SUPPLEMENT, DATED FEBRUARY 23, 1998
TO THE PRINCIPAL FUNDS' PROSPECTUS DATED DECEMBER 31, 1997
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.
The prospectus dated December 31, 1997 for the above-referenced Funds is
amended by deleting in Table A on page 4, the Balanced Fund and inserting the
following:
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
Balanced Fund .60% .25% .48% 1.33%
The prospectus is further amended by deleting the table on page 46 and
inserting the following in lieu thereof:
Contingent Deferred Sales Charge
as a Percentage of
Dollar Amount Subject to Charge
<TABLE>
<CAPTION>
For Certain Sponsored Plans
Commenced After 2/1/98
All Funds All Funds
Years Since Purchase Except Limited Term Limited Term Except Limited Term Limited Term
Payments Made Bond Fund Bond Fund Bond Fund Bond Fund
<S> <C> <C> <C> <C>
2 years or less 4.0% 1.25% 3.00% .75%
more than 2 years, up to 4 years 3.0% 0.75% 2.00% .50%
more than 4 years, up to 5 years 2.0% 0.50% 1.00% .25%
more than 5 years, up to 6 years 1.0% 0.25% None None
more than 6 years None None None None
</TABLE>
The prospectus is also amended by including as a part thereof the following
unaudited selected per share data and ratio information for the Principal
International Emerging Markets Fund, Inc. and Principal International SmallCap
Fund, Inc. for the period ended December 31, 1997. This information should be
read in conjunction with the financial statements and related notes for the
Funds included in the Statement of Additional Information dated December 31,
1997 as supplemented through February 23, 1998.
<PAGE>
December 31, 1997
FINANCIAL HIGHLIGHTS
PRINCIPAL INTERNATIONAL EMERGING MARKETS FUND, INC.
PRINCIPAL INTERNATIONAL SMALLCAP FUND, INC.
Selected data for a share of Capital Stock outstanding throughout the period:
<TABLE>
<CAPTION>
Principal International Principal International
Emerging Markets Fund, Inc. SmallCap Fund, Inc.
Class A(d) Class B(d) Class A(d) Class B(d)
<S> <C> <C> <C> <C>
Net Asset Value at Beginning of Period................... $9.51 $9.51 $10.04 $10.04
Income from Investment Operations:
Net Investment Income............................... (.02) (.03) (.03) (.03)
Net Realized and Unrealized Losses
on Investments.................................. (1.28) (1.28) (.26) (.27)
Total from Investment Operations (1.30) (1.31) (.29) (.30)
Net Asset Value at End of Period......................... $8.21 $8.20 $9.75 $9.74
Total Return(a).......................................... (11.05)% (11.16)% (1.61)% (1.72)%
Ratios/Supplemental Data:
Net Assets at End of Period (in thousands).......... $5,974 $3,408 $7,336 $4,925
Ratio of Expenses to Average Net Assets(b).......... 2.72% 2.84% 2.69% 2.98%
Ratio of Net Investment Income to Average
Net Assets(b)................................... (.85)% (.98)% (.95)% (1.15)%
Portfolio Turnover Rate(b).......................... 27.1% 27.1% 53.6% 53.6%
Average Commission Rate Paid(c)..................... $.0052 $.0052 $.0159 $.0159
<FN>
(a) Total return is calculated without the front-end sales charge or contingent
deferred sales charge and has not been annualized.
(b) Computed on an annualized basis.
(c) 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 the
International Growth Funds average commission rates are substantially
different from Domestic Growth Funds.
(d) 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 December 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)
Principal International
SmallCap Fund, Inc.
Class A .01 .03
Class B .01 .03
</FN>
</TABLE>
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.
<PAGE>
SUPPLEMENT, DATED FEBRUARY 20, 1998
TO THE PRINCIPAL FUNDS' R SHARE PROSPECTUS DATED DECEMBER 31, 1997
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 Utilities Fund, Inc.
The prospectus dated December 31, 1997 for the above-referenced Funds is
amended by including as a part thereof the following unaudited selected per
share data and ratio information for the Principal International Emerging
Markets Fund, Inc. and Principal International SmallCap Fund, Inc. for the
period ended December 31, 1997. This information should be read in conjunction
with the financial statements and related notes for the Funds included in the
Statement of Additional Information dated December 31, 1997 as supplemented
through February 23, 1998.
December 31, 1997
FINANCIAL HIGHLIGHTS
Selected data for a share of Capital Stock outstanding throughout the period:
<TABLE>
<CAPTION>
Principal International Principal International
Emerging Markets Fund, Inc. SmallCap Fund, Inc.
Class A(d) Class R(d) Class A(d) Class R(d)
<S> <C> <C> <C> <C>
Net Asset Value at Beginning of Period................... $9.51 $9.51 $10.04 $10.04
Income from Investment Operations:
Net Investment Income............................... (.02) (.03) (.03) (.03)
Net Realized and Unrealized Losses
on Investments.................................. (1.28) (1.28) (.26) (.26)
Total from Investment Operations (1.30) (1.31) (.29) (.29)
Net Asset Value at End of Period......................... $8.21 $8.20 $9.75 $9.75
Total Return(a).......................................... (11.05)% (11.16)% (1.61)% (1.61)%
Ratios/Supplemental Data:
Net Assets at End of Period (in thousands).......... $5,974 $2,501 $7,336 $2,970
Ratio of Expenses to Average Net Assets(b).......... 2.72% 2.73% 2.69% 2.43%
Ratio of Net Investment Income to Average
Net Assets(b)................................... (.85)% (.89)% (.95)% (.81)%
Portfolio Turnover Rate(b).......................... 27.1% 27.1% 53.6% 53.6%
Average Commission Rate Paid(c)..................... $.0052 $.0052 $.0159 $.0159
<FN>
(a) Total return is calculated without the front-end sales charge or contingent
deferred sales charge and has not been annualized.
(b) Computed on an annualized basis.
(c) 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 the
International Growth Funds average commission rates are substantially
different from Domestic Growth Funds.
(d) 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 December 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 R .01 (.50)
Principal International SmallCap
Fund, Inc.
Class A .01 .03
Class R .01 .03
</FN>
</TABLE>
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.
SUPPLEMENT DATED FEBRUARY 23, 1998
TO THE STATEMENT OF ADDITIONAL INFORMATION DATED DECEMBER 31, 1997
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.
The Statement of Additional Information dated December 31, 1997 for the
above-referenced Funds is amended by adding the following financial statements
beginning on page 72 thereof.
December 31, 1997
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
Principal Principal
International International
Emerging Markets SmallCap
GROWTH FUNDS (INTERNATIONAL) Fund, Inc. Fund, Inc.
<S> <C> <C>
Investment in securities -- at cost.................................. $13,691,549 $15,474,229
Assets
Investment in securities -- at value (Note 4)........................ $11,906,430 $15,220,092
Cash.............................................................. 25,165 83,717
Receivables:
Dividends and interest............................................ 15,452 17,636
Investment securities sold........................................ 14,262 --
Capital Stock sold................................................ 9,801 13,347
Net receivable for foreign currency contract (Note 5)................ 9,497 --
Total Assets 11,980,607 15,334,792
Liabilities
Accrued expenses..................................................... 18,977 21,125
Payables:
Investment securities purchased................................... 60,227 82,789
Capital Stock reacquired.......................................... 17,498 185
Total Liabilities 96,702 104,099
Net Assets Applicable to
Outstanding Shares ................................................. $11,883,905 $15,230,693
Net Assets Consist of:
Capital Stock........................................................ $ 14,482 $ 15,626
Additional paid-in capital........................................... 14,049,220 15,729,583
Accumulated undistributed net
investment income (operating loss)................................ (28,017) (32,700)
Accumulated undistributed net realized
gain (loss) from:
Investment transactions........................................... (376,319) (229,961)
Foreign currency transactions..................................... (382) 2,603
Net unrealized appreciation (depreciation)
of investments.................................................... (1,785,119) (254,137)
Net unrealized appreciation on translation of
assets and liabilities in foreign currencies...................... 9,276 (321)
Total Net Assets $11,883,905 $15,230,693
Capital Stock (par value: $.01 a share):
Shares authorized.................................................... 100,000,000 100,000,000
Net Asset Value Per Share:
Class A: Net Assets................................................. $5,974,119 $7,336,111
Shares issued and outstanding........................... 727,738 752,538
Net asset value per share............................... $8.21 $9.75
Maximum offering price per share(a) ......................... $8.62 $10.24
Class B: Net Assets................................................. $3,408,369 $4,924,791
Shares issued and outstanding........................... 415,556 505,537
Net asset value per share(b)............................ $8.20 $9.74
Class R: Net Assets................................................. $2,501,417 $2,969,791
Shares issued and outstanding........................... 304,869 304,592
Net asset value per share............................... $8.20 $9.75
<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>
See accompanying notes.
</TABLE>
<PAGE>
Period Ended December 31, 1997
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Principal Principal
International International
Emerging Markets SmallCap
GROWTH FUNDS (International) Fund, Inc. Fund, Inc.
<S> <C> <C>
Net Investment Income
Income:
Dividends......................................................... $ 55,616 $ 61,632
Withholding tax on foreign dividends.............................. (5,873) (6,630)
Interest.......................................................... 36,302 35,153
Total Income 86,045 90,155
Expenses:
Management and investment advisory fees (Note 3).................. 51,721 59,142
Distribution and shareholder servicing fees (Note 1 and 3)........ 10,416 11,689
Transfer and administrative services (Note 1 and 3)............... 20,899 20,852
Registration fees (Note 1)........................................ 5,578 5,578
Custodian fees ................................................... 15,923 14,683
Auditing and legal fees .......................................... 7,066 8,207
Directors' fees .................................................. 2,229 2,465
Other ............................................................ 230 239
Total Net Expenses 114,062 122,855
Net Investment Income (Operating Loss) (28,017) (32,700)
Net Realized and Unrealized Gain (Loss) on Investments and Foreign
Currencies Net realized gain (loss) from:
Investment transactions........................................... (376,319) 229,961
Foreign currency transactions..................................... (382) 2,603
Change in unrealized appreciation/depreciation of:
Investments....................................................... (1,785,119) (254,458)
Translation of assets and liabilities in foreign currencies....... 9,276 --
Net Realized and Unrealized Gain (Loss)
on Investments and Foreign Currencies (2,151,780) (21,894)
Net (Decrease) in Net
Assets Resulting from Operations $ (2,179,797) $(54,594)
</TABLE>
See accompanying notes.
<PAGE>
Period Ended December 31, 1997
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Principal Principal
International International
Emerging Markets SmallCap
GROWTH FUNDS (International) Fund, Inc. Fund, Inc.
1997 1997
Operations
<S> <C> <C>
Net investment income (operating loss)............................... $ (28,017) $ (32,700)
Net realized gain (loss) from:
Investment transactions........................................... (376,319) (229,961)
Foreign currency transactions..................................... (382) (2,603)
Change in unrealized appreciation/
depreciation of investments and translation of
assets and liabilities in foreign currencies...................... (1,775,843) (254,458)
Net Increase (Decrease) in Net
Assets Resulting from Operations (2,179,797) (514,516)
Capital Share Transactions (Note 6)
Shares sold:
Class A........................................................... 7,049,639 7,635,963
Class B .......................................................... 4,213,819 5,271,334
Class R........................................................... 3,043,723 3,052,058
Shares redeemed:
Class A .......................................................... (98,187) (64,747)
Class B .......................................................... (145,292) (143,604)
Class R........................................................... -- (5,795)
Net Increase in Net Assets from
Capital Share Transactions 14,063,702 15,745,209
Total Increase 11,883,905 15,230,693
Net Assets
Beginning of period -- --
End of period [including undistributed net
investment income (operating loss)
as set forth below]............................................... $11,883,905 $15,230,693
Undistributed Net Investment Income
(operating loss).................................................. $ (28,017) $ (32,701)
</TABLE>
See accompanying notes.
<PAGE>
December 31, 1997
NOTES TO FINANCIAL STATEMENTS
Principal International Emerging Markets Fund, Inc.
Principal International SmallCap Fund, Inc.
Note 1 -- Significant Accounting Policies
Principal International Emerging Markets Fund, Inc. and Principal International
SmallCap 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 December 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>
Principal International Emerging Markets Fund,Inc.$3,806 $4,304 $2,306 $555 $310 $327 $1,335 $ 906 $ 953
Principal International SmallCap Fund, Inc. 4,291 4,933 2,465 579 313 334 1,335 1,859 --
</TABLE>
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. No
reclassifications were during the period.
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 is
approximately the same for both federal income tax and financial reporting
purposes.
At December 31, 1997, Principal International Emerging Markets Fund, Inc. had
net capital loss carryforward of approximately $376,000 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:
<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>
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%
</TABLE>
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.
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. 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 December 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
No brokerage commissions were paid by the International Growth Funds to Princor
Financial Services Corporation during the period ended December 31, 1997.
Brokerage commissions were paid to other affiliates by the following funds:
Period Ended
December 31,
1997
Principal International Emerging Markets Fund, Inc. $ 2,152
Principal International SmallCap Fund, Inc. 1,913
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 December 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:
<TABLE>
<CAPTION>
Class A Class B Class R
<S> <C> <C> <C>
Principal International Emerging Markets Fund, Inc. 400,000 300,000 300,000
Principal International SmallCap Fund, Inc. 400,000 300,000 300,000
</TABLE>
Note 4 -- Investment Transactions
For the periods ended December 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. $14,167,937 $(1,089,068)
Principal International SmallCap Fund, Inc. 4,329,721 (1,959,001)
At December 31, 1997, net unrealized appreciation (depreciation) of investments
by the International Growth Funds was composed of the following:
<TABLE>
<CAPTION>
Net Unrealized
Gross Unrealized Appreciation (Depreciation)
Appreciation (Depreciation) of Investments
<S> <C> <C> <C>
Principal International Emerging Markets Fund, Inc. $ 460,569 $ (2,245,688) $ (1,785,119)
Principal International SmallCap Fund, Inc. 1,173,583 (1,427,720) (254,137)
</TABLE>
At December 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 December 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 $ 56,100 $ 62,150 .52%
Emerging Markets Fund, Inc. Bank Handlowy GDR 8/14/97 50,200 53,000 .45
Banque Libanaise le Commerce
SAL ADR 8/14/97 115,250 90,250 0.76
Banque Marocaine du Commerce
Exterieur 8/15/97 91,250 101,550 0.85
11/10/97 19,000 20,310 0.17
Industrial Credit & Investment Corp.
of India 8/14/97 181,250 129,250 1.09
10/7/97 31,400 25,850 0.22
10/20/97 33,400 25,850 0.22
11/10/97 15,000 12,925 0.11
12/04/97 10,750 12,925 0.11
12/17/97 18,675 23,265 0.20
Paints & Chemical Industries Co. GDR 9/26/97 176,250 157,500 1.33
10/20/97 11,700 10,500 0.09
10/30/97 19,750 21,000 0.18
12/04/97 12,155 13,650 0.11
Reliance Industries GDR 8/14/97 72,000 25,313 0.21
10/24/97 22,125 8,438 0.07
12/12/97 21,750 25,313 0.21
Videsh Sanchar Nigam Ltd. GDR 8/14/97 132,800 111,400 0.94
11/18/97 28,250 27,850 0.23
12/02/97 14,250 13,925 0.12
12/12/97 10,720 11,140 0.09
983,354 8.27
Principal International Bure Investment Aktiebolaget AB 8/14/97 71,568 81,658 0.54
SmallCap Fund, Inc. 8/18/97 46,092 52,682 0.35
8/22/97 8,100 9,219 0.06
10/7/97 105,213 105,364 0.69
12/11/97 27,070 26,341 0.17
12/12/97 17,701 17,122 0.11
Industrial & Financial Systems 8/14/97 43,796 69,319 0.46
8/18/97 10,528 16,636 0.11
9/8/97 51,954 73,478 0.48
10/9/97 101,152 103,978 0.68
10/30/97 53,442 55,455 0.36
11/12/97 91,033 97,046 0.64
Newsquest PLC 10/16/97 227,052 245,560 1.61
11/13/97 35,653 38,149 0.25
992,007 6.51
</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 December 31, 1997, Principal International Emerging Markets Fund, Inc. owned
a forward contracts to sell Hong Kong Dollars at a specified future date at a
fixed exchange rate. Forward foreign currency contracts are valued at the
forward rate, and are marked-to-market daily. The change in market value is
recorded by the fund as an unrealized gain or loss. When the contract is closed,
the 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 December 31, Net Unrealized
to Deliver For Date 1997 Appreciation
<S> <C> <C> <C> <C> <C> <C>
Principal International
Emerging Markets Fund, Inc. Hong Kong Dollars 2,385,000 $ 300,000 4/30/98 $ 290,503 $ 9,497
</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
Emerging Markets Fund, Inc.* SmallCap Fund, Inc.*
<S> <C> <C>
Period Ended December 31, 1997:
Shares sold:
Class A ......................................... $ 739,847 $ 759,144
Class B ......................................... 432,304 519,935
Class R ......................................... 304,869 305,178
Shares redeemed:
Class A ......................................... (12,109) (6,607)
Class B ......................................... (16,748) (14,398)
Class R ......................................... -- (585)
Net Increase (1,448,163) 1,562,667
Year Ended October 31, 1997, Except as Noted:
Shares sold:
Class A ......................................... 608,541 624,104
Class B ......................................... 389,744 489,175
Class R ......................................... 303,043 302,174
Shares redeemed:
Class A ......................................... (844) (707)
Class B ......................................... (13,468) (9,721)
Class R ......................................... -- (585)
Net Increase 1,287,016 1,404,440
</TABLE>
*Period from August 14, 1997(date operations commenced) through October 31,1997.
Note 7 -- Line of Credit
The International Growth Funds participate with other funds and portfolios
managed by Princor Management Corporation in an unsecured joint line of credit
with a bank, which allows them 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
participant, 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 and portfolios in proportion to their
average net assets during each quarter. At December 31, 1997, the International
Growth Funds had no outstanding borrowings under the line of credit.
<PAGE>
GROWTH FUNDS (INTERNATIONAL)
PRINCIPAL INTERNATIONAL EMERGING MARKETS FUND, INC.
Shares
Held Value
Common Stocks (90.82%)
Beer, Wine and Distilled Beverages (1.41%)
South African Breweries Ltd. 6,800 $ 167,682
Beverages (7.52%)
Al Ahram Beverages Co. 2,200(a)(b) 62,150
Embotelladora Andina ADR (Series A) 8,500 176,906
Fomento Economico Mexicano, SA
Class B 25,600 204,500
PanAmerican Beverages ADR 6,500 212,062
Quilmes Industrial Quins SA ADR 17,400 238,163
893,781
Blast Furnace & Basic Steel
Products (2.49%)
Hylsamex SA, Class B 25,000 148,850
Tubos de Acero de Mexico ADR 6,800(a) 147,050
295,900
Central Reserve Depositories (2.77%)
Arab Malaysian Finance Berhad 63,000 12,625
Banco Ganadero SA Sponsored ADR
Preference 6,400 153,600
Banco Santiago SA ADR 7,300 162,425
328,650
Chemicals & Allied Products (1.08%)
Sarantis SA 10,000 128,128
Commercial Banks (4.77%)
Banco Rio de La Plata ADR 3,000 42,000
Banco Rio de La Plata SA ADR 10,000(a) 140,000
Bank Handlowy GDR 4,000(a)(b) 53,000
Bank Inicjatyw Gospodarczych 40,000(a) 39,150
Banque Libanaise le Commerce
SAL ADR 5,000(a)(b) 90,250
Banque Marocaine du Commerce
Exterieur 6,000(b) 121,860
Big Bank Gdanski GDR 5,333(a) 80,000
PT Bank Bira TBK 158 9 566,269
Communications Equipment (3.16%)
ECI Telecommunications Ltd. ADR 8,800 224,400
Ericsson Telecommunicacoes 4,700,000(a) 150,768
375,168
Computer & Data Processing Services (1.11%)
Tecnomatix Technologies Ltd. 3,900(a) 131,625
Computer & Office Equipment (1.66%)
Orbotech Ltd. ADR 6,200(a) 197,625
Construction & Related
Machinery (1.14%)
Barlow Ltd. 15,900 134,941
Consumer Products (1.41%)
Rothmans Industries Ltd. 32,000 167,128
Deep Sea Foreign Transportation
of Freight (0.15%)
Noble Group Ltd. 100,000(a) $ 18,000
Department Stores (0.00%)
PT Matahari Putra Prima 7,034 576
Drugs (1.79%)
Teva Pharmaceutical ADR 4,500 212,906
Electric Services (5.31%)
Centrais Electricas de Santa Catarina133,000 165,651
Companhia Paranaense de
Enersis-Copel ADR 10,000 136,875
Electricidade de Portugal SA 9,400 178,189
Enersis SA ADR 5,200 150,800
631,515
Electrical Goods (1.34%)
Empresa Nacional de Electric
Sponsored ADR 9,000 159,187
Electrical Industrial Apparatus (0.45%)
Guangdong Kelon Electric Holdings 52,000 53,354
Electronic Components &
Accessories (2.44%)
Elec & Eltek International 21,100 96,638
Varitronix 82,000 140,754
Wong Circuits Holdings Ltd. 80,000(a) 52,400
289,792
Electronic Distribution
Equipment (6.76%)
KR Precision Public Co. Ltd. 10,000 37,800
Tadiran Ltd. ADR 6,000 212,250
Techtronic Industries Co. 1,250,000 290,387
Vtech Holdings Ltd. 89,000 262,465
802,902
Engines & Turbines (0.98%)
First Tractor Co. Ltd. 160,000(a) 96,538
LG Cable & Machinery 6,300 19,885
116,423
Federal & Federally Sponsored
Credit (1.94%)
Industrial Credit & Invest Corp.
of India 17,800(b) 230,065
Fire, Marine, & Casualty
Insurance (0.87%)
Alfa, Series A 15,300 103,622
Foreign Banks, Branches &
Agencies (1.97%)
Credicorp Ltd. ADR 8,700 156,600
Housing & Commercial Bank 11,000 77,000
233,600
Furniture & Home Furnishings
Stores (1.66%)
Grupo Elektra SA-CPO 112,000 197,554
Grocery Stores (1.21%)
Blue Square Chain Investments &
Property Ltd. 15,000(a) 143,331
Holding Offices (1.52%)
The India Fund, Inc. ADR 24,500 $ 180,688
Measuring and Controlling
Devices (1.09%)
IDT Holdings Singapore Ltd. 100,000 130,000
Meat Products (1.06%)
Davomas Abadi 234,000 42,585
PT Daya Guna Samudera 110,000 83,579
126,164
Metal Cans & Shipping
Containers (1.20%)
Colep 10,100(a) 142,838
Miscellaneous Electrical Equipment &
Supplies (1.30%)
G.P. Batteries International 59,500 154,670
Miscellaneous Investing (1.15%)
Banco Latino Americano de
Exportaciones 3,300 136,537
Miscellaneous Non-Durable
Goods (1.70%)
Desc SA ADR 5,400 202,500
Miscellaneous Textile Goods (1.36%)
Esprit Holdings Ltd. 316,000 102,978
Reliance Industries GDR 7,000(b) 59,062
162,040
Motor Vehicles & Equipment (1.57%)
Qingling Motors 162,000 79,450
Tata Engineering & Locomotive
Ltd. Co. GDR 12,900 107,522
186,972
Non-Classifiable Establishments (0.37%)
QPL International Holdings Ltd. 100,000 44,526
Paints & Allied Products (1.71%)
Paints & Chemical Industries Co. GDR 19,300(a)(b) 202,650
Petroleum Refining (4.27%)
Sasol Ltd. 22,400 234,295
YPF Sociedad Anonima ADR 8,000 273,500
507,795
Photographic Equipment &
Supplies (0.10%)
PT Bunas Finance 200,000 11,829
Search & Navigation Equipment (2.01%)
Elbit Systems Ltd. 17,400 239,250
Security & Commodity
Exchanges (1.01%)
OTK Holdings Ltd. 146,000 120,008
Security Brokers & Dealers (0.37%)
Peregrine Investment Holdings 62,000 44,010
Telephone Communication (12.16%)
Compania Anonima Telefonos de
Venezuela ADR 3,900 162,337
Hellenic Telecommunication 7,000 143,602
Investec-Consultadoria Internacional SA2,000(a) 59,289
Matav Rt ADR 7,800(a) $ 202,800
Telec de Sao Paulo SA 740,000(a) 196,925
Telecommunicacoes Brasileiras SA ADR 2,200 256,163
Telefonica de Argentina ADR 4,100 152,725
Teletypos/Mega Channel 18,000 106,591
Videsh Sanchar Nigam Ltd. GDR 11,800(b) 164,315
1,444,747
Water Supply (1.48%)
Companhia de Saneamento Basocp de
Estado de Sao Paulo - SABESP 740,000(a) 175,714
Total Common Stocks 10,792,662
Preferred Stock (1.12%)
Cement, Hydraulic (1.12%)
Titan Cement Co. 3,300 133,768
Principal
Amount Value
Commercial Paper (8.25%)
Federal & Federally Sponsored
Credit (8.25%)
FHLMC Commerical Paper;
4.75%; 1/2/98 $980,000 $ 980,000
Total Portfolio Investments (100.19%) 11,906,430
Liabilities, net of cash and receivables (-0.19%) (22,525)
Total Net Assets (100.00%) $11,883,905
(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 $ 846,387 7.11%
Brazil 1,082,095 9.09
Chile 649,319 5.45
China 132,804 1.12
Columbia 153,600 1.29
Egypt 264,800 2.22
Greece 512,088 4.30
Hungary 202,800 1.70
Hong Kong 981,658 8.25
Indonesia 138,578 1.16
India 741,651 6.23
Israel 1,361,388 11.43
Lebanon 90,250 0.76
Malaysia 12,625 0.11
Mexico 1,216,138 10.21
Morocco 121,860 1.02
Panama 136,538 1.15
Peru 156,600 1.32
Poland 172,150 1.45
Portugal 380,316 3.19
Singapore 618,836 5.20
South Africa 656,925 5.52
South Korea 96,886 0.81
Thailand 37,800 0.32
United States 980,000 8.23
Venezuela 162,338 1.36
Total $11,906,430 100.00%
<PAGE>
PRINCIPAL INTERNATIONAL SMALLCAP FUND, INC.
Shares
Held Value
Common Stock (95.17%)
Advertising (4.41%)
Industrial & Financial Systems 60,000(a)(b) $415,912
United Construction Group Ltd. 131,000 256,066
671,978
Air Transportation, Scheduled (2.09%)
Ryanair Holdings PLC ADR 12,700(a) 319,087
Airports, Flying Fields &
Services (3.92%)
Aeroporti Di Roma 23,000(a) 238,717
Virgin Express Holdings ADR 17,300(a) 358,975
597,692
Automotive Rentals, No Drivers (1.00%)
Avis Europe PLC 53,000 151,739
Cable & Other Pay TV Services (0.34%)
Tri-Vision International Ltd. 20,000(a) 52,410
Central Reserve Depositories (1.31%)
Union Bank of Norway 5,600 199,778
Chemicals & Allied Products (1.57%)
Sarantis SA 18,700 239,598
Communications Equipment (0.77%)
ASM Pacific 185,000 116,994
Computer & Data Processing
Services (4.47%)
Merkantildata ASA 6,900 237,731
Prosolvia AB 11,100(a) 443,476
681,207
Computer & Office Equipment (1.74%)
Orbotech Ltd. ADR 8,300(a) 264,562
Consumer Products (0.72%)
Rothmans Industries Ltd. 21,000 109,677
Crude Petroleum & Natural Gas (1.56%)
Elf Gabon 500 81,617
Hardy Oil & Gas 33,300 156,705
238,322
Deep Sea Foreign Transportation
of Freight (1.10%)
Van Ommeren NV 5,000 167,717
Drugs (1.97%)
Bio Technology General Corp. 17,400(a) 187,050
Teva Pharmaceutical ADR 2,400 113,550
300,600
Eating & Drinking Places (0.90%)
Restaurant Brands New Zealand Ltd. 138,300(a) 136,518
Electrical Industrial Apparatus (1.51%)
Doncasters PLC ADR 10,900(a) 230,263
Electrical Work (0.60%)
Internatio-Muller NV 2,900 91,268
Electronic Components &
Accessories (0.89%)
Elec & Eltek International 29,700 136,026
Electronic Distribution (4.16%)
ASM Lithography Holding NV 1,400(a) 94,500
Techtronic Industries Co. 1,447,000 336,153
Vtech Holding Ltd. 69,000 203,484
634,137
Engineering & Architects (2.02%)
CIE Generale De Geophysique 12,000(a) 307,500
Engines & Turbines (1.58%)
Radex-Heraklith
Industriebeteiligungs AG 7,000 240,695
Functions Closely Related
to Banking (0.55%)
Irish Permanent PLC 7,900 84,166
General Industrial Machinery (0.38%)
BE Semiconductor Industries NV 5,800(a) 57,221
Glass & Glassware, Pressed
or Blown (0.50%)
Vidrala SA 1,700 75,957
Hose, Belting, Gaskets
& Packing (1.71%)
Phoenix AG 14,600 259,838
Hotels & Motels (1.75%)
Choice Hotels Scandinavia 78,500(a) 266,203
Iron Ores (0.48%)
Repadre Capital Corp. 18,100(a) 72,728
Life Insurance (1.23%)
Scor SA 3,900 186,577
Meat Products (1.26%)
Davomas Abadi 390,000 70,976
Perkins Food PLC 70,200 120,705
191,681
Metal Services, NEC (3.40%)
Philip Services Corp. ADR 36,000(a) 517,500
Miscellaneous Business Services (0.84%)
Jaakko Poyry Group 12,000(a) 127,812
Miscellaneous Food &
Kindred Products (2.27%)
Greencore Group PLC 72,100 346,410
Miscellaneous Manufacturers (1.62%)
Docdata NV 14,300(a) 246,889
Miscellaneous Primary Metal
Products (1.84%)
YBM Magnex International, Inc. 26,700(a) 279,871
Miscellaneous Textile Goods (0.53%)
Esprit Holdings Ltd. 250,000 81,470
Miscellaneous Transportation Services (1.82%)
ASG AB, Class B 11,200 277,376
Motor Vehicles & Equipment (3.31%)
E.C.I.A. Equipment & Composants 900 181,021
Mayflower Corp. PLC 106,000 322,663
503,684
Newspapers (1.87%)
Newsquest PLC 64,700(a)(b) 283,709
Non-Classifiable Establishments (1.92%)
Bure Investment Aktiebolaget AB 22,200(b) 292,386
Non-Residential Building
Construction (2.04%)
Algeco 7,000 310,679
Oil & Gas Field Services (2.37%)
Det Sondenfjelds-Norske
Dampskibsselskab 7,300(a) 152,492
Farstad Shipping 38,000 208,758
361,250
Personnel Supply Services (1.37%)
Unique International NV 9,800 208,837
Petroleum Refining (1.65%)
Ocean Rig ASA 238,000(a) 251,811
Pulp Mills (2.26%)
Lassila & Tikanoja Ltd. OY 14,800 343,808
Radio & Television
Broadcasting (0.35%)
P4 Radio Hele Norge ASA 6,000 52,902
Real Estate Operators &
Lessors (1.02%)
Castellum AB 15,600(a) 155,324
Residential Building
Construction (0.65%)
Volker Wessels Stevin NV 3,200 99,446
Sanitary Services (1.96%)
De Sammensluttede Vognmand AS 400 297,932
Search & Navigation
Equipment (2.03%)
Elbit Systems Ltd. 22,500 309,375
Security Brokers & Dealers (1.65%)
Van Der Moolen Holdings 8,500 251,575
Soil Preparation (0.78%)
I.A.M.A. Ltd. 73,500 118,289
Telephone Communications (6.36%)
Colt Telecom Group PLC 29,500(a) 299,245
Energis PLC 40,000 167,173
Metronet Communications Class B ADR 28,900(a) 502,138
968,556
Timber Tracks (0.50%)
Evergreen Forest 273,000(a) 76,089
Trusts (1.86%)
Kiwi Income Property Trust 130,000 84,543
Nursing Home Properties PLC 93,060 199,058
283,601
Watches, Clocks, Watchcases &
Parts (0.45%)
Tag Heuer International SA ADR 8,300(a) 68,475
Women's & Children's
Undergarments (1.96%)
CSP International SPA 26,400(a) 297,897
Total Common Stocks 14,495,092
Principal
Amount Value
Commercial Paper (4.76%)
Business Credit Institutions (4.76%)
General Electric Capital;
6.50%; 1/2/98 $725,000 $ 725,000
Total Portfolio Investments (99.93%) 15,220,092
Cash, receivables and other assets,
net of liabilities (0.07%) 10,601
Total Net Assets (100.00%) $15,230,693
(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 $ 374,354 2.46%
Austria 240,695 1.58
Belgium 358,975 2.36
Canada 1,424,646 9.35
Denmark 297,932 1.96
Finland 471,620 3.10
France 1,067,394 7.01
Germany 259,838 1.71
Greece 239,599 1.57
Hong Kong 738,100 4.85
Indonesia 70,976 0.47
Ireland 319,088 2.10
Israel 874,537 5.75
Italy 536,613 3.53
Netherlands 1,217,453 8.00
New Zealand 297,150 1.95
Norway 1,369,675 9.00
Singapore 245,704 1.61
Spain 75,957 0.50
Sweden 1,584,475 10.41
Switzerland 68,475 0.45
United Kingdom 2,361,836 15.52
United States 725,000 4.76
Total $15,220,092 100.00%
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for a share of Capital Stock outstanding throughout each period:
<TABLE>
<CAPTION>
Income from Investment Operations Less Distributions
Net Net Realized
Invest- and
Net Asset ment Unrealized Total Dividends
Value at Income Gain from from Net Distributions
Beginning (Operating (Loss) on Investment Investment from Total
of Period Loss) Investments Operations Income Capital Gains Distributions
<S> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL INTERNATIONAL
EMERGING GROWTH FUND, INC.
Class A:
Period Ended December 31, 1997(b) $ 9.51 $(.02) $(1.28) $(1.30) $ -- $-- $ --
Class B:
Period Ended December 31, 1997(b) 9.51 (.03) (1.28) (1.31) -- -- --
Class R:
Period Ended December 31, 1997(b) 9.51 (.03) (1.28) (1.31) -- -- --
PRINCIPAL INTERNATIONAL
SMALLCAP FUND, INC.
Class A:
Period Ended December 31, 1997(b) 10.04 (.03) (.26) (.29) -- -- --
Class B:
Period Ended December 31, 1997(b) 10.04 (.03) (.27) (.30) -- -- --
Class R:
Period Ended December 31, 1997(b) 10.04 (.03) (.26) (.29) -- -- --
</TABLE>
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL INTERNATIONAL
EMERGING GROWTH FUND, INC.
Class A:
Period Ended December 31, 1997(b) $8.21 -- $ 5,974 2.72%(d) (.85)%(d) 29.0%(d) $.0052
Class B:
Period Ended December 31, 1997(b) 8.20 -- 3,408 2.84(d) (.98)(d) 29.0(d) .0052
Class R:
Period Ended December 31, 1997(b) 8.20 -- 2,501 2.73(d) (.89)(d) 29.0(d) .0052
PRINCIPAL INTERNATIONAL
SMALLCAP FUND, INC.
Class A:
Period Ended December 31, 1997(b) 9.75 -- 7,336 2.27(d) (.60)(d) 23.5(d) .0159
Class B:
Period Ended December 31, 1997(b) 9.74 -- 4,925 2.56(d) (.77)(d) 23.5(d) .0159
Class R:
Period Ended December 31, 1997(b) 9.75 -- 2,970 2.73(d) (.59)(d) 23.5(d) .0159
</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 December 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.
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................................................... 4
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
