Registration No. 33-59474
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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POST-EFFECTIVE AMENDMENT NO. 4 TO
FORM N-1A
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
and
REGISTRATION STATEMENT
under
THE INVESTMENT COMPANY ACT OF 1940
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PRINCIPAL SPECIAL MARKETS FUND, INC.
(Exact name of Registrant as specified in Charter)
The Principal Financial Group
Des Moines, Iowa 50392
(Address of principal executive offices)
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Telephone Number (515) 248-3842
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MICHAEL D. ROUGHTON Copy to:
The Principal Financial Group JOHN W. BLOUCH, L.L.P.
Des Moines, Iowa 50392 Suite 405 West
1025 Thomas Jefferson Street, N.W.
Washington, DC 20007-0805
(Name and address of agent for service)
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It is proposed that this filing will become effective (check appropriate box)
immediately upon filing pursuant to paragraph (b)of Rule 485
X on May 1, 1996 pursuant to paragraph (b) of Rule 485
60 days after filing pursuant to paragraph (a)(1) of Rule 485
on (date) pursuant to paragraph (a)(1) of Rule 485
75 days after filing pursuant to paragraph (a)(2) of Rule 485
on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
This post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
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Pursuant to the provisions of Rule 24f-2 under the Investment Company Act
of 1940, Registrant has registered an indefinite number of shares under the
Securities Act of 1933; Registrant filed a Rule 24f-2 Notice for the
fiscal year ended December 31, 1995 on February 27, 1996.
<PAGE>
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 May 1, 1996 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 May 1, 1996.
TABLE OF CONTENTS
Page
Summary................................................................. 3
Financial Highlights.................................................... 5
Investment Objectives, Policies and Restrictions........................ 5
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 $1.0 million. The minimum initial
purchase of $1.0 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.
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.
Shareholder Transaction Expenses
Maximum Sales Load Imposed
on Purchases
Portfolio (as a percentage of offering price) Redemption Fee
International Securities Portfolio None None*
Mortgage-Backed Securities Portfolio None None*
Annual Portfolio Operating Expenses
(as a percentage of average net assets)
Management 12b-1 Other Total Operating
Portfolio Fee Fee Expenses** Expenses
International Securities Portfolio .90% None None .90%
Mortgage-Backed Securities Portfolio .45% None None .45%
* A wire charge of up to $6.00 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.
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
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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.
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
Portfolio
Year Year Period
Ended Ended Ended
Dec. 31, Dec. 31, Dec. 31,
1995 1994 1993(a)
<S> <C> <C> <C>
Net Asset Value at Beginning of Period.......................... $11.29 $12.87 $10.01
Income from Investment Operations:
Net Investment Income...................................... .19 .13 .07
Net Realized and Unrealized Gains (Losses) on
Investments and Foreign Currency......................... 1.11 (.95) 2.91
.........................Total from Investment Operations 1.30 (.82) 2.98
Less Distributions:
Dividends (from net investment income)..................... (.10) (.12) (.10)
Excess distribution of net investment income .............. (.07) (.13) --
--..............................................
Distributions (from capital gains)......................... (.72) (.51) (.02)
......................................Total Distributions (.89) (.76) (.12)
Net Asset Value at End of Period................................ $11.70 $11.29 $12.87
Total Return.................................................... 12.02% (6.45)% 29.95%(c)
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands)................... $17,251 $15,542 $16,838
Ratio of Expenses to Average Net Assets.................... .90% .90% .90%(b)
Ratio of Net Investment Income to Average Net Assets....... 1.79% .94% 1.21%(b)
Portfolio Turnover Rate......................................... 46.0% 37.0% 6.9%(b)
Mortgage-Backed Securities
Portfolio
Year Year Period
Ended Ended Ended
Dec. 31, Dec. 31, Dec. 31,
1995 1994 1993(a)
Net Asset Value at Beginning of Period.......................... $ 9.11 $10.10 $10.01
Income from Investment Operations:
Net Investment Income...................................... .65 .63 .34
Net Realized and Unrealized Gains (Losses) on
Investments and Foreign Currency......................... 1.06 (.99) .09
Total from Investment Operations 1.71 (.36) .43
Less Distributions:
Dividends (from net investment income)..................... (.65) (.63) (.34)
Excess distribution of net investment income .............. (.13) -- --
Distributions (from capital gains)......................... -- -- --
Total Distributions (.65) (.63) (.34)
Net Asset Value at End of Period................................ $10.17 $ 9.11 $10.10
Total Return.................................................... 19.26% (3.60)% 4.47%(c)
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands)................... $14,523 $14,714 $24,309
Ratio of Expenses to Average Net Assets.................... .45% .45% .45%(b)
Ratio of Net Investment Income to Average Net Assets....... 6.66% 6.56% 5.23%(b)
Portfolio Turnover Rate......................................... 9.9% 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>
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, 1995 the Manager served as investment advisor for
such funds with assets totaling approximately $2.8 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, 1995 were approximately $15.7
billion. Invista's address is 1500 Hub Tower, 699 Walnut, Des Moines, Iowa
50309.
<TABLE>
<CAPTION>
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:
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, 1995. The accompanying charts display results for
the life of the Fund through December 31, 1995. 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
International equities provided positive returns for 1995 of just over 10%.
Europe was the star performing region for 1995, rising over 20% compared with a
small gain from Japan and losses in Southeast Asia and Latin America. The
International Securities Portfolio outperformed the average fund for the year on
the basis of large exposures to undervalued European markets which performed
well, and underweightings in Japan and Latin America which did poorly.
Europe was the strongest international region in the world for 1995, up over
20%. Japan was essentially flat, and emerging markets lost 7% paced by Latin
America's 15% drop. The International Securities Portfolio was significantly
overweighted in the top five performing countries in the world and underweighted
in the poorest performers. These weightings were based on relative valuations
with the heaviest overweightings found in the countries carrying the lowest
valuation parameters. The Fund also benefited from being overweighted in
industrial cyclical and consumer durable sectors which experienced earnings and
market value gains resulting from continued economic expansion in Europe.
Emerging markets performed poorly in 1995, and the Fund's small exposure to this
market sector allowed it to avoid the negative returns suffered by emerging
market investors. Finally, we estimate the International Securities Portfolio
experienced a positive 4.4% impact from currencies, while Morgan Stanley Capital
International EAFE's (Europe, Australia and Far East) yearly total was a
positive 1.5%.
Principal Special Markets Fund, Inc.
International Securities Portfolio *
Fund Morgan Stanley Lipper
Total EAFE International
Year Ended December 31 Return Index Index
1,000,000 1,000,000 1,000,000
1993 1,299,450 1,081,100 1,225,000
1994 1,215,602 1,165,101 1,216,303
1995 1,361,697 1,295,826 1,330,757
Total Returns *
As of December 31, 1995
1 Year Since Inception Date 5/7/93 10 Year
12.02% 12.35% --
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 254 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
The U.S. Federal Reserve Board's long-term goal of low inflation and steady
growth appears closer to reality with each passing year. The dismal performance
of 1994 was due to the Fed's actions to slow economic growth and potential
inflation. In 1995, the dramatic turnaround was the result of the markets
recognizing that inflation was well contained at the peak of this economic
cycle. In fact, the most powerful ingredient in calculating inflation--labor
costs--has been deflating. With wage increases holding steady and benefit
packages being trimmed, corporate America has forced workers to work smarter and
harder resulting in increased productivity. This provides products with lower
unit labor costs. We look for the Fed to continue their vigilant fight against
inflation. While ultimately this should be beneficial to all fixed-income
investors, the road to solid returns may be rocky from time to time.
This Fund's success reflects our preference for slightly longer duration assets
than our competitors. We try to keep our duration between 4.5 and 6 years. The
duration as of December 31, 1995, was 4.59 years. Duration measures the
sensitivity of the value of the mortgage-backed securities to changes in
interest rates. In general, if interest rates change one percentage point, the
value will change in the opposite direction by a percentage which equals the
duration.
Principal Special Markets Fund, Inc.
Mortgage-Backed Securities Portfolio *
Lehman Brothers Lipper U.S.
Year Ended Fund Mortgage Mortgage Fund
December 31, Value Index Average
1,000,000 1,000,000 1,000,000
1993 1,044,651 1,032,308 1,033,900
1994 1,006,746 1,015,723 990,786
1995 1,200,601 1,186,333 1,151,591
Total Returns *
As of December 31, 1995
1 Year Since Inception Date 5/7/93 10 Year
19.26% 7.14% --
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 58 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 March 21, 1996, 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 1,186,538 79.25%
Mortgage-Backed Securities Portfolio 1,193,984 82.87%
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, ABA No. 073000228, for credit to: Princor
Financial Services Corporation, Account Number 073-330; for further credit to:
Purchaser's Name and Account Number.
To make subsequent purchases by wire, the investor should instruct the bank to
wire transfer Federal Funds to: Norwest Bank Iowa, N.A., Des Moines, Iowa, ABA
No. 073000228, for credit to: Princor Management Corporation, Account No.
3000499968, for further credit to: Investor's name and fund account number. 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 $1.0 million. The minimum initial
purchase of $1.0 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 $1.0 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 $6.00 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 three business 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.
The Fund will redeem only Portfolio shares for which it has received good
payment. 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, and will
continue until cancelled. If the designated day is not a trading day, the
redemption will occur on the next trading day occurring during that month. If
the next trading day occurs in the following month, the redemption will occur on
the day prior to the designated day. Withdrawal payments will be sent on or
before the third business day following such redemption. The redemption of
shares to make payments under this Plan will reduce and may eventually exhaust
the account.
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 New York, 48 Wall Street, New York, New York 10286, 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., Global Security Services, 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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PART B
PRINCIPAL SPECIAL MARKETS FUND, INC.
INTERNATIONAL SECURITIES PORTFOLIO
MORTGAGE-BACKED SECURITIES PORTFOLIO
Statement of Additional Information
dated May 1, 1996
This Statement of Additional Information provides information about each
Portfolio in addition to the information that is contained in the Prospectus,
dated May 1, 1996.
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectus, a copy of which 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
FV 76B-4
-0-
TABLE OF CONTENTS
Investment Policies and Restrictions .............................. 2
Investments ....................................................... 4
Directors and Officers of the Fund................................. 14
Manager and Sub-Advisor ........................................... 16
Cost of Manager's Services ........................................ 17
Brokerage on Purchases and Sales of Securities .................... 19
Offering Price .................................................... 21
Determination of Net Asset Value .................................. 21
Performance Calculation ........................................... 22
Tax Treatment, Dividends and Distributions ........................ 24
Financial Statements............................................... 25
-1-
INVESTMENT POLICIES AND RESTRICTIONS
The following information supplements the information provided in the Prospectus
under the caption "Investment Objectives, Policies and Restrictions."
INVESTMENT RESTRICTIONS
In implementing the investment policies of the Portfolios, the Fund is subject
to fundamental and nonfundamental restrictions. Nonfundamental restrictions may
be changed by the Board of Directors without shareholder approval. Fundamental
restrictions may only be changed by a vote of the lesser of (i) 67% or more of
the shares represented at a meeting at which more than 50% of the outstanding
shares are represented or (ii) more than 50% of the outstanding shares. The
required shareholder approval shall be effective with respect to a Portfolio if
a majority of the outstanding voting securities of that Portfolio votes to
approve the matter, notwithstanding that the matter has not been approved by a
majority of the outstanding voting securities of the Fund or of any other
Portfolio affected by the matter.
The investment objective and investment policies and restrictions of each
Portfolio discussed in the Prospectus and the Statement of Additional
Information, except for those investment restrictions identified below under the
caption "Fundamental Restrictions," are not fundamental and may be changed by
the Fund's Board of Directors without shareholder approval. Shareholders must be
given 30 days prior written notice before the investment objectives of the
Portfolios may be amended at the discretion of the Board of Directors.
All percentage limitations apply at the time of acquisition of a security, and
any subsequent change in any applicable percentage resulting from changes in the
values or nature of a Portfolio's assets will not require elimination of the
security from the Portfolio.
Fundamental Restrictions. Each of the following restrictions is fundamental and
may not be changed without shareholder approval. Each Portfolio will not (unless
specifically excepted):
(1) With respect to 75% of its total assets, purchase the securities of
any issuer if the purchase would cause more than 5% of the total
assets of the Portfolio to be invested in the securities of any one
issuer (other than securities issued or guaranteed by the United
States Government or its agencies or instrumentalities) or cause more
than 10% of the outstanding voting securities of any one issuer to be
held by the Portfolio.
(2) Borrow money, except (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.
(3) Issue any senior securities as defined in the Investment Company Act
of 1940. For purposes of this restriction, purchasing and selling
securities, currency and futures contracts and options and borrowing
money in accordance with restrictions described herein do not involve
the issuance of a senior security.
(4) Act as an underwriter of securities, except to the extent the
Portfolio may be deemed to be an underwriter in connection with the
sale of securities held in its portfolio.
(5) Concentrate its investments in any particular industry or industries,
except that the Portfolio may invest not more than 25% of the value of
its total assets in a single industry. For purposes of this
restriction, foreign government and supranational issuers are not
considered members of any industry.
(6) Invest in real estate, although it may invest in securities which are
secured by real estate and securities of issuers which invest or deal
in real estate.
(7) Invest in commodities or commodity contracts, but it may purchase and
sell currency and financial futures contracts and options on such
contracts.
(8) Make loans, except that the Portfolio may (i) purchase and hold debt
obligations in accordance with its investment objective and policies,
(ii) enter into repurchase agreements, and (iii) lend its portfolio
securities but not in excess of 33% of the value of its total assets.
The deposit of underlying securities and other assets in escrow and
other collateral arrangements in connection with options, currency and
futures transactions are not deemed to be the making of loans.
Nonfundamental Restrictions. Each of the following restrictions is
nonfundamental and may be changed by the Board of Directors without shareholder
approval. Each Portfolio will not (unless specifically excepted):
(1) Invest more than 15% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven
days. The value of any options purchased in the over-the-counter
market are included as part of this 15% limitation.
(2) Sell securities short (except where the Portfolio holds or has the
right to obtain at no added cost a long position in the securities
sold that equals or exceeds the securities sold short) or purchase any
securities on margin, except it may obtain such short-term credits as
are necessary for the clearance of transactions. The deposit or
payment of margin in connection with options, currency and futures
transactions is not considered the purchase of securities on margin.
(3) Invest in companies for the purpose of exercising control or
management.
(4) Purchase puts, calls, straddles, spreads or any combination thereof if
by reason thereof the value of its aggregate investment in such
classes of securities will exceed 5% of its total assets. Options will
be used solely for hedging purposes; not for speculation.
(5) Invest more than 5% of its assets in initial margin and premiums on
futures contracts and options on such contracts.
(6) Purchase securities of other investment companies if the purchase
would cause more than 10% of its total assets to be invested in
securities of other investment companies or more than 5% of its total
assets to be invested in the securities of any investment company or
would cause the Portfolio to own more than 3% of the outstanding
voting securities of any investment company. These restrictions do not
apply to purchases in connection with a merger, consolidation, or plan
of reorganization. [For purposes of these restrictions, privately
issued collateralized mortgage obligations will not be treated as
investment company securities if issued by "Exemptive Issuers."
Exemptive Issuers are defined as unmanaged, fixed-asset issuers that
(i) invest primarily in mortgage-backed securities, (ii) do not issue
redeemable securities as defined in section 2(a)(32) of the Investment
Company Act of 1940, (iii) operate under general exemptive orders
exempting them from "all provisions of the Investment Company Act of
1940," and (iv) are not registered or regulated under the Investment
Company Act of 1940 as investment companies.]
(7) Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings. The deposit of underlying securities and other assets in
escrow and other collateral arrangements in connection with options,
currency and futures transactions are not deemed to be pledges or
other encumbrances.
(8) Purchase warrants in excess of 5% of its total assets, of which 2% may
be invested in warrants that are not listed on the New York, American
or Toronto Stock Exchanges or the Chicago Board Options Exchange. This
restriction does not apply to warrants included in units or attached
to other securities.
(9) Invest in interests in oil, gas or other mineral exploration or
development programs, although the Portfolio may invest in securities
of issuers which invest in or sponsor such programs.
(10) Purchase securities of any issuer having less than three years'
continuous operation (including operations of any predecessors) if
such purchase would cause the value of the Portfolio's investments in
all such issuers to exceed 5% of the value of its total assets.
(11) Purchase or retain in its portfolio securities of any issuer if those
officers or directors of the Fund or its Manager owning beneficially
more than one-half of 1% (0.5%) of the securities of the issuer
together own beneficially more than 5% of such securities.
(12) Invest in arbitrage transactions.
(13) Invest in mineral leases.
(14) Invest in real estate limited partnership interests.
(15) Invest more than 25% of the value of its total assets (i) in the
securities issued by a single foreign government; or (ii) in
securities issued by supranational issuers.
The Manager will waive its management fee on Portfolio assets invested in
securities of other open-end investment companies and will generally invest only
in those open-end investment companies that have investment policies requiring
investment in securities comparable to those in which the Portfolio invests.
INVESTMENTS
The following information further supplements the discussion of the investment
objectives and policies in the Prospectus under the caption "INVESTMENT
OBJECTIVES, POLICIES AND RESTRICTIONS."
In making selections of equity securities, Invista will use an approach
described broadly as fundamental analysis. Fundamental analysis consists of
three steps. First is the continuing study of basic economic factors in an
effort to conclude what the future general economic climate is likely to be over
the next one to two years. Second, given some conviction as to the likely
economic climate, Invista attempts to identify the prospects for the major
industrial, commercial and financial segments of the economy, by looking at such
factors as demand for products, capacity to produce, operating costs, pricing
structure, marketing techniques, adequacy of raw materials and components,
domestic and foreign competition, and research productivity, to ascertain
prospects for each industry for the near and intermediate term. Finally, Invista
determines what the earnings prospects are for individual companies within each
industry by considering the same types of factors described above. Invista
evaluates these earnings prospects in relation to the current price of the
securities of each company.
Although each Portfolio may pursue the investment practices described under the
captions Restricted Securities, Foreign Securities, Spread Transactions, Options
on Securities and Securities Indices, and Futures Contracts and Options on
Futures Contracts, Currency Contracts, Repurchase Agreements, Lending of
Portfolio Securities and When-Issued and Delayed Delivery Securities, none of
the Portfolios currently intends to commit during the present fiscal year more
than 5% of its net assets to any of the practices, with the exception that the
Mortgage-Backed Securities Portfolio may commit more than 5% of its net assets
in When-Issued and Delayed Delivery Securities and the International Securities
Portfolio's investments in foreign securities will exceed 5% of its net assets
and it may commit more than 5% of its assets to Currency Contracts.
Restricted Securities
Each Portfolio is subject to an investment restriction that limits its
investments in illiquid securities to 15% of its net asset value. In computing
the Portfolio's net asset value per share, illiquid securities are valued at
their fair value as determined in good faith by or under the direction of the
Board of Directors.
Each Portfolio may acquire securities that are subject to legal or contractual
restrictions upon resale. Securities subject to such restrictions ("restricted
securities") are frequently treated as illiquid for purposes of the 15%
restriction. Such securities may be sold only in a public offering with respect
to which a registration statement is in effect under the Securities Act of 1933
("1933 Act") or in a transaction which is exempt from the registration
requirements of that act. One such exemption is provided by Rule 144A under the
1933 Act, pursuant to which certain restricted securities may be sold at a
readily ascertainable price. The Board of Directors has adopted procedures to
determine the liquidity of restricted securities qualifying for Rule 144A
treatment, and any such securities so determined to be liquid will be excluded
when applying the Portfolio's limitation on illiquid securities. To the extent
Rule 144A securities held by a Portfolio should become illiquid because of a
lack of interest on the part of qualified institutional investors, the overall
liquidity of the Portfolio could be adversely affected.
When registration of a restricted security is required, a Portfolio may be
obligated to pay all or a part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the
Portfolio may be permitted to sell the security under an effective registration
statement. If during such a period adverse market conditions were to develop,
the Portfolio might obtain a less favorable price than prevailed when it decided
to sell.
Foreign Securities
Investment in foreign securities presents certain risks, including 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. A Portfolio's investment in foreign securities may also result in
higher custodial costs and the costs associated with currency conversions.
Spread Transactions, Options on Securities and Securities Indices, Futures
Contracts and Options on Futures Contracts, and Currency Contracts
Except as specifically indicated otherwise, each Portfolio may engage in the
practices described under this heading to attempt to hedge market value,
interest rate and currency risks and, in certain cases, to enhance its income.
Spread Transactions
A Portfolio may purchase from securities dealers covered spread options. Such
covered spread options are not presently exchange listed or traded. The purchase
of a spread option gives the Portfolio the right to put, or sell, a security
that it owns at a fixed dollar spread or fixed yield spread in relationship to
another security that the Portfolio does not own, but which is used as a
benchmark. The risk to the Portfolio in purchasing covered spread options is the
cost of the premium paid for the spread option and any transaction costs. In
addition, there is no assurance that closing transactions will be available. The
purchase of spread options can be used to protect the Portfolio against adverse
changes in prevailing credit quality spreads, i.e., the yield spread between
high quality and lower quality securities. The security covering the spread
option will be maintained in a segregated account by the Portfolio's custodian.
A security covered by a spread option is not considered to be "pledged" as that
term is used in the Portfolio's policy limiting the pledging or mortgaging of
assets.
Options on Securities and Securities Indices
The Portfolio may write (sell) and purchase call and put options on securities
in which it may invest and on securities indices based on securities in which
the Portfolio may invest. The Portfolio may write call and put options to
generate additional revenue, and may write and purchase call and put options in
seeking to hedge against a decline in the value of securities owned or an
increase in the price of securities which the Portfolio plans to purchase.
Writing Covered Call and Put Options. When a Portfolio writes a call option, it
gives the purchaser of the option, in return for the premium it receives, the
right to buy from the Portfolio the underlying security at a specified price at
any time before the option expires. When a Portfolio writes a put option, it
gives the purchaser of the option, in return for the premium it receives, the
right to sell to the Portfolio the underlying security at a specified price at
any time before the option expires.
The premium received by a Portfolio, when it writes a put or call option,
reflects, among other factors, the current market price of the underlying
security, the relationship of the exercise price to the market price, the time
period until the expiration of the option and interest rates. The premium will
generate additional income for the Portfolio if the option expires unexercised
or is closed out at a profit. By writing a call, a Portfolio limits its
opportunity to profit from any increase in the market value of the underlying
above the exercise price of the option, but it retains the risk of loss if the
price of the security should decline. By writing a put, a Portfolio assumes the
risk that it may have to purchase the underlying security at a price that may be
higher than its market value at time of exercise.
The Portfolios write only covered options and will comply with applicable
regulatory and exchange cover requirements. A Portfolio will own the underlying
security covered by any outstanding call option that it has written or will be
able to acquire such security through the exercise of conversion privileges on
convertible securities or otherwise at no additional cost. With respect to an
outstanding put option that it has written, each Portfolio will deposit and
maintain with its custodian cash, U.S. Government securities or other liquid
securities with a value at least equal to the exercise price of the option.
Once a Portfolio has written an option, it may terminate its obligation, before
the option is exercised, by effecting a closing transaction, which is
accomplished by the Portfolio's purchasing an option of the same series as the
option previously written. The Portfolio will have a gain or loss depending on
whether the premium received when the option was written exceeds the closing
purchase price plus related transaction costs.
Purchasing Call and Put Options. When a Portfolio purchases a call option, it
receives, in return for the premium it pays, the right to buy from the writer of
the option the underlying security at a specified price at any time before the
option expires. The Portfolio may purchase call options in anticipation of an
increase in the market value of securities that it intends ultimately to buy.
During the life of the call option, the Portfolio would be able to buy the
underlying security at the exercise price regardless of any increase in the
market price of the underlying security. In order for a call option to result in
a gain, the market price of the underlying security must rise to a level that
exceeds the sum of the exercise price, the premium paid and transaction costs.
If the option expires unexercised, the Portfolio will lose the premium paid and
any transaction costs incurred.
When a Portfolio purchases a put option, it receives, in return for the premium
it pays, the right to sell to the writer of the option the underlying security
at a specified price at any time before the option expires. The Portfolio may
purchase put options in anticipation of a decline in the market value of the
underlying security. During the life of the put option, the Portfolio would be
able to sell the underlying security at the exercise price regardless of any
decline in the market price of the underlying security. In order for a put
option to result in a gain, the market price of the underlying security must
decline, during the option period, below the exercise price sufficiently to
cover the premium and transaction costs.
Once a Portfolio has purchased an option, it may close out its position by
selling an option of the same series as the option previously purchased. The
Portfolio will have a gain or loss depending on whether the closing sale price
exceeds the initial purchase price plus related transaction costs.
Options on Securities Indices. Each Portfolio may purchase and sell put and call
options on any securities index based on securities in which the Portfolio may
invest. Securities index options are designed to reflect price fluctuations in a
group of securities or segment of the securities market rather than price
fluctuations in a single security. Options on securities indices are similar to
options on securities, except that the exercise of securities index options
requires cash payments and does not involve the actual purchase or sale of
securities. A Portfolio would engage in transactions in put and call options on
securities indices for the same purposes as it would engage in transactions in
options on securities. When a Portfolio writes call options on securities
indices, it will hold in its portfolio underlying securities which, in the
judgment of Invista, correlate closely with the securities index and which have
a value at least equal to the aggregate amount of the securities index options.
Risks Associated with Options Transactions. An options position may be closed
out only on an exchange which provides a secondary market for an option of the
same series. Although a Portfolio will generally purchase or write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular option, or at any particular time. For some options, no secondary
market on an exchange or elsewhere may exist. If a Portfolio is unable to effect
closing sale transactions in options it has purchased, the Portfolio would have
to exercise its options in order to realize any profit and may incur transaction
costs upon the purchase or sale of underlying securities pursuant thereto. If a
Portfolio is unable to effect a closing purchase transaction for a covered
option that it has written, it will not be able to sell the underlying
securities, or dispose of the assets held in a segregated account, until the
option expires or is exercised. A Portfolio's ability to terminate option
positions established in the over-the-counter market may be more limited than
for exchange-traded options and may also involve the risk that broker-dealers
participating in such transactions might fail to meet their obligations.
A Portfolio's hedging strategy that employs options on a securities index may be
unsuccessful due to imperfect correlation between the securities in the index
and the securities owned by the Portfolio. In addition, if Invista is incorrect
in predicting the direction of stock prices, interest rates and other economic
factors, hedging through the use of options could result in a lower return than
if the Portfolio had not hedged its investments.
Futures Contracts and Options on Futures
Each Portfolio may purchase and sell financial futures contracts and options on
those contracts. Financial futures contracts are commodities contracts based on
financial instruments such as U.S. Treasury bonds or bills or on securities
indices such as the S&P 500 Index. Futures contracts, options on futures
contracts and the commodity exchanges on which they are traded are regulated by
the Commodity Futures Trading Commission ("CFTC"). Through the purchase and sale
of futures contracts and related options, a Portfolio may seek to hedge against
a decline in securities owned by the Portfolio or an increase in the price of
securities which the Portfolio plans to purchase.
Futures Contracts. When a Portfolio sells a futures contract based on a
financial instrument, the Portfolio becomes obligated to deliver that kind of
instrument at a specified future time for a specified price. When a Portfolio
purchases the futures contract, it becomes obligated to take delivery of the
instrument at a specified time and to pay the specified price. In most
instances, these contracts are closed out by entering into an offsetting
transaction before the settlement date, thereby canceling the obligation to make
or take delivery of specific securities. The Portfolio realizes a gain or loss
depending on whether the price of an offsetting purchase plus transaction costs
are less or more than the price of the initial sale or on whether the price of
an offsetting sale is more or less than the price of the initial purchase plus
transaction costs. Although a Portfolio will usually liquidate futures contracts
on financial instruments in this manner, it may instead make or take delivery of
the underlying securities whenever it appears economically advantageous to do
so.
A futures contract based on a securities index provides for the purchase or sale
of a group of securities at a specified future time for a specified price. These
contracts do not require actual delivery of securities, but result in a cash
settlement based upon the difference in value of the index between the time the
contract was entered into and the time it is liquidated, which may be at its
expiration or earlier if it is closed out by entering into an offsetting
transaction.
When a futures contract is purchased or sold a brokerage commission is paid, but
unlike the purchase or sale of a security or option, no price or premium is paid
or received. Instead, an amount of cash or U.S. Government securities, which
varies, but is generally about 5% of the contract amount, is deposited by the
Portfolio with its custodian for the benefit of the futures commission merchant
through which the Portfolio engages in the transaction. This amount is known as
"initial margin." It does not involve the borrowing of funds by the Portfolio to
finance the transaction, but instead represents a "good faith" deposit assuring
the performance of both the purchaser and the seller under the futures contract.
It is returned to the Portfolio upon termination of the futures contract, if all
the Portfolio's contractual obligations have been satisfied.
Subsequent payments to and from the broker, known as "variation margin," are
required to be made on a daily basis as the price of the futures contract
fluctuates, making the long or short positions in the futures contract more or
less valuable, a process known as "marking to market." If the position is closed
out by taking an opposite position prior to the settlement date of the futures
contract, a final determination of variation margin is made, additional cash is
required to be paid to or released by the broker, and the Portfolio realizes a
loss or gain.
In using futures contracts, a Portfolio will seek to establish more certainly
than would otherwise be possible the effective price of or rate of return on
portfolio securities or securities that the Portfolio proposes to acquire. A
Portfolio, for example, may sell futures contracts in anticipation of a rise in
interest rates which would cause a decline in the value of its debt investments.
When this kind of hedging is successful, the futures contracts should increase
in value when the Portfolio's debt securities decline in value and thereby keep
the Portfolio's net asset value from declining as much as it otherwise would. A
Portfolio may also sell futures contracts on securities indices in anticipation
of or during a stock market decline in an endeavor to offset a decrease in the
market value of its equity investments. When a Portfolio is not fully invested
and anticipates an increase in the cost of securities it intends to purchase, it
may purchase financial futures contracts. When increases in the prices of
equities are expected, a Portfolio may purchase futures contracts on securities
indices in order to gain rapid market exposure that may partially or entirely
offset increases in the cost of the equity securities it intends to purchase.
Options on Futures. A Portfolio may also purchase and write call and put options
on futures contracts. A call option on a futures contract gives the purchaser
the right, in return for the premium paid, to purchase a futures contract
(assume a long position) at a specified exercise price at any time before the
option expires. A put option gives the purchaser the right, in return for the
premium paid, to sell a futures contract (assume a short position), for a
specified exercise price, at any time before the option expires.
Upon the exercise of a call, the writer of the option is obligated to sell the
futures contract (to deliver a long position to the option holder) at the option
exercise price, which will presumably be lower than the current market price of
the contract in the futures market. Upon exercise of a put, the writer of the
option is obligated to purchase the futures contract (deliver a short position
to the option holder) at the option exercise price, which will presumably be
higher than the current market price of the contract in the futures market.
However, as with the trading of futures, most options are closed out prior to
their expiration by the purchase or sale of an offsetting option at a market
price that will reflect an increase or a decrease from the premium originally
paid.
Options on futures can be used to hedge substantially the same risks as might be
addressed by the direct purchase or sale of the underlying futures contracts.
For example, if a Portfolio anticipated a rise in interest rates and a decline
in the market value of the debt securities in its portfolio, it might purchase
put options or write call options on futures contracts instead of selling
futures contracts.
If a Portfolio purchases an option on a futures contract, it may obtain benefits
similar to those that would result if it held the futures position itself. But
in contrast to a futures transaction, the purchase of an option involves the
payment of a premium in addition to transaction costs. In the event of an
adverse market movement, however, the Portfolio will not be subject to a risk of
loss on the option transaction beyond the price of the premium it paid plus its
transaction costs.
When a Portfolio writes an option on a futures contract, the premium paid by the
purchaser is deposited with the Portfolio's custodian, and the Portfolio must
maintain with its custodian all or a portion of the initial margin requirement
on the underlying futures contract. The Portfolio assumes a risk of adverse
movement in the price of the underlying futures contract comparable to that
involved in holding a futures position. Subsequent payments to and from the
broker, similar to variation margin payments, are made as the premium and the
initial margin requirement are marked to market daily. The premium may partially
offset an unfavorable change in the value of portfolio securities, if the option
is not exercised, or it may reduce the amount of any loss incurred by the
Portfolio if the option is exercised.
Risks Associated with Futures Transactions. There are a number of risks
associated with transactions in futures contracts and related options. A
Portfolio's successful use of futures contracts is subject to Invista's ability
to predict correctly the factors affecting the market values of the Portfolio's
portfolio securities. For example, if a Portfolio was hedged against the
possibility of an increase in interest rates which would adversely affect debt
securities held by the Portfolio and the prices of those debt securities instead
increased, the Portfolio would lose part or all of the benefit of the increased
value of its securities which it hedged because it would have offsetting losses
in its futures positions. Other risks include imperfect correlation between
price movements in the financial instrument or securities index underlying the
futures contract, on the one hand, and the price movements of either the futures
contract itself or the securities held by the Portfolio, on the other hand. If
the prices do not move in the same direction or to the same extent, the
transaction may result in trading losses.
Prior to exercise or expiration, a position in futures may be terminated only by
entering into a closing purchase or sale transaction. This requires a secondary
market on the relevant contract market. The Portfolio will enter into a futures
contract or related option only if there appears to be a liquid secondary
market. There can be no assurance, however, that such a liquid secondary market
will exist for any particular futures contract or related option at any specific
time. Thus, it may not be possible to close out a futures position once it has
been established. Under such circumstances, the Portfolio would continue to be
required to make daily cash payments of variation margin in the event of adverse
price movements. In such situations, if the Portfolio has insufficient cash, it
may be required to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. In addition, the
Portfolio may be required to perform under the terms of the futures contracts it
holds. The inability to close out futures positions also could have an adverse
impact on a Portfolio's ability effectively to hedge its portfolio.
Most United States futures exchanges limit the amount of fluctuation permitted
in futures contract prices during a single trading day. This daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
Limitations on the Use of Futures and Options on Futures. The Fund intends that
each Portfolio will come within an exclusion from the definition of "commodity
pool operator" provided by CFTC regulations by complying with certain
limitations on the use of futures and related options prescribed by those
regulations.
No Portfolio will purchase or sell futures contracts or options thereon if
immediately thereafter the aggregate initial margin and premiums exceed 5% of
the fair market value of the Portfolio's assets, after taking into account
unrealized profits and unrealized losses on any such contracts it has entered
into (except that in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount generally may be excluded in computing the
5%).
The Portfolios will enter into futures contracts and related options
transactions only for bona fide hedging purposes as permitted by the CFTC and
for other appropriate risk management purposes, if any, which the CFTC may deem
appropriate for mutual funds excluded from the regulations governing commodity
pool operators. A Portfolio is not permitted to engage in speculative futures
trading. Invista will determine that the price fluctuations in the futures
contracts and options on futures used for hedging or risk management purposes
for a Portfolio are substantially related to price fluctuations in securities
held by the Portfolio or which it expects to purchase. In pursuing traditional
hedging activities, each Portfolio will sell futures contracts or acquire puts
to protect against a decline in the price of securities that the Portfolio owns,
and each Portfolio will purchase futures contracts or calls on futures contracts
to protect the Portfolio against an increase in the price of securities the
Portfolio intends to purchase before it is in a position to do so.
When a Portfolio purchases a futures contract, or purchases a call option on a
futures contract, it will comply with applicable cover requirements, such as
maintaining an amount of cash, cash equivalents or short-term high grade fixed
income securities in a segregated account with the Portfolio's custodian, so
that the amount so segregated plus the amount of initial margin held for the
account of its broker equals the market value of the futures contract.
A Portfolio will not maintain open short positions in futures contracts, call
options written on futures contracts, and call options written on securities
indices if, in the aggregate, the value of the open positions (marked to market)
exceeds the current market value of that portion of its securities portfolio
being hedged by those futures and options plus or minus the unrealized gain or
loss on those open positions, adjusted for the historical volatility
relationship between that portion of the portfolio and the contracts (i.e., the
Beta volatility factor). To the extent a Portfolio has written call options on
specific securities in that portion of its portfolio, the value of those
securities will be deducted from the current market value of that portion of the
securities portfolio. If this limitation should be exceeded at any time, the
Portfolio will take prompt action to close out the appropriate number of open
short positions to bring its open futures and options positions within this
limitation.
Currency Contracts
The International Securities Portfolio may engage in currency transactions with
securities dealers, financial institutions or other parties that are deemed
credit worthy by Invista to hedge the value of portfolio securities denominated
in particular currencies against fluctuations in relative value. Currency
transactions include forward currency contracts, exchange-listed currency
futures contracts and options thereon and exchange-listed and over-the-counter
options on currencies. A forward currency contract involves a privately
negotiated obligation to purchase or sell (with delivery generally required) a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon the parties, at a price set at the time of
the contract.
A Portfolio will engage in currency transactions only for hedging and other
non-speculative purposes, including transaction hedging and position hedging.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of a Portfolio, which will generally arise in
connection with the purchase or sale of the Portfolio's portfolio securities or
the receipt of income from them. Position hedging is entering into a currency
transaction with respect to portfolio securities positions denominated or
generally quoted in that currency. A Portfolio will not enter into a transaction
to hedge currency exposure to an extent greater, after netting all transactions
intended wholly or partially to offset other transactions, than the aggregate
market value (at the time of entering into the transaction) of the securities
held by the Portfolio that are denominated or generally quoted in or currently
convertible into the currency, other than with respect to proxy hedging as
described below.
A Portfolio may cross-hedge currencies by entering into transactions to purchase
or sell one or more currencies that are expected to increase or decline in value
relative to other currencies to which the Portfolio has or in which the
Portfolio expects to have exposure. To reduce the effect of currency
fluctuations on the value of existing or anticipated holdings of its securities,
a Portfolio may also engage in proxy hedging. Proxy hedging is often used when
the currency to which a Portfolio's holding is exposed is difficult to hedge
generally or difficult to hedge against the dollar. Proxy hedging entails
entering into a forward contract to sell a currency, the changes in the value of
which are generally considered to be linked to a currency or currencies in which
some or all of a Portfolio's securities are or are expected to be denominated,
and to buy dollars. The amount of the contract would not exceed the market value
of the Portfolios's securities denominated in linked currencies.
Except when a Portfolio enters into a forward contract in connection with the
purchase or sale of a security denominated in a foreign currency or for other
non-speculative purposes, which requires no segregation, a currency contract
that obligates the Portfolio to buy or sell a foreign currency will generally
require the Portfolio to hold an amount of that currency or liquid securities
denominated in that currency equal to the Portfolio's obligations or to
segregate liquid high grade debt obligations equal to the amount of the
Portfolio's obligations.
Currency hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to a Portfolio if the currency being hedged fluctuates in value to a
degree or in a direction that is not anticipated. Further, the risk exists that
the perceived linkage between various currencies may not be present or may not
be present during the particular time that a Portfolio is engaging in proxy
hedging. Currency transactions are also subject to risks different from those of
other portfolio transactions. Because currency control is of great importance to
the issuing governments and influences economic planning and policy, purchases
and sale of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulations or exchange restrictions imposed by governments.
These forms of governmental actions can result in losses to a Portfolio if it is
unable to deliver or receive currency or monies in settlement of obligations and
could also cause hedges it has entered into to be rendered useless, resulting in
full currency exposure as well as incurring transaction costs. Currency exchange
rates may also fluctuate based on factors extrinsic to a country's economy.
Buyers and sellers of currency futures contracts are subject to the same risks
that apply to the use of futures contracts generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures contracts
is relative new, and the ability to establish and close out positions on these
options is subject to the maintenance of a liquid market that may not always be
available.
Repurchase Agreements
Each Portfolio may invest in repurchase agreements. No Portfolio will enter into
repurchase agreements that do not mature within seven days if any such
investment, together with other illiquid securities held by the Portfolio, would
amount to more than 15% of its assets. Repurchase agreements will typically
involve the acquisition by the Portfolio of debt securities from a selling
financial institution such as a bank, savings and loan association or
broker-dealer. A repurchase agreement provides that the Portfolio will sell back
to the seller and that the seller will repurchase the underlying securities at a
specified price and at a fixed time in the future. Repurchase agreements may be
viewed as loans by a Portfolio collateralized by the underlying securities
("collateral"). This arrangement results in a fixed rate of return that is not
subject to market fluctuation during the Portfolio's holding period. Although
repurchase agreements involve certain risks not associated with direct
investments in debt securities, each Portfolio follows procedures established by
the Board of Directors which are designed to minimize such risks. These
procedures include entering into repurchase agreements only with large,
well-capitalized and well-established financial institutions, which have been
approved by the Board of Directors and which Invista believes present minimum
credit risks. In addition, the value of the collateral underlying the repurchase
agreement will always be at least equal to the repurchase price, including
accrued interest. In the event of a default or bankruptcy by a selling financial
institution, the affected Portfolio bears a risk of loss. In seeking to
liquidate the collateral, a Portfolio may be delayed in or prevented from
exercising its rights and may incur certain costs. Further to the extent that
proceeds from any sale upon a default of the obligation to repurchase were less
than the repurchase price, the Portfolio could suffer a loss.
Lending of Portfolio Securities
Each Portfolio may lend its portfolio securities. No Portfolio intends to lend
its portfolio securities if as a result the aggregate of such loans made by the
Portfolio would exceed 33% of its total assets. Portfolio securities may be lent
to unaffiliated broker-dealers and other unaffiliated qualified financial
institutions provided that such loans are callable at any time on not more than
five business days' notice and that cash or government securities equal to at
least 100% of the market value of the securities loaned, determined daily, is
deposited by the borrower with the Portfolio and is maintained each business day
in a segregated account. While such securities are on loan, the borrower will
pay the Portfolio any income accruing thereon, and the Portfolio may invest any
cash collateral, thereby earning additional income, or may receive an agreed
upon fee from the borrower. Borrowed securities must be returned when the loan
is terminated. Any gain or loss in the market price of the borrowed securities
which occurs during the term of the loan inures to the Portfolio and its
shareholders. A Portfolio may pay reasonable administrative, custodial and other
fees in connection with such loans and may pay a negotiated portion of the
interest earned on the cash or government securities pledged as collateral to
the borrower or placing broker. The Fund does not vote securities that have been
loaned, but it will call a loan of securities in anticipation of an important
vote.
When-Issued and Delayed Delivery Securities
Each of the Portfolios may from time to time purchase securities on a
when-issued basis and may purchase or sell securities on a delayed delivery
basis. The price of such a transaction is fixed at the time of the commitment,
but delivery and payment take place on a later settlement date, which may be a
month or more after the date of the commitment. No interest accrues to the
purchaser during this period, and the securities are subject to market
fluctuation, which involves the risk for the purchaser that yields available in
the market at the time of delivery may be higher than those obtained in the
transaction. Each Portfolio will only purchase securities on a when-issued or
delayed delivery basis for the purpose of acquiring the securities and not for
the purpose of investment leverage or to speculate on interest rate changes, but
a Portfolio may sell the securities before the settlement date, if such action
is deemed advisable. At the time a Portfolio makes the commitment to purchase
securities on a when-issued or delayed delivery basis, the Fund will record the
transaction and thereafter reflect the value, each day, of the securities in
determining the net asset value of the Portfolio. Each Portfolio will also
establish a segregated account with its custodian bank in which it will maintain
cash or cash equivalents, United States Government securities and other high
grade debt obligations equal in value to the Portfolio's commitments for such
when-issued or delayed delivery securities. The availability of liquid assets
for this purpose and the effect of asset segregation on a 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 a Portfolio's total assets
that may be committed to transactions in such agreements.
Portfolio Turnover
Portfolio turnover will normally differ for each Portfolio, may vary from year
to year, as well as within a year, and may be affected by portfolio sales
necessary to meet cash requirements for redemptions of Portfolio shares. The
portfolio turnover rate for a Portfolio is calculated by dividing the lesser of
purchases or sales of its portfolio securities during the fiscal year by the
monthly average of the value of its portfolio securities (excluding from the
computation all securities, including options, with maturities at the time of
acquisition of one year or less).
A high rate of portfolio turnover generally involves correspondingly greater
brokerage commission expenses, which must be borne directly by the Portfolio.
Although the rate of portfolio turnover will not be a limiting factor when it is
deemed appropriate to purchase or sell securities for a Portfolio, each
Portfolio intends 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. This requirement may in some cases limit the ability of a Portfolio to
effect certain portfolio transactions.
The Mortgage-Backed Securities 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 in 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 Distribution." 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. The annualized portfolio
turnover rates for each portfolio for its most recent and immediately preceding
fiscal year were as follows: International Securities 46.0% and 37.0%;
Mortgage-Backed Securities 9.9% and 41.8%. The portfolio turnover rate was
higher for the Mortgage-Backed Securities portfolio during the preceding fiscal
year due to fund redemption activity.
DIRECTORS AND OFFICERS OF THE FUND
The following listing discloses the principal occupations and other principal
business affiliations of the Fund's Officers and Directors during the past five
years. All Directors and Officers listed here also hold similar positions with
each of the other mutual funds (currently 26 such mutual funds) sponsored by
Principal Mutual Life Insurance Company. All mailing addresses are The Principal
Financial Group, Des Moines, Iowa 50392, unless otherwise indicated.
David J. Brown, 36, Assistant Counsel. Counsel, Principal Mutual Life Insurance
Company since 1995. Prior thereto, Assistant Counsel 1994-1995; Attorney,
Dickinson, Mackaman, Tyler & Hogan 1986- 1994.
Michael W. Cumings, 44, Assistant Counsel. Counsel, Principal Mutual Life
Insurance Company since 1992. Prior thereto, Assistant Counsel.
@James D. Davis, 62, Director. 4940 Center Court, Bettendorf, Iowa. Attorney.
Vice President, Deere and Company, retired.
@Pamela A. Ferguson, 52, Director, P.O. Box 805, Grinnell, Iowa. President and
Professor of Mathematics, Grinnell College since 1991. Prior thereto, Associate
Provost and Dean of the Graduate School, University of Miami.
*J. Barry Griswell, 47, Director and Chairman of the Board. Senior Vice
President, Principal Mutual Life Insurance Company, since 1991. Prior thereto,
Agency Vice President. Director and Chairman of the Board, Princor Management
Corporation, Princor Financial Services Corporation.
*&Stephan L. Jones, 60, Director and President. Vice President, Principal Mutual
Life Insurance Company. Director and President, Princor Financial Services
Corporation and Princor Management Corporation.
@Barbara A. Lukavsky, 55, Director. 3920 Grand Avenue, Des Moines, Iowa.
President, Lu San, Inc.
Craig L. Bassett, 44, Assistant Treasurer. Director - Treasury, since 1996.
Prior thereto, Associate Treasurer, Principal Mutual Life Insurance Company.
Michael J. Beer, 35, Vice President and Financial Officer. Vice President and
Chief Operating Officer, Princor Financial Services Corporation and Princor
Management Corporation, since 1995; Financial Officer, 1991-1995. Prior thereto,
Accounting Manager, Principal Mutual Life Insurance Company.
Arthur S. Filean, 57, Vice President and Secretary. Vice President, Princor
Financial Services Corporation since 1990. Second Vice President, Principal
Mutual Life Insurance Company 1983-1990.
Ernest H. Gillum, 40, Assistant Secretary. Assistant Vice President, Registered
Products, Princor Financial Services Corporation and Princor Management
Corporation, since 1995; Product Development and Compliance Officer, 1991-1995.
Prior thereto, Registered Investments Products Manager, Principal Mutual Life
Insurance Company.
Michael D. Roughton, 44, Counsel. Counsel, Principal Mutual Life Insurance
Company. Counsel, Invista Capital Management, Inc., Princor Financial Services
Corporation, Principal Investors Corporation and Princor Management Corporation.
Jerry G. Wisgerhof, 58, Treasurer. Vice President and Treasurer, Principal
Mutual Life Insurance Company. Treasurer, Princor Financial Services
Corporation. Vice President and Treasurer, Princor Management Corporation.
@ Member of Audit Committee.
* Directors who are "Interested Persons," as defined in the Investment Company
Act of 1940, as amended.
& Member of the Executive Committee. The Executive Committee is elected by the
Board of Directors and may exercise all the powers of the Board of Directors,
with certain exceptions, when the Board is not in session and shall report its
actions to the Board.
The Fund does not pay fees or other remuneration to its directors and officers.
As of March 21, 1996, Principal Mutual Life Insurance Company, a mutual life
insurance company organized in 1879 under the laws of Iowa, its subsidiaries and
affiliates owned of record and beneficially the following number of shares or
percentage of the outstanding shares of each Portfolio:
No. of Shares % of Outstanding
Portfolio Owned Shares
International Securities Portfolio 1,186,538 79.25%
Mortgage-Backed Securities Portfolio 1,193,984 82.87%
As of March 21, 1996, the Officers and Directors of the Fund as a group owned
less than 1% of the outstanding shares of any Portfolio of the Fund.
As of March 21, 1996, the following shareholders of the Fund owned 5% or
more of the outstanding shares of any Portfolio of the Fund:
Percentage
Name Address of Ownership
Mortgage-Backed Securities Portfolio
Calhoun & Co. P.O. Box 75000 17.13%
Detroit MI 48275
International Securities Portfolio
Via-Bradley College of P.O. Box 13606 6.79%
Engineering Foundation Roanoke VA 24035
MANAGER AND SUB-ADVISOR
The Manager of each Portfolio of the Fund is Princor Management
Corporation, a wholly-owned subsidiary of Princor Financial Services Corporation
which is a wholly-owned subsidiary of Principal Holding Company. Principal
Holding Company is a holding company which is a wholly-owned subsidiary of
Principal Mutual Life Insurance Company, a mutual life insurance company
organized in 1879 under the laws of the state of Iowa. The address of the
Manager is The Principal Financial Group, Des Moines, Iowa 50392-0200. The
Manager was organized on January 10, 1969 and since that time has managed
various mutual funds sponsored by Principal Mutual Life Insurance Company.
The Manager has executed an agreement with Invista Capital Management, Inc.
("Invista") under which Invista has agreed to assume the obligations of the
Manager to provide investment advisory services for each 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, 1995 were approximately $15.7
billion. Invista's address is 1500 Hub Tower, 699 Walnut, Des Moines, Iowa
50309.
Each of the persons affiliated with the Fund who is also an affiliated person of
the Manager or Invista is named below, together with the capacities in which
such person is affiliated with the Fund, Invista and the Manager:
Office Held With Office Held With
Name Each Fund The Manager/Invista
Michael J. Beer Financial Officer Vice President and Financial Officer
(Manager)
Ernest H. Gillum Assistant Secretary Product Development and
Compliance Officer (Manager)
J. Barry Griswell Director and Chairman Director and Chairman of
of the Board the Board (Manager)
Stephan L. Jones Director and Director and President
President (Manager)
Michael D. Roughton Counsel Counsel (Manager; Invista)
Jerry G. Wisgerhof Treasurer Vice President and Treasurer
(Manager)
COST OF MANAGER'S SERVICES
The Manager has entered into a Management Agreement with the Fund pursuant to
which the Manager undertakes to act as investment adviser and manager of each
Portfolio. As compensation for its services and other responsibilities, the
Manager receives a fee computed and accrued daily and payable monthly at an
annual rate of .90% of the average net assets of the International Stock
Portfolio and .45% of the average net assets of the Mortgage-Backed Securities
Portfolio. Under a Sub-Advisory Agreement between Invista and the Manager,
Invista performs all investment advisory responsibilities of the Manager under
the Management Agreement and receives the full amount of the compensation paid
by the Fund to the Manager.
The average net assets of each portfolio on December 31, 1995 and the rate of
the fee for each portfolio for investment management services as provided in the
Management Agreement for the fiscal year then ended were as follows:
Management Fee for
Net Assets as of Fiscal Year Ended
Portfolio December 31, 1995 December 31, 1995
--------- ----------------- -----------------
International Securities $17,251,134 .90%
Mortgage Backed Securities $14,523,048 .45%
Fees paid for investment management services during the periods indicated were
as follows:
Management Fees for Fiscal
Portfolio Year Ended December 31
1995 1994 1993
---- ---- ----
International Securities $146,209 $147,720 $79,588*
Mortgage-Backed Securities $ 61,455 $102,737 $65,608*
* Period from April 26, 1993 (Commencement of Operations) through December 31,
1993.
In addition to investment advisory services, the responsibilities of the Manager
under the Management Agreement include various corporate and administrative
services, including furnishing the services of its officers and employees that
are elected to serve as officers or directors of the Fund; furnishing office
space and all necessary office facilities and equipment for the general
corporate functions of the Fund; furnishing the services of supervisory and
clerical personnel necessary to perform such functions; determining the net
asset value per share for the shares of each Portfolio; acting as and performing
the services of transfer and paying agent (including preparing and distributing
prospectuses, shareholder reports, tax information, notices and proxy
statements, making dividend payments, maintaining shareholder records in an open
account system and processing redemptions, repurchases and remittances to
shareholders); and qualifying Fund shares for sale in various jurisdictions.
In addition, the Manager is responsible for all expenses of each Portfolio
except (i) the management fee paid to it by the Fund, (ii) taxes, including in
case of redeemed shares any initial transfer taxes, (iii) portfolio brokerage
fees and incidental brokerage expenses, (iv) interest and (v) extraordinary
expenses. Since brokerage fees are treated as part of the price paid or received
upon the purchase or sale of securities and since taxes, interest and
extraordinary expenses are expected to be minimal, the management fee should
tend to give shareholders an idea as to the expected level of operating expenses
of the Portfolios in which they invest. This arrangement is different from the
fee structures of most mutual funds where one fee is paid to the investment
adviser for advisory services and many or all other expenses involved with the
operation of the fund are paid directly by the fund.
Under the terms of the Sub-Advisory Agreement with the Manager, Invista has
agreed to reimburse the Manager for all of its costs in performing corporate and
administrative services and to pay all expenses of the Fund that the Manager has
undertaken to pay under the Management Agreement.
The Management Agreement and Sub-Advisory Agreement ("Agreements") were last
approved by the Fund's Board of Directors on September 11, 1995. Both kinds of
agreements provide that each will continue in effect as to any Portfolio from
year to year only so long such continuance is specifically approved at least
annually either by the Board of Directors of the Fund or by a vote of a majority
of the outstanding voting securities of the Fund and in either event by vote of
a majority of the directors of the Fund who are not interested persons of the
Manager, Principal Mutual Life Insurance Company, the Fund and, in the case of
the Sub-Advisory Agreement, Invista cast in person at a meeting called for the
purpose of voting on such approval. Each Agreement may, on sixty days' written
notice, be terminated at any time without the payment of any penalty, by the
Board of Directors of the Fund, by vote of a majority of the outstanding voting
securities of the Fund, as to any Portfolio by the vote of a majority of the
outstanding voting securities of that Portfolio, by the Manager, and in the case
of the Sub-Advisory Agreement by Invista. Each Agreement shall automatically
terminate in the event of its assignment.
The required shareholder approval of any continuance of either Agreement shall
be effective with respect to any Portfolio if a majority of the outstanding
voting securities of that Portfolio votes to approve the continuance,
notwithstanding that the amendment may not have been approved by a majority of
the outstanding voting securities of the Fund or of any other Portfolio affected
by the amendment. If the shareholders of any Portfolio of the Fund fail to
approve the continuance of either Agreement and that failure causes the
Agreement to be invalid with respect to that Portfolio, the Manager and Invista
will continue to act as investment adviser and sub-adviser with respect to that
Portfolio pending the required approval of the Agreement's continuance or of a
new contract or other definitive action, provided that the compensation received
by each of the Manager and Invista, in case of the invalidity of the Management
Agreement, or by Invista, in case of the invalidity of the Sub-Advisory
Agreement, in respect of that Portfolio during such period will be no more than
its actual costs incurred in furnishing services to that Portfolio or the amount
it would have received under the Agreement in respect of that Portfolio,
whichever is less.
The Management Agreement may be amended but such amendment will not be effective
until specifically approved by vote of the holders of a majority of the Fund's
outstanding voting securities and by vote of a majority of the directors of the
Fund who are not interested persons of the Manager, Principal Mutual Life
Insurance Company or the Fund cast in person at a meeting called for the purpose
of voting on such approval. The required shareholder approval of any amendment
to the Management Agreement shall be effective with respect to any Portfolio if
a majority of the outstanding voting securities of that Portfolio votes to
approve the amendment, notwithstanding that the amendment may not have been
approved by a majority of the outstanding voting securities of the Fund or of
any other Portfolio affected by the matter.
The Manager has entered into an Investment Service Agreement with Principal
Mutual Life Insurance Company ("Principal Mutual") whereby Principal Mutual has
agreed to provide on a part-time basis such employees as the parties may agree
are reasonably needed by the Manager and Invista in the performance of
investment advisory services (but not corporate or administrative services)
under the Management Agreement. Principal Mutual also agreed to permit such
employees, in performing services for the Manager and Invista, full access to
statistical and economic data, investment research reports and other
non-confidential materials in the files of its Investment Department. For the
services of Principal Mutual employees, the Manager will reimburse Principal
Mutual for the direct and indirect costs fairly attributable to their services
performed for the Manager, and the Manager will be reimbursed for such costs by
Invista. The Investment Service Agreement contains provisions on continuation
and termination comparable to those described above for the Investment
Management Agreement. The Investment Management Agreement was last approved by
the Funds Board of Directors on September 11, 1995.
BROKERAGE ON PURCHASES AND SALES OF SECURITIES
In distributing brokerage business arising out of the placement of orders for
the purchase and sale of securities for any Portfolio, Invista's objective is to
obtain the best overall terms. In pursuing this objective, Invista considers all
matters it deems relevant, including the breadth of the market in the security,
the price of the security, the financial condition and executing capability of
the broker or dealer and the reasonableness of the commission, if any (for the
specific transaction and on a continuing basis). This may mean in some instances
that Invista will pay a broker commissions that are in excess of the amount of
commission another broker might have charged for executing the same transaction
when Invista believes that such commissions are reasonable in light of (a) the
size and difficulty of transactions (b) the quality of the execution provided
and (c) the level of commissions paid relative to commissions paid by other
institutional investors. (Such factors are viewed both in terms of that
particular transaction and in terms of all transactions that broker executes for
accounts over which Invista exercises investment discretion. Invista may
purchase securities in the over-the-counter market, utilizing the services of
principal market matters, unless better terms can be obtained by purchases
through brokers or dealers, and may purchase securities listed on the New York
Stock Exchange from non-Exchange members in transactions off the Exchange.)
Invista gives consideration in the allocation of business to services performed
by a broker (e.g. the furnishing of statistical data and research generally
consisting of information of the following types: analyses and reports
concerning issuers, industries, economic factors and trends, portfolio strategy
and performance of client accounts). If any such allocation is made, the primary
criteria used will be to obtain the best overall terms for such transactions.
Invista may pay additional commission amounts for research services but
generally does not do so. Such statistical data and research information
received from brokers or dealers may be useful in varying degrees and Invista
may use it in servicing some or all of the accounts it manages. Some statistical
data and research information may not be useful to Invista in managing the
client account, brokerage for which resulted in Invista's receipt of the
statistical data and research information. However, in Invista's opinion, the
value thereof is not determinable and it is not expected that Invista's expenses
will be significantly raised since the receipt of such statistical data and
research information is only supplementary to Invista's own research efforts.
The Manager, or Sub-advisor, allocated portfolio transactions for the
International Securities Portfolio to certain brokers during the fiscal year
ended December 31, 1995 due to research services provided by such brokers. These
portfolio transactions resulted in commissions paid to such brokers by the Fund
in the amount of $536.
Some products and services brokers provide to Invista (such as computer
hardware) may perform an administrative function (e.g. client accounting) as
well as a research function. In such cases, Invista makes a reasonable
allocation of the cost of the product or service according to Invista's use.
Invista pays for the portion of the product or service that consists of research
in commission dollars. Invista pays for the portion that provides it with
administrative or non-research assistance with its own money. Invista's
allocation of such products and services between research and non-research
functions poses a conflict of interest between Invista and its clients.
Annually the officers of Invista call a meeting to determine dollar limits on
business done with brokers who provide useful research information. A list of
products, research and services is kept in Invista's office.
Purchases and sales of debt securities and money market instruments usually will
be principal transactions and will normally be purchased directly from the
issuer or from an underwriter or marketmaker for the securities. Such
transactions are usually conducted on a net basis with a Portfolio paying no
brokerage commissions. Purchases from underwriters will include a commission or
concession paid by the issuer to the underwriter, and the purchases from dealers
serving as marketmakers will include the spread between the bid and asked
prices.
The following table shows the brokerage commissions paid during the periods
indicated. In each year, 100% of the commissions paid by each Fund went to
broker-dealers which provided research, statistical or other factual
information.
Total Brokerage Commissions
Portfolio Paid During Fiscal Year
Ended December 31
1995 1994 1993
---- ---- ----
International Securities $54,987 $47,909 $54,878*
Mortgage-Backed Securities $ -0- $ -0- $ -0-*
* Period from April 26, 1993 (date operations commenced) through December 31,
1993.
Brokerage commissions paid to affiliates during the year ended December
31, 1995 were as follows:
Commissions Paid to Morgan Stanley & Co.
As Percent of Dollar
Total Dollar As Percent of Amount of
Amount Total Commissions Commissionable Transactions
International
Securities Portfolio $2,888 5.25% 5.93%
Morgan Stanley and Co. is affiliated with Morgan Stanley Asset Management, Inc.,
which acts as sub- advisor to two mutual funds included in the Fund Complex.
The Manager acts as investment advisor for other funds sponsored by Principal
Mutual Life Insurance Company. Invista furnishes certain personnel, services and
facilities required by the Manager to assist the Manager in carrying out its
investment advisory responsibilities to such other funds. If, in carrying out
the investment objectives of these entities, occasions arise when purchases or
sales of the same equity securities are to be made for two or more of the
entities at the same time, a computer program will randomly order the
instructions to purchase and, whenever possible, to sell securities. Securities
purchased or proceeds of sales received on each trading day with respect to such
orders shall be allocated to the various entities placing orders on that trading
day by filling each entity's order for that day, in the sequence arrived at by
the random order. If purchases or sales of the same debt securities are to be
made for two or more of the Funds at the same time, the securities will be
purchased or sold proportionately in accordance with the amount of such security
sought to be purchased or sold at that time for each fund.
OFFERING PRICE
Each Portfolio offers its shares continuously through Princor Financial Services
Corporation which is principal underwriter for the Fund and sells shares as
agent for the Fund. Shares are sold at net asset value, without a sales charge.
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 held in a
customer account the establishment of which is attributable to the efforts of
the registered representatives or selected dealer.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares 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 a Portfolio's portfolio
securities will not materially affect the current net asset value of that
Portfolio's 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
Portfolios treat as customary national business holidays those days on which the
New York Stock Exchange is closed for New Year's Day (January 1), Washington's
Birthday (third Monday in February), Good Friday (variable date between March 20
and April 23, inclusive), Memorial Day (last Monday in May), Independence Day
(July 4), Labor Day (first Monday in September), Thanksgiving Day (fourth
Thursday in November) and Christmas Day (December 25). The net asset value per
share for each Portfolio is determined by dividing the value of securities in
the Portfolio's investment portfolio plus all other assets, less all
liabilities, by the number of Portfolio shares outstanding. Securities for which
market quotations are readily available, including options and futures traded on
an exchange, are valued at market value, which is for exchanged-listed
securities, the closing sale price; for United Kingdom-listed securities, the
market-maker provided price; and for non-listed equity securities, the bid
price. Non-listed corporate debt securities and government securities are
usually valued using an evaluated bid price provided by a pricing service. If
closing prices are unavailable for exchange-listed securities, generally the bid
price, or in the case of debt securities an evaluated bid price, is used to
value such securities. When reliable market quotations are not considered to be
readily available, which may be the case, for example, with respect to certain
debt securities, preferred stocks, foreign securities and over-the-counter
options, the investments are valued by using market quotations, prices provided
by market makers, which may include dealers with which the Portfolio has
executed transactions, or estimates of market values obtained from yield data
and other factors relating to instruments or securities with similar
characteristics in accordance with procedures established in good faith by the
Board of Directors. Securities with remaining maturities of 60 days or less are
valued at amortized cost. Other assets are valued at fair value as determined in
good faith through procedures established by the Board of Directors.
Generally, trading in foreign securities is substantially completed each day at
various times prior to the close of the New York Stock Exchange. The values of
such securities used in computing net asset value per share are usually
determined as of such times. Occasionally, events which affect the values of
such securities and foreign currency exchange rates may occur between the times
at which they are generally determined and the close of the New York Stock
Exchange and would therefore not be reflected in the computation of the net
asset values of the Portfolios. 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 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
Portfolio's net asset value could be significantly affected on days when
shareholders have no access to the Portfolio.
PERFORMANCE CALCULATION
Each Portfolio may from time to time advertise its performance in terms of total
return or yield. The figures used for total return and yield are based on the
historical performance of a Portfolio, show the performance of a hypothetical
investment and are not intended to indicate future performance. Total return and
yield will vary from time to time depending upon market conditions, the
composition of a Portfolio's portfolio and operating expenses. These factors and
possible differences in the methods used in calculating performance figures
should be considered when comparing a Portfolio's performance to the performance
of some other kind of investment.
A Portfolio may also include in its advertisements performance rankings and
other performance-related information published by independent statistical
services or publishers, such as Lipper Analytical Services, Weisenberger
Investment Companies Services, Money Magazine, Forbes, The Wall Street Journal,
Baron's and Changing Times, and comparisons of the performance of a Portfolio to
that of various market indices, such as the S&P 500 Index, Dow Jones Industrials
Index, Morgan Stanley Capital International EAFE (Europe, Australia and Far
East) Index and World Index, Lehman Brothers GNMA Index and the Salomon Brothers
Investment Grade Bond Index.
Total Return
When advertising total return figures, each Portfolio will include its average
annual total return for each of the one, five and ten year periods (or if
shorter, the period during which its registration statement has been in effect)
that end on the last day of the most recent calendar quarter. Average annual
total return is computed by calculating the average annual compounded rate of
return over the stated period that would equate an initial $1,000 investment to
the ending redeemable value assuming the reinvestment of all dividends and
capital gains distributions at net asset value. In its advertising, a Portfolio
may also include average annual total return for some other period or cumulative
total return for a specified period. Cumulative total return is computed by
dividing the difference between the ending redeemable value (assuming the
reinvestment of all dividends and capital gains distributions) and the initial
investment by the initial investment.
The following table shows as of December 31, 1995 average annual return for each
of the Portfolios for the periods indicated:
Portfolio 1-Year 5-Year 10-Year
International Securities 12.02 12.35%(1) N/A
Mortgage-Backed Securities 19.26 7.14%(1) N/A
(1) Period beginning May 7, 1993 and ending December 31, 1995.
Yield
The Mortgage-Backed Securities Portfolio calculates its yield by determining its
net investment income per share for a 30-day (or one month) period, annualizing
that figure (assuming semi-annual compounding) and dividing the result by the
net asset value per share for the last day of the same period. The yield for the
Mortgage-Backed Securities Portfolio as of December 31, 1995 was 6.42%.
A Portfolio may include in its advertisements the compounding effect of
reinvested dividends over an extended period of time as illustrated below.
The Power of Compounding
Shareholders who choose to reinvest their distributions get the advantage of
compounding. Here's what happens to a $10,000 investment with monthly income
reinvested at 6 percent, 8 percent and 10 percent over 20 years.
These figures assume no fluctuation in the value of principal. This chart is for
illustration purposes only and is not intended as an indication of the results a
shareholder may receive as a shareholder of a specific Portfolio. The return and
capital value of an investment in a Portfolio will fluctuate so that the value,
when redeemed, may be worth more or less than the original cost.
Years 6% 8% 10%
0 $10,000 $10,000 $10,000
20 $32,071 $46,610 $67,275
A Portfolio may also include in its advertisements an illustration of the impact
of income taxes and inflation on earnings from bank certificates of deposit
("CD's"). The interest rate on the hypothetical CD will be based upon average CD
rates for a stated period as reported in the Federal Reserve Bulletin. The
illustrated annual rate of inflation will be the core inflation rate as measured
by the Consumer Price Index for the 12-month period ended as of the most recent
month prior to the advertisement's publication. The illustrated income tax rate
may include any federal income tax rate applicable to individuals at the time
the advertisement is published. Any such advertisement will indicate that,
unlike bank CD's, an investment in the Fund is not insured nor is there any
guarantee that the Fund's net asset value or any stated rate of return will
remain constant.
An example of a typical calculation included in such advertisements is as
follows: the after-tax and inflation-adjusted earnings on a bank CD, assuming a
$10,000 investment in a six-month bank CD with an annual interest rate of 5.76%
(average six-month CD rate for the month of October, 1995, as reported in the
Federal Reserve Bulletin) and an inflation rate of 2.8% (rate of inflation for
the 12-month period ended October 31, 1995 as measured by the Consumer Price
Index) and an income tax bracket of 28% would be $(67).
($10,000 x 5.76%) / 2 = $288 Interest for six-month period
- 81 Federal income taxes (28%)
- 140 Inflation's impact on invested principal ($10,000 x 2.8%) / 2
($ 67) After-tax, inflation-adjusted earnings
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 amount so distributed to investors. The Tax Reform Act of 1986
imposed an excise tax on mutual funds which fail to distribute net investment
income and capital gains by the end of the calendar year in accordance with the
provisions of the Act. Each Portfolio intends to comply with the Act's
requirements and to avoid this excise tax.
Distributions from the International Securities Portfolio and Mortgage-Backed
Securities Portfolio will generally not be eligible for the 70% corporate
dividends received deduction. All taxable dividends and capital gains are
taxable in the year in which distributed, whether received in cash or reinvested
in additional shares. Dividends declared with a record date in December and paid
in January will be deemed to have been distributed to shareholders in December.
Each Portfolio will inform its shareholders of the amount and nature of their
taxable income dividends and capital gain distributions. Dividends from a
Portfolio's net income and distributions of capital gains, if any, may also be
subject to state and local taxation.
As previously discussed, a Portfolio may invest in futures contracts or options
thereon, index options or options traded on qualified exchanges. For federal
income tax purposes, capital gains and losses on futures contracts or options
thereon, index options or options traded on qualified exchanges are generally
treated as 60% long-term and 40% short-term. In addition, a Portfolio must
recognize any unrealized gains and losses on such positions held at the end of
the fiscal year. A Portfolio may elect out of such tax treatment, however, for a
futures or options position that is part of an "identified mixed straddle" such
as a put option purchased with respect to a portfolio security. Gains and losses
on futures and options included in an identified mixed straddle will be
considered 100% short-term and unrealized gain or loss on such positions will
not be realized at year end. The straddle provisions of the Code may require the
deferral of realized losses to the extent that a Portfolio has unrealized gains
in certain offsetting positions at the end of the fiscal year, and may also
require recharacterization of all or a part of losses on certain offsetting
positions from short-term to long-term, as well as adjustment of the holding
periods of straddle positions.
One of the requirements each Portfolio must meet to qualify as a regulated
investment company under federal tax law is that it must derive less than 30% of
its gross income from gains on the sale or other disposition of securities held
for less than three months. Accordingly, each Portfolio will be restricted in
selling securities held or considered under Code rules to have been held for
less than three months and in engaging in certain transactions to obtain or
close positions in options and futures contracts.
Each Portfolio is required by law under certain circumstances to withhold 31% of
dividends paid to investors who do not furnish their correct taxpayer
identification number (in the case of individuals, their social security
number).
Shareholders should consult their own tax advisors as to the federal, state and
local tax consequences of ownership of shares of the Portfolios in their
particular circumstances.
Special Tax Considerations
International Securities Portfolio
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 Code to
permit its Shareholders to take a credit (or a deduction) for foreign income
taxes paid by the Portfolio. In that case, Shareholders should include in their
report of gross income in their federal income tax returns both cash dividends
received from the Portfolio and also the amount which the Portfolio advises is
their pro rata portion of foreign income taxes paid with respect to, or withheld
from, dividends and interest paid to the Portfolio from its foreign investments.
Shareholders would then be entitled to subtract from their federal income taxes
the amount of such taxes withheld, or treat such foreign taxes as a deduction
from gross income, if that should be more advantageous. As in the case of
individuals receiving income directly from foreign sources, the above-described
tax credit or tax deduction is subject to certain limitations. Shareholders or
prospective shareholders should consult their tax advisors on how these
provisions apply to them.
FINANCIAL STATEMENTS
The financial statements of the Fund for the year ended December 31, 1995
appearing in the Annual Report to shareholders and the report thereon of Ernst &
Young LLP, independent auditors, appearing therein are incorporated by reference
in this Statement of Additional Information. The Annual Report will be furnished
without charge, to investors who request copies of the Statement of Additional
Information.
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PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements included in the Registration Statement
(1) Part A:
Financial Highlights for each of the two years in
the period ended December 31, 1995 and for the
period from May 7, 1993 through December 31, 1993.
(2) Part B:
None
(b) Exhibits
(1a) Articles of Amendment and Restatement
(1b) Articles of Amendment
(2) Bylaws
(5a) Management Agreement
(5b) Investment Service Agreement
(5c) Sub-Advisory Agreement
(6a) Distribution Agreement
(6b) Fund Application
(8a) Domestic Custody Agreement
(8b) Global Custody Agreement
(9a) Dealer Selling Agreement
(10) Opinion of Counsel
(11) Consent of Independent Auditors
(12) Audited Financial Statements as of December
31, 1995, including the Report of Ernst &
Young LLP, independent auditors for the
Registrant.
(13) Investment Letter
(16) Performance Quotations
Item 25. Persons Controlled by or Under Common Control with Depositor
Principal Mutual Life Insurance Company (incorporated as a
mutual life insurance company under the laws of Iowa);
Sponsored the organization of the following mutual funds,
some of which it controls by virtue of owning voting
securities:
Principal Asset Allocation Fund, Inc. (a Maryland
Corporation) 100.0% of shares outstanding owned by Principal
Mutual Life Insurance Company and its separate accounts on
March 21, 1996.
Principal Aggressive Growth Fund, Inc. (a Maryland Corporation)
100.0% of shares outstanding owned by Principal Mutual Life
Insurance Company and its separate accounts on March 21, 1996.
Princor Balanced Fund, Inc. (a Maryland Corporation) 14.10% of
shares outstanding owned by Principal Mutual Life Insurance
Company on March 21, 1996.
Principal Balanced Fund, Inc. (a Maryland Corporation) 100.0% of
shares outstanding owned by Principal Mutual Life Insurance
Company and its separate accounts on March 21, 1996.
Princor Blue Chip Fund, Inc. (a Maryland Corporation) 12.07% of
shares outstanding owned by Principal Mutual Life Insurance
Company on March 21, 1996.
Princor Bond Fund, Inc. (a Maryland Corporation) 1.75% of shares
outstanding owned by Principal Mutual Life Insurance Company on
March 21, 1996.
Principal Bond Fund, Inc. (a Maryland Corporation) 100.0% of
shares outstanding owned by Principal Mutual Life Insurance
Company and its separate accounts on March 21, 1996.
Princor Capital Accumulation Fund, Inc. (a Maryland
Corporation) 43.93% of outstanding shares owned by Principal
Mutual Life Insurance Company on March 21, 1996.
Principal Capital Accumulation Fund, Inc. (a Maryland
Corporation)100.0% of outstanding shares owned by Principal
Mutual Life Insurance Company and its Separate Accounts on
March 21, 1996.
Princor Cash Management Fund, Inc. (a Maryland Corporation) 1.28%
of outstanding shares owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on March 21,
1996.
Princor Emerging Growth Fund, Inc. (a Maryland Corporation) .78%
of shares outstanding owned by Principal Mutual Life Insurance
Company on March 21, 1996
Principal Emerging Growth Fund, Inc. (a Maryland Corporation)
100.0% of shares outstanding owned by Principal Mutual Life
Insurance Company and its Separate Accounts on March 21, 1996.
Princor Government Securities Income Fund, Inc. (a Maryland
Corporation) 0.39% of shares outstanding owned by Principal
Mutual Life Insurance Company on March 21, 1996.
Principal Government Securities Fund, Inc. (a Maryland
Corporation) 100.0% of shares outstanding owned by Principal
Mutual Life Insurance Company and its Separate Accounts on
March 21, 1996.
Princor Growth Fund, Inc. (a Maryland Corporation) 0.68% of
outstanding shares owned by Principal Mutual Life Insurance
Company on March 21, 1996.
Principal Growth Fund, Inc. (a Maryland Corporation) 100.0% of
outstanding shares are owned by Principal Mutual Life Insurance
Company and its Separate Accounts on March 21, 1996.
Princor High Yield Fund, Inc. (a Maryland Corporation) 34.94% of
shares outstanding owned by Principal Mutual Life Insurance
Company on March 21, 1996.
Principal High Yield Fund, Inc. (a Maryland Corporation) 100.0%
of shares outstanding owned by Principal Mutual Life Insurance
Company and its Separate Accounts on March 21, 1996.
Princor Limited Term Bond Fund, Inc. (a Maryland Corporation)
98.02% of shares outstanding owned by Principal Mutual Life
Insurance Company on March 21, 1996.
Principal Money Market Fund, Inc. (a Maryland Corporation) 100.0%
of shares outstanding owned by Principal Mutual Life Insurance
Company and its Separate Accounts on March 21, 1996.
Principal Special Markets Fund, Inc. (a Maryland Corporation)
79.25% of the shares outstanding of the International Securities
Portfolio and 82.87% of the shares outstanding of the
Mortgage-Backed Securities Portfolio were owned by Principal
Mutual Life Insurance Company on March 21, 1996.
Princor Tax-Exempt Bond Fund, Inc. (a Maryland Corporation) 0.60%
of shares outstanding owned by Principal Mutual Life Insurance
Company on March 21, 1996.
Princor Tax-Exempt Cash Management Fund, Inc. (a Maryland
Corporation) 0.90% of shares outstanding owned by Principal
Mutual Life Insurance Company on March 21, 1996.
Princor Utilities Fund, Inc. (a Maryland Corporation) 1.35% of
shares outstanding owned by Principal Mutual Life Insurance
Company on March 21, 1996.
Princor World Fund, Inc. (a Maryland Corporation) 20.19% of
shares outstanding owned by Principal Mutual Life Insurance
Company on March 21, 1996.
Principal World Fund, Inc. (a Maryland Corporation) 100.0% of
shares outstanding owned by Principal Mutual Life Insurance
Company on March 21, 1996.
Subsidiaries organized and wholly-owned by Principal Mutual Life
Insurance Company:
Principal Life Insurance Company (an Iowa Corporation) A general
insurance and annuity company. It is not currently active.
Principal Holding Company (an Iowa Corporation) A holding company
wholly-owned by Principal Mutual Life Insurance Company.
PT Asuransi Jiwa Principal Egalita Indonesia (an Indonesia
Corporation)
Subsidiaries wholly-owned by Principal Holding Company:
a. Petula Associates, Ltd. (an Iowa Corporation) a real
estate development company.
b. Patrician Associates, Inc. (a California Corporation) a real
estate development company.
c. Principal Development Associates, Inc. (a California
Corporation) a real estate development company.
d. Princor Financial Services Corporation (an Iowa
Corporation) a registered broker-dealer.
e. Invista Capital Management, Inc. (an Iowa Corporation) a
registered investment adviser.
f. Principal Marketing Services, Inc. (a Delaware Corporation) a
corporation formed to serve as an interface between marketers
and manufacturers of financial services products.
g. The Principal Financial Group, Inc. (a Delaware corporation)
a general business corporation established in connection with
the new corporate identity. It is not currently active.
h. Delaware Charter Guarantee & Trust Company (a Delaware
Corporation) a nondepository trust company.
i. Principal Securities Holding Corporation (a Delaware
Corporation) a holding company.
j. Principal Health Care, Inc. (an Iowa Corporation) a developer
and administrator of managed care systems.
k. Principal Financial Advisors, Inc. (an Iowa Corporation) a
registered investment advisor.
l. Principal Asset Markets, Inc. (an Iowa Corporation) a
residential mortgage loan broker.
m. Principal Portfolio Services, Inc. (an Iowa Corporation) a
mortgage due diligence company.
n. Principal International, Inc. (an Iowa Corporation) a company
formed for the purpose of international business development.
o. Principal Spectrum Associates, Inc. (a California
Corporation) a real estate development company.
p. Principal Commercial Advisors, Inc. (an Iowa Corporation) a
company that purchases, manages and sells commercial real
estate assets.
q. Principal FC, Ltd. (an Iowa Corporation) a limited purpose
investment corporation.
r. Principal Residential Mortgage, Inc. (an Iowa Corporation) a
residential mortgage loan broker.
s. Equity FC, LTD. (an Iowa Corporation) engaged in investment
transactions including limited partnership and limited
liability companies.
Subsidiaries organized and wholly-owned by Princor Financial Services
Corporation:
a. Princor Management Corporation (an Iowa Corporation) a
registered investment advisor.
b. Principal Investors Corporation (a New Jersey Corporation) a
registered broker-dealer with the Securities Exchange
Commission. It is not currently active.
Subsidiary wholly owned by Principal Securities Holding Corporation:
Principal Financial Securities, Inc. (a Delaware Corporation) an
investment banking and securities brokerage firm.
Subsidiaries organized and wholly-owned by Principal Health Care,
Inc.:
a. Americas Health Plan, Inc. (a Maryland Corporation) a
developer of discount provider networks.
b. PHC Merging Company ( a Florida Corporation) (a Florida
Corporation) it is not currently active.
c. Principal Behavioral Health Care, Inc. (an Iowa Corporation)
a mental and nervous/substance abuse preferred provider
organization.
d. Principal Health Care of Illinois, Inc. (an Illinois
Corporation) a health maintenance organization.
e. Principal Health Care of Nebraska, Inc. (a Nebraska
Corporation) a health maintenance organization.
f. Principal Health Care of Delaware, Inc. (a Delaware
Corporation) a health maintenance organization.
g. Principal Health Care of Georgia, Inc. (a Georgia
Corporation) a health maintenance organization.
h. Principal Health Care of Kansas City, Inc. (a Missouri
Corporation) a health maintenance organization.
i. Principal Health Care of Louisiana, Inc. (a Louisiana
Corporation) a health maintenance organization.
j. Principal Health Care of Florida, Inc. (a Florida
Corporation) a health maintenance organization.
k. United Health Care Services of Iowa, Inc. (an Iowa
Corporation) a health maintenance organization.
l. Principal Health Care of Iowa, Inc. (an Iowa Corporation) a
health maintenance organization.
m. Principal Health Care of Indiana, Inc. (a Delaware
Corporation) a health maintenance organization.
n. Principal Health Care of Pennsylvania, Inc. (a Pennsylvania
Corporation) a health maintenance organization. It is not
currently active.
o. Principal Health Care of Tennessee, Inc. (a Tennessee
Corporation) a health maintenance organization.
p. Principal Health Care of Texas, Inc. ( a Texas Corporation) a
health maintenance organization.
q. Principal Health Care of the Carolinas, Inc. (a North
Carolina Corporation) a health maintenance organization.
r. Principal Health Care, of South Carolina, Inc. (A South
Carolina Corporation) a health maintenance organization.
s. Principal Health Care of South Carolina, Inc. (A South
Carolina Corporation) a health maintenance organization.
Subsidiary owned by Principal Health Care of Delaware, Inc.:
Principal Health Care of the Mid-Atlantic, Inc. (a Virginia
Corporation) a health maintenance organization.
Subsidiaries owned by Principal International, Inc.:
a. Grupo Financiero Principal, S.A. de Seguros de Vida (a
Spanish insurance company).
b. Principal Internacional, S.A. Compania de Seguros (a Mexico
Corporation).
c. Principal International Argentina, S.A. (an Argentina
Corporation).
d. Principal International Asia Limited (formerly known as
Goldchin Champ, Limited) (a Hong Kong Corporation).
e. Principal International de Chile, S.A.
Subsidiary owned by Grupo Financiero Principal, S.A. de Seguros de
Vida:
Agencia de Seguros, SA (an insurance agency). It is currently
dormant.
Subsidiaries owned by Principal International Argentina, S.A.:
a. Ethika, S.A. Administradora de Fondos de Jubilaciones y
Pensiones (an Argentina Corporation).
b. Princor Compania de Seguros de Retiro, S.A. (an Argentina
Corporation).
c. Prinlife Compania de Seguros de Vida, S.A. (an Argentina
Corporation)
d. Jacaranda Administradora de Fondos Jubilaciones y Pensiones,
S.A. (an Argentina Corporation)
Subsidiary owned by Principal owned by Principal International de
Chile, S.A.:
a. Ban Renta Compania de Seguros de Vida Banmedica, S.A.
Item 26. Number of Holders of Securities - As of: February 29, 1996
(1) (2)
Title of Class Number of Holders
Princor Special Markets Fund, Inc.
Common - International Securities Portfolio 13
Common - Mortgage-Backed Securities Portfolio 3
Item 27. Indemnification
Under Section 2-418 of the Maryland General Corporation Law, with respect
to any proceedings against a present or former director, officer, agent or
employee (a "corporate representative") of the Registrant, the Registrant may
indemnify the corporate representative against judgments, fines, penalties, and
amounts paid in settlement, and against expenses, including attorneys' fees, if
such expenses were actually incurred by the corporate representative in
connection with the proceeding, unless it is established that:
(i) The act or omission of the corporate representative was
material to the matter giving rise to the proceeding; and
1. Was committed in bad faith; or
2. Was the result of active and deliberate dishonesty; or
(ii) The corporate representative actually received an improper
personal benefit in money, property, or services; or
(iii) In the case of any criminal proceeding, the corporate
representative had reasonable cause to believe that the act or
omission was unlawful.
If a proceeding is brought by or on behalf of the Registrant, however, the
Registrant may not indemnify a corporate representative who has been adjudged to
be liable to the Registrant. Under the Registrant's Articles of Incorporation
and Bylaws, directors and officers of Registrant are entitled to indemnification
by the Registrant to the fullest extent permitted under Maryland law and the
Investment Company Act of 1940. Reference is made to Article VI, Section 7 of
the Registrant's Articles of Incorporation, Article 12 of Registrant's Bylaws
and Section 2-418 of the Maryland General Corporation Law.
The Registrant has agreed to indemnify, defend and hold the Distributor,
its officers and directors, and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act of 1933, free and harmless from
and against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers, directors or any such controlling person may incur under the
Securities Act of 1933, or under common law or otherwise, arising out of or
based upon any untrue statement of a material fact contained in the Registrant's
registration statement or prospectus or arising out of or based upon any alleged
omission to state a material fact required to be stated in either thereof or
necessary to make the statements in either thereof not misleading, except
insofar as such claims, demands, liabilities or expenses arise out of or are
based upon any such untrue statement or omission made in conformity with
information furnished in writing by the Distributor to the Registrant for use in
the Registrant's registration statement or prospectus: provided, however, that
this indemnity agreement, to the extent that it might require indemnity of any
person who is also an officer or director of the Registrant or who controls the
Registrant within the meaning of Section 15 of the Securities Act of 1933, shall
not inure to the benefit of such officer, director or controlling person unless
a court of competent jurisdiction shall determine, or it shall have been
determined by controlling precedent that such result would not be against public
policy as expressed in the Securities Act of 1933, and further provided, that in
no event shall anything contained herein be so construed as to protect the
Distributor against any liability to the Registrant or to its security holders
to which the Distributor would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence, in the performance of its duties,
or by reason of its reckless disregard of its obligations under this Agreement.
The Registrant's agreement to indemnify the Distributor, its officers and
directors and any such controlling person as aforesaid is expressly conditioned
upon the Registrant being promptly notified of any action brought against the
Distributor, its officers or directors, or any such controlling person, such
notification to be given by letter or telegram addressed to the Registrant.
Item 28. Business or Other Connection of Investment Adviser
A complete list of the officers and directors of the investment adviser,
Princor Management Corporation, and the sub-advisor, Invista Capital Management,
Inc. are set out below. This list includes some of the same people (designated
by an *), who are serving as officers and directors of the Registrant. For these
people the information as set out in the Statement of Additional Information
(See Part B) under the caption "Directors and Officers of the Fund" is
incorporated by reference.
*Michael J. Beer The Principal See Part B
Vice President Financial Group
Des Moines, Iowa
50392
Mary L. Bricker Same Assistant Corporate
Assistant Corporate Secretary
Secretary Principal Mutual Life
Insurance Company
Ray S. Crabtree Same Senior Vice President
Director Principal Mutual Life
Insurance Company
David J. Drury Same Chief Executive Officer
Director and Chairman of the Board
Principal Mutual Life
Insurance Company
Paul N. Germain Same Operations Officer
Operations Officer Princor Financial Services
Corporation
*Ernest H. Gillum Same See Part B
Assistant Vice President
*J. Barry Griswell Same See Part B
Chairman of the Board
and Director
Joyce N. Hoffman Same Vice President and
Vice President and Corporate Secretary
Corporate Secretary Principal Mutual Life
Insurance Company
Theodore M. Hutchison Same Executive Vice President
Director Principal Mutual Life
Insurance Company
*Stephan L. Jones Same See Part B
President and Director
Ronald E. Keller Same Executive Vice President
Director Principal Mutual Life
Insurance Company
Sterling R. Kosmicke Same President and Director
Vice President Invista Capital Management,
Inc.
*Michael D. Roughton Same See Part B
Counsel
Charles E. Rohm Same Executive Vice President
Director Principal Mutual Life
Insurance Company
Dewain A. Sparrgrove Same Vice President -
Vice President Investment Securities
Principal Mutual Life
Insurance Company
*Jerry G. Wisgerhof Same See Part B
Vice President and
Treasurer
Princor Management Corporation serves as investment adviser and dividend
disbursing and transfer agent for, Principal Aggressive Growth Fund, Inc.,
Principal Asset, Allocation Fund, Inc., Principal Balanced Fund, Inc., Principal
Bond Fund, Inc., Principal Capital Accumulation Fund, Inc., Principal Emerging
Growth Fund, Inc., Principal Government Securities Fund, Inc., Principal Growth
Fund, Inc., Principal High Yield Fund, Inc., Principal Money Market Fund, Inc.,
Principal Special Markets Fund, Inc., Principal World Fund, Inc., Princor
Balanced Fund, Inc., Princor Blue Chip Fund, Inc., Princor Bond Fund, Inc.,
Princor Capital Accumulation Fund, Inc., Princor Cash Management Fund, Inc.,
Princor Emerging Growth Fund, Inc., Princor Government Securities Income Fund,
Inc., Princor Growth Fund, Inc., Princor High Yield Fund, Inc., Princor Limited
Term Bond Fund, Inc., Princor Tax-Exempt Bond Fund, Inc., Princor Tax-Exempt
Cash Management Fund, Inc., Princor Utilities Fund, Inc. and Princor World Fund,
Inc. - funds sponsored by Principal Mutual Life Insurance Company. For
information as to the business, profession, vocation or employment of a
substantial nature or each director or officer of each of the Subadvisers,
reference is made to the respective Form ADV, as amended, filed under the
Investment Advisers Act of 1940, each of which is herein incorporated by
reference.
Invista Capital Management, Inc.
D. M. Angstrom The Principal
Vice President Financial Group
Des Moines, Iowa
50392
C. R. Barnes Same
Executive Vice President and
Chief Operating Officer
M. L. Bricker Same Assistant Corporate
Assistant Corporate Secretary, Principal Mutual
Secretary Life Insurance Company
C. A. Green Same
Vice President
M. R. Hamilton Same
Vice President
G. C. Hauser Same Vice President - Commercial
Director Real Estate Underwriting,
Principal Mutual Life Insurance
Company
J. N. Hoffman Same Vice President and Corporate
Vice President and Secretary, Principal Mutual
Corporate Secretary Life Insurance Company
R. E. Keller Same Executive Vice President,
Chairman and Director Principal Mutual Life
Insurance Company
S. R. Kosmicke Same
President and Director
S. D. Opsal Same
Vice President
M. D. Roughton Same See Part B
Counsel
M. J. Schafer Same
Vice President
J. A. Vogel Same
Vice President
D. L. White Same
Executive Vice President,
Treasurer and Director
L. D. Zimpleman Same Vice President - Pension,
Director Principal Mutual Life Insurance
Company
Item 29. Principal Underwriters
(a) Princor Financial Services Corporation, principal underwriter for
Registrant, acts as principal underwriter for, Principal Aggressive Growth Fund,
Inc., Principal Asset Allocation Fund, Inc., Principal Balanced Fund, Inc.,
Principal Bond Fund, Inc., Principal Capital Accumulation Fund, Inc., Principal
Emerging Growth Fund, Inc., Principal Government Securities Fund, Inc.,
Principal Growth Fund, Inc., Principal High Yield Fund, Inc., Principal Money
Market Fund, Inc., Principal Special Markets Fund, Inc., Principal World Fund,
Inc., Princor Balanced Fund, Inc., Princor Blue Chip Fund, Inc., Princor Bond
Fund, Inc., Princor Capital Accumulation Fund, Inc., Princor Cash Management
Fund, Inc., Princor Emerging Growth Fund, Inc., Princor Government Securities
Income Fund, Inc., Princor Growth Fund, Inc., Princor High Yield Fund, Inc.,
Princor Limited Term Bond Fund, Inc., Princor Tax-Exempt Bond Fund, Inc.,
Princor Tax-Exempt Cash Management Fund, Inc., Princor Utilities Fund, Inc.,
Princor World Fund, Inc. and for variable annuity contracts participating in
Principal Mutual Life Insurance Company Separate AccountB, a registered unit
investment trust for retirement plans adopted by public school systems or
certain tax-exempt organizations pursuant to Section403(b) of the Internal
Revenue Code, Section 457 retirement plans, Section 401(a) retirement plans,
certain non- qualified deferred compensation plans and Individual Retirement
Annuity Plans adopted pursuant to Section 408 of the Internal Revenue Code, and
for variable life insurance contracts issued by Principal Mutual Life Insurance
Company Variable Life Separate Account, a registered unit investment trust.
(b) (1) (2) (3)
Positions
and offices Positions and
Name and principal with principal offices with
business address underwriter registrant
J. Barbara Alvord Marketing Officer None
The Principal
Financial Group
Des Moines, IA 50392
Robert W. Baehr Marketing Services None
The Principal Officer
Financial Group
Des Moines, IA 50392
Michael J. Beer Vice President Vice President
The Principal
Financial Group
Des Moines, IA 50392
Mary L. Bricker Assistant Corporate None
The Principal Secretary
Financial Group
Des Moines, IA 50392
Ray S. Crabtree Director None
The Principal
Financial Group
Des Moines, IA 50392
David J. Drury Director None
The Principal
Financial Group
Des Moines, IA 50392
Arthur S. Filean Vice President Vice President
The Principal and Secretary
Financial Group
Des Moines, IA 50392
Paul N. Germain Assistant Vice President- None
The Principal Operations
Financial Group
Des Moines, IA 50392
Ernest H. Gillum Assistant Vice President- Assistant
The Principal Registered Products Secretary
Financial Group
Des Moines, IA 50392
Thomas J. Graf Director None
The Principal
Financial Group
Des Moines, IA 50392
J. Barry Griswell Director and Director and
The Principal Chairman of the Chairman of the
Financial Group Board Board
Des Moines, IA 50392
Joyce N. Hoffman Vice President and None
The Principal Corporate Secretary
Financial Group
Des Moines, IA 50392
Theodore M. Hutchison Director None
The Principal
Financial Group
Des Moines, IA 50392
Stephan L. Jones Director and Director and
The Principal President President
Financial Group
Des Moines, IA 50392
Ronald E. Keller Director Director
The Principal
Financial Group
Des Moines, IA 50392
John R. Lepley Senior Vice None
The Principal President - Marketing
Financial Group and Distribution
Des Moines, IA 50392
Gregg R. Narber Director None
The Principal
Financial Group
Des Moines, IA 50392
Richard H. Neil Director None
The Principal
Financial Group
Des Moines, IA 50392
Layne A. Rasmussen Controller None
The Principal
Financial Group
Des Moines, IA 50392
Charles E. Rohm Director None
The Principal
Financial Group
Des Moines, IA 50392
Michael D. Roughton Counsel Counsel
The Principal
Financial Group
Des Moines, IA 50392
Jean B. Schustek Compliance Officer None
The Principal
Financial Group
Des Moines, IA 50392
Roger C. Stroud Assistant Director- None
The Principal Marketing
Financial Group
Des Moines, IA 50392
Jerry G. Wisgerhof Treasurer Treasurer
The Principal
Financial Group
Des Moines, IA 50392
Peter D. Zornik Arkansas State Director None
The Principal
Financial Group
Des Moines, IA 50392
(c) Inapplicable.
Item 30. Location of Accounts and Records
All accounts, books or other documents of the Registrant are located at the
offices of the Registrant and its Investment Adviser in the Principal Mutual
Life Insurance Company home office building, The Principal Financial Group, Des
Moines, Iowa 50392.
Item 31. Management Services
Inapplicable.
Item 32. Undertakings
Indemnification
Reference is made to Item 27 above, which discusses circumstances under
which directors and officers of the Registrant shall be indemnified by the
Registrant against certain liabilities and expenses incurred by them by reason
of being a director or officer of the Registrant.
Notwithstanding the provisions of Registrant's Articles of Incorporation
and Bylaws, the Registrant hereby makes the following undertaking:
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant, pursuant to the foregoing provisions or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant, in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person of the Registrant, in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue
Shareholder Communications
Registrant hereby undertakes to call a meeting of shareholders for the
purpose of voting upon the question of removal of a director or directors when
requested in writing to do so by the holders of at least 10% of the Registrant's
outstanding shares of common stock and in connection with such meeting to comply
with the provisions of Section 16(c) of the Investment Company Act of 1940
relating to shareholder communications
Delivery of Annual Report to Shareholders
The registrant hereby undertakes to furnish each person to whom a
prospectus is delivered a copy of the registrant's latest annual report to
shareholders, upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Des Moines and State of Iowa, on the
11th day of April, 1996.
PRINCOR SPECIAL MARKETS FUND, INC.
(Registrant)
By S. L. JONES
______________________________________
S. L. Jones, President
and Director
Attest:
ERNEST H. GILLUM
______________________________________
E. H. Gillum
Assistant Secretary
<PAGE>
As required by the Securities Act of 1933, this Amendment to the Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
Signature Title Date
S. L. JONES 4/11/96
_____________________________ President and Director __________
(Principal Executive Officer)
4/11/96
J. B. GRISWELL Director and __________
_____________________________ Chairman of the Board
4/11/96
J. G. WISGERHOF Treasurer (Principal Financial __________
_____________________________ and Accounting Officer)
4/11/96
(J. D. Davis)* Director __________
_____________________________
4/11/96
(P. A. Ferguson)* Director __________
_____________________________
4/11/96
(B. A. Lukavsky)* Director __________
_____________________________
*By S. L. JONES
_____________________________________
S. L. Jones
President and Director
April 11, 1996
______________________________, 1996
Pursuant to Powers of Attorney
Previously Filed or Included
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones and J. B.
Griswell and each of them (with full power to each of them to act alone), the
undersigned's true and lawful attorney-in-fact and agent, with full power of
substitution to each, for and on behalf and in the name of the undersigned, to
execute and file any documents relating to registration under the Securities Act
of 1933 and the Investment Company Act of 1940 with respect to open end
management investment companies currently organized or to be organized in the
future which are sponsored by Principal Mutual Life Insurance Company, and any
and all amendments thereto and reports thereunder with all exhibits and all
instruments necessary or appropriate in connection therewith, each of said
attorneys-in-fact and agents and his or their substitutes being empowered to act
with or without the others or other, and to have full power and authority to do
or cause to be done in the name and on behalf of the undersigned each and every
act and thing necessary or appropriate to be done in order to effectuate the
same, as fully to all intents and purposes as the undersigned might or could do
in person; hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 11th day
of April, 1996.
J. D. Davis
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones and J. B.
Griswell and each of them (with full power to each of them to act alone), the
undersigned's true and lawful attorney-in-fact and agent, with full power of
substitution to each, for and on behalf and in the name of the undersigned, to
execute and file any documents relating to registration under the Securities Act
of 1933 and the Investment Company Act of 1940 with respect to open end
management investment companies currently organized or to be organized in the
future which are sponsored by Principal Mutual Life Insurance Company, and any
and all amendments thereto and reports thereunder with all exhibits and all
instruments necessary or appropriate in connection therewith, each of said
attorneys-in-fact and agents and his or their substitutes being empowered to act
with or without the others or other, and to have full power and authority to do
or cause to be done in the name and on behalf of the undersigned each and every
act and thing necessary or appropriate to be done in order to effectuate the
same, as fully to all intents and purposes as the undersigned might or could do
in person; hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 11th day
of April, 1996.
B. A. Lukavsky
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones and J. B.
Griswell and each of them (with full power to each of them to act alone), the
undersigned's true and lawful attorney-in-fact and agent, with full power of
substitution to each, for and on behalf and in the name of the undersigned, to
execute and file any documents relating to registration under the Securities Act
of 1933 and the Investment Company Act of 1940 with respect to open end
management investment companies currently organized or to be organized in the
future which are sponsored by Principal Mutual Life Insurance Company, and any
and all amendments thereto and reports thereunder with all exhibits and all
instruments necessary or appropriate in connection therewith, each of said
attorneys-in-fact and agents and his or their substitutes being empowered to act
with or without the others or other, and to have full power and authority to do
or cause to be done in the name and on behalf of the undersigned each and every
act and thing necessary or appropriate to be done in order to effectuate the
same, as fully to all intents and purposes as the undersigned might or could do
in person; hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 11th day
of April, 1996.
S. L. Jones
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones and J. B.
Griswell and each of them (with full power to each of them to act alone), the
undersigned's true and lawful attorney-in-fact and agent, with full power of
substitution to each, for and on behalf and in the name of the undersigned, to
execute and file any documents relating to registration under the Securities Act
of 1933 and the Investment Company Act of 1940 with respect to open end
management investment companies currently organized or to be organized in the
future which are sponsored by Principal Mutual Life Insurance Company, and any
and all amendments thereto and reports thereunder with all exhibits and all
instruments necessary or appropriate in connection therewith, each of said
attorneys-in-fact and agents and his or their substitutes being empowered to act
with or without the others or other, and to have full power and authority to do
or cause to be done in the name and on behalf of the undersigned each and every
act and thing necessary or appropriate to be done in order to effectuate the
same, as fully to all intents and purposes as the undersigned might or could do
in person; hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 11th day
of April, 1996.
P. A. Ferguson
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones and J. B.
Griswell and each of them (with full power to each of them to act alone), the
undersigned's true and lawful attorney-in-fact and agent, with full power of
substitution to each, for and on behalf and in the name of the undersigned, to
execute and file any documents relating to registration under the Securities Act
of 1933 and the Investment Company Act of 1940 with respect to open end
management investment companies currently organized or to be organized in the
future which are sponsored by Principal Mutual Life Insurance Company, and any
and all amendments thereto and reports thereunder with all exhibits and all
instruments necessary or appropriate in connection therewith, each of said
attorneys-in-fact and agents and his or their substitutes being empowered to act
with or without the others or other, and to have full power and authority to do
or cause to be done in the name and on behalf of the undersigned each and every
act and thing necessary or appropriate to be done in order to effectuate the
same, as fully to all intents and purposes as the undersigned might or could do
in person; hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 11th day
of April, 1996.
J. B. Griswell
ARTICLES OF AMENDMENT AND
RESTATEMENT OF CHARTER
OF
PRINCIPAL SPECIAL MARKETS FUND, INC.
ARTICLE I
Incorporator
The undersigned Arthur S. Filean and Michael D. Roughton, whose post
office address is The Principal Financial Group, Des Moines, Iowa 50392, being
at least 18 years of age, incorporators, hereby form a corporation under and by
virtue of the laws of Maryland.
ARTICLE II
Name
The name of the corporation is Principal Special Markets Fund, Inc.,
hereinafter called the "Corporation."
ARTICLE III
Corporate Purposes and Powers
The Corporation is formed for the following purposes:
(1) To conduct and carry on the business of an investment company.
(2) To hold, invest and reinvest its assets in securities and other
investments or to hold part or all of its assets in cash.
(3) To issue and sell shares of its capital stock in such amounts and
on such terms and conditions and for such purposes and for such amount or kind
of consideration as may now or hereafter be permitted by law.
(4) To redeem, purchase or acquire in any other manner, hold, dispose
of, resell, transfer, reissue or cancel (all without the vote or consent of the
stockholders of the Corporation) shares of its capital stock, in any manner and
to the extent now or hereafter permitted by law and by these Articles of
Incorporation.
(5) To do any and all additional acts and to exercise any and all
additional powers or rights as may be necessary, incidental, appropriate or
desirable for the accomplishment of all or any of the foregoing purposes.
To carry out all or any part of the foregoing objects as principal, factor,
agent, contractor, or otherwise, either alone or through or in conjunction with
any person, firm, association or corporation, and, in carrying on its business
and for the purpose of attaining or furnishing any of its objects and purposes,
to make and perform any contracts and to do any acts and things, and to exercise
any powers suitable, convenient or proper for the accomplishment of any of the
objects and purposes herein enumerated or incidental to the powers herein
specified, or which at any time may appear conducive to or expedient for the
accomplishment of any such objects and purposes.
To carry out all or any part of the aforesaid objects and purposes, and
to conduct its business in all or any of its branches, in any or all states,
territories, districts and possessions of the United States of America and in
foreign countries; and to maintain offices and agencies in any or all states,
territories, districts and possessions of the United States of America and in
foreign countries.
The foregoing objects and purposes shall, except when otherwise
expressed, be in no way limited or restricted by reference to or inference from
the terms of any other clause of this or any other article of these Articles of
Incorporation or of any amendment thereto, and shall each be regarded as
independent, and construed as powers as well as objects and purposes.
The Corporation shall be authorized to exercise and enjoy all of the
powers, rights and privileges granted to, or conferred upon, corporations of a
similar character by the Maryland General Corporation Law now or hereafter in
force, and the enumeration of the foregoing powers shall not be deemed to
exclude any powers, rights or privileges so granted or conferred.
ARTICLE IV
Principal Office and Resident Agent
The post office address of the principal office of the Corporation in
this State is c/o The Corporation Trust Incorporated, 32 South Street,
Baltimore, Maryland 21202. The name of the resident agent of the Corporation in
this State is The Corporation Trust Incorporated, a corporation of this State,
and the post office address of the resident agent is 32 South Street, Baltimore,
Maryland 21202.
ARTICLE V
Capital Stock
Section 1. Authorized Shares The total number of shares of stock which the
Corporation shall have authority to issue is five hundred million (500,000,000)
shares of the par value of one cent ($.01) each and of the aggregate par value
of five million dollars ($5,000,000). The shares may be issued by the Board of
Directors in such separate and distinct classes and series of classes as the
Board of Directors shall from time to time create and establish. The Board of
Directors shall have full power and authority, in its sole discretion, to
establish and designate classes and series, and to classify or reclassify any
unissued shares in separate classes or series, having such preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption as shall be
fixed and determined from time to time by the Board of Directors. In the event
of establishment of series, each series of a class shall represent interests in
the assets belonging to that class and have identical voting, dividend,
liquidation and other rights and the same terms and conditions as any other
series of the class, except that expenses allocated to the series of a class may
be borne solely by such series as shall be determined by the Board of Director
sand may cause differences in rights as described in the following sentence, the
shares of a series may be converted into shares of another series upon such
terms and conditions as shall be determined by the Board of Directors, and a
series of a class may have exclusive voting rights with respect to matters
affecting only that series. Expenses related to the distribution of, and other
identified expenses that should properly be allocated to, the shares of a
particular class or series may be charged to and borne solely by such class or
series, and the bearing of expenses solely by a class or series may be
appropriately reflected (in a manner determined by the Board of Directors) and
cause differences in the net asset value attributable to, and the dividend,
redemption and liquidation rights of, the shares of each class or series.
Subject to the authority of the Board of Directors to increase and decrease the
number of, and to reclassify the, shares of any class, there are hereby
established two classes of common stock, each comprising the number of shares
and having the designation indicated:
Class Number of Shares
Mortgage-Backed Securities Portfolio 100,000,000
International Securities Portfolio 100,000,000
Notwithstanding the designations herein of classes and series, the Corporation
may refer, in prospectuses and other documents furnished to shareholders, filed
with the Securities and Exchange Commission or used for other purposes, to a
class of shares as a "series" and to a series of shares of a particular class as
a "class."
(a) The Corporation may issue shares of stock in fractional
denominations to the same extent as its whole shares, and shares in fractional
denominations shall be shares of stock having proportionately, to the respective
fractions represented thereby, all the rights of whole shares, including without
limitation, the right to vote, the right to receive dividends and distributions
and the right to participate upon liquidation of the Corporation, but excluding
the right to receive a stock certificate representing fractional shares.
(b) The holders of each share of stock of the Corporation shall be
entitled to one vote for each full share, and a fractional vote for each
fractional share, of stock, irrespective of the class, then standing in his name
on the books of the Corporation. On any matter submitted to a vote of
stockholders, all shares of the Corporation then issued and outstanding and
entitled to vote shall be voted in the aggregate and not by class or series
except that (1) when otherwise expressly required by the Maryland General
Corporation Law or the Investment Company Act of 1940, as amended, shares shall
be voted by individual class or series, and (2) if the Board of Directors, in
its sole discretion, determines that a matter affects the interests of only one
or more particular classes or series, then only the holders of shares of such
affected class or classes or series shall be entitled to vote thereon.
(c) Unless otherwise provided in the resolution of the Board of
Directors providing for the establishment and designation of any new class or
classes, each class of stock of the Corporation shall have the following powers,
preferences and rights, and qualifications, restrictions, and limitations
thereof:
(1) Assets Belonging to a Class. All consideration received by
the Corporation for the issue or sale of shares of a particular class,
together with all assets in which such consideration is invested or
reinvested, all income, earnings, profits and proceeds thereof,
including any proceeds derived from the sale, exchange or liquidation
of such assets, and any funds or payments derived from any reinvestment
of such proceeds in whatever form the same may be, shall irrevocably
belong to that class for all purposes, subject only to the rights of
creditors, and shall be so recorded upon the books and accounts of the
Corporation. Such consideration, assets, income, earnings, profits and
proceeds thereof, including any proceeds derived from the sale,
exchange or liquidation of such assets, and any funds or payments
derived from any reinvestment of such proceeds,in whatever form the
same may be, together with any General Items allocated to that class as
provided in the following sentence, are herein referred to as "assets
belonging to" that class. In the event that there are any assets,
income, earnings, profits, proceeds thereof, funds or payments which
are not readily identifiable as belonging to any particular class
(collectively "General Items"), such General Items shall be allocated
by or under the supervision of the Board of Directors to and among any
one or more of the classes established and designated from time to time
in such manner and on such basis as the Board of Directors, in its sole
discretion, deems fair and equitable, and any General Items so
allocated to a particular class shall belong to that class. Each such
allocation by the Board of Directors shall be conclusive and binding
for all purposes.
(2) Liabilities Belonging to a Class. The assets belonging to
each particular class shall be charged with the liabilities of the
Corporation in respect of that class and all expenses, costs, charges
and reserves attributable to that class, and any general liabilities,
expenses, costs, charges or reserves of the Corporation which are not
readily identifiable as belonging to any particular class shall be
allocated and charged by or under the supervision of the Board of
Directors to and among any one or more of the classes established and
designated from time to time in such manner and on such basis as the
Board of Directors, in its sole discretion, deems fair and equitable.
The liabilities, expenses, costs, charges and reserves allocated and so
charged to a class are herein referred to as "liabilities belonging to"
that class. Expenses related to the shares of a series may be borne
solely by that series (as determined by the Board of Directors). Each
allocation of liabilities, expenses, costs, charges and reserves by the
Board of Directors shall be conclusive and binding for all purposes.
(3) Dividends. The Board of Directors may from time to time
declare and pay dividends or distributions, in stock, or cash, on any
or all classes of stock or series of classes, the amount of such
dividends and property distributions and the payment of them being
wholly in the discretion of the Board of Directors. Dividends may be
declared daily or otherwise pursuant to a standing resolution or
resolutions adopted only once or with such frequency as the Board of
Directors may determine, after providing for
actual and accrued liabilities belonging to that class. All dividends
or distributions on shares of a particular class shall be paid only out
of surplus or other lawfully available assets determined by the Board
of Director as belonging to such class. Dividends and distributions may
vary between the series of a class to reflect differing allocations of
the expenses of each series of that class to such extent and for such
purposes as the Board of Directors may deem appropriate. The Board of
Directors shall have the power, in its sole discretion, to distribute
in any fiscal year as dividends, including dividends designated in
whole or in part as capital gains distributions, amounts sufficient, in
the opinion of the Board of Directors, to enable the Corporation, or
where applicable each class of shares, to qualify as a regulated
investment company under the Internal Revenue Code of 1986, as amended,
or any successor or comparable statute thereto, and regulations
promulgated thereunder, and to avoid liability for the Corporation, or
each class of shares, for Federal income and excise taxes in respect of
that or any other year.
(4) Liquidation. In the event of the liquidation of the
Corporation or of the assets attributable to a particular class, the
shareholders of each class that has been established and designated and
is being liquidated shall be entitled to receive, as a class, when and
as declared by the Board of Directors, the excess of the assets
belonging to that class over the liabilities belonging to that class.
The holders of shares of any class shall not be entitled thereby to any
distribution upon liquidation of any other class. The assets so
distributable to the shareholder of any particular class shall be
distributed among such shareholders according to their respective
rights taking into account the proper allocation of expenses being
borne by each series of that class. The liquidation of assets
attributable to any particular class in which there are shares then
outstanding may be authorized by vote of a majority of the Board of
Directors then in office, subject to the approval of a majority of the
outstanding voting securities of that class, as defined in the
Investment Company Act of 1940, as amended. In the event that there are
any general assets not belonging to any particular class of stock and
available for distribution, such distribution shall be made to holders
of stock of various classes or series in such proportion as the Board
of Directors determines to be fair and equitable, and such
determination by the Board of Directors shall be conclusive and binding
for all purposes.
(5) Redemption. All shares of stock of the Corporation
shall have the redemption rights provided for in Article V, Section 5.
(d) The Corporation's shares of stock are issued and sold, and all
persons who shall acquire stock of the Corporation shall acquire the same,
subject to the condition and understanding that the provisions of the
Corporation's Articles of Incorporation, as from time to time amended, shall be
binding upon them.
Section 2. Quorum Requirements and Voting Rights Except as otherwise
expressly provided by the Maryland General Corporation Law, the presence in
person or by proxy of the holders of one-third of all the shares of the capital
stock of the Corporation outstanding and entitled to vote thereat shall
constitute a quorum at any meeting of the stockholders, except that where the
holders of any class or series are required or permitted to vote as a class or
series, one-third of the aggregate number of shares of that class or series
outstanding and entitled to vote shall constitute a quorum.
Notwithstanding any provision of the Maryland General Corporation Law
requiring a greater proportion than a majority of the votes of all classes or of
any class of the Corporation's stock entitled to be cast in order to take or
authorize any action, any such action may be taken or authorized upon the
concurrence of a majority of the aggregate number of votes entitled to be cast
thereon subject to the applicable laws and regulations as from time to time in
effect or rules or orders of the Securities and Exchange Commission or any
successor thereto.
All shares of stock of this Corporation shall have the voting rights
provided for in Article V, Section 1, paragraph (b).
Section 3. No Preemptive Rights No holder of shares of the capital
stock of the Corporation shall, as such holder, have any right to purchase or
subscribe for any shares of the capital stock of the Corporation which the
Corporation may issue or sell (whether consisting of shares of capital stock
authorized by these Articles of Incorporation, or shares of capital stock of the
Corporation acquired by it after the issue thereof, or other shares) other than
any right which the Board of Directors of the Corporation, in its discretion,
may determine.
Section 4. Determination of Net Asset Value The net asset value of each
shares of the Corporation, or of each class or series, shall be the quotient
obtained by dividing the value of the net assets of the Corporation, or if
applicable of the class or series (being the value of the assets of the
Corporation or of the particular class or attributable to the particular series
less its actual and accrued liabilities exclusive of capital stock and surplus),
by the total number of outstanding shares of the Corporation, the class or the
series, as applicable. Such determination may be made on a class-by-class basis
or made or adjusted on a series-by-series basis, as appropriate, and shall
include any expenses allocated to a specific class or series thereof. The Board
of Directors may adopt procedures for determination of net asset value
consistent with the requirements of applicable statutes and regulations and, so
far as accounting matters are concerned, with generally accepted accounting
principles. The procedures may include, without limitation, procedures for
valuation of the Corporation's portfolio securities and other assets, for
accrual of expenses or creation of reserves and for the determination of the
number of shares issued and outstanding at any given time.
The Corporation may declare, pay and credit as dividends daily the net
income (which may include or give effect to realized and unrealized gains and
losses, as determined in accordance with the Corporation's accounting and
portfolio valuation policies) of the Corporation allocated to any class or
classes or series of the Corporation's stock. If the Board of Directors
determines that the net asset value per share of any such class or series of the
Corporation's stock should remain constant and if the amount so determined for
any day is negative, the Corporation may, without the payment of monetary
compensation but in consideration of the interest of the Corporation and its
stockholders in maintaining a constant net asset value per share of the class or
series, redeem pro rata from all the stockholders of record of shares of the
class or series at the time of such redemption such number of outstanding shares
of the class or series, or fractions thereof, as shall be required to reduce the
aggregate number of outstanding shares of the class or series in order to permit
the net asset value per share of the class or series to remain constant.
Section 5. Redemption and Repurchase of Shares of Capital Stock Any
shareholder may redeem shares of the Corporation for the net asset value of each
class or series thereof by presentation of an appropriate request, together with
the certificates, if any, for such shares, duly endorsed, at the office or
agency designated by the Corporation. Redemptions as aforesaid, or purchases by
the Corporation of its own stock, shall be made in the manner and subject to the
conditions contained in the bylaws or approved by the Board of Directors.
Section 6. Purchase of Shares The Corporation shall be entitled to
purchase shares of any class of its capital stock, to the extent that the
Corporation may lawfully effect such purchase under Maryland General Corporation
Law, upon such terms and conditions and for such consideration as the Board of
Directors shall deem advisable, by agreement with the stockholder at a price not
exceeding the net asset value per share computed in accordance with Section 4 of
this Article.
Section 7. Redemption of Minimum Amounts
(a) If after giving effect to a request for redemption by a stockholder
the aggregate net asset value of his remaining shares of any class or series
will be less than the Minimum Amount then in effect, the Corporation shall be
entitled to require the redemption of the remaining shares of such class or
series owned by such stockholder, upon notice given in accordance with paragraph
(c) of this Section, to the extent that the Corporation may lawfully effect such
redemption under Maryland General Corporation Law.
(b) The term "Minimum Amount" when used herein shall mean that amount
fixed by the Board of Directors from time to time, provided that the Minimum
Amount may not in any event exceed Two and One Half Million Dollars.
(c) If any redemption under paragraph (a) of this Section is upon
notice, the notice shall be in writing personally delivered or deposited in the
mail, at least thirty days prior to such redemption. If mailed, the notice shall
be addressed to the stockholder at his post office address as shown on the books
of the Corporation, and sent by certified or registered mail, postage prepaid.
The price for shares redeemed by the Corporation pursuant to paragraph (a) of
this Section shall be paid in cash in an amount equal to the net asset value of
such shares, computed in accordance with Section 4 of this Article.
Section 8. Mode of Payment Payment by the Corporation for shares of any
class of the capital stock of the Corporation surrendered to it for redemption
shall be made by the Corporation within seven business days of such surrender
out of the funds legally available therefor, provided that the Corporation may
suspend the right of the holders of capital stock of the Corporation to redeem
shares of capital stock and may postpone the right of such holders to receive
payment for any shares when permitted or required to do so by law. Payment of
the redemption or purchase price may be made in cash or by check on current
funds or at the option of the Corporation, wholly or partly in such portfolio
securities of the Corporation as the Corporation may select.
Section 9. Rights of Holders of Shares Purchased or Redeemed The right
of any holder of capital stock of any class or series of the Corporation
purchased or redeemed by the Corporation as provided in this Article to receive
dividends thereon and all other rights of such holder with respect to such
shares shall terminate at the time as of which the purchase or redemption price
of such shares is determined, except the right of such holder to receive (i) the
purchase or redemption price of such shares from the Corporation or its
designated agent and (ii) any dividend or distribution or voting rights to which
such holder has previously become entitled as the record holder of such shares
on the record date for the determination of the stockholders entitled to receive
such dividend or distribution or to vote at the meeting of stockholders.
Section 10. Status of Shares Purchased or Redeemed In the absence of
any specification as to the purpose for which such shares of any class of the
capital stock of the Corporation are redeemed or purchased by it, all shares so
redeemed or purchased shall be deemed to be retired in the sense contemplated by
the laws of the State of Maryland and may be reissued. The number of authorized
shares of capital stock of the Corporation shall not be reduced by the number of
any shares redeemed or purchased by it.
Section 11. Additional Limitations and Powers The following provisions
are inserted for the purpose of defining, limiting and regulating the powers of
the Corporation and of the Board of Directors and stockholders:
(a) Any determination made in good faith and, so far as accounting
matters are involved, in accordance with generally accepted accounting
principles by or pursuant to the direction of the Board of Directors, as to the
amount of the assets, debts, obligations or liabilities of the Corporation, as
to the amount of any reserves or charges set up and the propriety thereof, as to
the time of or purpose for creating such reserves or charges, as to the use,
alteration or cancellation of any reserves or charges (whether or not any debt,
obligation or liability for which such reserves or charges shall have been
created shall have been paid or discharged or shall be then or thereafter
required to be paid or discharged), as to the establishment or designation of
procedures or methods to be employed for valuing any investment or other asset
of the Corporation and as to the value of any investment or other asset, as to
the allocation of any asset of the Corporation to a particular class or classes
or series of the Corporation's stock, as to the funds available for the
declaration of dividends and as to the declaration of dividends, as to the
charging of any liability of the Corporation to a particular class or classes or
series of the Corporation's stock, as to the number of shares of any class or
classes or series of the Corporation's outstanding stock, as to the estimated
expense to the Corporation in connection with purchases or redemptions of its
shares, as to the ability to liquidate investments in orderly fashion, or as to
any other matters relating to the issue, sale, purchase or redemption or other
acquisition or disposition of investments or shares of the Corporation, or in
the determination of the net
asset value per share of shares of any class or series of the Corporation's
stock shall be conclusive and binding for all purposes.
(b) Except to the extent prohibited by the Investment Company Act of
1940, as amended, or rules, regulations or orders thereunder promulgated by the
Securities and Exchange Commission or any successor thereto or by the bylaws of
the Corporation, a director, officer or employee of the Corporation shall not be
disqualified by his position from dealing or contracting with the Corporation,
nor shall any transaction or contract of the Corporation be void or voidable by
reason of the fact that any director, officer or employee or any firm of which
any director, officer or employee is a member, or any corporation of which any
director, officer or employee is a stockholder, officer or director, is in any
way interested in such transaction or contract; provided that in case a
director, or a firm or corporation of which a director is a member, stockholder,
officer or director is so interested, such fact shall be disclosed to or shall
have been known by the Board of Directors or a majority thereof. Nor shall any
director or officer of the Corporation be liable to the Corporation or to any
stockholder or creditor thereof or to any person for any loss incurred by it or
him or for any profit realized by such director or officer under or by reason of
such contract or transaction; provided that nothing herein shall protect any
director or officer of the Corporation against any liability to the Corporation
or to its security holders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office; and provided always that such
contract or transaction shall have been on terms that were not unfair to the
Corporation at the time a which it was entered into. Any director of the
Corporation who is so interested, or who is a member, stockholder, officer or
director of such firm or corporation, may be counted in determining the
existence of a quorum at any meeting of the Board of Directors of the
Corporation which shall authorize any such transaction or contract, with like
force and effect as if he were not such director, or member, stockholder,
officer or director of such firm or corporation.
(c) Specifically and without limitation of the foregoing paragraph (b)
but subject to the exception therein prescribed, the Corporation may enter into
management or advisory, underwriting, distribution and administration contracts,
custodian contracts and such other contracts as may be appropriate.
ARTICLE VI
Directors
Section 1. Initial Board of Directors The number of directors of the
Corporation shall initially be two. The names of the directors who shall hold
office until the first annual meeting of stockholders or until their successors
are duly chosen and qualified are:
Stephan L. Jones
David K. Kauf
Section 2. Number of Directors The number of directors in office may be
changed from time to time in the manner specified in the bylaws of the
Corporation, but this number shall never be less than two.
Section 3. Certain Powers of Board of Directors The business and affairs
of the Corporation shall be managed under the direction of the Board of
Directors, which shall have and may exercise all powers of the Corporation
except those powers which are by law, by these Articles of Incorporation or by
the by-laws of the Corporation conferred upon or reserved to the stockholders.
In addition to its other powers explicitly or implicitly granted under these
Articles of Incorporation, by law or otherwise, the Board of Directors of the
Corporation (a) is expressly authorized to make, alter, amend or repeal bylaws
for the Corporation, (b) is empowered to authorize, without stockholder
approval, the issuance and sale from time to time of shares of capital stock of
the Corporation, whether now or hereafter authorized, in such amounts, for such
amount and kind of consideration and on such terms and conditions as the Board
of Directors shall determine, (c) is empowered to classify or reclassify any
unissued stock, whether now or hereafter authorized, by setting or changing the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption of such stock, and (d) shall have the power from time to time to set
apart out of any assets of the Corporation otherwise available for dividends a
reserve or reserves for taxes or for any other proper purpose or purposes, and
to reduce, abolish or add to any such reserve or reserves from time to time as
said Board of Directors may deem to be in the best interests of the Corporation;
and to determine in its discretion what part of the assets of the Corporation
available for dividends in excess of such reserve or reserves shall be declared
in dividends and paid to the stockholders of the Corporation.
ARTICLE VII
Indemnification
The Corporation shall indemnify its directors, including any director who
serves another corporation, partnership, joint venture, trust or other
enterprise in any capacity at the request of the Corporation, to the maximum
extent permitted by the Maryland General Corporation Law, the Investment Company
Act of 1940 and the bylaws of the Corporation. The Corporation shall indemnify
its officers to the same extent as its directors and to such further extent as
is consistent with law. The Corporation shall indemnify its employees and agents
to the extent provided by its Board of Directors.
ARTICLE VIII
Amendments
The Corporation reserves the right from time to time to make any amendment
of these Articles of Incorporation now or hereafter authorized by law, including
any amendment which alters the contract rights, as expressly set forth in these
Articles of Incorporation, of any outstanding capital stock. "Articles of
Incorporation" or "these Articles of Incorporation" as used herein and in the
bylaws of the Corporation shall be deemed to mean these Articles of
Incorporation as from time to time amended or restated.
ARTICLE IX
Duration
The duration of the Corporation shall be perpetual.
IN WITNESS WHEREOF, the undersigned incorporators of Principal Special
Markets Fund, Inc., have executed the foregoing Articles of Incorporation and
hereby acknowledge the same to be their voluntary act and deed.
Dated the 21st day of May, 1993.
-----------------------------
Arthur S. Filean
-----------------------------
Michael D. Roughton
ARTICLES OF AMENDMENT
OF
PRINCIPAL SPECIAL MARKETS FUND, INC.
Principal Special Markets Fund, Inc., a Maryland Corporation having its
principal office in this state in Baltimore City, Maryland (hereinafter called
the Corporation), hereby certifies to the State Department of Assessments and
Taxation of Maryland, that:
FIRST: The charter of the Corporation is hereby amended by changing
Article V of the Articles of Incorporation so that as amended, said Article
shall be and read as follows:
ARTICLE V
Capital Stock
Section 1. Authorized Shares The total number of shares of stock which the
Corporation shall have authority to issue is five hundred million (500,000,000)
shares of the par value of one cent ($.01) each and of the aggregate par value
of five million dollars ($5,000,000). The shares may be issued by the Board of
Directors in such separate and distinct classes and series of classes as the
Board of Directors shall from time to time create and establish. The Board of
Directors shall have full power and authority, in its sole discretion, to
establish and designate classes and series, and to classify or reclassify any
unissued shares in separate classes or series, having such preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption as shall be
fixed and determined from time to time by the Board of Directors. In the event
of establishment of series, each series of a class shall represent interests in
the assets belonging to that class and have identical voting, dividend,
liquidation and other rights and the same terms and conditions as any other
series of the class, except that expenses allocated to the series of a class may
be borne solely by such series as shall be determined by the Board of Directors
and may cause differences in rights as described in the following sentence, the
shares of a series may be converted into shares of another series upon such
terms and conditions as shall be determined by the Board of Directors, and a
series of a class may have exclusive voting rights with respect to matters
affecting only that series. Expenses related to the distribution of, and other
identified expenses that should properly be allocated to, the shares of a
particular class or series may be charged to and borne solely by such class or
series, and the bearing of expenses solely by a class or series may be
appropriately reflected (in a manner determined by the Board of Directors) and
cause differences in the net asset value attributable to, and the dividend,
redemption and liquidation rights of, the shares of each class or series.
Subject to the authority of the Board of Directors to increase and decrease the
number of, and to reclassify the, shares of any class, there are hereby
established two classes of common stock, each comprising the number of shares
and having the designation indicated:
Class Number of Shares
Mortgage-Backed Securities Portfolio 100,000,000
International Securities Portfolio 100,000,000
Notwithstanding the designations herein of classes and series, the Corporation
may refer, in prospectuses and other documents furnished to shareholders, filed
with the Securities and Exchange Commission or used for other purposes, to a
class of shares as a "series" and to a series of shares of a particular class as
a "class."
(a) The Corporation may issue shares of stock in fractional
denominations to the same extent as its whole shares, and shares in
fractional denominations shall be shares of stock having proportionately,
to the respective fractions represented thereby, all the rights of whole
shares, including without limitation, the right to vote, the right to
receive dividends and distributions and the right to participate upon
liquidation of the Corporation, but excluding the right to receive a stock
certificate representing fractional shares.
(b) The holder of each share of stock of the Corporation shall be
entitled to one vote for each full share, and a fractional vote for each
fractional share, of stock, irrespective of the class or series, then
standing in the holder's name on the books of the Corporation. On any
matter submitted to a vote of stockholders, all shares of the Corporation
then issued and outstanding and entitled to vote shall be voted in the
aggregate and not by class or series except that (1) when otherwise
expressly required by the Maryland General Corporation Law or the
Investment Company Act of 1940, as amended, shares shall be voted by
individual class or series, and (2) if the Board of Directors, in its sole
discretion, determines that a matter affects the interests of only one or
more particular classes or series, then only the holders of shares of such
affected class or classes or series shall be entitled to vote thereon.
(c) Unless otherwise provided in the resolution of the Board of
Directors providing for the establishment and designation of any new class
or classes, each class of stock of the Corporation shall have the
following powers, preferences and rights, and qualifications,
restrictions, and limitations thereof:
(1) Assets Belonging to a Class. All consideration received
by the Corporation for the issue or sale of shares of a particular
class, together with all assets in which such consideration is
invested or reinvested, all income, earnings, profits and proceeds
thereof, including any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived from
any reinvestment of such proceeds in whatever form the same may be,
shall irrevocably belong to that class for all purposes, subject
only to the rights of creditors, and shall be so recorded upon the
books and accounts of the Corporation. Such consideration, assets,
income, earnings, profits and proceeds thereof, including any
proceeds derived from the sale, exchange or liquidation of such
assets, and any funds or payments derived from any reinvestment of
such proceeds,in whatever form the same may be, together with any
General Items allocated to that class as provided in the following
sentence, are herein referred to as "assets belonging to" that
class. In the event that there are any assets, income, earnings,
profits, proceeds thereof, funds or payments which are not readily
identifiable as belonging to any particular class (collectively
"General Items"), such General Items shall be allocated by or under
the supervision of the Board of Directors to and among any one or
more of the classes established and designated from time to time in
such manner and on such basis as the Board of Directors, in its
sole discretion, deems fair and equitable, and any General Items so
allocated to a particular class shall belong to that class. Each
such allocation by the Board of Directors shall be conclusive and
binding for all purposes.
(2) Liabilities Belonging to a Class. The assets belonging to
each particular class shall be charged with the liabilities of the
Corporation in respect of that class and all expenses, costs,
charges and reserves attributable to that class, and any general
liabilities, expenses, costs, charges or reserves of the
Corporation which are not readily identifiable as belonging to any
particular class shall be allocated and charged by or under the
supervision of the Board of Directors to and among any one or more
of the classes established and designated from time to time in such
manner and on such basis as the Board of Directors, in its sole
discretion, deems fair and equitable. The liabilities, expenses,
costs, charges and reserves allocated and so charged to a class are
herein referred to as "liabilities belonging to" that class.
Expenses related to the shares of a series may be borne solely by
that series (as determined by the Board of Directors). Each
allocation of liabilities, expenses, costs, charges and reserves by
the Board of Directors shall be conclusive and binding for all
purposes.
(3) Dividends. The Board of Directors may from time to time
declare and pay dividends or distributions, in stock, or cash, on
any or all classes of stock or series of classes, the amount of
such dividends and property distributions and the payment of them
being wholly in the discretion of the Board of Directors. Dividends
may be declared daily or otherwise pursuant to a standing
resolution or resolutions adopted only once or with such frequency
as the Board of Directors may determine, after providing for actual
and accrued liabilities belonging to that class. All dividends or
distributions on shares of a particular class shall be paid only
out of surplus or other lawfully available assets determined by the
Board of Directors as belonging to such class. Dividends and
distributions may vary between the series of a class to reflect
differing allocations of the expenses of each series of that class
to such extent and for such purposes as the Board of Directors may
deem appropriate. The Board of Directors shall have the power, in
its sole discretion, to distribute in any fiscal year as dividends,
including dividends designated in whole or in part as capital gains
distributions, amounts sufficient, in the opinion of the Board of
Directors, to enable the Corporation, or where applicable each
class of shares, to qualify as a regulated investment company under
the Internal Revenue Code of 1986, as amended, or any successor or
comparable statute thereto, and regulations promulgated thereunder,
and to avoid liability for the Corporation, or each class of
shares, for Federal income and excise taxes in respect of that or
any other year.
(4) Liquidation. In the event of the liquidation of the
Corporation or of the assets attributable to a particular class,
the shareholders of each class that has been established and
designated and is being liquidated shall be entitled to receive, as
a class, when and as declared by the Board of Directors, the excess
of the assets belonging to that class over the liabilities
belonging to that class. The holders of shares of any class shall
not be entitled thereby to any distribution upon liquidation of any
other class. The assets so distributable to the shareholder of any
particular class shall be distributed among such shareholders
according to their respective rights taking into account the proper
allocation of expenses being borne by each series of that class.
The liquidation of assets attributable to any particular class in
which there are shares then outstanding may be authorized by vote
of a majority of the Board of Directors then in office, subject to
the approval of a majority of the outstanding voting securities of
that class, as defined in the Investment Company Act of 1940, as
amended. In the event that there are any general assets not
belonging to any particular class of stock and available for
distribution, such distribution shall be made to holders of stock
of various classes or series in such proportion as the Board of
Directors determines to be fair and equitable, and such
determination by the Board of Directors shall be conclusive and
binding for all purposes.
(5) Redemption. All shares of stock of the Corporation shall
have the redemption rights provided for in Article V, Section 5.
(d) The Corporation's shares of stock are issued and sold, and all
persons who shall acquire stock of the Corporation shall acquire the same,
subject to the condition and understanding that the provisions of the
Corporation's Articles of Incorporation, as from time to time amended,
shall be binding upon them.
Section 2. Quorum Requirements and Voting Rights Except as
otherwise expressly provided by the Maryland General Corporation Law, the
presence in person or by proxy of the holders of one-third of all the
shares of the capital stock of the Corporation outstanding and entitled to
vote thereat shall constitute a quorum at any meeting of the stockholders,
except that where the holders of any class or series are required or
permitted to vote as a class or series, one-third of the aggregate number
of shares of that class or series outstanding and entitled to vote shall
constitute a quorum.
Notwithstanding any provision of the Maryland General Corporation
Law requiring a greater proportion than a majority of the votes of all
classes or of any class of the Corporation's stock entitled to be cast in
order to take or authorize any action, any such action may be taken or
authorized upon the concurrence of a majority of the aggregate number of
votes entitled to be cast thereon subject to the applicable laws and
regulations as from time to time in effect or rules or orders of the
Securities and Exchange Commission or any successor thereto.
All shares of stock of this Corporation shall have the voting
rights provided for in Article V, Section 1, paragraph (b).
Section 3. No Preemptive Rights No holder of shares of the capital
stock of the Corporation shall, as such holder, have any right to purchase
or subscribe for any shares of the capital stock of the Corporation which
the Corporation may issue or sell (whether consisting of shares of capital
stock authorized by these Articles of Incorporation, or shares of capital
stock of the Corporation acquired by it after the issue thereof, or other
shares) other than any right which the Board of Directors of the
Corporation, in its discretion, may determine.
Section 4. Determination of Net Asset Value The net asset value of
each share of the Corporation, or of each class or series, shall be the
quotient obtained by dividing the value of the net assets of the
Corporation, or if applicable of the class or series (being the value of
the assets of the Corporation or of the particular class or attributable
to the particular series less its actual and accrued liabilities exclusive
of capital stock and surplus), by the total number of outstanding shares
of the Corporation, the class or the series, as applicable. Such
determination may be made on a class-by-class basis or made or adjusted on
a series-by-series basis, as appropriate, and shall include any expenses
allocated to a specific class or series thereof. The Board of Directors
may adopt procedures for determination of net asset value consistent with
the requirements of applicable statutes and regulations and, so far as
accounting matters are concerned, with generally accepted accounting
principles. The procedures may include, without limitation, procedures for
valuation of the Corporation's portfolio securities and other assets, for
accrual of expenses or creation of reserves and for the determination of
the number of shares issued and outstanding at any given time.
The Corporation may declare, pay and credit as dividends daily the
net income (which may include or give effect to realized and unrealized
gains and losses, as determined in accordance with the Corporation's
accounting and portfolio valuation policies) of the Corporation allocated
to any class or classes or series of the Corporation's stock. If the Board
of Directors determines that the net asset value per share of any such
class or series of the Corporation's stock should remain constant and if
the amount so determined for any day is negative, the Corporation may,
without the payment of monetary compensation but in consideration of the
interest of the Corporation and its stockholders in maintaining a constant
net asset value per share of the class or series, redeem pro rata from all
the stockholders of record of shares of the class or series at the time of
such redemption such number of outstanding shares of the class or series,
or fractions thereof, as shall be required to reduce the aggregate number
of outstanding shares of the class or series in order to permit the net
asset value per share of the class or series to remain constant.
Section 5. Redemption and Repurchase of Shares of Capital Stock Any
shareholder may redeem shares of the Corporation for the net asset value
of each class or series thereof by presentation of an appropriate request,
together with the certificates, if any, for such shares, duly endorsed, at
the office or agency designated by the Corporation. Redemptions as
aforesaid, or purchases by the Corporation of its own stock, shall be made
in the manner and subject to the conditions contained in the bylaws or
approved by the Board of Directors.
Section 6. Purchase of Shares The Corporation shall be entitled to
purchase shares of any class or series of its capital stock, to the extent
that the Corporation may lawfully effect such purchase under Maryland
General Corporation Law, upon such terms and conditions and for such
consideration as the Board of Directors shall deem advisable, by agreement
with the stockholder at a price not exceeding the net asset value per
share computed in accordance with Section 4 of this Article.
Section 7. Redemption of Minimum Amounts
(a) If after giving effect to a request for redemption by a
stockholder the aggregate net asset value of his remaining shares of any
class or series will be less than the Minimum Amount then in effect, the
Corporation shall be entitled to require the redemption of the remaining
shares of such class or series owned by such stockholder, upon notice
given in accordance with paragraph (c) of this Section, to the extent that
the Corporation may lawfully effect such redemption under Maryland General
Corporation Law.
(b) The term "Minimum Amount" when used herein shall mean that
amount fixed by the Board of Directors from time to time, provided that
the Minimum Amount may not in any event exceed Two and One Half Million
Dollars.
(c) If any redemption under paragraph (a) of this Section is upon
notice, the notice shall be in writing personally delivered or deposited
in the mail, at least thirty days prior to such redemption. If mailed, the
notice shall be addressed to the stockholder at his post office address as
shown on the books of the Corporation, and sent by certified or registered
mail, postage prepaid. The price for shares redeemed by the Corporation
pursuant to paragraph (a) of this Section shall be paid in cash in an
amount equal to the net asset value of such shares, computed in accordance
with Section 4 of this Article.
Section 8. Mode of Payment Payment by the Corporation for shares of
any class of the capital stock of the Corporation surrendered to it for
redemption shall be made by the Corporation within seven business days of
such surrender out of the funds legally available therefor, provided that
the Corporation may suspend the right of the holders of capital stock of
the Corporation to redeem shares of capital stock and may postpone the
right of such holders to receive payment for any shares when permitted or
required to do so by law. Payment of the redemption or purchase price may
be made in cash or by check on current funds or at the option of the
Corporation, wholly or partly in such portfolio securities of the
Corporation as the Corporation may select.
Section 9. Rights of Holders of Shares Purchased or Redeemed The
right of any holder of capital stock of any class or series of the
Corporation purchased or redeemed by the Corporation as provided in this
Article to receive dividends thereon and all other rights of such holder
with respect to such shares shall terminate at the time as of which the
purchase or redemption price of such shares is determined, except the
right of such holder to receive (i) the purchase or redemption price of
such shares from the Corporation or its designated agent and (ii) any
dividend or distribution or voting rights to which such holder has
previously become entitled as the record holder of such shares on the
record date for the determination of the stockholders entitled to receive
such dividend or distribution or to vote at the meeting of stockholders.
Section 10. Status of Shares Purchased or Redeemed In the absence
of any specification as to the purpose for which such shares of any class
of the capital stock of the Corporation are redeemed or purchased by it,
all shares so redeemed or purchased shall be deemed to be retired in the
sense contemplated by the laws of the State of Maryland and may be
reissued. The number of authorized shares of capital stock of the
Corporation shall not be reduced by the number of any shares redeemed or
purchased by it.
Section 11. Additional Limitations and Powers The following
provisions are inserted for the purpose of defining, limiting and
regulating the powers of the Corporation and of the Board of Directors and
stockholders:
(a) Any determination made in good faith and, so far as accounting
matters are involved, in accordance with generally accepted accounting
principles by or pursuant to the direction of the Board of Directors, as
to the amount of the assets, debts, obligations or liabilities of the
Corporation, as to the amount of any reserves or charges set up and the
propriety thereof, as to the time of or purpose for creating such reserves
or charges, as to the use, alteration or cancellation of any reserves or
charges (whether or not any debt, obligation or liability for which such
reserves or charges shall have been created shall have been paid or
discharged or shall be then or thereafter required to be paid or
discharged), as to the establishment or designation of procedures or
methods to be employed for valuing any investment or other asset of the
Corporation and as to the value of any investment or other asset, as to
the allocation of any asset of the Corporation to a particular class or
classes or series of the Corporation's stock, as to the funds available
for the declaration of dividends and as to the declaration of dividends,
as to the charging of any liability of the Corporation to a particular
class or classes or series of the Corporation's stock, as to the number of
shares of any class or classes or series of the Corporation's outstanding
stock, as to the estimated expense to the Corporation in connection with
purchases or redemptions of its shares, as to the ability to liquidate
investments in orderly fashion, or as to any other matters relating to the
issue, sale, purchase or redemption or other acquisition or disposition of
investments or shares of the Corporation, or in the determination of the
net asset value per share of shares of any class or series of the
Corporation's stock shall be conclusive and binding for all purposes.
(b) Except to the extent prohibited by the Investment Company Act
of 1940, as amended, or rules, regulations or orders thereunder
promulgated by the Securities and Exchange Commission or any successor
thereto or by the bylaws of the Corporation, a director, officer or
employee of the Corporation shall not be disqualified by his position from
dealing or contracting with the Corporation, nor shall any transaction or
contract of the Corporation be void or voidable by reason of the fact that
any director, officer or employee or any firm of which any director,
officer or employee is a member, or any corporation of which any director,
officer or employee is a stockholder, officer or director, is in any way
interested in such transaction or contract; provided that in case a
director, or a firm or corporation of which a director is a member,
stockholder, officer or director is so interested, such fact shall be
disclosed to or shall have been known by the Board of Directors or a
majority thereof. Nor shall any director or officer of the Corporation be
liable to the Corporation or to any stockholder or creditor thereof or to
any person for any loss incurred by it or him or for any profit realized
by such director or officer under or by reason of such contract or
transaction; provided that nothing herein shall protect any director or
officer of the Corporation against any liability to the Corporation or to
its security holders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his office; and provided always that
such contract or transaction shall have been on terms that were not unfair
to the Corporation at the time a which it was entered into. Any director
of the Corporation who is so interested, or who is a member, stockholder,
officer or director of such firm or corporation, may be counted in
determining the existence of a quorum at any meeting of the Board of
Directors of the Corporation which shall authorize any such transaction or
contract, with like force and effect as if he were not such director, or
member, stockholder, officer or director of such firm or corporation.
(c) Specifically and without limitation of the foregoing paragraph
(b) but subject to the exception therein prescribed, the Corporation may
enter into management or advisory, underwriting, distribution and
administration contracts, custodian contracts and such other contracts as
may be appropriate.
SECOND: The board of directors of the Corporation April 14, 1993, duly and
unanimously adopted a resolution approving the amendment described herein.
THIRD: No stock entitled to be voted on the proposed amendment was
outstanding or subscribed for at the time the board of directors adopted the
resolution.
FOURTH: The board of directors believes the resolution is in the best
interests of the corporation.
FIFTH: The Articles of Amendment shall become effective on the 21st day of
May, 1993.
IN WITNESS WHEREOF, Principal Special Markets Fund, Inc. has caused these
presents to be signed in its name and on its behalf by its President as attested
by its Assistant Secretary on May 3, 1993.
Principal Special Markets Fund, Inc.
By Stephan L. Jones
President
Attest
Arthur S. Filean
Secretary
The UNDERSIGNED, President of Principal Special Markets Fund, Inc., who
executed on behalf of said corporation the foregoing Articles of Amendment, of
which this certificate is made a part, hereby acknowledges, in the name on
behalf of said corporation, the foregoing Articles of Amendment to be the
corporate act of said corporation and further certifies that, to the best of his
knowledge, information and belief, the matters and facts set forth therein with
respect to the approval thereof are true in all material respects, under the
penalties of perjury.
Stephan L. Jones
President, Principal Special
Markets Fund, Inc.
BYLAWS
OF
PRINCIPAL SPECIAL MARKETS FUND, INC.
ARTICLE 1
Name, Fiscal Year
1.01 The name of this corporation shall be Principal Special Markets Fund,
Inc., Inc. Except as otherwise from time to time provided by the board of
directors, the fiscal year of the corporation shall begin January 1 and end
December 31.
ARTICLE 2
Stockholders' Meetings
2.01 Place of Meetings. All meetings of the stockholders shall be held at
such place within or without the State of Maryland, as is stated in the notice
of meeting.
2.02 Annual Meetings. The Board of Directors of the Fund shall determine
whether or not an annual meeting of stockholders shall be held. In the event
that an annual meeting of stockholders is held, such meeting shall be held on
the first Tuesday after the first Monday of April in each year or on such other
day during the 31-day period following the first Tuesday after the first Monday
of April as the directors may determine.
2.03 Special Meetings. Special meetings of the stockholders shall be held
whenever called by the chairman of the board, the president or the board of
directors, or when requested in writing by 10% of the Fund's outstanding shares.
2.04 Notice of Stockholders' Meetings. Notice of each stockholders' meeting
stating the place, date and hour of the meeting and the purpose or purposes for
which the meeting is called shall be given by mailing such notice to each
stockholder of record at his address as it appears on the records of the
corporation not less than 10 nor more than 90 days prior to the date of the
meeting. Any meeting at which all stockholders entitled to vote are present
either in person or by proxy or of which those not present have waived notice in
writing shall be a legal meeting for the transaction of business notwithstanding
that notice has not been given as herein provided.
2.05 Quorum. Except as otherwise expressly required by law, these bylaws or
the Articles of Incorporation, as from time to time amended, at any meeting of
the stockholders the presence in person or by proxy of the holders of one-third
of the shares of capital stock of the Corporation issued and outstanding and
entitled to vote, shall constitute a quorum, but a lesser interest may adjourn
any meeting from time to time and the meeting may be held as adjourned without
further notice. When a quorum is present at any meeting a majority of the stock
represented thereat shall decide any question brought before such meeting unless
the question is one upon which by express provision of law or of these bylaws or
the Articles of Incorporation a larger or different vote is required, in which
case such express provision shall govern.
2.06 Proxies and Voting Stockholders of record may vote at any meeting
either in person or by written proxy signed by the stockholder or by the
stockholder's duly authorized attorney-in-fact dated not more than eleven months
before the date of exercise, which shall be filed with the Secretary of the
meeting before being voted. Each stockholder shall be entitled to one vote for
each share of stock held, and to a fraction of a vote equal to any fractional
share held."
2.07 Stock Ledger. The Corporation shall maintain at the office of the
stock transfer agent of the Corporation, or at the office of any successor
thereto as stock transfer agent of the Corporation, an original stock ledger
containing the names and addresses of all stockholders and the number of shares
of each class held by each stockholder. Such stock ledger may be in written form
or any other form capable of being converted into written form within a
reasonable time for visual inspection.
ARTICLE 3
Board of Directors
3.01 Number, Service. The Corporation shall have a Board of Directors
consisting of not less than two and no more than fifteen members. The number of
Directors to constitute the whole board within the limits above-stated shall be
fixed by the Board of Directors. The Directors may be chosen (i) by stockholders
at any annual meeting of stockholders held for the purpose of electing directors
or at any meeting held in lieu thereof, or at any special meeting called for
such purpose, or (ii) by the Directors at any regular or special meeting of the
Board to fill a vacancy on the Board as provided in these bylaws and Maryland
General Corporation Law. Each director should serve until the next annual
meeting of shareholders and until a successor is duly qualified and elected,
unless sooner displaced.
3.02 Powers. The board of directors shall be responsible for the entire
management of the business of the Corporation. In the management and control of
the property, business and affairs of the Corporation the board of directors is
hereby vested with all the powers possessed by the corporation itself so far as
this designation of authority is not inconsistent with the laws of the State of
Maryland, but subject to the limitations and qualifications contained in the
Articles of Incorporation and in these bylaws.
3.03 Executive Committee and Other Committees. The board of directors may
elect from its members an executive committee of not less than three which may
exercise certain powers of the board of directors when the board is not in
session pursuant to Maryland law. The executive committee may make rules for the
holding and conduct of its meetings and keeping the records thereof, and shall
report its action to the board of directors.
The board of directors may elect from its members such other committees
from time to time as it may desire. The number composing such committees and the
powers conferred upon them shall be determined by the board of directors at its
own discretion.
3.04 Meetings. Regular meetings of the board of directors may be held in
such places within or without the State of Maryland, and at such times as the
board may from time to time determine, and if so determined, notices thereof
need not be given. Special meetings of the board of directors may be held at any
time or place whenever called by the president or a majority of the directors,
notice thereof being given by the secretary or the president, or the directors
calling the meeting, to each director. Special meetings of the board of
directors may also be held without formal notice provided all directors are
present or those not present have waived notice thereof.
3.05 Quorum. A majority of the members of the board of directors from time
to time in office but in no event not less than one-third of the number
constituting the whole board shall constitute a quorum for the transaction of
business provided, however, that where the Investment Company Act of 1940
requires a different quorum to transact business of a specific nature, the
number of directors so required shall constitute a quorum for the transaction of
such business.
A lesser number may adjourn a meeting from time to time and the meeting may
be held without further notice. When a quorum is present at any meeting a
majority of the members present thereat shall decide any question brought before
such meeting except as otherwise expressly required by law, the Articles of
Incorporation or these bylaws.
3.06 Action by Directors Other than at a Meeting. Any action required or
permitted to be taken at any meeting of the Board of Directors, or of any
committee thereof, may be taken without a meeting, if a written consent to such
action is signed by all members of the Board of Directors or such committee, as
the case may be, and such written consent is filed with the minutes of
proceedings of the Board of Directors or committee.
3.07 Holding of Meetings by Conference Telephone Call. At any regular or
special meeting, members of the Board of Directors or any committee thereof may
participate by conference telephone or similar communications equipment by means
of which all persons participating in the meeting can hear each other.
Participation in a meeting pursuant to this Section shall constitute presence in
person at such meeting.
ARTICLE 4
Officers
4.01 Selection. The officers of the corporation shall be a president, one
or more vice presidents, a secretary and a treasurer. The board of directors
may, if it so determines, also elect a chairman of the board. All officers shall
be elected by the board of directors and shall serve at the pleasure of the
board. The same person may hold more than one office except the offices of
president and vice president.
4.02 Eligibility. The chairman of the board, if any, and the president
shall be directors of the corporation. Other officers need not be directors.
4.03 Additional Officers and Agents. The board of directors may appoint one
or more assistant treasurers, one or more assistant secretaries and such other
officers or agents as it may deem advisable, and may prescribe the duties
thereof.
4.04 Chairman of the Board of Directors. The chairman of the board, if any,
shall preside at all meetings of the board of directors at which he is present.
He shall have such other authority and duties as the board of directors shall
from time to time determine.
4.05 The President. The president shall be the chief executive officer of
the corporation; he shall have general and active management of the business,
affairs and property of the corporation, and shall see that all orders and
resolutions of the board of directors are carried into effect. He shall preside
at meetings of stockholders, and of the board of directors unless a chairman of
the board has been elected and is present.
4.06 The Vice Presidents. The vice presidents shall respectively have such
powers and perform such duties as may be assigned to them by the board of
directors or the president. In the absence or disability of the president, the
vice presidents, in the order determined by the board of directors, shall
perform the duties and exercise the powers of the president.
4.07 The Secretary. The secretary shall keep accurate minutes of all
meetings of the stockholders and directors, and shall perform all duties
commonly incident to his office and as provided by law and shall perform such
other duties and have such other powers as the board of directors shall from
time to time designate. In his absence an assistant secretary or secretary pro
tempore shall perform his duties.
4.08 The Treasurer. The treasurer shall, subject to the order of the board
of directors and in accordance with any arrangements for performance of services
as custodian, transfer agent or disbursing agent approved by the board, have the
care and custody of the money, funds, securities, valuable papers and documents
of the corporation, and shall have and exercise under the supervision of the
board of directors all powers and duties commonly incident to his office and as
provided by law. He shall keep or cause to be kept accurate books of account of
the corporation's transactions which shall be subject at all times to the
inspection and control of the board of directors. He shall deposit all funds of
the corporation in such bank or banks, trust company or trust companies or such
firm or firms doing a banking business as the board of directors shall
designate. In his absence, an assistant treasurer shall perform his duties.
ARTICLE 5
Vacancies
5.01 Removals. The stockholders may at any meeting called for the purpose,
by vote of the holders of a majority of the capital stock issued and outstanding
and entitled to vote, remove from office any director and, unless the number of
directors constituting the whole board is accordingly decreased, elect a
successor. To the extent consistent with the Investment Company Act of 1940, the
board of directors may by vote of not less than a majority of the directors then
in office remove from office any director, officer or agent elected or appointed
by them and may for misconduct remove any thereof elected by the stockholders.
5.02 Vacancies. If the office of any director becomes or is vacant by
reason of death, resignation, removal, disqualification, an increase in the
authorized number of directors or otherwise, the remaining directors may by vote
of a majority of said directors choose a successor or successors who shall hold
office for the unexpired term; provided that vacancies on the board of directors
may be so filled only if, after the filling of the same, at least two-thirds of
the directors then holding office would be directors elected to such office by
the stockholders at a meeting or meetings called for the purpose. In the event
that at any time less than a majority of the directors were so elected by the
stockholders, a special meeting of the stockholders shall be called forthwith
and held as promptly as possible and in any event within sixty days for the
purpose of electing an entire new board of directors.
ARTICLE 6
Certificates of Stock
6.01 Certificates. The board of directors may adopt a policy of not issuing
certificates except in extraordinary situations as may be authorized from time
to time by an officer of the Corporation. If such a policy is adopted, a
stockholder may obtain a certificate or certificates of the capital stock of the
Corporation owned by such stockholder only if the stockholder demonstrates a
specific reason for needing a certificate. If issued, the certificate shall be
in such form as shall, in conformity to law, be prescribed from time to time by
the board of directors. Such certificates shall be signed by the chairman of the
board of directors or the president or a vice president and by the treasurer or
an assistant treasurer or the secretary or an assistant secretary. If such
certificates are countersigned by a transfer agent or registrar other than the
Corporation or an employee of the Corporation, the signatures of the
aforementioned officers upon such certificates may be facsimile. In case any
officer or officers who have signed, or whose facsimile signature or signatures
have been used on, any such certificate or certificates shall cease to be such
officer or officers of the Corporation, whether because of death, resignation or
otherwise, before such certificate or certificates have been delivered by the
Corporation, such certificate or certificates may nevertheless be adopted by the
Corporation and be issued and delivered as though the person or persons who
signed such certificate or certificates or whose facsimile signature or
signatures have been used thereon had not ceased to be such officer or officers
of the Corporation.
6.02 Replacement of Certificates. The board of directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost or
destroyed. When authorizing such issue of a new certificate or certificates, the
board of directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost or destroyed certificate or
certificates, or its legal representative, to advertise the same in such manner
as it shall require and/or to give the corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the corporation
with respect to the certificate alleged to have been lost or destroyed.
6.03 Stockholder Open Accounts. The corporation may maintain or cause to be
maintained for each stockholder a stockholder open account in which shall be
recorded such stockholder's ownership of stock and all changes therein, and
certificates need not be issued for shares so recorded in a stockholder open
account unless requested by the stockholder and such request is approved by an
officer.
6.04 Transfers. Transfers of stock for which certificates have been issued
will be made only upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, whereupon the
Corporation will issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction on its books. Transfers of stock
evidenced by open account authorized by Section 6.03 will be made upon delivery
to the Corporation or the transfer agent of the Corporation of instructions for
transfer or evidence of assignment or succession, in each case executed in such
manner and with such supporting evidence as the Corporation or transfer agent
may reasonably require.
6.05 Closing Transfer Books. The transfer books of the stock of the
corporation may be closed for such period (not to exceed 20 days) from time to
time in anticipation of stockholders' meetings or the declaration of dividends
as the directors may from time to time determine.
6.06 Record Dates. The board of directors may fix in advance a date, not
exceeding ninety days preceding the date of any meeting of stockholders, or the
date for the payment of any dividend, or the date for the allotment of rights,
or the date when any change or conversion or exchange of capital stock shall go
into effect, or a date in connection with obtaining any consent or for any other
lawful purpose, as a record date for the determination of the stockholders
entitled to notice of, and to vote at, any such meeting, and any adjournment
thereof, or entitled to receive payment of any such dividend, or to any such
allotment of rights, or to exercise the rights in respect of any such change,
conversion or exchange of capital stock, or to give such consent, and in such
case such stockholders and only such stockholders as shall be stockholders of
record on the date as fixed shall be entitled to such notice of, and to vote at,
such meeting, and any adjournment thereof, or to receive payment of such
dividend, or to receive such allotment of rights, or to exercise such rights, or
to give such consent, as the case may be, notwithstanding any transfer of any
stock on the books of the Corporation after any such record date fixed as
aforesaid.
6.07 Registered Ownership. The Corporation shall be entitled to recognize
the exclusive right of a person registered on its books as the owner of shares
to receive dividends, and to vote as such owner and shall not be bound to
recognize any equitable or other claim to or interest in such share or shares on
the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of the State of
Maryland.
ARTICLE 7
Notices
7.01 Manner of Giving. Whenever under the provisions of the statutes or of
the Articles of Incorporation or of these bylaws notice is required to be given
to any director, committee member, officer or stockholder, it shall not be
construed to mean personal notice, but such notice may be given, in the case of
stockholders, in writing, by mail, by depositing the same in a United States
post office or letter box, in a postpaid sealed wrapper, addressed to each
stockholder at such address as it appears on the books of the corporation, or,
in default to other address, to such stockholder at the General Post Office in
the City of Baltimore, Maryland, and, in the case of directors, committee
members and officers, by telephone, or by mail or by telegram to the last
business address known to the secretary of the corporation, and such notice
shall be deemed to be given at the time when the same shall be thus mailed or
telegraphed or telephoned.
7.02 Waiver. Whenever any notice is required to be given under the
provisions of the statutes or of the Articles of Incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE 8
General Provisions
8.01 Disbursement of Funds. All checks, drafts, orders or instructions for
the payment of money and all notes of the corporation shall be signed by such
officer or officers or such other person or persons as the board of directors
may from time to time designate.
8.02 Voting Stock in Other Corporations. Unless otherwise ordered by the
board of directors, any officer shall have full power and authority to attend
and act and vote at any meeting of stockholders of any corporation in which this
corporation may hold stock, and at any such meeting may exercise any and all the
rights and powers incident to the ownership of such stock. Any officer of this
corporation may execute proxies to vote shares of stock of other corporations
standing in the name of this corporation.
8.03 Execution of Instruments. Except as otherwise provided in these
bylaws, all deeds, mortgages, bonds, contracts, stock powers and other
instruments of transfer, reports and other instruments may be executed on behalf
of the corporation by the president or any vice president or by any other
officer or agent authorized to act in such matters, whether by law, the Articles
of Incorporation, these bylaws, or any general or special authorization of the
board of directors. If the corporate seal is required, it shall he affixed by
the secretary or an assistant secretary.
8.04 Seal. The corporate seal shall have inscribed thereon the name of the
corporation, the year of its incorporation and the words "Corporate Seal,
Maryland." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
ARTICLE 9
Regulations
9.01 Investment and Related Matters. The Corporation shall not purchase or
hold securities in violation of the investment restrictions enumerated in its
then current prospectus and the registration statement or statements filed with
the Securities and Exchange Commission pursuant to the Securities Act of 1933
and the Investment Company Act of 1940, as amended, nor shall the Corporation
invest in securities the purchase of which would cause the Corporation to
forfeit its rights to continue to publicly offer its shares under the laws,
rules or regulations of any state in which it may become authorized to so offer
its shares unless, by specific resolution of the board of directors, the
Corporation shall elect to discontinue the sale of its shares in such state.
9.02 Other Matters. When used in this section the following words shall
have the following meanings: "Sponsor" shall mean any one or more corporations,
firms or associations which have distributor's contracts in effect with this
Corporation. "Manager" shall mean any corporation, firm or association which may
at the time have an investment advisory contract with this Corporation.
(a) Limitation of Holdings by this Corporation of Certain Securities
and of Dealings with Officers or Directors. This Corporation shall not purchase
or retain securities of any issuer if those officers and directors of the Fund
or its Manager owning beneficially more than one-half of one per cent (0.5%) of
the shares or securities of such issuer together own beneficially more than five
per cent (5%) of such shares or securities; and each officer and director of
this Corporation shall keep the treasurer of this Corporation informed of the
names of all issuers (securities of which are held in the portfolio of this
Corporation) in which such officer or director owns as much as one-half of one
percent (1/2 of 1%) of the outstanding shares or securities and (except in the
case of a holding by the treasurer) this Corporation shall not be charged with
knowledge of any such security holding in the absence of notice given if as
aforesaid if this Corporation has requested such information not less often than
quarterly. The Corporation will not lend any of its assets to the Sponsor or
Manager or to any officer or director of the Sponsor or Manager or of this
Corporation and shall not permit any officer or director, and any officer or
director of the Sponsor or Manager, to deal for or on behalf of the Corporation
with himself as principal agent, or with any partnership, association or
corporation in which he has a financial interest. Nothing contained herein shall
prevent (1) officers and directors of the Corporation from buying, holding or
selling shares in the Corporation, or from being partners, officers or directors
of or otherwise financially interested in the Sponsor or the Manager or any
company controlling the Sponsor or the Manager; (2) employment of legal counsel,
registrar, transfer agent, dividend disbursing agent or custodian who is, or has
a partner shareholder, officer or director who is, an officer or director of the
Corporation, if only customary fees are charged for services to the Corporation;
(3) sharing statistical and research expenses and office hire and expenses with
any other investment company in which an officer or director of the Corporation
is an officer or director or otherwise financially interested.
(b) Limitation Concerning Participating by Interested Persons in
Investment Decisions. In any case where an officer or director of the
Corporation or of the Manager, or a member of an advisory committee or portfolio
committee of the Corporation, is also an officer or a director of another
corporation, and the purchase or sale of shares issued by that other corporation
is under consideration, the officer or director or committee member concerned
will abstain from participating in any decision made on behalf of the
Corporation to purchase or sell any securities issued by such other corporation.
(c) Limitation on Dealing in Securities of this Corporation by certain
Officers, Directors, Sponsor or Manager. Neither the Sponsor nor Manager, nor
any officer or director of this Corporation or of the Sponsor or Manager shall
take long or short positions in securities issued by this Corporation, provided,
however, that:
(1) The Sponsor may purchase from this Corporation shares issued
by this Corporation if the orders to purchase from this Corporation are entered
with this Corporation by the Sponsor upon receipt by the Sponsor of purchase
orders for shares of this Corporation and such purchases are not in excess of
purchase orders received by the Sponsor.
(2) The Sponsor may in the capacity of agent for this Corporation
buy securities issued by this Corporation offered for sale by other persons.
(3) Any officer or director of this Corporation or of the Sponsor
or Manager or any Company controlling the Sponsor or Manager may at any time, or
from time to time, purchase from this Corporation or from the Sponsor shares
issued by this Corporation at a price not lower than the net asset value of the
shares, no such purchase to be in contravention of any applicable state or
federal requirement.
(d) Securities and Cash of this Corporation to be held by Custodian
subject to certain Terms and Conditions.
(1) All securities and cash owned by this Corporation shall as
hereinafter provided, be held by or deposited with a bank or trust company
having (according to its last published report) not less than two million
dollars ($2,000,000) aggregate capital, surplus and undivided profits (which
bank or trust company is hereby designated as "Custodian"), provided such a
Custodian can be found ready and willing to act.
(2) This Corporation shall enter into a written contract with the
Custodian regarding the powers, duties and compensation of the Custodian with
respect to the cash and securities of this Corporation held by the Custodian.
Said contract and all amendments thereto shall be approved by the board of
directors of this Corporation.
(3) This Corporation shall upon the resignation or inability to
serve of its Custodian or upon change of the Custodian:
(aa) in case of such resignation or inability to serve, use
its best efforts to obtain a successor Custodian;
(bb) require that the cash and securities owned by this
Corporation be delivered directly to the successor Custodian; and
(cc) In the event that no successor Custodian can be found,
submit to the stockholders, before permitting delivery of the cash and
securities owned by this Corporation otherwise than to a successor Custodian,
the question whether or not this Corporation shall be liquidated or shall
function without a Custodian.
(e) Amendment of Investment Advisory Contract. Any investment advisory
contract entered into by this Corporation shall not be subject to amendment
except by (1) affirmative vote at a shareholders meeting, of the holders of a
majority of the outstanding stock of this Corporation, or (2) a majority of such
Directors who are not interested persons (as the term is defined in the
Investment Company Act of 1940) of the Parties to such agreements, cast in
person at a board meeting called for the purpose of voting on such amendment.
(f) Reports relating to Certain Dividends. Dividends paid from net
profits from the sale of securities shall be clearly revealed by this
Corporation to its shareholders and the basis of calculation shall be set forth.
(g) Maximum Sales Commission. The Corporation shall, in any
distribution contract with respect to its shares of common stock entered into by
it, provide that the maximum sales commission to be charged upon any sales of
such shares shall not be more than nine per cent (9%) of the offering price to
the public of such shares. As used herein, "offering price to the public" shall
mean net asset value per share plus the commission charged adjusted to the
nearest cent.
ARTICLE 10
Purchases and Redemption of Shares:
Suspension of Sales
10.01 Purchase by Agreement. The Corporation may purchase its shares by
agreement with the owner at a price not exceeding the net asset value next
computed following the time when the purchase or contract to purchase is made.
10.02 Redemption. The Corporation shall redeem such shares as are offered
by any stockholder for redemption upon the presentation of a written request
therefor, duly executed by the record owner, to the office or agency designated
by the corporation. If the shareholder has received stock certificates, the
request must be accompanied by the certificates, duly endorsed for transfer, in
acceptable form; and the Corporation will pay therefor the net asset value of
the shares next effective following the time at which the request, in acceptable
form, is so presented. Payment for said shares shall ordinarily be made by the
Corporation to the stockholder within seven days after the date on which the
shares are presented.
10.03 Suspension of Redemption. The obligations set out in Section 10.02
may be suspended (i) for any period during which the New York Stock Exchange,
Inc. is closed other than customary week-end and holiday closings, or during
which trading on the New York Stock Exchange, Inc. is restricted, as determined
by the rules and regulations of the Securities and Exchange Commission or any
successor thereto; (ii) for any period during which an emergency, as determined
by the rules and regulations of the Securities and Exchange Commission or any
successor thereto, exists as a result of which disposal by the Corporation of
securities owned by it is not reasonably practicable or as a result of which it
is not reasonably practicable for the Corporation to fairly determine the value
of its net assets; or (iii) for such other periods as the Securities and
Exchange Commission or any successor thereto may by order permit for the
protection of security holders of the Corporation. Payment of the redemption or
purchase price may be made in cash or, at the option of the Corporation, wholly
or partly in such portfolio securities of the Corporation as the Corporation may
select.
10.04 Suspension of Sales. The Corporation reserves the right to suspend
sales of its shares if, in the judgment of the majority of the board of
directors or a majority of the executive committee of its Board, if such
committee exists, it is in the best interest of the Corporation to do so, such
suspension to continue for such period as may be determined by such majority.
ARTICLE 11
Fractional Shares
11.01 The board of directors may authorize the issue from time to time of
shares of the capital stock of the corporation in fractional denominations,
provided that the transactions in which and the terms upon which shares in
fractional denominations may be issued may from time to time be determined and
limited by or under authority of the board of directors.
ARTICLE 12
Indemnification
12.01 (a) Every person who is or was a director, officer or employee of
this Corporation or of any other corporation which he served at the request of
this Corporation and in which this Corporation owns or owned shares of capital
stock or of which it is or was a creditor shall have a right to be indemnified
by this Corporation against all liability and reasonable expenses incurred by
him in connection with or resulting from a claim, action, suit or proceeding in
which he may become involved as a party or otherwise by reason of his being or
having been a director, officer or employee of this Corporation or such other
corporation, provided (1) said claim, action, suit or proceeding shall be
prosecuted to a final determination and he shall be vindicated on the merits, or
(2) in the absence of such a final determination vindicating him on the merits,
the board of directors shall determine that he acted in good faith and in a
manner he reasonably believed to be in the best interest of the Corporation in
the case of conduct in the director's official capacity with the Corporation and
in all other cases, that the conduct was at least not opposed to the best
interest of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful; said
determination to be made by the board of directors acting through a quorum of
disinterested directors, or in its absence on the opinion of counsel.
(b) For purposes of the preceding subsection: (1) "liability and
reasonable expenses" shall include hut not be limited to reasonable counsel fees
and disbursements, amounts of any judgment, fine or penalty, and reasonable
amounts paid in settlement; (2) "claim, action, suit or proceeding" shall
include every such claim, action, suit or proceeding, whether civil or criminal,
derivative or otherwise, administrative, judicial or legislative, any appeal
relating thereto, and shall include any reasonable apprehension or threat of
such a claim, action, suit or proceeding; (3) the termination of any proceeding
by judgment, order, settlement, conviction or upon a plea of nolo contendere or
its equivalent creates a rebuttable presumption that the director did not meet
the standard of conduct set forth in subsection (a)(2), supra.
(c) Notwithstanding the foregoing, the following limitations shall
apply with respect to any action by or in the right of the Corporation: (1) no
indemnification shall be made in respect of claim, issue or matter as to which
the person seeking indemnification shall have been adjudged to be liable for
negligence or misconduct in the performance of his duty to the Corporation
unless and only to the extent that the Court of Chancery of the State of
Maryland or the court in which such action or suit was brought shall determine
upon application that despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper; and (2) indemnification shall extend only to reasonable
expenses, including reasonable counsel's fees and disbursements.
(d) The right of indemnification shall extend to any person otherwise
entitled to it under this bylaw whether or not that person continues to be a
director, officer or employee of this Corporation or such other corporation at
the time such liability or expense shall be incurred. The right of
indemnification shall extend to the legal representative and heirs of any person
otherwise entitled to indemnification. If a person meets the requirements of
this bylaw with respect to some matters in a claim, action suit, or proceeding,
but not with respect to others, he shall be entitled to indemnification as to
the former. Advances against liability and expenses may be made by the
Corporation on terms fixed by the board of directors subject to an obligation to
repay if indemnification proves unwarranted.
(e) This bylaw shall not exclude any other rights of indemnification
or other rights to which any director, officer or employee may be entitled to by
contract, vote of the stockholders or as a matter of law.
If any clause, provision or application of this section shall be
determined to be invalid, the other clauses, provisions or applications of this
section shall not be affected but shall remain in full force and effect. The
provisions of this bylaw shall be applicable to claims, actions, suits or
proceedings made or commenced after the adoption hereof, whether arising from
acts or omissions to act occurring before or after the adoption hereof.
(f) Nothing contained in this bylaw shall be construed to protect any
director or officer of the Corporation against any liability to the Corporation
or its security holders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
ARTICLE 13
Amendments
13.01 These bylaws may be amended or added to, altered or repealed at any
annual or special meeting of the stockholders by the affirmative vote of the
holders of a majority of the shares of capital stock issued and outstanding and
entitled to vote, provided notice of the general purport of the proposed
amendment, addition, alteration or repeal is given in the notice of said
meeting, or, at any meeting of the board of directors by vote of a majority of
the directors then in office, except that the board of directors may not amend
Article 5 to permit removal by said board without cause of any director elected
by the stockholders.
PRINCIPAL SPECIAL MARKETS FUND, INC.
MANAGEMENT AGREEMENT
AGREEMENT executed as of the 22nd day of April, 1993, by and between
PRINCIPAL SPECIAL MARKETS FUND, INC., a Maryland corporation (hereinafter called
the "Fund") and PRINCOR MANAGEMENT CORPORATION, an Iowa corporation (hereinafter
called the "Manager").
W I T N E S S E T H:
WHEREAS, The Fund has furnished the Manager with copies properly
certified or authenticated of each of the following:
(a) Certificate of Incorporation of the Fund;
(b) Bylaws of the Fund as adopted by the Board of Directors;
(c) Resolutions of the Board of Directors of the Fund selecting the
Manager as investment adviser and approving the form of this
Agreement.
NOW THEREFORE, in consideration of the premises and mutual agreements
herein contained, the Fund hereby appoints the Manager to act as investment
adviser and manager of each of the portfolios of the Fund set forth in Appendix
A (the "Portfolios"), and the Manager agrees to act, perform or assume the
responsibility therefor in the manner and subject to the conditions hereinafter
set forth. The Fund will furnish the Manager from time to time with copies,
properly certified or authenticated, of all amendments of or supplements to the
foregoing, if any.
1. INVESTMENT ADVISORY SERVICES
The Manager will regularly perform the following services for the
Portfolios:
(a) Provide investment research, advice and supervision:
(b) Provide investment advisory, research and statistical facilities
and all clerical services relating to research, statistical and
investment work;
(c) Furnish to the Board of Directors of the Fund (or any appropriate
committee of such Board), and revise from time to time as
economic conditions require, a recommended investment program for
each of the Portfolios consistent with their investment
objectives and policies;
(d) Implement such of its recommended investment program for each
Portfolio as the Fund shall approve, by placing orders for the
purchase and sale of securities, subject always to the provisions
of the Fund's Certificate of Incorporation and Bylaws and the
requirements of the Investment Company Act of 1940 and the Fund's
Registration Statement, current Prospectus and Statement of
Additional Information, as each of the same shall be from time to
time in effect;
(e) Advise and assist the officers of the Fund in taking such steps
as are necessary or appropriate to carry out the decisions of its
Board of Directors and any appropriate committees of such Board
regarding the general conduct of the Fund's investment business
relating to the Portfolios;
(f) Report to the Board of Directors of the Fund at such times and in
such detail as the Board may deem appropriate in order to enable
it to determine that the Fund's investment policies relating to
each of the Portfolios are being observed.
2. CORPORATE AND ADMINISTRATIVE SERVICES
In addition to the investment advisory services set forth in Section 1,
the Manager will perform the following corporate and administrative services:
(a) Furnish the services of such of the Manager's officers and
employees as may be elected officers or directors of the Fund,
subject to their individual consent to serve and to any
limitations imposed by law.
(b) Furnish office space, and all necessary office facilities and
equipment, for the general corporate functions relating to the
Portfolios (i.e., functions other than (i) underwriting and
distribution of Fund shares, and (ii) custody of Fund assets);
(c) Furnish the services of the supervisory and clerical personnel
necessary to perform the general corporate functions relating to
the Portfolios;
(d) Determine the net asset value of the shares of each class of the
Fund's Capital Stock attributable to a Portfolio as frequently as
the Fund shall request, or as shall be required by applicable law
or regulations;
(e) Act as, and provide all services customarily performed by, the
transfer and paying agent of the Portfolios including, without
limitation, the following:
(i) preparation and distribution to shareholders of
prospectuses, reports, tax information, notices, proxy
statements and proxies;
(ii) preparation and distribution of dividend and capital gain
payments to shareholders;
(iii)issuance, transfer and registry of shares, and maintenance
of open account system;
(iv) delivery, redemption and repurchase of shares, and
remittances to shareholders;
(v) communication with shareholders concerning items (i), (ii),
(iii) and (iv) above.
In the carrying out of this function the Manager may contract
with others for data systems, processing services and other
administrative services.
(f) Use its best efforts to qualify the Capital Stock of the
Portfolios for sale in states and jurisdictions as directed by
the Fund.
(g) Prepare stock certificates, and distribute the same as requested
by shareholders of the Portfolios.
3. EXPENSES BORNE BY THE MANAGER
The Manager will pay all expenses of each of the Portfolios except
those expenses borne by the Fund as provided in Section 5 below.
4. COMPENSATION OF THE MANAGER BY FUND
For all services to be rendered and payments made as provided in
Sections 1, 2 and 3 hereof with respect to each Portfolio, the Fund will accrue
daily and pay the Manager within five days after the end of each calendar month
a fee based on the average of the values of the net assets of each Portfolio as
of the time of determination of the net asset value on each trading day
throughout the month. The annual rate of the fee as a percent of average daily
net assets is set forth in Appendix A for each of the Portfolios.
Net asset value shall be determined pursuant to applicable provisions
of the Certificate of Incorporation of the Fund. If pursuant to such provisions
the determination of net asset value is suspended for any of the Portfolios,
then for the purposes of this Section 4 the value of the net assets of that
Portfolio as last determined shall be deemed to be the value of the net assets
of that Portfolio for each day the suspension continues.
The Manager may, at its option, waive all or part of its compensation
for such period of time as it deems necessary or appropriate.
5. EXPENSES BORNE BY FUND
The Fund will pay, without reimbursement by the Manager, the following
expenses attributable or allocated to each of the Portfolios:
(a) the fee payable to the Manager as provided for in Section 4
above;
(b) Taxes, including in case of redeemed shares any initial transfer
taxes;
(c) Portfolio brokerage fees and incidental brokerage expenses;
(d) Interest;
(e) Extraordinary expenses, including the cost of meetings of
shareholders of any Portfolio if the meeting is called at the
request of shareholders of that Portfolio.
6. LIMITATION OF LIABILITY OF THE MANAGER
The Manager shall not be liable for any error of judgment or mistake of
law or for any loss suffered by the Fund in connection with the matters to which
this Agreement relates, except a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the Manager in the performance of its
duties or from reckless disregard by it of its obligations and duties under this
Agreement.
7. EFFECTIVE DATE: DURATION AND TERMINATION OF THIS AGREEMENT
This Agreement shall become effective as to any Portfolio on the latest
of (i) the date of its execution or the execution of an amendment making the
agreement applicable to that Portfolio, (ii) the date of its approval by a
majority of the directors of the Fund, including approval by the vote of a
majority of the directors of the Fund who are not interested persons of the
Manager, Principal Mutual Life Insurance Company or the fund, cast in person at
a meeting called for the purpose of voting on such approval, and (iii) the date
of its approval by a majority of the outstanding voting securities of the
Portfolio.
This Agreement will continue in effect as to any Portfolio for more
than two years from the date of its execution or the execution of an amendment
making this Agreement applicable to that Portfolio only so long such continuance
is specifically approved at least annually either by the Board of Directors of
the Fund or by a vote of a majority of the outstanding voting securities of the
Fund and in either event by vote of a majority of the directors of the Fund who
are not interested persons of the Manager, Principal Mutual Life Insurance
Company, or the Fund cast in person at a meeting called for the purpose of
voting on such approval. This Agreement may be terminated at any time on sixty
days' written notice without the payment of any penalty, by the Board of
Directors of the Fund, by vote of a majority of the outstanding voting
securities of the Fund, as to any Portfolio by the vote of a majority of the
outstanding voting securities of that Portfolio or by the Manager. This
Agreement shall automatically terminate in the event of its assignment. In
interpreting the provisions of this Section 9, the definitions contained in
Section 2(a) of the Investment Company Act of 1940 and the rules thereunder
(particularly the definitions of "interested person," "assignment" and "voting
security") shall be applied.
The required shareholder approval of this Agreement or of any
continuance of this Agreement shall be effective with respect to any Portfolio
if a majority of the outstanding voting securities of that Portfolio votes to
approve the Agreement or its continuance, notwithstanding that the Agreement or
its continuance may not have been approved by a majority of the outstanding
voting securities of the Fund or of any other Portfolio affected by the matter.
If the shareholders of any Portfolio of the Fund fail to approve any
continuance of the Management Agreement and that failure causes the Agreement
for that Portfolio to be invalid, the Manager will continue to act as investment
adviser with respect to that Portfolio pending the required approval of
continuance of the Agreement, of a new contract with the Manager or a different
adviser or other definitive action; provided, that the compensation received by
the Manager in respect of that Portfolio during such period will be no more than
its actual costs incurred in furnishing investment advisory and management
services to that Portfolio or the amount it would have received under this
Agreement in respect of that Portfolio, whichever is less.
8. AMENDMENT OF THIS AGREEMENT
No amendment of this Agreement shall be effective until approved by
vote of the holders of a majority of the outstanding voting securities and by
vote of a majority of the directors of the Fund who are not interested persons
of the Manager, Principal Mutual Life Insurance Company or the Fund cast in
person at a meeting called for the purpose of voting on such approval. The
required shareholder approval of any amendment to this Agreement shall be
effective with respect to any Portfolio if a majority of the outstanding voting
securities of that Portfolio votes to approve the amendment, notwithstanding
that the amendment may not have been approved by a majority of the outstanding
voting securities of the Fund or of any other Portfolio affected by the matter.
9. AGREEMENTS WITH OTHERS
The Manager may enter into agreements with others for the assumption of
any and all duties and responsibilities set forth in this Agreement. Section 6
shall apply to each such person as if it were named therein instead of the
Manager.
10. ADDRESS FOR PURPOSE OF NOTICE
Any notice under this Agreement shall be in writing, addressed and
delivered or mailed, postage prepaid, to the other party at such address as such
other party may designate for the receipt of such notices. Until further notice
to the other party, it is agreed that the address of the Fund and that of the
Manager for this purpose shall be The Principal Financial Group, Des Moines,
Iowa 50392-0200.
11. MISCELLANEOUS
The captions in this Agreement are included for convenience of
reference only, and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized.
PRINCIPAL SPECIAL MARKETS FUND, INC.
ARTHUR S. FILEAN
By --------------------------------
Arthur S. Filean, Vice President
PRINCOR MANAGEMENT CORPORATION
STEPHAN L. JONES
By -------------------------------
Stephan L. Jones, President
<PAGE>
PRINCIPAL SPECIAL MARKETS FUND, INC.
MANAGEMENT AGREEMENT - APPENDIX A
Portfolio Fee as a Percent of
Average Daily Net Assets
1. Mortgage-Backed Securities Portfolio .45%
2. International Securities Portfolio .90%
PRINCIPAL SPECIAL MARKETS FUND, INC.
INVESTMENT SERVICE AGREEMENT
THIS INVESTMENT SERVICE AGREEMENT, executed as of the 22nd day of April,
1993, by and between PRINCIPAL SPECIAL MARKETS FUND, INC. (the "Fund"), an
open-end investment company formed under the laws of Maryland, PRINCOR
MANAGEMENT CORPORATION ("Manager"), an Iowa corporation, AND PRINCIPAL MUTUAL
LIFE INSURANCE COMPANY, a specially chartered Iowa life insurance company.
WITNESSETH:
WHEREAS, Principal Mutual Life Insurance Company has organized the Manager
to serve as an investment adviser and is the owner (through its subsidiaries) of
all of the outstanding stock of the Manager; and
WHEREAS, the Manager and the Fund have entered into a Management Agreement
executed as of April 22, 1993 (the "Management Agreement") whereby the Manager
undertakes to furnish the Fund with investment advisory services and certain
other services relative to certain portfolios of the Fund (the "Portfolios");
and
WHEREAS, the Manager has the right under the Management Agreement to
appoint one or more sub-advisors to furnish such services to the Portfolios (the
"Sub-Advisors"); and
WHEREAS, Principal Mutual Life Insurance Company is willing to make
available to the Manager and the Sub-Advisers on a part-time basis certain
employees and services of Principal Mutual Life Insurance Company for the
purpose of better enabling the Manager or any Sub-Advisor to fulfill its
investment advisory obligations under the Management Agreement or any related
sub-advisory agreement, provided that the Manager bears all costs allocable to
the time spent by such employees on the affairs of the Manager and the
Sub-Advisers, and the Manager and the Fund believe that such an arrangement will
be for their mutual benefit:
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
1. The Manager shall have the right to use, on a part-time basis, and
Principal Mutual Life Insurance Company shall make available on such basis, such
employees of Principal Mutual Life Insurance Company and for such periods as may
be agreed upon by the Manager and Principal Mutual Life Insurance Company, as
reasonably needed by the Manager and any such Sub-Adviser in the performance of
investment advisory services (but not administrative, transfer and paying
services) under the Management Agreement. It is anticipated that such employees
will be persons assigned to the Investment Department of Principal Mutual Life
Insurance Company. Principal Mutual Life Insurance Company will also make
available to the Manager, any such Sub-Adviser or the Fund such clerical,
stenographic and administrative services as the Manager or any such Sub-Adviser
may reasonably request to facilitate performance of such investment advisory
services.
2. The employees of Principal Mutual Life Insurance Company in performing
services for the Manager or a Sub-Adviser hereunder may, to the full extent that
they deem appropriate, have access to and utilize statistical and economic data,
investment research reports and other material prepared for or contained in the
files of the Investment Department of Principal Mutual Life Insurance Company
that are relevant to making investments for the Fund, and may make such
materials available to the Manager or such Sub-Adviser, provided, that any such
materials prepared or obtained in connection with a private placement or other
non-public transaction need not be made available to the Manager or such
Sub-Adviser if Principal Mutual Life Insurance Company deems such materials
confidential.
3. Employees of Principal Mutual Life Insurance Company performing services
for the Manager or a sub-Adviser pursuant hereto shall report and be responsible
solely to the officers and directors of the Manager or persons designated by
them. Principal Mutual Life Insurance Company shall have no responsibility for
investment recommendations and decisions of the Manager or the Sub-Advisers
based upon information or advice given or obtained by or through such Principal
Mutual Life Insurance Company employees.
4. Principal Mutual Life Insurance Company will, to the extent requested by
the Manager, supply to employees of the Manager and the Sub-Advisers (including
part-time employees of Principal Mutual Life Insurance Company serving the
Manager and the Sub-Advisers) such clerical, stenographic and administrative
services and such office supplies and equipment as may be reasonably required in
order that they may properly perform their respective functions on behalf of the
Manager and the Sub-Advisers in connection with the performance of investment
advisory services under the Management Agreement and related sub-advisory
agreements.
5. The obligation of performance under the Management Agreement is solely
that of the Manager, and Principal Mutual Life Insurance Company undertakes no
obligation in respect thereto or in respect to the obligation of performance by
a Sub-Advisor under any related sub-advisory agreement, except as otherwise
expressly provided.
6. In consideration of the services to be rendered by Principal Mutual Life
Insurance Company employees pursuant to this Investment Service Agreement, the
Manager agrees to reimburse Principal Mutual Life Insurance Company for such
costs, direct and indirect, as may be fairly attributable to the services
performed for the Manager and for the Sub-Advisors. Such costs shall include,
but not be limited to, an appropriate portion of:
(a) salaries;
(b) employee benefits;
(c) general overhead expense;
(d) supplies and equipment; and
(e) a charge in the nature of rent for the cost of space
in Principal Mutual Life Insurance Company offices
fairly allocable to activities of the Manager under
the Management Agreement and of any Sub-Advisors
under related sub-advisory agreements.
In the event of disagreement between the Manager and Principal Mutual Life
Insurance Company as to a fair basis for allocating or apportioning costs, such
basis shall be fixed by the public accountants for the Fund.
7. This Agreement shall become effective as to any Portfolio on the latest
of (i) the date of its execution or the execution of an amendment making the
agreement applicable to that Portfolio, (ii) the date of its approval by a
majority of the directors of the Fund, including approval by the vote of a
majority of the directors of the Fund who are not interested persons of the
Manager, Principal Mutual Life Insurance Company or the Fund, cast in person at
a meeting called for the purpose of voting on such approval, and (iii) the date
of its approval by a majority of the outstanding voting securities of the
Portfolio.
This Agreement will continue in effect as to any Portfolio for more than
two years from the date of its execution or the execution of an amendment making
this Agreement applicable to that Portfolio only so long such continuance is
specifically approved at least annually either by the Board of Directors of the
Fund or by a vote of a majority of the outstanding voting securities of the Fund
and in either event by vote of a majority of the directors of the Fund who are
not interested persons of the Manager, Principal Mutual Life Insurance Company,
or the Fund cast in person at a meeting called for the purpose of voting on such
approval. This Agreement may, on sixty days' written notice, be terminated at
any time without the payment of any penalty, by the Board of Directors of the
Fund, by vote of a majority of the outstanding voting securities of the fund, as
to any Portfolio by the vote of a majority of the outstanding voting securities
of that Portfolio or by the Manager.
This Investment Service Agreement shall automatically terminate in the
event of its assignment. In interpreting the provisions of this Section 7, the
definitions contained in Section 2(a) of the Investment Company Act of 1940 and
the rules thereunder (particularly the definitions of "interested persons",
"assignment" and "voting securities") shall be applied.
The required shareholder approval of this Agreement or of any continuance
of this Agreement shall be effective with respect to any Portfolio if a majority
of the outstanding voting securities of that Portfolio votes to approve the
Agreement or its continuance, notwithstanding that the Agreement or its
continuance may not have been approved by a majority of the outstanding voting
securities of the Fund or of any other Portfolio affected by the matter.
8. No amendment of this Agreement shall be effective until approved by vote
of the holders of a majority of the outstanding voting securities and by vote of
a majority of the directors of the Fund who are not interested persons of the
Manager, Principal Mutual Life Insurance Company or the Fund cast in person at a
meeting called for the purpose of voting on such approval. The required
shareholder approval of any amendment to this Agreement shall be effective with
respect to any Portfolio if a majority of the outstanding voting securities of
that Portfolio votes to approve the amendment, notwithstanding that the
amendment may not have been approved by a majority of the outstanding voting
securities of the Fund or of any other Portfolio affected by the matter.
9. Any notice under this Investment Service Agreement shall be in writing,
addressed and delivered or mailed postage prepaid to the other parties at such
addresses as such other parties may designate for the receipt of such notices.
Until further notice it is agreed that the address of the Fund, that of the
Manager and that of Principal Mutual Life Insurance Company and its subsidiaries
for this purpose shall be The Principal Financial Group, Des Moines, Iowa
50392-0200.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed in three counterparts by their duly authorized officers the day and
year first above written.
PRINCIPAL SPECIAL MARKETS FUND, INC.
A. S. Filean
By ________________________________
A. S. Filean
PRINCOR MANAGEMENT CORPORATION
S. L. Jones
By ________________________________
S. L. Jones
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
D. K. Kauf
By ________________________________
D. K. Kauf
PRINCIPAL SPECIAL MARKETS FUND, INC.
SUB-ADVISORY AGREEMENT
AGREEMENT executed as of the 26th day of April, 1993, by and between PRINCOR
MANAGEMENT CORPORATION, an Iowa Corporation (hereinafter called "the Manager")
and INVISTA CAPITAL MANAGEMENT, INC. (hereinafter called "Invista").
W I T N E S S E T H:
WHEREAS, the Manager is the manager and investment adviser to Principal Special
Markets Fund, Inc., (the "Fund"), an open-end management investment company
organized as a series fund with separate portfolios, registered under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Manager desires to retain Invista to furnish it with portfolio
selection and related research and statistical services in connection with the
investment advisory services which the Manager has agreed to provide to certain
of the Fund's portfolios, and Invista desires to furnish such services; and
WHEREAS, The Manager has furnished Invista with copies properly certified or
authenticated of each of the following:
(a) Management Agreement (the "Management Agreement") with Principal
Special Markets Fund, Inc.;
(b) Copies of the registration statement of the Principal Special Markets
Fund, Inc. as filed pursuant to the federal securities laws of the
United States, including all exhibits and amendments:
NOW, THEREFORE, in consideration of the premises and the terms and conditions
hereinafter set forth, it is agreed as follows:
1. Appointment of Invista
In accordance with and subject to the Management Agreement, the Manager
hereby appoints Invista to perform portfolio selection services described herein
for investment and reinvestment of the securities and other assets of each of
the portfolios of the Fund set forth in Appendix A (the "Portfolios"), subject
to the control and direction of the Fund's Board of Directors, as well as to
assume other obligations as specified in Sections 2 and 3 below, for the period
and on the terms hereinafter set forth. Invista accepts such appointment and
agrees to furnish the services hereinafter set forth for the compensation herein
provided. Invista shall for all purposes herein be deemed to be an independent
contractor and shall, except as expressly provided or authorized, have no
authority to act for or represent the Fund or the Manager in any way or
otherwise be deemed an agent of the Fund or the Manager.
2. Obligations of and Services to be Provided by Invista
(a) Invista shall provide with respect to the Portfolios all services
and obligations of the Manager described in Section 1, Investment Advisory
Services, of the Management Agreement.
(b) Invista shall use the same skill and care in providing services to
the Fund as it uses in providing services to fiduciary accounts for which it has
investment responsibility. Invista will conform with all applicable rules and
regulations of the Securities and Exchange Commission.
3. Expenses
Invista will pay all expenses borne by the Manager pursuant to Section 3,
Expenses Borne by the Manager, of the Management Agreement. Invista will also
reimburse the manager for all of its costs in providing the services described
in Section 2, Corporate and Administrative Responsibilities, of the management
Agreement and for all the costs incurred by the Manager pursuant to the
Investment Service Agreement between the Manager and the Principal Mutual Life
Insurance Company relating to the Portfolios.
4. Compensation
As full compensation for all services rendered and obligations assumed by
Invista hereunder with respect to each Portfolio, the Manager shall pay Invista
within 10 days after the end of each calendar month a fee based on the average
net assets of the Portfolio determined as provided in Section 4 of the
Management Agreement. The annual rate of the fee as a percent of average daily
net assets is set forth in Appendix A for each of the Portfolios. Invista may,
at its option, waive all or a part of its compensation for such period of time
as it deems necessary or appropriate.
5. EFFECTIVE DATE: DURATION AND TERMINATION OF THIS AGREEMENT
This Agreement shall become effective as to any Portfolio on the latest of
(i) the date of its execution or the execution of an amendment making-the
agreement applicable to that Portfolio, (ii) the date of its approval by a
majority of the directors of the Fund, including approval by the vote of a
majority of the directors of the Fund who are not interested persons of the
Manager, Invista, Principal Mutual Life Insurance Company or the Fund, cast in
person at a meeting called for the purpose of voting on such approval, and (iii)
the date of its approval by a majority of the outstanding voting securities of
the Portfolio.
This Agreement will continue in effect as to any Portfolio for more than
two years from the date of its execution or the execution of any amendment
making this Agreement applicable to that Portfolio only so long such continuance
is specifically approved at least annually either by the Board of Directors of
the Fund or by a vote of a majority of the outstanding voting securities of the
Fund and in either event by vote of a majority of the directors of the Fund who
are not interested persons of the Manager, Invista, Principal Mutual Life
Insurance Company, or the Fund cast in person at a meeting called for the
purpose of voting on such approval. This Agreement may be terminated at any time
on sixty days' written notice without the payment of any penalty, by the Board
of Directors of the Fund, by vote of a majority of the outstanding voting
securities of the Fund, as to any Portfolio by the vote of a majority of the
outstanding voting securities of that Portfolio, by the Manager or by Invista.
This Agreement shall automatically terminate in the event of its assignment. In
interpreting the provisions of this Section 9, the definitions contained in
Section 2(a) of the Investment Company Act of 1940 and the rules thereunder
(particularly the efinitions of "interested person," "assignment" and "voting
security") shall be applied.
The required shareholder approval of this Agreement or of any continuance
of this Agreement shall be effective with respect to any Portfolio if a majority
of the outstanding voting securities of that Portfolio votes to approve the
Agreement or its continuance, notwithstanding that the Agreement or its
continuance may not have been approved by a majority of the outstanding voting
securities of the Fund or of any other Portfolio affected by the matter.
If the shareholders of any Portfolio of the Fund fail to approve any
continuance of this Agreement or of the Management Agreement relating to that
Portfolio, and that failure causes either of those agreements to be invalid,
Invista will continue to act as sub-adviser with respect to that Portfolio
pending the required approval of continuance of the invalid agreement, of a new
contract with the Manager or a different adviser or with Invista or a different
sub-adviser or other definitive action; provided, that the compensation received
by Invista in respect of that Portfolio during such period will be no more than
its actual costs incurred in furnishing investment advisory and management
services to that Portfolio or the amount it would have received under this
Agreement in respect of that Portfolio, whichever is less.
6. Amendment of this Agreement
No amendment of this Agreement shall be effective until approved by vote of
the holders of a majority of the outstanding voting securities and by vote of a
majority of the directors of the Fund who are not interested persons of the
Manager, Invista, Principal Mutual Life Insurance Company or the Fund cast in
person at a meeting called for the purpose of voting on such approval. The
required shareholder approval of any amendment to this Agreement shall be
effective with respect to any Portfolio if a majority of the outstanding voting
securities of that Portfolio votes to approve the amendment, notwithstanding
that the amendment may not have been approved by a majority of the outstanding
voting securities of the Fund or of any other Portfolio affected by the Matter.
7. General Provisions
(a) Each party agrees to perform such further acts and execute such
further documents as are necessary to effectuate the purposes hereof. This
Agreement shall be construed and enforced in accordance with and governed by the
laws of the State of Iowa. The captions in this Agreement are included for
convenience only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
(b) Any notice under this Agreement shall be in writing, addressed and
delivered or mailed postage pre-paid to the other party at such address as such
other party may designate for the receipt of such notices. Until further notice
to the other party, it is agreed that the address of Invista and of the Manager
for this purpose shall be The Principal Financial Group, Des Moines, Iowa
50392-0200.
(c) Invista agrees to notify the Manager of any change in Invista's
officers and directors within a reasonable time after such change.
IN WITNESS WHEREOF, the parties have duly executed this Agreement on
the date first above written.
PRINCOR MANAGEMENT CORPORATION
STEPHAN L. JONES
By --------------------------------
Stephan L. Jones, President
INVISTA CAPITAL MANAGEMENT, INC.
S. R. KOSMICKE
By --------------------------------
S. R. Kosmicke, President
PRINCIPAL SPECIAL MARKETS FUND, INC.
DISTRIBUTION AGREEMENT
Agreement executed as of April 22, 1993 by and between PRINCIPAL SPECIAL MARKETS
FUND, INC., a Maryland corporation (hereinafter sometimes called the "Fund") and
PRINCOR FINANCIAL SERVICES CORPORATION, an Iowa corporation (Hereinafter
sometimes called the "Distributor").
W I T N E S S E T H:
WHEREAS, The Fund and the Distributor wish to enter into an agreement setting
forth the terms upon which the Distributor will act as underwriter and
distributor of the Fund.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the Fund hereby appoints the Distributor to act as principal
underwriter (as such term is defined in Section 2(a)(29) of the Investment
Company Act of 1940 (as amended) of the shares of Capital Stock of the
portfolios set forth in Appendix A (the "Portfolios") of the Fund (hereinafter
sometimes called "shares"), and the Distributor agrees to act and perform the
duties and functions of underwriter in the manner and subject to the conditions
hereinafter set forth.
1. SOLICITATION OF ORDERS
The Distributor will use its best efforts (but only in states where it may
lawfully do so) to obtain from investors unconditional orders for shares
authorized for issue by the Fund and registered under the Securities Act of
1933, as amended, provided the Distributor may in its own discretion refuse
to accept orders for shares from any particular applicant. The Distributor
does not undertake to sell any specific number of shares of the Fund.
2. SALE OF SHARES
The Distributor is authorized to sell as agent on behalf of the Fund
authorized shares of the Fund by accepting unconditional orders placed with
the Distributor by investors in states wherever sales may lawfully be made.
3. PUBLIC OFFERING PRICE
All shares of the Portfolios sold to investors by the Distributor as agent
for the Fund will be sold for the basic retail price, which basic retail
price shall be the net asset value per share.
4. DELIVERY OF PAYMENTS AND ISSUANCE OF SHARES
The Distributor will deliver to the Fund all payments made pursuant to
orders accepted by the Distributor upon receipt thereof by the Distributor
in its principal place of business.
After payment the Fund will issue shares of the applicable class of Capital
Stock by crediting to the appropriate number of hares to a stockholder
account in such names and such manner as specified in the application or
order relating to such shares.
Certificates will be issued only upon request by the shareholder.
5. SALE OF SHARES TO INVESTORS BY THE FUND
Any right granted to the Distributor to accept orders for shares or make
sales on behalf of the Fund will not apply to shares issued in connection
with the merger or consolidation of any other investment company with the
Fund or its acquisition, purchase or otherwise, of all or substantially all
the assets of any investment company or substantially all the outstanding
shares of any such company. Also, any such right shall not apply to shares
issued, sold or transferred, whether Treasury or newly issued shares, that
may be offered by the Fund to its shareholders as stock dividends or splits
for not less than "net asset value".
6. AGREEMENTS WITH DEALERS OR OTHERS
In making agreements with any dealers or others, the Distributor shall act
only in its own behalf and in no sense as agent for the Fund and shall be
agent for the Fund only in respect of sales and repurchases of Fund shares.
7. COPIES OF CORPORATE DOCUMENTS
The Fund will furnish the Distributor promptly with properly certified or
authenticated copies of any registration statements filed by it with the
Securities and Exchange Commission under the Securities Act of 1933, as
amended, or the Investment Company Act of 1940, as amended, together with
any financial statements and exhibits included therein and all amendments
or supplements thereto hereafter filed. Also, the Fund shall furnish the
Distributor with a reasonable number of printed copies of each semi-annual
and annual report (quarterly if made) of the Fund as the Distributor may
request, and shall cooperate fully in the efforts of the Distributor to
sell and arrange for the sale of the Fund's shares of Capital Stock and in
the performance by the Distributor of all of its duties under this
Agreement.
8. RESPONSIBILITY FOR CONTINUED REGISTRATION INCLUDING INCREASE IN SHARES
The Fund will assume the continued responsibility for meeting the
requirements of registration under the Securities Act of 1933, as amended,
under the Investment Company Act of 1940, as amended, and under the
securities laws of the various states where the Distributor is registered
as a broker-dealer. The Fund, subject to the necessary approval of its
shareholders, will increase the number of authorized shares from time to
time as may be necessary to provide the Distributor with such number of
shares as the Distributor may reasonably be expected to sell.
9. SUSPENSION OF SALES
If and whenever the determination of asset value of a portfolio is
suspended pursuant to applicable law, and such suspension has become
effective, until such suspension is terminated no further applications for
shares of the Portfolio shall be accepted. In addition, the Fund reserves
the right to suspend sales and the Distributor's authority to accept orders
for shares on behalf of the Fund, if in the judgment of the majority of its
Board of Directors, or of its Executive Committee if such Committee exists,
it is in the best interest of the Fund to do so, suspension to continue for
such period as may be determined by such majority; and in that event no
shares of that portfolio will be sold by the Fund or by the Distributor on
behalf of the Fund while such suspension remains in effect except for
shares necessary to cover unconditional orders accepted by the Distributor
before the Distributor had knowledge of the suspension.
10. EXPENSES
The Fund will pay (or will enter into arrangements providing for the
payment of) all fees and expenses (1) in connection with the preparation
and filing of any registration statement or amendments thereto as required
under the Investment Company Act of 1940, as amended; (2) in connection
with the preparation and filing of any registration statement and
prospectus or amendments thereto under the Securities Act of 1933, as
amended, covering the issue and sale of the Fund's shares; and (3) in
connection with the registration of the Fund and qualification of shares
for sale in the various states and other jurisdictions. The Fund will also
pay (or will enter into arrangements providing for the payment of) the cost
of (i) preparation and distribution to shareholders of prospectuses,
reports, tax information, notices, proxy statements and proxies; (ii)
preparation and distribution of dividend and capital gain payments to
shareholders; (iii) issuance, transfer, registry and maintenance of open
account charges; (iv) delivery, remittance, redemption and repurchase
charges; (v) communication with shareholders concerning these items; and
(vi) stock certificates. The Fund will pay taxes including, in the case of
redeemed shares, any initial transfer taxes unpaid.
The Distributor shall assume responsibility for (or will enter into
arrangements providing for the payment of) the expense of printing
prospectuses used for the solicitation of new accounts of the Portfolios.
The Distributor will pay (or will enter into arrangements providing for the
payment of) the expenses of other sales literature for the Portfolios, will
pay all fees and expenses in connection with the Distributor's
qualification as a dealer under the Securities Exchange Act of 1934, as
amended, and in the various states, and all other expenses in connection
with the sale and offering for sale of shares of the Fund which have not
been herein specifically allocated to or assumed by the Fund.
11. CONFORMITY WITH LAW
The Distributor agrees that in selling the shares of the Fund it will duly
conform in all respects with the laws of the United States and any state or
other jurisdiction in which such shares may be offered for sale pursuant to
this Agreement.
12. MEMBERSHIP IN NATIONAL ASSOCIATION OF SECURITIES DEALERS
The Fund recognizes that the Distributor is now a member of the National
Association of Securities Dealers, and in the conduct of its duties under
this Agreement the Distributor is subject to the various rules, orders and
regulations of such organization. The right to determine whether such
membership should or should not continue, or to join other organizations,
is reserved by the Distributor.
13. OTHER INTERESTS
It is understood that directors, officers, agents and stockholders of the
Fund are or may be interested in the Distributor as directors, officers,
stockholders, or otherwise; that directors, officers, agents, and
stockholders of the Distributor are or may be interested in the Fund as
directors, officers, stockholders or otherwise; that the Distributor may be
interested in the Fund as a stockholder or otherwise; and that the
existence of any dual interest shall not affect the validity hereof or of
any transaction hereunder except as otherwise provided in the Articles of
Incorporation of the Fund and the Distributor, respectively, or by specific
provision of applicable law.
14. INDEMNIFICATION
The Fund agrees to indemnify, defend and hold the Distributor, its officers
and directors, and any person who controls the Distributor within the
meaning of Section 15 of the Securities Act of 1933, free and harmless from
and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such claims, demands or
liabilities and any counsel fees incurred in connection therewith) which
the Distributor, its officers, directors or any such controlling person may
incur under the Securities Act of 1933, or under common law or otherwise,
arising out of or based upon any untrue statement of a material fact
contained in the Fund's registration statement or prospectus or arising out
of or based upon any alleged omission to state a material fact required to
be stated in either thereof or necessary to make the statements in either
or necessary to make the statements in either thereof not misleading,
except insofar as such claims, demands, liabilities or expenses arise out
of or are based upon any such untrue statement or omission made in
conformity with information furnished in writing by the Distributor to the
Fund for use in the Fund's registration statement or prospectus: provided,
however, that this indemnity agreement, to the extent that it might require
indemnity of any person who is also an officer or director of the Fund or
who controls the Fund within the meaning of Section 15 of the Securities
Act of 1933, shall not inure to the benefit of such officer, director or
controlling person unless a court of competent jurisdiction shall
determine, or it shall have been determined by controlling precedent that
such result would not be against public policy as expressed in the
Securities Act of 1933, and further provided, that in no event shall
anything contained herein be so construed as to protect the Distributor
against any liability to the Fund or to its security holders to which the
Distributor would otherwise be subject by reason of willful misfeasance,
bad faith, or gross negligence, in the performance of its duties, or by
reason of its reckless disregard of its obligations under this Agreement.
The Fund's agreement to indemnify the Distributor, its officers and
directors and any such controlling person as aforesaid is expressly
conditioned upon the Fund being promptly notified of any action brought
against the Distributor, its officers or directors, or any such controlling
person, such notification to be given by letter or telegram addressed to
the Fund. The Fund agrees promptly to notify the Distributor of the
commencement of any litigation or proceedings against it or any of its
directors in connection with the issue and sale of any shares of it Capital
Stock.
The Distributor agrees to indemnify, defend and hold the Fund, its officers
and directors and any person who controls the Fund, if any, within the
meaning of Section 15 of the Securities Act of 1933, free and harmless from
and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such claims, demands
liabilities and any counsel fees incurred in connection therewith) which
the Fund, its directors or officers or any such controlling person may
incur under the Securities Act of 1933 or under common law or otherwise;
but only to the extent that such liability or expense incurred by the Fund,
its directors or officers or such controlling person resulting from such
claims or demands shall arise out of or be based upon any alleged untrue
statement of a material fact contained in information furnished in writing
by the Distributor to the Fund for use in the Fund's registration statement
or prospectus or shall arise out of or be based upon any alleged omission
to state a material fact in connection with such information required to be
stated in the registration statement or prospectus or shall arise out of or
be based upon any alleged omission to state a material fact in connection
with such information required to be stated in the registration statement
or prospectus or necessary to make such information not misleading. The
Distributor's agreement to indemnify the Fund, its directors and officers,
and any such controlling person as aforesaid is expressly conditioned upon
the Distributor being promptly notified of any action brought against the
Fund, its officers or directors or any such controlling person.
15. DURATION AND TERMINATION OF THIS AGREEMENT
This Agreement shall become effective as of the execution date specified on
page 1 of this Agreement and will remain in effect for more than two years
thereafter only so long as such continuance is specifically approved, at
least annually, either by the Board of Directors of the Fund or by a vote
of a majority of the outstanding voting securities of the Fund, provided
that in either event such continuation shall be approved by the vote of a
majority of the directors who are not interested persons of the
Distributor, Principal Mutual Life Insurance Company, or the Fund cast in
person at a meeting called for the purpose of voting on such approval. This
Agreement may be terminated on 60 days written notice at any time, without
payment of any penalty, by the Fund or by the Distributor. This Agreement
shall terminate automatically in the event of its assignment.
In interpreting the provisions of this paragraph 15, the definitions
contained in section 2(a) of the Investment Company Act of 1940 and the
rules thereunder (particularly the definitions of "interested person",
"assignment" and "voting security") shall be applied.
16. AMENDMENT OF THIS AGREEMENT
No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination
is sought. If the Fund should at any time deem it necessary or advisable in
the best interests of the Fund that any amendment of this Agreement be made
in order to comply with the recommendations or requirements of the
Securities and Exchange Commission or other governmental authority or to
obtain any advantage under state or federal tax laws and should notify the
Distributor of the form of such amendment, and the reasons therefor, and if
the Distributor should decline to assent to such amendment, the Fund may
terminate this Agreement forthwith. If the Distributor should at any time
request that a change be made in the Fund's Articles of Incorporation or
By-laws, or in its method of doing business, in order to comply with any
requirements of federal law or regulations of the Securities and Exchange
Commission or of a national securities association of which the Distributor
is or may be a member, relating to the sale of shares of the Fund, and the
Fund should not make such necessary change within a reasonable time, the
Distributor may terminate this Agreement forthwith.
17. ADDRESS FOR PURPOSES OF NOTICE
Any notice under this Agreement shall be in writing, addressed and
delivered or mailed, postage prepaid, to the other party at such address as
such other party may designate for the receipt of such notices. Until
further notice to the other party, it is agreed that the address of the
Fund and that of the Distributor for this purpose shall be The Principal
Financial Group, Des Moines, Iowa 50392-0200.
IN WITNESS WHEREOF, the parties hereof have caused this Agreement to be
executed in duplicate on the day and year first above written.
PRINCIPAL SPECIAL MARKETS FUND, INC. PRINCOR FINANCIAL SERVICES CORPORATION
A. S. FILEAN S. L. JONES
By ________________________________ By ________________________________
A. S. Filean, Vice President S. L. Jones, President
<PAGE>
PRINCIPAL SPECIAL MARKETS FUND, INC.
DISTRIBUTION AGREEMENT - APPENDIX A
Portfolio
1. Mortgage-Backed Securities Portfolio
2. International Securities Portfolio
_____________________________
Home Office Use Only
_____________________________
Account Number
ACCOUNT APPLICATION
PRINCIPAL SPECIAL MARKETS FUND, INC.
_______________________________________________________________________________
1 ACCOUNT REGISTRATION
(Please Print)
For Trust, Corporation, Partnership or other entity, complete first two lines
exactly as the registration should appear. For a corporation, include a
completed Corporate Resolution Form indicating persons authorized to act on
behalf of the corporation with regard to this account. For a partnership attach
a copy of the Partnership Agreement. For a trust attach a copy of the Trust
Agreement.
If an individual account has more than one shareholder, the account will be
registered "JOINT TENANTS WITH RIGHTS OF SURVIVORSHIP" unless otherwise
specified.
FOr a Uniform Gift/Transfer to Minors Act ("UGMA/UTMA") account, use the name of
the adult custodian on the owner line and the name of the child on the joint
owner(s) line. Use child's social security number.
Type of Account:
__ Corporate __ Trust __ Partnership
Owner: ________________________________________________________________________
__ Personal __ UGMA/UTMA
Owner: ______________________________________________________ ______________
First Middle Initial Last Date of Birth
Joint
Owner(s): ___________________________________________________ ______________
First Middle Initial Last Date of Birth
_______________________________________________________________________________
Address
__________________________________ _______________________ ____________
City State Zip Code
( ) __________________________________ ( ) ________________________________
Business Phone Home Phone
__ Social Security or
__ Tax Identification Number
________ - _____ - ________
____ - _____________________
__ I am subject to backup withholding.
__ I am a nonresident alien - attach
IRS Form W-8
__ I am a resident alien - specify country of
citizenship and attach IRS Form W-8 and,
if appicable IRS Form 1078.
____________________________
Country
_______________________________________________________________________________
2 INVESTMENT AND DIVIDEND SELECTION
Dividend Elections
(Dividends and Distributions will be reinvested
if none of the boxes are checked)
______________________________________________________
PORTFOLIO INVESTMENT DIVIDENDS DIVIDENDS AND DIVIDENDS
AMOUNT* IN DISTRIBUTIONS DIRECTED TO
CASH IN CASH BANK ACCOUNT
International Securities
Portfolio $_________ __ __ __
Mortgage-Backed Securities
Portfolio $_________ __ __ __
__ Check Enclosed. (Make check payable to: PRINCOR)
__ Bank wire. FIRST OBTAIN AN ACCOUNT NUMBER BY TELEPHONING THE DISTRIBUTOR
TOLL FREE 1-800-521-1502 and providing 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.
After an account number is assigned, instruct the bank to wire transfer Federal
Funds to: Norwest Bank Iowa, N.A., Des Moines, Iowa 50309 for credit to: Princor
Management Corporation, Account number 3000499968; for further credit to:
Purchaser's Name and Account Number. Then complete the following:
__________________ ___________________ __________________ ___________________
Amount Wired Date Telephone Date Wired Assigned Fund
Order Placed Account Number
__________________ ___________________ _______________________________________
Name of Bank Account Number Address of Bank
*The minimum initial purchase of $1.0 million may be invested over a three month
period.
_______________________________________________________________________________
3 OPTIONAL FEATURES
__ A. Decline Telephone Transaction Services. Telephone transaction services
as described in the prospectus are declined. (If this box is not checked
telephone transaction services will apply)
__ B. Redemptions Directed to Bank Account. Redemptions may be wired (subject
to a wire charge of up to $15) or mailed for deposit only to a bank
account as follows: (please attach a deposit slip or voided check)
_____________________ _________________ _________________________________
Name of Bank Account Number Address of Bank
__ C. Periodic Withdrawal Plan. (Complete "3B." above if periodic withdrawals
are to be directed to a bank account.) Funds automztically are to be
withdrawn from the account, in the amount and on the date (any day)
indicated below.
Beginning Any (M)onthly, (Q)uarterly,
Portfolio Amount Month Day (S)emi-Annually or (A)nnually
_____________ _________ ___________ _____ ___________________________
________________________________________________________________________________
4 SIGNATURE AND TAX NUMBER CERTIFICATION
I have read this application and have had the opportunity to read the prospectus
and agree to all their terms. In addition, I have full authority and legal
capacity to authorize the instructions in this application. I have been given
the opportunity to ask any questions I have regarding this investment, and they
have been answered to my satisfaction. I understand the investment objective(s)
of the Portfolio(s) for which I am applying and believe it is compatible with my
investment objective(s). I understand that telephone transaction privileges
(including telephone redemption and exchange requests) apply unless I have
specifically declined them on this application and that I bear the risk of loss
resulting from any fraudulent telephone redemption request. I also understand
the Fund has adopted procedures designed to reduce the risk of fraudulent
transactions, which are disclosed in the prospectus. I certify under penalties
of perjury (check the appropriate response):
__ (1) that the Social Security or taxpayer identification number shown in
Section 1 is correct and that the IRS has never notified me that I am
subject to backup withholding, or has notified me that I am no longer
subject to such backup withholding; or
__ (2) I have not been issued a taxpayer identification number but have
applied for such number, or intend to apply for such number in the near
future. I understand that if I do not provide a correct taxpayer
identification number to the Fund within 60 days from the date of this
certification, backup withholding as described in the Fund's prospectus
will commence; or
___ (3) I am subject to backup withholding.
Sign below exactly as your name appears in Section 1. For joint registratin,
all owners must sign.
X____________________________________ X_______________________________________
Signature of shareholder Date Signature of co-shareholder Date
or authorized individual (if any) or authorized individual
________________________________________________________________________________
TO BE COMPLETED BY SELLING FIRM
Firm Name ______________________________________________________________________
Representative's Signature _____________________________________________________
Representative Number ______________________________
By ______________________________ Name (Please Print) _________________________
Authorized Signature of Firm
Main Office Address ____________________________________________________________
City, State, Zip _______________________________________________________________
Address of Office Servicing Account: ___________________________________________
City __________________________________
State, Zip _____________________________ Telephone _____________________________
________________________________________________________________________________
PRINCOR FINANCIAL SERVICES CORPORATION review _________________________
Date ___________________________
________________________________________________________________________________
Mail to: Principal Special Markets Fund, Inc.,
P.O. Box 10423, Des Moines, Iowa 50306
For assistance in completing this form, call toll-free 1-800-521-1502.
Instructions for Corporations, Trusts, Partnerships:
Please furnish appropriate documents and resolutions authorizing the
establishment of this account and appointing individuals authorized to transact
business for the account. Individuals signing this application should identify
the capacity in which they are acting.
PRINCOR FINANCIAL SERVICES CORPORATION
The Principal Financial Group
Des Moines, Iowa 50392-0200
(515) 247-5711
DEALER
SELLING AGREEMENT
FOR SHARES OF
PRINCIPAL SPECIAL MARKETS FUND, INC.
, 19 __
As Distributor and Principal Underwriter for Principal Special Markets
Fund, Inc., (hereafter sometimes referred to as the "Fund"), we invite you to
become a Selected Dealer to distribute shares of the Fund.
1. Orders for shares received from you and accepted by us will be at the
current public offering price applicable to each order as established by
the then current Prospectus of each Fund. Shares of the Fund are currently
sold at net asset value. The procedure relating to the handling of orders
shall be subject to instructions which we shall forward from time to time
to all Selected Dealers. Each Fund reserves the right to withdraw shares
from sale temporarily or permanently. All orders are subject to acceptance
or rejection by us and the Fund, each in its sole discretion.
2. The minimum initial purchase in the Fund is $2.5 million, which may be made
over a three month period. Investments made by an individual, the
individual's, spouse and dependent children or by a trustee will be treated
as investments made by a single investor in determining whether the minimum
initial purchase requirement is satisfied.
3. As a Selected Dealer, you will be paid a fee quarterly in an amount equal
to .10% on an annualized basis of the average net asset value of shares
held in all customer accounts which have been established due to your
efforts.
(a) There is no concession or sales charge when a distribution of
dividends or capital gains to a shareholder is reinvested for the
shareholder's account or when there is a transfer from one Portfolio
to the other Portfolio or from one account to another account.
(b) Since rights to fees are not vested, designations such as Dealer of
Record shall cease upon termination of this Agreement or upon the
investor's instructions to transfer an account to another Dealer of
Record.
4. Each party to this Agreement represents that it currently is and, while
this Agreement is in effect, will continue to be a member in good standing
of the National Association of Securities Dealers, Inc. and agrees to abide
by all Rules and Regulations of that Association, including the N.A.S.D.
Rules of Fair Practice. If you are a foreign dealer, not eligible for
membership in the Association, you still agree to abide by the Rules and
Regulations of the Association. We both agree to comply with all applicable
state and federal laws, rules and regulations of the Securities and
Exchange Commission and other authorized United States or foreign
regulatory agencies. You further agree that you will not sell, offer for
sale, or solicit shares of the Funds in any state where they have not been
qualified for sale. You will solicit applications and sell shares only in
accordance with the terms and on the basis of the representations contained
in the appropriate prospectus and any supplemental literature furnished by
us.
5. IT IS AGREED
(a) That neither of us shall withhold placing customers' orders for shares
so as to profit as a result of such withholding.
(b) We shall not purchase shares from the Funds except for the purpose of
covering purchase orders already received, and you shall not purchase
shares of the Funds except for the purpose of covering purchase orders
already received by you or for your own bona fide investment purposes,
provided, however, any shares purchased for your own bona fide
investment purposes will not be resold except through redemption of
the Funds.
(c) We shall accept only unconditional orders. Any right granted to you to
sell shares on behalf of the Funds will not apply to shares issued in
connection with the merger or consolidation of any other investment
company with a Fund or its acquisition, purchase or otherwise, of all
or substantially all the assets of any investment company or
substantially all the outstanding shares of any such company. Also,
any such right shall not apply to shares issued, sold, or transferred,
whether Treasury or newly issued shares, that may be offered by a Fund
to its shareholders as stock dividends or splits for not less than
"net asset value."
(d) We reserve the right to reject any order or application for shares or
to withdraw the offering price of shares entirely, and to change any
sales charge and dealer concession, provided that no such change shall
affect concessions on orders accepted by us prior to notice of such
change is required by law.
(e) You shall not purchase shares of a Fund from a shareholder at a price
per share which is lower than the current net asset value per share
which is next computed after the receipt of the tender of such shares
by the shareholder.
(f) If a sales charge and/or dealer concession apply to the purchase of
shares of the Fund and, if such shares are tendered for redemption
within seven business days after confirmation by us of your original
purchase order for such shares, (i) you shall forthwith refund to us
the full concession allowed to you on the original sale, and (ii) we
shall forthwith pay to the Fund our share of the "sales charge" on the
original sale by us, and shall also pay to the Fund the refund which
we received under (i) above. You shall be notified by us of such
redemption within ten days of the date on which proper request for
redemption is delivered to us or the Fund. Termination or cancellation
of this Agreement shall not relieve you or us from requirements of
this subparagraph (f).
(g) This agreement shall not be assigned or transferred in any manner
including by operation of law.
5. We will furnish you, without charge, reasonable quantities of Prospectuses
and sales material or supplemental literature relating to the sale of
shares of the Funds.
6. In all sales of shares, you act as principal and are not employed by us as
broker-agent or employee. You are not authorized to act for us nor to make
any representations in our behalf. In purchasing or selling shares
hereunder you are entitled to rely only upon the current Prospectus and
supplemental literature approved by the Distributor. In the offer and sale
of shares of the Funds, you shall not use any Prospectus or supplemental
literature not approved in writing by the Distributor. No person is
authorized to make any representations concerning shares of the Funds
except those contained in a current Prospectus and supplemental literature
approved in writing by the Distributor.
7. That you will indemnify, defend, and hold harmless our firm and all of its
affiliates, and their officers, directors, employees, agents, and assignees
against all losses, claims, demands, liabilities, and expenses, including
reasonable legal and other expenses incurred in defending such claims or
liabilities, whether or not resulting in any liability to any of them, or
which they or any of them may incur, including but not limited to alleged
violations of the Securities Act of 1933, as amended and/or to the
Securities Exchange Act of 1934, as amended, arising out of the offer or
sale of any securities pursuant to this Agreement, or arising out of the
breach of any of the terms and conditions of this Agreement, other than any
claim, demand, or liability arising from any untrue statement of alleged
untrue statement of a material fact contained in a prospectus for our
funds, as filed and in effect with the SEC, or any amendment or supplement
thereto, or in any application prepared or approved in writing by our
counsel and filed with any state regulatory agency in order to register or
qualify under the securities laws thereof (the "blue sky applications"), or
which shall arise out of or be based upon any omission or alleged omission
to state therein a material fact required to be stated in the prospectus or
any of the blue sky applications or which is necessary to make the
statements or a part thereof not misleading, which indemnity provision
shall survive the termination of this Agreement.
8. No obligation not expressly assumed by us in this Agreement shall be
implied therefrom.
9. Either party to this Agreement may terminate this Agreement by written
notice to the other party. We may modify this Agreement at any time by
written notice to you. Any notice shall be deemed to have been given on the
date upon which it was either delivered personally to the other party or to
any office or member thereof, or was mailed post-paid or delivered to a
telegraph office for transmission at his or its address as shown herein.
10. All communications to us should be sent to the above address. Any notice to
you shall be duly given if mailed or telegraphed to you at the address
specified by you herein.
11. This Agreement shall be construed in accordance with the laws of the State
of Iowa and shall be binding upon both parties hereto when signed by both
of us in the spaces provided below. This Agreement shall not be applicable
to shares of the Funds in any state in which those shares are not qualified
for sale.
12. If the foregoing represents your understanding, please so indicate by
signing in the proper space below.
Very truly yours,
PRINCOR FINANCIAL SERVICES CORPORATION
By:
We accept the offer set forth above, which constitutes a Selling Agreement
with us.
BY:
DEALER:
ADDRESS:
DATE:
CUSTODY AGREEMENT
(Investment Companies - Domestic Securities)
CUSTODY AGREEMENT, dated as of April 14, 1993, between BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking association with its
principal place of business at 555 California Street, San Francisco, California
94105 (the "Bank"), and Principal Special Markets Fund, Inc., a Corporation
organized under the laws of the State of Maryland, with its principal place of
business at The Principal Financial Group, Des Moines, IA 50392-0200 (the
Company).
W I T N E S S E T H:
WHEREAS, the Company is authorized to issue shares in separate series,
with each such series representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Company offers shares in two series, all series currently
and subsequently established by the Company and made subject to this Agreement
are herein referred to as the "Portfolio(s)"; and
WHEREAS, the Company desires to establish a custody account for each
Portfolio listed on Exhibit A (each, a "Custody Account") with the Bank to hold
and maintain stocks, shares, bonds, notes, debentures, warrants or other
instruments representing rights to receive or subscribe for the same, and other
securities or similar instruments (collectively "Securities"), and distributions
with respect to such Securities, and other property, including, without
limitation, cash, bullion and coins, owned or held by such Portfolio (Securities
and such other property are hereinafter collectively referred to as "Property");
and
WHEREAS, the Bank agrees to establish the Custody Accounts and to hold
and to maintain the Property in the Custody Accounts on the terms and conditions
herein set forth;
NOW, THEREFORE, in consideration of the premises and of the agreements
hereinafter set forth, the Bank and the Company hereby agree as follows:
1. APPOINTMENT AND ACCEPTANCE.
The Company hereby appoints the Bank as custodian of the Property it
desires to be held within the United States by the Bank and the Bank agrees to
act as custodian upon the terms and conditions hereinafter provided.
2. DELIVERY OF CORPORATE DOCUMENTS.
The Company has delivered or will deliver to the Bank prior to the
effective date hereof copies of the following resolutions, properly certified:
(a) resolutions of the Board of Directors of the Company appointing
the Bank as custodian under the provisions of this Agreement and approving the
execution and delivery of this Agreement by the Company;
(b) resolutions of the Board of Directors of the Company authorizing
the use of the securities depositories listed on Exhibit B hereto in accordance
with the provisions of Section 6 hereof;
(c) resolutions of the Board of Directors of the Company authorizing
the use of BankAmerica National Trust Company as the Bank's agent in accordance
with Section 7 hereof; and
(d) resolutions of the Board of Directors of the Company naming the
persons authorized to give instructions to the Bank in accordance with Section 8
hereof.
3. DELIVERY AND SAFEKEEPING; REGISTRATION.
(a) Delivery of Property. The Company has heretofore delivered, will
deliver or will cause to be delivered, Property owned by the Portfolios to the
appropriate Custody Accounts with the Bank, which Property the Bank agrees to
safekeep in the Custody Accounts as custodian for the Company. The Bank shall
not be responsible for any Property of the Company which is not delivered to the
Bank. All Securities (other than bearer securities) delivered to the Bank will
be registered in the name of any person specified in Section 3(b) hereof or
properly endorsed in a form for transfer satisfactory to the Bank.
(b) Registration. Securities held hereunder may be registered in the
name of the Bank, or any other entity authorized to hold Property in accordance
with Section 6 or 7 hereof (hereinafter referred to as an "Authorized Entity"),
or a nominee of the Bank or any Authorized Entity, and the Company shall be
informed upon request of all such registrations. In the event that any
Securities so registered are called for partial redemption by the issuer of such
Securities, the Bank or any Authorized Entity may allot, or cause to be
allotted, the called portion to the beneficial holders of such class of Security
in any manner that the Bank or the Authorized Entity deems to be fair and
equitable. The Company agrees to hold the Bank, any Authorized Entity or any
nominee thereof harmless from any claim, liability, loss, damage or expense
(including attorneys' fees) of every nature or incurred as record holder of
Securities held in the Custody Accounts.
Securities in registered form will be transferred into such names or
registrations as the Company may specify in Proper Instructions (as defined in
Section 8 hereof).
Notwithstanding any other provision in this Agreement to the contrary,
in the event that any Securities held hereunder are registered in a name other
than that of the Bank, an Authorized Entity or any nominee thereof, the Bank
shall be responsible solely for the safekeeping of such Securities and shall not
be responsible to collect income or to take any other action with respect to
such Securities.
4. PERFORMANCE BY THE BANK.
(a) Segregation and Identification of Property. The Bank will
segregate on its books as belonging to each Portfolio all Securities and other
Property held by the Bank or any Authorized Entity, so that at all times the
Property may be identified as belonging to such Portfolio.
(b) Receipt of Securities. In accordance with Proper Instructions, the
Bank shall pay for Securities purchased by a Portfolio out of monies held in the
Custody Account and receive Securities purchased for the account of the Company.
The Bank shall notify the Company promptly (and in any event no later than the
next business day) of any failure to receive Securities.
(c) Release of Securities. In accordance with Proper Instructions, the
Bank shall deliver Securities held in the Custody Account of a Portfolio
designated as sold for the account of the Portfolio to the person specified in
the instructions relating to such sale. The Bank shall notify the Company
promptly (and in any event no later than the next business day) of any failure
to deliver Securities.
(d) Settlement of Securities Transactions. On the settlement date, the
Bank shall (i) with respect to the purchase of Securities, debit the appropriate
Portfolio for the payment of Securities and credit the appropriate Portfolio
with Securities, and (ii) with respect to the sale of Securities, credit the
appropriate Portfolio with the sale price of Securities and debit the
appropriate Portfolio for Securities. In the event that a transaction does not
settle within a reasonable amount of time, the Bank may reverse the transaction
in the appropriate Portfolio.
(e) Options Transactions. In accordance with Proper Instructions, the
Bank shall (i) receive and retain confirmations or other documents evidencing
the purchase or writing of an option on a Security or on a securities index by a
Portfolio, (ii) deposit or maintain Securities and/or cash in a segregated
account in accordance with Section 4(h) hereof and (iii) release Securities
and/or cash in accordance with a notice or other communication evidencing
expiration, termination or exercise of such option.
(f) Commodity Futures Transactions. In accordance with Proper
Instructions, the Bank shall (i) receive and retain confirmations or other
documents evidencing the purchase or sale of a commodity futures contract or an
option thereon by a Portfolio, (ii) deposit and maintain Securities and/or cash
in a segregated account in accordance with Section 4(h) hereof and (iii) release
Securities and/or cash in accordance with any agreement or agreements among the
Bank, the Company and a futures commission merchant or other third party.
(g) Cash Accounts. All cash received or held by the Bank or any
Authorized Entity as interest, dividends, proceeds from transfer or other
payments for or with respect to Securities, or otherwise, shall be held in the
Custody Account of the appropriate Portfolio.
(h) Segregated Account. Upon receipt of Proper Instructions, the Bank
shall establish and maintain a segregated account or accounts for and on behalf
of a Portfolio, into which account or accounts may be transferred Securities
and/or cash, (i) for the purposes of compliance by the Company with the
procedures required by Investment Company Act Release No. 10666, or any
subsequent release or releases of the Securities and Exchange Commission ("SEC")
relating to the maintenance of segregated accounts by registered investment
companies; (ii) for the purposes of segregating Securities and/or cash in
connection with options purchased, sold or written by the Company or commodity
futures contracts or options thereon purchased or sold by the Company; or (iii)
for any other purposes.
(i) Collection. Unless otherwise instructed by the Company, the Bank
shall, with respect to all Securities held for a Portfolio, (i) collect all
income due or payable, including all dividends, whether in cash or securities;
(ii) present for payment, if necessary, and collect the amounts payable upon all
such Securities which may mature or be called, redeemed, retired or which
otherwise become payable; (iii) endorse checks, drafts and other negotiable
instruments for collection; (iv) exchange Securities in temporary form for
Securities in definitive form; (v) exchange Securities when the par value of
such Securities is changed and (vi) in general, attend to all non-discretionary
details in connection with the sale, exchange, substitution, purchase, transfer
and other dealings with Securities and other Property of the Portfolio pursuant
to this Agreement.
The Bank shall either credit the Custody Account of the appropriate
Portfolio on the date payment is received or shall advance to the Custody
Account of the appropriate Portfolio on such other date as may be agreed upon
between the Bank and the Company all amounts specified in clauses (i) and (ii)
above. If the Bank causes the Custody Account of the appropriate Portfolio to be
credited for the amounts specified in clauses (i) and (ii) above and payment
thereof is not promptly received by the Bank, the Custody Account of such
Portfolio shall be debited in the amount of such credit, and the Bank shall
provide oral or written notice to the Company that such amount cannot be
collected in the ordinary course of business. Neither the Bank nor any
Authorized Entity shall have any duty or obligation to institute legal
proceedings, file a claim or proof of claim in any insolvency proceeding or take
any other action with respect to the collection of such amount beyond its
ordinary collection procedures.
Notwithstanding the foregoing, the Bank shall only be responsible to
take the action in clauses (i) and (ii) above or to take any other action
required concerning Securities if notice thereof is contained in the
publications listed on Exhibit C hereto (which list may, upon notification to
the Company, be amended by the Bank) or is provided by the issuer to the Bank.
It will be the responsibility of the Company to furnish the Bank with the
declaration, record and payment dates and amounts of any dividends or income and
any other actions required concerning each of the Securities held by the Bank
hereunder when such information is not available from the foregoing sources.
(j) Voting and Other Action. The Bank will promptly transmit to the
Company, and will instruct any Authorized Entity to transmit to the Bank, all
financial reports, stockholder communications and notices from issuers of
Securities in the Custody Account of a Portfolio, all public information from
issuers of such Securities or, in the case of information relating to exchange
or tender offers, from offerors, and all notices, proxies and proxy soliciting
materials with respect to such Securities, to the extent sufficient copies are
received by the Bank or any Authorized Entity in time for forwarding to the
Company. In the case of Securities registered in the name of the Bank, any
Authorized Entity or any nominee thereof, proxies will be executed by the
registered holder prior to transmittal to the Company, but the manner in which
Securities are to be voted will not be indicated. Specific instructions
regarding proxies will be provided when necessary. Neither the Bank nor any
Authorized Entity nor any nominee thereof shall vote any Securities or authorize
the voting of any Securities or give any consent or take any other action with
respect thereto, except as otherwise provided herein.
The Company agrees that if it gives an instruction for the performance
of an act on the last permissible date of a period established by an exchange
offer, tender offer or proxy solicitation or other notice for the performance of
any act, the Bank will use reasonable efforts to effect the instruction, but the
Company shall hold the Bank harmless from any adverse consequences if it is
unable to do so.
(k) Corporate Action. Upon receipt of Proper Instructions, the Bank
will (i) exchange Securities in the Custody Account of a Portfolio for other
securities or cash issued or paid in connection with any reorganization,
recapitalization, merger, consolidation, stock split, or conversion and will
deposit Securities in accordance with the terms of any reorganization or
protective plan and (ii) sell any rights entitlement resulting from a rights
issue.
(l) Fractional Interests. Whenever a fractional interest resulting
from a rights issue, stock dividend, stock split or for any other reason is
received with respect to Securities in the Custody Account of a Portfolio, the
Bank is authorized (but not required) to sell such fractional interest on behalf
of the Portfolio.
(m) Payment of Bills. Upon receipt of Proper Instructions, the Bank
shall pay out of monies held in the Custody Account of a Portfolio bills,
statements and other obligations of the Portfolio.
(n) Ownership Certificates for Tax Purposes. The Bank shall execute
ownership and other certificates and affidavits for federal tax purposes in
connection with receipt of income or other payments with respect to Securities
held by the Bank within the United States and in connection with transfers of
such Securities. Any payment to the Company for a Portfolio under this Agreement
shall be made net of any withholdings, taxes or governmental charges of any kind
whatsoever imposed on such payments.
(o) Authority of the Bank. The Bank and any Authorized Entity are each
authorized to accept and open on the Company's behalf all mail or communications
received by it or directed in its care. The Bank may make, execute and deliver
for, on behalf of and in the name of the Company, any declarations, affidavits
or certificates of ownership which the Bank, in its discretion, deems necessary,
appropriate or desirable to perform its obligations pursuant to this Agreement.
5. REPORTING SYSTEM; RECORDS; AND INSPECTION.
(a) Reporting System. The Bank has in place a system for providing
direct access by customers to the Bank's reporting system ("Reporting System")
for Property in the Custody Accounts held in the United States. At the Company's
election, the Bank shall provide the Company with such instructions and
passwords as may be necessary in order for the Company to have such direct
access through the Company's terminal device. Such direct access shall be
restricted to information relating to the Custody Accounts. Where direct access
to the Reporting System is requested by the Company, the Company agrees to
assume full responsibility for the consequences of the use, including any misuse
or unauthorized use of the terminal device, instructions or passwords referred
to above and agrees to release, indemnify and hold harmless the Bank from and
against any and all claims, liabilities, losses, damages and expenses (including
attorneys' fees) of every nature suffered or incurred by the Bank by reason of
or in connection with such use by the Company of such terminal device, unless
such claims, liabilities, losses, damages and expenses can be shown to be the
result of negligence or willful misconduct by the Bank. Further, where the
Company elects to have direct access, the Bank shall provide the Company on each
business day a report of the preceding business day's transactions relating to
the Custody Account of each Portfolio and of the closing or net balances of the
preceding business day in the Custody Account of each Portfolio.
The Bank will supply to the Company from time to time as mutually
agreed upon a written statement with respect to all of the Property in the
Custody Account of each Portfolio. If the Company does not elect to use the
Reporting System, then the Bank will send to the Company an advice or
notification of any transfers of Property to or from the Custody Account of each
Portfolio.
(b) Records. As agreed upon between the Company and the Bank from time
to time, the Bank will prepare and maintain records relating to each Portfolio
required to be maintained under the Internal Revenue Code of 1986, as amended
("Code"), the Investment Company Act of 1940, as amended (the "Act"), the rules
and regulations under the Act, with particular attention to Section 31 of the
Act and Rules 31a-1 and 31a-2 thereunder, and shall preserve said records in the
manner and for the periods prescribed in the Code, the Act and such rules and
regulations. The Bank acknowledges that all of the records it will prepare and
maintain pursuant to this Section 5(b) will be the property of the Company and
that, upon request of the Company, it shall make the records available to the
Company, along with such other information and data as are reasonably required
by the Company, for inspection, audit or copying, or shall deliver said records
to the Company.
(c) Inspection. The Bank will assist the Company's independent
auditors and, upon receipt of Proper Instructions or upon demand from any
regulatory authority having jurisdiction over the Company, assist such authority
in any examination of Property held by the Bank on its premises and of the
Bank's records regarding Property held in the Custody Account. The Bank's costs
and expenses in facilitating such examinations and providing such records,
including, but not limited to, the cost to the Bank of providing personnel in
connection with examinations, shall be borne by the Company.
The Bank shall also, subject to restrictions under applicable law,
seek to obtain from any Authorized Entity with which the Bank maintains the
physical possession of any of the Property in the Custody Accounts such records
of the Authorized Entity relating to the Custody Accounts as may be required by
the Company in connection with an internal examination of the Company's own
affairs.
The Bank shall send to the Company such reports of the external
auditors of the Bank on the Bank's system of internal accounting control as the
Company may reasonably request from time to time. The Bank shall request and
upon receipt furnish to the Company reports of the external auditors of any
Authorized Entity as relate directly to the Authorized Entity's system of
internal accounting controls applicable to its duties under its agreement with
the Bank.
6. AUTHORIZED USE OF U.S. DEPOSITORIES.
(a) Authorized Depositories. The Company authorizes the Bank, for any
Property held hereunder, to use the services of any United States securities
depository permitted to perform such services for registered investment
companies and their custodians pursuant to Rule 17f-4 under the Act, including,
but not limited to, the Depository Trust Company, Participants Trust Company and
the Federal Reserve Book Entry System (each an "Authorized Depository"), in
accordance with the provisions of this Section 6.
(b) Bank's Account in the Authorized Depository. The Bank may keep
Property in an Authorized Depository provided that such Property is represented
in an account of the Bank in the Authorized Depository which shall not include
any assets of the Bank, other than assets held as custodian or trustee for its
customers.
(c) Bank's Records. The records of the Bank with respect to Property
of a Portfolio which is maintained in an Authorized Depository shall identify
the Property as belonging to the Portfolio.
(d) Advices of Transactions. Copies of all advices from the Authorized
Depository of transfers of Property for the account of the Bank, as custodian
for the Company, shall be maintained for the Company by the Bank for a period
not less than that required by Rules 31a-1 and 31a-2 under the Act and shall be
provided to the Company at its request. Upon request, the Bank shall furnish the
Company with written confirmation of each transfer to or from the account of the
Bank, as custodian for the Company, in the form of monthly transaction sheets
reflecting the previous month's transactions in the Authorized Depository for
the account of the Bank, as custodian for the Company.
(e) Company's Approval. The Board of Directors of the Company shall
approve the use of each Authorized Depository by the Company, as required by
Rule 17f-4 under the Act, that is listed on Exhibit A hereto, and a certified
copy of such resolution shall be provided to the Bank. The Company shall notify
the Bank if the continued use of such Authorized Depository is not approved
annually by the Board of Directors of the Company, as required by Rule 17f-4
under the Act.
(f) Standard of Care. The Bank shall not be liable for any claim,
liability, loss, damage or expense incurred by the Company arising out of any
act or omission by an Authorized Depository, except such claim, liability, loss,
damage or expense arising out of the negligence or willful misconduct of the
Bank. In the event of any loss to the Company be reason of the failure of the
Bank to exercise the standard of care in the performance of its duties, the Bank
shall be liable to the Company to the extent of the Company's damages, to be
determined based on the market value of the Property which is the subject of the
loss at the date of discovery of such loss and without reference to any special
or consequential damages.
7. AUTHORIZED USE OF OTHER AGENTS.
The Company authorizes the Bank at any time or times in the Bank's
discretion to appoint (and to remove) one or more agents, including BankAmerica
National Trust Company, a national banking association, that are qualified under
the Act to act as a custodian, as the Bank's agent or agents to carry out such
of the provisions of this Agreement as the Bank may from time to time direct.
The appointment of such agent or agents will not relieve the Bank of its
responsibilities hereunder.
8. PROPER INSTRUCTIONS.
For purposes of this Agreement, "Proper Instructions" shall mean all
instructions upon which the Bank is authorized to rely in accordance with this
Section 8.
The persons authorized by the Company to give instructions to the Bank
shall be named in resolutions of the Board of Directors of the Company certified
to the Bank from time to time by the Company's Secretary or an Assistant
Secretary (the "Certificate"). The Company will provide the Bank with
authenticated specimen signatures of the persons so authorized. The Company will
deliver all instructions to the Bank in accordance with the operating procedures
of the Bank provided by the Bank to the Company from time to time.
The Bank is authorized to rely and act upon written, signed
instructions of those persons identified in the Certificate, as well as those
persons which the Bank reasonably believes in good faith to have been authorized
by the Company to give instructions to the Bank.
The Bank is further authorized to rely upon any instructions received
by any other means and identified as having been given or authorized by any
person named to the Bank by the Company as authorized to give instructions,
regardless of whether such instructions shall in fact have been authorized or
given by any of such persons, provided that the Bank and the Company shall have
agreed upon the means of transmission and the method of identification for such
instructions. Instructions received by any other means shall include oral
instructions, provided that any oral instructions shall be promptly confirmed in
writing. In the event oral instructions are not subsequently confirmed in
writing, the Company agrees to hold the Bank harmless and without liability for
acting upon oral instructions which it reasonably believes it has received.
If the Company elects to use the Bank's Reporting System for Property
in the Custody Account, pursuant to Section 5(a) hereof, the Bank is also
authorized to rely and act upon any instructions received by it through a
terminal device, provided that such instructions are accompanied by code words
which the Bank has furnished to the Company, or its authorized persons, by any
method mutually agreed to by the Bank and the Company, and which the Bank shall
not have then been notified by the Company or any such authorized person to
cease to recognize, regardless whether such instructions shall in fact have been
given or authorized by the Company or any such person.
9. STANDARD OF CARE.
The Bank shall be responsible for the performance of only such duties
as are set forth herein. The Bank shall not be liable for any claim, liability,
loss, damage or expense incurred by the Company arising out of any act or
omission by the Bank, except for any such claim, liability, loss, damage or
expense arising out of its negligence or willful misconduct. In the event of any
loss to the Company by reason of the failure of the Bank to exercise the
standard of care in the performance of its duties, the Bank shall be liable to
the Company to the extent of the Company's damages, to be determined based on
the market value of the Property which is the subject of the loss at the date of
discovery of such loss and without reference to any special or consequential
damages.
The Company shall release, indemnify and hold harmless the Bank and
its officers, directors, employees, nominees and agents from any claim,
liability, loss, damage or expense (including attorneys' fees) incurred by the
Bank arising out of any act or omission by the Bank under this Agreement, except
for any claim, liability, loss, damage, or expense arising out of the Bank's
negligence or wilful misconduct.
The Bank shall be entitled to apply for and obtain the advice of
counsel (who may be counsel for the Company) on all matters at the expense of
the Company and may rely and act on such advice, and the Bank shall be without
liability for any action reasonably taken or omitted pursuant to such advice.
The Bank need not maintain any insurance for the benefit of the Company.
Notwithstanding anything herein to the contrary:
(a) The Bank will be under no duty or obligation to inquire into, and
shall not be liable for:
(i) the legality of any Proper Instruction given by the Company,
the legality of any purchase or sale of any Property or the
propriety of the amount for which such Property is purchased
or sold; and
(ii) the validity of the issuance of any Securities purchased or
the genuineness of any certificate evidencing Securities
purchased.
(b) All collections of funds or other property paid or distributed in
respect of Securities in the Custody Accounts shall be made at the risk of the
Company. The Bank shall have no liability for any loss occasioned by delay in
the actual receipt of notice by the Bank or an Authorized Entity of any payment,
redemption or other transaction regarding Securities in the Custody Accounts in
respect of which the Bank has agreed to take action as provided herein.
(c) The Bank shall not be liable for any action taken in good faith
upon Proper Instructions or upon any certified copy of any resolution of the
Board of Directors of the Company and may rely on the genuineness of any such
documents which it may in good faith believe to be validly executed.
10. FEES AND EXPENSES.
The fees payable to the Bank for the services rendered under this
Agreement and any reimbursement of expenses incurred by the Bank in connection
with the performance of such services shall be provided for in a fee schedule
attached hereto as Exhibit D. Exhibit D may be amended from time to time by the
Bank on sixty (60) days' written notice to the Company.
If the Bank, any Authorized Entity or any nominee thereof shall incur
or be assessed any taxes, charges, expenses, assessments, claims or liabilities
in connection with the performance of its duties hereunder, or if the Bank
should, in its discretion, advance funds to the Company because the funds in the
Custody Account are insufficient to pay the total amount payable upon a purchase
of Securities or for some other reason, or if the Company is for any other
reason indebted to the Bank, such advance or indebtedness shall be deemed a loan
from the Bank to the Company. The loan shall be payable upon demand, and in any
event within 24 hours from notice by the Bank to the Company of such loan.
Interest shall be charged and calculated on the basis of 360 days and actual
days elapsed. The Bank, in its discretion, may at any time charge any such loan
together with interest due thereon, if any, against any balance of account
standing to the credit of the Company on the Bank's books.
Loans which are denominated in United States dollars will bear
interest from the date incurred at the rate of 2% per annum in excess of the
Reference Rate as the Reference Rate may change from time to time. The
"Reference Rate" is the rate of interest publicly announced from time to time by
the Bank in San Francisco, California as its Reference Rate. The Reference Rate
is set by the Bank based on various factors, including the Bank's costs and
desired return, general economic conditions and other factors, and is used as a
reference point for pricing some loans. The Bank may price loans to its
customers at, above, or below the Reference Rate. Any change in the Reference
Rate shall take effect at the opening of business on the day specified in the
public announcement of a change in the Bank's Reference Rate.
The Bank shall have a continuing lien on and security interest in, and
right of offset against, any Property of the Portfolio at any time held by the
Bank for the benefit of the Portfolio or in which the Portfolio may have an
interest which is then in the possession or control of the Bank to the extent of
any amount the Portfolio may at any time owe the Bank for the services rendered
under this agreement. The Company represents and warrants that the Bank shall
have a first and prior lien on such Property. The Company understands and agrees
that the title of any account which is created pursuant to Section 6(b) hereof
or any other section of this Agreement shall not impair or affect in any manner
the lien on and security interest in, and the right of offset against, any
Property held in the Custody Accounts.
11. TERMINATION.
Either party may terminate this Agreement upon ninety (90) days
written notice to the other, sent by registered mail, provided that any
termination by the Company shall be authorized by a resolution of its Board of
Directors, a certified copy of which shall accompany such notice of termination,
and provided further that such resolution shall specify the name of the person
to whom the Bank shall deliver the Property in the Custody Accounts. If notice
of termination is given by the Bank, the Company shall, within ninety (90) days
following the giving of such notice, deliver to the Bank a certified copy of a
resolution of its Board of Directors specifying the names of the persons to whom
the Bank shall deliver the Property in the Custody Accounts. In either case the
Bank will deliver the Property to the person so specified, after deducting
therefrom any amounts which the Bank determines to be owed to it under Section
10 hereof. If within ninety (90) days following the giving of a notice of
termination by the Bank, the Bank does not receive from the Company a certified
copy of a resolution of its Board of Directors specifying the name of the person
to whom the Bank shall deliver the Property in the Custody Accounts, the Bank,
at its election, may deliver the Property to a bank or trust company doing
business in the State of New York to be held and disposed of pursuant to the
provisions of this Agreement, or may continue to hold such Property until a
certified copy of one or more resolutions as aforesaid is delivered to the Bank.
The obligations of the parties hereto regarding indemnities and payment of fees
and expenses shall survive the termination of this Agreement.
12. NOTICES AND MISCELLANEOUS.
All notices and other communications hereunder, except for Proper
Instructions and reports relating to the Property which are transmitted through
the Bank's Reporting System for Property in the Custody Account, shall be in
writing, telex or telecopy or, if oral, shall be promptly confirmed in writing,
and shall be hand-delivered, telexed, telecopied or mailed by prepaid first
class mail (except that notice of termination, if mailed, shall be mailed by
registered mail) to the Company, at its address set forth above, marked
"Attention: Layne Rasmussen" and to the Bank, at 2 Rector Street, 13th Floor,
New York, New York 10006, marked "Attention: Mayra Adonnino," or such other
address as each party may give notice of to the other.
This Agreement may not be amended except by writing signed by the
party against whom enforcement is sought. This Agreement shall not be assignable
by either party without the written consent of the other and any attempted
assignment in contravention thereof shall be null and void. This Agreement may
be executed in several counterparts, each of which shall be an original, but all
of which shall constitute one and the same instrument. This Agreement contains
the entire agreement between the Company and the Bank relating to custody of
Property and supersedes all prior agreements on this subject. The invalidity,
illegality or unenforceability of any provisions of this Agreement shall in no
way affect the validity, legality or enforceability of any other provision; and
if any provision is held to be unenforceable as a matter of law, the other
provisions shall not be affected thereby and shall remain in full force and
effect. The captions included in this Agreement are included only for the
convenience of the parties and in no way define or limit any of the provisions
hereof or otherwise affect their construction or effect.
13. CHOICE OF LAW.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York, without giving effect to conflict of laws
principles thereof.
IN WITNESS WHEREOF, each of the parties hereto have caused this
Agreement to be executed by its duly authorized officer.
BANK OF AMERICA NATIONAL TRUST PRINCIPAL SPECIAL MARKETS FUND, INC.
AND SAVINGS ASSOCIATION
not legible ARTHUR S. FILEAN
By: -------------------------- By: -------------------------------
Title: Senior Vice President Title: Vice President & Secretary
Attest: Attest:
MIKE BEER
By: ------------------------- By: -------------------------------
Title: ------------------------- Title: Financial Officer
<PAGE>
EXHIBIT A
PORTFOLIOS OF THE COMPANY
Mortgage-Backed Securities Portfolio
<PAGE>
EXHIBIT B
AUTHORIZED U.S. DEPOSITORIES
The Depository Trust Company
Federal Reserve Book Entry System
Participants' Trust Company
<PAGE>
EXHIBIT C
LIST OF PUBLICATIONS
Standard and Poor's Semi-Weekly Called Bond Record
IDSI Interactive Data Service
Daily Financial Card Services (NY based)
Depository Transmissions
Wall St. Journal
Los Angeles Times
<PAGE>
EXHIBIT D
FEE SCHEDULE
Mutual Funds
Administration $4,000.00 per quarter per complex
(allocated amount all participating funds)
Mutual Fund Sub-Accounts $ 200.00 each/per year
Maintenance Transactions
(per month) (each)
----------- ------------
Treasuries $ 1.00 $ 8.50
Municipal Bonds $ 1.00 $ 8.50
Commercial Paper (eligible) $ 1.00 $ 8.50
Commercial Paper (ineligible) $ 2.50 $ 20.00
Global (Euro) $ 0.50/1000 $ 25.00
Corporate Bonds $ 1.00 $ 8.50
Equities $ 1.00 $ 8.50
GNMAs (PTC) $ 1.50 $ 12.00
Mortgage Backed (physical) $ 2.50 $ 20.00
Tax Exempt (eligible) $ 1.00 $ 8.50
P&I Payments $ 8.00 per pool/per issue
On-Line $1,250.00 per quarter
Outgoing Wires $ 15.00 each
<PAGE>
December 4, 1995
Ms. Diane J. Wiley
Vice President
The Bank of New York
One Wall Street
New York, NY 10286
RE: Custody Agreements Between Bank of America and Principal Aggressive Growth
Fund, Inc., Principal Asset Allocation Fund, Inc., Princor Blue Chip Fund,
Inc., Princor Bond Fund, Inc., Principal Bond Fund, Inc., Princor Capital
Accumulation Fund, Inc., Principal Capital Accumulation Fund, Inc., Princor
Cash Management Fund, Inc., Principal Money Market Fund, Inc., Princor
Emerging Growth Fund, Inc., Principal Emerging Growth Fund, Inc., Princor
Government Securities Income Fund, Inc., Principal Government Securities
Fund, Inc., Princor Growth Fund, Inc., Principal Growth Fund, Inc., Princor
High Yield Fund, Inc., Principal High Yield Fund, Inc., Princor Balanced
Fund, Inc., Principal Balanced Fund, Inc., Princor Tax-Exempt Bond Fund,
Inc., Princor Tax-Exempt Cash Management Fund, Inc., Princor Utilities
Fund, Inc., and Principal Special Markets Fund, Inc. - (Mortgage-Backed
Securities Portfolio) (the "Funds")
Dear Ms. Wiley:
It is our understanding that The Bank of New York has purchased the custody
business of Bank of America's Global Securities Division and Master Employee
Benefits Trust business. You have asked that each of the funds consent to Bank
of America's assignment to The Bank of New York of the Contracts entered into
between Bank of America and each of the Funds (the "Contracts"). Upon receipt of
a Fund's consent and after the transfer of that Fund's account to The Bank of
New York's data processing systems, The Bank of New York will become successor
to Bank of America for that Account.
The Funds hereby consent to the assignment with the understanding that The Bank
of New York is obligated to perform under the Contracts to the same extent and
in the same manner as Bank of America, with the following exceptions:
1. The fee schedule for the Contracts shall be replaced with the fee schedule
attached.
2. Notwithstanding anything to the contrary in the Contracts, The Bank of New
York shall settle on an "actual settlement" basis rather than a "contractual
settlement" basis.
To indicate your agreement, please sign and return to me the enclosed copy of
this letter.
Best Regards,
JERRY G. WISGERHOF
Jerry G. Wisgerhof
Treasurer
CHRISTOPHER M. TEEVAN, V.P.
- ------------------------------
(Signature of The Bank of New York
Representative)
<PAGE>
THE BANK OF NEW YORK
Institutional Custody Fee Schedule
for Principal Mutual Life Insurance Company
and
Princor Financial Corporation
I. Securities Settled and Safekept Within the United States.
The Bank of New York's fee for custody services for each account is as
follows:
Maintenance Charges
Category Monthly Fee Per Issue
Depository Trust Company Issues $ 1.50
Federal Reserve Bank Book Entry Issues 1.50
Participants Trust Company Issues 1.50
Physical Issues 2.50
Transaction Charges
Category Per Transaction
Depository Trust Company Transactions $ 6.50
Federal Reserve Bank Book Entry Transactions 6.50
Participant Trust Company Transaction 10.00
Physical Transactions 20.00
Book Entry Paydowns 4.00
Physical Paydowns 6.00
Options 25.00
A Transaction is defined as a receipt or delivery versus payment or a free
receipt or deliver.
Reimbursable charges such as postage, shipping, transfer fees, etc., will be
billed as incurred.
II. General
Minimum: There is a monthly minimum of $4,000.00 for the
relationship
On-Line Services: $200.00 monthly access fee. Usage and connect time
will be billed to the customer.
Reconciliation Tapes: $150.00 per tape.
Wire Charges: $5.50 - incoming
$9.00 - outgoing
Dated August 30, 1995
Supersedes any previous fee schedule provided by The Bank of New York
Accepted By: CHRISTOPHER M. TEEVAN
---------------------
Title: VICE PRESIDENT
---------------------
Date: 12/5/95
---------------------
GLOBAL CUSTODY AGREEMENT
This AGREEMENT is effective April, 1993, and is between THE CHASE
MANHATTAN BANK, N.A. (the "Bank") and Principal Special Markets Fund, Inc.
(i.e., "Customer".)
1. Customer Accounts.
The Bank agrees to establish and maintain the following accounts
("Accounts):
(a) a custody account in the name of the Customer ("Custody Account")
for any and all stocks, shares, bonds, debentures, notes, mortgages or other
obligations for the payment of money, bullion, coin and any certificates,
receipts, warrants or other instruments representing rights to receive, purchase
or subscribe for the same or evidencing or representing any other rights or
interests therein and other similar property whether certificated or
uncertificated as may be received by the Bank or its Subcustodian (as defined in
Section 3) for the account of the Customer ("Securities"); and
(b) a deposit account in the name of the Customer ("Deposit Account")
for any and all cash in any currency received by the Bank or its Subcustodian
for the account of the Customer, which cash shall not be subject to withdrawal
by draft or check.
The Customer warrants its authority to: 1) deposit the cash and
Securities ("Assets") received in the Accounts and 2) give Instructions (as
defined In Section 11) concerning the Accounts. The Bank may deliver securities
of the same class in place of those deposited in the Custody Account.
Upon written agreement between the Bank and the Customer, additional
Accounts may be established and separately accounted for as additional Accounts
under the terms of this Agreement.
2. Maintenance of Securities and Cash at Bank and Subcustodian
Locations.
Unless Instructions specifically require another location acceptable
to the Bank:
(a) Securities will be held in the country or other jurisdiction in
which the principal trading market for such Securities is located, where such
Securities are to be presented for payment or where such Securities are
acquired; and
(b) cash will be credited to an account in a country or other
jurisdiction in which such cash may be legally deposited or is the legal
currency for the payment of public or private debts.
Cash may be held pursuant to Instructions in either interest or
non-interest bearing accounts as may be available for the particular currency.
To the extent Instructions are issued and the Bank can comply with such
Instructions, the Bank is authorized to maintain cash balances on deposit for
the Customer with itself or one of its affiliates at such reasonable rates of
interest as may from time to time be paid on such accounts, or in non-interest
bearing accounts as the Customer may direct, if acceptable to the Bank.
If the Customer wishes to have any of its Assets held in the custody
of an institution other than the established Subcustodians or their securities
depositories, such arrangement must be authorized by a written agreement, signed
by the Bank and the Customer.
3. Subcustodians and Securities Depositories.
The Bank may act under this Agreement through the subcustodians listed
in Schedule A of this Agreement with which the Bank has entered into
subcustodial agreements ("Subcustodians"). The Customer authorizes the Bank to
hold Assets in the Accounts in accounts which the Bank has established with one
or more of its branches or Subcustodians. The Bank and Subcustodians are
authorized to hold any of the Securities in their account with any securities
depository in which they participate.
The Bank reserves the right to add new, replace or remove
Subcustodians. The Customer will be given reasonable notice by the Bank of any
amendment to Schedule A. Upon request by the Customer, the Bank will identify
the name, address and principal place of business of any Subcustodian of the
Customer's Assets and the name and address of the governmental agency or other
regulatory authority that supervises or regulates such Subcustodian.
4. Use of Subcustodian.
(a) The Bank will identify Assets on its books as belonging to the
Customer.
(b) A Subcustodian will hold Assets together with assets belonging to
other customers of the Bank in accounts identified on such Subcustodian's books
as special custody accounts for the exclusive benefit of customers of the Bank.
(c) Any Assets in the Accounts held by a Subcustodian will be subject
only to the instructions of the Bank or its agent. Any Securities held in a
securities depository for the account of a Subcustodian will be subject only to
the instructions of such Subcustodian.
(d) Any agreement the Bank enters into with a Subcustodian for holding
its customer's assets shall provide that such assets will not be subject to any
right, charge, security interest, lien or claim of any kind in favor of such
Subcustodian except for safe custody or administration, and that the beneficial
ownership of such assets will be freely transferable without the payment of
money or value other than for safe custody or administration. The foregoing
shall not apply to the extent of any special agreement or arrangement made by
the Customer with any particular Subcustodian.
5. Deposit Account Transaction.
(a) The Bank or its Subcustodians will make payments from the Deposit
Account upon receipt of Instructions which include all information required by
the Bank.
(b) In the event that any payment to be made under this Section 5
exceeds the funds available in the Deposit Account, the Bank, in its discretion,
may advance the Customer such excess amount which shall be deemed a loan payable
on demand, bearing interest at the rate customarily charged by the Bank on
similar loans.
(c) If the Bank credits the Deposit Account on a payable date, or at
any time prior to actual collection and reconciliation to the Deposit Account,
with interest, dividends, redemptions or any other amount due, the Customer will
promptly return any such amount upon oral or written notification: (i) that such
amount has not been received in the ordinary course of business or (ii) that
such amount was incorrectly credited. If the Customer does not promptly return
any amount upon such notification, the Bank shall be entitled, upon oral or
written notification to the Customer, to reverse such credit by debiting the
Deposit Account for the amount previously credited. The Bank or its Subcustodian
shall have no duty or obligation to institute legal proceedings, file a claim or
a proof of claim in any insolvency proceeding or take any other action with
respect to the collection of such amount, but may act for the Customer upon
Instructions after consultation with the Customer.
6. Custody Account Transactions.
(a) Securities will be transferred, exchanged or delivered by the Bank
or its Subcustodian upon receipt by the Bank of Instructions which include all
information required by the Bank. Settlement and payment for Securities received
for and delivery of Securities out of the Custody Account may be made in
accordance with the customary or established securities trading or securities
processing practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivery of Securities to a
purchaser, dealer or their agents against a receipt with the expectation of
receiving later payment and free delivery. Delivery of Securities out of the
Custody Account may also be made in any manner specifically required by
Instructions acceptable to the Bank.
(b) The Bank, in its discretion, may credit or debit the Accounts on a
contractual settlement date with cash or Securities with respect to any sale,
exchange or purchase of Securities. Otherwise, such transactions will be
credited or debited to the Accounts on the date cash or Securities are actually
received by the Bank and reconciled to the Accounts.
(i) The Bank may reverse credits or debits made to the Accounts in
its discretion if the related transaction fails to settle within
a reasonable period, determined by the Bank in its discretion,
after the contractual settlement date for the related
transaction.
(ii) If any Securities delivered pursuant to this Section 6 are
returned by the recipient thereof, the Bank may reverse the
credits and debits of the particular transaction at any time.
7. Actions of the Bank.
The Bank shall follow Instructions received regarding Assets held in
the Accounts. However, until it receives instructions to the contrary, the Bank
will perform the following functions.
(a) Present for payment any Securities which are called, redeemed or
retired or otherwise become payable and all coupons and other Income items which
call for payment upon presentation, to the extent that the Bank or Subcustodian
is actually aware of such opportunities.
(b) Execute in the name of the Customer such ownership and other
certificates as may be required to obtain payments in respect of Securities.
(c) Exchange Interim receipts or temporary Securities for definitive
Securities.
(d) Appoint brokers and agents for any transaction involving the
Securities, including, without limitation, affiliates of the Bank or any
Subcustodian.
(e) Issue statements to the Customer, at times mutually agreed upon,
identifying the Assets in the Accounts.
The Bank will send the Customer an advice or notification of any
transfers of Assets to or from the Accounts. Such statements, advices or
notifications shall indicate the identity of the entity having custody of the
Assets. Unless the Customer sends the Bank a written exception or objection to
any Bank statement within sixty days of receipt, the Customer shall be deemed to
have approved such statement. In such event, or where the Customer has otherwise
approved any such statement, the Bank shall, to the extent permitted by law, be
released, relieved and discharged with respect to all matters set forth in such
statement or reasonably implied therefrom as though it had been settled by the
decree of a court of competent jurisdiction in an action where the Customer and
all persons having or claiming an interest in the Customer or the Customer's
Accounts were parties.
All collections of funds or other property paid or distributed in
respect of Securities in the Custody Account shall be made at the risk of the
Customer. The Bank shall have no liability for any loss occasioned by delay in
the actual receipt of notice by the Bank or by its Subcustodians of any payment,
redemption or other transaction regarding Securities in the Custody Account in
respect of which the Bank has agreed to take any action under this Agreement.
8. Corporate Actions: Proxies.
Whenever the Bank receives Information concerning the Securities which
requires discretionary action by the beneficial owner of the Securities (other
than a proxy), such as subscription rights, bonus issues, stock repurchase plans
and rights offerings, or legal notices or other material intended to be
transmitted to securities holders ("Corporate Actions"), the Bank will give the
Customer notice of such Corporate Actions to the extent that the Bank's central
corporate actions department has actual knowledge of a Corporate Action in time.
When a rights entitlement or a fractional interest resulting from a
rights issue, stock dividend, stock-split or similar Corporate Action is
received which bears an expiration date, the Bank will endeavor to obtain
instructions from the Customer or its Authorized Person, as defined in Section
10, but if instructions are not received in time for the Bank to take timely
action, or actual notice of such Corporate Action was received too late to seek
instructions, the Bank is authorized to sell such rights entitlement or
fractional interest and to credit the Deposit Account with the proceeds or take
any other action it deems, in good faith, to be appropriate in which case it
shall be held harmless for any such action.
The Bank will deliver proxies to the Customer or its designated agent
pursuant to special arrangements which may have been agreed to in writing. Such
proxies shall be executed in the appropriate nominee name relating to Securities
in the Custody Account registered in the name of such nominee but without
indicating the manner in which such proxies are to be voted; and where bearer
Securities are involved, proxies will be delivered in accordance with
instructions.
9. Nominees.
Securities which are ordinarily held in registered form may be
registered in a nominee name of the Bank, Subcustodian or securities depository,
as the case may be. The Bank may, without notice to the Customer, cause any such
Securities to cease to be registered in the name of any such nominee and to be
registered in the name of the Customer. In the event that any Securities
registered in a nominee name are called for partial redemption by the issuer,
the Bank may allot the called portion to the respective beneficial holders of
such class of security in any manner the Bank deems to be fair and equitable.
The Customer agrees to hold the Bank, Subcustodians, and their respective
nominees harmless from any liability arising directly or indirectly from their
status as a mere record holder of Securities in the Custody Account.
10. Authorized Persons.
As used in this Agreement, the term "Authorized Person" means
employees or agents, including investment managers, as have been designated by
written notice from the Customer or its designated agent to act on behalf of the
Customer under this Agreement. Such persons shall continue to be Authorized
Persons until such time as the Bank receives instructions from the Customer or
its designated agent that any such employee or agent is no longer an Authorized
Person.
11. Instructions.
The term "Instructions" means instructions of any Authorized Person
received by the Bank, via telephone. telex. TWX, facsimile transmission, bank
wire or other teleprocess or electronic instruction or trade information system
acceptable to the Bank which the Bank believes in good faith to have been given
by Authorized Persons or which are transmitted with proper testing or
authentication pursuant to terms and conditions which the Bank may specify.
Unless otherwise expressly provided, all instructions shall continue in full
force and effect until cancelled or superseded.
Any instructions delivered to the Bank by telephone shall promptly
thereafter be confirmed in writing by an Authorized Person (which confirmation
may bear the facsimile signature of such Person), but the Customer will hold the
Bank harmless for the failure of an Authorized Person to send such confirmation
in writing, the failure of such confirmation to conform to the telephone
instructions received or the Bank's failure to produce such confirmation at any
subsequent time. Either Party may electronically record any Instructions given
by telephone, and any other telephone discussions with respect to the Custody
Account. The Customer shall be responsible for safeguarding any testkeys,
identification codes or other security devices which the Bank shall make
available to the Customer or its Authorized Persons.
12. Standard of Care; Liabilities.
(a) The Bank shall be responsible for the performance of only such
duties as are set forth in this Agreement or expressly contained in instructions
which are consistent with the provisions of this Agreement.
(i) The Bank will use reasonable care with respect to its obligations
under this Agreement and the safekeeping of Assets. The Bank
shall be liable to the Customer for any loss which shall occur as
the result of the failure of a Subcustodian to exercise
reasonable care with respect to the safekeeping of such Assets to
the same extent that the Bank would be liable to the Customer if
the Bank were holding such Assets in New York. In the event of
any loss to the Customer by reason of the failure of the Bank or
its Subcustodian to utilize reasonable care, the Bank shall be
liable to the Customer only to the extent of the Customer's
direct damages, to be determined based on the market value of the
property which is the subject of the loss at the date of
discovery of such loss and without reference to any special
conditions or circumstances.
(ii) The Bank will not be responsible for any act, omission, default
or for the solvency of any broker or agent which it or a
Subcustodian appoints unless such appointment was made
negligently or in bad faith.
(iii)The Bank shall be indemnified by and without liability to the
Customer for any action taken or omitted by the Bank whether
pursuant to instructions or otherwise within the scope of this
Agreement if such act or omission was in good faith, without
negligence. In performing its obligations under this Agreement,
the Bank may rely on the genuineness of any document which it
believes in good faith to have been validly executed.
(iv) The Customer agrees to pay for and hold the Bank harmless from
any liability or loss resulting from the Imposition or assessment
of any taxes or other governmental charges and any related
expenses with respect to income from or Assets in the Accounts.
(v) The Bank shall be entitled to rely and may act upon the advice of
counsel (who may be counsel for the Customer) on all matters and
shall be without liability for any action reasonably taken or
omitted pursuant to such advice.
(vi) The Bank need not maintain any insurance for the benefit of the
Customer.
(vii)Without limiting the foregoing, the Bank shall not be liable for
any loss which results from: 1) the general risk of investing, or
2) investing or holding Assets in a particular country,
including, but not limited to, losses resulting from
nationalization, expropriation or other governmental actions:
regulation of the banking or securities industry; currency
restrictions, devaluations or fluctuations; and market conditions
which prevent the orderly execution of securities transactions or
affect the value of Assets.
(viii) Neither party shall be liable to the other for any loss due to
forces beyond their control including, but not limited to strikes
or work stoppages, acts of war or terrorism, insurrection,
revolution, nuclear fusion, fission or radiation, or acts of God.
(b) Consistent with and without limiting the first paragraph of this
Section 12, it is specifically acknowledged that the Bank shall have no duty or
responsibility to:
(i) question instructions or make any suggestions to the Customer or
an Authorized Person regarding such instructions;
(ii) supervise or make recommendations with respect to investments or
the retention of Securities:
(iii)advise the Customer or an Authorized Person regarding any
default in the payment of principal or income of any security
other than as provided in Section 5(c) of this Agreement;
(iv) evaluate or report to the Customer or an Authorized Person
regarding the financial condition of any broker, agent or other
party to which Securities are delivered or payments are made
pursuant to this Agreement; or
(v) review or reconcile trade confirmations received from brokers.
The Customer or its Authorized Persons issuing instructions shall
bear any responsibility to review such confirmations against
instructions issued to and statements issued by the Bank.
(c) The Customer authorizes the Bank to act under this Agreement
notwithstanding that the Bank or any of its divisions or affiliates may have a
material interest in a transaction, or circumstances are such that the Bank may
have a potential conflict of duty or Interest including the fact that the Bank
or any of its affiliates may provide brokerage services to other customers, act
as financial advisor to the issuer of Securities, act as a lender to the issuer
of Securities, act in the same transaction as agent for more than one customer,
have a material interest in the issue of Securities, or earn profits from any of
the activities listed herein.
13. Fees and Expenses.
The Customer agrees to pay the Bank for its services under this
Agreement such amount as may be agreed upon in writing, together with the Bank's
reasonable out-of-pocket or incidental expenses, including, but not limited to
legal fees. The Bank shall have a lien on and is authorized to charge any
Accounts of the Customer for any amount owing to the Bank under any provision of
this Agreement.
14. Miscellaneous.
(a) Foreign Exchange Transactions. To facilitate the administration of
the Customer's trading and investment activity, the Bank is authorized to enter
into spot or forward foreign exchange contracts with the Customer or an
Authorized Person for the Customer and may also provide foreign exchange through
its subsidiaries, affiliates or Subcustodians. Instructions, including standing
instructions, may be issued with respect to such contracts but the Bank may
establish rules or limitations concerning any foreign exchange facility made
available. In all cases where the Bank, its subsidiaries, affiliates or
Subcustodians enter into a foreign exchange contract related to Accounts, the
terms and conditions of the then current foreign exchange contract of the Bank,
its subsidiary, affiliate or Subcustodian and, to the extent not inconsistent,
this Agreement shall apply to such transaction.
(b) Certification of Residency, etc. The Customer certifies that it is
a resident of the United States and agrees to notify the Bank of any changes in
residency. The Bank may rely upon this certification or the certification of
such other facts as may be required to administer the Bank's obligations under
this Agreement. The Customer will indemnify the Bank against all losses,
liability, claims or demands arising directly or indirectly from any such
certifications.
(c) Access to Records. The Bank shall allow the Customer's Independent
public accountants reasonable access to the records of the Bank relating to the
Assets as is required in connection with their examination of books and records
pertaining to the Customer's affairs. Subject to restrictions under applicable
law, the Bank shall also obtain an undertaking to permit the Customer's
independent public accountants reasonable access to the records of any
Subcustodian which has physical possession of any Assets as may be required in
connection with the examination of the Customer's books and records.
(d) Governing Law; Successors and Assigns. This Agreement shall be
governed by the laws of the State of New York and shall not be assignable by
either party, but shall bind the successors in interest of the Customer and the
Bank.
(e) Entire Agreement; Applicable Riders. Customer represents that the
Assets deposited in the Accounts are (check one):
employee benefit plan or other assets subject to the
Employee Retirement Income Security Act of 1974, as
amended ("ERISA"):
x mutual fund assets subject to Securities and Exchange
Commission ("SEC") rules and regulations;
neither of the above.
This Agreement consists exclusively of this document together with
Schedule A, Exhibits I - and the following rider(s) [check applicable rider(s)]:
ERISA
x MUTUAL FUND
SPECIAL TERMS AND CONDITIONS
There are no other provisions of this Agreement and this Agreement
supersedes any other agreements, whether written or oral, between the parties.
Any amendment to this Agreement must be in writing, executed by both parties.
(f) Severability. In the event that one or more provisions of this
Agreement are held invalid, illegal or unenforceable in any respect on the basis
of any particular circumstances or in any jurisdiction, the validity, legality
and enforceability of any such provision and the remaining provisions, under
other circumstances or in other jurisdictions will not in any way be affected or
impaired.
(g) Waiver. Except as otherwise provided in this Agreement, no failure
or delay on the part of either party in exercising any power or right under this
Agreement operates as a waiver, nor does any single or partial exercise of any
power or right preclude any other or further exercise thereof, or the exercise
of any other power or right. No waiver by a party of any provision of this
Agreement, or waiver of any breach or default, is effective unless in writing
and signed by the party against whom the waiver is to be enforced.
(h) Notices. All notices under this Agreement shall be effective when
actually received. Any notices or other communications which may be required
under this Agreement are to be sent to the parties at the following addresses or
such other addresses as may subsequently be given to the other party in writing:
Bank: The Chase Manhattan Bank. N.A.
1211 Avenue of the Americas
New York, NY 10036
Attention: Global Custody Division
Customer: Principal Special Markets Fund, Inc. - International Securities
Portfolio
The Principal Financial Group
Des Moines, IA 50392-0200
(i) Termination. This Agreement may be terminated by the Customer or
the Bank by giving sixty days written notice to the other, provided that such
notice to the Bank shall specify the names of the persons to whom the Bank shall
deliver the Assets in the Accounts. If notice of termination is given by the
Bank, the Customer shall, within sixty days following receipt of the notice,
deliver to the Bank Instructions specifying the names of the persons to whom the
Bank shall deliver the Assets. In either case the Bank will deliver the Assets
to the persons so specified, after deducting any amounts which the Bank
determines in good faith to be owed to it under Section 13. If within Sixty days
following receipt of a notice of termination by the Bank, the Bank does not
receive instructions from the Customer specifying the names of the persons to
whom the Bank shall deliver the Assets, the Bank, at its election, may deliver
the Assets to a bank or trust company doing business in the State of New York to
be held and disposed of pursuant to the provisions of this Agreement, or to
Authorized Persons, or may continue to hold the Assets until instructions are
provided to the Bank.
CUSTOMER
By A. S. FILEAN
______________________________
Vice President and Secretary
Title
THE CHASE MANHATTAN BANK, N.A.
By KATHLEEN ROEDER
______________________________
Vice President
Title
STATE OF Iowa
ss:
COUNTY OF Polk
On this 21st day of April, 1993, before me personally came Arthur S.
Filean to me known, who being by me duly sworn, did depose and say that he/she
resides in Iowa at Des Moines; that he/she is Vice President of Principal
Special Markets Fund Inc. ("Customer"). The Customer which executed the
foregoing Agreement; that he/she knows the seal of the Customer; that the seal
affixed to the Agreement is such seal; that it was affixed by order of the
Customer, and that he/she signed his/her name thereto by like order.
A. S. FILEAN
___________________________
Sworn to before me this 21st
day of April, 1993
KATHY ARTERBURN
_______________________________
Notary
STATE OF New York
ss:
COUNTY OF New York
On this 23rd day of April, 1993, before me personally came Kathleen
Roeder to me known, who being by me duly sworn, did depose and say that she
resides in New York at 245 East 24th Street, that she is a Vice President of THE
CHASE MANHATTAN BANK, N.A. ("Bank"), the Bank which executed the foregoing
Agreement, that she knows the seal of the Bank; that the seal affixed to the
Agreement is such corporate seal; that it was so affixed by order of the Board
of Directors of the Bank, and that she signed her name thereto by like order.
KATHLEEN ROEDER
_____________________________
Sworn to before me this 23rd
day of April 1993
JULIA R. SCALIA
______________________________
<PAGE>
Mutual Fund Rider to Global Custody Agreement
Between The Chase Manhattan Bank, N.A. and
Principal Special Markets Fund, Inc.
, effective April 21, 1993
Customer represents that the Assets being placed in the Banks custody
are subject to the Investment Company Act of 1940 (the "Act"), as the same may
be amended from time to time.
Except to the extent that the Bank has specifically agreed to comply
with a condition of a rule, regulation or interpretation promulgated by or under
the authority of the SEC or the Exemptive Order applicable to accounts of this
nature issued to the Bank (Investment Company Act of 1940, Release No. 12053,
November 20, 1981), as amended, or unless the Bank has otherwise specifically
agreed, the Customer shall be solely responsible to assure that the maintenance
of Assets under this Agreement complies with such rules, regulations,
interpretations or exemptive order promulgated by or under the authority of the
Securities Exchange Commission.
The following modifications are made to the Agreement:
Section 3. Subcustodians and Securities Depositories.
Add the following language to the end of Section 3:
The terms Subcustodian and securities depositories as used in this
Agreement shall mean a branch of a qualified U.S. bank, an eligible foreign
custodian or an eligible foreign securities depository, which are further
defined as follows:
(a) "qualified U.S. Bank" shall mean a qualified U.S. bank as defined
in Rule 17f-5 under the Act:
(b) "eligible foreign custodian" shall mean (i) a banking institution
or trust company incorporated or organized under the laws of a country other
than the United States that is regulated as such by that country's government or
an agency thereof and that has shareholders' equity in excess of $200 million in
U.S. currency (or a foreign currency equivalent thereof, (ii) a majority owned
direct or indirect subsidiary of a qualified U.S. bank or bank holding company
that is incorporated or organized under the laws of a country other than the
United States and that has shareholders' equity in excess of $100 million in
U.S. currency (or a foreign currency equivalent thereof), (iii) a banking
institution or trust company incorporated or organized under the laws of a
country other than the United States or a majority owned direct or indirect
subsidiary of a qualified U.S. bank or bank holding company that is incorporated
or organized under the laws of a country other than the United States which has
such other qualifications as shall be specified in instructions and approved by
the Bank or (iv) any other entity that shall have been so qualified by exemptive
order, rule or other appropriate action of the SEC; and
(c) "eligible foreign securities depository" shall mean a securities
depository or clearing agency, incorporated or organized under the laws of a
country other than the United States, which operates (i) the central system for
handling securities or equivalent book-entries in that country or (ii) a
transnational system for the central handling of securities or equivalent
book-entries.
The Customer represents that its Board of Directors has approved each
of the Subcustodians listed in Schedule A to this Agreement and the terms of the
subcustody agreements between the Bank and each Subcustodian, which are attached
as Exhibits I through of Schedule A, and further represents that its Board has
determined that the use of each Subcustodian and the terms of each subcustody
agreement are consistent with the best interests of the Customer's fund(s) and
its (their) shareholders. The Bank will supply the Customer with any amendment
to Schedule A for approval. The Customer has supplied or will supply the Bank
with certified copies of its Board of Directors resolution(s) with respect to
the foregoing prior to placing Assets with any Subcustodian so approved.
Section 11. Instructions.
Add the following language to the end of Section 11:
Account transactions made pursuant to Sections 5 and 6 of this
Agreement may be made only for the purposes listed below. Instructions must
specify the purpose for which any transaction is to be made and the Customer
shall be solely responsible to assure that Instructions are in accord with any
limitations or restrictions applicable to the Customer by law or as may be set
forth in its prospectus.
(a) In connection with the purchase or sale of Securities at prices as
confirmed by instructions.
(b) When Securities are called, redeemed or retired, or otherwise
become payable.
(c) In exchange for or upon conversion into other securities alone or
other securities and cash pursuant to any plan or merger, consolidation,
reorganization, recapitalization or readjustment.
(d) Upon conversion of Securities pursuant to their terms into other
securities.
(e) Upon exercise of subscription, purchase or other similar rights
represented by Securities.
(f) For the payment of interest, taxes, management or supervisory
fees, distributions or operating expenses.
(g) In connection with any borrowings by the Customer requiring a
pledge of Securities, but only against receipt of amounts borrowed.
(h) In connection with any loans, but only against receipt of adequate
collateral as specified in Instructions which shall reflect any restrictions
applicable to the Customer.
(i) For the purpose of redeeming shares of the capital stock of the
Customer and the delivery to, or the crediting to the account of the Bank, its
Subcustodian or the Customer's transfer agent, such shares to be purchased or
redeemed.
(j) For the purpose of redeeming in kind shares of the Customer
against delivery of the shares to be redeemed to the Bank, its Subcustodian or
the Customer's transfer agent.
(k) For delivery in accordance with the provisions of any agreement
among the Customer, the Bank and a broker-dealer registered under the Securities
Exchange Act of 1934 (the "Exchange Act") and a member of the National
Association of Securities Dealers, Inc., relating to compliance with the rules
of The Options Clearing Corporation and of any registered national securities
exchange, or of any similar organization or organizations, regarding escrow or
other arrangements in connection with transactions by the Customer.
(l) For release of Securities to designated brokers under covered call
options, provided, however, that such Securities shall be released only upon
payment to the Bank of monies for the premium due and a receipt for the
Securities which are to be held in escrow. Upon exercise of the option, or at
expiration, the Bank will receive the Securities previously deposited from
brokers. The Bank will act strictly in accordance with instructions in the
delivery of Securities to be held in escrow and will have no responsibility or
liability for any such Securities which are not returned promptly when due other
than to make proper request for such return.
(m) For spot or forward foreign exchange transactions to facilitate
security trading, receipt of income from Securities or related transactions.
(n) For other proper purposes as may be specified in instructions
issued by an officer of the Customer which shall include a statement of the
Purpose for which the delivery or payment is to be made, the amount of the
payment or specific Securities to be delivered, the name of the person or
persons to whom delivery or payment is to be made, and a certification that the
purpose is a proper purpose under the instruments governing the Customer.
(o) Upon the termination of this Agreement as set forth in Section
14(i).
Section 12. Standard of Care; Liabilities.
Add the following subsection (d) to Section 12:
(d) The Bank hereby warrants to the Customer that in its opinion,
after due inquiry, the established procedures to be followed by each of its
branches, each branch of a qualified U.S. bank, each eligible foreign custodian
and each eligible foreign securities depository holding the Customer's
Securities pursuant to this Agreement afford protection for such Securities at
least equal to that afforded by the Bank's established procedures with respect
to similar securities held by the Bank and its securities depositories in New
York.
Section 14. Access to Records.
Add the following language to the end of Section 14(c):
Upon reasonable request from the Customer, the Bank shall furnish the
Customer such reports (or portions thereof) of the Bank's system of internal
accounting controls applicable to the Bank's duties under this Agreement. The
Bank shall endeavor to obtain and furnish the Customer with such similar reports
as it may reasonably request with respect to each Subcustodian and securities
depository holding the Customer's assets.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE A
Country Sub-Custodian Central Depository
<S> <C> <C>
Australia Chase Manhattan Bank Australia Austraclear Limited
Limited The Reserve Bank Information and
Transfer System
Austria Creditanstalt - Bankverein Oesterreichische Kontrollbank
Aktiengesellschaft
Belgium Generale Bank Caisse Interprofessionnelle de
Depots et de Virements de Titres.
Canada Royal Bank of Canada; Canada Canadian Depository for
Trust Company Securities
Chile Chase Manhattan Bank, N.A. None
(branch)
Denmark Den Danske Bank Vaerdipapircentralen
Finland Kansallis-Osake-Pankki Pankkitarkastu Virasto
France Banque Paribas SICOVAM
Germany Chase Bank, A.G. Deutscher Kassenverein AG
Greece National Bank of Greece, S.A. None
Hong Kong Chase Manhattan Bank, N.A. Central Clearing and Settlement
(branch) System
Indonesia Standard Chartered Bank None
Italy Chase Manhattan Bank, N.A. Monte Titoli
(branch)
Japan Chase Manhattan Bank, N.A. Japan Securities Depository
(branch) Center
Malaysia Chase Manhattan Bank, N.A. None
(branch)
Mexico Chase Manhattan Bank, N.A. Instituto para el Deposito de
(branch); Valores - INDEVAL
Banco National de Mexico, S.A.
Netherlands ABN-AMRO Bank NY Nederlands Centraal Instituut
Voor Girall Effectenverkeer
New Zealand National Nominees Limited None
Norway Den norske Bank Verdipapirsentralen
Portugal Banco Espirito Santo E Commercial Central de Valores Mobilaros
de Lisboa
Singapore Chase Manhattan Bank, N.A. Central Depository Pte
(branch)
South Korea Hong Kong & Shanghai Banking Korean Securities Settlement
Corporation, Ltd. Corporation
Spain Chase Manhattan Bank, N.A. Servicio de compensacion y
(branch) Liquidacion de Valores
Sweden Skandinaviska Enskilda Banken Vardepapperscentralen
Switzerland Union Bank of Switzerland Schweizerisch Effekten-Giro
Taiwan Chase Manhattan Bank, N.A. Taiwan Securities Central
(branch) Depository Co.
Thailand Chase Manhattan Bank, N.A. The Shares Depository Center
(branch)
United Kingdom Chase Manhattan Bank, N.A. None
(branch); First National Bank of
Chicago, London
United States Chase Manhattan Bank, N.A. Depository Trust Co.,
Participants Trust Co.,
Federal Book Entry System
</TABLE>
April 27, 1993
Principal Special Markets Fund, Inc.
Des Moines, IA 50392-0200
RE Registrtion Statement on Form N-1A
Pursuant to Securities Act of 1933
Registration No. 33-59474
I am familiar with the organization of Principal Special Markets Fund, Inc. (the
"Fund") under the laws of the State of Maryland and have reviewed the above-
referenced Registration Statement (the "Registration Statement") filed with the
Securities and Exchange Commission relating to the offer and sale of an
indefinite number of shares of the Corporation's Common Stock, par value $.01
per share (the "Shares"). Based upon such investigation as I have deemed
necessary, I am of the following opinion:
(1) The Fund has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Maryland.
(2) Each Portfolio has 100,000,000 shares of Common Stock which have been duly
authorized, and the Shares, when issued in accordance with the terms
described in the Registration Statement, will be legally issued, fully paid
and non-assessable.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours
MICHAEL D. ROUGHTON
_____________________________________
Michael D. Roughton
Counsel
MDR/ka
Consent of Independent Auditors
The Board of Directors and Shareholders
Principal Special Markets Fund, Inc.
We consent to the reference to our firm under the captions "Financial
Highlights" and "Additional Information - Financial Statements" in the
Prospectus in Part A and to the incorporation by reference in Part B of our
report dated January 19, 1996 on the financial statements and the financial
highlights of Principal Special Markets Fund, Inc., in this Post Effective
Amendment to Form N-1A Registration Statement under the Securities Act of 1933
(No. 33-59474) and Registration Statement under the Investment Company Act of
1940 (No. 811-7572).
Des Moines, Iowa
April 11, 1996
A MESSAGE FROM THE PRESIDENT
Dear Shareholder
Securities markets rebounded in 1995, and typically finished the year with
returns far above those of 1994. Shareholders of the Principal Special Markets
Fund benefited from these strong markets. The Fund's two
portfolios--Mortgage-Backed Securities Portfolio and International Securities
Portfolio--posted double-digit returns for the one-year period ending 12/31/95.
The Funds returned 19.26% and 12.02%, respectively.
Marty Schafer--Mortgage-Backed Securities Portfolio
"Though rates did not fall as much in 1995 as they rose in 1994, it was a still
a favorable year for fixed-income securities. U.S. Treasury securities with
maturities between three and ten years rallied anywhere from 225 basis points to
as many as 260 basis points. The drop in interest rates combined with the Fund's
controlled duration, contributed to superior investment results. At this time,
mortgage-backed security spreads seem priced for higher volatility coupled with
the possibility of increasing prepayments. Looking forward, we will maintain our
disciplined investment approach in hopes of producing good long-term total
returns."
Scott Opsal--International Securities Portfolio
"International stock markets performed fairly well in 1995, but their gains were
overshadowed by the spectacular run in U.S. equities. Europe was the strongest
international region, as it was up over 20% for the year. Japanese markets were
essentially flat and the category of emerging markets lost 7% lead by a drop in
Latin America of 15%. Last year, markets which offered good economic investment
values beat overpriced markets almost across the board. Entering 1996, Europe
continues to command most of our attention due to ongoing economic growth and
falling interest rates. Asia appears fairly valued, and thus is not able to bite
into our European weighting. At this time we view Mexico as too unpredictable,
so our interest in this area remains light. Though Japan did reach more
reasonable levels during the past year, it rebounded so quickly and strongly
that investment there currently looks uninteresting to us."
We hope you find this Annual Report informative. We look forward to another fine
year in 1996. Please feel free to contact us at (800) 521-1502 if you have any
questions.
Sincerely,
STEPHAN L. JONES
Stephan L. Jones
President
<PAGE>
INDEX TO REPORT FOR
PRINCIPAL SPECIAL MARKETS FUND, INC.
Page
Statements of Assets and Liabilities...................................... 2
Statements of Operations ................................................. 3
Statements of Changes in Net Assets....................................... 4
Notes to Financial Statements............................................. 5
Schedules of Investments ................................................. 8
Financial Highlights...................................................... 12
Report of Independent Auditors............................................ 13
Federal Income Tax Information............................................ 14
<PAGE>
<TABLE>
<CAPTION>
December 31, 1995
STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL SPECIAL MARKETS FUND, INC.
International Mortgage-Backed
Securities Securities
Portfolio Portfolio
<S> <C> <C>
Assets
Investment in securities -- at value (cost -- $15,474,733
and $14,116,194, respectively) (Note 4)....................... $17,288,230 $14,243,770
Cash............................................................. 13,456 235,170
Dividends and interest receivable................................ 45,869 84,644
Other assets..................................................... 111 128
Total Assets 17,347,666 14,563,712
Liabilities
Accrued expenses................................................. 27,136 18,817
Payables:
Dividends to shareholders..................................... -- 21,847
Investment securities purchased............................... 69,396 --
Total Liabilities 96,532 40,664
Net Assets Applicable to Outstanding Shares ................. $17,251,134 $14,523,048
Capital Stock (par value: $.01 a share)
Shares authorized................................................ 100,000,000 100,000,000
Shares issued and outstanding.................................... 1,474,162 1,427,438
Net Asset Value Per Share ..................................... $11.70 $10.17
Net Assets Consist of:
Capital Stock.................................................... $ 14,742 $ 14,274
Additional paid-in capital....................................... 15,225,941 15,456,231
Accumulated overdistributed net investment income................ (97,960) --
Accumulated undistributed net realized gain (loss) from:
Investment transactions....................................... 297,589 (1,075,033)
Foreign currency transactions................................. (3,282) --
Net unrealized appreciation of investments....................... 1,813,497 127,576
Net unrealized appreciation on translation of assets and
liabilities in foreign currencies............................. 607 --
Total Net Assets $17,251,134 $14,523,048
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1995
STATEMENTS OF OPERATIONS
PRINCIPAL SPECIAL MARKETS FUND, INC.
International Mortgage-Backed
Securities Securities
Portfolio Portfolio
<S> <C> <C>
Net Investment Income
Income:
Dividends..................................................... $ 446,386 $ --
Less: Withholding tax on foreign dividends.................... (52,376) --
Interest...................................................... 42,252 970,720
Total Income 436,262 970,720
Expenses:
Management and investment advisory fees (Note 3) .......... 146,209 61,455
Net Investment Income 290,053 909,265
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency
Net realized gain (loss) from:
Investment transactions....................................... 962,249 (299,517)
Foreign currency transactions................................. (3,282) --
Net increase in unrealized appreciation/ depreciation on:
Investments................................................... 620,454 1,764,884
Translation of assets and liabilities in foreign currencies... 34 --
Net Realized and Unrealized Gain on
Investments and Foreign Currency 1,579,455 1,465,367
Net Increase in Net Assets
Resulting from Operations $1,869,508 $2,374,632
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31
STATEMENTS OF CHANGES IN NET ASSETS
PRINCIPAL SPECIAL MARKETS FUND, INC.
International Mortgage-Backed
Securities Securities
Portfolio Portfolio
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Operations
Net investment income............................................ $ 290,053 $ 153,520 $ 909,265 $ 1,497,893
Net realized gain (loss) from investment transactions............ 962,249 1,155,739 (299,517) (775,513)
Net realized (loss) from foreign currency transactions........... (3,282) (61,574) -- --
Net increase (decrease) in unrealized appreciation/depreciation
on investments and translation of assets and liabilities in
foreign currencies............................................ 620,488 (2,325,292) 1,764,884 (1,838,174)
Net Increase (Decrease) in Net Assets
Resulting from Operations 1,869,508 (1,077,607) 2,374,632 (1,115,794)
Dividends and Distributions to Shareholders
From net investment income....................................... (142,902) (153,520) (909,265) (1,497,893)
Excess distribution of net investment income (Note 1)............ (97,960) (174,931) -- --
From net realized gain on investments and
foreign currency transactions................................. (1,015,198) (680,385) -- --
(1,256,060) (1,008,836) (909,265) (1,497,893)
Capital Share Transactions (Note 5)
Shares sold ..................................................... 100,000 -- -- 2,500,000
Shares issued in reinvestment of dividends
and distributions............................................. 996,091 790,090 739,171 1,168,333
Shares redeemed ................................................ -- -- (2,395,23) (10,649,933)
Net Increase (Decrease) in Net Assets from
Capital Share Transactions 1,096,091 790,090 (1,656,064) (6,981,600)
Total Increase (Decrease) 1,709,539 (1,296,353) (190,697) (9,595,287)
Net Assets
Beginning of period.............................................. 15,541,595 16,837,948 14,713,745 24,309,032
End of period (including overdistributed net
investment income as set forth below)......................... $17,251,134 $15,541,595 $14,523,048 $14,713,745
Overdistributed Net Investment Income ................ $ (97,960) $ (114,791) $ -- $ --
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
PRINCIPAL SPECIAL MARKETS FUND, INC.
Note 1 -- Significant Accounting Policies
Principal Special Markets Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as an open-end diversified
management investment company and operates in the mutual fund industry. The Fund
currently consists of two portfolios (known as the International Securities and
Mortgage-Backed Securities Portfolios).
The Fund values securities for which market quotations are readily available at
market value, which is determined using the last reported sale price or, if no
sales are reported, as is regularly the case for some securities traded
over-the-counter, the last reported bid price. When reliable market quotations
are not considered to be readily available, which may be the case, for example,
with respect to certain debt securities and preferred stocks, the investments
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 Fund's Board of Directors.
Securities with remaining maturities of 60 days or less are valued at amortized
cost, which approximates market.
With respect to the International Securities Portfolio, the value of foreign
securities in foreign currency amounts is expressed in U.S. dollars at the
closing daily rate of exchange. The identified cost of the portfolio holdings is
translated at approximate rates prevailing when acquired. Income and expense
amounts are translated at approximate rates prevailing when received or paid,
with daily accruals of such amounts reported at approximate rates prevailing at
the date of valuation.
Since the carrying amount of the foreign securities of the International
Securities Portfolio is determined based on the exchange rate and market values
at the close of the period, it is not practicable to isolate that portion of the
results of operations arising as a result of changes in the foreign exchange
rates from the fluctuations arising from changes in the market prices of
securities during the period.
The Fund records investment transactions generally one day after the trade date.
The identified cost basis has been used in determining the net realized gain or
loss from investment transactions and unrealized appreciation or depreciation of
investments. Dividends are taken into income on an accrual basis as of the
ex-dividend date and interest income is recognized on an accrual basis.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, and the difference between the
amount of dividends and foreign withholding taxes recorded on the portfolio's
books and the U.S. dollar equivalent of the amounts actually received or paid.
Net unrealized foreign exchange gains and losses arise from changes in the value
of assets and liabilities other than investments in securities at fiscal year
end, resulting from changes in the exchange rate.
With respect to the Mortgage-Backed Securities Portfolio, all net investment
income is declared as a dividend daily to shareholders of record as of that day,
and all distributions of realized gains from investment transactions are
recorded on the ex-dividend date. Dividends and distributions to shareholders of
the International Securities Portfolio are recorded on the ex-dividend date.
Dividends and distributions to shareholders from net investment income and net
realized gain from investment and foreign currency transactions is determined in
accordance with federal income tax regulations, which may differ from generally
accepted accounting principles. To the extent these "book/tax" differences are
permanent in nature (i.e. that they result from other than timing of recognition
- - "temporary"), such amounts are reclassified within the capital accounts based
on their federal tax-basis treatment; temporary differences do not require
reclassification. Reclassifications made for the years ended December 31, 1995
and 1994 were not material.
Due to the timing of dividend distributions and the differences in accounting
for income and realized gains (losses) for financial statement and federal
income tax purposes, the fiscal year in which amounts are distributed may differ
from the year in which the income and realized gains (losses) are recorded for
financial statement purposes by the portfolio. The differences between the
income and gains distributed on a book versus tax basis are shown as excess
distributions of net investment income and net realized gain on investments in
the accompanying Statements of Changes in Net Assets.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2 -- Federal Income Taxes
No provision for federal income taxes is considered necessary because the Fund
is qualified as a "regulated investment company" under the Internal Revenue Code
and intends to distribute each year, substantially all of its net investment
income and realized capital gains to shareholders. The cost of investments for
federal income tax reporting purposes is approximately the same as that for
financial reporting purposes.
At December 31, 1995, Principal Special Markets Mortgage-Backed Securities
Portfolio had a net capital loss carryforward of approximately $1,075,000
expiring in 2002 and 2003.
Note 3 -- Management Agreement and Transactions With Affiliates
The Fund has agreed to pay investment advisory and management fees to Princor
Management Corporation (wholly owned by Princor Financial Services Corporation,
a subsidiary of Principal Mutual Life Insurance Company) (the "Manager") and to
Invista Capital Management, Inc. ("Invista"), an indirect wholly-owned
subsidiary of Principal Mutual Life Insurance Company, pursuant to a
sub-advisory agreement. Invista has agreed to assume the obligations of the
Manager to provide investment advisory services for the Fund in return for the
advisory fee paid by the Fund and to reimburse the Manager for the other costs
it incurs under the management agreement. The annual rate used in this
calculation for the International Securities Portfolio and the Mortgage-Backed
Securities Portfolio is .90% and .45%, respectively, of the average daily value
of each portfolio's net assets.
Brokerage commissions were paid to an affiliate by the International Securities
Portfolio in the amount of $2,888 during the year ended December 31, 1995. No
brokerage commissions were paid to this affiliate during the year ended December
31, 1994.
At December 31, 1995, Principal Mutual Life Insurance Company owned shares of
the Fund's portfolios as follows:
International Securities Portfolio 1,163,843
Mortgage-Backed Securities Portfolio 1,180,567
Note 4 -- Investment Transactions
For the year ended December 31, 1995, the cost of investment securities
purchased and proceeds from investment securities sold (not including short-term
investments and U.S. government securities) by the Fund were as follows:
Purchases Sales
International Securities Portfolio $7,199,936 $7,245,885
Mortgage-Backed Securities Portfolio 948,531 302,720
At December 31, 1995, net unrealized appreciation of investments by the Fund was
composed of the following:
Net Unrealized
Gross Unrealized Appreciation
Appreciation (Depreciation) of Investments
International
Securities Portfolio $3,112,559 $(1,299,062) $1,813,497
Mortgage-Backed
Securities Portfolio 200,793 (73,217) 127,576
At December 31, 1995, Principal Special Markets Fund, Inc. - International
Securities Portfolio held the following securities which may require
registration under the Securities Act of 1933 or an exemption therefrom in order
to effect a sale in the ordinary course of business.
Value at Value as a
Date of December 31, Percentage of
Security Description Acquisition Cost 1995 Net Assets
Alfa SA; Convertible
Subordinated Debentures 9/26/95 $199,250 $196,000 1.14%
Royal Plastics Group 11/23/94 58,057 102,816 .59%
Voest-Alpine Stahl 10/27/95 103,583 97,574 .56%
396,390 2.29%
The Mortgage-Backed Securities Portfolio's investments are with various issuers;
while the International Securities Portfolio's investments are with various
issuers in various industries. The Schedules of Investments contained herein
summarize the concentration of credit risk for Mortgage-Backed Securities
Portfolio by issuers and International Securities Portfolio by country, industry
and issuer.
Note 5 -- Capital Share Transactions
Transactions in Capital Stock by portfolio were as follows:
International Mortgage-Backed
Securities Portfolio Securities Portfolio
Year Ended December 31, 1995:
Shares sold ...................... 9,107 --
Shares issued in reinvestment of
dividends and distributions ..... 88,579 75,504
Shares redeemed .................. -- (262,636)
Net Increase (Decrease) 97,686 (187,132)
Year Ended December 31, 1994:
Shares sold ...................... -- 246,548
Shares issued in reinvestment of
dividends and distributions ..... 67,888 123,599
Shares redeemed .................. -- (1,161,754)
Net Increase (Decrease) 67,888 (791,607)
Note 6 -- Line of Credit
The Fund has an unsecured line of credit with a bank which allows each portfolio
to borrow up to $500,000. Borrowings are made solely to facilitate the handling
of unusual and/or unanticipated short-term cash requirements. Interest is
charged to each portfolio, based on its borrowings, at a rate equal to the
bank's Fed Funds Unsecured Rate plus 100 basis points. Additionally, a
commitment fee is charged at the annual rate of .25% on the line of credit. At
December 31, 1995, the Fund had no outstanding borrowings under the line of
credit.
<PAGE>
December 31, 1995
SCHEDULES OF INVESTMENTS
PRINCIPAL SPECIAL MARKETS FUND, INC.
International Securities Portfolio
Shares
Held Value
Common Stocks (96.50%)
AUSTRALIA (4.92%)
Commercial Banks (2.47%)
National Australia Bank, Ltd. 47,255 $ 425,332
Crude Petroleum & Natural
Gas (0.58%)
Ampolex Ltd. 45,600(a) 99,726
Gas Production &
Distribution (0.91%)
Australia Gas & Light 42,000 157,774
Miscellaneous Food & Kindred
Products (0.96%)
Burns, Philp & Co., Ltd. 73,998 165,684
848,516
AUSTRIA (2.31%)
Blast Furnace & Basic Steel
Products (0.56%)
Voest - Alpine Stahl 3,400(b) 97,574
Gas Production & Distribution (1.16%)
Omv AG 2,300 199,846
Railroad Equipment (0.59%)
Vae AG 1,200 101,288
398,708
CANADA (1.03%)
Coal Mining Services (0.44%)
Morgan Hydrocarbons, Inc. 25,000(a) 76,072
Miscellaneous Plastics Products,
NEC (0.59%)
Royal Plastics Group 7,100(a)(b) 102,816
178,888
CHILE (0.62%)
Telephone Communication (0.62%)
Compania De
Telecomunicaciones ADR 1,300 107,738
DENMARK (0.92%)
Telephone Communication (0.92%)
Tele Danmark B 2,900 158,559
FINLAND (4.15%)
Forest Products (0.43%)
Metsa-Serla 2,400 74,067
Miscellaneous Wood Products (0.63%)
Enso-Gutzeit 16,300 108,867
Pulp Mills (1.23%)
Kymmene 8,000 211,884
Sugar & Confectionary
Products (0.67%)
Huhtamake I Free 4,800 116,075
Telephone Communication (1.19%)
Nokia Corp. Class A ADR 5,300 206,037
716,930
FRANCE (2.03%)
Drugs (2.03%)
Roussel-Uclaf 2,060 349,625
GERMANY (4.27%)
Flat Glass (0.37%)
Weru AG 180 63,510
Industrial Inorganic
Chemicals (1.85%)
Bayer AG 1,200 319,267
Miscellaneous Chemical
Products (2.05%)
Hoechst AG 1,300 354,229
737,006
GREECE (0.51%)
Central Reserve Depositories (0.51%)
Ergo Bank 2,200 87,834
HONG KONG (5.17%)
Communications Equipment (0.29%)
ABC Communications Holdings Ltd. 278,000 50,337
Electric Services (0.54%)
CEP-A Consolidated Electric
Power-Asia 51,200 93,037
Electronic Components
& Accessories (0.50%)
Varitronix 47,000 87,229
Holding Offices (1.09%)
First Pacific Co., Ltd. 168,893 187,854
Miscellaneous Textile Goods (0.44%)
Espirit Asia 220,000 75,402
Office Furniture (0.55%)
Lamex Holdings 382,000 94,364
Personal Credit Institutions (0.65%)
Manhattan Card Co. 263,000 112,249
Security Brokers & Dealers (1.11%)
Peregrine Investment Holdings 148,000 191,414
891,886
INDIA (0.78%)
Coppor Ores (0.78%)
Reliance Industries 9,600(a) 134,400
INDONESIA (1.34%)
Broadwoven Fabric Mills,
Cotton (0.51%)
Roda Vivatex 150,000 88,566
Miscellaneous Furniture
& Fixtures (0.28%)
PT Surya Toto 22,200 48,547
Pulp Mills (0.55%)
Asia Pacific Resources 20,000(a) 95,000
232,113
ITALY (2.87%)
Metalworking Machinery (0.19%)
Danieli & Co.-DR 12,400 33,611
Telephone Communication (2.68%)
Telecom Italia-DI 203,000 248,504
Telecom Italia Mobile 203,000(a) 213,698
462,202
495,812
JAPAN (1.03%)
Computer & Office Equipment (0.21%)
Canon, Inc. 2,000 36,258
Electronic Components
& Accessories (0.43%)
Murata Mfg. 2,000 73,678
Engines & Turbines (0.39%)
Mabuchi Motor 1,100 68,462
178,398
KOREA (2.06%)
Concrete Work (0.60%)
Hanil Cemet 1,800 104,418
Construction & Related
Machinery (0.56%)
Keumkang 1,300 97,032
Electric Services (0.90%)
Korea Electric Power Corp. 3,900 154,849
356,299
MALAYSIA (0.55%)
Holding Offices (0.55%)
C. I. Holdings 27,000 95,711
MEXICO (1.88%)
Aircraft & Parts (0.19%)
Cemex SA NPV 9,928 32,987
Cement, Hydraulic (0.47%)
Apasco SA 20,000 81,897
Commercial Banks (0.24%)
Groupo Financiero Bancomer
Series B 141,000(a) 39,712
Groupo Financiero Bancomer
Series L 5,222(a) 1,342
41,054
Department Stores (0.18%)
Sears Roebuck De Mexico SA 13,200(a) 30,804
Miscellaneous Food Kindred
Products (0.06%)
Grupo Herdez SA 45,000(a) 9,812
Telephone Communication (0.74%)
Telefonos De Mexico SA ADR 4,000 127,500
324,054
NETHERLANDS (14.53%)
Beer, Wine, & Distilled
Beverages (0.55%)
Heineken Holdings 575 94,339
Commercial Banks (2.05%)
ABN - Amro Holdings NV 7,746 353,234
Communications Services, NEC (1.99%)
KPN Royal PTT Nederland 9,472 344,493
Electric Light & Wiring
Equipment (0.52%)
Otra NV 5,000 88,896
Electronic Distribution
Equipment (1.76%)
Phillips Electronics 8,400 303,932
Grocery Stores (1.40%)
Koninklijke Ahold NV 5,903 241,204
Meat Products (2.40%)
Unilever NV 2,950 414,990
Miscellaneous Durable Goods (2.03%)
Hagemeyer NV 6,700 350,258
Miscellaneous Transporation
Services (0.68%)
Koninklijke Pakhoed NV 4,253 117,005
Special Industry Machinery (1.15%)
IHC Caland NV 5,900 198,754
2,507,107
NEW ZEALAND (2.67%)
Beverages (1.19%)
Lion Nathan 86,000 205,213
Household Appliances (0.97%)
Fisher & Paykel 55,000 167,198
Miscellaneous Manufacturers (0.51%)
Carter Holt Harvey Ltd. 41,000 88,453
460,864
NORWAY (3.47%)
Commercial Banks (0.71%)
Christiana Bank 52,000 121,813
Drugs (0.46%)
Hafslund Nycomed 3,113 79,083
Meat Products (1.58%)
Orkla B 5,700 272,466
Ship & Boat Building &
Repairing (0.72%)
Unitor Ships Service 9,100 125,312
598,674
SINGAPORE (1.05%)
Electric Light & Wiring
Equipment (0.26%)
Clipsal Industries Holdings 20,000 45,200
Electronic Components &
Accessories (0.79%)
Amtek Engineering 94,500 136,960
182,160
SPAIN (6.03%)
Combination Utility
Services (0.76%)
Iberdrola 1 SA 14,300 130,840
Commercial Banks (1.79%)
Banco Popular 1,675 308,861
Oil & Gas Field Services (2.30%)
Repsol Petroleo, SA 12,100 396,464
Telephone Communication (1.18%)
Telefonica De Espana, SA 14,700 203,567
1,039,732
SWEDEN (7.89%)
Commercial Banks (1.98%)
Svenska Handelsbanken AB Free 17,050 342,173
Household Audio & Video
Equipment (0.71%)
SKF 'B' Free 6,400 122,646
Miscellaneous Transporation
Equipment (0.73%)
Autoliv AB 2,150 125,876
Motor Vehicles & Equipment (1.39%)
Volvo AB 11,700 240,101
Plastic Materials &
Synthetics (1.43%)
Astra AB 6,200 246,046
Water Transporation of
Freight, NEC (1.65%)
Argonaut AB 'B' Free 25,000(a) 37,535
ICB Shipping AB 'B' Free 28,666 246,553
284,088
1,360,930
SWITZERLAND (11.10%)
Combination Utility Services (1.15%)
BBC AG (Brown Boveri) 170 197,975
Drugs (2.11%)
Galenica Holdings AG 350 106,461
Sandoz AG 280 256,968
363,429
Functions Closely Related
To Banking (1.37%)
BIL GT Group 400 236,388
Miscellaneous Chemical
Products (1.99%)
CIBA Geigy Ag-Reg 390 344,023
Pulp Mills (0.24%)
Attisholz AG 70 39,786
Special Industry Machinery (1.86%)
Bobst SA 120 187,720
Sulzer AG 250 133,620
321,340
Sugar & Confectionary Products (2.38%)
Nestle 370 410,307
1,913,248
THAILAND (2.61%)
Commercial Banks (1.21%)
Bangkok Bank 17,000 206,517
Non-Classifiable
Establishments (1.40%)
Thailand International Fund 8 242,000
448,517
UNITED KINGDOM (10.71%)
Commerical Banks (0.89%)
Bank of Ireland 21,000 153,894
Construction & Related
Machinery (0.68%)
Powerscreen International PLC 19,400 116,717
Crude Petroleum & Natural
Gas (1.15%)
Hardy Oil & Gas 63,000 198,562
Electric Services (1.91%)
Northern Ireland Electric 49,100 330,087
Investment Offices (0.36%)
Invesco PLC 16,000 $ 62,974
Miscellaneous Non-Durable
Goods (2.02%)
Grand Metropolitan PLC 48,300 347,956
Primary Nonferrous Metals (1.36%)
British Steel PLC 93,000 234,998
Pulp Mills (0.35%)
Babcock International Group 27,740 61,158
Sand & Gravel (0.26%)
Bardon Group PLC 87,700 44,593
Telephone Communication (0.62%)
Cable & Wireless PLC 14,900 106,415
Water Supply (1.11%)
Wessex Water PLC 35,012 189,713
1,847,067
Total Common Stocks 16,650,776
Preferred Stocks (0.54%)
AUSTRIA (0.54%)
Highway & Street Construction (0.54%)
BAU Holdings AG 2,430 91,454
Principal
Amount Value
Bonds (1.14%)
MEXICO (1.14%)
Fire Marine & Casualty
Insurance (1.14%)
Alfa SA Convertible Subordinated
Debentures; 8.00%; 9/15/00 $200,000(b) $ 196,000
Federal Agency Short-Term
Obligations (2.03%)
Federal Home Loan Mortgage
Corporation
5.75%; 1/2/96 350,000 350,000
Total Portfolio Investments (100.21%) 17,288,230
Liabilities, net of cash, receivables
and other assets (0.21%) (37,096)
Total Net Assets (100.00%) $17,251,134
(a) Non-income producing security - No dividend paid during the past twelve
months.
(b) Restricted Securities - See Note 4 to the financial statements.
<PAGE>
Mortgage-Backed Securities Portfolio
Description of Issue
--------------------------------- Principal
Type Rate Maturity Amount Value
Federal National Mortgage Association (FNMA)
Certificates (50.20%)
FNMA 6.00% 11/1/23 $ 731,628 $ 707,404
FNMA 7.00 8/1/23 3,589,996 3,620,332
FNMA 7.50 6/1/23 938,323 962,335
FNMA 8.00 7/1/19-3/1/23 1,442,973 1,498,623
FNMA 8.50 1/1/25 480,063 501,277
Total FNMA Certificates 7,289,971
Government National Mortgage Association (GNMA)
Certificates (41.08%)
GNMA I 6.00 12/15/23 983,527 956,982
GNMA I 6.50 12/15/23-1/15/24 2,787,967 2,766,722
GNMA I 7.50 6/15/23-9/15/23 1,075,234 1,107,061
GNMA I 8.00 5/15/23 711,584 741,868
GNMA II 6.50 10/20/25 399,295 393,257
Total GNMA Certificates 5,965,890
Federal Home Loan Mortgage Corporation
(FHLMC) Certificates (6.80%)
FHLMC Gold 5.50 2/1/24-3/1/24 786,609 743,563
FHLMC Gold 6.00 4/1/24 252,551 244,346
Total FHLMC Certificates 987,909
Total Portfolio Investments (98.08%) 14,243,770
Cash, receivables and other assets,
net of liabilities (1.92%) 279,278
Total Net Assets (100.00%) $14,523,048
See accompanying notes.
<PAGE>
FINANCIAL HIGHLIGHTS
PRINCIPAL SPECIAL MARKETS FUND, INC.
<TABLE>
<CAPTION>
International Securities Mortgage-Backed Securities
Portfolio Portfolio
------------------------------- ------------------------------
Year Year Period Year Year Period
Ended Ended Ended Ended Ended Ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1995 1994 1993(a) 1995 1994 1993(a)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value at Beginning of Period....... $11.29 $12.87 $10.01 $ 9.11 $10.10 $10.01
Income from Investment Operations:
Net Investment Income..................... .19 .13 .07 .65 .63 .34
Net Realized and Unrealized Gains (Losses)
on Investments and Foreign Currency..... 1.11 (.95) 2.91 1.06 (.99) .09
Total from Investment Operations 1.30 (.82) 2.98 1.71 (.36) .43
Less Distributions:
Dividends (from net investment income).... (.10) (.12) (.10) (.65) (.63) (.34)
Excess distribution of net investment
income.................................. (.07) (.13) - - - -
Distributions (from capital gains)........ (.72) (.51) (.02) - - -
Total Distributions (.89) (.76) (.12) (.65) (.63) (.34)
Net Asset Value at End of Period............. $11.70 $11.29 $12.87 $10.17 $ 9.11 $10.10
Total Return................................. 12.02% (6.45)% 29.95%(c) 19.26% (3.60)% 4.47%(c)
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands).. $17,251 $15,542 $16,838 $14,523 $14,714 $24,309
Ratio of Expenses to Average Net Assets... .90% .90% .90%(b) .45% .45% .45%(b)
Ratio of Net Investment Income to Average
Net Assets.............................. 1.79% .94% 1.21%(b) 6.66% 6.56% 5.23%(b)
Portfolio Turnover Rate................... 46.0% 37.0% 6.9%(b) 9.9% 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
intitial 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>
REPORT OF INDEPENDENT AUDITORS
The Boards of Directors and Shareholders
Principal Special Markets Fund, Inc.
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of Principal Special Markets Fund, Inc.
(comprising, respectively, the International Securities and Mortgage-Backed
Securities Portfolios) as of December 31, 1995, and the related statements of
operations for the year then ended, and the statements of changes in net assets
and the financial highlights for each of the periods indicated therein. These
financial statements and financial highlights are the responsibility of the
Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995, by correspondence with the custodians and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective portfolios constituting the Principal Special Markets Fund,
Inc. at December 31, 1995, and the results of their operations for the year then
ended, and the changes in their net assets and the financial highlights for each
of the periods indicated therein, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Des Moines, Iowa
January 19, 1996
<PAGE>
FEDERAL INCOME TAX INFORMATION
Information for federal income tax purposes is presented as an aid to
shareholders in reporting the dividend distributions shown below. Shareholders
should consult a tax adviser on how to report these distributions for state and
local purposes.
<TABLE>
<CAPTION>
Year Ended December 31, 1995
Per Share Per Share
Income Dividend Distributions Capital Gain Distributions
Total
Total Dividends
Payable Per Total Deductible Payable Long- Short- Capital Gain and
Date Share Dividends Percentage* Date Term** Term*** Distributions Distributions
International
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Portfolio 1/31/95 $.0362 - 1/31/95 $.2722 $ -
12/28/95 .1345 12/28/95 .3400 .1100
$.1707 $.7222 $.8929
</TABLE>
<TABLE>
<CAPTION>
Per Share Income Dividend Distributions/Payable Date
2/1/95 3/1/95 4/3/95 5/1/95 6/1/95 7/3/95 8/1/95 9/1/95 10/2/95 11/1/95 12/1/95 12/29/95
Mortgage-Backed
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Portfolio $.0513 $.0553 $.0585 $.0510 $.0547 $.0575 $.0480 $.0542 $.0555 $.0526 $.0545 $.0554
*Percent qualifying for deduction by shareholders who are corporations.
**Taxable as long-term capital gain.
***Taxable at ordinary income rates.
</TABLE>
April 26, 1993
Mr. Stephan L. Jones
President
Principal Special Markets Fund, Inc.
Principal Financial Group
Des Moines, IA 50392-0200
Dear Mr. Jones
Principal Mutual Life Insurance Company intends to purchase 1,000,000 shares of
Common Stock of the International Securities Portfolio and 1,000,000 shares of
Common Stock of the Mortgage-Backed Securities Portfolio of Principal Speical
Markets Fund, Inc., par value $.01 per share (the "Shares") at $10.00 per share.
In connection with such purchase, Principal Mutual Life Insurance Company
represents and warrants that it will purchase such Shares as an investment and
not with a view to resale, distribution or redemption.
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
MICHAEL D. ROUGHTON
By _______________________________________________
Michael D. Roughton
MDR/ka
SCHEDULE FOR COMPUTING TOTAL RETURN
PRINCOR SPECIAL MARKETS FUND, INC.
Mortgage-Backed Securities Portfolio
The average annual total return quotation for the one year ending December 31,
1995 and the period from May 7, 1993 (effective date) to December 31, 1995 is
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1 + T)n = ERV
WHREE: P = a hypothetical initial payment of $1000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1000 payment made at
the beginning of the 1, 5, or 10 year periods at the end of the
1, 5, or 10 year periods (or fractional portion thereof).
The above calculation includes all recurring fees that are charged to all
shareholder accounts.
The Mortgage-Backed Securities Portfolio's average annual total return for the
periods indicated are calculated as follows:
1 YEAR
1000(1 + T)1 = 1,192.60
Solve for T
T = 19.26%
Period May 7, 1993 -
December 31, 1995
$1,000(1 +T)1766/365 = 1,396.10
Solve for T
T = 7.14%
<PAGE>
SCHEDULE FOR COMPUTING TOTAL RETURN
PRINCOR SPECIAL MARKETS FUND, INC.
International Securities Portfolio
The average annual total return quotation for the one year ending December 31,
1995 and the period from May 7, 1993 (effective date) to December 31, 1995 is
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1 + T)n = ERV
WHREE: P = a hypothetical initial payment of $1000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1000 payment made at
the beginning of the 1, 5, or 10 year periods at the end of the
1, 5, or 10 year periods (or fractional portion thereof).
The above calculation includes all recurring fees that are charged to all
shareholder accounts.
The Mortgage-Backed Securities Portfolio's average annual total return for the
periods indicated are calculated as follows:
1 YEAR
1000(1 + T)1 = 1,120.20
Solve for T
T = 12.02%
Period May 7, 1993 -
December 31, 1995
$1,000(1 +T)1766/365 = 1,756.67
Solve for T
T = 12.35%
<PAGE>
SCHEDULE FOR COMPUTING ANNUALIZED YIELD
PRINCIPAL SPECIAL MARKETS FUND, INC.
Mortgage-Backed Securities Portfolio
The yield quotation based on the 30-day period ended on December 31, 1995 is
computed by dividing the net investment income per share earned during the
period by the maximum offering price per share on December 31, 1995, according
to the following formula:
a-b 6
YIELD = 2[(----------------- + 1) -1]
cd
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
Principal Speicla Markets Fund, Mortgage-Backed Securities Portfolio's Yield
is as follows:
79,014.04 - 5,323.37
YIELD = 2[{---------------------------------- +1) -1]
1,421,418.799 x $10.18
YIELD = 6.19%
