333-86149
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
_________________
PRE-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: JOHN W. BLOUCH, L.L.P.
The Principal Financial Group Suite 405 West
Des Moines, Iowa 50392 1025 Thomas Jefferson Street, N.W.
Washington, DC 20007-0805
(Name and address of agent for service)
_________________
It is proposed that this filing will become effective (check appropriate box)
immediately upon filing pursuant to paragraph (b) of Rule 485
X on November 1, 1999 pursuant to paragraph (b) of Rule 485
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.
Approximate date of Proposed Public Offering: As soon as practicable after
effective date of Registration Statement.
PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND, INC.
This Prospectus describes a mutual fund organized by Principal Life Insurance
Company which is included in the Principal Mutual Funds. The Principal Mutual
Funds have three categories of funds: domestic growth-oriented funds,
international growth-oriented funds and income-oriented funds. The Principal
Partners Aggressive Growth Fund is a domestic growth-oriented fund. Only the
Principal Partners Aggressive Growth Fund is offered through this prospectus.
You may obtain a prospectus for our other Funds at no cost by calling us at
1-800-247-4123. The prospectus is also available on our website at:
www.principal.com/funds.
Three classes of Fund 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.
NOTE:Investments in the Fund 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 the Fund other than those
contained in this Prospectus. Information or representations from
unauthorized parties may not be relied upon as having been made by the
Fund, the Manager or the Sub-Advisor.
The date of this Prospectus is November 1, 1999.
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
Domestic Growth-Oriented Fund............................................. 4
The Costs of Investing.................................................... 8
Certain Investment Strategies and Related Risks........................... 18
Management, Organization and Capital Structure............................ 22
Pricing of Fund Shares.................................................... 23
Dividends and Distributions............................................... 24
How To Buy Shares......................................................... 25
How To Redeem (Sell) Shares............................................... 28
How To Exchange Shares Among Principal Mutual Funds....................... 32
General Information about a Fund Account.................................. 34
DOMESTIC GROWTH-ORIENTED FUND
Principal Partners Aggressive Growth Fund, Inc.
The Fund seeks to provide long-term capital appreciation by investing primarily
in equity securities.
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 Asset Management* ("Morgan Stanley" or
"Sub-Advisor"), 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.
The Fund is generally a suitable investment for investors who are willing to
accept the risks and uncertainties of investing in equity securities in the hope
of earning superior returns. 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.
* On December 1, 1998, Morgan Stanley Asset 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.
Historical performance data is not available for the Fund. Estimated annual Fund
operating expenses are as follows:
Fund Operating Expenses*
Annual operating expenses for the Fund are deducted from Fund assets
(stated as a percentage of Fund assets). Estimates of the Fund's operating
expenses are shown which are intended to help you compare the cost of
investing in a particular fund with the cost of investing in other mutual
funds.
Class A Class B Class C
Management Fees................ 0.75% 0.75% 0.75%
12b-1 Fees..................... 0.25 0.90 1.00
Other Expenses................. 1.13 1.08 1.83
Total Fund Operating Expenses 2.13% 2.73% 3.58%
* Total Fund Operating Expenses are estimated.
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
Class A $681 $1,110
Class B 685 1,168
Class C 462 1,097
You would pay the following expenses if you did not redeem your shares:
Class A 681 1,110
Class B 276 847
Class C 361 1,097
Day-to-day Fund Management
The investment professionals who manage the assets of the Fund are listed below.
Backed by their staff of experienced securities analysts, they provide the Fund
with professional investment management.
Principal Management Corporation (the "Manager") serves as the manager for the
Principal Mutual Funds. It has signed a sub-advisory agreement with Morgan
Stanley. Under that agreement, Morgan Stanley provides portfolio management for
the Fund.
Since October, 1999 Co-Manager, Philip W. Friedman, Managing Director of
(Fund's inception) 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.
THE COSTS OF INVESTING
Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
Shareholder Fees
(fees paid directly from your investment)
Class A Shares Class B Shares Class C Shares
Maximum Sales Charge Maximum Deferred Sales Charge Maximum Deferred
on Purchases (as a percentage of the lower of Sales Charge
(as a percentage of the original purchase price (as a percentage of
offering price) or current market value) offering price)
Redemptions During Year Redemptions During Year 1
1 2 3 4 5 6 7
---------------------------
4.75% 4% 4% 3% 3% 2% 1% 0% 1.00%
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.
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 Purchases 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 the 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 Fund.
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 in the Fund, but are unsure which Class to select,
this table may assist you. Class A shares of the Fund 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 of the Fund.
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 of the Fund.
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 of the Fund.
Front-end sales charge: Class A shares
Class A shares of the Fund 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 the Fund purchased with reinvested dividends or other distributions.
This table shows the sales charge which is based on the amount of your purchase.
Sales Charge as % of:
Offering Net Amount Dealers Allowance as
Amount invested Price Invested % of Offering Price
Less than $50,000 4.75% 4.99% 4.00%
$50,000 but less than $100,000 4.25% 4.44% 3.75%
$100,000 but less than $250,000 3.75% 3.90% 3.25%
$250,000 but less than $500,000 2.50% 2.56% 2.00%
$500,000 but less than $1,000,000 1.50% 1.52% 1.25%
$1,000,000 or more 0 0 0.75%
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 Fund may be purchased without a sales charge or at a
reduced sales charge. The Fund reserves 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)
The 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; 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 Class A shares may be purchased at a price equal to the share price plus an
initial sales charge;
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.
Sales Charge as % of:
Offering Net Amount Dealers Allowance as
Amount invested Price Invested %of Offering Price
Less than $500,000 2.50% 2.56% 2.10%
$500,000 but less than
$1,000,000 1.50% 1.52% 1.25%
$1,000,000 or more no sales charge
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). The employer chooses to fund the Plan with
either Class A, Class B or Class C shares when the plan is established.
a) Principal Mutual Fund 401 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 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 shares are
redeemed in the order purchased (first in, first out).
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:
Class B Share For Certain
Contingent Deferred Sales Sponsored Plans
Years Since Purchase Charge as a Percentage of Dollar Commenced
Was Made Amount Subject to Charge After 2/1/98
2 years or less 4.0% 3.00%
more than 2 years, up to 4 years 3.0% 2.00%
more than 4 years, up to 5 years 2.0% 1.00%
more than 5 years, up to 6 years 1.0% None
more than 6 years None None
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. The 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
The Fund 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 A shares 0.25%
o Class B shares 1.00%
o Class C shares 1.00%
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
The Fund 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 the 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 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.
The Fund may lend its portfolio securities to unaffiliated broker-dealers and
other unaffiliated qualified financial institutions.
Currency Contracts
The Fund may 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. The 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 the 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
The 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. The
Fund may also enter into contracts to sell its investments either on demand or
at a specific interval.
Warrants
The Fund 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.
Options
The Fund may buy and sell certain types of options. Each type is more fully
discussed in the SAI.
Foreign Securities
The Fund may invest up to 25% of its assets in foreign securities (securities of
non-U.S. companies).
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 Fund has 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.
Unseasoned Issuers
The Fund 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 Fund 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, the 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).
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
a sub-advisory agreement with Morgan Stanley for portfolio management functions
for the Fund. The Manager compensates Morgan Stanley for its subadvisory
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 September 30, 1999, the funds it managed had
assets of approximately $6.3 billion. The Manager's address is Principal
Financial Group, Des Moines, Iowa 50392-0200.
The Sub-Advisor
The Sub-Advisor for the Fund is Morgan Stanley Asset Management. Morgan Stanley,
with principal offices at 1221 Avenue of the Americas, New York, NY 10020,
conducts a worldwide portfolio management business and provides a broad range of
portfolio management services to customers in the U.S. and abroad. As of August
31, 1999, Morgan Stanley, together with its affiliated institutional asset
management companies, managed assets of approximately $175 billion.
Duties of the Manager and Sub-Advisor
The Manager or Sub-Advisor provides the Board of Directors of the Fund with 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.
PRICING OF FUND SHARES
The Fund shares are bought and sold at the current share price. The share price
of each Class of shares of the 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.
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.
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 The 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.
DIVIDENDS AND DISTRIBUTIONS
The Fund pays most of its net dividend income to you every year. The payment
schedule is:
Fund Record Date Payable Date
Partners Aggressive Growth three business days June 24 and each December 24
before payable date (or previous business day)
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.
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
(with Delaware Charter Guarantee and Trust Company as trustee).
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.
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). The
Fund can only sell shares after your check for investment into the Fund 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 Address on 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. Sales made under your periodic withdrawal plan will reduce and may
eventually exhaust your account. The Fund does 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.
HOW TO EXCHANGE SHARES AMONG PRINCIPAL FUNDS
Your shares in the Fund may be exchanged without a sales charge for the same
class of any other Principal Mutual Fund. A prospectus for the other Principal
Mutual Funds is available at no cost by calling us (1-800-247-4123) or from our
internet site (www.principal.com/funds).
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:
o the amount of the exchange is $500,000 or less; and
o 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 H 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 for the Fund. 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.
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 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;
o to add wire privileges to an existing account; and
o to exchange more than $500,000 among the Principal Mutual Funds.
Minimum Account Balance
Generally, the Fund does 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 Fund reserves 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 Fund reserves the right to refuse telephone instructions. You are liable for
a loss resulting from a fraudulent telephone order 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.
Year 2000 Readiness Disclosure
The business operations of the Fund depend on computer systems that contain date
fields. These systems include securities transfer agent operations and
securities pricing systems. Many of these systems were constructed using a two
digit date field to represent the date. Unless these systems are changed or
modified, they may not be able to distinguish the Year 1900 from the Year 2000
(commonly referred to as the Year 2000 Problem).
When the Year 2000 arrives, the Fund's operations could be adversely affected if
the computer systems used by the Manager, the service providers and other third
parties it does business with are not Year 2000 compliant. For example, the
Fund's portfolio and operational areas could be impacted, included securities
pricing, dividend and interest payments, shareholder account servicing and
reporting functions. In addition, the Fund could experience difficulties in
transactions if foreign broker-dealers or foreign markets are not Year 2000
compliant.
The Manager relies on public filings and other statements made by companies
about their Year 2000 readiness. Issuers in countries outside of the U.S.,
particularly in emerging countries, may not be required to make the same
disclosures about their readiness as are required in the U.S. It is likely that
if a company the Fund invests in is adversely affected by Year 2000 problems,
the price of its securities will also be negatively impacted. A decrease in
value of one or more of the Fund's securities will decrease the Fund's share
price.
In addition, the Manager and affiliated service providers have worked to
identify their Year 2000 problems and to take steps they reasonably believe will
address these issues. This process began in 1996 with the identification of
product vendors and service providers as well as the internal systems that might
be impacted.
We will continue to verify our systems through the end of 1999 and into 2000 to
help ensure that no new data-related problems are introduced into previously
tested or newly developed systems.
We have developed a series of contingency plans. Although it is not possible to
guarantee that all our systems will perform perfectly, we are confident our
extensive analysis and efforts to identify and correct potential Year 2000
problems will allow us to resolve quickly any date-related systems issues.
Other important Year 2000 initiatives include:
o the service provider for our transfer agent system has renovated its code.
We finished client testing in July, 1999. The service provider has
completed a securities industry wide testing program;
o the securities pricing system we use has renovated its code and conducted
client testing in June 1998;
o Facilities Management of Principal Life has identified non-systems issues
(heat, lights, water, phone, etc.) and is working with these service
providers to ensure continuity of service; and
o the Manager and other areas of Principal Life have contacted all vendors
with which we do business to receive assurances that they are able to deal
with any Year 2000 problems. We continue to work with the vendors to
identify any areas of risk.
In its budget for 1999 and 2000, the Manager has estimated expenses of between
$100,000 and $500,000 to deal with Year 2000 issues.
Financial Statements
Shareholders will receive an annual financial statement for the Fund, examined
by the Fund's independent auditors, Ernst & Young LLP. Shareholders will also
receive a semiannual financial statement which is unaudited.
Additional information about the Fund is available in the Statement of
Additional Information dated March 1, 1999 as revised through November 1, 1999
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 the Fund.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any financial institution, nor are shares of the Fund federally insured by
the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other agency.
SEC FILE
811-09567 Principal Partners Aggressive Growth Fund, Inc.
PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND, INC.
This Prospectus describes a mutual fund organized by Principal Life Insurance
Company which is included in the Principal Mutual Funds. The Principal Mutual
Funds have three categories of funds: domestic growth-oriented funds,
international growth-oriented funds and income-oriented funds. The Principal
Partners Aggressive Growth Fund is a domestic growth-oriented fund. Only the
Principal Partners Aggressive Growth Fund (Class R shares) is offered through
this prospectus. You may obtain a prospectus for our other Funds at no cost by
calling us at 1-800-247-4123.
Note:Investments in the Fund 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 other person is authorized to give
information or make representations about the Fund other than those
contained in this Prospectus. Information or representations from
unauthorized parties may not be relied upon as having been made by the
Fund, the Manager or the Sub-Advisor.
The date of this Prospectus is November 1, 1999.
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
Domestic Growth-Oriented Fund........................................... 4
The Costs of Investing.................................................. 8
Certain Investment Strategies and Related Risks......................... 12
Management, Organization and Capital Structure.......................... 16
Pricing of Fund Shares.................................................. 17
Dividends and Distributions............................................. 18
How To Buy Shares....................................................... 19
How To Sell Shares...................................................... 22
How To Exchange Shares Among Principal Mutual Funds..................... 26
General Information About a Fund Account................................ 28
DOMESTIC GROWTH-ORIENTED FUND
Principal Partners Aggressive Growth Fund, Inc.
The Fund seeks to provide long-term capital appreciation by investing primarily
in equity securities.
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 Asset Management* ("Morgan Stanley" or
"Sub-Advisor"), 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.
The Fund is generally a suitable investment for investors who are willing to
accept the risks and uncertainties of investing in equity securities in the hope
of earning superior returns. 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.
* On December 1, 1998, Morgan Stanley Asset 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.
Historical performance data is not available. Estimated annual Fund operating
expenses are as follows:
Fund Operating Expenses*
Annual operating expenses for the Fund are deducted from Fund assets (stated
as a percentage of Fund assets). Estimates of the Fund's operating expenses
are shown which are intended to help you compare the cost of investing in a
particular fund with the cost of investing in other mutual funds.
Class A Class R
Management Fees ............... 0.75% 0.75%
12b-1 Fees..................... 0.25 0.50
Other Expenses................. 1.13 1.16
Total Fund Operating Expenses 2.13% 2.41%
* Total Fund Operating Expenses are estimated.
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
Class A $681 $1,110
Class R 244 751
You would pay the following expenses if you did not redeem your shares:
Class A 681 1,110
Class R 244 751
Day-to-day Fund Management
The investment professionals who manage the assets of the Fund are listed
below. Backed by their staffs of experienced securities analysts, they
provide the Fund with professional investment management.
Principal Management Corporation (the "Manager") serves as the Manager for
the Principal Mutual Funds. It has signed a sub-advisory contract with Morgan
Stanley. Under that agreement, Morgan Stanley provides portfolio management
for the Fund.
Since October, 1999 Co-Manager, Philip W. Friedman, Managing Director of
(Fund's inception) 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.
THE COSTS OF INVESTING
Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
Shareholder Fees
(fees paid directly from your investment)
Maximum Sales Load
Imposed on Purchases Contingent
(as a percentage Redemption Exchange Deferred Sales
Fund of offering price) Fee* Fee Charge
Partners Aggressive Growth None None None None
* A wire charge of $6.00 will be deducted for all wire transfers.
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 operating 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.
You may buy Class R shares of the Fund without a front-end sales charge or a
contingent deferred sales charge. There is no sales charge on shares of the Fund
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 Fund are purchased with a sales charge that is a variable
percentage based on the amount of the purchase. This table shows the sales
charge for Class A shares which is based on the amount of your purchase.
Sales Charge as % of:
Offering Net Amount Dealers Allowance as
Amount invested Price Invested % of Offering Price
Less than $50,000 4.75% 4.99% 4.00%
$50,000 but less than $100,000 4.25% 4.44% 3.75%
$100,000 but less than $250,000 3.75% 3.90% 3.25%
$250,000 but less than $500,000 2.50% 2.56% 2.00%
$500,000 but less than $1,000,000 1.50% 1.52% 1.25%
$1,000,000 or more 0 0 0.75%
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 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 Fund may be purchased without a sales charge or at a
reduced sales charge. The Fund reserves 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. The 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 using cash payments received from the Principal Bank under its awards
program;
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; 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 fund 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. The 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
The Fund 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 Fund on an annual basis are:
o Class R shares 0.75%
o Class A shares 0.25%
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.
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
The Fund 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 the 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 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.
The Fund may lend its portfolio securities to unaffiliated broker-dealers and
other unaffiliated qualified financial institutions.
Currency Contracts
The Fund may 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. The 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 the 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
The 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. The
Fund may also enter into contracts to sell its investments either on demand or
at a specific interval.
Warrants
The Fund 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.
Options
The Fund may buy and sell certain types of options. Each type is more fully
discussed in the SAI.
Foreign Securities
The Fund may invest up to 25% of its assets in foreign securities (securities of
non-U.S. companies).
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 Fund has 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.
Unseasoned Issuers
The Fund 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 or Defensive Measures
For temporary or defensive purposes in times of unusual or adverse market
conditions, the Fund, 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, the 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).
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 Morgan Stanley for portfolio management functions
for the Fund. The Manager compensates Morgan Stanley for its subadvisory
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 September 30, 1999 the funds it managed had
assets of approximately $6.3 billion. The Manager's address is Principal
Financial Group, Des Moines, Iowa 50392-0200.
The Sub-Advisor
The Sub-Advisor for the Fund is Morgan Stanley Asset Management. Morgan Stanley,
with principal offices at 1221 Avenue of the Americas, New York, NY 10020,
conducts a worldwide portfolio management business and provides a broad range of
portfolio management services to customers in the U.S. and abroad. As of August
31, 1999, Morgan Stanley, together with its affiliated institutional asset
management companies, managed assets of approximately $175 billion.
Duties of the Manager and Sub-Advisor
The Manager or Sub-Advisor provides the Board of Directors of the Fund with 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.
PRICING OF FUND SHARES
The Fund's shares are bought and sold at the current share price. The share
price of each Class of shares of the 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.
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.
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 The 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.
DIVIDENDS AND DISTRIBUTIONS
The Fund pays most of its net dividend income to you every year. The payment
schedule is:
Fund Record Date Payable Date
Partners Aggressive Growth three business days June 24 and each December 24
before payable date (or previous business day)
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.
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 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.).
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
(with Delaware Charter Guarantee and Trust Company as trustee).
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.
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 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). The 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 or 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 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, 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 Address on 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 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.
* 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.
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 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. Sales made under your periodic withdrawal plan will reduce and may
eventually exhaust your account. The Fund does 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.
HOW TO EXCHANGE SHARES AMONG PRINCIPAL MUTUAL FUNDS
Your shares in the Fund may be exchanged without a sales charge for the same
class of any other Principal Mutual Fund. A prospectus for the other Principal
Mutual Funds is available at no cost by calling us at 1-800-247-4123.
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:
o the amount of the exchange is $500,000 or less; and
o 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 for the Fund. 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.
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 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;
o to add wire privileges to an existing account; and
o to exchange more than $500,000 among the Principal Funds.
Minimum Account Balance
Generally, the Fund does not have a minimum required balance. Because of the
disproportional high cost of maintaining small accounts, the Fund reserves 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 Fund reserves 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 Fund reserves the right to refuse telephone instructions. You are liable for
a loss resulting from a fraudulent telephone order 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.
Year 2000 Readiness Disclosure
The business operations of the Fund depend on computer systems that contain date
fields. These systems include securities transfer agent operations and
securities pricing systems. Many of these systems were constructed using a two
digit date field to represent the date. Unless these systems are changed or
modified, they may not be able to distinguish the Year 1900 from the Year 2000
(commonly referred to as the Year 2000 Problem).
When the Year 2000 arrives, the Fund's operations could be adversely affected if
the computer systems used by the Manager, the service providers and other third
parties it does business with are not Year 2000 compliant. For example, the
Fund's portfolio and operational areas could be impacted, included securities
pricing, dividend and interest payments, shareholder account servicing and
reporting functions. In addition, the Fund could experience difficulties in
transactions if foreign broker-dealers or foreign markets are not Year 2000
compliant.
The Manager relies on public filings and other statements made by companies
about their Year 2000 readiness. Issuers in countries outside of the U.S.,
particularly in emerging countries, may not be required to make the same
disclosures about their readiness as are required in the U.S. It is likely that
if a company a Fund invests in is adversely affected by Year 2000 problems, the
price of its securities will also be negatively impacted. A decrease in value of
one or more of the Fund's securities will decrease the Fund's share price.
In addition, the Manager and affiliated service providers have worked to
identify their Year 2000 problems and to take steps they reasonably believe will
address these issues. This process began in 1996 with the identification of
product vendors and service providers as well as the internal systems that might
be impacted.
We will continue to verify our systems through the end of 1999 and into 2000 to
help ensure that no new data-related problems are introduced into previously
tested or newly developed systems.
We have developed a series of contingency plans. Although it is not possible to
guarantee that all our systems will perform perfectly, we are confident our
extensive analysis and efforts to identify and correct potential Year 2000
problems will allow us to resolve quickly any date-related systems issues.
Other important Year 2000 initiatives include:
o the service provider for our transfer agent system has renovated its code.
We finished client testing in July, 1999. The service provider has
completed a securities industry wide testing program;
o the securities pricing system we use has renovated its code and conducted
client testing in June 1998;
o Facilities Management of Principal Life has identified non-systems issues
(heat, lights, water, phone, etc.) and is working with these service
providers to ensure continuity of service; and
o the Manager and other areas of Principal Life have contacted all vendors
with which we do business to receive assurances that they are able to deal
with any Year 2000 problems. We continue to work with the vendors to
identify any areas of risk.
In its budget for 1999 and 2000, the Manager has estimated expenses of between
$100,000 and $500,000 to deal with Year 2000 issues.
Financial Statements
Shareholders will receive an annual financial statement for the Fund, examined
by the Funds' independent auditors, Ernst & Young LLP. Shareholders will also
receive a semiannual financial statement which is unaudited.
Additional information about the Funds is available in the Statement of
Additional Information dated March 1, 1999 as revised through November 1, 1999
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 the Fund.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any financial institution, nor are shares of the Fund federally insured by
the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other agency.
SEC FILE
811-09567 Principal Partners Aggressive 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 Limited Term Bond Fund, Inc.
Principal MidCap Fund, Inc.
Principal Partners Aggressive 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, 1999
as revised through November 1, 1999
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 for
all Funds (except Principal Partners Aggressive Growth Fund, Inc.) for Class A,
Class B and Class R shares dated March 1, 1999 and for Class C shares dated June
30, 1999, the prospectuses for the Principal Partners Aggressive Growth Fund,
Inc. dated November 1, 1999 and shareholder report are available without charge.
Please call 1-800-247-4123 to request a copy. The prospectus for Class A and
Class B shares of all funds except the Principal Partners Aggressive Growth
Fund, Inc. may also be viewed on our web site at www.principal.com/funds.
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-Advisor............................................ 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, diversified, 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 eight 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 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); 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.
GROWTH-ORIENTED FUNDS
Investment Objectives
Principal Balanced Fund, Inc. ("Balanced Fund") seeks to generate a total
investment return consisting of current income and capital appreciation while
assuming reasonable risks in furtherance of the investment objective.
Principal Blue Chip Fund, Inc. ("Blue Chip Fund") seeks to achieve growth of
capital and growth of income by investing primarily in common stocks of well
capitalized, established companies.
Principal Capital Value Fund, Inc. ("Capital Value Fund") seeks to achieve
primarily long-term capital appreciation and secondarily growth of investment
income through the purchase primarily of common stocks, but the Fund may invest
in other securities.
Principal Growth Fund, Inc. ("Growth Fund") seeks growth of capital through the
purchase primarily of common stocks, but the Fund may invest in other
securities.
Principal International Emerging Markets Fund, Inc. ("International Emerging
Markets Fund") seeks to achieve long-term growth of capital by investing
primarily in equity securities of issuers in emerging market countries.
Principal International Fund, Inc. ("International Fund") seeks long-term growth
of capital by investing in a portfolio of equity securities of companies
domiciled in any of the nations of the world.
Principal International SmallCap Fund, Inc. ("International SmallCap Fund")
seeks to achieve long-term growth of capital by investing primarily in equity
securities of non-United States companies with comparatively smaller market
capitalizations.
Principal MidCap Fund, Inc. ("MidCap Fund") seeks to achieve capital
appreciation by investing primarily in securities of emerging and other
growth-oriented companies.
Principal Partners Aggressive Growth Fund, Inc. ("Partners Aggressive Growth
Fund") seeks to provide long-term capital appreciation by investing primarily in
equity securities.
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
Partners Aggressive Growth Fund
Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The Fund 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.
(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.
(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).
The Fund has also adopted the following restrictions that are not fundamental
policies and that may be changed without shareholder approval. It is contrary to
the 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% 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.
(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) except that this
limitation shall apply only with respect to 75% of the total assets of the
International Emerging Markets Fund and the International SmallCap Fund; or
purchase more than 10% of the outstanding voting securities of any one
issuer.
(8) Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in its portfolio.
(9) Concentrate its investments in any particular industry or industries,
except that:
(a) the Utilities Fund may not invest less than 25% of its total assets in
securities of companies in the public utilities industry,
(b) the Balanced Fund, Blue Chip Fund, International Emerging Markets Fund,
International Fund, International SmallCap Fund, MidCap Fund and
SmallCap Fund each may invest not more than 25% of the value of its
total assets in a single industry, and
(c) the Real Estate Fund may not invest less than 25% of its total assets
in securities of companies in the real estate industry.
(10) Sell securities short (except where the Fund holds or has the right to
obtain at no added cost a long position in the securities sold that equals
or exceeds the securities sold short) or purchase any securities on margin,
except it may obtain such short-term credits as are necessary for the
clearance of transactions. The deposit or payment of margin in connection
with transactions in options and financial futures contracts is not
considered the purchase of securities on margin.
(11) Invest in interests in oil, gas or other mineral exploration or development
programs, although the Fund may invest in securities of issuers which
invest in or sponsor such programs.
Each of these Funds has also adopted the following restrictions which are not
fundamental policies and may be changed without shareholder approval. It is
contrary to each Fund's present policy to:
(1) Invest more than 15% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven days.
The value of any options purchased in the Over-the-Counter market are
included as part of this 15% limitation.
(2) Purchase warrants in excess of 5% of its total assets, of which 2% may be
invested in warrants that are not listed on the New York or American Stock
Exchange. The 2% limitation for the International Fund also includes
warrants not listed on the Toronto Stock Exchange. The 2% limitation for
the International Emerging Markets Fund and International SmallCap Fund
also includes warrants not listed on the Toronto Stock Exchange and the
Chicago Board Options Exchange.
(3) Purchase securities of any issuer having less than three years' continuous
operation (including operations of any predecessors) if such purchase would
cause the value of the Fund's investments in all such issuers to exceed 5%
of the value of its total assets.
(4) Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings. The deposit of underlying securities and other assets in escrow
and other collateral arrangements in connection with transactions in put
and call options, futures contracts and options on futures contracts are
not deemed to be pledges or other encumbrances.
(5) Invest in companies for the purpose of exercising control or management.
(6) Invest more than 5% of its total assets in the purchase of covered spread
options and the purchase of put and call options on securities, securities
indices and financial futures contracts. Options on financial futures
contracts and options on securities indices will be used solely for hedging
purposes; not for speculation.
(7) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
(8) Invest in arbitrage transactions.
(9) Invest in real estate limited partnership interests except that this
restriction shall not apply to the Real Estate Fund.
(10) Invest in mineral leases.
The Balanced Fund, Blue Chip Fund, MidCap Fund, SmallCap Fund and Utilities Fund
have also adopted a restriction, which is not a fundamental policy and may be
changed without shareholder approval, that each such Fund may not invest more
than 20% of its total assets in securities of foreign issuers.
The Real Estate Fund has adopted a restriction, which is not a fundamental
policy and may be changed without shareholder approval, that the Fund may not
invest more than 25% of its total assets in securities of foreign issuers.
The Balanced Fund, Blue Chip Fund, International Emerging Markets Fund,
International Fund, International SmallCap Fund, MidCap Fund, SmallCap Fund and
Utilities Fund have also adopted a restriction, which is not a fundamental
policy and may be changed without shareholder approval, that each Fund may not
invest more than 10% of its assets in securities of other investment companies,
invest more than 5% of its total assets in the securities of any one investment
company or acquire more than 3% of the outstanding voting securities of any one
investment company except in connection with a merger, consolidation or plan of
reorganization and the Funds may purchase securities of closed-end companies in
the open market where no underwriter or dealer's commission or profit, other
than a customary broker's commission, is involved.
The Utilities Fund has also adopted a restriction, which is not a fundamental
policy and may be changed without shareholder approval, that the Fund may not
own more than 5% of the outstanding voting securities of more than one public
utility company as defined by the Public Utility Holding Company Act of 1935.
Capital Value Fund and Growth Fund
Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The Capital Value Fund and
Growth Fund each may not:
(1) Concentrate its investments in any one industry. No more than 25% of the
value of its total assets will be invested in any one industry.
(2) Purchase the securities of any issuer if the purchase will cause more than
5% of the value of its total assets to be invested in the securities of any
one issuer (except U.S. Government securities).
(3) Purchase the securities of any issuer if the purchase will cause more than
10% of the voting securities, or any other class of securities of the
issuer, to be held by the Fund.
(4) Underwrite securities of other issuers, except that the Fund may acquire
portfolio securities under circumstances where if sold the Fund might be
deemed an underwriter for purposes of the Securities Act of 1933.
(5) Purchase securities of any company with a record of less than three years'
continuous operation (including that of predecessors) if the purchase would
cause the value of the Fund's aggregate investments in all such companies
to exceed 5% of the Fund's total assets.
(6) Engage in the purchase and sale of illiquid interests in real estate. For
this purpose, readily marketable interests in real estate investment trusts
are not interests in real estate.
(7) Engage in the purchase and sale of commodities or commodity contracts.
(8) Purchase or retain in its portfolio securities of any issuer if those
officers and directors of the Fund or its Manager owning beneficially more
than one-half of one percent (0.5%) of the securities of the issuer
together own beneficially more than 5% of such securities.
(9) Purchase securities on margin, except it may obtain such short-term credits
as are necessary for the clearance of transactions. The Fund will not
effect a short sale of a security. The Fund will not issue or acquire put
and call options.
(10) Invest more than 5% of its assets at the time of purchase in rights and
warrants (other than those that have been acquired in units or attached to
other securities).
(11) Invest more than 20% of its total assets in securities of foreign issuers.
In addition:
(12) The Fund may not make loans except that the Fund may (i) purchase and hold
debt obligations in accordance with its investment objective and policies,
and (ii) enter into repurchase agreements.
(13) The Fund does not propose to borrow money except for temporary or
emergency purposes from banks in an amount not to exceed the lesser of (i)
5% of the value of the Fund's assets, less liabilities other than such
borrowings, or (ii) 10% of the Fund's assets taken at cost at the time
such borrowing is made. The Fund may not pledge, mortgage, or hypothecate
its assets (at value) to an extent greater than 15% of the gross assets
taken at cost.
Each of these Funds has also adopted the following restrictions which are not
fundamental policies and may be changed without shareholder approval, each Fund
may not:
(1) Invest in companies for the purpose of exercising control or management.
(2) Purchase warrants in excess of 5% of its total assets, of which 2% may be
invested in warrants that are not listed on the New York or American Stock
Exchange.
(3) Invest more than 15% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven days.
(4) Invest in real estate limited partnership interests.
(5) Invest in interests in oil, gas, or other mineral exploration or
development programs, but the Fund may purchase and sell securities of
companies which invest or deal in such interests.
(6) Invest more than 10% of its assets in securities of other investment
companies, invest more than 5% of its total assets in the securities of any
one investment company, or acquire more than 3% of the outstanding voting
securities of any one investment company except in connect with a merger,
consolidation or plan of reorganization.
INCOME-ORIENTED FUNDS
Investment Objectives
Principal Bond Fund, Inc. ("Bond Fund") seeks to provide as high a level of
income as is consistent with preservation of capital and prudent investment
risk.
Principal Government Securities Income Fund, Inc. ("Government Securities Income
Fund") seeks a high level of current income, liquidity and safety of principal
by purchasing obligations issued or guaranteed by the United States Government
or its agencies, with emphasis on Government National Mortgage Association
Certificates ("GNMA Certificates"). The guarantee by the United States
Government extends only to principal and interest. There are certain risks
unique to GNMA Certificates.
Principal High Yield Fund, Inc. ("High Yield Fund") seeks high current income
primarily by purchasing high yielding, lower or non-rated fixed income
securities which are believed to not involve undue risk to income or principal.
Capital growth is a secondary objective when consistent with the objective of
high current income.
Principal Limited Term Bond Fund, Inc. ("Limited Term Bond Fund") seeks a high
level of current income consistent with a relatively high level of principal
stability by investing in a portfolio of securities with a dollar weighted
average maturity of five years or less.
Principal Tax-Exempt Bond Fund, Inc. ("Tax-Exempt Bond Fund") seeks as high a
level of current income exempt from federal income tax as is consistent with
preservation of capital. The Fund seeks to achieve its objective primarily
through the purchase of investment grade quality, tax-exempt fixed income
obligations.
Investment Restrictions
Bond Fund, High Yield Fund and Limited Term Bond Fund
Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The Bond Fund, High Yield
Fund and Limited Term Bond Fund each may not:
(1) Issue any senior securities as defined in the Investment Company Act of
1940. Purchasing and selling securities and futures contracts and options
thereon and borrowing money in accordance with restrictions described below
do not involve the issuance of a senior security.
(2) Purchase or retain in its portfolio securities of any issuer if those
officers or directors of the fund or its Manager owning beneficially more
than one-half of 1% (0.5%) of the securities of the issuer together own
beneficially more than 5% of such securities.
(3) Invest in commodities or commodity contracts, but it may purchase and sell
financial futures contracts and options on such contracts.
(4) Invest in real estate, although it may invest in securities which are
secured by real estate and securities of issuers which invest or deal in
real estate.
(5) Borrow money, except for temporary or emergency purposes, in an amount not
to exceed 5% of the value of the Fund's total assets at the time of the
borrowing.
(6) Make loans, except that the Fund may (i) purchase and hold debt obligations
in accordance with its investment objective and policies, (ii) enter into
repurchase agreements, and (iii) lend its portfolio securities without
limitation against collateral (consisting of cash or securities issued or
guaranteed by the United States Government or its agencies or
instrumentalities) equal at all times to not less than 100% of the value of
the securities loaned.
(7) Invest more than 5% of its total assets in the securities of any one issuer
(other than obligations issued or guaranteed by the United States
Government or its agencies or instrumentalities); or purchase more than 10%
of the outstanding voting securities of any one issuer.
(8) Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in its portfolio.
(9) Concentrate its investments in any particular industry or industries,
except that the Fund may invest not more than 25% of the value of its total
assets in a single industry.
(10) Sell securities short (except where the Fund holds or has the right to
obtain at no added cost a long position in the securities sold that equals
or exceeds the securities sold short) or purchase any securities on margin,
except it may obtain such short-term credits as are necessary for the
clearance of transactions. The deposit or payment of margin in connection
with transactions in options and financial futures contracts is not
considered the purchase of securities on margin.
(11) Invest in interests in oil, gas or other mineral exploration or development
programs, although the Fund may invest in securities of issuers which
invest in or sponsor such programs.
Each of these Funds has also adopted the following restrictions which are not
fundamental policies and may be changed without shareholder approval. It is
contrary to each Fund's present policy to:
(1) Invest more than 15% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven days.
The value of any options purchased in the Over-the-Counter market are
included as part of this 15% limitation.
(2) Purchase warrants in excess of 5% of its total assets, of which 2% may be
invested in warrants that are not listed on the New York or American Stock
Exchange.
(3) Purchase securities of any issuer having less than three years' continuous
operation (including operations of any predecessors) if such purchase would
cause the value of the Fund's investments in all such issuers to exceed 5%
of the value of its total assets.
(4) Purchase securities of other investment companies except in connection with
a merger, consolidation, or plan of reorganization or by purchase in the
open market of securities of closed-end companies where no underwriter or
dealer's commission or profit, other than a customary broker's commission,
is involved, and if immediately thereafter not more than 10% of the value
of the Fund's total assets would be invested in such securities.
(5) Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings. The deposit of underlying securities and other assets in escrow
and other collateral arrangements in connection with transactions in put
and call options, futures contracts and options on futures contracts are
not deemed to be pledges or other encumbrances.
(6) Invest in companies for the purpose of exercising control or management.
(7) Invest more than 20% of its total assets in securities of foreign issuers.
(8) Invest more than 5% of its total assets in the purchase of covered spread
options and the purchase of put and call options on securities, securities
indices and financial futures contracts. Options on financial futures
contracts and options on securities indices will be used solely for hedging
purposes; not for speculation.
(9) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
(10) Invest in arbitrage transactions.
(11) Invest in real estate limited partnership interests.
Government Securities Income Fund
Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The Government Securities
Income Fund may not:
(1) Issue any senior securities.
(2) Purchase any securities other than obligations issued or guaranteed by the
United States Government or its agencies or instrumentalities, except that
the Fund may maintain reasonable amounts in cash or 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) 5% of its total assets in the securities of any one issuer (other than
obligations issued or guaranteed by the United States Government or its
agencies or instrumentalities).
(b) 15% of its total assets in securities that are not readily marketable
and in repurchase agreements maturing in more than seven days.
(8) Invest in real estate, although it may invest in securities which are
secured by real estate and securities of issuers which invest or deal in
real estate.
(9) Invest in commodities or commodity futures contracts.
(10) Write, purchase or sell puts, calls or combinations thereof.
(11) Invest in interests in oil, gas or other mineral exploration or development
programs, although it may invest in securities of issuers which invest in
or sponsor such programs.
(12) Make short sales of securities.
(13) Purchase any securities on margin, except it may obtain such short-term
credits as are necessary for the clearance of transactions.
(14) Make loans, except that the Fund may purchase and hold debt obligations in
accordance with its investment objective and policies, enter into
repurchase agreements, and may lend its portfolio securities without
limitation against collateral, consisting of cash or securities issued or
guaranteed by the United States Government or its agencies or
instrumentalities, which is equal at all times to 100% of the value of the
securities loaned.
(15) Borrow money, except for temporary or emergency purposes from banks in an
amount not to exceed 5% of the value of the Fund's total assets at the time
the loan is made.
(16) Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings.
The Fund has also adopted the following restriction which is not fundamental and
may be changed without shareholder approval. It is contrary to the Fund's
current policy to 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) Make loans to others except through the purchase of debt obligations in
which the Fund is authorized to invest and by entering into repurchase
agreements (see "Fund Investments").
(12) Borrow money except from banks for temporary or emergency purposes,
including the meeting of redemption requests which might otherwise require
the untimely disposition of securities, in an amount not to exceed the
lesser of (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 Partners Aggressive
Growth Fund) 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, 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.
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 and Real Estate Fund - 25%;
o Balanced, Blue Chip, Bond, Capital Value, Growth, High Yield, Limited Term
Bond, MidCap, SmallCap and Utilities Funds - 20%.
o 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
securities do not vary or float with the value of a foreign currency, the
rate of interest on foreign currency borrowings or with any other interest
rate or index expressed in a currency other than U.S.
dollars.
Debt securities issued in the United States pursuant to a registration statement
filed with the Securities and Exchange Commission are not treated as foreign
securities for purposes of these limitations.
Investment in foreign securities presents certain risks including: 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 International SmallCap, MidCap and SmallCap Funds 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 Partners Aggressive Growth, Balanced, Blue Chip, Bond, Government Securities
Income, High Yield, International, International Emerging Markets, International
SmallCap, Limited Term Bond, MidCap, Real Estate, SmallCap and Utilities Funds
may each engage in the practices described under this heading. The Tax-Exempt
Bond Fund may invest in financial futures contracts as described under this
heading. In the following discussion, the terms "the Fund," "each Fund" or "the
Funds" refer to each of these Funds.
Spread Transactions
Each Fund may purchase 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 Partners Aggressive Growth, International, International Emerging Markets
and International SmallCap 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 Partners Aggressive Growth, International, International Emerging Markets
and International SmallCap 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, except the Capital Value, Growth and Cash Management 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.
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 57.0% and 27.6%
Blue Chip Fund 0.5% and 55.4%
Bond Fund 15.2% and12.8%
Capital Value Fund 23.2% and 30.8%
Government Securities Income Fund 17.1% and 10.8%
Growth Fund 21.9% and16.5%
High Yield Fund 65.9% and 39.2%
International Emerging Markets Fund 45.2% and 21.4%
International Fund 38.7% and 26.6%
International SmallCap Fund 99.8% and10.4%
Limited Term Bond Fund 23.8% and 17.4%
MidCap Fund 25.1% and 9.5%
Real Estate Fund 60.4%
SmallCap Fund 20.5%
Tax-Exempt Bond Fund 6.6% and 8.9%
Utilities Fund 11.9% and 22.5%
Fund 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
Limited Term Bond Fund August 9, 1995
MidCap Fund February 20, 1987
Partners Aggressive Growth Fund August 10, 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 November 1, 1989 the Fund succeeded to the business of a
predecessor Fund that had been incorporated in Delaware on February 6,
1969.
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. Senior Vice President, Principal Life
Insurance Company since 1996; 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,
Principal Life Insurance Company since 1998; Executive Vice President,
1996-1998; Senior Vice President, 1991-1996. Director and Chairman of the
Board, Principal Management Corporation and Princor Financial Services
Corporation.
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 , 38, 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, 60, 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. Counsel, Principal Life Insurance Company
since 1994. Prior thereto, Assistant Counsel. Counsel, Invista Capital
Management, Inc., Princor Financial Services Corporation, Principal
Investors Corporation and Principal Management Corporation.
* 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.)
<TABLE>
<CAPTION>
COMPENSATION TABLE*
fiscal year ended October 31, 1998
Director Compensation from Each Principal Mutual Fund Compensation from Fund Complex
-------- -------------------------------------------- ------------------------------
<S> <C> <C>
James D. Davis $21,450 $50,775
Pamela A. Ferguson 20,100 43,950
Richard W. Gilbert 21,450 48,825
Barbara A. Lukavsky 21,450 50,775
<FN>
* None of the Funds provide retirement benefits for any of the directors.
</FN>
</TABLE>
As of October 13, 1999 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 0.12%
Blue Chip Fund 0.78
Bond Fund 0.62
Capital Value Fund 23.58
Cash Management Fund 6.50
Government Securities Income Fund 0.03
Growth Fund 0.39
High Yield Fund 7.54
International Emerging Markets Fund 39.15
International Fund 24.26
International SmallCap Fund 38.32
Limited Term Bond Fund 20.76
MidCap Fund 0.73
Partners Aggressive Growth Fund* 100.00
Real Estate Fund 63.04
SmallCap Fund 17.41
Tax-Exempt Bond Fund 0.05
Utilities Fund 0.25
* represents start-up capital.
As of October 13, 1999 the Officers and Directors of each Fund as a group owned
less than 1% of the outstanding shares of any of the Funds.
As of October 13, 1999, the following shareholders of the Funds owned 5% or more
of the outstanding shares of the Funds:
<TABLE>
<CAPTION>
Percentage
Name Address of Ownership
---- ------- ------------
<S> <C> <C>
Principal Balanced Fund, Inc.
Class C
Louis Barbieri 23 Highland Cross 8.8%
Rutherford, NJ 07070-2110
Jessica R. Payne 216 Summit Street 5.0
Whitewater, WI 53190-1733
Principal Life Insurance Company Custodian 1619 Cornfield Circle 5.7
IRA of Kirby L. Hill Farmington, NY 14425-9319
Wanda J. Mayer 301 6th Avenue 14.5%
Hiawatha, IA 52233-1704
Principal Life Insurance Company Custodian 1841 Derby Drive 6.0
Conduit IRA of George M. Johnson Santa Ana, CA 92705-2508
Principal Blue Chip Fund, Inc.
Class C
Principal Life Insurance Company Custodian 950 S. Dylan Way 5.3%
Conduit IRA of Yao Yu Anaheim, CA 92808-1515
Principal Bond Fund, Inc.
Class C
Ellen M. Bryan TOD Beneficiaries 2608 W. Castle Court 16.4
Peoria, IL 61614-3727
Axie E. Kennedy & Charles W. Kennedy Jtten 1011 Blaine Street 6.0
Holdrege, NE 68949-1739
Ruth M. Lux 103 Lee Avenue 7.3
Lidderdale, IA 51452
Principal Life Insurance Company Custodian 3344 Kalamazoo Avenue SE 7.4
Inherited IRA of Nicola L. Kern Grand Rapids, MI 49508-2558
Beneficiary of Richard Kern
Principal Capital Value Fund, Inc.
Class C
Woodland Heights Presbyterian Church 722 W. Atlantic Street 16.6
Attn Gregory W. Esselman Springfield, MO 65803-1516
Principal Life Insurance Company Custodian W. 4601 City Hwy IW 7.2
IRA of Carl J. Joosse Waldo, WI 53093
Principal Cash Management Fund, Inc.
Class A
Delaware Charter Guarantee & Trust Co. P.O. Box 8704 8.3
Attn: Thomas R. Kline, CFO Wilmington, DE 19899-8704
Class B
Principal Life Insurance Company Custodian 3110 N. Pinewood Street 10.1
Rollover IRA of Arthur R. Hoyt Orange, CA 92865-1224
Class C
Principal Life Insurance Company Custodian 3434 Thyme Drive 8.0
Rollover IRA of Thomas L. Parr Rockford, IL 61114-5385
Principal Life Insurance Company Custodian 803 Blaine Street 15.8
Conduit IRA of Marilyn J. Swanson Holdrege, NE 68949-2135
Principal Government Securities Income Fund, Inc.
Class C
Dominica M. Bradley 26751 Via Zaragosa 16.9
Mission Viejo, CA 92691-5024
Axie E. Kennedy & Charles W. Kennedy Jtten 1011 Blaine Street 7.1
Holdrege, NE 68949-1739
Principal Life Insurance Company Custodian 26111 Allentown Road 6.2
Conduit IRA of Ruth A. Uhlman Tremont, IL 61568-9449
George F. Kenney & Merlyn J. Kenney Jtten 3690 S. Willow Water Lane 16.0
Springfield, MO 65809-4238
Principal Life Insurance Company Custodian 3344 Kalamazoo Avenue SE 5.7
Inherited IRA of Nicola Kern Grand Rapid, MI 49508-2558
Beneficiary of Richard Kern
Principal Growth Fund, Inc.
Class C
Woodland Heights Presbyterian Church 722 W. Atlantic Street 8.0%
Attn Gregory W. Esselman Springfield, MO 65803-1516
Wanda J. Mayer 301 6th Avenue 8.9
Hiawatha, IA 52233-1704
Principal High Yield Fund, Inc.
Class C
Ellen M. Bryan TOD Beneficiaries 2608 W. Castle Court 33.4
Peoria, IL 61614-3727
Harley N. Foreman & Geraldine Foreman Jtten 314 Crawford Street 5.0
Carroll, IA 51401-2234
Principal Life Insurance Company Custodian 3344 Kalamazoo Avenue SE 5.0
Inherited IRA of Nicola Kern Grand Rapid, MI 49508-2558
Beneficiary of Richard Kern
Principal International Fund, Inc.
Class C
Principal Life Insurance Company Custodian 2390 Stonebridge Drive 6.7
IRA of Franklin D. Avery Orange Park, FL 32065-5769
Principal Life Insurance Company Custodian 2390 Stonebridge Drive 7.2
IRA of Faye Leneave Avery Orange Park, FL 32065-5769
Donaldson Lufkin Jenrette Securities Corporation, Inc. 10.9
Securities Corporation, Inc. P.O. Box 2052
Jersey City, NJ 07303-9998
Principal Life Insurance Company Custodian 3113 W. Ralph Rogers Road 8.0
Conduit IRA of Teri A. Pudenz Sioux Falls, SD 57108-2627
Principal Limited Term Bond Fund, Inc.
Class C
Principal Life Insurance Company Custodian 2101 Sumac Drive 13.8
Conduit IRA of Mary F. McClain Champaign, IL 61821-6323
Jessica R. Payne 216 Summit Street 5.1
Whitewater, WI 53190-1733
Melvinn T. Soswowski 8022 W. Burleigh Street 6.5
Milwaukee, WI 53222-4919
Principal Life Insurance Company Custodian 2101 Sumac Drive 20.7
IRA of William P. Klein Champaign, IL 61821-6323
Principal Life Insurance Company Custodian 3344 Kalamazoo Avenue SE 6.1
Inherited IRA of Nicola Kern Grand Rapid, MI 49508-2558
Beneficiary of Richard Kern
Principal International Emerging Markets Fund, Inc.
Class C
Principal Life Insurance Company Custodian 3113 W. Ralph Rogers Road 6.8
Conduit IRA of Teri A. Pudenz Sioux Falls, SD 57108-2627
Principal MidCap Fund, Inc.
Class C
Woodland Heights Presbyterian Church 722 W. Atlantic Street 14.6
Attn Gregory W. Esselman Springfield, MO 65803-1516
Principal Life Insurance Company Custodian 2119 E. Stolley Park Road 7.7
IRA of Orville O. Qualsett Grand Island, NE 68801-1206
Principal Life Insurance Company Custodian 3113 W. Ralph Rogers Road 6.6%
Conduit IRA of Teri A. Pudenz Sioux Falls, SD 57108-2627
Donaldson Lufkin Jenrette Securities Corporation, Inc. 8.0
P.O. Box 2052
Jersey City, NJ 07303-9998
Principal Real Estate Fund, Inc.
Class C
Principal Life Insurance Company Custodian 3344 Kalamazoo Avenue SE 9.1
Inherited IRA of Nicola Kern Grand Rapid, MI 49508-2558
Beneficiary of Richard Kern
Principal SmallCap Fund, Inc.
Class C
Donaldson Lufkin Jenrette Securities Corporation, Inc. 10.2
P.O. Box 2052
Jersey City, NJ 07303-9998
Principal Tax-Exempt Bond Fund, Inc.
Class C
Carol V. Hughes Trust 2932 E Gettysburg Avenue 13.8
Carol V. Hughes 1994 Trust Fresno, CA 93726-0435
Rowene C. Kracht & Robert A. Kracht Jtten 1717 N. Grant Road 10.8
Tod Beneficiaries Carroll, IA 51401-1612
Principal Utilities Fund, Inc.
Class C
Axie E. Kennedy & Charles W. Kennedy Jtten 1011 Blaine Street 5.4
Holdrege, NE 68949-1739
Donaldson Lufkin Jenrette Securities Corporation, Inc. 8.5
P.O. Box 2052
Jersey City, NJ 07303-9998
</TABLE>
MANAGER AND SUB-ADVISOR
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, 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 September 30, 1999 were approximately $6.3
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 August 31, 1999,
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.
The Manager, Invista, Morgan Stanley 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, Invista, Morgan Stanley 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>
Partners Aggressive Growth Fund .75% .70% .65% .60% .55%
</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 Fund .75 .70 .65 .60 .55
International SmallCap Fund 1.20 1.15 1.10 1.05 1.00
MidCap Fund .65 .60 .55 .50 .45
Real Estate Fund .90 .85 .80 .75 .70
SmallCap Fund .85 .80 .75 .70 .65
All Other Funds .50 .45 .40 .35 .30
</TABLE>
There is no assurance that any of the Funds' net assets will reach sufficient
amounts to be able to take advantage of the rate decreases. The net assets of
each Fund on October 31, 1998 and the rate of the fee for each Fund for
investment management services as provided in the Management Agreement for the
fiscal year then ended were as follows:
Management Fee
Net Assets as of For Fiscal Year Ended
Fund October 31, 1998 October 31, 1998
---- ----------------- --------------------
Balanced Fund $142,777,667 .59%
Blue Chip Fund 193,834,531 .48
Bond Fund 182,742,664 .48*
Capital Value Fund 647,492,207 .38
Cash Management Fund 308,933,585 .38*
Government Securities Income Fund 283,981,376 .46
Growth Fund 491,320,149 .41
High Yield Fund 44,734,802 .60
International Fund 362,172,335 .68
International Emerging Markets Fund 12,789,905 1.25
International SmallCap Fund 21,667,242 1.20
Limited Term Bond Fund 31,370,705 .50*
MidCap Fund 424,839,839 .56
Real Estate Fund 11,537,737 .89
SmallCap Fund 29,776,443 .75
Tax-Exempt Bond Fund 216,283,905 .47
Utilities Fund 98,928,795 .60*
* 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 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C>
Balanced Fund $ 750,616 $ 556,009 $ 404,461
Blue Chip Fund 764,784 417,958 212,845
Bond Fund 782,241(1) 636,217(1) 534,366(1)
Capital Value Fund 2,349,118 2,031,143 1,671,502
Cash Management Fund 2,127,595(1) 2,864,916(1) 2,555,687(1)
Government Securities Income Fund 1,239,644 1,227,604 1,223,631
Growth Fund 1,863,070 1,443,120 1,040,897
High Yield Fund 287,858 230,667 159,773
International Emerging Markets Fund 157,324 28,487(3) N/A
International Fund 2,492,037 1,882,664 1,154,783
International SmallCap Fund 242,403 30,283(3) N/A
Limited Term Bond Fund 133,825(1) 97,039(1) 18,619(1)(2)
MidCap Fund 2,548,924 2,004,305 1,293,848
Real Estate Fund 87,653(4) N/A N/A
SmallCap Fund 147,083(4) N/A N/A
Tax-Exempt Bond Fund 974,740 941,387 888,967
Utilities Fund 531,644(1) 436,296(1) 375,780(1)
<FN>
(1)Before waiver.
(2)Period from February 13, 1996 (Date Operations Commenced) through October 31, 1996.
(3)Period from August 14, 1997 (Date Operations Commenced) through October 31, 1997.
(4)Period from December 11, 1997 (Date Operations Commenced) through October 31, 1998.
</FN>
</TABLE>
The Manager waived $100,270, $59,630 and $25,970 of its fee for the Limited Term
Bond Fund for the years ended October 31, 1998, 1997 and the period ended
October 31, 1996, respectively. The Manager waived $172,366, $60,665, and
$28,413 of its fee for the Bond Fund for the years ended October 31, 1998, 1997
and 1996, respectively. The Manager also waived $1,343, $7,933 and $13,242 of
its fee for the Cash Management Fund for the years ended October 31, 1998, 1997
and 1996, respectively. The Manager also waived $82,515, $79,048, and $61,622 of
its fee for the Utilities Fund for the years ended October 31, 1998, 1997 and
1996, 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,
---- ----------------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balanced Fund $ 521,852 $ 364,442 $ 251,542
Blue Chip Fund 832,394 402,003 206,942
Bond Fund 482,817 278,385 221,648
Capital Value Fund 1,247,865 837,825 567,786
Cash Management Fund 854,575 1,833,423 1,762,455
Government Securities Income Fund 499,207 407,146 394,360
Growth Fund 1,421,948 1,121,832 837,917
High Yield Fund 217,020 98,481 66,305
International Emerging Markets Fund 119,948 4,116(2) N/A
International Fund 1,168,106 906,359 598,305
International SmallCap Fund 153,320 4,283(2) N/A
Limited Term Bond Fund 90,187 44,634 32,982(1)
MidCap Fund 1,840,474 1,308,608 942,986
Real Estate Fund 76,546(3) N/A N/A
SmallCap Fund 199,807(3) N/A N/A
Tax-Exempt Bond Fund 199,780 135,553 145,931
Utilities Fund 304,813 230,151 288,489
<FN>
(1)Period from February 13, 1996 (Date Operations Commenced) through October 31, 1996.
(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>
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 Management Agreements and the Investment Service Agreements, pursuant to
which Principal Capital Management, a subsidiary of Principal Life Insurance
Company, has agreed to furnish certain personnel, services and facilities
required by the Manager, were last approved by each of the Fund's Board of
Directors on September 13, 1999. The Sub-Advisory Agreements between the Manager
and Invista were also approved by the Boards of the Balanced, Blue Chip, Capital
Value, Government Securities Income, Growth, International Emerging Markets,
International, International SmallCap, Limited Term Bond, MidCap, SmallCap, &
Utilities Funds on September 13, 1999. The Board of the Partners Aggressive
Growth Fund approved the Sub-Advisory Agreement between the Manager and Morgan
Stanley on September 13, 1999. Each of these agreements provides for
continuation in effect from year to year only so long as such continuation is
specifically approved at least annually either by the Board of Directors of the
Fund or by vote of a majority of the outstanding voting securities of the
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, Invista, Morgan Stanley 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.
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, 1998 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 $ 70,261
Blue Chip 41,024
Capital Value 331,316
Growth 276,004
International Emerging Markets 51,821
International 758,808
International SmallCap 101,485
MidCap 242,311
Real Estate* 40,791
SmallCap* 46,957
Utilities 39,470
* Period from December 11, 1997 (date operations commenced) through
October 31, 1998.
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.
<TABLE>
<CAPTION>
Total Brokerage Commissions Paid
--------------------------------------------------------------
Fund 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C>
Balanced Fund $ 70,261 $ 47,096 $ 41,537
Blue Chip Fund 41,024 113,923 17,198
Capital Value Fund 331,316 339,994 375,742
Growth Fund 276,004 43,018 64,704
International Emerging Markets Fund 51,821 45,140* N/A
International Fund 758,808 708,333 338,670
International SmallCap Fund 101,485 46,970* N/A
MidCap Fund 242,311 98,217 99,466
Real Estate Fund 40,791** N/A N/A
SmallCap Fund 46,957** N/A N/A
Utilities Fund 39,470 58,450 70,140
<FN>
* Period from August 14, 1997 (date operations commenced) through October 31, 1997.
**Period from December 11, 1997 (date operations commenced) through October 31, 1998.
</FN>
</TABLE>
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
1998 $ 2,950 4.20% 1.87%
Growth Fund
1998 5,000 1.81% 1.87%
International Emerging Markets Fund
1998 662 1.28% 1.54%
International Fund
1998 41,600 5.48% 5.79%
International SmallCap Fund
1998 2,326 2.29% 2.96%
SmallCap Fund
1998 210 0.45% 0.61%
Utilities Fund
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
1998 $ 500 0.71% 1.03%
Blue Chip Fund
1998 1,950 4.75% 5.35%
Capital Value Fund
1998 18,935 5.72% 6.27%
Growth Fund
1998 1,250 0.45% 0.39%
International Emerging Markets Fund
1998 2,570 4.96% 6.77%
International Fund
1998 17,961 2.37% 1.80%
Real Estate Fund
1998 3,205 7.86% 7.67%
</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
1998 $ 2,630 3.74% 2.27%
1997 45 - 0.1%
1996 555 1.3% 1.0%
Blue Chip Fund
1998 365 0.89% 0.99%
1997 4,602 4.0% 2.4%
1996 420 3.0% 3.0%
Capital Value Fund
1998 13,740 4.15% 3.78%
1997 9,900 2.9% 2.4%
1996 9,400 2.5% 1.9%
Growth Fund
1998 12,500 4.53% 4.92%
1997 3,250 7.6% 8.5%
International Emerging Markets Fund
1998 1,499 2.89% 3.64%
1997 1,586 3.5% 9.3%
International Fund
1998 78,938 10.40% 10.03%
1997 20,595 2.9% 2.7%
1996 4,038 1.2% 3.2%
International SmallCap Fund
1998 4,284 4.22% 7.42%
1997 1,502 3.2% 4.2%
MidCap Fund
1998 7,716 3.18% 4.19%
1997 3,750 3.8% 2.8%
1996 500 .5% .9%
Real Estate Fund
1998 11,540 28.29% 28.36%
SmallCap Fund
1998 840 1.79% 1.65%
Utilities Fund
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.
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 Limited Term Bond Fund) the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. Shares subject to the CDSC which are exchanged
into another Principal 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 Limited Term Bond Fund) of the Fund's average net assets
attributable to Class A shares. See "Distribution Plan."
Class B Shares. Class B shares are purchased without an initial sales charge,
but are subject to a declining CDSC of up to 4% (1.25% for the Limited Term Bond
Fund) if redeemed within six years. 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 Limited Term Bond Fund) of the
Fund's average net assets attributable to Class B shares. See "Distribution
Plan." Class B shares provide an investor the benefit of putting all of the
investor's dollars to work from the time the investment is made, but (until
conversion to Class A shares) 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 Limited Term Bond Fund). 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
Limited Term Bond Fund) 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% 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 "To Exchange Shares" 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.
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 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.
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 Limited Term
Bond Fund, are sold to the public at the net asset value plus a sales charge
which ranges from a high 4.75% to a low of 0% of the offering price (equivalent
to a range of 4.99% to 0% of the net amount invested) according to the schedule
below. Class A shares of the Limited Term Bond Fund are sold to the public at
the net asset value plus a sales charge which ranges from a high of 1.50% to a
low of 0% of the offering price according to the schedule below. Selected
dealers are allowed a concession as shown. At Princor's discretion, the entire
sales charge may at times be reallowed to dealers. In some situations, depending
on the services provided by the dealer, the concession may be less. Any dealer
allowance on purchases not involving a sales charge 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. The Glass-Steagall Act prohibits banks
from underwriting securities, including fund shares; the Act does, however,
permit certain agency transactions and banking regulators have ruled that these
particular agency transactions are not prohibited under the Act.
<TABLE>
<CAPTION>
Sales Charge for
All Funds Except Sales Charge for Dealer Allowance as
Limited Term Bond Fund Limited Term Bond Fund % of Offering Price
---------------------- ---------------------- -------------------
Sales Charge as % of: Sales Charge as % of: All Funds Limited
Offering Amount Offering Amount Except Limited Term
Amount of Purchase Price Invested Price Invested Term Bond Fund Bond Fund
------------------ -------- -------- -------- -------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Less than $50,000 4.75% 4.99% 1.50% 1.52% 4.00% 1.25%
$50,000 but less than $100,000 4.25 4.44 1.25 1.27 3.75 1.00
$100,000 but less than $250,000 3.75 3.90 1.00 1.01 3.25 0.75
$250,000 but less than $500,000 2.50 2.56 0.75 0.76 2.00 0.50
$500,000 but less than $1,000,000 1.50 1.52 0.50 0.50 1.25 0.25
$1,000,000 or more No Sales Charge 0.00 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 and Class B shares already owned
by the investor to the amount of the new purchase. The corresponding percentage
factor in the schedule is then applied to the entire amount of the new purchase.
For example, if an investor currently owns Class A or Class B shares with a
value of $5,000 and makes an additional investment of $45,000 in Class A shares
of a Growth-Oriented Fund (the total of which equals $50,000), the charge
applicable to the $45,000 investment would be 4.25% of the offering price. If
the investor purchases shares of more than one Principal 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) and Class B shares of the Funds within a
thirteen-month period (two-year period if the intended investment is made by a
trustee of a Section 401(a) plan or is equal to or greater than $1 million). The
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) and Class B shares in that shareholder's account or
accounts combined for rights of accumulation purposes, is added to the amount
that has been indicated will be invested during the applicable period, and the
sales charge applicable to all purchases of Class A shares made under the 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;
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; 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.
In addition, investors who are clients of a registered representative of Princor
or other dealers through which shares of the Funds are distributed and who has
become affiliated with Princor or such other dealer within 180 days of the date
of the purchase of Class A shares of the Funds may purchase such shares at net
asset value provided that (i) the purchase is made within the first 180 days of
the registered representative's affiliation with the firm involved (as certified
by an officer or partner of the firm); and (ii) the investment represents the
proceeds of a redemption within that 180 day period of shares of another
investment company the purchase of which included a front-end sales charge or
the redemption of which included a contingent deferred sales charge; and (iii)
the investor indicates on the account application that the purchase qualifies
for a net asset value purchase and forwards to Princor either (a) the redemption
check representing the proceeds of the shares redeemed, endorsed to the order of
Princor, or (b) a copy of the confirmation from the other investment company
showing the redemption transaction. In the case of a wire purchase pursuant to
this provision, a copy of the confirmation from the other investment company
showing the redemption must be forwarded to and received by Princor within 21
days following the date of purchase. If the confirmation is not provided within
the 21-day period, a sufficient number of shares is redeemed from the
shareholder's account to pay the otherwise applicable sales charge. Investors
availing themselves of this option should be aware that a redemption from
another mutual fund is a taxable event and may be subject to a surrender charge
imposed by that fund.
Also during the period beginning December 1, 1999 and ending January 31, 2000,
investors may purchase Class A shares of the Funds at net asset value to the
extent that this investment represents the proceeds of a redemption, within the
preceding 60 days, of shares (the purchase price of which shares included a
front-end sales charge on the redemption of which was subject to a contingent
deferred sales charge) of another investment company. This provision does not
apply to purchase of Class A shares used to fund a defined contribution plan.
When making a purchase at net asset value pursuant to this provision, the
investor must indicate on the account application that the purchase qualifies
for a net asset value purchase and must forward to Princor either (i) the
redemption check representing the proceeds of the shares redeemed, endorsed to
the order of Princor Financial Services Corporation, or (ii) a copy of the
confirmation from the other investment company showing the redemption
transactions. In the case of a wire purchase pursuant to this provision, a copy
of the confirmation from the other investment company showing the redemption
must be forwarded to and received by Princor within 21 days following the date
of purchase. If the confirmation is not provided within the 21-day period, a
sufficient number of shares will be redeemed from the shareholder's account to
pay the otherwise applicable sales charge.
Purchases at a Reduced Sales Charge. A reduced sales charge is also available
for purchases of Class A shares of the Funds, except the Limited Term Bond Fund,
to the extent that the investment represents 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> <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
and Income-Oriented Funds, except Principal Limited Term Bond Fund and, in
certain circumstances, Principal Tax-Exempt Bond Fund which is not available for
certain retirement plans, are sold at net asset value to stock bonus, pension or
profit sharing plans that meet the requirements for qualification under Section
401 of the Internal Revenue Code of 1986, as amended, certain Section 403(b)
Plans, Section 457 Plans and other Non-qualified Plans administered by Principal
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>
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 or Class B 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 sales charge for purchases of less than $250,000 is 3.75% as
a percentage of the offering price and 3.90% of the net amount invested.
The regular sales charge table for Class A shares applies to purchases
$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 Limited Term Bond Fund) 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 sales charge for purchases of less
than $250,000 is 3.75% as a percentage of the offering price and 3.90% of
the net amount invested. The regular sales charge table for Class A shares
applies to purchases of $250,000 or more. 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 Limited Term Limited Term Except Limited Term Limited Term
Payments Made Bond Fund Bond Fund Bond Fund Bond Fund
-------------------- ------------------- ------------ ------------------- ------------
<S> <C> <C> <C> <C>
2 years or less 4.0% 1.25% 3.00% .75%
more than 2 years, up to 4 years 3.0 0.75 2.00 .50
more than 4 years, up to 5 years 2.0 0.50 1.00 .25
more than 5 years, up to 6 years 1.0 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" 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 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C>
Balanced Fund $ 716,315 $ 518,345 $ 448,584
Blue Chip Fund 1,230, 098 816,203 469,388
Bond Fund 887,870 582,903 637,949
Capital Value Fund 1,769,043 1,383,995 988,680
Cash Management Fund 19,171 14,123 1,013
Government Securities Income Fund 846,821 737,229 1,233,811
Growth Fund 2,079,726 1,548,696 1,813,439
High Yield Fund 335,156 321,051 164,687
International Emerging Markets Fund 114,325 33,588(2) N/A
International Fund 1,369,016 1,524,740 951,553
International SmallCap Fund 197,039 38,421(2) N/A
Limited Term Bond Fund 77,191 50,773 56,766(1)
MidCap Fund 2,447,638 2,152,664 2,112,480
Real Estate Fund 53,280(3) N/A N/A
SmallCap Fund 398,391(3) N/A N/A
Tax-Exempt Bond Fund 667,756 558,697 698,730
Utilities Fund 339,353 169,904 370,724
<FN>
(1)Period from February 13, 1996 (Date Operations Commenced) through October 31, 1996.
(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>
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 Limited Term
Bond Fund). 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
Years Since Purchase Except Limited Term Limited Term Except Limited Term Limited Term
Payments Made Bond Fund Bond Fund Bond Fund Bond Fund
---------------------------- ------------------- ------------ ------------------- ------------
<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 Limited Term Bond Fund) 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 Limited Term Bond Fund) to Registered Representatives and other selected
Dealers (including for this purpose, certain financial institutions) as a trail
fee in recognition of their services and assistance.
Class B Distribution Plan. Each Class B Plan provides for payments by the Fund
to Princor at the annual rate of up to 1.00% (.50% for the Limited Term Bond
Fund) of the Fund's average net asset attributable to Class B shares. Princor
also receives the proceeds of any CDSC imposed on redemptions of such shares.
Although Class B shares are sold without an initial sales charge, Princor pays a
sales commission equal to 4.00% (3.00% for certain sponsored plans or 1.25% for
the Limited Term Bond Fund) of the amount invested to dealers who sell such
shares. These commissions are not paid on exchanges from other Principal Mutual
Funds. In addition, Princor may remit on a continuous basis up to .25% (.15% for
the Limited Term Bond Fund) to the Registered Representatives and other selected
Dealers (including for this purpose, certain financial institutions) as a trail
fee in recognition of their services and assistance.
Class 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 Limited Term Bond
Fund) 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 Limited Term Bond Fund) to the
Registered Representatives and other selected Dealers (including for this
purpose, certain financial institutions) as a trail fee in recognition of their
services and assistance.
Class R Distribution Plan. Each of the Funds, except the Tax-Exempt Bond Fund,
has adopted a distribution plan for the Class R shares. Each Class R Plan
provides for payments by the Fund to Princor at the annual rate of up to .75% of
the Fund's average net assets attributable to Class R shares.
Although Class R shares are sold without an initial sales charge, Princor incurs
certain distribution expenses. In addition, Princor may remit on a continuous
basis up to .25% to Registered Representatives and other selected Dealers
(including, for this purpose, certain financial institutions) as a trail fee in
recognition of their ongoing services and assistance.
General Information Regarding Distribution Plans. A representative of Princor
provides to the 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 reinvested 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, 1998 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 $241,795 $ 5,132 $12,151 $ 77,012 $22,538 $124,963 $241,795
Blue Chip 265,449 7,358 17,096 96,066 27,270 117,660 265,449
Bond 341,013 5,951 14,278 84,649 24,871 211,263 341,013
Capital Value 817,936 10,797 25,099 144,595 39,870 597,575 817,936
Government Securities Income 487,256 5,039 12,500 78,969 22,778 367,970 487,256
Growth 795,083 11,128 26,652 150,363 42,246 564,693 795,083
High Yield 89,054 2,785 6,537 38,731 11,783 29,218 89,054
International Emerging Markets 17,129 652 1,722 8,539 5,466 750 17,129
International 611,261 11,751 27,044 147,012 65,397 360,057 611,261
International SmallCap 26,334 951 2,562 12,557 8,429 1,835 26,334
Limited Term Bond 36,351 1,083 2,739 18,632 7,771 6,125 36,351
MidCap 889,082 15,834 36,047 195,886 71,288 570,027 889,082
Real Estate 12,146 672 1,617 6,642 2,985 231 12,146
SmallCap 27,412 1,097 2,961 14,157 7,117 2,080 27,412
Tax-Exempt Bond 441,425 5,536 13,272 78,378 23,523 320,715 441,425
Utilities 191,411 3,401 8,922 55,013 17,158 106,918 191,411
</TABLE>
The amount received from each Fund and retained by Princor during the period
ended October 31, 1998 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 $141,265.21 $2,337 $ 5,394 $35,418 $ 7,315 $25,346 $ 65,455 $141,265
Blue Chip 251,374.65 4,239 9,752 56,565 13,111 45,518 122,191 251,375
Bond 164,902.96 2,670 6,125 37,369 8,256 30,246 80,238 164,903
Capital Value 298,016.25 4,573 10,244 58,181 13,698 64,745 146,575 298,016
Cash Management 4,546.23 193 443 2,179 611 1,121 0 4,546
Government Securities Income 162,933.40 2,087 4,955 32,057 6,769 33,255 83,810 162,933
Growth 370,747.74 4,758 11,146 61,237 15,109 94,760 183,737 370,748
High Yield 73,761.52 1,752 4,273 24,628 6,383 16,226 20,499 73,762
International Emerging Markets 24,803.94 872 2,068 11,905 2,831 2,196 4,932 24,804
International 289,325.03 4,999 11,241 65,109 15,177 73,543 119,257 289,325
International SmallCap 43,155.53 1,286 3,176 18,253 4,401 6,700 9,338 43,156
Limited Term Bond 5,183.75 129 304 2,222 415 1,634 478 5,184
MidCap 448,415.93 6,402 14,780 81,509 19,963 122,285 203,478 448,416
Real Estate 20,673.68 864 1,969 11,743 2,460 452 3,187 20,674
SmallCap 38,517.72 1,252 2,367 9,014 3,047 2,190 20,647 38,518
Tax-Exempt Bond 68,657.74 1,160 2,530 13,107 3,419 16,992 31,449 68,658
Utilities 85,830.39 1,988 4,786 31,228 6,588 17,146 24,095 85,830
</TABLE>
The amount received from each Fund and retained by Princor during the period
ended October 31, 1998 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 $112,833.63 $3,402 $ 7,377 $ 9,888 $38,345 $ 53,821 $112,834
Blue Chip 190,876.08 4,153 9,181 12,360 63,625 101,557 190,876
Bond 66,915.15 2,082 4,498 6,029 23,372 30,933 66,915
Capital Value 214,972.97 4,898 10,641 14,216 75,565 109,653 214,973
Cash Management 21,021.11 500 1,163 1,628 7,239 10,491 21,021
Government Securities Income 45,977.69 2,524 4,925 6,265 15,539 16,725 45,978
Growth 183,597.70 4,050 8,755 11,710 62,722 96,361 183,598
High Yield 17,845.34 1,051 2,147 2,777 5,948 5,921 17,845
International Emerging Markets 5,973.07 200 518 715 501 4,039 5,973
International 120,268.60 3,519 7,400 9,761 40,089 59,499 120,269
International SmallCap 5,512.27 175 437 595 776 3,530 5,512
Limited Term Bond 10,624.85 783 1,574 2,024 3,835 2,409 10,625
MidCap 171,905.63 4,242 9,012 11,946 57,302 89,404 171,906
Real Estate 6,190.11 439 988 1,171 271 3,321 6,190
SmallCap 10,183.89 58 247 384 2,301 7,195 10,184
Utilities 20,866.73 983 1,980 2,655 6,955 8,293 20,867
</TABLE>
A Plan may be terminated at any time by vote of a majority of the Directors who
are not interested persons (as defined in the Act), or by vote of a majority of
the outstanding voting securities of the class of shares of a Fund to which the
Plan relates. Any change in a Plan that would materially increase the
distribution expenses of a class of shares of a Fund provided for in the Plan
requires approval of the shareholders of the class of shares to which such
increase would relate.
While a Distribution Plan is in effect for a Fund, the selection and nomination
of Directors who are not interested persons of that Fund will be committed to
the discretion of the Directors who are not interested persons.
Each Plan 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 and R shares were last approved by the Board of Directors of all
Funds (except Partners Aggressive Growth Fund), including a majority of the
non-interested directors, on December 14, 1998. The Plans for Class C shares
were approved by the Board of Directors, for each Fund (except Partners
Aggressive Growth Fund) including a majority of the non-interested directors on
March 8, 1999. The Plans for all Classes of shares for the Partners Aggressive
Growth Fund were approved by the Board of Directors, including a majority of the
non-interested directors, on September 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
a 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 Government Corporate Intermediate 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 Salomon Brothers Investment Grade Bond Index
o S&P 400 Index
o S&P 500 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, 1998 average annual returns for
Class A shares for each of the Funds for the periods indicated:
<TABLE>
<CAPTION>
Fund 1-Year 5-Year 10-Year
---- ------ ------ -------
<S> <C> <C> <C>
Balanced Fund 5.78% 10.21% 10.43%
Blue Chip Fund 13.87 16.61 13.63(1)
Bond Fund 2.69 5.92 8.61
Capital Value Fund 10.16 17.04 13.55
Government Securities Income Fund 2.33 5.47 8.09
Growth Fund 9.75 16.32 16.44
High Yield Fund (7.73) 5.62 6.35
International Emerging Markets Fund (24.82) (28.45)(3) N/A
International Fund (2.86) 8.93 9.97
International SmallCap Fund (4.41) (3.36)(3) N/A
Limited Term Bond Fund 4.98 5.76(4) N/A
MidCap Fund (14.02) 12.25 14.58
Real Estate Fund (19.43)(5) N/A N/A
SmallCap Fund (19.90)(5) N/A N/A
Tax-Exempt Bond Fund 1.74 4.74 7.27
Utilities Fund 25.89 10.40 11.56(2)
<FN>
(1)Period beginning March 1, 1991 and ending October 31, 1998.
(2)Period beginning December 16, 1992 and ending October 31, 1998.
(3)Period beginning August 29, 1997 and ending October 31, 1998.
(4)Period beginning February 29, 1996 and ending October 31, 1998.
(5)Period beginning January 1, 1998 and ending October 31, 1998.
</FN>
</TABLE>
The following table shows as of October 31, 1998 average annual returns for
Class B shares for each of the Funds for the period indicated:
Fund 1-Year 5-Year
---- ------ ------
Balanced Fund 6.18% 14.35%(1)
Blue Chip Fund 14.59 21.21(1)
Bond Fund 3.04 9.09(1)
Capital Value Fund10.71 22.44(1)
Government Securities Income Fund 2.60 8.70(1)
Growth Fund 10.58 21.03(1)
High Yield (7.52) 6.87(1)
International Emerging Markets Fund (24.41) (28.20)(2)
International Fund (2.68) 11.50(1)
International SmallCap Fund (3.90) (2.90)(2)
Limited Term Bond Fund (4.99) 5.70(3)
MidCap Fund (13.75) 16.57(1)
Real Estate Fund (18.98)(4) N/A
SmallCap Fund (19.51)(4) N/A
Tax-Exempt Bond Fund 2.01 8.87(1)
Utilities Fund 27.23 18.74(1)
(1) Period beginning December 9, 1994 and ending October 31, 1998.
(2) Period beginning August 29, 1997 and ending October 31, 1998.
(3) Period beginning February 29, 1996 and ending October 31, 1998.
(4) Period beginning January 1, 1998 and ending October 31, 1998.
The following table shows as of October 31, 1998 average annual returns for
Class R shares for each of the Funds for the period indicated:
Fund 1-Year 5-Year
Balanced Fund 10.43% 12.44%(1)
Blue Chip Fund 19.01 17.89(1)
Bond Fund 7.05 7.60(1)
Capital Value Fund14.77 19.51(1)
Government Securities Income Fund 6.66 6.98(1)
Growth Fund 14.46 16.11(1)
High Yield Fund (3.97) 4.59(1)
International Emerging Markets Fund (21.14) (25.55)(2)
International Fund 1.13 11.04(1)
International SmallCap Fund 0.50 0.86(2)
Limited Term Bond Fund 6.12 5.77(1)
MidCap Fund (10.37) 8.48(1)
Real Estate Fund (15.37)(3) N/A
SmallCap Fund (15.75)(3) N/A
Tax-Exempt Bond Fund N/A N/A
Utilities Fund 31.47 16.13(1)
(1) Period beginning February 29, 1996 and ending October 31, 1998.
(2) Period beginning August 29, 1997 and ending October 31, 1998.
(3) Period beginning January 1, 1998 and ending October 31, 1998.
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, 1998 the yield for each class of
shares for each of the Income-Oriented Funds:
Yield as of October 31, 1998
----------------------------
Fund Class A Class B Class R
---- ------- ------- -------
Bond Fund 5.16% 4.66% 4.92%
Government Securities Income Fund 6.01 5.56 5.44
High Yield Fund 8.58 6.96 8.14
Limited Term Bond Fund 5.62 4.71 4.74
Tax-Exempt Bond Fund 3.59 3.35 N/A
The Tax-Exempt Bond Fund may advertise a tax-equivalent yield. Your
tax-equivalent yield would be calculated by:
[(Tax-exempt portion 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, 1998 the Fund's tax-equivalent yields for Class A and Class B
shares were as follows:
Tax-Equivalent Yield
--------------------- Assumed
Class A Class B Tax Rate
------- ------- --------
4.99% 4.65% 28.0%
5.61 5.23 36.0
5.94 5.55 39.6
Money Market Fund
The Cash Management Fund advertises its yield and its effective yield.
Yieldis 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, 1998 the yield for each class of
shares for the Cash Management Fund:
Yield as of October 31, 1998
----------------------------
Fund Class A Class B Class R
---- ------- ------- -------
Cash Management Fund 4.92% 4.23% 4.50%
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, 1998 the effective yield for each
class of shares for the Cash Management Fund:
Effective Yield as of October 31, 1998
--------------------------------------
Fund Class A Class B Class R
---- ------- ------- -------
Cash Management Fund 5.04% 4.31% 4.60%
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 illustrated below.
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 4.99%
(monthly average six-month CD rate for the month of October, 1998, as reported
in the Federal Reserve Bulletin) and an inflation rate of 1.5% (rate of
inflation for the 12-month period ended October 31, 1998 as measured by the
Consumer Price Index) and an income tax bracket of 28% would be $(105).
($10,000 x 4.99%) / 2 = $250 Interest for six-month period
- 70 Federal income taxes (28%)
- 75 Inflation's impact on invested principal
$(10,000 x 1.5%) / 2
($105) 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
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
Limited Term Bond Fund August 9, 1995
MidCap Fund February 20, 1987
Partners Aggressive Growth Fund August 10, 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 November 1, 1989 succeeded to the business of a
predecessor Fund that had been incorporated in Delaware on
February 6, 1969.
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 for the year
ended October 31, 1998 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 statement of net assets of the Principal Partners Aggressive Growth Fund as
of October 28, 1999 and the report 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.
Principal Partners Aggressive
Growth Fund, Inc.
Statement of Net Assets
October 28, 1999
Assets - cash in bank $4,000,000
===================
Net Assets Applicable to Outstanding Shares $4,000,000
===================
Net Assets Consist of:
Capital stock $ 4,000
Additional paid-in capital 3,996,000
===================
Total net assets $4,000,000
===================
Capital Stock (par value $.01 a share):
Shares authorized 100,000,000
Net Asset Value Per Share:
Class A:
Net assets $1,000,000
Shares issued and outstanding 100,000
Net asset value per share (b) $10.00
Maximum offering price per share (a) $10.50
Class B:
Net assets $1,000,000
Shares issued and outstanding 100,000
Net asset value per share (b) $10.00
Class C:
Net assets $1,000,000
Shares issued and outstanding 100,000
Net asset value per share (b) $10.00
Class R:
Net assets $1,000,000
Shares issued and outstanding 100,000
Net asset value per share $10.00
(a) Maximum offering price is equal to net asset value plus a front-end sales
charge of 4.75% of the offering price or 4.99% of the net asset value.
(b) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
See accompanying notes.
Principal Partners Aggressive
Growth Fund, Inc.
Notes to Statement of Net Assets
October 28, 1999
1. Organization
Principal Partners Aggressive Growth Fund, Inc. ("the Fund") is registered under
the Investment Company Act of 1940, as amended, as open-end diversified
management investment company. On October 28, 1999, the initial purchase of
100,000 shares each of Class A, Class B, Class C and Class R Capital Stock was
made by Principal Life Insurance Company, which is the indirect parent of
Princor Financial Services Corporation and Principal Management Corporation.
All organizational expenses have been paid by Principal Management Corporation.
Certain officers and directors of the Fund are also officers of Principal Life
Insurance Company, Princor Financial Services Corporation and Principal
Management Corporation.
2. Operations
The Fund has agreed to pay investment advisory and management fees to Principal
Management Corporation (the "Manager") computed at an annual percentage rate of
the Fund's average daily net assets. The annual rate to be used in this
calculation for the Funds is as follows:
Net Asset Value of Fund
(in millions)
----------------------------------
First Next Next Next Over
$250 $250 $250 $250 $1,000
----------------------------------
.75% .70% .65% .60% .55%
The Manager has subcontracted the investment advisory services of the Fund to
Morgan Stanley Dean Witter Investment Management, Inc. for a monthly fee
approximating the actual cost of providing the services by Morgan Stanley Dean
Witter Investment Management, Inc.
The Funds have also agreed to pay distribution and shareholder servicing fees to
Princor Financial Services Corporation (the "Underwriter") as follows: Class A,
.25% of the daily net assets of the Fund's Class A shares; Class B, 1.00% of the
daily net assets of the Fund's Class B shares; Class C, 1.00% of the daily net
assets of the Fund's Class C shares; and Class R, .75% of the daily net assets
of the Fund's Class R shares.
The Funds reimburse the Manager for transfer and administrative services,
including the cost of accounting, data processing, supplies and other services
rendered.
2. Operations (continued)
The Manager may, at its option, waive all or part of its compensation for such
period of time as it deems necessary or appropriate.
The Funds intend to qualify as "regulated investment companies" under the
Internal Revenue Code and intend to distribute each year substantially all of
their net investment income and realized capital gains to their shareholders.
3. Capital Stock
The Fund has authorized 100,000,000 shares and has allocated 25,000,000 shares
each for issuance of Class A, Class B, Class C, and Class R shares.
Class A shares generally are sold with an initial sales charge based on
declining rates and certain purchases may be subject to a contingent deferred
sales charge ("CDSC"). Class B shares are sold without an initial sales charge,
but are subject to a declining CDSC on certain redemptions redeemed within six
years of purchase. Class C shares are sold without an initial sales charge, but
are subject to a CDSC for redemptions within one year of purchase. Class R
shares are sold without an initial sales charge and are not subject to a CDSC.
Class B shares, Class C shares and Class R shares bear a higher ongoing
distribution fee than Class A shares. Class B shares automatically convert into
Class A shares, based on relative net asset value (without a sales charge) after
seven years. Class R shares automatically convert into Class A shares, based on
relative net asset value (without a sales charge) on the first business day of
the 49th month. All classes of shares for each fund represent interests in the
same portfolio of investments, and will vote together as a single class except
where otherwise required by law or as determined by each of the Funds'
respective Board of Directors. In addition, the Board of Directors of each fund
will declare separate dividends on each class of shares.
4. Line of Credit
The Fund participates with other funds and portfolios managed by Principal
Management Corporation in an unsecured joint line of credit with a bank, which
allows the funds to borrow up to $75,000,000, collectively. Borrowings are made
solely to facilitate the handling of unusual and/or unanticipated short-term
cash requirements. Interest is charged to each fund, based on its borrowings, at
a rate equal to the Fed Funds Rate plus .50%. Additionally, a commitment fee is
charged at the annual rate of .09% on the average unused portion of the line of
credit. The commitment fee is allocated among the participating funds and
portfolios in proportion to their average net assets during each quarter. At
October 28, 1999, the Fund had no outstanding borrowings under the line of
credit.
Report of Independent Auditors
The Board of Directors and Shareholder
Principal Partners Aggressive Growth Fund, Inc.
We have audited the accompanying statement of net assets of Principal Partners
Aggressive Growth Fund, Inc. as of October 28, 1999. This statement of net
assets is the responsibility of the Fund's management. Our responsibility is to
express an opinion on this statement of net assets based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of net assets is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement of net assets. Our procedures
included confirmation of cash held as of October 28, 1999, by correspondence
with the custodian. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall statement of net assets presentation. We believe that our audit of the
statement of net assets provides a reasonable basis for our opinion.
In our opinion, the statement of net assets referred to above presents fairly,
in all material respects, the financial position of Principal Partners
Aggressive Growth Fund, Inc. at October 28, 1999, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Des Moines, Iowa
October 28, 1999
<PAGE>
PRINCIPAL AGGRESSIVE GROWTH FUND, INC.
PART C. OTHER INFORMATION
Item 23. Exhibits.
- -------- ---------
(a) Articles of Incorporation (filed 8/31/99)
(1) Articles of Amendment*
(b) By-laws*
(c) Specimen Share Certificate*
(d) (1) Management Agreement**
(2) Sub-Advisory Agreement**
(e) (1) Distribution Agreement**
(2) Selling Agreement (filed 8/31/99)
(f) N/A
(g) Custodian Agreement**
(h) Transfer Agency & Shareholder Services Agreement**
(i) Legal Opinion*
(j) Consents of Auditors*
(l) Initial Capital Agreement*
(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 amendment.
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. Princor Financial Services Corporation (an Iowa Corporation) a
registered broker-dealer.
b. Principal Life Insurance Company (an Iowa corporation) a life
group, pension and individual insurance company.
c. Principal Financial Services (Australia), Inc. (an Iowa holding
company) formed to facilitate the acquisition of the Australian
business of BT Australia.
d. Principal Financial Services (NZ), Inc. (an Iowa holding company)
formed to facilitate the acquisition of the New Zealand business
of BT Australia.
e. BT Funds Management (Singapore) Limited (a Singapore asset
management company).
Subsidiaries wholly-owned by Princor Financial Services Corporation:
a. Principal Management Corporation (an Iowa Corporation) a
registered investment advisor.
Subsidiary wholly-owned by Principal Financial Group (Australia)
Holdings Pty Ltd:
a. Principal Financial Group (Australia) Pty Ltd (an Australia
holding company).
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 August 4, 1999.
Principal Blue Chip Fund, Inc.(a Maryland Corporation) 0.79% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on August 4, 1999.
Principal Bond Fund, Inc.(a Maryland Corporation) 0.62% of shares
outstanding owned by Principal Life Insurance Company (including
subsidiaries and affiliates) on August 4, 1999.
Principal Capital Value Fund, Inc. (a Maryland Corporation)
23.56% of outstanding shares owned by Principal Life Insurance
Company (including subsidiaries and affiliates)on August 4, 1999.
Principal Cash Management Fund, Inc. (a Maryland Corporation)
6.87% of outstanding shares owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on August 4,
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
August 4, 1999.
Principal Growth Fund, Inc. (a Maryland Corporation) 0.39% of
outstanding shares owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on August 4, 1999.
Principal High Yield Fund, Inc. (a Maryland Corporation) 7.55%
of shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on August 4, 1999.
Principal International Emerging Markets Fund, Inc. (a Maryland
Corporation) 41.40% of shares outstanding owned by Principal Life
Insurance Company (including subsidiaries and affiliates) on
August 4, 1999.
Principal International Fund, Inc. (a Maryland Corporation)
23.99% of shares outstanding owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on August 4,
1999.
Principal International SmallCap Fund, Inc. (a Maryland
Corporation) 40.65% of shares outstanding owned by Principal Life
Insurance Company (including subsidiaries and affiliates) on
August 4, 1999.
Principal Limited Term Bond Fund, Inc. (a Maryland Corporation)
21.59% of shares outstanding owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on August 4,
1999.
Principal MidCap Fund, Inc. (a Maryland Corporation) 0.70% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on August 4, 1999
Principal Real Estate Fund, Inc. (a Maryland Corporation) 65.58%
of shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on August 4, 1999
Principal SmallCap Fund, Inc.(a Maryland Corporation) 18.93% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on August 4, 1999.
Principal Special Markets Fund, Inc. (a Maryland Corporation)
83.30% of shares outstanding of the International Emerging
Markets Portfolio, 44.26% 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 August 4, 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 August 4,
1999.
Principal Utilities Fund, Inc. (a Maryland Corporation) 0.25% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on August 4, 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
August 4, 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 Egalita 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.
Item 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 Limited Term
Bond Fund, Inc., Principal MidCap Fund, Inc., Principal Partners Aggressive
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
Limited Term Bond Fund, Inc., Principal MidCap Fund, Inc., Principal Partners
Aggressive 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
(b) (1) (2)
Positions
and offices
Name and principal with principal
business address underwriter
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.
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 28th day of
October, 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
<PAGE>
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.
Signatures Title Date
/s/ R. C. Eucher
_____________________________ President and Director 10/28/99
R. C. Eucher (Principal Executive Officer) ________
(J. B.Griswell)*
_____________________________ Director and 10/28/99
J. B. Griswell Chairman of the Board ________
/s/ M. J. Beer
_____________________________ Financial Officer (Principal 10/28/99
M. J. Beer Financial and Accounting Officer) ________
(J. E. Aschenbrenner)* Director 10/28/99
_____________________________ ________
J. E. Aschenbrenner
(J. D. Davis)* Director 10/28/99
_____________________________ ________
J. D. Davis
(P. A. Ferguson)* Director 10/28/99
_____________________________ ________
P. A. Ferguson
(D. P. Francis)* Director 10/28/99
_____________________________ ________
D. P. Francis
(R. W. Gilbert)* Director 10/28/99
_____________________________ ________
R. W. Gilbert
(B. A. Lukavsky)* Director 10/28/99
_____________________________ ________
B. A. Lukavsky
By /s/ R. C. Eucher
____________________________________
R. C. Eucher
President and Director
*Pursuant to Powers of Attorney
Previously Filed or Included
ARTICLES OF AMENDMENT
OF
PRINCIPAL AGGRESSIVE GROWTH FUND, INC.
Principal Aggressive Growth Fund, Inc., a Maryland Corporation having
its principal office in this state in Baltimore City, Maryland (hereinafter
called the Corporation), hereby certifies to the State Department of Assessments
and Taxation of Maryland, that:
FIRST: The charter of the Corporation is hereby amended by changing
Article II of the Articles of Incorporation so that as amended, said Article
shall be and read as follows:
"The name of the corporation is Principal Partners Aggressive Growth
Fund, Inc. hereinafter called the 'Corporation'."
SECOND: The executive committee of the board of directors of the
Corporation on October 5, 1999 duly adopted the following action:
"Effective this date, the name of the Corporation is changed to
Principal Partners Aggressive Growth Fund, Inc. and the officers of the
Corporation are directed to take all steps necessary and required to
effect this change."
THIRD: No stock entitled to be voted on the proposed name change was
outstanding or subscribed for at the time the executive committee of the board
of directors adopted the action.
FOURTH: The executive committee of the board of directors believes the
action is in the best interests of the corporation.
FIFTH: The Articles of Amendment shall become effective on the 15th day
of October, 1999.
IN WITNESS WHEREOF, Principal Aggressive Growth Fund, Inc. has caused
these presents to be signed in its name and on its behalf by its Vice President
and by its Assistant Secretary on October 15, 1999.
Principal Aggressive Growth Fund, Inc.
By /s/ Arthur S. Filean
_____________________________________
Vice President and Secretary
Arthur S. Filean
____________________________________
Attest
/s/ Ernest H. Gillum
____________________________________
Assistant Secretary
Ernest H. Gillum
____________________________________
THE UNDERSIGNED, Vice President of Principal Aggressive Growth Fund,
Inc., who executed on behalf of said corporation the foregoing Articles of
Amendment, of which this certificate is made a part, hereby acknowledges, in the
name and on behalf of said corporation, the foregoing Articles of Amendment to
be the corporate act of said corporation and further certifies that, to the best
of his knowledge, information and belief, the matters and facts set forth
therein with respect to the approval thereof are true in all material respects,
under the penalties of perjury.
/s/ Arthur S. Filean
__________________________________________
Arthur S. Filean
BYLAWS
OF
PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND, INC.
ARTICLE 1
Name, Fiscal Year
1.01 The name of this corporation shall be Principal Partners
Aggressive Growth Fund, Inc., Inc. Except as otherwise from time to time
provided by the board of directors, the fiscal year of the corporation shall
begin November 1 and end October 31.
ARTICLE 2
Stockholders' Meetings
2.01 Place of Meetings. All meetings of the stockholders shall be held
at such place within or without the State of Maryland, as is stated in the
notice of meeting.
2.02 Annual Meetings. The Board of Directors of the Fund shall
determine whether or not an annual meeting of stockholders shall be held. In the
event that an annual meeting of stockholders is held, such meeting shall be held
on the first Tuesday after the first Monday of February in each year or on such
other day during the 31-day period following the first Tuesday after the first
Monday of February as the directors may determine.
2.03 Special Meetings. Special meetings of the stockholders shall be
held whenever called by the chairman of the board, the president or the board of
directors, or when requested in writing by 10% of the Fund's outstanding shares.
2.04 Notice of Stockholders' Meetings. Notice of each stockholders'
meeting stating the place, date and hour of the meeting and the purpose or
purposes for which the meeting is called shall be given by mailing such notice
to each stockholder of record at his address as it appears on the records of the
corporation not less than 10 nor more than 90 days prior to the date of the
meeting. Any meeting at which all stockholders entitled to vote are present
either in person or by proxy or of which those not present have waived notice in
writing shall be a legal meeting for the transaction of business notwithstanding
that notice has not been given as herein provided.
2.05 Quorum. Except as otherwise expressly required by law, these
bylaws or the Articles of Incorporation, as from time to time amended, at any
meeting of the stockholders the presence in person or by proxy of the holders of
one-third of the shares of capital stock of the Corporation issued and
outstanding and entitled to vote, shall constitute a quorum, but a lesser
interest may adjourn any meeting from time to time and the meeting may be held
as adjourned without further notice.
2.06 Proxies and Voting Stockholders of record may vote at any meeting
either in person or by written proxy signed by the stockholder or by the
stockholder's duly authorized attorney-in-fact dated not more than eleven months
before the date of exercise, which shall be filed with the Secretary of the
meeting before being voted. Each stockholder shall be entitled to one vote for
each share of stock held, and to a fraction of a vote equal to any fractional
share held.
2.07 Stock Ledger. The Corporation shall maintain at the office of the
stock transfer agent of the Corporation, or at the office of any successor
thereto as stock transfer agent of the Corporation, an original stock ledger
containing the names and addresses of all stockholders and the number of shares
of each class held by each stockholder. Such stock ledger may be in written form
or any other form capable of being converted into written form within a
reasonable time for visual inspection.
ARTICLE 3
Board of Directors
3.01 Number, Service. The Corporation shall have a Board of Directors
consisting of not less than three and no more than fifteen members. The number
of Directors to constitute the whole board within the limits above-stated shall
be fixed by the Board of Directors. The Directors may be chosen (i) by
stockholders at any annual meeting of stockholders held for the purpose of
electing directors or at any meeting held in lieu thereof, or at any special
meeting called for such purpose, or (ii) by the Directors at any regular or
special meeting of the Board to fill a vacancy on the Board as provided in these
bylaws and Maryland General Corporation Law. Each director should serve until
the next annual meeting of shareholders or until a successor is duly qualified
and elected, unless sooner displaced.
3.02 Powers. The board of directors shall be responsible for the entire
management of the business of the Corporation. In the management and control of
the property, business and affairs of the Corporation the board of directors is
hereby vested with all the powers possessed by the corporation itself so far as
this designation of authority is not inconsistent with the laws of the State of
Maryland, but subject to the limitations and qualifications contained in the
Articles of Incorporation and in these bylaws.
3.03 Executive Committee and Other Committees. The board of directors
may elect from its members an executive committee of not less than three which
may exercise certain powers of the board of directors when the board is not in
session pursuant to Maryland law. The executive committee may make rules for the
holding and conduct of its meetings and keeping the records thereof, and shall
report its action to the board of directors.
The board of directors may elect from its members such other committees
from time to time as it may desire. The number composing such committees and the
powers conferred upon them shall be determined by the board of directors at its
own discretion.
3.04 Meetings. Regular meetings of the board of directors may be held
in such places within or without the State of Maryland, and at such times as the
board may from time to time determine, and if so determined, notices thereof
need not be given. Special meetings of the board of directors may be held at any
time or place whenever called by the president or a majority of the directors,
notice thereof being given by the secretary or the president, or the directors
calling the meeting, to each director. Special meetings of the board of
directors may also be held without formal notice provided all directors are
present or those not present have waived notice thereof.
3.05 Quorum. A majority of the members of the board of directors from
time to time in office but in no event not less than one-third of the number
constituting the whole board shall constitute a quorum for the transaction of
business provided, however, that where the Investment Company Act of 1940
requires a different quorum to transact business of a specific nature, the
number of directors so required shall constitute a quorum for the transaction of
such business.
A lesser number may adjourn a meeting from time to time and the
meeting may be held without further notice. When a quorum is present at any
meeting a majority of the members present thereat shall decide any question
brought before such meeting except as otherwise expressly required by law, the
Articles of Incorporation or these bylaws.
3.06 Action by Directors Other than at a Meeting. Any action required
or permitted to be taken at any meeting of the Board of Directors, or of any
committee thereof, may be taken without a meeting, if a written consent to such
action is signed by all members of the Board of Directors or such committee, as
the case may be, and such written consent is filed with the minutes of
proceedings of the Board of Directors or committee.
3.07 Holding of Meetings by Conference Telephone Call. At any regular
or special meeting, members of the Board of Directors or any committee thereof
may participate by conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other.
Participation in a meeting pursuant to this Section shall constitute presence in
person at such meeting.
ARTICLE 4
Officers
4.01 Selection. The officers of the corporation shall be a president,
one or more vice presidents, a secretary and a treasurer. The board of directors
may, if it so determines, also elect a chairman of the board. All officers shall
be elected by the board of directors and shall serve at the pleasure of the
board. The same person may hold more than one office except the offices of
president and vice president.
4.02 Eligibility. The chairman of the board, if any, and the president
shall be directors of the corporation. Other officers need not be directors.
4.03 Additional Officers and Agents. The board of directors may appoint
one or more assistant treasurers, one or more assistant secretaries and such
other officers or agents as it may deem advisable, and may prescribe the duties
thereof.
4.04 Chairman of the Board of Directors. The chairman of the board, if
any, shall preside at all meetings of the board of directors at which he is
present. He shall have such other authority and duties as the board of directors
shall from time to time determine.
4.05 The President. The president shall be the chief executive officer
of the corporation; he shall have general and active management of the business,
affairs and property of the corporation, and shall see that all orders and
resolutions of the board of directors are carried into effect. He shall preside
at meetings of stockholders, and of the board of directors unless a chairman of
the board has been elected and is present.
4.06 The Vice Presidents. The vice presidents shall respectively have
such powers and perform such duties as may be assigned to them by the board of
directors or the president. In the absence or disability of the president, the
vice presidents, in the order determined by the board of directors, shall
perform the duties and exercise the powers of the president.
4.07 The Secretary. The secretary shall keep accurate minutes of all
meetings of the stockholders and directors, and shall perform all duties
commonly incident to his office and as provided by law and shall perform such
other duties and have such other powers as the board of directors shall from
time to time designate. In his absence an assistant secretary or secretary pro
tempore shall perform his duties.
4.08 The Treasurer. The treasurer shall, subject to the order of the
board of directors and in accordance with any arrangements for performance of
services as custodian, transfer agent or disbursing agent approved by the board,
have the care and custody of the money, funds, securities, valuable papers and
documents of the corporation, and shall have and exercise under the supervision
of the board of directors all powers and duties commonly incident to his office
and as provided by law. He shall keep or cause to be kept accurate books of
account of the corporation's transactions which shall be subject at all times to
the inspection and control of the board of directors. He shall deposit all funds
of the corporation in such bank or banks, trust company or trust companies or
such firm or firms doing a banking business as the board of directors shall
designate. In his absence, an assistant treasurer shall perform his duties.
ARTICLE 5
Vacancies
5.01 Removals. The stockholders may at any meeting called for the
purpose, by vote of the holders of a majority of the capital stock issued and
outstanding and entitled to vote, remove from office any director and, unless
the number of directors constituting the whole board is accordingly decreased,
elect a successor. To the extent consistent with the Investment Company Act of
1940, the board of directors may by vote of not less than a majority of the
directors then in office remove from office any director, officer or agent
elected or appointed by them and may for misconduct remove any thereof elected
by the stockholders.
5.02 Vacancies. If the office of any director becomes or is vacant by
reason of death, resignation, removal, disqualification, an increase in the
authorized number of directors or otherwise, the remaining directors may by vote
of a majority of said directors choose a successor or successors who shall hold
office for the unexpired term; provided that vacancies on the board of directors
may be so filled only if, after the filling of the same, at least two-thirds of
the directors then holding office would be directors elected to such office by
the stockholders at a meeting or meetings called for the purpose. In the event
that at any time less than a majority of the directors were so elected by the
stockholders, a special meeting of the stockholders shall be called forthwith
and held as promptly as possible and in any event within sixty days for the
purpose of electing an entire new board of directors.
ARTICLE 6
Certificates of Stock
6.01 Certificates. The board of directors may adopt a policy of not
issuing certificates except in extraordinary situations as may be authorized
from time to time by an officer of the Corporation. If such a policy is adopted,
a stockholder may obtain a certificate or certificates of the capital stock of
the Corporation owned by such stockholder only if the stockholder demonstrates a
specific reason for needing a certificate. If issued, the certificate shall be
in such form as shall, in conformity to law, be prescribed from time to time by
the board of directors. Such certificates shall be signed by the chairman of the
board of directors or the president or a vice president and by the treasurer or
an assistant treasurer or the secretary or an assistant secretary. If such
certificates are countersigned by a transfer agent or registrar other than the
Corporation or an employee of the Corporation, the signatures of the
aforementioned officers upon such certificates may be facsimile. In case any
officer or officers who have signed, or whose facsimile signature or signatures
have been used on, any such certificate or certificates shall cease to be such
officer or officers of the Corporation, whether because of death, resignation or
otherwise, before such certificate or certificates have been delivered by the
Corporation, such certificate or certificates may nevertheless be adopted by the
Corporation and be issued and delivered as though the person or persons who
signed such certificate or certificates or whose facsimile signature or
signatures have been used thereon had not ceased to be such officer or officers
of the Corporation.
6.02 Replacement of Certificates. The board of directors may direct a
new certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost or
destroyed. When authorizing such issue of a new certificate or certificates, the
board of directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost or destroyed certificate or
certificates, or its legal representative, to advertise the same in such manner
as it shall require and/or to give the corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the corporation
with respect to the certificate alleged to have been lost or destroyed.
6.03 Stockholder Open Accounts. The corporation may maintain or cause
to be maintained for each stockholder a stockholder open account in which shall
be recorded such stockholder's ownership of stock and all changes therein, and
certificates need not be issued for shares so recorded in a stockholder open
account unless requested by the stockholder and such request is approved by an
officer.
6.04 Transfers. Transfers of stock for which certificates have been
issued will be made only upon surrender to the Corporation or the transfer agent
of the Corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, whereupon
the Corporation will issue a new certificate to the person entitled thereto,
cancel the old certificate and record the transaction on its books. Transfers of
stock evidenced by open account authorized by Section 6.03 will be made upon
delivery to the Corporation or the transfer agent of the Corporation of
instructions for transfer or evidence of assignment or succession, in each case
executed in such manner and with such supporting evidence as the Corporation or
transfer agent may reasonably require.
6.05 Closing Transfer Books. The transfer books of the stock of the
corporation may be closed for such period (not to exceed 20 days) from time to
time in anticipation of stockholders' meetings or the declaration of dividends
as the directors may from time to time determine.
6.06 Record Dates. The board of directors may fix in advance a date,
not exceeding ninety days preceding the date of any meeting of stockholders, or
the date for the payment of any dividend, or the date for the allotment of
rights, or the date when any change or conversion or exchange of capital stock
shall go into effect, or a date in connection with obtaining any consent or for
any other lawful purpose, as a record date for the determination of the
stockholders entitled to notice of, and to vote at, any such meeting, and any
adjournment thereof, or entitled to receive payment of any such dividend, or to
any such allotment of rights, or to exercise the rights in respect of any such
change, conversion or exchange of capital stock, or to give such consent, and in
such case such stockholders and only such stockholders as shall be stockholders
of record on the date as fixed shall be entitled to such notice of, and to vote
at, such meeting, and any adjournment thereof, or to receive payment of such
dividend, or to receive such allotment of rights, or to exercise such rights, or
to give such consent, as the case may be, notwithstanding any transfer of any
stock on the books of the Corporation after any such record date fixed as
aforesaid.
6.07 Registered Ownership. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner and shall not be bound
to recognize any equitable or other claim to or interest in such share or shares
on the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of the State of
Maryland.
ARTICLE 7
Notices
7.01 Manner of Giving. Whenever under the provisions of the statutes or
of the Articles of Incorporation or of these bylaws notice is required to be
given to any director, committee member, officer or stockholder, it shall not be
construed to mean personal notice, but such notice may be given, in the case of
stockholders, in writing, by mail, by depositing the same in a United States
post office or letter box, in a postpaid sealed wrapper, addressed to each
stockholder at such address as it appears on the books of the corporation, or,
in default to other address, to such stockholder at the General Post Office in
the City of Baltimore, Maryland, and, in the case of directors, committee
members and officers, by telephone, or by mail or by telegram to the last
business address known to the secretary of the corporation, and such notice
shall be deemed to be given at the time when the same shall be thus mailed or
telegraphed or telephoned.
7.02 Waiver. Whenever any notice is required to be given under the
provisions of the statutes or of the Articles of Incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE 8
General Provisions
8.01 Disbursement of Funds. All checks, drafts, orders or instructions
for the payment of money and all notes of the corporation shall be signed by
such officer or officers or such other person or persons as the board of
directors may from time to time designate.
8.02 Voting of Stock in Other Corporations. Unless otherwise ordered by
the board of directors, any officer or, at the direction of any such officer,
any Manager shall have full power and authority to attend and act and vote at
any meeting of stockholders of any corporation in which this Corporation may
hold stock, at of any such meeting may exercise any and all the rights and
powers incident to the ownership of such stock. Any officer of this corporation
or, at the direction of any such officer, any Manager may execute proxies to
vote shares of stock of other corporations standing in the name of this
Corporation."
8.03 Execution of Instruments. Except as otherwise provided in these
bylaws, all deeds, mortgages, bonds, contracts, stock powers and other
instruments of transfer, reports and other instruments may be executed on behalf
of the corporation by the president or any vice president or by any other
officer or agent authorized to act in such matters, whether by law, the Articles
of Incorporation, these bylaws, or any general or special authorization of the
board of directors. If the corporate seal is required, it shall be affixed by
the secretary or an assistant secretary.
8.04 Seal. The corporate seal shall have inscribed thereon the name of
the corporation, the year of its incorporation and the words "Corporate Seal,
Maryland." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
ARTICLE 9
Regulations
9.01 Investment and Related Matters. The Corporation shall not purchase
or hold securities in violation of the investment restrictions enumerated in its
then current prospectus and the registration statement or statements filed with
the Securities and Exchange Commission pursuant to the Securities Act of 1933
and the Investment Company Act of 1940, as amended, nor shall the Corporation
invest in securities the purchase of which would cause the Corporation to
forfeit its rights to continue to publicly offer its shares under the laws,
rules or regulations of any state in which it may become authorized to so offer
its shares unless, by specific resolution of the board of directors, the
Corporation shall elect to discontinue the sale of its shares in such state.
9.02 Other Matters. When used in this section the following words shall
have the following meanings: "Sponsor" shall mean any one or more corporations,
firms or associations which have distributor's contracts in effect with this
Corporation. "Manager" shall mean any corporation, firm or association which may
at the time have an investment advisory contract with this Corporation.
(a) Limitation of Holdings by this Corporation of Certain
Securities and of Dealings with Officers or Directors. This
Corporation shall not purchase or retain securities of any issuer
if those officers and directors of the Fund or its Manager owning
beneficially more than one-half of one per cent (0.5%) of the
shares or securities of such issuer together own beneficially more
than five per cent (5%) of such shares or securities; and each
officer and director of this Corporation shall keep the treasurer
of this Corporation informed of the names of all issuers
(securities of which are held in the portfolio of this Corporation)
in which such officer or director owns as much as one-half of one
percent (1/2 of 1%) of the outstanding shares or securities and
(except in the case of a holding by the treasurer) this Corporation
shall not be charged with knowledge of any such security holding in
the absence of notice given if as aforesaid if this Corporation has
requested such information not less often than quarterly. The
Corporation will not lend any of its assets to the Sponsor or
Manager or to any officer or director of the Sponsor or Manager or
of this Corporation and shall not permit any officer or director,
and any officer or director of the Sponsor or Manager, to deal for
or on behalf of the Corporation with himself as principal agent, or
with any partnership, association or corporation in which he has a
financial interest. Nothing contained herein shall prevent (1)
officers and directors of the Corporation from buying, holding or
selling shares in the Corporation, or from being partners, officers
or directors of or otherwise financially interested in the Sponsor
or the Manager or any company controlling the Sponsor or the
Manager; (2) employment of legal counsel, registrar, transfer
agent, dividend disbursing agent or custodian who is, or has a
partner shareholder, officer or director who is, an officer or
director of the Corporation, if only customary fees are charged for
services to the Corporation; (3) sharing statistical and research
expenses and office hire and expenses with any other investment
company in which an officer or director of the Corporation is an
officer or director or otherwise financially interested.
(b) Limitation Concerning Participating by Interested Persons
in Investment Decisions. In any case where an officer or director
of the Corporation or of the Manager, or a member of an advisory
committee or portfolio committee of the Corporation, is also an
officer or a director of another corporation, and the purchase or
sale of shares issued by that other corporation is under
consideration, the officer or director or committee member
concerned will abstain from participating in any decision made on
behalf of the Corporation to purchase or sell any securities issued
by such other corporation.
(c) Limitation on Dealing in Securities of this Corporation by
Certain Officers, Directors, Sponsor or Manager. Neither the
Sponsor nor Manager, nor any officer or director of this
Corporation or of the Sponsor or Manager shall take long or short
positions in securities issued by this Corporation, provided,
however, that:
(1) The Sponsor may purchase from this Corporation shares
issued by this Corporation if the orders to purchase from this
Corporation are entered with this Corporation by the Sponsor upon
receipt by the Sponsor of purchase orders for shares of this
Corporation and such purchases are not in excess of purchase
orders received by the Sponsor.
(2) The Sponsor may in the capacity of agent for this
Corporation buy securities issued by this Corporation offered for
sale by other persons.
(3) Any officer or director of this Corporation or of the
Sponsor or Manager or any Company controlling the Sponsor or
Manager may at any time, or from time to time, purchase from this
Corporation or from the Sponsor shares issued by this Corporation
at a price not lower than the net asset value of the shares, no
such purchase to be in contravention of any applicable state or
federal requirement.
(d) Securities and Cash of this Corporation to be held by
Custodian subject to certain Terms and Conditions.
(1) All securities and cash owned by this Corporation shall as
hereinafter provided, be held by or deposited with a bank or
trust company having (according to its last published report) not
less than two million dollars ($2,000,000) aggregate capital,
surplus and undivided profits (which bank or trust company is
hereby designated as "Custodian"), provided such a Custodian can
be found ready and willing to act.
(2) This Corporation shall enter into a written contract with
the Custodian regarding the powers, duties and compensation of
the Custodian with respect to the cash and securities of this
Corporation held by the Custodian. Said contract and all
amendments thereto shall be approved by the board of directors of
this Corporation.
(3) This Corporation shall upon the resignation or inability
to serve of its Custodian or upon change of the Custodian:
(aa) in case of such resignation or inability to serve, use
its best efforts to obtain a successor Custodian;
(bb) require that the cash and securities owned by this
Corporation be delivered directly to the successor Custodian;
and
(cc) In the event that no successor Custodian can be found,
submit to the stockholders, before permitting delivery of the
cash and securities owned by this Corporation otherwise than
to a successor Custodian, the question whether or not this
Corporation shall be liquidated or shall function without a
Custodian.
(e) Amendment of Investment Advisory Contract. Any investment
advisory contract entered into by this Corporation shall not be
subject to amendment except by (1) affirmative vote at a
shareholders meeting, of the holders of a majority of the
outstanding stock of this Corporation, or (2) a majority of such
Directors who are not interested persons (as the term is defined in
the Investment Company Act of 1940) of the Parties to such
agreements, cast in person at a board meeting called for the
purpose of voting on such amendment.
(f) Reports relating to Certain Dividends. Dividends paid from
net profits from the sale of securities shall be clearly revealed
by this Corporation to its shareholders and the basis of
calculation shall be set forth.
(g) Maximum Sales Commission. The Corporation shall, in any
distribution contract with respect to its shares of common stock
entered into by it, provide that the maximum sales commission to be
charged upon any sales of such shares shall not be more than nine
per cent (9%) of the offering price to the public of such shares.
As used herein, "offering price to the public" shall mean net asset
value per share plus the commission charged adjusted to the nearest
cent.
ARTICLE 10
Purchases and Redemption of Shares:
Suspension of Sales
10.01 Purchase by Agreement. The Corporation may purchase its shares by
agreement with the owner at a price not exceeding the net asset value next
computed following the time when the purchase or contract to purchase is made.
10.02 Redemption. The Corporation shall redeem such shares as are
offered by any stockholder for redemption upon the presentation of a written
request therefor, duly executed by the record owner, to the office or agency
designated by the corporation. If the shareholder has received stock
certificates, the request must be accompanied by the certificates, duly endorsed
for transfer, in acceptable form; and the Corporation will pay therefor the net
asset value of the shares next effective following the time at which the
request, in acceptable form, is so presented. Payment for said shares shall
ordinarily be made by the Corporation to the stockholder within seven days after
the date on which the shares are presented.
10.03 Suspension of Redemption. The obligations set out in Section
10.02 may be suspended------------------
(i) for any period during which the New York Stock Exchange, Inc. is closed
other than customary week-end and holiday closings, or during which trading on
the New York Stock Exchange, Inc. is restricted, as determined by the rules and
regulations of the Securities and Exchange Commission or any successor thereto;
(ii) for any period during which an emergency, as determined by the rules and
regulations of the Securities and Exchange Commission or any successor thereto,
exists as a result of which disposal by the Corporation of securities owned by
it is not reasonably practicable or as a result of which it is not reasonably
practicable for the Corporation to fairly determine the value of its net assets;
or (iii) for such other periods as the Securities and Exchange Commission or any
successor thereto may by order permit for the protection of security holders of
the Corporation. Payment of the redemption or purchase price may be made in cash
or, at the option of the Corporation, wholly or partly in such portfolio
securities of the Corporation as the Corporation may select.
10.04 Suspension of Sales. The Corporation reserves the right to
suspend sales of its shares if, in the judgment of the majority of the board of
directors or a majority of the executive committee of its Board, if such
committee exists, it is in the best interest of the Corporation to do so, such
suspension to continue for such period as may be determined by such majority.
ARTICLE 11
Fractional Shares
11.01 The board of directors may authorize the issue from time to time
of shares of the capital stock of the corporation in fractional denominations,
provided that the transactions in which and the terms upon which shares in
fractional denominations may be issued may from time to time be determined and
limited by or under authority of the board of directors.
ARTICLE 12
Indemnification
12.01
(a) Every person who is or was a director, officer or employee
of this Corporation or of any other corporation which he served at
the request of this Corporation and in which this Corporation owns
or owned shares of capital stock or of which it is or was a
creditor shall have a right to be indemnified by this Corporation
against all liability and reasonable expenses incurred by him in
connection with or resulting from a claim, action, suit or
proceeding in which he may become involved as a party or otherwise
by reason of his being or having been a director, officer or
employee of this Corporation or such other corporation, provided
(1) said claim, action, suit or proceeding shall be prosecuted to a
final determination and he shall be vindicated on the merits, or
(2) in the absence of such a final determination vindicating him on
the merits, the board of directors shall determine that he acted in
good faith and in a manner he reasonably believed to be in the best
interest of the Corporation in the case of conduct in the
director's official capacity with the Corporation and in all other
cases, that the conduct was at least not opposed to the best
interest of the Corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his
conduct was unlawful; said determination to be made by the board of
directors acting through a quorum of disinterested directors, or in
its absence on the opinion of counsel.
(b) For purposes of the preceding subsection: (1) "liability
and reasonable expenses" shall include but not be limited to
reasonable counsel fees and disbursements, amounts of any judgment,
fine or penalty, and reasonable amounts paid in settlement; (2)
"claim, action, suit or proceeding" shall include every such claim,
action, suit or proceeding, whether civil or criminal, derivative
or otherwise, administrative, judicial or legislative, any appeal
relating thereto, and shall include any reasonable apprehension or
threat of such a claim, action, suit or proceeding; (3) the
termination of any proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent
creates a rebuttable presumption that the director did not meet the
standard of conduct set forth in subsection (a)(2), supra.
(c) Notwithstanding the foregoing, the following limitations
shall apply with respect to any action by or in the right of the
Corporation: (1) no indemnification shall be made in respect of
claim, issue or matter as to which the person seeking
indemnification shall have been adjudged to be liable for
negligence or misconduct in the performance of his duty to the
Corporation unless and only to the extent that the Court of
Chancery of the State of Maryland or the court in which such action
or suit was brought shall determine upon application that despite
the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such
other court shall deem proper; and (2) indemnification shall extend
only to reasonable expenses, including reasonable counsel's fees
and disbursements.
(d) The right of indemnification shall extend to any person
otherwise entitled to it under this bylaw whether or not that
person continues to be a director, officer or employee of this
Corporation or such other corporation at the time such liability or
expense shall be incurred. The right of indemnification shall
extend to the legal representative and heirs of any person
otherwise entitled to indemnification. If a person meets the
requirements of this bylaw with respect to some matters in a claim,
action suit, or proceeding, but not with respect to others, he
shall be entitled to indemnification as to the former. Advances
against liability and expenses may be made by the Corporation on
terms fixed by the board of directors subject to an obligation to
repay if indemnification proves unwarranted.
(e) This bylaw shall not exclude any other rights of
indemnification or other rights to which any director, officer or
employee may be entitled to by contract, vote of the stockholders
or as a matter of law.
If any clause, provision or application of this section shall
be determined to be invalid, the other clauses, provisions or
applications of this section shall not be affected but shall remain
in full force and effect. The provisions of this bylaw shall be
applicable to claims, actions, suits or proceedings made or
commenced after the adoption hereof, whether arising from acts or
omissions to act occurring before or after the adoption hereof.
(f) Nothing contained in this bylaw shall be construed to
protect any director or officer of the Corporation against any
liability to the Corporation or its security holders to which he
would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
ARTICLE 13
Amendments
13.01 These bylaws may be amended or added to, altered or repealed at
any annual or special meeting of the stockholders by the affirmative vote of the
holders of a majority of the shares of capital stock issued and outstanding and
entitled to vote, provided notice of the general purport of the proposed
amendment, addition, alteration or repeal is given in the notice of said
meeting, or, at any meeting of the board of directors by vote of a majority of
the directors then in office, except that the board of directors may not amend
Article 5 to permit removal by said board without cause of any director elected
by the stockholders.
PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
Number Class A Shares
AGG-_________
This Certifies that _____________________________
is the owner of Class A share of fully paid,
non-assessable, $.01 par value capital stock of Principal Parterners Aggressive
Growth Fund, Inc., transferable only on the books of the Corporation by the
holder hereof in person or by attorney upon the surrender of this certificate
duly endorsed. The holder hereof by accepting this certificate expressly assents
to and is bound by the Article of Incorporation, as amended, and the By-Laws, as
amended, of the Corporation, copies of which are available for inspection at the
principal office of the Corporation.
THE SHARES REPRESENTED BY THIS CERTIFICATE WILL BE REDEEMED BY THE CORPORATION
UPON REQUEST OF THE STOCKHOLDER AS PROVIDED IN THE ARTICLES OF INCORPORATION OF
THE CORPORATION. IN ADDITION, THE ARTICLES OF INCORPORATION PROVIDE THAT THE
CORPORATION, AT ITS OPTION, MAY PURCHASE OR REDEEM SHARES OF ITS COMMON STOCK
UNDER CERTAIN OTHER CIRCUMSTANCES. THE PROVISIONS OF THE CORPORATION'S ARTICLES
OF INCORPORATION RELATING TO SUCH PURCHASES OR REDEMPTIONS BY THE CORPORATION
APPEAR ON THE REVERSE OF THIS CERTIFICATE. THE NUMBER OF SHARES REPRESENTED BY
THIS CERTIFICATE IS SUBJECT TO REDUCTION BY REASON OF CERTAIN OF SUCH PROVISIONS
RELATING TO A REDEMPTION.
In witness whereof, the Corporaiton has caused this certificate to be signed by
its duly authorized Officers and to be sealed with the seal of the Corporation.
COUNTERSIGNED AND REGISTERD:
PRINCIPAL MANAGEMENT CORPORATION
TRANSFER AGENT AND REGISTRAR
BY:
AUTHORIZED OFFICER
Principal Corporate Seal /s/Ralph C. Eucher
Mutual Principal PRESIDENT
Funds Aggressive
Growth
Fund, Inc. /s/A.S. Filean
1999 SECRETARY
Maryland
Cusip No. See Reverse side for Certain Definitions DATED:
<PAGE>
PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND, INC.
SECTIONS 5, 6, 7, 8, and 9 OF ARTICLE FIFTH OF THE ARTICLES OF INCORPORATION OF
THE CORPORATION ARE SET FORTH BELOW.
Section 5. Redemption and Repurchase of Shares of Capital Stock: Any shareholder
may redeem shares of the Corporation for the net asset value of each class or
series thereof by presentation of an appropriate request, together with the
certificates, if any, for such shares, duly endorsed, at the office or agency
designated by the Corporation. Redemptions as aforesaid, or purchases by the
Corporation of its own stock, shall be made in the manner and subject to the
conditions contained in the bylaws or approved by the Board of Directors.
Section 6. Purchase of Shares: The Corporation shall be entitled to purchase
shares of any class of its capital stock, to the extent that the Corporation may
lawfully effect such purchase under Maryland General Corporation Law, upon such
terms and conditions and for such consideration as the Board of Directors shall
deem advisable, by agreement with the stockholder at a price not exceeding the
net asset value per share computed in accordance with Section 4 of this Article.
Section 7. Redemption of Minimum Amounts:
(a) If after giving effect to a request for redemption by a stockholder, the
aggregate net asset value of his remaining shares of any series or class will be
less than the Minimum Amount then in effect, the Corporation shall be entitled
to require the redemption of the remaining shares of such class owned by such
stockholder, upon notice given in accordance with paragraph (c) of this Section,
to the extent that the Corporation may lawfully effect such redemption under
Maryland General Corporation Law.
(b) The term "Minimum Amount" when used herein shall mean Three Hundred Dollars
($300) unless otherwise fixed by the Board of Directors from time to time,
provided that the Minimum amount may not in any event exceed Five Thousand
Dollars ($5,000).
(c) If any redemption under paragraph (a) of this Section is upon notice, the
notice shall be in writing personally delivered or deposited in the mail, at
least thirty days prior to such redemption. If mailed, the notice shall be
addressed to the stockholder at his post office address as shown on the books of
the Corporation, and sent by certified or registered mail, postage prepaid. The
price for shares redeemed by the Corporation pursuant to paragraph (a) of this
Section shall be paid in cash in an amount equal to the net asset value of
such shares, computed in accordance with Section 4 of this Article.
Section 8. Mode of Payment: Payment by the Corporation for shares of any series
or class of the capital stock of the Corporation surrendered to it for
redemption shall be made by the Corporation within three business days of such
surrender out of the funds legally available therefor, provided that the
Corporation may suspend the right of the holders of capital stock of the
Corporation to redeem shares of capital stock and may postpone the right of such
holders to receive payment for any shares when permitted or required to do so by
law. Payment of the redemption or purchase price may be made in cash or, at the
option of the Corporation, wholly or partly in such portfolio securities of the
Corporation as the Corporation may select.
Section 9. Rights of Holders of Shares Purchased or Redeemed: The right of any
holder of any series or class of capital stock of the Corporation purchased or
redeemed by the Corporation as provided in this Article to receive dividends
thereon and all other rights of such holder with respect to such shares shall
terminate at the time as of which the purchase or redemption price of such
shares is determined, except the right of such holder to receive (i) the
purchase or redemption price of such shares from the Corporation or its
designated agent and (ii) any dividend or distribution or voting rights to which
such holder has previously become entitled as the record holder of such shares
on the record date for the determination of the stockholders entitled to receive
such dividend or distribution or to vote at the meeting of stockholders.
The following abbreviations, when used in the inscription of the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations. Additional abbreviations may also
be used.
TEN COM - as tenants in common
JTTEN - as joint tenants with right of survivorship and not as tenants in
common
UNIF TRANS MIN ACT - ......................Custodian (Minor)
under Uniform Transfer to Minors Act..............(State)
TOD - Transfer on Death
For Value received ____________________hereby sell, assign and transfer unto
________________________________________________________________________________
PLEASE PRINT OR TYPE NAME AND ADDRESS OF ASSIGNEE
________________________________________________________________________________
__________________________________________________________________________Shares
of the Capital Stock represented by within Certificate, and do hereby
irrevocably constitute and appoint___________________________________Attorney to
transfer the said stock on the books of the within named Corporation with full
power of substitution in the premises. Dated ___________________________
_____________________________________
_____________________________________
In Presnce of
___________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE. IN EVERY PARTICULAR, WITHOUT ALTER-
ATION OR ENLARGEMENT, OR ANY CHANGE WHAT SO EVER.
<PAGE>
PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
Number Class B Shares
AGB-_________
This Certifies that _____________________________
is the owner of Class B share of fully paid,
non-assessable, $.01 par value capital stock of Principal Partners Aggressive
Growth Fund, Inc., transferable only on the books of the Corporation by the
holder hereof in person or by attorney upon the surrender of this certificate
duly endorsed. The holder hereof by accepting this certificate expressly assents
to and is bound by the Article of Incorporation, as amended, and the By-Laws, as
amended, of the Corporation, copies of which are available for inspection at the
principal office of the Corporation.
THE SHARES REPRESENTED BY THIS CERTIFICATE WILL BE REDEEMED BY THE CORPORATION
UPON REQUEST OF THE STOCKHOLDER AS PROVIDED IN THE ARTICLES OF INCORPORATION OF
THE CORPORATION. IN ADDITION, THE ARTICLES OF INCORPORATION PROVIDE THAT THE
CORPORATION, AT ITS OPTION, MAY PURCHASE OR REDEEM SHARES OF ITS COMMON STOCK
UNDER CERTAIN OTHER CIRCUMSTANCES. THE PROVISIONS OF THE CORPORATION'S ARTICLES
OF INCORPORATION RELATING TO SUCH PURCHASES OR REDEMPTIONS BY THE CORPORATION
APPEAR ON THE REVERSE OF THIS CERTIFICATE. THE NUMBER OF SHARES REPRESENTED BY
THIS CERTIFICATE IS SUBJECT TO REDUCTION BY REASON OF CERTAIN OF SUCH PROVISIONS
RELATING TO A REDEMPTION.
In witness whereof, the Corporaiton has caused this certificate to be signed by
its duly authorized Officers and to be sealed with the seal of the Corporation.
COUNTERSIGNED AND REGISTERD:
PRINCIPAL MANAGEMENT CORPORATION
TRANSFER AGENT AND REGISTRAR
BY:
AUTHORIZED OFFICER
Principal Corporate Seal /s/Ralph C. Eucher
Mutual Principal PRESIDENT
Funds Aggressive
Growth
Fund, Inc. /s/A.S. Filean
1999 SECRETARY
Maryland
Cusip No. See Reverse side for Certain Definitions DATED:
<PAGE>
PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND, INC.
SECTIONS 5, 6, 7, 8, and 9 OF ARTICLE FIFTH OF THE ARTICLES OF INCORPORATION OF
THE CORPORATION ARE SET FORTH BELOW.
Section 5. Redemption and Repurchase of Shares of Capital Stock: Any shareholder
may redeem shares of the Corporation for the net asset value of each class or
series thereof by presentation of an appropriate request, together with the
certificates, if any, for such shares, duly endorsed, at the office or agency
designated by the Corporation. Redemptions as aforesaid, or purchases by the
Corporation of its own stock, shall be made in the manner and subject to the
conditions contained in the bylaws or approved by the Board of Directors.
Section 6. Purchase of Shares: The Corporation shall be entitled to purchase
shares of any class of its capital stock, to the extent that the Corporation may
lawfully effect such purchase under Maryland General Corporation Law, upon such
terms and conditions and for such consideration as the Board of Directors shall
deem advisable, by agreement with the stockholder at a price not exceeding the
net asset value per share computed in accordance with Section 4 of this Article.
Section 7. Redemption of Minimum Amounts:
(a) If after giving effect to a request for redemption by a stockholder, the
aggregate net asset value of his remaining shares of any series or class will be
less than the Minimum Amount then in effect, the Corporation shall be entitled
to require the redemption of the remaining shares of such class owned by such
stockholder, upon notice given in accordance with paragraph (c) of this Section,
to the extent that the Corporation may lawfully effect such redemption under
Maryland General Corporation Law.
(b) The term "Minimum Amount" when used herein shall mean Three Hundred Dollars
($300) unless otherwise fixed by the Board of Directors from time to time,
provided that the Minimum amount may not in any event exceed Five Thousand
Dollars ($5,000).
(c) If any redemption under paragraph (a) of this Section is upon notice, the
notice shall be in writing personally delivered or deposited in the mail, at
least thirty days prior to such redemption. If mailed, the notice shall be
addressed to the stockholder at his post office address as shown on the books of
the Corporation, and sent by certified or registered mail, postage prepaid. The
price for shares redeemed by the Corporation pursuant to paragraph (a) of this
Section shall be paid in cash in an amount equal to the net asset value of
such shares, computed in accordance with Section 4 of this Article.
Section 8. Mode of Payment: Payment by the Corporation for shares of any series
or class of the capital stock of the Corporation surrendered to it for
redemption shall be made by the Corporation within three business days of such
surrender out of the funds legally available therefor, provided that the
Corporation may suspend the right of the holders of capital stock of the
Corporation to redeem shares of capital stock and may postpone the right of such
holders to receive payment for any shares when permitted or required to do so by
law. Payment of the redemption or purchase price may be made in cash or, at the
option of the Corporation, wholly or partly in such portfolio securities of the
Corporation as the Corporation may select.
Section 9. Rights of Holders of Shares Purchased or Redeemed: The right of any
holder of any series or class of capital stock of the Corporation purchased or
redeemed by the Corporation as provided in this Article to receive dividends
thereon and all other rights of such holder with respect to such shares shall
terminate at the time as of which the purchase or redemption price of such
shares is determined, except the right of such holder to receive (i) the
purchase or redemption price of such shares from the Corporation or its
designated agent and (ii) any dividend or distribution or voting rights to which
such holder has previously become entitled as the record holder of such shares
on the record date for the determination of the stockholders entitled to receive
such dividend or distribution or to vote at the meeting of stockholders.
The following abbreviations, when used in the inscription of the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations. Additional abbreviations may also
be used.
TEN COM - as tenants in common
JTTEN - as joint tenants with right of survivorship and not as tenants in
common
UNIF TRANS MIN ACT - ......................Custodian (Minor)
under Uniform Transfer to Minors Act..............(State)
TOD - Transfer on Death
For Value received ____________________hereby sell, assign and transfer unto
________________________________________________________________________________
PLEASE PRINT OR TYPE NAME AND ADDRESS OF ASSIGNEE
________________________________________________________________________________
__________________________________________________________________________Shares
of the Capital Stock represented by within Certificate, and do hereby
irrevocably constitute and appoint___________________________________Attorney to
transfer the said stock on the books of the within named Corporation with full
power of substitution in the premises. Dated ___________________________
_____________________________________
_____________________________________
In Presnce of
___________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE. IN EVERY PARTICULAR, WITHOUT ALTER-
ATION OR ENLARGEMENT, OR ANY CHANGE WHAT SO EVER.
<PAGE>
PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
Number Class C Shares
AGC-_________
This Certifies that _____________________________
is the owner of Class C share of fully paid,
non-assessable, $.01 par value capital stock of Principal Partners Aggressive
Growth Fund, Inc., transferable only on the books of the Corporation by the
holder hereof in person or by attorney upon the surrender of this certificate
duly endorsed. The holder hereof by accepting this certificate expressly assents
to and is bound by the Article of Incorporation, as amended, and the By-Laws, as
amended, of the Corporation, copies of which are available for inspection at the
principal office of the Corporation.
THE SHARES REPRESENTED BY THIS CERTIFICATE WILL BE REDEEMED BY THE CORPORATION
UPON REQUEST OF THE STOCKHOLDER AS PROVIDED IN THE ARTICLES OF INCORPORATION OF
THE CORPORATION. IN ADDITION, THE ARTICLES OF INCORPORATION PROVIDE THAT THE
CORPORATION, AT ITS OPTION, MAY PURCHASE OR REDEEM SHARES OF ITS COMMON STOCK
UNDER CERTAIN OTHER CIRCUMSTANCES. THE PROVISIONS OF THE CORPORATION'S ARTICLES
OF INCORPORATION RELATING TO SUCH PURCHASES OR REDEMPTIONS BY THE CORPORATION
APPEAR ON THE REVERSE OF THIS CERTIFICATE. THE NUMBER OF SHARES REPRESENTED BY
THIS CERTIFICATE IS SUBJECT TO REDUCTION BY REASON OF CERTAIN OF SUCH PROVISIONS
RELATING TO A REDEMPTION.
In witness whereof, the Corporaiton has caused this certificate to be signed by
its duly authorized Officers and to be sealed with the seal of the Corporation.
COUNTERSIGNED AND REGISTERD:
PRINCIPAL MANAGEMENT CORPORATION
TRANSFER AGENT AND REGISTRAR
BY:
AUTHORIZED OFFICER
Principal Corporate Seal /s/Ralph C. Eucher
Mutual Principal PRESIDENT
Funds Aggressive
Growth
Fund, Inc. /s/A.S. Filean
1999 SECRETARY
Maryland
Cusip No. See Reverse side for Certain Definitions DATED:
<PAGE>
PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND, INC.
SECTIONS 5, 6, 7, 8, and 9 OF ARTICLE FIFTH OF THE ARTICLES OF INCORPORATION OF
THE CORPORATION ARE SET FORTH BELOW.
Section 5. Redemption and Repurchase of Shares of Capital Stock: Any shareholder
may redeem shares of the Corporation for the net asset value of each class or
series thereof by presentation of an appropriate request, together with the
certificates, if any, for such shares, duly endorsed, at the office or agency
designated by the Corporation. Redemptions as aforesaid, or purchases by the
Corporation of its own stock, shall be made in the manner and subject to the
conditions contained in the bylaws or approved by the Board of Directors.
Section 6. Purchase of Shares: The Corporation shall be entitled to purchase
shares of any class of its capital stock, to the extent that the Corporation may
lawfully effect such purchase under Maryland General Corporation Law, upon such
terms and conditions and for such consideration as the Board of Directors shall
deem advisable, by agreement with the stockholder at a price not exceeding the
net asset value per share computed in accordance with Section 4 of this Article.
Section 7. Redemption of Minimum Amounts:
(a) If after giving effect to a request for redemption by a stockholder, the
aggregate net asset value of his remaining shares of any series or class will be
less than the Minimum Amount then in effect, the Corporation shall be entitled
to require the redemption of the remaining shares of such class owned by such
stockholder, upon notice given in accordance with paragraph (c) of this Section,
to the extent that the Corporation may lawfully effect such redemption under
Maryland General Corporation Law.
(b) The term "Minimum Amount" when used herein shall mean Three Hundred Dollars
($300) unless otherwise fixed by the Board of Directors from time to time,
provided that the Minimum amount may not in any event exceed Five Thousand
Dollars ($5,000).
(c) If any redemption under paragraph (a) of this Section is upon notice, the
notice shall be in writing personally delivered or deposited in the mail, at
least thirty days prior to such redemption. If mailed, the notice shall be
addressed to the stockholder at his post office address as shown on the books of
the Corporation, and sent by certified or registered mail, postage prepaid. The
price for shares redeemed by the Corporation pursuant to paragraph (a) of this
Section shall be paid in cash in an amount equal to the net asset value of
such shares, computed in accordance with Section 4 of this Article.
Section 8. Mode of Payment: Payment by the Corporation for shares of any series
or class of the capital stock of the Corporation surrendered to it for
redemption shall be made by the Corporation within three business days of such
surrender out of the funds legally available therefor, provided that the
Corporation may suspend the right of the holders of capital stock of the
Corporation to redeem shares of capital stock and may postpone the right of such
holders to receive payment for any shares when permitted or required to do so by
law. Payment of the redemption or purchase price may be made in cash or, at the
option of the Corporation, wholly or partly in such portfolio securities of the
Corporation as the Corporation may select.
Section 9. Rights of Holders of Shares Purchased or Redeemed: The right of any
holder of any series or class of capital stock of the Corporation purchased or
redeemed by the Corporation as provided in this Article to receive dividends
thereon and all other rights of such holder with respect to such shares shall
terminate at the time as of which the purchase or redemption price of such
shares is determined, except the right of such holder to receive (i) the
purchase or redemption price of such shares from the Corporation or its
designated agent and (ii) any dividend or distribution or voting rights to which
such holder has previously become entitled as the record holder of such shares
on the record date for the determination of the stockholders entitled to receive
such dividend or distribution or to vote at the meeting of stockholders.
The following abbreviations, when used in the inscription of the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations. Additional abbreviations may also
be used.
TEN COM - as tenants in common
JTTEN - as joint tenants with right of survivorship and not as tenants in
common
UNIF TRANS MIN ACT - ......................Custodian (Minor)
under Uniform Transfer to Minors Act..............(State)
TOD - Transfer on Death
For Value received ____________________hereby sell, assign and transfer unto
________________________________________________________________________________
PLEASE PRINT OR TYPE NAME AND ADDRESS OF ASSIGNEE
________________________________________________________________________________
__________________________________________________________________________Shares
of the Capital Stock represented by within Certificate, and do hereby
irrevocably constitute and appoint___________________________________Attorney to
transfer the said stock on the books of the within named Corporation with full
power of substitution in the premises. Dated ___________________________
_____________________________________
_____________________________________
In Presnce of
___________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE. IN EVERY PARTICULAR, WITHOUT ALTER-
ATION OR ENLARGEMENT, OR ANY CHANGE WHAT SO EVER.
<PAGE>
PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
Number Class R Shares
AGR-_________
This Certifies that _____________________________
is the owner of Class R share of fully paid,
non-assessable, $.01 par value capital stock of Principal Partners Aggressive
Growth Fund, Inc., transferable only on the books of the Corporation by the
holder hereof in person or by attorney upon the surrender of this certificate
duly endorsed. The holder hereof by accepting this certificate expressly assents
to and is bound by the Article of Incorporation, as amended, and the By-Laws, as
amended, of the Corporation, copies of which are available for inspection at the
principal office of the Corporation.
THE SHARES REPRESENTED BY THIS CERTIFICATE WILL BE REDEEMED BY THE CORPORATION
UPON REQUEST OF THE STOCKHOLDER AS PROVIDED IN THE ARTICLES OF INCORPORATION OF
THE CORPORATION. IN ADDITION, THE ARTICLES OF INCORPORATION PROVIDE THAT THE
CORPORATION, AT ITS OPTION, MAY PURCHASE OR REDEEM SHARES OF ITS COMMON STOCK
UNDER CERTAIN OTHER CIRCUMSTANCES. THE PROVISIONS OF THE CORPORATION'S ARTICLES
OF INCORPORATION RELATING TO SUCH PURCHASES OR REDEMPTIONS BY THE CORPORATION
APPEAR ON THE REVERSE OF THIS CERTIFICATE. THE NUMBER OF SHARES REPRESENTED BY
THIS CERTIFICATE IS SUBJECT TO REDUCTION BY REASON OF CERTAIN OF SUCH PROVISIONS
RELATING TO A REDEMPTION.
In witness whereof, the Corporaiton has caused this certificate to be signed by
its duly authorized Officers and to be sealed with the seal of the Corporation.
COUNTERSIGNED AND REGISTERD:
PRINCIPAL MANAGEMENT CORPORATION
TRANSFER AGENT AND REGISTRAR
BY:
AUTHORIZED OFFICER
Principal Corporate Seal /s/Ralph C. Eucher
Mutual Principal PRESIDENT
Funds Aggressive
Growth
Fund, Inc. /s/A.S. Filean
1999 SECRETARY
Maryland
Cusip No. See Reverse side for Certain Definitions DATED:
<PAGE>
PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND, INC.
SECTIONS 5, 6, 7, 8, and 9 OF ARTICLE FIFTH OF THE ARTICLES OF INCORPORATION OF
THE CORPORATION ARE SET FORTH BELOW.
Section 5. Redemption and Repurchase of Shares of Capital Stock: Any shareholder
may redeem shares of the Corporation for the net asset value of each class or
series thereof by presentation of an appropriate request, together with the
certificates, if any, for such shares, duly endorsed, at the office or agency
designated by the Corporation. Redemptions as aforesaid, or purchases by the
Corporation of its own stock, shall be made in the manner and subject to the
conditions contained in the bylaws or approved by the Board of Directors.
Section 6. Purchase of Shares: The Corporation shall be entitled to purchase
shares of any class of its capital stock, to the extent that the Corporation may
lawfully effect such purchase under Maryland General Corporation Law, upon such
terms and conditions and for such consideration as the Board of Directors shall
deem advisable, by agreement with the stockholder at a price not exceeding the
net asset value per share computed in accordance with Section 4 of this Article.
Section 7. Redemption of Minimum Amounts:
(a) If after giving effect to a request for redemption by a stockholder, the
aggregate net asset value of his remaining shares of any series or class will be
less than the Minimum Amount then in effect, the Corporation shall be entitled
to require the redemption of the remaining shares of such class owned by such
stockholder, upon notice given in accordance with paragraph (c) of this Section,
to the extent that the Corporation may lawfully effect such redemption under
Maryland General Corporation Law.
(b) The term "Minimum Amount" when used herein shall mean Three Hundred Dollars
($300) unless otherwise fixed by the Board of Directors from time to time,
provided that the Minimum amount may not in any event exceed Five Thousand
Dollars ($5,000).
(c) If any redemption under paragraph (a) of this Section is upon notice, the
notice shall be in writing personally delivered or deposited in the mail, at
least thirty days prior to such redemption. If mailed, the notice shall be
addressed to the stockholder at his post office address as shown on the books of
the Corporation, and sent by certified or registered mail, postage prepaid. The
price for shares redeemed by the Corporation pursuant to paragraph (a) of this
Section shall be paid in cash in an amount equal to the net asset value of
such shares, computed in accordance with Section 4 of this Article.
Section 8. Mode of Payment: Payment by the Corporation for shares of any series
or class of the capital stock of the Corporation surrendered to it for
redemption shall be made by the Corporation within three business days of such
surrender out of the funds legally available therefor, provided that the
Corporation may suspend the right of the holders of capital stock of the
Corporation to redeem shares of capital stock and may postpone the right of such
holders to receive payment for any shares when permitted or required to do so by
law. Payment of the redemption or purchase price may be made in cash or, at the
option of the Corporation, wholly or partly in such portfolio securities of the
Corporation as the Corporation may select.
Section 9. Rights of Holders of Shares Purchased or Redeemed: The right of any
holder of any series or class of capital stock of the Corporation purchased or
redeemed by the Corporation as provided in this Article to receive dividends
thereon and all other rights of such holder with respect to such shares shall
terminate at the time as of which the purchase or redemption price of such
shares is determined, except the right of such holder to receive (i) the
purchase or redemption price of such shares from the Corporation or its
designated agent and (ii) any dividend or distribution or voting rights to which
such holder has previously become entitled as the record holder of such shares
on the record date for the determination of the stockholders entitled to receive
such dividend or distribution or to vote at the meeting of stockholders.
The following abbreviations, when used in the inscription of the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations. Additional abbreviations may also
be used.
TEN COM - as tenants in common
JTTEN - as joint tenants with right of survivorship and not as tenants in
common
UNIF TRANS MIN ACT - ......................Custodian (Minor)
under Uniform Transfer to Minors Act..............(State)
TOD - Transfer on Death
For Value received ____________________hereby sell, assign and transfer unto
________________________________________________________________________________
PLEASE PRINT OR TYPE NAME AND ADDRESS OF ASSIGNEE
________________________________________________________________________________
__________________________________________________________________________Shares
of the Capital Stock represented by within Certificate, and do hereby
irrevocably constitute and appoint___________________________________Attorney to
transfer the said stock on the books of the within named Corporation with full
power of substitution in the premises. Dated ___________________________
_____________________________________
_____________________________________
In Presnce of
___________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE. IN EVERY PARTICULAR, WITHOUT ALTER-
ATION OR ENLARGEMENT, OR ANY CHANGE WHAT SO EVER.
Princor
Financial
Services
Corporation
October 15, 1999
Principal Partners Aggressive Growth Fund, Inc.
Des Moines, Iowa 50392-0200
Re Registration Statement on Form N-1A
Pursuant to Securities Act of 1933
Registration No. 333-86149
I am familiar with the organization of Principal Partners Aggressive Growth
Fund, Inc. (the "Fund") under the laws of the State of Maryland and have
reviewed the above-referenced Registration Statement (the "Registration
Statement") filed with the Securities and Exchange Commission relating to the
offer and sale of an indefinite number of shares of the Corporation's Common
Stock, par value $.01 per share (the "Shares"). Based upon such investigation as
I have deemed necessary, I am of the following opinion:
(1) The Fund has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Maryland.
(2) The Fund has authority to issue 100,000,000 shares of common stock. Subject
to the authority of the Board of Directors to increase and decrease the
number of, and to reclassify the shares of any class, the Directors have
established three classes of common stock having the designation of Class
A, Class B, Class C and Class R, with each class comprising of 25,000,000
shares, and the shares, when issued in accordance with the terms described
in the Registration Statement, will be legally issued, fully paid and
non-assessable.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours
/s/ Michael D. Roughton
Michael D. Roughton
Counsel
MDR/nja
Home Office: The Principal Financial Group, Des Moines, Iowa 50392-0200 (800)
451-5447/FAX (515) 248-4745 Securities offered through Princor Finanial Services
Corporation, a registered broker-dealer. Member SIPC.
Consent of Independent Auditors
We consent to the reference to our firm under the captions Financial Statements
in the Prospectuses in Part A and in Part B and to the use of our report dated
October28, 1999 on the statement of net assets of Principal Partners Aggressive
Growth Fund, Inc. and to the incorporation by reference in Part B of our report
dated November25, 1998 on the financial statements and financial highlights of
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 Limited Term Bond Fund, Inc., Principal MidCap Fund, Inc.,
Principal Real Estate Fund, Inc., Principal SmallCap Fund, Inc., Principal
Tax-Exempt Bond Fund, Inc., and Principal Utilities Fund, Inc. in this
Pre-Effective Amendment No. 1 to Form N-1A Registration Statement under the
Securities Act of 1933 (Registration No. 333-86149) and related prospectus of
Principal Partners Aggressive Growth Fund, Inc.
/s/ Ernest & Young LLP
Des Moines, Iowa
October 28, 1999
Princor
Financial
Services
Corporation
October 27, 1999
Mr. Ralph C. Eucher
President
Principal Partners Aggressive Growth Fund, Inc.
Principal Financial Group
Des Moines, IA 50392-0200
Dear Mr. Eucher
Principal Life Insurance Company intends to purchase 400,000 shares of
Common Stock of Principal Partners Aggressive Growth Fund, Inc., par value $.01
per share (the "Shares") at $10.00 per share. In connection with such purchase,
Principal Life Insurance Company represents and warrants that it will purchase
such Shares as an investment and not with a view to resell, distribute or
redeem.
PRINCIPAL LIFE INSURANCE COMPANY
/s/ Traci L. Weldon
BY _____________________________________________
Traci L. Weldon
Home Office: The Principal Financial Group, Des Moines, Iowa 50392-0200 (800)
451-5447/FAX (515) 248-4745 Securities offered through Princor Finanial Services
Corporation, a registered broker-dealer. Member SIPC.
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.
<TABLE>
Sales Charge for
All Funds Except Sales Charge for Dealer Allowance
Limited Term Bond Fund Limited Term Bond Fund as % of Offering
Sales Charge as % of: Sales Charge as % of: All Funds
<CAPTION>
Offering Amount Offering Amount Except Limited Limited Term
Amount of Purchase Price Invested Price Invested Term Bond Fund Bond Fund
------------------ ----- -------- ----- -------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Less than $50,000 4.75% 4.99% 1.50% 1.52% 4.00% 1.25%
$50,000 but less than $100,000 4.25% 4.44% 1.25% 1.27% 3.75% 1.00%
$100,000 but less than $250,000 3.75% 3.90% 1.00% 1.01% 3.25% 0.75%
$250,000 but less than $500,000 2.50% 2.56% 0.75% 0.76% 2.00% 0.50%
$500,000 but less than $1,000,000 1.50% 1.52% 0.50% 0.50% 1.25% 0.25%
$1,000,000 or more No Sales Charge 0.00% No Sales Charge 0.00% 0.75% 0.25%
</TABLE>
Class B shares
Class B shares are sold without an initial sales charge, although a
CDSC will be imposed on shares redeemed within six years of purchase. The
following types of shares may be redeemed without charge at any time: (i) shares
acquired by reinvestment of distributions and (ii) shares otherwise exempt from
the CDSC, as described below. Subject to the foregoing exclusions, the amount of
the charge is determined as a percentage of the lesser of the current market
value or the cost of the shares being redeemed. Therefore, when a share is
redeemed, any increase in its value above the initial purchase price is not
subject to any CDSC. The amount of the CDSC will depend on the number of years
shares have been owned and the dollar amount being redeemed, according to the
following table:
<TABLE>
====================================================================================================================================
Contingent Deferred Sales Charge
as a Percentage of
Dollar Amount Subject to Charge
====================================================================================================================================
For Certain Sponsored Plans
Commenced After 2/1/1998
==============================================
<CAPTION>
All Funds All Funds
Years Since Purchase Except Limited Term Limited Term Except Limited Term Limited Term
Payments Made Bond Fund Bond Fund Bond Fund Bond Fund
-------------- -------- ---------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C>
2 years or less 4.0% 1.25% 3.00% 0.75%
more than 2 years, up to 4 years 3.0% 0.75% 2.00% 0.50%
more than 4 years, up to 5 years 2.0% 0.50% 1.00% 0.25%
more than 5 years, up to 6 years 1.0% 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
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.
<PAGE>
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 Limited Term Bond Fund, Inc.
Principal MidCap Fund, Inc.
Principal Partners Aggressive Growth Fund, Inc.
Principal Real Estate Fund, Inc.
Principal SmallCap Fund, Inc.
Principal Tax-Exempt Bond Fund, Inc.
Principal Utilities Fund, Inc.