The examples also assume that your investment
has a 5% return each year and that the Fund's operating expenses are the same as
the most recent fiscal year expenses. Although your actual costs may be higher
or lower, based on these assumptions, your costs would be as shown.
Day-to-day fund management
The investment professionals who manage the assets of each Fund are listed with
each Fund. Backed by their staff of experienced securities analysts, they
provide the Funds with professional investment management.
Fund Performance
As certain Funds have not been offered before, no historical information is
available for those Funds. If historical data is available, the Fund's
description includes a set of tables and a bar chart.
The bar chart is included to provide you with an indication of the risks
involved when you invest. The chart shows changes in the Fund's performance from
year to year. The performance reflected in the chart does not include a sales
charge, which would make the returns less than those shown. Fund shares are
generally sold subject to a sales charge.
One of the tables compares the Fund's average annual returns with:
o a broad-based securities market index (An index measures the market price
of a specific group of securities in a particular market of securities in a
market sector. You cannot invest directly in an index. An index does not
have an investment adviser and does not pay any commissions or expenses. If
an index had expenses, its performance would be lower.); and
o an average of mutual funds with a similar investment objective and
management style. The averages used are prepared by independent statistical
services.
The other table provides the highest and lowest quarterly rate of return for the
Fund's Class A shares over a given period.
A Fund's past performance is not necessarily an indication of how the Fund will
perform in the future.
You may call Principal Mutual Funds (1-800-247-4123) to get the current 7-day
yield for the Cash Management Fund.
NOTE: Investments in these Funds are not deposits of a bank and are not
insured or guaranteed by the Federal Deposit Insurance Corporation or
any other government agency.
No salesperson, dealer or any other person is authorized to give
information or make representations about a Fund other than those
contained in this Prospectus. Information or representations from
unauthorized parties may not be relied upon as having been made by a
Fund, the Manager or any Sub-Advisor.
DOMESTIC GROWTH-ORIENTED FUND
PRINCIPAL BALANCED FUND, INC.
The 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.
Main Strategies
The Fund invests primarily in common stocks and corporate bonds. It may also
invest in other equity securities, government bonds and notes (obligations of
the U.S. government or its agencies) and cash. Though the percentages in each
category are not fixed, common stocks generally represent 40% to 70% of the
Fund's assets. The remainder of the Fund's assets are invested in bonds and
cash.
In selecting common stocks, the Sub-Advisor, Invista, looks for companies that
have predictable earnings and which, based on growth prospects, it believes are
undervalued in the marketplace. Invista buys stocks with the objective of
long-term capital appreciation. From time to time, Invista purchases stocks with
the expectation of price appreciation over the short term. In response to
changes in economic conditions, Invista may change the make-up of the portfolio
and emphasize different market sectors by buying and selling the portfolio's
stocks.
The Fund generates interest income by investing in bonds and notes. Bonds and
notes are also purchased for capital appreciation purposes when Invista thinks
that declining interest rates may increase market value. Deep discount bonds
(those which sell at a substantial discount from their face amount) are also
purchased to generate capital appreciation. The Fund may invest in bonds with
speculative characteristics but does not intend to invest more than 5% of its
assets in securities rated below BBB by S&P or Baa by Moody's. Fixed income
securities that are not investment grade are commonly referred to as "junk
bonds" or high yield securities. These securities offer a higher yield than
other, higher rated securities, but they carry a greater degree of risk and are
considered speculative by the major credit rating agencies.
Main Risks
The value of the stocks owned by the Fund changes on a daily basis. Stock prices
reflect the activities of individual companies and general market and economic
conditions. In the short term, stock prices can fluctuate dramatically in
response to these factors.
Bond values change daily. Their prices reflect changes in interest rates, market
conditions and announcements of other economic, political or financial
information. When interest rates fall, the price of a bond rises and when
interest rates rise, the price declines. As with all mutual funds, the value of
the Fund's assets may rise or fall. If you sell your shares when their value is
less than the price you paid, you will lose money.
Investor Profile
The Fund is generally a suitable investment if you are seeking long-term growth
but who are uncomfortable accepting the risks of investing entirely in common
stocks.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1990" -5.18
"1991" 31.72
"1992" 10.47
"1993" 9.01
"1994" -3.38
"1995" 23.39
"1996" 13
"1997" 17.29
"1998" 11.2
"1999"
Calendar Years Ended December 31
The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares form June
30, 1999 through December 31, 1999 is -----%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest .% (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Class A % % % S&P 500 Stock Index % % %
Class B * -- Lehman Brothers Government/Corporate Bond Index
Class C ** Lipper Balanced Fund Average *
<FN>
* Period from December 9, 1994, date Class B shares first offered to the
public, through December 31, 1999.
** Period from June 30, 1999, date Class C shares first offered to the
public, through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses
Class A Class B Class C
Management Fees................ % % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % % %
* Total Fund Operating Expenses for Class A and Class B shares are for
the year ended October 31, 1999. Expenses for Class C shares are for
the period from June 30, 1999 through December 31, 1999.
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------
Class A $ $ $ $
Class B
Class C
You would pay the following expenses if you did not redeem your shares:
Class A
Class B
Class C
Day-to-day Fund Management
<TABLE>
<S> <C>
Since October 1998 Co-Manager: Douglas D. Herold, CFA. Portfolio Manager of Invista Capital
Management, LLC since 1996. Prior thereto, Securities Analyst from 1993-1996.
Since December 1997 Co-Manager: Martin J. Schafer, Portfolio Manager of Invista Capital Management,
LLC since 1992.
Since April 1993 Co-Manager: Judith A. Vogel, CFA. Portfolio Manager of Invista Capital Management,
LLC since 1987.
</TABLE>
DOMESTIC GROWTH-ORIENTED FUND
PRINCIPAL BLUE CHIP FUND, INC.
The Fund seeks to achieve growth of capital and growth of income by investing
primarily in common stocks of well capitalized, established companies.
Main Strategies
The Fund invests primarily in common stocks of large, established companies. The
Sub-Advisor, Invista, selects the companies it believes to have the potential
for growth of capital, earnings and dividends. Under normal market conditions,
the Fund invests at least 65% (and may invest up to 100%) of its assets in blue
chip companies. Blue chip companies are easily identified by:
o size (market capitalization of at least $1 billion)
o established history of earnings and dividends
o easy access to credit
o good industry position
o superior management structure
In addition, the large market of publicly held shares for these companies and
their generally high trading volume results in a relatively high degree of
liquidity for these stocks.
Invista may invest up to 35% of Fund assets in equity securities, other than
common stocks, issued by blue chip companies and in equity securities of
companies that do not fit the blue chip definition. It may also invest up to 5%
of Fund assets in securities of unseasoned issuers, which are more speculative
than blue chip company securities. While small, unseasoned companies may offer
greater opportunities for capital growth than larger, more established
companies, they also involve greater risks and should be considered speculative.
Up to 20% of Fund assets may be invested in foreign securities. The issuers of
the foreign securities do not have to meet the criteria for blue chip companies.
In addition, foreign securities carry risks that are not generally found in
stocks of U.S. companies. These include the risk that a foreign security could
lose value as a result of political, financial and economic events in foreign
countries. In addition, foreign securities may be subject to securities
regulators with less stringent accounting and disclosure standards than are
required of U.S. companies.
Main Risks
The value of the stocks owned by the Fund changes on a daily basis. The current
price reflects the activities of individual companies and general market and
economic conditions. In the short term, stock prices can fluctuate dramatically
in response to these factors. Because of these fluctuations, as with all mutual
funds, the value of the Fund's assets may rise or fall. If you sell your shares
when their value is less than the price you paid, you will lose money.
Investor Profile
The Fund is generally a suitable investment if you are seeking long-term growth
and are willing to accept the risks of investing in common stocks but prefer
investing in larger, established companies.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1992" 6.09
"1993" 2.62
"1994" 3.36
"1995" 33.19
"1996" 16.78
"1997" 26.25
"1998" 16.55
"1999"
Calendar Years Ended December 31
The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares form June
30, 1999 through December 31,1 1999 is -----%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest .% (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Class A % % %* S&P 500 Stock Index % % %
Class B ** -- Lipper Large-Cap Value Fund Average
Class C ***
<FN>
* Period from March 1, 1991, date Class A shares first offered to the
public, through December 31, 1999. ** Period from December 9, 1994,
date Class B shares first offered to the public, through December 31,
1999. *** Period from June 30, 1999, date Class C shares first offered
to the public, through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses*
Class A Class B Class C
Management Fees**............. % % %
12b-1 Fees....................
Other Expenses................
Total Fund Operating Expenses % % %
* Total Fund Operating Expenses for Class A and Class B shares are for the
period ended October 31, 1999. Expenses for Class C shares are for the
period from June 30, 1999 through December 31, 1999
**The Manager has agreed to waive a portion of its fee for the Fund. The
Manager intends to continue the waiver and, if necessary, pay expenses
normally payable by the Fund through the period ending October 31, 2000.
The waiver will maintain a total level of operating expenses a (expressed
as percent of average net assets attributable to a Class on an annualized
basis) not to exceed: 1.20% for Class A Shares; 1.95% for Class B Shares;
and 1.95% for Class C shares. Theeffect of the waiver
is to reduce the Fund's annual operating expenses.
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------
Class A $ $ $ $
Class B
Class C
You would pay the following expenses if you did not redeem your shares:
Class A
Class B
Class C
Day-to-day Fund Management
Since March 1991 Mark T. Williams, CFA. Portfolio Manager of Invista Capital
(Fund's inception) Management, LLC since 1991.
DOMESTIC GROWTH-ORIENTED FUND
PRINCIPAL CAPITAL VALUE FUND, INC.
The 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.
Main Strategies
The Fund invests primarily in common stocks. It may also invest in other equity
securities. To achieve its investment objective, the Sub-Advisor, Invista,
invests primarily in securities that have "value" characteristics. This process
is known as "value investing." Value stocks tend to have higher yields and lower
price to earnings (P/E) ratios than other stocks.
Securities chosen for investment may include those of companies which Invista
believes can be expected to share in the growth of the nation's economy over the
long term. The current price of the Fund's assets reflect the activities of the
individual companies and general market and economic conditions. In the short
term, stock prices can fluctuate dramatically in response to these factors.
Because of these fluctuations, principal values and investment returns vary.
In making selections for the Fund's investment portfolio, Invista uses an
approach described as "fundamental analysis." The basic steps involved in this
analysis are:
o Research. Invista researches economic prospects over the next one to
two years rather than focusing on near term expectations. This approach
is designed to provide insight into a company's real growth potential.
o Valuation. The research findings allow Invista to identify the
prospects for the major industrial, commercial and financial segments
of the economy. Invista looks 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. It then uses this
information to judge the prospects for each industry for the near and
intermediate term.
o Ranking. Invista then ranks the companies in each industry group
according to their relative value. The greater a company's estimated
worth compared to the current market price of its stock, the more
undervalued the company. Computer models help to quantify the research
findings.
o Stock selection. Invista buys and sells stocks according to the Fund's
own policies using the research and valuation rankings as a basis. In
general, Invista buys stocks that are identified as undervalued and
considers selling them when they appear overvalued. Along with
attractive valuation, other factors may be taken into account such as:
o events that could cause a stock's price to rise or fall; o
anticipation of high potential reward compared to potential risk; and o
belief that a stock is temporarily mispriced because of market
overreactions.
Main Risks
The value of the stocks owned by the Fund changes on a daily basis. The current
price reflects the activities of individual companies and general market and
economic conditions. In the short term, stock prices can fluctuate dramatically
in response to these factors. As with all mutual funds, the value of the Fund's
assets may rise or fall. If you sell your shares when their value is less than
the price you paid, you will lose money.
Investor Profile
The Fund is generally a suitable investment if you are seeking long-term growth,
and are willing to accept the risks of investing in common stocks but also
prefer investing in companies that appear to be considered undervalued relative
to similar companies.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1990" -10.64
"1991" 37.21
"1992" 9.09
"1993" 7.56
"1994" 0.21
"1995" 31.9
"1996" 23.42
"1997" 28.69
"1998" 12.13
"1999"
Calendar Years Ended December 31
The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares form June
30, 1999 through December 31, 1999 is -----%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest .% (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Class A % % % S&P 500 Stock Index % % %
Class B * -- Lipper Large-Cap Value Fund Average
Class C **
<FN>
* Period from December 9, 1994, date Class B shares first offered to the
public, through December 31, 1999.
** Period from June 30, 1999, date Class C shares first offered to the
public, through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses*
Class A Class B Class C
Management Fees............... % % %
12b-1 Fees....................
Other Expenses................
Total Fund Operating Expenses % % %
* Total Fund Operating Expenses for Class A and Class B shares are for
the year ended October 31, 1999. Expenses for Class C shares are for
the period from June 30, 1999 through December 31, 1999.
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of thoseperiods. The
Examples also assume that your investment has a 5% returneach year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
Class A $ $ $ $
Class B
Class C
You would pay the following expenses if you did not redeem your shares:
Class A
Class B
Class C
Day-to-day Fund Management
Since November 1996 Catherine A. Zaharis, CFA. Portfolio Manager of Invista
Capital Management, LLC since 1987.
DOMESTIC GROWTH-ORIENTED FUND
PRINCIPAL GROWTH FUND, INC.
The Fund seeks growth of capital through the purchase primarily of common
stocks, but the Fund may invest in other securities.
Main Strategies
In seeking the Fund's objective of capital growth, the Fund's Sub-Advisor,
Invista, uses an approach described as "fundamental analysis." The basic steps
involved in this analysis are:
o Research. Invista researches economic prospects over the next one to
two years rather than focusing on near term expectations. This approach
is designed to provide insight into a company's real growth potential.
o Valuation. The research findings allow Invista to identify the
prospects for the major industrial, commercial and financial segments
of the economy. Invista looks 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. It then uses this
information to judge the prospects for each industry for the near and
intermediate term.
o Stock selection. Invista then purchases securities of issuers which
appear to have high growth potential. Common stocks selected for the
Fund may include securities of companies that:
o have a record of sales and earnings growth that exceeds the
growth rate of corporate profits of the S&P 500, or
o offer new products or new services.
Main Risks
These securities present greater opportunities for capital growth because of
high potential earnings growth, but may also involve greater risk than
securities which do not have the same potential. The companies may have limited
product lines, markets or financial resources, or may depend on a limited
management group. Their securities may trade less frequently and in limited
volume. As a result, these securities may change in value more than those of
larger, more established companies. As the value of the stocks owned by the Fund
changes, the Fund share price changes. In the short term, the share price can
fluctuate dramatically. As with all mutual funds, the value of the Fund's assets
may rise or fall. If you sell your shares when their value is less than the
price you paid, you will lose money.
Investor Profile
The Fund is generally a suitable investment if you are seeking long-term growth.
Additionally, you must be willing to accept the risks of investing in common
stocks that may have greater risks than stocks of companies with lower potential
for earnings growth.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1990" -1.41
"1991" 56.61
"1992" 10.16
"1993" 7.51
"1994" 3.21
"1995" 33.47
"1996" 12.23
"1997" 28.41
"1998" 20.37
"1999"
Calendar Years Ended December 31
The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares form June
30, 1999 through December 31, 1999 is -----%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest .% (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Class A % % % S&P 500 Stock Index % % %
Class B * -- Lipper Multi-Cap Core Fund Average
Class C **
<FN>
* Period from December 9, 1994, date Class B shares first offered
to the public, through December 31, 1999.
** Period from June 30, 1999, date Class C shares first offered to
the public, through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses*
Class A Class B Class C
Management Fees............. % % %
12b-1 Fees..................
Other Expenses..............
Total Fund Operating Expenses % % %
* Total Fund Operating Expenses for Class A and Class B shares are for
the year ended October 31, 1999. Expenses for Class C shares are for
the period from June 30, 1999 through December 31, 1999.
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costsmay be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
Class A $567 $763 $ 976 $1,586
Class B 563 795 1,035 1,543
Class C 270 517 892 1,944
You would pay the following expenses if you did not redeem your shares:
Class A 567 763 976 1,586
Class B 149 462 797 1,543
Class C 167 517 892 1,944
Day-to-day Fund Management
Since __________
DOMESTIC GROWTH-ORIENTED FUND
PRINCIPAL LARGECAP STOCK INDEX FUND, INC.
The LargeCap Stock Index Fund seeks long-term growth of capital.
Main Strategies
Under normal market conditions, the Fund invests at least 80% of its assets in
common stocks of companies that compose the Standard & Poor's* ("S&P") 500
Index. The Sub-advisor, Invista, will attempt to mirror the investment
performance of the index by allocating the Fund's assets in approximately the
same weightings as the S&P 500. Over the long-term, Invista seeks a correlation
between performance of the Fund, before expenses, and that of the S&P 500. It is
unlikely that a perfect correlation of 100 will be achieved.
The Fund is not managed according to traditional methods of "active" investment
management. Active management would include buying and selling securities based
on economic, financial and investment judgement. Instead, the Fund uses a
passive investment approach. Rather than judging the merits of a particular
stock in selecting investments, Invista focuses on tracking the S&P 500.
Main Risks
Because of the difficulty and expense of executing relatively small stock
trades, the Fund may not always be invested in the less heavily weighted S&P 500
stocks. At times, the Fund's portfolio may be weighted differently from the S&P
500, particularly if the Fund has a small level of assets to invest. In
addition, the Fund's ability to match the performance of the S&P 500 is effected
to some degree by the size and timing of cash flows into and out of the Fund.
The Fund is managed to attempt to minimize such effects.
Invista reserves the right to omit or remove any of the S&P 500 stocks from the
Fund if it determines that the stock is not sufficiently liquid. In addition, a
stock might be excluded or removed from the Fund if extraordinary events or
financial conditions lead Invista to believe that it should not be a part of the
Fund's assets.
While stocks have historically been a leading choice of long-term investors,
they do fluctuate in price. The value of your investment in the Fund will go up
and down which means that you could lose money. Because different types of
stocks tend to shift in and out of favor depending on market and economic
conditions, the Fund's performance may sometimes be lower or higher than that of
other types of funds.
The Fund uses an indexing strategy. It does not attempt to manage market
volatility, use defensive strategies or reduce the effect of any long-term
periods of poor stock performance. The correlation between Fund and index
performance may be affected by the Fund's expenses, changes in securities
markets, changes in the composition of the index and the timing of purchases and
sales of Fund shares. The Fund may invest in futures and options, which could
carry additional risks such as losses due to unanticipated market price
movements, and could also reduce the opportunity for gain.
Investor Profile
The Stock Index 500 Fund is generally a suitable investment if you are seeking
long-term growth and are willing to accept the risks of investing in common
stocks and prefer a passive rather than active management style.
* Standard & Poor's Corporation is not affiliated with the Principal Stock
Index 500 Fund, Inc., Invista Capital Management LLC or Principal Life
Insurance Company.
As the inception date of the Fund is ____________, historical performance data
is not available. Estimated annual Fund operating expenses are as follows:
Fund Operating Expenses*
Class A Class B Class C
Management Fees**........... % % %
12b-1 Fees..................
Other Expenses..............
Total Fund Operating Expenses % % %
* Total Fund Operating Expenses are estimated.
** The Manager has agreed to waive a portion of its fee for the Fund from
the date operations commenced. The Manager intends to continue the
waiver and, if necessary, pay expenses normally payable by the Fund
through the period ending October 31, 2000. The waiver will maintain a
total level of operating expenses (expressed as a percent of average
net assets attributable to a Class on an annualized basis) not to
exceed: 0.80% for Class A Shares; ____% for Class B Shares; and ____%
for Class C shares. The effect of the waiver is to reduce the Fund's
annual operating expenses.
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costsmay be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
Class A $567 $763 $ 976 $1,586
Class B 563 795 1,035 1,543
Class C 270 517 892 1,944
You would pay the following expenses if you did not redeem your shares:
Class A 567 763 976 1,586
Class B 149 462 797 1,543
Class C 167 517 892 1,944
Day-to-day Fund Management
Since _____________
DOMESTIC GROWTH-ORIENTED FUND
PRINCIPAL MIDCAP FUND, INC.
The Fund seeks to achieve capital appreciation by investing primarily in
securities of emerging and other growth-oriented companies.
Main Strategies
The Fund primarily invests in stocks of growth-oriented companies. Stocks that
are chosen for the Fund by the Sub-Advisor, Invista, are thought to be
responsive to changes in the marketplace and have the fundamental
characteristics to support growth. The Fund may invest for any period in any
industry, in any kind of growth-oriented company. Companies may range from the
well-established and well-known to the new and unseasoned. While small,
unseasoned companies may offer greater opportunities for capital growth than
larger, more established companies, they also involve greater risks and should
be considered speculative.
Under normal market conditions, the Fund invests at least 65% of its assets in
securities of companies with market capitalizations in the $1 billion to $10
billion range. Market capitalization is defined as total current market value of
a company's outstanding common stock.
The Fund may invest up to 20% of its assets in securities of foreign companies.
Foreign stocks carry risks that are not generally found in stocks of U.S.
companies. These include the risk that a foreign security could lose value as a
result of political, financial and economic events in foreign countries. In
addition, foreign securities may be subject to securities regulators with less
stringent accounting and disclosure standards than are required of U.S.
companies.
Main Risks
The value of the stocks owned by the Fund changes on a daily basis. The Fund's
share price may fluctuate more than that of funds primarily invested in stocks
of large companies. Mid-sized companies may pose greater risk due to narrow
product lines, limited financial resources, less depth in management or a
limited trading market for their stocks. In the short term, stock prices can
fluctuate dramatically in response to these factors. Because of these
fluctuations, principal values and investment returns vary. As with all mutual
funds, the value of the Fund's assets may rise or fall. If you sell your shares
when their value is less than the price you paid, you will lose money.
Investor Profile
The Fund is generally a suitable investment if you are seeking long-term growth
and are willing to accept the potential for short-term fluctuations in the value
of your investments. It is designed for a portion of your investments and not
designed for you if you are seeking income or conservation of capital.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1990" -6.33
"1991" 52.83
"1992" 14.81
"1993" 12.29
"1994" 3.03
"1995" 34.2
"1996" 19.13
"1997" 22.94
"1998" -0.23
"1999"
Calendar Years Ended December 31
The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares from June
30, 1999 through December 31, 1999 is -----%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest .% (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Class A % % % S&P 400 MidCap Index % % %
Class B * -- S&P 500 Stock Index
Class C ** Lipper Mid-Cap Core Fund Average
<FN>
* Period from December 9, 1994, date Class B shares first offered to the
public, through December 31, 1999.
** Period from June 30, 1999, date Class C shares first offered to the
public, through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses*
Class A Class B Class C
Management Fees................ % % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % % %
* Total Fund Operating Expenses for Class A and Class B shares are for
the year ended October 31, 1999. Expenses for Class C shares are for
the period from June 30, 1999 through December 31, 1999.
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
Class A $ $ $ $
Class B
Class C
You would pay the following expenses if you did not redeem your shares:
Class A
Class B
Class C
Day-to-day Fund Management
Since ___________
DOMESTIC GROWTH-ORIENTED FUND
PRINCIPAL REAL ESTATE FUND, INC.
The Fund seeks to generate total return by investing primarily in equity
securities of companies principally engaged in the real estate industry.
Main Strategies
The Fund invests primarily in equity securities of companies engaged in the real
estate industry. For purposes of the Fund's investment policies, a real estate
company has at least 50% of its assets, income or profits derived from products
or services related to the real estate industry. Real estate companies include
real estate investment trusts 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 assets in securities of foreign real estate
companies. Foreign stocks carry risks that are not generally found in stocks of
U.S. companies. These include the risk that a foreign security could lose value
as a result of political, financial and economic events in foreign countries. In
addition, foreign securities may be subject to securities regulators with less
stringent accounting and disclosure standards than are required of U.S.
companies.
Real estate investment trusts ("REITs") are corporations or business trusts that
are effectively permitted to eliminate corporate level federal income taxes if
they meet certain requirements of the Internal Revenue Code. The Fund focuses on
equity REITs. REITs are characterized as:
o equity REITs, which primarily own property and generate revenue from
rental income;
o mortgage REITs, which invest in real estate mortgages; and
o hybrid REITs, which combine the characteristics of both equity and
mortgage REITs.
Main Risks
Securities of real estate companies are subject to securities market risks as
well as risks similar to those of direct ownership of real estate. These
include:
o declines in the value of real estate
o risks related to general and local economic conditions
o dependency on management skills
o heavy cash flow dependency
o possible lack of available mortgage funds
o overbuilding
o extended vacancies in properties
o increases in property taxes and operating expenses
o changes in zoning laws
o expenses incurred in the cleanup of environmental problems
o casualty or condemnation losses
o changes in interest rates
In addition to the risks listed above, equity REITs are affected by the changes
in the value of the properties owned by the trust. Mortgage REITs are affected
by the quality of the credit extended. Both equity and mortgage REITs:
o are dependent upon management skills and may not be diversified;
o are subject to cash flow dependency and defaults by borrowers; and
o could fail to qualify for tax-free pass through of income under the
Code.
Because of these factors, the value of the securities held by the Fund, and in
turn the net asset value of the shares of the Fund change on a daily basis. The
current share price reflects the activities of individual companies and general
market and economic conditions. In the short term, share prices can fluctuate
dramatically in response to these factors. Because of these fluctuations,
principal values and investment returns vary. As with all mutual funds, the
value of the Fund's assets may rise or fall. If you sell your shares when their
value is less than the price you paid, you will lose money.
Investor Profile
The Real Estate Fund is generally a suitable investment if you are seeking
long-term growth, want to invest in companies engaged in the real estate
industry and are willing to accept fluctuations in the value of your investment.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1998" -13.62
"1999"
Calendar Year Ended December 31
The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares from June
30, 1999 through December 31, 1999 is -----%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest .% (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Class A % * Morgan Stanley REIT Index % % %
Class B * -- Lipper Real Estate Fund Average
Class C **
<FN>
* Period from December 31, 1997, date shares first offered to the
public, through December 31, 1999.
** Period from June 30, 1999, date Class C shares first offered to the
public, through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses*
Class A Class B Class C
Management Fees............... % % %
12b-1 Fees....................
Other Expenses................
Total Fund Operating Expenses % % %
* Total Fund Operating Expenses for Class A and Class B shares are for
the year ended October 31, 1999. Expenses for Class C shares are for
the period from June 30, 1999 through December 31, 1999.
** The Manager has agreed to waive a portion of its fee for the Fund from
the date operations commenced. The Manager intends to continue the
waiver and, if necessary, pay expenses normally payable by the Fund
through the period ending October 31, 2000. The waiver will maintain a
total level of operating expenses (expressed as a percent of average
net assets attributable to a Class on an annualized basis) not to
exceed: 1.90% for Class A Shares; 2.65% for Class B Shares; and 2.65%
for Class C Shares. The effect of the waiver is to reduce the Fund's
annual operating expenses.
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
Class A $ $ $ $
Class B
Class C
You would pay the following expenses if you did not redeem your shares:
Class A
Class B
Class C
Day-to-day Fund Management
Since December 1997 Kelly D. Rush, CFA. Assistant Director of Commercial Real
(Fund's inception) Estate, Principal Capital Management LLC since 1996.
Senior Administrator - Commercial Real Estate from
1993-1996.
DOMESTIC GROWTH-ORIENTED FUND
PRINCIPAL SMALLCAP FUND, INC.
The Fund seeks to achieve long-term growth of capital by investing primarily in
equity securities of companies with comparatively smaller market
capitalizations.
Main Strategies
The Fund invests in equity securities of companies in the U.S. with
comparatively smaller market capitalizations. Market capitalization is defined
as total current market value of a company's outstanding common stock. Under
normal market conditions, the Fund invests at least 65% of its assets in
securities of companies with market capitalizations of $1 billion or less.
In selecting securities for investment, Invista looks at stocks with value
and/or growth characteristics. In managing the assets of the Fund, Invista does
not have a policy of preferring one of these categories to the other. The value
orientation emphasizes buying stocks at less than their investment value and
avoiding stocks whose price has been artificially built up. The growth
orientation emphasizes buying stocks of companies whose potential for growth of
capital and earnings is expected to be above average. Selection is based on
fundamental analysis of the company relative to other companies with the focus
being on Invista's estimation of forward looking rates of return.
Main Risks
Investments in companies with smaller market capitalizations may involve greater
risks and price volatility (wide, rapid fluctuations) than investments in
larger, more mature companies. Smaller companies may be developing or marketing
new products or services for which markets are not yet established and may never
become established. While small, unseasoned companies may offer greater
opportunities for capital growth than larger, more established companies, they
also involve greater risks and should be considered speculative.
The net asset value of the Fund's shares is based on the values of the
securities it holds. The value of the stocks owned by the Fund changes on a
daily basis. The current share price reflects the activities of individual
companies as well as general market and economic conditions. In the short term,
stock prices can fluctuate dramatically in response to these factors. The Fund's
share price may fluctuate more than that of funds primarily invested in stocks
of mid-sized and large companies and may underperform as compared to the
securities of larger companies. Because of these fluctuations, principal values
and investment returns vary. As with all mutual funds, the value of the Fund's
assets may rise or fall. If you sell your shares when their value is less than
the price you paid, you will lose money.
Investor Profile
The Fund is generally a suitable investment if you are seeking long-term growth
and are willing to accept the potential for volatile fluctuations in the value
of your investment. It is not designed for you if you are seeking income or
conservation of capital.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1998" -5.68
"1999"
Calendar Year Ended December 31
The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares from June
30, 1999 through December 31, 1999 is -----%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest .% (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years
<S> <C> <C> <C> <C>
Class A % * S&P 500 Stock Index %
Class B * Lipper Small-Cap Core Fund Average
Class C **
<FN>
* Period from December 31, 1997, date shares first offered to the
public, through December 31, 1999.
** Period from June 30, 1999, date Class C shares first offered to the
public, through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses*
Class A Class B Class C
Management Fees................ % % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % % %
* Total Fund Operating Expenses for Class A and Class B shares are for
the year ended October 31, 1999. Expenses for Class C shares are for
the period from June 30, 1999 through December 31, 1999.
** The Manager has agreed to waive a portion of its fee for the Fund from
the date operations commenced. The Manager intends to continue the
waiver and, if necessary, pay expenses normally payable by the Fund
through the period ending October 31, 2000. The waiver will maintain a
total level of operating expenses (expressed as a percent of average
net assets attributable to a Class on an annualized basis) not to
exceed: 1.80% for Class A Shares; 2.55% for Class B Shares; and 2.55%
for Class C Shares. The effect of the waiver is to reduce the Fund's
annual operating expenses.
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
Class A $ $ $ $
Class B
Class C
You would pay the following expenses if you did not redeem your shares:
Class A
Class B
Class C
Day-to-day Fund Management
Since April 1998 Co-Manager: John F. McClain, Portfolio Manager of Invista
(Fund's inception) Capital Management, LLC since 1995.Investment Officer,
1992-1995.
Since April 1998 Co-Manager: Mark T. Williams, Portfolio Manager of
(Fund's inception) Invista Capital Management, LLC since 1991.
DOMESTIC GROWTH-ORIENTED FUND
PRINCIPAL UTILITIES FUND, INC.
The 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.
Main Strategies
The Fund invests in securities issued by companies in the public utilities
industry. These companies include:
o companies engaged in the manufacture, production, generation, sale or
distribution of electric or gas energy or other types of energy, and
o companies engaged in telecommunications, including telephone,
telegraph, satellite, microwave and other communications media (but
not public broadcasting or cable television).
The Sub-Advisor, Invista, considers a company to be in the public utilities
industry if, at the time of investment, at least 50% of the company's assets,
revenues or profits are derived from one or more of those industries.
Under normal market conditions, at least 65% (and up to 100%) of the assets of
the Fund are invested in equity securities and fixed-income securities in the
public utilities industry. The Fund does not have any policy to concentrate its
assets in any segment of the utilities industry. The portion of Fund assets
invested in equity securities and fixed-income securities varies from time to
time. When determining how to invest the Fund's assets to achieve its investment
objective, Invista considers:
o changes in interest rates,
o prevailing market conditions, and
o general economic and financial conditions.
The Fund invests in fixed-income securities, which at the time of purchase, are
o rated in one of the top four categories by S&P or Moody's, or
o if not rated, in the Manager's opinion are of comparable quality.
Main Risks
Since the Fund's investments are concentrated in the utilities industry, the
value of its shares changes in response to factors affecting those industries.
Many utility companies have been subject to risks of:
o increase in fuel and other operating costs;
o changes in interests rates on borrowings for capital improvement
programs;
o changes in applicable laws and regulations;
o changes in technology which render existing plants, equipment or
products obsolete;
o effects of conservation; and
o increased costs and delays associated with environmental regulations.
Generally, the prices charged by utilities are regulated with the intention of
protecting the public while ensuring that utility companies earn a return
sufficient to attract capital to grow and provide appropriate services. However,
due to political and regulatory factors, rate changes ordinarily occur following
a change in financing costs. This delay tends to favorably affect a utility
company's earnings and dividends when costs are decreasing but also adversely
affects earnings and dividends when costs are rising. In addition, the value of
the utility company bond prices rise when interest rates fall and fall when
interest rates rise.
Certain states are adopting deregulation plans. These plans generally allow for
the utility company to set the amount of their earnings without regulatory
approval.
The share price of the Fund may fluctuate more widely than the value of shares
of a fund that invests in a broader range of industries. Because of these
fluctuations, principal values and investment returns vary. As with all mutual
funds, the value of the Fund's assets may rise or fall. If you sell your shares
when their value is less than the price you paid, you will lose money.
Investor Profile
The Fund is generally a suitable investment if you are seeking quarterly
dividends to generate income or to be reinvested for growth, want to invest in
companies in the utilities industry and are willing to accept fluctuations in
the value of your investment.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1993" 8.42
"1994" -11.09
"1995" 33.87
"1996" 4.56
"1997" 29.58
"1998" 22.5
"1999"
Calendar Years Ended December 31
The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares from June
30, 1999 through December 31, 1999 is -----%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest .% (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Class A % % %* S&P 500 Stock Index % % %
Class B ** -- Dow Jones Utilities Index with Income Fund Average --
Class C *** Lipper Utilities Fund Average
<FN>
* Period from December 16, 1992, date Class A shares first offered to
the public, through December 31, 1999.
** Period from December 9, 1994, date Class B shares first offered to the
public, through December 31, 1999.
*** Period from June 30, 1999, date Class C shares first offered to the
public, through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses*
Class A Class B Class C
Management Fees................ % % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % % %
* Total Fund Operating Expenses for Class A and Class B shares are for
the year ended October 31, 1999. Expenses for Class C shares are for
the period from June 30, 1999 through December 31, 1999.
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
Class A $ $ $ $
Class B
Class C
You would pay the following expenses if you did not redeem your shares:
Class A
Class B
Class C
Day-to-day Fund Management
Since April 1993 Catherine A. Zaharis, CFA. Portfolio Manager of Invista
(Fund's inception) Capital Management, LLC since 1987.
INTERNATIONAL GROWTH-ORIENTED FUND
PRINCIPAL INTERNATIONAL EMERGING MARKETS FUND, INC.
The Fund seeks to achieve long-term growth of capital by investing primarily in
equity securities of issuers in emerging market countries.
Main Strategies
The Fund seeks to achieve its objective by investing in common stocks of
companies in emerging market countries. For this Fund, the term "emerging market
country" means any country which is considered to be an emerging country by the
international financial community (including the International Bank for
Reconstruction and Development (also 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. Investing in many emerging
market countries is not feasible or may involve unacceptable political risk.
Invista, the Sub-Advisor, focuses on those emerging market countries that it
believes have strongly developing economies and markets which are becoming more
sophisticated.
Under normal conditions, at least 65% of the Fund's assets are invested in
emerging market country equity securities. The Fund invests in securities of:
o companies with their principal place of business or principal office
in emerging market countries;
o companies for which the principal securities trading market is an
emerging market country; or
o companies, regardless of where its securities are 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.
Main Risks
Investments in emerging market countries involve special risks. Certain emerging
market countries have historically experienced, and may continue to experience,
certain economic problems. These may include: 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 risks involved with any investment in foreign securities.
Foreign stocks carry risks that are not generally found in stocks of U.S.
companies. These include the risk that a foreign security could lose value as a
result of political, financial and economic events in foreign countries. In
addition, foreign securities may be subject to securities regulators with less
stringent accounting and disclosure standards than are required of U.S.
companies.
Under unusual market or economic conditions, the Fund may invest in the same
kinds of securities as the other Growth-Oriented Funds. These include securities
issued by domestic or foreign corporations, governments or governmental
agencies, instrumentalities or political subdivisions. The securities may be
denominated in U.S. dollars or other currencies.
Because the values of the Fund's assets are likely to rise or fall dramatically,
if you sell your shares when their value is less than the price you paid, you
will lose money.
Investor Profile
The Fund is generally a suitable investment if you are seeking long-term growth
who want to invest a portion of their assets in securities of companies in
emerging market countries. This Fund is not an appropriate investment if you are
seeking either preservation of capital or high current income. You must be able
to assume the increased risks of higher price volatility and currency
fluctuations associated with investments in international stocks which trade in
non-U.S. currencies.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1998" -17.42
"1999"
Calendar Year Ended December 31
The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares from June
30, 1999 through December 31, 1999 is -----%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest .% (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Class A % %* -- Morgan Stanley Capital International EMF
Class B * -- (Emerging Markets Free) Index % % --
Class C ** Lipper Emerging Markets Fund Average --
<FN>
* Period from August 29, 1997, date shares first offered to the public,
through December 31, 1999.
** Period from June 30, 1999, date Class C shares first offered to the
public, through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses*
Class A Class B Class C
Management Fees................ % % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % % %
* Total Fund Operating Expenses for Class A and Class B shares are for
the year ended October 31, 1999. Expenses for Class C shares are for
the period from June 30, 1999 through December 31, 1999.
** The Manager has agreed to waive a portion of its fee for the Fund. The
Manager intends to continue the waiver and, if necessary, pay expenses
normally payable by the Fund through the period ending October 31,
2000. The waiver will maintain a total level of operating expenses
(expressed as a percent of average net assets attributable to a Class
on an annualized basis) not to exceed: 2.50% for Class A Shares; 3.25%
for Class B Shares; and 3.25% for Class C Shares. The effect of the
waiver is to reduce the Fund's annual operating expenses.
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
Class A $ $ $ $
Class B
Class C
You would pay the following expenses if you did not redeem your shares:
Class A
Class B
Class C
Day-to-day Fund Management
Since May 1997 Kurtis D. Spieler, CFA. Portfolio Manager of Invista
(Fund's inception) Capital Management, LLC since 1995.Portfolio Strategist,
1991-1995.
INTERNATIONAL GROWTH-ORIENTED FUND
PRINCIPAL INTERNATIONAL FUND, INC.
The 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.
Main Strategies
The Fund invests in common stocks of companies established outside of the U.S.
The Fund has no limitation on the percentage of assets that are invested in any
one country or denominated in any one currency. However under normal market
conditions, the Fund intends to have at least 65% of its assets invested in
companies in at least three different countries. One of those countries may be
the U.S. though currently the Fund does not intend to invest in equity
securities of U.S. companies.
Investments may be made anywhere in the world. Primary consideration is given to
securities of corporations of Western Europe, North America and Australasia
(Australia, Japan and Far East Asia). Changes in investments are made as
prospects change for particular countries, industries or companies.
In choosing investments for the Fund, the Sub-Advisor, Invista, pays particular
attention to the long-term earnings prospects of the various companies under
consideration. Invista then weighs those prospects relative to the price of the
security.
Main Risks
The values of the stocks owned by the Fund change on a daily basis. Stock prices
reflect the activities of individual companies as well as general market and
economic conditions. In the short term, stock prices and currencies can
fluctuate dramatically in response to these factors. In addition, there are
risks involved with any investment in foreign securities that are not generally
found in stocks of U.S. companies. These include the risk that a foreign
security could lose value as a result of political, financial and economic
events in foreign countries. In addition, foreign securities may be subject to
securities regulators with less stringent accounting and disclosure standards
than are required of U.S. companies.
Under unusual market or economic conditions, the Fund may invest in the same
kinds of securities as the other Growth-Oriented Funds. These include securities
issued by domestic or foreign corporations, governments or governmental
agencies, instrumentalities or political subdivisions. The securities may be
denominated in U.S. dollars or other currencies.
As with all mutual funds, the value of the Fund's assets may rise or fall. If
you sell your shares when their value is less than the price you paid, you will
lose money.
Investor Profile
The Fund is generally a suitable investment if you are seeking long-term growth
and want to invest in non-U.S. companies. This Fund is not an appropriate
investment if you are seeking either preservation of capital or high current
income. You must be able to assume the increased risks of higher price
volatility and currency fluctuations associated with investments in
international stocks which trade in non-U.S. currencies.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1990" -9.51
"1991" 15.25
"1992" 0.81
"1993" 46.34
"1994" -5.26
"1995" 11.56
"1996" 23.76
"1997" 12.22
"1998" 8.48
"1999"
Calendar Years Ended December 31
The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares from June
30, 1999 through December 31, 1999 is -----%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest .% (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Class A % % % Morgan Stanley Capital International EAFE
Class B * -- (Europe, Australia and Far East) Index % % %
Class C ** -- Lipper International Fund Average
<FN>
* Period from December 9, 1994, date Class B shares first offered to the
public, through December 31, 1999.
** Period from June 30, 1999, date Class C shares first offered to the
public, through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses*
Class A Class B Class C
Management Fees................ % % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % % %
* Total Fund Operating Expenses for Class A and Class B shares are for
the year ended October 31, 1999. Expenses for Class C shares are for
the period from June 30, 1999 through December 31, 1999.
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
Class A $ $ $ $
Class B
Class C
You would pay the following expenses if you did not redeem your shares:
Class A
Class B
Class C
Day-to-day Fund Management
Since April 1994 Scott D. Opsal, CFA. Executive Vice President and Chief
Investment Officer of Invista Capital Management, LLC
since 1997. Vice President, 1986-1997.
INTERNATIONAL GROWTH-ORIENTED FUND
PRINCIPAL INTERNATIONAL SMALLCAP FUND, INC.
The 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.
Main Strategies
The Fund invests in stocks of non-U.S. companies with comparatively smaller
market capitalizations. Market capitalization is defined as total current market
value of a company's outstanding common stock. Under normal market conditions,
the Fund invests at least 65% of its assets in securities of companies having
market capitalizations of $1 billion or less.
The Fund diversifies its investments geographically. There is no limitation on
the percentage of assets that may be invested in one country or denominated in
any one currency. However, under normal market circumstances, the Fund intends
to invest at least 65% of its assets in securities of companies of at least
three countries.
Main Risks
Foreign stocks carry risks that are not generally found in stocks of U.S.
companies. These include the risk that a foreign security could lose value as a
result of political, financial and economic events in foreign countries. In
addition, foreign securities may be subject to securities regulators with less
stringent accounting and disclosure standards than are required of U.S.
companies.
Investments in companies with smaller market capitalizations may involve greater
risks and price volatility (wide, rapid fluctuations) than investments in
larger, more mature companies. Smaller companies may be developing or marketing
new products or services for which markets are not yet established and may never
become established. While small, unseasoned companies may offer greater
opportunities for capital growth than larger, more established companies, they
also involve greater risks and should be considered speculative.
This Fund is not an appropriate investment for investors seeking either
preservation of capital or high current income. Investors must be able to assume
the increased risks of higher price volatility and currency fluctuations
associated with investments in international stocks which trade in non-U.S.
currencies. As with all mutual funds, the value of the Fund's assets may rise or
fall. If you sell your shares when their value is less than the price you paid,
you will lose money.
Investor Profile
The Fund is generally a suitable investment if you are seeking long-term growth
and want to invest a portion of your assets in smaller, non-U.S. companies.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1998" 14.4
"1999"
Calendar Year Ended December 31
The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares from June
30, 1999 through December 31, 1999 is -----%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest .% (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Class A % %* -- Morgan Stanley Capital International EAFE
Class B * -- (Europe, Australia and Far East) Index % % --
Class C ** Lipper International Small-Cap Fund Average --
<FN>
* Period from August 29, 1997, date shares first offered to the public,
through December 31, 1999.
** Period from June 30, 1999, date Class C shares first offered to the
public, through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses*
Class A Class B Class C
Management Fees................ % % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % % %
* Total Fund Operating Expenses for Class A and Class B shares are for
the year ended October 31, 1999. Expenses for Class C shares are for
the period from June 30, 1999 through December 31, 1999.
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
Class A $ $ $ $
Class B
Class C
You would pay the following expenses if you did not redeem your shares:
Class A
Class B
Class C
Day-to-day Fund Management
Since May 1997 Darren K. Sleister, CFA. Portfolio Manager of Invista
(Fund's inception) Capital Management, LLC since 1995. Portfolio Strategist,
1993-1995.
PARTNERS FUND
PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND, INC.
The Fund seeks to provide long-term capital appreciation.
Main Strategies
The Fund seeks to maximize long-term capital appreciation by investing primarily
in the equity securities of U.S. and, to a limited extent, foreign companies
that exhibit strong or accelerating earnings growth. The universe of eligible
companies generally includes those with market capitalizations of $1 billion or
more. The Sub-Advisor, Morgan Stanley, emphasizes individual security selection
and may focus the Fund's holdings within the limits permissible for a
diversified fund.
Morgan Stanley follows a flexible investment program in looking for companies
with above average capital appreciation potential. Morgan Stanley focuses on
companies with consistent or rising earnings growth records and compelling
business strategies. Morgan Stanley continually and rigorously studies company
developments, including business strategy, management focus and financial
results to identify companies with earnings growth and business momentum. In
addition, Morgan Stanley closely monitors analysts' expectations to identify
issuers that have the potential for positive earnings surprises versus consensus
expectations. Valuation is of secondary importance and is viewed in the context
of prospects for sustainable earnings growth and the potential for positive
earnings surprises in relation to consensus expectations.
The Fund has a long-term investment approach. However, Morgan Stanley considers
selling securities of issuers that no longer meet its criteria. To the extent
that the Fund engages in short-term trading, it may have increased transaction
costs.
Main Risks
The value of the stocks owned by the Fund changes on a daily basis. Stock prices
can fluctuate dramatically both in the long-term and short-term. The current
price reflects the activities of individual companies and general market and
economic conditions. Prices of equity securities tend to be more volatile than
prices of fixed-income securities. The prices of equity securities rise and fall
in response to a number of different factors. In particular, prices of equity
securities respond to events that affect entire financial markets or industries
(for example changes in inflation or consumer demand) and to events that affect
particular issuers (for example news about the success or failure of a new
product).
The Fund may invest up to 25% of its assets in securities of foreign companies.
Foreign stocks carry risks that are not generally found in stocks of U.S.
companies. These include the risk that a foreign security could lose value as a
result of political, financial and economic events in foreign countries. In
addition, foreign securities may be subject to securities regulators with less
stringent accounting and disclosure standards than are required of U.S.
companies.
At times, the Fund's market sector (mid- to large-capitalization growth-oriented
equity securities) may underperform relative to other sectors. The Fund may
purchase stocks of companies that may have greater risks than other stocks with
lower potential for earnings growth.
As with all mutual funds, as the value of the Fund's assets rise and fall, the
Fund's share price changes. If you redeem (sell) your shares when their value is
less than the price you paid, you will lose money.
Investor Profile
The Fund is generally a suitable investment if you are willing to accept the
risks and uncertainties of investing in equity securities in the hope of earning
superior returns.
As the inception date of the Fund is November 1, 1999, historical performance
data is not available. Estimated annual Fund operating expenses are as follows:
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's cumulative returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past One Past Five Past Ten
Year Year Years Years
<S> <C> <C> <C> <C> <C>
Class A % S&P 500 Stock Index % % %
Class B Lipper Multi-Cap Core Fund Average
Class C **
<FN>
* Period from December 9, 1994, date Class B shares first offered to the
public, through December 31, 1999.
** Period from June 30, 1999, date Class C shares first offered to the
public, through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses*
Class A Class B Class C
Management Fees**.............. % % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % % %
* Total Fund Operating Expenses are estimated.
** The Manager has agreed to waive a portion of its fee for the Fund from
the date operations commenced. The Manager intends to continue the
waiver and, if necessary, pay expenses normally payable by the Fund
through the period ending October 31, 2000. The waiver will maintain a
total level of operating expenses (expressed as a percent of average
net assets attributable to a Class on an annualized basis) not to
exceed: 1.60% for Class A Shares; 2.35% for Class B Shares; and 2.35%
for Class C Shares. The effect of the waiver is to reduce the Fund's
annual operating expenses.
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------
Class A $ $ N/A N/A
Class B N/A N/A
Class C N/A N/A
You would pay the following expenses if you did not redeem your shares:
Class A N/A N/A
Class B N/A N/A
Class C N/A N/A
Day-to-day Fund Management
Since November 1999
(Fund's inception)
Co-Manager, Philip W. Friedman, Managing Director of Morgan Stanley &
Co. Incorporated and Morgan Stanley. Prior to joining Morgan Stanley
in 1997, he was the Director of Equity Research, Morgan Stanley & Co.
Incorporated (1995-1997). Prior thereto, he was a member of Morgan
Stanley & Co. Incorporated's Equity Research team (1990-1995).
Co-Manager, William S. Auslander, Portfolio Manager and Principal of
Morgan Stanley & Co. Incorporated and Morgan Stanley. Prior to joining
Morgan Stanley in 1995, he was an equity analyst at Icahn & Co.
(1986-1995).
Co-Manager, Margaret K. Johnson, Portfolio Manager and Principal of
Morgan Stanley & Co. Incorporated and Morgan Stanley. Ms. Johnson
joined Morgan Stanley in 1984. PARTNERS FUND
PRINCIPAL PARTNERS LARGECAP GROWTH FUND, INC.
The Fund seeks long-term growth of capital by investing primarily in common
stocks of larger capitalization domestic companies.
Main Strategies
The Fund is a non-diversified fund that invests in equity securities of
companies in the U.S. with comparatively larger market capitalizations. Market
capitalization is defined as total current market value of a company's
outstanding common stock. Under normal market conditions, the Fund invests at
least 75% of its total assets in domestic companies with market capitalizations
in excess of $10 billion. In addition, the Fund may invest up to 25% of its
assets in securities of foreign issuers.
In selecting securities for investment, the Sub-Advisor, Duncan-Hurst, looks at
stocks it believes have prospects for above-average growth over an extended
period of time. Duncan-Hurst seeks to identify companies with accelerating
earnings growth and positive company fundamentals. While economic forecasting
and industry sector analysis play a part in its research effort, Duncan-Hurst's
stock selection process begins with individual company analysis. This is often
referred to as a bottom-up approach to investing. From a group of companies that
meet Duncan-Hurst's standards, it selects the securities of those companies that
it believes will have earnings growth at an above-average rate. In making this
determination, Duncan-Hurst considers certain characteristics of a particular
company including new product development, management change and competitive
market dynamics.
Main Risks
While stocks have historically been a leading choice of long-term investors,
they do fluctuate in price. The value of the stocks owned by the Fund changes on
a daily basis. The current price reflects the activities of individual companies
and general and market conditions. In the short-term, stock prices fluctuate
dramatically in response to these factors. As a result, the value of your
investment in the Fund will go up and down. If you sell your shares when their
value is less than the price you paid, you will lose money. Because different
types of stocks tend to shift in and out of favor depending on market and
economic conditions, the Fund's performance may sometimes be lower or higher
than that of other types of funds.
Foreign stocks carry risks that are not generally found in stocks of U.S.
companies. These include the risk that a foreign security could lose value as a
result of political, financial and economic events in foreign countries. In
addition, foreign securities may be subject to securities regulators with less
stringent accounting and disclosure standards than are required of U.S.
companies.
The Fund anticipates that its portfolio turnover rate will typically exceed
150%. Turnover rates in excess of 100% generally result in higher transaction
costs and a possible increase in short-term capital gains (or losses).
The Fund is a non-diversified company, as defined in the Investment Company Act
of 1940, as amended (the "1940 Act"), which means that a relatively high
percentage of assets of the Fund may be invested in the obligations of a limited
number of issuers. The value of the shares of the Fund may be more susceptible
to a single economic, political or regulatory occurrence than the shares of a
diversified investment company would be.
Investor Profile
The Fund is generally a suitable investment if you are seeking long-term growth
and are willing to accept the potential for volatile fluctuations in the value
of your investment. This Fund is designed as a long-term investment with growth
potential for diversification of your investment portfolio. It is not
appropriate if you are seeking income or conservation of capital.
As the inception date of the Fund is ____________________, historical
performance data is not available. Estimated annual Fund operating expenses are
as follows:
Fund Operating Expenses*
Class A Class B Class C
Management Fees**.............. % % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % % %
* Total Fund Operating Expenses are estimated.
** The Manager has agreed to waive a portion of its fee for the Fund from
the date operations commenced. The Manager intends to continue the
waiver and, if necessary, pay expenses normally payable by the Fund
through the period ending October 31, 2000. The waiver will maintain a
total level of operating expenses (expressed as a percent of average
net assets attributable to a Class on an annualized basis) not to
exceed: ____% for Class A Shares; ____% for Class B Shares; and ____%
for Class C Shares. The effect of the waiver is to reduce the Fund's
annual operating expenses.
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
Class A $ $ N/A N/A
Class B N/A N/A
Class C N/A N/A
You would pay the following expenses if you did not redeem your shares:
Class A N/A N/A
Class B N/A N/A
Class C N/A N/A
Day-to-day Fund Management
Since _____
(Fund's inception)
PARTNERS FUND
PRINCIPAL PARTNERS MIDCAP GROWTH FUND, INC.
The Fund seeks to provide long-term capital growth by investing primarily in
medium capitalization U.S. companies with strong earnings growth potential.
Main Strategies
The Fund invests primarily in common stocks and other equity securities of U.S.
companies. Under normal market conditions, the Fund invests at least 65% of its
assets in companies with market capitalizations in the $1 billion and $10
billion range.
The Fund invests in securities of companies that are diversified across economic
sectors. It attempts to maintain sector concentrations that approximate those of
its current benchmark, the Russell MidCap Index. The Fund is not an index fund
and does not limit its investment to the securities of issuers in the Russell
MidCap Index.
The Sub-Advisor, Turner, selects stocks that it believes have strong earnings
growth potential. Turner invests in companies with strong earnings dynamics, and
sells those with deteriorating earnings prospects. Turner believes forecasts for
market timing and sector rotation are unreliable, and introduce an unacceptable
level of risk. As a result, under normal market conditions the Fund is fully
invested.
Due to its investment strategy, the Fund may buy and sell securities frequently.
This may result in higher transaction costs and additional capital gains tax.
Main Risks
Because it purchases equity securities, the Fund is subject to the risk that
stock prices will fall over short or extended periods of time. Individual
companies may report poor results or be negatively affected by industry and/or
economic trends and developments. The price of securities issued by such
companies may suffer a decline in response. These factors contribute to price
volatility, which is the principal risk of investing in the Fund.
In addition, the Fund is subject to the risk that its principal market segment,
medium capitalization growth stocks, may underperform compared to other market
segments or to the equity markets as a whole. Because of this volatility, the
value of the Fund's equity securities may fluctuate on a daily basis. These
fluctuations may reduce your principal investment and lead to varying returns.
If you sell your shares when their value is less than the price you paid, you
will lose money.
The medium capitalization companies the Fund invests in may be more vulnerable
to adverse business or economic events than larger, more established companies.
In particular, these mid-size companies may pose greater risk due to narrow
product lines, limited financial resources, less depth in management or a
limited trading market for their securities.
Investor Profile
The Fund is generally a suitable investment if you are seeking long-term growth
of capital and are willing to accept the potential for short-term fluctuations
in the value of your investment. This Fund is not designed for income or
conservation of capital.
As the inception date of the Fund is ____________________, historical
performance data is not available. Estimated annual Fund operating expenses are
as follows:
Fund Operating Expenses*
Class A Class B Class C
Management Fees**.............. % % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % % %
* Total Fund Operating Expenses are estimated.
** The Manager has agreed to waive a portion of its fee for the Fund from
the date operations commenced. The Manager intends to continue the
waiver and, if necessary, pay expenses normally payable by the Fund
through the period ending October 31, 2000. The waiver will maintain a
total level of operating expenses (expressed as a percent of average
net assets attributable to a Class on an annualized basis) not to
exceed: ____% for Class A Shares; ____% for Class B Shares; and ____%
for Class C Shares. The effect of the waiver is to reduce the Fund's
annual operating expenses.
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
Class A $ $ N/A N/A
Class B N/A N/A
Class C N/A N/A
You would pay the following expenses if you did not redeem your shares:
Class A N/A N/A
Class B N/A N/A
Class C N/A N/A
Day-to-day Fund Management
Since _____
(Fund's inception)
INCOME-ORIENTED FUND
PRINCIPAL BOND FUND, INC.
The Fund seeks to provide as high a level of income as is consistent with
preservation of capital and prudent investment risk.
Main Strategies
The Fund invests in fixed-income securities. Generally, the Fund invests on a
long-term basis but may make short-term investments. Longer maturities typically
provide better yields but expose the Fund to the possibility of changes in the
values of its securities as interest rates change. Generally, when interest
rates fall, the price per share rises, and when rates rise, the price per share
declines.
Undernormal circumstances, the Fund invests at least 65% of its assets in:
o debt securities and taxable municipal bonds;
o rated, at the time of purchase, in one of the top four categories
by S&P or Moody's, or
o if not rated, in the Manager's opinion are of comparable quality.
o similar Canadian, Provincial or Federal Government securities payable
in U.S. dollars; and
o securities issued or guaranteed by the U.S. Government or its
agencies.
The rest of the Fund's assets may be invested in securities that may be
convertible (may be exchanged for a fixed number of shares of common stock of
the same issuer) or non-convertible including:
o domestic and foreign debt securities;
o preferred and common stock;
o foreign government securities; and
o securities rated less than the four highest grades of S&P or Moody's
but not lower BB- (S&P) or Ba3 (Moody's). Fixed income securities that
are not investment grade are commonly referred to as junk bonds or high
yield securities. These securities offer a potentially higher yield
than other, higher rated securities, but they carry a greater degree of
risk and are considered speculative by the major credit rating
agencies.
During the fiscal year ended October 31, 1999, the average ratings of this
Fund's assets based on market value at each month-end, were as follows (all
ratings are by Moody's):
Aaa 0.05%
Aa 2.90%
A 21.87%
Baa 66.11%
Ba 9.06%
Under unusual market or economic conditions, the Fund may invest up to 100% of
its assets in cash and cash equivalents.
Main Risks
When interest rates fall, the price of a bond rises and when interest rates
rise, the price declines. In addition, the value of securities held by the Fund
may be affected by factors such as credit rating of the entity that issued the
bond and effective maturities of the bond. Lower quality and longer maturity
bonds will be subject to greater credit risk and price fluctuations than higher
quality and shorter maturity bonds.
Investor Profile
The Fund is generally a suitable investment if you are seeking monthly dividends
to produce income or to be reinvested in additional Fund shares to help achieve
modest growth objectives without accepting the risks of investing in common
stocks. As with all mutual funds, if you sell your shares when their value is
less than the price you paid, you will lose money.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1990" 4.64
"1991" 17.45
"1992" 8.61
"1993" 12.77
"1994" -4.35
"1995" 22.28
"1996" 2.27
"1997" 10.96
"1998" 7.14
"1999"
Calendar Years Ended December 31
The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares from June
30, 1999 through December 31, 1999 is -----%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest .% (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Class A % % % Lehman Brothers BAA Corporate Index % % %
Class B * -- Lipper Corporate Debt BBB Rated Fund Average
Class C ** --
<FN>
* Period from December 9, 1994, date Class B shares first offered to the
public, through December 31, 1999.
** Period from June 30, 1999, date Class C shares first offered to the
public, through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses*
Class A Class B Class C
Management Fees................ % % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % % %
* Total Fund Operating Expenses for Class A and Class B shares are for
the year ended October 31, 1999. Expenses for Class C shares are for
the period from June 30, 1999 through December 31, 1999.
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
Class A $ $ $ $
Class B
Class C
You would pay the following expenses if you did not redeem your shares:
Class A
Class B
Class C
Day-to-day Fund Management
Since November 1996 Scott A. Bennett, CFA. Assistant Director - Securities
Investment of Principal Capital Management, LLC
since 1996. Investment Manager of Investment Securities
from 1991-1996.
INCOME-ORIENTED FUND
PRINCIPAL GOVERNMENT SECURITIES INCOME FUND, INC.
The 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 Associations
Certificates. The guarantees by the United States Government extends only to
principal and interest. There are certain risks unique to GNMA Certificates.
Main Strategies
The Fund invests in U.S. Government securities, which include obligations issued
or guaranteed by the U.S. Government or its agencies or instrumentalities. The
Fund may invest in securities supported by:
o full faith and credit of the U.S. Government (e.g. GNMA certificates);
or
o credit of the instrumentality (e.g. bonds issued by the Federal Home
Loan Bank).
In addition, the Fund may invest in money market instruments.
The Fund invests in modified pass-through GNMA Certificates. GNMA Certificates
are mortgage-backed securities representing an interest in a pool of mortgage
loans. Various lenders make the loans which are then insured (by the Federal
Housing Administration) or loans which are guaranteed (by Veterans
Administration or Farmers Home Administration). The lender or other security
issuer creates a pool of mortgages which it submits to GNMA for approval.
Owners of modified pass-through Certificates receive all interest and principal
payments owed on the mortgages in the pool, regardless of whether or not the
mortgagor has made the payment. Timely payment of interest and principal is
guaranteed by the full faith and credit of the U.S. Government.
Main Risks
Although some of the securities the Fund purchases are backed by the U.S.
government and its agencies, shares of the Fund are not guaranteed. When
interest rates fall, the value of the Fund's shares rises, and when rates rise,
the value declines. Because of the fluctuation in values of the Fund's shares,
if you sell your shares when their value is less than the price you paid, you
will lose money
U.S. Government securities do not involve the degree of credit risk associated
with investments in lower quality fixed-income securities. As a result, the
yields available from U.S. Government securities are generally lower than the
yields available from many other fixed-income securities. Like other
fixed-income securities, the values of U.S. Government securities change as
interest rates fluctuate. Fluctuations in the value of the Fund's securities do
not effect interest income on securities already held by the Fund, but are
reflected in the Fund's price per share. Since the magnitude of these
fluctuations generally are greater at times when the Fund's average maturity is
longer, under certain market conditions the Fund may invest in short-term
investments yielding lower current income rather than investing in higher
yielding longer term securities.
Mortgage-backed securities are subject to prepayment risk. Prepayments,
unscheduled principal payments, may result from voluntary prepayment,
refinancing or foreclosure of the underlying mortgage. When interest rates
decline, significant unscheduled prepayments may result. These prepayments must
then be reinvested at lower rates. Prepayments may also shorten the effective
maturities of these securities, especially during periods of declining interest
rates. On the other hand, during periods of rising interest rates, a reduction
in prepayments may increase the effective maturities of these securities,
subjecting them to the risk of decline in market value in response to rising
interest and potentially increasing the volatility of the fund.
In addition, prepayments may cause losses on securities purchased at a premium
(dollar amount by which the price of the bond exceeds its face value). At times,
mortgage-backed securities may have higher than market interest rates and are
purchased at a premium. Unscheduled prepayments are made at par and cause the
Fund to experience a loss of some or all of the premium.
Investor Profile
The Fund is generally a suitable investment if you who want monthly dividends to
provide income or to be reinvested in additional Fund shares to produce growth
and prefer to have the repayment of principal and interest on most of the
securities in which the Fund invests to be back by the U.S. Government or its
agencies.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1990" 9.52
"1991" 16.83
"1992" 6.13
"1993" 9.16
"1994" -4.89
"1995" 19.19
"1996" 3.85
"1997" 9.69
"1998" 7.19
"1999"
Calendar Years Ended December 31
The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares from June
30, 1999 through December 31, 1999 is -----%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest .% (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Class A % % % Lehman Brothers GNMA Index % % %
Class B * -- Lipper GNMA Fund Average
Class C **
<FN>
* Period from December 9, 1994, date Class B shares first offered to the
public, through December 31, 1999.
** Period from June 30, 1999, date Class C shares first offered to the
public, through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses*
Class A Class B Class C
Management Fees................ % % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % % %
* Total Fund Operating Expenses for Class A and Class B shares are for
the year ended October 31, 1999. Expenses for Class C shares are for
the period from June 30, 1999 through December 31, 1999.
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
Class A $ $ $ $
Class B
Class C
You would pay the following expenses if you did not redeem your shares:
Class A
Class B
Class C
Day-to-day Fund Management
Since May 1985 Martin J. Schafer, Portfolio Manager of Invista Capital
(Fund's inception) Management, LLC since 1992.
INCOME-ORIENTED FUND
PRINCIPAL HIGH YIELD FUND, INC.
The Fund 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.
Main Strategies
The Fund invests in high yield, lower or unrated fixed income securities. Fixed
income securities that are commonly known as "junk bonds" or high yield
securities. These securities offer a higher yield than other, higher rated
securities but they carry a greater degree of risk and are considered to be
speculative with respect to the issuer's ability to pay interest and repay
principal.
The Fund invests its assets in securities rated Ba1 or lower by Moody's or BB+
or lower by S&P. The Fund may also invest in unrated securities which the
Manager believes to be of comparable quality. The Fund does not invest in
securities rated below Caa (Moody's) or below CCC (S&P) at the time of purchase.
The SAI contains descriptions of the securities rating categories.
During the fiscal year ended October 31, 1999, the average ratings of the Fund's
assets, based on market value at each month-end, were as follows (all ratings
are by Moody's):
0.74% in securities rated A 46.72% in securities rated Ba
2.64% in securities rated C 2.62% in securities rated Baa
52.59% in securities rated B 0.10% in securities rated D
The above percentage for securities rated Ba includes 2.89% of unrated
securities and securities rated B includes 2.52% of unrated securities which
have been determined by the Manager to be of comparable quality.
Main Risks
Investors assume special risks when investing in the Fund. Compared to higher
rated securities, lower rated securities may:
o have a more volatile market value, generally reflecting specific
events affecting the issuer;
o be subject to greater risk of loss of income and principal (issuers
are generally not as financially secure);
o have a lower volume of trading, making it more difficult to value or
sell the security; and
o be more susceptible to a change in value or liquidity based on adverse
publicity and investor perception, whether or not based on factual
analysis.
The market for higher-yielding, lower-rated securities has not been tested by an
economic recession. An economic downturn may severely disrupt the market for
these securities. This could cause financial stress to the issuer negatively
affecting the issuer's ability to pay principal and interest. This may also
negatively affect the value of the Fund's securities. In addition, if an issuer
defaults the Fund may have additional expenses if it tries to recover the
amounts due it.
Some securities the Fund buys have call provisions. A call provision allows the
issuer of the security to redeem it before its maturity date. If a bond is
called in a declining interest rate market, the Fund would have to replace it
with a lower yielding security. This results in a decreased return for
investors. In addition, in a rising interest rate market, a higher yielding
security's value decreases. This is reflected in a lower share price for the
Fund.
The Fund tries to minimize the risks of investing in lower rated securities by
diversification, investment analysis and attention to current developments in
interest rates and economics conditions. Although the Fund's Manager considers
securities ratings when making investment decisions, it performs its own
investment analysis. This analysis includes traditional security analysis
considerations such as:
o experience and managerial strength
o changing financial condition
o borrowing requirements or debt maturity schedules
o responsiveness to changes in business conditions
o relative value based on anticipated cash flow
o earnings prospects
The Manager continuously monitors the issuers of the Fund's securities to
determine if the issuers will have sufficient cash flow and profits to meet
required principal and interest payments. It also monitors each security to
assure the security's liquidity so the Fund can meet requests for sales of Fund
shares.
For defensive purposes, the Fund may invest in other securities. During periods
of adverse market conditions, the Fund may invest in all types of money market
instruments, higher rated fixed-income securities or any other fixed-income
securities consistent with the temporary defensive strategy. The yield to
maturity on these securities is generally lower than the yield to maturity on
lower rated fixed-income securities.
Investor Profile
The Fund is generally a suitable investment if you are seeking monthly dividends
to provide income or to be reinvested in Fund shares for growth. However, it is
suitable only for that portion of your investments for which you are willing to
accept potentially greater risk. You should carefully consider your ability to
assume the risks of this Fund before making an investment and be prepared to
maintain your investment in the Fund during periods of adverse market
conditions. This Fund should not be relied on to meet short-term financial
needs. As with all mutual funds, the value of the Fund's assets may rise or
fall. If you sell your shares when their value is less than the price you paid,
you will lose money.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annaul Total Returns
"1990" -11.66
"1991" 28.74
"1992" 13.09
"1993" 12.1
"1994" -0.65
"1995" 15.61
"1996" 12.54
"1997" 9.68
"1998" -1.28
"1999"
Calendar Years Ended December 31
The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares from June
30, 1999 through December 31, 1999 is -----%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest .% (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Class A % % % Lehman Brothers High Yield Composite Bond Index % % %
Class B * -- Lipper High Current Yield Fund Average
Class C **
<FN>
* Period from December 9, 1994, date Class B shares first offered to the
public, through December 31, 1999.
** Period from June 30, 1999, date Class C shares first offered to the
public, through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses*
Class A Class B Class C
Management Fees................ % % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % % %
* Total Fund Operating Expenses for Class A and Class B shares are for
the year ended October 31, 1999. Expenses for Class C shares are for
the period from June 30, 1999 through December 31, 1999.
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
Class A $ $ $ $
Class B
Class C
You would pay the following expenses if you did not redeem your shares:
Class A
Class B
Class C
Day-to-day Fund Management
Since April 1998 Mark P. Denkinger, CFA. Assistant Director - Securities
Investment of Principal Capital Management, LLC
since 1998. Investment Manager from 1993-1998.
INCOME-ORIENTED FUND
PRINCIPAL LIMITED TERM BOND FUND, INC.
The 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 matruity of five years or less.
Main Strategies
The Fund invests in high grade, short-term debt securities. Under normal
circumstances, it invests at least 80% of its assets in:
o securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities;
o debt securities of U.S. issuers rated in the three highest grades by
S&P or Moody's; or
o if unrated, are of comparable quality in the opinion of the
Sub-Advisor, Invista.
The rest of the Fund's assets are invested in securities in the fourth highest
rating category or their equivalent. Securities in the fourth highest category
are "investment grade." While they are considered to have adequate capacity to
pay interest and repay principal, they do have speculative characteristics.
Changes in economic and other conditions are more likely to impact the ability
of the issuer to make principal and interest payments than is the case with
higher rated securities.
Main Risks
The Fund may invest in corporate debt securities and mortgage-backed securities.
When interest rates fall, the price of a bond rises and when interest rates
rise, the price declines. In addition, the value of the corporate debt
securities held by the Fund may be affected by factors such as credit rating of
the entity that issued the bond and effective maturities of the bond. Lower
quality and longer maturity bonds will be subject to greater credit risk and
price fluctuations than higher quality and short maturity bonds.
Mortgage backed securities are subject to prepayment risk. When interest rates
decline, significant unscheduled prepayments may result. These prepayments must
then be reinvested at lower rates. Prepayments may also shorten the effective
maturities of these securities, especially during periods of declining interest
rates. On the other hand, during periods of rising interest rates, a reduction
in prepayments may increase the effective maturities of these securities,
subjecting them to the risk of decline in market value in response to rising
interest. This may increase the volatility of the Fund.
Under normal circumstances, the Fund maintains a dollar-weighted average
maturity of not more than five years. In determining the average maturity of the
Fund's assets, the maturity date of callable or prepayable securities may be
adjusted to reflect Invista's judgment regarding the likelihood of the security
being called or prepaid.
Under unusual market or economic conditions, for temporary defensive purposes
the Fund may invest up to 100% of its assets in the cash or cash equivalents.
As with all mutual funds, the value of the Fund's assets may rise or fall. If
you sell your shares when their value is less than the price you paid, you will
lose money.
Investor Profile
The Fund is generally a suitable investment if you who want monthly dividends to
generate income or to reinvest for modest growth. You must be willing to accept
some volatility in the value of your investment but do not want dramatic
volatility.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1997" 6.63
"1998" 6.7
"1999"
Calendar Years Ended December
The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares from June
30, 1999 through December 31, 1999 is -----%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest .% (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Class A % %* -- Lehman Brothers Intermediate Government/Corporate Index % % --
Class B * -- Lipper Short-Intermediate Investment Grade Debt
Class C ** Fund Average --
<FN>
* Period from February 29, 1996, date shares first offered to the
public, through December 31, 1999.
** Period from June 30, 1999, date Class C shares first offered to the
public, through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses*
Class A Class B Class C
Management Fees................ % % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % % %
* Total Fund Operating Expenses for Class A and Class B shares are for
the year ended October 31, 1999. Expenses for Class C shares are for
the period from June 30, 1999 through December 31, 1999.
** The Manager has agreed to waive a portion of its fee for the Fund. The
Manager intends to continue the waiver and, if necessary, pay expenses
normally payable by the Fund through the period ending October 31,
2000. The waiver will maintain a total level of operating expenses
(expressed as a percent of average net assets attributable to a Class
on an annualized basis) not to exceed: 1.00% for Class A Shares; 1.35%
for Class B Shares; and 1.35% for Class C Shares. The effect of the
waiver is to reduce the Fund's annual operating expenses.
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
Class A $ $ $ $
Class B
Class C
You would pay the following expenses if you did not redeem your shares:
Class A
Class B
Class C
Day-to-day Fund Management
Since February 1996 Martin J. Schafer, Portfolio Manager of Invista Capital
(Fund's inception) Management, LLC since 1992.
INCOME-ORIENTED FUND
PRINCIPAL TAX-EXEMPT BOND FUND, INC.
The 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.
Main Strategies and Risks
The Fund invests in a diversified portfolio of securities issued by or on behalf
of state or local governments and other public authorities. In the opinion of
the issuer's bond counsel, interest on these obligations is exempt from federal
income tax. Investment in the Fund is not appropriate for IRA or other
tax-advantaged accounts.
Under normal market conditions, the Fund invests at least 80% of its assets in
municipal obligations. At the time these securities are purchased, they are:
municipal bonds which are rated in the four highest grades by Moody's; municipal
notes rated in the highest grade by Moody's; municipal commercial paper rated in
the highest grade by Moody's or S&P; or if unrated, are of comparable quality in
the opinion of the Manager. During normal market conditions, the Fund will not
invest more than 20% of its assets in: securities that do not meet the criteria
stated above; taxable securities; or municipal obligations the interest on which
is treated as a tax preference item for purposes of the federal alternative
minimum tax. The Fund may also invest in taxable securities which mature one
year or less from the time of purchase. These taxable investments are generally
made for liquidity purposes or as a temporary investment of cash pending
investment in municipal obligations. Under unusual market or economic
conditions, for temporary defensive purposes the Fund may invest more than 20%
of its assets in taxable securities.
Up to 20% of Fund assets may be invested in debt securities rated lower than BBB
by S&P or Baa by Moody's. The Fund will not purchase municipal bonds rated lower
than B by Moody's or S&P. It also will not buy municipal notes or commercial
paper which are unrated or are not comparable in quality to rated securities.
During the fiscal year ended October 31, 1999, the average ratings of the Fund's
assets, based on market value at each month-end, were (all ratings are by
Standard & Poor's): % rated AAA; % rated AA; % rated A and % rated BBB. The
above percentages includes unrated securities which the Manager has determined
to be of comparable quality: % rated AAA; % rated AAA; % rated AA; % rated A and
% rated BBB.
Main Risks
The Fund may not invest more than 5% of its assets in the securities of any one
issuer (except the U.S. Government) but may invest without limit in obligations
of issuers located in the same state. It may also invest in debt obligations
which are repayable out of revenue from economically related projects or
facilities. This represents a risk to the Fund since an economic, business or
political development or change affecting one security could also affect others.
The Fund may purchase industrial development bonds. These securities are issued
by industrial development authorities. They may only be backed by the assets and
revenues of the industrial corporation which uses the facility financed by the
bond.
Fixed income securities that are not investment grade are commonly referred to
as "junk bonds" or high yield securities. These securities offer a higher yield
than other, higher rated securities, but they carry a greater degree of risk and
are considered speculative by the major credit rating agencies.
When interest rates fall, the price of a bond rises and when interest rates
rise, the price declines. The value of debt securities may also be affected by
factors such as credit rating of the entity that issued the bond and effective
maturities of the bond. Lower quality and longer maturity bonds will be subject
to greater credit risk and price fluctuations than higher quality and short
maturity bonds.
Investor Profile
The Fund is generally a suitable investment if you are seeking monthly dividends
to produce income without incurring much principal risk or for short-term needs.
As with all mutual funds, the value of the Fund's assets may rise or fall. If
you sell your shares when their value is less than the price you paid, you will
lose money.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1990" 5.08
"1991" 12.07
"1992" 9.62
"1993" 12.44
"1994" -9.44
"1995" 20.72
"1996" 4.6
"1997" 9.19
"1998" 5.08
"1999"
Calendar Years Ended December 31
The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares from June
30, 1999 through December 31, 1999 is -----%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest .% (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Class A % % % Lehman Brothers Municipal Bond Index % % %
Class B * -- Lipper General Municipal Debt Fund Average
Class C **
<FN>
* Period from December 9, 1994, date Class B shares first offered to the
public, through December 31, 1999.
** Period from June 30, 1999, date Class C shares first offered to the
public, through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses*
Class A Class B Class C
Management Fees................ % % %
12b-1 Fees..................... None %
Other Expenses................. % %
Total Fund Operating Expenses % % %
* Total Fund Operating Expenses for Class A and Class B shares are for
the year ended October 31, 1999. Expenses for Class C shares are for
the period from June 30, 1999 through December 31, 1999.
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
Class A $ $ $ $
Class B
Class C
You would pay the following expenses if you did not redeem your shares:
Class A
Class B
Class C
Day-to-day Fund Management
Since July 1991 Daniel J. Garrett, CFA. Assistant Director - Securities
Investment of Principal Capital Management LLC since 1994.
MONEY MARKET FUND
PRINCIPAL CASH MANAGEMENT FUND, INC.
The 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.
Main Strategies
The 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.
The Fund invests its assets in a portfolio of money market instruments. The
investments are U.S. dollar denominated securities which the Manager believes
present minimal credit risks. At the time the Fund purchases each security, it
is an "eligible security" as defined in the regulations issued under the
Investment Company Act of 1940.
The Fund maintains a dollar weighted average portfolio maturity of 90 days or
less. It intends to hold its investments until maturity. However, the Fund may
sell a security before it matures:
o to take advantage of market variations;
o to generate cash to cover sales of Fund shares by its shareholders; or
o upon revised credit opinions of the security's issuer. The sale of a
security by the Fund before maturity may not be in the best interest of the
Fund. The Fund does have an ability to borrow money to cover the sale of
Fund shares. The sale of portfolio securities is usually a taxable event.
It is the policy of the Fund to be as fully invested as possible to maximize
current income. Securities in which the Fund invests include:
o Government securities which are issued or guaranteed by the U.S.
Government, including treasury bills, notes and bonds.
o U.S. Government agency securities which are issued or guaranteed by
agencies or instrumentalities of the U.S. Government. These are backed
either by the full faith and credit of the U.S. Government or by the credit
of the particular agency or instrumentality.
o Bank obligations consisting of:
o certificates of deposit which generally are negotiable certificates
against funds deposited in a commercial bank or
o bankers acceptances which are time drafts drawn on a commercial bank,
usually in connection with international commercial transactions.
o Commercial paper which is short-term promissory notes issued by U.S. or
foreign corporations primarily to finance short-term credit needs.
o Short-term corporate debt consisting of notes, bonds or debentures which at
the time of purchase by the Fund has 397 days or less remaining to
maturity.
o Repurchase agreements under which securities are purchased with an
agreement by the seller to repurchase the security at the same price plus
interest at a specified rate. Generally these have a short duration (less
than a week) but may also have a longer duration.
o Taxable municipal obligations which are short-term obligations issued or
guaranteed by state and municipal issuers which generate taxable income.
Main Risks
As with all mutual funds, the value of the Fund's assets may rise or fall.
Although the Fund seeks to preserve the value of an investment at $1.00 per
share, it is possible to lose money by investing in the Fund if you sell your
shares when their value is less than the price you paid. An investment in the
Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation
or any other government agency.
Investor Profile
The Fund is generally a suitable investment if you are seeking monthly dividends
to produce income without incurring much principal risk or your short-term
needs.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1990" 7.63
"1991" 5.8
"1992" 3.38
"1993" 2.63
"1994" 3.77
"1995" 5.44
"1996" 4.96
"1997" 4.88
"1998" 5.15
"1999"
Calendar Years Ended December 31
The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares from June
30, 1999 through December 31, 1999 is _____%. To obtain the Fund's current yield
information, please call 1-800-247-4123.
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
Past One Past Five Past Ten
Year Years Years
Class A % % %
Class B * --
Class C **
* Period from December 9, 1994, date Class B shares first offered to the
public, through December 31, 1999.
** Period from June 30, 1999, date Class C shares first offered to the
public, through December 31, 1999.
Fund Operating Expenses*
Class A Class B Class C
Management Fees................ % % %
12b-1 Fees..................... None %
Other Expenses................. % %
Total Fund Operating Expenses % % %
* Total Fund Operating Expenses for Class A and Class B shares are for
the year ended October 31, 1999. Expenses for Class C shares are for
the period from June 30, 1999 through December 31, 1999.
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
Class A $ $ $ $
Class B
Class C
You would pay the following expenses if you did not redeem your shares:
Class A
Class B
Class C
Day-to-day Fund Management
Since March 1983 Michael R. Johnson. Assistant Director - Securities Trading
of Principal Capital Management, LLC since 1994.
Since ______ Alice Robertson
THE COSTS OF INVESTING
Fees and Expenses of the Funds
This table describes the fees and expenses that you may pay if you buy and hold
shares of a Fund.
<TABLE>
Shareholder Fees
(fees paid directly from your investment)
<S> <C> <C> <C> <C> <C> <C>
Class A Shares Class B Shares Class C Shares
Maximum Deferred
Maximum Sales Charge Maximum Deferred Sales Charge Sales Charge on
on Purchases (as a percentage of the lower of Purchases (as a
(as a percentage of the original purchase price percentage of
offering price) or current market value) offering price)
Redemptions During Redemptions During
Year Year 1
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2 3 4 5 6 7
-------------------------------------------------------
All Funds except LargeCap Stock Index,
Limited Term Bond
and Cash Management Funds 4.75% 4% 4% 3% 3% 2% 1% 0% 1.00%
LargeCap Stock Index and
Limited Term Bond Funds 1.50% 1.25% 1.25% .75% .75% .50% .25% 0% .50%
Cash Management Fund None 4% 4% 3% 3% 2% 1% 0% 1.00%
<FN>
Notes:
o Shares do not have an exchange or redemption fee.
o A wire charge of $6.00 will be deducted for all wire transfers.
o Class A shares have no deferred sales charge on sales of less than $1 million.
o Class B and Class C shares have no front-end sales charge.
</FN>
</TABLE>
Fees and expenses are important because they lower your earnings. However, low
costs do not guarantee higher earnings. For example, a fund with no front-end
sales charge may have higher ongoing expenses than a fund with such a sales
charge. Before investing, you should be sure you understand the nature of
different costs. Your Registered Representative can help you with this process.
One-time fees. You may pay a one-time sales charge for each purchase (Class A
shares) or redemption (Class B or Class C shares).
o Class A shares may be purchased at a price equal to the share price plus an
initial sales charge.
o Investments of $1 million or more of Class A shares are sold without an
initial sales charge but may be subject to a contingent deferred sales
charge (CDSC) at the time of redemption.
o Class B and Class C shares have no initial sales charge but may be subject
to a CDSC. If you sell (redeem) shares and the CDSC is imposed, it will
reduce the amount of sales proceeds.
Choosing a Share Class
You may purchase Class A, Class B or Class C shares of each Fund. Your decision
to purchase a particular class depends on a number of factors including:
o the dollar amount you are investing;
o the amount of time you plan to hold the investment; and
o any plans to make additional investments in the Principal Mutual Funds.
In addition, you might consider:
o Class A shares if you are making an investment that qualifies for a reduced
sales charge;
o Class B shares if you prefer not to pay an initial sales charge and you
plan to hold your investment for at least six years; or
o Class C shares if you prefer not to pay an initial sales charge and you
plan to hold your investment for only a few years.
The difference between the share Classes is their expenses. Because of their
expenses, Class A shares tend to outperform Class C shares when the amount
invested is higher and/or the money is invested for a longer period of time. If
you plan on purchasing shares, but are unsure which Class to select, this table
may assist you. Class A shares may be advantageous over Class C shares when:
The amount invested is The holding period of the investment is
Less than $50,000 Greater than 5 years
$50,000 but less than $100,000 Greater than 5 years
$100,000 but less than $250,000 Greater than 4 years
$250,000 but less than $500,000 Greater than 4 years
$500,000 but less than $1,000,000 Greater than 1 year
Class A Shares.
o You generally pay a sales charge on an investment in Class A shares.
o Class A shares generally have lower annual operating expenses than Class B
or Class C shares.
o If you invest $50,000 or more, the sales charge is reduced.
o You are not assessed a sales charge on purchases of Class A shares of $1
million or more. A deferred sales charge may be imposed if you sell those
shares within eighteen months of purchase.
Class B Shares
o You do not pay a sales charge on an investment in Class B shares.
o If you sell your Class B shares within six years from the date of purchase,
you may pay a deferred sales charge.
o If you keep your Class B shares for seven years, your Class B shares
automatically convert to Class A shares without a charge.
o Class B shares generally have higher annual operating expenses than Class A
shares.
Class C Shares
o You do not pay a sales charge on an investment in Class C shares.
o If you sell your Class C shares within one year from the date of purchase,
you pay a deferred sales charge.
o Class C shares generally have higher annual operating expenses than Class A
or Class B shares.
Front-end sales charge: Class A shares
There is no sales charge on purchases of Class A shares of the Cash Management
Fund. Class A shares of the other Funds are purchased with a sales charge that
is a variable percentage based on the amount of the purchase. There is no sales
charge on shares of a Fund purchased with reinvested dividends or other
distributions. Your sales charge may be reduced for larger purchases as
indicated below.
<TABLE>
All Funds (Except Sales Charge for
LargeCap Stock LargeCap Stock
Index and Limited Term Index and Limited Term Sales Charge for
Bond Funds) Bond Funds Dealers Allowance as
Sales Charge as % of: Sales Charge as % of: % of Offering Price
<CAPTION>
All Funds Except LargeCap Stock
LargeCap Stock Index and
Offering Net Amount Offering Net Amount Index and Limited Term
Amount invested Price Invested Price Invested Limited Term Bond Bond
<S> <C> <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>
The front-end sales charge is waived on an investment of $1 million or more in
Class A shares. There may be a CDSC on shares sold within 18 months of the
purchase date. The CDSC does not apply to shares purchased with reinvested
dividends or other distributions. The CDSC is calculated as 0.75% of the lesser
of the current market value or the initial purchase price of the shares sold.
The CDSC is waived on shares sold to fund a Principal Mutual Fund 401(a) or
Principal Mutual Fund 401(k) retirement plan, except redemptions which are the
result of termination of the plan or transfer of all plan assets. The CDSC is
also waived:
o on shares sold to satisfy IRS minimum distribution rules; and
o using a periodic withdrawal plan. (You may sell up to 10% of the value of
the shares subject to a CDSC without paying the CDSC.)
In the case of selling some but not all of the shares in an account, the shares
not subject to a sales charge are redeemed first. Other shares are redeemed in
the order purchased (first in, first out). Shares subject to the CDSC which are
exchanged into another Principal Mutual Fund continue to be subject to the CDSC
until the CDSC expires.
Broker-dealers that sell Principal Mutual Funds are paid a certain percentage of
the sales charge in exchange for their services. At the option of Princor
Financial Services Corporation, the amount paid to a dealer may be more or less
than that shown in the chart above. The amount paid depends on the services
provided. Amounts paid to dealers on purchases without a front-end sales charge
are determined by and paid for by Princor.
SALES CHARGE WAIVER OR REDUCTION (Class A shares)
Class A shares of the Funds may be purchased without a sales charge or at a
reduced sales charge. The Funds reserve the right to change or stop offering
shares in this manner at any time for new accounts and with 60 days notice to
shareholders of existing accounts.
Waiver of sales charge (Class A shares)
A Fund's Class A shares may be purchased without a sales charge:
o by its Directors, Principal Life and its subsidiaries and their employees,
officers, directors (active or retired), brokers or agents. This also
includes their immediate family members and trusts for the benefit of these
individuals;
o by the Principal Employees' Credit Union;
o by non-ERISA clients of Invista Capital Management, LLC and Principal
Capital Management LLC;
o by any employee or Registered Representative (and their employees) of an
authorized broker-dealer;
o through broker-dealers, investment advisors and other financial
institutions that have entered into an agreement with Princor which
includes a requirement that such shares be sold for the benefit of clients
participating in a "wrap account" or similar program under which clients
pay a fee to the broker-dealer, investment advisor or financial
institution;
o by unit investment trusts sponsored by Principal Life Insurance Company
and/or its subsidiaries or affiliates;
o by certain employee welfare benefit plan customers of Principal Life with
Plan Deposit Accounts;
o by participants who receive distributions from certain annuity contracts
offered by Principal Life;
o to the extent the investment represents the proceeds of a total surrender
of certain Principal Life issued unregistered group annuity contracts if
Principal Life waives any applicable CDSC or other contract surrender
charge;
o using cash payments received from the Principal Bank under its awards
program;
o to the extent the investment represents redemption proceeds from certain
unregistered group annuity contracts issued by Principal Life to fund an
employer's 401(a) plan where such proceeds are used to fund the employer's
401(a) plan; and
o to the extent the purchase proceeds represent a distribution from a
terminating 401(a) plan if the employer or plan trustee has entered into a
written agreement with Princor permitting the group solicitation of
employees/participants. Such purchases are subject to the CDSC which
applies to purchases of $1 million or more as described above.
Class A shares may also be purchased without a sales charge if your Registered
Representative has recently become affiliated with a broker-dealer authorized to
sell shares of the Principal Mutual Funds. The following conditions must be met:
o your purchase of Class A shares must take place within the first 180 days
of your Registered Representative's affiliation with the authorized
broker-dealer;
o your investment must represent the sales proceeds from other mutual fund
shares (you must have paid a front-end sales charge or a CDSC) and the sale
must occur within the 180 day period; and
o you must indicate on your Principal Mutual Fund application that you are
eligible for waiver of the front-end sales charge.
o You must send us either:
o the check for the sales proceeds(endorsed to Principal Mutual Funds) or
o a copy of the confirmation statement from the other mutual fund showing
the sale transaction. If you place your order to buy Principal Mutual
Fund shares on the telephone, you must send us a copy of the
confirmation within 21 days of placing the order. If we do not receive
the confirmation within 21 days, we will sell enough of your Class A
shares to pay the sales charge that otherwise would have been charged.
NOTE: Please be aware that the sale of your other mutual fund shares may
be subject to federal (and state) income taxes. In addition, you
may pay a surrender charge to the other mutual fund.
Reduction of sales charge (Class A shares)
1) Dollar amount of purchase. The sales charge varies with the size of your
purchase. Reduced charges apply to the total of Principal Mutual Funds'
(excluding the Principal Cash Management Fund, Inc.) shares purchased at
one time by any "Qualified Purchaser." A Qualified Purchaser includes an
individual and his/her spouse and their children under the age of 25, a
trust primarily for such persons, and a trustee or other fiduciary
purchasing for a single trust estate or single fiduciary account. If the
total amount being invested in the Principal Mutual Funds is near a sales
charge breakpoint, you should consider increasing amount invested to take
advantage of a lower sales charge. A purchase made by or through an
employer on behalf of an employee or employees (including independent
contractors) is also considered a purchase by a Qualified Purchaser.
2) Statement of intention (SOI). Qualified Purchasers may obtain reduced sales
charges by signing an SOI. The SOI is a nonbinding obligation on the
Qualified Purchaser to purchase the full amount indicated in the SOI. The
sales charge is based on the total amount to be invested in a 13 month
period (24 months if the intended investment is $1 million or more). Upon
your request, we will set up a 90-day lookback period to include earlier
purchases - the 13 (24) month period then begins on the date of your first
purchase during the 90-day period. If the intended investment is not made,
sufficient shares will be sold to pay the additional sales charge due. A
401(a) plan trustee must submit the SOI at the time of the first plan
purchase. The 90-day lookback period is not available to a 401(a) plan
trustee.
3) Rights of accumulation. The Class A, Class B and Class C shares already
owned by a Qualified Purchaser are added to the amount of the new purchase
to determine the applicable sales charge percentage. Class A shares of the
Cash Management Fund are not included in the calculation unless they were
acquired in exchange for other Principal Mutual Fund shares.
4) Death Benefit proceeds. Death benefit proceeds from a life insurance policy
or certain annuity contracts issued by Principal Life (or its subsidiaries
or affiliates) may be invested in Class A shares at a reduced sales charge.
To qualify for the reduced sales charge, the proceeds must be applied to
the purchase of shares of a Principal Mutual Fund within one year of the
insured's death. The applicable sales charge is determined by the table
below.
<TABLE>
<CAPTION>
Sales Charge as a % of:
Dealer Allowance
Offering Net Amount as % of
Amount of Purchase Price Invested Offering Price
<S> <C> <C> <C> <C>
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
</TABLE>
5) Employer sponsored plans. Retirement plans meeting the requirements of
Section 401 of the Internal Revenue Code (401(k), Profit Sharing and Money
Purchase Pension Plans) and other employer sponsored retirement plans
(SIMPLE IRAs, SEPs, SAR-SEPs, non-qualified deferred compensation plans,
and Payroll Deduction Plans).
a) Principal Mutual Fund 401 Plans. The employer chooses to fund the Plan
with either Class A, Class B or Class C shares when the plan is
established.
o If Class A shares are used:
o all plan investments are treated as made by a single
investor to determine the applicable sales charge,
o the sales charge for investments of less than $250,000 is
3.75% as a percentage of offering price (3.90% of net amount
invested), and
o if the investment is $250,000 or more, the regular sales
charge table is used.
o If Class B shares are used, contributions into the plan after the
plan assets are $250,000 or more are used to buy Class A shares.
o Plan assets are not combined with investments made outside of the
plan to determine the applicable sales charge.
o Investments by plan participants outside the plan are not
included with plan assets to determine the applicable sales
charge.
b) Other employer sponsored retirement plans.
o If Class A shares are used:
o all plan investments are treated as made by a single
investor to determine the applicable sales charge;
o the sales charge for investments of less than $250,000 is
3.75% as a percentage of offering price (3.90% of net amount
invested); and
o if the investment is $250,000 or more, the regular sales
charge table is used.
o If Class B shares are used, contributions into the plan for a
plan participant, after the plan assets of that plan participant
are $250,000 or more, are used to buy Class A shares (unless the
plan participant elects otherwise).
o Plan assets are not combined with investments made outside of the
plan to determine the applicable sales charge.
o Investments by plan participants outside the plan are not
included with plan assets to determine the applicable sales
charge.
c) Participants of Principal Mutual Fund 403(b) plans may buy Fund shares
at the same sales charge levels available to other employer sponsored
plans described above. Contributions by plan participants are not
combined to determine the applicable sales charge.
Contingent deferred sales charge: Class B and Class C shares
A CDSC may be imposed on sales of Class B shares within six years of purchase
(five years for certain sponsored plans). A CDSC may be imposed on sales of
Class C shares within one year of purchase. Princor receives the proceeds of any
CDSC. The CDSC does not apply to shares purchased with reinvested dividends or
other distributions. The amount of the CDSC is a percentage based on the number
of years you own the shares multiplied by the lesser of the current market value
or the initial purchase price of the shares sold.
o In the case of selling some but not all of the shares in an account, the
shares not subject to a sales charge are redeemed first. Other Class B
shares are redeemed in the order purchased (first in, first out). In
processing redemptions for other Class C shares, shares held for the
shortest period of time during the one year period are next redeemed. As a
result of these methods, you pay the lowest possible CDSC.
o Using a periodic withdrawal plan, you may sell up to 10% of the value of
the shares subject to a CDSC without paying the CDSC.
o Shares subject to the CDSC which are exchanged into another Principal
Mutual Fund continue to be subject to the CDSC until the CDSC expires.
Class B shares
Class B shares automatically convert into Class A shares (based on share prices,
not numbers of shares) seven years after purchase. Class B shares provide you
the benefit of putting all your dollars to work from the time of investment, but
(until conversion) have higher ongoing fees and lower dividends than Class A
shares.
The Class B share CDSC, if any, is determined by multiplying the lesser of the
current market value or initial purchase price of the shares sold by the
appropriate percentage from the table below:
<TABLE>
Class B Share CDSC
as a Percentage of
Dollar Amount Subject to Charge
<CAPTION>
For Certain Sponsored Plans
Commenced After 2/1/98
All Funds Except LargeCap Stock All Funds Except LargeCap Stock
LargeCap Stock Index and LargeCap Stock Index and
Years Since Purchase Index and Limited Term Limited Term Index and Limited Term Limited Term
Payments Made Bond Funds Bond Funds Bond Funds Bond Funds
<S> <C> <C> <C> <C>
2 years or less 4.00% 1.25% 3.00% .75%
more than 2 years, up to 4 years 3.00 0.75 2.00 .50
more than 4 years, up to 5 years 2.00 0.50 1.00 .25
more than 5 years, up to 6 years 1.00 0.25 None None
more than 6 years None None None None
</TABLE>
Class C shares
A CDSC of 1% may be imposed on Class C shares sold within one year of purchase.
The charge is assessed on the amount equal to the lesser of the current market
value or the original purchase cost of the shares being redeemed. No CDSC is
imposed on increases in account value above the initial purchase price
(including shares acquiring from the reinvestment of dividends or capital gains
distributions). Class C shares do not convert to any other class of Fund shares.
Waiver of the sales charge (Class B and Class C shares)
The CDSC is waived on sales of Class B shares and of Class C shares which are
sold:
o due to a shareholder's death;
o due to the shareholder's disability, as defined in the Internal Revenue
Code;
o from retirement plans to satisfy minimum distribution rules under the Code;
o to pay surrender charges;
o to pay retirement plan fees;
o involuntarily from small balance accounts;
o through a systematic withdrawal plan (certain limits apply);
o from a retirement plan to assure the plan complies with Sections 401(k),
401(m), 408(k) and 415 of the Code; or
o 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.
Ongoing fees. Each Fund pays ongoing operating fees to its Manager, Underwriter
and others who provide services to the Fund. They reduce the value of each share
you own.
Distribution (12b-1) Fees
Each of the Funds has adopted a Distribution Plan under Rule 12b-1 of the
Investment Company Act of 1940. Under the Plan, the Fund pays a fee to Princor
based on the average daily net asset value of the Fund. These ongoing fees pay
expenses relating to distribution fees for the sale of Fund shares and for
services provided by Princor and other selling dealers to shareholders. Because
they are ongoing fees, over time they may exceed other types of sales charges.
The maximum 12b-1 fees that may be paid by the Funds on an annual basis are:
<TABLE>
<S> <C>
o Class A shares (except Cash Management, LargeCap Stock Index and Limited Term Bond) 0.25%
o Class A shares of LargeCap Stock Index and Limited Term Bond 0.15%
o Class B shares (except LargeCap Stock Index and Limited Term Bond) 1.00%
o Class B shares of LargeCap Stock Index and Limited Term Bond 0.50%
o Class C shares 1.00%
</TABLE>
CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS
The Statement of Additional Information (SAI) contains additional information
about investment strategies and their related risks.
Securities and Investment Practices
Equity securities include common stocks, preferred stocks, convertible
securities and warrants. Common stocks, the most familiar type, represent an
equity (ownership) interest in a corporation. Although equity securities have a
history of long-term growth in value, their prices fluctuate based on changes in
a company's financial condition and in overall market and economic conditions.
Smaller companies are especially sensitive to these factors.
Fixed income securities include bonds and other debt instruments that are used
by issuers to borrow money from investors. The issuer generally pays the
investor a fixed, variable or floating rate of interest. The amount borrowed
must be repaid at maturity. Some debt securities, such as zero coupon bonds, do
not pay current interest, but are sold at a discount from their face values.
Fixed income securities are sensitive to changes in interest rates. In general,
bond prices rise when interest rates fall and fall when interest rates rise.
Longer term bonds and zero coupon bonds are generally more sensitive to interest
rate changes.
Bond prices are also affected by the credit quality of the issuer. Investment
grade debt securities are medium and high quality securities. Some bonds may
have speculative characteristics and be particularly sensitive to economic
conditions and the financial condition of the issuers.
Repurchase Agreements and Loaned Securities
Each of the Funds may invest a portion of its assets in repurchase agreements.
Repurchase agreements typically involve the purchase of debt securities from a
financial institution such as a bank, savings and loan association or
broker-dealer. A repurchase agreement provides that the Fund sells back to the
seller and that the seller repurchases the underlying securities at a specified
price on a specific date. Repurchase agreements may be viewed as loans by a Fund
collateralized by the underlying securities. This arrangement results in a fixed
rate of return that is not subject to market fluctuation while the Fund holds
the security. In the event of a default or bankruptcy by a selling financial
institution, the affected Fund bears a risk of loss. To minimize such risks, the
Fund enters into repurchase agreements only with large, well-capitalized and
well-established financial institutions. In addition, the value of the
collateral underlying the repurchase agreement is always at least equal to the
repurchase price, including accrued interest.
Each of the Funds may lend its portfolio securities to unaffiliated
broker-dealers and other unaffiliated qualified financial institutions.
Currency Contracts
The International, International Emerging Markets, International SmallCap,
Partners Aggressive Growth, Partners LargeCap Growth and Partners MidCap Growth
Funds may each enter into forward currency contracts, currency futures contracts
and options, and options on currencies for hedging and other non-speculative
purposes. A forward currency contract involves a privately negotiated obligation
to purchase or sell a specific currency at a future date at a price set in the
contract. A Fund will not hedge currency exposure to an extent greater than the
aggregate market value of the securities held or to be purchased by the Fund
(denominated or generally quoted or currently convertible into the currency).
Hedging is a technique used in an attempt to reduce risk. If the Fund's Manager
or Sub-Advisor hedges market conditions incorrectly or employs a strategy that
does not correlate well with the Fund's investment, these techniques could
result in a loss, regardless of whether the intent was to reduce risk or to
increase return. These techniques may increase the volatility of a Fund and may
involve a small investment of cash relative to the magnitude of the risk
assumed. In addition, these techniques could result in a loss if the other party
to the transaction does not perform as promised. Additionally, there is the risk
of government action through exchange controls that would restrict the ability
of the Fund to deliver or receive currency.
Forward Commitments
Each of the Income-Oriented, Balanced and Partners Aggressive Growth Funds may
enter into forward commitment agreements. These agreements call for the Fund to
purchase or sell a security on a future date at a fixed price. Each of these
Funds may also enter into contracts to sell its investments either on demand or
at a specific interval.
Warrants
Each of the Funds (except Cash, Government Securities Income and Tax-Exempt
Bond) may invest up to 5% of its assets in warrants. A warrant is a certificate
granting its owner the right to purchase securities from the issuer at a
specified price, normally higher than the current market price.
Risks of High Yield Securities
The Balanced, Bond, High Yield and Tax-Exempt Bond Funds may, to varying
degrees, invest in debt securities rated lower than BBB by S&P or Baa by Moody's
or, if not rated, determined to be of equivalent quality by the Manager. Such
securities are sometimes referred to as high yield or "junk bonds" and are
considered speculative.
Investment in high yield bonds involves special risks in addition to the risks
associated with investment in high rated debt securities. High yield bonds may
be regarded as predominantly speculative with respect to the issuer's continuing
ability to meet principal and interest payments. Moreover, such securities may,
under certain circumstances, be less liquid than higher rated debt securities.
Analysis of the creditworthiness of issuers of high yield securities may be more
complex than for issuers of higher quality debt securities. The ability of a
Fund to achieve its investment objective may, to the extent of its investment in
high yield bonds, be more dependent on such creditworthiness analysis than would
be the case if the Fund were investing in higher quality bonds.
High yield bonds may be more susceptible to real or perceived adverse economic
and competitive industry conditions than higher grade bonds. The prices of high
yield bonds have been found to be less sensitive to interest rate changes than
more highly rated investments, but more sensitive to adverse economic downturns
or individual corporate developments. If the issuer of high yield bonds
defaults, a Fund may incur additional expenses to seek recovery.
The secondary market on which high yield bonds are traded may be less liquid
than the market for higher grade bonds. Less liquidity in the secondary trading
market could adversely affect the price at which a Fund could sell a high yield
bond and could adversely affect and cause large fluctuations in the daily price
of the Fund's shares. Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the value and liquidity of high
yield bonds, especially in a thinly traded market.
The use of credit ratings for evaluating high yield bonds also involves certain
risks. For example, credit ratings evaluate the safety of principal and interest
payments, not the market value risk of high yield bonds. Also, credit rating
agencies may fail to change credit ratings in a timely manner to reflect
subsequent events. If a credit rating agency changes the rating of a portfolio
security held by a Fund, the Fund may retain the security if the Manager thinks
it is in the best interest of shareholders.
Options
Each of the Funds (except Capital Value, Cash Management, Growth and Tax-Exempt
Bond) may buy and sell certain types of options. Each type is more fully
discussed in the SAI.
Foreign Securities
Each of the following Funds may invest in foreign securities (securities of
non-U.S. companies) to the indicated percentage of its assets: (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.)
o International, International Emerging Markets and International
SmallCap Funds - 100%;
o Partners Aggressive Growth, Partners LargeCap Growth and Real Estate
Funds - 25%;
o Balanced, Blue Chip, Bond, Capital Value, Growth, High Yield, Limited
Term Bond, MidCap, SmallCap and Utilities Funds - 20%;
o LargeCap Stock Index and Partners MidCap Growth Funds - 10%;
The Cash Management Fund does not invest in foreign securities other than those
that are United States dollar denominated. All principal and interest payments
for the security are payable in U.S. dollars. The interest rate, the principal
amount to be repaid and the timing of payments related to the security 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.
Investment in foreign securities presents certain risks including: 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. In addition, there may be reduced
availability of public information concerning foreign issuers compared to
domestic issuers. Foreign issuers are not generally subject to uniform
accounting, auditing and financial reporting standards or to other regulatory
practices and requirements that apply to domestic issuers. Transactions in
foreign securities may be subject to higher costs. The 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. Foreign securities markets,
particularly those in emerging market countries, are known to experience long
delays between the trade and settlement dates of securities purchased and sold.
Such delays may result in a lack of liquidity and greater volatility in the
price of securities on those markets. As a result of these factors, the Board of
Directors of the Funds have adopted Daily Pricing and Valuation Procedures for
the Fund. These procedures outline the steps to be followed by the Manager
and/or Sub-Advisor to establish a reliable market or fair value if a reliable
market value is not available through normal market quotations. The Executive
Committee of the Board of Directors oversees this process.
Securities of Smaller Companies
The Funds may invest in securities of companies with small- or mid-sized market
capitalizations. Market capitalization is defined as total current market value
of a company's outstanding common stock. Investments in companies with smaller
market capitalizations may involve greater risks and price volatility (wide,
rapid fluctuations) than investments in larger, more mature companies. Smaller
companies may be less mature than larger companies. At this earlier stage of
development, the companies may have limited product lines, reduced market
liquidity for their shares, limited financial resources or less depth in
management than larger or more established companies. Small companies also may
be less significant within their industries and may be at a competitive
disadvantage relative to their larger competitors. While smaller companies may
be subject to these additional risks, they may also realize more substantial
growth than larger or more established companies.
Unseasoned Issuers
The Funds may invest in the securities of unseasoned issuers. Unseasoned issuers
are companies with a record of less than three years continuous operation,
including the operation of predecessors and parents. Unseasoned issuers by their
nature have only a limited operating history which can be used for evaluating
the company's growth prospects. As a result, investment decisions for these
securities may place a greater emphasis on current or planned product lines and
the reputation and experience of the company's management and less emphasis on
fundamental valuation factors than would be the case for more mature growth
companies. In addition, many unseasoned issuers also may be small companies and
involve the risks and price volatility associated with smaller companies.
Temporary Defensive Measures
For temporary defensive purposes in times of unusual or adverse market
conditions, the Growth-Oriented Funds, the Bond and Limited Term Bond Funds may
invest without limit in cash and cash equivalents. For this purpose, cash
equivalents include: bank certificates of deposit, bank acceptances, repurchase
agreements, commercial paper, and commercial paper master notes which are
floating rate debt instruments without a fixed maturity. In addition, a Fund may
purchase U.S. Government securities, preferred stocks and debt securities,
whether or not convertible into or carrying rights for common stock.
Portfolio Turnover
"Portfolio Turnover" is the term used in the industry for measuring the amount
of trading that occurs in a Fund's portfolio during the year. For example, a
100% turnover rate means that on average every security in the portfolio has
been replaced once during the year.
Funds with high turnover rates (more than 100%) often have higher transaction
costs (which are paid by the Fund) and may generate short-term capital gains (on
which you pay taxes even if you don't sell any of your shares during the year).
You can find the turnover rate for each Fund, except for the Cash Management,
Partners LargeCap Growth and Partners MidCap Growth Funds, in the Fund's
Financial Highlights table.
Please consider all the factors when you compare the turnover rates of different
funds. A fund with consistently higher total returns and higher turnover rates
than another fund may actually be achieving better performance precisely because
the managers are active traders. You should also be aware that the "total
return" line in the Financial Highlights already includes portfolio turnover
costs.
MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE
The Manager
Principal Management Corporation serves as the manager for the Principal Mutual
Funds. In its handling of the business affairs of each Fund, the Manager
provides clerical, recordkeeping and bookkeeping services, and keeps the
financial and accounting records required for the Funds. The Manager has signed
sub-advisory agreements with various Sub-Advisors for portfolio management
functions for certain Funds. The Manager compensates the Sub-Advisor for its
services as provided in the subadvisory agreement.
The Manager is a subsidiary of Principal Financial Services, Inc. It has managed
mutual funds since 1969. As of ____________________, the funds it managed had
assets of approximately $____ billion. The Manager's address is Principal
Financial Group, Des Moines, Iowa 50392-0200.
The Sub-Advisors
Funds: Balanced, Blue Chip, Capital Value, Government Securities
Income, Growth, International, International Emerging Markets,
International SmallCap, LargeCap Stock Index, Limited Term Bond,
MidCap, SmallCap, and Utilities.
Sub-Advisor: Invista Capital Management, LLC ("Invista"), an
indirectly wholly-owned subsidiary of Principal Life Insurance
Company and an affiliate of the Manager, was founded in 1985. It
manages investments for institutional investors, including
Principal Life. Assets under management as of __________ were
approximately $____ billion. Invista's address is 1800 Hub Tower,
699 Walnut, Des Moines, Iowa 50309.
Fund: Partners Aggressive Growth
Sub-Advisor: Morgan Stanley Asset Management ("Morgan Stanley"), with
principal offices at 1221 Avenue of the Americas, New York, NY
10020, provides a broad range of portfolio management services to
customers in the U.S. and abroad. As of _______, Morgan Stanley
managed investments totaling approximately $_____ billion as
named fiduciary or fiduciary adviser. On December 1, 1998, Morgan
Stanley Assets Management Inc. changed its name to Morgan Stanley
Dean Witter Investment Management Inc. but continues to do
business in certain instances using the name Morgan Stanley Asset
Management.
Fund: Partners LargeCap Growth
Sub-Advisor: Duncan-Hurst Capital Management, Inc. was founded in
1990. Its address is 4365 Executive Drive, Suite 1520, San Diego,
CA 92121. Duncan-Hurst currently manages assets of $ ______
billion for institutional and individual investors.
Fund: Partners MidCap Growth
Sub-Advisor: Turner Investment Partners, Inc., 1235 Westlake Drive,
Suite 350, Berwyn, PA 19312, is a professional investment
management firm founded in 1990. As of ____, Turner had
discretionary management authority with respect to approximately
$______ billion in assets. Turner has provided investment
advisory services to investment companies since 1992.
Duties of the Manager and Sub-Advisor
The Manager or Sub-Advisor provides the Board of Directors of the Fund a
recommended investment program. The program must be consistent with the Fund's
investment objective and policies. Within the scope of the approved investment
program, the Manager or Sub-Advisor advises the Fund on its investment policies
and determines which securities are bought and sold, and in what amounts.
The Manager is paid a fee by the Fund for its services, which includes any fee
paid to the Sub-Advisor. The fee paid by each Fund (as a percentage of the
average daily net assets) for the fiscal year ended October 31, 1999 was:
Balanced %
Blue Chip %
Bond %
Capital Value %
Cash Management %
Government Securities Income %
Growth %
High Yield %
International %
International Emerging Markets %
International SmallCap %
Limited Term Bond %
MidCap %
Real Estate %
SmallCap %
Tax-Exempt Bond %
Utilities %
PRICING OF FUND SHARES
Each Fund's shares are bought and sold at the current share price. The share
price of each Class of shares of each Fund is calculated each day the New York
Stock Exchange is open. The share price is determined at the close of business
of the Exchange (normally at 3:00 p.m. Central Time). When your order to buy or
sell shares is received, the share price used to fill the order is the next
price calculated after the order is placed.
For all Funds except the Cash Management Fund, the share price is calculated by:
o taking the current market value of the total assets of the Fund
o subtracting liabilities of the Fund
o dividing the remainder proportionately into the Classes of the Fund
o subtracting the liabilities of each Class
o dividing the remainder by the total number of shares owned by that Class.
The securities of the Cash Management Fund are valued at amortized cost. The
calculation procedure is described in the Statement of Additional Information.
The Cash Management Fund reserves the right to determine a share price more than
once a day.
NOTES:
o If current market values are not readily available for a security, its fair
value is determined using a policy adopted by the Fund's Board of
Directors.
o A Fund's securities may be traded on foreign securities markets which
generally complete trading at various times during the day prior to the
close of the New York Stock Exchange. The values of foreign securities used
in computing share price are determined at the time the foreign market
closes. Occasionally, events affecting the value of foreign securities
occur when the foreign market is closed and the New York Stock Exchange is
open. If the Manager believes the market value is materially affected, the
share price will be calculated using the policy adopted by the Fund.
o Certain securities issued by companies in emerging market countries may
have more than one quoted valuation at any point in time. These may be
referred to as a local price and a premium price. The premium price is
often a negotiated price that may not consistently represent a price at
which a specific transaction can be effected. The international
growth-oriented funds each have a policy to value such securities at a
price at which the Manager or Sub-Advisor expects the shares may be sold.
DIVIDENDS AND DISTRIBUTIONS
The Growth-Oriented and Income-Oriented Funds pay most of their net dividend
income to you every year. The payment schedule is:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Funds Record Date Payable Date
Balanced, three business days before March 24, June 24,
Real Estate and each payable date September 24 and
December 24
Utilities (or previous business day)
Blue Chip three business days before June 24 and December 24
each payable date (or previous business day)
Capital Value, Growth three business days before December 24
International, International each payable date (or previous business day)
Emerging Markets, International
SmallCap, LargeCap Stock Index
MidCap, Partners Aggressive
Growth, Partners LargeCap
Growth, Partners Midcap
Growth and SmallCap
Bond, Government Securities three business days before monthly on the 24th
Income, High Yield, Limited each payable date (or previous business day)
Term Bond and Tax-Exempt Bond
</TABLE>
Net realized capital gains, if any, are distributed annually. Generally the
distribution is made on the fourth business day of December. Payments are made
to shareholders of record on the third business day prior to the payable date.
Capital gains may be taxable at different rates, depending on the length of time
that the Fund holds it assets.
You can authorize income dividend and capital gain distributions to be:
o invested in additional shares of the Fund you own without a sales charge;
o invested in shares of another Principal Mutual Fund (Dividend Relay)
without a sales charge (distributions of a Fund may be directed only to one
receiving Fund); or
o paid in cash.
NOTE: Payment of income dividends and capital gains shortly after you buy
shares has the effect of reducing the share price by the amount of the
payment.
Distributions from the Fund, whether received in cash or reinvested in
additional shares, may be subject to federal (and state) income tax.
Money Market Fund
The Cash Management Fund declares dividends of all its daily net investment
income each day its shares are priced. The dividends are paid daily and are
automatically reinvested back into additional shares of the Fund. You may ask to
have your dividends paid to you monthly in cash. These cash payments are made on
the 20th (or preceding business day if the 20th is not a business day) of each
month.
Under normal circumstances, the Fund intends to hold portfolio securities until
maturity and value them at amortized cost. Therefore, the Fund does not expect
any capital gains or losses. Should there be any gain, it could result in an
increase in dividends. A capital loss could result in a dividend decrease.
HOW TO BUY SHARES
To open an account and buy fund shares, rely on your Registered Representative.
Principal Mutual Funds are "load" funds which means you pay a sales charge for
the ongoing assistance of your Registered Representative.
Fill out the Principal Mutual Fund application* completely. You must include:
o the name(s) you want to appear on the account;
o your choice of Class A, Class B or Class C shares;
o the amount of the investment;
o your Social Security number or Taxpayer I.D. number;
o investor information (used to help your Registered Representative confirm
that your investment selection is consistent with your goals and
circumstances) ;
o employer information; and
o other required information (may include corporate resolutions, trust
agreements, etc.).
* An application is included with this prospectus. A different application
is needed for a Principal Mutual Fund IRA, 403(b), SEP, SIMPLE, SAR-SEP or
certain employee benefit plans. Call Principal Mutual Funds
(1-800-247-4123) for more information.
The Fund requires a minimum initial investment:
o Regular Accounts $1,000
o Uniform Transfer to Minor Accounts $500
o IRA Accounts $500
Subsequent investment minimums are $100. However, if your subsequent investment
are made using an Automatic Investment Plan, the investment minimum is $50.
Note: The minimum investment applies on a fund level, not on the total
investment being made. Minimums may be waived on accounts set up for:
certain employee benefit plans; Principal Mutual Fund asset allocation
programs; Automatic Investment Plans; and Cash Management Accounts.
Class B and Class C shares of the Cash Management Fund may be purchased only by
exchange from other Fund accounts in the same share class.
Invest by mail:
o Send a check and completed application to:
Principal Mutual Funds
P. O. Box 10423
Des Moines Iowa 50306-9780
o Make your check payable to Principal Mutual Funds.
o Your purchase will be priced at the next share price calculated after
Principal Mutual Funds receives your completed paperwork.
Order by telephone:
o Call us at 1-800-247-4123 between 7:00 a.m. and 7:00 p.m. Central Time on
any day that the New York Stock Exchange is open.
o To buy shares the same day, you need to call before 3:00 p.m. Central Time.
o We must receive your payment for the order within three business days (or
the order will be canceled and you may be liable for any loss).
o For new accounts, you also need to send a completed application.
Wire money from your bank:
o Have your Registered Representative call Principal Mutual Funds
(1-800-247-4123) for an account number and wiring instructions.
o For both initial and subsequent purchases, federal funds should be wired to:
Norwest Bank Iowa, N.A.
Des Moines, Iowa 50309
ABA No.: 073000228
For credit to: Principal Mutual Funds
Account No.: 3000499968
For credit: Principal ________ Fund, Class ____
Shareholder Account No. __________________
Shareholder Registration __________________
o Give the number and instructions to your bank (which may charge a wire
fee).
o To buy shares the same day, the wire must be received before 3:00 p.m.
Central Time.
o No wires are accepted on days when the New York Stock Exchange is closed or
when the Federal Reserve is closed (because the bank that would receive
your wire is closed).
Establish an Automatic Investment Plan
o Make regular monthly investments with automatic deductions from your bank
or other financial institution account.
o Minimum investment amounts are waived if you set up an Automatic Investment
Plan when you open your account.
o Minimum monthly purchase $50 per Fund (except Cash Management Fund).
o Cash Management Fund minimum monthly purchase is $100. However, if the Cash
Management account is greater than $1,000 when the plan is set up, the
monthly minimum is $50.
o Send completed application, check authorization form and voided check (or
voided deposit slip) to:
Principal Mutual Funds
P. O. Box 10423
Des Moines Iowa 50306-9780
Set up a Dividend Relay
o Invest your dividends and capital gains from one Principal Mutual Fund in
shares of another Principal Mutual Fund.
o Distributions from a Fund may be directed only to one receiving Fund.
o The Fund share class receiving the investment must be the same class as the
originating Fund.
o There is no sales charge or administrative charge for the Dividend Relay.
o You can set up Dividend Relay:
o on the application for a new account; or
o by calling Principal Mutual Funds (1-800-247-4123) if telephone
services apply to the originating account; or
o in writing (a signature guarantee may be required).
o You may discontinue your Dividend Relay election with a written notice to
Principal Mutual Funds.
o There may be a delay of up to 10 days before the Dividend Relay plan is
discontinued.
o The receiving Fund must meet fund minimums. If it does not, the Fund
reserves the right to close the account if it is not brought up to the
minimum investment amount within 90 days of sending you a deficiency
notice.
HOW TO REDEEM (SELL) SHARES
After you place a sell order in proper form, shares are sold using the next
share price calculated. The amount you receive will be reduced by any applicable
CDSC. There is no additional charge for a sale. However, you will be charged a
$6 wire fee if you have the sale proceeds wired to your bank. Generally, the
sale proceeds are sent out on the next business day after the sell order has
been placed. At your request, the check will be sent overnight (a $15 overnight
fee will be deducted from your account unless other arrangements are made). A
Fund can only sell shares after your check making the Fund investment has
cleared your bank. To avoid the inconvenience of a delay in obtaining sale
proceeds, shares may be purchased with a cashier's check, money order or
certified check. A sell order from one owner is binding on all joint owners.
Selling shares may create a gain or a loss for federal (and state) income tax
purposes. You should maintain accurate records for use in preparing your income
tax returns.
Generally, sales proceeds checks are:
o payable to all owners on the account (as shown in the account registration)
and
o mailed to address on the account (if not changed within last month) or
previously authorized bank account.
For other payment arrangements, please call Principal Mutual Funds
(1-800-247-4123).
You should also call Principal Mutual Funds (1-800-247-4123) for special
instructions that may apply to sales from accounts:
o when an owner has died;
o for certain employee benefit plans; or
o owned by corporations, partnerships, agents or fiduciaries.
Within 60 days after the sale of shares, you have a one time privilege to
reinvest the amount of the sale proceeds into any Principal Mutual Funds' Class
A shares without a sales charge if the shares that were sold were:
o Class A shares on which a sales charge was paid;
o Class A shares acquired by conversion of Class B shares; or
o Class B or Class C shares on which a CDSC was paid.
The transaction is considered a sale for federal (and state) income tax purposes
even if the proceeds are reinvested. If a loss is realized on the sale, the
reinvestment may be subject to the "wash sale" rules resulting in the
postponement of the recognition of the loss for tax purposes.
Sell shares by mail
o Send a letter (signed by the owner of the account) to:
Principal Mutual Funds
P. O. Box 10423
Des Moines Iowa 50306-9780
o Specify the Fund and account number.
o Specify the number of shares or the dollar amount to be sold.
o A signature guarantee* will be required if the:
o sell order is for more than $100,000;
o account address has been changed within one month of the sell order; or
o check is payable to a party other than the account shareholder(s) or
Principal Life Insurance Company.
* If required, the signature(s) must be guaranteed by a commercial
bank, trust company, credit union, savings and loan, national
securities exchange member or brokerage firm. A signature
guaranteed by a notary public or savings bank is not acceptable.
Sell shares in amounts of $100,000 or less by telephone* (1-800-247-4123)
o The address on the account must not have been changed within the last month
and telephone privileges must apply to the account from which the shares
are being sold.
o If our phone lines are busy, you may need to send in a written sell order.
o To sell shares the same day, the order must be received before 3:00 p.m.
Central Time.
o Telephone redemption privileges are NOT available for Principal Mutual
Funds IRAs, 403(b)s, SEPs, SIMPLES, SAR-SEPs, or certain employee benefit
plans, or on shares for which certificates have been issued.
o If previously authorized, checks can be sent to a shareholder's U.S. bank
account.
* The Fund and transfer agent reserve the right to refuse telephone
orders to sell shares. The shareholder is liable for a loss resulting
from a fraudulent telephone order that the Fund reasonably believes is
genuine. The Fund will use reasonable procedures to assure instructions
are genuine. If the procedures are not followed, the Fund may be liable
for loss due to unauthorized or fraudulent transactions. The procedures
include: recording all telephone instructions, requesting personal
identification information (name, phone number, social security number,
birth date, etc.) and sending written confirmation to the address on
the account.
Periodic withdrawal plans
You may set up a periodic withdrawal plan on a monthly, quarterly,
semiannual or annual basis to:
o sell a fixed number of shares ($25 initial minimum amount);
o sell enough shares to provide a fixed amount of money ($25 initial minimum
amount);
o pay insurance or annuity premiums or deposits to Principal Life Insurance
Company (call us at 1-800-247-4123 for details); and
o provide an easy method of making monthly installment payments (if the
service is available from your creditor who must supply the necessary
forms).
You can set up a periodic withdrawal plan by:
o completing the applicable section of the application; or
o sending us your written instructions (and share certificate, if any, issued
for the account).
Your periodic withdrawal plan continues until: o you instruct us to stop; or o
your Fund account balance is zero.
When you set up the withdrawal plan, you select which day you want the sale made
(if none selected, the sale will be made on the 15th of the month). If the
selected date is not a trading day, the sale will take place on the next trading
day (if that day falls in the month after your selected date, the transaction
will take place on the trading day before your selected date). If telephone
privileges apply to the account, you may change the date or amount by
telephoning us at 1-800-247-4123.
Sales may be subject to a CDSC. Up to 10% of the value of a Class B or Class C
share account may be withdrawn annually free of a CDSC. If the plan is set up
when the account is opened, 10% of the value of additional purchases made within
60 days may also be withdrawn free of a CDSC. The amount of the 10% withdrawal
privilege is reset as of the last business day of December of each year based on
the account's value as of that day.
Withdrawal payments are sent on or before the third business day after the date
of the sale. It may take an additional three business days for your financial
institution to post this payment to your account at that financial institution.
Sales made under your periodic withdrawal plan will reduce and may eventually
exhaust your account. The Funds do not normally accept purchase payments while a
periodic withdrawal plan is in effect (unless the purchase represents a
substantial addition to your account).
The Fund from which the periodic withdrawal is made makes no recommendation as
to either the number of shares or the fixed amount that you withdraw. The
portion of sales proceeds from the Tax-Exempt Bond Fund which represents
tax-exempt income which has been accrued but not declared a dividend by the Fund
may be taxed at capital gain rates.
HOW TO EXCHANGE SHARES AMONG PRINCIPAL MUTUAL FUNDS
Your shares in the Funds (except Class A shares of Cash Management, LargeCap
Stock Index and Limited Term Bond Funds) may be exchanged without a sales charge
for the same class of any other Principal Mutual Fund. After 90 days of their
purchase, Class A shares of LargeCap Stock Index and Limited Term Bond Funds may
be exchanged into Class A shares of the other Principal Mutual Funds.
Class A shares of the Cash Management Fund may be exchanged into
o Class A shares of other Principal Mutual Funds.
o If the Cash Management shares were acquired by direct purchase, a sales
charge will be imposed on the exchange into other Class A shares.
o If the Cash Management shares were acquired by (i) exchange from other
Funds, (ii) conversion of Class B shares or (iii) reinvestment of
dividends earned on Class A shares that were acquired through exchange,
no sales charge will be imposed on the exchange into other Class A
shares.
o Class B or Class C shares of other Principal Mutual Funds - subject to the
CDSC.
The CDSC, if any, is not charged on exchanges. However, the purchase date of the
exchanged shares and the CSDC table are used to determine if the newly acquired
shares are subject to the CDSC (and the amount of the CDSC if any) when they are
sold.
You may exchange shares by:
o calling us (1-800-247-4123), if you have telephone privileges on the
account and if no share certificate has been issued.
o sending a written request to:
Principal Mutual Funds
P. O. Box 10423
Des Moines, Iowa 50306-9780
o completing an Exchange Authorization Form (call us at 1-800-247-4123 to
obtain the form).
Automatic exchange election
This election authorizes an exchange from one Principal Mutual Fund to another
on a monthly, quarterly, semiannual or annual basis. You can set up an automatic
exchange by:
o completing the Automatic Exchange Election section of the application;
o calling us (1-800-247-4123) if telephone privileges apply to the account
from which the exchange is to be made; or
o sending us your written instructions.
Your automatic exchange continues until:
o you instruct us to stop; or
o your Fund account balance is zero.
You may specify the day of the exchange. If the selected day is not a trading
day, the sale will take place on the next trading day (if that day falls in the
month after your selected date, the transaction will take place on the trading
day before your selected date). If telephone privileges apply to the account,
you may change the date or amount by telephoning us at 1-800-247-4123.
General
o An exchange by any joint owner is binding on all joint owners.
o If you do not have an existing account in the Fund to which the exchange is
being made, a new account is established. The new account has the same
owner(s), dividend and capital gain options and dealer of record as the
account from which the shares are being exchanged.
o All exchanges are subject to the minimum investment and eligibility
requirement of the Fund being acquired.
o You may acquire shares of a Fund only if its shares are legally offered in
your state of residence.
o If a certificate has been issued, it must be returned to the Fund before
the exchange can take place.
o Instructions for exchanges in excess of $500,000 must be in writing and
signature guaranteed.
The exchange privilege is not intended for short-term trading. Excessive
exchange activity may interfere with portfolio management and have an adverse
impact on all shareholders. In order to limit excessive exchange activity, and
under other circumstances where the Board of Directors of the Fund or the
Manager believes it is 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, reject any exchange or close any account. You would be notified of
any such action to the extent required by law.
Fund shares used to fund an employee benefit plan may be exchanged only for
shares of other Principal Mutual Funds available to employee benefit plans. Such
an exchange must be made by following the procedures provided in the employee
benefit plan and the written service agreement. The exchange is treated as a
sale of shares for federal income (and state) tax purposes and may result 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.
GENERAL INFORMATION ABOUT A FUND ACCOUNT
Statements
You will receive quarterly statements (monthly statements for the Cash
Management Fund) for the Funds you own. The statements provide the number and
value of shares you own, transactions during the quarter, dividends declared or
paid and other information. The year end statement includes information for all
transactions that took place during the year. Please review your statement as
soon as your receive it. Keep your statements as you may need them for tax
reporting purposes.
Generally, each time you buy, sell or exchange shares between Principal Mutual
Funds, you will receive a confirmation in the mail shortly thereafter. It
summarizes all the key information - what you bought or sold, the amount of the
transaction, and other vital data. The Cash Management Fund mails confirmations
only once a month detailing dividend and account activity.
Certain purchases and sales are only included on your quarterly statement. These
include accounts
o when the only activity during the quarter:
o is purchase of shares from reinvested dividends and/or capital gains;
o is a result of Dividend Relay;
o are purchases under a Automatic Investment Plan;
o are sales under a periodic withdrawal plan; and
o are purchases or sales under an automatic exchange election.
o used to fund certain individual retirement or individual pension plans.
o established under a payroll deduction plan.
Signature Guarantees
Certain transactions require that your signature be guaranteed. If required, the
signature(s) must be guaranteed by a commercial bank, trust company, credit
union, savings and loan, national securities exchange member or brokerage firm.
A signature guaranteed by a notary public or savings bank is not acceptable.
Signature guarantees are required:
o if you sell more than $100,000 from any one Fund;
o if a sales proceeds check is payable to other than the account
shareholder(s), Principal Life Insurance Company or one of its affiliates;
o to make a Dividend Relay election from an account with joint owners to an
account with only one owner or different joint owners;
o to change ownership of an account;
o to add telephone transaction services, checkwriting and/or wire privileges
to an existing account;
o to change bank account information designated under an existing telephone
withdrawal plan;
o to have a sales proceeds check mailed to an address other than the address
on the account or to the address on the account if it has been changed
within the preceding month; and
o to exchange more than $500,000 among the Principal Mutual Funds.
Minimum Account Balance
Generally, the Funds do not have a minimum required balance. Because of the
disproportional high cost of maintaining small accounts, the Funds reserve the
right to set a minimum and sell all shares in an account with a value of less
than $300. The sales proceeds would then be mailed to you. These involuntary
sales will not be triggered just by market conditions. If the Fund exercises
this right, you will be notified that the redemption is going to be made. You
will have 30 days to make an additional investment and bring your account up to
the required minimum. The Fund reserves the right to increase the required
minimum.
Special Plans
The Funds reserve the right to amend or terminate the special plans described in
this prospectus. Such plans include automatic investment, dividend relay,
periodic withdrawal, and waiver or reduction of sales charges for certain
purchasers. You will be notified of any such action to the extent required by
law.
Telephone Instructions
The Funds reserve the right to refuse telephone instructions. You are liable for
a loss resulting from a fraudulent telephone instruction that we reasonably
believe is genuine. We use reasonable procedures to assure instructions are
genuine. If the procedures are not followed, we may be liable for loss due to
unauthorized or fraudulent transactions. The procedures include: recording all
telephone instructions, requesting personal identification information (name,
phone number, social security number, birth date, etc.) and sending written
confirmation to the shareholder's address of record.
Financial Statements
Shareholders will receive an annual financial statement for the Funds, examined
by the Funds' independent auditors, Ernst & Young LLP. Shareholders will also
receive a semiannual financial statement which is unaudited. That report is a
part of this prospectus. The following financial highlights are based on
financial statements which were audited by Ernst & Young LLP.
Additional information about the Fund is available in the Statement of
Additional Information dated ____________, and which is part of this prospectus.
The Statement of Additional Information can be obtained free of charge by
writing or telephoning Princor Financial Services Corporation, P.O. Box 10423,
Des Moines, IA 50306. Telephone 1-800-247-4123.
Information about the Fund can be reviewed and copied at the Securities and
Exchange Commission's Public Reference Room in Washington, D.C. Information on
the operation of the public reference room may be obtained by calling the
Commission at 800-SEC-0330. Reports and other information about the Fund are
available on the Commission's internet site at http://www.sec.gov. Copies of
this information may be obtained, upon payment of a duplicating fee, by writing
the Public Reference Section of the Commission, Washington, D.C. 20549-6009.
The U.S. Government does not insure or guarantee an investment in any of the
Funds. There can be no assurance that the Cash Management Fund will be able to
maintain a stable share price of $1.00 per share.
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.
SEC FILE DOMESTIC GROWTH-ORIENTED FUNDS
811-05072 Principal Balanced Fund, Inc.
811-06263 Principal Blue Chip Fund, Inc.
811-01874 Principal Capital Value Fund, Inc.
811-01873 Principal Growth Fund, Inc.
811- Principal LargeCap Stock Index Fund, Inc.
811-05171 Principal MidCap Fund, Inc.
811-08379 Principal Real Estate Fund, Inc.
811-08381 Principal SmallCap Fund, Inc.
811-07266 Principal Utilities Fund, Inc.
INTERNATIONAL GROWTH-ORIENTED FUNDS
811-08249 Principal International Emerging Markets Fund, Inc.
811-03183 Principal International Fund, Inc.
811-08251 Principal International SmallCap Fund, Inc.
INCOME-ORIENTED FUNDS
811-05172 Principal Bond Fund, Inc.
811-04226 Principal Government Securities Income Fund, Inc.
811-05174 Principal High Yield Fund, Inc.
811-07453 Principal Limited Term Bond Fund, Inc.
811-04449 Principal Tax-Exempt Bond Fund, Inc.
MONEY MARKET FUND
811-03585 Principal Cash Management Fund, Inc.
PARTNERS FUNDS
811-09567 Principal Partners Aggressive Growth Fund, Inc.
811- Principal Partners LargeCap Growth Fund, Inc.
811- Principal Partners MidCap Growth Fund, Inc.
PRINCIPAL MUTUAL FUNDS
DOMESTIC GROWTH-ORIENTED FUNDS
Principal Balanced Fund, Inc.
Principal Blue Chip Fund, Inc.
Principal Capital Value Fund, Inc.
Principal Growth Fund, Inc.
Principal LargeCap Stock Index Fund, Inc.
Principal MidCap Fund, Inc.
Principal Real Estate Fund, Inc.
Principal SmallCap Fund, Inc.
Principal Utilities Fund, Inc.
INCOME-ORIENTED FUNDS
Principal Bond Fund, Inc.
Principal Government Securities Income Fund, Inc.
Principal High Yield Fund, Inc.
Principal Limited Term Bond Fund, Inc.
INTERNATIONAL GROWTH-ORIENTED FUNDS
Principal International Emerging Markets Fund, Inc.
Principal International Fund, Inc.
Principal International SmallCap Fund, Inc.
MONEY MARKET FUND
Principal Cash Management Fund, Inc.
PARTNERS FUNDS
Principal Partners Aggressive Growth Fund, Inc.
Principal Partners LargeCap Growth Fund, Inc.
Principal Partners MidCap Growth Fund, Inc.
This Prospectus describes mutual funds organized by Principal Life Insurance
Company. The Funds provide a choice of investment objectives through Domestic
Growth-Oriented Funds, International Growth-Oriented Funds, Income-Oriented
Funds and the Money Market Fund.
The date of this Prospectus is March 1, 2000.
Neither the Securities and Exchange Commission nor any State Securities
Commission has approved or disapproved of these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
TABLE OF CONTENTS
Fund Descriptions....................................................... 4
Domestic Growth-Oriented Funds
Balanced Fund.................................................. 6
Blue Chip Fund................................................. 8
Capital Value Fund............................................. 10
Growth Fund ................................................... 12
LargeCap Stock Index Fund...................................... 14
MidCap Fund.................................................... 16
Real Estate Fund............................................... 18
SmallCap Fund.................................................. 20
Utilities Fund................................................. 22
International Growth-Oriented Funds
International Emerging Markets Fund............................ 24
International Fund............................................. 26
International SmallCap Fund.................................... 28
Partners Funds
Aggressive Growth Fund......................................... 30
LargeCap Growth Fund........................................... 32
MidCap Growth Fund............................................. 34
Income-Oriented Funds
Bond Fund...................................................... 36
Government Securities Income Fund.............................. 38
High Yield Fund................................................ 40
Limited Term Bond Fund......................................... 42
Money Market Fund
Cash Management Fund........................................... 44
The Costs of Investing.................................................. 46
Certain Investment Strategies and Related Risks......................... 48
Management, Organization and Capital Structure.......................... 52
Pricing of Fund Shares.................................................. 53
Dividends and Distributions............................................. 54
How To Buy Shares....................................................... 55
How To Sell Shares...................................................... 57
How To Exchange Shares Among Principal Mutual Funds..................... 60
General Information About a Fund Account................................ 61
Financial Highlights.................................................... 64
FUND DESCRIPTIONS
The Principal Mutual Funds have four categories of funds: domestic
growth-oriented funds, international growth-oriented funds, income-oriented
funds and Partners Funds (sub-advised by investment professionals not affiliated
with the Principal Financial Group). Principal Management Corporation, the
Manager of each of the Funds, selects Sub-Advisors based on the advisor's
investment philosophy. The Manager seeks to provide a full range of investment
approaches through the Principal Mutual Funds.
Fund Sub-Advisor
Balanced, Blue Chip, Capital Value, Invista Capital Management, LLC
Government Securities Income, ("Invista")
Growth, International, International
Emerging Markets, International
SmallCap, LargeCap Stock Index,
Limited Term Bond, MidCap,
SmallCap and Utilities
Partners Aggressive Growth Morgan Stanley Asset Management
("Morgan Stanley")
Partners LargeCap Growth Duncan-Hurst Capital Management Inc.
("Duncan-Hurst")
Partners MidCap Growth Turner Investment Partners, Inc.
("Turner")
Class R shares of the Principal Mutual Funds are sold without a front-end sales
charge and do not have a contingent deferred sales charge. Only Class R shares
are offered through this prospectus. Class A shares are only described because
Class R shares convert to Class A shares 49 months after purchase.
In the description for each Fund, you will find important information about the
Fund's:
Primary investment strategy
This section summarizes how the Fund intends to achieve its investment
objective. It identifies the Fund's primary investment strategy (including the
type or types of securities in which the Fund invests) and any policy to
concentrate in securities of issuers in a particular industry or group of
industries.
Annual operating expenses
The annual operating expenses for each Fund are deducted from Fund assets
(stated as a percentage of Fund assets) and are shown as of the end of the most
recent fiscal year (estimates of expenses are shown for the new Funds). Examples
are provided which are intended to help you compare the cost of investing in a
particular fund with the cost of investing in other mutual funds. The examples
assume you invest $10,000 in a Fund for the time periods indicated. The first
two lines of each example assume that you sell all of your shares at the end of
those time periods. The second two assume that you do not sell your shares at
the end of the periods. The examples also assume that your investment has a 5%
return each year and that the Fund's operating expenses are the same as the most
recent fiscal year expenses. Although your actual costs may be higher or lower,
based on these assumptions, your costs would be as shown.
Day-to-day fund management
The investment professionals who manage the assets of each Fund are listed with
each Fund. Backed by their staffs of experienced securities analysts, they
provide the Funds with professional investment management.
Fund Performance
As certain Funds have not been offered before, historical information is not
available for those Funds. If historical information is available, the Fund's
description includes a bar chart and a set of tables.
The bar chart is included to provide you with an indication of the risks
involved when you invest. The chart shows changes in the Fund's performance from
year to year. The performance reflected in the bar chart does not include a
sales charge. Class R shares are not subject to a sales charge.
One of the tables compares the Fund's average annual returns with:
o a broad-based securities market index (An index measures the market price
of a specific group of securities in a particular market of securities in a
market sector. You cannot invest directly in an index. An index does not
have an investment advisor and does not pay any commissions or expenses. If
an index had expenses, its performance would be lower.); and
o an average of mutual funds with a similar investment objective and
management style. The averages used are prepared by independent statistical
services.
The other table provides the highest and lowest quarterly return for the Fund's
Class A shares over a given period.
Included in each Fund's description is a set of tables and a bar chart.
Together, these provide an indication of the risks involved when you invest.
A Fund's past performance is not necessarily an indication of how the Fund will
perform in the future.
You may call Principal Mutual Funds (1-800-247-4123) to get the current 7-day
yield for the Cash Management Fund.
Note: Class R shares are offered only to individuals (and his/her spouse,
chile, parent, grandchild and trusts primarily for their benefit) who:
o receive lump sum distributions from retirement plans serviced by
Principal Life Insurance Comany;
o are participants in retirement plans serviced by the Principal Life;
o own life or disability insurance policies issued by the Principal
Life;
o are customers of Principal Residential Mortgage, Inc.;
o are customers of Principal Bank; and
o have existing Principal Mutual Fund Class R share accounts.
Investments in these Funds are not deposits of a bank and are not
insured or guaranteed by the Federal Deposit Insurance Corporation or
any other government agency.
No salesperson, dealer or any other person is authorized to give
information or make representations about a Fund other than those
contained in this Prospectus. Information or representations from
unauthorized parties may not be relied upon as having been made by a
Fund, the Manager or any Sub-Advisor.
DOMESTIC GROWTH-ORIENTED FUND
PRINCIPAL BALANCED FUND, INC.
The 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.
Main Strategies
The Fund invests primarily in common stocks and corporate bonds. It may also
invest in other equity securities, government bonds and notes (obligations of
the U.S. government or its agencies) and cash. Though the percentages in each
category are not fixed, common stocks generally represent 40% to 70% of the
Fund's assets. The remainder of the Fund's assets are invested in bonds and
cash.
In selecting common stocks, the Sub-Advisor, Invista, looks for companies that
have predictable earnings and which, based on growth prospects, it believes are
undervalued in the marketplace. Invista buys stocks with the objective of
long-term capital appreciation. From time to time, Invista purchases stocks with
the expectation of price appreciation over the short term. In response to
changes in economic conditions, Invista may change the make-up of the portfolio
and emphasize different market sectors by buying and selling the portfolio's
stocks.
The Fund generates interest income by investing in bonds and notes. Bonds and
notes are also purchased for capital appreciation purposes when Invista thinks
that declining interest rates may increase market value. Deep discount bonds
(those which sell at a substantial discount from their face amount) are also
purchased to generate capital appreciation. The Fund may invest in bonds with
speculative characteristics but does not intend to invest more than 5% of its
assets in securities rated below BBB by S&P or Baa by Moody's. Fixed income
securities that are not investment grade are commonly referred to as "junk
bonds" or high yield securities. These securities offer a higher yield than
other, higher rated securities, but they carry a greater degree of risk and are
considered speculative by the major credit rating agencies.
Main Risks
The value of the stocks owned by the Fund changes on a daily basis. Stock prices
reflect the activities of individual companies and general market and economic
conditions. In the short term, stock prices can fluctuate dramatically in
response to these factors.
Bond values change daily. Their prices reflect changes in interest rates, market
conditions and announcements of other economic, political or financial
information. When interest rates fall, the price of a bond rises and when
interest rates rise, the price declines. As with all mutual funds, the value of
the Fund's assets may rise or fall. If you sell your shares when their value is
less than the price you paid, you will lose money.
Investor Profile
The Fund is generally a suitable investment if you are seeking long-term growth
but are uncomfortable accepting the risks of investing entirely in common
stocks.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1990" -5.18
"1991" 31.72
"1992" 10.47
"1993" 9.01
"1994" -3.38
"1995" 23.39
"1996" 13
"1997" 17.29
"1998" 11.2
"1999"
Calendar Years Ended December 31
The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class R shares is _____%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest .% (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past FivePast Ten Past One Past FivePast Ten
Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Class A % % % S&P 500 Stock Index % % %
Class R * -- Lehman Brothers Government/Corporate Bond Index
Lipper Balanced Fund Average
<FN>
* Period from February 29, 1996, date Class R shares first offered to eligible purchasers, through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses
Class A Class R
Management Fees................ % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % %
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
- ----------------------------------------------------------
Class A $ $ $ $
Class R
You would pay the following expenses if you did not redeem your shares:
Class A
Class R
Day-to-day Fund Management
Since April 1993 Co-Manager: Judith A. Vogel, CFA. Portfolio Manager of
Invista since 1987.
Since December 1997 Co-Manager: Martin J. Schafer, Portfolio Manager of
Invista since 1992.
DOMESTIC GROWTH-ORIENTED FUND
PRINCIPAL BLUE CHIP FUND, INC.
The Fund seeks to achieve growth of capital and growth of income by investing
primarily in common stocks of well capitalized, established companies.
Main Strategies
The Fund invests primarily in common stocks of large, established companies. The
Sub-Advisor, Invista, selects the companies it believes to have the potential
for growth of capital, earnings and dividends. Under normal market conditions,
the Fund invests at least 65% (and may invest up to 100%) of its assets in blue
chip companies. Blue chip companies are easily identified by:
o size (market capitalization of at least $1 billion)
o established history of earnings and dividends
o easy access to credit
o good industry position
o superior management structure
In addition, the large market of publicly held shares for these companies and
their generally high trading volume results in a relatively high degree of
liquidity for these stocks.
Invista may invest up to 35% of Fund assets in equity securities, other than
common stocks, issued by blue chip companies and in equity securities of
companies that do not fit the blue chip definition. It may also invest up to 5%
of Fund assets in securities of unseasoned issuers, which are more speculative
than blue chip company securities. While small, unseasoned companies may offer
greater opportunities for capital growth than larger, more established
companies, they also involve greater risks and should be considered speculative.
Up to 20% of Fund assets may be invested in foreign securities. The issuers of
the foreign securities do not have to meet the criteria for blue chip companies.
In addition, foreign securities carry risks that are not generally found in
stocks of U.S. companies. These include the risk that a foreign security could
lose value as a result of political, financial and economic events in foreign
countries. In addition, foreign securities may be subject to securities
regulators with less stringent accounting and disclosure standards than are
required of U.S. companies.
Main Risks
The value of the stocks owned by the Fund changes on a daily basis. The current
price reflects the activities of individual companies and general market and
economic conditions. In the short term, stock prices can fluctuate dramatically
in response to these factors. Because of these fluctuations, as with all mutual
funds, the value of the Fund's assets may rise or fall. If you sell your shares
when their value is less than the price you paid, you will lose money.
Investor Profile
The Fund is generally a suitable investment if you are seeking long-term growth
and are willing to accept the risks of investing in common stocks but prefer
investing in larger, established companies.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1992" 6.09
"1993" 2.62
"1994" 3.36
"1995" 33.19
"1996" 16.78
"1997" 26.25
"1998" 16.55
"1999"
Calendar Years Ended December 31
The year-to-date return as of December 31, 1999 for Class A shares is _____% and
Class R shares is _____%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest .% (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Class A % % %* S&P 500 Stock Index % % %
Class R ** - - Lipper Large-Cap Value Fund Average
<FN>
* Period from March 1, 1991, date Class A shares first offered to the
public, through December 31, 1999.
** Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses
Class A Class R
Management Fees*............... % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % %
* The Manager has agreed to waive a portion of its fee for the Fund. The
Manager intends to continue the waiver and, if necessary, pay expenses
normally payable by the Fund through the period ending October 31,
2000. The waiver will maintain a total level of operating expenses
(expressed as a percent of average net assets attributable to a Class
on an annualized basis) not to exceed 1.70% for Class R Shares and
1.20% for Class A Shares. The effect of the waiver is to reduce the
Fund's annual operating expenses.
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------
Class A $ $ $ $
Class R
You would pay the following expenses if you did not redeem your shares:
Class A
Class R
Day-to-day Fund Management
Since March 1991 Manager: Mark T. Williams, CFA. Portfolio Manager of
Invista since 1995.
DOMESTIC GROWTH-ORIENTED FUND
PRINCIPAL CAPITAL VALUE FUND, INC.
The 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.
Main Strategies
The Fund invests primarily in common stocks. It may also invest in other equity
securities. To achieve its investment objective, the Sub-Advisor, Invista,
invests primarily in securities that have "value" characteristics. This process
is known as "value investing." Value stocks tend to have higher yields and lower
price to earnings (P/E) ratios than other stocks.
Securities chosen for investment may include those of companies which Invista
believes can be expected to share in the growth of the nation's economy over the
long term. The current price of the Fund's assets reflect the activities of the
individual companies and general market and economic conditions. In the short
term, stock prices can fluctuate dramatically in response to these factors.
Because of these fluctuations, principal values and investment returns vary.
In making selections for the Fund's investment portfolio, Invista uses an
approach described as "fundamental analysis." The basic steps involved in this
analysis are:
o Research. Invista researches economic prospects over the next one to
two years rather than focusing on near term expectations. This approach
is designed to provide insight into a company's real growth potential.
o Valuation. The research findings allow Invista to identify the
prospects for the major industrial, commercial and financial segments
of the economy. Invista looks 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. It then uses this
information to judge the prospects for each industry for the near and
intermediate term.
o Ranking. Invista then ranks the companies in each industry group
according to their relative value. The greater a company's estimated
worth compared to the current market price of its stock, the more
undervalued the company. Computer models help to quantify the research
findings.
o Stock selection. Invista buys and sells stocks according to the Fund's
own policies using the research and valuation rankings as a basis. In
general, Invista buys stocks that are identified as undervalued and
considers selling them when they appear overvalued. Along with
attractive valuation, other factors may be taken into account such as:
o events that could cause a stock's price to rise or fall; o
anticipation of high potential reward compared to potential risk; and o
belief that a stock is temporarily mispriced because of market
overreactions.
Main Risks
The value of the stocks owned by the Fund changes on a daily basis. The current
price reflects the activities of individual companies and general market and
economic conditions. In the short term, stock prices can fluctuate dramatically
in response to these factors. As with all mutual funds, the value of the Fund's
assets may rise or fall. If you sell your shares when their value is less than
the price you paid, you will lose money.
Investor Profile
The Fund is generally a suitable investment if you are seeking long-term growth,
and are willing to accept the risks of investing in common stocks but also
prefer investing in companies that appear to be considered undervalued relative
to similar companies.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1990" -10.64
"1991" 37.21
"1992" 9.09
"1993" 7.56
"1994" 0.21
"1995" 31.9
"1996" 23.42
"1997" 28.69
"1998" 12.13
"1999"
The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class R shares is _____%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest .% (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Class A % % % S&P 500 Stock Index % % %
Class R * -- Lipper Large-Cap Value Fund Average
<FN>
* Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses
Class A Class R
Management Fees................ % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % %
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------
Class A $ $ $ $
Class R
You would pay the following expenses if you did not redeem your shares:
Class A
Class R
Day-to-day Fund Management
Since November 1996 Manager: Catherine A. Zaharis, CFA. Portfolio Manager
of Invista since 1987.
DOMESTIC GROWTH-ORIENTED FUND
PRINCIPAL GROWTH FUND, INC.
The Fund seeks growth of capital through the purchase primarily of common
stocks, but the Fund may invest in other securities.
Main Strategies
In seeking the Fund's objective of capital growth, the Fund's Sub-Advisor,
Invista, uses an approach described as "fundamental analysis." The basic steps
involved in this analysis are:
o Research. Invista researches economic prospects over the next one to
two years rather than focusing on near term expectations. This approach
is designed to provide insight into a company's real growth potential.
o Valuation. The research findings allow Invista to identify the
prospects for the major industrial, commercial and financial segments
of the economy. Invista looks 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. It then uses this
information to judge the prospects for each industry for the near and
intermediate term.
o Stock selection. Invista then purchases securities of issuers which
appear to have high growth potential. Common stocks selected for the
Fund may include securities of companies that: o have a record of
sales and earnings growth that exceeds the growth rate of corporate
profits of the S&P 500, or
o offer new products or new services.
Main Risks
These securities present greater opportunities for capital growth because of
high potential earnings growth, but may also involve greater risk than
securities which do not have the same potential. The companies may have limited
product lines, markets or financial resources, or may depend on a limited
management group. Their securities may trade less frequently and in limited
volume. As a result, these securities may change in value more than those of
larger, more established companies. As the value of the stocks owned by the Fund
changes, the Fund share price changes. In the short term, the share price can
fluctuate dramatically. As with all mutual funds, the value of the Fund's assets
may rise or fall. If you sell your shares when their value is less than the
price you paid, you will lose money.
Investor Profile
The Fund is generally a suitable investment if you are seeking long-term growth.
Additionally, you must be willing to accept the risks of investing in common
stocks that may have greater risks than stocks of companies with lower potential
for earnings growth.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1990" -1.41
"1991" 56.61
"1992" 10.16
"1993" 7.51
"1994" 3.21
"1995" 33.47
"1996" 12.23
"1997" 28.41
"1998" 20.37
"1999"
Calendar Years Ended December 31
The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class R shares is _____%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest .% (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past FivePast Ten Past One Past FivePast Ten
Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Class A % % % S&P 500 Stock Index % % %
Class R * -- Lipper Multi-Cap Core Fund Average
<FN>
* Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses
Class A Class R
Management Fees................ % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % %
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------------
Class A $ $ $ $
Class R
You would pay the following expenses if you did not redeem your shares:
Class A
Class R
Day-to-day Fund Management
Since _________ Manager:
DOMESTIC GROWTH-ORIENTED FUND
PRINCIPAL LARGECAP STOCK INDEX FUND, INC.
The LargeCap Stock Index Fund seeks long-term growth of capital.
Main Strategies
Under normal market conditions, the Fund invests at least 80% of its assets in
common stocks of companies that compose the Standard & Poor's* ("S&P") 500
Index. The Sub-advisor, Invista, will attempt to mirror the investment
performance of the index by allocating the Fund's assets in approximately the
same weightings as the S&P 500. Over the long-term, Invista seeks a correlation
between performance of the Fund, before expenses, and that of the S&P 500. It is
unlikely that a perfect correlation of 100 will be achieved.
The Fund is not managed according to traditional methods of "active" investment
management. Active management would include buying and selling securities based
on economic, financial and investment judgement. Instead, the Fund uses a
passive investment approach. Rather than judging the merits of a particular
stock in selecting investments, Invista focuses on tracking the S&P 500.
Main Risks
Because of the difficulty and expense of executing relatively small stock
trades, the Fund may not always be invested in the less heavily weighted S&P 500
stocks. At times, the Fund's portfolio may be weighted differently from the S&P
500, particularly if the Fund has a small level of assets to invest. In
addition, the Fund's ability to match the performance of the S&P 500 is effected
to some degree by the size and timing of cash flows into and out of the Fund.
The Fund is managed to attempt to minimize such effects.
Invista reserves the right to omit or remove any of the S&P 500 stocks from the
Fund if it determines that the stock is not sufficiently liquid. In addition, a
stock might be excluded or removed from the Fund if extraordinary events or
financial conditions lead Invista to believe that it should not be a part of the
Fund's assets.
While stocks have historically been a leading choice of long-term investors,
they do fluctuate in price. The value of your investment in the Fund will go up
and down which means that you could lose money. Because different types of
stocks tend to shift in and out of favor depending on market and economic
conditions, the Fund's performance may sometimes be lower or higher than that of
other types of funds.
The Fund uses an indexing strategy. It does not attempt to manage market
volatility, use defensive strategies or reduce the effect of any long-term
periods of poor stock performance. The correlation between Fund and index
performance may be affected by the Fund's expenses, changes in securities
markets, changes in the composition of the index and the timing of purchases and
sales of Fund shares. The Fund may invest in futures and options, which could
carry additional risks such as losses due to unanticipated market price
movements, and could also reduce the opportunity for gain.
Investor Profile
The Stock Index 500 Fund is generally a suitable investment if you are seeking
long-term growth and are willing to accept the risks of investing in common
stocks and prefer a passive rather than active management style.
* Standard & Poor's Corporation is not affiliated with the Principal Stock
Index 500 Fund, Inc., Invista Capital Management LLC or Principal Life
Insurance Company.
As the inception date of the Fund is ___________________, historical performance
data is not available. Estimated annual Fund operating expenses are as follows:
Fund Operating Expenses*
Class A Class R
Management Fees**.............. % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % %
* Total Fund Operating Expenses are estimated.
** The Manager has agreed to waive a portion of its fee for the Fund from
the date operations commenced. The Manager intends to continue the
waiver and, if necessary, pay expenses normally payable by the Fund
through the period ending October 31, 2000. The waiver will maintain a
total level of operating expenses (expressed as a percent of average
net assets attributable to a Class on an annualized basis) not to
exceed _____% for Class R Shares and 0.80% for Class A Shares. The
effect of the waiver is to reduce the Funds annual operating
expenses.
EXAMPLES
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
- ----------------------------------------------------------
Class A $ $ $ $
Class R
You would pay the following expenses if you did not redeem your shares:
Class A
Class R
Day to Day Fund Management
Since __________
(Fund's Inception)
DOMESTIC GROWTH-ORIENTED FUND
PRINCIPAL MIDCAP FUND, INC.
The Fund seeks to achieve capital appreciation by investing primarily in
securities of emerging and other growth-oriented companies.
Main Strategies
The Fund primarily invests in stocks of growth-oriented companies. Stocks that
are chosen for the Fund by the Sub-Advisor, Invista, are thought to be
responsive to changes in the marketplace and have the fundamental
characteristics to support growth. The Fund may invest for any period in any
industry, in any kind of growth-oriented company. Companies may range from the
well-established and well-known to the new and unseasoned. While small,
unseasoned companies may offer greater opportunities for capital growth than
larger, more established companies, they also involve greater risks and should
be considered speculative.
Under normal market conditions, the Fund invests at least 65% of its assets in
securities of companies with market capitalizations in the $1 billion to $10
billion range. Market capitalization is defined as total current market value of
a company's outstanding common stock.
The Fund may invest up to 20% of its assets in securities of foreign companies.
Foreign stocks carry risks that are not generally found in stocks of U.S.
companies. These include the risk that a foreign security could lose value as a
result of political, financial and economic events in foreign countries. In
addition, foreign securities may be subject to securities regulators with less
stringent accounting and disclosure standards than are required of U.S.
companies.
Main Risks
The value of the stocks owned by the Fund changes on a daily basis. The Fund's
share price may fluctuate more than that of funds primarily invested in stocks
of large companies. Mid-sized companies may pose greater risk due to narrow
product lines, limited financial resources, less depth in management or a
limited trading market for their stocks. In the short term, stock prices can
fluctuate dramatically in response to these factors. Because of these
fluctuations, principal values and investment returns vary. As with all mutual
funds, the value of the Fund's assets may rise or fall. If you sell your shares
when their value is less than the price you paid, you will lose money.
Investor Profile
The Fund is generally a suitable investment if you are seeking long-term growth
and are willing to accept the potential for short-term fluctuations in the value
of your investments. It is designed for a portion of your investments and not
designed for you if you are seeking income or conservation of capital.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1990" -6.33
"1991" 52.83
"1992" 14.81
"1993" 12.29
"1994" 3.03
"1995" 34.2
"1996" 19.13
"1997" 22.94
"1998" -0.23
"1999"
Calendar Years Ended December 31
The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class R shares is _____%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest .% (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Class A % % % S&P 400 MidCap Index % % %
Class R * -- S&P 500 Stock Index
Lipper Mid-Cap Core Fund Average
<FN>
* Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses
Class A Class R
Management Fees................ % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % %
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------------
Class A $ $ $ $
Class R
You would pay the following expenses if you did not redeem your shares:
Class A
Class R
Day-to-day Fund Management
Since ______ Manager:
DOMESTIC GROWTH-ORIENTED FUND
PRINCIPAL REAL ESTATE FUND, INC.
The Fund seeks to generate total return by investing primarily in equity
securities of companies principally engaged in the real estate industry.
Main Strategies
The Fund invests primarily in equity securities of companies engaged in the real
estate industry. For purposes of the Fund's investment policies, a real estate
company has at least 50% of its assets, income or profits derived from products
or services related to the real estate industry. Real estate companies include
real estate investment trusts 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 assets in securities of foreign real estate
companies. Foreign stocks carry risks that are not generally found in stocks of
U.S. companies. These include the risk that a foreign security could lose value
as a result of political, financial and economic events in foreign countries. In
addition, foreign securities may be subject to securities regulators with less
stringent accounting and disclosure standards than are required of U.S.
companies.
Real estate investment trusts ("REITs") are corporations or business trusts that
are effectively permitted to eliminate corporate level federal income taxes if
they meet certain requirements of the Internal Revenue Code. The Fund focuses on
equity REITs. REITs are characterized as:
o equity REITs, which primarily own property and generate revenue from
rental income;
o mortgage REITs, which invest in real estate mortgages; and
o hybrid REITs, which combine the characteristics of both equity and
mortgage REITs.
Main Risks
Securities of real estate companies are subject to securities market risks as
well as risks similar to those of direct ownership of real estate. These
include:
<TABLE>
<S> <C> <C> <C> <C>
o declines in the value of real estate o risks related to general and local economic conditions
o dependency on management skills o heavy cash flow dependency
o possible lack of available mortgage funds o overbuilding
o extended vacancies in properties o increases in property taxes and operating expenses
o changes in zoning laws o expenses incurred in the cleanup of environmental problems
o casualty or condemnation losses o changes in interest rates
</TABLE>
In addition to the risks listed above, equity REITs are affected by the changes
in the value of the properties owned by the trust. Mortgage REITs are affected
by the quality of the credit extended. Both equity and mortgage REITs:
o are dependent upon management skills and may not be diversified;
o are subject to cash flow dependency and defaults by borrowers; and
o could fail to qualify for tax-free pass through of income under the
Code.
Because of these factors, the value of the securities held by the Fund, and in
turn the net asset value of the shares of the Fund change on a daily basis. The
current share price reflects the activities of individual companies and general
market and economic conditions. In the short term, share prices can fluctuate
dramatically in response to these factors. Because of these fluctuations,
principal values and investment returns vary. As with all mutual funds, the
value of the Fund's assets may rise or fall. If you sell your shares when their
value is less than the price you paid, you will lose money.
Investor Profile
The Real Estate Fund is generally a suitable investment if you are seeking
long-term growth, want to invest in companies engaged in the real estate
industry and are willing to accept fluctuations in the value of your investment.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1998" -13.62
"1999"
Calendar Year Ended December 31
The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class R shares is _____%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest .% (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Class A % %* -- Morgan Stanley REIT Index % % %
Class R %** -- Lipper Real Estate Fund Average
<FN>
* Period from December 31, 1997, date A shares first offered to the
public, through December 31, 1999.
** Period from December 31, 1997, date R shares first offered to eligible
purchasers, through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses
Class A Class R
Management Fees*............... % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % %
* The Manager has agreed to waive a portion of its fee for the Fund. The
Manager intends to continue the waiver and, if necessary, pay expenses
normally payable by the Fund through the period ending October 31,
2000. The waiver will maintain a total level of operating expenses
(expressed as a percent of average net assets attributable to a Class
on an annualized basis) not to exceed 2.40% for Class R Shares and
1.90% for Class A Shares. The effect of the waiver is to reduce the
Fund's annual operating expenses.
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------
Class A $ $ $ $
Class R
You would pay the following expenses if you did not redeem your shares:
Class A
Class R
Day-to-day Fund Management
Since December 1997 Manager: Kelly D. Rush, CFA. Assistant Director-Investment
- Commercial Real Estate of Principal Capital Management since 1996.
DOMESTIC GROWTH-ORIENTED FUND
PRINCIPAL SMALLCAP FUND, INC.
The Fund seeks to achieve long-term growth of capital by investing primarily in
equity securities of companies with comparatively smaller market
capitalizations.
Main Strategies
The Fund invests in equity securities of companies in the U.S. with
comparatively smaller market capitalizations. Market capitalization is defined
as total current market value of a company's outstanding common stock. Under
normal market conditions, the Fund invests at least 65% of its assets in
securities of companies with market capitalizations of $1 billion or less.
In selecting securities for investment, Invista looks at stocks with value
and/or growth characteristics. In managing the assets of the Fund, Invista does
not have a policy of preferring one of these categories to the other. The value
orientation emphasizes buying stocks at less than their investment value and
avoiding stocks whose price has been artificially built up. The growth
orientation emphasizes buying stocks of companies whose potential for growth of
capital and earnings is expected to be above average. Selection is based on
fundamental analysis of the company relative to other companies with the focus
being on Invista's estimation of forward looking rates of return.
Main Risks
Investments in companies with smaller market capitalizations may involve greater
risks and price volatility (wide, rapid fluctuations) than investments in
larger, more mature companies. Smaller companies may be developing or marketing
new products or services for which markets are not yet established and may never
become established. While small, unseasoned companies may offer greater
opportunities for capital growth than larger, more established companies, they
also involve greater risks and should be considered speculative.
The net asset value of the Fund's shares is based on the values of the
securities it holds. The value of the stocks owned by the Fund changes on a
daily basis. The current share price reflects the activities of individual
companies as well as general market and economic conditions. In the short term,
stock prices can fluctuate dramatically in response to these factors. The Fund's
share price may fluctuate more than that of funds primarily invested in stocks
of mid-sized and large companies and may underperform as compared to the
securities of larger companies. Because of these fluctuations, principal values
and investment returns vary. As with all mutual funds, the value of the Fund's
assets may rise or fall. If you sell your shares when their value is less than
the price you paid, you will lose money.
Investor Profile
The Fund is generally a suitable investment if you are seeking long-term growth
and are willing to accept the potential for volatile fluctuations in the value
of your investment. It is not designed for you if you are seeking income or
conservation of capital.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1998" -5.68
"1999"
Calendar Year Ended December 31
The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class R shares is _____%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest .% (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Class A % %* -- S&P 500 Stock Index % % %
Class R %** -- Lipper Small-Cap Core Fund Average
<FN>
* Period from December 31, 1997, date A shares first offered to the
public, through December 31, 1999.
** Period from December 31, 1997, date R shares first offered to eligible
purchasers, through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses
Class A Class R
Management Fees*............... % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % %
* The Manager has agreed to waive a portion of its fee for the Fund. The
Manager intends to continue the waiver and, if necessary, pay expenses
normally payable by the Fund through the period ending October 31,
2000. The waiver will maintain a total level of operating expenses
(expressed as a percent of average net assets attributable to a Class
on an annualized basis) not to exceed 2.30% for Class R Shares and
1.80% for Class A Shares. The effect of the waiver is to reduce the
Fund's annual operating expenses.
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------
Class A $ $ $ $
Class R
You would pay the following expenses if you did not redeem your shares:
Class A
Class R
Day-to-day Fund Management
Since December 1997 Co-Manager: Mark T. Williams, CFA. Portfolio Manager of
Invista since 1995.
Since December 1997 Co-Manager: John F. McClain, Portfolio Manager of Invista
since 1995.
DOMESTIC GROWTH-ORIENTED FUND
PRINCIPAL UTILITIES FUND, INC.
The 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.
Main Strategies
The Fund invests in securities issued by companies in the public utilities
industry. These companies include:
o companies engaged in the manufacture, production, generation, sale or
distribution of electric or gas energy or other types of energy, and
o companies engaged in telecommunications, including telephone,
telegraph, satellite, microwave and other communications media (but not
public broadcasting or cable television).
The Sub-Advisor, Invista, considers a company to be in the public utilities
industry if, at the time of investment, at least 50% of the company's assets,
revenues or profits are derived from one or more of those industries.
Under normal market conditions, at least 65% (and up to 100%) of the assets of
the Fund are invested in equity securities and fixed-income securities in the
public utilities industry. The Fund does not have any policy to concentrate its
assets in any segment of the utilities industry. The portion of Fund assets
invested in equity securities and fixed-income securities varies from time to
time. When determining how to invest the Fund's assets to achieve its investment
objective, Invista considers:
o changes in interest rates,
o prevailing market conditions, and
o general economic and financial conditions.
The Fund invests in fixed-income securities, which at the time of purchase, are:
o rated in one of the top four categories by S&P or Moody's, or;
o if not rated, in the Manager's opinion are of comparable quality.
Main Risks
Since the Fund's investments are concentrated in the utilities industry, the
value of its shares changes in response to factors affecting those industries.
Many utility companies have been subject to risks of:
o increase in fuel and other operating costs;
o changes in interests rates on borrowings for capital improvement
programs;
o changes in applicable laws and regulations;
o changes in technology which render existing plants, equipment or
products obsolete;
o effects of conservation; and
o increased costs and delays associated with environmental regulations.
Generally, the prices charged by utilities are regulated with the intention of
protecting the public while ensuring that utility companies earn a return
sufficient to attract capital to grow and provide appropriate services. However,
due to political and regulatory factors, rate changes ordinarily occur following
a change in financing costs. This delay tends to favorably affect a utility
company's earnings and dividends when costs are decreasing but also adversely
affects earnings and dividends when costs are rising. In addition, the value of
the utility company bond prices rise when interest rates fall and fall when
interest rates rise.
Certain states are adopting deregulation plans. These plans generally allow for
the utility company to set the amount of their earnings without regulatory
approval.
The share price of the Fund may fluctuate more widely than the value of shares
of a fund that invests in a broader range of industries. Because of these
fluctuations, principal values and investment returns vary. As with all mutual
funds, the value of the Fund's assets may rise or fall. If you sell your shares
when their value is less than the price you paid, you will lose money.
Investor Profile
The Fund is generally a suitable investment if you are seeking quarterly
dividends to generate income or to be reinvested for growth, want to invest in
companies in the utilities industry and are willing to accept fluctuations in
the value of your investment.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1993" 8.42
"1994" -11.09
"1995" 33.87
"1996" 4.56
"1997" 29.58
"1998" 22.5
"1999"
Calendar Years Ended December 31
The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class R shares is _____%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest . (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Class A % % %* S&P 500 Stock Index % % %
Class R ** -- Dow Jones Utilities Index with
Income Fund Average --
Lipper Utilities Fund Average
<FN>
* Period from December 16, 1992, date Class A shares first offered to the
public, through December 31, 1999.
** Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses
Class A Class R
Management Fees................ % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % %
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------
Class A $ $ $ $
Class R
You would pay the following expenses if you did not redeem your shares:
Class A
Class R
Day-to-day Fund Management
Since April 1993 Manager: Catherine A. Zaharis, CFA. Portfolio Manager of
Invista since 1987.
INTERNATIONAL GROWTH-ORIENTED FUND
PRINCIPAL INTERNATIONAL EMERGING MARKETS FUND, INC.
The Fund seeks to achieve long-term growth of capital by investing primarily in
equity securities of issuers in emerging market countries.
Main Strategies
The Fund seeks to achieve its objective by investing in common stocks of
companies in emerging market countries. For this Fund, the term "emerging market
country" means any country which is considered to be an emerging country by the
international financial community (including the International Bank for
Reconstruction and Development (also 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. Investing in many emerging
market countries is not feasible or may involve unacceptable political risk.
Invista, the Sub-Advisor, focuses on those emerging market countries that it
believes have strongly developing economies and markets which are becoming more
sophisticated.
Under normal conditions, at least 65% of the Fund's assets are invested in
emerging market country equity securities. The Fund invests in securities of:
o companies with their principal place of business or principal office
in emerging market countries;
o companies for which the principal securities trading market is an
emerging market country; or
o companies, regardless of where its securities are 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.
Main Risks
Investments in emerging market countries involve special risks. Certain emerging
market countries have historically experienced, and may continue to experience,
certain economic problems. These may include: 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 risks involved with any investment in foreign securities.
Foreign stocks carry risks that are not generally found in stocks of U.S.
companies. These include the risk that a foreign security could lose value as a
result of political, financial and economic events in foreign countries. In
addition, foreign securities may be subject to securities regulators with less
stringent accounting and disclosure standards than are required of U.S.
companies.
Under unusual market or economic conditions, the Fund may invest in the same
kinds of securities as the other Growth-Oriented Funds. These include securities
issued by domestic or foreign corporations, governments or governmental
agencies, instrumentalities or political subdivisions. The securities may be
denominated in U.S. dollars or other currencies.
Because the values of the Fund's assets are likely to rise or fall dramatically,
if you sell your shares when their value is less than the price you paid, you
will lose money.
Investor Profile
The Fund is generally a suitable investment if you are seeking long-term growth
who want to invest a portion of their assets in securities of companies in
emerging market countries. This Fund is not an appropriate investment if you are
seeking either preservation of capital or high current income. You must be able
to assume the increased risks of higher price volatility and currency
fluctuations associated with investments in international stocks which trade in
non-U.S. currencies.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1998" -17.42
"1999"
Calendar Year Ended December 31
The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class R shares is _____%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest .% (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Class A % %* -- Morgan Stanley Capital International EMF % % %
Class R ** -- (Emerging Markets Free) Index
Lipper Emerging Markets Fund Average
<FN>
* Period from August 29, 1997, date A shares first offered to the public,
through December 31, 1999.
** Period from August 29, 1997, date R shares first offered to eligible purchasers,
through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses
Class A Class R
Management Fees*............... % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % %
* The Manager has agreed to waive a portion of its fee for the Fund. The
Manager intends to continue the waiver and, if necessary, pay expenses
normally payable by the Fund through the period ending October 31,
2000. The waiver will maintain a total level of operating expenses
(expressed as a percent of average net assets attributable to a Class
on an annualized basis) not to exceed 3.00% for Class R Shares and
2.50% for Class A Shares. The effect of the waiver is to reduce the
Fund's annual operating expenses.
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------------
Class A $ $ $ $
Class R
You would pay the following expenses if you did not redeem your shares:
Class A
Class R
Day-to-day Fund Management
Since May 1997 Manager: Kurtis D. Spieler, CFA. Portfolio Manager of
Invista since 1995.
INTERNATIONAL GROWTH-ORIENTED FUND
PRINCIPAL INTERNATIONAL FUND, INC.
The 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.
Main Strategies
The Fund invests in common stocks of companies established outside of the U.S.
The Fund has no limitation on the percentage of assets that are invested in any
one country or denominated in any one currency. However under normal market
conditions, the Fund intends to have at least 65% of its assets invested in
companies in at least three different countries. One of those countries may be
the U.S. though currently the Fund does not intend to invest in equity
securities of U.S. companies.
Investments may be made anywhere in the world. Primary consideration is given to
securities of corporations of Western Europe, North America and Australasia
(Australia, Japan and Far East Asia). Changes in investments are made as
prospects change for particular countries, industries or companies.
In choosing investments for the Fund, the Sub-Advisor, Invista, pays particular
attention to the long-term earnings prospects of the various companies under
consideration. Invista then weighs those prospects relative to the price of the
security.
Main Risks
The values of the stocks owned by the Fund change on a daily basis. Stock prices
reflect the activities of individual companies as well as general market and
economic conditions. In the short term, stock prices and currencies can
fluctuate dramatically in response to these factors. In addition, there are
risks involved with any investment in foreign securities that are not generally
found in stocks of U.S. companies. These include the risk that a foreign
security could lose value as a result of political, financial and economic
events in foreign countries. In addition, foreign securities may be subject to
securities regulators with less stringent accounting and disclosure standards
than are required of U.S. companies.
Under unusual market or economic conditions, the Fund may invest in the same
kinds of securities as the other Growth-Oriented Funds. These include securities
issued by domestic or foreign corporations, governments or governmental
agencies, instrumentalities or political subdivisions. The securities may be
denominated in U.S. dollars or other currencies.
As with all mutual funds, the value of the Fund's assets may rise or fall. If
you sell your shares when their value is less than the price you paid, you will
lose money.
Investor Profile
The Fund is generally a suitable investment if you are seeking long-term growth
and want to invest in non-U.S. companies. This Fund is not an appropriate
investment if you are seeking either preservation of capital or high current
income. You must be able to assume the increased risks of higher price
volatility and currency fluctuations associated with investments in
international stocks which trade in non-U.S. currencies.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1990" -9.51
"1991" 15.25
"1992" 0.81
"1993" 46.34
"1994" -5.26
"1995" 11.56
"1996" 23.76
"1997" 12.22
"1998" 8.48
"1999"
Calendar Years Ended December 31
The year-to-date return as of December 31, 1999 for Class A shares is ____% and
for Class R shares is ____%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest .% (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Class A % % % Morgan Stanley Capital International EAFE % % %
Class R * -- (Europe, Australia and Far East) Index
Lipper International Fund Average
<FN>
* Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses
Class A Class R
Management Fees................ % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % %
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------
Class A $ $ $ $
Class R
You would pay the following expenses if you did not redeem your shares:
Class A
Class R
Day-to-day Fund Management
Since April 1994 Manager: Scott D. Opsal, CFA. Executive Vice President and
Chief Investment Officer of Invista since 1997.
INTERNATIONAL GROWTH-ORIENTED FUND
PRINCIPAL INTERNATIONAL SMALLCAP FUND, INC.
The 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.
Main Strategies
The Fund invests in stocks of non-U.S. companies with comparatively smaller
market capitalizations. Market capitalization is defined as total current market
value of a company's outstanding common stock. Under normal market conditions,
the Fund invests at least 65% of its assets in securities of companies having
market capitalizations of $1 billion or less.
The Fund diversifies its investments geographically. There is no limitation on
the percentage of assets that may be invested in one country or denominated in
any one currency. However, under normal market circumstances, the Fund intends
to invest at least 65% of its assets in securities of companies of at least
three countries.
Main Risks
Foreign stocks carry risks that are not generally found in stocks of U.S.
companies. These include the risk that a foreign security could lose value as a
result of political, financial and economic events in foreign countries. In
addition, foreign securities may be subject to securities regulators with less
stringent accounting and disclosure standards than are required of U.S.
companies.
Investments in companies with smaller market capitalizations may involve greater
risks and price volatility (wide, rapid fluctuations) than investments in
larger, more mature companies. Smaller companies may be developing or marketing
new products or services for which markets are not yet established and may never
become established. While small, unseasoned companies may offer greater
opportunities for capital growth than larger, more established companies, they
also involve greater risks and should be considered speculative.
This Fund is not an appropriate investment for investors seeking either
preservation of capital or high current income. Investors must be able to assume
the increased risks of higher price volatility and currency fluctuations
associated with investments in international stocks which trade in non-U.S.
currencies. As with all mutual funds, the value of the Fund's assets may rise or
fall. If you sell your shares when their value is less than the price you paid,
you will lose money.
Investor Profile
The Fund is generally a suitable investment if you are seeking long-term growth
and want to invest a portion of your assets in smaller, non-U.S. companies.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1998" 14.4
"1999"
Calendar Year Ended December 31
The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class R shares is _____%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest .% (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Class A % %* -- Morgan Stanley Capital International EAFE % % %
Class R ** -- (Europe, Australia and Far East) Index
Lipper International Small-Cap Fund Average
<FN>
* Period from August 29, 1997, date A shares first offered to the public,
through December 31, 1999.
** Period from August 29, 1997, date R shares first offered to eligible purchasers,
through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses
Class A Class R
Management Fees................ % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % %
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------
Class A $ $ $ $
Class R
You would pay the following expenses if you did not redeem your shares:
Class A
Class R
Day-to-day Fund Management
Since May 1997 Manager: Darren K. Sleister, CFA. Portfolio Manager of
Invista since 1995.
PARTNERS FUND
PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND, INC.
The Fund seeks to provide long-term capital appreciation.
Main Strategies
The Fund seeks to maximize long-term capital appreciation by investing primarily
in the equity securities of U.S. and, to a limited extent, foreign companies
that exhibit strong or accelerating earnings growth. The universe of eligible
companies generally includes those with market capitalizations of $1 billion or
more. The Sub-Advisor, Morgan Stanley, emphasizes individual security selection
and may focus the Fund's holdings within the limits permissible for a
diversified fund.
Morgan Stanley follows a flexible investment program in looking for companies
with above average capital appreciation potential. Morgan Stanley focuses on
companies with consistent or rising earnings growth records and compelling
business strategies. Morgan Stanley continually and rigorously studies company
developments, including business strategy, management focus and financial
results to identify companies with earnings growth and business momentum. In
addition, Morgan Stanley closely monitors analysts' expectations to identify
issuers that have the potential for positive earnings surprises versus consensus
expectations. Valuation is of secondary importance and is viewed in the context
of prospects for sustainable earnings growth and the potential for positive
earnings surprises in relation to consensus expectations.
The Fund has a long-term investment approach. However, Morgan Stanley considers
selling securities of issuers that no longer meet its criteria. To the extent
that the Fund engages in short-term trading, it may have increased transaction
costs.
Main Risks
The value of the stocks owned by the Fund changes on a daily basis. Stock prices
can fluctuate dramatically both in the long-term and short-term. The current
price reflects the activities of individual companies and general market and
economic conditions. Prices of equity securities tend to be more volatile than
prices of fixed-income securities. The prices of equity securities rise and fall
in response to a number of different factors. In particular, prices of equity
securities respond to events that affect entire financial markets or industries
(for example changes in inflation or consumer demand) and to events that affect
particular issuers (for example news about the success or failure of a new
product).
The Fund may invest up to 25% of its assets in securities of foreign companies.
Foreign stocks carry risks that are not generally found in stocks of U.S.
companies. These include the risk that a foreign security could lose value as a
result of political, financial and economic events in foreign countries. In
addition, foreign securities may be subject to securities regulators with less
stringent accounting and disclosure standards than are required of U.S.
companies.
At times, the Fund's market sector (mid- to large-capitalization growth-oriented
equity securities) may underperform relative to other sectors. The Fund may
purchase stocks of companies that may have greater risks than other stocks with
lower potential for earnings growth.
As with all mutual funds, as the value of the Fund's assets rise and fall, the
Fund's share price changes. If you redeem (sell) your shares when their value is
less than the price you paid, you will lose money.
Investor Profile
The Fund is generally a suitable investment if you are willing to accept the
risks and uncertainties of investing in equity securities in the hope of earning
superior returns.
As the inception date of the Fund is November 1, 1999, historical performance
data is not available. Estimated annual Fund operating expenses are as follows:
Average Annual total return for the period ending December 31, 1999
This table shows how the Fund's cumulative returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past One Past Five Past Ten
Year Year Years Years
<S> <C> <C> <C> <C> <C>
Class A %* S&P 500 Stock Index % % %
Class R ** Lipper Multi-Cap Core Fund Average
<FN>
* Period from November 1, 1999, date A shares first offered to the public, through December 31, 1999.
* Period from November 1, 1999, date R shares first offered to eligible purchasers, through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses*
Class A Class R
Management Fees **............. % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % %
* Total Fund Operating Expenses are estimated.
** The Manager has agreed to waive a portion of its fee for the Fund from
the date operations commenced. The Manager intends to continue the
waiver and, if necessary, pay expenses normally payable by the Fund
through the period ending October 31, 2000. The waiver will maintain a
total level of operating expenses (expressed as a percent of average
net assets attributable to a Class on an annualized basis) not to
exceed: 2.10% for Class R Shares and 1.60% for Class A Shares. The
effect of the waiver is to reduce the Fund's annual operating
expenses.
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
- -----------------------------------------------------------
Class A $ $ N/A N/A
Class R N/A N/A
You would pay the following expenses if you did not redeem your shares:
Class A N/A N/A
Class R N/A N/A
Day-to-day Fund Management
Since November 1999
(Fund's inception)
Co-Manager, Philip W. Friedman, Managing Director of Morgan Stanley & Co.
Incorporated and Morgan Stanley. Prior to joining Morgan Stanley in 1997,
he was the Director of Equity Research, Morgan Stanley & Co. (1995-1997).
Prior thereto, he was a member of Morgan Stanley & Co. Incorporated's
Equity Research team (1990-1995).
Co-Manager, William S. Auslander, Portfolio Manager and Principal of Morgan
Stanley & Co. Incorporated and Morgan Stanley. Prior to joining Morgan
Stanley in 1995, he was an equity analyst at Icahn & Co. (1986-1995).
Co-Manager, Margaret K. Johnson, Portfolio Manager and Principal of Morgan
Stanley & Co. Incorporated and Morgan Stanley. Ms. Johnson joined Morgan
Stanley in 1984.
PARTNERS FUND
PRINCIPAL PARTNERS LARGECAP GROWTH FUND, INC.
The Fund seeks long-term growth of capital by investing primarily in common
stocks of larger capitalization domestic companies.
Main Strategies
The Fund is a non-diversified fund that invests in equity securities of
companies in the U.S. with comparatively larger market capitalizations. Market
capitalization is defined as total current market value of a company's
outstanding common stock. Under normal market conditions, the Fund invests at
least 75% of its total assets in domestic companies with market capitalizations
in excess of $10 billion. In addition, the Fund may invest up to 25% of its
assets in securities of foreign issuers.
In selecting securities for investment, the Sub-Advisor, Duncan-Hurst, looks at
stocks it believes have prospects for above-average growth over an extended
period of time. Duncan-Hurst seeks to identify companies with accelerating
earnings growth and positive company fundamentals. While economic forecasting
and industry sector analysis play a part in its research effort, Duncan-Hurst's
stock selection process begins with individual company analysis. This is often
referred to as a bottom-up approach to investing. From a group of companies that
meet Duncan-Hurst's standards, it selects the securities of those companies that
it believes will have earnings growth at an above-average rate. In making this
determination, Duncan-Hurst considers certain characteristics of a particular
company including new product development, management change and competitive
market dynamics.
Main Risks
While stocks have historically been a leading choice of long-term investors,
they do fluctuate in price. The value of the stocks owned by the Fund changes on
a daily basis. The current price reflects the activities of individual companies
and general and market conditions. In the short-term, stock prices fluctuate
dramatically in response to these factors. As a result, the value of your
investment in the Fund will go up and down. If you sell your shares when their
value is less than the price you paid, you will lose money. Because different
types of stocks tend to shift in and out of favor depending on market and
economic conditions, the Fund's performance may sometimes be lower or higher
than that of other types of funds.
Foreign stocks carry risks that are not generally found in stocks of U.S.
companies. These include the risk that a foreign security could lose value as a
result of political, financial and economic events in foreign countries. In
addition, foreign securities may be subject to securities regulators with less
stringent accounting and disclosure standards than are required of U.S.
companies.
The Fund anticipates that its portfolio turnover rate will typically exceed
150%. Turnover rates in excess of 100% generally result in higher transaction
costs and a possible increase in short-term capital gains (or losses).
The Fund is a non-diversified company, as defined in the Investment Company Act
of 1940, as amended (the "1940 Act"), which means that a relatively high
percentage of assets of the Fund may be invested in the obligations of a limited
number of issuers. The value of the shares of the Fund may be more susceptible
to a single economic, political or regulatory occurrence than the shares of a
diversified investment company would be.
Investor Profile
The Fund is generally a suitable investment if you are seeking long-term growth
and are willing to accept the potential for volatile fluctuations in the value
of your investment. This Fund is designed as a long-term investment with growth
potential for diversification of your investment portfolio. It is not
appropriate if you are seeking income or conservation of capital.
As the inception date of the Fund is ____________________, historical
performance data is not available. Estimated annual Fund operating expenses are
as follows:
Fund Operating Expenses*
Class A Class R
Management Fees**.............. % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % %
* Total Fund Operating Expenses are estimated.
** The Manager has agreed to waive a portion of its fee for the Fund from
the date operations commenced. The Manager intends to continue the
waiver and, if necessary, pay expenses normally payable by the Fund
through the period ending October 31, 2000. The waiver will maintain a
total level of operating expenses (expressed as a percent of average
net assets attributable to a Class on an annualized basis) not to
exceed: ____% for Class R Shares; ____% and for Class A Shares. The
effect of the waiver is to reduce the Fund's annual operating
expenses.
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
- -----------------------------------------------------------
Class A $ $ N/A N/A
Class R N/A N/A
You would pay the following expenses if you did not redeem your shares:
Class A N/A N/A
Class R N/A N/A
Day-to-day Fund Management
Since _____
(Fund's inception)
PARTNERS FUND
PRINCIPAL PARTNERS MIDCAP GROWTH FUND, INC.
The Fund seeks to provide long-term growth of capital by investing primarily in
medium capitalization U.S. companies with strong earnings growth potential.
Main Strategies
The Fund invests primarily in common stocks and other equity securities of U.S.
companies. Under normal market conditions, the Fund invests at least 65% of its
assets in companies with market capitalizations in the $1 billion and $10
billion range.
The Fund invests in securities of companies that are diversified across economic
sectors. It attempts to maintain sector concentrations that approximate those of
its current benchmark, the Russell MidCap Index. The Fund is not an index fund
and does not limit its investment to the securities of issuers in the Russell
MidCap Index.
The Sub-Advisor, Turner, selects stocks that it believes have strong earnings
growth potential. Turner invests in companies with strong earnings dynamics, and
sells those with deteriorating earnings prospects. Turner believes forecasts for
market timing and sector rotation are unreliable, and introduce an unacceptable
level of risk. As a result, under normal market conditions the Fund is fully
invested.
Due to its investment strategy, the Fund may buy and sell securities frequently.
This may result in higher transaction costs and additional capital gains tax.
Main Risks
Because it purchases equity securities, the Fund is subject to the risk that
stock prices will fall over short or extended periods of time. Individual
companies may report poor results or be negatively affected by industry and/or
economic trends and developments. The price of securities issued by such
companies may suffer a decline in response. These factors contribute to price
volatility, which is the principal risk of investing in the Fund.
In addition, the Fund is subject to the risk that its principal market segment,
medium capitalization growth stocks, may underperform compared to other market
segments or to the equity markets as a whole. Because of this volatility, the
value of the Fund's equity securities may fluctuate on a daily basis. These
fluctuations may reduce your principal investment and lead to varying returns.
If you sell your shares when their value is less than the price you paid, you
will lose money.
The medium capitalization companies the Fund invests in may be more vulnerable
to adverse business or economic events than larger, more established companies.
In particular, these mid-size companies may pose greater risk due to narrow
product lines, limited financial resources, less depth in management or a
limited trading market for their securities.
Investor Profile
The Fund is generally a suitable investment if you are seeking long-term growth
of capital and are willing to accept the potential for short-term fluctuations
in the value of your investment. This Fund is not designed for income or
conservation of capital.
As the inception date of the Fund is ____________________, historical
performance data is not available. Estimated annual Fund operating expenses are
as follows:
Fund Operating Expenses*
Class A Class R
Management Fees**.............. % %
12b-1 Fees....................
Other Expenses................
Total Fund Operating Expenses % %
* Total Fund Operating Expenses are estimated.
** The Manager has agreed to waive a portion of its fee for the Fund from
the date operations commenced. The Manager intends to continue the
waiver and, if necessary, pay expenses normally payable by the Fund
through the period ending October 31, 2000. The waiver will maintain a
total level of operating expenses (expressed as a percent of average
net assets attributable to a Class on an annualized basis) not to
exceed: ____% for Class R Shares; ____% and for Class A Shares. The
effect of the waiver is to reduce the Fund's annual operating
expenses.
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
- ----------------------------------------------------------
Class A $ $ N/A N/A
Class R N/A N/A
You would pay the following expenses if you did not redeem your shares:
Class A N/A N/A
Class R N/A N/A
Day-to-day Fund Management
Since _____
(Fund's inception)
INCOME-ORIENTED FUND
PRINCIPAL BOND FUND, INC.
The Fund seeks to provide as high a level of income as is consistent with
preservation of capital and prudent investment risk.
Main Strategies
The Fund invests in fixed-income securities. Generally, the Fund invests on a
long-term basis but may make short-term investments. Longer maturities typically
provide better yields but expose the Fund to the possibility of changes in the
values of its securities as interest rates change. Generally, when interest
rates fall, the price per share rises, and when rates rise, the price per share
declines.
Under normal circumstances, the Fund invests at least 65% of its assets in:
o debt securities and taxable municipal bonds;
o rated, at the time of purchase, in one of the top four categories
by S&P or Moody's, or
o if not rated, in the Manager's opinion are of comparable quality.
o similar Canadian, Provincial or Federal Government securities
payable in U.S. dollars; and
o securities issued or guaranteed by the U.S. Government or its
agencies.
The rest of the Fund's assets may be invested in securities that may be
convertible (may be exchanged for a fixed number of shares of common stock of
the same issuer) or non-convertible including:
o domestic and foreign debt securities;
o preferred and common stock;
o foreign government securities; and
o securities rated less than the four highest grades of S&P or Moody's
but not lower BB- (S&P) or Ba3 (Moody's). Fixed income securities that
are not investment grade are commonly referred to as junk bonds or high
yield securities. These securities offer a potentially higher yield
than other, higher rated securities, but they carry a greater degree of
risk and are considered speculative by the major credit rating
agencies.
During the fiscal year ended October 31, 1999, the average ratings of this
Fund's assets based on market value at each month-end, were as follows (all
ratings are by Moody's):
Aaa 0.05%
Aa 2.90%
A 21.87%
Baa 66.11%
Ba 9.06%
Under unusual market or economic conditions, the Fund may invest up to 100% of
its assets in cash and cash equivalents.
Main Risks
When interest rates fall, the price of a bond rises and when interest rates
rise, the price declines. In addition, the value of securities held by the Fund
may be affected by factors such as credit rating of the entity that issued the
bond and effective maturities of the bond. Lower quality and longer maturity
bonds will be subject to greater credit risk and price fluctuations than higher
quality and shorter maturity bonds.
Investor Profile
The Fund is generally a suitable investment if you are seeking monthly dividends
to produce income or to be reinvested in additional Fund shares to help achieve
modest growth objectives without accepting the risks of investing in common
stocks. As with all mutual funds, if you sell your shares when their value is
less than the price you paid, you will lose money.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1990" 4.64
"1991" 17.45
"1992" 8.61
"1993" 12.77
"1994" -4.35
"1995" 22.28
"1996" 2.27
"1997" 10.96
"1998" 7.14
"1999"
Calendar Years Ended December 31
The year-to-date return as of December 31, 1999 for Class A shares is ____% and
for Class R shares is ____%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest . (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Class A % % % Lehman Brothers BAA Corporate Index % % %
Class R * -- Lipper Corporate Debt BBB Rated Fund Average
<FN>
* Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses
Class A Class R
Management Fees................ % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % %
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------
Class A $ $ $ $
Class R
You would pay the following expenses if you did not redeem your shares:
Class A
Class R
Day-to-day Fund Management
Since November 1996 Manager: Scott A. Bennett, CFA. Assistant Director -
Securities Investment of Principal Capital
Management since 1996.
INCOME-ORIENTED FUND
PRINCIPAL GOVERNMENT SECURITIES INCOME FUND, INC.
The 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 Associations
Certificates. The guarantees by the United States Government extends only to
principal and interest. There are certain risks unique to GNMA Certificates.
Main Strategies
The Fund invests in U.S. Government securities, which include obligations issued
or guaranteed by the U.S. Government or its agencies or instrumentalities. The
Fund may invest in securities supported by:
o full faith and credit of the U.S. Government (e.g. GNMA certificates);
or
o credit of the instrumentality (e.g. bonds issued by the Federal Home
Loan Bank).
In addition, the Fund may invest in money market instruments.
The Fund invests in modified pass-through GNMA Certificates. GNMA Certificates
are mortgage-backed securities representing an interest in a pool of mortgage
loans. Various lenders make the loans which are then insured (by the Federal
Housing Administration) or loans which are guaranteed (by Veterans
Administration or Farmers Home Administration). The lender or other security
issuer creates a pool of mortgages which it submits to GNMA for approval.
Owners of modified pass-through Certificates receive all interest and principal
payments owed on the mortgages in the pool, regardless of whether or not the
mortgagor has made the payment. Timely payment of interest and principal is
guaranteed by the full faith and credit of the U.S. Government.
Main Risks
Although some of the securities the Fund purchases are backed by the U.S.
government and its agencies, shares of the Fund are not guaranteed. When
interest rates fall, the value of the Fund's shares rises, and when rates rise,
the value declines. Because of the fluctuation in values of the Fund's shares,
if you sell your shares when their value is less than the price you paid, you
will lose money.
U.S. Government securities do not involve the degree of credit risk associated
with investments in lower quality fixed-income securities. As a result, the
yields available from U.S. Government securities are generally lower than the
yields available from many other fixed-income securities. Like other
fixed-income securities, the values of U.S. Government securities change as
interest rates fluctuate. Fluctuations in the value of the Fund's securities do
not effect interest income on securities already held by the Fund, but are
reflected in the Fund's price per share. Since the magnitude of these
fluctuations generally are greater at times when the Fund's average maturity is
longer, under certain market conditions the Fund may invest in short-term
investments yielding lower current income rather than investing in higher
yielding longer term securities.
Mortgage-backed securities are subject to prepayment risk. Prepayments,
unscheduled principal payments, may result from voluntary prepayment,
refinancing or foreclosure of the underlying mortgage. When interest rates
decline, significant unscheduled prepayments may result. These prepayments must
then be reinvested at lower rates. Prepayments may also shorten the effective
maturities of these securities, especially during periods of declining interest
rates. On the other hand, during periods of rising interest rates, a reduction
in prepayments may increase the effective maturities of these securities,
subjecting them to the risk of decline in market value in response to rising
interest and potentially increasing the volatility of the fund.
In addition, prepayments may cause losses on securities purchased at a premium
(dollar amount by which the price of the bond exceeds its face value). At times,
mortgage-backed securities may have higher than market interest rates and are
purchased at a premium. Unscheduled prepayments are made at par and cause the
Fund to experience a loss of some or all of the premium.
Investor Profile
The Fund is generally a suitable investment if you want monthly dividends to
provide income or to be reinvested in additional Fund shares to produce growth
and prefer to have the repayment of principal and interest on most of the
securities in which the Fund invests to be back by the U.S. Government or its
agencies.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1990" 9.52
"1991" 16.83
"1992" 6.13
"1993" 9.16
"1994" -4.89
"1995" 19.19
"1996" 3.85
"1997" 9.69
"1998" 7.19
"1999"
Calendar Years Ended December 31
The year-to-date return as of December 31, 1999 for Class A shares is ____% and
for Class R shares is ____%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest .% (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Class A % % % Lehman Brothers GNMA Index % % %
Class R * -- Lipper GNMA Fund Average
<FN>
* Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses
Class A Class R
Management Fees................ % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % %
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------
Class A $ $ $ $
Class R
You would pay the following expenses if you did not redeem your shares:
Class A
Class R
Day-to-day Fund Management
Since May 1985 Manager: Martin J. Schafer, CFA. Portfolio Manager of Invista
since 1992.
INCOME-ORIENTED FUND
PRINCIPAL HIGH YIELD FUND, INC.
The Fund 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.
Main Strategies
The Fund invests in high yield, lower or unrated fixed income securities. Fixed
income securities that are commonly known as "junk bonds" or high yield
securities. These securities offer a higher yield than other, higher rated
securities but they carry a greater degree of risk and are considered to be
speculative with respect to the issuer's ability to pay interest and repay
principal.
The Fund invests its assets in securities rated Ba1 or lower by Moody's or BB+
or lower by S&P. The Fund may also invest in unrated securities which the
Manager believes to be of comparable quality. The Fund does not invest in
securities rated below Caa (Moody's) or below CCC (S&P) at the time of purchase.
The SAI contains descriptions of the securities rating categories.
During the fiscal year ended October 31, 1999, the average ratings of the Fund's
assets, based on market value at each month-end, were as follows (all ratings
are by Moody's):
0.74% in securities rated A 46.72% in securities rated Ba
2.62% in securities rated Baa 52.59% in securities rated B
2.64% in securities rated C 0.10% in securities rated D
The above percentage for securities rated Ba includes 2.89% of unrated
securities and securities rated B includes 2.52% of unrated securities which
have been determined by the Manager to be of comparable quality.
Main Risks
Investors assume special risks when investing in the Fund. Compared to higher
rated securities, lower rated securities may:
o have a more volatile market value, generally reflecting specific
events affecting the issuer;
o be subject to greater risk of loss of income and principal (issuers
are generally not as financially secure);
o have a lower volume of trading, making it more difficult to value or
sell the security; and
o be more susceptible to a change in value or liquidity based on adverse
publicity and investor perception, whether or not based on factual
analysis.
The market for higher-yielding, lower-rated securities has not been tested by an
economic recession. An economic downturn may severely disrupt the market for
these securities. This could cause financial stress to the issuer negatively
affecting the issuer's ability to pay principal and interest. This may also
negatively affect the value of the Fund's securities. In addition, if an issuer
defaults the Fund may have additional expenses if it tries to recover the
amounts due it.
Some securities the Fund buys have call provisions. A call provision allows the
issuer of the security to redeem it before its maturity date. If a bond is
called in a declining interest rate market, the Fund would have to replace it
with a lower yielding security. This results in a decreased return for
investors. In addition, in a rising interest rate market, a higher yielding
security's value decreases. This is reflected in a lower share price for the
Fund.
The Fund tries to minimize the risks of investing in lower rated securities by
diversification, investment analysis and attention to current developments in
interest rates and economics conditions. Although the Fund's Manager considers
securities ratings when making investment decisions, it performs its own
investment analysis. This analysis includes traditional security analysis
considerations such as:
o experience and managerial strength
o changing financial condition
o borrowing requirements or debt maturity schedules
o responsiveness to changes in business conditions
o relative value based on anticipated cash flow
o earnings prospects
The Manager continuously monitors the issuers of the Fund's securities to
determine if the issuers will have sufficient cash flow and profits to meet
required principal and interest payments. It also monitors each security to
assure the security's liquidity so the Fund can meet requests for sales of Fund
shares.
For defensive purposes, the Fund may invest in other securities. During periods
of adverse market conditions, the Fund may invest in all types of money market
instruments, higher rated fixed-income securities or any other fixed-income
securities consistent with the temporary defensive strategy. The yield to
maturity on these securities is generally lower than the yield to maturity on
lower rated fixed-income securities.
Investor Profile
The Fund is generally a suitable investment if you are seeking monthly dividends
to provide income or to be reinvested in Fund shares for growth. However, it is
suitable only for that portion of your investments for which you are willing to
accept potentially greater risk. You should carefully consider your ability to
assume the risks of this Fund before making an investment and be prepared to
maintain your investment in the Fund during periods of adverse market
conditions. This Fund should not be relied on to meet short-term financial
needs. As with all mutual funds, the value of the Fund's assets may rise or
fall. If you sell your shares when their value is less than the price you paid,
you will lose money.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1990" -11.66
"1991" 28.74
"1992" 13.09
"1993" 12.1
"1994" -0.65
"1995" 15.61
"1996" 12.54
"1997" 9.68
"1998" -1.28
"1999"
Calendar Years Ended December 31
The year-to-date return as of December 31, 1999 for Class A shares is ____% and
for Class R shares is ____%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest .% (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Class A % % % Lehman Brothers High Yield Composite Bond Index % % %
Class R * -- Lipper High Current Yield Fund Average
<FN>
* Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses
Class A Class R
Management Fees................ % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % %
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------
Class A $ $ $ $
Class R
You would pay the following expenses if you did not redeem your shares:
Class A
Class R
Day-to-day Fund Management
Since April 1998 Manager: Mark P. Denkinger, CFA. Assistant Director -
Securities Investment of Principal Capital Management
since 1998.
INCOME-ORIENTED FUND
PRINCIPAL LIMITED TERM BOND FUND, INC.
The 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.
Main Strategies
The Fund invests in high grade, short-term debt securities. Under normal
circumstances, it invests at least 80% of its assets in:
o securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities;
o debt securities of U.S. issuers rated in the three highest grades by
S&P or Moody's; or
o if unrated, are of comparable quality in the opinion of the
Sub-Advisor, Invista.
The rest of the Fund's assets are invested in securities in the fourth highest
rating category or their equivalent. Securities in the fourth highest category
are "investment grade." While they are considered to have adequate capacity to
pay interest and repay principal, they do have speculative characteristics.
Changes in economic and other conditions are more likely to impact the ability
of the issuer to make principal and interest payments than is the case with
higher rated securities.
Main Risks
The Fund may invest in corporate debt securities and mortgage-backed securities.
When interest rates fall, the price of a bond rises and when interest rates
rise, the price declines. In addition, the value of the corporate debt
securities held by the Fund may be affected by factors such as credit rating of
the entity that issued the bond and effective maturities of the bond. Lower
quality and longer maturity bonds will be subject to greater credit risk and
price fluctuations than higher quality and short maturity bonds.
Mortgage backed securities are subject to prepayment risk. When interest rates
decline, significant unscheduled prepayments may result. These prepayments must
then be reinvested at lower rates. Prepayments may also shorten the effective
maturities of these securities, especially during periods of declining interest
rates. On the other hand, during periods of rising interest rates, a reduction
in prepayments may increase the effective maturities of these securities,
subjecting them to the risk of decline in market value in response to rising
interest. This may increase the volatility of the Fund.
Under normal circumstances, the Fund maintains a dollar-weighted average
maturity of not more than five years. In determining the average maturity of the
Fund's assets, the maturity date of callable or prepayable securities may be
adjusted to reflect Invista's judgment regarding the likelihood of the security
being called or prepaid.
Under unusual market or economic conditions, for temporary defensive purposes
the Fund may invest up to 100% of its assets in the cash or cash equivalents.
As with all mutual funds, the value of the Fund's assets may rise or fall. If
you sell your shares when their value is less than the price you paid, you will
lose money.
Investor Profile
The Fund is generally a suitable investment if you want monthly dividends to
generate income or to reinvest for modest growth. You must be willing to accept
some volatility in the value of your investment but do not want dramatic
volatility.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1997" 6.63
"1998" 6.7
"1999"
Calendar Years Ended December
The year-to-date return as of December 31, 1999 for Class A shares is ____% and
for Class R shares is ____%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest .% (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past Five Past Ten Past One Past Five Past Ten
Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Class A % %* -- Lehman Brothers Intermediate Government/Corporate Index % % %
Class R ** -- Lipper Short-Intermediate Investment Grade Debt
Fund Average
<FN>
* Period from February 29, 1996, date shares first offered to the public,
through December 31, 1999.
** Period from February 29, 1996, date R shares first offered to eligible
purchasers, through December 31, 1999.
</FN>
</TABLE>
Fund Operating Expenses
Class A Class R
Management Fees*............... % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % %
* The Manager has agreed to waive a portion of its fee for the Fund. The
Manager intends to continue the waiver and, if necessary, pay expenses
normally payable by the Fund through the period ending October 31,
2000. The waiver will maintain a total level of operating expenses
(expressed as a percent of average net assets attributable to a Class
on an annualized basis) not to exceed 1.60% for Class R Shares and
1.00% for Class A Shares. The effect of the waiver is to reduce the
Fund's annual operating expenses.
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------
Class A $ $ $ $
Class R
You would pay the following expenses if you did not redeem your shares:
Class A
Class R
Day-to-day Fund Management
Since February 1996 Manager: Martin J. Schafer, CFA. Portfolio Manager of
Invista since 1992.
MONEY MARKET FUND
PRINCIPAL CASH MANAGEMENT FUND, INC.
The 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.
Main Strategies
The 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.
The Fund invests its assets in a portfolio of money market instruments. The
investments are U.S. dollar denominated securities which the Manager believes
present minimal credit risks. At the time the Fund purchases each security, it
is an "eligible security" as defined in the regulations issued under the
Investment Company Act of 1940.
The Fund maintains a dollar weighted average portfolio maturity of 90 days or
less. It intends to hold its investments until maturity. However, the Fund may
sell a security before it matures:
o to take advantage of market variations;
o to generate cash to cover sales of Fund shares by its shareholders; or
o upon revised credit opinions of the security's issuer. The sale of a
security by the Fund before maturity may not be in the best interest of the
Fund. The Fund does have an ability to borrow money to cover the sale of
Fund shares. The sale of portfolio securities is usually a taxable event.
It is the policy of the Fund to be as fully invested as possible to maximize
current income. Securities in which the Fund invests include:
o Government securities which are issued or guaranteed by the U.S.
Government, including treasury bills, notes and bonds.
o U.S. Government agency securities which are issued or guaranteed by
agencies or instrumentalities of the U.S. Government. These are backed
either by the full faith and credit of the U.S. Government or by the credit
of the particular agency or instrumentality.
o Bank obligations consisting of:
o certificates of deposit which generally are negotiable certificates
against funds deposited in a commercial bank or
o bankers acceptances which are time drafts drawn on a commercial bank,
usually in connection with international commercial transactions.
o Commercial paper which is short-term promissory notes issued by U.S. or
foreign corporations primarily to finance short-term credit needs.
o Short-term corporate debt consisting of notes, bonds or debentures which at
the time of purchase by the Fund has 397 days or less remaining to
maturity.
o Repurchase agreements under which securities are purchased with an
agreement by the seller to repurchase the security at the same price plus
interest at a specified rate. Generally these have a short duration (less
than a week) but may also have a longer duration.
o Taxable municipal obligations which are short-term obligations issued or
guaranteed by state and municipal issuers which generate taxable income.
Main Risks
As with all mutual funds, the value of the Fund's assets may rise or fall.
Although the Fund seeks to preserve the value of an investment at $1.00 per
share, it is possible to lose money by investing in the Fund if you sell your
shares when their value is less than the price you paid. An investment in the
Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation
or any other government agency.
Investor Profile
The Fund is generally a suitable investment if you are seeking monthly dividends
to produce income without incurring much principal risk or your short-term
needs.
The Fund's past performance is not predictive of future performance. The bar
chart and tables provide some indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.
Annual Total Returns
"1990" 7.63
"1991" 5.8
"1992" 3.38
"1993" 2.63
"1994" 3.77
"1995" 5.44
"1996" 4.96
"1997" 4.88
"1998" 5.15
"1999"
Calendar Years Ended December 31
The year-to-date return as of December 31, 1999 for Class A shares is ____% and
for Class R shares is ____%.
The fund's highest/lowest quarterly results during this time period were:
Highest .% (quarter ended )
Lowest .% (quarter ended )
Average annual total returns for the period ending December 31, 1999
This table shows how the Fund's average annual returns compare with those of a
broad-based securities market index and an index of funds with similar
investment objectives.
Past One Past FivePast Ten
Year Years Years
Class A % % %
Class R * --
* Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through December 31, 1999.
Fund Operating Expenses
Class A Class R
Management Fees................ % %
12b-1 Fees.....................
Other Expenses.................
Total Fund Operating Expenses % %
Examples
The Examples assume that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------
Class A $ $ $ $
Class R
You would pay the following expenses if you did not redeem your shares:
Class A
Class R
Day-to-day Fund Management
Since March 1983 Co-Manager: Michael R.Johnson. Assistant Director - Securities
Trading of Principal Capital Management since 1994.
Since _________ Co-Manager: Alice Robertson
THE COSTS OF INVESTING
Fees and Expenses of the Funds
This table describes the fees and expenses that you may pay if you buy and hold
shares of a Fund.
<TABLE>
Shareholder Fees
(fees paid directly from your investment)
<CAPTION>
Maximum Sales Load Imposed Contingent
on Purchases of Class R sharesRedemption Exchange Deferred Sales
Fund (as a percentage of offering price) Fee* Fee Charge
<S> <C> <C> <C> <C>
All Funds None None None None
* A wire charge of $6.00 will be deducted for all wire transfers.
</TABLE>
Fees and expenses are important because they lower your earnings. However, low
costs do not guarantee higher earnings. For example, a fund with no front-end
sales charge may have higher ongoing expenses than a fund with such a sales
charge. Before investing, you should be sure you understand the nature of
different costs. Your Registered Representative can help you with this process.
Class R shares of the Principal Mutual Funds are sold without a front-end sales
charge and do not have a contingent deferred sales charge. There is no sales on
shares of any of the Funds purchased with reinvested dividends or other
distributions.
Class R shares automatically convert into Class A shares (based on share prices,
not numbers of shares) 49 months after purchase. Class R shares provide you the
benefit of putting all your dollars to work from the time of investment, but
(until conversion) have higher ongoing fees and lower dividends than Class A
shares.
Only Class R shares are offered in this prospectus. Class A shares are only
described because Class R shares convert to Class A shares. Orders for Class R
shares of $500,000 or more are treated as orders for Class A shares (unless you
include a written instruction that the order should be treated as an order for
Class R shares.)
Class A shares of the Cash Management Fund are sold without a sales charge.
Class A shares of the other Funds are sold with a sales charge that is a
variable percentage based on the amount of the purchase. This table shows the
sales charge for those funds which is based on the amount of your purchase.
<TABLE>
<CAPTION>
All Funds (Except
LargeCap Stock Index and LargeCap Stock Index and Sales Charge for
Limited Term Bond Funds) Limited Term Bond Funds Dealers Allowance as
Sales Charge as % of: Sales Charge as % of: % of Offering Price
All Funds Except LargeCap Stock
Offering Net Amount Offering Net Amount LargeCap Stock Index Index and Limited
Amount invested Price Invested Price Invested and Limited Term Bond Term Bond Funds
<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>
The front-end sales charge is waived on an investment of $1 million or more in
Class A shares. There may be a CDSC on shares sold within 18 months of the
purchase date. The CDSC does not apply to shares purchased with reinvested
dividends or other distributions. The CDSC is calculated as 0.75% (0.25% for the
LargeCap Stock Index and Limited Term Bond Funds) of the lesser of the current
market value or the initial purchase price of the shares sold. The CDSC is
waived on shares sold to fund a Principal Mutual Fund 401(a) or Principal Mutual
Fund 401(k) retirement plan, except redemptions which are the result of
termination of the plan or transfer of plan assets.
The CDSC is also waived:
o on shares sold to satisfy IRS minimum distribution rules
o using a periodic withdrawal plan. (You may sell up to 10% of the value of
the shares subject to a CDSC without paying the CDSC.)
In the case of selling some but not all of the shares in an account, the shares
not subject to a sales charge are redeemed first. Other shares are redeemed in
the order purchased (first in, first out). Shares subject to the CDSC which are
exchanged into another Principal Mutual Fund continue to be subject to the CDSC
until the CDSC expires.
Broker-dealers that sell Principal Mutual Funds are paid a certain percentage of
the sales charge in exchange for their services. At the option of Princor
Financial Services Corporation, the amount paid to a dealer may be more or less
than that shown in the chart above. The amount paid depends on the services
provided. Amounts paid to dealers on purchases without an front-end sales charge
are determined by and paid for by Princor.
SALES CHARGE WAIVER OR REDUCTION
Class A shares of the Funds may be purchased without a sales charge or at a
reduced sales charge. The Funds reserve the right to change or stop offering
shares in this manner at any time for new accounts and with 60 days notice to
shareholders of existing accounts.
Waiver of sales charge. A Fund's Class A shares may be purchased without a sales
charge:
o by its Directors, Principal Life and its subsidiaries and their employees,
officers, directors (active or retired), brokers or agents. This also
includes their immediate family members and trusts for the benefit of these
individuals;
o by the Principal Employees' Credit Union;
o by non-ERISA clients of Invista Capital Management LLC and Principal
Capital Management LLC;
o by any employee or Registered Representative (and their employees) of an
authorized broker-dealer;
o through broker-dealers, investment advisors and other financial
institutions that have entered into an agreement with Princor which
includes a requirement that such shares be sold for the benefit of clients
participating in a "wrap account" or similar program under which clients
pay a fee to the broker-dealer, investment advisor or financial
institution;
o by unit investment trusts sponsored by Principal Life Insurance Company
and/or its subsidiaries or affiliates;
o by certain employee welfare benefit plan customers of Principal Life with
Plan Deposit Accounts;
o by participants who receive distributions from certain annuity contracts
offered by Principal Life (except for shares of Tax-Exempt Bond Fund);
o to the extent the investment represents the proceeds of a total surrender
of certain Principal Life issued unregistered group annuity contracts to
fund an employer plan if Principal Life waives any applicable CDSC or other
contract surrender charge;
o using cash payments received from the Principal Bank under its awards
program;
o to the extent the investment represents redemption proceeds from certain
unregistered group annuity contracts issued by Principal Life to fund an
employer's 401(a) plan where such proceeds are used to fund the employer's
401(a) plan; and
o to the extent the purchase proceeds represent a distribution from a
terminating 401(a) plan if the employer or plan trustee has entered into a
written agreement with Princor permitting the group solicitation of
employees/participants. Such purchases are subject to the CDSC which
applies to purchases of $1 million or more as described above.
Class A shares may also be purchased without a sales charge if your Registered
Representative has recently become affiliated with a broker-dealer authorized to
sell shares of the Principal Mutual Funds. The following conditions must be met:
o your purchase of Class A shares must take place within the first 180 days
of your Registered Representative's affiliation with the authorized
broker-dealer;
o your investments must represent the sales proceeds from other mutual fund
shares (you must have paid a front-end sales charge or a CDSC) and the sale
must occur within the 180 day period; and
o you must indicate on your Principal Mutual Fund application that you are
eligible for waiver of the front-end sales charge.
o you must send Princor either:
o the check for the sales proceeds (endorsed to Principal Mutual Funds)
or
o a copy of the confirmation statement from the other mutual fund
showing the sale transaction. If you place your order to buy Principal
Mutual Fund shares on the telephone, you must send us a copy of the
confirmation within 21 days of placing the order. If we do not receive
the confirmation within 21 days, we will sell enough of your Class A
shares to pay the sales charge that otherwise would have been charged.
NOTE:Please be aware that the sale of your other mutual funds shares may be
subject to federal (and state) income taxes. In addition, you may pay a
surrender charge to the other mutual fund.
Ongoing fees. Each Fund pays ongoing operating fees to its Manager, Underwriter
and others who provide services to the Fund. They reduce the value of each share
you own.
Distribution (12b-1) Fees
Each of the Funds (except the Cash Management Fund for Class A shares) has
adopted a Distribution Plan under Rule 12b-1 of the Investment Company Act of
1940. Under the Plan, the Fund pays a fee to Princor based on the average daily
net asset value of the Fund. These ongoing fees pay expenses relating to
distribution fees for the sale of Fund shares and for services provided by
Princor and other selling dealers to shareholders. Because they are ongoing
fees, over time they may exceed other types of sales charges.
The maximum 12b-1 fees that may be paid by the Funds on an annual basis are:
o Class R shares (except LargeCap Stock Index Fund) 0.75%
o Class R shares of the LargeCap Stock Index Fund 0.65%
o Class A shares (except Cash Management, LargeCap Stock Index
and Limited Term Bond Funds) 0.25%
o Class A shares of the LargeCap Stock Index and
Limited Term Bond Funds 0.15%
CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS
The Statement of Additional Information (SAI) contains additional information
about investment strategies and their related risks.
Securities and Investment Practices
Equity securities include common stocks, preferred stocks, convertible
securities and warrants. Common stocks, the most familiar type, represent an
equity (ownership) interest in a corporation. Although equity securities have a
history of long-term growth in value, their prices fluctuate based on changes in
a company's financial condition and on overall market and economic conditions.
Smaller companies are especially sensitive to these factors.
Fixed income securities include bonds and other debt instruments that are used
by issuers to borrow money from investors. The issuer generally pays the
investor a fixed, variable or floating rate of interest. The amount borrowed
must be repaid at maturity. Some debt securities, such as zero coupon bonds, do
not pay current interest, but are sold at a discount from their face values.
Debt securities are sensitive to changes in interest rates. In general, bond
prices rise when interest rates fall and fall when interest rates rise. Longer
term bonds and zero coupon bonds are generally more sensitive to interest rate
changes.
Bond prices are also affected by the credit quality of the issuer. Investment
grade debt securities are medium and high quality securities. Some bonds may
have speculative characteristics and be particularly sensitive to economic
conditions and the financial condition of the issuers.
Repurchase Agreements and Loaned Securities
Each of the Principal Mutual Funds may invest a portion of its assets in
repurchase agreements. Repurchase agreements typically involve the purchase of
debt securities from a financial institution such as a bank, savings and loan
association or broker-dealer. A repurchase agreement provides that the Fund
sells back to the seller and that the seller repurchases the underlying
securities at a specified price on a specific date. Repurchase agreements may be
viewed as loans by a Fund collateralized by the underlying securities. This
arrangement results in a fixed rate of return that is not subject to market
fluctuation while the Fund holds the security. In the event of a default or
bankruptcy by a selling financial institution, the affected Fund bears a risk of
loss. To minimize such risks, the Fund enters into repurchase agreements only
with large, well-capitalized and well-established financial institutions. In
addition, the value of the collateral underlying the repurchase agreement is
always at least equal to the repurchase price, including accrued interest.
Each of the Principal Mutual Funds may lend its portfolio securities to
unaffiliated broker-dealers and other unaffiliated qualified financial
institutions.
Currency Contracts
The International, International Emerging Markets, International SmallCap,
Partners Aggressive Growth, Partners LargeCap Growth and Partners MidCap Growth
Funds may each enter into forward currency contracts, currency futures contracts
and options, and options on currencies for hedging and other non-speculative
purposes. A forward currency contract involves a privately negotiated obligation
to purchase or sell a specific currency at a future date at a price set in the
contract. A Fund will not hedge currency exposure to an extent greater than the
aggregate market value of the securities held or to be purchased by the Fund
(denominated or generally quoted or currently convertible into the currency).
Hedging is a technique used in an attempt to reduce risk. If a Fund's Manager or
Sub-Advisor hedges market conditions incorrectly or employs a strategy that does
not correlate well with the Fund's investment, these techniques could result in
a loss, regardless of whether the intent was to reduce risk or to increase
return. These techniques may increase the volatility of a Fund and may involve a
small investment of cash relative to the magnitude of the risk assumed. In
addition, these techniques could result in a loss if the other party to the
transaction does not perform as promised. Additionally, there is the risk of
government action through exchange controls that would restrict the ability of
the Fund to deliver or receive currency.
Forward Commitments
Each of the Income-Oriented Funds and the Balanced Fund may enter into forward
commitment agreements. These agreements call for the Fund to purchase or sell a
security on a future date at a fixed price. Each of these Funds may also enter
into contracts to sell its investments either on demand or at a specific
interval.
Warrants
Each of the Funds (except Cash Management and Government Securities Income) may
invest up to 5% of its assets in warrants. Up to 2% of a Fund's assets may be
invested in warrants which are not listed on either the New York or American
Stock Exchanges.
Risks of High Yield Securities
The Balanced, Bond, and High Yield Funds may, to varying degrees, invest in debt
securities rated lower than BBB by S&P or Baa by Moody's or, if not rated,
determined to be of equivalent quality by the Manager. Such securities are
sometimes referred to as high yield or "junk bonds" and are considered
speculative.
Investment in high yield bonds involves special risks in addition to the risks
associated with investment in high rated debt securities. High yield bonds may
be regarded as predominantly speculative with respect to the issuer's continuing
ability to meet principal and interest payments. Moreover, such securities may,
under certain circumstances, be less liquid than higher rated debt securities.
Analysis of the creditworthiness of issuers of high yield securities may be more
complex than for issuers of higher quality debt securities. The ability of a
Fund to achieve its investment objective may, to the extent of its investment in
high yield bonds, be more dependent on such creditworthiness analysis than would
be the case if the Fund were investing in higher quality bonds.
High yield bonds may be more susceptible to real or perceived adverse economic
and competitive industry conditions than higher grade bonds. The prices of high
yield bonds have been found to be less sensitive to interest rate changes than
more highly rated investments, but more sensitive to adverse economic downturns
or individual corporate developments. If the issuer of high yield bonds
defaults, a Fund may incur additional expenses to seek recovery.
The secondary market on which high yield bonds are traded may be less liquid
than the market for higher grade bonds. Less liquidity in the secondary trading
market could adversely affect the price at which a Fund could sell a high yield
bond and could adversely affect and cause large fluctuations in the daily price
of the Fund's shares. Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the value and liquidity of high
yield bonds, especially in a thinly traded market.
The use of credit ratings for evaluating high yield bonds also involves certain
risks. For example, credit ratings evaluate the safety of principal and interest
payments, not the market value risk of high yield bonds. Also, credit rating
agencies may fail to change credit ratings in a timely manner to reflect
subsequent events. If a credit rating agency changes the rating of a portfolio
security held by a Fund, the Fund may retain the security if the Manager thinks
it is in the best interest of shareholders.
Options
Each of the Funds (except Cash Management) may buy and sell certain types of
options. Each type is more fully discussed in the SAI.
Foreign Securities
Each of the following Funds may invest in foreign securities (securities of
non-U.S. companies) to the indicated percentage of its assets. (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.)
o International, International Emerging Markets and International SmallCap
Funds - 100%;
o Partners Aggressive Growth, Partners LargeCap Growth and Real Estate Funds
- 25%;
o Balanced, Blue Chip, Bond, Capital Value, Growth, High Yield, Limited Term
Bond, MidCap, SmallCap and Utilities Funds - 20%; and
o LargeCap Stock Index and Partners MidCap Growth Funds - 10%.
The Cash Management Fund does not invest in foreign securities other than those
that are United States dollar denominated. All principal and interest payments
for the security are payable in U.S. dollars. The interest rate, the principal
amount to be repaid and the timing of payments related to the security 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.
Investment in foreign securities presents certain risks including: 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. In addition, there may be reduced
availability of public information concerning issuers compared to domestic
issuers. Foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements that apply to domestic issuers. Transactions in foreign securities
may be subject to higher costs. 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. Foreign securities markets,
particularly those in emerging market countries, are known to experience long
delays between the trade and settlement dates of securities purchased and sold.
Such delays may result in a lack of liquidity and greater volatility in the
price of securities on those markets. As a result of these factors, the Boards
of Directors of the Funds have adopted Daily Pricing and Valuation Procedures
for the Funds. These procedures outline the steps to be followed by the Manager
and/or Sub-Advisor to establish a reliable market or fair value if a reliable
market value is not available through normal market quotations. The Executive
Committee of the Boards of Directors oversees this process.
Securities of Smaller Companies
The Funds may invest in securities of companies with small- or mid-sized market
capitalizations. Market capitalization is defined as total current market value
of a company's outstanding common stock. Investments in companies with smaller
market capitalizations may involve greater risks and price volatility (wide,
rapid fluctuations) than investments in larger, more mature companies. Smaller
companies may be less mature than larger companies. At this earlier stage of
development, the companies may have limited product lines, reduced market
liquidity for their shares, limited financial resources or less depth in
management than larger or more established companies. Small companies also may
be less significant within their industries and may be at a competitive
disadvantage relative to their larger competitors. While smaller companies may
be subject to these additional risks, they may also realize more substantial
growth than larger or more established companies.
Unseasoned Issuers
The Funds may invest in the securities of unseasoned issuers. Unseasoned issuers
are companies with a record of less than three years continuous operation,
including the operation of predecessors and parents. Unseasoned issuers by their
nature have only a limited operating history which can be used for evaluating
the companies growth prospects. As a result, investment decisions for these
securities may place a greater emphasis on current or planned product lines and
the reputation and experience of the companies management and less emphasis on
fundamental valuation factors than would be the case for more mature growth
companies. In addition, many unseasoned issuers also may be small companies and
involve the risks and price volatility associated with smaller companies.
Temporary Defensive Measures
For temporary defensive purposes in times of unusual or adverse market
conditions, the Growth-Oriented Funds, the Bond and Limited Term Bond Funds, may
invest without limit in cash and cash equivalents. For this purpose, cash
equivalents include: bank certificates of deposit, bank acceptances, repurchase
agreements, commercial paper, and commercial paper master notes which are
floating rate debt instruments without a fixed maturity. In addition, a Fund may
purchase U.S. Government securities, preferred stocks and debt securities,
whether or not convertible into or carrying rights for common stock.
Portfolio Turnover
"Portfolio Turnover" is the term used in the industry for measuring the amount
of trading that occurs in a Fund's portfolio during the year. For example, a
100% turnover rate means that on average every security in the portfolio has
been replaced once during the year. Funds with high turnover rates (more than
100%) often have higher transaction costs (which are paid by the Fund) and may
generate short-term capital gains (on which you pay taxes even if you don't sell
any of your shares during the year).
You can find the turnover rate for each Fund, except for the Cash Management,
LargeCap Stock Index, Partners Aggressive Growth, Partners LargeCap Growth and
Partners MidCap Growth Funds, in the Fund's Financial Highlights table.
Please consider all the factors when you compare the turnover rates of different
funds. A fund with consistently higher total returns and higher turnover rates
than another fund may actually be achieving better performance precisely because
the managers are active traders. You should also be aware that the "total
return" line in the Financial Highlights already includes portfolio turnover
costs.
MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE
The Manager
Principal Management Corporation serves as the manager for the Principal Mutual
Funds. In its handling of the business affairs of each Fund, the Manager
provides clerical, recordkeeping and bookkeeping services, and keeps the
financial and accounting records required for the Funds. The Manager has signed
sub-advisory agreements with various Sub-Advisors for portfolio management
functions for certain Funds. The Manager compensates the Sub-Advisor for its
services as provided in the subadvisory agreement.
The Manager is a subsidiary of Principal Financial Services, Inc. It has managed
mutual funds since 1969. As of ____________________, the funds it managed had
assets of approximately $____ billion. The Manager's address is Principal
Financial Group, Des Moines, Iowa 50392-0200.
The Sub-Advisors
Funds: Balanced, Blue Chip, Capital Value, Government Securities
Income, Growth, International, International Emerging Markets,
International SmallCap, LargeCap Stock Index, Limited Term
Bond, MidCap, SmallCap, and Utilities.
Sub-Advisor: Invista Capital Management, LLC ("Invista"), an indirectly
wholly-owned subsidiary of Principal Life Insurance Company
and an affiliate of the Manager, was founded in 1985. It
manages investments for institutional investors, including
Principal Life. Assets under management as of __________ were
approximately $____ billion. Invista's address is 1800 Hub
Tower, 699 Walnut, Des Moines, Iowa 50309.
Fund: Partners Aggressive Growth
Sub-Advisor: Morgan Stanley Asset Management ("Morgan Stanley"), with
principal offices at 1221 Avenue of the Americas, New York,
NY 10020, provides a broad range of portfolio management
services to customers in the U.S. and abroad. As of _______,
Morgan Stanley managed investments totaling approximately
$_____ billion as named fiduciary or fiduciary adviser.
On December 1, 1998, Morgan Stanley Assets Management Inc.
changed its name to Morgan Stanley Dean Witter Investment
Management Inc. but continues to do business in certain
instances using the name Morgan Stanley Asset Management.
Fund: Partners LargeCap Growth
Sub-Advisor: Duncan-Hurst Capital Management, Inc. was founded in 1990.
Its address is 4365 Executive Drive, Suite 1520, San Diego, CA
92121. Duncan-Hurst currently manages assets of $ ______
billion for institutional and individual investors.
Fund: Partners MidCap Growth
Sub-Advisor: Turner Investment Partners, Inc., 1235 Westlake Drive, Suite
350, Berwyn, PA 19312, is a professional investment management
firm founded in 1990. As of ____, Turner had discretionary
management authority with respect to approximately $______
billion in assets. Turner has provided investment advisory
services to investment companies since 1992.
Duties of the Manager and Sub-Advisor
The Manager or Sub-Advisor provides the Board of Directors of the Fund a
recommended investment program. The program must be consistent with the Fund's
investment objective and policies. Within the scope of the approved investment
program, the Manager or Sub-Advisor advises the Fund on its investment policies
and determines which securities are bought and sold, and in what amounts.
The Manager is paid a fee by the Fund for its services, which includes any fee
paid to the Sub-Advisor. The fee paid by each Fund (as a percentage of the
average daily net assets) for the fiscal year ended October 31, 1999 was:
Balanced 0.58%
Blue Chip 0.46%
Bond 0.48%
Capital Value 0.37%
Cash Management 0.44%
Government Securities Income 0.45%
Growth 0.38%
High Yield 0.60%
International 1.25%
International Emerging Markets 0.68%
International SmallCap 1.20%
Limited Term Bond 0.50%*
MidCap 0.56%
Real Estate 0.90%
SmallCap 0.85%
Tax-Exempt Bond 0.46%
Utilities 0.59%
* Before waiver.
PRICING OF FUND SHARES
Each Fund's shares are bought and sold at the current share price. The share
price of each Class of shares of each Fund is calculated each day the New York
Stock Exchange is open. The share price is determined at the close of business
of the Exchange (normally at 3:00 p.m. Central Time). When your order to buy or
sell shares is received, the share price used to fill the order is the next
price calculated after the order is placed.
For all Funds, except the Cash Management Fund, the share price is calculated
by:
o taking the current market value of the total assets of the Fund
o subtracting liabilities of the Fund
o dividing the remainder proportionately into the Classes of the Fund
o subtracting the liabilities of each Class
o dividing the remainder by the total number of shares owned by that Class.
The securities of the Cash Management Fund are valued at amortized cost. The
calculation procedure is described in the Statement of Additional Information.
The Cash Management Fund reserves the right to determine a share price more than
once a day.
NOTES:
o If current market values are not readily available for a security, its fair
value is determined using a policy adopted by the Fund's Board of
Directors.
o A Fund's securities may be traded on foreign securities markets which
generally complete trading at various times during the day prior to the
close of the New York Stock Exchange. The values of foreign securities used
in computing share price are determined at the time the foreign market
closes. Occasionally, events affecting the value of foreign securities
occur when the foreign market is closed and the New York Stock Exchange is
open. If the Manager believes the market value is materially affected, the
share price will be calculated using the policy adopted by the Fund.
o Certain securities issued by companies in emerging market countries may
have more than one quoted valuation at any point in time. These may be
referred to as a local price and a premium price. The premium price is
often a negotiated price that may not consistently represent a price at
which a specific transaction can be effected. The international
growth-oriented funds each have a policy to value such securities at a
price at which the Manager or Sub-Advisor expects the shares may be sold.
DIVIDENDS AND DISTRIBUTIONS
The Growth-Oriented and Income-Oriented Funds pay most of their net dividend
income to you every year. The payment schedule is:
<TABLE>
<CAPTION>
Funds Record Date Payable Date
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Balanced, Real Estate three business days before March 24, June 24,
and Utilities each payable date September 24 and December 24
(or previous business day)
Blue Chip three business days before June 24 or December 24
each payable date (or previous business day)
Capital Value, Growth, International, three business days before December 24
International Emerging Markets, each payable date (or previous business day)
International SmallCap, LargeCap
Growth Stock Index, MidCap,
Partners Aggressive Growth,
Partners LargeCap Growth,
Partners MidCap Growth
and SmallCap
Bond, Government Securities three business days before monthly on the 24th
Income, High Yield and each payable date (or previous business day)
Limited Term Bond
</TABLE>
Net realized capital gains, if any, are distributed annually. Generally the
distribution is made on the fourth business day of December. Payments are made
to shareholders of record on the third business day prior to the payable date.
Capital gains may be taxable at different rates, depending on the length of time
that the Fund holds it assets.
You can authorize income dividend and capital gain distributions to be:
o invested in additional shares of the Fund you own without a sales charge;
o invested in shares of another Principal Mutual Fund (Dividend Relay)
without a sales charge (distributions of a Fund may be directed only to one
receiving Fund); or
o paid in cash.
NOTE: Payment of income dividends and capital gains shortly after you buy
shares has the effect of reducing the share price by the amount of the
payment.
Distributions from a Fund, whether received in cash or reinvested in
additional shares, may be subject to federal (and state) income tax.
Money Market Fund
The Cash Management Fund declares dividends of all its daily net investment
income each day its shares are priced. The dividends are paid daily and are
automatically reinvested back into additional shares of the Fund. You may ask to
have your dividends paid to you monthly in cash. These cash payments are made on
the 20th (or preceding business day if the 20th is not a business day) of each
month.
Under normal circumstances, the Fund intends to hold portfolio securities until
maturity and value them at amortized cost. Therefore, the Fund does not expect
any capital gains or losses. Should there be any gain, it could result in an
increase in dividends. A capital loss could result in a dividend decrease.
HOW TO BUY SHARES
To open an account and buy fund shares, rely on your Registered Representative.
Principal Mutual Funds are "load" funds which means you pay a sales charge for
the ongoing assistance of your Registered Representative.
Fill out the Principal Mutual Fund or Principal Mutual Fund IRA application
completely. You must include:
o the name(s) you want to appear on the account;
o the Principal Mutual Fund(s) you want to invest in;
o the amount of the investment;
o your Social Security number or Taxpayer I.D. number;
o investor information (used to help your Registered Representative confirm
that your investment selection is consistent with your goals and
circumstances) ;
o employer information; and
o other required information (may include corporate resolutions, trust
agreements, etc.).
Each Fund requires a minimum initial investment:
o Regular Accounts $1,000
o Uniform Transfer to Minor Accounts $500
o IRA Accounts $500
Subsequent investment minimums are $100 per Fund. However, if your subsequent
investment are made using an Automatic Investment Plan, the investment minimum
is $50 per Fund.
NOTE:The minimum investment applies on a fund level, not on the total
investment being made. Minimums may be waived on accounts set up for:
certain employee benefit plans; Principal Mutual Fund asset allocation
programs; Automatic Investment Plans; and Cash Management Accounts.
Invest by mail:
o Send a check and completed application to:
Principal Mutual Funds
P. O. Box 10423
Des Moines Iowa 50306-9780
o Make your check payable to Principal Mutual Funds.
o Your purchase will be priced at the next share price calculated after
Principal Mutual Funds receives your completed paperwork.
Order by telephone:
o Call us at 1-800-247-4123 between 7:00 a.m. and 7:00 p.m. Central Time on
any day that the New York Stock Exchange is open.
o To buy shares the same day, you need to call before 3:00 p.m. Central Time.
o We must receive your payment for the order within three business days (or
the order will be canceled and you may be liable for any loss).
o For new accounts, you also need to send a completed application.
Wire money from your bank:
o Have your Registered Representative call Principal Mutual Funds
(1-800-247-4123) for an account number and wiring instructions.
o For both initial and subsequent purchases, federal funds should be wired
to:
Norwest Bank Iowa, N.A.
Des Moines, Iowa 50309
ABA No.: 073000228
For credit to: Principal Mutual Funds
Account No.: 3000499968
For credit: Principal ________ Fund, Class ____
Shareholder Account No. __________________
Shareholder Registration __________________
o Give the number and instructions to your bank (which may charge a wire
fee).
o To buy shares the same day, the wire must be received before 3:00 p.m.
Central Time.
o No wires are accepted on days when the New York Stock Exchange is closed or
when the Federal Reserve is closed (because the bank that would receive
your wire is closed).
Establish an Automatic Investment Plan
o Make regular monthly investments with automatic deductions from your bank
or other financial institution account.
o Minimum investment amounts are waived if you set up an Automatic Investment
Plan when you open your account.
o Minimum monthly purchase $50 per Fund (except Cash Management Fund).
o Cash Management Fund minimum monthly purchase is $100. However, if the Cash
Management account is greater than $1,000 when the plan is set up, the
monthly minimum is $50.
o Send completed application, check authorization form and voided check (or
voided deposit slip) to:
Principal Mutual Funds
P. O. Box 10423
Des Moines Iowa 50306-9780
Set up a Dividend Relay
o Invest your dividends and capital gains from one Principal Mutual Fund in
shares of another Principal Mutual Fund.
o Distributions from a Fund may be directed only to one receiving Fund.
o The Fund share class receiving the investment must be the same class as the
originating Fund.
o There is no sales charge or administrative charge for the Dividend Relay.
o You can set up Dividend Relay:
o on the application for a new account; or
o by calling Principal Mutual Funds (1-800-247-4123) if telephone
services apply to the originating account; or
o in writing (a signature guarantee may be required).
o You may discontinue your Dividend Relay election with a written notice to
Principal Mutual Funds.
o There may be a delay of up to 10 days before the Dividend Relay plan is
discontinued.
o The receiving Fund must meet fund minimums. If it does not, the Fund
reserves the right to close the account if it is not brought up to the
minimum investment amount within 90 days of sending you a deficiency
notice.
HOW TO SELL SHARES
After you place a sell order in proper form, shares are sold using the next
share price calculated. There is no additional charge for a sale of Class R
shares. However, you will be charged a $6 wire fee if you have the sale proceeds
wired to your bank. Generally, the sale proceeds are sent out on the next
business day after the sell order has been placed. At your request, the check
will be sent overnight (a $15 overnight fee will be deducted from your account
unless other arrangements are made). A Fund can only sell shares after your
check making the Fund investment has cleared your bank. To avoid the
inconvenience of a delay in obtaining sale proceeds, shares may be purchased
with a cashier's check, money order or certified check. A sell order from one
owner is binding on all joint owners.
Your request for a distribution from your IRA must be in writing. You may obtain
a distribution form by telephoning us (1-800-247-4123) or writing to Princor at
P.O. Box 10423, Des Moines, Iowa 50309. Distributions from an IRA may be taken
as:
o lump sum of the entire interest in the IRA;
o partial interest in the IRA; or
o periodic payments of either a fixed amount of amounts based on certain life
expectancy calculations.
Tax penalties may apply to distributions before the IRA participant reaches age
50 1/2.
Selling shares may create a gain or a loss for federal (and state) income tax
purposes. You should maintain accurate records for use in preparing your income
tax returns.
Generally, sales proceeds checks are:
o payable to the owner(s) on the account (as shown in the account
registration) and
o mailed to address on the account (if not changed within last month) or
previously authorized bank account.
For other payment arrangements, please call Principal Mutual Funds
(1-800-247-4123).
You should also call Principal Mutual Funds (1-800-247-4123) for special
instructions that may apply to sales from accounts:
o when an owner has died;
o for certain employee benefit plans; or
o owned by corporations, partnerships, agents or fiduciaries.
Within 60 days after the sale of shares, the amount of the sale proceeds can be
reinvested in any Principal Mutual Funds' Class R shares (or Class A shares
acquired by conversion of Class R shares into Class A shares). This is a one
time privilege that permits you to reinvest the amount of the sales proceeds in
shares of the same Class of shares of the Funds without a sales charge. The
transaction is considered a sale for federal (and state) income tax purposes
even if the proceeds are reinvested. If a loss is realized on the sale, the
reinvestment may be subject to the "wash sale" rules resulting in the
postponement of the recognition of the loss for tax purposes.
Sell shares by mail
o Send a letter or distribution form (call us at 1-800-247-4123 for the form)
which is signed by the owner of the account to:
Principal Mutual Funds
P. O. Box 10423
Des Moines Iowa 50306-9780
o Specify the Fund and account number.
o Specify the number of shares or the dollar amount to be sold.
o A signature guarantee* will be required if the:
o sell order is for more than $100,000;
o account address has been changed within one month of the sell order;
or
o check is payable to a party other than the account shareholder(s) or
Principal Life Insurance Company.
* If required, the signature(s) must be guaranteed by a commercial bank,
trust company, credit union, savings and loan, national securities
exchange member or brokerage firm. A signature guaranteed by a notary
public or savings bank is not acceptable.
Sell shares in amounts of $100,000 or less by telephone* (1-800-247-4123)
o The address on the account must not have been changed within the last month
and telephone privileges must apply to the account from which the shares
are being sold.
o If our phone lines are busy, you may need to send in a written sell order.
o To sell shares the same day, the order must be received before 3:00 p.m.
Central Time.
o Telephone redemption privileges are not available for Principal Mutual
Funds IRAs, 403(b)s, certain employee benefit plans, or on shares for which
certificates have been issued.
o If previously authorized, checks can be sent to a shareholder's U.S. bank
account.
o Shares in IRA accounts may not be sold over the telephone.
* The Fund and transfer agent reserve the right to refuse telephone
orders to sell shares. The shareholder is liable for a loss resulting
from a fraudulent telephone order that the Fund reasonably believes is
genuine. Each Fund will use reasonable procedures to assure
instructions are genuine. If the procedures are not followed, the Fund
may be liable for loss due to unauthorized or fraudulent transactions.
The procedures include: recording all telephone instructions,
requesting personal identification information (name, phone number,
social security number, birth date, etc.) and sending written
confirmation to the address on the account.
Sell shares by checkwriting (Class A shares of Cash Management Fund only)
o Checkwriting must be elected on initial application or by written request
to Principal Mutual Funds.
o The Fund can only sell shares after your check making the Fund investment
has cleared your bank.
o Checks must be written for at least $100.
o Checks are drawn on Norwest Bank Iowa, N.A. and its rules concerning
checking accounts apply.
o If the account does not have sufficient funds to cover the check, it is
marked "Insufficient Funds" and returned (the Fund may revoke checkwriting
on accounts on which "Insufficient Funds" checks are drawn).
o Accounts may not be closed by withdrawal check (accounts continue to earn
dividends until checks clear and the exact value of the account is not
known until the check is received by Norwest).
o Not available for Principal Mutual Funds IRAs, 403(b)s, SEPs, SIMPLES,
SAR-SEPs or certain employee benefit plans or shares subject to a CDSC or
on shares for which a certificate has been issued.
Periodic withdrawal plan
You may set up a periodic withdrawal plan on a monthly, quarterly, semiannual or
annual basis to:
o sell a fixed number of shares ($25 initial minimum amount);
o sell enough shares to provide a fixed amount of money ($25 initial minimum
amount);
o pay insurance or annuity premiums or deposits to Principal Life Insurance
Company (call us at 1-800-247-4123 for details); and
o to provide an easy method of making monthly installment payments (if the
service is available from your creditor who must supply the necessary
forms).
You can set up a periodic withdrawal plan by:
o completing the applicable section of the application; or
o sending us your written instructions (and share certificate, if any, issued
for the account).
Your periodic withdrawal plan continues until:
o you instruct us to stop; or
o your Fund account balance is zero.
When you set up the withdrawal plan, you select which day you want the sale made
(if none selected, the sale will be made on the 15th of the month). If the
selected date is not a trading day, the sale will take place on the next trading
day (if that day falls in the month after your selected date, the transaction
will take place on the trading day before your selected date). If telephone
privileges apply to the account, you may change the date or amount by
telephoning us at 1-800-247-4123.
Withdrawal payments are sent on or before the third business day after the date
of the sale. It may take an additional three business days for your financial
institution to post this payment to your account at that financial institution.
Sales made under your periodic withdrawal plan will reduce and may eventually
exhaust your account. The Funds do not normally accept purchase payments for
shares of any Fund except the Cash Management Fund while a periodic withdrawal
plan is in effect (unless the purchase represents a substantial addition to your
account).
The Fund from which the periodic withdrawal is made makes no recommendation as
to either the number of shares or the fixed amount that you withdraw.
HOW TO EXCHANGE SHARES AMONG PRINCIPAL MUTUAL FUNDS
Your shares in the Funds. The purchase date of the exchanged shares is used to
measure the length of time you have owned the acquired shares. The minimum
amount that may be exchanged into any Principal Mutual Fund must be at least
$300 on an annual basis.
You may exchange shares by:
o calling us (1-800-247-4123), if you have telephone privileges on the
account and if no share certificate has been issued.
o sending a written request to:
Principal Mutual Funds
P. O. Box 10423
Des Moines, Iowa 50306-9780
o completing an Exchange Authorization Form (call us at 1-800-247-4123 to
obtain the form).
Automatic exchange election.
This election authorizes an exchange from one Principal Mutual Fund to another
on a monthly, quarterly, semiannual or annual basis. You can set up an automatic
exchange by:
o completing the Automatic Exchange Election section of the application;
o calling us (1-800-247-4123) if telephone privileges apply to the account
from which the exchange is to be made; or
o sending us your written instructions.
Your automatic exchange continues until:
o you instruct us to stop; or
o your Fund account balance is zero.
You may specify the day of the exchange. If the selected day is not a trading
day, the sale will take place on the next trading day (if that day falls in the
month after your selected date, the transaction will take place on the trading
day before your selected date). If telephone privileges apply to the account,
you may change the date or amount by telephoning us at 1-800-247-4123.
General
o An exchange by any joint owner is binding on all joint owners.
o If you do not have an existing account in the Fund to which the exchange is
being made, a new account is established. The new account has the same
owner(s), dividend and capital gain options and dealer of record as the
account from which the shares are being exchanged.
o All exchanges are subject to the minimum investment and eligibility
requirement of the Fund being acquired.
o You may acquire shares of a Fund only if its shares are legally offered in
your state of residence.
o If a certificate has been issued, it must be returned to the Fund before
the exchange can take place.
o Instructions for exchanges in excess of $500,000 must be in writing and
signature guaranteed.
The exchange privilege is not intended for short-term trading. Excessive
exchange activity may interfere with portfolio management and have an adverse
impact on all shareholders. In order to limit excessive exchange activity, and
under other circumstances where the Board of Directors of the Fund or the
Manager believes it is 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, reject any exchange or close the account. You would be notified of
any such action to the extent required by law.
Fund shares used to fund an employee benefit plan may be exchanged only for
shares of other Principal Mutual Funds available to employee benefit plans. Such
an exchange must be made by following the procedures provided in the employee
benefit plan and the written service agreement. The exchange is treated as a
sale of shares for federal income tax purposes and may result 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.
GENERAL INFORMATION ABOUT A FUND ACCOUNT
Statements
You will receive quarterly statements (monthly statements for the Cash
Management Fund) for the Funds you own. The statements provide the number and
value of shares you own, transactions during the quarter, dividends declared or
paid and other information. The year end statement includes information for all
transactions that took place during the year. Please review your statement as
soon as your receive it. Keep your statements as you may need them for tax
reporting purposes.
Generally, each time you buy, sell or exchange shares between Principal Mutual
Funds, you will receive a confirmation in the mail shortly thereafter. It
summarizes all the key information; what you bought or sold, the amount of the
transaction, and other vital data. The Cash Management Fund mails confirmations
only once a month detailing dividend and account activity.
Certain purchases and sales are only included on your quarterly statement. These
include accounts
o when the only activity during the quarter:
o is purchase of shares from reinvested dividends and/or capital gains;
o is a result of Dividend Relay;
o purchases under a Automatic Investment Plan;
o sales under a periodic withdrawal plan; and
o purchases or sales under an automatic exchange election.
o used to fund certain individual retirement or individual pension plans.
o established under a payroll deduction plan.
Signature Guarantees
Certain transactions require that your signature be guaranteed. If required, the
signature(s) must be guaranteed by a commercial bank, trust company, credit
union, savings and loan, national securities exchange member or brokerage firm.
A signature guaranteed by a notary public or savings bank is not acceptable.
Signature guarantees are required:
o if you sell more than $100,000 from any one Fund;
o if a sales proceeds check is payable to other than the account
shareholder(s), Principal Life Insurance Company or one of its affiliates;
o to make a Dividend Relay election from an account with joint owners to an
account with only one owner or different joint owners;
o to change ownership of an account;
o to add telephone transaction services, checkwriting and/or wire privileges
to an existing account;
o to change bank account information designated under an existing telephone
withdrawal plan;
o to have a sales proceeds check mailed to an address other than the address
on the account or to the address on the account if it has been changed
within the preceding month; and
o to exchange more than $500,000 among the Principal Mutual Funds.
Minimum Account Balance
Generally, the Funds do not have a minimum required balance. Because of the
disproportional high cost of maintaining small accounts, the Funds reserve the
right to set a minimum and sell all shares in an account with a value of less
than $300. The sales proceeds would then be mailed to you. These involuntary
sales will not be triggered just by market conditions. If a Fund exercises this
right, you will be notified that the redemption is going to be made. You will
have 30 days to make an additional investment and bring your account up to the
required minimum. The Funds reserve the right to increase the required minimum.
Special Plans
The Funds reserve the right to amend or terminate the special plans described in
this prospectus. Such plans include automatic investment, dividend relay,
periodic withdrawal, and waiver or reduction of sales charges for certain
purchasers. You will be notified of any such action to the extent required by
law.
Telephone Instructions
The Funds reserve the right to refuse telephone instructions. You are liable for
a loss resulting from a fraudulent telephone instruction that we reasonably
believe is genuine. We will use reasonable procedures to assure instructions are
genuine. If the procedures are not followed, we may be liable for loss due to
unauthorized or fraudulent transactions. The procedures include: recording all
telephone instructions, requesting personal identification information (name,
phone number, social security number, birth date, etc.) and sending written
confirmation to the shareholder's address of record.
Financial Statements
You will receive an annual financial statement for the Funds, examined by the
Funds' independent auditors, Ernst & Young LLP. That report is a part of this
prospectus. You will also receive a semiannual financial statement which is
unaudited. The following financial highlights are based on financial statements
which were audited by Ernst & Young LLP.
Financial Highlights (will be filed by amendment)
Additional information about the Funds is available in the Statement of
Additional Information dated March 1, 1999, and which is part of this
prospectus. Information about the Funds' investments is also available in the
Funds' annual and semiannual reports to shareholders. In the Funds' annual
report, you will find a discussion of the market conditions and investment
strategies that significantly affected the Funds' performance during its last
fiscal year. The Statement of Additional Information and annual and semiannual
reports can be obtained free of charge by writing or telephoning Princor
Financial Services Corporation, P.O. Box 10423, Des Moines, IA 50306. Telephone
1-800-247-4123.
Information about the Funds can be reviewed and copied at the Securities and
Exchange Commission's Public Reference Room in Washington, D.C. Information on
the operation of the public reference room may be obtained by calling the
Commission at 800-SEC-0330. Reports and other information about the Funds are
available on the Commission's internet site at http://www.sec.gov. Copies of
this information may be obtained, upon payment of a duplicating fee, by writing
the Public Reference Section of the Commission, Washington, D.C. 20549-6009.
The U.S. Government does not insure or guarantee an investment in any of the
Funds. There can be no assurance the Money Market Fund will be able to maintain
a stable share price of $1.00 per share.
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.
SEC FILE DOMESTIC GROWTH-ORIENTED FUNDS
811-05072 Principal Balanced Fund, Inc.
811-06263 Principal Blue Chip Fund, Inc.
811-01874 Principal Capital Value Fund, Inc.
811-01873 Principal Growth Fund, Inc.
811- Principal LargeCap Stock Index Fund, Inc.
811-05171 Principal MidCap Fund, Inc.
811-08379 Principal Real Estate Fund, Inc.
811-08381 Principal SmallCap Fund, Inc.
811-07266 Principal Utilities Fund, Inc.
INTERNATIONAL GROWTH-ORIENTED FUNDS
811-08249 Principal International Emerging Markets Fund, Inc.
811-03183 Principal International Fund, Inc.
811-08251 Principal International SmallCap Fund, Inc.
INCOME-ORIENTED FUNDS
811-05172 Principal Bond Fund, Inc.
811-04226 Principal Government Securities Income Fund, Inc.
811-05174 Principal High Yield Fund, Inc.
811-07453 Principal Limited Term Bond Fund, Inc.
MONEY MARKET FUND
811-03585 Principal Cash Management Fund, Inc.
PARTNERS FUNDS
811-09567 Principal Partners Aggressive Growth Fund, Inc.
811- Principal Partners LargeCap Growth Fund, Inc.
811- Principal Partners MidCap Growth Fund, Inc.
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 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 LargeCap Stock Index Fund, Inc.
Principal Limited Term Bond Fund, Inc.
Principal MidCap Fund, Inc.
Principal Partners Aggressive Growth Fund, Inc.
Principal Partners LargeCap Growth Fund, Inc.
Principal Partners MidCap Growth Fund, Inc.
Principal Real Estate Fund, Inc.
Principal SmallCap Fund, Inc.
Principal Tax-Exempt Bond Fund, Inc.
Principal Utilities Fund, Inc.
Statement of Additional Information
dated March 1, 2000
This Statement of Additional Information is not a prospectus but is a part of
the prospectuses for the Funds listed above. The most recent prospectuses dated
March 1, 2000 and shareholder report are available without charge. Please call
1-800-247-4123 to request a copy. The prospectus for Class A, Class B and Class
C shares of all funds may also be viewed on our web site at
www.principal.com/funds.
<PAGE>
TABLE OF CONTENTS
Investment Policies and Restrictions of the Funds................. 3
Growth-Oriented Funds............................................. 5
Income-Oriented Funds ............................................ 10
Money Market Fund................................................. 14
Funds' Investments................................................ 15
Management of the Fund............................................ 26
Manager and Sub-Advisors.......................................... 31
Cost of Manager's Services........................................ 32
Brokerage on Purchases and Sales of Securities.................... 36
How to Purchase Shares............................................ 39
Offering Price of Funds' Shares................................... 41
Distribution Plan................................................. 48
Determination of Net Asset Value of Funds' Shares ................ 51
Performance Calculation........................................... 52
Tax Treatment of Funds, Dividends and Distributions ............. 58
General Information and History................................... 60
Financial Statements ............................................. 60
Appendix A........................................................ 61
INVESTMENT POLICIES AND RESTRICTIONS OF THE FUNDS
The following information about the Principal Mutual Funds, a family of
separately incorporated, open-end management investment companies, commonly
called mutual funds, supplements the information provided in the Prospectuses
under the caption "CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS".
There are three categories of Principal Mutual Funds:
Growth-Oriented Funds which include:
o ten Funds which seek capital appreciation primarily through investments in
equity securities (Capital Value Fund, Growth Fund, International Emerging
Markets Fund, International Fund, International SmallCap Fund, MidCap Fund,
Partners Aggressive Growth Fund, Partners LargeCap Growth Fund, Partners
MidCap Growth Fund and SmallCap Fund);
o one Fund which seeks a total investment return including both capital
appreciation and income through investments in equity and debt securities
(Balanced Fund);
o 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);
o 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);
o one Fund which seeks to approximate the performance of the Standard &
Poor's 500 Composite Stock Price Index (LargeCap Stock Index Fund); and
o 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).
Money Market Fund which seeks primarily a high level of income through
investments in short-term debt securities (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 Prospectuses 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 or 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 Mutual Funds.
INCOME-ORIENTED FUNDS
PRINCIPAL LIMITED TERM BOND FUND . . . for investors seeking a high level of
current income combined with a relative high level of stability of principal by
investing in fixed-income securities with maturities of 5 years or less.
PRINCIPAL GOVERNMENT SECURITIES INCOME FUND . . . for investors seeking a high
level of current income, liquidity, and relative safety from a portfolio
emphasizing GNMA securities.
PRINCIPAL BOND FUND . . . for investors seeking high current income from a
portfolio of higher quality bonds.
PRINCIPAL TAX-EXEMPT BOND FUND . . . for investors seeking a high level of
current income exempt from federal income tax, consistent with preservation of
capital.
PRINCIPAL HIGH YIELD FUND . . . for investors seeking higher current income from
a portfolio of lower or non-rated fixed-income securities.
MONEY MARKET FUND
PRINCIPAL CASH MANAGEMENT FUND . . . for investors seeking income, liquidity and
the stability of money market securities.
GROWTH ORIENTED
INTERNATIONAL FUNDS
PRINCIPAL INTERNATIONAL FUND . . . for investors seeking growth from common
stocks of companies domiciled in any of the major nations of the world.
PRINCIPAL INTERNATIONAL SMALLCAP FUND . . . for investors seeking long-term
growth from equities from non-United States companies with relatively small
market capitalization.
PRINCIPAL INTERNATIONAL EMERGING MARKETS FUND . . . for investors seeking
long-term growth by investing in stocks of companies in emerging market
countries.
GROWTH-ORIENTED DOMESTIC FUNDS
PRINCIPAL UTILITIES FUND . . . for investors seeking current income and
long-term growth of income and capital from securities issued by public
utilities companies.
PRINCIPAL REAL ESTATE FUND . . . for investors seeking long-term capital growth
and current income from securities of companies primarily engaged in the real
estate industry.
PRINCIPAL BALANCED FUND . . . for investors seeking total return from a flexible
portfolio of common stocks, corporate bonds and money market securities.
PRINCIPAL BLUE CHIP FUND . . . for investors seeking growth of capital and
growth of income from stocks of well capitalized, established companies.
PRINCIPAL CAPITAL VALUE FUND . . . for investors seeking long-term capital
appreciation, with growth of income as a secondary objective.
PRINCIPAL GROWTH FUND . . . for investors seeking long-term growth opportunities
from a common stock portfolio.
PRINCIPAL MIDCAP FUND . . . for investors seeking long-term capital growth from
securities of emerging and other growth-oriented companies.
PRINCIPAL SMALLCAP FUND . . . for investors seeking long-term growth of capital
from a portfolio of investment securities issued by companies domiciled in the
United States with comparatively smaller market capitalization.
PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND . . . for investors seeking long-term
capital appreciation from a portfolio of primarily equity securities.
* 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. In no way should
the illustrations 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 LargeCap Stock Index Fund, Inc. ("LargeCap Stock Index") seeks
long-term growth of capital. The Fund attempts to mirror the investment results
of the Standard & Poor's 500 Composite Stock Price Index.
Principal MidCap Fund, Inc. ("MidCap Fund") seeks to achieve capital
appreciation by investing primarily in securities of emerging and other
growth-oriented companies.
Principal Partners Aggressive Growth Fund, Inc. ("Partners Aggressive Growth
Fund") seeks to provide long-term capital appreciation by investing primarily in
equity securities.
Principal Partners LargeCap Growth Fund, Inc. ("Partners LargeCap Growth Fund")
seeks long-term growth of capital by investing primarily in common stocks of
larger capitalization domestic companies.
Principal Partners MidCap Growth Fund, Inc. ("Partners MidCap Growth Fund")
seeks to provide long-term capital growth by investing primarily in medium
capitalization U.S. companies with strong earnings growth potential.
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
LargeCap Stock Index Fund, Partners Aggressive Growth Fund, Partners LargeCap
Growth Fund and Partners MidCap Growth Fund
Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The LargeCap Stock Index
Fund, Partners Aggressive Growth Fund, Partners LargeCap Growth Fund and
Partners MidCap Growth Fund each may not:
(1) Issue any senior securities as defined in the Investment Company Act of
1940, as amended. 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) Invest in physical commodities or commodity contracts (other than foreign
currencies), but it may purchase and sell financial futures contracts,
options on such contracts, swaps and securities backed by physical
commodities.
(3) Invest in real estate, although it may invest in securities that are
secured by real estate and securities of issuers that invest or deal in
real estate.
(4) Borrow money, except that it may (a) borrow from banks (as defined in the
Investment Company Act of 1940, as amended) or other financial institutions
or through reverse repurchase agreements in amounts up to 33 1/3% of its
total assets (including the amount borrowed); (b) to the extent permitted
by applicable law, borrow up to an additional 5% of its total assets for
temporary purposes; (c) obtain short-term credits as may be necessary for
the clearance of purchases and sales of portfolio securities; and (d)
purchase securities on margin to the extent permitted by applicable law
(the deposit or payment of margin in connection with transactions in
options and financial futures contracts is not considered purchase of
securities on margin).
(5) Make loans, except that the Fund may (a) purchase and hold debt obligations
in accordance with its investment objective and policies; (b) enter into
repurchase agreements; and (c) 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. This limit does not apply to purchases of debt
securities or commercial paper.
(6) 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, except that this
limitation shall apply only with respect to 75% of the total assets of the
Fund. This restriction does not apply to the Partners LargeCap Growth Fund.
(7) Act as an underwriter of securities, except to the extent that the Fund may
be deemed to be an underwriter in connection with the sale of securities
held in its portfolio.
(8) Concentrate its investments in any particular industry, except that the
Fund may invest up to 25% of the value of its total assets in a single
industry, provided that, when the Fund has adopted a temporary defensive
posture, there shall be no limitation on the purchase of obligations issued
or guaranteed by the United States Government or its agencies or
instrumentalities. This restriction applies to the LargeCap Stock Index
Fund except to the extent that the Standard & Poor's Stock Index also is so
concentrated.
(9) 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).
Each of these Funds has also adopted the following restrictions that are not
fundamental policies and that may be changed without shareholder approval. It is
contrary to each Fund's present policy to:
(1) Invest more than 15% of its net assets in illiquid securities and in
repurchase agreements maturing in more than seven days except to the extent
permitted by applicable law.
(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 or
call options, futures contracts and options on futures contracts are not
deemed to be pledges or other encumbrances.
(3) Invest in companies for the purpose of exercising control or management.
(4) Invest more than 25% (10% for the LargeCap Stock Index and Partners MidCap
Growth Funds) of its total assets in securities of foreign issuers.
(5) Enter into (a) any futures contracts and related options for non-bona fide
hedging purposes within the meaning of Commodity Futures Trading Commission
(CFTC) regulations if the aggregate initial margin and premiums required to
establish such positions will exceed 5% of the fair market value of the
Fund's net assets, after taking into account unrealized profits and
unrealized losses on any such contracts it has entered into; and (b) any
futures contracts if the aggregate amount of such Fund's commitments under
outstanding futures contracts positions would exceed the market value of
its total assets.
(6) Invest more than 5% of its total assets in real estate limited partnership
interests or real estate investment trusts. This restriction does not apply
to the Partners MidCap Growth Fund.
(7) Acquire securities of other investment companies, except as permitted by
the Investment Company Act of 1940, as amended, or any rule, order or
interpretation thereunder, or in connection with a merger, consolidation,
reorganization, acquisition of assets or an offer of exchange. The Fund may
purchase securities of closed-end investment companies in the open market
where no underwriter or dealer's commission or profit, other than a
customary broker's commission, is involved.
Balanced Fund, Blue Chip Fund, International Emerging Markets Fund,
International Fund, International SmallCap Fund, MidCap Fund, Real Estate Fund,
SmallCap Fund 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 Fund, SmallCap Fund 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) or purchase more than 10%
of the outstanding voting securities of any one issuer, except that these
limitations shall apply only with respect to 75% of the Fund's total
assets.
(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) Invest in commodities or commodity contracts, but it may purchase and sell
financial futures contracts and options on such 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 may not 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). 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. 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,
(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% or
the value of the securities loaned.
(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. 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.
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.
(7) 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.
(8) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
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, except that these
limitations shall apply only with respect to 75% of the Fund's total
assets.
(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 commercial paper 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) 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,
except that these limitations shall apply only with respect to 75% of
the Fund's total assets.
(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 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, the subdivision is deemed 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 is deemed the sole issuer. If, in either case,
the creating government or some other entity guarantees a security, the
guarantee is considered a separate security and is treated as an issue of such
government or other entity. However, that guarantee is not deemed 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 increase the 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 FUND
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.
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) 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,
(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% or
the value of the securities loaned.
(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 (i) 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.
FUNDS' INVESTMENTS
The following information supplements the discussion of the Funds' investment
objectives and policies in the Prospectuses under the caption "CERTAIN
INVESTMENT STRATEGIES AND RELATED RISKS."
Selections of equity securities for the Funds (except the LargeCap Stock Index,
Partners Aggressive Growth, Partners LargeCap Growth and Partners MidCap Growth
Funds) are made based on an approach described broadly as "top-down" fundamental
analysis. Three basic steps are involved in this analysis.
o 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.
o Second, given some conviction as to the likely economic climate, the
Manager or Sub-Advisor 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,
the Manager or Sub-Advisor evaluates the prospects for each industry for
the near and intermediate term.
o 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 evaluated in relation
to the current price of the securities of each company.
In selecting securities for the Partners Aggressive Growth Fund and the Partners
LargeCap Growth Fund, the Sub-Advisors, Morgan Stanley Asset Management ("Morgan
Stanley") and Duncan-Hurst Capital Management, Inc. ("Duncan-Hurst"),
respectively, follow a flexible investment program in looking for companies with
above average capital appreciation potential. The Sub-Advisor focuses on
companies with consistent or rising earnings growth records and compelling
business strategies. The Sub-Advisor continually and rigorously studies company
developments, including business strategy, management focus and financial
results, to identify companies with earnings growth and business momentum. In
addition, the Sub-Advisor closely monitors analysts' expectations to identify
issuers that have the potential for positive earnings surprises versus consensus
expectations. Valuation is of secondary importance and is viewed in the context
of prospects for sustainable earnings growth and the potential for positive
earnings surprises in relation to consensus expectations.
The Sub-Advisor for the Partners MidCap Growth Fund, Turner Investment Partners,
Inc. ("Turner"), selects securities that it believes to have strong earnings
growth potential. Turner seeks to purchase securities that are well diversified
across economic sectors and to maintain sector concentrations that approximate
the economic sector weightings comprising the Russell Midcap Growth Index (or
such other appropriate index selected by Turner). Any remaining assets may be
invested in securities issued by smaller capitalization companies and larger
capitalization companies, warrants and rights to purchase common stocks, and it
may invest to 10% of its total assets in ADRs. Turner will only purchase
securities that are traded on registered exchanges or the over-the-counter
market in the United States.
The Sub-Advisor for the LargeCap Stock Index Fund, Invista Capital Management,
LLC ("Invista"), allocates Fund assets in approximately the same weightings as
the S&P 500. Invista may omit or remove any S&P 500 stocks from the Fund if it
determines that the stock is not sufficiently liquid. In addition, Invista may
exclude or remove a stock from the Fund if extraordinary events or financial
conditions lead it to believe that such stock should not be a part of the Fund's
assets. Fund assets may be invested in futures and options.
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 Fund) 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
under these procedures are excluded from the preceding investment restriction.
Generally, restricted securities are not readily marketable because they are
subject to legal or contractual restrictions upon resale. They are sold only in
a public offering with an effective registration statement or in a transaction
which is exempt from the registration requirements of the Securities Act of
1933. 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. If, during such a period, adverse market conditions were to develop,
the Fund might obtain a less favorable price than existed when it decided to
sell. Restricted securities and other securities not readily marketable are
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 Funds may invest in foreign securities to the indicated
percentage of its assets:
o International, International Emerging Markets and International SmallCap
Funds - 100%;
o Partners Aggressive Growth, Partners LargeCap Growth and Real Estate Funds
- 25%;
o Balanced, Blue Chip, Bond, Capital Value, Growth, High Yield, Limited Term
Bond, MidCap, SmallCap and Utilities Funds - 20%;
o LargeCap Stock Index and Partners MidCap Growth Funds - 10%.
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: 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. In addition, there may be reduced
availability of public information concerning issuers compared to domestic
issuers. Foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements that apply to domestic issuers. Transactions in foreign securities
may be subject to higher costs. 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. Foreign securities markets,
particularly those in emerging market countries, are known to experience long
delays between the trade and settlement dates of securities purchased and sold.
Such delays may result in a lack of liquidity and greater volatility in the
price of securities on those markets. 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.
Securities of Smaller Companies
The Funds may invest in securities of companies with small- or mid-sized market
capitalizations. Market capitalization is defined as total current market value
of a company's outstanding common stock. Investments in companies with smaller
market capitalizations may involve greater risks and price volatility (wide,
rapid fluctuations) than investments in larger, more mature companies. Smaller
companies may be less mature than older companies. At this earlier stage of
development, the companies may have limited product lines, reduced market
liquidity for their shares, limited financial resources or less depth in
management than larger or more established companies. Small companies also may
be less significant factors within their industries and may be at a competitive
disadvantage relative to their larger competitors. While smaller companies may
be subject to these additional risks, they may also realize more substantial
growth than larger or more established companies.
Unseasoned Issuers
The Funds may invest in the securities of unseasoned issuers. Unseasoned issuers
are companies with a record of less than three years continuous operation,
including the operation of predecessors and parents. Unseasoned issuers by their
nature have only a limited operating history which can be used for evaluating
the companies growth prospects. As a result, investment decisions for these
securities may place a greater emphasis on current or planned product lines and
the reputation and experience of the companies management and less emphasis on
fundamental valuation factors than would be the case for more mature growth
companies. In addition, many unseasoned issuers also may be small companies and
involve the risks and price volatility associated with smaller companies.
Spread Transactions, Options on Securities and Securities Indices, and Futures
Contracts and Options on Futures Contracts
The Funds (except Cash Management) 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 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 is 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 invests and on securities indices based on securities in which
the Fund invests. The International Fund would only write covered call
options on its portfolio securities; it does 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 the right to buy a specific 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 the right to sell to the
Fund a specific security at a specified price at any time before the option
expires. In both situations, the Fund receives a premium from the purchaser
of the option.
The premium received by a Fund 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 generates 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 comply with applicable regulatory
and exchange cover requirements. The Funds usually (and the International
Fund must) own the underlying security covered by any outstanding call
option. With respect to an outstanding put option, each Fund deposits and
maintains 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. The Fund executes a closing transaction by
purchasing an option of the same series as the option previously written.
The Fund has 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. A Fund purchases 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 is
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 exceed 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. A Fund
purchases put options in anticipation of a decline in the market value of
the underlying security. During the life of the put option, the Fund is
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 enough to
cover the premium and transaction costs.
Once a Fund purchases an option, it may close out its position by selling
an option of the same series as the option previously purchased. The Fund
has 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
financial 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 engage in transactions in put and
call options on securities indices for the same purposes as they engage in
transactions in options on securities. When a Fund writes call options on
securities indices, it holds in its portfolio underlying securities which,
in the judgment of the Manager or Sub-Advisor, 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. The Funds generally purchase or write only those
options for which there appears to be an active secondary market. However,
there is no assurance that a liquid secondary market on an exchange exists
for any particular option, or at any particular time. If a Fund is unable
to effect closing sale transactions in options it has purchased, it has to
exercise its options in order to realize any profit and may incur
transaction costs upon the purchase or sale of underlying securities. If a
Fund is unable to effect a closing purchase transaction for a covered
option that it has written, it is not 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 Contracts
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 seeks 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. The Partners
Aggressive Growth Fund may also purchase and sell futures contracts and
related options to maintain cash reserves while simulating full investment
in equity securities and to keep substantially all of its assets exposed to
the market.
Futures Contracts. When a Fund sells a futures contract based on a
financial instrument, the Fund is 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 is 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. 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 usually liquidate
futures contracts on financial instruments in this manner, they may make or
take delivery of the underlying securities when 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. The amount of the
settlement is based on the difference in value of the index between the
time the contract was entered into and the time it is liquidated (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. 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 (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. It 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, a process known as "marking to market." The
fluctuations make the long or short positions in the futures contract more
or less valuable. 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. Any 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 Fund seeks 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, sells 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 contract
increases 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 also sells 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
purchases 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 Contracts. 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 reflects an increase or
a decrease from the premium originally paid. Options on futures can be used
to hedge substantially the same risks addressed by the direct purchase or
sale of the underlying futures contracts. For example, if a Fund
anticipates 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 is not 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. The Fund must maintain
with its custodian all or a portion of the initial margin requirement on
the underlying futures contract. It 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 or
Sub-Advisor's ability to predict correctly the factors affecting the market
values of the Fund's portfolio securities. For example, if a Fund is 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 increases, the Fund loses part or all of the
benefit of the increased value of its securities it hedged because it has
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 enters into a
futures contract or related option only if there appears to be a liquid
secondary market. There can be no assurance, however, that such a liquid
secondary market exists 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 continues 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 Contracts. 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 for non-bona fide hedging purposes 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 may 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 deems
appropriate for mutual funds excluded from the regulations governing
commodity pool operators, and to a limited extent to enhance returns. The
Funds (other than Partners Aggressive Growth) are not permitted to engage
in speculative futures trading. Each Fund determines 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 may sell
futures contracts or acquire puts to protect against a decline in the price
of securities that the Fund owns. Each Fund may 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 places any asset, including equity securities and
non-investment grade debt in a segregated account, so long as the asset is
liquid and marked to the market daily. 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 do 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
writes call options on specific securities in that portion of its
portfolio, the value of those securities is deducted from the current
market value of that portion of the securities portfolio. If this
limitation is exceeded at any time, the Fund takes 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, International SmallCap,
Partners Aggressive Growth, Partners LargeCap Growth and Partners MidCap Growth
Funds may, but are not obligated to, enter into forward foreign currency
exchange contracts 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 Sub-Advisor 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 does not enter
into a forward contract with a term of greater than one year.
The International, International Emerging Markets International SmallCap,
Partners Aggressive Growth and Partners LargeCap Growth Funds 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 or exposed. They do not enter into such forward contracts
for speculative purposes. A Fund sets 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 that 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.
Currency hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to a Fund if the currency being hedged fluctuates in value to a degree or
in a direction that is not anticipated. Further, the risk exists that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that a Fund is engaging in proxy hedging.
Currency transactions are also subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulations or exchange restrictions imposed by governments.
These forms of governmental actions can result in losses to a Fund if it is
unable to deliver or receive currency or monies in settlement of obligations.
They could also cause hedges the Fund has entered into to be rendered useless,
resulting in full currency exposure as well as incurring transaction costs.
Currency exchange rates may also fluctuate based on factors extrinsic to a
country's economy. Buyers and sellers of currency futures contracts are subject
to the same risks that apply to the use of futures contracts generally. Further,
settlement of a currency futures contract for the purchase of most currencies
must occur at a bank based in the issuing nation. Trading options on currency
futures contracts is relative new, and the ability to establish and close out
positions on these options is subject to the maintenance of a liquid market that
may not always be available.
Repurchase Agreements
All Funds may invest in repurchase agreements. None of the Growth-Oriented or
Income-Oriented Funds may enter into repurchase agreements that do not mature
within seven days if any such investment, together with other illiquid
securities held by the Fund, amount to more than 15% of its assets. The Money
Market Fund does not enter into repurchase agreements that do not mature within
seven days of such investment together with other illiquid securities held by
the Fund, amount to more than 10% of its assets. Repurchase agreements 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 sells back to the seller and that
the seller repurchases 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. 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 or Sub-Advisor believes present minimum credit risks. In
addition, the value of the collateral underlying the repurchase agreement is
always 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 are less than the repurchase price, the Fund
could suffer a loss.
Lending of Portfolio Securities
All Funds may lend their portfolio securities. None of the Funds intends to lend
its portfolio securities if as a result the aggregate of such loans made by the
Fund would exceed 30% (33 1/3 for the Partners Aggressive Growth Fund) 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 pays the Fund any income accruing thereon.
The Fund may invest any cash collateral, thereby earning additional income, and
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 belongs to the
Fund and its shareholders. A Fund pays 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 may call a loan of securities in anticipation of an important
vote.
When-Issued and Delayed Delivery Securities
Each of the 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. The securities are subject to market fluctuation which involve the
risk for the purchaser that yields available in the market at the time of
delivery are higher than those obtained in the transaction. Each Fund only
purchases securities on a when-issued or delayed delivery basis with the
intention of acquiring the securities. However, a Fund may sell the securities
before the settlement date, if such action is deemed advisable. At the time a
Fund commits to purchase securities on a when-issued or delayed delivery basis,
it records the transaction and reflects the value of the securities in
determining its net asset value. Each Fund also establishes a segregated account
with its custodian bank in which it maintains cash or other liquid assets equal
in value to the Fund's commitments for 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
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 invests all of its available assets in money market
instruments maturing in 397 days or less. The types of instruments which this
Fund purchases are described 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.
o 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.
o 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, are supported by discretionary authority of the U.S.
Government to purchase certain obligations of the agency or
instrumentality. Still others, such as those issued by the Student Loan
Marketing Association, are supported 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 overseas branches of U.S. commercial banks and foreign
banks, which in the Manager's opinion, are of comparable quality. However,
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 must 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 only buys short-term
instruments where the risks of adverse governmental action are believed by
the Manager to be minimal. The Fund considers these factors along with
other appropriate factors in making an investment decision to acquire such
obligations. It only acquires those which, in the opinion of management,
are of an investment quality comparable to other debt securities bought by
the Fund. The Fund invests 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
occasionally invests 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),
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 NRSROs other than Moody's and
S&P, are the initial criteria for selection of portfolio investments, but the
Manager further evaluates these securities.
Municipal Obligations
The Tax-Exempt Bond Fund can 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 on Municipal
Obligations 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 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, water and sewer works, and electric utilities.
Other public purposes for which Municipal Obligations are issued include
refunding outstanding obligations, obtaining funds for general operating
expenses and lending such funds to other public institutions and facilities.
Industrial development bonds are 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. They 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
purposes 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. Generally they are repaid 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. 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.
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 monitors on an
ongoing basis the pricing, quality and liquidity of such instruments and
similarly monitors 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 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 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. 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 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 also depends
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. They are also subject to federal or state laws, if any,
which extend the time for payment of principal or interest, or both, or impose
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
will be introduced in the future. If such a proposal was enacted, the ability of
the Funds to pay "exempt interest" dividends may be adversely affected. Each
Fund would reevaluate 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 is 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.
Portfolio Turnover
Portfolio turnover normally differs for each Fund, varies from year to year (as
well as within a year) and is affected by portfolio sales necessary to meet cash
requirements for redemptions of Fund shares. This requirement may in some cases
limit the ability of a Fund to effect certain portfolio transactions. 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 are paid by
the Fund.
No portfolio turnover rate can be calculated for the Cash Management Fund
because of the short maturities of the securities in which it invests. No
turnover rates are calculated for the new Funds (LargeCap Stock Index, Partners
LargeCap Growth and Partners MidCap Growth).
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 24.2% and 57.0%
Blue Chip Fund 16.4% and 0.5%
Bond Fund 48.9% and15.2%
Capital Value Fund 44.5% and 23.2%
Government Securities Income Fund 19.4% and 17.1%
Growth Fund 32.4% and21.9%
High Yield Fund 86.1% and 65.9%
International Emerging Markets Fund 95.8% and 45.2%
International Fund 58.7% and 38.7%
International SmallCap Fund 191.5% and99.8%
Limited Term Bond Fund 20.9% and 23.8%
MidCap Fund 59.9% and 25.1%
Real Estate Fund 55.1% and 60.4%
SmallCap Fund 100.7% and 20.5%
Tax-Exempt Bond Fund 15.6% and 6.6%
Utilities Fund 23.5% and 11.9%
MANAGEMENT OF THE FUND
Board of Directors
Under Maryland law, a Board of Directors oversees each of the Funds. The
Directors have financial or other relevant experience and meet several times
during the year to review contracts, Fund activities and the quality of services
provided to the Funds. Other than serving as Directors, most of the Board
members have no affiliation with the Funds or service providers.
The current Directors and Officers are shown below. Each person also has the
same position with the Principal Variable Contracts Fund, Inc. which is also
sponsored by Principal Life Insurance Company. Unless an address is shown, the
mailing address for the Directors and Officers is Principal Financial Group, Des
Moines, Iowa 50392.
* John E. Aschenbrenner, 50, Director. Executive Vice President, Principal
Life Insurance Company since 2000; Senior Vice President, 1996-2000; Vice
President - Individual Markets 1990-1996. Director, Principal Management
Corporation and Princor Financial Services Corporation.
@ James D. Davis, 65, Director. 4940 Center Court, Bettendorf, Iowa.
Attorney. Vice President, Deere and Company, Retired.
*& Ralph C. Eucher, 47, Director and President. Vice President, Principal Life
Insurance Company since 1999. Director and President, Princor Financial
Services Corporation and Principal Management Corporation since 1999. Prior
thereto, Second Vice President, Principal Life Insurance Company.
@ Pamela A. Ferguson, 56, Director. 4112 River Oaks Drive, Des Moines, Iowa.
Professor of Mathematics, Grinnell College since 1998. Prior thereto,
President, Grinnell College.
Richard W. Gilbert, 59, Director. 1357 Asbury Avenue, Winnetka, Illinois.
President, Gilbert Communications, Inc. since 1993. Prior thereto,
President and Publisher, Pioneer Press.
*& J. Barry Griswell, 50, Director and Chairman of the Board. President and
CEO, Principal Life Insurance Company since 2000; President, 1998-2000;
Executive Vice President, 1996-1998; Senior Vice President, 1991-1996.
Director and Chairman of the Board, Principal Management Corporation and
Princor Financial Services Corporation.
@ William C. Kimball, 52, 4700 Westown Parkway, Suite 300, West Des Moines,
Iowa 50266-6730. Chairman and CEO, Medicap Pharmacies, Inc. since 1998.
Prior thereto, President and CEO.
& Barbara A. Lukavsky, 59, Director. 13731 Bay Hill Court, Clive, Iowa.
President and CEO, Barbican Enterprises, Inc. since 1997. President and
CEO, Lu San ELITE USA, L.C. 1985-1998.
* Craig L. Bassett, 47, Treasurer. Second Vice President and Treasurer,
Principal Life Insurance Company since 1998. Director - Treasury 1996-1998.
Prior thereto, Associate Treasurer.
* Michael J. Beer, 39, Financial Officer. Executive Vice President, Princor
Financial Services Corporation and Principal Management Corporation since
1999. Senior Vice President and Chief Operating Officer, 1997-1999. Vice
President and Chief Operating Officer, 1995-1997. Prior thereto, Financial
Officer.
Michael W. Cumings, 48, Assistant Counsel. Counsel, Principal Life
Insurance Company since 1989.
* Arthur S. Filean, 61, Vice President and Secretary. Vice President, Princor
Financial Services Corporation, since 1990. Vice President, Principal
Management Corporation, since 1996.
* Ernest H. Gillum, 44, Assistant Secretary. Vice President - Compliance and
Product Development, Princor Financial Services Corporation and Principal
Management Corporation, since 1998. Prior thereto, Assistant Vice
President, Registered Products, 1995-1998. Prior thereto, Product
Development and Compliance Officer.
Jane E. Karli, 42, Assistant Treasurer. Assistant Treasurer, Principal Life
Insurance Company since 1998; Senior Accounting and Custody Administrator
1994-1998; Prior thereto, Senior Investment Cost Accountant.
* Michael D. Roughton, 48, Counsel. Vice President and Associate General
Counsel, Principal Life Insurance Company, since 1999. Counsel 1994-1999.
Counsel, Invista Capital Management, Inc., Princor Financial Services
Corporation, Principal Investors Corporation and Principal Management
Corporation.
* Considered to be "Interested Persons" as defined in the Investment Company
Act of 1940, as amended, because of current or former affiliation with the
Manager or Principal Life.
@ Member of Audit and Nominating Committee
& Member of Executive Committee (which is selected by the Board and which may
exercise all the powers of the Board, with certain exceptions, when the
Board is not in session. The Committee must report its actions to the
Board.)
COMPENSATION TABLE*
fiscal year ended October 31, 1999
Compensation from Compensation from
Director Each Principal Mutual Fund Fund Complex
James D. Davis $1,350 $53,250
Pamela A. Ferguson 1,200 47,700
Richard W. Gilbert 1,350 50,850
Barbara A. Lukavsky 1,200 47,700
* None of the Funds provide retirement benefits for any of the directors.
As of _______________ Principal Life Insurance Company, a life insurance company
organized in 1879 under the laws of Iowa, its subsidiaries and affiliates owned
of record a percentage of the outstanding voting shares of each Fund:
% of Outstanding
Fund Shares Owned
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
LargeCap Stock Index Fund
Limited Term Bond Fund
MidCap Fund
Partners Aggressive Growth Fund*
Partners LargeCap Growth Fund*
Partners MidCap Growth Fund*
Real Estate Fund
SmallCap Fund
Tax-Exempt Bond Fund
Utilities Fund
* represents start-up capital.
As of __________the Officers and Directors of each Fund as a group owned less
than 1% of the outstanding shares of any Class of any of the Funds.
As of __________, the following shareholders of the Funds owned 5% or more of
the outstanding shares of any Class of the Funds:
MANAGER AND SUB-ADVISORS
The Manager of each of the Funds is Principal Management Corporation, a
wholly-owned subsidiary of Princor Financial Services Corporation which is a
wholly-owned subsidiary of Principal Financial Services, Inc. Principal
Financial Services, Inc. is a holding company which is a wholly-owned subsidiary
of Principal Financial Group, Inc. The Principal Financial Group, Inc. is a
holding company which is a wholly-owned subsidiary of Principal Mutual Holding
Company. 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 Life Insurance
Company.
The Manager has executed agreements with various Sub-Advisors. Under those
Sub-Advisory agreements, the Sub-Advisor agrees to assume the obligations of the
Manager to provide investment advisory services for a specific Fund. For these
services, each Sub-Advisor is paid a fee by the Manager.
Funds: Balanced, Blue Chip, Capital Value, Government Securities
Income, Growth, International, International Emerging Growth,
International SmallCap, LargeCap Stock Index, Limited Term
Bond, MidCap, SmallCap and Utilities Funds.
Sub-Advisor: Invista, an indirectly wholly-owned subsidiary of Principal
Life Insurance Company and an affiliate of the Manager, was
founded in 1985 and manages investments for institutional
investors, including Principal Life Insurance Company. Assets
under management at ____________ were approximately $___
billion. Invista's address is 1800 Hub Tower, 699 Walnut, Des
Moines, Iowa 50309.
Fund: Partners Aggressive Growth Fund
Sub-Advisor: Morgan Stanley Asset Management ("Morgan Stanley"), with
principal offices at 1221 Avenue of the Americas, New York, NY
10020, provides a broad range of portfolio management services
to customers in the U.S. and abroad. As of _____________,
Morgan Stanley, together with its affiliated institutional
asset management companies, managed investments of
approximately $175 billion as named fiduciary or fiduciary
advisor. On December 1, 1998, Morgan Stanley Asset Management
Inc. changed it name to Morgan Stanley Dean Witter Investment
Management Inc. but continues to do business in certain
instances using the name Morgan Stanley Asset Management.
Fund: Partners LargeCap Growth Fund
Sub-Advisor: Duncan-Hurst Capital Management Inc. ("Duncan-Hurst"), was
founded in 1990. Its address is 4365 Executive Drive, Suite
1520, San Diego CA 92121. Duncan-Hurst currently manages
assets of $____ billion for institutional and individual
investors.
Fund: Partners MidCap Growth Fund
Sub-Advisor: Turner Investment Partners, Inc. ("Turner"), 1235 Westlake
Drive, Suite 350, Berwyn PA 19312, is a professional
investment management firm founded in 1990. As of __________,
Turner had discretionary management authority with respect to
approximately $____ billion in assets. Turner has provided
investment advisory services to investment companies since
1992.
The Manager, each of the Sub-Advisors 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
Boards of Directors for the Manager, each of the Sub-Advisors and each of the
Funds periodically review their respective Code of Ethics.
Each of the persons affiliated with a Fund who is also an affiliated person of
the Manager or Invista is named below, together with the capacities in which
such person is affiliated:
<TABLE>
<CAPTION>
Name Office Held With Each Fund Office Held With The Manager/Invista
<S> <C> <C>
John E. Aschenbrenner Director Director (Manager)
Michael J. Beer Financial Officer Vice President and Chief Operating Officer (Manager)
Ralph C. Eucher Director and President Director and President (Manager)
Arthur S. Filean Vice President and Secretary Vice President (Manager)
Ernest H. Gillum Assistant Secretary Vice President, Compliance and Product Development (Manager)
J. Barry Griswell Director and Chairman of the Board Director and Chairman of the Board (Manager)
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
$250,000,000 $250,000,000 $250,000,000 $250,000,000 Thereafter
<S> <C> <C> <C> <C> <C>
Blue Chip, Capital Value and Growth Funds .60% .55% .50% .45% .40%
Partners Aggressive Growth Fund .75 .70 .65 .60 .55
International Fund .85 .80 .75 .70 .65
</TABLE>
<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 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>
Overall Fee
LargeCap Stock Index Fund .35%
Partners LargeCap Growth Fund .90%
Partners MidCap Growth Fund .90%
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 assets of
each Fund on October 31, 1999 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 or Fiscal Year Ended
Fund October 31, 1999 October 31, 1999
Balanced Fund $160,113,402 0.58%
Blue Chip Fund 291,707,955 0.46
Bond Fund 187,792,641 0.48
Capital Value Fund 670,726,648 0.37
Cash Management Fund 374,707,858 0.44
Government Securities Income Fund 279,432,929 0.45
Growth Fund 636,878,130 0.38
High Yield Fund 40,312,045 0.60
International Emerging Markets Fund 22,166,474 0.68
International Fund 408,882,643 1.25
International SmallCap Fund 40,867,074 1.20
Limited Term Bond Fund 33,418,483 0.50*
MidCap Fund 407,721,977 0.56
Real Estate Fund 13,009,308 0.90
SmallCap Fund 66,121,454 0.85
Tax-Exempt Bond Fund 198,589,990 0.46
Utilities Fund 126,445,559 0.59
* Before waiver.
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:
<TABLE>
<CAPTION>
Management Fees For Fiscal Years Ended October 31,
Fund 1999 1998 1997
<S> <C> <C> <C>
Balanced Fund $ 914,378 $ 750,616 $ 556,009
Blue Chip Fund 1,142,839 764,784 417,958
Bond Fund 909,902 782,241(1) 636,217(1)
Capital Value Fund 2,570,792 2,349,118 2,031,143
Cash Management Fund 1,526,404 2,127,595(1) 2,864,916(1)
Government Securities Income Fund 1,283,959 1,239,644 1,227,604
Growth Fund 2,283,089 1,863,070 1,443,120
High Yield Fund 259,764 287,858 230,667
International Emerging Markets Fund 216,500 157,324 28,487(2)
International Fund 2,673,903 2,492,037 1,882,664
International SmallCap Fund 358,891 242,403 30,283(2)
Limited Term Bond Fund 160,694(1) 133,825(1) 97,039(1)
MidCap Fund 2,461,880 2,548,924 2,004,305
Real Estate Fund 114,693 87,653(3) N/A
SmallCap Fund 412,361 147,083(3) N/A
Tax-Exempt Bond Fund 972,600 974,740 941,387
Utilities Fund 685,175 531,644(1) 436,296(1)
<FN>
(1) Before waiver.
(2) Period from August 14, 1997 (Date Operations Commenced) through
October 31, 1997.
(3) Period from December 11, 1997 (Date Operations Commenced) through
October 31, 1998.
</FN>
</TABLE>
The Manager waived $66,728, $100,270 and $59,630 of its fee for the Limited Term
Bond Fund for the years ended October 31, 1999, 1998 and 1997, respectively. The
Manager waived $172,366 and $60,665 of its fee for the Bond Fund for the years
ended October 31, 1998 and 1997, respectively. The Manager also waived $1,343
and $7,933 of its fee for the Cash Management Fund for the years ended October
31, 1998 and 1997, respectively. The Manager also waived $82,515 and $79,048 of
its fee for the Utilities Fund for the years ended October 31, 1998 and 1997,
respectively.
Costs reimbursed to the Manager during the periods indicated for providing other
services pursuant to the Management Agreement were as follows:
<TABLE>
<CAPTION>
Reimbursement by Fund
of Certain Costs For
Fund Fiscal Years Ended October 31,
1999 1998 1997
<S> <C> <C> <C>
Balanced Fund $ 664,179 $ 521,852 $ 364,442
Blue Chip Fund 1,336,983 832,394 402,003
Bond Fund 534,104 482,817 278,385
Capital Value Fund 1,415,788 1,247,865 837,825
Cash Management Fund 788,303 854,575 1,833,423
Government Securities Income Fund 544,396 499,207 407,146
Growth Fund 1,613,707 1,421,948 1,121,832
High Yield Fund 170,349 217,020 98,481
International Emerging Markets Fund 148,065 119,948 4,116(1)
International Fund 1,111,335 1,168,106 906,359
International SmallCap Fund 168,397 153,320 4,283(1)
Limited Term Bond Fund 123,038 90,187 44,634
MidCap Fund 1,733,436 1,840,474 1,308,608
Real Estate Fund 93,688 76,546(2) N/A
SmallCap Fund 348,721 199,807(2) N/A
Tax-Exempt Bond Fund 165,845 199,780 135,553
Utilities Fund 390,699 304,813 230,151
<FN>
(1) Period from August 14, 1997 (Date Operations Commenced) through
October 31, 1997.
(2) Period from December 11, 1997 (Date Operations Commenced)
through October 31, 1998.
</FN>
</TABLE>
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 October 31,
1999 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 1.00% for the Class A
shares, 1.35% for the Class B shares, 1.35% for the Class C shares and
1.60% 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.
The Manager has agreed to waive a portion of its fee for the Blue Chip
Fund from November 1, 1999. The Manager intends to continue the waiver
and, if necessary, pay expenses normally payable by the Blue Chip Fund
through the period ending October 31, 2000. The waiver will maintain a
total level of operating expenses (expressed as a percent of average
net assets attributable to a Class on an annualized basis) not to
exceed 1.20% for Class A Shares, 1.95% for Class B Shares, 1.95% for
Class C Shares and 1.70% for Class R Shares. The effect of the waiver
is to reduce the Fund's annual operating expenses.
The Manager has agreed to waive a portion of its fee for the Real
Estate Fund from November 1, 1999. The Manager intends to continue the
waiver and, if necessary, pay expenses normally payable by the Real
Estate Fund through the period ending October 31, 2000. The waiver will
maintain a total level of operating expenses (expressed as a percent of
average net assets attributable to a Class on an annualized basis) not
to exceed 1.90% for Class A Shares, 2.65% for Class B Shares, 2.65% for
Class C Shares and 2.40% for Class R Shares. The effect of the waiver
is to reduce the Fund's annual operating expenses.
The Manager has agreed to waive a portion of its fee for the SmallCap
Fund from November 1, 1999. The Manager intends to continue the waiver
and, if necessary, pay expenses normally payable by the SmallCap Fund
through the period ending October 31, 2000. The waiver will maintain a
total level of operating expenses (expressed as a percent of average
net assets attributable to a Class on an annualized basis) not to
exceed 1.80% for Class A Shares, 2.55% for Class B Shares, 2.55% for
Class C Shares and 2.30% for Class R Shares. The effect of the waiver
is to reduce the Fund's annual operating expenses
The Manager has agreed to waive a portion of its fee for the
International Emerging Markets Fund from November 1, 1999. The Manager
intends to continue the waiver and, if necessary, pay expenses normally
payable by the International Emerging Markets Fund through the period
ending October 31, 2000. The waiver will maintain a total level of
operating expenses (expressed as a percent of average net assets
attributable to a Class on an annualized basis) not to exceed 2.50% for
Class A Shares, 3.25% for Class B Shares, 3.25% for Class C Shares and
3.00% for Class R Shares. The effect of the waiver is to reduce the
Fund's annual operating expenses.
The Manager has agreed to waive a portion of its fee for the LargeCap
Stock Index Fund from March 1, 2000. The Manager intends to continue
the waiver and, if necessary, pay expenses normally payable by the
LargeCap Stock Index Fund through the period ending October 31, 2000.
The waiver will maintain a total level of operating expenses (expressed
as a percent of average net assets attributable to a Class on an
annualized basis) not to exceed 0.80% for Class A Shares, _____% for
Class B Shares, _____% for Class C Shares and _____% for Class R
Shares. The effect of the waiver is to reduce the Fund's annual
operating expenses.
The Manager has agreed to waive a portion of its fee for the Partners
Aggressive Growth Fund from November 1, 1999. The Manager intends to
continue the waiver and, if necessary, pay expenses normally payable by
the Partners Aggressive Growth Fund through the period ending October
31, 2000. The waiver will maintain a total level of operating expenses
(expressed as a percent of average net assets attributable to a Class
on an annualized basis) not to exceed 1.60% for Class A Shares, 2.35%
for Class B Shares, 2.35% for Class C Shares and 2.10% for Class R
Shares. The effect of the waiver is to reduce the Fund's annual
operating expenses.
The Manager has agreed to waive a portion of its fee for the Partners
LargeCap Growth Fund from March 1, 2000. The Manager intends to
continue the waiver and, if necessary, pay expenses normally payable by
the Partners LargeCap Growth Fund through the period ending October 31,
2000. The waiver will maintain a total level of operating expenses
(expressed as a percent of average net assets attributable to a Class
on an annualized basis) not to exceed 1.80% for Class A Shares, _____%
for Class B Shares, _____% for Class C Shares and _____% for Class R
Shares. The effect of the waiver is to reduce the Fund's annual
operating expenses.
The Manager has agreed to waive a portion of its fee for the Partners
MidCap Growth Fund from March 1, 2000. The Manager intends to continue
the waiver and, if necessary, pay expenses normally payable by the
Partners MidCap Growth Fund through the period ending October 31, 2000.
The waiver will maintain a total level of operating expenses (expressed
as a percent of average net assets attributable to a Class on an
annualized basis) not to exceed 1.80% for Class A Shares, _____% for
Class B Shares, _____% for Class C Shares and _____% for Class R
Shares. The effect of the waiver is to reduce the Fund's annual
operating expenses.
Each Fund has entered into certain agreements that provide 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 applicable 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 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
applicable Fund or by a vote of a majority of the outstanding securities of the
Fund and by the Manager, the respective sub-advisor, if any, or Principal 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 Management Agreement for each Fund (except Growth, LargeCap Stock Index,
MidCap, Partners Aggressive Growth, Partners LargeCap Growth and Partners MidCap
Growth) was last approved by shareholders of the applicable Fund on November 2,
1999. Shareholders approved the Management Agreement for the other Funds as
follows: Growth - November 9, 1999; LargeCap Stock Index - _____________, 2000;
MidCap - December 10, 1999; Partners Aggressive Growth - November 1, 1999;
Partners LargeCap Growth - ____________, 2000; and Partners MidCap Growth-
_____________, 2000.
The agreements for each Fund were last approved by the Board of Directors for
that Fund as follows:
<TABLE>
<CAPTION>
Investment Services Management Sub-Advisory
Fund Agreement Agreement Agreement
<S> <C> <C> <C>
Balanced 9/13/99 9/13/99 9/13/99
Blue Chip 9/13/99 9/13/99 9/13/99
Bond 9/13/99 9/13/99 9/13/99
Capital Value 9/13/99 9/13/99 9/13/99
Cash Management 9/13/99 9/13/99 9/13/99
Government Securities Income 9/13/99 9/13/99 9/13/99
Growth 9/13/99 9/13/99 9/13/99
High Yield 9/13/99 9/13/99 9/13/99
International 9/13/99 9/13/99 9/13/99
International Emerging Markets 9/13/99 9/13/99 9/13/99
International SmallCap 9/13/99 9/13/99 9/13/99
LargeCap Stock Index 12/13/99 12/13/99 12/13/99
Limited Term Bond 9/13/99 9/13/99 9/13/99
MidCap 9/13/99 9/13/99 9/13/99
Partners Aggressive Growth N/A 9/13/99 9/13/99
Partners LargeCap Growth N/A 12/13/99 12/13/99
Partners MidCap Growth N/A 12/13/99 12/13/99
Real Estate 9/13/99 9/13/99 9/13/99
SmallCap 9/13/99 9/13/99 9/13/99
Tax-Exempt Bond 9/13/99 9/13/99 9/13/99
Utilities 9/13/99 9/13/99 9/13/99
</TABLE>
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
commissions 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 the transaction (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, but not limited to, 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 statistical data and
research information received from brokers or dealers may be useful in varying
degrees 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, 1999 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 Value
Growth
International Emerging Markets
International
International SmallCap
MidCap
Real Estate
SmallCap
Utilities
Purchases and sales of debt securities and money market instruments usually are
principal transactions; portfolio securities are normally 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 include a commission or
concession paid by the issuer to the underwriter, and the purchases from dealers
serving as marketmakers 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
Fund 1999 1998 1997
Balanced Fund $ 50,867 $ 70,261 $ 47,096
Blue Chip Fund 149,945 41,024 113,923
Capital Value Fund 695,270 331,316 339,994
Growth Fund 438,476 276,004 43,018
International Emerging Markets Fund 125,801 51,821 45,140*
International Fund 1,201,021 758,808 708,333
International SmallCap Fund 306,636 101,485 46,970*
MidCap Fund 517,173 242,311 98,217
Real Estate Fund 36,634 40,791** N/A
SmallCap Fund 154,031 46,957** N/A
Utilities Fund 95,017 39,470 58,450
* Period from August 14, 1997 (date operations commenced) through
October 31, 1997.
**Period from December 11, 1997 (date operations commenced) through
October 31, 1998.
Brokerage commissions paid to affiliates during the fiscal year ending October
31 were as follows:
<TABLE>
<CAPTION>
Commissions Paid to Goldman Sachs Co.
Total Dollar As Percent of Percent of Dollar Amount
Fund Amount Total Commissions of Commissionable Transactions
<S> <C> <C> <C>
Balanced Fund
1999 $ 1,725 3.39% 1.94%
1998 2,950 4.20% 1.87%
Blue Chip Fund
1999 7,735 5.16% 5.25%
Capital Value Fund
1999 87,440 12.58% 10.41%
Growth Fund
1999 10,650 2.43% 3.63%
1998 5,000 1.81% 1.87%
International Emerging Markets Fund
1999 6,756 5.37% 5.97%
1998 662 1.28% 1.54%
International Fund
1999 90,123 7.50% 5.97%
1998 41,600 5.48% 5.79%
International SmallCap Fund
1999 26,377 8.60% 9.72%
1998 2,326 2.29% 2.96%
MidCap Fund
1999 21,673 4.19% 3.49%
Real Estate Fund
1999 135 0.37% 0.47%
SmallCap Fund
1999 2,370 1.54% 2.95%
1998 210 0.45% 0.61%
Utilities Fund
1999 3,160 3.33% 3.83%
1998 1,500 3.80% 3.71%
</TABLE>
<TABLE>
<CAPTION>
Commissions Paid to J.P. Morgan Securities
Total Dollar As Percent of Percent of Dollar Amount
Fund Amount Total Commissions of Commissionable Transactions
<S> <C> <C> <C>
Balanced Fund
1999 $ 6,841 13.45% 15.18%
1998 500 0.71% 1.03%
Blue Chip Fund
1999 8,485 5.66% 5.82%
1998 1,950 4.75% 5.35%
Capital Value Fund
1999 9,470 1.36% 1.83%
1998 18,935 5.72% 6.27%
Growth Fund
1999 23,170 5.28% 5.47%
1998 1,250 0.45% 0.39%
International Emerging Markets Fund
1999 4,492 3.57% 4.82%
1998 2,570 4.96% 6.77%
International Fund
1999 13,911 1.16% 1.22%
1998 17,961 2.37% 1.80%
MidCap Fund
1999 10,715 2.07% 1.87%
Real Estate Fund
1999 8,845 24.14% 23.03%
1998 3,205 7.86% 7.67%
SmallCap Fund
1999 3,065 1.99% 2.68%
Utilities Fund
1999 3,935 4.14% 4.98%
</TABLE>
<TABLE>
<CAPTION>
Commissions Paid to Morgan Stanley& Co. Incorporated
Total Dollar As Percent of Percent of Dollar Amount
Fund Amount Total Commissions of Commissionable Transactions
<S> <C> <C> <C>
Balanced Fund
1999 $ 2,300 4.52% 4.33%
1998 2,630 3.74% 2.27%
1997 45 - 0.1%
Blue Chip Fund
1999 13,950 9.30% 11.72%
1998 365 0.89% 0.99%
1997 4,602 4.0% 2.4%
Capital Value Fund
1999 12,575 1.81% 2.48%
1998 13,740 4.15% 3.78%
1997 9,900 2.9% 2.4%
Growth Fund
1999 12,338 2.81% 3.90%
1998 12,500 4.53% 4.92%
1997 3,250 7.6% 8.5%
International Emerging Markets Fund
1999 2,570 2.04% 2.76%
1998 1,499 2.89% 3.64%
1997 1,586 3.5% 9.3%
International Fund
1999 128,900 10.73% 11.76%
1998 78,938 10.40% 10.03%
1997 20,595 2.9% 2.7%
International SmallCap Fund
1999 18,755 6.12% 8.26%
1998 4,284 4.22% 7.42%
1997 1,502 3.2% 4.2%
MidCap Fund
1999 21,551 4.17% 5.00%
1998 7,716 3.18% 4.19%
1997 3,750 3.8% 2.8%
Real Estate Fund
1999 1,600 4.37% 4.10%
1998 11,540 28.29% 28.36%
SmallCap Fund
1999 795 0.52% 0.81%
1998 840 1.79% 1.65%
Utilities Fund
1999 340 0.36% 0.49%
1998 1,735 4.40% 5.95%
</TABLE>
Morgan Stanley & Co. Incorporated is affiliated with Morgan Stanley, which acts
as sub-advisor to the Partners Aggressive Growth Fund and two Accounts included
in the Fund complex.
The Manager acts as investment advisor for each of the funds sponsored by
Principal Life Insurance Company. The Manager or Sub-Advisor, if any, 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 (or, in the case of accounts managed by a Sub-Advisor, for two
or more Funds and any other accounts managed by the Sub-Advisor), the Manager or
Sub-Advisor may submit the orders to purchase or, whenever possible, to sell, to
a broker/dealer for execution on an aggregate or "bunched" basis. The Manager
(or, in the case of accounts managed by a Sub-Advisor, the Sub-Advisor) may
create several aggregate or "bunched" orders relating to a single security at
different times during the same day. On such occasions, the Manager (or, in the
case of accounts managed by a Sub-Advisor, the Sub-Advisor) will randomly order
the accounts whose individual orders for purchase or sale make up each aggregate
or "bunched" order. Securities purchased or proceeds of sales received on each
trading day with respect to each such aggregate or "bunched" order shall be
allocated to the various Funds (or, in the case of a Sub-Advisor, the various
Funds and other client accounts) whose individual orders for purchase or sale
make up the aggregate or "bunched" order by filling each Fund's (or, in the case
of a Sub-Advisor, each Fund's or other client account's) order in the sequence
arrived at by the random ordering. Securities purchased for funds (or, in the
case of a Sub-Advisor, Funds and other client accounts) participating in an
aggregate or "bunched" order will be placed into those Funds and, where
applicable, other client accounts at a price equal to the average of the prices
achieved in the course of filling that aggregate or "bunched" order.
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, offers investors four classes of
shares which bear sales charges in different forms and amounts: Class A, Class
B, Class C and Class R shares. The Tax-Exempt Bond Fund offers only Class A,
Class B and Class C shares.
Purchases are generally made by completing an Account Application or a Principal
Mutual Fund IRA Application and mailing it to Princor. Shares are 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 Principal Mutual Fund IRA is directly transferred to
Princor from the Administered Employee Benefit Plans ("AEBP"). However, in some
cases the investor purchases shares by check. If investing by check, shares are
issued at the offering price next computed after the completed application and
check are received at Princor's main office. Subsequent purchases are 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. Orders from individuals for Class R shares that equal or exceed
$500,000 are treated as orders for Class A shares, unless accompanied by a
written acknowledgment that the order should be treated as an order for Class R
shares.
Redemptions by shareholders investing by check will be effected only after
payment has been collected on the check, which may take up to 8 business 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.
Class A Shares. An investor who purchases less than $1 million of Class A shares
(except Class A shares of the Cash Management Fund) 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 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 LargeCap Stock Index and Limited Term Bond Funds) 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 redemption of Class A shares used to fund a
Principal Mutual Fund 401(a) or Principal Mutual Fund 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 Cash Management Fund, currently bear a 12b-1 fee at
the annual rate of up to 0.25% (0.15% for the LargeCap Stock Index and Limited
Term Bond Funds) 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 LargeCap Stock
Index and Limited Term Bond Funds) if redeemed within six years. Class B shares
purchased under certain sponsored Principal Mutual Fund plans established after
February 1, 1998, are subject to a CDSC of up to 3% if redeemed within five
years of purchase. (See "Plans Other than Administered Employee Benefit Plans"
("AEBP") for discussion of sponsored Principal Mutual Fund plans.) 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 LargeCap Stock
Index and Limited Term Bond Funds) 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) have a higher
expense ratio and pay lower dividends than Class A shares due to the higher
12b-1 fee. Class B shares automatically convert into Class A shares, based on
relative net asset value (without a sales charge), seven years after the
purchase date. Class B shares acquired by exchange from Class B shares of
another Principal Mutual Fund 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 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.
Class C Shares. Class C shares are sold without the imposition of an initial
sales charge; however, Class C shares redeemed within one year of purchase are
subject to a CDSC of 1% (.5% for LargeCap Stock Index and Limited Term Bond
Funds). The charge is assessed on the amount equal to the lesser of the current
market value or the original purchase cost of the shares being redeemed. No CDSC
is imposed on increases in account value above the initial purchase price,
including shares derived from the reinvestment of dividends or capital gains
distributions. Class C shares do not convert to any other class of Fund shares.
Class C shares bear a higher 12b-1 fee than other Class shares. Currently Class
C share 12b-1 fees are set at the annual rate of up to 1.00% (.50% for the
LargeCap Stock Index and Limited Term Bond Funds) of the Fund's average net
assets. See "Distribution Plan." Class C shares provide an investor the benefit
of putting all of the investor's dollars to work from the time the investment is
made, but have a higher expense ratio and pay lower dividends than other Class
shares due to the higher 12b-1 fee. Class C shares do not convert into other
Class shares. Class C shares are subject to higher expenses than other Class
shares for an indefinite period.
Which arrangement between Class A, Class B and Class C 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. If you prefer not
to pay an initial sales charge and you plan to hold your investment for greater
than one but less than seven years, you may prefer Class C shares.
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% (.25% for
the LargeCap Stock Index and .35% for the Limited Term Bond Funds) 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) have a higher
expense ratio and pay lower dividends than Class A shares due to the higher
12b-1 fee. Class R shares 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 Mutual Fund convert into Class A shares
based on the time of the initial purchase. (See "How to Exchange Shares Among
Principal Mutual Funds" in the Prospectus.) At the same time, a pro rata portion
of all shares purchased through reinvestment of dividends and distributions
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 individuals (and
his/her spouse, child, parent, grandchild and trusts primarily for their
benefit) who: receive lump sum distributions from retirement plans serviced by
Principal Life Insurance Company; or are participants in retirement plans
serviced by Principal Life Insurance Company; or own individual life or
disability insurance policies issued by Principal Life Insurance Company that do
not have an insurance agent licensed to sell such policies assigned to the
policies; or have mortgages which are serviced by Principal Life Insurance
Company; or have existing Principal Mutual Fund Class R Share accounts.
Generally, the initial amount to be invested in a Principal Mutual Fund IRA is
directly transferred to Princor from the Administered Employee Benefit Plans
("AEBP"). However, in some cases the investor purchases shares by check. If
investing by check, shares are issued at the offering price next computed after
the completed application and check are received at Princor's main office.
Orders from individuals for Class R shares that equal or exceed $500,000 are
treated as orders for Class A shares, unless accompanied by a written
acknowledgment that the order should be treated as an order for Class R shares.
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 Cash Management Fund is sold to the public at net asset
value; no sales charge applies to purchases of the Cash Management Fund. Class A
shares of the Growth-Oriented and Income-Oriented Funds, except the LargeCap
Stock Index and Limited Term Bond Funds, 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 LargeCap Stock Index and
Limited Term Bond Funds 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 is 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.
<TABLE>
<CAPTION>
Sales Charge for
All Funds Except Sales Charge for
LargeCap Stock Index and LargeCap Stock Index and Dealer Allowance as
Limited Term Bond Funds Limited Term Bond Funds % of Offering Price
All Funds LargeCap
Except LargeCap Stock Index
Sales Charge as % of: Sales Charge as % of: Stock Index and Limited
Offering Amount Offering Amount and Limited Term
Amount of Purchase Price Invested Price Invested Term Bond Funds Bond Funds
<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 0.00 No Sales Charge 0.00 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, Class B shares and Class C 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,
Class B or Class C 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 Mutual Fund at the same time, those purchases are aggregated and added
to the net asset value of the shares of Principal Mutual Funds already owned by
the investor to determine the sales charge for the new purchase. Class A shares
of the Cash Management Fund 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 Cash Management Fund were acquired in exchange for shares of
other Principal Mutual 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. In
addition, investments made through an employer by or on behalf of an employee
(including independent contractors) by means of payroll deductions or otherwise,
are also considered investments 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 (SOI). 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 an SOI 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 Cash Management Fund), Class B shares and Class C 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 SOI may be submitted by a shareholder other than a trustee of a
Principal Mutual Fund 401(a) plan, within 90 days after the date of the first
purchase to be included within the SOI period. A trustee of a Principal Mutual
Fund 401(a) plan must submit the SOI at the time the first plan purchase is
made; the SOI may not be submitted after the initial plan purchase and the 90
day backdating is not available. The SOI period begins on the date of the first
purchase included for purposes of satisfying the statement. When an existing
shareholder submits an SOI, the net asset value of all Class A shares (except
Class A shares of the Cash Management Fund), Class B shares and Class C 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 SOI is the sales charge which applies to a single
purchase of this total amount.
An SOI 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 is allowed any
further reduced sales charge for which it qualifies.
The SOI 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, are
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 are released to the shareholder. If the total intended investment is
not completed within that period shares are, to the extent necessary, redeemed
and the proceeds used to pay the additional sales charge due. A shareholder that
is 401(a) qualified plan trustee is 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 is no more
than the applicable sales charge had the shareholder made all of such purchases
at one time. The SOI does not constitute an obligation on the shareholder to
purchase, nor the Funds to sell, the amount indicated.
Purchases at Net Asset Value.
A Fund's Class A shares may be purchased without a sales charge:
o by its Directors, Principal Life and its subsidiaries and their employees,
officers, directors (active or retired), brokers or agents. This also
includes their immediate family members and trusts for the benefit of these
individuals;
o by the Principal Employees' Credit Union;
o by non-ERISA clients of Invista and Principal Capital Management LLC;
o by any employee or Registered Representative (and their employees) of an
authorized broker-dealer;
o through broker-dealers, investment advisors and other financial
institutions that have entered into an agreement with Princor which
includes a requirement that such shares be sold for the benefit of clients
participating in a "wrap account" or similar program under which clients
pay a fee to the broker-dealer, investment advisor or financial
institution;
o by unit investment trusts sponsored by Principal Life and/or its
subsidiaries or affiliates;
o by certain employee welfare benefit plan customers of Principal Life with
Plan Deposit Accounts;
o by participants who receive distributions from certain annuity contracts
offered by Principal Life (except for shares of Tax-Exempt Bond Fund);
o to the extent the investment represents the proceeds of a total surrender
of certain Principal Life issued unregistered group annuity contracts if
Principal Life waives any applicable CDSC or other contract surrender
charge;
o by using cash payments received from Principal Bank under its awards
program;
o to the extent the investment represents redemption proceeds from certain
unregistered group annuity contracts issued by Principal Life to fund an
employer's 401(a) plan where such proceeds are used to fund the employer's
401(a) plan; and
o to the extent the purchase proceeds represent a distribution from a
terminating 401(a) plan if the employer or plan trustee has entered into a
written agreement with Princor permitting the group solicitation of
employees/participants. Such purchases are subject to the CDSC which
applies to purchases of $1 million or more as described above.
Class A shares may also be purchased without a sales charge if your Registered
Representative has recently become affiliated with a broker-dealer authorized to
sell shares of the Principal Mutual Funds. The following conditions must be met;
o your purchase of Class A shares must take place within the first 180 days
of your Registered Representative's affiliation with the authorized
broker-dealer;
o your investment must represent the sales proceeds from other mutual fund
shares (you must have paid a front-end sales charge or a CDSC) and the sale
must occur within the 180 day period; and
o you must indicate on your Principal Mutual Fund application that you are
eligible for waiver of the front-end sales charge.
o you must send us either:
o the check for the sales proceeds (endorsed to Principal Mutual Funds)
or
o a copy of the confirmation statement from the other mutual fund showing
the sale transaction. If you place your order to buy Principal Mutual
Fund shares on the telephone, you must send us a copy of the
confirmation within 21 days of placing the order. If we do not receive
the confirmation within 21 days, we will sell enough of your Class A
shares to pay the sales charge that otherwise would have been charged.
Each of the Funds, except Principal Tax-Exempt Bond 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 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 Life Insurance Company and for which Principal
Life Insurance Company waives any applicable contingent deferred sales charges
or other contract surrender charges.
During the period beginning December 1, 2000 and ending January 31, 2001,
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 LargeCap Stock Index
and Limited Term Bond Funds, to the extent that the investment represents 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 an 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 Life Insurance Company, or any directly or
indirectly owned subsidiary of Principal Life Insurance Company, and such
investment is made in any Principal Mutual 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:
<TABLE>
<CAPTION>
Sales Charge as a % of:
Net Dealer Allowance as %
Offering Amount of Offering
Amount of Purchase Price Invested Price
<S> <C> <C> <C>
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 0.00 0.75
</TABLE>
Sales Charges for Employer-Sponsored Plans
Administered Employee Benefit Plans. Class A shares of the Growth-Oriented
Funds, except LargeCap Stock Index Fund, and Income-Oriented Funds, except
Limited Term Bond Fund and, in certain circumstances, 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 Life Insurance Company pursuant to a written
service agreement ("Administered Employee Benefit Plans"). The service agreement
between Principal 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 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:
<TABLE>
<CAPTION>
Schedule 1
Amount Payable by Employer as a Percent
Amount of Plan Contributions* in Each Year of Plan Contributions
<S> <C> <C> <C>
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
<FN>
* Plan contributions directed to an annuity contract issued by Principal
Life Insurance Company to fund the plan are combined with contributions
directed to the Funds to determine the applicable commission charge.
</FN>
</TABLE>
Generally, the commission level described in Schedule 2 apply for salary
deferral Plans and the commission level described in Schedule 1 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 Life Insurance Company.
Plans Other Than Administered Employee Benefit Plans. Shares of the Funds are
offered to fund certain sponsored Princor plans. These plans can be divided into
three categories: Retirement plans meeting the requirements of Section 401 of
the Internal Revenue Code (e.g. 401(k) Plans, Profit Sharing Plans and Money
Purchase Pension Plans); Group Solicited Plan Terminations; and other
employer-sponsored retirement plans (SIMPLE IRA Plans, Simplified Employee
Pension Plans, Salary Reduction Simplified Employee Pension Plans, Non-Qualified
Deferred Compensation Plans, Payroll Deduction Plans ("PDP") and certain
Association Plan.
Princor 401 Plans
When establishing a Princor Section 401 Plan, the employer chooses whether
to fund the plan with either Class A shares, Class B shares or Class C
shares. If Class A shares are used to fund the plan, all plan investments
are treated as made by a single investor to determine whether a reduced
sales charge is available. The regular sales charge table for Class A
shares applies to purchases $250,000 or more. If Class B shares are used to
fund the plan, contributions into the plan after the plan assets amount to
$250,000 or more, are used to purchase Class A shares unless the plan
trustee directs otherwise. Plan assets are not combined with investments
made outside of the plan to determine the sales charge applicable to such
investments. Investments made by plan participants outside of the plan are
not included with plan assets to determine the sales charge applicable to
the plan.
Group Solicited Plan Terminations
Occasionally, an employer terminates a Section 401 Plan. If the employer or
plan trustee enters into a written agreement with Princor permitting the
group solicitation of the employees/plan participants, the proceeds of
distributions from such plans are eligible to purchase shares of the funds
at net asset value. A redemption of such shares within 18 months after
purchase are subject to a contingent deferred sales charge ("CDSC") at the
rate of .75% (.25% for the LargeCap Stock Index and Limited Term Bond
Funds) of the lesser of the value of the shares redeemed (exclusive of
reinvested dividends and capital gain distributions) or the total cost of
such shares. The CDSC is waived in connection with (1) redemption of shares
to satisfy IRS minimum distribution rules or (2) shares redeemed through a
systematic withdrawal plan that permits up to 10% of the value of the
shareholder's Class A shares of a Fund on the last business day of December
each year to be withdrawn automatically in equal monthly installments
throughout the year.
Other Employer Sponsored Princor Plans
When establishing an employer-sponsored Princor plan, the employer chooses
whether to fund the plan with either Class A shares, Class B shares or
Class C shares. If Class A shares are used to fund the plan, all plan
investments are treated as made by a single investor to determine whether a
reduced sales charge is available. The regular sales charge table for Class
A shares applies to purchases of $250,000 or more. 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 are purchased with plan contributions
attributable to the plan participant, unless the plan participant elects
otherwise. Plan assets are not combined with investments made outside of
the plan to determine the sales charge applicable to such investments.
Investments made by plan participants outside of the plan are not included
with plan assets to determine the sales charge applicable to the plan.
Shares of the funds are also available to participants of Princor 403(b) plans
at the same sales charge levels available to other employer-sponsored Princor
plans described above. However, contributions by plan participants are not
combined to determine sales 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. Other types of sponsored plans may
be added in the future.
Class B shares
Class B shares are sold without an initial sales charge, although a CDSC is
imposed if you redeem shares within six years of purchase. Class B shares
purchased under certain sponsored Princor plans established after February 1,
1998, are subject to a CDSC of up to 3% if redeemed within five years of
purchase. (See "Plans Other than Administered Employee Benefit Plans" above for
discussion of sponsored Princor plans.) 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:
<TABLE>
<CAPTION>
Contingent Deferred Sales Charge
as a Percentage of
Dollar Amount Subject to Charge
For Certain Sponsored Plans
Commenced After 2/1/98
All Funds All Funds
Years Since Purchase Except LargeCap LargeCap Stock Except LargeCap LargeCap Stock
Stock Index and Index and Stock Index and Index and
Limited Term Limited Term Limited Term Limited Term
Payments Made Bond Funds Bond Funds Bond Funds Bond Funds
<S> <C> <C> <C> <C>
2 years or less 4.00% 1.25% 3.00% .75%
more than 2 years, up to 4 years 3.00 0.75 2.00 .50
more than 4 years, up to 5 years 2.00 0.50 1.00 .25
more than 5 years, up to 6 years 1.00 0.25 None None
more than 6 years None None None None
</TABLE>
In determining whether a CDSC is payable on any redemption, the Fund first
redeems shares not subject to any charge, and then shares held longest during
the six (five) year period. For information on how sales charges are calculated
if shares are exchanged, see "How To Exchange Shares Among Principal Mutual
Funds" in the Prospectus.
The CDSC is 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
or to satisfy substantially equal periodic payment
calculation 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.
As principal underwriter, Princor received underwriting fees from the sale of
shares for the periods indicated as follows:
<TABLE>
<CAPTION>
Underwriting Fees for
Fiscal Years Ended October 31,
Fund 1999 1998 1997
<S> <C> <C> <C>
Balanced Fund $ 689,518 $ 716,315 $ 518,345
Blue Chip Fund 1,419,225 1,230, 098 816,203
Bond Fund 800,916 887,870 582,903
Capital Value Fund 1,647,688 1,769,043 1,383,995
Cash Management Fund 76,773 19,171 14,123
Government Securities Income Fund 940,825 846,821 737,229
Growth Fund 2,515,833 2,079,726 1,548,696
High Yield Fund 200,747 335,156 321,051
International Emerging Markets Fund 111,950 114,325 33,588(1)
International Fund 1,032,623 1,369,016 1,524,740
International SmallCap Fund 156,120 197,039 38,421(1)
Limited Term Bond Fund 89,515 77,191 50,773
MidCap Fund 1,677,041 2,447,638 2,152,664
Real Estate Fund 50,841 53,280(2) N/A
SmallCap Fund 453,831 398,391(2) N/A
Tax-Exempt Bond Fund 576,841 667,756 558,697
Utilities Fund 513,501 339,353 169,904
<FN>
(1) Period from August 14, 1997 (Date Operations Commenced) through October
31, 1997.
(2) Period from December 11, 1997 (Date Operations Commenced) through
October 31, 1998.
</FN>
</TABLE>
Class C Shares
Class C shares are sold without a sales charge; however, Class C shares redeemed
within one year of purchase are subject to a CDSC of 1% (.5% for LargeCap Stock
Index and Limited Term Bond Funds). The charge is assessed on the amount equal
to the lesser of the current market value or the original purchase cost of the
shares being redeemed. The amount of the CDSC, if any, is calculated as a
percentage of the amount being redeemed according to the following table.
<TABLE>
<CAPTION>
Contingent Deferred Sales Charge
as a Percentage of
Dollar Amount Subject to Charge
For Certain Sponsored Plans
Commenced After 2/1/98
All Funds All Funds
Except LargeCap LargeCap Stock Except LargeCap LargeCap Stock
Stock Index and Index and Stock Index and Index and
Years Since Purchase Limited Term Limited Term Limited Term Limited Term
Payments Made Bond Funds Bond Funds Bond Funds Bond Funds
<S> <C> <C> <C> <C> <C>
1 year or less 1.00% 0.50% 1.00% 0.50%
more than 1 year None None None None
</TABLE>
For the purpose of determining the holding period of Class C shares, all
payments during a month are aggregated and considered to have be made on the
first day of that month. In processing redemptions of Class C shares, the Fund
first redeems shares not subject to any CDSC, and then shares held for the
shortest period of time during the one-year period. As a result, you pay the
lowest possible CDSC.
The CDSC on Class C shares may be waived or reduced as follows:
o for automatic redemptions (Periodic Withdrawal Plans) (limited to 10%
of the value of the account);
o if the redemption results from the death or a total and permanent
disability (as defined in Section 72 of the Internal Revenue Code)
occurring after the purchase of the shares being redeemed of a
shareholder or participant in an employer-sponsored retirement plan;
o if the distribution is part of a series of substantially equal
payments made over the life expectancy of the participant or the joint
life expectancy of the participant and his or her beneficiary; or
o if the distribution is to a participant in an employer-sponsored
retirement plan and is
o a return of excess employee deferrals or contributions,
o a qualifying hardship distribution as defined by the Code,
o from a termination of employment,
o in the form of a loan to a participant in a plan which permits
loans, or
o from qualified defined contribution plan and represents a
participant's directed transfer (provided that this privilege has
been pre-authorized through a prior agreement with PFD regarding
participant directed transfers).
The CDSC may be waived or reduced for either non-retirement or retirement plan
accounts if the redemption is made pursuant to the Fund's right to liquidate or
involuntarily redeem shares in a shareholder's account. The CDSC is not
applicable if the selling broker-dealer elects, with Princor's approval, to
waive receipt of the commission normally paid at the time of the sale.
Class C shares of the Cash Management Fund may be purchased only by exchange
from other Class C share accounts. Class C shares do not convert into any other
Class shares. Class C shares provide you the benefit of putting all your dollars
to work from the time of investment, but have higher ongoing fees and lower
dividends than Class A shares.
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 Cash Management Fund.
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 Cash Management Fund,
has adopted a distribution plan for the Class A shares. The Class A Plan
provides that the Fund makes 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 pays Princor a fee after the end of each month at an annual rate no greater
than 0.25% (.15% for the LargeCap Stock Index and Limited Term Bond Funds) of
the daily net asset value of the Fund. Princor retains 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 LargeCap Stock Index and Limited Term
Bond Funds) 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 LargeCap Stock Index
and Limited Term Bond Funds) 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% (3.00% for certain sponsored plans or 1.25% for
the LargeCap Stock Index and Limited Term Bond Funds) of the amount invested to
dealers who sell such shares. These commissions are not paid on exchanges from
other Principal Mutual Funds. In addition, Princor may remit on a continuous
basis up to .25% (.15% for the LargeCap Stock Index and Limited Term Bond Funds)
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 C Distribution Plan. Each Class C Plan provides for payments by the Fund
to Princor at the annual rate of up to 1.00% (.50% for the LargeCap Stock Index
and Limited Term Bond Funds) of the Fund's average net asset attributable to
Class C shares. Princor also receives the proceeds of any CDSC imposed on
redemptions of such shares.
Class C shares are sold without an initial sales charge. Princor may remit on a
continuous basis up to 1.00% (.50% for the LargeCap Stock Index and Limited Term
Bond Funds) 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,
has adopted a distribution plan for the Class R shares. Each Class R Plan
(except the LargeCap Stock Index Fund) 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. The Class R Plan for the LargeCap Stock Index
Fund provides for payments from the Fund to Princor at the annual rate of up to
.65% 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
provides to each Fund's Board of Directors, and the Board reviews, at least
quarterly, a written report of the amounts expended pursuant to the Plans and
the purposes for which such expenditures were made.
If expenses under a Class A, Class B or Class R Plan exceed the compensation
limit for Princor described in the Plan in any one fiscal year, the Fund does
not carry over such expenses to the next fiscal year. The Funds have no legal
obligation to pay any amount pursuant to these Plans that exceeds the
compensation limit. The Funds do not pay, directly or indirectly, interest,
carrying charges, or other financing costs in connection with these Plans. If
the aggregate payments received by Princor under these Plans in any fiscal year
exceed the expenditures made by Princor in that year pursuant to the Plan,
Princor promptly reimburses the Fund for the amount of the excess.
The Funds pay Princor the compensation described in the Class C Plan. The amount
of the payment and the distribution expenses are reviewed annually by the Board
of Directors of each Fund.
The amount received from each Fund and retained by Princor during the year ended
October 31, 1999 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 Registered
Shareholder Salaries Representative
Amount Report Sales & Sales Service Total
Fund Retained Printing Brochures Overhead Materials Fees Expenditures
<S> <C> <C> <C> <C> <C> <C> <C>
Balanced $ $ $ $ $ $ $
Blue Chip
Bond
Capital Value
Government Securities Income
Growth
High Yield
International Emerging Markets
International
International SmallCap
Limited Term Bond
MidCap
Real Estate
SmallCap
Tax-Exempt Bond
Utilities
</TABLE>
The amount received from each Fund and retained by Princor during the period
ended October 31, 1999 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
Shareholder Salaries Representative
Amount Report Sales & Sales Service Total
Fund Retained Printing Brochures Overhead Materials Fees Commissions Expenditures
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balanced $ $ $ $ $ $ $ $
Blue Chip
Bond
Capital Value
Cash Management
Government Securities Income
Growth
High Yield
International Emerging Markets
International
International SmallCap
Limited Term Bond
MidCap
Real Estate
SmallCap
Tax-Exempt Bond
Utilities
</TABLE>
The amount received from each Fund and retained by Princor during the period
ended October 31, 1999 and the manner in which such amounts were spent pursuant
to the Class C Distribution Plan for the last fiscal period of each of the Funds
were as follows:
<TABLE>
<CAPTION>
Expenditures
Prospectus and Registered
Shareholder Salaries Representative
Amount Report Sales & Sales Service Total
Fund Retained Printing Brochures Overhead Materials Fees Commissions Expenditures
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balanced $ $ $ $ $ $ $ $
Blue Chip
Bond
Capital Value
Cash Management
Government Securities Income
Growth
High Yield
International Emerging Markets
International
International SmallCap
Limited Term Bond
MidCap
Real Estate
SmallCap
Tax-Exempt Bond
Utilities
</TABLE>
The amount received from each Fund and retained by Princor during the period
ended October 31, 1999 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
Shareholder Representative Underwriter's
Amount Report Sales Sales Service Salaries and Total
Fund Retained Printing Brochures Materials Fees Overhead Expenditures
<S> <C> <C> <C> <C> <C> <C> <C>
Balanced $ $ $ $ $ $ $
Blue Chip
Bond
Capital Value
Cash Management
Government Securities Income
Growth
High Yield
International Emerging Markets
International
International SmallCap
Limited Term Bond
MidCap
Real Estate
SmallCap
Utilities
</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 is at the discretion of
the Directors who are not interested persons.
Each Plan continues 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
Classes A, B, C and R shares were last approved by the Board of Directors of all
Funds, including a majority of the non-interested directors, on December 13,
1999.
DETERMINATION OF NET ASSET VALUE OF FUNDS' SHARES
Growth-Oriented and Income-Oriented Funds
The share price of each class of the Growth-Oriented and Income-Oriented Funds
is calculated each day that the New York Stock Exchange is open. The Funds treat
as customary national business holidays the days when the New York Stock
Exchange is closed (New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day).
The share price 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 marketmaker
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 considered
reliable, 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
foreign securities used to compute the share prices are usually determined when
the foreign market closes. Occasionally, events which affect the values of such
securities and foreign currency exchange rates occur between the times at which
the values 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 securities occur during such
period, the securities are 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 a 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-Advisor 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 Fund
The share price of each class of shares of the Cash Management Fund is
determined at the same time and on the same days as the Growth-Oriented and
Income-Oriented Funds as described above. The share price for each class of
shares of the 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 Cash Management Fund are 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 Cash Management Fund requires
the 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, the Fund invests
only in obligations determined by its Board of Directors to be of high quality
with minimal credit risks.
The Board of Directors for the Cash Management Fund 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 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 promptly considers what action, if
any, will be initiated. In the event the Board determines that a deviation
exists which may result in material dilution or other unfair results to
shareholders, the Board takes such corrective action as it regards as
appropriate, including: 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
The Principal Mutual Funds advertise their 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 past performance of a Fund. They show the performance of a
hypothetical investment and are not intended to indicate future performance.
Total return and yield vary from time to time depending upon:
o market conditions
o the composition of a Fund's portfolio
o operating expenses
These factors and differences in the methods used in calculating performance
figures should be considered when comparing a Fund's performance to the
performance of other investments.
A Fund may include in its advertisements performance rankings and other
performance-related information published by independent statistical services or
publishers, such as
o Baron's, Changing Times
o Forbes
o Fortune
o Investment Advisor
o Lipper Analytical Services
o Money Magazine
o Stanger's Investment Advisor
o The Wall Street Journal
o USA Today
o U.S. News
o Weisenberger Investment Companies Services
o W. R. Kipplinger's Personal Finance
A Fund may also include in its advertisements comparisons of the performance of
the Fund to that of various market indices, such as:
o Bond Buyer Municipal Index
o Dow Jones Industrials Index
o Dow Jones Utility Index with Income
o Lehman Brothers BAA Corporate Index
o Lehman Brothers GNMA Index
o Lehman Brothers High Yield Index
o Lehman Brothers Municipal Bond Index
o Lehman Brothers Revenue Bond Index
o Brothers Mutual Fund Short Government/Corporate Index
o Lehman Brothers Intermediate Government/Corporate Index
o Lehman Brothers Government/Corporate Bond Index
o Merrill Lynch Corporate Government Bond Index
o Morgan Stanley Capital International EAFE (Europe, Australia and Far East)
Index
o Morgan Stanley Capital International EMF (Emerging Markets) Index
o Morgan Stanley REIT Index
o Salomon Brothers Investment Grade Bond Index
o S&P 400 Index
o S&P 500 Index
o S&P 600 Index
o Valueline
o World Index
Total Return
The Growth-Oriented and Income-Oriented Funds include its average annual total
return for the one-, five- and ten-year periods as of the last day of the most
recent calendar quarter when advertising total return figures. If the Fund or
class has been in existence for a shorter time period, it uses the time from the
beginning of the Fund (or class) to the end of the most recent calendar quarter.
Average annual total return is calculated by comparing an initial $1,000
investment to the redeemable value of the Fund at the end of 1, 5 or 10 years
(or from the Fund's inception date).
Initial Investment - $1,000 less maximum front-end sales charge (in the
case of Class A shares)
Ending redeemable value - assumes the reinvestment of all dividends and
capital gains at net asset value less the applicable contingent deferred
sales charge (in the case of Class B or Class C shares).
A Fund may also include in its advertising average annual total return for some
other period or cumulative total return for a specified period. These returns
may include reduced sales charges, reflect no sales charge or CDSC in order to
illustrate the change in a Fund's net asset value over time. Cumulative total
return is calculated:
(Ending redeemable value less the initial investment)
Initial investment
The following table shows as of October 31, 1999 average annual returns for
Class A shares for each of the Funds for the periods indicated:
Fund 1-Year 5-Year 10-Year
Balanced Fund (0.07)% 11.06% 9.80%
Blue Chip Fund 11.50 18.81 14.01(1)
Bond Fund (9.53) 6.83 7.22
Capital Value Fund (1.84) 16.22 12.42
Government Securities Income Fund (3.30) 7.16 7.13
Growth Fund 11.94 17.89 16.38
High Yield Fund (2.02) 5.90 6.36
International Emerging Markets Fund 24.74 (5.53)(3)
International Fund 10.72 10.21 11.04
International SmallCap Fund 47.25 19.94(3)
Limited Term Bond Fund 0.31 4.67(4)
MidCap Fund 0.60 11.98 13.15
Real Estate Fund (8.87) (13.27)
SmallCap Fund 28.20 4.16
Tax-Exempt Bond Fund (7.09) 5.82 6.07
Utilities Fund 9.35 17.29 12.02(2)
(1)Period beginning March 1, 1991 and ending October 31, 1999.
(2)Period beginning December 16, 1992 and ending October 31, 1999.
(3)Period beginning August 29, 1997 and ending October 31, 1999.
(4)Period beginning February 29, 1996 and ending October 31, 1999.
(5)Period beginning January 1, 1998 and ending October 31, 1999.
The following table shows as of October 31, 1999 average annual returns for
Class B shares for each of the Funds for the period indicated:
Fund 1-Year 5-Year
Balanced Fund 0.06% 12.31(1)
Blue Chip Fund 12.09 20.30(1)
Bond Fund (6.36) 6.72(1)
Capital Value Fund (1.57) 18.12(1)
Government Securities Income Fund (3.17) 7.17(1)
Growth Fund 12.75 20.29(1)
High Yield Fund (1.76) 6.05(1)
International Emerging Markets Fund 25.91 (5.67)(2)
International Fund 11.27 12.45(1)
International SmallCap Fund 49.42 20.65(2)
Limited Term Bond Fund 0.08 4.49(3)
MidCap Fund 1.09 14.26(1)
Real Estate Fund (8.79) (13.20)(4)
SmallCap Fund 29.29 4.16(4)
Tax-Exempt Bond Fund (6.73) 6.48(1)
Utilities Fund 9.85 17.88(1)
(1)Period beginning December 9, 1994 and ending October 31, 1999.
(2)Period beginning August 29, 1997 and ending October 31, 1999.
(3)Period beginning February 29, 1996 and ending October 31, 1999.
(4)Period beginning January 1, 1998 and ending October 31, 1999.
The following table shows as of October 31, 1999 average annual returns for
Class C shares for each of the Funds for the period indicated:
Fund 1-Year(1)
Balanced Fund (5.67)%
Blue Chip Fund (2.29)
Bond Fund (1.40)
Capital Value Fund (8.42)
Government Securities Income Fund 0.11
Growth Fund (4.75)
High Yield Fund (1.99)
International Emerging Markets Fund (5.47)
International Fund 2.95
International SmallCap Fund 16.81
Limited Term Bond Fund 0.34
MidCap Fund (9.36)
Real Estate Fund (11.21)
SmallCap Fund 0.53
Tax-Exempt Bond Fund (3.59)
Utilities Fund (1.47)
(1)Period beginning June 30, 1999 and ending October 31, 1999.
The following table shows as of October 31, 1999 average annual returns for
Class R shares for each of the Funds for the period indicated:
Fund 1-Year 5-Year
Balanced Fund 4.21% 10.14%(1)
Blue Chip Fund 16.31 17.46(1)
Bond Fund (2.45) (4.76)(1)
Capital Value Fund 2.35 14.57(1)
Government Securities Income Fund 0.78 5.25(1)
Growth Fund 16.78 16.29(1)
High Yield Fund 2.01 3.88(1)
International Emerging Markets Fund 30.93 (3.46)(2)
International Fund 15.27 12.18(1)
International SmallCap Fund 54.61 22.77(2)
Limited Term Bond Fund 1.13 4.48(1)
MidCap Fund 4.89 7.49(1)
Real Estate Fund (4.70) (11.07)(3)
SmallCap Fund 33.85 6.77(3)
Utilities Fund 13.97 15.54(1)
(1)Period beginning February 29, 1996 and ending October 31, 1999.
(2)Period beginning August 29, 1997 and ending October 31, 1999.
(3) Period beginning January 1, 1998 and ending October 31, 1999.
Yield
Income-Oriented Funds
Each Income-Oriented Fund computes a yield by:
1. calculating net investment income per share for a 30 day (or one month)
period
2. annualizing net investment income per share, assuming semi-annual
compounding
3. dividing the annualized net investment income by the maximum public
offering price for Class A shares or the net asset value for Class B, Class
C and Class R shares for the last day of the same period.
The following table shows as of October 31, 1999 the yield for each class of
shares for each of the Income-Oriented Funds:
<TABLE>
<CAPTION>
Yield as of October 31, 1999
Fund Class A Class B Class C Class R
<S> <C> <C> <C> <C>
Bond Fund 7.40% 6.63% 6.56% 6.79%
Government Securities Income Fund 6.34 5.48 5.50 5.76
High Yield Fund 9.69 8.74 8.87 8.56
Limited Term Bond Fund 6.23 5.83 5.83 5.58
Tax-Exempt Bond Fund 4.94 4.54 3.96 N/A
</TABLE>
The Tax-Exempt Bond Fund may advertise a tax-equivalent yield. Your
tax-equivalent yield would be calculated by:
[(Tax-exemptportion of the yield) divided by (1 minus your tax rate)] plus
[any portion of the yield which is not tax-exempt]
As of October 31, 1999 the Fund's tax-equivalent yields for Class A , Class B
and Class C shares were as follows:
Tax-Equivalent Yield Assumed
Class A Class B Class C Tax Rate
6.53% 6.31% 5.50% 28.0%
7.34 7.09 6.19 36.0
7.78 7.52 6.56 39.6
Money Market Fund
The Cash Management Fund advertises its yield and its effective yield.
Yield is computed by:
o determining the net change (excluding shareholder purchases and
redemptions) in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period
o dividing the difference by the value of the account at the beginning of the
base period to obtain the base period return
o multiplying the base period return by (365/7) with the resulting yield
figure carried to at least the nearest hundredth of one percent.
The following table shows as of October 31, 1999 the yield for each class of
shares for the Cash Management Fund:
Yield as of October 31, 1999
Fund Class A Class B Class C Class R
Cash Management Fund 5.17% 4.75% 4.65% 3.63%
There may be a difference in the net investment income per share used to
calculate yield and the net investment income per share used for dividend
purposes. This is because the calculation for yield purposes does not include
net short-term realized gains or losses on the Fund's investment, which are
included in the calculation for dividend purposes.
Effective yield is computed by:
o determining the net change (excluding shareholder purchases and
redemptions) in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period
o dividing the difference by the value of the account at the beginning of the
base period to obtain the base period return 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.
The following table shows as of October 31, 1999 the effective yield for each
class of shares for the Cash Management Fund:
Effective Yield as of October 31, 1999
Fund Class A Class B Class C Class R
Cash Management Fund 5.30% 4.85% 3.69% 4.75%
The yield quoted at any time for the Cash Management Fund represents the amount
that has earned during a specific, recent seven-day period and is a function of:
o the quality of investments in the Fund's portfolio
o types of investments in the Fund's portfolio
o length of maturity of investments in the Fund's portfolio
o Fund's operating expenses.
The length of maturity for the portfolio is calculated using the average dollar
weighted maturity of all investments. This means that the portfolio has an
average maturity of a stated number of days for its investments. The calculation
is weighted by the relative value of each investment.
The yield for the Cash Management Fund will fluctuate daily as the income earned
on the investments of the Fund fluctuates. There is no assurance 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.
There is no guarantee that the net asset value or any stated rate of return will
remain constant. A shareholder's investment in the Fund is not insured.
Investors comparing results of the Cash Management 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 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 shown in the following
illustrations.
The Power of Compounding
Fund shareholders who 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 change in the value of principal. This chart is for
illustration purposes only and is not 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 vary 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 that may apply 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 ____%
(monthly average six-month CD rate for the month of October, 1999, as reported
in the Federal Reserve Bulletin) and an inflation rate of ____% (rate of
inflation for the 12-month period ended October 31, 1999 as measured by the
Consumer Price Index) and an income tax bracket of 28% would be $(105).
($10,000 x ___9%) / 2 = $___ Interest for six-month period
- __ Federal income taxes (28%)
- __5 Inflation's impact on invested principal
$(10,000 x ___%) / 2
($___) 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 Mutual Funds. An investment in the
Principal Mutual 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
qualifies, it is exempt from federal income tax upon the amount 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 Cash Management Fund 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 are deemed
to be distributed to shareholders in December. Each Fund informs 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 is 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 recognizes 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 is considered capital gain or loss
(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 is disallowed to the extent of the amount of
exempt-interest dividends received on such shares and (to the extent not
disallowed) is 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
The Tax-Exempt Bond Fund also intends to qualify to pay "exempt-interest
dividends" to its shareholders. An exempt-interest dividend is that part of
dividend distributions made by the 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. The
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 is treated as a long term capital loss to the
extent the loss exceeds any exempt-interest dividend received with respect
to such shares, and is disallowed to the extent of such exempt-interest
dividend.
Interest on indebtedness incurred or continued by a shareholder to purchase
or carry shares of this Fund 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 Fund.
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 legislation is enacted that
eliminates or significantly reduces the availability of Municipal
Obligations, it could adversely affect the ability of the Fund to continue
to pursue its investment objectives and policies. In such event, the Fund
would reevaluate its investment objectives and policies.
International Emerging Markets, International and International SmallCap
Funds
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,
International or the International SmallCap Funds are invested in
securities of foreign corporations, the Fund may elect pursuant to Section
853 of the Code to permit 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 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 are then 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 Mutual Funds 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 are considered 100%
short-term and unrealized gain or loss on such positions are not 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. The Code 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
The Funds were incorporated in 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
Cash Management Fund June 10, 1982
Government Securities Income Fund September 5, 1984
Growth Fund May 26, 1989
High Yield Fund November 26, 1986
International Emerging Markets Fund May 27, 1997
International Fund May 12, 1981
International SmallCap Fund May 27, 1997
LargeCap Stock Index Fund November 24, 1999
Limited Term Bond Fund August 9, 1995
MidCap Fund February 20, 1987
Partners Aggressive Growth Fund August 10, 1999
Partners LargeCap Growth Fund November 24, 1999
Partners MidCap Growth Fund November 24, 1999
Real Estate Fund May 27, 1997
SmallCap Fund August 13, 1997
Tax-Exempt Bond Fund June 7, 1985
Utilities Fund September 3, 1992
Effective January 1, 1998, the following changes were made to the names of the
Funds:
<TABLE>
<CAPTION>
Old Fund Name New Fund Name
<S> <C> <C>
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 Fund, Inc. Principal Government Securities 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 Utilities Fund, Inc. Principal Utilities Fund, Inc.
Princor World Fund, Inc. Principal International Fund, Inc.
</TABLE>
FINANCIAL STATEMENTS
The financial statements for each of the Principal Mutual Funds (except the
LargeCap Stock Index, Partners Aggressive Growth, Partners LargeCap Growth and
Partners MidCap Growth Funds) for the year ended October 31, 1999 are a part of
this Statement of Additional Information. The financial statements appear in the
Annual Reports to Shareholders. Reports on those statements from Ernst & Young
LLP, independent auditors, are included in the Annual Report and are also a part
of this Statement of Additional Information. The Annual Reports are furnished,
without charge, to investors who request copies of the Statement of Additional
Information.
The statements of net assets of the Principal Partners Aggressive Growth Fund as
of October 28, 1999, the LargeCap Stock Index, Partners LargeCap Growth and
Partners MidCap Growth Funds as of February 28, 2000 and the reports of Ernst &
Young LLP thereon are provided herein following the Appendix.
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.
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits.
- -------- ---------
(a) (1) Articles of Incorporation (filed 8/31/99)
(2) Articles of Amendment (filed 10/29/99)
(b) By-laws (filed 10/29/99)
(c) Specimen Share Certificate (filed 10/29/99)
(d) (1) Management Agreement*
(2) Sub-Advisory Agreement*
(e) (1) Distribution Agreement*
(2) (a) Selling Agreement (A, B & C Shares) (filed 8/31/99)
(b) Selling Agreement (R Shares) (filed 8/31/99)
(f) N/A
(g) Custodian Agreement*
(h) Transfer Agency & Shareholder Services Agreement*
(i) Legal Opinion (filed 10/29/99)
(j) Consents of Auditors (filed 10/29/99)
(k) Financial Statements (N/A)
(l) Initial Capital Agreement (filed 10/29/99)
(m) Rule 12b-1 Plan
(1) A Share Plan*
(2) B Share Plan*
(3) C Share Plan*
(4) R Share Plan*
(n) Financial Data Schedule (N/A)
(o) Rule 18f-3 Plan*
* Filed herein.
** To be filed by amendent.
Item 24. Persons Controlled by or Under Common Control with Registrant
Principal Financial Services, Inc. (an Iowa corporation) an
intermediate holding company organized pursuant to Section 512A.14 of
the Iowa Code.
Subsidiaries wholly-owned by Principal Financial Services, Inc.
a. Principal Life Insurance Company (an Iowa corporation) a life
group, pension and individual insurance company.
b. Princor Financial Services Corporation (an Iowa Corporation) a
registered broker-dealer.
c. PFG Do Brasil LTDA (Brazil) a Brazilian holding company.
d. Principal Financial Services (Australia), Inc. (an Iowa holding
company) formed to facilitate the acquisition of the Australian
business of BT Australia.
e. Principal Financial Services (NZ), Inc. (an Iowa holding company)
formed to facilitate the acquisition of the New Zealand business
of BT Australia.
f. BT Funds Management (Singapore) Limited (a Singapore asset
management company).
g. Principal Capital Management (Europe) Limited a fund management
company.
h. Principal Capital Management (Ireland) Limited a fund management
company.
Subsidiary wholly-owned by Princor Financial Services Corporation:
a. Principal Management Corporation (an Iowa Corporation) a
registered investment advisor.
Subsidiary wholly-owned by PFG Do Brasil LTDA
a. Brasilprev Previdencia Privada S.A.(Brazil) a pension
administration company.
Subsidiary wholly-owned by Principal Financial Services (Australia),
Inc.:
a. Principal Financial Group (Australia) Holdings Pty Ltd. an
Australian holding company organized in connection with the
contemplated acquisition of BT Australia Funds Management.
Subsidiary wholly-owned by Principal Financial Group (Australia)
Holdings Pty Ltd:
a. Principal Financial Group (Australia) Pty Ltd. an Australia
holding company organized on connection the contemplated
acquisition of BT Australia Funds Management.
Subsidiary wholly-owned by Principal Financial Group (Australia) Pty
Ltd:
a. BT International (Australia) Limited (an Australian holding
company).
Subsidiary wholly-owned by BT International (Australia) Limited:
a. Bankers Trust Australia Limited (an Australian holding company).
Subsidiary wholly-owned by Bankers Trust Australia Limited:
a. BT Australia Limited (an Australian holding company).
Subsidiaries wholly-owned by BT Australia Limited:
a. Bankers Trust Life Limited (an Australian financial services
company).
b. BT Funds Management Limited (an Australian financial services
company).
c. BT Funds Management (International) Limited (an Australian
financial services company).
d. BT Tactical Asset Management Limited (an Australian financial
services company).
e. BT Securities Limited (an Australian financial services
company).
f. BT (Queensland) Pty Limited (an Australian financial services
company).
g. BT Portfolio Services Limited (an Australian financial services
company).
h. BT Australia Corporate Services Pty Limited (an Australian
services company).
i. Oniston Pty Ltd (an Australian financial services company).
Subsidiaries wholly-owned by BT Portfolio Services Limited:
a. BT Custodial Services Pty Ltd (an Australian financial services
company).
b. BT Custodians Limited (an Australian financial services company).
c. National Registry Services Pty Ltd. (an Australian financial
services company).
d. National Registry Services (WA) Pty Limited (an Australian
financial services company).
e. BT Finance & Investments Pty Ltd (an Australian financial
services company).
Subsidiaries and wholly-owned by BT Australia Corporate Services Pty
Limited:
a. BT Finance Pty Ltd (an Australian financial services company).
b. Chifley Services Pty Limited (an Australian financial services
company).
c. BT Nominees Pty Limited (an Australian financial services
company).
Subsidiary organized and wholly-owned by Principal Financial Services
(NZ), Inc.
a. Principal Financial Group (NZ) Limited (a New Zealand holding
company).
Subsidiary organized and wholly-owned by Principal Financial Group
(NZ) Limited:
a. BT Portfolio Service (NZ) Limited (a New Zealand financial
services company).
b. BT New Zealand Nominees Limited (a New Zealand financial services
company).
c. BT Funds Management (NZ) Limited (a New Zealand financial
services company).
Principal Life Insurance Company sponsored the organization of the
following mutual funds, some of which it controls by virtue of owning
voting securities:
Principal Balanced Fund, Inc.(a Maryland Corporation) 0.14% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on December 6, 1999.
Principal Blue Chip Fund, Inc.(a Maryland Corporation) 0.78% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on December 6, 1999.
Principal Bond Fund, Inc.(a Maryland Corporation) 0.63% of shares
outstanding owned by Principal Life Insurance Company (including
subsidiaries and affiliates) on December 6, 1999.
Principal Capital Value Fund, Inc. (a Maryland Corporation)
23.63% of outstanding shares owned by Principal Life Insurance
Company (including subsidiaries and affiliates)on December 6,
1999.
Principal Cash Management Fund, Inc. (a Maryland Corporation)
5.86% of outstanding shares owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on December 6,
1999.
Principal Government Securities Income Fund, Inc. (a Maryland
Corporation) 0.03% of shares outstanding owned by Principal Life
Insurance Company (including subsidiaries and affiliates) on
December 6, 1999.
Principal Growth Fund, Inc. (a Maryland Corporation) 0.37% of
outstanding shares owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on December 6, 1999.
Principal High Yield Fund, Inc. (a Maryland Corporation) 7.60%
of shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on December 6, 1999.
Principal International Emerging Markets Fund, Inc. (a Maryland
Corporation) 37.34% of shares outstanding owned by Principal Life
Insurance Company (including subsidiaries and affiliates) on
December 6, 1999.
Principal International Fund, Inc. (a Maryland Corporation)
24.44% of shares outstanding owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on December 6,
1999.
Principal International SmallCap Fund, Inc. (a Maryland
Corporation) 34.71% of shares outstanding owned by Principal Life
Insurance Company (including subsidiaries and affiliates) on
December 6, 1999.
Principal Limited Term Bond Fund, Inc. (a Maryland Corporation)
20.71% of shares outstanding owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on December 6,
1999.
Principal MidCap Fund, Inc. (a Maryland Corporation) 0.73% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on December 6, 1999
Principal Partners Aggressive Growth Fund, Inc.(a Maryland
Corporation) 42.96% of shares outstanding owned by Principal Life
Insurance Company (including subsidiaries and affiliates) on
December 6, 1999
Principal Real Estate Fund, Inc. (a Maryland Corporation) 63.30%
of shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on December 6, 1999
Principal SmallCap Fund, Inc.(a Maryland Corporation) 15.15% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on December 6, 1999.
Principal Special Markets Fund, Inc. (a Maryland Corporation)
83.30% of shares outstanding of the International Emerging
Markets Portfolio, 41.88% of the shares outstanding of the
International Securities Portfolio, 98.66% of shares outstanding
of the International SmallCap Portfolio and 100% of the shares
outstanding of the Mortgage-Backed Securities Portfolio were
owned by Principal Life Insurance Company (including subsidiaries
and affiliates) on December 6, 1999
Principal Tax-Exempt Bond Fund, Inc. (a Maryland Corporation)
0.05% of shares outstanding owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on December 6,
1999.
Principal Utilities Fund, Inc. (a Maryland Corporation) 0.26% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on December 6, 1999.
Principal Variable Contracts Fund, Inc. (a Maryland Corporation)
100% of shares outstanding of the following Accounts owned by
Principal Life Insurance Company and its Separate Accounts on
December 6, 1999: Aggressive Growth, Asset Allocation, Balanced,
Blue Chip, Bond, Capital Value, Government Securities, Growth,
High Yield, International, International SmallCap, LargeCap
Growth, MicroCap, MidCap, MidCap Growth, MidCap Value, Money
Market, Real Estate, SmallCap, SmallCap Growth, SmallCap Value
Stock Index 500, and Utilities.
Subsidiaries organized and wholly-owned by Principal Life Insurance
Company:
a. Principal Holding Company (an Iowa Corporation) a holding company
wholly-owned by Principal Life Insurance Company.
b. PT Asuransi Jiwa Principal Indonesia (an Indonesia Corporation) a
life insuranced corporation which offers group and individual
products.
c. Principal Development Investors, LLC (a Delaware Corporation) a
limited liability company engaged in acquiring and improving real
property through development and redevelopment.
d. Principal Capital Management, LLC (a Delaware Corporation) a
limited liability company that provides investment management
services.
e. Principal Net Lease Investors, LLC (a Delaware Corporation) a
limited liability company which operates as a buyer and seller of
net leased investments.
Subsidiaries wholly-owned by Principal Capital Management, LLC:
a. Principal Structured Investments, LLC (a Delaware Corporation) a
limited liability company that provides product development
administration, marketing and asset management services
associated with stable value products together with other related
institutional financial services including derivatives,
asset-liability management, fixed income investment management
and ancillary money management products.
b. Principal Enterprise Capital, LLC (a Delaware Corporation) a
company engaged in the operation of nonresidential buildings.
c. Principal Commercial Acceptance, LLC (a Delaware Corporation) a
limited liability company involved in purchasing, managing and
selling commercial real estate assets in the secondary market.
d. Principal Real Estate Investors, LLC (a Delaware Corporation) a
registered investment advisor.
e. Principal Commercial Funding, LLC (a Delaware Corporation) a
correspondent lender and service provider for loans.
f. Principal Real Estate Services, LLC (a Delaware Corporation) a
limited liability company which acts as a property manager and
real estate service provider.
Subsidiaries wholly-owned by Principal Holding Company:
a. Principal Bank (a Federal Corporation) a Federally chartered
direct delivery savings bank.
b. Patrician Associates, Inc. (a California Corporation) a real
estate development company.
c. Petula Associates, Ltd. (an Iowa Corporation) a real estate
development company.
d. Principal Development Associates, Inc. (a California Corporation)
a real estate development company.
e. Principal Spectrum Associates, Inc. (a California Corporation) a
real estate development company.
f. Principal FC, Ltd. (an Iowa Corporation) a limited purpose
investment corporation.
g. Equity FC, Ltd. (an Iowa Corporation) engaged in investment
transactions including limited partnership and limited liability
companies.
h. HealthRisk Resource Group, Inc. (an Iowa Corporation) a
management services organization.
i. Invista Capital Management, LLC (an Iowa Corporation) a
registered investment adviser.
j. Principal Residential Mortgage, Inc. (an Iowa Corporation) a
residential mortgage loan broker.
k. Principal Asset Markets, Inc. (an Iowa Corporation) a residential
mortgage loan broker.
l. Principal Portfolio Services, Inc. (an Iowa Corporation) a
mortgage due diligence company.
m. The Admar Group, Inc. (a Florida Corporation) a national managed
care service organization that develops and manages preferred
provider organizations.
n. 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.
o. Principal Marketing Services, Inc. (a Delaware Corporation) a
corporation formed to serve as an interface between marketers and
manufacturers of financial services products.
p. Principal Health Care, Inc. (an Iowa Corporation) a developer and
administrator of managed care systems.
q. Dental-Net, Inc. (an Arizona Corporation) holding company of
Employers Dental Services; a managed dental care services
organization. HMO and dental group practice.
r. Principal Financial Advisors, Inc. (an Iowa Corporation) a
registered investment advisor.
s. Delaware Charter Guarantee & Trust Company, d/b/a Trustar
Retirement Services (a Delaware Corporation) a nondepository
trust company.
t. Professional Pensions, Inc. (a Connecticut Corporation) a
corporation engaged in sales, marketing and administration of
group insurance plans and serves as a record keeper and third
party administrator for various clients' defined contribution
plans.
u. Principal Investors Corporation (a New Jersey Corporation) a
registered broker-dealer with the Securities Exchange Commission.
It is not currently active.
v. Principal International, Inc. (an Iowa Corporation) a company
formed for the purpose of international business development.
Subsidiary wholly-owned by Petula Associates, Ltd.
a. Magnus Properties, Inc. (an Iowa Corporation) which owns real
estate.
Subsidiary wholly-owned by Invista Capital Management, LLC:
a. Principal Capital - Invista Trust. (a Delaware Corporation) a
business trust and private investment company offering
non-registered units, initially, to tax-exempt entities.
Subsidiary wholly-owned by Principal Residential Mortgage, Inc.:
a. Principal Wholesale Mortgage, Inc. (an Iowa Corporation) a
brokerage and servicer of residential mortgages.
Subsidiaries wholly-owned by The Admar Group, Inc.:
a. Admar Corporation (a California Corporation) a managed care
services organization.
Subsidiaries wholly-owned by Dental-Net, Inc.
a. Employers Dental Services, Inc. (an Arizona corporation) a
prepaid dental plan organization.
Subsidiaries wholly-owned by Professional Pensions, Inc.:
a. Benefit Fiduciary Corporation (a Rhode Island corporation) serves
as a corporate trustee for retirement trusts.
b. PPI Employee Benefits Corporation (a Connecticut corporation) a
registered broker-dealer pursuant to Section 15(b) of the
Securities Exchange Act an a member of the National Association
of Securities Dealers (NASD), limited to the sale of open-end
mutual funds and variable insurance products.
c. Boston Insurance Trust, Inc. (a Massachusetts corporation)
authorized by charter to serve as a trustee in connection with
multiple-employer group life insurance trusts or arrangements,
and to generally participate in the administration of insurance
trusts.
Subsidiaries wholly-owned by Principal International, Inc.:
a. Principal International Espana, S.A. de Seguros de Vida (a Spain
Corporation) a life insurance company (individual group),
annuities and pension.
b. Zao Principal International (a Russia Corporation) inactive.
c. Principal International Argentina, S.A. (an Argentina services
corporation).
d. Principal Asset Management Company (Asia) Ltd. (Hong Kong) a
corporation which manages pension funds.
e. Principal International Asia Limited (a Hong Kong Corporation) a
corporation operating as a regional headquarters for Asia.
f. Principal Insurance Company (Hong Kong) Limited (a Hong Kong
Corporation) group life and group pension products.
g. Principal Trust Company (Asia) Limited (an Asia trust company).
h. Principal International de Chile, S.A. (a Chile Corporation) a
holding company.
i. Principal Mexico Compania de Seguros, S.A. de C.V. (a Mexico
Corporation) a life insurance company (individual and group),
personal accidents.
j. Principal Pensiones, S.A. de C.V. (a Mexico Corporation) a single
premium annuity.
k. Principal Afore, S.A. de C.V. (a Mexico Corporation), a pension
administration company.
l. Principal Consulting (India) Private Limited (an India
corporation) an India consulting company.
Subsidiary wholly-owned by Principal International Espana, S.A. de
Seguros de Vida:
a. Princor International Espana Sociedad Anonima de Agencia de
Seguros (a Spain Corporation) an insurance agency.
Subsidiary wholly-owned by Principal International (Asia) Limited
(Hong Kong):
a. BT Funds Management (Asia) Limited (a Hong Kong Corporation) an
asset management company.
Subsidiaries wholly-owned by Principal International Argentina, S.A.:
a. Principal Retiro Compania de Seguros de Retiro, S.A. (an
Argentina Corporation) an individual annuity/employee benefit
company.
b. Principal Life Compania de Seguros, S.A. (an Argentina
Corporation) a life insurance company.
Subsidiary wholly-owned by Principal International de Chile, S.A.:
a. Principal Compania de Seguros de Vida Chile S.A. (a Chile
Corporation) life insurance and annuity company.
Subsidiary wholly-owned by Principal Compania de Seguros de Vida Chile
S.A.:
a. Andueza & Principal Creditos Hipotecarios S.A. (a Chile
Corporation) a residential mortgage company.
Subsidiary wholly-owned by Principal Afore, S.A. de C.V.:
a. Siefore Principal, S.A. de C.V. (a Mexico Corporation) an
investment fund company.
tem 25. 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 26. Business or Other Connection of Investment Adviser
A complete list of the officers and directors of the investment adviser,
Principal 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.
A complete list of the officers and directors of the investment adviser,
Principal 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.
John E. Aschenbrenner Principal Senior Vice President
Director Financial Group Principal Life Insurance
Company
Craig R. Barnes Same President & Chief Executive
Vice President Officer, Invista Capital
Management LLC
*Craig L. Bassett Same See Part B
Treasurer
*Michael J. Beer Same See Part B
Executive Vice President
David J. Drury Same Chief Executive Officer
Director and Chairman of the Board
Principal Life
Insurance Company
*Ralph C. Eucher Same See Part B
President and Director
*Arthur S. Filean Same See Part B
Vice President
Dennis P. Francis Same Senior Vice President
Director Principal Life
Insurance Company
Paul N. Germain Same Vice President -
Vice President - Mutual Fund Operations
Mutual Fund Operations Princor Financial Services
Corporation
*Ernest H. Gillum Same See Part B
Vice President - Compliance
& Product Development
Thomas J. Graf Same Senior Vice President
Director Principal 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 Life
Insurance Company
Ellen Z. Lamale Same Vice President & Chief Actuary
Director Principal Life Insurance
Company
Julia M. Lawler Same Second Vice President
Director Principal Life Insurance
Company
Gregg R. Narber Same Senior Vice President and
Director General Counsel
Principal Life
Insurance Company
Richard L. Prey Same Senior Vice President
Director Principal Life Insurance
Company
Layne A. Rasmussen Same Controller
Controller - Princor Financial Services
Mutual Funds Corporation
Elizabeth R. Ring Same Controller- Broker Dealer
Controller Operations
Princor Financial Services
Corporation
*Michael D. Roughton Same See Part B
Counsel
Jean B. Schustek Same Product Compliance Officer -
Product Compliance Officer - Princor Financial Services
Registered Products Corporation
Principal Management Corporation serves as investment adviser and dividend
disbursing and transfer agent for, 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 LargeCap
Stock Index Fund, Inc., Principal Limited Term Bond Fund, Inc., Principal MidCap
Fund, Inc., Principal Partners Aggressive Growth Fund, Inc., Principal Partners
LargeCap Growth Fund, Inc., Principal Partners MidCap Growth Fund, Inc.,
Principal Real Estate Fund, Inc., Principal SmallCap Fund, Inc., Principal
Special Markets Fund, Inc., Principal Tax-Exempt Bond Fund, Inc., Principal
Utilities Fund, Inc., Principal Variable Contracts Fund, Inc. - funds sponsored
by Principal Life Insurance Company.
Item 27. Principal Underwriters
(a) Princor Financial Services Corporation, principal underwriter for
Registrant, acts as principal underwriter for, 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
LargeCap Stock Index Fund, Inc., Principal Limited Term Bond Fund, Inc.,
Principal MidCap Fund, Inc., Principal Partners Aggressive Growth Fund, Inc.,
Principal Partners LargeCap Growth Fund, Inc., Principal Partners MidCap Growth
Fund, Inc., Principal Real Estate Fund, Inc., Principal SmallCap Fund, Inc.,
Principal Special Markets Fund, Inc., Principal Tax-Exempt Bond Fund, Inc.,
Principal Utilities Fund, Inc., Principal Variable Contracts Fund, Inc. and for
variable annuity contracts participating in Principal 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 Section 408 of
the Internal Revenue Code, and for variable life insurance contracts issued by
Principal 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
John E. Aschenbrenner Director Director
Principal
Financial Group
Des Moines, IA 50392
Robert W. Baehr Marketing Services None
Principal Officer
Financial Group
Des Moines, IA 50392
Craig L. Bassett Treasurer Treasurer
Principal
Financial Group
Des Moines, IA 50392
Michael J. Beer Executive Vice President Financial Officer
Principal
Financial Group
Des Moines, IA 50392
Jerald L. Bogart Insurance License Officer None
Principal
Financial Group
Des Moines, IA 50392
David J. Drury Director None
Principal
Financial Group
Des Moines, IA 50392
Ralph C. Eucher Director and President and
Principal President Director
Financial Group
Des Moines, IA 50392
Arthur S. Filean Vice President Vice President and
Principal Secretary
Financial Group
Des Moines, IA 50392
Dennis P. Francis Director None
Principal
Financial Group
Des Moines, IA 50392
Paul N. Germain Vice President- None
Principal Mutual Fund Operations
Financial Group
Des Moines, IA 50392
Ernest H. Gillum Vice President- Assistant Vice
Principal Compliance and Product President
Financial Group Development
Des Moines, IA 50392
Thomas J. Graf Director None
Principal
Financial Group
Des Moines, IA 50392
J. Barry Griswell Director and Director and
Principal Chairman of the Chairman of the
Financial Group Board Board
Des Moines, IA 50392
Susan R. Haupts Marketing Officer None
Principal
Financial Group
Des Moines, IA 50392
Joyce N. Hoffman Vice President and None
Principal Corporate Secretary
Financial Group
Des Moines, IA 50392
Kraig L. Kuhlers Marketing Officer None
Principal
Financial Group
Des Moines, IA 50392
Ellen Z. Lamale Director None
Principal
Financial Group
Des Moines, IA 50392
Julia M. Lawler Director None
Principal
Financial Group
Des Moines, IA 50392
John R. Lepley Senior Vice None
Principal President - Marketing
Financial Group and Distribution
Des Moines, IA 50392
Gregg R. Narber Director None
Principal
Financial Group
Des Moines, IA 50392
Kelly A. Paul Systems & Technology None
Principal Officer
Financial Group
Des Moines, IA 50392
Elise M. Pilkington Assistant Director - None
Principal Retirement Consulting
Financial Group
Des Moines, IA 50392
Richard L. Prey Director None
Principal
Financial Group
Des Moines, IA 50392
Layne A. Rasmussen Controller-Mutual Funds None
Principal
Financial Group
Des Moines, IA 50392
Martin R. Richardson Operations Officer- None
Principal Broker/Dealer Services
Financial Group
Des Moines, IA 50392
Elizabeth R. Ring Controller None
Principal
Financial Group
Des Moines, IA 50392
Michael D. Roughton Counsel Counsel
Principal
Financial Group
Des Moines, IA 50392
Jean B. Schustek Product Compliance Officer- None
Principal Registered Products
Financial Group
Des Moines, IA 50392
Kyle R. Selberg Vice President- None
Principal Marketing
Financial Group
Des Moines, IA 50392
Minoo Spellerberg Compliance Officer None
Principal
Financial Group
Des Moines, IA 50392
Roger C. Stroud Assistant Director- None
Principal Marketing
Financial Group
Des Moines, IA 50392
(c) Inapplicable.
Item 28. 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 Life
Insurance Company home office building, The Principal Financial Group, Des
Moines, Iowa 50392.
Item 29. Management Services
Inapplicable.
Item 30. 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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940 the Registrant has duly caused this Amendment to the
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 29th day of
December, 1999.
Principal Partners Aggressive Growth Fund, Inc.
(Registrant)
By /s/ R. C. Eucher
--------------------------------------
R. C. Eucher
President and Director
Attest:
/s/ A. S. Filean
- --------------------------------------
A. S. Filean
Vice President and Secretary
Pursuant to the requirement of the Securities Act of 1933, this Amendment to the
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ R. C. Eucher
_____________________________ President and Director
R. C. Eucher (Principal Executive Officer) 12/29/1999
(J. B. Griswell)*
_____________________________ Director and
J. B. Griswell Chairman of the Board 12/29/1999
/s/ M. J. Beer
_____________________________ Financial Officer (Principal
M. J. Beer Financial and Accounting Officer) 12/29/1999
(J. E. Aschenbrenner)*
_____________________________ Director
J. E. Aschenbrenner 12/29/1999
(J. D. Davis)*
_____________________________ Director
J. D. Davis 12/29/1999
(P. A. Ferguson)*
_____________________________ Director
P. A. Ferguson 12/29/1999
(R. W. Gilbert)*
_____________________________ Director
R. W. Gilbert 12/29/1999
(W. C. Kimball)*
_____________________________ Director
W. C. Kimball 12/29/1999
(B. A. Lukavsky)*
_____________________________ Director
B. A. Lukavsky 12/29/1999
By /s/ R. C. Eucher
-------------------------------------
R. C. Eucher
President and Director
*Pursuant to Powers of Attorney
Previously Filed or Included
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints R. C. Eucher, J. B. Griswell, M.
D. Roughton, E. H. Gillum 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 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 13th day of
December, 1999.
/s/ John E. Aschenbrenner
____________________________
J. E. Aschenbrenner
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints R. C. Eucher, J. B. Griswell, M.
D. Roughton, E. H. Gillum 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 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 13th day of
December, 1999.
/s/ James D. Davis
____________________________
J. D. Davis
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints J. B. Griswell, M. D. Roughton,
E. H. Gillum 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 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 13th day of
December, 1999.
/s/ Ralph C. Eucher
____________________________
R. C. Eucher
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints R. C. Eucher, J. B. Griswell, M.
D. Roughton, E. H. Gillum 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 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 13th day of
December, 1999.
/s/ P. A. Ferguson
____________________________
P. A. Ferguson
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints R. C. Eucher, J. B. Griswell, M.
D. Roughton, E. H. Gillum 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 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 13th day of
December, 1999.
/s/ Richard W. Gilbert
____________________________
R. W. Gilbert
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints R. C. Eucher, M. D. Roughton, E.
H. Gillum 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 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 13th day of
December, 1999.
/s/ J. Barry Griswell
____________________________
J. B. Griswell
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints R. C. Eucher, J. B. Griswell, M.
D. Roughton, E. H. Gillum 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 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 13th day of
December, 1999.
/s/ W. C. Kimball
____________________________
W. C. Kimball
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints R. C. Eucher, J. B. Griswell, M.
D. Roughton, E. H. Gillum 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 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 13th day of
December, 1999.
/s/ B. A. Lukavsky
____________________________
B. A. Lukavsky
MANAGEMENT AGREEMENT
AGREEMENT to be effective October 27, 1999, by and between PRINCIPAL
PARTNERS AGGRESSIVE GROWTH FUND, INC., a Maryland corporation (hereinafter
called the "Fund") and PRINCIPAL 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 Life
Insurance Company, or an affiliate thereof; provided, however, that entry into
any such agreements shall not relieve the Manager of its duty to review and
monitor the performance of such persons to the extent provided in the agreements
with such persons or as determined from time to time by the Board of Directors.
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.
0.90% on all assets
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 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.
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;
(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;
(g) The cost of meetings of shareholders; and
(h) The fees and expenses of transfer and paying agent and registrar
services.
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 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 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 PARTNERS AGGRESSIVE GROWTH FUND, INC.
By /s/Arthur S. Filean
Arthur S. Filean, Vice President
PRINCIPAL MANAGEMENT CORPORATION
By /s/Ralph C. Eucher
Ralph C. Eucher, President
PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND, INC.
SUB-ADVISORY AGREEMENT
AGREEMENT executed as of the 27th day of October, 1999, by and between PRINCIPAL
MANAGEMENT CORPORATION, an Iowa Corporation (hereinafter called "the Manager")
and MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT INC.
(hereinafter called "the Sub-Advisor").
W I T N E S S E T H:
WHEREAS, the Manager is the manager and investment adviser to Principal Partners
Aggressive Growth 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 the Sub-Advisor to furnish it with
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 the Sub-Advisor desires to furnish such services; and
WHEREAS, the Manager has furnished the Sub-Advisor with copies properly
certified or authenticated of each of the following and will promptly provide
the Sub-Advisor with copies properly certified or authenticated of any amendment
or supplement thereto:
(a) Management Agreement (the "Management Agreement") between the Manager
and the Fund;
(b) The Fund's registration statement as filed with the Securities and
Exchange Commission (the "Registration Statement");
(c) The Fund's Articles of Incorporation and By-laws;
NOW, THEREFORE, in consideration of the promises and the terms and conditions
hereinafter set forth, the parties agree as follows:
1. Appointment of Sub-Advisor
In accordance with and subject to the Management Agreement, the Manager
hereby appoints the Sub-Advisor to perform the 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, for the period and on the terms hereinafter
set forth. The Sub-Advisor accepts such appointment and agrees to
furnish the services hereinafter set forth for the compensation herein
provided. The Sub-Advisor 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 the Sub-Advisor
(a) Provide investment advisory services, including but not limited to
research, advice and supervision for the Fund.
(b) 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
portfolio of the Fund consistent with the Fund=s investment
objective and policies as set forth in the Registration Statement,
as may be amended from time to time.
c) Implement such of its recommended investment program as the Board
of Directors (or any appropriate committee of the Board) shall
approve, by placing orders for the purchase and sale of
securities, subject always to the provisions of the Fund's
Articles of Incorporation and Bylaws and the requirements of the
1940 Act, as each of the same shall be from time to time in
effect.
(d) Advise and assist the officers of the Fund in taking such steps as
are necessary or appropriate to carry out the decisions of the
Fund's Board of Directors, and any appropriate committees of such
Board, regarding the general conduct of the investment business of
the Fund.
(e) 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.
(f) Provide determinations of the fair value of certain securities
when market quotations are not readily available for purposes of
calculating net asset value in accordance with procedures and
methods established by the Fund's Board of Directors.
(g) Furnish, at its own expense, (i) all necessary investment and
management facilities, including salaries of clerical and other
personnel required for it to execute its duties faithfully, and
(ii) administrative facilities, including bookkeeping, clerical
personnel and equipment necessary for the efficient conduct of
the investment advisory affairs of the Fund. Except for expenses
specifically assumed or agreed to be paid by the Sub-Advisor
under this Agreement, the Sub-Advisor shall not be liable for any
expenses of the Manager or the Fund including, without
limitation, (i) interest and taxes, (ii) brokerage commissions
and other costs in connection with the purchase or sale of
securities or other investment instruments with respect to the
Fund, and (iii) custodian fees and expenses.
(h) Select brokers and dealers to effect all transactions for the
Fund (which may include brokers or dealers affiliated with the
Sub-Advisor, provided such transactions comply with applicable
requirements under the 1940 Act), place all necessary orders with
brokers, dealers, or issuers, and negotiate brokerage commissions
if applicable. To the extent consistent with applicable law,
purchase or sell orders for the Fund may be aggregated with
contemporaneous purchase or sell orders of other clients of the
Sub-Advisor. The Sub-Advisor shall use its best efforts to obtain
execution of transactions for the Fund at prices that are
advantageous to the Fund and at commission rates that are
reasonable in relation to the benefits received.
(i) Maintain all accounts, books and records with respect to the Fund
as are required of an investment advisor of a registered
investment company pursuant to the 1940 Act and Investment
Advisers Act of 1940 (the "Investment Advisers Act") and the rules
thereunder.
(j) Provide to the Manager a copy of its Form ADV as filed with the
Securities and Exchange Commission, as amended from time to time,
and a list of the persons whom the Sub-Advisor wishes to have
authorized to give written and/or oral instructions to custodians
of assets of the Fund.
3. Compensation
As full compensation for all services rendered and obligations assumed
by the Sub-Advisor hereunder with respect to the Fund, the Manager
shall pay the compensation specified in Appendix A to this Agreement.
Although the Manager may from time to time waive the compensation it is
entitled to receive from the Fund, such waiver will have no effect on
the Manager's obligation to pay the Sub-Advisor the compensation
provided for herein.
4. Liability of Sub-Advisor
Neither the Sub-Advisor nor any of its directors, officers or employees
shall be liable to the Manager, the Fund or any shareholder of the Fund
for any loss suffered by the Manager, the Fund or any shareholder of
the Fund resulting from any error of judgment made in the good faith
exercise of the Sub-Advisor's investment discretion in connection with
selecting Fund investments except for losses resulting from willful
misfeasance, bad faith or gross negligence of, or from reckless
disregard of, the duties of the Sub-Advisor or any of its directors,
officers or employees. The Manager shall hold harmless and indemnify
the Sub-Advisor for any loss, liability, cost, damage or expense
(including reasonable attorneys fees and costs) arising from any claim
or demand by any past or present shareholder of the Fund that is not
based upon the obligations of the Sub-Advisor with respect to the Fund
under this Agreement. The Manager acknowledges and agrees that the
Sub-Advisor makes no representation or warranty, express or implied,
that any level of performance or investment results will be achieved by
the Fund or that the Fund will perform comparably with any standard or
index, including other clients of the Sub-Advisor, whether public or
private.
5. Supplemental Arrangements
The Sub-Advisor may enter into arrangements with other persons
affiliated with the Sub-Advisor for the provision of certain personnel
and facilities to the Sub-Advisor to better enable it to fulfill its
obligations under this Agreement.
6. Regulation
The Sub-Advisor shall submit to all regulatory and administrative
bodies having jurisdiction over the services provided pursuant to this
Agreement any information, reports or other material which any such
body may request or require pursuant to applicable laws and
regulations.
7. Duration and Termination of This Agreement
This Agreement shall become effective as of the date of execution and,
unless otherwise terminated, shall remain in force for two years from
the date of execution and 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 a vote of a majority of the directors of the Fund who are not
interested persons of the Manager, Principal Life Insurance Company,
the Sub-Advisor or the Fund cast in person at a meeting called for the
purpose of voting on such approval.
If the shareholders of the Fund fail to approve the Agreement or any
continuance of the Agreement, the Sub-Advisor will continue to act as
Sub-Advisor with respect to the Fund pending the required approval of
the Agreement or its continuance or of any contract with the
Sub-Advisor or a different manager or sub-advisor or other definitive
action; provided, that the compensation received by the Sub-Advisor in
respect to the Fund during such period is in compliance with Rule 15a-4
under the 1940 Act.
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, the Sub-Advisor or the Manager or by vote of a majority of
the outstanding voting securities of the Fund. This Agreement shall
automatically terminate in the event of its assignment or upon
termination of the Management Agreement. In interpreting the provisions
of this Section 7, the definitions contained in Section 2(a) of the
1940 Act (particularly the definitions of "interested person,"
"assignment" and "voting security") shall be applied.
8. Amendment of this Agreement
This Agreement may be amended at any time by mutual consent of the
parties, provided that, if required by law, such amendment shall also
have been approved by vote of the holders of a majority of the
outstanding voting securities of the Fund and by vote of a majority of
the Directors of the Fund who are not interested persons of the
Manager, the Sub-Advisor, Principal Life Insurance Company or the Fund
cast in person at a meeting called for the purpose of voting on such
approval.
9. 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 the Manager for this purpose shall be the
Principal Financial Group, Des Moines, Iowa 50392-0200, and the
address of the Sub-Advisor shall be 1221 Avenue of the Americas,
New York, NY 10020.
(c) Each party will promptly notify the other in writing of the
occurrence of any of the following events:
(1) the party fails to be registered as an investment adviser
under the Investment Advisers Act or under the laws of any
jurisdiction in which the party is required to be registered
as an investment adviser in order to perform its obligations
under this Agreement.
(2) the party is served or otherwise receives notice of any
action, suit, proceeding, inquiry or investigation, at law or
in equity, before or by any court, public board or body,
involving the affairs of the Fund.
(d) This Agreement contains the entire understanding and agreement of
the parties.
(e) No written materials naming or relating to the Sub-Advisor, its
employees or its affiliated companies, other than materials
provided or approved by the Sub-Advisor, shall be used by the
Manager, the Fund or their affiliates in offering or marketing
shares of the Fund.
IN WITNESS WHEREOF, the parties have duly executed this Agreement on the
date first above written.
PRINCIPAL MANAGEMENT CORPORATION
By /s/A. S. Filean
A. S. Filean, Vice President
MORGAN STANLEY DEAN WITTER INVESTMENT
MANAGEMENT INC.
By /s/Philip A. Friedman
Philip A. Friedman
Attachment I-1
APPENDIX A
The Sub-Advisor shall serve as investment sub-advisor for the Fund. With
respect to the Fund, the Manager will pay the Sub-Advisor, as full compensation
for all services provided under this Agreement, a fee computed at an annual rate
as follows (the "Sub-Advisor Percentage Fee"):
First $200 million.........................0.30%
Next $100 million..........................0.25%
Thereafter.................................0.20%
The Sub-Advisor Percentage Fee shall be accrued for each calendar day and
the sum of the daily fee accruals shall be paid monthly to the Sub-Advisor. The
daily fee accruals will be computed by multiplying the fraction of one over the
number of calendar days in the year by the applicable annual rate described
above and multiplying this product by the net assets of the Fund as determined
in accordance with the Fund=s prospectus and statement of additional information
as of the close of business on the previous business day on which the Fund was
open for business.
DISTRIBUTION AGREEMENT
Agreement to be effective October 27, 1999, by and between PRINCIPAL PARTNERS
AGGRESSIVE GROWTH 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 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 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 Partners Aggressive
Growth Fund, Inc. Princor Financial Services Corporation
By /s/A. S. Filean By /s/R. C. Eucher
A. S. Filean, Vice President R. C. Eucher, President
CUSTODY AGREEMENT
Agreement made as of this 28th day of October ,1999, between PRINCIPAL
PARTNERS AGGRESSIVE GROWTH FUND INC., a Maryland 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 One 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. "Authorized Persons" shall be deemed to include any person, whether or
not such person is an officer or employee 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.
2. "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.
3. "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.
4. "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 Authorized Persons, and the term Certificate shall also include
Instructions.
5. "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.
6. "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.
7. "Composite Currency Unit" shall mean the European Currency Unit or any
other composite unit consisting of the aggregate of specified amounts of
specified Currencies as such unit may be constituted from time to time.
8. "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.
9. "Currency" shall mean money denominated in a lawful currency of any
country or the European Currency Unit.
10. "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.
11. "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.
12. "Futures Contract" shall mean a Financial Futures Contract and/or Stock
Index Futures Contracts.
13. "Futures Contract Option" shall mean an option with respect to a
Futures Contract.
14. "FX Transaction" shall mean any transaction for the purchase by one
party of an agreed amount in one Currency against the sale by it to the other
party of an agreed amount in another Currency.
15. "Instructions" shall mean instructions communications transmitted by
electronic or telecommunications media including S.W.I.F.T.,
computer-to-computer interface, dedicated transmission line, facsimile
transmission signed by an Authorized Person and tested telex.
16. "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.
17. "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.
18. "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.
19. "Option" shall mean a Call Option, Covered Call Option, Stock Index
Option and/or a Put Option.
20. "Oral Instructions" shall mean verbal instructions actually received by
the Custodian from an Authorized Person or from a person reasonably believed by
the Custodian to be an Authorized Person.
21. "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.
22. "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.
23. "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.
24. "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 allocated
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.
25. "Series" shall mean the various portfolios, if any, of the Fund listed
on Appendix B hereto as amended from time to time.
26. "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.
27. "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.
28. "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 money 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 money 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 money 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 money is not
finally collected. The Fund shall deliver to the Custodian a certified
resolution of the Board of Directors of the Fund, substantially in the form of
Exhibit A hereto, approving, authorizing and instructing the Custodian on a
continuous and on-going basis to deposit in the Book-Entry System all Securities
eligible for deposit therein, regardless of the Series to which the same are
specifically allocated and to utilize 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, substantially in the form of Exhibit B hereto, approving,
authorizing and instructing the Custodian on a continuous and ongoing basis
until instructed to the contrary by a Certificate actually received by the
Custodian to deposit in the Depository all Securities specifically allocated to
such Series eligible for deposit therein, and to utilize 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 money 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 C 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 money 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
money 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, dividends and distributions due or payable;
(b) give notice to the Fund and present 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;
(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; and
(g) deliver to the Fund all notices, proxies, proxy soliciting
materials, consents and other written information (including, without
limitation, notices of tender offers and exchange offers, pendency of
calls, maturities of Securities and expiration of rights) relating to
Securities held pursuant to this Agreement which are actually received by the
Custodian, such proxies and other similar materials to be executed by the
registered owner (if Securities are registered otherwise than in the name of
the Fund), but without indicating the manner in which proxies or consents are
to be voted.
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 futures 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 money 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 money 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 money 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 money 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 money 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 of 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 identical Futures Contracts entered into; (d) the
delivery or settlement 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 money 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.
5. Notwithstanding any other provision in this Agreement to the contrary,
the Custodian shall deliver cash and Securities to a futures commission merchant
upon receipt of a Certificate from the Fund specifying: (a) the name of the
futures commission merchant; (b) the specific cash and Securities to be
delivered; (c) the date of such delivery; and (d) the date of the agreement
between the Fund and such futures commission merchant entered pursuant to Rule
17f-6 under the Investment Company Act 1940, as amended. Each delivery of such a
Certificate by the Fund shall constitute (x) a representation and warranty by
the Fund that the Rule 17f-6 agreement has been duly authorized, executed and
delivered by the Fund and the futures commission merchant and complies with Rule
17f-6, and (y) an agreement by the Fund that the Custodian shall not be liable
for the acts or omissions of any such futures commission merchant.
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 money 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) the
Series to which such Futures Contract Option was 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; (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 or 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 specifying: (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 money 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 money 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 money 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 Futures 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.
10. Notwithstanding any other provision in this Agreement to the contrary,
the Custodian shall deliver cash and Securities to a futures commission merchant
upon receipt of a Certificate from the Fund specifying: (a) the name of the
futures commission merchant; (b) the specific cash and Securities to be
delivered; (c) the date of such delivery; and (d) the date of the agreement
between the Fund and such futures commission merchant entered pursuant to Rule
17f-6 under the Investment Company Act 1940, as amended. Each delivery of such a
Certificate by the Fund shall constitute (x) a representation and warranty by
the Fund that the Rule 17f-6 agreement has been duly authorized, executed and
delivered by the Fund and the futures commission merchant and complies with Rule
17f-6, and (y) an agreement by the Fund that the Custodian shall not be liable
for the acts or omissions of any such futures commission merchant.
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 money 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 into 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 or Oral 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 money 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 XIV 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 statement, the Fund shall furnish to the Custodian
a Certificate 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.
PAYMENT OF DIVIDENDS OR DISTRIBUTIONS
1. The Fund shall furnish to the Custodian a copy of the resolution of the
Board of Directors of the Fund, certified by the Secretary or any Assistant
Secretary, either (i) setting forth with respect to the Series specified therein
the date of the declaration of a dividend or distribution, the date of payment
thereof, the record date as of which shareholders entitled to payment shall be
determined, the amount payable per Share of such Series to the shareholders of
record as of that date and the total amount payable to the Dividend Agent and
any sub-dividend agent or co-dividend agent of the Fund on the payment date, or
(ii) authorizing with respect to the Series specified therein the declaration of
dividends and distributions on a daily basis and authorizing the Custodian to
rely on Oral Instructions or a Certificate setting forth the date of the
declaration of such dividend or distribution, the date of payment thereof, the
record date as of which shareholders entitled to payment shall be determined,
the amount payable per Share of such Series to the shareholders of record as of
that date and the total amount payable to the Dividend Agent on the payment
date.
2. Upon the payment date specified in such resolution, Oral Instructions or
Certificate, as the case may be, the Custodian shall pay out of the money held
for the account of each Series the total amount payable to the Dividend Agent
and any sub-dividend agent or co-dividend agent of the Fund with respect to such
Series.
ARTICLE XIII.
SALE AND REDEMPTION OF SHARES
1. Whenever the Fund shall sell any Shares, it shall deliver to the
Custodian a Certificate duly specifying:
(a) the Series, the number of Shares sold, trade date, and price; and
(b) the amount of money to be received by the Custodian for the sale
of such Shares and specifically allocated to the separate account in the name
of such Series.
2. Upon receipt of such money from the Transfer Agent, the Custodian shall
credit such money to the separate account in the name of the Series for which
such money was received.
3. Upon issuance of any Shares of any Series described in the foregoing
provisions of this Article, the Custodian shall pay, out of the money held for
the account of such Series, all original issue or other taxes required to be
paid by the Fund in connection with such issuance upon the receipt of a
Certificate specifying the amount to be paid.
4. Except as provided hereinafter, whenever the Fund desires the Custodian
to make payment out of the money held by the Custodian hereunder in connection
with a redemption of any Shares, it shall furnish to the Custodian a Certificate
specifying:
(a) the number and Series of Shares redeemed; and
(b) the amount to be paid for such Shares.
5. Upon receipt from the Transfer Agent of an advice setting forth the
Series and number of Shares received by the Transfer Agent for redemption and
that such Shares are in good form for redemption, the Custodian shall make
payment to the Transfer Agent out of the money held in the separate account in
the name of the Series the total amount specified in the Certificate issued
pursuant to the foregoing paragraph 4 of this Article.
6. Notwithstanding the above provisions regarding the redemption of any
Shares, whenever any Shares are redeemed pursuant to any check redemption
privilege which may from time to time be offered by the Fund, the Custodian,
unless otherwise instructed by a Certificate, shall, upon receipt of an advice
from the Fund or its agent setting forth that the redemption is in good form for
redemption in accordance with the check redemption procedure, honor the check
presented as part of such check redemption privilege out of the money held in
the separate account of the Series of the Shares being redeemed.
ARTICLE XIV.
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 money 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, security
interest, and security entitlement in and to any property including any
investment property or any financial asset 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 XV.
INSTRUCTIONS
1. With respect to any software provided by the Custodian to a Fund in
order for the Fund to transmit Instructions to the Custodian (the "Software"),
the Custodian grants to such Fund a personal, nontransferable and nonexclusive
license to use the Software solely for the purpose of transmitting Instructions
to, and receiving communications from, the Custodian in connection with its
account(s). The Fund shall use the Software solely for its own internal and
proper business purposes, and not in the operation of a service bureau, and
agrees not to sell, reproduce, lease or otherwise provide, directly or
indirectly, the Software or any portion thereof to any third party without the
prior written consent of the Custodian. The Fund acknowledges that the Custodian
and its suppliers have title and exclusive proprietary rights to the Software,
including any trade secrets or other ideas, concepts, know how, methodologies,
or information incorporated therein and the exclusive rights to any copyrights,
trademarks and patents (including registrations and applications for
registration of either) or statutory or legal protections available with respect
thereof. The Fund further acknowledges that all or a part of the Software may be
copyrighted or trademarked (or a registration or claim made therefor) by the
Custodian or its suppliers. The Fund shall not take any action with respect to
the Software inconsistent with the foregoing acknowledgments, nor shall the Fund
attempt to decompile, reverse engineer or modify the Software. The Fund may not
copy, sell, lease or provide, directly or indirectly, any of the Software or any
portion thereof to any other person or entity without the Custodian's prior
written consent. The Fund may not remove any statutory copyright notice, or
other notice including the software or on any media containing the Software. The
Fund shall reproduce any such notice on any reproduction of the Software and
shall add statutory copyright notice or other notice to the Software or media
upon the Bank's request. Custodian agrees to provide reasonable training,
instruction manuals and access to Custodian's "help desk" in connection with the
Fund's user support necessary to use of the Software. At the Fund's request,
Custodian agrees to permit reasonable testing of the Software by the Fund.
2. The Fund shall obtain and maintain at its own cost and expense all
equipment and services, including but not limited to communications services,
necessary for it to utilize the Software and transmit Instructions to the
Custodian. The Custodian shall not be responsible for the reliability,
compatibility with the Software or availability of any such equipment or
services or the performance or nonperformance by any nonparty to this Custody
Agreement.
3. The Fund acknowledges that the Software, all data bases made available
to the Fund by utilizing the Software (other than data bases relating solely to
the assets of the Fund and transactions with respect thereto), and any
proprietary data, processes, information and documentation (other than which are
or become part of the public domain or are legally required to be made available
to the public) (collectively, the "Information"), are the exclusive and
confidential property of the Custodian. The Fund shall keep the Information
confidential by using the same care and discretion that the Fund uses with
respect to its own confidential property and trade secrets and shall neither
make nor permit any disclosure without the prior written consent of the
Custodian. Upon termination of this Agreement or the Software license granted
hereunder for any reason, the Fund shall return to the Custodian all copies of
the Information which are in its possession or under its control or which the
Fund distributed to third parties. The provisions of this Article shall not
affect the copyright status of any of the Information which may be copyrighted
and shall apply to all Information whether or not copyrighted.
4. The Custodian reserves the right to modify, at its own expense, the
Software from time to time without prior notice and the Fund shall install new
releases of the Software as the Custodian may direct. The Fund agrees not to
modify or attempt to modify the Software without the Custodian's prior written
consent. The Fund acknowledges that any modifications to the Software, whether
by the Fund or the Custodian and whether with or without the Custodian's
consent, shall become the property of the Custodian.
5. The Custodian and its manufacturers and suppliers make no warranties or
representations of any kind with regard to the Software or the method(s) by
which the Fund may transmit Instructions to the Custodian, express or implied,
including but not limited to any implied warranties of merchantability or
fitness for a particular purpose.
6. EXPORT RESTRICTIONS. EXPORT OF THE SOFTWARE IS PROHIBITED BY UNITED
STATES LAW. THE FUND AGREES THAT IT WILL NOT UNDER ANY CIRCUMSTANCES RESELL,
DIVERT, TRANSFER, TRANSSHIP OR OTHERWISE DISPOSE OF THE SOFTWARE (IN ANY FORM)
IN OR TO ANY OTHER COUNTRY. IF THE CUSTODIAN DELIVERS THE SOFTWARE TO THE FUND
OUTSIDE THE UNITED STATES, THE SOFTWARE WAS EXPORTED FROM THE UNITED STATES IN
ACCORDANCE WITH EXPORT ADMINISTRATIVE REGULATIONS. DIVERSION CONTRARY TO U.S.
LAWS PROHIBITED. The Fund hereby authorizes Custodian to report its name and
address to government agencies to which Custodian is required to provide such
information by law.
7. Where the method for transmitting Instructions by the Fund involves an
automatic systems acknowledgment by the Custodian of its receipt of such
Instructions, then in the absence of such acknowledgment the Custodian shall not
be liable for any failure to act pursuant to such Instructions, the Fund may not
claim that such Instructions were received by the Custodian, and the Fund shall
deliver a Certificate by some other means.
8. (a) The Fund agrees that where it delivers to the Custodian
Instructions hereunder, it shall be the Fund's sole responsibility to ensure
that only persons duly authorized by the Fund transmit such Instructions to the
Custodian. The Fund will cause all persons transmitting Instructions to the
Custodian to treat applicable user and authorization codes, passwords and
authentication keys with extreme care, and irrevocably authorizes the Custodian
to act in accordance with and rely upon Instructions received by it pursuant
hereto.
(b) The Fund hereby represents, acknowledges and agrees that it is
fully informed of the protections and risks associated with the various methods
of transmitting Instructions to the Custodian and that there may be more
secure methods of transmitting instructions to the Custodian than the
method(s) selected by the Fund. The Fund hereby agrees that the security
procedures (if any) to be followed in connection with the Fund's transmission
of Instructions provide to it a commercially reasonable degree of protection
in light of its particular needs and circumstances.
9. The Fund hereby represents, warrants and covenants to the Custodian that
this Agreement has been duly approved by a resolution of its Board of Directors,
and that its transmission of Instructions pursuant hereto shall at all times
comply with the Investment Company Act.
10. The Fund shall notify the Custodian of any errors, omissions or
interruptions in, or delay or unavailability of, its ability to send
Instructions as promptly as practicable, and in any event within 24 hours after
the earliest of (i) discovery thereof, (ii) the Business Day on which discovery
should have occurred through the exercise of reasonable care and (iii) in the
case of any error, the date of actual receipt of the earliest notice which
reflects such error, it being agreed that discovery and receipt of notice may
only occur on a business day. The Custodian shall promptly advise the Fund
whenever the Custodian learns of any errors, omissions or interruption in, or
delay or unavailability of, the Fund's ability to send Instructions.
11. Custodian will indemnify and hold harmless the Fund with respect to any
liability, damages, loss or claim incurred by or brought against Fund by reason
any claim or infringement against any patent, copyright, license or other
property right arising out or by reason of the Fund's use of the Software in the
form provided under this Section. Custodian at its own expense will defend such
action or claim brought against Fund to the extent that it is based on a claim
that the Software in the form provided by Custodian infringes any patents,
copyrights, license or other property right, provided that Custodian is provided
with reasonable written notice of such claim, provided that the Fund has not
settled, compromised or confessed any such claim without the Custodian's written
consent, in which event Custodian shall have no liability or obligation
hereunder, and provided Fund cooperates with and assists Custodian in the
defense of such claim. Custodian shall have the right to control the defense of
all such claims, lawsuits and other proceedings. If, as a result of any claim of
infringement against any patent, copyright, license or other property right,
Custodian is enjoined from using the Software, or if Custodian believes that the
System is likely to become the subject of a claim of infringement, Custodian at
its option may in its sole discretion either (a) at its expenses procure the
right for the Fund to continue to use the Software, or (b), replace or modify
the Software so as to make it non-infringing, or (c) may discontinue the license
granted herein upon written notice to Fund.
ARTICLE XVI.
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' Securities for which the primary market is outside the United
States ("Foreign Securities") and other assets, the foreign banking
institutions, foreign branches of U.S. banks, and foreign securities
depositories and clearing agencies designated on Schedule I hereto ("Foreign
Sub-Custodians"). 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 delivery of a Certificate to the Custodian in connection with a
transaction involving the use of a Foreign Sub-Custodian shall constitute a
representation and warranty by the Fund that its Board of Directors, or its
third party foreign custody manager as defined in Rule 17f-5 under the
Investment Company Act of 1940, as amended, if any, has determined that use of
such Foreign Sub-Custodian satisfies the requirements of such Investment Company
Act of 1940 and such Rule 17f-5 thereunder.
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 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.
7. 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.
8. 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 XVII.
FX TRANSACTIONS
1. Whenever the Fund shall enter into an FX Transaction, the Fund shall
promptly deliver to the Custodian a Certificate or Oral Instructions specifying
with respect to such FX Transaction: (a) the Series to which such FX Transaction
is specifically allocated; (b) the type and amount of Currency to be purchased
by the Fund; (c) the type and amount of Currency to be sold by the Fund; (d) the
date on which the Currency to be purchased is to be delivered; (e) the date on
which the Currency to be sold is to be delivered; and (f) the name of the person
from whom or through whom such currencies are to be purchased and sold. Unless
otherwise instructed by a Certificate or Oral Instructions, the Custodian shall
deliver, or shall instruct a Foreign Sub-Custodian to deliver, the Currency to
be sold on the date on which such delivery is to be made, as set forth in the
Certificate, and shall receive, or instruct a Foreign Sub-Custodian to receive,
the Currency to be purchased on the date as set forth in the Certificate.
2. Where the Currency to be sold is to be delivered on the same day as the
Currency to be purchased, as specified in the Certificate or Oral Instructions,
the Custodian or a Foreign Sub-Custodian may arrange for such deliveries and
receipts to be made in accordance with the customs prevailing from time to time
among brokers or dealers in Currencies, and such receipt and delivery may not be
completed simultaneously. The Fund assumes all responsibility and liability for
all credit risks involved in connection with such receipts and deliveries, which
responsibility and liability shall continue until the Currency to be received by
the Fund has been received in full.
3. Any FX Transaction effected by the Custodian in connection with this
Agreement may be entered with the Custodian, any office, branch or subsidiary of
The Bank of New York Company, Inc., or any Foreign Sub-Custodian acting as
principal or otherwise through customary banking channels. The Fund may issue a
standing Certificate with respect to FX Transaction but the Custodian may
establish rules or limitations concerning any foreign exchange facility made
available to the Fund. The Fund shall bear all risks of investing in Securities
or holding Currency. Without limiting the foregoing, the Fund shall bear the
risks that rules or procedures imposed by a Foreign Sub-Custodian or foreign
depositories, exchange controls, asset freezes or other laws, rules, regulations
or orders shall prohibit or impose burdens or costs on the transfer to, by or
for the account of the Fund of Securities or any cash held outside the Fund's
jurisdiction or denominated in Currency other than its home jurisdiction or the
conversion of cash from one Currency into another currency. The Custodian shall
not be obligated to substitute another Currency for a Currency (including a
Currency that is a component of a Composite Currency Unit) whose
transferability, convertibility or availability has been affected by such law,
regulation, rule or procedure. Neither the Custodian nor any Foreign
Sub-Custodian shall be liable to the Fund for any loss resulting from any of the
foregoing events.
ARTICLE XVIII.
CONCERNING THE CUSTODIAN
1. Except as hereinafter provided, or as provided in Article XVI, 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 Securities, 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 XVI 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 money 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 Authorized Person.
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. The Custodian shall promptly after receipt of notice of a claim or
commencement of any action, notify the Fund in writing of the claim or the
commencement of such action, and in the event that such prompt notice is not
provided the Fund shall not be liable to the extent the delay in providing
prompt notice increases the liability of the Fund. The Custodian shall not
settle any claim or action without the Fund's prior written consent, which
consent shall not be unreasonably withheld.
15. Subject to the foregoing provisions of this Agreement, including,
without limitation, those contained in Article XVI and XVII 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 liability 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 XIX.
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 money 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 money 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 XX.
MISCELLANEOUS
1. Annexed hereto as Appendix A is a Certificate signed by two of the
present Authorized Persons of the Fund under its seal, setting forth the names
and the signatures of the present Authorized Persons of the Fund. The Fund
agrees to furnish to the Custodian a new Certificate in similar form in the
event that any such present Authorized Person ceases to be an Authorized Person
of the Fund, or in the event that other or additional Authorized Persons 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 or Oral Instructions upon the signatures of the Authorized Persons 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 officers, thereunto duly authorized and their
respective seals to be hereunto affixed, as of the day and year first above
written.
PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND INC.
[SEAL] By: /s/ A. S. Filean
Arthur S. Filean
Vice President and Secretary
Attest:
/s/ Barbara R. Duncan
THE BANK OF NEW YORK
[SEAL] By:
Name: /s/ Stephen E. Grunston
Title: Vice President
Attest:
/s/ Marjorie McLaughlin
APPENDIX A
I, Michael J. Beer, Financial Officer and I, Arthur S. Filean Vice
President and Secretary of PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND INC., a
Maryland corporation (the "Fund"), do hereby certify that:
The following persons have been duly authorized in conformity with the
Fund's Declaration of Trust and By-Laws to execute any Certificate, instruction,
notice or other instrument on behalf of the Fund, and the signatures set forth
opposite their respective names are their true and correct signatures:
Name Position Signature
Ralph C. Eucher President /s/ Ralph C. Eucher
Arthur S. Filean Vice President and Secretary /s/ A. S. Filean
Michael J. Beer Financial Officer /s/ Mike Beer
Craig L. Bassett Treasurer /s/ C. L. Bassett
Michael D. Roughton Counsel /s/ Michael Roughton
Michael W. Cumings Assistant Counsel /s/ Michael W. Cumings
Jane E. Karli Assistant Treasurer /s/ J. E. Karli
Ernest H. Gillum Assistant Secretary /s/ Ernest H. Gillum
APPENDIX B
SERIES
APPENDIX C
I, M. McLaughlin, 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, Arthur S. Filean, hereby certifies that he or she is
the duly elected and acting Vice President and Secretary of PRINCIPAL PARTNERS
AGGRESSIVE GROWTH FUND INC., 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 September 13, 1999, 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 October 28 , 1999, (the "Custody Agreement") is authorized and
instructed on a continuous and ongoing basis to deposit in the
Book-Entry System, as defined in the Custody Agreement, all securities
eligible for deposit therein, regardless of the Series to which the
same are specifically allocated, and to utilize the Book-Entry System
to the extent possible in connection with its performance thereunder,
including, without limitation, in connection with settlements of
purchases and sales of securities, loans of securities, and deliveries
and returns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of
PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND INC., as of the day of
November 16, 1999.
/s/ A. S. Filean
Arthur S. Filean
Vice President and Secretary
[SEAL]
/s/ Barbara R. Duncan
EXHIBIT B
CERTIFICATION
The undersigned, Arthur S. Filean, hereby certifies that he or she is
the duly elected and acting of PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND INC., 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 September 13, 1999, 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 October 28, 1999, (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 deposit in the Depository, as defined in the Custody
Agreement, all securities eligible for deposit therein, regardless of
the Series to which the same are specifically allocated, and to utilize
the Depository to the extent possible in connection with its
performance thereunder, including, without limitation, in connection
with settlements of purchases and sales of securities, loans of
securities, and deliveries and returns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of
PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND INC., as of the day of
November 16, 1999.
/s/ A. S. Filean
Arthur S. Filean
Vice President and Secretary
[SEAL]
/s/ Barbara R. Duncan
EXHIBIT B-1
CERTIFICATION
The undersigned, Arthur S. Filean, hereby certifies that he or she is
the duly elected and acting Vice President and Secretary of PRINCIPAL PARTNERS
AGGRESSIVE GROWTH FUND INC., 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 September 13, 1999, 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 October 28,1999, (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 deposit in the Participants Trust Company as Depository, as
defined in the Custody Agreement, all securities eligible for deposit
therein, regardless of the Series to which the same are specifically
allocated, and to utilize the Participants Trust Company to the extent
possible in connection with its performance thereunder, including,
without limitation, in connection with settlements of purchases and
sales of securities, loans of securities, and deliveries and returns of
securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of
PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND INC., as of the day of
November 16, 1999.
/s/ A. S. Filean
Arthur S. Filean
Vice President and Secretary
[SEAL]
/s/ Barbara R. Duncan
EXHIBIT C
CERTIFICATION
The undersigned, Arthur S. Filean, hereby certifies that he or she is
the duly elected and acting Vice President and Secretary of PRINCIPAL PARTNERS
AGGRESSIVE GROWTH FUND INC., 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 September 13, 1999, 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 October 28, 1999, (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
PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND INC., as of the day of
November 16, 1999.
/s/ A. S. Filean
Arthur S. Filean
Vice President and Secretary
[SEAL]
/s/ Barbara R. Duncan
EXHIBIT D
The undersigned, Arthur S. Filean, hereby certifies that he or she is
the duly elected and acting Vice President and Secretary of PRINCIPAL PARTNERS
AGGRESSIVE GROWTH FUND INC., a Maryland corporation (the "Fund"), further
certifies that the following resolutions were adopted by the Board of Directors
of the Fund at a meeting duly held on September 13, 1999, 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 Bank of New York, as Custodian pursuant to
the Custody Agreement between The Bank of New York and the Fund dated
as of October 28, 1999 (the "Custody Agreement") is authorized and
instructed on a continuous and ongoing basis to act in accordance with,
and to rely on Instructions (as defined in the Custody Agreement).
RESOLVED, that the Fund shall establish access codes and grant
use of such access codes only to Authorized Persons of the Fund as
defined in the Custody Agreement, shall establish internal safekeeping
procedures to safeguard and protect the confidentiality and
availability of user and access codes, passwords and authentication
keys, and shall use Instructions only in a manner that does not
contravene the Investment Company Act of 1940, as amended, or the rules
and regulations thereunder.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of
PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND INC., as of the day of
November 16, 1999.
/s/ A. S. Filean
Arthur S. Filean
Vice President and Secretary
[SEAL]
/s/ Barbara R. Duncan
THE
New York BANK OF
October 1999 Global Network Management NEW
SCHEDULE 1 YORK
- ------------------ --------------------------------------
Country/
Market Subcustodian(s)
- ------------------ -------------------------------------
Argentina BankBoston, N.A.
Australia Commonwealth Bank of Australia/
National Australia Bank Limited
Austria Bank Austria AG
Bahrain The British Bank of the Middle East
Bangladesh Standard Chartered Bank
Belgium Banque Bruxelles Lambert
Bermuda Bank of Bermuda Limited
Bolivia Citibank, N.A.
Botswana Stanbic Bank Botswana Limited
Brazil BankBoston, N.A.
Bulgaria ING Bank
Canada Royal Bank of Canada
Chile BankBoston, N.A.
China Standard Chartered Bank
Colombia Cititrust Colombia S.A.
Costa Rica Banco BCT
Croatia Privredna Banka Zagreb d.d.
Cyprus Bank of Cyprus
Czech Republic Ceskoslovenska Obchodni Banka A.S.
Denmark Den Danske Bank
EASDAQ Banque Bruxelles Lambert
Ecuador Citibank, N.A.
Egypt Citibank, N.A.
Estonia Hansabank Limited
Euromarket Cedelbank
Euromarket Euroclear
Finland Merita Bank plc
France Paribas
Germany Dresdner Bank AG
Ghana Merchant Bank (Ghana) Limited
Greece Paribas
Hong Kong HSBC
Hungary Citibank Budapest Rt.
Iceland Landsbanki Islands
India HSBC / Deutsche Bank AG
Indonesia HSBC
Ireland Allied Irish Banks, plc
Israel Bank Leumi LE - Israel B.M.
Italy Banca Commerciale Italiana /
Paribas
Ivory Coast Societe Generale de Banques en Cote
d'Ivoire
Jamaica CIBC Trust & Merchant Bank Jamaica
Ltd.
Japan The Bank of Tokyo-Mitsubishi
Limited/
The Fuji Bank, Limited
Jordan HSBC
Kazakhstan ABN/AMRO
Kenya Stanbic Bank Kenya Limited
Latvia Hansabanka Limited
Lebanon The British Bank of the Middle East
Lithuania Vilniaus Bankas
Luxembourg Banque et Caisse dEpargne de
lEtat
Malaysia HongKong Bank Malaysia Berhad
Malta Mid-Med Bank
Mauritius HSBC
Mexico Banco Nacional de Mexico
Morocco Banque Commerciale du Maroc
Namibia Stanbic Bank Namibia Limited
Netherlands MeesPierson
New Zealand Australia and New Zealand Banking
Group
Nigeria Stanbic Merchant Bank Nigeria
Limited
Norway Den norske Bank ASA
Oman The British Bank of the Middle East
Pakistan Standard Chartered Bank
Peru Citibank, N.A.
Philippines HSBC
Poland Bank Handlowy W Warszawie S.A.
Portugal Banco Comercial Portugus
Romania ING Bank
Russia Vneshtorgbank (Min Fin Bonds only)/
Credit Suisse First Boston AO
Singapore United Overseas Bank Limited/
The Development Bank of Singapore
Ltd.
Slovakia Ceskoslovenska Obchodni Banka, a.s.
Slovenia Bank Austria Creditanstalt d.d.
Ljubljana
South Africa The Standard Bank of South Africa
Limited
South Korea Standard Chartered Bank
Spain Banco Bilbao Vizcaya
Sri Lanka Standard Chartered Bank
Swaziland Stanbic Bank Swaziland Limited
Sweden Skandinaviska Enskilda Banken
Switzerland Union Bank of Switzerland /
Credit Suisse First Boston
Taiwan HSBC
Thailand Standard Chartered Bank/
Bangkok Bank Public Company Limited
Trinidad & Tobago Republic Bank Limited
Tunisia Banque Internationale Arabe de
Tunisie
Turkey Osmanli Bankasi A.S. (Ottoman Bank)
Ukraine ING Bank
United Kingdom The Bank of New York /
First Chicago Clearing Center
United States The Bank of New York
Uruguay BankBoston, N.A.
Venezuela Citibank, N.A.
Zambia Stanbic Bank Zambia Limited
Zimbabwe Stanbic Bank Zimbabwe Limited
TRANSFER AGENCY AGREEMENT AND
SHAREHOLDER SERVICES AGREEMENT
AGREEMENT to be effective October 27, 1999, by and between PRINCIPAL
PARTNERS AGGRESSIVE GROWTH FUND, INC., a Maryland corporation (hereinafter
called the "Fund") and PRINCIPAL 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 transfer and shareholder servicing agent and approving the
form of this Agreement.
WHEREAS, the Manager is registered as a transfer agent under Section 17A of
the Securities Exchange Act of 1934, as amended (the "1934 Act");
NOW, THEREFORE, in consideration of the premises and mutual agreements
herein contained, the Fund hereby appoints the Manager to act as transfer and
shareholder servicing agent 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. SERVICES FURNISHED BY THE MANAGER
The Manager will act as, and provide all services customarily performed by,
the transfer and paying agent of the Fund including, without limitation, the
following:
(a) preparation and distribution to shareholders of reports, tax
information, notices, proxy statements and proxies;
(b) preparation and distribution of dividend and capital gain payments to
shareholders;
(c) issuance, transfer and registry of shares, and maintenance of open
account system;
(d) delivery, redemption and repurchase of shares, and remittances to
shareholders; and
(e) communication with shareholders concerning items (a), (b), (c) and (d)
above.
In the carrying out of this function, the Manager may contract with others
for data systems, processing services and other administrative services.
The Manager may at any time or times in its discretion appoint (and may at
any time remove) other parties as its agent to carry out such provisions of
the Agreement as the Manager may from time to time direct; provided,
however, that the appointment of any such agent shall not relieve the
Manager of any of its responsibilities or liabilities hereunder.
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 1. At the end of each calendar month the Fund will pay the Manager for
its performance of these services.
2. 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.
3. DURATION AND TERMINATION OF THIS AGREEMENT
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.
4. 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.
5. 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.
6. MISCELLANEOUS
The captions in this Agreement are included for convenience of reference
only, and in no way define or limit 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 Partners Aggressive Growth Fund, Inc.
BY/s/Arthur S. Filean
ARTHUR S. FILEAN, VICE PRESIDENT
Principal Management Corporation
BY /s/Ralph C. Eucher
Ralph C. Eucher, President
PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND, INC.
DISTRIBUTION AND SHAREHOLDER SERVICING
PLAN AND AGREEMENT
CLASS A SHARES
PLAN AND AGREEMENT made as of the 27th day of October, 1999, by and
between PRINCIPAL PARTNERS AGGRESSIVE GROWTH 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 A shares of the
Fund and the rendering of services to class A 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 A shareholders;
NOW, THEREFORE, the following shall constitute the written Plan pursuant
to which the Fund shall participate in financing the distribution of its class A
shares.
Section 1. The Fund is hereby authorized to make payments to the
Underwriter from that portion of the Fund's assets attributable to its class A
shares for the purpose of compensating the Underwriter and other selling Dealers
for (i) providing shareholder services to existing class A shareholders,
including without limitation, furnishing information as to the status of
shareholder accounts, requests, responding to telephone and written inquiries,
and assisting class A shareholders with tax information and (ii) rendering
assistance in the distribution and promotion of the sale of class A 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 0.25% of the
daily net asset value of the Fund's class A shares. The Underwriter shall retain
such amounts as are appropriate to compensate the Underwriter for actual
expenses incurred in distributing and promoting the sale of class A shares to
the public and remit such amounts as are appropriate to other Dealers in
recognition of their services and assistance as described above. 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 A 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 A 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 A 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 Partners Aggressive Growth Fund, Inc.
By: /s/A. S. Filean
A. S. Filean, Vice President and Secretary
Princor Financial Services Corporation
By: /s/M. J. Beer
M. J. Beer, Executive Vice President
PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND, INC.
DISTRIBUTION AND SHAREHOLDER SERVICING
PLAN AND AGREEMENT
CLASS B SHARES
PLAN AND AGREEMENT made as of the 27th day of October, 1999, by and between
PRINCIPAL PARTNERS AGGRESSIVE GROWTH 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 B shares of the
Fund and the rendering of services to Class B 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 B shareholders;
NOW, THEREFORE, the following shall constitute the written Plan pursuant to
which the Fund shall participate in financing the distribution of its Class B
shares.
Section 1. The Fund is hereby authorized to make payments to the
Underwriter from that portion of its assets attributable to its Class B shares
for the purpose of reimbursing the Underwriter for commissions it pays to
registered representatives and Dealers in connection with sales of the Class B
shares and to compensate the Underwriter and other selling Dealers for (i)
providing shareholder services to existing Class B 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 B 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 1.00% of the
daily net asset value of the Fund's Class B shares. The Underwriter shall retain
such amounts as are appropriate to compensate the Underwriter for actual
expenses incurred in distributing and promoting the sale of Class B shares to
the public and remit such amounts (not to exceed 0.25% annually of the daily net
asset value of the Fund=s shares) as are appropriate to other Dealers in
recognition of their services and assistance as described above. 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 is has been approved (1)
by a vote of at least a majority (as defined in the Act) of the outstanding
Class B 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 B 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 B 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 Partners Aggressive Growth Fund, Inc.
By: /s/A. S. Filean
A. S. Filean, Vice President and Secretary
Princor Financial Services Corporation
By: /s/M. J. Beer
M. J. Beer, Executive Vice President
PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND, INC.
DISTRIBUTION AND SHAREHOLDER SERVICING
PLAN AND AGREEMENT
CLASS C SHARES
PLAN AND AGREEMENT made as of the 27th of October, 1999, by and between
PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUNDS, 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 C shares of the
Fund and the rendering of services to Class C shareholders and that such payment
should be separate from the investment advisory and management fee paid to
Principal 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 C shareholders;
NOW, THEREFORE, the following shall constitute the written Plan pursuant
to which the Fund shall participate in financing the distribution of its Class C
shares.
Section 1. The Fund is hereby authorized to make payments to the
Underwriter from that portion of its assets attributable to its Class C shares
for the purpose of paying the Underwriter for its activities in connection with
sales of the Class C shares and to compensate the Underwriter and other selling
Dealers for (i) providing shareholder services to existing Class C 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 C shares to the public.
(a) Service Fee. The Fund will pay a service fee (the "Service Fee") as
defined in Section 26 of the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. (or any successor provision
thereto) as in effect from time to time (the "NASD Rule") at an annual
rate not to exceed 0.25% of the fund's average daily net assets
attributable to the Class C shares. The Service Fee shall be accrued
daily and paid monthly or at such other intervals as the directors
shall determine. The Underwriter may pay all or any portion of the
Service Fee to securities dealers or other organizations (including,
but not limited to, any affiliate of the Underwriters) as service fees
pursuant to agreements with such organizations for providing personal
services to investors in Class C shares of the Fund and/or the
maintenance of shareholder accounts, and may retain all or any portion
of the Service Fee as compensation for providing personal services to
investors in Class C shares of the Fund and/or the maintenance of
shareholder accounts. All payments under this Section 1(a) are
intended to qualify as "service fees" as defined in the NASD Rule.
(b) Distribution Fees. In addition to the Service Fee, the Fund will pay
to the Underwriter a fee (the "Distribution Fee") at an annual rate of
0.75% (unless reduced as contemplated by and permitted pursuant to the
next sentence hereof) of the Fund's average daily net assets
attributable to the Class C shares in consideration of the services
rendered in connection with the sale of such shares by the
Underwriter. The Fund will not terminate the Distribution Fee in
respect of Fund assets attributable to Class C shares, or pay such fee
at an annual rate of less than 0.75% of the Fund's average daily net
assets attributable to the Class C shares, unless it has ceased, and
not resumed, paying the Service Fee to the Underwriter. The
Distribution Fee shall be accrued daily and paid monthly or at such
other intervals as the Directors shall determine.
The obligation of the Fund to pay the Distribution Fee shall terminate
upon the termination of this Plan or the relevant distribution
agreement between the Distributor and the Fund in accordance with the
terms hereof or thereof, but until any such termination shall not be
subject to any dispute, offset, counterclaim or defense whatsoever (it
being understood that nothing in this sentence shall be deemed a
waiver by the Fund of its right separately to pursue any claims it may
have against the Distributor and enforce such claims against any
assets of the Distributor (other than its right to be paid the
Distribution Fee and to be paid contingent deferred sales charges)).
The Underwriter may pay all or any portion of the Distribution Fee to
securities dealers or other organizations (including, but not limited
to, any affiliate of the Underwriter as commissions, asset-based sales
charges or other compensation with respect to the sale of Class C
shares of the Fund may retain all or any portion of the Distribution
Fee as compensation for the Underwriter's services as principal
underwriter of the Class C shares of the Fund. All payments under this
Section 1(b) are intended to qualify as "asset-based sales charges" as
defined in the NASD Rule.
Section 2. This Plan shall not take effect until it has been approved (a)
by a vote of at least a majority (as defined in the Act) of the outstanding
Class C shares of the Fund and (b) 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(b).
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 C 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 C shares on not more than ninety (90) 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 Service Fees or Distribution Fees provided for in Section 1(a) and (b) 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(b)
hereof.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Plan as of the first date written above.
Principal Partners Aggressive Growth Fund, Inc.
By: /s/A. S. Filean
A. S. Filean, Vice President and Secretary
PRINCOR FINANCIAL SERVICES CORPORATION
By: /s/M. J. Beer
M. J. Beer, Executive Vice President
PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND, INC.
DISTRIBUTION AND SHAREHOLDER SERVICING
PLAN AND AGREEMENT
CLASS R SHARES
PLAN AND AGREEMENT made as of the 27th day of October, 1999, by and
between PRINCIPAL PARTNERS AGGRESSIVE GROWTH 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 Partners Aggressive Growth Fund, Inc.
By: /s/A. S. Filean
A. S. Filean, Vice President and Secretary
Princor Financial Services Corporation
By: /s/M. J. Beer
M. J. Beer, Executive Vice President
PRINCIPAL FAMILY OF MUTUAL FUNDS
MULTIPLE CLASS DISTRIBUTION PLAN
Princor Financial Services Corporation ("The Distributor"), Principal 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"/"Class C Shares").
The Plan also permits each Fund, except Principal Tax Exempt Cash Management
Fund, Inc., to offer distributees of retirement plans administered by Principal
Mutual Life Insurance Company, and other classes of customers identified from
time-to-time by the Funds' management, 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 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 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.
Sales Charge for
All Funds Except
Limited Term Bond Fund
------------------------
Sales Charge as % of:
------------------------
Offering Amount
Amount of Purchase Price Invested
------------------ ----- --------
Less than $50,000 4.75% 4.99%
$50,000 but less than $100,000 4.25% 4.44%
$100,000 but less than $250,000 3.75% 3.90%
$250,000 but less than $500,000 2.50% 2.56%
$500,000 but less than $1,000,000 1.50% 1.52%
$1,000,000 or more No Sales Charge 0.00%
Sales Charge for
Limited Term Bond Fund
------------------------
Sales Charge as % of:
-------------------------
Offering Amount
Amount of Purchase Price Invested
------------------ ----- --------
Less than $50,000 1.50% 1.52%
$50,000 but less than $100,000 1.25% 1.27%
$100,000 but less than $250,000 1.00% 1.01%
$250,000 but less than $500,000 0.75% 0.76%
$500,000 but less than $1,000,000 0.50% 0.50%
$1,000,000 or more No Sales Charge 0.00%
Dealer Allowance
as % of Offering
--------------------------------
All Funds
Except Limited Limited Term
Amount of Purchase Term Bond Fund Bond Fund
------------------ -------------- ---------
Less than $50,000 4.00% 1.25%
$50,000 but less than $100,000 3.75% 1.00%
$100,000 but less than $250,000 3.25% 0.75%
$250,000 but less than $500,000 2.00% 0.50%
$500,000 but less than $1,000,000 1.25% 0.25%
$1,000,000 or more 0.75% 0.25%
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:
================================================================================
Contingent Deferred Sales Charge
as a Percentage of
Dollar Amount Subject to Charge
================================================================================
All Funds
Years Since Purchase Except Limited Term Limited Term
Payments Made 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
================================================================================
=========================================
For Certain Sponsored Plans
Commenced After 2/1/1998
=========================================
All Funds
Years Since Purchase Except Limited Term Limited Term
Payments Made Bond Fund Bond Fund
-------------------- ------------------- ------------
2 years or less 3.00% 0.75%
more than 2 years, up to 4 years 2.00% 0.50%
more than 4 years, up to 5 years 1.00% 0.25%
more than 5 years, up to 6 years None None
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. 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 C shares
Class C shares do not have a sales charge at time of purchase. However, a CDSC
is imposed at a rate of 1% for redemptions within 1st year (0.50% for Limited
Term Bond). No CDSC is imposed on redemptions after the first year.
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
Principal Limited Term Bond Fund, Inc.) of the average daily net asset value of
the Class A shares; (ii) up to 1.00% (.50% for Principal Limited Term Bond Fund,
Inc.) of the average daily net asset value of the Class B shares; (iii) up to
1.00 % of daily net asset value (0.50% for Limited Term Bond) Class C shares;
and (iv) 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) state
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, Class C shares and Class R shares, the net income attributable to and
the dividends payable on Class B shares, Class C 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
(61st month for certain sponsored plans) 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 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 C shares. Class C shares do not automatically convert nor will they be
manually converted to any other class shares.
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 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 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 Limited Term Bond Fund) may be exchanged at the net asset value for Class A
shares of any other Principal 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 Principal Cash Management Fund or Principal 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 Principal 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 C shares. Class C shares for all Funds may be exchanged at net asset value
at any time for Class C shares of any Fund.
The CDSC that might apply to Class C 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 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 Fund, Inc.
Principal International Emerging Markets Fund, Inc.
Principal International SmallCap Fund, Inc.
Principal LargeCap Stock Index Fund, Inc.
Principal Limited Term Bond Fund, Inc.
Principal MidCap Fund, Inc.
Principal Partners Aggressive Growth Fund, Inc.
Principal Partners LargeCap Growth Fund, Inc.
Principal Partners MidCap Growth Fund, Inc.
Principal Real Estate Fund, Inc.
Principal SmallCap Fund, Inc.
Principal Tax-Exempt Bond Fund, Inc.
Principal Utilities Fund, Inc.