File No. 333-71475
Rule 497
[LOGO]
The Principal Mutual Funds
March 1, 1999
Dear Shareholder:
The Board of Directors of Principal Tax-Exempt Cash Management Fund has
called a special meeting of shareholders for April 7, 1999 to vote on an
Agreement and Plan of Acquisition which provides for the combination of the
Principal Tax-Exempt Cash Management Fund with Principal Cash Management Fund.
If the Plan is approved by shareholders and implemented, you will cease to own
shares of the Tax-Exempt Cash Management Fund and will become the owner of an
equal number of Class A shares of the Cash Management Fund.
Both Funds are money-market funds which invest only in short-term
securities, seek a high a level of income and strive to maintain a stable net
asset value per share of $1.00. The principal difference between the two Funds
is that the Tax-Exempt Fund invests primarily for income exempt from federal
income tax while the Cash Management Fund invests for taxable income.
On the following pages you will find a brief overview of the Plan, the
notice of the meeting and a complete prospectus/proxy statement. No matter how
many shares you own, it is important that you read these materials and complete
and mail the proxy ballot in the enclosed postage-paid envelope as soon as you
can. As an alternative, you may telephone toll free 1-800-944-8454 or you may
fax a copy of your proxy ballot to 515-235- 9235 (this is not a toll-free
number).
We appreciate your taking the time to respond on this important matter.
If you have any questions, please call our shareholder services department
toll-free at 1-800-944-8454.
Sincerely,
/s/ Stephan L. Jones
Stephan L. Jones
President
Principal Tax-Exempt Cash Management Fund, Inc.
<PAGE>
[LOGO]
The Principal Mutual Funds
IMPORTANT INFORMATION TO HELP YOU UNDERSTAND AND VOTE ON THE PROPOSAL
Please read the complete prospectus/proxy statement. For your
convenience, we are providing this brief overview of the Agreement and Plan of
Acquisition on which you are being asked to vote.
What will happen if shareholders approve the Plan and it becomes effective?
At the effective time, which is scheduled for 3:00 p.m. C.D.T. on April
8, 1999, Principal Cash Management Fund, Inc. (Cash Management Fund)
will acquire all the assets and assume all the liabilities of Principal
Tax-Exempt Cash Management Fund, Inc. (Tax-Exempt Fund) and will issue
to the Tax-Exempt Fund shares of its Class A common stock having a
value equal to the net assets acquired. Immediately thereafter, the
Tax-Exempt Fund will distribute those shares to its shareholders and
thereby redeem all its outstanding shares. You will receive Class A
shares of the Cash Management Fund equal in number and value to the
shares of the Tax-Exempt Fund which you own at the effective time. The
acquisition will not dilute the value of your shares.
Why has the Board decided to recommend the combination of the Tax-Exempt Fund
with the Cash Management Fund?
The Tax-Exempt Fund was organized in 1987 at the request of a
broker-dealer subsidiary of Principal Life Insurance Company primarily
as an investment alternative for cash balances of clients of that
subsidiary. Principal Life sold the subsidiary in January 1998. Since
then, there have been substantial redemptions from the Tax-Exempt Fund,
and its net assets have declined by more than 60%. The Board considered
that the small asset size of the Tax-Exempt fund and its lack of
expected asset growth would result in a lack of economies of scale. The
Board also considered that the tax- equivalent yield of the Tax-Exempt
Fund generally has been less than the yield of the Cash Management
Fund.
How have the Funds performed in relation to each other?
For the 7-day period ended January 25, 1999, the yield for the Class A
shares of the Tax-Exempt Fund was 2.06%, and the yield for the Class A
shares of the Cash Management Fund was 4.61%. The following table
shows, for each of five tax brackets, the average annualized
tax-equivalent yield of the Tax-Exempt Fund for the 7-day period ended
January 25, 1999.
<TABLE>
<CAPTION>
Tax Bracket
<S> <C> <C> <C> <C> <C>
15% 28% 31% 36% 39.6%
--- --- --- --- -----
Tax-equivalent yield 2.42% 2.86% 2.99% 3.22% 3.41%
</TABLE>
What are the advantages of the acquisition?
Because the Cash Management Fund is substantially larger than the
Tax-Exempt Fund, the Board believes that shareholders will benefit from
economies of scale.
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<PAGE>
Who will pay the fees and expenses incurred by the Funds in connection with the
Plan?
Principal Management Corporation, the manager of the Funds, will bear
all out-of-pocket fees and expenses incurred by the Funds in connection
with the transactions contemplated by the Plan.
Do the Funds have similar investment objectives, policies and procedures?
The investment objectives, policies and restrictions of the two Funds
are substantially similar. Both Funds are money-market funds and both
invest in short-term securities and strive to maintain their respective
net asset values at $1.00 per share. The principal difference between
the two funds is that the Tax-Exempt Fund invests primarily for income
exempt from federal income tax and the Cash Management Fund invests for
taxable income. The Funds have the same distribution, purchase and
redemption procedures, the same dividend payment and reinvestment
procedures and the same exchange rights.
How do the expense structures of the Funds compare?
The Funds have the same contractual rates for management fees. The Cash
Management Fund, however, pays a lower rate than the Tax-Exempt Fund
because its larger size qualifies it for reduced rates that apply to
larger amounts of net assets. As a percentage of average daily net
assets and before any applicable fee waivers, for the year ended
October 31, 1998, the Tax-Exempt Fund had total operating expenses of
0.81%, which included a management fee of 0.50%, and the Cash
Management Fund had total operating expenses of 0.56%, which included a
management fee of 0.38%.
What will be the size of the Cash Management Fund after the transaction?
As of January 25, 1999, the Tax-Exempt Fund had net assets of $26.7
million, and the Cash Management Fund had net assets of $333.9 million.
The net assets of the Tax-Exempt Fund represent less than 10% of the
net assets of the Cash Management Fund, and the manager of the Funds
believes that their transfer will permit them to be managed more
efficiently and will not have any adverse effect on the Cash Management
Fund.
What are the federal tax implications?
The transactions contemplated by the Plan will not result in a tax-free
"reorganization" under the Internal Revenue Code. The Funds, however,
have obtained an opinion from tax counsel to the effect that no gain or
loss will be recognized by either Fund or its shareholders in
connection with the transactions contemplated by the Plan and that your
tax cost basis will not change, although your holding period will begin
anew at the effective time.
What do I do if I wish to maintain an investment in a tax-exempt fund?
Principal Tax-Exempt Bond Fund will offer to exchange its Class A
shares without a sales charge for your shares of the Tax-Exempt Fund or
the shares of the Cash Management Fund issued in exchange for those
shares. The exchange offer will commence on the day after the
shareholders approve the Plan and will continue until June 1,1999.
Has the Board of Directors approved the Plan?
Yes. The Board of Directors of each of the Funds has approved the Plan.
The Board of Directors of the Tax-Exempt Fund recommends that you vote
in favor of the Plan.
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<PAGE>
What if there are not enough votes to reach a quorum by the scheduled date of
the shareholder meeting?
Although we expect to have a quorum for the meeting, if a quorum is not
obtained, the meeting will be postponed to allow time to solicit
additional proxies from shareholders. We urge you to vote promptly
after reviewing the enclosed material so that the meeting is not
delayed.
How many votes am I entitled to cast?
You are entitled to one vote for each share of the Tax-Exempt Fund
owned on the record date, February 25, 1999. The number of shares that
you owned on that date is stated on the enclosed proxy ballot.
How do I vote my shares?
Voting is easy. You can vote your shares by completing and signing the
enclosed proxy ballot and mailing it in the enclosed postage paid
envelope or faxing a copy to 515-235-9235 (this is not a toll free
number). You may also call toll free at 1-800-944-8454. If you need any
assistance or have any questions concerning the Plan or how to vote
your shares, please call Principal Management Corporation at
1-800-944-8454.
How do I sign the proxy ballot?
Individual Accounts: Shareholders should sign exactly as their names
appear in the account registration shown on
the proxy ballot.
Joint Accounts: Either owner may sign, but the name of the person
signing should conform exactly to a name that appears in the
account registration shown on the proxy ballot.
All Other Accounts: The person signing must indicate his or her capacity.
For example, a trustee for a trust or
other entity should sign, "John A. Doe, Trustee."
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<PAGE>
PRINCIPAL TAX-EXEMPT CASH MANAGEMENT FUND, INC.
Des Moines, Iowa 50392-0200
------------
NOTICE OF
SPECIAL MEETING OF SHAREHOLDERS
To be held on April 7, 1999
-----------
To the Shareholders:
Notice hereby is given that a special meeting of the shareholders of
Principal Tax-Exempt Cash Management Fund, Inc. (Tax-Exempt Fund) will be held
at 2:00 p.m. C.D.T., on April 7, 1999, at the offices of Principal Management
Corporation, 680 8th Street, Des Moines, Iowa 50392-0200. The meeting is being
held to consider and vote on the following matter as well as any other business
that may properly come before the meeting or any adjournment:
1. Approval of an Agreement and Plan of Acquisition among the
Tax-Exempt Fund, Principal Cash Management Fund, Inc. and Principal
Management Corporation, and the transactions contemplated thereby,
pursuant to which the Cash Management Fund would acquire all the assets
and assume all the liabilities of the Tax-Exempt Fund and issue in
exchange shares of its Class A common stock, and the Tax-Exempt Fund
would distribute those shares to its shareholders in redemption of all
its outstanding shares and then dissolve.
You are entitled to notice of and to vote at the meeting, and any
adjournment, if you owned shares of the Tax- Exempt Fund at the close of
business on February 25, 1999, the record date for the meeting.
Your vote is important. No matter how many shares you own, please read
the attached prospectus/proxy statement, and vote today.
For the Board of Directors
/s/ Arthur S. Filean
Arthur S. Filean
Vice-President and Secretary
March 1, 1999
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<PAGE>
PRINCIPAL CASH MANAGEMENT FUND, INC.
PRINCIPAL TAX-EXEMPT CASH MANAGEMENT FUND, INC.
PROSPECTUS/PROXY STATEMENT
This prospectus/proxy statement is being furnished in connection with
the solicitation of proxies by the Board of Directors of Principal Tax-Exempt
Cash Management Fund, Inc. (the "Tax-Exempt Fund") for use at a special meeting
of the shareholders of the Tax-Exempt Fund, to be held at 2:00 p.m. C.D.T., on
April 7, 1999, at the offices of Principal Management Corporation, 680 8th
Street, Des Moines, Iowa 50392-0200, and at any adjournment of the meeting.
At the meeting, Tax-Exempt Fund shareholders ("you") will vote on an
Agreement and Plan of Acquisition. Under the Plan, if approved, Principal Cash
Management Fund, Inc. (the "Cash Management Fund") will acquire all the assets
and assume all the liabilities of the Tax-Exempt Fund and issue in exchange
shares of its Class A common stock. The Tax-Exempt Fund will immediately redeem
all its outstanding shares by distributing the Cash Management Fund shares to
you. As a result, you will own the same number of shares in the Cash Management
Fund as you owned in the Tax-Exempt Fund at the effective time. The Funds'
manager, Principal Management Corporation, is also a party to the Plan and has
agreed to pay all expenses incurred by the Funds in connection with the Plan.
Both Funds are Maryland corporations organized by Principal Life
Insurance Company ("Principal Life") and registered as open-end, diversified
management investment companies under the Investment Company Act of 1940 (the
"Investment Company Act"). Both are money market funds which strive to maintain
a stable net asset value of $1.00 per share. The Cash Management Fund's
investment objective is to seek as high a level of income available from
short-term securities as is considered consistent with preservation of principal
and maintenance of liquidity. The Tax-Exempt Fund has a similar investment
objective, but it generally invests only in securities which pay interest income
that is exempt from federal income tax.
This prospectus/proxy statement sets forth concisely the information
you should know before voting on the proposed Plan. You should retain it for
future reference.
The prospectuses and Statements of Additional Information for the Cash
Management Fund and the Tax- Exempt Fund dated March 1, 1999 and the Statement
of Additional Information dated March 1, 1999 relating to this proxy
statement/prospectus have been filed with the Securities and Exchange Commission
("SEC") and are available without charge by writing to the Funds or their
manager at their principal executive offices, 680 8th Street, Des Moines, Iowa
50392-0200 or by telephoning toll-free 1-800-247-4123. The prospectuses of the
Cash Management Fund and Tax-Exempt Fund and the Statement of Additional
Information relating to this proxy statement/prospectus are incorporated herein
by reference. A copy of the Cash Management Fund prospectus accompanies this
prospectus.
The shares of the Funds are not deposits or obligations of any bank, are not
endorsed or guaranteed by any bank, and are not insured or guaranteed by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other U.S. government agency.
An investment in either Fund is neither insured nor guaranteed by the U.S.
government and there can be no assurance that either Fund will be able to
maintain a stable net asset value of $1.00 per share.
---------------------
The SEC has not approved or disapproved of these securities or passed upon
the adequacy of this prospectus/proxy statement. Any representation to the
contrary is a criminal offense.
---------------------
The date of this prospectus/proxy statement is
March 1, 1999
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<PAGE>
PROSPECTUS/PROXY STATEMENT
TABLE OF CONTENTS
INTRODUCTION AND VOTING INFORMATION.................................. 3
Special Meeting; Voting of Proxies; Adjournment............. 3
Proxy Solicitation.......................................... 3
Revocation of Proxies....................................... 4
Additional Information...................................... 4
SUMMARY.............................................................. 4
The Plan.................................................... 4
Reasons for the Plan........................................ 4
Investment Objectives and Policies.......................... 5
Management Fees and Other Operating Expenses................ 5
Purchases and Exchanges..................................... 5
Redemption Procedures and Fees.............................. 6
Dividends and Distributions; Automatic Reinvestment......... 6
Federal Income Tax Consequences of the Proposed Combination. 6
Costs and Expenses.......................................... 6
Continuation of Shareholder Accounts........................ 6
Exchange Offer.............................................. 6
PRINCIPAL RISK FACTORS............................................... 7
THE PLAN............................................................. 7
Agreement and Plan of Acquisition........................... 7
Description of Securities to Be Issued...................... 8
Reasons for the Proposed Combination........................ 8
Federal Income Tax Consequences............................. 9
Capitalization.............................................. 9
COMPARISON OF INVESTMENT OBJECTIVES,
POLICIES AND RESTRICTIONS............................................ 10
ADDITIONAL INFORMATION ABOUT THE FUNDS............................... 11
PROPOSALS OF SHAREHOLDERS............................................ 11
OTHER BUSINESS....................................................... 11
APPENDIX A: Form of Agreement and Plan of Acquisition
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<PAGE>
INTRODUCTION AND VOTING INFORMATION
Special Meeting; Voting of Proxies; Adjournment
We are furnishing this prospectus/proxy statement to you as
shareholders of the Tax-Exempt Fund in connection with the solicitation by the
Board of Directors of the Fund of proxies to be used at a special meeting of the
shareholders of the Fund to be held on April 7, 1999 and at any adjournment
thereof. The purpose of the meeting is to vote on an Agreement and Plan of
Acquisition to which the Tax-Exempt Fund, the Cash Management Fund and the
manager of those Funds, Principal Management Corporation, are parties. The Plan
provides for the combination of the Tax-Exempt Fund with the Cash Management
Fund, as more fully described below. The prospectus/proxy statement is first
being furnished to shareholders on or about March 1, 1999.
The Board of Directors of the Tax-Exempt Fund has approved the Plan and
recommends that the shareholders of the Tax-Exempt Fund vote FOR the Plan and
the transactions which it contemplates.
Shareholders of record of the Tax-Exempt Fund at the close of business
on February 25, 1999, the record date, are entitled to vote at the meeting. As
of the record date, the Tax-Exempt Fund had 25,912,717.570 shares outstanding
and entitled to be voted. Shareholders are entitled to one vote for each share
held. A quorum must be present for the transaction of business at the meeting.
The holders of record of a one-third of the shares outstanding at the close of
business on the record date present in person or represented by proxy will
constitute a quorum for the meeting. The approval of the Plan requires the
affirmative vote of a majority of all the votes entitled to be cast by
shareholders of the Tax-Exempt Fund. Abstentions and broker non-votes (proxies
from brokers or nominees indicating that they have not received instructions
from the beneficial owners on an item for which the broker or nominee does not
have discretionary power) are counted toward a quorum but do not represent votes
cast for the Plan or any other issue. If the shareholders of the Tax-Exempt Fund
do not approve the Plan, the Funds will consider possible alternative
arrangements, and Principal Management Corporation will continue to manage the
Tax-Exempt Fund.
To vote your shares: by mail - return your proxy ballot in the enclosed
postage-paid envelope
by fax - fax to 515-235-9235 (this is not
a toll-free number)
by telephone - call toll-free 1-800-944-8454
The proxies will vote in accordance with your direction, as indicated
on your proxy ballot, if the proxy ballot is received and is properly executed.
If you properly execute your proxy and give no voting instructions with respect
to the Plan, the proxies will vote your shares in favor of the Plan. The
proxies, in their discretion, may vote upon such other matters as may properly
come before the meeting. We are not aware of any other matters to come before
the meeting.
If either (i) a quorum is not present at the Meeting or (ii) a quorum
is present but sufficient votes in favor of approving the Plan are not received
by 12:00 Noon C.D.T., April 7, 1999, then the persons named as proxies in the
enclosed form of proxy may propose one or more adjournments of the meeting to
permit further solicitation of proxies. Any such adjournment will require the
affirmative vote of at least a majority of the Tax-Exempt Fund Shares
represented, in person or by proxy, at the session of the meeting to be
adjourned. The proxies will vote those proxies that they are required to vote
FOR the Plan in favor of such an adjournment and will vote those proxies
required to be voted AGAINST the Plan against such an adjournment.
Proxy Solicitation
We will solicit proxies primarily by mail. Additional solicitations may
be made by telephone, facsimile or personal contact by officers or employees of
the Tax-Exempt Fund or Principal Management Corporation who will not be
specially compensated for these services. Principal Management Corporation will
bear the costs of the meeting,
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<PAGE>
including costs of preparing and mailing the notice, the prospectus/proxy
statement, and the proxy, and of soliciting proxies. Banks, brokers, and other
persons holding Tax-Exempt Fund shares as nominees will be reimbursed for their
reasonable expenses incurred in sending proxy materials to and obtaining voting
information from the beneficial owners of those shares.
The vote of the shareholders of the Cash Management Fund is not being
solicited, because their approval or consent is not necessary for the approval
of the Plan.
Revocation of Proxies
You may revoke your proxy: (i) at any time prior to the proxy's
exercise by sending written notice to the Secretary of the Tax-Exempt Fund, at
680 8th Street, Des Moines, Iowa, 50392-0200 prior to the meeting; (ii) by the
subsequent execution and return of another proxy prior to the meeting; or (iii)
by being present and voting in person at the meeting after giving oral notice of
revocation to the Chairman of the meeting.
Additional Information
On January 25, 1999, the directors and officers of the Tax-Exempt Fund
together owned less than 1% of the outstanding shares. Principal Life, Des
Moines, Iowa, 50392-0200, an Iowa life insurance company and the parent of the
manager of the Funds, owned of record and beneficially, either directly or
through subsidiaries, 8.8 % of the outstanding shares of the Cash Management
Fund (including 8.7 % of the Class A shares) and 3.8 % of the outstanding shares
of the Tax-Exempt Fund and, based on those holdings, would own at the effective
time 8.4 % of the outstanding shares of the Cash Management Fund (8.4 % of the
Class A shares). Dolores A. Staples, 1054 19th Street, West Des Moines, Iowa
50265, owned 7.0 % of the outstanding shares of the Tax-Exempt Fund and, based
on that holding, would own at the effective time .005% of the outstanding shares
of the Cash Management Fund. The Funds do not know of any other person who owned
at the record date, or will own at the effective time, of record or beneficially
5% or more of the outstanding shares of either Fund.
SUMMARY
The following is a summary of certain information contained or
incorporated by reference in this prospectus/proxy statement. It is qualified in
its entirety by the more detailed information appearing elsewhere or
incorporated by reference in this prospectus/proxy statement.
The Plan
You are being asked to approve the Plan, which provides for the
combination of the Tax-Exempt Fund with the Cash Management Fund. Under the
Plan, at the effective time on the closing date, the Cash Management Fund will
acquire all the assets and assume all the liabilities of the Tax-Exempt Fund and
issue to the Tax-Exempt Fund shares of its Class A common stock having a value
equal to the net assets acquired. Immediately thereafter, the Tax Exempt Fund
will distribute all the Cash Management Fund shares to its shareholders and
thereby redeem all its outstanding shares. Each Tax-Exempt Fund shareholder will
receive Cash Management Fund shares equal in number and value to the shares of
the Tax-Exempt Fund held by the shareholder at the effective time. We expect the
effective time will be 3:00 p.m. C.D.T. on April 8, 1999.
Reasons for the Plan
We believe that the Plan will provide shareholders of the Tax-Exempt
Fund with an investment in a larger money-market fund with a more favorable
expense ratio and greater possibilities for economies of scale than are likely
with the Tax-Exempt Fund. The yield of the Cash Management Fund has generally
been higher than the tax-equivalent yield of the Tax-Exempt Fund. For example,
for the 7-day period ended January 25, 1999, the yield for the Class A shares of
the Cash Management Fund was 4.61% and the tax-equivalent yield for the
Tax-Exempt Fund was 3.41%
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<PAGE>
(assuming a tax rate of 39.6%). The Board, including a majority of the directors
who are not interested persons of the Fund, has determined that the Plan is
consistent with the best interests of the Fund and its shareholders, that the
terms of the Plan are fair and reasonable and that the interests of the
shareholders of the Fund will not be diluted as a result of the transactions
contemplated by the Plan.
Investment Objectives and Policies
Both the Tax-Exempt Fund and the Cash Management Fund are money-market
funds and both invest in short-term securities and strive to maintain their
respective net asset values at $1.00 per share. Their investment objectives,
policies and restrictions are substantially similar. The principal difference
between the two Funds is that the Tax- Exempt Fund generally invests only in
securities that pay interest which is exempt from federal income tax while the
Cash Management Fund invests in securities that pay taxable interest.
Management Fees and Other Operating Expenses
The operating expenses attributable to the Class A shares of the Funds
(as a percentage of the average daily net assets and before any applicable
waivers) for the fiscal year ended October 31, 1998 were as follows:
<TABLE>
<CAPTION>
Cash Management
Tax-Exempt Fund Fund
<S> <C> <C>
Management Fees: 0.50% 0.38%
Other Expenses: 0.31% 0.18%
----- -----
Total Fund Operating
Expenses: 0.81% 0.56%
</TABLE>
The manager of the Funds voluntarily waived a portion of its fee for
the Class A shares of the Tax-Exempt Fund until October 31, 1998. With the fee
waiver, total fund operating expenses were 0.72% for the Tax-Exempt Fund.
The following is an example of the effect of the operating expenses of
the Funds. Although your actual costs may be higher or lower, you would pay the
following expenses on a $10,000 investment in the Class A shares of the Funds,
assuming (1) a 5% annual return, (2) the Fund's operating expenses (before any
applicable reimbursement) remain the same, and (3) you redeem all of your shares
at the end of the periods shown.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Tax-Exempt Fund $594 $847 $1,119 $1,893
Cash Management Fund 556 727 914 1,452
</TABLE>
Purchases and Exchanges
Each Fund offers its shares for sale through Princor Financial Services
Corporation, a broker-dealer that is also the principal underwriter for the
Funds, or other dealers which it selects. Class A shares of the Funds are
offered to the public without a sales charge at the net asset value next
determined after receipt of an order. Both Funds strive to maintain a constant
net asset value per share of $1.00.
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<PAGE>
Class A shares of both Funds may be exchanged for Class A or Class B
shares of other funds sponsored by Principal Life Insurance Company. If Class A
shares of another fund are acquired upon exchange, a sales charge will be
imposed if the Class A shares being exchanged were acquired by direct purchase,
and a sales charge will not be imposed if the Class A shares being exchanged
were acquired by exchange from other funds, conversion of Class B shares or
reinvestment of dividends earned on Class A shares. If Class A shares of the
Funds are exchanged for Class B shares of other funds, the shares acquired will
be subject to the applicable contingent deferred sales charge imposed by the new
fund; however, the holding period of the Class A shares exchanged is added to
the holding period of the Class B shares for purposes of determining the
applicable charge.
Redemption Procedures and Fees
Shares of the Funds may be redeemed without charge at a price equal to
the net asset value of the shares next computed following the receipt of a
request for redemption in proper form. The Funds generally pay redemption
proceeds on the next business day after receipt of the request.
Dividends and Distributions; Automatic Reinvestment
The Funds declare dividends of all their daily net investment income
each day the net asset value per share is determined. Dividends are paid daily
and are automatically reinvested in Fund shares.
Federal Income Tax Consequences of the Proposed Combination
The combination will not be a tax-free "reorganization" under the
Internal Revenue Code of 1986, as amended (the "Code"). In the opinion of tax
counsel to the Funds, however, no gain or loss will be recognized by either Fund
or its shareholders, in connection with the combination, and the tax cost basis
of the Cash Management Fund shares received by Tax-Exempt Fund shareholders will
equal the tax cost basis of their shares in the Tax-Exempt Fund, although their
holding period will begin anew at the effective time of the combination.
Costs and Expenses
Principal Management Corporation will bear all out-of-pocket fees and
expenses incurred by the Funds in connection with the transactions contemplated
by the Plan.
Continuation of Shareholder Accounts
At the effective time, you will cease to be a shareholder of the
Tax-Exempt Fund and will become a shareholder of the Cash Management Fund owning
the same number of Class A shares of the Cash Management Fund as you had owned
of the Tax-Exempt Fund at the effective time.
Exchange Offer
Principal Tax-Exempt Bond Fund, Inc. will offer to exchange its Class A
shares without a sales charge for shares of the Tax-Exempt Fund or the shares of
the Cash Management Fund issued in exchange for those shares. The exchange offer
is designed to provide a tax-exempt investment alternative. It will commence on
the day after the shareholders approve the Plan and will continue until June 1,
1999.
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<PAGE>
PRINCIPAL RISK FACTORS
Because their investment objectives, policies and restrictions are
substantially similar, the Funds are subject to similar risks. These risks are
those typically associated with investing in money market funds. The Funds'
yields will vary with changes in short-term interest rates and their investments
are subject to the ability of the issuer to pay interest and principal when due.
Both Funds may enter into repurchase agreements. Repurchase agreements
carry certain risks not associated with direct investments in securities,
including possible decline in the market value of the underlying securities and
delays and costs to the Fund if the other party to the repurchase agreement
becomes insolvent.
THE PLAN
Agreement and Plan of Acquisition
The terms of the Plan are summarized below. The summary is qualified in
its entirety by reference to the Plan, a copy of which is attached as Appendix
A.
Under the Plan, the Cash Management Fund will acquire all the assets
and assume all the liabilities of the Tax- Exempt Fund and will issue to the
Tax-Exempt Fund the number of shares of Class A Common Stock of the Cash
Management Fund that have a net asset value equal to the net asset value of the
Tax-Exempt Fund. We expect that the closing date will be April 8, 1999 and that
the effective time will be the close of regular trading on the New York Stock
Exchange at 4:00 P.M., Eastern Time, on that date. The Funds will determine
their net asset values as of the effective time using the procedures described
in the Cash Management Fund's prospectus. Because both Funds are money-market
funds that maintain a stable net asset value of $1.00 per share, the Cash
Management Fund will issue to the Tax- Exempt Fund a number of shares equal to
the number of shares of the Tax-Exempt Fund outstanding at the effective time.
The Tax-Exempt Fund will be managed such that at the effective time it will hold
only cash or other securities that are eligible investments for the Cash
Management Fund.
Immediately after the effective time, the Tax-Exempt Fund will
distribute its Cash Management Fund shares to you in exchange for all your
outstanding Tax-Exempt Fund shares. Each Tax-Exempt Fund shareholder will
receive shares of the Cash Management Fund that are equal in number and value to
the shares of the Tax-Exempt Fund that are given up by the shareholder in the
exchange. In connection with the exchange, the Cash Management Fund will credit
on its books an appropriate number of its shares to the account of each
Tax-Exempt Fund shareholder, and the Tax- Exempt Fund will cancel on its books
all its shares registered to the account of that shareholder. Any outstanding
certificate for Tax-Exempt Fund shares that is not surrendered will be deemed to
represent the number of Cash Management Fund shares for which the Tax-Exempt
shares have been exchanged. After the effective time, the Tax- Exempt Fund will
dissolve in accordance with applicable law.
The consummation of the transactions contemplated by the Plan is
subject to the approval of the Plan by the shareholders of the Tax-Exempt Fund,
the continued correctness at the closing of the representations and warranties
of the Tax-Exempt Fund in the Plan and the delivery by the Tax-Exempt Fund to
the Cash Management Fund of a list of assets and liabilities being transferred.
The Plan may be amended in any manner mutually-agreeable to the Funds, except
that no amendment may be made to the Plan which in the opinion of the Board of
Directors of the Tax-Exempt Fund would materially adversely affect the interests
of the shareholders of that Fund. Either Fund may terminate the Plan at any time
before the effective time if it believes that consummation of the transactions
contemplated by the Plan would not be in the best interests of its shareholders.
Principal Management Corporation, the manager of the Funds, will pay
all fees and out-of-pocket expenses incurred by the Funds in connection with the
transactions contemplated by the Plan.
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<PAGE>
Principal Tax-Exempt Bond Fund, Inc. will offer to exchange its Class A
shares without a sales charge for shares of the Tax-Exempt Fund or shares of the
Cash Management Fund issued in exchange for shares of the Tax- Exempt Fund. The
exchange offer will permit you, if you wish, to maintain your investment in a
tax-exempt fund. The exchange offer will commence the day after the Plan is
approved by the shareholders of the Tax-Exempt Fund and continue until June 1,
1999.
Like the Funds, the Bond Fund is a Maryland corporation that is
registered as an open-end, diversified management investment company under the
Investment Company Act. It is also managed by Principal Management Corporation.
The Bond Fund's principal investment objective is to seek as high a level of
current income exempt from federal income tax as is consistent with preservation
of capital. The Bond Fund seeks to achieve its objective primarily through the
purchase of investment grade quality, tax-exempt fixed income obligations. Class
A shares of the Bond Fund are sold with a sales charge which is 4.75% on
purchases up to $50,000 and declines to no fee on purchases of more than $1
million. The charge will not be deducted in connection with the exchange.
Purchases of over $1 million of Class A shares are subject to a contingent
deferred sales charge at the rate of .75% if redeemed within 18 months of
purchase. For purposes of this charge, the Bond Fund will deem shares acquired
upon exchange to have been acquired at the time you purchased your Tax-Exempt
Fund shares. There is a 12b-1 fee at the annual rate of up to .25% of the Bond
Fund's average net assets attributable to Class A shares. As of January 25,
1999, the Bond Fund had approximately $214 million in net assets.
Description of Securities to Be Issued
The Class A Shares of the Cash Management Fund are shares of common
stock, par value $.01 per share. They have the same rights with respect to the
Cash Management Fund as the Class A Shares of the Tax-Exempt Fund have with
respect to the Tax-Exempt Fund. Each share is entitled to one vote and has equal
rights with every other share as to dividends, earnings, voting, assets and
redemption. There is no cumulative voting for directors. Shares are fully paid
and non-assessable, have no preemptive or conversion rights and are freely
transferable. Each fractional share has proportionately the same rights as are
provided for a full share.
Reasons For the Proposed Combination
The Tax-Exempt Fund was established in 1987 at the request of Principal
Financial Securities, Inc. (PFS), then an affiliated broker-dealer and indirect
subsidiary of Principal Life. A primary purpose of the Tax-Exempt Fund was to
serve as an investment alternative available for cash balances in accounts of
PFS customers. PFS was sold in January, 1998. Between the time of the sale of
PFS and October 31, 1998, the assets of the Tax-Exempt Fund declined from
approximately $76 million to approximately $26 million, and the assets of the
Cash Management Fund, which was also used extensively for cash balances of PFS
customers, declined from approximately $763 million to approximately $309
million. The Funds believe that the net redemptions of $50 million from the
Tax-Exempt Fund and $454 million from the Cash Management Fund are attributable
primarily to redemptions by PFS clients. Because the Tax-Exempt Fund was created
primarily for the purpose of serving the clients of PFS and because of the
substantial net redemptions that the Funds have experienced since the sale of
PFS, the Funds concluded that the combination contemplated by the Plan would be
in the best interests of each of the Funds and their respective shareholders.
The Plan has been approved by the Board of Directors of each of the
Funds, including a majority of the directors of each Fund who are not
"interested persons" of that Fund as defined in Section 2(a)(19) of the
Investment Company Act. In approving the Plan, the Boards considered the
substantial similarity of the investment objectives of the two Funds and
determined that interests of the existing shareholders of their respective Funds
will not be diluted as a result of the transactions contemplated by the Plan.
The Tax-Exempt Fund Board considered the following factors, among others, in
determining whether to recommend that you approve the Plan:(1) possible
alternatives to the Plan; (2) the terms and conditions of the Plan and whether
it would result in dilution of shareholder interests; (3) the advantage
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<PAGE>
to the Tax-Exempt Fund shareholders of investing in a larger asset pool with
greater diversification; (4) any direct or indirect costs incurred by the
Tax-Exempt Fund and the Cash Management Fund as a result of the Plan; (5)
expense ratios and available information regarding the fees and expenses of the
Tax-Exempt Fund and the Cash Management Fund; (6) tax consequences of the Plan;
(7) the compatibility of the investment objectives of the Funds; and (8) the
likelihood that the shareholders of the Tax-Exempt Fund would prefer the option
of selecting between the Cash Management Fund, which does not seek current
interest income exempt from federal income taxation, and the Bond Fund, which is
not a money-market fund, to maintaining their interests in the Tax-Exempt Fund.
The tax-equivalent yield of the Tax-Exempt Fund generally has been less
than the yield of the Cash Management Fund. For the 7-day period ended January
25, 1999, the yield for the Class A shares of the Tax-Exempt Fund was 2.06%, the
yield for the Class A shares of the Cash Management Fund was 4.61%. The
following table shows, for each of five tax brackets, the average annualized
tax-equivalent yield of the Tax-Exempt Fund for the 7-day period ended January
25, 1999.
<TABLE>
<CAPTION>
Tax Bracket
<S> <C> <C> <C> <C> <C>
15% 28% 31% 36% 39.6%
--- --- --- --- -----
Tax-equivalent yield 2.42% 2.86% 2.99% 3.22% 3.41%
</TABLE>
Federal Income Tax Consequences
To be considered a tax-free "reorganization" under the applicable
provisions of the Code, a reorganization must exhibit a continuity of business
enterprise. Because the Cash Management Fund will not use the Tax-Exempt Fund's
assets in its business or continue the Tax-Exempt Fund's historic business, the
combination of the Tax-Exempt Fund with the Cash Management Fund will not
exhibit a continuity of business enterprise. Therefore, the combination will not
be considered a tax-free "reorganization," under applicable provisions of the
Code. Although the combination will not be considered a tax-free
"reorganization," in the opinion of tax counsel to the Funds, no gain or loss
will be recognized by either Fund or its shareholders, in connection with the
combination, and the tax cost basis of the Cash Management Fund shares received
by Tax-Exempt Fund shareholders will equal the tax cost basis of their shares in
the Tax-Exempt Fund, although their holding periods will begin anew with the
combination.
The foregoing is only a summary of the principal federal income tax
consequences of the combination and should not be considered to be tax advice.
There can be no assurance that the Internal Revenue Service will concur on all
or any of the issues discussed above. You may wish to consult with your own tax
advisers regarding the federal, state, and local tax consequences with respect
to the foregoing matters and any other considerations which may apply in your
particular circumstances.
Capitalization
The following tables show the capitalization of the Tax-Exempt Fund and
the Cash Management Fund separately, as of January 25, 1999, and combined in the
aggregate (unaudited), as of that date, giving effect to the Plan:
-9-
<PAGE>
<TABLE>
<CAPTION>
Tax-Exempt Cash
Fund Management Combined
Fund
<S> <C> <C> <C>
Net Assets: $26,678,427 $333,911,502 $360,589,929
Net Asset Value
Per Share: $1.00 $1.00 $1.00
Shares Outstanding: 26,678,427 333,911,502 360,589,929
</TABLE>
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The investment objectives of the Funds are fundamental and certain
investment restrictions which are designated as such in the Funds' prospectus or
statement of additional information are fundamental policies that may not be
changed without approval by the holders of the lesser of: (i) 67% of the fund's
shares present or represented at a shareholder's meeting at which the holders of
more than 50% of such shares are present or represented by proxy; or (ii) more
than 50% of the outstanding shares of the Fund. All other investment policies
and restrictions are not fundamental and may be changed by a Fund's Board of
Directors without shareholder approval.
The investment objectives of the Cash Management Fund and the
Tax-Exempt Fund are substantially similar. The investment objective of the
Tax-Exempt Fund is to seek, through investment in a professionally managed
portfolio of high-quality, short-term municipal obligations, as high a level of
current interest income exempt from federal income tax as is consistent with
stability of principal and maintenance of liquidity. The investment objective of
the Cash Management Fund is to seek as high a level of income available from
short-term securities as is considered consistent with preservation of principal
and maintenance of liquidity by investing in a portfolio of money-market
instruments. The principal difference between the two Funds is that the
Tax-Exempt Fund invests primarily in tax-exempt municipal securities, i.e.,
municipal obligations that are issued by or on behalf of state or local
governments or other public authorities and that pay interest which is exempt
from federal income tax, and the Cash Management Fund invests primarily in
taxable securities, such as U.S. Government securities, U.S. Government agency
securities, bank obligations, commercial paper, short-term corporate debt,
repurchase agreements and taxable municipal obligations.
Both Funds are money-market funds that strive to maintain a stable net
asset value of $1.00 per share. Both are required to follow stringent
requirements under the Investment Company Act, including those set forth in Rule
2a-7, which requires, in part, that a money-market fund may neither purchase any
instrument with a remaining maturity of greater than 397 calendar days nor
maintain a dollar-weighted average portfolio maturity that exceeds 90 days. Rule
2a-7 also imposes certain portfolio quality and diversification requirements.
The Funds have substantially similar investment policies and
restrictions. For example, in order to utilize effectively cash reserves kept
for liquidity, each may invest in repurchase agreements, but neither will enter
into repurchase agreements that do not mature within seven days if any such
investment, together with other illiquid securities held by the Fund, would
amount to more than 10% of its assets. The primary differences arise in
connection with: (i) the lending of portfolio securities - the Tax-Exempt Fund,
but not the Cash Management Fund, may lend its portfolio securities to
unaffiliated broker-dealers and other unaffiliated qualified financial
institutions (up to 30% of its assets); (ii) warrants - the Tax-Exempt Fund, but
not the Cash Management Fund, may invest in warrants (up to 5% of
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<PAGE>
its assets); and (iii) borrowing. Both Funds may borrow money, but only from
banks for temporary or emergency purposes. The Tax-Exempt Fund may borrow in an
amount which permits it to maintain a 300% asset coverage. While any such
borrowing exceeds 5% of the Fund's total assets, the Fund may not make
additional purchases of investment securities. If due to market fluctuations or
other reasons the Fund's asset coverage falls below 300% of its borrowings, the
Fund will reduce its borrowings within 3 business days. The Cash Management Fund
may borrow only in an amount not exceeding the lesser of (i) 5% of the value of
its assets, or (ii) 10% of the value of its net assets taken at cost at the time
the borrowing is made.
The Cash Management Fund's investment restrictions are all fundamental
policies except for the restriction dealing with investments in real estate
limited partnership interests. The Tax-Exempt Fund's investment restrictions are
all fundamental policies except for those dealing with investments in illiquid
securities, purchasing securities of issuers with less than three year's
operations, investing in securities of other investment companies, pledging,
mortgaging or hypothecating assets, investing in companies for purposes of
exercising control or management, writing or purchasing put or call options and
investing in real estate limited partnership interests.
ADDITIONAL INFORMATION ABOUT THE FUNDS
Additional information about the Funds is available in their annual
reports to shareholders for the year ended October 31, 1998 and in the following
documents which have been filed with the SEC: prospectus and statement of
additional information for the Tax-Exempt Fund, both dated March 1, 1999;
prospectus and statement of additional information for the Cash Management Fund,
both dated March 1, 1999; and statement of additional information for the
registration statement of which this prospectus/proxy statement is a part, dated
March 1, 1999. You may obtain copies of the annual reports to shareholders, the
prospectuses and the statements of additional information by contacting Princor
Financial Services Corporation at Des Moines, Iowa 50392-0200, or by telephoning
shareholder services toll-free at 1-800-247-4123.
Each of the Funds is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and the Investment Company Act, as
applicable. Accordingly, each files, reports, proxy materials and other
information with the SEC. You can inspect those reports, proxy materials and
other information at the public reference facilities maintained by the SEC at
450 Fifth Street, N.W., Washington, D. C. 20549. Copies of such material also
can be obtained from the Public Reference Branch, Office of Consumer Affairs and
Information Services, Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D. C. 20549, at prescribed rates, or at no charge from the
EDGAR database on the Commission's website at "www.sec.gov."
PROPOSALS OF SHAREHOLDERS
A shareholder who has an issue that he or she would like to have
included in the agenda at a shareholder meeting should send the proposal to the
Fund at the Principal Financial Group, Des Moines, Iowa 50392-0200. To be
considered for presentation at a shareholders meeting, the proposal must be
received a reasonable time before a solicitation is made for such meeting.
Timely submission of a proposal does not necessarily mean that such proposal
will be included.
OTHER BUSINESS
We do not know of any business to be brought before the meeting other
than the matters set forth in this prospectus/proxy statement. Should any other
matter requiring a vote of shareholders arise, however, the proxies will vote
thereon according to their best judgment.
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<PAGE>
APPENDIX A:
AGREEMENT AND PLAN OF ACQUISITION
<PAGE>
AGREEMENT AND PLAN OF ACQUISITION
THIS AGREEMENT made as of the 25th day of January, 1999 is made by and
among Principal Cash Management Fund, Inc., a Maryland corporation (hereinafter
called "Cash Management"), Principal Tax-Exempt Cash Management Fund, Inc., a
Maryland corporation (hereinafter called "Tax-Exempt Cash Management"), and
Principal Management Corporation, an Iowa corporation (hereinafter called
"Principal Management").
WITNESSETH:
Whereas the Board of Directors of Cash Management and the Board of
Directors of Tax-Exempt Cash Management, each an open-end management investment
company, deem it advisable that Cash Management acquire all of the assets of
Tax-Exempt Cash Management in exchange for the assumption by Cash Management of
all of the liabilities of Tax-Exempt Cash Management and shares issued by Cash
Management which are thereafter to be distributed by Tax-Exempt Cash Management
pro rata to its shareholders in complete liquidation and termination of
Tax-Exempt Cash Management and in exchange for all of Tax-Exempt Cash
Management's outstanding shares;
NOW, THEREFORE, in consideration of the mutual promises herein contained, each
of the parties hereto represents and warrants to, and agrees with each of the
other parties as follows:
1. Cash Management hereby represents and warrants to Tax-Exempt Cash
Management that:
(a) Cash Management is a corporation with transferable shares duly
organized and validly existing under the laws of Maryland and has
full power to own its properties and assets and to carry on its
business as such business is now being conducted;
(b) Cash Management's statement of assets and liabilities as of
October 31,1998 and the related statements of operations and
changes in net assets for the fiscal year ended October 31, 1998,
all as certified by Ernst & Young LLP, have been prepared in
accordance with generally accepted accounting principles applied
on a consistent basis. Such statement of assets and liabilities
fairly presents the financial position and net assets of Cash
Management as of such date and such statements of operations and
changes in net assets fairly present the results of its operations
for the period covered thereby,
(c) There are no claims, actions, suits or proceedings pending or, to
its knowledge, threatened against or affecting Cash Management or
its properties or business or its right to issue and sell shares,
or which would prevent or hinder consummation of the transactions
contemplated hereby, and it is not charged with, or to Cash
Management's knowledge, threatened with, any charge or
investigation of any violation of any provision of any federal,
state or local law or any administrative ruling or regulation
relating to any aspect of its business or the issuance or sale of
its shares;
(d) Cash Management is not a party to or subject to any judgment or
decree or order entered in any suit or proceeding brought by any
governmental agency or by any other person enjoining it in respect
of, or the effect of which is to prohibit, any business practice
or the acquisition of any property or the conduct of business by
it or the issuance or sale of its shares in any area;
(e) Cash Management has filed all tax returns required to be filed,
has no liability for any unpaid taxes and has made a proper
election to be treated as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986 (the "Code") for
each of its taxable years. Cash Management has not committed any
action or failed to perform any necessary action that would render
invalid its election to be treated as a regulated investment
company for any of its taxable years;
(f) The authorization, execution and delivery of this Agreement on
behalf of Cash Management does not, and the consummation of the
transactions contemplated hereby will not, violate or conflict
with any provision
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<PAGE>
of Cash Management's Articles of Incorporation or Bylaws, or any
provision of, or result in the acceleration of any obligation
under, any mortgage, lien, lease, agreement, instrument, order,
arbitration award, judgment or decree to which it is party or by
which it or any of its assets is bound, or violate or conflict
with any other material contractual or statutory restriction of
any kind or character to which it is subject;
(g) This Agreement has been duly authorized, executed, and delivered
by Cash Management and constitutes a valid and binding agreement
of Cash Management and all governmental and other approvals
required for Cash Management to carry out the transactions
contemplated hereunder have been or on or prior to the Closing
Date (as herein after defined) will have been obtained;
(h) Cash Management is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end, diversified
management investment company. Cash Management is currently in
compliance with the 1940 Act and the rules of the Securities and
Exchange Commission promulgated thereunder. Neither Cash
Management nor its affiliates have violated Section 9 of the 1940
Act, are currently subject to an exemptive order of the Securities
and Exchange Commission pursuant to Section 9(c) of the 1940 Act,
or are currently subject to any current or threatened
investigation or enforcement action by the Securities and Exchange
Commission or any other federal or state authority which could
result in a violation of Section 9(a) of the 1940 Act;
(i) On the Closing Date, Cash Management will own its assets free and
clear of all liens, claims, charges, options and encumbrances;
(j) Cash Management will declare to shareholders of record on or prior
to the Closing Date a dividend or dividends which, together with
all previous such dividends, shall have the effect of distributing
to its shareholders all of its income (computed without regard to
any deduction for dividends paid) and all of its net realized
capital gains, if any, as of the Closing Date;
(k) On the Closing Date the shares of Cash Management to be delivered
to Tax-Exempt Cash Management hereunder shall have been registered
under the Securities Act of 1933, as amended (the "1933 Act") and
duly authorized, and, when issued and delivered pursuant to this
Agreement, will be validly issued, fully paid and nonassessable;
and Cash Management will comply with all applicable laws in
connection with the issuance of such shares and shall not be
subject to a stop-order of the Securities and Exchange Commission
in connection therewith.
2. Tax-Exempt Cash Management hereby represents and warrants to Cash
Management that:
(a) Tax-Exempt Cash Management is a corporation with transferable
shares duly organized and validly existing under the laws of
Maryland and has full power to own its properties and assets and
to carry on its business as such business is now being conducted;
(b) Tax-Exempt Cash Management's statement of assets and liabilities
as of October 31, 1998 and the related statements of operations
and changes in net assets for the fiscal year ended October
31,1998, all as certified by Ernst & Young LLP, have been prepared
in accordance with generally accepted accounting principles
applied on a consistent basis. Such statement of assets and
liabilities fairly presents the financial position and net assets
of Tax-Exempt Cash Management as of that date and such statements
of operations and changes in net assets fairly present the results
of its operations for the periods covered thereby.
(c) There are no claims, actions, suits or proceedings pending or, to
its knowledge, threatened against or affecting Tax-Exempt Cash
Management or its properties or business or its tight to issue and
sell shares, or which would prevent or hinder consummation of the
transactions contemplated hereby, and it is not charged with, or
to Tax-Exempt Cash Management's knowledge, threatened with, any
charge or
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<PAGE>
investigation of any violation of any provision of any federal,
state or local law or any administrative ruling or regulation
relating to any aspect of its business or the issuance or sale of
its shares;
(d) Tax-Exempt Cash Management is not party to or subject to any
judgment or decree or order entered in any suit or proceeding
brought by any governmental agency or by any other persons
enjoining it in respect of, or the effect of which is to prohibit,
any business practice or the acquisition of any property or the
conduct of business by it or the issuance or sale of its shares in
any area;
(e) Tax-Exempt Cash Management has filed all tax returns required to
be filed, has no liability for any unpaid taxes and has made a
proper election to be treated as a regulated investment company
under Subchapter M of the Code for each of its taxable years.
Tax-Exempt Cash Management has not committed any action or failed
to perform any necessary action that would render invalid its
election to be treated as a regulated investment company for any
of its taxable years;
(f) The authorization, execution and delivery of this Agreement on
behalf of Tax-Exempt Cash Management does not, and the
consummation of the transactions contemplated hereby will not,
violate or conflict with any provision of Tax-Exempt Cash
Management's Articles of Incorporation or Bylaws, or any provision
of, or result in the acceleration of any obligation under, any
mortgage, lien, lease, agreement, instrument, order, arbitration
award, judgment or decree to which it is party or by which it or
any of its assets is bound, or violate or conflict with any other
material contractual or statutory restriction of any kind or
character to which it is subject;
(g) This Agreement has been duly authorized, executed, and delivered
by Tax-Exempt Cash Management and constitutes a valid and binding
agreement of Tax-Exempt Cash Management, and all governmental and
other approvals required for Tax-Exempt Cash Management to carry
out the transactions contemplated hereunder have been or on or
prior to the Closing Date will have been obtained;
(h) On the Closing Date Tax-Exempt Cash Management will own its assets
free and clear of all liens, claims, charges, options, and
encumbrances and, except for the Management Agreement, Investment
Service Agreement, Distribution Agreement, Distribution and
Shareholder Servicing Agreement and the Custodian Agreement with
Bank of New York, there will be no material contracts or
agreements (other than this Agreement) outstanding to which
Tax-Exempt Cash Management is a party or to which it is subject;
(i) On the Closing Date Tax-Exempt Cash Management will have full
right, power and authority to sell, assign and deliver the assets
to be sold, assigned, transferred and delivered to Cash Management
hereunder, and upon delivery and payment for such assets, Cash
Management will acquire good, marketable title thereto free and
clear of all liens, claims, charges, options and encumbrances;
(j) Tax-Exempt Cash Management will declare to shareholders of record
on or prior to the Closing Date a dividend or dividends which,
together with all previous such dividends, shall have the effect
of distributing to the shareholders all of its income (computed
without regard to any deduction for dividends paid) and all of its
net realized capital gains, if any, as of the Closing; and
(k) Tax-Exempt Cash Management will, from time to time, as and when
requested by Cash Management, execute and deliver or cause to be
executed and delivered all such assignments and other instruments,
and will take and cause to be taken such further action, as Cash
Management may deem necessary or desirable in order to vest in and
confirm to Cash Management title to and possession of all the
assets of Tax-Exempt Cash Management to be sold, assigned,
transferred and delivered hereunder and otherwise to carryout the
intent and purpose of this Agreement.
3. Based on the respective representations and warranties, subject to
the terms and conditions contained herein, Tax-Exempt Cash
Management agrees to transfer to Cash Management and Cash
Management
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<PAGE>
agrees to acquire from Tax-Exempt Cash Management, all of the
assets of Tax-Exempt Cash Management on the Closing Date and to
assume from Tax-Exempt Cash Management all of the liabilities of
Tax- Exempt Cash Management in exchange for the issuance of the
number of shares of Cash Management provided in Section 4 which
will be subsequently distributed pro rata to the shareholders of
Tax-Exempt Cash Management in complete liquidation and termination
of Tax-Exempt Cash Management and in exchange for all of
Tax-Exempt Cash Management's outstanding shares. Tax-Exempt Cash
Management shall not issue, sell or transfer any of its shares
after the Closing Date, and only redemption requests received by
Tax-Exempt Cash Management in proper form prior to the Closing
Date shall be fulfilled by Tax-Exempt Cash Management. Redemption
requests received by Tax-Exempt Cash Management thereafter shall
be treated as requests for redemption of those shares of Cash
Management allocable to the shareholder in question as provided in
Section 6 of this Agreement.
4. On the Closing Date, Cash Management will issue to Tax-Exempt Cash
Management a number of full and fractional shares of Cash
Management, taken at their then net asset value, having an
aggregate net asset value equal to the aggregate value of the net
assets of Tax-Exempt Cash Management. The aggregate value of the
net assets of Tax-Exempt Cash Management and Cash Management shall
be determined in accordance with the then current Prospectus of
Cash Management as of closing of the New York Stock Exchange on
the Closing Date.
5. The closing of the transactions contemplated in this Agreement
(the "Closing") shall be held at the offices of Principal
Management, 680 8th Street, Des Moines, Iowa 50392-0200 (or at
such other place as the parties hereto may agree) at 3:00 p.m.
Central Daylight Time on April 8, 1999 or on such earlier or later
date as the parties hereto may mutually agree. The date on which
the Closing is to be held as provided in this Agreement shall be
known as the "Closing Date."
In the event that on the Closing Date (a) the New York Stock
Exchange is closed for other than customary week-end and holiday
closings or (b) trading on said Exchange is restricted or (c) an
emergency exists as a result of which it is not reasonably
practicable for Cash Management or Tax-Exempt Cash Management to
fairly determine the value of its assets, the Closing Date shall
be postponed until the first business day after the day on which
trading shall have been fully resumed.
6. As soon as practicable after the Closing, Tax-Exempt Cash
Management shall (a) distribute on a pro rata basis to the
shareholders of record of Tax-Exempt Cash Management at the close
of business on the Closing Date the shares of Cash Management
received by Tax-Exempt Cash Management at the Closing in exchange
for all of Tax-Exempt Cash Management's outstanding shares, and
(b) be liquidated and dissolved in accordance with applicable law
and its Articles of Incorporation.
For purposes of the distribution of shares of Cash Management to
shareholders of Tax-Exempt Cash Management, Cash Management shall
credit on the books of Cash Management an appropriate number of
shares of Cash Management to the account of each shareholder of
Tax-Exempt Cash Management. Cash Management will issue a
certificate or certificates only upon request and, in the case of
a shareholder of Tax-Exempt Cash Management whose shares are
represented by certificates, only upon surrender of such
certificates. No certificates will be issued for fractional shares
of Cash Management. After the Closing Date and until surrendered,
each outstanding certificate which, prior to the Closing Date,
represented shares of Tax-Exempt Cash Management, shall be deemed
for all purposes of Cash Management's Articles of Incorporation
and Bylaws to evidence the appropriate number of shares of Cash
Management to be credited on the books of Cash Management in
respect of such shares of Tax-Exempt Cash Management as provided
above.
7. Subsequent to the execution of this Agreement and prior to the
Closing Date, Tax-Exempt Cash Management shall deliver to Cash
Management a list setting forth the assets to be assigned,
delivered and transferred to Cash Management, including the
securities then owned by Tax-Exempt Cash Management
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<PAGE>
and the respective federal income tax bases (on an identified cost
basis) thereof, and the liabilities to be assumed by Cash
Management pursuant to this Agreement.
8. All of Tax-Exempt Cash Management's portfolio securities shall
be delivered by Tax-Exempt Cash Management's custodian on the
Closing Date to Cash Management or its custodian, either endorsed
in proper form for transfer in such condition as to constitute
good delivery thereof in accordance with the practice of brokers
or, if such securities are held in a securities depository within
the meaning of Rule 17f- 4 under the 1940 Act, transferred to an
account in the name of Cash Management or its custodian with said
depository. All cash to be delivered pursuant to this Agreement
shall be transferred from Tax-Exempt Cash Management's account at
its custodian to Cash Management's account at its custodian. If on
the Closing Date Tax-Exempt Cash Management is unable to make good
delivery pursuant to this Section 8 to Cash Management's custodian
of any of Tax-Exempt Cash Management's portfolio securities
because such securities have not yet been delivered to Tax-Exempt
Cash Management's custodian by its brokers or by the transfer
agent for such securities, then the delivery requirement of this
Section 8 with respect to such securities shall be waived, and
Tax-Exempt Cash Management shall deliver to Cash Management's
custodian on or by said Closing Date with respect to said
undelivered securities executed copies of an agreement of
assignment in a form satisfactory to Cash Management, and a due
bill or due bills in form and substance satisfactory to the
custodian, together with such other documents including brokers'
confirmations, as may be reasonably required by Cash Management.
9. The obligations of Cash Management under this Agreement shall be
subject to receipt by Cash Management on or prior to the Closing
Date of:
(a) Copies of the resolutions adopted by the Board of Directors of
Tax-Exempt Cash Management and its shareholders authorizing the
execution of this Agreement by Tax-Exempt Cash Management and the
transactions contemplated hereunder, certified by the Secretary or
Assistant Secretary of Tax-Exempt Cash Management;
(b) A certificate of the Secretary or Assistant Secretary of
Tax-Exempt Cash Management as to the signatures and incumbency of
its officers who executed this Agreement on behalf of Tax-Exempt
Cash Management and any other documents delivered in connection
with the transactions contemplated thereby on behalf of Tax-Exempt
Cash Management;
(c) A certificate of an appropriate officer of Tax-Exempt Cash
Management as to the fulfillment of all agreements and conditions
on its part to be fulfilled hereunder at or prior to the Closing
Date and to the effect that the representations and warranties of
Tax-Exempt Cash Management are true and correct in all material
respects at and as of the Closing Date as if made at and as of
such date; and
(d) Such other documents, including an opinion of counsel, as Cash
Management may reasonably request to show fulfillment of the
purposes and conditions of this Agreement.
10. The obligations of Tax-Exempt Cash Management under this Agreement
shall be subject to receipt by Tax-Exempt Cash Management on or
prior to the Closing Date of:
(a) Copies of the resolutions adopted by the Board of Directors of
Cash Management authorizing the execution of this Agreement and
the transactions contemplated hereunder, certified by the
Secretary or Assistant Secretary of Cash Management,
(b) A certificate of the Secretary or Assistant Secretary of Cash
Management as to the signatures and incumbency of its officers who
executed this Agreement on behalf of Cash Management and any other
documents delivered in connection with the transactions
contemplated thereby on behalf of Cash Management,
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(c) A certificate of an appropriate officer of Cash Management as to
the fulfillment of all agreements and conditions on its part to be
fulfilled hereunder at or prior to the Closing Date and to the
effect that the representations and warranties of Cash Management
are true and correct in all material respects at and as of the
Closing Date as if made at and as of such date; and
(d) Such other documents, including an opinion of counsel, as
Tax-Exempt Cash Management may reasonably request to show
fulfillment of the purposes and conditions of this Agreement.
11. The obligations of the parties under this Agreement shall be
subject to:
(a) Any required approval, at a meeting duly called for the purpose,
of the holders of the outstanding shares of Tax-Exempt Cash
Management of this Agreement and the transactions contemplated
hereunder, and
(b) The right to abandon and terminate this Agreement, if either party
to this Agreement believes that the consummation of the
transactions contemplated hereunder would not be in the best
interests of its shareholders.
12. Except as expressly provided otherwise in this Agreement,
Principal Management will pay or cause to be paid all out-of
pocket fees and expenses incurred by Tax-Exempt Cash Management or
Cash Management in connection with the transactions contemplated
under this Agreement, including, but not limited to, accountants'
fees, legal fees, registration fees, printing expenses, transfer
taxes (if any) and the fees of banks and transfer agents. This
obligation shall survive the termination or expiration of this
Agreement regardless of the consummation of the transactions
contemplated hereunder.
13. This Agreement may be amended by an instrument executed by both
the duly authorized officers of Cash Management and Tax-Exempt
Cash Management at any time, except that after approval by the
shareholders of Tax-Exempt Cash Management no amendment may be
made with respect to the Agreement which in the opinion of the
Board of Directors of Tax-Exempt Cash Management materially
adversely affects the interests of the shareholders of Tax-Exempt
Cash Management. At any time either party hereto may by written
instrument signed by it (i) waive any inaccuracies in the
representations and warranties made to it contained herein and
(ii) waive compliance with any of the covenants or conditions made
for its benefit contained herein.
14. In addition to the right to terminate this Agreement described in
paragraph 11, this Agreement may be terminated and the plan
described in the Agreement abandoned at any time prior to the
Closing Date, whether before or after action thereon by the
shareholders of Tax-Exempt Cash Management and notwithstanding
favorable action by such shareholders, by mutual consent of the
Board of Directors of Cash Management and the Board of Directors
of Tax-Exempt Cash Management. This Agreement may also be
terminated by action of the Board of Directors of Cash Management
or the Board of Directors of Tax-Exempt Cash Management (the
"Terminating Fund"), if:
(a) The plan described in the Agreement shall not have become
effective by August 6, 1999 (hereinafter called the "Final Date")
unless such Final Date shall have been changed by mutual
agreement; or
(b) Cash Management shall, at the Final Date, have failed to comply
with any of its agreements; or
(c) Prior to the Final Date any one or more of the conditions to the
obligations of Cash Management contained in this Agreement shall
not be fulfilled to the reasonable satisfaction of Tax-Exempt Cash
Management and its counsel or it shall become evident to
Tax-Exempt Cash Management that any of such conditions are
incapable of being fulfilled.
15. This Agreement shall bind and inure to the benefit of the parties
hereto and is not intended to confer upon
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any other person any rights or remedies hereunder.
16. The parties hereto represent and warrant that they have not
employed any broker, finder or intermediary in connection with
this transaction who might be entitled to a finder's fee or other
similar fee or commission.
17. All prior or contemporaneous agreements and representations are
hereby merged into this Agreement, which constitutes the entire
contract between the parties hereto.
18. This Agreement shall be governed by and construed in accordance
with the laws of the State of Iowa.
19. This Agreement maybe executed in one or more counterparts, all of
which shall be considered one and the same agreement, and shall
become effective when one or more of the counterparts has been
signed by all parties hereto.
20. Principal Management shall indemnify, defend and hold harmless the
Cash Management Fund, its officers, directors, employees and
agents against all losses, claims, demands, liabilities and
expenses, including reasonable legal and other expenses incurred
in defending claims or liabilities, whether or not resulting in
any liability to the Cash Management Fund, its officers,
directors, employees or agents, arising out of (1) breach by the
Tax-Exempt Fund of any warranty made by the Tax-Exempt Fund herein
or (2) any untrue statement or alleged untrue statement of a
material fact contained in any prospectus or registration
statement for the Tax-Exempt Fund, as filed with the SEC or any
state, or any amendment or supplement thereto, or in any
information provided by the Tax-Exempt Fund included in any
registration statement filed by the Cash Management Fund with the
SEC or any state or any amendment or supplement thereto; or which
shall arise out of or be based upon any omission or alleged
omission to state therein a material fact required to be stated in
any such prospectus, registration statement or application
necessary to make the statements therein not misleading. This
indemnity provision shall survive the termination of this
Agreement.
21. Cash Management shall indemnify, defend and hold harmless
Tax-Exempt Cash Management, its officers, trustees, employees and
agents against all losses, claims, demands, liabilities and
expenses, including reasonable legal and other expenses incurred
in defending claims or liabilities, whether or not resulting in
any liability to Tax-Exempt Cash Management, its officers,
trustees, employees or agents, arising out of any untrue statement
or alleged untrue statement of a material fact contained in any
prospectus or registration statement for Cash Management, as filed
with the SEC or any state, or any amendment or supplement thereto,
or any application prepared by or on behalf of Cash Management and
filed with any state regulatory agency in order to register or
qualify shares of Cash Management under the securities laws
thereof; or which shall arise out of or be based upon any omission
or alleged omission to state therein a material fact required to
be stated in any such prospectus, registration statement or
application necessary to make the statements therein not
misleading; provided, however, Cash Management shall not be
required to indemnify Tax-Exempt Cash Management, its officers,
trustees, employees and agents against any loss, claim, demand,
liability or expense arising out of any information provided by
Tax-Exempt Cash Management included in any registration statement
filed by Cash Management with the SEC or any state, or any
amendment or supplement thereto. This indemnity provision shall
survive the termination of this Agreement.
22. The execution of this Agreement has been authorized by the Board
of Directors of Cash Management and by the Board of Directors of
Tax-Exempt Cash Management.
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<PAGE>
IN WlTNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and attested by their officers thereunto duly authorized, as of the
date first written above.
PRINCIPAL CASH MANAGEMENT FUND, INC.
Attest: BY: /s/ Arthur S. Filean
By: /s/ Ernest H. Gillum TITLE: Vice President and Secretary
Title: Assistant Secretary
PRINCIPAL TAX-EXEMPT CASH
MANAGEMENT FUND, INC.
Attest: BY: /s/ Arthur S. Filean
By: /s/ Ernest H. Gillum TITLE: Vice President and Secretary
Title: Assistant Secretary
PRINCIPAL MANAGEMENT CORPORATION
Attest: BY: /s/ Arthur S. Filean
By: /s/ Ernest H. Gillum TITLE: Vice President
Title: Vice President
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<PAGE>
PRINCIPAL CASH MANAGEMENT FUND, INC.
Des Moines, Iowa 50392-0200
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the prospectus/proxy statement dated March 1, 1999
for the special meeting of the holders of the common stock, $.01 par value per
share, of Principal Tax-Exempt Cash Management Fund, Inc., a diversified,
open-end management investment company. The meeting is to be held on Wednesday,
April 7, 1999.
The prospectus/proxy statement describes certain transactions
contemplated by the proposed combination of the Tax-Exempt Fund with Principal
Cash Management Fund, Inc. pursuant to the terms of an Agreement and Plan of
Acquisition among the two Funds and their manager, Principal Management
Corporation. Under the Plan, Principal Cash Management Fund would acquire all
the assets and assume all the liabilities of the Tax-Exempt Fund and issue in
exchange shares of its Class A common stock. The Tax-Exempt fund would
immediately redeem all its outstanding shares by distributing the Cash
Management Fund shares to its shareholders. As a result, each shareholder would
own the same number of shares in the Cash Management Fund as he or she had owned
in the Tax-Exempt Fund at the effective time. Principal Management Corporation
has agreed to pay all expenses incurred by the Funds in connection with the
Plan.
The date of the Statement of Additional Information is March 1, 1999
<PAGE>
FINANCIAL STATEMENTS
The following audited historical financial statements and footnotes
thereto of the Tax-Exempt Fund and the Cash Management Fund, together with the
Report of Independent Auditors thereon, are incorporated herein by reference
from the Funds' Annual Report to Shareholders for the year ended October 31,
1998:
(1) Statement of Assets and Liabilities for each of the Funds as of
October 31, 1998;
(2) Statement of Operations for each of the Funds for the year ended
October 31, 1998;
(3) Statement of Changes in Net Assets for each of the Funds for the
years ended October 31, 1998 and 1997;
(4) Schedule of Investments of each of the Funds as of October 31,
1998;
(5) Financial Highlights for each of the Funds; and
(6) Notes to Financial Statements.
The audited financial statements of the Funds incorporated into this
Statement of Additional Information have been audited by Ernst & Young LLP,
independent auditors, as indicated in their report with respect thereto, which
also is incorporated by reference into this Statement of Additional Information,
and have been so incorporated in reliance upon the report of Ernst & Young LLP
given upon the authority of that firm as experts in accounting and auditing.
OTHER INFORMATION
The information otherwise required to be set forth in this Statement of
Additional Information is included in the prospectuses and Statements of
Additional Information of the two Funds, all dated March 1, 1999, and in the
Funds' Annual Reports to Shareholders for the year ended October 31, 1998, all
of which are incorporated herein by reference.
<PAGE>
