Registration No. 33-59474
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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POST-EFFECTIVE AMENDMENT NO. 6 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
on April 1, 1997 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
X 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, 1996 on February 27, 1997.
<PAGE>
PRINCIPAL SPECIAL MARKETS FUND, INC.
International Emerging Markets Portfolio
International Securities Portfolio
International SmallCap Portfolio
Mortgage-Backed Securities Portfolio
The Principal Financial Group(R)
Des Moines, Iowa 50392-0200
1-800-451-5447
Principal Special Markets Fund, Inc. (the "Fund") is a no-load, open-end
management investment company, currently consisting of four 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 Emerging Markets Portfolio: Long-term growth of capital by
investing primarily in equity securities of issuers in emerging market
countries.
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.
International SmallCap Portfolio: Long-term growth of capital by investing
primarily in equity securities of non-United States companies with comparatively
smaller market capitalizations.
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 _______________ 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 1-800-451-5447.
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_______________.
TABLE OF CONTENTS
Page
Summary................................................................. 3
Financial Highlights.................................................... 5
Investment Objectives, Policies and Restrictions........................ 6
Certain Investment Policies and Restrictions............................ 10
Risk Factors............................................................ 11
Manager and Investment Sub-Advisor ..................................... 11
Duties Performed by the Manager and Sub-Advisor......................... 12
Managers' Comments...................................................... 13
Determination of Net Asset Value ....................................... 14
Performance Calculation ................................................ 15
Shareholder Rights...................................................... 15
Distribution of Income Dividends and Realized Capital Gains ............ 16
Tax Treatment, Dividends and Distributions ............................. 16
How to Invest ......................................................... 17
Offering Price of Shares .............................................. 17
Minimum Investment Requirement......................................... 18
Open Account System.................................................... 18
Redemption of Shares................................................... 18
Periodic Withdrawal Plan............................................... 20
Additional Information................................................. 20
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 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 Emerging Markets Portfolio is
to seek long-term growth of capital by investing primarily in equity securities
of issuers in emerging market countries.
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 International SmallCap Portfolio is to seek
long-term growth of capital by investing in a portfolio of equity securities of
non-United States companies with comparatively smaller market capitalizations.
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 any of the 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 Emerging Markets Portfolio None None
International Securities Portfolio None None
International SmallCap 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 Emerging Markets
Portfolio 1.15% None None 1.15%
International Securities Portfolio .90% None None .90%
International SmallCap Portfolio 1.00% None None 1.00%
Mortgage-Backed Securities Portfolio .45% None None .45%
* 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 Emerging Markets, International
Securities and International SmallCap Portfolios are higher than that paid by
most funds to their advisors, but not higher than the fees paid by many funds
with similar investment objectives and policies and does cover substantially all
expenses of the Portfolios, 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)
Portfolio 1 3 5 10
International Emerging Markets Portfolio $12 $37 N/A N/A
International Securities Portfolio $9 $29 $50 $111
International SmallCap Portfolio $10 $32 N/A N/A
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.
<PAGE>
<TABLE>
<CAPTION>
International Securities Portfolio
Year Year Year Period
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
1996 1995 1994 1993(a)
<S> <C> <C> <C> <C>
Net Asset Value at Beginning of Period................... $11.70 $11.29 $12.87 $10.01
Income from Investment Operations:
Net Investment Income................................. .31 .19 .13 .07
Net Realized and Unrealized Gains (Losses)
on Investments..................................... 2.46 1.11 (.95) 2.91
Total from Investment Operations 2.77 1.30 (.82) 2.98
Less Distributions:
Dividends (from net investment income)................ (.16) (.10) (.12) (.10)
Excess distribution of net investment income.......... (.07) (.07) (.13) --
Distributions (from capital gains).................... (.57) (.72) (.51) (.02)
Total Distributions (.80) (.89) (.76) (.12)
Net Asset Value at End of Period......................... $13.67 $11.70 $11.29 $12.87
Total Return............................................. 24.12% 12.02% (6.45)% 29.95%(c)
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands).............. $28,161 $17,251 $15,542 $16,838
Ratio of Expenses to Average Net Assets............... .90% .90% .90% .90%(b)
Ratio of Net Investment Income to Average
Net Assets......................................... 1.90% 1.79% .94% 1.21%(b)
Portfolio Turnover Rate............................... 25.52% 46.0% 37.0% 6.9%(b)
Average Commission Rate Paid.......................... $.0187 -- -- --
<FN>
(a)Period from May 7, 1993, date shares first offered to the public, through
December 31, 1993. Net investment income, aggregating $.01 per share for the
International Securities Portfolio and $.01 per share for the Mortgage-Backed
Securities Portfolio for the period from the initial purchase of shares on
April 26, 1993 through May 6, 1993, was recognized, none of which was
distributed from the International Securities Portfolio and all of which was
distributed from the Mortgage-Backed Securities Portfolio to the sole
shareholder, Principal Mutual Life Insurance Company, during the period.
Additionally, the Mortgage-Backed Securities Portfolio incurred unrealized
gains on investments of $.01 per share during the initial interim period.
This represented activities of each portfolio prior to the initial offering.
(b)Computed on an annualized basis.
(c)Total return amounts have not been annualized.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Mortgage-Backed Securities Portfolio
Year Year Year Period
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
1996 1995 1994 1993(a)
<S> <C> <C> <C> <C>
Net Asset Value at Beginning of Period................... $10.17 $ 9.11 $10.10 $10.01
Income from Investment Operations:
Net Investment Income................................. .64 .65 .63 .34
Net Realized and Unrealized Gains (Losses)
on Investments..................................... (.24) 1.06 (.99) .09
Total from Investment Operations .40 1.71 (.36) .43
Less Distributions:
Dividends (from net investment income)................ (.64) (.65) (.63) (.34)
Net Asset Value at End of Period......................... $ 9.93 $10.17 $ 9.11 $10.10
Total Return............................................. 4.20% 19.26% (3.60)% 4.47%(c)
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands).............. $14,968 $14,253 $14,714 $24,309
Ratio of Expenses to Average Net Assets............... .45% .45% .45% .45%(b)
Ratio of Net Investment Income to Average
Net Assets......................................... 6.51% 6.66% 6.56% 5.23%(b)
Portfolio Turnover Rate............................... 28.7% 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>
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The investment objectives and policies of the Portfolios are described
below. There can be no assurance that the objectives will be realized.
The International Emerging Markets Portfolio, International Securities
Portfolio and International SmallCap Portfolio (together the "International
Portfolios") each 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.
Each Portfolio 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 Manager will waive its management fee on the
portfolio's assets invested in securities of other open-end investment
companies. The Portfolio will generally invest only in those investment
companies that have investment policies requiring investment in securities
comparable in quality to those in which the Portfolio invests.
When in the opinion of Invista current market or economic conditions
warrant, the Portfolios each 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.
International Emerging Markets Portfolio
The investment objective of the International Emerging Markets Portfolio is
long-term growth of capital. The Portfolio seeks to achieve this objective by
investing primarily in equity securities of issuers in emerging market
countries. As used in this Prospectus, the term "emerging market country" means
any country which, in the opinion of Invista, is generally considered to be an
emerging country by the international financial community, including the
International Bank for Reconstruction and Development (more commonly known as
the World Bank) and the International Financial Corporation. These countries
generally include every nation in the world except the United States, Canada,
Japan, Australia, New Zealand and most nations located in Western Europe.
Currently, investing in many emerging countries is not feasible or may involve
unacceptable political risks. The Portfolio focuses on those emerging market
countries in which it believes the economies are developing strongly and in
which the markets are becoming more sophisticated.
Investments in emerging market countries involve special risks. Certain
emerging market countries have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate
fluctuations, large amounts of debt, balance of payments and trade difficulties,
and extreme poverty and unemployment. In addition, there are certain risks
associated with investments in foreign securities (see "Risk Factors").
Under normal conditions at least 65% of the Portfolio's total assets will
be invested in emerging market country equity securities. The Portfolio invests
in securities of (1) issuers with their principal place of business or principal
office in emerging market countries, or (2) issuers for which the principal
securities trading market is an emerging market country, or (3) issuers,
regardless of where the security is traded, that derive 50% or more of their
total revenue from either goods or services produced in emerging market
countries or sales made in emerging market countries.
A small portion of the Portfolio assets may also be invested in closed end
country specific investment companies and sovereign debt of developing
countries. Closed end investment companies provide a way to gain exposure to
countries where the mechanics of trading securities are not cost effective.
Investment in sovereign debt may have the potential for returns that are higher
than returns on stocks within the country.
International Securities Portfolio
The investment objective of the International Securities Portfolio 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 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.
International SmallCap Portfolio
The investment objective of the International SmallCap Portfolio is
long-term growth of capital. The strategy of this Portfolio is to invest
primarily in equity securities of non-United States companies with comparatively
smaller market capitalizations. Under normal market conditions, the Portfolio
invests at least 65% of its assets in securities of companies having a total
market capitalization of $1 billion or less.
The Portfolio diversifies its investments geographically. 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. For a description of certain
investment risks associated with foreign securities, see "Risk Factors."
Mortgage-Backed Securities Portfolio
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 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 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. The Portfolios do not intend (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 Portfolios each 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 Portfolios 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 Portfolios each 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. A
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 a 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 an International 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.
Securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. In particular, securities
markets in emerging market countries are known to experience long delays between
the trade and settlement dates of securities purchased and sold, potentially
resulting in a lack of liquidity and greater volatility in the price of
securities on those markets. In addition, investments in smaller companies may
present greater opportunities for capital appreciation, but may also involve
greater risks than large, mature issuers. Such companies may have limited
product lines and financial resources. Their securities may trade in more
limited volume than larger companies and may therefore experience significantly
more price volatility and less liquidity than securities of larger companies. As
a result of these factors, the Board of Directors of the Fund has adopted Daily
Pricing and Valuation Procedures for the Portfolios which sets forth the steps
to be followed by the Manager and Sub-Advisor to establish a reliable market or
fair value if a reliable market value is not available through normal market
quotations. Oversight of this process is provided by the Executive Committee of
the Board of Directors.
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 ________, 1997 the Manager served as
investment advisor for 28 such funds with assets totaling approximately $_._
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 ___________,1997 were approximately $__._
billion. Invista's address is 1500 Hub Tower, 699 Walnut, Des Moines, Iowa
50309.
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 Portfolio are identified in
the table below:
<TABLE>
<CAPTION>
Primarily
Fund Responsible Since Person Primarily Responsible
<S> <C> <C>
International Emerging Markets _______, 1997 Kurtis D. Spieler, CFA (MBA degree, Drake University).
Portfolio (Fund's inception) Vice President, Invista Capital Management, Inc. since
1995; Investment Officer, 94-95. Prior Thereto, Investment
Manager, Principal Mutual Life Insurance Company.
International Securities April, 1994 Scott D. Opsal, CFA (MBA degree, University of
Portfolio Minnesota). Executive Vice President and Chief Investment
Officer, Invista Capital Management, Inc. since 1997.
Vice President, 1986-1997.
International SmallCap _______, 1997 Darren K. Sleister, CFA (MBA degree, University of Iowa).
Portfolio (Fund's inception) Investment Officer, Invista Capital Management, Inc. since
1995; Prior thereto, Security Analyst.
Mortgage-Backed Securities May, 1993 Martin J. Schafer (BBA degree, University of Iowa). Vice
Portfolio (Fund's inception) President, Invista Capital Management, Inc. since 1992.
Director - Securities Trading, Principal Mutual Life
Insurance Company 1992; Prior thereto, Associate Director.
</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 Management Fees are computed at the following annual rates:
Fees Computed On Fees as a Percent of
Portfolio Net Asset Value of Portfolio Average Daily Net Assets
International Emerging
Markets Portfolio First $250 million 1.15%
Next $250 million 1.05%
Over $500 million 0.95%
International Securities
Portfolio Entire Portfolio 0.90%
International SmallCap
Portfolio First $250 million 1.00%
Next $250 million 0.90%
Over $500 million 0.80%
Mortgage-Backed Securities
Portfolio Entire Portfolio 0.45%
The fee payable by the International Portfolios are 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, 1996. The accompanying charts display results for
the life of the Fund through December 31, 1996. 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
The International Portfolio had a strong quarter to finish off an equally strong
year. The Portfolio's 7.8% fourth quarter total return outpaced the Lipper
average of 3.9% and EAFE's 1.6%. International equity markets continued their
progress with double-digit gains in Europe and most other markets finishing the
quarter in positive territory. Japan and the troubled Asian markets were the
only poor performers. The Portfolio's strong relative returns resulted from its
large exposure to Europe and minor exposures to Japan and other weak Asian
markets.
Europe continues to reap the benefits of falling interest rates, solid economic
growth and low inflation. Markets received an added boost as many governments
tried to tame budget deficits, inflation, and interest rates in order to qualify
for entry into the European Monetary Union. EMU will only admit countries in
sound fiscal position and these widespread moves toward sound fiscal decision
making has clearly given equity markets added optimism. Japan fell recently as
our skepticism over its economic upsurge early in the year proved correct. Japan
is once again facing weak economic conditions and low confidence. Asia remains a
mixed bag as Hong Kong, Indonesia and Malaysia all performed well recently, but
South Korea and Thailand lagged on the news of economic slowdowns and trade
problems. Asian economies which have remained strong still command investor
attention and have kept up with Europe's run.
Our current strategy is focused on stable growth stocks. We feel Europe's large
outperformance relative to emerging markets over the last few quarters has
caused the valuation spread on emerging markets to become attractive. We are
therefore making an effort to obtain some of our new growth names in markets
outside of Europe. We hope the weaker Asian economies will provide opportunities
someday but we remain in a wait-and-see mode. We also sense that smaller cap
names have become more attractive and will consider using midcap names to
capture better forward-looking returns. Although the dollar continues to
strengthen to the disadvantage of U.S. investors, we do not see economic forces
in place today which will cause a large and widespread shift worthy of hedging.
The International Securities Portfolio is subject to specific risks associated
with foreign currency rates, foreign taxation and foreign economies.
Graphic Representation
Comparison of Change in Value of $1.0 Million
Investment in the International Securities Portfolio, EAFE
and Lipper International Fund Average
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
1996 1,690,200 1,374,223 1,487,520
Total Returns *
As of December 31, 1996
1 Year Since Inception Date 5/7/93 10 Year
24.12% 15.46% --
Note: Past performance is not predictive of future performance.
Important Notes:
Lipper International Fund Average: this average consists of mutual funds which
invest in securities whose primary trading markets are outside the United
States. The one year average currently contains 331 funds.
Morgan Stanley Capital International EAFE (Europe, Australia and Far East )
Index: an unmanaged index consisting of stocks of 1,920 companies traded in
twenty major world stock markets.
Mortgage-Backed Securities Portfolio
Interest rates rose in 1996, which dampened absolute fixed income returns, but
did not disadvantage us against our competitors. We maintained our competitive
position as measured by the Lipper U.S. Mortgage Fund Average in 1996. We
underperformed the Lehman Brothers Mortgage Index in 1996 due primarily to
operating expenses inherent in all mutual funds and our slightly longer
duration.However, since the portfolio was organized we have slightly
outperformed this Index.
We added to our results last year by identifying and selecting certain
undervalued sectors of mortgage-backed securities for a portion of the
portfolio. These securities have now become very popular with Wall Street and
other investors, resulting in our securities increasing in value.
We believe our current portfolio to be well positioned for the period ahead. We
have a number of securities that are "seasoned" (e.g., original 30 year loans
that have been outstanding for three years or more) and therefore valued more
highly in the marketplace. There are few securities priced above par, so
prepayment risk is negligible. If the future continues to be an era of economic
prosperity we should continue to see strong housing markets and housing turnover
that will cause prepayments on our securities to exceed market expectations. We
welcome these repayments, as our portfolio is priced at a discount and we will
be paid-off at par.
Graphic Representation
Comparison of Change in Value of $1.0 Million
Investment in the Mortgage-Backed Securities Portfolio
Lehman Brothers Mortgage Index and
Lipper U.S. Mortgage Fund Average
Lehman Brothers Lipper U.S.
Fund Mortgage Mortgage Fund
Year Ended 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
1996 1,251,002 1,249,802 1,196,158
Total Returns *
As of December 31, 1996
1 Year Since Inception Date 5/7/93 10 Year
4.20% 6.32% --
Note: Past performance is not predictive of future performance.
Important Notes:
Lehman Brothers Mortgage Index: an unmanaged index of 15- and 30-year fixed rate
securities backed by mortgage pools of the Government National Mortgage
Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and Federal
National Mortgage Association (FNMA).
Lipper U.S. Mortgage Fund Average: this average consists of mutual funds
investing at least 65% of their assets in mortgages/securities issued or
guaranteed as to principal and interest by the U.S. Government and certain
federal agencies. The one year average currently contains 59 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 Portfolios invest in foreign securities listed on foreign
exchanges which trade on days on which the Portfolios do not determine 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 Portfolios.
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 Portfolios may
advertise 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 ________________, 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 Emerging Markets Portfolio %
International Securities Portfolio %
International SmallCap Portfolio
Mortgage-Backed Securities Portfolio %
DISTRIBUTION OF INCOME DIVIDENDS AND REALIZED CAPITAL GAINS
Any dividends from the net income of the International Portfolios 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 Portfolios 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 each of the value of
the International 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 International Portfolio shareholders to take a credit (or a
deduction) for foreign income taxes paid by the Fund. In that case,
International 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. International 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 Portfolios 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 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 Federal Funds to: Norwest Bank Iowa, N.A., Des Moines, Iowa, ABA No.
073000228, for credit to: Princor Management Corporation, Account Number
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 any of the 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 Emerging Markets
Portfolio, International Securities Portfolio and the International SmallCap
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.
FV 76A-6
PART B
PRINCIPAL SPECIAL MARKETS FUND, INC.
INTERNATIONAL EMERGING MARKETS PORTFOLIO
INTERNATIONAL SECURITIES PORTFOLIO
INTERNATIONAL SMALLCAP PORTFOLIO
MORTGAGE-BACKED SECURITIES PORTFOLIO
Statement of Additional Information
dated _______________
This Statement of Additional Information provides information about
each Portfolio in addition to the information that is contained in the
Prospectus, dated _______________.
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: 1-800-451-5447
FV 76 B-6
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
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. The
International Emerging Markets Portfolio, International Securities Portfolio and
International SmallCap Portfolio will each invest more than 5% of its net assets
in foreign securities. Each Portfolio 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.
Securities of many foreign issuers may be less liquid and their prices
more volatile than those of comparable domestic issuers. In particular,
securities markets in emerging market countries are known to experience long
delays between the trade and settlement dates of securities purchased and sold,
potentially resulting in a lack of liquidity and greater volatility in the price
of securities on those markets. In addition, investments in smaller companies
may present greater opportunities for capital appreciation, but may also involve
greater risks than large, mature issuers. Such companies may have limited
product lines and financial resources. Their securities may trade in more
limited volume than larger companies and may therefore experience significantly
more price volatility and less liquidity than securities of larger companies. As
a result of these factors, the Boards of Directors of the Funds have adopted
Daily Pricing and Valuation Procedures for the Funds which set forth the steps
to be followed by the Manager and Sub-Advisor to establish a reliable market or
fair value if a reliable market value is not available through normal market
quotations. Oversight of this process is provided by the Executive Committee of
the Boards of Directors.
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
Each 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 security above the exercise price of the option, but it retains the
risk of loss if the price of the security should decline. By writing a put, a
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 Emerging Markets Portfolio, International Securities
Portfolio and International SmallCap Portfolio each 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.
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 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
25.5% and 46.0%; Mortgage-Backed Securities 28.7% and 9.9%. 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 28 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, 37, Assistant Counsel. Counsel, Principal Mutual Life
Insurance Company since 1995. Attorney, 1994-1995. Prior thereto, Attorney,
Dickinson, Mackaman, Tyler & Hogan, P.C..
Michael W. Cumings, 46, Assistant Counsel. Counsel, Principal Mutual
Life Insurance Company.
@James D. Davis, 63, Director. 4940 Center Court, Bettendorf, Iowa.
Attorney. Vice President, Deere and Company, retired.
Pamela A. Ferguson, 54, Director, P.O. Box 805, Grinnell, Iowa.
President and Professor of Mathematics, Grinnell College.
*&J. Barry Griswell, 48, Director and Chairman of the Board. Executive
Vice President, Principal Mutual Life Insurance Company, since 1996; Senior Vice
President, 1991-1996. Director and Chairman of the Board, Principal Management
Corporation and Princor Financial Services Corporation.
*&Stephan L. Jones, 62, Director and President. Vice President,
Principal Mutual Life Insurance Company. Director and President, Princor
Financial Services Corporation and Principal Management Corporation.
@&Barbara A. Lukavsky, 57, Director. 3920 Grand Avenue, Des Moines,
Iowa. President and Chief Operating Officer, Lu San ELITE USA, L.C.
*Craig L. Bassett, 45, Treasurer. Treasurer, Principal Mutual Life
Insurance Company since 1996. Prior thereto, Associate Treasurer. Treasurer,
Princor Financial Services Corporation and Principal Management Corporation
since 1996.
*Michael J. Beer, 36, Financial Officer. Senior Vice President and Chief
Operating Officer, Princor Financial Services Corporation and Principal
Management Corporation, since 1997. Prior thereto, Vice President and Chief
Operating Officer.
*Arthur S. Filean, 59, Vice President and Secretary. Vice President,
Princor Financial Services Corporation. Vice President, Principal Management
Corporation, since 1996.
*Ernest H. Gillum, 42, Assistant Secretary. Assistant Vice President,
Registered Products, Princor Financial Services Corporation and Principal
Management Corporation, since 1995. Prior thereto, Product Development and
Compliance Officer.
Jane E. Karli, 40, Assistant Treasurer. Senior Accounting and Custody
Administrator, Principal Mutual Life Insurance Company since 1994. Senior
Investment Cost Accountant 1993-1994. Senior Investment Accountant 1992-1993.
Prior thereto, Manager-Investment Accounting and Treasury.
*Michael D. Roughton, 46, Counsel. Counsel, Principal Mutual Life
Insurance Company, since 1994. Prior thereto Assistant Counsel. Counsel, Invista
Capital Management, Inc., Princor Financial Services Corporation, Principal
Investors Corporation and Principal Management Corporation.
@ Member of Audit and Nominating Committee.
* Affiliated with the Manager of the Fund or its parent and considered
an "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 ________________, 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 _______ ____%
Mortgage-Backed Securities Portfolio _______ ____%
- --------------------------------------------------------------------------------
As of_______________, 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 _______________, 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
%
%
%
- --------------------------------------------------------------------------------
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, 1996 were approximately $19.6
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
Craig L. Bassett Treasurer Treasurer (Manager)
Michael J. Beer Financial Officer Senior Vice President and Chief
Operating Officer (Manager)
Arthur S. Filean Vice President and Vice President (Manager)
Secretary
Ernest H. Gillum Assistant Secretary Assistant Vice President -
Registered Products (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)
COST OF MANAGER'S SERVICES
The Manager has entered into a Management Agreement with the Fund which
requires the Manager 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. Under a
Sub-Advisory Agreement between Invista and the Manager, Invista performs all
investment advisory responsibilities of the Manger under the Management
Agreement and receive the full amount of the compensation paid by the Fund to
the Manager.
<TABLE>
<CAPTION>
The Management Fees are computed at the following annual rates:
Fees Computed On Fees as a Percent of
Portfolio Net Asset Value of Portfolio Average Daily Net Assets
<S> <C> <C> <C>
International Emerging
Markets Portfolio First $250 million 1.15%
Next $250 million 1.05%
Over $500 million 0.95%
International Securities
Portfolio Entire Portfolio 0.90%
International SmallCap
Portfolio First $250 million 1.00%
Next $250 million 0.90%
Over $500 million 0.80%
Mortgage-Backed Securities
Portfolio Entire Portfolio 0.45%
</TABLE>
The average net assets of each portfolio on December 31, 1996 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, 1996 December 31, 1996
- -------------------------- ----------------- -----------------
International Securities $28,160,624 .90%
Mortgage Backed Securities $14,968,258 .45%
- -------------------------------------------- -----------------------------------
Fees paid for investment management services during the periods
indicated were as follows:
- --------------------------------------------------------------------------------
Management Fees for Fiscal
Portfolio Year Ended December 31
- ------------------ ----------------------
1996 1995 1994
---- ---- ----
International $185,375 $146,209 $147,720
Securities $ 65,114 $ 61,455 $102,737
Mortgage-Backed Securities
- --------------------------------------------------------------------------------
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 8, 1997. 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 Management
Agreement. The Management Agreement was last approved by the Funds Board of
Directors on September 8, 1997.
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, 1996 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 $931.
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
1996 1995 1994
---- ----- ----
International Securities $66,683 $54,987 $47,909
Mortgage-Backed Securities $ -0- $ -0- $ -0-
- --------------------------------------------------------------------------------
Brokerage commissions paid to affiliates during the year ended December
31, 1996 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 $1,655 2.02% 2.10%
- --------------------------------------------------------------------------------
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, 1996 average annual return
for each of the Portfolios for the periods indicated:
Portfolio 1-Year 5-Year 10-Year
International Securities 24.12 15.46%(1) N/A
Mortgage-Backed Securities 4.20 6.32%(1) N/A
(1) Period beginning May 7, 1993 and ending December 31, 1996.
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, 1996
was 6.35%.
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
5.51% (average six-month CD rate for the month of October, 1996, as reported in
the Federal Reserve Bulletin) and an inflation rate of 3.0% (rate of inflation
for the 12-month period ended October 31, 1996 as measured by the Consumer Price
Index) and an income tax bracket of 28% would be $(49).
($10,000 x 5.51%) / 2 = $276 Interest for six-month period
- 77 Federal income taxes (28%)
- 150 Inflation's impact on invested principal
($10,000 x 3.0%) / 2
($ 49) 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 Emerging Markets Portfolio,
International Securities Portfolio, International SmallCap 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.
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 Emerging Markets Portfolio, International Securities
Portfolio and International SmallCap Portfolio
When at the close of a fiscal year more than 50% of the value of a
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,
1996 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.
<PAGE>
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 three years in
the period ended December 31, 1996 and for the
period from May 7, 1993 through December 31, 1993.
(2) Part B:
None
(b) Exhibits
(1) Articles of Amendment and Restatement
(2) Bylaws (Filed 4/12/96)
(5a) Management Agreement
(5b) Investment Service Agreement
(5c) Sub-Advisory Agreement
(6a) Distribution Agreement
(6b) Fund Application
(8a) Domestic Custody Agreement (Filed 4/12/96)
(8b) Global Custody Agreement (Filed 4/12/96)
(9a) Dealer Selling Agreement
(10) Opinion of Counsel (Filed 4/12/96)
(11) Consent of Independent Auditors
(12) Audited Financial Statements as of December
31, 1996, including the Report of Ernst &
Young LLP, independent auditors for the
Registrant. (Filed 3/17/97)
(13) Investment Letter (Filed 4/12/96)
(16) Performance Quotations (Filed 4/12/96)
(27) Financial Data Schedules
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
August 11, 1997.
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 August 11, 1997.
Princor Balanced Fund, Inc. (a Maryland Corporation) 1.86% of
shares outstanding owned by Principal Mutual Life Insurance
Company on August 11, 1997.
Principal Balanced Fund, Inc. (a Maryland Corporation) 100.0% of
shares outstanding owned by Principal Mutual Life Insurance
Company and its separate accounts on August 11, 1997.
Princor Blue Chip Fund, Inc. (a Maryland Corporation) 1.42% of
shares outstanding owned by Principal Mutual Life Insurance
Company on August 11, 1997.
Princor Bond Fund, Inc. (a Maryland Corporation) 1.49% of shares
outstanding owned by Principal Mutual Life Insurance Company on
August 11, 1997.
Principal Bond Fund, Inc. (a Maryland Corporation) 100.0% of
shares outstanding owned by Principal Mutual Life Insurance
Company and its separate accounts on August 11, 1997.
Princor Capital Accumulation Fund, Inc. (a Maryland
Corporation) 31.35% of outstanding shares owned by Principal
Mutual Life Insurance Company on August 11, 1997.
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
August 11, 1997.
Princor Cash Management Fund, Inc. (a Maryland Corporation) 1.35%
of outstanding shares owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on August 11,
1997.
Princor Emerging Growth Fund, Inc. (a Maryland Corporation) 0.62%
of shares outstanding owned by Principal Mutual Life Insurance
Company on August 11, 1997.
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 August 11, 1997.
Princor Government Securities Income Fund, Inc. (a Maryland
Corporation) 0.40% of shares outstanding owned by Principal
Mutual Life Insurance Company on August 11, 1997.
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
August 11, 1997.
Princor Growth Fund, Inc. (a Maryland Corporation) 0.52% of
outstanding shares owned by Principal Mutual Life Insurance
Company on August 11, 1997.
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 August 11, 1997.
Princor High Yield Fund, Inc. (a Maryland Corporation) 22.70% of
shares outstanding owned by Principal Mutual Life Insurance
Company on August 11, 1997.
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 August 11, 1997.
Principal International Emerging Markets Fund, Inc. (a Maryland
Corporation) 100.0% of shares outstanding owned by Principal
Mutual Life Insurance Company on August 15, 1997.
Principal International SmallCap Fund, Inc. (a Maryland
Corporation) 100.0% of shares outstanding owned by Principal
Mutual Life Insurance Company on August 15, 1997.
Princor Limited Term Bond Fund, Inc. (a Maryland Corporation)
53.17% of shares outstanding owned by Principal Mutual Life
Insurance Company on August 11, 1997.
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 August 11, 1997.
Principal Special Markets Fund, Inc. (a Maryland Corporation)
51.39% of the shares outstanding of the International Securities
Portfolio and 84.13% of the shares outstanding of the
Mortgage-Backed Securities Portfolio were owned by Principal
Mutual Life Insurance Company on August 11, 1997.
Princor Tax-Exempt Bond Fund, Inc. (a Maryland Corporation) 0.56%
of shares outstanding owned by Principal Mutual Life Insurance
Company on August 11, 1997.
Princor Tax-Exempt Cash Management Fund, Inc. (a Maryland
Corporation) 1.00% of shares outstanding owned by Principal
Mutual Life Insurance Company on August 11, 1997.
Princor Utilities Fund, Inc. (a Maryland Corporation) 1.54% of
shares outstanding owned by Principal Mutual Life Insurance
Company on August 11, 1997.
Princor World Fund, Inc. (a Maryland Corporation) 22.96% of
shares outstanding owned by Principal Mutual Life Insurance
Company on August 11, 1997.
Principal World Fund, Inc. (a Maryland Corporation) 100.0% of
shares outstanding owned by Principal Mutual Life Insurance
Company on August 11, 1997.
Subsidiaries organized and wholly-owned by Principal Mutual Life
Insurance Company:
a. Principal Holding Company (an Iowa Corporation) A holding
company wholly-owned by Principal Mutual Life Insurance
Company.
b. 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:
a. Principal Financial Securities, Inc. (a Delaware
Corporation) an investment banking and securities brokerage
firm.
Subsidiary wholly owned by Delaware Charter Guarantee & Trust Company:
a. Trust Consultants, Inc. (a California Corporation) a
Consulting and Administration of Employee Benefit Plans.
Subsidiaries organized and wholly-owned by Principal Health Care,
Inc.:
a. The Admar Group, Inc. (a Florida Corporation) a national
managed care service organization that develops and manages
preferred provider organizations.
b. America's Health Plan, Inc. (a Maryland Corporation) a
developer of discount provider networks.
c. Principal Health Care Management Corporation (an Iowa
Corporation) provide management services to health
maintenance organizations.
d. Principal Behavioral Health Care, Inc. (an Iowa Corporation)
a mental and nervous/substance abuse preferred provider
organization.
e. Principal Health Care of the Carolinas, Inc. (a North
Carolina Corporation) a health maintenance organization.
f. Principal Health Care of Delaware, Inc. (a Delaware
Corporation) a health maintenance organization.
g. Principal Health Care of Florida, Inc. (a Florida
Corporation) a health maintenance organization.
h. Principal Health Care of Georgia, Inc. (a Georgia
Corporation) a health maintenance organization.
i. Principal Health Care of Illinois, Inc. (an Illinois
Corporation) a health maintenance organization.
j. Principal Health Care of Indiana, Inc. (a Delaware
Corporation) a health maintenance organization.
k. Principal Health Care of Iowa, Inc. (an Iowa Corporation) a
health maintenance organization.
l. Principal Health Care of Kansas City, Inc. (a Missouri
Corporation) a health maintenance organization.
m. Principal Health Care of Louisiana, Inc. (a Louisiana
Corporation) a health maintenance organization.
n. Principal Health Care of the Mid-Atlantic, Inc. (a Virginia
Corporation) a health maintenance organization.
o. Principal Health Care of Nebraska, Inc. (a Nebraska
Corporation) a health maintenance organization.
p. Principal Health Care of Pennsylvania, Inc. (a Pennsylvania
Corporation) a health maintenance organization.
q. Principal Health Care of St. Louis, Inc. (a Delaware
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 Tennessee, Inc. (a Tennessee
Corporation) a health maintenance organization.
t. Principal Health Care of Texas, Inc. ( a Texas Corporation)
a health maintenance organization.
u. United Health Care Services of Iowa, Inc. (an Iowa
Corporation) a health maintenance organization.
Subsidiary owned by The Admar Group, Inc.:
a. Admar Corporation (a California Corporation) a managed care
services organization.
b. Admar Insurance Marketing, Inc. (a California Corporation) a
managed care services organization.
c. SelectCare Management Co., Inc. (a California Corporation) a
managed care services organization.
d. Image Financial & Insurance Services, Inc. (a California
Corporation) a managed care services organization.
e. WM. G. Hofgard & Co., Inc. (a California Corporation) a
managed care services organization.
f. Benefit Plan Administrators, Inc. (a Colorado Corporation) a
managed care services organization.
Subsidiaries owned by Principal International, Inc.:
a. Principal International Espana, S.A. de Seguros de Vida (a
Spain Corporation).
b. Zao Principal International (a Russia Corporation) inactive.
c. Principal International Argentina, S.A. (an Argentina
services corporation).
d. Principal International Asia Limited (a Hong Kong
Corporation).
e. Principal Insurance Company (Hong Kong) Limited (a Hong Kong
Corporation).
f. Principal International de Chile, S.A. (a Chile
Corporation) a holding company.
g. Principal Mexico Compania de Seguros, S.A. de C.V. (a Mexico
Corporation) a life insurance company.
h. Afore Confia-Principal, S.A. de C.V. (a Mexico Corporation).
i. Qualitas Medica, S.A. (an Argentina Corporation).
Subsidiary owned by Principal International Espana, S.A. de Seguros de
Vida:
a. Princor International Espana S.A. de Agencia de Seguros
(a Spain Corporation).
Subsidiaries owned by Principal International Argentina, S.A.:
a. Ethika-S.A. Administradora de Fondos de Jubilaciones y
Pensiones (an Argentina company)
b. Princor Compania de Seguros de Retiro, S.A. (an Argentina
Corporation).
c. Prinlife Compania de Seguros de Vida, S.A. (an Argentina
Corporation).
Subsidiary owned by Principal International de Chile, S.A.:
a. BanRenta Compania de Seguros de Vida, S.A. (a Chile
Corporation) a life insurance company.
Subsidiary owned by Afore Confia-Principal, S.A. de C.V.:
a. Siefore Confia-Principal, S.A. de C.V.
(a Mexico Corporation)
Item 26. Number of Holders of Securities - As of: August 31, 1997
(1) (2)
Title of Class Number of Holders
Principal Special Markets Fund, Inc.
Common - International Securities Portfolio 7
Common - Mortgage-Backed Securities Portfolio 2
Common - International Emerging Markets Portfolio N/A
Common - International SmallCap Portfolio N/A
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.
Craig R. Barnes The Principal President
Vice President Financial Group Invista Capital
Des Moines, IA Management, Inc.
50392
*Craig L. Bassett Same See Part B
Treasurer
*Michael J. Beer Same See Part B
Senior Vice President
and Chief Operating
Officer
Mary L. Bricker Same Counsel and Assistant
Assistant Corporate Corporate Secretary
Secretary Principal Mutual Life
Insurance Company
Ray S. Crabtree Same Executive 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
*Arthur S. Filean Same See Part B
Vice President
Paul N. Germain Same Assistant Vice President -
Assistant Vice President - Operations
Operations Princor Financial Services
Corporation
Michael H. Gersie Same Senior Vice President
Director Principal Mutual Life
Insurance Company
*Ernest H. Gillum Same See Part B
Assistant Vice President -
Registered Products
Thomas J. Graf Same Senior Vice President
Director Principal Mutual Life
Insurance Company
*J. Barry Griswell Same See Part B
Chairman of the Board
and Director
Joyce N. Hoffman Same Vice President and
Vice President and Corporate Secretary
Corporate Secretary Principal 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
Gregg R. Narber Same Senior Vice President and
Director General Counsel
Principal Mutual Life
Insurance Company
Layne A. Rasmussen Same Controller
Controller - Princor Financial Services
Mutual Funds Corporation
Elizabeth R. Ring Same Controller
Controller Princor Financial Services
Corporation
*Michael D. Roughton Same See Part B
Counsel
Charles E. Rohm Same Executive Vice President
Director Principal Mutual Life
Insurance Company
Jean B Schustek Same Product Compliance Officer -
Product Compliance Officer - Princor Financial Services
Registered Products Corporation
Dewain A. Sparrgrove Same Vice President -
Vice President Investment Securities
Principal Mutual Life
Insurance Company
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., Principal
International Emerging Markets, Inc., Principal International SmallCap 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.
Invista Capital Management, Inc.
Kelly R. Alexander The Principal
Vice President Financial Group
Des Moines, Iowa
50392
Douglas M. Angstrom Same
Director of Institutional
Marketing
Craig R. Barnes Same
President and Director
*Craig L. Bassett Same See Part B
Assistant Treasurer
Mary L. Bricker Same Counsel and Assistant
Assistant Corporate Corporate Secretary
Secretary Principal Mutual Life
Insurance Company
Dennis W. Cameron Same
Chief Financial Officer
Catherine A. Green Same
Vice President
Michael R. Hamilton Same
Vice President
Gregory C. Hauser Same Vice President - Commercial
Director Real Estate Underwriting
Principal Mutual Life
Insurance Company
Joyce N. Hoffman Same Vice President and
Vice President and Corporate Secretary
Corporate Secretary Principal Mutual
Life Insurance Company
*Stephan L. Jones Same See Part B
Director
Ronald E. Keller Same Executive Vice President
Chairman and Director Principal Mutual Life
Insurance Company
Scott D. Opsal Same
Executive Vice President
and Director
*Michael D. Roughton Same See Part B
Counsel
Martin J. Schafer Same
Vice President
Judith A. Vogel Same
Vice President
David L. White Same
Executive Vice President,
Treasurer and Director
Larry 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., Principal International Emerging Markets
Fund, Inc., Principal International SmallCap 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 Account B, a
registered unit investment trust for retirement plans adopted by public school
systems or certain tax-exempt organizations pursuant to Section 403(b) of the
Internal Revenue Code, Section 457 retirement plans, Section 401(a) retirement
plans, certain non- qualified deferred compensation plans and Individual
Retirement Annuity Plans adopted pursuant to Section408 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
Robert W. Baehr Marketing Services None
The Principal Officer
Financial Group
Des Moines, IA 50392
Craig L. Bassett Treasurer Treasurer
The Principal
Financial Group
Des Moines, IA 50392
Michael J. Beer Senior Vice President and Vice President
The Principal Chief Operating Officer
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
Michael H. Gersie Director None
The Principal
Financial Group
Des Moines, IA 50392
Ernest H. Gillum Assistant Vice President- Assistant
The Principal Registered Products Secretary
Financial Group
Des Moines, IA 50392
William C. Gordon Insurance License Officer None
The Principal
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
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
Mark M. Oswald Compliance Officer None
The Principal
Financial Group
Des Moines, IA 50392
Layne A. Rasmussen Controller-Mutual Funds None
The Principal
Financial Group
Des Moines, IA 50392
Elizabeth R. Ring 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 Product Compliance Officer- None
The Principal Registered Products
Financial Group
Des Moines, IA 50392
Kyle R. Selberg Vice President- None
The Principal Marketing
Financial Group
Des Moines, IA 50392
Susan R. Sorensen Marketing 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
(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.
Post-Effective Amendment Filing
Registrant hereby undertakes to file a post-effective amendment using
financial statements which need not be certified, with four months to six months
from the effective of Registrant's 1933 Act Registration Statement.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirments for effectiveness of this Registration Statement and 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 12th day of September, 1997.
PRINCIPAL SPECIAL MARKETS FUND, INC.
(Registrant)
By /s/ S. L. JONES
______________________________________
S. L. Jones
President and Director
Attest:
/s/ ERNEST H. GILLUM
______________________________________
E. H. Gillum
Assistant Secretary
<PAGE>
Pursuant to the requirement of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
Signature Title Date
/s/ S. L. Jones
_____________________________ President and Director 9/12/97
S. L. Jones (Principal Executive Officer) __________
/s/ J. B. Griswell
_____________________________ Director and 9/12/97
J. B. Griswell Chairman of the Board __________
/s/ M. J. Beer
_____________________________ Financial Officer (Principal 9/12/97
M. J. Beer Financial and Accounting Officer) __________
(J. D. Davis)*
_____________________________ Director 9/12/97
J. D. Davis __________
(P. A. Ferguson)*
_____________________________ Director 9/12/97
P. A. Ferguson __________
(B. A. Lukavsky)*
_____________________________ Director 9/12/97
B. A. Lukavsky __________
*By /s/ S. L. JONES
_____________________________________
S. L. Jones
President and Director
Pursuant to Powers of Attorney
Previously Filed or Included
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones, J. B. Griswell, C.
L. Bassett, M. J. Beer and A. S. Filean and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, with full power of substitution to each, for and on behalf and in the
name of the undersigned, to execute and file any documents relating to
registration under the Securities Act of 1933 and the Investment Company Act of
1940 with respect to open end management investment companies currently
organized or to be organized in the future which are sponsored by Principal
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 14th day
of March, 1997.
/s/ S. L. Jones
_________________________
S. L. Jones
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones, J. B. Griswell, C.
L. Bassett, M. J. Beer and A. S. Filean and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, with full power of substitution to each, for and on behalf and in the
name of the undersigned, to execute and file any documents relating to
registration under the Securities Act of 1933 and the Investment Company Act of
1940 with respect to open end management investment companies currently
organized or to be organized in the future which are sponsored by Principal
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 14th day
of March, 1997.
/s/ J. B. Griswell
_________________________
J. B. Griswell
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones, J. B. Griswell, C.
L. Bassett, M. J. Beer and A. S. Filean and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, with full power of substitution to each, for and on behalf and in the
name of the undersigned, to execute and file any documents relating to
registration under the Securities Act of 1933 and the Investment Company Act of
1940 with respect to open end management investment companies currently
organized or to be organized in the future which are sponsored by Principal
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 14th day
of March, 1997.
/s/ J. D. Davis
_________________________
J. D. Davis
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones, J. B. Griswell, C.
L. Bassett, M. J. Beer and A. S. Filean and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, with full power of substitution to each, for and on behalf and in the
name of the undersigned, to execute and file any documents relating to
registration under the Securities Act of 1933 and the Investment Company Act of
1940 with respect to open end management investment companies currently
organized or to be organized in the future which are sponsored by Principal
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 14th day
of March, 1997.
/s/ P. A. Ferguson
_________________________
P. A. Ferguson
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones, J. B. Griswell, C.
L. Bassett, M. J. Beer and A. S. Filean and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, with full power of substitution to each, for and on behalf and in the
name of the undersigned, to execute and file any documents relating to
registration under the Securities Act of 1933 and the Investment Company Act of
1940 with respect to open end management investment companies currently
organized or to be organized in the future which are sponsored by Principal
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 14th day
of March, 1997.
/s/ B. A. Lukavsky
_________________________
B. A. Lukavsky
ARTICLES OF AMENDMENT AND
RESTATEMENT OF CHARTER
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 Articles of
Incorporation shall be and read as follows:
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 series and
classes of series 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 series and classes of series, and to
classify or reclassify any unissued shares in separate series or classes 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 classes, each class of a series
shall represent interests in the assets belonging to that series and have
identical voting, dividend, liquidation and other rights and the same terms and
conditions as any other class of the series, except that expenses allocated to
the class of a series may be borne solely by such class 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 class may be converted into shares of
another class upon such terms and conditions as shall be determined by the Board
of Directors, and a class of a series may have exclusive voting rights with
respect to matters affecting only that class. Expenses related to the
distribution of, and other identified expenses that should properly be allocated
to, the shares of a particular series or class may be charged to and borne
solely by such series or class, and the bearing of expenses solely by a series
or class 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 series or
class. Subject to the authority of the Board of Directors to increase and
decrease the number of, and to reclassify the shares of any series or class,
there are hereby established four series of common stock all of the same class,
each comprising the number of shares and having the designation indicated:
Series Number of Shares
International Emerging Markets Portfolio 100,000,000
International Securities Portfolio 100,000,000
International SmallCap Portfolio 100,000,000
Mortgage-Backed Securities Portfolio 100,000,000
In addition, the Board of Directors is hereby expressly granted authority to
change the designation of any series or class, to increase or decrease the
number of shares of any series or class, provided that the number of shares of
any series or class shall not be decreased by the Board of Directors below the
number of shares thereof then outstanding, and to reclassify any unissued shares
into one or more series or classes that may be established and designated from
time to time. Notwithstanding the designations herein of series and classes, 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 series of shares as a "class" and to a class of shares of a
particular series as a "series."
(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 series or class, 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 series or class 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 series or class, and (2) if the Board of Directors, in its sole
discretion, determines that a matter affects the interests of only one or
more particular series or class or classes then only the holders of shares
of such affected series or class or classes 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 series
or class or classes, each series 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, property or cash,
on any or all series of stock or classes of series, 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 classes of a series to reflect differing allocations of the expense
of each class of that series to such extent and for such purposes as
the Boards 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 series of shares or class of a series, 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 series of shares or class of a series, 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 series or
class, the shareholders of each series or class that has been
established and designated and is being liquidated shall be entitled to
receive, as a series or class, when and as declared by the Board of
Directors, the excess of the assets belonging to that series or class
over the liabilities belonging to that series or class. The holders of
shares of any series or class shall not be entitled thereby to any
distribution upon liquidation of any other series or class. The assets
so distributable to the shareholder of any particular series or class
shall be distributed among such shareholders according to their
respective rights taking into account the proper allocation of expenses
being borne by that series or class. The liquidation of assets
attributable to any particular series or 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 series or 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
series or class of stock and available for distribution, such
distribution shall be made to holders of stock of various series or
classes 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 do so, 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 the shares of 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
series or class are required or permitted to vote as a series or class,
one-third of the aggregate number of shares of that series or class outstanding
and entitled to vote shall constitute a quorum.
Notwithstanding any provision of Maryland General Corporation Law requiring
a greater proportion than a majority of the votes of all series or classes or of
any series or 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 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 each series or class of each series of the Corporation shall be the
quotient obtained by dividing the value of the net assets of the Corporation, or
if applicable of the series or class (being the value of the assets of the
Corporation or of the particular series or class or attributable to the
particular series or class less its actual and accrued liabilities exclusive of
capital stock and surplus), by the total number of outstanding shares of the
Corporation or the series or class, as applicable. Such determination may be
made on a series-by-series basis or made or adjusted on a class-by-class basis,
as appropriate, and shall include any expenses allocated to a specific series or
class 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.
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
series or class 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 series or class of its capital stock, to the extent that
the Corporation may lawfully effect such purchase under Maryland General
Corporation Law, upon such terms and conditions and for such consideration as
the Board of Directors shall deem advisable, by agreement with the stockholder
at a price not exceeding the net asset value per share computed in accordance
with Section 4 of this Article.
Section 7. Redemption of Minimum Amounts:
(a) If after giving effect to a request for redemption by a
stockholder, the aggregate net asset value of his remaining shares of any
series or class will be less than the Minimum Amount then in effect, the
Corporation shall be entitled to require the redemption of the remaining
shares of such series or class owned by such stockholder, upon notice given
in accordance with paragraph (c) of this Section, to the extent that the
Corporation may lawfully effect such redemption under Maryland General
Corporation Law.
(b) The term "Minimum Amount" when used herein shall mean that amount
fixed by the Board of Directors from time to time, provided that Minimum
Amount may not in any event exceed Five Thousand Dollars ($5,000).
(c) If any redemption under paragraph (a) of this Section is upon
notice, the notice shall be in writing personally delivered or deposited in
the mail, at least thirty days prior to such redemption. If mailed, the
notice shall be addressed to the stockholder at his post office address as
shown on the books of the Corporation, and sent by certified or registered
mail, postage prepaid. The price for shares redeemed by the Corporation
pursuant to paragraph (a) of this Section shall be paid in cash in an
amount equal to the net asset value of such shares, computed in accordance
with Section 4 of this Article.
Section 8. Mode of Payment: Payment by the Corporation for shares of any
series or class of the capital stock of the Corporation surrendered to it for
redemption shall be made by the Corporation within three business days of such
surrender out of the funds legally available therefor, provided that the
Corporation may suspend the right of the holders of capital stock of the
Corporation to redeem shares of capital stock and may postpone the right of such
holders to receive payment for any shares when permitted or required to do so by
law. Payment of the redemption or purchase price may be made in cash or, at the
option of the Corporation, wholly or partly in such portfolio securities of the
Corporation as the Corporation may select.
Section 9. Rights of Holders of Shares Purchased or Redeemed: The right of
any holder of any series or class of capital stock of the Corporation purchased
or redeemed by the Corporation as provided in this Article to receive dividends
thereon and all other rights of such holder with respect to such shares shall
terminate at the time as of which the purchase or redemption price of such
shares is determined, except the right of such holder to receive (i) the
purchase or redemption price of such shares from the Corporation or its
designated agent and (ii) any dividend or distribution or voting rights to which
such holder has previously become entitled as the record holder of such shares
on the record date for the determination of the stockholders entitled to receive
such dividend or distribution or to vote at the meeting of stockholders.
Section 10. Status of Shares Purchased or Redeemed: In the absence of any
specification as to the purpose for which such shares of any series or class of
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 assets 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 series or class
or classes 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 series or
class or classes of the Corporation's stock, as to the number of shares of
any series or class or classes 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 series or class 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 at
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 10th day of September, 1997.
/s/ Arthur S. Filean
-----------------------------------
Arthur S. Filean
/s/ Michael D. Roughton
-----------------------------------
Michael D. Roughton
SECOND: The board of directors of the Corporation September 8, 1997, 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 17th day of
September, 1997.
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 Secretary on September 10, 1997.
Principal Special Markets Fund, Inc.
By /s/ Stephan L. Jones
-----------------------------------
Stephan L. Jones, President
Attest
/s/ Arthur S. Filean
- -----------------------------------
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.
/s/ Stephan L. Jones
-----------------------------------
Stephan L. Jones
President, Principal Special Markets Fund, Inc.
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.
/s/ ARTHUR S. FILEAN
By --------------------------------
Arthur S. Filean, Vice President
PRINCOR MANAGEMENT CORPORATION
/s/ 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%
<PAGE>
FIRST AMENDMENT TO THE
PRINCIPAL SPECIAL MARKETS FUND, INC.
MANAGEMENT AGREEMENT
The Management Agreement executed and entered into by and between Principal
Special Markets Fund, Inc., a Maryland corporation, and Princor Management
Corporation, an Iowa corporation, on the 22nd day of April, 1993, is hereby
amended to including the following:
PRINCIPAL SPECIAL MARKETS FUNDS, INC.
MANAGEMENT AGREEMENT - APPENDIX A
Portfolio Fees as a Percent of
Average Daily Net Assets
1. International Emerging Markets Portfolio
Net Asset Value of Portfolio
-----------------------------
First $250 million 1.15%
Next $250 million 1.05%
Over $500 million 0.95%
2. International Securities Portfolio 0.90%
3. International SmallCap Portfolio
Net Asset Value of Portfolio
-----------------------------
First $250 million 1.00%
Next $250 million 0.90%
Over $500 million 0.80%
4. Mortgage-Backed Securities Portfolio 0.45%
Executed this ________ day of ________________, 1997
Principal Special Markets Fund, Inc.
by:_________________________________
Princor Management Corporation
by:_________________________________
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.
/s/ A. S. Filean
By ________________________________
A. S. Filean
PRINCOR MANAGEMENT CORPORATION
/s/ S. L. Jones
By ________________________________
S. L. Jones
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
/s/ D. K. Kauf
By ________________________________
D. K. Kauf
<PAGE>
FIRST AMENDMENT TO THE
PRINCIPAL SPECIAL MARKETS FUND, INC.
INVESTMENT SERVICE AGREEMENT
The Investment Service Agreement ("Agreement") by and between Principal Special
Markets Fund, Inc., an open-end investment company formed under the laws of
Maryland, Princor Management Corporation, an Iowa corporation, and Principal
Mutual Life Insurance Company, a specially chartered Iowa life insurance
company, was executed on the 22nd day of April, 1993.
WHEREAS, The Agreement contemplates the addition of Portfolios
("Portfolios") to the Fund, and
WHEREAS, The Board of Directors of the Fund has adopted Resolutions to add
Portfolios to the Fund, and
WHEREAS, Principal Special Markets Fund, Inc., Princor Management
Corporation and Principal Mutual Life Insurance Company wish the provisions of
the Agreement to extend to the additional Portfolios:
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
1. The Agreement shall be effective with respect to the International
Emerging Markets Portfolio as of the _____ day of _________________,
1997.
2. The Agreement shall be effective with respect to the International
SmallCap Portfolio as of the _____ day of _________________, 1997.
Executed this ________ day of ________________, 1997
Principal Special Markets Fund, Inc.
by:_________________________________
Princor Management Corporation
by:_________________________________
Principal Mutual Life Insurance Company
by:_________________________________
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
/s/ Stephan L. Jones
By --------------------------------
Stephan L. Jones, President
INVISTA CAPITAL MANAGEMENT, INC.
/s/ S. R. Kosmicke
By --------------------------------
S. R. Kosmicke, President
<PAGE>
PRINCIPAL SPECIAL MARKETS FUND, INC.
SUB-ADVISORY AGREEMENT - APPENDIX A
Fee as a Percent of
Portfolio Average Daily Net Assets
1. Mortgage-Backed Securities Portfolio .45%
2. International Securities Portfolio .90%
<PAGE>
FIRST AMENDMENT TO THE
PRINCIPAL SPECIAL MARKETS FUND, INC.
SUB-ADVISORY AGREEMENT
The Sub-Advisory Agreement executed and entered into by and between Princor
Management Corporation, an Iowa corporation, and Invista Capital Management,
Inc., an Iowa corporation, on the 26th day of April, 1993, is hereby amended to
including the following:
PRINCIPAL SPECIAL MARKETS FUNDS, INC.
SUB-ADVISORY AGREEMENT - APPENDIX A
Portfolio Fees as a Percent of
Average Daily Net Assets
1. International Emerging Markets Portfolio
Net Asset Value of Portfolio
-----------------------------
First $250 million 1.15%
Next $250 million 1.05%
Over $500 million 0.95%
2. International Securities Portfolio 0.90%
3. International SmallCap Portfolio
Net Asset Value of Portfolio
-----------------------------
First $250 million 1.00%
Next $250 million 0.90%
Over $500 million 0.80%
4. Mortgage-Backed Securities Portfolio 0.45%
Executed this ________ day of ________________, 1997
Princor Management Corporation
by:_________________________________
Invista Capital Management, Inc.
by:_________________________________
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 the appropriate number of such shares 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 for the Fund
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 that Portfolio shall be accepted. In addition, the Fund
reserves the right to suspend sales and the Distributor's authority to
accept orders for shares of any Portfolio 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 its
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 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 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 the 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
By _/s/ A. S. Filean_________________ By _______/s/ S. L. Jones______________
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
<PAGE>
FIRST AMENDMENT TO THE
PRINCIPAL SPECIAL MARKETS FUND, INC.
DISTRIBUTION AGREEMENT
The Distribution Agreement executed and entered into by and between Principal
Special Markets Fund, Inc., an Maryland corporation, and Princor Financial
Services Corporation, an Iowa corporation, on the 22nd day of April, 1993, is
hereby amended to including the following:
PRINCIPAL SPECIAL MARKETS FUNDS, INC.
DISTRIBUTION AGREEMENT - APPENDIX A
Portfolio
1. International Emerging Markets Portfolio
2. International Securities Portfolio
3. International SmallCap Portfolio
4. Mortgage-Backed Securities Portfolio
Executed this ________ day of ________________, 1997
Principal Special Markets Fund, Inc.
by:_________________________________
Princor Financial Services Corporation
by:_________________________________
_____________________________
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 __ TOD
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 Emerging
Markets Portfolio $_________ __ __ __
International Securities
Portfolio $_________ __ __ __
International SmallCap
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
Financial Services Corporation, Account number 073-330; 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 which the Fund
reasonably believes to be genuine. 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. The Internal Revenue Services does not require your consent to
any provision of this document other than the certifications required to avoid
backup withholding.
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 the 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. The 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 $1.0 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 another 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 NASD 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 Fund except for the purpose of
covering purchase orders already received, and you shall not purchase
shares of the Fund 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 Fund.
(c) We shall accept only unconditional orders. Any right granted to you to
sell shares 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 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.
6. We will furnish you, without charge, reasonable quantities of Prospectuses
and sales material or supplemental literature relating to the sale of
shares of the Fund.
7. 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 Fund, 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 Fund except
those contained in a current Prospectus and supplemental literature
approved in writing by the Distributor.
8. 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.
9. No obligation not expressly assumed by us in this Agreement shall be
implied therefrom.
10. 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.
11. 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.
12. 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 Fund in any state in which those shares are not qualified
for sale.
13. 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:
Ernst & Young LLP Suite 3400 Phone 515 243-2727
801 Grand Avenue
Des Moines, Iowa 50309-2764
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", "Additional Information Financial Statements", and "Financial
Statements" and to the incorporation by reference of our report dated January
17, 1997 in the registration statement of Principal Special Markets Fund, Inc.
on Form N-1A and related Prospectus and Statement of Additional Information
filed with the Securities and Exchange Commission in this Post-Effective
Amendment No. 6 to the Registration Statement under the Securities Act of 1933
(Registration No. 33-59474) and to the Registration Statement under the
Investment Company Act of 1940 (Registration No. 811-7572).
/s/ Ernst & Young LLP
Des Moines, Iowa
September 10, 1997
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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