SUPPLEMENT, DATED JUNE 14, 1995
TO THE PROSPECTUS DATED MARCH 1, 1995 OF
PRINCIPAL SPECIAL MARKETS FUND, INC.
Effective June 14, 1995, the prospectus dated March 1, 1995 is amended by adding
the following as the last sentence to the paragraph under the caption Minimum
Investment Requirement on page 15 of the prospectus :
The minimum initial purchase of the fund has been reduced to $1 million until
September 15, 1995.
FV76S
PRINCIPAL SPECIAL MARKETS FUND, INC.
International Securities Portfolio
Mortgage-Backed Securities Portfolio
The Principal Financial Group(R)
Des Moines, Iowa 50392-0200
1-800-521-1502
Principal Special Markets Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, currently consisting of two series
("Portfolios"), each of which is classified as a diversified investment company.
Each Portfolio is designed to meet the investment needs of institutions,
corporations and high net worth individuals desiring professional investment
management for the type of securities in which each Portfolio invests. The
investment objective of each Portfolio is as follows:
International Securities Portfolio: Long-term growth of capital by investing
in a portfolio of securities of companies domiciled in any of the nations of
the world.
Mortgage-Backed Securities Portfolio: A total investment return consisting of
current income and capital appreciation while maintaining liquidity and safety
of principal. The Portfolio seeks to achieve its objective through the purchase
of mortgage-backed securities and other obligations issued or guaranteed by the
United States Government or its agencies or instrumentalities. Portfolio shares
are not guaranteed by the United States Government.
This Prospectus concisely states information that an investor ought to know
before investing. It should be read and retained for future reference.
Additional information about the Fund has been filed with the Securities and
Exchange Commission, including a document called a Statement of Additional
Information dated March 1, 1995 which is incorporated by reference herein. 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,
Iowa 50306-0423. Telephone 1-800-521-1502.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is March 1, 1995.
<PAGE>
TABLE OF CONTENTS
Page
Summary .......................................................... 3
Financial Highlights ............................................. 5
Investment Objectives, Policies and Restrictions ................. 6
Certain Investment Policies and Restrictions ..................... 8
Risk Factors ..................................................... 9
Manager and Investment Sub-Advisor ............................... 9
Duties Performed by the Manager and Sub-Advisor .................. 10
Managers' Comments ............................................... 10
Determination of Net Asset Value ................................. 12
Performance Calculation .......................................... 12
Shareholder Rights ............................................... 12
Distribution of Income Dividends and Realized Capital Gains ...... 13
Tax Treatment, Dividends and Distributions ....................... 13
How to Invest .................................................... 14
Offering Price of Shares ......................................... 15
Minimum Investment Requirement ................................... 15
Open Account System .............................................. 15
Redemption of Shares ............................................. 16
Periodic Withdrawal Plan ......................................... 17
Additional Information ........................................... 17
This Prospectus does not constitute an offer to sell, or a solicitation of
an offer to buy, the securities of any Portfolio in any jurisdiction in which
such sale, offer to sell, or solicitation may not be lawfully made. No dealer,
salesperson, or other person has been authorized to give any information or to
make any representations, other than those contained in this Prospectus, in
connection with the offer contained in this Prospectus, and, if given or made,
such other information or representations must not be relied upon as having been
authorized by Principal Special Markets Fund, Inc. or its Manager or
Sub-Advisor.
SUMMARY
The following summarized information should be read in conjunction with the
detailed information appearing elsewhere in the Prospectus.
What benefits are offered investors?
Professional Investment Management: Experienced securities analysts provide
each Portfolio with professional investment management.
Diversification: Each Portfolio will diversify by investing in securities
issued by a number of issuers. Diversification reduces investment risk.
Economies of Scale: Pooling individual shareholder's investments in either
of the Portfolios creates administrative efficiencies and in certain
circumstances saves on brokerage commissions through the purchase of larger
blocks of securities.
Liquidity: Upon request each Portfolio will redeem its shares and promptly
pay the investor the current net asset value next determined of the shares
redeemed. See "Redemption of Shares."
Dividends: Each Portfolio will normally declare a dividend payable from
investment income in accordance with its distribution policy. See "Distribution
of Income Dividends and Realized Capital Gains."
Convenient Investment and Recordkeeping Services: Shareholders will receive
a statement of account each time there is activity in their account.
No Sales Charge: Each Portfolio offers its shares at net asset value,
without a sales charge.
What are the Portfolio investment objectives?
The investment objective of the International Securities Portfolio is to
seek long-term growth of capital by investing in a portfolio of securities of
companies domiciled in any of the nations of the world.
The investment objective of the Mortgage-Backed Securities Portfolio is to
generate a total investment return consisting of current income and capital
appreciation while maintaining liquidity and safety of principal. The Portfolio
seeks to achieve its objective through the purchase of mortgage-backed
securities and other obligations issued or guaranteed by the United States
Government or its agencies or instrumentalities. Portfolio shares are not
guaranteed by the United States Government.
There can be no assurance that the investment objectives will be realized.
See "Investment Objectives, Policies and Restrictions."
What are the risk factors?
Because each Portfolio has a different investment objective, each Portfolio
is subject to different financial and market risks. Financial risk refers to the
earnings stability and overall financial soundness of an issuer of an equity
security and to the ability of an issuer of a debt security to pay interest and
principal when due. Market risk refers to the degree to which the price of a
security will react to changes in securities markets in general and, with
particular reference to debt securities, to changes in the overall level of
interest rates. See "Risk Factors", and "Investment Objectives, Policies and
Restrictions."
What minimum amount may be invested?
The minimum initial purchase in the Fund is $1.5 million. The minimum
initial purchase of $1.5 million may be invested over a three month period.
Investments in both Portfolios by an investor, investor's spouse and dependent
children, or a trustee may be combined to meet this minimum. There is no minimum
for subsequent investments. Each Portfolio may involuntarily redeem all shares
in an account which, after a redemption, has a value of less than $5,000 and
mail the proceeds of such redemption to the shareholder at the address of
record. See "Minimum Investment Requirement."
How may investments be withdrawn?
Withdrawals, which are also known as redemptions, may be made by mail or by
telephone if telephone transaction services apply to the account. Upon proper
authorization certain redemptions may be processed through a selected dealer.
Redemptions may also be made through a Periodic Withdrawal Plan. Withdrawals are
made at net asset value without charge. See "Redemption of Shares."
Who manages each Portfolio?
Princor Management Corporation, a corporation organized in 1969 by
Principal Mutual Life Insurance Company, is the Manager for each of the
Portfolios. It is also the dividend disbursing and transfer agent. See
"Manager." Invista Capital Management, Inc. ("Invista"), an indirect
wholly-owned subsidiary of Principal Mutual Life Insurance Company and an
affiliate of the Manager, has executed an agreement with the Manager to assume
the obligations of the Manager to provide investment advisory services for each
Portfolio.
<PAGE>
What fees and expenses apply to ownership of shares?
The following table depicts fees and expenses applicable to the purchase
and ownership of shares of each Portfolio.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses
Maximum Sales Load Imposed
on Purchases
Portfolio (as a percentage of offering price) Redemption Fee
<S> <C> <C>
International Securities Portfolio None None*
Mortgage-Backed Securities Portfolio None None*
</TABLE>
<TABLE>
<CAPTION>
Annual Portfolio Operating Expenses
(as a percentage of average net assets)
Management 12b-1 Other Total Operating
Portfolio Fee Fee Expenses** Expenses
<S> <C> <C> <C> <C>
International Securities Portfolio .90% None None .90%
Mortgage-Backed Securities Portfolio .45% None None .45%
<FN>
* A wire charge of up to $15.00 will be deducted for all wire transfers.
**In addition to brokerage and extraordinary expenses, a Portfolio will pay
only taxes and interest expenses, which it is anticipated will be minimal or
nonexistent under normal circumstances.
</FN>
</TABLE>
The purpose of the above table is to assist the investor in understanding
the various expenses that an investor in each Portfolio will bear directly or
indirectly. The fee payable by the International Securities Portfolio is higher
than that paid by most funds to their advisors, but it is not higher than the
fees paid by many funds with similar investment objectives and policies and does
cover substantially all expenses of the Portfolio, unlike many other funds. See
"How to Invest" and "Duties Performed by the Manager and Sub-Advisor."
Examples
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period:
Period (in years)
Fund 1 3 5 10
---- - - - --
International Securities Portfolio $9 $29 $50 $111
Mortgage-Backed Securities Portfolio $5 $14 $25 $57
The Examples are based on each Portfolio's Annual Operating Expenses
described above. The Examples should not be considered a representation of
past or future expenses; actual expenses may be greater or less than those
shown.
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights have been derived from financial
statements which have been audited by Ernst & Young LLP, independent auditors
whose report thereon has been incorporated by reference herein. The financial
highlights should be read in conjunction with the financial statements, related
notes and other financial information for each portfolio incorporated by
reference herein. The financial statements may be obtained by shareholders,
without charge, by telephoning 1-800-451-5447.
<TABLE>
<CAPTION>
Principal Special Markets Fund
International Securities Mortgage-Backed Securities
Portfolio Portfolio
Year Period Year Period
Ended Ended Ended Ended
Dec. 31, 1994 Dec. 31, 1993(a) Dec. 31, 1994 Dec. 31, 1993(a)
<S> <C> <C> <C> <C>
Net Asset Value at Beginning of Period.......................... $12.87 $10.01 $10.10 $10.01
Income from Investment Operations:
Net Investment Income...................................... .13 .07 .63 .34
Net Realized and Unrealized Gains (Losses) on
Investments and Foreign Currency......................... (.95) 2.91 (.99) .09
Total from Investment Operations (.82) 2.98 (.36) .43
Less Distributions:
Dividends (from net investment income)..................... (.25) (.10) (.63) (.34)
Distributions (from capital gains)......................... (.51) (.02) -- --
Total Distributions (.76) (.12) (.63) (.34)
Net Asset Value at End of Period................................ $11.29 $12.87 $ 9.11 $10.10
Total Return.................................................... (6.45)% 29.95%(c) (3.60)% 4.47%(c)
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands)................... $15,542 $16,838 $14,714 $24,309
Ratio of Expenses to Average Net Assets.................... .90% .90%(b) .45% .45%(b)
Ratio of Net Investment Income to Average Net Assets....... .94% 1.21%(b) 6.56% 5.23%(b)
Portfolio Turnover Rate.................................... 37.0% 6.9%(b) 41.8% 9.6%(b)
<FN>
(a) Period from May 7, 1993, date shares first offered to the public, through
December 31, 1993. Net investment income, aggregating $.01 per share for
the International Securities Portfolio and $.01 per share for the
Mortgage-Backed Securities Portfolio for the period from the initial
purchase of shares on April 26, 1993 through May 6, 1993, was recognized,
none of which was distributed from the International Securities Portfolio
and all of which was distributed from the Mortgage-Backed Securities
Portfolio to the sole shareholder, Principal Mutual Life Insurance Company,
during the period. Additionally, the Mortgage-Backed Securities Portfolio
incurred unrealized gains on investments of $.01 per share during the
initial interim period. This represented activities of each portfolio prior
to the initial offering.
(b) Computed on an annualized basis.
(c) Total return amounts have not been annualized.
</FN>
</TABLE>
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The investment objectives and policies of the Portfolios are described
below. There can be no assurance that the objectives will be realized.
International Securities Portfolio
The investment objective is to seek long-term growth of capital through
investment in a portfolio of securities of companies domiciled in any of the
nations of the world. In choosing investments, which will consist primarily of
equity securities of foreign corporations, Invista intends to pay particular
attention to long-term earnings prospects and the relationship of then-current
prices to such prospects. Short-term trading is not generally intended, but
occasional investments may be made for the purpose of seeking short-term or
medium-term gain. The Portfolio expects its investment objective to be met over
long periods which may include several market cycles. For a description of
certain investment risks and tax implications associated with foreign
securities, see "Risk Factors," and "Tax Treatment, Dividends and
Distributions."
The Portfolio will seek to be fully invested under normal conditions in the
following equity securities: common stocks; preferred stocks and debt securities
that are convertible into common stock, that carry rights or warrants to
purchase common stock or that carry rights to participate in earnings; rights or
warrants to subscribe to or purchase any of the foregoing securities; and
sponsored and unsponsored American Depository Receipts (ADRs) based on any of
the foregoing securities. Unsponsored ADRs are not created by the issuer of the
underlying security, may be subject to fees imposed by the issuing bank that, in
the case of sponsored ADRs, would be paid by the issuer of a sponsored ADR and
may involve additional risks such as reduced availability of information about
the issuer of the underlying security.
The Portfolio intends that its investments normally will be allocated among
various countries. Although there is no limitation on the percentage of assets
that may be invested in any one country or denominated in any one currency, the
Portfolio intends under normal market conditions to have at least 65% of its
assets invested in securities issued by corporations of at least three countries
other than the United States. Investments may be made anywhere in the world, but
it is expected that primary consideration will be given to investing in the
securities issued by corporations of Western Europe, North America and
Australasia (Australia, Japan and Far East Asia) that have developed or
developing economies. Changes in investments may be made as prospects change for
particular countries, industries or companies.
The Fund may invest in the securities of other investment companies but may
not invest more than 10% of its assets in securities of other investment
companies, invest more than 5% of its total assets in the securities of any one
investment company, or acquire more than 3% of the outstanding voting securities
of any one investment company except in connection with a merger, consolidation
or plan of reorganization. The Fund's Manager will waive its management fee on
the Fund's assets invested in securities of other open-end investment companies.
The Fund will generally invest only in those investment companies that have
investment policies requiring investment in securities comparable in quality to
those in which the Fund invests.
When in the opinion of Invista current market or economic conditions
warrant, the Portfolio may for temporary defensive purposes place all or a
portion of its assets in cash, on which the Portfolio would earn no income, cash
equivalents, bank certificates of deposit, bankers acceptances, repurchase
agreements, commercial paper, commercial paper master notes which are floating
rate debt instruments without a fixed maturity, government securities, and
preferred stock and investment grade debt securities, whether or not convertible
into or carrying rights for common stock. These securities may be issued by
domestic or foreign corporations, governments or governmental agencies,
instrumentalities or political subdivisions and may be denominated in United
States dollars or some other currency. When investing for temporary defensive
purposes, the Portfolio is not investing so as to achieve its investment
objective. The Portfolio may also maintain reasonable amounts in cash or
short-term debt securities (rated by a nationally recognized statistical rating
organization in one of the two highest rating categories for short-term debt
obligations) for daily cash management purposes or pending selection of
particular long-term investments.
Mortgage-Backed Securities Portfolio
The investment objective is to generate a total investment return
consisting of current income and capital appreciation while maintaining
liquidity and safety of principal.
The Portfolio will invest in mortgage-backed securities and other
obligations issued or guaranteed by the United States Government or by its
agencies or instrumentalities ("U.S. Government Securities") and in repurchase
agreements collateralized by such obligations. Under normal market conditions,
the Portfolio intends to invest at least 65% of its assets in mortgage-backed
securities. The U.S. Government Securities in which the Portfolio intends to
invest include Government National Mortgage Association ("GNMA") Certificates of
the modified pass-through type, Federal National Mortgage Association ("FNMA")
Obligations, Federal Home Loan Mortgage Corporation ("FHLMC") Certificates and
Student Loan Marketing Association ("SLMA") Certificates and collateralized
mortgage obligations issued by private issuers for which the underlying
mortgage-backed securities serving as collateral are guaranteed by the U.S.
Government or its agencies or instrumentalities. GNMA is a wholly-owned
corporate instrumentality of the United States whose securities and guarantees
are backed by the full faith and credit of the United States. FNMA, a federally
chartered and privately-owned corporation, FHLMC, a federal corporation, and
SLMA, a government sponsored stockholder-owned organization, are
instrumentalities of the United States. The securities and guarantees of FNMA,
FHLMC and SLMA are backed by the credit of the issuing organization but are not
backed, directly or indirectly, by the full faith and credit of the United
States. Although the Secretary of the Treasury of the United States has
discretionary authority to lend FNMA up to $2.25 billion outstanding at any
time, neither the United States nor any agency thereof is obligated to finance
the operations of FNMA, FHLMC or SLMA or to assist them in any other manner. The
Portfolio may maintain reasonable amounts of cash or short-term debt securities
for daily cash management purposes or pending selection of particular long-term
investments.
GNMA Certificates are mortgage-backed securities representing an interest
in a pool of mortgage loans. Such loans are made by lenders such as mortgage
bankers, insurance companies, commercial banks and savings and loan
associations. Then, they are either insured by the Federal Housing
Administration (FHA) or they are guaranteed by the Veterans Administration (VA)
or Farmers Home Administration (FmHA). The lender or other prospective issuer
creates a specific pool of such mortgages, which it submits for approval to
GNMA, a United States Government corporation within the Department of Housing
and Urban Development. After approval, a GNMA Certificate is typically offered
by the issuer to investors through securities dealers.
GNMA Certificates differ from bonds in that the principal is scheduled to
be paid back by the borrower on a monthly basis over the life of the loan rather
than returned in a lump sum at maturity. Modified pass-through GNMA Certificates
entitle the holder to receive all interest and principal payments owed on the
mortgages in the pool whether or not the mortgagor has made such payment. The
timely payment of interest and principal is guaranteed by the full faith and
credit of the United States Government.
Although the payment of interest and principal is guaranteed, the guarantee
does not extend to the value of a GNMA Certificate or the value of the shares of
the Portfolio. The market value of a GNMA Certificate typically will fluctuate
to reflect changes in prevailing interest rates. It falls when rates increase
(as does the market value of other debt securities) and it rises when rates
decline (but it may not rise on a comparable basis with other debt securities
because of its prepayment feature), and, therefore, may be more or less than the
face amount of the GNMA Certificate, which reflects the aggregate principal
amount of the underlying mortgages. As a result the net asset value of shares
will fluctuate as interest rates change.
Mortgagors may pay off their mortgages at any time. Prepayments of the
mortgages can affect the market value of the GNMA Certificate and the return
ultimately received. Prepayments, like scheduled payments of principal, are
reinvested by the Portfolio at prevailing interest rates which may be less than
the rate on the GNMA Certificate. Prepayments are likely to increase as the
interest rate for new mortgages moves lower than the rate on the GNMA
Certificate. Moreover, if the GNMA Certificate had been purchased at a premium
above principal because its rate exceeded prevailing rates, the premium is not
guaranteed and a decline in value to par may result in a loss of the premium
especially in the event of prepayment.
The FNMA and FHLMC securities in which the Portfolio invests are very
similar to GNMA certificates as described above but are not guaranteed by the
full faith and credit of the United States but rather by the agency itself. FNMA
and FHLMC securities are rated Aaa by Moody's and AAA by Standard & Poor's.
These ratings reflect the status of FNMA and FHLMC as federal agencies as well
as the important role each plays in financing purchases of homes in the U.S.
Student Loan Marketing Association is a government sponsored
stockholder-owned organization whose goal is to provide liquidity to financial
and educational institutions. SLMA provides liquidity by purchasing student
loans, which are principally government guaranteed loans issued under the
Federal Guaranteed Student Loan Program and the Health Education Assistance Loan
Program. SLMA securities are not guaranteed by the U.S. Government but are
obligations solely of the agency. SLMA senior debt issues in which the Fund
invests are rated AAA by Standard & Poor's and Aaa by Moody's.
There are other obligations issued or guaranteed by the United States
Government (such as U.S. Treasury securities) or by its agencies or
instrumentalities that are either supported by the full faith and credit of the
U.S. Treasury or the credit of a particular agency or instrumentality. Included
in the latter category are Federal Home Loan Bank and Farm Credit Banks.
Obligations not guaranteed by the United States Government are highly rated
because they are issued by indirect branches of government. Such obligations are
issued as needs arise by an agency and are traded regularly in denominations
similar to those in which government obligations are traded.
The Portfolio may enter into contracts with dealers in securities whereby
the Portfolio agrees to purchase or sell an agreed-upon principal amount of the
securities at a specified price on a certain date. The Portfolio may enter into
similar purchase agreements with issuers of securities other than Principal
Mutual Life Insurance Company. The Portfolio may also purchase optional delivery
standby commitments which give the Portfolio the right to sell particular
securities at a specified price on a specified date. Failure of the other party
to such a contract or commitment to abide by the terms thereof could result in a
loss to the Portfolio. When the Portfolio enters into a forward commitment
contract to purchase securities, it assumes the rights and risks of an owner of
the securities, including the risk of price and yield fluctuation. The Portfolio
accrues no interest until the securities are delivered, and although payment for
and delivery of the securities will occur at a later date, it records the
purchase price as a liability and segregates portfolio assets having a value
equal to the purchase price. The availability of liquid assets for this purpose
and the effect of asset segregation on the Portfolio's ability to meet its
current obligations, to honor requests for redemption and to have its investment
portfolio managed properly will limit the extent to which the Portfolio may
engage in forward commitment agreements. Except as may be imposed by these
factors, there is no limit on the percent of the Portfolio's total assets that
may be committed to transactions in such agreements. The Portfolio intends to be
active in the forward commitment market when the return from holding forward
positions appears to be greater than the return from holding the actual
securities. The Portfolio will enter into forward commitment contracts to
purchase securities for the purpose of acquiring those securities and not for
the purpose of investment leverage or to speculate on interest rate changes, but
as delivery dates approach, a determination will be made whether to take
delivery of a specific forward position, or sell that position and purchase
another forward position. Because of this strategy, it is anticipated that its
annual portfolio turnover rate should generally exceed 100% and may be as much
as 600% or more, although this rate should not be construed as a limiting
factor. The Portfolio intends, however, to limit turnover so that realized
short-term gains on securities held for less than three months do not exceed 30%
of gross income in order to qualify as a "regulated investment company" under
the Internal Revenue Code. See "Tax Treatment, Dividends and Distributions." The
effect of a high turnover rate would be to incur more transaction expenses than
would be incurred at a lower turnover rate, and there is no assurance that the
additional transactions that cause the higher turnover rate would result in
gains for the Portfolio or in sufficient gains to offset the increased
transaction expenses.
CERTAIN INVESTMENT POLICIES AND RESTRICTIONS
Following is a discussion of certain investment practices that each
Portfolio may use in an effort to achieve its investment objective.
Each Portfolio may enter into repurchase agreements with, and may lend its
portfolio securities to, unaffiliated broker-dealers and other unaffiliated
qualified financial institutions. These transactions must be fully
collateralized at all times, but involve some credit risk if the other party
should default on its obligations, and the Portfolio is delayed or prevented
from recovering on the collateral. See the Statement of Additional Information
for further information regarding the credit risks associated with repurchase
agreements and the standards adopted by the Board of Directors to deal with
those risks. Neither Portfolio intends either (i) to enter into repurchase
agreements that mature in more than seven days if any such investment, together
with any other illiquid securities held by the Portfolio, would amount to more
than 15% of its total assets or (ii) to lend securities in excess of 33% of its
total assets.
From time to time, a Portfolio may enter into forward commitment agreements
which call for it to purchase or sell a security on a future date and at a price
fixed at the time the Portfolio enters into the agreement. Each Portfolio may
acquire rights to sell its investments to other parties, either on demand or at
specific intervals. The International Securities Portfolio may invest in
warrants up to 5% of its assets, of which not more than 2% may be invested in
warrants that are not listed on the New York, American or Toronto Stock
Exchanges or the Chicago Board Options Exchange.
As a matter of fundamental policy, each Portfolio may borrow money (a) for
temporary or emergency purposes in an amount not to exceed 5% of the value of
the Portfolio's total assets at the time of the borrowing and (b) for any
purpose from banks in an amount not to exceed one-third of the Portfolio's total
assets (including the amount borrowed) less all liabilities and indebtedness
other than borrowings deemed to be senior securities and while any such
borrowing exceeds 5% of the Funds' total assets, no additional purchases of
investment securities will be made.
Each Portfolio may purchase covered spread options, which would give the
Portfolio the right to sell a security that it owns at a fixed dollar spread or
yield spread in relationship to another security that the Portfolio does not
own, but which is used as a benchmark. Each Portfolio may also purchase and sell
covered financial futures contracts, options on financial futures contracts and
options on securities and securities indices, but will not invest more than 5%
of its assets in initial margin and premiums on financial futures contracts and
options thereon. Each Portfolio may write options on securities and securities
indices to generate additional revenue and for hedging purposes and may enter
into transactions in financial futures contracts and options on those contracts
for hedging purposes. The use of futures contracts and options involves certain
risks, including their failure as hedges when the price movements of the
securities underlying the futures and options do not follow the price movements
of the portfolio securities subject to the hedge; the inability to control
losses by closing a position when a liquid secondary market does not exist; and
the ability of Invista to predict correctly the direction of stock prices,
interest rates and other market and economic factors. Additional information
about risks is included in the Statement of Additional Information.
The International Securities Portfolio may enter into forward currency
contracts, currency futures contracts and options thereon 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 at the time of the contract.
The Portfolio will not enter into a transaction to hedge currency exposure to an
extent greater in effect than the aggregate market value of the securities held
or to be purchased by the Portfolio that are denominated or generally quoted in
or currently convertible into the currency. When the Portfolio enters into a
contract to buy or sell a foreign currency, it generally will hold an amount of
that currency, liquid securities denominated in that currency or a forward
contract for such securities equal to the Portfolio's obligation, or it will
segregate liquid high grade debt obligations equal to the amount of the
Portfolio's obligations. The use of currency contracts involves many of the same
risks as transactions in futures contracts and options as well as the risk of
government action through exchange controls or otherwise that would restrict the
ability of the Portfolio to deliver or receive currency.
Each Portfolio may from time to time execute transactions for portfolio
securities with, and pay related brokerage commissions to, Principal Financial
Securities, Inc. a broker-dealer that is an affiliate of the Distributor,
Manager and Sub-Advisor for each of the Portfolios.
The Statement of Additional Information includes additional information
concerning the investment policies and restrictions applicable to the
Portfolios. Certain investment policies and restrictions are designated in this
Prospectus or in the Statement of Additional Information as fundamental and may
not be changed as to any Portfolio without approval by the holders of the lesser
of: (i) 67% of the shares of that Portfolio represented at a meeting at which
more than 50% of the outstanding shares of the Portfolio are represented or (ii)
more than 50% of the outstanding shares of the Portfolio. The investment
objectives of the Portfolios and all other investment policies and restrictions
described in this Prospectus and the Statement of Additional Information are not
fundamental and may be changed by the Board of Directors without shareholder
approval. A change of an investment objective may result in a Portfolio having
an investment objective different from the objective which a shareholder
considered appropriate at the time of investment in the Portfolio. Shareholders
must be given 30 days prior written notice before the investment objectives of
the Portfolios may be changed at the discretion of the Board of Directors.
RISK FACTORS
An investment in the International Securities Portfolio involves the
financial and market risks that are inherent in any investment in securities.
These risks include changes in the financial condition of issuers, in economic
conditions generally and in the conditions in securities markets. They also
include the extent to which the prices of securities will react to those
changes. Investment in foreign securities presents certain risks which may
affect net asset value. These risks include, but are not limited to, those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, the imposition of foreign taxes, the withholding of taxes on
dividends at the source, future political and economic developments including
war, expropriations, nationalization, the possible imposition of currency
exchange controls and other foreign governmental laws or restrictions, reduced
availability of public information concerning issuers, and the fact that foreign
issuers are not generally subject to uniform accounting, auditing and financial
reporting standards or to other regulatory practices and requirements comparable
to those applicable to domestic issuers. Moreover, securities of many foreign
issuers may be less liquid and their prices more volatile than those of
comparable domestic issuers. In addition, transactions in foreign securities may
be subject to higher costs, and the time for settlement of transactions in
foreign securities may be longer than the settlement period for domestic
issuers. Investment in foreign securities may also result in higher custodial
costs and the costs associated with currency conversions.
An investment in the Mortgage-Backed Securities Portfolio involves market
risks associated with movements in interest rates. The market value of
investments will fluctuate in response to changes in interest rates and other
factors. During periods of falling interest rates, the values of outstanding
long-term fixed-income securities generally rise. Conversely, during periods of
rising interest rates, the values of such securities generally decline. Changes
by recognized rating agencies in their ratings of any fixed-income security and
in the ability of an issuer to make payments of interest and principal may also
affect the value of these investments. Changes in the value of portfolio
securities will affect the net asset value but will not affect cash income
derived from the securities unless a change results from a failure of an issuer
to pay interest or principal when due.
MANAGER AND INVESTMENT SUB-ADVISOR
The Manager for the Funds is Princor Management Corporation (the
"Manager"), an indirectly wholly-owned subsidiary of Principal Mutual Life
Insurance Company, a mutual life insurance company organized in 1879 under the
laws of the State of Iowa. The address of the Manager is The Principal Financial
Group, Des Moines, Iowa 50392. The Manager was organized on January 10, 1969,
and since that time has managed various mutual funds sponsored by Principal
Mutual Life Insurance Company. As of December 31, 1994 the Manager served as
investment advisor for such funds with assets totaling approximately $2.0
billion.
The Manager has executed an agreement with Invista Capital Management, Inc.
("Invista") under which Invista has agreed to assume the obligations of the
Manager to provide investment advisory services for each Portfolio and to
reimburse the Manager for the other costs it incurs under the Management
Agreement. Invista, an indirectly wholly-owned subsidiary of Principal Mutual
Life Insurance Company and an affiliate of the Manager, was founded in 1985 and
manages investments for institutional investors, including Principal Mutual
Life. Assets under management at December 31, 1994 were approximately $11.2
billion. Invista's address is 1500 Hub Tower, 699 Walnut, Des Moines, Iowa
50309.
<PAGE>
Invista has assigned certain individuals the primary responsibility for the
day-to-day management of each Fund's portfolio. The persons primarily
responsible for the day-to-day management of each Fund are identified in the
table below:
<TABLE>
<CAPTION>
Primarily
Fund Responsible Since Person Primarily Responsible
<S> <C> <C>
Mortgage-Backed Securities May, 1993 Martin J. Schafer (BBA degree, University of Iowa). Vice
Portfolio (Fund's inception) President, Invista Capital Management Company since 1992.
Director - Securities Trading, Principal Mutual Life
Insurance Company 1992; Prior thereto, Associate Director.
International Securities April, 1994 Scott D. Opsal, CFA (MBA degree, University of
Portfolio Minnesota). Vice President, Invista Capital Management,
Inc. since 1987.
</TABLE>
DUTIES PERFORMED BY THE MANAGER AND SUB-ADVISOR
Under Maryland law, the business and affairs of the Fund are managed under
the direction of its Board of Directors. The investment services and certain
other services referred to under the heading "Cost of Manager's Services" in the
Statement of Additional Information are furnished to each Portfolio under the
terms of a Management Agreement between the Fund and the Manager and a
sub-advisory agreement between the Manager and Invista. Invista advises each
Portfolio on investment policies and on the composition of each Portfolio. In
this connection, Invista furnishes to the Board of Directors a recommended
investment program consistent with each Portfolio's investment objective and
policies. Invista is authorized, within the scope of the approved investment
program, to determine which securities are to be bought or sold, and in what
amounts.
The compensation being paid by each of the Mortgage-Backed Portfolio and
the International Securities Portfolio for investment management and
administrative services is equal on an annual basis to .45% and .90%,
respectively, of the average daily value of its net assets. The fee payable by
the International Securities Portfolio is higher than that paid by most funds to
their advisors, but it is not higher than the fees paid by many funds with
similar investment objectives and policies and does cover substantially all
expenses of the Portfolio, unlike many other funds. The only expenses paid by
each Portfolio are brokerage commissions on portfolio transactions, taxes,
interest (if any) and extraordinary expenses.
The Manager and Invista may purchase at their own expense statistical and other
information or services from outside sources, including Principal Mutual Life
Insurance Company. An Investment Service Agreement between the Fund, the
Manager, and Principal Mutual Life Insurance Company provides that Principal
Mutual Life Insurance Company will furnish certain personnel, services and
facilities required by the Manager and Invista in connection with the
performance of their services for each Portfolio and that the Manager will
reimburse Principal Mutual Life Insurance Company for its costs incurred in this
regard. The Manager serves as dividend disbursing agent and transfer agent for
each Portfolio.
MANAGERS' COMMENTS
Princor Management Corporation and Invista, the adviser and sub-advisor to the
Fund, are staffed with investment professionals who manage each portfolio.
Comments by these individuals in the following paragraphs summarize in capsule
form the general strategy and recent results of each Portfolio throughout the
fiscal year ended December 31, 1994. The accompanying charts display results for
the life of the Fund through December 31, 1994. Average Annual Total Return
figures provided for each fund in the graphs below reflect all expenses of the
Fund and assume all distributions are reinvested at net asset value. Past
performance is not predictive of future performance. Returns and net asset
values fluctuate. Shares are redeemable at current net asset value, which may be
more or less than original cost.
International Securities Portfolio
After once in a lifetime returns in 1993, international stock markets turned in
unexciting results in 1994. The most notable factor was currency moves, which
contributed positively to US dollar based investor returns in 1994. Since we
have not hedged foreign currencies the portfolio gained approximately 5% due to
the weak dollar. Sweden, Finland, and The Netherlands were all outperforming
markets for the year, and our strategy of owning undervalued cyclicals paid off
as overweighting in these countries enhanced performance.
Japan was the only major market that enjoyed high returns, and a good portion of
that was driven by the strong yen. We continue to avoid Japan based on its clear
overvaluation relative to world markets, and this position will negatively
affect our returns relative to other funds as long as Japan does well. In
contrast to Japan, there were several markets that performed very poorly, with
the common factor between them being a dramatic turn in investor sentiment
towards greater risk aversion. Hong Kong and Mexico offered investors growth and
good valuations, but the shift in risk aversion caused them to be the worst
performing markets for the quarter and the year. Our account was overweighted in
both markets, which negatively impacted relative returns.
Comparison of Changes in Value of $2.5 Million Investment in the International
Securities Portfolio, Morgan Stanley Capital International EAFE (Europe,
Australia and Far East) Index and Lipper International Fund Average
International
Securities Lipper
Portfolio EAFE International
Year Ended December 31 Value Index Average
2,500,000 2,500,000 2,500,000
1993 3,248,625 2,702,750 3,062,500
1994 3,039,006 3,148,974 3,040,756
Note: Past performance is not predictive of future performance.
Important Notes:
Lipper International Fund Average: this average consists of mutual funds
which invest in securities whose primary trading markets are outside the United
States. The one year average currently contains 121 funds.
Morgan Stanley Capital International EAFE (Europe, Australia and Far East)
Index: an unmanaged index consisting of stocks of 4,552 companies traded in
twenty major world stock markets.
Mortgage-Backed Securities Portfolio
Our policy is to avoid the various types of derivative securities available in
this marketplace and, as a result, we averted the significant decrease in value
(and the resulting publicity) these issues caused investors in government and
other fixed-income securities. Nevertheless, we were unable to escape the
decreases in market value which inevitably accompany a broad and sharp increase
in the general level of interest rates, such as what was triggered from the
action of the Federal Reserve in raising short-term rates in recent months. Our
policy of running a fairly straightforward portfolio priced at or below par was
instrumental in maintaining our competitive position in the past, but did act to
push our prices to levels lower than other funds investing in similar
mortgage-backed securities. Their portfolios were structured more toward a
premium over par position. The worst may be behind us from a total return
standpoint, unless the Fed is behind in trying to contain potential inflation.
If they are, then a series of rate increases will be needed in an effort to
lessen the possibility of future inflation. Although our values and those of
other fixed-income funds have fallen in 1994, the good news, if any, is that
dividend flows to investors should increase.
Comparison of Changes in Value of $2.5 Million Investment in the Mortgage-Backed
Securities Portfolio, Lehman Brothers Mortgage Index and Lipper U.S. Mortgage
Fund Average.
Mortgage-Backed
Securities Lehman Brothers Lipper U.S.
Portfolio Mortgage Mortgage Fund
Year Ended December 31, Value Index Average
2,500,000 2,500,000 2,500,000
1993 2,611,628 2,580,769 2,584,750
1994 2,516,864 2,539,307 2,476,966
Note: Past performance is not predictive of future performance.
Important Notes:
Lehman Brothers Mortgage Index: an unmanaged index of 15- and 30 year fixed rate
securities backed by mortgage pools of the Government National Mortgage
Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and Federal
National Mortgage Association (FNMA).
Lipper U.S. Mortgage Fund Average: this average consists of mutual funds
investing at least 65% of their assets in mortgages/securities issued or
guaranteed as to principal and interest by the U.S. Government and certain
federal agencies. The one year average currently contains 73 mutual funds.
NOTE: Mutual fund data from Lipper Analytical Services, Inc.
DETERMINATION OF NET ASSET VALUE
The net asset value of each Portfolio is determined daily, Monday through
Friday, as of the close of trading on the New York Stock Exchange except on days
on which changes in the value of the portfolio securities will not materially
affect the current net asset value of the redeemable securities, on days during
which a Portfolio receives no order for the purchase or sale of its redeemable
securities and no tender of such a security for redemption, and on customary
national business holidays. The net asset value per share of each Portfolio is
determined by dividing the value of the Portfolios' securities plus all other
assets, less all liabilities, by the number of Portfolio shares outstanding.
Securities for which market quotations are readily available are valued
using those quotations. Other securities are valued by using market quotations,
prices provided by market makers 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.
Trading of foreign securities is substantially completed each day at
various times prior to the close of the New York Stock Exchange. The values of
such securities used in computing net asset value per share are usually
determined as of such times. Occasionally, events which affect the values of
such securities and foreign currency exchange rates may occur between the times
at which they are generally determined and the close of the New York Stock
Exchange and would therefore not be reflected in the computation of the net
asset value. If events materially affecting the value of such securities occur
during such period, then these securities will be valued at their fair value as
determined in good faith by the Manager or Invista under procedures established
and regularly reviewed by the Board of Directors. To the extent the
International Securities Portfolio invests in foreign securities listed on
foreign exchanges which trade on days on which the Portfolio does not determine
its net asset value, for example Saturdays and other customary national U.S.
holidays, the net asset value could be significantly affected on days when
shareholders have no access to the Portfolio.
PERFORMANCE CALCULATION
From time to time, the Fund may publish advertisements containing
information (including graphs, charts, tables and examples) about the
performance of one or more of its Portfolios. The yield and total return figures
described below will vary depending upon market conditions, the composition of
portfolios and operating expenses. These factors and possible differences in the
methods used in calculating yield and total return should be considered when
comparing performance figures for the Portfolios to performance figures
published for other investment vehicles. Any performance data quoted for a
Portfolio represents only historical performance and is not intended to indicate
future performance. For further information on how the Fund calculates yield and
total return figures for its Portfolios, see the Statement of Additional
Information.
The Mortgage-Backed Securities Portfolio may advertise its yield and
average annual and cumulative total return. The International Securities
Portfolio may advertise its average annual and cumulative total return. Yield is
determined by annualizing a Portfolio's net investment income per share for a
specific, historical 30-day period and dividing the result by the ending net
asset value of the Portfolio for the same period. Average annual total return
for each Portfolio is computed by calculating the average annual compounded rate
of return over the stated period that would equate an initial $1,000 investment
to the ending redeemable value assuming the reinvestment of all dividends and
capital gains distributions at net asset value. Cumulative total return is
computed by dividing the ending redeemable value by the initial investment on
the basis of the same assumptions. Each Portfolio may also quote rankings,
yields or returns as published by independent statistical services or
publishers, and information regarding the performance of certain market indices.
SHAREHOLDER RIGHTS
Each share is entitled to one vote either in person or by proxy at all
shareholder meetings. This includes the right to vote on the election of
directors, selection of independent accountants and other matters submitted to
meetings of shareholders. Shares of each Portfolio generally vote in the
aggregate without regard to series, except where otherwise required by the
Investment Company Act of 1940 in which case any matter being voted upon must be
approved by each Portfolio affected by the matter being voted upon. Matters
required by the Investment Company Act of 1940 to be voted upon by each affected
Portfolio include changes to the Management Agreement, a subadvisory agreement
and fundamental investment policies and restrictions. Each share of a Portfolio
has equal rights with every other share of that Portfolio as to dividends,
earnings, voting, assets and redemption. Shares are fully paid and
non-assessable, have no preemptive or conversion rights, and are freely
transferable. Shares may be issued as full or fractional shares, and each
fractional share has proportionately the same rights, including voting, as are
provided for a full share. Shareholders of the Fund may remove any director with
or without cause by the vote of a majority of the votes entitled to be cast at a
meeting of shareholders. Shareholders will be assisted with shareholder
communication in connection with such matter, and the Fund will hold a meeting
of shareholders for such purpose when requested to do so in writing by the
holders of 10% or more of the outstanding shares of the Fund.
The articles of incorporation of the Fund provide that the Board of
Directors may increase or decrease the aggregate number of shares which the Fund
has authority to issue and may create additional series of shares at any time
without a shareholder vote.
The Fund intends to hold meetings of shareholders only when required by law
and at such other times as may be deemed appropriate by the Board of Directors.
The Fund will hold annual meetings of shareholders only when the election of
directors by shareholders is required under the Investment Company Act of 1940
and special meetings of shareholders when the approval by shareholders of such
matters as investment advisory agreements and distribution agreements is
required under that Act.
Shareholder inquiries should be directed to the Fund at The Principal
Financial Group, Des Moines, Iowa 50392.
NON-CUMULATIVE VOTING: The shares have non-cumulative voting rights which
means that the holders of more than 50% of the shares voting for the election of
directors can elect 100% of the directors if they choose to do so, and in such
event, the holders of the remaining shares voting for the election of directors
will not be able to elect any directors.
As of January 6, 1995, Principal Mutual Life Insurance Company and its
subsidiaries and affiliates owned the following number and percentage of the
outstanding shares of each Portfolio of the Fund:
Percentage of
Number of Outstanding Shares
Portfolio Shares Owned Owned
International Securities Portfolio 1,076,707 77.71%
Mortgage-Backed Securities Portfolio 1,105,062 81.74%
DISTRIBUTION OF INCOME DIVIDENDS AND REALIZED CAPITAL GAINS
Any dividends from the net income of the International Securities Portfolio
normally will be distributed to shareholders annually and any dividends from the
net income of the Mortgage-Backed Securities Portfolio will normally be
distributed monthly. Distributions from the International Securities Portfolio
will be made on the last business day of December to shareholders of record on
the preceding business day. Distributions from the Mortgage-Backed Securities
Portfolio will normally be declared daily and payable on the first business day
of each month to shareholders of record at the close of business on the last
business day of the preceding month. A shareholder who redeems the entire
balance of an account during the month will receive the dividends declared
through the date of the redemption. Net realized capital gains for each of the
Portfolios, if any, will be distributed annually, generally the last business
day of December to shareholders of record on the preceding business day. In the
application, the shareholder authorizes income dividends and capital gains
distributions to be invested in additional shares at net asset value as of the
payment date, but the shareholder at any time on ten days written notice to the
Fund and without charge may have future dividends (or dividends and capital
gains distributions) paid in cash. Any dividends or distributions paid shortly
after a purchase of shares by an investor will have the effect of reducing the
per share net asset value by the amount of the dividends or distributions. These
dividends or distributions are subject to taxation like other dividends and
distributions, even though they are in effect a return of capital.
TAX-TREATMENT, DIVIDENDS AND DISTRIBUTIONS
It is the policy of each Portfolio to distribute substantially all net
investment income and net realized gains. Through such distributions, and by
satisfying certain other requirements, the Fund intends to qualify each
Portfolio 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 Portfolio so qualifies, it will be exempt from federal income
tax upon the amounts so distributed to investors. The Tax Reform Act of 1986
imposed an excise tax on mutual funds which fail to distribute net investment
income and capital gains by the end of the calendar year in accordance with the
provisions of the Act. The Fund intends to comply with the Act's requirements
and to avoid this excise tax.
When at the close of a fiscal year, more than 50% of the value of the
International Securities Portfolio's total assets are invested in securities of
foreign corporations, the Fund may elect pursuant to Section 853 of the Internal
Revenue Code to permit Portfolio shareholders to take a credit (or a deduction)
for foreign income taxes paid by the Fund. In that case, Portfolio shareholders
should include in gross income for federal income tax purposes both cash
dividends received from the Fund and the amount which the Fund advises is their
pro rata portion of foreign income taxes paid with respect to, or withheld from,
dividends and interest paid to the Fund from its foreign investments. Portfolio
shareholders would then be entitled to subtract from their federal income taxes
the amount of such taxes withheld, or else treat such foreign taxes as a
deduction from gross income, if that should be more advantageous. As in the case
of individuals receiving income directly from foreign sources, the
above-described tax credit for tax deduction is subject to certain limitations.
Under the federal income tax law, dividends paid from investment income and
from realized short-term capital gains, if any, are generally taxable at
ordinary income rates whether received in cash or additional shares.
Dividends from the International Securities Portfolio and the
Mortgage-Backed Securities Portfolio are not expected to qualify for the 70%
dividends received deduction for corporations. Dividends and capital gains are
taxable in the year in which distributed, whether received in cash or reinvested
in additional shares. Dividends declared with a record date in December and paid
in January will be deemed to have been distributed to shareholders in December.
The Fund will inform shareholders of the amount and nature of their income
dividends and capital gains distributions. Dividends from net income and
distributions of capital gains may also be subject to state and local taxation.
The Fund is required by law to withhold 31% of dividends paid to investors
who do not furnish their correct taxpayer identification number, which, in the
case of most individuals is their social security number. If, at the time the
account is established the investor does not have a taxpayer identification
number but certifies that one has been applied for, such withholding will be
delayed but will commence 60 days after the date of such certification if within
such time the investor has not provided such number to the Fund.
Shareholders should consult their own tax advisors as to the federal, state
and local tax consequences of ownership of shares of a Portfolio in their
particular circumstances.
HOW TO INVEST
Investments by check - An account with either Portfolio may be established
by submitting a completed application and check made payable to Princor
Financial Services Corporation (the "Distributor") to the Distributor or other
dealers which it selects. An application is attached to this Prospectus. All
applications are subject to acceptance by the Fund and the Distributor. If an
application and check are properly submitted to the Distributor, the shares will
be issued at the net asset value next determined after the check has been
converted into Federal Funds, ordinarily within one business day following
receipt of the check.
Investments By Wire - Shares may also be purchased by wiring Federal Funds
directly to Norwest Bank Iowa, N.A., on a day on which the New York Stock
Exchange, Norwest Bank Iowa, N.A., and, in the case of an initial purchase,
Princor Financial Services Corporation are open for business. It is possible the
shareholder's bank will charge a fee for transmitting funds by wire. FOR AN
INITIAL PURCHASE, FIRST OBTAIN AN ACCOUNT NUMBER BY TELEPHONING THE DISTRIBUTOR
TOLL FREE 1-800-521-1502. Princor Financial Services Corporation requests the
following information:
1. Name in which the account will be registered
2. Address and Telephone Number
3. Tax Identification Number
4. Dividend distribution election
5. Amount being wired and wiring bank
6. Name of Princor Financial Services Corporation registered
representative, if any.
7. Portfolio for which shares are being purchased.
Princor Financial Services Corporation will assign an account number
immediately upon receipt of the above information. After an account number is
assigned, the purchaser should instruct the bank to wire transfer Federal Funds
to: Norwest Bank Iowa, N.A., Des Moines, Iowa 50309, for credit to: Princor
Financial Services Corporation, Account Number 073-330; for further credit to:
Purchaser's Name and Account Number.
Subsequent purchases may be made in the same manner. It is the
shareholder's responsibility to advise Princor Financial Services Corporation
when a subsequent purchase has been wired so that proper credit can be given.
Payment of Federal Funds normally must be received by Norwest Bank before
3:00 p.m. Central Time for an order to be accepted on that day. If payment is
received after that time, the order will not be accepted until the next business
day. Wire transfers may take two hours or more to complete. Investors may make
special arrangements to transmit orders for Portfolio shares to the Distributor
prior to 3:00 p.m. (Central Time) on a day when the Fund is open for business
with the investor's assurance that payment for such shares will be made by
wiring Federal Funds directly to Norwest Bank Iowa, N.A. prior to 10:00 a.m.
(Central Time) the following regular business day. Such orders will be effected
at the Portfolio's net asset value per share next determined after such purchase
order is received by the Distributor.
Promptly after the initial purchase, INVESTORS SHOULD COMPLETE AN ACCOUNT
APPLICATION and mail to Princor Financial Services Corporation, P.O. Box 10423,
Des Moines, Iowa 50306-0423.
Investments through a Selected Dealer - If the application and settlement
funds are submitted through a selected dealer, the shares will be issued in
accordance with the following: An order accepted by a dealer on any day before
the close of the Exchange and received by the Distributor as principal
underwriter before the close of its business on that day will be executed at the
net asset value computed as of the close of the Exchange on that day. An order
accepted by such dealer after the close of the Exchange and received by the
Distributor before its closing on the following business day will be executed at
the net asset value computed as of the close of the Exchange on such following
business day. Dealers have the responsibility to transmit orders to the
Distributor promptly. After an open account has been established (see "Open
Account System"), purchases will be executed at the price next computed after
receipt of the investor's funds at the main office of the Distributor. Wire
purchases through a selected dealer may involve other procedures established by
that dealer.
OFFERING PRICE OF SHARES
The Fund offers shares of each Portfolio continuously through Princor
Financial Services Corporation which is the principal underwriter for the Fund
and sells shares as agent for the Fund. Shares are sold to the public at net
asset value, subject to the minimum investment requirements. In certain
circumstances, Princor Financial Services Corporation will compensate its
registered representatives or a selected dealer with whom it has entered into a
selling agreement for their efforts in distributing shares of the fund.
Compensation will be an ongoing fee in an amount up to 0.10% on an annualized
basis of the average net asset value of shares held in a customer account the
establishment of which is attributable to the efforts of the registered
representative or selected dealer.
MINIMUM INVESTMENT REQUIREMENT
The minimum initial purchase in the Fund is $1.5 million. The minimum
initial purchase of $1.5 million may be invested over a three month period.
Investments in both Portfolios by an investor, the investor's spouse, dependent
children or a trustee may be combined to meet this minimum. There is no minimum
for additional investments. If the total $1.5 million investment is not
completed within the three month period, the shareholder will be given notice of
the additional investment needed to meet the minimum and if not remitted within
30 days, the account will be redeemed.
OPEN ACCOUNT SYSTEM
Share certificates will not ordinarily be issued to shareholders.
Shareholders of each Portfolio will receive a statement of account each time
they invest. The statement will record the current investment and the total
number of shares then owned.
The Fund treats the statement of account as evidence of ownership of
shares. This is known as an open account system. It avoids the trouble and
expense of safeguarding share certificates and the cost of a lost instrument
bond if certificates are lost or destroyed. Certificates, which can be stolen or
lost, are unnecessary except for special purposes such as collateral for a loan.
A shareholder may obtain a certificate at any time for full shares by requesting
it from the Fund in writing. The certificate will be delivered promptly at no
cost. In cases where certificates have been issued, the certificate must be
surrendered in connection with a redemption, transfer or exchange.
The Fund has adopted the policy of requiring signature guarantees in
certain circumstances to safeguard shareholder accounts. A signature guarantee
is necessary under the following circumstances:
1. If a redemption payment is to be made payable to a payee other than the
registered shareholder or joint shareholders, or to Principal Mutual
Life Insurance Company or any of its affiliated companies;
2. To change the ownership of the account;
3. If a redemption payment is to be mailed to an address other than the
address of record or to an address of record that has been changed
within the preceding three months.
4. To add telephone transaction services to an account after the initial
application is processed.
5. To change the designated commercial bank account authorized to accept
redemption proceeds.
A shareholder's signature must be guaranteed by a commercial bank, trust
company, credit union, savings and loan association, national securities
exchange member, or brokerage firm. A signature guaranteed by a notary public is
not acceptable.
Although there currently is no minimum balance, due to the
disproportionately high cost of maintaining small accounts, the Fund reserves
the right to redeem all shares in an account with a value of less than $5,000
and to mail the proceeds to the shareholder. Involuntary redemptions will not be
triggered solely by market activity. Shareholders will be notified before these
redemptions are to be made and will have thirty days to make an additional
investment to bring their accounts up to the required minimum. The Fund reserves
the right to increase the required minimum.
All orders are subject to acceptance by the Fund and the Distributor. The
Fund's Board of Directors reserves the right to change or waive minimum
investment requirements at any time, which would be applicable to all investors
alike.
REDEMPTION OF SHARES
Each Portfolio will redeem its shares upon request. There is no charge for
redemptions. Princor Financial Services usually requires additional
documentation for the sale of shares by a corporation, partnership, agent or
fiduciary, or a surviving joint owner. Contact Princor Financial Services for
details. Shareholders may redeem in one of two ways:
By Mail - If no certificates have been issued, a shareholder simply writes
a letter to the Fund, at Princor Financial Services Corporation, P.O. Box 10423,
Des Moines, Iowa 50306-0423, requesting redemption of any part or all of the
shares owned by specifying either a dollar or share amount. The letter must
provide the account number, shareholder social security number, or tax
identification number and be signed by a registered owner. If certificates have
been issued, they must be properly endorsed and forwarded with the redemption
request. If redemption proceeds are to be sent by wire transfer to a bank
account previously designated as authorized to accept a wire transfer, or if
payment is to be mailed to the address of record, which has not been changed
within the three month period preceding the redemption request, and is made
payable to the registered shareholder or joint shareholders, or to Principal
Mutual Life Insurance Company or any of its affiliated companies, the Fund will
not require a signature guarantee as a part of a proper endorsement; otherwise
the shareholder's signature must be guaranteed by either a commercial bank,
trust company, credit union, savings and loan association, national securities
exchange member, or by a brokerage firm. A signature guaranteed by a notary
public or savings bank is not acceptable.
By Telephone - Shareholders may, by telephone, direct proceeds from
redemptions from the shareholder's account to be sent to the address of record,
if such address has not changed within the three month period preceding the date
of the request, or transferred to a commercial bank account in the United States
previously authorized in writing by the shareholder. The telephone redemption
privilege is available only if telephone transaction services apply to the
account from which shares are redeemed. Telephone transaction services apply to
all accounts, unless the shareholder has specifically declined this service on
the account application or in writing to the Fund. If certificates have been
issued, the telephone redemption privilege will not be allowed on those shares.
Shareholders may exercise the telephone redemption privilege by telephoning
1-800-521-1502. If all telephone lines are busy, shareholders might not be able
to request telephone redemptions and would have to submit written redemption
requests. Redemption proceeds may be sent to the previously designated bank by
check or wire transfer. A wire charge of up to $15.00 will be deducted from the
account from which the redemption is made for all wire transfers. If proceeds
are to be used to settle a securities transaction with a selected dealer,
telephone redemptions may be requested by the shareholder or upon appropriate
authorization from an authorized representative of the dealer, and the proceeds
will be wired to the dealer.
Telephone redemption requests must be received by the Fund by the close of
the New York Stock Exchange on a day when the Fund is open for business to be
effective that day. Requests made after that time or on a day when the Fund is
not open for business will be effective the next business day. Although the Fund
and the transfer agent are not responsible for the authenticity of redemption
requests received by telephone, the right is reserved to refuse telephone
redemptions when in the opinion of the Fund or the transfer agent it seems
prudent to do so. The shareholder bears the risk of loss caused by a fraudulent
telephone redemption request which the Fund reasonably believes to be genuine.
The Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine and if such procedures are not followed,
the Fund may be liable for losses due to unauthorized or fraudulent
transactions. Such procedures include requiring the caller to provide the
shareholder's social security number or tax identification number, date of birth
(if an individual) and current address; mailing written confirmation of the
transaction to the address of record; and recording telephone instructions. In
addition, the Fund directs redemption proceeds made payable to the owner or
owners of the account only to the address of record that has not been changed
within the three month period prior to the date of the telephone request or to a
previously authorized bank account.
General - Redemptions, whether in writing or by telephone or other means,
by any joint owner shall be binding upon all joint owners. The price at which
the shares are redeemed will be the net asset value per share as next determined
after the request is received by the Fund in proper and complete form. The
amount received for shares upon redemption may be more or less than the cost of
such shares depending upon the net asset value at the time of redemption.
Accurate records should be kept for the duration of the account for tax
purposes.
Redemption proceeds will be sent within seven days after receipt of a
request for redemption in proper form. However, the Fund may suspend the right
of redemption during any period when (a) trading on the New York Stock Exchange
is restricted as determined by the Securities and Exchange Commission or such
Exchange is closed for other than weekends and holidays; (b) an emergency
exists, as determined by the Securities and Exchange Commission, as a result of
which (i) disposal by the Fund of securities owned by it is not reasonably
practicable, or (ii) it is not reasonably practicable for the Fund fairly to
determine the value of its net assets; or (c) the Commission by order so permits
for the protection of security holders of the Fund.
Occasionally the Fund may be requested to redeem Portfolio shares which
have been purchased by check for which it has not yet received good payment. If
this happens, the Fund may delay transmittal of redemption proceeds until good
payment has been collected for the purchase of such shares (which may take up to
15 days or more). To avoid the inconvenience of such a delay, shares may be
purchased with a certified check, bank cashier's check or money order.
The Fund reserves the right to modify any of the methods of redemption or
to charge a fee for providing these services upon written notice to
shareholders.
PERIODIC WITHDRAWAL PLAN
A shareholder may request that a fixed number of shares ($100 initial
minimum amount) or enough shares to produce a fixed amount of money ($100
initial minimum payment) be withdrawn from an account monthly, quarterly,
semi-annually or annually. The Fund makes no recommendation as to either the
number of shares or the fixed amount that the investor may withdraw. An investor
may initiate a Periodic Withdrawal Plan by signing an Agreement for Periodic
Withdrawal Form and depositing any share certificates that have been issued or,
if no certificates have been issued and telephone transaction services apply to
the account, by telephoning the Fund.
Cash withdrawals are made out of the proceeds of redemption on the day
designated by the shareholder, so long as the day is a trading day that is the
1st through the 28th day of the month, and will continue until cancelled.
Withdrawal payments will be sent on or before the fifth business day following
such redemption. The redemption of shares to make payments under this Plan will
reduce and may eventually exhaust the account.
Each redemption of shares may result in a gain or loss, which may be
reportable for income tax purposes. An investor should keep an accurate record
of any gain or loss on each withdrawal. Any income dividends or capital gains
distributions on shares held under a Periodic Withdrawal Plan are reinvested in
additional shares at net asset value. Withdrawals may be stopped at any time
without penalty, subject to notice in writing which is received by the Fund.
ADDITIONAL INFORMATION
Organization: The Fund was incorporated in the state of Maryland on
January 28, 1993.
Custodian: Bank of America National Trust and Savings Association, 555
California Street, San Francisco, California 94105, is custodian of the
portfolio securities and cash assets of the Mortgage-Backed Securities
Portfolio. The custodian for the International Securities Portfolio is Chase
Manhattan Bank, N.A., Chase Metro Tech Center, Brooklyn, New York 11245. The
custodians perform no managerial or policymaking functions for the Fund.
Capitalization: The authorized capital stock of each Portfolio consists of
100,000,000 shares of common stock, $.01 par value.
Financial Statements: Copies of the financial statements of the Fund will
be mailed to each shareholder semi-annually. At the close of each fiscal year,
the Fund's financial statements will be audited by a firm of independent
auditors. The firm of Ernst & Young LLP has been appointed to audit the
financial statements of the Fund.
Registration Statement: This Prospectus omits some information contained in
the Statement of Additional Information (also known as Part B of the
Registration Statement) and Part C of the Registration Statement which the Fund
has filed with the Securities and Exchange Commission. The Fund's Statement of
Additional Information is hereby incorporated by reference into this Prospectus.
A copy of this Statement of Additional Information can be obtained upon request,
free of charge, by writing or telephoning Princor Financial Services
Corporation. You may obtain a copy of Part C of the Registration Statement filed
with the Securities and Exchange Commission, Washington, D.C. from the
Commission upon payment of the prescribed fees.
Principal Underwriter: Princor Financial Services Corporation,
P.O. Box 10423, Des Moines, Iowa 50306-0423, is the principal underwriter for
the Fund.
Transfer Agent and Dividend Disbursing Agent: Princor Management
Corporation, The Principal Financial Group, Des Moines, Iowa, 50392-0200, is the
transfer agent and dividend disbursing agent for the Fund.
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