333-29139
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
POST-EFFECTIVE AMENDMENT NO. 3 TO
FORM N-1A
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
and
REGISTRATION STATEMENT
under
THE INVESTMENT COMPANY ACT OF 1940
--------
PRINCIPAL INTERNATIONAL SMALLCAP FUND, INC.
(Exact name of Registrant as specified in Charter)
The Principal Financial Group
Des Moines, Iowa 50392
(Address of principal executive offices)
Telephone number (515) 248-3842
-----------------
MICHAEL D. ROUGHTON copy to: JOHN W. BLOUCH, L.L.P.
The Principal Financial Group Suite 405 West
Des Moines, Iowa 50392 1025 Thomas Jefferson Street, N.W.
Washington, DC 20007-0805
(Name and address of agent for service)
----------
It is proposed that this filing will become effective (check
appropriate box) immediately upon filing pursuant to paragraph
(b)of Rule 485
X on December 31, 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 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.
----------
<PAGE>
This Prospectus describes a family of investment companies ("Principal
Funds" formerly known as "Princor Funds") which has been organized by Principal
Mutual Life Insurance Company. Together the Funds provide the following range of
investment objectives:
GROWTH-ORIENTED FUNDS
Domestic
Principal Balanced Fund, Inc. (formerly known as Princor Balanced Fund, Inc.)
seeks to generate a total investment return consisting of current income and
capital appreciation while assuming reasonable risks in furtherance of the
investment objective.
Principal Blue Chip Fund, Inc. (formerly known as Princor Blue Chip Fund, Inc.)
seeks to achieve growth of capital and growth of income by investing primarily
in common stocks of well capitalized, established companies.
Principal Capital Value Fund, Inc. (formerly known as Princor Capital
Accumulation Fund, Inc.) seeks to achieve primarily long-term capital
appreciation and secondarily growth of investment income through the purchase
primarily of common stocks, but the Fund may invest in other securities.
Principal Growth Fund, Inc. (formerly known as Princor Growth Fund, Inc.) seeks
growth of capital through the purchase primarily of common stocks, but the Fund
may invest in other securities.
Principal MidCap Fund, Inc. (formerly known as Princor Emerging Growth Fund,
Inc.) seeks to achieve long-term capital appreciation by investing primarily in
securities of emerging and other growth-oriented companies.
Principal Real Estate Fund, Inc. seeks to generate total return by investing
primarily in equity securities of companies principally engaged in the real
estate industry.
Principal SmallCap Fund, Inc. seeks to achieve long-term growth of capital by
investing primarily in equity securities of companies with comparatively smaller
market capitalizations.
Principal Utilities Fund, Inc. (formerly known as Princor Utilities Fund, Inc.)
seeks to provide current income and long-term growth of income and capital by
investing primarily in equity and fixed income securities of companies in the
public utilities industry. International
Principal International Emerging Markets Fund, Inc. seeks to achieve long-term
growth of capital by investing primarily in equity securities of issuers in
emerging market countries.
Principal International Fund, Inc. (formerly known as Princor World Fund, Inc.)
seeks long-term growth of capital by investing in a portfolio of equity
securities of companies domiciled in any of the nations of the world.
Principal International SmallCap Fund, Inc. seeks to achieve long-term growth of
capital by investing primarily in equity securities of non-United States
companies with comparatively smaller market capitalizations.
INCOME-ORIENTED FUNDS
Principal Bond Fund, Inc. (formerly known as Princor Bond Fund, Inc.) seeks to
provide as high a level of income as is consistent with preservation of capital
and prudent investment risk.
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 December 31, 1997.
Principal Government Securities Income Fund, Inc. (formerly known as Princor
Government Securities Income Fund, Inc.) seeks a high level of current income,
liquidity and safety of principal by purchasing obligations issued or guaranteed
by the United States Government or its agencies, with emphasis on Government
National Mortgage Association Certificates ("GNMA Certificates"). The guarantee
by the United States Government extends only to principal and interest. There
are certain risks unique to GNMA Certificates.
Principal High Yield Fund, Inc. (formerly known as Princor High Yield Fund,
Inc.) seeks high current income primarily by purchasing high yielding, lower or
non-rated fixed income securities which are believed not to involve undue risk
to income or principal. Capital growth is a secondary objective when consistent
with the objective of high current income. Principal High Yield Fund, Inc.
invests predominantly in lower rated bonds, commonly referred to as "junk bonds"
and may invest 100% of its assets in such bonds. Bonds of this type are
considered to be speculative with regard to payment of interest and return of
principal. Purchasers should carefully assess the risks associated with an
investment in this fund. THESE ARE SPECULATIVE SECURITIES.
Principal Limited Term Bond Fund, Inc. (formerly known as Princor Limited Term
Bond Fund, Inc.) seeks a high level of current income consistent with a
relatively high level of principal stability by investing in a portfolio of
securities with a dollar weighted average maturity of five years or less.
Principal Tax-Exempt Bond Fund, Inc. (formerly known as Princor Tax-Exempt Bond
Fund, Inc.) seeks as high a level of current income exempt from federal income
tax as is consistent with preservation of capital. The Fund seeks to achieve its
objective primarily through the purchase of investment grade quality tax-exempt
fixed income obligations.
MONEY MARKET FUNDS
Principal Cash Management Fund, Inc. (formerly known as Princor Cash Management
Fund, Inc.) seeks as high a level of income available from short-term securities
as is considered consistent with preservation of principal and maintenance of
liquidity by investing in a portfolio of money market instruments.
Principal Tax-Exempt Cash Management Fund, Inc. (formerly known as Princor
Tax-Exempt Cash Management Fund, Inc.) seeks, through investment in a
professionally managed portfolio of high quality, short-term Municipal
Obligations, as high a level of current interest income exempt from federal
income tax as is consistent with stability of principal and maintenance of
liquidity.
Each of the Principal Funds, except the Tax-Exempt Bond Fund and Tax-Exempt Cash
Management Fund, offers three classes of shares: Class A, Class B and Class R
shares. Tax-Exempt Bond Fund offers Class A and Class B shares. Tax-Exempt Cash
Management Fund only offers Class A shares. Each class is sold under a different
sales arrangement and has different expenses. Only Class A and Class B shares
are offered through this Prospectus. For more information about the different
sales arrangements, see "How to Purchase Shares" and "Offering Price of Fund's
Shares." For information about various expenses borne by each class see
"Overview."
Shares of the Funds are not deposits or obligations of, or guaranteed or
endorsed by, any financial institution, nor are shares of the Funds federally
insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board,
or any other agency.
An investment in any of the Funds is neither insured nor guaranteed by the
U.S. Government. There can be no assurance the Money Market Funds will be able
to maintain a stable net asset value of $1.00 per share.
This Prospectus concisely states information about the Principal Funds that
an investor should know before investing. It should be read and retained for
future reference.
Additional information about the Funds has been filed with the Securities
and Exchange Commission, including a document called a Statement of Additional
Information dated December 31, 1997 which is incorporated by reference herein.
The Statement of Additional Information and a Prospectus for Class R shares can
be obtained free of charge by writing or telephoning the Funds' principal
underwriter: Princor Financial Services Corporation, P.O. Box 10423, Des Moines,
IA 50306. Telephone 1-800-247-4123.
TABLE OF CONTENTS
Page
Overview .............................................................. 4
Financial Highlights.................................................... 10
Investment Objectives, Policies and Restrictions........................ 24
Growth-Oriented Funds............................................... 24
Domestic........................................................ 24
International................................................... 29
Income-Oriented Funds............................................... 30
Money Market Funds.................................................. 36
Certain Investment Policies and Restrictions........................ 38
Risk Factors............................................................ 40
How the Funds are Managed............................................... 40
How to Purchase Shares.................................................. 43
Offering Price of Funds' Shares ........................................ 45
Distribution and Shareholder Servicing Plans and Fees................... 47
Determination of Net Asset Value of Funds' Shares....................... 47
Distribution of Income Dividends and Realized Capital Gains ............ 48
Tax Treatment of the Funds, Dividends and Distributions ................ 50
How to Exchange Shares.................................................. 51
How to Sell Shares...................................................... 52
Periodic Withdrawal Plan................................................ 53
Performance Calculation................................................. 54
General Information About a Fund Account................................ 55
Retirement Plans........................................................ 56
Shareholder Rights...................................................... 56
Additional Information.................................................. 56
This Prospectus does not constitute an offer to sell, or a solicitation of
an offer to buy, the securities of any of the Funds in any jurisdiction in which
such sale, offer to sell, or solicitation may not be lawfully made. Currently,
shares of the Funds are not available for sale in New Hampshire, in any U.S.
possession or in Canada or any other foreign country. 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 the Funds or the Funds Manager. Because the Principal Funds use a combined
Prospectus there may be a possibility that one Fund might become liable for any
misstatements, inaccuracy, or incomplete disclosure in the Prospectus concerning
another Fund.
OVERVIEW
The following overview is provided for your convenience. Please read the
detailed information found in the prospectus.
The Principal Funds are separately incorporated, open-end diversified
management investment companies. Each of the Funds, except the Tax-Exempt Bond
Fund and Tax-Exempt Cash Management Fund, offers three classes of shares: Class
A, Class B and Class R shares. The Tax-Exempt Bond Fund offers only Class A and
Class B shares. The Tax-Exempt Cash Management Fund offers only Class A shares.
Only Class A and Class B Shares are offered through this Prospectus.
What it Costs to Invest
There are costs to acquire and own many types of investments. Shares of the
Principal Funds are no exception. The tables on the next pages show the fees and
expenses of buying and owning shares of each of the Funds. Except as noted, the
information for all of the Funds is based on the fiscal year ended October 31,
1997. The Examples are based on each Fund's Annual Operating Expenses described
in Tables A and B. Please remember that actual expenses and future expenses may
be more or less than those shown.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses
Class A Shares
Maximum Sales Load Imposed Contingent
on Purchases Redemption Exchange Deferred Sales
Fund (as a percentage of offering price) Fee* Fee Charge
---- ----------------------------------- ---------- -------- --------------
All Funds except Limited Term Bond Fund
<S> <C> <C> <C> <C>
and Money Market Funds 4.75% None None None
Limited Term Bond Fund 1.50% None None None
Money Market Funds None None None None
<FN>
* A wire charge of $6.00 will be deducted for all wire transfers.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Class B Shares
Maximum Sales Load Contingent Deferred Sales Charge
Imposed on Purchases (as a percentage of the lower of
(as a percentage of Redemption Exchange the original purchase price
Fund offering price) Fee* Fee or redemption proceeds
---- -------------------- ---------- -------- ------------------------------------
<S> <C> <C> <C> <C>
All Funds except Limited Term Bond Fund None None None Redemptions During Year
-----------------------
1 2 3 4 5 6 7
4% 4% 3% 3% 2% 1% 0%
Limited Term Bond Fund None None None Redemptions During Year
-----------------------
1 2 3 4 5 6 7
1.25% 1.25% .75% .75% .50% .25% 0%
<FN>
* A wire charge of $6.00 will be deducted for all wire transfers.
</FN>
</TABLE>
<TABLE>
<CAPTION>
TABLE A CLASS A SHARES
Annual Fund Operating Expenses
(as a percentage of average net assets)
----------------------------------------------------------------------
Management 12b-1 Other Total Operating
Fund Fee Fee Expenses Expenses
---- ---------- ----- -------- ---------------
<S> <C> <C> <C> <C>
Balanced Fund .60% .26% .47% 1.33%
Blue Chip Fund .50 .25 .55 1.30
Bond Fund .46 .23 .26 .95*
Capital Value Fund .40 .12 .18 .70
Cash Management Fund .37 None .26 .63*
Government Securities Income Fund .46 .19 .19 .84
Growth Fund .44 .21 .38 1.03
High Yield Fund .60 .25 .37 1.22
International Emerging Markets Fund 1.23 .09 .71 2.03**
International Fund .71 .21 .47 1.39
International SmallCap Fund 1.19 .09 .71 1.99**
Limited Term Bond Fund .25 .17 .48 .90*
MidCap Fund .59 .25 .42 1.26
Real Estate Fund .90 .25 .55 1.70***
SmallCap Fund .85 .25 .55 1.65***
Tax-Exempt Bond Fund .48 .20 .11 .79
Tax-Exempt Cash Management Fund .47 None .23 .70*
Utilities Fund .50 .25 .40 1.15*
<FN>
* After waiver.
** Annualized
*** Estimated expenses.
</FN>
</TABLE>
<TABLE>
<CAPTION>
TABLE B CLASS B SHARES
Annual Fund Operating Expenses
(as a percentage of average net assets)
-----------------------------------------------------------------------
Management 12b-1 Other Total Operating
Fund Fee Fee Expenses Expenses
---- ---------- ----- -------- ---------------
<S> <C> <C> <C> <C>
Balanced Fund .60% .92% .62% 2.14%
Blue Chip Fund .50 .89 .67 2.06
Bond Fund .40 .91 .39 1.70*
Capital Value Fund .40 .91 .34 1.65
Cash Management Fund .00 .31 1.16 1.47*
Government Securities Income Fund .46 .63 .30 1.39
Growth Fund .44 .58 .46 1.48
High Yield Fund .60 .95 .58 2.13
International Emerging Markets Fund 1.23 .18 .75 2.16**
International Fund .71 .90 .56 2.17
International SmallCap Fund 1.19 .18 .70 2.07**
Limited Term Bond Fund .00 .51 .73 1.24*
MidCap Fund .59 .63 .47 1.69
Real Estate Fund .90 .90 .55 2.35***
SmallCap Fund .85 .90 .55 2.30***
Tax-Exempt Bond Fund .48 .76 .21 1.45
Utilities Fund .54 .85 .51 1.90*
<FN>
* After waiver.
** Annualized
*** Estimated expenses.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Example A
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:
1 Year 3 Years 5 Years 10 Years(a)
---------------- ---------------- ----------------- -----------------
Class A Class B Class A Class B Class A Class B Class A Class B
Fund Shares Shares Shares Shares Shares Shares Shares Shares
----------------------------------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balanced Fund $60 $63 $88 $100 $117 $138 $200 $217
Blue Chip Fund $60 $62 $87 $97 $115 $134 $197 $210
Bond Fund $57 $59 $76 $87 $98 $116 $159 $172
Capital Value Fund $54 $58 $69 $85 $85 $113 $130 $158
Cash Management Fund $6 $56 $20 $80 $35 $104 $79 $142
Government Securities Income Fund $56 $56 $73 $77 $92 $100 $146 $145
Growth Fund $58 $56 $79 $80 $102 $105 $167 $159
High Yield Fund $59 $63 $84 $99 $111 $137 $188 $212
International Emerging Markets Fund $67 $63 $108 $100 N/A N/A N/A N/A
International Fund $61 $63 $89 $101 $120 $139 $206 $221
International SmallCap Fund $57 $62 $107 $98 N/A N/A N/A N/A
Limited Term Bond Fund $24 $26 $43 $48 $64 $74 $124 $136
MidCap Fund $60 $59 $86 $86 $113 $115 $193 $183
Real Estate Fund $64 $65 $99 $106 N/A N/A N/A N/A
SmallCap Fund $63 $64 $97 $104 N/A N/A N/A N/A
Tax-Exempt Bond Fund $55 $56 $72 $79 $89 $103 $141 $147
Tax-Exempt Cash Management Fund $7 $56 $22 $80 $39 $104 $87 $145
Utilities Fund $59 $61 $82 $93 $108 $126 $181 $194
</TABLE>
<TABLE>
<CAPTION>
Example B
You would pay the following expenses on the same investment, assuming no
redemption:
1 Year 3 Years 5 Years 10 Years (a)
----------------- ----------------- ----------------- -----------------
Class A Class B Class A Class B Class A Class B Class A Class B
Fund Shares Shares Shares Shares Shares Shares Shares Shares
----------------------------------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balanced Fund $60 $22 $88 $67 $117 $115 $200 $217
Blue Chip Fund $60 $21 $87 $65 $115 $111 $197 $210
Bond Fund $57 $17 $76 $54 $98 $92 $159 $172
Capital Value Fund $54 $17 $69 $52 $85 $90 $130 $158
Cash Management Fund $6 $15 $20 $46 $35 $80 $79 $142
Government Securities Income Fund $56 $14 $73 $44 $92 $76 $146 $145
Growth Fund $58 $15 $79 $47 $102 $81 $167 $159
High Yield Fund $59 $22 $84 $67 $111 $114 $188 $212
International Emerging Markets Fund $67 $22 $108 $68 N/A N/A N/A N/A
International Fund $61 $22 $89 $68 $120 $116 $206 $221
International SmallCap Fund $57 $21 $107 $65 N/A N/A N/A N/A
Limited Term Bond Fund $24 $13 $43 $39 $64 $68 $124 $136
MidCap Fund $60 $17 $86 $53 $113 $92 $193 $183
Real Estate Fund $64 $24 $99 $73 N/A N/A N/A N/A
SmallCap Fund $63 $23 $97 $72 N/A N/A N/A N/A
Tax-Exempt Bond Fund $55 $15 $72 $46 $89 $79 $141 $147
Tax-Exempt Cash Management Fund $7 $15 $22 $46 $39 $80 $87 $145
Utilities Fund $59 $19 $82 $60 $108 $103 $181 $194
<FN>
(a) The amount in this column reflects the conversion of Class B shares to
Class A shares seven years after the initial purchase.
</FN>
</TABLE>
The purpose of these tables is to help you understand the expenses of the
Principal mutual funds. The Fund's Annual Fund Operating Expenses shown in Table
A for Class A shares are generally based on each Fund's actual expenses.
However, each of the Funds, except Money Market - Class A shares, have adopted a
12b-1 Plan. These Plans permit Princor Financial Services Corporation
("Princor") as underwriter of the Funds to collect an annual fee of up to .25%
of each Fund's average net assets. A portion of this annual fee is considered an
asset-based sales charge. It may then be possible that a long-term shareholder
of Class A shares may pay more than the maximum front-end sales charge permitted
by the National Association of Securities Dealers. See "Distribution and
Shareholder Servicing Plan and Fees", "How to Purchase Shares" and "How the
Funds are Managed."
For the fiscal year ended October 31, 1997, the Manager waived a portion of
its fees as shown below:
<TABLE>
<CAPTION>
Total operating expenses
Before waiver After waiver
Fund Class A Class B Class A Class B
---- ---------------------------- ------------------------
<S> <C> <C> <C> <C>
Bond Fund .98% 1.79% .95% 1.70%
Cash Management Fund .63% 2.14% .63% 1.47%
Limited Term Bond Fund 1.15% 3.82% .90% 1.24%
Tax-Exempt Cash Management Fund .73 22.58% .70% 1.47%
Utilities Fund 1.25% 1.95% 1.15% 1.90%
</TABLE>
A significant portion of the assets of the Cash Management and Tax-Exempt
Cash Management Funds have been invested via Principal Financial Securities,
Inc. ("PFS"), a broker-dealer affiliated with Princor and the Manager of both
the Funds. Subject to regulatory approval, PFS will be sold in mid-January,
1998. It is anticipated that the assets of PFS clients will be redeemed from
these two funds. Should that occur, management fees before waiver are estimated
to be .46% and .62% respectively. With the waivers, management fees, for Cash
Management and Tax-Exempt Cash Management are estimated to be .33% and .33%.
What the Principal Funds Offer You
Your financial objectives may be investing for retirement or a child's
education, accumulating a vacation fund or generating current income. Your
purchase of Principal Funds may help you achieve your financial goals. The Funds
offer a choice of investment risks allowing you to choose different options
based on your willingness to assume risk. The Funds offer:
Professional Investment Management: Principal Management Corporation (the
"Manager") (formerly known as Princor Management Corporation) is the Manager for
each of the Funds. Through a Sub-Advisory Agreement between Invista Capital
Management ("Invista") and the Manager, Invista performs the investment advisory
responsibilities of the Manager for the Growth-Oriented Funds (except the Real
Estate Fund), the Government Securities Income Fund and the Limited Term Bond
Fund. The Manager and Invista employ experienced securities analysts to provide
you with professional investment management. The Manager or Invista decides how
and where to invest Fund assets. Investment decisions are based on research into
the financial performance of individual companies and specific securities
issues, taking into account general economic and market trends. See "How the
Funds are Managed."
Diversification: Principal Funds allow you to diversify your assets across
dozens of securities issued by a number of issuers. In addition, you may further
diversify by investing in several of the Funds. Diversification reduces
investment risk.
Economies of Scale: Pooling individual shareholders' money creates
administrative efficiencies and, in certain Funds, saves on brokerage
commissions through round-lot orders and quantity discounts. By pooling money
with other investors, you can invest indirectly in many more securities than you
could on your own.
Liquidity: Upon request, each Fund will redeem all or part of your shares
and promptly pay the current net asset value of the shares redeemed, less any
applicable contingent deferred sales charge. See "How to Sell Shares."
Dividends: Each Fund will normally declare a dividend payable to
shareholders from investment income in accordance with its distribution policy.
Dividends payable for Class B shares will be lower than dividends payable for
Class A shares. See "Distribution of Income Dividends and Realized Capital
Gains."
Convenient Investment and Recordkeeping Services: Generally, shareholders
of any of the Funds (except the Money Market Funds) will receive a statement of
account each time there is a transaction that effects the account. Shareholders
of the Money Market Funds will receive a monthly statement of account. However,
certain shareholders will receive quarterly statements in lieu of other
statements. See "General Information About a Fund Account." In addition,
shareholders may complete certain transactions and access account information by
telephoning 1-800-247-4123.
Investment Objectives of the Funds
GROWTH-ORIENTED FUNDS
Domestic
--------
Fund Investment Objectives
---- ---------------------
Principal Balanced Fund, Inc. Total investment return consisting of current
income and capital appreciation while
assuming reasonable risks in furtherance of
this objective.
Principal Blue Chip Fund, Inc.
Growth of capital and growth of income. In
seeking to achieve its objective, the Fund
will invest primarily in common stocks of
well-capitalized, established companies which
the Fund's Manager believes to have the
potential for growth of capital, earnings and
dividends.
Principal Capital Value Fund, Inc. Long-term capital appreciation with a
secondary objective of growth of investment
income. The Fund seeks to achieve its
objectives primarily through the purchase
of common stocks, but the Fund may invest in
other securities.
Principal Growth Fund, Inc. Growth of capital. The Fund seeks to achieve
its objective through the purchase primarily
of common stocks, but the Fund may invest in
other securities.
Principal MidCap Fund, Inc. Long-term capital appreciation. The Fund
invests primarily in securities of emerging
and other growth-oriented companies.
Principal Real Estate Fund, Inc. Generate total return. In seeking to achieve
its objective, the Fund will primarily invest
in equity securities of companies
principally engaged in the real estate
industry.
Principal SmallCap Fund, Inc. Long-term growth of capital. The Fund seeks
to achieve its objective by investing
primarily in equity securities of companies
with comparatively smaller market
capitalizations.
Principal Utilities Fund, Inc. Current income and long-term growth of income
and capital. The Fund invests primarily in
equity and fixed-income securities of
companies engaged in the public utilities
industry.
International
-------------
Fund Investment Objectives
---- ---------------------
Principal International Emerging Long-term growth of capital. The Fund will
Markets Fund, Inc. invest primarily in equity securities of
issuers in emerging market countries.
Principal International Fund, Inc. Long-term growth of capital by investing in
a portfolio of equity securities of companies
domiciled in any of the nations of the world.
Principal International SmallCap Long-term growth of capital. The Fund will
Fund, Inc. invest primarily in equity securities of
non-UnitedStates companies with comparatively
smaller market capitalizations.
INCOME-ORIENTED FUNDS
Fund Investment Objectives
---- ---------------------
Principal Bond Fund, Inc. As high a level of income as is consistent
with preservation of capital and prudent
investment risk. This Fund invests primarily
in investment-grade bonds.
Principal Government Securities A high level of current income, liquidity and
Income Fund, Inc. safety of principal. The Fund seeks to
achieve its objective through the purchase of
obligations issued or guaranteed by the
United States Government or its agencies,
with emphasis on Government National Mortgage
Association Certificates ("GNMA
Certificates"). Fund shares are not
guaranteed by the United States Government.
Principal High Yield Fund, Inc. High current income. Capital growth is a
secondary objective when consistent with the
objective of high current-income. The Fund
will invest primarily in high yielding, lower
or non-rated fixed-income securities
(commonly known as "junk bonds").
Principal Limited Term Bond A high level of current income consistent
Fund, Inc. with a relatively high level of principal
stability by investing in a portfolio of
securities with a dollar weighted average
maturity of five years or less.
Principal Tax-Exempt Bond As high a level of current interest income
Fund, Inc. exempt from federal income tax as is
consistent with preservation of capital. This
Fund invests primarily in investment-grade,
tax-exempt, fixed-income obligations.
MONEY MARKET FUNDS
Fund Investment Objectives
---- ---------------------
Principal Cash Management As high a level of current income available
Fund, Inc. from short-term securities as is considered
consistent with preservation of principal and
maintenance of liquidity. The Fund invests in
money market instruments.
Principal Tax-Exempt Cash As high a level of current interest income
Management Fund, Inc. exempt from federal income tax liquidity. The
Fund invests in high-quality, short-term
municipal obligations.
There can be no assurance that the investment objectives of any of the
Funds will be realized. See "Investment Objectives, Policies and Restrictions."
The Risks of Investing
Because the Funds have different investment objectives, each Fund is
subject to varying degrees of financial and market risks and current income
volatility. 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 reacts to changes in
conditions in securities markets in general and, with particular reference to
debt securities, to changes in the overall level of interest rates. Current
income volatility refers to the degree and rapidity which changes in the overall
level of interest rates are reflected in the level of current income of a Fund.
See "Risk Factors" and "Investment Objectives, Policies and Restrictions."
How to Buy Shares
You can become a shareholder by completing the application that accompanies
this Prospectus. Mail it, along with a check, to Princor. The initial investment
for the Funds must be at least $1,000 ($250 for an account established under the
Uniform Gifts to Minors Act or Uniform Transfers Act). An IRA may be established
with a minimum of $250. See "Retirement Plans." The minimum subsequent
investment is $100. Lower minimum initial and subsequent purchase amounts are
available to you if you make regular periodic investments under an Automatic
Investment Plan. Minimum investment amounts do not apply to certain Money Market
Fund accounts. See "How to Purchase Shares." Class B shares of the Cash
Management Fund may only be purchased by an exchange from other Class B shares.
See "How to Exchange Shares."
Each Fund, except Tax-Exempt Bond Fund and Tax-Exempt Cash Management Fund,
offers three classes of shares through Princor and other dealers which it
selects. Tax-Exempt Bond Fund offers Class A and Class B shares. Tax-Exempt Cash
Management Fund offers only Class A shares. Only two classes of shares are
offered through this Prospectus, Class A shares and Class B shares. The two
classes of shares bear sales charges in different forms and amounts and bear
different expense levels.
Class A shares. When you buy less than $1 million of Class A shares of any
of the Principal Funds (except the Money Market Funds), you pay a sales charge
at the time of purchase. The sales charge ranges from a high of 4.75% (1.50% for
Limited Term Bond Fund) on purchases of up to $50,000 to a low of 0% on
purchases of $1 million or more. Purchases of $1 million or more are subject to
a .75% (.25% of the Limited Term Bond Fund) contingent deferred sales charge on
redemptions within 18 months from the date of purchase. Certain purchases of
Class A shares qualify for reduced sales charges. See "How to Purchase Shares"
and "Offering Price of Funds' Shares." Class A shares for each of the Funds
(except the Money Market Funds) currently bear a 12b-1 fee at the annual rate of
up to 0.25% (.15% for the Limited Term Bond Fund) of the Fund's average net
assets attributable to Class A shares. See "Distribution and Shareholder
Servicing Plans and Fees."
Class A shares of the Money Market Funds are sold without a sales charge at
the net asset value next determined after receipt of an order. Under most
circumstances, the net asset value will remain constant at $1.00 per share;
however, there can be no assurance that the net asset value will not change.
Class B shares. Class B shares for each Fund are sold without an initial
sales charge, but are subject to a declining contingent deferred sales charge
which begins at 4% (1.25% for the Limited Term Bond Fund) and declines to zero
over a seven-year schedule. Class B shares purchased under certain sponsored
Princor plans established after February 1, 1998, are subject to a CDSC of up to
3% if redeemed within five years of purchase. Class B shares of the Cash
Management Fund may be purchased only by exchange from other Class B shares.
Class B shares bear a higher 12b-1 fee than Class A shares, currently at the
annual rate of 1.00% (.50% for the Limited Term Bond Fund) of the Fund's average
net assets attributable to Class B shares. Class B shares will automatically
convert into Class A shares, based on relative net asset value, approximately
seven years (five years for certain sponsored plans) after purchase. Class B
shares provide you the benefit of putting all your dollars to work from the time
the investment is made, but (until conversion) will have a higher expense ratio
and pay lower dividends than Class A shares due to the higher 12b-1 fee. See
"How to Purchase Shares" and "Offering Price of Funds' Shares."
How to Exchange Shares
Shares of Principal Funds may be exchanged for shares of the same Class of
other Principal Funds without a sales charge or administrative fee under certain
conditions as described under "How to Exchange Shares." In addition, Class A
shares of the Money Market Funds acquired by direct purchase or reinvestment of
dividends on such shares may be exchanged for Class B shares of any
Growth-Oriented or Income-Oriented Fund. Shares may be exchanged by telephone or
written request. An exchange is a sale for tax purposes. Also, dividends and
capital gains distributions from shares of a Class of one Principal Fund may be
automatically "cross-reinvested" in shares of the same Class of another
Principal Fund. See "Distribution of Income Dividends and Realized Capital
Gains."
How to Sell Shares
You may sell (redeem) shares by mail or by telephone. Redemption proceeds
will generally be mailed to you on the next business day after the redemption
request is received in good order. Upon proper authorization certain redemptions
may be processed through a selected dealer. Automatic redemptions of a specified
amount may also be made through a Periodic Withdrawal Plan. In addition, Class A
shares of the Money Market Funds may be redeemed by writing a check against the
account balance or by establishing a preauthorized withdrawal service on the
account. Redemptions of Class A shares are generally made at net asset value
without charge. However, Class A share purchases of $1 million or more may be
subject to a .75% (.25% for the Limited Term Bond Fund) contingent deferred
sales charge if redeemed within 18 months of purchase. Redemptions of Class B
shares within six years (five years for certain sponsored plans) of purchase
will generally be subject to a contingent deferred sales charge. See "Offering
Price of Funds' Shares" and "How to Sell Shares." If redemption proceeds are
wired to a financial institution, a six dollar ($6) wire fee will be charged.
FINANCIAL HIGHLIGHTS
The following financial highlights are derived from financial statements
which, for the five years in the period ended October 31, 1997, have been
audited by Ernst & Young LLP, independent auditors, whose report has been
incorporated by reference herein. The financial highlights should be read in
conjunction with the financial statements, related notes, and other financial
information incorporated by reference herein. Audited financial statements may
be obtained by shareholders, without charge, by telephoning 1-800-451-5447.
<PAGE>
<TABLE>
<CAPTION>
GROWTH-ORIENTED FUNDS
Domestic
Selected data for a share of Capital Stock outstanding throughout each period:
Income from Investment Operations Less Distributions
Net Realized
and
Net Asset Net Unrealized Total Dividends Net Asset
Value at Invest- Gain from from Net Distributions Value at
Beginning ment (Loss) on Investment Investment from Total End
of Period Income Investments Operations Income Capital Gains Distributions of Period
Principal Balanced Fund, Inc.(b)(c)
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $14.61 $.35 $1.81 $ 2.16 $(.36) $(1.30) $(1.66) $15.11
1996 13.74 .38 1.59 1.97 (.43) (.67) (1.10) 14.61
1995 12.43 .41 1.31 1.72 (.36) (.05) (.41) 13.74
1994 13.26 .32 (.20) .12 (.40) (.55) (.95) 12.43
1993 12.78 .35 1 .14 1.49 (.37) (.64) (1.01) 13.26
1992 11.81 .41 .98 1.39 (.42) -- (.42) 12.78
1991 9.24 .46 2.61 3.07 (.50) -- (.50) 11.81
1990 11.54 .53 (1.70) (1.17) (.59) (.54) (1.13) 9.24
1989 11.09 .61 .56 1.17 (.56) (.16) (.72) 11.54
Period Ended October 31, 1988 (d) 9.96 .40 1.02 1.42 (.29) -- (.29) 11.09
Class B
Year Ended October 31,
1997 14.56 .25 1.79 2.04 (.25) (1.30) (1.55) 15.05
1996 13.71 .29 1.55 1.84 (.32) (.67) (.99) 14.56
Period Ended October 31, 1995 (g) 11.80 .31 1.90 2.21 (.30) -- (.30) 13.71
Principal Blue Chip Fund, Inc.(c)
Class A
Year Ended October 31,
1997 17.10 .21 3.58 3.79 (.21) (.46) (.67) 20.22
1996 15.03 .23 2.45 2.68 (.26) (.35) (.61) 17.10
1995 12.45 .24 2.55 2.79 (.21) -- (.21) 15.03
1994 11.94 .20 .57 .77 (.26) -- (.26) 12.45
1993 11.51 .21 .43 .64 (.18) (.03) (.21) 11.94
1992 10.61 .17 .88 1.05 (.15) -- (.15) 11.51
Period Ended October 31, 1991(h) 10.02 .10 .57 .67 (.08) -- (.08) 10.61
Class B
Year Ended October 31,
1997 17.03 .07 3.54 3.61 (.04) (.46) (.50) 20.14
1996 14.99 .11 2.41 2.52 (.13) (.35) (.48) 17.03
Period Ended October 31, 1995(g) 11.89 .15 3.10 3.25 (.15) -- (.15) 14.99
Principal Capital Value Fund, Inc.(c)
Class A
Year Ended October 31,
1997 27.72 .50 5.80 6.30 (.48) (3.85) (4.33) 29.69
1996 23.69 .45 5.48 5.93 (.43) (1.47) (1.90) 27.72
1995 20.83 .45 3.15 3.60 (.39) (.35) (.74) 23.69
1994 21.41 .39 .93 1.32 (.41) (1.49) (1.90) 20.83
1993 21.34 .43 1.67 2.10 (.43) (1.60) (2.03) 21.41
1992 19.53 .45 1.82 2.27 (.46) -- (.46) 21.34
1991 14.31 .49 5.24 5.73 (.51) -- (.51) 19.53
1990 18.16 .52 (3.64) (3.12) (.40) (.33) (.73) 14.31
Four Months Ended October 31,
1989(i) 19.11 .18 (.06) .12 (.29) (.78) (1.07) 18.16
Year Ended June 30,
1989 18.82 .53 1.10 1.63 (.51) (.83) (1.34) 19.11
1988 21.66 .44 (1.06) (.62) (.41) (1.81) (2.22) 18.82
Class B
Year Ended October 31,
1997 27.58 .23 5.77 6.00 (.22) (3.85) (4.07) 29.51
1996 23.61 .21 5.45 5.66 (.22) (1.47) (1.69) 27.58
Period Ended October 31, 1995(g) 19.12 .33 4.46 4.79 (.30) -- (.30) 23.61
</TABLE>
<TABLE>
<CAPTION>
Ratio/Supplemental Data
Ratio of Net
Ratio of Investment
Net Assets at Expenses to Income to Portfolio Average
Total End of Period Average Average Turnover Commission
Return (a) (in thousands) Net Assets Net Assets Rate Rate Paid
Principal Balanced Fund, Inc.(b)(c)
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1997 15.88% $ 85,436 1.33% 2.42% 27.6% $.0392
1996 15.10 70,820 1.28 2.82 32.6 .0421
1995 14.18 57,125 1.37 3.21 35.8 N/A
1994 .94 53,366 1.51 2.70 14.4 N/A
1993 12.24 39,952 1.35 2.78 27.5 N/A
1992 11.86 31,339 1.29 3.39 30.6 N/A
1991 34.09 23,372 1.30 4.25 23.6 N/A
1990 (11.28) 18,122 1.32 5.22 33.7 N/A
1989 11.03 20,144 1.25 5.45 30.2 N/A
Period Ended October 31, 1988 (d) 12.42(e) 16,282 1.12(f) 4.51(f) 65.2(f) N/A
Class B
Year Ended October 31,
1997 14.96 11,885 2.14 1.58 27.6 .0392
1996 14.10 5,964 2.13 1.93 32.6 .0421
Period Ended October 31, 1995 (g) 18.72(e) 1,263 1.91(f) 2.53(f) 35.8(f) N/A
Principal Blue Chip Fund, Inc.(c)
Class A
Year Ended October 31,
1997 22.57 79,985 1.30 1.10 55.4 .0394
1996 18.20 44,389 1.33 1.41 13.3 .0456
1995 22.65 35,212 1.38 1.83 26.1 N/A
1994 6.58 27,246 1.46 1.72 5.5 N/A
1993 5.65 23,759 1.25 1.87 11.2 N/A
1992 9.92 19,926 1.56 1.49 13.5 N/A
Period Ended October 31, 1991(h) 6.37(e) 12,670 1.71(f) 1.67(f) 0.4(f) N/A
Class B
Year Ended October 31,
1997 21.59 18,265 2.06 .32 55.4 .0394
1996 17.18 6,527 2.19 .49 13.3 .0456
Period Ended October 31, 1995 (g) 26.20(e) 1,732 1.90(f) .97(f) 26.1(f) N/A
Principal Capital Value Fund, Inc.(c)
Class A
Year Ended October 31,
1997 25.36 494,444 .70 1.85 30.8 .0457
1996 26.41 435,617 .69 1.82 50.2 .0421
1995 17.94 339,656 .75 2.08 46.0 N/A
1994 6.67 285,965 .83 2.02 31.7 N/A
1993 10.42 240,016 .82 2.16 24.8 N/A
1992 11.67 190,301 .93 2.17 38.3 N/A
1991 40.63 152,814 .99 2.72 19.7 N/A
1990 (17.82) 109,507 1.10 3.10 27.7 N/A
Four Months Ended October 31, 1989 (i) .44(e) 122,685 1.10(f) 2.87(f) 19.7(f)
Year Ended June 30,
1989 9.53 117,473 1.00 3.04 28.1 N/A
1988 (2.30) 97,147 .96 2.40 27.9 N/A
Class B
Year Ended October 31,
1997 24.13 27,240 1.65 .84 30.8 .0457
1996 25.19 9,832 1.70 .80 50.2 .0421
Period Ended October 31, 1995 (g) 25.06(e) 2,248 1.50(f) 1.07(f) 46.0(f) N/A
<FN>
Notes to financial highlights
(a) Total return is calculated without the front-end sales charge or contingent
deferred sales charge.
(b) Effective December 5, 1994, the name of Princor Managed Fund, Inc. was
changed to Princor Balanced Fund, Inc.
(c) Effective January 1, 1998, the names of the following Domestic Growth Funds
were changed:
from to
---- --
Princor Balanced Fund, Inc. Principal Balanced Fund, Inc.
Princor Blue Chip Fund, Inc. Principal Blue Chip Fund, Inc.
Princor Capital Accumulation Fund, Inc. Principal Capital Value Fund, Inc.
(d) Period from December 18, 1987, date shares first offered to public, through
October 31, 1988. Net investment income, aggregating $.08 per share for the
period from the initial purchase of shares on October 30, 1987 through
December 17, 1987, was recognized, none of which was distributed to its
sole stockholder, Principal Mutual Life Insurance Company, during the
period. Additionally, the Fund incurred net realized and unrealized losses
on investments of $.12 per share during this initial interim period. This
represented activities of the fund prior to the initial public offering of
fund shares.
(e) Total return amounts have not been annualized.
(f) Computed on an annualized basis.
(g) Period from December 9,1994, date Class B shares first offered to the
public, through October 31, 1995. For the initial period from December 5,
1994 through December 8, 1994, certain Domestic Growth Funds' Class B
shares recognized no net investment income but incurred unrealized losses
on investments as shown below. This represented Class B shares activities
of each fund prior to the initial public offering of Class B shares.
Per Share
Fund Unrealized (Loss)
---- -----------------
Principal Balanced Fund, Inc. $(.19)
Principal Blue Chip Fund, Inc. (.15)
Principal Capital Value Fund, Inc. (.46)
(h) Period from March 1, 1991, date shares first offered to public, through
October 31, 1991. Net investment income, aggregating $.01 per share for the
period from the initial purchase of shares on February 11, 1991 through
February 28, 1991, was recognized, none of which was distributed to its
sole stockholder, Principal Mutual Life Insurance Company, during the
period. Additionally, the Fund incurred unrealized gains on investments of
$.01 per share during this initial interim period. This represented
activities of the fund prior to the initial public offering of fund shares.
(i) Effective July 1, 1989, the fund changed its fiscal year-end from June 30
to October 3l.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GROWTH-ORIENTED FUNDS
Domestic
Selected data for a share of Capital Stock outstanding throughout each period:
Income from Investment Operations Less Distributions
Net Realized
Net and
Net Asset Invest- Unrealized Total Dividends Net Asset
Value at ment Gain from from Net Distributions Value at
Beginning Income (Loss) on Investment Investment from Total End
of Period (Loss) Investments Operations Income Capital Gains Distributions of Period
Principal Growth Fund, Inc.(b)
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $39.54 $ .31 $11.26 $11.57 $(.31) $ (.37) $ (.68) $50.43
1996 37.22 .35 3.50 3.85 (.35) (1.18) (1.53) 39.54
1995 31.14 .35 6.67 7.02 (.31) (.63) (.94) 37.22
1994 30.41 .26 2.56 2.82 (.28) (1.81) (2.09) 31.14
1993 28.63 .40 2.36 2.76 (.42) (.56) (.98) 30.41
1992 25.92 .39 3.32 3.71 (.40) (.60) (1.00) 28.63
1991 16.57 .41 9.32 9.73 (.38) -- (.38) 25.92
1990 19.35 .35 (1.99) (1.64) (.34) (.80) (1.14) 16.57
Four Months Ended October 31, 1989(c)18.35 .08 1.17 1.25 (.16) (.09) (.25) 19.35
Year Ended June 30,
1989 19.84 .32 .36 .68 (.29) (1.88) (2.17) 18.35
1988 23.27 .26 (2.08) (1.82) (.22) (1.39) (1.61) 19.84
Class B
Year Ended October 31,
1997 39.43 .09 11.23 11.32 (.02) (.37) (.39) 50.36
1996 37.10 .08 3.48 3.56 (.05) (1.18) (1.23) 39.43
Period Ended October 31, 1995(f) 28.33 .21 8.76 8.97 (.20) -- (.20) 37.10
Principal MidCap Fund, Inc.(b)
Class A
Year Ended October 31,
1997 35.75 .07 10.80 10.87 (.11) (1.18) (1.29) 45.33
1996 31.45 .14 5.05 5.19 (.14) (.75) (.89) 35.75
1995 25.08 .12 6.45 6.57 (.06) (.14) (.20) 31.45
1994 23.56 -- 1.61 1.61 -- (.09) (.09) 25.08
1993 19.79 .06 3.82 3.88 (.11) -- (.11) 23.56
1992 18.33 .14 1.92 2.06 (.15) (.45) (.60) 19.79
1991 11.35 .17 7.06 7.23 (.21) (.04) (.25) 18.33
1990 14.10 .31 (2.59) (2.28) (.37) (.10) (.47) 11.35
1989 12.77 .26 2.02 2.28 (.15) (.80) (.95) 14.10
Period Ended October 31, 1988(g) 10.50 .06 2.26 2.32 (.05) -- (.05) 12.77
Class B
Year Ended October 31,
1997 35.48 (.05) 10.64 10.59 (.01) (1.18) (1.19) 44.88
1996 31.31 (.04) 4.97 4.93 (.01) (.75) (.76) 35.48
Period Ended October 31,1995(f) 23.15 -- 8.18 8.18 (.02) -- (.02) 31.31
Principal Utilities Fund, Inc.(b)
Class A
Year Ended October 31,
1997 11.40 .48(h) 1.12 1.60 (.45) -- (.45) 12.55
1996 10.94 .44(h) .45 .89 (.43) -- (.43) 11.40
1995 9.25 .48(h) 1.70 2.18 (.49) -- (.49) 10.94
1994 11.45 .46(h) (2.19) (1.73) (.45) (.02) (.47) 9.25
Period Ended October 31, 1993(i) 10.18 .35(h) 1.27 1.62 (.35) -- (.35) 11.45
Class B
Year Ended October 31,
1997 11.38 .38(h) 1.13 1.51 (.36) -- (.36) 12.53
1996 10.93 .36(h) .43 .79 (.34) -- (.34) 11.38
Period Ended October 31, 1995(f) 9.20 .40(h) 1.77 2.17 (.44) -- (.44) 10.93
</TABLE>
<TABLE>
<CAPTION>
Ratio/Supplemental Data
Ratio of Net
Ratio of Investment
Net Assets at Expenses to Income to Portfolio Average
Total End of Period Average Average Turnover Commission
Return (a) (in thousands) Net Assets Net Assets Rate Rate Paid
Principal Growth Fund, Inc.(b)
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1997 29.55% $317,386 1.03% .68% 16.5% $.0411
1996 10.60 228,361 1.08 .95 1.8 .0443
1995 23.29 174,328 1.16 1.12 12.2 N/A
1994 9.82 116,363 1.30 .95 13.6 N/A
1993 9.83 80,051 1.26 1.40 16.4 N/A
1992 14.76 63,405 1.19 1.46 15.6 N/A
1991 59.30 45,892 1.13 1.85 10.6 N/A
1990 (9.20) 28,917 1.18 1.88 9.7 N/A
Four Months Ended October 31, 1989(c) 6.83(d) 32,828 1.22(e) 1.25(e) 50.1(e) N/A
Year Ended June 30,
1989 4.38 31,770 1.08 1.78 9.7 N/A
1988 (7.19) 34,316 1.00 1.29 24.9 N/A
Class B
Year Ended October 31,
1997 28.92 42,241 1.48 .23 16.5 .0411
1996 9.80 24,019 1.79 .22 1.8 .0443
Period Ended October 31, 1995(f) 31.48(d) 8,279 1.80(e) .31(e) 12.2(e) N/A
Principal MidCap Fund, Inc.(b)
Class A
Year Ended October 31,
1997 31.26 346,666 1.26 .20 9.5 .0435
1996 16.89 229,465 1.32 .46 12.3 .0391
1995 26.41 150,611 1.47 .47 13.5 N/A
1994 6.86 92,965 1.74 .02 8.1 N/A
1993 19.66 48,668 1.66 .26 7.0 N/A
1992 11.63 29,055 1.74 .80 5.8 N/A
1991 64.56 17,174 1.78 1.14 8.4 N/A
1990 (16.80) 8,959 1.94 2.43 15.8 N/A
1989 19.65 8,946 1.79 2.09 13.5 N/A
Period Ended October 31, 1988(g) 19.72(d) 6,076 1.52(e) .84(e) 19.5(e) N/A
Class B
Year Ended October 31,
1997 30.64 59,554 1.69 (.24) 9.5 .0435
1996 16.07 28,480 2.01 (.24) 12.3 .0391
Period Ended October 31,1995(f) 35.65(d) 8,997 2.04(e) (.17)(e) 13.5(e) N/A
Principal Utilities Fund, Inc.(b)
Class A
Year Ended October 31,
1997 14.26 64,366 1.15(h) 3.90 22.5 .0465
1996 8.13 66,322 1.17(h) 3.85 34.2 .0410
1995 24.36 65,873 1.04(h) 4.95 13.0 N/A
1994 (15.20) 56,747 1.00(h) 4.89 13.8 N/A
Period Ended October 31, 1993(i) 15.92(d) 50,372 1.00(e)(h) 4.48(e) 4.3(e) N/A
Class B
Year Ended October 31,
1997 13.41 6,937 1.90(h) 3.14 22.5 .0465
1996 7.23 5,579 1.93(h) 3.07 34.2 .0410
Period Ended October 31, 1995(f) 24.18(d) 3,952 1.72(e)(h) 3.84(e) 13.0(e) N/A
<FN>
Notes to financial highlights
(a) Total return is calculated without the front-end sales charge or the
contingent deferred sales charge.
(b) Effective January 1, 1998, the names of the following Domestic Growth Funds
were changed:
from to
---- --
Princor Growth Fund, Inc. Principal Growth Fund, Inc.
Princor Emerging Growth Fund, Inc. Principal MidCap Fund, Inc.
Princor Utilities Fund, Inc. Principal Utilities Fund, Inc.
(c) Effective July 1, 1989, the fund changed its fiscal year-end from June 30
to October 3l.
(d) Total return amounts have not been annualized.
(e) Computed on an annualized basis.
(f) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995. For the initial interim period from
December 5, 1994 through December 8, 1994, the following Domestic Growth
Funds' Class B shares recognized net investment income (none of which was
distributed to the sole shareholder, Principal Management Corporation) and
incurred unrealized losses on investments as shown below. This represented
Class B shares activities of each fund prior to the initial public offering
of Class B shares.
Per Share
Net Investment
Fund Income
---- --------------
Principal Growth Fund, Inc. $ --
Principal MidCap Fund, Inc. --
Principal Utilities Fund, Inc. .01
(g) Period from December 18, 1987, date shares first offered to public, through
October 31, 1988. Net investment income, aggregating $.04 per share for the
period from the initial purchase of shares on October 30, 1987 through
December 17, 1987, was recognized, none of which was distributed to its
sole stockholder, Principal Mutual Life Insurance Company, during the
period. Additionally, the Fund incurred net realized and unrealized gains
on investments of $.46 per share during this initial interim period. This
represented activities of the Fund prior to the initial public offering of
Fund shares.
(h) Without the Manager's voluntary waiver of a portion of certain of its
expenses for the periods (year except as noted) ended October 31 of the
years indicated, the Principal Utilities Fund would have had per share net
investment income and the ratios of expenses to average net assets as
shown:
Ratio of
Per Share Expenses
Net Invest- to Average Net Amount
Fund Year ment Income Assets Waived
---- ------- ----------- -------------- --------
Principal Utilties
Fund, Inc.
Class A 1997 $.46 1.25% $ 65,940
1996 .43 1.25 54,932
1995 .46 1.30 151,145
1994 .41 1.50 284,836
1993(i) .32 1.54(e) 139,439
Class B 1997 .37 1.95 3,753
1996 .34 2.06 6,690
1995(f) .40 1.81(e) 1,338
(i) Period from December 16, 1992, date shares first offered to public, through
October 31, 1993. Net investment income, aggregating $.05 per share for the
period from the initial purchase of shares on November 16, 1992 through
December 15, 1992, was recognized, none of which was distributed to its
sole stockholder, Principal Mutual Life Insurance Company, during the
period. Additionally, the Fund incurred unrealized gains on investments of
$.13 per share during the initial interim period. This represented
activities of the Fund prior to the initial public offering of Fund shares.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GROWTH-ORIENTED FUNDS
International
Selected data for a share of Capital Stock outstanding throughout each period:
Income from Investment Operations Less Distributions
Net Net Realized
Invest- and
Net Asset ment Unrealized Total Dividends Net Asset
Value at Income Gain from from Net Distributions Value at
Beginning(Operating (Loss) on Investment Investment from Total End
of Period Loss) Investments Operations Income Capital Gains Distributions of Period
Principal International Emerging
Growth Fund, Inc.
Class A
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Period Ended October 31, 1997(c) $9.51 $(.01) $(1.21) $(1.22) $-- $-- $ -- $8.29
Class B
Period Ended October 31, 1997(c) 9.51 (.01) (1.22) (1.23) -- -- -- 8.28
Principal International Fund, Inc.(f)
Class A
Year Ended October 31,
1997 8.14 .09 1.52 1.61 (.11) (.31) (.42) 9.33
1996 7.28 .10 1.17 1.27 (.08) (.33) (.41) 8.14
1995 7.44 .08 (.02) .06 (.03) (.19) (.22) 7.28
1994 6.85 .01 .64 .65 (.02) (.04) (.06) 7.44
1993 5.02 .03 1.98 2.01 (.05) (.13) (.18) 6.85
1992 5.24 .06 (.14) (.08) (.06) (.08) (.14) 5.02
1991 4.64 .05 .58 .63 (.03) -- (.03) 5.24
1990 4.66 .09 (.04) .05 (.07) -- (.07) 4.64
Ten Months Ended October 31, 1989(g) 4.58 .07 .07 .14 (.06) -- (.06) 4.66
1988(h) 3.88 .12 .67 .79 (.09) -- (.09) 4.58
1987(h) 8.55 .12 (.96) (.84) (.08) (3.75) (3.83) 3.88
Class B
Year Ended October 31,
1997 8.07 .03 1.51 1.54 (.04) (.31) (.35) 9.26
1996 7.24 .03 1.15 1.18 (.02) (.33) (.35) 8.07
Period Ended October 31, 1995(i) 6.71 .05 .51 .56 (.03) -- (.03) 7.24
Principal International SmallCap
Fund, Inc.
Class A
Period Ended October 31, 1997(c) 10.04 (.01) (.07) (.08) -- -- -- 9.96
Class B
Period Ended October 31, 1997(c) 10.04 (.01) (.07) (.08) -- -- -- 9.96
</TABLE>
<TABLE>
<CAPTION>
Ratio/Supplemental Data
Ratio of Net
Investment
Income
Ratio of (Operating
Net Assets at Expenses to Loss) to Portfolio Average
Total End of Period Average Average Turnover Commission
Return (a) (in thousands) Net Assets Net Assets Rate Rate Paid(b)
Principal International Emerging
Growth Fund, Inc.
Class A
<S> <C> <C> <C> <C> <C> <C>
Period Ended October 31, 1997(c) (10.18)%(d) $ 5,039 2.03%(e) (.32)%(e) 21.4%(e) $.0050
Class B
Period Ended October 31, 1997(c) (10.29)(d) 3,116 2.16(e) (.46)(e) 21.4(e) .0050
Principal International Fund, Inc.(f)
Class A
Year Ended October 31,
1997 20.46 281,158 1.39 1.25 26.6 N/A
1996 18.36 172,276 1.45 1.43 23.8 N/A
1995 1.03 126,554 1.63 1.10 35.4 N/A
1994 9.60 115,812 1.74 .10 13.2 N/A
1993 41.39 63,718 1.61 .59 19.5 N/A
1992 (1.57) 35,048 1.69 1.23 19.9 N/A
1991 13.82 26,478 1.72 1.36 27.6 N/A
1990 .94 16,044 1.79 1.89 37.9 N/A
Ten Months Ended October 31, 1989(g) 2.98(d) 13,928 1.55(e) 1.82(e) 32.4(e) N/A
1988(h) 20.25 13,262 1.55 1.43 56.9 N/A
1987(h) (10.13) 3,943 2.09 .83 183.0 N/A
Class B
Year Ended October 31,
1997 19.62 33,842 2.17 .42 26.6 .0174
1996 17.16 15,745 2.28 .64 23.8 .0197
Period Ended October 31, 1995(i) 9.77(d) 3,908 2.19(e) .58(e) 35.4(e) N/A
Principal International SmallCap
Fund, Inc.
Class A
Period Ended October 31, 1997(c) .50(d) 6,210 1.99(e) (.40)(e) 10.4(e) .0104
Class B
Period Ended October 31, 1997(c) .50(d) 4,774 2.07(e) (.47)(e) 10.4(e) .0104
<FN>
Notes to financial highlights
(a) Total return is calculated without the front-end sales charge or the
contingent deferred sales charge.
(b) The International Growth Funds identified the cost of commissions paid on
purchases and sales of portfolio securities charged to each Fund in the
local currency of the respective country involved. The value of the
commissions is translated into U.S. dollars at approximate rates when
acquired or sold. This translation can give the appearance that the
International Growth Funds average commission rates are substantially
different from the Domestic Growth Funds.
(c) Period from August 29, 1997, date Class A and Class B shares first offered
to the public through October 31, 1997. Principal International Emerging
Markets Fund, Inc. and Principal International SmallCap Fund, Inc. classes
of shares recognized net investment income as follows for the period from
the initial purchase of shares on August 14, 1997 through August 28, 1997,
none of which was distributed to the sole shareholder, Principal Mutual
Life Insurance Company. Principal International Emerging Markets Fund, Inc.
and Principal International SmallCap Fund, Inc. incurred unrealized gains
(losses) on investments during the initial interim period as follows. This
represents Class A and Class B share activities prior to the initial public
offering of all classes of shares of each Fund.
Per Share Per Share
Net Investment Unrealized
Fund Income Gain (Loss)
---- ------------- -----------
Principal International
Emerging Markets Fund, Inc.
Class A $.01 $(.50)
Class B .01 (.50)
Principal International
SmallCap Fund, Inc.
Class A .01 .03
Class B .01 .03
(d) Total return amounts have not been annualized.
(e) Computed on an annualized basis.
(f) Effective January 1, 1998, Princor World Fund, Inc. changed its name to
Principal International Fund, Inc.
(g) Effective January 1, 1989, the Fund changed its fiscal year-end from
December 31 to October 31.
(h) The investment manager of Principal International Fund, Inc. was changed on
August 1, 1988 to the current manager, Principal Management Corporation.
The years 1983 through 1987 are not covered by the current independent
auditor's report.
(i) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995. Principal World Fund, Inc. Class B shares
recognized no net investment income for the period from the initial
purchase by Principal Management Corporation of Class B shares on December
5, 1994, through December 8, 1994. Additionally, Class B shares incurred
unrealized losses on investments of $(.07) per share during the initial
interim period. This represents Class B share activities of the Fund prior
to the initial public offering of Class B shares.
</FN>
</TABLE>
<TABLE>
<CAPTION>
INCOME-ORIENTED FUNDS
Selected data for a share of Capital Stock outstanding throughout each period:
Income from Investment Operations Less Distributions
Net Realized
and
Net Asset Net Unrealized Total Dividends Net Asset
Value at Invest- Gain from from Net Distributions Value at
Beginning ment (Loss) on Investment Investment from Total End
of Period Income Investments Operations Income Capital Gains Distributions of Period
Principal Bond Fund, Inc.(b)
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $11.17 $.75(c) $ .33 $1.08 $ (.81) $ -- $ (.81) $11.44
1996 11.42 .76(c) (.25) .51 (.76) -- (.76) 11.17
1995 10.27 .78(c) 1.16 1.94 (.78) (.01) (.79) 11.42
1994 11.75 .78(c) (1.47) (.69) (.78) (.01) (.79) 10.27
1993 10.97 .81(c) .79 1.60 (.81) (.01) (.82) 11.75
1992 10.65 .85(c) .32 1.17 (.85) -- (.85) 10.97
1991 9.99 .88(c) .65 1.53 (.87) -- (.87) 10.65
1990 10.57 .86 (.55) .31 (.89) -- (.89) 9.99
1989 10.37 .87 .25 1.12 (.86) (.06) (.92) 10.57
Period Ended October 31, 1988(d) 9.95 .80(c) .38 1.18 (.76) -- (.76) 10.37
Class B
Year Ended October 31,
1997 11.15 .67(c) .31 .98 (.71) -- (.71) 11.42
1996 11.41 .67(c) (.25) .42 (.68) -- (.68) 11.15
Period Ended October 31, 1995(g) 10.19 .63(c) 1.19 1.82 (.60) -- (.60) 11.41
Principal Government Securities
Income Fund, Inc.(b)
Class A
Year Ended October 31,
1997 11.26 .70 .29 .99 (.74) -- (.74) 11.51
1996 11.31 .70 (.05) .65 (.70) -- (.70) 11.26
1995 10.28 .71 1.02 1.73 (.70) -- (.70) 11.31
1994 11.79 .69 (1.40) (.71) (.68) (.12) (.80) 10.28
1993 11.44 .74 .55 1.29 (.74) (.20) (.94) 11.79
1992 11.36 .81 .12 .93 (.81) (.04) (.85) 11.44
1991 10.54 .85 .84 1.69 (.87) -- (.87) 11.36
1990 10.76 .85 (.22) .63 (.85) -- (.85) 10.54
Four Months Ended October 31, 1989(h)10.66 .29 .09 .38 (.28) -- (.28) 10.76
Year Ended June 30,
1989 10.33 .87 .32 1.19 (.86) -- (.86) 10.66
1988 10.40 .89 (.05) .84 (.88) (.03) (.91) 10.33
Class B
Year Ended October 31,
1997 11.23 .64 .29 .93 (.66) -- (.66) 11.50
1996 11.29 .61 (.05) .56 (.62) -- (.62) 11.23
Period Ended October 31, 1995(g) 10.20 .56 1.07 1.63 (.54) -- (.54) 11.29
Principal High Yield Fund, Inc.(b)
Class A
Year Ended October 31,
1997 8.27 .67 .31 .98 (.73) -- (.73) 8.52
1996 8.06 .68 .23 .91 (.70) -- (.70) 8.27
1995 7.83 .68 .20 .88 (.65) -- (.65) 8.06
1994 8.36 .63 (.51) .12 (.65) -- (.65) 7.83
1993 8.15 .71 .21 .92 (.71) -- (.71) 8.36
1992 7.86 .79 .29 1.08 (.79) -- (.79) 8.15
1991 7.12 .88 .80 1.68 (.94) -- (.94) 7.86
1990 9.47 1.10 (2.35) (1.25) (1.09) (.01) (1.10) 7.12
1989 10.44 1.10 (.83) .27 (1.09) (.15) (1.24) 9.47
Period Ended October 31, 1988(d) 9.97 .98(c) .38 1.36 (.89) -- (.89) 10.44
Class B
Year Ended October 31,
1997 8.22 .62 .28 .90 (.65) -- (.65) 8.47
1996 8.05 .60 .20 .80 (.63) -- (.63) 8.22
Period Ended October 31, 1995(g) 7.64 .53 .38 .91 (.50) -- (.50) 8.05
</TABLE>
<TABLE>
<CAPTION>
Ratio/Supplemental Data
Ratio of Net
Investment
Income
Ratio of (Operating
Net Assets at Expenses to Loss) to Portfolio
Total End of Period Average Average Turnover
Return (a) (in thousands) Net Assets Net Assets Rate
Principal Bond Fund, Inc.(b)
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C>
1997 10.15% $126,427 .95%(c) 6.70% 12.8%
1996 4.74 113,437 .95(c) 6.85 3.4
1995 19.73 106,962 .94(c) 7.26 5.1
1994 (6.01) 88,801 .95(c) 7.27 8.9
1993 15.22 85,015 .92(c) 7.19 9.3
1992 11.45 62,534 .88(c) 7.95 8.4
1991 16.04 37,825 .80(c) 8.66 .9
1990 3.08 22,719 1.22 8.40 3.6
1989 11.54 13,314 1.24 8.59 0.0
Period Ended October 31, 1988(d) 11.59(e) 10,560 .70(c)(f) 8.85(f) 63.9(f)
Class B
Year Ended October 31,
1997 9.20 13,403 1.70(c) 5.92 12.8
1996 3.91 7,976 1.69(c) 6.14 3.4
Period Ended October 31, 1995(g) 17.98(e) 2,708 1.59(c)(f) 6.30(f) 5.1(f)
Principal Government Securities
Income Fund, Inc.(b)
Class A
Year Ended October 31,
1997 9.23 249,832 .84 6.19 10.8
1996 6.06 259,029 .81 6.31 25.9
1995 17.46 261,128 .87 6.57 10.1
1994 (6.26) 249,438 .95 6.35 24.8
1993 11.80 236,718 .93 6.38 52.6
1992 8.49 161,565 .95 7.04 54.3
1991 16.78 94,613 .98 7.80 14.9
1990 6.17 71,806 1.07 8.15 22.4
Four Months Ended October 31, 1989(h) 3.63(e) 55,702 1.07(f) 8.18(f) 5.2(f)
Year Ended June 30,
1989 12.37 56,848 .96 8.58 --
1988 8.60 59,884 .82 8.65 --
Class B
Year Ended October 31,
1997 8.65 15,431 1.39 5.63 10.8
1996 5.17 11,586 1.60 5.53 25.9
Period Ended October 31, 1995(g) 16.07(e) 4,699 1.53(f) 5.68(f) 10.1
Principal High Yield Fund, Inc.(b)
Class A
Year Ended October 31,
1997 12.33 38,239 1.22 7.99 39.2
1996 11.88 28,432 1.26 8.49 18.8
1995 11.73 23,396 1.45 8.71 40.3
1994 1.45 19,802 1.46 7.82 27.2
1993 11.66 19,154 1.35 8.57 23.4
1992 14.35 16,359 1.41 9.69 28.2
1991 25.63 13,195 1.50 12.06 14.2
1990 (14.51) 9,978 1.45 12.99 15.8
1989 2.68 12,562 1.43 11.22 19.9
Period Ended October 31, 1988(d) 14.15(e) 10,059 .77(c)(f) 10.55(f) 73.2(f)
Class B
Year Ended October 31,
1997 11.31 6,558 2.13 7.03 39.2
1996 10.46 2,113 2.38 7.39 18.8
Period Ended October 31, 1995(g) 12.20(e) 633 2.10(f) 7.78(f) 40.3(f)
Notes to financial highlights
<FN>
Notes to financial highlights
(a) Total return is calculated without the front-end sales charge or the
contingent deferred sales charge.
(b) Effective January 1, 1998, the names of the following Income Funds were
changed:
from to
---- --
Princor Bond Fund, Inc. Principal Bond Fund, Inc.
Princor Government Securities Principal Government Securities
Income Fund, Inc. Income Fund, Inc.
Princor High Yield Fund, Inc. Principal High Yield Fund, Inc.
(c) Without the Manager's voluntary waiver of a portion of certain of its
expenses for the periods (year, except as noted) ended October 31 of the
years indicated, the following Funds would have had per share expenses and
the ratios of net investment income to average net assets as shown:
Ratio of
Per Share Expenses
Net Invest-to Average Net Amount
Fund Year ment Income Assets Waived
---- ---- ------------- ----------- --------
Principal Bond
Fund, Inc.
Class A 1997 $.74 .98% $ 41,256
1996 .76 .97 22,536
1995 .77 1.02 86,018
1994 .77 1.09 120,999
1993 .79 1.07 111,162
1992 .82 1.11 110,868
1991 .84 1.15 100,396
1988(d) .76 1.12(f) 31,187
Class B 1997 .66 1.79 8,982
1996 .67 1.79 5,874
1995(g) .62 1.62(f) 300
Principal High Yield
Fund, Inc. 1988(d) .95 1.33(f) 32,609
(d) Period from December 18, 1987, date shares first offered to public, through
October 31, 1988. Net investment income, aggregating $.10 per share for the
period from the initial purchase of shares on October 30, 1987 through
December 17, 1987, was recognized of which $.06 per share was distributed
to its sole stockholder, Principal Mutual Life Insurance Company, during
the period. Additionally, each Fund incurred net realized and unrealized
losses on investments of $.09 per share during this initial interim period.
This represented activities of each Fund prior to the initial public
offering of Fund shares.
(e) Total return amounts have not been annualized.
(f) Computed on an annualized basis.
(g) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995. Certain of the Income Funds Class B
shares recognized net investment income as follows, for the period from the
initial purchase of Class B shares on December 5, 1994 through December 8,
1994, none of which was distributed to the sole shareholder, Principal
Management Corporation. Additionally, the Income Funds Class B shares
incurred unrealized loss during the initial interim period as follows. This
represented Class B share activities of each Fund prior to the intitial
public offering of Class B shares:
Per Share Per Share
Net Investment Unrealized
Fund Income (Loss)
---- -------------- ----------
Principal Bond Fund, Inc. $.01 $ --
Principal Government Securities
Income Fund, Inc. .01 (.02)
Principal High Yield Fund, Inc. .01 (.03)
(h) Effective July 1, 1989, the fund changed its fiscal year-end from June 30
to October 3l.
</FN>
</TABLE>
<TABLE>
<CAPTION>
INCOME-ORIENTED FUNDS
Selected data for a share of Capital Stock outstanding throughout each period:
Income from Investment Operations Less Distributions
Net Realized
and
Net Asset Net Unrealized Total Dividends Net Asset
Value at Invest- Gain from from Net Distributions Value at
Beginning ment (Loss) on Investment Investment from Total End
of Period Income Investments Operations Income Capital Gains Distributions of Period
Principal Limited Term Bond
Fund, Inc.(b)
Class A
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended October 31, 1997 $ 9.89 $.61(c) $ .03 $ .64 $(.65) $ -- $(.65) $9.88
Period Ended October 31, 1996(d) 9.90 .38(c) (.04) .34 (.35) -- (.35) 9.89
Class B
Year Ended October 31, 1997 9.89 .56(c) .04 .60 (.59) -- (.59) 9.90
Period Ended October 31, 1996(d) 9.90 .36(c) (.05) .31 (.32) -- (.32) 9.89
Principal Tax-Exempt Bond Fund, Inc.(b)
Class A
Year Ended October 31,
1997 12.04 .63 .39 1.02 (.68) -- (.68) 12.38
1996 11.98 .64 .07 .71 (.65) -- (.65) 12.04
1995 10.93 .65 1.05 1.70 (.65) -- (.65) 11.98
1994 12.62 .64 (1.54) (.90) (.63) (.16) (.79) 10.93
1993 11.62 .66 1.11 1.77 (.66) (.11) (.77) 12.62
1992 11.47 .68 .19 .87 (.69) (.03) (.72) 11.62
1991 10.82 .69 .68 1.37 (.70) (.02) (.72) 11.47
1990 11.06 .68 (.25) .43 (.67) -- (.67) 10.82
Four Months Ended October 31, 1989(g) 11.18 .22 (.12) .10 (.22) -- (.22) 11.06
Year Ended June 30,
1989 10.40 .69 .77 1.46 (.68) -- (.68) 11.18
1988 10.51 .71 .06 .77 (.72) (.16) (.88) 10.40
Class B
Year Ended October 31,
1997 12.02 .55 .40 .95 (.58) -- (.58) 12.39
1996 11.96 .55 .06 .61 (.55) -- (.55) 12.02
Period Ended October 31, 1995(h) 10.56 .50 1.38 1.88 (.48) -- (.48) 11.96
</TABLE>
<TABLE>
<CAPTION>
Ratio/Supplemental Data
Ratio of Net
Investment
Income
Ratio of (Operating
Net Assets at Expenses to Loss) to Portfolio
Total End of Period Average Average Turnover
Return (a) (in thousands) Net Assets Net Assets Rate
Principal Limited Term Bond
Fund, Inc.(b)
Class A
<S> <C> <C> <C> <C> <C>
Year Ended October 31, 1997 6.75% $ 20,567 .90(c) 6.20% 17.4%
Period Ended October 31, 1996(d) 3.62(e) 17,249 .89(c)(f) 6.01(f) 16.5(f)
Class B
Year Ended October 31, 1997 6.31 625 1.24(c) 5.84 17.4
Period Ended October 31, 1996(d) 3.32(e) 112 1.15(c)(f) 5.75(f) 16.5(f)
Principal Tax-Exempt Bond Fund, Inc.(b)
Class A
Year Ended October 31,
1997 8.71 193,007 .79 5.14 8.9
1996 6.08 187,180 .78 5.34 9.8
1995 16.03 179,715 .83 5.67 17.6
1994 (7.41) 171,425 .91 5.49 20.6
1993 15.70 177,480 .89 5.45 20.3
1992 7.76 106,661 .99 5.96 22.9
1991 13.09 62,755 1.01 6.24 13.1
1990 4.06 46,846 1.11 6.31 2.6
Four Months Ended October 31, 1989(g) .90(e) 36,877 1.24(f) 6.18(f) 5.1(f)
Year Ended June 30,
1989 14.64 31,278 1.07 6.54 2.1
1988 7.76 22,812 .95 7.00 11.0
Class B
Year Ended October 31,
1997 8.08 7,783 1.45 4.46 8.9
1996 5.23 5,794 1.52 4.59 9.8
Period Ended October 31, 1995(h) 17.97(e) 3,486 1.51(f) 4.78(f) 17.6(f)
<FN>
Notes to financial highlights
(a) Total return is calculated without the front-end sales charge or the
contingent deferred sales charge.
(b) Effective January 1, 1998, the names of the following Income Funds were
changed:
from to
---- --
Princor Limited Term Bond Principal Limited Term Bond
Fund, Inc. Fund, Inc.
Princor Tax-Exempt Bond Principal Tax-Exempt Bond
Fund, Inc. Fund, Inc.
(c) Without the Manager's voluntary waiver of a portion of certain of its
expenses for the periods (year except as noted) ended October 31 of the
years indicated, the following fund would have had per share net investment
income and the ratios of expenses to average net assets as shown:
Ratio of
Per Share Expenses
Net Invest-to Average Net Amount
Fund Year ment Income Assets Waived
---- ---- ------------- ---------- ------
Principal Limited Term
Bond Fund, Inc.
Class A 1997 $.59 1.15% $46,271
1996(d) .37 1.16(f) 22,716
Class B 1997 .46 3.82 6,528
1996(d) .34 1.94(f) 259
(d) Period from February 29, 1996, date shares first offered to the public,
through October 31, 1996. With respect to Class A shares, net investment
income, aggregating $.02 per share for the period from the initial purchase
of shares on February 13, 1996 through February 28,1996, was recognized,
none of which was distributed to its sole stockholder, Principal Mutual
Life Insurance Company during the period. Additionally, Class A shares
incurred unrealized losses on investments of $.12 per share during the
initial interim period. With respect to Class B shares, no net investment
income was recognized for the period from initial purchase of shares on
February 27, 1996 through February 28, 1996. Class B shares incurred
unrealized losses on investments of $.02 per share during the initial
interim period. This represents Class A share and Class B share activities
of the Fund prior to the initial public offering of both classes of shares.
(e) Total return amounts have not been annualized.
(f) Computed on an annualized basis.
(g) Effective July 1, 1989, the fund changed its fiscal year-end from June 30
to October 3l.
(h) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995. Principal Tax-Exempt Bond Fund, Inc.
Class B shares recognized no net investment income for the period from the
initial purchase of Class B shares on December 5, 1994 through December 8,
1994. Class B shares incurred unrealized losses on investments of $.05 per
share during the initial interim period. This represented Class B share
activities of the Fund prior to the intitial public offering of Class B
</FN>
</TABLE>
<TABLE>
<CAPTION>
MONEY MARKET FUNDS
Selected data for a share of Capital Stock outstanding throughout each period:
Income from Investment Operations Less Distributions
Net Realized
and
Net Asset Net Unrealized Total Dividends Net Asset
Value at Invest- Gain from from Net Distributions Value at
Beginning ment (Loss) on Investment Investment from Total End
of Period Income(a) Investments Operations Income Capital Gains Distributions of Period
Principal Cash Management Fund, Inc.(c)
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $1.000 $.050 -- $.050 $(.050) -- $(.050) $1.000
1996 1.000 .049 -- .049 (.049) -- (.049) 1.000
1995 1.000 .052 -- .052 (.052) -- (.052) 1.000
1994 1.000 .033 -- .033 (.033) -- (.033) 1.000
1993 1.000 .026 -- .026 (.026) -- (.026) 1.000
1992 1.000 .036 -- .036 (.036) -- (.036) 1.000
1991 1.000 .061 -- .061 (.061) -- (.061) 1.000
1990 1.000 .074 -- .074 (.074) -- (.074) 1.000
Four Months Ended October 31, 1989(d) 1.000 .027 -- .027 (.027) -- (.027) 1.000
Year Ended June 30,
1989 1.000 .080 -- .080 (.080) -- (.080) 1.000
1988 1.000 .060 -- .060 (.060) -- (.060) 1.000
Class B
Year Ended October 31,
1997 1.000 .041 -- .041 (.041) -- (.041) 1.000
1996 1.000 .041 -- .041 (.041) -- (.041) 1.000
Period Ended October 31, 1995(h) 1.000 .041 -- .041 (.041) -- (.041) 1.000
Principal Tax-Exempt Cash
Management Fund, Inc.(c)
Class A
Year Ended October 31,
1997 1.000 .029 -- .029 (.029) -- (.029) 1.000
1996 1.000 .029 -- .029 (.029) -- (.029) 1.000
1995 1.000 .032 -- .032 (.032) -- (.032) 1.000
1994 1.000 .021 -- .021 (.021) -- (.021) 1.000
1993 1.000 .020 -- .020 (.020) -- (.020) 1.000
1992 1.000 .028 -- .028 (.028) -- (.028) 1.000
1991 1.000 .043 -- .043 (.043) -- (.043) 1.000
1990 1.000 .053 -- .053 (.053) -- (.053) 1.000
1989 1.000 .058 -- .058 (.058) -- (.058) 1.000
Period Ended October 31, 1988(g) 1.000 .005 -- .005 (.005) -- (.005) 1.000
Class B
Year Ended October 31,
1997 1.000 .022 -- .022 (.022) -- (.022) 1.000
1996 1.000 .021 -- .021 (.021) -- (.021) 1.000
Period Ended October 31, 1995(h) 1.000 .021 -- .021 (.021) -- (.021) 1.000
</TABLE>
<TABLE>
<CAPTION>
Ratio/Supplemental Data
Ratio of Net
Ratio of Investment
Net Assets at Expenses to Income to
Total End of Period Average Average
Return (b) (in thousands) Net Assets(b) Net Assets
Principal Cash Management Fund, Inc.(c)
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C>
1997 4.96% $836,072 .63% 4.98%
1996 5.00 694,962 .66 4.88
1995 5.36 623,864 .72 5.24
1994 3.40 332,346 .70 3.27
1993 2.67 284,739 .67 2.63
1992 3.71 247,189 .65 3.66
1991 6.29 262,543 .61 5.95
1990 7.65 151,007 .93 7.36
Four Months Ended October 31, 1989(d) 2.63(e) 124,895 1.04(f) 7.86(f)
Year Ended June 30,
1989 8.15 120,149 1.00 8.21
1988 6.18 51,320 1.02 6.06
Class B
Year Ended October 31,
1997 4.05 992 1.47 4.08
1996 4.13 520 1.50 4.08
Period Ended October 31, 1995(h) 4.19(e) 208 1.42(f) 4.50(f)
Principal Tax-Exempt Cash
Management Fund, Inc.(c)
Class A
Year Ended October 31,
1997 2.89 98,939 .70 2.93
1996 2.92 98,482 .71 2.87
1995 3.24 99,887 .69 3.19
1994 2.11 79,736 .67 2.08
1993 1.99 79,223 .66 1.96
1992 2.86 69,224 .65 2.84
1991 4.36 71,469 .61 4.27
1990 5.40 58,301 .71 5.26
1989 5.88 42,639 .60 5.78
Period Ended October 31, 1988(g) .47(e) 6,000 .26(f) 5.24(f)
Class B
Year Ended October 31,
1997 2.18 28 1.47 2.16
1996 2.13 27 1.47 2.11
Period Ended October 31, 1995(h) 2.19(e) 27 1.42(f) 2.40(f)
<FN>
Notes to financial highlights
(a) Without the Manager's voluntary waiver of a portion of certain of its
expenses for the periods (year except as noted) ended October 31 of the
years indicated, the following funds would have had per share net
investment income and the ratios of expenses to average net assets as
shown:
Per Share Net Ratio of Expenses
Investment to Average Net Amount
Fund Year Income Assets Waived
Principal Cash
Management
Fund, Inc.
Class A 1997 $.050 .63% $ --
1996 .049 .67 7,102
1995 .052 .78 296,255
1994 .031 .90 595,343
1993 .025 .84 468,387
1992 .035 .80 385,328
1991 .059 .79 433,196
1990 .073 1.01 106,841
1989 ** .026 1.06(f) 101,625
1989 * .079 1.11 9,558
Class B 1997 .036 2.14 5,492
1996 .029 3.94 6,140
1995(h) .041 1.63(f) 104
Principal Tax-Exempt
Cash Management
Fund, Inc.
Class A 1997 .029 .73 27,978
1996 .028 .77 69,107
1995 .031 .84 138,574
1994 .019 .85 150,515
1993 .018 .83 131,442
1992 .026 .82 134,497
1991 .040 .83 147,279
1990 .050 .96 123,656
1989 .053 1.04 125,604
1988(g) .004 .76(f) 2,630
Class B 1997 (.188) 22.58 5,807
1996 (.243) 27.43 7,160
1995(h) .018 1.89(f) 99
* Year ended June 30, 1989
** Four months ended October 31, 1989
(b) Total return is calculated without the front-end sales charge or the
contingent deferred sales charge.
(c) Effective January 1, 1998, the names of the Money Market Funds were changed
as follows:
from to
---- --
Princor Cash Management Fund, Inc. Principal Cash Management Fund, Inc.
Princor Tax-Exempt Cash Principal Tax-Exempt Cash
Management Fund, Inc. Management Fund, Inc.
(d) Effective July 1, 1989, the fund changed its fiscal year-end from June 30
to October 3l.
(e) Total return amounts have not been annualized.
(f) Computed on an annualized basis.
(g) Period from September 30, 1988, date shares first offered to public,
through October 31, 1988. Net investment income, aggregating $.005 per
share, for the period from the initial purchase of shares on August 23,
1988 through September 29, 1988, was recognized and distributed to its sole
stockholder, Principal Mutual Life Insurance Company, during the period.
This represented activities of the Fund prior to the initial public
offering of Fund shares.
(h) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995. The Money Market Funds' Class B shares
recognized no net investment income for the period from the initial
purchase of Class B shares on December 5, 1994 through December 8, 1994.
This represented Class B share activities of each Fund prior to the initial
public offering of Class B shares.
</FN>
</TABLE>
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The investment objectives and policies of each Fund are described below.
There can be no assurance that the objectives of the Funds will be realized.
GROWTH-ORIENTED FUNDS
The Growth-Oriented Funds have different investment objectives. They seek:
o capital appreciation and growth primarily through investments in equity
securities of corporations established in the United States ("U.S.")
(Capital Value Fund, Growth Fund, MidCap Fund and SmallCap Fund)
o long-term growth of capital primarily through investments in equity
securities of corporations located outside of the U.S. (International
Emerging Markets Fund, International Fund and International SmallCap
Fund)
o total investment return including both capital appreciation and income
through investments in equity and debt securities (Balanced Fund)
o growth of capital and growth of income primarily through investments in
common stocks of well-capitalized, established companies (Blue Chip
Fund)
o current income and long-term growth of income and capital through
investment in equity securities of real estate companies (Real Estate
Fund)
o current income and long-term growth of income and capital through
investment in equity and fixed-income securities of public utilities
companies (Utilities Fund)
The Growth-Oriented Funds may invest in the following equity securities:
common stocks; preferred stocks and debt securities that are convertible into
common stock, that carry rights or warrants to purchase common stock or that
carry rights to participate in earnings; rights or warrants to subscribe to or
purchase any of the foregoing securities; and sponsored and unsponsored American
Depository Receipts (ADRs) based on any of the foregoing securities. Unsponsored
ADRs are not created by the issuer of the underlying security, may be subject to
fees imposed by the issuing bank that, in the case of sponsored ADRs, would be
paid by the issuer of a sponsored ADR and may involve additional risks such as
reduced availability of information about the issuer of the underlying security.
The Blue Chip, Capital Value, Growth, International, International Emerging
Markets, International SmallCap, MidCap, and SmallCap Funds will seek to be
fully invested under normal conditions in equity securities. When in the opinion
of the Manager current market or economic conditions warrant, a Growth-Oriented
Fund may, for temporary defensive purposes, place all or a portion of its assets
in cash (on which the Fund 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, United States Government securities, and preferred
stocks and debt securities, whether or not convertible into or carrying rights
for common stock. When investing for temporary defensive purposes a
Growth-Oriented Fund is not investing so as to achieve its investment objective.
A Growth-Oriented Fund may also maintain reasonable amounts in cash or
short-term debt securities for daily cash management purposes or pending
selection of particular long-term investments.
DOMESTIC
Principal Balanced Fund
The investment objective of Principal Balanced Fund is to generate a total
investment return consisting of current income and capital appreciation while
assuming reasonable risks in furtherance of the investment objective. The term
"reasonable risks" refers to investment decisions that in the Manager's judgment
do not present a greater than normal risk of loss in light of current or
anticipated future market and economic conditions, trends in yields and interest
rates, and fiscal and monetary policies.
In seeking to achieve the investment objective, the Fund invests primarily
in growth and income-oriented common stocks (including securities convertible
into common stocks), corporate bonds and debentures and short-term money market
instruments. The Fund may also invest in other equity securities and in debt
securities issued or guaranteed by the United States Government and its agencies
or instrumentalities. The Fund seeks to generate real (inflation plus) growth
during favorable investment periods and may emphasize income and capital
preservation strategies during uncertain investment periods. The Manager will
seek to minimize declines in the net asset value per share. However, there is no
guarantee that the Manager will be successful in achieving this goal.
The portions of the Fund's total assets invested in equity securities, debt
securities and short-term money market instruments are not fixed, although
ordinarily 40% to 70% of the Fund's portfolio will be invested in equity
securities with the balance of the portfolio invested in debt securities. The
investment mix will vary from time to time depending upon the judgment of the
Manager as to general market and economic conditions, trends in investment
yields and interest rates, and changes in fiscal or monetary policies. The Fund
may invest up to 20% of its assets in foreign securities. For a description of
certain investment risks associated with foreign securities, see "Risk Factors."
The Fund may invest in all types of common stocks and other equity
investments, without regard to any objective investment criteria such as size of
the issue or issuer, exchange listing or seasoning. The Fund may invest in both
exchange-listed and over-the-counter securities, in small or large companies,
and in well-established or unseasoned companies. Also, the Fund's investments in
corporate bonds and debentures and money market instruments are not restricted
by credit ratings or other objective investment criteria, except with respect to
bank certificates of deposit as set forth below. Some of the fixed income
securities in which the Fund may invest may be considered to include speculative
characteristics and the Fund may purchase such securities that are in default
but does not currently intend to invest more than 5% of its assets in securities
rated below BBB by Standard & Poor's or Baa by Moody's. The rating services'
descriptions of BBB or Baa securities are as follows: Moody's Investors Service,
Inc. Bond Ratings -- Baa: Bonds which are rated Baa are considered as medium
grade obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well. Standard &
Poor's Corporation Bond Ratings -- BBB: Debt rated "BBB" is regarded as having
an adequate capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than for debt in higher-rated
categories. See the discussion of the High Yield Fund for information concerning
risks associated with below-investment grade bonds. The Fund will not
concentrate its investments in any industry.
In selecting common stocks, the Manager seeks companies which the Manager
believes have predictable earnings increases and which, based on their future
growth prospects, may be currently undervalued in the market place. During
periods when the Manager determines that general economic conditions are
favorable, it will generally purchase common stocks with the objective of
long-term capital appreciation. From time to time, and in periods of economic
uncertainty, the Manager may purchase common stocks with the expectation of
price appreciation over a relatively short period of time.
To achieve its investment objective, the Fund may at times emphasize the
generation of interest income by investing in short, medium or long-term debt
securities. Investment in debt securities may also be made with a view to
realizing capital appreciation when the Manager believes that declining interest
rates may increase market values. The Fund may also purchase "deep discount
bonds," i.e., bonds which are selling at a substantial discount from their face
amount, with a view to realizing capital appreciation.
The Fund may invest in the following short-term money market investments:
U.S. Treasury bills, bank certificates of deposit, bankers' acceptances,
repurchase agreements, commercial paper and commercial paper master notes which
are floating rate debt instruments without a fixed maturity. The Fund will only
invest in domestic bank certificates of deposit issued by banks which are
members of the Federal Reserve System that have total deposits in excess of one
billion dollars.
The United States Government securities in which the Fund may invest
consist of U.S. Treasury obligations and obligations of certain agencies, such
as the Government National Mortgage Association, which are supported by the full
faith and credit of the United States, as well as obligations of certain other
Federal agencies or instrumentalities, such as the Federal National Mortgage
Association, Federal Land Banks and the Federal Farm Credit Administration,
which are backed only by the right of the issuer to borrow limited funds from
the U.S. Treasury, by the discretionary authority of the U.S. Government to
purchase such obligations or by the credit of the agency or instrumentality
itself.
Principal Blue Chip Fund
The objective of Principal Blue Chip Fund is growth of capital and growth
of income. Growth of income means increasing the Fund's investment income which
is primarily derived from dividends earned on portfolio securities. In seeking
to achieve its objective, the Fund will invest primarily in common stocks of
well capitalized, established companies which the Fund's manager believes to
have the potential for growth of capital, earnings and dividends. Under normal
market conditions, the Fund will invest at least 65%, and may invest up to 100%,
of its total assets in the common stocks of blue chip companies.
Blue chip companies are defined as those companies with market
capitalizations of at least $1 billion. Blue chip companies are generally
identified by their substantial capitalization, established history of earnings
and dividends, easy access to credit, good industry position and superior
management structure. In addition, the large market of publicly held shares for
such companies and the generally high trading volume in those shares results in
a relatively high degree of liquidity for such investments. The characteristics
of high quality and high liquidity of blue chip investments should make the
market for such stocks attractive to many investors.
Examples of blue chip companies currently eligible for investment by the
Fund include, but are not limited to, companies such as General Electric
Company, Ford Motor Company, Exxon Corporation, Merck & Company, Inc., Digital
Equipment Corporation, Capital Cities ABC, Inc., J.P. Morgan & Co. and Coca Cola
Company. In general, the Fund will seek to invest in those established, high
quality companies whose industries are experiencing favorable secular or
cyclical change.
The Fund's Manager may invest up to 35% of the Fund's total assets in
equity securities, other than common stock, issued by companies that meet the
investment criteria for blue chip companies and in equity securities issued by
companies that do not meet those criteria. The Manager does not intend to invest
regularly in speculative securities, which are those issued by new, unseasoned
companies or by companies that have limited product lines, markets, financial
resources or management, but it may from time to time invest not more than 5% of
the Fund's total assets in those kinds of securities. The Fund may invest up to
20% of its assets in securities of foreign issuers. The foreign securities in
which the Fund may invest need not be issued by companies that meet the
investment criteria for blue chip companies. For a description of certain
investment risks associated with foreign securities, see "Risk Factors."
Principal Capital Value Fund
The primary objective of Principal Capital Value Fund is long-term capital
appreciation. A secondary objective is growth of investment income.
The Fund will invest primarily in common stocks, but it may invest in other
equity securities. In making selections for the Fund's investment portfolio, the
Manager will use an approach described broadly as that of fundamental analysis,
which is discussed in the Statement of Additional Information. To achieve its
investment objective, Invista will invest in securities that have "value"
characteristics. This process is known as "value investing." Value investing is
purchasing securities of companies with above average dividend yields and below
average price to earnings (P/E) ratios. Securities chosen for investment may
include those of companies which the Manager believes can reasonably be expected
to share in the growth of the nation's economy over the long term.
Principal Growth Fund
The objective of Principal Growth Fund is growth of capital. Realization of
current income will be incidental to the objective of growth of capital.
The Fund will invest primarily in common stocks, but it may invest in other
equity securities. In making selections for the Fund's investment portfolio, the
Manager will use an approach described broadly as that of fundamental analysis,
which is discussed in the Statement of Additional Information. In pursuit of the
Fund's investment objective, investments will be made in securities which as a
group appear to possess potential for appreciation in market value. Common
stocks chosen for investment may include those of companies which have a record
of sales and earnings growth that exceeds the growth rate of corporate profits
of the S&P 500 or which offer new products or new services. The policy of
investing in securities which have a high potential for growth of capital can
mean that the assets of the Fund may be subject to greater risk than securities
which do not have such potential.
Principal MidCap Fund
The objective of Principal MidCap Fund is to achieve long-term capital
appreciation. The strategy of this Fund is to invest primarily in the common
stocks and securities (both debt and preferred stock) convertible into common
stocks of emerging and other growth-oriented companies that, in the judgment of
the Manager, are responsive to changes within the marketplace and have the
fundamental characteristics to support growth. In pursuing its objective of
capital appreciation, the Fund may invest, for any period of time, in any
industry and in any kind of growth-oriented company, whether new and unseasoned
or well known and established. Under normal market conditions, the Fund will
invest at least 65% of its assets in securities of companies with market
capitalizations in the $1 billion to $10 billion range. The Fund may invest up
to 20% of its assets in securities of foreign issuers. For a description of
certain investment risks associated with foreign securities, see "Risk Factors."
There can be, of course, no assurance that the Fund will attain its
objective. Investment in emerging and other growth-oriented companies may
involve greater risk than investment in other companies. The securities of
growth-oriented companies may be subject to more abrupt or erratic market
movements, and many of them may have limited product lines, markets, financial
resources or management. Because of these factors and of the length of time that
may be required for full development of the growth prospects of some of the
companies in which the Fund invests, the Fund believes that its shares are
suitable only for persons who are able to assume the risk of investing in
securities of emerging and growth-oriented companies and prepared to maintain
their investment during periods of adverse market conditions. Investors should
not rely on the Fund for their short-term financial needs. Since the Fund will
not be seeking current income, investors should not view a purchase of Fund
shares as a complete investment program.
Principal Real Estate Fund
The investment objective of Principal Real Estate Fund is to generate total
return by investing primarily in equity securities of companies principally
engaged in the real estate industry. The Fund will seek to achieve its objective
by seeking, with approximately equal emphasis, long-term capital growth and
current income through the purchase of equity securities.
Under normal circumstances the Fund will invest at least 65 percent of its
assets in the equity securities of real estate companies. Equity securities
include common stock (including shares in real estate investment trusts),
preferred stock, rights and warrants. A real estate investment trust ("REIT") is
a corporation, or a business trust which, in satisfying certain Internal Revenue
Code requirements, is permitted to effectively eliminate corporate level federal
income taxes. Qualifying REITs must, among other things, derive substantially
all of their income from real estate assets and annually distribute to
shareholders 95 percent or more of their otherwise taxable income.
REITs are characterized as equity REITs, mortgage REITs and hybrid REITs.
An equity REIT invests primarily in the fee ownership of real estate and revenue
is primarily derived from rental income. A mortgage REIT primarily invests in
real estate mortgages and hybrid REITs combine the characteristics of both an
equity REIT and a mortgage REIT.
For purposes of the Fund's investment policies, a real estate company is
one that has at least 50% of its assets, income or profits attributable to
products or services related to the real estate industry. Real estate companies
include REITs or other securitized real estate investments and companies with
substantial real estate holdings such as paper, lumber, hotel and entertainment
companies. Companies whose products and services relate to the real estate
industry include building supply manufacturers, mortgage lenders and mortgage
servicing companies. The Fund may invest up to 25% of its total assets in
securities of foreign real estate companies (see "Risk Factors").
Securities issued by real estate companies may be subject to risks similar
to those associated with the direct ownership of real estate (in addition to
securities market risks) because of its policy of concentration in the
securities of companies in the real estate industry. These include declines in
the value of real estate, risks related to general and local economic
conditions, dependency on management skills, heavy cash flow dependency,
possible lack of availability of mortgage funds, overbuilding, extended
vacancies in properties, increases in property taxes and operating expenses,
changes in zoning laws, losses due to costs resulting from the cleanup of
environmental problems, casualty or condemnation losses, changes in neighborhood
values and changes in interest rates.
In addition to these risks, equity REITS may be affected by changes in the
value of the underlying property owned by the trusts, while mortgage REITS may
be affected by the quality of any credit extended. Further, equity and mortgage
REITS are dependent upon management skills and generally may not be diversified.
Equity and mortgage REITS are also subject to heavy cash flow dependency,
defaults by borrowers and self-liquidation. In addition, equity or mortgage
REITS could possibly fail to qualify for tax free pass-through of income under
the Internal Revenue Code of 1986, as amended, or to maintain their exemptions
from registration under the Investment Company Act of 1940. The above factors
may also adversely affect a borrower's or lessee's ability to meet its
obligations to the REIT. In the event of a default by a borrower or lessee, the
REIT may experience delays in enforcing its rights as a mortgagee or lessor and
may incur substantial costs associated with protecting its investments.
Principal SmallCap Fund
The investment objective of Principal SmallCap Fund is long-term growth of
capital. The strategy of this Fund is to invest primarily in equity securities
of companies domiciled in the United States with comparatively smaller market
capitalizations. Under normal market conditions, the Fund invests at least 65%
of its assets in securities of companies having a total market capitalization of
$1 billion or less.
In selecting securities for investment, the Fund will look at stocks with
both "growth" and "value" characteristics, with no consistent preference between
the two categories. The growth orientation emphasizes buying stocks of companies
whose potential for growth of capital and earnings is expected to be above
average. The value orientation emphasizes buying stocks at less than their
intrinsic value and avoiding those whose price has been speculatively bid up.
Principal Utilities Fund
The investment objective of Principal Utilities Fund is to provide current
income and long-term growth of income and capital. The Fund seeks to achieve its
investment objective by investing primarily in equity and fixed-income
securities of companies engaged in the public utilities industry. The term
"public utilities industry" consists of companies engaged in the manufacture,
production, generation, transmission, sale and distribution of gas and electric
energy, as well as companies engaged in the communications field, including
telephone, telegraph, satellite, microwave and other companies providing
communication facilities for the public, but excluding public broadcasting
companies. For purposes of the Fund, a company will be considered to be in the
public utilities industry if, during the most recent twelve-month period, at
least 50% of the company's gross revenues, on a consolidated basis, is derived
from the public utilities industry. Under normal market conditions, the Fund, as
an investment policy, will invest at least 65%, and may invest up to 100%, of
its total assets in securities of companies in the public utilities industry,
and as a matter of fundamental policy will invest no less than 25% of its total
assets in those securities. As a non-fundamental policy, the Fund may not own
more than 5% of the outstanding voting securities of more than one public
utility company as defined by the Public Utility Holding Company Act of 1935.
The Fund invests in both equity securities (as defined previously under
"Growth-Oriented Funds") and fixed- income securities (bonds and preferred
stock) in the public utilities industry. The Fund does not have any set policies
to concentrate within any particular segment of the utilities industry. The Fund
will shift its asset allocation without restriction between types of utilities
and between equity and fixed-income securities based upon the Manager's
determination of how to achieve the Fund's investment objective in light of
prevailing market, economic and financial conditions. For example, at a
particular time the Manager may choose to allocate up to 100% of the Fund's
assets in a particular type of security (for example, equity securities) or in a
specific utility industry segment (for example, electric utilities).
Fixed-income securities in which the Fund may invest are debt securities
and preferred stocks, which are rated at the time of purchase Baa or better by
Moody's or BBB or better by S&P, or which, if unrated, are deemed to be of
comparable quality by the Fund's Manager. A description of corporate bond
ratings is contained in the Appendix to the Statement of Additional Information.
The rating services' descriptions of Baa or BBB securities are as follows:
Moody's Investors Service, Inc. Bond ratings -- Baa: Bonds which are rated Baa
are considered as medium grade obligations, i.e., they are neither highly
protected nor poorly secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well. Standard and Poor's Corporation Bond Ratings -- BBB:
Debt rated "BBB" is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than for debt in higher-rated categories.
If a fixed-income security held by the Fund is rated BBB or Baa and is
subsequently down graded by a rating agency, the Fund will retain such security
in its portfolio until the Manager determines that it is practicable to sell the
security without undue market or tax consequences to the Fund.
While the Fund will invest primarily in the securities of public utility
companies, it may invest up to 35% of its total assets in those securities that
are permissible investments for the Balanced Fund. See "Principal Balanced Fund"
and "Certain Investment Policies and Restrictions." However the Fund will not
invest in fixed-income securities rated below Baa by Moody's or BBB by S&P.
The public utilities industry as a whole has certain characteristics and
risks particular to that industry. Unlike industrial companies, the rates which
utility companies may charge their customers generally are subject to review and
limitation by governmental regulatory commissions. Although rate changes of a
utility usually fluctuate in approximate correlation with financing costs, due
to political and regulatory factors rate changes ordinarily occur only following
a delay after the changes in financing costs. This factor will tend to favorably
affect a utility company's earnings and dividends in times of decreasing costs,
but conversely will tend to adversely affect earnings and dividends when costs
are rising. In addition, the value of public utility debt securities (and, to a
lesser extent, equity securities) tends to have an inverse relationship to the
movement of interest rates.
Among the risks affecting the utilities industry are the following: risks
of increases in fuel and other operating costs; the high cost of borrowing to
finance capital construction during inflationary periods; restrictions on
operations and increased costs and delays associated with compliance with
environmental and nuclear safety regulations; the difficulties involved in
obtaining natural gas for resale or fuel for generating electricity at
reasonable prices; the risks in connection with the construction and operation
of nuclear power plants; the effects of energy conservation and effects of
regulatory changes, such as the possible adverse effects on profits of recent
increased competition among telecommunications companies and the uncertainties
resulting from such companies' diversification into new domestic and
international businesses, as well as agreements by many such companies linking
future rate increases to inflation or other factors not directly related to the
actual operating profits of the enterprise.
INTERNATIONAL
Principal International Emerging Markets Fund
The investment objective of Principal International Emerging Markets Fund
is long-term growth of capital. The Fund 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 the Manager, 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 Fund 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 Fund's total assets will be
invested in emerging market country equity securities. The Fund 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 Fund 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.
For temporary defensive purposes, the International Emerging Markets Fund
may invest in the same kinds of securities as the other Growth-Oriented Funds
whether issued by domestic or foreign corporations, governments, or governmental
agencies, instrumentalities or political subdivisions and whether denominated in
United States dollars or some other currency.
Principal International Fund
The investment objective of Principal International Fund is to seek
long-term growth of capital through investment in a portfolio of equity
securities of companies domiciled in any of the nations of the world. In
choosing investments in equity securities of foreign and United States
corporations, the Manager 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 Fund expects its investment objective to be met over long periods
which may include several market cycles. For a description of certain investment
risks associated with foreign securities, see "Risk Factors."
For temporary defensive purposes, the International Fund may invest in the
same kinds of securities as the other Growth-Oriented Funds whether issued by
domestic or foreign corporations, governments, or governmental agencies,
instrumentalities or political subdivisions and whether denominated in United
States dollars or some other currency.
The Fund 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
Fund intends under normal market conditions to have at least 65% of its assets
invested in securities issued by corporations of at least three countries, one
of which may be the United States (although the Fund currently intends not to
invest in equity securities of United State companies). 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 economies. Changes in investments may be made as prospects change for
particular countries, industries or companies.
Principal International SmallCap Fund
The investment objective of Principal International SmallCap Fund is
long-term growth of capital. The strategy of this Fund is to invest primarily in
equity securities of non-United States companies with comparatively smaller
market capitalizations. Under normal market conditions, the Fund invests at
least 65% of its assets in securities of companies having a total market
capitalization of $1 billion or less.
The Fund 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 Fund 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."
For temporary defensive purposes, the International SmallCap Fund may
invest in the same kinds of securities as the other Growth-Oriented Funds
whether issued by domestic or foreign corporations, governments, or governmental
agencies, instrumentalities or political subdivisions and whether denominated in
United States dollars or some other currency.
INCOME-ORIENTED FUNDS
The Principal Funds currently include five Funds which seek a high level of
income through investments in fixed-income securities. These Funds are Bond
Fund, Government Securities Income Fund, High Yield Fund, Limited Term Bond Fund
and Tax-Exempt Bond Fund, collectively referred to as the "Income-Oriented
Funds." Each Fund has rating limitations with regard to the quality of
securities that may be held in the portfolio. The rating limitations apply at
the time of acquisition of a security and any subsequent change in a rating by a
rating service will not require elimination of a security from the Fund's
portfolio. The Statement of Additional Information contains descriptions of the
ratings of Moody's Investors Service, Inc. ("Moody's") and Standard and Poor's
Corporation ("S&P").
Principal Bond Fund
The investment objective of Principal Bond Fund is to provide as high a
level of income as is consistent with preservation of capital and prudent
investment risk.
In seeking to achieve the investment objective, the Fund will predominantly
invest in marketable fixed-income securities. Investments will be made generally
on a long-term basis, but the Fund may make short-term investments from time to
time as deemed prudent by the Manager. Longer maturities typically provide
better yields but will subject the Fund to a greater possibility of substantial
changes in the values of its portfolio securities as interest rates change.
Under normal circumstances, the Fund will invest at least 65% of its assets
in bonds in one or more of the following categories: (i) corporate debt
securities and taxable municipal obligations, which at the time of purchase have
an investment grade rating within the four highest grades used by S&P (AAA, AA,
A or BBB) or by Moody's (Aaa, Aa, A or Baa) or which, if nonrated, are
comparable in quality in the opinion of the Fund's Manager; (ii) similar
Canadian corporate, Provincial and Federal Government securities payable in U.S.
funds; and (iii) securities issued or guaranteed by the United States Government
or its agencies or instrumentalities. The balance of the Fund's assets may be
invested in the following securities: domestic and foreign corporate debt
securities, preferred stocks, common stocks that provide returns that compare
favorably with the yields on fixed income investments, common stocks acquired
upon conversion of debt securities or preferred stocks or upon exercise of
warrants acquired with debt securities or otherwise and foreign government
securities. The debt securities and preferred stocks in which the Fund invests
may be convertible or nonconvertible. Securities rated below BBB or Baa are
commonly referred to as junk bonds. The Fund does not intend to purchase debt
securities rated lower than Ba3 by Moody's or BB- by S&P (bonds which are judged
to have speculative elements; their future cannot be considered as
well-assured). The rating services' descriptions of BBB or Baa securities are as
follows: Moody's Investors Service, Inc. Bond Ratings -- Baa: Bonds which are
rated Baa are considered as medium grade obligations, i.e., they are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well. Standard & Poor's Corporation Bond Ratings -- BBB: Debt
rated "BBB" is regarded as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than for debt in higher-rated categories. See the discussion of the High Yield
Fund for information concerning risks associated with below investment grade
bonds.
During the fiscal year ended October 31, 1997, the percentage of the Fund's
portfolio securities invested in the various ratings established by Moody's,
based upon the weighted average ratings of the portfolio, was as follows:
Moody's Rating Portfolio Percentage
-------------- --------------------
Aa .85%
A 22.85%
Baa 74.14%
Ba 1.22%
B .94%
The preceding percentage for A and AA rated securities includes .35% and
.99%, respectively of unrated securities which have been determined by the
Manager to be of comparable quality.
Cash equivalents in which the Fund invests include corporate commercial
paper rated A-1+, A-1 or A-2 by S&P or P-1 or P-2 by Moody's, unrated commercial
paper issued by corporations with outstanding debt securities rated in the four
highest grades by S&P and Moody's and bank certificates of deposit and bankers'
acceptances issued or guaranteed by national or state banks and repurchase
agreements considered by the Fund to have investment quality. Under unusual
market or economic conditions, the Fund for temporary defensive purposes may
invest up to 100% of its assets in cash or cash equivalents.
Principal Government Securities Income Fund
The objective of Principal Government Securities Income Fund is a high
level of current income, liquidity and safety of principal.
The Fund will invest in obligations issued or guaranteed by the United
States Government or by its agencies or instrumentalities and in repurchase
agreements collateralized by such obligations. Such securities 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 other U.S. Government
Securities. 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 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 FNMA's or FHLMC's operations or
to assist FNMA or FHLMC in any other manner. The Fund may maintain reasonable
amounts of cash or short-term debt securities not issued or guaranteed by the
U.S. Government or its agencies or instrumentalities for daily cash management
purposes or pending selection of long-term investments.
Cash equivalents in which the Fund invests include corporate commercial
paper rated A-1+, A-1 or A-2 by S&P or P-1 or P-2 by Moody's, unrated commercial
paper issued by corporations with outstanding debt securities rated in the four
highest grades by S&P and Moody's and bank certificates of deposit and bankers'
acceptances issued or guaranteed by national or state banks and repurchase
agreements considered by the Fund to have investment quality.
Depending on market conditions, a substantial portion of the assets may be
invested in GNMA Certificates of the modified pass-through type and in
repurchase agreements collateralized by such obligations. GNMA is a United
States Government corporation within the Department of Housing and Urban
Development. 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 to GNMA for
approval. 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, which are the only kind in which the Fund intends to invest,
entitle the holder to receive all interest and principal payments owed on the
mortgages in the pool (net of the issuer and GNMA fee of .5% prescribed by
regulation), regardless of 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 Fund. 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 Fund shares will
fluctuate as interest rates change.
Mortgagors may pay off their mortgages at any time. Expected prepayments of
the mortgages can affect the market value of the GNMA Certificate, and actual
prepayments can affect the return ultimately received. Prepayments, like
scheduled payments of principal, are reinvested by the Fund 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 Fund 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 Marking 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 paper is issued
as needs arise by an agency and is traded regularly in denominations similar to
those in which government obligations are traded.
The Fund will not engage in the trading of securities for the purpose of
realizing short-term profits, but it will adjust its portfolio as considered
advisable in view of prevailing or anticipated market conditions and the Fund's
investment objective. Accordingly, the Fund may sell portfolio securities in
anticipation of a rise in interest rates and purchase securities for inclusion
in its portfolio in anticipation of a decline in interest rates.
As a hedge against changes in interest rates, the Fund may enter into
contracts with dealers in GNMA Certificates whereby the Fund agrees to purchase
or sell an agreed-upon principal amount of GNMA Certificates at a specified
price on a certain date. The Fund may enter into similar purchase agreements
with issuers of GNMA Certificates other than Principal Mutual Life Insurance
Company. The Fund may also purchase optional delivery standby commitments which
give the Fund the right to sell particular GNMA Certificates 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 Fund. To
the extent the Fund engages in delayed delivery transactions it will do so for
the purpose of acquiring portfolio securities consistent with its investment
objective and policies and not for the purpose of investment leverage or to
speculate on interest rate changes. Liability accrues to the Fund at the time it
becomes obligated to purchase such securities, although delivery and payment
occur at a later date. From the time the Fund becomes obligated to purchase
securities on a delayed delivery basis, the Fund has all the rights and risks
attendant to the ownership of a security except that no interest accrues to the
purchaser until delivery. At the time the Fund enters into a binding obligation
to purchase such securities, Fund assets of a dollar amount sufficient to make
payment for the securities to be purchased will be segregated. The availability
of liquid assets for this purpose and the effect of asset segregation on the
Fund'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 Fund may engage in forward commitment agreements. Except as may be
imposed by these factors, there is no limit on the percent of the Fund's total
assets that may be committed to transactions in such agreements.
Principal High Yield Fund
Principal High Yield Fund's primary investment objective is high current
income. Capital growth is a secondary objective when consistent with the
objective of high current income. This Fund is designed for investors willing to
assume additional risk in return for above average income.
In seeking to attain the Fund's objective of high current income, the Fund
invests primarily in high yielding, lower or nonrated fixed-income securities
(commonly known as "junk bonds"), constituting a diversified portfolio which the
Fund Manager believes does not involve undue risk to income or principal.
Normally, at least 80% of the Fund's assets will be invested in debt securities,
convertible securities (both debt and preferred stock) or preferred stocks that
are consistent with its primary investment objective of high current income. The
Fund's remaining assets may be invested in common stocks and other equity
securities in which the Growth-Oriented Funds may invest when these types of
investments are consistent with the objective of high current income.
The Fund seeks to invest its assets in securities rated Ba1 or lower by
Moody's or BB+ or lower by S&P or in unrated securities which the Fund's Manager
believes are of comparable quality. These securities are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and to repay principal in accordance with the terms of the obligation.
The Fund will not invest in securities rated below Caa by Moody's and below CCC
by S&P.
The rating services' descriptions of securities rating categories in which
the Fund may normally invest are as follows:
Moody's Investors Service, Inc. Bond Ratings - Ba: Bonds which are rated Ba
are judged to have speculative elements; their future cannot be considered as
well-assured. Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in this class. B:
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and a modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Standard & Poor's Corporation Bond Ratings - BB, B, CCC, CC: Debt rated
"BB", "B", "CCC" and "CC" is regarded, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. "BB" indicates the lowest degree of speculation and
"CC" the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Plus (+) or Minus (-): The ratings from "AA" to "BB" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
The higher-yielding, lower-rated securities in which the High Yield Fund
invests present special risks to investors. The market value of lower-rated
securities may be more volatile than that of higher-rated securities and
generally tends to reflect the market's perception of the creditworthiness of
the issuer and short-term market developments to a greater extent than more
highly-rated securities, which reflect primarily fluctuations in general levels
of interest rates. Periods of economic uncertainty and change can be expected to
result in increased volatility in the market value of lower-rated securities.
Further, such securities may be subject to greater risks of loss of income and
principal, particularly in the event of adverse economic changes or increased
interest rates, because their issuers generally are not as financially secure or
as creditworthy as issuers of higher-rated securities. Additionally, to the
extent that there is not a national market system for secondary trading of
lower-rated securities, there may be a low volume of trading in such securities
which may make it more difficult to value or sell those securities than
higher-rated securities. Adverse publicity and investor perceptions, whether or
not based on fundamental analysis, may decrease the values and liquidity of high
yield securities, especially in a thinly traded market.
Investors should recognize that the market for higher-yielding, lower-rated
securities is a relatively recent development that has not been tested by an
economic recession. An economic downturn may severely disrupt the market for
such securities and cause financial stress to the issuers which may adversely
affect the value of the securities held by the High Yield Fund and the ability
of the issuers of the securities held by it to pay principal and interest. A
default by an issuer may result in the Fund incurring additional expenses to
seek recovery of the amounts due it.
Some of the securities in which the Fund invests contain call provisions.
If the issuer of such a security exercises a call provision in a declining
interest rate market, the Fund would have to replace the security with a
lower-yielding security, resulting in a decreased return for investors. Further,
a higher-yielding security's value will decrease in a rising interest rate
market, which will be reflected in the Fund's net asset value per share.
Investors should carefully consider their ability to assume the risks of
investing in lower-rated securities before making an investment in the Fund, and
should be prepared to maintain their investment during periods of adverse market
conditions. Investors should not rely on the Fund for their short-term financial
needs.
The Fund seeks to minimize the risks of investing in lower-rated securities
through diversification, investment analysis and attention to current
developments in interest rates and economic conditions. Because the Fund invests
primarily in securities in the lower rating categories, the achievement of the
Fund's goals is more dependent on the Manager's ability than would be the case
if the Fund were investing in securities in the higher rating categories.
Although the Fund's Manager considers security ratings when making investment
decisions, it performs its own investment analysis and does not rely principally
on the ratings assigned by the rating services. There are risks in applying
credit ratings as a method for evaluating high yield securities. For example,
credit ratings evaluate the safety of principal and interest payments, not the
market value risk of high yield securities, and credit rating agencies may fail
to make timely changes in credit ratings to reflect subsequent events. The
Manager's analysis includes traditional security analysis considerations such as
the issuer's experience and managerial strength, changing financial condition,
borrowing requirements or debt maturity schedules, and its responsiveness to
changes in business conditions and interest rates. It also considers relative
values based on anticipated cash flow, interest or dividend coverage, asset
coverage and earnings prospects. In addition, the Manager analyzes general
business conditions and other factors such as anticipated changes in economic
activity and interest rates, the availability of new investment opportunities,
and the economic outlook for specific industries. The Manager continuously
monitors the issuers of portfolio securities to determine if the issuers will
have sufficient cash flow and profits to meet required principal and interest
payments and to assure the securities' liquidity so the Fund can meet redemption
requests.
During the fiscal year ended October 31, 1997, the percentage of the Fund's
portfolio securities invested in the various ratings established by Moody's,
based upon the weighted average ratings of the portfolio, was as follows:
Moody's Rating Portfolio Percentage
-------------- --------------------
Baa .84%
Ba 33.12%
B 66.04%
The above percentages for Ba and B rated securities include unrated
securities in the amount of 1.55% and 4.04%, respectively, which have been
determined by the Manager to be of comparable quality.
There may be times when, in the Manager's judgment, unusual market or
economic conditions make pursuing the Fund's basic investment strategy
inconsistent with the best interests of its shareholders. At such times the
Manager may employ alternative strategies, primarily seeking to reduce
fluctuations in the value of the Fund's assets. In implementing these
"defensive" strategies, the Fund may temporarily invest in money-market
instruments of all types, higher-rated fixed-income securities or any other
fixed-income securities that the Fund considers consistent with such strategy.
The yield to maturity on these securities would generally be lower than the
yield to maturity on lower-rated fixed-income securities. It is impossible to
predict when, or for how long, such alternative strategies will be utilized.
The Fund's Manager buys and sells securities for the Fund principally in
response to its evaluation of an issuer's continuing ability to meet its
obligations, the availability of better investment opportunities, and its
assessment of changes in business conditions and interest rates. From time to
time, consistent with its investment objectives, the Fund may sell securities
that have appreciated in value because of declines in interest rates. It may
also trade securities for the purpose of seeking short-term profits. Securities
may be sold in anticipation of a market decline or bought in anticipation of a
market rise. They may also be traded for securities of comparable quality and
maturity to take advantage of perceived short-term disparities in market values
or yields.
Principal Limited Term Bond Fund
The objective of Principal Limited Term Bond Fund is to seek a high level
of current income consistent with a relatively high level of principal stability
by investing in a portfolio of securities with a dollar weighted average
maturity of five years or less. The Fund seeks to achieve its objective by
investing primarily in high grade, short-term debt securities.
The Fund will invest, under normal circumstances, at least 80% of its total
assets in securities issued or guaranteed by the United States ("U.S.")
Government or its agencies or instrumentalities (as described in the discussion
of Government Securities Income Fund) and other debt securities of U.S. issuers
rated within the three highest grades used by Standard & Poor's (AAA, AA or A)
or by Moody's (Aaa, Aa, or A) or which, if nonrated, are comparable in quality
in the opinion of the Fund's Manager. The balance of the Fund's assets may be
invested in debt securities rated in the fourth highest grade by the major
rating services (i.e., at least "Baa" by Moody's Investors Service or "BBB" by
Standard & Poor's Corporation, or their equivalents) or, if not rated, judged to
be of comparable quality. Securities rated BBB or Baa are considered investment
grade securities having adequate capacity to pay interest and repay principal.
Such securities may have speculative characteristics, however, and changes in
economic and other conditions are more likely to lead to a weakened capacity of
the issuer of such securities to make principal and interest payments than is
the case with higher rated securities. Under normal circumstances, the Fund will
maintain a dollar weighted average maturity of not more than five years. In
determining the average maturity of the Fund's portfolio, the Manager may adjust
the maturity dates on callable or prepayable securities to reflect the Manager's
judgment regarding the likelihood of such securities being called or prepaid.
The Fund may also invest in other debt securities including corporate debt
securities such as bonds, notes and debentures, mortgage-backed securities
including collateralized mortgage obligations and other asset-backed securities.
For a more complete description of asset-backed securities, see "Government
Securities Income Fund" discussion.
Cash equivalents in which the Fund invests include corporate commercial
paper rated A-1+, A-1 or A-2 by S&P or P-1 or P-2 by Moody's, unrated commercial
paper issued by corporations with outstanding debt securities rated in the four
highest grades by S&P and Moody's and bank certificates of deposit and bankers'
acceptances issued or guaranteed by national or state banks and repurchase
agreements considered by the Fund to have investment quality. Under unusual
market or economic conditions, the Fund for temporary defensive purposes, may
invest up to 100% of its assets in cash or cash equivalents.
Principal Tax-Exempt Bond Fund
The objective of Principal Tax-Exempt Bond Fund is to seek as high a level
of current income exempt from federal income tax as is consistent with
preservation of capital. The Fund seeks to achieve its objective by investing
primarily in a diversified portfolio of securities issued by or on behalf of
state or local governments or other public authorities. Interest on these
obligations ("Municipal Obligations") is exempt from federal income tax in the
opinion of bond counsel to the issuer.
The Fund will invest, during normal market conditions, at least 80% of its
total assets in Municipal Obligations which, at the time of purchase, meet the
following standards: (a) Municipal Bonds rated within the four highest grades by
(i) Moody's, these ratings are: Aaa, Aa, A and Baa or (ii) S&P, these ratings
are: AAA, AA, A and BBB; (b) Municipal Notes rated within the highest grade by
Moody's (MIG-1) or S&P (SP-1); (c) Municipal Commercial Paper rated within the
highest grade by Moody's (Prime-1) or S&P (A-1); and (d) unrated Municipal
Obligations comparable in quality to those described above in the opinion of the
Fund's Manager.
The Fund may invest up to 20% of its total assets in Municipal Obligations
that do not meet the standards required for the balance of the portfolio as set
forth above. Securities rated below BBB or Baa are commonly referred to as junk
bonds. These investments normally will provide an opportunity for higher yield
but will be more speculative than Municipal Obligations that meet higher
standards. They typically will entail greater price volatility and a higher risk
of default, that is, the nonpayment of interest and principal by the issuer. The
Fund does not intend to purchase Municipal Obligations that would be in default
as to payment of either interest or principal at the time of purchase. As a
result, it will not purchase Municipal Bonds rated lower than B by Moody's or
S&P (bonds that are predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation) or
Municipal Notes or Municipal Commercial Paper which is unrated by either Moody's
or S&P and which in the opinion of the Fund's Manager is not comparable in
quality to rated obligations. See the discussion of the High Yield Fund for
information concerning risks associated with below-investment grade bonds.
The Fund may also invest from time to time in the following taxable
securities which mature one year or less from the time of purchase: Obligations
issued or guaranteed by the United States Government or its agencies or
instrumentalities ("U.S. Government securities"), domestic bank certificates of
deposit and bankers' acceptances, commercial paper, short-term corporate debt
securities and repurchase agreements ("Taxable Investments"). The Fund will make
Taxable Investments primarily for liquidity purposes or as a temporary
investment of cash pending its investment in Municipal Obligations. During
normal market conditions, the Fund will not invest more than 20% of its total
assets in Taxable Investments, the Municipal Obligations identified in the
preceding paragraph and Municipal Obligations the interest on which is treated
as a tax preference item for purposes of the federal alternative minimum tax.
The Fund, however, may temporarily invest more than 20% of its assets in Taxable
Investments when in the opinion of the Fund's Manager it is advisable to do so
for defensive purposes because of market conditions.
The Fund may not invest more than 5% of its total assets in the securities
of any one issuer (except for U.S. Government securities), but it may invest
without limit in debt obligations of issuers located in the same state and in
debt obligations which are repayable out of revenue sources generated from
economically related projects or facilities. Sizeable investments in such
obligations could involve an increased risk to the Fund since an economic,
business or political development or change affecting one security could also
affect others. The Fund may also invest without limit in industrial development
bonds, which are issued by industrial development authorities but may be backed
only by the assets and revenues of the non-governmental entities that use the
facilities financed by the bonds.
During the fiscal year ended October 31, 1997, the percentage of the Fund's
portfolio securities invested in the various ratings established by S & P, based
upon the weighted average ratings of the portfolio, was as follows:
S & P Rating Portfolio Percentage
------------ --------------------
AAA .68%
AA 17.35%
A 41.74%
BBB 36.15%
BB 4.08%
The above percentages for AA, A and BBB rated securities include unrated
securities in the amount of .97%, 2.67% and 9.11%, respectively, which have been
determined by the Manager to be of comparable quality.
The Fund will not engage in the trading of securities for the purpose of
realizing short-term profits, but it will adjust its portfolio as considered
advisable in view of prevailing or anticipated market conditions and the Fund's
investment objective. Accordingly, the Fund may sell portfolio securities in
anticipation of a rise in interest rates and purchase securities for inclusion
in its portfolio in anticipation of a decline in interest rates.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Obligations. It may be expected that similar proposals may
be introduced in the future. If such a proposal were enacted, the ability of the
Fund to pay "exempt interest" dividends may be adversely affected and the Fund
would reevaluate its investment objective and policies and consider changes in
its structure.
MONEY MARKET FUNDS
The Principal Funds currently include two Funds which seek a high level of
income through investments in short-term securities. These Funds are Principal
Cash Management Fund and Principal Tax-Exempt Cash Management Fund, together
referred to as the "Money Market Funds." Securities in which the Money Market
Funds will invest may not yield as high a level of current income as securities
of lower quality and longer maturities which generally have less liquidity,
greater market risk and more fluctuation.
Each of the Money Market Funds will limit its portfolio investments to
United States dollar denominated instruments that the Manager, subject to the
oversight of the Board of Directors, determines present minimal credit risks and
which at the time of acquisition are "Eligible Securities" as that term is
defined in regulations issued under the Investment Company Act of 1940.
Eligible Securities include:
(1) A security with a remaining maturity of 397 days or less that is rated
(or that has been issued by an issuer that is rated in respect to a
class of short-term debt obligations, or any security within that
class, that is comparable in priority and security with the security)
by a nationally recognized statistical rating organization in one of
the two highest rating categories for short-term debt obligations; or
(2) A security that at the time of issuance was a long-term security with a
remaining maturity of 397 calendar days or less, and whose issuer has
received from a nationally recognized statistical rating organization a
rating, with respect to a class of short-term debt obligations (or any
security within that class) that is now comparable in priority and
security with the security, in one of the two highest rating categories
for short-term debt obligations; or
(3) an unrated security that is of comparable quality to a security meeting
the requirements of (1) or (2) above, as determined by the board of
directors.
The Cash Management Fund will not invest more than 5% of its total assets
in the following securities:
(1) Securities which, when acquired by the Fund (either initially or upon
any subsequent rollover), are rated in the second highest rating
category for short-term debt obligations;
(2) Securities which at the time of issuance were long-term securities but
when acquired by the Fund have a remaining maturity of 397 calendar
days or less, if the issuer of such securities is rated, with respect
to a class of comparable short-term debt obligations, in the second
highest rating category for short-term obligations; and
(3) Securities which are unrated but are determined by the Fund's Board of
Directors to be of comparable quality to securities rated in the second
highest rating category for short-term debt obligations.
Each Fund will maintain a dollar-weighted average portfolio maturity of 90
days or less. Each Fund intends to hold its investments until maturity, but may
on occasion trade securities to take advantage of market variations. Also,
revised valuations of an issuer or redemptions may result in sales of portfolio
investments prior to maturity or at a time when such sales might otherwise not
be desirable. Each Fund's right to borrow to facilitate redemptions may reduce
the need for such sales. The sale of portfolio securities would be a taxable
event. See "Tax Treatment of the Funds, Dividends and Distributions." It is the
policy of the Money Market Funds to be as fully invested as reasonably practical
at all times to maximize current income.
Since portfolio assets of the Money Market Funds will consist of short-term
instruments, replacement of portfolio securities will occur frequently. However,
since these Funds expect to usually transact purchases and sales of portfolio
securities with issuers or dealers on a net basis, it is not anticipated that
the Funds will pay any significant brokerage commissions. The Funds are free to
dispose of portfolio securities at any time, when changes in circumstances or
conditions make such a move desirable in light of their investment objectives.
Principal Cash Management Fund
The objective of Principal Cash Management Fund is to seek as high a level
of current income available from short-term securities as is considered
consistent with preservation of principal and maintenance of liquidity by
investing its assets in a portfolio of money market instruments. These money
market instruments are U.S. Government Securities, U.S. Government Agency
Securities, Bank Obligations, Commercial Paper, Short-term Corporate Debt,
Repurchase Agreements and Taxable Municipal Obligations, which are described
briefly below and in more detail in the Statement of Additional Information.
U.S. Government Securities are securities issued or guaranteed by the U.S.
Government, including treasury bills, notes and bonds.
U.S. Government Agency Securities are obligations issued or guaranteed by
agencies or instrumentalities of the U.S. Government whether supported by the
full faith and credit of the U.S. Treasury or only by the credit of a particular
agency or instrumentality.
Bank Obligations consist of certificates of deposit which are generally
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return and bankers acceptances
which are time drafts drawn on a commercial bank by a borrower, usually in
connection with international commercial transactions.
Commercial Paper is short-term promissory notes issued by U.S. or foreign
corporations primarily to finance short-term credit needs.
Short-term Corporate Debt consists of notes, bonds or debentures which at
the time of purchase have one year or less remaining to maturity.
Repurchase Agreements are transactions under which securities are purchased
from a bank or securities dealer with an agreement by the seller to repurchase
the securities at the same price plus interest at a specified rate. Generally,
Repurchase Agreements are of short duration, usually less than a week but on
occasion for longer periods.
Taxable Municipal Obligations are short-term obligations issued or
guaranteed by state and municipal issuers which generate taxable income.
Principal Tax-Exempt Cash Management Fund
The objective of Principal Tax-Exempt Cash Management Fund is to provide as
high a level of current interest income exempt from federal income tax as is
consistent, in the view of the Fund's management, with stability of principal
and the maintenance of liquidity. The Fund seeks to achieve its objective
through investment in a professionally managed portfolio of high quality,
short-term obligations that have been issued by or on behalf of state or local
governments or other public authorities and that pay interest which is exempt
from federal income tax in the opinion of bond counsel to the issuer ("Municipal
Obligations").
The Fund may invest in Municipal Obligations with fixed, variable or
floating interest rates and may invest in participation interests in pools of
Municipal Obligations held by banks or other financial institutions. The Fund
may treat a variable or floating interest rate obligation as maturing before its
ultimate maturity date if the Fund has acquired a right to sell the obligation
that meets requirements established by the Securities and Exchange Commission.
The Fund expects to invest primarily in variable rate or floating rate
instruments. Typically such instruments carry demand features permitting the
Fund to redeem at par upon specified notice. The Fund's right to obtain payment
at par on a demand instrument upon demand could be affected by events occurring
between the date the Fund elects to redeem the instrument and the date
redemption proceeds are due which affect the ability of the issuer to pay the
instrument at par value. The Manager will monitor on an ongoing basis the
pricing, quality and liquidity of such instruments and will similarly monitor
the ability of an issuer of a demand instrument, including those supported by
bank letters of credit or guarantees, to pay principal and interest on demand.
Although the ultimate maturity of such variable rate obligations may exceed one
year, the Fund will treat the maturity of each variable rate demand obligation
as the longer of (i) the notice period required before the Fund is entitled to
payment of the principal amount through demand, or (ii) the period remaining
until the next interest rate adjustment. Floating rate instruments with demand
features are deemed to have a maturity equal to the period remaining until the
principal amount can be recovered through demand.
The Fund may also invest in bond anticipation notes, tax anticipation
notes, revenue anticipation notes, construction loan notes and bank notes issued
by governmental authorities to commercial banks as evidence of borrowings. Since
these short-term securities frequently serve as interim financing pending
receipt of anticipated funds from the issuance of long-term bonds, tax
collections or other anticipated future revenues, a weakness in an issuer's
ability to obtain such funds as anticipated could adversely affect the issuer's
ability to meet its obligations on these short-term securities.
The Fund may also invest from time to time on a temporary basis in the
following taxable securities which mature 397 days or less from the time of
purchase: Obligations issued or guaranteed by the United States Government or
its agencies or instrumentalities ("U.S. Government securities"), domestic bank
certificates of deposit and bankers' acceptances, United States dollar
denominated foreign bank certificates of deposit and bankers' acceptances,
commercial paper, short-term corporate debt securities and repurchase agreements
("Temporary Investments"). The Fund will make Temporary Investments primarily
for liquidity purposes or as a temporary investment of cash pending its
investment in Municipal Obligations. During normal market conditions, the Fund
will not invest more than 20% of its total assets in Temporary Investments. The
Fund, however, may temporarily invest more than 20% of its assets in Temporary
Investments when in the opinion of the Fund's Manager it is advisable to
maintain a temporary "defensive" posture.
The Fund may invest in the securities of other open-end investment
companies but may not invest more than 10% of its assets in securities of other
investment companies, invest more than 5% of its total assets in the securities
of any one investment company, or acquire more than 3% of the outstanding voting
securities of any one investment company except in connection with a merger,
consolidation or plan of reorganization. The Fund's Manager will waive its
management fee on the Fund's assets invested in securities of other open-end
investment companies. The Fund will generally invest in other investment
companies only for short-term cash management purposes when the advisor
anticipates the net return from the investment to be superior to alternatives
then available. The Fund will generally invest only in those investment
companies that have investment policies requiring investment in securities
comparable in quality to those in which the Fund invests.
The Fund may not invest more than 5% of its total assets in the securities
of any one issuer (except for U.S. Government securities), but it may invest
without limit in debt obligations of issuers located in the same state and in
debt obligations which are repayable out of revenue sources generated from
economically related projects or facilities. Sizeable investments in such
obligations could involve an increased risk to the Fund since an economic,
business or political development or change affecting one security could also
affect others. The Fund may also invest without limit in industrial development
bonds, which are issued by industrial development authorities but may be backed
only by the assets and revenues of the non-governmental entities that use the
facilities financed by the bonds. The Fund, however, will not invest more than
20% of its total assets in any Municipal Obligation the interest on which is
treated as a tax preference item for purposes of the federal alternative minimum
tax, and during normal market conditions, it will limit its investments in such
securities and in Temporary Investments to 20% of its total assets.
Municipal Obligations are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Act, and laws, if any, which may be enacted by
Congress or any state extending the time for payment of principal or interest,
or both, or imposing other constraints upon enforcement of such obligations or
upon municipalities to levy taxes. The power or ability of issuers to pay, when
due, principal of and interest on Municipal Obligations may also be materially
affected by the results of litigation or other conditions.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Obligations. It may be expected that similar proposals may
be introduced in the future. If such a proposal were enacted, the ability of the
Fund to pay "exempt interest" dividends may be adversely affected, and the Fund
would reevaluate its investment objective and policies and consider changes in
its structure.
CERTAIN INVESTMENT POLICIES AND RESTRICTIONS
Following is a discussion of certain investment practices that the Funds
may use in an effort to achieve their respective investment objectives.
Repurchase Agreements/Lending Portfolio Securities
Each of the Funds may enter into repurchase agreements with, and each of
the Funds, except the Capital Value Fund, Growth Fund and Cash Management Fund,
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 to the Fund if the
other party should default on its obligations, and the Fund 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 each Fund's Board of
Directors to deal with those risks. None of the Funds intends either (i) to
enter into repurchase agreements that mature in more than seven days if any such
investment, together with any other illiquid securities held by the Fund, would
amount to more than 15% (10% for the Government Securities Income Fund) of its
total assets or (ii) to lend securities in excess of 30% of its total assets.
Forward Commitments
From time to time, each of the Income-Oriented Funds and the Balanced Fund
may enter into forward commitment agreements which call for the Fund to purchase
or sell a security on a future date and at a price fixed at the time the Fund
enters into the agreement. Each of these Funds may also acquire rights to sell
its investments to other parties, either on demand or at specific intervals.
Warrants
Each of the Funds, except the Cash Management Fund, Government Securities
Income Fund and Tax-Exempt Bond Fund, 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 or American Stock Exchange. For the International,
International Emerging Markets and International SmallCap Funds, the 2%
limitation also applies to warrants not listed on the Toronto Stock Exchange.
Borrowing
As a matter of fundamental policy, each Fund may borrow money only for
temporary or emergency purposes. The Capital Value, Cash Management, Growth,
Tax-Exempt Bond and Tax-Exempt Cash Management Funds may borrow only from banks.
Further, each Fund may borrow only in an amount not exceeding 5% of its assets,
except:
(1) the Capital Value Fund and Growth Fund, each of which may borrow only
in an amount not exceeding the lesser of (i) 5% of the value of its
assets less liabilities other than such borrowings, or (ii) 10% of its
assets taken at cost at the time the borrowing is made;
(2) the Cash Management Fund which may borrow only in an amount not
exceeding the lesser of (i) 5% of the value of its assets, or (ii) 10%
of the value of its net assets taken at cost at the time the borrowing
is made; and
(3) the Tax-Exempt Cash Management Fund which may borrow in an amount which
permits it to maintain a 300% asset coverage and while any such
borrowing exceeds 5% of the Fund's total assets no additional purchases
of investment securities will be made. If due to market fluctuations or
other reasons the Fund's asset coverage falls below 300% of its
borrowings, the Fund will reduce its borrowings within 3 business days.
To do this, the Fund may have to sell a portion of its investments at a
time when it may be disadvantageous to do so.
Options
Each of the Funds (except Capital Value, Cash Management, Growth,
Tax-Exempt Bond and Tax-Exempt Cash Management Funds) may purchase covered
spread options, which would give the Fund the right to sell a security that it
owns at a fixed dollar spread or yield spread in relationship to another
security that the Fund does not own, but which is used as a benchmark. These
Funds may also purchase and sell financial futures contracts, options on
financial futures contracts and options on securities and securities indices,
but will not invest more than 5% of their assets in the purchase of options on
securities, securities indices and financial futures contracts or in initial
margin and premiums on financial futures contracts and options thereon. The
Funds 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.
General
The Statement of Additional Information includes further information
concerning the Funds' investment policies and applicable investment
restrictions. The investment objectives of the Funds are fundamental and certain
investment restrictions designated as such in this Prospectus or in the
Statement of Additional Information are fundamental policies that may not be
changed without approval by the holders of the lesser of: (i) 67% of the Fund's
shares present or represented at a shareholders' meeting at which the holders of
more than 50% of such shares are present or represented by proxy; or (ii) more
than 50% of the outstanding shares of the Fund. All other investment policies
described in this Prospectus and the Statement of Additional Information are not
fundamental and may be changed by the Board of Directors of the appropriate Fund
without shareholder approval.
RISK FACTORS
An investment in any of the Growth-Oriented Funds involves the financial
and market risks that are inherent in any investment in equity 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.
An investment in any of the Income-Oriented Funds involves market risks
associated with movements in interest rates. The market value of the Funds'
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 Funds' net asset values 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.
The yields on an investment in either of the Money Market Funds will vary
with changes in short-term interest rates. In addition, the investments of each
Money Market Fund are subject to the ability of the issuer to pay interest and
principal when due.
Each of the following Principal Funds may invest in foreign securities to
the indicated percentage of its assets: International, International Emerging
Markets and International SmallCap Funds - 100%; Real Estate - 25%; Balanced,
Blue Chip, Bond, Capital Value, Growth, High Yield, Limited Term Bond Fund,
MidCap, SmallCap and Utilities Funds - 20%. Neither the Government Securities
Income Fund nor the Tax-Exempt Bond Fund may invest in foreign securities. The
Cash Management and Tax Exempt Cash Management Funds do not invest in foreign
securities other than those that are United States dollar denominated. United
State dollar denominated means that all principal and interest payments for the
security are payable in U.S. dollars and that the interest rate of, the
principal amount to be repaid and the timing of payments related to the
securities do not vary or float with the value of a foreign currency, the rate
of interest on foreign currency borrowings or with any other interest rate or
index expressed in a currency other than U.S. dollars. Debt securities issued in
the United States pursuant to a registration statement filed with the Securities
and Exchange Commission are not treated as foreign securities for purposes of
these limitations. Investment in foreign securities presents certain risks which
may affect a Fund's 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, 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. 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 Fund's investment in foreign securities may also result in
higher custodial costs and the costs associated with currency conversions.
Securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. 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 Invista Capital Management, Inc. ("Invista")
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.
HOW THE FUNDS ARE MANAGED
Under Maryland law, the business and affairs of each of the Funds are
managed under the direction of its Board of Directors. Investment services and
certain other services are furnished to the Funds under the terms of a
Management Agreement between each of the Funds and the Manager. The Manager for
the Funds is Principal Management Corporation (formerly known as Princor
Management Corporation), 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 October 31, 1997, the Manager
served as investment advisor for 28 such funds with assets totaling
approximately $5.0 billion.
The Manager is responsible for investment advisory, managerial and
administrative services for the Funds. However, under a Sub-Advisory Agreement
between Invista and the Manager, Invista performs all the investment advisory
responsibilities of the Manager for the Growth-Oriented Funds (except the Real
Estate Fund), the Government Securities Income Fund and the Limited Term Bond
Fund. The Manager will reimburse Invista for the cost of providing these
services. 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 September 30, 1997 were approximately $25.3
billion. Invista's address is 1800 Hub Tower, 699 Walnut, Des Moines, Iowa
50309.
The Manager or Invista advises the Funds on investment policies and on the
composition of the Funds' portfolios. In this connection, the Manager or Invista
furnishes to the Board of Directors of each Fund a recommended investment
program consistent with that Fund's investment objective and policies. The
Manager or 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 Manager or Invista has assigned certain individuals the primary
responsibility for the day-to-day management of each Fund's portfolio. The
persons primarily responsible for the day-to-day management of each Fund are
identified in the table below:
<TABLE>
<CAPTION>
Primarily
Fund Responsible Since Person Primarily Responsible
<S> <C> <C>
Balanced Fund April, 1993 Judith A. Vogel, CFA (BA degree, Central College). Vice President, Invista
Capital Management, Inc., since 1987. Co-Manager since December, 1997: Martin
J. Schafer (BBA degree, University of Iowa). Vice President, Invista Capital
Management, Inc.
Blue Chip Fund March, 1991 Mark T. Williams, CFA (MBA degree, Drake University). Vice President,
(Fund's inception) Invista Capital Management, Inc., since 1995; Investment Officer, 92-95.
Prior thereto, Security Analyst.
Bond Fund November, 1996 Scott A. Bennett,CFA (MBA degree, University of Iowa) Assistant Director
Investment Securities, Principal Mutual Life Insurance Company, since 1996.
Prior thereto, Investment Manager.
Capital Value Fund October, 1969 David L. White, CFA (BBA degree, University of Iowa). Executive Vice
(Fund's inception) President, Invista Capital Management, Inc., since 1984. Co-Manager since
November 1996: Catherine A. Green, CFA, (MBA degree, Drake University).
Vice President, Invista Capital Management, Inc. since 1987.
Government Securities May, 1985 Martin J. Schafer (BBA degree, University of Iowa). Vice President, Invista
Income Fund (Fund's inception) Capital Management, Inc., since 1992. Director - Securities Trading,
Principal Mutual Life Insurance Company 1992; Prior thereto, Associate Director.
Growth and MidCap August, 1987 Michael R. Hamilton, (MBA degree, Bellarmine College). Vice President, Funds
and December, 1987 Invista Capital Management, Inc., since 1987.
(Fund's inception),
respectively
High Yield Fund December, 1987 James K. Hovey, CFA (MBA degree, University of Iowa). Director - Investment
(Fund's inception) Securities, Principal Mutual Life Insurance Company, since 1990; Prior thereto,
Assistant Director Investment Securities.
International Fund April, 1994 Scott D. Opsal, CFA (MBA degree, University of Minnesota). Executive Vice
President and Chief Investment Officer, Invista Capital Management, Inc.,
since 1997. Vice President, 1986-1997.
International Emerging May, 1997 Kurtis D. Spieler, CFA (MBA degree, Drake University). Vice President,
Markets Fund (Fund's inception) Invista Capital Management, Inc., since 1995; Investment Officer, 94-95.
Prior thereto, Investment Manager, Principal Mutual Life Insurance Company.
International SmallCap May, 1997 Darren K. Sleister, CFA (MBA degree, University of Iowa). Investment Officer,
Fund (Fund's inception) Invista Capital Management, Inc., since 1995; Prior thereto, Security
Analyst.
Limited Term Bond February, 1996 Martin J. Schafer (BBA degree, University of Iowa). Vice President, Invista
Fund (Fund's inception) Capital Management, Inc., since 1992. Director-Securities Trading,
Principal Mutual Life Insurance Company 1992; Prior thereto, Associate
Director.
Real Estate Fund December, 1997 Kelly D. Rush, CFA (MBA degree, University of Iowa). Assistant Director -
(Fund's inception) Investment - Commercial Real Estate, Principal Mutual Life Insurance
Company, since 1996; Prior thereto, Senior Administrator Investment -
Commercial Real Estate.
SmallCap Fund December, 1997 Co-Manager: Mark T. Williams, CFA (MBA degree, Drake University). Vice
(Fund's inception) President, Invista Capital Management, Inc., since 1995; Investment Officer,
1992-1995. Co-Manager: John F. McClain, (MBA degree, Indiana University).
Vice President, Invista Capital Management, Inc., since 1995; Investment
Officer, 1992-1995.
Tax-Exempt Bond July, 1991 Daniel J. Garrett, CFA (MBA degree, Drake University). Assistant Director -
Fund Investment Securities, Principal Mutual Life Insurance Company since 1994;
Prior thereto, Senior Analyst.
Utilities Fund April, 1993 Catherine A. Green, CFA (MBA degree, Drake University). Vice President,
(Fund's inception) Invista Capital Management, Inc., since 1987.
</TABLE>
Until August 1, 1988 the International Fund's portfolio was managed by
Principal Management, Inc. of Edmonton, Canada and Scottsdale, Arizona, which
company has changed its name to Sea Investment Management, Inc. The Fund's
previous manager and the current manager are unaffiliated. This change in
managers should be kept in mind when reviewing historical investment results.
For a description of the investment and other services provided by the
Manager, see "Cost of Manager's Services" in the Statement of Additional
Information. The management fee and total Class A share or total Class B share
expenses incurred by each Fund for the period ended October 31, 1997 were equal
to the following percentages of each Fund's respective average net assets:
<TABLE>
<CAPTION>
Class A Shares Class B Shares
---------------------------- ----------------------------
Total Total
Manager's Annualized Manager's Annualized
Fund Fee Expenses Fee Expenses
---- --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Balanced Fund .60% 1.33% .60% 2.14%
Blue Chip Fund .50% 1.30% .50% 2.06%
Bond Fund .46% .95%* .40% 1.70%*
Capital Value Fund .40% .70% .40% 1.65%
Cash Management Fund .37% .63% .00% 1.47%*
Government Securities Income Fund .46% .84% .46% 1.39%
Growth Fund .44% 1.03% .44% 1.48%
High Yield Fund .60% 1.22% .60% 2.13%
International Emerging Markets Fund 1.23% 2.03% 1.23% 2.16%
International Fund .71% 1.39% .71% 2.17%
International SmallCap Fund 1.19% 1.99% 1.19% 2.07%
Limited Term Bond Fund .25% .90%* .00% 1.24%*
MidCap Fund .59% 1.26% .59% 1.69%
Tax-Exempt Bond Fund .48% .79% .48% 1.45%
Tax-Exempt Cash Management Fund .47% .70%* .00% 1.47%*
Utilities Fund .50% 1.15%* .54% 1.90%*
<FN>
* After waiver.
</FN>
</TABLE>
The Manager voluntarily waived a portion of its fee for the Bond, Cash
Management, Limited Term Bond, Utilities and Tax-Exempt Cash Management Funds
throughout the fiscal year ended October 31, 1997. The Manager intends to
continue its voluntary waiver and, if necessary, pay expenses normally payable
by the Bond, Limited Term Bond, Utilities and Tax-Exempt Cash Management Funds
through October 31, 1998. The waiver, if necessary, for the Cash Management Fund
will continue through February 28, 1998. If necessary, waivers will be in
amounts that will maintain a total level of operating expenses which as a
percentage of average net assets attributable to a class on an annualized basis
during that period will not exceed, for the Class A shares, .95% for the Bond
Fund, .90% for the Limited Term Bond Fund, 1.15% for the Utilities Fund and .75%
for the Money Market Funds, and for the Class B shares, 1.70% for the Bond Fund,
1.25% for the Limited Term Bond Fund, 1.95% for the Utilities Fund and 1.50% for
the Money Market Funds. The effect of the waivers is and will be to reduce each
Fund's annual operating expenses and increase each Fund's yield.
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 each 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 in connection with its performance of the
Management Agreements, and that the Manager will reimburse Principal Mutual Life
Insurance Company for its costs incurred in this regard.
Among the expenses paid by each Fund are brokerage commissions on portfolio
transactions, the cost of stock issue and transfer and dividend disbursements,
administration of shareholder accounts, custodial fees, expenses of registering
and qualifying shares for sale after the initial registration, auditing and
legal expenses, fees and expenses of unaffiliated directors, the cost of
shareholder meetings and taxes and interest (if any).
The Funds may from time to time execute transactions for portfolio
securities with, and pay related brokerage commissions to, Principal Financial
Securities, Inc. ("PFS") and Morgan Stanley and Co., each a broker-dealer
affiliated with Princor and/or the Manager for each of the Funds. PFS also
provides distribution services for the Money Market Funds for which it is
compensated by the Manager. These services include, but are not limited to,
providing office space, equipment, telephone facilities and various personnel as
necessary or beneficial to establish and maintain shareholder accounts. PFS
receives a fee from the Manager calculated as a percentage of the average net
asset value of shares of each Fund held in PFS client accounts during the period
for which PFS provides the services. During the fiscal years ended October 31,
1995, 1996, and 1997, PFS received fees in the amount of $991,520, $1,650,714
and $1,765,033 respectively, in consideration of the services it rendered to the
Cash Management Fund. During the fiscal years ending October 31, 1995, 1996, and
1997 PFS received fees in the amount of $191,789, $254,083 and $226,297
respectively, in consideration of the services it rendered to the Tax-Exempt
Cash Management Fund.
The Manager serves as investment advisor, dividend disbursing agent and,
directly and through an affiliate, as transfer agent for each of the Funds
sponsored by Principal Mutual Life Insurance Company. The Funds reimburse the
Manager for the costs of providing these services.
HOW TO PURCHASE SHARES
Purchases are generally made through registered representatives of Princor
or other dealers it selects. If an order and check are properly submitted to
Princor, the shares will be issued at the offering price next computed after the
order and check are received at Princor's main office. If Fund shares are
purchased by telephone order or electronic means and thereafter settled by
delivery of a check or a payment by wire, the shares so purchased will be issued
at the offering price next computed after the telephone or electronic order is
received at Princor's main office. If an order and check 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 New York Stock
Exchange and received by Princor before the close of its business on that day
will be executed at the offering price 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 Princor before its closing on the following business day will be
executed at the offering price computed as of the close of the Exchange on such
following business day. Dealers have the responsibility to transmit orders to
Princor promptly. After an open account has been established, purchases will be
executed at the price next computed after receipt of the investor's check at
Princor's main office. All orders are subject to acceptance by the Fund or Funds
and Princor.
Redemptions by shareholders investing by check will be effected only after
payment has been collected on the check, which may take up to eight days or
more. Investors considering redeeming or exchanging shares or transferring
shares to another person shortly after purchase should pay for those shares with
a certified check, bank cashier's check or money order to avoid any delay in
redemption, exchange or transfer.
Class B shares of the Cash Management Fund may be purchased only by an
exchange from Class B shares of the Principal Funds. Shares of each of the other
Principal Funds may be purchased by mail, by telephone or by exchange from other
Principal Funds.
Investments by Mail. Shares of the Funds may be purchased by submitting a
completed application and check made payable to Principal Mutual Funds. An
application is attached to this Prospectus. A different application is necessary
to establish an IRA, TDA, SEP, SAR-SEP or certain employee benefit plans. See
"Retirement Plans.".
Investments by Telephone. Shares of the Funds may be purchased by placing a
telephone order with Princor. Princor's telephone number is 1-800-247-4123.
Investors must have a current Prospectus for the funds in order to place a
telephone order. An investor must provide Princor with the payment for the order
within three business days from the date the order is placed. The investor may
provide this payment by submitting a check payable to Princor within the time
period. In addition, investors may provide the purchase payment by wiring
Federal Funds directly to Norwest Bank Iowa, N.A., on a day on which the New
York Stock Exchange and Norwest Bank Iowa, N.A. are open for business. The
investor should instruct the bank to wire transfer Federal Funds to: Norwest
Bank Iowa, N.A., Des Moines, Iowa , ABA No. 073000228; for credit to: Princor
Financial Services Corporation, Account No. 073-330; for further credit to:
investor's name and account number. Payment for both initial purchases and
subsequent purchases may be made by wire.
Investors may make subsequent purchases by wire to existing accounts
without placing a telephone order. However, if a telephone order is not placed,
shares will be purchased at the offering price next computed after the wired
payment is received by Princor. To make subsequent purchases by wire, the
investor should instruct the bank to wire transfer Federal Funds to: Norwest
Bank Iowa, N.A., Des Moines, Iowa , ABA No. 073000228; for credit to: Principal
Management Corporation, Account No. 3000499968; for further credit to:
investor's name and account number. Wire transfers may take two hours or more to
complete. Investors may make special arrangements to transmit orders for Money
Market Fund shares to Princor 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. the following regular business day. Such orders will be
effected at the Fund's offering price in effect on the date such purchase order
is received by Princor. Wire purchases through a selected dealer may involve
other procedures established by that dealer.
Minimum Purchase Amount. An investor may open an account with any of the
Funds with a minimum initial investment of $1,000. Accounts established under
the Uniform Gifts to Minors Act or Uniform Transfers Act may be funded with a
minimum initial investment of $250. IRAs may be established with a minimum
initial investment of $250. Additional investments of $100 or more may be made
at any time without completing a new application. The minimum initial and
subsequent investment amounts are not applicable to accounts used to fund
certain employee benefit plans, to accounts designated as receiving accounts in
a Dividend Relay Election, to Money Market Fund accounts used as sweep accounts,
to accounts used as part of an asset allocation service provided by Princor
Financial Services Corporation, to Money Market Fund accounts for which Delaware
Charter Guarantee & Trust Company acts as trustee or to Automatic Investment
Plans. Each 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.
Automatic Investment Plan. An investor may make regular monthly investments
through automatic deductions from the account of a bank or similar financial
institution. The minimum monthly purchase is $25 for all Funds except the Money
Market Funds, which have a $100 monthly minimum requirement. A $25 minimum
monthly purchase may be established for the Money Market Funds if the account
value is at least $1,000 at the time the plan is established. Plan forms and
preauthorized check agreements are available from Princor on request. There is
no obligation to continue the plan and it may be terminated by the investor at
any time.
Each Fund offers investors two classes of shares through this Prospectus
which bear sales charges in different forms and amounts:
Class A Shares. An investor who invests less than $1 million in Class A
shares (except Class A shares of the Money Market Funds) pays a sales charge at
the time of purchase. As a result, shares purchased are not subject to any
charges when they are redeemed. Certain purchases of Class A shares qualify for
reduced sales charges. Class A shares purchases of $1 million or more are not
subject to a sales charge at the time of purchase but may be subject to a
contingent deferred sales charge if redeemed within 18 months of purchase. See
"Offering Price of Funds' Shares." Class A shares of each of the Funds, except
the Money Market Funds, currently bear a 12b-1 fee at the annual rate of up to
0.25% (.15% for the Limited Term Bond Fund) of the Fund's average net assets
attributable to Class A shares. See "Distribution and Shareholder Servicing
Plans and Fees."
Class B Shares. Class B shares are purchased without an initial sales
charge, but are subject to a declining contingent deferred sales charge ("CDSC")
of up to 4% (1.25% for Limited Term Bond Fund) if redeemed within six years.
Class B shares purchased under certain sponsored Princor plans established after
February 1, 1998, are subject to a CDSC of up to 3% if redeemed within five
years of purchase. (See Statement of Additional Information for discussion of
sponsored Princor plans.) See "Offering Price of Funds Shares."
Class B shares bear a higher 12b-1 fee than Class A shares, currently at
the annual rate of up to 1.00% (.50% for the Limited Term Bond Fund) of the
Fund's average net assets attributable to Class B shares. See "Distribution and
Shareholder Servicing Plans and Fees." Class B shares provide an investor the
benefit of putting all of the investor's dollars to work from the time the
investment is made, but (until conversion to Class A shares) will have a higher
expense ratio and pay lower dividends than Class A shares due to the higher
12b-1 fee. Class B shares will automatically convert to Class A shares, based on
relative net asset value (without a sales charge), on the first business day of
the 85th month after the purchase date (61st month for certain sponsored plans).
Class B shares acquired by exchange from Class B shares of another Principal
fund will convert into Class A shares based on the time of the initial purchase.
(See "How to Exchange Shares".) At the same time, a pro rata portion of all
shares purchased through reinvestment of dividends and distributions would
convert into Class A shares, with that portion determined by the ratio that the
shareholder's Class B shares converting into Class A shares bears to the
shareholder's total Class B shares that were not acquired through dividends and
distributions. The conversion of Class B shares to Class A shares is subject to
the continuing availability of a ruling from the Internal Revenue Service or an
opinion of counsel that such conversions will not constitute taxable events for
Federal tax purposes. There can be no assurance that such ruling or opinion will
be available, and the conversion of Class B shares to Class A shares will not
occur if such ruling or opinion is not available. In such event, Class B shares
would continue to be subject to higher expenses than Class A shares for an
indefinite period.
Which arrangement is better for you? The decision as to which class of
shares provides a more suitable investment for an investor depends on a number
of factors, including the amount and intended length of the investment.
Investors making investments that qualify for reduced sales charges might
consider Class A shares. Investors who prefer not to pay an initial sales charge
and who plan to hold their investment for more than seven years (five years for
certain sponsored plans) might consider Class B shares. Orders from individuals
for Class B shares that when added to the current value of Class A shares and
Class B shares combined for rights of accumulation purposes equal or exceeds
$250,000 will be treated as orders for Class A shares unless the shareholder
provides written acknowledgment that the order should be treated as an order for
Class B shares. Sales personnel may receive different compensation depending on
which class of shares are purchased.
OFFERING PRICE OF FUNDS' SHARES
The Funds offer their respective shares continuously through Princor, which
is the principal underwriter for the Funds and sells shares as agent on behalf
of the Funds. Princor may select other dealers through which shares of the Funds
may be sold. Certain dealers may not sell all classes of shares.
Class A shares. Class A shares of the Money Market Funds are sold to the
public at net asset value; no sales charge applies to purchases of the Money
Market Funds. Class A shares of the Growth-Oriented and Income-Oriented Funds
are sold to the public at the net asset value plus a sales charge which ranges
from a high 4.75% (1.50% for the Limited Term Bond Fund) to a low of 0% of the
offering price (equivalent to a range of 4.99% to 0% of the net amount invested)
according to the schedule below. Selected dealers are allowed a concession as
shown. At Princor's discretion, the entire sales charge may at times be
reallowed to dealers. In some situations, depending on the services provided by
the dealer, the concession may be less. Any dealer allowance on purchases not
involving a sales charge will be determined by Princor.
<TABLE>
<CAPTION>
Sales Charge for
All Funds Except Sales Charge for
Limited Term Bond Fund Limited Term Bond Fund Dealers Allowance as
Sales Charge as % of: Sales Charge as % of: % of Offering Price
------------------------ ------------------------ --------------------------------
Offering Net Amount Offering Net Amount All Funds Except Limited Term
Price Invested Price Invested Limited Term Bond Bond
-------- ---------- -------- ---------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Less than $50,000 4.75% 4.99% 1.50% 1.52% 4.00% 1.25%
$50,000 but less than $100,000 4.25% 4.44% 1.25% 1.27% 3.75% 1.00%
$100,000 but less than $250,000 3.75% 3.90% 1.00% 1.10% 3.25% 0.75%
$250,000 but less than $500,000 2.50% 2.56% 0.75% 0.76% 2.00% 0.50%
$500,000 but less than $1,000,000 1.50% 1.52% 0.50% 0.50% 1.25% 0.25%
$1,000,000 or more 0 0 0 0 0.75% 0.25%
</TABLE>
CDSC on Class A Shares. Purchases of Class A shares of $1,000,000 or more
may be subject to CDSC upon redemption. A CDSC is payable to Princor on these
investments in the event of a share redemption within 18 months following the
share purchase, at the rate of .75% (.25% for the Limited Term Bond Fund) of the
lesser of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares. Shares subject to
the CDSC which are exchanged into another Principal Fund will continue to be
subject to the CDSC until the original 18 month period expires. However, no CDSC
is payable with respect to redemptions of Class A shares used to fund a Princor
401 (a) or Princor 401 (k) retirement plan, except redemptions resulting from
the termination of the plan or transfer of plan assets.
The CDSC will be waived on redemptions of shares in connection with certain
withdrawals from certain retirement plans. See Statement of Additional
Information. Up to 10% of the value of Class A shares subject to a Periodic
Withdrawal Plan may also be redeemed each year without a CDSC. See "Periodic
Withdrawal Plan."
Investors may be eligible to buy Class A shares at reduced sales charges.
Consult your registered representative for details about Rights of Accumulation
and Statement of Intention as well as the reduced sales charge available for the
investment of certain life insurance and annuity contract death benefits and
various Employee Benefit Plans and other plans. Descriptions are also included
in the Statement of Additional Information.
Investors may be able to purchase Class A shares at net asset value. The
following persons may purchase Class A shares of the Growth-Oriented Funds and
Income-Oriented Funds at the net asset value (without a sales charge): (1)
Principal Mutual Life Insurance Company and its directly and indirectly owned
subsidiaries; (2) Active and retired directors, officers and employees of any of
the Funds, Principal Mutual Life Insurance Company, and directly and indirectly
owned subsidiaries of Principal Mutual Life Insurance Company (including
full-time insurance agents of, and persons who have entered into insurance
brokerage contracts with, Principal Mutual Life Insurance Company and its
directly and indirectly owned subsidiaries and employees of such persons); (3)
The Principal Financial Group Employees' Credit Union; (4) Non-ERISA investment
advisory clients of Invista Capital Management, Inc., an indirectly wholly-owned
subsidiary of Principal Mutual Life Insurance Company; (5) Sales representatives
and employees of sales representatives of Princor or other dealers through which
shares of the Funds are distributed; (6) Spouses, surviving spouses and
dependent children of the foregoing persons; (7) Trusts primarily for the
benefit of the foregoing individuals; (8) certain "wrap accounts" for the
benefit of clients of Princor and other broker-dealers or financial planners
selected by Princor; (9) clients of a registered representative of Princor or
other dealers through which shares of the Funds are distributed and who has
become affiliated with Princor or other dealer within 180 days prior to the date
of the purchase of Class A shares of the Funds, if the investment represents the
proceeds of a redemption within that 180 day period of shares of another
investment company the purchase of which included a front-end sales charge or
the redemption of which was subject to a contingent deferred sales charge; (10)
Unit Investment Trusts sponsored by Principal Mutual Life Insurance Company
and/or its directly or indirectly owned subsidiaries; (11) certain employee
welfare benefit plan customers of Principal Mutual Life Insurance Company for
whom Plan Deposit Accounts are established.
Each of the Funds, except Principal Tax-Exempt Bond Fund and Principal
Tax-Exempt Cash Management Fund, has obtained an exemptive order from the
Securities and Exchange Commission ("SEC") to permit each Fund to offer its
shares at net asset value to participants of certain annuity contracts issued by
Principal Mutual Life Insurance Company. In addition, shares of each of these
funds are available at net asset value to the extent the investment represents
the proceeds from a total surrender of certain unregistered annuity contracts
issued by Principal Mutual Life Insurance Company and for which Principal Mutual
Life Insurance Company waives any applicable contingent deferred sales charges
or other contract surrender charges.
The Funds reserve the right to discontinue offering shares at net asset
value and/or at a reduced sales charge at any time for new accounts and upon 60
days notice to shareholders of existing accounts.
Class B shares. Class B shares (including Class B shares of the Cash
Management Fund) are sold without an initial sales charge, although a CDSC will
be imposed if you redeem shares within six years of purchase (five years for
certain sponsored plans). The following types of shares may be redeemed without
charge at any time: (i) shares acquired by reinvestment of distributions and
(ii) shares otherwise exempt from the CDSC, as described below. Subject to the
foregoing exclusions, the amount of the charge is determined as a percentage of
the lesser of the current market value or the cost of the shares being redeemed.
Therefore, when a share is redeemed, any increase in its value above the initial
purchase price is not subject to any CDSC. The amount of the CDSC will depend on
the number of years since you invested and the dollar amount being redeemed,
according to the following table:
<TABLE>
<CAPTION>
Contingent Deferred Sales Charge
as a Percentage of
Dollar Amount Subject to Charge
--------------------------------------------------
For Certain
Years Since Purchase For all Funds Except For Limited Term Sponsored Plans
Payments Made Limited Term Bond Fund Bond Fund (Commenced After 2/1/98
-------------------- ---------------------- ---------------- -----------------------
<S> <C> <C> <C> <C>
2 years or less 4.0% 1.25% 3.00%
more than 2 years, up to 4 years 3.0% 0.75% 2.00%
more than 4 years, up to 5 years 2.0% 0.50% 1.00%
more than 5 years, up to 6 years 1.0% 0.25% None
more than 6 years None None None
</TABLE>
In determining how much, if any, a CDSC is payable on a redemption, the
Fund will first redeem shares not subject to any charge, and then shares held
longest during the six (five) year period. For information on how sales charges
are calculated if shares are exchanged, see "How to Exchange Shares." Princor
receives the entire amount of any CDSC paid.
The CDSC will be waived on redemptions of shares arising out of death or
disability or in connection with certain withdrawals from certain retirement
plans. See the Statement of Additional Information. Up to 10% of the value of
Class B shares subject to a Periodic Withdrawal Plan may also be redeemed each
year without a CDSC. See "Periodic Withdrawal Plan."
Non-cash compensation. Princor may, at its expense, provide additional
promotional incentives or payments to dealers that sell shares of the Principal
Funds. In some instances, these incentives or payments may be offered only to
certain dealers who have sold or may sell significant amounts of shares. Princor
has established a non-cash compensation program for registered representatives
of Principal Financial Securities, Inc. ("PFS") based upon sales of shares of
the Principal funds during the year ending December 31, 1997. Registered
representatives of PFS will receive a choice of promotional items, or will be
invited to attend a professional development seminar, receive a subscription for
a financial newspaper and an allowance to be used to promote the Principal
Funds.
DISTRIBUTION AND SHAREHOLDER SERVICING PLANS AND FEES
Class A Distribution Plan. Each of the Funds, except the Money Market
Funds, has adopted a distribution plan for the Class A shares. The Fund will
make payments from its assets to Princor pursuant to this Plan after the end of
each month at an annual rate not to exceed 0.25% (.15% for the Limited Term Bond
Fund) of the average daily net asset value of the Fund. Princor will retain such
amounts as are appropriate to compensate for actual expenses incurred in
distributing and promoting the sale of the Fund shares but may remit on a
continuous basis up to .25% (.15% for the Limited Term Bond Fund) to Registered
Representatives and other selected Dealers (including, for this purpose, certain
financial institutions) as a trail fee in recognition of their services and
assistance.
Class B Distribution Plan. Each of the Funds, except Tax-Exempt Cash
Management Fund, has adopted a distribution plan for the Class B shares. Each
Class B Plan provides for payments by the Fund to Princor at the annual rate of
up to 1.00% (.50% for the Limited Term Bond Fund) of the Fund's average net
assets attributable to Class B shares. Princor also receives the proceeds of any
CDSC imposed on redemptions of such shares.
Although Class B shares are sold without an initial sales charge, Princor
pays a sales commission equal to 4.00% (3.00% for certain sponsored plans or
1.25% for the Limited Term Bond Fund) of the amount invested to dealers who sell
such shares. These commissions are not paid on exchanges from other Principal
Funds. In addition, Princor may remit on a continuous basis up to .25% (.15% for
the Limited Term Bond Fund) to Registered Representatives and other selected
Dealers (including, for this purpose, certain financial institutions) as a trail
fee in recognition of their ongoing services and assistance.
General. The purpose of the Plans is to permit the Fund to compensate
Princor for expenses incurred by it in promoting and distributing Fund shares
and providing services to Fund shareholders. If the aggregate payments received
by Princor under any of the Plans in any fiscal year exceed the expenditures
made by Princor in that year pursuant to that Plan, Princor will promptly
reimburse the Fund for the amount of the excess. If expenses under a Plan exceed
the amount for which Princor may be compensated in any one fiscal year, the Fund
will not carry over such expenses to the next fiscal year. The Funds have no
legal obligation to pay any amount pursuant to the Plans that exceeds the
compensation limit. The Funds will not pay, directly or indirectly, interest,
carrying charges, or other financing costs in connection with the Plans. The
Plans are further described in the Statement of Additional Information.
DETERMINATION OF NET ASSET VALUE OF FUNDS' SHARES
Each Fund calculates net asset value of a share of each class by dividing
the total value of the assets attributable to the class, less all liabilities
attributable to the class, by the number of shares outstanding of the class.
Shares are valued as of the close of trading on the New York Stock Exchange each
day the Exchange is open.
Growth-Oriented and Income-Oriented Funds
The following valuation information applies to the Growth-Oriented and
Income-Oriented Funds. Securities for which market quotations are readily
available are valued using those quotations. Securities with remaining
maturities of 60 days or less are valued at amortized cost when it is determined
by the Board of Directors that amortized cost reflects fair value. Other assets
are valued at fair value as determined in good faith through procedures
established by the Board.
As previously described, some of the Funds may purchase foreign securities,
whose trading 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 Fund's 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 under procedures established and regularly reviewed by the Board
of Directors. To the extent the Fund invests in foreign securities listed on
foreign exchanges which trade on days on which the Fund does not determine its
net asset value, for example Saturdays and other customary national U.S.
holidays, the Fund's net asset value could be significantly affected on days
when shareholders have no access to the Fund.
Money Market Funds
Portfolio securities of the Money Market Funds are valued at amortized
cost. For a description of this calculation procedure see the Statement of
Additional Information. The Money Market Funds reserve the right to calculate or
estimate their net asset values more frequently than once a day if they deem it
desirable.
DISTRIBUTION OF INCOME DIVIDENDS AND REALIZED CAPITAL GAINS
Growth-Oriented and Income-Oriented Funds
Each of these Funds distributes substantially all of its net income to
shareholders each year according to the following schedule:
<TABLE>
<CAPTION>
Funds Record date Payable date
----- ----------- ------------
<S> <C> <C> <C>
Growth
Balanced, Blue Chip, three business days before March 24, June 24,
Real Estate, and Utilities each payable date September 24 and December 24
(or previous business day)
Capital Value and Growth three business days before June 24 and December 24
each payable date (or previous business day)
International, International three business days before December 24
Emerging Markets, each payable date (or previous business day)
International SmallCap,
MidCap and SmallCap
Income
Bond, Government Securities three business days before monthly on the 24th (or
Income, High Yield, Limited each payable date previous business day)
Term Bond and Tax-Exempt Bond
</TABLE>
Net realized capital gains for each of the Funds, if any, will be
distributed annually. Generally the distribution will be made on the fourth
business day of December, to shareholders of record on the third business day
prior to the payable date.
On the Account Application, you can authorize income dividend and capital
gains distributions to be invested in additional Fund shares at net asset value
(without a sales charge), invested in shares of other Principal Funds or paid in
cash. You may change this instruction without charge at any time by giving ten
days written notice to the Fund.
Any dividends or distributions paid shortly after a purchase of shares 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. A shareholder of the Tax-Exempt Bond Fund who redeems
shares when tax-exempt income has been accrued but not declared as a dividend by
that Fund may have the portion of the redemption proceeds which represents such
income taxed at capital gains rates.
Money Market Funds
The Money Market Funds declare dividends of all their daily net investment
income on each day the net asset value per share is determined. Dividends for
each Fund are payable daily and are automatically reinvested in full and
fractional shares of the Fund at the then current net asset value. Shareholders
may request to have their dividends paid out monthly in cash. For such
shareholders, the shares reinvested and credited to their account during the
month will be redeemed as of the close of business on the 20th day (or the
preceding business day if the 20th is not a business day) of each month and the
proceeds will be paid to them in cash.
Net investment income of the Money Market Funds, for dividend purposes,
consists of (1) accrued interest income plus or minus accrued discount or
amortized premium; plus or minus (2) all net short-term realized gains and
losses; minus (3) all accrued expenses of the Fund. Expenses of the Fund are
accrued each day. Net income will be calculated immediately prior to the
determination of net asset value per share of each Fund. Dividends payable on
Class B shares of the Cash Management Fund on a per share basis will be lower
than dividends payable on Class A shares of the Funds.
Since it is the policy of each Money Market Fund, under normal
circumstances, to hold portfolio securities to maturity and to value portfolio
securities at amortized cost, neither Fund expects any capital gains or losses.
If either Fund does experience gains, however, it could result in an increase in
dividends. Capital losses could result in a decrease in dividends. If, for some
extraordinary reason, either Fund realizes net long-term capital gains, it will
distribute them once every 12 months.
Since the net income of each Fund (including realized gains and losses on
the portfolio securities) is normally declared as a dividend each time the net
income of the Fund is determined, the net asset value per share of each Fund
normally remains at $1.00 immediately after each determination and dividend
declaration. Any increase in the value of a shareholder's investment in either
Fund, representing reinvestment of dividend income, is reflected by an increase
in the number of shares of that Fund in the account.
Normally each Fund will have a positive net income at the time of each
determination thereof. Net income may be negative if an unexpected liability
must be accrued or a loss is realized. If the net investment income of either
Fund determined at any time is a negative amount, the net asset value per share
will be reduced below $1.00. If this happens, the Fund may endeavor to restore
the net asset value per share to $1.00 by reducing the number of outstanding
shares by redeeming proportionately from shareholders without the payment of any
monetary consideration, such number of full and fractional shares as is
necessary to maintain a net asset value per share of $1.00. Each shareholder
will be deemed to have agreed to such a redemption in these circumstances by
investment in the Fund. The Fund may seek to achieve the same objective of
restoring the net asset value per share to $1.00 by not declaring dividends from
net income on subsequent days until restoration, with the result that the net
asset value per share would increase to the extent of positive net income which
is not declared as a dividend, or any other method approved by the Board of
Directors for the Fund.
The Board of Directors of each Fund may revise the above dividend policy,
or postpone the payment of dividends, if the Fund should have or anticipate any
large presently unexpected expense, loss or fluctuation in net assets which in
the opinion of the Board might have a significant adverse effect on the
shareholders.
Dividend Relay Election
Shareholders may elect to have dividends and capital gains distributions
from one of the Principal Funds invested in shares of the same class of one of
the other Principal Funds. This Dividend Relay Election can be made on the
application or at any time on 10 days written notice or, if telephone
transaction services apply to the account from which the dividends and
distributions originate, on 10 days notice by telephone to the Fund. A signature
guarantee may be required to make the Dividend Relay Election. See "General
Information About a Fund Account." There is no administrative charge for this
service. No sales charge will apply to the purchase of shares of the
Growth-Oriented or Income-Oriented Funds made pursuant to the election;
dividends and distributions are credited to the receiving Fund the day they are
paid at the receiving Fund's net asset value for that day. If the Dividend Relay
Election is made to direct dividends and distributions from a Fund used to fund
the shareholder's retirement plan (for example, an IRA) to a receiving Fund that
is not used to fund the shareholder's retirement plan, a taxable distribution
from the retirement plan will result.
Shareholders should consult their tax advisor prior to making such an election.
Dividends and distributions derived from shares of the Funds used to fund
certain employee benefit plans are not eligible for the Dividend Relay Election.
If the Dividend Relay Election privilege is discontinued with respect to a
particular receiving Fund, the value of the account in that Fund must equal or
exceed the Fund's minimum initial investment requirement or the Fund shall have
the right, if the shareholder fails to increase the value of the account to such
minimum within 90 days after being notified of the deficiency, to redeem the
account and send the proceeds to the shareholder.
Shareholders may discontinue the Dividend Relay Election at any time on 10
days written notice or, if telephone transaction services apply to the account
from which the dividends originate, on 10 days notice by telephone to the Fund.
The Funds reserve the right to discontinue or modify this service upon 60 days
written notice to shareholders.
TAX TREATMENT OF FUNDS, DIVIDENDS AND DISTRIBUTIONS
It is the policy of each of the Funds to distribute substantially all net
investment income and net realized gains. Through such distributions, and by
satisfying certain other requirements, the Funds intend to qualify for the tax
treatment applicable to regulated investment companies under the provisions of
the Internal Revenue Code. This means that in each year in which a Fund 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
Funds intend to comply with the Act's requirements and to avoid this excise tax.
The Funds record dividend income on the ex-dividend date, except dividend income
from foreign securities where the ex-dividend date may have passed, in which
case such dividends are recorded as soon as the Fund is informed of the
ex-dividend date. The Funds are required by law to withhold 31% of dividends
paid to investors who do not furnish the Fund their correct taxpayer
identification number, which in the case of most individuals is their social
security number.
The Tax-Exempt Bond Fund and Tax-Exempt Cash Management Fund also intend to
qualify to pay exempt-interest dividends to their shareholders. An
exempt-interest dividend is that part of dividend distributions made by the
Funds which consists of interest received by the Funds on tax-exempt Municipal
Obligations. Shareholders incur no federal income taxes on exempt-interest
dividends. However, these exempt-interest dividends may be taxable under state
or local law. Fund shareholders that are corporations must include
exempt-interest dividends when calculating the corporate alternative minimum
tax. Persons investing on behalf of a Subchapter S corporation should seek the
advice of a tax advisor prior to purchasing shares of the Tax-Exempt Bond Fund
or Tax-Exempt Cash Management Fund. Exempt-interest dividends that derive from
certain private activity bonds must be included by individuals as a preference
item to determine whether they are subject to the alternative minimum tax. These
Funds may also pay ordinary income dividends and distribute capital gains from
time to time. Ordinary income dividends and distributions of capital gains, if
any, are taxable for federal purposes.
In each fiscal year when, at the close of such year, more than 50% of the
value of the International, International Emerging Markets or International
SmallCap Fund'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 its shareholders to take a credit (or a deduction) for foreign income
taxes paid by the Fund. In that case, 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. The 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. The net
income of the Cash Management Fund for purposes of its financial reports and
determination of the amount of distributions to shareholders may exceed its net
income as determined for tax purposes because certain market discount income
will be currently included as income for book purposes but not for tax purposes.
Although all net income for book purposes will be distributed to shareholders,
such distributions are taxable to shareholders of the Fund as ordinary income
only to the extent that they do not exceed the shareholder's ratable share of
the Fund's investment income and any short-term capital gain as determined for
tax purposes. The balance, if any, will be applied against and will reduce the
shareholder's cost or other tax basis for the shares.
Dividends from net investment income of each of the Funds will be eligible
for a 70% dividends received deduction generally available to corporations to
the extent of the amount of qualifying dividends received by the Fund from
domestic corporations for the taxable year. Dividends from the Income-Oriented
Funds and the Money Market Funds are not expected to qualify for the 70%
dividend received deduction. 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 Funds
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.
Additional information regarding taxation is included in the Statement of
Additional Information. Shareholders should consult their own tax advisors as to
the federal, state and local tax consequences of ownership of shares of the
Funds in their particular circumstances.
HOW TO EXCHANGE SHARES
Class A shares for all of the Funds (except the Money Market Funds and the
Limited Term Bond Fund), or Class B shares for all of the Funds may be exchanged
at net asset value for shares of the same class of any other Principal Fund
described in the Prospectus, at any time. Class A shares of the Limited Term
Bond Fund may be exchanged at net asset value for Class A shares of any of the
other Principal Funds at any time 90 days after the purchase of such shares. The
CDSC that might apply if Class B shares, or certain Class A shares, are redeemed
will not apply if these shares are exchanged. However, for purposes of computing
the CDSC on the shares acquired through the exchange, the length of time the
acquired shares have been owned by a shareholder will be measured from the date
of original purchase of the exchanged shares and the amount of the CDSC will be
determined based upon the CDSC table to which the exchanged shares were subject.
Thus, when shares acquired through the exchange are redeemed, the redemption may
be subject to the CDSC, depending upon when the exchanged shares were originally
purchased.
Class A shares of Principal Cash Management Fund or Principal Tax-Exempt
Cash Management Fund acquired by direct purchase are not included in the net
asset value exchange privilege. However, Class A shares of these two Funds
acquired by exchange of any other Principal Fund shares, or by conversion of
Class B shares, and additional shares which have been purchased by reinvesting
dividends earned on Class A shares, may be exchanged for other Class A shares
without a sales charge. In addition, Class A shares of the Money Market Funds
acquired by direct purchase or reinvestment of dividends on such shares may be
exchanged for Class B shares of any Growth-Oriented or Income-Oriented Fund.
Shares of a Fund used to fund an employee benefit plan may be exchanged
only for shares of other Principal Funds made available to such plan. A request
for an exchange of shares used to fund an Employee Benefit Plan must be made in
accordance with the procedures provided in the Plan and the written service
agreement. All other shareholders may exchange shares by simply submitting a
written request or a completed Exchange Authorization Form to the Fund. Exchange
Authorization Forms are available by calling or writing the Fund. For federal
income tax purposes, an exchange is treated as a sale of shares and generally
results in a capital gain or loss. Income tax rules regarding the calculation of
cost basis may make it undesirable in certain circumstances to exchange shares
within 90 days of their purchase. A telephone exchange privilege is currently
available for amounts up to $500,000. Procedures for telephone transactions are
described under "How to Sell Shares." The telephone exchange privilege is not
available for accounts for which share certificates remain outstanding.
A shareholder may also make an Automatic Exchange Election. This election
authorizes an exchange as described above from one Principal Fund to any or all
of the other Principal Funds on a monthly, quarterly, semiannual or annual
basis. The minimum amount that may be exchanged into any Principal Fund must
equal or exceed $300 on an annual basis. The exchange will occur on the date of
the month specified by the shareholder in the election so long as the day is a
trading day. If the designated day is not a trading day, the exchange will occur
on the next trading day occurring during that month. If the next trading day
occurs in the following month, the exchange will occur on the trading day prior
to the designated day. The Automatic Exchange Election may be made on the open
account application, on 10 days written notice or, if telephone transaction
services apply to the account from which the exchange is made, on 10 days notice
by telephone to the Fund from which the exchange will be made. See "How to Sell
Shares" for an explanation of the applicability of telephone transaction
services. Exchanges from a Fund used to fund the shareholder's retirement plan
to a Principal Fund not used to fund the shareholder's retirement plan will
result in a taxable distribution from the retirement plan. Shareholders should
consult their tax adviser prior to making such an exchange. A shareholder may
modify or discontinue the election on 10 days written notice or notice by
telephone to the Fund from which exchanges are made.
General - An exchange, whether in writing, by telephone or other means, by
any joint owner shall be binding upon all joint owners. If the exchanging
shareholder does not have an account with the Fund in which shares are being
acquired, a new account will be established with the same registration, dividend
and capital gain options and dealer of record as the account from which shares
are exchanged. All exchanges are subject to the minimum investment and
eligibility requirements of the Fund being acquired. A shareholder may receive
shares in exchange only if they may be legally offered in the shareholder's
state of residence. If a certificate has been issued an exchange will be made
only upon receipt of the certificate of shares to be exchanged. In order to
establish a systematic accumulation plan or a periodic withdrawal plan for the
new account, an exchanging shareholder must file a specific written request.
The exchange privilege is not intended as a vehicle for short-term trading.
Excessive exchange activity may interfere with portfolio management and have an
adverse effect on all shareholders. In order to limit excessive exchange
activity and in other circumstances where the Directors or Principal Management
Corporation believes doing so would be in the best interest of the Fund, the
Fund reserves the right to revise or terminate the exchange privilege, limit the
amount or number of exchanges or reject any exchange. Shareholders would be
notified of any such action to the extent required by law. A shareholder may
modify or discontinue an election on 10 days written notice or notice by
telephone to the Fund from which exchanges are made.
HOW TO SELL SHARES
Each Fund will redeem its shares upon request. Shares are redeemed at the
net asset value calculated after the Fund receives the request in proper form,
less any applicable CDSC. There is no additional charge for redemptions.
Redemptions, whether in writing or by telephone or other means, by any joint
owner shall be binding upon all joint owners. 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. The Funds generally send
redemption proceeds the business day after the request is received. Under
unusual circumstances, the Funds may suspend redemptions, or postpone payment
for more than three business days, as permitted by federal securities law. A
Fund will redeem only those shares for which it has received payment. To avoid
the inconvenience of a delay in obtaining redemption proceeds, shares may be
purchased with a certified check, bank cashiers check or money order.
A request for the redemption of shares used to fund certain employee
benefit plans must be made in accordance with the procedures provided in the
Plan and the written service agreement. Princor usually requires additional
documentation for the sale of shares by a corporation, partnership, agent or
fiduciary, or a surviving joint owner. Contact Princor for details. Shareholders
may redeem by mail, by telephone or, in the case of Class A shares of Money
Market Fund accounts, by a checkwriting service. 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.
By Mail - A shareholder simply sends a letter to Princor, at P.O. Box
10423, Des Moines, Iowa 50306, requesting redemption of any part or all of the
shares owned by specifying the Fund account from which the redemption is to be
made and either a dollar or share amount. The letter must provide the account
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
payment of less than $100,000 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 redeem shares valued at up to $100,000 from
any one Fund by telephone, unless the shareholder has notified the Fund of an
address change within the three month period preceding the date of the request.
Such redemption proceeds will be mailed to the shareholder's address of record.
Telephone redemption proceeds may also be sent by check or wire transfer to a
commercial bank account in the United States previously authorized in writing by
the shareholder. A wire charge of up to $6.00 will be deducted from the Fund
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. 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, except
accounts used to fund a Princor IRA or TDA or certain employee benefit plans,
unless the shareholder has specifically declined this service on the account
application or in writing to the Fund. The telephone redemption privilege will
not be allowed on shares for which certificates have been issued.
Shareholders may exercise the telephone redemption privilege by telephoning
1-800-247-4123. If all telephone lines are busy, shareholders might not be able
to request telephone redemptions and would have to submit written redemption
requests. Although the Funds 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 from which the
redemption is requested or the transfer agent it seems prudent to do so. The
shareholder bears the risk of loss caused by a fraudulent telephone redemption
request the Fund reasonably believes to be genuine. Each Fund will employ
reasonable procedures to assure telephone instructions 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 recording all
telephone instructions, requesting personal identification information such as
the caller's name, daytime telephone number, social security number and/or birth
date and names of all owners listed on the account and sending a written
confirmation of the transaction to the shareholder's address of record. In
addition, the Fund directs redemption proceeds made payable to the owner or
owners of the account only to an 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.
By Checkwriting Service - Shareholders of Class A shares of the Money
Market Funds may redeem shares, other than shares subject to a CDSC or shares
used to fund a Princor IRA, TDA, SEP, SAR-SEP or certain employee benefit plans,
by writing checks on their accounts if this service is elected when completing
the Fund application. Upon receipt of the properly completed form and signature
card, the Fund will provide withdrawal checks drawn on Norwest Bank Iowa, N.A.
These checks may be payable to the order of any person in the amount of not less
than $100. Shareholders will continue to earn dividends until the check clears.
After a check is presented to Norwest Bank for payment, a sufficient number of
full or fractional shares will be redeemed from the account to cover the amount
of the check. Shareholders currently pay no fee for the checkwriting service,
but this may be changed in the future upon written notice to shareholders. The
checkwriting service is not available on shares for which certificates have been
issued.
Shareholders utilizing withdrawal checks will be subject to Norwest Bank's
rules governing checking accounts. Shareholders should make sure their accounts
have sufficient shares to cover the amount of any check drawn. If insufficient
shares are in the account, the check will be returned marked "Insufficient
Funds" and no shares will be redeemed. The checkwriting service may be revoked
on accounts on which "Insufficient Funds" checks are drawn. Accounts may not be
closed by a withdrawal check because the exact amount of the account will not be
known until after the check is received by Norwest Bank.
Moreover, following a purchase by check, redemptions from the Money Market
Funds pursuant to the checkwriting service or any of the Principal Funds
pursuant to the telephone withdrawal procedure will not be permitted until
payment has been collected on the check. During the period prior to the time the
redemption is effective, dividends on the Money Market Funds' shares will accrue
and be paid and the shareholder will be entitled to exercise all other rights of
beneficial ownership.
Reinvestment Privilege - Within 60 days after redemption, shareholders who
redeem all or part of their Class A shares for which a sales charge was paid or
which were acquired by the conversion of Class B shares, or Class B shares for
which a CDSC was paid, have a onetime privilege to reinvest the amount redeemed
in Class A shares of any of the Funds without a sales charge.
The reinvestment or exchange will be made at the net asset value next
computed after written notice of exercise of the privilege is received in proper
and correct form by Princor. All reinvestments or exchanges are subject to
acceptance by the Fund or Funds and Princor. The redemption which precedes such
reinvestment or exchange is regarded as a sale; therefore, if the shareholder
has realized a gain on the redemption, such gain may be taxable and exercising
the reinvestment privilege will not alter any tax payable. If a loss is realized
on the redemption of Fund shares, the reinvestment may be subject to the "wash
sale" rules, resulting in a postponement of the recognition of such loss for
federal income tax purposes. Accurate records should be kept for the duration of
the account for tax purposes.
PERIODIC WITHDRAWAL PLAN
A shareholder may request that a fixed number of Class A shares or Class B
shares ($25 initial minimum amount) or enough Class A shares or Class B shares
to produce a fixed amount of money ($25 initial minimum amount) be withdrawn
from an account monthly, quarterly, semiannually or annually. As described under
"Offering Price of the Funds' Shares," withdrawals from certain Class A shares
of the Funds other than the Money Market Funds, and Class B shares may be
subject to a CDSC. However, each year a shareholder may make periodic
withdrawals of up to 10% of the value of an account for Class B shares without
incurring a CDSC. The amount of the 10% free withdrawal privilege for an account
is initially determined based upon the value of the account as of the date of
the initial periodic withdrawal. If a periodic withdrawal plan is established at
the time Class B shares are purchased, the amount of the initial 10% free
withdrawal privilege may be increased by 10% of the amount of additional
purchases in that account made within 60 days after Class B shares were first
purchased. After a periodic withdrawal plan has been established the amount of
the 10% withdrawal privilege will be re-determined as of the last business day
of December each year. The Fund from which the periodic withdrawal is made makes
no recommendation as to either the number of shares or the fixed amount that the
investor may withdraw. Shareholders considering the implementation of a Plan
using shares of the Tax-Exempt Bond Fund are cautioned that the portion of
redemption proceeds which represents tax-exempt income which has been accrued
but not declared as a dividend by the Fund may be taxed at capital gains rates.
See "Distribution of Income Dividends and Realized Capital Gains." 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.
A shareholder of Class A shares of the Money Market Funds may establish a
Pre-Authorized Check (PAC) Withdrawal Service to enable a shareholder's creditor
to receive monthly installment payments from the shareholder's account if the
shareholder's creditor is capable of providing this service. The shareholder's
creditor will provide the necessary forms to establish a PAC Withdrawal Service.
Redemptions to pay insurance premiums - Upon completion of the necessary
authorization, shareholders of Class A shares of the Money Market Funds who pay
insurance or annuity premiums or deposits to Principal Mutual Life Insurance
Company or its affiliated companies may authorize automatic redemptions from
Class A shares of the Fund to pay such amounts. Details relative to this option
may be obtained from the Funds.
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 no date is designated, redemptions will occur on
the fifteenth day of the month. 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 trading 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. An investor will be disadvantaged by making additional purchases of
shares of any investment company on which there is a sales charge at the same
time that a Periodic Withdrawal Plan is in effect since a duplication of sales
charges will result. No purchase payments for shares of any Fund except Cash
Management Fund or Tax-Exempt Cash Management Fund will be knowingly accepted by
Princor Financial Services Corporation while periodic withdrawals under this
plan are being made, unless the purchase represents a substantial addition to
the shareholder's 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. Shareholders should consult their tax
advisors prior to establishing a periodic withdrawal plan from an Individual
Retirement Account. 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.
PERFORMANCE CALCULATION
From time to time, the Funds may publish advertisements containing
information (including graphs, charts, tables and examples) about the
performance of one or more of the Funds and about a Fund's largest industry
holdings and largest five to ten specific securities holdings in its portfolio.
The funds may also quote rankings, yields or returns as published by independent
statistical services or publishers, and information regarding the performance of
certain market indices. The Funds' yield and total return figures described
below will vary depending upon market conditions, the composition of the Funds'
portfolios and operating expenses. These factors and possible differences in the
methods used in calculating yield and total return should be considered when
comparing the Funds' performance figures to performance figures published for
other investment vehicles. Any performance data quoted for the Funds represents
only historical performance and is not intended to indicate future performance
of the Funds. For further information on how the Funds calculate yield and total
return figures, see the Statement of Additional Information.
Growth-Oriented and Income-Oriented Funds
The Income-Oriented Funds may advertise their respective yields and average
annual total returns. The Growth-Oriented Funds may advertise their respective
average annual total returns. Yield is determined by annualizing each Fund's net
investment income per share for a specific, historical 30-day period and
dividing the result by the ending maximum public offering price for Class A
shares or the net asset value for Class B shares of the Fund for the same
period. Average annual total return for each Fund 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. The same assumptions are made when computing cumulative total return by
dividing the ending redeemable value by the initial investment. These
calculations assume the payment of the maximum front-end load (in the case of
Class A shares) or the applicable CDSC (in the case of Class B shares). The
Funds may also calculate total return figures for a specified period that
reflect reduced sales charges available to certain classes of investors and
figures that do not take into account the maximum initial sales charge or
contingent deferred sales charge to illustrate changes in the Funds' net asset
values over time. A tax-equivalent yield may also be advertised by the
Tax-Exempt Bond Fund.
Money Market Funds
From time to time the Money Market Funds may advertise their respective
yield and effective yield. The yield of each Fund refers to the income generated
by an investment in that Fund over a seven-day period. This income is then
annualized. That is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The effective yield is calculated
similarly but, when annualized, the income earned by an investment in the Fund
is assumed to be reinvested. The effective yield will be slightly higher than
the yield because of the compounding effect of this assumed reinvestment. A
tax-equivalent yield may also be advertised by the Tax-Exempt Cash Management
Fund.
The yield for the Money Market Funds will fluctuate daily as the income
earned on the investments of the Funds fluctuates. Accordingly, there is no
assurance that the yield quoted on any given occasion will remain in effect for
any period of time. The Funds are open-end investment companies and there is no
guarantee that the net asset value or any stated rate of return will remain
constant. A shareholder's investment in the Funds is not insured. Investors
comparing results of the Funds with investment results and yields from other
sources such as banks or savings and loan associations should understand these
distinctions. Historical and comparative yield information may, from time to
time, be presented by the Fund.
GENERAL INFORMATION ABOUT A FUND ACCOUNT
Share certificates will be issued to shareholders only when requested.
Shareholders of the Funds will receive a statement of account for the Fund in
which they have invested. The Funds treat the statement of account as evidence
of ownership of Fund shares.
This is known as an open account system. Each Fund bears the cost of the open
account system.
A confirmation statement indicating the current transaction and the total
number of Fund shares owned will generally be provided each time a shareholder
invests in a Fund. However, there are certain exceptions, described below, when
quarterly or monthly confirmation statements will be provided.
Quarterly Statements. A quarterly statement disclosing information
regarding purchases, redemptions, and reinvested dividends or distributions
occurring during the quarter, as well as the balance of shares owned and account
values as of the statement date will be provided to shareholders for the
following types of accounts:
1. Accounts for which the only activity during a calendar quarter is the
purchase of shares due to the reinvestment of dividends and/or capital
gains distributions from the Fund or from another Principal Fund as a
result of a Dividend Relay Election;
2. Accounts from which redemptions are made pursuant to a Periodic
Withdrawal Plan;
3. Accounts for which purchases are made pursuant to a Systematic
Accumulation Plan;
4. Accounts from which purchases or redemptions are made pursuant to an
automatic exchange election;
5. Accounts used to fund certain individual retirement or individual
pensions plans qualified under the Internal Revenue Code; and
6. Accounts established through an arrangement involving a group of two or
more shareholders for whom purchases of shares are made through a
person (e.g. an employer ) designated by the group. A statement
indicating receipt of the total amount paid by the group will be sent
to the designated person at the time each purchase is made. If the
payment on behalf of the group is not received from the designated
person within 10 days of the date such payments are to be made, each
member will be notified and thereafter each member will receive a
statement at the time of each purchase for the three succeeding
payments. If a payment is not received in the current quarter on behalf
of a member for whom a payment had been received in the previous
quarter, a statement will be sent to such group member reflecting that
a payment was not received on the member's behalf.
Monthly Statements. Shareholders of the Money Market Funds for whom
quarterly statements are not available, will receive a monthly statement
disclosing the current balance of shares owned and a summary of transactions
through the last business day of the month.
Signature Guarantee. The Funds have 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 Principal Mutual Life
Insurance Company or any of its affiliated companies or selected
administrators of qualified retirement plans;
2. To make a Dividend Relay Election directing dividends from a Fund
account which has joint owners to a Fund account which has only one
owner or different joint owners;
3. To change the ownership of the account;
4. To add telephone transaction services to an account established prior
to March 1, 1992 or to any account after the initial application is
processed;
5. When there is any change to a bank account designated under an
established telephone withdrawal plan; and
6. 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.
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.
Minimum Account Balance. Although there currently is no minimum balance,
due to the disproportionately high cost of maintaining small accounts, the Funds
reserve the right to redeem all shares in an account with a value of less than
$300 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 Funds reserve
the right to increase the required minimum.
RETIREMENT PLANS
Shares of the Funds, except the Tax-Exempt Bond and Tax-Exempt Cash
Management Fund, are offered to fund certain retirement plans for which
Principal Mutual Life Insurance Company acts as custodian. These retirement
plans include Individual Retirement Accounts (IRAs), Simplified Employee Pension
and Salary Reduction Simplified Employee Pension Plans (SEPs and SAR/SEPs) all
of which are described in Section 408 of the Internal Revenue Code, and salary
deferral TDA plans as described in Section 403(b)(7) of the Internal Revenue
Code. The necessary forms to establish one of the Princor retirement plans,
including an application, may be obtained from a registered representative of
Princor or by calling 1-800-451-5447. DO NOT USE THE APPLICATION INCLUDED IN
THIS PROSPECTUS TO START A PRINCOR RETIREMENT PLAN. The Systematic Accumulation
Plan may be used to purchase shares of the Funds for a Princor retirement plan.
See "How to Purchase Shares." Telephone redemptions are not available on
accounts used to fund a Princor retirement plan. See "How to Sell Shares."
Investors should consult their tax counsel for retirement plan tax information.
SHAREHOLDER RIGHTS
The following information is applicable to each of the Principal Funds.
Each Fund's shares (except Tax-Exempt Bond Fund and Tax-Exempt Cash Management
Fund) are currently divided into three classes. Shares of the Tax-Exempt Bond
Fund are divided into two classes. The Tax-Exempt Cash Management Fund is only
offered in Class A shares. Each Fund share is entitled to one vote with
fractional shares voting proportionately. All classes of shares for each Fund
will vote together as a single class except where required by law or as
determined by the Fund's Board of Directors. Shares are freely transferable, are
entitled to dividends as declared by the Fund's Board of Directors and, if the
Fund were liquidated, would receive the net assets of the Fund. Shareholders of
a Fund may remove any director of that Fund 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.
The Board of Directors of each Fund may increase or decrease the aggregate
number of shares which the Fund has authority to issue and may issue two or more
classes of shares having such preferences and special or relative rights and
privileges as the Directors may determine, without shareholder approval.
The Funds are not required to hold an annual meeting of shareholders in any
year unless required to do so under the Investment Company Act of 1940. The
Funds intend to hold shareholder meetings only when required by law and at such
other times as may be deemed appropriate by their respective Boards of
Directors. However, each Fund will hold a meeting of shareholders when requested
to do so in writing by the holders of 10% or more of the outstanding shares of
that Fund.
Shareholder inquiries should be directed to the appropriate Fund at The
Principal Financial Group, Des Moines, Iowa 50392.
As of October 31, 1997, Principal Mutual Life Insurance Company and its
subsidiaries and affiliates owned 25% or more of the outstanding voting shares
of each Fund as indicated:
Percentage of
Number of Outstanding Shares
Fund Shares Owned Owned
---- ------------ ------------------
Capital Value Fund 5,332,094 29.30%
International Emerging Markets Fund 1,000,000 77.70%
International SmallCap Fund 1,000,000 71.20%
Limited Term Bond Fund 1,111,843 50.37%
ADDITIONAL INFORMATION
Organization: The Funds were incorporated in the state of Maryland on the
following dates: Balanced Fund - November 26, 1986; Blue Chip Fund - December
10, 1990; Bond Fund - December 2, 1986; Capital Value Fund - May 26, 1989
(effective November 1, 1989 succeeded to the business of a predecessor Fund that
had been incorporated in Delaware on February 6, 1969); Cash Management Fund -
June 10, 1982; International Emerging Markets Fund - May 27, 1997; Government
Securities Income Fund - September 5, 1984; Growth Fund - May 26, 1989
(effective November 1, 1989 succeeded to the business of a predecessor Fund that
had been incorporated in Delaware on February 6, 1969); High Yield Fund -
November 26, 1986; International Fund - May 12, 1981; International SmallCap
Fund - May 27, 1997; Limited Term Bond Fund - August 9, 1995; MidCap Fund -
February 20, 1987; Real Estate Fund - May 27, 1997; SmallCap Fund August 13,
1997; Tax-Exempt Bond Fund - June 7, 1985; Tax-Exempt Cash Management Fund -
August 17, 1987; Utilities Fund - September 3, 1992.
Custodian: Bank of New York, 48 Wall Street, New York, New York 10286, is
custodian of the portfolio securities and cash assets of each of the Funds
except the International Emerging Markets Fund, International Fund and
International SmallCap Fund. The custodian for the International Emerging
Markets Fund, International Fund and International SmallCap Fund is Chase
Manhattan Bank, Global Securities Services, Chase Metro Tech Center, Brooklyn,
New York 11245. The custodians perform no managerial or policymaking functions
for the Funds.
Capitalization: The authorized capital stock of each Fund consists of
100,000,000 shares of common stock (2,000,000,000 for Principal Cash Management
Fund and 1,000,000,000 Principal Tax-Exempt Cash Management Fund), $.01 par
value.
Financial Statements: Copies of the financial statements of each Fund will
be mailed to each shareholder semiannually. At the close of each fiscal year,
each 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 each Fund for their respective present fiscal years.
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 Statements which the
Funds have filed with the Securities and Exchange Commission. The Funds'
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 Statements 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, IA 50306, is the principal underwriter for each of the
Principal Funds.
Transfer Agent and Dividend Disbursing Agent: Principal Management
Corporation, The Principal Financial Group, Des Moines, Iowa, 50392, is the
transfer agent and dividend disbursing agent for each of the Principal Funds.
This Prospectus describes a family of investment companies ("Principal
Funds" formerly known as "Princor Funds") which has been organized by Principal
Mutual Life Insurance Company. Together the Funds provide the following range of
investment objectives:
GROWTH-ORIENTED FUNDS
Domestic
Principal Balanced Fund, Inc. (formerly known as Princor Balanced Fund, Inc.)
seeks to generate a total investment return consisting of current income and
capital appreciation while assuming reasonable risks in furtherance of the
investment objective.
Principal Blue Chip Fund, Inc. (formerly known as Princor Blue Chip Fund, Inc.)
seeks to achieve growth of capital and growth of income by investing primarily
in common stocks of well capitalized, established companies.
Principal Capital Value Fund, Inc. (formerly known as Princor Capital
Accumulation Fund, Inc.) seeks to achieve primarily long-term capital
appreciation and secondarily growth of investment income through the purchase
primarily of common stocks, but the Fund may invest in other securities.
Principal Growth Fund, Inc. (formerly known as Princor Growth Fund, Inc.) seeks
growth of capital through the purchase primarily of common stocks, but the Fund
may invest in other securities.
Principal MidCap Fund, Inc. (formerly known as Princor Emerging Growth Fund,
Inc.) seeks to achieve long-term capital appreciation by investing primarily in
securities of emerging and other growth-oriented companies.
Principal Real Estate Fund, Inc. seeks to generate total return by investing
primarily in equity securities of companies principally engaged in the real
estate industry.
Principal SmallCap Fund, Inc. seeks to achieve long-term growth of capital by
investing primarily in equity securities of companies with comparatively smaller
market capitalizations.
Principal Utilities Fund, Inc. (formerly known as Princor Utilities Fund, Inc.)
seeks to provide current income and long-term growth of income and capital by
investing primarily in equity and fixed income securities of companies in the
public utilities industry.
International
Principal International Emerging Markets Fund, Inc. seeks to achieve long-term
growth of capital by investing primarily in equity securities of issuers in
emerging market countries.
Principal International Fund, Inc. (formerly known as Princor World Fund, Inc.)
seeks long-term growth of capital by investing in a portfolio of equity
securities of companies domiciled in any of the nations of the world.
Principal International SmallCap Fund, Inc. seeks to achieve long-term growth of
capital by investing primarily in equity securities of non-United States
companies with comparatively smaller market capitalizations.
INCOME-ORIENTED FUNDS
Principal Bond Fund, Inc. (formerly known as Princor Bond Fund, Inc.) seeks to
provide as high a level of income as is consistent with preservation of capital
and prudent investment risk.
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 December 31, 1997.
Principal Government Securities Income Fund, Inc. (formerly known as Princor
Government Securities Income Fund, Inc.) seeks a high level of current income,
liquidity and safety of principal by purchasing obligations issued or guaranteed
by the United States Government or its agencies, with emphasis on Government
National Mortgage Association Certificates ("GNMA Certificates"). The guarantee
by the United States Government extends only to principal and interest. There
are certain risks unique to GNMA Certificates.
Principal High Yield Fund, Inc. (formerly known as Princor High Yield Fund,
Inc.) seeks high current income primarily by purchasing high yielding, lower or
non-rated fixed income securities which are believed not to involve undue risk
to income or principal. Capital growth is a secondary objective when consistent
with the objective of high current income. Principal High Yield Fund, Inc.
invests predominantly in lower rated bonds, commonly referred to as "junk bonds"
and may invest 100% of its assets in such bonds. Bonds of this type are
considered to be speculative with regard to payment of interest and return of
principal. Purchasers should carefully assess the risks associated with an
investment in this fund. THESE ARE SPECULATIVE SECURITIES.
Principal Limited Term Bond Fund, Inc. (formerly known as Princor Limited Term
Bond Fund, Inc.) seeks a high level of current income consistent with a
relatively high level of principal stability by investing in a portfolio of
securities with a dollar weighted average maturity of five years or less.
Money Market Funds
Principal Cash Management Fund, Inc. (formerly known as Princor Cash Management
Fund, Inc.) seeks as high a level of income available from short-term securities
as is considered consistent with preservation of principal and maintenance of
liquidity by investing in a portfolio of money market instruments.
Each of the Principal Funds described in this Prospectus offers three
classes of shares: Class A shares, Class B shares and Class R shares. Each class
is sold pursuant to different sales arrangements and bears different expenses.
Only Class R shares are offered through this Prospectus. Class A shares are
described herein only because Class R shares convert to Class A shares after a
period of time. For more information about the different sales arrangements, see
"How to Purchase Shares" and "Offering Price of Fund's Shares ." For information
about various expenses borne by Class R shares and Class A shares see
"Overview."
Shares of the Funds are not deposits or obligations of, or guaranteed or
endorsed by any financial institution, nor are shares of the Funds federally
insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board,
or any other agency.
An investment in any of the Funds is neither insured nor guaranteed by the
U.S. Government. There can be no assurance the Principal Cash Management Fund
will be able to maintain a stable net asset value of $1.00 per share.
This Prospectus concisely states information about the Principal Funds that
an investor should know before investing. It should be read and retained for
future reference.
Additional information about the Funds has been filed with the Securities
and Exchange Commission, including a document called a Statement of Additional
Information dated December 31, 1997 which is incorporated by reference herein.
The Statement of Additional Information and a Prospectus describing Class A and
Class B shares can be obtained free of charge by writing or telephoning the
Funds' principal underwriter: Princor Financial Services Corporation, P.O. Box
10423, Des Moines, IA 50306. Telephone 1-800-247-4123.
TABLE OF CONTENTS
Page
Overview................................................................ 3
Financial Highlights.................................................... 9
Investment Objectives, Policies and Restrictions........................ 20
Growth-Oriented Funds............................................... 20
Domestic........................................................ 20
International................................................... 25
Income-Oriented Funds............................................... 26
Money Market Fund................................................... 31
Certain Investment Policies and Restrictions............................ 32
Risk Factors............................................................ 33
How the Funds are Managed............................................... 34
How to Purchase Shares.................................................. 37
Offering Price of Funds' Shares ........................................ 38
Distribution and Shareholder Servicing Plans and Fees................... 39
Determination of Net Asset Value of Funds' Shares....................... 39
Distribution of Income Dividends and Realized Capital Gains ............ 40
Tax Treatment of the Funds, Dividends and Distributions ................ 42
How to Exchange Shares.................................................. 43
How to Sell Shares...................................................... 44
Periodic Withdrawal Plan................................................ 45
Performance Calculation................................................. 45
General Information About a Fund Account................................ 46
Shareholder Rights...................................................... 46
Additional Information.................................................. 47
This Prospectus does not constitute an offer to sell, or a solicitation of
an offer to buy, the securities of any of the Funds in any jurisdiction in which
such sale, offer to sell, or solicitation may not be lawfully made. Currently,
shares of the Funds are not available for sale in New Hampshire, in any U.S.
possession or in Canada or any other foreign country. 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 the Funds or the Funds Manager. Because the Principal Funds use a combined
Prospectus there may be a possibility that one Fund might become liable for any
misstatements, inaccuracy, or incomplete disclosure in the Prospectus concerning
another Fund.
OVERVIEW
The following overview is provided for your convenience. Please read the
detailed information found in the prospectus.
The Principal Funds are separately incorporated, open-end diversified
management investment companies. Each of the Principal Funds described in this
Prospectus offers three classes of shares: Class A, Class B and Class R shares.
However, only Class R shares are offered through this Prospectus.
Who may Invest
Class R shares are offered only to the following: (1) people who receive
lump sum distributions from certain retirement plans administered by Principal
Mutual Life Insurance Company under the terms of a written service agreement
("Administered Employee Benefit Plans") to fund individual retirement accounts;
(2) people who receive lump sum distributions from certain unregistered annuity
contracts issued by Principal Mutual Life Insurance Company; (3) policyowners of
individual life or disability insurance policies issued by Principal Mutual Life
Insurance Company that do not have an insurance agent licensed to sell such
policies assigned to the policies; (4) mortgagors of mortgages serviced by
Principal Mutual Life Insurance Company, its subsidiaries or affiliates; and (5)
shareholders of Class R shares.
What it Costs to Invest
Class R shares are sold without a front-end sales charge or a contingent
deferred sales charge. Class R shares of each Fund are subject to a 12b-1 fee at
annual rate of .75% of the Fund's average net assets attributable to Class R
shares. Class R shares automatically convert into Class A shares, based on
relative net asset values (which means without a sales charge), approximately
four years after purchase. The tables on the next page depict the fees and
expenses applicable to the purchase and ownership of shares of each of the
Funds. Table A depicts Class R shares and is based on amounts incurred by the
Funds' Class A shares during the fiscal year ended October 31, 1997, and
assumptions regarding the level of expenses anticipated for Class R shares
during the current fiscal year. Table B depicts Class A shares and is based on
amounts incurred by the Funds during the fiscal year ended October 31, 1997,
except as otherwise indicated. While Table B depicts the maximum sales charge
applicable to shares sold to the public, no sales charge applies when Class R
shares convert to Class A shares. The table included as an Example indicates the
cumulative expenses an investor would pay on an initial $1,000 investment that
earns a 5% annual return, regardless of whether shares are redeemed. The
examples are based on each Fund's Annual Operating Expenses described in Tables
A and B. Please remember that the Examples should not be considered a
representation of future expenses and that actual expenses may be greater or
less than those shown.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses
Maximum Sales Load Imposed Contingent
on Purchases Redemption Exchange Deferred Sales
Fund (as a percentage of offering price) Fee* Fee Charge
---- ----------------------------------- ---------- -------- --------------
Class A Shares
--------------
All Funds except Limited Term Bond Fund
<S> <C> <C> <C> <C>
and Money Market Funds 4.75% None None None
Limited Term Bond Fund 1.50% None None None
Money Market Funds None None None None
Class R Shares
--------------
All Funds None None None None
<FN>
* A wire charge of $6.00 will be deducted for all wire transfers.
</FN>
</TABLE>
<TABLE>
<CAPTION>
CLASS R SHARES
TABLE A Annual Fund Operating Expenses
(as a percentage of average net assets)
------------------------------------------------------------------------
Management 12b-1 Other Total Operating
Fund Fee Fee Expenses Expenses
---- ---------- ----- -------- ---------------
<S> <C> <C> <C> <C>
Balanced Fund .60% .75% .64% 1.99%
Blue Chip Fund .50 .75 .64 1.89
Bond Fund .16 .75 .54 1.45*
Capital Value Fund .40 .75 .35 1.50
Cash Management Fund .28 .31 .67 1.26*
Government Securities Income Fund .46 .75 .58 1.79
Growth Fund .44 .75 .50 1.69
High Yield Fund .60 .75 1.07 2.42
International Emerging Markets Fund 1.23 .18 .79 2.20**
International Fund .70 .75 .65 2.10
International SmallCap Fund 1.19 .18 .78 2.15**
Limited Term Bond Fund .00 .57 .91 1.48*
MidCap Fund .58 .75 .54 1.87
Real Estate Fund .90 .75 .55 2.20***
SmallCap Fund .85 .75 .55 2.15***
Utilities Fund .00 .76 .89 1.65*
<FN>
* After waiver.
** Annualized
*** Estimated expenses.
</FN>
</TABLE>
<TABLE>
<CAPTION>
CLASS A SHARES
TABLE B Annual Fund Operating Expenses
(as a percentage of average net assets)
------------------------------------------------------------------------
Management 12b-1 Other Total Operating
Fund Fee Fee Expenses Expenses
---- ---------- ----- -------- ---------------
<S> <C> <C> <C> <C>
Balanced Fund .60% .26% .47% 1.33%
Blue Chip Fund .50 .25 .55 1.30
Bond Fund .46 .23 .26 .95*
Capital Value Fund .40 .12 .18 .70
Cash Management Fund .37 None .26 .63*
Government Securities Income Fund .46 .19 .19 .84
Growth Fund .44 .21 .38 1.03
High Yield Fund .60 .25 .37 1.22
International Emerging Markets Fund 1.23 .09 .71 2.03**
International Fund .71 .21 .47 1.39
International SmallCap Fund 1.19 .09 .71 1.99**
Limited Term Bond Fund .25 .17 .48 .90*
MidCap Fund .59 .25 .42 1.26
Real Estate Fund .90 .25 .55 1.70***
SmallCap Fund .85 .25 .55 1.65***
Utilities Fund .50 .25 .40 1.15*
<FN>
* After waiver.
** Annualized
*** Estimated expenses.
</FN>
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE
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:
1 Year 3 Years 5 Years (a) 10 Years (a)
----------------- ----------------- ----------------- -----------------
Class A Class R Class A Class R Class A Class R Class A Class R
Fund Shares Shares Shares Shares Shares Shares Shares Shares
--------------------------------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balanced Fund $60 $20 $88 $62 $117 $100 $200 $185
Blue Chip Fund $60 $19 $87 $59 $115 $95 $197 $179
Bond Fund $57 $15 $76 $46 $98 $73 $159 $136
Capital Value Fund $54 $15 $69 $47 $85 $73 $130 $119
Cash Management Fund $6 $13 $20 $40 $35 $62 $79 $104
Government Securities Income Fund $56 $18 $73 $56 $92 $86 $146 $141
Growth Fund $58 $17 $79 $53 $102 $84 $167 $152
High Yield Fund $59 $25 $84 $75 $111 $116 $188 $193
International Emerging Markets Fund $67 $22 $108 $69 N/A N/A N/A N/A
International Fund $61 $21 $89 $66 $120 $105 $206 $193
International SmallCap Fund $67 $22 $107 $67 N/A N/A N/A N/A
Limited Term Bond Fund $24 $15 $43 $47 $64 $74 $124 $134
MidCap Fund $60 $19 $86 $59 $113 $94 $193 $175
Real Estate Fund $64 $22 $99 $69 N/A N/A N/A N/A
SmallCap Fund $63 $22 $97 $67 N/A N/A N/A N/A
Utilities Fund $59 $17 $82 $52 $108 $84 $181 $159
<FN>
(a) The amount in this column reflects the conversion of Class R shares to
Class A shares four years after the initial purchase.
</FN>
</TABLE>
The purpose of the preceding tables is to help you understand the various
expenses that you will pay, either directly or indirectly. Although Annual Fund
Operating Expenses shown in the Expense Table for Class A shares are generally
based upon each Fund's actual expenses, the 12b-1 Plan adopted by each of the
Funds (except the Money Market Funds which have no such Plan for Class A shares)
permits Princor Financial Services Corporation ("Princor") as underwriter to
retain an annual fee of up to .25% of each Fund's average net assets. A portion
of this annual fee is considered an asset-based sales charge. Thus, it is
theoretically possible for a long-term shareholder of Class A shares, whether
acquired directly or by conversion of Class R shares, to pay more than the
economic equivalent of the maximum front-end sales charges permitted by the
National Association of Securities Dealers. See "Distribution and Shareholder
Servicing Plans and Fees", "How to Purchase Shares" and "How the Funds are
Managed."
The Manager voluntarily waived a portion of its fee for the Bond, Cash
Management, Limited Term Bond and Utilities Funds throughout the fiscal year
ended October 31, 1997. Without these waivers, total annualized operating
expenses as a percentage of average net assets actually incurred by the Funds
for the fiscal year ended October 31, 1997 for the Class A shares would have
amounted to .98% for the Bond Fund, .63% for the Cash Management Fund, 1.15% for
the Limited Term Bond Fund and 1.25% for the Utilities Fund, and for Class R
shares, 1.78% for the Bond Fund, 1.34% for the Cash Management Fund, 2.95% for
the Limited Term Bond Fund and 2.67% for the Utilities Fund. The Manager intends
to continue its voluntary waiver and, if necessary, pay expenses normally
payable by each of these Funds through February 28, 1998 in an amount that will
maintain a total level of operating expenses which as a percent of average net
assets attributable to a class on an annualized basis during the period will not
exceed, for the Class A shares, .95% for the Bond Fund, .75% for the Cash
Management Fund, .90% for the Limited Term Bond Fund and 1.15% for the Utilities
Fund, and for the Class R shares, 1.45% for the Bond Fund, 1.25% for the Cash
Management Fund, 1.50% for the Limited Term Bond Fund and 1.65% for the
Utilities Fund. The foregoing examples assume the continuation of these waivers
throughout the periods shown.
A significant portion of the assets of the Cash Management Fund has been
invested via Principal Financial Securities, Inc. ("PFS"), a broker-dealer
affiliated with Princor and the Manager of this Fund. Subject to regulatory
approval, PFS will be sold in mid-January, 1998. It is anticipated that the
assets of PFS clients will be redeemed from this fund. Should that occur, the
management fee before waiver is estimated to be .46% . With the waiver, the
management fee for Cash Management is estimated to be .33%.
What the Funds Offer Investors
Investor objectives and risk tolerances vary. For example, some of you may
want growth to help accumulate assets prior to retirement or to generate current
income during retirement. Investors purchase shares of Funds that have
investment objectives that match their own financial objectives. The Funds also
offer a choice of varying levels of investment risks to assist you in to
choosing one or more Funds based on your willingness to assume various risks.
The Funds offer:
Professional Investment Management: Principal Management Corporation
(formerly known as Princor Management Corporation) is the Manager for each of
the Funds. Through a Sub-Advisory Agreement between Invista Capital Management
("Invista") and the Manager, Invista performs the investment advisory
responsibilities of the Manager for the Growth-Oriented Funds (except the Real
Estate Fund), the Government Securities Income Fund and the Limited Term Bond
Fund. The Manager and Invista employ experienced securities analysts to provide
you with professional investment management. The Manager or Invista decides how
and where to invest Fund assets. Investment decisions are based on research into
the financial performance of individual companies and specific securities
issues, taking into account general economic and market trends. See "How the
Funds are Managed."
Diversification: Principal Funds allow you to diversify your assets across
dozens of securities issued by a number of issuers. In addition, you may further
diversify by investing in several of the Funds. Diversification reduces
investment risk.
Economies of Scale: Pooling individual shareholders' money creates
administrative efficiencies and, in certain Funds, saves on brokerage
commissions through round-lot orders and quantity discounts. By pooling money
with other investors, you can invest indirectly in many more securities than you
could on your own.
Liquidity: Upon request, each Fund will redeem all or part of your shares
and promptly pay the current net asset value of the shares redeemed, less any
applicable contingent deferred sales charge. See "How to Sell Shares."
Dividends: Each Fund will normally declare a dividend payable to
shareholders from investment income in accordance with its distribution policy.
Dividends payable for Class R shares will be lower than dividends payable for
Class A shares. See "Distribution of Income Dividends and Realized Capital
Gains."
Convenient Investment and Recordkeeping Services: You will receive
quarterly statements of account with information regarding purchases,
redemptions and reinvested dividends or distributions occurring during the
quarter, as well as the balance of shares owned and account values as of the
statement date. In addition, you may complete certain transactions and access
account information by telephoning 1-800-247-4123.
Investment Objectives of the Funds
GROWTH-ORIENTED FUNDS
Domestic
Fund Investment Objectives
Principal Balanced Fund, Inc. Total investment return consisting of
current income and capital appreciation
while assuming reasonable risks in
furtherance of this objective.
Principal Blue Chip Fund, Inc. Growth of capital and growth of income.
In seeking to achieve its objective, the
Fund will invest primarily in common stocks
of well-capitalized, established companies
which the Fund's Manager believes to have
the potential for growth of capital,
earnings and dividends.
Principal Capital Value Fund, Inc. Long-term capital appreciation with a
secondary objective of growth of investment
income. The Fund seeks to achieve its
objectives primarily through the purchase
of common stocks, but the Fund may
invest in other securities.
Principal Growth Fund, Inc. Growth of capital. The Fund seeks to
achieve its objective through the
purchase primarily of common stocks, but
the Fund may invest in other securities.
Principal MidCap Fund, Inc. Long-term capital appreciation. The Fund
invests primarily in securities of emerging
and other growth-oriented companies.
Principal Real Estate Fund, Inc. Generate total return. In seeking to achieve
its objective, the Fund will primarily
invest in equity securities of companies
principally engaged in the real estate
industry.
Principal SmallCap Fund, Inc. Long-term growth of capital. The Fund seeks
to achieve its objective by investing
primarily in equity securities of companies
with comparatively smaller market
capitalizations.
Principal Utilities Fund, Inc. Current income and long-term growth of
income and capital. The Fund invests
primarily in equity and fixed-income
securities of companies engaged in the
public utilities industry.
International
Fund Investment Objectives
Principal International Emerging Long-term growth of capital. The Fund will
Markets Fund, Inc. invest primarily in equity securities of
issuers in emerging market countries.
Principal International Fund, Inc. Long-term growth of capital by investing
in a portfolio of equity securities of
companies domiciled in any of the nations
of the world.
Principal International
SmallCap Fund, Inc. Long-term growth of capital. The Fund will
invest primarily in equity securities of
non-United States companies with
comparatively smaller market
capitalizations.
Income-Oriented Funds
Fund Investment Objectives
Principal Bond Fund, Inc. As high a level of income as is consistent
with preservation of capital and prudent
investment risk. This Fund invests primarily
in investment-grade bonds.
Principal Government Securities A high level of current income, liquidity
Income Fund, Inc. and safety of principal. The Fund seeks to
achieve its objective through the purchase
of obligations issued or guaranteed by the
United States Government or its agencies,
with emphasis on Government National
Mortgage Association Certificates ("GNMA
Certificates"). Fund shares are not
guaranteed by the United States
Government.
Principal High Yield Fund, Inc. High current income.Capital growth is a
secondary objective when consistent with
the objective of high current-income.
The Fund will invest primarily in high
yielding, lower or non-rated fixed-income
securities (commonly known as "junk bonds").
Principal Limited Term Bond A high level of current income consistent
Fund, Inc. with a relatively high level of principal
stability by investing in a portfolio of
securities with a dollar weighted average
maturity of five years or less.
Money Market Fund
Fund Investment Objectives
Principal Cash Management As high a level of current income available
Fund, Inc. from short-term securities as is considered
consistent with preservation of principal
and maintenance of liquidity. The Fund
invests in money market instruments.
There can be no assurance that the investment objectives of any of the
Funds will be realized. See "Investment Objectives, Policies and Restrictions."
The Risks of Investing
Because the Funds have different investment objectives, each Fund is
subject to varying degrees of financial and market risks and current income
volatility. 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 reacts to changes in
conditions in securities markets in general and, with particular reference to
debt securities, to changes in the overall level of interest rates. Current
income volatility refers to the degree and rapidity which changes in the overall
level of interest rates are reflected in the level of current income of a Fund.
See "Risk Factors" and "Investment Objectives, Policies and Restrictions."
How to Buy Shares
You can buy shares by completing an Account Application or a Princor IRA or
SEP-IRA Application provided by Princor. Mail it, along with a check if
establishing an account that is not part of a direct rollover, to Princor. The
initial investment must be at least $1,000 ($250 for an IRA). The minimum
initial investment for an account established under the Uniform Gifts to Minors
Act or Uniform Transfers Act is $250. The minimum subsequent investment is $100.
See "How to Purchase Shares" and "How to Exchange Shares."
Each Fund described in the Prospectus offers three classes of shares
through Princor and other dealers which it selects. The three classes are Class
A shares, Class B shares and Class R shares. Only Class R shares are offered
through this Prospectus. Each class is sold in different sales arrangements and
bears different expense levels.
Class R shares for each Fund are sold without an initial sales charge or a
contingent deferred sales charge. Class R shares have a higher 12b-1 fee than
Class A shares, currently at the annual rate of .75% of the Fund's average net
assets attributable to Class R shares. Class R shares will automatically convert
into Class A shares, based on relative net asset value, approximately four years
after purchase. Class R shares provide the benefit of putting all of the
investor's dollars to work from the time the investment is made, but (until
conversion) will have a higher expense ratio and pay lower dividends than Class
A shares due to the higher 12b-1 fee. See "How to Purchase Shares" and "Offering
Price of Funds' Shares." Class R shares were first offered to the public on
February 29, 1996.
How to Exchange Shares
Shares of Principal Funds may be exchanged for shares of the same Class of
other Principal Funds without a sales charge or administrative fee under certain
conditions as described under "How to Exchange Shares." Shares may be exchanged
by telephone or written request. Also, dividends and capital gains distributions
from shares of a Class of one Principal Fund may be automatically
"cross-reinvested" in shares of the same Class of another Principal Fund. See
"Distribution of Income Dividends and Realized Capital Gains."
How to Sell Shares
You may sell (redeem) shares only by written request. The request form may
be obtained by telephoning 1-800-247-4123 or by writing to Princor, P.O. Box
10423, Des Moines, Iowa 50306. Redemption proceeds will generally be mailed to
you on the next business day after the redemption request is received in good
order. Redemptions are at net asset value, without charge. See "Offering Price
of Funds' Shares" and "How to Sell Shares."
FINANCIAL HIGHLIGHTS
The following financial highlights are derived from financial statements
which, for the five years in the period ended October 31, 1997, have been
audited by Ernst & Young LLP, independent auditors, whose report has been
incorporated by reference herein. The financial highlights should be read in
conjunction with the financial statements, related notes, and other financial
information incorporated by reference herein. Audited financial statements may
be obtained by shareholders, without charge, by telephoning 1-800-451-5447.
<TABLE>
<CAPTION>
GROWTH-ORIENTED FUNDS
Domestic
Selected data for a share of Capital Stock outstanding throughout each period:
Income from Investment Operations Less Distributions
Net Realized
and
Net Asset Net Unrealized Total Dividends Net Asset
Value at Invest- Gain from from Net Distributions Value at
Beginning ment (Loss) on Investment Investment from Total End
of Period Income Investments Operations Income Capital Gains Distributions of Period
Principal Balanced Fund, Inc.(b)(c)
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $14.61 $.35 $1.81 $ 2.16 $(.36) $(1.30) $(1.66) $15.11
1996 13.74 .38 1.59 1.97 (.43) (.67) (1.10) 14.61
1995 12.43 .41 1.31 1.72 (.36) (.05) (.41) 13.74
1994 13.26 .32 (.20) .12 (.40) (.55) (.95) 12.43
1993 12.78 .35 1 .14 1.49 (.37) (.64) (1.01) 13.26
1992 11.81 .41 .98 1.39 (.42) -- (.42) 12.78
1991 9.24 .46 2.61 3.07 (.50) -- (.50) 11.81
1990 11.54 .53 (1.70) (1.17) (.59) (.54) (1.13) 9.24
1989 11.09 .61 .56 1.17 (.56) (.16) (.72) 11.54
Period Ended October 31, 1988 (d) 9.96 .40 1.02 1.42 (.29) -- (.29) 11.09
Class R
Year Ended October 31, 1997 14.52 .29 1.76 2.05 (.30) (1.29) (1.59) 14.98
Period Ended October 31, 1996(g) 13.81 .24 .73 .97 (.26) -- (.26) 14.52
Principal Blue Chip Fund, Inc.(c)
Class A
Year Ended October 31,
1997 17.10 .21 3.58 3.79 (.21) (.46) (.67) 20.22
1996 15.03 .23 2.45 2.68 (.26) (.35) (.61) 17.10
1995 12.45 .24 2.55 2.79 (.21) -- (.21) 15.03
1994 11.94 .20 .57 .77 (.26) -- (.26) 12.45
1993 11.51 .21 .43 .64 (.18) (.03) (.21) 11.94
1992 10.61 .17 .88 1.05 (.15) -- (.15) 11.51
Period Ended October 31, 1991(h) 10.02 .10 .57 .67 (.08) -- (.08) 10.61
Class R
Year Ended October 31, 1997 17.08 .13 3.53 3.66 (.12) (.46) (.58) 20.16
Period Ended October 31, 1996(g) 16.21 .12 .90 1.02 (.15) -- (.15) 17.08
Principal Capital Value Fund, Inc.(c)
Class A
Year Ended October 31,
1997 27.72 .50 5.80 6.30 (.48) (3.85) (4.33) 29.69
1996 23.69 .45 5.48 5.93 (.43) (1.47) (1.90) 27.72
1995 20.83 .45 3.15 3.60 (.39) (.35) (.74) 23.69
1994 21.41 .39 .93 1.32 (.41) (1.49) (1.90) 20.83
1993 21.34 .43 1.67 2.10 (.43) (1.60) (2.03) 21.41
1992 19.53 .45 1.82 2.27 (.46) -- (.46) 21.34
1991 14.31 .49 5.24 5.73 (.51) -- (.51) 19.53
1990 18.16 .52 (3.64) (3.12) (.40) (.33) (.73) 14.31
Four Months Ended October 31, 1989(i)19.11 .18 (.06) .12 (.29) (.78) (1.07) 18.16
Year Ended June 30,
1989 18.82 .53 1.10 1.63 (.51) (.83) (1.34) 19.11
1988 21.66 .44 (1.06) (.62) (.41) (1.81) (2.22) 18.82
Class R
Year Ended October 31, 1997 27.57 .30 5.74 6.04 (.32) (3.85) (4.17) 29.44
Period Ended October 31, 1996(g) 24.73 .19 2.81 3.00 (.16) -- (.16) 27.57
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Ratio of Investment
Net Assets at Expenses to Income to Portfolio Average
Total End of Period Average Average Turnover Comisssion
Return (a) (in thousands) Net Assets Net Assets Rate Rate Paid
Principal Balanced Fund, Inc.(b)(c)
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1997 15.88% $ 85,436 1.33% 2.42% 27.6% $.0392
1996 15.10 70,820 1.28 2.82 32.6 .0421
1995 14.18 57,125 1.37 3.21 35.8 N/A
1994 .94 53,366 1.51 2.70 14.4 N/A
1993 12.24 39,952 1.35 2.78 27.5 N/A
1992 11.86 31,339 1.29 3.39 30.6 N/A
1991 34.09 23,372 1.30 4.25 23.6 N/A
1990 (11.28) 18,122 1.32 5.22 33.7 N/A
1989 11.03 20,144 1.25 5.45 30.2 N/A
Period Ended October 31, 1988 (d) 12.42(e) 16,282 1.12(f) 4.51(f) 65.2(f) N/A
Class R
Year Ended October 31, 1997 15.16 9,745 1.99 1.66 27.6 .0392
Period Ended October 31, 1996(g) 7.52(e) 875 1.49(f) 2.26(f) 32.6(f) .0421(f)
Principal Blue Chip Fund, Inc.(c)
Class A
Year Ended October 31,
1997 22.57 79,985 1.30 1.10 55.4 .0394
1996 18.20 44,389 1.33 1.41 13.3 .0456
1995 22.65 35,212 1.38 1.83 26.1 N/A
1994 6.58 27,246 1.46 1.72 5.5 N/A
1993 5.65 23,759 1.25 1.87 11.2 N/A
1992 9.92 19,926 1.56 1.49 13.5 N/A
Period Ended October 31, 1991(h) 6.37(e) 12,670 1.71(f) 1.67(f) 0.4(f) N/A
Class R
Year Ended October 31, 1997 21.82 15,502 1.89 .45 55.4 .0394
Period Ended October 31, 1996(g) 7.02(e) 1,575 1.48(f) .68(f) 13.3(f) .0456(f)
Principal Capital Value Fund, Inc.(c)
Class A
Year Ended October 31,
1997 25.36 494,444 .70 1.85 30.8 .0457
1996 26.41 435,617 .69 1.82 50.2 .0421
1995 17.94 339,656 .75 2.08 46.0 N/A
1994 6.67 285,965 .83 2.02 31.7 N/A
1993 10.42 240,016 .82 2.16 24.8 N/A
1992 11.67 190,301 .93 2.17 38.3 N/A
1991 40.63 152,814 .99 2.72 19.7 N/A
1990 (17.82) 109,507 1.10 3.10 27.7 N/A
Four Months Ended October 31, 1989(i) .44(e) 122,685 1.10(f) 2.87(f) 19.7(f) N/A
Year Ended June 30,
1989 9.53 117,473 1.00 3.04 28.1 N/A
1988 (2.30) 97,147 .96 2.40 27.9 N/A
Class R
Year Ended October 31, 1997 24.36 18,326 1.50 .93 30.8 .0457
Period Ended October 31, 1996(g) 12.74(e) 1,752 1.16(f) 1.18(f) 50.2(f) .0421(f)
<FN>
Notes to financial highlights
(a) Total return is calculated without the front-end sales charge.
(b) Effective December 5, 1994, the name of Princor Managed Fund, Inc. was
changed to Princor Balanced Fund, Inc.
(c) Effective January 1, 1998, the names of the following Domestic Growth Funds
were changed:
from to
---- --
Princor Balanced Fund, Inc. Principal Balanced Fund, Inc.
Princor Blue Chip Fund, Inc. Principal Blue Chip Fund, Inc.
Princor Capital Accumulation Principal Capital Value
Fund, Inc. Fund, Inc.
(d) Period from December 18, 1987, date shares first offered to public, through
October 31, 1988. Net investment income, aggregating $.08 per share for the
period from the initial purchase of shares on October 30, 1987 through
December 17, 1987, was recognized, none of which was distributed to its
sole stockholder, Principal Mutual Life Insurance Company. Additionally,
the Fund incurred net realized and unrealized losses on investments of $.12
per share during this initial interim period. This represented activities
of the Fund prior to the initial public offering of Fund shares.
(e) Total return amounts have not been annualized.
(f) Computed on an annualized basis.
(g) Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through October 31, 1996. For the initial interim
period from February 27, 1996 through February 28, 1996, certain Domestic
Growth Funds' Class R shares recognized net investment income (none of
which was distributed to the sole shareholder, Principal Management
Corporation) and incurred unrealized losses on investments as shown below.
This represented Class R shares activities of each fund prior to the
initial public offering of Class R shares.
Per Share Per Share
Net Investment Unrealized
Fund Income Gain/(Loss)
---- -------------- -----------
Principal Balanced Fund, Inc. $-- $(.03)
Principal Blue Chip Fund, Inc. .01 (.02)
Principal Capital Value Fund, Inc. .01 (.11)
(h) Period from March 1, 1991, date shares first offered to public, through
October 31, 1991. Net investment income, aggregating $.01 per share for the
period from the initial purchase of shares on February 11, 1991 through
February 28, 1991, was recognized, none of which was distributed to its
sole stockholder, Principal Mutual Life Insurance Company. Additionally,
the Fund incurred unrealized gains on investments of $.01 per share during
this initial interim period. This represented activities of the Fund prior
to the initial public offering of Fund shares.
(i) Effective July 1, 1989, the Fund changed its fiscal year-end from June 30
to October 3l.
</FN>
</TABLE>
<TABLE>
<CAPTION>
GROWTH-ORIENTED FUNDS (Cont.)
Domestic
Selected data for a share of Capital Stock outstanding throughout each period:
Income from Investment Operations Less Distributions
Net Realized
Net and
Net Asset Invest- Unrealized Total Dividends Net Asset
Value at ment Gain from from Net Distributions Value at
Beginning Income (Loss) on Investment Investment from Total End
of Period (Loss) Investments Operations Income Capital Gains Distributions of Period
Principal Growth Fund, Inc.(b)
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $39.54 $.31 $11.26 $11.57 $(.31) $ (.37) $ (.68) $50.43
1996 37.22 .35 3.50 3.85 (.35) (1.18) (1.53) 39.54
1995 31.14 .35 6.67 7.02 (.31) (.63) (.94) 37.22
1994 30.41 .26 2.56 2.82 (.28) (1.81) (2.09) 31.14
1993 28.63 .40 2.36 2.76 (.42) (.56) (.98) 30.41
1992 25.92 .39 3.32 3.71 (.40) (.60) (1.00) 28.63
1991 16.57 .41 9.32 9.73 (.38) -- (.38) 25.92
1990 19.35 .35 (1.99) (1.64) (.34) (.80) (1.14) 16.57
Four Months Ended October 31, 1989(c)18.35 .08 1.17 1.25 (.16) (.09) (.25) 19.35
Year Ended June 30,
1989 19.84 .32 .36 .68 (.29) (1.88) (2.17) 18.35
1988 23.27 .26 (2.08) (1.82) (.22) (1.39) (1.61) 19.84
Class R
Year Ended October 31, 1997 39.40 .06 11.16 11.22 (.09) (.37) (.46) 50.16
Period Ended October 31, 1996(f) 39.27 .10 .13 .23 (.10) -- (.10) 39.40
Principal MidCap Fund, Inc.(b)
Class A
Year Ended October 31,
1997 35.75 .07 10.80 10.87 (.11) (1.18) (1.29) 45.33
1996 31.45 .14 5.05 5.19 (.14) (.75) (.89) 35.75
1995 25.08 .12 6.45 6.57 (.06) (.14) (.20) 31.45
1994 23.56 -- 1.61 1.61 -- (.09) (.09) 25.08
1993 19.79 .06 3.82 3.88 (.11) -- (.11) 23.56
1992 18.33 .14 1.92 2.06 (.15) (.45) (.60) 19.79
1991 11.35 .17 7.06 7.23 (.21) (.04) (.25) 18.33
1990 14.10 .31 (2.59) (2.28) (.37) (.10) (.47) 11.35
1989 12.77 .26 2.02 2.28 (.15) (.80) (.95) 14.10
Period Ended October 31, 1988(g) 10.50 .06 2.26 2.32 (.05) -- (.05) 12.77
Class R
Year Ended October 31, 1997 35.67 (.12) 10.74 10.62 (.01) (1.18) (1.19) 45.10
Period Ended October 31, 1996(f) 33.77 .04 1.88 1.92 (.02) -- (.02) 35.67
Principal Utilities Fund, Inc.(b)
Class A
Year Ended October 31,
1997 11.40 .48(h) 1.12 1.60 (.45) -- (.45) 12.55
1996 10.94 .44(h) .45 .89 (.43) -- (.43) 11.40
1995 9.25 .48(h) 1.70 2.18 (.49) -- (.49) 10.94
1994 11.45 .46(h) (2.19) (1.73) (.45) (.02) (.47) 9.25
Period Ended October 31, 1993(i) 10.18 .35(h) 1.27 1.62 (.35) -- (.35) 11.45
Class R
Year Ended October 31, 1997 11.33 .39(h) 1.14 1.53 (.37) -- (.37) 12.49
Period Ended October 31, 1996(f) 11.75 .28(h) (.41) (.13) (.29) -- (.29) 11.33
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Ratio of Investment
Net Assets at Expenses to Income to Portfolio Average
Total End of Period Average Average Turnover Comisssion
Return (a) (in thousands) Net Assets Net Assets Rate Rate Paid
Principal Growth Fund, Inc.(b)
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1997 29.55% $317,386 1.03% .68% 14.2% $.0411
1996 10.60 228,361 1.08 .95 1.8 .0443
1995 23.29 174,328 1.16 1.12 12.2 N/A
1994 9.82 116,363 1.30 .95 13.6 N/A
1993 9.83 80,051 1.26 1.40 16.4 N/A
1992 14.76 63,405 1.19 1.46 15.6 N/A
1991 59.30 45,892 1.13 1.85 10.6 N/A
1990 (9.20) 28,917 1.18 1.88 9.7 N/A
Four Months Ended October 31, 1989(c) 6.83(d) 32,828 1.22(e) 1.25(e) 50.1(e) N/A
Year Ended June 30,
1989 4.38 31,770 1.08 1.78 9.7 N/A
1988 (7.19) 34,316 1.00 1.29 24.9 N/A
Class R
Year Ended October 31, 1997 28.72 16,265 1.69 .00 16.5 .0411
Period Ended October 31, 1996(f) 1.12(d) 2,014 1.42(e) .14(e) 1.8(e) .0443(e)
Principal MidCap Fund, Inc.(b)
Class A
Year Ended October 31,
1997 31.26 346,666 1.26 .20 9.5 .0435
1996 16.89 229,465 1.32 .46 12.3 .0391
1995 26.41 150,611 1.47 .47 13.5 N/A
1994 6.86 92,965 1.74 .02 8.1 N/A
1993 19.66 48,668 1.66 .26 7.0 N/A
1992 11.63 29,055 1.74 .80 5.8 N/A
1991 64.56 17,174 1.78 1.14 8.4 N/A
1990 (16.80) 8,959 1.94 2.43 15.8 N/A
1989 19.65 8,946 1.79 2.09 13.5 N/A
Period Ended October 31, 1988(g) 19.72(d) 6,076 1.52(e) .84(e) 19.5(e) N/A
Class R
Year Ended October 31, 1997 30.56 17,448 1.87 (.45) 9.5 .0435
Period Ended October 31, 1996(f) 6.20(d) 2,016 1.53(e) .29(e) 12.3(e) .039(e)
Principal Utilities Fund, Inc.(b)
Class A
Year Ended October 31,
1997 14.26 64,366 1.15(h) 3.90 22.5 .0465
1996 8.13 66,322 1.17(h) 3.85 34.2 .0410
1995 24.36 65,873 1.04(h) 4.95 13.0 N/A
1994 (15.20) 56,747 1.00(h) 4.89 13.8 N/A
Period Ended October 31, 1993(i) 15.92(d) 50,372 1.00(e)(h) 4.48(e) 4.3(e) N/A
Class R
Year Ended October 31, 1997 13.72 1,512 1.65(h) 3.35 22.5 .0465
Period Ended October 31, 1996(f) (.31)(d) 311 1.47(e)(h) 3.77(e) 34.2(e) .0410(e)
<FN>
Notes to financial highlights
(a) Total return is calculated without the front-end sales charge.
(b) Effective January 1, 1998, the names of the following Domestic Growth Funds
were changed:
from to
---- --
Princor Growth Fund, Inc. Principal Growth Fund, Inc.
Princor Emerging Growth Principal MidCap Fund, Inc.
Fund, Inc.
Princor Utilities Fund, Inc. Principal Utilities Fund, Inc.
(c) Effective July 1, 1989, the Fund changed its fiscal year-end from June 30
to October 3l.
(d) Total return amounts have not been annualized.
(e) Computed on an annualized basis.
(f) Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through October 31, 1996. For the initial interim
period from February 27, 1996 through February 28, 1996, certain Domestic
Growth Funds' Class R shares recognized net investment income (none of
which was distributed to the sole shareholder, Principal Management
Corporation) and incurred unrealized losses on investments as shown below.
This represented Class R shares activities of each fund prior to the
initial public offering of Class R shares.
Per Share Per Share
Net Investment Unrealized
Fund Income Gain
---- -------------- ----------
Principal Growth Fund, Inc. $.01 $.10
Principal MidCap Fund, Inc. -- .19
(g) Period from December 18, 1987, date shares first offered to public, through
October 31, 1988. Net investment income, aggregating $.04 per share for the
period from the initial purchase of shares on October 30, 1987 through
December 17, 1987, was recognized, none of which was distributed to its
sole stockholder, Principal Mutual Life Insurance Company. Additionally,
the Fund incurred net realized and unrealized gains on investments of $.46
per share during this initial interim period. This represented activities
of the Fund prior to the initial public offering of Fund shares.
(h) Without the Manager's voluntary waiver of a portion of certain of its
expenses for the periods (year except as noted) ended October 31 of the
years indicated, the following fund would have had per share net investment
income and the ratios of expenses to average net assets as shown:
Per Share Ratio of Expenses
Net Invest- to Average Net Amount
Fund Year ment Income Assets Waived
---- ---- ----------- ----------------- ------
Princor Utilities
Fund, Inc.
Class A 1997 $.46 1.25% $ 65,940
1996 .43 1.25 54,932
1995 .46 1.30 151,145
1994 .41 1.50 284,836
1993(i) .32 1.54(e) 139,439
Class R 1997 .31 2.67 9,355
1996(f) .28 1.47(e) --
(i) Period from December 16, 1992, date shares first offered to public, through
October 31, 1993. Net investment income, aggregating $.05 per share for the
period from the initial purchase of shares on November 16, 1992 through
December 15, 1992, was recognized, none of which was distributed to its
sole stockholder, Principal Mutual Life Insurance Company. Additionally,
the Fund incurred unrealized gains on investments of $.13 per share during
the initial interim period. This represented activities of the Fund prior
to the initial public offering of Fund shares.
</FN>
</TABLE>
<TABLE>
<CAPTION>
GROWTH-ORIENTED FUNDS (Cont.)
International
Selected data for a share of Capital Stock outstanding throughout each period:
Income from Investment Operations Less Distributions
Net Net Realized
Invest- and
Net Asset ment Unrealized Total Dividends Net Asset
Value at Income Gain from from Net Distributions Value at
Beginning (Operating (Loss) on Investment Investment from Total End
of Period Loss) Investments Operations Income Capital Gains Distributions of Period
Principal International Emerging
Growth Fund, Inc.
Class A
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Period Ended October 31, 1997(c) $9.51 $(.01) $(1.21) $(1.22) $ -- $ -- $ -- $8.29
Class R
Period Ended October 31, 1997(c) 9.51 (.01) (1.22) (1.23) -- -- -- 8.28
Principal International Fund, Inc.(f)
Class A
Year Ended October 31,
1997 8.14 .09 1.52 1.61 (.11) (.31) (.42) 9.33
1996 7.28 .10 1.17 1.27 (.08) (.33) (.41) 8.14
1995 7.44 .08 (.02) .06 (.03) (.19) (.22) 7.28
1994 6.85 .01 .64 .65 (.02) (.04) (.06) 7.44
1993 5.02 .03 1.98 2.01 (.05) (.13) (.18) 6.85
1992 5.24 .06 (.14) (.08) (.06) (.08) (.14) 5.02
1991 4.64 .05 .58 .63 (.03) -- (.03) 5.24
1990 4.66 .09 (.04) .05 (.07) -- (.07) 4.64
Ten Months Ended October 31, 1989(g) 4.58 .07 .07 .14 (.06) -- (.06) 4.66
Year Ended December 31,
1988(h) 3.88 .12 .67 .79 (.09) -- (.09) 4.58
1987(h) 8.55 .12 (.96) (.84) (.08) (3.75) (3.83) 3.88
Class R
Year Ended October 31, 1997 8.12 .07 1.47 1.54 (.08) (.31) (.39) 9.27
Period Ended October 31, 1996(i) 7.48 .01 .63 .64 -- -- -- 8.12
Principal International SmallCap
Fund, Inc.
Class A
Period Ended October 31, 1997(c) 10.04 (.01) (.07) (.08) -- -- -- 9.96
Class R
Period Ended October 31, 1997(c) 10.04 (.01) (.07) (.08) -- -- -- 9.96
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Ratio of Investment
Net Assets at Expenses to Income to Portfolio Average
Total End of Period Average Average Turnover Comisssion
Return (a) (in thousands) Net Assets Net Assets Rate Rate Paid(b)
Principal International Emerging
Growth Fund, Inc.
Class A
<S> <C> <C> <C> <C> <C> <C>
Period Ended October 31, 1997(c) (10.18)%(d) $ 5,039 2.03%(e) (.32)%(e) 21.4%(e $.0050
Class R
Period Ended October 31, 1997(c) (10.29)(d) 2,510 2.20(e) (.51)(e) 21.4(e) .0050
Principal International Fund, Inc.(f)
Class A
Year Ended October 31,
1997 20.46 281,158 1.39 1.25 26.6 .0174
1996 18.36 172,276 1.45 1.43 23.8 .0147
1995 1.03 126,554 1.63 1.10 35.4 N/A
1994 9.60 115,812 1.74 .10 13.2 N/A
1993 41.39 63,718 1.61 .59 19.5 N/A
1992 (1.57) 35,048 1.69 1.23 19.9 N/A
1991 13.82 26,478 1.72 1.36 27.6 N/A
1990 .94 16,044 1.79 1.89 37.9 N/A
Ten Months Ended October 31, 1989(g) 2.98(d) 13,928 1.55(e) 1.82(e) 32.4(e) N/A
Year Ended December 31,
1988(h) 20.25 13,262 1.55 1.43 56.9 N/A
1987(h) (10.13) 3,943 2.09 .83 183.0 N/A
Class R
Year Ended October 31, 1997 19.65 11,773 2.10 .44 26.6 .0174
Period Ended October 31, 1996(i) 9.29(d) 1,057 1.59(e) .78(e) 23.8(e) .0197
Principal International SmallCap
Fund, Inc.
Class A
Period Ended October 31, 1997(c) .50(d) 6,210 1.99(e) (.40)(e) 10.4(e) .0104
Class R
Period Ended October 31, 1997(c) .50(d) 3,004 2.15(e) (.54)(e) 10.4(e) .0104
<FN>
Notes to financial highlights
(a) Total return is calculated without the front-end sales charge or contingent
deferred sales charge.
(b) The International Growth Funds identified the cost of commissions paid on
purchases and sales of portfolio securities charged to each Fund in the
local currency of the respective country involved. The value of the
commissions is translated into U.S. dollars at approximate rates when
acquired or sold. This translation can give the appearance that the
International Growth Funds average commission rates are substantially
different from the Domestic Growth Funds.
(c) Period from August 29, 1997, date Class A shares first offered to the
public and Class R shares first offered to eligible purchasers, through
October 31, 1997. Principal International Emerging Markets Fund, Inc. and
Principal International SmallCap Fund, Inc. classes of shares recognized
net investment income as follows for the period from the initial purchase
of shares on August 14, 1997, through August 28, 1997, none of which was
distributed to the sole shareholder, Principal Mutual Life Insurance
Company. Principal International Emerging Markets Fund, Inc. and Principal
International SmallCap Fund, Inc. incurred unrealized gains (losses) on
investments during the initial interim period as follows. This represents
Class A and Class R share activities prior to the initial public offering
of all classes of shares of each Fund.
Per Share Per Share
Net Investment Unrealized
Fund Income (Loss)
---- -------------- ----------
Principal International Emerging
Markets Fund, Inc.
Class A $ .01 $(.50)
Class R .01 (.50)
Principal International SmallCap
Fund, Inc.
Class A .01 (.03)
Class R .01 (.03)
(d) Total return amounts have not been annualized.
(e) Computed on an annualized basis.
(f) Effective January 1, 1998, the name of Princor World Fund, Inc. changed to
Principal International Fund, Inc.
(g) Effective January 1, 1989, the Fund changed its fiscal year-end from
December 31 to October 31.
(h) The investment manager of Princor World Fund, Inc. was changed on August 1,
1988 to the current manager, Principal Management Corporation. The years
1983 through 1987 are not covered by the current independent auditor's
report.
(i) Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through October 31, 1996. Principal International
Fund, Inc. Class R shares recognized no net investment income for the
period from the initial purchase by Principal Management Corporation of
Class R shares on February 27, 1996, through February 28, 1996.
Additionally, Class R shares incurred unrealized gains on investments of
$.02 per share during the initial interim period. This represents Class R
share activities of the Fund prior to the initial offering of Class R
shares.
</FN>
</TABLE>
<TABLE>
<CAPTION>
INCOME-ORIENTED FUNDS
Selected data for a share of Capital Stock outstanding throughout each period:
Income from Investment Operations Less Distributions
Net Realized
and
Net Asset Net Unrealized Total Dividends Net Asset
Value at Invest- Gain from from Net Distributions Value at
Beginning ment (Loss) on Investment Investment from Total End
of Period Income Investments Operations Income Capital Gains Distributions of Period
Principal Bond Fund, Inc.(b)
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $11.17 $ .75(c) $ .33 $ 1.08 $ (.81) $-- $ (.81) $11.44
1996 11.42 .76(c) (.25) .51 (.76) -- (.76) 11.17
1995 10.27 .78(c) 1.16 1.94 (.78) (.01) (.79) 11.42
1994 11.75 .78(c) (1.47) (.69) (.78) (.01) (.79) 10.27
1993 10.97 .81(c) .79 1.60 (.81) (.01) (.82) 11.75
1992 10.65 .85(c) .32 1.17 (.85) -- (.85) 10.97
1991 9.99 .88(c) .65 1.53 (.87) -- (.87) 10.65
1990 10.57 .86 (.55) .31 (.89) -- (.89) 9.99
1989 10.37 .87 .25 1.12 (.86) (.06) (.92) 10.57
Period Ended October 31, 1988(d) 9.95 .80(c) .38 1.18 (.76) -- (.76) 10.37
Class R
Year Ended October 31, 1997 11.16 .71(c) .30 1.01 (.74) -- (.74) 11.43
Period Ended October 31, 1996(g) 11.27 .51(c) (.13) .38 (.49) -- (.49) 11.16
Principal Government Securities
Income Fund, Inc.(b)
Class A
Year Ended October 31,
1997 11.26 .70 .29 .99 (.74) -- (.74) 11.51
1996 11.31 .70 (.05) .65 (.70) -- (.70) 11.26
1995 10.28 .71 1.02 1.73 (.70) -- (.70) 11.31
1994 11.79 .69 (1.40) (.71) (.68) (.12) (.80) 10.28
1993 11.44 .74 .55 1.29 (.74) (.20) (.94) 11.79
1992 11.36 .81 .12 .93 (.81) (.04) (.85) 11.44
1991 10.54 .85 .84 1.69 (.87) -- (.87) 11.36
1990 10.76 .85 (.22) .63 (.85) -- (.85) 10.54
Four Months Ended October 31, 1989(h)10.66 .29 .09 .38 (.28) -- (.28) 10.76
Year Ended June 30,
1989 10.33 .87 .32 1.19 (.86) -- (.86) 10.66
1988 10.40 .89 (.05) .84 (.88) (.03) (.91) 10.33
Class R
Year Ended October 31, 1997 11.21 .64 .24 .88 (.67) -- (.67) 11.42
Period Ended October 31, 1996(g) 11.27 .47 (.08) .39 (.45) -- (.45) 11.21
Principal High Yield Fund, Inc.(b)
Class A
Year Ended October 31,
1997 8.27 .67 .31 .98 (.73) -- (.73) 8.52
1996 8.06 .68 .23 .91 (.70) -- (.70) 8.27
1995 7.83 .68 .20 .88 (.65) -- (.65) 8.06
1994 8.36 .63 (.51) .12 (.65) -- (.65) 7.83
1993 8.15 .71 .21 .92 (.71) -- (.71) 8.36
1992 7.86 .79 .29 1.08 (.79) -- (.79) 8.15
1991 7.12 .88 .80 1.68 (.94) -- (.94) 7.86
1990 9.47 1.10 (2.35) (1.25) (1.09) (.01) (1.10) 7.12
1989 10.44 1.10 (.83) .27 (1.09) (.15) (1.24) 9.47
Period Ended October 31, 1988(d) 9.97 .98(c) .38 1.36 (.89) -- (.89) 10.44
Class R
Year Ended October 31, 1997 8.20 .62 .26 .88 (.68) -- (.68) 8.40
Period Ended October 31, 1996(g) 8.21 .46 (.03) .43 (.44) -- (.44) 8.20
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Ratio of Investment
Net Assets at Expenses to Income to Portfolio
Total End of Period Average Average Turnover
Return(a)(in thousands) Net Assets Net Assets Rate
Principal Bond Fund, Inc.(b)
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C>
1997 10.15% $126,427 .95%(c) 6.70% 12.8%
1996 4.74 113,437 .95(c) 6.85 3.4
1995 19.73 106,962 .94(c) 7.26 5.1
1994 (6.01) 88,801 .95(c) 7.27 8.9
1993 15.22 85,015 .92(c) 7.19 9.3
1992 11.45 62,534 .88(c) 7.95 8.4
1991 16.04 37,825 .80(c) 8.66 .9
1990 3.08 22,719 1.22 8.40 3.6
1989 11.54 13,314 1.24 8.59 0.0
Period Ended October 31, 1988(d) 11.59(e) 10,560 .70(c)(f) 8.85(f) 63.9(f)
Class R
Year Ended October 31, 1997 9.49 5,976 1.45 6.11 12.8
Period Ended October 31, 1996(g) 3.75(e) 525 1.28(c)(f) 6.51(f) 3.4(f)
Principal Government Securities
Income Fund, Inc.(b)
Class A
Year Ended October 31,
1997 9.23 249,832 .84 6.19 10.8
1996 6.06 259,029 .81 6.31 25.9
1995 17.46 261,128 .87 6.57 10.1
1994 (6.26) 249,438 .95 6.35 24.8
1993 11.80 236,718 .93 6.38 52.6
1992 8.49 161,565 .95 7.04 54.3
1991 16.78 94,613 .98 7.80 14.9
1990 6.17 71,806 1.07 8.15 22.4
Four Months Ended October 31, 1989(h 3.63(e) 55,702 1.07(f) 8.18(f) 5.2(f)
Year Ended June 30,
1989 12.37 56,848 .96 8.58 --
1988 8.60 59,884 .82 8.65 --
Class R
Year Ended October 31, 1997 8.19 4,152 1.79 5.21 10.8
Period Ended October 31, 1996(g) 3.76(e) 481 1.18(f) 5.84(f) 25.9(f)
Principal High Yield Fund, Inc.(b)
Class A
Year Ended October 31,
1997 12.33 38,239 1.22 7.99 39.2
1996 11.88 28,432 1.26 8.49 18.8
1995 11.73 23,396 1.45 8.71 40.3
1994 1.45 19,802 1.46 7.82 27.2
1993 11.66 19,154 1.35 8.57 23.4
1992 14.35 16,359 1.41 9.69 28.2
1991 25.63 13,195 1.50 12.06 14.2
1990 (14.51) 9,978 1.45 12.99 15.8
1989 2.68 12,562 1.43 11.22 19.9
Period Ended October 31, 1988(d) 14.15(e) 10,059 .77(c)(f) 10.55(f) 73.2(f)
Class R
Year Ended October 31, 1997 11.14 1,961 2.42 6.70 39.2
Period Ended October 31, 1996(g) 5.60(e) 124 1.59(f) 7.84(f) 18.8(f)
<FN>
Notes to financial highlights
(a) Total return is calculated without the front-end sales charge or contingent
deferred sales charge.
(b) Effective January 1, 1998, the names of the following Income Funds were
changed:
from to
---- --
Princor Bond Fund, Inc. Principal Bond Fund, Inc.
Princor Government Securities Principal Government Securities
Income Fund, Inc. Income Fund, Inc.
Princor High Yield Fund, Inc. Principal High Yield Fund, Inc.
(c) Without the Manager's voluntary waiver of a portion of certain of its
expenses for the periods (year, except as noted in the financial
statements) ended October 31 of the years indicated, the following Income
Funds would have had per share net investment income and the ratios of
expenses to average net assets as shown:
Per Share Ratio of Expenses
Net Invest- to Average Net Amount
Fund Year ment Income Assets Waived
---- ------ ----------- ----------------- ---------
Principal Bond Fund, Inc.
Class A 1997 $.74 .98% $ 41,256
1996 .76 .97 22,536
1995 .77 1.02 86,018
1994 .77 1.09 120,999
1993 .79 1.07 111,162
1992 .82 1.11 110,868
1991 .84 1.15 100,396
1988(d) .76 1.12(f) 31,187
Class R 1997 .69 1.78 10,427
1996(g) .51 1.28(f) 3
Principal High Yield
Fund, Inc.
Class A 1988(d) .95 1.33(f) 32,609
(d) Period from December 18, 1987, date shares first offered to public, through
October 31, 1988. Net investment income, aggregating $.10 per share for the
period from the initial purchase of shares on October 30, 1987 through
December 17, 1987, was recognized of which $.06 per share was distributed
to its sole stockholder, Principal Mutual Life Insurance Company.
Additionally, the Fund incurred net realized and unrealized losses on
investments of $.09 per share during this initial interim period. This
represented activities of the Fund prior to the initial public offering of
Fund shares.
(e) Total return amounts have not been annualized.
(f) Computed on an annualized basis.
(g) Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through October 31, 1996. For the initial interim
period from February 27, 1996 through February 28, 1996, certain Income
Funds' Class R shares recognized no net investment income but incurred
unrealized losses on investments as shown below. This represented Class R
shares activities of each fund prior to the initial public offering of
Class R shares.
Per Share
Fund Unrealized (Loss)
---- -----------------
Principal Bond Fund, Inc. $(.03)
Principal Government Securities
Income Fund, Inc. (.03)
(h) Effective July 1, 1989, the Fund changed its fiscal year-end from June 30
to October 3l.
</FN>
</TABLE>
<TABLE>
<CAPTION>
INCOME-ORIENTED FUNDS (Cont.)
Selected data for a share of Capital Stock outstanding throughout each period:
Income from Investment Operations Less Distributions
Net Realized
and
Net Asset Net Unrealized Total Dividends Net Asset
Value at Invest- Gain from from Net Distributions Value at
Beginning ment (Loss) on Investment Investment from Total End
of Period Income Investments Operations Income Capital Gains Distributions of Period
Principal Limited Term Bond Fund, Inc.(b)
Class A
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended October 31, 1997 $9.89 $.61(c) $ .03 $.64 $(.65) -- $(.65) $9.88
Period Ended October 31, 1996(d) 9.90 .38(c) (.04) .34 (.35) -- (.35) 9.89
Class R
Year Ended October 31, 1997 9.88 .54(c) .03 .57 (.60) -- (.60) 9.85
Period Ended October 31, 1996(f) 9.90 .36(c) (.06) .30 (.32) -- (.32) 9.88
MONEY MARKET FUND
Principal Cash Management Fund, Inc.(b)
Class A
Year Ended October 31,
1997 1.000 .050(c) -- .050 (.050) -- (.050) 1.000
1996 1.000 .049(c) -- .049 (.049) -- (.049) 1.000
1995 1.000 .052(c) -- .052 (.052) -- (.052) 1.000
1994 1.000 .033(c) -- .033 (.033) -- (.033) 1.000
1993 1.000 .026(c) -- .026 (.026) -- (.026) 1.000
1992 1.000 .036(c) -- .036 (.036) -- (.036) 1.000
1991 1.000 .061(c) -- .061 (.061) -- (.061) 1.000
1990 1.000 .074(c) -- .074 (.074) -- (.074) 1.000
Four Months Ended October 31, 1989(g)1.000 .027(c) -- .027 (.027) -- (.027) 1.000
Year Ended June 30,
1989 1.000 .080(c) -- .080 (.080) -- (.080) 1.000
1988 1.000 .060 -- .060 (.060) -- (.060) 1.000
Class R
Year Ended October 31, 1997 1.000 .044(c) -- .044 (.044) -- (.044) 1.000
Period Ended October 31, 1996(f) 1.000 .030 -- .030 (.030) -- (.030) 1.000
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Ratio of Investment
Net Assets at Expenses to Income to Portfolio
Total End of Period Average Average Turnover
Return (a) (in thousands) Net Assets Net Assets Rate
Principal Limited Term Bond Fund, Inc.(b)
Class A
<S> <C> <C> <C> <C> <C>
Year Ended October 31, 1997 6.75% $ 20,567 .90%(c) 6.20% 17.5%
Period Ended October 31, 1996(d) 3.62(d) 17,249 .89(c)(e) 6.01(e) 16.5(e)
Class R
Year Ended October 31, 1997 6.01 606 1.48(c) 5.60 17.4
Period Ended October 31, 1996(f) 3.24(d) 83 1.40(c)(e) 5.64(e) 16.5(e)
MONEY MARKET FUND
Principal Cash Management Fund, Inc.(b)
Class A
Year Ended October 31,
1997 4.96 836,072 .63(c) 4.98 N/A
1996 5.00 694,962 .66(c) 4.88 N/A
1995 5.36 623,864 .72(c) 5.24 N/A
1994 3.40 332,346 .70(c) 3.27 N/A
1993 2.67 284,739 .67(c) 2.63 N/A
1992 3.71 247,189 .65(c) 3.66 N/A
1991 6.29 262,543 .61(c) 5.95 N/A
1990 7.65 151,007 .93(c) 7.36 N/A
Four Months Ended October 31, 1989(g) 2.63(d) 124,895 1.04(c)(e) 7.86(e) N/A
Year Ended June 30,
1989 8.15 120,149 1.00(c) 8.21 N/A
1988 6.18 51,320 1.02 6.06 N/A
Class R
Year Ended October 31, 1997 4.16(d) 4,296 1.26 4.40 N/A
Period Ended October 31, 1996(f) 2.97(d) 1,639 .99(e) 4.41(e) N/A
<FN>
Notes to financial highlights
(a) Total return is calculated without the front-end sales charge or contingent
deferred sales charge.
(b) Effective January 1, 1998, the names of the following Income Funds were
changed:
from to
---- --
Princor Limited Term Principal Limited Term
Bond Fund, Inc. Bond Fund, Inc.
Princor Cash Management Principal Cash Management
Fund, Inc. Fund, Inc.
(c) Without the Manager's voluntary waiver of a portion of certain of its
expenses for the periods (year except as noted) ended October 31 of the
years indicated, the following Funds would have had per share net
investment income and the ratios of expenses to average net assets as
shown:
Per Share Ratio of Expenses
Net Invest- to Average Net Amount
Fund Year ment Income Assets Waived
---- ---- ----------- ----------------- ------
Principal Limited Term
Bond Fund, Inc.
Class A 1997 $.59 1.15% $ 46,271
1996 .37 1.16(e) 22,716
Class R 1997 .43 2.95 6,831
1996 .35 1.79(e) 60
Principal Cash
Management Fund, Inc.
Class A 1997 .050 .63 --
1996 .049 .67 7,102
1995 .052 .78 296,255
1994 .031 .90 595,343
1993 .025 .84 468,387
1992 .035 .80 385,328
1991 .059 .79 433,196
1990 .073 1.01 106,841
1989 ** .026 1.06(e) 101,625
1989 * .079 1.11 9,558
Class R 1997 .043 1.34 2,441
* Year ended June 30, 1989
** Four months ended October 31, 1989
(d) Total return amounts have not been annualized.
(e) Computed on an annualized basis.
(f) Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through October 31, 1996. For the initial interim
period from February 27, 1996 through February 28, 1996, Principal Limited
Term Bond Fund, Inc. Class R shares recognized no net investment income but
incurred unrealized losses on investments of $.02 per share. This
represents Class R share activities of the fund prior to the initial public
offering of Class R shares.
(g) Period from February 29, 1996, date shares first offered to the public,
through October 31, 1996. With respect to Class A shares, net investment
income, aggregating $.02 per share for the period from the initial purchase
of shares on February 13, 1996 through February 28, 1996, was recognized,
none of which was distributed to its sole stockholder, Principal Mutual
Life Insurance Company. Additionally, Class A shares incurred unrealized
losses on investments of $.12 per share during the initial interim period.
This represents Class A share activities of the Fund prior to the initial
public offering of Class A shares.
(h) Effective July 1, 1989, the Fund changed its fiscal year-end from June 30
to October 3l.
</FN>
</TABLE>
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The investment objectives and policies of each Fund are described below.
There can be no assurance that the objectives of the Funds will be realized.
GROWTH-ORIENTED FUNDS
The Growth-Oriented Funds have different investment objectives. They
seek:
o capital appreciation and growth primarily through investments in equity
securities of corporations established in the United States ("U.S.")
(Capital Value Fund, Growth Fund, MidCap Fund and SmallCap Fund)
o long-term growth of capital primarily through investments in equity
securities of corporations located outside of the U.S. (International
Emerging Markets Fund, International Fund and International SmallCap
Fund)
o total investment return including both capital appreciation and income
through investments in equity and debt securities (Balanced Fund)
o growth of capital and growth of income primarily through investments in
common stocks of well-capitalized, established companies (Blue Chip
Fund)
o current income and long-term growth of income and capital through
investment in equity securities of real estate companies (Real Estate
Fund)
o current income and long-term growth of income and capital through
investment in equity and fixed-income securities of public utilities
companies (Utilities Fund)
The Growth-Oriented Funds may invest in the following equity securities:
common stocks; preferred stocks and debt securities that are convertible into
common stock, that carry rights or warrants to purchase common stock or that
carry rights to participate in earnings; rights or warrants to subscribe to or
purchase any of the foregoing securities; and sponsored and unsponsored American
Depository Receipts (ADRs) based on any of the foregoing securities. Unsponsored
ADRs are not created by the issuer of the underlying security, may be subject to
fees imposed by the issuing bank that, in the case of sponsored ADRs, would be
paid by the issuer of a sponsored ADR and may involve additional risks such as
reduced availability of information about the issuer of the underlying security.
The Blue Chip, Capital Value, Growth, International, International Emerging
Markets, International SmallCap, MidCap and SmallCap Funds will seek to be fully
invested under normal conditions in equity securities. When in the opinion of
the Manager current market or economic conditions warrant, a Growth-Oriented
Fund may, for temporary defensive purposes, place all or a portion of its assets
in cash (on which the Fund 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, United States Government securities, and preferred
stocks and debt securities, whether or not convertible into or carrying rights
for common stock. When investing for temporary defensive purposes a
Growth-Oriented Fund is not investing so as to achieve its investment objective.
A Growth-Oriented Fund may also maintain reasonable amounts in cash or
short-term debt securities for daily cash management purposes or pending
selection of particular long-term investments.
DOMESTIC
Principal Balanced Fund
The investment objective of Principal Balanced Fund is to generate a total
investment return consisting of current income and capital appreciation while
assuming reasonable risks in furtherance of the investment objective. The term
"reasonable risks" refers to investment decisions that in the Manager's judgment
do not present a greater than normal risk of loss in light of current or
anticipated future market and economic conditions, trends in yields and interest
rates, and fiscal and monetary policies.
In seeking to achieve the investment objective, the Fund invests primarily
in growth and income-oriented common stocks (including securities convertible
into common stocks), corporate bonds and debentures and short-term money market
instruments. The Fund may also invest in other equity securities and in debt
securities issued or guaranteed by the United States Government and its agencies
or instrumentalities. The Fund seeks to generate real (inflation plus) growth
during favorable investment periods and may emphasize income and capital
preservation strategies during uncertain investment periods. The Manager will
seek to minimize declines in the net asset value per share. However, there is no
guarantee that the Manager will be successful in achieving this goal.
The portions of the Fund's total assets invested in equity securities, debt
securities and short-term money market instruments are not fixed, although
ordinarily 40% to 70% of the Fund's portfolio will be invested in equity
securities with the balance of the portfolio invested in debt securities. The
investment mix will vary from time to time depending upon the judgment of the
Manager as to general market and economic conditions, trends in investment
yields and interest rates, and changes in fiscal or monetary policies. The Fund
may invest up to 20% of its assets in foreign securities. For a description of
certain investment risks associated with foreign securities, see "Risk Factors."
The Fund may invest in all types of common stocks and other equity
investments, without regard to any objective investment criteria such as size of
the issue or issuer, exchange listing or seasoning. The Fund may invest in both
exchange-listed and over-the-counter securities, in small or large companies,
and in well-established or unseasoned companies. Also, the Fund's investments in
corporate bonds and debentures and money market instruments are not restricted
by credit ratings or other objective investment criteria, except with respect to
bank certificates of deposit as set forth below. Some of the fixed income
securities in which the Fund may invest may be considered to include speculative
characteristics and the Fund may purchase such securities that are in default
but does not currently intend to invest more than 5% of its assets in securities
rated below BBB by Standard & Poor's or Baa by Moody's. The rating services'
descriptions of BBB or Baa securities are as follows: Moody's Investors Service,
Inc. Bond Ratings -- Baa: Bonds which are rated Baa are considered as medium
grade obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well. Standard &
Poor's Corporation Bond Ratings -- BBB: Debt rated "BBB" is regarded as having
an adequate capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than for debt in higher-rated
categories. See the discussion of the Princor High Yield Fund for information
concerning risks associated with below-investment grade bonds. The Fund will not
concentrate its investments in any industry.
In selecting common stocks, the Manager seeks companies which the Manager
believes have predictable earnings increases and which, based on their future
growth prospects, may be currently undervalued in the market place. During
periods when the Manager determines that general economic conditions are
favorable, it will generally purchase common stocks with the objective of
long-term capital appreciation. From time to time, and in periods of economic
uncertainty, the Manager may purchase common stocks with the expectation of
price appreciation over a relatively short period of time.
To achieve its investment objective, the Fund may at times emphasize the
generation of interest income by investing in short, medium or long-term debt
securities. Investment in debt securities may also be made with a view to
realizing capital appreciation when the Manager believes that declining interest
rates may increase market values. The Fund may also purchase "deep discount
bonds," i.e., bonds which are selling at a substantial discount from their face
amount, with a view to realizing capital appreciation.
The Fund may invest in the following short-term money market investments:
U.S. Treasury bills, bank certificates of deposit, bankers' acceptances,
repurchase agreements, commercial paper and commercial paper master notes which
are floating rate debt instruments without a fixed maturity. The Fund will only
invest in domestic bank certificates of deposit issued by banks which are
members of the Federal Reserve System that have total deposits in excess of one
billion dollars.
The United States Government securities in which the Fund may invest
consist of U.S. Treasury obligations and obligations of certain agencies, such
as the Government National Mortgage Association, which are supported by the full
faith and credit of the United States, as well as obligations of certain other
Federal agencies or instrumentalities, such as the Federal National Mortgage
Association, Federal Land Banks and the Federal Farm Credit Administration,
which are backed only by the right of the issuer to borrow limited funds from
the U.S. Treasury, by the discretionary authority of the U.S. Government to
purchase such obligations or by the credit of the agency or instrumentality
itself.
Principal Blue Chip Fund
The objective of Principal Blue Chip Fund is growth of capital and growth
of income. Growth of income means increasing the Fund's investment income which
is primarily derived from dividends earned on portfolio securities. In seeking
to achieve its objective, the Fund will invest primarily in common stocks of
well capitalized, established companies which the Fund's manager believes to
have the potential for growth of capital, earnings and dividends. Under normal
market conditions, the Fund will invest at least 65%, and may invest up to 100%,
of its total assets in the common stocks of blue chip companies.
Blue chip companies are defined as those companies with market
capitalizations of at least $1 billion. Blue chip companies are generally
identified by their substantial capitalization, established history of earnings
and dividends, easy access to credit, good industry position and superior
management structure. In addition, the large market of publicly held shares for
such companies and the generally high trading volume in those shares results in
a relatively high degree of liquidity for such investments. The characteristics
of high quality and high liquidity of blue chip investments should make the
market for such stocks attractive to many investors.
Examples of blue chip companies currently eligible for investment by the
Fund include, but are not limited to, companies such as General Electric
Company, Ford Motor Company, Exxon Corporation, Merck & Company, Inc., Digital
Equipment Corporation, Capital Cities ABC, Inc., J.P. Morgan & Co. and Coca Cola
Company. In general, the Fund will seek to invest in those established, high
quality companies whose industries are experiencing favorable secular or
cyclical change.
The Fund's Manager may invest up to 35% of the Fund's total assets in
equity securities, other than common stock, issued by companies that meet the
investment criteria for blue chip companies and in equity securities issued by
companies that do not meet those criteria. The Manager does not intend to invest
regularly in speculative securities, which are those issued by new, unseasoned
companies or by companies that have limited product lines, markets, financial
resources or management, but it may from time to time invest not more than 5% of
the Fund's total assets in those kinds of securities. The Fund may invest up to
20% of its assets in securities of foreign issuers. The foreign securities in
which the Fund may invest need not be issued by companies that meet the
investment criteria for blue chip companies. For a description of certain
investment risks associated with foreign securities, see "Risk Factors."
Principal Capital Value Fund
The primary objective of Principal Capital Value Fund is long-term capital
appreciation. A secondary objective is growth of investment income.
The Fund will invest primarily in common stocks, but it may invest in other
equity securities. In making selections for the Fund's investment portfolio, the
Manager will use an approach described broadly as that of fundamental analysis,
which is discussed in the Statement of Additional Information. To achieve its
investment objective, Invista will invest in securities that have "value"
characteristics. This process is known as "value investing." Value investing is
purchasing securities of companies with above average dividend yields and below
average price to earnings (P/E) ratios. Securities chosen for investment may
include those of companies which the Manager believes can reasonably be expected
to share in the growth of the nation's economy over the long term.
Principal Growth Fund
The objective of Principal Growth Fund is growth of capital. Realization of
current income will be incidental to the objective of growth of capital.
The Fund will invest primarily in common stocks, but it may invest in other
equity securities. In making selections for the Fund's investment portfolio, the
Manager will use an approach described broadly as that of fundamental analysis,
which is discussed in the Statement of Additional Information. In pursuit of the
Fund's investment objective, investments will be made in securities which as a
group appear to possess potential for appreciation in market value. Common
stocks chosen for investment may include those of companies which have a record
of sales and earnings growth that exceeds the growth rate of corporate profits
of the S&P 500 or which offer new products or new services. The policy of
investing in securities which have a high potential for growth of capital can
mean that the assets of the Fund may be subject to greater risk than securities
which do not have such potential.
Principal MidCap Fund
The objective of Principal MidCap Fund is to achieve long-term capital
appreciation. The strategy of this Fund is to invest primarily in the common
stocks and securities (both debt and preferred stock) convertible into common
stocks of emerging and other growth-oriented companies that, in the judgment of
the Manager, are responsive to changes within the marketplace and have the
fundamental characteristics to support growth. In pursuing its objective of
capital appreciation, the Fund may invest, for any period of time, in any
industry and in any kind of growth-oriented company, whether new and unseasoned
or well known and established. Under normal market conditions, the Fund will
invest at least 65% of its assets in securities of companies with market
capitalizations in the $1 billion to $10 billion range. The Fund may invest up
to 20% of its assets in securities of foreign issuers. For a description of
certain investment risks associated with foreign securities, see "Risk Factors."
There can be, of course, no assurance that the Fund will attain its
objective. Investment in emerging and other growth-oriented companies may
involve greater risk than investment in other companies. The securities of
growth-oriented companies may be subject to more abrupt or erratic market
movements, and many of them may have limited product lines, markets, financial
resources or management. Because of these factors and of the length of time that
may be required for full development of the growth prospects of some of the
companies in which the Fund invests, the Fund believes that its shares are
suitable only for persons who are able to assume the risk of investing in
securities of emerging and growth-oriented companies and prepared to maintain
their investment during periods of adverse market conditions. Investors should
not rely on the Fund for their short-term financial needs. Since the Fund will
not be seeking current income, investors should not view a purchase of Fund
shares as a complete investment program.
Principal Real Estate Fund
The investment objective of Principal Real Estate Fund is to generate total
return by investing primarily in equity securities of companies principally
engaged in the real estate industry. The Fund will seek to achieve its objective
by seeking, with approximately equal emphasis, long-term capital growth and
current income through the purchase of equity securities.
Under normal circumstances the Fund will invest at least 65 percent of its
assets in the equity securities of real estate companies. Equity securities
include common stock (including shares in real estate investment trusts),
preferred stock, rights and warrants. A real estate investment trust ("REIT") is
a corporation, or a business trust which, in satisfying certain Internal Revenue
Code requirements, is permitted to effectively eliminate corporate level federal
income taxes. Qualifying REITs must, among other things, derive substantially
all of their income from real estate assets and annually distribute to
shareholders 95 percent or more of their otherwise taxable income.
REITs are characterized as equity REITs, mortgage REITs and hybrid REITs.
An equity REIT invests primarily in the fee ownership of real estate and revenue
is primarily derived from rental income. A mortgage REIT primarily invests in
real estate mortgages and hybrid REITs combine the characteristics of both an
equity REIT and a mortgage REIT.
For purposes of the Fund's investment policies, a real estate company is
one that has at least 50% of its assets, income or profits attributable to
products or services related to the real estate industry. Real estate companies
include REITs or other securitized real estate investments and companies with
substantial real estate holdings such as paper, lumber, hotel and entertainment
companies. Companies whose products and services relate to the real estate
industry include building supply manufacturers, mortgage lenders and mortgage
servicing companies. The Fund may invest up to 25% of its total assets in
securities of foreign real estate companies (see "Risk Factors").
Securities issued by real estate companies may be subject to risks similar
to those associated with the direct ownership of real estate (in addition to
securities market risks) because of its policy of concentration in the
securities of companies in the real estate industry. These include declines in
the value of real estate, risks related to general and local economic
conditions, dependency on management skills, heavy cash flow dependency,
possible lack of availability of mortgage funds, overbuilding, extended
vacancies in properties, increases in property taxes and operating expenses,
changes in zoning laws, losses due to costs resulting from the cleanup of
environmental problems, casualty or condemnation losses, changes in neighborhood
values and changes in interest rates.
In addition to these risks, equity REITS may be affected by changes in the
value of the underlying property owned by the trusts, while mortgage REITS may
be affected by the quality of any credit extended. Further, equity and mortgage
REITS are dependent upon management skills and generally may not be diversified.
Equity and mortgage REITS are also subject to heavy cash flow dependency,
defaults by borrowers and self-liquidation. In addition, equity or mortgage
REITS could possibly fail to qualify for tax free pass-through of income under
the Internal Revenue Code of 1986, as amended, or to maintain their exemptions
from registration under the Investment Company Act of 1940. The above factors
may also adversely affect a borrower's or lessee's ability to meet its
obligations to the REIT. In the event of a default by a borrower or lessee, the
REIT may experience delays in enforcing its rights as a mortgagee or lessor and
may incur substantial costs associated with protecting its investments.
Principal SmallCap Fund
The investment objective of Principal SmallCap Fund is long-term growth of
capital. The strategy of this Fund is to invest primarily in equity securities
of companies domiciled in the United States with comparatively smaller market
capitalizations. Under normal market conditions, the Fund invests at least 65%
of its assets in securities of companies having a total market capitalization of
$1 billion or less.
In selecting securities for investment, the Fund will look at stocks with
both "growth" and "value" characteristics, with no consistent preference between
the two categories. The growth orientation emphasizes buying stocks of companies
whose potential for growth of capital and earnings is expected to be above
average. The value orientation emphasizes buying stocks at less than their
intrinsic value and avoiding those whose price has been speculatively bid up.
Principal Utilities Fund
The investment objective of Principal Utilities Fund is to provide current
income and long-term growth of income and capital. The Fund seeks to achieve its
investment objective by investing primarily in equity and fixed-income
securities of companies engaged in the public utilities industry. The term
"public utilities industry" consists of companies engaged in the manufacture,
production, generation, transmission, sale and distribution of gas and electric
energy, as well as companies engaged in the communications field, including
telephone, telegraph, satellite, microwave and other companies providing
communication facilities for the public, but excluding public broadcasting
companies. For purposes of the Fund, a company will be considered to be in the
public utilities industry if, during the most recent twelve-month period, at
least 50% of the company's gross revenues, on a consolidated basis, is derived
from the public utilities industry. Under normal market conditions, the Fund, as
an investment policy, will invest at least 65%, and may invest up to 100%, of
its total assets in securities of companies in the public utilities industry,
and as a matter of fundamental policy will invest no less than 25% of its total
assets in those securities. As a non-fundamental policy, the Fund may not own
more than 5% of the outstanding voting securities of more than one public
utility company as defined by the Public Utility Holding Company Act of 1935.
The Fund invests in both equity securities (as defined previously under
"Growth-Oriented Funds") and fixed- income securities (bonds and preferred
stock) in the public utilities industry. The Fund does not have any set policies
to concentrate within any particular segment of the utilities industry. The Fund
will shift its asset allocation without restriction between types of utilities
and between equity and fixed-income securities based upon the Manager's
determination of how to achieve the Fund's investment objective in light of
prevailing market, economic and financial conditions. For example, at a
particular time the Manager may choose to allocate up to 100% of the Fund's
assets in a particular type of security (for example, equity securities) or in a
specific utility industry segment (for example, electric utilities).
Fixed-income securities in which the Fund may invest are debt securities
and preferred stocks, which are rated at the time of purchase Baa or better by
Moody's or BBB or better by S&P, or which, if unrated, are deemed to be of
comparable quality by the Fund's Manager. A description of corporate bond
ratings is contained in the Appendix to the Statement of Additional Information.
The rating services' descriptions of Baa or BBB securities are as follows:
Moody's Investors Service, Inc. Bond ratings -- Baa: Bonds which are rated Baa
are considered as medium grade obligations, i.e., they are neither highly
protected nor poorly secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well. Standard and Poor's Corporation Bond Ratings -- BBB:
Debt rated "BBB" is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than for debt in higher-rated categories.
If a fixed-income security held by the Fund is rated BBB or Baa and is
subsequently down graded by a rating agency, the Fund will retain such security
in its portfolio until the Manager determines that it is practicable to sell the
security without undue market or tax consequences to the Fund.
While the Fund will invest primarily in the securities of public utility
companies, it may invest up to 35% of its total assets in those securities that
are permissible investments for the Balanced Fund. See "Princor Balanced Fund"
and "Certain Investment Policies and Restrictions." However the Fund will not
invest in fixed-income securities rated below Baa by Moody's or BBB by S&P.
The public utilities industry as a whole has certain characteristics and
risks particular to that industry. Unlike industrial companies, the rates which
utility companies may charge their customers generally are subject to review and
limitation by governmental regulatory commissions. Although rate changes of a
utility usually fluctuate in approximate correlation with financing costs, due
to political and regulatory factors rate changes ordinarily occur only following
a delay after the changes in financing costs. This factor will tend to favorably
affect a utility company's earnings and dividends in times of decreasing costs,
but conversely will tend to adversely affect earnings and dividends when costs
are rising. In addition, the value of public utility debt securities (and, to a
lesser extent, equity securities) tends to have an inverse relationship to the
movement of interest rates.
Among the risks affecting the utilities industry are the following: risks
of increases in fuel and other operating costs; the high cost of borrowing to
finance capital construction during inflationary periods; restrictions on
operations and increased costs and delays associated with compliance with
environmental and nuclear safety regulations; the difficulties involved in
obtaining natural gas for resale or fuel for generating electricity at
reasonable prices; the risks in connection with the construction and operation
of nuclear power plants; the effects of energy conservation and effects of
regulatory changes, such as the possible adverse effects on profits of recent
increased competition among telecommunications companies and the uncertainties
resulting from such companies' diversification into new domestic and
international businesses, as well as agreements by many such companies linking
future rate increases to inflation or other factors not directly related to the
actual operating profits of the enterprise.
INTERNATIONAL
Principal International Emerging Markets Fund
The investment objective of Principal International Emerging Markets Fund
is long-term growth of capital. The Fund 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 the Manager, 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 Fund 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 Fund's total assets will be
invested in emerging market country equity securities. The Fund 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 Fund 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.
For temporary defensive purposes, the International Emerging Markets Fund
may invest in the same kinds of securities as the other Growth-Oriented Funds
whether issued by domestic or foreign corporations, governments, or governmental
agencies, instrumentalities or political subdivisions and whether denominated in
United States dollars or some other currency.
Principal International Fund
The investment objective of Principal International Fund is to seek
long-term growth of capital through investment in a portfolio of equity
securities of companies domiciled in any of the nations of the world. In
choosing investments in equity securities of foreign and United States
corporations, the Manager 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 Fund expects its investment objective to be met over long periods
which may include several market cycles. For a description of certain investment
risks associated with foreign securities, see "Risk Factors."
For temporary defensive purposes, the International Fund may invest in the
same kinds of securities as the other Growth-Oriented Funds whether issued by
domestic or foreign corporations, governments, or governmental agencies,
instrumentalities or political subdivisions and whether denominated in United
States dollars or some other currency.
The Fund 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
Fund intends under normal market conditions to have at least 65% of its assets
invested in securities issued by corporations of at least three countries, one
of which may be the United States (although the Fund currently intends not to
invest in equity securities of United States companies). 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 economies. Changes in investments may be made as prospects change for
particular countries, industries or companies.
Principal International SmallCap Fund
The investment objective of Principal International SmallCap Fund is
long-term growth of capital. The strategy of this Fund is to invest primarily in
equity securities of non-United States companies with comparatively smaller
market capitalizations. Under normal market conditions, the Fund invests at
least 65% of its assets in securities of companies having a total market
capitalization of $1 billion or less.
The Fund 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 Fund 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."
For temporary defensive purposes, the International SmallCap Fund may
invest in the same kinds of securities as the other Growth-Oriented Funds
whether issued by domestic or foreign corporations, governments, or governmental
agencies, instrumentalities or political subdivisions and whether denominated in
United States dollars or some other currency.
INCOME-ORIENTED FUNDS
The Principal Funds that offer Class R shares currently include four Funds
which seek a high level of income through investments in fixed-income
securities. These Funds are Principal Bond Fund, Principal Government Securities
Income Fund, Principal High Yield Fund and Principal Limited Term Bond Fund,
collectively referred to as the "Income-Oriented Funds." Each Fund has rating
limitations with regard to the quality of securities that may be held in the
portfolio. The rating limitations apply at the time of acquisition of a security
and any subsequent change in a rating by a rating service will not require
elimination of a security from the Fund's portfolio. The Statement of Additional
Information contains descriptions of the ratings of Moody's Investors Service,
Inc. ("Moody's") and Standard and Poor's Corporation ("S&P").
Principal Bond Fund
The investment objective of Principal Bond Fund is to provide as high a
level of income as is consistent with preservation of capital and prudent
investment risk.
In seeking to achieve the investment objective, the Fund will predominantly
invest in marketable fixed-income securities. Investments will be made generally
on a long-term basis, but the Fund may make short-term investments from time to
time as deemed prudent by the Manager. Longer maturities typically provide
better yields but will subject the Fund to a greater possibility of substantial
changes in the values of its portfolio securities as interest rates change.
Under normal circumstances, the Fund will invest at least 65% of its assets
in bonds in one or more of the following categories: (i) corporate debt
securities and taxable municipal obligations, which at the time of purchase have
an investment grade rating within the four highest grades used by S&P (AAA, AA,
A or BBB) or by Moody's (Aaa, Aa, A or Baa) or which, if nonrated, are
comparable in quality in the opinion of the Fund's Manager; (ii) similar
Canadian corporate, Provincial and Federal Government securities payable in U.S.
funds; and (iii) securities issued or guaranteed by the United States Government
or its agencies or instrumentalities. The balance of the Fund's assets may be
invested in the following securities: domestic and foreign corporate debt
securities, preferred stocks, common stocks that provide returns that compare
favorably with the yields on fixed income investments, common stocks acquired
upon conversion of debt securities or preferred stocks or upon exercise of
warrants acquired with debt securities or otherwise and foreign government
securities. The debt securities and preferred stocks in which the Fund invests
may be convertible or nonconvertible. Securities rated below BBB or Baa are
commonly referred to as junk bonds. The Fund does not intend to purchase debt
securities rated lower than Ba3 by Moody's or BB- by S&P (bonds which are judged
to have speculative elements; their future cannot be considered as
well-assured). The rating services' descriptions of BBB or Baa securities are as
follows: Moody's Investors Service, Inc. Bond Ratings -- Baa: Bonds which are
rated Baa are considered as medium grade obligations, i.e., they are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well. Standard & Poor's Corporation Bond Ratings -- BBB: Debt
rated "BBB" is regarded as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than for debt in higher-rated categories. See the discussion of the Principal
High Yield Fund for information concerning risks associated with below
investment grade bonds.
During the fiscal year ended October 31, 1997, the percentage of the Fund's
portfolio securities invested in the various ratings established by Moody's,
based upon the weighted average ratings of the portfolio, was as follows:
Moody's Rating Portfolio Percentage
-------------- --------------------
Aa .85%
A 22.85
Baa 74.14
Ba 1.22
B .94
The preceding percentage for AA and A rated securities includes .35% and
.99% respectively of unrated securities which have been determined by the
Manager to be of comparable quality.
Cash equivalents in which the Fund invests include corporate commercial
paper rated A-1+, A-1 or A-2 by S&P or P-1 or P-2 by Moody's, unrated commercial
paper issued by corporations with outstanding debt securities rated in the four
highest grades by S&P and Moody's and bank certificates of deposit and bankers'
acceptances issued or guaranteed by national or state banks and repurchase
agreements considered by the Fund to have investment quality. Under unusual
market or economic conditions, the Fund for temporary defensive purposes may
invest up to 100% of its assets in cash or cash equivalents.
Principal Government Securities Income Fund
The objective of Principal Government Securities Income Fund is a high
level of current income, liquidity and safety of principal.
The Fund will invest in obligations issued or guaranteed by the United
States Government or by its agencies or instrumentalities and in repurchase
agreements collateralized by such obligations. Such securities 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 other U.S. Government
Securities. 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 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 FNMA's or FHLMC's operations or
to assist FNMA or FHLMC in any other manner. The Fund may maintain reasonable
amounts of cash or short-term debt securities not issued or guaranteed by the
U.S. Government or its agencies or instrumentalities for daily cash management
purposes or pending selection of long-term investments.
Depending on market conditions, a substantial portion of the assets may be
invested in GNMA Certificates of the modified pass-through type and in
repurchase agreements collateralized by such obligations. GNMA is a United
States Government corporation within the Department of Housing and Urban
Development. 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 to GNMA for
approval. 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, which are the only kind in which the Fund intends to invest,
entitle the holder to receive all interest and principal payments owed on the
mortgages in the pool (net of the issuer and GNMA fee of .5% prescribed by
regulation), regardless of 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 Fund. 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 Fund shares will
fluctuate as interest rates change.
Mortgagors may pay off their mortgages at any time. Expected prepayments of
the mortgages can affect the market value of the GNMA Certificate, and actual
prepayments can affect the return ultimately received. Prepayments, like
scheduled payments of principal, are reinvested by the Fund 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 Fund 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 Marking 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 paper is issued
as needs arise by an agency and is traded regularly in denominations similar to
those in which government obligations are traded.
The Fund will not engage in the trading of securities for the purpose of
realizing short-term profits, but it will adjust its portfolio as considered
advisable in view of prevailing or anticipated market conditions and the Fund's
investment objective. Accordingly, the Fund may sell portfolio securities in
anticipation of a rise in interest rates and purchase securities for inclusion
in its portfolio in anticipation of a decline in interest rates.
As a hedge against changes in interest rates, the Fund may enter into
contracts with dealers in GNMA Certificates whereby the Fund agrees to purchase
or sell an agreed-upon principal amount of GNMA Certificates at a specified
price on a certain date. The Fund may enter into similar purchase agreements
with issuers of GNMA Certificates other than Principal Mutual Life Insurance
Company. The Fund may also purchase optional delivery standby commitments which
give the Fund the right to sell particular GNMA Certificates 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 Fund. To
the extent the Fund engages in delayed delivery transactions it will do so for
the purpose of acquiring portfolio securities consistent with its investment
objective and policies and not for the purpose of investment leverage or to
speculate on interest rate changes. Liability accrues to the Fund at the time it
becomes obligated to purchase such securities, although delivery and payment
occur at a later date. From the time the Fund becomes obligated to purchase
securities on a delayed delivery basis, the Fund has all the rights and risks
attendant to the ownership of a security except that no interest accrues to the
purchaser until delivery. At the time the Fund enters into a binding obligation
to purchase such securities, Fund assets of a dollar amount sufficient to make
payment for the securities to be purchased will be segregated. The availability
of liquid assets for this purpose and the effect of asset segregation on the
Fund'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 Fund may engage in forward commitment agreements. Except as may be
imposed by these factors, there is no limit on the percent of the Fund's total
assets that may be committed to transactions in such agreements.
Cash equivalents in which the Fund invests include corporate commercial
paper rated A-1+, A-1 or A-2 by S&P or P-1 or P-2 by Moody's, unrated commercial
paper issued by corporations with outstanding debt securities rated in the four
highest grades by S&P and Moody's and bank certificates of deposit and bankers'
acceptances issued or guaranteed by national or state banks and repurchase
agreements considered by the Fund to have investment quality.
Principal High Yield Fund
Principal High Yield Fund's primary investment objective is high current
income. Capital growth is a secondary objective when consistent with the
objective of high current income. This Fund is designed for investors willing to
assume additional risk in return for above average income.
In seeking to attain the Fund's objective of high current income, the Fund
invests primarily in high yielding, lower or nonrated fixed-income securities
(commonly known as "junk bonds"), constituting a diversified portfolio which the
Fund Manager believes does not involve undue risk to income or principal.
Normally, at least 80% of the Fund's assets will be invested in debt securities,
convertible securities (both debt and preferred stock) or preferred stocks that
are consistent with its primary investment objective of high current income. The
Fund's remaining assets may be invested in common stocks and other equity
securities in which the Growth-Oriented Funds may invest when these types of
investments are consistent with the objective of high current income.
The Fund seeks to invest its assets in securities rated Ba1 or lower by
Moody's or BB+ or lower by S&P or in unrated securities which the Fund's Manager
believes are of comparable quality. These securities are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and to repay principal in accordance with the terms of the obligation.
The Fund will not invest in securities rated below Caa by Moody's and below CCC
by S&P.
The rating services' descriptions of securities rating categories in which
the Fund may normally invest are as follows:
Moody's Investors Service, Inc. Bond Ratings - Ba: Bonds which are rated Ba
are judged to have speculative elements; their future cannot be considered as
well-assured. Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in this class. B:
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and a modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Standard & Poor's Corporation Bond Ratings - BB, B, CCC, CC: Debt rated
"BB", "B", "CCC" and "CC" is regarded, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. "BB" indicates the lowest degree of speculation and
"CC" the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Plus (+) or Minus (-): The ratings from "AA" to "BB" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
The higher-yielding, lower-rated securities in which the High Yield Fund
invests present special risks to investors. The market value of lower-rated
securities may be more volatile than that of higher-rated securities and
generally tends to reflect the market's perception of the creditworthiness of
the issuer and short-term market developments to a greater extent than more
highly-rated securities, which reflect primarily fluctuations in general levels
of interest rates. Periods of economic uncertainty and change can be expected to
result in increased volatility in the market value of lower-rated securities.
Further, such securities may be subject to greater risks of loss of income and
principal, particularly in the event of adverse economic changes or increased
interest rates, because their issuers generally are not as financially secure or
as creditworthy as issuers of higher-rated securities. Additionally, to the
extent that there is not a national market system for secondary trading of
lower-rated securities, there may be a low volume of trading in such securities
which may make it more difficult to value or sell those securities than
higher-rated securities. Adverse publicity and investor perceptions, whether or
not based on fundamental analysis, may decrease the values and liquidity of high
yield securities, especially in a thinly traded market.
Investors should recognize that the market for higher-yielding, lower-rated
securities is a relatively recent development that has not been tested by an
economic recession. An economic downturn may severely disrupt the market for
such securities and cause financial stress to the issuers which may adversely
affect the value of the securities held by the High Yield Fund and the ability
of the issuers of the securities held by it to pay principal and interest. A
default by an issuer may result in the Fund incurring additional expenses to
seek recovery of the amounts due it.
Some of the securities in which the Fund invests contain call provisions.
If the issuer of such a security exercises a call provision in a declining
interest rate market, the Fund would have to replace the security with a
lower-yielding security, resulting in a decreased return for investors. Further,
a higher-yielding security's value will decrease in a rising interest rate
market, which will be reflected in the Fund's net asset value per share.
Investors should carefully consider their ability to assume the risks of
investing in lower-rated securities before making an investment in the Fund, and
should be prepared to maintain their investment during periods of adverse market
conditions. Investors should not rely on the Fund for their short-term financial
needs.
The Fund seeks to minimize the risks of investing in lower-rated securities
through diversification, investment analysis and attention to current
developments in interest rates and economic conditions. Because the Fund invests
primarily in securities in the lower rating categories, the achievement of the
Fund's goals is more dependent on the Manager's ability than would be the case
if the Fund were investing in securities in the higher rating categories.
Although the Fund's Manager considers security ratings when making investment
decisions, it performs its own investment analysis and does not rely principally
on the ratings assigned by the rating services. There are risks in applying
credit ratings as a method for evaluating high yield securities. For example,
credit ratings evaluate the safety of principal and interest payments, not the
market value risk of high yield securities, and credit rating agencies may fail
to make timely changes in credit ratings to reflect subsequent events. The
Manager's analysis includes traditional security analysis considerations such as
the issuer's experience and managerial strength, changing financial condition,
borrowing requirements or debt maturity schedules, and its responsiveness to
changes in business conditions and interest rates. It also considers relative
values based on anticipated cash flow, interest or dividend coverage, asset
coverage and earnings prospects. In addition, the Manager analyzes general
business conditions and other factors such as anticipated changes in economic
activity and interest rates, the availability of new investment opportunities,
and the economic outlook for specific industries. The Manager continuously
monitors the issuers of portfolio securities to determine if the issuers will
have sufficient cash flow and profits to meet required principal and interest
payments and to assure the securities' liquidity so the Fund can meet redemption
requests.
During the fiscal year ended October 31, 1997, the percentage of the Fund's
portfolio securities invested in the various ratings established by Moody's,
based upon the weighted average ratings of the portfolio, was as follows:
Moody's Rating Portfolio Percentage
-------------- --------------------
Baa .84%
Ba 33.12
B 66.04
The above percentages for Ba and B rated securities include unrated
securities in the amount of 1.55% and 4.04%, respectively, which have been
determined by the Manager to be of comparable quality.
There may be times when, in the Manager's judgment, unusual market or
economic conditions make pursuing the Fund's basic investment strategy
inconsistent with the best interests of its shareholders. At such times the
Manager may employ alternative strategies, primarily seeking to reduce
fluctuations in the value of the Fund's assets. In implementing these
"defensive" strategies, the Fund may temporarily invest in money-market
instruments of all types, higher-rated fixed-income securities or any other
fixed-income securities that the Fund considers consistent with such strategy.
The yield to maturity on these securities would generally be lower than the
yield to maturity on lower-rated fixed-income securities. It is impossible to
predict when, or for how long, such alternative strategies will be utilized.
The Fund's Manager buys and sells securities for the Fund principally in
response to its evaluation of an issuer's continuing ability to meet its
obligations, the availability of better investment opportunities, and its
assessment of changes in business conditions and interest rates. From time to
time, consistent with its investment objectives, the Fund may sell securities
that have appreciated in value because of declines in interest rates. It may
also trade securities for the purpose of seeking short-term profits. Securities
may be sold in anticipation of a market decline or bought in anticipation of a
market rise. They may also be traded for securities of comparable quality and
maturity to take advantage of perceived short-term disparities in market values
or yields.
Principal Limited Term Bond Fund
The objective of Principal Limited Term Bond Fund is to seek a high level
of current income consistent with a relatively high level of principal stability
by investing in a portfolio of securities with a dollar weighted average
maturity of five years or less. The Fund seeks to achieve its objective by
investing primarily in high grade, short-term debt securities.
The Fund will invest, under normal circumstances, at least 80% of its total
assets in securities issued or guaranteed by the United States ("U.S.")
Government or its agencies or instrumentalities (as described in the discussion
of Principal Government Securities Income Fund) and other debt securities of
U.S. issuers rated within the three highest grades used by Standard & Poor's
(AAA, AA or A) or by Moody's (Aaa, Aa, or A) or which, if nonrated, are
comparable in quality in the opinion of the Fund's Manager. The balance of the
Fund's assets may be invested in debt securities rated in the fourth highest
grade by the major rating services (i.e., at least "Baa" by Moody's Investors
Service or "BBB" by Standard & Poor's Corporation, or their equivalents) or, if
not rated, judged to be of comparable quality. Securities rated BBB or Baa are
considered investment grade securities having adequate capacity to pay interest
and repay principal. Such securities may have speculative characteristics,
however, and changes in economic and other conditions are more likely to lead to
a weakened capacity of the issuer of such securities to make principal and
interest payments than is the case with higher rated securities. Under normal
circumstances, the Fund will maintain a dollar weighted average maturity of not
more than five years. In determining the average maturity of the Fund's
portfolio, the Manager may adjust the maturity dates on callable or prepayable
securities to reflect the Manager's judgment regarding the likelihood of such
securities being called or prepaid.
The Fund may also invest in other debt securities including corporate debt
securities such as bonds, notes and debentures, mortgage-backed securities
including collateralized mortgage obligations and other asset-backed securities.
For a more complete description of asset-backed securities, see "Principal
Government Securities Income Fund" discussion.
Cash equivalents in which the Fund invests include corporate commercial
paper rated A-1+, A-1 or A-2 by S&P or P-1 or P-2 by Moody's, unrated commercial
paper issued by corporations with outstanding debt securities rated in the four
highest grades by S&P and Moody's and bank certificates of deposit and bankers'
acceptances issued or guaranteed by national or state banks and repurchase
agreements considered by the Fund to have investment quality. Under unusual
market or economic conditions, the Fund for temporary defensive purposes may
invest up to 100% of its assets in cash or cash equivalents.
MONEY MARKET FUND
The Principal Funds currently include one Fund offering Class R shares
which seeks a high level of income through investments in short-term securities.
This Fund is Principal Cash Management Fund referred to as the "Money Market
Fund." Securities in which the Principal Cash Management Fund will invest may
not yield as high a level of current income as securities of lower quality and
longer maturities which generally have less liquidity, greater market risk and
more fluctuation.
The Fund will limit its portfolio investments to United States dollar
denominated instruments that the Manager, subject to the oversight of the Board
of Directors, determines present minimal credit risks and which at the time of
acquisition are "Eligible Securities" as that term is defined in regulations
issued under the Investment Company Act of 1940. Eligible Securities include:
(1) A security with a remaining maturity of 397 days or less that is rated
(or that has been issued by an issuer that is rated in respect to a
class of short-term debt obligations, or any security within that
class, that is comparable in priority and security with the security)
by a nationally recognized statistical rating organization in one of
the two highest rating categories for short-term debt obligations; or
(2) A security that at the time of issuance was a long-term security with a
remaining maturity of 397 calendar days or less, and whose issuer has
received from a nationally recognized statistical rating organization a
rating, with respect to a class of short-term debt obligations (or any
security within that class) that is now comparable in priority and
security with the security, in one of the two highest rating categories
for short-term debt obligations; or
(3) an unrated security that is of comparable quality to a security meeting
the requirements of (1) or (2) above, as determined by the board of
directors.
Principal Cash Management Fund will not invest more than 5% of its total
assets in the following securities:
(1) Securities which, when acquired by the Fund (either initially or upon
any subsequent rollover), are rated in the second highest rating
category for short-term debt obligations;
(2) Securities which at the time of issuance were long-term securities but
when acquired by the Fund have a remaining maturity of 397 calendar
days or less, if the issuer of such securities is rated, with respect
to a class of comparable short-term debt obligations, in the second
highest rating category for short-term obligations; and
(3) Securities which are unrated but are determined by the Fund's Board of
Directors to be of comparable quality to securities rated in the second
highest rating category for short-term debt obligations.
The Fund will maintain a dollar-weighted average portfolio maturity of 90
days or less. The Fund intends to hold its investments until maturity, but may
on occasion trade securities to take advantage of market variations. Also,
revised valuations of an issuer or redemptions may result in sales of portfolio
investments prior to maturity or at a time when such sales might otherwise not
be desirable. The Fund's right to borrow to facilitate redemptions may reduce
the need for such sales. The sale of portfolio securities would be a taxable
event. See "Tax Treatment of the Funds, Dividends and Distributions." It is the
policy of the Fund to be as fully invested as reasonably practical at all times
to maximize current income.
Since portfolio assets of the Fund will consist of short-term instruments,
replacement of portfolio securities will occur frequently. However, since this
Fund expects to usually transact purchases and sales of portfolio securities
with issuers or dealers on a net basis, it is not anticipated that the Fund will
pay any significant brokerage commissions. The Fund is free to dispose of
portfolio securities at any time, when changes in circumstances or conditions
make such a move desirable in light of its investment objective.
The objective of Principal Cash Management Fund is to seek as high a level
of current income available from short-term securities as is considered
consistent with preservation of principal and maintenance of liquidity by
investing its assets in a portfolio of money market instruments. These money
market instruments are U.S. Government Securities, U.S. Government Agency
Securities, Bank Obligations, Commercial Paper, Short-term Corporate Debt,
Taxable Municipal Obligations and Repurchase Agreements, which are described
briefly below and in more detail in the Statement of Additional Information.
U.S. Government Securities are securities issued or guaranteed by the U.S.
Government, including treasury bills, notes and bonds.
U.S. Government Agency Securities are obligations issued or guaranteed by
agencies or instrumentalities of the U.S. Government whether supported by the
full faith and credit of the U.S. Treasury or only by the credit of a particular
agency or instrumentality.
Bank Obligations consist of certificates of deposit which are generally
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return and bankers acceptances
which are time drafts drawn on a commercial bank by a borrower, usually in
connection with international commercial transactions.
Commercial Paper is short-term promissory notes issued by corporations
primarily to finance short-term credit needs.
Short-term Corporate Debt consists of notes, bonds or debentures which at
the time of purchase have one year or less remaining to maturity.
Taxable Municipal Obligations are short-term obligations issued or
guaranteed by state and municipal issuers which generate taxable income.
Repurchase Agreements are transactions under which securities are purchased
from a bank or securities dealer with an agreement by the seller to repurchase
the securities at the same price plus interest at a specified rate. Generally,
Repurchase Agreements are of short duration, usually less than a week but on
occasion for longer periods.
CERTAIN INVESTMENT POLICIES AND RESTRICTIONS
Following is a discussion of certain investment practices that the Funds
may use in an effort to achieve their respective investment objectives.
Repurchase Agreements/Lending Portfolio Securities
Each of the Funds may enter into repurchase agreements with, and each of
the Funds, except the Capital Value Fund, Growth Fund and Cash Management Fund,
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 to the Fund if the
other party should default on its obligations, and the Fund 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 each Fund's Board of
Directors to deal with those risks. None of the Funds intends either (i) to
enter into repurchase agreements that mature in more than seven days if any such
investment, together with any other illiquid securities held by the Fund, would
amount to more than 15% (10% for the Government Securities Income Fund) of its
total assets or (ii) to lend securities in excess of 30% of its total assets.
Forward Commitments
From time to time, each of the Income-Oriented Funds and the Balanced Fund
may enter into forward commitment agreements which call for the Fund to purchase
or sell a security on a future date and at a price fixed at the time the Fund
enters into the agreement. Each of these Funds may also acquire rights to sell
its investments to other parties, either on demand or at specific intervals.
Warrants
Each of the Funds, except the Cash Management Fund and Government
Securities Income Fund, 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
or American Stock Exchange. For the International Emerging Markets Fund,
International Fund and International SmallCap Fund, the 2% limitation also
applies to warrants not listed on the Toronto Stock Exchange.
Borrowing
As a matter of fundamental policy, each Fund may borrow money only for
temporary or emergency purposes the Capital Value, Cash Management, Growth,
Tax-Exempt Bond and Tax-Exempt Cash Management Funds may borrow only from banks.
Further, each Fund may borrow only in an amount not exceeding 5% of its assets,
except:
(1) the Capital Value Fund and Growth Fund, each of which may borrow only
in an amount not exceeding the lesser of (i) 5% of the value of its
assets less liabilities other than such borrowings, or (ii) 10% of its
assets taken at cost at the time the borrowing is made; and
(2) the Cash Management Fund which may borrow only in an amount not
exceeding the lesser of (i) 5% of the value of its assets, or (ii) 10%
of the value of its net assets taken at cost at the time the borrowing
is made.
Options
Each of the Funds (except Capital Value, Cash Management, Growth,
Tax-Exempt Bond and Tax-Exempt Cash Management Funds) may purchase covered
spread options, which would give the Fund the right to sell a security that it
owns at a fixed dollar spread or yield spread in relationship to another
security that the Fund does not own, but which is used as a benchmark. These
same Funds may also purchase and sell financial futures contracts, options on
financial futures contracts and options on securities and securities indices,
but will not invest more than 5% of their assets in the purchase of options on
securities, securities indices and financial futures contracts or in initial
margin and premiums on financial futures contracts and options thereon. The
Funds 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.
General
The Statement of Additional Information includes further information
concerning the Funds' investment policies and applicable investment
restrictions. The investment objectives of the Funds are fundamental and certain
investment restrictions designated as such in this Prospectus or in the
Statement of Additional Information are fundamental policies that may not be
changed without approval by the holders of the lesser of: (i) 67% of the Fund's
shares present or represented at a shareholders' meeting at which the holders of
more than 50% of such shares are present or represented by proxy; or (ii) more
than 50% of the outstanding shares of the Fund. All other investment policies
described in this Prospectus and the Statement of Additional Information are not
fundamental and may be changed by the Board of Directors of the appropriate Fund
without shareholder approval.
RISK FACTORS
An investment in any of the Growth-Oriented Funds involves the financial
and market risks that are inherent in any investment in equity 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.
An investment in any of the Income-Oriented Funds involves market risks
associated with movements in interest rates. The market value of the Funds'
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 Funds' net asset values 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.
The yields on an investment in the Cash Management Fund will vary with
changes in short-term interest rates. In addition, the investments of the Cash
Management Fund are subject to the ability of the issuer to pay interest and
principal when due.
Each of the following Principal Funds may invest in foreign securities to
the indicated percentage of its assets: International, International Emerging
Markets and International SmallCap Funds - 100%; Real Estate - 25%; Balanced,
Blue Chip, Bond, Capital Value, High Yield, Limited Term Bond Fund, MidCap,
SmallCap and Utilities Funds - 20%. The Government Securities Income Fund may
not invest in foreign securities. The Cash Management and Tax-Exempt Cash
Management Funds do not invest in foreign securities other than those that are
United States dollar denominated. United States dollar denominated means that
all principal and interest payments for the security are payable in U.S. dollars
and that the interest rate of, the principal amount to be repaid and the timing
of payments related to the securities do not vary or float with the value of a
foreign currency, the rate of interest on foreign currency borrowings or with
any other interest rate or index expressed in a currency other than U.S.
dollars. Debt securities issued in the United States pursuant to a registration
statement filed with the Securities and Exchange Commission are not treated as
foreign securities for purposes of these limitations. Investment in foreign
securities presents certain risks which may affect a Fund's 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, 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.
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 Fund's investment in foreign
securities may also result in higher custodial costs and the costs associated
with currency conversions.
Securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. 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 Invista Capital Management, Inc. ("Invista")
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.
HOW THE FUNDS ARE MANAGED
Under Maryland law, the business and affairs of each of the Funds are
managed under the direction of its Board of Directors. Investment services and
certain other services are furnished to the Funds under the terms of a
Management Agreement between each of the Funds and the Manager. The Manager for
the Funds is Principal Management Corporation (the "Manager") (formerly known as
Princor Management Corporation), 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
November 30, 1997, the Manager served as investment advisor for 28 such funds
with assets totaling approximately $5.0 billion.
The Manager is responsible for investment advisory, managerial and
administrative services for the Funds. However, under a Sub-Advisory Agreement
between Invista Capital Management, Inc. ("Invista") and the Manager, Invista
performs all the investment advisory responsibilities of the Manager for the
Growth-Oriented Funds (except the Real Estate Fund), the Government Securities
Income Fund and the Limited Term Bond Fund. The Manager will reimburse Invista
for the cost of providing these services. 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 September
30, 1997 were approximately $25.3 billion. Invista's address is 1800 Hub Tower,
699 Walnut, Des Moines, Iowa 50309.
The Manager or Invista advises the Funds on investment policies and on the
composition of the Funds' portfolios. In this connection, the Manager or Invista
furnishes to the Board of Directors of each Fund a recommended investment
program consistent with that Fund's investment objective and policies. The
Manager or 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 Manager or Invista has assigned certain individuals the primary
responsibility for the day-to-day management of each Fund's portfolio. The
persons primarily responsible for the day-to-day management of each Fund are
identified in the table below:
<TABLE>
<CAPTION>
Primarily
Fund Responsible Since Person Primarily Responsible
---- ----------------- ----------------------------
<S> <C> <C>
Balanced Fund April, 1993 Judith A. Vogel, CFA (BA degree, Central College). Vice President, Invista
Capital Management, Inc., since 1987. Co-Manager since December, 1997:
Martin J. Schafer (BBA degree, University of Iowa). Vice President, Invista
Capital Management, Inc.
Blue Chip Fund March, 1991 Mark T. Williams, CFA (MBA degree, Drake University). Vice President,
(Fund's inception) Invista Capital Management, Inc., since 1995; Investment Officer, 92-95.
Prior thereto, Security Analyst.
Bond Fund November, 1996 Scott A. Bennett,CFA (MBA degree, University of Iowa) Assistant Director
Investment Securities, Principal Mutual Life Insurance Company, since 1996;
Prior thereto, Investment Manager.
Capital Value Fund October, 1969 David L. White, CFA (BBA degree, University of Iowa). Executive Vice
(Fund's inception) President, Invista Capital Management, Inc., since 1984. Co-Manager since
November 1996: Catherine A. Green, CFA, (MBA degree, Drake University).
Vice President, Invista Capital Management, Inc. since 1987.
Government Securities May, 1985 Martin J. Schafer (BBA degree, University of Iowa). Vice President, Invista
Income Fund Fund's inception) Capital Management, Inc., since 1992. Director - Securities Trading,
Principal Mutual Life Insurance Company 1992; Prior thereto, Associate Director.
Growth and MidCap August, 1987 Michael R. Hamilton, (MBA degree, Bellarmine College). Vice President, Funds
and December, 1987 Invista Capital Management, Inc., since 1987.
(Fund's inception),
respectively
High Yield Fund December, 1987 James K. Hovey, CFA (MBA degree, University of Iowa). Director - Investment
(Fund's inception) Securities, Principal Mutual Life Insurance Company, since 1990; Prior thereto,
Assistant Director Investment Securities.
International Fund April, 1994 Scott D. Opsal, CFA (MBA degree, University of Minnesota). Executive Vice
President and Chief Investment Officer, Invista Capital Management, Inc.,
since 1997. Vice President, 1986-1997.
International Emerging May, 1997 Kurtis D. Spieler, CFA (MBA degree, Drake University). Vice President,
Markets Fund (Fund's inception) Invista Capital Management, Inc., since 1995; Investment Officer, 94-95.
Prior thereto, Investment Manager, Principal Mutual Life Insurance Company.
International SmallCap May, 1997 Darren K. Sleister, CFA (MBA degree, University of Iowa). Investment Fund
(Fund's inception) Officer, Invista Capital Management, Inc., since 1995; Prior thereto, Security
Analyst.
Limited Term Bond February, 1996 Martin J. Schafer (BBA degree, University of Iowa). Vice President, Invista
Fund (Fund's inception) Capital Management, Inc., since 1992. Director-Securities Trading,
Principal Mutual Life Insurance Company 1992; Prior thereto, Associate
Director.
Real Estate Fund December, 1997 Kelly D. Rush, CFA (MBA degree, University of Iowa). Assistant Director -
(Fund's inception) Investment - Commercial Real Estate, Principal Mutual Life Insurance Company,
since 1996; Prior thereto, Senior Administrator Investment -
Commercial Real Estate.
SmallCap Fund December, 1997 Co-Manager: Mark T. Williams, CFA (MBA degree, Drake University). Vice
(Fund's inception) President, Invista Capital Management, Inc., since 1995;
Investment Officer, 1992-1995. Co-Manager: John F. McClain, (MBA degree Indiana
University). Vice President, Invista Capital Management, Inc., since 1995;
Investment Officer, 1992-1995.
Utilities Fund April, 1993 Catherine A. Green, CFA (MBA degree, Drake University). Vice President,
(Fund's inception) Invista Capital Management, Inc., since 1987.
</TABLE>
Until August 1, 1988 the International Fund's portfolio was managed by
Principal Management, Inc. of Edmonton, Canada and Scottsdale, Arizona, which
company has changed its name to Sea Investment Management, Inc. The Fund's
previous manager and the current manager are unaffiliated. This change in
managers should be kept in mind when reviewing historical investment results.
For a description of the investment and other services provided by the
Manager, see "Cost of Manager's Services" in the Statement of Additional
Information. The management fee and total Class A share or total Class R share
expenses incurred by each Fund for the period ended October 31, 1997 were equal
to the following percentages of each Fund's respective average net assets:
<TABLE>
<CAPTION>
Class A Shares Class R Shares
---------------------------- ----------------------------
Total Total
Manager's Annualized Manager's Annualized
Fund Fee Expenses Fee Expenses
---- --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Balanced Fund .60% 1.33% .60% 1.99%
Blue Chip Fund .50% 1.30% .50% 1.89%
Bond Fund .46% .95%* .16% 1.45%*
Capital Value Fund .40% .70% .40% 1.50%
Cash Management Fund .37% .63% .28% 1.26%*
Government Securities Income Fund .46% .84% .46% 1.79%
Growth Fund .44% 1.03% .44% 1.69%
High Yield Fund .60% 1.22% .60% 2.42%
International Fund .71% 1.39% .71% 2.10%
International Emerging Markets Fund 1.23% 2.03% 1.23% 2.20%
International SmallCap Fund 1.19% 1.99% 1.19% 2.15%
Limited Term Bond Fund .25% .90%* .00% 1.48%*
MidCap Fund .59% 1.26% .59% 1.87%
Utilities Fund .50% 1.15%* .00% 1.65%*
<FN>
*After waiver.
</FN>
</TABLE>
The Manager voluntarily waived a portion of its fee for the Bond, Cash
Management, Limited Term Bond and Utilities Funds throughout the fiscal year
ended October 31, 1997. The Manager intends to continue its voluntary waiver
and, if necessary, pay expenses normally payable by the Bond, Limited Term Bond
and Utilities Funds through October 31, 1998. The waiver, if necessary, for the
Cash Management Fund will continue through February 28, 1998. If necessary,
waivers will be in amounts that will maintain a total level of operating
expenses which as a percentage of average net assets attributable to a class on
an annualized basis during that period will not exceed, for the Class A shares,
.95% for the Bond Fund, .75% for the Cash Management Fund, .90% for the Limited
Term Bond Fund and 1.15% for the Utilities Fund, and for the Class R shares,
1.45% for the Bond Fund, 1.25% for the Cash Management Fund, 1.50% for the
Limited Term Bond Fund and 1.65% for the Utilities Fund. The effect of the
waivers is and will be to reduce each Fund's annual operating expenses and
increase each Fund's yield.
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 each 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 in connection with its performance of the
Management Agreements, and that the Manager will reimburse Principal Mutual Life
Insurance Company for its costs incurred in this regard.
Among the expenses paid by each Fund are brokerage commissions on portfolio
transactions, the cost of stock issue and transfer and dividend disbursements,
administration of shareholder accounts, custodial fees, expenses of registering
and qualifying shares for sale after the initial registration, auditing and
legal expenses, fees and expenses of unaffiliated directors, the cost of
shareholder meetings and taxes and interest (if any).
The Funds may from time to time execute transactions for portfolio
securities with, and pay related brokerage commissions to, Principal Financial
Securities, Inc. ("PFS"), Morgan Stanley Trust Co. and Morgan Stanley and Co.,
each a broker-dealer affiliated with Princor and/or the Manager for each of the
Funds. PFS also provides distribution services for Principal Cash Management
Fund for which it is compensated by the Manager. These services include, but are
not limited to, providing office space, equipment, telephone facilities and
various personnel as necessary or beneficial to establish and maintain
shareholder accounts. PFS receives a fee from the Manager calculated as a
percentage of the average net asset value of shares of the Fund held in PFS
client accounts during the period for which PFS provides the services. During
the fiscal years ended October 31, 1995, 1996, and 1997, PFS received fees in
the amount of $991,520, $1,650,714 and $1,765,033 respectively, in consideration
of the services it rendered to the Cash Management Fund.
The Manager serves as investment advisor, dividend disbursing agent and,
directly and through an affiliate, as transfer agent for each of the Funds
sponsored by Principal Mutual Life Insurance Company. The Funds reimburse the
Manager for the costs of providing these services.
HOW TO PURCHASE SHARES
Purchases are generally made by completing an Account Application or a
Princor IRA Application and mailing it to Princor. You may obtain either of
these applications by calling Princor at 1-800-774-6267. Shares will be issued
at the offering price next computed after the application is received at
Princor's main office and Princor receives the amount to be invested. Generally,
the initial amount to be invested in a Princor IRA will be directly transferred
to Princor from the retirement plan in which the investor participates. However,
in some cases the investor will purchase shares by check. Checks for IRA
accounts should be made payable to Principal Mutual Life. Checks for other than
IRA accounts should be made payable to Principal Mutual Funds. If investing by
check, shares will be issued at the offering price next computed after the
completed application and check are received at Princor's main office.
Subsequent purchases will be executed at the price next computed after receipt
of the investor's check at Princor's main office. All orders are subject to
acceptance by the Fund or Funds and Princor.
Redemptions by shareholders investing by check will be effected only after
payment has been collected on the check, which may take up to eight days or
more. Investors considering redeeming or exchanging shares or transferring
shares to another person shortly after purchase should pay for those shares with
a certified check, bank cashier's check or money order to avoid any delay in
redemption, exchange or transfer.
Minimum Purchase Amount. You may open an account with any of the Funds with
a minimum initial investment of $1,000 ($250 for an IRA or account established
under the Uniform Gifts to Minors Act or Uniform Transfers Act). Additional
investments of $100 or more may be made at any time without completing a new
application. The minimum initial and subsequent investment amounts are not
applicable to accounts designated as receiving accounts in a Dividend Relay
Election. Each 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.
Automatic Investment Plan. You may make regular monthly investments through
automatic deductions from the account of a bank or similar financial
institution. The minimum monthly purchase is $25 for all Funds except the Money
Market Funds, which have a $100 monthly minimum requirement. A $25 minimum
monthly purchase may be established for the Money Market Funds if the account
value is at least $1,000 at the time the plan is established. Plan forms and
preauthorized check agreements are available from Princor on request. There is
no obligation to continue the plan and it may be terminated by the investor at
any time.
Each Fund described in this Prospectus offers investors three classes of
shares which bear sales charges in different forms and amounts, Class A shares,
Class B shares and Class R shares. Only Class R shares are offered through this
Prospectus. Class A shares are described herein only because Class R shares
convert to Class A shares as described below.
Class R Shares. Class R shares are purchased without an initial sales
charge or a contingent deferred sales charge ("CDSC"). Class R shares bear a
higher 12b-1 fee than Class A shares, currently at the annual rate of up to .75%
of the Fund's average net assets attributable to Class R shares. See
"Distribution and Shareholder Servicing Plans and Fees." Class R shares provide
you the benefit of putting all of your dollars to work from the time the
investment is made, but (until conversion to Class A shares) will have a higher
expense ratio and pay lower dividends than Class A shares due to the higher
12b-1 fee. Class R shares will automatically convert to Class A shares, based on
relative net asset value (without a sales charge), on the first business day of
the 49th month after the purchase date. Class R shares acquired by exchange from
Class R shares of another Principal fund will convert into Class A shares based
on the time of the initial purchase. (See "How to Exchange Shares".) At the same
time, a pro rata portion of all shares purchased through reinvestment of
dividends and distributions would convert into Class A shares, with that portion
determined by the ratio that the shareholder's Class R shares converting into
Class A shares bears to your total Class R shares that were not acquired through
dividends and distributions. The conversion of Class R shares to Class A shares
is subject to the continuing availability of a ruling from the Internal Revenue
Service or an opinion of counsel that such conversions will not constitute
taxable events for Federal tax purposes. There can be no assurance that such
ruling or opinion will be available, and the conversion of Class R shares to
Class A shares will not occur if such ruling or opinion is not available. In
such event, Class R shares would continue to be subject to higher expenses than
Class A shares for an indefinite period.
Class A Shares. If you invest less than $1 million in Class A shares
(except Class A shares of the Cash Management Fund), you pay a sales charge at
the time of purchase. Certain purchases of Class A shares qualify for reduced
sales charges. Class A share purchases of $1 million or more are not subject to
a sales charge at the time of purchase, but may be subject to a contingent
deferred sales charge if redeemed within 18 months of purchase. See "Offering
Price of Funds' Shares." Class A shares of each of the Funds, except the Cash
Management Fund, currently bear a 12b-1 fee at the annual rate of up to 0.25%
(0.15% for the Limited Term Bond Fund) of the Fund's average net assets
attributable to Class A shares. See "Distribution and Shareholder Servicing
Plans and Fees."
Which arrangement is better for you? The decision as to which class of
shares provides a more suitable investment for you depends on a number of
factors, including the amount and intended duration of the investment. Orders
for Class R shares that equal or exceed $500,000 will be treated as orders for
Class A shares, unless accompanied by a written acknowledgement that the order
should be treated as an order for Class R shares.
OFFERING PRICE OF FUNDS' SHARES
The Funds offer their respective shares continuously through Princor, which
is the principal underwriter for the Funds and sells shares as agent on behalf
of the Funds. Princor may select other dealers through which shares of the Funds
may be sold. Certain dealers may not sell all classes of shares.
Class R shares. Class R shares are sold to eligible purchasers at net asset
value; no front-end load or contingent deferred sales charge applies to the
purchase of Class R shares. Class R shares are offered only through Princor and
other dealers it selects.
Class A shares. Class A shares of Principal Cash Management Fund are sold
to the public at net asset value; no sales charge applies to such purchases.
Class R shares convert to Class A shares at NAV, without a sales charge, as
previously described. Class A shares of the Growth-Oriented and Income-Oriented
Funds are sold to the public at the net asset value plus a sales charge which
ranges from a high 4.75% (1.50% for the Limited Term Bond Fund) to a low of 0%
of the offering price (equivalent to a range of 4.99% to 0% of the net amount
invested) according to the schedule below. Selected dealers are allowed a
concession as shown. At Princor's discretion, the entire sales charge may at
times be reallowed to dealers. In some situations, depending on the services
provided by the dealer, the concession may be less. Any dealer allowance on
purchases not involving a sales charge will be determined by Princor.
<TABLE>
<CAPTION>
Sales Charge for
All Funds Except Sales Charge for
Limited Term Bond Fund Limited Term Bond Fund Dealers Allowance as
Sales Charge as % of: Sales Charge as % of: % of Offering Price
------------------------ ------------------------ --------------------------------
Offering Net Amount Offering Net Amount All Funds Except Limited Term
Price Invested Price Invested Limited Term Bond Bond
-------- ---------- -------- ---------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Less than $50,000 4.75% 4.99% 1.50% 1.52% 4.00% 1.25%
$50,000 but less than $100,000 4.25% 4.44% 1.25% 1.27% 3.75% 1.00%
$100,000 but less than $250,000 3.75% 3.90% 1.00% 1.10% 3.25% .75%
$250,000 but less than $500,000 2.50% 2.56% 0.75% 0.76% 2.00% .50%
$500,000 but less than $1,000,000 1.50% 1.52% 0.50% 0.50% 1.25% .25%
$1,000,000 or more 0 0 0 0 .75% .25%
</TABLE>
CDSC on Class A Shares. Purchases of Class A shares of $1,000,000 or more
may be subject to CDSC upon redemption. A CDSC is payable to Princor on these
investments in the event of a share redemption within 18 months following the
share purchase, at the rate of .75% (.25% for the Limited Term Bond Fund) of the
lesser of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares. Shares subject to
the CDSC which are exchanged into another Principal mutual fund will continue to
be subject to the CDSC until the original 18 month period expires. However, no
CDSC is payable with respect to redemptions of Class A shares used to fund a
Princor 401 (a) or Princor 401 (k) retirement plan, except redemptions resulting
from the termination of the plan or transfer of plan assets.
The CDSC on Class A shares will be waived on redemptions of shares in
connection with certain withdrawals from certain retirement plans. See Statement
of Additional Information. Up to 10% of the value of Class A shares subject to a
Periodic Withdrawal Plan may also be redeemed each year without a CDSC. See
"Periodic Withdrawal Plan."
Investors may be eligible to buy Class A shares at reduced sales charges.
Purchasers of Class A shares may benefit from Rights of Accumulation and
Statement of Intention as well as the reduced sales charge available for the
investment of certain life insurance and annuity contract death benefits and
various Employee Benefit Plans and other plans. Descriptions are included in the
Statement of Additional Information.
Investors may be able to purchase Class A shares at net asset value. The
following persons may purchase Class A shares of the Growth-Oriented Funds and
Income-Oriented Funds at the net asset value (without a sales charge): (1)
Principal Mutual Life Insurance Company and its directly and indirectly owned
subsidiaries; (2) Active and retired directors, officers and employees of any of
the Funds, Principal Mutual Life Insurance Company, and directly and indirectly
owned subsidiaries of Principal Mutual Life Insurance Company (including
full-time insurance agents of, and persons who have entered into insurance
brokerage contracts with, Principal Mutual Life Insurance Company and its
directly and indirectly owned subsidiaries, and employees of such persons); (3)
The Principal Financial Group Employees' Credit Union; (4) Non-ERISA investment
advisory clients of Invista Capital Management, Inc., an indirectly wholly-owned
subsidiary of Principal Mutual Life Insurance Company; (5) Sales representatives
and employees of sales representatives of Princor or other dealers through which
shares of the Funds are distributed; (6) Spouses, surviving spouses and
dependent children of the foregoing persons; (7) Trusts primarily for the
benefit of the foregoing individuals; (8) certain "wrap accounts" for the
benefit of clients of Princor and other broker-dealers or financial planners
selected by Princor; and (9) clients of a registered representative of Princor
or other dealers through which shares of the Funds are distributed and who has
become affiliated with Princor or other dealer within 180 days prior to the date
of the purchase of Class A shares of the Funds, if the investment represents the
proceeds of a redemption within that 180 day period of shares of another
investment company the purchase of which included a front-end sales charge or
the redemption of which was subject to a contingent deferred sales charge; (10)
Unit Investment Trust sponsored by Principal Mutual Life Insurance Company
and/or its directly or indirectly owned subsidiaries; and (11) certain employee
welfare benefit plan customers of Principal Mutual Life Insurance Company for
whom Plan Deposit Accounts are established.
Each of the Funds has obtained an exemptive order from the Securities and
Exchange Commission ("SEC") to permit each Fund to offer its shares at net asset
value to participants of certain annuity contracts issued by Principal Mutual
Life Insurance Company. In addition, each of these Funds are available at net
asset value to the extent the investment represents the proceeds from a total
surrender of certain unregistered annuity contracts issued by Principal Mutual
Life Insurance Company, and for which Principal Mutual Life Insurance Company
waives any applicable contingent deferred sales charges or other contract
surrender charges.
The Funds reserve the right to discontinue offering shares at net asset
value and/or at a reduced sales charge at any time for new accounts and upon 60
days notice to shareholders of existing accounts.
DISTRIBUTION AND SHAREHOLDER SERVICING PLANS AND FEES
Class R Distribution Plan. Each of the Funds described in this Prospectus
has adopted a distribution plan for the Class R shares. Each Class R Plan
provides for payments by the Fund to Princor at the annual rate of up to .75% of
the Fund's average net assets attributable to Class R shares.
Although Class R shares are sold without an initial sales charge, Princor
incurs certain distribution expenses. In addition, Princor may remit on a
continuous basis up to .25% to Registered Representatives and other selected
Dealers (including, for this purpose, certain financial institutions) as a trail
fee in recognition of their ongoing services and assistance.
Class A Distribution Plan. Each of the Funds, except the Cash Management
Fund, has adopted a distribution plan for the Class A shares. The Fund will make
payments from its assets to Princor pursuant to this Plan after the end of each
month at an annual rate not to exceed 0.25% (0.15% for the Limited Term Bond
Fund) of the average daily net asset value of the Fund. Princor will retain such
amounts as are appropriate to compensate for actual expenses incurred in
distributing and promoting the sale of the Fund shares but may remit on a
continuous basis up to .25% (0.15% for the Limited Term Bond Fund) to Registered
Representatives and other selected Dealers (including, for this purpose, certain
financial institutions) as a trail fee in recognition of their services and
assistance.
General. The purpose of the Plans is to permit the Fund to compensate
Princor for expenses incurred by it in promoting and distributing Fund shares
and providing services to Fund shareholders. If the aggregate payments received
by Princor under any of the Plans in any fiscal year exceed the expenditures
made by Princor in that year pursuant to that Plan, Princor will promptly
reimburse the Fund for the amount of the excess. If expenses under a Plan exceed
the amount for which Princor may be compensated in any one fiscal year, the Fund
will not carry over such expenses to the next fiscal year. The Funds have no
legal obligation to pay any amount pursuant to the Plans that exceeds the
compensation limit. The Funds will not pay, directly or indirectly, interest,
carrying charges, or other financing costs in connection with the Plans. The
Plans are further described in the Statement of Additional Information.
DETERMINATION OF NET ASSET VALUE OF FUNDS' SHARES
Each Fund calculates net asset value of a share of each class by dividing
the total value of the assets attributable to the class, less all liabilities
attributable to the class, by the number of shares outstanding of the class.
Shares are valued as of the close of trading on the New York Stock Exchange each
day the Exchange is open.
Growth-Oriented and Income-Oriented Funds
The following valuation information applies to the Growth-Oriented and
Income-Oriented Funds. Securities for which market quotations are readily
available are valued using those quotations. Securities with remaining
maturities of 60 days or less are valued at amortized cost when it is determined
by the Board of Directors that amortized cost reflects fair value. Other assets
are valued at fair value as determined in good faith through procedures
established by the Board.
As previously described, some of the Funds may purchase foreign securities,
whose trading 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 Fund's 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 under procedures established and regularly reviewed by the Board
of Directors. To the extent the Fund invests in foreign securities listed on
foreign exchanges which trade on days on which the Fund does not determine its
net asset value, for example Saturdays and other customary national U.S.
holidays, the Fund's net asset value could be significantly affected on days
when shareholders have no access to the Fund.
Money Market Fund
Portfolio securities of the Cash Management Fund are valued at amortized
cost. For a description of this calculation procedure see the Statement of
Additional Information. The Cash Management Fund reserves the right to calculate
or estimate its net asset value more frequently than once a day if it deems it
desirable.
DISTRIBUTION OF INCOME DIVIDENDS AND REALIZED CAPITAL GAINS
Growth-Oriented and Income-Oriented Funds
Each of these Funds distributes substantially all of its net income to
shareholders each year according to the following schedule:
<TABLE>
<CAPTION>
Funds Record date Payable date
----- ----------- ------------
Growth
------
<S> <C> <C> <C>
Balanced, Blue Chip, three business days before March 24, June 24,
Real Estate, and Utilities each payable date September 24 and December 24
(or previous business day)
Capital Value and Growth three business days before June 24 and December 24
each payable date (or previous business day)
International, International three business days before December 24
Emerging Markets, each payable date (or previous business day)
International SmallCap,
MidCap and SmallCap
Income
------
Bond, Government Securities three business days before monthly on the 24th (or
Income, High Yield, Limited each payable date previous business day)
Term Bond and Tax-Exempt Bond
</TABLE>
Net realized capital gains for each of the Funds, if any, will be
distributed annually. Generally the distribution will be made on the fourth
business day of December, to shareholders of record on the third business day
prior to the payable date.
On the Account Application, you can authorize income dividend and capital
gains distributions to be invested in additional Fund shares at net asset value
(without a sales charge), invested in shares of other Principal Funds or paid in
cash. You may change this instruction without charge at any time by giving ten
days written notice to the Fund.
Any dividends or distributions paid shortly after a purchase of shares 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. A shareholder of the Tax-Exempt Bond Fund who redeems
shares when tax-exempt income has been accrued but not declared as a dividend by
that Fund may have the portion of the redemption proceeds which represents such
income taxed at capital gains rates.
Money Market Fund
The Cash Management Fund declares dividends of all its daily net investment
income on each day the net asset value per share is determined. Dividends for
the Fund are payable daily and are automatically reinvested in full and
fractional shares of the Fund at the then current net asset value.
Net investment income of the Cash Management Fund, for dividend purposes,
consists of (1) accrued interest income plus or minus accrued discount or
amortized premium; plus or minus (2) all net short-term realized gains and
losses; minus (3) all accrued expenses of the Fund. Expenses of the Fund are
accrued each day. Net income will be calculated immediately prior to the
determination of net asset value per share of each Fund. Dividends payable on
Class R shares of the Cash Management Fund on a per share basis will be lower
than dividends payable on Class A shares of the Fund.
Since it is the policy of the Cash Management Fund, under normal
circumstances, to hold portfolio securities to maturity and to value portfolio
securities at amortized cost, the Fund does not expect any capital gains or
losses. If the Fund does experience gains, however, it could result in an
increase in dividends. Capital losses could result in a decrease in dividends.
If, for some extraordinary reason, the Fund realizes net long-term capital
gains, it will distribute them once every 12 months.
Since the net income of the Fund (including realized gains and losses on
the portfolio securities) is normally declared as a dividend each time the net
income of the Fund is determined, the net asset value per share of the Fund
normally remains at $1.00 immediately after each determination and dividend
declaration. Any increase in the value of a shareholder's investment in the
Fund, representing reinvestment of dividend income, is reflected by an increase
in the number of shares of the Fund in the account.
Normally the Fund will have a positive net income at the time of each
determination thereof. Net income may be negative if an unexpected liability
must be accrued or a loss is realized. If the net investment income of the Fund
determined at any time is a negative amount, the net asset value per share will
be reduced below $1.00. If this happens, the Fund may endeavor to restore the
net asset value per share to $1.00 by reducing the number of outstanding shares
by redeeming proportionately from shareholders without the payment of any
monetary consideration, such number of full and fractional shares as is
necessary to maintain a net asset value per share of $1.00. Each shareholder
will be deemed to have agreed to such a redemption in these circumstances by
investment in the Fund. The Fund may seek to achieve the same objective of
restoring the net asset value per share to $1.00 by not declaring dividends from
net income on subsequent days until restoration, with the result that the net
asset value per share would increase to the extent of positive net income which
is not declared as a dividend, or any other method approved by the Board of
Directors for the Fund.
The Board of Directors of the Fund may revise the above dividend policy, or
postpone the payment of dividends, if the Fund should have or anticipate any
large presently unexpected expense, loss or fluctuation in net assets which in
the opinion of the Board might have a significant adverse effect on the
shareholders.
Dividend Relay Election
Shareholders may elect to have dividends and capital gains distributions
from one of the Principal funds invested in shares of the same class of one of
the other Principal funds. This Dividend Relay Election can be made on the
application or at any time on 10 days written notice or, if telephone
transaction services apply to the account from which the dividends and
distributions originate, on 10 days notice by telephone to the Fund. A signature
guarantee may be required to make the Dividend Relay Election. See "General
Information About a Fund Account." There is no administrative charge for this
service. Dividends and distributions are credited to the receiving Fund the day
such dividends are paid at the receiving Fund's net asset value for that day.
If the Dividend Relay Election privilege is discontinued with respect to a
particular receiving Fund, the value of the account in that Fund must equal or
exceed the Fund's minimum initial investment requirement or the Fund shall have
the right, if the shareholder fails to increase the value of the account to such
minimum within 90 days after being notified of the deficiency, to redeem the
account and send the proceeds to the shareholder.
Shareholders may discontinue the Dividend Relay Election at any time on 10
days written notice or, if telephone transaction services apply to the account
from which the dividends originate, on 10 days notice by telephone to the Fund.
The Funds reserve the right to discontinue or modify this service upon 60 days
written notice to shareholders.
TAX TREATMENT OF FUNDS, DIVIDENDS AND DISTRIBUTIONS
It is the policy of each of the Funds to distribute substantially all net
investment income and net realized gains. Through such distributions, and by
satisfying certain other requirements, the Funds intend to qualify for the tax
treatment applicable to regulated investment companies under the provisions of
the Internal Revenue Code. This means that in each year in which a Fund 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
Funds intend to comply with the Act's requirements and to avoid this excise tax.
The Funds record dividend income on the ex-dividend date, except dividend income
from foreign securities where the ex-dividend date may have passed in which case
such dividends are recorded as soon as the Fund is informed of the ex-dividend
date.
Individual Retirement Accounts
Distributions from IRAs are taxed as ordinary income to the recipient,
although special rules exist for the tax-free return of non-deductible
contributions. In addition, taxable distributions received from an IRA prior to
age 59 1/2 are subject to a 10% penalty tax in addition to regular income tax.
Certain distributions are exempted from this penalty tax, including
distributions following the participant's death or disability; distributions
paid as part of a series of substantially equal periodic payments made for the
life (or life expectancy) of the participant or the joint lives (or joint life
expectancies) of the participant and the participant's designated beneficiary;
distributions for medical expenses; distributions for certain unemployment
expenses and distributions after 1997 for first home purchases (up to $10,000)
and higher education expenses.
Generally, distributions from IRAs must commence not later than April 1 of
the calendar year following the calendar year in which the participant attains
age 70 1/2, and such distributions must be made over a period that does not
exceed the life expectancy of the participant (or the participant and
beneficiary). A penalty tax of 50% would be imposed on any amount by which the
minimum required distribution in any year exceeded the amount actually
distributed in that year. In addition, in the event that the participant dies
before his or her entire interest in the IRA has been distributed, the
participant's entire interest must be distributed at least as rapidly as under
the method of distribution being used as of the date of that person's death. If
the participant dies prior to beginning any distributions from the IRA, the
entire interest in the IRA will be distributed (1) within five years after the
date of the participant's death or (2) as periodic payments which will begin
within one year of the participant's death and which will be made over the life
expectancy of the participant's designated beneficiary. However, if the
participant's designated beneficiary is the surviving spouse, the IRA may be
continued with the surviving spouse deemed to be the new IRA participant.
The Code permits the taxable portion of funds to be transferred in a
tax-free rollover from a qualified employer pension, profit-sharing, annuity,
bond purchase or tax-deferred annuity plan to an IRA if certain conditions are
met, and if the rollover of assets is completed within 60 days after the
distribution from the qualified plan is received. A direct rollover of funds may
avoid a 20% federal tax withholding generally applicable to qualified plans or
tax -deferred annuity plan distributions. In addition, not more frequently than
once every twelve months, amounts may be rolled over tax-free from one IRA to
another, subject to the 60-day limitation and other requirements. The
once-per-year limitation on rollovers does not apply to direct transfers of
funds between IRA custodians or trustees.
Non-IRA Accounts
In each fiscal year when, at the close of such year, more than 50% of the
value of the International, International Emerging Markets or International
SmallCap Fund'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 its shareholders to take a credit (or a deduction) for foreign income
taxes paid by the Fund. In that case, 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. The 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. The net
income of the Cash Management Fund for purposes of its financial reports and
determination of the amount of distributions to shareholders may exceed its net
income as determined for tax purposes because certain market discount income
will be currently included as income for book purposes but not for tax purposes.
Although all net income for book purposes will be distributed to shareholders,
such distributions are taxable to shareholders of the Fund as ordinary income
only to the extent that they do not exceed the shareholder's ratable share of
the Fund's investment income and any short-term capital gain as determined for
tax purposes. The balance, if any, will be applied against and will reduce the
shareholder's cost or other tax basis for the shares.
Withholding
The Funds are required by law to withhold 10% of IRA distributions unless
the shareholder elects not to have withholding apply. The Funds are required by
law to withhold 31% of dividends paid from accounts other than IRA accounts, to
investors who do not furnish the Fund their correct taxpayer identification
number, which in the case of most individuals is 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 Funds in their
particular circumstances.
HOW TO EXCHANGE SHARES
Class R shares and Class A shares acquired by the conversion of Class R
shares may be exchanged at net asset value for shares of the same class of any
other Principal Fund described in the Prospectus, at any time. For purposes of
computing the length of time Class R shares acquired by the exchange are held
prior to conversion to Class A shares, the length of time the acquired shares
have been owned by a shareholder will be measured from the date of original
purchase of the exchanged shares.
A shareholder may also make an Automatic Exchange Election. This election
authorizes an exchange as described above from one Principal Fund to any or all
of the other Principal Funds on a monthly, quarterly, semiannual or annual
basis. The minimum amount that may be exchanged into any Principal Fund must
equal or exceed $300 on an annual basis. The exchange will occur on the date of
the month specified by the shareholder in the election so long as the day is a
trading day. If the designated day is not a trading day, the exchange will occur
on the next trading day occurring during that month. If the next trading day
occurs in the following month, the exchange will occur on the trading day prior
to the designated day. The Automatic Exchange Election may be made on the open
account application, on 10 days written notice or, if telephone transaction
services apply to the account from which the exchange is made, on 10 days notice
by telephone to the Fund from which the exchange will be made.
You may exercise the telephone exchange privilege by telephoning
1-800-247-4123. If all telephone lines are busy, you might not be able to
request telephone exchanges and would have to submit written exchange requests.
Although the Funds and the transfer agent are not responsible for the
authenticity of exchange requests received by telephone, the right is reserved
to refuse telephone exchanges when in the opinion of the Fund from which the
exchange is requested or the transfer agent it seems prudent to do so. You bear
the risk of loss caused by a fraudulent telephone exchange request the Fund
reasonably believes to be genuine. Each Fund will employ reasonable procedures
to assure telephone instructions 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 recording all telephone instructions,
requesting personal identification information such as the caller's name,
daytime telephone number, social security number and/or birthdate and sending a
written confirmation of the transaction to the shareholder's address of record.
In addition, the Fund directs exchange proceeds only to another Principal fund
account used to fund the shareholder's IRA.
General - If you do not have an account with the Fund in which shares are
being acquired, a new account will be established with the same registration as
the account from which shares are exchanged. All exchanges are subject to the
minimum investment and eligibility requirements of the Fund being acquired. You
may receive shares in exchange only if they may be legally offered in your state
of residence.
The exchange privilege is not intended as a vehicle for short-term trading.
Excessive exchange activity may interfere with portfolio management and have an
adverse effect on all shareholders. In order to limit excessive exchange
activity and in other circumstances where the Directors or Principal Management
Corporation believes doing so would be in the best interest of the Fund, the
Fund reserves the right to revise or terminate the exchange privilege, limit the
amount or number of exchanges or reject any exchange. You would be notified of
any such action to the extent required by law. You may modify or discontinue an
election on 10 days written notice or notice by telephone to the Fund from which
exchanges are made.
HOW TO SELL SHARES
Each Fund will redeem its shares upon request. Shares are redeemed at the
net asset value calculated after the Fund receives the written request in proper
form. There is no charge for redemptions. 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. The Funds generally send redemption
proceeds the business day after the request is received. Under unusual
circumstances, the Funds may suspend redemptions, or postpone payment for more
than three business days, as permitted by federal securities law. A Fund will
redeem only those shares for which it has received payment. To avoid the
inconvenience of a delay in obtaining redemption proceeds, shares may be
purchased with a certified check, bank cashiers check or money order.
A request for a distribution from an IRA must be made in writing. You may
obtain a distribution form by telephoning 1-800-247-4123 or writing to Princor,
at P.O. Box 10423, Des Moines, Iowa 50306. Distributions from an IRA may be
taken as a lump sum of the entire interest in the IRA, a partial interest in the
IRA, or in periodic payments of either a fixed amount or amounts based upon
certain life expectancy calculations. Tax penalties may apply to distributions
taken before the IRA participant attains age 59 1/2. See "Tax Treatment of Fund
Dividends and Distributions." A redemption request made payable to someone other
than the plan participant requires a signature guarantee as a part of a proper
endorsement. The 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.
A shareholder may redeem shares from an account, other than an IRA account,
by mail or by telephone. Each 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.
By Mail - A shareholder of a non-IRA account simply sends a letter to
Princor, at P.O. Box 10423, Des Moines, Iowa 50306, requesting redemption of any
part or all of the shares owned by specifying the Fund account from which the
redemption is to be made and either a dollar or share amount. The letter must
provide the account 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 payment of less than $100,000 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 of non-IRA accounts may redeem shares valued at
up to $100,000 from any one Fund by telephone, unless the shareholder has
notified the Fund of an address change within the three month period preceding
the date of the request. Such redemption proceeds will be mailed to the
shareholder's address of record. Telephone redemption proceeds may also be sent
by check or wire transfer to a commercial bank account in the United States
previously authorized in writing by the shareholder. A wire charge of up to
$6.00 will be deducted from the Fund 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. 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, except accounts used to fund a
Princor IRA, unless the shareholder has specifically declined this service on
the account application or in writing to the Fund. The telephone redemption
privilege will not be allowed on shares for which certificates have been issued.
You may exercise the telephone redemption privilege by telephoning
1-800-247-4123. If all telephone lines are busy, you might not be able to
request telephone redemptions and would have to submit written redemption
requests. Although the Funds 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 from which the
redemption is requested or the transfer agent it seems prudent to do so. You
bear the risk of loss caused by a fraudulent telephone redemption request the
Fund reasonably believes to be genuine. Each Fund will employ reasonable
procedures to assure telephone instructions 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 recording all telephone
instructions, requesting personal identification information such as the
caller's name, daytime telephone number, social security number and/or birth
date and names of all owners listed on the account and sending a written
confirmation of the transaction to your address of record. In addition, the Fund
directs redemption proceeds made payable to the owner or owners of the account
only to an 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.
Reinvestment Privilege - Within 60 days after redemption, shareholders who
redeem all or part of their Class R shares or Class A shares which were acquired
by conversion of Class R shares have a onetime privilege to reinvest the amount
redeemed in shares of the same class of any of the Funds without a sales charge.
The reinvestment will be made at the net asset value next computed after
written notice of exercise of the privilege is received in proper and correct
form by Princor. All reinvestments are subject to acceptance by the Fund or
Funds and Princor.
PERIODIC WITHDRAWAL PLAN
You may request that a fixed number of Class A shares or Class R shares
($25 initial minimum amount) or enough Class A shares or Class R shares to
produce a fixed amount of money ($25 initial minimum amount) be withdrawn from
an account monthly, quarterly, semiannually or annually. Periodic withdrawals
from non-Money Market Fund Class A share accounts opened with purchases of Class
A shares of $1,000,000 or more, may be subject to a CDSC. However, each year you
may make periodic withdrawals of up to 10% of the value of a Class A share
account without incurring a CDSC. The amount of the 10% free withdrawal
privilege for an account is initially determined based upon the value of the
account as of the date of the initial periodic withdrawal. If a periodic
withdrawal plan is established at the time the Class A shares are purchased, the
amount of the initial 10% free withdrawal privilege may be increased by 10% of
the amount of additional purchases in that account made within 60 days after the
shares were first purchased. After a periodic withdrawal plan has been
established the amount of the 10% withdrawal privilege will be re-determined as
of the last business day of December each year. The Fund from which the periodic
withdrawal is made 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 certificate that has been issued, or if no certificate
has been issued and telephone transaction services apply to the account, by
telephoning the Fund.
PERFORMANCE CALCULATION
From time to time, the Funds may publish advertisements containing
information (including graphs, charts, tables and examples) about the
performance of one or more of the Funds and about a Fund's largest industry
holdings and largest specific securities holdings in its portfolio. The Funds
may also quote rankings, yields or returns as published by independent
statistical services or publishers, and information regarding the performance of
certain market indices. The Funds' yield and total return figures described
below will vary depending upon market conditions, the composition of the Funds'
portfolios and operating expenses. These factors and possible differences in the
methods used in calculating yield and total return should be considered when
comparing the Funds' performance figures to performance figures published for
other investment vehicles. Any performance data quoted for the Funds represents
only historical performance and is not intended to indicate future performance
of the Funds. For further information on how the Funds calculate yield and total
return figures, see the Statement of Additional Information.
Growth-Oriented and Income-Oriented Funds
The Income-Oriented Funds may advertise their respective yields and average
annual total returns. The Growth-Oriented Funds may advertise their respective
average annual total returns. Yield is determined by annualizing each Fund's net
investment income per share for a specific, historical 30-day period and
dividing the result by the ending maximum public offering price for Class A
shares or the net asset value for Class R shares of the Fund for the same
period. Average annual total return for each Fund 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. The same assumptions are made when computing cumulative total return by
dividing the ending redeemable value by the initial investment. These
calculations assume the payment of the maximum front-end load in the case of
Class A shares, although shareholders who acquire such shares by conversion from
Class R shares do not pay a front-end load. The Funds may also calculate total
return figures for a specified period that do not take into account the maximum
initial sales charge to illustrate changes in the Funds' net asset values over
time.
Money Market Fund
From time to time the Cash Management Fund may advertise its yield and
effective yield. The yield of the Fund refers to the income generated by an
investment in the Fund over a seven-day period. This income is then annualized.
That is, the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. The effective yield is calculated similarly but,
when annualized, the income earned by an investment in the Fund is assumed to be
reinvested. The effective yield will be slightly higher than the yield because
of the compounding effect of this assumed reinvestment.
The yield for the Cash Management Fund will fluctuate daily as the income
earned on the investments of the Fund fluctuates. Accordingly, there is no
assurance that the yield quoted on any given occasion will remain in effect for
any period of time. The Fund is an open-end investment company and there is no
guarantee that the net asset value or any stated rate of return will remain
constant. Your investment in the Fund is not insured. Investors comparing
results of the Fund with investment results and yields from other sources such
as banks or savings and loan associations should understand these distinctions.
Historical and comparative yield information may, from time to time, be
presented by the Fund.
GENERAL INFORMATION ABOUT A FUND ACCOUNT
Share certificates will be issued only when requested. You will receive a
quarterly statement of account for the Fund(s) in which you have invested. The
statement contains information regarding purchases, redemptions, and reinvested
dividends or distributions occurring during the quarter, as well as the balance
of shares owned and account values as of the statement date . The Funds treat
the statement of account as evidence of ownership of Fund shares. This is known
as an open account system. Each Fund bears the cost of the open account system.
Signature Guarantee. The Funds have adopted the policy of requiring
signature guarantees in certain circumstances to safeguard your 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 Principal Mutual Life Insurance Company or
any of its affiliated companies or selected administrators of qualified
retirement plans;
2. To add telephone transaction services to an account after the initial
application is processed;
3. When there is any change to a bank account designated to receive
distributions; and
4. 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.
Your 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.
Minimum Account Balance. Although there currently is no minimum balance,
due to the disproportionately high cost of maintaining small accounts, the Funds
reserve the right to redeem all shares in an account with a value of less than
$250 and to mail the proceeds to you. Involuntary redemptions will not be
triggered solely by market activity. You 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 Funds reserve
the right to increase the required minimum.
SHAREHOLDER RIGHTS
The following information is applicable to each of the Principal Funds
described in this prospectus. Except for Tax-Exempt Cash Management Fund (Class
A shares only) and Tax-Exempt Bond Fund (Class A and Class B shares only), each
Fund's shares are currently divided into three classes. Each Fund share is
entitled to one vote with fractional shares voting proportionately. The classes
of shares for each Fund will vote together as a single class except where
required by law or as determined by the Fund's Board of Directors. Shares are
freely transferable, are entitled to dividends as declared by the Fund's Board
of Directors and, if the Fund were liquidated, would receive the net assets of
the Fund. Shareholders of a Fund may remove any director of that Fund 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.
The Board of Directors of each Fund may increase or decrease the aggregate
number of shares which the Fund has authority to issue and may issue two or more
classes of shares having such preferences and special or relative rights and
privileges as the Directors may determine, without shareholder approval.
The Funds are not required to hold an annual meeting of shareholders in any
year unless required to do so under the Investment Company Act of 1940. The
Funds intend to hold shareholder meetings only when required by law and at such
other times as may be deemed appropriate by their respective Boards of
Directors. However, each Fund will hold a meeting of shareholders when requested
to do so in writing by the holders of 10% or more of the outstanding shares of
that Fund.
Shareholder inquiries should be directed to the appropriate Fund at The
Principal Financial Group, Des Moines, Iowa 50392.
As of October 31, 1997, Principal Mutual Life Insurance Company and its
subsidiaries and affiliates owned 25% or more of the outstanding voting shares
of each Fund as indicated:
Percentage of
Number of Outstanding Shares
Fund Shares Owned Owned
---- ------------ ------------------
Capital Value Fund 5,332,094 29.30%
International Emerging Markets Fund 1,000,000 77.70%
International SmallCap Fund 1,000,000 71.20%
Limited Term Bond Fund 1,111,843 50.37%
ADDITIONAL INFORMATION
Organization: The Funds were incorporated in the state of Maryland on the
following dates: Balanced Fund - November 26, 1986; Blue Chip Fund - December
10, 1990; Bond Fund - December 2, 1986; Capital Value Fund - May 26, 1989
(effective November 1, 1989 succeeded to the business of a predecessor Fund that
had been incorporated in Delaware on February 6, 1969); Cash Management Fund -
June 10, 1982; Government Securities Income Fund - September 5, 1984; Growth
Fund - May 26, 1989 (effective November 1, 1989 succeeded to the business of a
predecessor Fund that had been incorporated in Delaware on February 6, 1969);
High Yield Fund - November 26, 1986; International Emerging Markets Fund - May
27, 1997; International Fund - May 12, 1981; International SmallCap Fund - May
27, 1997; Limited Term Bond Fund - August 9, 1995; MidCap Fund - February 20,
1987; Real Estate Fund - May 27, 1997; SmallCap Fund - August 13, 1997;
Utilities Fund - September 3, 1992.
Custodian: Bank of New York, 48 Wall Street, New York, New York 10286, is
custodian of the portfolio securities and cash assets of each of the Funds
except the International, International Emerging Markets and International
SmallCap Funds. The custodian for the International Emerging Markets Fund,
International Fund and International SmallCap Fund is Chase Manhattan Bank,
Global Securities Services, Chase Metro Tech Center, Brooklyn, New York 11245.
The custodians perform no managerial or policymaking functions for the Funds.
Capitalization: The authorized capital stock of each Fund consists of
100,000,000 shares of common stock (2,000,000,000 for Princor Cash Management
Fund), $.01 par value.
Financial Statements: Copies of the financial statements of each Fund will
be mailed to each shareholder semiannually. At the close of each fiscal year,
each 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 each Fund for their respective present fiscal years.
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 Statements which the
Funds have filed with the Securities and Exchange Commission. The Funds'
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 Statements 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, IA 50306, is the principal underwriter for each of the
Principal Funds.
Transfer Agent and Dividend Disbursing Agent: Principal Management
Corporation, The Principal Financial Group, Des Moines, Iowa, 50392, is the
transfer agent and dividend disbursing agent for each of the Principal Funds.
PRINCIPAL BALANCED FUND, INC.
PRINCIPAL BLUE CHIP FUND, INC.
PRINCIPAL BOND FUND, INC.
PRINCIPAL CAPITAL VALUE FUND, INC.
PRINCIPAL CASH MANAGEMENT FUND, INC.
PRINCIPAL GOVERNMENT SECURITIES INCOME FUND, INC.
PRINCIPAL GROWTH FUND, INC.
PRINCIPAL HIGH YIELD FUND, INC.
PRINCIPAL INTERNATIONAL EMERGING MARKETS FUND, INC.
PRINCIPAL INTERNATIONAL FUND, INC.
PRINCIPAL INTERNATIONAL SMALLCAP FUND, INC.
PRINCIPAL LIMITED TERM BOND FUND, INC.
PRINCIPAL MIDCAP FUND, INC.
PRINCIPAL REAL ESTATE FUND, INC.
PRINCIPAL SMALLCAP FUND, INC.
PRINCIPAL TAX-EXEMPT BOND FUND, INC.
PRINCIPAL TAX-EXEMPT CASH MANAGEMENT FUND, INC.
PRINCIPAL UTILITIES FUND, INC.
Statement of Additional Information
dated December 31, 1997
This Statement of Additional Information provides information about each of
the above Funds in addition to the information that is contained in the Funds'
Prospectus, dated December 31, 1997.
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Funds' Prospectus, a copy of which can be obtained
free of charge by writing or telephoning:
Princor Financial Services Corporation
A Member of The Principal Financial Group
Des Moines, Iowa 50392-0200
Telephone: 1-800-247-4123
MM 625 B-9
<PAGE>
TABLE OF CONTENTS
Investment Policies and Restrictions of the Funds.......................... 2
Growth-Oriented Funds................................................... 3
Income-Oriented Funds .................................................. 8
Money Market Funds...................................................... 14
Funds' Investments......................................................... 17
Directors and Officers of the Funds........................................ 32
Manager and Sub-Advisor.................................................... 34
Cost of Manager's Services................................................. 35
Brokerage on Purchases and Sales of Securities............................. 39
How to Purchase Shares..................................................... 42
Offering Price of Funds' Shares............................................ 44
Distribution Plan.......................................................... 50
Determination of Net Asset Value of Funds' Shares ......................... 53
Performance Calculation.................................................... 55
Tax Treatment of Funds, Dividends and Distributions ...................... 60
General Information and History............................................ 62
Financial Statements ...................................................... 63
Appendix A................................................................. 63
Real Estate Fund and SmallCap Fund Statements of Net Assets................ 68
<PAGE>
INVESTMENT POLICIES AND RESTRICTIONS OF THE FUNDS
The following information about the Principal Funds, a family of separately
incorporated, diversified, open-end management investment companies, commonly
called mutual funds, supplements the information provided in the Prospectus
under the caption "Investment Objectives, Policies and Restrictions."
There are three categories of Principal Funds: Growth-Oriented Funds, which
include seven Funds which seek primarily capital appreciation through
investments in equity securities (Capital Value Fund, Growth Fund, International
Emerging Markets Fund, International Fund, International SmallCap Fund, MidCap
Fund and SmallCap Fund), one Fund which seeks a total investment return
including both capital appreciation and income through investments in equity and
debt securities (Balanced Fund), one Fund which seeks growth of capital and
growth of income primarily through investments in common stocks of
well-capitalized, established companies (Blue Chip Fund), one Fund which seeks
to generate total return by investing primarily in equity securities of
companies principally engaged in the real estate industry (Real Estate Fund),
and one Fund which seeks current income and long-term growth of income and
capital by investing primarily in equity and fixed-income securities of
companies in the public utilities industry (Utilities Fund); Income-Oriented
Funds, which include five funds which seek primarily a high level of income
through investments in debt securities (Bond Fund, Government Securities Income
Fund, High Yield Fund, Limited Term Bond Fund and Tax-Exempt Bond Fund); and
Money Market Funds, which include two funds which seek primarily a high level of
income through investments in short-term debt securities (Cash Management Fund
and Tax-Exempt Cash Management Fund).
In seeking to achieve its investment objective, each Fund has adopted as
matters of fundamental policy certain investment restrictions which cannot be
changed without approval by the holders of the lesser of: (I) 67% of the Fund's
shares present or represented at a shareholders' meeting at which the holders of
more than 50% of such shares are present or represented by proxy; or (ii) more
than 50% of the outstanding shares of the Fund. Similar shareholder approval is
required to change the investment objective of each of the Funds. The following
discussion provides for each Fund a statement of its investment objective, a
description of its investment restrictions that are matters of fundamental
policy and a description of any investment restrictions it may have adopted that
are not matters of fundamental policy and may be changed without shareholder
approval. For purposes of the investment restrictions, all percentage and rating
limitations apply at the time of acquisition of a security, and any subsequent
change in any applicable percentage resulting from market fluctuations or in a
rating by a rating service will not require elimination of any security from the
portfolio. Unless specifically identified as a matter of fundamental policy,
each investment policy discussed in the Prospectus or the Statement of
Additional Information is not fundamental and may be changed by the respective
Fund's Board of Directors.
The Table on the next page graphically illustrates each Fund's emphasis on
producing current income and capital growth and the stability of the market
value of the Fund's portfolio. These illustrations represent comparative
relationships only with regard to the investment objectives sought by the Funds.
Relative income, stability and growth may vary among the Funds with certain
market conditions. The illustrations are not intended and should not be
construed as projected relative performances of the Principal Funds.
GROWTH-ORIENTED FUNDS
INVESTMENT OBJECTIVES
Principal Balanced Fund, Inc. ("Balanced Fund") seeks to generate a total
investment return consisting of current income and capital appreciation
while assuming reasonable risks in furtherance of the investment objective.
Principal Blue Chip Fund, Inc. ("Blue Chip Fund") seeks to achieve growth
of capital and growth of income by investing primarily in common stocks of
well capitalized, established companies.
Principal Capital Value Fund, Inc. ("Capital Value Fund") seeks to achieve
primarily long-term capital appreciation and secondarily growth of
investment income through the purchase primarily of common stocks, but the
Fund may invest in other securities.
Principal Growth Fund, Inc. ("Growth Fund") seeks growth of capital through
the purchase primarily of common stocks, but the Fund may invest in other
securities.
Principal International Emerging Markets Fund, Inc. ("International
Emerging Markets Fund") seeks to achieve long-term growth of capital by
investing primarily in equity securities of issuers in emerging market
countries.
Principal International Fund, Inc. ("International Fund") seeks long-term
growth of capital by investing in a portfolio of equity securities of
companies domiciled in any of the nations of the world.
Principal International SmallCap Fund, Inc. ("International SmallCap Fund")
seeks to achieve long-term growth of capital by investing primarily in
equity securities of non-United States companies with comparatively smaller
market capitalizations.
Principal MidCap Fund, Inc. ("MidCap Fund") seeks to achieve capital
appreciation by investing primarily in securities of emerging and other
growth-oriented companies.
Principal Real Estate Fund, Inc. ("Real Estate Fund") seeks to generate
total return by investing primarily in equity securities of companies
principally engaged in the real estate industry.
Principal SmallCap Fund, Inc. ("SmallCap Fund") seeks to achieve long-term
growth of capital by investing primarily in equity securities of companies
with comparatively smaller market capitalizations.
Principal Utilities Fund, Inc. ("Utilities Fund") seeks to provide high
current income and long-term growth of income and capital. The Fund seeks
to achieve its objective by investing primarily in equity and fixed income
securities of companies in the public utilities industry.
INVESTMENT RESTRICTIONS
Balanced Fund, Blue Chip Fund, International Emerging Markets Fund,
International Fund, International SmallCap Fund, MidCap Fund, Real Estate,
SmallCap and Utilities Fund
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Balanced Fund,
Blue Chip Fund, International Fund, International Emerging Markets Fund,
International SmallCap Fund, MidCap Fund, Real Estate, SmallCap and Utilities
Fund each may not:
(1) Issue any senior securities as defined in the Investment Company Act
of 1940. Purchasing and selling securities and futures contracts and
options thereon and borrowing money in accordance with restrictions
described below do not involve the issuance of a senior security.
(2) Purchase or retain in its portfolio securities of any issuer if those
officers or directors of the Fund or its Manager owning beneficially
more than one-half of 1% (0.5%) of the securities of the issuer
together own beneficially more than 5% of such securities.
(3) Invest in commodities or commodity contracts, but it may purchase and
sell financial futures contracts and options on such contracts.
(4) Invest in real estate, although it may invest in securities which are
secured by real estate and securities of issuers which invest or deal
in real estate.
(5) Borrow money, except for temporary or emergency purposes, in an amount
not to exceed 5% of the value of the Fund's total assets at the time
of the borrowing.
(6) Make loans, except that the Fund may (I) purchase and hold debt
obligations in accordance with its investment objective and policies,
(ii) enter into repurchase agreements, and (iii) lend its portfolio
securities without limitation against collateral (consisting of cash
or securities issued or guaranteed by the United States Government or
its agencies or instrumentalities) equal at all times to not less than
100% of the value of the securities loaned.
(7) Invest more than 5% of its total assets in the securities of any one
issuer (other than obligations issued or guaranteed by the United
States Government or its agencies or instrumentalities) except that
this limitation shall apply only with respect to 75% of the total
assets of the International Emerging Markets Fund and the
International SmallCap Fund; or purchase more than 10% of the
outstanding voting securities of any one issuer.
(8) Act as an underwriter of securities, except to the extent the Fund may
be deemed to be an underwriter in connection with the sale of
securities held in its portfolio.
(9) Concentrate its investments in any particular industry or
industries, except that:
(a) the Utilities Fund may not invest less than 25% of its total
assets in securities of companies in the public utilities
industry,
(b) the Balanced Fund, Blue Chip Fund, International
Emerging Markets Fund, International Fund,
International SmallCap Fund, MidCap Fund and SmallCap
Fund each may invest not more than 25% of the value of
its total assets in a single industry, and
(c) the Real Estate Fund may not invest less than 25% of
its total assets in securities of companies in the real
estate industry.
(10) Sell securities short (except where the Fund holds or has the right to
obtain at no added cost a long position in the securities sold that
equals or exceeds the securities sold short) or purchase any
securities on margin, except it may obtain such short-term credits as
are necessary for the clearance of transactions. The deposit or
payment of margin in connection with transactions in options and
financial futures contracts is not considered the purchase of
securities on margin.
(11) Invest in interests in oil, gas or other mineral exploration or
development programs, although the Fund may invest in securities of
issuers which invest in or sponsor such programs.
Each of these Funds has also adopted the following restrictions which are
not fundamental policies and may be changed without shareholder approval. It is
contrary to each Fund's present policy to:
(1) Invest more than 15% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven
days. The value of any options purchased in the Over-the-Counter
market are included as part of this 15% limitation.
(2) Purchase warrants in excess of 5% of its total assets, of which 2%
may be invested in warrants that are not listed on the New York or
American Stock Exchange. The 2% limitation for the International
Fund also includes warrants not listed on the Toronto Stock
Exchange. The 2% limitation for the International Emerging Markets
Fund and International SmallCap Fund also includes warrants not
listed on the Toronto Stock Exchange and the Chicago Board Options
Exchange.
(3) Purchase securities of any issuer having less than three years'
continuous operation (including operations of any predecessors) if
such purchase would cause the value of the Fund's investments in
all such issuers to exceed 5% of the value of its total assets.
(4) Pledge, mortgage or hypothecate its assets, except to secure
permitted borrowings. The deposit of underlying securities and
other assets in escrow and other collateral arrangements in
connection with transactions in put and call options, futures
contracts and options on futures contracts are not deemed to be
pledges or other encumbrances.
(5) Invest in companies for the purpose of exercising control or
management.
(6) Invest more than 5% of its total assets in the purchase of covered
spread options and the purchase of put and call options on
securities, securities indices and financial futures contracts.
Options on financial futures contracts and options on securities
indices will be used solely for hedging purposes; not for
speculation.
(7) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
(8) Invest in arbitrage transactions.
(9) Invest in real estate limited partnership interests except that
this restriction shall not apply to the Real Estate Fund.
(10) Invest in mineral leases.
The Balanced Fund, Blue Chip Fund, MidCap Fund, SmallCap Fund and
Utilities Fund have also adopted a restriction, which is not a fundamental
policy and may be changed without shareholder approval, that each such Fund may
not invest more than 20% of its total assets in securities of foreign issuers.
The Real Estate Fund has adopted a restriction, which is not a
fundamental policy and may be changed without shareholder approval, that the
Fund may not invest more than 25% of its total assets in securities of foreign
issuers.
The Balanced Fund, Blue Chip Fund, International Emerging Markets Fund,
International Fund, International SmallCap Fund, MidCap Fund, SmallCap Fund and
Utilities Fund have also adopted a restriction, which is not a fundamental
policy and may be changed without shareholder approval, that each Fund may not
invest more than 10% of its assets in securities of other investment companies,
invest more than 5% of its total assets in the securities of any one investment
company or acquire more than 3% of the outstanding voting securities of any one
investment company except in connection with a merger, consolidation or plan of
reorganization and the Funds may purchase securities of closed-end companies in
the open market where no underwriter or dealer's commission or profit, other
than a customary broker's commission, is involved.
The Utilities Fund has also adopted a restriction, which is not a
fundamental policy and may be changed without shareholder approval, that the
Fund may not own more than 5% of the outstanding voting securities of more than
one public utility company as defined by the Public Utility Holding Company Act
of 1935.
Capital Value Fund and Growth Fund
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Capital Value
Fund and Growth Fund each may not:
(1) Concentrate its investments in any one industry. No more than 25% of
the value of its total assets will be invested in any one industry.
(2) Purchase the securities of any issuer if the purchase will cause more
than 5% of the value of its total assets to be invested in the
securities of any one issuer (except U. S. Government securities).
(3) Purchase the securities of any issuer if the purchase will cause more
than 10% of the voting securities, or any other class of securities of
the issuer, to be held by the Fund.
(4) Underwrite securities of other issuers, except that the Fund may
acquire portfolio securities under circumstances where if sold the
Fund might be deemed an underwriter for purposes of the Securities Act
of 1933.
(5) Purchase securities of any company with a record of less than three
years' continuous operation (including that of predecessors) if the
purchase would cause the value of the Fund's aggregate investments in
all such companies to exceed 5% of the Fund's total assets.
(6) Engage in the purchase and sale of illiquid interests in real estate.
For this purpose, readily marketable interests in real estate
investment trusts are not interests in real estate.
(7) Engage in the purchase and sale of commodities or commodity contracts.
(8) Purchase or retain in its portfolio securities of any issuer if those
officers and directors of the Fund or its Manager owning beneficially
more than one-half of one percent (0.5%) of the securities of the
issuer together own beneficially more than 5% of such securities.
(9) Purchase securities on margin, except it may obtain such short-term
credits as are necessary for the clearance of transactions. The Fund
will not effect a short sale of a security. The Fund will not issue or
acquire put and call options.
(10) Invest more than 5% of its assets at the time of purchase in rights
and warrants (other than those that have been acquired in units or
attached to other securities).
(11) Invest more than 20% of its total assets in securities of foreign
issuers.
In addition:
(12) The Fund may not make loans except that the Fund may (i) purchase and
hold debt obligations in accordance with its investment objective and
policies, and (ii) enter into repurchase agreements.
(13) The Fund does not propose to borrow money except for temporary or
emergency purposes from banks in an amount not to exceed the lesser of
(i) 5% of the value of the Fund's assets, less liabilities other than
such borrowings, or (ii) 10% of the Fund's assets taken at cost at the
time such borrowing is made. The Fund may not pledge, mortgage, or
hypothecate its assets (at value) to an extent greater than 15% of the
gross assets taken at cost.
Each of these Funds has also adopted the following restrictions which are
not fundamental policies and may be changed without shareholder approval, each
Fund may not:
(1) Invest in companies for the purpose of exercising control or
management.
(2) Purchase warrants in excess of 5% of its total assets, of which 2% may
be invested in warrants that are not listed on the New York or
American Stock Exchange.
(3) Invest more than 15% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven
days.
(4) Invest in real estate limited partnership interests.
(5) Invest in interests in oil, gas, or other mineral exploration or
development programs, but the Fund may purchase and sell securities of
companies which invest or deal in such interests.
(6) Invest more than 10% of its assets in securities of other investment
companies, invest more than 5% of its total assets in the securities
of any one investment company, or acquire more than 3% of the
outstanding voting securities of any one investment company except in
connect with a merger, consolidation or plan of reorganization.
INCOME-ORIENTED FUNDS
INVESTMENT OBJECTIVES
Principal Bond Fund, Inc. ("Bond Fund") seeks to provide as high a level of
income as is consistent with preservation of capital and prudent investment
risk.
Principal Government Securities Income Fund, Inc. ("Government Securities
Income Fund") seeks a high level of current income, liquidity and safety of
principal by purchasing obligations issued or guaranteed by the United
States Government or its agencies, with emphasis on Government National
Mortgage Association Certificates ("GNMA Certificates"). The guarantee by
the United States Government extends only to principal and interest. There
are certain risks unique to GNMA Certificates.
Principal High Yield Fund, Inc. ("High Yield Fund") seeks high current
income primarily by purchasing high yielding, lower or non-rated fixed
income securities which are believed to not involve undue risk to income or
principal. Capital growth is a secondary objective when consistent with the
objective of high current income.
Principal Limited Term Bond Fund, Inc. ("Limited Term Bond Fund") seeks a
high level of current income consistent with a relatively high level of
principal stability by investing in a portfolio of securities with a dollar
weighted average maturity of five years or less.
Principal Tax-Exempt Bond Fund, Inc. ("Tax-Exempt Bond Fund") seeks as high
a level of current income exempt from federal income tax as is consistent
with preservation of capital. The Fund seeks to achieve its objective
primarily through the purchase of investment grade quality, tax-exempt
fixed income obligations.
INVESTMENT RESTRICTIONS
Bond Fund, High Yield Fund and Limited Term Bond Fund
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Bond Fund, High
Yield Fund and Limited Term Bond Fund each may not:
(1) Issue any senior securities as defined in the Investment Company Act
of 1940. Purchasing and selling securities and futures contracts and
options thereon and borrowing money in accordance with restrictions
described below do not involve the issuance of a senior security.
(2) Purchase or retain in its portfolio securities of any issuer if those
officers or directors of the fund or its Manager owning beneficially
more than one-half of 1% (0.5%) of the securities of the issuer
together own beneficially more than 5% of such securities.
(3) Invest in commodities or commodity contracts, but it may purchase and
sell financial futures contracts and options on such contracts.
(4) Invest in real estate, although it may invest in securities which are
secured by real estate and securities of issuers which invest or deal
in real estate.
(5) Borrow money, except for temporary or emergency purposes, in an amount
not to exceed 5% of the value of the Fund's total assets at the time
of the borrowing.
(6) Make loans, except that the Fund may (i) purchase and hold debt
obligations in accordance with its investment objective and policies,
(ii) enter into repurchase agreements, and (iii) lend its portfolio
securities without limitation against collateral (consisting of cash
or securities issued or guaranteed by the United States Government or
its agencies or instrumentalities) equal at all times to not less than
100% of the value of the securities loaned.
(7) Invest more than 5% of its total assets in the securities of any one
issuer (other than obligations issued or guaranteed by the United
States Government or its agencies or instrumentalities); or purchase
more than 10% of the outstanding voting securities of any one issuer.
(8) Act as an underwriter of securities, except to the extent the Fund may
be deemed to be an underwriter in connection with the sale of
securities held in its portfolio.
(9) Concentrate its investments in any particular industry or industries,
except that the Fund may invest not more than 25% of the value of its
total assets in a single industry.
(10) Sell securities short (except where the Fund holds or has the right to
obtain at no added cost a long position in the securities sold that
equals or exceeds the securities sold short) or purchase any
securities on margin, except it may obtain such short-term credits as
are necessary for the clearance of transactions. The deposit or
payment of margin in connection with transactions in options and
financial futures contracts is not considered the purchase of
securities on margin.
(11) Invest in interests in oil, gas or other mineral exploration or
development programs, although the Fund may invest in securities of
issuers which invest in or sponsor such programs.
Each of these Funds has also adopted the following restrictions which are
not fundamental policies and may be changed without shareholder approval. It is
contrary to each Fund's present policy to:
(1) Invest more than 15% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven
days. The value of any options purchased in the Over-the-Counter
market are included as part of this 15% limitation.
(2) Purchase warrants in excess of 5% of its total assets, of which 2% may
be invested in warrants that are not listed on the New York or
American Stock Exchange.
(3) Purchase securities of any issuer having less than three years'
continuous operation (including operations of any predecessors) if
such purchase would cause the value of the Fund's investments in all
such issuers to exceed 5% of the value of its total assets.
(4) Purchase securities of other investment companies except in connection
with a merger, consolidation, or plan of reorganization or by purchase
in the open market of securities of closed-end companies where no
underwriter or dealer's commission or profit, other than a customary
broker's commission, is involved, and if immediately thereafter not
more than 10% of the value of the Fund's total assets would be
invested in such securities.
(5) Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings. The deposit of underlying securities and other assets in
escrow and other collateral arrangements in connection with
transactions in put and call options, futures contracts and options on
futures contracts are not deemed to be pledges or other encumbrances.
(6) Invest in companies for the purpose of exercising control or
management.
(7) Invest more than 20% of its total assets in securities of foreign
issuers.
(8) Invest more than 5% of its total assets in the purchase of covered
spread options and the purchase of put and call options on securities,
securities indices and financial futures contracts. Options on
financial futures contracts and options on securities indices will be
used solely for hedging purposes; not for speculation.
(9) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
(10) Invest in arbitrage transactions.
(11) Invest in real estate limited partnership interests.
Government Securities Income Fund
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Government
Securities Income Fund may not:
(1) Issue any senior securities.
(2) Purchase any securities other than obligations issued or guaranteed
by the United States Government or its agencies or
instrumentalities, except that the Fund may maintain reasonable
amounts in cash or commercial paper or purchase short-term debt
securities not issued or guaranteed by the United States Government
or its agencies or instrumentalities for daily cash management
purposes or pending selection of particular long-term investments.
There is no limit on the amount of its assets which may be invested
in the securities of any one issuer of obligations issued by the
United States Government or its agencies or instrumentalities.
(3) Act as an underwriter of securities, except to the extent the Fund
may be deemed to be an underwriter in connection with the sale of
GNMA certificates held in its portfolio.
(4) Engage in the purchase and sale of interests in real estate,
including interests in real estate investment trusts (although it
will invest in securities secured by real estate or interests
therein, such as mortgage-backed securities) or invest in
commodities or commodity contracts, oil and gas interests, or
mineral exploration or development programs.
(5) Purchase or retain in its portfolio securities of any issuer if
those officers and directors of the Fund or its Manager owning
beneficially more than one-half of 1% (0.5%) of the securities of
the issuer together own beneficially more than 5% of such
securities.
(6) Sell securities short or purchase any securities on margin, except
it may obtain such short-term credits as are necessary for the
clearance of transactions. The deposit or payment of margin in
connection with transactions in options and financial futures
contracts is not considered the purchase of securities on margin.
(7) Invest in companies for the purpose of exercising control or
management.
(8) Make loans, except that the Fund may purchase or hold debt
obligations in accordance with the investment restrictions set
forth in paragraph (2) and may enter into repurchase agreements for
such securities, and may lend its portfolio securities without
limitation against collateral consisting of cash, or securities
issued or guaranteed by the United States Government or its
agencies or instrumentalities, which is equal at all times to 100%
of the value of the securities loaned.
(9) Borrow money, except for temporary or emergency purposes, in an amount
not to exceed 5% of the value of the Fund's total assets.
(10) Enter into repurchase agreements maturing in more than seven days
if, as a result, thereof, more than 10% of the Fund's total assets
would be invested in such repurchase agreements and other assets
without readily available market quotations.
(11) Invest more than 5% of its total assets in the purchase of covered
spread options and the purchase of put and call options on
securities, securities indices and financial futures contracts.
(12) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
The Fund has also adopted the following restrictions which are not
fundamental policies and may be changed without shareholder approval. It is
contrary to the Fund's current policy to:
(1) Invest more than 15% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven
days. The value of any options purchased in the Over-the-Counter
market are included as part of this 15% limitation.
(2) Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings. The deposit of underlying securities and other assets in
escrow and other collateral arrangements in connection with
transactions in put and call options, futures contracts and options on
futures contracts are not deemed to be pledges or other encumbrances.
(3) Invest in real estate limited partnership interests.
(4) Invest more than 10% of its assets in securities of other investment
companies, invest more than 5% of its total assets in the securities
of any one investment company, or acquire more than 3% of the
outstanding voting securities of any one investment company except in
connection with a merger, consolidation or plan of reorganization.
Tax-Exempt Bond Fund
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Tax-Exempt Bond
Fund may not:
(1) Issue any senior securities as defined in the Act except insofar as
the Fund may be deemed to have issued a senior security by reason
of: (a) purchasing any securities on a when-issued or delayed
delivery basis; or (b) borrowing money in accordance with
restrictions described below.
(2) Purchase any securities other than Municipal Obligations and
Taxable Investments as defined in the Prospectus and Statement of
Additional Information.
(3) Act as an underwriter of securities, except to the extent the Fund
may be deemed to be an underwriter in connection with the sale of
securities held in its portfolio.
(4) Invest more than 10% of its assets in securities of other
investment companies, invest more than 5% of its total assets in
the securities of any one investment company, or acquire more than
3% of the outstanding voting securities of any one investment
company except in connection with a merger, consolidation or plan
of reorganization.
(5) Purchase or retain in its portfolio securities of any issuer if
those officers and directors of the Fund or its Manager owning more
than one-half of 1% (0.5%) of the securities of the issuer together
own beneficially more than 5% of such securities.
(6) Invest in companies for the purpose of exercising control or
management.
(7) Invest more than:
(a) 5% of its total assets in the securities of any one issuer
(other than obligations issued or guaranteed by the United
States Government or its agencies or instrumentalities).
(b) 15% of its total assets in securities that are not readily
marketable and in repurchase agreements maturing in more than
seven days.
(8) Invest in real estate, although it may invest in securities which
are secured by real estate and securities of issuers which invest
or deal in real estate.
(9) Invest in commodities or commodity futures contracts.
(10) Write, purchase or sell puts, calls or combinations thereof.
(11) Invest in interests in oil, gas or other mineral exploration or
development programs, although it may invest in securities of
issuers which invest in or sponsor such programs.
(12) Make short sales of securities.
(13) Purchase any securities on margin, except it may obtain such
short-term credits as are necessary for the clearance of
transactions.
(14) Make loans, except that the Fund may purchase and hold debt
obligations in accordance with its investment objective and
policies, enter into repurchase agreements, and may lend its
portfolio securities without limitation against collateral,
consisting of cash or securities issued or guaranteed by the United
States Government or its agencies or instrumentalities, which is
equal at all times to 100% of the value of the securities loaned.
(15) Borrow money, except for temporary or emergency purposes from banks in
an amount not to exceed 5% of the value of the Fund's total assets at
the time the loan is made.
(16) Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings.
The Fund has also adopted the following restriction which is not
fundamental and may be changed without shareholder approval. It is contrary to
the Fund's current policy to:
(1) Invest in real estate limited partnership interests.
The identification of the issuer of a Municipal Obligation depends on the
terms and conditions of the security. When the assets and revenues of an agency,
authority, instrumentality or other political subdivision are separate from
those of the government creating the subdivision and the security is backed only
by the assets and revenues of the subdivision, such subdivision would be deemed
to be the sole issuer. Similarly, in the case of an industrial development bond,
if that bond is backed only by the assets and revenues of the non-governmental
user, then such non-governmental user would be deemed to be the sole issuer. If,
however, in either case, the creating government or some other entity guarantees
a security, such a guarantee would be considered a separate security and will be
treated as an issue of such government or other entity provided that guarantee
is not deemed to be a security issued by the guarantor if the value of all
securities issued or guaranteed by the guarantor and owned by the Fund does not
exceed 10% of the value of the Fund's total assets.
The Fund may invest without limit in debt obligations of issuers located
in the same state and in debt obligations which are repayable out of revenue
sources generated from economically related projects or facilities. Sizable
investments in such obligations could involve an increased risk to the Fund
since an economic, business or political development or change affecting one
security could also affect others. The Fund may also invest without limit in
industrial development bonds, but it will not invest more than 20% of its total
assets in any Municipal Obligation the interest on which is treated as a tax
preference item for purposes of the federal alternative minimum tax.
MONEY MARKET FUNDS
INVESTMENT OBJECTIVES
Principal Cash Management Fund, Inc. ("Cash Management Fund") seeks as
high a level of income available from short-term securities as is
considered consistent with preservation of principal and maintenance of
liquidity by investing in a portfolio of money market instruments.
Principal Tax-Exempt Cash Management Fund, Inc. ("Tax-Exempt Cash
Management Fund") seeks, through investment in a professionally managed
portfolio of high quality short-term Municipal Obligations, as high a
level of interest income exempt from federal income tax as is consistent
with stability of principal and maintenance of liquidity.
INVESTMENT RESTRICTIONS
Cash Management Fund
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Cash Management
Fund may not:
(1) Concentrate its investments in any one industry. No more than 25%
of the value of its total assets will be invested in securities of
issuers having their principal activities in any one industry,
other than securities issued or guaranteed by the U.S. Government
or its agencies or instrumentalities, or obligations of domestic
branches of U.S. banks and savings institutions. (See "Bank
Obligations").
(2) Purchase the securities of any issuer if the purchase will cause
more than 5% of the value of its total assets to be invested in the
securities of any one issuer (except securities issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities).
(3) Purchase the securities of any issuer if the purchase will cause
more than 10% of the outstanding voting securities of the issuer to
be held by the Fund (other than securities issued or guaranteed by
the U.S.
Government, its agencies or instrumentalities).
(4) Act as an underwriter except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be an
underwriter under the federal securities laws.
(5) Purchase securities of any company with a record of less than 3
years continuous operation (including that of predecessors) if the
purchase would cause the value of the Fund's aggregate investments
in all such companies to exceed 5% of the value of the Fund's total
assets.
(6) Engage in the purchase and sale of illiquid interests in real
estate, including interests in real estate investment trusts
(although it may invest in securities secured by real estate or
interests therein) or invest in commodities or commodity contracts,
oil and gas interests, or mineral exploration or development
programs.
(7) Purchase securities of other investment companies except in
connection with a merger, consolidation, or plan of reorganization.
(8) Purchase or retain in its portfolio securities of any issuer if
those officers and directors of the Fund or its Manager owning
beneficially more than one-half of 1% (0.5%) of the securities of
the issuer together own beneficially more than 5% of such
securities.
(9) Purchase securities on margin, except it may obtain such short-term
credits as are necessary for the clearance of transactions. The
Fund will not effect a short sale of any security. The Fund will
not issue or acquire put and call options, straddles or spreads or
any combination thereof.
(10) Invest in companies for the purpose of exercising control or
management.
(11) Make loans to others except through the purchase of debt
obligations in which the Fund is authorized to invest and by
entering into repurchase agreements (see "Fund Investments").
(12) Borrow money except from banks for temporary or emergency purposes,
including the meeting of redemption requests which might otherwise
require the untimely disposition of securities, in an amount not to
exceed the lesser of (1) 5% of the value of the Fund's assets, or
(ii) 10% of the value of the Fund's net assets taken at cost at the
time such borrowing is made. The Fund will not issue senior
securities except in connection with such borrowings. The Fund may
not pledge, mortgage, or hypothecate its assets (at value) to an
extent greater than 10% of the net assets.
(13) Invest in time deposits maturing in more than seven days; time
deposits maturing from two business days through seven calendar
days may not exceed 10% of the value of the Fund's total assets.
(14) Invest more than 10% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven
days.
The Fund has also adopted the following restriction which is not
fundamental and may be changed without shareholder approval. It is contrary to
the Fund's current policy to:
(1) Invest in real estate limited partnership interests.
Tax-Exempt Cash Management Fund
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Tax-Exempt Cash
Management Fund may not:
(1) Invest in securities other than Municipal Obligations and Temporary
Investments as those terms are defined in the Prospectus and the
Statement of Additional Information.
(2) Issue any senior securities as defined in the Investment Company
Act of 1940. Purchasing and selling securities and borrowing money
in accordance with restrictions described below do not involve the
issuance of a senior security.
(3) 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.
(4) Invest in commodities or commodity contracts.
(5) 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.
(6) Borrow money, except from banks for temporary or emergency
purposes, including the purpose of meeting redemption requests
which might otherwise require the untimely disposition of
securities, in an amount not to exceed one-third of the sum of (a)
the value of the Fund's net assets at the time of the borrowing and
(b) the amount borrowed. While any such borrowings exceed 5% of
total assets, no additional purchases of investment securities will
be made by the Fund. If due to market fluctuations or other reasons
the Fund's asset coverage falls below 300% of its borrowings, the
Fund will reduce its borrowings within 3 business days.
(7) Make loans, except that the Fund may (i) purchase and hold debt
obligations in accordance with its investment objective and
policies, (ii) enter into repurchase agreements, and (iii) lend its
portfolio securities without limitation against collateral
(consisting of cash or securities issued or guaranteed by the
United States Government or its agencies or instrumentalities)
equal at all times to not less than 100% of the value of the
securities loaned.
(8) Invest more than 5% of its total assets in the securities of any
one issuer (other than obligations issued or guaranteed by the
United States Government or its agencies or instrumentalities); or
purchase more than 10% of the outstanding voting securities of any
one issuer.
(9) Act as an underwriter of securities, except to the extent the Fund
may be deemed to be an underwriter in connection with the sale of
securities held in its portfolio.
(10) Concentrate its investments in any particular industry or
industries, except that the Fund may invest not more than 25% of
the value of its total assets in a single industry; provided,
however, that this limitation shall not be applicable to the
purchase of Municipal Obligations issued by governments or
political subdivisions of governments, obligations issued or
guaranteed by the United States Government or its agencies or
instrumentalities, or obligations of domestic banks (excluding
foreign branches of domestic banks).
(11) Sell securities short (except where the Fund holds or has the right
to obtain at no added cost a long position in the securities sold
that equals or exceeds the securities sold short) or purchase any
securities on margin, except it may obtain such short-term credits
as are necessary for the clearance of transactions.
(12) Invest in interests in oil, gas or other mineral exploration or
development programs, although the Fund may invest in securities of
issuers which invest in or sponsor such programs.
The Fund has also adopted the following restrictions which are not
fundamental policies and may be changed without shareholder approval. It is
contrary to the Fund's present policy to:
(1) Invest more than 10% of its total assets in securities not readily
marketable, in repurchase agreements maturing in more than seven days,
and in other illiquid securities.
(2) Purchase securities of any issuer having less than three years'
continuous operation (including operations of any predecessors) if
such purchase would cause the value of the Fund's investments in all
such issuers to exceed 5% of the value of its total assets; provided
that this limitation shall not apply to obligations issued or
guaranteed by the United States Government or its agencies or
instrumentalities or to Municipal Obligations other than industrial
development bonds issued by non-governmental issuers.
(3) 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.
(4) Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings.
(5) Invest in companies for the purpose of exercising control or
management.
(6) Write or purchase put or call options.
(7) Invest more than 20% of its total assets in industrial development
bonds the interest on which is treated as a tax preference item for
purposes of the federal alternative minimum tax.
(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 or
American Stock Exchange.
(9) Invest in real estate limited partnership interests.
The identification of the issuer of a Municipal Obligation depends on the
terms and conditions of the security. When the assets and revenues of an agency,
authority, instrumentality or other political subdivision are separate from
those of the government creating the subdivision and the security is backed only
by the assets and revenues of the subdivision, such subdivision would be deemed
to be the sole issuer. Similarly, in the case of an industrial development bond,
if that bond is backed only by the assets and revenues of the non-governmental
user, then such non-governmental user would be deemed to be the sole issuer. If,
however, in either case, the creating government or some other entity guarantees
a security, such a guarantee would be considered a separate security and will be
treated as an issue of such government or other entity.
The Fund may invest without limit in debt obligations of issuers located in
the same state and in debt obligations which are repayable out of revenue
sources generated from economically related projects or facilities. Sizable
investments in such obligations could involve an increased risk to the Fund
since an economic, business or political development or change affecting one
security could also affect others. The Fund may also invest without limit in
industrial development bonds, but it will not invest more than 20% of its total
assets in any municipal obligations the interest on which is treated as a tax
preference item for purposes of the federal alternative minimum tax.
The Fund's Manager will waive its management fee on the Fund's assets
invested in securities of other investment companies. The Fund will generally
invest in other investment companies only for short-term cash management
purposes when the advisor anticipates the net return from the investment to be
superior to alternatives then available. The Fund will generally invest only in
those investment companies that have investment policies requiring investment in
securities comparable in quality to those in which the Fund invests.
FUNDS' INVESTMENTS
The following information further supplements the discussion of the
Funds' investment objectives and policies in the Prospectus under the caption
"INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS."
In making selections of equity securities for the Funds, the Manager will
use an approach described broadly as that of fundamental analysis. Three basic
steps are involved in this analysis. 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, the Manager 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, determinations are made regarding earnings prospects
for individual companies within each industry by considering the same types of
factors described above. These earnings prospects are then evaluated in relation
to the current price of the securities of each company.
Although the Funds 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, Forward Foreign Currency Exchange Contracts, Repurchase
Agreements, Lending of Portfolio Securities and When-Issued and Delayed of
Delivery Securities, none of the Funds either committed during the last fiscal
year or currently intends to commit during the present fiscal year more than 5%
of its net assets to any of the practices, with the following exceptions: (1)
The High Yield Fund's investments in restricted securities are expected to
exceed 5% of the fund's net assets; and (2) The Bond, High Yield, International,
International Emerging Markets and International SmallCap Funds' investments in
foreign securities are expected to continue to exceed 5% of each Fund's net
assets.
Restricted Securities
Each of the Funds has adopted investment restrictions that limit its
investments in restricted securities or other illiquid securities to 15% (10%
for the Government Securities Income Fund and the Money Market Funds and not
more than 5% in equity securities) of its assets. The Board of Directors of each
of the Growth-Oriented and Income-Oriented Funds has adopted procedures to
determine the liquidity of Rule 4(2) short-term paper and of restricted
securities under Rule 144A. Securities determined to be liquid pursuant to such
procedures are excluded from other restricted securities when applying the
preceding investment restrictions.
Generally, restricted securities are not readily marketable because they
are subject to legal or contractual restrictions upon resale. They may be sold
only in a public offering with respect to which a registration statement is in
effect under the Securities Act of 1933 or in a transaction which is exempt from
the registration requirements of that act. When registration is required, a Fund
may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the Fund might obtain a less favorable price than prevailed when it
decided to sell. Restricted securities and other securities not readily
marketable will be priced at fair value as determined in good faith by or under
the direction of the Board of Directors.
Foreign Securities
Each of the following Principal Funds may invest in foreign securities to
the indicated percentage of its assets: International, International Emerging
Markets and International SmallCap Funds - 100%; Real Estate Fund - 25%;
Balanced, Blue Chip, Bond, Capital Value, Growth, High Yield, Limited Term Bond,
MidCap, SmallCap and Utilities Funds - 20%. The Cash Management and Tax-Exempt
Cash Management Funds do not invest in foreign securities other than those that
are United States dollar denominated. United State dollar denominated means that
all principal and interest payments for the security are payable in U.S. dollars
and that the interest rate of, the principal amount to be repaid and the timing
of payments related to the securities do not vary or float with the value of a
foreign currency, the rate of interest on foreign currency borrowings or with
any other interest rate or index expressed in a currency other than U.S.
dollars. Debt securities issued in the United States pursuant to a registration
statement filed with the Securities and Exchange Commission are not treated as
foreign securities for purposes of these limitations.
Investment in foreign securities presents certain risks, including those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, the imposition of foreign taxes, future political and economic
developments including war, expropriations, nationalization, the possible
imposition of currency exchange controls and other foreign governmental laws or
restrictions, 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. 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. Each Fund's investment in foreign
securities may also result in higher custodial costs and the costs associated
with currency conversions.
Securities of many foreign issuers may be less liquid and their prices
more volatile than those of comparable domestic issuers. 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, and Futures
Contracts and Options on Futures Contracts
The Balanced, Blue Chip, Bond, Government Securities Income, High Yield,
International, International Emerging Markets, International SmallCap, Limited
Term Bond, MidCap, Real Estate, SmallCap and Utilities Funds may each engage in
the practices described under this heading. The Tax-Exempt Bond Fund may invest
in financial futures contracts as described under this heading. In the following
discussion, the terms "the Fund," "each Fund" or "the Funds" refer to each of
these Funds.
Spread Transactions
Each Fund may purchase 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 Fund the right to put, or sell, a security
that it owns at a fixed dollar spread or fixed yield spread in relationship to
another security that the Fund does not own, but which is used as a benchmark.
The risk to the Fund in purchasing covered spread options is the cost of the
premium paid for the spread option and any transaction costs. In addition, there
is no assurance that closing transactions will be available. The purchase of
spread options can be used to protect each Fund against adverse changes in
prevailing credit quality spreads, i.e., the yield spread between high quality
and lower quality securities. The security covering the spread option will be
maintained in a segregated account by each Fund's custodian. The Funds do not
consider a security covered by a spread option to be "pledged" as that term is
used in the Funds' policy limiting the pledging or mortgaging of assets.
Options on Securities and Securities Indices
Each Fund may write (sell) and purchase call and put options on
securities in which it may invest and on securities indices based on securities
in which the Fund may invest. The International Fund may only write covered call
options on its portfolio securities; it may not write or purchase put options.
The Funds may write call and put options to generate additional revenue, and may
write and purchase call and put options in seeking to hedge against a decline in
the value of securities owned or an increase in the price of securities which
the Fund plans to purchase.
Writing Covered Call and Put Options. When a Fund writes a call option,
it gives the purchaser of the option, in return for the premium it receives, the
right to buy from the Fund the underlying security at a specified price at any
time before the option expires. When a Fund writes a put option, it gives the
purchaser of the option, in return for the premium it receives, the right to
sell to the Fund the underlying security at a specified price at any time before
the option expires.
The premium received by a Fund, 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 Fund if the option expires unexercised or is
closed out at a profit. By writing a call, a Fund limits its opportunity to
profit from any increase in the market value of the underlying security above
the exercise price of the option, but it retains the risk of loss if the price
of the security should decline. By writing a put, a Fund assumes the risk that
it may have to purchase the underlying security at a price that may be higher
than its market value at time of exercise.
The Funds write only covered options and will comply with applicable
regulatory and exchange cover requirements. The Funds usually will (and the
International Fund must) own the underlying security covered by any outstanding
call option that it has written. With respect to an outstanding put option that
it has written, each Fund 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 Fund has written an option, it may terminate its obligation,
before the option is exercised, by effecting a closing transaction, which is
accomplished by the Fund's purchasing an option of the same series as the option
previously written. The Funds 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 Fund purchases a call
option, it receives, in return for the premium it pays, the right to buy from
the writer of the option the underlying security at a specified price at any
time before the option expires. The Fund 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 Fund 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.
When a Fund purchases a put option, it receives, in return for the
premium it pays, the right to sell to the writer of the option the underlying
security at a specified price at any time before the option expires. The Fund
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 Fund 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 Fund has purchased an option, it may close out its position by
selling an option of the same series as the option previously purchased. The
Fund will have a gain or loss depending on whether the closing sale price
exceeds the initial purchase price plus related transaction costs.
None of the Funds will invest more than 5% of its assets in the purchase
of call and put options on individual securities, securities indices and futures
contracts.
Options on Securities Indices. Each Fund may purchase and sell put and
call options on any securities index based on securities in which the Fund may
invest. Securities index options are designed to reflect price fluctuations in a
group of securities or segment of the securities market rather than price
fluctuations in a single security. Options on securities indices are similar to
options on securities, except that the exercise of securities index options
requires cash payments and does not involve the actual purchase or sale of
securities. The Funds would engage in transactions in put and call options on
securities indices for the same purposes as they would engage in transactions in
options on securities. When a Fund writes call options on securities indices, it
will hold in its portfolio underlying securities which, in the judgment of the
Manager, 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 the Funds 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 Fund is unable to effect
closing sale transactions in options it has purchased, the Fund 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
Fund 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 Fund's ability to terminate option positions established in the
over-the-counter market may be more limited than for exchange-traded options and
may also involve the risk that broker-dealers participating in such transactions
might fail to meet their obligations.
Futures Contracts and Options on Futures
Each Fund may purchase and sell financial futures contracts and options
on those contracts. Financial futures contracts are commodities contracts based
on financial instruments such as U.S. Treasury bonds or bills or on securities
indices such as the S&P 500 Index. Futures contracts, options on futures
contracts and the commodity exchanges on which they are traded are regulated by
the Commodity Futures Trading Commission ("CFTC"). Through the purchase and sale
of futures contracts and related options, a Fund may seek to hedge against a
decline in securities owned by the Fund or an increase in the price of
securities which the Fund plans to purchase.
Futures Contracts. When a Fund sells a futures contract based on a
financial instrument, the Fund becomes obligated to deliver that kind of
instrument at a specified future time for a specified price. When a Fund
purchases that kind of contract, it 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 Fund realizes a gain or loss
depending on whether the price of an offsetting purchase plus transaction costs
are less or more than the price of the initial sale or on whether the price of
an offsetting sale is more or less than the price of the initial purchase plus
transaction costs. Although the Funds will usually liquidate futures contracts
on financial instruments in this manner, they 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 Fund with its custodian for the benefit of the futures
commission merchant through which the Fund engages in the transaction. This
amount is known as "initial margin." It does not involve the borrowing of funds
by the Fund to finance the transaction, 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 Fund upon termination of the futures
contract, if all the Fund's contractual obligations have been satisfied.
Subsequent payments to and from the broker, known as "variation margin,"
are required to be made on a daily basis as the price of the futures contract
fluctuates, 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 Fund realizes a loss
or gain.
In using futures contracts, the Funds 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 Fund proposes to acquire.
A Fund, 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 Fund's debt securities decline in value and thereby keep the
Fund's net asset value from declining as much as it otherwise would. A Fund 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 Fund is not fully invested and anticipates an
increase in the cost of securities it intends to purchase, it may purchase
financial futures contracts. When increases in the prices of equities are
expected, a Fund 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. The Funds may also purchase and write call and put
options on futures contracts. A call option on a futures contract gives the
purchaser the right, in return for the premium paid, to purchase a futures
contract (assume a long position) at a specified exercise price at any time
before the option expires. A put option gives the purchaser the right, in return
for the premium paid, to sell a futures contract (assume a short position), for
a specified exercise price, at any time before the option expires.
Upon the exercise of a call, the writer of the option is obligated to
sell the futures contract (to deliver a long position to the option holder) at
the option exercise price, which will presumably be lower than the current
market price of the contract in the futures market. Upon exercise of a put, the
writer of the option is obligated to purchase the futures contract (deliver a
short position to the option holder) at the option exercise price, which will
presumably be higher than the current market price of the contract in the
futures market. However, as with the trading of futures, most options are closed
out prior to their expiration by the purchase or sale of an offsetting option at
a market price that 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 Fund 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 Fund purchases an option on a futures contract, it may obtain
benefits similar to those that would result if it held the futures position
itself. But in contrast to a futures transaction, the purchase of an option
involves the payment of a premium in addition to transaction costs. In the event
of an adverse market movement, however, the Fund 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 Fund writes an option on a futures contract, the premium paid by
the purchaser is deposited with the Fund's custodian, and the Fund must maintain
with its custodian all or a portion of the initial margin requirement on the
underlying futures contract. The Fund assumes a risk of adverse movement in the
price of the underlying futures contract comparable to that involved in holding
a futures position. Subsequent payments to and from the broker, similar to
variation margin payments, are made as the premium and the initial margin
requirement are marked to market daily. The premium may partially offset an
unfavorable change in the value of portfolio securities, if the option is not
exercised, or it may reduce the amount of any loss incurred by the Fund if the
option is exercised.
Risks Associated with Futures Transactions. There are a number of risks
associated with transactions in futures contracts and related options. A Fund's
successful use of futures contracts is subject to the Manager's ability to
predict correctly the factors affecting the market values of the Fund's
portfolio securities. For example, if a Fund was hedged against the possibility
of an increase in interest rates which would adversely affect debt securities
held by the Fund and the prices of those debt securities instead increased, the
Fund 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 Fund, on the other hand. If the
prices do not move in the same direction or to the same extent, the transaction
may result in trading losses.
Prior to exercise or expiration, a position in futures may be terminated
only by entering into a closing purchase or sale transaction. This requires a
secondary market on the relevant contract market. The Fund will enter into a
futures contract or related option only if there appears to be a liquid
secondary market therefor. 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
Fund 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 Fund
has insufficient cash, it may be required to sell portfolio securities to meet
daily variation margin requirements at a time when it may be disadvantageous to
do so. In addition, the Fund may be required to perform under the terms of the
futures contracts it holds. The inability to close out futures positions also
could have an adverse impact on the Fund's ability effectively to hedge its
portfolio.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. This daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
Limitations on the Use of Futures and Options on Futures. Each Fund
intends to come within an exclusion from the definition of "commodity pool
operator" provided by CFTC regulations by complying with certain limitations on
the use of futures and related options prescribed by those regulations.
None of the Funds will purchase or sell futures contracts or options
thereon if immediately thereafter the aggregate initial margin and premiums
exceed 5% of the fair market value of the Fund's assets, after taking into
account unrealized profits and unrealized losses on any such contracts it has
entered into (except that in the case of an option that is in-the-money at the
time of purchase, the in-the-money amount generally may be excluded in computing
the 5%).
The Funds 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. The Funds are not permitted to engage in speculative futures
trading. Each Fund will determine that the price fluctuations in the futures
contracts and options on futures used for hedging or risk management purposes
are substantially related to price fluctuations in securities held by the Fund
or which it expects to purchase. In pursuing traditional hedging activities,
each Fund will sell futures contracts or acquire puts to protect against a
decline in the price of securities that the Fund owns, and each Fund will
purchase futures contracts or calls on futures contracts to protect the Fund
against an increase in the price of securities the Fund intends to purchase
before it is in a position to do so.
When a Fund purchases a futures contract, or purchases a call option on a
futures contract, it will place any asset, including equity securities and
non-investment grade debt in a segregated account, so long as the asset is
liquid and marked to the market daily. The amount so segregated plus the amount
of initial margin held for the account of its broker equals the market value of
the futures contract.
The Funds 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 Fund 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
Fund 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.
Forward Foreign Currency Exchange Contracts
The International, International Emerging Markets and International
SmallCap Funds may, but are not obligated to, enter into forward foreign
currency exchange contracts but may do so only under two circumstances. First,
when a Fund is entering into a contract for the purchase or sale of a security
denominated in a foreign currency and wants to "lock-in" the U.S. dollar price
of the security. Second, when the Manager believes that the currency of a
particular foreign country in which a portion of a Fund's securities are
denominated may suffer a substantial decline against the U.S. dollar. A Fund
generally will not enter into a forward contract with a term of greater than one
year.
The International, International Emerging Markets and International
SmallCap Funds will enter into forward foreign currency exchange contracts only
for the purpose of "hedging," that is limiting the risks associated with changes
in the relative rates of exchange between the U.S. dollar and foreign currencies
in which securities owned by a Fund are denominated. They will not enter into
such forward contracts for speculative purposes. A Fund will set up a separate
account with the Custodian to place foreign securities denominated in the
currency for which the Fund has entered into forward contracts under the second
circumstance, as set forth above, for the term of the forward contract. It
should be noted that the use of forward foreign currency exchange contracts does
not eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange between the currencies which can be achieved at
some future point in time. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they also tend to limit any potential gain which might result if the value of
the currency increases.
Repurchase Agreements
All Principal Funds may invest in repurchase agreements. None of the
Growth-Oriented or Income-Oriented Funds will enter into repurchase agreements
that do not mature within seven days if any such investment, together with other
illiquid securities held by the Fund, would amount to more than 15% of its
assets. Neither of the Money Market Funds will enter into repurchase agreements
that do not mature within seven days of such investment together with other
illiquid securities held by the Fund, would amount to more than 10% of its
assets. Repurchase agreements will typically involve the acquisition by the Fund
of debt securities from a selling financial institution such as a bank, savings
and loan association or broker-dealer. A repurchase agreement provides that the
Fund 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 Fund collateralized by the
underlying securities ("collateral"). This arrangement results in a fixed rate
of return that is not subject to market fluctuation during the Fund's holding
period. Although repurchase agreements involve certain risks not associated with
direct investments in debt securities, each of the Funds follows procedures
established by its Board of Directors which are designed to minimize such risks.
These procedures include entering into repurchase agreements only with large,
well-capitalized and well-established financial institutions which the Fund's
Manager 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 Fund bears a risk of
loss. In seeking to liquidate the collateral, a Fund may be delayed in or
prevented from exercising its rights and may incur certain costs. Further to the
extent that proceeds from any sale upon a default of the obligation to
repurchase were less than the repurchase price, the Fund could suffer a loss.
Lending of Portfolio Securities
All Principal Funds, except the Capital Value, Growth and Cash Management
Funds, may lend their portfolio securities. None of the Principal Funds intends
to lend its portfolio securities if as a result the aggregate of such loans made
by the Fund would exceed 30% of its total assets. Portfolio securities may be
lent to unaffiliated broker-dealers and other unaffiliated qualified financial
institutions provided that such loans are callable at any time on not more than
five business days' notice and that cash or government securities equal to at
least 100% of the market value of the securities loaned, determined daily, is
deposited by the borrower with the Fund and is maintained each business day in a
segregated account. While such securities are on loan, the borrower will pay the
Fund any income accruing thereon, and the Fund 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 Fund and its shareholders. A Fund 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. A
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 Principal Funds may from time to time purchase securities on
a when-issued basis and may purchase or sell securities on a delayed delivery
basis. The price of such a transaction is fixed at the time of the commitment,
but delivery and payment take place on a later settlement date, which may be a
month or more after the date of the commitment. No interest accrues to the
purchaser during this period, 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 Fund will only purchase securities on a when-issued or delayed
delivery basis with the intention of acquiring the securities, but a Fund may
sell the securities before the settlement date, if such action is deemed
advisable. At the time a Fund makes the commitment to purchase securities on a
when-issued or delayed delivery basis, it will record the transaction and
thereafter reflect the value, each day, of the securities in determining its net
asset value. Each Fund 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 Fund'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 Fund'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 Fund may engage in forward commitment
agreements. Except as may be imposed by these factors, there is no limit on the
percent of a Fund's total assets that may be committed to transactions in such
agreements.
Money Market Instruments
The Cash Management Fund will invest all of its available assets in money
market instruments maturing in 397 days or less. The types of instruments which
this Fund may purchase are described in the Prospectus and below.
(1) U.S. Government Securities -- Securities issued or guaranteed by the
U.S. Government, including treasury bills, notes and bonds.
(2) U.S. Government Agency Securities -- Obligations issued or guaranteed
by agencies or instrumentalities of the U.S. Government. U.S. agency
obligations include, but are not limited to, the Bank for
Co-operatives, Federal Home Loan Banks, Federal Intermediate Credit
Banks, and the Federal National Mortgage Association. U.S.
instrumentality obligations include, but are not limited to, the
Export-Import Bank and Farmers Home Administration. Some obligations
issued or guaranteed by U.S. Government agencies and instrumentalities
are supported by the full faith and credit of the U.S. Treasury,
others such as those issued by the Federal National Mortgage
Association, by discretionary authority of the U.S. Government to
purchase certain obligations of the agency or instrumentality, and
others, such as those issued by the Student Loan Marketing
Association, only by the credit of the agency or instrumentality.
(3) Bank Obligations -- Certificates of deposit, time deposits and
bankers' acceptances of U.S. commercial banks having total assets of
at least one billion dollars, and of the overseas branches of U.S.
commercial banks and foreign banks, which in the Manager's opinion,
are of comparable quality, provided each such bank with its branches
has total assets of at least five billion dollars, and certificates,
including time deposits of domestic savings and loan associations
having at least one billion dollars in assets which are insured by the
Federal Savings and Loan Insurance Corporation. The Fund may acquire
obligations of U.S. banks which are not members of the Federal Reserve
System or of the Federal Deposit Insurance Corporation. Any
obligations of foreign banks shall be denominated in U.S. dollars.
Obligations of foreign banks and obligations of overseas branches of
U.S. banks are subject to somewhat different regulations and risks
than those of U.S. domestic banks. For example, an issuing bank may be
able to maintain that the liability for an investment is solely that
of the overseas branch which could expose the Fund to a greater risk
of loss. In addition, obligations of foreign banks or of overseas
branches of U.S. banks may be affected by governmental action in the
country of domicile of the branch or parent bank. Examples of adverse
foreign governmental actions include the imposition of currency
controls, the imposition of withholding taxes on interest income
payable on such obligations, interest limitations, seizure or
nationalization of assets, or the declaration of a moratorium.
Deposits in foreign banks or foreign branches of U.S. banks are not
covered by the Federal Deposit Insurance Corporation. The Fund will
only buy short-term instruments where the risks of adverse
governmental action are believed by the Manager to be minimal. The
Fund will consider these factors along with other appropriate factors
in making an investment decision to acquire such obligations and will
only acquire those which, in the opinion of management, are of an
investment quality comparable to other debt securities bought by the
Fund. The Fund may invest in certificates of deposit of selected banks
having less than one billion dollars of assets providing the
certificates do not exceed the level of insurance (currently $100,000)
provided by the applicable government agency. A certificate of deposit
is issued against funds deposited in a bank or savings and loan
association for a definite period of time, at a specified rate of
return. Normally they are negotiable. However, the Fund may
occasionally invest in certificates of deposit which are not
negotiable. Such certificates may provide for interest penalties in
the event of withdrawal prior to their maturity. A bankers' acceptance
is a short-term credit instrument issued by corporations to finance
the import, export, transfer or storage of goods. They are termed
"accepted" when a bank guarantees their payment at maturity and
reflect the obligation of both the bank and drawer to pay the face
amount of the instrument at maturity.
(4) Commercial Paper -- Short-term promissory notes issued by U.S. or
foreign corporations.
(5) Short-term Corporate Debt -- Corporate notes, bonds and debentures
which at the time of purchase have 397 days or less remaining to
maturity.
(6) Repurchase Agreements -- Instruments under which securities are
purchased from a bank or securities dealer with an agreement by the
seller to repurchase the securities at the same price plus interest at
a specified rate. (See "FUND INVESTMENTS - Repurchase Agreements.")
(7) Taxable Municipal Obligations -- Short-term obligations issued or
guaranteed by state and municipal issuers which generate taxable
income.
The ratings of nationally recognized statistical rating organization
(NRSRO's), such as Moody's Investor Services, Inc. ("Moody's") and Standard and
Poor's ("S&P"), which are described in Appendix A, represent their opinions as
to the quality of the money market instruments which they undertake to rate. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality. These ratings, including ratings of NRSRO's other than
Moody's and S&P, are the initial criteria for selection of portfolio
investments, but the Manager will further evaluate these securities.
Municipal Obligations
The Tax-Exempt Bond Fund and Tax-Exempt Cash Management Fund can each
invest in "Municipal Obligations." Municipal Obligations are obligations issued
by or on behalf of states, territories, and possessions of the United States and
the District of Columbia and their political subdivisions, agencies and
instrumentalities, including municipal utilities, or multi-state agencies or
authorities, the interest from which is exempt from federal income tax in the
opinion of bond counsel to the issuer. Three major classifications of Municipal
Obligations are Municipal Bonds, which generally have a maturity at the time of
issue of one year or more, Municipal Notes, which generally have a maturity at
the time of issue of six months to three years, and Municipal Commercial Paper,
which generally has a maturity at the time of issue of 30 to 270 days. The
Tax-Exempt Cash Management Fund will only purchase Municipal Obligations that,
at the time of purchase, have 397 days or less remaining to maturity or have a
variable or floating rate of interest.
The term "Municipal Obligations" includes debt obligations issued to
obtain funds for various public purposes, including the construction of a wide
range of public facilities such as airports, bridges, highways, housing,
hospitals, mass transportation, schools, streets and water and sewer works and
electric utilities. Other public purposes for which Municipal Obligations may be
issued include refunding outstanding obligations, obtaining funds for general
operating expenses and lending such funds to other public institutions and
facilities.
Industrial development bonds issued by or on behalf of public authorities
to obtain funds to provide for the construction, equipment, repair or
improvement of privately operated housing facilities, sports facilities,
convention or trade show facilities, airport, mass transit, industrial, port or
parking facilities, air or water pollution control facilities and certain local
facilities for water supply, gas, electricity or sewage or solid waste disposal
are considered to be Municipal Obligations if the interest paid thereon
qualifies as exempt from federal income tax in the opinion of bond counsel to
the issuer, even though the interest may be subject to the federal alternative
minimum tax.
Municipal Bonds. Municipal Bonds may be either "general obligation" or
"revenue" issues. General obligation bonds are secured by the issuer's pledge of
its faith, credit and taxing power for the payment of principal and interest.
Revenue bonds are payable from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source (e.g., the user of the facilities being
financed), but not from the general taxing power. Industrial development bonds
and pollution control bonds in most cases are revenue bonds and generally do not
carry the pledge of the credit of the issuing municipality. The payment of the
principal and interest on industrial revenue bonds depends solely on the ability
of the user of the facilities financed by the bonds to meet its financial
obligations and the pledge, if any, of real and personal property so financed as
security for such payment. The Fund may also invest in "moral obligation" bonds
which are normally issued by special purpose public authorities. If an issuer of
moral obligation bonds is unable to meet its obligations, the repayment of the
bonds becomes a moral commitment but not a legal obligation of the state or
municipality in question.
Municipal Notes. Municipal Notes usually are general obligations of the
issuer and are sold in anticipation of a bond sale, collection of taxes or
receipt of other revenues. Payment of these notes is primarily dependent upon
the issuer's receipt of the anticipated revenues. Other notes include
"Construction Loan Notes" issued to provide construction financing for specific
projects, and "Bank Notes" issued by local governmental bodies and agencies to
commercial banks as evidence of borrowings. Some notes ("Project Notes") are
issued by local agencies under a program administered by the United States
Department of Housing and Urban Development. Project Notes are secured by the
full faith and credit of the United States.
Bond Anticipation Notes (BANs) are usually general obligations of state
and local governmental issuers which are sold to obtain interim financing for
projects that will eventually be funded through the sale of long-term debt
obligations or bonds. The ability of an issuer to meet its obligations on its
BANs is primarily dependent on the issuer's access to the long-term municipal
bond market and the likelihood that the proceeds of such bond sales will be used
to pay the principal and interest on the BANs.
Tax Anticipation Notes (TANs) are issued by state and local governments
to finance the current operations of such governments. Repayment is generally to
be derived from specific future tax revenues. TANs are usually general
obligations of the issuer. A weakness in an issuer's capacity to raise taxes due
to, among other things, a decline in its tax base or a rise in delinquencies,
could adversely affect the issuer's ability to meet its obligations on
outstanding TANs.
Revenue Anticipation Notes (RANs) are issued by governments or
governmental bodies with the expectation that future revenues from a designated
source will be used to repay the notes. In general they also constitute general
obligations of the issuer. A decline in the receipt of projected revenues, such
as anticipated revenues from another level of government, could adversely affect
an issuer's ability to meet its obligations on outstanding RANs. In addition,
the possibility that the revenues would, when received, be used to meet other
obligations could affect the ability of the issuer to pay the principal and
interest on RANs.
Construction Loan Notes are issued to provide construction financing for
specific projects. Frequently, these notes are redeemed with funds obtained from
the Federal Housing Administration.
Bank Notes are notes issued by local governmental bodies and agencies
such as those described above to commercial banks as evidence of borrowings. The
purpose for which the notes are issued are varied but they are frequently issued
to meet short-term working-capital or capital-project needs. These notes may
have risks similar to the risks associated with TANs and RANs.
Municipal Commercial Paper. Municipal Commercial Paper refers to
short-term obligations of municipalities which may be issued at a discount and
may be referred to as Short-Term Discount Notes. Municipal Commercial Paper is
likely to be used to meet seasonal working capital needs of a municipality or
interim construction financing and to be paid from general revenues of the
municipality or refinanced with long-term debt. In most cases Municipal
Commercial Paper is backed by letters of credit, lending agreements, note
repurchase agreements or other credit facility agreements offered by banks or
other institutions.
Variable and Floating Rate Obligations. Certain Municipal Obligations,
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities and debt instruments issued by domestic banks or corporations
may carry variable or floating rates of interest. Such instruments bear interest
at rates which are not fixed, but which vary with changes in specified market
rates or indices, such as a bank prime rate or tax-exempt money market index.
Variable rate notes are adjusted to current interest rate levels at certain
specified times, such as every 30 days, as set forth in the instrument. A
floating rate note adjusts automatically whenever there is a change in its base
interest rate adjustor, e.g., a change in the prime lending rate or specified
interest rate indices. Typically such instruments carry demand features
permitting the Fund to redeem at par upon specified notice.
A Fund's right to obtain payment at par on a demand instrument upon
demand could be affected by events occurring between the date the Fund elects to
redeem the instrument and the date redemption proceeds are due which affects the
ability of the issuer to pay the instrument at par value. The Manager will
monitor on an ongoing basis the pricing, quality and liquidity of such
instruments and will similarly monitor the ability of an issuer of a demand
instrument, including those supported by bank letters of credit or guarantees,
to pay principal and interest on demand. Although the ultimate maturity of such
variable rate obligations may exceed one year, the Funds will treat the maturity
of each variable rate demand obligation as the longer of (i) the notice period
required before the Fund is entitled to payment of the principal amount through
demand, or (ii) the period remaining until the next interest rate adjustment.
Floating rate instruments with demand features are deemed to have a maturity
equal to the period remaining until the principal amount can be recovered
through demand.
The Funds may purchase from financial institutions participation
interests in variable rate Municipal Obligations (such as industrial development
bonds). A participation interest gives the purchaser an undivided interest in
the Municipal Obligation in the proportion that its participation interest bears
to the total principal amount of the Municipal Obligation. A Fund has the right
to demand payment on seven days' notice, for all or any part of the Fund's
participation interest in the Municipal Obligation, plus accrued interest. Each
participation interest is backed by an irrevocable letter of credit or guarantee
of a bank. Banks will retain a service and letter of credit fee and a fee for
issuing repurchase commitments in an amount equal to the excess of the interest
paid on the Municipal Obligations over the negotiated yield at which the
instruments were purchased by the Funds. No Fund committed during the last
fiscal year or currently intends to commit during the present fiscal year more
than 5% of its net assets to participation interests.
Other Municipal Obligations. Other kinds of Municipal Obligations are
occasionally available in the marketplace, and a Fund may invest in such other
kinds of obligations to the extent consistent with its investment objective and
limitations. Such obligations may be issued for different purposes and with
different security than those mentioned above.
Risks of Municipal Obligations. The yields on Municipal Obligations are
dependent on a variety of factors, including general economic and monetary
conditions, money market factors, conditions in the Municipal Obligations
market, size of a particular offering, maturity of the obligation, and rating of
the issue. Each Fund's ability to achieve its investment objective is also
dependent on the continuing ability of the issuers of the Municipal Obligations
in which it invests to meet their obligation for the payment of interest and
principal when due.
Municipal Obligations are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Act, and laws, if any, which may be enacted by
Congress or any state extending the time for payment of principal or interest,
or both, or imposing other constraints upon enforcement of such obligations or
upon municipalities to levy taxes. The power or ability of issuers to pay, when
due, principal of and interest on Municipal Obligations may also be materially
affected by the results of litigation or other conditions.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Obligations. It may be expected that similar proposals may
be introduced in the future. If such a proposal were enacted, the ability of the
Funds to pay "exempt interest" dividends may be adversely affected and each Fund
would re-evaluate its investment objective and policies and consider changes in
its structure.
Taxable Investments of the Tax-Exempt Bond Fund
The Tax-Exempt Bond Fund may invest up to 20% of its assets in taxable
short-term investments consisting of: Obligations issued or guaranteed by the
United States Government or its agencies or instrumentalities; domestic bank
certificates of deposit and bankers' acceptances; short-term corporate debt
securities such as commercial paper; and repurchase agreements ("Taxable
Investments"). These investments must have a stated maturity of one year or less
at the time of purchase and must meet the following standards: banks must have
assets of at least $1 billion; commercial paper must be rated at least "A" by
S&P or "Prime" by Moody's or, if not rated, must be issued by companies having
an outstanding debt issue rated at least "A" by S&P or Moody's; corporate bonds
and debentures must be rated at least "A" by S&P or Moody's. Interest earned
from Taxable Investments will be taxable to investors. When, in the opinion of
the Fund's Manager, it is advisable to maintain a temporary "defensive" posture,
the Fund may invest more than 20% of its total assets in Taxable Investments. At
other times, Taxable Investments, Municipal Obligations that do not meet the
quality standards required for the 80% portion of the portfolio and Municipal
Obligations the interest on which is treated as a tax preference item for
purposes of the federal alternative minimum tax will not exceed 20% of the
Fund's total assets.
Temporary Investments for the Tax-Exempt Cash Management Fund
The Tax-Exempt Cash Management Fund may invest, on a temporary basis, up
to 20% of its net assets in taxable short-term investments consisting of:
Obligations issued or guaranteed by the United States Government or its agencies
or instrumentalities; U.S. dollar denominated certificates of deposit issued by
U.S. banks and bankers' acceptances; commercial paper of U.S. corporations;
short-term corporate debt securities; and repurchase agreements ("Temporary
Investments"). These investments must have a stated maturity of 397 days or less
at the time of purchase and must meet the same standards that apply to
securities in which the Cash Management Fund may invest. Interest earned from
Temporary Investments will be taxable to investors. When, in the opinion of the
Fund's Manager, it is advisable to maintain a temporary "defensive" posture, the
Fund may invest more than 20% of its total assets in Temporary Investments.
Portfolio Turnover
Portfolio turnover will normally differ for each Fund, 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 Fund shares. The
portfolio turnover rate for a Fund is calculated by dividing the lesser of
purchases or sales of its portfolio securities during the fiscal year by the
monthly average of the value of its portfolio securities (excluding from the
computation all securities, including options, with maturities at the time of
acquisition of one year or less). A high rate of portfolio turnover generally
involves correspondingly greater brokerage commission expenses, which must be
borne directly by the Fund. This requirement may in some cases limit the ability
of a Fund to effect certain portfolio transactions. No portfolio turnover rate
can be calculated for the Money Market Funds because of the short maturities of
the securities in which they invest. The portfolio turnover rates for each of
the other Funds for its most recent and immediately preceding fiscal periods
were as follows (annualized when reporting period is less than one year):
Balanced Fund - 27.6% and 32.6%; Blue Chip Fund - 55.4% and 13.3%; Bond Fund -
12.8% and 3.4%; Capital Value Fund - 30.8% and 50.2%; Government Securities
Income Fund - 10.8% and 25.9%; Growth Fund - 16.5% and 1.8%; High Yield Fund -
39.2% and 18.8%; International Emerging Markets Fund - 21.4%; International Fund
- - 26.6% and 23.8%; International SmallCap Fund - 10.4%; Limited Term Bond Fund -
17.4% and 16.5%; MidCap Fund - 9.5% and 12.3%; Tax-Exempt Bond Fund - 8.9% and
9.8%; Utilities Fund - 22.5% and 34.2%. In view of the investment objectives and
management policies of the Real Estate and SmallCap, it is anticipated that
their annual portfolio turnover rates should generally not exceed 75-100%, but
in any particular year market conditions could result in portfolio activity
greater than anticipated.
DIRECTORS AND OFFICERS OF THE FUNDS
The following listing discloses the principal occupations and other
principal business affiliations of the Funds' 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 sponsored by Principal Mutual Life
Insurance Company, except Principal Special Markets Fund, Inc. All mailing
addresses are The Principal Financial Group, Des Moines, Iowa 50392, unless
otherwise indicated.
@James D. Davis, 63, Director. 4940 Center Court, Bettendorf, Iowa.
Attorney. Vice President, Deere and Company, Retired.
*Roy W. Ehrle, 69, Director. 2424 Jordan Trail, West Des Moines, Iowa.
Retired. Prior thereto, Vice Chairman, Principal Mutual Life Insurance Company.
Vice Chairman of the Board and Director, Principal Management Corporation.
Chairman of the Board and Director, Invista Capital Management, Inc. Director,
Iowa Business Development Credit Corporation.
Pamela A. Ferguson, 54, Director. P.O. Box 805, Grinnell, Iowa. President
and Professor of Mathematics, Grinnell College since 1991.
@Richard W. Gilbert, 57, Director. 1357 Asbury Avenue, Winnetka, Illinois.
President, Gilbert Communications, Inc. since 1993. Prior thereto, President and
Publisher, Pioneer Press.
*&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 since 1986. Director and President, Princor
Financial Services Corporation and Principal Management Corporation.
*Ronald E. Keller, 61, Director. Executive Vice President, Principal Mutual
Life Insurance Company since 1992. Prior thereto, Senior Vice President.
Director, Princor Financial Services Corporation and Principal Management
Corporation. Director and Chairman, Invista Capital Management, Inc.
@Barbara A. Lukavsky, 57, Director. 3930 Grand Avenue, Des Moines, Iowa.
President and CEO, Lu San ELITE USA, L.C.
&Richard G. Peebler, 68, Director. 1916 79th Street, Des Moines, Iowa. Dean
and Professor Emeritus, Drake University, College of Business and Public
Administration, since 1996. Prior thereto, Professor, Drake University, College
of Business and Public Administration.
*Craig L. Bassett, 45, Treasurer. Treasurer, Principal Mutual Life
Insurance Company since 1996. Prior thereto, Associate Treasurer.
*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, 1995-1997. Prior thereto, Financial Officer.
David J. Brown, 37, Assistant Counsel. Counsel, Principal Mutual Life
Insurance Company since 1995; Attorney, 1994-1995. Prior thereto,
Attorney-at-Law, Dickinson, Mackaman, Tyler & Hagen, P.C.
Michael W. Cumings, 46, Assistant Counsel. Counsel, Principal Mutual Life
Insurance Company since 1989.
*Arthur S. Filean, 59, Vice President and Secretary. Vice President,
Princor Financial Services Corporation, since 1990. 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 Person," 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 following information relates to compensation paid by each fund during
the fiscal year ended October 31, 1997.
<TABLE>
<CAPTION>
Principal International
Emerging Markets,
Principal International
SmallCap and Principal
Director Each Principal Fund Principal SmallCap Real Estate
-------- -------------------- ------------------- -----------
<S> <C> <C> <C>
James D. Davis $1,200 $150 $300
Roy W. Ehrle $1,200 $150 $300
Pamela A. Ferguson $1,350 $150 $300
Richard W. Gilbert $1,200 $150 $300
Barbara A. Lukavsky $1,350 $150 $300
Richard G. Peebler $1,350* $150 $300
</TABLE>
* Richard G. Peebler received $1,350 from each of the Principal funds. He
received an additional $225 from Principal MidCap Fund, Principal Capital
Value Fund and Principal Growth Fund and $75 from Principal International
Fund due to his participation in the executive committee of each of those
funds.
None of the mutual funds provide retirement benefits for any of the
directors. Total compensation from the 30 investment companies included in the
fund complex for the fiscal year ended October 31, 1997 was as follows:
James D. Davis $32,250 Richard W. Gilbert $31,050
Roy W. Ehrle $31,050 Barbara A. Lukavsky $36,000
Pamela A. Ferguson $36,000 Richard G. Peebler $37,125
As of October 31, 1997, 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 voting shares or percentage of the outstanding voting shares of each
Fund:
- --------------------------------------------------------------------------
No. of % of Outstanding
Fund Shares Shares Owned
Owned
Balanced Fund 62,485 0.88%
Blue Chip Fund 64,630 1.15%
Bond Fund 178,469 1.40%
Capital Value Fund 5,332,094 29.30%
Cash Management Fund 20,168,986 2.40%
Government Securities Income Fund 94,248 0.40%
Growth Fund 37,639 0.50%
High Yield Fund 1,121,076 20.40%
International Emerging Markets Fund 1,000,000 77.70%
International Fund 8,056,778 22.98%
International SmallCap Fund 1,000,000 71.20%
Limited Term Bond Fund 1,111,843 50.37%
MidCap Fund 46,814 0.50%
Tax-Exempt Bond Fund 92,626 0.57%
Tax-Exempt Cash Management Fund 1,027,698 1.04%
Utilities Fund 85,764 1.48%
--------------------------------------------------------------------------
As of November 30, 1997, the Officers and Directors of each Fund as a
group owned less than 1% of the outstanding shares of any of the Funds. Other
than as noted in the above table, the Funds knew of no person who owned 5% or
more of the shares of any one Fund.
MANAGER AND SUB-ADVISOR
The Manager of each of the Funds is Principal Management Corporation
(formerly known as 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 of the Growth-Oriented
Funds (except the Real Estate Fund), the Government Securities Income Fund and
the Limited Term Bond Fund. The Manager will reimburse Invista for the cost of
providing these services. 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 Insurance Company. Assets under management at September
30, 1997 were approximately $25.3 billion. Invista's address is 1800 Hub Tower,
699 Walnut, Des Moines, Iowa 50309.
The Manager, Invista and each of the Funds have adopted a Code of
Ethics designed to prevent persons with access to information regarding the
portfolio trading activity of the Funds from using that information for their
personal benefit. In certain circumstances personal securities trading is
permitted in accordance with procedures established by the Code of Ethics. The
Board of Directors for the Manager, Invista and each of the Funds periodically
reviews the Code of Ethics.
<PAGE>
Each of the persons affiliated with a Fund who is also an affiliated
person of the Manager or Sub-Advisor is named below, together with the
capacities in which such person is affiliated:
<TABLE>
<CAPTION>
Office Held With Office Held With
Name Each Fund The Manager/Invista
---- ---------------------- ----------------------
<S> <C> <C>
Michael J. Beer Financial Officer Vice President and Chief Operating Officer (Manager)
Arthur S. Filean Vice President and Secretary Vice President (Manager)
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 President Director and President (Manager)
Ronald E. Keller Director Director (Manager)
Director and Chairman of
the Board (Invista)
Michael D. Roughton Counsel Counsel (Manager; Invista)
</TABLE>
COST OF MANAGER'S SERVICES
For providing the investment advisory services, and specified other
services, the Manager, under the terms of the Management Agreement for each
Fund, is entitled to receive a fee computed and accrued daily and payable
monthly, at the following annual rates:
<TABLE>
<CAPTION>
Net Asset Value of Fund
First Next Next Next Over
$100,000,000 $100,000,000 $100,000,000 $100,000,000 $400,000,000
<S> <C> <C> <C> <C> <C>
Balanced, High Yield,
and Utilities Funds .60% .55% .50% .45% .40%
International Emerging Markets Fund 1.25% 1.20% 1.15% 1.10% 1.05%
International Fund .75% .70% .65% .60% .55%
International SmallCap Fund 1.20% 1.15% 1.10% 1.05% 1.00%
MidCap Fund .65% .60% .55% .50% .45%
Real Estate Fund .90% .85% .80% .75% .70%
SmallCap Fund .85% .80% .75% .70% .65%
All Other Funds .50% .45% .40% .35% .30%
</TABLE>
There is no assurance that any of the Funds' net assets will reach
sufficient amounts to be able to take advantage of the rate decreases. The net
asset value of each Fund on October 31, 1997 and the rate of the fee for each
Fund for investment management services as provided in the Management Agreement
for the fiscal year then ended were as follows:
- --------------------------------------------------------------------------------
Management Fee
Net Assets as of For Fiscal Year Ended
Fund October 31, 1997 October 31, 1997
-------------------------- ---------------- ----------------
Balanced Fund $107,065,653 .60%
Blue Chip Fund 113,751,507 .50%
Bond Fund 145,961,344 .46%*
Capital Value Fund 540,009,841 .40%
Cash Management Fund 843,812,054 .37%*
Government Securities 273,709,251 .46%
Income Fund
Growth Fund 376,271,743 .44%
High Yield Fund 46,842,641 .60%
International Fund 329,329,737 .71%
International Emerging
Markets Fund 11,082,710 1.23%
International SmallCap Fund 14,449,560 1.19%
Limited Term Bond Fund 21,832,872 .25%*
MidCap Fund 428,173,030 .59%
Tax-Exempt Bond Fund 201,061,565 .48%
Tax-Exempt Cash 99,232,893 .47%*
Management Fund
Utilities Fund 73,153,165 .50%*
* Before waiver.
- --------------------------------------------------------------------------------
Under a Sub-Advisory Agreement between Invista and the Manager, Invista
performs all the investment advisory responsibilities of the Manager under the
Management Agreement for the Growth-Oriented Funds, the Government Securities
Income Fund, the Limited Term Bond Fund and the Utilities Fund and is reimbursed
by the Manager for the cost of providing such services.
The Manager pays for office space, facilities and simple business
equipment and the costs of keeping the books of the Fund. The Manager also
compensates all personnel who are officers and directors, if such officers and
directors are also affiliated with the Manager.
Each Fund pays all its other corporate expenses incurred in the operation
of the Fund and the continuous public offering of its shares, but not selling
expenses. Among other expenses, the Fund pays its taxes (if any), brokerage
commissions on portfolio transactions, interest, the cost of stock issue and
transfer and dividend disbursement, administration of shareholder accounts,
custodial fees, expenses of registering and qualifying shares for sale after the
initial registration, auditing and legal expenses, fees and expenses of
unaffiliated directors, and costs of shareholder meetings. The Manager pays most
of these expenses in the first instance, and is reimbursed for them by the Fund
as provided in the Management Agreement. The Manager also is responsible for the
performance of certain of the functions described above, such as transfer and
dividend disbursement and administration of shareholder accounts, the cost of
which the Manager is reimbursed by the Fund.
Fees paid for investment management services during the periods indicated
were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Management Fees For
Fiscal Years Ended October 31,
Fund 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C>
Balanced Fund $ 556,009 $ 404,461 $ 330,469
Blue Chip Fund 417,958 212,845 154,603
Bond Fund 636,217* 534,366* 489,133*
Capital Value Fund 2,031,143 1,671,502 1,380,466
Cash Management 2,864,916* 2,555,687* 1,980,472*
Government Securities Income Fund 1,227,604 1,223,631 1,165,241
Growth Fund 1,443,120 1,040,897 701,276
High Yield Fund 230,667 159,773 129,542
International Emerging Markets Fund 28,487***
International Fund 1,882,664 1,154,783 881,227
International SmallCap Fund 30,283***
Limited Term Bond Fund 97,039 18,619* **
MidCap Fund 2,004,305 1,293,848 772,512
Tax-Exempt Bond Fund 941,387 888,967 828,825
Tax-Exempt Cash Management Fund 499,606* 451,467* 471,994*
Utilities Fund 436,296* 375,780* 367,403*
<FN>
* Before waiver.
** Period from February 29, 1996 (Date Operations Commenced) through
October 31, 1996.
*** Period from August 29, 1997 (Date Operations
Commenced) through October 31, 1997.
</FN>
- -----------------------------------------------------------------------------------------------------
</TABLE>
The Manager waived $59,630 and $25,970 of its fee for the Limited Term
Bond Fund for the year ended October 31, 1997 and the period ended October 31,
1996, respectively. The Manager waived $60,665, $28,413 and $86,318 of its fee
for the Bond Fund for the years ended October 31, 1997, 1996 and 1995,
respectively. The Manager also waived $33,785, $76,266 and $138,673 of its fee
for the Tax-Exempt Cash Management Fund for the years ended October 31, 1997,
1996 and 1995, respectively. The Manager also waived $7,933, $13,242 and
$296,359 of its fee for the Cash Management Fund for the years ended October 31,
1997, 1996 and 1995, respectively. The Manager also waived $79,048, $61,622 and
$152,483 of its fee for the Utilities Fund for the years ended October 31, 1997,
1996 and 1995, respectively.
Costs reimbursed to the Manager during the periods indicated for providing
other services pursuant to the Management Agreement were as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Reimbursement by Fund
of Certain Costs For
Fiscal Years Ended October 31,
Fund 1997 1996 1995
---- ----
<S> <C> <C> <C>
Balanced Fund $ 364,442 $ 251,542 $ 220,147
Blue Chip Fund 402,003 206,942 146,409
Bond Fund 278,385 221,648 213,198
Capital Value Fund 837,825 567,786 510,906
Cash Management Fund 1,833,423 1,762,455 1,494,200
Government Securities Income Fund 407,146 394,360 435,625
Growth Fund 1,121,832 837,917 584,133
High Yield Fund 98,481 66,305 86,915
International Emerging Markets Fund 4,116**
International Fund 906,359 598,305 525,897
International SmallCap Fund 4,283**
Limited Term Bond Fund 44,634 32,982*
MidCap Fund 1,308,608 942,986 612,488
Tax-Exempt Bond Fund 135,553 145,931 193,662
Tax-Exempt Cash Management Fund 176,572 205,099 214,963
Utilities Fund 230,151 288,489 211,232
<FN>
* Period from February 13, 1996 (Date Operations Commenced) through
October 31, 1996.
** Period from August 14, 1997 (Date Operations
Commenced) through October 31, 1997.
</FN>
-----------------------------------------------------------------------------------------------
</TABLE>
NOTE: The Manager voluntarily waived a portion of its fee for the Limited
Term Bond Fund from the date operations commenced and intends to continue such
waiver and, if necessary, pay expenses normally payable by the Limited Term Bond
Fund through the period ending October 31, 1998 in an amount that will maintain
a total level of operating expenses, which as a percent of average net assets
attributable to a class on an annualized basis will not exceed .90% for the
Class A shares, 1.25% for the Class B shares and 1.50% for the Class R shares.
The effect of the waiver was and will be to reduce the Fund's annual operating
expenses and increase the Fund's yield and effective yield.
NOTE: The Manager voluntarily waived a portion of its management fees for
Principal Cash Management Fund, Inc. and Principal Tax-Exempt Cash Management
Fund, Inc. throughout the fiscal years ended October 31, 1997, 1996 and 1995.
The Manager intends to continue its voluntary waiver and, if necessary, pay
expenses normally payable by the Cash Management Fund through February 28, 1998
and the Tax-Exempt Cash Management Fund through October 31, 1998 in an amount
that will maintain a total level of operating expenses which as a percentage of
average net assets attributable to a class on an annualized basis during such
periods will not exceed 0.75% of each Fund's Class A shares, 1.50% of Principal
Cash Management Fund, Inc.'s Class B shares and 1.25% of Principal Cash
Management Fund, Inc.'s Class R shares. The effect of the waiver was and will be
to reduce each Fund's annual operating expenses and increase each Fund's yield
and effective yield.
NOTE: The Manager voluntary waived a portion of its fee for Principal Bond
Fund through February 28, 1993 in an amount that maintained a total level of
operating expenses for the Fund that did not exceed .90% of the Fund's average
net assets on an annualized basis during such period. The Manager waived a
portion of its fee for the period beginning March 1, 1993 and intends to
continue such waiver through October 31, 1998 in an amount that will maintain a
total level of operating expenses which as a percentage of the Fund's average
net assets attributable to a class on an annualized basis during such period did
not and will not exceed 0.95% of the Fund's Class A shares, 1.70% of the Fund's
Class B shares and 1.45% of the Fund's Class R shares. The effect of the waiver
was and will be to reduce the Fund's annual operating expenses and increase the
Fund's yield.
NOTE: The Manager voluntarily waived a portion of its fee for the Utilities
Fund from the date operations commenced and continued such waiver through the
period ending February 28, 1995 in an amount that maintained a total level of
operating expenses which as a percentage of the Fund's average net assets
attributable to a class on an annualized basis did not exceed 1.00% of the
Fund's Class A shares and did not exceed 1.75% of the Fund's Class B shares. The
Manager continued its voluntary waiver for the period beginning March 1, 1995
and ended February 29, 1996 in an amount that maintained a total level of
operating expenses which as a percentage of the Fund's average net assets
attributable to a class on an annualized basis did not exceed 1.10% of the
Fund's Class A shares and 1.85% of the Fund's Class B shares. The Manager
continued its voluntary waiver for the period beginning March 1, 1996 and
intends to continue such waiver and, if necessary, pay expenses normally payable
by the Fund through October 31, 1998 in an amount that will maintain a total
level of operating expenses which as a percentage of the Fund's average net
assets attributable to a class on an annualized basis did not and will not
exceed 1.15% of the Fund's Class A shares, 1.90% of the Fund's Class B shares
and 1.65% for the Fund's Class R shares.
The Management Agreements and the Investment Service Agreements, pursuant
to which Principal Mutual Life Insurance Company has agreed to furnish certain
personnel, services and facilities required by the Manager, and the Sub-Advisory
Agreements for each of the Growth-Oriented Funds (except Real Estate and
SmallCap Funds), the Government Securities Income Fund and the Limited Term Bond
Fund were last approved by the Board of Directors for each of the Funds on
September 8, 1997. Each of these agreements for the Real Estate Fund, which are
dated June 9, 1997, and for the SmallCap Fund, which are dated September 8,
1997, provide for continuation in effect until the conclusion of the first
meeting of shareholders of the Funds, and if approved by a vote of the
outstanding voting securities of the Funds, shall continue in effect in the same
manner as such agreements for the other Principal Funds. Each of these
agreements provides for continuation in effect from year to year only so long as
such continuation is specifically approved at least annually either by the Board
of Directors of the Fund or by vote of a majority of the outstanding voting
securities of the Fund, provided that in either event such continuation shall be
approved by vote of a majority of the Directors who are not "interested persons"
(as defined in the Investment Company Act of 1940) of the Manager, Principal
Mutual Life Insurance Company or its subsidiaries or the Fund, cast in person at
a meeting called for the purpose of voting on such approval. The Agreements may
be terminated at any time on 60 days written notice to the Manager by the Board
of Directors of the Fund or by a vote of a majority of the outstanding
securities of the Fund and by the Manager, Invista or Principal Mutual Life
Insurance Company, as the case may be, on 60 days written notice to the Fund.
The Agreements will automatically terminate in the event of their assignment.
The Manager assumed management of the International Fund's portfolio on
August 1, 1988. Prior to that time, the previous Investment Advisor for the
International Fund, as compensation for its services to the Fund, had been
receiving monthly compensation in the form of an advisory fee at an annual rate
of 1/2 of 1% of the average daily net assets of the Fund. In addition, the
Investment Advisor received an annual fee, paid monthly, for the administrative
services at an annual rate of 1.5% of the first $10,000,000 of the Fund's
average net assets during the month preceding each payment, decreasing to 1% on
assets in excess of $10,000,000 and 1/2 of 1% of the Fund's assets in excess of
$30,000,000. Overall, the Fund's aggregate expenses for any fiscal year other
than taxes, brokerage fees, Directors' fees, commissions, and extraordinary
expenses, such as litigation, could not exceed 2% of the first $10,000,000 of
the Fund's total net assets, 1.5% of the next $20,000,000 and 1% of the Fund's
total net assets in excess of $30,000,000. The aggregate of these two fees could
have amounted to a maximum of 2.0% of net assets, which is higher than most
funds pay as an advisory fee; however, the administrative services fee included
payment for certain expenses most other funds are required to pay themselves.
Under the prior agreement, when the accrued amount of such expenses exceeded the
2% limit the monthly payment to the Advisor was reduced by the amount of such
excess. For the seven-month period ended July 31, 1988, the Fund paid the
previous Investment Advisor $9,811 for investment advisory services and $29,433
for administrative services and other expenses.
BROKERAGE ON PURCHASES AND SALES OF SECURITIES
In distributing brokerage business arising out of the placement of orders
for the purchase and sale of securities for any Fund, the objective of the
Fund's Manager or Sub-Advisor is to obtain the best overall terms. In pursuing
this objective, the Manager or Sub-Advisor considers all matters it deems
relevant, including the breadth of the market in the security, the price of the
security, the financial condition and executing capability of the broker or
dealer and the reasonableness of the commission, if any (for the specific
transaction and on a continuing basis). This may mean in some instances that the
Manager or Sub-Advisor will pay a broker commissions that are in excess of the
amount of commission another broker might have charged for executing the same
transaction when the Manager or Sub-Advisor believes that such commissions are
reasonable in light of (a) the size and difficulty of 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 the Manager or Sub-Advisor
exercises investment discretion. The Manager or Sub-Advisor may purchase
securities in the over-the-counter market, utilizing the services of principal
market makers, unless better terms can be obtained by purchases through brokers
or dealers, and may purchase securities listed on the New York Stock Exchange
from non-Exchange members in transactions off the Exchange.) The Manager or
Sub-Advisor gives consideration in the allocation of business to services
performed by a broker (e.g. the furnishing of statistical data and research
generally consisting of information of the following types: analyses and reports
concerning issuers, industries, economic factors and trends, portfolio strategy
and performance of client accounts). If any such allocation is made, the primary
criteria used will be to obtain the best overall terms for such transactions.
The Manager or Sub-Advisor may pay additional commission amounts for research
services. Such statistical data and research information received from brokers
or dealers may be useful in varying degrees and the Manager or Sub-Advisor may
use it in servicing some or all of the accounts it manages. Some statistical
data and research information may not be useful to the Manager or Sub-Advisor in
managing the client account, brokerage for which resulted in the Manager's or
Sub-Advisor's receipt of the statistical data and research information. However,
in the Manager's or Sub-Advisor's opinion, the value thereof is not determinable
and it is not expected that the Manager's or Sub-Advisor's expenses will be
significantly reduced since the receipt of such statistical data and research
information is only supplementary to the Manager's or Sub-Advisor's own research
efforts. The Manager or Sub-Advisor allocated portfolio transactions for the
Funds indicated in the following table to certain brokers during the fiscal year
ended October 31, 1997 due to research services provided by such brokers. The
table also indicates the commissions paid to such brokers as a result of these
portfolio transactions.
------------------------- -----------------------
Fund Commissions Paid
Balanced $ 5,630
Blue Chip 29,611
Capital Value 28,370
International 30,135
International SmallCap 106
Utilities 12,825
------------------------- -----------------------
Purchases and sales of debt securities and money market instruments usually
will be principal transactions; portfolio securities 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 the Fund
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.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Total Brokerage
Commissions Paid
During Fiscal Years Ended
October 31,
Fund 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C>
Balanced Fund $ 47,096 $ 41,537 $ 34,622
Blue Chip Fund 113,923 17,198 21,040
Capital Value Fund 339,994 375,742 335,720
Growth Fund 43,018 64,704 56,733
International Emerging Markets Fund* 45,140 N/A N/A
International Fund 708,333 338,670 360,682
International SmallCap Fund* 46,970 N/A N/A
MidCap Fund 98,217 99,466 59,471
Utilities Fund 58,450 70,140 27,861
<FN>
* Period from August 14, 1997 (date operations commenced) through
October 31, 1997.
</FN>
-------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Brokerage commissions paid to affiliates during the
year ended October 31, 1997 were as follows:
Commissions Paid to Principal Financial Securities,
Inc. Total DollarAs Percent of
Percent of Dollar Amount
Fund Amount Total Commissions of Commissionable Transactions
- ------------- ------ ----------------- ------------------------------
<S> <C> <C> <C>
Balanced Fund $15,149 32.2% 42.6%
Blue Chip Fund 16,641 14.6% 18.7%
Capital Value Fund 7,116 2.1% 7.2%
Growth Fund 1,387 3.2% 3.2%
Utilities Fund 4,665 8.0% 11.2%
</TABLE>
<TABLE>
<CAPTION>
Commissions Paid to Morgan Stanley and
Co.
Total Dollar As Percent of Percent of Dollar Amount
Fund Amount Total Commissions of Commissionable Transactions
- ------------- ------ ----------------- ------------------------------
<S> <C> <C> <C>
Balanced Fund $ 45 -- .1%
Blue Chip Fund 4,602 4.0% 2.4%
Capital Value Fund 9,900 2.9% 2.4%
Growth 3,250 7.6% 8.5%
International Emerging Markets Fund 1,586 3.5% 9.3%
International Fund 20,595 2.9% 2.7%
International SmallCap Fund 1,502 3.2% 4.2%
MidCap Fund 3,750 3.8% 2.8%
</TABLE>
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 each of the funds sponsored by
Principal Mutual Life Insurance Company and it, or Invista where Invista acts as
sub-advisor, places orders to trade portfolio securities for each of these
Funds. If, in carrying out the investment objectives of the funds, occasions
arise when purchases or sales of the same equity securities are to be made for
two or more of the funds at the same time (or, in the case of accounts managed
by Invista, for two or more Funds and any other accounts managed by Invista),
the Manager or Invista may submit the orders to purchase or, whenever possible,
to sell, to a broker/dealer for execution on an aggregate or "bunched" basis.
The Manager (or, in the case of accounts managed by Invista, Invista) may create
several aggregate or "bunched" orders relating to a single security at different
times during the same day. On such occasions, the Manager (or, in the case of
accounts managed by Invista, Invista) will employ a computer program to randomly
order the accounts whose individual orders for purchase or sale make up each
aggregate or "bunched" order. Securities purchased or proceeds of sales received
on each trading day with respect to each such aggregate or "bunched" order shall
be allocated to the various funds (or, in the case of Invista, the various Funds
and other client accounts) whose individual orders for purchase or sale make up
the aggregate or "bunched" order by filling each Fund's (or, in the case of
Invista, each Fund's or other client account's) order in the sequence arrived at
by the random ordering. Securities purchased for funds (or, in the case of
Invista, (Funds and other client accounts) participating in an aggregate or
"bunched" order will be placed into those Funds and where applicable, other
client accounts at a price equal to the average of the prices achieved in the
course of filling that aggregate or "bunched" order.
If purchases or sales of the same debt securities are to be made for two or
more of the Funds at the same time, the securities will be purchased or sold
proportionately in accordance with the amount of such security sought to be
purchased or sold at that time for each Fund.
HOW TO PURCHASE SHARES
Each Fund, except the Tax-Exempt Bond Fund and Tax-Exempt Cash Management
Fund, offers investors three classes of shares which bear sales charges in
different forms and amounts: Class A, Class B and Class R shares. The Tax-Exempt
Bond Fund offers only Class A and Class B shares. The Tax-Exempt Cash Management
Fund offers only Class A shares. Class A Shares. An investor who purchases less
than $1 million of Class A shares (except Class A shares of the Money Market
Funds) pays a sales charge at the time of purchase. As a result, such shares are
not subject to any charges when they are redeemed. An investor who purchases $1
million or more of Class A shares does not pay a sales charge at thetime of
purchase. However, a redemption of such shares occurring within 18 months from
the date of purchase will be subject to a contingent deferred sales charge
("CDSC") at the rate of .75% (.25% for the Limited Term Bond Fund) the lesser of
the value of the shares redeemed (exclusive of reinvested dividend and capital
gain distributions) or the total cost of such shares. Shares subject to the CDSC
which are exchanged into another Principal Fund will continue to be subject to
the CDSC until the original 18 month period expires. However no CDSC is payable
with respect to redemption of Class A shares used to fund a Princor 401(a) or
Princor 401(k) retirement plan, except redemptions resulting from the
termination of the plan or transfer of plan assets. In addition, the CDSC will
be waived in connection with 1) redemption of shares from retirement plans to
satisfy minimum distribution rules under the Code or 2) shares redeemed through
a systematic withdrawal plan that permits up to 10% of the value of a
shareholder's Class A shares of a particular Fund on the last business day of
December of each year to be withdrawn automatically in equal monthly
installments throughout the year. Certain purchases of Class A shares qualify
for reduced sales charges. Class A shares for each Fund, except the Money Market
Funds, currently bear a 12b-1 fee at the annual rate of up to 0.25% (0.15% for
the Limited Term Bond Fund) of the Fund's average net assets attributable to
Class A shares. See "Distribution Plan."
Class B Shares. Class B shares are purchased without an initial sales
charge, but are subject to a declining CDSC of up to 4% (1.25% for the Limited
Term Bond Fund) if redeemed within six years. Class B shares purchased under
certain sponsored Princor plans established after February 1, 1998, are subject
to a CDSC of up to 3% if redeemed within five years of purchase. (See "Plans
Other than Administered Employee Benefit Plans" for discussion of sponsored
Princor plans.) See "Offering Price of Funds' Shares." Class B shares bear a
higher 12b-1 fee than Class A shares, currently at the annual rate of up to
1.00% (.50% for the Limited Term Bond Fund) of the Fund's average net assets
attributable to Class B shares. See "Distribution Plan." Class B shares provide
an investor the benefit of putting all of the investor's dollars to work from
the time the investment is made, but (until conversion to Class A shares) will
have a higher expense ratio and pay lower dividends than Class A shares due to
the higher 12b-1 fee. Class B shares will automatically convert into Class A
shares, based on relative net asset value (without a sales charge), on the first
business day of the 85th month after the purchase date. Class B shares acquired
by exchange from Class B shares of another Principal Fund will convert into
Class A shares based on the time of the initial purchase. At the same time, a
pro rata portion of all shares purchased through reinvestment of dividends and
distributions would convert into Class A shares, with that portion determined by
the ratio that the shareholder's Class B shares converting into Class A shares
bears to the shareholder's total Class B shares that were not acquired through
dividends and distributions. The conversion of Class B shares to Class A shares
is subject to the continuing availability of a ruling from the Internal Revenue
Service or an opinion of counsel that such conversions will not constitute
taxable events for Federal tax purposes. There can be no assurance that such
ruling or opinion will be available, and the conversion of Class B shares to
Class A shares will not occur if such ruling or opinion is not available. In
such event, Class B shares would continue to be subject to higher expenses than
Class A shares for an indefinite period.
Purchasing Class A and Class B shares. Purchases are generally made through
registered representatives of Princor or other dealers it selects. If an order
and check are properly submitted to Princor, the shares will be offered at the
offering price next computed after the order and check are received at Princor's
main office. If fund shares are purchased by telephone order or electronic means
and thereafter settled by delivery of a check or a payment by wire, the shares
so purchased will be issued at the offering price next computed after the
telephone or electronic order are received at Princor's main office. If an order
and check 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 New York Stock Exchange and received by Princor before the
close of its business on that day will be executed at the offering price
computed of the close of the Exchange on that day. An order accepted by such
dealer after the close of the Exchange and received by Princor before its
closing on the following business day will be executed at the offering price
computed as of the close of the Exchange on such following business day. Dealers
have the responsibility to transmit orders to Princor promptly. After an open
account has been established, purchases will be executed at the price next
computed after receipt of the investor's check at Princor's main office. All
orders are subject to acceptance by the Fund or Funds and Princor.
Redemptions by shareholders investing by check will be effected only after
payment has been collected on the check, which may take up to eight days or
more. Investors considering redeeming or exchanging shares or transferring
shares to another person shortly after purchase should pay for those shares with
a certified check, bank cashier's check or money order to avoid any delay in
redemption, exchange or transfer.
Which arrangement between Class A and Class B Shares is better for an
investor? The decision as to which class of shares provides a more suitable
investment for an investor depends on a number of factors, including the amount
and intended length of the investment. Investors making investments that qualify
for reduced sales charges might consider Class A shares. Investors who prefer
not to pay an initial sales charge and who plan to hold their investment for
more than seven years might consider Class B shares. Orders from individuals for
Class B shares for $250,000 or more will be treated as orders for Class A shares
unless the shareholder provides written acknowledgment that the order should be
treated as an order for Class B shares. Sales personnel may receive different
compensation depending on which class of shares are purchased.
Class R Shares. Class R shares are purchased without an initial sales
charge or a contingent deferred sales charge ("CDSC"). Class R shares bear a
higher 12b-1 fee than Class A shares, currently at the annual rate of up to .75%
ofthe Fund's average net assets attributable to Class R shares. See
"Distribution and Shareholder Servicing Plans and Fees." Class R shares provide
an investor the benefit of putting all of the investor's dollars to work from
the time the investment is made, but (until conversion to Class A shares) will
have a higher expense ratio and pay lower dividends than Class A shares due to
the higher 12b-1 fee. Class R shares will automatically convert to Class A
shares, based on relative net asset value (without a sales charge), on the first
business day of the 49th month after the purchase date. Class R shares acquired
by exchange from Class R shares of another Principal Fund will convert into
Class A shares based on the time of the initial purchase. (See "How to Exchange
Shares".) At the same time, a pro rata portion of all shares purchased through
reinvestment of dividends and distributions would convert into Class A shares,
with that portion determined by the ratio that the shareholder's Class R shares
converting into Class A shares bears to the shareholder's total Class R shares
that were not acquired through dividends and distributions. The conversion of
Class R shares to Class A shares is subject to the continuing availability of a
ruling from the Internal Revenue Service or an opinion of counsel that such
conversions will not constitute taxable events for Federal tax purposes. There
can be no assurance that such ruling or opinion will be available, and the
conversion of Class R shares to Class A shares will not occur if such ruling or
opinion is not available. In such event, Class R shares would continue to be
subject to higher expenses that Class A shares for an indefinite period.
Purchasing Class R Shares. Class R shares are offered only to: (1) people
who receive lump sum distributions from certain retirement plans administered by
Principal Mutual Life Insurance Company under the terms of a written service
agreement ("Administered Employee Benefit Plans" or "AEBP") to fund Individual
Retirement Accounts ("IRA's"); (2) people who receive lump sum distributions
from certain unregistered annuity contracts issued by Principal Mutual Life
Insurance Company; (3) policyowners of individual life or disability insurance
policies issued by Principal Mutual Life Insurance Company that do not have an
insurance agent licensed to sell such policies assigned to the policies; (4)
mortgagors of mortgages serviced by Principal Mutual Life Insurance Company, its
subsidiaries or affiliates; and (5) shareholders of Class R shares. Purchases
are generally made by completing an Account Application or a Princor IRA
Application and mailing it to Princor. Shares will be issued at the offering
price next computed after the application is received at Princor's main office
and Princor receives the amount to be invested. Generally, the initial amount to
be invested in a Princor IRA will be directly transferred to Princor from the
AEBP. However, in some cases the investor will purchase shares by check. If
investing by check, shares will be issued at the offering price next computed
after the completed application and check are received at Princor's main office.
Subsequent purchases will be executed at the price next computed after receipt
of the investor's check at Princor's main office. All orders are subject to
acceptance by the Fund or Funds and Princor. Orders from individuals for Class R
shares that equal or exceed $500,000 will be treated as orders for Class A
shares, unless accompanied by a written acknowledgment that the order should be
treated as an order for Class R shares.
Redemptions by shareholders investing by check will be effected only after
payment has been collected on the check, which may take up to 15 days or more.
Investors considering redeeming or exchanging shares shortly after purchase
should pay for those shares with a certified check, bank cashier's check or
money order to avoid any delay in redemption, exchange or transfer.
OFFERING PRICE OF FUNDS' SHARES
The Funds offer their respective shares continuously through Princor, which
is the principal underwriter for the Funds and sells shares as agent on behalf
of the Funds. Princor may select other dealers through which shares of the Funds
may be sold. Certain dealers may not sell all classes of shares.
Class A shares
Class A shares of the Money Market Funds are sold to the public at net
asset value; no sales charge applies to purchases of the Money Market Funds.
Class A shares of the Growth-Oriented and Income-Oriented Funds, except the
Limited Term Bond Fund, are sold to the public at the net asset value plus a
sales charge which ranges from a high 4.75% to a low of 0% of the offering price
(equivalent to a range of 4.99% to 0% of the net amount invested) according to
the schedule below. Class A shares of the Limited Term Bond Fund are sold to the
public at the net asset value plus a sales charge which ranges from a high of
1.50% to a low of 0% of the offering price according to the schedule below.
Selected dealers are allowed a concession as shown. At Princor's discretion, the
entire sales charge may at times be reallowed to dealers. In some situations,
depending on the services provided by the dealer, the concession may be less.
Any dealer allowance on purchases not involving a sales charge will be
determined by Princor. Upon notice to all broker-dealers with whom it has a
selling agreement, Princor may allow to broker-dealers electing to participate
up to the full applicable sales charge, as shown in the table below, during
periods and for transactions specified in such notice, and such reallowances may
be based in whole or in part upon attainment of minimum sales levels. Certain
commercial banks may make shares of the Funds available to their customers on an
agency basis. Pursuant to the agreements between Princor and such banks all or a
portion of the sales charge paid by a bank customer in connection with a
purchase of Fund shares may be retained by or remitted to the bank. The
Glass-Steagall Act prohibits banks from underwriting securities, including fund
shares; the Act does, however, permit certain agency transactions and banking
regulators have ruled that these particular agency transactions are not
prohibited under the Act. The Fund will obtain a representation from the banks
doing business in Texas or dealing with Texas residents that they will be
licensed as dealers as required by the Texas Securities Act, or that they will
not engage in activities which would constitute acting as a "dealer" as defined
under the Act.
<TABLE>
<CAPTION>
Sales Charge for
All Funds Except Sales Charge for Dealer Allowance as
Limited Term Bond Limited Term Bond % of Offering Price
FundSales Charge as % of: FundSales Charge as % of: All
Funds Limited
Offering Amount Offering Amount Except Limited Term
Amount of Purchase Price Invested Price Invested Term Bond Fund Bond Fund
------------------ ----- -------- ----- -------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Less than $50,000 4.75% 4.99% 1.50% 1.52% 4.00% 1.25%
$50,000 but less than $100,000 4.25% 4.44% 1.25% 1.27% 3.75% 1.00%
$100,000 but less than $250,000 3.75% 3.90% 1.00% 1.01% 3.25% 0.75%
$250,000 but less than $500,000 2.50% 2.56% 0.75% 0.76% 2.00% 0.50%
$500,000 but less than $1,000,000 1.50% 1.52% 0.50% 0.50% 1.25% 0.25%
$1,000,000 or more No Sales Charge 0% No Sales Charge 0% .75% 0.25%
</TABLE>
Rights of Accumulation. The applicable sales charge is determined by
adding the current net asset value of any Class A shares and Class B shares
already owned by the investor to the amount of the new purchase. The
corresponding percentage factor in the schedule is then applied to the entire
amount of the new purchase. For example, if an investor currently owns Class A
or Class B shares with a value of $5,000 and makes an additional investment of
$45,000 in Class A shares of a Growth-Oriented Fund (the total of which equals
$50,000), the charge applicable to the $45,000 investment would be 4.25% of the
offering price. If the investor purchases shares of more than one Principal Fund
at the same time, those purchases are aggregated and added to the net asset
value of the shares of Principal Funds already owned by the investor to
determine the sales charge for the new purchase. Class A shares of the Money
Market Funds are not counted in determining either the amount of a new purchase
or the current net asset value of shares already owned, unless the shares of the
Money Market Funds were acquired in exchange for shares of other Principal
Funds. If the investor purchases shares from a broker/dealer other than Princor,
the dealer should be advised of any shares already owned.
Investments made by an individual, or by an individual's spouse and
dependent children purchasing shares for their own account or by a trust
primarily for the benefit of such persons, or by a trustee or other fiduciary
purchasing for a single trust estate or single fiduciary account (including a
pension, profit-sharing, or other employee-benefit trust created pursuant to a
plan qualified under Section 401 of the Internal Revenue Code) will be treated
as investments made by a single investor in calculating the sales charge. Other
groups (as allowed by rules of the Securities and Exchange Commission) may be
considered for a reduced sales charge. An investor whose new account qualifies
for a reduced charge on the basis of other accounts owned by the individual,
spouse or children, should be certain to identify those accounts at the time of
the new application.
Statement of Intention. Another method is available by which a purchaser
may qualify for a reduced sales charge on the purchase of Class A shares of the
Funds. A purchaser may execute a Statement of Intention indicating the total
amount (excluding reinvested dividends and capital gains distributions) intended
to be invested (including all investments for the account of the spouse and
dependent children or trusts for the benefit of such persons) in Class A shares
(except Class A shares of the Money Market Funds) and Class B shares of the
Funds within a thirteen-month period (two-year period if the intended investment
is made by a trustee of a Section 401(a) plan or is equal to or greater than $1
million). The Statement of Intention may be submitted by a shareholder other
than a trustee of a 401(a) plan, within 90 days after the date of the first
purchase to be included within the Statement of Intention period. A trustee of a
401(a) plan must submit the Statement of Intention at the time the first plan
purchase is made; the Statement of Intention may not be submitted after the
initial plan purchase and the 90 day backdating is not available. The Statement
of Intention period will begin on the date of the first purchase included for
purposes of satisfying the statement. When an existing shareholder submits a
Statement of Intention, the net asset value of all Class A shares (except Class
A shares of the Money Market Funds) and Class B shares in that shareholder's
account or accounts combined for rights of accumulation purposes, is added to
the amount that has been indicated will be invested during the applicable
period, and the sales charge applicable to all purchases of Class A shares made
under the Statement of Intention is the sales charge which will apply to a
single purchase of this total amount.
A Statement of Intention may be entered into for any amount provided such
amount, when added to the net asset value of any shares already held, equals or
is in excess of the amount needed to qualify for a reduced sales charge. In the
event a shareholder invests an amount in excess of the indicated amount, such
excess will be allowed any further reduced sales charge for which it qualifies.
The Statement of Intention provides for a price adjustment if the amount
actually invested is less than the amount specified therein. Sufficient Class A
shares belonging to the shareholder, other than a shareholder that is 401(a)
qualified plan trustee, will be held in escrow in the shareholder's account by
Princor to make up any difference in sales charges based on the amount actually
purchased. If the intended investment is completed within the thirteen-month
period (or two-year period), such shares will be released to the shareholder. If
the total intended investment is not completed within that period shares will,
to the extent necessary, be redeemed and the proceeds used to pay the additional
sales charge due. A shareholder that is 401(a) qualified plan trustee will be
billed by Princor Financial Services Corporation for any additional sales charge
due at the end of the two-year period. In any event, the sales charge applicable
to these purchases will be no more than the applicable sales charge had the
shareholder made all of such purchases at one time. The Statement of Intention
does not constitute an obligation on the shareholder to purchase, nor the Funds
to sell, the amount indicated.
Purchases at Net Asset Value. The following may purchase Class A shares
of the Growth-Oriented Funds and Income-Oriented Funds at the net asset value,
without a sales charge: (1) Principal Mutual Life Insurance Company and its
directly and indirectly owned subsidiaries; (2) Active and retired directors,
officers and employees of the Fund, Principal Mutual Life Insurance Company, and
directly and indirectly owned subsidiaries of Principal Mutual Life Insurance
Company (including full-time insurance agents of, and persons who have entered
into insurance brokerage contracts with, Principal Mutual Life Insurance Company
and its directly and indirectly owned subsidiaries and employees of such
persons); (3) The Principal Financial Group Employee's Credit Union; (4)
Non-ERISA investment advisory clients of Invista Capital Management, Inc., an
indirectly wholly-owned subsidiary of Principal Mutual Life Insurance Company;
(5) Sales representatives and employees of sales representatives of the
Distributor or other dealers through which shares of the Fund are distributed;
(6) Spouses, surviving spouses and dependent children of the foregoing persons;
and (7) Trusts primarily for the benefit of the foregoing individuals; (8)
certain "wrap accounts" for the benefit of clients of Princor and other Broker
dealers or financial planners selected by Princor; (9) Unit Investment Trusts
sponsored by Principal Mutual Life Insurance Company, and/or its directly or
indirectly owned subsidiaries; and (10) certain employee welfare benefit plan
customers of Principal Mutual Life Insurance Company for whom Plan Deposit
Accounts are established.
Each of the Funds, except Principal Tax-Exempt Bond Fund and Principal
Tax-Exempt Cash Management Fund, have obtained an exemptive order from the
Securities and Exchange Commission ("SEC") to permit each Fund to offer its
shares at net asset value to participants of certain annuity contracts issued by
Principal Mutual Life Insurance Company. In addition, each of these Funds are
available at net asset value to the extent the investment represents the
proceeds from a total surrender of certain unregistered annuity contracts issued
by Principal Mutual Life Insurance Company and for which Principal Mutual Life
Insurance Company waives any applicable contingent deferred sales charges or
other contract surrender charges.
In addition, investors who are clients of a registered representative of
Princor or other dealers through which shares of the Funds are distributed and
who has become affiliated with Princor or such other dealer within 180 days of
the date of the purchase of Class A shares of the Funds may purchase such shares
at net asset value provided that (i) the purchase is made within the first 180
days of the registered representative's affiliation with the firm involved (as
certified by an officer or partner of the firm); and (ii) the investment
represents the proceeds of a redemption within that 180 day period of shares of
another investment company the purchase of which included a front-end sales
charge or the redemption of which included a contingent deferred sales charge;
and (iii) the investor indicates on the account application that the purchase
qualifies for a net asset value purchase and forwards to Princor either (a) the
redemption check representing the proceeds of the shares redeemed, endorsed to
the order of Princor, or (b) a copy of the confirmation from the other
investment company showing the redemption transaction. In the case of a wire
purchase pursuant to this provision, a copy of the confirmation from the other
investment company showing the redemption must be forwarded to and received by
Princor within 21 days following the date of purchase. If the confirmation is
not provided within the 21-day period, a sufficient number of shares will be
redeemed from the shareholder's account to pay the otherwise applicable sales
charge. Investors availing themselves of this option should be aware that a
redemption from another mutual fund will be a taxable event and may be subject
to a surrender charge imposed by that fund.
Also during the period beginning December 1, 1997 and ending January 31,
1998, investors may purchase Class A shares of the Funds at net asset value to
the extent that this investment represents the proceeds of a redemption, within
the preceding 60 days, of shares (the purchase price of which shares included a
front-end sales charge on the redemption of which was subject to a contingent
deferred sales charge) of another investment company. This provision does not
apply to purchase of Class A shares used to fund a defined contribution plan.
When making a purchase at net asset value pursuant to this provision, the
investor must indicate on the account application that the purchase qualifies
for a net asset value purchase and must forward to Princor either (i) the
redemption check representing the proceeds of the shares redeemed, endorsed to
the order of Princor Financial Services Corporation, or (ii) a copy of the
confirmation from the other investment company showing the redemption
transactions. In the case of a wire purchase pursuant to this provision, a copy
of the confirmation from the other investment company showing the redemption
must be forwarded to and received by Princor within 21 days following the date
of purchase. If the confirmation is not provided within the 21-day period, a
sufficient number of shares will be redeemed from the shareholder's account to
pay the otherwise applicable sales charge.
Purchases at a Reduced Sales Charge. A reduced sales charge is also
available for purchases of Class A shares of the Funds, except the Limited Term
Bond Fund, to the extent that the investment represents either the proceeds from
a total surrender of a Pension Builder Annuity Contract ( an unregistered fixed
annuity contract issued by Principal Mutual Life Insurance Company) or the death
benefit proceeds of one or more life insurance policies or annuity contracts
(other than an annuity contract issued to fund an employer-sponsored retirement
plan that is not a SEP, salary deferral 403(b) plan or HR-10 plan) of which the
shareholder is a beneficiary if one or more of such policies or contracts is
issued by Principal Mutual Life Insurance Company, or any directly or indirectly
owned subsidiary of Principal Mutual Life Insurance Company, and such investment
is made in any Principal Fund within one year after the date of death of the
insured. (Shareholders should seek advice from their tax advisors regarding the
tax consequences of distributions from annuity contracts.) Such shares may be
purchased at net asset value plus a sales charge which ranges from a high of
2.50% to a low of 0% of the offering price (equivalent to a range of 2.56% to 0%
of the net amount invested) according to the schedule below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Sales Charge as a % of:
Net Dealer Allowance as %
Offering Amount of Offering
Amount of Purchase Price Invested Price
------------------ ----- -------- ---- -----
<S> <C> <C> <C>
Less than $500,000 2.50% 2.56% 2.10%
$500,000 but less than $1,000,000 1.50% 1.52% 1.25%
$1,000,000 or more No Sales Charge 0% .75%
- --------------------------------------- ----------------------------------- ----------- -------------------------------
</TABLE>
Sales Charges for Employer-Sponsored Plans
Administered Employee Benefit Plans. Class A shares of the Growth-Oriented
Funds and Income-Oriented Funds, except Principal Limited Term Bond Fund and, in
certain circumstances, Principal Tax-Exempt Bond Fund which is not available for
certain retirement plans, are sold at net asset value to stock bonus, pension or
profit sharing plans that meet the requirements for qualification under Section
401 of the Internal Revenue Code of 1986, as amended, certain Section 403(b)
Plans, Section 457 Plans and other Non-qualified Plans administered by Principal
Mutual Life Insurance Company pursuant to a written service agreement
("Administered Employee Benefit Plans"). The service agreement between Principal
Mutual Life Insurance Company and the employer relating to the administration of
the plan includes a charge payable by the employer for any commissions which
Princor is authorized to pay in connection with such sales. Principal Mutual
Life Insurance Company in turn pays the amount of these charges to Princor. The
commission payable by Princor in connection with any such sale will be
determined in accordance with one of the following schedules:
- ----------------------------------------------------------------------------
Schedule 1
- ----------------------------------------------------------------------------
Amount of Plan Contributions* Amount Payable by Employer as
In each year a Percent of Plan
Contributions
The first $5,000 4.50%
The next $5,000 3.00%
The next $5,000 1.70%
The next $35,000 1.40%
The next $50,000 0.90%
The next $400,000 0.60%
Excess over $500,000 0.25%
- --------------------------------------------------------------------
Schedule 2
- --------------------------------------------------------------------
The first $50,000 3.00%
The next $50,000 2.00%
The next $400,000 1.00%
The next $2,500,000 0.50%
Excess over $3,000,000 0.25%
- ----------------------------------------------------------------------------
* Plan contributions directed to an annuity contract issued by Principal
Mutual Life Insurance Company to fund the plan are combined with contributions
directed to the Funds to determine the applicable commission charge.
- --------------------------------------------------------------------------------
Generally, the commission level described in Schedule 2 will apply for
salary deferral Plans and the commission level described in Schedule 1 will
apply to other plans. No commission will be payable by the employer if shares of
the Funds used to fund an Administered Employee Benefit Plan are purchased
through a registered representative of Princor Financial Services Corporation
who is also a Group Insurance Representative employee of Principal Mutual Life
Insurance Company.
Plans Other than Administered Employee Benefit Plans. Shares of the Funds
are offered to fund certain sponsored Princor plans. These plans can be divided
into three categories: Retirement plans meeting the requirements of Section 401
of the Internal Revenue Code (e.g. 401(k) Plans, Profit Sharing Plans and Money
Purchase Pension Plans), Group Solicited Plan Terminations and other
employer-sponsored retirement plans (SIMPLE IRA Plans, Simplified Employee
Pension Plans, Salary Reduction Simplified Employee Pension Plans, Non-Qualified
Deferred Compensation Plans, Payroll Deduction Plans ("PDP") certain Association
Plans.
Princor 401 Plans
When establishing a Princor Section 401 Plan, the employer chooses whether
to fund the plan with either Class A shares or Class B shares. If Class A shares
are used to fund the plan, all plan investments will be treated as made by a
single investor to determine whether a reduced sales charge is available. The
sales charge for purchases of less than $250,000 is 3.75% as a percentage of the
offering price and 3.90% of the net amount invested. The regular sales charge
table for Class A shares applies to purchases $250,000 or more. If Class B
shares are used to fund the plan, contributions into the plan after the plan
assets amount to $250,000 or more, will be used to purchase Class A shares. Plan
assets will not be combined with investments made outside of the plan to
determine the sales charge applicable to such investments. Investments made by
plan participants outside of the plan will not be included with plan assets to
determine the sales charge applicable to the plan.
Group Solicited Plan Terminations
Occasionally, an employer will terminate a Section 401 Plan. If the
employer or plan trustee enters into a written agreement with Princor permitting
the group solicitation of the employees/plan participants, the proceeds of
distributions from such plans are eligible to purchase shares of the funds at
net asset value. A redemption of such shares within 18 months after purchase
will be subject to a contingent deferred sales charge ("CDSC") at the rate of
.75% (.25% for the Limited Term Bond Fund) of the lesser of the value of the
shares redeemed (exclusive of reinvested dividends and capital gain
distributions) or the total cost of such shares. The CDSC will be waived in
connection with (1) redemption of shares to satisfy IRS minimum distribution
rules or (2) shares redeemed through a systematic withdrawal plan that permits
up to 10% of the value of the shareholder's Class A shares of a Fund on the last
business day of December each year to be withdrawn automatically in equal
monthly installments throughout the year.
Other Employer Sponsored Princor Plans
When establishing an employer-sponsored Princor plan, the employer chooses
whether to fund the plan with either Class A shares or Class B shares. If Class
A shares are used to fund the plan, all plan investments will be treated as made
by a single investor to determine whether a reduced sales charge is available.
The sales charge for purchases of less than $250,000 is 3.75% as a percentage of
the offering price and 3.90% of the net amount invested. The regular sales
charge table for Class A shares applies to purchases of $250,000 or more. If
Class B shares are used to fund the plan and a plan participant has $250,000 or
more invested in Class B shares, Class A shares will be purchased with plan
contributions attributable to the plan participant, unless the plan participant
elects otherwise. Plan assets will not be combined with investments made outside
of the plan to determine the sales charge applicable to such investments.
Investments made by plan participants outside of the plan will not be included
with plan assets to determine the sales charge applicable to the plan.
Shares of the funds are also available to participants of Princor 403(b)
plans at the same sales charge levels available to other employer-sponsored
Princor plans described above. However, contributions by plan participants are
not combined to determine sales charges.
The Funds reserve the right to discontinue offering shares at net asset
value and/or at a reduced sales charge at any time for new accounts and upon
60-days notice to shareholders of existing accounts. Other types of sponsored
plans may be added in the future.
Class B shares
Class B shares are sold without an initial sales charge, although a CDSC
will be imposed if you redeem shares within six years of purchase. Class B
shares purchased under certain sponsored Princor plans established after
February 1, 1998, are subject to a CDSC of up to 3% if redeemed within five
years of purchase. (See "Plans Other than Administered Employee Benefit Plans"
above for discussion of sponsored Princor plans.) The following types of shares
may be redeemed without charge at any time: (I) shares acquired by reinvestment
of distributions and (ii) shares otherwise exempt from the CDSC, as described
below. Subject to the foregoing exclusions, the amount of the charge is
determined as a percentage of the lesser of the current market value or the cost
of the shares being redeemed. Therefore, when a share is redeemed, any increase
in its value above the initial purchase price is not subject to any CDSC. The
amount of the CDSC will depend on the number of years since you invested and the
dollar amount being redeemed, according to the following table:
<TABLE>
<CAPTION>
Contingent Deferred Sales Charge as a
Percentage of Dollar Amount Subject to Charge
Years Since Purchase All Funds Except Limited Term Certain
Payments Limited Term Bond Fund Bond Fund Sponsored Plans
Made
<S> <C> <C> <C>
2 years or less 4.0% 1.25% 3.0%
more than 2 years, up to 4 years 3.0% 0.75% 2.0%
more than 4 years, up to 5 years 2.0% 0.50% 1.0%
more than 5 years, up to 6 years 1.0% 0.25% None
more than 6 years None None None
</TABLE>
In determining whether a CDSC is payable on any redemption, the Fund will
first redeem shares not subject to any charge, and then shares held longest
during the six (five) year period. For information on how sales charges are
calculated if shares are exchanged, see "How to Exchanges Shares" in the
Prospectus.
The CDSC will be waived on redemptions of Class B shares in connection with
the following types of transactions:
a. Shares redeemed due to a shareholder's death;
b. Shares redeemed due to the shareholder's disability, as defined in the
Internal Revenue Code of 1986 (the "Code"), as amended;
c. Shares redeemed from retirement plans to satisfy minimum distribution
rules under the Code;
d. Shares redeemed to pay surrender charges;
e. Shares redeemed to pay retirement plan fees;
f. Shares redeemed involuntarily from small balance accounts (values of
less than $300);
g. Shares redeemed through a systematic withdrawal plan that permits up
to 10% of the value of a shareholder's Class B shares of a particular
Fund on the last business day of December of each year to be withdrawn
automatically in equal monthly installments throughout the year;
h. Shares redeemed from a retirement plan to assure the plan complies
with Sections 401(k), 401(m), 408(k) and 415 of the Code; or
I. Shares redeemed from retirement plans qualified under Section 401(a)
of the Code due to the plan participant's death, disability,
retirement or separation from service after attaining age 55.
<TABLE>
<CAPTION>
Underwriting fees from the sale of shares for the periods indicated were as
follows:
------------------------------------------- ----------------------------------------------------------
Underwriting Fees for
Fiscal Years Ended October 31,
1997 1996 1995
----
<S> <C> <C> <C>
Balanced Fund $518,345 $ 448,584 $ 266,479
Blue Chip Fund 816,203 469,388 168,419
Bond Fund 582,903 637,949 476,813
Capital Value Fund 1,383,995 988,680 611,180
Cash Management Fund 14,123 1,013 0
Government Securities Income Fund 737,229 1,233,811 835,393
Growth Fund 1,548,696 1,813,439 1,237,015
High Yield Fund 321,051 164,687 93,608
International Emerging Markets Fund** 33,588 N/A N/A
International Fund 1,524,740 951,553 739,560
International SmallCap Fund** 38,421 N/A N/A
Limited Term Bond Fund* 50,773 56,766 N/A
MidCap Fund 2,152,664 2,112,480 1,293,597
Tax-Exempt Bond Fund 558,697 698,730 584,221
Tax-Exempt Cash Management Fund 0 1,631 0
Utilities Fund 169,904 370,724 288,533
<FN>
* Period from February 29, 1996 (Date Operations Commenced) through
October 31, 1996. **Period from August 29, 1997 (Date Operations
Commenced) through October 31, 1997
</FN>
------------------------------------------------------------------------------------------------------
</TABLE>
DISTRIBUTION PLAN
Rule 12b-1 of the Investment Company Act of 1940 (the "Act"), as amended,
permits a mutual fund to finance distribution activities and bear expenses
associated with the distribution of its shares provided that any payments made
by the Fund are made pursuant to a written plan adopted in accordance with the
Rule. A majority of the Board of Directors of each Fund, including a majority of
the Directors who have no direct or indirect financial interest in the operation
of the Plan or any agreements related to the Plan and who are not "interested
persons" as defined in the Act, adopted the Distribution Plans as described
below. No such Plan was adopted for Class A shares of the Money Market Funds.
Shareholders of each class of shares of each Fund approved the adoption of the
Plan for their respective class of shares.
Class A Distribution Plan. Each of the Funds, except the Money Market
Funds, has adopted a distribution plan for the Class A shares. The Class A Plan
provides that the Fund will make payments from its assets to Princor pursuant to
this Plan to compensate Princor and other selling Dealers for providing
shareholder services to existing Fund shareholders and rendering assistance in
the distribution and promotion of the Fund Class A shares to the public. The
Fund will pay Princor a fee after the end of each month at an annual rate no
greater than 0.25% (.15% for the Limited Term Bond Fund) of the daily net asset
value of the Fund. Princor will retain such amounts as are appropriate to
compensate for actual expenses incurred in distributing and promoting the sale
of the Fund shares to the public but may remit on a continuous basis up to .25%
(.15% for the Limited Term Bond Fund) to Registered Representatives and other
selected Dealers (including for this purpose, certain financial institutions) as
a trail fee in recognition of their services and assistance.
Class B Distribution Plan. Each Class B Plan provides for payments by the
Fund to Princor at the annual rate of up to 1.00% (.50% for the Limited Term
Bond Fund) of the Fund's average net asset attributable to Class B shares.
Princor also receives the proceeds of any CDSC imposed on redemptions of such
shares.
Although Class B shares are sold without an initial sales charge, Princor
pays a sales commission equal to 4.00% (3.00% for certain sponsored plans or
1.25% for the Limited Term Bond Fund) of the amount invested to dealers who sell
such shares. These commissions are not paid on exchanges from other Principal
Funds. In addition, Princor may remit on a continuous basis up to .25% (.15% for
the Limited Term Bond Fund) to the Registered Representatives and other selected
Dealers (including for this purpose, certain financial institutions) as a trail
fee in recognition of their services and assistance.
Class R Distribution Plan. Each of the Funds, except the Tax-Exempt Bond
Fund and Tax-Exempt Cash Management Fund, have adopted a distribution plan for
the Class R shares. Each Class R Plan provides for payments by the Fund to
Princor at the annual rate of up to .75% of the Fund's average net assets
attributable to Class R shares.
Although Class R shares are sold without an initial sales charge, Princor
incurs certain distribution expenses. In addition, Princor may remit on a
continuous basis up to .25% to Registered Representatives and other selected
Dealers (including, for this purpose, certain financial institutions) as a trail
fee in recognition of their ongoing services and assistance.
General Information Regarding Distribution Plans. A representative of
Princor will provide to the Fund's Board of Directors, and the Board will
review, at least quarterly, a written report of the amounts expended pursuant to
the Plans and the purposes for which such expenditures were made.
Whether any expenditure under the Plans is subject to a state expense limit
will depend upon the nature of the expenditure and the terms of the state law,
regulation or order imposing the limit. Any expenditure subject to such a limit
will be included in the Fund's total operating expenses for purposes of
determining compliance with the expense limit.
If expenses under a Plan exceed the compensation limit for Princor
described in the Plan in any one fiscal year, the Fund will not carry over such
expenses to the next fiscal year. The Funds have no legal obligation to pay any
amount pursuant to this Plan that exceeds the compensation limit. The Funds will
not pay, directly or indirectly, interest, carrying charges, or other financing
costs in connection with the Plans. If the aggregate payments received by
Princor under a Plan in any fiscal year exceed the expenditures made by Princor
in that year pursuant to the Plan, Princor will promptly reimburse the Fund for
the amount of the excess.
The amount received from each Fund and retained by Princor during the year
ended October 31, 1997 and the manner in which such amounts were spent pursuant
to the Class A Distribution Plan for the last fiscal period of each of the Funds
were as follows:
<TABLE>
<CAPTION>
====================================================================================================================
EXPENDITURES
Prospectus
and
Shareholder Registered Underwriter's
Amount Report Sales Media Representative Salaries Total
Retained Printing Brochures Advertising Sales Service and Expenditures
Fund Materials Fees Overhead
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balanced 196,691 4,165 22,012 97 10,504 97,652 62,261 196,691
Blue Chip 158,562 4,902 20,732 43 10,407 64,493 57,984 158,562
Bond 265,600 4,194 18,827 45 11,162 168,229 63,144 265,600
Capital Value 618,065 10,051 38,746 63 20,159 441,949 107,097 618,065
Government Securities 489,263 4,972 23,132 57 13,671 373,832 73,598 489,263
Income
Growth 616,975 11,925 45,681 117 24,858 411,717 122,677 616,975
High Yield 83,413 2,069 10,907 69 6,423 26,864 37,081 83,413
International Emerging 2,422 3 1,272 6 248 2 891 2,422
Markets 480,472 11,215 58,402 191 23,334 274,791 112,539 480,472
International 2,616 3 1,434 7 271 2 899 2,616
International SmallCap
Limited Term Bond 27,465 649 4,204 32 3,510 3,456 15,614 27,465
MidCap 693,086 16,376 57,360 135 31,717 433,105 154,393 693,086
Tax-Exempt Bond 412,071 3,204 20,505 146 17,800 307,965 62,452 412,071
Utilities 163,975 2,634 17,794 39 8,122 87,221 48,156 163,975
====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
The amount received from each Fund and retained by Princor during the
period ended October 31, 1997 and the manner in which such amounts were spent
pursuant to the Class B Distribution Plan for the last fiscal period of each
of the Funds were as follows:
=================================================================================================================
EXPENDITURES
Prospectus Registered Underwriter's
Amount and Sales Representative Salaries Total
Retained Shareholder Brochures Sales Service and Commissions Expenditures
Fund Report Materials Fees Overhead
Printing
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balanced 80,591 2,110 7,001 4,251 14,091 25,227 27,911 80,591
Blue Chip 111,649 2,961 7,751 4,719 20,038 26,389 49,791 111,649
Bond 89,572 2,019 7,191 4,352 17,231 24,643 34,136 89,572
Capital Value 157,373 4,424 10,765 6,479 30,438 34,711 70,556 157,373
Cash Management 2,579 110 250 147 1,004 1,068 0 2,579
Government Securities 92,012 1,725 6,448 3,905 23,877 20,992 35,064 92,012
Income
Growth 196,924 5,157 13,418 8,072 55,680 41,153 73,444 196,924
High Yield 38,669 831 3,699 2,254 8,064 12,910 10,911 38,669
International Emerging 3,247 6 479 487 53 1,575 647 3,247
Markets
International 221,369 5,094 14,024 8,464 46,275 43,733 103,780 221,369
International SmallCap 3,835 8 511 532 59 2,181 544 3,835
Limited Term Bond 1,255 12 149 89 376 589 40 1,255
MidCap 279,416 7,513 17,711 10,671 71,448 52,796 119,276 279,416
Tax-Exempt Bond 46,931 671 3,758 2,257 12,121 11,771 16,353 46,931
Utilities 55,986 1,964 7,138 4,305 12,485 24,159 5,936 55,986
=================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
The amount received from each Fund and retained by Princor during the
period ended October 31, 1997 and the manner in which such amounts were spent
pursuant to the Class R Distribution Plan for the last fiscal period of each of
the Funds were as follows:
====================================================================================================================
EXPENDITURES
Prospectus
and Registered Underwriter's
Amount Shareholder Sales Representative Salaries Total
Retained Report Brochures Sales Service and Expenditures
Fund Printing Materials Fees Overhead
<S> <C> <C> <C> <C> <C> <C> <C>
Balanced 2,240 5,719 3,294 13,259 15,264 39,776 39,776
Blue Chip 61,693 3,378 7,489 4,322 20,564 25,940 61,693
Bond 23,388 1,183 3,593 2,070 7,796 8,746 23,388
Capital Value 74,405 3,947 7,718 4,502 24,802 33,436 74,405
Cash Management 9,165 268 1,028 607 3,012 4,250 9,165
Government Securities Income 17,242 956 2,831 1,634 5,747 6,074 17,242
Growth 70,575 4,193 7,414 4,312 23,525 31,131 70,575
High Yield 7,488 209 944 534 2,496 3,305 7,488
International Emerging 1,370 1 727 635 7 0 1,370
Markets
International 46,587 2,277 4,312 2,611 15,529 21,858 46,587
International SmallCap 1,340 1 717 622 0 0 1,340
Limited Term Bond 3,460 149 1,029 615 1,178 489 3,460
MidCap 69,806 4,065 6,712 3,911 23,269 31,849 69,806
Utilities 6,851 440 1,469 884 2,284 1,774 6,851
====================================================================================================================
</TABLE>
A Plan may be terminated at any time by vote of a majority of the
Directors who are not interested persons (as defined in the Act), or by vote of
a majority of the outstanding voting securities of the class of shares of a Fund
to which the Plan relates. Any change in a Plan that would materially increase
the distribution expenses of a class of shares of a Fund provided for in the
Plan requires approval of the shareholders of the class of shares to which such
increase would relate.
While a Distribution Plan is in effect for a Fund, the selection and
nomination of Directors who are not interested persons of that Fund will be
committed to the discretion of the Directors who are not interested persons.
Each Plan will continue in effect from year to year as long as its
continuance is specifically approved at least annually by a majority vote of the
directors of the Fund including a majority of the non-interested directors. The
Plans for all Classes of shares were last approved by each Fund's Board of
Directors, including a majority of the non-interested directors, on September 8,
1997.
DETERMINATION OF NET ASSET VALUE OF FUNDS' SHARES
Growth-Oriented and Income-Oriented Funds
The net asset values of the shares of each of the Growth-Oriented and
Income-Oriented Funds are 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 Fund's portfolio securities will not materially affect the
current net asset value of that Fund's redeemable securities, on days during
which a Fund 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 Funds treat as customary national business
holidays those days on which the New York Stock Exchange is closed for New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net
asset value per share for each class of shares for each Fund is determined by
dividing the value of securities in the Fund's investment portfolio plus all
other assets attributable to that class, less all liabilities attributable to
that class, by the number of Fund shares of that class outstanding. Securities
for which market quotations are readily available, including options and futures
traded on an exchange, are valued at market value, which is for exchanged-listed
securities, the closing price; for United Kingdom-listed securities, the
market-maker provided price; and for non-listed equity securities, the bid
price. Non-listed corporate debt securities, government securities and municipal
securities are usually valued using an evaluated bid price provided by a pricing
service. If closing prices are unavailable for exchange-listed securities,
generally the bid price, or in the case of debt securities an evaluated bid
price, is used to value such securities. When reliable market quotations are not
considered to be readily available, which may be the case, for example, with
respect to certain debt securities, preferred stocks, foreign securities and
over-the-counter options, the investments are valued by using market quotations,
prices provided by market makers, which may include dealers with which the Fund
has executed transactions, or estimates of market values obtained from yield
data and other factors relating to instruments or securities with similar
characteristics in accordance with procedures established in good faith by the
Board of Directors. Securities with remaining maturities of 60 days or less are
valued at amortized cost. Other assets are valued at fair value as determined in
good faith through procedures established by the Board of Directors of the Fund.
Generally, trading in foreign securities is substantially completed each
day at various times prior to the close of the New York Stock Exchange. The
values of 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
Fund's 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 under procedures
established and regularly reviewed by the Board of Directors. To the extent the
Fund invests in foreign securities listed on foreign exchanges which trade on
days on which the Fund does not determine its net asset value, for example
Saturdays and other customary national U.S. holidays, the Fund's net asset value
could be significantly affected on days when shareholders have no access to the
Fund.
Certain securities issued by companies in emerging market countries may
have more than one quoted valuation at any given point in time, sometimes
referred to as a "local" price and a "premium" price. The premium price is often
a negotiated price which may not consistently represent a price at which a
specific transaction can be effected. It is the policy of the International
Emerging Markets Fund, International Fund and International SmallCap Fund to
value such securities at prices at which it is expected those shares may be
sold, and the Manager or any sub-adviser is authorized to make such
determinations subject to such oversight by the Fund's Board of Directors as may
from time to time be necessary.
Money Market Funds
The net asset value of each class of shares of each of the Money Market
Funds is determined at the same time and on the same days as each of the
Growth-Oriented Funds and Income-Oriented Funds as described above. The net
asset value per share for each class of shares of each Fund is computed by
dividing the total value of the Fund's securities and other assets, less
liabilities, by the number of Fund shares outstanding.
All securities held by the Money Market Funds will be valued on an
amortized cost basis. Under this method of valuation, a security is initially
valued at cost; thereafter, the Fund assumes a constant proportionate
amortization in value until maturity of any discount or premium, regardless of
the impact of fluctuating interest rates on the market value of the security.
While this method provides certainty in valuation, it may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price that would be received upon sale of the security.
Use of the amortized cost valuation method by the Money Market Funds
requires each Fund to maintain a dollar weighted average maturity of 90 days or
less and to purchase only obligations that have remaining maturities of 397 days
or less or have a variable or floating rate of interest. In addition, each Fund
can invest only in obligations determined by its Board of Directors to be of
high quality with minimal credit risks.
The Board of Directors for each of the Money Market Funds has
established procedures designed to stabilize, to the extent reasonably possible,
the Fund's price per share as computed for the purpose of sales and redemptions
at $1.00. Such procedures include a directive to the Manager to test price the
portfolio or specific securities thereof on a weekly basis using a
mark-to-market method of valuation to determine possible deviations in the net
asset value from $1.00 per share. If such deviation exceeds 1/2 of 1%, the Board
of Directors will promptly consider what action, if any, will be initiated. In
the event the Board of Directors determines that a deviation exists which may
result in material dilution or other unfair results to shareholders, the Board
will take such corrective action as it regards as appropriate, including: the
sale of portfolio instruments prior to maturity; the withholding of dividends;
redemptions of shares in kind; the establishment of a net asset value per share
based upon available market quotations; or splitting, combining or otherwise
recapitalizing outstanding shares. The Fund may also reduce the number of shares
outstanding by redeeming proportionately from shareholders, without the payment
of any monetary compensation, such number of full and fractional shares as is
necessary to maintain the net asset value at $1.00 per share.
PERFORMANCE CALCULATION
Each of the Principal Funds may from time to time advertise its
performance in terms of total return or yield for each class of shares. The
figures used for total return and yield are based on the historical performance
of a Fund, 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 Fund's
portfolio and operating expenses. These factors and possible differences in the
methods used in calculating performance figures should be considered when
comparing a Fund's performance to the performance of some other kind of
investment.
A Fund 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, Changing Times, Fortune, U.S. News, W. R. Kipplinger's Personal
Finance, USA Today, Investment Advisor and Stanger's Investment Advisor and
comparisons of the performance of a Fund to that of various market indices, such
as the S&P 500 Index, Valueline, Dow Jones Industrials Index, Morgan Stanley
Capital International EAFE (Europe, Australia and Far East) Index and World
Index, Dow Jones Utility Index with Income, Lehman Brothers GNMA Index, Salomon
Brothers Investment Grade Bond Index and Bond Buyer Municipal Index, Lehman
Brothers BAA Corporate Index, Lehman Brothers High Yield Index, Lehman Brothers
Municipal Bond Index, Lehman Brothers Revenue Bond Index, Merrill Lynch
Corporate Government Bond Index, Lehman Brothers Mutual Fund Short
Government/Corporate Index and the Lehman Brothers Government Corporate
Intermediate Index.
Total Return
When advertising total return figures, each of the Growth-Oriented Funds
and Income-Oriented Funds will include its average annual total return for each
of the one-, five- and ten-year periods (or for such shorter periods as the
registration statement for the relevant class 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 Fund 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 at net asset value) and the initial
investment by the initial investment. Total return calculations assume the
payment of the maximum front-end load (in the case of Class A shares) or the
applicable CDSC (in the case of Class B shares). Average annual total return and
cumulative total return may also be calculated for a specified period which
reflect reduced sales charges or which reflect no sales charge or CDSC in order
to illustrate the change in a Fund's net asset value over time.
The following table shows as of October 31, 1997 average annual return
for Class A shares for each of the Funds for the periods indicated:
Fund 1-Year 5-Year 10-Year
---- -------- -------- -------
Balanced Fund 10.44% 10.46% 10.72%(1)
Blue Chip Fund 16.81 13.78 12.78 (2)
Bond Fund 4.97 7.35 9.12 (1)
Capital Value Fund 19.47 15.97 13.43
Government Securities Income Fund 4.10 6.33 8.74
Growth Fund 23.46 15.22 15.86
High Yield Fund 7.05 8.67 8.23 (1)
International Emerging Markets Fund (14.45)(3)
International Fund 14.80 16.30 11.69
International SmallCap Fund (4.27)(3)
Limited Term Bond Fund 5.14 5.27 (4)
MidCap Fund 25.09 18.77 18.12 (1)
Tax-Exempt Bond Fund 3.60 6.44 8.56
Utilities Fund 8.89 7.76 (5)
(1) Period beginning December 18, 1987 and ending October 31, 1997.
(2) Period beginning March 1, 1991 and ending October 31, 1997.
(3) Period beginning August 29, 1997 and ending October 31, 1997.
(4) Period beginning February 29, 1996 and ending October 31, 1997.
(5) Period beginning December 16, 1992 and ending October 31, 1997.
The following table shows as of October 31, 1997 average annual return for
Class B shares for each of the Funds for the period indicated:
Fund 1-Year 5-Year
Balanced Fund 10.96% 15.76%(1)
Blue Chip Fund 17.59 22.02(1)
Bond Fund 5.20 9.75(1)
Capital Value Fund 20.13 25.14(1)
Government Securities Income Fund 4.65 9.38(1)
Growth Fund 24.92 23.26(1)
High Yield 7.31 10.92(1)
International Emerging Markets Fund (13.88)(3)
International Fund 15.62 15.26(1)
International SmallCap Fund (3.50)(3)
Limited Term Bond Fund 5.06 5.05(2)
MidCap Fund 26.64 27.66(1)
Tax-Exempt Bond Fund 4.08 9.83(1)
Utilities Fund 9.41 14.52(1)
(1) Period beginning December 9, 1994 and ending October 31, 1997.
(2) Period beginning February 29, 1996 and ending October 31, 1997.
(3) Period beginning August 29, 1997 and ending October 31, 1997.
The following table shows as of October 31, 1997 average annual return for
Class R shares for each of the Funds for the period indicated:
Fund 1-Year 5-Year(1)
Balanced Fund 15.16% 13.64%
Blue Chip Fund 21.82 17.20
Bond Fund 9.49 7.93
Capital Value Fund 24.36 22.41
Government Securities Income Fund 8.19 7.16
Growth Fund 28.72 17.08
High Yield Fund 11.14 10.05
International Emerging Markets Fund (10.29)(2)
International Fund 19.65 17.41
International SmallCap Fund .50(2)
Limited Term Bond Fund 6.01 5.55
MidCap Fund 30.56 21.60
Utilities Fund 13.72 7.80
(1) Period beginning February 29, 1996 and ending October 31, 1997.
(2) Period beginning August 29, 1997 and ending October 31, 1997.
Yield
Income-Oriented Funds
Each of the Income-Oriented Funds 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 maximum
public offering price for Class A shares or the net asset value for Class B and
Class R shares for the last day of the same period. The following table shows as
of October 31, 1997 the yield for each class of shares for each of the
Income-Oriented Funds:
Yield As of October 31, 1997
Fund Class A Class B Class R
---- ------- ------- -------
Bond Fund 5.72% 5.25% 5.49%
Government Securities Income Fund 5.59 7.20 4.95
High Yield Fund 7.35 6.83 6.64
Limited Term Bond Fund 5.57 5.32 5.07
Tax-Exempt Bond Fund 4.28 3.92
The Tax-Exempt Bond Fund may advertise a tax-equivalent yield, which is
calculated by dividing that portion of the yield which is tax-exempt by one
minus a stated income tax rate and adding the product to that portion, if any,
of the yield which is not tax-exempt. As of October 31, 1997 the Fund's
tax-equivalent yields for Class A and Class B shares were as follows:
Tax-Equivalent Yield Assumed
Class A Class B Tax Rate
5.94% 5.44% 28.0%
6.69% 6.13% 36.0%
7.09% 6.49% 39.6%
Money Market Funds
Each of the Money Market Funds may advertise its yield and its effective
yield and the Tax-Exempt Cash Management Fund may also advertise its
tax-equivalent yield.
Yield is computed by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account having a balance of
one share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return, and then multiplying the base period return by (365/7) with the
resulting yield figure carried to at least the nearest hundredth of one percent.
As of October 31, 1997, the Cash Management Fund's yield for Class A shares,
Class B shares and Class R shares was 5.09%, 4.19% and 4.44%, respectively, and
the Tax-Exempt Cash Management Fund's yield for Class A shares and Class B
shares was 3.04% and 2.25%, respectively. Because realized capital gains or
losses in a Fund's portfolio are not included in the calculation, the Fund's net
investment income per share for yield purposes may be different from the net
investment income per share for dividend purposes, which includes net short-term
realized gains or losses on the Fund's portfolio.
Effective yield is computed by determining the net change, exclusive of
capital changes, in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period, subtracting a hypothetical
charge reflecting deductions from shareholder accounts, and dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return, and then compounding the base period return by
adding 1, raising the sum to apower equal to 365 divided by 7, and subtracting 1
from the result. The resulting effective yield figure is carried to at least the
nearest hundredth of one percent. As of October 31, 1997, the Cash Management
Fund's effective yield for Class A shares, Class B shares and Class R shares was
5.21%, 4.27% and 4.54%, respectively, and the Tax-Exempt Cash Management Fund's
effective yield for Class A shares and Class B shares was 3.09% and 2.27%,
respectively.
Tax equivalent yield for the Tax-Exempt Cash Management Fund is computed
by dividing that portion of the yield or effective yield which is tax-exempt by
one minus a stated income tax rate and adding the product to that portion, if
any, of the yield or effective yield which is not tax-exempt. As of October 31,
1997 the Fund's tax-equivalent yield and tax-equivalent effective yield for
Class A shares and Class B shares were as follows:
Tax-Equivalent Yield Tax-Equivalent Effective Yield Assumed
Class A Class B Class A Class B Tax-Rate
4.22% 3.13% 4.29% 3.15% 28.0%
4.75% 3.52% 4.83% 3.55% 36.0%
5.03% 3.73% 5.12% 3.76% 39.6%
The yield quoted at any time for one of the Money Market Funds represents
the amount that was earned during a specific, recent seven-day period and is a
function of the quality, types and length of maturity of instruments in the
Fund's portfolio and the Fund's operating expenses. The length of maturity for
the portfolio is the average dollar weighted maturity of the portfolio. This
means that the portfolio has an average maturity of a stated number of days for
its issues. The calculation is weighted by the relative value of each
investment.
The yield for either of the Money Market Funds will fluctuate daily as
the income earned on the investments of the Fund fluctuates. Accordingly, there
is no assurance that the yield quoted on any given occasion will remain in
effect for any period of time. It should also be emphasized that the Funds are
open-end investment companies and that there is no guarantee that the net asset
value or any stated rate of return will remain constant. A shareholder's
investment in either Fund is not insured. Investors comparing results of the
Money Market Funds with investment results and yields from other sources such as
banks or savings and loan associations should understand these distinctions.
Historical and comparative yield information may, from time to time, be
presented by the Funds.
A Fund may include in its advertisements the compounding effect of
reinvested dividends over an extended period of time as illustrated below.
The Power of Compounding
Fund shareholders who 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 Fund. The return and
capital value of an investment in a Fund will fluctuate so that the value, when
redeemed, may be worth more or less than the original cost.
(chart)
Year 6% 8% 10%
0 $10,000 $10,000 $10,000
20 $32,071 $46,610 $67,275
A Fund may also include in its advertisements an illustration of the impact
of income taxes and inflation on earnings from bank certificates of deposit
("CD's"). The interest rate on the hypothetical CD will be based upon average CD
rates for a stated period as reported in the Federal Reserve Bulletin. The
illustrated annual rate of inflation will be the core inflation rate as measured
by the Consumer Price Index for the 12-month period ended as of the most recent
month prior to the advertisement's publication. The illustrated income tax rate
may include any federal income taxrate 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 5.72%
(monthly average six-month CD rate for the month of October, 1997, as reported
in the Federal Reserve Bulletin) and an inflation rate of 2.1% (rate of
inflation for the 12-month period ended October 31, 1997 as measured by the
Consumer Price Index) and an income tax bracket of 28% would be $(49).
($10,000 x 5.72%) / 2 = $286 Interest for six-month period
- 80 Federal income taxes (28%)
- 105 Inflation's impact on invested principal
($10,000 x 2.1%) / 2
($101) After-tax, inflation-adjusted earnings
A Fund may also include in its advertisements an illustration of
tax-deferred accumulation versus currently taxable accumulation in conjunction
with the Fund's use as a funding vehicle for 403(b) plans, IRAs or other
retirement plans. The illustration set forth below assumes a monthly investment
of $200, an annual return of 8% compounded monthly, and a 28% tax bracket.
The information is for illustrative purposes only and is not meant to
represent the performance of any of the Principal Funds. An investment in the
Principal Funds is not guaranteed; values and returns generally vary with
changes in market conditions.
Tax-deferred vs. taxable savings plan
_______________________________________ - $300,059
---------------------------------------
_______________________________________ --- $192,844
---------------------------------------
---------------------------------------
---------------------------------------
---------------------------------------
Years: 5 10 15 20 25 30
- With a tax-deferred savings plan
--- Without a tax-deferred savings plan
TAX TREATMENT OF FUNDS, DIVIDENDS AND DISTRIBUTIONS
It is the policy of each Fund to distribute substantially all net
investment income and net realized gains. Through such distributions, and by
satisfying certain other requirements, each Fund intends to qualify for the tax
treatment accorded to regulated investment companies under the applicable
provisions of the Internal Revenue Code. This means that in each year in which a
Fund 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
Fund intends to comply with the Act's requirements and to avoid this excise tax.
Dividends from net investment income will be eligible for a 70% dividends
received deduction generally available to corporations to the extent of the
amount of qualifying dividends received by the Funds from domestic corporations
for the taxable year. Distributions from the Money Market Funds and
Income-Oriented Funds are generally not eligible for the corporate dividend
received deduction.
All taxable dividends and capital gains are taxable in the year in which
distributed, whether received in cash or reinvested in additional shares.
Dividends declared with a record date in December and paid in January will be
deemed to have been distributed to shareholders in December. Each Fund will
inform its shareholders of the amount and nature of their taxable income
dividends and capital gain distributions. Dividends from a Fund's net income and
distributions of capital gains, if any, may also be subject to state and local
taxation.
The Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of ordinary income dividends and capital gain dividends, and
the proceeds of redemption of shares, paid to any shareholder (1) who has
provided either an incorrect tax identification number or no number at all, (2)
who is subject to backup withholding by the Internal Revenue Service for failure
to report the receipt of interest or dividend income properly, or (3) who has
failed to certify to the Fund that it is not subject to backup withholding or
that it is a corporation or other "exempt recipient."
A shareholder will recognize gain or loss on the sale or redemption of
shares of the Fund in an amount equal to the difference between the proceeds of
the sales or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of the Fund within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of the Fund will be considered capital
gain or loss and will be long-term capital gain or loss if the shares were held
for longer than one year. However, any capital loss arising from the sales or
redemption of shares held for six months or less will be disallowed to the
extent of the amount of exempt-interest dividends received on such shares and
(to the extent not disallowed) will be treated as a long-term capital loss to
the extent of the amount of capital gain dividends received on such shares.
Capital losses in any year are deductible only to the extent of capital gains
plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income.
If a shareholder (i) incurs a sales load in acquiring shares of the Fund,
(ii) disposes of such shares less than 91 days after they are acquired and (iii)
subsequently acquires shares of the Fund or another fund at a reduced sales load
pursuant to a right to reinvest at such reduced sales load acquired in
connection with the acquisition of the shares disposed of, then the sales load
on the shares disposed of (to the extent of the reduction in the sales load on
the shares subsequently acquired) shall not be taken into account in determining
gain or loss on the shares disposed of but shall be treated as incurred on the
acquisition of the shares subsequently acquired.
Shareholders should consult their own tax advisors as to the federal,
state and local tax consequences of ownership of shares of the Funds in their
particular circumstances.
Special Tax Considerations
Tax-Exempt Bond Fund and Tax-Exempt Cash Management Fund
The Tax-Exempt Bond Fund and Tax-Exempt Cash Management Fund also intend to
qualify to pay "exempt-interest dividends" to their respective shareholders. An
exempt-interest dividend is that part of dividend distributions made by either
Fund which consist of interest received by that Fund on tax-exempt Municipal
Obligations. Shareholders incur no federal income taxes on exempt-interest
dividends. However, these exempt-interest dividends may be taxable under state
or local law. Fund shareholders that are corporations must include
exempt-interest dividends in determining whether they are subject to the
corporate alternative minimum tax. Exempt-interestdividends that derive from
certain private activity bonds must be included by individuals as a preference
item in determining whether they are subject to the alternative minimum tax.
Each Fund may also pay ordinary income dividends and distribute capital gains
from time to time. Ordinary income dividends and distributions of capital gains,
if any, are taxable for federal purposes.
If a shareholder receives an exempt-interest dividend with respect to
shares of the Funds held for six months or less, then any loss on the sale or
exchange of such shares, to the extent of the amount of such dividend, is
disallowed. If a shareholder receives a capital gain dividend with respect to
shares held for six months or less, then any loss on the sale or exchange of
such shares will be treated as a long term capital loss to the extent such loss
exceeds any exempt-interest dividend received with respect to such shares, and
will be disallowed to the extent of such exempt-interest dividend.
Interest on indebtedness incurred or continued by a shareholder to
purchase or carry shares of either of these Funds is not deductible.
Furthermore, entities or persons who are "substantial users" (or related
persons) under Section 147(a) of the Code of facilities financed by private
activity bonds should consult their tax advisors before purchasing shares of the
Funds.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Obligations. If any such legislation as enacted would
eliminate or significantly reduce the availability of Municipal Obligations, it
could adversely affect the ability of the Funds to continue to pursue their
respective investment objectives and policies. In such event, the Funds would
reevaluate their investment objectives and policies.
International Emerging Markets Fund, International Fund and International
SmallCap Fund
In each fiscal year when, at the close of such year, more than 50% of the
value of the total assets of the International Emerging Market Fund,
International Fund or the International SmallCap Fund are invested in securities
of foreign corporations, such 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 Fund. In that case, Shareholders should include in their
report of gross income in their federal income tax returns both cash dividends
received from the Fund and also the amount which the Fund advises is their pro
rata portion of foreign income taxes paid with respect to, or withheld from,
dividends and interest paid to the Fund from its foreign investments.
Shareholders 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.
Futures Contracts and Options
As previously discussed, some of the Principal Funds 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, the Funds must recognize any unrealized gains and losses on such
positions held at the end of the fiscal year. A Fund may elect out of such tax
treatment, however, for a futures or options position that is part of an
"identified mixed straddle" such as a put option purchased with respect to a
portfolio security. Gains and losses on futures and options included in an
identified mixed straddle 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 Fund 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.
GENERAL INFORMATION AND HISTORY
Effective January 1, 1998, the following changes were made to the names
of the Funds:
Old Fund Name New Fund Name
Princor Balanced Fund, Inc. Principal Balanced Fund, Inc.
Princor Blue Chip Fund, Inc. Principal Blue Chip Fund, Inc.
Princor Bond Fund, Inc. Principal Bond Fund, Inc.
Princor Capital Accumulation Fund, Inc. Principal Capital Value Fund, Inc.
Princor Cash Management Fund, Inc. Principal Cash Management Fund, Inc.
Princor Emerging Growth Fund, Inc. Principal MidCap Fund, Inc.
Princor Government Principal Government Securities
Securities Income Fund, Inc. Income Fund, Inc.
Princor Growth Fund, Inc. Principal Growth Fund, Inc.
Princor High Yield Fund, Inc. Principal High Yield Fund, Inc.
Princor Limited Term Bond Fund, Inc. Principal Limited Term Bond
Fund, Inc.
Princor Tax-Exempt Bond Fund, Inc. Principal Tax-Exempt Bond Fund, Inc.
Princor Tax-Exempt Principal Tax-Exempt Cash
Cash Management Fund, Inc. Management Fund, Inc.
Princor Utilities Fund, Inc. Principal Utilities Fund, Inc.
Princor World Fund, Inc. Principal International Fund, Inc.
FINANCIAL STATEMENTS
The financial statements for each of the Principal Funds for the year
ended October 31, 1997 appearing in the Annual Reports to Shareholders and the
reports thereon of Ernst & Young LLP, independent auditors, appearing therein
are incorporated by reference in this Statement of Additional Inforamtion. The
Annual Reports will be furnished, without charge, to investors who request
copies of the Statement of Additional Information.
The statement of net assets of the Real Estate Fund and the SmallCap Fund
as of December 11, 1997 and the report of Ernst & Young LLP thereon are provided
herein following the Appendix.
APPENDIX A
Description of Bond Ratings:
Moody's Investors Service, Inc. Bond Ratings
Aaa:
Bonds which are rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa:
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A:
Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa:
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba:
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B:
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa:
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca:
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C:
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
CONDITIONAL RATING: Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
RATING REFINEMENTS: Moody's may apply numerical modifiers, 1, 2 and 3 in
each generic rating classification from Aa through B in its bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and a
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
SHORT-TERM NOTES: The four ratings of Moody's for short-term notes are
MIG 1, MIG 2, MIG 3 and MIG 4; MIG 1 denotes "best quality, enjoying strong
protection from established cash flows"; MIG 2 denotes "high quality" with
"ample margins of protection"; MIG 3 notes are of "favorable quality...but
lacking the undeniable strength of the preceding grades"; MIG 4 notes are of
"adequate quality, carrying specific risk for having protection...and not
distinctly or predominantly speculative."
Description of Moody's Commercial Paper Ratings
Moody's Commercial Paper ratings are opinions of the ability to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have
a superior capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) have
a strong capacity for repayment of short-term promissory obligations.
Issuers rated Prime-3 (or related supporting institutions) have
an acceptable capacity for repayment of short-term promissory
obligations.
Issuers rated Not Prime do not fall within any of the Prime
rating categories.
Description of Standard & Poor's Corporation's Debt Ratings:
A Standard & Poor's debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default -- capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the
laws of bankruptcy and other laws affecting creditor's rights.
AAA:
Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA:
Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small
degree.
A:
Debt rated "A" has a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in
higher-rated categories.
BBB:
Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher-rated categories.
BB, B, CCC, CC:
Debt rated "BB", "B", "CCC" and "CC" is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "CC" the highest degree
of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties
or major risk exposures to adverse conditions.
C:
The rating "C" is reserved for income bonds on which no interest is
being paid.
D:
Debt rated "D" is in default, and payment of interest and/or repayment
of principal is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by
the addition of a plus or minus sign to show relative standing within
the major rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of
the project being financed by the bonds being rated and indicates that
payment of debt service requirements is largely or entirely dependent
upon the successful and timely completion of the project. This rating,
however, while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of, or the risk of default
upon failure of, such completion. The investor should exercise his own
judgment with respect to such likelihood and risk.
NR:
Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does not
rate a particular type of obligation as a matter of policy.
Standard & Poor's, Commercial Paper Ratings
A Standard & Poor's Commercial Paper Rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. Ratings are applicable to
both taxable and tax-exempt commercial paper. The four categories are as
follows:
A:
Issues assigned the highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with
the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1 This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Issues that
possess overwhelming safety characteristics will be given a "+"
designation.
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as
for issues designated "A-1".
A-3 Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to
the adverse effects of changes in circumstances than obligations
carrying the highest designations.
B:
Issues rated "B" are regarded as having only an adequate capacity for
timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
C:
This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D:
This rating indicates that the issue is either in default or is expected
to be in default upon maturity.
The Commercial Paper Rating is not a recommendation to purchase or sell
a security. The ratings are based on current information furnished to Standard &
Poor's by the issuer and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in or unavailability of, such information.
Standard & Poor's rates notes with a maturity of less than three years
as follows:
SP-1 A very strong, or strong, capacity to pay principal and interest.
Issues that possess overwhelming safety characteristics will be
given a "+" designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
<PAGE>
Principal Real Estate Fund, Inc.
Principal SmallCap Fund, Inc.
Statements of Net Assets
December 11, 1997
Principal Real Principal SmallCap
Estate Fund, Inc. Fund, Inc.
-------------------------------------
Assets - cash in bank $10,000,000 $10,000,000
=====================================
=====================
Net Assets Applicable to Outstanding Shares $10,000,000 $10,000,000
=====================================
Net Assets Consist of:
Capital stock $ 10,000 $ 10,000
Additional paid-in capital 9,990,000 9,990,000
=====================================
Total net assets $10,000,000 $10,000,000
=====================================
Capital Stock (par value $.01 a share):
Shares authorized 100,000,000 100,000,000
Net Asset Value Per Share:
Class A:
Net assets $ 4,000,000 $ 4,000,000
Shares issued and outstanding 400,000 400,000
Net asset value per share $10.00 $10.00
Maximum offering price per share (a) $10.50 $10.50
Class B:
Net assets $ 3,000,000 $ 3,000,000
Shares issued and outstanding 300,000 300,000
Net asset value per share (b) $10.00 $10.00
Class R:
Net assets $ 3,000,000 $ 3,000,000
Shares issued and outstanding 300,000 300,000
Net asset value per share $10.00 $10.00
(a) Maximum offering price is equal to net asset value plus a front-end sales
charge of 4.75% of the offering price or 4.99% of the net asset value.
(b) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
See accompanying notes.
<PAGE>
Principal Real Estate Fund, Inc.
Principal SmallCap Fund, Inc.
Notes to Statements of Net Assets
December 11, 1997
1. Organization
Principal Real Estate Fund, Inc. and Principal SmallCap Fund, Inc. ("the Funds")
are registered under the Investment Company Act of 1940, as amended, as open-end
diversified management investment companies. On December 11, 1997, the initial
purchase of 400,000 shares of Class A, 300,000 shares of Class B and 300,000
shares of Class R Capital Stock of each of the Funds was made by Principal
Mutual Life Insurance Company, which is the indirect parent of Invista Capital
Management, Inc., Princor Financial Services Corporation and Princor Management
Corporation.
All organizational expenses have been paid by Princor Management Corporation.
Certain officers and directors of the Fund are also officers of Principal Mutual
Life Insurance Company, Princor Financial Services Corporation, Invista Capital
Management, Inc., and Princor Management Corporation.
2. Operations
The Funds have agreed to pay investment advisory and management fees to Princor
Management Corporation (the "Manager") computed at an annual percentage rate of
each Fund's average daily net assets. The annual rate to be used in this
calculation for the Funds is as follows:
Net Asset Value of Funds
(in millions)
--------------------------------------------
First Next Next Next Over
$100 $100 $100 $100 $400
----- --------- --------- --------- ---------
Principal Real Estate Fund, Inc. .90% .85% .80% .75% .70%
Principal SmallCap Fund, Inc. .85 .80 .75 .70 .65
The Manager has subcontracted the investment advisory services of Principal
SmallCap Fund, Inc. to Invista Capital Management, Inc. for a monthly fee
approximating the actual cost of providing the services by Invista Capital
Management, Inc.
The Funds have also agreed to pay distribution and shareholder servicing fees to
Princor Financial Services Corporation (the "Underwriter") as follows: Class A,
.25% of the daily net assets of the Funds' Class A shares; Class B, 1.00% of the
daily net assets of the Funds' Class B shares; and Class R, .75% of the daily
net assets of the Funds' Class R shares.
The Funds reimburse the Manager for transfer and administrative services,
including the cost of accounting, data processing, supplies and other services
rendered.
<PAGE>
Principal Real Estate Fund, Inc.
Principal SmallCap Fund, Inc.
Notes to Statements of Net Assets (continued)
2. Operations (continued)
The Manager may, at its option, waive all or part of its compensation for such
period of time as it deems necessary or appropriate.
The Funds intend to qualify as "regulated investment companies" under the
Internal Revenue Code and intend to distribute each year substantially all of
their net investment income and realized capital gains to their shareholders.
3. Capital Stock
Principal Real Estate Fund, Inc. and Principal SmallCap Fund, Inc. have each
authorized 100,000,000 shares and both have allocated 25,000,000 shares each for
issuance of Class A, Class B, and Class R shares. The remaining 25,000,000
shares have not been allocated.
Class A shares generally are sold with an initial sales charge based on
declining rates and certain purchases may be subject to a contingent deferred
sales charge ("CDSC"). Class B shares are sold without an initial sales charge,
but are subject to a declining CDSC on certain redemptions redeemed within six
years of purchase. Class R shares are sold without an initial sales charge and
are not subject to a CDSC. Class B shares and Class R shares bear a higher
ongoing distribution fee than Class A shares. Class B shares automatically
convert into Class A shares, based on relative net asset value (without a sales
charge) after seven years. Class R shares automatically convert into Class A
shares, based on relative net asset value (without a sales charge) after four
years. All classes of shares for each fund represent interests in the same
portfolio of investments, and will vote together as a single class except where
otherwise required by law or as determined by each of the Funds' respective
Board of Directors. In addition, the Board of Directors of each fund will
declare separate dividends on each class of shares.
Report of Independent Auditors
The Boards of Directors and Shareholder
Principal Real Estate Fund, Inc.
Principal SmallCap Fund, Inc.
We have audited the accompanying statements of net assets of Principal Real
Estate Fund, Inc. and Principal SmallCap Fund, Inc. as of December 11, 1997.
These statements of net assets are the responsibility of the Funds' management.
Our responsibility is to express an opinion on these statements of net assets
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements of net assets are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of net assets. Our
procedures included confirmation of cash held as of December 11, 1997, by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall statement of net assets presentation. We believe that
our audits of the statements of net assets provide a reasonable basis for our
opinion.
In our opinion, the statements of net assets referred to above present fairly,
in all material respects, the financial positions of Principal Real Estate Fund,
Inc. and Principal SmallCap Fund, Inc. at December 11, 1997, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Des Moines, Iowa
December 11, 1997
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements included in the Registration
Statement (1) Part A:
None (2) Part B:
Financial Highlights for the period from August
29, 1997 through October 31, 1997.
(3) Part C:
None
(b) Exhibits
(1) Articles of Incorporation (Filed 6/13/97)
(2) By-Laws (Filed 6/13/97)
(5a) Management Agreement (Filed 6/13/97)
(5b) Investment Service Agreement (Filed 6/13/97)
(5c) Sub-Advisory Agreement (Filed 6/13/97)
(6a) Distribution Agreement (Filed 6/13/97)
(6b) Account Application
(6c) Account Application-R Shares
(8a) Custody Agreement (Filed 6/13/97)
(9a) Dealer Selling Agreement (Filed 6/13/97)
(9b) Dealer Selling Agreement-R Shares (Filed 6/13/97)
(10) Opinion of Counsel (Filed 8/15/97)
(11) Consent of Independent Auditors
(12) Audited Financial Statements as of October 31,
1997 including the Report of Ernst & Young LLP,
independent auditors for the Registrant.
(13) Investment Letter (Filed 8/15/97) (14a) Principal
Mutual IRA Plan (14b) Principal Mutual SEP Plan (Filed
6/13/97) (14c) Principal Mutual 403(b) Plan (Filed
6/13/97) (15a) 12b-1 Plan - Class A Shares (Filed 6/13/97)
(15b) 12b-1 Plan - Class B Shares (Filed 6/13/97) (15r)
12b-1 Plan - Class R Shares (Filed 6/13/97) (18) Multiple
Class Distribution Plan (Filed 6/13/97) (27a) Financial
Data Schedule-Class A Shares (27b) Financial Data
Schedule-Class B Shares (27c) Financial Data
Schedule-Class R Shares
* To be filed by amendment.
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
October 8, 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 October 8, 1997.
Princor Balanced Fund, Inc. (a Maryland Corporation) 0.88% of
shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 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 October 8, 1997.
Princor Blue Chip Fund, Inc. (a Maryland Corporation) 1.30% of
shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 1997.
Princor Bond Fund, Inc. (a Maryland Corporation) 1.43% of shares
outstanding owned by Principal Mutual Life Insurance Company on
October 8, 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 October 8, 1997.
Princor Capital Accumulation Fund, Inc. (a Maryland
Corporation) 29.63% of outstanding shares owned by Principal
Mutual Life Insurance Company on October 8, 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
October 8, 1997.
Princor Cash Management Fund, Inc. (a Maryland Corporation) 2.25%
of outstanding shares owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on October 8,
1997.
Princor Emerging Growth Fund, Inc. (a Maryland Corporation) 0.61%
of shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 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 October 8, 1997.
Princor Government Securities Income Fund, Inc. (a Maryland
Corporation) 0.40% of shares outstanding owned by Principal
Mutual Life Insurance Company on October 8, 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
October 8, 1997.
Princor Growth Fund, Inc. (a Maryland Corporation) 0.51% of
outstanding shares owned by Principal Mutual Life Insurance
Company on October 8, 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 October 8, 1997.
Princor High Yield Fund, Inc. (a Maryland Corporation) 21.18% of
shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 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 October 8, 1997.
Principal International Emerging Markets Fund, Inc. (a Maryland
Corporation) 86.90% of shares outstanding owned by Principal
Mutual Life Insurance Company on October 8, 1997.
Principal International SmallCap Fund, Inc. (a Maryland
Corporation) 82.32% of shares outstanding owned by Principal
Mutual Life Insurance Company on October 8, 1997.
Princor Limited Term Bond Fund, Inc. (a Maryland Corporation)
50.89% of shares outstanding owned by Principal Mutual Life
Insurance Company on October 8, 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 October 8, 1997.
Principal Special Markets Fund, Inc. (a Maryland Corporation)
100.00% of shares outstanding of the International Emerging
Markets Portfolio, 50.72% of the shares outstanding of the
International Securities Portfolio, 100% of shares outstanding of
the International SmallCap Portfolio and 100.00% of the shares
outstanding of the Mortgage-Backed Securities Portfolio were
owned by Principal Mutual Life Insurance Company on November 17,
1997.
Princor Tax-Exempt Bond Fund, Inc. (a Maryland Corporation) 0.57%
of shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 1997.
Princor Tax-Exempt Cash Management Fund, Inc. (a Maryland
Corporation) 1.03% of shares outstanding owned by Principal
Mutual Life Insurance Company on October 8, 1997.
Princor Utilities Fund, Inc. (a Maryland Corporation) 1.56% of
shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 1997.
Princor World Fund, Inc. (a Maryland Corporation) 23.36% of
shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 1997.
Principal World Fund, Inc. (a Maryland Corporation) 100.0% of
shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 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.
t. Principal L.L.C. (an Illinois Corporation) a limited
liability company.
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. Principal Health Care Management Corporation (an Iowa
Corporation) provide management services to health
maintenance organizations.
c. Principal Health Care of the Carolinas, Inc. (a North
Carolina Corporation) a health maintenance organization.
d. Principal Health Care of Delaware, Inc. (a Delaware
Corporation) a health maintenance organization.
e. Principal Health Care of Florida, Inc. (a Florida
Corporation) a health maintenance organization.
f. Principal Health Care of Georgia, Inc. (a Georgia
Corporation) a health maintenance organization.
g. Principal Health Care of Illinois, Inc. (an Illinois
Corporation) a health maintenance organization.
h. Principal Health Care of Indiana, Inc. (a Delaware
Corporation) a health maintenance organization.
i. Principal Health Care of Iowa, Inc. (an Iowa Corporation) a
health maintenance organization.
j. Principal Health Care of Kansas City, Inc. (a Missouri
Corporation) a health maintenance organization.
k. Principal Health Care of Louisiana, Inc. (a Louisiana
Corporation) a health maintenance organization.
l. Principal Health Care of the Mid-Atlantic, Inc. (a Virginia
Corporation) a health maintenance organization.
m. Principal Health Care of Nebraska, Inc. (a Nebraska
Corporation) a health maintenance organization.
n. Principal Health Care of Pennsylvania, Inc. (a Pennsylvania
Corporation) a health maintenance organization.
o. Principal Health Care of St. Louis, Inc. (a Delaware
Corporation) a health maintenance organization.
p. Principal Health Care of South Carolina, Inc. (A South
Carolina Corporation) a health maintenance organization.
q. Principal Health Care of Tennessee, Inc. (a Tennessee
Corporation) a health maintenance organization.
r. Principal Health Care of Texas, Inc. ( a Texas Corporation)
a health maintenance organization.
s. 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. Benefit Plan Administrators, Inc. (a Colorado Corporation) a
managed care services organization.
d. SelectCare Management Co., Inc. (a California Corporation) a
managed care services organization.
e. Image Financial & Insurance Services, Inc. (a California
Corporation) a managed care services organization.
f. WM. G. Hofgard & Co., Inc. (a California Corporation) a
managed care services organization.
Subsidiaries owned by Principal International, Inc.:
a. Principal Insurance Company Limited (a Hong Kong
Corporation) sells insurance and pension products.
b. Principal International Argentina, S.A. (an Argentina
services corporation).
c. Principal International Asia Limited (a Hong Kong
Corporation) a corporation operating as a regional
headquarters for Asia.
d. Principal International de Chile, S.A. (a Chile Corporation)
a holding company.
e. Principal International Espana, S.A. de Seguros de Vida (a
Spain Corporation) a life insurance company.
f. Principal Mexico Compania de Seguros, S.A. de C.V. (a Mexico
Corporation) a life insurance company.
g. Qualitas Medica, S.A. (an Argentina HMO) a health
maintenance organization.
h. Afore Confia-Principal, S.a. de C.V. (a Mexico Corporation).
i. Zao Principal International (a Russia Corporation) inactive.
Subsidiaries owned by Principal International Argentina, S.A.:
a. Ethika-Jacaranda S.A. Administradora de Fondos de
Jubilaciones y Pensions (an Argentina company) a pension
company.
b. Princor Compania de Seguros de Retiro, S.A. (an Argentina
Corporation) an individual annuity/employee benefit company.
c. Prinlife Compania de Seguros de Vida, S.A. (an Argentina
Corporation) a life insurance company.
Subsidiary owned by Principal International de Chile, S.A.:
a. BanRenta Compania de Seguros de Vida, S.A. (a Chile
Corporation).
Subsidiary owned by Principal International Espana, S.A. de Seguros de
Vida:
a. Princor International Espana Sociedad Anonima de Agencia de
Seguros (a Spain Corporation) an insurance agency.
Subsidiary owned by Afore Confia-Principal, S.A. de C.V.:
a. Siefore Confia-Principal, S.A. de C.V. (a Mexico
Corporation) an investment fund company.
Item 26. Number of Holders of Securities - As of: November 30, 1997
(1) (2)
Title of Class Number of Holders
Principal International SmallCap
Fund, Inc.
Common-Class A 674
Principal International SmallCap
Fund, Inc.
Common-Class B 248
Principal International SmallCap
Fund, Inc.
Common-Class R 12
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, 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 Fund, 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.
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 Section 408 of the Internal Revenue
Code, and for variable life insurance contracts issued by Principal Mutual Life
Insurance Company Variable Life Separate Account, a registered unit investment
trust.
(b) (1) (2) (3)
Positions
and offices Positions and
Name and principal with principal offices with
business address underwriter registrant
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
Lynn A. Brones Vice President of Sales, None
The Principal Princor Investment Network
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
Kelly A. Paul Systems & Technology None
The Principal Officer
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 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 23rd day of
December, 1997.
Principal International SmallCap Fund, Inc.
(Registrant)
By /s/ S. L. Jones
--------------------------------------
S. L. Jones
President and Director
Attest:
/s/ A. S. Filean
- --------------------------------------
A. S. Filean
Secretary
<PAGE>
Signature Title Date
/s/ S. L. Jones
_____________________________ President and Director 12/23/97
S. L. Jones (Principal Executive Officer) __________
(J. B. Griswell)*
_____________________________ Director and 12/23/97
J. B. Griswell Chairman of the Board __________
/s/ M. J. Beer
_____________________________ Financial Officer (Principal 12/23/97
M. J. Beer Financial and Accounting Officer) __________
(J. D. Davis)*
_____________________________ Director 12/23/97
J. D. Davis __________
(R. W. Erhle)*
_____________________________ Director 12/23/97
R. W. Ehrle __________
(P. A. Ferguson)*
_____________________________ Director 12/23/97
P. A. Ferguson __________
(R. W. Gilbert)*
_____________________________ Director 12/23/97
R. W. Gilbert __________
(R. E. Keller)*
_____________________________ Director 12/23/97
R. E. Keller __________
(B. A. Lukavsky)*
_____________________________ Director 12/23/97
B. A. Lukavsky __________
(R. G. Peebler)*
_____________________________ Director 12/23/97
R. G. Peebler __________
By /s/ S. L. Jones
-------------------------------------
S. L. Jones
President and Director
*Pursuant to Powers of Attorney
Previously Filed or Included
Principal Mutual Funds ACCOUNT APPLICATION
1-800-247-4123, 7:00 AM to 7:00 PM Central time
1) ACCOUNT INFORMATION (Please print)
Type of Account Personal ___ UTMA ___ TOD ___ Corporate ___ Trust ___
Partnership ___
-------------------------------------------------------------------------
First Middle Initial Last Date of Birth
-------------------------------------------------------------------------
First Middle Initial Last Date of Birth
------------------------------------------------------------------
Address
------------------------------------------------------------------
City State Zip Code
------------------------------------------------------------------
Evening Phone Daytime Phone
___ Social Security or ___ Tax Identification Number
Owner _______________________________
Joint Owner _________________________
__ 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 applicable, IRS Form 1078.
Registered representative is licensed in state of client's primary residence.
__ Yes __ No
2) INVESTMENT DIRECTION
Class "A" will be purchased LUMP-SUM
FUND NUMBER if no class selected INVESTMENT MONTHLY INVESTMENT*
(see instructions) FUND NAME Minimum of $1,000 AMOUNT DATE (1-31)
($250 for UTMA accounts)
- -------------- ------------------- $----------- $------------- -------
- -------------- ------------------- $----------- $------------- -------
- -------------- ------------------- $----------- $------------- -------
- -------------- ------------------- $----------- $------------- -------
- -------------- ------------------- $----------- $------------- -------
Total $___________ $_____________
* Complete Check Authorization Form in the instructions to this application and
attach a voided check or deposit slip.
__ Check enclosed. (Make check payable to Principal Mutual Funds).
__ This application is for settlement of a telephone order placed on _________.
3) INVESTOR INFORMATION
Primary Investment Objective: ____Appreciation with Emphasis on Safety
____Appreciation with Acceptance of Risk
____Speculation
____Income with Emphasis on Safety
____Income with Acceptance of Risk
____Tax Reduction
Estimated Income (current tax year in thousands): __ Under $25 __ $25 - $50
__ $51 - $100 __ Over $100 __ Tax Bracket ____%
Approximate Net Worth (in thousands): __ Under $25 __ $25 - $50 __ $51 - $100
__ $101 - $250 __ Over $250
Occupation(s): _________________________________________________________________
Source of funds for this purchase ______________________________________________
Employer(s) name and address ___________________________________________________
Other Investments $_____________________________________________________________
(amount) invested in ___________________________________________________________
__ I am an associated person of an NASD member firm __ No __ Yes
4) SIGNATURE AND TAX NUMBER CERTIFICATION
I have read this application and had the opportunity to read the prospectus and
agree to all their terms. In addition, I 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 of each Principal Mutual Fund for which I am
applying and believe it is compatible with my investment objective. I understand
that telephone transaction privileges (including telephone redemption and
exchange requests) apply unless I specifically decline them on this application
and that I bear the risk of loss resulting from any fraudulent telephone
redemption or exchange 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 understand
that exchanges between Funds are taxable transactions. I certify under penalties
of perjury (check the appropriate response):
__ that the Social Security or Taxpayer Identification Number shown in Section 1
is correct and that the IRS has either never notified me that I am subject to
backup withholding or has notified me that I am no longer subject to such
backup withholding.
__ that 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, backup withholding as described in the Fund's prospectus will
commence immediately.
__ that I am subject to backup withholding.
Sign below exactly as your name appears in Section 1. For joint registration,
all owners must sign. The Internal Revenue Service does not require your consent
to any provision of this document other than the certifications required to
avoid backup withholding.
- -------------------------------------------------------------------------------
Signature of owner Date
- -------------------------------------------------------------------------------
Signature of joint owner (if any) Date
1. Registered Representative's Name ___________________________________________
(Please Print and Sign)
Rep Number __________________ Percentage ________________
2. Registered Representative's Name ___________________________________________
(Please Print and Sign)
Rep Number ___________________ Percentage ________________
Dealer's Name ______________________________________________________________
Authorized Dealer's Signature ______________________________________________
<PAGE>
OPTIONAL FEATURES
__ A. Decline Telephone Transaction Services. I(We) do not want telephone
transaction services as described in the prospectus. (If this box is not
checked telephone transaction services will apply.)
__ B. Dividend/Distribution/Redemption Election. If no option is indicated,
dividends will be reinvested, without charge, in shares of the Fund from
which they are paid. If you want redemptions directed to a bank account,
please complete this section.
DISTRIBUTIONS TO
BANK ACCOUNT (See Instructions)
FUND DIVIDENDS CAPITAL GAINS ELECTRONIC DIVIDEND RELAY
NUMBER IN CASH IN CASH WIRED* FUNDS TRANSFER** (See Instructions)
- ----- ----- ----- ----- ----- -----
- ----- ----- ----- ----- ----- -----
- ----- ----- ----- ----- ----- -----
- ----- ----- ----- ----- ----- -----
- ----- ----- ----- ----- ----- -----
* Up to $6 charge per transfer.
** No additional charge, but takes up to 3 days to complete.
__ C. Checkwriting. I (We) wish to be able to redeem Class A shares from
Principal Cash Management Fund, Inc. and/or Principal Tax-Exempt Cash
Management Fund, Inc. by check ($100 minimum). The checkwriting service is
subject to all of the terms and conditions contained in the Fund(s)
then-current prospectus.
By signing in Section 4, I/we authorize Norwest Bank Iowa, N.A. (the
"Bank") to honor checks drawn by the undersigned on the account of the
indicating Fund(s). The Fund(s) transfer agent, Principal Management
Corporation (the "Transfer Agent"), is authorized to redeem enough shares
from the Fund account of the undersigned to cover payment of the check.
This authorization will continue in effect until the Fund(s) receives
written notice of any change signed by the undersigned, with signatures
guaranteed.
__ Check here if the signatures of all account owners are required on checks.
If this box is not checked, only one signature will be required.
<TABLE>
<CAPTION>
__ D. Automatic Exchange Election. (See Prospectus for details.) To authorize
automatic exchanges from one Fund to another, complete the following:
<S> <C> <C> <C> <C> <C> <C> <C>
Dollar Amount and Receiving Fund Number
Exchanging Exchange (M)onthly or ($25 minimum for each receiving Fund)
Fund Number Date (Q)uarterly Dollar Amount Fund Number Dollar Amount Fund Number
1. ___________ _______ ____ $___________ _________ $____________ ___________
2. ___________ _______ ____ $___________ _________ $____________ ___________
</TABLE>
<TABLE>
<CAPTION>
__ E. Periodic Withdrawal Election. (Complete "5.B." above if periodic
withdrawals are to be directed to a bank account.) Complete the following
to redeem shares automatically on a scheduled basis:
<S> <C> <C> <C> <C> <C>
Date of Withdrawal
Fund Amount Beginning (M)onthly, (Q)uarterly,
Number ($25 Minimum) Month Date (S)emiannually or (A)nnually
1. __________ $___________ ________ ________ ____
2. __________ $___________ ________ ________ ____
3. __________ $___________ ________ ________ ____
</TABLE>
6) SALES CHARGE REDUCTION PRIVILEGES
(See the Prospectus "Offering Price of Funds' Shares" for details.)
__ A. Statement of Intention (SOI)
If $50,000 or more will be invested in shares of the PRINCIPAL FUNDS (Class A
shares subject to a sales charge or Class B shares) over a 13-month period
(2-year period if investing $1 million or more), check the intended amount. A
reduced sales charge will be granted, subject to the terms and conditions set
forth in the Statement of Additional Information.
__ $50,000 __ $100,000 __ $250,000 __ $500,000 __ $1,000,000
or Over or Over or Over or Over or Over
NOTE: SOIs apply only to Class A shares. However, Class B shares will be
credited toward the fulfillment of this SOI.
__ B. Rights of Accumulation
List below the fund account number(s) for you, your spouse and dependents who
have existing Principal Mutual Fund accounts or are opening one at this time.
Class A shares, including Class A shares of the Money Market Funds acquired by
exchange of other Principal Funds, and Class B shares are combined for Rights of
Accumulation purposes. A reduced sales charge is available as described in the
Statement of Additional Information.
- ----------------------------------- ------------------------------------
Account Number Account Number
- ----------------------------------- ------------------------------------
Account Number Account Number
__ C. Designated Investors who may Purchase Class A Shares at a Reduced
Sales Charge (Additional information may be required. See the
Statement of Additional Information for details.)
__ No sales charge applies because of the following:
---------------------------------------------------------------------
__ A reduced sales charge applies as outlined within the Statement of
Additional Information: (specify, e.g., payroll deduction plan)
----------------------------------------------------------------------
<PAGE>
INSTRUCTIONS FOR COMPLETING THE PRINCIPAL FUND APPLICATION
Sections 1-4 of the account application must be completed to establish an
account. (Do not use this application to establish an IRA or 403(b) account.)
Optional features may be elected in Section 5 and an indication that a purchase
is or may be eligible for a reduced sales charge must be made in Section 6. Mail
the completed application with a check for the purchase amount to: Princor, P.O.
Box 10423, Des Moines, Iowa 50306-0423. For assistance in completing the
application, call toll-free 1-800-247-4123.
SECTION 1: ACCOUNT REGISTRATION
If this 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 ("UTMA") account, use the name of the adult
custodian on the owner line and the name of the child on the joint owner line.
Use the child's social security number. For a trust, corporation, partnership or
other entity, complete the first two lines exactly as the registration should
appear and attach a copy of the trust agreement, corporate resolution
identifying the person authorized to act on behalf of the corporation or
partnership agreement, as applicable. For a Transfer on Death (TOD) account,
attach Transfer on Death Registration Form (MM 1578).
SECTION 2: INVESTMENT DIRECTION
* Indicate the Fund or Funds (see below) in which you want to invest. Each
Fund is assigned a number for its Class A shares (front-end sales charge)
and its Class B shares (contingent deferred sales charge). The table below
lists the Fund numbers. Write the Fund number for the class of shares in
which you choose to invest in the "FUND NUMBER" column.
Fund Number
Class A Class B
GROWTH-ORIENTED FUNDS shares shares
Domestic
Balanced Fund 105 205
Blue Chip Fund 110 210
Capital Value Fund 120 220
Growth Fund 140 240
MidCap Fund 130 230
Real Estate Fund 148 248
SmallCap Fund 149 249
Utilities Fund 160 260
International
International Emerging Markets Fund 143 243
International Fund 165 265
International SmallCap Fund 144 244
Fund Number
Class A Class B
INCOME-ORIENTED FUNDS shares shares
Bond Fund 115 215
Government Securities Income Fund 135 235
High Yield Fund 145 245
Limited Term Bond Fund 147 247
Tax-Exempt Bond Fund 150 250
MONEY MARKET FUNDS
Cash Management Fund 125
Tax-Exempt Cash Management Fund 155
<TABLE>
<CAPTION>
* Indicate the amount (lump sum, monthly, or both) you are investing. To
establish a monthly Automatic Investment Plan (AIP) complete Section 2 of
the application, the Check Authorization Form at the end of these
instructions and include a voided check or deposit slip. If a monthly
investment date is not provided in Section 2, monthly investments will be
completed on the 15th day of each month, or the following business day if
the 15th is not a business day. An additional waiver form is required to
invest more than $250,000 in Class B shares. Ask your registered
representative for details. The minimum amounts you may invest are as
follows:
<S> <C> <C> <C> <C>
Monthly
Amounts on AIP or Additional Lump
Type of Investment Initial Lump Sums Payroll Deduction Sum Investments
*Growth - or Income - $1,000 $25 $100
Oriented Funds
*Money Market Funds $1,000 $100 ($25 monthly if $100
the account has been
established with $1,000).
*PATH Direction $10,000 $100 (only available after
(A PATH selection form initial $10,000 investment $500
must also be completed.) is made).
</TABLE>
SECTION 3: INVESTOR INFORMATION
This section must be completed to establish an account. The information is
necessary to enable Princor to fulfill its obligation to determine whether the
investment is suitable.
SECTION 4: SIGNATURE AND TAX NUMBER CERTIFICATION
The application must be signed exactly as your name appears in Section 1. If the
account is registered to multiple owners, all owners must sign.
MM 1433
<PAGE>
SECTION 5: OPTIONAL FEATURES
Optional account features and services are available. The options include:
A. Decline Telephone Services
B. Dividend/Distribution/Redemption Elections - Indicate whether you want
dividends and capital gains distributions, if any, paid in cash or
paid to a bank account or invested in shares of another Principal
Fund. If you do not indicate otherwise, dividends and capital gains
distributions will be reinvested, at no charge, in additional shares
of the Fund from which they are paid. If distributions are directed to
a bank account, include a voided check or deposit slip. You may also
have dividends and capital gains distributions from one Principal Fund
automatically invested in shares of the same class of another
Principal Fund by indicating the receiving Fund number under the
Dividend Relay section. You must also complete the "Distribution to
Bank Account" choice if you want fund redemptions directed to a bank
account. A wire charge of up to $6 may apply to each payment wired to
a bank account. No additional charge applies if payments are
transferred to a bank account by means of an electronic funds
transfer, but such a transfer may take up to 3 days to complete.
C. Checkwriting (for Class A shares of the Money Market Funds)
D. Automatic Exchange Election - Complete this section to make monthly or
quarterly investments in one or more Principal Funds by exchanging
shares of the same class from another Principal Fund. Class A shares
of the Limited Term Bond Fund can be exchanged only after they have
been owned for 90 days or more. If an exchange date is not indicated
in this section, automatic exchanges will be completed on the 15th
day, or next business day if the 15th is not a business day.
E. Periodic Withdrawal Election - Complete this section to receive
periodic withdraws from a fund account. Also complete Section 5.B. if
withdrawals are directed to a bank account. If no date is indicated,
periodic withdrawals will be completed on the 15th day, or the next
business day if the 15th is not a business day.
Section 6: SALES CHARGE REDUCTION PRIVILEGES
Class A shares of the Funds may be purchased at a reduced sales charge in one of
three ways:
A. Statement of Intention - Complete this section if you, your spouse and
dependents will be investing $50,000 or more over a 13-month period,
or $1 million or more over a 2-year period.
B. Rights of Accumulation - Complete this section to combine for sales
charge purposes accounts owned by you, your spouse and dependents.
C. Designated Investors - Complete this section if you are purchasing
shares as a member of a group identified in the Prospectus or
Statement of Additional Information eligible for reduced sales charge
privileges.
- -------------------------------------------------------------------------------
CHECK AUTHORIZATION FORM
I request Princor Financial Services Corporation ("Princor") or Norwest Bank
Iowa, N.A., acting as agent for Princor, to obtain payment of the sums becoming
due Princor by charging my account in the form of checks, drafts, or electronic
debit entries, and I request and authorize the financial institution named below
to accept and honor the same and to charge the same to my account. This
Authorization will remain in effect until I notify Princor 31 days in advance in
writing to terminate. This Authorization will become effective only upon
acceptance by Princor at its home office.
Bank/Financial Institution Information
(please print clearly)
Clearly print the bank/financial institution name and address on the lines
below.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- ---------------------------------------------
SIGNATURE OF DEPOSITOR
- ---------------------------------------------
SIGNATURE OF JOINT DEPOSITOR
(Joint signatures are required when bank account is in joint names. Please sign
exactly as appearing on your bank's records and attach a voided check or deposit
slip.)
Please check one: ___ Checking
___ Savings
- --`-------------------------------------------
DATE
(-----)--------------------------------------
DEPOSITOR'S DAYTIME TELEPHONE
- ---------------------------------------------
ACCOUNT NAME (if other than name of Depositor)
- ---------------------------------------------
BANK ACCOUNT NUMBER
- ---------------------------------------------
TRANSIT NUMBER
FUND USE ONLY
Account Number
PRINCOR IRA APPLICATION
A. Account
Registration ______________________________________________________
Please print First Name Middle Initial Last
------------------------------------------------------
Street address
------------------------------------------------------
City State Zip
Home phone #
(------)----------------------------
Daytime/business phone #
(------)----------------------------
Date of birth ________________________
Mo. Day Yr.
Social Security # ____________________
Are you subject to backup withholding?
__ Yes __ No
Are you a U.S. Citizen? __ Yes __ No
If you are a resident alien, attach IRS Form 1078.
If you are a nonresident alien, specify country
of residence and attach IRS Form W-8
------------------------------
B. Source of Rollover Source of assets to be rolled over:
Assets ________________________________________________________
Note: This application Name of plan Principal Mutual Contract #
is used only for IRAs
established with rollovers
from retirement plans
administered by Principal If you are over age 70 1/2, you must receive
Mutual Life Insurance distributions from this plan under IRS regulations.
Company. For all other The Required Minimum Distribution (RMD) for this
IRAs, use Form MM-394. year may not be included in the rollover.
__ Please indicate if you have begun to receive
distributions from the previous plan.
C. Investment Direction
I elect to invest the assets rolled over from my employer's retirement plan as
follows:
FUND (code) ROLLOVER INVESTMENT
__ Principal Balanced (305) $ or %
__ Principal Blue Chip (310) $ or %
__ Principal Bond (315) $ or %
__ Principal Capital Value (320) $ or %
__ Principal Cash Management (325) $ or %
__ Principal Government Securities Income (335) $ or %
__ Principal Growth (340) $ or %
__ Principal High Yield (345) $ or %
__ Principal International (355) $ or %
__ Principal International Emerging Markets (343) $ or %
__ Principal International SmallCap (344) $ or %
__ Principal Limited Term Bond (347) $ or %
__ Principal MidCap (330) $ or %
__ Principal Real Estate (348) $ or %
__ Principal SmallCap (349) $ or %
__ Principal Utilities (350) $ or %
__ Conservative Growth PATH Model $ or %
__ Moderate Growth PATH Model $ or %
__ Dynamic Growth PATH Model $ or %
TOTAL 100%
If a PATH Model is selected ($10,000 minimum required), shares of the Principal
mutual funds will be purchased in proportions established by the current model.
Indicate your rebalancing
choice here:
__ Quarterly
__ Semiannually
__ Annually
__ By Request Only
D. Decline Telephone
Transaction Services
__ Please check if you DO NOT wish to authorize telephone transaction services.
(Telephone transaction services automatically apply if box is not checked.)
Note: All distribution requests from IRA accounts must be in writing on
forms provided by Princor.
E. Automatic Exchange Election
See Prospectus for details.
Not available for PATH
investors.
Please complete to make the Automatic Exchange Election and authorize automatic
exchanges as indicated below:
Fund From Which Exchange (M)onthly or Dollar
Exchange is Made Date (Q)uarterly Receiving Fund Amount
1. $
2. $
3. $
__ Check here if exchange is from Class A shares of the Cash Management Fund to
Class R shares of another fund.
F. Investor
Information
This Section Must
Be Completed
Primary Investment Objective: ____Appreciation with Emphasis on Safety
____Appreciation with Acceptance of Risk
____Speculation
____Income with Emphasis on Safety
____Income with Acceptance of Risk
Estimated Income (in thousands for current tax year)
__ Under $25 __ $25-$50 __ $51-$100 __ Over $100
Approximate Net Worth (in thousands)
__ Under $25 __ $25-$50 __ $51-$100 __ $101-$250 __ Over $250
Tax Bracket _________% Occupation:_____________________________________________
Other Investments (amount) $_______________invested in__________________________
Are you an associated person of an NASD member firm? __ No __ Yes
- --------------------------------------------------------------------------------
Name and address of member firm
G. Beneficiary Instructions
If not completed, we will
assume the estate of the
investor to be the beneficiary
which may result in adverse
tax consequences at death. If
you have additional
beneficiaries, please attach a
separate list.
Primary Beneficiaries
At your death, the assets in this Princor IRA will be distributed to the primary
beneficiary(ies) named below. If two or more primary beneficiaries are named,
they will receive equal amounts unless you specify otherwise. If one of the
named primary beneficiaries dies before you, that person's share will be
distributed proportionately among the surviving primary beneficiaries, unless
you select one of the following options:
__ If a primary beneficiary dies before you, that person's share will be
distributed to their surviving lineal descendants in equal shares; OR
__ If a primary beneficiary dies before you, that person's share will be
distributed to your estate.
Name Relationship Social Security # %
================================= ============= ================= =========
- --------------------------------- ------------- ----------------- ---------
Secondary Beneficiaries
If no primary beneficiary survives you, the secondary beneficiary(ies) will
receive the assets in your account in equal shares unless you specify otherwise.
Name Relationship Social Security # %
================================= ============= ================= =========
- --------------------------------- ------------- ----------------- ---------
Are you married? __ Yes __ No
H. Signature
I hereby establish a Princor IRA account and appoint Principal Mutual Life
Insurance Company as custodian. I direct that contributions be invested as
authorized in Section C, and designate the individual(s) in Section G as my
beneficiary(ies). I have received and read the prospectus, Custodial Agreement,
IRA Disclosure Statement and this application and agree to all their terms and
conditions. I acknowledge that I am responsible for determining the
deductibility of any contributions that may be made in the future to my account.
I certify that I have satisfied all rules applicable to this rollover
distribution, and I irrevocably elect to treat this Qualified Plan distribution
as nontaxable and ineligible for any special tax treatment that may otherwise be
available. I consent to an annual maintenance fee as provided in the Custodial
Agreement. I understand the investment objective(s) of the Principal Fund(s)for
which I am applying and believe such to be compatible with my investment
objective(s). I understand that telephone transaction services apply unless I
have specifically declined them on this application, that I bear the risk of
loss resulting from any fraudulent telephone transaction request which the Fund
reasonably believes to be genuine and the Fund has adopted procedures designed
to reduce the risk of fraudulent transactions, which are described in the
prospectus. I certify under penalty of perjury that the Social Security number
shown in Section A is correct. (The IRS does not require your consent to any
provision of this application other than the certification in the preceding
sentence.)
- --------------------------------------------------------------------------------
Participant's Signature Date
I. To Be Completed
by Selling Firm
Dealer's Name __________________________________________________________________
By _____________________________________________________________________________
Authorized Signature of Dealer
Home Office Address ____________________________________________________________
City, State, Zip _______________________________________________________________
================================================================================
Address of Office Servicing Account:
City __________________________________________________________________________
State, Zip _____________________________________________________________________
Telephone _____________________________________________________________________
================================================================================
Make checks payable to "Principal Mutual Life Insurance Company as
custodian FBO (participant's name) IRA."
Mail this completed form to:
Princor Financial Services Corporation, Attention: Princor IRA
P.O. Box 10423, Des Moines, Iowa 50306
A Message from the President
Dear Shareholder:
Stock and bond markets began the second half of the 1997 quite strong. After
reaching record levels, U.S. equity markets experienced a market correction in
late October. This decline was in reaction to the dramatic sell off of various
international markets, particularly Hong Kong. Asia and Japan face continued
difficulties in the aftermath of a currency crisis. Extreme declines in both
these markets evidenced this problem. Europe and Latin America fared better,
enjoying strong business cycles and low inflation. At the same time, U.S. bond
markets experienced similar volatility.
Fortunately, U.S. investors rapidly reevaluated the situation and returned
domestic stock and bond prices to near predecline levels. Given a continued
strong U.S. economy and few, if any, overt signs of inflation, the long-term
outlook remains positive.
Princor shareholders weathered the market turbulence well and refused to succumb
to market jitters. Buoyed by strong investor/registered representative
relationships and a long-term investment philosophy, our shareholder base and
assets under management increased despite fluctuating markets.
After receiving shareholder approval in a proxy vote held last summer, Princor
funds will be known as the Principal Mutual Funds as of January 1, 1998. Three
of our funds will have their "descriptive" names changed, as well. Princor
Capital Accumulation, Princor Emerging Growth and Princor World funds will be
known as Principal Capital Value, Principal MidCap and Principal International
funds, respectively. These name changes are being made to provide investors with
a clearer description of the funds and their investment objectives.
Earlier this year, Princor announced the addition of two new funds--Principal
International SmallCap Fund and Principal International Emerging Markets Fund.
These funds offer investors more opportunities to participate in foreign
markets. In addition, new real estate and domestic small-cap funds will be
available in January. This will bring the total number of funds in the Principal
family to eighteen.
As the year draws to a close, we thank our shareholders for their loyalty. We
remain committed to delivering the quality financial products and services our
shareholders deserve.
Sincerely,
/S/ STEPHAN L. JONES
Stephan L. Jones
President
<TABLE>
<CAPTION>
Princor Funds Performance
Average Annual Total Returns
As of October 31, 1997
1 Year 5 Years 10 Years
with without with without with without
sales sales sales sales sales sales
A Shares of: charge charge charge charge charge charge
<S> <C> <C> <C> <C> <C> <C>
Balanced 10.44% 15.88% 10.46% 11.53% 10.72%a 11.26%a
Blue Chip 16.81 22.57 13.78 14.88 12.78b 13.59b
Bond 4.97 10.15 7.35 8.39 9.12a 9.65a
Capital Accumulation 19.47 25.36 15.97 17.09 13.43 13.98
Emerging Growth 25.09 31.26 18.77 19.92 18.12a 18.70a
Government Securities Income 4.10 9.23 6.33 7.36 8.74 9.26
Growth 23.46 29.55 15.22 16.33 15.86 16.42
High Yield 7.05 12.33 8.67 9.73 8.23a 8.76a
International Emerging Markets (14.45)c (10.18)c
International SmallCap (4.27)c .50c
Limited Term Bond 5.14 6.75 5.27d 6.22d
Tax-Exempt Bond 3.60 8.71 6.44 7.47 8.56 9.08
Utilities 8.89 14.26 7.76e 8.83e
World 14.80 20.46 16.30 17.42 11.69 12.23
</TABLE>
1 Year 5 Years(f)
with without with without
B Shares of: CDSC* CDSC* CDSC* CDSC*
Balanced 10.96% 14.96% 15.76% 16.54%
Blue Chip 17.59 21.59 22.02 22.73
Bond 5.20 9.20 9.75 10.61
Capital Accumulation 20.13 24.13 25.14 25.82
Emerging Growth 26.64 30.64 27.66 28.31
Government Securities Income 4.65 8.65 9.38 10.25
Growth 24.92 28.92 23.26 23.95
High Yield 7.31 11.31 10.92 11.76
International Emerging Markets (13.88)c (10.29)c
International SmallCap (3.50)c .50c
Limited Term Bond 5.06 6.31 5.05d 5.77d
Tax-Exempt Bond 4.08 8.08 9.83 10.69
Utilities 9.41 13.41 14.52 15.31
World 15.62 19.62 15.26 16.05
* Contingent Deferred Sales Charge
R Shares of: 1 Year 5 Years(d)
Balanced 15.16% 13.64%
Blue Chip 21.82 17.20
Bond 9.49 7.93
Capital Accumulation 24.36 22.41
Emerging Growth 30.56 21.60
Government Securities Income 8.19 7.16
Growth 28.72 17.08
High Yield 11.14 10.05
International Emerging Markets (10.29)c
International SmallCap .50c
Limited Term Bond 6.01 5.55
Utilities 13.72 7.80
World 19.65 17.41
a Partial period, from effective date 12/18/87
b Partial period, from effective date 3/1/91
c Partial period, from effective date 8/29/97
d Partial period, from effective date 2/29/96
e Partial period, from effective date 12/16/92
f Partial period, from effective date 12/9/94
Total return represents the overall performance of an investment for a specific
period of time, assuming the reinvestment of dividends and capital gains and
after applicable expenses. Average annual total returns for A shares are with
and without maximum 4.75% sales charge. Average annual total returns for B
shares are with and without maximum 4.0% contingent deferred sales charge. Total
returns reflect past performance. Past performance does not predict future
performance. The investment return and principal value of an investment will
fluctuate so that shares, when redeemed, may be worth more or less than their
original cost.
Contents Page
Portfolio Managers Comments................1
Three Keys to More Successful Investing...12
Domestic Growth-Oriented Funds
Financial Statements and Highlights
Statements of Assets and Liabilities....14
Statements of Operations................16
Statements of Changes in Net Assets.....18
Notes to Financial Statements...........20
Schedules of Portfolio Investments
Balanced Fund..........................26
Blue Chip Fund.........................28
Capital Accumulation Fund..............29
Emerging Growth Fund...................30
Growth Fund, Inc.......................33
Utilities Fund, Inc....................35
Financial Highlights....................36
International Growth-Oriented Funds
Financial Statements and Highlights
Statements of Assets and Liabilities....44
Statements of Operations................45
Statements of Changes in Net Assets.....46
Notes to Financial Statements...........48
Schedules of Portfolio Investments
International Emerging Growth Fund.....54
International SmallCap Fund............56
World Fund.............................58
Financial Highlights......................62
Income-Oriented Funds
Financial Statements and Highlights
Statements of Assets and Liabilities....66
Statements of Operations................68
Statements of Changes in Net Assets.....70
Notes to Financial Statements...........72
Schedules of Portfolio Investments
Bond Fund..............................80
Government Securities Income Fund......82
High Yield Fund........................83
Limited Term Bond Fund.................85
Tax-Exempt Bond Fund...................86
Financial Highlights....................90
Money Market Funds
Financial Statements and Highlights
Statements of Assets and Liabilities....96
Statements of Operations................97
Statements of Changes in Net Assets.....98
Notes to Financial Statements..........100
Schedules of Portfolio Investments
Cash Management Fund..................104
Tax-Exempt Cash Management
Fund................................106
Financial Highlights...................110
Shareholder Meeting Results..............112
Report of Independent Auditors...........117
Federal Tax Information..................119
The Princor Family of Mutual Funds.......123
PORTFOLIO MANAGER'S COMMENTS
Princor Management Corporation, the adviser to the Princor funds, is staffed
with investment professionals who manage each individual fund. Comments by these
individuals in the following paragraphs summarize in capsule form the general
strategy and recent results of each fund over the past year. We believe any
Princor fund should, under normal circumstances, represent only a portion of an
investor's total investments. For most investors, a portfolio should be balanced
among stocks, bonds, and cash reserves to fit their own needs and risk
tolerance. Those who maintain this balanced approach should be aware of the
short-term results, but focus on the long term. Past performance is no guarantee
of future results. Fund values will fluctuate so that the shares, upon
redemption, may be worth more or less than their original cost.
Growth-Oriented Funds
Domestic Growth Funds
Princor Balanced Fund
Judi Vogel
The Princor Balanced Fund participated in strong financial markets that
delivered well above average returns for the third year in a row. The economy's
consistently strong growth combined with the lowest inflation in decades kept
corporate profits up while interest rates actually declined over the year.
Investors enthusiastically embraced these near perfect conditions, pouring
record amounts of dollars into the markets. Bonds benefited from the benign
inflation environment as interest rates declined and the yield curve flattened
over the year. Bond yields ended the fiscal year at their lowest levels since
1995. In the equity market, companies that met or exceeded analysts' earnings
estimates were handsomely rewarded, while those with even slight disappointments
were dealt harsh blows. Large, blue chip stocks performed best for most of the
year, although small caps picked up steam in the last half. The Southeast Asia
currency crisis in the third quarter caused a rotation out of large
multinational companies and into domestic small cap stocks as investors
predicted slower export sales and negative currency translation effects from
foreign operations for the global powerhouses. This rotation and new emphasis on
small cap stocks negatively impacted the Fund because its equity holdings are
predominantly large cap in nature.
The Fund, with 60% in stocks and convertibles and 40% in fixed income and cash,
enjoyed above average returns in the absolute yet trailed the Lipper Balanced
Fund Average on a relative basis for the year. With a focus on high quality
bonds and undervalued stocks, the Fund is positioned to perform best when
economic growth slows and investors become more concerned with valuation and
less concerned with meeting next quarter's earnings estimates. There is no
independent market index against which to measure returns of balanced
portfolios, however the S&P 500 Stock Index and the Lehman Government/Corporate
Bond Index are included in the accompanying graph for your information.
Comparison of Change in Value of $10,000 Investment in the
Balanced Fund Class A, S&P 500, Lehman Brothers Gov't./Corporate Bond Index
and Lipper Balanced Fund Average
Lipper Lehman Gov't
Year Ended Balanced S&P 500 Balanced Corporate
October 31, Fund Index Average Bond
9,525 10,000 10,000 10,000
1988 10,714 11,627 11,233 10,845
1989 11,896 14,696 13,152 12,162
1990 10,554 13,595 12,465 12,831
1991 14,152 18,151 16,015 14,803
1992 15,830 19,959 17,413 16,359
1993 17,768 22,938 19,994 18,594
1994 17,935 23,823 19,852 17,731
1995 20,480 30,112 23,300 20,598
1996 23,573 37,355 26,758 21,707
1997 27,316 49,356 31,978 23,619
Note:Past performance is not predictive of future performance. The performance
of Class B and Class R Shares will vary from the performance of Class A Shares
based on the differences in loads and fees.
Total Returns
As of October 31, 1997
1 Year 5 Year 10 Year
10.44% 10.46% 10.72%* Class A
10.96% 15.76% ** Class B
15.16%*** Class R
* - Since Inception Date 12/18/87
** - Since Inception Date 12/9/94
*** - Since Inception Date 2/29/96
Princor Blue Chip Fund
Mark Williams
This Fund's investment strategy is to concentrate on those companies with a
significant operating history, a well-capitalized balance sheet, and a history
of consistent increases in earnings and dividends. Special importance is placed
on the consistency of dividend increases. This is true for two reasons. First,
by increasing the dividend, management sends a signal of confidence to
investors. Management generally increases the dividend when they are confident
of future business conditions. Second, companies that consistently increase the
dividend provide investors the benefit of a rising income stream. This differs
from bond investors who receive a fixed-income stream.
The year ended October 31, 1997, saw a continuation of the recent years' ideal
business conditions. Inflation remained subdued with no sign of any catalysts
for change. Consumer confidence was at an all-time high. Unemployment reached
twenty-four year lows, and Washington worked on reducing the deficit and passing
capital gains legislation. Gross Domestic Product growth remained very strong
given the extended length of this business cycle. It seems hard to believe
conditions could get much better. An increase in market volatility was the only
indication of investor nervousness during the year. Daily moves of one percent
or more have increased in frequency, especially during the latter half of the
year.
Princor Blue Chip Fund's performance trailed market averages for the year.
However, the relative performance for each half of the year was dramatically
different. During the first half of the year, the Fund's performance placed it
near the top of the Lipper Growth and Income Category. Investors were focusing
on large companies with predictable earnings and adequate trading liquidity.
This Fund's investment strategy focuses on these types of companies, and
investors were amply rewarded for it during the first half. The second half of
the year proved to be almost the exact opposite. Beginning in July, a
significant rotation to smaller companies was underway. Since many of the
managers in the Growth and Income Category focus on a broader range of
companies, including small companies, the Fund's second half relative
performance was near the bottom of the Lipper Growth and Income Category.
Underperformance during the second half of the year outweighed positive relative
performance during the first half. Going forward, Fund managers believe the
economic expansion will slow and corporate profit growth will be restrained. The
economy has shown an amazing resiliency to this point, but could be in for some
tough sledding going forward. Wage gains are accelerating and foreign economies,
especially those in Southeast Asia, remain weak. Managers continue to look for
those companies that meet the Fund's criteria and can be purchased at favorable
prices.
Comparison of Change in Value of $10,000 Investment in the Blue Chip Fund
Class A, S&P 500 and Lipper Growth & Income Fund Average
Blue S&P 500 Lipper
Chip Stock Growth & Income
Year Ended October 31, Fund Index Fund Average
9,525 10,000 10,000
1991 10,137 10,911 10,544
1992 11,142 11,998 11,499
1993 11,771 13,789 13,424
1994 12,546 14,321 13,763
1995 15,388 18,100 16,510
1996 18,188 22,455 20,011
1997 22,294 29,668 25,638
Note: Past performance is not predictive of future performance. The performance
of Class B and Class R Shares will vary from the performance of Class A Shares
based on the differences in loads and fees.
Total Returns
As of October 31, 1997
1 Year 5 Year 10 Year
16.81% 13.78% 12.78%* Class A
17.59% 22.02% ** Class B
21.82% 17.20*** Class R
* - Since Inception Date 3/1/91
** - Since Inception Date 12/9/94
*** - Since Inception Date 2/29/96
Princor Capital Accumulation Fund
David White Catherine Green
This fiscal year has been another strong year for shareholders of Princor
Capital Accumulation Fund. Absolute returns are at historically high levels, as
this fund has benefited from the best of all worlds. Companies continue to enjoy
solid earnings growth, interest rates remain low, inflation has stayed in check,
and the overall economy has reached the "Goldilocks phase"--not too hot, not too
cold--just right. From this scenario, the market has focused for most of the
year on a small subset of companies--those traditional, large growth companies
who have continued to exhibit stellar earnings growth. Given the Fund's value
orientation, it is difficult to purchase stocks and pay high premiums relative
to other stocks. Therefore, the portfolio has a lower exposure to these
companies, and it has hurt performance relative to the indexes. This began to
change during the most recent months, and it remains to be seen how the market
will react to the events in Asia during October. The volatility of the market
has certainly increased in the near-term, and is expected to continue until it
is determined the true underlying economic impact of events around the world.
However, a value criteria is maintained to provide the same, consistent
philosophy over the entire economic cycle.
The goal of the Fund is to look for companies that are priced at a discount to
their future potential and relative to where the stock has sold historically.
Fund managers continue to look for companies they feel the market has
underpriced the potential. This is a solid way to understand the values of the
companies as the market increases in its short term volatility.
Comparison of Change in Value of $10,000 Investment in the Capital Accumulation
Fund Class A, S&P 500 and Lipper Growth & Income Fund Average
S&P 500 Lipper
Capital Stock Growth & Income
Year Ended October 31, Accumulation Index Fund Average
9,525 10,000 10,000
1987 9,954 10,646 10,105
1988 11,388 12,223 11,756
1989 12,962 15,449 14,163
1990 10,652 14,292 12,772
1991 14,980 19,081 17,050
1992 16,728 20,982 18,595
1993 18,471 24,114 21,708
1994 19,702 25,044 22,255
1995 23,238 31,655 26,697
1996 29,374 39,250 32,360
1997 35,256 48,735 41,028
Note: Past performance is not predictive of future performance. The performance
of Class B and Class R Shares will vary from the performance of Class A Shares
based on the differences in loads and fees.
Total Returns
As of October 31, 1997
1 Year 5 Year 10 Year
19.47% 15.97% 13.43% Class A
20.13% 25.14%* Class B
24.36% 22.41** Class R
* - Since Inception Date 12/9/94
** - Since Inception Date 2/29/96
Princor Emerging Growth Fund
Mike Hamilton
Small cap growth stocks were rediscovered during the third quarter of 1997.
After lagging at the start of the year these companies were favored by investors
looking for opportunities with more favorable valuations outside the favored
"nifty fifty."
Princor Emerging Growth Fund was no exception, outperforming its peer group year
to dateby focusing on more stable companies such as those in the financial
sector. In a more competitive global marketplace, companies need to have a
portfolio of quality products available for sale in an economic environment that
affords little pricing power.
The Fund's focus has been and continues to be on companies that have focused on
controlling costs while at the same time improving their productivity. Also, a
focus on niche or specialized products with few competitors which better equips
companies for a competitive marketplace. The sectors currently favored by fund
managers are technology, given its productivity enhancements; healthcare, with
power demographics and new products; and financial, because of bank
consolidation and rational capital allocation.
Comparison of Change in Value of $10,000 Investment in the
Emerging Growth Fund Class A, S&P 500 and Lipper Mid Cap Fund Average
S&P 500 Lipper
Emerging Stock MID CAP
Year Ended October 31, Growth Index Fund Average
9,525 10,000 10,000
1988 11,409 11,627 11,344
1989 13,651 14,696 14,346
1990 11,357 13,595 12,349
1991 18,689 18,151 19,744
1992 20,862 19,959 21,136
1993 24,964 22,938 26,260
1994 26,676 23,823 26,816
1995 33,721 30,112 33,389
1996 39,418 37,355 39,489
1997 51,738 49,356 48,493
Note: Past performance is not predictive of future performance. The performance
of Class B and Class R Shares will vary from the performance of Class A Shares
based on the differences in loads and fees.
Total Returns
As of October 31, 1997
1 Year 5 Year 10 Year
25.09% 18.77% 18.12%* Class A
26.64% 27.66% ** Class B
30.56% 21.60*** Class R
* - Since Inception Date 12/18/87
** - Since Inception Date 12/9/94
*** - Since Inception Date 2/29/96
Princor Growth Fund
Mike Hamilton
The financial markets have continued to reward investors with double digit
returns through the third quarter of 1997. The focus has been on large
multinational companies by the markets until now. Smaller cap stocks have
recently shown some life.
Princor Growth Fund trailed the S&P 500 Index because this index is heavily
weighted in a few securities. The Fund outperformed the Lipper Growth Fund
Average by holding securities with less risk and more consistent earnings while
it had a good weighting in financial stocks.
The economy has remained stable with little or no inflation and interest rates
have pulled back in response. This is an ideal environment for equities, and
stock returns are ample witness to this proposition. Some current concerns are
the weakness in foreign economies and corresponding currency devaluations. While
foreign trade will retard growth somewhat, managers do not foresee a dramatic
impact on the U.S. economy.
The Fund continues to focus on companies with stable earnings expectations that
are not dependent on exports for growth. Many financial companies, especially
large regional banks, networking providers, consumer products and
healthcare-related products are sectors favored by this Fund.
Comparison of Change in Value of $10,000 Investment in the
Growth Fund Class A, S&P 500 and Lipper Growth Fund Average
S&P 500 Lipper
Growth Stock Growth
Year Ended October 31, Fund Index Fund Average
9,525 10,000 10,000
1987 9,782 10,646 9,957
1988 10,713 12,223 11,536
1989 12,647 15,449 14,341
1990 11,483 14,292 12,670
1991 18,293 19,081 17,906
1992 20,992 20,982 19,314
1993 23,056 24,114 22,611
1994 25,321 25,044 22,959
1995 31,218 31,655 28,465
1996 34,528 39,250 33,722
1997 43,577 48,735 43,107
Note: Past performance is not predictive of future performance. The performance
of Class B and Class R Shares will vary from the performance of Class A Shares
based on the differences in loads and fees.
Total Returns
As of October 31, 1997
1 Year 5 Year 10 Year
23.46% 15.22% 15.86% Class A
24.92% 23.26%* Class B
28.72% 17.08** Class R
* - Since Inception Date 12/9/94
** - Since Inception Date 2/29/96
Princor Utilities Fund
Catherine Green
The stock market in general has been providing investors with returns that are
quite high by historical standards. Although utility returns have been strong in
the absolute sense, they have not been as high as the rest of the stock market.
The market is currently focusing on companies that can exhibit consistent
growth, and, due to the nature of utility stocks, earnings growth has lagged
more aggressive industries. Therefore, these stocks have not kept up with the
rest of the market.
The utility industry (both in telecommunications and electrics) is experiencing
tremendous change as a move is made to a more competitive environment for both
sectors. Investors need to have a thoughtful strategy as these changes occur.
The Fund's goal is to determine the companies that will be successful in
preparing themselves for the move to a more competitive environment. Companies
are taking different paths to move to competition, and there may be more than
one way to be successful. Being a low cost provider can be an advantage.
Diversifying overseas is another way some companies are trying to grow. Adding
additional energy service products is yet another way a company can add to its
revenue base. Fund managers analyze the efforts of each company in preparing for
the future and assess how well those strategies fit the company needs and
industry. With this Fund's focus on the higher quality end of the spectrum, many
of the stocks in this portfolio experienced lower volatility and stronger
performance in the year. The Fund outperformed the Dow Jones Utility Index with
Income as this focus on quality aided our relative performance. However, utility
stocks did underperform the market during the year, and comparable funds which
have a broader list of holdings outside of the utility universe tended to
outperform the Fund.
The recent moves within the market have focused on the telecommunications
industry. Consolidation is the current theme, and companies continue to merge
with partners for a strategic alliance they believe will benefit their future
growth. If the market felt the merger made sense, shareholders were rewarded.
Also, all companies in each sector of the utility industry are committed to
major cost cutting as they prepare to compete.
Management will continue to make quality a focus of this portfolio and monitor
the changing environment to determine factors impacting the investment results.
Comparison of Change in Value of $10,000 Investment in the Utilities
Fund Class A, S&P 500, Lipper Utilities Fund Average and the
Dow Jones Utilities Index with Income
Lipper Dow Jones
Utilities S&P 500 Utilities Fund Utilities
Year Ended October 31, Fund Index Average With Income
9,525 10,000 10,000 10,000
1993 11,047 10,980 11,575 11,658
1994 9,368 11,403 10,475 9,349
1995 11,651 14,413 12,325 11,810
1996 12,598 17,880 13,733 13,216
1997 14,394 23,625 16,179 14,879
Note: Past performance is not predictive of future performance. The performance
of Class B and Class R Shares will vary from the performance of Class A Shares
based on the differences in loads and fees.
Total Returns
As of October 31, 1997
1 Year 5 Year 10 Year
8.89% 7.76% * -- Class A
9.41% 14.52%** -- Class B
13.72% 7.80%*** -- Class R
* Since Inception Date 12/16/92
** - Since Inception Date 12/9/94
*** - Since Inception Date 2/29/96
International Growth Funds
Principal International Emerging Markets Fund
Kurt Spieler
Emerging markets experienced strong performance in the first half of 1997.
Unfortunately, the Principal International Emerging Market Fund commenced
operations in August, during the middle of an asset class correction. The Fund's
investment approach utilizes a bottom-up investment concept where managers
search the emerging universe for competitive companies with sustainable growth
rates. The goal of the manager's in-depth research is to find companies trading
cheaply on a discounted cash flow basis. Traditional measures of
price-to-earnings and price-to-cash flow ratios with emphasis on comparing
valuations within industries are also used. Qualitative factors include an
emphasis on buying high quality companies with strong balance sheets.
In looking at the emerging universe, the countries are divided into the
following regions: Asia, Latin America and EMEA (Eastern Europe, Middle East,
Africa). The Asian `contagion' effect has received widespread press with the
average market down 46% through September. Thailand, Indonesia, Philippines,
Malaysia, Taiwan and South Korea all experienced significant currency
devaluation in 1997. The expectation of global economists is for a slowdown in
economic activity within that region. As of the end of the year, the Fund had a
26% exposure in Asia, which is less than the MSCI Emerging Market `Free' Index
and the average emerging market fund. The managers believe the Fund's holdings
are well positioned based on an emphasis on export-oriented companies which
benefit from weak currencies.
The Fund's largest regional exposure is Latin America, with a year-end weighting
of 34%. This region experienced strong equity performance in 1997 based on solid
economic growth, low inflation and declining interest rates. Governments have
also responded correctly to keep the problems in Asia from spreading to Latin
America. The largest overweight position versus the MSCI Index is in EMEA where
the Fund has a 26% exposure. Based on the Fund's bottom-up approach, it has also
found undervalued companies in Israel and South Africa. Certain countries within
this region have held up well in the current volatile environment.
Fund managers believe investors in the Principal International Emerging Markets
Fund should focus on the long-term potential of this asset class. The average
emerging country is growing at around double the growth rate in developed
economies. This higher growth rate will result in high equity market returns
over the long-term. The Fund is taking advantage of the sell-off in emerging
markets to build positions in attractive companies at cheap prices.
Comparison of Change in Value of $10,000 Investment in the
International Emerging Markets Fund, MSCI EMF
and Lipper Emerging Markets Fund Average
International Emerging Lipper
Markets Fund MSCI Emerging
Period Ended --------------------------- EMF ID Markets
October 31, Class A Class B Class R Index Fund Avg.
9,525 10,000 10,000 10,000 10,000
1997 8,555 8,612 8,971 8,570 8,816
Note: Past performance is not predictive of future performance. The performance
of Class B and Class R Shares will vary from the performance of Class A Shares
based on the differences in loads and fees.
Total Returns
As of October 31, 1997
1 Year 5 Year 10 Year
-14.45%* -- -- Class A
-13.88%* -- -- Class B
-10.29%* -- -- Class R
* - Since Inception Date 8/29/97
Principal International SmallCap Fund
Darren Sleister
The Principal International SmallCap Fund began operations in the midst of the
most turbulent market conditions in recent memory. Many Asian equity markets
were already "melting down" when this Fund began in late August. From inception
to October 31, Hong Kong experienced a turbulent stock market decline of 20.8%.
For the year, the Malaysian, Thai and Indonesian equity markets each declined
over 60%, and the Japanese small cap index is off over 40%. Fortunately, the
Fund's shareholders were well served with a very low portfolio exposure in the
region. The near flat account performance clearly outperformed the double digit
losses in both the EAFE Index and the average international small cap fund.
At present the Fund remains extremely underweighted in Asian equities as Fund
managers wait for the region's economic ills to work themselves out. What
exposure the Fund has emphasizes export-oriented companies which benefit from
weak currencies. The European investment environment remains attractive with low
interest rates, steady growth and subdued inflation. Nimble companies that are
able to take advantage of the opportunities presented through deregulation as
well as those arising from large corporations restructuring in an attempt to
gain global competitiveness are favored.
The Fund invests in a borderless global manner searching for the best small
companies around the world without regard to location. With careful and diligent
research managers are able to buy companies at attractive valuations relative to
their earnings and cash flow potential. In addition to Asian exporters, the
portfolio remains positive on the oil service sector, competitive access
telecommunication providers, global outsourcing, select technology providers and
pharmaceutical companies. Managers are using recent equity market turmoil to
build positions opportunistically in attractive long-term investments for the
Fund's shareholders.
Comparison of Change in Value of $10,000 Investment in the
International SmallCap Fund, EAFE
and Lipper International SmallCap Fund Average
International Lipper
SmallCap Fund International
Period Ended --------------------------- MSCI SmallCap
October 31, Class A Class B Class R EAFE Fund Avg.
9,525 10,000 10,000 10,000 10,000
1997 9,573 9,650 10,050 9,748 9,736
Note: Past performance is not predictive of future performance. The performance
of Class B and Class R Shares will vary from the performance of Class A Shares
based on the differences in loads and fees.
Total Returns
As of October 31, 1997
1 Year 5 Year 10 Year
-4.27%* -- -- Class A
-3.50%* -- -- Class B
-0.50%* -- -- Class R
* - Since Inception Date 8/29/97
Princor World Fund
Scott Opsal
The Princor World Fund's overweighting in European markets and its underexposure
to Asia and Japan drove the Fund's outperformance in fiscal 1997. Europe was the
star performer, rising 26% based on strong economic growth, falling inflation
and interest rates, and fiscal restraint in preparation for Economic and
Monetary Union. European markets also benefited from the stronger U.S. dollar
that makes European exporters more competitive, and these export driven
economies stand to gain from an improved trade climate.
Asian markets underperformed dramatically as higher interest rates and weak
currencies produced a collapse in economic growth across the region. Asia is
suffering the effects of a massive credit bubble, and its markets are factoring
in a long and costly recovery. The Fund's Asian exposure at the start of the
crisis was less than two-thirds that of the average fund, producing a relative
outperformance in the region. While being underweighted helped, even better was
the fact that more than one-half of the Fund's Asian exposure was in Hong Kong,
the most stable and respectable economy in the region.
Japan, which underperformed European markets this year, is also underweighted in
the Fund's portfolio. Japan continues to report weak Gross Domestic Product
growth, the financial system is still shaky and the government is not able to
jump-start sustainable economic recovery. Interest rates remain near 1% yet
lending growth is nonexistent. The Japanese economy and local investors still
seem to be looking to the government for bailouts and artificial props to keep
the economy from sliding downhill again. The manager has always tried to avoid
economies and markets which are sustained by artificial and temporary means, and
still feels Japan fits this description.
Foreign exchange considerations cost the Fund approximately 1.5% in returns
relative to the EAFE Index. Although Japan was a weak market, the Yen was one of
the best currencies to own and the Fund's overweighting in weaker European
currencies was a disadvantage.
Finally, Fund performance was positively impacted by an increased weighting in
markets outside Europe and Asia. Europe's rising valuation levels caused
management to utilize new countries which offer moderate risk and valuation
advantages over the European markets which historically have been favored.
Selective smaller capitalization companies were also used as value is seen in
the lower capitalization ranges that can be used to an advantage when trading
volume proves sufficient.
Comparison of Change in Value of $10,000 Investment in the
World Fund Class A, EAFE and Lipper International Fund Average
Lipper
World EAFE International
Year Ended October 31 Fund Index Average
9,525 10,000 10,000
1988 9,529 10,594 10,854
1989 10,055 11,457 12,475
1990 10,149 9,995 12,380
1991 11,552 10,689 13,434
1992 11,371 9,276 12,776
1993 16,077 12,751 17,045
1994 17,620 14,036 18,848
1995 17,801 13,986 18,733
1996 21,071 15,441 20,743
1997 25,382 16,154 22,898
Note: Past performance is not predictive of future performance. The performance
of Class B and Class R Shares will vary from the performance of Class A Shares
based on the differences in loads and fees.
Total Returns
As of October 31, 1997
1 Year 5 Year 10 Year
14.80% 16.30% 11.69% Class A
15.62% 15.26%* Class B
19.65% 17.41%** Class R
* - Since Inception Date 12/9/94
** - Since Inception Date 2/29/96
*** Previous periods during which the fund was advised by another investment
advisor are not shown.
Important Notes on the Growth-Oriented Funds:
Standard & Poor's 500 Stock Index: An unmanaged index of 500 widely held common
stocks representing industrial, financial, utility and transportation companies
listed on the New York Stock Exchange, American Stock Exchange and the
Over-the-Counter market.
Lipper Growth & Income Fund Average: This average consists of funds which
combine a growth of earnings orientation and an income requirement for level
and/or rising dividends. The one-year average currently contains 589 funds.
Lipper Mid Cap Fund Average: This average consists of funds which, by prospectus
or portfolio practice, limit their investments to companies with average market
capitalizations and/or revenues between $800 million and the average market
capitalization of the Wilshire 4500 Index (as captured by the Vanguard Index
Extended Market Fund). The one-year average currently contains 215 funds.
Lipper Growth Fund Average: This average consists of funds which normally invest
in companies whose long-term earnings are expected to grow significantly faster
than the earnings of the stocks represented in the major unmanaged stock
indices. The one-year average currently contains 799 funds.
Lipper Balanced Fund Average: This average consists of funds whose primary
objective is to conserve principal by maintaining at all times a balanced
portfolio of both stocks and bonds. Typically, the stock/bond ratio ranges
around 60%/40%. The one-year average currently contains 343 funds.
Lipper Utilities Fund Average: This average consists of funds which invest 65%
of its equity portfolio in utility shares. The one-year average currently
contains 96 funds.
Dow Jones Utility Index with Income: This average is a price-weighted average of
15 utility companies that are listed on the New York Stock Exchange and are
involved in the production of electrical energy.
Lipper Emerging Markets Fund Average: This average consists of funds which
invest at least 65% of their total assets in emerging market equity securities,
where "emerging market" is defined by a country's GNP per capita or other
economic measures. The one-year average currently contains 118 funds.
Morgan Stanley EMF (Emerging Markets Free) Index: This average is capitalization
weighted and consists of stocks from 26 countries. These countries include:
Argentina, Brazil, Chile, China Free, Columbia, Czech Republic, Greece, Hungary,
India, Indomesia Free, Israel, Jordan, Korea at 50%, Malaysia Free, Mexico Free,
Pakistan, Peru, Philippines Free, Poland, Portugal, South Africa, Sri Lanka,
Taiwan at 50%, Thailand Free, Turkey and Venezuela.
Lipper International Small Cap Funds Average: This average consists of funds
which invest at least 65% of their assets in equity securities of non-United
States companies with market capitalizations less than U.S. $1 billion at the
time of purchase. The one-year average currently contains 26 funds.
Morgan Stanley EAFE (Europe, Australia and Far East) Index: This average
reflects an arithmetic, market value weighted average of performance of more
than 900 securities which are listed on the stock exchanges of the following
countries: Australia, Austria, Belgium, Denmark, Netherlands, New Zealand,
Norway, Singapore/Malaysia, Spain, Sweden, Switzerland, and the United Kingdom.
Lipper International Fund Average: This average consists of funds which invest
in securities primarily traded in markets outside of the United States. The
one-year average currently contains 406 funds.
Note: Mutual fund data from Lipper Analytical Services, Inc.
Income-Oriented Funds
Princor Bond Fund
Scott Bennett
The Princor Bond Fund's investment strategy is to concentrate in BBB-rated
corporate bonds and remain fully invested with a duration target of seven years.
(Average credit rating of bonds in the portfolio is BBB+.) This asset class
performed well during the year with BBB's outperforming treasuries, higher rated
corporate bonds and less than investment grade bonds during the second half of
the year. Corporate bonds performed well on the continued strength of the U.S.
economy and the absence of any signs of increased inflation. These conditions
were also instrumental in driving interest rates lower during the year leading
to relatively high absolute levels of return for fixed-income investments.
The Fund lagged the Lehman Brothers BAA Corporate Index, which does not include
expenses, but outperformed the Lipper Corporate Debt BBB-Rated Fund Average.
Outperformance was driven by the Fund's longer duration and a strategy of
remaining fully invested and not guessing interest rates.
Comparison of Change in Value of $10,000 Investment in the Bond
Fund Class A, Lehman Brothers BAA Corporate Index and Lipper
Corporate Debt BBB Rated Fund Average
Lehman Lipper
Bond Baa BBB Corp.
Year Ended October 31, Fund Index Average
9,525 10,000 10,000
1988 10,634 11,207 10,947
1989 11,862 12,598 11,980
1990 12,227 13,135 12,295
1991 14,189 15,451 14,397
1992 15,814 17,167 15,952
1993 18,220 19,771 18,362
1994 17,125 18,564 17,376
1995 20,504 22,156 19,873
1996 21,476 23,669 20,974
1997 23,656 26,074 22,981
Note: Past performance is not predictive of future performance. The performance
of Class B and Class R Shares will vary from the performance of Class A Shares
based on the differences in loads and fees.
Total Returns
As of October 31, 1997
1 Year 5 Year 10 Year
4.97% 7.35% 9.12%* Class A
5.20% 9.75%** Class B
9.49% 7.93%*** Class R
* - Since Inception Date 12/18/87
** - Since Inception Date 12/9/94
*** - Since Inception Date 2/29/96
Princor Government Securities Income Fund
Marty Schafer
Fund managers expected and benefited from the very strong housing markets and
housing turnover. Mortgage prepayments on discount securities were 10 to 20
percent higher than previous summer peaks. Management continues to expect this
to be very beneficial to the Fund.
Reasonable growth, shrinking federal deficits and non-threatening inflation
reports pushed interest rates lower, while investors maintained their conviction
that the Federal Reserve Board would not change interest rates.
With advancements in technology and improved competition among mortgage lenders,
borrowers are becoming more efficient in their ability to prepay (call) their
home loans. The manager's disciplined approach of running a portfolio priced at
or below par continues to protect shareholders from a drop in rates. Value is
also added by selecting undervalued sectors of mortgage-backed securities for a
portion of the portfolio. With this strategy, the Fund continues to outperform
the Lehman Brothers GNMA Index.
Comparison of Change in Value of $10,000 Investment in the Government Securities
Income Fund Class A, Lehman Brothers GNMA Index and the Lipper GNMA Fund Average
Government Lehman Lipper
Securities GNMA GNMA
Year Ended October 31, Income Fund Index Average
9,525 10,000 10,000
1987 9,677 10,402 10,171
1988 11,030 11,836 11,387
1989 12,230 13,187 12,499
1990 12,985 14,281 13,411
1991 15,164 16,721 15,414
1992 16,450 18,192 16,694
1993 18,391 19,569 18,050
1994 17,241 19,267 17,494
1995 20,250 22,194 19,880
1996 21,478 23,781 20,984
1997 23,105 24,966 22,362
Note: Past performance is not predictive of future performance. The performance
of Class B and Class R Shares will vary from the performance of Class A Shares
based on the differences in loads and fees.
Total Returns
As of October 31, 1997
1 Year 5 Year 10 Year
4.10% 6.33% 8.74% Class A
4.65% 9.38% * Class B
8.19% 7.16%** Class R
* - Since Inception Date 12/9/94
** - Since Inception Date 2/29/96
Princor High Yield Fund
Ken Hovey
The Princor High Yield Fund, and the high yield market in general, performed
well during the Fund's fiscal year ended October 31. Returns for the Fund and
high yield indices exceeded those of other fixed-income products, except very
long duration corporate or government bonds. Most measures of equity returns
exceeded those of high yield. Remember that high yield bonds have fixed-income
characteristics, but returns have low correlation with both other fixed-income
products and equities.
Bond markets had a down and then back up year. The low point was last April,
just prior to the midpoint for the Fund's fiscal year. Returns over the past six
months have been excellent. The low correlation of high yield bonds to other
bonds is in part demonstrated by lower sensitivity of high yield bonds to
changes in interest rates and increased sensitivity of high yield bonds to
sector, such as industry, fundamentals and outlook. During the fiscal year, long
interest rates (i.e. ten years and longer) declined approximately .50%. High
yield indexes captured most of that change, but risk premiums expanded
approximately .10%; a relatively minor change. Sector changes, both industry and
credit quality wise, had more significant impacts. For example, the competitive
local exchange (CLEC) telecommunications sector had a very good year as it
gained legitimacy in the eyes of the market. Conversely, emerging market
indebtedness, such as from Southeast Asia, has done poorly given the real or
perceived economic problems that have developed. From a credit risk perspective,
funds that took more risk were again rewarded for that strategy as default rates
remained low. The Fund did not suffer a default and did not have a forced
distressed sale during the year. Nevertheless, returns are lower than many
competing funds which take more credit risk. Additionally, in hindsight the Fund
had too much exposure to Asia and not enough in some popular sectors. These are
the main reasons for underperforming both the Lehman and Lipper averages for the
fiscal year.
At this juncture the high yield market is considered slightly undervalued. The
key variables for high yield market performance have proven to be credit
quality, market liquidity and monetary policy. With the combination of default
rates on high yield bonds remaining low, cash coming into the market and plenty
of credit availability from the banking industry, managers expect the high yield
market to continue providing good returns relative to other income-generating
assets in the foreseeable future. The main caveats to continued good returns, at
least in the near term, are the immense supply of new high yield bonds coming
into the market as more and more issuers come in, the uncertain impact on
worldwide economic growth and bond values of economic slowdown, and financial
turmoil going on in Asia.
Comparison of Change in Value of $10,000 Investment in the High
Yield Fund Class A, Lehman Brothers High Yield Index and Lipper
High Current Yield Fund Average
Lehman Lipper
High High Yield High Yield
Year Ended October 31, Yield Fund Index Average
9,525 10,000 10,000
1988 10,879 11,403 11,230
1989 11,171 11,625 11,355
1990 9,550 10,131 9,967
1991 11,998 15,050 13,589
1992 13,719 17,345 15,816
1993 15,319 20,450 18,991
1994 15,540 20,702 18,913
1995 17,363 23,958 21,409
1996 19,426 26,618 24,118
1997 21,821 30,270 27,605
Note: Past performance is not predictive of future performance. The performance
of Class B and Class R Shares will vary from the performance of Class A Shares
based on the differences in loads and fees.
Total Returns
As of October 31, 1997
1 Year 5 Year 10 Year
7.05% 8.67% 8.23%* Class A
7.31% 10.92% ** Class B
11.14% 10.05% *** Class R
* - Since Inception Date 12/18/87
** - Since Inception Date 12/9/94
*** - Since Inception Date 2/29/96
Princor Limited Term Bond Fund
Marty Schafer
The Princor Limited Term Bond Fund investment performance during 1997 compared
very favorably with the Short Intermediate Grade Universe. The favorable market
conditions of declining interest rates, low inflation, and a significant
reduction in the budget deficit proved to be a real benefit for fixed-income
investors during 1997. The Fund's above average performance during the year can
be attributed to the implementation of a very consistent and disciplined
investment strategy. Fund managers continue to maintain a well diversified and
high quality portfolio with an average overall rating of A1. The composition of
the portfolio is comprised of corporate bonds (66%), mortgage-backed securities
(27%), commercial mortgage-backed securities (4%) and asset-backed securities
(3%).
One of the main investment strategies is to pursue corporate bonds with a rating
in the Single A category while seeking a balance between high credit quality and
acceptable returns. Diversification is enhanced by selecting investments in very
specialized areas such as mortgage-backed, asset-backed and commercial
mortgage-backed securities. It is quite probable that the Fund will increase its
investing activities in these complex asset classes where the manager can
utilize internal resources and add significant value. The Fund continues to be
an investment well suited for those investors looking to improve upon lower
yielding money market funds and similar investments, but who are unwilling to
take on the investment risk of longer term bonds or stocks. The Fund's strategy
continues to be as follows: Stay fully invested and maintain a low level of
cash; diversify within and across multiple asset classes; find the best value
among various short-term fixed-income securities; maintain high credit quality
standards and manage duration within a target range.
Comparison of Change in Value of $10,000 Investment in the Limited
Term Bond Fund, Lehman Brothers Government Corporate Intermediate
Index and Lipper Short-Intermediate Investment Grade Bond Fund Average
Lehman
Brothers
Government Lipper
Limited Term Bond Fund Corporate Intermediate
Year Ended --------------------------- Intermediate Investment Grade
October 31, Class A Class B Class R Index Bond Fund Avg.
9,850 10,000 10,000 10,000 10,000
1996 10,207 10,207 10,324 10,369 10,357
1997 10,896 10,859 10,994 11,146 11,032
Note: Past performance is not predictive of future performance. The performance
of Class B and Class R Shares will vary from the performance of Class A Shares
based on the differences in loads and fees.
Total Returns
As of October 31, 1997
1 Year 5 Year 10 Year
5.14% 5.27%* -- Class A
5.06% 5.05%* -- Class B
6.01% 5.55%* -- Class R
* - Since Inception Date 2/29/96
Princor Tax-Exempt Bond Fund
Dan Garrett
The Princor Tax-Exempt Bond Fund continued to add value for investors seeking
long-term income exempt from federal income tax for the year ended October 31,
1997. Fund managers focus on revenue bonds backed by guarantees of corporations
that tend to have higher yields than the average bond on the broader Lehman
Municipal Bond Index or the Fund's Lipper peer group. The strategy has been to
focus on slightly higher quality during the past year and quality ratings of A
and AA have been added to the portfolio. Risk premiums have dropped considerably
and as a result BBB rated bonds have had prices rising faster than higher
quality holdings. However, if risk premiums rise, higher quality ratings will
likely retain more value.
The Fund continues to avoid mistakes such as unfavorable bond structures such as
certificates of participation, project lease revenue bonds, sports stadium
projects and utilities poorly positioned for deregulation. The portfolio has
been diversified across a variety of quality (average A rating), coupons and
terms with interest rate risk similar to the broader index and peers while
adding value with selective trades relative to the market. For the future, the
economy shows signs of continued low inflation with steady growth. Our position
in higher coupon revenue bonds should continue to provide positive relative
return compared to the broader municipal market and the Fund's peers.
Comparison of Change in Value of $10,000 Investment in the Tax-Exempt
Bond Fund Class A, Lehman Brothers Revenue Bond Index, Lehman Brothers
Municipal Bond Index and the Lipper General Municipal Fund Average
Lehman Lehman Lipper
Year Ended Tax-Exempt Revenue Municipal General
October 31, Bond Fund Bond Index Bond Index Muni. Debt
9,525 10,000 10,000 10,000
1987 8,924 9,923 9,915 9,641
1988 10,730 11,652 11,359 11,166
1989 11,710 12,705 12,278 12,036
1990 12,185 13,650 13,190 12,703
1991 13,780 15,431 14,795 14,265
1992 14,850 16,774 16,038 15,320
1993 17,181 19,332 18,294 17,686
1994 15,907 18,305 17,497 16,650
1995 18,457 21,221 20,095 18,931
1996 19,579 22,526 21,240 19,898
1997 22,729 24,731 23,241 22,315
Note: Past performance is not predictive of future performance. The performance
of Class B Shares will vary from the performance of Class A Shares based on the
difference in loads and fees
Total Returns
As of October 31, 1997
1 Year 5 Year 10 Year
3.60% 6.44% 8.56% Class A
4.08% 9.83%* Class B
* - Since Inception Date 12/9/94
Princor Cash Management Fund
Princor Tax-Exempt Cash Management Fund
Mike Johnson Steve Schneider
After raising the targeted Federal Funds rate* by .25% to 5.50% in March of this
year, the Federal Reserve continued to maintain this target throughout the
remainder of fiscal 1997. Despite periodic strong economic releases the Fed
chose to hold rates steady while they waited for stronger signs of increased
inflation. Chairman Greenspan continues to believe that the economy has been on
an "unsustainable track" and does not support the "new paradigm" theory which
has the economy growing at a faster pace without fueling inflation. The Fund's
average maturity target spent most of the year in the high 50 day to 60+ day
range. Downward fluctuations occurred if the market anticipated a Federal
Reserve rate adjustment. The 60+ level was maintained during the latter four
months of the fiscal year. Fund management continues to target and actively
monitor the industry averages to keep both yields and average maturities in
line. Both Funds continue to invest from a list of the highest credit quality
issues that are actively managed by the manager's analytical staff.
Investment in the money market funds is neither insured nor guaranteed by the
U.S. Government. While the Funds strive to maintain a $1.00 per share net asset
value, there can be no guarantee they will do so.
Fund dividends are exempt from federal taxation, but may not be exempt from
state and local taxes. The alternative minimum tax applies to some investors.
Possibly, any capital gains resulting from the growth of principal are not
tax-exempt.
* The Fed Funds rate is the rate at which banks lend to each other on an
overnight basis.
Important Notes on the Income-Oriented Funds:
Lehman Brothers, Baa Index: An unmanaged index of all publicly issued,
fixed-rate, nonconvertible, dollar-denominated, SEC-registered corporate debt
rated Baa or BBB by Moody's or Standard & Poor's.
Lipper Corporate Debt BBB Rated Fund Average: This average consists of funds
which invest at least 65% of their assets in corporate and government debt
issues rated in the top four grades. The one-year average currently contains 104
funds.
Lehman Brothers, GNMA Index: An unmanaged index of 15- and 30-year fixed-rate
securities backed by mortgage pools of the Government National Mortgage
Association (GNMA) and Graduated Payment Mortgages (GPMs) with at least $100
million outstanding and one year or more to maturity.
Lipper GNMA Fund Average: This average consists of funds which invest a least
65% of their assets in Government National Mortgage Association securities. The
one-year average currently contains 53 funds.
Lehman Brothers, High Yield Index: An unmanaged index of all publicly issued
fixed, dollar-denominated, SEC-registered corporate debt rated Ba1 or lower with
at least $100 million outstanding and one year or more to maturity.
Lipper High Current Yield Fund Average: This average consists of funds which aim
at high (relative) current yield from fixed-income securities. No quality or
maturity restrictions. They tend to invest in lower grade debt issues. The
one-year average currently contains 173 funds.
Lehman Brothers, Government Corporate Intermediate Index: An unmanaged index of
U. S. Government agency and Treasury securities and investment-grade corporate
debt securities with maturities of five to ten years.
Lehman Brothers, Municipal Bond Index: An unmanaged index of investment-grade,
tax-exempt bonds which have been issued within the last five years and at least
one year or more to maturity. This index is classified into four main sectors:
General Obligation, Revenue, Insured and Prerefunded.
Lehman Brothers, Revenue Bond Index: An unmanaged index of investment-grade,
tax-exempt revenue bonds which have been issued within the last five years and
at least one year or more to maturity.
Lipper Short-Intermediate Investment Grade Debt Fund Average: This average
consists of funds which invest at least 65% of their assets in investment-grade
debt issues rated in the top four grades with dollar-weighted average maturities
of one to five years. The one-year average currently contains 80 funds.
Lipper General Municipal Debt Fund Average: This average consists of funds which
invest at least 65% of their assets in municipal debt issues in the top four
credit ratings. The one-year average currently contains 231 funds.
Note: Mutual fund data from Lipper Analytical Services, Inc.
<PAGE>
Three Keys To More Successful Investing
"Industrials Dive 554 Points" and "Stocks Plummet as Investors Seek Cover" are
just two of the headlines you may have seen on October 28, 1997, the day
following recent dramatic events on Wall Street. With a thud heard around the
world, fear rapidly spread that the mighty bull (market, that is) had fallen out
of bed! But wait! Perhaps those fears were expressed too soon. Taking a page out
of the Black Monday (October 19, 1987) text book, investors chose to wait and
watch what unfolded...rather than panic!
Witnessing this rational behavior, financial professionals breathed a collective
sigh of relief. Because you see, those lessons from 1987 were hard learned. But
over the past ten years, good registered representatives have made sure their
clients understood the three keys to more successful investing--maintain a
long-term perspective, invest regularly and consistently and diversify.
Maintaining a long-term perspective keeps you focused on the big picture.
Investors who watch the ups and downs of the market over short time periods,
often see large fluctuations. Step back and look at the securities markets over
longer time periods, and you'll see that these movements become less
sensational. By maintaining a long-term perspective and avoiding becoming overly
concerned with sudden market movements, you improve your chances for successful
investing. The following chart demonstrates how the stock market becomes less
erratic when viewed over longer time periods.
Stock Returns for Various Holding Periods
1926 - 1996
<TABLE>
<CAPTION>
Year by Year Total Returns (in percent) From 1926 to 1996
Intermediate-
Large Small Long-Term Long-Term Term U.S
Company Company Corporate Government Government Treasury
Year Stocks Stocks Bonds Bonds Bond Bills Inflation
<S> <C> <C> <C> <C> <C> <C> <C>
1926 11.62 0.28 7.37 7.77 5.38 3.27 -1.49
1927 37.49 22.10 7.44 8.93 4.52 3.12 -2 08
1928 43.61 39.69 2.84 0.10 0.92 3.56 -0.97
1929 -8.42 -51.36 3.27 3.42 6.01 4.75 0.20
1930 24.90 -38.15 7.98 4.66 6.72 2.41 -6.03
1931 -43.34 -49.75 -1.85 -5.31 -2.32 1.07 -9.52
1932 -8.19 -5.39 10.82 16.84 8.81 0.96 -10.30
1933 53.99 142.87 10.38 -0.07 1.83 0.30 0.51
1934 -1.44 24.22 13.84 10.03 9.00 0.16 2.03
1935 47.67 40.19 9.61 4.98 7.01 0.17 2.99
1936 33.92 64.80 6.74 7.52 3.06 0.18 1.21
1937 -35.03 -58.01 2.75 0.23 1.56 0.31 3.10
1938 31.12 32.80 6.13 5.53 6.23 -0.02 -2.78
1939 -0.41 0.35 3.97 5.94 4.52 0.02 -0.48
1940 -9.78 -5.16 3.39 6.09 2.96 0.00 0.96
1941 -11.59 -9.00 2.73 0.93 0.50 0.06 9.72
1942 20.34 44.51 2.60 3.22 1.94 0.27 9.29
1943 25.90 88.37 2.83 2.08 2.81 0.35 3.16
1944 19.75 53.72 4.73 2.81 1.80 0.33 2.11
1945 36.44 73.61 4.08 10.73 2.22 0.33 2.25
1946 -8.07 -11.63 1.72 -0.10 1.00 0.35 18.16
1947 5.71 0.92 -2.34 -2.62 0.91 0.50 9.01
1948 5.50 -2.11 4.14 3.40 1.85 0.81 2.71
1949 18.79 19.75 3.31 6.45 2.32 1.10 -1.80
1950 31.71 38.75 2.12 0.06 0.70 1.20 5.79
1951 24.02 7.80 -2.69 -3.93 0.36 1.49 5.87
1952 18.37 3.03 3.52 1.16 -1.63 1.66 0.88
1953 -0.99 -6.49 3.41 3.64 3.23 1.82 0.62
1954 52.62 60.58 5.39 7.19 2.68 0.86 -0.50
1955 31.56 20.44 0.48 -1.29 -0.65 1.57 0.37
1956 6.56 4.28 -6.81 -5.59 -0.42 2.46 2.86
1957 -10.78 -14.57 8.71 7.46 7.84 3.14 3.02
1958 43.36 64.89 -2.22 -6.09 -1.29 1.54 1.76
1959 11.96 16.40 -0.97 -2.26 -0.39 2.95 1.50
1960 0.47 -3.29 9.07 13.78 11.76 2.66 1.48
1961 26.89 32.09 4.82 0.97 1.85 2.13 0.67
1962 -8.73 -11.90 7.95 6.89 5.56 2.73 1.22
1963 22.80 23.57 2.19 1.21 1.64 3.12 1.65
1964 16.48 23.52 4.77 3.51 4.04 3.54 1.19
1965 12.45 41.75 -0.46 0.71 1.02 3.93 1.92
1966 -10.06 -7.01 0.20 3.65 4.69 4.76 3.35
1967 23.98 83.57 -4.95 -9.18 1.01 4.21 3.04
1968 11.06 35.97 2.57 -0.26 4.54 5.21 4.72
1969 -8.50 -25.05 -8.09 -5.07 -0.74 6.58 6.11
1970 4.01 -17.43 18.37 12.11 16.86 6.52 5.49
1971 14.31 16.50 11.01 13.23 8.72 4.39 3.36
1972 18.98 4.43 7.26 5.69 5.16 3.84 3.41
1973 -14.66 -30.90 1.14 -1.11 4.61 6.93 8.80
1974 -26.47 -19.95 -3.06 4.35 5.69 8.00 12.20
1975 37.20 52.82 14.64 9.20 7.83 5.80 7.01
1976 23.84 57.38 18.65 16.75 12.87 5.08 4.81
1977 -7.18 25.38 1.71 -0.69 1.41 5.12 6.77
1978 6.56 23.46 -0.07 -1.18 3.49 7.18 9.03
1979 18.44 43.46 -4.18 -1.23 4.09 10.38 13.31
1980 32.42 39.88 -2.76 -3.95 3.91 11.24 12.40
1981 -4.91 13.88 -1.24 1.86 9.45 14.71 8.94
1982 21.41 28.01 42.56 40.36 29.10 10.54 3.87
1983 22.51 39.67 6.26 0.65 7.41 8.80 3.80
1984 6.27 -6.67 16.86 15.48 14.02 9.85 3.95
1985 32.16 24.66 30.09 30.97 20.33 7.72 3.77
1986 18.47 6.85 19.85 24.53 15.14 6.16 1.13
1987 5.23 -9.30 -0.27 -2.71 2.90 5.47 4.41
1988 16.81 22.87 10.70 9.67 6.10 6.35 4.42
1989 31.49 10.18 16.23 18.11 13.29 8.37 4.65
1990 -3.17 -21.56 6.78 6.18 9.73 7.81 6.11
1991 30.55 44.63 19.89 19.30 15.46 5.60 3.06
1992 7.67 23.35 9.39 8.05 7.19 3.51 2.90
1993 9.99 20.98 13.19 18.24 11.24 2.90 2.75
1994 1.31 3.11 -5.76 -7.77 -5.14 3.90 2.67
1995 37.43 34.46 27.20 31.67 16.80 5.60 2.54
1996 23.07 17.62 1.40 -0.93 2.10 5.21 3.32
</TABLE>
<TABLE>
<CAPTION>
Compound Annual Returns for 5-Year Holding Periods (percent per annum) From 1926 to 1996
Large Small Long-Term Long-Term Intermediate U.S
Company Company Corporate Government Government Treasury
Year Stocks Stocks Bonds Bonds Bond Bills Inflation
<S> <C> <C> <C> <C> <C> <C> <C>
1926-1930 8.68 -12.44 5.76 4.93 4.69 3.42 -2.10
1927-1931 -5.10 -23.74 3.87 2.25 3.11 2.98 -3.75
1928-1932 12.47 -27.54 4.52 3.69 3.95 2.54 -5.42
1929-1933 -11.24 -19.06 6.0l 3.66 4.13 1.89 -5.14
1930-1934 -9.93 -2.37 8.09 4.95 4.71 0.98 -4.80
1931-1935 3.12 14.99 8.42 5.01 4.77 0.53 -3.04
1932-1936 22.47 45.63 10 26 7.71 5.90 0.35 -0.84
1933-1937 14.29 23.96 8.60 4.46 4.45 0.22 1.96
1934-1938 10.67 9.86 7.75 5.61 5.33 0.16 1.29
1935-1939 1O.9l 5.27 5.81 4.81 4.46 0.13 0.78
1936-1940 0.50 -2.64 4.59 5.03 3.65 0.10 0.38
1937-1941 -7.51 -13.55 3.79 3.71 3.13 0.08 2.02
1938-1942 4.62 10.70 3.76 4.32 3.21 0.07 3.21
1939-1943 3.77 18.71 3.10 3.63 2.54 0.14 4.44
1940-1944 7.67 29.28 3.25 3.01 2.00 0.20 4.98
1941-1945 16.96 45.90 3.39 3.90 1.85 0.27 5.25
1942-1946 17.87 45.05 3.19 3.69 1.95 0.33 6.82
1943-1947 14.86 35.00 2.17 2.49 l.75 0.37 6.77
1944-1948 10.87 18.43 2.43 2.75 1.55 0.47 6.67
1945-1949 10.69 12.66 2.15 3.46 1.66 0.62 5.84
1946-1950 9.91 7.72 1.76 1.39 1.36 0.79 6.57
1947-l951 16.70 12.09 0.87 0.60 1.23 1.02 4.25
1948-1952 19.37 12.55 2.05 1.37 1.37 1.25 2.65
1949-1953 17.86 11.53 1.91 1.41 1.64 1.45 2.23
1950-1954 23.92 18.27 2.31 1.55 1.72 1.41 2.50
1951-1955 23.89 14.97 1.98 1.28 1.44 1.48 1.43
1952-1956 20.18 14.21 1.10 0.93 1.28 1.67 0.84
1953-1957 13.58 10.01 2.10 2.15 2.49 1.97 1.27
1954-1958 22.31 23.22 0.96 0.16 1.58 1.91 1.49
1955-1959 14.96 15.54 -0.29 -1.67 0.96 2.33 1.90
1956-1960 8.92 10.58 1.36 1.16 3.37 2.55 2.12
1957-1961 12.79 15.93 3.77 2.53 3.83 2.48 1.68
1958-1962 13.31 16.65 3.63 2.42 3.39 2.40 1.33
1959-1963 9.85 10.11 4.55 3.97 4.00 2.72 1.30
1960-1964 10.73 11.43 5.73 5.17 4.91 2.83 1.24
1961-1965 13.25 20.28 3.82 2.63 2.81 3.09 1.33
1962-1966 5.72 12.13 2.88 3.17 3.38 3.61 1.86
1963-1967 12.39 29.86 0.30 -0.14 2.47 3.91 2.23
1964-1968 10.16 32.37 0.37 -0.43 3.04 4.33 2.84
1965-1969 4.96 19.78 -2.22 -2.14 2.08 4.93 3.82
1966-1970 3.34 7.51 1.23 -0.02 5.10 5.45 4.54
1967-1971 8.42 12.47 3.32 1.77 5.90 5.38 4.54
1968-1972 7.53 0.47 5.85 4.90 6.75 5.30 4.61
1969-1973 2.01 -12.25 5.55 4.72 6.77 5.65 5.41
1970-1974 -2.36 -11.09 6.68 6.72 8.11 5.93 6.60
1971-1975 3.21 0.56 6.00 6.16 6.39 5.78 6.90
1972-1976 4.87 6.80 7.42 6.82 7.19 5.92 7.20
1973-1977 -0.21 -10.77 6.29 5.50 6.41 6.18 7.89
1974-1978 4.32 24.41 6.03 5.48 6.18 6.23 7.94
1975-1979 14.76 39.80 5.78 4.33 5.86 6.69 8.15
1976-1980 13.95 37.35 2.36 1.68 5.08 7.77 9.21
1977-1981 8.08 28.75 -1.33 -1.05 4.44 9.67 10.06
1978-1982 14.05 29.28 5.57 6.03 9.60 10.78 9.46
1979-1983 17.27 32.51 6.87 6.42 10.42 11.12 8.39
1980-1984 14.76 21.59 11.20 9.80 12.45 11.01 6.53
1981-1985 14.71 18.82 17.86 16.63 15.80 10.30 4.85
1982-1986 19.87 17.32 22.51 21.62 16.98 8 60 3.30
1983-1987 16.49 9.51 14.06 13.02 11.79 7.59 3.41
1984-1988 15.38 6.74 15.00 14.98 11.52 7.1O 3.53
1985-1989 20.40 10.34 14.88 15.50 11.38 6.81 3.67
1986-1990 13.14 0.58 10.43 10.75 9.34 6.83 4.13
1987-1991 15.36 6.86 10.44 9.81 9.40 6.71 4.52
1988-1992 15.89 13.63 12.50 12.14 10.30 6.31 4.22
1989-1993 14.50 13.28 13.00 13.84 11.35 5.61 3.89
1990-1994 8.69 11.79 8.36 8.34 7.46 4.73 3.49
1991-1995 16.57 24.51 12.22 13.10 8.81 4.29 2.79
1992-1996 15.20 19.47 8.52 8.98 6.17 4.22 2.84
</TABLE>
<TABLE>
<CAPTION>
Compound Annual Returns for 10-Year Holding Periods (percent per annum) From 1926 to 1996
Large Small Long-Term Long-Term Intermediate U.S
Company Company Corporate Government Government Treasury
Year Stocks Stocks Bonds Bonds Bond Bills Inflation
<S> <C> <C> <C> <C> <C> <C> <C>
1926-1930 5.86 0.34 7.08 4.97 4.73 1.97 -2.57
1927-1936 7.81 5.45 7.02 4.95 4.50 1.66 -2.30
1928-1937 0.02 -5.22 6.54 4.08 4.20 1.37 -1.80
1929-1938 -O.89 -5.70 6.88 4.63 4.73 1.02 -1.98
1930-1939 -0.05 1.38 6.95 4.88 4.58 0.55 -2.05
1931-1940 1.80 5.81 6.49 5.02 4.21 0.32 -1.34
1932-1941 6.43 12.28 6.97 5.69 4.51 0.21 0.58
1933-1942 9.35 17.14 6.15 4.39 3.83 0.15 2.59
1934-1943 7.17 14.20 5.40 4 62 3.93 0.15 2.85
1935-1944 9.28 16.66 4.53 3.91 3.22 0.17 2.86
1936-1945 8.42 19.18 3.99 4.46 2.75 0.18 2.79
1937-1946 4.41 11.98 3.49 3.70 2.54 0.20 4.39
1938-1947 9.62 22.24 2.96 3.40 2.48 0.22 4.97
1939-1948 7.26 18.57 2.77 3.19 2.04 0.30 5.55
1940-1949 9.17 20.69 2.70 3.24 1.83 0.41 5.41
1941-1950 13.38 25.37 2.57 2.64 1.60 0.53 5.91
1942-1951 17.28 27.51 2.02 2.13 1.59 0.67 5.53
1943-1952 17.09 23.27 2.11 1.93 1.56 0.81 4.69
1944-1953 14.31 14.93 2.17 2.08 1.60 0.96 4.43
1945-1954 17.12 15.43 2.23 2.51 1.69 1.01 4.16
1946-1955 16.69 11.29 1.87 1.33 1.40 1.14 3.96
1947-1956 18.43 13.14 0.98 0.76 1.25 1.35 2.53
1948-1957 16.44 11.27 2.07 1.76 1.93 1.61 1.96
1949-1958 20.06 17.23 1.43 0.79 1.61 1.68 1.86
1950-1959 l9.35 16.90 1.00 -0.07 1.34 1.87 2.20
1951-1960 16.16 12.75 1.67 1.22 2.40 2.01 1.77
1952-1961 16.43 15.07 2.43 1.73 2.55 2.08 1.26
1953-1962 13.44 13.28 2.86 2.29 2.94 2.19 1.30
1954-1963 15.91 16.48 2.74 2.05 2.78 2.31 1.40
1955-1964 12.82 13.47 2.68 1.69 2.92 2.58 1.57
1956-1965 11.06 15.33 2.58 1.89 3.09 2.82 1.73
1957-1966 9.20 14.02 3.33 2.85 3.60 3.05 1.77
1958-1967 12.85 23.08 1.95 1.13 2.93 3.15 1.78
1959-1968 10.00 20.73 2.44 1.75 3.52 3.52 2.07
1960-1969 7.81 15.53 1.68 1.45 3.48 3.88 2.52
1961-1970 8.18 13.72 2.51 1.30 3.95 4.26 2.92
1962-1971 7.06 12.30 3.10 2.47 4.63 4.49 3.19
1963-1972 9.93 14.22 3.04 2.35 4.59 4.60 3.41
1964-1973 6.00 7.77 2.93 2.11 4.89 4.98 4.12
1965-1974 1.24 3.20 2.13 2.20 5.05 5.43 5.20
1966-1975 3.27 3.98 3.59 3.03 5.74 5.62 5.71
1967-1976 6.63 9.60 5.35 4.26 6.54 5.65 5.86
1968-1977 3.59 5.50 6.07 5.20 6.58 5.74 6.24
1969-1978 3.16 4.48 5.79 5.10 6.47 5.94 6.67
1970-1979 5.86 11.49 6.23 5.52 6.98 6.31 7.37
1971-1980 8.44 17.53 4.16 3.90 5.73 6.77 8.05
1972-1981 6.47 17.26 2.95 2.81 5.80 7.78 8.62
1973-1982 6.68 19.67 5.93 5.76 8.00 8.46 8.67
1974-1983 10.61 28.40 6.45 5.95 8.28 8.65 8.16
1975-1982 14.76 30.38 8.46 7.03 9.11 8.83 7.34
1976-1985 14.33 27.75 9.84 8.99 10.31 9.03 7.01
1977-1986 13.82 22.90 9.95 9.70 10.53 9.14 6.63
1978-1987 15.26 18.99 9.73 9.47 10.69 9.17 6.39
1979-1988 16.33 18.93 10.86 l0.62 10.97 9.09 5.93
1980-1989 17.55 15.83 13.02 12.62 11.91 8.89 5.09
1981-1990 13.93 9.32 14.09 13.75 12.52 8.55 4.49
1982-1991 17.59 11.97 16.32 15.56 13.13 7.65 3.91
1983-1992 16.19 11.55 13.28 12.58 11.04 6.95 3.81
1984-1993 14.94 9.96 14.00 14.41 11.43 6.35 3.71
1985-1994 14.40 11.06 11.57 11.86 9.40 5.76 3.58
1986-1995 14.84 11.90 11.32 11.92 9.08 5.55 3.46
1987-1996 15.28 12.98 9.48 9.39 7.77 5.46 3.68
</TABLE>
Source: Computed from data from Stocks, Bonds, Bill & Inflation 1997 Yearbook,
Ibbotson Associates, Chicago (annually updates work by Roger G. Ibbotson and Rex
Sinquefield). Used with permission. All rights reserved.
No one has a crystal ball. Choosing exactly the right time to invest is
difficult, if not impossible. Instead, a regular and consistent investment
program helps you take advantage of swings in securities prices. Investing the
same amount regularly, regardless of market trends, is a concept known as
dollar-cost averaging. When stock prices decrease, you purchase more shares;
when prices are higher, you purchase fewer shares. Though no investment program
can assure a profit or protect against loss, a dollar-cost averaging program can
help you ride out market ups and downs. Before beginning a dollar-cost averaging
program, you should assess your ability to continue purchasing through periods
of low prices levels, since such a program involves continuous investment
regardless of fluctuating price levels.
Consider this dollar-cost averaging program.
The investor began a $200 per month dollar-cost averaging program. In the first
five months, a total of $1000 was invested and 24 shares were purchased at an
average price per share of $42.67. However, when you calculate the average cost
per share paid, you see that the investor actually paid only $41.67 per share
($1000 divided by 24 shares = $41.67 per share). By investing the same amount
every month, the investor was able to lower the average cost per share and take
advantage of fluctuation in share prices.
================================================================================
Dollar Amount Invested Price Paid Per Share Number of Shares Purchased
- --------------------------------------------------------------------------------
$200 $40.00 5
- --------------------------------------------------------------------------------
$200 $50.00 4
- --------------------------------------------------------------------------------
$200 $33.33 6
- --------------------------------------------------------------------------------
$200 $40.00 5
- --------------------------------------------------------------------------------
$200 $50.00 4
- --------------------------------------------------------------------------------
Total $1000 Average $42.67 per share Total 24 shares
================================================================================
Diversification helps distribute the risk in your investment portfolio. When you
invest in a variety of asset classes, chances are that some of them will perform
well even when others perform poorly. Investments which move in opposite
directions are said to be negatively correlated. By diversifying your portfolio,
you eliminate many of the worries associated with having all your investment
dollars in a single asset class. The following shows how investing in different
asset classes (which are negatively correlated) can help reduce portfolio
volatility.
Time
O X O X O X O X O
O X X O O X X O O X X O O X X O
Value X O X O X O X O
X O O X X O O X X O O X X O O X
X O X O X O X O X
During times of market volatility, we suggest you remember the hard-learned
lessons of 1987: maintain your long-term perspective, invest regularly and
consistently and diversify. If you keep these in mind, the chances are good that
you'll enjoy greater success as an investor.
Each example shown here is for illustrative purposes only. They are not meant to
represent the actual performance or share price of any Princor fund. Past
performance provides no assurance of future results. Investment return and
principal values will fluctuate so that, when redeemed, shares may be worth more
or less than the original cost.
<PAGE>
<TABLE>
<CAPTION>
October 31, 1997
STATEMENTS OF ASSETS AND LIABILITIES
Princor Princor Princor Capital Princor Princor Princor
Balanced Blue Chip Accumulation Emerging Growth Growth Utilities
GROWTH FUNDS (DOMESTIC) Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc.
<S> <C> <C> <C> <C> <C> <C>
Investment in securities -- at cost....... $ 96,234,653 $ 96,660,150 $402,289,056 $282,800,379 $232,575,765 $62,461,957
Assets
Investment in securities -- at value (Note 4)$106,554,104 $111,007,205 $532,992,503 $427,238,488 $368,916,504 $72,773,934
Cash.................................... 2,000 1,491 1,450 6,582 34,814 2,000
Receivables:
Dividends and interest................. 576,197 122,929 891,844 368,679 276,924 358,515
Investment securities sold.............. -- 2,330,949 6,388,110 -- 6,624,700 --
Capital Stock sold...................... 134,132 378,067 669,764 557,152 410,163 18,284
Other assets............................... 3,796 545 24,412 2,129 8,638 432
Total Assets 107,270,229 113,841,186 540,968,083 428,173,030 376,271,743 73,153,165
Liabilities
Accrued expenses........................... 137,624 86,020 351,865 357,440 324,347 92,514
Payables:
Investment securities purchased......... -- -- 484,210 4,062,365 -- 191,656
Capital Stock reacquired................ 66,970 3,659 122,167 85,325 55,834 53,619
Total Liabilities 204,594 89,679 958,242 4,505,130 380,181 337,789
Net Assets Applicable to
Outstanding Shares ....................... $107,065,635 $113,751,507 $540,009,841 $423,667,900 $375,891,562 $72,815,376
Net Assets Consist of:
Capital Stock.............................. $ 70,956 $ 56,307 $ 182,006 $ 93,622 $ 74,563 $ 58,028
Additional paid-in capital................. 89,151,738 87,123,080 360,956,197 268,648,191 227,449,485 62,064,393
Accumulated undistributed net
investment income....................... 75,127 79,494 3,270,973 36,047 813,820 445,581
Accumulated undistributed net realized
gain (loss) on investment transactions.. 7,448,363 12,145,571 44,897,218 10,451,931 11,212,955 (64,603)
Net unrealized appreciation of investments. 10,319,451 14,347,055 130,703,447 144,438,109 136,340,739 10,311,977
Total Net Assets $107,065,635 $113,751,507 $540,009,841 $423,667,900 $375,891,562 $72,815,376
Capital Stock (par value: $.01 a share):
Shares authorized.......................... 100,000,000 100,000,000 100,000,000 100,000,000 100,000,000 1,000,000,000
Net Asset Value Per Share:
Class A: Net Assets....................... $85,436,157 $79,984,970 $494,444,176 $346,666,076 $317,386,196 $64,365,733
Shares issued and outstanding. 5,655,291 3,954,855 16,655,239 7,648,242 6,293,303 5,128,206
Net asset value per share...... $15.11 $20.22 $29.69 $45.33 $50.43 $12.55
Maximum offering price per share(a) $15.86 $21.23 $31.17 $47.59 $52.94 $13.18
Class B: Net Assets....................... $11,884,919 $18,264,614 $27,240,130 $59,553,656 $42,240,638 $6,937,262
Shares issued and outstanding. 789,927 906,999 923,000 1,327,081 838,793 553,485
Net asset value per share(b)... $15.05 $20.14 $29.51 $44.88 $50.36 $12.53
Class R: Net Assets....................... $9,744,559 $15,501,923 $18,325,535 $17,448,168 $16,264,728 $1,512,381
Shares issued and outstanding. 650,354 768,856 622,398 386,887 324,239 121,119
Net asset value per share...... $14.98 $20.16 $29.44 $45.10 $50.16 $12.49
<FN>
(a) Maximum offering price is equal to net asset value plus a front-end
sales charge of 4.75% of the offering price or 4.99% of the net asset
value.
(b) Redemption price per share is equal to net asset value less any
applicable contingent deferred sales charge.
</FN>
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
Year Ended October 31, 1997
STATEMENTS OF OPERATIONS
Princor Princor Princor Capital Princor Princor Princor
Balanced Blue Chip Accumulation Emerging Growth Growth Utilities
GROWTH FUNDS (DOMESTIC) Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc.
Net Investment Income
Income:
<S> <C> <C> <C> <C> <C> <C>
Dividends............................. $ 1,145,579 $ 1,744,320 $ 12,408,674 $ 2,487,286 $ 3,616,275 $3,610,326
Interest............................... 2,328,983 262,357 572,572 2,495,557 1,972,348 45,428
Total Income 3,474,562 2,006,677 12,981,246 4,982,843 5,588,623 3,655,754
Expenses:
Management and investment advisory
fees (Note 3)....................... 556,009 417,958 2,031,143 2,004,305 1,443,120 436,296
Distribution and shareholder servicing
fees (Note 1 and 3)................. 328,952 329,357 824,254 1,059,596 851,065 223,460
Transfer and administrative services
(Note 1 and 3)...................... 364,442 402,003 837,825 1,308,608 1,121,832 230,151
Registration fees (Note 1)............. 49,872 45,038 61,183 88,950 73,665 42,365
Custodian fees ........................ 5,332 4,232 4,749 6,557 5,044 2,862
Auditing and legal fees ............... 6,251 5,899 8,980 8,057 8,266 6,338
Directors' fees ....................... 7,268 7,268 7,566 7,642 7,567 7,268
Other ................................. 21,850 21,023 69,333 79,342 69,999 18,011
Total Gross Expenses 1,339,976 1,232,778 3,845,033 4,563,057 3,580,558 966,751
Less: Management and investment
advisory fees waived................ -- -- -- -- -- 79,048
Total Net Expenses 1,339,976 1,232,778 3,845,033 4,563,057 3,580,558 887,703
Net Investment Income 2,134,586 773,899 9,136,213 419,786 2,008,065 2,768,051
Net Realized and Unrealized
Gain on Investments
Net realized gain from investment
transactions 7,456,891 12,146,669 44,903,311 10,456,322 11,213,338 1,274,214
Change in unrealized appreciation/
depreciation of investments............ 3,601,722 617,291 57,109,297 80,084,426 65,942,389 5,564,046
Net Realized and Unrealized
Gain (Loss) on Investments 11,058,613 12,763,960 102,012,608 90,540,748 77,155,727 6,838,260
Net Increase in Net Assets
Resulting from Operations $13,193,199 $13,537,859 $111,148,821 $90,960,534 $79,163,792 $9,606,311
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
Years Ended October 31, Except as Noted
STATEMENTS OF CHANGES IN NET ASSETS
Princor Princor
Balanced Blue Chip
GROWTH FUNDS (DOMESTIC) Fund, Inc. Fund, Inc.
1997 1996 1997 1996
Operations
<S> <C> <C> <C> <C>
Net investment income ............................ $ 2,134,586 $ 1,869,747 $ 773,899 $ 562,602
Net realized gain from investment transactions.... 7,456,891 6,825,321 12,146,669 1,456,128
Change in unrealized appreciation/
depreciation of investments................... 3,601,722 751,917 617,291 4,958,684
Net Increase in Net Assets
Resulting from Operations 13,193,199 9,446,985 13,537,859 6,977,414
Dividends and Distributions to Shareholders From
net investment income:
Class A....................................... (1,962,353) (1,977,960) (664,560) (597,121)
Class B ...................................... (152,316) (80,727) (25,978) (28,747)
Class R....................................... (102,915) (3,345)a (42,305) (3,612)a
From net realized gain on investments:
Class A ...................................... (6,130,810) (2,798,187) (1,212,100) (811,021)
Class B ...................................... (566,868) (71,791) (188,032) (46,234)
Class R....................................... (112,915) -- (55,610) --
Total Dividends and Distributions (9,028,177) (4,932,010) (2,188,585) (1,486,735)
Capital Share Transactions (Note 5)
Shares sold:
Class A....................................... 21,449,772 14,014,587 34,250,614 16,456,171
Class B ...................................... 5,741,685 4,729,247 11,442,392 4,623,404
Class R....................................... 9,101,517 894,478a 14,353,877 1,584,827a
Shares issued in reinvestment of dividends and
distributions:
Class A....................................... 7,361,276 3,967,925 1,791,093 1,107,738
Class B ...................................... 712,904 151,751 211,943 74,660
Class R....................................... 215,722 3,345a 97,891 3,610a
Shares redeemed:
Class A ...................................... (17,550,684) (8,463,657) (9,512,640) (13,383,349)
Class B ...................................... (943,794) (499,765) (1,463,536) (370,763)
Class R ...................................... (846,178) (42,847)a (1,259,802) (40,315)a
Net Increase (Decrease) in Net Assets
from Capital Share Transactions 25,242,220 14,755,064 49,911,832 10,055,983
Total Increase 29,407,242 19,270,039 61,261,106 15,546,662
Net Assets
Beginning of year................................. 77,658,393 58,388,354 52,490,401 36,943,739
End of year (including undistributed net
investment income as set forth below)......... $107,065,635 $ 77,658,393 $113,751,507$ 52,490,401
Undistributed Net Investment Income .......... $ 75,127 $ 158,125 $ 79,494 $ 38,438
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended October 31, Except as Noted
STATEMENTS OF CHANGES IN NET ASSETS
GROWTH FUNDS (Domestic)
Princor Capital Princor
Accumulation Emerging Growth
Fund, Inc. Fund, Inc.
1997 1996 1997 1996
Operations
<S> <C> <C> <C> <C>
Net investment income ............................ $ 9,136,213 $ 7,096,846 $ 419,786 $ 824,482
Net realized gain from investment transactions.... 44,903,311 62,796,872 10,456,322 8,797,569
Change in unrealized appreciation/
depreciation of investments................... 57,109,297 21,196,743 80,084,426 21,625,120
Net Increase in Net Assets
Resulting from Operations 111,148,821 91,090,461 90,960,534 31,247,171
Dividends and Distributions to Shareholders From
net investment income:
Class A....................................... (8,406,934) (6,575,207) (741,359) (769,946)
Class B ...................................... (131,991) (40,153) (4,780) (5,762)
Class R....................................... (86,476) (377)a (594) (100)a
From net realized gain on investments:
Class A ...................................... (60,902,870) (20,944,284) (7,708,737) (3,664,659)
Class B ...................................... (1,471,954) (159,788) (989,543) (234,733)
Class R....................................... (338,789) -- (95,503) --
Total Dividends and Distributions (71,339,014) (27,719,809) (9,540,516) (4,675,200)
Capital Share Transactions (Note 5)
Shares sold:
Class A....................................... 57,963,775 38,526,395 76,822,359 73,310,489
Class B ...................................... 15,764,589 6,857,184 24,764,751 18,956,446
Class R....................................... 16,511,369 1,747,855a 14,520,116 2,007,738a
Shares issued in reinvestment of dividends and
distributions:
Class A....................................... 68,083,831 27,060,108 8,245,913 4,310,643
Class B ...................................... 1,583,642 199,814 981,686 236,262
Class R....................................... 425,209 377a 96,080 100a
Shares redeemed:
Class A ...................................... (103,901,296) (31,940,130) (36,719,008) (23,052,083)
Class B ...................................... (1,795,682) (468,502) (4,945,062) (1,969,387)
Class R ...................................... (1,636,526) (57,097)a (1,479,854) (19,892)a
Net Increase (Decrease) in Net Assets
from Capital Share Transactions 52,998,911 41,926,004 82,286,981 73,780,316
Total Increase 92,808,718 105,296,656 163,706,999 100,352,287
Net Assets
Beginning of year................................. 447,201,123 341,904,467 259,960,901 159,608,614
End of year (including undistributed net
investment income as set forth below)......... $ 540,009,841 $447,201,123 $423,667,900 $259,960,901
Undistributed Net Investment Income .......... $ 3,270,973 $ 2,760,161 $ 36,047 $ 373,519
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Princor Princor
Growth Utilities
GROWTH FUNDS (Domestic) Fund, Inc. Fund, Inc.
1997 1996 1997 1996
Operations
<S> <C> <C> <C> <C>
Net investment income ............................ $ 2,008,065 $ 1,998,350 $ 2,768,051 $ 2,763,362
Net realized gain from investment transactions.... 11,213,338 2,443,260 1,274,214 1,903,036
Change in unrealized appreciation/
depreciation of investments................... 65,942,389 15,785,039 5,564,046 907,722
Net Increase in Net Assets
Resulting from Operations 79,163,792 20,226,649 9,606,311 5,574,120
Dividends and Distributions to Shareholders From
net investment income:
Class A....................................... (1,853,254) (1,861,151) (2,431,314) ( 2,523,991)
Class B ...................................... (14,911) (18,683) (183,927) (158,855)
Class R....................................... (8,766) (57)a (28,627) (1,864)a
From net realized gain on investments:
Class A ...................................... (2,178,840) (5,595,988) -- --
Class B ...................................... (232,571) (291,406) -- --
Class R....................................... (27,607) -- -- --
Total Dividends and Distributions (4,315,949) (7,767,285) (2,643,868) (2,684,710)
Capital Share Transactions (Note 5)
Shares sold:
Class A....................................... 54,732,684 57,801,956 5,270,881 11,274,737
Class B ...................................... 14,638,635 16,237,487 2,196,079 3,349,548
Class R....................................... 13,558,095 2,064,878a 1,364,313 308,620a
Shares issued in reinvestment of dividends and
distributions:
Class A....................................... 3,915,241 7,227,308 2,147,554 2,196,843
Class B ...................................... 244,569 308,579 165,257 146,631
Class R....................................... 36,360 57a 28,603 1,864a
Shares redeemed:
Class A ...................................... (35,146,370) (22,732,322) (15,663,584) (15,770,532)
Class B ...................................... (4,184,396) (1,567,488) (1,595,827) (2,007,039)
Class R ...................................... (1,144,394) (13,380)a (272,901) (2,894)a
Net Increase (Decrease) in Net Assets
from Capital Share Transactions 46,650,424 59,327,075 (6,359,625) (502,222)
Total Increase 121,498,267 71,786,439 602,818 2,387,188
Net Assets
Beginning of year................................. 254,393,295 182,606,856 72,212,558 69,825,370
End of year (including undistributed net
investment income as set forth below)......... $375,891,562 $254,393,295 $ 72,815,376 $ 72,212,558
Undistributed Net Investment Income .......... $ 813,820 $ 682,686 $ 445,581 $ 325,361
<FN>
a Period from February 27, 1996 (date operations commenced) through
October 31, 1996.
</FN>
</TABLE>
See accompanying notes.
<PAGE>
October 31, 1997
NOTES TO FINANCIAL STATEMENTS
Princor Balanced Fund, Inc.
Princor Blue Chip Fund, Inc.
Princor Capital Accumulation Fund, Inc.
Princor Emerging Growth Fund, Inc.
Princor Growth Fund, Inc.
Princor Utilities Fund, Inc.
Note 1 -- Significant Accounting Policies
Princor Balanced Fund, Inc., Princor Blue Chip Fund, Inc., Princor Capital
Accumulation Fund, Inc., Princor Emerging Growth Fund, Inc., Princor Growth
Fund, Inc. and Princor Utilities Fund, Inc. (the "Domestic Growth Funds") are
registered under the Investment Company Act of 1940, as amended, as open-end
diversified management investment companies and operate in the mutual fund
industry.
Class A shares generally are sold with an initial sales charge based on
declining rates and certain purchases may be subject to a contingent deferred
sales charge ("CDSC"). Class B shares are sold without an initial sales charge,
but are subject to a declining CDSC on certain redemptions redeemed within six
years of purchase. Class R shares are sold without an initial sales charge and
are not subject to a CDSC. Class B shares and Class R shares bear a higher
ongoing distribution fee than Class A shares. Class B shares automatically
convert into Class A shares, based on relative net asset value (without a sales
charge) after seven years. Class R shares automatically convert into Class A
shares, based on relative net asset value (without a sales charge) after four
years. All classes of shares for each fund represent interests in the same
portfolio of investments, and will vote together as a single class except where
otherwise required by law or as determined by each of the Domestic Growth Funds'
respective Board of Directors. In addition, the Board of Directors of each fund
declare separate dividends on each class of shares.
The Domestic Growth Funds allocate daily all income, expenses (other than
class-specific expenses), and realized and unrealized gains or losses to each
class of shares based upon the relative proportion of the value of shares
outstanding of each class. Expenses specifically attributable to a particular
class are charged directly to such class. Class-specific expenses charged to
each class during the year ended October 31, 1997, which are included in the
corresponding captions of the Statement of Operations, were as follows:
<TABLE>
<CAPTION>
Distribution and Transfer and
Shareholder Servicing Fees Administrative Services Registration Fees
Class A Class B Class R Class A Class B Class R Class A Class B Class R
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Princor Balanced Fund, Inc. $207,135 $ 82,018 $39,799 $110,153 $17,336 $ 9,330 $10,880 $ 9,485 $7,484
Princor Blue Chip Fund, Inc. 158,562 109,019 61,776 87,710 22,712 11,712 8,361 9,429 7,468
Princor Capital Accumulation Fund, Inc. 583,332 166,429 74,493 305,637 32,691 16,025 14,522 9,855 7,085
Princor Emerging Growth Fund, Inc. 717,159 272,547 69,890 435,639 76,306 18,022 25,017 12,483 7,775
Princor Growth Fund, Inc. 587,173 193,368 70,524 381,849 64,214 16,328 16,821 10,765 8,624
Princor Utilities Fund, Inc. 163,975 52,578 6,907 96,790 9,820 2,843 13,435 7,140 7,099
</TABLE>
The Domestic Growth Funds value securities for which market quotations are
readily available at market value, which is determined using the last reported
sale price or, if no sales are reported, as is regularly the case for some
securities traded over-the-counter, the last reported bid price. When reliable
market quotations are not considered to be readily available, which may be the
case, for example, with respect to certain debt securities and preferred stocks,
the investments are valued by using market quotations, prices provided by market
makers or estimates of market values obtained from yield data and other factors
relating to instruments or securities with similar characteristics in accordance
with procedures established in good faith by each fund's Board of Directors.
Securities with remaining maturities of 60 days or less are valued at amortized
cost, which approximates market.
The Domestic Growth Funds record investment transactions generally one day after
the trade date, except for short-term investment transactions which are recorded
generally on the trade date. The identified cost basis has been used in
determining the net realized gain or loss from investment transactions and
unrealized appreciation or depreciation of investments. The Domestic Growth
Funds record dividend income on the ex-dividend date. Interest income is
recognized on an accrual basis.
The Domestic Growth Funds may, pursuant to an exemptive order issued by the
Securities and Exchange Commission, transfer uninvested funds into a joint
trading acount. The order permits the Domestic Growth Funds' cash balances to be
deposited into a single joint account along with the cash of other registered
investment companies managed by Princor Management Corporation. These balances
may be invested in one or more short-term instruments.
Dividends and distributions to shareholders are recorded on the ex-dividend
date. Dividends and distributions to shareholders from net investment income and
net realized gain from investments are determined in accordance with federal tax
regulations, which may differ from generally accepted accounting principles.
Permanent book and tax basis differences are reclassified within the capital
accounts based on their federal tax-basis treatment; temporary differences do
not require reclassification. Reclassifications made for the years ended October
31, 1997 and 1996 were not material.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2 -- Federal Income Taxes
No provision for federal income taxes is considered necessary because each fund
is qualified as a "regulated investment company" under the Internal Revenue Code
and intends to distribute each year substantially all of its net investment
income and realized capital gains to shareholders. The cost of investments for
federal income tax reporting purposes is approximately the same as that for
financial reporting purposes.
At October 31, 1997, Princor Utilities Fund, Inc. had a net capital loss
carryforward of approximately $65,000 which expires in 2003.
Note 3 -- Management Agreement and Transactions With Affiliates
The Domestic Growth Funds have agreed to pay investment advisory and management
fees to Princor Management Corporation (wholly owned by Princor Financial
Services Corporation, a subsidiary of Principal Mutual Life Insurance
Company)(the "Manager") computed at an annual percentage rate of each fund's
average daily net assets. The annual rate used in this calculation for the
Domestic Growth Funds is as follows:
Net Asset Value of Funds
(in millions)
First Next Next Next Over
$100 $100 $100 $100 $400
Princor Balanced Fund, Inc. 0.60% 0.55% 0.50% 0.45% 0.40%
Princor Blue Chip Fund, Inc. 0.50% 0.45% 0.40% 0.35% 0.30%
Princor Capital Accumulation Fund, Inc. 0.50% 0.45% 0.40% 0.35% 0.30%
Princor Emerging Growth Fund, Inc. 0.65% 0.60% 0.55% 0.50% 0.45%
Princor Growth Fund, Inc. 0.50% 0.45% 0.40% 0.35% 0.30%
Princor Utilities Fund, Inc. 0.60% 0.55% 0.50% 0.45% 0.40%
The Domestic Growth Funds also reimburse the Manager for transfer and
administrative services, including the cost of accounting, data processing,
supplies and other services rendered.
The Manager voluntarily waives a portion of its fee for the Princor Utilities
Fund, Inc. The waivers are in amounts that maintain total operating expenses
within certain limits. The limits are expressed as a percentage of average net
assets attributable to each class on an annualized basis during the reporting
period. The amount waived and the operating limits, which were maintained at or
below those shown, are as follows:
Amount
Waived
Year Ended Year Ended Expense
October 31, 1997 October 31, 1996 Limit
Princor Utilities Fund, Inc.:
Class A $65,940 $54,932 1.15%
Class B 3,753 6,690 1.90%
Class R 9,355 --(a) 1.65%
(a) Period from February 27, 1996, (date operations commenced) through
October 31, 1996.
The Manager intends to continue its voluntary waiver and, if necessary, pay
expenses normally payable by Princor Utilities Fund, Inc. through October 31,
1998.
Princor Financial Services Corporation, as principal underwriter, receives
proceeds of any CDSC on certain Class A and Class B share redemptions. The
charge is based on declining rates which for Class A shares begin at .75%, and
for Class B shares at 4.00%, of the lesser of the current market value or the
cost of shares being redeemed. Princor Financial Services Corporation also
retains sales charges on sales of Class A shares based on declining rates which
begin at 4.75% of the offering price. The aggregate amount of these charges
retained, by fund, for the period ended October 31, 1997 were as follows:
Class A Class B
Princor Balanced Fund, Inc. $ 497,949 $20,396
Princor Blue Chip Fund, Inc. 797,403 18,800
Princor Capital Accumulation Fund, Inc. 1,355,878 28,117
Princor Emerging Growth Fund, Inc. 2,073,917 78,747
Princor Growth Fund, Inc. 1,466,748 81,948
Princor Utilities Fund, Inc. 141,999 27,905
No brokerage commissions were paid by the Domestic Growth Funds to Princor
Financial Services Corporation during the periods ended October 31, 1997 and
1996. Brokerage commissions were paid to other affiliates by the following
funds:
Year Ended Year Ended
October 31, October 31,
1997 1996
Princor Balanced Fund, Inc. $15,194 $ 555
Princor Blue Chip Fund, Inc. 21,243 420
Princor Capital Accumulation Fund, Inc. 17,016 25,993
Princor Emerging Growth Fund, Inc. 3,750 500
Princor Growth Fund, Inc. 4,637 --
Princor Utilities Fund, Inc. 4,665 2,217
The Domestic Growth Funds bear distribution and shareholder servicing fees with
respect to Class A shares computed at an annual rate of up to 0.25% of the
average daily net assets attributable to Class A shares of each fund. Each of
the Domestic Growth Funds adopted a distribution plan with respect to Class B
shares that provides for distribution and shareholder servicing fees computed at
an annual rate of up to 1.00% of the average daily net assets attributable to
Class B shares of each fund. Each of the Domestic Growth Funds adopted a
distribution plan with respect to Class R shares that provides for distribution
and shareholder servicing fees computed at an annual rate of up to .75% of the
average daily net assets attributable to Class R shares of each fund.
Distribution and shareholder servicing fees are paid to Princor Financial
Services Corporation; a portion of the fees are subsequently remitted to retail
dealers. Pursuant to the distribution agreements, fees unused by the principal
underwriter at the end of the fiscal year are returned to the Domestic Growth
Funds.
At October 31, 1997, Principal Mutual Life Insurance Company, subsidiaries of
Principal Mutual Life Insurance Company and benefit plans sponsored on behalf of
Principal Mutual Life Insurance Company owned shares of the Domestic Growth
Funds as follows:
Class A Class B Class R
Princor Balanced Fund, Inc. 59,946 102 2,437
Princor Blue Chip Fund, Inc. 64,477 89 64
Princor Capital Accumulation Fund, Inc. 5,331,983 64 47
Princor Emerging Growth Fund, Inc. 46,739 44 31
Princor Growth Fund, Inc. 37,577 36 26
Princor Utilities Fund, Inc. 85,553 121 90
Note 4 -- Investment Transactions
For the year ended October 31, 1997, the cost of investment securities purchased
and proceeds from investment securities sold (not including short-term
investments and U.S. government securities) by the Domestic Growth Funds were as
follows:
Purchases Sales
Princor Balanced Fund, Inc. $ 30,297,613 $ 24,321,006
Princor Blue Chip Fund, Inc. 90,170,258 43,742,031
Princor Capital Accumulation Fund, Inc. 151,641,157 169,985,349
Princor Emerging Growth Fund, Inc. 106,456,640 28,626,054
Princor Growth Fund, Inc. 52,941,105 45,300,042
Princor Utilities Fund, Inc. 16,017,778 22,025,002
At October 31, 1997, net unrealized appreciation of investments by the Domestic
Growth Funds was composed of the following:
<TABLE>
<CAPTION>
Net Unrealized
Gross Unrealized Appreciation
Appreciation (Depreciation) of Investments
<S> <C> <C> <C>
Princor Balanced Fund, Inc. $ 12,708,281 $ (2,388,830) $ 10,319,451
Princor Blue Chip Fund, Inc. 17,303,715 (2,956,660) 14,347,055
Princor Capital Accumulation
Fund, Inc. 136,706,857 (6,003,410) 130,703,447
Princor Emerging Growth
Fund, Inc. 163,534,559 (19,096,450) 144,438,109
Princor Growth Fund, Inc. 142,676,155 (6,335,416) 136,340,739
Princor Utilities Fund, Inc. 11,430,685 (1,118,708) 10,311,977
</TABLE>
At October 31, 1997, the Domestic Growth Funds held the following securities
which may require registration under the Securities Act of 1933, or an exemption
therefrom, in order to effect a sale in the ordinary course of business.
<TABLE>
<CAPTION>
Value at Value as a
Date of October 31, Percentage of
Security Description Acquisition Cost 1997 Net Assets
<S> <C> <C> <C> <C> <C>
Princor Emerging Ciba-Geigy Corp.; Exchangeable
Growth Fund, Inc. Subordinated Debentures 3/20/91 $350,000 $ 368,375 .09%
Sierra On Line;
Convertible Subordinated Debentures 8/15/94 458,750 1,961,875 .46
8/17/94 447,125 1,922,638 .46
4,252,888 1.01
Princor Growth Ciba-Geigy Corp.; Exchangeable
Fund, Inc. Subordinated Debentures 3/20/91 500,000 526,250 .14
</TABLE>
The Domestic Growth Funds' investments are with various issuers in various
industries. The Schedules of Investments contained herein summarize
concentrations of credit risk by issuer and industry.
Note 5 -- Capital Share Transactions
Transactions in Capital Stock by fund were as follows:
<TABLE>
<CAPTION>
Princor Princor Blue Princor Capital
Balanced Fund, Inc. Chip Fund, Inc. Accumulation Fund, Inc.
Year Ended October 31, 1997:
Shares sold:
<S> <C> <C> <C>
Class A ......................................... 1,484,901 1,757,696 2,094,307
Class B ......................................... 394,660 585,899 569,099
Class R ......................................... 632,661 734,050 600,469
Shares issued in reinvestment of dividends and
distributions:
Class A ........................................... 521,642 97,219 2,633,617
Class B ........................................... 50,747 11,785 61,682
Class R ......................................... 15,156 5,263 16,393
Shares redeemed:
Class A ......................................... (1,197,833) (495,337) (3,785,181)
Class B ......................................... (65,006) (73,924) (64,340)
Class R ......................................... (57,684) (62,702) (58,005)
Net Increase 1,779,244 2,559,949 2,068,041
Year Ended October 31, 1996, Except as Noted:
Shares sold:
Class A ......................................... 1,006,927 1,010,928 1,522,381
Class B ......................................... 342,259 285,616 271,398
Class R* ........................................ 62,977 94,417 65,641
Shares issued in reinvestment of dividends and
distributions:
Class A ........................................... 289,049 69,998 1,127,785
Class B ........................................... 11,027 4,760 8,361
Class R* ........................................ 234 214 15
Shares redeemed:
Class A ......................................... (606,332) (828,161) (1,274,731)
Class B ......................................... (35,859) (22,683) (18,454)
Class R* ........................................ (2,990) (2,386) (2,115)
Net Increase 1,067,292 612,703 1,700,281
<FN>
* Period from February 27, 1996 (date operations commenced) through
October 31, 1996.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Princor Princor Princor
Emerging Growth Growth Utilities
Fund, Inc. Fund, Inc. Fund, Inc.
Year Ended October 31, 1997:
Shares sold:
<S> <C> <C> <C>
Class A ......................................... 1,925,742 1,188,640 442,282
Class B ......................................... 622,365 315,097 182,586
Class R .......................................... 363,949 296,077 114,303
Shares issued in reinvestment of dividends and
distributions:
Class A ........................................... 223,920 89,929 179,204
Class B ........................................... 27,006 5,779 13,766
Class R............................................ 2,629 863 2,382
Shares redeemed:
Class A ......................................... (920,261) (760,739) (1,312,610)
Class B ......................................... (125,040) (91,289) (133,160)
Class R ......................................... (36,211) (23,813) (23,006)
Net Increase (Decrease) 2,084,099 1,020,544 (534,253)
Year Ended October 31, 1996, Except as Noted:
Shares sold:
Class A ......................................... 2,182,164 1,486,767 985,437
Class B ......................................... 566,438 418,002 292,572
Class R* ......................................... 57,072 51,440 27,529
Shares issued in reinvestment of dividends and distributions:
Class A ........................................... 136,102 191,988 190,416
Class B ........................................... 7,537 8,274 12,720
Class R*........................................... 3 2 167
Shares redeemed:
Class A ......................................... (688,302) (587,050) (1,377,265)
Class B ......................................... (58,563) (40,235) (176,703)
Class R * ........................................ (555) (330) (256)
Net Increase (Decrease) 2,201,896 1,528,858 (45,383)
<FN>
* Period from February 27, 1996 (date operations commenced) through
October 31, 1996.
</FN>
</TABLE>
Note 6 -- Line of Credit
The Domestic Growth Funds participate with the other funds managed by Princor
Management Corporation in an unsecured joint line of credit with a bank, which
allows the funds to borrow up to $40,000,000, collectively. Borrowings are made
solely to facilitate the handling of unusual and/or unanticipated short-term
cash requirements. Interest is charged to each fund, based on its borrowings, at
a rate equal to the Fed Funds Rate plus .50%. Additionally, a commitment fee is
charged at the annual rate of .08% on the average unused portion of the line of
credit. The commitment fee is allocated among the participating funds in
proportion to their average net assets during each quarter. At October 31, 1997,
the Domestic Growth Funds had no outstanding borrowings under the line of
credit.
<PAGE>
October 31, 1997
SCHEDULES OF INVESTMENTS
GROWTH FUNDS (DOMESTIC)
PRINCOR BALANCED FUND, INC.
Shares
Held Value
Common Stocks (55.24%)
Auto & Home Supply Stores (1.13%)
AutoZone, Inc. 41,000(a)$ 1,212,063
Bakery Products (0.56%)
Sara Lee Corp. 11,800 603,275
Beverages (1.19%)
Pepsico, Inc. 24,300 894,544
Universal Foods Corp. 9,600 378,600
1,273,144
Commercial Banks (4.53%)
BankBoston Corp. 12,600 1,021,387
CoreStates Financial Corp. 11,600 843,900
First of America Bank Corp. 5,050 281,538
Fleet Financial Group, Inc. 13,200 848,925
Nationsbank Corp. 15,500 928,062
PNC Financial Corp. 19,400 921,500
4,845,312
Commercial Printing (0.54%)
R. R. Donnelley & Sons Co. 17,700 577,463
Communications Equipment (0.66%)
Allen Telecom, Inc. 11,100(a) 210,206
DSC Communications Corp. 20,500(a) 499,688
709,894
Computer & Data Processing
Services (3.20%)
Adobe Systems, Inc. 18,400 878,600
Computer Sciences Corp. 10,500(a) 744,844
Electronic Data Systems Corp. 33,400 1,292,162
First Data Corp. 17,400 505,688
Siebel Systems, Inc. 61(a) 2,476
3,423,770
Computer & Office Equipment (1.67%)
Hewlett-Packard Co. 10,300 635,381
International Business Machines Corp. 11,700 1,147,331
1,782,712
Consumer Products (1.95%)
Fortune Brands, Inc. 31,000 1,024,938
Philip Morris Cos., Inc. 11,700 463,612
UST, Inc. 19,900 595,756
2,084,306
Crude Petroleum & Natural Gas (1.43%)
Texaco, Inc. 26,800 1,525,925
Department Stores (0.86%)
Dillard's, Inc., Class A 23,900 917,163
Drug Stores & Proprietary Stores (0.47%)
Rite Aid Corp. 8,400 498,750
Drugs (3.85%)
Abbott Labs 7,100 435,319
American Home Products Corp. 13,500 1,000,687
Johnson & Johnson 15,300 877,838
Merck & Co., Inc. 9,200 821,100
Pharmacia & Upjohn, Inc. 31,100 987,425
4,122,369
Eating & Drinking Places (0.08%)
Tricon Global Restaurants, Inc. 2,660 80,631
Electric Services (2.26%)
Central & Southwest Corp. 48,900 1,054,406
Dominion Resources, Inc. 13,900 516,906
Houston Industries, Inc. 26,700 580,725
Potomac Electric Power Co. 12,000 269,250
2,421,287
Electrical Industrial Apparatus (0.87%)
Emerson Electric Co. 17,800 933,388
Electronic Distribution Equipment (0.50%)
General Electric Co. 8,300 535,869
Fats & Oils (1.03%)
Archer Daniels Midland Co. 49,708 1,106,003
Fire, Marine & Casualty
Insurance (0.55%)
General Re Corp 3,000 591,563
General Industrial Machinery (0.63%)
Pall Corp. 32,500 672,344
Grain Mill Products (0.99%)
Ralston-Ralston Purina Group 11,800 1,059,050
Greeting Cards (0.85%)
American Greetings Corp. 26,100 905,344
Grocery Stores (3.80%)
Albertson's, Inc. 40,200 1,482,375
American Stores Co. 43,200 1,109,700
Sysco Corp. 37,000 1,480,000
4,072,075
Household Furniture (0.82%)
Masco Corp. 20,100 881,887
Industrial Inorganic Chemicals (0.85%)
Dow Chemical Co. 6,800 617,100
Eastman Chemical Co. 4,850 289,181
906,281
Jewelry, Silverware &
Plated Ware (0.18%)
Jostens, Inc. 8,400 195,825
Life Insurance (0.87%)
Lincoln National Corp. 13,600 935,000
Management & Public Relations (1.36%)
Cognizant Corp. 20,800 815,100
Dun & Bradstreet Corp. 22,500 642,656
1,457,756
Meat Products (0.82%)
Tyson Foods, Inc. 46,350 874,856
Medical Instruments & Supplies (0.96%)
St. Jude Medical, Inc. 33,850(a) 1,026,078
Medical Service & Health
Insurance (1.91%)
AON Corp. 11,400 614,888
Foundation Health Systems, Inc.,
Class A 28,550(a) 820,812
Pacificare Health Systems, Inc.,
Class B 9,500(a) 615,125
2,050,825
Metal Forgings & Stampings (0.54%)
Newell Co. 15,100 579,463
Miscellaneous Electrical Equipment &
Supplies (0.51%)
Motorola, Inc. 8,800 543,400
Miscellaneous Shopping Goods
Stores (1.59%)
Toys 'R' Us, Inc. 49,900(a) 1,699,719
Motor Vehicles, Parts &
Supplies (1.13%)
Grainger (W. W.), Inc. 13,800 1,206,637
Paper Mills (1.49%)
Kimberly Clark Corp. 30,700 1,594,481
Petroleum Refining (3.34%)
Amoco Corp. 6,700 614,306
Atlantic Richfield Co. 17,200 1,415,775
Exxon Corp. 25,200 1,548,225
3,578,306
Plastic Materials & Synthetics (0.11%)
Wellman, Inc. 5,900 119,844
Rubber & Plastics Footwear (0.65%)
Nike, Inc. 14,900 700,300
Sanitary Services (1.44%)
Browning-Ferris Industries, Inc. 16,500 536,250
Waste Management, Inc. 43,300 1,012,137
1,548,387
Security & Commodity
Exchanges (0.34%)
Nextlevel Systems 27,000(a) 364,500
Telephone Communication (1.37%)
AT&T Corp. 13,800 675,338
GTE Corp. 18,600 789,337
1,464,675
Toys & Sporting Goods (0.69%)
Hasbro, Inc. 25,400 736,600
Variety Stores (0.67%)
Wal-Mart Stores, Inc. 20,500 720,062
Total Common Stocks 59,138,582
Preferred Stocks (1.36%)
Motor Vehicles & Equipment (1.31%)
Ford Motor Co.
Series A Convertible 10,000 1,402,500
Paper Mills (0.05%)
Fort James Corp.
Exchangeable 1,000 57,500
Total Preferred Stocks 1,460,000
Principal
Amount Value
Bonds (1.74%)
Aircraft & Parts (0.24%)
Rohr Industries, Inc.
Convertible Subordinated
Debentures; 7.00%; 10/1/12 $ 260,000 $ 256,100
Blast Furnace & Basic
Steel Products (0.34%)
Quanex Corp. Convertible
Subordinated Debentures;
6.88%; 6/30/07 350,000 360,938
Engines & Turbines (0.46%)
Outboard Marine Corp. Convertible
Subordinated Debentures;
7.00%; 7/1/02 500,000 496,250
Petroleum Refining (0.55%)
Pennzoil Co. Senior Exchangeable
Debentures; 6.50%; 1/15/03 300,000 587,625
Trucking & Courier Services,
Except Air (0.15%)
Builders Transport, Inc. Convertible
Subordinated Debentures;
6.50%; 5/1/11 306,000(b) 163,710
Total Bonds 1,864,623
U.S. Government Treasury Notes & Bonds (37.74%)
Treasury Notes & Bonds (37.74%)
5.13%; 2/28/98 4,000,000 3,995,000
5.13%; 11/30/98 1,000,000 995,313
6.00%; 10/15/99 2,150,000 2,166,798
5.50%; 4/15/00 5,800,000 5,778,250
6.25%; 4/30/01 2,000,000 2,032,500
6.38%; 9/30/01 2,000,000 2,042,500
6.38%; 8/15/02 3,300,000 3,384,563
5.75%; 8/15/03 4,800,000 4,786,502
5.88%; 2/15/04 4,000,000 4,016,252
7.50%; 2/15/05 1,000,000 1,094,688
8.25%; 5/15/05 750,000 790,781
5.63%; 2/15/06 3,600,000 3,532,500
7.25%; 5/15/16 1,575,000 1,757,602
7.50%; 11/15/16 1,575,000 1,800,422
7.25%; 8/15/22 1,000,000 1,126,250
6.25%; 8/15/23 1,100,000 1,102,750
40,402,671
Commercial Paper (3.44%)
Personal Credit Institutions (3.44%)
Investment in Joint Trade Account;
Associates Corp.;
5.73%; 11/3/97 3,688,228 3,688,228
Total Portfolio Investments (99.52%) 106,554,104
Cash, receivables and other assets,
net of liabilities (0.48%) 511,531
Total Net Assets (100.00%) $107,065,635
(a) Non-income producing security - No dividend paid during the period.
(b) Non-income producing - Security in default.
PRINCOR BLUE CHIP FUND, INC.
Shares
Held Value
Common Stocks (95.88%)
Bakery Products (2.89%)
Sara Lee Corp. 64,200 $ 3,282,225
Beverages (5.74%)
Anheuser-Busch Cos., Inc. 81,900 3,270,881
Pepsico, Inc. 88,400 3,254,225
6,525,106
Commercial Banks (5.67%)
Banc One Corp. 63,345 3,301,858
J. P. Morgan & Co., Inc. 28,700 3,149,825
6,451,683
Computer & Office Equipment (5.89%)
Automatic Data Processing, Inc. 69,200 3,537,850
Hewlett-Packard Co. 51,300 3,164,569
6,702,419
Drugs (11.61%)
American Home Products Corp. 47,800 3,543,175
Johnson & Johnson 59,200 3,396,600
Merck & Co., Inc. 35,200 3,141,600
Pharmacia & Upjohn, Inc. 98,400 3,124,200
13,205,575
Eating & Drinking Places (2.81%)
McDonald's Corp. 71,300 3,195,131
Electrical Industrial Apparatus (2.79%)
Emerson Electric Co. 60,400 3,167,225
Electronic Distribution
Equipment (2.80%)
General Electric Co. 49,400 3,189,388
Fire, Marine & Casualty
Insurance (5.71%)
American International Group 31,950 3,260,897
Chubb Corp. 48,800 3,233,000
6,493,897
General Industrial Machinery (2.80%)
Pall Corp. 153,900 3,183,806
Grain Mill Products (2.95%)
Kellogg Co. 77,900 3,354,569
Grocery Stores (3.18%)
Sysco Corp. 90,500 3,620,000
Medical Instruments & Supplies (2.92%)
Becton, Dickinson & Co. 72,100 3,321,106
Metal Cans & Shipping
Containers (2.84%)
Crown Cork & Seal Co., Inc. 71,800 3,235,488
Miscellaneous Electrical Equipment &
Supplies (2.70%)
Motorola, Inc. 49,800 3,075,150
Miscellaneous Shopping Goods
Stores (3.05%)
Toys 'R' Us, Inc. 101,700(a) 3,464,156
Petroleum Refining (8.71%)
Exxon Corp. 52,700 3,237,756
Mobil Corp. 45,800 3,334,813
Royal Dutch Petroleum Co. ADR 63,300 3,331,162
9,903,731
Preserved Fruits & Vegetables (6.13%)
CPC International, Inc. 36,000 3,564,000
H. J. Heinz Co. 73,500 3,413,156
6,977,156
Sugar & Confectionary Products (2.96%)
Wrigley Wm. Jr. Co. 46,600 3,372,675
Telephone Communication (6.07%)
AT&T Corp. 77,100 3,773,081
GTE Corp. 73,700 3,127,644
6,900,725
Variety Stores (2.98%)
Wal-Mart Stores, Inc. 96,600 3,393,075
Women's Clothing Stores (2.68%)
The Limited, Inc. 129,200 3,044,275
Total Common Stocks 109,058,561
Principal
Amount Value
Commercial Paper (1.71%)
Personal Credit Institutions (1.71%)
Investment in Joint Trade Account;
Associates Corp.;
5.73%; 11/3/97 $1,948,644 $ 1,948,644
Total Portfolio Investments (97.59%) 111,007,205
Cash, receivables and other assets,
net of liabilities (2.41%) 2,744,302
Total Net Assets (100.00%) $113,751,507
(a) Non-income producing security - No dividend paid during the period.
PRINCOR CAPITAL ACCUMULATION FUND, INC.
Shares
Held Value
Common Stocks (95.47%)
Beverages (3.28%)
Anheuser Busch Cos., Inc. 285,000 $11,382,188
Pepsico, Inc. 119,700 4,406,456
Universal Foods Corp. 48,300 1,904,831
17,693,475
Combination Utility Services (0.97%)
Cinergy Corp. 158,800 5,240,400
Commercial Banks (19.49%)
Banc One Corp. 295,240 15,389,385
BankBoston Corp. 100,700 8,162,994
Comerica, Inc. 180,000 14,231,250
CoreStates Financial Corp. 248,000 18,042,000
First of America Bank Corp. 120,300 6,706,725
First Union Corp. 135,500 6,647,969
KeyCorp 229,500 14,042,531
Nationsbank Corp. 86,000 5,149,250
Summit Bancorp 385,500 16,456,031
Union Planters Corp. 8,200 486,362
105,314,497
Commercial Printing (1.18%)
R. R. Donnelley & Sons Co. 195,000 6,361,875
Communications Equipment (0.16%)
Allen Telecom, Inc. 44,700(a) 846,506
Computer & Office Equipment (2.68%)
Hewlett-Packard Co. 82,000 5,058,375
International Business
Machines Corp. 96,000 9,414,000
14,472,375
Crude Petroleum & Natural Gas (2.01%)
Texaco, Inc. 190,600 10,852,288
Drugs (6.47%)
Abbott Labs 65,000 3,985,313
American Home Products Corp. 153,000 11,341,125
Merck & Co., Inc. 85,000 7,586,250
Pharmacia & Upjohn, Inc. 378,000 12,001,500
34,914,188
Eating & Drinking Places (0.07%)
Tricon Global Restaurants, Inc. 11,970 362,841
Electric Services (4.08%)
Dominion Resources, Inc. 98,200 3,651,813
FPL Group, Inc. 85,100 4,398,606
Houston Industries, Inc. 530,000 11,527,500
Potomac Electric Power Co. 110,000 2,468,125
22,046,044
Electrical Industrial Apparatus (1.18%)
Emerson Electric Co. 121,394 6,365,598
Electronic Distribution Equipment (0.97%)
General Electric Co. 81,000 5,229,563
Farm & Garden Machinery (2.35%)
Tenneco, Inc. 282,000 12,672,375
Fats & Oils (1.82%)
Archer Daniels Midland Co. 441,000 9,812,250
General Industrial Machinery (2.05%)
Pall Corp. 534,000 11,047,125
Grain Mill Products (1.08%)
Ralston-Ralston Purina Group 65,000 5,833,750
Greeting Cards (2.37%)
American Greetings Corp. 369,100 12,803,156
Grocery Stores (3.56%)
Albertson's, Inc. 98,000 3,613,750
American Stores Co. 280,000 7,192,500
Sysco Corp. 210,500 8,420,000
19,226,250
Household Furniture (2.61%)
Masco Corp. 321,500 14,105,813
Industrial Inorganic Chemicals (1.19%)
Dow Chemical Co. 47,700 4,328,775
Eastman Chemical Co. 35,400 2,110,725
6,439,500
Jewelry, Silverware & Plated
Ware (0.38%)
Jostens, Inc. 88,200 2,056,163
Life Insurance (2.76%)
American General Corp. 292,000 14,892,000
Management & Public Relations (2.23%)
Cognizant Corp. 110,600 4,334,138
Dun & Bradstreet Corp. 270,600 7,729,012
12,063,150
Meat Products (1.15%)
Tyson Foods, Inc. 329,550 6,220,256
Medical Instruments & Supplies (0.74%)
St. Jude Medical, Inc. 131,450(a) 3,984,578
Medical Service & Health
Insurance (1.76%)
AON Corp. 111,900 6,035,606
Foundation Health Systems, Inc. 121,160(a) 3,483,350
9,518,956
Metal Forgings & Stampings (1.07%)
Newell Co. 150,000 5,756,250
Miscellaneous Electrical Equipment
& Supplies (0.88%)
Motorola, Inc. 77,300 4,773,275
Miscellaneous Shopping Goods
Stores (1.70%)
Toys 'R' Us, Inc. 270,100(a) 9,200,281
Motor Vehicles, Parts & Supplies (1.46%)
Grainger (W. W.), Inc. 90,300 7,895,606
Paper Mills (1.42%)
Kimberly Clark Corp. 147,800 7,676,363
Petroleum Refining (7.10%)
Atlantic Richfield Co. 179,600 14,783,325
Chevron Corp. 150,000 12,440,625
Exxon Corp. 180,800 11,107,900
38,331,850
Photographic Equipment &
Supplies (0.89%)
Eastman Kodak Co. 80,000 4,790,000
Rental of Railroad Cars (2.87%)
GATX Corp. 240,000 15,495,000
Sanitary Services (2.38%)
Browning-Ferris Industries, Inc. 395,000 12,837,500
Soap, Cleaners & Toilet Goods (0.97%)
Avon Products 80,000 5,240,000
Telephone Communication (5.01%)
AT&T Corp. 128,300 6,278,680
Southern New England Telecom 150,000 6,431,250
US West Communications Group 360,000 14,332,500
27,042,430
Variety Stores (1.13%)
Wal-Mart Stores, Inc. 174,000 6,111,750
Total Common Stocks 515,525,277
Principal
Amount Value
Commercial Paper (3.23%)
Personal Credit Institutions (3.23%)
Investment in Joint Trade Account;
Associates Corp.; 5.73%; 11/3/97 $17,467,226 $17,467,226
Total Portfolio Investments (98.70%) 532,992,503
Cash, receivables and other assets,
net of liabilities (1.30%) 7,017,338
Total Net Assets (100.00%) $540,009,841
(a) Non-Income producing security - No dividend paid during the period.
PRINCOR EMERGING GROWTH FUND, INC.
Shares
Held Value
Common Stocks (91.79%)
Blast Furnace & Basic Steel
Products (0.62%)
Lukens, Inc. 145,400 $ 2,617,200
Carpets & Rugs (0.57%)
Shaw Industries, Inc. 198,700 2,409,238
Chemicals & Allied Products (0.33%)
Sigma-Aldrich Corp. 40,400 1,419,050
Commercial Banks (10.85%)
Associated Banc Corp. 134,028 6,718,154
First Commerce Corp. 35,300 2,268,025
First Federal Capital Corp. 164,398 4,479,845
Independent Bank Corp. Michigan 66,200 2,134,962
Mercantile Bancorp., Inc. 195,529 9,495,377
Merchants Bancorp., Inc. 116,200 2,730,700
National City Corp. 32,300 1,929,925
Nationsbank Corp. 13,310 796,936
North Fork Bancorp., Inc. 241,458 7,107,920
Peoples Heritage Financial Group, Inc. 98,900 3,894,187
Princeton National Bancorp., Inc. 100,000 2,400,000
Summit Bancorp. 46,950 2,004,178
45,960,209
Commercial Printing (0.46%)
Merrill Corp. 87,200 1,951,100
Computer & Data Processing
Services (9.45%)
American Management Systems, Inc. 101,000(a) 2,184,125
Bitstream 198,000(a) 420,750
Cadence Design Systems, Inc. 163,600(a) 8,711,700
Cerner Corp. 238,900(a) 5,793,325
Choicepoint, Inc. 15,890(a) 591,902
HBO & Co. 138,000 6,003,000
Microsoft Corp. 50,500(a) 6,565,000
National Processing, Inc. 41,000(a) 417,687
Sunquest Information Systems, Inc. 169,300(a) 1,502,537
Synopsys, Inc. 201,900(a) 7,848,862
40,038,888
Computer & Office Equipment (5.73%)
3COM Corp. 85,000(a) 3,522,187
Ascend Communications 149,000(a) 4,023,000
Cabletron Systems, Inc. 140,000(a) 4,060,000
EMC Corp. 177,800(a) 9,956,800
Optika Imaging Systems 140,500(a) 632,250
Seagate Technology 9,410(a) 255,246
SystemSoft Corp. 232,200(a) 1,843,087
24,292,570
Construction & Related
Machinery (4.77%)
EVI, Inc. 314,800(a) 20,206,225
Crude Petroleum & Natural Gas (1.07%)
Devon Energy Corp. 101,000 4,519,750
Dairy Products (0.32%)
Dreyer's Grand Ice Cream, Inc. 32,700 1,352,963
Department Stores (1.43%)
Saks Holding 283,000(a) 6,049,125
Drugs (1.52%)
Alliance Pharmaceutical Corp. 48,600(a) 486,000
Forest Laboratories, Inc. 34,000(a) 1,572,500
Genzyme Corp. - General Division 15,130(a) 414,184
Genzyme Corp. - Tissue Repair 453(a) 3,907
Merck & Co., Inc. 16,970 1,514,572
Pharmacia & Upjohn, Inc. 75,700 2,403,475
Seragen, Inc. 60,000(a) 33,750
6,428,388
Electronic Components &
Accessories (5.98%)
Altera Corp. 100,000(a) 4,437,500
Intel Corp. 86,800 6,683,600
Linear Technology Corp. 99,900 6,281,213
Solectron Corp. 202,000(a) 7,928,500
25,330,813
Engineering & Architectural
Services (1.08%)
Paychex, Inc. 120,162 4,581,176
Fire, Marine & Casualty
Insurance (1.29%)
Berkley W. R. Corp. 132,750 5,459,344
Footwear, Except Rubber (0.91%)
Nine West Group, Inc. 109,200(a) 3,856,125
General Industrial Machinery (4.46%)
Flow International Corp. 187,200(a) 1,965,600
Kaydon Corp. 181,600 5,516,100
Pentair, Inc. 137,500 5,310,938
Roper Industries, Inc. 228,000 6,084,750
18,877,388
Grocery Stores (0.81%)
Casey's General Stores, Inc. 141,400 3,411,275
Holding Offices (0.63%)
ISB Financial Corp. 109,100 2,686,588
Hose, Belting, Gaskets & Packing (0.93%)
Mark IV Industries 162,168 3,932,574
Hospitals (1.64%)
Humana, Inc. 119,800(a) 2,515,800
Universal Health Services, Inc.,
Class B 101,000(a) 4,450,313
6,966,113
Household Appliances (1.11%)
Maytag Corp. 141,300 4,715,888
Industrial Machinery (1.31%)
Coltec Industries 276,900(a) 5,538,000
Insurance Agents, Brokers &
Services (1.47%)
Equifax, Inc. 200,000 6,212,500
Investment Offices (1.08%)
AMVESCAP PLC Sponsored ADR 69,460 4,566,995
Iron & Steel Foundries (0.54%)
Atchison Casting Corp. 111,100(a) 2,284,494
Laundry, Cleaning & Garment
Services (0.72%)
G&K Services, Inc., Class A 84,600 3,045,600
Measuring & Controlling Devices (1.20%)
ISCO, Inc. 30,935 297,745
Millipore Corp. 102,200 3,998,575
Photon Dynamics 129,300(a) 808,125
5,104,445
Meat Products (1.13%)
Michael Foods, Inc. 188,500 4,806,750
Medical Instruments & Supplies (1.99%)
Boston Scientific Corp. 68,100(a) 3,098,550
Steris Corp. 134,300(a) 5,338,425
8,436,975
Medical Service & Health
Insurance (4.67%)
Alternative Living Services 234,200(a) 5,737,900
Foundation Health Systems, Inc.,
Class A 202,340(a) 5,817,275
Orthofix International NV 156,200(a) 2,108,700
Pacificare Health Systems, Inc.,
Class A 188(a) 11,962
Pacificare Health Systems, Inc.,
Class B 30,591(a) 1,980,767
Patient Infosystems, Inc. 125,000(a) 406,250
United Healthcare Corp. 80,000 3,705,000
19,767,854
Metal Services, NEC (1.30%)
BMC Industries, Inc. 171,000 5,504,062
Miscellaneous Apparel &
Accessories (0.46%)
Designer Holdings, Ltd. 227,200(a) 1,959,600
Miscellaneous Chemical Products (1.37%)
Cytec Industries 72,600(a) 3,539,250
H. B. Fuller Co. 47,500 2,244,375
5,783,625
Mortgage Bankers & Brokers (1.01%)
Money Store, Inc. 151,400 4,295,975
Non-Store Retailers (0.97%)
U.S. Office Products Co. 131,200(a) 4,100,000
Office Furniture (0.88%)
Chromcraft Revington, Inc. 71,400(a) 2,240,175
Kimball International, Inc., Class B 36,600 1,500,600
3,740,775
Offices & Clinics of Medical
Doctors (0.89%)
Phycor, Inc. 162,800(a) 3,754,575
Oil & Gas Field Services (2.20%)
Diamond Offshore Drilling 150,000 9,337,500
Operative Builders (1.26%)
D. R. Horton, Inc. 294,500 4,417,500
Pulte Corp. 25,200 941,850
5,359,350
Paints & Allied Products (0.71%)
RPM, Inc. 160,400 3,007,500
Plastic Materials & Synthetics (0.57%)
A. Schulman, Inc. 107,800 2,425,500
Plumbing, Heating &
Air Conditioning (2.01%)
Apogee Enterprises, Inc. 343,700 8,205,838
Metalclad Corp. 228,400(a) 299,775
8,505,613
Public Building & Related
Furniture (1.00%)
BE Aerospace, Inc. 150,000(a) 4,218,750
Refrigeration & Service
Machinery (0.31%)
Tecumseh Products Co. Class A 25,200 1,307,250
Sanitary Services (0.74%)
Browning-Ferris Industries, Inc. 86,200 2,801,500
USA Waste Services, Inc. 8,846(a) 327,302
3,128,802
Savings Institutions (1.68%)
Greenpoint Financial Corp. 70,000 4,506,250
Sterling Financial Corp. 124,133(a) 2,637,826
7,144,076
Screw Machine Products,
Bolts, Etc. (0.78%)
Trimas Corp. 113,500 3,319,875
Security Brokers & Dealers (0.83%)
Jefferies Group, Inc. 53,200 3,524,500
Telephone Communication (1.63%)
Brooks Fiber Properties 10,000(a) 558,750
McLeod, Inc. 171,300(a) 6,359,513
6,918,263
Toys & Sporting Goods (0.72%)
Mattel, Inc. 78,050 3,034,194
Trucking & Courier Services,
Except Air (0.40%)
J. B. Hunt Transport Services, Inc. 109,900 1,689,713
Total Common Stocks 388,885,101
Preferred Stock (0.35%)
Medical Service & Health
Insurance (0.35%)
Pacificare Health Systems, Inc.
Series A Convertible 55,600 1,501,200
Principal
Amount Value
Bonds (1.98%)
Computer & Data Processing
Services (0.92%)
Sierra On Line Convertible
Subordinated Debentures;
6.50%; 4/1/01 $ 990,000(b) $3,884,513
Industrial Inorganic Chemicals (0.60%)
Ciba-Geigy Corp. Exchangeable
Subordinated Debentures;
6.25%; 3/15/16 350,000(b) 368,375
ICN Pharmaceuticals, Inc.
Convertible Subordinated
Debentures; 8.50%; 11/15/99 1,000,000 2,175,000
2,543,375
Management & Public Relations (0.41%)
Complete Management, Inc.
Convertible Debentures;
8.00%; 12/15/03 1,500,000 1,740,000
Sanitary Services (0.05%)
Enclean, Inc. Convertible
Subordinated Debentures;
7.50%; 8/1/01 200,000 205,073
Total Bonds 8,372,961
Commercial Paper (6.72%)
Business Credit Institutions (0.14%)
General Electric Capital Corp.;
5.70%; 11/3/97 570,000 570,000
Miscellaneous Electrical
Equipment & Supplies (0.27%)
General Electric Co.;
5.53%; 11/4/97 1,150,000 1,149,823
Personal Credit Institutions (4.95%)
Investment in Joint Trade Account;
Associates Corp.;
5.73%; 11/3/97 20,980,403 20,980,403
Security Brokers & Dealers (1.36%)
Merrill Lynch & Co., Inc.;
5.51%; 11/3/97 5,779,000 5,779,000
Total Commercial Paper 28,479,226
Total Portfolio Investments (100.84%) 427,238,488
Liabilities, net of cash, receivables
and other assets (-0.84%) (3,570,588)
Total Net Assets (100.00%) $423,667,900
(a) Non-income producing security - No dividend paid during the period.
(b) Restricted security - See Note 4 to the financial statements.
PRINCOR GROWTH FUND, INC.
Shares
Held Value
Common Stocks (84.57%)
Advertising (1.14%)
Interpublic Group of Cos., Inc. 90,000 $ 4,275,000
Beverages (1.88%)
Coca-Cola Co. 60,000 3,390,000
Pepsico, Inc. 100,000 3,681,250
7,071,250
Blast Furnace & Basic Steel
Products (0.38%)
Lukens, Inc. 80,000 1,440,000
Carpets & Rugs (0.65%)
Shaw Industries, Inc. 200,000 2,425,000
Cash Grains (2.44%)
Pioneer Hi-Bred International 100,000 9,162,500
Commercial Banks (6.26%)
Banc One Corp. 55,000 2,866,875
BankBoston Corp. 45,000 3,647,812
First of America Bank Corp. 60,000 3,345,000
Firstar Corp. 150,000 5,418,750
FirstMerit Corp. 100,000 2,550,000
Nationsbank Corp. 71,644 4,289,685
Princeton National Bancorp., Inc. 60,000 1,440,000
23,558,122
Communications Equipment (2.59%)
Commscope, Inc. 58,333(a) 641,663
Nextlevel Systems 175,000(a) 2,362,500
Northern Telecom Ltd. 75,000 6,726,563
9,730,726
Computer & Data Processing
Services (4.10%)
GTECH Holdings Corp. 139,300(a) 4,492,425
Microsoft Corp. 84,000(a) 10,920,000
15,412,425
Computer & Office Equipment (3.55%)
Ceridian Corp. 106,200(a) 4,148,437
Digital Equipment Corp. 71,500(a) 3,579,469
Hewlett-Packard Co. 60,000 3,701,250
Pitney Bowes, Inc. 24,700 1,959,019
13,388,175
Department Stores (2.10%)
Federated Department Stores 100,000(a) 4,400,000
May Department Stores 65,000 3,501,875
7,901,875
Drugs (9.04%)
Bristol-Myers Squibb Co. 50,000 4,387,500
Forest Laboratories, Inc. 66,300(a) 3,066,375
Genzyme Corp. - General Division 68,756(a) 1,882,195
Genzyme Corp. - Tissue Repair 283(a) 2,440
Johnson & Johnson 80,000 4,590,000
Lilly (Eli) & Co. 100,000 6,687,500
Merck & Co., Inc. 50,000 4,462,500
Pharmacia & Upjohn, Inc. 100,000 3,175,000
Smithkline Beecham PLC ADR. 120,000 5,715,000
33,968,510
Eating & Drinking Places (1.14%)
Marriott International, Inc. 57,000 3,975,750
Tricon Global Restaurants, Inc. 10,000 303,125
4,278,875
Electrical Goods (0.50%)
Avnet, Inc. 30,000 1,888,125
Electronic Components &
Accessories (3.32%)
General Semiconductors 43,750(a) 497,656
Intel Corp. 82,000 6,314,000
Linear Technology Corp. 90,000 5,658,750
12,470,406
Electronic Distribution Equipment (0.69%)
General Electric Co. 40,000 2,582,500
Federal & Federally Sponsored
Credit (0.83%)
Federal National Mortgage Association 64,600 3,129,062
Footwear, Except Rubber (1.33%)
Stride Rite Corp. 425,000 4,993,750
General Industrial Machinery (3.19%)
Ingersoll-Rand Co. 105,000 4,088,438
Tyco International Ltd. 209,400 7,904,850
11,993,288
Grain Mill Products (1.67%)
General Mills, Inc. 26,865 1,773,090
Ralston-Ralston Purina Group 50,000 4,487,500
6,260,590
Grocery Stores (0.14%)
Casey's General Stores, Inc. 21,052 507,880
Hose, Belting, Gaskets & Packing (0.87%)
Mark IV Industries 134,563 3,263,153
Hospitals (1.76%)
Humana, Inc. 105,000(a) 2,205,000
Universal Health Services, Inc.,
Class B 100,000(a) 4,406,250
6,611,250
Household Furniture (0.93%)
Masco Corp. 80,000 3,510,000
Investment Offices (1.05%)
AMVESCAP PLC Sponsored ADR 60,000 3,945,000
Lumber & Other Building
Materials (2.22%)
Home Depot, Inc. 150,000 8,343,750
Management & Public Relations (.01%)
Medaphis Corp. 2,000(a) 12,125
Medical Instruments & Supplies (2.67%)
Becton, Dickinson & Co. 70,000 3,224,375
Boston Scientific Corp. 150,000(a) 6,825,000
10,049,375
Medical Service & Health
Insurance (3.22%)
AON Corp. 60,000 3,236,250
Foundation Health Systems, Inc.,
Class A 147,500(a) 4,240,625
Pacificare Health Systems, Inc.,
Class B 28,540(a) 1,847,965
United Healthcare Corp. 60,000 2,778,750
12,103,590
Millwork, Plywood & Structural
Members (0.45%)
Georgia-Pacific Corp. 20,000 1,696,250
Miscellaneous Converted Paper
Products (0.34%)
Minnesota Mining & Mfg. Co. 14,000 1,281,000
Miscellaneous Electrical Equipment
& Supplies (0.99%)
Motorola, Inc. 60,000 3,705,000
Miscellaneous Fabricated Metal
Products (1.15%)
Parker-Hannifin Corp. 103,350 4,321,322
Miscellaneous Investing (1.22%)
HFS, Inc. 65,000(a) 4,582,500
Miscellaneous Shopping Goods
Stores (0.49%)
Toys 'R' Us, Inc. 54,500(a) 1,856,406
Motor Vehicles & Equipment (2.16%)
Chrysler Corp. 100,000 3,525,000
Dana Corp. 98,000 4,587,625
8,112,625
Petroleum Refining (2.02%)
Atlantic Richfield Co. 40,000 3,292,500
Exxon Corp. 70,000 4,300,625
7,593,125
Plastic Materials & Synthetics (0.48%)
A. Schulman, Inc. 80,000 1,800,000
Preserved Fruits & Vegetables (0.66%)
CPC International, Inc. 25,000 2,475,000
Radio, Television & Computer
Stores (0.18%)
Tandy Corp. 20,000 687,500
Radio & Television Broadcasting (0.97%)
Sinclair Broadcast Group 100,000(a) 3,650,000
Refrigeration & Service
Machinery (0.55%)
Tecumseh Products Co., Class A 40,000 2,075,000
Rubber & Plastics Footwear (0.49%)
Reebok International Ltd. 50,000(a) 1,843,750
Sanitary Services (1.15%)
Browning-Ferris Industries, Inc. 80,000 2,600,000
USA Waste Services, Inc. 17,695(a) 654,715
Waste Management, Inc. 45,000 1,051,875
4,306,590
Security Brokers & Dealers (1.45%)
Salomon, Inc. 70,000 5,438,125
Soap, Cleaners & Toilet Goods (2.90%)
Colgate-Palmolive Co. 80,000 5,180,000
Ecolab, Inc. 120,000 5,707,500
10,887,500
Sugar & Confectionary Products (1.06%)
Wrigley Wm. Jr. Co. 55,000 3,980,625
Telephone Communication (3.53%)
MCI Communications Corp. 110,000 3,905,000
Teleport Communication 110,000(a) 5,321,250
Worldcom, Inc. 120,000(a) 4,035,000
13,261,250
Toys & Sporting Goods (1.27%)
Mattel, Inc. 123,046 4,783,413
Women's & Children's
Undergarments (1.39%)
Warnaco Group, Class A 185,200 5,231,900
Total Common Stocks 317,845,183
Preferred Stocks (0.82%)
Medical Service & Health
Insurance (0.45%)
Pacificare Health Systems, Inc.
Series A Convertible 62,000 1,674,000
Motor Vehicles & Equipment (0.37%)
Ford Motor Co.
Series A Convertible 10,000 1,402,500
Total Preferred Stocks 3,076,500
Principal
Amount Value
Bonds (0.74%)
Electrical Industrial Apparatus (0.52%)
Liebert Co. Convertible
Subordinated Debentures;
8.00%; 11/15/10 $ 500,000 $ 1,960,625
Industrial Inorganic Chemicals (0.14%)
Ciba-Geigy Corp. Exchangeable
Subordinated Debentures;
6.25%; 3/15/16 500,000(b) 526,250
Sanitary Services (0.08%)
Enclean, Inc. Convertible
Subordinated Debentures;
7.50%; 8/1/01 300,000 307,610
Total Bonds 2,794,485
Commercial Paper (12.02%)
Business Credit Institutions (0.92%)
American Express Credit Corp.;
5.53%; 11/24/97 3,470,000 3,458,806
Personal Credit Institutions (7.62%)
Investment in Joint Trade Account;
Associates Corp;
5.73%; 11/3/97 16,108,981 16,108,981
Ford Motor Credit Co.;
5.51%; 11/10/97 12,555,000 12,541,549
28,650,530
Securities Brokers & Dealers (3.48%)
Merrill Lynch & Co.;
5.51%; 11/3/97 13,091,000 13,091,000
Total Commercial Paper 45,200,336
Total Portfolio Investments (98.15%) 368,916,504
Cash, receivables and other assets,
net of liabilities (1.85%) 6,975,058
Total Net Assets (100.00%) $375,891,562
(a) Non-income producing security - No dividend paid during the period.
(b) Restricted security - See Note 4 to the financial statements.
PRINCOR UTILITIES FUND, INC.
Shares
Held Value
Common Stocks (98.71%)
Combination Utility Services (32.06%)
Baltimore Gas & Electric Co. 82,500 $ 2,263,593
Cilcorp, Inc. 46,100 1,884,337
Cinergy Corp. 61,799 2,039,367
Citizens Utilities 100,000(a) 993,750
LG&E Energy Corp. 45,400 964,750
Montana Power Co. 72,800 1,842,750
Nipsco Industries, Inc. 46,600 2,047,488
Pacificorp 107,600 2,333,575
Scana Corp. 70,600 1,782,650
Utilicorp United, Inc. 69,000 2,177,813
Washington Water Power Co. 40,500 807,469
Western Resources, Inc. 39,700 1,478,825
Wisconsin Energy Corp. 79,300 2,007,281
WPS Resources Corp. 25,000 723,437
23,347,085
Electric Services (33.43%)
Carolina Power & Light Co. 60,300 2,155,725
Dominion Resources, Inc. 56,300 2,093,656
Duke Energy Corporation 42,700 2,060,275
Edison International 50,000 1,281,250
Enron Corp. 34,780 1,321,640
FPL Group, Inc. 47,600 2,460,325
GPU, Inc. 32,400 1,172,475
Houston Industries, Inc. 94,900 2,064,075
Mid American Energy Holdings Co. 106,800 1,909,050
Pinnacle West Capital Corp. 59,700 2,078,306
Southern Co. 100,800 2,312,100
Teco Energy, Inc. 90,500 2,160,688
Texas Utilities Holdings 35,600 1,277,150
24,346,715
Gas Production & Distribution (4.22%)
AGL Res., Inc. 54,400 986,000
New Jersey Resources Corp. 38,700 1,252,913
Peoples Energy Corp. 23,300 832,975
3,071,888
Telephone Communication (29.00%)
AT&T Corp. 46,900 2,295,168
Ameritech Corp. 41,300 2,684,500
Bell Atlantic Corp. 36,800 2,939,400
Bellsouth Corp. 59,500 2,815,094
GTE Corp. 52,900 2,244,944
MCI Communications Corp. 65,700 2,332,350
Sprint Corp. 53,400 2,776,800
US West Communications Group 76,000 3,025,750
21,114,006
Total Common Stocks 71,879,694
Principal
Amount Value
Commercial Paper (1.23%)
Personal Credit Institutions (1.23%)
Investment in Joint Trade Account;
Associates Corp.;
5.73%; 11/3/97 $894,240 $ 894,240
Total Portfolio Investments (99.94%) 72,773,934
Cash, receivables and other assets, net of
liabilities (0.06%) 41,442
Total Net Assets (100.00%) $72,815,376
(a) Non-income producing security - No dividend paid during the period.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Selected data for a share of Capital Stock outstanding throughout each period:
Income from Investment Operations Less Distributions
Net Realized
and
Net Asset Net Unrealized Total Dividends
Value at Invest- Gain from from Net Distributions
Beginning ment (Loss) on Investment Investment from Total
of Period Income Investments Operations Income Capital Gains Distributions
<S> <C> <C> <C> <C> <C> <C> <C>
PRINCOR BALANCED FUND, INC.(b)
Class A:
Year Ended October 31,
1997 $14.61 $.35 $1.81 $2.16 $(.36) $(1.30) $(1.66)
1996 13.74 .38 1.59 1.97 (.43) (.67) (1.10)
1995 12.43 .41 1.31 1.72 (.36) (.05) (.41)
1994 13.26 .32 (.20) .12 (.40) (.55) (.95)
1993 12.78 .35 1.14 1.49 (.37) (.64) (1.01)
Class B:
Year Ended October 31,
1997 14.56 .25 1.79 2.04 (.25) (1.30) (1.55)
1996 13.71 .29 1.55 1.84 (.32) (.67) (.99)
Period Ended October 31, 1995(c) 11.80 .31 1.90 2.21 (.30) -- (.30)
Class R:
Year Ended October 31, 1997 14.52 .29 1.76 2.05 (.30) (1.29) (1.59)
Period Ended October 31, 1996(f) 13.81 .24 .73 .97 (.26) -- (.26)
PRINCOR BLUE CHIP FUND, INC.
Class A:
Year Ended October 31,
1997 17.10 .21 3.58 3.79 (.21) (.46) (.67)
1996 15.03 .23 2.45 2.68 (.26) (.35) (.61)
1995 12.45 .24 2.55 2.79 (.21) -- (.21)
1994 11.94 .20 .57 .77 (.26) -- (.26)
1993 11.51 .21 .43 .64 (.18) (.03) (.21)
Class B:
Year Ended October 31,
1997 17.03 .07 3.54 3.61 (.04) (.46) (.50)
1996 14.99 .11 2.41 2.52 (.13) (.35) (.48)
Period Ended October 31, 1995(c) 11.89 .15 3.10 3.25 (.15) -- (.15)
Class R:
Year Ended October 31, 1997 17.08 .13 3.53 3.66 (.12) (.46) (.58)
Period Ended October 31, 1996(f) 16.21 .12 .90 1.02 (.15) -- (.15)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio Average
End Total End of Period Average Average Turnover Commission
of Period Return(a) (in thousands) Net Assets Net Assets Rate Rate Paid
<S> <C> <C> <C> <C> <C> <C> <C>
PRINCOR BALANCED FUND, INC.(b)
Class A:
Year Ended October 31,
1997 $15.11 15.88% $85,436 1.33% 2.42% 27.6% $.0392
1996 14.61 15.10 70,820 1.28 2.82 32.6 .0421
1995 13.74 14.18 57,125 1.37 3.21 35.8 N/A
1994 12.43 0.94 53,366 1.51 2.70 14.4 N/A
1993 13.26 12.24 39,952 1.35 2.78 27.5 N/A
Class B:
Year Ended October 31,
1997 15.05 14.96 11,885 2.14 1.58 27.6 .0392
1996 14.56 14.10 5,964 2.13 1.93 32.6 .0421
Period Ended October 31, 1995(c) 13.71 18.72(d) 1,263 1.91(e) 2.53(e) 35.8(e) N/A
Class R:
Year Ended October 31, 1997 14.98 15.16 9,745 1.99 1.66 27.6 .0392
Period Ended October 31, 1996(f) 14.52 7.52(d) 875 1.49(e) 2.26(e) 32.6(e) .0421(e)
PRINCOR BLUE CHIP FUND, INC.
Class A:
Year Ended October 31,
1997 20.22 22.57 79,985 1.30 1.10 55.4 .0394
1996 17.10 18.20 44,389 1.33 1.41 13.3 .0456
1995 15.03 22.65 35,212 1.38 1.83 26.1 N/A
1994 12.45 6.58 27,246 1.46 1.72 5.5 N/A
1993 11.94 5.65 23,759 1.25 1.87 11.2 N/A
Class B:
Year Ended October 31,
1997 20.14 21.59 18,265 2.06 .32 55.4 .0394
1996 17.03 17.18 6,527 2.19 .49 13.3 .0456
Period Ended October 31, 1995(c) 14.99 26.20(d) 1,732 1.90(e) .97(e) 26.1(e) N/A
Class R:
Year Ended October 31, 1997 20.16 21.82 15,502 1.89 .45 55.4 .0394
Period Ended October 31, 1996(f) 17.08 7.02(d) 1,575 1.48(e) .68(e) 13.3(e) .0456(e)
See accompanying notes.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS (Cont.)
<TABLE>
<CAPTION>
Income from Investment Operations Less Distributions
Net Realized
Net and
Net Asset Invest- Unrealized Total Dividends
Value at ment Gain from from Net Distributions
Beginning Income (Loss) on Investment Investment from Total
of Period (Loss) Investments Operations Income Capital Gains Distributions
<S> <C> <C> <C> <C> <C> <C> <C>
PRINCOR CAPITAL
ACCUMULATION FUND, INC.
Class A:
Year Ended October 31,
1997 $27.72 $.50 $5.80 $6.30 $(.48) $(3.85) $(4.33)
1996 23.69 .45 5.48 5.93 (.43) (1.47) (1.90)
1995 20.83 .45 3.15 3.60 (.39) (.35) (.74)
1994 21.41 .39 .93 1.32 (.41) (1.49) (1.90)
1993 21.34 .43 1.67 2.10 (.43) (1.60) (2.03)
Class B:
Year Ended October 31,
1997 27.58 .23 5.77 6.00 (.22) (3.85) (4.07)
1996 23.61 .21 5.45 5.66 (.22) (1.47) (1.69)
Period Ended October 31, 1995(c) 19.12 .33 4.46 4.79 (.30) -- (.30)
Class R:
Year Ended October 31, 1997 27.57 .30 5.74 6.04 (.32) (3.85) (4.17)
Period Ended October 31, 1996(f) 24.73 .19 2.81 3.00 (.16) -- (.16)
PRINCOR EMERGING GROWTH
FUND, INC.
Class A:
Year Ended October 31,
1997 35.75 .07 10.80 10.87 (.11) (1.18) (1.29)
1996 31.45 .14 5.05 5.19 (.14) (.75) (.89)
1995 25.08 .12 6.45 6.57 (.06) (.14) (.20)
1994 23.56 -- 1.61 1.61 -- (.09) (.09)
1993 19.79 .06 3.82 3.88 (.11) -- (.11)
Class B:
Year Ended October,
1997 35.48 (.05) 10.64 10.59 (.01) (1.18) (1.19)
1996 31.31 (.04) 4.97 4.93 (.01) (.75) (.76)
Period Ended October 31, 1995(c) 23.15 -- 8.18 8.18 (.02) -- (.02)
Class R:
Year Ended October 31, 1997 35.67 (.12) 10.74 10.62 (.01) (1.18) (1.19)
Period Ended October 31, 1996(f) 33.77 .04 1.88 1.92 (.02) -- (.02)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio Average
End Total End of Period Average Average Turnover Commission
of Period Return(a) (in thousands) Net Assets Net Assets Rate Rate Paid
<S> <C> <C> <C> <C> <C> <C> <C>
PRINCOR CAPITAL
ACCUMULATION FUND, INC.
Class A:
Year Ended October 31,
1997 $29.69 25.36% $494,444 .70% 1.85% 30.8% $.0457
1996 27.72 26.41 435,617 .69 1.82 50.2 .0421
1995 23.69 17.94 339,656 .75 2.08 46.0 N/A
1994 20.83 6.67 285,965 .83 2.02 31.7 N/A
1993 21.41 10.42 240,016 .82 2.16 24.8 N/A
Class B:
Year Ended October 31,
1997 29.51 24.13 27,240 1.65 .84 30.8 .0457
1996 27.58 25.19 9,832 1.70 .80 50.2 .0421
Period Ended October 31, 1995(c) 23.61 25.06(d) 2,248 1.50(e) 1.07(e) 46.0(e) N/A
Class R:
Year Ended October 31, 1997 29.44 24.36 18,326 1.50 .93 30.8 .0457
Period Ended October 31, 1996(f) 27.57 12.74(d) 1,752 1.16(e) 1.18(e) 50.2(e) .0421(e)
PRINCOR EMERGING GROWTH
FUND, INC.
Class A:
Year Ended October 31,
1997 45.33 31.26 346,666 1.26 .20 9.5 .0435
1996 35.75 16.89 229,465 1.32 .46 12.3 .0391
1995 31.45 26.89 150,611 1.47 .47 13.5 N/A
1994 25.08 6.86 92,965 1.74 .02 8.1 N/A
1993 23.56 19.66 48,668 1.66 .26 7.0 N/A
Class B:
Year Ended October,
1997 44.88 30.64 59,554 1.69 (.24) 9.5 .0435
1996 35.48 16.07 28,480 2.01 (.24) 12.3 .0391
Period Ended October 31, 1995(c) 31.31 35.65(d) 8,997 2.04(e) (.17)(e) 13.5(e) N/A
Class R:
Year Ended October 31, 1997 45.10 30.56 17,448 1.87 (.45) 9.5 .0435
Period Ended October 31, 1996(f) 35.67 6.20(d) 2,016 1.53(e) .29(e) 12.3(e) .0391(e)
</TABLE>
See accompanying notes.
<PAGE>
FINANCIAL HIGHLIGHTS (Cont.)
<TABLE>
<CAPTION>
Income from Investment Operations Less Distributions
and
Net Asset Net Unrealized Total Dividends
Value at Invest- Gain from from Net Distributions
Beginning ment (Loss) on Investment Investment from Total
of Period Income Investments Operations Income Capital Gains Distributions
<S> <C> <C> <C> <C> <C> <C> <C>
PRINCOR GROWTH FUND, INC.
Class A:
Year Ended October 31,
1997 $39.54 $.31 $11.26 $11.57 $(.31) $ (.37) $ (.68)
1996 37.22 .35 3.50 3.85 (.35) (1.18) (1.53)
1995 31.14 .35 6.67 7.02 (.31) (.63) (.94)
1994 30.41 .26 2.56 2.82 (.28) (1.81) (2.09)
1993 28.63 .40 2.36 2.76 (.42) (.56) (.98)
Class B:
Year Ended October 31,
1997 39.43 .09 11.23 11.32 (.02) (.37) (.39)
1996 37.10 .08 3.48 3.56 (.05) (1.18) (1.23)
Period Ended October 31, 1995(c) 28.33 .21 8.76 8.97 (.20) -- (.20)
Class R:
Year Ended October 31, 1997 39.40 .06 11.16 11.22 (.09) (.37) (.46)
Period Ended October 31, 1996(f) 39.27 .10 .13 .23 (.10) -- (.10)
PRINCOR UTILITIES FUND, INC.
Class A:
Year Ended October 31,
1997 11.40 .48(g) 1.12 1.60 (.45) -- (.45)
1996 10.94 .44(g) .45 .89 (.43) -- (.43)
1995 9.25 .48(g) 1.70 2.18 (.49) -- (.49)
1994 11.45 .46(g) (2.19) (1.73) (.45) (.02) (.47)
Period Ended October 31, 1993(h) 10.18 .35(g) 1.27 1.62 (.35) -- (.35)
Class B:
Year Ended October 31,
1997 11.38 .38(g) 1.13 1.51 (.36) -- (.36)
1996 10.93 .36(g) .43 .79 (.34) -- (.34)
Period Ended October 31, 1995(c) 9.20 .40(g) 1.77 2.17 (.44) -- (.44)
Class R:
Year Ended October 31, 1997 11.33 .39(g) 1.14 1.53 (.37) -- (.37)
Period Ended October 31, 1996(f) 11.75 .28(g) (.41) (.13) (.29) -- (.29)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio Average
End Total End of Period Average Average Turnover Commission
of Period Return(a) (in thousands) Net Assets Net Assets Rate Rate Paid
<S> <C> <C> <C> <C> <C> <C> <C>
PRINCOR GROWTH FUND, INC.
Class A:
Year Ended October 31,
1997 $50.43 29.55% $317,386 1.03% .68% 16.5% $.0411
1996 39.54 10.60 228,361 1.08 .95 1.8 .0443
1995 37.22 23.29 174,328 1.16 1.12 12.2 N/A
1994 31.14 9.82 116,363 1.30 .95 13.6 N/A
1993 30.41 9.83 80,051 1.26 1.40 16.4 N/A
Class B:
Year Ended October 31,
1997 50.36 28.92 42,241 1.48 .23 16.5 .0411
1996 39.43 9.80 24,019 1.79 .22 1.8 .0443
Period Ended October 31, 1995(c) 37.10 31.48(d) 8,279 1.80(e) .31(e) 12.2(e) N/A
Class R:
Year Ended October 31, 1997 50.16 28.72 16,265 1.69 .00 16.5 .0411
Period Ended October 31, 1996(f) 39.40 1.12(d) 2,014 1.42(e) .14(e) 1.8(e) .0443(e)
PRINCOR UTILITIES FUND, INC.
Class A:
Year Ended October 31,
1997 12.55 14.26 64,366 1.15(g) 3.90 22.5 .0465
1996 11.40 8.13 66,322 1.17(g) 3.85 34.2 .0410
1995 10.94 24.36 65,873 1.04(g) 4.95 13.0 --
1994 9.25 (15.20) 56,747 1.00(g) 4.89 13.8 --
Period Ended October 31, 1993(h) 11.45 15.92(d) 50,372 1.00(e)(g) 4.48(e) 4.3(e) --
Class B:
Year Ended October 31,
1997 12.53 13.41 6,937 1.90(g) 3.14 22.5 .0465
1996 11.38 7.23 5,579 1.93(g) 3.07 34.2 .0410
Period Ended October 31, 1995(c) 10.93 24.18(d) 3,952 1.72(e)(g) 3.84(e) 13.0(e) --
Class R:
Year Ended October 31, 1997 12.49 13.72 1,512 1.65(g) 3.35 22.5 .0465
Period Ended October 31, 1996(f) 11.33 (.31)(d) 311 1.47(e)(g) 3.77(e) 34.2(e) .0410(e)
</TABLE>
See accompanying notes.
Notes to Financial Highlights
(a) Total return is calculated without the front-end sales charge or contingent
deferred sales charge.
(b) Effective December 5, 1994, the name of Princor Managed Fund, Inc. was
changed to Princor Balanced Fund, Inc.
(c) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995. The Domestic Growth Funds' Class B shares
recognized net investment income as follows for the period from the initial
purchase of Class B shares on December 5, 1994 through December 8, 1994,
none of which was distributed to the sole shareholder, Princor Management
Corporation. The Domestic Growth Funds' Class B shares incurred unrealized
losses on investments during the initial interim period as follows. This
represents Class B share activities of each fund prior to the initial
public offering of Class B shares:
Per Share Per Share
Net Investment Unrealized
Income (Loss)
Princor Balanced Fund, Inc. $-- $(.19)
Princor Blue Chip Fund, Inc. -- (.15)
Princor Capital Accumulation Fund, Inc. -- (.46)
Princor Emerging Growth Fund, Inc. -- (.77)
Princor Growth Fund, Inc. -- (.86)
Princor Utilities Fund, Inc. .01 (.01)
(d) Total return amounts have not been annualized.
(e) Computed on an annualized basis.
(f) Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through October 31, 1996. Certain of the Domestic
Growth Funds' Class R shares recognized net investment income for the
period from the initial purchase of Class R shares on February 27, 1996
through February 28, 1996 as follows, none of which was distributed to the
sole shareholder, Princor Management Corporation. Additionally, the
Domestic Growth Funds incurred unrealized gains (losses) on investments
during the initial interim period as follows. This represents Class R share
activities of each fund prior to the initial offering of Class R shares:
Per Share Net Investment Income
Per Share Per Share
Net Investment Unrealized
Income Gain (Loss)
Princor Balanced Fund, Inc. $-- $(.03)
Princor Blue Chip Fund, Inc. .01 (.02)
Princor Capital Accumulation Fund, Inc. .01 (.11)
Princor Emerging Growth Fund, Inc -- .19
Princor Growth Fund, Inc. .01 .10
(g) Without the Manager's voluntary waiver of a portion of certain of its
expenses (see Note 3 to the financial statements) for the periods
indicated, Princor Utilities Fund, Inc. would have had per share net
investment income and the ratios of expenses to average net assets as
shown:
Year Ended
October 31, Per Share Ratio of Expenses
Except Net Investment to Average Net Amount
as Noted Income Assets Waived
Class A 1997 $.46 1.25% $ 65,940
1996 .43 1.25% 54,932
1995 .46 1.30% 151,145
1994 .41 1.50% 284,836
1993(h) .32 1.54%(e) 139,439
Class B 1997 .37 1.95% 3,753
1996 .34 2.06% 6,690
1995(c) .40 1.81%(e) 1,338
Class R 1997 .31 2.67% 9,355
1996(f) .28 1.47%(e) --
(h) Period from December 16, 1992, date shares first offered to public, through
October 31, 1993. Net investment income, aggregating $.05 per share for the
period from the initial purchase of shares on November 16, 1992 through
December 15, 1992, was recognized, none of which was distributed to its
sole stockholder, Principal Mutual Life Insurance Company, during the
period. Additionally, the fund incurred unrealized gains on investments of
$.13 per share during the initial interim period. This represents
activities of the fund prior to the initial public offering of fund shares.
<PAGE>
October 31, 1997
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
Principal Principal
International International Princor
Emerging Markets SmallCap World
GROWTH FUNDS (INTERNATIONAL) Fund, Inc. Fund, Inc. Fund, Inc.
<S> <C> <C> <C>
Investment in securities -- at cost........ $12,923,940 $14,180,800 $265,209,155
Assets
Investment in securities -- at value (Note 4) $10,935,937 $14,138,846 $328,281,796
Cash....................................... 18,940 19,133 20,112
Receivables:
Dividends and interest.................. 6,231 7,872 315,907
Investment securities sold.............. -- 18,972 --
Capital Stock sold...................... 119,565 264,737 689,936
Net receivable for foreign currency
contract (Note 5)....................... 2,037 -- 20,369
Other assets............................... -- -- 1,617
Total Assets 11,082,710 14,449,560 329,329,737
Liabilities
Accrued expenses........................... 19,336 22,399 441,320
Payables:
Investment securities purchased......... 398,415 434,802 2,001,810
Capital Stock reacquired................ -- 3,745 113,407
Total Liabilities 417,751 460,946 2,556,537
Net Assets Applicable to
Outstanding Shares ....................... $10,664,959 $13,988,614 $326,773,200
Net Assets Consist of:
Capital Stock.............................. $ 12,870 $ 14,044 $ 350,626
Additional paid-in capital................. 12,724,020 14,172,912 253,407,763
Accumulated undistributed net
investment income (operating loss)...... (861) (1,911) 2,790,261
Accumulated undistributed net realized
gain (loss) from:
Investment transactions................. (86,672) (157,671) 7,221,024
Foreign currency transactions........... 1,642 3,171 (91,683)
Net unrealized appreciation (depreciation)
of investments.......................... (1,988,003) (41,954) 63,072,641
Net unrealized appreciation on translation
of assets and liabilities in foreign
currencies 1,963 23 22,568
Total Net Assets $10,664,959 $13,988,614 $326,773,200
Capital Stock (par value: $.01 a share):
Shares authorized.......................... 100,000,000 100,000,000 100,000,000
Net Asset Value Per Share:
Class A: Net Assets....................... $5,038,551 $6,210,049 $281,158,284
Shares issued and outstanding. 607,697 623,397 30,135,898
Net asset value per share...... $8.29 $9.96 $9.33
Maximum offering price per share(a) $8.70 $10.46 $9.80
Class B: Net Assets....................... $3,116,421 $4,774,476 $33,842,184
Shares issued and outstanding. 376,276 479,454 3,656,153
Net asset value per share(b)... $8.28 $9.96 $9.26
Class R: Net Assets....................... $2,509,987 $3,004,089 $11,772,732
Shares issued and outstanding. 303,043 301,589 1,270,567
Net asset value per share............... $8.28 $9.96 $9.27
<FN>
(a) Maximum offering price is equal to net asset value plus a front-end sales
charge of 4.75% of the offering price or 4.99% of the net asset value.
(b) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
</FN>
</TABLE>
See accompanying notes.
<PAGE>
Year Ended October 31, 1997, Except as Noted
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
Principal Principal
International International Princor
Emerging Markets SmallCap World
GROWTH FUNDS (INTERNATIONAL) Fund, Inc.(a) Fund, Inc.(a) Fund, Inc.
Net Investment Income
Income:
<S> <C> <C> <C>
Dividends............................. $ 27,818 $ 29,915 $ 6,706,446
Withholding tax on foreign dividends... (3,394) (3,052) (815,523)
Interest............................... 24,983 25,174 1,165,273
Total Income 49,407 52,037 7,056,196
Expenses:
Management and investment advisory
fees (Note 3)....................... 28,487 30,283 1,882,664
Distribution and shareholder servicing
fees (Note 1 and 3)................. 3,390 3,810 769,909
Transfer and administrative services
(Note 1 and 3)...................... 4,116 4,283 906,359
Registration fees (Note 1)............. -- -- 66,555
Custodian fees ........................ 7,353 7,433 270,872
Auditing and legal fees ............... 5,666 6,667 9,200
Directors' fees ....................... 1,177 1,385 7,493
Other ................................. 79 87 53,070
Total Net Expenses 50,268 53,948 3,966,122
Net Investment Income (Operating Loss) (861) (1,911) 3,090,074
Net Realized and Unrealized Gain (Loss) on Investments and Foreign
Currencies Net realized gain (loss) from:
Investment transactions................ (86,672) (157,671) 7,163,553
Foreign currency transactions.......... 1,642 3,171 (91,683)
Change in unrealized appreciation/ depreciation of:
Investments............................ (1,988,003) (41,954) 32,577,442
Translation of assets and liabilities in
foreign currencies.................. 1,963 23 21,665
Net Realized and Unrealized Gain (Loss)
on Investments and Foreign Currencies (2,071,070) (196,431) 39,670,977
Net Increase (Decrease) in Net
Assets Resulting from Operations $(2,071,931) $(198,342) $42,761,051
<FN>
(a) Period from August 14, 1997 (date operations commenced) through October 31, 1997.
</FN>
</TABLE>
See accompanying notes.
<PAGE>
Years Ended October 31, Except as Noted
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
Principal Principal
International International Princor
Emerging Markets SmallCap World
GROWTH FUNDS (INTERNATIONAL) Fund, Inc.(a) Fund, Inc.(a) Fund, Inc.
1997 1997 1997 1996
Operations
<S> <C> <C> <C> <C>
Net investment income (operating loss).... $ (861) $ (1,911) $ 3,090,074 $ 2,201,363
Net realized gain (loss) from:
Investment transactions................ (86,672) (157,671) 7,163,553 7,946,241
Foreign currency transactions.......... 1,642 3,171 (91,683) (20,659)
Change in unrealized appreciation/
depreciation of investments and translation
of assets and liabilities in foreign
currencies (1,986,040) (41,931) 32,599,107 15,857,412
Net Increase (Decrease) in Net
Assets Resulting from Operations (2,071,931) (198,342) 42,761,051 25,984,357
Dividends and Distributions to Shareholders
From net investment income:
Class A................................ -- -- (2,378,873) (1,382,783)
Class B ............................... -- -- (79,037) (15,481)
Class R ............................... -- -- (19,984) --
From net realized gain on investments and
foreign currency transactions:
Class A ............................... -- -- (6,657,874) (5,735,484)
Class B ............................... -- -- (635,525) (196,110)
Class R................................ -- -- (55,824) --
Total Dividends and Distributions -- -- (9,827,117) (7,329,858)
Capital Share Transactions (Note 6)
Shares sold:
Class A................................ 5,966,460 6,307,287 96,500,904 38,822,208
Class B ............................... 3,867,018 4,967,080 20,265,356 11,226,931
Class R................................ 3,028,924 3,022,777 11,220,828 1,038,560(b)
Shares issued in reinvestment of dividends
and distributions:
Class A................................ -- -- 8,872,973 7,075,336
Class B ............................... -- -- 696,974 209,953
Class R................................ -- -- 75,789 --
Shares redeemed:
Class A ............................... (7,197) (7,102) (26,121,521) (17,658,243)
Class B ............................... (118,315) (97,291) (5,667,020) (746,863)
Class R ............................... -- (5,795) (1,083,455) (6,119)(b)
Net Increase in Net Assets from
Capital Share Transactions 12,736,890 14,186,956 104,760,828 39,961,763
Total Increase 10,664,959 13,988,614 137,694,762 58,616,262
Net Assets
Beginning of period....................... -- -- 189,078,438 130,462,176
End of period [including undistributed net
investment income (operating loss)
as set forth below].................... $10,664,959 $13,988,614 $326,773,200 $189,078,438
Undistributed Net Investment Income
(operating loss)....................... $ (861) $ (1,911) $ 2,790,261 $ 1,601,065
<FN>
(a) Period from August 14, 1997 (date operations commenced) through October 31,
1997.
(b) Period from February 27, 1996 (date operations commenced) through October
31, 1996.
</FN>
</TABLE>
See accompanying notes.
<PAGE>
October 31, 1997
NOTES TO FINANCIAL STATEMENTS
Principal International Emerging Markets Fund, Inc.
Principal International SmallCap Fund, Inc.
Princor World Fund, Inc.
Note 1 -- Significant Accounting Policies
Principal International Emerging Markets Fund, Inc., Principal International
SmallCap Fund, Inc. and Princor World Fund, Inc. (the "International Growth
Funds") are registered under the Investment Company Act of 1940, as amended, as
open-end diversified management investment companies and operate in the mutual
fund industry.
On August 14, 1997, the initial purchases of 400,000 shares of Class A Capital
Stock, 300,000 shares of Class B Capital Stock and 300,000 shares of Class R
Capital Stock of Principal International Emerging Markets Fund, Inc. and
Principal International SmallCap Fund, Inc. were made by Principal Mutual Life
Insurance Company (see Note 3). Effective August 29, 1997, Principal
International Emerging Markets Fund, Inc. and Principal International SmallCap
Fund, Inc. began offering Class A and Class B shares to the public and Class R
shares to eligible purchasers.
Class A shares generally are sold with an initial sales charge based on
declining rates and certain purchases may be subject to a contingent deferred
sales charge ("CDSC"). Class B shares are sold without an initial sales charge,
but are subject to a declining CDSC on certain redemptions redeemed within six
years of purchase. Class R shares are sold without an initial sales charge and
are not subject to a CDSC. Class B shares and Class R shares bear a higher
ongoing distribution fee than Class A shares. Class B shares automatically
convert into Class A shares, based on relative net asset value (without a sales
charge) after seven years. Class R shares automatically convert into Class A
shares, based on relative net asset value (without a sales charge) after four
years. All classes of shares for each fund represent interests in the same
portfolio of investments, and will vote together as a single class except where
otherwise required by law or as determined by each of the International Growth
Funds' respective Board of Directors. In addition, the Board of Directors of
each fund declare separate dividends on each class of shares.
The International Growth Funds allocate daily all income, expenses (other than
class-specific expenses), and realized and unrealized gains or losses to each
class of shares based upon the relative proportion of the value of shares
outstanding of each class. Expenses specifically attributable to a particular
class are charged directly to such class. Class-specific expenses charged to
each class during the periods ended October 31, 1997, which are included in the
corresponding captions of the Statement of Operations, were as follows:
Distribution and
Shareholder Servicing Fees
Class A Class B Class R
Principal International Emerging
Markets Fund, Inc. $ 921 $ 1,392$ 1,077
Principal International SmallCap Fund, Inc. 1,016 1,635 1,159
Princor World Fund, Inc. 495,097 228,145 46,667
Transfer and
Administrative Services
Class A Class B Class R
Principal International Emerging
Markets Fund, Inc. $ 122 $ 17 $ 35
Principal International SmallCap Fund, Inc. 144 21 42
Princor World Fund, Inc. 303,407 45,206 12,657
Registration Fees
Class A Class B Class R
Principal International Emerging
Markets Fund, Inc. $ -- $ -- $ --
Principal International SmallCap Fund, Inc. -- -- --
Princor World Fund, Inc. 18,518 12,887 6,239
The International Growth Funds value securities for which market quotations are
readily available at market value, which is determined using the last reported
sale price or, if no sales are reported, as is regularly the case for some
securities traded over-the-counter, the last reported bid price. When reliable
market quotations are not considered to be readily available, which may be the
case, for example, with respect to certain debt securities, preferred stocks and
foreign securities, the investments are valued by using market quotations,
prices provided by market makers or estimates of market values obtained from
yield data and other factors relating to instruments or securities with similar
characteristics in accordance with procedures established in good faith by each
fund's Board of Directors. Securities with remaining maturities of 60 days or
less are valued at amortized cost, which approximates market.
The value of foreign securities in foreign currency amounts is expressed in U.S.
dollars at the closing daily rate of exchange. The identified cost of the
portfolio holdings is translated at approximate rates prevailing when acquired.
Income and expense amounts are translated at approximate rates prevailing when
received or paid, with daily accruals of such amounts reported at approximate
rates prevailing at the date of valuation. Since the carrying amount of the
foreign securities is determined based on the exchange rate and market values at
the close of the period, it is not practicable to isolate that portion of the
results of operations arising as a result of changes in the foreign exchange
rates from the fluctuations arising from changes in the market prices of
securities during the period.
The International Growth Funds record investment transactions generally one day
after the trade date, except for short-term investment transactions which are
recorded generally on the trade date. The identified cost basis has been used in
determining the net realized gain or loss from investment transactions and
unrealized appreciation or depreciation of investments. The International Growth
Funds record dividend income on the ex-dividend date, except dividend income
from foreign securities whereby the ex-dividend date has passed; such dividends
are recorded as soon as the International Growth Funds are informed of the
ex-dividend date. Interest income is recognized on an accrual basis.
Reported net realized foreign exchange gains or losses arise from sales of
foreign curencies, currency gains or losses realized between trade and
settlement dates on security transactions, and the difference between the amount
of dividends and foreign withholding taxes recorded on the books and the U.S.
dollar equivalent of the amounts actually received or paid. Net unrealized
appreciation on translation of assets and liabilities in foreign currencies
arise from changes in the exchange rate relating to assets and liabilities,
other than investments in securities, purchased and held in non-U.S. denominated
currencies.
The International Growth Funds may, pursuant to an exemptive order issued by the
Securities and Exchange Commission, transfer uninvested funds into a joint
trading acount. The order permits the International Growth Funds' cash balances
to be deposited into a single joint account along with the cash of other
registered investment companies managed by Princor Management Corporation. These
balances may be invested in one or more short-term instruments.
Dividends and distributions to shareholders are recorded on the ex-dividend
date. Dividends and distributions to shareholders from net investment income and
net realized gain from investments and foreign currency transactions are
determined in accordance with federal income tax regulations, which may differ
from generally accepted accounting principles. Permanent book and tax basis
differences are reclassified within the capital accounts based on their federal
tax-basis treatment; temporary differences do not require reclassification.
Reclassifications made for Princor World Fund, Inc. for the year ended October
31, 1997 aggregated $577,016. Other reclassifications made for the periods ended
October 31, 1997 and 1996 were not material.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2 -- Federal Income Taxes
No provision for federal income taxes is considered necessary because each fund
is qualified as a "regulated investment company" under the Internal Revenue Code
and intends to distribute each year substantially all of its net investment
income and realized capital gains to shareholders. The cost of investments for
federal income tax reporting purposes is approximately the same as that for
financial reporting purposes.
At October 31, 1997, Principal International Emerging Markets Fund, Inc. had net
capital loss carryforward of approximately $70,000 which expires in 2005;
Principal International SmallCap Fund, Inc. had net capital loss carryforward of
approximately $158,000 which expires in 2005.
Note 3 -- Management Agreement and Transactions With Affiliates
The International Growth Funds have agreed to pay investment advisory and
management fees to Princor Management Corporation (wholly owned by Princor
Financial Services Corporation, a subsidiary of Principal Mutual Life Insurance
Company)(the "Manager") computed at an annual percentage rate of each fund's
average daily net assets. The annual rate used in this calculation for the
International Growth Funds is as follows:
Net Asset Value of Funds
(in millions)
First Next Next Next Over
$100 $100 $100 $100 $400
Principal International
Emerging Markets Fund, Inc. 1.25% 1.20% 1.15% 1.10% 1.05%
Principal International
SmallCap Fund, Inc. 1.20% 1.15% 1.10% 1.05% 1.00%
Princor World Fund, Inc. 0.75% 0.70% 0.65% 0.60% 0.55%
The International Growth Funds also reimburse the Manager for transfer and
administrative services, including the cost of accounting, data processing,
supplies and other services rendered.
Princor Financial Services Corporation, as principal underwriter, receives
proceeds of any CDSC on certain Class A and Class B share redemptions. The
charge is based on declining rates which for Class A shares begin at .75%, and
for Class B shares at 4.00%, of the lesser of the current market value or the
cost of shares being redeemed. Princor Financial Services Corporation also
retains sales charges on sales of Class A shares based on declining rates which
begin at 4.75% of the offering price. The aggregate amount of these charges
retained, by fund, for the period ended October 31, 1997 were as follows:
Class A Class B
Principal International Emerging Markets Fund, Inc. $ 33,588 $ --
Principal International SmallCap Fund, Inc. 37,421 1,000
Princor World Fund, Inc. 1,440,300 84,440
No brokerage commissions were paid by the International Growth Funds to Princor
Financial Services Corporation during the periods ended October 31, 1997 and
1996. Brokerage commissions were paid to other affiliates by the following
funds:
Period Ended Year Ended
October 31, October 31,
1997 1996
Principal International Emerging Markets Fund, Inc. $ 1,586 --
Principal International SmallCap Fund, Inc. 1,502 --
Princor World Fund, Inc. 20,595 $4,038
The International Growth Funds bear distribution and shareholder servicing fees
with respect to Class A shares computed at an annual rate of up to 0.25% of the
average daily net assets attributable to Class A shares of each fund. Each of
the International Growth Funds adopted a distribution plan with respect to Class
B shares that provides for distribution and shareholder servicing fees computed
at an annual rate of up to 1.00% of the average daily net assets attributable to
Class B shares of each fund. Each of the International Growth Funds adopted a
distribution plan with respect to Class R shares that provides for distribution
and shareholder servicing fees computed at an annual rate of up to .75% of the
average daily net assets attributable to Class R shares of each fund.
Distribution and shareholder servicing fees are paid to Princor Financial
Services Corporation; a portion of the fees are subsequently remitted to retail
dealers. Pursuant to the distribution agreements, fees unused by the principal
underwriter at the end of the fiscal year are returned to the International
Growth Funds.
At October 31, 1997, Principal Mutual Life Insurance Company, subsidiaries of
Principal Mutual Life Insurance Company and benefit plans sponsored on behalf of
Principal Mutual Life Insurance Company owned shares of the International Growth
Funds as follows:
Class A Class B Class R
Principal International Emerging
Markets Fund, Inc. 400,000 300,000 300,000
Principal International SmallCap Fund, Inc. 400,000 300,000 300,000
Princor World Fund, Inc. 8,056,476 162 140
Note 4 -- Investment Transactions
For the periods ended October 31, 1997, the cost of investment securities
purchased and proceeds from investment securities sold (not including short-term
investments and U.S. government securities) by the International Growth Funds
were as follows:
Purchases Sales
Principal International Emerging Markets Fund, Inc. $ 12,047,565 $ 421,952
Principal International SmallCap Fund, Inc. 12,847,913 239,442
Princor World Fund, Inc. 167,589,404 65,525,692
At October 31, 1997, net unrealized appreciation (depreciation) of investments
by the International Growth Funds was composed of the following:
Net Unrealized
Appreciation
Gross Unrealized (Depreciation)
Appreciation (Depreciation) of Investments
Principal International Emerging
Markets Fund, Inc. 111,344 $ (2,099,347) $ (1,988,003)
Principal International SmallCap
Fund, Inc. 925,902 (967,856) (41,954)
Princor World Fund, Inc. 74,786,093 (11,713,452) 63,072,641
At October 31, 1997, the International Growth Funds held the following
securities which were purchased in a private placement transaction and may
require registration in order to effect a sale in the ordinary course of
business.
<TABLE>
<CAPTION>
Value at Value as a
Date of October 31, Percentage of
Security Description Acquisition Cost 1997 Net Assets
<S> <C> <C> <C> <C> <C>
Principal International Al Ahram Beverages Co. 8/21/97 $ 76,500 $ 82,500 .77%
Emerging Markets Fund, Inc. Bank Handlowy GDR 8/14/97 50,200 54,800 .51
Banque Libanaise le Commerce
SAL ADR 8/14/97 115,250 110,500 1.04
Banque Marocaine du Commerce
Exterieur 8/15/97 91,250 94,250 .88
Compania Anonima Telefonos
de Venezuela ADR 8/14/97 102,114 105,000 .98
8/19/97 12,053 13,125 .12
8/20/97 12,165 13,125 .12
10/21/97 14,059 13,125 .12
10/30/97 11,265 13,125 .12
Hyundai Motor Co., Ltd. GDR 8/14/97 95,666 37,500 .35
Paints & Chemical Industries Co. GDR 9/26/97 176,250 150,000 1.41
10/20/97 11,700 10,000 .09
10/30/97 19,750 20,000 .19
Industrial Credit & Investment Corp.
of India 8/14/97 181,250 142,500 1.33
10/7/97 31,400 28,500 .27
10/20/97 33,400 28,500 .27
Reliance Industries GDR 8/14/97 72,000 61,687 .58
10/24/97 22,125 20,563 .19
Videsh Sanchar Nigam Ltd. GDR 8/14/97 132,800 110,400 1.04
1,109,200 10.38
Principal International Bure Investment Aktiebolaget AB 8/14/97 71,568 75,799 .54
SmallCap Fund, Inc. 8/18/97 46,092 48,903 .35
8/22/97 8,101 8,558 .06
10/7/97 105,213 97,806 .70
Industrial & Financial Systems 8/14/97 43,796 63,801 .46
8/18/97 10,528 15,312 .11
9/8/97 51,954 67,629 .48
10/9/97 101,152 95,701 .68
10/30/97 53,442 51,041 .36
Newsquest PLC 10/16/97 227,052 219,272 1.57
743,822 5.31
Princor World Alfa SA Convertible
Fund, Inc. Subordinated Debentures 9/25/95 $1,293,500 $ 2,015,000 .61%
11/20/96 779,234 1,100,500 .34
Fokus Bank 10/9/95 557,692 1,054,196 .32
12/17/96 797,392 1,054,196 .32
Hyundai Motor Co. Ltd. GDR 8/23/96 318,750 93,750 .03
8/28/96 312,500 93,750 .03
9/3/96 159,998 48,750 .01
Kemira OY 12/13/96 610,584 508,005 .16
12/20/96 1,478,458 1,188,732 .36
2/26/97 1,162,586 1,026,170 .31
4/8/97 615,051 609,606 .19
4/9/97 41,573 40,640 .01
Voest-Alpine Stahl 10/27/95 913,965 1,300,153 .40
1/11/96 414,525 563,400 .17
6/26/96 585,672 745,421 .23
6/27/96 298,647 381,378 .12
11,823,647 3.61
</TABLE>
The International Growth Funds' investments are with various issuers in various
industries. The Schedules of Investments contained herein summarize
concentrations of credit risk by issuer and industry.
Note 5 -- Foreign Currency Contracts
At October 31, 1997, Principal International Emerging Markets Fund, Inc. and
Princor World Fund, Inc. owned forward contracts to sell Hong Kong Dollars at
specified future dates at fixed exchange rates. Forward foreign currency
contracts are valued at the forward rate, and are marked-to-market daily. The
change in market value is recorded by each fund as an unrealized gain or loss.
When the contract is closed, each fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed.
<TABLE>
<CAPTION>
Value at
Contracts In Exchange Settlement October 31, Net Unrealized
to Deliver For Date 1997 Appreciation
<S> <C> <C> <C> <C> <C>
Principal International
Emerging Markets Fund, Inc. Hong Kong Dollars 2,385,000 $ 300,000 4/30/98 $ 297,963 $ 2,037
Princor World Fund, Inc. Hong Kong Dollars 23,850,000 3,000,000 4/30/98 2,979,631 20,369
</TABLE>
The use of forward foreign currency contracts does not eliminate fluctuations in
underlying prices of each fund's portfolio securities, but it does establish a
rate of exchange that can be achieved in the future. Although forward foreign
currency contracts limit the risk of loss due to a decline in the value of the
hedged currency, they also limit any potential gain that might result should the
value of the currency increase. In addition, each fund could be exposed to risks
if the counterparties to the contracts are unable to meet the terms of their
contracts.
Note 6 -- Capital Share Transactions
Transactions in Capital Stock by fund were as follows:
<TABLE>
<CAPTION>
Principal International Principal International Princor
Emerging Markets Fund, Inc.* SmallCap Fund, Inc.* World Fund, Inc.
Year Ended October 31, 1997, Except as Noted:
Shares sold:
<S> <C> <C> <C>
Class A ......................................... 608,541 624,104 10,828,384
Class B ......................................... 389,744 489,175 2,259,005
Class R ......................................... 303,043 302,174 1,249,248
Shares issued in reinvestment of dividends and distributions:
Class A ........................................... -- -- 1,075,120
Class B ........................................... -- -- 85,277
Class R ......................................... -- -- 9,208
Shares redeemed:
Class A ......................................... (844) (707) (2,929,702)
Class B ......................................... (13,468) (9,721) (638,189)
Class R ......................................... -- (585) (118,068)
Net Increase 1,287,016 1,404,440 11,820,283
Year Ended October 31, 1996, Except as Noted:
Shares sold:
Class A ......................................... -- -- 5,112,891
Class B ......................................... -- -- 1,476,354
Class R** ....................................... -- -- 130,933
Shares issued in reinvestment of dividends and distributions:
Class A ........................................... -- -- 1,013,112
Class B ........................................... -- -- 30,387
Shares redeemed:
Class A ......................................... -- -- (2,342,950)
Class B ......................................... -- -- (96,808)
Class R** ....................................... -- -- (754)
Net Increase -- -- 5,323,165
<FN>
* Period from August 14, 1997 (date operations commenced) through October
31, 1997. ** Period from February 27, 1996 (date operations commenced)
through October 31, 1996.
</FN>
</TABLE>
Note 7 -- Line of Credit
The International Growth Funds participate with the other funds managed by
Princor Management Corporation in an unsecured joint line of credit with a bank,
which allows the funds to borrow up to $40,000,000, collectively. Borrowings are
made solely to facilitate the handling of unusual and/or unanticipated
short-term cash requirements. Interest is charged to each fund, based on its
borrowings, at a rate equal to the Fed Funds Rate plus .50%. Additionally, a
commitment fee is charged at the annual rate of .08% on the average unused
portion of the line of credit. The commitment fee is allocated among the
participating funds in proportion to their average net assets during each
quarter. At October 31, 1997, the International Growth Funds had no outstanding
borrowings under the line of credit.
<PAGE>
SCHEDULE OF INVESTMENTS
GROWTH FUNDS (INTERNATIONAL)
PRINCIPAL INTERNATIONAL EMERGING MARKETS FUND, INC.
Shares
Held Value
Common Stocks (88.37%)
Beverages (8.27%)
Al Ahram Beverages Co. 3,000(a)(b) $ 82,500
Companhia Cervehavia Brahama ADR 6,000 77,250
Embotelladora Andina ADR (Series A) 7,700 184,800
Fomento Economico Mexicano, SA
Class B 23,400 164,245
PanAmerican Beverages ADR 5,500 170,500
Quilmes Industrial Quins SA ADR 16,400 202,950
882,245
Blast Furnace & Basic Steel
Products (2.74%)
Hylsamex SA Class B 25,000 160,926
Tubos De Acero De Mexico ADR 6,500(a) 131,219
292,145
Cable & Other Pay TV Services (0.58%)
Multicanal Participacoes - ADR 10,000(a) 61,875
Central Reserve Depositories (2.50%)
Arab Malaysian Finance Berhad 70,000 36,567
Banco Ganadero SA Sponsored ADR 5,000 120,000
Banco Santiago SA ADR 5,000 109,375
265,942
Chemicals & Allied Products (1.14%)
Sarantis SA 10,000 121,684
Commercial Banks (4.59%)
Bank Handlowy GDR 4,000(a)(b) 54,800
Bank Inicjatyw Gospodarczych 120,000(a) 120,516
Bank Rio De La Plata SA ADR 10,000(a) 105,000
Banque Libanaise Le Commerce
SAL ADR 5,000(a)(b) 110,500
Banque Marocaine du Commerce
Exterieur 5,000(b) 94,250
PT Bank Bira 33,000 4,577
489,643
Communications Equipment (2.83%)
ECI Telecommunications Ltd. ADR 7,100 196,138
Ericsson Telecommunicacoes 3,600,000(a) 106,127
302,265
Computer & Office Equipment (1.52%)
Orbotech Ltd. ADR 3,800(a) 162,450
Construction & Related
Machinery (1.18%)
Barlow Ltd. 12,500 125,974
Consumer Products (1.43%)
Rothmans Industries Ltd. 38,000 152,191
Deep Sea Foreign Transportation
of Freight (0.28%)
Noble Group Ltd. 100,000(a) 30,000
Department Stores (0.26%)
PT Matahari Putra Prima 108,000 20,971
PT Matahari Putra Prima Rights 216,000 6,990
27,961
Drugs (1.75%)
Teva Pharmaceutical ADR 4,000 187,000
Electric Services (4.87%)
Centrais Electricas de Santa Catarina 115,000 125,176
Companhia Paranaense de
Enersis-Copel ADR 9,000(a) 107,438
Electricidade De Portugal SA 8,400 147,695
Enersis SA 4,200 138,600
518,909
Electrical Goods (1.45%)
Empresa Nacional De Electric
Sponsored ADR 7,700 154,963
Electrical Industrial Apparatus (0.44%)
Guangdong Kelon Electric Holding 40,000 47,324
Electronic Components &
Accessories (2.68%)
Elec & Eltek International 15,000 108,000
Varitronix 66,000 109,296
Wong Circuits Hldgs Ltd. 48,000(a) 68,640
285,936
Electronic Distribution
Equipment (6.34%)
KR Precision Public Co. Ltd. 10,000 72,151
Tadiran Ltd. ADR 5,300 200,075
Techtronic Industries Co. 1,190,000 218,617
Vtech Holding Ltd. 95,000 185,588
676,431
Engines & Turbines (1.20%)
LG Cable & Machinery 12,300 127,487
Federal & Federally Sponsored
Credit (1.87%)
Industrial Credit & Invest Corp.
of India 14,000(a)(b) 199,500
Fire, Marine, & Casualty
Insurance (1.05%)
Alfa A 15,300 111,752
Foreign Banks, Branches &
Agencies (2.20%)
Credicorp Ltd. ADR 7,800 139,913
Housing & Commercial Bank 11,000 94,875
234,788
Furniture & Home Furnishings
Stores (1.27%)
Grupo Elektra SA-CPO 100,000 135,392
Gas Production & Distribution (0.51%)
Transportadora de Gas del SUR SA 28,500 54,182
Grocery Stores (1.29%)
Blue Square Chain Investments &
Property Ltd. 15,000(a) 137,434
Holding Offices (1.66%)
The India Fund, Inc. ADR 21,500 177,375
Local & Suburban
Transportation (0.13%)
PT Steady Safe 50,000 13,523
Meat Products (2.19%)
Davomas Abadi 210,000 91,748
PT Daya Guna Samudera 110,000 141,886
233,634
Metal Cans & Shipping
Containers (0.83%)
Colep 6,100(a) 88,442
Miscellaneous Electrical Equipment &
Supplies (1.73%)
G.P. Batteries International 63,200 184,816
Miscellaneous Investing (1.08%)
Banco Latino Americano de
Exportacione 2,900 115,275
Miscellaneous Non-Durable
Goods (1.62%)
Desc SA ADR 5,100 172,763
Miscellaneous Textile Goods (1.83%)
Esprit Holdings Ltd. 316,000 112,426
Reliance Industries GDR 4,000(b) 82,250
194,676
Motor Vehicles & Equipment (1.95%)
Hyundai Motor Co. Ltd. GDR 10,000(a)(b) 37,500
Qingling Motors Co. 80,000 48,772
Tata Engineering & Locomotive
Ltd. Co. 12,000 121,500
207,772
Non-Classifiable Establishments (0.58%)
QPL International Holdings Ltd. 100,000 62,100
Paints & Allied Products (1.69%)
Paints & Chemical Industries Co. GDR 18,000(a)(b) 180,000
Petroleum Refining (3.95%)
Sasol Ltd. 18,000 216,934
YPF Sociedad Anonima ADR 6,400 204,800
421,734
Photographic Equipment &
Supplies (0.23%)
PT Bunas Finance 100,000 24,965
Search & Navigation Equipment (1.92%)
Elbit Systems Ltd. 17,400 204,450
Security & Commodity
Exchanges (1.03%)
OTK Holdings Ltd. 126,000 109,963
Security Brokers & Dealers (0.48%)
Peregrine Investment Holdings 52,000 51,129
Telephone Communication (10.13%)
Compania Anonima Telefonos De
Venezuela ADR 3,600(b) 157,500
Hellenic Telecommunication 7,000 146,426
Investec-Consattadoria Internacional SA 2,000(a) 66,120
Telec De Sao Paulo SA 540,000 144,006
Telec De Sao Paulo SA Rights Issue 16,718(a) 8
Telecommunicacoes Brasileiras SA ADR 2,300 233,450
Telefonica de Argentina ADR 4,300 120,938
Teletypos/Mega Channel 18,000 101,575
Videsh Sanchar Nigam Ltd. GDR 8,000(b) 110,400
1,080,423
Water Supply (1.10%)
Companhia de Saneamento Basico de
Estado de Sao Paulo - SABESP 660,000(a) 116,740
Total Common Stocks 9,425,253
Preferred Stock (1.18%)
Cement, Hydraulic (1.18%)
Titan Cement Co. 3,300 125,684
Principal
Amount Value
Commercial Paper (12.99%)
Federal & Federally Sponsored
Credit (12.99%)
FHLMC Commerical Paper;
5.65%; 11/3/97 $1,385,000 $ 1,385,000
Total Portfolio Investments (102.54%) 10,935,937
Liabilities, net of cash, receivables and
other assets (-2.54%) (270,978)
Total Net Assets (100.00%) $10,664,959
(a) Non-income producing security - No dividend paid during the period.
(b) Restricted security - See Note 4 to the financial statements.
Principal International Emerging Markets Fund, Inc.
Investments by Country
Total Percentage of
Country Value Total Value
Argentina $ 687,870 6.29%
Brazil 972,070 8.89
Chile 587,737 5.38
China 96,096 0.88
Columbia 120,000 1.10
Egypt 262,500 2.40
Greece 495,370 4.53
Hong Kong 739,155 6.76
Indonesia 304,660 2.79
India 691,025 6.32
Israel 1,087,547 9.94
Korea 259,863 2.38
Lebanon 110,500 1.01
Malaysia 36,567 0.33
Mexico 1,046,796 9.58
Morocco 94,250 0.86
Panama 115,274 1.05
Peru 139,912 1.28
Poland 175,316 1.60
Portugal 302,258 2.76
Singapore 543,648 4.97
South Africa 452,872 4.14
Thailand 72,151 0.66
United States 1,385,000 12.66
Venezuela 157,500 1.44
Total $10,935,937 100.00%
PRINCIPAL INTERNATIONAL SMALLCAP FUND, INC.
Shares
Held Value
Common Stock (88.70%)
Advertising (3.92%)
Industrial & Financial Systems 46,000(a)(b) $ 293,484
United Construction Group Ltd. 131,000 253,932
547,416
Air Transportation, Scheduled (1.66%)
Ryanair Holdings PLC ADR 9,300(a) 232,500
Airports, Flying Fields &
Services (1.49%)
Aeroporti Di Roma 23,000(a) 208,955
Automotive Rentals, No Drivers (1.30%)
Avis Europe PLC 73,000 182,397
Central Reserve Depositories (1.39%)
Union Bank of Norway 5,600 193,983
Chemicals & Allied Products (1.63%)
Sarantis SA 18,700 227,550
Communications Equipment (0.64%)
ASM Pacific 120,000 90,045
Computer & Data Processing
Services (4.86%)
Justsystem Corp. 5,800(a) 113,328
Merkantildata ASA 5,500 183,841
Prosolvia AB 11,100(a) 382,645
679,814
Computer & Office Equipment (1.28%)
Orbotech Ltd. ADR 4,200(a) 179,550
Consumer Products (0.89%)
Rothmans Industries Ltd. 31,000 124,156
Crude Petroleum & Natural Gas (1.47%)
Elf Gabon 500 95,726
Hardy Oil & Gas 21,300 110,369
206,095
Deep Sea Foreign Transportation
of Freight (3.94%)
Saevik Supply ASA 16,300(a) 372,540
Van Ommeren NV 5,000 179,057
551,597
Dimension Stone (0.80%)
Ausdrill Ltd. 114,000 112,498
Drugs (2.79%)
Bio Technology General Corp. 17,400(a) 213,150
Teva Pharmaceutical ADR 3,800 177,650
390,800
Eating & Drinking Places (1.28%)
Restaurant Brands New Zealand Ltd. 138,300(a) 179,432
Electrical Industrial Apparatus (1.68%)
Doncasters PLC ADR 8,700(a) 234,356
Electrical Work (0.66%)
Internatio-Muller NV 2,900 92,198
Electronic Components &
Accessories (0.93%)
Elec & Eltek International 18,000 129,600
Electronic Distribution (3.27%)
ASM Lithography Holding NV 1,400(a) 102,550
KR Precision Public Co. Ltd. 14,500 104,619
Techtronic Industries Co. 1,361,000 250,032
457,201
Engineering & Architects (2.40%)
CIE Generale De Geophysique 12,000(a) 336,000
Engines & Turbines (1.67%)
Radex-Heraklith
Industriebeteiligungs AG 6,000 233,285
Functions Closely Related
to Banking (0.54%)
Irish Permanent PLC 7,900 76,173
General Industrial Machinery (0.62%)
BE Semiconductor Industries NV 5,800(a) 86,669
Glass & Glassware, Pressed
or Blown (0.53%)
Vidrala SA 1,700 73,679
Hose & Belting & Gaskets
& Packing (1.88%)
Phoenix AG 14,600 262,963
Iron Ores (0.64%)
Repadre Capital Corp. 18,100(a) 89,924
Life Insurance (1.30%)
Scor SA 3,900 181,515
Meat Products (2.50%)
Davomas Abadi 390,000 170,388
Perkins Food PLC 111,200 179,013
349,401
Metal Services, NEC (2.00%)
Philip Services Corp. ADR 16,000(a) 280,000
Miscellaneous Food &
Kindred Products (1.98%)
Greencore Group PLC 59,100 277,494
Miscellaneous Manufacturers (2.04%)
Docdata NV 15,700(a) 285,569
Miscellaneous Primary Metal
Products (2.30%)
YBM Magnex International, Inc. 26,700(a) 322,151
Miscellaneous Textile Goods (0.64%)
Esprit Holdings Ltd. 250,000 88,945
Motor Vehicles & Equipment (3.35%)
E.C.I.A. Equipment & Composants 900 149,321
Mayflower Corp. PLC 95,000 318,611
467,932
Newspapers (1.57%)
Newsquest PLC 56,000(a)(b) 219,272
Nonclassifiable Establishments (1.65%)
Bure Investment Aktiebolaget AB 18,900(b) 231,066
Nonresidential Building
Construction (1.46%)
Algeco 5,500 204,672
Oil & Gas Field Services (2.91%)
Det Sondenfjelds-Norske
Dampskibsselskab 7,300(a) 163,715
Farstad Shipping 38,000 243,722
407,437
Personnel Supply Services (1.74%)
Unique International NV 9,800 243,899
Petroleum Refining (0.89%)
Ocean Rig ASA 100,000(a) 124,275
Ocean Rig ASA Rights 250,000(a) 357
124,632
Pulp Mills (2.41%)
Lassila & Tikanoja Ltd. OY 3,700 336,541
Radio & Television
Broadcasting (0.40%)
P4 Radio Hele Norge ASA 6,000 55,709
Real Estate Operators &
Lessors (0.64%)
Castellum AB 9,500(a) 88,853
Residential Building
Construction (0.70%)
Volker Wessels Stevin NV 3,200 97,283
Sanitary Services (2.08%)
De Sammensluttede Vognmand AS 400 290,763
Search & Navigation
Equipment (1.55%)
Elbit Systems Ltd. 18,500 217,375
Security Brokers & Dealers (2.09%)
Van Der Moolen Holdings 3,400 292,571
Soil Preparation (0.96%)
I.A.M.A. Ltd. 73,500 134,702
Telephone Communications (2.73%)
Colt Telecom Group PLC 44,500(a) 381,692
Timber Tracks (0.71%)
Evergreen Forest 273,000(a) 98,765
Trusts (1.43%)
Kiwi Income Property Trust 130,000 93,251
Nursing Home Properties PLC 51,700 107,069
200,320
Watches, Clocks, Watchcases &
Parts (0.68%)
Tag Heuer International SA ADR 8,300(a) 95,450
Women's & Children's
Undergarments (1.83%)
CSP International SPA 23,200(a) 256,001
Total Common Stocks 12,408,846
Principal
Amount Value
Commercial Paper (12.37%)
Federal & Federally Sponsored
Credit (12.37%)
FHLMC Commercial Paper;
5.65%; 11/3/97 $1,730,000 $ 1,730,000
Total Portfolio Investments (101.07%) 14,138,846
Liabilities, net of cash, receivables and
other assets (-1.07%) (150,232)
Total Net Assets (100.00%) $13,988,614
(a) Non-income producing security - No dividend paid during the period.
(b) Restricted security - See Note 4 to the financial statements.
Principal International SmallCap Fund, Inc.
Investments by Country
Total Percentage of
Country Value Total Value
Australia $ 501,132 3.54%
Austria 233,285 1.65
Canada 692,075 4.89
Denmark 290,763 2.06
Finland 336,541 2.38
France 967,235 6.84
Germany 262,963 1.86
Greece 227,550 1.61
Hong Kong 429,021 3.03
Indonesia 170,388 1.21
Ireland 232,500 1.64
Israel 787,725 5.57
Italy 464,956 3.29
Japan 113,328 0.80
Netherlands 1,379,796 9.76
New Zealand 371,448 2.63
Norway 1,338,143 9.46
Singapore 253,756 1.79
Spain 73,679 0.52
Sweden 996,048 7.04
Switzerland 95,450 0.68
Thailand 104,619 0.74
United Kingdom 2,086,445 14.77
United States 1,730,000 12.24
Total $14,138,846 100.00%
PRINCOR WORLD FUND, INC.
Shares
Held Value
Common Stocks (94.45%)
Advertising (1.94%)
WPP Group PLC 1,382,000 $ 6,326,714
Beverages (1.39%)
Lion Nathan 596,000 1,442,419
PanAmerican Beverages ADR 99,800 3,093,800
4,536,219
Blast Furnace & Basic Steel
Products (0.92%)
Voest-Alpine Stahl 69,000(b) 2,990,352
Central Reserve Depositories (3.66%)
Banco Totta & Acores 145,000 2,805,280
National Westminster Bank 447,931 6,474,793
Union Bank of Norway 36,700 1,271,285
Wing Hang Bank 549,600 1,414,973
11,966,331
Combination Utility Services (0.90%)
ABB AG 2,240 2,927,557
Commercial Banks (11.62%)
ABN-AMRO Holdings NV 290,748 5,857,738
Bank of Ireland 537,239 6,779,248
Barclays PLC 190,594 4,813,287
Fokus Bank 240,000(b) 2,108,392
Istituto Mobiliare Italiano 413,000 3,699,565
National Australia Bank Ltd. 294,437 4,036,689
Royal Bank of Canada Montreal Quebec 103,000 5,508,322
Svenska Handelsbanken AB Free 172,750 5,147,259
37,950,500
Communications Equipment (0.87%)
ECI Telecommunications Ltd. ADR 103,000 2,845,375
Communications Services, NEC (0.93%)
KPN Royal PTT Nederland 79,780 3,050,243
Computer & Office Equipment (0.26%)
Canon, Inc. 35,000 849,755
Construction & Related
Machinery (0.65%)
Powerscreen International PLC 182,000 2,128,742
Consumer Products (3.08%)
Imasco Ltd. 170,217 5,412,275
Imperial Tobacco Group PLC 758,500 4,661,622
10,073,897
Crude Petroleum & Natural Gas (0.82%)
Hardy Oil & Gas 520,000 2,694,445
Deep Sea Foreign Transportation of
Freight (0.71%)
Van Ommeren NV 64,841 2,322,047
Department Stores (0.61%)
Vendex International 36,751 2,007,296
Drugs (6.66%)
Elan Corp. PLC ADR 103,000(a) 5,137,125
Galencia Holdings AG 2,890 1,448,740
Novartis AG 4,423 6,946,245
Pharmacia & Upjohn, Inc. 135,000 4,286,250
Teva Pharmaceutical ADR 84,400 3,945,700
21,764,060
Electric Light & Wiring
Equipment (0.12%)
Clipsal Industries Holdings 149,000 385,910
Electric Services (1.05%)
Enersis SA ADR 87,000 2,871,000
Korea Electric Power Corp. 39,500 560,893
3,431,893
Electronic Components &
Accessories (1.45%)
Amtek Engineering 675,000 532,097
Elec & Eltek International 454,000 3,268,800
Murata Mfg. 9,000 365,178
Varitronix 340,000 563,038
4,729,113
Electronic Distribution
Equipment (1.66%)
Phillips Electronics 69,100 5,412,004
Engines & Turbines (2.15%)
Mabuchi Motor 4,000 222,832
Radex-Heraklith
Industriebeteiligungs AG 89,000 3,460,388
Scapa Group PLC 838,000 3,344,479
7,027,699
Farm & Garden Machinery (1.35%)
New Holland NV 155,000 4,407,813
Finance Services (0.08%)
MBF Capital Berhad 419,000 245,147
Functions Closely Related to
Banking (0.46%)
Liechtenstein Global Trust AG 3,000 1,503,882
Gas Production & Distribution (1.33%)
OMV AG 30,600 4,357,370
General Industrial Machinery (0.76%)
SKF AB 'B' Free 106,700 2,480,657
Holding Offices (0.72%)
First Pacific Co., Ltd. 3,727,303 2,350,812
Hose, Belting, Gaskets &
Packing (0.52%)
Phoenix AG 94,000 1,693,052
Industrial Inorganic Chemicals (2.03%)
Bayer AG 90,550 3,261,827
Kemira OY 332,000(b) 3,373,153
6,634,980
Investment Offices (1.31%)
AMVESCAP PLC 651,400 4,287,409
Life Insurance (1.36%)
QBE Insurance Group Ltd. 946,390 4,436,133
Meat Products (5.25%)
Danisco AS 120,000 6,796,016
Orkla B Ordinary Shares 70,400 5,802,477
Unilever NV 86,000 4,573,141
17,171,634
Metal Services, NEC (1.05%)
Philip Services Corp. ADR 196,000(a) 3,430,000
Miscellaneous Chemical Products (1.19%)
Hoechst AG 101,000 3,887,658
Miscellaneous Converted Paper
Products (1.64%)
Bunzl PLC 1,285,000 5,343,949
Miscellaneous Food &
Kindred Products (1.42%)
Greencore Group PLC 991,000 4,653,066
Miscellaneous Manufacturers (0.16%)
Carter Holt Harvey Ltd. 297,300 519,238
Miscellaneous Non-Durable
Goods (1.77%)
Grand Metropolitan PLC 643,726 5,791,330
Miscellaneous Textile Goods (0.62%)
Esprit Holdings Ltd. 5,666,000 2,015,848
Miscellaneous Transportation
Equipment (1.04%)
Autoliv, Inc. 86,000 3,391,625
Miscellaneous Wood Products (0.41%)
Enso Oy 142,000 1,332,812
Motor Vehicles & Equipment (1.70%)
E.C.I.A. Equipment & Composants 17,597 2,919,567
Hyundai Motor Co., Ltd. GDR 63,000(b) 236,250
Swedish Match Co. 785,000 2,412,407
5,568,224
Newspapers (1.26%)
Publishing & Broadcasting Ltd. 710,000 4,128,812
Oil & Gas Field Services (1.18%)
Eni SPA 684,000 3,852,723
Petroleum Refining (4.48%)
Repsol Petroleo SA 114,400 4,800,770
Sasol Ltd. 372,000 4,483,315
YPF Sociedad Anonima ADR 167,000 5,344,000
14,628,085
Plastic Materials & Synthetics (1.06%)
Astra AB 222,466 3,448,059
Pulp Mills (2.48%)
Lassila & Tikanoja Ltd. Oy 41,000 3,729,241
UPM-Kymmene Oy 196,980 4,387,692
8,116,933
Radio & Television Broadcasting (1.53%)
Carlton Communications PLC 600,000 5,000,520
Security & Commodity Services (1.22%)
Corporacion Bancaria de Espania SA 72,000 4,002,201
Security Brokers & Dealers (0.69%)
Peregrine Investment Holdings 2,289,000 2,250,650
Peregrine Investment - Warrants 127,000(a) 4,108
2,254,758
Soap, Cleaners & Toilet Goods (1.40%)
Reckitt & Colman PLC 298,797 4,567,099
Special Industry Machinery (2.33%)
Cookson Group 1,540,000 6,172,003
IHC Caland NV 23,300 1,433,497
7,605,500
Sugar & Confectionery Products (2.03%)
Nestle 4,704 6,646,437
Telephone Communication (6.36%)
Nokia Corp. Class A ADR 71,000 6,265,750
Tele Danmark B 34,800 2,045,216
Telecom Corp of New Zealand Ltd. 842,000 4,086,063
Telecom Italia-DI 837,200 3,388,130
Telefonica de Espana SA 183,400 5,008,929
20,794,088
Watches, Clocks, Watchcases &
Parts (0.81%)
Tag Heuer International SA 23,200(a) 2,658,291
Total Common Stocks 308,626,296
Preferred Stock (0.82%)
Commercial Banks (0.82%)
National Australia Bank ECU 96,000 2,670,000
Principal
Amount Value
Bond (0.95%)
Fire, Marine & Casualty
Insurance (0.95%)
Alfa SA Convertible Subordinated
Debentures; 8.00%; 9/15/00 $2,010,000(b) $ 3,115,500
Commercial Paper (4.24%)
Personal Credit Institutions (2.82%)
Associates Corp.;
5.68%; 11/3/97 9,215,000 9,215,000
Securities Brokers & Dealers (1.42%)
Merrill Lynch & Co.;
5.55%; 11/3/97 4,655,000 4,655,000
Total Commercial Paper 13,870,000
Total Portfolio Investments (100.46%) 328,281,796
Liabilities, net of cash, receivables and
other assets (-0.46%) (1,508,596)
Total Net Assets (100.00%) $326,773,200
(a) Non-Income producing security - No dividend paid during the period.
(b) Restricted security - See Note 4 to the financial statements.
Princor World Fund, Inc.
Investments by Country
Total Percentage of
Country Value Total Value
Argentina $ 5,344,000 1.63%
Australia 15,271,634 4.66
Austria 10,808,109 3.29
Canada 14,350,597 4.37
Chile 2,871,000 0.88
Denmark 8,841,232 2.69
Finland 19,088,647 5.82
France 2,919,567 0.89
Germany 8,842,537 2.69
Hong Kong 8,599,429 2.62
Israel 6,791,075 2.07
Italy 10,940,417 3.33
Japan 1,437,765 0.44
Korea, Republic of 797,143 0.24
Malaysia 245,147 0.07
Mexico 6,209,300 1.89
Netherlands 29,063,777 8.85
New Zealand 6,047,722 1.84
Norway 9,182,154 2.80
Portugal 2,805,280 0.85
Singapore 4,186,807 1.28
South Africa 4,483,314 1.37
Spain 13,811,901 4.21
Sweden 16,880,008 5.14
Switzerland 22,131,152 6.74
United Kingdom 78,175,832 23.81
United States 18,156,250 5.53
Total $328,281,796 100.00%
See accompanying note.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Selected data for a share of Capital Stock outstanding throughout each period:
Income from Investment Operations Less Distributions
Net Net Realized
Invest- and
Net Asset ment Unrealized Total Dividends Distri-
Value at Income Gain from from Net butions Total
Beginning (Operating (Loss) on Investment Investment from Distri-
of Period Loss) Investments Operations Income Capital Gains butions
<S> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL INTERNATIONAL
EMERGING GROWTH FUND, INC.
Class A:
Period Ended October 31, 1997(b) $ 9.51 $(.01) $(1.21) $(1.22) $ -- $ -- $ --
Class B:
Period Ended October 31, 1997(b) 9.51 (.01) (1.22) (1.23) -- -- --
Class R:
Period Ended October 31, 1997(b) 9.51 (.01) (1.22) (1.23) -- -- --
PRINCIPAL INTERNATIONAL
SMALLCAP FUND, INC.
Class A:
Period Ended October 31, 1997(b) 10.04 (.01) (.07) (.08) -- -- --
Class B:
Period Ended October 31, 1997(b) 10.04 (.01) (.07) (.08) -- -- --
Class R:
Period Ended October 31, 1997(b) 10.04 (.01) (.07) (.08) -- -- --
PRINCOR WORLD FUND, INC.
Class A:
Year Ended October 31,
1997 8.14 .09 1.52 1.61 (.11) (.31) (.42)
1996 7.28 .10 1.17 1.27 (.08) (.33) (.41)
1995 7.44 .08 (.02) .06 (.03) (.19) (.22)
1994 6.85 .01 .64 .65 (.02) (.04) (.06)
1993 5.02 .03 1.98 2.01 (.05) (.13) (.18)
Class B:
Year Ended October 31,
1997 8.07 .03 1.51 1.54 (.04) (.31) (.35)
1996 7.24 .03 1.15 1.18 (.02) (.33) (.35)
Period Ended October 31, 1995(f) 6.71 .05 .51 .56 (.03) -- (.03)
Class R:
Year Ended October 31, 1997 8.12 .07 1.47 1.54 (.08) (.31) (.39)
Period Ended October 31, 1996(g) 7.48 .01 .63 .64 -- -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Investment
Net Asset Ratio of Income (Oper-
Value at Net Assets at Expenses to ating Loss) Portfolio Average
End Total End of Period Average to Average Turnover Commission
of Period Return(a) (in thousands) Net Assets Net Assets Rate Rate Paid(e)
<S> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL INTERNATIONAL
EMERGING GROWTH FUND, INC.
Class A:
Period Ended October 31, 1997(b) $8.29 (10.18)%(c) $ 5,039 2.03%(d) (.32)%(d) 21.4%(d) $.005
Class B:
Period Ended October 31, 1997(b) 8.28 (10.29)(c) 3,116 2.16(d) (.46)(d) 21.4(d) .005
Class R:
Period Ended October 31, 1997(b) 8.28 (10.29)(c) 2,510 2.20(d) (.51)(d) 21.4(d) .005
PRINCIPAL INTERNATIONAL
SMALLCAP FUND, INC.
Class A:
Period Ended October 31, 1997(b) 9.96 .50(c) 6,210 1.99(d) (.40)(d) 10.4(d) .0104
Class B:
Period Ended October 31, 1997(b) 9.96 .50(c) 4,774 2.07(d) (.47)(d) 10.4(d) .0104
Class R:
Period Ended October 31, 1997(b) 9.96 .50(c) 3,004 2.15(d) (.54)(d) 10.4(d) .0104
PRINCOR WORLD FUND, INC.
Class A:
Year Ended October 31,
1997 9.33 20.46 281,158 1.39 1.25 26.6 .0174
1996 8.14 18.36 172,276 1.45 1.43 23.8 .0147
1995 7.28 1.03 126,554 1.63 1.10 35.4 N/A
1994 7.44 9.60 115,812 1.74 .10 13.2 N/A
1993 6.85 41.39 63,718 1.61 .59 19.5 N/A
Class B:
Year Ended October 31,
1997 9.26 19.62 33,842 2.17 .42 26.6 .0174
1996 8.07 17.16 15,745 2.28 .64 23.8 .0197
Period Ended October 31, 1995(f) 7.24 9.77(c) 3,908 2.19(d) .58(d) 35.4(d) N/A
Class R:
Year Ended October 31, 1997 9.27 19.65 11,773 2.10 .44 26.6 .0174
Period Ended October 31, 1996(g) 8.12 9.29(c) 1,057 1.59(d) .78(d) 23.8(d) .0197
</TABLE>
See accompanying notes.
Notes to Financial Highlights
(a) Total return is calculated without the front-end sales charge or contingent
deferred sales charge.
(b) Period from August 29, 1997, date Class A and Class B shares first offered
to the public and Class R shares first offered to eligible purchasers,
through October 31, 1997. Principal International Emerging Markets Fund,
Inc. and Principal International SmallCap Fund, Inc. classes of shares
recognized net investment income as follows for the period from the initial
purchase of shares on August 14, 1997, through August 28, 1997, none of
which was distributed to the sole shareholder, Principal Mutual Life
Insurance Company. Principal International Emerging Markets Fund, Inc. and
Principal International SmallCap Fund, Inc. incurred unrealized gains
(losses) on investments during the initial interim period as follows. This
represents Class A, Class B and Class R share activities prior to the
initial public offering of all classes of shares of each fund.
Per Share Per Share
Net Investment Unrealized
Income Gain (Loss)
Principal International
Emerging Markets Fund, Inc.:
Class A $.01 $(.50)
Class B .01 (.50)
Class R .01 (.50)
Principal International
SmallCap Fund, Inc.:
Class A .01 .03
Class B .01 .03
Class R .01 .03
(c) Total return amounts have not been annualized.
(d) Computed on an annualized basis.
(e) The International Growth Funds identified the cost of commissions paid on
purchases and sales of portfolio securities charged to each fund in the
local currency of the respective country involved. The value of the
commissions is translated into U.S. dollars at approximate rates when
acquired or sold. This translation can give the appearance that the
International Growth Funds average commission rates are substantially
different from the Domestic Growth Funds.
(f) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995. Princor World Fund, Inc. Class B shares
recognized no net investment income for the period from the initial
purchase by Princor Management Corporation of Class B shares on December 5,
1994, through December 8, 1994. Additionally, Class B shares incurred
unrealized losses on investments of $.07 per share during the initial
interim period. This represents Class B share activities of the fund prior
to the initial public offering of Class B shares.
(g) Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through October 31, 1996. Princor World Fund, Inc.
Class R shares recognized no net investment income for the period from the
initial purchase by Princor Management Corporation of Class R shares on
February 27, 1996, through February 28, 1996. Additionally, Class R shares
incurred unrealized gains on investments of $.02 per share during the
initial interim period. This represents Class R share activities of the
fund prior to the intial offering of Class R shares.
<PAGE>
<TABLE>
<CAPTION>
October 31, 1997
STATEMENTS OF ASSETS AND LIABILITIES
Princor Princor Government Princor
Bond Securities Income High Yield
INCOME FUNDS Fund, Inc. Fund, Inc. Fund, Inc.
<S> <C> <C> <C>
Investment in securities -- at cost.............................. $135,200,913 $264,922,931 $44,647,368
Assets
Investment in securities -- at value (Note 4).................... $142,875,265 $271,804,892 $45,637,392
Cash ............................................................ 1,789 3,230 2,001
Receivables:
Interest...................................................... 2,795,985 1,595,978 1,037,276
Investment securities sold.................................... -- -- --
Capital Stock sold............................................ 284,868 288,370 163,982
Other assets..................................................... 3,437 16,781 1,990
Total Assets 145,961,344 273,709,251 46,842,641
Liabilities
Accrued expenses................................................. 113,646 189,919 42,785
Payables:
Investment securities purchased............................... -- 4,004,688 --
Capital Stock reacquired...................................... 41,696 99,756 40,932
Indebtedness (Note 6)............................................ -- -- --
Total Liabilities 155,342 4,294,363 83,717
Net Assets Applicable to Outstanding Shares ................... $145,806,002 $269,414,888 $46,758,924
Net Assets Consist of:
Capital Stock................................................... $ 127,509 $ 234,071 $ 54,954
Additional paid-in capital....................................... 138,008,605 264,101,882 47,656,566
Accumulated undistributed net investment income.................. 68,563 447,772 33,718
Accumulated net realized (loss) on investment transactions ...... (73,027) (2,250,798) (1,976,338)
Net unrealized appreciation (depreciation) of investments........ 7,674,352 6,881,961 990,024
Total Net Assets $145,806,002 $269,414,888 $46,758,924
Capital Stock (par value: $.01 a share):
Shares authorized................................................ 100,000,000 100,000,000 100,000,000
Net Asset Value Per Share:
Class A: Net Assets.............................................. $126,427,349 $249,832,217 $38,239,255
Shares issued and outstanding........................... 11,054,664 21,701,714 4,487,914
Net asset value per share............................... $11.44 $11.51 $8.52
Maximum offering price per share(a) .................. $12.01 $12.08 $8.94
Class B: Net Assets ............................................. $13,402,627 $15,430,876 $6,558,337
Shares issued and outstanding........................... 1,173,331 1,341,948 774,091
Net asset value per share(b)............................ $11.42 $11.50 $8.47
Class R: Net Assets.............................................. $5,976,026 $4,151,795 $1,961,332
Shares issued and outstanding........................... 522,900 363,410 233,444
Net asset value per share............................... $11.43 $11.42 $8.40
<FN>
(a) Maximum offering price is equal to net asset value plus a front-end sales
charge of 4.75% (1.50% with respect to Princor Limited Term Bond Fund,
Inc.) of the offering price or 4.99% of the net asset value (1.52% of net
asset value with respect to Princor Limited Term Bond Fund, Inc.)
(b) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
</FN>
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
October 31, 1997
STATEMENTS OF ASSETS AND LIABILITIES
Princor Princor
Limited Term Bond Tax-Exempt Bond
INCOME FUNDS Fund, Inc. Fund, Inc.
<S> <C> <C>
Investment in securities -- at cost.............................. $21,443,423 $184,918,482
Assets
Investment in securities -- at value (Note 4).................... $21,432,010 $196,943,398
Cash ............................................................ 1,999 1,455,936
Receivables:
Interest...................................................... 332,448 2,542,622
Investment securities sold.................................... 18,062 --
Capital Stock sold............................................ 48,353 112,276
Other assets..................................................... -- 7,333
Total Assets 21,832,872 201,061,565
Liabilities
Accrued expenses................................................. 21,055 117,130
Payables:
Investment securities purchased............................... -- --
Capital Stock reacquired...................................... 14,089 30,080
Indebtedness (Note 6)............................................ -- 125,000
Total Liabilities 35,144 272,210
Net Assets Applicable to Outstanding Shares ................... $21,797,728 $200,789,355
Net Assets Consist of:
Capital Stock................................................... $ 22,073 $ 162,131
Additional paid-in capital....................................... 21,795,791 189,244,795
Accumulated undistributed net investment income.................. 25,655 191,601
Accumulated net realized (loss) on investment transactions ...... (34,378) (834,088)
Net unrealized appreciation (depreciation) of investments........ (11,413) 12,024,916
Total Net Assets $21,797,728 $200,789,355
Capital Stock (par value: $.01 a share):
Shares authorized................................................ 100,000,000 100,000,000
Net Asset Value Per Share:
Class A: Net Assets.............................................. $20,567,328 $193,006,582
Shares issued and outstanding........................... 2,082,741 15,584,737
Net asset value per share............................... $9.88 $12.38
Maximum offering price per share(a) .................. $10.03 $13.00
Class B: Net Assets ............................................. $624,613 $7,782,773
Shares issued and outstanding........................... 63,117 628,373
Net asset value per share(b)............................ $9.90 $12.39
Class R: Net Assets.............................................. $605,787 N/A
Shares issued and outstanding........................... 61,475 N/A
Net asset value per share............................... $9.85 N/A
<FN>
(a) Maximum offering price is equal to net asset value plus a front-end sales
charge of 4.75% (1.50% with respect to Princor Limited Term Bond Fund,
Inc.) of the offering price or 4.99% of the net asset value (1.52% of net
asset value with respect to Princor Limited Term Bond Fund, Inc.)
(b) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
</FN>
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended October 31, 1997
STATEMENTS OF OPERATIONS
Princor Princor Government Princor
Bond Securities Income High Yield
INCOME FUNDS Fund, Inc. Fund, Inc. Fund, Inc.
Net Investment Income
<S> <C> <C> <C>
Interest income.................................................... $ 9,956,799 $18,921,110 $3,545,599
Expenses:
Management and investment advisory fees (Note 3) ............. 636,217 1,227,604 230,667
Distribution and shareholder servicing fees (Note 1 and 3)...... 385,643 577,692 130,061
Transfer and administrative services (Note 1 and 3)............. 278,385 407,146 135,553
Registration fees (Note 1)...................................... 47,998 66,578 45,922
Custodian fees ................................................. 3,846 17,188 3,424
Auditing and legal fees ........................................ 6,893 9,125 8,124
Directors' fees ................................................ 7,293 7,268 7,268
Other .......................................................... 21,953 42,448 6,245
Total Gross Expenses 1,388,228 2,355,049 520,314
Less: Management and investment
advisory fees waived......................................... 60,665 -- --
Total Net Expenses 1,327,563 2,355,049 520,314
Net Investment Income 8,629,236 16,566,061 3,025,285
Net Realized and Unrealized Gain (Loss) on Investments
Net realized gain (loss) from investment transactions.............. 921,121 (776,007) 1,000,035
Change in unrealized appreciation/depreciation
of investments ................................................. 3,176,634 7,674,729 221,232
Net Realized and Unrealized
Gain (Loss) of Investments 4,097,755 6,898,722 1,221,267
Net Increase in Net Assets
Resulting from Operations $12,726,991 $23,464,783 $4,246,552
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended October 31, 1997
STATEMENTS OF OPERATIONS
Princor Princor
Limited Term Bond Tax-Exempt Bond
INCOME FUNDS Fund, Inc. Fund, Inc.
Net Investment Income
<S> <C> <C>
Interest income................................................... $1,378,412 $11,777,082
Expenses:
Management and investment advisory fees (Note 3) ............ 97,039 941,387
Distribution and shareholder servicing fees (Note 1 and 3)..... 36,355 441,115
Transfer and administrative services (Note 1 and 3)............ 98,481 44,634
Registration fees (Note 1)..................................... 37,485 38,048
Custodian fees ................................................ 4,222 2,174
Auditing and legal fees ....................................... 5,885 6,326
Directors' fees ............................................... 7,326 7,268
Other ......................................................... 6,094 22,409
Total Gross Expenses 237,996 1,605,202
Less: Management and investment
advisory fees waived........................................ 59,630 --
Total Net Expenses 178,366 1,605,202
Net Investment Income 1,200,046 10,171,880
Net Realized and Unrealized Gain (Loss) on Investments
Net realized gain (loss) from investment transactions............. (30,744) 818,662
Change in unrealized appreciation/depreciation
of investments ................................................ 99,272 5,658,545
Net Realized and Unrealized
Gain (Loss) of Investments 68,528 6,477,207
Net Increase in Net Assets
Resulting from Operations $1,268,574 $16,649,087
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended October 31, Except as Noted
STATEMENTS OF CHANGES IN NET ASSETS
Princor Princor Government
Bond Securities Income
INCOME FUNDS Fund, Inc. Fund, Inc.
1997 1996 1997 1996
Operations
<S> <C> <C> <C> <C>
Net investment income............................................ $ 8,629,236 $ 7,759,173 $ 16,566,061 $ 16,881,312
Net realized gain (loss) from investment transactions............ 921,121 (608,660) (776,007) 434,186
Change in unrealized appreciation/depreciation
of investments................................................ 3,176,634 (1,814,840) 7,674,729 (1,721,443)
Net Increase in Net Assets
Resulting from Operations 12,726,991 5,335,673 23,464,783 15,594,055
Dividends and Distributions to Shareholders
from Net Investment Income:
Class A....................................................... (8,447,557) (7,395,304) (16,727,976) (16,420,667)
Class B....................................................... (648,042) (336,861) (797,919) (470,574)
Class R....................................................... (193,972) (3,457)(b) (127,873) (2,908)(b)
Total Dividends and Distributions (9,289,571) (7,735,622) (17,653,768) (16,894,149)
Capital Share Transactions (Note 5)
Shares sold:
Class A....................................................... 27,360,904 21,969,069 31,378,780 37,110,671
Class B....................................................... 6,449,151 5,830,264 6,564,032 8,060,500
Class R....................................................... 6,016,081 517,933(b) 3,952,066 469,159(b)
Shares issued in reinvestment of dividends and distributions:
Class A....................................................... 5,936,473 4,977,027 13,338,406 12,945,447
Class B....................................................... 523,092 270,581 644,830 375,343
Class R....................................................... 193,561 3,457(b) 127,615 2,905(b)
Shares redeemed:
Class A....................................................... (23,209,507) (18,116,844) (59,260,515) (50,822,999)
Class B....................................................... (1,891,456) (773,259) (3,726,468) (1,570,936)
Class R....................................................... (948,686) (8,814)(b) (510,669) (1,707)(b)
Net Increase (Decrease) in Net Assets from
Capital Share Transactions 20,429,613 14,669,414 (7,491,923) 6,568,383
Total Increase (Decrease) 23,867,033 12,269,465 (1,680,908) 5,268,289
Net Assets
Beginning of period.............................................. 121,938,969 109,669,504 271,095,796 265,827,507
End of period (including undistributed net investment
income as set forth below).................................... $145,806,002 $121,938,969 $269,414,888 $271,095,796
Undistributed Net Investment Income ............................ $ 68,563 $ 728,898 $ 447,772 $ 1,535,479
<FN>
(a) Period from February 13, 1996 (date operations commenced) through October
31, 1996.
(b) Period from February 27, 1996 (date operations commenced) through October
31, 1996.
</FN>
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended October 31, Except as Noted
STATEMENTS OF CHANGES IN NET ASSETS
Princor Princor
High Yield Limited Term Bond
INCOME FUNDS Fund, Inc. Fund, Inc.
1997 1996 1997 1996(a)
Operations
<S> <C> <C> <C> <C>
Net investment income............................................ $ 3,025,285 $ 2,246,839 $ 1,200,046 $ 535,922
Net realized gain (loss) from investment transactions............ 1,000,035 26,628 (30,744) (3,634)
Change in unrealized appreciation/depreciation
of investments................................................ 221,232 765,331 99,272 (110,685)
Net Increase in Net Assets
Resulting from Operations 4,246,552 3,038,798 1,268,574 421,603
Dividends and Distributions to Shareholders
from Net Investment Income:
Class A....................................................... (2,851,339) (2,164,495) (1,227,443) (434,063)
Class B....................................................... (305,236) (100,795) (14,695) (1,401)(b)
Class R....................................................... (76,561) (1,126)(b) (27,342) (522)(b)
Total Dividends and Distributions (3,233,136) (2,266,416) (1,269,480) (435,986)
Capital Share Transactions (Note 5)
Shares sold:
Class A....................................................... 12,193,322 6,203,975 6,544,078 17,452,369
Class B....................................................... 4,993,786 1,663,572 580,621 108,544(b)
Class R....................................................... 1,904,286 120,413(b) 847,672 81,911(b)
Shares issued in reinvestment of dividends and distributions:
Class A....................................................... 1,195,770 975,918 1,161,005 419,436
Class B....................................................... 195,332 56,034 8,758 1,352(b)
Class R....................................................... 76,523 1,126(b) 27,342 522(b)
Shares redeemed:
Class A....................................................... (4,508,255) (2,864,299) (4,380,863) (605,448)
Class B....................................................... (825,099) (288,473) (78,682) (139)(b)
Class R....................................................... (149,618) -- (355,461) --
Net Increase (Decrease) in Net Assets from
Capital Share Transactions 15,076,047 5,868,266 4,354,470 17,458,547
Total Increase (Decrease) 16,089,463 6,640,648 4,353,564 17,444,164
Net Assets
Beginning of period.............................................. 30,669,461 24,028,813 17,444,164 --
End of period (including undistributed net investment
income as set forth below).................................... $46,758,924 $30,669,461 $21,797,728 $17,444,164
Undistributed Net Investment Income ............................ $ 33,718 $ 246,818 $ 25,655 $ 99,936
<FN>
(a) Period from February 13, 1996 (date operations commenced) through October
31, 1996.
(b) Period from February 27, 1996 (date operations commenced) through October
31, 1996.
</FN>
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended October 31, Except as Noted
STATEMENTS OF CHANGES IN NET ASSETS
Princor
Tax-Exempt Bond
INCOME FUNDS Fund, Inc.
1997 1996
Operations
<S> <C> <C>
Net investment income............................................ $ 10,171,880 $ 9,923,693
Net realized gain (loss) from investment transactions............ 818,662 674,906
Change in unrealized appreciation/depreciation
of investments................................................ 5,658,545 362,726
Net Increase in Net Assets
Resulting from Operations 16,649,087 10,961,325
Dividends and Distributions to Shareholders
from Net Investment Income:
Class A....................................................... (10,615,003) (9,811,318)
Class B....................................................... (312,381) (209,899)
Class R....................................................... N/A N/A
Total Dividends and Distributions (10,927,384) (10,021,217)
Capital Share Transactions (Note 5)
Shares sold:
Class A....................................................... 24,107,825 23,815,010
Class B....................................................... 2,704,384 2,684,628
Class R....................................................... N/A N/A
Shares issued in reinvestment of dividends and distributions:
Class A....................................................... 7,156,854 6,720,668
Class B....................................................... 214,928 155,939
Class R....................................................... N/A N/A
Shares redeemed:
Class A....................................................... (30,946,309) (23,971,299)
Class B....................................................... (1,143,685) (572,822)
Class R....................................................... N/A N/A
Net Increase (Decrease) in Net Assets from
Capital Share Transactions 2,093,997 8,832,124
Total Increase (Decrease) 7,815,700 9,772,232
Net Assets
Beginning of period.............................................. 192,973,655 183,201,423
End of period (including undistributed net investment
income as set forth below).................................... $200,789,355 $192,973,655
Undistributed Net Investment Income ............................ $191,601 $ 947,865
<FN>
(a) Period from February 13, 1996 (date operations commenced) through October
31, 1996.
(b) Period from February 27, 1996 (date operations commenced) through October
31, 1996.
</FN>
See accompanying notes.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Princor Bond Fund, Inc.
Princor High Yield Fund, Inc.
Princor Government Securities Income Fund, Inc.
Princor Tax-Exempt Bond Fund, Inc.
Princor Limited Term Bond Fund, Inc.
Note 1 -- Significant Accounting Policies
Princor Bond Fund, Inc., Princor Government Securities Income Fund, Inc.,
Princor High Yield Fund, Inc., Princor Limited Term Bond Fund, Inc. and Princor
Tax-Exempt Bond Fund, Inc. (the "Income Funds") are registered under the
Investment Company Act of 1940, as amended, as open-end diversified management
investment companies and operate in the mutual fund industry.
Class A shares generally are sold with an initial sales charge based on
declining rates and certain purchases may be subject to a contingent deferred
sales charge ("CDSC"). Class B shares are sold without an initial sales charge,
but are subject to a declining CDSC on certain redemptions redeemed within six
years of purchase. Class R shares are sold without an initial sales charge and
are not subject to a CDSC. Class B shares and Class R shares bear a higher
ongoing distribution fee than Class A shares. Class B shares automatically
convert into Class A shares, based on relative net asset value (without a sales
charge) after seven years. Class R shares automatically convert into Class A
shares, based on relative net asset value (without a sales charge) after four
years. All classes of shares for each fund represent interests in the same
portfolio of investments, and will vote together as a single class except where
otherwise required by law or as determined by each of the Income Funds'
respective Board of Directors. In addition, the Board of Directors of each fund
declare separate dividends on each class of shares.
The Income Funds allocate daily all income, expenses (other than class-specific
expenses), and realized and unrealized gains or losses to each class of shares
based upon the relative proportion of the value of shares outstanding of each
class. Expenses specifically attributable to a particular class, are charged
directly to such class. Class-specific expenses charged to each class during the
year ended October 31, 1997, which are included in the corresponding captions of
the Statement of Operations, were as follows:
<TABLE>
<CAPTION>
Distribution and Transfer and
Shareholder Servicing Fees Administrative Services Registration Fees
Class A Class B Class R Class A Class B Class R Class A Class B Class R
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Princor Bond Fund, Inc. $268,328 $93,892 $23,423 $101,921 $14,667 $4,517 $12,318 $ 7,806 $7,229
Princor Government Securities Income Fund, Inc. 475,309 85,084 17,299 202,816 15,873 3,032 13,530 12,352 8,084
Princor High Yield Fund, Inc. 83,413 39,158 7,490 22,497 4,443 1,514 8,729 7,546 6,434
Princor Limited Term Bond Fund, Inc. 32,412 1,287 2,656 3,645 380 669 9,552 5,733 6,244
Princor Tax-Exempt Bond Fund, Inc. 390,614 50,501 N/A 64,170 2,962 N/A 19,928 7,741 N/A
</TABLE>
The Income Funds value securities for which market quotations are readily
available at market value, which is determined using the last reported sale
price or, if no sales are reported, as is regularly the case for some securities
traded over-the-counter, the last reported bid price. When reliable market
quotations are not considered to be readily available, which may be the case,
for example, with respect to certain debt securities and preferred stocks, the
investments are valued by using market quotations, prices provided by market
makers or estimates of market values obtained from yield data and other factors
relating to instruments or securities with similar characteristics in accordance
with procedures established in good faith by each fund's Board of Directors.
Securities with remaining maturities of 60 days or less are valued at amortized
cost, which approximates market.
The Income Funds record investment transactions generally one day after the
trade date, except for short-term investment transactions which are recorded
generally on the trade date. The identified cost basis has been used in
determining the net realized gain or loss from investment transactions and
unrealized appreciation or depreciation of investments. Interest income is
recognized on an accrual basis.
The Income Funds may, pursuant to an exemptive order issued by the Securities
and Exchange Commission, transfer uninvested funds into a joint trading account.
The order permits the Income Funds' cash balances to be deposited into a single
joint account along with the cash of other registered investment companies
managed by Princor Management Corporation. These balances may be invested in one
or more short-term instruments.
Dividends and distributions to shareholders are recorded on the ex-dividend
date. Dividends and distributions to shareholders from net investment income and
net realized gain are determined in accordance with federal tax regulations,
which may differ from generally accepted accounting principles. Permanent book
and tax basis differences are reclassified within the capital accounts based on
their federal tax-basis treatment; temporary differences do not require
reclassification. Reclassifications made for the periods ended October 31, 1997
and 1996 were not material.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2 -- Federal Income Taxes
No provision for federal income taxes is considered necessary because each fund
is qualified as a "regulated investment company" under the Internal Revenue Code
and intends to distribute each year substantially all of its net investment
income and realized capital gains to shareholders. The cost of investments for
federal income tax reporting purposes is approximately the same as that for
financial reporting purposes.
At October 31, 1997, the Income Funds had approximate net capital loss
carryforwards as follows:
<TABLE>
<CAPTION>
Princor
Princor Government Princor Princor Princor
Bond Securities Income High Yield Limited Term Bond Tax-Exempt Bond
Net Capital Loss Carryforwards Expire In: Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc.
<S> <C> <C> <C> <C> <C> <C>
1999 $ -- $ -- $ 577,000 $ -- $ --
2000 -- -- 561,000 -- --
2001 -- -- 409,000 -- --
2002 -- 400,000 323,000 -- --
2003 -- 1,075,000 106,000 -- 834,000
2004 73,000 -- -- 4,000 --
2005 -- 776,000 -- 31,000 --
$73,000 $2,251,000 $1,976,000 $35,000 $834,000
</TABLE>
Note 3 -- Management Agreement and Transactions With Affiliates
The Income Funds have agreed to pay investment advisory and management fees to
Princor Management Corporation (wholly owned by Princor Financial Services
Corporation, a subsidiary of Principal Mutual Life Insurance Company) (the
"Manager") computed at an annual percentage rate of each fund's average daily
net assets. The annual rate used in this calculation for the Income Funds is as
follows:
<TABLE>
<CAPTION>
Net Asset Value of Funds
(in millions)
First Next Next Next Over
$100 $100 $100 $100 $400
<S> <C> <C> <C> <C> <C>
Princor Bond Fund, Inc. 0.50% 0.45% 0.40% 0.35% 0.30%
Princor Government Securities
Income Fund, Inc. 0.50% 0.45% 0.40% 0.35% 0.30%
Princor High Yield Fund, Inc. 0.60% 0.55% 0.50% 0.45% 0.40%
Princor Limited Term Bond Fund, Inc. 0.50% 0.45% 0.40% 0.35% 0.30%
Princor Tax-Exempt Bond Fund, Inc. 0.50% 0.45% 0.40% 0.35% 0.30%
</TABLE>
Note 3 -- Management Agreement and Transactions With Affiliates (Cont.)
The Income Funds also reimburse the Manager for transfer and administrative
services, including the cost of accounting, data processing, supplies and other
services rendered.
The Manager voluntarily waives a portion of its fee for some of the Income
Funds. The waivers are in amounts that maintain total operating expenses for
each fund within certain limits. The limits are expressed as a percentage of
average daily net assets attributable to each class on an annualized basis
during the reporting period. The amounts waived and the operating expense
limits, which were maintained at or below those shown, are as follows:
Amount
Waived
Year Ended Year Ended Expense
October 31, 1997 October 31, 1996 Limit
Princor Bond
Fund, Inc.
Class A $41,256 $22,536 0.95%
Class B 8,982 5,874 1.70
Class R 10,427 3(b) 1.45
Princor Limited
Term Bond
Fund, Inc.
Class A 46,271 25,651(a) 0.90
Class B 6,528 259(a) 1.25
Class R 6,831 60(b) 1.50
(a)Period from February 13, 1996 (date operations commenced) through
October 31, 1996.
(b)Period from February 27, 1996 (date operations commenced)
through October 31, 1996.
The Manager intends to continue its voluntary waiver and, if necessary, pay
expenses normally payable by each of the Funds through October 31, 1998.
Princor Financial Services Corporation, as principal underwriter, receives
proceeds of any CDSC on certain Class A and Class B share redemptions. The
charge is based on declining rates which for Class A shares begin at .75%, and
for Class B shares at 4.00% (.25% and 1.25% for Princor Limited Term Bond Fund,
Inc., respectively), of the lesser of the current market value or the cost of
shares being redeemed. Princor Financial Services Corporation also retains sales
charges on sales of Class A shares based on declining rates which begin at 4.75%
of the offering price (1.50% for Princor Limited Term Bond Fund, Inc.). The
aggregate amount of these charges retained, by fund, for the year ended October
31, 1997 were as follows:
Class A Class B
Princor Bond Fund, Inc. $542,346 $40,557
Princor Government Securities Income Fund, Inc. 681,401 55,828
Princor High Yield Fund, Inc. 304,387 16,664
Princor Limited Term Bond Fund, Inc. 50,591 182
Princor Tax-Exempt Bond Fund, Inc. 538,158 20,539
No brokerage commissions were paid by the Income Funds to affiliated broker
dealers during the periods ended October 31, 1997 and 1996.
The Income Funds bear distribution and shareholder servicing fees with respect
to Class A shares computed at an annual rate of up to .25% (.15% for the Princor
Limited Term Bond Fund, Inc.) of the average daily net assets attributable to
Class A shares of each fund. Each of the Income Funds adopted a distribution
plan with respect to Class B shares that provides for distribution and
shareholder servicing fees computed at an annual rate of up to 1.00% of the
average daily net assets attributable to Class B shares of each fund (.50% for
the Princor Limited Term Bond Fund, Inc.). Each of the Income Funds, with the
exception of Princor Tax-Exempt Bond Fund, Inc., adopted a distribution plan
with respect to Class R shares that provides for distribution and shareholder
servicing fees computed at an annual rate of up to .75% of the average daily net
assets attributable to Class R shares of each fund. Distribution and shareholder
servicing fees are paid to Princor Financial Services Corporation; a portion of
the fees are subsequently remitted to retail dealers. Pursuant to the
distribution agreements, fees unused by the principal underwriter at the end of
the fiscal year are returned to the Income Funds.
At October 31, 1997, Principal Mutual Life Insurance Company and subsidiaries of
Principal Mutual Life Insurance Company owned shares of the Income Funds as
follows:
Class A Class B Class R
Princor Bond Fund, Inc. 178,252 118 99
Princor Government Securities Income Fund, Inc. 94,035 115 98
Princor High Yield Fund, Inc. 1,116,210 162 4,704
Princor Limited Term Bond Fund, Inc. 1,107,238 111 4,494
Princor Tax-Exempt Bond Fund, Inc. 92,517 109 N/A
Note 4 -- Investment Transactions
For the year ended October 31, 1997, the cost of investment securities purchased
and proceeds from investment securities sold (not including short-term
investments and U. S. government securities) by the Income Funds were as
follows:
Purchases Sales
Princor Bond Fund, Inc. $35,535,653 $16,091,925
Princor High Yield Fund, Inc. 29,404,850 14,166,740
Princor Limited Term Bond Fund, Inc. 5,388,580 2,327,955
Princor Tax-Exempt Bond Fund, Inc. 21,102,304 17,150,358
At October 31, 1997, net unrealized appreciation (depreciation) of investments
by the Income Funds was composed of the following:
<TABLE>
<CAPTION>
Net Unrealized
Gross Unrealized Appreciation (Depreciation)
Appreciation (Depreciation) of Investments
<S> <C> <C> <C>
Princor Bond Fund, Inc. $ 8,032,325 $(357,973) $ 7,674,352
Princor Government Securities Income Fund, Inc. 7,521,916 (639,955) 6,881,961
Princor High Yield Fund, Inc. 1,392,012 (401,988) 990,024
Princor Limited Term Bond Fund, Inc. 177,764 (189,177) (11,413)
Princor Tax-Exempt Bond Fund, Inc. 12,029,259 (4,343) 12,024,916
</TABLE>
The Income Funds may trade portfolio securities on a "to-be-announced" (TBA)
basis. In a TBA transaction, the fund commits to purchase or sell securities for
which all specific information is not known at the time of the trade. Securities
purchased on a TBA basis are not settled until they are delivered to the fund,
normally 15 to 30 days later. These transactions are subject to market
fluctuations and their current value is determined in the same manner as for
other portfolio securities. As of October 31, 1997, Princor Government
Securities Income Fund, Inc. had TBA purchase commitments involving securities
with a face amount of $4,000,000, cost of $4,004,688 and market value of
$4,063,880. The fund has set aside investment securities and other assets in
excess of the commitments to serve as collateral.
Note 4 -- Investment Transactions (Cont.)
At October 31, 1997, the Income Funds held the following securities which may
require registration under the Securities Act of 1933, or an exemption
therefrom, in order to effect a sale in the ordinary course of business.
<TABLE>
<CAPTION>
Value at Value as a
Date of October 31, Percentage of
Security Description Acquisition Cost 1997 Net Assets
<S> <C> <C> <C> <C> <C>
Princor Bond Fund, Inc. John Hancock Mutual Life;
Insurance Co. Surplus Notes 1/8/97 $2,396,100 $2,547,915 1.75%
Princor High Yield Fund, Inc. Antenna TV S.A. Senior Notes 8/7/97 387,269 388,000 .83
8/22/97 490,000 485,000 1.04
Calpine Corp. Senior Notes 7/2/97 797,082 812,000 1.74
Flextronics International Ltd. 10/9/97 400,000 396,000 .85
Senor Subordinated Notes 10/14/97 402,500 396,000 .85
Indah Kiat Finance Mauritius Ltd.
Guaranteed Senior Notes 6/26/97 794,776 720,000 1.54
Integrated Health Services, Inc.
Senior Subordinated Notes 9/8/97 800,000 816,000 1.75
Paperboard Industries
International, Inc. Senior Notes 9/18/97 225,000 222,750 .48
Riviera Holdings Corp.
First Mortgage Notes 8/8/97 395,080 402,000 .86
The DII Group 9/16/97 452,250 443,813 .95
Senior Subordinated Notes 9/16/97 450,000 443,812 .95
Zale Corp. Senior Notes 9/23/97 895,770 879,750 1.88
6,405,125 13.72
Princor Limited Term Bond Fund, Inc. B.A.T. Capital Corp.
Medium-Term Notes 7/24/96 583,584 595,613 2.73
Orix Credit Alliance, Inc.
Medium-Term Notes 11/8/96 850,000 853,144 3.91
1,448,757 6.64
Princor Tax-Exempt Bond Fund, Inc. Eddyville, Iowa, IDR Ref. Bonds,
Cargill Inc. Project 1/11/95 859,910 1,027,500 .51
</TABLE>
The Income Funds' investments are with various issuers in various industries.
The Schedules of Investments contained herein summarize concentration of credit
risk by issuer and industry.
Note 5 -- Capital Share Transactions
Transactions in Capital Stock by fund were as follows:
<TABLE>
<CAPTION>
Princor Princor Princor
Bond Government Securities High Yield
Fund, Inc. Income Fund, Inc. Fund, Inc.
Year Ended October 31, 1997:
Shares sold:
<S> <C> <C> <C>
Class A ......................................... 2,460,201 2,799,875 1,440,198
Class B ......................................... 581,347 585,099 591,875
Class R............................................ 542,993 354,800 227,035
Shares issued in reinvestment of dividends and
distributions:
Class A ........................................... 534,855 1,189,680 141,482
Class B ........................................... 47,159 57,621 23,153
Class R............................................ 17,417 11,432 9,113
Shares redeemed:
Class A ......................................... (2,091,860) (5,287,652) (532,170)
Class B ......................................... (170,486) (332,061) (97,891)
Class R............................................ (84,604) (45,744) (17,821)
Net Increase (Decrease) 1,837,022 (666,950) 1,784,974
Year Ended October 31, 1996, Except as Noted:
Shares sold:
Class A ......................................... 1,970,454 3,321,877 768,505
Class B ......................................... 523,960 722,764 207,062
Class R(a)......................................... 47,584 42,812 14,977
Shares issued in reinvestment of dividends and distributions:
Class A ........................................... 448,289 1,164,488 121,239
Class B ........................................... 24,582 33,968 6,991
Class R(a)......................................... 318 266 140
Shares redeemed:
Class A ......................................... (1,629,399) (4,575,851) (354,640)
Class B ......................................... (70,602) (141,657) (35,769)
Class R(a)......................................... (808) (156) --
Net Increase 1,314,378 568,511 728,505
<FN>
(a) Period from February 27, 1996 (date operations commenced) through
October 31, 1996.
</FN>
</TABLE>
Note 5 -- Capital Share Transactions (Cont)
<TABLE>
<CAPTION>
Princor Princor
Limited Term Bond Tax-Exempt Bond
Fund, Inc.(b) Fund, Inc.
Year Ended October 31, 1997:
<S> <C> <C>
Shares sold:
Class A ......................................... 666,459 1,983,441
Class B ......................................... 58,936 222,542
Class R............................................ 86,576 N/A
Shares issued in reinvestment of dividends and
distributions:
Class A ......................................... 118,478 589,808
Class B ......................................... 892 17,694
Class R............................................ 2,797 N/A
Shares redeemed:
Class A ......................................... (445,740) (2,541,274)
Class B ......................................... (7,993) (93,935)
Class R............................................ (36,339) N/A
Net Increase 444,066 178,276
Year Ended October 31, 1996, Except as Noted:
Shares sold:
Shares sold:
Class A ......................................... 1,762,547 1,994,928
Class B ......................................... 11,158 225,823
Class R(c)......................................... 8,387 N/A
Shares issued in reinvestment of dividends and
distributions:
Class A ......................................... 43,053 563,980
Class B ......................................... 139 13,120
Class R(c)......................................... 54 N/A
Shares redeemed:
Class A ......................................... (62,056) (2,011,737)
Class B ......................................... (15) (48,315)
Net Increase 1,763,267 737,799
<FN>
(b) Year ended October 31, 1997 and Period from February 13, 1996 (date
operations commenced) through October 31, 1996. (c) Period from
February 27, 1996 (date operations commenced) through October 31, 1996.
</FN>
</TABLE>
Note 6 -- Line of Credit
The Income Funds participate with the other funds managed by Princor Management
Corporation in an unsecured joint line of credit with a bank, which allows the
funds to borrow up to $40,000,000, collectively. Borrowings are made solely to
facilitate the handling of unusual and/or unanticipated short-term cash
requirements. Interest is charged to each fund, based on its borrowings, at a
rate equal to the Fed Funds Rate plus .50%. Additionally, a commitment fee is
charged at the annual rate of .08% on the average unused portion of the line of
credit. The commitment fee is allocated among the participating funds in
proportion to their average net assets during each quarter. At October 31, 1997,
Princor Tax-Exempt Bond Fund, Inc. had an outstanding borrowing of $125,000 at
an annual rate of 6.08%. No other Income Fund had outstanding borrowings at
October 31, 1997 under the line of credit.
<PAGE>
SCHEDULES OF INVESTMENTS
INCOME FUNDS
PRINCOR BOND FUND, INC.
Principal
Amount Value
Bonds (96.53%)
Air Transportation, Scheduled (1.87%)
Federal Express Corp. 1994 Pass
Through Cert., Series A310-A3;
8.40%; 3/23/10 $1,500,000 $ 1,694,265
Federal Express Corp. Pass Through
Cert.; 7.58%; 7/2/19 1,000,000 1,035,800
2,730,065
Aircraft & Parts (0.75%)
Textron, Inc. Medium-Term
Notes, Series C;
9.80%; 1/11/00 500,000 537,472
9.55%; 3/19/01 500,000 549,939
1,087,411
Auto & Home Supply Stores (1.05%)
Pep Boys-Manny, Moe & Jack Notes;
7.00%; 6/1/05 1,500,000 1,528,605
Beverages (1.59%)
Joseph E. Seagram & Sons
Guaranteed Debentures;
8.38%; 2/15/07 1,000,000 1,123,535
8.88%; 9/15/11 1,000,000 1,198,643
2,322,178
Cable & Other Pay TV Services (1.76%)
Tele-Communications, Inc. Notes;
7.25%; 8/1/05 2,000,000 2,033,996
Tele-Communications, Inc. Senior
Debentures; 7.88%; 8/1/13 500,000 530,198
2,564,194
Cash Grains (1.77%)
Aktiebolaget SKF Senior Notes;
7.63%; 7/15/03 2,500,000 2,589,720
Combination Utility Services (1.33%)
PG Energy, Inc. First Mortgage
Bonds; 8.38%; 12/1/02 500,000 535,255
Public Service Electric & Gas
Medium-Term Notes;
8.16%; 5/26/09 1,250,000 1,405,595
1,940,850
Computer & Office Equipment (1.79%)
Seagate Technology, Inc. Senior Notes;
7.37%; 3/1/07 2,500,000 2,612,550
Construction & Related
Machinery (0.86%)
Caterpillar, Inc. Global Debentures;
9.38%; 8/15/11 1,000,000 1,258,386
Consumer Products (1.07%)
Philip Morris Cos. Notes;
6.80%; 12/1/03 500,000 503,234
RJR Nabisco Capital Corp. Senior
Notes; 8.75%; 4/15/04 1,000,000 1,061,250
1,564,484
Copper Ores (2.34%)
Asarco, Inc. Debentures;
7.88%; 4/15/13 2,000,000 2,161,288
Asarco, Inc. Notes; 7.38%; 2/1/03 1,200,000 1,251,431
3,412,719
Crude Petroleum & Natural Gas (0.38%)
Occidental Petroleum Corp.
Medium-Term Notes;
9.73%; 6/15/01 500,000 555,362
Department Stores (2.25%)
Harcourt General, Inc. Subordinated
Notes; 9.50%; 3/15/00 400,000 426,874
J.C. Penney Co., Inc. Debentures;
7.13%; 11/15/23 1,000,000 1,008,209
Sears Roebuck Co.
Medium-Term Notes;
9.05%; 2/6/12 500,000 612,590
9.12%; 2/13/12 1,000,000 1,231,712
3,279,385
Drug Stores & Proprietary Stores (1.36%)
Rite Aid Corp. Senior Debentures;
6.88%; 8/15/13 2,000,000 1,976,942
Eating & Drinking Places (1.63%)
Marriott International, Inc. Notes;
6.75%; 12/15/03 1,300,000 1,306,878
Marriott International, Inc. Senior
Notes; 7.88%; 4/15/05 1,000,000 1,066,739
2,373,617
Electric Services (2.86%)
Ohio Edison Co. First Mortgage
Bonds; 8.25%; 4/1/02 2,000,000 2,120,706
Southern California Edison Co. Notes;
6.38%; 1/15/06 1,000,000 994,250
Toledo Edison Co. Debentures;
8.70%; 9/1/02 1,000,000 1,050,100
4,165,056
Engines & Turbines (0.70%)
Brunswick Corp. Debentures;
7.38%; 9/1/23 1,000,000 1,016,307
Fabricated Rubber Products,
NEC (1.17%)
M. A. Hanna Co. Senior Notes;
9.38%; 9/15/03 1,500,000 1,705,060
Farm & Garden Machinery (1.82%)
Case Corp. Notes; 7.25%; 1/15/16 1,000,000 1,024,879
Tenneco, Inc. Notes;
10.08%; 2/1/01 500,000 554,783
8.08%; 10/1/02 1,000,000 1,069,508
2,649,170
General Government, NEC (3.04%)
Ontario Hydro Debentures;
7.45%; 3/31/13 2,000,000 2,168,720
Province of Saskatchewan, Canada
Global Notes; 8.00%; 2/1/13 2,000,000 2,262,060
4,430,780
Gold & Silver Ores (0.87%)
Placer Dome, Inc. Notes;
7.13%; 6/15/07 1,250,000 1,278,196
Grain Mill Products (0.73%)
Ralston Purina Co. Debentures;
7.75%; 10/1/15 1,000,000 1,069,502
Grocery Stores (3.40%)
American Stores Co. Bond;
8.00%; 6/1/26 2,500,000 2,765,978
Food Lion, Inc. Medium-Term
Notes; 8.67%; 8/28/06 1,000,000 1,145,021
Food Lion, Inc. Notes;
7.55%; 4/15/07 1,000,000 1,044,604
4,955,603
Highway & Street Construction (1.72%)
Foster Wheeler Corp. Notes;
6.75%; 11/15/05 2,500,000 2,510,148
Household Furniture (1.42%)
Masco Corp. Debentures;
7.13%; 8/15/13 2,000,000 2,079,886
Industrial Inorganic Chemicals (3.80%)
Dow Chemical Co. Debentures;
7.38%; 3/1/23 1,000,000 1,036,891
Dow Chemical Co. Medium-Term
Notes; 7.75%; 9/15/20 1,000,000 1,074,745
FMC Corp. Senior Notes;
6.38%; 9/1/03 750,000 747,812
Grace, (W.R.) & Co. Guaranteed
Notes; 8.00%; 8/15/04 2,500,000 2,691,060
5,550,508
Life Insurance (1.75%)
John Hancock Mutual Life Insurance
Co. Surplus Notes; 7.38%; 2/15/24 2,500,000(a) 2,547,915
Machinery, Equipment,
& Supplies (0.17%)
AAR Corp. Notes; 7.25%; 10/15/03 250,000 250,746
Millwork, Plywood & Structural
Members (1.24%)
Georgia-Pacific Corp. Debentures;
9.50%; 12/1/11 600,000 747,599
Georgia-Pacific Corp. Senior
Debentures; 7.70%; 6/15/15 1,000,000 1,053,328
1,800,927
Miscellaneous Amusement,
Recreation Service (1.33%)
Circus Circus Enterprises Senior
Notes; 6.45%; 2/1/06 2,000,000 1,933,446
Miscellaneous Chemical
Products (2.31%)
Cabot Corp. Notes;
10.25%; 12/15/97 400,000 401,854
Ferro Corp. Senior Debentures;
7.63%; 5/1/13 1,100,000 1,169,155
Smith International, Inc. Senior
Notes; 7.00%; 9/15/07 1,750,000 1,790,880
3,361,889
Miscellaneous Investing (2.32%)
BRE Properties, Inc. Notes;
7.20%; 6/15/07 2,000,000 2,067,620
Weingarten Realty Investors
Medium-Term Notes;
7.29%; 5/23/05 1,250,000 1,312,087
3,379,707
Miscellaneous Metal Ores (1.30%)
Cyprus Amax Minerals Notes;
7.38%; 5/15/07 1,100,000 1,151,847
Cyprus Minerals Co. Notes;
10.13%; 4/1/02 650,000 740,158
1,892,005
Motion Picture Production
& Services (0.28%)
Columbia Pictures Entertainment, Inc.
Senior Subordinated Notes;
9.88%; 2/1/98 400,000 403,678
Motor Vehicles & Equipment (2.33%)
Ford Motor Co. Debentures;
8.88%; 1/15/22 1,000,000 1,224,431
7.50%; 8/1/26 1,000,000 1,060,010
General Motors Corp. Global
Medium-Term Notes;
8.88%; 5/15/03 1,000,000 1,118,119
3,402,560
Newspapers (1.69%)
News America Holdings, Inc.
Guaranteed Senior Notes;
8.50%; 2/15/05 2,250,000 2,468,995
Oil & Gas Field Services (1.80%)
Petroleum Geo-Services Notes;
7.50%; 3/31/07 2,500,000 2,625,185
Operative Builders (1.74%)
Pulte Corp. Senior Notes;
8.38%; 8/15/04 500,000 539,330
7.63%; 10/15/17 2,000,000 1,994,628
2,533,958
Paper Mills (4.19%)
Bowater, Inc. Debentures;
9.50%; 10/15/12 1,000,000 1,269,199
9.38%; 12/15/21 1,500,000 1,868,712
Champion International Corp.
Notes; 9.88%; 6/1/00 750,000 814,118
Chesapeake Corp. Notes;
9.88%; 5/1/03 1,000,000 1,154,532
James River Corp. Notes;
6.70%; 11/15/03 1,000,000 1,007,927
6,114,488
Paperboard Mills (1.25%)
Federal Paper Board Co., Inc.
Debentures; 8.88%; 7/1/12 1,500,000 1,820,104
Personal Credit Institutions (1.88%)
General Motors Acceptance Corp.
Global Notes; 8.50%; 1/1/03 2,000,000 2,192,166
Household Finance Corp. Senior
Subordinated Notes;
9.63%; 7/15/00 500,000 543,083
2,735,249
Petroleum Refining (8.28%)
Ashland, Inc. Medium-Term Notes;
7.71%; 5/11/07 500,000 540,243
7.72%; 7/15/13 1,000,000 1,079,762
7.73%; 7/15/13 750,000 810,548
Mapco, Inc. Medium-Term Notes;
8.48%; 8/5/13 1,000,000 1,132,777
Pennzoil Co. Debentures;
10.13%; 11/15/09 1,675,000 2,123,133
Sun Co., Inc. Debentures;
9.00%; 11/1/24 2,000,000 2,389,794
Sun Co., Inc. Notes; 7.13%; 3/15/04 300,000 308,938
Tosco Corp. Note; 7.25%; 1/1/07 2,500,000 2,595,022
Ultramar Credit Corp. Guaranteed
Notes; 8.63%; 7/1/02 1,000,000 1,089,944
12,070,161
Plastic Materials & Synthetics (0.34%)
Geon Co. Notes; 6.88%; 12/15/05 500,000 500,639
Primary Nonferrous Metals (2.17%)
Reynolds Metals Co.
Medium-Term Notes;
8.22%; 5/30/07 2,000,000 2,220,922
7.65%; 2/4/08 875,000 938,884
3,159,806
Pulp Mills (1.95%)
ITT Rayonier, Inc. Notes;
7.50%; 10/15/02 1,875,000 1,964,316
International Paper Co.
Medium-Term Notes;
9.70%; 8/15/00 800,000 872,637
2,836,953
Real Estate Operators & Lessor (0.90%)
First Industrial, L.P. Notes;
7.60%; 5/15/07 1,250,000 1,316,642
Refrigeration & Service
Machinery (1.81%)
Westinghouse Electric Corp.
Debentures; 8.63%; 8/1/12 1,000,000 1,056,667
Global Notes; 8.88%; 6/1/01 1,500,000 1,588,978
2,645,645
Rental of Railroad Cars (2.12%)
Gatx Capital Corp. Medium-Term Notes;
Series B; 9.50%; 1/10/02 1,500,000 1,671,753
Series C; 6.86%; 10/13/05 1,000,000 1,014,922
General American Transportation
Corp. Medium-Term Notes;
10.65%; 11/14/97 400,000 400,448
3,087,123
Rubber & Plastics Footwear (1.70%)
Reebok International Ltd.;
6.75%; 9/15/05 2,500,000 2,479,308
Sanitary Services (1.27%)
Laidlaw, Inc. Notes;
7.70%; 8/15/02 1,000,000 1,054,744
Laidlaw, Inc. Senior Notes;
7.88%; 4/15/05 750,000 803,217
1,857,961
Security Brokers & Dealers (1.79%)
Lehman Brothers, Inc. Senior
Subordinated Notes;
7.38%; 1/15/07 2,500,000 2,604,320
Telephone Communication (4.45%)
Korea Telecom Notes; 7.63%; 4/15/07 2,500,000 2,333,655
Sprint Corp. Notes; 8.13%; 7/15/02 1,500,000 1,609,670
U.S. West Capital Funding, Inc. Notes;
7.30%; 1/15/07 1,500,000 1,541,451
6.80%; 11/23/07 1,000,000 1,009,439
6,494,215
Variety Stores (0.84%)
Dayton-Hudson Corp. Debentures;
9.25%; 8/15/11 1,000,000 1,219,778
Total Bonds 140,750,087
Commercial Paper (1.46%)
Personal Credit Institutions (1.46%)
Investment In Joint Trade Account;
Associates Corp.; 5.73%; 11/3/97 2,125,178 2,125,178
Total Portfolio Investments (97.99%) 142,875,265
Cash, receivables and other assets, net of
liabilities (2.01%) 2,930,737
Total Net Assets (100.00%) $145,806,002
(a) Restricted security - See Note 4 to the financial statements.
PRINCOR GOVERNMENT SECURITIES INCOME
FUND, INC.
Description of Issue Principal
Type Rate Maturity Amount Value
Government National Mortgage Association (GNMA)
Certificates (99.94%)
GNMA I 6.00% 10/15/23-3/15/26 $21,917,248 $ 21,200,563
GNMA I 6.50 9/15/23-5/15/26 47,911,508 47,512,855
GNMA I 7.00 10/15/22-11/15/27 63,479,660 64,047,130
GNMA I 7.25 9/15/25-10/15/25 5,470,009 5,550,309
GNMA I 7.50 4/15/17-11/1/27 52,385,119 53,787,178
GNMA I 8.00 8/15/16-2/15/22 12,250,277 12,865,141
GNMA II 6.00 1/20/24-3/20/27 51,537,081 49,498,039
GNMA II 6.50 3/20/24-3/20/27 14,987,485 14,800,853
Total GNMA Certificates 269,262,068
Principal
Amount Value
Federal Agency Short-Term Obligation (0.94%)
Investment in Joint Trade Account;
Federal Home Loan Mortgage
Corporation; 5.65%; 11/3/97 $2,542,824 $ 2,542,824
Total Portfolio Investments (100.88%) 271,804,892
Liabilities, net of cash, receivables and other
assets (-0.88%) (2,390,004)
Total Net Assets (100.00%) $269,414,888
PRINCOR HIGH YIELD FUND, INC.
Principal
Amount Value
Bonds (96.12%)
Advertising (3.56%)
Lamar Advertising Company
Senior Subordinated Notes;
9.63%; 12/1/06 $ 800,000 $ 846,000
Outdoor Systems
Senior Subordinated Notes;
8.88%; 6/15/07 800,000 818,000
1,664,000
Aircraft & Parts (1.53%)
Rohr Industries, Inc. Subordinated
Debentures; 9.25%; 3/1/17 700,000 717,500
Blast Furnace & Basic Steel
Products (2.45%)
Titan Wheel International Senior
Subordinated Notes;
8.75%; 4/1/07 700,000 724,500
Weirton Steel Corp. Senior Notes;
10.75%; 6/1/05 400,000 421,000
1,145,500
Broadwoven Fabric Mills, Cotton (1.54%)
J.P. Stevens & Co., Inc. Sinking
Fund Debentures; 9.00%; 3/1/17 700,000 721,000
Cable & Other Pay TV Services (3.51%)
Century Communications Senior Notes;
8.75%; 10/1/07 900,000 900,000
Jones Intercable, Inc. Senior Notes;
9.63%; 3/15/02 700,000 738,500
1,638,500
Cogeneration - Small Power
Producer (3.40%)
AES Corporation Senior Subordinated
Notes; 8.38%; 8/15/07 800,000 780,000
Calpine Corp. Senior Notes;
8.75%; 7/15/07 800,000(a) 812,000
1,592,000
Computer & Data Processing
Services (1.98%)
Decisionone Corporation Senior
Subordinated Notes; 9.75%; 8/1/07 900,000 927,000
Crude Petroleum & Natural Gas (6.50%)
Chesapeake Energy Corp. Senior
Notes; 8.50%; 3/15/12 800,000 784,000
Nuevo Energy Co. Senior Subordinated
Notes; 9.50%; 4/15/06 600,000 637,500
Ocean Energy, Inc. Senior Subordinated
Notes; 8.88%; 7/15/07 800,000 820,000
Snyder Oil Company Senior
Subordinated Notes; 8.75%; 6/15/07 800,000 796,000
3,037,500
Dairy Farms (1.45%)
Fage Dairy Industry S.A. Senior Notes;
9.00%; 2/1/07 700,000 679,000
Electrical Industrial Appratus (1.80%)
Motors and Gears, Inc. Senior Notes,
Series A; 10.75%; 11/15/06 800,000 840,000
Electric Components
& Accessories (5.00%)
Advanced Micro Devices, Inc.
Senior Secured Notes;
11.00%; 8/1/03 700,000 756,000
Fairchild Semiconductor Corp.
Senior Subordinated Notes;
10.13%; 3/15/07 750,000 791,250
Flextronics International Ltd.
Senior Subordinated Notes;
8.75%; 10/15/07 800,000(a) 792,000
2,339,250
Engines & Turbines (1.48%)
Outboard Marine Corp. Debentures;
9.13%; 4/15/17 700,000 693,000
Family Clothing Stores (1.96%)
Specialty Retailers, Inc. Senior Notes;
8.50%; 7/15/05 900,000 918,000
Finance Services (1.75%)
DVI, Inc. Senior Notes;
9.88%; 2/1/04 800,000 816,000
Footwear, Except Rubber (1.75%)
Brown Group, Inc. Senior Notes;
9.50%; 10/15/06 800,000 818,000
Forest Products (1.46%)
Doman Industries Ltd. Senior Notes;
8.75%; 3/15/04 700,000 684,250
Fuel Dealers (1.49%)
Petroleum Heat & Power Co., Inc.
Subordinated Notes;
10.13%; 4/1/03 700,000 695,625
Groceries & Related Products (1.54%)
Rykoff-Sexton, Inc. Senior
Subordinated Notes;
8.88%; 11/1/03 700,000 719,250
Grocery Stores (1.72%)
Quality Food Centers Senior
Subordinated Notes;
8.70%; 3/15/07 800,000 804,000
Hotels & Motels (4.12%)
HMH Properties, Inc. Senior Notes;
8.88%; 7/15/07 800,000 816,000
John Q. Hammons Hotels, L.P. &
Finance Corp. First Mortgage
Notes; 8.88%; 2/15/04 700,000 707,000
Riviera Holdings Corp. First
Mortgage Notes;
10.00%; 8/15/04 400,000(a) 402,000
1,925,000
Industrial Inorganic Chemicals (1.57%)
PT. Tri Polyta Indonesia TBK
Guaranteed Secured Notes;
11.38%; 12/1/03 800,000 736,000
Knitting Mills (1.61%)
Tultex Corp. Senior Notes;
10.63%; 3/15/05 700,000 750,750
Miscellaneous Amusement, Recreation
Service (3.26%)
Rio Hotel & Casino, Inc. Senior
Subordinated Notes;
9.50%; 4/15/07 700,000 728,000
Station Casinos, Inc. Senior
Subordinated Notes, Series B;
9.63%; 6/1/03 800,000 795,000
1,523,000
Miscellaneous Electrical Equipment
& Supplies (1.90%)
The DII Group Senior Subordinated
Notes; 8.50%; 9/15/07 900,000(a) 887,625
Miscellaneous Plastics Products,
NEC (1.50%)
Congoleum Corp. Senior Notes;
9.00%; 2/1/01 700,000 700,000
Miscellaneous Shopping Goods
Stores (1.88%)
Zale Corporation Senior Notes;
8.50%; 10/1/07 900,000(a) 879,750
Newspapers (1.75%)
Hollinger International Publishing, Inc.
Senior Notes; 8.63%; 3/15/05 800,000 816,000
Nursing & Personal Care Facilities (3.29%)
Integrated Health Services, Inc. Senior
Subordinated Notes; 9.25%; 1/15/08 800,000(a) 816,000
Mariner Health Group, Inc. Senior
Subordinated Notes; 9.50%; 4/1/06 700,000 724,500
1,540,500
Oil & Gas Field Services (3.11%)
Dawson Production Services
Senior Notes; 9.38%; 2/1/07 700,000 735,000
Polysindo International Finance Co.
B.V. Guaranteed Secured Notes;
9.38%; 7/30/07 800,000 720,000
1,455,000
Paper Mills (1.54%)
Indah Kiat Finance Mauritius Limited
Guaranteed Senior Notes;
10.00%; 7/1/07 800,000(a) 720,000
Paperboard Containers & Boxes (0.48%)
Paperboard Industries International, Inc.
Senior Notes; 8.38%; 9/15/07 225,000(a) 222,750
Petroleum Refining (1.56%)
Crown Central Petroleum Corp.
Senior Notes; 10.88%; 2/1/05 700,000 728,000
Pulp Mills (1.69%)
Pen-Tab Industries, Inc. Senior
Subordinated Notes; 10.88%; 2/1/07 800,000 788,000
Radio, Television, & Computer
Stores (1.53%)
CompUSA, Inc. Senior Subordinated
Notes; 9.50%; 6/15/00 700,000 715,750
Radio & Television Broadcasting (3.45%)
American Radio Systems Senior
Subordinated Notes; 9.00%; 2/1/06 700,000 742,000
Antenna TV S.A. Senior Notes;
9.00%; 8/1/07 900,000(a) 873,000
1,615,000
Retail Stores, NEC (1.82%)
Cole National Group, Inc.
Senior Subordinated Notes;
9.88%; 12/31/06 800,000 852,000
Search & Navigation Equipment (1.56%)
AMRESCO, Inc. Senior Subordinated
Notes; 10.00%; 3/15/04 700,000 731,500
Soap, Cleaners, & Toilet Goods (1.59%)
Coty, Inc. Senior Subordinated
Notes; 10.25%; 5/1/05 700,000 745,500
Telephone Communication (7.95%)
Lenfest Communications Senior Notes;
8.38%; 11/1/05 800,000 796,000
Paging Network, Inc. Senior Debentures;
8.88%; 2/1/06 700,000 670,250
Rogers Cablesystems Ltd. Senior
Secured Second Priority Notes;
9.63%; 8/1/02 750,000 785,625
Rogers Cantel, Inc. Senior Secured
Debentures; 9.75%; 6/1/16 700,000 749,000
Vanguard Cellular Systems, Inc. Senior
Debentures; 9.38%; 4/15/06 700,000 717,500
3,718,375
Textile Finishing, Except Wool (1.54%)
Dominion Textile (USA), Inc. Guaranteed
Senior Notes; 9.25%; 4/1/06 700,000 719,250
Water Supply (1.55%)
California Energy Casecnan Water &
Energy Co., Inc. Senior Secured,
Series B; 11.95%; 11/15/10 700,000 724,500
Total Bonds 44,943,625
Commercial Paper (1.48%)
Personal Credit Institutions (1.48%)
Investment in Joint Trade Account;
Associates Corp.;
5.73%; 11/3/97 693,767 693,767
Total Portfolio Investments (97.60%) 45,637,392
Cash, receivables and other assets, net of
liabilities (2.40%) 1,121,532
Total Net Assets (100.00%) $46,758,924
(a) Restricted security - See Note 4 to the financial statements.
PRINCOR LIMITED TERM BOND FUND, INC.
Principal
Amount Value
Bonds (65.33%)
Business Credit Institutions (6.81%)
Ford Motor Credit Co. Notes;
7.50%; 1/15/03 $ 600,000 $ 631,322
Orix Credit Alliance, Inc.
Medium-Term Notes;
6.46%; 5/17/99 850,000(a) 853,144
1,484,466
Combination Utility Services (5.03%)
Consolidated Edison Co. Debentures,
Series 93-B; 6.50%; 2/1/01 824,000 833,634
Pacificorp First Mortgage Medium-Term
Notes; 9.50%; 5/20/99 250,000 262,834
1,096,468
Consumer Products (6.98%)
B.A.T. Capital Corp. Medium-Term
Notes; 5.32%; 10/28/98 600,000(a) 595,613
Philip Morris Cos. Notes;
7.13%; 12/1/99 910,000 925,354
1,520,967
Department Stores (7.96%)
J. C. Penney Co., Inc. Notes;
9.05%; 3/1/01 850,000 921,580
Sears Roebuck Acceptance Corp.
Medium-Term Notes, Series II;
6.69%; 8/13/01 450,000 456,775
Sears Roebuck Co. Medium-Term
Notes; 6.46%; 5/12/00 100,000 100,915
Sears Roebuck Co. Notes;
8.20%; 4/15/99 250,000 256,453
1,735,723
Miscellaneous Investing (1.38%)
United Dominion Realty Trust Notes;
7.25%; 4/1/99 300,000 300,894
Mortgage Bankers & Brokers (3.92%)
Countrywide Funding Corp.
Medium-Term Notes;
6.05%; 3/1/01 860,000 854,490
Motor Vehicles & Equipment (2.52%)
General Motors Corp. Medium-Term
Notes; 9.20%; 7/2/01 500,000 548,606
Paper Mills (4.22%)
International Paper Co. Notes;
7.00%; 6/1/01 900,000 919,816
Paperboard Mills (3.74%)
Temple-Inland, Inc. Notes;
9.00%; 5/1/01 750,000 816,176
Personal Credit Institutions (11.07%)
American General Finance Corp.
Medium-Term Notes, Series D;
7.46%; 3/28/00 350,000 360,855
American General Finance Corp. Notes;
7.25%; 4/15/00 500,000 512,626
Chrysler Financial Corp.
Medium-Term Notes;
8.45%; 1/28/00 500,000 525,822
General Motors Acceptance Corp.
Notes; 6/63%; 10/1/02 1,000,000 1,014,652
2,413,955
Security Brokers & Dealers (4.25%)
Lehman Brothers, Inc. Senior
Subordinated Notes;
5.75%; 11/15/98 930,000 927,255
Telephone Communication (7.45%)
Nynex Capital Funding Medium-Term
Notes, Series A; 9.40%; 6/1/00 670,000 722,817
U.S. West Capital Funding, Inc.
Medium-Term Notes;
6.13%; 11/30/99 900,000 899,870
1,622,687
Total Bonds 14,241,503
Description of Issue Principal
Type Rate Maturity Amount Value
Federal Home Loan Mortgage Corporation (FHLMC)
Certificates (13.76%)
FHLMC 7.25% 12/1/07 $ 686,180 $ 700,157
FHLMC 8.00 12/1/11 341,147 351,900
FHLMC 8.00 10/1/22 251,559 263,400
FHLMC 8.25 1/1/12 120,178 123,517
FHLMC Gold 8.50 1/1/00 480,505 492,600
FHLMC Gold 8.50 3/1/00 313,343 321,230
FHLMC Gold 8.50 4/1/00 210,762 216,066
FHLMC Gold 9.00 9/1/09 500,443 530,395
Total FHLMC Certificates 2,999,265
Federal National Mortgage Association (FNMA)
Certificates (9.22%)
FNMA 8.00 10/1/06 149,049 152,918
FNMA 8.00 5/1/27 477,700 495,189
FNMA 8.50 5/1/22 576,848 603,821
FNMA 9.00 2/1/25 709,603 757,622
Total FNMA Certificates 2,009,550
Government National Mortgage Association (GNMA)
Certificates (2.66%)
GNMA 8.00 1/20/16 395,428 415,781
GNMA 9.00 7/15/17 151,566 164,504
Total GNMA Certificates 580,285
Principal
Amount Value
Asset-Backed Securities (7.18%)
Personal Credit Institutions (2.68%)
Union Acceptance Corp. 1996-B Auto
Trust Pass-Through Certificates,
Class A; 6.45%; 7/8/03 $ 579,168 $ 583,367
Mortgage Pass Thru Securities (4.50%)
J.P. Morgan Commercial Mortgage
Finance Corp. Mortgage
Pass-Through Series 97-C5,
Class A-2; 7.06%; 9/15/29 950,000 981,170
Total Asset-Backed Securities 1,564,537
Commercial Paper (0.17%)
Personal Credit Institutions (0.17%)
Investment in Joint Trade Account;
Associates Corp.; 5.73%; 11/3/97 36,870 36,870
Total Portfolio Investments (98.32%) 21,432,010
Cash, receivables and other assets, net of
liabilities (1.68%) 365,718
Total Net Assets (100.00%) $21,797,728
(a) Restricted security - See Note 4 to the financial statements.
PRINCOR TAX-EXEMPT BOND FUND, INC.
Principal
Amount Value
Long-Term Tax-Exempt Bonds (98.08%)
Alabama (2.11%)
Courtland, Alabama IDB IDR Series A
Bonds for Champion International;
7.20%; 12/1/13 $3,815,000 $ 4,239,419
Arizona (2.10%)
Navajo County, Arizona Pollution
Control Corp. Rev. Ref. Bonds,
Arizona Public Service Co.,
Series 1993A; 5.88%; 8/15/28 4,100,000 4,223,000
Arkansas (2.49%)
City of Blytheville, Arkansas Solid Waste
Recycling & Sewer Treatment Rev.
Bonds, Series 1992, Nucor Corp.
Project; 6.90%; 12/1/21 4,610,000 4,990,325
California (4.72%)
ABAG Finance Authority for Nonprofit
Corp., Cert. of Participation,
Stanford University Hospital;
5.00%; 11/1/04 750,000 763,125
5.50%; 11/1/13 1,250,000 1,262,500
5.25%; 11/1/20 1,750,000 1,686,563
California Pollution Control Funding
Authority Pollution Control Rev. Ref.
Bonds for San Diego Gas & Electric,
Series A; 5.90%; 6/1/14 1,000,000 1,080,000
California Pollution Control Funding
Authority Rev. Bonds, Atlantic
Richfield Co. Project; 5.00%; 4/1/08 2,500,000 2,546,875
City of Upland, California San Antonio
Comm. Hospital Cert. of Participation;
5.25%; 1/1/04 2,080,000 2,134,600
9,473,663
Colorado (2.72%)
City & County of Denver, Colorado,
Airport System Rev. Bonds,
Series 1991D; 7.75%; 11/15/13 3,185,000 3,961,344
Colorado Health Fac. Authority Rev.
Bonds for Sisters of Charity
Healthcare Systems, Series 1994;
5.25%; 5/15/14 1,500,000 1,503,750
5,465,094
Florida (1.19%)
Nassau County, Florida Pollution
Control Rev. Ref. Bonds; ITT
Rayonier, Inc. Project;
6.10%; 6/1/05 1,000,000 1,058,750
7.65%; 6/1/06 1,265,000 1,334,575
2,393,325
Georgia (1.79%)
Fulco, Georgia, Hospital Authority Rev.
Anticipation Cert. for St. Joseph's
Hospital of Atlanta, Inc.;
5.50%; 10/1/14 2,000,000 2,012,500
Municipal Electric Authority of Georgia
Power Rev. Bonds, Series R;
7.30%; 1/1/09 1,505,000 1,578,369
3,590,869
Illinois (14.88%)
Chicago, Illinois Midway Airport Rev.
Bonds, Series A, MBIA Insured;
5.50%; 1/1/11 1,500,000 1,546,875
5.50%; 1/1/13 500,000 511,250
Chicago, Illinois O'Hare International
Airport Special Fac. Rev. Bonds for
American Airlines, Inc. Project-A;
7.88%; 11/1/25 6,010,000 6,626,025
Chicago, Illinois O'Hare International
Airport Special Fac. Rev. Bonds for
Lufthansa German Airlines Project;
7.13%; 5/1/18 1,000,000 1,082,500
City of Chicago, Illinois Adj. Rate Gas
Supply Rev. Bonds, Series 1985A,
Peoples Gas Light & Coke Project;
6.88%; 3/1/15 2,800,000 3,076,500
Illinois Health Fac. Authority Ref. Rev.
Bonds for OSF Healthcare System;
5.75%; 11/15/07 1,000,000 1,030,000
6.00%; 11/15/10 500,000 516,250
6.00%; 11/15/13 500,000 521,250
Illinois Health Fac. Authority Rev.
Bonds for Sarah Bush Lincoln
Health Center;
Series 1992; 7.25%; 5/15/02 2,950,000 3,351,937
Series 1996B; 6.00%; 2/15/11 1,000,000 1,033,750
Series 1996B; 5.50%; 2/15/16 1,000,000 973,750
Illinois Health Fac. Authority Rev.
Bonds for South Suburban Hospital,
Series 1992;
7.00%; 2/15/02 725,000 811,094
7.00%; 2/15/09 305,000 360,662
7.00%; 2/15/18 720,000 873,900
Illinois Health Fac. Authority Rev. Bonds,
Northwestern Memorial Hospital,
Series 1994A;
5.60%; 8/15/06 500,000 525,000
5.75%; 8/15/08 615,000 643,444
5.80%; 8/15/09 840,000 873,600
6.10%; 8/15/14 1,000,000 1,056,250
Illinois Health Fac. Authority Rev. Ref.
Bonds for Advocate Healthcare,
Series A; 6.75%; 4/15/12 2,000,000 2,309,150
Regional Transportation Authority,
Illinois General Obligation Bonds,
Series 1994A; 6.25%; 6/1/15 2,000,000 2,157,500
29,880,687
Indiana (7.46%)
City of Mount Vernon, Indiana,
Pollution Control Rev. Bonds for
Southern Indiana Gas & Electric
Co. Project; 7.25%; 3/1/14 700,000 761,250
City of Petersburg, Indiana, Pollution
Control Rev. Bonds, for Indianapolis
Power & Light Co. Project,
Series 1993A; 6.10%; 1/1/16 4,000,000 4,220,000
Indiana Health Fac. Financial Authority
Hospital Rev. Bonds, Clarian Health
Partners, Inc.; 5.50%; 2/15/09 2,520,000 2,560,950
Indiana Health Fac. Financing
Authority Hospital Rev. Ref. Bonds,
Welborn Memorial Baptist Hospital,
Series 1993; 5.63%; 7/1/23 1,860,000 1,827,450
Lawrenceburg, Indiana Pollution
Control Rev. Ref. Bonds, Indiana
Michigan Power Co. Project,
Series D; 7.00%; 4/1/15 1,000,000 1,078,750
Series E; 5.90%; 11/1/19 3,220,000 3,280,375
Warrick County, Indiana
Environmental Improvement Rev.
Bonds, Southern Indiana Gas &
Electric, Series 1993B;
6.00%; 5/1/23 1,190,000 1,246,525
14,975,300
Iowa (4.29%)
City of Muscatine, Iowa, Electric Rev.
Ref. Bonds, Series 1986;
6.00%; 1/1/06 150,000 150,171
5.00%; 1/1/07 1,575,000 1,533,656
Eddyville, Iowa, IDR Ref. Bonds,
Cargill, Inc. Project; 5.63%; 12/1/13 1,000,000(a) 1,027,500
Iowa Finance Authority Hospital Fac.
Ref. Rev. Bonds for Jennie
Edmundson Memorial Hospital;
7.40%; 11/1/06 550,000 589,875
7.65%; 11/1/16 4,900,000 5,316,500
8,617,702
Kentucky (0.95%)
City of Ashland, Kentucky, Sewage
and Solid Waste Rev. Bonds for
Ashland, Inc. Project, Series 1995;
7.13%; 2/1/22 750,000 834,375
City of Ashland, Kentucky, Solid
Waste Rev. Bonds for Ashland
Oil, Inc. Project, Series 1991;
7.20%; 10/1/20 1,000,000 1,082,500
1,916,875
Louisiana (1.06%)
St. Charles Parish, Louisiana Pollution
Control Rev. Bonds for Louisiana
Power & Light Co. Project;
7.50%; 6/1/21 1,950,000 2,123,063
Maine (1.04%)
Skowhegan, Maine, Pollution Control
Rev. Ref. Bonds for Scott Paper
Co. Project, Series 1993;
5.90%; 11/1/13 2,000,000 2,082,500
Michigan (2.31%)
Michigan State Hospital Financing
Authority Hospital Rev. Bonds for
Detroit Medical Center, Series 1993B;
5.75%; 8/15/13 600,000 615,750
5.50%; 8/15/23 2,000,000 1,980,000
Michigan State Hospital Financing
Authority Rev. Ref. Bonds,
Daughters of Charity Hospital;
5.25%; 11/1/15 1,000,000 991,250
Michigan State Hospital Financing
Authority Rev. Ref. Bonds,
Daughters of Charity Natl. Health
System; 5.50%; 11/1/05 1,000,000 1,056,250
4,643,250
Minnesota (1.54%)
City of Bass Brook, Minnesota Pollution
Control Rev. Ref. Bonds for
Minnesota Power & Light Project;
6.00%; 7/1/22 3,000,000 3,090,000
Missouri (1.17%)
Missouri State Health & Educational
Fac. Authority Health Fac. Rev.
Bonds, BJC Health System,
Series 1994A; 6.75%; 5/15/12 2,000,000 2,352,500
Montana (1.03%)
Forsyth, Montana Pollution Control
Rev. Ref. Bonds, Montana Power
Co., Colstrip Project, Series 1993A;
6.13%; 5/1/23 2,000,000 2,070,000
Nebraska (2.32%)
Dawson County Nebraska Sanitary &
Improvement General Obligation
Ref. Bonds; 5.55%; 2/1/17 1,000,000 1,013,750
Nebraska Public Power Dist. Power
Supply System Rev. Bonds;
5.30%; 1/1/02 1,000,000 1,033,750
5.40%; 1/1/03 1,500,000 1,561,875
5.50%; 1/1/04 1,000,000 1,046,250
4,655,625
Nevada (1.98%)
Clark County, Nevada, IDR Ref.
Bonds, Nevada Power Co. Project,
Series 1992C; 7.20%; 10/1/22 3,600,000 3,969,000
New Mexico (1.07%)
City of Lordsburg, New Mexico
Pollution Control Rev. Bonds
for Phelps Dodge Corp. Project;
6.50%; 4/1/13 2,000,000 2,155,000
North Carolina (3.55%)
Martin County, North Carolina
Industrial Fac. & Pollution Control
Finance Authority Solid Waste
Rev. Bonds, Weyerhaeuser;
5.65%; 12/1/23 1,500,000 1,505,625
6.80%; 5/1/24 2,000,000 2,212,500
North Carolina Medical Care Hospital
Rev. Bonds for Rex Hospital Project;
6.13%; 6/1/10 1,700,000 1,802,000
Wake County, North Carolina,
Industrial Fac. & Pollution Control
Finance Authority Rev. Bonds,
Carolina Power & Light Co.;
6.90%; 4/1/09 1,500,000 1,606,875
7,127,000
North Dakota (1.05%)
Mercer County, North Dakota,
Pollution Control Rev. Bonds,
Ottertail Power Co. Project,
Series 1991; 6.90%; 2/1/19 1,950,000 2,101,125
Ohio (5.08%)
Cuyahoga County, Ohio, Hospital
Rev. Bonds for Meridia Health
Systems, Series 1991;
7.25%; 8/15/19 1,445,000 1,560,600
Lorain County, Ohio Hospital Ref.
Bonds, Humility Mary Health
Care, Series A; 5.90%; 12/15/08 3,270,000 3,523,425
Ohio Air Quality Dev. Rev. Bonds,
Columbus Southern Power Co.
Project, Series 1985B;
6.25%; 12/1/20 4,900,000 5,120,500
10,204,525
Oklahoma (1.21%)
Tulsa Industrial Authority Rev. Bonds,
St. John Medical Center Project,
Series 1994;
6.25%; 2/15/14 1,280,000 1,366,400
6.25%; 2/15/17 1,000,000 1,065,000
2,431,400
Rhode Island (1.53%)
Rhode Island State Industrial Facilities
Corp. Marine Term Rev. Bonds,
Mobile Oil Refining;
6.00%; 11/1/14 2,900,000 3,063,125
South Carolina (4.83%)
Darlington County, South Carolina
Pollution Control Rev. Bonds for
Carolina Power & Light;
6.60%; 11/1/10 1,000,000 1,093,750
Greenville Hospital System, South
Carolina Hospital Fac. Rev. Ref.
Bonds, Series C; 5.50%; 5/1/16 2,500,000 2,521,875
Oconee County, South Carolina
Pollution Control Rev. Ref. Bonds,
Duke Energy Corp. Project, Series
1993; 5.80%; 4/1/14 2,000,000 2,095,000
York County, South Carolina Exempt
Fac. Industrial Rev. Bonds for
Hoechst Celanese Project,
Series 1994; 5.70%; 1/1/24 2,000,000 2,025,000
York County, South Carolina Pollution
Control Rev. Bonds, Bowater, Inc.
Project; 7.63%; 3/1/06 1,700,000 1,969,875
9,705,500
South Dakota (0.54%)
Pennington County, South Dakota
Pollution Control Rev. Ref. Bonds
for Black Hills Power & Light Co.
Project; 6.70%; 6/1/10 1,000,000 1,082,500
Texas (7.20%)
Brazos River Authority, Texas,
Pollution Control Rev. Bonds for
Houston Lighting & Power;
8.25%; 5/1/15 820,000 851,759
7.75%; 10/1/15 855,000 897,716
8.25%; 5/1/19 500,000 519,365
Guadalupe-Blanco River Authority,
Texas, Industrial Dev. Corp.
Pollution Control Rev. E I Du Pont
1982 Series A; 6.35%; 7/1/22 2,500,000 2,703,125
Matagorda County, Texas,
Navigational District No. 1 Pollution
Control Rev. Bonds for Central
Power & Light Co.;
7.50%; 12/15/14 2,585,000 2,817,650
6.00%; 7/1/28 1,000,000 1,041,250
Milam County, Texas Industrial Dev.
Corp. Pollution Control Rev. Ref.
Bonds, Alcoa Project;
5.65%; 12/1/12 2,000,000 2,087,500
Red River Authority, Texas Pollution
Control Rev. Ref. Bonds, Hoechst
Celanese Corp. Project;
5.20%; 5/1/07 2,425,000 2,452,281
Tarrant County, Texas, Health Fac.
Dev. Corp., Harris Methodist Health
System Rev. Bonds; 5.90%; 9/1/06 1,000,000 1,093,750
14,464,396
Utah (1.68%)
Intermountain Power Agency, Utah
Power Supply, Rev. Ref. Bonds,
Series 1993A; 5.50%; 7/1/20 1,500,000 1,485,000
Series 1996D; 5.00%; 7/1/21 2,000,000 1,885,000
3,370,000
Virginia (1.70%)
Albemarle County, Virginia IDA
Hospital Rev. Ref. Bonds, Martha
Jefferson Hospital; 5.50%; 10/1/15 1,900,000 1,921,375
Chesapeake, Virginia IDA Rev. Ref.
Bond for Cargill, Inc. Project;
5.88%; 3/1/13 1,410,000 1,487,550
3,408,925
Washington (2.48%)
City of Seattle, Washington Municipal
Light and Power Rev. Bonds;
1993; 5.10%; 11/1/05 1,950,000 2,008,500
1994; 6.63%; 7/1/16 1,000,000 1,092,500
Washington Health Care Fac.
Authority Rev. Bonds; Series 1989,
Sisters of Providence;
7.88%; 10/1/99 1,735,000 1,880,306
4,981,306
West Virginia (6.10%)
Marshall County, West Virginia,
Pollution Control Rev. Bonds
for Ohio Power Co. Project;
Series C; 6.85%; 6/1/22 1,200,000 1,308,000
Series D; 5.90%; 4/1/22 4,500,000 4,663,125
Pleasants County, West Virgina
Pollution Control Rev. Bonds
for Potomac Edison Co.;
6.15%; 5/1/15 2,000,000 2,130,000
Putnam County, West Virginia,
Pollution Control Rev. Bonds for
Appalachian Power Co. Project,
Series C; 6.60%; 7/1/19 3,875,000 4,155,937
12,257,062
Wisconsin (2.91%)
Kaukauna, Wisconsin Pollution
Control Rev. Ref. Bonds for Intl.
Paper Co. Project, Series A;
5.40%; 5/1/04 3,610,000 3,731,837
Wisconsin Health & Educational
Fac. Authority Rev. Bonds;
Series 1995; Franciscan Skemp
Medical Center, Inc.;
5.88%; 11/15/10 1,000,000 1,046,250
6.13%; 11/15/15 1,000,000 1,061,250
5,839,337
Total Portfolio Investments (98.08%) 196,943,398
Cash, receivables and other assets, net of
liabilities (1.92%) 3,845,957
Total Net Assets (100.00%) $200,789,355
(a) Restricted security - See Note 4 to the financial statements.
See accompanying notes.
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Selected data for a share of Capital Stock outstanding throughout each period:
Income from Investment Operations Less Distributions
Net Realized
and
Net Asset Net Unrealized Total Dividends
Value at Invest- Gain from from Net Distributions Total
Beginning ment (Loss) on Investment Investment from Distri-
of Period Income Investments Operations Income Capital Gains butions
<S> <C> <C> <C> <C> <C> <C> <C>
PRINCOR BOND FUND, INC.
Class A:
Year Ended October 31,
1997 $11.17 $.75(b) $ .33 $1.08 $(.81) $ -- $(.81)
1996 11.42 .76(b) (.25) .51 (.76) -- (.76)
1995 10.27 .78(b) 1.16 1.94 (.78) (.01) (.79)
1994 11.75 .78(b) (1.47) (.69) (.78) (.01) (.79)
1993 10.97 .81(b) .79 1.60 (.81) (.01) (.82)
Class B:
Year Ended October 31,
1997 11.15 .67(b) .31 .98 (.71) -- (.71)
1996 11.41 .67(b) (.25) .42 (.68) -- (.68)
Period Ended October 31, 1995(c) 10.19 .63(b) 1.19 1.82 (.60) -- (.60)
Class R:
Year Ended October 31, 1997 11.16 .71(b) .30 1.01 (.74) -- (.74)
Period Ended October 31, 1996(f) 11.27 .51(b) (.13) .38 (.49) -- (.49)
PRINCOR GOVERNMENT
SECURITIES INCOME FUND, INC.
Class A:
Year Ended October 31,
1997 11.26 .70 .29 .99 (.74) -- (.74)
1996 11.31 .70 (.05) .65 (.70) -- (.70)
1995 10.28 .71 1.02 1.73 (.70) -- (.70)
1994 11.79 .69 (1.40) (.71) (.68) (.12) (.80)
1993 11.44 .74 .55 1.29 (.74) (.20) (.94)
Class B:
Year Ended October 31,
1997 11.23 .64 .29 .93 (.66) -- (.66)
1996 11.29 .61 (.05) .56 (.62) -- (.62)
Period Ended October 31, 1995(c) 10.20 .56 1.07 1.63 (.54) -- (.54)
Class R:
Year Ended October 31, 1997 11.21 .64 .24 .88 (.67) -- (.67)
Period Ended October 31, 1996(f) 11.27 .47 (.08) .39 (.45) -- (.45)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio
End Total End of Period Average Average Turnover
of Period Return(a) (in thousands) Net Assets Net Assets Rate
<S> <C> <C> <C> <C> <C> <C>
PRINCOR BOND FUND, INC.
Class A:
Year Ended October 31,
1997 $11.44 10.15% $126,427 .95%(b) 6.70% 12.8%
1996 11.17 4.74 113,437 .95(b) 6.85 3.4
1995 11.42 19.73 106,962 .94(b) 7.26 5.1
1994 10.27 (6.01) 88,801 .95(b) 7.27 8.9
1993 11.75 15.22 85,015 .92(b) 7.19 9.3
Class B:
Year Ended October 31,
1997 11.42 9.20 13,403 1.70(b) 5.92 12.8
1996 11.15 3.91 7,976 1.69(b) 6.14 3.4
Period Ended October 31, 1995(c) 11.41 17.98(d) 2,708 1.59(b)(e) 6.30(e) 5.1(e)
Class R:
Year Ended October 31, 1997 11.43 9.49 5,976 1.45(b) 6.11 12.8
Period Ended October 31, 1996(f) 11.16 3.75(d) 525 1.28(b)(e) 6.51(e) 3.4(e)
PRINCOR GOVERNMENT
SECURITIES INCOME FUND, INC.
Class A:
Year Ended October 31,
1997 11.51 9.23 249,832 .84 6.19 10.8
1996 11.26 6.06 259,029 .81 6.31 25.9
1995 11.31 17.46 261,128 .87 6.57 10.1
1994 10.28 (6.26) 249,438 .95 6.35 24.8
1993 11.79 11.80 236,718 .93 6.38 52.6
Class B:
Year Ended October 31,
1997 11.50 8.65 15,431 1.39 5.63 10.8
1996 11.23 5.17 11,586 1.60 5.53 25.9
Period Ended October 31, 1995(c) 11.29 16.07(d) 4,699 1.53(e) 5.68(e) 10.1(e)
Class R:
Year Ended October 31, 1997 11.42 8.19 4,152 1.79 5.21 10.8
Period Ended October 31, 1996(f) 11.21 3.76(d) 481 1.18(e) 5.84(e) 25.9(e)
</TABLE>
See accompanying notes.
<PAGE>
FINANCIAL HIGHLIGHTS (Cont.)
<TABLE>
<CAPTION>
Income from Investment Operations Less Distributions
Net Realized
and
Net Asset Net Unrealized Total Dividends
Value at Invest- Gain from from Net Distributions Total
Beginning ment (Loss) on Investment Investment from Distr-
of Period Income Investments Operations Income Capital Gains butions
<S> <C> <C> <C> <C> <C> <C> <C>
PRINCOR HIGH YIELD FUND, INC.
Class A:
Year Ended October 31,
1997 $ 8.27 $.67 $ .31 $ .98 $(.73) $-- $(.73)
1996 8.06 .68 .23 .91 (.70) -- (.70)
1995 7.83 .68 .20 .88 (.65) -- (.65)
1994 8.36 .63 (.51) .12 (.65) -- (.65)
1993 8.15 .71 .21 .92 (.71) -- (.71)
Class B:
Year Ended October 31,
1997 8.22 .62 .28 .90 (.65) -- (.65)
1996 8.05 .60 .20 .80 (.63) -- (.63)
Period Ended October 31, 1995(c) 7.64 .53 .38 .91 (.50) -- (.50)
Class R:
Year Ended October 31, 1997 8.20 .62 .26 .88 (.68) -- (.68)
Period Ended October 31, 1996(f) 8.21 .46 (.03) .43 (.44) -- (.44)
PRINCOR LIMITED TERM BOND FUND, INC.
Class A:
Year Ended October 31, 1997 9.89 .61(b) .03 .64 (.65) -- (.65)
Period Ended October 31, 1996(g) 9.90 .38(b) (.04) .34 (.35) -- (.35)
Class B:
Year Ended October 31, 1997 9.89 .56(b) .04 .60 (.59) -- (.59)
Period Ended October 31, 1996(g) 9.90 .36(b) (.05) .31 (.32) -- (.32)
Class R:
Year Ended October 31, 1997 9.88 .54(b) .03 .57 (.60) -- (.60)
Period Ended October 31, 1996(f) 9.90 .36(b) (.06) .30 (.32) -- (.32)
PRINCOR TAX-EXEMPT BOND FUND, INC.
Class A:
Year Ended October 31,
1997 12.04 .63 .39 1.02 (.68) -- (.68)
1996 11.98 .64 .07 .71 (.65) -- (.65)
1995 10.93 .65 1.05 1.70 (.65) -- (.65)
1994 12.62 .64 (1.54) (.90) (.63) (.16) (.79)
1993 11.62 .66 1.11 1.77 (.66) (.11) (.77)
Class B:
Year Ended October 31,
1997 12.02 .55 .40 .95 (.58) -- (.58)
1996 11.96 .55 .06 .61 (.55) -- (.55)
Period Ended October 31, 1995(c) 10.56 .50 1.38 1.88 (.48) -- (.48)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio
End Total End of Period Average Average Turnover
of Period Return(a) (in thousands) Net Assets Net Assets Rate
<S> <C> <C> <C> <C> <C> <C>
PRINCOR HIGH YIELD FUND, INC.
Class A:
Year Ended October 31,
1997 $ 8.52 12.33% $ 38,239 1.22% 7.99% 39.2%
1996 8.27 11.88 28,432 1.26 8.49 18.8
1995 8.06 11.73 23,396 1.45 8.71 40.3
1994 7.83 1.45 19,802 1.46 7.82 27.2
1993 8.36 11.66 19,154 1.35 8.57 23.4
Class B:
Year Ended October 31,
1997 8.47 11.31 6,558 2.13 7.03 39.2
1996 8.22 10.46 2,113 2.38 7.39 18.8
Period Ended October 31, 1995(c) 8.05 12.20(d) 633 2.10(e) 7.78(e) 40.3(e)
Class R:
Year Ended October 31, 1997 8.40 11.14 1,961 2.42 6.70 39.2
Period Ended October 31, 1996(f) 8.20 5.60(d) 124 1.59(e) 7.84(e) 18.8(e)
PRINCOR LIMITED TERM BOND FUND, INC.
Class A:
Year Ended October 31, 1997 9.88 6.75 20,567 .90(b) 6.20 17.4
Period Ended October 31, 1996(g) 9.89 3.62(d) 17,249 .89(b)(e) 6.01(e) 16.5(e)
Class B:
Year Ended October 31, 1997 9.90 6.31 625 1.24(b) 5.84 17.4
Period Ended October 31, 1996(g) 9.89 3.32(d) 112 1.15(b)(e) 5.75(e) 16.5(e)
Class R:
Year Ended October 31, 1997 9.85 6.01 606 1.48(b) 5.60 17.4
Period Ended October 31, 1996(f) 9.88 3.24(d) 83 1.40(b)(e) 5.64(e) 16.5(e)
PRINCOR TAX-EXEMPT BOND FUND, INC.
Class A:
Year Ended October 31,
1997 12.38 8.71 193,007 .79 5.14 8.9
1996 12.04 6.08 187,180 .78 5.34 9.8
1995 11.98 16.03 179,715 .83 5.67 17.6
1994 10.93 (7.41) 171,425 .91 5.49 20.6
1993 12.62 15.70 177,480 .89 5.45 20.3
Class B:
Year Ended October 31,
1997 12.39 8.08 7,783 1.45 4.46 8.9
1996 12.02 5.23 5,794 1.52 4.59 9.8
Period Ended October 31, 1995(c) 11.96 17.97(d) 3,486 1.51(e) 4.78(e) 17.6(e)
</TABLE>
See accompanying notes.
Notes to Financial Highlights
(a) Total return is calculated without the front-end sales charge or contingent
deferred sales charge.
(b) Without the Manager's voluntary waiver of a portion of certain of its
expenses (see Note 3 to the financial statements) for the periods
indicated, the following funds would have had per share net investment
income and the ratios of expenses to average net assets as shown:
Year Ended Per Share Ratio of
October 31, Net Expenses
Except Investment to Average Amount
as Noted Income Net Assets Waived
Princor Bond Fund, Inc.:
Class A 1997 $.74 .98% $ 41,256
1996 .76 .97 22,536
1995 .77 1.02 86,018
1994 .77 1.09 120,999
1993 .79 1.07 111,162
Class B 1997 .66 1.79 8,982
1996 .67 1.79 5,874
1995(c) .62 1.62(e) 300
Class R 1997 .69 1.78 10,427
1996(f) .51 1.28(e) 3
Princor Limited Term
Bond Fund, Inc.:
Class A 1997 .59 1.15 46,271
1996(g) .37 1.16(e) 22,716
Class B 1997 .46 3.82 6,528
1996(g) .34 1.94(e) 259
Class R 1997 .43 2.95 6,831
1996(f) .35 1.79(e) 60
(c) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995. Certain of the Income Funds' Class B
shares recognized net investment income as follows, for the period from the
initial purchase of Class B shares on December 5, 1994 through December 8,
1994, none of which was distributed to the sole shareholder, Princor
Management Corporation. Additionally, the Income Funds' Class B shares
incurred unrealized losses on investments during the initial interim period
as follows. This represents Class B share activities of each fund prior to
the initial public offering of Class B shares:
Per Share Per Share
Net Investment Unrealized
Income (Loss)
Princor Bond Fund, Inc. $.01 $ --
Princor Government Securities
Income Fund, Inc. .01 (.02)
Princor High Yield Fund, Inc. .01 (.03)
Princor Tax-Exempt Bond Fund, Inc. -- (.05)
(d) Total return amounts have not been annualized.
(e) Computed on an annualized basis.
(f) Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through October 31, 1996. The Income Funds' Class R
shares recognized no net investment income for the period from the initial
purchase by Princor Management Corporation of Class R shares on February
27, 1996 through February 28, 1996. Certain of the Income Funds' Class R
shares incurred unrealized losses on investments during the initial interim
period as follows. This represents Class R share activities of each fund
prior to the initial public offering of Class R shares:
Per Share
Unrealized (Loss)
Princor Bond Fund, Inc. $(.03)
Princor Government Securities
Income Fund, Inc. (.03)
Princor Limited Term Bond Fund, Inc. (.02)
(g) Period from February 29, 1996, date shares first offered to the public,
through October 31, 1996. With respect to Class A shares, net investment
income, aggregating $.02 per share for the period from the initial purchase
of shares on February 13, 1996 through February 28, 1996, was recognized,
none of which was distributed to its sole shareholder, Principal Mutual
Life Insurance Company during the period. Additionally, Class A shares
incurred unrealized losses on investments of $.12 per share during the
initial interim period. With respect to Class B shares, no net investment
income was recognized for the period from initial purchase of shares on
February 27, 1996 through February 28, 1996. Additionally, Class B shares
incurred unrealized losses on investments of $.02 per share during the
initial interim period. This represents Class A share and Class B share
activities of the fund prior to the initial public offering of both classes
of shares.
<PAGE>
October 31, 1997
STATEMENTS OF ASSETS AND LIABILITIES
Princor Cash Princor Tax-Exempt
Management Cash Management
MONEY MARKET FUNDS Fund, Inc. Fund, Inc.
Assets
Investment in securities -- at value
(approximates cost) (Note 1)........... $837,819,239 $93,112,479
Cash...................................... 549,465 140,022
Receivables:
Interest .............................. 2,337,432 593,447
Capital Stock sold..................... 3,086,045 18,920
Investment securities sold............. -- 5,365,000
Other assets.............................. 19,873 3,025
Total Assets 843,812,054 99,232,893
Liabilities
Accrued expenses.......................... 781,037 83,292
Capital Stock reacquired.................. 1,671,361 182,827
Total Liabilities 2,452,398 266,119
Net Assets Applicable to
Outstanding Shares ..................... $841,359,656 $98,966,774
Net Assets Consist of:
Capital Stock............................. $ 8,413,597 $ 989,668
Additional paid-in capital................ 832,946,059 97,977,106
Total Net Assets $841,359,656 $98,966,774
Capital Stock (par value: $.01 a share):
Shares authorized......................... 2,000,000,000 1,000,000,000
Net Asset Value Per Share:
Class A: Net Assets....................... $836,071,594 $98,939,110
Shares issued and outstanding.... 836,071,594 98,939,110
Net asset value per share........ $1.000 $1.000
Class B: Net Assets....................... $992,098 $27,664
Shares issued and outstanding.... 992,098 27,664
Net asset value per share(a)..... $1.000 $1.000
Class R: Net Assets....................... $4,295,964 N/A
Shares issued and outstanding.... 4,295,964 N/A
Net asset value per share........ $1.000 N/A
(a) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
See accompanying notes.
<PAGE>
Year Ended October 31, 1997
STATEMENTS OF OPERATIONS
Princor Cash Princor Tax-Exempt
Management Cash Management
MONEY MARKET FUNDS Fund, Inc. Fund, Inc.
Net Investment Income
Interest income......................... $44,213,534 $3,668,491
Expenses:
Management and investment
advisory fees (Note 3)............ 2,864,916 499,606
Distribution and shareholder
servicing fees (Notes 1 and 3).... 11,951 --
Transfer and administrative
services (Notes 1 and 3).......... 1,833,423 176,572
Registration fees (Note 1)........... 93,717 30,957
Custodian fees....................... 16,598 5,413
Auditing and legal fees.............. 8,559 6,880
Directors' fees...................... 7,268 7,268
Other................................ 138,728 13,164
Total Gross Expenses 4,975,160 739,860
Less: Management and investment
advisory fees waived.............. 7,933 33,785
Total Net Expenses 4,967,227 706,075
Net Investment Income $39,246,307 $2,962,416
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
Years Ended Ended October 31, Except as Noted
STATEMENTS OF CHANGES IN NET ASSETS
Princor Cash Princor Tax-Exempt
Management Cash Management
MONEY MARKET FUNDS Fund, Inc. Fund, Inc.
1997 1996 1997 1996
Operations
<S> <C> <C> <C> <C>
Net investment income .................. $ 39,246,307 $ 33,617,063 $ 2,962,416 $ 3,083,273
Dividends to Shareholders from Net
Investment Income:
Class A.............................. (39,078,437) (33,599,980) (2,961,821) (3,082,691)
Class B.............................. (33,816) (10,263) (595) (582)
Class R ............................. (134,054) (6,820)(a) N/A N/A
Total Dividends (39,246,307) (33,617,063) (2,962,416) (3,083,273)
Capital Share Transactions (Note 4)
Shares sold:
Class A.............................. 3,393,711,785 3,094,164,602 372,738,780 396,446,652
Class B.............................. 3,168,600 913,414 -- 41,568
Class R ............................. 6,448,386 1,820,278(a) N/A N/A
Shares issued in reinvestment of dividends:
Class A.............................. 38,790,163 33,369,259 2,914,790 3,032,398
Class B.............................. 29,671 9,815 595 564
Class R ............................. 129,398 6,800(a) N/A N/A
Shares redeemed:
Class A.............................. (3,291,392,367) (3,056,436,126) (375,196,233) (400,884,456)
Class B.............................. (2,725,899) (611,240) -- (41,568)
Class R ............................. (3,921,162) (187,736)(a) N/A N/A
Net Increase (Decrease) in Net Assets
from Capital Share Transactions 144,238,575 73,049,066 457,932 (1,404,842)
Total Increase (Decrease) 144,238,575 73,049,066 457,932 (1,404,842)
Net Assets
Beginning of year....................... 697,121,081 624,072,015 98,508,842 99,913,684
End of year ............................ $ 841,359,656 $ 697,121,081 $ 98,966,774 $ 98,508,842
<FN>
(a) Period from February 27, 1996 (date operations commenced) through October
31, 1996.
</FN>
See accompanying notes.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Princor Cash Management Fund, Inc.
Princor Tax-Exempt Cash Management Fund, Inc.
Note 1 -- Significant Accounting Policies
Princor Cash Management Fund, Inc. and Princor Tax-Exempt Cash Management Fund,
Inc. (the "Money Market Funds") are registered under the Investment Company Act
of 1940, as amended, as open-end diversified management investment companies and
operate in the mutual fund industry.
Shares of the Money Market Funds are sold to the public at net asset value; no
sales charge applies to purchases of the money market funds. Class B shares are
sold without an initial sales charge, but bear a higher ongoing distribution fee
and are subject to a declining contingent deferred sales charge ("CDSC") of up
to 4.00% on certain redemptions redeemed within six years of purchase. Class B
shares automatically convert into Class A shares, based on relative net asset
value (without a sales charge) after seven years. All classes of shares for each
fund represent interests in the same portfolio of investments, and will vote
together as a single class except where otherwise required by law or as
determined by each of the Money Market Funds' respective Boards of Directors. In
addition, the Board of Directors of each fund declare separate dividends on each
class of shares.
The Money Market Funds allocate daily all income, expenses (other than
class-specific expenses), and realized gains or losses to each class of shares
based upon the relative proportion of the number of settled shares outstanding
of each class. Expenses specifically attributable to a particular class are
charged directly to such class. Class-specific expenses charged to each class
during the year ended October 31, 1997, which are included in the corresponding
captions of the Statement of Operations, were as follows:
<TABLE>
<CAPTION>
Distribution and Transfer and
Shareholder Servicing Fees Administrative Services Registration Fees
Class A Class B Class R Class A Class B Class R Class A Class B Class R
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Princor Cash Management Fund, Inc. N/A $2,579 $9,372 $261,803 $967 $2,659 $15,580 $9,914 $13,368
Princor Tax-Exempt Cash Management Fund, Inc. N/A -- N/A 51,938 23 N/A 12,951 6,006 N/A
</TABLE>
The Money Market Funds value their securities at amortized cost, which
approximates market. Under the amortized cost method, a security is valued by
applying a constant yield to maturity of the difference between the principal
amount due at maturity and the cost of the security to the fund.
The Money Market Funds record investment transactions generally on the trade
date. The identified cost basis has been used in determining the net realized
gain or loss from investment transactions. Interest income is recognized on an
accrual basis.
The Money Market Funds may, pursuant to an exemptive order issued by the
Securities and Exchange Commission, transfer uninvested funds into a joint
trading acount. The order permits the Money Market Funds' cash balances to be
deposited into a single joint account along with the cash of other registered
investment companies managed by Princor Management Corporation. These balances
may be invested in one or more short-term instruments.
The Money Market Funds declare all net investment income and any realized gains
and losses from investment transactions as dividends daily to shareholders of
record as of that day. Dividends and distributions to shareholders from net
investment income and net realized gain from investments are determined in
accordance with federal income tax regulations, which may differ from generally
accepted accounting principles. Permanent book and tax basis differences are
reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification.
Reclassifications made for the years ended October 31, 1997 and 1996 were not
material.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Money Market Funds' investments are with various issuers in various
industries. The Schedules of Investments contained herein summarize
concentration of credit risk by issuer and industry.
Note 2 -- Federal Income Taxes
No provision for federal income taxes is considered necessary because each fund
is qualified as a "regulated investment company" under the Internal Revenue Code
and intends to distribute each year substantially all of its net investment
income and realized capital gains to shareholders. The cost of investments for
federal income tax reporting purposes is approximately the same as that for
financial reporting purposes.
Note 3 -- Management Agreement and Transactions With Affiliates
The Money Market Funds have agreed to pay investment advisory and management
fees to Princor Management Corporation (wholly owned by Princor Financial
Services Corporation, a subsidiary of Principal Mutual Life Insurance Company)
(the "Manager") computed at an annual percentage rate of each fund's average
daily net assets. The annual rate used in this calculation for the Money Market
Funds is as follows:
<TABLE>
<CAPTION>
Net Asset Value of Funds
(in millions)
First Next Next Next Over
$100,000 $100,000 $100,000 $100,000 $400,000
<S> <C> <C> <C> <C> <C>
Princor Cash Management Fund, Inc. 0.50% 0.45% 0.40% 0.35% 0.30%
Princor Tax-Exempt Cash Management
Fund, Inc. 0.50% 0.45% 0.40% 0.35% 0.30%
</TABLE>
The Money Market Funds also reimburse the Manager for transfer and
administrative services, including the cost of accounting, data processing,
supplies and other services rendered.
The Manager voluntarily waives a portion of its fee for the Money Market Funds.
The waivers are in amounts that maintain total operating expenses for each fund
within certain limits. The limits are expressed as a percentage of average net
assets attributable to each class on an annualized basis during the reporting
period. The amounts waived and the operating expense limits which were
maintained at or below those shown, are as follows:
<TABLE>
<CAPTION>
Amount
Waived
Year Ended Year Ended Expense
October 31, 1997 October 31, 1996 Limit
Princor Cash Management Fund, Inc.
<S> <C> <C> <C>
Class A $ -- $ 7,102 0.75%
Class B 5,492 6,140 1.50%
Class R 2,441 --(b) 1.25%(a)
Princor Tax-Exempt Cash Management Fund, Inc.
Class A $27,978 $69,107 0.75%
Class B 5,807 7,160 1.50%
<FN>
(a) For the period March 1, 1996 through March 2, 1997, the expense limit was
1.50%.
(b) Period from February 27, 1996 (date operations commenced) through October
31, 1996.
</FN>
</TABLE>
The manager intends to continue its voluntary waiver and, if necessary, pay
expenses normally payable by the Money Market Funds through February 28, 1998
for Princor Cash Management Fund, Inc. and through October 31, 1998 for Princor
Tax-Exempt Cash Management Fund, Inc.
Note 3 -- Management Agreement and Transactions With Affiliates (Cont)
Princor Financial Services Corporation, as principal underwriter, receives
proceeds of any CDSC on certain Class A and Class B share redemptions. The
charge is based on declining rates, which for Class A shares begin at .75%, and
for Class B shares at 4.00%, of the lesser of the current market value or the
cost of shares being redeemed. The aggregate amount of these charges retained by
Princor Financial Services Corporation for the year ended October 31, 1997, was
$3,182 and $10,941 for Princor Cash Management Fund, Inc. for Class A and Class
B shares, respectively. There were no charges retained by Princor Financial
Services Corporation for Princor Tax-Exempt Cash Management Fund, Inc.
No brokerage commissions were paid by the Money Market Funds to affiliated
broker dealers during the years ended October 31, 1997 and 1996.
Each of the Money Market Funds adopted a distribution plan with respect to Class
B shares that provides for distribution and shareholder servicing fees computed
at an annual rate of up to 1.00% of the average daily net assets attributable to
Class B shares of each fund. Princor Cash Management Fund, Inc., adopted a
distribution plan with respect to Class R shares that provides for distribution
and shareholder servicing fees computed at an annual rate of up to .75% of the
average daily net assets attributable to Class R shares of the fund.
Distribution and shareholder servicing fees are paid to Princor Financial
Services Corporation; a portion of the fees are subsequently remitted to retail
dealers. Pursuant to the distribution agreements, fees unused by the principal
underwriter at the end of the fiscal year are returned to the Money Market
Funds. There are no distribution or shareholder servicing fees with respect to
Class A shares.
At October 31, 1997, Principal Mutual Life Insurance Company, subsidiaries of
Principal Mutual Life Insurance Company, benefit plans sponsored on behalf of
Principal Mutual Life Insurance Company and several joint ventures (in each of
which a subsidiary of Principal Mutual Life Insurance Company is a participant)
owned shares of the Money Market Funds as follows:
Class A Class B Class R
Princor Cash Management Fund, Inc. 20,112,903 29,214 26,869
Princor Tax-Exempt Cash Management Fund, Inc. 1,000,056 27,642 N/A
Note 4 -- Capital Share Transactions
Transactions in Capital Stock by fund were as follows:
<TABLE>
<CAPTION>
Princor Tax-Exempt
Princor Cash Cash Management
Management Fund, Inc. Fund, Inc.
Year Ended October 31, 1997:
Shares sold:
<S> <C> <C>
Class A .......................................... 3,393,711,785 372,738,780
Class B ......................................... 3,168,600 --
Class R .......................................... 6,448,386 N/A
Shares issued in reinvestment of dividends:
Class A ........................................... 38,790,163 2,914,790
Class B ........................................... 29,671 595
Class R .......................................... 129,398 N/A
Shares redeemed:
Class A ......................................... (3,291,392,367) (375,196,233)
Class B ......................................... (2,725,899) --
Class R .......................................... (3,921,162) N/A
Net Increase 144,238,575 457,932
Year Ended October 31, 1996, Except as Noted:
Shares sold:
Class A ......................................... 3,094,164,602 396,446,652
Class B ........................................ 913,414 41,568
Class R* ......................................... 1,820,278 N/A
Shares issued in reinvestment of dividends:
Class A ........................................... 33,369,259 3,032,398
Class B ........................................... 9,815 564
Class R* ........................................ 6,800 N/A
Shares redeemed:
Class A ......................................... (3,056,436,126) (400,884,456)
Class B ......................................... (611,240) ( 41,568)
Class R* ........................................ (187,736) N/A
Net Increase (Decrease) 73,049,066 (1,404,842)
<FN>
* Period from February 27, 1996 (date operations commenced) through October
31, 1996.
</FN>
</TABLE>
Note 5 -- Line of Credit
The Money Market Funds participate with the other funds managed by Princor
Management Corporation in an unsecured joint line of credit with a bank, which
allows the funds to borrow up to $40,000,000, collectively. Borrowings are made
solely to facilitate the handling of unusual and/or unanticipated short-term
cash requirements. Interest is charged to each fund, based on its borrowings, at
a rate equal to the Fed Funds Rate plus .50%. Additionally, a commitment fee is
charged at the annual rate of .08% on the average unused portion of the line of
credit. The commitment fee is allocated among the participating funds in
proportion to their average net assets during each quarter. At October 31, 1997,
the Money Market Funds had no outstanding borrowings under the line of credit.
<PAGE>
SCHEDULES OF INVESTMENTS
PRINCOR CASH MANAGEMENT FUND, INC.
Principal
Amount Value
Commercial Paper (80.99%)
Asset-Backed Securities (10.31%)
Ciesco L.P.;
5.53%; 11/7/97 $10,175,000 $ 10,168,748
5.52%; 12/4/97 9,000,000 8,957,220
5.50%; 12/10/97 7,500,000 7,457,604
Retailer Funding Corp.;
5.53%; 11/6/97 4,150,000 4,148,088
5.54%; 11/13/97 6,000,000 5,990,767
5.55%; 11/21/97 7,000,000 6,980,575
5.55%; 12/5/97 3,154,000 3,138,440
Sheffield Receivables Corp.;
5.52%; 11/4/97 3,000,000 2,999,540
5.58%; 11/6/97 10,000,000 9,995,350
5.51%; 11/6/97 4,994,000 4,991,707
5.54%; 11/21/97 7,000,000 6,980,610
5.55%; 12/4/97 7,025,000 6,991,426
5.55%; 12/5/97 8,000,000 7,960,533
86,760,608
Business Credit Institutions (2.70%)
American Express Credit Corp.;
5.51%; 11/26/97 10,000,000 9,964,797
5.51%; 12/2/97 6,000,000 5,973,368
General Electric Capital Corp.;
5.53%; 11/5/97 1,825,000 1,824,439
5.85%; 1/23/98 5,000,000 4,934,188
22,696,792
Combination Utility
Services (0.47%)
Citizens Utilities Co.
5.56%; 12/5/97 4,000,000 3,980,231
Commercial Banks (0.47%)
J. P. Morgan & Co., Inc.
5.55%; 12/8/97 2,500,000 2,486,510
5.55%; 12/23/97 1,500,000 1,488,438
3,974,948
Cutlery, Handtools &
Hardware (0.69%)
Stanley Works; 5.52%; 11/21/97 5,825,000 5,808,923
Department Stores (4.94%)
Sears Roebuck Acceptance Corp.;
5.54%; 11/24/97 10,000,000 9,967,683
5.54%; 11/26/97 8,125,000 8,096,242
5.53%; 12/2/97 5,675,000 5,649,720
5.52%; 12/3/97 6,025,000 5,997,285
5.59%; 1/21/98 6,000,000 5,926,398
5.59%; 1/22/98 6,000,000 5,925,467
41,562,795
Electric Services (5.38%)
AES Shady Point, Inc.; LOC Bank of
Tokyo-Mitsubishi, Ltd.;
5.65%; 1/20/98 $ 9,025,000 $ 8,914,519
CommEd Fuel Co., Inc.;
LOC Canadian Imperial Bank of
Commerce; 5.52%; 11/20/97 8,000,000 7,979,147
CommEd Fuel Co., Inc.;
LOC Credit Suisse;
5.52%; 11/3/97 10,000,000 10,000,000
5.55%; 11/14/97 6,000,000 5,989,825
CommEd Fuel Co., Inc.;
LOC First National Bank of
Chicago; 5.52%; 11/7/97 4,175,000 4,172,439
Florida Power Corp.;
5.49%; 11/3/97 5,200,000 5,200,000
Wisconsin Power & Light Co.;
5.51%; 12/2/97 3,000,000 2,986,684
45,242,614
Finance Services (3.54%)
Mitsubishi International Corp.;
5.50%; 11/7/97 7,500,000 7,495,417
5.50%; 11/12/97 7,700,000 7,689,413
5.51%; 11/18/97 7,000,000 6,983,929
PHH Corp.;
5.49%; 11/25/97 7,650,000 7,624,334
29,793,093
Foreign Banks, Branches &
Agencies (4.12%)
Barclays U.S. Funding Corp.;
5.50%; 11/13/97 4,250,000 4,243,513
5.50%; 11/14/97 10,000,000 9,983,210
5.51%; 11/14/97 10,000,000 9,983,179
5.51%; 11/20/97 5,500,000 5,485,702
5.51%; 11/25/97 5,000,000 4,983,179
34,678,783
Gas Production &
Distribution (0.41%)
Washington Gas Light Co.;
5.52%; 12/9/97 3,500,000 3,480,680
Investment Offices (0.89%)
Morgan Stanley Group, Inc.;
5.51%; 11/12/97 7,500,000 7,489,669
Life Insurance (1.90%)
American General Corp.;
5.49%; 11/12/97 7,000,000 6,990,392
5.50%; 11/19/97 9,000,000 8,978,000
15,968,392
Measuring & Controlling
Devices (0.27%)
Johnson Controls, Inc.;
5.52%; 11/10/97 2,225,000 2,222,612
Miscellaneous Electrical Equipment &
Supplies (1.60%)
General Electric Co.;
5.50%; 11/18/97 1,625,000 1,621,276
5.50%; 11/21/97 7,925,000 7,903,206
5.52%; 12/31/97 4,000,000 3,964,427
13,488,909
Miscellaneous Investing (4.55%)
Delaware Funding Corp.;
5.51%; 11/14/97 $ 3,325,000 $ 3,319,402
5.50%; 11/17/97 10,000,000 9,978,611
5.51%; 11/18/97 3,000,000 2,993,112
5.52%; 11/19/97 10,000,000 9,975,467
5.53%; 11/24/97 5,000,000 4,983,871
MLTC Funding, Inc.; LOC
Citibank, N.A.; 5.53%; 11/25/97 7,040,000 7,016,209
38,266,672
Miscellaneous Manufacturers (3.14%)
Dover Corp.;
5.51%; 11/3/97 4,500,000 4,500,000
5.52%; 11/6/97 7,500,000 7,496,550
5.50%; 11/20/97 10,000,000 9,974,028
5.52%; 12/5/97 4,500,000 4,477,920
26,448,498
Mortgage Bankers & Brokers (4.92%)
Countrywide Home Loan, Inc.;
5.52%; 11/5/97 4,000,000 3,998,773
5.57%; 11/10/97 9,000,000 8,990,253
5.53%; 11/13/97 10,500,000 10,483,871
5.53%; 11/17/97 9,000,000 8,980,645
5.53%; 11/18/97 9,000,000 8,979,262
41,432,804
Personal Credit Institutions (12.75%)
Associates First Capital Corp.;
5.54%; 12/8/97 10,000,000 9,946,139
5.57%; 1/16/98 6,900,000 6,820,999
Beneficial Corp.;
5.53%; 11/5/97 2,000,000 1,999,386
Comoloco, Inc.;
5.43%; 11/24/97 5,300,000 5,283,212
5.47%; 12/5/97 2,000,000 1,990,276
5.72%; 12/12/97 4,000,000 3,975,213
5.74%; 2/17/98 4,000,000 3,932,396
5.76%; 2/24/98 3,000,000 2,945,760
5.63%; 3/17/98 500,000 489,522
5.59%; 4/13/98 1,000,000 975,000
5.54%; 4/20/98 8,300,000 8,085,417
5.54%; 4/24/98 1,600,000 1,557,650
5.64%; 5/8/98 1,100,000 1,067,946
5.60%; 5/8/98 400,000 388,427
5.54%; 5/15/98 2,000,000 1,940,599
Ford Motor Credit Co.;
5.27%; 11/18/97 5,000,000 4,989,021
General Motors Acceptance Corp.;
5.77%; 12/3/97 5,600,000 5,573,073
5.80%; 1/27/98 4,700,000 4,635,636
5.56%; 4/3/98 6,000,000 5,860,073
5.59%; 5/26/98 7,000,000 6,778,263
Norwest Financial, Inc.;
5.50%; 11/18/97 4,125,000 4,115,547
5.50%; 11/20/97 4,500,000 4,488,312
Transamerica Finance Corp.;
5.50%; 11/10/97 7,750,000 7,741,712
5.52%; 11/21/97 1,800,000 1,795,032
5.52%; 12/2/97 3,500,000 3,484,437
5.54%; 12/4/97 6,450,000 6,419,230
107,278,278
Real Estate Operators &
Lessors (1.99%)
Towson Town Center, Inc.; LOC
Bank of Tokyo-Mitsubishi, Ltd.;
5.57%; 11/6/97 $ 3,956,000 $ 3,954,164
5.57%; 11/7/97 6,270,000 6,266,119
5.57%; 11/19/97 6,500,000 6,483,909
16,704,192
Security Brokers & Dealers (11.95%)
Bear Stearns Cos., Inc.;
5.52%; 11/5/97 9,000,000 8,997,240
5.51%; 12/1/97 9,825,000 9,782,894
5.60%; 1/16/98 5,000,000 4,942,444
Goldman Sachs Group L.P.;
5.53%; 11/10/97 5,000,000 4,994,624
5.53%; 11/12/97 8,000,000 7,988,940
5.53%; 11/13/97 5,000,000 4,992,319
5.53%; 11/14/97 5,500,000 5,490,707
5.53%; 11/24/97 10,000,000 9,967,742
5.88%; 1/20/98 4,000,000 3,949,083
5.80%; 1/23/98 3,150,000 3,108,892
Merrill Lynch & Co., Inc.;
5.51%; 11/4/97 3,450,000 3,449,472
5.55%; 11/7/97 5,000,000 4,996,917
5.29%; 11/18/97 2,500,000 2,494,490
5.53%; 12/1/97 7,500,000 7,467,742
5.57%; 4/6/98 2,000,000 1,952,346
5.57%; 4/13/98 5,500,000 5,362,993
5.57%; 5/8/98 2,150,000 2,088,127
5.60%; 5/29/98 1,300,000 1,258,140
5.51%; 7/2/98 7,500,000 7,223,352
100,508,464
Subdividers & Developers (1.49%)
Hartz 667 Commercial Paper Corp.;
LOC Bank of Tokyo-Mitsubishi,
Ltd.; 5.57%; 11/5/97 12,560,000 12,556,113
Telephone Communication (2.51%)
Bell Atlantic Financial Services;
5.56%; 11/3/97 3,000,000 3,000,000
5.54%; 11/12/97 1,805,000 1,802,500
5.49%; 11/25/97 5,000,000 4,983,225
5.52%; 12/3/97 9,370,000 9,326,898
5.52%; 12/10/97 2,000,000 1,988,653
21,101,276
Total Commercial Paper 681,445,346
Bank Notes (3.21%)
Commercial Banks (3.21%)
BankBoston, N.A.;
5.97%; 10/23/98 5,000,000 5,000,000
Lasalle National Bank;
5.88%; 6/25/98 7,000,000 7,000,000
Morgan Guaranty Trust Company;
5.93%; 8/31/98 5,000,000 4,999,792
Morgan Guaranty Trust Company;
Certificate of Deposit;
5.84%; 7/28/98 10,000,000 9,997,199
Total Bank Notes 26,996,991
Bonds (15.38%)
Beverages (0.53%)
Pepsico, Inc. Notes;
6.13%; 1/15/98 $ 4,500,000 $ 4,501,747
Business Credit Institutions (4.58%)
CIT Group Holdings, Inc.
Debentures; 8.75%; 4/15/98 13,425,000 13,583,258
CIT Group Holdings, Inc.
Medium-Term Notes;
6.20%; 4/15/98 5,000,000 4,999,371
6.13%; 9/1/98 7,000,000 7,012,723
CIT Group Holdings, Inc. Senior Notes;
5.85%; 3/16/98 7,500,000 7,505,167
International Lease Finance Corp.
Notes; 5.63%; 3/1/98 3,000,000 2,997,387
5.75%; 3/15/98 2,410,000 2,408,407
38,506,313
Electric Services (0.06%)
Southern California Edison Co. Notes;
5.88%; 2/1/98 500,000 500,024
Finance Services (0.65%)
PHH Corporation
Medium-Term Bonds;
6.00%; 10/27/98 5,500,000 5,497,842
Investment Offices (0.98%)
Morgan Stanley Group, Inc. Notes;
9.25%; 3/1/98 8,140,000 8,221,973
Newspapers (0.24%)
Gannett Co. Notes;
5.25%; 3/1/98 2,000,000 1,995,581
Personal Credit Institutions (8.22%)
American General Finance Corp.
Notes; 7.70%; 11/15/97 8,500,000 8,505,274
Associates Corp. of North America
Senior Notes;
7.75%; 11/1/97 2,400,000 2,400,000
8.13%; 1/15/98 1,000,000 1,004,436
8.38%; 1/15/98 6,000,000 6,029,310
7.30%; 3/15/98 4,000,000 4,018,749
6.63%; 5/15/98 3,500,000 3,511,656
6.38%; 8/15/98 8,400,000 8,426,205
5.25%; 9/1/98 4,300,000 4,275,433
6.50%; 9/9/98 1,800,000 1,808,866
Avco Financial Services, Inc.
Senior Notes;
5.50%; 5/1/98 5,750,000 5,739,460
Beneficial Corp. Debentures;
9.13%; 2/15/98 $ 1,595,000 $ 1,607,710
Ford Motor Credit Co. Notes;
9.25%; 6/15/98 1,000,000 1,019,876
General Motors Acceptance Corp.
Medium-Term Notes;
7.50%; 11/4/97 10,700,000 10,700,477
7.85%; 11/17/97 1,250,000 1,250,991
Norwest Financial, Inc. Senior Notes;
6.50%; 11/15/97 2,000,000 2,000,470
8.50%; 8/15/98 2,000,000 2,037,942
Transamerica Financial Corp.
Medium-Term Notes;
9.25%; 2/16/98 4,760,000 4,803,220
69,140,075
Security Brokers & Dealers (0.12%)
Bear Stearns Cos., Inc. Senior Notes;
9.13%; 4/15/98 1,000,000 1,013,347
Total Bonds 129,376,902
Total Portfolio Investments (99.58%) 837,819,239
Cash, receivables and other assets, net of
liabilities (0.42%) 3,540,417
Total Net Assets (100.00%) $841,359,656
PRINCOR TAX-EXEMPT CASH MANAGEMENT
FUND, INC.
Principal
Amount Value
Short-Term Tax-Exempt Bonds (94.08%)
Alabama (1.01%)
City of Stevenson, Alabama
IDB, Improvement Rev. Bonds,
The Mead Corp., Series 1986;
LOC Credit Suisse;
4.05%; 11/3/97*; 11/1/16 $1,000,000 $ 1,000,000
Alaska (4.36%)
Alaska Industrial Dev. & Export
Authority, IDB Current Ref. Bonds,
Series 1988A; LOC Security Pacific
Bank Washington;
Lot #5; 3.75%; 11/9/97*; 7/1/98 1,415,000 1,415,000
Lot #6; 3.75%; 11/9/97*; 7/1/01 1,395,000 1,395,000
Lot #7; 3.75%; 11/9/97*; 7/1/01 125,000 125,000
Lot #8; 3.75%; 11/9/97*; 7/1/05 160,000 160,000
Lot #9; 3.75%; 11/9/97*; 7/1/05 220,000 220,000
Lot #12; 3.75%; 11/9/97*; 7/1/12 1,000,000 1,000,000
4,315,000
Arizona (1.31%)
Chandler County, Arizona, IDA, F/R
Monthly IDR, Parsons Municipal
Services, Series 1983; LOC
National Westminster;
3.70%; 11/15/97*; 12/15/09 $1,300,000 $ 1,300,000
California (2.03%)
County of Los Angeles, California,
1996-1997 Tax & Rev. Anticipation
Notes; 4.50%; 6/30/98 2,000,000 2,008,168
Colorado (6.21%)
Adams County, Colorado, IDR Bonds,
City View Park Project, Series 1985;
LOC Barclays Bank;
3.65%; 11/9/97*; 12/1/15 2,000,000 2,000,000
City of Thornton, Colorado, F/R
Monthly IDR, Service Merchandise
Co., Inc., Series 1984; LOC CIBC;
3.65%; 11/15/97*; 12/15/99 100,000 100,000
South Denver Metropolis District,
City & County of Denver, Colorado,
General Obligation Bonds, Series
1985; LOC Barclays Bank;
3.80%; 11/30/97**; 12/1/05 4,050,000 4,050,000
6,150,000
Florida (1.62%)
Florida Housing Finance Agency,
F/R Monthly MF Rev's., Water
Apt. Project, Series 1984A;
LOC Wells Fargo;
3.95%; 11/9/97*; 4/1/07 1,600,000 1,600,000
Georgia (4.34%)
Burke County, Georgia, Dev. Authority,
Pollution Control Note, Ogelthorpe
Vogtle Project, LOC AMBAC
Insurance Policy;
Series 1997A; 3.60%; 12/1/97 500,000 500,000
Series 1997B; 3.80%; 5/28/98 1,500,000 1,500,000
Hapeville, Georgia, Dev. Authority,
Adj. Tender IDR Bonds, Hapeville
Hotel Ltd., Partnership Project
Series 1985; LOC Deutch Bank
Corp.; 4.00%; 11/3/97*; 11/1/15 2,300,000 2,300,000
4,300,000
Idaho (1.02%)
State of Idaho Tax Anticipation
Notes, Series 1997;
4.63%; 6/30/98; 1,000,000 1,004,697
Illinois (8.29%)
Chicago, Illinois, Cook County CSX
Beckett Aviation, Inc., F/R Monthly
Airport Rev. Bonds; LOC Barclays
Bank; 3.72%; 11/15/97*; 12/15/14 1,000,000 1,000,000
City of Burbank, Illinois, F/R Monthly
IDR, Service Merchandise Co., Inc.,
Series 1984; LOC CIBC;
3.65%; 11/15/97*; 9/15/24 2,100,000 2,100,000
City of Galesburg, Illinois, Knox College
Project, Series 1996; LOC LaSalle
National Bank;
3.65%; 11/9/97*; 3/1/31 $3,700,000 $ 3,700,000
City of Naperville, Illinois, Economic
Dev. Rev. Bonds, Service Merchandise
Co., Inc.; LOC CIBC;
3.65%; 11/15/97*; 11/30/24 1,400,000 1,400,000
8,200,000
Indiana (9.15%)
Allen County, Indiana Econ. Dev. Rev.
Golden Years Homestead, Series
1996; LOC Norwest Bank Minnesota,
N.A.; 3.65%; 11/9/97*; 8/1/21 1,500,000 1,500,000
Indiana Health Authority Fac., Ref. Rev.
Bonds, Pathfinders Series 19967;
LOC Norwest Bank Minnesota, N.A.;
3.65%; 11/9/97*; 11/1/19 2,560,000 2,560,000
Tippecanoe School Corp., Temporary
Loan Warrants of 1997;
3.78%; 12/30/97 5,000,000 5,000,221
9,060,221
Iowa (5.53%)
City of Storm Lake, Iowa, Private
College Rev. Bonds, Buena Vista
College, Series 1993; LOC Norwest
Bank Minnesota, N. A.;
3.75%; 11/9/97*; 12/1/03 400,000 400,000
Iowa Higher Education Loan Authority
Fac., Rev. Bonds, Series 1995;
LOC Norwest Bank Minnesota, N.A.;
3.75%; 11/9/97*; 2/1/05 1,200,000 1,200,000
Iowa Higher Education Loan Authority
Fac., Rev. Bonds, St. Ambrose, Series
1997; LOC Norwest Bank Minnesota,
N.A.; 3.75%; 11/9/97* 2/1/07 875,000 875,000
Woodbury County, Iowa, Education Fac.
Rev. Bonds, Siouxland, Series 1996;
LOC Firstar Bank Milwaukee, N.A.;
3.80%; 11/9/97*; 11/1/16 3,000,000 3,000,000
5,475,000
Louisiana (4.75%)
Jefferson Parish, Louisiana, Hospital
Rev. Bonds, Jefferson Parish Hospital
Service, District #2, Customized
Purchase Program, Series 1985;
Insured by FGIC;
3.65%; 11/9/97*; 12/1/15 3,300,000 3,300,000
Jefferson Parish, Louisiana, IDB Rev.
Ref. Bonds, George J. Achel, Sr.
Project, Series 1986; LOC Barclays
Bank; 3.70%; 11/9/97*; 12/1/04 1,400,000 1,400,000
4,700,000
Maryland (0.23%)
Montgomery County, Maryland, F/R
Monthly IDA, Information Systems
& Networks; LOC PNC Bank;
3.80%; 11/9/97*; 4/1/14 230,000 230,000
Massachusetts (0.20%)
Commonwealth of Massachusetts,
Dedicated Income Tax Bonds, Series
B; LOC National Westminster;
4.00%; 11/3/97*; 12/1/97 $ 100,000 $ 100,000
Commonwealth of Massachusetts,
Dedicated Income Tax Bonds, Series
E; LOC ABN-AMRO Bank;
4.00%; 11/3/97*; 12/1/97 100,000 100,000
200,000
Michigan (1.92%)
Township of Cornell, Michigan,
The Economic Dev. Corp.,
Environmental Improvement
Rev. Ref. Bonds, Series 1986,
Mead Escanaba Paper Co. Project;
LOC Suisse Bank;
4.00%; 11/3/97*; 11/1/16 1,900,000 1,900,000
Minnesota (6.92%)
City of Coon Rapids, Minnesota
Rev. Bonds for Health Central
System, Series 1985; LOC Norwest
Bank Minnesota, N.A.;
3.70%; 11/9/97*; 8/1/15 2,000,000 2,000,000
City of Rochester, Minnesota, Health Care
Fac. Rev. Bonds, Mayo Foundation/
Mayo Medical Center, Adj. Tender,
Series 1992C;
3.60%; 11/10/97**; 11/15/21 500,000 500,000
3.65%; 11/17/97**; 11/15/21 400,000 400,000
3.50%; 11/19/97**; 11/15/21 350,000 350,000
3.50%; 12/2/97**; 11/15/21 500,000 500,000
3.50%; 12/3/97**; 11/15/21 500,000 500,000
3.60%; 12/4/97**; 11/15/21 500,000 500,000
3.65%; 12/9/97**; 11/15/21 500,000 500,000
3.75%; 1/20/98**; 11/15/21 400,000 400,000
3.65%; 2/2/98**; 11/15/21 500,000 500,000
3.70%; 2/5/98**; 11/15/21 700,000 700,000
6,850,000
Mississippi (0.51%)
Jackson County, Mississippi,
Pollution Control Ref. Rev. Bonds,
Series 1993; Guaranteed by
Chevron Corp.;
4.00%; 11/3/97*; 6/1/23 500,000 500,000
Missouri (3.07%)
Health & Education Fac. Authority of
Missouri School Dist. Program
Notes, Series 1996A;
4.50%; 9/14/98 3,020,000 3,034,977
Montana (4.95%)
City of Forsyth, Montana, Portland
General Electric Co., LOC Swiss
Bank Corp.;
Series B; 3.55%; 11/9/97*;
6/1/13 $2,400,000 $ 2,400,000
Series D; 3.60%; 11/9/97*;
6/1/13 1,500,000 1,500,000
Series 1984; 3.60%; 11/9/97*;
8/1/14 1,000,000 1,000,000
4,900,000
Nebraska (1.52%)
Lincoln Electric System
Commercial Paper Notes;
3.50%; 11/4/97 500,000 500,000
3.70%; 11/9/97 1,000,000 1,000,000
1,500,000
New Hampshire (1.82%)
New Hampshire IDA, F/R Monthly
1983 Hudson, Oerlikon-Buhrle
USA/Balzers; LOC Union Bank of
Switzerland;
3.85%; 11/9/97*; 7/1/13 1,800,000 1,800,000
New York (5.05%)
New York State Energy Research &
Dev. Authority for New York State
Electric & Gas Corp.; Series 1985-D;
LOC Union Bank of Switzerland;
3.60%; 12/1/97**; 12/1/15 1,000,000 1,000,000
New York State Energy Research &
Dev. Authority Pollution Control
Rev. Bonds, Long Island Lighting
Co.; Series 1985B; LOC Deutsche
Bank; 3.60%; 3/1/98**; 3/1/16 4,000,000 4,000,000
5,000,000
North Carolina (4.04%)
North Carolina Eastern Municipal Power
Agency, Series 1988B; LOC Morgan
Guaranty Trust Co.; LOC Union
Bank of Switzerland;
3.60%; 11/3/97**; 1/1/26 500,000 500,000
3.60%; 12/11/97**; 1/1/26 500,000 500,000
3.80%; 1/22/98**; 1/1/26 500,000 500,000
University of North Carolina
Foundation, Inc., Series 1989;
LOC Credit Suisse;
3.60%; 11/9/97*; 10/1/09 2,500,000 2,500,000
4,000,000
Ohio (1.72%)
Toledo-Lucas County, Ohio, Port
Fac. Ref. Rev. Bonds, CSX
Transport Project, Series 1992;
LOC Bank of Nova Scotia;
3.70%; 1/14/98**; 12/15/21 500,000 500,000
Village of Evendale, Ohio, SHV Real
Estate Income Project;
LOC ABN-AMRO;
3.60%; 11/9/97*; 9/1/15 1,200,000 1,200,000
1,700,000
Pennsylvania (2.43%)
Bucks County, Pennsylvania, IDA SHV
Real Estate, Inc. Project, Series 1985;
LOC ABN-AMRO Bank;
3.70%; 11/9/97*; 7/1/15 2,300,000 2,300,000
Delaware County, Pennsylvania, Fac.
Rev. Tax & Rev. Anticipation Notes,
Series 1985; Guaranteed by United
Parcel Service;
4.00%; 11/3/97*; 12/1/15 $ 100,000 $ 100,000
2,400,000
Tennessee (3.74%)
County of Sullivan, Tennessee, IDB
PCR Ref. Bonds, Series 1986, Mead
Project; LOC Union Bank of
Switzerland;
4.05%; 11/3/97*; 10/1/16 3,200,000 3,200,000
Knox, Tennessee, IDB F/R Monthly
IDR 1983, Service Merchandise Co.,
Inc.; LOC CIBC;
3.65%; 11/15/97*; 12/15/08 500,000 500,000
3,700,000
Texas (3.27%)
Coppell, Texas, Industrial Dev. Corp.,
IDA 1984, Minyard Properties
Project; LOC Citibank;
3.80%; 11/9/97*; 12/1/01 1,070,000 1,070,000
Montgomery County, Texas, Industrial
Dev. Corp. Ref. Bonds,
Series 1986A; Dal-Tile Corp.
Project; LOC Credit Suisse;
3.70%; 11/9/97*; 12/1/03 150,000 150,000
State of Texas Tax & Revenue
Anticipation Notes, Series 1997A;
4.75%; 8/31/98 1,000,000 1,007,305
4.75%; 8/31/98 1,000,000 1,007,111
3,234,416
West Virginia (1.81%)
Putnam County, West Virginia,
F/R Monthly IDR 1981, FMC Corp.
Project; LOC UBS;
3.85%; 11/9/97*; 10/1/11 1,800,000 1,800,000
Wyoming (1.26%)
Lincoln County, Wyoming, Pollution
Control Ref. Bonds, Pacificorp
Project, Series 1991; LOC
Union Bank of Switzerland;
3.60%; 11/5/97**; 1/1/16 750,000 750,000
3.60%; 11/6/97**; 1/1/16 500,000 500,000
1,250,000
Total Portfolio Investments (94.08%) 93,112,479
Cash, receivables and other assets,
net of liabilities (5.92%) 5,884,295
Total Net Assets (100.00%) $98,966,774
* Demand Date
** Put Date
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Selected data for a share of Capital Stock outstanding throughout each period:
Income from Investment Operations Less Distributions
Net Realized
and
Net Asset Net Unrealized Total Dividends Net Asset
Value at Invest- Gain from from Net Distributions Total Value at
Beginning ment (Loss) on Investment Investment from Distri- End of
of Period Income(a) Investments Operations Income Capital Gains butions Period
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRINCOR CASH MANAGEMENT FUND, INC.
Class A:
Year Ended October 31,
1997 $1.000 $.050 -- $.050 $(.050) -- $(.050) $1.000
1996 1.000 .049 -- .049 (.049) -- (.049) 1.000
1995 1.000 .052 -- .052 (.052) -- (.052) 1.000
1994 1.000 .033 -- .033 (.033) -- (.033) 1.000
1993 1.000 .026 -- .026 (.026) -- (.026) 1.000
Class B:
Year Ended October 31,
1997 1.000 .041 -- .041 (.041) -- (.041) 1.000
1996 1.000 .041 -- .041 (.041) -- (.041) 1.000
Period Ended October 31, 1995(c) 1.000 .041 -- .041 (.041) -- (.041) 1.000
Class R:
Year Ended October 31, 1997 1.000 .044 -- .044 (.044) -- (.044) 1.000
Period Ended October 31, 1996(f) 1.000 .030 -- .030 (.030) -- (.030) 1.000
PRINCOR TAX-EXEMPT CASH MANAGEMENT
FUND, INC.
Class A:
Year Ended October 31,
1997 1.000 .029 -- .029 (.029) -- (.029) 1.000
1996 1.000 .029 -- .029 (.029) -- (.029) 1.000
1995 1.000 .032 -- .032 (.032) -- (.032) 1.000
1994 1.000 .021 -- .021 (.021) -- (.021) 1.000
1993 1.000 .020 -- .020 (.020) -- (.020) 1.000
Class B:
Year Ended October 31,
1997 1.000 .022 -- .022 (.022) -- (.022) 1.000
1996 1.000 .021 -- .021 (.021) -- (.021) 1.000
Period Ended October 31, 1995(c) 1.000 .021 -- .021 (.021) -- (.021) 1.000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Ratio of Investment
Net Assets at Expenses to Income to
Total End of Period Average Average
Return(b) (in thousands)Net Assets(a) Net Assets
<S> <C> <C> <C> <C>
PRINCOR CASH MANAGEMENT FUND, INC.
Class A:
Year Ended October 31,
1997 4.96% $836,072 .63% 4.98%
1996 5.00 694,962 .66 4.88
1995 5.36 623,864 .72 5.24
1994 3.40 332,346 .70 3.27
1993 2.67 284,739 .67 2.63
Class B:
Year Ended October 31,
1997 4.05 992 1.47 4.08
1996 4.13 520 1.50 4.08
Period Ended October 31, 1995(c) 4.19(d) 208 1.42(e) 4.50(e)
Class R:
Year Ended October 31, 1997 4.16 4,296 1.26 4.40
Period Ended October 31, 1996(f) 2.97(d) 1,639 .99(e) 4.41(e)
PRINCOR TAX-EXEMPT CASH MANAGEMENT
FUND, INC.
Class A:
Year Ended October 31, 2.89 98,939 .70 2.93
1997 2.92 98,482 .71 2.87
1996 3.24 99,887 .69 3.19
1995 2.11 79,736 .67 2.08
1994 1.99 79,223 .66 1.96
1993
Class B:
Year Ended October 31, 2.18 28 1.47 2.16
1997 2.13 27 1.47 2.11
1996 2.19(d) 27 1.42(e) 2.40(e)
Period Ended October 31, 1995(c)
</TABLE>
See accompanying notes.
Notes to Financial Highlights
(a) Without the Manager's voluntary waiver of a portion of certain of its
expenses (see Note 3 to the financial statements) for the periods indicated,
the Money Market Funds would have had per share net investment income
(operating loss) and the ratios of expenses to average net assets as shown:
Per Share
Net
Year EndedInvestment Ratio of
October 31, Income Expenses
Except (Operating to Average Amount
Fund as Noted Loss) Net Assets Waived
Princor Cash Management
Fund, Inc.:
Class A 1997 $.050 .63% $ --
1996 .049 .67 7,102
1995 .052 .78 296,255
1994 .031 .90 595,343
1993 .025 .84 468,387
Class B 1997 .036 2.14 5,492
1996 .029 3.94 6,140
1995(c) .041 1.63(e) 104
Class R 1997 .043 1.34 2,441
Princor Tax-Exempt Cash
Management Fund, Inc.:
Class A 1997 .029 .73 27,978
1996 .028 .77 69,107
1995 .031 .84 138,574
1994 .019 .85 150,515
1993 .018 .83 131,442
Class B 1997 (.188) 22.58 5,807
1996 (.243) 27.43 7,160
1995(c) .018 1.89(e) 99
(b) Total return is calculated without the front-end sales charge or contingent
deferred sales charge.
(c) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995.
(d) Total return amounts have not been annualized.
(e) Computed on an annualized basis.
(f) Period from February 29, 1996, date Class R shares first offered to eligible
purchasers, through October 31, 1996.
<PAGE>
SHAREHOLDER MEETING RESULTS
SPECIAL MEETING OF SHAREHOLDERS PRINCOR BALANCED FUND, INC.
HELD SEPTEMBER 16, 1997
1.Election of the Board of Directors.
For Withheld
Davis 3,544,389 72,718
Ehrle 3,540,847 76,260
Ferguson 3,536,209 80,898
Gilbert 3,544,204 72,903
Griswell 3,539,331 77,776
Jones 3,547,615 69,492
Keller 3,544,982 72,125
Lukavsky 3,538,481 78,626
Peebler 3,532,660 84,447
2.Ratification of selection of Ernst & Young LLP as independent public auditors.
In Favor Opposed Abstain
3,511,213 18,730 87,163
3.Approval of name change to Principal Balanced Fund, Inc..
In Favor Opposed Abstain
3,400,738 112,727 103,642
4.Approval of modification of management agreement.
In Favor Opposed Abstain
3,199,599 201,536 215,972
SPECIAL MEETING OF SHAREHOLDERS PRINCOR BLUE CHIP FUND, INC.
HELD SEPTEMBER 16, 1997
1.Election of the Board of Directors.
For Withheld
Davis 2,451,532 31,847
Ehrle 2,450,555 32,824
Ferguson 2,449,693 33,685
Gilbert 2,451,742 31,637
Griswell 2,449,390 33,989
Jones 2,452,073 31,306
Keller 2,453,060 30,319
Lukavsky 2,448,619 34,760
Peebler 2,445,708 37,671
2.Ratification of selection of Ernst & Young LLP as independent public auditors.
In Favor Opposed Abstain
2,416,753 15,960 50,666
3.Approval of name change Principal Blue Chip Fund, Inc..
In Favor Opposed Abstain
2,342,896 81,672 58,810
4.Approval of modification of management agreement.
In Favor Opposed Abstain
2,269,547 127,540 86,292
SPECIAL MEETING OF SHAREHOLDERS PRINCOR BOND FUND, INC. HELD SEPTEMBER 16, 1997
1.Election of the Board of Directors.
For Withheld
Davis 6,961,310 125,016
Ehrle 6,958,707 127,619
Ferguson 6,954,467 131,859
Gilbert 6,965,661 120,665
Griswell 6,962,143 124,183
Jones 6,963,809 122,517
Keller 6,956,414 129,912
Lukavsky 6,959,271 127,055
Peebler 6,956,062 130,265
2.Ratification of selection of Ernst & Young LLP as independent public auditors.
In Favor Opposed Abstain
6,881,664 40,443 164,220
3.Approval of name change to Principal Bond Fund, Inc.
In Favor Opposed Abstain
6,638,729 215,543 232,054
4.Approval of modification of management agreement
In Favor Opposed Abstain
6,520,272 294,590 271,464
SPECIAL MEETING OF SHAREHOLDERS PRINCOR CAPITAL ACCUMULATION FUND, INC.
HELD SEPTEMBER 16, 1997
1.Election of the Board of Directors.
For Withheld
Davis 11,285,657 132,900
Ehrle 11,278,202 140,354
Ferguson 11,280,496 138,061
Gilbert 11,287,795 130,761
Griswell 11,271,302 147,255
Jones 11,286,352 132,205
Keller 11,285,159 133,397
Lukavsky 11,275,129 143,428
Peebler 11,273,997 144,560
2.Ratification of selection of Ernst & Young LLP as independent public auditors.
In Favor Opposed Abstain
11,245,210 38,783 134,564
3.Approval of name change to Principal Capital Value Fund, Inc.
In Favor Opposed Abstain
11,027,240 234,408 156,909
4.Approval of modification of management agreement.
In Favor Opposed Abstain
10,839,806 316,349 262,402
5.Approval to eliminate the fundamental investment restriction regarding the
purchase of shares of other investment companies.
In Favor Opposed Abstain Broker Non-Votes
10,847,398 146,393 238,156 186,609
SPECIAL MEETING OF SHAREHOLDERS PRINCOR CASH MANAGEMENT FUND, INC.
HELD SEPTEMBER 16, 1997
1.Election of the Board of Directors.
For Withheld
Davis 474,868,466 18,710,706
Ehrle 474,584,207 18,994,965
Ferguson 475,010,196 18,568,975
Gilbert 474,942,281 18,636,891
Griswell 474,821,905 18,757,267
Jones 475,021,635 18,557,536
Keller 474,689,162 18,890,009
Lukavsky 474,746,037 18,833,133
Peebler 474,099,254 19,479,917
2.Ratification of selection of Ernst & Young LLP as independent public auditors.
In Favor Opposed Abstain
472,256,851 13,023,679 8,298,641
3.Approval of name change to Principal Cash Management Fund, Inc.
In Favor Opposed Abstain
465,803,211 14,092,571 13,683,389
4.Approval of modification of management agreement.
In Favor Opposed Abstain
445,346,374 35,584,301 12,648,496
5.Defeat of proposal to eliminate the fundamental investment restriction
regarding the purchase of shares of other investment companies.
In Favor Opposed Abstain Broker Non-Votes
242,055,220 20,637,250 17,322,711 213,563,990
6.Defeat of proposed change to the fundamental investment restriction with
respect to diversification requirements.
In Favor Opposed Abstain Broker Non-Votes
239,753,774 22,517,642 17,743,764 213,563,990
SPECIAL MEETING OF SHAREHOLDERS PRINCOR EMERGING GROWTH FUND, INC.
HELD SEPTEMBER 16, 1997
1.Election of the Board of Directors.
For Withheld
Davis 4,357,654 127,073
Ehrle 4,355,968 128,760
Ferguson 4,360,306 124,422
Gilbert 4,354,684 130,043
Griswell 4,347,852 136,875
Jones 4,354,487 130,241
Keller 4,356,725 128,003
Lukavsky 4,354,913 129,814
Peebler 4,344,537 140,190
2.Ratification of selection of Ernst & Young LLP as independent public
auditors.
In Favor Opposed Abstain
4,323,493 47,792 113,443
3.Approval of name change Principal MidCap Fund, Inc.
In Favor Opposed Abstain
4,157,790 197,103 129,835
4.Approval of modification of management agreement.
In Favor Opposed Abstain
3,983,217 309,019 192,492
SPECIAL MEETING OF SHAREHOLDERS PRINCOR GOVERNMENT SECURITIES INCOME FUND, INC.
HELD SEPTEMBER 16, 1997
1.Election of the Board of Directors.
For Withheld
Davis 13,320,803 264,616
Ehrle 13,291,809 293,610
Ferguson 13,321,908 263,512
Gilbert 13,326,110 259,309
Griswell 13,293,926 291,493
Jones 13,300,094 285,326
Keller 13,303,919 281,501
Lukavsky 13,313,069 272,350
Peebler 13,288,992 296,428
2.Ratification of selection of Ernst & Young LLP as independent public auditors.
In Favor Opposed Abstain
13,147,713 115,460 322,246
3.Approval of name change Principal Government Securities Income Fund, Inc.
In Favor Opposed Abstain
12,593,127 602,448 389,843
4.Approval of modification of management agreement.
In Favor Opposed Abstain
12,357,748 692,513 535,157
5.Approval to eliminate the fundamental investment restriction regarding the
purchase of shares of other investment companies.
In Favor Opposed Abstain Broker Non-Votes
12,124,155 381,237 510,024 570,003
SPECIAL MEETING OF SHAREHOLDERS PRINCOR GROWTH FUND, INC.
HELD SEPTEMBER 16, 1997
1.Election of the Board of Directors.
For Withheld
Davis 3,701,772 76,828
Ehrle 3,700,176 78,424
Ferguson 3,703,462 75,138
Gilbert 3,702,760 75,840
Griswell 3,693,088 85,512
Jones 3,701,245 77,355
Keller 3,699,325 79,275
Lukavsky 3,698,811 79,789
Peebler 3,693,840 84,760
2.Ratification of selection of Ernst & Young LLP as independent public
auditors.
In Favor Opposed Abstain
3,655,638 27,049 95,914
3.Approval of name change to Principal Growth Fund, Inc.
In Favor Opposed Abstain
3,540,950 136,289 101,361
4.Approval of modification of management agreement.
In Favor Opposed Abstain
3,357,347 274,372 146,881
5.Approval to eliminate the fundamental investment restriction regarding the
purchase of shares of other investment companies.
In Favor Opposed Abstain Broker Non-Votes
3,421,585 99,129 132,866 125,019
SPECIAL MEETING OF SHAREHOLDERS PRINCOR HIGH YIELD FUND, INC.
HELD SEPTEMBER 16, 1997
1.Election of the Board of Directors.
For Withheld
Davis 3,252,836 28,034
Ehrle 3,251,629 29,241
Ferguson 3,253,098 27,771
Gilbert 3,247,268 33,601
Griswell 3,253,146 27,724
Jones 3,253,184 27,686
Keller 3,252,061 28,809
Lukavsky 3,248,678 32,192
Peebler 3,240,116 40,754
2.Ratification of selection of Ernst & Young LLP as independent public auditors.
In Favor Opposed Abstain
3,251,638 4,997 24,235
3.Approval of name change to Principal High Yield Fund, Inc.
In Favor Opposed Abstain
3,192,377 52,120 36,373
4.Approval of modification of management agreement.
In Favor Opposed Abstain
3,101,832 126,026 53,011
SPECIAL MEETING OF SHAREHOLDERS PRINCOR LIMITED TERM BOND FUND, INC.
HELD SEPTEMBER 16, 1997
1.Election of the Board of Directors.
For Withheld
Davis 1,589,936 22,272
Ehrle 1,590,105 22,103
Ferguson 1,590,105 22,103
Gilbert 1,590,105 22,103
Griswell 1,590,105 22,103
Jones 1,590,105 22,103
Keller 1,590,105 22,103
Lukavsky 1,589,838 22,370
Peebler 1,590,105 22,103
2.Ratification of selection of Ernst & Young LLP as independent public auditors.
In Favor Opposed Abstain
1,594,318 248 17,642
3.Approval of name change to Principal Limited Term Bond Fund, Inc.
In Favor Opposed Abstain
1,575,696 17,346 19,166
4.Approval of modification of management agreement.
In Favor Opposed Abstain
1,576,541 16,234 19,433
SPECIAL MEETING OF SHAREHOLDERS PRINCOR TAX-EXEMPT BOND FUND, INC.
HELD SEPTEMBER 16, 1997
1.Election of the Board of Directors.
For Withheld
Davis 10,250,402 159,467
Ehrle 10,255,818 154,051
Ferguson 10,256,316 153,552
Gilbert 10,244,841 165,028
Griswell 10,246,748 163,121
Jones 10,256,836 153,032
Keller 10,230,697 179,172
Lukavsky 10,193,986 215,883
Peebler 10,206,188 203,680
2.Ratification of selection of Ernst & Young LLP as independent public auditors.
In Favor Opposed Abstain
10,088,348 26,665 294,856
3.Approval of name change to Principal Tax-Exempt Bond Fund, Inc.
In Favor Opposed Abstain
9,815,496 342,276 252,096
4.Approval of modification of management agreement.
In Favor Opposed Abstain
9,528,058 518,484 362,326
SPECIAL MEETING OF SHAREHOLDERS PRINCOR TAX-EXEMPT CASH MANAGEMENT FUND, INC.
HELD SEPTEMBER 16, 1997
1.Election of the Board of Directors.
For Withheld
Davis 71,109,314 1,750,764
Ehrle 71,075,406 1,784,671
Ferguson 71,188,198 1,671,880
Gilbert 71,188,198 1,671,880
Griswell 70,862,581 1,997,496
Jones 71,150,550 1,709,528
Keller 71,126,436 1,733,641
Lukavsky 70,960,187 1,899,890
Peebler 71,104,126 1,755,951
2.Ratification of selection of Ernst & Young LLP as independent public auditors.
In Favor Opposed Abstain
71,819,882 425,323 614,873
3.Approval of name change to Principal Tax-Exempt Cash Management Fund, Inc.
In Favor Opposed Abstain
3,540,950 136,289 101,361
71,202,432 780,482 877,163
4.Approval of modification of management agreement.
In Favor Opposed Abstain
68,139,890 3,298,216 1,421,972
5.Defeat of proposed change to the fundamental investment restriction with
respect to diversification requirements.
In Favor Opposed Abstain Broker Non-Votes
29,963,800 2,494,905 1,410,739 38,990,633
SPECIAL MEETING OF SHAREHOLDERS PRINCOR UTILITIES FUND, INC.
HELD SEPTEMBER 16, 1997
1.Election of the Board of Directors.
For Withheld
Davis 3,056,213 52,862
Ehrle 3,047,260 61,814
Ferguson 3,055,302 53,772
Gilbert 3,049,932 59,143
Griswell 3,050,401 58,673
Jones 3,056,129 52,946
Keller 3,051,450 57,625
Lukavsky 3,054,898 54,176
Peebler 3,051,707 57,368
2.Ratification of selection of Ernst & Young LLP as independent public
auditors.
In Favor Opposed Abstain
3,021,115 28,058 59,901
3.Approval of name change to Principal Utilities Fund, Inc.
In Favor Opposed Abstain
2,930,187 87,321 91,566
4.Approval of modification of management agreement.
In Favor Opposed Abstain
2,821,723 146,107 141,245
SPECIAL MEETING OF SHAREHOLDERS PRINCOR WORLD FUND, INC.
HELD SEPTEMBER 16, 1997
1.Election of the Board of Directors.
For Withheld
Davis 19,340,274 281,606
Ehrle 19,338,923 282,957
Ferguson 19,347,163 274,717
Gilbert 19,345,556 276,324
Griswell 19,303,259 318,622
Jones 19,339,920 281,960
Keller 19,337,876 284,004
Lukavsky 19,331,887 289,993
Peebler 19,315,053 306,828
2.Ratification of selection of Ernst & Young LLP as independent public auditors.
In Favor Opposed Abstain
19,282,350 77,378 262,152
3.Approval of name change to Principal International Fund, Inc.
In Favor Opposed Abstain
18,903,073 404,722 314,085
4.Approval of modification of management agreement.
In Favor Opposed Abstain
18,212,966 830,315 578,600
<PAGE>
The Boards of Directors and Shareholders
Princor Balanced Fund, Inc.
Princor Blue Chip Fund, Inc.
Princor Capital Accumulation Fund, Inc.
Princor Emerging Growth Fund, Inc.
Princor Growth Fund, Inc.
Princor Utilities Fund, Inc.
Principal International Emerging Markets Fund, Inc.
Principal International SmallCap Fund, Inc.
Princor World Fund, Inc.
Princor Bond Fund, Inc.
Princor Government Securities Income Fund, Inc.
Princor High Yield Fund, Inc.
Princor Limited Term Bond Fund, Inc.
Princor Tax-Exempt Bond Fund, Inc.
Princor Cash Management Fund, Inc.
Princor Tax-Exempt Cash Management Fund, Inc.
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of The Princor Domestic Growth Funds (comprising,
respectively, Princor Balanced Fund, Inc., Princor Blue Chip Fund, Inc., Princor
Capital Accumulation Fund, Inc., Princor Emerging Growth Fund, Inc., Princor
Growth Fund, Inc. and Princor Utilities Fund, Inc.), The Princor International
Growth Funds (comprising, respectively, Principal International Emerging Markets
Fund, Inc., Principal International SmallCap Fund, Inc. and Princor World Fund,
Inc.), The Princor Income Funds (comprising, respectively, Princor Bond Fund,
Inc., Princor Government Securities Income Fund, Inc., Princor High Yield Fund,
Inc., Princor Limited Term Bond Fund, Inc. and Princor Tax-Exempt Bond Fund,
Inc.) and The Princor Money Market Funds (comprising, respectively, Princor Cash
Management Fund, Inc. and Princor Tax-Exempt Cash Management Fund, Inc.) as of
October 31, 1997, and the related statements of operations, statements of
changes in net assets and the financial highlights for each of the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of October 31, 1997, by correspondence with the custodians
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective funds constituting The Princor Domestic Growth Funds, The
Princor International Growth Funds, The Princor Income Funds and The Princor
Money Market Funds at October 31, 1997, and the results of their operations ,
the changes in their net assets and the financial highlights for each of the
periods indicated therein, in conformity with generally accepted accounting
principles.
/S/ ERNST & YOUNG LLP
Des Moines, Iowa
November 26, 1997
<PAGE>
FEDERAL INCOME TAX INFORMATION
Information for federal income tax purposes is presented as an aid to
shareholders in reporting the dividend distributions shown below. Shareholders
should consult a tax adviser on how to report these distributions for state and
local purposes.
<TABLE>
<CAPTION>
Period Ended October 31, 1997
Per Share Per Share
Income Dividend Distributions Capital Gain Distributions
Total
Total Dividends
Payable Per Total Deductible Payable Long- Short- Capital Gain and
Date Share Dividends Percentage* Date Term** Term*** Distributions Distributions
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Princor Balanced
Fund, Inc.
A Shares 12/31/96 $.0950 32.63% 12/02/96 $1.081 $.2149
3/24/97 .0950 29.84%
6/24/97 .0900 29.91%
9/24/97 .0850 37.03%
$.3650 $1.2959 $1.6609
B Shares 12/31/96 $.0649 32.63% 12/02/96 $1.081 $.2149
3/24/97 .0700 29.84%
6/24/97 .0613 29.91%
9/24/97 .0548 37.03%
$.2510 $1.2959 $1.5469
R Shares 12/31/96 $.0876 32.63% 12/02/96 $1.081 $.2149
3/24/97 .0790 29.84%
6/24/97 .0701 29.91%
9/24/97 .0610 37.03%
$.2977 $1.2959 $1.5936
Princor Blue Chip
Fund, Inc.
A Shares 12/31/96 $.0525 84.54% 12/02/96 $ .4593
3/24/97 .0525 84.00%
6/24/97 .0525 81.64%
9/24/97 .0475 71.31%
$.2050 $0.4593 $ .6643
B Shares 12/31/96 $.0112 84.54% 12/02/96 $ .4593
3/24/97 .0126 84.00%
6/24/97 .0126 81.64%
9/24/97 .0066 71.31%
$.0430 $0.4593 $ .5023
R Shares 12/31/96 $.0417 84.54% 12/02/96 $ .4593
3/24/97 .0309 84.00%
6/24/97 .0274 81.64%
9/24/97 .0173 71.31%
$.1173 $0.4593 $ .5766
Princor Capital
Accumulation Fund,
Inc.
A Shares 12/31/96 $.2395 81.00% 12/02/96 $3.3064 $.5486
6/24/97 .2395 90.70%
$.4790 $3.8550 $4.3340
B Shares 12/31/96 $.1063 81.00% 12/02/96 $3.3064 $.5486
6/24/97 .1087 90.70%
$.2150 $3.8550 $4.0700
R Shares 12/31/96 $.1729 81.00% 12/02/96 $3.3064 $.5486
6/24/97 .1414 90.70%
$.3143 $3.8550 $4.1693
</TABLE>
<TABLE>
<CAPTION>
Period Ended October 31, 1997
Per Share Per Share
Income Dividend Distributions Capital Gain Distributions
Total
Total Dividends
Payable Per Total Deductible Payable Long- Short- Capital Gain and
Date Share Dividends Percentage* Date Term** Term*** Distributions Distributions
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Princor Emerging
Growth Fund, Inc.
A Shares 12/31/96 $.0525 52.14% 12/02/96 $1.0733 $.1130
6/24/97 .0525 46.10%
$.1050 $1.1863 $1.2913
B Shares 12/31/96 $.0053 52.14% 12/02/96 $1.0733 $.1130
$.0053 $1.1863 $1.1916
R Shares 12/31/96 $.0055 52.14% 12/02/96 $1.0733 $.1130
$.0055 $1.1863 $1.1918
Princor Growth
Fund, Inc.
A Shares 12/31/96 $.1650 72.89% 12/02/96 $.3744
6/24/97 .1425 65.37%
$.3075 $ .3744 $ .6819
B Shares 12/31/96 $.0231 72.89% 12/02/96 $.3744
$.0231 $ .3744 $ .3975
R Shares 12/31/96 $.0924 72.89% 12/02/96 $.3744
$.0924 $ .3744 $ .4668
Princor Utilities
Fund, Inc.
A Shares 12/31/96 $.1129 97.93%
3/24/97 .1050 86.61%
6/24/97 .1050 99.11%
9/24/97 .1250 98.24%
$.4479 $ .4479
B Shares 12/31/96 $.0875 97.93%
3/24/97 .0823 86.61%
6/24/97 .0823 99.11%
9/24/97 .1041 98.24%
$.3562 $ .3562
R Shares 12/31/96 $.1041 97.93%
3/24/97 .0828 86.61%
6/24/97 .0828 99.11%
9/24/97 .1020 98.24%
$.3717 $ .3717
Princor World
Fund, Inc.
A Shares 12/31/96 $.1057 00.00% 12/02/96 $.2477 $.0634
$.1057 $ .3111 $ .4168
B Shares 12/31/96 $.0345 00.00% 12/02/96 $.2477 $.0634
$.0345 $ .3111 $ .3456
R Shares 12/31/96 $.0810 00.00% 12/02/96 $.2477 $.0634
$.0810 $ .3111 $ .3921
<FN>
*Percent qualifying for deduction by shareholders who are corporations.
**Taxable as long-term capital gain.
***Taxable at ordinary income rates.
</FN>
</TABLE>
Foreign Taxes Paid
Princor World Fund, Inc. makes an election under the Internal Revenue Code
Section 853 to pass through foreign taxes paid by the fund to its
shareholders. The total amount of foreign taxes passed through to
shareholders for the year ended October 31, 1997 totals $.0233 per share.
This information is given to meet certain requirements of the Internal
Revenue Code and should not be used by shareholders for preparing their
income tax returns. For tax return preparation purposes, please refer to the
information supplied with the 1099 form you receive from the fund's transfer
agent.
FEDERAL INCOME TAX INFORMATION (Cont)
Information for federal income tax purposes is presented as an aid to
shareholders in reporting the dividend distributions shown below. Shareholders
should consult a tax adviser on how to report these distributions for state and
local purposes.
Ordinary Income Dividends
The Funds paid the following per share income dividends on the dates indicated:
<TABLE>
<CAPTION>
Per Share Dividends/Payable Date
Fund 11/1/96 12/2/96 12/31/96 1/24/97 2/24/97 3/24/97 4/24/97 5/23/97 6/24/97 7/24/97 8/22/97 9/24/97 10/24/97
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Princor Bond
Fund, Inc.
Class A $.0625 $.0625 $.0625 $.0625 $.0625 $.0625 $.0625 $.0625 $.0625 $.0625 $.0625 $.0613 $.0613
Class B $.0556 $.0556 $.0548 $.0548 $.0548 $.0548 $.0548 $.0548 $.0548 $.0548 $.0548 $.0537 $.0537
Class R $.0609 $.0590 $.0590 $.0574 $.0574 $.0574 $.0564 $.0564 $.0564 $.0564 $.0564 $.0542 $.0542
Princor Government
Securities Income
Fund, Inc.
Class A $.0588 $.0588 $.0588 $.0588 $.0588 $.0563 $.0563 $.0563 $.0563 $.0563 $.0563 $.0563 $.0575
Class B $.0515 $.0515 $.0515 $.0515 $.0549 $.0512 $.0512 $.0512 $.0497 $.0497 $.0497 $.0497 $.0507
Class R $.0572 $.0572 $.0533 $.0533 $.0533 $.0503 $.0503 $.0494 $.0494 $.0494 $.0494 $.0494 $.0500
Princor High Yield
Fund, Inc.
Class A $.0563 $.0563 $.0563 $.0563 $.0563 $.0563 $.0563 $.0563 $.0563 $.0563 $.0563 $.0563 $.0563
Class B $.0500 $.0500 $.0500 $.0500 $.0500 $.0500 $.0500 $.0500 $.0500 $.0500 $.0500 $.0500 $.0500
Class R $.0551 $.0551 $.0551 $.0517 $.0517 $.0517 $.0517 $.0517 $.0517 $.0517 $.0517 $.0517 $.0517
Princor Limited Term
Bond Fund, Inc.
Class A $.0425 $.0500 $.0588 $.0500 $.0500 $.0500 $.0500 $.0500 $.0500 $.0500 $.0500 $.0500 $.0500
Class B $.0377 $.0451 $.0547 $.0460 $.0460 $.0460 $.0452 $.0452 $.0452 $.0452 $.0452 $.0452 $.0452
Class R $.0375 $.0447 $.0536 $.0478 $.0478 $.0478 $.0462 $.0462 $.0462 $.0462 $.0462 $.0462 $.0462
Princor Tax-Exempt
Bond Fund, Inc.*
Class A $.0538 $.0538 $.0538 $.0538 $.0513 $.0513 $.0513 $.0513 $.0513 $.0513 $.0513 $.0513 $.0513
Class B $.0442 $.0442 $.0465 $.0465 $.0428 $0428 $.0428 $.0428 $.0446 $.0446 $.0446 $.0446 $.0446
<FN>
*Dividends from the Tax-Exempt Bond Fund, Inc. were exempt from federal income taxation for non-corporate shareholders.
</FN>
</TABLE>
Information for federal income tax purposes is presented as an aid to
shareholders in reporting the dividend distributions shown below. Shareholders
should consult a tax adviser on how to report these distributions for state and
local purposes.
Ordinary Income Dividends
The Funds paid the following per share income dividends on the dates indicated:
<TABLE>
<CAPTION>
Per Share Dividends/Payable Date
Fund 11/20/96 12/20/96 1/20/97 2/20/97 3/20/97 4/18/97 5/20/97 6/20/97 7/18/97 8/20/97 9/19/97 10/20/97
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Princor Cash Management
Fund, Inc.
Class A $.0041 $.0043 $.0039 $.0041 $.0038 $.0042 $.0041 $.0046 $.0039 $.0043 $.0044 $.0040
Class B $.0034 $.0035 $.0032 $.0034 $.0031 $.0035 $.0035 $.0038 $.0032 $.0035 $.0036 $.0033
Class R $.0037 $.0037 $.0034 $.0035 $.0032 $.0037 $.0036 $.0040 $.0034 $.0038 $.0039 $.0035
Princor Tax-Exempt Cash
Management Fund, Inc.*
Class A $.0025 $.0025 $.0023 $.0023 $.0020 $.0024 $.0026 $.0028 $.0023 $.0025 $.0026 $.0025
Class B $.0018 $.0018 $.0017 $.0017 $.0014 $.0018 $.0020 $.0021 $.0017 $.0018 $.0019 $.0018
<FN>
*Dividends from the Tax-Exempt Cash Management Fund, Inc. were exempt from federal income taxation for non-corporate shareholders.
</FN>
</TABLE>
<PAGE>
THE PRINCOR FAMILY OF MUTUAL FUNDS
Principal Mutual Life Insurance Company has sponsored the development of a
number of mutual funds. The funds which make up the Princor family of mutual
funds and a brief description of their respective investment objectives are
provided below. For more complete information about any of the funds, including
charges and expenses, obtain a prospectus from Princor Financial Services
Corporation, The Principal Financial Group, Des Moines, Iowa 50392-0200
(telephone 1-800-247-4123). Please read it carefully before you invest or send
money.
<TABLE>
<CAPTION>
DOMESTIC GROWTH FUNDS INVESTMENT OBJECTIVE
<S> <C>
Princor Balanced Fund To seek the generation of a total return consisting of current income and capital
appreciation while assuming reasonable risks in furtherance of this objective.
Princor Blue Chip Fund To seek growth of capital and growth of income by investing primarily in common stocks of
well capitalized, established companies.
Princor Capital To seek long-term capital appreciation and a secondary objective of growth of investment
Accumulation Fund income.
Princor Emerging To seek capital appreciation by investing primarily in securities of emerging and other
Growth Fund growth-oriented companies.
Princor Growth Fund To seek growth of capital with realization of current income incidental to the objective of
growth of capital.
Princor Utilities Fund To seek current income and long-term growth of income and capital by investing primarily in
equity and fixed income securities of companies in the public utilities industry.
INTERNATIONAL GROWTH FUNDS
Principal International To seek long-term growth of capital by investing primarily in equity securities of issuers
Emerging Markets Fund, Inc. in emerging market countries.
Principal International To seek long-term growth of capital by investing primarily in equity securities of
SmallCap Fund, Inc. non-United States companies with comparatively smaller market capitalizations.
Princor World Fund To seek long-term growth of capital by investing in a portfolio of equity securities of
companies domiciled in any of the nations of the world.
INCOME FUNDS
Princor Bond Fund To seek as high a level of income as is consistent with preservation of capital and prudent
investment risk.
Princor Government Securities To seek a high level of current income, liquidity and safety of principal.
Income Fund
Princor High Yield Fund To seek high current income. Capital growth is a secondary objective when consistent with
seeking high current income.
Princor Limited Term Bond Fund To seek a high level of current income consistent with a relatively high level of principal
stability by investing in a portfolio of securities with a dollar weighted average maturity
of five years or less.
Princor Tax-Exempt Bond Fund To seek as high a level of current income exempt from federal taxation as is consistent with
preservation of capital.
MONEY MARKET FUNDS
Princor Cash Management Fund To seek as high a level of current income available from short-term securities as is
considered consistent with preservation of principal and maintenance of liquidity by
investing in a portfolio of money market instruments.
Princor Tax-Exempt Cash To seek, through investment in a professionally-managed portfolio of high quality short-term
Management Fund Municipal Obligations, as high a level of current interest income exempt from federal income
tax as is consistent with stability of principal and maintenance of liquidity.
</TABLE>
Principal Mutual Life Insurance Company Master Individual
Retirement Account Plan And Custody Agreement
This is the Principal Mutual Life Insurance Company's Master Individual
Retirement Account Plan and Custody Agreement for use by individuals who desire
to establish a Traditional Individual Retirement Account (Traditional IRA), as
described in Section 408(a) of the Internal Revenue Code (Code) or a Roth
Individual Retirement Account (Roth IRA) as described in Section 408A of the
Code. Traditional IRAs include Regular IRAs, Spousal IRAs, SEP IRAs and Rollover
IRAs Principal Mutual Life Insurance Company hereby agrees to act as Custodian
of any Traditional IRA or Roth IRA established under the Plan and this
Agreement, subject to the following terms and conditions:
ARTICLE I - Limitations on Contributions
In addition to the initial contribution made at the time the Account is
established, the Custodian may accept additional cash contributions from, or on
behalf of, the Participant for a taxable year of the Participant except as
limited below.
Only cash contributions will be accepted. Contributions to a Traditional IRA
shall not exceed the lesser of $2,000 or 100% of compensation, except in the
case of a rollover contribution as that term is described in Code Sections
402(c), 403(a)(4), 403(b)(8) or 408(d)(3), an employer contribution to a
Simplified Employee Pension as defined in Section 408(k), or any other
contribution as permitted by the Code. For Roth IRAs, cash contributions are
limited to the lesser of $2,000 or 100% of compensation, unless the contribution
is a rollover contribution described in Section 408(e) of the Code.
Contributions to a Traditional IRA (except SEP and Rollover IRAs) and Roth IRA
are coordinated; contributions to one reduces the amount that may be contributed
to the other so that contributions cannot exceed the 100% of compensation/$2,000
per Participant limitation.
Two applications are necessary if both spouses are establishing an IRA. The
maximum combined contribution in the event of a non-working spouse is the lesser
of 100% of compensation or $4,000. The maximum contribution must be split
between the Participant and the Participant's spouse so no more than $2000 is
contributed for either of them.
Excess Contributions
A retirement savings contribution will not be allowed for a Roth IRA or
Traditional IRA in excess of the 100%-$2,000/$4,000 limits, or in the case of a
Simplified Employee Pension, 15%-$30,000 limitation, nor can a contribution be
made to a Traditional IRA during the year in which or after the Participant
reaches 70 1/2 (except in the case of a Simplified Employee Pension). (A spousal
contribution can be made to the Traditional IRA of the non-working spouse as
long as the non-working spouse is under age 70 1/2 and the working spouse has
earned income.) Additionally, a non-deductible federal excise tax penalty in the
amount of 6% of excess contributions will be imposed on any Participant who has
excess contributions in a Traditional IRA or Roth IRA. This penalty will be
imposed each year until the excess contributions are removed.
An excess contribution may be removed from a Traditional IRA or Roth IRA by
withdrawing the amount of the excess or by applying the excess contribution
toward the contribution of the Participant in a subsequent year. If an excess
contribution is withdrawn from the Account, together with the net income of such
excess contribution, prior to the due date for filing the Participant's income
tax return for the year in which the excess contribution was made (including
extensions of time), the 6% non-deductible excise tax will not be imposed, the
contribution withdrawn will not be included in the Participant's gross income
for the year in which received, and the federal 10% tax on premature
distributions (see Distributions) will not be imposed on the excess withdrawn.
The net income on such excess contribution that is withdrawn will be deemed to
have been earned and is taxable in the taxable year in which such excess
contribution was made.
If an excess contribution is withdrawn after the due date for filing the
Participant's income tax return for the taxable year (including extensions of
time) and no deduction was taken for the excess portion of the contribution, the
excess withdrawn will not be included in the Participant's federal gross income
for the year in which received, and the 10% federal tax on premature
distributions will not be imposed on the excess withdrawn, provided that the
total contributions during the year, including the excess contribution, did not
exceed the applicable limitations. Any earnings of such excess contributions
withdrawn after the due date for filing the Participant's income tax return
(including extensions of time) will be subject to the taxes on premature
distributions and will be included in federal gross income.
If an excess contribution is withdrawn after the due date for filing the
Participant's income tax return for the taxable year (including extensions of
time) and the total contribution for the taxable year exceeded the $2,000/$4,000
limitation, the excess contribution that is withdrawn will be included in the
Participant's federal gross income for the year in which received, the 10%
federal tax on premature distributions will be imposed on the amount withdrawn,
and the 6% non-deductible excise tax will be imposed for each year until the
excess contribution is removed.
ARTICLE II - Nonforfeitability
The Participant's interest in the balance in the Account shall at all times be
nonforfeitable. The Account is established for the exclusive benefit of the
Participant and the Participant's beneficiaries.
ARTICLE III - Prohibited Investments
No part of the custodial funds shall be invested in life insurance contracts,
nor may the assets of any Participant's Account be commingled with other
property except in a common trust fund or common investment fund [within the
meaning of Code Section 408(a)(5)]. All funds shall be invested in shares of
such Mutual Funds as Participant shall designate.
ARTICLE IV - Distributions
Notwithstanding any other provision of this Plan, the Participant or a
Beneficiary may elect to receive distribution in any manner permitted by law
which is approved by the Custodian.
The duty to determine the amount of the distributions hereunder shall be the
Participant's or, when applicable, the designated Beneficiary. The Custodian
shall not be liable to the Participant or any other person for taxes or other
penalties incurred as a result of failure to distribute the minimum amount
required by law.
If the Participant dies before his or her entire interest has been distributed
and if the beneficiary is other than the surviving spouse, no additional cash
contributions or rollover contributions may be accepted in the account.
Pursuant to this Participation Agreement, certain distributions are at the
direction of the Participant as follows:
A. Traditional IRAs
(1) The Participant may begin to take money out of a Traditional IRA
without tax penalty after the age of 59 1/2, but must begin receiving a
distribution from the Account not later than the April 1 following the
calendar year in which the Participant attains age 70 1/2 (required
beginning date). At least 30 days prior to that date the Participant
must elect to have the balance in the Account distributed in:
(a) a single sum payment,
(b) an Annuity Contract that provides equal or substantially equal
monthly, quarterly or annual payments over the life the
Participant or over the joint and last survivor lives of the
Participant and the Participant's beneficiary.
(c) equal, or substantially equal, monthly, quarterly, semiannual or
annual payments (see "Minimum amounts to be distributed" below)
commencing not later than the above date and not extending beyond
the life expectancy of the Participant, or
(d) equal, or substantially equal, monthly, quarterly, semiannual or
annual payments (see "Minimum amounts to be distributed" below)
commencing not later than the above date and not extending beyond
the joint and last survivor expectancy of the lives of the
Participant and the designated Beneficiary.
Minimum amounts to be distributed. If the Participant's entire
interest is to be distributed in other than a lump sum, then the
amount to be distributed each year (commencing with the required
beginning date and each year thereafter) must be at least equal
to the quotient obtained by dividing the Participant's benefit by
the lesser of (1) the applicable life expectancy or (2) if the
Participant's spouse is not the designated beneficiary, the
applicable divisor determined from the table set forth in Q&A-4
of section 1.401(a)(9)-2 of the Proposed Income Tax Regulations.
Distributions after the death of the Participant shall be
distributed using the applicable life expectancy as the relevant
divisor without regard to proposed regulations section
1.401(a)(9)-2. A 50% excise tax will be imposed on the difference
between the minimum payout required and the amount actually paid,
unless the underdistribution was due to reasonable cause.
Notwithstanding that required minimum distributions may have
commenced as described above, the Participant may receive a
larger distribution from the Account upon written request to the
Custodian. If the Participant fails to elect any of the methods
described above on or before April 1 following the year in which
the Participant attains age 70 1/2, distribution will be made in
a single sum payment on or before that date.
(2) If the Participant dies before receiving full distribution from
the Account, the balance in the Account must be distributed in
the following manner:
(a) If the owner dies after distribution of his or her interest
has begun, the remaining portion of such interest will
continue to be distributed at least as rapidly as under the
method of distribution being used prior to the owner's
death.
(b) If the owner dies before distribution of his or her interest
begins, the owner's entire interest will be distributed in
accordance with one of the following four provisions:
(1) The owner's entire interest will be paid by December 31
of the calendar year containing the fifth anniversary
of the owner's death.
(2) If the owner's interest is payable to a Beneficiary
designated by the owner and the owner has not elected
(1) above, then the entire interest will be distributed
over the life or over a period certain not greater than
the life expectancy of the designated Beneficiary
commencing on or before December 31 of the calendar
year immediately following the calendar year in which
the owner died. The designated Beneficiary may elect at
any time to receive greater payments.
(3) If the designated Beneficiary of the owner is the
owner's surviving spouse, the spouse may elect to
receive equal or substantially equal payments over the
life or life expectancy of the surviving spouse
commencing at any date prior to the later of
(1) December 31 of the calendar year immediately
following the calendar year in which the owner
died and
(2) December 31 of the calendar year in which the owner
would have attained age 70 1/2. Such election must
be made no later than the earlier of December 31 of
the calendar year containing the fifth anniversary
of the owner's death or the date distributions are
required to begin pursuant to the preceding
sentence. The surviving spouse may increase the
frequency or amount of such payments at any time.
(4) If the designated Beneficiary is the owner's surviving
spouse, the spouse may treat the account as his or her
own individual retirement arrangement (IRA). This
election will be deemed to have been made if such
surviving spouse makes a regular IRA contribution to
the account, makes a rollover to or from such account,
or fails to elect any of the above three provisions.
(c) For purposes of this requirement, any amount paid to a child
of the owner will be treated as if it had been paid to the
surviving spouse if the remainder of the interest becomes
payable to the surviving spouse when the child reaches the
age of majority.
(3) Life expectancy is computed by use of the expected return
multiples in Tables V and VI of section 1.72-9 of the Income Tax
Regulations. Unless otherwise elected by the Participant by the
time distributions are required to begin, life expectancies shall
be recalculated annually. Such election shall be irrevocable as
to the Participant and shall apply to all subsequent years. The
life expectancy of a non-spouse beneficiary may not be
recalculated; instead, life expectancy will be calculated using
the attained age of such beneficiary during the calendar year in
which distributions are required to begin pursuant to this
section, and payments for subsequent years shall be calculated
based on such life expectancy reduced by one for each calendar
year which has elapsed since the calendar year life expectancy
was first calculated.
The owner of two or more individual retirement accounts may use the
"alternative method" described in Notice 88-38, 1988-1 C.B. 524, to satisfy
the minimum distribution requirements described above. This method permits
an individual to satisfy these requirements be taking from one individual
retirement account the amount required to satisfy the requirement for
another.
B. Roth IRAs
No minimum distribution rules apply to Roth IRAs during the Participant's
lifetime. Unless IRS rules or regulations require or permit otherwise, if
the Participant dies before his or her entire interest in a Roth IRA is
distributed to him or her, the entire remaining interest will be
distributed as follows:
(1) If the Participant dies on or after distribution of his or her
interest has begun, distribution must continue to be made at least as
rapidly as under the method of distribution in effect at the
Participant's death.
(2) If the Participant dies before distribution of his or her interest has
begun, the entire remaining interest will, at the election of the
Participant or, if the Participant has not so elected, at the election
of the Beneficiary or Beneficiaries, either (a) Be distributed by the
December 31 of the year containing the fifth anniversary of the
Participant's death, or (b) Be distributed in equal or substantially
equal payments over the life or life expectancy ( computed by use of
the expected return multiples in Tables V and VI of section 1.72-9 of
the Income Tax Regulations) of the designated Beneficiary or
Beneficiaries starting by December 31 of the year following the year
of the Participant's death. If, however, the Beneficiary is the
Participant's surviving spouse, then this distribution is not required
to begin before the later of (A) the December 31 of the year following
the year of the Participant's death, or (B) the December 31 of the
year in which the Participant would have turned age 70 1/2.
If the Participant dies before his or her entire interest has been
distributed and if the beneficiary is other than the surviving spouse,
no additional cash contributions or rollover contributions may be
accepted in the account.
(3) Life expectancy is computed by use of the expected return multiples in
Tables V and VI of section 1.72-9 of the Income Tax Regulations. Unless
otherwise elected by the Participant by the time distributions are
required to begin, life expectancies shall be recalculated annually.
Such election shall be irrevocable as to the Participant and shall
apply to all subsequent years. The life expectancy of a non-spouse
beneficiary may not be recalculated; instead, life expectancy will be
calculated using the attained age of such beneficiary during the
calendar year in which distributions are required to begin pursuant to
this section, and payments for subsequent years shall be calculated
based on such life expectancy reduced by one for each calendar year
which has elapsed since the calendar year life expectancy was first
calculated.
ARTICLE V - Declaration of Intention
Except in the case of the Participant's death, Disability [as defined in Section
72(m) of the Code] or attainment of age 59 1/2, the Custodian shall receive from
the Participant a declaration of the Participant's intention as to the
disposition of the amount distributed before distributing an amount from the
Participant's Account.
ARTICLE VI - Notices And Reports
The Participant agrees to provide information to the Custodian at such time and
in such manner and containing such information as may be necessary for the
Custodian to prepare any reports required pursuant to Section 408(i) and
408A(d)(3)E of the Code and the regulations thereunder, and any other applicable
guidance issued by the Internal Revenue Service.
The Custodian agrees to submit reports to the Internal Revenue Service and the
Participant as prescribed by the Internal Revenue Service. Currently, calendar
year reports concerning the status of the account are required to be furnished
annually.
ARTICLE VII - Controlling Article
Notwithstanding any other articles which may be added or incorporated, the
provisions of Articles I through III and this sentence shall be controlling.
Furthermore, any such additional article shall be wholly invalid if it is
inconsistent, in whole or in part, with Section 408(a) or 408A of the Code,
whichever is applicable, and the regulations thereunder.
ARTICLE VIII - Amendments
The Custodian shall have the authority to amend this Agreement from time to time
in order to comply with the provisions of the Code and regulations thereunder.
The Custodian shall have the right to amend its fee structure and amounts. Such
an amendment shall apply to current and/or future years only. The Custodian
shall also have the right to amend this agreement by adding additional
investment alternatives. Furthermore, other amendments may be made upon written
consent of the Custodian and the Participant.
ARTICLE IX - Definitions
Account shall mean the Principal Mutual Life Insurance Company Individual
Retirement Account which has been established in accordance with Section 408 of
the Code and consists of the terms and conditions herein set forth together with
the provisions of the Application.
Annuity Contract shall mean an annuity contract issued by Principal Mutual Life
Insurance Company.
Beneficiary shall mean the person(s) or entity(ies) designated to receive the
balance in the Account upon the death of the Participant or upon the death of a
prior Beneficiary.
ERISA means the Employee Retirement Income Security Act of 1974, as it may be
amended from time to time.
Compensation means wages, salaries, professional fees, and other amounts derived
from or received for personal services actually rendered (including, but not
limited to, commissions-paid salespersons, remuneration for services on the
basis of a percentage of profits, commissions on insurance premiums, tips and
bonuses) and includes earned income, as defined in Section 401(c)(2) of the Code
(reduced by the deduction the self-employed individual takes for contributions
made to a self-employed retirement plan). For purposes of this definition,
Section 401(c)(2) shall be applied as if the term trade or business for purposes
of Section 1402 included service described in subsection (c)(6). Compensation
does not include amounts derived from or received as earnings or profits from
property (including, but not limited to, interest and dividends) or amounts not
includible in gross income. Compensation also does not include any amount
received as a pension or annuity or as deferred compensation. The term
compensation shall include any amount includible in the individual's gross
income under Section 71 with respect to a divorce or separation instrument
described in subparagraph (A) of Section 71(b)(2).
Custodian means Principal Mutual Life Insurance Company or any successor
thereto.
Investment Manager refers to Principal Management Corporation. This term shall
have the same meaning as that in Section 3(38) of ERISA. The Investment Managers
with respect to the Mutual Funds hereby acknowledge that they are fiduciaries
with respect to the Plan. The Investment Managers with respect to the individual
Participant's Account hereby acknowledge that they are fiduciaries with respect
to the funds of the Participant.
Principal Group of Funds, Mutual Fund, Fund, or The Principal Family of Mutual
Funds means the fund or funds managed by Principal Management Corporation which
have been made available for the investment of Traditional IRA or Roth IRA
contributions.
Participant means any individual of legal age who shall execute the
Participation Agreement and make contributions to this Plan.
Participation Agreement means the written agreement executed by the Participant
and, where applicable, the Broker, whereby the Participant agrees to participate
in the Plan.
Plan means the terms and conditions of this Principal Mutual Life Insurance
Company IRA Plan and Custody Agreement including any amendments made pursuant to
Article IX of the Plan.
Spousal IRA means two contributory Traditional or Roth IRAs established by a
working individual for himself or herself and for the benefit of his or her
non-employed spouse.
All other capitalized words, terms and phrases not specifically defined shall
have and carry the meaning given them under the Code.
ARTICLE X - Investments
All contributions received by the Custodian shall be invested in such Mutual
Funds as the Participant may designate, or shall be used to purchase an Annuity
Contract as directed by the Participant.
At the time the Participant executes the Participation Agreement, the
Participant shall specify the particular Mutual Fund or Funds in which
contributions shall be invested. After the initial contribution, the Participant
may, at any time, direct the Custodian to transfer contributions then invested
in any such Fund into any other such Funds or to an Annuity Contract. Transfers
made pursuant to such direction shall not be considered a distribution of any
Account to the Participant.
No party identified herein shall be required to comply with any direction of the
Participant which in the judgment of such party may subject it to liability or
expense unless such party shall be indemnified in manner and amount satisfactory
to it.
The Participant is 100% vested at all times in all funds attributed to his
Account.
The Participant may not borrow funds from his Account, nor may he use the funds
as security for any loan or extension of credit.
Except as provided in this Plan, no right, interest or claim in or to any funds
held in the Mutual Fund or Annuity Contract shall be transferable, assignable or
subject to pledge by the Participant or Beneficiary, and any attempt to
transfer, assign or pledge the same shall not be recognized except as required
by law. The right, interest or claim in or to any funds held in the Mutual Fund
or Annuity Contract shall not be subject to garnishment, attachment, execution
or levy except as permitted by law.
Any Participant under the Plan may transfer his or her interest, in whole or in
part, to his or her spouse under a decree of divorce or dissolution of marriage
or a written instrument incident to such divorce or dissolution. At the time of
transfer, such interest shall be deemed an IRA of such spouse. The Participant
shall promptly notify Custodian of any such transfer by delivery to Custodian of
a certified copy of such decree or a true copy of such written instrument. Upon
receipt of the certified copy of such decree or a true copy of such written
instrument from any source, Custodian shall promptly adjust its books and
records to reflect that such Account is for the benefit of such former spouse.
Custodian shall not be required to accept contributions to or make distributions
from an Account established for a former spouse by reason of a transfer of
interest by a Participant to such former spouse hereunder until such former
spouse shall execute a Participation Agreement.
The Plan and the Accounts established hereunder shall be governed by all
applicable laws, rules and regulations of the United States of America and the
State of Iowa.
ARTICLE XI - Contributions
All initial contributions shall be paid to the Custodian at the time the
Participation Agreement is executed. Additional contributions may be paid to the
Custodian in such manner and in such amounts as the Custodian shall specify.
Contributions made by or on behalf of the Participant may be paid at any time
during the calendar year, but in no event later than the last day for the filing
of the Federal Income Tax Return for the calendar year to which they relate, not
to include any extensions thereof (except for contributions to a SEP IRA, which
may be made until the federal income tax filing deadline of the Participant's
employer, including extensions).
Except in the case of a Rollover IRA, Simplified Employee Pension or Roth IRA,
contributions made by or on behalf of the Participant shall not be made during
or after the calendar year in which the Participant attains age 70 1/2 years.
All IRA contributions must be in cash. Participant must clearly identify on the
application for the IRA account whether the IRA being established is a
Traditional IRA or a Roth IRA. Traditional IRAs and Roth IRAs must be maintained
in separate Custodial Accounts.
If an Excess Contribution is made by or on behalf of the Participant for any
calendar year, upon written request for distribution from the Participant
stating the amount of the Excess Contribution to be distributed, Custodian will
distribute such amount of the Excess Contribution to the Participant, together
with the income attributable thereto. The Custodian shall not have any duty to
determine whether an Excess Contribution has been made by or on behalf of the
Participant, and the Custodian shall not be held liable by the Participant or
any other person for failing to determine whether an Excess Contribution was
made or for failing to make distribution of such Excess Contribution without
request of the Participant. The Custodian shall not be liable to the Participant
or any other person for taxes or other penalties incurred as a result of an
Excess Contribution and any income attributable thereto or as a result of a
distribution of an Excess Contribution and any income attributable thereto.
Before the Custodian shall accept a contribution by or on behalf of the
Participant as a Rollover Contribution or Roth Conversion Contribution, the
Participant shall deliver to the Custodian a written declaration, in a form
acceptable to the Custodian, that such contribution is eligible for treatment as
a Rollover Contribution or Roth Conversion Contribution. Notwithstanding
anything to the contrary in the Plan, once the Custodian has received a
declaration from the Participant that a contribution is a Rollover Contribution
or Roth Conversion Contribution, the Custodian may conclusively rely on the
Participant's declaration and may accept and treat the contribution as a
Rollover Contribution or Roth Conversion Contribution. All Rollover
Contributions from a qualified employer plan shall be maintained in a separate
Rollover IRA, unless the Participant makes a written request to combine new
contributions and rollover contributions in one IRA. The Custodian shall have no
duty to determine whether combining new contributions and rollover contributions
in the same IRA is in the best interests of the Participant.
ARTICLE XII - Designation of Beneficiary
The Participant may designate the Beneficiary of his or her Account by a written
form acceptable to and filed with Custodian. Community property states and
marital property states require spousal consent if someone other than the spouse
is to be named as Beneficiary.
If the Participant designates more than one Beneficiary, he or she shall
designate the percentage interest that each such Beneficiary shall receive from
his or her Account upon distribution. In the event no such percentage interest
is designated, the interest of each Beneficiary shall be equal.
If the Participant predeceases his or her spouse before his or her entire
Account is distributed in accordance with Article IV(A)(1) of the Plan and the
Participant has designated no Beneficiary for the remaining interest or all such
Beneficiaries predecease the Participant's spouse, then the interest of the
Participant's spouse in the Account shall be fully vested and subject to the
terms and conditions of this Article and the Participant's spouse shall be
entitled to designate the Beneficiary of the Account in accordance with this
Article.
The Participant may, at any time, change or revoke any designation made under
this Article in a written form acceptable to and filed with the Custodian. Upon
the death of the Participant, the designation or designations made hereunder
shall be irrevocable. The designation shall be effective only if received by the
Custodian prior to the death of the Participant.
If the Participant fails to designate any Beneficiary or if the Participant
revokes the designation of Beneficiary or if all Beneficiaries designated
predecease the Participant, then the entire interest of the Participant in his
Account shall pass to the Participant's estate.
ARTICLE XIII - Administrative Duties
This Article shall delineate the responsibilities of the Custodian. The
Custodian shall maintain the Account in the name of the Participant and shall be
responsible only for the contributions of which it receives notice from the
Participant. The Custodian shall make distributions and transfers only in
accordance with the directions of the Participant. The Custodian shall keep
records of all receipts, investments and disbursements relating to the Account.
The Custodian shall furnish the Participant or the Beneficiary, where
applicable, with a written statement of transactions relating to the Account.
Unless the Participant shall have filed with the Custodian Agent written
exceptions or objections to such statement within thirty (30) days after it is
furnished, the custodian shall be forever released and discharged from liability
or accountability to the Participant or the Beneficiary, with respect to the
acts and transactions shown in the statement. No Beneficiary shall be entitled
to statements hereunder until the Participant is deceased and distribution shall
have commenced to such Beneficiary.
The duties and responsibilities of all parties to this Agreement are limited to
those specifically stated herein and no other or further duties or
responsibilities shall be implied.
ARTICLE XIV - Revocation Of Participation in Plan
The Participant may terminate participation in the Plan at any time by notifying
the Custodian in writing of the intention to terminate and instructing the
Custodian in writing to whom and by what means the funds on deposit in his
Account shall be transferred. Withdrawal of all funds invested in the Mutual
Fund shall terminate participation in the Plan. Although termination of this
Account could have an adverse effect on a Simplified Employee Pension in which
the Participant is participating, the Custodian has no liability to the
Participant, the employer, or to any other employees of that employer with
respect to such termination.
The Participant may revoke participation in the Plan within seven (7) business
days from the date the Participant executes the Participation Agreement by
notice to the Custodian in writing.
The Custodian may be required to withhold 10% from any taxable distribution from
an IRA unless the Participant elects no withholding at the time distributions
begin. Whether or not the Participant allows the Custodian to withhold, he or
she may be required to make quarterly estimated tax payments. In addition,
unless the Participant indicates at the time he or she closes an IRA account
that it is being transferred to another tax qualified plan, the Custodian will
be required to withhold at least 10% of the distribution.
ARTICLE XV - Miscellaneous
All instructions to the Custodian shall be in writing. The Participant may
authorize an agent to give instructions hereunder. Any such agent, including any
Broker authorized to direct the investment of a Participant's Account, must be
authorized in writing by the Participant in such form which is approved by and
filed with the Custodian. Any instruction by an agent so authorized shall be
binding on the Participant. Any authorization hereunder shall remain in effect
until revoked by the Participant in writing filed with the Custodian.
Principal Mutual Life Insurance Company shall substitute another Trustee or
Custodian upon notification by the Internal Revenue Service that such
substitution is required because it has failed to comply with the requirements
of Section 1.401-12(n) of the Treasury Regulations, or is not keeping such
records, or mailing such returns or sending such statements as are required by
forms or regulations.
In no event shall the Custodian be liable or responsible for the payment of any
tax or any penalty attributable to Excess Contributions, retention of Excess
Contributions, failure to make the minimum distribution from the Account, or
withdrawals or distributions made from the Account. Custodian shall not be
required to make any distribution which, in the judgment of Custodian, will
render Custodian directly liable for any such tax or penalty.
In the event Custodian shall receive any claim to the funds held under the Plan
which claim is adverse to the interest of the Participant or the Beneficiary and
which claim Custodian, in its absolute discretion, deems meritorious, Custodian
may withhold distribution under the Plan until the claim is resolved or until
instructed by a court of competent jurisdiction or Custodian may pay all or any
portion of the funds then invested in the Mutual Fund into such court. Payment
to a court under the Plan shall relieve Custodian of any further obligation to
anyone for the amount so paid.
In the event any question arises or ambiguity exists as to the meaning,
interpretation or construction of any provisions of the Plan, the Custodian is
authorized to construe or interpret any such provision and such construction and
interpretation shall be binding upon the Participant and the Beneficiary.
As compensation for its service hereunder, the Custodian shall be paid an annual
maintenance fee of $15 per IRA Plan Participant Account on the first business
day of December each year. Such fees shall be deducted from the Accounts as
applicable and paid to the Custodian unless the participant elects, in a writing
filed with the Custodian, to pay such fee directly. Any fee not paid directly
when due may be deducted from the Account and paid to the Custodian.
Any notices required or permitted to be given to Custodian under the Plan shall
be given to Custodian at the office of Custodian or any of its offices, and any
notices required or permitted to be given to the Participant under the Plan
shall be given to the Participant at the address for notice the Participant may
file with Custodian from time to time. Notices hereunder may be personally
served or sent by United States mail, first class, with postage prepaid and
properly addressed.
Any provision of the Plan which disqualifies it as a Traditional IRA or Roth IRA
shall be disregarded to the extent necessary to continue to qualify it as such
under the code.
Titles to Articles in this Plan are for convenience only and, in the event of
any conflict, the text of the Plan rather than the titles shall control.
Individual Retirement Custody
Account Disclosure Statement
Right To Revoke
AN INDIVIDUAL MAY REVOKE HIS OR HER TRADITIONAL INDIVIDUAL RETIREMENT ACCOUNT
(TRADITIONAL IRA) OR ROTH IRA AND HIS OR HER PARTICIPATION IN THE PLAN AT ANY
TIME WITHIN SEVEN (7) BUSINESS DAYS AFTER HIS OR HER ADOPTION OF THE PLAN. In
the event of such a revocation, the entire amount contributed by the individual
will be returned.
Individuals wishing to revoke their Traditional IRA or Roth IRA are required to
mail or deliver a written notice of revocation to the custodian not later than
the seventh business day after the establishment of the Account. The notice
shall be deemed delivered on the date of the postmark.
Custodian: Principal Mutual Life Insurance Company
Princor Financial Services Corporation
Attn: IRA Section
PO Box 10423
Des Moines, Iowa 50306
Telephone Number: 1-800-247-4123
Sponsor: Principal Group of Funds
General Description Of The Plan
A Traditional IRA may be established under the Plan by any working individual
who will not reach the age of 70 1/2 before the end of the year. The age
limitation does not apply to rollover contributions, Simplified Employee Pension
contributions and Roth IRA contributions. See the Plan for a more detailed
description of the restrictions on participation.
Contributions may be invested in any of the Mutual Funds named in the
application and instructions. All dividends and capital gains distributions will
be reinvested in the Funds selected and will accumulate in the account on a
tax-deferred basis. The individual (or the named beneficiary who survives the
individual) may request the Custodian to exchange shares of one fund for any
other eligible fund. Investments may be split among any of the funds named in
the application.
Traditional IRA(s) must be maintained in separate Custodial Account(s) from Roth
IRA(s).
The Participant may begin receiving distributions from a Traditional IRA without
incurring a 10% penalty tax on premature distributions at any time after a
Participant reaches age 59 1/2. The 10% penalty tax does not apply to
distributions made
o Due to the Participant's death
o Due to the Participant's disability as defined in the Plan o In
substantially equal periodic payments (at least annually) for the life
expectancy of the Participant or joint life expectancies of the Participant
and the Participant's beneficiary
o For medical expenses which are deductible on the Participant's income tax
return
o To pay health insurance premiums for a Participant who has been unemployed
for at least 12 weeks in the current or preceding tax year
o For qualified education expenses
o For a first-time home purchase for distributions of up to $10,000
The Participant must begin receiving distributions from a Traditional IRA before
April 1 following the year in which he or she attains age 70 1/2. He or she may
elect to receive their distribution in a lump sum or in installments over any
number of years selected by the Participant, but not exceeding their life
expectancy or the joint and survivor expectancy of the Participant and his or
her designated Beneficiary. Each payment is calculated by dividing the net asset
value of the shares in the account, and any dividends held, by the number of
payments remaining until the end of the period selected.
Income Tax Considerations
1997 Tax Year
Single persons who are not covered by an employer retirement plan can deduct
amounts contributed to a Regular IRA up to the lesser of $2,000 or 100% of
compensation. Persons who are covered by an employer retirement plan will be
able to make tax-deductible contributions to Regular IRAs only if their incomes
are below certain levels. For married persons filing separate tax returns, the
fact that the spouse is covered by an employer retirement plan does not affect
the non-covered spouse's ability to make deductible contributions. For married
persons filing jointly where either spouse has an employer retirement plan, the
full Traditional IRA deduction may be taken if adjusted gross income (AGI) is
$40,000 or less ($25,000 or less for single taxpayers.) However, as the joint
AGI exceeds $40,000 ($25,000 for singles), the deduction is phased down at 20
cents (22.5 cents for spousal IRAs) per dollar of AGI and is eventually
phased-out when joint AGI reaches $50,000 ($35,000 for singles). The phaseout is
based on AGI before it is reduced for deductible IRA contributions. The
deduction is rounded down to the next lowest multiple of $10 when not already a
multiple of $10. There is a $200 minimum deduction for anyone without phaseout
limits. The amount of a contribution that is deductible is determined by the
Participant. To the extent allowable contributions are not eligible for
deduction due to the AGI limits, non-deductible contributions are permitted.
Employer retirement plans include pension and profit sharing plans, 401(k)
plans, 403(b) plans, SEP and SIMPLE IRAs, government plans and just about every
other type of employer-maintained retirement plan. One exception: unfunded
deferred compensation plans including plans of state and local government and
tax-exempt organizations. A person will be considered a participant in an
employer retirement plan even if not vested. However, a person who works for an
employer that has a plan, but who has not yet met the plan's eligibility
requirements, can make deductible IRA contributions. A person's Form W-2 for the
year should indicate whether that person is covered by an employer retirement
plan.
1998 Tax Year and Later
Regular IRAs. For tax years beginning in 1998, any single person or any married
person where neither spouse is covered by an employer retirement plan (as
defined in the preceding paragraph) can deduct contributions of up to the lesser
of $2,000 or 100% of compensation to a Regular IRA. Persons covered by an
employer retirement plan may make deductible contributions to a Regular IRA, but
deductions are phased out based upon the person's AGI as described in the table
below:
Tax Year Joint Returns (AGI) Individual Returns (AGI)
- -----------------------------------------------------------------
1998 $50,000-$60,000 $30,000-$40,000
1999 $51,000-$61,000 $31,000-$41,000
2000 $52,000-$62,000 $32,000-$42,000
2001 $53,000-$63,000 $33,000-$43,000
2002 $54,000-$64,000 $34,000-$44,000
2003 $60,000-$70,000 $40,000-$50,000
2004 $65,000-$75,000 $45,000-$55,000
2005 $70,000-$80,000 $50,000-$60,000
2006 $75,000-$85,000 $50,000-$60,000
2007+ $80,000-$100,000 $50,000-$60,000
A married person who is not covered by an employer retirement plan, but whose
spouse is covered may deduct IRA contributions if AGI on a joint return is less
than $150,000. The deduction is phased out as previously discussed between
$150,000 and $160,000. The foregoing does not apply to Rollover IRAs or SEP
IRAs.
The amount of the contribution that is deductible is determined by the
Participant. To the extent allowable contributions are not eligible for
deductions due to the AGI limits, non-deductible contributions are permitted.
Roth IRAs. For tax years beginning in 1998, any person whose AGI is less than
$95,000 ($150,000 if filing a joint return) can contribute the lesser of 100% of
compensation or $2,000 to a Roth IRA. Contributions to a Roth IRA are not
deductible. Eligibility to contribute to a Roth IRA is phased out for AGI
between $95,000 - $110,000 for individuals and $150,000 - $160,000 for married
persons filing joint returns. Contributions to a Roth IRA are coordinated with
contributions to a Regular IRA; contribution to one reduces the amount that may
be contributed to the other so that total contributions cannot exceed the 100%
of compensation/$2,000 per Participant limitation. Participation in an employer
retirement plan does not affect eligibility for Roth IRA contributions.
Set-up charges and annual fees are considered miscellaneous deductions and,
therefore, are not deductible unless miscellaneous deductions are in excess of
2% of the Participant's adjusted gross income.
Rollover Contributions
Rollovers to Traditional IRAs from other retirement plans. Certain distributions
from qualified employee benefit plans and 403(b) plans (tax-sheltered annuities)
are eligible to be paid to a Traditional IRA. Such a payment is referred to as a
rollover of an eligible rollover distribution. The administrator or custodian
for the employee benefit plan or 403(b) plan from which the distribution is made
can indicate which portion of a distribution is an eligible rollover
distribution. Non-taxable distributions, distributions that are part of a series
of substantially equal payments made at least once a year over long periods of
time and distributions that are required after a participant attains age 70 1/2
are not eligible rollover distributions.
A rollover can be completed as a direct rollover to a Traditional IRA (which
avoids the application of a 20% income tax withholding requirement) or by
reinvesting distribution proceeds paid to the plan participant in a Traditional
IRA within 60 days of the date the participant receives the distribution. If the
distribution is not reinvested within 60 days of its receipt, the payment is
taxed in the year in which the participant received it. Distributions from a
qualified employee benefit plan may be eligible for special tax treatment such
as 10-year averaging and capital gain tax treatment. This special tax treatment
is not available if an individual previously rolled over a payment from the
employee benefit plan or certain other similar plans of the employer. The
special tax treatment is also not available for distributions rolled over to an
IRA when distributions are subsequently made from that IRA. Also, if only part
of a distribution from an employee benefit plan is rolled over to an IRA, this
special tax treatment is not available for the part of the distribution that was
not so rolled over. Additional restrictions are described in IRS Form 4972,
which has more information on lump sum distributions and how an individual may
elect the special tax treatment. The Plan provides that Rollover contributions
from a qualified employer plan shall be held in a separate IRA (called a Conduit
IRA) at all times, unless the Participant instructs the Custodian, in writing,
to the contrary. The Custodian shall be entitled to rely upon all written
instructions it reasonably believes to be genuine.
Rollovers to Traditional IRAs from other Traditional IRAs. Amounts distributed
from another Traditional IRA may be rolled over to the Princor Traditional IRA.
Rollovers between Traditional IRAs may occur no more than once a year; however,
direct transfers of Traditional IRA assets to another Traditional IRA may occur
at any time.
Under the Plan, Rollover Contributions may only be made in cash. If an
individual receives a distribution from a qualified employee benefit plan of
property other than cash, the individual may sell such property and invest the
proceeds of the sale in a Traditional Rollover IRA under the Plan within 60 days
after distribution.
Rollover from a Traditional IRA to a Roth IRA. An individual whose AGI is less
than $100,000 (regardless of whether filing an individual or joint return) may
rollover amounts from a Traditional IRA to a Roth IRA. Any income resulting from
the rollover is not taken into account when determining whether the AGI cap has
been exceeded. The 10% penalty tax does not apply to amounts rolled over to the
Roth IRA. The income resulting from a rollover from a Traditional IRA to a Roth
IRA completed during 1998 is spread evenly over four years (1998-2001). Amounts
rolled over to a Roth IRA must remain in the Roth IRA for a period of five years
from the year of the rollover in order to receive favorable tax treatment. The
Participant shall provide the Custodian with information necessary to ensure
compliance with holding period and IRS reporting requirements.
Simplified Employee Pension Contribution
If an Individual Retirement Account is being used as a receptacle for employer
contributions made under a Simplified Employee Pension (SEP) Plan, the limit on
employer contributions in a taxable year is the lesser of $30,000 or 15% of a
Participant's compensation.
Contributions must bear a uniform relationship to the total compensation [not in
excess of the first $160,000 beginning in 1997, as indexed in future years under
Code Section 401(a)(17)] of each employee maintaining a SEP. The employer's
contribution is excluded from the Participant's current taxable income.
Please see your Registered Representative for additional information about
Simplified Employee Pension plans.
Excess Contributions
Contributions for an individual during a taxable year are considered excess
contributions if they exceed 100% of compensation or $2,000, or such other limit
as may be prescribed by law. Contributions to Traditional IRAs and Roth IRAs are
coordinated; contributions to one reduces the amount that may be contributed to
the other so that total contributions cannot exceed the 100% of
compensation/$2,000 limitation. Contributions to individual accounts for a
person and that person's spouse are considered excess contributions if
contributions exceed the lesser of: (1) $4,000; (b) 100% of the compensation
includable in gross income for the taxable year; or (c) more than $2,000 paid to
a single individual retirement account for the individual or the individual's
spouse. If excess contributions are made, the individual must pay a cumulative,
non-deductible 6% excise tax on the portion of the contribution that exceeds the
amounts permitted by law. An individual can avoid this excise tax by withdrawing
the excess contribution prior to filing the tax return. Any income earned by the
excess contribution must also be withdrawn at the time the excess contribution
is withdrawn. Since the excess contribution was not deductible when made, it is
not included in the individual's income when returned, nor is it subject to the
10% tax on premature distributions. Income earned by the excess contribution,
however, must be included in the individual's income tax return for the tax year
in which it was earned. If the 6% excise tax is imposed for the taxable year,
its cumulative effect can be avoided by making reduced contributions in a future
year. Excess rollover contributions can also be corrected (with regard to dollar
limitations) if the excess contribution was due to reasonable cause.
Form 5329
Form 5329 (Return for Individual Retirement Savings Arrangement) must accompany
an individual's tax return (Form 1040) only if the individual owes excess
contribution taxes, premature distribution taxes, or taxes on certain
accumulations.
Distributions/Transfers
Traditional IRAs. Distributions from Traditional IRAs are taxed as ordinary
income when received. Ten-year averaging is not permissible.
If non-deductible contributions are made, the portion of the Traditional IRA
contribution consisting of non-deductible contributions will not be taxed again
when distributed. A distribution of a non-deductible contribution will generally
consist of a non-taxable portion (the return of non-deductible contributions)
and a taxable portion (the return of deductible contributions, if any, and
account earnings).
Thus, an individual may not take a distribution from a Traditional IRA which is
entirely tax free. The following formula is used to determine the non-taxable
portion of distributions for a taxable year:
[Remaining Non-Deductible Contributions Year-End / Total Traditional IRA
Account Balances] X Total Distributions (for the year) =
Non-Taxable Distributions (for the year)
All of an individual's Traditional IRAs are treated as a single IRA to figure
the year-end total IRA account balance. This includes all regular IRAs, as well
as Simplified Employer Pension (SEP) IRAs, SIMPLE IRAs and Rollover IRAs.
Distributions taken during the year must also be added back in. Calculation of
the taxable portion of any IRA distribution as well as recordkeeping of the
non-deductible contributions made to an IRA are the Participant's
responsibility.
Roth IRAs. Distributions from Roth IRAs are not subject to federal income tax
if:
(1) made after the Participant attains age 59 1/2, or due to the
Participant's death or disability, or for a first-time home purchase
(up to $10,000), and
(2) made more than five tax years after the tax year of the initial
contribution to any Roth IRA.
Distributions from a Roth IRA that do not qualify for tax-exempt treatment (e.g.
because taken before the Participant attains age 59 1/2 or before five years
have passed since the initial contribution was made) are treated first as a
return of the Participant's contribution and after that amount is distributed,
additional distributions would be taxed as ordinary income and would be subject
to the 10% penalty tax if none of the previously described exceptions to the
penalty tax apply. Calculation of the taxable portion of any distribution as
well as recordkeeping of the undistributed balance of Roth IRA contributions are
the Participant's responsibility.
The IRS has not issued regulations governing distributions from Roth IRAs, so
there are some unanswered questions regarding distributions subsequent to the
Participant's death. Distributions will be subject to such regulations when and
as adopted.
Financial Disclosure
Information about the Funds and the method by which the annual earnings are
computed and allocated to each shareholder's account is described in the
prospectus accompanying this disclosure statement.
An annual administration fee of $15.00 is also required. This fee will be
deducted from the account as a separate item on the first business day of
December each year. You will be notified of this fee by invoice and may pay by
separate check before November 15. There is also a sales charge deducted on the
purchase of Class A shares of most of the Funds amounting to 4.75% (3.75% for
SEP IRAs and certain "listbill" plans) or less of the amount of the transaction
at offering price. These sales charges are reduced under various circumstances
described in detail in the Fund's prospectus. A contingent deferred sales charge
of up to 4% (3% for SEP IRAs and certain "listbill" plans) applies to Class B
shares of each of the Funds. A complete description of Class A shares and Class
B shares is provided in the prospectus. You must have received a prospectus
prior to submitting your application to create a Traditional or Roth IRA. The
annual earnings on your Account will depend upon the investment income received
by the Fund or Funds which you select. Growth in value of this Account is
neither guaranteed nor projected. All certificates shall be held by the
Custodian. The Custodian has the right to change its fees in the current and/or
future years.
Prohibited Transactions
If the Participant borrows money by use of the Traditional or Roth IRA or uses
any portion of it as security for a loan (which the plan prohibits), the portion
so used will be treated for tax purposes as having been distributed to the
Participant. In addition, if a Participant or a Beneficiary engages in a
prohibited transaction (as defined in Section 4975 of the Internal Revenue Code)
with respect to the Traditional or Roth IRA, the Account will be disqualified
and the entire amount in the Account will be treated as having been distributed
to the Participant. Examples of prohibited transactions for both Traditional and
Roth IRAs are: the borrowing of the income or principal from the IRA, selling
property to or buying property from the IRA, or receiving more than reasonable
compensation for services performed for the IRA. When all or a portion of an IRA
is treated as having been distributed, such amounts will be taxed as previously
described as a distribution for that taxable year and will generally be subject
to the 10% federal tax on premature distributions (unless an exemption applies).
Estate And Gift Tax Considerations
Transfers of Traditional and Roth IRAs are generally subject to taxation under
federal estate and gift tax laws. To the extent that benefits are distributed to
the spouse of the Participant, the amount of the benefits may be eligible for
the estate tax marital deduction.
In community property states, if a person other than a spouse is designated as
the plan beneficiary, the spouse might be considered to have made a gift on
one-half of the value of the benefit conveyed when the conveyance is complete.
IRS Approval Letter
An IRS approval letter has not been obtained for the IRA Plan and Custodial
Agreement contained in this booklet but the Custodian is of the opinion that the
form of the Plan and Custodial Agreement complies with applicable federal income
tax rules and regulations.
Further Information
Further information regarding Individual Retirement Accounts and the retirement
savings deduction may be obtained from any district office of the Internal
Revenue Service.
BECAUSE LEGAL AND TAX CONSEQUENCES OF THE USE OF THE PLAN MAY VARY IN PARTICULAR
CASES, INDEPENDENT ADVICE SHOULD BE SOUGHT FROM YOUR ATTORNEY OR TAX ADVISOR.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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