Registration No. 02-35570
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
--------
POST-EFFECTIVE AMENDMENT NO. 37 TO
FORM N-1A
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
and
REGISTRATION STATEMENT
under
THE INVESTMENT COMPANY ACT OF 1940
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PRINCIPAL CAPITAL ACCUMULATION FUND, INC.
(Exact name of Registrant as specified in Charter)
The Principal Financial Group
Des Moines, Iowa 50392
(Address of principal executive offices)
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Telephone Number (515) 248-3842
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MICHAEL D. ROUGHTON Copy to:
The Principal Financial Group JOHN W. BLOUCH, L.L.P.
Des Moines, Iowa 50392 Suite 405 West
1025 Thomas Jefferson Street, N.W.
Washington, DC 20007-0805
(Name and address of agent for service)
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It is proposed that this filing will become effective (check appropriate box)
immediately upon filing pursuant to paragraph (b)of Rule 485
X on May 1, 1996 pursuant to paragraph (b) of Rule 485
60 days after filing pursuant to paragraph (a)(1) of Rule 485
on (date) pursuant to paragraph (a)(1) of Rule 485
75 days after filing pursuant to paragraph (a)(2) of Rule 485
on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
This post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
----------
Pursuant to the provisions of Rule 24f-2 under the Investment Company Act
of 1940, Registrant has registered an indefinite number of shares under the
Securities Act of 1933; Registrant intends to file a Rule 24f-2 Notice for the
fiscal year ended Dccember 31, 1995 on February 27, 1996.
<PAGE>
The Principal(R) Mutual Funds ("Principal Funds") described in this Prospectus
are a family of separately incorporated, diversified, open-end management
investment companies, commonly called mutual funds, which provide the following
range of investment objectives:
Growth-Oriented Funds
PRINCIPAL Aggressive Growth Fund, Inc. seeks to provide long-term capital
appreciation by investing primarily in growth-oriented common stocks of medium
and large capitalization U.S. corporations and, to a limited extent, foreign
corporations.
PRINCIPAL Asset Allocation Fund, Inc. seeks to generate a total investment
return consistent with the preservation of capital.
PRINCIPAL Balanced Fund, Inc. seeks to generate a total return consisting of
current income and capital appreciation while assuming reasonable risks in
furtherance of the investment objective.
PRINCIPAL Capital Accumulation Fund, Inc. seeks to achieve primarily long-term
capital appreciation and secondary growth of investment income through the
purchase primarily of common stocks, but the Fund may invest in other
securities.
PRINCIPAL Emerging Growth Fund, Inc. seeks to achieve capital appreciation by
investing primarily in securities of emerging and other growth-oriented
companies.
PRINCIPAL Growth Fund, Inc. seeks growth of capital through the purchase
primarily of common stocks, but the Fund may invest in other securities.
PRINCIPAL 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.
Income-Oriented Funds
PRINCIPAL Bond Fund, Inc. seeks to provide as high a level of income as is
consistent with preservation of capital and prudent investment risk.
PRINCIPAL Government Securities Fund, Inc. seeks a high level of current income,
liquidity 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.
Money Market Fund
PRINCIPAL Money Market 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 all of its assets in a portfolio of
money market instruments.
An investment in the Money Market fund 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 ought to 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 Statement of Additional
Information, dated May 1, 1996. The Statement of Additional Information is
incorporated by reference into this Prospectus. A copy of the Statement of
Additional Information can be obtained free of charge by writing or telephoning:
Principal Mutual Funds
The Principal Financial Group
Des Moines, IA 50392
Telephone 1-800-247-4123
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Date of this Prospectus is May 1, 1996.
<PAGE>
TABLE OF CONTENTS
Page
Summary ............................................................. 3
Financial Highlights.................................................. 5
Investment Objectives, Policies and Restrictions...................... 10
Certain Investment Policies and Restrictions.......................... 18
Manager and Sub-Advisors ............................................ 21
Duties Performed by the Manager and Sub-Advisors...................... 22
Managers' Comments.................................................... 23
Determination of Net Asset Value of Fund Shares....................... 30
Performance Calculation............................................... 31
Income Dividends, Distributions and Tax Status........................ 31
Eligible Purchasers and Purchase of Shares............................ 32
Shareholder Rights ................................................... 33
Redemption of Shares.................................................. 34
Additional Information................................................ 34
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. 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.
SUMMARY
The following summarized information should be read in conjunction with the
detailed information appearing elsewhere in this Prospectus.
The Principal Funds are separately incorporated, open-end diversified management
investment companies.
Who may purchase shares of the Funds?
Shares of the Funds are available only to Eligible Purchasers which are limited
to: (a) separate accounts of Principal Mutual Life Insurance Company or of other
insurance companies; (b) Principal Mutual Life Insurance Company or any
subsidiary or affiliate thereof; (c) trustees or other managers of any qualified
profit sharing, incentive or bonus plan established by Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof for the employees of
such company, subsidiary or affiliate. The Board of Directors of each Fund
reserves the right to broaden or limit the designation of Eligible Purchasers.
What do the Funds offer investors?
Professional Investment Management: Experienced securities analysts provide each
Fund with professional investment management.
Diversification: Each Fund will diversify by investing in securities issued by a
number of issuers doing business in a variety of industries and/or located in
different geographical regions. Diversification reduces investment risk.
Economies of Scale: Pooling individual shareholder's investments in any of the
Funds creates administrative efficiencies.
Redeemability: Upon request each Fund will redeem its shares and promptly pay
the investor the current net asset value of the shares redeemed. See "Redemption
of Shares."
What are the Funds' investment objectives?
Growth-Oriented Funds
The investment objective of Principal Aggressive Growth Fund, Inc. (sometimes
referred to as the Aggressive Growth Fund) is to provide long-term capital
appreciation by investing primarily in growth-oriented common stocks of medium
and large capitalization U.S. corporations and, to a limited extent, foreign
corporations.
The investment objective of Principal Asset Allocation Fund, Inc. (sometimes
referred to as the Asset Allocation Fund) is to generate a total investment
return consistent with the preservation of capital. The Fund intends to pursue a
flexible investment policy in seeking to achieve this investment objective.
The investment objective of Principal Balanced Fund, Inc. (sometimes referred to
as the Balanced Fund) is to seek to generate a total return consisting of
current income and capital appreciation while assuming reasonable risks in
furtherance of this objective.
The primary investment objective of Principal Capital Accumulation Fund, Inc.
(sometimes referred to as the Capital Accumulation Fund) is long-term capital
appreciation and its secondary investment objective is growth of investment
income. The Fund seeks to achieve its investment objectives through the purchase
primarily of common stocks, but the Fund may invest in other securities.
The investment objective of Principal Emerging Growth Fund, Inc. (sometimes
referred to as the Emerging Growth Fund) is to achieve capital appreciation by
investing primarily in securities of emerging and other growth-oriented
companies.
The investment objective of Principal Growth Fund, Inc. (sometimes referred to
as the Growth Fund) is 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.
The investment objective of Principal World Fund, Inc. (sometimes referred to as
the World Fund) is to seek long-term growth of capital by investing in a
portfolio of equity securities domiciled in any of the nations of the world.
Income-Oriented Funds
The investment objective of Principal Bond Fund, Inc. (sometimes referred to as
the Bond Fund) is to provide as high a level of income as is consistent with
preservation of capital and prudent investment risk.
The investment objective of Principal Government Securities Fund, Inc.
(sometimes referred to as the Government Securities Fund) is to seek a high
level of current income, liquidity 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.
Money Market Fund
The investment objective of Principal Money Market Fund, Inc. (sometimes
referred to as the Money Market 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 all of its
assets in a portfolio of 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."
Who serves as Manager for the Funds?
Princor Management Corporation, a corporation organized in 1969 by Principal
Mutual Life Insurance Company, is the Manager for each of the Funds. It is also
the dividend disbursing and transfer agent for the Principal Funds. In order to
provide investment advisory service for certain funds the Manager has executed
sub-advisory agreements with Invista Capital Management, Inc. (Balanced Fund,
Growth Fund and World Fund) and Morgan Stanley Asset Management Inc. (Aggressive
Growth Fund and Asset Allocation Fund). Subsequent references to these
corporations may be as "Invista", "MSAM" or "Sub-Advisor". See "Manager and
Sub-Advisors."
What fees and expenses apply to ownership of shares of the Funds?
The following table depicts fees and expenses applicable to the purchase and
ownership of shares of each of the Funds.
ANNUAL FUND OPERATING EXPENSES
(As a Percentage of Average Net Assets)
Management Other Total Operating
Fund Fee Expenses Expenses
Aggressive Growth Fund .80% .10% .90%
Asset Allocation Fund .80% .09% .89%
Balanced Fund .60% .06% .66%
Bond Fund .50% .06% .56%
Capital Accumulation Fund .49% .02% .51%
Emerging Growth Fund .65% .05% .70%
Government Securities Fund .50% .05% .55%
Growth Fund .50% .08% .58%
Money Market Fund .50% .08% .58%
World Fund .75% .20% .95%
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:
Period (in years)
Fund 1 3 5 10
Aggressive Growth Fund $9 $29 $50 $111
Asset Allocation Fund $9 $28 $49 $110
Balanced Fund $7 $21 $37 $82
Bond Fund $6 $18 $31 $70
Capital Accumulation Fund $5 $16 $29 $64
Emerging Growth Fund $7 $22 $39 $87
Government Securities Fund $6 $18 $31 $69
Growth Fund $6 $19 $32 $73
Money Market Fund $6 $19 $32 $73
World Fund $10 $30 $53 $117
This Example is based on the Annual Fund Operating expenses for each Fund
described above. Please remember that the Example should not be considered a
representation of past or future expenses and that actual expenses may be
greater or less than shown.
The purpose of the above table is to assist the investor in understanding the
various expenses that an investor in the Funds will bear directly or indirectly.
See "Duties Performed by the Manager and Sub-Advisors."
FINANCIAL HIGHLIGHTS
The following financial highlights for the periods ended December 31, 1995
and prior thereto are derived from financial statements which 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>
Income from
Investment Operations Less Distributions
Net Realized
and
Net Asset Net Unrealized Total Dividends Excess
Value at Invest- Gain from from Net Distributions Distributions
Beginning ment (Loss) on Investmen Investment from from
of Period Income Investments Operations Income Capital Gains Capital Gains
Principal Aggressive
<S> <C> <C> <C> <C> <C> <C> <C>
Growth Fund, Inc.
Year Ended December 31, 1995 $10.11 $.13 $4.31 $4.44 $(.13) $(1.48) $ _
Period Ended December 31, 1994(a) 9.92 .05 .24 .29 (.05) (.05) _
Principal Asset
Allocation Fund, Inc.
Year Ended December 3, 1995 9.79 .40 1.62 2.02 (.40) (.30) _
Period Ended December 31, 1994(a) 9.98 .23 (.18) .05 (.23) _ (.01)
Principal Balanced Fund, Inc. (d)
Year Ended December 31,
1995 11.95 .45 2.44 2.89 (.45) (.42) _
1994 12.77 .37 (.64) (.27) (.37) (.18) _
1993 12.58 .42 .95 1.37 (.42) (.76) _
Six Months Ended December 31, 1992(e) 12.93 .23 .75 .98 (.47) (.86) _
Year Ended June 30,
1992 11.33 .47 1.61 2.08 (.48) _ _
1991 10.79 .54 .59 1.13 (.57) (.02) _
1990 11.89 .60 (.48) .12 (.63) (.59) _
1989 11.75 .62 .30 .92 (.55) (.23) _
Period Ended June 30, 1988(f) 10.00 .27 1.51 1.78 (.03) _ _
Principal Bond Fund, Inc.
Year Ended December 31,
1995 10.12 .62 1.62 2.24 (.63) _ _
1994 11.16 .72 (1.04) (.32) (.72) _ _
1993 10.77 .88 .38 1.26 (.87) _ _
Six Months Ended December 31, 1992(e) 11.08 .45 .13 .58 (.89) _ _
Year Ended June 30,
1992 10.64 .91 .46 1.37 (.93) _ _
1991 10.72 .94 (.06) .88 (.96) _ _
1990 10.92 .95 (.21) .74 (.94) _ _
1989 10.68 1.15 .17 1.32 (.96) (.12) _
Period Ended June 30, 1988(f) 10.00 .32 .40 .72 (.04) _ _
Principal Capital
Accumulation Fund, Inc.
Year Ended December 31,
1995 23.44 .60 6.69 7.29 (.60) (2.33) _
1994 24.61 .62 (.49) .13 (.61) (.69) _
1993 25.19 .61 1.32 1.93 (.60) (1.91) _
Six Months Ended December 31, 1992(e) 26.03 .31 1.84 2.15 (.64) (2.35) _
Year Ended June 30,
1992 23.35 .65 2.70 3.35 (.67) _ _
1991 22.48 .74 1.22 1.96 (.79) (.30) _
1990 23.63 .79 .14 .93 (.81) (1.27) _
1989 23.23 .77 1.32 2.09 (.68) (1.01) _
1988 27.51 .60 (1.50) (.90) (.69) (2.69) _
1987 25.48 .40 4.46 4.86 (.50) (2.33) _
1986 21.93 .51 6.65 7.16 (.66) (2.95) _
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio
Total End of Total End of Period Average Average Turnover
Distributions Period Return (in thousands) Net Assets Net Assets Rate
<S> <C> <C> <C> <C> <C> <C> <C>
Principal Aggressive
Growth Fund, Inc.
Year Ended December 31, 1995 $(1.61) $12.94 44.19% $33,643 .90% 1.34% 172.9%
Period Ended December 31, 1994(a) (.10) 10.11 2.59%(b) 13,770 1.03%(c) 1.06%(c) 105.6%(c)
Principal Asset
Allocation Fund, Inc.
Year Ended December 3, 1995 (.70) 11.11 20.66% 41,074 .89% 4.07% 47.1%
Period Ended December 31, 1994(a) (.24) 9.79 .52%(b) 28,041 .95%(c) 4.27%(c) 60.7%(c)
Principal Balanced Fund, Inc. (d)
Year Ended December 31,
1995 (.87) 13.97 24.58% 45,403 .66% 4.12% 25.7%
1994 (.55) 11.95 (2.09)% 25,043 .69% 3.42% 31.5%
1993 (1.18) 12.77 11.06% 21,399 .69% 3.30% 15.8%
Six Months Ended December 31, 1992(e) (1.33) 12.58 8.00%(b) 18,842 .73%(c) 3.71%(c) 38.4%(c)
Year Ended June 30,
1992 (.48) 12.93 18.78% 17,344 .72% 3.80% 26.6%
1991 (.59) 11.33 11.36% 14,555 .73% 5.27% 27.1%
1990 (1.22) 10.79 .87% 13,016 .74% 5.52% 33.1%
1989 (.78) 11.89 8.55% 12,751 .74% 5.55% 29.3%
Period Ended June 30, 1988(f) (.03) 11.75 17.70%(b) 11,469 .80%(c) 4.96%(c) 41.7%(c)
Principal Bond Fund, Inc.
Year Ended December 31,
1995 (.63) 11.73 22.17% 35,878 .56% 7.28% 5.9%
1994 (.72) 10.12 (2.90)% 17,108 .58% 7.86% 18.2%
1993 (.87) 11.16 11.67% 14,387 .59% 7.57% 14.0%
Six Months Ended December 31, 1992(e) (.89) 10.77 5.33%(b) 12,790 .62%(c) 8.10%(c) 6.7%(c)
Year Ended June 30,
1992 (.93) 11.08 13.57% 12,024 .62% 8.47% 6.1%
1991 (.96) 10.64 8.94% 10,552 .63% 9.17% 2.7%
1990 (.94) 10.72 7.15% 9,658 .64% 9.09% 0.0%
1989 (1.08) 10.92 13.51% 9,007 .64% 9.18% 12.2%
Period Ended June 30, 1988(f) (.04) 10.68 6.06%(b) 17,598 .58%(c) 8.11%(c) 68.8%(c)
Principal Capital
Accumulation Fund, Inc.
Year Ended December 31,
1995 (2.93) 27.80 31.91% 135,640 .51% 2.25% 49.2%
1994 (1.30) 23.44 .49% 120,572 .51% 2.36% 44.5%
1993 (2.51) 24.61 7.79% 128,515 .51% 2.49% 25.8%
Six Months Ended December 31, 1992(e) (2.99) 25.19 8.81%(b) 105,355 .55%(c) 2.56%(c) 39.7%(c)
Year Ended June 30,
1992 (.67) 26.03 14.53% 94,596 .54% 2.65% 34.8%
1991 (1.09) 23.35 9.46% 76,537 .53% 3.53% 14.0%
1990 (2.08) 22.48 3.94% 74,008 .56% 3.56% 30.2%
1989 (1.69) 23.63 10.02% 68,132 .57% 3.53% 23.5%
1988 (3.38) 23.23 (2.67)% 62,696 .60% 2.76% 26.7%
1987 (2.83) 27.51 22.17% 57,478 .63% 1.99% 16.1%
1986 (3.61) 25.48 38.37% 35,960 .60% 2.63% 37.8%
<FN>
Notes to financial highlights
(a) Period from June 1, 1994, date shares first offered to public, through
December 31, 1994. Net investment income, aggregating $.01 per share for
Principal Aggressive Growth Fund, Inc. and $.01 per share for Principal
Asset Allocation Fund, Inc. for the period from the initial purchase of
shares on May 23, 1994 through May 31, 1994, was recognized, none of which
was distributed to the sole stockholder, Principal Mutual Life Insurance
Company, during the period. Additionally, Principal Aggressive Growth Fund,
Inc. and Principal Asset Allocation Fund, Inc. incurred unrealized losses
on investments of $.09 and $.03 per share, respectively, during the initial
interm period. This represented activities of each fund prior to the
initial public offering of fund shares.
(b) Total return amounts have not been annualized.
(c) Computed on an annualized basis.
(d) Effective May 1, 1994, the name of Principal Managed Fund, Inc. was
changed to Principal Balanced Fund, Inc.
(e) Effective July 1, 1992 the fund changed its fiscal year end from June 30 to
December 31.
(f) Period from December 18, 1987, date shares first offered to eligible
purchasers, through June 30, 1988. Net investment income aggregating
$.01 per share for the period from the initial purchase of shares on
December 10, 1987 through December 17, 1987 was recognized, all of which
was distributed to the Fund's sole stockholder, Principal Mutual Life
Insurance Company. This represented activity of the fund prior to the
initial offering of shares to eligible purchasers.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Income from
Investment Operations Less Distributions
Net Realized
and Excess
Net Asset Net Unrealized Total Dividends Distributions
Value at Invest- Gain from from Net from Net Distributions
Beginning ment (Loss) on Investment Investment Investment from
of Period Income Investments Operations Income Income Capital Gains
Principal Emerging Growth
Fund, Inc. (a)
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended December 31,
1995 $19.97 $.22 $5.57 $5.79 $(.22) $ - $(.21)
1994 20.79 .14 .03 .17 (.14) - (.85)
1993 18.91 .17 3.47 3.64 (.17) - (1.59)
Six Months Ended
December 31, 1992(b) 15.97 .10 3.09 3.19 (.21) - (.04)
Year Ended June 30,
1992 13.93 .21 2.04 2.25 (.21) - -
1991 14.25 .20 .50 .70 (.23) - (.79)
1990 13.35 .24 .87 1.11 (.20) - (.01)
1989 12.85 .16 1.35 1.51 (.11) - (.90)
Period Ended June 30, 1988(e) 10.00 .05 2.83 2.88 (.03) - -
Principal Government
Securities Fund, Inc.
Year Ended December 31,
1995 9.38 .60 1.18 1.78 (.61) - -
1994 10.61 .76 (1.24) (.48) (.75) - -
1993 10.28 .71 .33 1.04 (.71) - -
Six Months Ended
December 31, 1992(b) 10.93 .40 .04 .44 (.78) - (.31)
Year Ended June 30,
1992 10.24 .80 .71 1.51 (.81) - (.01)
1991 10.05 .80 .24 1.04 (.81) - (.04)
1990 10.05 .78 - .78 (.78) - -
1989 9.37 .80 .34 1.14 (.46) - -
1988 9.47 .78 (.09) .69 (.79) - -
Period ended June 30, 1987(f) 10.00 .18 (.59) (.41) (.12) - -
Principal Growth Fund, Inc.
Year Ended December 31, 1995 10.10 .17 2.42 2.59 (.17) (.09)
Period Ended
December 31, 1994(g) 9.60 .07 .51 .58 (.08) - -
Principal Money Market
Fund, Inc.
Year Ended December 31,
1995 1.000 .054 - .054 (.054) - -
1994 1.000 .037 - .037 (.037) - -
1993 1.000 .027 - .027 (.027) - -
Six Months Ended
December 31, 1992(b) 1.000 .016 - .016 (.016) - -
Year Ended June 30,
1992 1.000 .046 - .046 (.046) - -
1991 1.000 .070 - .070 (.070) - -
1990 1.000 .077 - .077 (.077) - -
1989 1.000 .083 - .083 (.083) - -
1988 1.000 .064 - .064 (.064) - -
1987 1.000 .057 - .057 (.057) - -
1986 1.000 .070 - .070 (.070) - -
Principal World Fund, Inc.
Year Ended December 31, 1995 9.56 .19 1.16 1.35 (.18) - (.01)
Period Ended
December 31, 1994(g) 9.94 .03 (.33) (.30) (.05) (.02) (.01)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio
Total End of Total End of Period Average Average Turnover
Distributions Period Return (in thousands) Net Assets Net Assets Rate
Principal Emerging Growth
Fund, Inc. (a)
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended December 31, $(.43) $25.33 29.01% $58,520 .70% 1.23% 13.1%
1995 (.99) 19.97 .78% 23,912 .74% 1.15% 12.0%
1994 (1.76) 20.79 19.28% 12,188 .78% .89% 22.4%
1993
Six Months Ended (.25) 18.91 20.12%(c) 9,693 .81%(d) 1.24%(d) 8.6%(d)
December 31, 1992(b)
Year Ended June 30, (.21) 15.97 16.19% 7,829 .82% 1.33% 10.1%
1992 (1.02) 13.93 5.72% 6,579 .89% 1.70% 11.1%
1991 (.21) 14.25 8.32% 6,067 .88% 1.74% 17.9%
1990 (1.01) 13.35 13.08% 5,509 .90% 1.31% 21.4%
1989 (.03) 12.85 28.72%(c) 4,857 .94%(d) .64%(d) 4.6%(d)
Period Ended June 30, 1988(e)
Principal Government
Securities Fund, Inc.
Year Ended December 31, (.61) 10.55 19.07% 50,079 .55% 6.73% 9.8%
1995 (.75) 9.38 (4.53)% 36,121 .56% 7.05% 23.2%
1994 (.71) 10.61 10.07% 36,659 .55% 7.07% 20.4%
1993
Six Months Ended (1.09) 10.28 4.10%(c) 31,760 .59%(d) 7.35%(d) 34.5%(d)
December 31, 1992(b)
Year Ended June 30, (.82) 10.93 15.34% 33,022 .58% 7.84% 38.9%
1992 (.85) 10.24 10.94% 26,021 .59% 8.31% 4.2%
1991 (.78) 10.05 8.16% 21,488 .61% 8.48% 18.7%
1990 (.46) 10.05 12.61% 15,890 .63% 8.68% 3.7%
1989 (.79) 9.37 7.69% 12,902 .66% 8.47% 2.7%
1988 (.12) 9.47 (.94)%(c) 10,778 .64%(d) 8.50%(d) 0.2%(d)
Period ended June 30, 1987(f)
Principal Growth Fund, Inc. (.26) 12.43 25.62% 42,708 .58% 2.08% 6.9%
Year Ended December 31, 1995
Period Ended (.08) 10.10 5.42%(c) 13,086 .75%(d) 2.39%(d) 0.9%(d)
December 31, 1994(g)
Principal Money Market
Fund, Inc.
Year Ended December 31,
1995 (.054) 1.000 5.59% 32,670 .58% 5.32% N/A
1994 (.037) 1.000 3.76% 29,372 .60% 3.81% N/A
1993 (.027) 1.000 2.69% 22,753 .60% 2.64% N/A
Six Months Ended (.016) 1.000 1.54%(c) 27,680 .59%(d) 3.10%(d) N/A
December 31, 1992(b)
Year Ended June 30, (.046) 1.000 4.64% 25,194 .57% 4.54% N/A
1992 (.070) 1.000 7.20% 26,509 .56% 6.94% N/A
1991 (.077) 1.000 8.37% 26,588 .57% 8.05% N/A
1990 (.083) 1.000 8.59% 20,707 .61% 8.40% N/A
1989 (.064) 1.000 6.61% 14,571 .64% 6.39% N/A
1988 (.057) 1.000 5.78% 11,902 .65% 5.68% N/A
1987 (.070) 1.000 7.35% 8,896 .69% 7.06% N/A
1986
Principal World Fund, Inc. (.19) 10.72 14.17% 30,566 .95% 2.26% 15.6%
Year Ended December 31, 1995
Period Ended (.08) 9.56 (3.37)%(c) 13,746 1.24%(d) 1.31%(d) 14.4%(d)
December 31, 1994(g)
<FN>
Notes to financial highlights
(a) Effective May 1, 1992, the name of Principal Aggressive Growth Fund, Inc.
was changed to Principal Emerging Growth Fund, Inc.
(b) Effective July 1, 1992 the fund changed its fiscal year end from June 30 to
December 31.
(c) Total return amounts have not been annualized.
(d) Computed on an annualized basis.
(e) Period from December 18, 1987, date shares first offered to eligible
purchasers, through June 30, 1988. Net investment income aggregating $.01
per share for the period from the initial purchase of shares on December
10, 1987 through December 17, 1987 was recognized, all of which was
distributed to the Fund's sole stockholder, Principal Mutual Life Insurance
Company. This represented activity of the fund prior to the initial
offering of shares to eligible purchasers.
(f) Period from April 9, 1987, date shares first offered to the public, through
June 30, 1987. Net investment income, aggregating $.01 per share for the
period from the initial purchase of shares on October 31, 1987 through
December 17, 1987 was recognized, all of which was distributed to the
Fund's sole stockholder, Principal Mutual Life Insurance Company. This
represented activity of the Fund prior to the initial offering of shares to
eligible purchasers. (g) Period from May 1, 1994, date shares first offered
to public, through December 31, 1994. Net investment income, aggregating
$.01 per share for Principal Growth Fund, Inc. and $.04 per share for
Principal World Fund, Inc. for the period from the initial purchase of
shares on March 23, 1994 through April 30, 1994, was recognized, none of
which was distributed to the sole stockholder, Principal Mutual Life
Insurance Company, during the period. Additionally, Principal Growth Fund,
Inc. and Principal World Fund, Inc. incurred unrealized losses on
investments of $.41 and $.10 per share, respectively, during the initial
interim period. This represented activities of each fund prior to the
initial public offering of fund 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 Principal Funds currently include five Funds which seek capital appreciation
through investments in equity securities (Principal Aggressive Growth Fund,
Principal Capital Accumulation Fund, Principal Emerging Growth Fund, Principal
Growth Fund and Principal World Fund) and two Funds which seek a total
investment return including both capital appreciation and income through
investments in equity and debt securities (Principal Asset Allocation Fund and
Principal Balanced Fund). These seven Funds are collectively referred to as the
Growth-Oriented Funds.
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 American Depositary Receipts based
on any of the foregoing securities. The Aggressive Growth, Capital Accumulation,
Emerging Growth, Growth and World Funds will seek to be fully invested under
normal conditions in equity securities. When, in the opinion of the Manager or
Sub-Advisor, 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. 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.
Principal Aggressive Growth Fund
The Aggressive Growth Fund's investment objective is to provide long-term
capital appreciation by investing primarily in growth-oriented common stocks of
medium and large capitalization U.S. corporations and, to a limited extent,
foreign corporations. Common stocks for this purpose include common stocks and
equivalents, such as securities convertible into common stocks and securities
having common stock characteristics, such as rights and warrants to purchase
common stocks. Under normal circumstances, the Fund will invest at least 65% of
the value of its total assets in common stocks.
The Fund employs a flexible and eclectic investment process in pursuit of its
investment objective. In selecting stocks for the Fund, the Sub-Advisor, MSAM,
concentrates on a universe of rapidly growing, high quality companies and lower
but accelerating earnings growth situations. The Sub-Advisor's universe of
potential investments generally comprises companies with market capitalizations
of $750 million or more and is not restricted to specific market sectors. The
Sub-Advisor uses its research capabilities, analytical resources and judgment to
assess economic, industry and market trends, as well as individual company
developments, to select promising growth investments for the Fund. The
Sub-Advisor concentrates on companies with strong, communicative managements and
clearly defined strategies for growth. In addition, the Sub-Advisor rigorously
assesses company developments, including changes in strategic direction,
management focus and current and likely future earnings results. Valuation is
important to the Sub-Advisor but is viewed in the context of prospects for
sustainable earnings growth and the potential for positive earnings surprises
vis-a-vis consensus expectations. The Fund is free to invest in any common stock
which in the Sub-Advisor's judgment provides above average potential for capital
appreciation.
In selecting investments for the Fund, the Sub-Advisor emphasizes individual
security selection. The Fund's investments will generally be diversified by
industry but concentrated sector positions may result from the investment
process. The Fund has a long-term investment perspective; however, the
Sub-Advisor may take advantage of short-term opportunities that are consistent
with its objective by selling recently purchased securities which have increased
in value.
contracts which provide for the purchase or sale of foreign currencies in
connection with the settlement of foreign securities transactions or to hedge
the underlying currency exposure related to foreign investments. The Fund will
not enter into these commitments for speculative purposes. Investors should
recognize that investing in foreign companies involves certain special
considerations which are not typically associated with investing in U.S.
companies. See "Foreign Securities" and "Currency Contracts."
The Fund may invest in convertible securities of domestic and, subject to the
above restrictions, foreign issuers on occasions when, due to market conditions,
it is more advantageous to purchase such securities than common stock.
Convertible securities entitle the holder to exchange the securities for a
specified number of shares of common stock, usually of the same company, at
specified prices within a certain period of time and to receive interest or
dividends until the holder elects to exercise the conversion privilege. Since
the Fund invests in both common stocks and convertible securities, the risks of
investing in the general equity markets may be tempered to a degree by the
Fund's investments in convertible securities which are often not as volatile as
equity securities.
Principal Asset Allocation Fund
The Asset Allocation Fund seeks to generate a total investment return consistent
with preservation of capital. In seeking to achieve its objective, the Fund
intends to pursue a flexible investment policy by investing primarily in the
common stock and other securities having common stock characteristics of large
and small domestic or foreign companies that appear to be undervalued relative
to their earnings results or potential, or whose earnings growth prospects
appear to be more attractive than the economy as a whole, and domestic or
foreign fixed-income securities, including high yield securities when, in the
judgement of the Sub-Advisor, MSAM, it is appropriate to do so.
The securities in which the Fund invests will be identified as belonging to an
"asset class." Asset classes may include, but are not limited to, small
capitalization (companies whose market value is less than $1 billion) value
stocks, large capitalization (companies with a market value in excess of $1
billion) value stocks, small capitalization growth stocks, large capitalization
growth stocks, common stocks of foreign corporations, domestic fixed-income
securities, domestic high yield fixed-income securities, foreign fixed-income
securities, and money market instruments (debt securities maturing in one year
or less). "Value" stocks are generally defined as companies with distinctly
below average stock price to earnings ratios and stock price to book value
ratios, and higher than average dividend yields. "Growth" stocks are generally
defined as those companies whose earnings are expected to grow more rapidly than
the economy as a whole.
The allocation among asset classes is designed to lessen overall investment risk
through participation in a variety of types of investments in several markets.
Reallocation among asset classes, or the elimination of an asset class for a
period of time, will occur when in the Sub-Advisor's judgement such shift offers
the investor better prospects of achieving the overall investment objective of
the Fund. Under normal conditions, abrupt shifts among asset classes will not
occur and it is not the policy of the Sub-Advisor to attempt market timing. The
Sub-Advisor does not undertake to maintain a specific portion of the Fund in any
asset class, but expects that over time the investment mix will be within the
following ranges: 25% to 75% in equities, 20% to 60% in fixed-income securities
and 0% to 40% in money market instruments. Factors involved with this decision
will depend upon the judgement of the Sub-Advisor as to general market and
economic conditions, trends and investment yields and interest rates and changes
in fiscal or monetary policies. The Sub-Advisor will seek to minimize declines
in the net asset value per share; however, there is no guarantee this goal can
be achieved.
The Fund may invest in all types of common stocks and other equities and
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, including American Depositary
Receipts ("ADRs") and closed end mutual funds. 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. See "Below-Investment Grade
Bonds" for a discussion of the risks associated with these securities. Normally,
investments in below investment grade bonds are not expected to exceed 20% of
Fund assets. Securities purchases may be either U.S. dollar or Non-U.S. dollar
denominated.
To achieve its investment objective, the Fund may at times emphasize the
generation of interest income by investing in short, medium or long-term
fixed-income securities. Investment in those securities may also be made with a
view to realizing capital appreciation when the Sub-Advisor believes that
declining interest rates may increase market values.
Money market instruments in which the Fund may invest may include 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, and non-U.S. dollar denominated money
market instruments. 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 $1 billion.
The Fund may invest in U.S. government securities including 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 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 Balanced Fund
The investment objective of Principal Balanced Fund is to generate a total
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 judgment of the
Sub-Advisor, Invista, 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 Sub-Advisor
will seek to minimize declines in the net asset value per share. However, there
is no guarantee that the Sub-Advisor 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
Sub-Advisor 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 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. See "Below
Investment-Grade Bonds" for a discussion of the risks associated with these
securities. 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. The Fund will not concentrate its
investments in any industry.
In selecting common stocks, the Sub-Advisor seeks companies which it 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 Sub-Advisor 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
Sub-Advisor 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 short-term money market investments in which the Fund may invest include the
following: 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 $1 billion.
The United States government securities in which the Fund may invest include
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 Capital Accumulation Fund
The primary objective of Principal Capital Accumulation 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
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 objectives, investments will be made in securities which as a
group appear to offer long-term prospects for capital and income growth.
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 Emerging Growth Fund
The objective of Principal Emerging Growth Fund is to achieve 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 Emerging Growth Fund may invest, for any period of
time, in any industry, in any kind of growth-oriented company, whether new and
unseasoned or well known and established.
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
prepared to experience above-average fluctuations in net asset value, to assume
above-average investment risk in search of above-average return, and to consider
the Fund as a long-term investment and not as a vehicle for seeking short-term
profits. Moreover, since the Fund will not be seeking current income, investors
should not view a purchase of Fund shares as a complete investment program.
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
Sub-Advisor, Invista, 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 World Fund
The investment objective of Principal World 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 Sub-Advisor, Invista,
intends to pay particular attention to long-term earnings prospects and the
relationship of then-current prices to such prospects. Short-term trading is not
generally intended, but occasional investments may be made for the purpose of
seeking short-term or medium-term gain. The 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 "Foreign Securities."
For temporary defensive purposes, the World 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 five countries, one of
which may be the United States. Investments may be made anywhere in the world,
but it is expected that primary consideration will be given to investing in the
securities issued by corporations of Western Europe, North America and
Australasia (Australia, Japan and Far East Asia) that have developed economies.
Changes in investments may be made as prospects change for particular countries,
industries or companies.
The Fund may invest in the securities of other investment companies but may not
invest more than 10% of its assets in securities of other investment companies,
invest more than 5% of its total assets in the securities of any one investment
company, or acquire more than 3% of the outstanding voting securities of any one
investment company except in connection with a merger, consolidation or plan of
reorganization. The Fund's Manager will waive its management fee on the Fund's
assets invested in securities of other open-end investment companies. The Fund
will generally invest only in those investment companies that have investment
policies requiring investment in securities comparable in quality to those in
which the Fund invests.
INCOME-ORIENTED FUNDS
The Principal Funds currently include two Funds which seek a high level of
income through investments in fixed-income securities (Principal Bond Fund and
Principal Government Securities Fund) collectively referred to as the
"Income-Oriented Funds." An investment in either 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. Each Fund's 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 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,
exclusive of cash items, in one or more of the following kinds of securities:
(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 Standard & Poor's Corporation (AAA, AA, A or BBB) or by Moody's
Investors Service, Inc. (Aaa, Aa, A or Baa) or which, if lower-rated or
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 other fixed income securities, including domestic and
foreign corporate debt securities or preferred stocks, in common stocks that
provide returns that compare favorably with the yields on fixed income
investments, and in 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. 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). See "Below Investment-Grade Bonds" for a
discussion of the risks associated with these securities. 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.
During the year ended December 31, 1995, 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
Aaa .09%
Aa 1.02%
A 20.32%
Baa 69.78%
Ba 8.79%
* The above percentages for A rated securities include 1.42% respectively,
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 Standard & Poor's 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 Standard & Poor's 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 may
for temporary defense purposes invest up to 100% of its assets in cash or cash
equivalents.
Principal Government Securities Fund
The objective of Principal Government Securities 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 for daily cash management purposes or pending selection of
particular long-term investments.
Depending on market conditions, up to 55% of the assets may be invested in GNMA
Certificates. 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.
To the extent deemed appropriate by the Fund's Manager, the Fund intends to
purchase GNMA Certificates directly from Principal Mutual Life Insurance Company
and other issuers as well as from securities dealers. The Fund will purchase
directly from issuers only if it can obtain a price advantage by not paying the
commission or mark-up that would be required if the Certificates were purchased
from a securities dealer. The Securities and Exchange Commission has issued an
order under the Investment Company Act of 1940 that permits the Fund to purchase
GNMA Certificates directly from Principal Mutual Life Insurance Company subject
to certain conditions.
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 Marketing Association is a government sponsored stockholder-owned
organization whose goal is to provide liquidity to financial and educational
institutions. SLMA provides liquidity by purchasing student loans, which are
principally government guaranteed loans issued under the Federal Guaranteed
Student Loan Program and the Health Education Assistance Loan Program. SLMA
securities are not guaranteed by the U.S. Government but are obligations solely
of the agency. SLMA senior debt issues in which the Fund invests are rated AAA
by Standard & Poor's and Aaa by Moody's.
There are other obligations issued or guaranteed by the United States Government
(such as U.S. Treasury securities) or by its agencies or instrumentalities that
are either supported by the full faith and credit of the U.S. Treasury or the
credit of a particular agency or instrumentality. Included in the latter
category are Federal Home Loan Bank and Farm Credit Banks. Obligations not
guaranteed by the United States Government are highly rated because they are
issued by indirect branches of government. Such paper is issued as needs arise
by the 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. 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.
MONEY MARKET FUND
The Principal Funds also include a Fund which invests primarily in short-term
securities, Principal Money Market Fund. Securities in which the Money Market
Fund will invest may not yield as high a level of current income as securities
of low quality and longer maturities which generally have less liquidity,
greater market risk and more fluctuation.
The Money Market Fund will limit its portfolio investments to United States
dollar denominated instruments that its board of directors determines present
minimal credit risks and which are at the time of acquisition "Eligible
Securities" as that term is defined in regulations issued under the Investment
Company Act of 1940. Eligible Securities include:
(1) A security with the 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 at the time of issuance was a long-term security that has 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 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 below the 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, below
the highest rating category for short-term obligations;
(3) Securities which are unrated but are determined by the Fund's board of
directors to be of comparable quality to securities rated below the
highest rating category for short-term debt obligations. The Fund will
maintain a dollar-weighted average portfolio maturity of 90 days or
less.
The objective of Principal Money Market 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 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.
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.
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 times when such sales might otherwise not be
desirable. The Fund's right to borrow to facilitate redemptions may reduce the
need for such sales. It is the Fund's policy to be as fully invested as
reasonably practical at all times to maximize current income.
Since portfolio assets will consist of short-term instruments, replacement of
portfolio securities will occur frequently. However, since the 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 the investment objective.
A shareholder's rate of return will vary with the general interest rate levels
applicable to the money market instruments in which the Fund invests. The rate
of return and the net asset value will be affected by such other factors as
sales of portfolio securities prior to maturity and the Fund's operating
expenses.
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.
Diversification
Each Fund is subject to the diversification requirements of Section 817(h) of
the Internal Revenue Code (the "Code") which must be met at the end of each
quarter of the year (or within 30 days thereafter). Regulations issued by the
Secretary of the Treasury have the effect of requiring each Fund to invest no
more than 55% of its total assets in securities of any one issuer, no more than
70% in the securities of any two issuers, no more than 80% in the securities of
any three issuers, and no more than 90% in the securities of any four issuers.
For this purpose, the United States Treasury and each U.S. Government agency and
instrumentality is considered to be a separate issuer. Thus, the Government
Securities Fund intends to invest in U.S. Treasury securities and in securities
issued by at least four U.S. Government agencies or instrumentalities in the
amounts necessary to meet those diversification requirements at the end of each
quarter of the year (or within thirty days thereafter).
In the event any of the Funds do not meet the diversification requirements of
Section 817(h) of the Code, the contracts funded by shares of the Funds will not
be treated as annuities or life insurance for Federal income tax purposes and
the owners of the Funds will be subject to taxation on their share of the
dividends and distributions paid by the Funds.
Foreign Securities
Each of the following Principal Funds has adopted investment restrictions that
limit its investments in foreign securities to the indicated percentage of its
assets: Asset Allocation and World Funds - 100%; Aggressive Growth Fund - 25%;
Bond, Capital Accumulation - 20%; Balanced, Emerging Growth and Growth Funds -
10%. 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. Moreover,
securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. In addition, transactions in
foreign securities may be subject to higher costs, and the time for settlement
of transactions in foreign securities may be longer than the settlement period
for domestic issuers. A Fund's investment in foreign securities may also result
in higher custodial costs and the costs associated with currency conversions.
Currency Contracts
The Aggressive Growth, Asset Allocation and World Funds may each enter into
forward currency contracts, currency futures contracts and options thereon and
options on currencies for hedging and other non-speculative purposes. A forward
currency contract involves a privately negotiated obligation to purchase or sell
a specific currency at a future date at a price set at the time of the contract.
The Funds will not enter into a transaction to hedge currency exposure to an
extent greater in effect than the aggregate market value of the securities held
or to be purchased by the Fund that are denominated or generally quoted in or
currently convertible into the currency. When the Fund enters into a contract to
buy or sell a foreign currency, it generally will hold an amount of that
currency, liquid securities denominated in that currency or a forward contract
for such securities equal to the Fund's obligation, or it will segregate liquid
high grade debt obligations equal to the amount of the Fund's obligations. The
use of currency contracts involves many of the same risks as transactions in
futures contracts and options as well as the risk of government action through
exchange controls or otherwise that would restrict the ability of the Fund to
deliver or receive currency.
Repurchase Agreements and Securities Loans
Each of the Funds, except the Capital Accumulation Fund, may enter into
repurchase agreements with, and each of the Funds, except the Capital
Accumulation and Money Market Funds, 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 Funds' 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 intend 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 10% of its
total assets or (ii) to loan securities in excess of 30% of its total assets.
Forward Commitments
From time to time, each of the Funds 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 the 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 Money Market and Government Securities Funds, 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 World Fund, the 2% limitation also does not apply to warrants
listed on the Toronto Stock Exchange or the Chicago Board Options Exchange.
Borrowing
As a matter of fundamental policy, each Fund may borrow money only for temporary
or emergency purposes. The Balanced Fund, Bond Fund, Capital Accumulation Fund
and Money Market Fund may borrow only from banks. Further, each may borrow only
in an amount not exceeding 5% of its assets, except the Capital Accumulation
Fund 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 the Money
Market 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
The Aggressive Growth Fund, Asset Allocation Fund, Balanced Fund, Bond Fund,
Emerging Growth Fund, Government Securities Fund, Growth Fund and World Fund 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.
Below Investment Grade Bonds
Below investment-grade bonds are securities rated Ba1 or lower by Moody's
Investors Service, Inc. ("Moody's") or BB+ or lower by Standard & Poor's
Corporation ("S&P") or unrated securities which the Fund's Manager or
Sub-Advisor 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 Funds, except the Asset Allocation Fund, do not intend to invest
in securities rated lower than Ba3 by Moody's or BB by S&P. The Asset Allocation
Fund does not intend to invest in securities rated below Caa by Moody's and
below CCC by S&P. The Asset Allocation Fund normally will not invest more than
20% of its assets in below investment grade securities. The Bond Fund may not
invest more than 35% of its assets in such securities. The Balanced Fund does
not intend to invest more than 5% of its assets in such securities.
The rating services' descriptions of below investment grade securities rating
categories in which the Funds 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 high 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 "BB" rating may be modified by the addition of a plus
or minus sign to show relative standing within
the major rating categories.
Below investment-grade securities 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 below investment-grade 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 Funds and the ability of the issuers of
the securities held by the Funds to pay principal and interest. A default by an
issuer may result in a Fund incurring additional expenses to seek recovery of
the amounts due it.
Some of the securities in which the Funds invest may 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.
Congress recently enacted legislation requiring federally-insured savings and
loan associations to divest themselves of investments in high yield securities.
This legislation might increase the supply of securities available for purchase
in the secondary market and, potentially, lower the value of the securities held
by the Funds.
The Statement of Additional Information includes further information concerning
the Funds' investment policies and applicable investment restrictions. Each
Fund's investment objective and certain investment restrictions designated as
such in this Prospectus or the Statement of Additional Information are
fundamental policies that may not be changed without shareholder approval. All
other investment policies described in the Prospectus and the Statement of
Additional Information for a Fund are not fundamental and may be changed by the
Board of Directors of the Fund without shareholder approval.
MANAGER AND SUB-ADVISORS
The Manager for the Funds is Princor Management Corporation (the "Manager"), an
indirectly wholly-owned subsidiary of Principal Mutual Life Insurance Company, a
mutual life insurance company organized in 1879 under the laws of the State of
Iowa. The address of the Manager is The Principal Financial Group, Des Moines,
Iowa 50392. The Manager was organized on January 10, 1969, and since that time
has managed various mutual funds sponsored by Principal Mutual Life Insurance
Company. As of December 31, 1995, the Manager served as investment advisor for
25 such funds with assets totaling approximately $2.9 billion.
The Manager has executed an agreement with Invista Capital Management, Inc.
("Invista") under which Invista has agreed to assume the obligations of the
Manager to provide investment advisory services for the Balanced Fund, Growth
Fund and World 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 December 31, 1995 were
approximately $15.7 billion. Invista's address is 1500 Hub Tower, 699 Walnut,
Des Moines, Iowa 50309.
The Manager has also executed an agreement with Morgan Stanley Asset Management
Inc. ("MSAM") under which MSAM has agreed to assume the obligations of the
Manager to provide investment advisory services for the Aggressive Growth Fund
and Asset Allocation Fund. The Manager pays MSAM a fee for such investment
advisory services. MSAM, with principal offices at 1221 Avenue of the Americas,
New York, NY 10020, provides a broad range of portfolio management services to
customers in the United States and abroad. At December 31, 1995, MSAM managed
investments totaling approximately $57.5 billion, including approximately $42.0
billion under active management and $15.5 billion as Named Fiduciary or
Fiduciary Adviser.
The Manager, Invista, or MSAM 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>
Aggressive Growth May, 1994 Kurt Feuerman (MBA degree, Columbia University; M.A. degree, Syracuse
(Fund's inception) University). Managing Director, Morgan Stanley Asset Management Inc.
Asset Allocation May, 1994 Robert Angevine (MBA degree, Farleigh Dickinson University). Principal,
(Fund's inception) Morgan Stanley Asset Management, Inc. and Morgan Stanley & Co.
Incorporated. Responsible for high yield securities.
May, 1994 Francine J. Bovich (MBA degree, New York University). Principal, Morgan
(Fund's inception) Stanley Asset Management Inc. and Morgan Stanley & Co.
Incorporated. Responsible for allocation among asset classes.
May, 1994 Kurt Feuerman (MBA degree, Columbia University; M.A. degree, Syracuse
(Fund's inception) University). Managing Director, Morgan Stanley Asset Management Inc.
Responsible for equity growth stocks.
April, 1996 Stephen C. Sexauer (MBA degree, University of Chicago).
Principal, Morgan Stanley Asset Management Inc. and Morgan Stanley & Co.
Incorporated. Responsible for large capitalization value stocks,
international equity stocks and fixed income securities.
April, 1996 Christian K. Stadlinger (Ph.D. degree, Northwestern University).
Vice President, Morgan Stanley Asset Management, Inc. Responsible for
small capitalization value stocks.
Balanced April, 1993 Judith A. Vogel, CFA (BA degree, Central College). Vice President, Invista
Capital Management, Inc.
Bond December, 1987 Donald D. Brattebo (BBA degree, Upper Iowa University). Second Vice
(Fund's inception) President, Principal Mutual Life Insurance Company.
Capital Accumulation November, 1969 David L. White, CFA (BBA degree, University of Iowa). Executive Vice
(Fund's inception) President, Invista Capital Management, Inc.
Emerging Growth December, 1987 Michael R. Hamilton, (BMBA degree, Bellarmine College). Vice President,
and Growth (Fund's inception) Invista Capital Management, Inc.
and May, 1994 (Fund's
inception), respectively
Government Securities April, 1987 Martin J. Schafer (BBA degree, University of Iowa). Vice President, Invista
(Fund's inception) Capital Management Company since 1992. Director - Securities Trading,
Principal Mutual Life Insurance Company 1992; Prior thereto, Associate
Director.
World April, 1994 Scott D. Opsal, CFA (MBA degree, University of Minnesota).
Vice President, Invista Capital Management, Inc.
</TABLE>
DUTIES PERFORMED BY THE MANAGER AND SUB-ADVISORS
Under Maryland law, the business and affairs of each of the Funds are managed
under the direction of its Board of Directors. The investment services and
certain other services referred to under the heading "Cost of Manager's
Services" in the Statement of Additional Information are furnished to the Funds
under the terms of a Management Agreement between each of the Funds and the
Manager and, for some of the Funds, a Sub-Advisory Agreement between the Manager
and Invista or the Manager and MSAM. The Manager, Invista, or MSAM, advises the
Funds on investment policies and on the composition of the Funds' portfolios. In
this connection, the Manager, or Sub-Advisor, 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 Sub-Advisor, is
authorized, within the scope of the approved investment program, to determine
which securities are to be bought or sold, and in what amounts.
The compensation paid by each Fund to the Manager for the fiscal year ended
December 31, 1995 was, on an annual basis, equal to the following percentage of
average net assets:
Total
Manager's Annualized
Fund Fee Expenses
Aggressive Growth Fund .80% .90%
Asset Allocation Fund .80% .89%
Balanced Fund .60% .66%
Bond Fund .50% .56%
Capital Accumulation Fund .49% .51%
Emerging Growth Fund .65% .70%
Government Securities Fund .50% .55%
Growth Fund .50% .58%
Money Market Fund .50% .58%
World Fund .75% .95%
The compensation being paid by the Aggressive Growth Fund, Asset Allocation Fund
and World Fund for investment management services is higher than that paid by
most funds to their advisor, but it is not higher than the fees paid by many
funds with similar investment objectives and policies.
The Manager and Sub-Advisors may purchase at their own expense statistical and
other information or services from outside sources, including Principal Mutual
Life Insurance Company. An Investment Service Agreement between the Manager,
Principal Mutual Life Insurance Company and each Fund, except the Aggressive
Growth Fund and Asset Allocation Fund, 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. The Investment Service Agreements
for the Capital Accumulation, Emerging Growth and Government Securities Funds
also include as a party Invista Capital Management, Inc., an indirectly
wholly-owned subsidiary of Principal Mutual Life Insurance Company, and also
provide that the subsidiaries of Principal Mutual Life Insurance Company will
furnish the same items and be reimbursed by the Manager for their costs incurred
in this regard.
The Funds may from time to time execute transactions for portfolio securities
with, and pay related brokerage commissions to, Principal Financial Securities,
Inc., a broker-dealer that is an affiliate of the Distributor and Manager for
each of the Funds. The Fund may also execute transactions for portfolio
securities through Morgan Stanley & Co. Incorporated, an affiliate of Morgan
Stanley Asset Management Inc.
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.
MANAGERS' COMMENTS
Princor Management Corporation, Invista and MSAM are staffed with investment
professionals who manage each individual fund. Comments by these individuals in
the following paragraphs summarize in capsule form the general strategy and
recent results of each fund during the year ended December 31, 1995. The
accompanying charts display results for the past 10 years or the life of the
fund, whichever is shorter. Average Annual Total Return figures provided for
each fund in the graphs below reflect all expenses of the fund and assume all
distributions are reinvested at net asset value. The figures do not reflect
expenses of the variable life insurance contracts or variable annuity contracts
that purchase fund shares; performance figures for the divisions of the
contracts would be lower than performance figures for the funds due to the
additional contract expenses. Past performance is not predictive of future
performance. Returns and net asset value fluctuate. Shares are redeemable at
current net asset value, which may be more or less than original cost.
The various indices included in the following graphs are unmanaged and do not
reflect any commissions or fees which would be incurred by an investor
purchasing the securities included in the index.
Growth-Oriented Funds
Principal Aggressive Growth Fund
(Kurt Feuerman)
Since the SEC effective date of June 1, 1994, the Principal Aggressive Growth
has generated an annualized return of 28.05% versus 18.67% for the S&P 500 and
16.37% for the Lipper Growth Fund Average. In 1995 the Fund returned 44.19%
versus 37.59% for the S&P 500 and 30.79% for the Lipper Growth Fund Average.
For most of 1995 the market rally was led by three sectors: growth stocks,
including the large cap consumer staple names; technology; and finance.
Throughout 1995 we were roughly market weighted in consumer staples but we
concentrated our bet on Phillip Morris, which was our largest holding in the
group (and the Fund) for most of the period. The barrage of negative publicity
about tobacco in 1994 and 1995 diverted investors' attention from the underlying
positive fundamentals at the company (earnings and cash flow expected to grow
15% over the next five years; dividend yield significantly above the market) but
the stock returned approximately 57% in 1995 powered by strong earnings and
aggressive share repurchase. Our weighting in Phillip Morris at year end was
10%, and we continue to like the stock very much, given its prospects for
mid-teens earnings growth through the end of the decade, a dividend yield of
4.4% versus 2.3% for the S&P 500, and strong free cash flow -- 1996 cash flow
after dividend payments and capital expenditures will approximate $2.8 billion
which will support the company's large and ongoing share buyback program. The
stock has weakened recently in the wake of renewed litigation fears but earnings
estimates have gone up and the pullback in the price allows Phillip Morris to
repurchase more shares per dollar.
The technology sector was a driver for the market most of the year before giving
up some ground in the fourth quarter. We started the year about market weighted
in this sector (and therefore underweight most growth managers). When the stocks
began to pull back late in the year we selectively increased our holdings,
taking advantage of the weakness. We ended the year with approximately 15% in
the group.
Finance was a third very important sector for the market in 1995. Buoyed by
falling interest rates and good earnings growth many of our favorite financial
stocks rose considerably. The Fund's largest financial holding at year end was
Wells Fargo which climbed about 49% in 1995; other financial holdings which did
well included Citicorp, up 62%; Federal Home Loan, up 65%; and Federal National
Mortgage, up 70%.
In the last three weeks of December, while the broad market averages held up,
many of the sectors which had led the equity market higher in 1995 did poorly.
For example, utilities, energy and consumer staples did well while technology,
finance and growth stocks retreated. We took advantage of this weakness to add
to our favorite stocks, particularly in the finance area. Financial stocks, for
the most part, peaked in October and proceeded to correct 5-10% but earnings
estimates during this period were flat to up for our favorite names; i.e. p/e
multiple contracted but earnings growth fundamentals remained intact. The stocks
were driven down largely on fears of rising consumer debt delinquencies which
will not impact all financial stocks to the same degree. Our favorites in the
group include Wells Fargo and American Express.
As we begin 1996, in addition to our emphasis on tobacco and finance, we
continue to favor select high growth stocks. One such issue is HFS. Formerly
known as Hospitality Franchise Systems, this rapidly growing franchisor of
lodging brands (Ramada, Howard Johnson and Days Inns) recently purchased real
estate broker Century 21 in the belief that HFS, with its expertise in managing
franchise businesses, could dramatically improve the results at Century. The
early signs are very encouraging as evidenced by the company's moves to cut
costs and to improve Century 21's competitive advantage by negotiating preferred
vendor contracts that offer the buyer of a Century 21-listed residence discounts
on everything from new cars to telephone service. Earnings fundamentals look
solid with the company having reported $0.74 for 1995 (post split) and expected
to earn $1.25 for a 60%+ gain in earnings.
Principal Aggressive Growth Fund*
S&P 500
Fund Broad Lipper
Total Based Growth
Year Ended December 31, Return Index Average
10,000 10,000 10,000
1994 10,259 10,229 10,055
1995 14,793 14,067 13,151
Total Returns *
As of December 31, 1995
Since Inception
1 Year Date 6/1/94 10 Year
44.19% 28.05% --
Principal Asset Allocation Fund
(Francine J. Bovich)
Global financial markets enjoyed solid performance in 1995. Equity and bond
markets continued their ascents (with the exception of emerging market
equities), aided by further monetary easings, slow economic growth and low
inflation. During the year, the world equity markets returned 20.7% in dollar
terms as measured by the MSCI World Index (all reported indices are including
net dividends). The US was among the strongest performers, returning 37.5% on
the S&P 500. Outside the US, equity performance was divergent with Europe up
21.6%, while performance in Japan was slightly positive for the year, returning
0.7%. The emerging markets declined 10.8% on the year led by the Latin American
markets. The U.S. fixed income markets also performed well with the Lehman
Corporate Intermediate index appreciating 15.3%, and the First Boston High Yield
index returning 17.4% for the year.
Through the year we maintained our diversified investment policy. At year-end
1995, the Fund was invested: 39% US equities, 18% international equities, 28% US
fixed income, 12% US high yield, and 3% short-term investments. For 1995, the
fund enjoyed strong absolute gains of 20.7%, but failed to outperform the Lipper
Flexible Portfolio Fund average gain of 25.1%.
Given the dominance of the US equity market, the portfolio benefited from a
substantial commitment to US large capitalization equity issues. Results were
particularly enhanced by an overweight in high-quality growth companies which
enjoyed returns of 44.5% for the year. Exposure to value stocks, both large and
small cap, contributed positively to the fund's total performance, but
underperformed the general US equity markets.
International equities failed to outperform the U.S. markets. Effective stock
selection in Japan, which was the largest weighting within the international
portfolio, was offset by the drag of commitments to the emerging markets.
The US fixed income markets enjoyed solid gains but they were unable to keep
pace with equities. The fixed income sub-portfolios (40% of the total)
outperformed their benchmarks, led by the strong relative performance of US high
yield.
Going forward, our economists expect the continuation of a benign environment of
slow growth and modest inflation for the industrialized world for 1996. With
this economic backdrop, we would expect the liquidity cycle to support financial
asset prices; however, we would look for a rotation of the bull market out of
the U.S. and into the international markets, particularly those with superior
growth potential. The global mandate of the program positions the Fund well for
this occurrence.
Principal Asset Allocation Fund*
Fund Lipper
Total Flexible Portfolio
Year Ended October 31, Return S&P 500 Index
10,000 10,000 10,000
1994 10,052 10,229 10,008
1995 12,128 14,067 12,518
Total Returns *
As of December 31, 1995
Since Inception
1 Year Date 6/1/94 10 Year
20.66% 12.96% --
Principal Balanced Fund
(Judith A. Vogel)
This balanced portfolio is designed to combine stocks, bonds and cash in a
relatively conservative mix which provides both capital appreciation and income
to the shareholder without taking on undue risk. Financial markets cooperated in
helping us to achieve our objectives over the year, as both stocks and bonds
delivered double digit returns for the year ended December 31, 1995. The economy
backed off from extremely strong growth in late 1994 to register modest advances
over the succeeding four quarters. Inflation remained benign over the year and
still is not a concern today. It appears the Federal Reserve did a remarkable
job of managing interest rates in order to cool the economy without plunging it
into recession. Long term interest rates fell about 2% during 1995, enabling the
bond market to surge. Corporate earnings continued their robust growth, even in
the fourth year of an economic expansion, thanks to widespread increases in
productivity and almost zero growth in labor costs. These higher earnings
boosted common stocks, while lower interest rates enabled stock prices to rise
without the market appearing overvalued. Clearly, 1995 was a great year in the
financial markets. Absolute returns were very attractive for balanced
portfolios. The asset structure of the Principal Balanced fund was a bit more
cautious than the average balanced mutual fund during the year. Just over 50% of
the portfolio's holdings were in equity-related securities with the balanced in
fixed income. According to Morningstar Mutual Funds, the average balanced fund
had 53% allocated to common stocks. Although our asset allocation was less
aggressive than average, our returns were nearly even with the Lipper Balanced
Fund Average return for the year. There is no independent market index against
which to measure returns of balanced portfolios, however, we show the S&P 500
stock index for your information.
Principal Balanced Fund, Inc.*
Fund Lipper
Total S&P 500 Mid Cap
Year Ended December 31, Return Index Index
10,000 10,000 10,000
1988 11,637 11,661 11,229
1989 12,982 15,356 13,429
1990 12,147 14,877 13,355
1991 16,321 19,412 16,930
1992 18,410 20,892 18,122
1993 20,447 22,995 20,066
1994 20,019 23,296 19,561
1995 24,941 32,037 24,482
Total Returns *
As of December 31, 1995
Since Inception Date
1 Year 5 Year 12/18/87
24.58% 15.48% 12.05%
Principal Capital Accumulation Fund
(David L. White)
Our strategy with this portfolio is to hold common stocks of a wide number of
established companies and to vary the emphasis among various types of companies
based on our view of the economy and the value of companies based on estimates
of future free cash flows. While it is impossible to ignore short-term
influences, we tend to take the longer view. Our approach might also be
described as "top down". We look at the big picture, then move to industries,
geography, markets, etc., and from there to selection of specific investments.
The Fund outperformed the Lipper Growth and Income Average while lagging behind
the S&P 500 for the year, but outperformed the S&P 500 during the 4th quarter of
1995 mainly due to the increase in emphasis in the consumer noncyclical area.
During the past six quarters, the portfolio has moved from being substantially
overweighted in cyclical stocks to being neutral. The economic recovery that
commenced March 1991 is now nearing its end. Cyclical stocks do not do well in
the latter stages of an economic recovery. Aggregate corporate profit margins
are near all time highs, leaving them nowhere to go but down. This will make
growth in total corporate profits difficult to achieve. Therefore, we have
substantially increased the portfolios exposure to companies that will continue
to grow earnings even if the economy or corporate profits stop growing.
Principal Capital Accumulation Fund, Inc.*
Fund S&P 500 Lipper
Total Stock Growth & Income
Year Ended December 31, Return Index Fund Average
10,000 10,000 10,000
1986 11,619 11,868 11,629
1987 12,371 12,499 11,843
1988 14,156 14,575 13,739
1989 16,447 19,193 16,973
1990 14,825 18,595 16,218
1991 20,557 24,263 20,934
1992 22,515 26,112 22,814
1993 24,269 28,742 25,449
1994 24,388 29,117 25,210
1995 32,170 40,043 32,979
Total Returns *
As of December 31, 1995
1 Year 5 Year 10 Year
31.91% 16.76% 12.39%
Principal Emerging Growth Fund
(Michael R. Hamilton)
The Emerging Growth Fund performed better than the Lipper Mid Cap Average for
the year. This was a period of time the NASDAQ Composite return was the second
highest in its 24 year history. The portfolio has been structured to take
advantage of our broad themes of productivity enhancements, an aging population
trend and lower interest rates. The structure has resulted in investment
concentration in technology, financials, growth cyclicals and healthcare. We
have chosen to underweight utilities, energy and consumer areas. The Emerging
Growth Fund trailed the S&P 500 for 1995 primarily because of the differences in
sector weighting compared to the market. The emphasis on cyclical growth and
financial stocks hurt performance against benchmarks. An economic slowdown
seemed to be anticipated by investors and they sold off economically sensitive
stocks.
Going forward, the portfolio remains positioned to capture growth from an
elongated economic cycle. The current slowing in economic activity should set
the stage for further growth; therefore we continue to over-weight growth
cyclicals. These companies are low-cost producers with niche markets whose
revenues should benefit from the trend toward more outsourcing.
Principal Emerging Growth Fund, Inc.*
Fund Lipper
Total S&P 500 MID CAP
Year Ended December 31, Return Index Index
10,000 10,000 10,000
1988 12,369 11,661 11,476
1989 15,070 15,356 14,586
1990 13,186 14,877 14,067
1991 20,240 19,412 21,275
1992 23,264 20,892 23,213
1993 27,750 22,995 26,625
1994 27,967 23,296 26,079
1995 36,080 32,037 34,469
Total Returns*
As of December 31, 1995
Since Inception
1 Year 5 Year Date 12/18/87
29.01% 22.30% 17.31%
Principal Growth Fund
(Michael R. Hamilton)
The equity markets had a banner year in 1995. With inflation seemingly under
control, interest rates eased supporting a robust stock market. In addition,
corporate profits had one their better increases than had been seen in a long
time. The portfolio has been structured around a theme of productivity and
manufacturing efficiency. The companies that can enable the enhancement of both
labor and machines should be in a stronger position than their competition.
Another related theme has been the demographic growth of babyboomers and the
corresponding need for healthcare and financial services.
The healthcare sector was the strongest in the portfolio for the year. The fund
did trail the S&P 500 given the selloff in the Technology sector in the fourth
quarter. While no major change is planned currently in the portfolio we continue
to focus on those companies that are best positioned the take market share from
their competitors, develop new markets and products and sell into a global
marketplace. Also, we favor companies with proven management that have the
skills to operate profitably in this competitive environment.
Principal Growth Fund*
S&P 500
Fund Broad Lipper
Total Based Growth
Year Ended December 31, Return Index Index
10,000 10,000 10,000
1994 10,542 10,395 10,090
1995 13,243 14,296 13,197
Total Returns *
As of December 31, 1995
Since Inception
1 Year Date 5/2/94 10 Year
25.62% 18.33% --
Principal World Fund
(Scott D. Opsal)
International equities provided positive returns for 1995 of just over 10%.
Europe was the star performing region for 1995, rising over 20% compared with a
small gain from Japan and losses in Southeast Asia and Latin America. The
Principal World Fund outperformed the average fund for the year on the basis of
large exposures to undervalued European markets which performed well, and
underweightings in Japan and Latin America which did poorly.
Europe was the strongest international region in the world for 1995, up over
20%. Japan was essentially flat, and emerging markets lost 7% paced by Latin
America's 15% drop. The Principal World Fund was significantly overweighted in
the top five performing countries in the world and underweighted in the poorest
performers. These weightings were based on relative valuations with the heaviest
overweightings found in the countries carrying the lowest valuation parameters.
The Fund also benefited from being overweighted in industrial cyclical and
consumer durable sectors which experienced earnings and market value gains
resulting from continued economic expansion in Europe. Emerging markets
performed poorly in 1995, and the Fund's small exposure to this market sector
allowed it to avoid the negative returns suffered by emerging market investors.
Finally, we estimate the World Fund experienced a positive 4.4% impact from
currencies, while Morgan Stanley Capital International EAFE's (Europe, Australia
and Far East) yearly total was a positive 1.5%.
Principal World Fund*
Fund Morgan Stanley Lipper
Total EAFE International
Year Ended December 31, Return Index Index
10,000 10,000 10,000
1994 9,663 9,991 9,758
1995 11,032 11,111 10,676
Total Returns *
As of December 31, 1995
Since Inception
1 Year Date 5/2/94 10 Year
14.17% 6.06% --
Important Notes of the Growth-Oriented Funds:
Standard & Poor's 500 Stock Index: an unmanaged index of 500 widely held common
stocks representing industrial, financial, utility and transportation companies
listed on the New York Stock Exchange, American Stock Exchange and the
Over-the-Counter market.
Lipper Growth Fund Average: This average consists of funds which normally invest
in companies whose long-term earnings are expected to grow significantly faster
than the earnings of the stocks represented in the major unmanaged stock
indices. The one-year average currently contains 572 funds.
Lipper Flexible Portfolio Fund Average: This average consists of funds which
allocate their investments across various asset classes, including domestic
common stocks, bonds and money market instruments, with a focus on total return.
The one-year average currently contains 150 funds.
Lipper Balanced Fund Average: this average consists of mutual funds which
attempt to conserve principal by maintaining at all times a balanced portfolio
of both stocks and bonds. Typically, the stock/bond ratio ranges around 60%/40%.
The one year average currently contains 220 mutual funds.
Lipper Growth & Income Fund Average: this average consists of funds which
combine a growth of earnings orientation and an income requirement for level
and/or rising dividends. The one year average currently contains 438 funds.
Lipper Mid Cap Fund Average: This average consists of funds which by prospectus
or portfolio practice, limit their investments to companies with average market
capitalizations and/or revenues between $800 million and the average market
capitalization of the Wilshire 4500 Index (as captured by the Vanguard Index
Extended Market Fund). The one-year average currently contains 106 funds.
Morgan Stanley Capital International EAFE (Europe, Australia and Far East)
Index: This average reflects an arithmetic, market value weighted average of
performance of more than 900 listed securities which are listed on the stock
exchanges of the following countries: Australia, Austria, Belgium, Denmark,
Netherlands, New Zealand, Norway, Singapore/Malaysia, Spain, Sweden,
Switzerland, and the United Kingdom.
Lipper International Fund Average: This average consists of funds which invest
in securities primarily traded in markets outside of the United States. The
one-year average currently contains 254 funds.
Income-Oriented Funds
Principal Bond Fund
(Donald D. Brattebo)
1995 was an extremely good year for fixed income securities as interest rates
declined dramatically throughout the year. The Principal Bond Fund was no
exception, posting double digit total returns and erasing the slight losses
experienced in 1994. Our relatively long portfolio duration contributed to our
superior performance versus the Lipper BAA Corporate Index during 1995. The high
absolute level of returns for the Fund was also driven by investment grade
corporate securities outperforming most other fixed income alternatives. The
Fund's total return also compares favorably to the Lipper BAA Corporate Index
over the life of the Fund. We believe the above average long-term performance is
the result of consistently following our investment strategy of being fully
invested in a well diversified portfolio of investment grade corporate issues
and not betting on interest rates through changes in portfolio duration or
purchasing callable securities. We will continue to follow this strategy and
expect investment grade corporates to continue to be a good fixed income
investment selection.
Principal Bond Fund, Inc.*
Fund Lehman Lipper
Total BAA BBB
Year Ended December 31, Return Index Avg
10,000 10,000 10,000
1988 10,991 11,129 10,900
1989 12,514 12,699 12,060
1990 13,167 13,595 12,751
1991 15,369 16,113 15,020
1992 16,810 17,512 16,258
1993 18,771 19,665 18,261
1994 18,227 18,707 17,447
1995 22,268 22,959 20,948
Total Returns *
As of December 31, 1995
Since Inception
1 Year 5 Year date 12/18/87
22.17% 11.08% 10.48%
Principal Government Securities Fund
(Martin J. Schafer)
The U.S. Federal Reserve Board's long-term goal of low inflation and steady
growth appears closer to reality with each passing year. The dismal performance
of 1994 was due to the Fed's actions to slow economic growth and potential
inflation. In 1995, the dramatic turnaround was the result of the markets
recognizing that inflation was well contained at the peak of this economic
cycle. In fact, the most powerful ingredient in calculating inflation--labor
costs--has been deflating. With wage increases holding steady and benefit
packages being trimmed, corporate America has forced workers to work smarter and
harder resulting in increased productivity. This provides products with lower
unit labor costs. We look for the Fed to continue their vigilant fight against
inflation. While ultimately this should be beneficial to all fixed-income
investors, the road to solid returns may be rocky from time to time.
This Fund's success reflects our preference for slightly longer duration assets
than our competitors. We try to keep our duration between 5 and 6 years. The
duration as of December 31, 1995, was 5.16 years. Duration measures the
sensitivity of the value of the mortgage-backed securities to changes in
interest rates. In general, if interest rates change one percentage point, the
value will change in the opposite direction by a percentage which equals the
duration.
Principal Government Securities Fund*
Fund Lehman Lipper
Total Mortgage U.S. Mortgage
Year Ended December 31, Return Index Index
10,000 10,000 10,000
1987 10,099 10,204 10,104
1988 10,939 11,094 10,858
1989 12,645 12,808 12,224
1990 13,852 14,183 13,370
1991 16,200 16,410 15,348
1992 17,308 17,551 16,285
1993 19,051 18,751 17,499
1994 18,188 18,450 16,769
1995 21,656 21,549 19,491
Total Returns *
As of December 31, 1995
Since Inception
1 Year 5 Year Date 4/9/87
19.07% 9.35% 9.26%
Important Notes of the Income-Oriented Funds:
Lehman Brothers, BAA Corporate Index: an unmanaged index of all publicly issued
fixed rate nonconvertible, dollar-denominated, SEC-registered corporate debt
rated Baa or BBB by Moody's or S&P.
Lipper Corporate Debt BBB Rated Funds Average: this average consists of mutual
funds investing at least 65% of their assets in corporate and government debt
issues rated by S&P or Moody's in the top four grades. The one year average
currently contains 82 mutual funds.
Lehman Brothers Mortgage Index: an unmanaged index of 15- and 30-year fixed rate
securities backed by mortgage pools of the Government National Mortgage
Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and Federal
National Mortgage Association (FNMA).
Lipper U.S. Mortgage Fund Average: this average consists of mutual funds
investing at least 65% of their assets in mortgages/securities issued or
guaranteed as to principal and interest by the U.S. Government and certain
federal agencies. The one year average currently contains 58 mutual funds.
Note: Mutual fund data from Lipper Analytical Services, Inc.
DETERMINATION OF NET ASSET VALUE OF FUND SHARES
The net asset value of each Fund's shares is determined daily, Monday through
Friday, as of the close of trading on the New York Stock Exchange, except on
days on which changes in the value of the Fund's portfolio securities will not
materially affect the current net asset value of the 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 net asset value per
share of each Fund is determined by dividing the value of the Fund's securities
plus all other assets, less all liabilities, by the number of Fund shares
outstanding.
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. Other securities are valued by
using market quotations, prices provided by market makers or estimates of market
values obtained from yield data and other factors relating to instruments or
securities with similar characteristics in accordance with procedures
established in good faith by the Board of Directors. Securities with remaining
maturities of 60 days or less are valued at amortized cost when it is determined
by the Board that amortized cost reflects fair value. Other assets are valued at
fair value as determined in good faith by the Board of Directors of the Fund.
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 or
Sub-Advisor 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
The Money Market Fund values its securities at amortized cost. For a description
of this calculation procedure see the Funds' Statement of Additional
Information.
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. 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. 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. Any performance data quoted
for the Funds represents only historical performance and is not intended to
indicate future performance of the Funds. The calculation of average annual
total return and yield for the Funds does not include fees and charges of the
separate accounts that invest in the Funds and, therefore, does not reflect the
investment performance of those separate accounts. For further information on
how the Funds calculate yield and total return figures, see the Statement of
Additional Information.
Average Annual Total Return
Each Fund may advertise its respective average annual total return. 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. 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.
Yield and Effective Yield
From time to time the Money Market Fund may advertise its respective 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 Money Market 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. A
shareholder's 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.
INCOME DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
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, the Funds intend 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 amounts so
distributed to investors.
Any dividends from the net investment income of the Funds (except the Money
Market Fund) will normally be payable to the shareholders annually, and any net
realized gains will be distributed annually. All dividends and capital gains
distributions are applied to purchase additional Fund shares at net asset value
as of the payment date without the imposition of any sales charge.
Each Fund will notify shareholders of the portion of each distribution which
constitutes investment income or capital gain. In view of the complexity of tax
considerations, it is advisable for Eligible Purchasers considering the purchase
of shares of the Funds to consult with tax advisors on the federal and state tax
aspects of their investments and redemptions.
Money Market Fund
The Money Market Fund declares dividends of all its daily net investment income
on each day the Fund's net asset value per share is determined. Dividends are
payable daily and are automatically reinvested in full and fractional shares of
the Fund at the then current net asset value unless a shareholder requests
payment in cash.
Net investment income, 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 the Fund.
Since the Fund's policy is, under normal circumstances, to hold portfolio
securities to maturity and to value portfolio securities at amortized cost, it
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 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 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 investing 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.
The Board of Directors 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 affect on shareholders.
ELIGIBLE PURCHASERS AND PURCHASE OF SHARES
Only Eligible Purchasers may purchase shares of the Funds. Eligible Purchasers
are limited to (a) separate accounts of Principal Mutual Life Insurance Company
or of other insurance companies; (b) Principal Mutual Life Insurance Company or
any subsidiary or affiliate thereof; (c) trustees or other managers of any
qualified profit sharing, incentive or bonus plan established by Principal
Mutual Life Insurance Company or any subsidiary or affiliate thereof for the
employees of such company, subsidiary or affiliate. Such trustees or managers
may purchase Fund shares only in their capacities as trustees or managers and
not for their personal accounts. The Board of Directors of each Fund reserves
the right to broaden or limit the designation of Eligible Purchasers.
Principal Balanced, Principal Bond, Principal Capital Accumulation, Principal
Emerging Growth and Principal Money Market Funds each serve as an underlying
investment medium for variable annuity contracts and variable life insurance
policies that are funded in separate accounts established by Principal Mutual
Life Insurance Company. It is conceivable that in the future it may be
disadvantageous for variable life insurance separate accounts and variable
annuity separate accounts to invest in the Funds simultaneously. Although
neither Principal Mutual Life Insurance Company nor the Funds currently foresee
any such disadvantages either to variable life insurance policy owners or to
variable annuity contract owners, each Fund's Board of Directors intends to
monitor events in order to identify any material conflicts between such policy
owners and contract owners and to determine what action, if any, should be taken
in response thereto. Such action could include the sale of Fund shares by one or
more of the separate accounts, which could have adverse consequences. Material
conflicts could result from, for example, (1) changes in state insurance laws,
(2) changes in Federal income tax law, (3) changes in the investment management
of the Fund, or (4) differences in voting instructions between those given by
policy owners and those given by contract owners.
Shares are purchased from Princor Financial Services Corporation, the principal
underwriter for the Funds. There are no sales charges on the Funds' shares.
There are no restrictions on amounts to be invested in the Funds' shares.
Shareholder accounts for each Fund will be maintained under an open account
system. Under this system, an account is automatically opened and maintained for
each new investor. Each investment is confirmed by sending the investor a
statement of account showing the current purchase and the total number of shares
then owned. The statement of account is treated by each Fund as evidence of
ownership of Fund shares in lieu of stock certificates, and unless written
request is made to the Fund, stock certificates will not be issued or delivered
to investors. Certificates, which can be stolen or lost, are unnecessary except
for special purposes such as collateral for a loan. Fractional interests in the
Funds' shares are reflected to three decimal places in the statement of account,
but any stock certificates will be issued only for full shares owned.
If an offer to purchase shares is received by any of the Funds before the close
of trading on the New York Stock Exchange, the shares will be issued at the
offering price (net asset value of Fund shares) computed on that day. If an
offer is received after the close of trading or on a day which is not a trading
day, the shares will be issued at the offering price computed on the first
succeeding day on which a price is determined. Dividends on the Money Market
Fund shares will be paid on the next day following the effective date of a
purchase order.
SHAREHOLDER RIGHTS
The following information is applicable to each of the Principal Funds. Each
Fund share is entitled to one vote either in person or by proxy at all
shareholder meetings for that Fund. This includes the right to vote on the
election of directors, selection of independent accountants and other matters
submitted to meetings of shareholders. Each share has equal rights with every
other share as to dividends, earnings, voting, assets and redemption. Shares are
fully paid and non-assessable, and have no preemptive or conversion rights.
Shares may be issued as full or fractional shares, and each fractional share has
proportionately the same rights, including voting, as are provided for a full
share. Shareholders of each of these Funds may remove any director with or
without cause by the vote of a majority of the votes entitled to be cast at a
meeting of shareholders.
The bylaws of each Fund provide that the Board of Directors of the Fund may
increase or decrease the aggregate number of shares which the Fund has authority
to issue without a shareholder vote.
The bylaws of each Fund also provide that the Fund need not hold an annual
meeting of shareholders in any year in which none of the following is required
to be acted on by shareholders under the Investment Company Act of 1940:
election of directors; approval of investment advisory agreement; ratification
of selection of independent public accountants; and approval of distribution
agreement. 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.
Shareholder inquiries should be directed to the applicable Fund at The Principal
Financial Group, Des Moines, Iowa 50392.
NON-CUMULATIVE VOTING: The Funds' shares have non-cumulative voting rights which
means that the holders of more than 50% of the shares voting for the election of
directors of a Fund can elect 100% of the directors if they choose to do so, and
in such event, the holders of the remaining shares voting for the election of
directors will not be able to elect any directors.
Principal Mutual Life Insurance Company votes each Fund's shares allocated to
each of its separate accounts registered under the Investment Company Act of
1940 and attributable to variable annuity contracts or variable life insurance
policies participating therein in accordance with instructions received from
contract or policy holders, participants and annuitants. Other shares of each
Fund held by each registered separate account, including those for which no
timely instructions are received, are voted in proportion to the instructions
that are received with respect to contracts or policies participating in that
separate account. Shares of each of the Funds held in the general account of
Principal Mutual Life Insurance Company or in its unregistered separate accounts
are voted in proportion to the instructions that are received with respect to
contracts and policies participating in its registered and unregistered separate
accounts. If Principal Mutual determines pursuant to applicable law that a
Fund's shares held in one or more separate accounts or in its general account
need not be voted pursuant to instructions received with respect to
participating contracts or policies, it then may vote those Fund shares in its
own right.
REDEMPTION OF SHARES
Except for the third paragraph below, most of the following discussion of
redemption procedures is relevant only to Eligible Purchasers other than
variable annuity and variable life separate accounts of Principal Mutual Life
Insurance Company, and its wholly-owned subsidiaries.
Each Fund will redeem its shares upon request. There is no charge for
redemption. If no certificates have been issued, a shareholder simply writes a
letter to the appropriate Fund requesting redemption of any part or all of the
shares. The letter must be signed exactly as the account is registered. If
certificates have been issued, they must be properly endorsed and forwarded with
the request. If payment is to be made to the registered shareholder or joint
shareholders, 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. The
price at which the shares are redeemed will be the net asset value per share as
next computed after the request (with appropriate certificate, if any) is
received by the Fund in proper and complete form. The amount received for shares
upon redemption may be more or less than the cost of such shares depending upon
the net asset value at the time of redemption.
Redemption proceeds will be sent within three business days after receipt of
request for redemption in proper form. However, each Fund may suspend the right
of redemption during any period when (a) trading on the New York Stock Exchange
is restricted as determined by the Securities and Exchange Commission or such
Exchange is closed for other than weekends and holidays; (b) an emergency
exists, as determined by the Securities and Exchange Commission, as a result of
which (i) disposal by the Fund of securities owned by it is not reasonably
practicable, or (ii) it is not reasonably practicable for the Fund fairly to
determine the value of its net assets; or (c) the Commission by order so permits
for the protection of security holders of the Fund. A Fund will redeem only
those shares for which it has good payment. To avoid the inconvenience of such a
delay, shares may be purchased with a certified check, bank cashier's check or
money order. During the period prior to the time a redemption from the Money
Market Fund is effective, dividends on such shares will accrue and be payable
and the shareholder will be entitled to exercise all other rights of beneficial
ownership.
Restricted Transfer: Shares of each of the Funds may be transferred to an
Eligible Purchaser. However, whenever any of the Funds is requested to transfer
shares to other than an Eligible Purchaser, the Fund has the right at its
election to purchase such shares at their net asset value next effective
following the time at which the request for transfer is presented; provided,
however, that the Fund must notify the transferee or transferees of such shares
in writing of its election to purchase such shares within seven (7) days
following the date of such request and settlement for such shares shall be made
within such seven-day period.
ADDITIONAL INFORMATION
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 World Fund. The custodian for the World 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.
Organization and Share Ownership: The Funds were incorporated in the state of
Maryland on the following dates: Aggressive Growth Fund - August 20, 1993; Asset
Allocation Fund - August 20, 1993; Balanced Fund - November 26, 1986; Bond Fund
- - November 26, 1986; Capital Accumulation 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); Emerging Growth Fund - February
20, 1987; Government Securities Fund - June 7, 1985; Growth Fund - August 20,
1993; Money Market Fund - June 10, 1982; and World Fund - August 20, 1993.
Principal Mutual Life Insurance Company owns 100% of each Fund's outstanding
shares.
Capitalization: The authorized capital stock of each Fund consists of
100,000,000 shares of common stock (500,000,000 for Principal Money Market Fund,
Inc.), $.01 par value.
Financial Statements: Copies of the financial statements of each Fund will be
mailed to each shareholder of that Fund semi-annually. 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
the Funds' Statement of Additional Information can be obtained upon request,
free of charge, by writing or telephoning the Fund. 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, The Principal
Financial Group, Des Moines, Iowa 50392-0200, is the principal underwriter for
each of the Principal Funds.
The Principal(R) Mutual Funds ("Principal Funds") described in this
Prospectus are a family of separately incorporated, diversified, open-end
management investment companies, commonly called mutual funds, which provide the
following range of investment objectives:
Growth-Oriented Funds
PRINCIPAL Balanced Fund, Inc. seeks to generate a total return consisting of
current income and capital appreciation while assuming reasonable risks in
furtherance of the investment objective.
PRINCIPAL Capital Accumulation Fund, Inc. seeks to achieve primarily long-term
capital appreciation and secondary growth of investment income through the
purchase primarily of common stocks, but the Fund may invest in other
securities.
PRINCIPAL Emerging Growth Fund, Inc. seeks to achieve capital appreciation by
investing primarily in securities of emerging and other growth-oriented
companies.
Income-Oriented Funds
PRINCIPAL Bond Fund, Inc. seeks to provide as high a level of income as is
consistent with preservation of capital and prudent investment risk.
PRINCIPAL High Yield Fund, Inc. seeks high current income. Capital growth is a
secondary objective when consistent with the objective of high current income.
The Fund seeks to achieve its objective primarily through the purchase of high
yielding, lower or non-rated fixed income securities commonly referred to as
"junk 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.
Money Market Fund
PRINCIPAL Money Market 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 all of its assets in a portfolio of
money market instruments.
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 ought to 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 Statement of Additional
Information, dated May 1, 1996. The Statement of Additional Information is
incorporated by reference into this Prospectus. A copy of the Statement of
Additional Information can be obtained free of charge by writing or telephoning:
Principal Mutual Funds
A Member of
The Principal Financial Group
Des Moines, IA 50392
Telephone 1-800-247-4123
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Date of this Prospectus is May 1, 1996.
TABLE OF CONTENTS
Page
Summary ...................................................... 3
Financial Highlights........................................... 5
Investment Objectives, Policies and Restrictions............... 7
Certain Investment Policies and Restrictions................... 13
Manager and Sub-Advisor ...................................... 14
Duties Performed by the Manager and Sub-Advisor................ 15
Managers' Comments............................................. 15
Determination of Net Asset Value of Fund Shares................ 18
Performance Calculation........................................ 19
Income Dividends, Distributions and Tax Status................. 19
Eligible Purchasers and Purchase of Shares..................... 20
Shareholder Rights ............................................ 21
Redemption of Shares........................................... 22
Additional Information......................................... 22
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. 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.
SUMMARY
The following summarized information should be read in conjunction with the
detailed information appearing elsewhere in this Prospectus.
The Principal Funds are separately incorporated, open-end diversified
management investment companies.
Who may purchase shares of the Funds?
Shares of the Funds are available only to Eligible Purchasers which are
limited to: (a) separate accounts of Principal Mutual Life Insurance Company or
of other insurance companies; (b) Principal Mutual Life Insurance Company or any
subsidiary or affiliate thereof; (c) trustees or other managers of any qualified
profit sharing, incentive or bonus plan established by Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof for the employees of
such company, subsidiary or affiliate. The Board of Directors of each Fund
reserves the right to broaden or limit the designation of Eligible Purchasers.
What do the Funds offer investors?
Professional Investment Management: Experienced securities analysts provide
each Fund with professional investment management.
Diversification: Each Fund will diversify by investing in securities issued
by a number of issuers doing business in a variety of industries and/or located
in different geographical regions. Diversification reduces investment risk.
Economies of Scale: Pooling individual shareholder's investments in any of
the Funds creates administrative efficiencies.
Redeemability: Upon request each Fund will redeem its shares and promptly
pay the investor the current net asset value of the shares redeemed. See
"Redemption of Shares."
What are the Funds' investment objectives?
Growth-Oriented Funds
The investment objective of Principal Balanced Fund, Inc. (sometimes
referred to as the Balanced Fund) is to seek to generate a total return
consisting of current income and capital appreciation while assuming reasonable
risks in furtherance of this objective. The Fund intends to pursue a flexible
investment policy in seeking to achieve this investment objective.
The primary investment objective of Principal Capital Accumulation Fund,
Inc. (sometimes referred to as the Capital Accumulation Fund) is long-term
capital appreciation and its secondary investment objective is growth of
investment income. The Fund seeks to achieve its investment objectives through
the purchase primarily of common stocks, but the Fund may invest in other
securities.
The investment objective of Principal Emerging Growth Fund, Inc. (sometimes
referred to as the Emerging Growth Fund) is to achieve capital appreciation by
investing primarily in securities of emerging and other growth-oriented
companies.
Income-Oriented Funds
The investment objective of Principal Bond Fund, Inc. (sometimes referred
to as the Bond Fund) is to provide as high a level of income as is consistent
with preservation of capital and prudent investment risk.
The primary investment objective of Principal High Yield Fund, Inc.
(sometimes referred to as the High Yield Fund) is to seek 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.
Money Market Fund
The investment objective of Principal Money Market Fund, Inc. (sometimes
referred to as the Money Market 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 all of its
assets in a portfolio of 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."
Who serves as Manager for the Funds?
Princor Management Corporation, a corporation organized in 1969 by
Principal Mutual Life Insurance Company, is the Manager for each of the Funds.
It is also the dividend disbursing and transfer agent for the Principal Funds.
In order to provide investment advisory services for the Balanced Fund, the
Manager has executed a sub-advisory agreement with Invista Capital Management,
Inc. ("Invista" or "Sub-Advisor"). See "Manager and Sub-Advisor."
What fees and expenses apply to ownership of shares of the Funds?
The following table depicts fees and expenses applicable to the purchase
and ownership of shares of each of the Funds.
ANNUAL FUND OPERATING EXPENSES
(As a Percentage of Average Net Assets)
Management Other Total Operating
Fund Fee Expenses Expenses
Balanced Fund .60 .06 .66
Bond Fund .50 .06 .56
Capital Accumulation Fund .49 .02 .51
Emerging Growth Fund .65 .05 .70
High Yield Fund .60 .13 .73
Money Market Fund .50 .08 .58
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:
Period (in years)
Fund 1 3 5 10
Balanced Fund $7 $21 $37 $82
Bond Fund $6 $18 $31 $70
Capital Accumulation Fund $5 $16 $29 $64
Emerging Growth Fund $8 $24 $41 $92
High Yield Fund $7 $22 $39 $87
Money Market Fund $6 $19 $32 $73
This Example is based on the Annual Fund Operating expenses for each Fund
described above. Please remember that the Example should not be considered a
representation of past or future expenses and that actual expenses may be
greater or less than shown.
The purpose of the above table is to assist the investor in understanding the
various expenses that an investor in the Funds will bear directly or indirectly.
See "Duties Performed by the Manager."
FINANCIAL HIGHLIGHTS
The following financial highlights for the periods ended December 31, 1995
and prior thereto are derived from financial statements which 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>
Income from
Investment Operations Less Distributions
--------------------------------------- --------------------------------------------
Net Realized
Net Asset and
Value at Unrealized Total Dividends Distribution
Beginning Net Gain from from Net from
of Investment (Loss) on Investment Investment Capital Total
Period Income Investments Operations Income Gains Distributions
--------- ---------- ------------ ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Principal Balanced
Fund, Inc.(a)
Year Ended
December 31,
1995 $11.95 $.45 $2.44 $2.89 $(.45) $(.42) $(.87)
1994 12.77 .37 (.64) (.27) (.37) (.18) (.55)
1993 12.58 .42 .95 1.37 (.42) (.76) (1.18)
Six Months Ended
December 31,
1992(b) 12.93 .23 .75 .98 (.47) (.86) (1.33)
Year Ended
June 30,
1992 11.33 .47 1.61 2.08 (.48) - (.48)
1991 10.79 .54 .59 1.13 (.57) (.02) (.59)
1990 11.89 .60 (.48) .12 (.63) (.59) (1.22)
1989 11.75 .62 .30 .92 (.55) (.23) (.78)
Period Ended
June 30, 1988(e) 10.00 .27 1.51 1.78 (.03) - (.03)
Principal Bond
Fund, Inc.
Year Ended
December 31,
1995 10.12 .62 1.62 2.24 (.63) - (.63)
1994 11.16 .72 (1.04) (.32) (.72) - (.72)
1993 10.77 .88 .38 1.26 (.87) - (.87)
Six Months Ended
December 31,
1992(b) 11.08 .45 .13 .58 (.89) - (.89)
Year Ended
June 30,
1992 10.64 .91 .46 1.37 (.93) - (.93)
1991 10.72 .94 (.06) .88 (.96) - (.96)
1990 10.92 .95 (.21) .74 (.94) - (.94)
1989 10.68 1.15 .17 1.32 (.96) (.12) (1.08)
Period Ended
June 30, 1988(e) 10.00 .32 .40 .72 (.04) - (.04)
Principal Capital
Accumulation
Fund, Inc.
Year Ended
December 31,
1995 23.44 .60 6.69 7.29 (.60) (2.33) (2.93)
1994 24.61 .62 (.49) .13 (.61) (.69) (1.30)
1993 25.19 .61 1.32 1.93 (.60) (1.91) (2.51)
Six Months Ended
December 31,
1992(b) 26.03 .31 1.84 2.15 (.64) (2.35) (2.99)
Year Ended
June 30,
1992 23.35 .65 2.70 3.35 (.67) - (.67)
1991 22.48 .74 1.22 1.96 (.79) (.30) (1.09)
1990 23.63 .79 .14 .93 (.81) (1.27) (2.08)
1989 23.23 .77 1.32 2.09 (.68) (1.01) (1.69)
1988 27.51 .60 (1.50) (.90) (.69) (2.69) (3.38)
1987 25.48 .40 4.46 4.86 (.50) (2.33) (2.83)
1986 21.93 .51 6.65 7.16 (.66) (2.95) (3.61)
Principal Emerging
Growth Fund,
Inc.(f)
Year Ended
December 31,
1995 19.97 .22 5.57 5.79 (.22) (.21) (.43)
1994 20.79 .14 .03 .17 (.14) (.85) (.99)
1993 18.91 .17 3.47 3.64 (.17) ( 1.59) (1.76)
Six Months Ended
December 31,
1992(b) 15.97 .10 3.09 3.19 (.21) (.04) (.25)
Year Ended
June 30,
1992 13.93 .21 2.04 2.25 (.21) - (.21)
1991 14.25 .20 .50 .70 (.23) (.79) (1.02)
1990 13.35 .24 .87 1.11 (.20) (.01) (.21)
1989 12.85 .16 1.35 1.51 (.11) (.90) (1.01)
Period Ended
June 30, 1988(e) 10.00 .05 2.83 2.88 (.03) - (.03)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
-------------------------------------------------------
Ratio of
Net
Net Asset Net Assets Ratio of Investment
Value at end of Expenses to Income to Portfolio
at End Total Period (in Average Average Turnover
of Period Return thousands) Net Assets Net Assets Rate
--------- ------ ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Principal Balanced
Fund, Inc.(a)
Year Ended
December 31,
1995 $13.97 24.58% $ 45,403 .66% 4.12% 25.7%
1994 11.95 (2.09)% 25,043 .69% 3.42% 31.5%
1993 12.77 11.06% 21,399 .69% 3.30% 15.8%
Six Months Ended
December 31,
1992(b) 12.58 8.00%(c) 18,842 . 73%(d) .71%(d) 38.4%(d)
Year Ended
June 30,
1992 12.93 18.78% 17,344 .72% 3.80% 26.6%
1991 11.33 11.36% 14,555 .73% 5.27% 27.1%
1990 10.79 .87% 13,016 .74% 5.52% 33.1%
1989 11.89 8.55% 12,751 .74% 5.55% 29.3%
Period Ended
June 30, 1988(e) 11.75 17.70%(c) 11,469 .80%(d) 4.96%(d) 41.7%(d)
Principal Bond
Fund, Inc.
Year Ended
December 31,
1995 11.73 22.17% 35,878 .56% 7.28% 5.9%
1994 10.12 (2.90)% 17,108 .58% 7.86% 18.2%
1993 11.16 11.67% 14,387 .59% 7.57% 14.0%
Six Months Ended
December 31,
1992(b) 10.77 5.33%(c) 12,790 .62%(d) 8.10%(d) 6.7%(d)
Year Ended
June 30,
1992 11.08 13.57% 12,024 .62% 8.47% 6.1%
1991 10.64 8.94% 10,552 .63% 9.17% 2.7%
1990 10.72 7.15% 9,658 .64% 9.09% 0.0%
1989 10.92 13.51% 9,007 .64% 9.18% 12.2%
Period Ended
June 30, 1988(e) 10.68 6.06%(c) 17,598 .58%(d) 8.11%(d) 68.8%(d)
Principal Capital
Accumulation
Fund, Inc.
Year Ended
December 31,
1995 27.80 31.91% 135,640 .51% 2.25% 49.2%
1994 23.44 .49% 120,572 .51% 2.36% 44.5%
1993 24.61 7.79% 128,515 .51% 2.49% 25.8%
Six Months Ended
December 31,
1992(b) 25.19 8.81%(c) 105,355 .55%(d) 2.56%(d) 39.7%(d)
Year Ended
June 30,
1992 26.03 14.53% 94,596 .54% 2.65% 34.8%
1991 23.35 9.46% 76,537 .53% 3.53% 14.0%
1990 22.48 3.94% 74,008 .56% 3.56% 30.2%
1989 23.63 10.02% 68,132 .57% 3.53% 23.5%
1988 23.23 (2.67)% 62,696 .60% 2.76% 26.7%
1987 27.51 22.17% 57,478 .63% 1.99% 16.1%
1986 25.48 38.37% 35,960 .60% 2.63% 37.8%
Principal Emerging
Growth Fund,
Inc.(f)
Year Ended
December 31,
1995 25.33 29.01% 58,520 .70% 1.23% 13.1%
1994 19.97 .78% 23,912 .74% 1.15% 12.0%
1993 20.79 19.28% 12,188 .78% .89% 22.4%
Six Months Ended
December 31,
1992(b) 18.91 20.12%(c) 9,693 .81%(d) 1.24%(d) 8.6%(d)
Year Ended
June 30,
1992 15.97 16.19% 7,829 .82% 1.33% 10.1%
1991 13.93 5.72% 6,579 .89% 1.70% 11.1%
1990 14.25 8.32% 6,067 .88% 1.74% 17.9%
1989 13.35 13.08% 5,509 .90% 1.31% 21.4%
Period Ended
June 30, 1988(e) 12.85 28.72%(c) 4,857 .94%(d) .64%(d) 4.6%(d)
<FN>
(a) Effective May 1, 1994, the name of Principal Managed Fund, Inc. was changed
to Principal Balanced Fund, Inc.
(b) Effective July 1, 1992, the fund changed its fiscal year end from June 30 to
December 31.
(c) Total return amounts have not been annualized.
(d) Computed on an annualized basis.
(e) Period from December 18, 1987, date shares first offered to eligible
purchasers, through June 30, 1988. Net investment income aggregating $.01
per share for the period from the initial purchase of shares on December 10,
1987 through December 17, 1987 was recognized, all of which was distributed
to the Fund's sole stockholder, Principal Mutual Life Insurance Company.
This represented activity of the fund prior to the initial offering of
shares to eligible purchasers.
(f) Effective May 1, 1992, the name of Principal Aggressive Growth Fund, Inc.
was changed to Principal Emerging Growth Fund, Inc.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Income from
Investment Operations Less Distributions
--------------------------------------- --------------------------------------------------
Net Realized
Net Asset and Excess
Value at Unrealized Total Dividends Distribution Distribution
Beginning Net Gain from from Net from Net from
of Investment (Loss) on Investment Investment Investment Capital Total
Period Income Investments Operations Income Income Gains Distributions
--------- ---------- ------------ ---------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal High
Yield Fund, Inc.
Year Ended
December 31,
1995 $ 7.91 $ .76 $ .51 $1.27 $ (.77) $(.02) $ - $ (.79)
1994 8.62 .77 (.72) .05 (.76) - - (.76)
1993 8.38 .80 .23 1.03 (.79) - - (.79)
Six Months Ended
December 31,
1992(a) 8.93 .45 (.10) .35 (.90) - - (.90)
Year Ended
June 30,
1992 8.28 .92 .66 1.58 (.93) - - (.93)
1991 8.96 .99 (.53) .46 (1.14) - - (1.14)
1990 10.37 1.21 (1.35) (.14) (1.22) - (.05) (1.27)
1989 11.01 1.23 (.45) .78 (1.21) - (.21) (1.42)
Period Ended
June 30, 1988(c) 10.00 .67 .49 1.16 (.15) - - (.15)
Principal Money
Market Fund, Inc.
Year Ended
December 31,
1995 1.000 .054 - .054 (.054) - - (.054)
1994 1.000 .037 - .037 (.037) - - (.037)
1993 1.000 .027 - .027 (.027) - - (.027)
Six Months Ended
December 31,
1992(a) 1.000 .016 - .016 (.016) - - (.016)
Year Ended
June 30,
1992 1.000 .046 - .046 (.046) - - (.046)
1991 1.000 .070 - .070 (.070) - - (.070)
1990 1.000 .077 - .077 (.077) - - (.077)
1989 1.000 .083 - .083 (.083) - - (.083)
1988 1.000 .064 - .064 (.064) - - (.064)
1987 1.000 .057 - .057 (.057) - - (.057)
1986 1.000 .070 - .070 (.070) - - (.070)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
-------------------------------------------------------
Ratio of
Net
Net Asset Net Assets Ratio of Investment
Value at end of Expenses to Income to Portfolio
at End Total Period (in Average Average Turnover
of Period Return thousands) Net Assets Net Assets Rate
--------- ------ ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Principal High
Yield Fund, Inc.
Year Ended
December 31,
1995 $ 8.39 16.08% $11,830 .73% 9.09% 35.1%
1994 7.91 .62% 9,697 .73% 9.02% 30.6%
1993 8.62 12.31% 9,576 .74% 8.80% 28.7%
Six Months Ended
December 31,
1992(a) 8.38 4.06%(b) 8,924 .77%(a) 10.33%(a) 20.6%(a)
Year Ended
June 30,
1992 8.93 20.70% 8,556 .77% 11.00% 31.3%
1991 8.28 6.35% 7,085 .82% 12.58% 6.4%
1990 8.96 (1.46)% 6,643 .83% 13.07% 24.2%
1989 10.37 7.88% 6,741 .95% 11.89% 27.8%
Period Ended
June 30, 1988(c) 11.01 11.25%(b) 6,703 .78%(a) 11.71%(a) 58.2%(a)
Principal Money
Market Fund, Inc.
Year Ended
December 31,
1995 1.000 5.59% 32,670 .58% 5.32% N/A
1994 1.000 3.76% 29,372 .60% 3.81% N/A
1993 1.000 2.69% 22,753 .60% 2.64% N/A
Six Months Ended
December 31,
1992(a) 1.000 1.54%(b) 27,680 .59%(c) 3.10%(c) N/A
Year Ended
June 30,
1992 1.000 4.64% 25,194 .57% 4.54% N/A
1991 1.000 7.20% 26,509 .56% 6.94% N/A
1990 1.000 8.37% 26,588 .57% 8.05% N/A
1989 1.000 8.59% 20,707 .61% 8.40% N/A
1988 1.000 6.61% 14,571 .64% 6.39% N/A
1987 1.000 5.78% 11,902 .65% 5.68% N/A
1986 1.000 7.35% 8,896 .69% 7.06% N/A
<FN>
(a) Effective July 1, 1992 the fund changed its fiscal year end from June 30 to
December 31.
(b) Total return amounts have not been annualized.
(c) Computed on an annualized basis.
(d) Period from December 19, 1987, date shares first offered to eligible
purchasers, through June 30, 1988. Net investment income aggregating $.06
per share for the period from the initial purchase of shares on December 10,
1987 through December 17, 1987 was recognized, all of which was distributed
to the Fund's sole stockholder, Principal Mutual Life Insurance Company.
This represented activity of the fund prior to the initial offering of
shares to eligible purchasers.
</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 Principal Funds currently include two Funds which seek capital
appreciation through investments in equity securities (Principal Capital
Accumulation Fund and Principal Emerging Growth Fund) and one Fund which seeks a
total investment return including both capital appreciation and income through
investments in equity and debt securities (Principal Balanced Fund). These three
Funds are collectively referred to as the Growth-Oriented Funds.
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 American Depository Receipts based
on any of the foregoing securities. The Capital Accumulation and Emerging Growth
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. 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.
Principal Balanced Fund
The investment objective of Principal Balanced Fund is to generate a total
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 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. See the discussion of
the Principal 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 short-term money market investments in which the Fund may invest
include the following: 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
include 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 Capital Accumulation Fund
The primary objective of Principal Capital Accumulation 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
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 objectives, investments will be made in securities which as a
group appear to offer long-term prospects for capital and income growth.
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 Emerging Growth Fund
The objective of Principal Emerging Growth Fund is to achieve 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 Emerging Growth Fund may invest, for any period of
time, in any industry, in any kind of growth-oriented company, whether new and
unseasoned or well known and established.
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 prepared to experience above-average
fluctuations in net asset value, to assume above-average investment risk in
search of above-average return, and to consider the Fund as a long-term
investment and not as a vehicle for seeking short-term profits. Moreover, since
the Fund will not be seeking current income, investors should not view a
purchase of Fund shares as a complete investment program.
INCOME-ORIENTED FUNDS
The Principal Funds currently include two Funds which seek a high level of
income through investments in fixed-income securities (Principal Bond Fund and
Principal High Yield Fund) collectively referred to as the "Income-Oriented
Funds." 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. Each Fund's 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 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, exclusive of cash items, in one or more of the following kinds of
securities: (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 Standard & Poor's Corporation (AAA, AA, A or BBB) or by
Moody's Investors Service, Inc. (Aaa, Aa, A or Baa) or which, if lower-rated or
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 other fixed income securities, including domestic and
foreign corporate debt securities or preferred stocks, in common stocks that
provide returns that compare favorably with the yields on fixed income
investments, and in 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. 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). See the discussion of the Principal High
Yield Fund for information concerning risks associated with below investment
grade bonds.
During the year ended December 31, 1995, 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
Aaa .09%
Aa 1.02%
A 20.32%
Baa 69.78%
Ba 8.79%
* The above percentages for A rated securities include 1.42% 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 Standard & Poor's 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 Standard & Poor's 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 may
for temporary defense purposes invest up to 100% of its assets in cash or cash
equivalents.
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 non-rated (high risk) 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 held in cash or cash equivalents, or
invested in common stocks and other equity securities 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 Investors Service, Inc. ("Moody's") or BB+ or lower by Standard & Poor's
Corporation ("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 Caa or lower by Moody's and CCC or lower 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 high 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.
Congress recently enacted legislation requiring federally-insured savings
and loan associations to divest themselves of investments in high yield
securities. This legislation might increase the supply of securities available
for purchase in the secondary market and, potentially, lower the value of the
securities held by the Fund.
Investors should carefully consider their ability to assume the risks of
investing in lower-rated securities before making an investment in the High
Yield 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 year ended December 31, 1995 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 3.03%
Ba 43.42%
B 52.85%
C .70%
The above percentages for B rated securities include 2.39% unrated
securities 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.
MONEY MARKET FUND
The Principal Funds also include a Fund which invests primarily in
short-term securities, Principal Money Market Fund. Securities in which the
Money Market Fund will invest may not yield as high a level of current income as
securities of low quality and longer maturities which generally have less
liquidity, greater market risk and more fluctuation.
The Money Market Fund will limit its portfolio investments to United States
dollar denominated instruments that its board of directors determines present
minimal credit risks and which are at the time of acquisition "Eligible
Securities" as that term is defined in regulations issued under the Investment
Company Act of 1940. Eligible Securities include:
(1) A security with the 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 at the time of issuance was a long-term security that has 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 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 below the 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, below the highest
rating category for short-term obligations;
(3) Securities which are unrated but are determined by the Fund's board of
directors to be of comparable quality to securities rated below the
highest rating category for short-term debt obligations. The Fund will
maintain a dollar-weighted average portfolio maturity of 90 days or
less.
The objective of Principal Money Market 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 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.
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.
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 times when such sales might otherwise not be
desirable. The Fund's right to borrow to facilitate redemptions may reduce the
need for such sales. It is the Fund's policy to be as fully invested as
reasonably practical at all times to maximize current income.
Since portfolio assets will consist of short-term instruments, replacement
of portfolio securities will occur frequently. However, since the 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 the investment objective.
A shareholder's rate of return will vary with the general interest rate
levels applicable to the money market instruments in which the Fund invests. The
rate of return and the net asset value will be affected by such other factors as
sales of portfolio securities prior to maturity and the Fund's operating
expenses.
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.
Diversification
Each Fund is subject to the diversification requirements of Section 817(h)
of the Internal Revenue Code (the "Code") which must be met at the end of each
quarter of the year (or within 30 days thereafter). Regulations issued by the
Secretary of the Treasury have the effect of requiring each Fund to invest no
more than 55% of its total assets in securities of any one issuer, no more than
70% in the securities of any two issuers, no more than 80% in the securities of
any three issuers, and no more than 90% in the securities of any four issuers.
For this purpose, the United States Treasury and each U.S. Government agency and
instrumentality is considered to be a separate issuer. Thus, the Government
Securities Fund intends to invest in U.S. Treasury securities and in securities
issued by at least four U.S. Government agencies or instrumentalities in the
amounts necessary to meet those diversification requirements at the end of each
quarter of the year (or within thirty days thereafter).
In the event any of the Funds do not meet the diversification requirements
of Section 817(h) of the Code, the contracts funded by shares of the Funds will
not be treated as annuities or life insurance for Federal income tax purposes
and the owners of the Funds will be subject to taxation on their share of the
dividends and distributions paid by the Funds.
Foreign Securities
Each of the following Principal Funds has adopted investment restrictions
that limit its investments in foreign securities to the indicated percentage of
its assets: Bond, Capital Accumulation and High Yield - 20%; Balanced Fund and
Emerging Growth - 10%. 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.
Moreover, securities of many foreign issuers may be less liquid and their prices
more volatile than those of comparable domestic issuers. In addition,
transactions in foreign securities may be subject to higher costs, and the time
for settlement of transactions in foreign securities may be longer than the
settlement period for domestic issuers. A Fund's investment in foreign
securities may also result in higher custodial costs and the costs associated
with currency conversions.
Repurchase Agreements
Each of the Funds, except the Capital Accumulation, may enter into
repurchase agreements with, and each of the Funds, except the Capital
Accumulation and Money Market Funds, 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 Funds' 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 intend 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 10% of its
total assets or (ii) to loan securities in excess of 30% of its total assets.
Forward Commitments
From time to time, each of the Funds 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 Money Market 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.
Borrowing
As a matter of fundamental policy, each Fund may borrow money only for
temporary or emergency purposes. The Balanced Fund, Bond Fund, Capital
Accumulation Fund, High Yield Fund and Money Market Fund may borrow only from
banks. Further, each may borrow only in an amount not exceeding 5% of its
assets, except the Capital Accumulation Fund 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 the Money Market 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
The Balanced Fund, Bond Fund, Emerging Growth Fund and High Yield Fund 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.
The Statement of Additional Information includes further information
concerning the Funds' investment policies and applicable investment
restrictions. Each Fund's investment objective and certain investment
restrictions designated as such in this Prospectus or the Statement of
Additional Information are fundamental policies that may not be changed without
shareholder approval. All other investment policies described in the Prospectus
and the Statement of Additional Information for a Fund are not fundamental and
may be changed by the Board of Directors of the Fund without shareholder
approval.
MANAGER AND SUB-ADVISOR
The Manager for the Funds is Princor Management Corporation (the
"Manager"), an indirectly wholly-owned subsidiary of Principal Mutual Life
Insurance Company, a mutual life insurance company organized in 1879 under the
laws of the State of Iowa. The address of the Manager is The Principal Financial
Group, Des Moines, Iowa 50392. The Manager was organized on January 10, 1969,
and since that time has managed various mutual funds sponsored by Principal
Mutual Life Insurance Company. As of December 31, 1995, the Manager served as
investment advisor for 25 such funds with assets totaling approximately $2.9
billion.
The Manager has executed an agreement with Invista Capital Management, Inc.
("Invista") under which Invista has agreed to assume the obligations of the
Manager to provide investment advisory services for the Balanced 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 December 31, 1995 were approximately $15.7
billion. Invista's address is 1500 Hub Tower, 699 Walnut, Des Moines, Iowa
50309.
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:
Primarily
Fund Responsible Since Person Primarily Responsible
- ----------------- ------------------- ---------------------------------
Balanced April, 1993 Judith A. Vogel, CFA (BA degree,
Central College). Vice President,
Invista Capital Management, Inc.
since 1987.
Bond December, 1987 Donald D. Brattebo (BBA degree,
(Fund's inception) Upper Iowa University). Second Vice
President, Principal Mutual Life
Insurance Company since 1990; Prior
thereto, Director, Investment
Securities.
Capital November, 1969 David L. White, CFA (BBA degree,
Accumulation (Fund's inception) University of Iowa). Executive Vice
President, Invista Capital Management,
Inc. since 1984.
Emerging Growth December, 1987 Michael R. Hamilton, (BMBA degree,
(Fund's inception) Bellarmine College). Vice President,
Invista Capital Management, Inc.
since 1987.
High Yield December, 1987 James K. Hovey, CFA (MBA degree
(Fund's inception) University of Iowa). Director -
Investment Securities, Principal
Mutual Life Insurance Company since
1990; Prior thereto, Assistant
Director Investment Securities.
DUTIES PERFORMED BY THE MANAGER AND SUB-ADVISOR
Under Maryland law, the business and affairs of each of the Funds are
managed under the direction of its Board of Directors. The investment services
and certain other services referred to under the heading "Cost of Manager's
Services" in the Statement of Additional Information are furnished to the Funds
under the terms of a Management Agreement between each of the Funds and the
Manager, and for the Balanced Fund, a Sub-Advisory Agreement between the Manager
and Invista. 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 compensation paid by each Fund to the Manager for the fiscal year ended
December 31, 1995 was, on an annual basis, equal to the following percentage of
average net assets:
Total
Manager's Annualized
Fund Fee Expenses
--------------------------- --------- ----------
Balanced Fund .60% .66%
Bond Fund .50% .56%
Capital Accumulation Fund .49% .51%
Emerging Growth Fund .65% .70%
High Yield Fund .60% .73%
Money Market Fund .50% .58%
The Manager, or Invista, may purchase at its 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. The Investment Service
Agreements for the Capital Accumulation, Emerging Growth and Government
Securities Funds also include as a party Invista Capital Management, Inc., an
indirectly wholly-owned subsidiary of Principal Mutual Life Insurance Company,
and also provide that the subsidiaries of Principal Mutual Life Insurance
Company will furnish the same items and be reimbursed by the Manager for their
costs incurred in this regard.
The Funds may from time to time execute transactions for portfolio
securities with, and pay related brokerage commissions to, The Principal/Eppler,
Guerin and Turner, Inc., a broker-dealer that is an affiliate of the Distributor
and Manager for each of the Funds.
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.
MANAGERS' COMMENTS
Princor Management Corporation and Invista are staffed with investment
professionals who manage each individual fund. Comments by these individuals in
the following paragraphs summarize in capsule form the general strategy and
recent results of each fund over the past year. The accompanying charts display
results for the past 10 years or the life of the fund, whichever is shorter.
Average Annual Total Return figures provided for each fund in the graphs below
reflect all expenses of the fund and assume all distributions are reinvested at
net asset value. The figures do not reflect expenses of the variable life
insurance contracts or variable annuity contracts that purchase fund shares;
performance figures for the divisions of the contracts would be lower than
performance figures for the funds due to the additional contract expenses. Past
performance is not predictive of future performance. Returns and net asset value
fluctuate. Shares are redeemable at current net asset value, which may be more
or less than original cost.
The various indices included in the graphs below are unmanaged and do not
reflect any commissions or fees which would be incurred by an investor
purchasing the securities included in the index.
Growth-Oriented Funds
Principal Balanced Fund
This balanced portfolio is designed to combine stocks, bonds and cash in a
relatively conservative mix which provides both capital appreciation and income
to the shareholder without taking on undue risk. Financial markets cooperated in
helping us to achieve our objectives over the year, as both stocks and bonds
delivered double digit returns for the year ended December 31, 1995. The economy
backed off from extremely strong growth in late 1994 to register modest advances
over the succeeding four quarters. Inflation remained benign over the year and
still is not a concern today. It appears the Federal Reserve did a remarkable
job of managing interest rates in order to cool the economy without plunging it
into recession. Long term interest rates fell about 2% during 1995, enabling the
bond market to surge. Corporate earnings continued their robust growth, even in
the fourth year of an economic expansion, thanks to widespread increases in
productivity and almost zero growth in labor costs. These higher earnings
boosted common stocks, while lower interest rates enabled stock prices to rise
without the market appearing overvalued. Clearly, 1995 was a great year in the
financial markets. Absolute returns were very attractive for balanced
portfolios. The asset structure of the Principal Balanced fund was a bit more
cautious than the average balanced mutual fund during the year. Just over 50% of
the portfolio's holdings were in equity-related securities with the balanced in
fixed income. According to Morningstar Mutual Funds, the average balanced fund
had 53% allocated to common stocks. Although our asset allocation was less
aggressive than average, our returns were nearly even with the Lipper Balanced
Fund Average return for the year. There is no independent market index against
which to measure returns of balanced portfolios, however, we show the S&P 500
stock index for your information.
Principal Balanced Fund, Inc.*
Fund Lipper
Total S&P 500 Mid Cap
Year Ended December 31, Return Index Index
10,000 10,000 10,000
1988 11,637 11,661 11,229
1989 12,982 15,356 13,429
1990 12,147 14,877 13,355
1991 16,321 19,412 16,930
1992 18,410 20,892 18,122
1993 20,447 22,995 20,066
1994 20,019 23,296 19,561
1995 24,941 32,037 24,482
Total Returns *
As of December 31, 1995
Since Inception Date
1 Year 5 Year 12/18/87
24.58% 15.48% 12.05%
Principal Capital Accumulation Fund
David L. White
Our strategy with this portfolio is to hold common stocks of a wide number of
established companies and to vary the emphasis among various types of companies
based on our view of the economy and the value of companies based on estimates
of future free cash flows. While it is impossible to ignore short-term
influences, we tend to take the longer view. Our approach might also be
described as "top down". We look at the big picture, then move to industries,
geography, markets, etc., and from there to selection of specific investments.
The Fund outperformed the Lipper Growth and Income Average while lagging behind
the S&P 500 for the year, but outperformed the S&P 500 during the 4th quarter of
1995 mainly due to the increase in emphasis in the consumer noncyclical area.
During the past six quarters, the portfolio has moved from being substantially
overweighted in cyclical stocks to being neutral. The economic recovery that
commenced March 1991 is now nearing its end. Cyclical stocks do not do well in
the latter stages of an economic recovery. Aggregate corporate profit margins
are near all time highs, leaving them nowhere to go but down. This will make
growth in total corporate profits difficult to achieve. Therefore, we have
substantially increased the portfolios exposure to companies that will continue
to grow earnings even if the economy or corporate profits stop growing.
Principal Capital Accumulation Fund, Inc.*
Fund S&P 500 Lipper
Total Stock Growth & Income
Year Ended December 31, Return Index Fund Average
10,000 10,000 10,000
1986 11,619 11,868 11,629
1987 12,371 12,499 11,843
1988 14,156 14,575 13,739
1989 16,447 19,193 16,973
1990 14,825 18,595 16,218
1991 20,557 24,263 20,934
1992 22,515 26,112 22,814
1993 24,269 28,742 25,449
1994 24,388 29,117 25,210
1995 32,170 40,043 32,979
Total Returns *
As of December 31, 1995
1 Year 5 Year 10 Year
31.91% 16.76% 12.39%
Principal Emerging Growth Fund
Mike Hamilton
The Emerging Growth Fund performed better than the Lipper Mid Cap Average for
the year. This was a period of time the NASDAQ Composite return was the second
highest in its 24 year history. The portfolio has been structured to take
advantage of our broad themes of productivity enhancements, an aging population
trend and lower interest rates. The structure has resulted in investment
concentration in technology, financials, growth cyclicals and healthcare. We
have chosen to underweight utilities, energy and consumer areas. The Emerging
Growth Fund trailed the S&P 500 for 1995 primarily because of the differences in
sector weighting compared to the market. The emphasis on cyclical growth and
financial stocks hurt performance against benchmarks. An economic slowdown
seemed to be anticipated by investors and they sold off economically sensitive
stocks.
Going forward, the portfolio remains positioned to capture growth from an
elongated economic cycle. The current slowing in economic activity should set
the stage for further growth; therefore we continue to over-weight growth
cyclicals. These companies are low-cost producers with niche markets whose
revenues should benefit from the trend toward more outsourcing.
Fund Lipper
Total S&P 500 MID CAP
Year Ended December 31, Return Index Index
10,000 10,000 10,000
1988 12,369 11,661 11,476
1989 15,070 15,356 14,586
1990 13,186 14,877 14,067
1991 20,240 19,412 21,275
1992 23,264 20,892 23,213
1993 27,750 22,995 26,625
1994 27,967 23,296 26,079
1995 36,080 32,037 34,469
Total Returns*
As of December 31, 1995
Since Inception
1 Year 5 Year Date 12/18/87
29.01% 22.30% 17.31%
Important Notes of the Growth-Oriented Funds:
Standard & Poor's 500 Stock Index: an unmanaged index of 500 widely held common
stocks representing industrial, financial, utility and transportation companies
listed on the New York Stock Exchange, American Stock Exchange and the
Over-the-Counter market.
Lipper Balanced Fund Average: this average consists of mutual funds which
attempt to conserve principal by maintaining at all times a balanced portfolio
of both stocks and bonds. Typically, the stock/bond ratio ranges around 60%/40%.
The one year average currently contains 220 mutual funds.
Lipper Growth & Income Fund Average: this average consists of funds which
combine a growth of earnings orientation and an income requirement for level
and/or rising dividends. The one year average currently contains 438 funds.
Lipper Mid Cap Fund Average: This average consists of funds which by prospectus
or portfolio practice, limit their investments to companies with average market
capitalizations and/or revenues between $800 million and the average market
capitalization of the Wilshire 4500 Index (as captured by the Vanguard Index
Extended Market Fund). The one-year average currently contains 106 funds.
Income-Oriented Funds
Principal Bond Fund
Don Brattebo
1995 was an extremely good year for fixed income securities as interest rates
declined dramatically throughout the year. The Principal Bond Fund was no
exception, posting double digit total returns and erasing the slight losses
experienced in 1994. Our relatively long portfolio duration contributed to our
superior performance versus the Lipper BAA Corporate Index during 1995. The high
absolute level of returns for the Fund was also driven by investment grade
corporate securities outperforming most other fixed income alternatives. The
Fund's total return also compares favorably to the Lipper BAA Corporate Index
over the life of the Fund. We believe the above average long-term performance is
the result of consistently following our investment strategy of being fully
invested in a well diversified portfolio of investment grade corporate issues
and not betting on interest rates through changes in portfolio duration or
purchasing callable securities. We will continue to follow this strategy and
expect investment grade corporates to continue to be a good fixed income
investment selection.
Principal Bond Fund, Inc.*
Fund Lehman Lipper
Total BAA BBB
Year Ended December 31, Return Index Avg
10,000 10,000 10,000
1988 10,991 11,129 10,900
1989 12,514 12,699 12,060
1990 13,167 13,595 12,751
1991 15,369 16,113 15,020
1992 16,810 17,512 16,258
1993 18,771 19,665 18,261
1994 18,227 18,707 17,447
1995 22,268 22,959 20,948
Total Returns *
As of December 31, 1995
Since Inception
1 Year 5 Year date 12/18/87
22.17% 11.08% 10.48%
Principal High Yield Fund
Ken Hovey
As shown in the accompanying graph, 1995 was a good year for the high yield
market. Although returns were good relative to most other years, they still
trailed other fixed income and equity categories. The key reasons high yield had
lower returns than investment grade bonds, government securities or other fixed
income categories is because of the following: (1) an additional premium or
spread over risk free bonds was added during the year as defaults rates
increased; (2) many high yield bonds are callable by their issuers which caps
upside potential in a strong bond market like 1995; (3) high yield bonds usually
have a fairly short duration, i.e. time weighted present value of future
payments, as compared to other bonds which limits the upward price movement when
interest rates fall. The Fund performed in line with the Lipper High Current
Yield Fund Average and trailed the Lehman Brothers High Yield Index. We use
these as benchmarks but do not attempt to duplicate them. Performance
differences are mostly the result of differences in weighting of rating classes
and industry groups. Due to our fairly defensive portfolio, we did not enjoy
much of the rally in some of the cyclical industries and weaker companies. Most
of what underperformance we had came in the third quarter when we had one
anticipated default which subsequently occurred on November 1, 1995. This
default has since remedied itself in the first quarter of 1996. Going forward,
we expect to remain more defensive and hold better quality on average than most
funds. We believe this position provides a good risk/return relationship
opportunity for investors.
Principal High Yield Fund, Inc.*
Fund Lehman Lipper
Total High Yield Narrow
Year Ended December 31, Return Index Index
10,000 10,000 10,000
1988 11,492 11,524 11,298
1989 11,735 11,620 11,239
1990 10,831 10,506 10,059
1991 13,788 15,346 13,876
1992 15,798 17,764 16,352
1993 17,743 20,803 19,500
1994 17,854 20,593 18,753
1995 20,725 24,549 21,844
Total Returns *
As of December 31, 1995
Since Inception
1 Year 5 Year Date 12/18/87
16.08% 13.86% 9.49%
Important Notes of the Income-Oriented Funds:
Lehman Brothers, BAA Corporate Index: an unmanaged index of all publicly issued
fixed rate nonconvertible, dollar-denominated, SEC-registered corporate debt
rated Baa or BBB by Moody's or S&P.
Lipper Corporate Debt BBB Rated Funds Average: this average consists of mutual
funds investing at least 65% of their assets in corporate and government debt
issues rated by S&P or Moody's in the top four grades. The one year average
currently contains 82 mutual funds.
Lehman Brothers High Yield Index: an unmanaged index of all publicly issued
fixed, dollar-denominated, SEC-registered corporate debt rated Ba1 or lower with
at least $100 million outstanding and one-year or more to maturity.
Lipper High Current Yield Fund Average: this average consists of mutual funds
investing in high (relative) current yield fixed income securities with no
quality or maturity restrictions. The mutual funds tend to invest in lower grade
debt issues. The one year average currently contains 119 mutual funds.
Note: Mutual fund data from Lipper Analytical Services, Inc.
DETERMINATION OF NET ASSET VALUE OF FUND SHARES
The net asset value of each Fund's shares is determined daily, Monday
through Friday, as of the close of trading on the New York Stock Exchange,
except on days on which changes in the value of the Fund's portfolio securities
will not materially affect the current net asset value of the 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 net asset value per
share of each Fund is determined by dividing the value of the Fund's securities
plus all other assets, less all liabilities, by the number of Fund shares
outstanding.
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. Other securities are valued by
using market quotations, prices provided by market makers or estimates of market
values obtained from yield data and other factors relating to instruments or
securities with similar characteristics in accordance with procedures
established in good faith by the Board of Directors. Securities with remaining
maturities of 60 days or less are valued at amortized cost when it is determined
by the Board that amortized cost reflects fair value. Other assets are valued at
fair value as determined in good faith by the Board of Directors of the Fund.
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
The Money Market Fund values its securities at amortized cost. For a
description of this calculation procedure see the Funds' Statement of Additional
Information.
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. 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. 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. Any performance data quoted for the Funds represents only
historical performance and is not intended to indicate future performance of the
Funds. The calculation of average annual total return and yield for the Funds
does not include fees and charges of the separate accounts that invest in the
Funds and, therefore, does not reflect the investment performance of those
separate accounts. For further information on how the Funds calculate yield and
total return figures, see the Statement of Additional Information.
Average Annual Total Return
Each Fund may advertise its respective average annual total return. 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. 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.
Yield and Effective Yield
From time to time the Money Market Fund may advertise its respective 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 Money Market 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. A shareholder's 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.
INCOME DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
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, the Funds intend 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 amounts so
distributed to investors.
Any dividends from the net investment income of the Funds (except the Money
Market Fund) will normally be payable to the shareholders annually, and any net
realized gains will be distributed annually. All dividends and capital gains
distributions are applied to purchase additional Fund shares at net asset value
as of the payment date without the imposition of any sales charge.
Each Fund will notify shareholders of the portion of each distribution
which constitutes investment income or capital gain. In view of the complexity
of tax considerations, it is advisable for Eligible Purchasers considering the
purchase of shares of the Funds to consult with tax advisors on the federal and
state tax aspects of their investments and redemptions.
Money Market Fund
The Money Market Fund declares dividends of all its daily net investment
income on each day the Fund's net asset value per share is determined. Dividends
are payable daily and are automatically reinvested in full and fractional shares
of the Fund at the then current net asset value unless a shareholder requests
payment in cash.
Net investment income, 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 the Fund.
Since the Fund's policy is, under normal circumstances, to hold portfolio
securities to maturity and to value portfolio securities at amortized cost, it
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 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 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 investing 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.
The Board of Directors 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 affect on shareholders.
ELIGIBLE PURCHASERS AND PURCHASE OF SHARES
Only Eligible Purchasers may purchase shares of the Funds. Eligible
Purchasers are limited to (a) separate accounts of Principal Mutual Life
Insurance Company or of other insurance companies; (b) Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof; (c) trustees or other
managers of any qualified profit sharing, incentive or bonus plan established by
Principal Mutual Life Insurance Company or any subsidiary or affiliate thereof
for the employees of such company, subsidiary or affiliate. Such trustees or
managers may purchase Fund shares only in their capacities as trustees or
managers and not for their personal accounts. The Board of Directors of each
Fund reserves the right to broaden or limit the designation of Eligible
Purchasers.
Principal Balanced, Principal Bond, Principal Capital Accumulation Fund,
Principal Emerging Growth and Principal Money Market Fund each serve as an
underlying investment medium for variable annuity contracts and variable life
insurance policies that are funded in separate accounts established by Principal
Mutual Life Insurance Company. It is conceivable that in the future it may be
disadvantageous for variable life insurance separate accounts and variable
annuity separate accounts to invest in the Funds simultaneously. Although
neither Principal Mutual Life Insurance Company nor the Funds currently foresee
any such disadvantages either to variable life insurance policy owners or to
variable annuity contract owners, each Fund's Board of Directors intends to
monitor events in order to identify any material conflicts between such policy
owners and contract owners and to determine what action, if any, should be taken
in response thereto. Such action could include the sale of Fund shares by one or
more of the separate accounts, which could have adverse consequences. Material
conflicts could result from, for example, (1) changes in state insurance laws,
(2) changes in Federal income tax law, (3) changes in the investment management
of the Fund, or (4) differences in voting instructions between those given by
policy owners and those given by contract owners.
Shares are purchased from Princor Financial Services Corporation, the
principal underwriter for the Funds. There are no sales charges on the Funds'
shares. There are no restrictions on amounts to be invested in the Funds'
shares.
Shareholder accounts for each Fund will be maintained under an open account
system. Under this system, an account is automatically opened and maintained for
each new investor. Each investment is confirmed by sending the investor a
statement of account showing the current purchase and the total number of shares
then owned. The statement of account is treated by each Fund as evidence of
ownership of Fund shares in lieu of stock certificates, and unless written
request is made to the Fund, stock certificates will not be issued or delivered
to investors. Certificates, which can be stolen or lost, are unnecessary except
for special purposes such as collateral for a loan. Fractional interests in the
Funds' shares are reflected to three decimal places in the statement of account,
but any stock certificates will be issued only for full shares owned.
If an offer to purchase shares is received by any of the Funds before the
close of trading on the New York Stock Exchange, the shares will be issued at
the offering price (net asset value of Fund shares) computed on that day. If an
offer is received after the close of trading or on a day which is not a trading
day, the shares will be issued at the offering price computed on the first
succeeding day on which a price is determined. Dividends on the Money Market
Fund shares will be paid on the next day following the effective date of a
purchase order.
SHAREHOLDER RIGHTS
The following information is applicable to each of the Principal Funds.
Each Fund share is entitled to one vote either in person or by proxy at all
shareholder meetings for that Fund. This includes the right to vote on the
election of directors, selection of independent accountants and other matters
submitted to meetings of shareholders. Each share has equal rights with every
other share as to dividends, earnings, voting, assets and redemption. Shares are
fully paid and non-assessable, and have no preemptive or conversion rights.
Shares may be issued as full or fractional shares, and each fractional share has
proportionately the same rights, including voting, as are provided for a full
share. Shareholders of each of these Funds may remove any director with or
without cause by the vote of a majority of the votes entitled to be cast at a
meeting of shareholders.
The bylaws of each Fund provide that the Board of Directors of the Fund may
increase or decrease the aggregate number of shares which the Fund has authority
to issue without a shareholder vote.
The bylaws of each Fund also provide that the Fund need not hold an annual
meeting of shareholders in any year in which none of the following is required
to be acted on by shareholders under the Investment Company Act of 1940:
election of directors; approval of investment advisory agreement; ratification
of selection of independent public accountants; and approval of distribution
agreement. 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.
Shareholder inquiries should be directed to the applicable Fund at The
Principal Financial Group, Des Moines, Iowa 50392.
NON-CUMULATIVE VOTING: The Funds' shares have non-cumulative voting rights
which means that the holders of more than 50% of the shares voting for the
election of directors of a Fund can elect 100% of the directors if they choose
to do so, and in such event, the holders of the remaining shares voting for the
election of directors will not be able to elect any directors.
Principal Mutual Life Insurance Company votes each Fund's shares allocated
to each of its separate accounts registered under the Investment Company Act of
1940 and attributable to variable annuity contracts or variable life insurance
policies participating therein in accordance with instructions received from
contract or policy holders, participants and annuitants. Other shares of each
Fund held by each registered separate account, including those for which no
timely instructions are received, are voted in proportion to the instructions
that are received with respect to contracts or policies participating in that
separate account. Shares of each of the Funds held in the general account of
Principal Mutual Life Insurance Company or in its unregistered separate accounts
are voted in proportion to the instructions that are received with respect to
contracts and policies participating in its registered and unregistered separate
accounts. If Principal Mutual determines pursuant to applicable law that a
Fund's shares held in one or more separate accounts or in its general account
need not be voted pursuant to instructions received with respect to
participating contracts or policies, it then may vote those Fund shares in its
own right.
REDEMPTION OF SHARES
Except for the third paragraph below, most of the following discussion of
redemption procedures is relevant only to Eligible Purchasers other than
variable annuity and variable life separate accounts of Principal Mutual Life
Insurance Company, and its wholly-owned subsidiaries.
Each Fund will redeem its shares upon request. There is no charge for
redemption. If no certificates have been issued, a shareholder simply writes a
letter to the appropriate Fund requesting redemption of any part or all of the
shares. The letter must be signed exactly as the account is registered. If
certificates have been issued, they must be properly endorsed and forwarded with
the request. If payment is to be made to the registered shareholder or joint
shareholders, 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. The
price at which the shares are redeemed will be the net asset value per share as
next computed after the request (with appropriate certificate, if any) is
received by the Fund in proper and complete form. The amount received for shares
upon redemption may be more or less than the cost of such shares depending upon
the net asset value at the time of redemption.
Redemption proceeds will be sent within three business days after receipt
of request for redemption in proper form. However, each Fund may suspend the
right of redemption during any period when (a) trading on the New York Stock
Exchange is restricted as determined by the Securities and Exchange Commission
or such Exchange is closed for other than weekends and holidays; (b) an
emergency exists, as determined by the Securities and Exchange Commission, as a
result of which (i) disposal by the Fund of securities owned by it is not
reasonably practicable, or (ii) it is not reasonably practicable for the Fund
fairly to determine the value of its net assets; or (c) the Commission by order
so permits for the protection of security holders of the Fund. A Fund will
redeem only those shares for which it has good payment. To avoid the
inconvenience of such a delay, shares may be purchased with a certified check,
bank cashier's check or money order. During the period prior to the time a
redemption from the Money Market Fund is effective, dividends on such shares
will accrue and be payable and the shareholder will be entitled to exercise all
other rights of beneficial ownership.
Restricted Transfer: Shares of each of the Funds may be transferred to an
Eligible Purchaser. However, whenever any of the Funds is requested to transfer
shares to other than an Eligible Purchaser, the Fund has the right at its
election to purchase such shares at their net asset value next effective
following the time at which the request for transfer is presented; provided,
however, that the Fund must notify the transferee or transferees of such shares
in writing of its election to purchase such shares within seven (7) days
following the date of such request and settlement for such shares shall be made
within such seven-day period.
ADDITIONAL INFORMATION
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. The
custodian performs no managerial or policymaking functions for the Funds.
Organization and Share Ownership: The Funds were incorporated in the state
of Maryland on the following dates: Balanced Fund - November 26, 1986; Bond Fund
- - November 26, 1986; Capital Accumulation 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); Emerging Growth Fund - February
20, 1987; High Yield Fund - December 2, 1986; and Money Market Fund - June 10,
1982. Principal Mutual Life Insurance Company owns 100% of each Fund's
outstanding shares.
Capitalization: The authorized capital stock of each Fund consists of
100,000,000 shares of common stock (500,000,000 for Principal Money Market Fund,
Inc.), $.01 par value.
Financial Statements: Copies of the financial statements of each Fund will
be mailed to each shareholder of that Fund semi-annually. 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 the Funds' Statement of Additional Information can be
obtained upon request, free of charge, by writing or telephoning the Fund. 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, The
Principal Financial Group, Des Moines, Iowa 50392-0200, is the principal
underwriter for each of the Principal Funds.
The Principal(R) Mutual Funds ("Principal Funds") described in this
Prospectus are a family of separately incorporated, diversified, open-end
management investment companies, commonly called mutual funds, which provide the
following range of investment objectives:
Growth-Oriented Funds
PRINCIPAL Balanced Fund, Inc. seeks to generate a total return consisting of
current income and capital appreciation while assuming reasonable risks in
furtherance of the investment objective.
PRINCIPAL Capital Accumulation Fund, Inc. seeks to achieve primarily long-term
capital appreciation and secondary growth of investment income through the
purchase primarily of common stocks, but the Fund may invest in other
securities.
PRINCIPAL Emerging Growth Fund, Inc. seeks to achieve capital appreciation by
investing primarily in securities of emerging and other growth-oriented
companies.
PRINCIPAL Growth Fund, Inc. seeks growth of capital through the purchase
primarily of common stocks, but the Fund may invest in other securities.
PRINCIPAL 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.
Income-Oriented Funds
PRINCIPAL Bond Fund, Inc. seeks to provide as high a level of income as is
consistent with preservation of capital and prudent investment risk.
PRINCIPAL Government Securities Fund, Inc. seeks a high level of current income,
liquidity 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.
Money Market Fund
PRINCIPAL Money Market 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 all of its assets in a portfolio of
money market instruments.
An investment in the Money Market fund 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 ought to 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 Statement of Additional
Information, dated May 1, 1996. The Statement of Additional Information is
incorporated by reference into this Prospectus. A copy of the Statement of
Additional Information can be obtained free of charge by writing or telephoning:
Principal Mutual Funds
The Principal Financial Group
Des Moines, IA 50392
Telephone 1-800-247-4123
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Date of this Prospectus is May 1, 1996.
TABLE OF CONTENTS
Page
Summary ....................................................... 3
Financial Highlights............................................ 5
Investment Objectives, Policies and Restrictions................ 7
Certain Investment Policies and Restrictions.................... 14
Manager and Sub-Advisor ....................................... 16
Duties Performed by the Manager and Sub-Advisor................. 17
Managers' Comments.............................................. 18
Determination of Net Asset Value of Fund Shares................. 22
Performance Calculation......................................... 23
Income Dividends, Distributions and Tax Status.................. 24
Eligible Purchasers and Purchase of Shares...................... 24
Shareholder Rights ............................................. 25
Redemption of Shares............................................ 26
Additional Information.......................................... 26
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. 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.
SUMMARY
The following summarized information should be read in conjunction with the
detailed information appearing elsewhere in this Prospectus.
The Principal Funds are separately incorporated, open-end diversified
management investment companies.
Who may purchase shares of the Funds?
Shares of the Funds are available only to Eligible Purchasers which are
limited to: (a) separate accounts of Principal Mutual Life Insurance Company or
of other insurance companies; (b) Principal Mutual Life Insurance Company or any
subsidiary or affiliate thereof; (c) trustees or other managers of any qualified
profit sharing, incentive or bonus plan established by Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof for the employees of
such company, subsidiary or affiliate. The Board of Directors of each Fund
reserves the right to broaden or limit the designation of Eligible Purchasers.
What do the Funds offer investors?
Professional Investment Management: Experienced securities analysts provide
each Fund with professional investment management.
Diversification: Each Fund will diversify by investing in securities issued
by a number of issuers doing business in a variety of industries and/or located
in different geographical regions. Diversification reduces investment risk.
Economies of Scale: Pooling individual shareholder's investments in any of
the Funds creates administrative efficiencies.
Redeemability: Upon request each Fund will redeem its shares and promptly
pay the investor the current net asset value of the shares redeemed. See
"Redemption of Shares."
What are the Funds' investment objectives?
Growth-Oriented Funds
The investment objective of Principal Balanced Fund, Inc. (sometimes
referred to as the Balanced Fund) is to seek to generate a total return
consisting of current income and capital appreciation while assuming reasonable
risks in furtherance of this objective.
The primary investment objective of Principal Capital Accumulation Fund,
Inc. (sometimes referred to as the Capital Accumulation Fund) is long-term
capital appreciation and its secondary investment objective is growth of
investment income. The Fund seeks to achieve its investment objectives through
the purchase primarily of common stocks, but the Fund may invest in other
securities.
The investment objective of Principal Emerging Growth Fund, Inc. (sometimes
referred to as the Emerging Growth Fund) is to achieve capital appreciation by
investing primarily in securities of emerging and other growth-oriented
companies.
The investment objective of Principal Growth Fund, Inc. (sometimes referred
to as the Growth Fund) is 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.
The investment objective of Principal World Fund, Inc. (sometimes referred
to as the World Fund) is to seek long-term growth of capital by investing in a
portfolio of equity securities domiciled in any of the nations of the world.
Income-Oriented Funds
The investment objective of Principal Bond Fund, Inc. (sometimes referred
to as the Bond Fund) is to provide as high a level of income as is consistent
with preservation of capital and prudent investment risk.
The investment objective of Principal Government Securities Fund, Inc.
(sometimes referred to as the Government Securities Fund) is to seek a high
level of current income, liquidity 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.
Money Market Fund
The investment objective of Principal Money Market Fund, Inc. (sometimes
referred to as the Money Market 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 all of its
assets in a portfolio of 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."
Who serves as Manager for the Funds?
Princor Management Corporation, a corporation organized in 1969 by
Principal Mutual Life Insurance Company, is the Manager for each of the Funds.
It is also the dividend disbursing and transfer agent for the Principal Funds.
In order to provide investment advisory services for the Balanced, Growth and
World Funds the Manager has executed sub-advisory agreements with Invista
Capital Management, Inc. ("Invista" or "Sub-Advisor"). See "Manager and
Sub-Advisor."
What fees and expenses apply to ownership of shares of the Funds?
The following table depicts fees and expenses applicable to the purchase
and ownership of shares of each of the Funds.
ANNUAL FUND OPERATING EXPENSES
(As a Percentage of Average Net Assets)
Management Other Total Operating
Fund Fee Expenses Expenses
Balanced Fund .60 .06 .66
Bond Fund .50 .06 .56
Capital Accumulation Fund .49 .02 .51
Emerging Growth Fund .65 .05 .70
Government Securities Fund .50 .05 .55
Growth Fund .50 .08 .58
Money Market Fund .50 .08 .58
World Fund .75 .20 .95
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:
Period (in years)
Fund 1 3 5 10
Balanced Fund $7 $21 $37 $82
Bond Fund $6 $18 $31 $70
Capital Accumulation Fund $5 $16 $29 $64
Emerging Growth Fund $7 $22 $39 $87
Government Securities Fund $6 $18 $31 $69
Growth Fund $6 $19 $32 $73
Money Market Fund $6 $19 $32 $73
World Fund $10 $30 $53 $117
This Example is based on the Annual Fund Operating expenses for each Fund
described above. Please remember that the Example should not be considered a
representation of past or future expenses and that actual expenses may be
greater or less than shown.
The purpose of the above table is to assist the investor in understanding the
various expenses that an investor in the Funds will bear directly or indirectly.
See "Duties Performed by the Manager and Sub-Advisor."
FINANCIAL HIGHLIGHTS
The following financial highlights for the periods ended December 31, 1995
and prior thereto are derived from financial statements which 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>
Income from
Investment Operations Less Distributions
--------------------------------------- --------------------------------------------
Net Realized
Net Asset and
Value at Unrealized Total Dividends Distribution
Beginning Net Gain from from Net from
of Investment (Loss) on Investment Investment Capital Total
Period Income Investments Operations Income Gains Distributions
--------- ---------- ------------ ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Principal Balanced
Fund, Inc. (a)
Year Ended
December 31,
1995 $11.95 $ .45 $ 2.44 $ 2.89 $(.45) $ (.42) $ (.87)
1994 12.77 .37 (.64) (.27) (.37) (.18) (.55)
1993 12.58 .42 .95 1.37 (.42) (.76) (1.18)
Six Months Ended
December 31,
1992(b) 12.93 .23 .75 .98 (.47) (.86) (1.33)
Year Ended
June 30,
1992 11.33 .47 1.61 2.08 (.48) - (.48)
1991 10.79 .54 .59 1.13 (.57) (.02) (.59)
1990 11.89 .60 (.48) .12 (.63) (.59) (1.22)
1989 11.75 .62 .30 .92 (.55) (.23) (.78)
Period Ended
June 30, 1988(c) 10.00 .27 1.51 1.78 (.03) - (.03)
Principal Bond
Fund, Inc.
Year Ended
December 31,
1995 10.12 .62 1.62 2.24 (.63) - (.63)
1994 11.16 .72 (1.04) (.32) (.72) - (.72)
1993 10.77 .88 .38 1.26 (.87) - (.87)
Six Months Ended
December 31,
1992(b) 11.08 .45 .13 .58 (.89) - (.89)
Year Ended
June 30,
1992 10.64 .91 .46 1.37 (.93) - (.93)
1991 10.72 .94 (.06) .88 (.96) - (.96)
1990 10.92 .95 (.21) .74 (.94) - (.94)
1989 10.68 1.15 .17 1.32 (.96) (.12) (1.08)
Period Ended
June 30, 1988(e) 10.00 .32 .40 .72 (.04) - (.04)
Principal Capital
Accumulation
Fund, Inc.
Year Ended
December 31,
1995 23.44 .60 6.69 7.29 (.60) (2.33) (2.93)
1994 24.61 .62 (.49) .13 (.61) (.69) (1.30)
1993 25.19 .61 1.32 1.93 (.60) (1.91) (2.51)
Six Months Ended
December 31,
1992(b) 26.03 .31 1.84 2.15 (.64) (2.35) (2.99)
Year Ended
June 30,
1992 23.35 .65 2.70 3.35 (.67) - (.67)
1991 22.48 .74 1.22 1.96 (.79) (.30) (1.09)
1990 23.63 .79 .14 .93 (.81) (1.27) (2.08)
1989 23.23 .77 1.32 2.09 (.68) (1.01) (1.69)
1988 27.51 .60 (1.50) (.90) (.69) (2.69) (3.38)
1987 25.48 .40 4.46 4.86 (.50) (2.33) (2.83)
1986 21.93 .51 6.65 7.16 (.66) (2.95) (3.61)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
-------------------------------------------------------
Ratio of
Net
Net Asset Net Assets Ratio of Investment
Value at end of Expenses to Income to Portfolio
at End Total Period (in Average Average Turnover
of Period Return thousands) Net Assets Net Assets Rate
--------- ------ ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Principal Balanced
Fund, Inc. (a)
Year Ended
December 31,
1995 $13.97 24.58% $ 45,403 .66% 4.12% 25.7%
1994 11.95 (2.09)% 25,043 .69% 3.42% 31.5%
1993 12.77 11.06% 21,399 .69% 3.30% 15.8%
Six Months Ended
December 31,
1992(b) 12.58 8.00%(c) 18,842 .73%(d) 3.71%(d) 38.4%(d)
Year Ended
June 30,
1992 12.93 18.78% 17,344 .72% 3.80% 26.6%
1991 11.33 11.36% 14,555 .73% 5.27% 27.1%
1990 10.79 .87% 13,016 .74% 5.52% 33.1%
1989 11.89 8.55% 12,751 .74% 5.55% 29.3%
Period Ended
June 30, 1988(c) 11.75 17.70%(c) 11,469 .80%(d) 4.96%(d) 41.7%(d)
Principal Bond
Fund, Inc.
Year Ended
December 31,
1995 11.73 22.17% 35,878 .56% 7.28% 5.9%
1994 10.12 (2.90)% 17,108 .58% 7.86% 18.2%
1993 11.16 11.67% 14,387 .59% 7.57% 14.0%
Six Months Ended
December 31,
1992(b) 10.77 5.33%(c) 12,790 .62%(d) 8.10%(d) 6.7%(d)
Year Ended
June 30,
1992 11.08 13.57% 12,024 .62% 8.47% 6.1%
1991 10.64 8.94% 10,552 .63% 9.17% 2.7%
1990 10.72 7.15% 9,658 .64% 9.09% 0.0%
1989 10.92 13.51% 9,007 .64% 9.18% 12.2%
Period Ended
June 30, 1988(e) 10.68 6.06%(c) 17,598 .58%(d) 8.11%(d) 68.8%(d)
Principal Capital
Accumulation
Fund, Inc.
Year Ended
December 31,
1995 27.80 31.91% 135,640 .51% 2.25% 49.2%
1994 23.44 .49% 120,572 .51% 2.36% 44.5%
1993 24.61 7.79% 128,515 .51% 2.49% 25.8%
Six Months Ended
December 31,
1992(b) 25.19 8.81%(c) 105,355 .55%(d) 2.56%(d) 39.7%(d)
Year Ended
June 30,
1992 26.03 14.53% 94,596 .54% 2.65% 34.8%
1991 23.35 9.46% 76,537 .53% 3.53% 14.0%
1990 22.48 3.94% 74,008 .56% 3.56% 30.2%
1989 23.63 10.02% 68,132 .57% 3.53% 23.5%
1988 23.23 (2.67)% 62,696 .60% 2.76% 26.7%
1987 27.51 22.17% 57,478 .63% 1.99% 16.1%
1986 25.48 38.37% 35,960 .60% 2.63% 37.8%
<FN>
(a) Effective May 1, 1994, the name of Principal Managed Fund, Inc. was changed
to Principal Balanced Fund, Inc.
(b) Effective July 1, 1992, the fund changed its fiscal year end from June 30 to
December 31.
(c) Total return amounts have not been annualized.
(d) Computed on an annualized basis.
(e) Period from December 18, 1987, date shares first offered to eligible
purchasers, through June 30, 1988. Net investment income aggregating $.01
per share for the period from the initial purchase of shares on December 10,
1987 through December 17, 1987 was recognized, all of which was distributed
to the Fund's sole stockholder, Principal Mutual Life Insurance Company.
This represented activity of the fund prior to the initial offering of
shares to eligible purchasers.
[/FN]
</TABLE>
<TABLE>
<CAPTION>
Income from
Investment Operations Less Distributions
--------------------------------------- --------------------------------------------------
Net Realized
Net Asset and Excess
Value at Unrealized Total Dividends Distribution Distribution
Beginning Net Gain from from Net from Net from
of Investment (Loss) on Investment Investment Investment Capital Total
Period Income Investments Operations Income Income Gains Distributions
--------- ---------- ------------ ---------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Emerging
Growth Fund, Inc.(a)
Year Ended
December 31,
1995 $19.97 $.22 $5.57 $5.79 $(.22) $ - $ (.21) $ (.43)
1994 20.79 .14 .03 .17 (.14) - (.85) (.99)
1993 18.91 .17 3.47 3.64 (.17) - (1.59) (1.76)
Six Months Ended
December 31,
1992(b) 15.97 .10 3.09 3.19 (.21) - (.04) (.25)
Year Ended
June 30,
1992 13.93 .21 2.04 2.25 (.21) - - (.21)
1991 14.25 .20 .50 .70 (.23) - (.79) (1.02)
1990 13.35 .24 .87 1.11 (.20) - (.01) (.21)
1989 12.85 .16 1.35 1.51 (.11) - (.90) (1.01)
Period Ended
June 30, 1988(e) 10.00 .05 2.83 2.88 (.03) - - (.03)
Principal
Government
Securities Fund,
Inc.
Year Ended
December 31,
1995 9.38 .60 1.18 1.78 (.61) - - (.61)
1994 10.61 .76 (1.24) (.48) (.75) - - (.75)
1993 10.28 .71 .33 1.04 (.71) - - (.71)
Six Months Ended
December 31,
1992(b) 10.93 .40 .04 .44 (.78) - (.31) (1.09)
Year Ended
June 30,
1992 10.24 .80 .71 1.51 (.81) - (.01) (.82)
1991 10.05 .80 .24 1.04 (.81) - (.04) (.85)
1990 10.05 .78 - .78 (.78) - - (.78)
1989 9.37 .80 .34 1.14 (.46) - - (.46)
1988 9.47 .78 (.09) .69 (.79) - - (.79)
Period Ended
June 30, 1987(f) 10.00 .18 (.59) (.41) (.12) - - (.12)
Principal Growth
Fund, Inc.
Year Ended
December 31,
1995 10.10 .17 2.42 2.59 (.17) - (.09) (.26)
Period Ended
December 31,
1994(g) 9.60 .07 .51 .58 (.08) - - (.08)
Principal Money
Market Fund, Inc.
Year Ended
December 31,
1995 1.000 .054 - .054 (.054) - - (.054)
1994 1.000 .037 - .037 (.037) - - (.037)
1993 1.000 .027 - .027 (.027) - - (.027)
Six Months Ended
December 31,
1992(b) 1.000 .016 - .016 (.016) - - (.016)
Year Ended
June 30,
1992 1.000 .046 - .046 (.046) - - (.046)
1991 1.000 .070 - .070 (.070) - - (.070)
1990 1.000 .077 - .077 (.077) - - (.077)
1989 1.000 .083 - .083 (.083) - - (.083)
1988 1.000 .064 - .064 (.064) - - (.064)
1987 1.000 .057 - .057 (.057) - - (.057)
1986 1.000 .070 - .070 (.070) - - (.070)
Principal World
Fund, Inc.
Year Ended
December 31,
1995 9.56 .19 1.16 1.35 (.18) - (.01) (.19)
Period Ended
December 31,
1994(g) 9.94 .03 (.33) (.30) (.05) (.02) (.01) (.08)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
-------------------------------------------------------
Ratio of
Net
Net Asset Net Assets Ratio of Investment
Value at end of Expenses to Income to Portfolio
at End Total Period (in Average Average Turnover
of Period Return thousands) Net Assets Net Assets Rate
--------- ------ ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Principal Emerging
Growth Fund, Inc.(a)
Year Ended
December 31,
1995 $25.33 29.01% $58,520 .70% 1.23% 13.1%
1994 19.97 .78% 23,912 .74% 1.15% 12.0%
1993 20.79 19.28% 12,188 .78% .89% 22.4%
Six Months Ended
December 31,
1992(b) 18.91 20.12%(c) 9,693 .81%(d) 1.24%(d) 8.6%(d)
Year Ended
June 30,
1992 15.97 16.19% 7,829 .82% 1.33% 10.1%
1991 13.93 5.72% 6,579 .89% 1.70% 11.1%
1990 14.25 8.32% 6,067 .88% 1.74% 17.9%
1989 13.35 13.08% 5,509 .90% 1.31% 21.4%
Period Ended
June 30, 1988(e) 12.85 28.72%(c) 4,857 .94%(d) .64%(d) 4.6%(d)
Principal
Government
Securities Fund,
Inc.
Year Ended
December 31,
1995 10.55 19.07% 50,079 .55% 6.73% 9.8%
1994 9.38 (4.53)% 36,121 .56% 7.05% 23.2%
1993 10.61 10.07% 36,659 .55% 7.07% 20.4%
Six Months Ended
December 31,
1992(b) 10.28 4.10%(c) 31,760 .59%(d) 7.35%(d) 34.5%(d)
Year Ended
June 30,
1992 10.93 15.34% 33,022 .58% 7.84% 38.9%
1991 10.24 10.94% 26,021 .59% 8.31% 4.2%
1990 10.05 8.16% 21,488 .61% 8.48% 18.7%
1989 10.05 12.61% 15,890 .63% 8.68% 3.7%
1988 9.37 7.69% 12,902 .66% 8.47% 2.7%
Period Ended
June 30, 1987(f) 9.47 (.94)%(c) 10,778 .64%(d) 8.50%(d) .2%(d)
Principal Growth
Fund, Inc.
Year Ended
December 31,
1995 12.43 25.62% 42,708 .58% 2.08% 6.9%
Period Ended
December 31,
1994(g) 10.10 5.42%(c) 13,086 .75%(d) 2.39%(d) .9%(d)
Principal Money
Market Fund, Inc.
Year Ended
December 31,
1995 1.000 5.59% 32,670 .58% 5.32% N/A
1994 1.000 3.76% 29,372 .60% 3.81% N/A
1993 1.000 2.69% 22,753 .60% 2.64% N/A
Six Months Ended
December 31,
1992(b) 1.000 1.54%(c) 27,680 .59%(d) 3.10%(d) N/A
Year Ended
June 30,
1992 1.000 4.64% 25,194 .57% 4.54% N/A
1991 1.000 7.20% 26,509 .56% 6.94% N/A
1990 1.000 8.37% 26,588 .57% 8.05% N/A
1989 1.000 8.59% 20,707 .61% 8.40% N/A
1988 1.000 6.61% 14,571 .64% 6.39% N/A
1987 1.000 5.78% 11,902 .65% 5.68% N/A
1986 1.000 7.35% 8,896 .69% 7.06% N/A
Principal World
Fund, Inc.
Year Ended
December 31,
1995 10.72 14.17% 30,566 .95% 2.26% 15.6%
Period Ended
December 31,
1994(g) 9.56 (3.37)%(c) 13,746 1.24%(d) 1.31%(d) 14.4%(d)
<FN>
(a) Effective May 1, 1992, the name of Principal Aggressive Growth Fund, Inc.
was changed to Principal Emerging Growth Fund, Inc.
(b) Effective July 1, 1992 the fund changed its fiscal year end from June 30 to
December 31.
(c) Total return amounts have not been annualized.
(d) Computed on an annualized basis.
(e) Period from December 18, 1987, date shares first offered to eligible
purchasers, through June 30, 1988. Net investment income aggregating $.01
per share for the period from the initial purchase of shares on December 10,
1987 through December 17, 1987 was recognized, all of which was distributed
to the Fund's sole stockholder, Principal Mutual Life Insurance Company.
This represented activity of the fund prior to the initial offering of
shares to eligible purchasers.
(f) Period from April 9, 1987, date shares first offered to the public, through
June 30, 1987. Net investment income, aggregating $.01 per share for the
period from the initial purchase of shares on October 31, 1987 through
December 17, 1987 was recognized, all of which was distributed to the Fund's
sole stockholder, Principal Mutual Life Insurance Company. This represented
activity of the Fund prior to the initial offering of shares to eligible
purchasers.
(g) Period from May 1, 1994, date shares first offered to public, through
December 31, 1994. Net investment income, aggregating $.01 per share for
Principal Growth Fund, Inc. and $.04 per share for Principal World Fund,
Inc. for the period from the initial purchase of shares on March 23, 1994
through April 30, 1994, was recognized, none of which was distributed to the
sole stockholder, Principal Mutual Life Insurance Company, during the
period. Additionally, Principal Growth Fund, Inc. and Principal World Fund,
Inc. incurred unrealized losses on investments of $.41 and $.10 per share,
respectively, during the initial interim period. This represented activities
of each fund prior to the initial public offering of fund shares.
[/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 Principal Funds currently include four Funds which seek capital
appreciation through investments in equity securities (Principal Capital
Accumulation Fund, Principal Emerging Growth Fund, Principal Growth Fund and
Principal World Fund) and one Fund which seeks a total investment return
including both capital appreciation and income through investments in equity and
debt securities (Principal Balanced Fund). These five Funds are collectively
referred to as the Growth-Oriented Funds.
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 American Depositary Receipts based
on any of the foregoing securities. The Capital Accumulation, Emerging Growth,
Growth and World Funds will seek to be fully invested under normal conditions in
equity securities. When, in the opinion of the Manager or Sub-Advisor, 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. 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.
Principal Balanced Fund
The investment objective of Principal Balanced Fund is to generate a total
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 judgment of the
Sub-Advisor, Invista, 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 Sub-Advisor
will seek to minimize declines in the net asset value per share. However, there
is no guarantee that the Sub-Advisor 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
Sub-Advisor 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 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. See "Below
Investment-Grade Bonds" for a discussion of the risks associated with these
securities. 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. The Fund will not concentrate its
investments in any industry.
In selecting common stocks, the Sub-Advisor seeks companies which it
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 Sub-Advisor 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 Sub-Advisor 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 short-term money market investments in which the Fund may invest
include the following: 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 $1 billion.
The United States government securities in which the Fund may invest
include 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 Capital Accumulation Fund
The primary objective of Principal Capital Accumulation 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
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 objectives, investments will be made in securities which as a
group appear to offer long-term prospects for capital and income growth.
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 Emerging Growth Fund
The objective of Principal Emerging Growth Fund is to achieve 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 Emerging Growth Fund may invest, for any period of
time, in any industry, in any kind of growth-oriented company, whether new and
unseasoned or well known and established.
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 prepared to experience above-average
fluctuations in net asset value, to assume above-average investment risk in
search of above-average return, and to consider the Fund as a long-term
investment and not as a vehicle for seeking short-term profits. Moreover, since
the Fund will not be seeking current income, investors should not view a
purchase of Fund shares as a complete investment program.
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
Sub-Advisor, Invista, 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 World Fund
The investment objective of Principal World 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 Sub-Advisor,
Invista, intends to pay particular attention to long-term earnings prospects and
the relationship of then-current prices to such prospects. Short-term trading is
not generally intended, but occasional investments may be made for the purpose
of seeking short-term or medium-term gain. The 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 "Foreign Securities."
For temporary defensive purposes, the World 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 five countries, one of
which may be the United States. Investments may be made anywhere in the world,
but it is expected that primary consideration will be given to investing in the
securities issued by corporations of Western Europe, North America and
Australasia (Australia, Japan and Far East Asia) that have developed economies.
Changes in investments may be made as prospects change for particular countries,
industries or companies.
The Fund may invest in the securities of other investment companies but may
not invest more than 10% of its assets in securities of other investment
companies, invest more than 5% of its total assets in the securities of any one
investment company, or acquire more than 3% of the outstanding voting securities
of any one investment company except in connection with a merger, consolidation
or plan of reorganization. The Fund's Manager will waive its management fee on
the Fund's assets invested in securities of other open-end investment companies.
The Fund will generally invest only in those investment companies that have
investment policies requiring investment in securities comparable in quality to
those in which the Fund invests.
INCOME-ORIENTED FUNDS
The Principal Funds currently include two Funds which seek a high level of
income through investments in fixed-income securities (Principal Bond Fund and
Principal Government Securities Fund) collectively referred to as the
"Income-Oriented Funds." An investment in either 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. Each Fund's 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 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, exclusive of cash items, in one or more of the following kinds of
securities: (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 Standard & Poor's Corporation (AAA, AA, A or BBB) or by
Moody's Investors Service, Inc. (Aaa, Aa, A or Baa) or which, if lower-rated or
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 other fixed income securities, including domestic and
foreign corporate debt securities or preferred stocks, in common stocks that
provide returns that compare favorably with the yields on fixed income
investments, and in 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. 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). See "Below Investment-Grade Bonds" for a
discussion of the risks associated with these securities. 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.
During the year ended December 31, 1995, 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
Aaa .09%
Aa 1.02%
A 20.32%
Baa 69.78%
Ba 8.79%
The above percentages for A rated securities include 1.42%, 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 Standard & Poor's 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 Standard & Poor's 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 may
for temporary defense purposes invest up to 100% of its assets in cash or cash
equivalents.
Principal Government Securities Fund
The objective of Principal Government Securities 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 for daily cash management purposes
or pending selection of particular long-term investments.
Depending on market conditions, up to 55% of the assets may be invested in
GNMA Certificates. 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.
To the extent deemed appropriate by the Fund's Manager, the Fund intends to
purchase GNMA Certificates directly from Principal Mutual Life Insurance Company
and other issuers as well as from securities dealers. The Fund will purchase
directly from issuers only if it can obtain a price advantage by not paying the
commission or mark-up that would be required if the Certificates were purchased
from a securities dealer. The Securities and Exchange Commission has issued an
order under the Investment Company Act of 1940 that permits the Fund to purchase
GNMA Certificates directly from Principal Mutual Life Insurance Company subject
to certain conditions.
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 Marketing Association is a government sponsored
stockholder-owned organization whose goal is to provide liquidity to financial
and educational institutions. SLMA provides liquidity by purchasing student
loans, which are principally government guaranteed loans issued under the
Federal Guaranteed Student Loan Program and the Health Education Assistance Loan
Program. SLMA securities are not guaranteed by the U.S. Government but are
obligations solely of the agency. SLMA senior debt issues in which the Fund
invests are rated AAA by Standard & Poor's and Aaa by Moody's.
There are other obligations issued or guaranteed by the United States
Government (such as U.S. Treasury securities) or by its agencies or
instrumentalities that are either supported by the full faith and credit of the
U.S. Treasury or the credit of a particular agency or instrumentality. Included
in the latter category are Federal Home Loan Bank and Farm Credit Banks.
Obligations not guaranteed by the United States Government are highly rated
because they are issued by indirect branches of government. Such paper is issued
as needs arise by the 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. 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.
MONEY MARKET FUND
The Principal Funds also include a Fund which invests primarily in
short-term securities, Principal Money Market Fund. Securities in which the
Money Market Fund will invest may not yield as high a level of current income as
securities of low quality and longer maturities which generally have less
liquidity, greater market risk and more fluctuation.
The Money Market Fund will limit its portfolio investments to United States
dollar denominated instruments that its board of directors determines present
minimal credit risks and which are at the time of acquisition "Eligible
Securities" as that term is defined in regulations issued under the Investment
Company Act of 1940. Eligible Securities include:
(1) A security with the 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 at the time of issuance was a long-term security that has 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 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 below the 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, below the highest
rating category for short-term obligations;
(3) Securities which are unrated but are determined by the Fund's board of
directors to be of comparable quality to securities rated below the
highest rating category for short-term debt obligations. The Fund will
maintain a dollar-weighted average portfolio maturity of 90 days or
less.
The objective of Principal Money Market 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 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.
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.
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 times when such sales might otherwise not be
desirable. The Fund's right to borrow to facilitate redemptions may reduce the
need for such sales. It is the Fund's policy to be as fully invested as
reasonably practical at all times to maximize current income.
Since portfolio assets will consist of short-term instruments, replacement
of portfolio securities will occur frequently. However, since the 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 the investment objective.
A shareholder's rate of return will vary with the general interest rate
levels applicable to the money market instruments in which the Fund invests. The
rate of return and the net asset value will be affected by such other factors as
sales of portfolio securities prior to maturity and the Fund's operating
expenses.
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.
Diversification
Each Fund is subject to the diversification requirements of Section 817(h)
of the Internal Revenue Code (the "Code") which must be met at the end of each
quarter of the year (or within 30 days thereafter). Regulations issued by the
Secretary of the Treasury have the effect of requiring each Fund to invest no
more than 55% of its total assets in securities of any one issuer, no more than
70% in the securities of any two issuers, no more than 80% in the securities of
any three issuers, and no more than 90% in the securities of any four issuers.
For this purpose, the United States Treasury and each U.S. Government agency and
instrumentality is considered to be a separate issuer. Thus, the Government
Securities Fund intends to invest in U.S. Treasury securities and in securities
issued by at least four U.S. Government agencies or instrumentalities in the
amounts necessary to meet those diversification requirements at the end of each
quarter of the year (or within thirty days thereafter).
In the event any of the Funds do not meet the diversification requirements
of Section 817(h) of the Code, the contracts funded by shares of the Funds will
not be treated as annuities or life insurance for Federal income tax purposes
and the owners of the Funds will be subject to taxation on their share of the
dividends and distributions paid by the Funds.
Foreign Securities
Each of the following Principal Funds has adopted investment restrictions
that limit its investments in foreign securities to the indicated percentage of
its assets: World Fund - 100%; Bond and Capital Accumulation Funds - 20%;
Balanced, Emerging Growth and Growth Funds - 10%. 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. Moreover, securities of many foreign issuers may
be less liquid and their prices more volatile than those of comparable domestic
issuers. In addition, transactions in foreign securities may be subject to
higher costs, and the time for settlement of transactions in foreign securities
may be longer than the settlement period for domestic issuers. A Fund's
investment in foreign securities may also result in higher custodial costs and
the costs associated with currency conversions.
Currency Contracts
The World Fund may enter into forward currency contracts, currency futures
contracts and options thereon and options on currencies for hedging and other
non-speculative purposes. A forward currency contract involves a privately
negotiated obligation to purchase or sell a specific currency at a future date
at a price set at the time of the contract. The Fund will not enter into a
transaction to hedge currency exposure to an extent greater in effect than the
aggregate market value of the securities held or to be purchased by the Fund
that are denominated or generally quoted in or currently convertible into the
currency. When the Fund enters into a contract to buy or sell a foreign
currency, it generally will hold an amount of that currency, liquid securities
denominated in that currency or a forward contract for such securities equal to
the Fund's obligation, or it will segregate liquid high grade debt obligations
equal to the amount of the Fund's obligations. The use of currency contracts
involves many of the same risks as transactions in futures contracts and options
as well as the risk of government action through exchange controls or otherwise
that would restrict the ability of the Fund to deliver or receive currency.
Repurchase Agreements and Securities Loans
Each of the Funds, except the Capital Accumulation Fund, may enter into
repurchase agreements with, and each of the Funds, except the Capital
Accumulation and Money Market Funds, 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 Funds' 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 intend 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 10% of its
total assets or (ii) to loan securities in excess of 30% of its total assets.
Forward Commitments
From time to time, each of the Funds 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 the 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 Money Market and Government Securities Funds,
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 World Fund, the 2% limitation also does not apply to warrants
listed on the Toronto Stock Exchange or the Chicago Board Options Exchange.
Borrowing
As a matter of fundamental policy, each Fund may borrow money only for
temporary or emergency purposes. The Balanced Fund, Bond Fund, Capital
Accumulation Fund and Money Market Fund may borrow only from banks. Further,
each may borrow only in an amount not exceeding 5% of its assets, except the
Capital Accumulation Fund 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 the Money Market 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
The Balanced Fund, Bond Fund, Emerging Growth Fund, Government Securities
Fund, Growth Fund and World Fund 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.
Below Investment Grade Bonds
Below investment-grade bonds are securities rated Ba1 or lower by Moody's
Investors Service, Inc. ("Moody's") or BB+ or lower by Standard & Poor's
Corporation ("S&P") or unrated securities which the Fund's Manager or
Sub-Advisor 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 Funds do not intend to invest in securities rated lower than Ba3
by Moody's or BB by S&P. The Bond Fund may not invest more than 35% of its
assets in below investment grade securities. The Balanced Fund does not intend
to invest more than 5% of its assets in such securities.
The rating services' descriptions of below investment grade securities
rating categories in which the Funds 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.
Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through Ba in its bond rating system. The modifier 1
indicates that the security ranks in the high 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: Debt rated "BB" 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. 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 "BB" rating may be modified by the addition of a
plus or minus sign to show relative standing within the major rating categories.
Below investment-grade securities 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 below investment-grade
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 Funds and the ability of the
issuers of the securities held by the Funds to pay principal and interest. A
default by an issuer may result in a Fund incurring additional expenses to seek
recovery of the amounts due it.
Some of the securities in which the Funds invest may 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.
Congress recently enacted legislation requiring federally-insured savings
and loan associations to divest themselves of investments in high yield
securities. This legislation might increase the supply of securities available
for purchase in the secondary market and, potentially, lower the value of the
securities held by the Funds.
The Statement of Additional Information includes further information
concerning the Funds' investment policies and applicable investment
restrictions. Each Fund's investment objective and certain investment
restrictions designated as such in this Prospectus or the Statement of
Additional Information are fundamental policies that may not be changed without
shareholder approval. All other investment policies described in the Prospectus
and the Statement of Additional Information for a Fund are not fundamental and
may be changed by the Board of Directors of the Fund without shareholder
approval.
MANAGER AND SUB-ADVISOR
The Manager for the Funds is Princor Management Corporation (the
"Manager"), an indirectly wholly-owned subsidiary of Principal Mutual Life
Insurance Company, a mutual life insurance company organized in 1879 under the
laws of the State of Iowa. The address of the Manager is The Principal Financial
Group, Des Moines, Iowa 50392. The Manager was organized on January 10, 1969,
and since that time has managed various mutual funds sponsored by Principal
Mutual Life Insurance Company. As of December 31, 1995, the Manager served as
investment advisor for 25 such funds with assets totaling approximately $2.9
billion.
The Manager has executed an agreement with Invista Capital Management, Inc.
("Invista") under which Invista has agreed to assume the obligations of the
Manager to provide investment advisory services for the Balanced Fund, Growth
Fund and World 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 December 31, 1995 were
approximately $15.7 billion. Invista's address is 1500 Hub Tower, 699 Walnut,
Des Moines, Iowa 50309.
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:
Primarily
Fund Responsible Since Person Primarily Responsible
- --------------- ------------------------ -------------------------------
Balanced April, 1993 Judith A. Vogel, CFA (BA degree,
Central College). Vice
President, Invista Capital
Management, Inc. since 1987.
Bond December, 1987 Donald D. Brattebo (BBA degree,
(Fund's inception) Upper Iowa University). Second Vice
President, Principal Mutual Life
Insurance Company since 1990; Prior
thereto, Director, Investment
Securities.
Capital November, 1969 David L. White, CFA (BBA degree,
Accumulation (Fund's inception) University of Iowa). Executive Vice
President, Invista Capital Management,
Inc. since 1984.
Emerging Growth December, 1987 Michael R. Hamilton, (BMBA degree,
and Growth (Fund's inception) Bellarmine College). Vice President,
and May, 1994 Invista Capital Management, Inc.
(Fund's inception), since 1987.
respectively
Government April, 1987 Martin J. Schafer (BBA degree,
Scurities (Fund's inception) University of Iowa). Vice President,
Invista Capital Management Company
since 1992. Director - Securities
Trading, Principal Mutual Life
Insurance Company 1992; Prior thereto,
Associate Director.
World April, 1994 Scott D. Opsal, CFA (MBA degree,
University of Minnesota). Vice
President, Invista Capital Management,
Inc. since 1987.
DUTIES PERFORMED BY THE MANAGER AND SUB-ADVISOR
Under Maryland law, the business and affairs of each of the Funds are
managed under the direction of its Board of Directors. The investment services
and certain other services referred to under the heading "Cost of Manager's
Services" in the Statement of Additional Information are furnished to the Funds
under the terms of a Management Agreement between each of the Funds and the
Manager and, for some of the Funds, a Sub-Advisory Agreement between the Manager
and Invista. 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 compensation paid by each Fund to the Manager for the fiscal year ended
December 31, 1995 was, on an annual basis, equal to the following percentage of
average net assets:
Total
Manager's Annualized
Fund Fee Expenses
- ------------------------------------------------------------------------------
Balanced Fund .60% .66%
Bond Fund .50% .56%
Capital Accumulation Fund .49% .51%
Emerging Growth Fund .65% .70%
Government Securities Fund .50% .55%
Growth Fund .50% .58%
Money Market Fund .50% .58%
World Fund .75% .95%
The compensation being paid by the World Fund for investment management
services is higher than that paid by most funds to their advisor, but it is not
higher than the fees paid by many funds with similar investment objectives and
policies.
The Manager and Sub-Advisor may purchase at their own expense statistical
and other information or services from outside sources, including Principal
Mutual Life Insurance Company. An Investment Service Agreement between the
Manager, Principal Mutual Life Insurance Company and each Fund, 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. The Investment Service
Agreements for the Capital Accumulation, Emerging Growth and Government
Securities Funds also include as a party Invista Capital Management, Inc., an
indirectly wholly-owned subsidiary of Principal Mutual Life Insurance Company,
and also provide that the subsidiaries of Principal Mutual Life Insurance
Company will furnish the same items and be reimbursed by the Manager for their
costs incurred in this regard.
The Funds may from time to time execute transactions for portfolio
securities with, and pay related brokerage commissions to, Principal Financial
Securities, Inc., a broker-dealer that is an affiliate of the Distributor and
Manager for each of the Funds.
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.
MANAGERS' COMMENTS
Princor Management Corporation and Invista are staffed with investment
professionals who manage each individual fund. Comments by these individuals in
the following paragraphs summarize in capsule form the general strategy and
recent results of each fund during the year ended December 31, 1995. The
accompanying charts display results for the past 10 years or the life of the
fund, whichever is shorter. Average Annual Total Return figures provided for
each fund in the graphs below reflect all expenses of the fund and assume all
distributions are reinvested at net asset value. The figures do not reflect
expenses of the variable life insurance contracts or variable annuity contracts
that purchase fund shares; performance figures for the divisions of the
contracts would be lower than performance figures for the funds due to the
additional contract expenses. Past performance is not predictive of future
performance. Returns and net asset value fluctuate. Shares are redeemable at
current net asset value, which may be more or less than original cost.
The various indices included in the graphs below are unmanaged and do not
reflect any commissions or fees which would be incurred by an investor
purchasing the securities included in the index.
Growth-Oriented Funds
Principal Balanced Fund
(Judith A. Vogel)
This balanced portfolio is designed to combine stocks, bonds and cash in a
relatively conservative mix which provides both capital appreciation and income
to the shareholder without taking on undue risk. Financial markets cooperated in
helping us to achieve our objectives over the year, as both stocks and bonds
delivered double digit returns for the year ended December 31, 1995. The economy
backed off from extremely strong growth in late 1994 to register modest advances
over the succeeding four quarters. Inflation remained benign over the year and
still is not a concern today. It appears the Federal Reserve did a remarkable
job of managing interest rates in order to cool the economy without plunging it
into recession. Long term interest rates fell about 2% during 1995, enabling the
bond market to surge. Corporate earnings continued their robust growth, even in
the fourth year of an economic expansion, thanks to widespread increases in
productivity and almost zero growth in labor costs. These higher earnings
boosted common stocks, while lower interest rates enabled stock prices to rise
without the market appearing overvalued. Clearly, 1995 was a great year in the
financial markets. Absolute returns were very attractive for balanced
portfolios. The asset structure of the Principal Balanced fund was a bit more
cautious than the average balanced mutual fund during the year. Just over 50% of
the portfolio's holdings were in equity-related securities with the balanced in
fixed income. According to Morningstar Mutual Funds, the average balanced fund
had 53% allocated to common stocks. Although our asset allocation was less
aggressive than average, our returns were nearly even with the Lipper Balanced
Fund Average return for the year. There is no independent market index against
which to measure returns of balanced portfolios, however, we show the S&P 500
stock index for your information.
Principal Balanced Fund, Inc.*
Fund Lipper
Total S&P 500 Mid Cap
Year Ended December 31, Return Index Index
10,000 10,000 10,000
1988 11,637 11,661 11,229
1989 12,982 15,356 13,429
1990 12,147 14,877 13,355
1991 16,321 19,412 16,930
1992 18,410 20,892 18,122
1993 20,447 22,995 20,066
1994 20,019 23,296 19,561
1995 24,941 32,037 24,482
Total Returns *
As of December 31, 1995
Since Inception Date
1 Year 5 Year 12/18/87
24.58% 15.48% 12.05%
Principal Capital Accumulation Fund
(David L. White)
Our strategy with this portfolio is to hold common stocks of a wide number of
established companies and to vary the emphasis among various types of companies
based on our view of the economy and the value of companies based on estimates
of future free cash flows. While it is impossible to ignore short-term
influences, we tend to take the longer view. Our approach might also be
described as "top down". We look at the big picture, then move to industries,
geography, markets, etc., and from there to selection of specific investments.
The Fund outperformed the Lipper Growth and Income Average while lagging behind
the S&P 500 for the year, but outperformed the S&P 500 during the 4th quarter of
1995 mainly due to the increase in emphasis in the consumer noncyclical area.
During the past six quarters, the portfolio has moved from being substantially
overweighted in cyclical stocks to being neutral. The economic recovery that
commenced March 1991 is now nearing its end. Cyclical stocks do not do well in
the latter stages of an economic recovery. Aggregate corporate profit margins
are near all time highs, leaving them nowhere to go but down. This will make
growth in total corporate profits difficult to achieve. Therefore, we have
substantially increased the portfolios exposure to companies that will continue
to grow earnings even if the economy or corporate profits stop growing.
Principal Capital Accumulation Fund, Inc.*
Fund S&P 500 Lipper
Total Stock Growth & Income
Year Ended December 31, Return Index Fund Average
10,000 10,000 10,000
1986 11,619 11,868 11,629
1987 12,371 12,499 11,843
1988 14,156 14,575 13,739
1989 16,447 19,193 16,973
1990 14,825 18,595 16,218
1991 20,557 24,263 20,934
1992 22,515 26,112 22,814
1993 24,269 28,742 25,449
1994 24,388 29,117 25,210
1995 32,170 40,043 32,979
Total Returns *
As of December 31, 1995
1 Year 5 Year 10 Year
31.91% 16.76% 12.39%
Principal Emerging Growth Fund
(Michael R. Hamilton)
The Emerging Growth Fund performed better than the Lipper Mid Cap Average for
the year. This was a period of time the NASDAQ Composite return was the second
highest in its 24 year history. The portfolio has been structured to take
advantage of our broad themes of productivity enhancements, an aging population
trend and lower interest rates. The structure has resulted in investment
concentration in technology, financials, growth cyclicals and healthcare. We
have chosen to underweight utilities, energy and consumer areas. The Emerging
Growth Fund trailed the S&P 500 for 1995 primarily because of the differences in
sector weighting compared to the market. The emphasis on cyclical growth and
financial stocks hurt performance against benchmarks. An economic slowdown
seemed to be anticipated by investors and they sold off economically sensitive
stocks.
Going forward, the portfolio remains positioned to capture growth from an
elongated economic cycle. The current slowing in economic activity should set
the stage for further growth; therefore we continue to over-weight growth
cyclicals. These companies are low-cost producers with niche markets whose
revenues should benefit from the trend toward more outsourcing.
Principal Emerging Growth Fund, Inc.*
Fund Lipper
Total S&P 500 MID CAP
Year Ended December 31, Return Index Index
10,000 10,000 10,000
1988 12,369 11,661 11,476
1989 15,070 15,356 14,586
1990 13,186 14,877 14,067
1991 20,240 19,412 21,275
1992 23,264 20,892 23,213
1993 27,750 22,995 26,625
1994 27,967 23,296 26,079
1995 36,080 32,037 34,469
Total Returns*
As of December 31, 1995
Since Inception
1 Year 5 Year Date 12/18/87
29.01% 22.30% 17.31%
Principal Growth Fund
(Michael R. Hamilton)
The equity markets had a banner year in 1995. With inflation seemingly under
control, interest rates eased supporting a robust stock market. In addition,
corporate profits had one their better increases than had been seen in a long
time. The portfolio has been structured around a theme of productivity and
manufacturing efficiency. The companies that can enable the enhancement of both
labor and machines should be in a stronger position than their competition.
Another related theme has been the demographic growth of babyboomers and the
corresponding need for healthcare and financial services.
The healthcare sector was the strongest in the portfolio for the year. The fund
did trail the S&P 500 given the selloff in the Technology sector in the fourth
quarter. While no major change is planned currently in the portfolio we continue
to focus on those companies that are best positioned the take market share from
their competitors, develop new markets and products and sell into a global
marketplace. Also, we favor companies with proven management that have the
skills to operate profitably in this competitive environment.
Principal Growth Fund*
S&P 500
Fund Broad Lipper
Total Based Growth
Year Ended December 31, Return Index Index
10,000 10,000 10,000
1994 10,542 10,395 10,090
1995 13,243 14,296 13,197
Total Returns *
As of December 31, 1995
Since Inception
1 Year Date 5/2/94 10 Year
25.62% 18.33% --
Principal World Fund
(Scott D. Opsal)
International equities provided positive returns for 1995 of just over 10%.
Europe was the star performing region for 1995, rising over 20% compared with a
small gain from Japan and losses in Southeast Asia and Latin America. The
Principal World Fund outperformed the average fund for the year on the basis of
large exposures to undervalued European markets which performed well, and
underweightings in Japan and Latin America which did poorly.
Europe was the strongest international region in the world for 1995, up over
20%. Japan was essentially flat, and emerging markets lost 7% paced by Latin
America's 15% drop. The Principal World Fund was significantly overweighted in
the top five performing countries in the world and underweighted in the poorest
performers. These weightings were based on relative valuations with the heaviest
overweightings found in the countries carrying the lowest valuation parameters.
The Fund also benefited from being overweighted in industrial cyclical and
consumer durable sectors which experienced earnings and market value gains
resulting from continued economic expansion in Europe. Emerging markets
performed poorly in 1995, and the Fund's small exposure to this market sector
allowed it to avoid the negative returns suffered by emerging market investors.
Finally, we estimate the World Fund experienced a positive 4.4% impact from
currencies, while Morgan Stanley Capital International EAFE's (Europe, Australia
and Far East) yearly total was a positive 1.5%.
Principal World Fund*
Fund Morgan Stanley Lipper
Total EAFE International
Year Ended December 31, Return Index Index
10,000 10,000 10,000
1994 9,663 9,991 9,758
1995 11,032 11,111 10,676
Total Returns *
As of December 31, 1995
Since Inception
1 Year Date 5/2/94 10 Year
14.17% 6.06% --
Important Notes of the Growth-Oriented Funds:
Standard & Poor's 500 Stock Index: an unmanaged index of 500 widely held common
stocks representing industrial, financial, utility and transportation companies
listed on the New York Stock Exchange, American Stock Exchange and the
Over-the-Counter market.
Lipper Balanced Fund Average: this average consists of mutual funds which
attempt to conserve principal by maintaining at all times a balanced portfolio
of both stocks and bonds. Typically, the stock/bond ratio ranges around 60%/40%.
The one year average currently contains 220 mutual funds.
Lipper Growth Fund Average: This average consists of funds which normally invest
in companies whose long-term earnings are expected to growth significantly
faster than the earnings of the stocks represented in the major unmanaged stock
indices. The one-year average currently contains 572 funds.
Lipper Growth & Income Fund Average: this average consists of funds which
combine a growth of earnings orientation and an income requirement for level
and/or rising dividends. The one year average currently contains 438 funds.
Lipper Mid Cap Fund Average: This average consists of funds which by prospectus
or portfolio practice, limit their investments to companies with average market
capitalizations and/or revenues between $800 million and the average market
capitalization of the Wilshire 4500 Index (as captured by the Vanguard Index
Extended Market Fund). The one-year average currently contains 106 funds.
Morgan Stanley EAFE (Europe, Australia and Far East) Index: This average
reflects an arithmetic, market value weighted average of performance of more
than 900 listed securities which are listed on the stock exchanges of the
following countries: Australia, Austria, Belgium, Denmark, Netherlands, New
Zealand, Norway, Singapore/Malaysia, Spain, Sweden, Switzerland, and the United
Kingdom.
Lipper International Fund Average: This average consists of funds which invest
in securities primarily traded in markets outside of the United States. The
one-year average currently contains 254 funds.
Income-Oriented Funds
Principal Bond Fund
(Donald D. Brattebo)
1995 was an extremely good year for fixed income securities as interest rates
declined dramatically throughout the year. The Principal Bond Fund was no
exception, posting double digit total returns and erasing the slight losses
experienced in 1994. Our relatively long portfolio duration contributed to our
superior performance versus the Lipper BAA Corporate Index during 1995. The high
absolute level of returns for the Fund was also driven by investment grade
corporate securities outperforming most other fixed income alternatives. The
Fund's total return also compares favorably to the Lipper BAA Corporate Index
over the life of the Fund. We believe the above average long-term performance is
the result of consistently following our investment strategy of being fully
invested in a well diversified portfolio of investment grade corporate issues
and not betting on interest rates through changes in portfolio duration or
purchasing callable securities. We will continue to follow this strategy and
expect investment grade corporates to continue to be a good fixed income
investment selection.
Principal Bond Fund, Inc.*
Fund Lehman Lipper
Total BAA BBB
Year Ended December 31, Return Index Avg
10,000 10,000 10,000
1988 10,991 11,129 10,900
1989 12,514 12,699 12,060
1990 13,167 13,595 12,751
1991 15,369 16,113 15,020
1992 16,810 17,512 16,258
1993 18,771 19,665 18,261
1994 18,227 18,707 17,447
1995 22,268 22,959 20,948
Total Returns *
As of December 31, 1995
Since Inception
1 Year 5 Year date 12/18/87
22.17% 11.08% 10.48%
Principal Government Securities Fund
(Martin J. Schafer)
The U.S. Federal Reserve Board's long-term goal of low inflation and steady
growth appears closer to reality with each passing year. The dismal performance
of 1994 was due to the Fed's actions to slow economic growth and potential
inflation. In 1995, the dramatic turnaround was the result of the markets
recognizing that inflation was well contained at the peak of this economic
cycle. In fact, the most powerful ingredient in calculating inflation--labor
costs--has been deflating. With wage increases holding steady and benefit
packages being trimmed, corporate America has forced workers to work smarter and
harder resulting in increased productivity. This provides products with lower
unit labor costs. We look for the Fed to continue their vigilant fight against
inflation. While ultimately this should be beneficial to all fixed-income
investors, the road to solid returns may be rocky from time to time.
This Fund's success reflects our preference for slightly longer duration assets
than our competitors. We try to keep our duration between 5 and 6 years. The
duration as of December 31, 1995, was 5.16 years. Duration measures the
sensitivity of the value of the mortgage-backed securities to changes in
interest rates. In general, if interest rates change one percentage point, the
value will change in the opposite direction by a percentage which equals the
duration.
Principal Government Securities Fund*
Fund Lehman Lipper
Total Mortgage U.S. Mortgage
Year Ended December 31, Return Index Index
10,000 10,000 10,000
1987 10,099 10,204 10,104
1988 10,939 11,094 10,858
1989 12,645 12,808 12,224
1990 13,852 14,183 13,370
1991 16,200 16,410 15,348
1992 17,308 17,551 16,285
1993 19,051 18,751 17,499
1994 18,188 18,450 16,769
1995 21,656 21,549 19,491
Total Returns *
As of December 31, 1995
Since Inception
1 Year 5 Year Date 4/9/87
19.07% 9.35% 9.26%
Important Notes of the Income-Oriented Funds:
Lehman Brothers, BAA Corporate Index: an unmanaged index of all publicly issued
fixed rate nonconvertible, dollar-denominated, SEC-registered corporate debt
rated Baa or BBB by Moody's or S&P.
Lipper Corporate Debt BBB Rated Funds Average: this average consists of mutual
funds investing at least 65% of their assets in corporate and government debt
issues rated by S&P or Moody's in the top four grades. The one year average
currently contains 82 mutual funds.
Lehman Brothers Mortgage Index: an unmanaged index of 15- and 30-year fixed rate
securities backed by mortgage pools of the Government National Mortgage
Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and Federal
National Mortgage Association (FNMA).
Lipper U.S. Mortgage Fund Average: this average consists of mutual funds
investing at least 65% of their assets in mortgages/securities issued or
guaranteed as to principal and interest by the U.S. Government and certain
federal agencies. The one year average currently contains 51 mutual funds.
Note: Mutual fund data from Lipper Analytical Services, Inc.
DETERMINATION OF NET ASSET VALUE OF FUND SHARES
The net asset value of each Fund's shares is determined daily, Monday
through Friday, as of the close of trading on the New York Stock Exchange,
except on days on which changes in the value of the Fund's portfolio securities
will not materially affect the current net asset value of the 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 net asset value per
share of each Fund is determined by dividing the value of the Fund's securities
plus all other assets, less all liabilities, by the number of Fund shares
outstanding.
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. Other securities are valued by
using market quotations, prices provided by market makers or estimates of market
values obtained from yield data and other factors relating to instruments or
securities with similar characteristics in accordance with procedures
established in good faith by the Board of Directors. Securities with remaining
maturities of 60 days or less are valued at amortized cost when it is determined
by the Board that amortized cost reflects fair value. Other assets are valued at
fair value as determined in good faith by the Board of Directors of the Fund.
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 or Sub-Advisor 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
The Money Market Fund values its securities at amortized cost. For a
description of this calculation procedure see the Funds' Statement of Additional
Information.
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. 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. 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. Any performance data quoted for the Funds represents only
historical performance and is not intended to indicate future performance of the
Funds. The calculation of average annual total return and yield for the Funds
does not include fees and charges of the separate accounts that invest in the
Funds and, therefore, does not reflect the investment performance of those
separate accounts. For further information on how the Funds calculate yield and
total return figures, see the Statement of Additional Information.
Average Annual Total Return
Each Fund may advertise its respective average annual total return. 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. 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.
Yield and Effective Yield
From time to time the Money Market Fund may advertise its respective 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 Money Market 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. A shareholder's 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.
INCOME DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
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, the Funds intend 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 amounts so
distributed to investors.
Any dividends from the net investment income of the Funds (except the Money
Market Fund) will normally be payable to the shareholders annually, and any net
realized gains will be distributed annually. All dividends and capital gains
distributions are applied to purchase additional Fund shares at net asset value
as of the payment date without the imposition of any sales charge.
Each Fund will notify shareholders of the portion of each distribution
which constitutes investment income or capital gain. In view of the complexity
of tax considerations, it is advisable for Eligible Purchasers considering the
purchase of shares of the Funds to consult with tax advisors on the federal and
state tax aspects of their investments and redemptions.
Money Market Fund
The Money Market Fund declares dividends of all its daily net investment
income on each day the Fund's net asset value per share is determined. Dividends
are payable daily and are automatically reinvested in full and fractional shares
of the Fund at the then current net asset value unless a shareholder requests
payment in cash.
Net investment income, 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 the Fund.
Since the Fund's policy is, under normal circumstances, to hold portfolio
securities to maturity and to value portfolio securities at amortized cost, it
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 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 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 investing 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.
The Board of Directors 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 affect on shareholders.
ELIGIBLE PURCHASERS AND PURCHASE OF SHARES
Only Eligible Purchasers may purchase shares of the Funds. Eligible
Purchasers are limited to (a) separate accounts of Principal Mutual Life
Insurance Company or of other insurance companies; (b) Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof; (c) trustees or other
managers of any qualified profit sharing, incentive or bonus plan established by
Principal Mutual Life Insurance Company or any subsidiary or affiliate thereof
for the employees of such company, subsidiary or affiliate. Such trustees or
managers may purchase Fund shares only in their capacities as trustees or
managers and not for their personal accounts. The Board of Directors of each
Fund reserves the right to broaden or limit the designation of Eligible
Purchasers.
Principal Balanced, Principal Bond, Principal Capital Accumulation Fund,
Principal Emerging Growth and Principal Money Market Fund each serve as an
underlying investment medium for variable annuity contracts and variable life
insurance policies that are funded in separate accounts established by Principal
Mutual Life Insurance Company. It is conceivable that in the future it may be
disadvantageous for variable life insurance separate accounts and variable
annuity separate accounts to invest in the Funds simultaneously. Although
neither Principal Mutual Life Insurance Company nor the Funds currently foresee
any such disadvantages either to variable life insurance policy owners or to
variable annuity contract owners, each Fund's Board of Directors intends to
monitor events in order to identify any material conflicts between such policy
owners and contract owners and to determine what action, if any, should be taken
in response thereto. Such action could include the sale of Fund shares by one or
more of the separate accounts, which could have adverse consequences. Material
conflicts could result from, for example, (1) changes in state insurance laws,
(2) changes in Federal income tax law, (3) changes in the investment management
of the Fund, or (4) differences in voting instructions between those given by
policy owners and those given by contract owners.
Shares are purchased from Princor Financial Services Corporation, the
principal underwriter for the Funds. There are no sales charges on the Funds'
shares. There are no restrictions on amounts to be invested in the Funds'
shares.
Shareholder accounts for each Fund will be maintained under an open account
system. Under this system, an account is automatically opened and maintained for
each new investor. Each investment is confirmed by sending the investor a
statement of account showing the current purchase and the total number of shares
then owned. The statement of account is treated by each Fund as evidence of
ownership of Fund shares in lieu of stock certificates, and unless written
request is made to the Fund, stock certificates will not be issued or delivered
to investors. Certificates, which can be stolen or lost, are unnecessary except
for special purposes such as collateral for a loan. Fractional interests in the
Funds' shares are reflected to three decimal places in the statement of account,
but any stock certificates will be issued only for full shares owned.
If an offer to purchase shares is received by any of the Funds before the
close of trading on the New York Stock Exchange, the shares will be issued at
the offering price (net asset value of Fund shares) computed on that day. If an
offer is received after the close of trading or on a day which is not a trading
day, the shares will be issued at the offering price computed on the first
succeeding day on which a price is determined. Dividends on the Money Market
Fund shares will be paid on the next day following the effective date of a
purchase order.
SHAREHOLDER RIGHTS
The following information is applicable to each of the Principal Funds.
Each Fund share is entitled to one vote either in person or by proxy at all
shareholder meetings for that Fund. This includes the right to vote on the
election of directors, selection of independent accountants and other matters
submitted to meetings of shareholders. Each share has equal rights with every
other share as to dividends, earnings, voting, assets and redemption. Shares are
fully paid and non-assessable, and have no preemptive or conversion rights.
Shares may be issued as full or fractional shares, and each fractional share has
proportionately the same rights, including voting, as are provided for a full
share. Shareholders of each of these Funds may remove any director with or
without cause by the vote of a majority of the votes entitled to be cast at a
meeting of shareholders.
The bylaws of each Fund provide that the Board of Directors of the Fund may
increase or decrease the aggregate number of shares which the Fund has authority
to issue without a shareholder vote.
The bylaws of each Fund also provide that the Fund need not hold an annual
meeting of shareholders in any year in which none of the following is required
to be acted on by shareholders under the Investment Company Act of 1940:
election of directors; approval of investment advisory agreement; ratification
of selection of independent public accountants; and approval of distribution
agreement. 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.
Shareholder inquiries should be directed to the applicable Fund at The
Principal Financial Group, Des Moines, Iowa 50392.
NON-CUMULATIVE VOTING: The Funds' shares have non-cumulative voting rights
which means that the holders of more than 50% of the shares voting for the
election of directors of a Fund can elect 100% of the directors if they choose
to do so, and in such event, the holders of the remaining shares voting for the
election of directors will not be able to elect any directors.
Principal Mutual Life Insurance Company votes each Fund's shares allocated
to each of its separate accounts registered under the Investment Company Act of
1940 and attributable to variable annuity contracts or variable life insurance
policies participating therein in accordance with instructions received from
contract or policy holders, participants and annuitants. Other shares of each
Fund held by each registered separate account, including those for which no
timely instructions are received, are voted in proportion to the instructions
that are received with respect to contracts or policies participating in that
separate account. Shares of each of the Funds held in the general account of
Principal Mutual Life Insurance Company or in its unregistered separate accounts
are voted in proportion to the instructions that are received with respect to
contracts and policies participating in its registered and unregistered separate
accounts. If Principal Mutual determines pursuant to applicable law that a
Fund's shares held in one or more separate accounts or in its general account
need not be voted pursuant to instructions received with respect to
participating contracts or policies, it then may vote those Fund shares in its
own right.
REDEMPTION OF SHARES
Except for the third paragraph below, most of the following discussion of
redemption procedures is relevant only to Eligible Purchasers other than
variable annuity and variable life separate accounts of Principal Mutual Life
Insurance Company, and its wholly-owned subsidiaries.
Each Fund will redeem its shares upon request. There is no charge for
redemption. If no certificates have been issued, a shareholder simply writes a
letter to the appropriate Fund requesting redemption of any part or all of the
shares. The letter must be signed exactly as the account is registered. If
certificates have been issued, they must be properly endorsed and forwarded with
the request. If payment is to be made to the registered shareholder or joint
shareholders, 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. The
price at which the shares are redeemed will be the net asset value per share as
next computed after the request (with appropriate certificate, if any) is
received by the Fund in proper and complete form. The amount received for shares
upon redemption may be more or less than the cost of such shares depending upon
the net asset value at the time of redemption.
Redemption proceeds will be sent within three business days after receipt
of request for redemption in proper form. However, each Fund may suspend the
right of redemption during any period when (a) trading on the New York Stock
Exchange is restricted as determined by the Securities and Exchange Commission
or such Exchange is closed for other than weekends and holidays; (b) an
emergency exists, as determined by the Securities and Exchange Commission, as a
result of which (i) disposal by the Fund of securities owned by it is not
reasonably practicable, or (ii) it is not reasonably practicable for the Fund
fairly to determine the value of its net assets; or (c) the Commission by order
so permits for the protection of security holders of the Fund. A Fund will
redeem only those shares for which it has good payment. To avoid the
inconvenience of such a delay, shares may be purchased with a certified check,
bank cashier's check or money order. During the period prior to the time a
redemption from the Money Market Fund is effective, dividends on such shares
will accrue and be payable and the shareholder will be entitled to exercise all
other rights of beneficial ownership.
Restricted Transfer: Shares of each of the Funds may be transferred to an
Eligible Purchaser. However, whenever any of the Funds is requested to transfer
shares to other than an Eligible Purchaser, the Fund has the right at its
election to purchase such shares at their net asset value next effective
following the time at which the request for transfer is presented; provided,
however, that the Fund must notify the transferee or transferees of such shares
in writing of its election to purchase such shares within seven (7) days
following the date of such request and settlement for such shares shall be made
within such seven-day period.
ADDITIONAL INFORMATION
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 World Fund. The custodian for the World 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.
Organization and Share Ownership: The Funds were incorporated in the state
of Maryland on the following dates: Balanced Fund - November 26, 1986; Bond Fund
- - November 26, 1986; Capital Accumulation 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); Emerging Growth Fund - February
20, 1987; Government Securities Fund - June 7, 1985; Growth Fund - August 20,
1993; Money Market Fund - June 10, 1982; and World Fund August 20, 1993.
Principal Mutual Life Insurance Company owns 100% of each Fund's outstanding
shares.
Capitalization: The authorized capital stock of each Fund consists of
100,000,000 shares of common stock (500,000,000 for Principal Money Market Fund,
Inc.), $.01 par value.
Financial Statements: Copies of the financial statements of each Fund will
be mailed to each shareholder of that Fund semi-annually. 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 the Funds' Statement of Additional Information can be
obtained upon request, free of charge, by writing or telephoning the Fund. 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, The
Principal Financial Group, Des Moines, Iowa 50392-0200, is the principal
underwriter for each of the Principal Funds.
The Principal(R) Mutual Funds ("Principal Funds") described in this
Prospectus are a family of separately incorporated, diversified, open-end
management investment companies, commonly called mutual funds, which provide the
following range of investment objectives:
PRINCIPAL 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 Government Securities Fund, Inc. seeks a high level of current income,
liquidity 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 Money Market 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 all of its assets in a portfolio of
money market instruments.
An investment in the Money Market Fund 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 ought to 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 documents called Statements of Additional
Information, dated May 1, 1996. The Statements of Additional Information are
incorporated by reference into this Prospectus. A copy of the Statements of
Additional Information can be obtained free of charge by writing or telephoning:
Principal Mutual Funds
a Member of
The Principal Financial Group
Des Moines, IA 50392
Telephone 1-800-247-4123
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is May 1, 1996.
<PAGE>
TABLE OF CONTENTS
Page
Summary ................................................ 2
Financial ............................................... 4
Investment Objectives, Policies and Restrictions......... 5
Certain Investment Policies and Restrictions............. 7
Manager ................................................. 9
Duties Performed by the Manager.......................... 9
Managers' Comments....................................... 10
Determination of Net Asset Value of Fund Shares.......... 11
Performance Calculation.................................. 12
Income Dividends, Distributions and Tax Status........... 12
Eligible Purchasers and Purchase of Shares............... 13
Shareholder Rights ...................................... 14
Redemption of Shares..................................... 14
Additional Information................................... 15
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. 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.
SUMMARY
The following summarized information should be read in conjunction with the
detailed information appearing elsewhere in this Prospectus.
The Principal Funds are separately incorporated, open-end diversified
management investment companies.
Who may purchase shares of the Funds?
Shares of the Funds are available only to Eligible Purchasers which are
limited to: (a) separate accounts of Principal Mutual Life Insurance Company or
of other insurance companies; (b) Principal Mutual Life Insurance Company or any
subsidiary or affiliate thereof; (c) trustees or other managers of any qualified
profit sharing, incentive or bonus plan established by Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof for the employees of
such company, subsidiary or affiliate. The Board of Directors of each Fund
reserves the right to broaden or limit the designation of Eligible Purchasers.
What do the Funds offer investors?
Professional Investment Management: Experienced securities analysts provide
each Fund with professional investment management.
Diversification: Each Fund will diversify by investing in securities issued
by a number of issuers doing business in a variety of industries, located in
different geographical regions and/or securities which have varying maturities.
Diversification reduces investment risk.
Economies of Scale: Pooling individual shareholder's investments in any of
the Funds creates administrative efficiencies.
Redeemability: Upon request each Fund will redeem its shares and promptly
pay the investor the current net asset value of the shares redeemed. See
"Redemption of Shares."
What are the Funds' investment objectives?
The investment objective of Principal Capital Accumulation Fund, Inc.
(sometimes referred to as the Capital Accumulation Fund) is long-term capital
appreciation and its secondary investment objective is growth of investment
income. The Fund seeks to achieve its investment objectives through the purchase
primarily of common stocks but the Fund may invest in other securities.
The investment objective of Principal Government Securities Fund, Inc.
(sometimes referred to as the Government Securities Fund) is to seek a high
level of current income, liquidity 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.
The investment objective of Principal Money Market Fund, Inc. (sometimes
referred to as the Money Market 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 all of its
assets in a portfolio of 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."
Who serves as Manager for the Funds?
Princor Management Corporation, a corporation organized in 1969 by
Principal Mutual Life Insurance Company, is the Manager for each of the Funds.
It is also the dividend disbursing and transfer agent for the Principal Funds.
See "Manager."
What fees and expenses apply to ownership of shares of the Funds?
The following table depicts fees and expenses applicable to the purchase
and ownership of shares of each of the Funds.
ANNUAL FUND OPERATING EXPENSES
(As a Percentage of Average Net Assets)
Management Other Total Operating
Fund Fee Expenses Expenses
Capital Accumulation Fund .49 .02 .51
Government Securities Fund .50 .05 .55
Money Market Fund .50 .08 .58
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: Period (in
years)
Fund 1 3 5 10
Capital Accumulation Fund $5 $16 $29 $64
Government Securities Fund $6 $18 $31 $69
Money Market Fund $6 $19 $32 $73
This Example is based on the Annual Fund Operating Expenses for each Fund
described above. Please remember that the Example should not be considered a
representation of past or future expenses and that actual expenses may be
greater or less than those shown.
The purpose of the above table is to assist the investor in understanding
the various expenses that an investor in the Funds will bear directly or
indirectly. The Fee Table and Example do not reflect expenses and charges of the
Separate Accounts that invest in the Fund. Information regarding Separate
Account expenses and charges is provided in the respective Separate Account
prospectuses.
See "Duties Performed by the Manager."
FINANCIAL HIGHLIGHTS
The following financial highlights for the periods ended December 31, 1995
are derived from the financial statements which 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. The financial statements may be obtained by
investors, without charge, by telephoning 1-800-451-5447.
<TABLE>
<CAPTION>
Income from
Investment Operations Less Distributions
--------------------------------------- --------------------------------------------
Net Realized
Net Asset and
Value at Unrealized Total Dividends Distribution
Beginning Net Gain from from Net from
of Investment (Loss) on Investment Investment Capital Total
Period Income Investments Operations Income Gains Distributions
--------- ---------- ------------ ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Principal Capital
Accumulation Fund, Inc.
Year Ended
December 31,
1995 $23.44 $.60 $6.69 $7.29 $(.60) $(2.33) $(2.93)
1994 24.61 .62 (.49) .13 (.61) (.69) (1.30)
1993 25.19 .61 1.32 1.93 (.60) (1.91) (2.51)
Six Months Ended
December 31,
1992(a) 26.03 .31 1.84 2.15 (.64) (2.35) (2.99)
Year Ended
June 30,
1992 23.35 .65 2.70 3.35 (.67) - (.67)
1991 22.48 .74 1.22 1.96 (.79) (.30) (1.09)
1990 23.63 .79 .14 .93 (.81) (1.27) (2.08)
1989 23.23 .77 1.32 2.09 (.68) (1.01) (1.69)
1988 27.51 .60 (1.50) (.90) (.69) (2.69) (3.38)
1987 25.48 .40 4.46 4.86 (.50) (2.33) (2.83)
1986 21.93 .51 6.65 7.16 (.66) (2.95) (3.61)
Principal Government
Securities Fund, Inc.
Year Ended
December 31,
1995 9.38 .60 1.18 1.78 (.61) - (.61)
1994 10.61 .76 (1.24) (.48) (.75) - (.75)
1993 10.28 .71 .33 1.04 (.71) - (.71)
Six Months Ended
December 31,
1992(a) 10.93 .40 .04 .44 (.78) (.31) (1.09)
Year Ended
June 30,
1992 10.24 .80 .71 1.51 (.81) (.01) (.82)
1991 10.05 .80 .24 1.04 (.81) (.04) (.85)
1990 10.05 .78 - .78 (.78) - (.78)
1989 9.37 .80 .34 1.14 (.46) - (.46)
1988 9.47 .78 (.09) .69 (.79) - (.79)
Period Ended
June 30,
1987(d) 10.00 .18 (.59) (.41) (.12) - (.12)
Principal Money
Market Fund, Inc.
Year Ended
December 31,
1995 1.000 .054 - .054 (.054) - (.054)
1994 1.000 .037 - .037 (.037) - (.037)
1993 1.000 .027 - .027 (.027) - (.027)
Six Months Ended
December 31,
1992(a) 1.000 .016 - .016 (.016) - (.016)
Year Ended
June 30,
1992 1.000 .046 - .046 (.046) - (.046)
1991 1.000 .070 - .070 (.070) - (.070)
1990 1.000 .077 - .077 (.077) - (.077)
1989 1.000 .083 - .083 (.083) - (.083)
1988 1.000 .064 - .064 (.064) - (.064)
1987 1.000 .057 - .057 (.057) - (.057)
1986 1.000 .070 - .070 (.070) - (.070)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
-------------------------------------------------------
Ratio of
Net
Net Asset Net Assets Ratio of Investment
Value at end of Expenses to Income to Portfolio
at End Total Period (in Average Average Turnover
of Period Return thousands) Net Assets Net Assets Rate
--------- ------ ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Principal Capital
Accumulation Fund, Inc.
Year Ended
December 31,
1995 $27.80 31.91% $135,640 .51% 2.25% 49.2%
1994 23.44 .49% 120,572 .51% 2.36% 44.5%
1993 24.61 7.79% 128,515 .51% 2.49% 25.8%
Six Months Ended
December 31,
1992(a) 25.19 8.81%(b) 105,355 .55%(c) 2.56%(c) 39.7%(c)
Year Ended
June 30,
1992 26.03 14.53% 94,596 .54% 2.65% 34.8%
1991 23.35 9.46% 76,537 .53% 3.53% 14.0%
1990 22.48 3.94% 74,008 .56% 3.56% 30.2%
1989 23.63 10.02% 68,132 .57% 3.53% 23.5%
1988 23.23 (2.67)% 62,696 .60% 2.76% 26.7%
1987 27.51 22.17% 57,478 .63% 1.99% 16.1%
1986 25.48 38.37% 35,960 .60% 2.63% 37.8%
Principal Government
Securities Fund, Inc.
Year Ended
December 31,
1995 10.55 19.07% 50,079 .55% 6.73% 9.8%
1994 9.38 (4.59)% 36,121 .56% 7.05% 23.2%
1993 10.61 10.07% 36,659 .55% 7.07% 20.4%
Six Months Ended
December 31,
1992(a) 10.28 4.10%(b) 31,760 .59%(c) 7.35%(c) 34.5%(c)
Year Ended
June 30,
1992 10.93 15.34% 33,022 .58% 7.84% 38.9%
1991 10.24 10.94% 26,021 .59% 8.31% 4.2%
1990 10.05 8.16% 21,488 .61% 8.48% 18.7%
1989 10.05 12.61% 15,890 .63% 8.68% 3.7%
1988 9.37 7.69% 12,902 .66% 8.47% 2.7%
Period Ended
June 30,
1987(d) 9.47 (.94)%(b) 10,778 .64%(c) 8.50%(c) 0.2%
Principal Money
Market Fund, Inc.
Year Ended
December 31,
1995 1.00 05.59% 32,670 .58% 5.32% N/A
1994 1.00 03.76% 29,372 .60% 3.81% N/A
1993 1.00 02.69% 22,753 .60% 2.64% N/A
Six Months Ended
December 31,
1992(a) 1.00 01.54%(b) 27,680 .59%(c) 3.10%(c) N/A
Year Ended
June 30,
1992 1.00 04.64% 25,194 .57% 4.54% N/A
1991 1.00 07.20% 26,509 .56% 6.94% N/A
1990 1.00 08.37% 26,588 .57% 8.05% N/A
1989 1.00 08.59% 20,707 .61% 8.40% N/A
1988 1.00 06.61% 14,571 .64% 6.39% N/A
1987 1.00 05.78% 11,902 .65% 5.68% N/A
1986 1.00 07.35% 8,896 .69% 7.06% N/A
<FN>
(a) Effective June 8, 1992, the fund changed its fiscal year-end from June 30 to
December 31.
(b) Total Return Amounts have not been annualized.
(c) Computed on an annualized basis.
(d) Period from April 9, 1987, date shares first offered to the public, through
June 30, 1987. Net investment income, aggregating $.01 per share for the
period from the initial purchase of shares on March 30, 1987 through April
8, 1987 was recognized, all of which was distributed to the Fund's sole
stockholder, Principal Mutual Life Insurance Company. This represented
activity of the Fund prior to the initial offering of shares to eligible
purchasers.
</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.
Principal Capital Accumulation Fund
The objective of Principal Capital Accumulation Fund is long-term capital
appreciation. A secondary objective is growth of investment income.
The Fund will invest primarily in common stocks, but may invest in other
securities. In making selections for the Fund's investment portfolio, the Fund
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
objective, investments will be made in securities which as a group appear to
offer long-term prospects for capital and income growth. 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 Government Securities Fund
The objective of Principal Government Securities 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 for daily cash management purposes
or pending selection of particular long-term investments.
Depending on market conditions, up to 55% of the assets may be invested in
GNMA Certificates. 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.
To the extent deemed appropriate by the Fund's Manager, the Fund intends to
purchase GNMA Certificates directly from Principal Mutual Life Insurance Company
and other issuers as well as from securities dealers. The Fund will purchase
directly from issuers only if it can obtain a price advantage by not paying the
commission or mark-up that would be required if the Certificates were purchased
from a securities dealer. The Securities and Exchange Commission has issued an
order under the Investment Company Act of 1940 that permits the Fund to purchase
GNMA Certificates directly from Principal Mutual Life Insurance Company subject
to certain conditions.
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 Marketing Association is a government sponsored
stockholder-owned organization whose goal is to provide liquidity to financial
and educational institutions. SLMA provides liquidity by purchasing student
loans, which are principally government guaranteed loans issued under the
Federal Guaranteed Student Loan Program and the Health Education Assistance Loan
Program. SLMA securities are not guaranteed by the U.S. Government but are
obligations solely of the agency. SLMA senior debt issues in which the Fund
invests are rated AAA by Standard & Poor's and Aaa by Moody's.
There are other obligations issued or guaranteed by the United States
Government (such as U.S. Treasury securities) or by its agencies or
instrumentalities that are either supported by the full faith and credit of the
U.S. Treasury or the credit of a particular agency or instrumentality. Included
in the latter category are Federal Home Loan Bank and Farm Credit Banks.
Obligations not guaranteed by the United States Government are highly rated
because they are issued by indirect branches of government. Such paper is issued
as needs arise by the 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. 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 Money Market Fund
The Principal Funds also include a Fund which invests primarily in
short-term securities, Principal Money Market Fund. Securities in which this
Fund invests 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 Money Market Fund will limit its portfolio investments to United States
dollar denominated instruments that its 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 the 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 at the time of issuance was a long-term security that has 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 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 below the 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, below the highest
rating category for short-term obligations;
(3) Securities which are unrated but are determined by the Fund's board of
directors to be of comparable quality to securities rated below the
highest rating category for short-term debt obligations.
The Fund will maintain a dollar-weighted average portfolio maturity of
90 days or less.
The objective of the Money Market Fund is to seek 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 all of 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 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.
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.
The Fund intends to hold its investments until maturity. However, it may
attempt from time to time to increase its yield by trading 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 times when such
sales might otherwise not be desirable. The Fund's right to borrow to facilitate
redemptions may reduce the need for such sales. It is the Fund's policy to be as
fully invested as reasonably practical at all times to maximize current income.
Since portfolio assets will consist of short-term instruments, replacement
of portfolio securities will occur frequently. However, since the 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 the investment objective.
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.
Diversification
Each Fund is subject to the diversification requirements of Section 817(h)
of the Internal Revenue Code (the "Code") which must be met at the end of each
quarter of the year (or within 30 days thereafter). Regulations issued by the
Secretary of the Treasury have the effect of requiring the Fund to invest no
more than 55% of its total assets in securities of any one issuer, no more than
70% in the securities of any two issuers, no more than 80% in the securities of
any three issuers, and no more than 90% in the securities of any four issuers.
For this purpose, the United States Treasury and each U.S. Government agency and
instrumentality is considered to be a separate issuer. Thus, the Government
Securities Fund intends to invest in U.S. Treasury securities and in securities
issued by at least four U.S. Government agencies or instrumentalities in the
amounts necessary to meet those diversification requirements at the end of each
quarter of the year (or within thirty days thereafter).
In the event any of the Funds do not meet the diversification requirements
of Section 817(h) of the Code, the contracts funded by shares of the Funds will
not be treated as annuities or life insurance for Federal income tax purposes
and the owners of the Funds will be subject to taxation on their share of the
dividends and distributions paid by the Funds.
Foreign Securities
The Capital Accumulation Fund may invest up to 20% of its assets in foreign
securities. Investment in foreign securities presents certain risks including
those resulting from fluctuations in currency exchange rates, revaluation of
currencies, the imposition of foreign taxes, future political and economic
developments including war, expropriations, nationalization, the possible
imposition of currency exchange controls and other foreign governmental laws or
restrictions, reduced availability of public information concerning issuers, and
the fact that foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements comparable to those applicable to domestic issuers. Moreover,
securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. In addition, transactions in
foreign securities may be subject to higher costs, and the time for settlement
of transactions in foreign securities may be longer than the settlement period
for domestic issuers. The Fund's investment in foreign securities may also
result in higher custodial costs and the costs associated with currency
conversions.
Investment Hedges
The Government Securities Fund may purchase covered spread options, which
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. In addition, the Fund may write call and put
options on securities and securities indices to generate additional income, and
it may purchase and sell those kinds of options, financial futures contracts and
options on financial futures contracts in anticipation of a decline in the value
of securities owned by the Fund or an increase in the price of securities the
Fund plans to purchase. 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. The Fund will not invest more than
5% of its assets in the purchase of covered spread options and the purchase of
put and call options on securities, securities indices and financial futures
contracts. The Fund will also not invest more than 5% of its assets in initial
margin and premiums on financial futures contracts and options thereon. Risks
associated with options transactions include the risk that movements in the
market prices of underlying securities could cause the Fund to lose the amount
of the premium paid for an option or to have to sell securities for less than
their current market price or purchase securities for more than their current
market price, and the risk that trading markets could become illiquid thereby
precluding closing transactions. Futures contracts have similar risks and, in
addition, are subject to the risk of imperfect correlation between changes in
the prices of futures contracts and the securities being hedged. A more complete
statement of these investment practices and their associated risks is contained
in the Fund's Statement of Additional Information.
Other Investment Practices
Each of the Funds, except the Capital Accumulation Fund, may enter into
repurchase agreements with, and the Government Securities 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 each Fund's Statement of
Additional Information for further information regarding the credit risks
associated with repurchase agreements and the standards adopted by the 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 10% of its total assets or (ii) to loan
securities in excess of 30% of its total assets.
The Capital Accumulation Fund may invest in warrants up to 5% of its
assets, of which 2% may be invested in warrants that are not listed on the New
York or American Stock Exchange.
As a matter of fundamental policy, each of the Funds may borrow money only
for temporary or emergency purposes. The Capital Accumulation Fund and Money
Market Fund may borrow only from banks. The Government Securities Fund may
borrow only in an amount not exceeding 5% of its assets. The Capital
Accumulation Fund may borrow only in an amount not exceeding 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 the
borrowing is made. The Money Market Fund 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.
The Capital Accumulation Fund from time to time executes transactions for
portfolio securities with, and pays related brokerage commissions to, The
Principal/Eppler, Guerin and Turner, Inc., a broker-dealer that is an affiliate
of the Manager for each of the Funds.
The Statement of Additional Information includes further information
concerning the Funds' investment policies and applicable investment
restrictions. Each Fund's investment objective and certain investment
restrictions designated as such in this Prospectus or the Statement of
Additional Information are fundamental policies that may not be changed without
shareholder approval. All other investment policies described in the Prospectus
and the Statement of Additional Information for a Fund are not fundamental and
may be changed by the Board of Directors of the Fund without shareholder
approval.
MANAGER
The Manager for the Funds is Princor Management Corporation (the
"Manager"), which is 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 a Member of 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.
Through its affiliation with Principal Mutual Life Insurance Company, the
Manager has access to investment analysts and other resources necessary for the
Manager to perform as investment advisor for the Funds. The Manager has assigned
certain individuals the primary responsibility for the day-to-day management of
each Fund's portfolio. The persons primarily responsible for the day-to-day
management of each Fund are identified in the table below:
Primarily
Fund Responsible Since Person Primarily Responsible
- -------------------- ----------------- --------------------------------------
Capital Accumulation November, 1969 David L. White, CFA (BBA degree,
(Fund's inception) University of Iowa). Executive Vice
President, Invista Capital Management,
Inc. since 1984.
Government Securities April, 1987 Martin J. Schafer (BBA degree,
University of Iowa). Vice President,
Invista Capital Management Company
since 1992. Director - Securities
Trading, Principal Mutual Life
Insurance Company 1992; Prior thereto,
Associate Director.
DUTIES PERFORMED BY THE MANAGER
Under Maryland law, the business and affairs of each of the Funds are
managed under the direction of its Board of Directors. The Manager advises the
Funds on investment policies and on the composition of the Funds' portfolios. In
this connection, the Manager furnishes to the Board of Directors of each Fund a
recommended investment program consistent with that Fund's investment objective
and policies. The Manager 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 investment services and certain other services referred to under the
heading "Cost of Manager's Services" in the Statements of Additional Information
are furnished to the Funds under the terms of a Management Agreement between
each of the Funds and the Manager. The compensation paid by the Government
Securities Fund and Money Market Fund to the Manager for the year ended December
31, 1995 was equal to .50% of their respective average net assets. The
compensation paid by the Capital Accumulation Fund to the Manager for the fiscal
year ended December 31, 1995 was equal to .49% of the Fund's average net assets.
Total expenses for the Funds for the year ended December 31, 1995 were equal to
the following percentage of average net assets: Capital Accumulation Fund, .51%;
Government Securities Fund, .55%; and Money Market Fund, .58%.
The Manager may purchase at its 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. The Investment Service
Agreements for the Capital Accumulation Fund and Government Securities Fund also
include as a party Invista Capital Management, Inc., an indirectly wholly-owned
subsidiary of Principal Mutual Life Insurance Company, and also provides that
the subsidiaries of Principal Mutual Life Insurance Company will furnish the
same items and be reimbursed by the Manager for their costs incurred in this
regard.
Among the expenses paid by each Fund are its taxes (if any), brokerage
commissions on portfolio transactions, interest, custodial fees, fees and
expenses of unaffiliated directors and the cost of shareholder meetings. The
Manager is the dividend disbursing and transfer agent for each Fund and also
serves as investment advisor and dividend disbursing and transfer agent for each
of the other funds sponsored by Principal Mutual Life Insurance Company.
MANAGERS' COMMENTS
Princor Management Corporation is staffed with investment professionals who
manage each individual fund. Comments by these individuals in the following
paragraphs summarize in capsule form the general strategy and recent results of
each fund over the past year. The accompanying charts display results for the
past 10 years or the life of the fund, whichever is shorter. Average Annual
Total Return figures provided for each fund in the graphs below reflect all
expenses of the fund and assume all distributions are reinvested at net asset
value. The figures do not reflect expenses of the variable life insurance
contracts or variable annuity contracts that purchase fund shares; performance
figures for the divisions of the contracts would be lower than performance
figures for the funds due to the additional contract expenses. Past performance
is not predictive of future performance. Returns and net asset value fluctuate.
Shares are redeemable at current net asset value, which may be more or less than
original cost.
The various indices included in the following graphs are unmanaged and do
not reflect any commissions or fees which would be incurred by an investor
purchasing the securities included in the index.
PRINCIPAL CAPITAL ACCUMULATION FUND
David L. White
Our strategy with this portfolio is to hold common stocks of a wide number of
established companies and to vary the emphasis among various types of companies
based on our view of the economy and the value of companies based on estimates
of future free cash flows. While it is impossible to ignore short-term
influences, we tend to take the longer view. Our approach might also be
described as "top down". We look at the big picture, then move to industries,
geography, markets, etc., and from there to selection of specific investments.
The Fund outperformed the Lipper Growth and Income Average while lagging behind
the S&P 500 for the year, but outperformed the S&P 500 during the 4th quarter of
1995 mainly due to the increase in emphasis in the consumer noncyclical area.
During the past six quarters, the portfolio has moved from being substantially
overweighted in cyclical stocks to being neutral. The economic recovery that
commenced March 1991 is now nearing its end. Cyclical stocks do not do well in
the latter stages of an economic recovery. Aggregate corporate profit margins
are near all time highs, leaving them nowhere to go but down. This will make
growth in total corporate profits difficult to achieve. Therefore, we have
substantially increased the portfolios exposure to companies that will continue
to grow earnings even if the economy or corporate profits stop growing.
Principal Capital Accumulation Fund, Inc.*
Fund S&P 500 Lipper
Total Stock Growth & Income
Year Ended December 31, Return Index Fund Average
10,000 10,000 10,000
1986 11,619 11,868 11,629
1987 12,371 12,499 11,843
1988 14,156 14,575 13,739
1989 16,447 19,193 16,973
1990 14,825 18,595 16,218
1991 20,557 24,263 20,934
1992 22,515 26,112 22,814
1993 24,269 28,742 25,449
1994 24,388 29,117 25,210
1995 32,170 40,043 32,979
Total Returns *
As of December 31, 1995
1 Year 5 Year 10 Year
31.91% 16.76% 12.39%
Important Notes:
Standard and Poor's 500 Stock Index: an unmanaged index of 500 widely held
common stocks representing industrial, financial, utility and
transportation companies listed on the New York Stock Exchange, American
Stock Exchange and the Over-the-Counter market.
Lipper Growth and Income Fund Average: this average consists of mutual
funds which combine a growth of earnings orientation and an income
requirement for level and/or rising dividends. The one year average
currently contains 438 mutual funds.
PRINCIPAL GOVERNMENT SECURITIES FUND
Marty Schafer
The U.S. Federal Reserve Board's long-term goal of low inflation and steady
growth appears closer to reality with each passing year. The dismal performance
of 1994 was due to the Fed's actions to slow economic growth and potential
inflation. In 1995, the dramatic turnaround was the result of the markets
recognizing that inflation was well contained at the peak of this economic
cycle. In fact, the most powerful ingredient in calculating inflation--labor
costs--has been deflating. With wage increases holding steady and benefit
packages being trimmed, corporate America has forced workers to work smarter and
harder resulting in increased productivity. This provides products with lower
unit labor costs. We look for the Fed to continue their vigilant fight against
inflation. While ultimately this should be beneficial to all fixed-income
investors, the road to solid returns may be rocky from time to time.
This Fund's success reflects our preference for slightly longer duration assets
than our competitors. We try to keep our duration between 5 and 6 years. The
duration as of December 31, 1995, was 5.16 years. Duration measures the
sensitivity of the value of the mortgage-backed securities to changes in
interest rates. In general, if interest rates change one percentage point, the
value will change in the opposite direction by a percentage which equals the
duration.
Principal Government Securities Fund*
Fund Lehman Lipper
Total Mortgage U.S. Mortgage
Year Ended December 31, Return Index Index
10,000 10,000 10,000
1987 10,099 10,204 10,104
1988 10,939 11,094 10,858
1989 12,645 12,808 12,224
1990 13,852 14,183 13,370
1991 16,200 16,410 15,348
1992 17,308 17,551 16,285
1993 19,051 18,751 17,499
1994 18,188 18,450 16,769
1995 21,656 21,549 19,491
Total Returns *
As of December 31, 1995
Since Inception
1 Year 5 Year Date 4/9/87
19.07% 9.35% 9.26%
Important Notes:
Lehman Brothers Mortgage Index: an unmanaged index of 15- and 30-year fixed
rate securities backed by mortgage pools of the Government National
Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation
(FHLMC), and Federal National Mortgage Association (FNMA).
Lipper U.S. Mortgage Fund Average: this average consists of mutual funds
investing at least 65% of their assets in mortgage/securities issued or
guaranteed as to principal and interest by the U.S. Government and certain
federal agencies. The one year average currently contains 51 mutual funds.
DETERMINATION OF NET ASSET VALUE OF FUND SHARES
The net asset value of each Fund's shares is determined daily, Monday
through Friday, as of the close of trading on the New York Stock Exchange except
on days on which changes in the value of the Fund's portfolio securities will
not materially affect the current net asset value of the Fund's redeemable
securities, on days during which the 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 net asset value per
share of each Fund is determined by dividing the value of the Fund's securities
plus all other assets, less all liabilities, by the number of Fund shares
outstanding.
The portfolios of the Capital Accumulation Fund and Government Securities
Fund are valued as follows. Securities for which market quotations are readily
available are valued using those quotations. Other securities are valued by
using market quotations, prices provided by market makers or estimates of market
values obtained from yield data and other factors relating to instruments or
securities with similar characteristics in accordance with procedures
established in good faith by the Board of Directors. Securities with remaining
maturities of 60 days or less are valued at amortized cost 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 by the Board of Directors
of the Fund.
As previously described, the Capital Accumulation Fund 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.
The Money Market Fund values its securities at amortized cost. For a
description of this calculation procedure see the Statement of Additional
Information. The Money Market Fund reserves the right to calculate or estimate
its net asset value more frequently than once per day if it deems it desirable.
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. 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. 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. Any performance data quoted for the Funds represents only
historical performance and is not intended to indicate future performance of the
Funds. The calculation of average annual total return and yield for the Funds
does not include fees and charges of the separate accounts that invest in the
Funds and, therefore, does not reflect the investment performance of those
separate accounts. For further information on how the Funds calculate yield and
total return figures, see the Statement of Additional Information.
The Capital Accumulation Fund and Government Securities Fund may advertise
their respective average annual total returns. 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.
The Money Market 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 Money Market 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. A shareholder's 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.
INCOME DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
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, the Funds intend 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
the Funds so qualify they will be exempt from federal income tax upon the
amounts so distributed to investors.
Any dividends from the net investment income of the Funds (except the Money
Market Fund) will normally be payable to the shareholders annually, and any net
realized gains will be distributed annually. All dividends and capital gains
distributions are applied to purchase additional Fund shares at net asset value
as of the payment date without the imposition of any sales charge.
Each Fund will notify shareholders of the portion of each distribution
which constitutes investment income or capital gain. In view of the complexity
of tax considerations, it is advisable for Eligible Purchasers considering the
purchase of shares of the Funds to consult with tax advisors on the federal and
state tax aspects of their investments and redemptions.
Money Market Fund
The Money Market Fund declares dividends of all its daily net investment
income on each day the Fund's net asset value per share is determined. Dividends
are declared and payable daily and are automatically reinvested in full and
fractional shares of the Fund at the then current net asset value unless a
shareholder requests payment in cash.
Net investment income, 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 the Fund.
Since the Fund's policy is, under normal circumstances, to hold portfolio
securities to maturity and to value portfolio securities at amortized cost, it
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 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 income of the Fund determined
at any time is a negative amount, the net asset value per share will be reduced
below $1.00. 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 investing 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.
The Board of Directors 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 shareholders.
ELIGIBLE PURCHASERS AND PURCHASE OF SHARES
Only Eligible Purchasers may purchase shares of the Funds. Eligible
Purchasers are limited to (a) separate accounts of Principal Mutual Life
Insurance Company or of other insurance companies; (b) Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof; (c) trustees or other
managers of any qualified profit sharing, incentive or bonus plan established by
Principal Mutual Life Insurance Company or any subsidiary or affiliate thereof
for the employees of such company, subsidiary or affiliate. Such trustees or
managers may purchase Fund shares only in their capacities as trustees or
managers and not for their personal accounts. The Board of Directors of each
Fund reserves the right to broaden or limit the designation of Eligible
Purchasers.
The Capital Accumulation Fund and Money Market Fund each serve as an
underlying investment medium for variable annuity contracts and variable life
insurance policies that are funded in separate accounts established by Principal
Mutual Life Insurance Company. It is conceivable that in the future it may be
disadvantageous for variable life insurance separate accounts and variable
annuity separate accounts to invest in the Funds simultaneously. Although
neither Principal Mutual Life Insurance Company nor the Funds currently foresee
any such disadvantages either to variable life insurance policy owners or to
variable annuity contract owners, each Fund's Board of Directors intends to
monitor events in order to identify any material conflicts between such policy
owners and contract owners and to determine what action, if any, should be taken
in response thereto. Such action could include the sale of Fund shares by one or
more of the separate accounts, which could have adverse consequences. Material
conflicts could result from, for example, (1) changes in state insurance laws,
(2) changes in Federal income tax law, (3) changes in the investment management
of the Fund, or (4) differences in voting instructions between those given by
policy owners and those given by contract owners.
Shares are purchased from Princor Financial Services Corporation, the
principal underwriter for the Funds. There are no sales charges on the Funds'
shares. There are no restrictions on amounts to be invested in the Funds'
shares.
Shareholder accounts for each Fund will be maintained under an open account
system. Under this system, an account is automatically opened and maintained for
each new investor. Each investment is confirmed by sending the investor a
statement of account showing the current purchase and the total number of shares
then owned. The statement of account is treated by each Fund as evidence of
ownership of Fund shares in lieu of stock certificates, and unless written
request is made to the Fund, stock certificates will not be issued or delivered
to investors. Certificates, which can be stolen or lost, are unnecessary except
for special purposes such as collateral for a loan. Fractional interests in the
Funds' shares are reflected to three decimal places in the statement of account,
but any stock certificates will be issued only for full shares owned.
If an offer to purchase shares is received by any of the Funds before the
close of trading on the New York Stock Exchange, the shares will be issued at
the offering price (net asset value of Fund shares) computed on that day. If an
offer is received after the close of trading or on a day which is not a trading
day, the shares will be issued at the offering price computed on the first
succeeding day on which a price is determined. Dividends on the Money Market
Fund shares will be paid on the next day following the effective date of a
purchase order.
SHAREHOLDER RIGHTS
The following information is applicable to each of the Principal Funds.
Each Fund share is entitled to one vote either in person or by proxy at all
shareholder meetings for that Fund. This includes the right to vote for the
election of directors, selection of independent accountants and on other matters
submitted to meetings of shareholders. Each share has equal rights with every
other share as to dividends, earnings, voting, assets and redemption. Shares are
fully paid and non-assessable, and have no preemptive or conversion rights.
Shares may be issued as full or fractional shares, and each fractional share has
proportionately the same rights, including voting, as are provided for a full
share. Shareholders of each of these Funds may remove any director with or
without cause by the vote of a majority of the votes entitled to be cast at a
meeting of shareholders.
The bylaws of each Fund provide that the Board of Directors of the Fund may
increase or decrease the aggregate number of shares which the Fund has authority
to issue without a shareholder vote.
The bylaws of each Fund also provide that the Fund need not hold an annual
meeting of shareholders in any year in which none of the following is required
to be acted on by shareholders under the Investment Company Act of 1940:
election of directors; approval of investment advisory agreement; ratification
of selection of independent public accountants; and approval of distribution
agreement. 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.
Shareholder inquiries should be directed to the applicable Fund at a Member
of The Principal Financial Group, Des Moines, Iowa 50392.
NON-CUMULATIVE VOTING: The Funds' shares have non-cumulative voting rights
which means that the holders of more than 50% of the shares voting for the
election of directors of a Fund can elect 100% of the directors if they choose
to do so, and in such event, the holders of the remaining shares voting for the
election of directors will not be able to elect any directors.
Principal Mutual Life Insurance Company votes each Fund's shares allocated
to each of its separate accounts registered under the Investment Company Act of
1940 and attributable to variable annuity contracts or variable life insurance
policies participating therein in accordance with instructions received from
contract or policy holders, participants and annuitants. Other shares of each
Fund held by each registered separate account, including those for which no
timely instructions are received, are voted in proportion to the instructions
that are received with respect to contracts or policies participating in that
separate account. Shares of each of the Funds held in the general account of
Principal Mutual Life Insurance Company or in its unregistered separate accounts
are voted in proportion to the instructions that are received with respect to
contracts and policies participating in its registered and unregistered separate
accounts. If Principal Mutual determines pursuant to applicable law that a
Fund's shares held in one or more separate accounts or in its general account
need not be voted pursuant to instructions received with respect to
participating contracts or policies, it then may vote those Fund shares in its
own right.
REDEMPTION OF SHARES
Except for the third paragraph below, most of the following discussion of
redemption procedures is relevant only to Eligible Purchasers other than
variable annuity and variable life separate accounts of Principal Mutual Life
Insurance Company, and its wholly-owned subsidiaries.
Each Fund will redeem shares upon request. There is no charge for
redemption. If no certificates have been issued, a shareholder simply writes a
letter to the appropriate Fund requesting redemption of any part or all of the
shares. The letter must be signed exactly as the account is registered. If
certificates have been issued, they must be properly endorsed and forwarded with
the request. If payment is to be made to the registered shareholder or joint
shareholders, 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. The
price at which the shares are redeemed will be the net asset value per share as
next computed after the request (with appropriate certificate, if any) is
received by the Fund in proper and complete form. The amount received for shares
upon redemption may be more or less than the cost of such shares depending upon
the net asset value at the time of redemption.
Redemption proceeds will be sent within three business days after receipt
of request for redemption in proper form. However, each Fund may suspend the
right of redemption during any period when (a) trading on the New York Stock
Exchange is restricted as determined by the Securities and Exchange Commission
or such Exchange is closed for other than weekends and holidays; (b) an
emergency exists, as determined by the Securities and Exchange Commission, as a
result of which (i) disposal by the Fund of securities owned by it is not
reasonably practicable, or (ii) it is not reasonably practicable for the Fund
fairly to determine the value of its net assets; or (c) the Commission by order
so permits for the protection of security holders of the Fund. A Fund will
redeem only those shares for which it has good payment. To avoid the
inconvenience of such a delay, shares may be purchased with a certified check,
bank cashier's check or money order. During the period prior to the time a
redemption from the Money Market Fund is effective, dividends on such shares
will accrue and be payable and the shareholder will be entitled to exercise all
other rights of beneficial ownership.
Restricted Transfer: Shares of each of the Funds may be transferred to an
Eligible Purchaser. However, whenever any of the Funds is requested to transfer
shares to other than an Eligible Purchaser, the Fund has the right at its
election to purchase such shares at their net asset value next effective
following the time at which the request for transfer is presented; provided,
however, that the Fund must notify the transferee or transferees of such shares
in writing of its election to purchase such shares within seven (7) days
following the date of such request and settlement for such shares shall be made
within such seven-day period.
ADDITIONAL INFORMATION
Organization: The Funds were incorporated in the state of Maryland on the
following dates: Capital Accumulation 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); Government Securities Fund - June 7, 1985; and
Money Market Fund - June 10, 1982.
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. The
custodian performs 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 (500,000,000 for Principal Money Market
Fund), $.01 par value.
Financial Statements: Copies of the financial statements of each Fund will
be mailed to each shareholder of that Fund semi-annually. 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 the Fund. 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, a Member of
The Principal Financial Group, Des Moines, Iowa 50392-0200, is the principal
underwriter for each of the Principal Funds.
PART B
PRINCIPAL AGGRESSIVE GROWTH FUND, INC.
PRINCIPAL ASSET ALLOCATION FUND, INC.
PRINCIPAL BALANCED FUND, INC.
PRINCIPAL BOND FUND, INC.
PRINCIPAL CAPITAL ACCUMULATION FUND, INC.
PRINCIPAL EMERGING GROWTH FUND, INC.
PRINCIPAL GOVERNMENT SECURITIES FUND, INC.
PRINCIPAL GROWTH FUND, INC.
PRINCIPAL HIGH YIELD FUND, INC.
PRINCIPAL MONEY MARKET FUND, INC.
PRINCIPAL WORLD FUND, INC.
Statement of Additional Information
dated May 1, 1996
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 May 1, 1996.
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:
Principal Funds
The Principal Financial Group
Des Moines, Iowa 50392-0200
Telephone: 1-800-247-4123
LV12-6
<PAGE>
TABLE OF CONTENTS
Investment Policies and Restrictions of the Fund......................... 2
Growth-Oriented Funds............................................. 2
Income-Oriented Funds............................................. 6
Money Market Fund................................................. 10
Fund Investments......................................................... 11
Directors and Officers of the Fund....................................... 22
Manager and Sub-Advisors ................................................ 23
Cost of Manager's Services .............................................. 24
Brokerage on Purchases and Sales of Securities........................... 26
Determination of Net Asset Value of Fund Shares.......................... 28
Performance Calculation.................................................. 30
Tax Status............................................................... 32
General Information and History.......................................... 33
Financial Statements..................................................... 34
Appendix A............................................................... 35
- 1 -
<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 five Funds which seek primarily capital appreciation through
investments in equity securities (Aggressive Growth Fund, Capital Accumulation
Fund, Emerging Growth Fund, Growth Fund and World Fund) and two Funds which seek
a total investment return including both capital appreciation and income through
investments in equity and debt securities (Asset Allocation Fund and Balanced
Fund); Income-Oriented Funds, which include three funds which seek primarily a
high level of income through investments in debt securities (Bond Fund,
Government Securities Fund and High Yield Fund) and a Money Market Fund, which
seeks primarily a high level of income through investments in short-term debt
securities.
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.
GROWTH-ORIENTED FUNDS
Investment Objectives
Principal Aggressive Growth Fund, Inc. ("Aggressive Growth Fund") seeks to
provide long- term capital appreciation by investing primarily in
growth-oriented common stocks of medium and large capitalization U.S.
corporations and, to a limited extent, foreign corporations.
Principal Asset Allocation Fund, Inc. ("Asset Allocation Fund") seeks to
generate a total investment return consistent with the preservation of
capital.
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 Capital Accumulation Fund, Inc. ("Capital Accumulation 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 Emerging Growth Fund, Inc. ("Emerging Growth Fund") seeks to
achieve capital appreciation by investing primarily in securities of
emerging and other growth-oriented companies.
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 World Fund, Inc. ("World 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.
Investment Restrictions
Aggressive Growth Fund, Asset Allocation Fund, Balanced Fund, Emerging
Growth Fund, Growth Fund and World Fund
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Aggressive
Growth Fund, Asset Allocation Fund, Balanced Fund, Emerging Growth Fund,
Growth Fund and World 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. The Balanced Fund may borrow only
from banks.
(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 Aggressive Growth Fund, Asset Allocation
Fund, Growth Fund and World 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 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 10% 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, including all covered spread options and the assets used as
cover for any options written in the Over-the-Counter market are
included as part of this 10% 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 World Fund does
not apply to warrants listed on the Toronto Stock Exchange or 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 10% (25% for the Aggressive Growth Fund) of its
total assets in securities of foreign issuers. This restriction
does not pertain to the World Fund or the Asset Allocation Fund.
(7) 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.
(8) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
(9) Invest in arbitrage transactions.
(10) Invest in real estate limited partnership interests.
The Balanced Fund and Emerging Growth Fund have also adopted the
following restrictions which are not fundamental policies and may be changed
without shareholder approval. It is contrary to each such Fund's present policy
to:
(1) 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.
The Aggressive Growth Fund, Asset Allocation Fund, Growth Fund and World
Fund have also adopted the following restriction which is not a fundamental
policy and may be changed without shareholder approval. It is contrary to each
such Fund's present policy to:
(1) Invest its assets in the securities of any investment company
except that the Fund may invest not more than 10% of its assets in
securities of other investment companies, invest not more than 5%
of its total assets in the securities of any one investment
company, or acquire not 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 Fund 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.
Capital Accumulation Fund
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Capital
Accumulation 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 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. The Fund will not purchase securities,
including obligations acquired in private offerings (see (14)
below), which are subject to legal or contractual restrictions
upon resale or are otherwise not readily marketable, if the
purchase will cause more than 10% of the value of its assets to
be invested in such securities.
(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 securities of other investment companies except in
connection with a merger, consolidation, or plan of
reorganization.
(9) 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.
(10) Purchase securities on margin, except it may obtain such
short-term credits as are necessary for the clearance of
transactions. The Fund will not participate on a joint or joint
and several basis in any trading account in securities or effect
a short sale of any security, except in connection with an
underwriting in which it is a participant in the circumstances
specified in (4) above. The Fund will not issue or acquire put
and call options.
(11) Invest in companies for the purpose of exercising control or
management.
(12) 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).
(13) Invest more than 20% of its total assets in securities of foreign
issuers.
In addition:
(14) The Fund may make loans only through the purchase in private
offerings of debentures or other evidences of indebtedness of types
customarily purchased by institutional investors, but such
purchases shall be subject to the limitation contained in (4)
above.*
(15) 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.
(16) It is contrary to the Fund's present policy to 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.
* It is anticipated that any debt securities acquired subject to
"Restriction 14" will be convertible into or carry rights or
warrants to purchase common stock or to participate in earnings,
unless acquired for temporary defensive or liquidity purposes.
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 Fund, Inc. ("Government
Securities 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; Fund shares
are not guaranteed by the United States Government. 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.
Investment Restrictions
Bond Fund, High Yield Fund
Each of the following numbered restrictions is a matter of
fundamental policy and may not be changed without shareholder approval.
The Bond Fund and High Yield 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. The Bond Fund and High Yield Fund
may borrow only from banks.
(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 Bond Fund and High Yield Fund each
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 10% 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, including all covered spread options and
the assets used as cover for any options written in the
Over-the-Counter market are included as part of this 10%
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 Fund
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Government
Securities 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 standby, when-issued or
delayed delivery basis; or (b) borrowing money in accordance with
restrictions described below.
(2) Purchase any securities other than obligations issued or guaranteed
by the United States Government or its agencies or
instrumentalities. There is no limit on the amount of its assets
which may be invested in the securities of any one issuer of such
obligations.
(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 securities of other investment companies except in
connection with a merger, consolidation, or plan of reorganization.
(6) 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.
(7) 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.
(8) Invest in companies for the purpose of exercising control or
management.
(9) 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.
(10) 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.
(11) Enter into repurchase agreements maturing in more than seven days
if, as a result thereof, more than 10% of the value of the Fund's
total assets would be invested in such repurchase agreements and
other assets without readily available market quotations.
(12) Participate on a joint or joint and several basis in any trading
account in securities.
(13) 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.
(14) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
The Government Fund has also adopted the following restriction which is
not a fundamental policy and may be changed without shareholder approval. It is
contrary to the Government Fund's present policy to:
(1) 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 future contracts are not deemed to be pledges or other
encumbrances.
MONEY MARKET FUND
Investment Objective
Principal Money Market Fund, Inc. ("Money Market 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.
Investment Restrictions
Money Market Fund
Each of the following numbered restrictions is a matter of
fundamental policy and may not be changed without shareholder approval.
The Money Market 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 any class of 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; or knowingly
purchase any security restricted as to disposition 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 participate on a joint or joint
and several basis in any trading account in securities or 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 uncertificated time deposits maturing in more than
seven days; uncertificated 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) Enter into repurchase agreements maturing in more than seven days
if, as a result thereof, more than 10% of the value of the Fund's
total assets would be invested in such repurchase agreements and
other assets (excluding time deposits) without readily available
market quotations.
FUND 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."
Selections of equity securities for the Funds, except the Aggressive
Growth and Asset Allocation Funds, are made based upon 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 Fund 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, Currency Contracts, Repurchase Agreements, Lending of
Portfolio Securities and When Issued and Delay 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. Investments in foreign securities
by the Aggressive Growth, Asset Allocation and World Funds are expected to
exceed 5% of each fund's net assets.
Restricted Securities
Each of the following Principal Funds has adopted investment restrictions
as non-fundamental policies that limit its investments in restricted securities
and other illiquid securities to 10% of its assets: Aggressive Growth, Asset
Allocation, Balanced, Bond, Capital Accumulation, Emerging Growth, Growth, High
Yield and World Funds.
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 by 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 has adopted investment restrictions
as non-fundamental policies that limit its investments in foreign securities to
the indicated percentage of its assets: Asset Allocation and World Funds - 100%
; Aggressive Growth Fund - 25%; Bond, Capital Accumulation, High Yield 20%;
Balanced, Emerging Growth and Growth Funds - 10%.
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. Moreover,
securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. In addition, transactions in
foreign securities may be subject to higher costs, and the time for settlement
of transactions in foreign securities may be longer than the settlement period
for domestic issuers. Each Fund's investment in foreign securities may also
result in higher custodial costs and the costs associated with currency
conversions.
Spread Transactions, Options on Securities and Securities Indices, and Futures
Contracts and Options on Futures Contracts
The Aggressive Growth, Asset Allocation, Balanced, Bond, Emerging Growth,
Government Securities, Growth, High Yield and World Funds may each engage in the
practices described under this heading. 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. 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 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 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.
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 or the Sub-Advisor, 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 35 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 and the
Sub-Advisor'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 maintain an amount of cash, cash equivalents or
short-term high grade fixed income securities in a segregated account with the
Fund's custodian, so that the amount so segregated plus the amount of initial
margin held for the account of its broker equals the market value of the futures
contract.
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.
Currency Contracts
The Aggressive Growth, Asset Allocation and World Funds may engage in
currency transactions with securities dealers, financial institutions or other
parties that are deemed creditworthy by the Fund's Sub-Advisor to hedge the
value of portfolio securities denominated in particular currencies against
fluctuations in relative value. Currency transactions include forward currency
contracts, exchange-listed currency futures contracts and options thereon and
exchange-listed and over-the-counter options on currencies. A forward currency
contract involves a privately negotiated obligation to purchase or sell (with
delivery generally required) a specific currency at a future date, which may be
any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract.
The Funds will engage in currency transactions only for hedging and other
non-speculative purposes, including transaction hedging and position hedging.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of the Fund, which will generally arise in
connection with the purchase or sale of the Fund's portfolio securities or the
receipt of income from them. Position hedging is entering into a currency
transaction with respect to portfolio securities positions denominated or
generally quoted in that currency. The Funds will not enter into a transaction
to hedge currency exposure to an extent greater, after netting all transactions
intended wholly or partially to offset other transactions, than the aggregate
market value (at the time of entering into the transaction) of the securities
held by the Fund that are denominated or generally quoted in or currently
convertible into the currency, other than with respect to proxy hedging as
described below.
The Funds may cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to increase or decline
in value relative to other currencies to which the Fund has or in which the Fund
expects to have exposure. To reduce the effect of currency fluctuations on the
value of existing or anticipated holdings of its securities, the Fund may also
engage in proxy hedging. Proxy hedging is often used when the currency to which
a Fund's holding is exposed is difficult to hedge generally or difficult to
hedge against the dollar. Proxy hedging entails entering into a forward contract
to sell a currency, the changes in the value of which are generally considered
to be linked to a currency or currencies in which some or all of a Fund's
securities are or are expected to be denominated, and to buy dollars. The amount
of the contract would not exceed the market value of the Fund's securities
denominated in linked currencies.
Except when a Fund enters into a forward contract in connection with the
purchase or sale of a security denominated in a foreign currency or for other
non-speculative purposes, which requires no segregation, a currency contract
that obligates the Fund to buy or sell a foreign currency will generally require
the Fund to hold an amount of that currency or liquid securities denominated in
that currency equal to the Fund's obligations or to segregate liquid high grade
debt obligations equal to the amount of the Fund's obligations.
Currency hedging involves some of the same risks and considerations as
other transactions with similar instruments. Currency transactions can result in
losses to a Fund if the currency being hedged fluctuates in value to a degree or
in a direction that is not anticipated. Further, the risk exists that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that a Fund is engaging in proxy hedging.
Currency transactions are also subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sale of currency and related instruments can be adversely affected by government
exchange controls, limitations or restrictions on repatriation of currency, and
manipulations or exchange restrictions imposed by governments. These forms of
governmental actions can result in losses to a Fund if it is unable to deliver
or receive currency or monies in settlement of obligations and could also cause
hedges it has entered into to be rendered useless, resulting in full currency
exposure as well as incurring transaction costs. Currency exchange rates may
also fluctuate based on factors extrinsic to a country's economy. Buyers and
sellers of currency futures contracts are subject to the same risks that apply
to the use of futures contracts generally. Further, settlement of a currency
futures contract for the purchase of most currencies must occur at a bank based
in the issuing nation. Trading options on currency futures contracts is relative
new, and the ability to establish and close out positions on these options is
subject to the maintenance of a liquid market that may not always be available.
Repurchase Agreements
All Principal Funds, except the Capital Accumulation, may invest in
repurchase agreements. None of the 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 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 have been
approved by the Fund's Board of Directors and 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 Accumulation and Money Market
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
loaned 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 Money Market 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 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 Student Loan Marketing Association, 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, such as those issued by Federal Intermediate
Credit Banks, are supported by the right of the issuer to
borrower from the 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
corporations which at time of purchase are rated A-1 or better by
Standard and Poor's ("S&P") or Prime-1 or better by Moody's
Investors Service, Inc. ("Moody's") or, if not rated, issued or
guaranteed by a corporation with outstanding debt rated AA or
better by S&P or Aa or better by Moody's. The Fund will not
invest in master demand notes. (See Appendix A.)
(5) Short-term Corporate Debt -- Corporate notes, bonds and
debentures which at the time of purchase are rated AA or better
by S&P or Aa or better by Moody's provided such securities have
one year or less remaining to maturity. (See Appendix A.)
(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.")
The ratings of Moody's and 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 are the initial
criteria for selection of portfolio investments, but the Manager will further
evaluate these securities.
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. Although the rate of portfolio turnover will not be
a limiting factor when it is deemed appropriate to purchase or sell securities
for a Fund, each Fund intends to limit turnover so that realized short-term
gains on securities held for less than three months do not exceed 30% of gross
income in order to qualify as a "regulated investment company" under the
Internal Revenue Code. This requirement may in some cases limit the ability of a
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,
respectively, were as follows (annualized when reporting period is less than one
year): Aggressive Growth - 172.9% and 105.6% (for the period beginning June 1,
1994 and ended December 31, 1994); Asset Allocation - 47.1% and 60.7% (for the
period beginning June 1, 1994 and ended December 31, 1994); Balanced - 25.7% and
31.5%; Bond - 5.9% and 18.2%; Capital Accumulation - 49.2% and 44.5%; Emerging
Growth - 13.1% and 12.0%; Government Securities - 9.8% and 23.2%; Growth - 6.9%
and 0.9% (for the period beginning May 1, 1994 and ended December 31, 1994);
High Yield - 35.1% and 30.6%; World - 15.6% and 14.4% (for the period beginning
May 1, 1994 and ended December 31, 1994).
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 mailing addresses are The Principal Financial Group, Des
Moines, Iowa 50392, unless otherwise indicated.
James D. Davis, 62, Director. 4940 Center Court, Bettendorf, Iowa.
Attorney. Vice President, Deere and Company, Retired.
Roy W. Ehrle, 68, Director. 2424 Jordan Trail, West Des Moines, Iowa. Vice
Chairman, Principal Mutual Life Insurance Company, Retired.
P. Pamela A. Ferguson, 52, Director. P.O. Box 805, Grinnell, Iowa.
President, Grinnell College since 1991. Prior thereto, Associate Provost and
Dean of the Graduate School at the University of Miami.
Richard W. Gilbert, 55, Director. 543 Park Drive, Kenilworth, IL 60043.
President, Gilbert Communications, Inc. since 1993. Prior thereto, President and
Publisher, Pioneer Press.
*J. Barry Griswell, 47, Director and Chairman of the Board. Senior Vice
President, Principal Mutual Life Insurance Company, since 1991. Prior thereto,
Agency Vice President. Director and Chairman of the Board, Princor Management
Corporation, Princor Financial Services Corporation.
*ss.Stephan L. Jones, 60, Director and President. Vice President, Principal
Mutual Life Insurance Company since 1986. Director and President, Princor
Financial Services Corporation and Princor Management Corporation.
*Ronald E. Keller, 60, Director. Executive Vice President, Principal Mutual
Life Insurance Company since 1992. Prior thereto, Senior Vice President,
Principal Mutual Life Insurance Company. Director, Princor Financial Services
Corporation and Princor Management Corporation. Director and Chairman, Invista
Capital Management, Inc.
P. Barbara A. Lukavsky, 55, Director. 3920 Grand Avenue, Des Moines, Iowa.
President, Lu San, Inc.
P. ss.Richard G. Peebler, 66, Director. 25th and University, Des Moines,
Iowa. Professor, Drake University, College of Business and Public
Administration, since 1990.
*Craig L. Bassett, 44, Assistant Treasurer. Director - Treasury, since
1996. Prior thereto, Associate Treasurer, Principal Mutual Life Insurance
Company since 1988.
*Michael J. Beer, 35, Vice President and Financial Officer. Vice President
and Chief Operating Officer, Princor Financial Services Corporation and Princor
Management Corporation, since 1995; Financial Officer, 1991-1995. Prior thereto,
Accounting Manager, Principal Mutual Life Insurance Company.
*David J. Brown, 36, Assistant Counsel. Counsel, Principal Mutual Life
Insurance Company since 1995. Prior thereto, Assistant Counsel 1994-1995;
Attorney, Dickinson, Mackaman, Tyler & Hogan 1986-1994.
*Michael W. Cumings, 44, Assistant Counsel. Counsel, Principal Mutual Life
Insurance Company since 1992. Prior thereto, Assistant Counsel.
* Arthur S. Filean, 57, Vice President and Secretary. Vice President,
Princor Financial Services Corporation since 1990.
* Ernest H. Gillum, 40, Assistant Secretary. Assistant Vice President,
Registered Products, Princor Financial Services Corporation and Princor
Management Corporation, since 1995; Product Development and Compliance Officer,
1991-1995. Prior thereto, Registered Investments Products Manager, Principal
Mutual Life Insurance Company.
*Michael D. Roughton, 44, Counsel. Counsel, Principal Mutual Life Insurance
Company. Counsel, Invista Capital Management, Inc., Princor Financial Services
Corporation, Principal Investors Corporation and Princor Management Corporation.
*Jerry G. Wisgerhof, 58, Treasurer. Vice President and Treasurer, Principal
Mutual Life Insurance Company. Treasurer, Princor Financial Services
Corporation. Vice President and Treasurer, Princor Management Corporation.
P. 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.
ss. 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.
All Directors and Officers listed above hold similar positions with
twenty-four mutual funds sponsored by Principal Mutual Life Insurance Company.
In addition, James D. Davis, Pamela A. Ferguson, Stephan L. Jones, J. Barry
Griswell, Barbara A. Lukavsky, and all of the officers hold similar positions
with one other Fund sponsored by Principal Mutual Life Insurance Company.
During the period ended December 31, 1995, the Funds did not pay any
salaries directly to officers but paid management fees to the Manager as
described herein. During such period, six unaffiliated directors of each Fund
(those who are not officers or directors of the Manager) as a group received the
following amounts in directors' fees ($600 Annual Retainer plus $150 per Board
of Directors or Audit and Nominating Committee meeting attended, and $75 for
attendance at any executive or special committee meetings) plus expenses of
attending the meeting, if any: Aggressive Growth, $7,765; Asset Allocation,
$7,765; Balanced, $7,811; Bond, $7,811; Capital Accumulation, $7,838; Emerging
Growth, $7,811; Government Securities, $7,811; Growth, $8,046; High Yield,
$7,811; Money Market, $7,663; and World, $7,792.
All of the outstanding shares of the Funds are owned by Principal Mutual
Life Insurance Company and its Separate Accounts B and C and Variable Life
Separate Account. As of December 31, 1995, the Officers and Directors of each
Fund as a group owned none of the outstanding shares of any of the Funds.
MANAGER AND SUB-ADVISORS
The Manager of each of the Funds is Princor Management Corporation (the
"Manager"), 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. 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 the Balanced Fund, Growth
Fund and World 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 December 31, 1995 were
approximately $15.7 billion. Invista's address is 1500 Hub Tower, 699 Walnut,
Des Moines, Iowa 50309.
The Manager has also executed an agreement with Morgan Stanley Asset
Management Inc. ("MSAM") under which MSAM has agreed to assume the obligations
of the Manager to provide investment advisory services for the Aggressive Growth
Fund and Asset Allocation Fund. The Manager pays MSAM a fee for such investment
advisory services. MSAM, with principal offices at 1221 Avenue of the Americas,
New York, NY 10020, provides a broad range of portfolio management services to
customers in the United States and abroad. At December 31, 1995, MSAM managed
investments totaling approximately $57.5 billion, including approximately $42.0
billion under active management and $15.5 billion as Named Fiduciary or
Fiduciary Adviser.
Each of the persons affiliated with a Fund who is also an affiliated
person of the Manager or a Sub-Advisor is named below, together with the
capacities in which such person is affiliated:
Office Held With Office Held With
Name Each Fund The Manager/Invista
Michael J. Beer Financial Officer Vice President &
Financial Officer (Manager)
Ernest H. Gillum Assistant Secretary Product Development and
Compliance Officer
(Manager)
J. Barry Griswell Director and Chairman Director and Chairman of
of the Board the Board (Manager)
Director (Manager)
Stephan L. Jones Director and Director and President
President (Manager)
Ronald E. Keller Director Director (Manager)
Director and Chairman of
the Board (Invista)
Michael D. Roughton Counsel Counsel (Manager; Invista)
Jerry G. Wisgerhof Treasurer Vice President and Treasurer
(Manager)
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:
Aggressive
Growth High
and Yield
Asset Emerging and All
Net Asset Value Allocation World Growth Balanced Other
of Fund Funds Fund Fund Funds Funds
---------------- ---------- ----- -------- ------- -----
First $100,000,000 .80% .75% .65% .60% .50%
Next 100,000,000 .75% .70% .60% .55% .45%
Next 100,000,000 .70% .65% .55% .50% .40%
Next 100,000,000 .65% .60% .50% .45% .35%
Over 400,000,000 .60% .55% .45% .40% .30%
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 December 31, 1995 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 Year Ended
Fund December 31, 1995 December 31, 1995
- -------------------------- ----------------- -----------------
Aggressive Growth $ 33,642,941 .80%
Asset Allocation 41,074,038 .80
Balanced 45,403,326 .60
Bond 35,877,659 .50
Capital Accumulation 135,639,680 .49
Emerging Growth 58,520,440 .65
Government Securities 50,079,469 .50
Growth 42,707,521 .50
High Yield 11,829,933 .60
Money Market 32,669,919 .50
World 30,565,620 .75
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 Balanced, Growth and World Funds and is reimbursed
by the Manager for the cost of providing such services.
Under a Sub-Advisory Agreement between MSAM and the Manager, MSAM
performs all the investment advisory responsibilities of the Manager under the
Management Agreement for the Aggressive Growth and Asset Allocation Funds. The
Manager pays MSAM a fee, accrued daily and payable monthly, at the following
annual rates:
Net Asset Value of Fund Fee to MSAM
First $40 million .45%
Next $160 million .30%
Next $100 million .25%
Over $300 million .20%
Except for certain Fund expenses set out below, the Manager is
responsible for expenses, administrative duties and services including the
following: Expenses incurred in connection with the registration of the Fund and
Fund shares with the Securities and Exchange Commission and state regulatory
agencies; office space, facilities and costs of keeping the books of the Fund;
compensation of personnel and officers and any directors who are also affiliated
with the Manager; fees for auditors and legal counsel; preparing and printing
Fund prospectuses; administration of shareholder accounts, including issuance,
maintenance of open account system, dividend disbursement, reports to
shareholders, and redemption. However, some or all of these expenses may be
assumed by Principal Mutual Life Insurance Company and some or all of the
administrative duties and services may be delegated by the Manager to Principal
Mutual Life Insurance Company or affiliate thereof.
Each Fund pays for certain corporate expenses incurred in its operation.
Among such expenses, the Fund pays brokerage commissions on portfolio
transactions, transfer taxes and other charges and fees attributable to
investment transactions, any other local, state or federal taxes, the fees and
expenses of all directors of the Fund who are not persons affiliated with the
Manager, interest, fees for Custodian of the Fund, and the cost of meetings of
shareholders.
Fees paid for investment management services during the periods indicated
were as follows:
Management Fees For
Year Ended
December 31,
1995 1994 1993
---- ---- ----
Aggressive Growth $180,022 $53,716 * N/A
Asset Allocation 272,724 127,034 * N/A
Balanced 206,614 131,488 $120,288
Bond 122,783 72,1989 69,168
Capital Accumulation 591,891 637,781 579,904
Emerging Growth 264,411 94,644 68,441
Government Securities 202,554 195,469 163,313
Growth 137,029 24,971 ** N/A
High Yield 64,422 57,369 55,420
Money Market 140,895 125,791 120,428
World 172,258 38,147 ** N/A
* Period beginning June 1, 1994 and ended December 31, 1994. ** Period beginning
May 1, 1994 and ended December 31, 1994.
The Management Agreements, Sub-Advisory Agreements and Investment Service
Agreements, pursuant to which Principal Mutual Life Insurance Company has agreed
to furnish certain personnel, services and facilities required by the Manager to
enable it to fulfill its investment advisory responsibilities for each of the
Funds except the Aggressive Growth and Asset Allocation Funds, were last
approved by each such Fund's Board of Directors on September 11, 1995. 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, the Fund and, in
the case of the Sub-Advisory Agreement for each of the Funds other than the
Aggressive Growth and Asset Allocation Funds, Invista, and in the case of the
Sub-Advisory Agreement for each of the Aggressive Growth and Asset Allocation
Funds, MSAM, 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,
MSAM 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.
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
Funds' 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 matters, unless better terms can be obtained by purchases through brokers
or dealers, and may purchase securities listed on the New York Stock Exchange
from non-Exchange members in transactions off the Exchange.)
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 SubAdvisor, may pay additional commission
amounts for research services but generally does not do so. Such statistical
data and research information received from brokers or dealers may be useful in
varying degrees and 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 Aggressive Growth Fund, Asset Allocation Fund, Balanced Fund, Capital
Accumulation Fund, Emerging Growth Fund and Growth Fund to certain brokers
during the fiscal year ended December 31, 1995 due to research services provided
by such brokers. These portfolio transactions resulted in commissions paid to
such brokers by the Funds in the amounts of $16,868, $8,497, $1,740, $19,460,
$2,000, and $1,765, respectively.
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.
Total Brokerage Commissions Paid
Fiscal Year Ended
December 31,
Fund 1995 1994 1993
---- ---- ---- ----
Aggressive Growth $102,404 $ 37,910 * N/A
Asset Allocation 35,476 40,055 * N/A
Balanced 18,780 14,596 6,942
Capital Accumulation 142,577 149,871 86,990
Emerging Growth 31,588 7,527 8,601
Growth 28,870 7,280 ** N/A
World 78,939 43,151 ** N/A
* Period beginning June 1, 1994 and ended December 31, 1994.
** Period beginning May 1, 1994 and ended December 31, 1994.
<TABLE>
<CAPTION>
Brokerage commissions paid to affiliates during the year ended December
31, 1995 were as follows:
Commissions Paid to Principal Financial Securities, Inc.
Total Dollar As Percent of As Percent of Dollar Amount
Fund Amount Total Commissionsof Commissionable Transactions
- ---- ------ -----------------------------------------------
<S> <C> <C> <C>
Balanced $ 219 1.17% 1.88%
Capital Accumulation 3,750 2.63% 3.37%
Emerging Growth 660 2.08% 3.02%
Growth 4,022 13.86% 17.06%
Commissions Paid to Morgan Stanley and Co.
Total Dollar As Percent of As Percent of Dollar Amount
Fund Amount Total Commissionsof Commissionable Transactions
- ---- ------ -----------------------------------------------
Capital Accumulation $ 135 0.09% 0.12%
Emerging Growth 250 0.79% 1.53%
Growth 250 0.87% 0.67%
World 2,207 2.80% 2.91%
</TABLE>
Morgan Stanley and Co. Is affiliated with Morgan Stanley Asset
Management, Inc., which acts as a 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 places orders to trade portfolio
securities for each of these funds, except the Aggressive Growth Fund and Asset
Allocation Fund. 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, a computer program will
randomly order the instructions to purchase and, whenever possible, to sell
securities. Securities purchased or proceeds of sales received on each trading
day with respect to such orders shall be allocated to the various funds placing
orders on that trading day by filling each fund's order for that day, in the
sequence arrived at by the random ordering. 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. If the purchase or sale of securities consistent with the investment
objectives of the funds or one or more of the other clients for which MSAM acts
as investment sub-advisor or advisor is to be made 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 or client.
DETERMINATION OF NET ASSET VALUE OF FUND 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 (January 1), Washington's Birthday (third Monday in February), Good
Friday (variable date between March 20 and April 23, inclusive), Memorial Day
(last Monday in May), Independence Day (July 4), Labor Day (first Monday in
September), Thanksgiving Day (fourth Thursday in November) and Christmas Day
(December 25). The net asset value per share for each Fund is determined by
dividing the value of securities in the Fund's investment portfolio plus all
other assets, less all liabilities, by the number of Fund shares outstanding.
Securities for which market quotations are readily available, including options
and futures traded on an exchange, are valued at market value, which is
currently 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, 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 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.
Money Market Fund
The net asset value of shares of the Money Market Fund 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 the
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 Fund 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 Fund
requires the 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, the Fund
can invest only in "Eligible Securities" as that term is defined in Regulations
issued under the Investment Company Act of 1940 (see the Fund's Prospectus for a
more complete description) determined by its Board of Directors to present
minimal credit risks.
The Board of Directors for the Money Market Fund have 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 upon certain changes in the Treasury Bill auction
interest rate for the purpose of identifying possible deviations in the net
asset value per share calculated by using available market quotations or
equivalents 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 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. 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. The calculations of total return
and yield for the Funds do not include the fees and charges of the separate
accounts that invest in the Funds and, therefore, do not reflect the investment
performance of those separate accounts.
Each 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,
Barron's and Changing Times, and comparisons of the performance of a Fund to
that of various market indices, such as the S&P 500 Index, Lehman Brothers GNMA
Index, Dow Jones Industrials Index, and the Salomon Brothers Investment Grade
Bond 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 if shorter, the period during which
its registration statement has been in effect) that end on the last day of the
most recent calendar quarter. Average annual total return is computed by
calculating the average annual compounded rate of return over the stated period
that would equate an initial $1,000 investment to the ending redeemable value
assuming the reinvestment of all dividends and capital gains distributions at
net asset value. In its advertising, a 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 ending redeemable
value (assuming the reinvestment of all dividends and capital gains
distributions at net asset value) by the initial investment.
The following table shows as of December 31, 1995 average annual total
return for each of the Funds for the periods indicated:
Fund 1-Year 5-Year 10-Year
- ------------------------ ------- ----------- -------
Aggressive Growth 44.19% 28.05%(4) N/A
Asset Allocation 20.66% 12.96%(4) N/A
Balanced 24.58% 15.48% 12.05%(1)
Bond 22.17% 11.08% 10.48%(1)
Capital Accumulation 31.91% 16.76% 12.39%
Emerging Growth 29.01% 22.30% 17.31%(1)
Government Securities 19.07% 9.35% 9.26%(2)
Growth 25.62% 18.33%(3) N/A
High Yield 16.08% 13.86% 9.48%(1)
World 14.17% 6.06%(3) N/A
(1) Period beginning December 18, 1987 and ending December 31, 1995.
(2) Period beginning March 30, 1987 and ending December 31, 1995.
(3) Period beginning May 1, 1994 and ending December 31, 1995.
(4) Period beginning June 1, 1994 and ending December 31, 1995.
Yield
Money Market Fund
The Money Market Fund may advertise its yield and its effective 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 December 31, 1995, the Money Market Fund's yield was 5.29%. 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 a power 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 December 31, 1995, the Money Market
Fund's effective yield was 5.43%.
The yield quoted at any time for 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 the Money Market 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. It should also be emphasized that the Fund is an open-end
investment company 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
the Fund is not insured. Investors comparing results of the Money Market 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.
TAX STATUS
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.
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 at 60% long-term and 40% short-term. In
addition, a Fund 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 by the Fund with
respect to a portfolio security. Gains and losses on figures 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 the 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.
One of the requirements the Funds must meet to qualify as a regulated
investment company under federal tax law is that the Fund must derive less than
30% of its gross income from gains on the sale or other disposition of
securities held for less than three months. Accordingly, the Funds will be
restricted in selling securities held or considered under Code rules to have
been held for less than three months and in engaging in certain transactions to
obtain or close positions in options and futures contracts.
The 1986 Tax Reform Act imposes 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.
GENERAL INFORMATION AND HISTORY
The Aggressive Growth Fund was incorporated under the laws of Maryland on
August 20, 1993 as Principal Blue Chip Fund, Inc. The Fund changed its name to
Principal Aggressive Growth Fund on May 1, 1994.
The Asset Allocation Fund was incorporated under the laws of Maryland on
August 20, 1993 as Principal Utilities Fund, Inc. The Fund changed its name to
Principal Asset Allocation Fund on May 1, 1994.
The Balanced Fund was incorporated under the laws of Maryland on November
26, 1986. Effective November 1, 1988 the Fund changed its name from Princor
Managed Investment Fund, Inc. to Principal Managed Fund, Inc. Effective May 1,
1994, the Fund changed its name to Principal Balanced Fund, Inc.
The Bond Fund was incorporated under the laws of Maryland on November 26,
1986. Effective March 20, 1987, its name was changed from Princor Corporate Bond
Fund, Inc. to Princor Bond Investment Fund, Inc. Effective November 1, 1988 the
Fund changed its name to Principal Bond Fund, Inc.
The Capital Accumulation Fund was incorporated under the laws of Maryland
on May 26, 1989 as the successor to the business of a fund with the same name
that had been incorporated in Delaware on February 6, 1969 (the "Predecessor
Fund"). Effective November 1, 1986, the Predecessor Fund changed its name from
BLC Fund, Inc. to Princor Fund, Inc. Effective November 1, 1987, the Predecessor
Fund changed its name to Princor Investment Fund, Inc. Effective November 1,
1988, the Predecessor Fund changed its name to Principal Capital Accumulation
Fund, Inc.
The Emerging Growth Fund was incorporated under the laws of Maryland on
February 20, 1987. Effective November 1, 1988, the Fund changed its name from
Princor Aggressive Growth Investment Fund, Inc. to Principal Aggressive Growth
Fund, Inc. Effective May 1, 1992, the Fund changed its name from Principal
Aggressive Growth Fund, Inc., to Principal Emerging Growth Fund, Inc.
The Government Securities Fund was incorporated under the laws of
Maryland on June 7, 1985 a BLC Federal Government Securities Fund, Inc.
Effective November 1, 1986 the Fund changed its name to Princor Federal
Government Securities Fund, Inc. On November 1, 1987, the Fund changed its name
to Princor Government Securities Investment Fund, Inc. Effective November 1,
1988, the Fund changed its name to Principal Government Securities Fund, Inc.
The High Yield Fund was incorporated under the laws of Maryland on
December 2, 1986. Effective March 20, 1987, its name was changed from Princor
High Yield Bond Investment Fund, Inc. to Princor High Yield Investment Fund,
Inc. Effective November 1, 1988, the Fund changed its name to Principal High
Yield Fund, Inc.
The Money Market Fund was incorporated under the laws of Maryland on June
10, 1982. Effective November 1, 1986, the Fund changed its name from BLC Money
Market Fund, Inc. to Princor Money Market Fund, Inc. Effective November 1, 1987,
the Fund changed its name to Princor Money Market Investment Fund, Inc.
Effective November 1, 1988, the Fund changed its name to Principal Money Market
Fund, Inc.
Effective July 1, 1992, the Bond, Capital Accumulation, Emerging Growth,
Government Securities, High Yield, Managed and Money Market Funds changed their
respective fiscal year-ends from June 30 to December 31.
Reorganization
Following is a description of a Reorganization completed by the Capital
Accumulation Fund on November 1, 1989. "Predecessor Fund" as used below means
the Capital Accumulation Fund, which was incorporated in Delaware on February 6,
1969. "Successor Fund" as used below refers to the Capital Accumulation Fund,
which was incorporated in Maryland on May 26, 1989 for the purpose of completing
the Reorganization.
On October 3, 1989, a majority of the outstanding shares of the
Predecessor Fund approved a proposal to permit the Predecessor Fund to transfer
all of its assets and liabilities to the Successor Fund in accordance with an
Agreement and Plan of Reorganization and Liquidation dated June 16, 1989 (the
"Agreement") between the Successor Fund and Predecessor Fund (the
"Reorganization"). The Agreement was authorized and approved by the Boards of
Directors of the Predecessor Fund and the Successor Fund in accordance with the
laws of Delaware and Maryland, respectively. The net asset values of the shares
were unaffected by the Reorganization.
The primary purpose for the Reorganization was to change the Predecessor
Fund's domicile, thereby eliminating an unnecessary state tax burden for which
the Predecessor Fund was responsible. The state of Delaware imposed a franchise
tax on the Predecessor Fund based upon the assets of the Predecessor Fund.
Payment of this state tax reduced the Predecessor Fund's income otherwise
distributable to the Predecessor Fund's shareholders. Maryland does not impose a
franchise tax but imposes an income tax based upon undistributed net income. The
amount of state income tax for a Maryland mutual fund is low or non-existent
because a mutual fund distributes substantially all of its net income each
fiscal year.
By voting in favor of the Agreement the shareholders authorized the
Predecessor Fund, as the sole shareholder of the Fund prior to the
Reorganization, to: (i) elect as directors of the Successor Fund all of the
Predecessor Fund's Directors at the time of the Reorganization; (ii) ratify the
selection of Ernst & Young LLP as the independent auditors of the Successor
Fund; and (iii) approve as Management Agreement and Investment Service Agreement
for the Successor Fund agreements substantially identical to the Management
Agreement and Investment Service Agreement in effect for the Predecessor Fund at
the time of the Reorganization.
In the Prospectus and Statement of Additional Information, the term
Capital Accumulation Fund is used generally to refer to the Successor Fund and
with respect to matters occurring prior to the reorganization to the Predecessor
Fund.
FINANCIAL STATEMENTS
The financial statements for the Funds for the fiscal period ended
December 31, 1995 appearing in the Annual Report to Shareholders and the report
thereon of Ernst and Young LLP, independent auditors, appearing therein are
incorporated by reference in this Statement of Additional Information. The
Annual Report will be furnished, without charge, to investors who request copies
of the Statement of Additional Information.
<PAGE>
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>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements included in the Registration Statement
(1) Part A:
Financial Highlights for each of the seven years in
the period ended December 31, 1995 and for the
period from December 18, 1987 through
December 31, 1988.
(2) Part B:
None
(b) Exhibits
(1) Articles of Incorporation
(2) Bylaws
(5a) Management Agreement
(5b) Investment Service Agreement
(6) Distribution Agreement
(8) Custody Agreement
(11) Consent of Independent Auditors
(12) Audited Financial Statements as of
December 31, 1995, including the Report of
Ernst & Young LLP, independent auditors for
the Registrant.
(16) Total Return Performance Quotation
(27) Financial Data Schedule
Item 25. Persons Controlled by or Under Common Control with Depositor
Principal Mutual Life Insurance Company (incorporated as a
mutual life insurance company under the laws of Iowa);
Sponsored the organization of the following mutual funds,
some of which it controls by virtue of owning voting
securities:
Principal Asset Allocation Fund, Inc. (a Maryland
Corporation) 100.0% of shares outstanding owned by Principal
Mutual Life Insurance Company and its separate accounts on
March 21, 1996.
Principal Aggressive Growth Fund, Inc. (a Maryland Corporation)
100.0% of shares outstanding owned by Principal Mutual Life
Insurance Company and its separate accounts on March 21, 1996.
Princor Balanced Fund, Inc. (a Maryland Corporation) 14.10% of
shares outstanding owned by Principal Mutual Life Insurance
Company on March 21, 1996.
Principal Balanced Fund, Inc. (a Maryland Corporation) 100.0% of
shares outstanding owned by Principal Mutual Life Insurance
Company and its separate accounts on March 21, 1996.
Princor Blue Chip Fund, Inc. (a Maryland Corporation) 12.07% of
shares outstanding owned by Principal Mutual Life Insurance
Company on March 21, 1996.
Princor Bond Fund, Inc. (a Maryland Corporation) 1.75% of shares
outstanding owned by Principal Mutual Life Insurance Company on
March 21, 1996.
Principal Bond Fund, Inc. (a Maryland Corporation) 100.0% of
shares outstanding owned by Principal Mutual Life Insurance
Company and its separate accounts on March 21, 1996.
Princor Capital Accumulation Fund, Inc. (a Maryland
Corporation) 43.93% of outstanding shares owned by Principal
Mutual Life Insurance Company on March 21, 1996.
Principal Capital Accumulation Fund, Inc. (a Maryland
Corporation)100.0% of outstanding shares owned by Principal
Mutual Life Insurance Company and its Separate Accounts on
March 21, 1996.
Princor Cash Management Fund, Inc. (a Maryland Corporation) 1.28%
of outstanding shares owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on March 21,
1996.
Princor Emerging Growth Fund, Inc. (a Maryland Corporation) .78%
of shares outstanding owned by Principal Mutual Life Insurance
Company on March 21, 1996
Principal Emerging Growth Fund, Inc. (a Maryland Corporation)
100.0% of shares outstanding owned by Principal Mutual Life
Insurance Company and its Separate Accounts on March 21, 1996.
Princor Government Securities Income Fund, Inc. (a Maryland
Corporation) 0.39% of shares outstanding owned by Principal
Mutual Life Insurance Company on March 21, 1996.
Principal Government Securities Fund, Inc. (a Maryland
Corporation) 100.0% of shares outstanding owned by Principal
Mutual Life Insurance Company and its Separate Accounts on
March 21, 1996.
Princor Growth Fund, Inc. (a Maryland Corporation) 0.68% of
outstanding shares owned by Principal Mutual Life Insurance
Company on March 21, 1996.
Principal Growth Fund, Inc. (a Maryland Corporation) 100.0% of
outstanding shares are owned by Principal Mutual Life Insurance
Company and its Separate Accounts on March 21, 1996.
Princor High Yield Fund, Inc. (a Maryland Corporation) 34.94% of
shares outstanding owned by Principal Mutual Life Insurance
Company on March 21, 1996.
Principal High Yield Fund, Inc. (a Maryland Corporation) 100.0%
of shares outstanding owned by Principal Mutual Life Insurance
Company and its Separate Accounts on March 21, 1996.
Princor Limited Term Bond Fund, Inc. (a Maryland Corporation)
98.02% of shares outstanding owned by Principal Mutual Life
Insurance Company on March 21, 1996.
Principal Money Market Fund, Inc. (a Maryland Corporation) 100.0%
of shares outstanding owned by Principal Mutual Life Insurance
Company and its Separate Accounts on March 21, 1996.
Principal Special Markets Fund, Inc. (a Maryland Corporation)
79.25% of the shares outstanding of the International Securities
Portfolio and 82.87% of the shares outstanding of the
Mortgage-Backed Securities Portfolio were owned by Principal
Mutual Life Insurance Company on March 21, 1996.
Princor Tax-Exempt Bond Fund, Inc. (a Maryland Corporation) 0.60%
of shares outstanding owned by Principal Mutual Life Insurance
Company on March 21, 1996.
Princor Tax-Exempt Cash Management Fund, Inc. (a Maryland
Corporation) 0.90% of shares outstanding owned by Principal
Mutual Life Insurance Company on March 21, 1996.
Princor Utilities Fund, Inc. (a Maryland Corporation) 1.35% of
shares outstanding owned by Principal Mutual Life Insurance
Company on March 21, 1996.
Princor World Fund, Inc. (a Maryland Corporation) 20.19% of
shares outstanding owned by Principal Mutual Life Insurance
Company on March 21, 1996.
Principal World Fund, Inc. (a Maryland Corporation) 100.0% of
shares outstanding owned by Principal Mutual Life Insurance
Company on March 21, 1996.
Subsidiaries organized and wholly-owned by Principal Mutual Life
Insurance Company:
Principal Life Insurance Company (an Iowa Corporation) A general
insurance and annuity company. It is not currently active.
Principal Holding Company (an Iowa Corporation) A holding company
wholly-owned by Principal Mutual Life Insurance Company.
PT Asuransi Jiwa Principal Egalita Indonesia (an Indonesia
Corporation)
Subsidiaries wholly-owned by Principal Holding Company:
a. Petula Associates, Ltd. (an Iowa Corporation) a real
estate development company.
b. Patrician Associates, Inc. (a California Corporation) a real
estate development company.
c. Principal Development Associates, Inc. (a California
Corporation) a real estate development company.
d. Princor Financial Services Corporation (an Iowa
Corporation) a registered broker-dealer.
e. Invista Capital Management, Inc. (an Iowa Corporation) a
registered investment adviser.
f. Principal Marketing Services, Inc. (a Delaware Corporation) a
corporation formed to serve as an interface between marketers
and manufacturers of financial services products.
g. The Principal Financial Group, Inc. (a Delaware corporation)
a general business corporation established in connection with
the new corporate identity. It is not currently active.
h. Delaware Charter Guarantee & Trust Company (a Delaware
Corporation) a nondepository trust company.
i. Principal Securities Holding Corporation (a Delaware
Corporation) a holding company.
j. Principal Health Care, Inc. (an Iowa Corporation) a developer
and administrator of managed care systems.
k. Principal Financial Advisors, Inc. (an Iowa Corporation) a
registered investment advisor.
l. Principal Asset Markets, Inc. (an Iowa Corporation) a
residential mortgage loan broker.
m. Principal Portfolio Services, Inc. (an Iowa Corporation) a
mortgage due diligence company.
n. Principal International, Inc. (an Iowa Corporation) a company
formed for the purpose of international business development.
o. Principal Spectrum Associates, Inc. (a California
Corporation) a real estate development company.
p. Principal Commercial Advisors, Inc. (an Iowa Corporation) a
company that purchases, manages and sells commercial real
estate assets.
q. Principal FC, Ltd. (an Iowa Corporation) a limited purpose
investment corporation.
r. Principal Residential Mortgage, Inc. (an Iowa Corporation) a
residential mortgage loan broker.
s. Equity FC, LTD. (an Iowa Corporation) engaged in investment
transactions including limited partnership and limited
liability companies.
Subsidiaries organized and wholly-owned by Princor Financial Services
Corporation:
a. Princor Management Corporation (an Iowa Corporation) a
registered investment advisor.
b. Principal Investors Corporation (a New Jersey Corporation) a
registered broker-dealer with the Securities Exchange
Commission. It is not currently active.
Subsidiary wholly owned by Principal Securities Holding Corporation:
Principal Financial Securities, Inc. (a Delaware Corporation) an
investment banking and securities brokerage firm.
Subsidiaries organized and wholly-owned by Principal Health Care,
Inc.:
a. America's Health Plan, Inc. (a Maryland Corporation) a
developer of discount provider networks.
b. PHC Merging Company (a Florida Corporation) it is not
currently active.
c. Principal Behavioral Health Care, Inc. (an Iowa Corporation)
a mental and nervous/substance abuse preferred provider
organization.
d. Principal Health Care of Illinois, Inc. (an Illinois
Corporation) a health maintenance organization.
e. Principal Health Care of Nebraska, Inc. (a Nebraska
Corporation) a health maintenance organization.
f. Principal Health Care of Delaware, Inc. (a Delaware
Corporation) a health maintenance organization.
g. Principal Health Care of Georgia, Inc. (a Georgia
Corporation) a health maintenance organization.
h. Principal Health Care of Kansas City, Inc. (a Missouri
Corporation) a health maintenance organization.
i. Principal Health Care of Louisiana, Inc. (a Louisiana
Corporation) a health maintenance organization.
j. Principal Health Care of Florida, Inc. (a Florida
Corporation) a health maintenance organization.
k. United Health Care Services of Iowa, Inc. (an Iowa
Corporation) a health maintenance organization.
l. Principal Health Care of Iowa, Inc. (an Iowa Corporation) a
health maintenance organization.
m. Principal Health Care of Indiana, Inc. (a Delaware
Corporation) a health maintenance organization.
n. Principal Health Care of Pennsylvania, Inc. (a Pennsylvania
Corporation) a health maintenance organization. It is not
currently active.
o. Principal Health Care of Tennessee, Inc. (a Tennessee
Corporation) a health maintenance organization.
p. Principal Health Care of Texas, Inc. (a Texas Corporation) a
health maintenance organization.
q. Principal Health Care of the Carolinas, Inc. (a North
Carolina Corporation) a health maintenance organization.
r. Principal Health Care, of South Carolina, Inc. (a South
Carolina Corporation) a health maintenance organization.
s. MetraHealth Care Plan, Inc. (a Missouri Corporation) a
health maintenance organization.
t. The Admar Group, Inc. (a Florida Corporation) a general
business corporation engaged in the business of managed
healthcare.
Subsidiary owned by Principal Health Care of Delaware, Inc.:
Principal Health Care of the Mid-Atlantic, Inc. (a Virginia
Corporation) a health maintenance organization.
Subsidiaries owned by Principal International, Inc.:
a. Grupo Financiero Principal, S.A. de Seguros de Vida (a
Spanish insurance company).
b. Principal Internacional, S.A. Compania de Seguros (a Mexico
Corporation).
c. Principal International Argentina, S.A. (an Argentina
Corporation).
d. Principal International Asia Limited (formerly known as
Goldchin Champ, Limited) (a Hong Kong Corporation).
e. Principal International de Chile, S.A.
Subsidiary owned by Grupo Financiero Principal, S.A. de Seguros de
Vida:
Grupo Financiero Principal S.A. de Agencia de Seguros (an
insurance agency). It is currently dormant.
Subsidiaries owned by Principal International Argentina, S.A.:
a. Ethika, S.A. Administradora de Fondos de Jubilaciones y
Pensiones (an Argentina Corporation).
b. Princor Compania de Seguros de Retiro, S.A. (an Argentina
Corporation).
c. Prinlife Compania de Seguros de Vida, S.A. (an Argentina
Corporation)
d. Jacaranda Administradora de Fondos de Jubilaciones y
Pensiones, S.A. (an Argentina Corporation)
Subsidiary owned by Principal International de Chile, S.A.:
BanRenta Compania de Seguros de Vida, S.A.
Subsidiaries owned by The Admar Group, Inc.
a. Admar Corporation (a California Corporation)
b. Admar Insurance Marketing, Inc. (a California Corporation)
c. Benefit Plan Administrators, Inc. (a Colorado corporation)
d. Image Financial & Insurance Services, Inc. (a California
Corporation)
e. SelectCare Management Co., Inc. (a California Corporation)
f. Wm. G. Hofgard & Co., Inc. (a Colorado corporation)
Item 26. Number of Holders of Securities - As of: January 31, 1996
(1) (2)
Title of Class Number of Holders
Principal Capital Accumulation Fund, Inc.
Common-Class A 14
Item 27. Indemnification
Under Section 2-418 of the Maryland General Corporation Law, with respect
to any proceedings against a present or former director, officer, agent or
employee (a "corporate representative") of the Registrant, the Registrant may
indemnify the corporate representative against judgments, fines, penalties, and
amounts paid in settlement, and against expenses, including attorneys' fees, if
such expenses were actually incurred by the corporate representative in
connection with the proceeding, unless it is established that:
(i) The act or omission of the corporate representative was
material to the matter giving rise to the proceeding; and
1. Was committed in bad faith; or
2. Was the result of active and deliberate dishonesty; or
(ii) The corporate representative actually received an improper
personal benefit in money, property, or services; or
(iii) In the case of any criminal proceeding, the corporate
representative had reasonable cause to believe that the act or
omission was unlawful.
If a proceeding is brought by or on behalf of the Registrant, however, the
Registrant may not indemnify a corporate representative who has been adjudged to
be liable to the Registrant. Under the Registrant's Articles of Incorporation
and Bylaws, directors and officers of Registrant are entitled to indemnification
by the Registrant to the fullest extent permitted under Maryland law and the
Investment Company Act of 1940. Reference is made to Article VI, Section 7 of
the Registrant's Articles of Incorporation, Article 12 of Registrant's Bylaws
and Section 2-418 of the Maryland General Corporation Law.
The Registrant has agreed to indemnify, defend and hold the Distributor,
its officers and directors, and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act of 1933, free and harmless from
and against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers, directors or any such controlling person may incur under the
Securities Act of 1933, or under common law or otherwise, arising out of or
based upon any untrue statement of a material fact contained in the Registrant's
registration statement or prospectus or arising out of or based upon any alleged
omission to state a material fact required to be stated in either thereof or
necessary to make the statements in either thereof not misleading, except
insofar as such claims, demands, liabilities or expenses arise out of or are
based upon any such untrue statement or omission made in conformity with
information furnished in writing by the Distributor to the Registrant for use in
the Registrant's registration statement or prospectus: provided, however, that
this indemnity agreement, to the extent that it might require indemnity of any
person who is also an officer or director of the Registrant or who controls the
Registrant within the meaning of Section 15 of the Securities Act of 1933, shall
not inure to the benefit of such officer, director or controlling person unless
a court of competent jurisdiction shall determine, or it shall have been
determined by controlling precedent that such result would not be against public
policy as expressed in the Securities Act of 1933, and further provided, that in
no event shall anything contained herein be so construed as to protect the
Distributor against any liability to the Registrant or to its security holders
to which the Distributor would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence, in the performance of its duties,
or by reason of its reckless disregard of its obligations under this Agreement.
The Registrant's agreement to indemnify the Distributor, its officers and
directors and any such controlling person as aforesaid is expressly conditioned
upon the Registrant being promptly notified of any action brought against the
Distributor, its officers or directors, or any such controlling person, such
notification to be given by letter or telegram addressed to the Registrant.
Item 28. Business or Other Connection of Investment Adviser
A complete list of the officers and directors of the investment adviser,
Princor Management Corporation, are set out below. This list includes some of
the same people (designated by an *), who are serving as officers and directors
of the Registrant. For these people the information as set out in the Statement
of Additional Information (See Part B) under the caption "Directors and Officers
of the Fund" is incorporated by reference.
*Michael J. Beer The Principal See Part B
Vice President Financial Group
Des Moines, Iowa
50392
Mary L. Bricker Same Assistant Corporate
Assistant Corporate Secretary
Secretary Principal Mutual Life
Insurance Company
Ray S. Crabtree Same Senior Vice President
Director Principal Mutual Life
Insurance Company
David J. Drury Same Chief Executive Officer
Director and Chairman of the Board
Principal Mutual Life
Insurance Company
Paul N. Germain Same Operations Officer
Operations Officer Princor Financial Services
Corporation
*Ernest H. Gillum Same See Part B
Assistant Vice President
*J. Barry Griswell Same See Part B
Chairman of the Board
and Director
Joyce N. Hoffman Same Vice President and
Vice President and Corporate Secretary
Corporate Secretary Principal Mutual Life
Insurance Company
Theodore M. Hutchison Same Executive Vice President
Director Principal Mutual Life
Insurance Company
*Stephan L. Jones Same See Part B
President and Director
Ronald E. Keller Same Executive Vice President
Director Principal Mutual Life
Insurance Company
Sterling R. Kosmicke Same President and Director
Vice President Invista Capital Management,
Inc.
*Michael D. Roughton Same See Part B
Counsel
Charles E. Rohm Same Executive Vice President
Director Principal Mutual Life
Insurance Company
Dewain A. Sparrgrove Same Vice President -
Vice President Investment Securities
Principal Mutual Life
Insurance Company
*Jerry G. Wisgerhof Same See Part B
Vice President and
Treasurer
Princor Management Corporation serves as investment adviser and dividend
disbursing and transfer agent for, Principal Aggressive Growth Fund, Inc.,
Principal Asset Allocation Fund, Inc., Principal Balanced Fund, Inc., Principal
Bond Fund, Inc., Principal Capital Accumulation Fund, Inc., Principal Emerging
Growth Fund, Inc., Principal Government Securities Fund, Inc., Principal Growth
Fund, Inc., Principal High Yield Fund, Inc., Principal Money Market Fund, Inc.,
Principal Special Markets Fund, Inc., Principal World Fund, Inc., Princor
Balanced Fund, Inc., Princor Blue Chip Fund, Inc., Princor Bond Fund, Inc.,
Princor Capital Accumulation Fund, Inc., Princor Cash Management Fund, Inc.,
Princor Emerging Growth Fund, Inc., Princor Government Securities Income Fund,
Inc., Princor Growth Fund, Inc., Princor High Yield Fund, Inc., Princor Limited
Term Bond Fund, Inc., Princor Tax-Exempt Bond Fund, Inc., Princor Tax-Exempt
Cash Management Fund, Inc., Princor Utilities Fund, Inc. and Princor World Fund,
Inc. - funds sponsored by Principal Mutual Life Insurance Company.
Item 29. Principal Underwriters
(a) Princor Financial Services Corporation, principal underwriter for
Registrant, acts as principal underwriter for, Principal Balanced Fund, Inc.,
Principal Bond Fund, Inc., Principal Capital Accumulation Fund, Inc., Principal
Emerging Growth Fund, Inc., Principal Government Securities Fund, Inc.,
Principal Growth Fund, Inc., Principal High Yield Fund, Inc., Principal Money
Market Fund, Inc., Principal Special Markets Fund, Inc., Principal World Fund,
Inc., Princor Balanced Fund, Inc., Princor Blue Chip Fund, Inc., Princor Bond
Fund, Inc., Princor Capital Accumulation Fund, Inc., Princor Cash Management
Fund, Inc., Princor Emerging Growth Fund, Inc., Princor Government Securities
Income Fund, Inc., Princor Growth Fund, Inc., Princor High Yield Fund, Inc.,
Princor Limited Term Bond Fund, Inc., Princor Tax-Exempt Bond Fund, Inc.,
Princor Tax-Exempt Cash Management Fund, Inc., Princor Utilities Fund, Inc.,
Princor World Fund, Inc. and for variable annuity contracts participating in
Principal Mutual Life Insurance Company Separate Account B, a registered unit
investment trust for retirement plans adopted by public school systems or
certain tax-exempt organizations pursuant to Section 403(b) of the Internal
Revenue Code, Section 457 retirement plans, Section 401(a) retirement plans,
certain non- qualified deferred compensation plans and Individual Retirement
Annuity Plans adopted pursuant to Section408 of the Internal Revenue Code, and
for variable life insurance contracts issued by Principal Mutual Life Insurance
Company Variable Life Separate Account, a registered unit investment trust.
(b) (1) (2) (3)
Positions
and offices Positions and
Name and principal with principal offices with
business address underwriter registrant
J. Barbara Alvord Marketing Officer None
The Principal
Financial Group
Des Moines, IA 50392
Robert W. Baehr Marketing Services None
The Principal Officer
Financial Group
Des Moines, IA 50392
Michael J. Beer Vice President and Chief Vice President
The Principal Operating Officer
Financial Group
Des Moines, IA 50392
Mary L. Bricker Assistant Corporate None
The Principal Secretary
Financial Group
Des Moines, IA 50392
Ray S. Crabtree Director None
The Principal
Financial Group
Des Moines, IA 50392
David J. Drury Director None
The Principal
Financial Group
Des Moines, IA 50392
Arthur S. Filean Vice President Vice President
The Principal and Secretary
Financial Group
Des Moines, IA 50392
Paul N. Germain Assistant Vice President- None
The Principal Operations
Financial Group
Des Moines, IA 50392
Ernest H. Gillum Assistant Vice President- Assistant
The Principal Registered Products Secretary
Financial Group
Des Moines, IA 50392
Thomas J. Graf Director None
The Principal
Financial Group
Des Moines, IA 50392
J. Barry Griswell Director and Director and
The Principal Chairman of the Chairman of the
Financial Group Board Board
Des Moines, IA 50392
Joyce N. Hoffman Vice President and None
The Principal Corporate Secretary
Financial Group
Des Moines, IA 50392
Theodore M. Hutchison Director None
The Principal
Financial Group
Des Moines, IA 50392
Stephan L. Jones Director and Director and
The Principal President President
Financial Group
Des Moines, IA 50392
Ronald E. Keller Director Director
The Principal
Financial Group
Des Moines, IA 50392
John R. Lepley Senior Vice None
The Principal President - Marketing
Financial Group and Distribution
Des Moines, IA 50392
Gregg R. Narber Director None
The Principal
Financial Group
Des Moines, IA 50392
Richard H. Neil Director None
The Principal
Financial Group
Des Moines, IA 50392
Layne A. Rasmussen Controller None
The Principal
Financial Group
Des Moines, IA 50392
Charles E. Rohm Director None
The Principal
Financial Group
Des Moines, IA 50392
Michael D. Roughton Counsel Counsel
The Principal
Financial Group
Des Moines, IA 50392
Jean B. Schustek Compliance Officer None
The Principal
Financial Group
Des Moines, IA 50392
Roger C. Stroud Assistant Director- None
The Principal Marketing
Financial Group
Des Moines, IA 50392
Jerry G. Wisgerhof Treasurer Treasurer
The Principal
Financial Group
Des Moines, IA 50392
Peter D. Zornik Arkansas State Director None
The Principal
Financial Group
Des Moines, IA 50392
(c) Inapplicable.
Item 30. Location of Accounts and Records
All accounts, books or other documents of the Registrant are located at the
offices of the Registrant and its Investment Adviser in the Principal Mutual
Life Insurance Company home office building, The Principal Financial Group, Des
Moines, Iowa 50392.
Item 31. Management Services
Inapplicable.
Item 32. Undertakings
Indemnification
Reference is made to Item 27 above, which discusses circumstances under
which directors and officers of the Registrant shall be indemnified by the
Registrant against certain liabilities and expenses incurred by them by reason
of being a director or officer of the Registrant.
Notwithstanding the provisions of Registrant's Articles of Incorporation
and Bylaws, the Registrant hereby makes the following undertaking:
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant, pursuant to the foregoing provisions or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant, in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person of the Registrant, in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue
Shareholder Communications
Registrant hereby undertakes to call a meeting of shareholders for the
purpose of voting upon the question of removal of a director or directors when
requested in writing to do so by the holders of at least 10% of the Registrant's
outstanding shares of common stock and in connection with such meeting to comply
with the provisions of Section 16(c) of the Investment Company Act of 1940
relating to shareholder communications
Delivery of Annual Report to Shareholders
The registrant hereby undertakes to furnish each person to whom a
prospectus is delivered a copy of the registrant's latest annual report to
shareholders, upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Des Moines and State of Iowa, on the
11th day of April, 1996.
PRINCIPAL CAPITAL ACCUMULATION FUND, INC.
(Registrant)
By S. L. JONES
______________________________________
S. L. Jones, President
and Director
Attest:
ERNEST H. GILLUM
______________________________________
E. H. Gillum
Assistant Secretary
<PAGE>
As required by the Securities Act of 1933, this Amendment to the Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
Signature Title Date
S. L. JONES 4/11/96
_____________________________ President and Director __________
(Principal Executive Officer)
4/11/96
J. B. GRISWELL Director and __________
_____________________________ Chairman of the Board
4/11/96
J. G. WISGERHOF Treasurer (Principal Financial __________
_____________________________ and Accounting Officer)
4/11/96
(J. D. Davis)* Director __________
_____________________________
4/11/96
(R. W. Ehrle)* Director __________
_____________________________
4/11/96
(P. A. Ferguson)* Director __________
_____________________________
4/11/96
(R. W. Gilbert)* Director __________
_____________________________
4/11/96
(R. E. Keller)* Director __________
_____________________________
4/11/96
(B. A. Lukavsky)* Director __________
_____________________________
4/11/96
(R. G. Peebler)* Director __________
_____________________________
*By S. L. JONES
_____________________________________
S. L. Jones
President and Director
April 11, 1996
______________________________, 1996
Pursuant to Powers of Attorney
Previously Filed or Included
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones and J. B.
Griswell and each of them (with full power to each of them to act alone), the
undersigned's true and lawful attorney-in-fact and agent, with full power of
substitution to each, for and on behalf and in the name of the undersigned, to
execute and file any documents relating to registration under the Securities Act
of 1933 and the Investment Company Act of 1940 with respect to open end
management investment companies currently organized or to be organized in the
future which are sponsored by Principal Mutual Life Insurance Company, and any
and all amendments thereto and reports thereunder with all exhibits and all
instruments necessary or appropriate in connection therewith, each of said
attorneys-in-fact and agents and his or their substitutes being empowered to act
with or without the others or other, and to have full power and authority to do
or cause to be done in the name and on behalf of the undersigned each and every
act and thing necessary or appropriate to be done in order to effectuate the
same, as fully to all intents and purposes as the undersigned might or could do
in person; hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 11th day
of April, 1996.
R. G. Peebler
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones and J. B.
Griswell and each of them (with full power to each of them to act alone), the
undersigned's true and lawful attorney-in-fact and agent, with full power of
substitution to each, for and on behalf and in the name of the undersigned, to
execute and file any documents relating to registration under the Securities Act
of 1933 and the Investment Company Act of 1940 with respect to open end
management investment companies currently organized or to be organized in the
future which are sponsored by Principal Mutual Life Insurance Company, and any
and all amendments thereto and reports thereunder with all exhibits and all
instruments necessary or appropriate in connection therewith, each of said
attorneys-in-fact and agents and his or their substitutes being empowered to act
with or without the others or other, and to have full power and authority to do
or cause to be done in the name and on behalf of the undersigned each and every
act and thing necessary or appropriate to be done in order to effectuate the
same, as fully to all intents and purposes as the undersigned might or could do
in person; hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 11th day
of April, 1996.
J. D. Davis
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones and J. B.
Griswell and each of them (with full power to each of them to act alone), the
undersigned's true and lawful attorney-in-fact and agent, with full power of
substitution to each, for and on behalf and in the name of the undersigned, to
execute and file any documents relating to registration under the Securities Act
of 1933 and the Investment Company Act of 1940 with respect to open end
management investment companies currently organized or to be organized in the
future which are sponsored by Principal Mutual Life Insurance Company, and any
and all amendments thereto and reports thereunder with all exhibits and all
instruments necessary or appropriate in connection therewith, each of said
attorneys-in-fact and agents and his or their substitutes being empowered to act
with or without the others or other, and to have full power and authority to do
or cause to be done in the name and on behalf of the undersigned each and every
act and thing necessary or appropriate to be done in order to effectuate the
same, as fully to all intents and purposes as the undersigned might or could do
in person; hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 11th day
of April, 1996.
B. A. Lukavsky
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones and J. B.
Griswell and each of them (with full power to each of them to act alone), the
undersigned's true and lawful attorney-in-fact and agent, with full power of
substitution to each, for and on behalf and in the name of the undersigned, to
execute and file any documents relating to registration under the Securities Act
of 1933 and the Investment Company Act of 1940 with respect to open end
management investment companies currently organized or to be organized in the
future which are sponsored by Principal Mutual Life Insurance Company, and any
and all amendments thereto and reports thereunder with all exhibits and all
instruments necessary or appropriate in connection therewith, each of said
attorneys-in-fact and agents and his or their substitutes being empowered to act
with or without the others or other, and to have full power and authority to do
or cause to be done in the name and on behalf of the undersigned each and every
act and thing necessary or appropriate to be done in order to effectuate the
same, as fully to all intents and purposes as the undersigned might or could do
in person; hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 11th day
of April, 1996.
S. L. Jones
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones and J. B.
Griswell and each of them (with full power to each of them to act alone), the
undersigned's true and lawful attorney-in-fact and agent, with full power of
substitution to each, for and on behalf and in the name of the undersigned, to
execute and file any documents relating to registration under the Securities Act
of 1933 and the Investment Company Act of 1940 with respect to open end
management investment companies currently organized or to be organized in the
future which are sponsored by Principal Mutual Life Insurance Company, and any
and all amendments thereto and reports thereunder with all exhibits and all
instruments necessary or appropriate in connection therewith, each of said
attorneys-in-fact and agents and his or their substitutes being empowered to act
with or without the others or other, and to have full power and authority to do
or cause to be done in the name and on behalf of the undersigned each and every
act and thing necessary or appropriate to be done in order to effectuate the
same, as fully to all intents and purposes as the undersigned might or could do
in person; hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 11th day
of April, 1996.
R. W. Ehrle
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones and J. B.
Griswell and each of them (with full power to each of them to act alone), the
undersigned's true and lawful attorney-in-fact and agent, with full power of
substitution to each, for and on behalf and in the name of the undersigned, to
execute and file any documents relating to registration under the Securities Act
of 1933 and the Investment Company Act of 1940 with respect to open end
management investment companies currently organized or to be organized in the
future which are sponsored by Principal Mutual Life Insurance Company, and any
and all amendments thereto and reports thereunder with all exhibits and all
instruments necessary or appropriate in connection therewith, each of said
attorneys-in-fact and agents and his or their substitutes being empowered to act
with or without the others or other, and to have full power and authority to do
or cause to be done in the name and on behalf of the undersigned each and every
act and thing necessary or appropriate to be done in order to effectuate the
same, as fully to all intents and purposes as the undersigned might or could do
in person; hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 11th day
of April, 1996.
R. E. Keller
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones and J. B.
Griswell and each of them (with full power to each of them to act alone), the
undersigned's true and lawful attorney-in-fact and agent, with full power of
substitution to each, for and on behalf and in the name of the undersigned, to
execute and file any documents relating to registration under the Securities Act
of 1933 and the Investment Company Act of 1940 with respect to open end
management investment companies currently organized or to be organized in the
future which are sponsored by Principal Mutual Life Insurance Company, and any
and all amendments thereto and reports thereunder with all exhibits and all
instruments necessary or appropriate in connection therewith, each of said
attorneys-in-fact and agents and his or their substitutes being empowered to act
with or without the others or other, and to have full power and authority to do
or cause to be done in the name and on behalf of the undersigned each and every
act and thing necessary or appropriate to be done in order to effectuate the
same, as fully to all intents and purposes as the undersigned might or could do
in person; hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 11th day
of April, 1996.
R. W. Gilbert
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones and J. B.
Griswell and each of them (with full power to each of them to act alone), the
undersigned's true and lawful attorney-in-fact and agent, with full power of
substitution to each, for and on behalf and in the name of the undersigned, to
execute and file any documents relating to registration under the Securities Act
of 1933 and the Investment Company Act of 1940 with respect to open end
management investment companies currently organized or to be organized in the
future which are sponsored by Principal Mutual Life Insurance Company, and any
and all amendments thereto and reports thereunder with all exhibits and all
instruments necessary or appropriate in connection therewith, each of said
attorneys-in-fact and agents and his or their substitutes being empowered to act
with or without the others or other, and to have full power and authority to do
or cause to be done in the name and on behalf of the undersigned each and every
act and thing necessary or appropriate to be done in order to effectuate the
same, as fully to all intents and purposes as the undersigned might or could do
in person; hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 11th day
of April, 1996.
P. A. Ferguson
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones and J. B.
Griswell and each of them (with full power to each of them to act alone), the
undersigned's true and lawful attorney-in-fact and agent, with full power of
substitution to each, for and on behalf and in the name of the undersigned, to
execute and file any documents relating to registration under the Securities Act
of 1933 and the Investment Company Act of 1940 with respect to open end
management investment companies currently organized or to be organized in the
future which are sponsored by Principal Mutual Life Insurance Company, and any
and all amendments thereto and reports thereunder with all exhibits and all
instruments necessary or appropriate in connection therewith, each of said
attorneys-in-fact and agents and his or their substitutes being empowered to act
with or without the others or other, and to have full power and authority to do
or cause to be done in the name and on behalf of the undersigned each and every
act and thing necessary or appropriate to be done in order to effectuate the
same, as fully to all intents and purposes as the undersigned might or could do
in person; hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 11th day
of April, 1996.
J. B. Griswell
ARTICLES OF INCORPORATION
of
Principal Capital Accumulation Fund, Inc.
ARTICLE I
Incorporator
The undersigned William P. Kovacs, whose post office address is 711 High
Street, Des Moines, Iowa 50309, being at least 18 years of age, as an
incorporator, hereby forms a corporation under and by virtue of the laws of
Maryland.
ARTICLE II
Name
The name of the corporation is Principal Capital Accumulation Fund, Inc.
hereinafter called the "Corporation."
ARTICLE III
Corporate Purposes and Powers
The Corporation is formed for the following purposes:
(1) To conduct and carry on the business of an investment company.
(2) To hold, invest and reinvest its assets in securities and other
investments or to hold part or all of its assets in cash.
(3) To issue and sell shares of its capital stock in such amounts and on
such terms and conditions and for such purposes and for such amount or kind of
consideration as may now or hereafter be permitted by law.
(4) To redeem, purchase or acquire in any other manner, hold, dispose of,
resell, transfer, reissue or cancel (all without the vote or consent of the
stockholders of the Corporation) shares of its capital stock, in any manner and
to the extent now or hereafter permitted by law and by these Articles of
Incorporation.
(5) To do any and all additional acts and to exercise any and all
additional powers or rights as may be necessary, incidental, appropriate or
desirable for the accomplishment of all or any of the foregoing purposes.
To carry out all or any part of the foregoing objects as principal, factor,
agent, contractor, or otherwise, either alone or through or in conjunction with
any person, firm, association or corporation, and, in carrying on its business
and for the purpose of attaining or furnishing any of its objects and purposes,
to make and perform any contracts and to do any acts and things, and to exercise
any powers suitable, convenient or proper for the accomplishment of any of the
objects and purposes herein enumerated or incidental to the powers herein
specified, or which at any time may appear conducive to or expedient for the
accomplishment of any such objects and purposes.
To carry out all or any part of the aforesaid objects and purposes, and
to conduct its business in all or any of its branches, in any or all states,
territories, districts and possessions of the United States of America and in
foreign countries; and to maintain offices and agencies in any or all states,
territories, districts and possessions of the United States of America and in
foreign countries.
The foregoing objects and purposes shall, except when otherwise
expressed, be in no way limited or restricted by reference to or inference from
the terms of any other clause of this or any other article of these Articles of
Incorporation or of any amendment thereto, and shall each be regarded as
independent, and construed as powers as well as objects and purposes.
The Corporation shall be authorized to exercise and enjoy all of the
powers, rights and privileges granted to, or conferred upon, corporations of a
similar character by the Maryland General Corporation Law now or hereafter in
force, and the enumeration of the foregoing powers shall not be deemed to
exclude any powers, rights or privileges so granted or conferred.
ARTICLE IV
Principal Office and Resident Agent
The post office address of the principal office of the Corporation in
this State is c/o The Corporation Trust Incorporated, 32 South Street,
Baltimore, Maryland 21202. The name of the resident agent of the Corporation in
this State is The Corporation Trust Incorporated, a corporation of this State,
and the post office address of the resident agent is 32 South Street, Baltimore,
Maryland 21202.
ARTICLE V
Capital Stock
Section 1. Authorized Shares: The total number of shares of stock which
the Corporation shall have authority to issue is one hundred million
(100,000,000) shares, all of one class, of the par value of one cent ($.01) each
and of the aggregate par value of one million dollars ($1,000,000).
Section 2. Quorum Requirements and Voting Rights: Except as otherwise
expressly provided by the Maryland General Corporation Law, the presence in
person or by proxy of the holders of one-third of the shares of capital stock of
the Corporation outstanding and entitled to vote thereat shall constitute a
quorum at any meeting of the stockholders.
Any action which, under the Maryland General Corporation Law, and in the
absence of this Article, would require approval by more than a majority of all
the votes entitled to be cast thereon, shall, by virtue of this Article, require
approval by only a majority of all the votes entitled to be cast thereon, except
to the extent otherwise required by the Investment Company Act of 1940.
Section 3. No Preemptive Rights: No holder of shares of capital stock of
the Corporation shall, as such holder, have any right to purchase or subscribe
for any shares of the capital stock of the Corporation which the Corporation may
issue or sell (whether consisting of shares of capital stock authorized by these
Articles of Incorporation, or shares of capital stock of the Corporation
acquired by it after the issue thereof, or other shares) other than any right
which the Board of Directors of the Corporation, in its discretion, may
determine.
Section 4. Determination of Net Asset Value: The net asset value of a
share of the Corporation's stock for purposes of sale, redemption or purchase of
shares shall be equal to the value of the Corporation's assets, less it s
liabilities (exclusive of capital stock and surplus), divided by the number of
shares outstanding, and shall be determined at such time or times as the Board
of Directors shall fix in compliance with applicable statutes and regulatory
requirements. The Board of Directors may adopt procedures for determination of
net asset value consistent with the requirements of applicable statutes and
regulations and, so far as accounting matters are concerned, with generally
accepted accounting principles. The procedures may include, without limitation,
procedures for valuation of the Corporation's portfolio securities and other
assets, for accrual of expenses or creation of reserves and for the
determination of the number of shares issued and outstanding at any given time.
Section 5. Redemption and Repurchase of Shares of Capital Stock: Any
shareholder may redeem shares of the Corporation for the net asset value thereof
by presentation of an appropriate request, together with the certificates, if
any, for such shares, duly endorsed, at the office or agency designated by the
Corporation. Redemptions as aforesaid, or purchases by the Corporation of its
own stock, shall be made in the manner and subject to the conditions contained
in the bylaws or approved by the Board of Directors.
Section 6. Fractional Shares Authorized: The Corporation may issue, sell,
redeem, repurchase, and otherwise deal in and with shares of its capital stock
in fractional denominations to the same extent as its whole shares, and shares
in fractional denominations shall be shares of capital stock having
proportionately to the respective fractions represented thereby all the rights
of whole shares, including, without limitation, the right to vote, the right to
receive dividends and distributions, and the right to participate upon
liquidation of the Corporation; provided that the issue of shares in fractional
denominations or certificates therefor shall be limited to such transactions and
be made upon such terms as may be fixed by or under authority of the bylaws or
approved by the Board of Directors.
Section 7. Purchase of Shares: The Corporation shall be entitled to
purchase shares of capital stock, to the extent that the Corporation may
lawfully effect such purchase under Maryland General Corporation Law, upon such
terms and conditions and for such consideration as the Board of Directors shall
deem advisable, by agreement with the stockholder at a price not exceeding the
net asset value per share computed in accordance with Section 4 of this Article.
Section 8. Redemption of Minimum Amounts:
(a) If after giving effect to a request for redemption by a stockholder
the aggregate net asset value of his remaining shares will be less than the
Minimum Amount then in effect, the Corporation shall be entitled to require the
redemption of the remaining shares of such stockholder, upon notice given in
accordance with paragraph (c) of this Section, to the extent that the
Corporation may lawfully effect such redemption under Maryland General
Corporation Law.
(b) The term "Minimum Amount" when used herein shall mean Three Hundred
Dollars ($300) unless otherwise fixed by the Board of Directors from time to
time, provided that the Minimum Amount may not in any event exceed Five Thousand
Dollars ($5,000).
(c) If any redemption under paragraph (a) of this Section is upon notice,
the notice shall be in writing personally delivered or deposited in the mail, at
least thirty days prior to such redemption. If mailed, the notice shall be
addressed to the stockholder at his post office address as shown on the books of
the Corporation, and sent by certified or registered mail, postage prepaid. The
price for shares redeemed by the Corporation pursuant to paragraph (a) of this
Section shall be paid in cash in an amount equal to the net asset value of such
shares, computed in accordance with Section 4 of this Article.
Section 9. Mode of Payment: Payment by the Corporation for shares of
capital stock of the Corporation surrendered to it for redemption shall be made
by the Corporation within seven business days of such surrender out of the funds
legally available therefor, provided that the Corporation may suspend the right
of the holders of capital stock of the Corporation to redeem shares of capital
stock and may postpone the right of such holders to receive payment for any
shares when permitted or required to do so by law. Payment of the redemption or
purchase price may be made in cash or, at the option of the Corporation, wholly
or partly in such portfolio securities of the Corporation as the Corporation may
select.
Section 10: Rights of Holders of Shares Purchased or Redeemed. The right
of any holder of capital stock of the Corporation purchased or redeemed by the
Corporation as provided in this Article to receive dividends thereon and all
other rights of such holder with respect to such shares shall terminate at the
time as of which the purchase or redemption price of such shares is determined,
except the right of such holder to receive (i) the purchase or redemption price
of such shares from the Corporation or its designated agent and (ii) any
dividend or distribution or voting rights to which such holder has previously
become entitled as the record holder of such shares on the record date for the
determination of the stockholders entitled to receive such dividend or
distribution or to vote at the meeting of stockholders.
Section 11. Status of Shares Purchased or Redeemed: In the absence of any
specification as to the purpose for which such shares of capital stock of the
Corporation are redeemed or purchased by it, all shares so redeemed or purchased
shall be deemed to be retired in the sense contemplated by the laws of the State
of Maryland and may be reissued. The number of authorized shares of capital
stock of the Corporation shall not be reduced by the number of any shares
redeemed or purchased by it.
Section 12. Additional Limitations and Powers: The following provisions are
inserted for the purpose of defining, limiting and regulating the powers of the
Corporation and of the Board of Directors and stockholders:
(a) Any determination made in good faith and, so far as accounting
matters are involved, in accordance with generally accepted accounting
principles by or pursuant to the direction of the Board of Directors, as to the
amount of the assets, debts, obligations or liabilities of the Corporation, as
to the amount of any reserves or charges set up and the propriety thereof, as to
the time of or purpose for creating such reserves or charges, as to the use,
alteration or cancellation of any reserves or charges (whether or not any debt,
obligation or liability for which such reserves or charges shall have been
created shall have been paid or discharged or shall be then or thereafter
required to be paid or discharged), as to the value of any investment or other
asset of the Corporation, as to the number of shares of the Corporation
outstanding, as to the estimated expense to the Corporation in connection with
purchases of its shares, as to the ability to liquidate investments in orderly
fashion, or as to any other matters relating to the issue, sale, purchase and/or
other acquisition or disposition of investments or shares of the Corporation,
shall be final and conclusive and shall be binding upon the Corporation and all
holders of its shares, past, present and future, and shares of the Corporation
are issued and sold on the condition and understanding that any and all such
determinations shall be binding as aforesaid.
(b) Except to the extent prohibited by the Investment Company Act of
1940, as amended, or rules, regulations or orders thereunder promulgated by the
Securities and Exchange Commission or any successor thereto or by the bylaws of
the Corporation, a director, officer or employee of the Corporation shall not be
disqualified by his position from dealing or contracting with the Corporation,
nor shall any transaction or contract of the Corporation be void or voidable by
reason of the fact that any director, officer or employee or any firm of which
any director, officer or employee is a member, or any corporation of which any
director, officer or employee is a stockholder, officer or director, is in any
way interested in such transaction or contract; provided that in case a
director, or a firm or corporation of which a director is a member, stockholder,
officer or director is so interested, such fact shall be disclosed to or shall
have been known by the Board of Directors or a majority thereof. Nor shall any
director or officer of the Corporation be liable to the Corporation or to any
stockholder or creditor thereof or to any person for any loss incurred by it or
him or for any profit realized by such director or officer under or by reason of
such contract or transaction; provided that nothing herein shall protect any
director or officer of the Corporation against any liability to the Corporation
or to its security holders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office; and provided always that such
contract or transaction shall have been on terms that were not unfair to the
Corporation at the time at which it was entered into. Any director of the
Corporation who is so interested, or who is a member, stockholder, officer or
director of such firm or corporation, may be counted in determining the
existence of a quorum at any meeting of the Board of Directors of the
Corporation which shall authorize any such transaction or contract, with like
force and effect as if he were not such director, or member, stockholder,
officer or director of such firm or corporation.
(c) Specifically and without limitation of the foregoing paragraph (b)
but subject to the exception therein prescribed, the Corporation may enter into
management or advisory, underwriting, distribution and administration contracts,
custodian contracts and such other contracts as may be appropriate.
(d) All persons who shall acquire capital stock of the Corporation shall
acquire the same subject to the provisions of these Articles of Incorporation.
ARTICLE VI
Directors
Section 1. Initial Board of Directors: The number of directors of the
Corporation shall initially be nine. The names of the directors who shall hold
office until the first annual meeting of stockholders or until their successors
are duly chosen and qualified are:
James S. Craiger David K. Kauf
James D. Davis Barbara A. Lukavsky
Roy W. Ehrle Robert E. Larson
Richard W. Gilbert Richard G. Peebler
Stephan L. Jones
Section 2. Number of Directors: The number of directors in office may be
changed from time to time in the manner specified in the bylaws of the
Corporation, but this number shall never be less than three.
Section 3. Certain Powers of Board of Directors: In addition to its other
powers explicitly or implicitly granted under these Articles of Incorporation,
by law or otherwise, the Board of Directors of the Corporation (a) is expressly
authorized to make, alter, amend or repeal bylaws for the Corporation, (b) is
empowered to authorize, without stockholder approval, the issuance and sale from
time to time of shares of capital stock of the Corporation, whether now or
hereafter authorized, in such amounts, for such amount and kind of consideration
and on such terms and conditions as the Board of Directors shall determine, (c)
is empowered to classify or reclassify any unissued stock, whether now or
hereafter authorized, by setting or changing the preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption of such stock.
ARTICLE VII
Indemnification
The Corporation shall indemnify its directors, including any director who
serves another corporation, partnership, joint venture, trust or other
enterprise in any capacity at the request of the Corporation, to the maximum
extent permitted by the Maryland General Corporation Law and the Investment
Company Act of 1940. The Corporation shall indemnify its officers to the same
extent as its directors and to such further extent as is consistent with law.
The Corporation shall indemnify its employees and agents to the extent provided
by its Board of Directors.
ARTICLE VIII
Amendments
The Corporation reserves the right from time to time to make any
amendment of these Articles of Incorporation now or hereafter authorized by law,
including any amendment which alters the contract rights, as expressly set forth
in these Articles of Incorporation, of any outstanding capital stock. "Articles
of Incorporation" or "these Articles of Incorporation" as used herein and in the
bylaws of the Corporation shall be deemed to mean these Articles of
Incorporation as from time to time amended or restated.
ARTICLE IX
Duration
The duration of the Corporation shall be perpetual.
IN WITNESS WHEREOF, the undersigned incorporators of Principal Capital
Accumulation Fund, Inc., have executed the foregoing Articles of Incorporation
and hereby acknowledge the same to be their voluntary act and deed.
Dated the 25th day of May, 1989.
-----------------------------
William P. Kovacs
- 1 -
BYLAWS
OF
PRINCIPAL CAPITAL ACCUMULATION FUND, INC.
ARTICLE 1
Name, Fiscal Year
1.01 The name of this corporation shall be Principal Capital Accumulation
Fund, Inc., Inc. Except as otherwise from time to time provided by the board of
directors, the fiscal year of the corporation shall begin January 1 and end
December 31.
ARTICLE 2
Stockholders' Meetings
2.01 Place of Meetings. All meetings of the stockholders shall be held at
such place within or without the State of Maryland, as is stated in the notice
of meeting.
2.02 Annual Meetings. The Board of Directors of the Fund shall determine
whether or not an annual meeting of stockholders shall be held. In the event
that an annual meeting of stockholders is held, such meeting shall be held on
the first Tuesday after the first Monday of April in each year or on such other
date during the 31-day period following the first Tuesday after the first Monday
of April as the directors may determine.
2.03 Special Meetings. Special meetings of the stockholders shall be held
whenever called by the chairman of the board, the president or the board of
directors.
2.04 Notice of Stockholders' Meetings. Notice of each stockholders' meeting
stating the place, date and hour of the meeting and the purpose or purposes for
which the meeting is called shall be given by mailing such notice to each
stockholder of record at his address as it appears on the records of the
corporation not less than 10 nor more than 90 days prior to the date of the
meeting. Any meeting at which all stockholders entitled to vote are present
either in person or by proxy or of which those not present have waived notice in
writing shall be a legal meeting for the transaction of business notwithstanding
that notice has not been given as herein provided.
2.05 Quorum. Except as otherwise expressly required by law, these bylaws or
the Articles of Incorporation, as from time to time amended, at any meeting of
the stockholders the presence in person or by proxy of the holders of one-third
of the shares of capital stock of the Corporation issued and outstanding and
entitled to vote, shall constitute a quorum, but a lesser interest may adjourn
any meeting from time to time and the meeting may be held as adjourned without
further notice. When a quorum is present at any meeting a majority of the stock
represented thereat shall decide any question brought before such meeting unless
the question is one upon which by express provision of law or of these bylaws or
the Articles of Incorporation a larger or different vote is required, in which
case such express provision shall govern.
2.06 Proxies and Voting. Stockholders of record may vote at any meeting
either in person or by written proxy signed by the stockholder or by the
stockholder's duly authorized attorney-in-fact dated not more than eleven months
before the date of exercise, which shall be filed with the Secretary of the
meeting before being voted. Each stockholder shall be entitled to one vote for
each share of stock held, and to a fraction of a vote equal to any fractional
share held.
2.07 Stock Ledger. The Corporation shall maintain at the office of the
stock transfer agent of the Corporation, or at the office of any successor
thereto as stock transfer agent of the Corporation, an original stock ledger
containing the names and addresses of all stockholders and the number of shares
of each class held by each stockholder. Such stock ledger may be in written form
or any other form capable of being converted into written form within a
reasonable time for visual inspection.
ARTICLE 3
Board of Directors
3.01 Number, Service. The Corporation shall have a Board of Directors
consisting of not less than three and no more than fifteen members. The number
of Directors to constitute the whole board within the limits above-stated shall
be fixed by the Board of Directors. The Directors may be chosen (i) by
stockholders at any annual meeting of stockholders held for the purpose of
electing directors or at any meeting held in lieu thereof, or at any special
meeting called for such purpose, or (ii) by the Directors at any regular or
special meeting of the Board to fill a vacancy on the Board as provided in these
bylaws and Maryland General Corporation Law. Each director should serve until
the next annual meeting of shareholders and until a successor is duly qualified
and elected, unless sooner displaced.
3.02 Powers. The board of directors shall be responsible for the entire
management of the business of the Corporation. In the management and control of
the property, business and affairs of the Corporation the board of directors is
hereby vested with all the powers possessed by the corporation itself so far as
this designation of authority is not inconsistent with the laws of the State of
Maryland, but subject to the limitations and qualifications contained in the
Articles of Incorporation and in these bylaws.
3.03 Executive Committee and Other Committees. The board of directors may
elect from its members an executive committee of not less than three which may
exercise certain powers of the board of directors when the board is not in
session pursuant to Maryland law. The executive committee may make rules for the
holding and conduct of its meetings and keeping the records thereof, and shall
report its action to the board of directors.
The board of directors may elect from its members such other committees
from time to time as it may desire. The number composing such committees and the
powers conferred upon them shall be determined by the board of directors at its
own discretion.
3.04 Meetings. Regular meetings of the board of directors may be held in
such places within or without the State of Maryland, and at such times as the
board may from time to time determine, and if so determined, notices thereof
need not be given. Special meetings of the board of directors may be held at any
time or place whenever called by the president or a majority of the directors,
notice thereof being given by the secretary or the president, or the directors
calling the meeting, to each director. Special meetings of the board of
directors may also be held without formal notice provided all directors are
present or those not present have waived notice thereof.
3.05 Quorum. A majority of the members of the board of directors from time
to time in office but in no event not less than one-third of the number
constituting the whole board shall constitute a quorum for the transaction of
business provided, however, that where the Investment Company Act of 1940
requires a different quorum to transact business of a specific nature, the
number of directors so required shall constitute a quorum for the transaction of
such business.
A lesser number may adjourn a meeting from time to time and the meeting may
be held without further notice. When a quorum is present at any meeting a
majority of the members present thereat shall decide any question brought before
such meeting except as otherwise expressly required by law, the Articles of
Incorporation or these bylaws.
3.06 Action by Directors Other than at a Meeting. Any action required or
permitted to be taken at any meeting of the Board of Directors, or of any
committee thereof, may be taken without a meeting, if a written consent to such
action is signed by all members of the Board of Directors or such committee, as
the case may be, and such written consent is filed with the minutes of
proceedings of the Board of Directors or committee.
3.07 Holding of Meetings by Conference Telephone Call. At any regular or
special meeting, members of the Board of Directors or any committee thereof may
participate by conference telephone or similar communications equipment by means
of which all persons participating in the meeting can hear each other.
Participation in a meeting pursuant to this Section shall constitute presence in
person at such meeting.
ARTICLE 4
Officers
4.01 Selection. The officers of the corporation shall be a president, one
or more vice presidents, a secretary and a treasurer. The board of directors
may, if it so determines, also elect a chairman of the board. All officers shall
be elected by the board of directors and shall serve at the pleasure of the
board. The same person may hold more than one office except the offices of
president and vice president.
4.02 Eligibility. The chairman of the board, if any, and the president
shall be directors of the corporation. Other officers need not be directors.
4.03 Additional Officers and Agents. The board of directors may appoint one
or more assistant treasurers, one or more assistant secretaries and such other
officers or agents as it may deem advisable, and may prescribe the duties
thereof.
4.04 Chairman of the Board of Directors. The chairman of the board, if any,
shall preside at all meetings of the board of directors at which he is present.
He shall have such other authority and duties as the board of directors shall
from time to time determine.
4.05 The President. The president shall be the chief executive officer of
the corporation; he shall have general and active management of the business,
affairs and property of the corporation, and shall see that all orders and
resolutions of the board of directors are carried into effect. He shall preside
at meetings of stockholders, and of the board of directors unless a chairman of
the board has been elected and is present.
4.06 The Vice Presidents. The vice presidents shall respectively have such
powers and perform such duties as may be assigned to them by the board of
directors or the president. In the absence or disability of the president, the
vice presidents, in the order determined by the board of directors, shall
perform the duties and exercise the powers of the president.
4.07 The Secretary. The secretary shall keep accurate minutes of all
meetings of the stockholders and directors, and shall perform all duties
commonly incident to his office and as provided by law and shall perform such
other duties and have such other powers as the board of directors shall from
time to time designate. In his absence an assistant secretary or secretary pro
tempore shall perform his duties.
4.08 The Treasurer. The treasurer shall, subject to the order of the board
of directors and in accordance with any arrangements for performance of services
as custodian, transfer agent or disbursing agent approved by the board, have the
care and custody of the money, funds, securities, valuable papers and documents
of the corporation, and shall have and exercise under the supervision of the
board of directors all powers and duties commonly incident to his office and as
provided by law. He shall keep or cause to be kept accurate books of account of
the corporation's transactions which shall be subject at all times to the
inspection and control of the board of directors. He shall deposit all funds of
the corporation in such bank or banks, trust company or trust companies or such
firm or firms doing a banking business as the board of directors shall
designate. In his absence, an assistant treasurer shall perform his duties.
ARTICLE 5
Vacancies
5.01 Removals. The stockholders may at any meeting called for the purpose,
by vote of the holders of a majority of the capital stock issued and outstanding
and entitled to vote, remove from office any director and, unless the number of
directors constituting the whole board is accordingly decreased, elect a
successor. To the extent consistent with the Investment Company Act of 1940, the
board of directors may by vote of not less than a majority of the directors then
in office remove from office any director, officer or agent elected or appointed
by them and may for misconduct remove any thereof elected by the stockholders.
5.02 Vacancies. If the office of any director becomes or is vacant by
reason of death, resignation, removal, disqualification, an increase in the
authorized number of directors or otherwise, the remaining directors may by vote
of a majority of said directors choose a successor or successors who shall hold
office for the unexpired term; provided that vacancies on the board of directors
may be so filled only if, after the filling of the same, at least two-thirds of
the directors then holding office would be directors elected to such office by
the stockholders at a meeting or meetings called for the purpose. In the event
that at any time less than a majority of the directors were so elected by the
stockholders, a special meeting of the stockholders shall be called forthwith
and held as promptly as possible and in any event within sixty days for the
purpose of electing an entire new board of directors.
ARTICLE 6
Certificates of Stock
6.01 Certificates. The board of directors may adopt a policy of not issuing
certificates except in extraordinary situations as may be authorized from time
to time by an officer of the Corporation. If such a policy is adopted, a
stockholder may obtain a certificate or certificates of the capital stock of the
Corporation owned by such stockholder only if the stockholder demonstrates a
specific reason for needing a certificate. If issued, the certificate shall be
in such form as shall, in conformity to law, be prescribed from time to time by
the board of directors. Such certificates shall be signed by the chairman of the
board of directors or the president or a vice president and by the treasurer or
an assistant treasurer or the secretary or an assistant secretary. If such
certificates are countersigned by a transfer agent or registrar other than the
Corporation or an employee of the Corporation, the signatures of the
aforementioned officers upon such certificates may be facsimile. In case any
officer or officers who have signed, or whose facsimile signature or signatures
have been used on, any such certificate or certificates shall cease to be such
officer or officers of the Corporation, whether because of death, resignation or
otherwise, before such certificate or certificates have been delivered by the
Corporation, such certificate or certificates may nevertheless be adopted by the
Corporation and be issued and delivered as though the person or persons who
signed such certificate or certificates or whose facsimile signature or
signatures have been used thereon had not ceased to be such officer or officers
of the Corporation.
6.02 Replacement of Certificates. The board of directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost or
destroyed. When authorizing such issue of a new certificate or certificates, the
board of directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost or destroyed certificate or
certificates, or its legal representative, to advertise the same in such manner
as it shall require and/or to give the corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the corporation
with respect to the certificate alleged to have been lost or destroyed.
6.03 Stockholder Open Accounts. The corporation may maintain or cause to be
maintained for each stockholder a stockholder open account in which shall be
recorded such stockholder's ownership of stock and all changes therein, and
certificates need not be issued for shares so recorded in a stockholder open
account unless requested by the stockholder and such request is approved by an
officer.
6.04 Transfers. Transfers of stock for which certificates have been issued
will be made only upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, whereupon the
Corporation will issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction on its books. Transfers of stock
evidenced by open account authorized by Section 6.03 will be made upon delivery
to the Corporation or the transfer agent of the Corporation of instructions for
transfer or evidence of assignment or succession, in each case executed in such
manner and with such supporting evidence as the Corporation or transfer agent
may reasonably require.
6.05 Closing Transfer Books. The transfer books of the stock of the
corporation may be closed for such period (not to exceed 20 days) from time to
time in anticipation of stockholders' meetings or the declaration of dividends
as the directors may from time to time determine.
6.06 Record Dates. The board of directors may fix in advance a date, not
exceeding ninety days preceding the date of any meeting of stockholders, or the
date for the payment of any dividend, or the date for the allotment of rights,
or the date when any change or conversion or exchange of capital stock shall go
into effect, or a date in connection with obtaining any consent or for any other
lawful purpose, as a record date for the determination of the stockholders
entitled to notice of, and to vote at, any such meeting, and any adjournment
thereof, or entitled to receive payment of any such dividend, or to any such
allotment of rights, or to exercise the rights in respect of any such change,
conversion or exchange of capital stock, or to give such consent, and in such
case such stockholders and only such stockholders as shall be stockholders of
record on the date as fixed shall be entitled to such notice of, and to vote at,
such meeting, and any adjournment thereof, or to receive payment of such
dividend, or to receive such allotment of rights, or to exercise such rights, or
to give such consent, as the case may be, notwithstanding any transfer of any
stock on the books of the Corporation after any such record date fixed as
aforesaid.
6.07 Registered Ownership. The Corporation shall be entitled to recognize
the exclusive right of a person registered on its books as the owner of shares
to receive dividends, and to vote as such owner and shall not be bound to
recognize any equitable or other claim to or interest in such share or shares on
the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of the State of
Maryland.
ARTICLE 7
Notices
7.01 Manner of Giving. Whenever under the provisions of the statutes or of
the Articles of Incorporation or of these bylaws notice is required to be given
to any director, committee member, officer or stockholder, it shall not be
construed to mean personal notice, but such notice may be given, in the case of
stockholders, in writing, by mail, by depositing the same in a United States
post office or letter box, in a postpaid sealed wrapper, addressed to each
stockholder at such address as it appears on the books of the corporation, or,
in default to other address, to such stockholder at the General Post Office in
the City of Baltimore, Maryland, and, in the case of directors, committee
members and officers, by telephone, or by mail or by telegram to the last
business address known to the secretary of the corporation, and such notice
shall be deemed to be given at the time when the same shall be thus mailed or
telegraphed or telephoned.
7.02 Waiver. Whenever any notice is required to be given under the
provisions of the statutes or of the Articles of Incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE 8
General Provisions
8.01 Disbursement of Funds. All checks, drafts, orders or instructions for
the payment of money and all notes of the corporation shall be signed by such
officer or officers or such other person or persons as the board of directors
may from time to time designate.
8.02 Voting Stock in Other Corporations. Unless otherwise ordered by the
board of directors, any officer shall have full power and authority to attend
and act and vote at any meeting of stockholders of any corporation in which this
corporation may hold stock, and at any such meeting may exercise any and all the
rights and powers incident to the ownership of such stock. Any officer of this
corporation may execute proxies to vote shares of stock of other corporations
standing in the name of this corporation.
8.03 Execution of Instruments. Except as otherwise provided in these
bylaws, all deeds, mortgages, bonds, contracts, stock powers and other
instruments of transfer, reports and other instruments may be executed on behalf
of the corporation by the president or any vice president or by any other
officer or agent authorized to act in such matters, whether by law, the Articles
of Incorporation, these bylaws, or any general or special authorization of the
board of directors. If the corporate seal is required, it shall he affixed by
the secretary or an assistant secretary.
8.04 Seal. The corporate seal shall have inscribed thereon the name of the
corporation, the year of its incorporation and the words "Corporate Seal,
Maryland." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
ARTICLE 9
Regulations
9.01 Investment and Related Matters. The Corporation shall not purchase or
hold securities in violation of the investment restrictions enumerated in its
then current prospectus and the registration statement or statements filed with
the Securities and Exchange Commission pursuant to the Securities Act of 1933
and the Investment Company Act of 1940, as amended, nor shall the Corporation
invest in securities the purchase of which would cause the Corporation to
forfeit its rights to continue to publicly offer its shares under the laws,
rules or regulations of any state in which it may become authorized to so offer
its shares unless, by specific resolution of the board of directors, the
Corporation shall elect to discontinue the sale of its shares in such state.
9.02 Other Matters. When used in this section the following words shall
have the following meanings: "Sponsor" shall mean any one or more corporations,
firms or associations which have distributor's contracts in effect with this
Corporation. "Manager" shall mean any corporation, firm or association which may
at the time have an investment advisory contract with this Corporation.
(a) Limitation of Holdings by this Corporation of Certain Securities
and of Dealings with Officers or Directors. This Corporation shall not purchase
or retain securities of any issuer if those officers and directors of the Fund
or its Manager owning beneficially more than one-half of one per cent (0.5%) of
the shares or securities of such issuer together own beneficially more than five
per cent (5%) of such shares or securities; and each officer and director of
this Corporation shall keep the treasurer of this Corporation informed of the
names of all issuers (securities of which are held in the portfolio of this
Corporation) in which such officer or director owns as much as one-half of one
percent (1/2 of 1%) of the outstanding shares or securities and (except in the
case of a holding by the treasurer) this Corporation shall not be charged with
knowledge of any such security holding in the absence of notice given if as
aforesaid if this Corporation has requested such information not less often than
quarterly. The Corporation will not lend any of its assets to the Sponsor or
Manager or to any officer or director of the Sponsor or Manager or of this
Corporation and shall not permit any officer or director, and any officer or
director of the Sponsor or Manager, to deal for or on behalf of the Corporation
with himself as principal agent, or with any partnership, association or
corporation in which he has a financial interest. Nothing contained herein shall
prevent (1) officers and directors of the Corporation from buying, holding or
selling shares in the Corporation, or from being partners, officers or directors
of or otherwise financially interested in the Sponsor or the Manager or any
company controlling the Sponsor or the Manager; (2) employment of legal counsel,
registrar, transfer agent, dividend disbursing agent or custodian who is, or has
a partner shareholder, officer or director who is, an officer or director of the
Corporation, if only customary fees are charged for services to the Corporation;
(3) sharing statistical and research expenses and office hire and expenses with
any other investment company in which an officer or director of the Corporation
is an officer or director or otherwise financially interested.
(b) Limitation Concerning Participating by Interested Persons in
Investment Decisions. In any case where an officer or director of the
Corporation or of the Manager, or a member of an advisory committee or portfolio
committee of the Corporation, is also an officer or a director of another
corporation, and the purchase or sale of shares issued by that other corporation
is under consideration, the officer or director or committee member concerned
will abstain from participating in any decision made on behalf of the
Corporation to purchase or sell any securities issued by such other corporation.
(c) Limitation on Dealing in Securities of this Corporation by certain
Officers, Directors, Sponsor or Manager. Neither the Sponsor nor Manager, nor
any officer or director of this Corporation or of the Sponsor or Manager shall
take long or short positions in securities issued by this Corporation, provided,
however, that:
(1) The Sponsor may purchase from this Corporation shares issued
by this Corporation if the orders to purchase from this Corporation are entered
with this Corporation by the Sponsor upon receipt by the Sponsor of purchase
orders for shares of this Corporation and such purchases are not in excess of
purchase orders received by the Sponsor.
(2) The Sponsor may in the capacity of agent for this Corporation
buy securities issued by this Corporation offered for sale by other persons.
(3) Any officer or director of this Corporation or of the Sponsor
or Manager or any Company controlling the Sponsor or Manager may at any time, or
from time to time, purchase from this Corporation or from the Sponsor shares
issued by this Corporation at a price not lower than the net asset value of the
shares, no such purchase to be in contravention of any applicable state or
federal requirement.
(d) Securities and Cash of this Corporation to be held by Custodian
subject to certain Terms and Conditions.
(1) All securities and cash owned by this Corporation shall as
hereinafter provided, be held by or deposited with a bank or trust company
having (according to its last published report) not less than two million
dollars ($2,000,000) aggregate capital, surplus and undivided profits (which
bank or trust company is hereby designated as "Custodian"), provided such a
Custodian can be found ready and willing to act.
(2) This Corporation shall enter into a written contract with the
Custodian regarding the powers, duties and compensation of the Custodian with
respect to the cash and securities of this Corporation held by the Custodian.
Said contract and all amendments thereto shall be approved by the board of
directors of this Corporation.
(3) This Corporation shall upon the resignation or inability to
serve of its Custodian or upon change of the Custodian:
(aa) in case of such resignation or inability to serve, use
its best efforts to obtain a successor Custodian;
(bb) require that the cash and securities owned by this
Corporation be delivered directly to the successor Custodian; and
(cc) In the event that no successor Custodian can be found,
submit to the stockholders, before permitting delivery of the cash and
securities owned by this Corporation otherwise than to a successor Custodian,
the question whether or not this Corporation shall be liquidated or shall
function without a Custodian.
(e) Amendment of Investment Advisory Contract. Any investment advisory
contract entered into by this Corporation shall not be subject to amendment
except by (1) affirmative vote at a shareholders meeting, of the holders of a
majority of the outstanding stock of this Corporation, or (2) a majority of such
Directors who are not interested persons (as the term is defined in the
Investment Company Act of 1940) of the Parties to such agreements, cast in
person at a board meeting called for the purpose of voting on such amendment.
(f) Reports relating to Certain Dividends. Dividends paid from net
profits from the sale of securities shall be clearly revealed by this
Corporation to its shareholders and the basis of calculation shall be set forth.
(g) Maximum Sales Commission. The Corporation shall, in any
distribution contract with respect to its shares of common stock entered into by
it, provide that the maximum sales commission to be charged upon any sales of
such shares shall not be more than nine per cent (9%) of the offering price to
the public of such shares. As used herein, "offering price to the public" shall
mean net asset value per share plus the commission charged adjusted to the
nearest cent.
ARTICLE 10
Purchases and Redemption of Shares:
Suspension of Sales
10.01 Purchase by Agreement. The Corporation may purchase its shares by
agreement with the owner at a price not exceeding the net asset value next
computed following the time when the purchase or contract to purchase is made.
10.02 Redemption. The Corporation shall redeem such shares as are offered
by any stockholder for redemption upon the presentation of a written request
therefor, duly executed by the record owner, to the office or agency designated
by the corporation. If the shareholder has received stock certificates, the
request must be accompanied by the certificates, duly endorsed for transfer, in
acceptable form; and the Corporation will pay therefor the net asset value of
the shares next effective following the time at which the request, in acceptable
form, is so presented. Payment for said shares shall ordinarily be made by the
Corporation to the stockholder within seven days after the date on which the
shares are presented.
10.03 Suspension of Redemption. The obligations set out in Section 10.02
may be suspended (i) for any period during which the New York Stock Exchange,
Inc. is closed other than customary week-end and holiday closings, or during
which trading on the New York Stock Exchange, Inc. is restricted, as determined
by the rules and regulations of the Securities and Exchange Commission or any
successor thereto; (ii) for any period during which an emergency, as determined
by the rules and regulations of the Securities and Exchange Commission or any
successor thereto, exists as a result of which disposal by the Corporation of
securities owned by it is not reasonably practicable or as a result of which it
is not reasonably practicable for the Corporation to fairly determine the value
of its net assets; or (iii) for such other periods as the Securities and
Exchange Commission or any successor thereto may by order permit for the
protection of security holders of the Corporation. Payment of the redemption or
purchase price may be made in cash or, at the option of the Corporation, wholly
or partly in such portfolio securities of the Corporation as the Corporation may
select.
10.04 Suspension of Sales. The Corporation reserves the right to suspend
sales of its shares if, in the judgment of the majority of the board of
directors or a majority of the executive committee of its Board, if such
committee exists, it is in the best interest of the Corporation to do so, such
suspension to continue for such period as may be determined by such majority.
10.05 Sales only to Eligible Purchasers. Only Eligible Purchasers may
purchase shares directly from the Corporation. Eligible Purchasers are limited
to (a) separate accounts of Principal Mutual Life Insurance Company or of other
insurance companies; (b) Principal Mutual Life Insurance Company or any
subsidiary or affiliate thereof; (c) trustees or other managers of any qualified
profit sharing, incentive or bonus plan established by Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof for the employees of
such company, subsidiary or affiliate.
ARTICLE 11
Fractional Shares
11.01 The board of directors may authorize the issue from time to time of
shares of the capital stock of the corporation in fractional denominations,
provided that the transactions in which and the terms upon which shares in
fractional denominations may be issued may from time to time be determined and
limited by or under authority of the board of directors.
ARTICLE 12
Indemnification
12.01 (a) Every person who is or was a director, officer or employee of
this Corporation or of any other corporation which he served at the request of
this Corporation and in which this Corporation owns or owned shares of capital
stock or of which it is or was a creditor shall have a right to be indemnified
by this Corporation against all liability and reasonable expenses incurred by
him in connection with or resulting from a claim, action, suit or proceeding in
which he may become involved as a party or otherwise by reason of his being or
having been a director, officer or employee of this Corporation or such other
corporation, provided (1) said claim, action, suit or proceeding shall be
prosecuted to a final determination and he shall be vindicated on the merits, or
(2) in the absence of such a final determination vindicating him on the merits,
the board of directors shall determine that he acted in good faith and in a
manner he reasonably believed to be in the best interest of the Corporation in
the case of conduct in the director's official capacity with the Corporation and
in all other cases, that the conduct was at least not opposed to the best
interest of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful; said
determination to be made by the board of directors acting through a quorum of
disinterested directors, or in its absence on the opinion of counsel.
(b) For purposes of the preceding subsection: (1) "liability and
reasonable expenses" shall include hut not be limited to reasonable counsel fees
and disbursements, amounts of any judgment, fine or penalty, and reasonable
amounts paid in settlement; (2) "claim, action, suit or proceeding" shall
include every such claim, action, suit or proceeding, whether civil or criminal,
derivative or otherwise, administrative, judicial or legislative, any appeal
relating thereto, and shall include any reasonable apprehension or threat of
such a claim, action, suit or proceeding; (3) the termination of any proceeding
by judgment, order, settlement, conviction or upon a plea of nolo contendere or
its equivalent creates a rebuttable presumption that the director did not meet
the standard of conduct set forth in subsection (a)(2), supra.
(c) Notwithstanding the foregoing, the following limitations shall
apply with respect to any action by or in the right of the Corporation: (1) no
indemnification shall be made in respect of claim, issue or matter as to which
the person seeking indemnification shall have been adjudged to be liable for
negligence or misconduct in the performance of his duty to the Corporation
unless and only to the extent that the Court of Chancery of the State of
Maryland or the court in which such action or suit was brought shall determine
upon application that despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper; and (2) indemnification shall extend only to reasonable
expenses, including reasonable counsel's fees and disbursements.
(d) The right of indemnification shall extend to any person otherwise
entitled to it under this bylaw whether or not that person continues to be a
director, officer or employee of this Corporation or such other corporation at
the time such liability or expense shall be incurred. The right of
indemnification shall extend to the legal representative and heirs of any person
otherwise entitled to indemnification. If a person meets the requirements of
this bylaw with respect to some matters in a claim, action suit, or proceeding,
but not with respect to others, he shall be entitled to indemnification as to
the former. Advances against liability and expenses may be made by the
Corporation on terms fixed by the board of directors subject to an obligation to
repay if indemnification proves unwarranted.
(e) This bylaw shall not exclude any other rights of indemnification
or other rights to which any director, officer or employee may be entitled to by
contract, vote of the stockholders or as a matter of law.
If any clause, provision or application of this section shall be
determined to be invalid, the other clauses, provisions or applications of this
section shall not be affected but shall remain in full force and effect. The
provisions of this bylaw shall be applicable to claims, actions, suits or
proceedings made or commenced after the adoption hereof, whether arising from
acts or omissions to act occurring before or after the adoption hereof.
(f) Nothing contained in this bylaw shall be construed to protect any
director or officer of the Corporation against any liability to the Corporation
or its security holders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
ARTICLE 13
Amendments
13.01 These bylaws may be amended or added to, altered or repealed at any
annual or special meeting of the stockholders by the affirmative vote of the
holders of a majority of the shares of capital stock issued and outstanding and
entitled to vote, provided notice of the general purport of the proposed
amendment, addition, alteration or repeal is given in the notice of said
meeting, or, at any meeting of the board of directors by vote of a majority of
the directors then in office, except that the board of directors may not amend
Article 5 to permit removal by said board without cause of any director elected
by the stockholders.
MANAGEMENT AGREEMENT
AGREEMENT executed as of the 1st day of November 1989, by and between
PRINCIPAL CAPITAL ACCUMULATION FUND, INC., a Maryland corporation (hereinafter
called the "Fund") and PRINCIPAL MANAGEMENT, INC., an Iowa corporation
(hereinafter called the "Manager").
W I T N E S S E T H:
WHEREAS, The Fund has furnished the Manager with copies properly
certified or authenticated of each of the following:
(a) Certificate of Incorporation of the Fund;
(b) Bylaws of the Fund as adopted by the Board of Directors;
(c) Resolutions of the Board of Directors of the Fund selecting the
Manager as investment adviser and approving the form of this
Agreement.
NOW THEREFORE, in consideration of the premises and mutual agreements
herein contained, the Fund hereby appoints the Manager to act as investment
adviser and manager of the Fund, and the Manager agrees to act, perform or
assume the responsibility therefor in the manner and subject to the conditions
hereinafter set forth. The Fund will furnish the Manager from time to time with
copies, properly certified or authenticated, of all amendments of or supplements
to the foregoing, if any.
1. INVESTMENT ADVISORY SERVICES
The Manager will regularly perform the following services for the Fund:
(a) Provide investment research, advice and supervision;
(b) Provide investment advisory, research and statistical facilities
and all clerical services relating to research, statistical and
investment work;
(c) Furnish to the Board of Directors of the Fund (or any appropriate
committee of such Board), and revise from time to time as economic
conditions require, a recommended investment program for the
Fund's portfolio consistent with the Fund's investment objective
and policies;
(d) Implement such of its recommended investment program as the Fund
shall approve, by placing orders for the purchase and sale of
securities, subject always to the provisions of the Fund's
Certificate of Incorporation and Bylaws and the requirements of
the Investment Company Act of 1940, as each of the same shall be
from time to time in effect;
(e) Advise and assist the officers of the Fund in taking such steps as
are necessary or appropriate to carry out the decisions of its
Board of Directors and any appropriate committees of such Board
regarding the general conduct of the investment business of the
Fund; and
(f) Report to the Board of Directors of the Fund at such times and in
such detail as the Board may deem appropriate in order to enable
it to determine that the investment policies of the Fund are being
observed.
2. CORPORATE AND OTHER ADMINISTRATIVE SERVICES AND EXPENSES
The Manager will regularly perform or assume responsibility for general
corporate and all other administrative services and expenses, except as set out
in Section 4 hereof, as follows:
(a) Furnish office space, all necessary office facilities and assume
costs of keeping books of the Fund;
(b) Furnish the services of executive and clerical personnel necessary
to perform the general corporate functions of the Fund;
(c) Compensate and pay the expenses of all officers, and employees of
the Fund, and of all directors of the Fund who are persons
affiliated with the Manager;
(d) Determine the net asset value of the shares of the Fund's Capital
Stock as frequently as the Fund shall request or as shall be
required by applicable law or regulations;
(e) Provide for the organizational expenses of the Fund and expenses
incurred with the registration of the Fund and Fund shares with
the federal and state regulatory agencies, including the costs of
printing prospectuses in such number as the Fund shall need for
purposes of registration and for the sale of its shares;
(f) Be responsible for legal and auditing fees and expenses incurred
with respect to registration and continued operation of the Fund;
(g) Act as, and provide all services customarily performed by, the
transfer and paying agent of the Fund including, without
limitation, the following:
(i) issuance, registry of shares, and maintenance of open
account system;
(ii) preparation and distribution of dividend and capital gain
payments to shareholders;
(iii) preparation and distribution to shareholders of reports, tax
information, notices, proxy statements and proxies;
(iv) delivery, redemption and repurchase of shares, and
remittances to shareholders; and
(v) correspondence with shareholders concerning items (i), (ii),
(iii) and (iv) above.
(h) Prepare stock certificates, and distribute the same as requested
by shareholders of the Fund; and
(i) Provide such other services as required by law or considered
reasonable or necessary in the conduct of the affairs of the Fund
in order for it to meet its business purpose.
3. RESERVED RIGHT TO DELEGATE DUTIES AND SERVICES TO OTHERS
The Manager in assuming responsibility for the various services as set
forth in 2 above, reserves the right to delegate the performance of some or all
of such duties and services to Principal Mutual Life Insurance Company, or an
affiliate thereof.
4. EXPENSES BORNE BY FUND
The Fund will pay, without reimbursement by the Manager, the following
expenses:
(a) Taxes, including in case of redeemed shares any initial
transfer taxes, and other local, state and federal taxes,
governmental fees and other charges attributable to investment
transactions;
(b) Portfolio brokerage fees and incidental brokerage expenses;
(c) Interest;
(d) The fees and expenses of the Custodian of its assets;
(e) The fees and expenses of all directors of the Fund who are not
persons affiliated with the Manager; and
(f) The cost of meetings of shareholders.
5. COMPENSATION OF THE MANAGER BY FUND
For all services to be rendered and payments made as provided in
Sections 1 and 2 hereof, the Fund will accrue daily and pay the Manager within
five days after the end of each calendar month a fee based on the average of the
values placed on the net assets of the Fund as of the time of determination of
the net asset value on each trading day throughout the month in accordance with
the following schedule.
Average Daily Net Fee as a Percentage of
Assets of the Fund Average Daily Net Assets
First $100,000,000 .04167%
Next $100,000,000 .03750%
Next $100,000,000 .03333%
Next $100,000,000 .02917%
Amount Over $400,000,000 .02500%
Net asset value shall be determined pursuant to applicable provisions
of the Certificate of Incorporation of the Fund. If pursuant to such provisions
the determination of net asset value is suspended, then for the purposes of this
Section 5 the value of the net assets of the Fund as last determined shall be
deemed to be the value of the net assets for each day the suspension continues.
The Manager may, at its option, waive all or part of its compensation
for such period of time as it deems necessary or appropriate.
6. ASSUMPTION OF EXPENSES BY PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
Although in no way relieving the Manager of its responsibility for the
performance of the duties and services set out in Section 2 hereof, and
regardless of any delegation thereof as permitted under Section 3 hereof, some
or all of the expenses therefore may be voluntarily assumed by Principal Mutual
Life Insurance Company and the Manager may be reimbursed therefor, or such
expenses may be paid directly by Principal Mutual Life Insurance Company.
7. AVOIDANCE OF INCONSISTENT POSITION
In connection with purchases or sales of portfolio securities for the
account of the Fund, neither the Manager nor any of the Manager's directors,
officers or employees will act as a principal or agent or receive any
commission.
8. LIMITATION OF LIABILITY OF THE MANAGER
The Manager shall not be liable for any error of judgment or mistake of
law or for any loss suffered by the Fund in connection with the matters to which
this Agreement relates, except a loss resulting from willful misfeasance, bad
faith or gross negligence on the Manager's part in the performance of its duties
or from reckless disregard by it of its obligations and duties under this
Agreement.
9. COPIES OF CORPORATE DOCUMENTS
The Fund will furnish the Manager promptly with properly certified or
authenticated copies of amendments or supplements to its articles or bylaws.
Also, the Fund will furnish the Manager financial and other corporate
information as needed, and otherwise cooperate fully with the Manager in its
efforts to carry out its duties and responsibilities under this Agreement.
10. DURATION AND TERMINATION OF THIS AGREEMENT
This Agreement shall remain in force until the conclusion of the first meeting
of the shareholders of the Fund and if it is approved by a vote of a majority of
the outstanding voting securities of the Fund it shall continue in effect
thereafter from year to year provided that the continuance is specifically
approved at least annually either by the Board of Directors of the Fund or by a
vote of a majority of the outstanding voting securities of the Fund and in
either event by vote of a majority of the directors of the Fund who are not
interested persons of the Manager, Principal Mutual Life Insurance Company, or
the Fund cast in person at a meeting called for the purpose of voting on such
approval. This Agreement may, on sixty days written notice, be terminated at any
time without the payment of any penalty, by the Board of Directors of the Fund,
by vote of a majority of the outstanding voting securities of the Fund, or by
the Manager. This Agreement shall automatically terminate in the event of its
assignment. In interpreting the provisions of this Section 10, the definitions
contained in Section 2(a) of the Investment Company Act of 1940 (particularly
the definitions of "interested person," "assignment" and "voting security")
shall be applied.
11. AMENDMENT OF THIS AGREEMENT
No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought, and no amendment of this Agreement shall be effective until approved by
vote of the holders of a majority of the Fund's outstanding voting securities
and by vote of a majority of the directors who are not interested persons of the
Manager, Principal Mutual Life Insurance Company or the Fund cast in person at a
meeting called for the purpose of voting on such approval.
12. ADDRESS FOR PURPOSE OF NOTICE
Any notice under this Agreement shall be in writing, addressed and
delivered or mailed, postage prepaid, to the other party at such address as such
other party may designate for the receipt of such notices. Until further notice
to the other party, it is agreed that the address of the Fund and that of the
Manager for this purpose shall be 711 High Street, Des Moines, Iowa 50309.
13. MISCELLANEOUS
The captions in this Agreement are included for convenience of
reference only, and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized.
PRINCIPAL CAPITAL ACCUMULATION FUND, INC.
ARTHUR S. FILEAN
Date September 29, 1989 By ____________________________________
Arthur S. Filean, Vice President
PRINCIPAL MANAGEMENT, INC.
STEPHEN L. JONES
Date September 29, 1989 By ____________________________________
Stephan L. Jones, President
INVESTMENT SERVICE AGREEMENT
THIS INVESTMENT SERVICE AGREEMENT, to be effective the 1st day of November,
1989, by and between PRINCIPAL CAPITAL ACCUMULATION FUND, INC. (the "Fund"), an
open-end investment company formed under the laws of Maryland, PRINCIPAL
MANAGEMENT, INC. ("Manager"), an Iowa corporation, PRINCIPAL MUTUAL LIFE
INSURANCE COMPANY, a specially chartered Iowa life insurance company and INVISTA
CAPITAL MANAGEMENT, INC., an Iowa corporation that is an indirectly wholly-owned
subsidiary of Principal Mutual Life Insurance Company;
WITNESSETH:
WHEREAS, Principal Mutual Life Insurance Company has organized the Manager
to serve as investment adviser and is the owner (through its subsidiaries) of
all of the outstanding stock of the Manager; and
WHEREAS, the Manager and the Fund have entered into a Management Agreement
effective as of November 1, 1989, whereby the Manager undertakes to furnish the
Fund with investment advisory services and certain other services; and
WHEREAS, Principal Mutual Life Insurance Company is willing to make
available to the Manager on a part-time basis certain employees and services of
Principal Mutual Life Insurance Company and its subsidiaries for the purpose of
better enabling the Manager to fulfill its investment advisory obligations under
the Management Agreement, provided that the Manager bears all costs allocable to
the time spent by them on the affairs of the Manager, and the Manager and the
Fund believe that such an arrangement will be for their mutual benefit:
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
1. The Manager shall have the right to use, on a part-time basis, and
Principal Mutual Life Insurance Company shall make available on such basis, such
employees of Principal Mutual Life Insurance Company and its subsidiaries and
for such periods as may be agreed upon by the Manager and Principal Mutual Life
Insurance Company and its subsidiaries, as reasonably needed by the Manager in
the performance of its investment advisory services (but not its administrative,
transfer and paying services) under the Management Agreement. It is anticipated
that such employees will be persons employed in the Investment Department of
Principal Mutual Life Insurance Company or its subsidiaries such as Invista
Capital Management that presently handle common stock investments. Principal
Mutual Life Insurance Company will also make available to the Manager or the
Fund such clerical, stenographic and administrative services as the Manager may
reasonably request to facilitate its performance of such investment advisory
services.
2. The employees of Principal Mutual Life Insurance Company and its
subsidiaries in performing services for the Manager hereunder may, to the full
extent that they deem appropriate, have access to and utilize statistical and
economic data, investment research reports and other material prepared for or
contained in the files of the Investment Department of Principal Mutual Life
Insurance Company or its subsidiaries which is relevant to making investments
for the Fund, and may make such materials available to the Manager, provided,
that any such materials prepared or obtained in connection with a private
placement or other non-public transaction need not be made available to the
Manager if Principal Mutual Life Insurance Company or its subsidiaries deem such
materials confidential.
3. Employees of Principal Mutual Life Insurance Company or its subsidiaries
performing services for the Manager pursuant hereto shall report and be
responsible solely to the officers and directors of the Manager or persons
designated by them. Principal Mutual Life Insurance Company or its subsidiaries
shall have no responsibility for investment recommendations and decisions of the
Manager based upon information or advice given or obtained by or through such
Principal Mutual Life Insurance Company employees or employees of Principal
Mutual Life Insurance Company subsidiaries.
4. Principal Mutual Life Insurance Company will, to the extent requested by
the Manager, supply to employees of the Manager (including part-time employees
of Principal Mutual Life Insurance Company or its subsidiaries serving the
Manager) such clerical, stenographic and administrative services and such office
supplies and equipment as may be reasonably required in order that they may
properly perform their respective functions on behalf of the Manager in
connection with its performance of its investment advisory services under the
Management Agreement.
5. The obligation of performance under the Management Agreement is solely
that of the Manager, and Principal Mutual Life Insurance Company and its
subsidiaries undertake no obligation in respect thereto, except as otherwise
expressly provided herein.
6. In consideration of the services to be rendered by Principal Mutual Life
Insurance Company or its subsidiaries and their employees pursuant to this
Investment Service Agreement, the Manager agrees to reimburse Principal Mutual
Life Insurance Company or its subsidiaries for such costs, direct and indirect,
as may be fairly attributable to the services performed for the Manager. Such
costs shall include, but not be limited to, an appropriate portion of:
(a) salaries;
(b) employee benefits;
(c) general overhead expense;
(d) supplies and equipment; and
(e) a charge in the nature of rent for the cost of space in Principal
Mutual Life Insurance Company offices fairly allocable to
activities of the Manager under the Management Agreement.
In the event of disagreement between the Manager and Principal Mutual Life
Insurance Company and its subsidiaries as to a fair basis for allocating or
apportioning costs, such basis shall be fixed by the public accountants for the
Fund.
7. This Investment Service Agreement shall remain in force until the
conclusion of the first meeting of the shareholders of the Fund and if it is
approved by a vote of a majority of the outstanding voting securities of the
Fund, it shall continue from year to year provided that the continuance 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
and in either event such continuance shall be approved by the vote of a majority
of the directors who are not interested persons 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. This Investment
Service Agreement may, on sixty days written notice, be terminated at any time
without the payment of any penalty, by the Board of Directors of the Fund, by
vote of a majority of the outstanding voting securities of the Fund, by the
Manager or Principal Mutual Life Insurance Company. This Investment Service
Agreement shall automatically terminate in the event of its assignment. In
interpreting the provisions of this Section 7, the definitions contained in
Section 2(a) of the Investment Company Act of 1940 (particularly the definitions
of "interested persons", "assignment" and "voting securities") shall be applied.
8. Any notice under this Investment Service Agreement shall be in writing,
addressed and delivered or mailed postage prepaid to the other parties at such
addresses as such other parties may designate for the receipt of such notices.
Until further notice it is agreed that the address of the fund, that of the
Manager and that of Principal Mutual Life Insurance Company and its subsidiaries
for this purpose shall be 711 High Street, Des Moines, Iowa 50309.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed in three counterparts by their duly authorized officers the day and
year first above written.
PRINCIPAL CAPITAL ACCUMULATION FUND, INC.
September 29, 1989 A. S. Filean
Date ________________________ By ________________________________
A. S. Filean
PRINCIPAL MANAGEMENT, INC.
September 29, 1989 S. L. Jones
Date ________________________ By ________________________________
S. L. Jones
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
September 29, 1989 D. K. Kauf
Date ________________________ By ________________________________
D. K. Kauf
INVISTA CAPITAL MANAGEMENT, INC.
September 29, 1989 Ralph Kosmicke
Date ________________________ By ________________________________
Ralph Kosmicke
DISTRIBUTION AGREEMENT
Agreement made January 1, 1990 by and between PRINCIPAL CAPITAL ACCUMULATION
FUND, INC., a Maryland corporation (hereinafter sometimes called the "Fund") and
PRINCOR FINANCIAL SERVICES CORPORATION, INC., an Iowa corporation (hereinafter
sometimes called the "Distributor").
W I T N E S S E T H:
WHEREAS, the Fund and the Distributor wish to enter into an agreement setting
forth the terms upon which the Distributor will act as underwriter and
distributor of the Fund.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the Fund hereby appoints the Distributor to act as principal
underwriter (as such term is defined in Section 2(a)(29) of the Investment
Company Act of 1940, (as amended) of the shares of Capital Stock of the Fund
(hereinafter sometimes called "shares"), and the Distributor agrees to act and
perform the duties and functions of underwriter in the manner and subject to the
conditions hereinafter set forth.
1. SALE OF SHARES
The Distributor is authorized to sell as agent on behalf of the Fund
authorized shares of the Fund by accepting unconditional orders placed
with the Distributor by Eligible Investors, as defined in the Fund's
prospectus, in states where sales may lawfully be made.
2. PUBLIC OFFERING PRICE
Except as limited by paragraph 4 hereof, all shares of the Fund sold to
Eligible Investors by the Distributor as agent for the Fund will be at net
asset value.
3. DELIVERY OF PAYMENTS AND ISSUANCE OF SHARES
The Distributor will deliver to the Fund all payments made pursuant to
orders accepted by the Distributor upon receipt thereof by the Distributor
at its principal place of business.
After payment the Fund will issue shares of Capital Stock by crediting to
a stockholder account in such names and such manner as specified in the
application or order relating to such shares. Certificates will be issued
only upon request by the stockholder.
4. SALE OF SHARES TO INVESTORS BY THE FUND
Any right granted to the Distributor to accept orders for shares or make
sales on behalf of the Fund will not apply to shares issued in connection
with the merger or consolidation of any other investment company with the
Fund or the Fund's acquisition, purchase or otherwise, of all or
substantially all the assets of any investment company or substantially
all the outstanding shares of any such company. Also, any such right shall
not apply to shares issued, sold or transferred, whether Treasury or newly
issued shares, that may be offered by the Fund to its shareholders as
stock dividends or splits for not less than "net asset value" (which term,
"net asset value," as used herein, means said value as determined either
as of the close of trading of the New York Stock Exchange on the day an
order for purchase of shares is accepted or as of such other time as may
be in accordance with any provision of the 1940 Investment Company Act,
any rule or regulation thereunder, or any rule or regulation made or
adopted by any securities association registered under the 1934 Securities
Exchange Act (all as the Distributor may determine) or as of such time as
the Board of Directors or duly authorized officers, or agents of the Fund
may determine in the manner provided in the Fund's Certificate of
Incorporation or Bylaws as from time to time amended).
5. AGREEMENTS WITH DEALERS OR OTHERS
In making agreements with any dealers or others, the Distributor shall act
only in its own behalf and in no sense as agent for the Fund and shall be
agent for the Fund only in respect of sales and repurchases of Fund
shares.
6. COPIES OF CORPORATE DOCUMENTS
The Fund will furnish the Distributor promptly with properly certified or
authenticated copies of any registration statements filed by it with the
Securities and Exchange Commission under the Securities Act of 1933, as
amended, or the Investment Company Act of 1940, as amended, together with
any financial statements and exhibits included therein and all amendments
or supplements thereto hereafter filed. Also, the Fund shall furnish the
Distributor with a reasonable number of printed copies of each report to
shareholders of the Fund as the Distributor may request, and shall
cooperate fully in the efforts of the Distributor to sell and arrange for
the sale of the Fund's shares of Capital Stock and in the performance by
the Distributor of all of its duties under this Agreement.
7. RESPONSIBILITY FOR CONTINUED REGISTRATION INCLUDING INCREASE IN
SHARES
The Fund will arrange for or assume the continued responsibility for
meeting the requirements of registration under the Securities Act of 1933,
as amended, under the Investment Company Act of 1940, as amended, and as
necessary under the securities laws of the various states where the
Distributor is registered as a broker-dealer. The Fund, subject to the
necessary approval of its shareholders, will increase the number of
authorized shares from time to time as may be necessary to provide the
Distributor with such number of shares as the Distributor may reasonably
be expected to sell.
8. SUSPENSION OF SALES
If an whenever the determination of asset value is suspended pursuant to
applicable law, and such suspension has become effective, until such
suspension is terminated no further applications for shares shall be
accepted by the Distributor except unconditional orders placed with the
Distributor before the Distributor had knowledge of the suspension. In
addition, the Fund reserves the right to suspend sales and the
Distributor's authority to accept orders for shares on behalf of the Fund,
if in the judgment of a majority of the Fund's Board of Directors, or a
majority of the Executive Committee of the Board of Directors, if such
Committee exists, it is in the best interest of the Fund to do so,
suspension to continue for such period as may be determined by such
majority; and in that event no shares will be sold by the Fund or by the
Distributor on behalf of the Fund while such suspension remains in effect
except for shares necessary to cover unconditional orders accepted by the
Distributor before the Distributor had knowledge of the suspension.
9. EXPENSES
The Fund will pay (or will enter into arrangements providing for the
payment of) all fees and expenses (1) in connection with the preparation
and filing of any registration statement or amendments thereto as required
under the Investment Company Act of 1940, as amended; (2) in connection
with the preparation and filing of any registration statement and
prospectus or amendments thereto under the Securities Act of 1933, as
amended, covering the issue and sale of the Fund's shares; and (3) in
connection with the registration of the Fund and qualifications of shares
for sale in the various states and other jurisdictions. The Fund will also
pay (or will enter into arrangements providing for the payment of) the
cost of (i) preparation and distribution to shareholders of prospectuses,
reports, tax information, notices, proxy statements and proxies; (ii)
preparation and distribution of dividend and capital gain payments to
shareholders; (iii) issuance, transfer, registry and maintenance of open
account charges; (iv) delivery, remittance, redemption and repurchase
charges; (v) communication with shareholders concerning these items; (vi)
stock certificates; and (vii) prospectuses used for the sale of its
shares. The Fund will pay taxes including, in the case of redeemed shares,
any initial transfer taxed unpaid.
The Distributor will pay all fees and expenses in connection with the
Distributor's qualification as a dealer under the Securities Exchange Act
of 1934, as amended, and in the various states, and all other expenses in
connection with the sale and offering for sale of shares of the Fund which
have not been herein specifically allocated to or assumed or provided for
by the Fund.
10. CONFORMITY WITH LAW
The Distributor agrees that in selling the shares of the Fund it will duly
conform in all respects with the laws of the United States and any state
or other jurisdiction in which such shares may be offered for sale
pursuant to this Agreement.
11. MEMBERSHIP IN NATIONAL ASSOCIATION OF SECURITIES DEALERS
The Fund recognizes that the Distributor is now a member of the National
Association of Securities Dealers, and in the conduct of its duties under
this agreement the Distributor is subject to the various rules, orders and
regulations of such organization. The right to determine whether such
membership should or should not continue, or to join other organizations,
is reserved by the Distributor.
12. OTHER INTERESTS
It is understood that directors, officers, agents and stockholders of the
Fund are or may be interested in the Distributor as directors, officers,
stockholders, or otherwise; that directors, officers, agents and
stockholders of the Distributor are or may be interested in the Fund as
directors, officers, stockholders or otherwise; that the Distributor may
be interested in the Fund as a stockholder or otherwise; and that the
existence of any dual interest shall not affect the validity hereof or of
any transaction hereunder except as otherwise provided in the
Certification of Incorporation of the Fund and the Distributor,
respectively, or by specific provision of applicable law.
13. INDEMNIFICATION
The Fund agrees to indemnify, defend and hold the Distributor, its
officers and directors, and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act of 1933, free and harmless
from and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such claims, demands or
liabilities and any counsel fees incurred in connection therewith) which
the Distributor, its officers, directors or any such controlling person
may incur under the Securities Act of 1933, or under common law or
otherwise, arising out of or based upon any untrue statement of a material
fact contained in the Fund's registration statement or prospectus or
arising out of or based upon any alleged omission to state a material fact
contained in the Fund's registration statement or prospectus or arising
out of or based upon any alleged omission to state a material fact
required to be stated in either thereof or necessary to make the
statements in either thereof not misleading, except insofar as such
claims, demands, liabilities or expenses arise out of or are based upon
any such untrue statement or in conformity with information furnished in
writing by the Distributor to the Fund for use in the Fund's registration
statement or prospectus; provided, however, that this indemnity agreement,
to the extent that it might require indemnity of any person who is also an
officer or director of the Fund or who controls the Fund within the
meaning of Section 15 of the Securities Act of 1933, shall not inure to
the benefit of such officer, director or controlling person unless a court
of competent jurisdiction shall determine, or it shall have been
determined by controlling precedent that such result would not be against
public policy as expressed in the Securities Act of 1933, and further
provided, that in no event shall anything contained herein be so construed
as to protect the Distributor against any liability to the Fund or to its
security holders to which the Distributor would otherwise be subject by
reason of willful misfeasance, bad faith, or gross negligence, in the
performance of its duties, or by reason of its reckless disregard of its
obligations under this Agreement. The Fund's agreement to indemnify the
Distributor, its officers and directors any such controlling person as
aforesaid is expressly conditioned upon the Fund being promptly notified
of any action brought against the Distributor, its officers or directors,
or any such controlling person. Such notification is to be given by letter
or telegram addressed to the Fund. The Fund agrees promptly to notify the
Distributor of the commencement of any litigation or proceeding against it
or any of its directors in connection with the issue and sale of any
shares of its Capital Stock.
The Distributor agrees to indemnify, defend and hold the Fund, its
officers and directors and any person who controls the Fund, if any,
within the meaning of Section 15 of the Securities Act of 1933, free and
harmless from and against any and all claims, demands, liabilities and
expenses (including the cost of investigating or defending such claims,
demands, liabilities and any counsel fees incurred in connection
therewith) which the Fund, its directors or officers or any such
controlling person may incur under the Securities Act of 1933 or under
common law or otherwise; but only to the extent that such liability or
expense incurred by the Fund, its directors or officers or such
controlling person resulting from such claims or demands shall arise out
of or be based upon any alleged untrue statement of material fact
contained in information furnished in writing by the Distributor to the
Fund for use in the Fund's registration statement or prospectus or shall
arise out of or be based upon any alleged omission to state a material
fact in connection with such information required to be stated in the
registration statement or prospectus or necessary to make such information
not misleading. The Distributor's agreement to indemnify the Fund, its
directors and officers, and any such controlling person as aforesaid is
expressly conditioned upon the Distributor being promptly notified of any
action brought against the Fund, its officers or directors or any such
controlling person.
14. DURATION AND TERMINATION OF THIS AGREEMENT
This Agreement shall become effective on January 1, 1990, and will remain
in effect from year to year thereafter, but only so long as such
continuance is specifically approved, at least annually, either by the
Board of Directors of the Fund, or by a vote of a majority of the
outstanding voting securities of the Fund, provided that in either event
such continuation shall be approved by the vote of a majority of the
directors who are not interested persons of the Distributor, Principal
Mutual Life Insurance Company, or the Fund cast in person at a meeting
called for the purpose of voting on such approval. This Agreement may on
60 days written notice be terminated at any time, without the payment of
any penalty, by the Fund, or by the Distributor. This Agreement shall
terminate automatically in the event of its assignment by the Distributor
and shall not be assignable by the Fund without the consent of the
Distributor.
15. AMENDMENT OF THIS AGREEMENT
No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the
party against which enforcement of the change, waiver, discharge or
termination is sought. If the Fund should at any time deem it necessary or
advisable in the best interests of the Fund that any amendment of this
Agreement be made in order to comply with the recommendations or
requirements of the Securities and Exchange Commission or other
governmental authority or to obtain any advantage under state or federal
tax laws, and should notify the Distributor of the form of such amendment,
and the reasons therefor, and if the Distributor should at any time
request that a change be made in the Fund's Certificate of Incorporation
or By-laws, or in its method of doing business, in order to comply with
any requirements of federal law or regulations of the Securities and
Exchange Commission or of a national securities association of which the
Distributor is or may be a member, relating to the sale of shares of the
Fund, and the Fund should not make such necessary change within a
reasonable time, the Distributor may terminate this Agreement
forthwith.
16. ADDRESS FOR PURPOSES OF NOTICE
Any notice under this Agreement shall be in writing, addressed and
delivered or mailed, postage prepaid, to the other party at such address
as such other party may designate for the receipt of such notices. Until
further notice to the other party, it is agreed that the address of the
Fund and that of the Distributor for this purpose shall be 711 High
Street, Des Moines, Iowa 50309.
IN WITNESS WHEREOF, the parties hereof have caused this Agreement to be executed
in duplicate on the day and year first above written.
PRINCIPAL CAPITAL ACCUMULATION PRINCOR FINANCIAL
FUND, INC. SERVICES CORPORATION
A. S. FILEAN S L. JONES
By: _________________________________ By: ________________________________
A. S. Filean, Vice President S. L. Jones, President
CUSTODY AGREEMENT
(Investment Companies - Domestic Securities)
CUSTODY AGREEMENT, dated as of September 1, 1992, between BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking association with its
principal place of business at 555 California Street, San Francisco, California
94105 (the "Bank"), and PRINCIPAL CAPITAL ACCUMULATION FUND,* a corporation
organized under the laws of the State of Maryland, with its principal place of
business at c/o The Principal Financial Group, Des Moines, Iowa 50392-0200 (the
"Company").
WITNESSETH:
WHEREAS, the Company desires to establish a custody account (the "Custody
Account") with the Bank to hold and maintain stocks, shares, bonds, notes,
debentures, warrants or other instruments representing rights to receive or
subscribe for the same, and other securities or similar instruments
(collectively "Securities"), and distributions with respect to such Securities,
and other property, including, without limitation, cash, bullion and coins,
owned or held by the Company (Securities and such other property are hereinafter
collectively referred to as "Property"); and
WHEREAS, the Bank agrees to establish the Custody Account and to hold and
to maintain the Property in the Custody Account on the terms and conditions
herein set forth;
NOW, THEREFORE, in consideration of the premises and of the agreements
hereinafter set forth, the Bank and the Company hereby agree as follows:
1. APPOINTMENT AND ACCEPTANCE.
The Company hereby appoints the Bank as custodian of the Property it
desires to be held within the United States by the Bank and the Bank agrees to
act as custodian upon the terms and conditions hereinafter provided.
2. DELIVERY OF CORPORATE DOCUMENTS.
The Company has delivered or will deliver to the Bank prior to the
effective date hereof copies of the following resolutions, properly certified:
(a) resolutions of the Board of Directors of the Company appointing the
Bank as custodian under the provisions of this Agreement and approving the
execution and delivery of this Agreement by the Company;
(b) resolutions of the Board of Directors of the Company authorizing the
use of the securities depositories listed on Exhibit A hereto in accordance with
the provisions of Section 6 hereof;
(c) resolutions of the Board of Directors of the Company authorizing the
use of Securities Pacific national trust Company (New York) as the Bank's agent
in accordance with Section 7 hereof; and
(d) resolutions of the Board of Directors of the Company naming the persons
authorized to give instructions to the Bank in accordance with Section 8 hereof.
3. DELIVERY AND SAFEKEEPING: REGISTRATION.
(a) Delivery of Property. The Company has heretofore delivered, will
deliver or will cause to be delivered, Property to the Custody Account with the
Bank, which Property the Bank agrees to safekeep as custodian for the Company.
The Bank shall not be responsible for any Property of the Company which is not
delivered to the Bank. All Securities (other than bearer securities) delivered
to the Bank will be registered in the name of any person specified in Section
3(b) hereof or properly endorsed in a form for transfer satisfactory to the
Bank.
(b) Registration. Securities held hereunder may be registered in the name
of the Bank, or any other entity authorized to hold Property in accordance with
Section 6 or 7 hereof (hereinafter referred to as an "Authorized Entity"), or a
nominee of the Bank or any Authorized Entity, and the Company shall be informed
upon request of all such registrations. In the event that any Securities so
registered are called for partial redemption by the issuer of such Securities,
the Bank or any Authorized Entity may allot, or cause to be allotted, the called
portion to the beneficial holders of such class of Security in any manner that
the Bank or the Authorized Entity deems to be fair and equitable. The Company
agrees to hold the Bank, any Authorized Entity or any nominee thereof harmless
from any claim, liability, loss, damage or expense (including attorneys' fees)
of every nature or incurred as record holder of Securities held in the Custody
Account.
Securities in registered form will be transferred into such names or
registrations as the Company may specify in Proper Instructions (as defined in
Section 8 hereof). Notwithstanding any other provision in this Agreement to the
contrary, in the event that any Securities held hereunder are registered in a
name other than that of the Bank, an Authorized Entity or any nominee thereof,
the Bank shall be responsible solely for the safekeeping of such Securities and
shall not be responsible to collect income or to take any other action with
respect to such Securities.
4. PERFORMANCE BY THE BANK.
(a) Segregation and Identification of Property. The Bank will segregate on
its books as belonging to the Company all Securities and other Property held by
the Bank or any Authorized Entity, so that at all times the Property may be
identified as belonging to the Company.
(b) Receipt of Securities. In accordance with Proper Instructions, the Bank
shall pay for Securities purchased out of monies held in the Custody Account and
receive Securities purchased for the account of the Company. The Bank shall
notify the Company promptly (and in any event no later than the next business
day) of any failure to receive Securities.
(c) Release of Securities. In accordance with Proper Instructions, the Bank
shall deliver Securities held in the Custody Account designated as sold for the
account of the Company to the person specified in the instructions relating to
such sale. The Bank Shall release such Securities only upon receipt of payment
therefore in accordance with the customary and established trading and
securities processing practices, unless prior to the release of the company's
securities the bank has received permission from a person named in the
certificate to release the company's securities without payment therefore. The
Bank shall notify the Company promptly (and in any event no later than the next
business day) of any failure to deliver Securities.
(d) Settlement of Securities Transactions. On the settlement date, the Bank
shall (i) with respect to the purchase of Securities, debit the Custody
Agreement for the payment of Securities and credit the appropriate Custody
Account with Securities, and (ii) with respect to the sale of Securities, credit
the Custody Account with the sale price of Securities and debit the Custody
Account for Securities. In the event that a transaction does not settle within a
reasonable amount of time, the Bank may reverse the transaction in the Custody
Account.
(e) Options Transactions. In accordance with Proper Instructions, the Bank
shall (i) receive and retain confirmations or other documents evidencing the
purchase or writing of an option on a Security or on a securities index by the
Company, (ii) deposit or maintain Securities and/or cash in a segregated account
in accordance with Section 4(h) hereof and (iii) release Securities and/or cash
in accordance with a notice or other communication evidencing expiration,
termination or exercise of such option.
(f) Commodity Futures Transactions. In accordance with Proper Instructions,
the Bank shall (i) receive and retain confirmations or other documents
evidencing the purchase or sale of a commodity futures contract or an option
thereon by the Company, (ii) deposit and maintain Securities and/or cash in a
segregated account in accordance with Section 4(h) hereof and (iii) release
Securities and/or cash in accordance with any agreement or agreements among the
Bank, the Company and a futures commission merchant or other third party.
(g) Cash Accounts. All cash received or held by the Bank or any Authorized
Entity as interest, dividends, proceeds from transfer or other payments for or
with respect to Securities, or otherwise, shall be held in the Custody Account.
(h) Segregated Account. Upon receipt of Proper Instructions, the Bank shall
establish and maintain a segregated account or accounts for and on behalf of the
Company, into which account or accounts may be transferred Securities and/or
cash, (i) for the purposes of compliance by the Company with the procedures
required by Investment Company Act Release No. 10666, or any subsequent release
or releases of the Securities and Exchange Commission ("SEC") relating to the
maintenance of segregated accounts by registered investment companies; (ii) for
the purposes of segregating Securities and/or cash in connection with options
purchased, sold or written by the Company or commodity futures contracts or
options thereon purchased or sold by the Company; or (iii) for any other
purposes.
(i) Collection. Unless otherwise instructed by the Company, the Bank shall,
with respect to all Securities held for the Company in the Custody Account, (i)
collect all income due or payable, including all dividends, whether in cash or
securities; (ii) present for payment, if necessary, and collect the amounts
payable upon all such securities which may mature or be called, redeemed,
retired or which otherwise become payable; (iii) endorse checks, drafts and
other negotiable instruments for collection; (iv) exchange securities in
temporary form for securities in definitive form; (v) exchange securities when
the par value of such securities is changed and (vi) in general, attend to all
non-discretionary details in connection with the sale, exchange, substitution,
purchase, transfer and other dealings with securities and other Property
pursuant to this Agreement.
The Bank shall either credit the Custody Account on the date payment is
received or shall advance to the Custody Account on such other date as may be
agreed upon between the Bank and the Company all amounts specified in clauses
(i) and (ii) above. If the Bank causes the Custody Account to be credited for
the amounts specified in clauses (i) and (ii) above and payment thereof is not
promptly received by the Bank, the Custody Account shall be debited in the
amount of such credit, and the Bank shall provide oral or written notice to the
Company that such amount cannot be collected in the ordinary course of business.
Neither the Bank nor any Authorized Entity shall have any duty or obligation to
institute legal proceedings, file a claim or proof of claim in any insolvency
proceeding or take any other action with respect to the collection of such
amount beyond its ordinary collection procedures.
Notwithstanding the foregoing, the Bank shall only be responsible to take
the action in clauses (i) and (ii) above or to take any other action required
concerning Securities if notice thereof is contained in the publications listed
on Exhibit B hereto (which list may, upon notification to the Company, be
amended by the Bank) or is provided by the issuer to the Bank. It will be the
responsibility of the Company to furnish the Bank with the declaration, record
and payment dates and amounts of any dividends or income and any other actions
required concerning each of the Securities held by the Bank hereunder when such
information is not available from the foregoing sources.
(j) Voting and Other Action. The Bank will promptly transmit to the
Company, and will instruct any Authorized Entity to transmit to the Bank, all
financial reports, stockholder communications and notices from issuers of
Securities in the Custody Account, all public information from issuers of such
Securities or, in the case of information relating to exchange or tender offers,
from offerors, and all notices, proxies and proxy soliciting materials with
respect to such Securities, to the extent sufficient copies are received by the
Bank or any Authorized Entity in time for forwarding to the Company. In the case
of Securities registered in the name of the Bank, any Authorized Entity or any
nominee thereof, proxies will be executed by the registered holder prior to
transmittal to the Company, but the manner in which Securities are to be voted
will not be indicated. Specific instructions regarding proxies will be provided
when necessary. Neither the Bank nor any Authorized Entity nor any nominee
thereof shall vote any Securities or authorize the voting of any Securities or
give any consent or take any other action with respect thereto, except as
otherwise provided herein
The Company agrees that if it gives an instruction for the performance of
an act on the last permissible date of a period established by an exchange
offer, tender offer or proxy solicitation or other notice for the performance of
any act, the Bank will use reasonable efforts to effect the instruction, but the
Company shall hold the Bank harmless from any adverse consequences if it is
unable to do so.
(k) Corporate Action. Upon receipt of Proper Instructions, the Bank will
(i) exchange Securities in the Custody Account for other securities or cash
issued or paid in connection with any reorganization, recapitalization, merger,
consolidation, stock split or conversion and will deposit Securities in
accordance with the terms of any reorganization or protective plan and (ii) sell
any rights entitlement resulting from a rights issue.
(l) Fractional Interests. Whenever a fractional interest resulting from a
rights issue, stock dividend, stock split or for any other reason is received
with respect to Securities in the Custody Account, the Bank is authorized (but
not required) to sell such fractional interest on behalf of the Company.
(m) Payment of Bills. Upon receipt of Proper Instructions, the Bank shall
pay out of monies held in the Custody Account, bills, statements and other
obligations of the Company.
(n) Ownership Certificates for Tax Purposes. The Bank shall execute
ownership and other certificates and affidavits for federal tax purposes in
connection with receipt of income or other payments with respect to Securities
held by the Bank within the United States and in connection with transfers of
such Securities. Any payment to the Company under this Agreement shall be made
net of any withholdings, taxes or governmental charges of any kind whatsoever
imposed on such payments.
(o) Authority of the Bank. The Bank and any Authorized Entity are each
authorized to accept and open on the Company's behalf all mail or communications
received by it or directed in its care. The Bank may make, execute and deliver
for, on behalf of and in the name of the Company, any declarations, affidavits
or certificates of ownership which the Bank, in its discretion, deems necessary,
appropriate or desirable to perform its obligations pursuant to this Agreement.
5. REPORTING SYSTEM: RECORDS; AND INSPECTION.
(a) Reporting System. The Bank has in place a system for providing direct
access by customers to the Bank's reporting system ("Reporting System") for
Property in the Custody Account held in the United States. At the Company's
election, the Bank shall provide the Company with such instructions and
passwords as may be necessary in order for the Company to have such direct
access through the Company's terminal device. Such direct access shall be
restricted to information relating to the Custody Account. Where direct access
to the Reporting System is requested by the Company, the Company agrees to
assume full responsibility for the consequences of the use, including any misuse
or unauthorized use of the terminal device, instructions or passwords referred
to above and agrees to release, indemnify and hold harmless the Bank from and
against any and all claims, liabilities, losses, damages and expenses (including
attorneys' fees) of every nature suffered or incurred by the Bank by reason of
or in connection with such use by the Company of such terminal device, unless
such claims, liabilities, losses, damages and expenses can be shown to be the
result of negligence or willful misconduct by the Bank. Further, where the
Company elects to have direct access, the Bank shall provide the Company on each
business day a report of the preceding business day.
The Bank will supply to the Company from time to time as mutually agreed
upon a written statement with respect to all of the Property in the Custody
Account. If the Company does not elect to use the Reporting System, then the
Bank will send to the Company an advice or notification of any transfers of
Property to or from the Custody Account.
(b) Records. As agreed upon between the Company and the Bank from time to
time, the Bank will prepare and maintain records with respect to the Company
required to be maintained under the Internal Revenue Code of 1986, as amended
("Code"), the Investment Company Act of 1940, as amended (the "Act"), and the
rules and regulations under the Act, with particular attention to Section 31 of
the Act and Rules 31a-1 and 31a-2 thereunder, and shall preserve said records in
the manner and for the periods prescribed in the Code, the Act and such rules
and regulations. The Bank acknowledges that all of the records it will prepare
and maintain pursuant to this Section 5(b) will be the property of the Company
and that, upon request of the Company, it shall make the records available to
the Company, along with such other information and data as are reasonably
required by the Company, for inspection, audit or copying, or shall deliver said
records to the Company.
(c) Inspection. The Bank will assist the Company's independent auditors
and, upon receipt of Proper Instructions or upon demand from any regulatory
authority having jurisdiction over the Company, assist such authority in any
examination of Property held by the Bank on its premises and of the Bank's
records regarding Property held in the Custody Account. The Bank's costs and
expenses in facilitating such examinations and providing such records,
including, but not limited to, the cost to the Bank of providing personnel in
connection with examinations, shall be borne by the Company.
The Bank shall also, subject to restrictions under applicable law, seek to
obtain from any Authorized Entity with which the Bank maintains the physical
possession of any of the Property in the Custody Account such records of the
Authorized Entity relating to the Custody Account as may be required by the
Company in connection with an internal examination of the Company's own affairs.
The Bank shall send to the Company such reports of the external auditors
of the Bank on the Bank's system of internal accounting control as the Company
may reasonably request from time to time. The Bank shall request and upon
receipt furnish to the Company reports of the external auditors of any
Authorized Entity as relate directly to the. Authorized Entity's system of
internal accounting controls applicable to its duties under its agreement with
the Bank.
6. AUTHORIZED USE OF U.S. DEPOSITORIES.
(a) Authorized Depositories. The Company authorizes the Bank, for any
Property held hereunder, to use the services of any United States securities
depository permitted to perform such services for registered investment
companies and their custodians pursuant to Rule 17f-4 under the Act including,
but not limited to the Depository Trust Company, Participants Trust Company and
the Federal Reserve Book Entry System (each an "Authorized Depository"), in
accordance with the provisions of this Section 6.
(b) Bank's Account in the Authorized Depository. The Bank may keep Property
in an Authorized Depository provided that such Property is represented in an
account of the Bank in the Authorized Depository which shall not include any
assets of the Bank, other than assets held as custodian or trustee for its
customers.
(c) Bank's Records. The records of the Bank with respect to Property which
is maintained in an Authorized Depository shall identify the Property as
belonging to the Company.
(d) Advices of Transactions. Copies of all advices from the Authorized
Depository of transfers of Property for the account of the Bank, as custodian
for the Company, shall be maintained for the Company by the Bank for a period
not less than that required by Rules 31a-1 and 31a-2 under the Act and shall be
provided to the Company at its request. Upon request, the Bank shall furnish the
Company with written confirmation of each transfer to or from the account of the
Bank, as custodian for the Company, in the form of monthly transaction sheets
reflecting the previous month's transactions in the Authorized Depository for
the account of the Bank, as custodian for the Company.
(e) Company's Approval. The Board of Directors of the Company shall approve
the use of each Authorized Depository by the Company, as required by Rule 17f-4
under the Act, that is listed on Exhibit A hereto, and a certified copy of such
resolution shall be provided to the Bank. The Company shall notify the Bank if
the continued use of such Authorized Depository is not approved annually by the
Board of Directors of the Company, as required by Rule 17f-4 under the Act.
(f) Standard of Care. The Bank shall not be liable for any claim,
liability, loss, damage or expense incurred by the Company arising out of any
act or omission by an Authorized Depository, except such claim, liability, loss,
damage or expense arising out of the negligence or willful misconduct of the
Bank. In the event of any loss to the Company by reason of the failure of the
Bank to exercise the standard of care in the performance of its duties, the Bank
shall be liable to the Company to the extent of the Company's damages, to be
determined based on the market value of the Property which is the subject of the
loss at the date of discovery of such loss and without reference to any special
or consequential damages.
7. AUTHORIZED USE OF OTHER AGENTS.
The Company authorizes the Bank at any time or times in the Bank's
discretion to appoint (and to remove) one or more agents, including Security
Pacific National Trust Company (New York), a national banking association, that
are qualified under the Act to act as a custodian, as the Bank's agent or agents
to carry out such of the provisions of this Agreement as the Bank may from time
to time direct. The appointment of such agent or agents will not relieve the
Bank of its responsibilities hereunder.
8. PROPER INSTRUCTIONS.
For purposes of this Agreement, "Proper Instructions" shall mean all
instructions upon which the Bank is authorized to rely in accordance with this
Section 8.
The persons authorized by the Company to give instructions to the Bank
shall be named in resolutions of the Board of Directors of the Company certified
to the Bank from time to time by the Company's Secretary or an Assistant
Secretary (the "Certificate"). The Company will provide the Bank with
authenticated specimen signatures of the persons so authorized. The Company will
deliver all instructions to the Bank in accordance with the operating procedures
of the Bank provided by the Bank to the Company from time to time.
The Bank is authorized to rely and act upon written, signed instructions of
those persons identified in the Certificate, as well as those persons which the
Bank reasonably believes in good faith to have been authorized by the Company to
give instructions to the Bank.
The Bank is further authorized to rely upon any instructions received by
any other means and identified as having been given or authorized by any person
named to the Bank by the Company as authorized to give instructions, regardless
of whether such instructions shall in fact have been authorized or given by any
of such persons, provided that the Bank and the Company shall have agreed upon
the means of transmission and the method of identification for such
instructions. Instructions received by any other means shall include oral
instructions, provided that any oral instructions shall be promptly confirmed in
writing. In the event oral instructions are not subsequently confirmed in
writing, the Company agrees to hold the Bank harmless and without liability for
acting upon oral instructions which it reasonably believes it has received.
If the Company elects to use the Bank's Reporting System for Property in
the Custody Account, pursuant to Section 5(a) hereof, the Bank is also
authorized to rely and act upon any instructions received by it through a
terminal device, provided that such instructions are accompanied by code words
which the Bank has furnished to the Company, or its authorized persons, by any
method mutually agreed to by the Bank and the Company, and which the Bank shall
not have then been notified by the Company or any such authorized person to
cease to recognize, regardless whether such instructions shall in fact have been
given or authorized by the Company or any such person.
9. STANDARD OF CARE.
The Bank shall be responsible for the performance of only such duties as
are set forth herein. The Bank shall not be liable for any claim, liability,
loss, damage or expense incurred by the Company arising out of any act or
omission by the Bank, except for any such claim, liability, loss, damage or
expense arising out of its negligence or willful misconduct. In the event of any
loss to the Company by reason of the failure of the Bank to exercise the
standard of care in the performance of its duties, the Bank shall be liable to
the Company to the extent of the Company's damages, to be determined based on
the market value of the Property which is the subject of the loss at the date of
discovery of such loss and without reference to any special or consequential
damages.
The Company shall release, indemnify and hold harmless the Bank and its
officers, directors, employees, nominees and agents from any claim, liability,
loss, damage or expense (including attorneys' fees and expenses of external
counsel and allocated costs and expenses of internal counsel) incurred by the
Bank arising out of any act or omission by the Bank under this Agreement, except
for any claim, liability, loss, damage, or expense arising out of the Bank's
negligence or wilful misconduct.
The Bank shall be entitled to apply for and obtain the advice of counsel
(who may be counsel for the Company) on all matters at the expense of the
Company and may rely and act on such advice, and the Bank shall be without
liability for any action reasonably taken or omitted pursuant to such advice.
The Bank need not maintain any insurance for the benefit of the Company.
Notwithstanding anything herein to the contrary:
(a) The Bank will be under no duty or obligation to inquire into, and shall
not be liable for:
(i) the legality of any Proper Instruction given by the Company, the
legality of any purchase or sale of any Property or the propriety of the amount
for which such Property is purchased or sold; and
(ii) the validity of the issuance of any Securities purchased or the
genuineness of any certificate evidencing Securities purchased.
(b) All collections of funds or other property paid or distributed in
respect of Securities in the Custody Account shall be made at the risk of the
Company. The Bank shall have no liability for any loss occasioned by delay in
the actual receipt of notice by the Bank or an Authorized Entity of any payment,
redemption or other transaction regarding Securities in the Custody Accounts in
respect of which the Bank has agreed to take action as provided herein.
(c) The Bank shall not be liable for any action taken in good faith upon
Proper Instructions or upon any certified copy of any resolution of the Board of
Directors of the Company and may rely on the genuineness of any such documents
which it may in good faith believe to be validly executed.
10. FEES AND EXPENSES.
The fees payable to the Bank for the services rendered under this Agreement
and any reimbursement of expenses incurred by the Bank in connection with the
performance of such services shall be provided for in a fee schedule attached
hereto as Exhibit C. Exhibit C may be amended from time to time by the Bank on
sixty (60) days' written notice to the Company.
If the Bank, any Authorized Entity or any nominee thereof shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of its duties hereunder, or if the Bank should,
in its discretion, advance funds to the Company because the funds in the Custody
Account are insufficient to pay the total amount payable upon a purchase of
Securities or for some other reason, or if the Company is for any other reason
indebted to the Bank, such advance or indebtedness shall be deemed a loan from
the Bank to the Company. The loan shall be payable upon demand, and in any event
within 24 hours from notice by the Bank to the Company of such loan. Interest
shall be charged and calculated on the basis of 360 days and actual days
elapsed. The Bank, in its discretion, may at any time charge any such loan
together with interest due thereon, if any, against any balance of account
standing to the credit of the Company on the Bank's books.
Loans which are denominated in United States dollars will bear interest
from the date incurred at the rate of 2% per annum in excess of the Reference
Rate as the Reference Rate may change from time to time. The "Reference Rate" is
the rate of interest publicly announced from time to time by the Bank in San
Francisco, California as its Reference Rate. The Reference Rate is set by the
Bank based on various factors, including the Bank's costs and desired return,
general economic conditions and other factors, and is used as a reference point
for pricing some loans. The Bank may price loans to its customers at, above, or
below the Reference Rate. Any change in the Reference Rate shall take effect at
the opening of business on the day specified in the public announcement of a
change in the Bank's Reference Rate.
The Bank shall have a continuing lien on and security interest in, and
right of offset against, any Property at any time held by the Bank for the
benefit of the Company or in which the Company may have an interest which is
then in the possession or control of the Bank to the extent of any amount the
Company may at any time owe the Bank for the services rendered under this
agreement. The Company represents and warrants that the Bank shall have a first
and prior lien on such Property. The Company understands and agrees that the
title of any account which is created pursuant to Section 6(b) hereof or any
other section of this Agreement shall not impair or affect in any manner the
lien on and security interest in, and the right of offset against, any Property
held in the Custody Accounts.
11. TERMINATION.
Either party may terminate this Agreement upon ninety (90) days written
notice to the other, sent by registered mail, provided that any termination by
the Company shall be authorized by a resolution of its Board of Directors, a
certified copy of which shall accompany such notice of termination, and provided
further that such resolution shall specify the name of the person to whom the
Bank shall deliver the Property in the Custody Account. If notice of termination
is given by the Bank, the Company shall, within ninety (90) days following the
giving of such notice, deliver to the Bank a certified copy of a resolution of
its Board of Directors specifying the names of the persons to whom the Bank
shall deliver the Property in the Custody Account. In either case the Bank will
deliver the Property to the person so specified, after deducting therefrom any
amounts which the Bank determines to be owed to it under Section 10 hereof. If
within ninety (90) days following the giving of a notice of termination by the
Bank, the Bank does not receive from the Company a certified copy of a
resolution of its Board of Directors specifying the name of the person to whom
the Bank shall deliver the Property in the Custody Account, the Bank, at its
election, may deliver the Property to a bank or trust company doing business in
the State of New York to be held and disposed of pursuant to the provisions of
this Agreement, or may continue to hold such Property until a certified copy of
one or more resolutions as aforesaid is delivered to the Bank. The obligations
of the parties hereto regarding indemnities and payment of fees and expenses
shall survive the termination of this Agreement.
12. NOTICES AND MISCELLANEOUS.
All notices and other communications hereunder, except for Proper
Instructions and reports relating to the Property which are transmitted through
the Bank's Reporting System for Property in the Custody Account, shall be in
writing, telex or telecopy or, if oral, shall be promptly confirmed in writing,
and shall be hand-delivered, telexed, telecopied or mailed by prepaid first
class mail (except that notice of termination, if mailed, shall be mailed by
registered mail) to the Company, at its address set forth above, marked
"Attention: Layne Rasmussen" and to the Bank, at 2 Rector Street, 13th Floor,
New York, New York 10006, marked "Attention: "Mayra Adonnino", or such other
address as each party may give notice of to the other.
This Agreement may not be amended except by writing signed by the party
against whom enforcement is sought. This Agreement shall not be assignable by
either party without the written consent of the other and any attempted
assignment in contravention thereof shall be null and void. This Agreement may
be executed in several counterparts, each of which shall be an original, but all
of which shall constitute one and the same instrument. This Agreement contains
the entire agreement between the Company and the Bank relating to custody of
Property and supersedes all prior agreements on this subject. The invalidity,
illegality or unenforceability of any provisions of this Agreement shall in no
way affect the validity, legality or enforceability of any other provision; and
if any provision is held to be unenforceable as a matter of law, the other
provisions shall not be affected thereby and shall remain in full force and
effect. The captions included in this Agreement are included only for the
convenience of the parties and in no way define or limit any of the provisions
hereof or otherwise affect their construction or effect.
13. CHOICE OF LAW.
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York, without giving effect to conflict of laws
principles thereof.
IN WITNESS WHEREOF, each of the parties hereto have caused this Agreement
to be executed by its duly authorized officer.
BANK OF AMERICA NATIONAL TRUST PRINCIPAL CAPITAL ACCUMULATION FUND, INC.
AND SAVINGS ASSOCIATION
NOT LEGIBLE A. S. FILEAN
By:______________________________ By: ___________________________________
Title: Senior Vice President Title: Vice President & Secretary
ERNEST H. GILLUM
Attest: _________________________ Attest: ______________________________
Title: _________________________ Title: Assistant Secretary
*PRINCIPAL CAPITAL ACCUMULATION FUND, INC.
<PAGE>
EXHIBIT A
AUTHORIZED U.S. DEPOSITORIES
The Depository Trust Company
Federal Reserve Book Entry System
Participants Trust Company
<PAGE>
EXHIBIT B
LIST OF PUBLICATIONS
Standard and Poor's Semi-Weekly Called Bond Record
Daily Financial Card Services (NY based)
Depository Transmissions
Wall St. Journal
Los Angeles Times
IDSI Interactive Data Service
<PAGE>
EXHIBIT C
FEE SCHEDULE
Mutual Funds
Administration $4,000.00 per quarter
Mutual Fund Sub-Accounts $ 200.00 each/per year
Maintenance Transactions
(per month) (each)
Treasuries $ 1.00 $ 8.50
Municipal Bonds $ 1.00 $ 8.50
Commercial Paper (eligible) $ 1.00 $ 8.50
Commercial Paper (ineligible) $ 2.50 $ 20.00
Global (Euro) $ 0.50/1000 $ 25.00
Corporate Bonds $ 1.00 $ 8.50
Equities $ 1.00 $ 8.50
GNMAs (PTC) $ 1.50 $ 12.00
Mortgage Backed (physical) $ 2.50 $ 20.00
Tax Exempt (eligible) $ 1.00 $ 8.50
P&I Payments $ 8.00 per pool/per issue
On-Line $1,250.00 per quarter
Outgoing Wires $ 15.00 each
<PAGE>
December 4, 1995
Ms. Diane J. Wiley
Vice President
The Bank of New York
One Wall Street
New York, NY 10286
RE: Custody Agreements Between Bank of America and Principal Aggressive Growth
Fund, Inc., Principal Asset Allocation Fund, Inc., Princor Blue Chip Fund,
Inc., Princor Bond Fund, Inc., Principal Bond Fund, Inc., Princor Capital
Accumulation Fund, Inc., Principal Capital Accumulation Fund, Inc., Princor
Cash Management Fund, Inc., Principal Money Market Fund, Inc., Princor
Emerging Growth Fund, Inc., Principal Emerging Growth Fund, Inc., Princor
Government Securities Income Fund, Inc., Principal Government Securities
Fund, Inc., Princor Growth Fund, Inc., Principal Growth Fund, Inc., Princor
High Yield Fund, Inc., Principal High Yield Fund, Inc., Princor Balanced
Fund, Inc., Principal Balanced Fund, Inc., Princor Tax-Exempt Bond Fund,
Inc., Princor Tax-Exempt Cash Management Fund, Inc., Princor Utilities
Fund, Inc., and Principal Special Markets Fund, Inc. - (Mortgage-Backed
Securities Portfolio) (the "Funds")
Dear Ms. Wiley:
It is our understanding that The Bank of New York has purchased the custody
business of Bank of America's Global Securities Division and Master Employee
Benefits Trust business. You have asked that each of the funds consent to Bank
of America's assignment to The Bank of New York of the Contracts entered into
between Bank of America and each of the Funds (the "Contracts"). Upon receipt of
a Fund's consent and after the transfer of that Fund's account to The Bank of
New York's data processing systems, The Bank of New York will become successor
to Bank of America for that Account.
The Funds hereby consent to the assignment with the understanding that The Bank
of New York is obligated to perform under the Contracts to the same extent and
in the same manner as Bank of America, with the following exceptions:
1. The fee schedule for the Contracts shall be replaced with the fee schedule
attached.
2. Notwithstanding anything to the contrary in the Contracts, The Bank of New
York shall settle on an "actual settlement" basis rather than a "contractual
settlement" basis.
To indicate your agreement, please sign and return to me the enclosed copy of
this letter.
Best Regards,
JERRY G. WISGERHOF
Jerry G. Wisgerhof
Treasurer
CHRISTOPHER M. TEEVAN, V.P.
______________________________
(Signature of The Bank of New York
Representative)
<PAGE>
THE BANK OF NEW YORK
Institutional Custody Fee Schedule
for Principal Mutual Life Insurance Company
and
Princor Financial Corporation
I. Securities Settled and Safekept Within the United States.
The Bank of New York's fee for custody services for each account is as
follows:
Maintenance Charges
Category Monthly Fee Per Issue
Depository Trust Company Issues $ 1.50
Federal Reserve Bank Book Entry Issues 1.50
Participants Trust Company Issues 1.50
Physical Issues 2.50
Transaction Charges
Category Per Transaction
Depository Trust Company Transactions $ 6.50
Federal Reserve Bank Book Entry Transactions 6.50
Participant Trust Company Transaction 10.00
Physical Transactions 20.00
Book Entry Paydowns 4.00
Physical Paydowns 6.00
Options 25.00
A Transaction is defined as a receipt or delivery versus payment or a free
receipt or deliver.
Reimbursable charges such as postage, shipping, transfer fees, etc., will be
billed as incurred.
II. General
Minimum: There is a monthly minimum of $4,000.00 for the
relationship
On-Line Services: $200.00 monthly access fee. Usage and connect time
will be billed to the customer.
Reconciliation Tapes: $150.00 per tape.
Wire Charges: $5.50 - incoming
$9.00 - outgoing
Dated August 30, 1995
Supersedes any previous fee schedule provided by The Bank of New York
Accepted By: CHRISTOPHER M. TEEVAN
_____________________
Title: VICE PRESIDENT
_____________________
Date: 12/5/95
_____________________
Consent of Independent Auditors
The Board of Directors and Shareholders
Principal Capital Accumulation Fund, Inc.
We consent to the reference to our firm under the captions "Financial
Highlights" and "Additional Information - Financial Statements" in the
Prospectus in Part A and to the incorporation by reference in Part B of our
report dated January 19, 1996 on the financial statements and the financial
highlights of Principal Aggressive Growth Fund, Inc., Principal Asset Allocation
Fund, Inc., Principal Balanced Fund, Inc., Principal Bond Fund, Inc., Principal
Capital Accumulation Fund, Inc., Principal Emerging Growth Fund, Inc., Principal
Government Securities Fund, Inc., Principal Growth Fund, Inc., Principal High
Yield Fund, Inc., Principal Money Market Fund, Inc., and Principal World Fund,
Inc., in this Post Effective Amendment to Form N-1A Registration Statement under
the Securities Act of 1933 (No. 2-35570) and Registration Statement under the
Investment Company Act of 1940 (No. 811-1944) of Principal Capital Accumulation
Fund, Inc.
ERNST & YOUNG LLP
Des Moines, Iowa
April 11, 1996
A MESSAGE FROM THE PRESIDENT
Dear Principal Mutual Life Insurance Company Customers
This is the Annual Report for the Principal Mutual Funds. The Report contains
important financial information resulting from the operation of the Funds for
the year ended December 31, 1995. Several different Principal Mutual variable
annuity and variable life insurance contracts offer these Funds within the
investment options. Please see your contract prospectus for a description of the
Funds specifically available in your contract.
Last year proved to be an excellent one for investors. U.S. stock and bond
markets finished the year at levels significantly higher than 1994.
International stock markets also performed fairly well. However, often their
gains were overshadowed by the spectacular run in U.S. equities. Principal
Mutual variable annuity and variable life contract owners benefited from these
robust markets. For the one-year period ending 12/31/95, all the Funds posted
positive returns.
Looking to the new year, most market strategists expect to see continued
economic growth, moderate inflation and limited movement in interest rates.
These factors should be favorable for the U.S. stock and bond markets. Though
foreign markets lagged U.S. equity markets in 1995, potential gains from
international investing remain good for the long term.
Thank you for helping make 1995 a very successful year. The Principal Mutual
Funds continue to grow in both assets and the number of contracts. We look
forward to another fine year in 1996.
Sincerely,
Stephan L. Jones
President
<PAGE>
CONTENTS
Page
Financial Statements and Financial Highlights
Statements of Assets and Liabilities................................. 2
Statements of Operations ............................................ 4
Statements of Changes in Net Assets.................................. 6
Notes to Financial Statements............................................. 10
Schedules of Investments
Principal Aggressive Growth Fund, Inc............................ 16
Principal Asset Allocation Fund, Inc............................. 17
Principal Balanced Fund, Inc..................................... 24
Principal Bond Fund, Inc......................................... 26
Principal Capital Accumulation Fund, Inc......................... 28
Principal Emerging Growth Fund, Inc...... ....................... 30
Principal Government Securities Fund, Inc........................ 33
Principal Growth Fund, Inc....................................... 33
Principal High Yield Fund, Inc................................... 35
Principal Money Market Fund, Inc................................. 37
Principal World Fund, Inc........................................ 38
Financial Highlights................................................. 44
Report of Independent Auditors....... ............................... 48
<PAGE>
<TABLE>
<CAPTION>
December 31, 1995
STATEMENTS OF ASSETS AND LIABILITIES
Principal Principal
Aggressive Asset Principal Principal
Growth Allocation Balanced Bond
Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc.
Assets
<S> <C> <C> <C> <C>
Investment in securities -- at value
(cost -- $28,658,034; $34,130,116; $39,330,608;
$32,445,537; $110,642,942; $46,991,820;
$48,231,081; $37,269,334; $11,147,545;
$32,473,125 and $29,713,996, respectively)
(Note 4)......................................... $31,356,080 $37,006,764 $45,086,052 $35,080,896
Cash ................................................. 4,752,850 3,982,848 1,311 1,745
Receivables:
Dividends and interest........................... 84,799 354,862 437,908 640,478
Investment securities sold....................... 316,798 125,148 - -
Capital Stock sold............................... 74,551 28,561 103,970 231,404
Total Assets 36,585,078 41,498,183 45,629,241 35,954,523
Liabilities
Accrued expenses...................................... 26,223 33,743 27,191 17,237
Payables:
Investment securities purchased.................. 2,914,773 385,906 191,789 -
Capital Stock reacquired......................... 1,141 4,496 6,935 59,627
Total Liabilities 2,942,137 424,145 225,915 76,864
Net Assets Applicable to Outstanding Shares ....... $33,642,941 $41,074,038 $45,403,326 $35,877,659
Capital Stock (par value: $.01 a share)
Shares authorized..................................... 100,000,000 100,000,000 100,000,000 100,000,000
Shares issued and outstanding......................... 2,599,416 3,697,872 3,251,073 3,059,029
Net Asset Value Per Share .......................... $12.94 $11.11 $13.97 $11.73
Net Assets Consist of:
Capital Stock......................................... $ 25,994 $ 36,979 $ 32,511 $ 30,590
Additional paid-in capital............................ 29,359,130 37,717,137 38,773,913 33,508,257
Accumulated undistributed (overdistributed)
net investment income............................ 3,483 19,826 11,765 -
Accumulated undistributed net realized
gain (loss) from:
Investment transactions ......................... 1,556,288 423,448 829,693 (296,547)
Foreign currency transactions.................... - - - -
Net unrealized appreciation of investments............ 2,698,046 2,876,648 5,755,444 2,635,359
Net unrealized appreciation on translation
of assets and liabilities in foreign currencies.. - - - -
Total Net Assets $33,642,941 $41,074,038 $45,403,326 $35,877,659
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31, 1995
STATEMENTS OF ASSETS AND LIABILITIES
Principal Principal Principal
Capital Emerging Government Principal
Accumulation Growth Securities Growth
Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc.
Assets
<S> <C> <C> <C> <C>
Investment in securities -- at value
(cost -- $28,658,034; $34,130,116; $39,330,608;
$32,445,537; $110,642,942; $46,991,820;
$48,231,081; $37,269,334; $11,147,545;
$32,473,125 and $29,713,996, respectively)
(Note 4)......................................... $136,067,278 $59,360,369 $50,430,539 $42,551,459
Cash ................................................. 4,843 8,083 4,295 4,302
Receivables:
Dividends and interest........................... 228,412 56,659 739,240 68,862
Investment securities sold....................... - - - -
Capital Stock sold............................... 270,874 249,011 141,581 115,143
Total Assets 136,571,407 59,674,122 51,315,655 42,739,766
Liabilities
Accrued expenses...................................... 62,272 35,324 25,560 23,186
Payables:
Investment securities purchased.................. 270,239 1,101,914 964,688 -
Capital Stock reacquired......................... 599,216 16,444 245,938 9,059
Total Liabilities 931,727 1,153,682 1,236,186 32,245
Net Assets Applicable to Outstanding Shares ....... $135,639,680 $58,520,440 $50,079,469 $42,707,521
Capital Stock (par value: $.01 a share)
Shares authorized..................................... 100,000,000 100,000,000 100,000,000 100,000,000
Shares issued and outstanding......................... 4,878,949 2,310,202 4,748,214 3,437,095
Net Asset Value Per Share .......................... $27.80 $25.33 $10.55 $12.43
Net Assets Consist of:
Capital Stock......................................... 48,789 $ 23,102 $ 47,482 $ 34,371
Additional paid-in capital............................ 107,046,263 45,375,332 48,531,472 37,381,406
Accumulated undistributed (overdistributed)
net investment income............................ 59,420 6,354 16,895 5,761
Accumulated undistributed net realized
gain (loss) from:
Investment transactions ......................... 3,060,872 747,103 (715,838) 3,858
Foreign currency transactions.................... - - - -
Net unrealized appreciation of investments............ 25,424,336 12,368,549 2,199,458 5,282,125
Net unrealized appreciation on translation
of assets and liabilities in foreign currencies.. - - - -
Total Net Assets $135,639,680 $58,520,440 $50,079,469 $42,707,521
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31, 1995
STATEMENTS OF ASSETS AND LIABILITIES
Principal Principal
High Money Principal
Yield Market World
Fund, Inc. Fund, Inc. Fund, Inc.
Assets
<S> <C> <C> <C>
Investment in securities -- at value
(cost -- $28,658,034; $34,130,116; $39,330,608;
$32,445,537; $110,642,942; $46,991,820;
$48,231,081; $37,269,334; $11,147,545;
$32,473,125 and $29,713,996, respectively)
(Note 4)......................................... $11,389,212 $32,473,125 $31,760,990
Cash ................................................. 199,133 15,245 20,131
Receivables:
Dividends and interest........................... 249,185 21,953 68,426
Investment securities sold....................... - - -
Capital Stock sold............................... 658 560,671 34,058
Total Assets 11,838,188 33,070,994 31,883,605
Liabilities
Accrued expenses...................................... 7,928 17,431 30,169
Payables:
Investment securities purchased.................. - - 1,229,880
Capital Stock reacquired......................... 327 383,644 57,936
Total Liabilities 8,255 401,075 1,317,985
Net Assets Applicable to Outstanding Shares ....... $11,829,933 $32,669,919 $30,565,620
Capital Stock (par value: $.01 a share)
Shares authorized..................................... 100,000,000 500,000,000 100,000,000
Shares issued and outstanding......................... 1,409,500 32,669,919 2,852,252
Net Asset Value Per Share .......................... $8.39 $1.000 $10.72
Net Assets Consist of:
Capital Stock......................................... 14,095 $ 326,699 $ 28,523
Additional paid-in capital............................ 12,805,331 32,343,220 28,349,066
Accumulated undistributed (overdistributed)
net investment income............................ (25,104) - 12,505
Accumulated undistributed net realized
gain (loss) from:
Investment transactions ......................... (1,206,056) - 133,579
Foreign currency transactions.................... - - (5,526)
Net unrealized appreciation of investments............ 241,667 - 2,046,994
Net unrealized appreciation on translation
of assets and liabilities in foreign currencies.. - - 479
Total Net Assets $11,829,933 $32,669,919 $30,565,620
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1995
STATEMENTS OF OPERATIONS
Principal Principal
Aggressive Asset Principal Principal
Growth Allocation Balanced Bond
Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc.
Net Investment Income
<S> <C> <C> <C> <C>
Income:
Dividends........................................ $ 423,403 $ 498,964 $ 469,990 $ -
Less: Withholding tax on foreign dividends...... - - - -
Interest......................................... 83,079 1,191,139 1,177,066 1,928,613
Total Income 506,482 1,690,103 1,647,056 1,928,613
Expenses:
Management and investment advisory
fees (Note 3)................................ 180,022 272,724 206,614 122,783
Custodian fees................................... 14,717 20,436 11,315 6,124
Directors' fees.................................. 7,765 7,765 7,811 7,811
Other............................................ 1,426 1,553 1,580 1,328
Total Expenses 203,930 302,478 227,320 138,046
Net Investment Income 302,552 1,387,625 1,419,736 1,790,567
Net Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency
Net realized gain (loss) from:
Investment transactions.......................... 4,905,174 1,628,048 1,509,204 (178,683)
Foreign currency transactions.................... - - - -
Net increase in unrealized
appreciation/depreciation o
Investments ..................................... 2,660,711 3,340,632 4,627,533 3,151,543
Translation of assets and liabilities in
foreign currencies.......................... - - - -
Net Realized and Unrealized Gain on
Investments and Foreign Currency 7,565,885 4,955,102 6,136,737 2,972,860
Net Increase in Net Assets
Resulting from Operations $7,868,437 $6,356,305 $7,556,473 $4,763,427
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1995
STATEMENTS OF OPERATIONS
Principal Principal Principal
Capital Emerging Government Principal
Accumulation Growth Securities Growth
Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc.
Net Investment Income
Income:
<S> <C> <C> <C> <C>
Dividends........................................ $ 3,049,810 $ 361,828 $ - $ 450,045
Less: Withholding tax on foreign dividends...... - - - -
Interest......................................... 275,913 425,555 2,951,088 282,243
Total Income 3,325,723 787,383 2,951,088 732,288
Expenses:
Management and investment advisory
fees (Note 3)................................ 591,891 264,411 202,554 137,029
Custodian fees................................... 17,774 11,636 11,376 13,433
Directors' fees.................................. 7,838 7,811 7,811 8,046
Other............................................ 1,356 1,430 2,149 1,483
Total Expenses 618,859 285,288 223,890 159,991
Net Investment Income 2,706,864 502,095 2,727,198 572,297
Net Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency
Net realized gain (loss) from:
Investment transactions.......................... 11,294,865 1,202,668 (41,117) 298,608
Foreign currency transactions.................... - - - -
Net increase in unrealized
appreciation/depreciation o
Investments ..................................... 19,225,574 8,417,614 4,199,844 5,280,826
Translation of assets and liabilities in
foreign currencies.......................... - - - -
Net Realized and Unrealized Gain on
Investments and Foreign Currency 30,520,439 9,620,282 4,158,727 5,579,434
Net Increase in Net Assets
Resulting from Operations $33,227,303 $10,122,377 $6,885,925 $6,151,731
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1995
STATEMENTS OF OPERATIONS
Principal Principal
High Money Principal
Yield Market World
Fund, Inc. Fund, Inc. Fund, Inc.
Net Investment Income
Income:
<S> <C> <C> <C>
Dividends........................................ $ - $ - $ 585,383
Less: Withholding tax on foreign dividends...... - - (69,955)
Interest......................................... 1,054,837 1,664,566 223,115
Total Income 1,054,837 1,664,566 738,543
Expenses:
Management and investment advisory
fees (Note 3)................................ 64,422 140,895 172,258
Custodian fees................................... 4,819 12,512 37,884
Directors' fees.................................. 7,811 7,663 7,792
Other............................................ 1,371 1,354 1,427
Total Expenses 78,423 162,424 219,361
Net Investment Income 976,414 1,502,142 519,182
Net Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency
Net realized gain (loss) from:
Investment transactions.......................... (49,300) - 174,169
Foreign currency transactions.................... - - (5,526)
Net increase in unrealized
appreciation/depreciation o
Investments ..................................... 664,483 - 2,573,961
Translation of assets and liabilities in
foreign currencies.......................... - - 304
Net Realized and Unrealized Gain on
Investments and Foreign Currency 615,183 - 2,742,908
Net Increase in Net Assets
Resulting from Operations $1,591,597 $1,502,142 $3,262,090
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31, Except as Noted
STATEMENTS OF CHANGES IN NET ASSETS
Principal Principal
Aggressive Growth Asset Allocation
Fund, Inc. Fund, Inc.
1995 1994(a) 1995 1994(a)
Operations
<S> <C> <C> <C> <C>
Net investment income....................... $ 302,552 $ 76,039 $ 1,387,625 $ 663,604
Net realized gain (loss) from investment transactions 4,905,174 91,717 1,628,048 (136,298)
Net increase (decrease) in unrealized appreciation/
depreciation on investments and translation of
assets and liabilities in foreign currencies .. 2,660,711 37,335 3,340,632 (463,984)
Net Increase (Decrease) in Net Assets
Resulting from Operations 7,868,437 205,091 6,356,305 63,322
Dividends and Distributions to Shareholders
From net investment income.................. (305,795) (69,313) (1,398,405) (633,124)
From net realized gain on investments and foreign
currency transactions................. (3,377,897) (62,706) (1,026,374) -
Excess distribution of net realized gain on
investments (Note 1)................... - - - (41,928)
(3,683,692) (132,019) (2,424,779) (675,052)
Capital Share Transactions (Note 5)
Shares sold................................. 14,807,229 13,605,360 7,552,421 27,985,523
Shares issued in reinvestment of dividends
and distributions...................... 3,683,692 132,019 2,424,779 675,052
Shares redeemed............................. (2,803,211) (39,965) (875,745) (7,788)
Net Increase (Decrease) in Net Assets from
Capital Share Transactions 15,687,710 13,697,414 9,101,455 28,652,787
Total Increase (Decrease) 19,872,455 13,770,486 13,032,981 28,041,057
Net Assets
Beginning of period......................... 13,770,486 - 28,041,057 -
End of period (including undistributed net
investment income as set forth below).. $33,642,941 $13,770,486 $41,074,038 $28,041,057
Undistributed Net Investment Income......... $ 3,483 $ 6,726 $ 19,826 $ 30,480
(a) Period from May 23, 1994 (date operations
commenced) through December 31, 1994.
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31, Except as Noted
STATEMENTS OF CHANGES IN NET ASSETS
Principal Principal
Balanced Bond
Fund, Inc. Fund, Inc.
1995 1994 1995 1994
Operations
<S> <C> <C> <C> <C>
Net investment income....................... $ 1,419,736 $ 749,475 $ 1,790,567 $1,135,608
Net realized gain (loss) from investment transactions 1,509,204 754,708 (178,683) (105,044)
Net increase (decrease) in unrealized appreciation/
depreciation on investments and translation of
assets and liabilities in foreign currencies .. 4,627,533 (2,010,252) 3,151,543 (1,416,499)
Net Increase (Decrease) in Net Assets
Resulting from Operations 7,556,473 (506,069) 4,763,427 (385,935)
Dividends and Distributions to Shareholders
From net investment income.................. (1,419,914) (742,989) (1,807,251) (1,129,640)
From net realized gain on investments and foreign
currency transactions................. (1,126,793) (359,204) - -
Excess distribution of net realized gain on
investments (Note 1)................... - - - -
(2,546,707) (1,102,193) (1,807,251) (1,129,640)
Capital Share Transactions (Note 5)
Shares sold................................. 18,469,155 4,652,236 15,942,301 3,317,198
Shares issued in reinvestment of dividends
and distributions...................... 1,530,787 1,102,194 1,815,744 1,129,640
Shares redeemed............................. (4,649,589) (501,945) (1,944,884) (209,853)
Net Increase (Decrease) in Net Assets from
Capital Share Transactions 15,350,353 5,252,485 15,813,161 4,236,985
Total Increase (Decrease) 20,360,119 3,644,223 18,769,337 2,721,410
Net Assets
Beginning of period......................... 25,043,207 21,398,984 17,108,322 14,386,912
End of period (including undistributed net
investment income as set forth below).. $45,403,326 $25,043,207 $35,877,659 $ 17,108,322
Undistributed Net Investment Income......... $ 11,765 $ 11,943 $ - $ 16,684
(a) Period from May 23, 1994 (date operations
commenced) through December 31, 1994.
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31, Except as Noted
STATEMENTS OF CHANGES IN NET ASSETS
PRINCIPAL
CAPITAL ACCUMULATION
FUND, INC.
1995 1994
Operations
<S> <C> <C>
Net investment income....................... $ 2,706,864 $ 3,083,195
Net realized gain (loss) from investment transactions 11,294,865 3,704,610
Net increase (decrease) in unrealized appreciation/
depreciation on investments and translation of
assets and liabilities in foreign currencies. 19,225,574 (5,902,482)
Net Increase (Decrease) in Net Assets
Resulting from Operations 33,227,303 885,323
Dividends and Distributions to Shareholders
From net investment income.................. (2,707,756) (3,039,878)
From net realized gain on investments and foreign
currency transactions................. (10,552,706) (3,606,801)
Excess distribution of net realized gain on
investments (Note 1)................... - -
(13,260,462) (6,646,679)
Capital Share Transactions (Note 5)
Shares sold................................. 38,113,651 33,765,050
Shares issued in reinvestment of dividends
and distributions...................... 13,137,194 6,592,055
Shares redeemed............................. (56,149,805) (42,538,618)
Net Increase (Decrease) in Net Assets from
Capital Share Transactions (4,898,960) (2,181,513)
Total Increase (Decrease) 15,067,881 (7,942,869)
Net Assets
Beginning of period......................... 120,571,799 128,514,668
End of period (including undistributed net
investment income as set forth below).. $135,639,680 $120,571,799
Undistributed Net Investment Income......... $ 59,419 $ 60,311
(a) Period from May 23, 1994 (date operations commenced)
through December 31, 1994.
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31, Except as Noted
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
Principal Principal
Emerging Growth Government Securities
Fund, Inc. Fund, Inc.
1995 1994 1995 1994
Operations
<S> <C> <C> <C> <C>
Net investment income........................................ $ 502,095 $ 166,792 $ 2,727,198 $ 2,755,820
Net realized gain (loss) from investment transactions........ 1,202,668 677,550 (41,117) (674,721)
Net realized gain (loss) from foreign currency transactions.. - - - -
Net increase (decrease) in unrealized appreciation/depreciation
on investments and translation of assets and
liabilities in foreign currencies....................... 8,417,614 (716,715) 4,199,844 (3,960,440)
Net Increase (Decrease) in Net Assets Resulting from Operations 10,122,377 127,627 6,885,925 (1,879,341)
Dividends and Distributions to Shareholders
From net investment income................................... (496,559) (165,538) (2,764,369) (2,694,877)
Excess distribution of net investment income (Note 1)........ - - - -
From net realized gain on investments and foreign currency
transactions (473,643) (824,006) - -
(970,202) (989,544) (2,764,369) (2,694,877)
Capital Share Transactions (Note 5)
Shares sold.................................................. 33,010,562 12,744,993 24,755,653 20,568,925
Shares issued in reinvestment of dividends
and distributions...................................... 825,122 989,544 2,708,209 2,626,308
Shares redeemed.............................................. (8,379,384) (1,148,919) (17,627,312) (19,158,954)
Net Increase in Net Assets from
Capital Shares Transactions 25,456,300 12,585,618 9,836,550 4,036,279
Total Increase (Decrease) 34,608,475 11,723,701 13,958,106 (537,939)
Net Assets
Beginning of period.......................................... 23,911,965 12,188,264 36,121,363 36,659,302
End of period (including undistributed (overdistributed) net
investment income as set forth below)................... $58,520,440 $23,911,965 $50,079,469 $36,121,363
Undistributed (Overdistributed) Net Investment Income........ $ 6,354 $ 1,353 $ 16,895 $ 79,009
(b) Period from March 23, 1994 (date operations
commenced) through December 31, 1994.
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31, Except as Noted
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
Principal Principal
Growth High Yield
Fund, Inc. Fund, Inc.
1995 1994(b) 1995 1994
Operations
<S> <C> <C> <C> <C>
Net investment income........................................ $ 572,297 $ 107,760 $ 976,414 $ 862,613
Net realized gain (loss) from investment transactions........ 298,608 (8) (49,300) (113,805)
Net realized gain (loss) from foreign currency transactions.. - - - -
Net increase (decrease) in unrealized appreciation/depreciation
on investments and translation of assets and
liabilities in foreign currencies....................... 5,280,826 1,299 664,483 (691,913)
Net Increase (Decrease) in Net Assets Resulting from Operations 6,151,731 109,051 1,591,597 56,895
Dividends and Distributions to Shareholders
From net investment income................................... (566,536) (107,760) (991,915) (854,622)
Excess distribution of net investment income (Note 1)........ - (199) (25,104) -
From net realized gain on investments and foreign currency
transactions (294,742) - - -
(861,278) (107,959) (1,017,019) (854,622)
Capital Share Transactions (Note 5)
Shares sold.................................................. 29,355,706 13,353,752 673,188 120,658
Shares issued in reinvestment of dividends
and distributions...................................... 753,669 107,959 1,017,019 854,623
Shares redeemed.............................................. (5,778,425) (376,685) (131,664) (56,349)
Net Increase in Net Assets from
Capital Shares Transactions 24,330,950 13,085,026 1,558,543 918,932
Total Increase (Decrease) 29,621,403 13,086,118 2,133,121 121,205
Net Assets
Beginning of period.......................................... 13,086,118 - 9,696,812 9,575,607
End of period (including undistributed (overdistributed) net
investment income as set forth below)................... $42,707,521 $13,086,118 $11,829,933 $9,696,812
Undistributed (Overdistributed) Net Investment Income........ $ 5,761 $ - $ (25,104) $ 16,274
(b) Period from March 23, 1994 (date operations
commenced) through December 31, 1994.
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31, Except as Noted
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
Principal Principal
Money Market World
Fund, Inc. Fund, Inc.
1995 1994 1995 1994(b)
Operations
<S> <C> <C> <C> <C>
Net investment income........................................ $ 1,502,142 $ 958,162 $ 519,182 $ 74,661
Net realized gain (loss) from investment transactions........ - - 174,169 8,912
Net realized gain (loss) from foreign currency transactions.. - - (5,526) 14,084
Net increase (decrease) in unrealized appreciation/depreciation
on investments and translation of assets and
liabilities in foreign currencies....................... - - 2,574,265 (526,792)
Net Increase (Decrease) in Net Assets Resulting from Operations 1,502,142 958,162 3,262,090 (429,135)
Dividends and Distributions to Shareholders
From net investment income................................... (1,502,142) (958,162) (506,808) (74,661)
Excess distribution of net investment income (Note 1)........ - - - (25,968)
From net realized gain on investments and foreign currency
transactions - - (23,834) (4,568)
(1,502,142) (958,162) (530,642) (105,197)
Capital Share Transactions (Note 5)
Shares sold.................................................. 94,151,329 73,870,425 15,630,379 14,270,677
Shares issued in reinvestment of dividends
and distributions...................................... 1,130,170 706,556 530,642 105,196
Shares redeemed.............................................. (91,983,464) (67,958,011) (2,072,943) (95,447)
Net Increase in Net Assets from
Capital Shares Transactions 3,298,035 6,618,970 14,088,078 14,280,426
Total Increase (Decrease) 3,298,035 6,618,970 16,819,526 13,746,094
Net Assets
Beginning of period.......................................... 29,371,884 22,752,914 13,746,094 -
End of period (including undistributed (overdistributed) net
investment income as set forth below)................... $32,669,919 $29,371,884 $30,565,620 $13,746,094
Undistributed (Overdistributed) Net Investment Income........ $ - $ - $ 12,505 $ (11,884)
(b) Period from March 23, 1994 (date operations
commenced) through December 31, 1994.
See accompanying notes.
</TABLE>
<PAGE>
December 31, 1995
NOTES TO FINANCIAL STATEMENTS
Principal Aggressive Growth Fund, Inc.
Principal Asset Allocation Fund, Inc.
Principal Balanced Fund, Inc.
Principal Bond Fund, Inc.
Principal Capital Accumulation Fund, Inc.
Principal Emerging Growth Fund, Inc.
Principal Government Securities Fund, Inc.
Principal Growth Fund, Inc.
Principal High Yield Fund, Inc.
Principal Money Market Fund, Inc.
Principal World Fund, Inc.
Note 1 - Significant Accounting Policies
Principal Aggressive Growth Fund, Inc., Principal Asset Allocation Fund, Inc.,
Principal Balanced Fund, Inc., Principal Bond Fund, Inc., Principal Capital
Accumulation Fund, Inc., Principal Emerging Growth Fund, Inc., Principal
Government Securities Fund, Inc., Principal Growth Fund, Inc., Principal High
Yield Fund, Inc., Principal Money Market Fund, Inc. and Principal World Fund,
Inc. (the "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 March 23, 1994, the initial purchases of 500,000 shares of Capital Stock of
the Principal Growth Fund, Inc. and 500,000 shares of Capital Stock of the
Principal World Fund, Inc. were made by Principal Mutual Life Insurance Company.
On May 23, 1994, the initial purchases of 1,000,000 shares of Capital Stock of
the Principal Aggressive Growth Fund, Inc. and 2,500,000 shares of Capital Stock
of the Principal Asset Allocation Fund, Inc. were made by Principal Mutual Life
Insurance Company (see Note 3).
Principal Money Market Fund, Inc. values its securities at amortized cost, which
approximates market. Under the amortized cost method, a security is valued by
applying a constant amortization to maturity of the difference between the
principal amount due at maturity and the cost of the security to the fund.
The other funds value securities for which market quotations are readily
available at market value, which is determined using the last reported sale
price or, if no sales are reported, as is regularly the case for some securities
traded over-the-counter, the last reported bid price. When reliable market
quotations are not considered to be readily available, which may be the case,
for example, with respect to certain debt securities and preferred stocks, the
investments are valued by using market quotations, prices provided by market
makers or estimates of market values obtained from yield data and other factors
relating to instruments or securities with similar characteristics in accordance
with procedures established in good faith by each fund's Board of Directors.
Securities with remaining maturities of 60 days or less are valued at amortized
cost, which approximates market.
With respect to Principal World Fund, Inc., 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 in the Principal World Fund,
Inc. 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 Funds record investment transactions generally one day after the trade date.
The identified cost basis has been used in determining the net realized gain or
loss from investment transactions and unrealized appreciation or depreciation of
investments. Dividends are taken into income on an accrual basis as of the
ex-dividend date and interest income is recognized on an accrual basis.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, and the difference between the
amount of dividends and foreign withholding taxes recorded on the fund's books
and the U.S. dollar equivalent of the amounts actually received or paid. Net
unrealized foreign exchange gains and losses arise from changes in the value of
assets and liabilities other than investments in securities at fiscal year end,
resulting from changes in the exchange rate.
With respect to Principal Money Market Fund, Inc., all net investment income and
any realized gains and losses from investment transactions are declared as
dividends daily to shareholders of record as of that day. Dividends and
distributions to shareholders of the other funds are recorded on the ex-dividend
date.
Dividends and distributions to shareholders from net investment income and net
realized gain from investment and foreign currency transactions is determined in
accordance with federal income tax regulations, which may differ from generally
accepted accounting principles. To the extent these "book/tax" differences are
permanent in nature (i.e. that they result from other than timing of recognition
- - "temporary"), such amounts are reclassified within the capital accounts based
on their federal tax-basis treatment; temporary differences do not require
reclassification. Reclassifications made for the years ended December 31, 1995
and 1994 were not material.
Due to the timing of dividend distributions and the differences in accounting
for income and realized gains (losses) for financial statement and federal
income tax purposes, the fiscal year in which amounts are distributed may differ
from the year in which the income and realized gains (losses) are recorded for
financial statement purposes by the fund. The differences between the income and
gains distributed on a book versus tax basis are shown as excess distributions
of net investment income and net realized gain on investments in the
accompanying Statements of Changes in Net Assets.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2 - Federal Income Taxes
No provision for federal income taxes is considered necessary because 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, 1995, Principal Bond Fund, Inc. had a net capital loss
carryforward of approximately $297,000 expiring in 1999 through 2004. Principal
Government Securities Fund, Inc. had a net capital loss carryforward of
approximately $716,000 expiring in 2002 and 2003. Principal High Yield Fund,
Inc. had a net capital loss carryforward of approximately $1,206,000 expiring in
1997 through 2004.
Note 3 - Management Agreement and Transactions With Affiliates
The 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 Principal Bond Fund, Inc.,
Principal Capital Accumulation Fund, Inc., Principal Government Securities Fund,
Inc., Principal Growth Fund, Inc. and Principal Money Market Fund, Inc. is .50%
of the first $100 million of the fund's average daily net assets and .45% of the
next $100 million of the fund's average daily net assets. The annual rate used
in this calculation for Principal Asset Allocation Fund, Inc. and Principal
Aggressive Growth Fund, Inc. is .80% of the first $100 million of the fund's
average daily net assets. With respect to Principal Balanced Fund, Inc. and
Principal High Yield Fund, Inc., the annual rate used in this calculation is
.60% of the first $100 million of the fund's average daily net assets. With
respect to Principal Emerging Growth Fund, Inc. and Principal World Fund, Inc.,
the annual rate used in this calculation is .65% and .75%, respectively, of the
first $100 million of the fund's average daily net assets.
Brokerage commissions were paid to affiliates by certain of the funds, as
follows:
Year Ended Year Ended
December 31, December 31,
1995 1994
Principal Balanced Fund, Inc. $ 219 $ 669
Principal Capital Accumulation
Fund, Inc. 3,885 8,243
Principal Emerging Growth
Fund, Inc. 910 357
Principal Growth Fund, Inc. 4,252 632
Principal World Fund, Inc. 2,207 -
All of the shares of the Funds are owned by Principal Mutual Life Insurance
Company and/or one or more Separate Accounts sponsored by Principal Mutual Life
Insurance Company.
Note 4 - Investment Transactions
For the year ended December 31, 1995, the cost of investment securities
purchased and proceeds from investment securities sold (not including short-term
investments and U.S. government securities) by the Funds were as follows:
Purchases Sales
Principal Aggressive Growth Fund, Inc. $47,132,569 $35,553,552
Principal Asset Allocation Fund, Inc. 17,840,056 14,515,105
Principal Balanced Fund, Inc. 10,450,120 6,649,589
Principal Bond Fund, Inc. 15,684,250 1,364,080
Principal Capital Accumulation Fund, Inc. 57,328,669 71,739,432
Principal Emerging Growth Fund, Inc. 27,041,960 4,585,280
Principal Government Securities Fund, Inc. 10,622,207 3,096,381
Principal Growth Fund, Inc. 29,143,961 1,567,901
Principal High Yield Fund, Inc. 5,276,816 3,539,464
Principal World Fund, Inc. 18,300,514 3,049,748
At December 31, 1995, net unrealized appreciation of investments held by
the Funds was composed of the following:
<TABLE>
<CAPTION>
Net Unrealized
Gross Unrealized Appreciation
Appreciation (Depreciation) of Investments
<S> <C> <C> <C>
Principal Aggressive Growth Fund, Inc. $ 3,213,961 $ (515,915) $ 2,698,046
Principal Asset Allocation Fund, Inc. 3,913,777 (1,037,129) 2,876,648
Principal Balanced Fund, Inc. 6,281,111 (525,667) 5,755,444
Principal Bond Fund, Inc. 2,638,218 (2,859) 2,635,359
Principal Capital Accumulation Fund, Inc. 28,143,974 (2,719,638) 25,424,336
Principal Emerging Growth Fund, Inc. 13,876,605 (1,508,056) 12,368,549
Principal Government Securities Fund, Inc. 2,263,134 (63,676) 2,199,458
Principal Growth Fund, Inc. 6,432,155 (1,150,030) 5,282,125
Principal High Yield Fund, Inc. 466,848 (225,181) 241,667
Principal World Fund, Inc. 3,485,222 (1,438,228) 2,046,994
</TABLE>
Principal Government Securities Fund, Inc. may trade portfolio securities on a
"to-be-announced" (TBA) basis. In a TBA transaction, the fund commits to
purchase or sell securities for which all specific information is not known at
the time of the trade. Securities purchased on a TBA basis are not settled until
they are delivered to the fund, normally 15 to 30 days later. These transactions
are subject to market fluctuations and their current value is determined in the
same manner as for other portfolio securities. As of December 31, 1995, TBA
purchase commitments involved securities with a face amount of $1,000,000, cost
of $964,688 and market value of $967,510. Principal Government Securities Fund,
Inc. has set aside investment securities and other assets in excess of the
commitments to serve as collateral.
At December 31, 1995, Principal Asset Allocation Fund, Inc., Principal Balanced
Fund, Inc., Principal Emerging Growth Fund, Inc., Principal High Yield Fund,
Inc. and Principal World Fund, Inc. held the following securities which may
require registration under the Securities Act of 1933 or an exemption therefrom
in order to effect a sale in the ordinary course of business.
<TABLE>
<CAPTION>
Value at Value as a
Date of Dec. 31, Percentage of
Fund Security Description Acquisition Cost 1995 Net Assets
<S> <C> <C> <C> <C>
Principal Asset
Allocation Fund, Inc. Telebras GDR 9/14/94 $ 1,012 $ 853 .00%
HMC Acquisition Properties;
Senior Notes 12/15/95 200,000 200,000 .49%
200,853 .49%
Principal Balanced Federal-Mogul Corp.; Series D
Fund, Inc. Convertible 10/15/92 248,325 258,538 .57%
Principal Emerging Ciba-Geigy Corp.; Exchangeable
Growth Fund, Inc. Subordinated Debentures 3/20/91 150,000 151,500 .26%
Sierra On Line; Convertible
Subordinated Debentures 8/17/94 100,375 225,087 .38%
376,587 .64%
Principal High Yield California Energy Casecnan
Fund, Inc. Water & Energy Co., Inc.;
Senior Secured Series B 11/21/95 300,000 303,000 2.56%
Continental Cablevision, Inc.;
Senior Notes 12/8/95 299,037 300,000 2.54%
Howmet Corp.; Senior
Subordinated Notes 11/22/95 150,000 157,500 1.33%
760,500 6.43%
Principal World
Fund, Inc. Alfa SA; Convertible
Subordinated Debentures 9/25/95 398,000 392,000 1.28%
Koninklijke KNP BT NV 3/7/95 91,891 71,966 .25%
3/29/95 46,567 41,123 .13%
Royal Plastics Group 11/23/94 41,703 73,854 .24%
9/25/95 132,960 144,812 .47%
Voest-Alpine Stahl 10/30/95 280,007 264,025 .86%
</TABLE>
The Fund's investments are with various issuers in various industries. The
Schedules of Investments contained herein summarize concentrations of credit
risk by industry and issuer except for Principal World Fund, Inc. which is
summarized by country, industry and issuer.
Note 5 - Capital Share Transactions
Transactions in Capital Stock by fund were as follows:
<TABLE>
<CAPTION>
Principal Aggressive Principal Asset Principal Balanced
Growth Fund, Inc. Allocation Fund, Inc. Fund, Inc.
Year Ended December 31, 1995:
<S> <C> <C> <C>
Shares sold................................... 1,161,931 692,541 1,392,999
Shares issued in reinvestment of
dividends and distributions.................. 287,452 219,390 115,881
Shares redeemed............................... (211,535) (78,261) (354,061)
Net Increase 1,237,848 833,670 1,154,819
Period Ended December 31, 1994:(1)
Shares sold................................... 1,352,371 2,796,023 368,768
Shares issued in reinvestment of
dividends and distributions.................. 13,058 68,953 91,841
Shares redeemed............................... (3,861) (774) (39,693)
Net Increase 1,361,568 2,864,202 420,916
(1)Principal Aggressive Growth Fund, Inc. and Principal Asset Allocation
Fund, Inc., period from May 23, 1994 (date operations commenced) through
December 31, 1994.
</TABLE>
<TABLE>
<CAPTION>
Principal Principal Capital Principal Emerging
Bond Fund, Inc. Accumulation Fund, Inc. Growth Fund, Inc.
Year Ended December 31, 1995:
<S> <C> <C> <C>
Shares sold................................... 1,388,036 1,462,128 1,443,488
Shares issued in reinvestment of
dividends and distributions.................. 155,537 493,432 32,984
Shares redeemed............................... (174,815) (2,220,452) (363,945)
Net Increase (Decrease) 1,368,758 (264,892) 1,112,527
Year Ended December 31, 1994:
Shares sold................................... 308,755 1,381,360 618,438
Shares issued in reinvestment of
dividends and distributions.................. 111,513 275,405 49,050
Shares redeemed............................... (19,236) (1,735,373) (56,074)
Net Increase (Decrease) 401,032 (78,608) 611,414
</TABLE>
<TABLE>
<CAPTION>
Principal Government Principal Growth Principal High
Securities Fund, Inc. Fund, Inc. Yield Fund, Inc.
Year Ended December 31, 1995:
<S> <C> <C> <C>
Shares sold................................... 2,389,165 2,597,297 77,400
Shares issued in reinvestment of
dividends and distributions.................. 258,394 61,037 121,455
Shares redeemed............................... (1,752,028) (517,157) (15,228)
Net Increase 895,531 2,141,177 183,627
Period Ended December 31, 1994:(2)
Shares sold................................... 1,999,929 1,322,072 14,057
Shares issued in reinvestment of
dividends and distributions.................. 279,684 10,689 107,934
Shares redeemed............................... (1,881,876) (36,843) (6,581)
Net Increase 397,737 1,295,918 115,410
(2)Principal Growth Fund, Inc., period from March 23, 1994 (date operations
commenced) through December 31, 1994.
</TABLE>
<TABLE>
<CAPTION>
Principal Money Principal World
Market Fund, Inc. Fund, Inc.
Year Ended December 31, 1995:
<S> <C> <C>
Shares sold................................... 94,151,329 1,566,265
Shares issued in reinvestment of
dividends and distributions.................. 1,130,170 49,808
Shares redeemed............................... (91,983,464) (202,182)
Net Increase 3,298,035 1,413,891
Period Ended December 31, 1994:(3)
Shares sold................................... 73,870,425 1,437,009
Shares issued in reinvestment of
dividends and distributions.................. 706,556 11,004
Shares redeemed............................... (67,958,011) (9,652)
Net Increase 6,618,970 1,438,361
(3)Principal World Fund, Inc., period from March 23, 1994 (date operations
commenced) through December 31, 1994.
</TABLE>
Note 6 - Line of Credit
The Funds have an unsecured line of credit with a bank which allows each
fund to borrow up to $500,000. Borrowings are made solely to facilitate the
handling of unusual and/or unanticipated short-term cash requirements. Interest
is charged to each fund, based on its borrowings, at a rate equal to the bank's
Fed Funds Unsecured Rate plus 100 basis points. Additionally, a commitment fee
is charged at the annual rate of .25% on the line of credit. At December 31,
1995, the Funds had no outstanding borrowings under the line of credit.
<PAGE>
December 31, 1995
SCHEDULES OF INVESTMENTS
PRINCIPAL AGGRESSIVE GROWTH FUND, INC.
Shares
Held Value
Common Stocks (93.20%)
Agricultural Chemicals (0.44%)
IMC Global Group, Inc. 3,600 $ 147,150
Air Transportation, Scheduled (0.86%)
AMR Corp. 2,000(a) 148,500
USAir Group, Inc. 10,600(a) 140,450
288,950
Aircraft & Parts (8.48%)
Boeing Co. 3,700 289,988
Lockheed Martin Corp. 2,300 181,700
McDonnell Douglas Corp. 7,300 671,600
Sunstrand Corp. 8,900 626,337
Textron, Inc. 4,800 324,000
United Technologies Corp. 8,000 759,000
2,852,625
Auto & Home Supply Stores (1.08%)
Autozone, Inc. 12,600(a) 363,825
Bakery Products (0.29%)
Interstate Bakeries 4,400 98,450
Beverages (1.14%)
Coca-Cola Enterprises 14,300 382,525
Commercial Banks (9.68%)
Chase Manhattan Bank Corp. 4,600 278,875
Citicorp 5,900 396,775
First Interstate Bancorp. 5,800 791,700
J. P. Morgan & Co. 4,400 353,100
Wells Fargo & Co. 6,650 1,436,400
3,256,850
Computer & Data Processing
Services (2.82%)
First Data Corp. 4,700 314,313
Microsoft Corp. 3,900(a) 342,225
Oracle Systems Corp. 6,900(a) 292,387
948,925
Computer & Office Equipment (4.17%)
Bell & Howell Holdings 3,300(a) 92,400
Cisco Systems 2,700(a) 201,487
Hewlett-Packard Co. 4,000 335,000
International Business
Machines Corp. 5,900 541,325
Seagate Technology Co. 4,900(a) 232,750
1,402,962
Consumer Products (10.27%)
Philip Morris Cos., Inc. 33,500 3,031,750
RJR Nabisco 13,700 422,987
3,454,737
Department Stores (0.81%)
Harcourt General, Inc. 6,500 272,188
Drugs (3.26%)
American Home Products Corp. 3,300 320,100
Pfizer, Inc. 5,900 371,700
Schering-Plough Corp. 7,400 405,150
1,096,950
Eating & Drinking Places (0.55%)
Boston Chicken, Inc. 5,800(a) 186,325
Electronic Components &
Accessories (1.92%)
Intel Corp. 4,100 $ 232,675
Logic Corp. 5,700(a) 186,675
Texas Instruments 4,400 227,700
647,050
Federal & Federally Sponsored
Credit (3.85%)
Federal Home Loan Mortgage Corp. 4,800 400,800
Federal National Mortgage
Association 4,600 570,975
Student Loan Marketing Association
(non-voting) 4,900 322,787
1,294,562
Finance Services (2.35%)
Loews Corp. 10,100 791,587
Fire, Marine, & Casualty
Insurance (1.70%)
Aetna Life & Casualty Co. 3,600 249,300
Cigna Corp. 2,600 268,450
GCR Holdings Limited 2,400(a) 54,000
571,750
Grain Mill Products (1.62%)
Kellogg Co. 4,000 309,000
Ralston-Ralston Purina Group 3,800 237,025
546,025
Hospitals (1.03%)
Columbia/HCA Healthcare Corp. 6,800 345,100
Hotels & Motels (0.77%)
La Quinta Motor Inns 8,000 219,000
Trump Hotels & Casinos 1,800(a) 38,700
257,700
Industrial Inorganic Chemicals (1.40%)
Monsanto Co. 1,900 232,750
Olin Corp. 3,200 237,600
470,350
Industrial Machinery, NEC (0.99%)
Applied Materials, Inc. 8,500(a) 334,688
Insurance Agents, Brokers, &
Services (1.47%)
Exel Ltd. 8,100 494,100
Life Insurance (0.19%)
The Guarantee Life Co. 4,000(a) 63,000
Lumber & Other Building
Materials (0.94%)
Home Depot, Inc. 6,600 315,975
Manifold Business Forms (0.62%)
Reynolds & Reynolds 5,400 209,925
Medical Service & Health
Insurance (1.31%)
United Healthcare Corp. 2,800 183,400
U.S. HealthCare, Inc. 5,500 255,750
439,150
Miscellaneous Business Services (0.82%)
CUC International, Inc. 8,050 274,706
Miscellaneous Electrical Equipment &
Supplies (0.66%)
Motorola, Inc. 3,900 $ 222,300
Miscellaneous Food Stores (1.18%)
General Nutrition Cos. 17,300 397,900
Miscellaneous Investing (1.92%)
HFS, Inc. 7,900(a) 645,825
Motion Picture Production &
Services (0.95%)
Walt Disney Productions 5,400 318,600
Motion Picture Theaters (0.31%)
AMC Entertainment 4,500(a) 105,188
Newspapers (1.68%)
Gannett Co. 6,100 374,387
New York Times Co. 6,400 189,600
563,987
Nonstore Retailers (0.55%)
AMRE Inc. 12,600 184,275
Periodicals (1.16%)
K III Communications 32,300(a) 391,638
Personal Credit Institutions (2.49%)
Dean Witter, Discover & Co. 8,000 376,000
Household International Corp. 7,800 461,175
837,175
Photographic Equipment &
Supplies (0.91%)
Eastman Kodak Co. 4,550 304,850
Plastic Materials & Synthetics (0.90%)
Hercules, Inc. 5,400 304,425
Primary Nonferrous Metals (0.47%)
Aluminum Co. of America 3,000 158,625
Radio, Television & Computer
Stores (0.32%)
Tandy Corp. 2,600 107,900
Radio & Television
Broadcasting (1.49%)
Infinity Broadcasting 8,400(a) 312,900
New World Communications 10,700(a) 187,250
500,150
Refrigeration & Service
Machinery (1.24%)
American Standard, Inc. 14,900 417,200
Retail Stores, NEC (0.29%)
PETsMART Inc. 3,200(a) 99,200
Rubber & Plastics Footwear (0.46%)
Nike, Inc. 1,400 97,475
Reebok International Ltd. 2,000 56,500
153,975
Search & Navigation Equipment (1.29%)
Litton Industries, Inc. 1,500(a) 66,750
Watkins Johnson Co. 8,400 367,500
434,250
Security & Commodity Services (0.82%)
Franklin Resources, Inc. 5,500 $ 277,063
Security Brokers & Dealers (2.84%)
American Express Co. 23,100 955,762
Ship & Boat Building &
Repairing (0.51%)
General Dynamics Corp. 2,900 171,463
Sugar & Confectionary
Products (0.84%)
Wrigley, (Wm.) Jr. Co. 5,400 283,500
Surety Insurance (0.76%)
Ace Ltd. 6,400 254,400
Telephone Communication (2.33%)
AT&T Corp. 5,300 343,175
Airtouch Communications, Inc. 4,900(a) 138,425
MCI Communications Corp. 11,600 303,050
784,650
Tires & Inner Tubes (0.96%)
Goodyear Tire & Rubber Co. 7,100 322,163
Toys & Sporting Goods (0.27%)
Toy Biz, Inc. 4,200(a) 91,350
Video Tape Rental (0.77%)
Viacom Inc., Class B 5,491(a) 260,136
Total Portfolio Investments (93.20%) 31,356,080
Cash and receivables, net of liabilities (6.80%) 2,286,861
Total Net Assets (100.00%) $33,642,941
(a) Non-income producing security - No dividend paid during the past twelve
months.
PRINCIPAL ASSET ALLOCATION FUND, INC.
Shares
Held Value
Common Stocks (53.00%)
Aerospace Industries (0.48%)
Gencorp, Inc. 4,800 $ 58,800
Rockwell International Corp. 1,500 79,312
Thiokol Corp. 1,700 57,588
195,700
Agricultural Chemicals (0.10%)
IMC Global Group, Inc. 1,000 40,875
Air Transportation, Scheduled (0.93%)
AMR Corp. 1,200(a) 89,100
Airborne Freight Corp. 2,500 66,563
British Airways PLC ADR 1,400 101,850
Cathay Pacific Airways ADR 8,500 64,860
SkyWest Airlines, Inc. 2,700 34,762
USAir Group, Inc. 1,700(a) 22,525
379,660
Aircraft & Parts (1.32%)
Boeing Co. 800 $ 62,700
Lockheed Martin Corp. 600 47,400
McDonnell Douglas Corp. 2,500 230,000
Sunstrand Corp. 1,800 126,675
United Technologies Corp. 800 75,900
542,675
Auto & Home Supply Stores (0.21%)
Autozone, Inc. 3,000(a) 86,625
Automotive Rentals,
No Drivers (0.17%)
Ryder Systems, Inc. 2,800 69,300
Bakery Products (0.04%)
Interstate Bakeries 700 15,662
Bituminous Coal &
Lignite Mining (0.11%)
Ashland Coal, Inc. 2,000 42,750
Beverages (0.98%)
Bass PLC ADR 5,000 111,250
Coca-Cola Enterprises 2,800 74,900
Coors (Adolph); Class B 3,200 70,800
Kirin Brewery 1,200 143,400
400,350
Blast Furnace & Basic Steel
Products (0.48%)
Acesita-Cia Acos Especiais
Itabira ADR 2,260 23,648
Australian National Industries 8,960 26,660
Birmingham Steel 3,800 56,525
British Steel PLC ADS 3,500 89,687
196,520
Bowling Centers (0.31%)
Meija Seika Kaisha Ltd. ADR 2,100 126,629
Broadwoven Fabric Mills,
Cotton (0.15%)
Springs Industries, Inc. 1,500 62,062
Chemicals & Allied Products (0.67%)
Aceto, Inc. 4,400 70,400
Bayer AG Sponsored ADR 3,300 87,268
Ciba-Geigy Sponsored ADR 2,700 119,085
276,753
Cogeneration - Small Power
Producer (0.13%)
Zurn Industries 2,500 53,437
Combination Utility Services (0.86%)
Central Hudson Gas & Electric Corp. 1,900 58,663
Commonwealth Energy Systems 1,500 67,125
NIPSCO Industries, Inc. 2,550 97,537
Orange & Rockland Utilities, Inc. 1,700 60,775
Washington Water Power Co. 4,000 70,000
354,100
Commercial Banks (5.21%)
ABN-AMRO Holdings NV ADR 2,600 $ 118,566
Allied Irish Banks ADR 2,900 94,250
Banco Central ADR 6,500 65,812
Banco Fraces Del Rio De La Plata 2,875 77,266
BankAmerica Corp. 1,050 67,988
Banker's Trust 1,150 76,475
Brierly Investments Ltd. ADR 5,550 87,805
Chase Manhattan Bank Corp. 900 54,562
Chemical Banking Corp. 1,400 82,250
Citicorp 1,600 107,600
Commerzbank AG ADR 1,800 85,267
Finova Group, Inc. 1,400 67,550
First of America Bank Corp. 1,800 79,875
First Security Corp. 1,800 69,300
HSBC Holdings ADR 600 90,792
Mellon Bank Corp. 1,300 69,875
National Westminster ADR 1,900 115,425
Onbankcorp, Inc. 1,800 60,075
PNC Financial Corp. 2,600 83,850
Peoples Heritage Financial
Group, Inc. 2,400 54,600
Summit Bancorp. 80 2,520
Trustmark Corp. 3,200 72,800
Union Planter's Corp. 2,000 63,750
Wells Fargo & Co. 1,300 280,800
Westpac Banking ADR 4,900 110,250
2,139,303
Commercial Printing (0.17%)
Bowne & Co., Inc. 3,500 70,000
Communications Equipment (0.52%)
Alcatel Alsthom ADR 4,700 82,250
Hanson PLC ADR 3,850 58,712
Harris Corp. 1,350 73,744
214,706
Communications Services,
NEC (0.15%)
Comsat Corp. 3,200 59,600
Computer & Data Processing
Services (0.43%)
First Data Corp. 900 60,188
Microsoft Corp. 700(a) 61,425
Oracle Systems Corp. 1,300(a) 55,087
176,700
Computer & Office Equipment (1.25%)
Apple Computer, Inc. 1,800 57,375
Bell & Howell Holdings 600(a) 16,800
Cisco Systems 500(a) 37,313
Hewlett-Packard Co. 900 75,375
Hitachi Ltd. ADR 1,300 130,650
International Business
Machines Corp. 1,000 91,750
National Computer Systems, Inc. 3,000 56,625
Seagate Technology Co. 1,000(a) 47,500
513,388
Concrete, Gypsum & Plaster
Products (0.36%)
Ameron, Inc. 1,900 71,488
Italcementi Fabriche S P A ADR 13,000 77,849
149,337
Concrete Work (0.16%)
Pioneer International Ltd. ADR 25,000 $ 64,530
Construction & Related
Machinery (0.15%)
Cascade Corp. 4,400 61,600
Consumer Products (1.58%)
American Brands, Inc. 1,800 80,325
Philip Morris Cos., Inc. 6,300 570,150
650,475
Crude Petroleum &
Natural Gas (0.76%)
Broken Hill Proprietary Ltd. ADR 1,100 62,150
Petrofina SA ADR 2,900 88,786
Societe Generale ADR 3,600 89,073
Texaco, Inc. 900 70,650
310,659
Cutlery, Handtools &
Hardware (0.17%)
Starrett (L.S.); Class A 2,700 69,862
Deep Sea Foreign Transportation
of Freight (0.12%)
Overseas Shipholding Group, Inc. 2,700 51,300
Department Stores (0.69%)
Harcourt General, Inc. 1,200 50,250
Marui Corp. ADR 3,800 158,407
J. C. Penney 1,600 76,200
284,857
Dimension Stone (0.19%)
English China Clays ADR 5,300 79,500
Drugs (1.16%)
Baxter International, Inc. 1,900 79,563
Hafslund Nycomed ADR 4,400 115,500
Novo Nordisk ADR 3,200 108,800
Pfizer, Inc. 1,800 113,400
Schering-Plough Corp. 1,100 60,225
477,488
Drugs, Proprietaries &
Sundries (0.70%)
Amway Japan Lrd ADS 7,000 146,125
Bergen Brunswig 2,700 67,163
Bindley Western Industries, Inc. 4,300 73,100
286,388
Eating & Drinking Places (0.35%)
Boston Chicken, Inc. 1,000(a) 32,125
Piccadilly Cafeterias 6,000 57,000
Sbarro, Inc. 2,500 53,750
142,875
Electric Light & Wiring
Equipment (0.17%)
National Service Industries 2,100 67,987
Electric Services (1.47%)
EVN Energie-Vansorgung Nied ADR 3,000 82,520
Empresa Nacional De Electricidad
SA ADR 1,400 80,150
General Public Utilities Corp. 2,900 98,600
National Power ADR 3,300 92,400
Pinnacle West Capital Corp. 3,400 97,750
Shangdong Huaneng Power
Development Ltd. 8,000 $ 54,000
Texas Utilities Co. 2,400 98,700
604,120
Electronic Components &
Accessories (0.86%)
Aida Engineering Ltd. ADR 800 61,424
Intel Corp. 900 51,075
Logic Corp. 1,300(a) 42,575
Nintendo Ltd. ADR 17,600 167,422
Texas Instruments 800 41,400
363,896
Electronic Distribution
Equipment (0.32%)
Matsushita Electrical ADR 800 131,600
Engineering & Architectural
Services (0.14%)
Gilbert Associates, Inc.; Class A 4,700 58,750
Family Clothing Stores (0.32%)
Ross Stores, Inc. 1,900 36,338
TJX Cos., Inc. 5,000 94,375
130,713
Farm & Garden Machinery (0.20%)
Deere & Co. 2,300 81,075
Federal & Federally Sponsored
Credit (0.70%)
Federal Home Loan Mortgage Corp. 1,100 91,850
Federal National
Mortgage Association 1,000 124,125
Student Loan Marketing Association
(Non-Voting) 1,100 72,462
288,437
Finance Services (0.53%)
Greenpoint Financial Corp. 2,600 69,550
Loews Corp. 1,900 148,913
218,463
Fire Marine & Casualty
Insurance (0.61%)
Argonaut Group, Inc. 1,700 55,250
CIGNA Corp. 500 51,625
GCR Holdings Limited 500(a) 11,250
St. Paul Cos., Inc. 1,300 72,313
Selective Insurance Group, Inc. 1,700 60,350
250,788
Gas Production & Distribution (0.29%)
Eastern Enterprises 1,800 63,450
Oneok, Inc. 2,400 54,900
118,350
General Industrial Machinery (0.44%)
Amer Group Ltd. ADR 5,500 43,004
Binks Mfg. 2,100 49,350
SKF AB ADR 4,500 87,750
180,104
Glass & Glassware, Pressed or
Blown (0.05%)
Vitro Sociedad Anonima ADR 3,960 18,810
Grain Mill Products (0.44%)
Kellogg Co. 1,200 92,700
Ralston-Ralston Purina Group 1,400 87,325
180,025
Groceries & Related Products (0.29%)
Fleming Cos., Inc. 3,450 $ 71,156
Nash Finch Co. 2,600 47,450
118,606
Highway & Street Construction (0.07%)
Emprasas ICA Sociedad Controladora
SA ADR 2,700 27,675
Holding Offices (0.15%)
Jardine Strategic Holdings Ltd.
ADR 10,000 61,200
Hospitals (0.17%)
Columbia/HCA Healthcare Corp. 1,400 71,050
Hotels & Motels (0.34%)
La Quinta Motor Inns 1,700 46,538
Ladbroke Group ADR 37,000 84,156
Trump Hotels & Casinos 400(a) 8,600
139,294
Household Audio & Video
Equipment (0.37%)
Sony Corp. ADR 2,500 153,437
Industrial Inorganic
Chemicals (0.12%)
Monsanto Co. 400 49,000
Industrial Machinery, NEC (0.16%)
Applied Materials, Inc. 1,700(a) 66,937
Industrial Organic Chemicals (0.24%)
Nova Corp. ADR 6,700 53,600
Witco Corp. 1,500 43,875
97,475
Insurance Agents, Brokers &
Services (0.24%)
Exel Ltd. 1,600 97,600
Iron Ores (0.12%)
Cleveland-Cliffs, Inc. 1,200 49,200
Jewelry, Silverware & Plated
Ware (0.15%)
Oneida Ltd. 3,400 59,925
Knitting Mills (0.12%)
Guilford Mills, Inc. 2,500 50,937
Life Insurance (0.40%)
American General Corp. 2,200 76,725
The Guarantee Life Cos., Inc. 200(a) 3,150
Lincoln National Corp. 1,600 86,000
165,875
Logging (0.18%)
Weyerhaeuser Co. 1,700 73,525
Lumber & Other Building
Materials (0.15%)
Home Depot, Inc. 1,300 62,237
Machinery, Equipment &
Supplies (0.24%)
AAR Corp. 2,300 $ 50,600
Kaman Corp.; Class A 4,300 47,837
98,437
Management & Public Relations (0.35%)
Ogden Corp. 6,800 145,350
Manifold Business Forms (0.24%)
New England Business Service 2,800 60,900
Reynolds & Reynolds 1,000 38,875
99,775
Measuring & Controlling Devices (0.77%)
Analogic Corp. 3,000 55,500
Beckman Instruments, Inc. 1,700 60,138
Core Industries 5,600 72,100
Cubic Corp. 2,200 62,700
MTS Systems, Corp. 2,000 66,000
316,438
Meat Products (0.47%)
Groupe Danone 2,500 82,611
Nestle ADR 2,000 110,894
193,505
Medical Service & Health
Insurance (0.52%)
Provident Cos., Inc. 2,500 84,688
United Healthcare Corp. 500 32,750
United Wisconsin Services 2,000 44,000
US Life Corp. 1,800 53,775
215,213
Metal Cans & Shipping
Containers (0.13%)
Ball Corp. 1,900 52,250
Metal Forgings & Stampings (0.17%)
Zero Corp. 3,900 69,225
Metalworking Machinery (0.34%)
Makita Corp. ADR 9,000 140,625
Miscellaneous Amusement, Recreation
Service (0.12%)
Jackpot Enterprises 4,200 48,825
Miscellaneous Apparel &
Accessories (0.14%)
Angelica Corp. 2,900 59,450
Miscellaneous Business Services (0.15%)
CUC International, Inc. 1,800(a) 61,425
Miscellaneous Chemical
Products (0.08%)
Learonal, Inc. 1,500 34,500
Miscellaneous Converted Paper
Products (0.08%)
P. T. Inti Indorayon Utama ADR 10,000 31,490
Miscellaneous Electrical Equipment &
Supplies (0.46%)
Motorola, Inc. 700 39,900
TDK Corp. 2,800 147,000
186,900
Miscellaneous Fabricated Metal
Products (0.15%)
Barnes Group, Inc. 1,700 $ 61,200
Miscellaneous Fabricated Textile
Products (0.13%)
Alpargatas SAIC ADR 10,000(a) 52,510
Miscellaneous Food Stores (0.21%)
General Nutrition Cos. 3,800(a) 87,400
Miscellaneous Furniture &
Fixtures (0.15%)
Kinetic Concepts, Inc. 5,000 60,000
Miscellaneous Investing (0.63%)
HFS, Inc. 1,500(a) 122,625
Manufactured Home Communities 4,200 73,500
Southwest Property, Inc. 2,300 31,050
Wellsford Residential Property 1,300 29,900
257,075
Miscellaneous Petroleum & Coal
Products (0.14%)
Quaker Chemical Corp. 4,200 56,700
Miscellaneous Plastics Products,
NEC (0.15%)
Amer Filtrona Corp. 1,900 63,650
Miscellaneous Special Trade
Contractors (0.18%)
Hang Lung Development Co. ADR 9,400 74,768
Miscellaneous Transporation
Services (0.02%)
Petro PSC Properties Warrants 200(a) 6,800
Motion Picture Production &
Services (0.14%)
Walt Disney Productions 1,000 59,000
Motion Picture Theaters (0.05%)
AMC Entertainment 800(a) 18,700
Motor Vehicles & Equipment (2.03%)
Arvin Industries, Inc. 2,900 47,850
Augat, Inc. 4,000 68,500
Chrysler Corp. 900 49,838
Fiat SPA ADR 4,700 74,025
Ford Motor Co. 2,000 58,000
General Motors Corp. 1,400 74,025
Honda Motor ADR 4,400 184,800
Smith A.O. Corp. 2,500 51,875
Toyota Motor Corp. ADR 3,100 130,975
Volkswagen AG ADR 1,400 93,824
833,712
Newspapers (0.32%)
Gannett Co. 1,500 92,063
New York Times Co. 1,300 38,512
130,575
Non-Classifiable Establishments (0.19%)
Keppel Corp. Ltd. ADR 4,300 76,608
Non-Store Retailers (0.08%)
AMRE Inc. 2,300 33,638
Operative Builders (0.30%)
Fujita Corp. ADR 2,700 $ 121,975
Ophthalmic Goods (0.16%)
Bausch & Lomb 1,650 65,381
Paints & Allied Products (0.14%)
Dexter Corp. 2,400 56,700
Paper Mills (0.31%)
Potlatch Corp. 1,500 60,000
Willamette Industry, Inc. 1,200 67,500
127,500
Paperboard Containers & Boxes (0.09%)
Sealright Co. 3,300 36,712
Paperboard Mills (0.06%)
Groupo Industrial Durango ADR 3,800(a) 25,175
Partitions & Fixtures (0.17%)
Knape & Vogt Mfg. 4,060 70,543
Pens, Pencils, Office & Art
Supplies (0.12%)
Cross (A.T.) Co.; Class A 3,300 49,912
Periodicals (0.16%)
K III Communications 5,400(a) 65,475
Personal Credit Institutions (0.45%)
Dean Witter, Discover & Co. 1,900 89,300
Household International Corp. 1,600 94,600
183,900
Petroleum Refining (1.55%)
Ashland, Inc. 2,000 70,250
Atlantic Richfield Co. 800 88,600
Diamond Shamrock, Inc. 2,400 62,100
Exxon Corp. 400 32,050
Royal Dutch Petroleum Co. ADR 400 56,450
Shell Transport & Trading Co. ADR 1,000 81,375
Total SA IE Francaise ADR 2,800 95,200
Ultramar Corp. 2,600 66,950
YPF Sociedad Anonima ADR 3,800 82,175
635,150
Photographic Equipment &
Supplies (0.97%)
Eastman Chemical Co. 1,050 65,756
Eastman Kodak Co. 750 50,250
Fuji Photo Film 3,400 197,625
OCE Van Der Grinten NV ADR 1,400 84,350
397,981
Photographic Studios, Portrait (0.12%)
CPI Corp. 3,000 48,000
Plastic Materials & Synthetics (0.41%)
Hercules, Inc. 1,700 95,838
Shanghai Petrochemical Co. Ltd. ADR 2,600 74,100
169,938
Preserved Fruits & Vegetables (0.21%)
H. J. Heinz Co. 1,200 39,750
International Multifoods Corp. 2,400 48,300
88,050
Primary Nonferrous Metals (0.25%)
Aluminum Co. of America 600 $ 31,725
Phelps Dodge Corp. 1,150 71,587
103,312
Radio, Television &
Computer Stores (0.06%)
Tandy Corp. 600 24,900
Radio & Television
Broadcasting (0.25%)
Infinity Broadcasting 1,700(a) 63,325
New World Communications 2,300(a) 40,250
103,575
Refrigeration &
Service Machinery (0.37%)
American Standard, Inc. 2,700(a) 75,600
Tecumseh Products Co.;
Class A 1,500 77,625
153,225
Rental of Railroad Cars (0.12%)
GATX Corp. 1,000 48,625
Retail Stores, NEC (0.24%)
Koninklijke Bijenkorf Beheer NV ADR 2,400 79,352
PETsMART Inc. 600(a) 18,600
97,952
Rubber & Plastics Footwear (0.10%)
NIKE, Inc. 500 34,812
Reebok International Ltd. 200 5,650
40,462
Savings Institutions (0.30%)
Standard Federal Bancorp., Inc. 1,500 59,063
Washington Mutual, Inc. 2,200 63,525
122,588
Sawmills & Planning Mills (0.17%)
Louisiana Pacific Corp. 2,900 70,325
Search & Navigation
Equipment (0.26%)
Litton Industries, Inc. 500(a) 22,250
Watkins Johnson Co. 1,900 83,125
105,375
Security & Commodity Services (0.15%)
Franklin Resources, Inc. 1,200 60,450
Security Brokers & Dealers (0.43%)
American Express Co. 4,300 177,913
Services to Buildings (0.14%)
American Building Maintenance 2,000 55,500
Soap, Cleaners & Toilet Goods (0.67%)
Block Drug Co. 1,900 66,037
Kao Corp. ADR 1,200 148,907
Smithkline Beecham PLC ADR 1,100 61,050
275,994
Special Industry Machinery (0.28%)
Gerber Scientific Inc. 3,700 $ 60,125
Scitex Corp. 4,000 54,500
114,625
Subdividers & Developers (0.18%)
Singapore Land ADR 11,600 75,038
Sugar & Confectionary
Products (0.28%)
Perlis Plantations ADR 20,000 62,624
Wrigley, (WM.) Jr. Co. 1,000 52,500
115,124
Surety Insurance (0.31%)
ACE Ltd. 1,400 55,650
Enhance Financial Services Group 2,700 71,888
127,538
Telephone Communication (1.74%)
AT&T Corp. 1,000 64,750
Airtouch Communications, Inc. 1,000(a) 28,250
BCE, Inc. 2,200 75,900
MCI Communications Corp. 2,100 54,862
Nynex Corp. 1,700 91,800
SBC Communications, Inc. 1,400 80,500
Sprint Corp. 2,100 83,738
Telecommunicacoes
Brasileiras SA ADR 1,600 75,800
Telebras GDR 18(c) 853
Telefonica De Espana SA ADS 2,500 104,688
Telfonos De Mexico SA ADR 1,700 54,187
715,328
Tires & Inner Tubes (0.51%)
Bridgestone ADR 900 143,090
Goodyear Tire & Rubber Co. 1,500 68,063
211,153
Toys & Sporting Goods (0.17%)
Russ Berrie & Co. 3,900 49,238
Toy Biz, Inc. 900(a) 19,575
68,813
Variety Stores (0.25%)
K Mart Corp. 5,400 39,150
Woolworth Corp. 4,750 61,750
100,900
Video Tape Rental (0.13%)
Viacom Inc.; Class B 1,148(a) 54,386
Water Supply (0.16%)
SJW Corp. 1,700 64,175
Water Transportation of Freight,
NEC (0.19%)
Penninsular & Oriental Steamships
ADR 5,400 79,816
Women's & Children's
Undergarments (0.35%)
Wacoal Corp. ADR 2,100 142,013
Women's Clothing Stores (0.02%)
Deb Shops, Inc. 2,700 9,281
Total Common Stocks 21,769,279
Bonds (10.85%)
Advertising (0.52%)
Ackerly Communications, Inc.
Senior Notes; 10.75%; 10/1/03 $ 200,000 $ 213,000
Agricultural Chemicals (0.52%)
IMC Fertilizer Senior Notes;
9.25%; 10/1/00 200,000 213,000
Cable & Other Pay TV Services (0.52%)
Cablevision Systems Corp. Senior
Subordinated Notes; 9.88%;
2/15/13 200,000 213,000
Cash Grains (0.12%)
PM Holdings Corp. Subordinated
Notes; 9/5/05 100,000(b) 51,000
Cogeneration - Small Power
Producer (0.51%)
California Energy Co., Inc. Senior
Secured Notes; 9.88%; 6/30/03 200,000 208,000
Communications Equipment (0.26%)
Plantronics, Inc. Senior Notes;
10.00%; 1/15/01 100,000 105,125
Communications Services, NEC (1.11%)
Dial Call Communications, Inc.
Senior Discount Note, Series B;
12/15/05 500,000(b) 265,625
Helicon Group Senior Notes,
Series B; 9.00%*; 11/1/03 200,000 192,000
457,625
Crude Petroleum & Natural Gas (0.82%)
Gulf Canada Senior Subordinated
Debentures; 9.25%; 1/15/04 125,000 129,458
Maxus Energy Corp. Debentures;
11.50%; 11/15/15 200,000 206,500
335,958
Finance Services (0.36%)
Tiphook Finance Corp. Guaranteed
Notes; 8.00%; 3/15/00 200,000 148,000
Glass & Glassware, Pressed
or Blown (0.52%)
Owens Illinois, Inc. Senior
Subordinated Notes;
9.95%; 10/15/04 200,000 212,000
Health & Allied Services, NEC (0.26%)
Nacolah Holding Corp. Senior Notes;
9.50%; 12/1/03 100,000 105,000
Meat Products (0.33%)
Pilgrim's Pride Corp. Senior
Subordinated Notes;
10.88%; 8/1/03 150,000 136,500
Miscellaneous Amusement, Recreation
Service (0.85%)
Casino America, Inc. First Mortgage
Notes; 11.50%; 11/15/01 250,000 233,125
Six Flags Theme Park, Inc.
Senior Subordinated Notes;
6/15/05 $150,000(b) $ 117,375
350,500
Miscellaneous Chemical
Products (0.40%)
Arcadian Partners Senior Notes;
10.75%; 5/1/05 150,000 165,000
Miscellaneous Investing (0.49%)
HMC Acquisition Properties Senior
Notes; 9.00%; 12/15/07 200,000(c) 200,000
Miscellaneous Publishing (0.17%)
Marvel Parent Holding;
4/15/98 100,000(b) 70,000
Miscellaneous Shopping Goods
Stores (0.40%)
Southland Corp. Senior Subordinated
Debentures; 5.00%; 12/15/03 200,000 167,000
Miscellaneous Textile Goods (0.86%)
PT Polysindo EKA Senior Notes;
13.00%; 6/15/01 150,000 155,250
West Point Stevens Senior Subordinated
Debentures; 9.38%; 12/15/05 200,000 197,500
352,750
Non-Store Retailers (0.49%)
Corporate Express Senior Subordinated
Notes; 9.13%; 3/15/04 200,000 201,000
Radio & Television
Broadcasting (0.70%)
Heritage Media Senior Subordinated
Notes; 11.00%; 10/1/02 175,000 185,500
Viacom Subordinated Debentures ;
8.00%; 7/7/06 100,000 102,008
287,508
Telephone Communication (0.64%)
Paging Network Inc. Senior
Subordinated Notes;
10.13%; 8/1/07 100,000 108,875
Telefonica De Argentina Notes;
11.88%; 11/1/04 150,000 155,250
264,125
Total Bonds 4,456,091
U.S. Government Treasury Notes (26.25%)
8.00%; 1/15/97 3,809,000 3,912,555
7.88%; 11/15/04 5,931,000 6,868,839
Total Treasury Notes 10,781,394
Total Portfolio Investments (90.10%) 37,006,764
Cash and receivables, net of liabilities (9.90%) 4,067,274
Total Net Assets (100.00%) $41,074,038
(a) Non-income producing security - No dividend paid during the past twelve
months.
(b) Non-income producing security - zero-and zero-step coupon bonds.
(c) Restricted Security - See Note 4 to the financial statements.
* Variable Rate
Common Stocks (43.86%)
Advertising (0.37%)
Interpublic Group of Cos., Inc. 3,900 $ 169,163
Air Transportation, Scheduled (0.16%)
Southwest Airlines Co. 3,200 74,400
Automotive Rentals, No Drivers (0.39%)
Ryder Systems, Inc. 7,100 175,725
Beverages (1.41%)
Pepsico, Inc. 9,900 553,162
Universal Foods Corp. 2,200 88,275
641,437
Combination Utility Services (0.45%)
Cinergy Corp. 6,600 202,125
Commercial Banks (5.06%)
AmSouth Bancorp. 4,750 191,781
Banc One Corp. 7,921 299,018
Boatmen's Bancshares, Inc. 4,682 191,377
Chase Manhattan Bank Corp. 2,500 151,562
Comerica, Inc. 5,700 228,712
First of America Bank Corp. 3,600 159,750
Firstar Corp. 3,700 146,613
Keycorp. 7,900 286,375
Marshall & Ilsley Corp. 6,000 156,000
Mercantile Bankshares Corp. 3,400 94,775
Meridian Bancorp., Inc. 4,200 195,300
Nationsbank Corp. 2,800 194,950
2,296,213
Communications Equipment (1.47%)
Allen Group, Inc. 2,000 44,750
DSC Communications Corp. 5,000(a) 184,375
General Instrument Corp. 12,900(a) 301,538
Northern Telecom Ltd. 3,200 137,600
668,263
Computer & Office Equipment (0.91%)
Hewlett-Packard Co. 2,100 175,875
International Business
Machines Corp. 2,600 238,550
414,425
Construction & Related
Machinery (0.57%)
Caterpillar, Inc. 4,400 258,500
Crude Petroleum & Natural
Gas (0.90%)
Texaco, Inc. 5,200 408,200
Dairy Products (0.32%)
Dean Foods Co. 5,300 145,750
Department Stores (0.41%)
Sears, Roebuck & Co. 4,800 187,200
Drugs (3.85%)
American Home Products Corp. 3,000 291,000
Bristol-Myers Squibb Co. 5,400 463,725
Lilly (Eli) & Co. 4,200 236,250
Merck & Co., Inc. 8,000 $ 526,000
Warner-Lambert Co. 2,400 233,100
1,750,075
Eating & Drinking Places (0.42%)
McDonald's Corp. 4,200 189,525
Electric Services (1.39%)
Dominion Resources, Inc. 6,300 259,875
FPL Group, Inc. 4,300 199,412
Potomac Electric Power Co. 6,600 173,250
632,537
Electrical Industrial Apparatus (0.34%)
Emerson Electric Co. 1,900 155,325
Electronic Components &
Accessories (0.70%)
Duracell International, Inc. 6,100 315,675
Electronic Distribution
Equipment (1.17%)
General Electric Co. 7,400 532,800
Fats & Oils (0.63%)
Archer Daniels Midland Co. 16,000 288,000
Fire, Marine & Casualty
Insurance (0.48%)
Allstate Corp. 5,320 218,785
General Industrial Machinery (0.33%)
BW/IP Holdings, Inc.; Class A 2,900 47,850
Pall Corp. 3,800 102,125
149,975
Grain Mill Products (0.76%)
Ralston-Ralston Purina Group 5,500 343,063
Grocery Stores (2.01%)
Albertsons Inc. 7,500 246,562
American Stores Co. 10,800 288,900
Sysco Corp. 11,600 377,000
912,462
Household Furniture (0.50%)
Masco Corp. 7,300 229,038
Industrial Inorganic Chemicals (0.65%)
Dow Chemical Co. 4,200 295,575
Insurance Agents, Brokers &
Services (0.47%)
Equifax, Inc. 10,000 213,750
Jewelry, Silverware & Plated
Ware (0.21%)
Jostens, Inc. 3,900 94,575
Meat Products (1.33%)
Conagra, Inc. 8,142 335,850
Tyson Foods, Inc. 10,300 269,087
604,937
Medical Instruments &
Supplies (0.80%)
Becton, Dickinson & Co. 1,900 142,500
St. Jude Medical, Inc. 3,750(a) 161,250
United States Surgical Corp. 2,700 57,713
361,463
Medical Service & Health
Insurance (1.68%)
Aon Corp. 4,350 $ 216,956
Foundation Health Corp. 4,200(a) 180,600
Physicians Corp. of America 2,900(a) 49,300
U.S. Healthcare, Inc. 6,800 316,200
763,056
Metal Forgings & Stampings (0.92%)
Newell Co. 16,200 419,175
Metalworking Machinery (0.11%)
Giddings & Lewis 2,900 47,850
Miscellaneous Business Services (0.19%)
Safety-Kleen Corp. 5,400 84,375
Miscellaneous Converted Paper
Products (1.81%)
Avery Dennison Corp. 4,600 230,575
Minnesota Mining & Mfg. Co. 8,900 589,625
820,200
Miscellaneous Electrical Equipment
& Supplies (1.12%)
Motorola, Inc. 8,900 507,300
Miscellaneous Fabricated Metal
Products (0.15%)
Keystone International, Inc. 3,400 68,000
Miscellaneous Shopping
Goods Stores (0.65%)
Toys 'R' Us, Inc. 13,600(a) 295,800
Offices & Clinics of Medical
Doctors (0.32%)
FHP International Corp. 5,100(a) 145,350
Petroleum Refining (1.25%)
Atlantic Richfield Co. 1,800 199,350
Exxon Corp. 4,600 368,575
567,925
Photographic Equipment &
Supplies (0.21%)
Eastman Chemical Co. 1,550 97,069
Plastic Materials & Synthetics (0.14%)
Wellman, Inc. 2,800 63,700
Sanitary Services (1.57%)
Browning-Ferris Industries, Inc. 7,500 221,250
WMX Technologies, Inc. 16,400 489,950
711,200
Security Brokers & Dealers (0.24%)
Edwards (A.G.), Inc. 4,500 107,437
Soap, Cleaners & Toilet Goods (1.37%)
Avon Products 4,700 354,263
Colgate-Palmolive Co. 3,800 266,950
621,213
Telephone Communication (1.84%)
AT&T Corp. 7,300 472,675
MCI Communications Corp. 13,800 360,525
833,200
Variety Stores (1.83%)
Dayton-Hudson Corp. 6,300 $ 472,500
Wal-Mart Stores, Inc. 16,100 360,237
832,737
Total Common Stocks 19,914,548
Preferred Stocks (2.66%)
Motor Vehicles & Equipment (2.66%)
Federal-Mogul Corp.
Series D Convertible 4,300b) 258,538
Ford Motor Co.
Series A Convertible 10,000 947,500
1,206,038
Principal
Amount Value
Bonds (3.37%)
Blast Furnace & Basic Steel
Products (0.43%)
Quanex Corp. Convertible
Subordinated Debentures;
6.88%; 6/30/07 $200,000 $ 193,000
Electrical Lighting & Wiring
Equipment (0.47%)
Cooper Industries Inc. Convertible
Subordinated Debentures;
7.05%; 1/1/15 208,000 214,240
Electric Industrial Apparatus (0.53%)
Liebert Co. Convertible Subordinated
Debentures; 8.00%; 11/15/10 80,000 239,300
Engines & Turbines (0.46%)
Outboard Marine Corp. Convertible
Subordinated Debentures;
7.00%; 7/1/02 200,000 210,250
Lumber & Other Building
Materials (0.43%)
Hechinger Co. Convertible
Subordinated Debentures;
5.50%; 4/1/12 425,000 196,563
Petroleum Refining (0.56%)
Pennzoil Co. Senior Exchangeable
Debentures; 6.50%; 1/15/03 200,000 252,000
Trucking & Courier Services,
Ex., Air (0.49%)
Builders Transport, Inc. Convertible
Subordinated Debentures;
6.50%; 5/1/11 306,000 224,145
Total Bonds 1,529,498
U.S. Government Treasury Notes & Bonds (40.80%)
5.13%; 2/28/98 $1,500,000 $1,496,720
6.38%; 1/15/00 1,900,000 1,970,655
5.50%; 4/15/00 2,500,000 2,518,750
6.38%; 8/15/02 1,000,000 1,050,625
6.25%; 2/15/03 1,000,000 1,043,750
5.75%; 8/15/03 3,200,000 3,238,998
7.25%; 8/15/04 1,500,000 1,668,280
7.50%; 2/15/05 800,000 908,000
7.25%; 5/15/16 1,000,000 1,141,875
7.50%; 11/15/16 1,000,000 1,173,125
7.25%; 8/15/22 2,000,000 2,315,626
Total U. S. Government Treasury Notes & Bonds 18,526,404
Commercial Paper (8.61%)
Business Credit Institutions (4.62%)
American Express Credit Corp.;
5.75%; 1/2/96 2,100,000 2,100,000
Personal Credit Institutions (3.99%)
Ford Motor Credit Co. ;
5.77%; 1/2/96 885,000 885,000
5.65%; 1/5/96 925,000 924,564
1,809,564
Total Commercial Paper 3,909,564
Total Portfolio Investments (99.30%) 45,086,052
Cash and receivables, net of liabilities (0.70%) 317,274
Total Net Assets (100.00%) $45,403,326
(a) Non-income producing security - No dividend paid during the past twelve
months.
(b) Restricted Security - See Note 4 to the financial statements.
PRINCIPAL BOND FUND, INC.
Principal
Amount Value
Bonds (93.11%)
Aircraft & Parts (0.97%)
Textron, Inc. Medium-Term Notes,
Series C; 9.55%; 3/19/01 $300,000 $ 347,142
Auto & Home Supply Stores (1.74%)
Pep Boys-Manny, Moe & Jack Notes;
7.00%; 6/1/05 600,000 624,557
Bakery Products (1.29%)
Nabisco, Inc. Notes; 7.05%; 7/15/07450,000 462,924
Beverages (1.68%)
Joseph E. Seagram & Sons Guaranteed
Debentures; 8.88%; 9/15/11 $500,000 $ 601,538
Broadwoven Fabric Mills,
Cotton (2.17%)
Burlington Industries, Inc. Notes;
7.25%; 9/15/05 750,000 777,860
Cable & Other Pay TV Services (2.97%)
TCI Communications, Inc. Senior
Notes; 8.00%; 8/1/05 1,000,000 1,067,354
Cash Grains (0.84%)
Dekalb Corp. Notes;
10.00%; 4/15/98 300,000 300,750
Combination Utility Services (0.79%)
Public Service Electric & Gas
Medium-Term Notes;
8.16%; 5/26/09 250,000 285,565
Consumer Products (0.86%)
RJR Nabisco Capital Corp. Senior
Notes; 8.75%; 4/15/04 300,000 307,875
Copper Ores (0.88%)
Asarco, Inc. Notes; 7.38%; 2/1/03 300,000 315,953
Crude Petroleum & Natural Gas (0.81%)
Occidental Petroleum Corp.
Medium-Term Notes;
9.73%; 6/15/01 250,000 291,097
Department Stores (3.38%)
Dillard Investment Co. Notes;
9.25%; 5/1/97 200,000 209,405
Harcourt General, Inc. Subordinated
Notes; 9.50%; 3/15/00 350,000 394,434
Sears Roebuck Co. Medium-Term
Notes; 9.05%; 2/6/12 500,000 607,895
1,211,734
Drug Stores & Proprietary
Stores (1.36%)
Rite Aid Corp. Senior Debentures;
6.88%; 8/15/13 500,000 488,970
Eating & Drinking Places (2.23%)
Marriott International, Inc.;
Notes; 6.75%; 12/15/03 200,000 202,925
Senior Notes; 7.88%; 4/15/05 550,000 597,175
800,100
Electric Services (1.13%)
Cleveland Electric Illuminating Co.
First Mortgage Bonds;
8.75%; 11/15/05 400,000 404,000
Fabricated Rubber Products,
NEC (0.83%)
M. A. Hanna Co. Senior Notes;
9.38%; 9/15/03 250,000 298,436
Finance Services (2.87%)
GATX Capital Corp. Medium-Term
Notes, Series C; 6.86%; 10/13/05
1,000,000 1,030,790
Gas Production & Distribution (4.64%)
Enron Corp. Notes; 7.13%; 5/15/07 750,000 795,436
Tennessee Gas Pipeline Co. Notes;
9.00%; 1/15/97 $400,000 $ 413,536
Transco Energy Co. Notes;
9.38%; 8/15/01 400,000 460,754
1,669,726
General Government, NEC (3.11%)
Ontario Hydro Debentures;
7.45%; 3/31/13 500,000 545,975
Province of Saskatchewan, Canada
Global Notes; 8.00%; 2/1/13 500,000 568,310
1,114,285
Gold & Silver Ores (2.16%)
Placer Dome, Inc. Notes;
7.13%; 6/15/07 750,000 776,626
Grain Mill Products (3.03%)
Ralston Purina Co. Debentures;
7.75%; 10/1/15 1,000,000 1,085,340
Hospitals (1.67%)
Columbia/HCA Healthcare Corp.
Medium-Term Notes; 8.70%; 2/10/10
500,000 599,590
Household Appliances (1.63%)
Maytag Corp. Medium-Term Notes;
8.62%; 11/15/07 500,000 584,950
Household Furniture (1.44%)
Masco Corp. Debentures;
7.13%; 8/15/13 500,000 516,783
Industrial Inorganic Chemicals (2.09%)
FMC Corp. Senior Notes;
6.38%; 9/1/03 200,000 198,670
Grace, (W.R.) & Co. Guaranteed
Notes; 8.00%; 8/15/04 500,000 551,893
750,563
Iron Ores (1.17%)
Cyprus Minerals Co. Notes;
10.13%; 4/1/02 350,000 419,594
Machinery, Equipment &
Supplies (2.12%)
AAR Corp. Notes; 7.25%; 10/15/03 750,000 759,174
Metalworking Machinery (0.57%)
Black & Decker Corp. Notes;
7.00%; 2/1/06 200,000 206,194
Millwork, Plywood & Structural
Members (0.34%)
Georgia-Pacific Corp. Debentures;
9.50%; 12/1/11 100,000 122,863
Miscellaneous Chemical
Products (1.19%)
Ferro Corp. Senior Debentures;
7.63%; 5/1/13 400,000 426,336
Miscellaneous Investing (2.21%)
Weingarten Realty Investors
Medium-Term Notes;
7.29%; 5/23/05 750,000 792,765
Miscellaneous Metal Ores (1.19%)
Cyprus Amax Minerals Notes;
7.38%; 5/15/07 $400,000 $ 427,255
Motion Picture Production &
Services (1.06%)
Columbia Pictures Entertainment, Inc.
Senior Subordinated Notes;
9.88%; 2/1/98 350,000 378,691
Motor Vehicles & Equipment (3.12%)
Arvin Overseas Finance B.V.
Medium-Term Notes;
9.62%; 8/9/96 250,000 254,762
TRW, Inc. Medium-Term Notes;
9.25%; 12/30/11 700,000 864,066
1,118,828
Newpapers (2.36%)
News America Holdings, Inc. Guaranteed
Senior Notes; 8.50%; 2/15/05 750,000 845,198
Paper Mills (4.38%)
Bowater, Inc. Debentures;
9.38%; 12/15/21 200,000 256,778
Champion International Corp. Notes;
9.88%; 6/1/00 250,000 287,609
Chesapeake Corp. Notes;
7.20%; 3/15/05 400,000 421,244
Potlatch Corp. Medium-Term Notes;
8.75%; 1/14/22 500,000 604,820
1,570,451
Personal Credit Institutions (2.99%)
General Motors Acceptance Corp.
Medium-Term Notes;
8.25%; 2/24/04 500,000 560,025
General Motors Acceptance Corp.
Notes; 6.63%; 10/15/05 500,000 511,708
1,071,733
Petroleum Refining (7.51%)
Ashland Oil, Inc. Medium-Term Notes;
7.71%; 5/11/07 500,000 549,360
7.73%; 7/15/13 250,000 270,920
Pennzoil Co. Debentures;
10.13%; 11/15/09 325,000 415,187
Phillips Petroleum Co. Notes;
9.38%; 2/15/11 500,000 629,856
Sun Co., Inc. Debentures;
9.00%; 11/1/24 500,000 617,690
Sun Co., Inc. Notes;
7.13%; 3/15/04 200,000 210,706
2,693,719
Primary Nonferrous Metals (2.31%)
Amax, Inc. Notes; 9.88%; 6/13/01 100,000 113,767
Reynolds Metals Co.
Medium-Term Notes;
8.34%; 5/22/07 500,000 576,270
7.65%; 2/4/08 125,000 137,682
827,719
Pulp Mills (0.64%)
International Paper Co. Medium-Term
Notes; 9.70%; 8/15/00 200,000 229,492
Refrigeration & Service
Machinery (0.97%)
Westinghouse Electric Corp.
Debentures; 8.63%; 8/1/12 $350,000 $ 349,412
Rental of Railroad Cars (0.50%)
Signal Capital Corp. Equipment Trust
Certificates; 9.95%; 2/1/06 179,000 178,553
Sanitary Services (2.30%)
Laidlaw, Inc. Senior Notes;
7.88%; 4/15/05 750,000 825,367
Sawmills & Planning Mills (2.34%)
MacMillan Bloedel Delaware
Guaranteed Notes;
8.50%; 1/15/04 750,000 840,664
Telephone Communication (4.41%)
Sprint Corp. Notes;
8.13%; 7/15/02 500,000 553,081
U.S. West Capital Funding, Inc.;
6.83%; 11/15/07 1,000,000 1,029,430
1,582,511
Variety Stores (2.86%)
Dayton-Hudson Corp. Debentures;
9.63%; 2/1/08 150,000 188,632
Dayton-Hudson Corp. Sinking Fund
Debentures; 9.50%; 10/15/16 250,000 267,462
Shopko Stores, Inc. Senior Notes;
9.00%; 11/15/04 500,000 569,152
1,025,246
Total Bonds 33,406,273
Commercial Paper (4.67%)
Federal & Federally Sponsored
Credit (2.44%)
FHLMC
5.75%; 1/2/96 875,000 875,000
Personal Credit Institutions (2.23%)
Ford Motor Credit Co.
5.65%; 1/5/96 800,000 799,623
Total Commercial Paper 1,674,623
Total Portfolio Investments (97.78%) 35,080,896
Cash and receivables, net of liabilities (2.22%) 796,763
Total Net Assets (100.00%) $35,877,659
PRINCIPAL CAPITAL ACCUMULATION
FUND, INC.
Shares
Held Value
Common Stocks (98.32%)
Advertising (0.98%)
Interpublic Group of Cos., Inc. 31,000 $ 1,344,625
Air Transportation, Scheduled (0.44%)
Southwest Airlines Co. 25,500 592,875
Automotive Rentals, No Drivers (1.03%)
Ryder Systems, Inc. 56,800 1,405,800
Beverages (3.23%)
Pepsico, Inc. 66,100 3,693,337
Universal Foods Corp. 17,200 690,150
4,383,487
Combination Utility Services (1.05%)
Cinergy Corp. 46,500 1,424,063
Commercial Banks (7.63%)
Banc One Corp. 37,400 1,411,850
Boatmen's Bancshares, Inc. 31,200 1,275,300
Chase Manhattan Bank Corp. 20,900 1,267,063
Comerica, Inc. 37,300 1,496,662
First of America Bank Corp. 28,700 1,273,562
Firstar Corp. 31,300 1,240,263
KeyCorp 47,200 1,711,000
Nationsbank Corp. 9,600 668,400
10,344,100
Communications Equipment (3.25%)
Allen Group, Inc. 16,000 358,000
DSC Communications Corp. 36,200(a) 1,334,875
General Instrument Corp. 77,500(a) 1,811,563
Northern Telecom Ltd. 21,100 907,300
4,411,738
Computer & Office Equipment (2.23%)
Hewlett-Packard Co. 15,200 1,273,000
International Business
Machines Corp. 19,100 1,752,425
3,025,425
Construction & Related
Machinery (1.46%)
Caterpillar, Inc. 33,600 1,974,000
Crude Petroleum & Natural Gas (2.19%)
Texaco, Inc. 37,900 2,975,150
Dairy Products (0.71%)
Dean Foods Co. 35,000 962,500
Department Stores (0.99%)
Sears, Roebuck & Co. 34,500 1,345,500
Drugs (8.95%)
American Home Products Corp. 21,400 2,075,800
Bristol-Myers Squibb Co. 38,000 3,263,250
Lilly (Eli) & Co. 29,000 1,631,250
Merck & Co., Inc. 53,200 3,497,900
Warner-Lambert Co. 17,200 1,670,550
12,138,750
Eating & Drinking Places (1.13%)
McDonald's Corp. 34,000 $1,534,250
Electric Services (3.41%)
Dominion Resources, Inc. 44,400 1,831,500
FPL Group, Inc. 30,500 1,414,437
Potomac Electric Power Co. 52,400 1,375,500
4,621,437
Electrical Industrial Apparatus (1.95%)
Emerson Electric Co. 32,290 2,639,708
Electronic Components &
Accessories (1.59%)
Duracell International, Inc. 41,600 2,152,800
Electronic Distribution
Equipment (2.60%)
General Electric Co. 49,000 3,528,000
Engineering & Architectural
Services (0.05%)
Dun & Bradstreet Corp. 1,100 71,225
Fats & Oils (1.50%)
Archer Daniels Midland Co. 113,000 2,034,000
Fire, Marine & Casualty
Insurance (1.29%)
Allstate Corp. 42,643 1,753,693
General Industrial Machinery (0.88%)
BW/IP Holdings, Inc., Class A 23,000 379,500
Pall Corp. 30,100 808,937
1,188,437
Grain Mill Products (2.06%)
Ralston-Ralston Purina Group 44,800 2,794,400
Grocery Stores (4.40%)
Albertsons Inc. 48,100 1,581,288
American Stores Co. 68,500 1,832,375
Sysco Corp. 78,800 2,561,000
5,974,663
Household Furniture (1.27%)
Masco Corp. 55,100 1,728,763
Industrial Inorganic Chemicals (1.55%)
Dow Chemical Co. 29,800 2,097,175
Insurance Agents, Brokers &
Services (1.05%)
Equifax, Inc. 66,600 1,423,575
Jewelry, Silverware & Plated
Ware (0.57%)
Jostens, Inc. 31,700 768,725
Meat Products (1.37%)
Tyson Foods, Inc. 71,100 1,857,487
Medical Instruments & Supplies (2.01%)
Becton, Dickinson & Co. 13,500 $ 1,012,500
St. Jude Medical, Inc. 29,100 1,251,300
United States Surgical Corp. 21,900 468,113
2,731,913
Medical Service & Health
Insurance (3.87%)
Aon Corp. 28,450 1,418,944
Foundation Health Corp. 33,400(a) 1,436,200
Physicians Corp. of America 22,900(a) 389,300
U.S. Healthcare, Inc. 43,000 1,999,500
5,243,944
Metal Forgings & Stampings (2.02%)
Newell Co. 105,700 2,734,987
Metalworking Machinery (0.28%)
Giddings & Lewis 23,000 379,500
Miscellaneous Business Services (0.50%)
Safety-Kleen Corp. 43,500 679,688
Miscellaneous Converted Paper
Products (4.30%)
Avery Dennison Corp. 32,100 1,609,012
Minnesota Mining & Mfg. Co. 63,800 4,226,750
5,835,762
Miscellaneous Electrical Equipment
& Supplies (2.35%)
Motorola, Inc. 55,900 3,186,300
Miscellaneous Fabricated Metal
Products (0.40%)
Keystone International, Inc. 27,300 546,000
Miscellaneous Shopping Goods
Stores (1.42%)
Toys 'R' Us, Inc. 88,300(a) 1,920,525
Offices & Clinics of Medical
Doctors (0.86%)
FHP International Corp. 40,800(a) 1,162,800
Petroleum Refining (2.97%)
Atlantic Richfield Co. 12,900 1,428,675
Exxon Corp. 32,400 2,596,050
4,024,725
Photographic Equipment &
Supplies (0.60%)
Eastman Chemical Co. 12,900 807,863
Plastic Materials & Synthetics (0.39%)
Wellman, Inc. 23,000 523,250
Sanitary Services (3.68%)
Browning-Ferris Industries, Inc. 49,800 1,469,100
WMX Technologies, Inc. 117,900 3,522,263
4,991,363
Security Brokers & Dealers (0.63%)
Edwards (A.G.), Inc. 36,015 859,858
Soap, Cleaners, & Toilet Goods (3.12%)
Avon Products 33,900 $ 2,555,212
Colgate-Palmolive Co. 23,800 1,671,950
4,227,162
Telephone Communication (4.06%)
AT&T Corp. 48,300 3,127,425
MCI Communications Corp. 91,400 2,387,825
5,515,250
Variety Stores (4.05%)
Dayton-Hudson Corp. 41,800 3,135,000
Wal-Mart Stores, Inc. 105,700 2,365,037
5,500,037
Total Common Stocks 133,367,278
Principal
Amount Value
Commercial Paper (2.00%)
Business Credit Institutions (2.00%)
American Express Credit Co.
5.55%; 1/2/96 $2,700,000$ 2,700,000
Total Portfolio Investments (100.32%) 136,067,278
Liabilities, net of cash and receivables (-0.32%) (427,598)
Total Net Assets (100.00%) $135,639,680
(a) Non-income producing security - No dividend paid during the past twelve
months.
PRINCIPAL EMERGING GROWTH FUND, INC.
Shares
Held Value
Common Stocks (79.86%)
Blast Furnace & Basic Steel
Products (1.47%)
Lukens, Inc. 30,000 $ 862,500
Carpets & Rugs (1.26%)
Shaw Industries, Inc. 50,000 737,500
Chemicals & Allied Products (0.85%)
Sigma-Aldrich Corp. 10,000 495,000
Commercial Banks (5.28%)
Boatmen's Bancshares, Inc. 6,100 249,337
First Federal Capital Corp. 40,665 731,970
Hawkeye Bancorp. 6,000 159,750
Independent Bank Corp. Michigan 25,200 674,100
Mercantile Bancorp., Inc. 5,373 247,158
Merchants Bancorp., Inc. 11,500 327,750
Peoples Heritage Financial
Group, Inc. 11,100 $ 252,525
Princeton National Bancorp., Inc. 25,800 445,050
3,087,640
Commercial Printing (0.49%)
Bowne & Co., Inc. 4,000 80,000
Merrill Corp. 13,000 208,000
288,000
Communications Equipment (0.48%)
California Amplifier, Inc. 10,000(a) 282,500
Computer & Data Processing
Services (5.96%)
American Management Systems, Inc. 35,000(a) 1,050,000
Cerner Corp. 50,000(a) 1,025,000
HBO & Co. 7,000 536,375
Microsoft Corp. 10,000(a) 877,500
3,488,875
Computer & Office Equipment (0.79%)
EMC Corp. 30,000(a) 461,250
Construction & Related
Machinery (0.43%)
Energy Ventures, Inc. 10,000(a) 252,500
Crude Petroleum & Natural
Gas (0.26%)
Devon Energy Corp. 6,000 153,000
Dairy Products (0.57%)
Dreyer's Grand Ice Cream, Inc. 10,000 332,500
Drugs (2.61%)
Alliance Pharmaceutical Corp. 30,000(a) 408,750
Forest Laboratories, Inc. 10,000(a) 452,500
Pharmacia & Upjohn, Inc. 15,000 581,250
Seragen, Inc. 20,000(a) 82,500
1,525,000
Eating & Drinking Places (0.60%)
Ryan's Family Steak Houses, Inc. 50,000(a) 350,000
Electronic Components &
Accessories (5.88%)
Intel Corp. 20,000 1,135,000
Linear Technology Corp. 25,000 981,250
Solectron Corp. 30,000(a) 1,323,750
3,440,000
Engineering & Architectural
Services (1.28%)
Paychex, Inc. 15,000 748,125
Finance Services (1.38%)
First Financial Corp. 35,000 805,000
Fire, Marine, & Casualty
Insurance (3.25%)
Avemco Corp. 35,000 560,000
Berkley W.R. Corp. 25,000 1,343,750
1,903,750
Footwear, Except Rubber (0.83%)
Nine West Group, Inc. 13,000(a) 487,500
General Industrial Machinery (5.76%)
Flow International Corp. 55,000(a) $ 515,625
Kaydon Corp. 25,000 759,375
Pentair, Inc. 20,000 995,000
Roper Industries, Inc. 30,000 1,102,500
3,372,500
Grocery Stores (0.93%)
Casey's General Stores, Inc. 25,000 546,875
Hardware Stores (0.88%)
Central Tractor Farm
& Country, Inc. 50,000(a) 512,500
Holding Offices (0.93%)
ISB Financial Corp. 20,000 300,000
Today's Bancorp., Inc. 11,000 244,063
544,063
Hose, Belting, Gaskets
& Packing (1.06%)
Mark IV Industries 31,500 622,125
Hospitals (3.77%)
Humana, Inc. 40,000(a) 1,095,000
Universal Health Services, Inc.;
Class B 25,000(a) 1,109,375
2,204,375
Industrial Inorganic Chemicals (0.92%)
AMSCO International, Inc. 36,000(a) 535,500
Insurance Agents, Brokers &
Services (1.83%)
Equifax, Inc. 50,000 1,068,750
Investment Offices (1.32%)
INVESCO PLC ADS 20,000 775,000
Iron & Steel Foundries (0.71%)
Atchison Casting Corp. 30,000(a) 360,000
Intermet Corp. 5,400(a) 56,700
416,700
Laundry, Cleaning & Garment
Services (0.85%)
G & K Services, Inc.; Class A 19,525 497,888
Life Insurance (0.65%)
First Colony Corp. 15,000 380,625
Measuring & Controlling
Devices (0.75%)
ISCO, Inc. 8,613 79,666
Photon Dynamics 45,000(a) 360,000
439,666
Meat Products (0.79%)
Michael Foods, Inc. 40,000 465,000
Medical Instruments
& Supplies (3.13%)
Andros Analyzers, Inc. 12,000(a) 183,000
Boston Scientific Corp. 17,417(a) 853,433
MDT Corp. 20,000(a) 97,500
Nellcor Puritan Bennett 12,000(a) 696,000
1,829,933
Medical Service & Health
Insurance (4.08%)
Foundation Health Corp. 25,000(a) $1,075,000
United Healthcare Corp. 20,000 1,310,000
2,385,000
Metal Forgings & Stampings (0.61%)
Varlen Corp. 16,656 358,104
Metal Services, NEC (1.51%)
BMC Industries, Inc. 38,000 883,500
Miscellaneous Chemical
Products (4.41%)
Cytec Industries 15,000(a) 935,625
H.B. Fuller Co. 20,000 695,000
Loctite Corp. 20,000 950,000
2,580,625
Miscellaneous Plastics Products,
NEC (0.17%)
Rubbermaid, Inc. 4,000 102,000
Nursing & Personal Care
Facilities (0.03%)
Horizon Healthcare Corp. 629(a) 15,882
Office Furniture (1.34%)
Chromcraft Revington, Inc. 20,000(a) 532,500
Kimball International, Inc.;
Class B 10,000 252,500
785,000
Operative Builders (0.60%)
Pulte Corp. 10,421 350,406
Paints & Allied Products (1.06%)
RPM, Inc. 37,500 618,750
Pens, Pencils, Office & Art
Supplies (0.14%)
Hunt Mfg. Co. 4,750 82,531
Personnel Supply Services (0.45%)
Olsten Corp. 6,703 264,769
Plastic Materials & Synthetics (1.15%)
A. Schulman, Inc. 30,000 675,000
Plumbing, Heating,
Air-Conditioning (1.47%)
Apogee Enterprises, Inc. 40,000 680,000
Metalclad Corp. 45,600(a) 182,400
862,400
Refrigeration & Service
Machinery (0.53%)
Tecumseh Products Co.; Class A 6,000 310,500
Sanitary Services (0.76%)
Browning-Ferris Industries, Inc. 15,000 442,500
Savings Institutions (0.31%)
Sterling Financial Corp. 13,200(a) 181,500
Screw Machine Products,
Bolts, Etc. (0.97%)
TriMas Corp. 30,000 566,250
Security Brokers & Dealers (0.81%)
Jefferies Group, Inc. 10,000 $ 472,500
Special Industry Machinery (0.14%)
Key Technology, Inc. 6,000(a) 83,250
Toys & Sporting Goods (0.74%)
Mattel, Inc. 14,000 430,500
Trucking & Courier Services,
Ex., Air (0.63%)
J. B. Hunt Transport Services, Inc.22,000 368,500
Total Common Stocks 46,731,607
Preferred Stocks (1.00%)
Gas Production & Distribution (0.09%)
Kelley Oil & Gas Corp.
Convertible 7,189 50,323
Offices & Clinics of Medical
Doctors (0.91%)
FHP International Corp.
Series A Convertible 20,000 532,500
Total Preferred Stocks 582,823
Principal
Amount Value
Bonds (2.07%)
Combination Utility Services (0.00%)
Bonneville Pacific Corp. Convertible
Subordinated Debentures;
7.75%; 8/15/09 $100,000(b) $ 0
Computer & Data Processing
Services (0.39%)
Sierra On Line Convertible
Subordinated Debentures;
6.50%; 4/1/01 110,000(c) 225,087
Drugs (0.21%)
Genzyme Corp.
Convertible Notes;
6.75%; 10/1/01 100,000 123,750
Industrial Inorganic Chemicals (0.81%)
Ciba-Geigy Corp. Exchangeable
Subordinated Debentures;
6.25%; 3/15/16 150,000(c) 151,500
ICN Pharmaceuticals, Inc. Convertible
Subordinated Debentures;
8.50%; 11/15/99 300,000 323,625
475,125
Nursing & Personal Care
Facilities (0.38%)
Greenery Rehabilitation Group, Inc.
Convertible Senior Subordinated
Notes; 8.75%; 4/1/15 $250,000 $ 222,500
Sanitary Services (0.28%)
Enclean, Inc. Convertible Subordinated
Debentures; 7.50%; 8/1/01 100,000 104,505
Sanifill, Inc. Convertible Subordinated
Debentures; 7.50%; 6/1/06 50,000 59,000
163,505
Total Bonds 1,209,967
Commercial Paper (18.51%)
Business Credit Institutions (7.37%)
American Express Credit Corp.;
5.75%; 1/2/96 2,470,000 2,470,000
John Deere Capital Corp.;
5.70%; 1/3/96 1,345,000 1,344,787
5.75%; 1/5/96 500,000 499,760
4,314,547
Life Insurance (4.32%)
Prudential Funding Corp.;
5.52%; 1/2/96 1,000,000 1,000,000
5.92%; 1/5/96 1,530,000 1,529,245
2,529,245
Personal Credit Institutions (6.82%)
Beneficial Corp.
5.80%; 1/4/96 1,520,000 1,519,510
Ford Motor Credit Co.;
5.65%; 1/8/96 2,475,000 2,472,670
3,992,180
Total Commercial Paper 10,835,972
Total Portfolio Investments (101.44%) 59,360,369
Liabilities, net of cash and receivables (-1.44%) (839,929)
Total Net Assets (100.00%) $58,520,440
(a) Non-income producing security - No dividend paid during the past twelve
months.
(b) Non-income producing security - Security in default.
(c) Restricted Security - See Note 4 to the financial statements.
PRINCIPAL GOVERNMENT SECURITIES
FUND, INC.
Description of Issue Principal
Type Rate Maturity Amount Value
Government National Mortgage Association (GNMA)
Certificates (21.67%)
GNMA I 7.00% 1/15/24 $ 876,586 $ 887,587
GNMA I 8.00 10/15/16-6/15/17 2,160,616 2,272,165
GNMA I 8.50 2/15/17-5/15/21 3,724,204 3,947,013
GNMA II 6.00 5/20/24-11/20/25 2,865,926 2,759,915
GNMA II 6.50 12/20/25 1,001,500 986,357
Total GNMA Certificates 10,853,037
Federal National Mortgage Association (FNMA)
Certificates (17.73%)
FNMA 6.00 11/1/23 1,188,896 1,149,531
FNMA 6.50 11/1/23-7/1/25 2,818,464 2,788,161
FNMA 7.00 8/1/23 842,981 850,104
FNMA 7.50 4/1/22 639,726 656,832
FNMA 8.00 6/1/17-8/15/25 597,128 619,912
FNMA GL 6.50 8/15/25 997,624 986,102
FNMA Major 7.50 4/1/22 569,013 583,910
FNMA Major 8.00 10/1/21 329,535 341,721
FNMA Note 8.01 2/16/99 900,000 903,328
Total FNMA Certificates 8,879,601
Federal Home Loan Mortgage Corporation (FHLMC) Certificates (24.82%)
FHLMC Gold 5.50 2/1/24-3/1/24 1,583,285 1,493,349
FHLMC Gold 6.00 12/1/23-1/15/26* 2,979,395 2,882,595
FHLMC Gold 6.50 4/1/24-10/15/25 2,403,422 2,377,922
FHLMC Gold 7.00 9/1/23-1/1/24 2,716,777 2,744,393
FHLMC Gold 7.50 2/1/22-6/1/24 1,974,440 2,028,110
FHLMC Gold 8.00 11/1/21 869,620 902,344
Total FHLMC Certificates 12,428,713
Principal
Amount Value
Student Loan Marketing Association (SLMA)
Certificates (18.26%)
Student Loan Marketing Association
Debentures; 7.30%; 8/1/12 7,500,000 8,126,789
Student Loan Marketing Association
Notes; 7.82%; 10/14/99 1,000,000 1,019,658
Total SLMA Certificates 9,146,447
Private Export Funding Corporation (PEFCO)
Certificates (16.70%)
Private Export Funding Corp.
Secured Notes;
5.80%; 2/1/04 $2,200,000 $2,210,956
6.62%; 10/1/05 1,000,000 1,053,870
9.45%; 12/31/99 4,500,000 5,097,915
Total PEFCO Certificates 8,362,741
Federal Agency Short-Term Obligations (1.52%)
Federal Home Loan Mortgage Corp.;
5.75%; 1/2/96 760,000 760,000
Total Portfolio Investments (100.70%) 50,430,539
Liabilities, net of cash and receivables (-0.70%) (351,070)
Total Net Assets (100.00%) $50,079,469
* Includes securities purchased on a to-be-announced basis (see Note 4 to the
financial statements).
PRINCIPAL GROWTH FUND, INC.
Shares
Held Value
Common Stocks (91.89%)
Advertising (1.02%)
Interpublic Group of Cos., Inc. 10,000 $ 433,750
Beverages (1.31%)
Pepsico, Inc. 10,000 558,750
Blast Furnace & Basic Steel
Products (0.84%)
Lukens, Inc. 12,500 359,375
Carpets & Rugs (1.21%)
Shaw Industries, Inc. 35,000 516,250
Cash Grains (1.95%)
Pioneer Hi-Bred International 15,000 834,375
Commercial Banks (5.62%)
Banc One Corp. 15,000 566,250
Barnett Banks, Inc. 5,000 295,000
Baybanks, Inc. 5,000 491,250
Boatmen's Bancshares, Inc. 6,000 245,250
Firstar Corp. 15,000 594,375
Princeton National Bancorp., Inc. 12,000 207,000
2,399,125
Communications Equipment (4.25%)
General Instrument Corp. 50,000(a) 1,168,750
Northern Telecom Ltd. 15,000 645,000
1,813,750
Computer & Data Processing
Services (1.23%)
Microsoft Corp. 6,000(a) $ 526,500
Computer & Office Equipment (3.27%)
Automatic Data Processing, Inc. 10,000 742,500
Hewlett-Packard Co. 5,000 418,750
Pitney Bowes, Inc. 5,000 235,000
1,396,250
Consumer Products (2.12%)
Philip Morris Cos., Inc. 10,000 905,000
Department Stores (0.99%)
May Department Stores 10,000 422,500
Drugs (9.42%)
Alliance Pharmaceutical Corp. 10,000(a) 136,250
Bristol-Myers Squibb Co. 10,000 858,750
Johnson & Johnson 10,000 856,250
Lilly (Eli) & Co. 20,000 1,125,000
Merck & Co., Inc. 10,000 657,500
Pharmacia & Upjohn, Inc. 10,000 387,500
4,021,250
Eating & Drinking Places (0.74%)
McDonald's Corp. 7,000 315,875
Electrical Goods (0.52%)
Avnet, Inc. 5,000 223,750
Electronic Components &
Accessories (3.17%)
Linear Technology Corp. 20,000 785,000
Intel Corp. 10,000 567,500
1,352,500
Electronic Distribution
Equipment (0.84%)
General Electric Co. 5,000 360,000
Engineering & Architectural
Services (0.76%)
Dun & Bradstreet Corp. 5,000 323,750
Footwear, Except Rubber (0.53%)
Stride Rite Corp. 30,000 225,000
General Industrial Machinery (2.49%)
Ingersoll-Rand Co. 10,000 351,250
Tyco International Ltd. 20,000 712,500
1,063,750
Grain Mill Products (2.31%)
Ralcorp Holdings, Inc. 15,000(a) 363,750
Ralston-Ralston Purina Group 10,000 623,750
987,500
Hose, Belting, Gaskets &
Packing (0.92%)
Mark IV Industries 20,000 395,000
Hospitals (3.48%)
Humana, Inc. 30,000(a) $ 821,250
Universal Health Services, Inc.,
Class B 15,000(a) 665,625
1,486,875
Household Furniture (1.10%)
Masco Corp. 15,000 470,625
Investment Offices (0.91%)
Invesco PLC ADR 10,000 387,500
Knitting Mills (0.65%)
Russell Corp. 10,000 277,500
Lumber & Other Building
Materials (1.68%)
Home Depot, Inc. 15,000 718,125
Medical Instruments & Supplies (6.23%)
Andros Analyzers, Inc. 20,000(a) 305,000
Becton, Dickinson & Co. 10,000 750,000
Boston Scientific Corp. 15,000(a) 735,000
Nellcor Puritan Bennett 15,000(a) 870,000
2,660,000
Medical Service & Health
Insurance (6.78%)
Aon Corp. 10,000 498,750
Foundation Health Corp. 15,000(a) 645,000
Health System International, Inc. 2,500(a) 80,312
United Healthcare Corp. 15,000 982,500
Value Health, Inc. 25,000(a) 687,500
2,894,062
Millwork, Plywood &
Structural Members (0.48%)
Georgia-Pacific Corp. 3,000 205,875
Miscellaneous Chemical
Products (1.11%)
Loctite Corp. 10,000 475,000
Miscellaneous Electrical Equipment
& Supplies (1.33%)
Motorola, Inc. 10,000 570,000
Miscellaneous Plastics Products,
NEC (0.60%)
Rubbermaid, Inc. 10,000 255,000
Miscellaneous Shopping Goods
Stores (0.76%)
Toys 'R' Us, Inc. 15,000(a) 326,250
Motor Vehicles & Equipment (2.67%)
Chrysler Corp. 10,000 553,750
Dana Corp. 20,000 585,000
1,138,750
Offices & Clinics of Medical
Doctors (0.50%)
FHP International Corp. 7,500 213,750
Paints & Allied Products (0.96%)
RPM, Inc. 25,000 412,500
Petroleum Refining (1.79%)
Atlantic Richfield Co. 4,000 $ 443,000
Exxon Corp. 4,000 320,500
763,500
Plastic Materials & Synthetics (0.79%)
A. Schulman, Inc. 15,000 337,500
Preserved Fruits & Vegetables (1.12%)
CPC International, Inc. 7,000 480,375
Radio, Television &
Computer Stores (0.49%)
Tandy Corp. 5,000 207,500
Refrigeration & Service
Machinery (0.91%)
Tecumseh Products Co.; Class A 7,500 388,125
Rubber & Plastics Footwear (1.63%)
Nike, Inc. 10,000 696,250
Sanitary Services (1.88%)
Browning-Ferris Industries, Inc. 12,000 354,000
WMX Technologies, Inc. 15,000 448,125
802,125
Security Brokers & Dealers (0.83%)
Salomon, Inc. 10,000 355,000
Soap, Cleaners & Toilet Goods (5.83%)
Colgate-Palmolive Co. 7,000 491,750
Ecolab, Inc. 20,000 600,000
International Flavors & Fragrances,
Inc. 6,000 288,000
Smithkline Beecham PLC ADR 20,000 1,110,000
2,489,750
Toys & Sporting Goods (1.08%)
Mattel, Inc. 15,000 461,250
Variety Stores (0.79%)
Wal-Mart Stores, Inc. 15,000 335,625
Total Common Stock 39,242,812
Preferred Stocks (0.76%)
Offices & Clinics of Medical
Doctors (0.76%)
FHP International Corp.;
Series A Convertible 12,182 324,346
Principal
Amount Value
Commercial Paper (6.98%)
Business Credit Institutions (3.51%)
American Express Credit Corp.
5.55%; 1/2/96 $1,500,000 $1,500,000
Personal Credit Institutions (3.47%)
Ford Motor Credit Co.
5.65%; 1/5/96 1,485,000 1,484,301
Total Commercial Paper 2,984,301
Total Portfolio Investments (99.63%) $42,551,459
Cash and receivables, net of liabilities (0.37%) 156,062
Total Net Assets (100.00%) $42,707,521
(a) Non-income producing security - No dividend paid during the past twelve
months.
PRINCIPAL HIGH YIELD FUND, INC.
Principal
Amount Value
Bonds (96.27%)
Agricultural Chemicals (2.71%)
IMC Fertilizer Group, Inc. Senior
Debentures; 9.45%; 12/15/11 $300,000 $321,000
Aircraft & Parts (2.36%)
Rohr Industries, Inc. Subordinated
Debentures; 9.25%; 3/1/17 300,000 279,000
Blast Furnace & Basic Steel
Products (3.64%)
Ivaco Senior Notes;
11.50%; 9/1/05 150,000 147,750
Weirton Steel Corp. Senior Notes;
10.75%; 6/1/05 300,000 282,750
430,500
Broadwoven Fabric Mills,
Cotton (2.54%)
J.P. Stevens & Co. Inc.
Sinking Fund Debentures;
9.00%; 3/1/17 300,000 300,000
Cable & Other Pay TV Services (5.26%)
Continental Cablevision, Inc.
Senior Notes; 8.30%; 5/15/06 300,000(a) 300,000
Jones Intercable, Inc. Senior Notes;
9.63%; 3/15/02 300,000 322,125
622,125
Cogeneration - Small Power
Producer (1.32%)
California Energy Co., Inc.
Ltd. Resource Senior Secured Notes;
9.88%; 6/30/03 150,000 156,000
Communications Equipment (2.67%)
Rogers Cantel Mobile, Inc. Senior
Secured Guaranteed Notes;
10.75%; 11/1/01 300,000 316,125
Computer & Data Processing
Services (2.81%)
Tenet Healthcare Corp.
Senior Subordinated Notes;
10.13%; 3/1/05 300,000 332,250
Computer & Office Equipment (3.74%)
Dell Computer Corp. Senior Notes;
11.00%; 8/15/00 400,000 442,000
Consumer Products (3.47%)
RJR Nabisco, Inc. Senior Notes;
8.75%; 8/15/05 $400,000 $ 410,500
Electric Services (3.45%)
Tucson Electric Power Co.
First Mortgage Bonds;
8.50%; 11/1/99 400,000 408,639
Engines & Turbines (2.43%)
Outboard Marine Debentures;
9.13%; 4/15/17 300,000 288,000
Ferroalloy Ores, Except
Vanadium (0.99%)
Geneva Steel Co. Senior Notes;
9.50%; 1/15/04 150,000 116,625
Forest Products (2.53%)
Doman Industries, Ltd. Senior
Notes; 8.75%; 3/15/04 300,000 299,511
Fuel Dealers (2.49%)
Petroleum Heat & Power Co., Inc.
Subordinated Notes;
10.13%; 4/1/03 300,000 294,000
General Government, NEC (1.07%)
Republic of Argentina Global
Bonds; 8.38%; 12/20/03 150,000 126,750
Groceries & Related Products (5.03%)
Fleming Cos., Inc. Senior Notes;
10.63%; 12/15/01 300,000 297,000
Rykoff-Sexton, Inc. Senior
Subordinated Notes;
8.88%; 11/1/03 300,000 298,500
595,500
Grocery Stores (5.91%)
Dominick's Finer Foods, Inc.
Senior Subordinated Notes;
10.88%; 5/1/05 150,000 158,250
Ralph's Grocery Co.
Senior Subordinated Notes;
11.00%; 6/15/05 300,000 292,500
Stater Brothers Holdings, Inc.
Senior Notes;
11.00%; 3/1/01 250,000 248,750
699,500
Hotels & Motels (5.06%)
Bally's Grand, Inc. First Mortgage
Notes; 10.38%; 12/15/03 300,000 304,500
John Q. Hammons Hotels, L.P. &
Finance Corp. First Mortgage
Notes; 8.88%; 2/15/04 300,000 294,375
598,875
Knitting Mills (2.58%)
Tultex Corp. Senior Notes
10.63%; 3/15/05 300,000 305,250
Miscellaneous Amusement, Recreation
Service (1.30%)
Rio Hotel & Casino, Inc.
Senior Subordinated Notes;
10.63%; 7/15/05 $150,000 $153,750
Miscellaneous Converted Paper
Products (1.27%)
Drypers Corp. Senior Notes;
12.50%; 11/1/02 300,000(b) 150,000
Miscellaneous Plastics Products,
NEC (5.14%)
Congoleum Corp. Senior Notes;
9.00%; 2/1/01 300,000 303,000
Plastic Containers, Inc. Senior
Secured Notes; 10.75%; 4/1/01 300,000 305,625
608,625
Motor Vehicles & Equipment (2.49%)
Lear Seating Corp. Subordinated
Notes; 8.25%; 2/1/02 300,000 294,000
Nonferrous Foundries (Casting) (1.33%)
Howmet Corp., Senior
Subordinated Debentures;
10.00%; 12/1/03 150,000(a) 157,500
Petroleum Refining (2.66%)
Crown Central Petroleum Corp.
Senior Notes; 10.88%; 2/1/05 300,000 315,000
Pulp Mills (3.08%)
Magnetek, Inc. Senior Subordinated
Debentures; 10.75%; 11/15/98 350,000 364,000
Radio, Television & Computer
Stores (2.54%)
Compusa, Inc. Senior
Subordinated Notes;
9.50%; 6/15/00 300,000 300,000
Radio & Television
Broadcasting (2.99%)
Act III Broadcasting, Inc.
Senior Subordinated Notes;
10.25%; 12/15/05 150,000 153,187
EZ Communications, Inc.
Senior Subordinated Notes;
9.75%; 12/1/05 200,000 201,000
354,187
Soap, Cleaners & Toilet Goods (2.69%)
Coty, Inc. Senior Subordinated
Notes; 10.25%; 5/1/05 300,000 318,000
Telephone Communication (6.16%)
Paging Network, Inc. Senior
Debentures; 8.88%; 2/1/06 300,000 307,125
Rogers Cablesystems Ltd. Senior
Secured Second Priority Notes;
9.63%; 8/1/02 250,000 262,500
Telecom Argentina Stet-France
Telecom SA Senior Notes;
12.00%; 11/15/02 150,000 159,375
729,000
Water Supply (2.56%)
California Energy Casecnan Water
& Energy Co., Inc. Senior
Secured Series B ;
11.95%; 11/15/10 $300,000(a) $ 303,000
Total Portfolio Investments (96.27%) 11,389,212
Cash and receivables, net of liabilities (3.73%) 440,721
Total Net Assets (100.00%) $11,829,933
(a) Restricted Security - See Note 4 to the financial statements.
(b) Non-income producing security - security in default.
PRINCIPAL MONEY MARKET FUND, INC.
Principal
Amount Value
Commercial Paper (95.57%)
Business Credit Institutions (17.90%)
American Express Credit Corp.;
5.58%; 3/15/96 $450,000 $ 444,908
5.47%; 3/19/96 325,000 321,198
5.53%; 4/10/96 350,000 344,677
5.52%; 5/3/96 150,000 147,194
5.58%; 5/28/96 290,000 283,392
CIT Group Holdings, Inc.;
5.65%; 2/14/96 400,000 397,301
5.56%; 2/16/96 200,000 198,610
5.65%; 2/29/96 150,000 148,635
5.56%; 4/12/96 425,000 418,370
General Electric Capital Corp.;
5.82%; 1/2/96 550,000 550,000
5.80%; 1/22/96 450,000 448,550
5.64%; 3/29/96 150,000 147,956
5.24%; 6/24/96 300,000 292,402
International Lease Finance Corp.;
5.72%; 1/8/96 200,000 199,809
5.77%; 1/9/96 300,000 299,663
5.65%; 2/13/96 250,000 248,352
5.65%; 2/26/96 200,000 198,274
5.55%; 3/20/96 200,000 197,595
5.55%; 3/29/96 170,000 167,720
John Deere Capital Corp.;
5.34%; 4/26/96 400,000 393,177
5,847,783
Combination Utility Services (1.90%)
Public Service Electric & Gas Co.;
5.90%; 1/23/96 275,000 274,054
5.77%; 2/23/96 350,000 347,083
621,137
Computer & Office Equipment (0.72%)
Pitney Bowes Credit Corp.;
5.95%; 1/5/96 235,000 234,884
Department Stores (4.25%)
Sears Roebuck Acceptance Corp.;
5.70%; 2/2/96 250,000 248,773
5.65%; 2/16/96 $350,000 $ 347,528
5.72%; 2/23/96 350,000 347,108
5.62%; 3/12/96 200,000 197,815
5.62%; 3/13/96 250,000 247,229
1,388,453
Electric Services (5.95%)
AES Shady Point, Inc.;
LOC Bank of Tokyo Ltd.;
5.90%; 1/18/96 250,000 249,344
5.90%; 1/19/96 1,000,000 997,214
Transmission Agency - Northern
California; LOC Industrial
Bank of Japan;
6.10%; 1/17/96 500,000 498,729
Wisconsin Power & Light Co.;
5.72%; 2/5/96 200,000 198,920
1,944,207
Electronic Components
& Accessories (1.83%)
SCI Systems, Inc.;
LOC ABN-Amro Bank NV;
5.72%; 1/29/96 250,000 248,927
5.61%; 1/30/96 350,000 348,473
597,400
Federal & Federally Sponsored
Credit (0.97%)
FNMA;
5.50%; 4/29/96 125,000 122,746
US Government Treasury Bills;
5.35%; 8/22/96 200,000 193,075
315,821
Finance Services (5.39%)
Mitsubishi International Corp.;
5.63%; 1/31/96 350,000 348,413
5.76%; 1/31/96 175,000 174,188
5.50%; 3/6/96 300,000 297,067
5.64%; 3/11/96 250,000 247,298
5.65%; 3/29/96 250,000 246,586
5.58%; 4/30/96 125,000 122,694
PHH Corp.;
5.76%; 1/10/96 325,000 324,584
1,760,830
Investment Offices (4.12%)
Morgan Stanley Group, Inc.;
6.00%; 1/3/96 500,000 499,917
5.77%; 1/8/96 200,000 199,807
5.70%; 2/7/96 400,000 397,720
5.70%; 2/9/96 250,000 248,496
1,345,940
Jewelry, Silverware, &
Plated Ware (0.67%)
Jostens, Inc.;
5.73%; 2/2/96 220,000 218,914
Life Insurance (3.13%)
Prudential Funding Corp.;
5.65%; 1/4/96 225,000 224,929
5.78%; 1/5/96 450,000 449,783
5.64%; 2/12/96 350,000 347,752
1,022,464
Miscellaneous Food &
Kindred Products (0.46%)
Cargill, Inc.;
5.57%; 1/26/96 150,000 149,443
Miscellaneous Investing (1.68%)
MLTC Funding, Inc.; LOC
Union Bank of Switzerland;
5.75%; 1/24/96 $550,000 $ 548,067
Motor Vehicles & Equipment (0.91%)
Echlin, Inc.;
5.75%; 1/29/96 300,000 298,706
Personal Credit Institutions (22.07%)
American General Finance Corp.;
5.78%; 1/9/96 500,000 499,438
5.55%; 3/18/96 300,000 296,485
Associates Corp. of North America;
5.71%; 2/5/96 325,000 323,247
5.66%; 2/26/96 300,000 297,406
5.69%; 2/27/96 375,000 371,681
5.60%; 3/5/96 300,000 297,060
5.58%; 3/7/96 200,000 197,985
Beneficial Corp.;
5.56%; 3/8/96 250,000 247,452
5.47%; 3/25/96 260,000 256,721
5.46%; 4/17/96 400,000 393,569
Ford Motor Credit Co.;
5.58%; 2/15/96 425,000 422,101
5.67%; 2/20/96 350,000 347,299
5.69%; 2/22/96 325,000 322,380
5.56%; 3/27/96 325,000 320,733
5.50%; 4/5/96 150,000 147,846
General Motors Acceptance Corp.;
5.73%; 2/6/96 300,000 298,329
5.75%; 2/8/96 250,000 248,523
5.75%; 2/12/96 150,000 149,018
5.69%; 2/13/96 240,000 238,407
5.64%; 3/8/96 300,000 296,898
5.50%; 4/1/96 160,000 157,800
5.50%; 4/30/96 150,000 147,273
Norwest Financial, Inc.;
5.79%; 1/25/96 450,000 448,335
5.69%; 2/28/96 250,000 247,748
5.46%; 3/22/96 240,000 237,088
7,210,822
Real Estate Operators &
Lessors (5.32%)
Maguire/Thomas Partners Westlake
Southlake Partnership; LOC
Sumitomo Bank;
6.02%; 1/4/96 250,000 249,916
5.78%; 3/4/96 250,000 247,511
5.70%; 3/5/96 500,000 495,013
5.78%; 3/12/96 400,000 395,505
Towson Town Center, Inc.; LOC
Mitsubishi Bank;
6.00%; 1/16/96 350,000 349,183
1,737,128
Security Brokers & Dealers (10.58%)
Bear Stearns Cos.;
5.72%; 1/11/96 400,000 399,428
Goldman Sachs Group, L.P.;
5.60%; 2/14/96 150,000 148,997
5.64%; 2/23/96 290,000 287,638
5.65%; 3/6/96 $250,000 $ 247,489
5.52%; 3/14/96 250,000 247,240
5.60%; 4/9/96 150,000 147,713
5.63%; 4/11/96 200,000 196,872
5.60%; 4/19/96 300,000 294,960
Merrill Lynch & Co., Inc.;
5.76%; 1/10/96 225,000 224,712
5.72%; 1/31/96 375,000 373,272
5.67%; 2/28/96 175,000 173,429
5.66%; 2/29/96 225,000 222,948
5.55%; 3/28/96 225,000 222,017
5.60%; 3/28/96 275,000 271,321
3,458,036
Subdividers & Developers (1.53%)
Hartz 667 Commercial Paper Corp.;
LOC Mitsubishi Bank;
6.00%; 1/8/96 500,000 499,500
Asset Backed Securities (6.19%)
Corporate Asset Funding Co.;
5.82%; 1/2/96 240,000 240,000
5.85%; 1/4/96 240,000 239,922
5.85%; 1/12/96 275,000 274,553
5.55%; 3/11/96 350,000 346,277
Retailer Funding Corp.;
5.75%; 1/12/96 300,000 299,521
5.77%; 1/17/96 325,000 324,219
5.77%; 1/17/96 175,000 174,579
5.77%; 1/26/96 125,000 124,519
2,023,590
Total Commercial Paper 31,223,125
Bank Notes (3.83%)
Commercial Banks (3.83%)
Lasalle National Bank;
5.75%; 7/8/96 250,000 250,000
5.75%; 8/26/96 500,000 500,000
5.72%; 8/30/96 500,000 500,000
1,250,000
Total Portfolio Investments (99.40%) 32,473,125
Cash and receivables, net of liabilities (0.60%) 196,794
Total Net Assets (100.00%) $32,669,919
PRINCIPAL WORLD FUND, INC.
Shares
Held Value
Common Stocks (89.42%)
AUSTRALIA (4.77%)
Commercial Banks (2.15%)
National Australia Bank Ltd. 72,886 $ 656,031
Crude Petroleum & Natural
Gas (0.34%)
Ampolex Ltd. 48,100(a) $ 105,193
Gas Production & Distribution (1.14%)
Australia Gas & Light 93,000 349,357
Miscellaneous Food &
Kindred Products (1.14%)
Burns, Philp & Co., Ltd. 155,631 348,464
1,459,045
AUSTRIA (2.69%)
Blast Furnace &
Basic Steel Products (0.86%)
Voest-Alpine Stahl 9,200(a)(b) 264,025
Gas Production & Distribution (1.42%)
OMV AG 5,000 434,447
Railroad Equipment (0.41%)
Vae AG 1,470 124,078
822,550
CANADA (0.92%)
Coal Mining Services (0.21%)
Morgan Hydrocarbons, Inc. 20,600(a) 62,683
Miscellaneous Plastics
Products, NEC (0.71%)
Royal Plastics Group 15,100(a)(b) 218,666
281,349
CHILE (0.43%)
Telephone Communication (0.43%)
Compania De
Telecomunicaciones ADR 1,600 132,600
DENMARK (1.52%)
Telephone Communication (1.52%)
Tele Danmark B 8,500 464,741
FINLAND (3.40%)
Forest Products (0.32%)
Metsa-Serla 3,200 98,756
Miscellaneous Wood Products (0.49%)
Enso-Gutzeit 22,300 148,941
Pulp Mills (0.88%)
Kymmene 10,100 267,503
Sugar & Confectionary
Products (0.57%)
Huhtamake I Free 7,200 174,113
Telephone Communication (1.14%)
Nokia Corp. Class A ADR 9,000 349,875
1,039,188
FRANCE (2.26%)
Drugs (2.26%)
Roussel-Uclaf 4,070 $ 690,765
GERMANY (3.99%)
Flat Glass (0.23%)
Weru AG 200 70,566
Industrial Inorganic Chemicals (1.75%)
Bayer AG 2,010 534,773
Miscellaneous Chemical
Products (2.01%)
Hoechst AG 2,250 613,089
1,218,428
GREECE (1.09%)
Central Reserve Depositories (0.50%)
Ergo Bank 3,800 151,713
Highway & Street Construction (0.59%)
Edrasis Psallidas 12,220 179,757
331,470
HONG KONG (4.51%)
Communications Equipment (0.25%)
ABC Communications
Holdings Ltd. 420,000 76,048
Electric Services (0.72%)
CEP-A Consolidated Electric
Power-Asia 121,000 219,874
Electronic Components &
Accessories (0.38%)
Varitronix 63,000 116,924
Holding Offices (1.24%)
First Pacific Co. Ltd. 340,382 378,597
Miscellaneous Textile Goods (0.40%)
Espirit Asia 356,000 122,013
Office Furniture (0.20%)
Lamex Holdings 242,000 59,781
Personal Credit Institutions (0.56%)
Manhattan Card Co. 402,000 171,574
Security Brokers & Dealers (0.76%)
Peregrine Investment Holdings 180,000 232,801
1,377,612
INDONESIA (0.77%)
Miscellaneous Furniture &
Fixtures (0.21%)
Pt Surya Toto 29,000 63,418
Pulp Mills (0.56%)
Asia Pacific Resources 36,300(a) 172,425
235,843
ITALY (2.80%)
Metalworking Machinery (0.15%)
Danieli & Co.-DR 17,400 $ 47,163
Telephone Communication (2.65%)
Telecom Italia-DI 300,200 367,492
Telecom Italia Mobile 419,200(a) 441,291
808,783
855,946
JAPAN (0.64%)
Computer & Office Equipment (0.24%)
Canon, Inc. 4,000 72,514
Electronic Components &
Accessories (0.12%)
Murata Mfg. 1,000 36,839
Engines & Turbines (0.28%)
Mabuchi Motor 1,400 87,134
196,487
MALAYSIA (0.39%)
Holding Offices (0.39%)
C.I. Holdings 34,000 120,525
MEXICO (0.88%)
Aircraft & Parts (0.08%)
Cemex SA 6,936 23,046
Cement, Hydraulic (0.08%)
Apasco SA 6,320 25,879
Commercial Banks (0.22%)
Grupo Financiero Bancomer
Series B 235,000(a) 66,186
Series L 8,704(a) 2,237
68,423
Concrete, Gypsum & Plaster
Products (0.04%)
Cementos De Mexico SA 3,200 11,484
Department Stores (0.04%)
Sears Roebuck De Mexico SA 5,300(a) 12,368
Telephone Communication (0.42%)
Telefonos De Mexico SA ADR 4,050 129,094
270,294
NETHERLANDS (14.76%)
Beer, Wine & Distilled
Beverages (0.42%)
Heineken Holdings 782 128,302
Commercial Banks (1.83%)
ABN-AMRO Holdings NV 12,235 557,944
Communications Services, NEC (2.31%)
KPN Royal PTT Nederland 19,389 705,169
Department Stores (0.97%)
Vendex International 10,000 $ 297,569
Electric Light & Wiring
Equipment (0.38%)
Otra NV 6,500 115,565
Electronic Distribution
Equipment (1.59%)
Phillips Electronics 13,400 484,844
Grocery Stores (1.36%)
Koninklijke Ahold NV 10,164 415,313
Meat Products (2.31%)
Unilever NV 5,030 707,594
Miscellaneous Durable Goods (1.55%)
Hagemeyer NV 9,050 473,110
Miscellaneous Transportation
Services (0.47%)
Koninklijke Pakhoed NV 5,281 145,286
Paperboard Containers & Boxes (0.37%)
Koninklijke KNP BT NV 4,400(b) 113,089
Plastic Materials & Synthetics (0.35%)
DSM NV 1,300 107,050
Special Industry Machinery (0.85%)
IHC Caland NV 7,700 259,391
4,510,226
NORWAY (3.06%)
Commercial Banks (0.57%)
Christiana Bank 74,000 173,350
Drugs (0.15%)
Hafslund Nycomed 1,867 47,430
Meat Products (1.80%)
Orkla B 11,500 549,712
Ship & Boat Building &
Repairing (0.54%)
Unitor Ships Service 11,930 164,282
934,774
NEW ZEALAND (3.48%)
Beverages (2.04%)
Lion Nathan 261,000 622,798
Household Appliances (0.88%)
Fisher & Paykel 88,000 267,516
Miscellaneous Manufacturers (0.56%)
Carter Holt Harvey LTD. 80,000 172,591
1,062,905
SINGAPORE (2.18%)
Electric Light & Wiring
Equipment (0.18%)
Clipsal Industries Holdings 25,000 56,500
Electronic Components &
Accessories (2.00%)
Amtek Engineering 209,250 $ 303,268
Elec & Eltek International 114,000 306,660
609,928
664,428
SPAIN (5.02%)
Combination Utility Services ( 0.53%)
Iberdrola 1 SA 17,600 161,034
Commercial Banks (1.28%)
Banco Popular 2,120 390,916
Oil & Gas Field Services (2.11%)
Repsol Petroleo, SA 19,660 644,172
Telephone Communication (1.10%)
Telefonica De Espana, SA 24,400 337,894
1,534,016
SWEDEN (6.96%)
Commercial Banks (1.48%)
Svenska Handelsbanken AB Free 22,500 451,548
Household Audio & Video
Equipment (1.11%)
SKF 'B' Free 17,700 339,192
Miscellaneous Transportation
Equipment (0.85%)
Autoliv AB 4,450 260,532
Motor Vehicles & Equipment (1.11%)
Volvo AB 16,450 337,578
Plastic Materials & Synthetics (1.43%)
Astra AB 11,000 436,534
Water Transportation of
Freight, NEC (0.98%)
Argonaut AB 'B' Free 17,100(a) 25,674
ICB Shipping AB 'B' Free 32,000 275,229
300,903
2,126,287
SWITZERLAND (10.45%)
Combination Utility Services (1.54%)
BBC AG (Brown Boveri) 405 471,646
Drugs (1.86%)
Galenica Holdings AG 480 146,005
Sandoz AG 460 422,161
568,166
Functions Closely Related to
Banking (1.17%)
Bil GT Group 605 357,537
Miscellaneous Chemical Products (2.11%)
Ciba Geiby AG-REG 730 643,940
Pulp Mills (0.20%)
Attisholz AG 110 62,521
Special Industry Machinery (1.56%)
Bobst SA 205 $ 320,688
Sulzer AG 290 154,999
475,687
Sugar & Confectionary
Products (2.01%)
Nestle 555 615,460
3,194,957
THAILAND (1.00%)
Commercial Banks (0.80%)
Bangkok Bank 20,100 244,176
Non-Classifiable Establishments (0.20%)
Thailand International Fund 2 60,500
304,676
UNITED KINGDOM (11.45%)
Commercial Banks (1.80%)
Bank of Ireland 75,000 549,620
Construction & Related
Machinery (1.14%)
Powerscreen International PLC 58,100 349,549
Crude Petroleum & Natural
Gas (0.89%)
Hardy Oil & Gas 86,200 271,683
Electric Services (1.39%)
Northern Ireland Electric 63,400 426,223
Investment Offices (0.85%)
Invesco PLC 66,000 259,765
Miscellaneous Non-Durable
Goods (1.92%)
Grand Metropolitan PLC 81,500 587,131
Primary Nonferrous Metals (1.00%)
British Steel PLC 121,300 306,508
Pulp Mills (0.30%)
Babcock International Group 41,000 90,392
Sand & Gravel (0.13%)
Bardon Group PLC 75,900 38,593
Sugar & Confectionary Products (1.03%)
Tate & Lyle 43,000 315,116
Telephone Communication (0.49%)
Cable & Wireless PLC 21,000 149,981
Water Supply (0.51%)
Wessex Water PLC 28,597 154,953
3,499,514
Total Common Stocks 27,330,626
Preferred Stocks (0.37%)
AUSTRIA (0.37%)
Highway & Street Construction (0.37%)
BAU Holdings AG 3,030 $ 114,036
Principal
Amount Value
Bond (1.28%)
MEXICO (1.28%)
Fire, Marine & Casualty
Insurance (1.28%)
Alfa SA Convertible Subordinated
Debentures; 8.00%; 9/15/00 $400,000(b) $ 392,000
Commercial Paper (12.84%)
UNITED STATES (12.84%)
Business Credit Institutions (7.35%)
American Express Credit Corp.;
5.75%; 1/2/96 1,345,000 1,345,000
John Deere Capital Corp.;
5.70%; 1/2/96 900,000 900,000
2,245,000
Life Insurance (4.41%)
Prudential Funding Corp.;
5.50%; 1/5/96 1,350,000 1,349,381
Personal Credit Institutions (1.08%)
Ford Motor Credit Co.;
5.80%; 1/3/96 330,000 329,947
Total Commercial Paper 3,924,328
Total Portfolio Investments (103.91%) $31,760,990
Liabilities, net of cash and receivables(-3.91%) (1,195,370)
Total Net Assets (100.00%) $ 30,565,620
(a)Non-income producing security - No dividend paid during the past twelve
months.
(b) Restricted Security - See Note 4 to the financial statements.
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<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Selected data for a share of Capital Stock outstanding throughout each period:
Income from
Investment Operations Less Distributions
Net Realized
and
Net Asset Net Unrealized Total Dividends Excess
Value at Invest- Gain from from Net Distributions Distributions
Beginning ment (Loss) on Investment Investment from from
of Period Income Investments Operations Income Capital Gains Capital Gains
Principal Aggressive
Growth Fund, Inc.
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1995 $10.11 $ .13 $4.31 $4.44 $(.13) $(1.48) $ -
Period Ended December 31, 1994(d) 9.92 .05 .24 .29 (.05) (.05) -
Principal Asset
Allocation Fund, Inc.
Year Ended December 31, 1995 9.79 .40 1.62 2.02 (.40) (.30) -
Period Ended December 31, 1994(d) 9.98 .23 (.18) .05 (.23) - (.01)
Principal Balanced Fund, Inc.
Year Ended December 31,
1995 11.95 .45 2.44 2.89 (.45) (.42) -
1994 12.77 .37 (.64) (.27) (.37) (.18) -
1993 12.58 .42 .95 1.37 (.42) (.76) -
Six Months Ended December 31, 1992(a) 12.93 .23 .75 .98 (.47) (.86) -
Year Ended June 30,
1992 11.33 .47 1.61 2.08 (.48) - -
1991 10.79 .54 .59 1.13 (.57) (.02) -
Principal Bond Fund, Inc.
Year Ended December 31,
1995 10.12 .62 1.62 2.24 (.63) - -
1994 11.16 .72 (1.04) (.32) (.72) - -
1993 10.77 .88 .38 1.26 (.87) - -
Six Months Ended December 31, 1992(a) 11.08 .45 .13 .58 (.89) - -
Year Ended June 30,
1992 10.64 .91 .46 1.37 (.93) - -
1991 10.72 .94 (.06) .88 (.96) - -
Principal Capital
Accumulation Fund, Inc.
Year Ended December 31,
1995 23.44 .60 6.69 7.29 (.60) (2.33) -
1994 24.61 .62 (.49) .13 (.61) (.69) -
1993 25.19 .61 1.32 1.93 (.60) (1.91) -
Six Months Ended December 31, 1992(a) 26.03 .31 1.84 2.15 (.64) (2.35) -
Year Ended June 30,
1992 23.35 .65 2.70 3.35 (.67) - -
1991 22.48 .74 1.22 1.96 (.79) (.30) -
Principal Emerging
Growth Fund, Inc.
Year Ended December 31,
1995 19.97 .22 5.57 5.79 (.22) (.21) -
1994 20.79 .14 .03 .17 (.14) (.85) -
1993 18.91 .17 3.47 3.64 (.17) (1.59) -
Six Months Ended December 31, 1992(a) 15.97 .10 3.09 3.19 (.21) (.04) -
Year Ended June 30,
1992 13.93 .21 2.04 2.25 (.21) - -
1991 14.25 .20 .50 .70 (.23) (.79) -
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Selected data for a share of Capital Stock outstanding throughout each period:
Ratios/Supplemental Data
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio
Total End of Total End of Period Average Average Turnover
Distributions Period Return (in thousands) Net Assets Net Assets Rate
Principal Aggressive
Growth Fund, Inc.
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1995 $(1.61) $12.94 44.19% $ 33,643 .90% 1.34% 172.9%
Period Ended December 31, 1994(d) (.10) 10.11 2.59%(c) 13,770 1.03%(b) 1.06%(b) 105.6%(b)
Principal Asset
Allocation Fund, Inc.
Year Ended December 31, 1995 (.70) 11.11 20.66% 41,074 .89% 4.07% 47.1%
Period Ended December 31, 1994(d) (.24) 9.79 .52%(c) 28,041 .95%(b) 4.27%(b) 60.7%(b)
Principal Balanced Fund, Inc.
Year Ended December 31,
1995 (.87) 13.97 24.58% 45,403 .66% 4.12% 25.7%
1994 (.55) 11.95 (2.09)% 25,043 .69% 3.42% 31.5%
1993 (1.18) 12.77 11.06% 21,399 .69% 3.30% 15.8%
Six Months Ended December 31, 1992(a) (1.33) 12.58 8.00%(c) 18,842 .73%(b) 3.71%(b) 38.4%(b)
Year Ended June 30,
1992 (.48) 12.93 18.78% 17,344 .72% 3.80% 26.6%
1991 (.59) 11.33 11.36% 14,555 .73% 5.27% 27.1%
Principal Bond Fund, Inc.
Year Ended December 31,
1995 (.63) 11.73 22.17% 35,878 .56% 7.28% 5.9%
1994 (.72) 10.12 (2.90)% 17,108 .58% 7.86% 18.2%
1993 (.87) 11.16 11.67% 14,387 .59% 7.57% 14.0%
Six Months Ended December 31, 1992(a) (.89) 10.77 5.33%(c) 12,790 .62%(b) 8.10%(b) 6.7%(b)
Year Ended June 30,
1992 (.93) 11.08 13.57% 12,024 .62% 8.47% 6.1%
1991 (.96) 10.64 8.94% 10,552 .63% 9.17% 2.7%
Principal Capital
Accumulation Fund, Inc.
Year Ended December 31,
1995 (2.93) 27.80 31.91% 135,640 .51% 2.25% 49.2%
1994 (1.30) 23.44 .49% 120,572 .51% 2.36% 44.5%
1993 (2.51) 24.61 7.79% 128,515 .51% 2.49% 25.8%
Six Months Ended December 31, 1992(a) (2.99) 25.19 8.81%(c) 105,355 .55%(b) 2.56%(b) 39.7%(b)
Year Ended June 30,
1992 (.67) 26.03 14.53% 94,596 .54% 2.65% 34.8%
1991 (1.09) 23.35 9.46% 76,537 .53% 3.53% 14.0%
Principal Emerging
Growth Fund, Inc.
Year Ended December 31,
1995 (.43) 25.33 29.01% 58,520 .70% 1.23% 13.1%
1994 (.99) 19.97 .78% 23,912 .74% 1.15% 12.0%
1993 (1.76) 20.79 19.28% 12,188 .78% .89% 22.4%
Six Months Ended December 31, 1992(a) (.25) 18.91 20.12%(c) 9,693 .81%(b) 1.24%(b) 8.6%(b)
Year Ended June 30,
1992 (.21) 15.97 16.19% 7,829 .82% 1.33% 10.1%
1991 (1.02) 13.93 5.72% 6,579 .89% 1.70% 11.1%
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (Continued)
Selected data for a share of Capital Stock outstanding throughout each period:
Income from
Investment Operations Less Distributions
Net Realized
and Excess
Net Asset Net Unrealized Total Dividend Distributions
Value at Invest- Gain from from Net from Net Distributions
Beginning ment (Loss) on InvestmentInvestment Investment from
of PeriodIncome InvestmentsOperations Income Income Capital Gains
Principal Government Securities Fund, Inc.
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $ 9.38 $ .60 $ 1.18 $1.78 $(.61) $ - $ -
1994 10.61 .76 (1.24) (.48) (.75) - -
1993 10.28 .71 .33 1.04 (.71) - -
Six Months Ended December 31, 1992(a) 10.93 .40 .04 .44 (.78) - (.31)
Year Ended June 30,
1992 10.24 .80 .71 1.51 (.81) - (.01)
1991 10.05 .80 .24 1.04 (.81) - (.04)
Principal Growth Fund, Inc
Year Ended December 31, 1995 10.10 .17 2.42 2.59 (.17) - (.09)
Period Ended December 31, 1994(e) 9.60 .07 .51 .58 (.08) - -
Principal High Yield Fund, Inc.
Year Ended December 31,
1995 7.91 .76 .51 1.27 (.77) (.02) -
1994 8.62 .77 (.72) .05 (.76) - -
1993 8.38 .80 .23 1.03 (.79) - -
Six Months Ended December 31, 1992(a) 8.93 .45 (.10) .35 (.90) - -
Year Ended June 30,
1992 8.28 .92 .66 1.58 (.93) - -
1991 8.96 .99 (.53) .46 (1.14) - -
Principal Money Market Fund, Inc.
Year Ended December 31,
1995 1.000 .054 - .054 (.054) - -
1994 1.000 .037 - .037 (.037) - -
1993 1.000 .027 - .027 (.027) - -
Six Months Ended December 31, 1992(a) 1.000 .016 - .016 (.016) - -
Year Ended June 30,
1992 1.000 .046 - .046 (.046) - -
1991 1.000 .070 - .070 (.070) - -
Principal World Fund, Inc.
Year Ended December 31, 1995 9.56 .19 1.16 1.35 (.18) - (.01)
Period Ended December 31, 1994(e) 9.94 .03 (.33) (.30) (.05) (.02) (.01)
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio
Total End of Total End of Period Average Average Turnover
istributions Period Return (in thousands) Net Assets Net Assets Rate
Principal Government Securities Fund, Inc
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1995 $ (.61) $10.55 19.07% 50,079 .55% 6.73% 9.8%
1994 (.75) 9.38 (4.53)% 36,121 .56% 7.05% 23.2%
1993 (.71) 10.61 10.07% 36,659 .55% 7.07% 20.4%
Six Months Ended December 31, 1992(a) (1.09) 10.28 4.10%(c) 31,760 .59%(b) 7.35%(b) 34.5%(b)
Year Ended June 30,
1992 (.82) 10.93 15.34% 33,022 .58% 7.84% 38.9%
1991 (.85) 10.24 10.94% 26,021 .59% 8.31% 4.2%
Principal Growth Fund, Inc
Year Ended December 31, 1995 (.26) 12.43 25.62% 42,708 .58% 2.08% 6.9%
Period Ended December 31, 1994(e) (.08) 10.10 5.42%(c) 13,086 .75%(b) 2.39%(b) 0.9%(b)
Principal High Yield Fund, Inc.
Year Ended December 31,
1995 (.79) 8.39 16.08% 11,830 .73% 9.09% 35.1%
1994 (.76) 7.91 .62% 9,697 .73% 9.02% 30.6%
1993 (.79) 8.62 12.31% 9,576 .74% 8.80% 28.7%
Six Months Ended December 31, 1992(a) (.90) 8.38 4.06%(c) 8,924 .77%(b) 10.33%(b) 20.6%(b)
Year Ended June 30,
1992 (.93) 8.93 20.70% 8,556 .77% 11.00% 31.3%
1991 (1.14) 8.28 6.35% 7,085 .82% 12.58% 6.4%
Principal Money Market Fund, Inc.
Year Ended December 31,
1995 (.054) 1.000 5.59% 32,670 .58% 5.32% N/A
1994 (.037) 1.000 3.76% 29,372 .60% 3.81% N/A
1993 (.027) 1.000 2.69% 22,753 .60% 2.64% N/A
Six Months Ended December 31, 1992(a) (.016) 1.000 1.54%(c) 27,680 .59%(b) 3.10%(b) N/A
Year Ended June 30,
1992 (.046) 1.000 4.64% 25,194 .57% 4.54% N/A
1991 (.070) 1.000 7.20% 26,509 .56% 6.94% N/A
Principal World Fund, Inc.
Year Ended December 31, 1995 (.19) 10.72 14.17% 30,566 .95% 2.26% 15.6%
Period Ended December 31, 1994(e) (.08) 9.56 (3.37)%(c) 13,746 1.24%(b) 1.31%(b) 14.4%(b)
See accompanying notes.
</TABLE>
Notes to Financial Highlights
(a) Effective July 1, 1992 the fund changed its fiscal year end from June 30 to
December 31.
(b) Computed on an annualized basis.
(c) Total return amounts have not been annualized.
(d) Period from June 1, 1994, date shares first offered to public, through
December 31, 1994. Net investment income, aggregating $.01 per share for
Principal Aggressive Growth Fund, Inc. and $.01 per share for Principal
Asset Allocation Fund, Inc. for the period from the initial purchase of
shares on May 23, 1994 through May 31, 1994, was recognized, none of which
was distributed to the sole stockholder, Principal Mutual Life Insurance
Company, during the period. Additionally, Principal Aggressive Growth Fund,
Inc. and Principal Asset Allocation Fund, Inc. incurred unrealized losses
on investments of $.09 and $.03 per share, respectively, during the initial
interim period. This represented activities of each fund prior to the
initial public offering of fund shares.
(e) Period from May 1, 1994, date shares first offered to public, through
December 31, 1994. Net investment income, aggregating $.01 per share for
Principal Growth Fund, Inc. and $.04 per share for Principal World Fund,
Inc. for the period from the initial purchase of shares on March 23, 1994
through April 30, 1994, was recognized, none of which was distributed to
the sole stockholder, Principal Mutual Life Insurance Company, during the
period. Additionally, Principal Growth Fund, Inc. and Principal World Fund,
Inc. incurred unrealized losses on investments of $.41 and $.10 per share,
respectively, during the initial interim period. This represented
activities of each fund prior to the initial public offering of fund
shares.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Boards of Directors and Shareholders
Principal Aggressive Growth Fund, Inc.
Principal Asset Allocation Fund, Inc.
Principal Balanced Fund, Inc.
Principal Bond Fund, Inc.
Principal Capital Accumulation Fund, Inc.
Principal Emerging Growth Fund, Inc.
Principal Government Securities Fund, Inc.
Principal Growth Fund, Inc.
Principal High Yield Fund, Inc.
Principal Money Market Fund, Inc.
Principal World Fund, Inc.
We have audited the accompanying statements of assets and liabilities of
Principal Aggressive Growth Fund, Inc., Principal Asset Allocation Fund, Inc.,
Principal Balanced Fund, Inc., Principal Bond Fund, Inc., Principal Capital
Accumulation Fund, Inc., Principal Emerging Growth Fund, Inc., Principal
Government Securities Fund, Inc., Principal Growth Fund, Inc., Principal High
Yield Fund, Inc., Principal Money Market Fund, Inc., and Principal World Fund,
Inc., including the schedules of investments, as of December 31, 1995, and the
related statements of operations for the year then ended, and the statements of
changes in net assets and the financial highlights for each of the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995, by correspondence with the custodians and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion. In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Principal Aggressive Growth Fund, Inc., Principal Asset Allocation
Fund, Inc., Principal Balanced Fund, Inc., Principal Bond Fund, Inc., Principal
Capital Accumulation Fund, Inc., Principal Emerging Growth Fund, Inc., Principal
Government Securities Fund, Inc., Principal Growth Fund, Inc., Principal High
Yield Fund, Inc., Principal Money Market Fund, Inc., and Principal World Fund,
Inc. at December 31, 1995, and the results of their operations for the year then
ended, and the changes in their net assets and the financial highlights for each
of the periods indicated therein, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Des Moines, Iowa
January 19, 1996
<PAGE>
This page left blank intentionally.
SCHEDULE FOR COMPUTING TOTAL RETURN
PRINCIPAL CAPITAL ACCUMULATION FUND, INC.
The average annual total return quotation for the 1, 5 and 10 year periods
ending December 31, 1995 is computed by finding the average annual
compounded rate of return over the period that would equate the initial
amount invested to the ending redeemable value, according to the following
formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1000
payment made at the beginning of the 1, 5, or 10 year
periods at the end of the 1, 5, or 10 year periods
(or fractional portion thereof).
The above calculation includes all recurring fees that are charged to all
shareholder accounts.
The Fund's average annual total return for the 1, 5 and 10 year period
ending December 31, 1995 is calculated as follows:
One Year Total Return:
- ----------------------
$1,000(1 + T)1 = $1,319.10
Solve for T
T = 31.91%
Five Year Total Return:
- -----------------------
$1,000(1 + T)^5 = $2,170.05
Solve for T
T = 16.76%
Ten Year Total Return:
- ----------------------
$1,000(1 + T)^10 = $3,215.71
Solve for T
T = 12.39%
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 110642942
<INVESTMENTS-AT-VALUE> 136067278
<RECEIVABLES> 499286
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 4843
<TOTAL-ASSETS> 136571407
<PAYABLE-FOR-SECURITIES> 270239
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 661488
<TOTAL-LIABILITIES> 931727
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 107095052
<SHARES-COMMON-STOCK> 4878949
<SHARES-COMMON-PRIOR> 5143841
<ACCUMULATED-NII-CURRENT> 59420
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3060872
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 25424336
<NET-ASSETS> 135639680
<DIVIDEND-INCOME> 3049810
<INTEREST-INCOME> 275913
<OTHER-INCOME> 0
<EXPENSES-NET> (618859)
<NET-INVESTMENT-INCOME> 2706864
<REALIZED-GAINS-CURRENT> 11294865
<APPREC-INCREASE-CURRENT> 19225574
<NET-CHANGE-FROM-OPS> 33227303
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2707756)
<DISTRIBUTIONS-OF-GAINS> (10552706)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1462128
<NUMBER-OF-SHARES-REDEEMED> (2220452)
<SHARES-REINVESTED> 493432
<NET-CHANGE-IN-ASSETS> 15,067,881
<ACCUMULATED-NII-PRIOR> 60311
<ACCUMULATED-GAINS-PRIOR> 2420047
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 591891
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 618859
<AVERAGE-NET-ASSETS> 120823525
<PER-SHARE-NAV-BEGIN> 23.44
<PER-SHARE-NII> .60
<PER-SHARE-GAIN-APPREC> 6.69
<PER-SHARE-DIVIDEND> (.60)
<PER-SHARE-DISTRIBUTIONS> (2.33)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 27.80
<EXPENSE-RATIO> .51
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
