This Prospectus describes a family of investment companies which has been
organized by Principal Mutual Life Insurance Company. Together the Funds provide
the following range of investment objectives:
GROWTH-ORIENTED FUNDS
Domestic
Principal Balanced Fund, Inc. seeks to generate a total investment return
consisting of current income and capital appreciation while assuming reasonable
risks in furtherance of the investment objective.
Principal Blue Chip Fund, Inc. seeks to achieve growth of capital and growth of
income by investing primarily in common stocks of well capitalized, established
companies.
Principal Capital Value Fund, Inc. seeks to achieve primarily long-term capital
appreciation and secondarily growth of investment income through the purchase
primarily of common stocks, but the Fund may invest in other securities.
Principal Growth Fund, Inc. seeks growth of capital through the purchase
primarily of common stocks, but the Fund may invest in other securities.
Principal MidCap Fund, Inc. seeks to achieve long-term capital appreciation by
investing primarily in securities of emerging and other growth-oriented
companies.
Principal Real Estate Fund, Inc. seeks to generate total return by investing
primarily in equity securities of companies principally engaged in the real
estate industry.
Principal SmallCap Fund, Inc. seeks to achieve long-term growth of capital by
investing primarily in equity securities of companies with comparatively smaller
market capitalizations.
Principal Utilities Fund, Inc. seeks to provide current income and long-term
growth of income and capital by investing primarily in equity and fixed income
securities of companies in the public utilities industry.
International
Principal International Emerging Markets Fund, Inc. seeks to achieve long-term
growth of capital by investing primarily in equity securities of issuers in
emerging market countries.
Principal International Fund, Inc. seeks long-term growth of capital by
investing in a portfolio of equity securities of companies domiciled in any of
the nations of the world.
Principal International SmallCap Fund, Inc. seeks to achieve long-term growth of
capital by investing primarily in equity securities of non-United States
companies with comparatively smaller market capitalizations.
INCOME-ORIENTED FUNDS
Principal Bond Fund, Inc. seeks to provide as high a level of income as is
consistent with preservation of capital and prudent investment risk.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is December 31, 1997
as revised through August 1, 1998.
Principal Government Securities Income Fund, Inc. seeks a high level of current
income, liquidity and safety of principal by purchasing obligations issued or
guaranteed by the United States Government or its agencies, with emphasis on
Government National Mortgage Association Certificates ("GNMA Certificates"). The
guarantee by the United States Government extends only to principal and
interest. There are certain risks unique to GNMA Certificates.
Principal High Yield Fund, Inc. seeks high current income primarily by
purchasing high yielding, lower or non-rated fixed income securities which are
believed not to involve undue risk to income or principal. Capital growth is a
secondary objective when consistent with the objective of high current income.
Principal High Yield Fund, Inc. invests predominantly in lower rated bonds,
commonly referred to as "junk bonds" and may invest 100% of its assets in such
bonds. Bonds of this type are considered to be speculative with regard to
payment of interest and return of principal. Purchasers should carefully assess
the risks associated with an investment in this fund. THESE ARE SPECULATIVE
SECURITIES.
Principal Limited Term Bond Fund, Inc. seeks a high level of current income
consistent with a relatively high level of principal stability by investing in a
portfolio of securities with a dollar weighted average maturity of five years or
less.
Principal Tax-Exempt Bond Fund, Inc. seeks as high a level of current income
exempt from federal income tax as is consistent with preservation of capital.
The Fund seeks to achieve its objective primarily through the purchase of
investment grade quality tax-exempt fixed income obligations.
MONEY MARKET FUNDS
Principal Cash Management Fund, Inc. seeks as high a level of income available
from short-term securities as is considered consistent with preservation of
principal and maintenance of liquidity by investing in a portfolio of money
market instruments.
Principal Tax-Exempt Cash Management Fund, Inc. seeks, through investment in a
professionally managed portfolio of high quality, short-term Municipal
Obligations, as high a level of current interest income exempt from federal
income tax as is consistent with stability of principal and maintenance of
liquidity.
Each of the Principal Funds, except the Tax-Exempt Bond Fund and Tax-Exempt Cash
Management Fund, offers three classes of shares: Class A, Class B and Class R
shares. Tax-Exempt Bond Fund offers Class A and Class R shares. Tax-Exempt Cash
Management Fund only offers Class A shares. Each class is sold under a different
sales arrangement and has different expenses. Only Class A and Class B shares
are offered through this Prospectus. For more information about the different
sales arrangements, see "How to Purchase Shares" and "Offering Price of Fund's
Shares." For information about various expenses borne by each class see
"Overview."
Shares of the Funds are not deposits or obligations of, or guaranteed or
endorsed by, any financial institution, nor are shares of the Funds federally
insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board,
or any other agency.
An investment in any of the Funds is neither insured nor guaranteed by the
U.S. Government. There can be no assurance the Money Market Funds will be able
to maintain a stable net asset value of $1.00 per share.
This Prospectus concisely states information about the Principal Funds that
an investor should know before investing. It should be read and retained for
future reference.
Additional information about the Funds has been filed with the Securities
and Exchange Commission, including a document called a Statement of Additional
Information dated December 31, 1997 which is incorporated by reference herein.
The Statement of Additional Information and a Prospectus for Class R shares can
be obtained free of charge by writing or telephoning the Funds' principal
underwriter: Princor Financial Services Corporation, P.O. Box 10423, Des Moines,
IA 50306. Telephone 1-800-247-4123.
TABLE OF CONTENTS
Page
Overview .............................................................. 4
Financial Highlights.................................................... 11
Investment Objectives, Policies and Restrictions........................ 24
Growth-Oriented Funds............................................... 24
Domestic........................................................ 24
International................................................... 29
Income-Oriented Funds............................................... 30
Money Market Funds.................................................. 36
Certain Investment Policies and Restrictions............................ 38
Risk Factors............................................................ 40
How the Funds are Managed............................................... 40
How to Purchase Shares.................................................. 43
Offering Price of Funds' Shares ........................................ 45
Distribution and Shareholder Servicing Plans and Fees................... 47
Determination of Net Asset Value of Funds' Shares....................... 47
Distribution of Income Dividends and Realized Capital Gains ............ 48
Tax Treatment of the Funds, Dividends and Distributions ................ 50
How to Exchange Shares.................................................. 51
How to Sell Shares...................................................... 52
Periodic Withdrawal Plan................................................ 53
Performance Calculation................................................. 54
General Information About a Fund Account................................ 55
Retirement Plans........................................................ 56
Shareholder Rights...................................................... 56
Additional Information.................................................. 56
This Prospectus does not constitute an offer to sell, or a solicitation of
an offer to buy, the securities of any of the Funds in any jurisdiction in which
such sale, offer to sell, or solicitation may not be lawfully made. Currently,
shares of the Funds are not available for sale in any U.S. possession or in
Canada or any other foreign country. No dealer, salesperson, or other person has
been authorized to give any information or to make any representations, other
than those contained in this Prospectus, in connection with the offer contained
in this Prospectus, and, if given or made, such other information or
representations must not be relied upon as having been authorized by the Funds
or the Funds Manager. Because the Principal Funds use a combined Prospectus
there may be a possibility that one Fund might become liable for any
misstatements, inaccuracy, or incomplete disclosure in the Prospectus concerning
another Fund.
OVERVIEW
The following overview is provided for your convenience. Please read the
detailed information found in the prospectus.
The Principal Funds are separately incorporated, open-end diversified
management investment companies. Each of the Funds, except the Tax-Exempt Bond
Fund and Tax-Exempt Cash Management Fund, offers three classes of shares: Class
A, Class B and Class R shares. The Tax-Exempt Bond Fund offers only Class A and
Class B shares. The Tax-Exempt Cash Management Fund offers only Class A shares.
Only Class A and Class B Shares are offered through this Prospectus.
What it Costs to Invest
There are costs to acquire and own many types of investments. Shares of the
Principal Funds are no exception. The tables on the next pages show the fees and
expenses of buying and owning shares of each of the Funds. Except as noted, the
information for all of the Funds is based on the fiscal year ended October 31,
1997. The Examples are based on each Fund's Annual Operating Expenses described
in Tables A and B. Please remember that actual expenses and future expenses may
be more or less than those shown.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses
Class A Shares
Maximum Sales Load Imposed Contingent
on Purchases Redemption Exchange Deferred Sales
Fund (as a percentage of offering price) Fee* Fee Charge
---- ----------------------------------- ---------- -------- --------------
<S> <C> <C> <C> <C>
All Funds except Limited Term Bond Fund
and Money Market Funds 4.75% None None None
Limited Term Bond Fund 1.50% None None None
Money Market Funds None None None None
<FN>
* A wire charge of $6.00 will be deducted for all wire transfers.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Class B Shares
Maximum Sales Load Contingent Deferred Sales Charge
Imposed on Purchases (as a percentage of the lower of
(as a percentage of Redemption Exchange the original purchase price
Fund offering price) Fee* Fee or redemption proceeds
---- -------------------- ---------- -------- -------------------------------
<S> <C> <C> <C> <C>
All Funds except Limited Term Bond Fund 4.75% None None Redemptions During Year
-----------------------
1 2 3 4 5 6 7
- - - - - - -
4% 4% 3% 3% 2% 1% 0%
Limited Term Bond Fund 1.50% None None Redemptions During Year
-----------------------
1 2 3 4 5 6 7
- - - - - - -
1.25% 1.25% .75% .75% .50% .25% 0%
<FN>
* A wire charge of $6.00 will be deducted for all wire transfers.
</FN>
</TABLE>
<TABLE>
<CAPTION>
TABLE A CLASS A SHARES
Annual Fund Operating Expenses
(as a percentage of average net assets)
-----------------------------------------------------------------------
Management 12b-1 Other Total Operating
Fund Fee Fee Expenses Expenses
---- ---------- ----- -------- ---------------
<S> <C> <C> <C> <C>
Balanced Fund .60% .25% .48% 1.33%
Blue Chip Fund .50 .25 .55 1.30
Bond Fund .46 .23 .26 .95*
Capital Value Fund .40 .12 .18 .70
Cash Management Fund .37 None .26 .63*
Government Securities Income Fund .46 .19 .19 .84
Growth Fund .44 .21 .38 1.03
High Yield Fund .60 .25 .37 1.22
International Emerging Markets Fund 1.23 .09 .71 2.03**
International Fund .71 .21 .47 1.39
International SmallCap Fund 1.19 .09 .71 1.99**
Limited Term Bond Fund .25 .17 .48 .90*
MidCap Fund .59 .25 .42 1.26
Real Estate Fund .90 .25 .55 1.70***
SmallCap Fund .85 .25 .55 1.65***
Tax-Exempt Bond Fund .48 .20 .11 .79
Tax-Exempt Cash Management Fund .47 None .23 .70*
Utilities Fund .50 .25 .40 1.15*
<FN>
* After waiver.
** Annualized
*** Estimated expenses.
</FN>
</TABLE>
<TABLE>
<CAPTION>
TABLE B CLASS B SHARES
Annual Fund Operating Expenses
(as a percentage of average net assets)
-----------------------------------------------------------------------
Management 12b-1 Other Total Operating
Fund Fee Fee Expenses Expenses
---- ---------- ----- -------- ---------------
<S> <C> <C> <C> <C>
Balanced Fund .60% .92% .62% 2.14%
Blue Chip Fund .50 .89 .67 2.06
Bond Fund .40 .91 .39 1.70*
Capital Value Fund .40 .91 .34 1.65
Cash Management Fund .00 .31 1.16 1.47*
Government Securities Income Fund .46 .63 .30 1.39
Growth Fund .44 .58 .46 1.48
High Yield Fund .60 .95 .58 2.13
International Emerging Markets Fund 1.23 .18 .75 2.16**
International Fund .71 .90 .56 2.17
International SmallCap Fund 1.19 .18 .70 2.07**
Limited Term Bond Fund .00 .51 .73 1.24*
MidCap Fund .59 .63 .47 1.69
Real Estate Fund .90 .90 .55 2.35***
SmallCap Fund .85 .90 .55 2.30***
Tax-Exempt Bond Fund .48 .76 .21 1.45
Utilities Fund .54 .85 .51 1.90*
<FN>
* After waiver.
** Annualized
*** Estimated expenses.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Example A
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
1 Year 3 Years 5 Years 10 Years(a)
--------------- ----------------- ----------------- ----------------
Class A Class B Class A Class B Class A Class B Class A Class B
Fund Shares Shares Shares Shares Shares Shares Shares Shares
---- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balanced Fund $60 $63 $88 $100 $117 $138 $200 $217
Blue Chip Fund $60 $62 $87 $97 $115 $134 $197 $210
Bond Fund $57 $59 $76 $87 $98 $116 $159 $172
Capital Value Fund $54 $58 $69 $85 $85 $113 $130 $158
Cash Management Fund $6 $56 $20 $80 $35 $104 $79 $142
Government Securities Income Fund $56 $56 $73 $77 $92 $100 $146 $145
Growth Fund $58 $56 $79 $80 $102 $105 $167 $159
High Yield Fund $59 $63 $84 $99 $111 $137 $188 $212
International Emerging Markets Fund $67 $63 $108 $100 N/A N/A N/A N/A
International Fund $61 $63 $89 $101 $120 $139 $206 $221
International SmallCap Fund $57 $62 $107 $98 N/A N/A N/A N/A
Limited Term Bond Fund $24 $26 $43 $48 $64 $74 $124 $136
MidCap Fund $60 $59 $86 $86 $113 $115 $193 $183
Real Estate Fund $64 $65 $99 $106 N/A N/A N/A N/A
SmallCap Fund $63 $64 $97 $104 N/A N/A N/A N/A
Tax-Exempt Bond Fund $55 $56 $72 $79 $89 $103 $141 $147
Tax-Exempt Cash Management Fund $7 $56 $22 $80 $39 $104 $87 $145
Utilities Fund $59 $61 $82 $93 $108 $126 $181 $194
</TABLE>
<TABLE>
<CAPTION>
Example B
You would pay the following expenses on the same investment, assuming no
redemption:
1 Year 3 Years 5 Years 10 Years(a)
--------------- ----------------- ----------------- ----------------
Class A Class B Class A Class B Class A Class B Class A Class B
Fund Shares Shares Shares Shares Shares Shares Shares Shares
---- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balanced Fund $60 $22 $88 $67 $117 $115 $200 $217
Blue Chip Fund $60 $21 $87 $65 $115 $111 $197 $210
Bond Fund $57 $17 $76 $54 $98 $92 $159 $172
Capital Value Fund $54 $17 $69 $52 $85 $90 $130 $158
Cash Management Fund $6 $15 $20 $46 $35 $80 $79 $142
Government Securities Income Fund $56 $14 $73 $44 $92 $76 $146 $145
Growth Fund $58 $15 $79 $47 $102 $81 $167 $159
High Yield Fund $59 $22 $84 $67 $111 $114 $188 $212
International Emerging Markets Fund $67 $22 $108 $68 N/A N/A N/A N/A
International Fund $61 $22 $89 $68 $120 $116 $206 $221
International SmallCap Fund $57 $21 $107 $65 N/A N/A N/A N/A
Limited Term Bond Fund $24 $13 $43 $39 $64 $68 $124 $136
MidCap Fund $60 $17 $86 $53 $113 $92 $193 $183
Real Estate Fund $64 $24 $99 $73 N/A N/A N/A N/A
SmallCap Fund $63 $23 $97 $72 N/A N/A N/A N/A
Tax-Exempt Bond Fund $55 $15 $72 $46 $89 $79 $141 $147
Tax-Exempt Cash Management Fund $7 $15 $22 $46 $39 $80 $87 $145
Utilities Fund $59 $19 $82 $60 $108 $103 $181 $194
<FN>
(a) The amount in this column reflects the conversion of Class B shares to
Class A shares seven years after the initial purchase.
</FN>
</TABLE>
The purpose of these tables is to help you understand the expenses of the
Principal mutual funds. The Fund's Annual Fund Operating Expenses shown in Table
A for Class A shares are generally based on each Fund's actual expenses.
However, each of the Funds, except Money Market - Class A shares, have adopted a
12b-1 Plan. These Plans permit Princor Financial Services Corporation
("Princor") as underwriter of the Funds to collect an annual fee of up to .25%
of each Fund's average net assets. A portion of this annual fee is considered an
asset-based sales charge. It may then be possible that a long-term shareholder
of Class A shares may pay more than the maximum front-end sales charge permitted
by the National Association of Securities Dealers. See "Distribution and
Shareholder Servicing Plan and Fees", "How to Purchase Shares" and "How the
Funds are Managed."
For the fiscal year ended October 31, 1997, the Manager waived a portion of
its fees as shown below:
Total operating expenses
Before waiver After waiver
------------------------ ----------------
Fund Class A Class B Class A Class B
---- ------- ------- ------- -------
Bond Fund .98% 1.79% .95% 1.70%
Cash Management Fund .63% 2.14% .63% 1.47%
Limited Term Bond Fund 1.15% 3.82% .90% 1.24%
Tax-Exempt Cash Management Fund .73 22.58% .70% 1.47%
Utilities Fund 1.25% 1.95% 1.15% 1.90%
A significant portion of the assets of the Cash Management and Tax-Exempt
Cash Management Funds have been invested via Principal Financial Securities,
Inc. ("PFS"), a broker-dealer affiliated with Princor and the Manager of both
the Funds. Subject to regulatory approval, PFS will be sold in mid-January,
1998. It is anticipated that the assets of PFS clients will be redeemed from
these two funds. Should that occur, management fees before waiver are estimated
to be .46% and .62% respectively. With the waivers, management fees, for Cash
Management and Tax-Exempt Cash Management are estimated to be .33% and .33%.
What the Principal Funds Offer You
Your financial objectives may be investing for retirement or a child's
education, accumulating a vacation fund or generating current income. Your
purchase of Principal Funds may help you achieve your financial goals. The Funds
offer a choice of investment risks allowing you to choose different options
based on your willingness to assume risk. The Funds offer:
Professional Investment Management: Principal Management Corporation (the
"Manager") is the Manager for each of the Funds. Through a Sub-Advisory
Agreement between Invista Capital Management ("Invista") and the Manager,
Invista performs the investment advisory responsibilities of the Manager for the
Growth-Oriented Funds (except the Real Estate Fund), the Government Securities
Income Fund and the Limited Term Bond Fund. The Manager and Invista employ
experienced securities analysts to provide you with professional investment
management. The Manager or Invista decides how and where to invest Fund assets.
Investment decisions are based on research into the financial performance of
individual companies and specific securities issues, taking into account general
economic and market trends. See "How the Funds are Managed."
Diversification: Principal Funds allow you to diversify your assets across
dozens of securities issued by a number of issuers. In addition, you may further
diversify by investing in several of the Funds. Diversification reduces
investment risk.
Economies of Scale: Pooling individual shareholders' money creates
administrative efficiencies and, in certain Funds, saves on brokerage
commissions through round-lot orders and quantity discounts. By pooling money
with other investors, you can invest indirectly in many more securities than you
could on your own.
Liquidity: Upon request, each Fund will redeem all or part of your shares
and promptly pay the current net asset value of the shares redeemed, less any
applicable contingent deferred sales charge. See "How to Sell Shares."
Dividends: Each Fund will normally declare a dividend payable to
shareholders from investment income in accordance with its distribution policy.
Dividends payable for Class B shares will be lower than dividends payable for
Class A shares. See "Distribution of Income Dividends and Realized Capital
Gains."
Convenient Investment and Recordkeeping Services: Generally, shareholders
of any of the Funds (except the Money Market Funds) will receive a statement of
account each time there is a transaction that effects the account. Shareholders
of the Money Market Funds will receive a monthly statement of account. However,
certain shareholders will receive quarterly statements in lieu of other
statements. See "General Information About a Fund Account." In addition,
shareholders may complete certain transactions and access account information by
telephoning 1-800-247-4123.
Investment Objectives of the Funds
GROWTH-ORIENTED FUNDS
Domestic
--------
Fund Investment Objectives
---- ---------------------
Principal Balanced Fund, Inc. Total investment return consisting of
current income and capital appreciation
while assuming reasonable risks in
furtherance of this objective.
Principal Blue Chip Fund, Inc. Growth of capital and growth of income.
In seeking to achieve its objective, the
Fund will invest primarily in common stocks
of well-capitalized, established companies
which the Fund's Manager believes to have
the potential for growth of capital,
earnings and dividends.
Principal Capital Value Fund, Inc. Long-term capital appreciation with a
secondary objective of growth of investment
income. The Fund seeks to achieve its
objectives primarily through the purchase
of common stocks, but the Fund may
invest in other securities.
Principal Growth Fund, Inc. Growth of capital. The Fund seeks to
achieve its objective through the
purchase primarily of common stocks, but
the Fund may invest in other securities.
Principal MidCap Fund, Inc. Long-term capital appreciation. The Fund
invests primarily in securities of emerging
and other growth-oriented companies.
Principal Real Estate Fund, Inc. Generate total return. In seeking to achieve
its objective, the Fund will primarily
invest in equity securities of companies
principally engaged in the real estate
industry.
Principal SmallCap Fund, Inc. Long-term growth of capital. The Fund seeks
to achieve its objective by investing
primarily in equity securities of companies
with comparatively smaller market
capitalizations.
Principal Utilities Fund, Inc. Current income and long-term growth of
income and capital. The Fund invests
primarily in equity and fixed-income
securities of companies engaged in the
public utilities industry.
International
-------------
Fund Investment Objectives
---- ---------------------
Principal International Emerging Long-term growth of capital. The Fund will
Markets Fund, Inc. invest primarily in equity securities of
issuers in emerging market countries.
Principal International Fund, Inc. Long-term growth of capital by investing
in a portfolio of equity securities of
companies domiciled in any of the nations
of the world.
Principal International
SmallCap Fund, Inc. Long-term growth of capital. The Fund will
invest primarily in equity securities of
non-United States companies with
comparatively smaller market
capitalizations.
INCOME-ORIENTED FUNDS
Fund Investment Objectives
---- ---------------------
Principal Bond Fund, Inc. As high a level of income as is consistent
with preservation of capital and prudent
investment risk. This Fund invests primarily
in investment-grade bonds.
Principal Government Securities A high level of current income, liquidity
Income Fund, Inc. and safety of principal. The Fund seeks to
achieve its objective through the purchase
of obligations issued or guaranteed by the
United States Government or its agencies,
with emphasis on Government National
Mortgage Association Certificates ("GNMA
Certificates"). Fund shares are not
guaranteed by the United States
Government.
Principal High Yield Fund, Inc. High current income.Capital growth is a
secondary objective when consistent with
the objective of high current-income.
The Fund will invest primarily in high
yielding, lower or non-rated fixed-income
securities (commonly known as "junk bonds").
Principal Limited Term Bond A high level of current income consistent
Fund, Inc. with a relatively high level of principal
stability by investing in a portfolio of
securities with a dollar weighted average
maturity of five years or less.
Principal Tax-Exempt Bond As high a level of current interest income
Fund, Inc. exempt from federal income tax as is
consistent with preservation of capital.
This Fund invests primarily in investment-
grade, tax-exempt, fixed-income obligations.
MONEY MARKET FUNDS
Fund Investment Objectives
---- ---------------------
Principal Cash Management As high a level of current income available
Fund, Inc. from short-term securities as is considered
consistent with preservation of principal
and maintenance of liquidity. The Fund
invests in money market instruments.
Principal Tax-Exempt Cash As high a level of current interest income
Management Fund, Inc. exempt from federal income tax as is
consistent with stability of principal
and the maintenance of liquidity. The
Fund invests in high-quality, short-term
municipal obligations.
There can be no assurance that the investment objectives of any of the
Funds will be realized. See "Investment Objectives, Policies and Restrictions."
The Risks of Investing
Because the Funds have different investment objectives, each Fund is
subject to varying degrees of financial and market risks and current income
volatility. Financial risk refers to the earnings stability and overall
financial soundness of an issuer of an equity security and to the ability of an
issuer of a debt security to pay interest and principal when due. Market risk
refers to the degree to which the price of a security reacts to changes in
conditions in securities markets in general and, with particular reference to
debt securities, to changes in the overall level of interest rates. Current
income volatility refers to the degree and rapidity which changes in the overall
level of interest rates are reflected in the level of current income of a Fund.
See "Risk Factors" and "Investment Objectives, Policies and Restrictions."
How to Buy Shares
You can become a shareholder by completing the application that accompanies
this Prospectus. Mail it, along with a check, to Princor. The initial investment
for the Funds must be at least $1,000 ($500 for an account established under the
Uniform Gifts to Minors Act or Uniform Transfers Act). An IRA may be established
with a minimum of $500. See "Retirement Plans." The minimum subsequent
investment is $100. Lower minimum initial and subsequent purchase amounts are
available to you if you make regular periodic investments under an Automatic
Investment Plan. Minimum investment amounts do not apply to certain Money Market
Fund accounts. See "How to Purchase Shares." Class B shares of the Cash
Management Fund may only be purchased by an exchange from other Class B shares.
See "How to Exchange Shares."
Each Fund, except Tax-Exempt Bond Fund and Tax-Exempt Cash Management Fund,
offers three classes of shares through Princor and other dealers which it
selects. Tax-Exempt Bond Fund offers Class A and Class B shares. Tax-Exempt Cash
Management Fund offers only Class A shares. Only two classes of shares are
offered through this Prospectus, Class A shares and Class B shares. The two
classes of shares bear sales charges in different forms and amounts and bear
different expense levels.
Class A shares. When you buy less than $1 million of Class A shares of any
of the Principal Funds (except the Money Market Funds), you pay a sales charge
at the time of purchase. The sales charge ranges from a high of 4.75% (1.50% for
Limited Term Bond Fund) on purchases of up to $50,000 to a low of 0% on
purchases of $1 million or more. Purchases of $1 million or more are subject to
a .75% (.25% of the Limited Term Bond Fund) contingent deferred sales charge on
redemptions within 18 months from the date of purchase. Certain purchases of
Class A shares qualify for reduced sales charges. See "How to Purchase Shares"
and "Offering Price of Funds' Shares." Class A shares for each of the Funds
(except the Money Market Funds) currently bear a 12b-1 fee at the annual rate of
up to 0.25% (.15% for the Limited Term Bond Fund) of the Fund's average net
assets attributable to Class A shares. See "Distribution and Shareholder
Servicing Plans and Fees."
Class A shares of the Money Market Funds are sold without a sales charge at
the net asset value next determined after receipt of an order. Under most
circumstances, the net asset value will remain constant at $1.00 per share;
however, there can be no assurance that the net asset value will not change.
Class B shares. Class B shares for each Fund are sold without an initial
sales charge, but are subject to a declining contingent deferred sales charge
which begins at 4% (1.25% for the Limited Term Bond Fund) and declines to zero
over a seven-year schedule. Class B shares purchased under certain sponsored
Princor plans established after February 1, 1998, are subject to a CDSC of up to
3% if redeemed within five years of purchase. Class B shares of the Cash
Management Fund may be purchased only by exchange from other Class B shares.
Class B shares bear a higher 12b-1 fee than Class A shares, currently at the
annual rate of 1.00% (.50% for the Limited Term Bond Fund) of the Fund's average
net assets attributable to Class B shares. Class B shares will automatically
convert into Class A shares, based on relative net asset value, approximately
seven years (five years for certain sponsored plans) after purchase. Class B
shares provide you the benefit of putting all your dollars to work from the time
the investment is made, but (until conversion) will have a higher expense ratio
and pay lower dividends than Class A shares due to the higher 12b-1 fee. See
"How to Purchase Shares" and "Offering Price of Funds' Shares."
How to Exchange Shares
Shares of Principal Funds may be exchanged for shares of the same Class of
other Principal Funds without a sales charge or administrative fee under certain
conditions as described under "How to Exchange Shares." In addition, Class A
shares of the Money Market Funds acquired by direct purchase or reinvestment of
dividends on such shares may be exchanged for Class B shares of any
Growth-Oriented or Income-Oriented Fund. Shares may be exchanged by telephone or
written request. An exchange is a sale for tax purposes. Also, dividends and
capital gains distributions from shares of a Class of one Principal Fund may be
automatically "cross-reinvested" in shares of the same Class of another
Principal Fund. See "Distribution of Income Dividends and Realized Capital
Gains."
How to Sell Shares
You may sell (redeem) shares by mail or by telephone. Redemption proceeds
will generally be mailed to you on the next business day after the redemption
request is received in good order. Upon proper authorization certain redemptions
may be processed through a selected dealer. Automatic redemptions of a specified
amount may also be made through a Periodic Withdrawal Plan. In addition, Class A
shares of the Money Market Funds may be redeemed by writing a check against the
account balance or by establishing a preauthorized withdrawal service on the
account. Redemptions of Class A shares are generally made at net asset value
without charge. However, Class A share purchases of $1 million or more may be
subject to a .75% (.25% for the Limited Term Bond Fund) contingent deferred
sales charge if redeemed within 18 months of purchase. Redemptions of Class B
shares within six years (five years for certain sponsored plans) of purchase
will generally be subject to a contingent deferred sales charge. See "Offering
Price of Funds' Shares" and "How to Sell Shares." If redemption proceeds are
wired to a financial institution, a six dollar ($6) wire fee will be charged.
FINANCIAL HIGHLIGHTS
The following financial highlights are derived from financial statements
which, for the five years in the period ended October 31, 1997, have been
audited by Ernst & Young LLP, independent auditors, whose report has been
incorporated by reference herein. The financial highlights should be read in
conjunction with the financial statements, related notes, and other financial
information incorporated by reference herein. Audited financial statements may
be obtained by shareholders, without charge, by telephoning 1-800-451-5447.
<PAGE>
<TABLE>
<CAPTION>
GROWTH-ORIENTED FUNDS
Domestic
Selected data for a share of Capital Stock outstanding throughout each period:
Income from Investment Operations Less Distributions
Net Realized
and
Net Asset Net Unrealized Total Dividends Net Asset
Value at Invest- Gain from from Net Distributions Value at
Beginning ment (Loss) on Investment Investment from Total End
of Period Income Investments Operations Income Capital Gains Distributions of Period
Principal Balanced Fund, Inc.(b)(c)
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $14.61 $.35 $1.81 $ 2.16 $(.36) $(1.30) $(1.66) $15.11
1996 13.74 .38 1.59 1.97 (.43) (.67) (1.10) 14.61
1995 12.43 .41 1.31 1.72 (.36) (.05) (.41) 13.74
1994 13.26 .32 (.20) .12 (.40) (.55) (.95) 12.43
1993 12.78 .35 1 .14 1.49 (.37) (.64) (1.01) 13.26
1992 11.81 .41 .98 1.39 (.42) -- (.42) 12.78
1991 9.24 .46 2.61 3.07 (.50) -- (.50) 11.81
1990 11.54 .53 (1.70) (1.17) (.59) (.54) (1.13) 9.24
1989 11.09 .61 .56 1.17 (.56) (.16) (.72) 11.54
Period Ended October 31, 1988 (d) 9.96 .40 1.02 1.42 (.29) -- (.29) 11.09
Class B
Year Ended October 31,
1997 14.56 .25 1.79 2.04 (.25) (1.30) (1.55) 15.05
1996 13.71 .29 1.55 1.84 (.32) (.67) (.99) 14.56
Period Ended October 31, 1995 (g) 11.80 .31 1.90 2.21 (.30) -- (.30) 13.71
Principal Blue Chip Fund, Inc.(c)
Class A
Year Ended October 31,
1997 17.10 .21 3.58 3.79 (.21) (.46) (.67) 20.22
1996 15.03 .23 2.45 2.68 (.26) (.35) (.61) 17.10
1995 12.45 .24 2.55 2.79 (.21) -- (.21) 15.03
1994 11.94 .20 .57 .77 (.26) -- (.26) 12.45
1993 11.51 .21 .43 .64 (.18) (.03) (.21) 11.94
1992 10.61 .17 .88 1.05 (.15) -- (.15) 11.51
Period Ended October 31, 1991(h) 10.02 .10 .57 .67 (.08) -- (.08) 10.61
Class B
Year Ended October 31,
1997 17.03 .07 3.54 3.61 (.04) (.46) (.50) 20.14
1996 14.99 .11 2.41 2.52 (.13) (.35) (.48) 17.03
Period Ended October 31, 1995(g) 11.89 .15 3.10 3.25 (.15) -- (.15) 14.99
Principal Capital Value Fund, Inc.(c)
Class A
Year Ended October 31,
1997 27.72 .50 5.80 6.30 (.48) (3.85) (4.33) 29.69
1996 23.69 .45 5.48 5.93 (.43) (1.47) (1.90) 27.72
1995 20.83 .45 3.15 3.60 (.39) (.35) (.74) 23.69
1994 21.41 .39 .93 1.32 (.41) (1.49) (1.90) 20.83
1993 21.34 .43 1.67 2.10 (.43) (1.60) (2.03) 21.41
1992 19.53 .45 1.82 2.27 (.46) -- (.46) 21.34
1991 14.31 .49 5.24 5.73 (.51) -- (.51) 19.53
1990 18.16 .52 (3.64) (3.12) (.40) (.33) (.73) 14.31
Four Months Ended October 31,
1989(i) 19.11 .18 (.06) .12 (.29) (.78) (1.07) 18.16
Year Ended June 30,
1989 18.82 .53 1.10 1.63 (.51) (.83) (1.34) 19.11
1988 21.66 .44 (1.06) (.62) (.41) (1.81) (2.22) 18.82
Class B
Year Ended October 31,
1997 27.58 .23 5.77 6.00 (.22) (3.85) (4.07) 29.51
1996 23.61 .21 5.45 5.66 (.22) (1.47) (1.69) 27.58
Period Ended October 31, 1995(g) 19.12 .33 4.46 4.79 (.30) -- (.30) 23.61
</TABLE>
<TABLE>
<CAPTION>
Ratio/Supplemental Data
Ratio of Net
Ratio of Investment
Net Assets at Expenses to Income to Portfolio Average
Total End of Period Average Average Turnover Commission
Return (a) (in thousands) Net Assets Net Assets Rate Rate Paid
Principal Balanced Fund, Inc.(b)(c)
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1997 15.88% $ 85,436 1.33% 2.42% 27.6% $.0392
1996 15.10 70,820 1.28 2.82 32.6 .0421
1995 14.18 57,125 1.37 3.21 35.8 N/A
1994 .94 53,366 1.51 2.70 14.4 N/A
1993 12.24 39,952 1.35 2.78 27.5 N/A
1992 11.86 31,339 1.29 3.39 30.6 N/A
1991 34.09 23,372 1.30 4.25 23.6 N/A
1990 (11.28) 18,122 1.32 5.22 33.7 N/A
1989 11.03 20,144 1.25 5.45 30.2 N/A
Period Ended October 31, 1988 (d) 12.42(e) 16,282 1.12(f) 4.51(f) 65.2(f) N/A
Class B
Year Ended October 31,
1997 14.96 11,885 2.14 1.58 27.6 .0392
1996 14.10 5,964 2.13 1.93 32.6 .0421
Period Ended October 31, 1995 (g) 18.72(e) 1,263 1.91(f) 2.53(f) 35.8(f) N/A
Principal Blue Chip Fund, Inc.(c)
Class A
Year Ended October 31,
1997 22.57 79,985 1.30 1.10 55.4 .0394
1996 18.20 44,389 1.33 1.41 13.3 .0456
1995 22.65 35,212 1.38 1.83 26.1 N/A
1994 6.58 27,246 1.46 1.72 5.5 N/A
1993 5.65 23,759 1.25 1.87 11.2 N/A
1992 9.92 19,926 1.56 1.49 13.5 N/A
Period Ended October 31, 1991(h) 6.37(e) 12,670 1.71(f) 1.67(f) 0.4(f) N/A
Class B
Year Ended October 31,
1997 21.59 18,265 2.06 .32 55.4 .0394
1996 17.18 6,527 2.19 .49 13.3 .0456
Period Ended October 31, 1995 (g) 26.20(e) 1,732 1.90(f) .97(f) 26.1(f) N/A
Principal Capital Value Fund, Inc.(c)
Class A
Year Ended October 31,
1997 25.36 494,444 .70 1.85 30.8 .0457
1996 26.41 435,617 .69 1.82 50.2 .0421
1995 17.94 339,656 .75 2.08 46.0 N/A
1994 6.67 285,965 .83 2.02 31.7 N/A
1993 10.42 240,016 .82 2.16 24.8 N/A
1992 11.67 190,301 .93 2.17 38.3 N/A
1991 40.63 152,814 .99 2.72 19.7 N/A
1990 (17.82) 109,507 1.10 3.10 27.7 N/A
Four Months Ended October 31, 1989 (i) .44(e) 122,685 1.10(f) 2.87(f) 19.7(f)
Year Ended June 30,
1989 9.53 117,473 1.00 3.04 28.1 N/A
1988 (2.30) 97,147 .96 2.40 27.9 N/A
Class B
Year Ended October 31,
1997 24.13 27,240 1.65 .84 30.8 .0457
1996 25.19 9,832 1.70 .80 50.2 .0421
Period Ended October 31, 1995 (g) 25.06(e) 2,248 1.50(f) 1.07(f) 46.0(f) N/A
<FN>
Notes to financial highlights
(a) Total return is calculated without the front-end sales charge or contingent
deferred sales charge.
(b) Effective December 5, 1994, the name of Princor Managed Fund, Inc. was
changed to Princor Balanced Fund, Inc.
(c) Effective January 1, 1998, the names of the following Domestic Growth Funds
were changed:
from to
---- --
Princor Balanced Fund, Inc. Principal Balanced Fund, Inc.
Princor Blue Chip Fund, Inc. Principal Blue Chip Fund, Inc.
Princor Capital Accumulation Fund, Inc. Principal Capital Value Fund, Inc.
(d) Period from December 18, 1987, date shares first offered to public, through
October 31, 1988. Net investment income, aggregating $.08 per share for the
period from the initial purchase of shares on October 30, 1987 through
December 17, 1987, was recognized, none of which was distributed to its
sole stockholder, Principal Mutual Life Insurance Company, during the
period. Additionally, the Fund incurred net realized and unrealized losses
on investments of $.12 per share during this initial interim period. This
represented activities of the fund prior to the initial public offering of
fund shares.
(e) Total return amounts have not been annualized.
(f) Computed on an annualized basis.
(g) Period from December 9,1994, date Class B shares first offered to the
public, through October 31, 1995. For the initial period from December 5,
1994 through December 8, 1994, certain Domestic Growth Funds' Class B
shares recognized no net investment income but incurred unrealized losses
on investments as shown below. This represented Class B shares activities
of each fund prior to the initial public offering of Class B shares.
Per Share
Fund Unrealized (Loss)
---- -----------------
Principal Balanced Fund, Inc. $(.19)
Principal Blue Chip Fund, Inc. (.15)
Principal Capital Value Fund, Inc. (.46)
(h) Period from March 1, 1991, date shares first offered to public, through
October 31, 1991. Net investment income, aggregating $.01 per share for the
period from the initial purchase of shares on February 11, 1991 through
February 28, 1991, was recognized, none of which was distributed to its
sole stockholder, Principal Mutual Life Insurance Company, during the
period. Additionally, the Fund incurred unrealized gains on investments of
$.01 per share during this initial interim period. This represented
activities of the fund prior to the initial public offering of fund shares.
(i) Effective July 1, 1989, the fund changed its fiscal year-end from June 30
to October 3l.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GROWTH-ORIENTED FUNDS
Domestic
Selected data for a share of Capital Stock outstanding throughout each period:
Income from Investment Operations Less Distributions
Net Realized
Net and
Net Asset Invest- Unrealized Total Dividends Net Asset
Value at ment Gain from from Net Distributions Value at
Beginning Income (Loss) on Investment Investment from Total End
of Period (Loss) Investments Operations Income Capital Gains Distributions of Period
Principal Growth Fund, Inc.(b)
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $39.54 $ .31 $11.26 $11.57 $(.31) $ (.37) $ (.68) $50.43
1996 37.22 .35 3.50 3.85 (.35) (1.18) (1.53) 39.54
1995 31.14 .35 6.67 7.02 (.31) (.63) (.94) 37.22
1994 30.41 .26 2.56 2.82 (.28) (1.81) (2.09) 31.14
1993 28.63 .40 2.36 2.76 (.42) (.56) (.98) 30.41
1992 25.92 .39 3.32 3.71 (.40) (.60) (1.00) 28.63
1991 16.57 .41 9.32 9.73 (.38) -- (.38) 25.92
1990 19.35 .35 (1.99) (1.64) (.34) (.80) (1.14) 16.57
Four Months Ended October 31, 1989(c)18.35 .08 1.17 1.25 (.16) (.09) (.25) 19.35
Year Ended June 30,
1989 19.84 .32 .36 .68 (.29) (1.88) (2.17) 18.35
1988 23.27 .26 (2.08) (1.82) (.22) (1.39) (1.61) 19.84
Class B
Year Ended October 31,
1997 39.43 .09 11.23 11.32 (.02) (.37) (.39) 50.36
1996 37.10 .08 3.48 3.56 (.05) (1.18) (1.23) 39.43
Period Ended October 31, 1995(f) 28.33 .21 8.76 8.97 (.20) -- (.20) 37.10
Principal MidCap Fund, Inc.(b)
Class A
Year Ended October 31,
1997 35.75 .07 10.80 10.87 (.11) (1.18) (1.29) 45.33
1996 31.45 .14 5.05 5.19 (.14) (.75) (.89) 35.75
1995 25.08 .12 6.45 6.57 (.06) (.14) (.20) 31.45
1994 23.56 -- 1.61 1.61 -- (.09) (.09) 25.08
1993 19.79 .06 3.82 3.88 (.11) -- (.11) 23.56
1992 18.33 .14 1.92 2.06 (.15) (.45) (.60) 19.79
1991 11.35 .17 7.06 7.23 (.21) (.04) (.25) 18.33
1990 14.10 .31 (2.59) (2.28) (.37) (.10) (.47) 11.35
1989 12.77 .26 2.02 2.28 (.15) (.80) (.95) 14.10
Period Ended October 31, 1988(g) 10.50 .06 2.26 2.32 (.05) -- (.05) 12.77
Class B
Year Ended October 31,
1997 35.48 (.05) 10.64 10.59 (.01) (1.18) (1.19) 44.88
1996 31.31 (.04) 4.97 4.93 (.01) (.75) (.76) 35.48
Period Ended October 31,1995(f) 23.15 -- 8.18 8.18 (.02) -- (.02) 31.31
Principal Utilities Fund, Inc.(b)
Class A
Year Ended October 31,
1997 11.40 .48(h) 1.12 1.60 (.45) -- (.45) 12.55
1996 10.94 .44(h) .45 .89 (.43) -- (.43) 11.40
1995 9.25 .48(h) 1.70 2.18 (.49) -- (.49) 10.94
1994 11.45 .46(h) (2.19) (1.73) (.45) (.02) (.47) 9.25
Period Ended October 31, 1993(i) 10.18 .35(h) 1.27 1.62 (.35) -- (.35) 11.45
Class B
Year Ended October 31,
1997 11.38 .38(h) 1.13 1.51 (.36) -- (.36) 12.53
1996 10.93 .36(h) .43 .79 (.34) -- (.34) 11.38
Period Ended October 31, 1995(f) 9.20 .40(h) 1.77 2.17 (.44) -- (.44) 10.93
</TABLE>
<TABLE>
<CAPTION>
Ratio/Supplemental Data
Ratio of Net
Ratio of Investment
Net Assets at Expenses to Income to Portfolio Average
Total End of Period Average Average Turnover Commission
Return (a) (in thousands) Net Assets Net Assets Rate Rate Paid
Principal Growth Fund, Inc.(b)
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1997 29.55% $317,386 1.03% .68% 16.5% $.0411
1996 10.60 228,361 1.08 .95 1.8 .0443
1995 23.29 174,328 1.16 1.12 12.2 N/A
1994 9.82 116,363 1.30 .95 13.6 N/A
1993 9.83 80,051 1.26 1.40 16.4 N/A
1992 14.76 63,405 1.19 1.46 15.6 N/A
1991 59.30 45,892 1.13 1.85 10.6 N/A
1990 (9.20) 28,917 1.18 1.88 9.7 N/A
Four Months Ended October 31, 1989(c) 6.83(d) 32,828 1.22(e) 1.25(e) 50.1(e) N/A
Year Ended June 30,
1989 4.38 31,770 1.08 1.78 9.7 N/A
1988 (7.19) 34,316 1.00 1.29 24.9 N/A
Class B
Year Ended October 31,
1997 28.92 42,241 1.48 .23 16.5 .0411
1996 9.80 24,019 1.79 .22 1.8 .0443
Period Ended October 31, 1995(f) 31.48(d) 8,279 1.80(e) .31(e) 12.2(e) N/A
Principal MidCap Fund, Inc.(b)
Class A
Year Ended October 31,
1997 31.26 346,666 1.26 .20 9.5 .0435
1996 16.89 229,465 1.32 .46 12.3 .0391
1995 26.41 150,611 1.47 .47 13.5 N/A
1994 6.86 92,965 1.74 .02 8.1 N/A
1993 19.66 48,668 1.66 .26 7.0 N/A
1992 11.63 29,055 1.74 .80 5.8 N/A
1991 64.56 17,174 1.78 1.14 8.4 N/A
1990 (16.80) 8,959 1.94 2.43 15.8 N/A
1989 19.65 8,946 1.79 2.09 13.5 N/A
Period Ended October 31, 1988(g) 19.72(d) 6,076 1.52(e) .84(e) 19.5(e) N/A
Class B
Year Ended October 31,
1997 30.64 59,554 1.69 (.24) 9.5 .0435
1996 16.07 28,480 2.01 (.24) 12.3 .0391
Period Ended October 31,1995(f) 35.65(d) 8,997 2.04(e) (.17)(e) 13.5(e) N/A
Principal Utilities Fund, Inc.(b)
Class A
Year Ended October 31,
1997 14.26 64,366 1.15(h) 3.90 22.5 .0465
1996 8.13 66,322 1.17(h) 3.85 34.2 .0410
1995 24.36 65,873 1.04(h) 4.95 13.0 N/A
1994 (15.20) 56,747 1.00(h) 4.89 13.8 N/A
Period Ended October 31, 1993(i) 15.92(d) 50,372 1.00(e)(h) 4.48(e) 4.3(e) N/A
Class B
Year Ended October 31,
1997 13.41 6,937 1.90(h) 3.14 22.5 .0465
1996 7.23 5,579 1.93(h) 3.07 34.2 .0410
Period Ended October 31, 1995(f) 24.18(d) 3,952 1.72(e)(h) 3.84(e) 13.0(e) N/A
<FN>
Notes to financial highlights
(a) Total return is calculated without the front-end sales charge or the
contingent deferred sales charge.
(b) Effective January 1, 1998, the names of the following Domestic Growth Funds
were changed:
from to
---- --
Princor Growth Fund, Inc. Principal Growth Fund, Inc.
Princor Emerging Growth Fund, Inc. Principal MidCap Fund, Inc.
Princor Utilities Fund, Inc. Principal Utilities Fund, Inc.
(c) Effective July 1, 1989, the fund changed its fiscal year-end from June 30
to October 3l.
(d) Total return amounts have not been annualized.
(e) Computed on an annualized basis.
(f) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995. For the initial interim period from
December 5, 1994 through December 8, 1994, the following Domestic Growth
Funds' Class B shares recognized net investment income (none of which was
distributed to the sole shareholder, Principal Management Corporation) and
incurred unrealized losses on investments as shown below. This represented
Class B shares activities of each fund prior to the initial public offering
of Class B shares.
Per Share
Net Investment
Fund Income
---- --------------
Principal Growth Fund, Inc. $ --
Principal MidCap Fund, Inc. --
Principal Utilities Fund, Inc. .01
(g) Period from December 18, 1987, date shares first offered to public, through
October 31, 1988. Net investment income, aggregating $.04 per share for the
period from the initial purchase of shares on October 30, 1987 through
December 17, 1987, was recognized, none of which was distributed to its
sole stockholder, Principal Mutual Life Insurance Company, during the
period. Additionally, the Fund incurred net realized and unrealized gains
on investments of $.46 per share during this initial interim period. This
represented activities of the Fund prior to the initial public offering of
Fund shares.
(h) Without the Manager's voluntary waiver of a portion of certain of its
expenses for the periods (year except as noted) ended October 31 of the
years indicated, the Principal Utilities Fund would have had per share net
investment income and the ratios of expenses to average net assets as
shown:
Ratio of
Per Share Expenses
Net Invest- to Average Net Amount
Fund Year ment Income Assets Waived
---- ------- ----------- -------------- --------
Principal Utilties
Fund, Inc.
Class A 1997 $.46 1.25% $ 65,940
1996 .43 1.25 54,932
1995 .46 1.30 151,145
1994 .41 1.50 284,836
1993(i) .32 1.54(e) 139,439
Class B 1997 .37 1.95 3,753
1996 .34 2.06 6,690
1995(f) .40 1.81(e) 1,338
(i) Period from December 16, 1992, date shares first offered to public, through
October 31, 1993. Net investment income, aggregating $.05 per share for the
period from the initial purchase of shares on November 16, 1992 through
December 15, 1992, was recognized, none of which was distributed to its
sole stockholder, Principal Mutual Life Insurance Company, during the
period. Additionally, the Fund incurred unrealized gains on investments of
$.13 per share during the initial interim period. This represented
activities of the Fund prior to the initial public offering of Fund shares.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GROWTH-ORIENTED FUNDS
International
Selected data for a share of Capital Stock outstanding throughout each period:
Income from Investment Operations Less Distributions
Net Net Realized
Invest- and
Net Asset ment Unrealized Total Dividends Net Asset
Value at Income Gain from from Net Distributions Value at
Beginning(Operating (Loss) on Investment Investment from Total End
of Period Loss) Investments Operations Income Capital Gains Distributions of Period
Principal International Emerging
Growth Fund, Inc.
Class A
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Period Ended October 31, 1997(c) $9.51 $(.01) $(1.21) $(1.22) $-- $-- $ -- $8.29
Class B
Period Ended October 31, 1997(c) 9.51 (.01) (1.22) (1.23) -- -- -- 8.28
Principal International Fund, Inc.(f)
Class A
Year Ended October 31,
1997 8.14 .09 1.52 1.61 (.11) (.31) (.42) 9.33
1996 7.28 .10 1.17 1.27 (.08) (.33) (.41) 8.14
1995 7.44 .08 (.02) .06 (.03) (.19) (.22) 7.28
1994 6.85 .01 .64 .65 (.02) (.04) (.06) 7.44
1993 5.02 .03 1.98 2.01 (.05) (.13) (.18) 6.85
1992 5.24 .06 (.14) (.08) (.06) (.08) (.14) 5.02
1991 4.64 .05 .58 .63 (.03) -- (.03) 5.24
1990 4.66 .09 (.04) .05 (.07) -- (.07) 4.64
Ten Months Ended October 31, 1989(g) 4.58 .07 .07 .14 (.06) -- (.06) 4.66
1988(h) 3.88 .12 .67 .79 (.09) -- (.09) 4.58
1987(h) 8.55 .12 (.96) (.84) (.08) (3.75) (3.83) 3.88
Class B
Year Ended October 31,
1997 8.07 .03 1.51 1.54 (.04) (.31) (.35) 9.26
1996 7.24 .03 1.15 1.18 (.02) (.33) (.35) 8.07
Period Ended October 31, 1995(i) 6.71 .05 .51 .56 (.03) -- (.03) 7.24
Principal International SmallCap
Fund, Inc.
Class A
Period Ended October 31, 1997(c) 10.04 (.01) (.07) (.08) -- -- -- 9.96
Class B
Period Ended October 31, 1997(c) 10.04 (.01) (.07) (.08) -- -- -- 9.96
</TABLE>
<TABLE>
<CAPTION>
Ratio/Supplemental Data
Ratio of Net
Investment
Income
Ratio of (Operating
Net Assets at Expenses to Loss) to Portfolio Average
Total End of Period Average Average Turnover Commission
Return (a) (in thousands) Net Assets Net Assets Rate Rate Paid(b)
Principal International Emerging
Growth Fund, Inc.
Class A
<S> <C> <C> <C> <C> <C> <C>
Period Ended October 31, 1997(c) (10.18)%(d) $ 5,039 2.03%(e) (.32)%(e) 21.4%(e) $.0050
Class B
Period Ended October 31, 1997(c) (10.29)(d) 3,116 2.16(e) (.46)(e) 21.4(e) .0050
Principal International Fund, Inc.(f)
Class A
Year Ended October 31,
1997 20.46 281,158 1.39 1.25 26.6 N/A
1996 18.36 172,276 1.45 1.43 23.8 N/A
1995 1.03 126,554 1.63 1.10 35.4 N/A
1994 9.60 115,812 1.74 .10 13.2 N/A
1993 41.39 63,718 1.61 .59 19.5 N/A
1992 (1.57) 35,048 1.69 1.23 19.9 N/A
1991 13.82 26,478 1.72 1.36 27.6 N/A
1990 .94 16,044 1.79 1.89 37.9 N/A
Ten Months Ended October 31, 1989(g) 2.98(d) 13,928 1.55(e) 1.82(e) 32.4(e) N/A
1988(h) 20.25 13,262 1.55 1.43 56.9 N/A
1987(h) (10.13) 3,943 2.09 .83 183.0 N/A
Class B
Year Ended October 31,
1997 19.62 33,842 2.17 .42 26.6 .0174
1996 17.16 15,745 2.28 .64 23.8 .0197
Period Ended October 31, 1995(i) 9.77(d) 3,908 2.19(e) .58(e) 35.4(e) N/A
Principal International SmallCap
Fund, Inc.
Class A
Period Ended October 31, 1997(c) .50(d) 6,210 1.99(e) (.40)(e) 10.4(e) .0104
Class B
Period Ended October 31, 1997(c) .50(d) 4,774 2.07(e) (.47)(e) 10.4(e) .0104
<FN>
Notes to financial highlights
(a) Total return is calculated without the front-end sales charge or the
contingent deferred sales charge.
(b) The International Growth Funds identified the cost of commissions paid on
purchases and sales of portfolio securities charged to each Fund in the
local currency of the respective country involved. The value of the
commissions is translated into U.S. dollars at approximate rates when
acquired or sold. This translation can give the appearance that the
International Growth Funds average commission rates are substantially
different from the Domestic Growth Funds.
(c) Period from August 29, 1997, date Class A and Class B shares first offered
to the public through October 31, 1997. Principal International Emerging
Markets Fund, Inc. and Principal International SmallCap Fund, Inc. classes
of shares recognized net investment income as follows for the period from
the initial purchase of shares on August 14, 1997 through August 28, 1997,
none of which was distributed to the sole shareholder, Principal Mutual
Life Insurance Company. Principal International Emerging Markets Fund, Inc.
and Principal International SmallCap Fund, Inc. incurred unrealized gains
(losses) on investments during the initial interim period as follows. This
represents Class A and Class B share activities prior to the initial public
offering of all classes of shares of each Fund.
Per Share Per Share
Net Investment Unrealized
Fund Income Gain (Loss)
---- ------------- -----------
Principal International
Emerging Markets Fund, Inc.
Class A $.01 $(.50)
Class B .01 (.50)
Principal International
SmallCap Fund, Inc.
Class A .01 .03
Class B .01 .03
(d) Total return amounts have not been annualized.
(e) Computed on an annualized basis.
(f) Effective January 1, 1998, Princor World Fund, Inc. changed its name to
Principal International Fund, Inc.
(g) Effective January 1, 1989, the Fund changed its fiscal year-end from
December 31 to October 31.
(h) The investment manager of Principal International Fund, Inc. was changed on
August 1, 1988 to the current manager, Principal Management Corporation.
The years 1983 through 1987 are not covered by the current independent
auditor's report.
(i) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995. Principal World Fund, Inc. Class B shares
recognized no net investment income for the period from the initial
purchase by Principal Management Corporation of Class B shares on December
5, 1994, through December 8, 1994. Additionally, Class B shares incurred
unrealized losses on investments of $(.07) per share during the initial
interim period. This represents Class B share activities of the Fund prior
to the initial public offering of Class B shares.
</FN>
</TABLE>
<TABLE>
<CAPTION>
INCOME-ORIENTED FUNDS
Selected data for a share of Capital Stock outstanding throughout each period:
Income from Investment Operations Less Distributions
Net Realized
and
Net Asset Net Unrealized Total Dividends Net Asset
Value at Invest- Gain from from Net Distributions Value at
Beginning ment (Loss) on Investment Investment from Total End
of Period Income Investments Operations Income Capital Gains Distributions of Period
Principal Bond Fund, Inc.(b)
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $11.17 $.75(c) $ .33 $1.08 $ (.81) $ -- $ (.81) $11.44
1996 11.42 .76(c) (.25) .51 (.76) -- (.76) 11.17
1995 10.27 .78(c) 1.16 1.94 (.78) (.01) (.79) 11.42
1994 11.75 .78(c) (1.47) (.69) (.78) (.01) (.79) 10.27
1993 10.97 .81(c) .79 1.60 (.81) (.01) (.82) 11.75
1992 10.65 .85(c) .32 1.17 (.85) -- (.85) 10.97
1991 9.99 .88(c) .65 1.53 (.87) -- (.87) 10.65
1990 10.57 .86 (.55) .31 (.89) -- (.89) 9.99
1989 10.37 .87 .25 1.12 (.86) (.06) (.92) 10.57
Period Ended October 31, 1988(d) 9.95 .80(c) .38 1.18 (.76) -- (.76) 10.37
Class B
Year Ended October 31,
1997 11.15 .67(c) .31 .98 (.71) -- (.71) 11.42
1996 11.41 .67(c) (.25) .42 (.68) -- (.68) 11.15
Period Ended October 31, 1995(g) 10.19 .63(c) 1.19 1.82 (.60) -- (.60) 11.41
Principal Government Securities
Income Fund, Inc.(b)
Class A
Year Ended October 31,
1997 11.26 .70 .29 .99 (.74) -- (.74) 11.51
1996 11.31 .70 (.05) .65 (.70) -- (.70) 11.26
1995 10.28 .71 1.02 1.73 (.70) -- (.70) 11.31
1994 11.79 .69 (1.40) (.71) (.68) (.12) (.80) 10.28
1993 11.44 .74 .55 1.29 (.74) (.20) (.94) 11.79
1992 11.36 .81 .12 .93 (.81) (.04) (.85) 11.44
1991 10.54 .85 .84 1.69 (.87) -- (.87) 11.36
1990 10.76 .85 (.22) .63 (.85) -- (.85) 10.54
Four Months Ended October 31, 1989(h)10.66 .29 .09 .38 (.28) -- (.28) 10.76
Year Ended June 30,
1989 10.33 .87 .32 1.19 (.86) -- (.86) 10.66
1988 10.40 .89 (.05) .84 (.88) (.03) (.91) 10.33
Class B
Year Ended October 31,
1997 11.23 .64 .29 .93 (.66) -- (.66) 11.50
1996 11.29 .61 (.05) .56 (.62) -- (.62) 11.23
Period Ended October 31, 1995(g) 10.20 .56 1.07 1.63 (.54) -- (.54) 11.29
Principal High Yield Fund, Inc.(b)
Class A
Year Ended October 31,
1997 8.27 .67 .31 .98 (.73) -- (.73) 8.52
1996 8.06 .68 .23 .91 (.70) -- (.70) 8.27
1995 7.83 .68 .20 .88 (.65) -- (.65) 8.06
1994 8.36 .63 (.51) .12 (.65) -- (.65) 7.83
1993 8.15 .71 .21 .92 (.71) -- (.71) 8.36
1992 7.86 .79 .29 1.08 (.79) -- (.79) 8.15
1991 7.12 .88 .80 1.68 (.94) -- (.94) 7.86
1990 9.47 1.10 (2.35) (1.25) (1.09) (.01) (1.10) 7.12
1989 10.44 1.10 (.83) .27 (1.09) (.15) (1.24) 9.47
Period Ended October 31, 1988(d) 9.97 .98(c) .38 1.36 (.89) -- (.89) 10.44
Class B
Year Ended October 31,
1997 8.22 .62 .28 .90 (.65) -- (.65) 8.47
1996 8.05 .60 .20 .80 (.63) -- (.63) 8.22
Period Ended October 31, 1995(g) 7.64 .53 .38 .91 (.50) -- (.50) 8.05
</TABLE>
<TABLE>
<CAPTION>
Ratio/Supplemental Data
Ratio of Net
Investment
Income
Ratio of (Operating
Net Assets at Expenses to Loss) to Portfolio
Total End of Period Average Average Turnover
Return (a) (in thousands) Net Assets Net Assets Rate
Principal Bond Fund, Inc.(b)
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C>
1997 10.15% $126,427 .95%(c) 6.70% 12.8%
1996 4.74 113,437 .95(c) 6.85 3.4
1995 19.73 106,962 .94(c) 7.26 5.1
1994 (6.01) 88,801 .95(c) 7.27 8.9
1993 15.22 85,015 .92(c) 7.19 9.3
1992 11.45 62,534 .88(c) 7.95 8.4
1991 16.04 37,825 .80(c) 8.66 .9
1990 3.08 22,719 1.22 8.40 3.6
1989 11.54 13,314 1.24 8.59 0.0
Period Ended October 31, 1988(d) 11.59(e) 10,560 .70(c)(f) 8.85(f) 63.9(f)
Class B
Year Ended October 31,
1997 9.20 13,403 1.70(c) 5.92 12.8
1996 3.91 7,976 1.69(c) 6.14 3.4
Period Ended October 31, 1995(g) 17.98(e) 2,708 1.59(c)(f) 6.30(f) 5.1(f)
Principal Government Securities
Income Fund, Inc.(b)
Class A
Year Ended October 31,
1997 9.23 249,832 .84 6.19 10.8
1996 6.06 259,029 .81 6.31 25.9
1995 17.46 261,128 .87 6.57 10.1
1994 (6.26) 249,438 .95 6.35 24.8
1993 11.80 236,718 .93 6.38 52.6
1992 8.49 161,565 .95 7.04 54.3
1991 16.78 94,613 .98 7.80 14.9
1990 6.17 71,806 1.07 8.15 22.4
Four Months Ended October 31, 1989(h) 3.63(e) 55,702 1.07(f) 8.18(f) 5.2(f)
Year Ended June 30,
1989 12.37 56,848 .96 8.58 --
1988 8.60 59,884 .82 8.65 --
Class B
Year Ended October 31,
1997 8.65 15,431 1.39 5.63 10.8
1996 5.17 11,586 1.60 5.53 25.9
Period Ended October 31, 1995(g) 16.07(e) 4,699 1.53(f) 5.68(f) 10.1
Principal High Yield Fund, Inc.(b)
Class A
Year Ended October 31,
1997 12.33 38,239 1.22 7.99 39.2
1996 11.88 28,432 1.26 8.49 18.8
1995 11.73 23,396 1.45 8.71 40.3
1994 1.45 19,802 1.46 7.82 27.2
1993 11.66 19,154 1.35 8.57 23.4
1992 14.35 16,359 1.41 9.69 28.2
1991 25.63 13,195 1.50 12.06 14.2
1990 (14.51) 9,978 1.45 12.99 15.8
1989 2.68 12,562 1.43 11.22 19.9
Period Ended October 31, 1988(d) 14.15(e) 10,059 .77(c)(f) 10.55(f) 73.2(f)
Class B
Year Ended October 31,
1997 11.31 6,558 2.13 7.03 39.2
1996 10.46 2,113 2.38 7.39 18.8
Period Ended October 31, 1995(g) 12.20(e) 633 2.10(f) 7.78(f) 40.3(f)
Notes to financial highlights
<FN>
Notes to financial highlights
(a) Total return is calculated without the front-end sales charge or the
contingent deferred sales charge.
(b) Effective January 1, 1998, the names of the following Income Funds were
changed:
from to
---- --
Princor Bond Fund, Inc. Principal Bond Fund, Inc.
Princor Government Securities Principal Government Securities
Income Fund, Inc. Income Fund, Inc.
Princor High Yield Fund, Inc. Principal High Yield Fund, Inc.
(c) Without the Manager's voluntary waiver of a portion of certain of its
expenses for the periods (year, except as noted) ended October 31 of the
years indicated, the following Funds would have had per share expenses and
the ratios of net investment income to average net assets as shown:
Ratio of
Per Share Expenses
Net Invest-to Average Net Amount
Fund Year ment Income Assets Waived
---- ---- ------------- ----------- --------
Principal Bond
Fund, Inc.
Class A 1997 $.74 .98% $ 41,256
1996 .76 .97 22,536
1995 .77 1.02 86,018
1994 .77 1.09 120,999
1993 .79 1.07 111,162
1992 .82 1.11 110,868
1991 .84 1.15 100,396
1988(d) .76 1.12(f) 31,187
Class B 1997 .66 1.79 8,982
1996 .67 1.79 5,874
1995(g) .62 1.62(f) 300
Principal High Yield
Fund, Inc. 1988(d) .95 1.33(f) 32,609
(d) Period from December 18, 1987, date shares first offered to public, through
October 31, 1988. Net investment income, aggregating $.10 per share for the
period from the initial purchase of shares on October 30, 1987 through
December 17, 1987, was recognized of which $.06 per share was distributed
to its sole stockholder, Principal Mutual Life Insurance Company, during
the period. Additionally, each Fund incurred net realized and unrealized
losses on investments of $.09 per share during this initial interim period.
This represented activities of each Fund prior to the initial public
offering of Fund shares.
(e) Total return amounts have not been annualized.
(f) Computed on an annualized basis.
(g) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995. Certain of the Income Funds Class B
shares recognized net investment income as follows, for the period from the
initial purchase of Class B shares on December 5, 1994 through December 8,
1994, none of which was distributed to the sole shareholder, Principal
Management Corporation. Additionally, the Income Funds Class B shares
incurred unrealized loss during the initial interim period as follows. This
represented Class B share activities of each Fund prior to the intitial
public offering of Class B shares:
Per Share Per Share
Net Investment Unrealized
Fund Income (Loss)
---- -------------- ----------
Principal Bond Fund, Inc. $.01 $ --
Principal Government Securities
Income Fund, Inc. .01 (.02)
Principal High Yield Fund, Inc. .01 (.03)
(h) Effective July 1, 1989, the fund changed its fiscal year-end from June 30
to October 3l.
</FN>
</TABLE>
<TABLE>
<CAPTION>
INCOME-ORIENTED FUNDS
Selected data for a share of Capital Stock outstanding throughout each period:
Income from Investment Operations Less Distributions
Net Realized
and
Net Asset Net Unrealized Total Dividends Net Asset
Value at Invest- Gain from from Net Distributions Value at
Beginning ment (Loss) on Investment Investment from Total End
of Period Income Investments Operations Income Capital Gains Distributions of Period
Principal Limited Term Bond
Fund, Inc.(b)
Class A
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended October 31, 1997 $ 9.89 $.61(c) $ .03 $ .64 $(.65) $ -- $(.65) $9.88
Period Ended October 31, 1996(d) 9.90 .38(c) (.04) .34 (.35) -- (.35) 9.89
Class B
Year Ended October 31, 1997 9.89 .56(c) .04 .60 (.59) -- (.59) 9.90
Period Ended October 31, 1996(d) 9.90 .36(c) (.05) .31 (.32) -- (.32) 9.89
Principal Tax-Exempt Bond Fund, Inc.(b)
Class A
Year Ended October 31,
1997 12.04 .63 .39 1.02 (.68) -- (.68) 12.38
1996 11.98 .64 .07 .71 (.65) -- (.65) 12.04
1995 10.93 .65 1.05 1.70 (.65) -- (.65) 11.98
1994 12.62 .64 (1.54) (.90) (.63) (.16) (.79) 10.93
1993 11.62 .66 1.11 1.77 (.66) (.11) (.77) 12.62
1992 11.47 .68 .19 .87 (.69) (.03) (.72) 11.62
1991 10.82 .69 .68 1.37 (.70) (.02) (.72) 11.47
1990 11.06 .68 (.25) .43 (.67) -- (.67) 10.82
Four Months Ended October 31, 1989(g) 11.18 .22 (.12) .10 (.22) -- (.22) 11.06
Year Ended June 30,
1989 10.40 .69 .77 1.46 (.68) -- (.68) 11.18
1988 10.51 .71 .06 .77 (.72) (.16) (.88) 10.40
Class B
Year Ended October 31,
1997 12.02 .55 .40 .95 (.58) -- (.58) 12.39
1996 11.96 .55 .06 .61 (.55) -- (.55) 12.02
Period Ended October 31, 1995(h) 10.56 .50 1.38 1.88 (.48) -- (.48) 11.96
</TABLE>
<TABLE>
<CAPTION>
Ratio/Supplemental Data
Ratio of Net
Investment
Income
Ratio of (Operating
Net Assets at Expenses to Loss) to Portfolio
Total End of Period Average Average Turnover
Return (a) (in thousands) Net Assets Net Assets Rate
Principal Limited Term Bond
Fund, Inc.(b)
Class A
<S> <C> <C> <C> <C> <C>
Year Ended October 31, 1997 6.75% $ 20,567 .90(c) 6.20% 17.4%
Period Ended October 31, 1996(d) 3.62(e) 17,249 .89(c)(f) 6.01(f) 16.5(f)
Class B
Year Ended October 31, 1997 6.31 625 1.24(c) 5.84 17.4
Period Ended October 31, 1996(d) 3.32(e) 112 1.15(c)(f) 5.75(f) 16.5(f)
Principal Tax-Exempt Bond Fund, Inc.(b)
Class A
Year Ended October 31,
1997 8.71 193,007 .79 5.14 8.9
1996 6.08 187,180 .78 5.34 9.8
1995 16.03 179,715 .83 5.67 17.6
1994 (7.41) 171,425 .91 5.49 20.6
1993 15.70 177,480 .89 5.45 20.3
1992 7.76 106,661 .99 5.96 22.9
1991 13.09 62,755 1.01 6.24 13.1
1990 4.06 46,846 1.11 6.31 2.6
Four Months Ended October 31, 1989(g) .90(e) 36,877 1.24(f) 6.18(f) 5.1(f)
Year Ended June 30,
1989 14.64 31,278 1.07 6.54 2.1
1988 7.76 22,812 .95 7.00 11.0
Class B
Year Ended October 31,
1997 8.08 7,783 1.45 4.46 8.9
1996 5.23 5,794 1.52 4.59 9.8
Period Ended October 31, 1995(h) 17.97(e) 3,486 1.51(f) 4.78(f) 17.6(f)
<FN>
Notes to financial highlights
(a) Total return is calculated without the front-end sales charge or the
contingent deferred sales charge.
(b) Effective January 1, 1998, the names of the following Income Funds were
changed:
from to
---- --
Princor Limited Term Bond Principal Limited Term Bond
Fund, Inc. Fund, Inc.
Princor Tax-Exempt Bond Principal Tax-Exempt Bond
Fund, Inc. Fund, Inc.
(c) Without the Manager's voluntary waiver of a portion of certain of its
expenses for the periods (year except as noted) ended October 31 of the
years indicated, the following fund would have had per share net investment
income and the ratios of expenses to average net assets as shown:
Ratio of
Per Share Expenses
Net Invest-to Average Net Amount
Fund Year ment Income Assets Waived
---- ---- ------------- ---------- ------
Principal Limited Term
Bond Fund, Inc.
Class A 1997 $.59 1.15% $46,271
1996(d) .37 1.16(f) 22,716
Class B 1997 .46 3.82 6,528
1996(d) .34 1.94(f) 259
(d) Period from February 29, 1996, date shares first offered to the public,
through October 31, 1996. With respect to Class A shares, net investment
income, aggregating $.02 per share for the period from the initial purchase
of shares on February 13, 1996 through February 28,1996, was recognized,
none of which was distributed to its sole stockholder, Principal Mutual
Life Insurance Company during the period. Additionally, Class A shares
incurred unrealized losses on investments of $.12 per share during the
initial interim period. With respect to Class B shares, no net investment
income was recognized for the period from initial purchase of shares on
February 27, 1996 through February 28, 1996. Class B shares incurred
unrealized losses on investments of $.02 per share during the initial
interim period. This represents Class A share and Class B share activities
of the Fund prior to the initial public offering of both classes of shares.
(e) Total return amounts have not been annualized.
(f) Computed on an annualized basis.
(g) Effective July 1, 1989, the fund changed its fiscal year-end from June 30
to October 3l.
(h) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995. Principal Tax-Exempt Bond Fund, Inc.
Class B shares recognized no net investment income for the period from the
initial purchase of Class B shares on December 5, 1994 through December 8,
1994. Class B shares incurred unrealized losses on investments of $.05 per
share during the initial interim period. This represented Class B share
activities of the Fund prior to the intitial public offering of Class B
</FN>
</TABLE>
<TABLE>
<CAPTION>
MONEY MARKET FUNDS
Selected data for a share of Capital Stock outstanding throughout each period:
Income from Investment Operations Less Distributions
Net Realized
and
Net Asset Net Unrealized Total Dividends Net Asset
Value at Invest- Gain from from Net Distributions Value at
Beginning ment (Loss) on Investment Investment from Total End
of Period Income(a) Investments Operations Income Capital Gains Distributions of Period
Principal Cash Management Fund, Inc.(c)
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $1.000 $.050 -- $.050 $(.050) -- $(.050) $1.000
1996 1.000 .049 -- .049 (.049) -- (.049) 1.000
1995 1.000 .052 -- .052 (.052) -- (.052) 1.000
1994 1.000 .033 -- .033 (.033) -- (.033) 1.000
1993 1.000 .026 -- .026 (.026) -- (.026) 1.000
1992 1.000 .036 -- .036 (.036) -- (.036) 1.000
1991 1.000 .061 -- .061 (.061) -- (.061) 1.000
1990 1.000 .074 -- .074 (.074) -- (.074) 1.000
Four Months Ended October 31, 1989(d) 1.000 .027 -- .027 (.027) -- (.027) 1.000
Year Ended June 30,
1989 1.000 .080 -- .080 (.080) -- (.080) 1.000
1988 1.000 .060 -- .060 (.060) -- (.060) 1.000
Class B
Year Ended October 31,
1997 1.000 .041 -- .041 (.041) -- (.041) 1.000
1996 1.000 .041 -- .041 (.041) -- (.041) 1.000
Period Ended October 31, 1995(h) 1.000 .041 -- .041 (.041) -- (.041) 1.000
Principal Tax-Exempt Cash
Management Fund, Inc.(c)
Class A
Year Ended October 31,
1997 1.000 .029 -- .029 (.029) -- (.029) 1.000
1996 1.000 .029 -- .029 (.029) -- (.029) 1.000
1995 1.000 .032 -- .032 (.032) -- (.032) 1.000
1994 1.000 .021 -- .021 (.021) -- (.021) 1.000
1993 1.000 .020 -- .020 (.020) -- (.020) 1.000
1992 1.000 .028 -- .028 (.028) -- (.028) 1.000
1991 1.000 .043 -- .043 (.043) -- (.043) 1.000
1990 1.000 .053 -- .053 (.053) -- (.053) 1.000
1989 1.000 .058 -- .058 (.058) -- (.058) 1.000
Period Ended October 31, 1988(g) 1.000 .005 -- .005 (.005) -- (.005) 1.000
Class B
Year Ended October 31,
1997 1.000 .022 -- .022 (.022) -- (.022) 1.000
1996 1.000 .021 -- .021 (.021) -- (.021) 1.000
Period Ended October 31, 1995(h) 1.000 .021 -- .021 (.021) -- (.021) 1.000
</TABLE>
<TABLE>
<CAPTION>
Ratio/Supplemental Data
Ratio of Net
Ratio of Investment
Net Assets at Expenses to Income to
Total End of Period Average Average
Return (b) (in thousands) Net Assets(b) Net Assets
Principal Cash Management Fund, Inc.(c)
Class A
Year Ended October 31,
<S> <C> <C> <C> <C> <C>
1997 4.96% $836,072 .63% 4.98%
1996 5.00 694,962 .66 4.88
1995 5.36 623,864 .72 5.24
1994 3.40 332,346 .70 3.27
1993 2.67 284,739 .67 2.63
1992 3.71 247,189 .65 3.66
1991 6.29 262,543 .61 5.95
1990 7.65 151,007 .93 7.36
Four Months Ended October 31, 1989(d) 2.63(e) 124,895 1.04(f) 7.86(f)
Year Ended June 30,
1989 8.15 120,149 1.00 8.21
1988 6.18 51,320 1.02 6.06
Class B
Year Ended October 31,
1997 4.05 992 1.47 4.08
1996 4.13 520 1.50 4.08
Period Ended October 31, 1995(h) 4.19(e) 208 1.42(f) 4.50(f)
Principal Tax-Exempt Cash
Management Fund, Inc.(c)
Class A
Year Ended October 31,
1997 2.89 98,939 .70 2.93
1996 2.92 98,482 .71 2.87
1995 3.24 99,887 .69 3.19
1994 2.11 79,736 .67 2.08
1993 1.99 79,223 .66 1.96
1992 2.86 69,224 .65 2.84
1991 4.36 71,469 .61 4.27
1990 5.40 58,301 .71 5.26
1989 5.88 42,639 .60 5.78
Period Ended October 31, 1988(g) .47(e) 6,000 .26(f) 5.24(f)
Class B
Year Ended October 31,
1997 2.18 28 1.47 2.16
1996 2.13 27 1.47 2.11
Period Ended October 31, 1995(h) 2.19(e) 27 1.42(f) 2.40(f)
<FN>
Notes to financial highlights
(a) Without the Manager's voluntary waiver of a portion of certain of its
expenses for the periods (year except as noted) ended October 31 of the
years indicated, the following funds would have had per share net
investment income and the ratios of expenses to average net assets as
shown:
Per Share Net Ratio of Expenses
Investment to Average Net Amount
Fund Year Income Assets Waived
Principal Cash
Management
Fund, Inc.
Class A 1997 $.050 .63% $ --
1996 .049 .67 7,102
1995 .052 .78 296,255
1994 .031 .90 595,343
1993 .025 .84 468,387
1992 .035 .80 385,328
1991 .059 .79 433,196
1990 .073 1.01 106,841
1989 ** .026 1.06(f) 101,625
1989 * .079 1.11 9,558
Class B 1997 .036 2.14 5,492
1996 .029 3.94 6,140
1995(h) .041 1.63(f) 104
Principal Tax-Exempt
Cash Management
Fund, Inc.
Class A 1997 .029 .73 27,978
1996 .028 .77 69,107
1995 .031 .84 138,574
1994 .019 .85 150,515
1993 .018 .83 131,442
1992 .026 .82 134,497
1991 .040 .83 147,279
1990 .050 .96 123,656
1989 .053 1.04 125,604
1988(g) .004 .76(f) 2,630
Class B 1997 (.188) 22.58 5,807
1996 (.243) 27.43 7,160
1995(h) .018 1.89(f) 99
* Year ended June 30, 1989
** Four months ended October 31, 1989
(b) Total return is calculated without the front-end sales charge or the
contingent deferred sales charge.
(c) Effective January 1, 1998, the names of the Money Market Funds were changed
as follows:
from to
---- --
Princor Cash Management Fund, Inc. Principal Cash Management Fund, Inc.
Princor Tax-Exempt Cash Principal Tax-Exempt Cash
Management Fund, Inc. Management Fund, Inc.
(d) Effective July 1, 1989, the fund changed its fiscal year-end from June 30
to October 3l.
(e) Total return amounts have not been annualized.
(f) Computed on an annualized basis.
(g) Period from September 30, 1988, date shares first offered to public,
through October 31, 1988. Net investment income, aggregating $.005 per
share, for the period from the initial purchase of shares on August 23,
1988 through September 29, 1988, was recognized and distributed to its sole
stockholder, Principal Mutual Life Insurance Company, during the period.
This represented activities of the Fund prior to the initial public
offering of Fund shares.
(h) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995. The Money Market Funds' Class B shares
recognized no net investment income for the period from the initial
purchase of Class B shares on December 5, 1994 through December 8, 1994.
This represented Class B share activities of each Fund prior to the initial
public offering of Class B shares.
</FN>
</TABLE>
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The investment objectives and policies of each Fund are described below.
There can be no assurance that the objectives of the Funds will be realized.
GROWTH-ORIENTED FUNDS
The Growth-Oriented Funds have different investment objectives. They seek:
o capital appreciation and growth primarily through investments in equity
securities of corporations established in the United States ("U.S.")
(Capital Value Fund, Growth Fund, MidCap Fund and SmallCap Fund)
o long-term growth of capital primarily through investments in equity
securities of corporations located outside of the U.S. (International
Emerging Markets Fund, International Fund and International SmallCap
Fund)
o total investment return including both capital appreciation and income
through investments in equity and debt securities (Balanced Fund)
o growth of capital and growth of income primarily through investments in
common stocks of well-capitalized, established companies (Blue Chip
Fund)
o current income and long-term growth of income and capital through
investment in equity securities of real estate companies (Real Estate
Fund)
o current income and long-term growth of income and capital through
investment in equity and fixed-income securities of public utilities
companies (Utilities Fund)
The Growth-Oriented Funds may invest in the following equity securities:
common stocks; preferred stocks and debt securities that are convertible into
common stock, that carry rights or warrants to purchase common stock or that
carry rights to participate in earnings; rights or warrants to subscribe to or
purchase any of the foregoing securities; and sponsored and unsponsored American
Depository Receipts (ADRs) based on any of the foregoing securities. Unsponsored
ADRs are not created by the issuer of the underlying security, may be subject to
fees imposed by the issuing bank that, in the case of sponsored ADRs, would be
paid by the issuer of a sponsored ADR and may involve additional risks such as
reduced availability of information about the issuer of the underlying security.
The Blue Chip, Capital Value, Growth, International, International Emerging
Markets, International SmallCap, MidCap, and SmallCap Funds will seek to be
fully invested under normal conditions in equity securities. When in the opinion
of the Manager current market or economic conditions warrant, a Growth-Oriented
Fund may, for temporary defensive purposes, place all or a portion of its assets
in cash (on which the Fund would earn no income), cash equivalents, bank
certificates of deposit, bankers acceptances, repurchase agreements, commercial
paper, commercial paper master notes which are floating rate debt instruments
without a fixed maturity, United States Government securities, and preferred
stocks and debt securities, whether or not convertible into or carrying rights
for common stock. When investing for temporary defensive purposes a
Growth-Oriented Fund is not investing so as to achieve its investment objective.
A Growth-Oriented Fund may also maintain reasonable amounts in cash or
short-term debt securities for daily cash management purposes or pending
selection of particular long-term investments.
DOMESTIC
Principal Balanced Fund
The investment objective of Principal Balanced Fund is to generate a total
investment return consisting of current income and capital appreciation while
assuming reasonable risks in furtherance of the investment objective. The term
"reasonable risks" refers to investment decisions that in the Manager's judgment
do not present a greater than normal risk of loss in light of current or
anticipated future market and economic conditions, trends in yields and interest
rates, and fiscal and monetary policies.
In seeking to achieve the investment objective, the Fund invests primarily
in growth and income-oriented common stocks (including securities convertible
into common stocks), corporate bonds and debentures and short-term money market
instruments. The Fund may also invest in other equity securities and in debt
securities issued or guaranteed by the United States Government and its agencies
or instrumentalities. The Fund seeks to generate real (inflation plus) growth
during favorable investment periods and may emphasize income and capital
preservation strategies during uncertain investment periods. The Manager will
seek to minimize declines in the net asset value per share. However, there is no
guarantee that the Manager will be successful in achieving this goal.
The portions of the Fund's total assets invested in equity securities, debt
securities and short-term money market instruments are not fixed, although
ordinarily 40% to 70% of the Fund's portfolio will be invested in equity
securities with the balance of the portfolio invested in debt securities. The
investment mix will vary from time to time depending upon the judgment of the
Manager as to general market and economic conditions, trends in investment
yields and interest rates, and changes in fiscal or monetary policies. The Fund
may invest up to 20% of its assets in foreign securities. For a description of
certain investment risks associated with foreign securities, see "Risk Factors."
The Fund may invest in all types of common stocks and other equity
investments, without regard to any objective investment criteria such as size of
the issue or issuer, exchange listing or seasoning. The Fund may invest in both
exchange-listed and over-the-counter securities, in small or large companies,
and in well-established or unseasoned companies. Also, the Fund's investments in
corporate bonds and debentures and money market instruments are not restricted
by credit ratings or other objective investment criteria, except with respect to
bank certificates of deposit as set forth below. Some of the fixed income
securities in which the Fund may invest may be considered to include speculative
characteristics and the Fund may purchase such securities that are in default
but does not currently intend to invest more than 5% of its assets in securities
rated below BBB by Standard & Poor's or Baa by Moody's. The rating services'
descriptions of BBB or Baa securities are as follows: Moody's Investors Service,
Inc. Bond Ratings -- Baa: Bonds which are rated Baa are considered as medium
grade obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well. Standard &
Poor's Corporation Bond Ratings -- BBB: Debt rated "BBB" is regarded as having
an adequate capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than for debt in higher-rated
categories. See the discussion of the High Yield Fund for information concerning
risks associated with below-investment grade bonds. The Fund will not
concentrate its investments in any industry.
In selecting common stocks, the Manager seeks companies which the Manager
believes have predictable earnings increases and which, based on their future
growth prospects, may be currently undervalued in the market place. During
periods when the Manager determines that general economic conditions are
favorable, it will generally purchase common stocks with the objective of
long-term capital appreciation. From time to time, and in periods of economic
uncertainty, the Manager may purchase common stocks with the expectation of
price appreciation over a relatively short period of time.
To achieve its investment objective, the Fund may at times emphasize the
generation of interest income by investing in short, medium or long-term debt
securities. Investment in debt securities may also be made with a view to
realizing capital appreciation when the Manager believes that declining interest
rates may increase market values. The Fund may also purchase "deep discount
bonds," i.e., bonds which are selling at a substantial discount from their face
amount, with a view to realizing capital appreciation.
The Fund may invest in the following short-term money market investments:
U.S. Treasury bills, bank certificates of deposit, bankers' acceptances,
repurchase agreements, commercial paper and commercial paper master notes which
are floating rate debt instruments without a fixed maturity. The Fund will only
invest in domestic bank certificates of deposit issued by banks which are
members of the Federal Reserve System that have total deposits in excess of one
billion dollars.
The United States Government securities in which the Fund may invest
consist of U.S. Treasury obligations and obligations of certain agencies, such
as the Government National Mortgage Association, which are supported by the full
faith and credit of the United States, as well as obligations of certain other
Federal agencies or instrumentalities, such as the Federal National Mortgage
Association, Federal Land Banks and the Federal Farm Credit Administration,
which are backed only by the right of the issuer to borrow limited funds from
the U.S. Treasury, by the discretionary authority of the U.S. Government to
purchase such obligations or by the credit of the agency or instrumentality
itself.
Principal Blue Chip Fund
The objective of Principal Blue Chip Fund is growth of capital and growth
of income. Growth of income means increasing the Fund's investment income which
is primarily derived from dividends earned on portfolio securities. In seeking
to achieve its objective, the Fund will invest primarily in common stocks of
well capitalized, established companies which the Fund's manager believes to
have the potential for growth of capital, earnings and dividends. Under normal
market conditions, the Fund will invest at least 65%, and may invest up to 100%,
of its total assets in the common stocks of blue chip companies.
Blue chip companies are defined as those companies with market
capitalizations of at least $1 billion. Blue chip companies are generally
identified by their substantial capitalization, established history of earnings
and dividends, easy access to credit, good industry position and superior
management structure. In addition, the large market of publicly held shares for
such companies and the generally high trading volume in those shares results in
a relatively high degree of liquidity for such investments. The characteristics
of high quality and high liquidity of blue chip investments should make the
market for such stocks attractive to many investors.
Examples of blue chip companies currently eligible for investment by the
Fund include, but are not limited to, companies such as General Electric
Company, Ford Motor Company, Exxon Corporation, Merck & Company, Inc., Digital
Equipment Corporation, Capital Cities ABC, Inc., J.P. Morgan & Co. and Coca Cola
Company. In general, the Fund will seek to invest in those established, high
quality companies whose industries are experiencing favorable secular or
cyclical change.
The Fund's Manager may invest up to 35% of the Fund's total assets in
equity securities, other than common stock, issued by companies that meet the
investment criteria for blue chip companies and in equity securities issued by
companies that do not meet those criteria. The Manager does not intend to invest
regularly in speculative securities, which are those issued by new, unseasoned
companies or by companies that have limited product lines, markets, financial
resources or management, but it may from time to time invest not more than 5% of
the Fund's total assets in those kinds of securities. The Fund may invest up to
20% of its assets in securities of foreign issuers. The foreign securities in
which the Fund may invest need not be issued by companies that meet the
investment criteria for blue chip companies. For a description of certain
investment risks associated with foreign securities, see "Risk Factors."
Principal Capital Value Fund
The primary objective of Principal Capital Value Fund is long-term capital
appreciation. A secondary objective is growth of investment income.
The Fund will invest primarily in common stocks, but it may invest in other
equity securities. In making selections for the Fund's investment portfolio, the
Manager will use an approach described broadly as that of fundamental analysis,
which is discussed in the Statement of Additional Information. To achieve its
investment objective, Invista will invest in securities that have "value"
characteristics. This process is known as "value investing." Value investing is
purchasing securities of companies with above average dividend yields and below
average price to earnings (P/E) ratios. Securities chosen for investment may
include those of companies which the Manager believes can reasonably be expected
to share in the growth of the nation's economy over the long term.
Principal Growth Fund
The objective of Principal Growth Fund is growth of capital. Realization of
current income will be incidental to the objective of growth of capital.
The Fund will invest primarily in common stocks, but it may invest in other
equity securities. In making selections for the Fund's investment portfolio, the
Manager will use an approach described broadly as that of fundamental analysis,
which is discussed in the Statement of Additional Information. In pursuit of the
Fund's investment objective, investments will be made in securities which as a
group appear to possess potential for appreciation in market value. Common
stocks chosen for investment may include those of companies which have a record
of sales and earnings growth that exceeds the growth rate of corporate profits
of the S&P 500 or which offer new products or new services. The policy of
investing in securities which have a high potential for growth of capital can
mean that the assets of the Fund may be subject to greater risk than securities
which do not have such potential.
Principal MidCap Fund
The objective of Principal MidCap Fund is to achieve long-term capital
appreciation. The strategy of this Fund is to invest primarily in the common
stocks and securities (both debt and preferred stock) convertible into common
stocks of emerging and other growth-oriented companies that, in the judgment of
the Manager, are responsive to changes within the marketplace and have the
fundamental characteristics to support growth. In pursuing its objective of
capital appreciation, the Fund may invest, for any period of time, in any
industry and in any kind of growth-oriented company, whether new and unseasoned
or well known and established. Under normal market conditions, the Fund will
invest at least 65% of its assets in securities of companies with market
capitalizations in the $1 billion to $10 billion range. The Fund may invest up
to 20% of its assets in securities of foreign issuers. For a description of
certain investment risks associated with foreign securities, see "Risk Factors."
There can be, of course, no assurance that the Fund will attain its
objective. Investment in emerging and other growth-oriented companies may
involve greater risk than investment in other companies. The securities of
growth-oriented companies may be subject to more abrupt or erratic market
movements, and many of them may have limited product lines, markets, financial
resources or management. Because of these factors and of the length of time that
may be required for full development of the growth prospects of some of the
companies in which the Fund invests, the Fund believes that its shares are
suitable only for persons who are able to assume the risk of investing in
securities of emerging and growth-oriented companies and prepared to maintain
their investment during periods of adverse market conditions. Investors should
not rely on the Fund for their short-term financial needs. Since the Fund will
not be seeking current income, investors should not view a purchase of Fund
shares as a complete investment program.
Principal Real Estate Fund
The investment objective of Principal Real Estate Fund is to generate total
return by investing primarily in equity securities of companies principally
engaged in the real estate industry. The Fund will seek to achieve its objective
by seeking, with approximately equal emphasis, long-term capital growth and
current income through the purchase of equity securities.
Under normal circumstances the Fund will invest at least 65 percent of its
assets in the equity securities of real estate companies. Equity securities
include common stock (including shares in real estate investment trusts),
preferred stock, rights and warrants. A real estate investment trust ("REIT") is
a corporation, or a business trust which, in satisfying certain Internal Revenue
Code requirements, is permitted to effectively eliminate corporate level federal
income taxes. Qualifying REITs must, among other things, derive substantially
all of their income from real estate assets and annually distribute to
shareholders 95 percent or more of their otherwise taxable income.
REITs are characterized as equity REITs, mortgage REITs and hybrid REITs.
An equity REIT invests primarily in the fee ownership of real estate and revenue
is primarily derived from rental income. A mortgage REIT primarily invests in
real estate mortgages and hybrid REITs combine the characteristics of both an
equity REIT and a mortgage REIT.
For purposes of the Fund's investment policies, a real estate company is
one that has at least 50% of its assets, income or profits attributable to
products or services related to the real estate industry. Real estate companies
include REITs or other securitized real estate investments and companies with
substantial real estate holdings such as paper, lumber, hotel and entertainment
companies. Companies whose products and services relate to the real estate
industry include building supply manufacturers, mortgage lenders and mortgage
servicing companies. The Fund may invest up to 25% of its total assets in
securities of foreign real estate companies (see "Risk Factors").
Securities issued by real estate companies may be subject to risks similar
to those associated with the direct ownership of real estate (in addition to
securities market risks) because of its policy of concentration in the
securities of companies in the real estate industry. These include declines in
the value of real estate, risks related to general and local economic
conditions, dependency on management skills, heavy cash flow dependency,
possible lack of availability of mortgage funds, overbuilding, extended
vacancies in properties, increases in property taxes and operating expenses,
changes in zoning laws, losses due to costs resulting from the cleanup of
environmental problems, casualty or condemnation losses, changes in neighborhood
values and changes in interest rates.
In addition to these risks, equity REITS may be affected by changes in the
value of the underlying property owned by the trusts, while mortgage REITS may
be affected by the quality of any credit extended. Further, equity and mortgage
REITS are dependent upon management skills and generally may not be diversified.
Equity and mortgage REITS are also subject to heavy cash flow dependency,
defaults by borrowers and self-liquidation. In addition, equity or mortgage
REITS could possibly fail to qualify for tax free pass-through of income under
the Internal Revenue Code of 1986, as amended, or to maintain their exemptions
from registration under the Investment Company Act of 1940. The above factors
may also adversely affect a borrower's or lessee's ability to meet its
obligations to the REIT. In the event of a default by a borrower or lessee, the
REIT may experience delays in enforcing its rights as a mortgagee or lessor and
may incur substantial costs associated with protecting its investments.
Principal SmallCap Fund
The investment objective of Principal SmallCap Fund is long-term growth of
capital. The strategy of this Fund is to invest primarily in equity securities
of companies domiciled in the United States with comparatively smaller market
capitalizations. Under normal market conditions, the Fund invests at least 65%
of its assets in securities of companies having a total market capitalization of
$1 billion or less.
In selecting securities for investment, the Fund will look at stocks with
both "growth" and "value" characteristics, with no consistent preference between
the two categories. The growth orientation emphasizes buying stocks of companies
whose potential for growth of capital and earnings is expected to be above
average. The value orientation emphasizes buying stocks at less than their
intrinsic value and avoiding those whose price has been speculatively bid up.
Principal Utilities Fund
The investment objective of Principal Utilities Fund is to provide current
income and long-term growth of income and capital. The Fund seeks to achieve its
investment objective by investing primarily in equity and fixed-income
securities of companies engaged in the public utilities industry. The term
"public utilities industry" consists of companies engaged in the manufacture,
production, generation, transmission, sale and distribution of gas and electric
energy, as well as companies engaged in the communications field, including
telephone, telegraph, satellite, microwave and other companies providing
communication facilities for the public, but excluding public broadcasting
companies. For purposes of the Fund, a company will be considered to be in the
public utilities industry if, during the most recent twelve-month period, at
least 50% of the company's gross revenues, on a consolidated basis, is derived
from the public utilities industry. Under normal market conditions, the Fund, as
an investment policy, will invest at least 65%, and may invest up to 100%, of
its total assets in securities of companies in the public utilities industry,
and as a matter of fundamental policy will invest no less than 25% of its total
assets in those securities. As a non-fundamental policy, the Fund may not own
more than 5% of the outstanding voting securities of more than one public
utility company as defined by the Public Utility Holding Company Act of 1935.
The Fund invests in both equity securities (as defined previously under
"Growth-Oriented Funds") and fixed- income securities (bonds and preferred
stock) in the public utilities industry. The Fund does not have any set policies
to concentrate within any particular segment of the utilities industry. The Fund
will shift its asset allocation without restriction between types of utilities
and between equity and fixed-income securities based upon the Manager's
determination of how to achieve the Fund's investment objective in light of
prevailing market, economic and financial conditions. For example, at a
particular time the Manager may choose to allocate up to 100% of the Fund's
assets in a particular type of security (for example, equity securities) or in a
specific utility industry segment (for example, electric utilities).
Fixed-income securities in which the Fund may invest are debt securities
and preferred stocks, which are rated at the time of purchase Baa or better by
Moody's or BBB or better by S&P, or which, if unrated, are deemed to be of
comparable quality by the Fund's Manager. A description of corporate bond
ratings is contained in the Appendix to the Statement of Additional Information.
The rating services' descriptions of Baa or BBB securities are as follows:
Moody's Investors Service, Inc. Bond ratings -- Baa: Bonds which are rated Baa
are considered as medium grade obligations, i.e., they are neither highly
protected nor poorly secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well. Standard and Poor's Corporation Bond Ratings -- BBB:
Debt rated "BBB" is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than for debt in higher-rated categories.
If a fixed-income security held by the Fund is rated BBB or Baa and is
subsequently down graded by a rating agency, the Fund will retain such security
in its portfolio until the Manager determines that it is practicable to sell the
security without undue market or tax consequences to the Fund.
While the Fund will invest primarily in the securities of public utility
companies, it may invest up to 35% of its total assets in those securities that
are permissible investments for the Balanced Fund. See "Principal Balanced Fund"
and "Certain Investment Policies and Restrictions." However the Fund will not
invest in fixed-income securities rated below Baa by Moody's or BBB by S&P.
The public utilities industry as a whole has certain characteristics and
risks particular to that industry. Unlike industrial companies, the rates which
utility companies may charge their customers generally are subject to review and
limitation by governmental regulatory commissions. Although rate changes of a
utility usually fluctuate in approximate correlation with financing costs, due
to political and regulatory factors rate changes ordinarily occur only following
a delay after the changes in financing costs. This factor will tend to favorably
affect a utility company's earnings and dividends in times of decreasing costs,
but conversely will tend to adversely affect earnings and dividends when costs
are rising. In addition, the value of public utility debt securities (and, to a
lesser extent, equity securities) tends to have an inverse relationship to the
movement of interest rates.
Among the risks affecting the utilities industry are the following: risks
of increases in fuel and other operating costs; the high cost of borrowing to
finance capital construction during inflationary periods; restrictions on
operations and increased costs and delays associated with compliance with
environmental and nuclear safety regulations; the difficulties involved in
obtaining natural gas for resale or fuel for generating electricity at
reasonable prices; the risks in connection with the construction and operation
of nuclear power plants; the effects of energy conservation and effects of
regulatory changes, such as the possible adverse effects on profits of recent
increased competition among telecommunications companies and the uncertainties
resulting from such companies' diversification into new domestic and
international businesses, as well as agreements by many such companies linking
future rate increases to inflation or other factors not directly related to the
actual operating profits of the enterprise.
INTERNATIONAL
Principal International Emerging Markets Fund
The investment objective of Principal International Emerging Markets Fund
is long-term growth of capital. The Fund seeks to achieve this objective by
investing primarily in equity securities of issuers in emerging market
countries. As used in this Prospectus, the term "emerging market country" means
any country which, in the opinion of the Manager, is generally considered to be
an emerging country by the international financial community, including the
International Bank for Reconstruction and Development (more commonly known as
the World Bank) and the International Financial Corporation. These countries
generally include every nation in the world except the United States, Canada,
Japan, Australia, New Zealand and most nations located in Western Europe.
Currently, investing in many emerging countries is not feasible or may involve
unacceptable political risks. The Fund focuses on those emerging market
countries in which it believes the economies are developing strongly and in
which the markets are becoming more sophisticated.
Investments in emerging market countries involve special risks. Certain
emerging market countries have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate
fluctuations, large amounts of debt, balance of payments and trade difficulties,
and extreme poverty and unemployment. In addition, there are certain risks
associated with investments in foreign securities (see "Risk Factors").
Under normal conditions at least 65% of the Fund's total assets will be
invested in emerging market country equity securities. The Fund invests in
securities of (1) issuers with their principal place of business or principal
office in emerging market countries, or (2) issuers for which the principal
securities trading market is an emerging market country, or (3) issuers,
regardless of where the security is traded, that derive 50% or more of their
total revenue from either goods or services produced in emerging market
countries or sales made in emerging market countries.
A small portion of the Fund assets may also be invested in closed end
country specific investment companies and sovereign debt of developing
countries. Closed end investment companies provide a way to gain exposure to
countries where the mechanics of trading securities are not cost effective.
Investment in sovereign debt may have the potential for returns that are higher
than returns on stocks within the country.
For temporary defensive purposes, the International Emerging Markets Fund
may invest in the same kinds of securities as the other Growth-Oriented Funds
whether issued by domestic or foreign corporations, governments, or governmental
agencies, instrumentalities or political subdivisions and whether denominated in
United States dollars or some other currency.
Principal International Fund
The investment objective of Principal International Fund is to seek
long-term growth of capital through investment in a portfolio of equity
securities of companies domiciled in any of the nations of the world. In
choosing investments in equity securities of foreign and United States
corporations, the Manager intends to pay particular attention to long-term
earnings prospects and the relationship of then-current prices to such
prospects. Short-term trading is not generally intended, but occasional
investments may be made for the purpose of seeking short-term or medium-term
gain. The Fund expects its investment objective to be met over long periods
which may include several market cycles. For a description of certain investment
risks associated with foreign securities, see "Risk Factors."
For temporary defensive purposes, the International Fund may invest in the
same kinds of securities as the other Growth-Oriented Funds whether issued by
domestic or foreign corporations, governments, or governmental agencies,
instrumentalities or political subdivisions and whether denominated in United
States dollars or some other currency.
The Fund intends that its investments normally will be allocated among
various countries. Although there is no limitation on the percentage of assets
that may be invested in any one country or denominated in any one currency, the
Fund intends under normal market conditions to have at least 65% of its assets
invested in securities issued by corporations of at least three countries, one
of which may be the United States (although the Fund currently intends not to
invest in equity securities of United State companies). Investments may be made
anywhere in the world, but it is expected that primary consideration will be
given to investing in the securities issued by corporations of Western Europe,
North America and Australasia (Australia, Japan and Far East Asia) that have
developed economies. Changes in investments may be made as prospects change for
particular countries, industries or companies.
Principal International SmallCap Fund
The investment objective of Principal International SmallCap Fund is
long-term growth of capital. The strategy of this Fund is to invest primarily in
equity securities of non-United States companies with comparatively smaller
market capitalizations. Under normal market conditions, the Fund invests at
least 65% of its assets in securities of companies having a total market
capitalization of $1 billion or less.
The Fund diversifies its investments geographically. Although there is no
limitation on the percentage of assets that may be invested in any one country
or denominated in any one currency, the Fund intends, under normal market
conditions, to have at least 65% of its assets invested in securities issued by
corporations of at least three countries. For a description of certain
investment risks associated with foreign securities, see "Risk Factors."
For temporary defensive purposes, the International SmallCap Fund may
invest in the same kinds of securities as the other Growth-Oriented Funds
whether issued by domestic or foreign corporations, governments, or governmental
agencies, instrumentalities or political subdivisions and whether denominated in
United States dollars or some other currency.
INCOME-ORIENTED FUNDS
The Principal Funds currently include five Funds which seek a high level of
income through investments in fixed-income securities. These Funds are Bond
Fund, Government Securities Income Fund, High Yield Fund, Limited Term Bond Fund
and Tax-Exempt Bond Fund, collectively referred to as the "Income-Oriented
Funds." Each Fund has rating limitations with regard to the quality of
securities that may be held in the portfolio. The rating limitations apply at
the time of acquisition of a security and any subsequent change in a rating by a
rating service will not require elimination of a security from the Fund's
portfolio. The Statement of Additional Information contains descriptions of the
ratings of Moody's Investors Service, Inc. ("Moody's") and Standard and Poor's
Corporation ("S&P").
Principal Bond Fund
The investment objective of Principal Bond Fund is to provide as high a
level of income as is consistent with preservation of capital and prudent
investment risk.
In seeking to achieve the investment objective, the Fund will predominantly
invest in marketable fixed-income securities. Investments will be made generally
on a long-term basis, but the Fund may make short-term investments from time to
time as deemed prudent by the Manager. Longer maturities typically provide
better yields but will subject the Fund to a greater possibility of substantial
changes in the values of its portfolio securities as interest rates change.
Under normal circumstances, the Fund will invest at least 65% of its assets
in bonds in one or more of the following categories: (i) corporate debt
securities and taxable municipal obligations, which at the time of purchase have
an investment grade rating within the four highest grades used by S&P (AAA, AA,
A or BBB) or by Moody's (Aaa, Aa, A or Baa) or which, if nonrated, are
comparable in quality in the opinion of the Fund's Manager; (ii) similar
Canadian corporate, Provincial and Federal Government securities payable in U.S.
funds; and (iii) securities issued or guaranteed by the United States Government
or its agencies or instrumentalities. The balance of the Fund's assets may be
invested in the following securities: domestic and foreign corporate debt
securities, preferred stocks, common stocks that provide returns that compare
favorably with the yields on fixed income investments, common stocks acquired
upon conversion of debt securities or preferred stocks or upon exercise of
warrants acquired with debt securities or otherwise and foreign government
securities. The debt securities and preferred stocks in which the Fund invests
may be convertible or nonconvertible. Securities rated below BBB or Baa are
commonly referred to as junk bonds. The Fund does not intend to purchase debt
securities rated lower than Ba3 by Moody's or BB- by S&P (bonds which are judged
to have speculative elements; their future cannot be considered as
well-assured). The rating services' descriptions of BBB or Baa securities are as
follows: Moody's Investors Service, Inc. Bond Ratings -- Baa: Bonds which are
rated Baa are considered as medium grade obligations, i.e., they are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well. Standard & Poor's Corporation Bond Ratings -- BBB: Debt
rated "BBB" is regarded as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than for debt in higher-rated categories. See the discussion of the High Yield
Fund for information concerning risks associated with below investment grade
bonds.
During the fiscal year ended October 31, 1997, the percentage of the Fund's
portfolio securities invested in the various ratings established by Moody's,
based upon the weighted average ratings of the portfolio, was as follows:
Moody's Rating Portfolio Percentage
-------------- --------------------
Aa .85%
A 22.85%
Baa 74.14%
Ba 1.22%
B .94%
The preceding percentage for A and AA rated securities includes .35% and
.99%, respectively of unrated securities which have been determined by the
Manager to be of comparable quality.
Cash equivalents in which the Fund invests include corporate commercial
paper rated A-1+, A-1 or A-2 by S&P or P-1 or P-2 by Moody's, unrated commercial
paper issued by corporations with outstanding debt securities rated in the four
highest grades by S&P and Moody's and bank certificates of deposit and bankers'
acceptances issued or guaranteed by national or state banks and repurchase
agreements considered by the Fund to have investment quality. Under unusual
market or economic conditions, the Fund for temporary defensive purposes may
invest up to 100% of its assets in cash or cash equivalents.
Principal Government Securities Income Fund
The objective of Principal Government Securities Income Fund is a high
level of current income, liquidity and safety of principal.
The Fund will invest in obligations issued or guaranteed by the United
States Government or by its agencies or instrumentalities and in repurchase
agreements collateralized by such obligations. Such securities include
Government National Mortgage Association ("GNMA") Certificates of the modified
pass-through type, Federal National Mortgage Association ("FNMA") Obligations,
Federal Home Loan Mortgage Corporation ("FHLMC") Certificates and Student Loan
Marketing Association ("SLMA") Certificates and other U.S. Government
Securities. GNMA is a wholly-owned corporate instrumentality of the United
States whose securities and guarantees are backed by the full faith and credit
of the United States. FNMA, a federally chartered and privately-owned
corporation, FHLMC, a federal corporation, and SLMA, a government sponsored
stockholder-owned organization, are instrumentalities of the United States. The
securities and guarantees of FNMA, FHLMC and SLMA are not backed, directly or
indirectly, by the full faith and credit of the United States. Although the
Secretary of the Treasury of the United States has discretionary authority to
lend FNMA up to $2.25 billion outstanding at any time, neither the United States
nor any agency thereof is obligated to finance FNMA's or FHLMC's operations or
to assist FNMA or FHLMC in any other manner. The Fund may maintain reasonable
amounts of cash or short-term debt securities not issued or guaranteed by the
U.S. Government or its agencies or instrumentalities for daily cash management
purposes or pending selection of long-term investments.
Cash equivalents in which the Fund invests include corporate commercial
paper rated A-1+, A-1 or A-2 by S&P or P-1 or P-2 by Moody's, unrated commercial
paper issued by corporations with outstanding debt securities rated in the four
highest grades by S&P and Moody's and bank certificates of deposit and bankers'
acceptances issued or guaranteed by national or state banks and repurchase
agreements considered by the Fund to have investment quality.
Depending on market conditions, a substantial portion of the assets may be
invested in GNMA Certificates of the modified pass-through type and in
repurchase agreements collateralized by such obligations. GNMA is a United
States Government corporation within the Department of Housing and Urban
Development. GNMA Certificates are mortgage-backed securities representing an
interest in a pool of mortgage loans. Such loans are made by lenders such as
mortgage bankers, insurance companies, commercial banks and savings and loan
associations. Then, they are either insured by the Federal Housing
Administration (FHA) or they are guaranteed by the Veterans Administration (VA)
or Farmers Home Administration (FmHA). The lender or other prospective issuer
creates a specific pool of such mortgages, which it submits to GNMA for
approval. After approval, a GNMA Certificate is typically offered by the issuer
to investors through securities dealers.
GNMA Certificates differ from bonds in that the principal is scheduled to
be paid back by the borrower on a monthly basis over the life of the loan rather
than returned in a lump sum at maturity. Modified pass-through GNMA
Certificates, which are the only kind in which the Fund intends to invest,
entitle the holder to receive all interest and principal payments owed on the
mortgages in the pool (net of the issuer and GNMA fee of .5% prescribed by
regulation), regardless of whether or not the mortgagor has made such payment.
The timely payment of interest and principal is guaranteed by the full faith and
credit of the United States Government.
Although the payment of interest and principal is guaranteed, the guarantee
does not extend to the value of a GNMA Certificate or the value of the shares of
the Fund. The market value of a GNMA Certificate typically will fluctuate to
reflect changes in prevailing interest rates. It falls when rates increase (as
does the market value of other debt securities) and it rises when rates decline
(but it may not rise on a comparable basis with other debt securities because of
its prepayment feature), and, therefore, may be more or less than the face
amount of the GNMA Certificate, which reflects the aggregate principal amount of
the underlying mortgages. As a result the net asset value of Fund shares will
fluctuate as interest rates change.
Mortgagors may pay off their mortgages at any time. Expected prepayments of
the mortgages can affect the market value of the GNMA Certificate, and actual
prepayments can affect the return ultimately received. Prepayments, like
scheduled payments of principal, are reinvested by the Fund at prevailing
interest rates which may be less than the rate on the GNMA Certificate.
Prepayments are likely to increase as the interest rate for new mortgages moves
lower than the rate on the GNMA Certificate. Moreover, if the GNMA Certificate
had been purchased at a premium above principal because its rate exceeded
prevailing rates, the premium is not guaranteed and a decline in value to par
may result in a loss of the premium especially in the event of prepayment.
The FNMA and FHLMC securities in which the Fund invests are very similar to
GNMA certificates as described above but are not guaranteed by the full faith
and credit of the United States but rather by the agency itself. FNMA and FHLMC
securities are rated Aaa by Moody's and AAA by Standard & Poor's. These ratings
reflect the status of FNMA and FHLMC as federal agencies as well as the
important role each plays in financing purchases of homes in the U.S.
Student Loan Marking Association is a government sponsored
stockholder-owned organization whose goal is to provide liquidity to financial
and educational institutions. SLMA provides liquidity by purchasing student
loans, which are principally government guaranteed loans issued under the
Federal Guaranteed Student Loan Program and the Health Education Assistance Loan
Program. SLMA securities are not guaranteed by the U.S. Government but are
obligations solely of the agency. SLMA senior debt issues in which the Fund
invests are rated AAA by Standard & Poor's and Aaa by Moody's.
There are other obligations issued or guaranteed by the United States
Government (such as U.S. Treasury securities) or by its agencies or
instrumentalities that are either supported by the full faith and credit of the
U.S. Treasury or the credit of a particular agency or instrumentality. Included
in the latter category are Federal Home Loan Bank and Farm Credit Banks.
Obligations not guaranteed by the United States Government are highly rated
because they are issued by indirect branches of government. Such paper is issued
as needs arise by an agency and is traded regularly in denominations similar to
those in which government obligations are traded.
The Fund will not engage in the trading of securities for the purpose of
realizing short-term profits, but it will adjust its portfolio as considered
advisable in view of prevailing or anticipated market conditions and the Fund's
investment objective. Accordingly, the Fund may sell portfolio securities in
anticipation of a rise in interest rates and purchase securities for inclusion
in its portfolio in anticipation of a decline in interest rates.
As a hedge against changes in interest rates, the Fund may enter into
contracts with dealers in GNMA Certificates whereby the Fund agrees to purchase
or sell an agreed-upon principal amount of GNMA Certificates at a specified
price on a certain date. The Fund may enter into similar purchase agreements
with issuers of GNMA Certificates other than Principal Mutual Life Insurance
Company. The Fund may also purchase optional delivery standby commitments which
give the Fund the right to sell particular GNMA Certificates at a specified
price on a specified date. Failure of the other party to such a contract or
commitment to abide by the terms thereof could result in a loss to the Fund. To
the extent the Fund engages in delayed delivery transactions it will do so for
the purpose of acquiring portfolio securities consistent with its investment
objective and policies and not for the purpose of investment leverage or to
speculate on interest rate changes. Liability accrues to the Fund at the time it
becomes obligated to purchase such securities, although delivery and payment
occur at a later date. From the time the Fund becomes obligated to purchase
securities on a delayed delivery basis, the Fund has all the rights and risks
attendant to the ownership of a security except that no interest accrues to the
purchaser until delivery. At the time the Fund enters into a binding obligation
to purchase such securities, Fund assets of a dollar amount sufficient to make
payment for the securities to be purchased will be segregated. The availability
of liquid assets for this purpose and the effect of asset segregation on the
Fund's ability to meet its current obligations, to honor requests for redemption
and to have its investment portfolio managed properly will limit the extent to
which the Fund may engage in forward commitment agreements. Except as may be
imposed by these factors, there is no limit on the percent of the Fund's total
assets that may be committed to transactions in such agreements.
Principal High Yield Fund
Principal High Yield Fund's primary investment objective is high current
income. Capital growth is a secondary objective when consistent with the
objective of high current income. This Fund is designed for investors willing to
assume additional risk in return for above average income.
In seeking to attain the Fund's objective of high current income, the Fund
invests primarily in high yielding, lower or nonrated fixed-income securities
(commonly known as "junk bonds"), constituting a diversified portfolio which the
Fund Manager believes does not involve undue risk to income or principal.
Normally, at least 80% of the Fund's assets will be invested in debt securities,
convertible securities (both debt and preferred stock) or preferred stocks that
are consistent with its primary investment objective of high current income. The
Fund's remaining assets may be invested in common stocks and other equity
securities in which the Growth-Oriented Funds may invest when these types of
investments are consistent with the objective of high current income.
The Fund seeks to invest its assets in securities rated Ba1 or lower by
Moody's or BB+ or lower by S&P or in unrated securities which the Fund's Manager
believes are of comparable quality. These securities are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and to repay principal in accordance with the terms of the obligation.
The Fund will not invest in securities rated below Caa by Moody's and below CCC
by S&P.
The rating services' descriptions of securities rating categories in which
the Fund may normally invest are as follows:
Moody's Investors Service, Inc. Bond Ratings - Ba: Bonds which are rated Ba
are judged to have speculative elements; their future cannot be considered as
well-assured. Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in this class. B:
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa:Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and a modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Standard & Poor's Corporation Bond Ratings - BB, B, CCC, CC: Debt rated
"BB", "B", "CCC" and "CC" is regarded, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. "BB" indicates the lowest degree of speculation and
"CC" the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Plus (+) or Minus (-): The ratings from "AA" to "BB" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
The higher-yielding, lower-rated securities in which the High Yield Fund
invests present special risks to investors. The market value of lower-rated
securities may be more volatile than that of higher-rated securities and
generally tends to reflect the market's perception of the creditworthiness of
the issuer and short-term market developments to a greater extent than more
highly-rated securities, which reflect primarily fluctuations in general levels
of interest rates. Periods of economic uncertainty and change can be expected to
result in increased volatility in the market value of lower-rated securities.
Further, such securities may be subject to greater risks of loss of income and
principal, particularly in the event of adverse economic changes or increased
interest rates, because their issuers generally are not as financially secure or
as creditworthy as issuers of higher-rated securities. Additionally, to the
extent that there is not a national market system for secondary trading of
lower-rated securities, there may be a low volume of trading in such securities
which may make it more difficult to value or sell those securities than
higher-rated securities. Adverse publicity and investor perceptions, whether or
not based on fundamental analysis, may decrease the values and liquidity of high
yield securities, especially in a thinly traded market.
Investors should recognize that the market for higher-yielding, lower-rated
securities is a relatively recent development that has not been tested by an
economic recession. An economic downturn may severely disrupt the market for
such securities and cause financial stress to the issuers which may adversely
affect the value of the securities held by the High Yield Fund and the ability
of the issuers of the securities held by it to pay principal and interest. A
default by an issuer may result in the Fund incurring additional expenses to
seek recovery of the amounts due it.
Some of the securities in which the Fund invests contain call provisions.
If the issuer of such a security exercises a call provision in a declining
interest rate market, the Fund would have to replace the security with a
lower-yielding security, resulting in a decreased return for investors. Further,
a higher-yielding security's value will decrease in a rising interest rate
market, which will be reflected in the Fund's net asset value per share.
Investors should carefully consider their ability to assume the risks of
investing in lower-rated securities before making an investment in the Fund, and
should be prepared to maintain their investment during periods of adverse market
conditions. Investors should not rely on the Fund for their short-term financial
needs.
The Fund seeks to minimize the risks of investing in lower-rated securities
through diversification, investment analysis and attention to current
developments in interest rates and economic conditions. Because the Fund invests
primarily in securities in the lower rating categories, the achievement of the
Fund's goals is more dependent on the Manager's ability than would be the case
if the Fund were investing in securities in the higher rating categories.
Although the Fund's Manager considers security ratings when making investment
decisions, it performs its own investment analysis and does not rely principally
on the ratings assigned by the rating services. There are risks in applying
credit ratings as a method for evaluating high yield securities. For example,
credit ratings evaluate the safety of principal and interest payments, not the
market value risk of high yield securities, and credit rating agencies may fail
to make timely changes in credit ratings to reflect subsequent events. The
Manager's analysis includes traditional security analysis considerations such as
the issuer's experience and managerial strength, changing financial condition,
borrowing requirements or debt maturity schedules, and its responsiveness to
changes in business conditions and interest rates. It also considers relative
values based on anticipated cash flow, interest or dividend coverage, asset
coverage and earnings prospects. In addition, the Manager analyzes general
business conditions and other factors such as anticipated changes in economic
activity and interest rates, the availability of new investment opportunities,
and the economic outlook for specific industries. The Manager continuously
monitors the issuers of portfolio securities to determine if the issuers will
have sufficient cash flow and profits to meet required principal and interest
payments and to assure the securities' liquidity so the Fund can meet redemption
requests.
During the fiscal year ended October 31, 1997, the percentage of the Fund's
portfolio securities invested in the various ratings established by Moody's,
based upon the weighted average ratings of the portfolio, was as follows:
Moody's Rating Portfolio Percentage
-------------- --------------------
Baa .84%
Ba 33.12%
B 66.04%
The above percentages for Ba and B rated securities include unrated
securities in the amount of 1.55% and 4.04%, respectively, which have been
determined by the Manager to be of comparable quality.
There may be times when, in the Manager's judgment, unusual market or
economic conditions make pursuing the Fund's basic investment strategy
inconsistent with the best interests of its shareholders. At such times the
Manager may employ alternative strategies, primarily seeking to reduce
fluctuations in the value of the Fund's assets. In implementing these
"defensive" strategies, the Fund may temporarily invest in money-market
instruments of all types, higher-rated fixed-income securities or any other
fixed-income securities that the Fund considers consistent with such strategy.
The yield to maturity on these securities would generally be lower than the
yield to maturity on lower-rated fixed-income securities. It is impossible to
predict when, or for how long, such alternative strategies will be utilized.
The Fund's Manager buys and sells securities for the Fund principally in
response to its evaluation of an issuer's continuing ability to meet its
obligations, the availability of better investment opportunities, and its
assessment of changes in business conditions and interest rates. From time to
time, consistent with its investment objectives, the Fund may sell securities
that have appreciated in value because of declines in interest rates. It may
also trade securities for the purpose of seeking short-term profits. Securities
may be sold in anticipation of a market decline or bought in anticipation of a
market rise. They may also be traded for securities of comparable quality and
maturity to take advantage of perceived short-term disparities in market values
or yields.
Principal Limited Term Bond Fund
The objective of Principal Limited Term Bond Fund is to seek a high level
of current income consistent with a relatively high level of principal stability
by investing in a portfolio of securities with a dollar weighted average
maturity of five years or less. The Fund seeks to achieve its objective by
investing primarily in high grade, short-term debt securities.
The Fund will invest, under normal circumstances, at least 80% of its total
assets in securities issued or guaranteed by the United States ("U.S.")
Government or its agencies or instrumentalities (as described in the discussion
of Government Securities Income Fund) and other debt securities of U.S. issuers
rated within the three highest grades used by Standard & Poor's (AAA, AA or A)
or by Moody's (Aaa, Aa, or A) or which, if nonrated, are comparable in quality
in the opinion of the Fund's Manager. The balance of the Fund's assets may be
invested in debt securities rated in the fourth highest grade by the major
rating services (i.e., at least "Baa" by Moody's Investors Service or "BBB" by
Standard & Poor's Corporation, or their equivalents) or, if not rated, judged to
be of comparable quality. Securities rated BBB or Baa are considered investment
grade securities having adequate capacity to pay interest and repay principal.
Such securities may have speculative characteristics, however, and changes in
economic and other conditions are more likely to lead to a weakened capacity of
the issuer of such securities to make principal and interest payments than is
the case with higher rated securities. Under normal circumstances, the Fund will
maintain a dollar weighted average maturity of not more than five years. In
determining the average maturity of the Fund's portfolio, the Manager may adjust
the maturity dates on callable or prepayable securities to reflect the Manager's
judgment regarding the likelihood of such securities being called or prepaid.
The Fund may also invest in other debt securities including corporate debt
securities such as bonds, notes and debentures, mortgage-backed securities
including collateralized mortgage obligations and other asset-backed securities.
For a more complete description of asset-backed securities, see "Government
Securities Income Fund" discussion.
Cash equivalents in which the Fund invests include corporate commercial
paper rated A-1+, A-1 or A-2 by S&P or P-1 or P-2 by Moody's, unrated commercial
paper issued by corporations with outstanding debt securities rated in the four
highest grades by S&P and Moody's and bank certificates of deposit and bankers'
acceptances issued or guaranteed by national or state banks and repurchase
agreements considered by the Fund to have investment quality. Under unusual
market or economic conditions, the Fund for temporary defensive purposes, may
invest up to 100% of its assets in cash or cash equivalents.
Principal Tax-Exempt Bond Fund
The objective of Principal Tax-Exempt Bond Fund is to seek as high a level
of current income exempt from federal income tax as is consistent with
preservation of capital. The Fund seeks to achieve its objective by investing
primarily in a diversified portfolio of securities issued by or on behalf of
state or local governments or other public authorities. Interest on these
obligations ("Municipal Obligations") is exempt from federal income tax in the
opinion of bond counsel to the issuer.
The Fund will invest, during normal market conditions, at least 80% of its
total assets in Municipal Obligations which, at the time of purchase, meet the
following standards: (a) Municipal Bonds rated within the four highest grades by
(i) Moody's, these ratings are: Aaa, Aa, A and Baa or (ii) S&P, these ratings
are: AAA, AA, A and BBB; (b) Municipal Notes rated within the highest grade by
Moody's (MIG-1) or S&P (SP-1); (c) Municipal Commercial Paper rated within the
highest grade by Moody's (Prime-1) or S&P (A-1); and (d) unrated Municipal
Obligations comparable in quality to those described above in the opinion of the
Fund's Manager.
The Fund may invest up to 20% of its total assets in Municipal Obligations
that do not meet the standards required for the balance of the portfolio as set
forth above. Securities rated below BBB or Baa are commonly referred to as junk
bonds. These investments normally will provide an opportunity for higher yield
but will be more speculative than Municipal Obligations that meet higher
standards. They typically will entail greater price volatility and a higher risk
of default, that is, the nonpayment of interest and principal by the issuer. The
Fund does not intend to purchase Municipal Obligations that would be in default
as to payment of either interest or principal at the time of purchase. As a
result, it will not purchase Municipal Bonds rated lower than B by Moody's or
S&P (bonds that are predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation) or
Municipal Notes or Municipal Commercial Paper which is unrated by either Moody's
or S&P and which in the opinion of the Fund's Manager is not comparable in
quality to rated obligations. See the discussion of the High Yield Fund for
information concerning risks associated with below-investment grade bonds.
The Fund may also invest from time to time in the following taxable
securities which mature one year or less from the time of purchase: Obligations
issued or guaranteed by the United States Government or its agencies or
instrumentalities ("U.S. Government securities"), domestic bank certificates of
deposit and bankers' acceptances, commercial paper, short-term corporate debt
securities and repurchase agreements ("Taxable Investments"). The Fund will make
Taxable Investments primarily for liquidity purposes or as a temporary
investment of cash pending its investment in Municipal Obligations. During
normal market conditions, the Fund will not invest more than 20% of its total
assets in Taxable Investments, the Municipal Obligations identified in the
preceding paragraph and Municipal Obligations the interest on which is treated
as a tax preference item for purposes of the federal alternative minimum tax.
The Fund, however, may temporarily invest more than 20% of its assets in Taxable
Investments when in the opinion of the Fund's Manager it is advisable to do so
for defensive purposes because of market conditions.
The Fund may not invest more than 5% of its total assets in the securities
of any one issuer (except for U.S. Government securities), but it may invest
without limit in debt obligations of issuers located in the same state and in
debt obligations which are repayable out of revenue sources generated from
economically related projects or facilities. Sizeable investments in such
obligations could involve an increased risk to the Fund since an economic,
business or political development or change affecting one security could also
affect others. The Fund may also invest without limit in industrial development
bonds, which are issued by industrial development authorities but may be backed
only by the assets and revenues of the non-governmental entities that use the
facilities financed by the bonds.
During the fiscal year ended October 31, 1997, the percentage of the Fund's
portfolio securities invested in the various ratings established by S & P, based
upon the weighted average ratings of the portfolio, was as follows:
S & P Rating Portfolio Percentage
------------ --------------------
AAA .68%
AA 17.35%
A 41.74%
BBB 36.15%
BB 4.08%
The above percentages for AA, A and BBB rated securities include unrated
securities in the amount of .97%, 2.67% and 9.11%, respectively, which have been
determined by the Manager to be of comparable quality.
The Fund will not engage in the trading of securities for the purpose of
realizing short-term profits, but it will adjust its portfolio as considered
advisable in view of prevailing or anticipated market conditions and the Fund's
investment objective. Accordingly, the Fund may sell portfolio securities in
anticipation of a rise in interest rates and purchase securities for inclusion
in its portfolio in anticipation of a decline in interest rates.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Obligations. It may be expected that similar proposals may
be introduced in the future. If such a proposal were enacted, the ability of the
Fund to pay "exempt interest" dividends may be adversely affected and the Fund
would reevaluate its investment objective and policies and consider changes in
its structure.
MONEY MARKET FUNDS
The Principal Funds currently include two Funds which seek a high level of
income through investments in short-term securities. These Funds are Principal
Cash Management Fund and Principal Tax-Exempt Cash Management Fund, together
referred to as the "Money Market Funds." Securities in which the Money Market
Funds will invest may not yield as high a level of current income as securities
of lower quality and longer maturities which generally have less liquidity,
greater market risk and more fluctuation.
Each of the Money Market Funds will limit its portfolio investments to
United States dollar denominated instruments that the Manager, subject to the
oversight of the Board of Directors, determines present minimal credit risks and
which at the time of acquisition are "Eligible Securities" as that term is
defined in regulations issued under the Investment Company Act of 1940.
Eligible Securities include:
(1) A security with a remaining maturity of 397 days or less that is rated
(or that has been issued by an issuer that is rated in respect to a
class of short-term debt obligations, or any security within that
class, that is comparable in priority and security with the security)
by a nationally recognized statistical rating organization in one of
the two highest rating categories for short-term debt obligations; or
(2) A security that at the time of issuance was a long-term security with a
remaining maturity of 397 calendar days or less, and whose issuer has
received from a nationally recognized statistical rating organization a
rating, with respect to a class of short-term debt obligations (or any
security within that class) that is now comparable in priority and
security with the security, in one of the two highest rating categories
for short-term debt obligations; or
(3) an unrated security that is of comparable quality to a security meeting
the requirements of (1) or (2) above, as determined by the board of
directors.
The Cash Management Fund will not invest more than 5% of its total assets
in the following securities:
(1) Securities which, when acquired by the Fund (either initially or upon
any subsequent rollover), are rated in the second highest rating
category for short-term debt obligations;
(2) Securities which at the time of issuance were long-term securities but
when acquired by the Fund have a remaining maturity of 397 calendar
days or less, if the issuer of such securities is rated, with respect
to a class of comparable short-term debt obligations, in the second
highest rating category for short-term obligations; and
(3) Securities which are unrated but are determined by the Fund's Board of
Directors to be of comparable quality to securities rated in the second
highest rating category for short-term debt obligations.
Each Fund will maintain a dollar-weighted average portfolio maturity of 90
days or less. Each Fund intends to hold its investments until maturity, but may
on occasion trade securities to take advantage of market variations. Also,
revised valuations of an issuer or redemptions may result in sales of portfolio
investments prior to maturity or at a time when such sales might otherwise not
be desirable. Each Fund's right to borrow to facilitate redemptions may reduce
the need for such sales. The sale of portfolio securities would be a taxable
event. See "Tax Treatment of the Funds, Dividends and Distributions." It is the
policy of the Money Market Funds to be as fully invested as reasonably practical
at all times to maximize current income.
Since portfolio assets of the Money Market Funds will consist of short-term
instruments, replacement of portfolio securities will occur frequently. However,
since these Funds expect to usually transact purchases and sales of portfolio
securities with issuers or dealers on a net basis, it is not anticipated that
the Funds will pay any significant brokerage commissions. The Funds are free to
dispose of portfolio securities at any time, when changes in circumstances or
conditions make such a move desirable in light of their investment objectives.
Principal Cash Management Fund
The objective of Principal Cash Management Fund is to seek as high a level
of current income available from short-term securities as is considered
consistent with preservation of principal and maintenance of liquidity by
investing its assets in a portfolio of money market instruments. These money
market instruments are U.S. Government Securities, U.S. Government Agency
Securities, Bank Obligations, Commercial Paper, Short-term Corporate Debt,
Repurchase Agreements and Taxable Municipal Obligations, which are described
briefly below and in more detail in the Statement of Additional Information.
U.S. Government Securities are securities issued or guaranteed by the U.S.
Government, including treasury bills, notes and bonds.
U.S. Government Agency Securities are obligations issued or guaranteed by
agencies or instrumentalities of the U.S. Government whether supported by the
full faith and credit of the U.S. Treasury or only by the credit of a particular
agency or instrumentality.
Bank Obligations consist of certificates of deposit which are generally
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return and bankers acceptances
which are time drafts drawn on a commercial bank by a borrower, usually in
connection with international commercial transactions.
Commercial Paper is short-term promissory notes issued by U.S. or foreign
corporations primarily to finance short-term credit needs.
Short-term Corporate Debt consists of notes, bonds or debentures which at
the time of purchase have one year or less remaining to maturity.
Repurchase Agreements are transactions under which securities are purchased
from a bank or securities dealer with an agreement by the seller to repurchase
the securities at the same price plus interest at a specified rate. Generally,
Repurchase Agreements are of short duration, usually less than a week but on
occasion for longer periods.
Taxable Municipal Obligations are short-term obligations issued or
guaranteed by state and municipal issuers which generate taxable income.
Principal Tax-Exempt Cash Management Fund
The objective of Principal Tax-Exempt Cash Management Fund is to provide as
high a level of current interest income exempt from federal income tax as is
consistent, in the view of the Fund's management, with stability of principal
and the maintenance of liquidity. The Fund seeks to achieve its objective
through investment in a professionally managed portfolio of high quality,
short-term obligations that have been issued by or on behalf of state or local
governments or other public authorities and that pay interest which is exempt
from federal income tax in the opinion of bond counsel to the issuer ("Municipal
Obligations").
The Fund may invest in Municipal Obligations with fixed, variable or
floating interest rates and may invest in participation interests in pools of
Municipal Obligations held by banks or other financial institutions. The Fund
may treat a variable or floating interest rate obligation as maturing before its
ultimate maturity date if the Fund has acquired a right to sell the obligation
that meets requirements established by the Securities and Exchange Commission.
The Fund expects to invest primarily in variable rate or floating rate
instruments. Typically such instruments carry demand features permitting the
Fund to redeem at par upon specified notice. The Fund's right to obtain payment
at par on a demand instrument upon demand could be affected by events occurring
between the date the Fund elects to redeem the instrument and the date
redemption proceeds are due which affect the ability of the issuer to pay the
instrument at par value. The Manager will monitor on an ongoing basis the
pricing, quality and liquidity of such instruments and will similarly monitor
the ability of an issuer of a demand instrument, including those supported by
bank letters of credit or guarantees, to pay principal and interest on demand.
Although the ultimate maturity of such variable rate obligations may exceed one
year, the Fund will treat the maturity of each variable rate demand obligation
as the longer of (i) the notice period required before the Fund is entitled to
payment of the principal amount through demand, or (ii) the period remaining
until the next interest rate adjustment. Floating rate instruments with demand
features are deemed to have a maturity equal to the period remaining until the
principal amount can be recovered through demand.
The Fund may also invest in bond anticipation notes, tax anticipation
notes, revenue anticipation notes, construction loan notes and bank notes issued
by governmental authorities to commercial banks as evidence of borrowings. Since
these short-term securities frequently serve as interim financing pending
receipt of anticipated funds from the issuance of long-term bonds, tax
collections or other anticipated future revenues, a weakness in an issuer's
ability to obtain such funds as anticipated could adversely affect the issuer's
ability to meet its obligations on these short-term securities.
The Fund may also invest from time to time on a temporary basis in the
following taxable securities which mature 397 days or less from the time of
purchase: Obligations issued or guaranteed by the United States Government or
its agencies or instrumentalities ("U.S. Government securities"), domestic bank
certificates of deposit and bankers' acceptances, United States dollar
denominated foreign bank certificates of deposit and bankers' acceptances,
commercial paper, short-term corporate debt securities and repurchase agreements
("Temporary Investments"). The Fund will make Temporary Investments primarily
for liquidity purposes or as a temporary investment of cash pending its
investment in Municipal Obligations. During normal market conditions, the Fund
will not invest more than 20% of its total assets in Temporary Investments. The
Fund, however, may temporarily invest more than 20% of its assets in Temporary
Investments when in the opinion of the Fund's Manager it is advisable to
maintain a temporary "defensive" posture.
The Fund may invest in the securities of other open-end investment
companies but may not invest more than 10% of its assets in securities of other
investment companies, invest more than 5% of its total assets in the securities
of any one investment company, or acquire more than 3% of the outstanding voting
securities of any one investment company except in connection with a merger,
consolidation or plan of reorganization. The Fund's Manager will waive its
management fee on the Fund's assets invested in securities of other open-end
investment companies. The Fund will generally invest in other investment
companies only for short-term cash management purposes when the advisor
anticipates the net return from the investment to be superior to alternatives
then available. The Fund will generally invest only in those investment
companies that have investment policies requiring investment in securities
comparable in quality to those in which the Fund invests.
The Fund may not invest more than 5% of its total assets in the securities
of any one issuer (except for U.S. Government securities), but it may invest
without limit in debt obligations of issuers located in the same state and in
debt obligations which are repayable out of revenue sources generated from
economically related projects or facilities. Sizeable investments in such
obligations could involve an increased risk to the Fund since an economic,
business or political development or change affecting one security could also
affect others. The Fund may also invest without limit in industrial development
bonds, which are issued by industrial development authorities but may be backed
only by the assets and revenues of the non-governmental entities that use the
facilities financed by the bonds. The Fund, however, will not invest more than
20% of its total assets in any Municipal Obligation the interest on which is
treated as a tax preference item for purposes of the federal alternative minimum
tax, and during normal market conditions, it will limit its investments in such
securities and in Temporary Investments to 20% of its total assets.
Municipal Obligations are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Act, and laws, if any, which may be enacted by
Congress or any state extending the time for payment of principal or interest,
or both, or imposing other constraints upon enforcement of such obligations or
upon municipalities to levy taxes. The power or ability of issuers to pay, when
due, principal of and interest on Municipal Obligations may also be materially
affected by the results of litigation or other conditions.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Obligations. It may be expected that similar proposals may
be introduced in the future. If such a proposal were enacted, the ability of the
Fund to pay "exempt interest" dividends may be adversely affected, and the Fund
would reevaluate its investment objective and policies and consider changes in
its structure.
CERTAIN INVESTMENT POLICIES AND RESTRICTIONS
Following is a discussion of certain investment practices that the Funds
may use in an effort to achieve their respective investment objectives.
Repurchase Agreements/Lending Portfolio Securities
Each of the Funds may enter into repurchase agreements with, and each of
the Funds, except the Capital Value Fund, Growth Fund and Cash Management Fund,
may lend its portfolio securities to, unaffiliated broker-dealers and other
unaffiliated qualified financial institutions. These transactions must be fully
collateralized at all times, but involve some credit risk to the Fund if the
other party should default on its obligations, and the Fund is delayed or
prevented from recovering on the collateral. See the Statement of Additional
Information for further information regarding the credit risks associated with
repurchase agreements and the standards adopted by each Fund's Board of
Directors to deal with those risks. None of the Funds intends either (i) to
enter into repurchase agreements that mature in more than seven days if any such
investment, together with any other illiquid securities held by the Fund, would
amount to more than 15% (10% for the Government Securities Income Fund) of its
total assets or (ii) to lend securities in excess of 30% of its total assets.
Forward Commitments
From time to time, each of the Income-Oriented Funds and the Balanced Fund
may enter into forward commitment agreements which call for the Fund to purchase
or sell a security on a future date and at a price fixed at the time the Fund
enters into the agreement. Each of these Funds may also acquire rights to sell
its investments to other parties, either on demand or at specific intervals.
Warrants
Each of the Funds, except the Cash Management Fund, Government Securities
Income Fund and Tax-Exempt Bond Fund, may invest in warrants up to 5% of its
assets, of which not more than 2% may be invested in warrants that are not
listed on the New York or American Stock Exchange. For the International,
International Emerging Markets and International SmallCap Funds, the 2%
limitation also applies to warrants not listed on the Toronto Stock Exchange.
Borrowing
As a matter of fundamental policy, each Fund may borrow money only for
temporary or emergency purposes. The Capital Value, Cash Management, Growth,
Tax-Exempt Bond and Tax-Exempt Cash Management Funds may borrow only from banks.
Further, each Fund may borrow only in an amount not exceeding 5% of its assets,
except:
(1) the Capital Value Fund and Growth Fund, each of which may borrow only
in an amount not exceeding the lesser of (i) 5% of the value of its
assets less liabilities other than such borrowings, or (ii) 10% of its
assets taken at cost at the time the borrowing is made;
(2) the Cash Management Fund which may borrow only in an amount not
exceeding the lesser of (i) 5% of the value of its assets, or (ii) 10%
of the value of its net assets taken at cost at the time the borrowing
is made; and
(3) the Tax-Exempt Cash Management Fund which may borrow in an amount which
permits it to maintain a 300% asset coverage and while any such
borrowing exceeds 5% of the Fund's total assets no additional purchases
of investment securities will be made. If due to market fluctuations or
other reasons the Fund's asset coverage falls below 300% of its
borrowings, the Fund will reduce its borrowings within 3 business days.
To do this, the Fund may have to sell a portion of its investments at a
time when it may be disadvantageous to do so.
Options
Each of the Funds (except Capital Value, Cash Management, Growth,
Tax-Exempt Bond and Tax-Exempt Cash Management Funds) may purchase covered
spread options, which would give the Fund the right to sell a security that it
owns at a fixed dollar spread or yield spread in relationship to another
security that the Fund does not own, but which is used as a benchmark. These
Funds may also purchase and sell financial futures contracts, options on
financial futures contracts and options on securities and securities indices,
but will not invest more than 5% of their assets in the purchase of options on
securities, securities indices and financial futures contracts or in initial
margin and premiums on financial futures contracts and options thereon. The
Funds may write options on securities and securities indices to generate
additional revenue and for hedging purposes and may enter into transactions in
financial futures contracts and options on those contracts for hedging purposes.
General
The Statement of Additional Information includes further information
concerning the Funds' investment policies and applicable investment
restrictions. The investment objectives of the Funds are fundamental and certain
investment restrictions designated as such in this Prospectus or in the
Statement of Additional Information are fundamental policies that may not be
changed without approval by the holders of the lesser of: (i) 67% of the Fund's
shares present or represented at a shareholders' meeting at which the holders of
more than 50% of such shares are present or represented by proxy; or (ii) more
than 50% of the outstanding shares of the Fund. All other investment policies
described in this Prospectus and the Statement of Additional Information are not
fundamental and may be changed by the Board of Directors of the appropriate Fund
without shareholder approval.
RISK FACTORS
An investment in any of the Growth-Oriented Funds involves the financial
and market risks that are inherent in any investment in equity securities. These
risks include changes in the financial condition of issuers, in economic
conditions generally and in the conditions in securities markets. They also
include the extent to which the prices of securities will react to those
changes.
An investment in any of the Income-Oriented Funds involves market risks
associated with movements in interest rates. The market value of the Funds'
investments will fluctuate in response to changes in interest rates and other
factors. During periods of falling interest rates, the values of outstanding
long-term fixed-income securities generally rise. Conversely, during periods of
rising interest rates, the values of such securities generally decline. Changes
by recognized rating agencies in their ratings of any fixed-income security and
in the ability of an issuer to make payments of interest and principal may also
affect the value of these investments. Changes in the value of portfolio
securities will affect the Funds' net asset values but will not affect cash
income derived from the securities unless a change results from a failure of an
issuer to pay interest or principal when due.
The yields on an investment in either of the Money Market Funds will vary
with changes in short-term interest rates. In addition, the investments of each
Money Market Fund are subject to the ability of the issuer to pay interest and
principal when due.
Each of the following Principal Funds may invest in foreign securities to
the indicated percentage of its assets: International, International Emerging
Markets and International SmallCap Funds - 100%; Real Estate - 25%; Balanced,
Blue Chip, Bond, Capital Value, Growth, High Yield, Limited Term Bond Fund,
MidCap, SmallCap and Utilities Funds - 20%. Neither the Government Securities
Income Fund nor the Tax-Exempt Bond Fund may invest in foreign securities. The
Cash Management and Tax Exempt Cash Management Funds do not invest in foreign
securities other than those that are United States dollar denominated. United
State dollar denominated means that all principal and interest payments for the
security are payable in U.S. dollars and that the interest rate of, the
principal amount to be repaid and the timing of payments related to the
securities do not vary or float with the value of a foreign currency, the rate
of interest on foreign currency borrowings or with any other interest rate or
index expressed in a currency other than U.S. dollars. Debt securities issued in
the United States pursuant to a registration statement filed with the Securities
and Exchange Commission are not treated as foreign securities for purposes of
these limitations. Investment in foreign securities presents certain risks which
may affect a Fund's net asset value. These risks include, but are not limited
to, those resulting from fluctuations in currency exchange rates, revaluation of
currencies, the imposition of foreign taxes, the withholding of taxes on
dividends at the source, political and economic developments including war,
expropriations, nationalization, the possible imposition of currency exchange
controls and other foreign governmental laws or restrictions, reduced
availability of public information concerning issuers, and the fact that foreign
issuers are not generally subject to uniform accounting, auditing and financial
reporting standards or to other regulatory practices and requirements comparable
to those applicable to domestic issuers. In addition, transactions in foreign
securities may be subject to higher costs, and the time for settlement of
transactions in foreign securities may be longer than the settlement period for
domestic issuers. A Fund's investment in foreign securities may also result in
higher custodial costs and the costs associated with currency conversions.
Securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. In particular, securities
markets in emerging market countries are known to experience long delays between
the trade and settlement dates of securities purchased and sold, potentially
resulting in a lack of liquidity and greater volatility in the price of
securities on those markets. In addition, investments in smaller companies may
present greater opportunities for capital appreciation, but may also involve
greater risks than large, mature issuers. Such companies may have limited
product lines and financial resources. Their securities may trade in more
limited volume than larger companies and may therefore experience significantly
more price volatility and less liquidity than securities of larger companies. As
a result of these factors, the Boards of Directors of the Funds have adopted
Daily Pricing and Valuation Procedures for the Funds which set forth the steps
to be followed by the Manager and Invista Capital Management, Inc. ("Invista")
to establish a reliable market or fair value if a reliable market value is not
available through normal market quotations. Oversight of this process is
provided by the Executive Committee of the Boards of Directors.
HOW THE FUNDS ARE MANAGED
Under Maryland law, the business and affairs of each of the Funds are
managed under the direction of its Board of Directors. Investment services and
certain other services are furnished to the Funds under the terms of a
Management Agreement between each of the Funds and the Manager. The Manager for
the Funds is Principal Management Corporation, an indirectly wholly-owned
subsidiary of Principal Life Insurance Company. Principal Life was organized as
a life insurance company in 1879 under the laws of the State of Iowa. The
address of the Manager is 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 Life. As of October 31, 1997, the
Manager served as investment advisor for 28 such funds with assets totaling
approximately $5.0 billion.
The Manager is responsible for investment advisory, managerial and
administrative services for the Funds. However, under a Sub-Advisory Agreement
between Invista and the Manager, Invista performs all the investment advisory
responsibilities of the Manager for the Growth-Oriented Funds (except the Real
Estate Fund), the Government Securities Income Fund and the Limited Term Bond
Fund. The Manager will reimburse Invista for the cost of providing these
services. Invista, an indirectly wholly-owned subsidiary of Principal Life
Insurance Company and an affiliate of the Manager, was founded in 1985 and
manages investments for institutional investors, including Principal Life.
Assets under management at September 30, 1997 were approximately $25.3 billion.
Invista's address is 1800 Hub Tower, 699 Walnut, Des Moines, Iowa 50309.
The Manager or Invista advises the Funds on investment policies and on the
composition of the Funds' portfolios. In this connection, the Manager or Invista
furnishes to the Board of Directors of each Fund a recommended investment
program consistent with that Fund's investment objective and policies. The
Manager or Invista is authorized, within the scope of the approved investment
program, to determine which securities are to be bought or sold, and in what
amounts.
The Manager or Invista has assigned certain individuals the primary
responsibility for the day-to-day management of each Fund's portfolio. The
persons primarily responsible for the day-to-day management of each Fund are
identified in the table below:
<TABLE>
<CAPTION>
Primarily
Fund Fund Responsible Since Person Primarily Responsible
---- ---------------------- ----------------------------
<S> <C> <C>
Balanced Fund April, 1993 Judith A. Vogel, CFA (BA degree, Central College). Vice President, Invista
Capital Management, Inc., since 1987. Co-Manager since December, 1997: Martin
J. Schafer (BBA degree, University of Iowa). Vice President, Invista Capital
Management, Inc.
Blue Chip Fund March, 1991 Mark T. Williams, CFA (MBA degree, Drake University). Vice President,
(Fund's inception) Invista Capital Management, Inc., since 1995; Investment Officer, 92-95.
Prior thereto, Security Analyst.
Bond Fund November, 1996 Scott A. Bennett,CFA (MBA degree, University of Iowa) Assistant Director
Investment Securities, Principal Life Insurance Company, since 1996.
Prior thereto, Investment Manager.
Capital Value Fund November, 1996 Catherine A. Zaharis, CFA, (MBA degree, Drake University). Vice President,
Invista Capital Management, Inc. since 1987.
Government Securities May, 1985 Martin J. Schafer (BBA degree, University of Iowa). Vice President, Invista
Income Fund (Fund's inception) Capital Management, Inc., since 1992. Director - Securities Trading,
Principal Life Insurance Company 1992; Prior thereto, Associate Director.
Growth and MidCap August, 1987 Michael R. Hamilton, (MBA degree, Bellarmine College). Vice President, Funds
and December, 1987 Invista Capital Management, Inc., since 1987.
(Fund's inception),
respectively
High Yield Fund April, 1998 Mark P. Denkinger, CFA (MBA, University of Iowa). Assistant Director -
Securities Investment, Principal Life Insurance Company since 1998. Prior
thereto, Investment Manager.
International Fund April, 1994 Scott D. Opsal, CFA (MBA degree, University of Minnesota). Executive Vice
President and Chief Investment Officer, Invista Capital Management, Inc.,
since 1997. Vice President, 1986-1997.
International Emerging May, 1997 Kurtis D. Spieler, CFA (MBA degree, Drake University). Vice President,
Markets Fund (Fund's inception) Invista Capital Management, Inc., since 1995; Investment Officer, 94-95.
Prior thereto, Investment Manager, Principal Life Insurance Company.
International SmallCap May, 1997 Darren K. Sleister, CFA (MBA degree, University of Iowa). Investment Officer,
Fund (Fund's inception) Invista Capital Management, Inc., since 1995; Prior thereto, Security Analyst.
Limited Term Bond February, 1996 Martin J. Schafer (BBA degree, University of Iowa). Vice President, Invista
Fund (Fund's inception) Capital Management, Inc., since 1992. Director - Securities Trading,
Principal Life Insurance Company 1992; Prior thereto, Associate Director.
Real Estate Fund December, 1997 Kelly D. Rush, CFA (MBA degree, University of Iowa). Assistant Director -
(Fund's inception) Investment - Commercial Real Estate, Principal Life Insurance Company, since
1996; Prior thereto, Senior Administrator Investment - Commercial Real Estate.
SmallCap Fund December, 1997 Co-Manager: Mark T. Williams, CFA (MBA degree, Drake University). Vice
(Fund's inception) President, Invista Capital Management, Inc., since 1995; Investment Officer,
1992-1995. Co-Manager: John F. McClain, (MBA degree, Indiana University).
Vice President, Invista Capital Management, Inc., since 1995; Investment
Officer, 1992-1995.
Tax-Exempt Bond July, 1991 Daniel J. Garrett, CFA (MBA degree, Drake University). Assistant Director -
Fund Securities Investment, Principal Life Insurance Company since 1994; Prior
thereto, Senior Analyst.
Utilities Fund April, 1993 Catherine A. Green, CFA (MBA degree, Drake University). Vice President,
(Fund's inception) Invista Capital Management, Inc., since 1987.
</TABLE>
Until August 1, 1988 the International Fund's portfolio was managed by
Principal Management, Inc. of Edmonton, Canada and Scottsdale, Arizona, which
company has changed its name to Sea Investment Management, Inc. The Fund's
previous manager and the current manager are unaffiliated. This change in
managers should be kept in mind when reviewing historical investment results.
For a description of the investment and other services provided by the
Manager, see "Cost of Manager's Services" in the Statement of Additional
Information. The management fee and total Class A share or total Class B share
expenses incurred by each Fund for the period ended October 31, 1997 were equal
to the following percentages of each Fund's respective average net assets:
<TABLE>
<CAPTION>
Class A Shares Class B Shares
---------------------------- ----------------------------
Total Total
Manager's Annualized Manager's Annualized
Fund Fee Expenses Fee Expenses
---- --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Balanced Fund .60% 1.33% .60% 2.14%
Blue Chip Fund .50% 1.30% .50% 2.06%
Bond Fund .46% .95%* .40% 1.70%*
Capital Value Fund .40% .70% .40% 1.65%
Cash Management Fund .37% .63% .00% 1.47%*
Government Securities Income Fund .46% .84% .46% 1.39%
Growth Fund .44% 1.03% .44% 1.48%
High Yield Fund .60% 1.22% .60% 2.13%
International Emerging Markets Fund 1.23% 2.03% 1.23% 2.16%
International Fund .71% 1.39% .71% 2.17%
International SmallCap Fund 1.19% 1.99% 1.19% 2.07%
Limited Term Bond Fund .25% .90%* .00% 1.24%*
MidCap Fund .59% 1.26% .59% 1.69%
Tax-Exempt Bond Fund .48% .79% .48% 1.45%
Tax-Exempt Cash Management Fund .47% .70%* .00% 1.47%*
Utilities Fund .50% 1.15%* .54% 1.90%*
<FN>
* After waiver.
</FN>
</TABLE>
The Manager voluntarily waived a portion of its fee for the Bond, Cash
Management, Limited Term Bond, Utilities and Tax-Exempt Cash Management Funds
throughout the fiscal year ended October 31, 1997. The Manager intends to
continue its voluntary waiver and, if necessary, pay expenses normally payable
by the Bond, Limited Term Bond, Utilities and Tax-Exempt Cash Management Funds
through October 31, 1998. The waiver, if necessary, for the Cash Management Fund
will continue through February 28, 1998. If necessary, waivers will be in
amounts that will maintain a total level of operating expenses which as a
percentage of average net assets attributable to a class on an annualized basis
during that period will not exceed, for the Class A shares, .95% for the Bond
Fund, .90% for the Limited Term Bond Fund, 1.15% for the Utilities Fund and .75%
for the Money Market Funds, and for the Class B shares, 1.70% for the Bond Fund,
1.25% for the Limited Term Bond Fund, 1.95% for the Utilities Fund and 1.50% for
the Money Market Funds. The effect of the waivers is and will be to reduce each
Fund's annual operating expenses and increase each Fund's yield.
The Manager and Invista may purchase at their own expense statistical and
other information or services from outside sources, including Principal Life
Insurance Company. An Investment Service Agreement between each Fund, the
Manager, and Principal Life Insurance Company provides that Principal 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 Life Insurance Company
for its costs incurred in this regard.
Among the expenses paid by each Fund are brokerage commissions on portfolio
transactions, the cost of stock issue and transfer and dividend disbursements,
administration of shareholder accounts, custodial fees, expenses of registering
and qualifying shares for sale after the initial registration, auditing and
legal expenses, fees and expenses of unaffiliated directors, the cost of
shareholder meetings and taxes and interest (if any).
The Funds may from time to time execute transactions for portfolio
securities with, and pay related brokerage commissions to, Principal Financial
Securities, Inc. ("PFS") and Morgan Stanley and Co., each a broker-dealer
affiliated with Princor and/or the Manager for each of the Funds. PFS also
provides distribution services for the Money Market Funds for which it is
compensated by the Manager. These services include, but are not limited to,
providing office space, equipment, telephone facilities and various personnel as
necessary or beneficial to establish and maintain shareholder accounts. PFS
receives a fee from the Manager calculated as a percentage of the average net
asset value of shares of each Fund held in PFS client accounts during the period
for which PFS provides the services. During the fiscal years ended October 31,
1995, 1996, and 1997, PFS received fees in the amount of $991,520, $1,650,714
and $1,765,033 respectively, in consideration of the services it rendered to the
Cash Management Fund. During the fiscal years ending October 31, 1995, 1996, and
1997 PFS received fees in the amount of $191,789, $254,083 and $226,297
respectively, in consideration of the services it rendered to the Tax-Exempt
Cash Management Fund.
The Manager serves as investment advisor, dividend disbursing agent and,
directly and through an affiliate, as transfer agent for each of the Funds
sponsored by Principal Life Insurance Company. The Funds reimburse the Manager
for the costs of providing these services.
HOW TO PURCHASE SHARES
Purchases are generally made through registered representatives of Princor
or other dealers it selects. If an order and check are properly submitted to
Princor, the shares will be issued at the offering price next computed after the
order and check are received at Princor's main office. If Fund shares are
purchased by telephone order or electronic means and thereafter settled by
delivery of a check or a payment by wire, the shares so purchased will be issued
at the offering price next computed after the telephone or electronic order is
received at Princor's main office. If an order and check are submitted through a
selected dealer, the shares will be issued in accordance with the following: An
order accepted by a dealer on any day before the close of the New York Stock
Exchange and received by Princor before the close of its business on that day
will be executed at the offering price computed as of the close of the Exchange
on that day. An order accepted by such dealer after the close of the Exchange
and received by Princor before its closing on the following business day will be
executed at the offering price computed as of the close of the Exchange on such
following business day. Dealers have the responsibility to transmit orders to
Princor promptly. After an open account has been established, purchases will be
executed at the price next computed after receipt of the investor's check at
Princor's main office.
All orders are subject to acceptance by the Fund or Funds and Princor.
Redemptions by shareholders investing by check will be effected only after
payment has been collected on the check, which may take up to eight days or
more. Investors considering redeeming or exchanging shares or transferring
shares to another person shortly after purchase should pay for those shares with
a certified check, bank cashier's check or money order to avoid any delay in
redemption, exchange or transfer.
Class B shares of the Cash Management Fund may be purchased only by an
exchange from Class B shares of the Principal Funds. Shares of each of the other
Principal Funds may be purchased by mail, by telephone or by exchange from other
Principal Funds.
Investments by Mail. Shares of the Funds may be purchased by submitting a
completed application and check made payable to Principal Mutual Funds. An
application is attached to this Prospectus. A different application is necessary
to establish an IRA, TDA, SEP, SAR-SEP or certain employee benefit plans. See
"Retirement Plans.".
Investments by Telephone. Shares of the Funds may be purchased by placing a
telephone order with Princor. Princor's telephone number is 1-800-247-4123.
Investors must have a current Prospectus for the funds in order to place a
telephone order. An investor must provide Princor with the payment for the order
within three business days from the date the order is placed. The investor may
provide this payment by submitting a check payable to Princor within the time
period. In addition, investors may provide the purchase payment by wiring
Federal Funds directly to Norwest Bank Iowa, N.A., on a day on which the New
York Stock Exchange and Norwest Bank Iowa, N.A. are open for business. The
investor should instruct the bank to wire transfer Federal Funds to: Norwest
Bank Iowa, N.A., Des Moines, Iowa , ABA No. 073000228; for credit to: Princor
Financial Services Corporation, Account No. 073-330; for further credit to:
investor's name and account number. Payment for both initial purchases and
subsequent purchases may be made by wire.
Investors may make subsequent purchases by wire to existing accounts
without placing a telephone order. However, if a telephone order is not placed,
shares will be purchased at the offering price next computed after the wired
payment is received by Princor. To make subsequent purchases by wire, the
investor should instruct the bank to wire transfer Federal Funds to: Norwest
Bank Iowa, N.A., Des Moines, Iowa , ABA No. 073000228; for credit to: Principal
Management Corporation, Account No. 3000499968; for further credit to:
investor's name and account number. Wire transfers may take two hours or more to
complete. Investors may make special arrangements to transmit orders for Money
Market Fund shares to Princor prior to 3:00 p.m. (Central Time) on a day when
the Fund is open for business with the investor's assurance that payment for
such shares will be made by wiring Federal Funds directly to Norwest Bank Iowa,
N.A. prior to 10:00 a.m. the following regular business day. Such orders will be
effected at the Fund's offering price in effect on the date such purchase order
is received by Princor. Wire purchases through a selected dealer may involve
other procedures established by that dealer.
Minimum Purchase Amount. An investor may open an account with any of the
Funds with a minimum initial investment of $1,000. Accounts established under
the Uniform Gifts to Minors Act or Uniform Transfers Act may be funded with a
minimum initial investment of $500. IRAs may be established with a minimum
initial investment of $500. Additional investments of $100 or more may be made
at any time without completing a new application. The minimum initial and
subsequent investment amounts are not applicable to accounts used to fund
certain employee benefit plans, to accounts designated as receiving accounts in
a Dividend Relay Election, to Money Market Fund accounts used as sweep accounts,
to accounts used as part of an asset allocation service provided by Princor
Financial Services Corporation, to Money Market Fund accounts for which Delaware
Charter Guarantee & Trust Company acts as trustee or to Automatic Investment
Plans. Each Fund's Board of Directors reserves the right to change or waive
minimum investment requirements at any time, which would be applicable to all
investors alike.
Automatic Investment Plan. An investor may make regular monthly investments
through automatic deductions from the account of a bank or similar financial
institution. The minimum monthly purchase is $50 for all Funds except the Money
Market Funds, which have a $100 monthly minimum requirement. A $50 minimum
monthly purchase may be established for the Money Market Funds if the account
value is at least $1,000 at the time the plan is established. Plan forms and
preauthorized check agreements are available from Princor on request. There is
no obligation to continue the plan and it may be terminated by the investor at
any time.
Each Fund offers investors two classes of shares through this Prospectus
which bear sales charges in different forms and amounts:
Class A Shares. An investor who invests less than $1 million in Class A
shares (except Class A shares of the Money Market Funds) pays a sales charge at
the time of purchase. As a result, shares purchased are not subject to any
charges when they are redeemed. Certain purchases of Class A shares qualify for
reduced sales charges. Class A shares purchases of $1 million or more are not
subject to a sales charge at the time of purchase but may be subject to a
contingent deferred sales charge if redeemed within 18 months of purchase. See
"Offering Price of Funds' Shares." Class A shares of each of the Funds, except
the Money Market Funds, currently bear a 12b-1 fee at the annual rate of up to
0.25% (.15% for the Limited Term Bond Fund) of the Fund's average net assets
attributable to Class A shares. See "Distribution and Shareholder Servicing
Plans and Fees."
Class B Shares. Class B shares are purchased without an initial sales
charge, but are subject to a declining contingent deferred sales charge ("CDSC")
of up to 4% (1.25% for Limited Term Bond Fund) if redeemed within six years.
Class B shares purchased under certain sponsored Princor plans established after
February 1, 1998, are subject to a CDSC of up to 3% if redeemed within five
years of purchase. (See Statement of Additional Information for discussion of
sponsored Princor plans.) See "Offering Price of Funds Shares."
Class B shares bear a higher 12b-1 fee than Class A shares, currently at
the annual rate of up to 1.00% (.50% for the Limited Term Bond Fund) of the
Fund's average net assets attributable to Class B shares. See "Distribution and
Shareholder Servicing Plans and Fees." Class B shares provide an investor the
benefit of putting all of the investor's dollars to work from the time the
investment is made, but (until conversion to Class A shares) will have a higher
expense ratio and pay lower dividends than Class A shares due to the higher
12b-1 fee. Class B shares will automatically convert to Class A shares, based on
relative net asset value (without a sales charge), on the first business day of
the 85th month after the purchase date (61st month for certain sponsored plans).
Class B shares acquired by exchange from Class B shares of another Principal
fund will convert into Class A shares based on the time of the initial purchase.
(See "How to Exchange Shares".) At the same time, a pro rata portion of all
shares purchased through reinvestment of dividends and distributions would
convert into Class A shares, with that portion determined by the ratio that the
shareholder's Class B shares converting into Class A shares bears to the
shareholder's total Class B shares that were not acquired through dividends and
distributions. The conversion of Class B shares to Class A shares is subject to
the continuing availability of a ruling from the Internal Revenue Service or an
opinion of counsel that such conversions will not constitute taxable events for
Federal tax purposes. There can be no assurance that such ruling or opinion will
be available, and the conversion of Class B shares to Class A shares will not
occur if such ruling or opinion is not available. In such event, Class B shares
would continue to be subject to higher expenses than Class A shares for an
indefinite period.
Which arrangement is better for you? The decision as to which class of
shares provides a more suitable investment for an investor depends on a number
of factors, including the amount and intended length of the investment.
Investors making investments that qualify for reduced sales charges might
consider Class A shares. Investors who prefer not to pay an initial sales charge
and who plan to hold their investment for more than seven years (five years for
certain sponsored plans) might consider Class B shares. Orders from individuals
for Class B shares that when added to the current value of Class A shares and
Class B shares combined for rights of accumulation purposes equal or exceeds
$250,000 will be treated as orders for Class A shares unless the shareholder
provides written acknowledgment that the order should be treated as an order for
Class B shares. Sales personnel may receive different compensation depending on
which class of shares are purchased.
OFFERING PRICE OF FUNDS' SHARES
The Funds offer their respective shares continuously through Princor, which
is the principal underwriter for the Funds and sells shares as agent on behalf
of the Funds. Princor may select other dealers through which shares of the Funds
may be sold. Certain dealers may not sell all classes of shares.
Class A shares. Class A shares of the Money Market Funds are sold to the
public at net asset value; no sales charge applies to purchases of the Money
Market Funds. Class A shares of the Growth-Oriented and Income-Oriented Funds
are sold to the public at the net asset value plus a sales charge which ranges
from a high 4.75% (1.50% for the Limited Term Bond Fund) to a low of 0% of the
offering price (equivalent to a range of 4.99% to 0% of the net amount invested)
according to the schedule below. Selected dealers are allowed a concession as
shown. At Princor's discretion, the entire sales charge may at times be
reallowed to dealers. In some situations, depending on the services provided by
the dealer, the concession may be less. Any dealer allowance on purchases not
involving a sales charge will be determined by Princor.
<TABLE>
<CAPTION>
Sales Charge for
All Funds Except Sales Charge for
Limited Term Bond Fund Limited Term Bond Fund Dealers Allowance as
Sales Charge as % of: Sales Charge as % of: % of Offering Price
------------------------ ------------------------ --------------------------------
Offering Net Amount Offering Net Amount All Funds Except Limited Term
Price Invested Price Invested Limited Term Bond Bond
-------- ---------- -------- ---------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Less than $50,000 4.75% 4.99% 1.50% 1.52% 4.00% 1.25%
$50,000 but less than $100,000 4.25% 4.44% 1.25% 1.27% 3.75% 1.00%
$100,000 but less than $250,000 3.75% 3.90% 1.00% 1.10% 3.25% 0.75%
$250,000 but less than $500,000 2.50% 2.56% 0.75% 0.76% 2.00% 0.50%
$500,000 but less than $1,000,000 1.50% 1.52% 0.50% 0.50% 1.25% 0.25%
$1,000,000 or more 0 0 0 0 0.75% 0.25%
</TABLE>
CDSC on Class A Shares. Purchases of Class A shares of $1,000,000 or more
may be subject to CDSC upon redemption. A CDSC is payable to Princor on these
investments in the event of a share redemption within 18 months following the
share purchase, at the rate of .75% (.25% for the Limited Term Bond Fund) of the
lesser of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares. Shares subject to
the CDSC which are exchanged into another Principal Fund will continue to be
subject to the CDSC until the original 18 month period expires. However, no CDSC
is payable with respect to redemptions of Class A shares used to fund a Princor
401 (a) or Princor 401 (k) retirement plan, except redemptions resulting from
the termination of the plan or transfer of plan assets.
The CDSC will be waived on redemptions of shares in connection with certain
withdrawals from certain retirement plans. See Statement of Additional
Information. Up to 10% of the value of Class A shares subject to a Periodic
Withdrawal Plan may also be redeemed each year without a CDSC. See "Periodic
Withdrawal Plan."
Investors may be eligible to buy Class A shares at reduced sales charges.
Consult your registered representative for details about Rights of Accumulation
and Statement of Intention as well as the reduced sales charge available for the
investment of certain life insurance and annuity contract death benefits and
various Employee Benefit Plans and other plans. Descriptions are also included
in the Statement of Additional Information.
Investors may be able to purchase Class A shares at net asset value. The
following persons may purchase Class A shares of the Growth-Oriented Funds and
Income-Oriented Funds at the net asset value (without a sales charge): (1)
Principal Life Insurance Company and its directly and indirectly owned
subsidiaries; (2) Active and retired directors, officers and employees of any of
the Funds, Principal Life Insurance Company, and directly and indirectly owned
subsidiaries of Principal Life Insurance Company (including full-time insurance
agents of, and persons who have entered into insurance brokerage contracts with,
Principal Life Insurance Company and its directly and indirectly owned
subsidiaries and employees of such persons); (3) The Principal Financial Group
Employees' Credit Union; (4) Non-ERISA investment advisory clients of Invista
Capital Management, Inc., an indirectly wholly-owned subsidiary of Principal
Life Insurance Company; (5) Sales representatives and employees of sales
representatives of Princor or other dealers through which shares of the Funds
are distributed; (6) Spouses, surviving spouses and dependent children of the
foregoing persons; (7) Trusts primarily for the benefit of the foregoing
individuals; (8) certain "wrap accounts" for the benefit of clients of Princor
and other broker-dealers or financial planners selected by Princor; (9) clients
of a registered representative of Princor or other dealers through which shares
of the Funds are distributed and who has become affiliated with Princor or other
dealer within 180 days prior to the date of the purchase of Class A shares of
the Funds, if the investment represents the proceeds of a redemption within that
180 day period of shares of another investment company the purchase of which
included a front-end sales charge or the redemption of which was subject to a
contingent deferred sales charge; (10) Unit Investment Trusts sponsored by
Principal Life Insurance Company and/or its directly or indirectly owned
subsidiaries; (11) certain employee welfare benefit plan customers of Principal
Life Insurance Company for whom Plan Deposit Accounts are established.
Each of the Funds, except Principal Tax-Exempt Bond Fund and Principal
Tax-Exempt Cash Management Fund, has obtained an exemptive order from the
Securities and Exchange Commission ("SEC") to permit each Fund to offer its
shares at net asset value to participants of certain annuity contracts issued by
Principal Life Insurance Company. In addition, shares of each of these funds are
available at net asset value to the extent the investment represents the
proceeds from a total surrender of certain unregistered annuity contracts issued
by Principal Life Insurance Company and for which Principal Life Insurance
Company waives any applicable contingent deferred sales charges or other
contract surrender charges.
The Funds reserve the right to discontinue offering shares at net asset
value and/or at a reduced sales charge at any time for new accounts and upon 60
days notice to shareholders of existing accounts.
Class B shares. Class B shares (including Class B shares of the Cash
Management Fund) are sold without an initial sales charge, although a CDSC will
be imposed if you redeem shares within six years of purchase (five years for
certain sponsored plans). The following types of shares may be redeemed without
charge at any time: (i) shares acquired by reinvestment of distributions and
(ii) shares otherwise exempt from the CDSC, as described below. Subject to the
foregoing exclusions, the amount of the charge is determined as a percentage of
the lesser of the current market value or the cost of the shares being redeemed.
Therefore, when a share is redeemed, any increase in its value above the initial
purchase price is not subject to any CDSC. The amount of the CDSC will depend on
the number of years since you invested and the dollar amount being redeemed,
according to the following table:
<TABLE>
<CAPTION>
Contingent Deferred Sales Charge
as a Percentage of
Dollar Amount Subject to Charge
- ---------------------------------------------------------------------------------------------------------------------------
For Certain Sponsored Plans
Commenced After 2/1/98
--------------------------------------
All Funds All Funds
Years Since Purchase Except Limited Term Limited Term Except Limited Term Limited Term
Payments Made Bond Fund Bond Fund Bond Fund Bond Fund
-------------------- ------------------- ------------ ------------------- ------------
<S> <C> <C> <C> <C>
2 years or less 4.0% 1.25% 3.00% .75%
more than 2 years, up to 4 years 3.0% 0.75% 2.00% .50%
more than 4 years, up to 5 years 2.0% 0.50% 1.00% .25%
more than 5 years, up to 6 years 1.0% 0.25% None None
more than 6 years None None None None
</TABLE>
In determining how much, if any, a CDSC is payable on a redemption, the
Fund will first redeem shares not subject to any charge, and then shares held
longest during the six (five) year period. For information on how sales charges
are calculated if shares are exchanged, see "How to Exchange Shares." Princor
receives the entire amount of any CDSC paid.
The CDSC will be waived on redemptions of shares arising out of death or
disability or in connection with certain withdrawals from certain retirement
plans. See the Statement of Additional Information. Up to 10% of the value of
Class B shares subject to a Periodic Withdrawal Plan may also be redeemed each
year without a CDSC. See "Periodic Withdrawal Plan."
Non-cash compensation. Princor may, at its expense, provide additional
promotional incentives or payments to dealers that sell shares of the Principal
Funds. In some instances, these incentives or payments may be offered only to
certain dealers who have sold or may sell significant amounts of shares. Princor
has established a non-cash compensation program for registered representatives
of Principal Financial Securities, Inc. ("PFS") based upon sales of shares of
the Principal funds during the year ending December 31, 1997. Registered
representatives of PFS will receive a choice of promotional items, or will be
invited to attend a professional development seminar, receive a subscription for
a financial newspaper and an allowance to be used to promote the Principal
Funds.
DISTRIBUTION AND SHAREHOLDER SERVICING PLANS AND FEES
Class A Distribution Plan. Each of the Funds, except the Money Market
Funds, has adopted a distribution plan for the Class A shares. The Fund will
make payments from its assets to Princor pursuant to this Plan after the end of
each month at an annual rate not to exceed 0.25% (.15% for the Limited Term Bond
Fund) of the average daily net asset value of the Fund. Princor will retain such
amounts as are appropriate to compensate for actual expenses incurred in
distributing and promoting the sale of the Fund shares but may remit on a
continuous basis up to .25% (.15% for the Limited Term Bond Fund) to Registered
Representatives and other selected Dealers (including, for this purpose, certain
financial institutions) as a trail fee in recognition of their services and
assistance.
Class B Distribution Plan. Each of the Funds, except Tax-Exempt Cash
Management Fund, has adopted a distribution plan for the Class B shares. Each
Class B Plan provides for payments by the Fund to Princor at the annual rate of
up to 1.00% (.50% for the Limited Term Bond Fund) of the Fund's average net
assets attributable to Class B shares. Princor also receives the proceeds of any
CDSC imposed on redemptions of such shares.
Although Class B shares are sold without an initial sales charge, Princor
pays a sales commission equal to 4.00% (3.00% for certain sponsored plans or
1.25% for the Limited Term Bond Fund) of the amount invested to dealers who sell
such shares. These commissions are not paid on exchanges from other Principal
Funds. In addition, Princor may remit on a continuous basis up to .25% (.15% for
the Limited Term Bond Fund) to Registered Representatives and other selected
Dealers (including, for this purpose, certain financial institutions) as a trail
fee in recognition of their ongoing services and assistance.
General. The purpose of the Plans is to permit the Fund to compensate
Princor for expenses incurred by it in promoting and distributing Fund shares
and providing services to Fund shareholders. If the aggregate payments received
by Princor under any of the Plans in any fiscal year exceed the expenditures
made by Princor in that year pursuant to that Plan, Princor will promptly
reimburse the Fund for the amount of the excess. If expenses under a Plan exceed
the amount for which Princor may be compensated in any one fiscal year, the Fund
will not carry over such expenses to the next fiscal year. The Funds have no
legal obligation to pay any amount pursuant to the Plans that exceeds the
compensation limit. The Funds will not pay, directly or indirectly, interest,
carrying charges, or other financing costs in connection with the Plans. The
Plans are further described in the Statement of Additional Information.
DETERMINATION OF NET ASSET VALUE OF FUNDS' SHARES
Each Fund calculates net asset value of a share of each class by dividing
the total value of the assets attributable to the class, less all liabilities
attributable to the class, by the number of shares outstanding of the class.
Shares are valued as of the close of trading on the New York Stock Exchange each
day the Exchange is open.
Growth-Oriented and Income-Oriented Funds
The following valuation information applies to the Growth-Oriented and
Income-Oriented Funds. Securities for which market quotations are readily
available are valued using those quotations. Securities with remaining
maturities of 60 days or less are valued at amortized cost when it is determined
by the Board of Directors that amortized cost reflects fair value. Other assets
are valued at fair value as determined in good faith through procedures
established by the Board.
As previously described, some of the Funds may purchase foreign securities,
whose trading is substantially completed each day at various times prior to the
close of the New York Stock Exchange. The values of such securities used in
computing net asset value per share are usually determined as of such times.
Occasionally, events which affect the values of such securities and foreign
currency exchange rates may occur between the times at which they are generally
determined and the close of the New York Stock Exchange and would therefore not
be reflected in the computation of the Fund's net asset value. If events
materially affecting the value of such securities occur during such period, then
these securities will be valued at their fair value as determined in good faith
by the Manager under procedures established and regularly reviewed by the Board
of Directors. To the extent the Fund invests in foreign securities listed on
foreign exchanges which trade on days on which the Fund does not determine its
net asset value, for example Saturdays and other customary national U.S.
holidays, the Fund's net asset value could be significantly affected on days
when shareholders have no access to the Fund.
Money Market Funds
Portfolio securities of the Money Market Funds are valued at amortized
cost. For a description of this calculation procedure see the Statement of
Additional Information. The Money Market Funds reserve the right to calculate or
estimate their net asset values more frequently than once a day if they deem it
desirable.
DISTRIBUTION OF INCOME DIVIDENDS AND REALIZED CAPITAL GAINS
Growth-Oriented and Income-Oriented Funds
Each of these Funds distributes substantially all of its net income to
shareholders each year according to the following schedule:
<TABLE>
<CAPTION>
Funds Record date Payable date
----- ----------- ------------
<S> <C> <C> <C>
Growth
Balanced, Blue Chip, three business days before March 24, June 24,
Real Estate, and Utilities each payable date September 24 and December 24
(or previous business day)
Capital Value and Growth three business days before June 24 and December 24
each payable date (or previous business day)
International, International three business days before December 24
Emerging Markets, each payable date (or previous business day)
International SmallCap,
MidCap and SmallCap
Income
Bond, Government Securities three business days before monthly on the 24th (or
Income, High Yield, Limited each payable date previous business day)
Term Bond and Tax-Exempt Bond
</TABLE>
Net realized capital gains for each of the Funds, if any, will be
distributed annually. Generally the distribution will be made on the fourth
business day of December, to shareholders of record on the third business day
prior to the payable date.
On the Account Application, you can authorize income dividend and capital
gains distributions to be invested in additional Fund shares at net asset value
(without a sales charge), invested in shares of other Principal Funds or paid in
cash. You may change this instruction without charge at any time by giving ten
days written notice to the Fund.
Any dividends or distributions paid shortly after a purchase of shares will
have the effect of reducing the per share net asset value by the amount of the
dividends or distributions. These dividends or distributions are subject to
taxation like other dividends and distributions, even though they are in effect
a return of capital. A shareholder of the Tax-Exempt Bond Fund who redeems
shares when tax-exempt income has been accrued but not declared as a dividend by
that Fund may have the portion of the redemption proceeds which represents such
income taxed at capital gains rates.
Money Market Funds
The Money Market Funds declare dividends of all their daily net investment
income on each day the net asset value per share is determined. Dividends for
each Fund are payable daily and are automatically reinvested in full and
fractional shares of the Fund at the then current net asset value. Shareholders
may request to have their dividends paid out monthly in cash. For such
shareholders, the shares reinvested and credited to their account during the
month will be redeemed as of the close of business on the 20th day (or the
preceding business day if the 20th is not a business day) of each month and the
proceeds will be paid to them in cash.
Net investment income of the Money Market Funds, for dividend purposes,
consists of (1) accrued interest income plus or minus accrued discount or
amortized premium; plus or minus (2) all net short-term realized gains and
losses; minus (3) all accrued expenses of the Fund. Expenses of the Fund are
accrued each day. Net income will be calculated immediately prior to the
determination of net asset value per share of each Fund. Dividends payable on
Class B shares of the Cash Management Fund on a per share basis will be lower
than dividends payable on Class A shares of the Funds.
Since it is the policy of each Money Market Fund, under normal
circumstances, to hold portfolio securities to maturity and to value portfolio
securities at amortized cost, neither Fund expects any capital gains or losses.
If either Fund does experience gains, however, it could result in an increase in
dividends. Capital losses could result in a decrease in dividends. If, for some
extraordinary reason, either Fund realizes net long-term capital gains, it will
distribute them once every 12 months.
Since the net income of each Fund (including realized gains and losses on
the portfolio securities) is normally declared as a dividend each time the net
income of the Fund is determined, the net asset value per share of each Fund
normally remains at $1.00 immediately after each determination and dividend
declaration. Any increase in the value of a shareholder's investment in either
Fund, representing reinvestment of dividend income, is reflected by an increase
in the number of shares of that Fund in the account.
Normally each Fund will have a positive net income at the time of each
determination thereof. Net income may be negative if an unexpected liability
must be accrued or a loss is realized. If the net investment income of either
Fund determined at any time is a negative amount, the net asset value per share
will be reduced below $1.00. If this happens, the Fund may endeavor to restore
the net asset value per share to $1.00 by reducing the number of outstanding
shares by redeeming proportionately from shareholders without the payment of any
monetary consideration, such number of full and fractional shares as is
necessary to maintain a net asset value per share of $1.00. Each shareholder
will be deemed to have agreed to such a redemption in these circumstances by
investment in the Fund. The Fund may seek to achieve the same objective of
restoring the net asset value per share to $1.00 by not declaring dividends from
net income on subsequent days until restoration, with the result that the net
asset value per share would increase to the extent of positive net income which
is not declared as a dividend, or any other method approved by the Board of
Directors for the Fund.
The Board of Directors of each Fund may revise the above dividend policy,
or postpone the payment of dividends, if the Fund should have or anticipate any
large presently unexpected expense, loss or fluctuation in net assets which in
the opinion of the Board might have a significant adverse effect on the
shareholders.
Dividend Relay Election
Shareholders may elect to have dividends and capital gains distributions
from one of the Principal Funds invested in shares of the same class of one of
the other Principal Funds. This Dividend Relay Election can be made on the
application or at any time on 10 days written notice or, if telephone
transaction services apply to the account from which the dividends and
distributions originate, on 10 days notice by telephone to the Fund. A signature
guarantee may be required to make the Dividend Relay Election. See "General
Information About a Fund Account." There is no administrative charge for this
service. No sales charge will apply to the purchase of shares of the
Growth-Oriented or Income-Oriented Funds made pursuant to the election;
dividends and distributions are credited to the receiving Fund the day they are
paid at the receiving Fund's net asset value for that day. If the Dividend Relay
Election is made to direct dividends and distributions from a Fund used to fund
the shareholder's retirement plan (for example, an IRA) to a receiving Fund that
is not used to fund the shareholder's retirement plan, a taxable distribution
from the retirement plan will result.
Shareholders should consult their tax advisor prior to making such an election.
Dividends and distributions derived from shares of the Funds used to fund
certain employee benefit plans are not eligible for the Dividend Relay Election.
If the Dividend Relay Election privilege is discontinued with respect to a
particular receiving Fund, the value of the account in that Fund must equal or
exceed the Fund's minimum initial investment requirement or the Fund shall have
the right, if the shareholder fails to increase the value of the account to such
minimum within 90 days after being notified of the deficiency, to redeem the
account and send the proceeds to the shareholder.
Shareholders may discontinue the Dividend Relay Election at any time on 10
days written notice or, if telephone transaction services apply to the account
from which the dividends originate, on 10 days notice by telephone to the Fund.
The Funds reserve the right to discontinue or modify this service upon 60 days
written notice to shareholders.
TAX TREATMENT OF FUNDS, DIVIDENDS AND DISTRIBUTIONS
It is the policy of each of the Funds to distribute substantially all net
investment income and net realized gains. Through such distributions, and by
satisfying certain other requirements, the Funds intend to qualify for the tax
treatment applicable to regulated investment companies under the provisions of
the Internal Revenue Code. This means that in each year in which a Fund so
qualifies, it will be exempt from federal income tax upon the amounts so
distributed to investors. The Tax Reform Act of 1986 imposed an excise tax on
mutual funds which fail to distribute net investment income and capital gains by
the end of the calendar year in accordance with the provisions of the Act. The
Funds intend to comply with the Act's requirements and to avoid this excise tax.
The Funds record dividend income on the ex-dividend date, except dividend income
from foreign securities where the ex-dividend date may have passed, in which
case such dividends are recorded as soon as the Fund is informed of the
ex-dividend date. The Funds are required by law to withhold 31% of dividends
paid to investors who do not furnish the Fund their correct taxpayer
identification number, which in the case of most individuals is their social
security number.
The Tax-Exempt Bond Fund and Tax-Exempt Cash Management Fund also intend to
qualify to pay exempt-interest dividends to their shareholders. An
exempt-interest dividend is that part of dividend distributions made by the
Funds which consists of interest received by the Funds on tax-exempt Municipal
Obligations. Shareholders incur no federal income taxes on exempt-interest
dividends. However, these exempt-interest dividends may be taxable under state
or local law. Fund shareholders that are corporations must include
exempt-interest dividends when calculating the corporate alternative minimum
tax. Persons investing on behalf of a Subchapter S corporation should seek the
advice of a tax advisor prior to purchasing shares of the Tax-Exempt Bond Fund
or Tax-Exempt Cash Management Fund. Exempt-interest dividends that derive from
certain private activity bonds must be included by individuals as a preference
item to determine whether they are subject to the alternative minimum tax. These
Funds may also pay ordinary income dividends and distribute capital gains from
time to time. Ordinary income dividends and distributions of capital gains, if
any, are taxable for federal purposes.
In each fiscal year when, at the close of such year, more than 50% of the
value of the International, International Emerging Markets or International
SmallCap Fund's total assets are invested in securities of foreign corporations,
the Fund may elect pursuant to Section 853 of the Internal Revenue Code to
permit its shareholders to take a credit (or a deduction) for foreign income
taxes paid by the Fund. In that case, shareholders should include in gross
income for federal income tax purposes both cash dividends received from the
Fund and the amount which the Fund advises is their pro rata portion of foreign
income taxes paid with respect to, or withheld from, dividends and interest paid
to the Fund from its foreign investments. The shareholders would then be
entitled to subtract from their federal income taxes the amount of such taxes
withheld, or else treat such foreign taxes as a deduction from gross income, if
that should be more advantageous. As in the case of individuals receiving income
directly from foreign sources, the above-described tax credit for tax deduction
is subject to certain limitations.
Under the federal income tax law, dividends paid from investment income and
from realized short-term capital gains, if any, are generally taxable at
ordinary income rates whether received in cash or additional shares. The net
income of the Cash Management Fund for purposes of its financial reports and
determination of the amount of distributions to shareholders may exceed its net
income as determined for tax purposes because certain market discount income
will be currently included as income for book purposes but not for tax purposes.
Although all net income for book purposes will be distributed to shareholders,
such distributions are taxable to shareholders of the Fund as ordinary income
only to the extent that they do not exceed the shareholder's ratable share of
the Fund's investment income and any short-term capital gain as determined for
tax purposes. The balance, if any, will be applied against and will reduce the
shareholder's cost or other tax basis for the shares.
Dividends from net investment income of each of the Funds will be eligible
for a 70% dividends received deduction generally available to corporations to
the extent of the amount of qualifying dividends received by the Fund from
domestic corporations for the taxable year. Dividends from the Income-Oriented
Funds and the Money Market Funds are not expected to qualify for the 70%
dividend received deduction. Dividends and capital gains are taxable in the year
in which distributed, whether received in cash or reinvested in additional
shares. Dividends declared with a record date in December and paid in January
will be deemed to have been distributed to shareholders in December. The Funds
will inform shareholders of the amount and nature of their income dividends and
capital gains distributions. Dividends from net income and distributions of
capital gains may also be subject to state and local taxation.
Additional information regarding taxation is included in the Statement of
Additional Information. Shareholders should consult their own tax advisors as to
the federal, state and local tax consequences of ownership of shares of the
Funds in their particular circumstances.
HOW TO EXCHANGE SHARES
Class A shares for all of the Funds (except the Money Market Funds and the
Limited Term Bond Fund), or Class B shares for all of the Funds may be exchanged
at net asset value for shares of the same class of any other Principal Fund
described in the Prospectus, at any time. Class A shares of the Limited Term
Bond Fund may be exchanged at net asset value for Class A shares of any of the
other Principal Funds at any time 90 days after the purchase of such shares. The
CDSC that might apply if Class B shares, or certain Class A shares, are redeemed
will not apply if these shares are exchanged. However, for purposes of computing
the CDSC on the shares acquired through the exchange, the length of time the
acquired shares have been owned by a shareholder will be measured from the date
of original purchase of the exchanged shares and the amount of the CDSC will be
determined based upon the CDSC table to which the exchanged shares were subject.
Thus, when shares acquired through the exchange are redeemed, the redemption may
be subject to the CDSC, depending upon when the exchanged shares were originally
purchased.
Class A shares of Principal Cash Management Fund or Principal Tax-Exempt
Cash Management Fund acquired by direct purchase are not included in the net
asset value exchange privilege. However, Class A shares of these two Funds
acquired by exchange of any other Principal Fund shares, or by conversion of
Class B shares, and additional shares which have been purchased by reinvesting
dividends earned on Class A shares, may be exchanged for other Class A shares
without a sales charge. In addition, Class A shares of the Money Market Funds
acquired by direct purchase or reinvestment of dividends on such shares may be
exchanged for Class B shares of any Growth-Oriented or Income-Oriented Fund.
Shares of a Fund used to fund an employee benefit plan may be exchanged
only for shares of other Principal Funds made available to such plan. A request
for an exchange of shares used to fund an Employee Benefit Plan must be made in
accordance with the procedures provided in the Plan and the written service
agreement. All other shareholders may exchange shares by simply submitting a
written request or a completed Exchange Authorization Form to the Fund. Exchange
Authorization Forms are available by calling or writing the Fund. For federal
income tax purposes, an exchange is treated as a sale of shares and generally
results in a capital gain or loss. Income tax rules regarding the calculation of
cost basis may make it undesirable in certain circumstances to exchange shares
within 90 days of their purchase. A telephone exchange privilege is currently
available for amounts up to $500,000. Procedures for telephone transactions are
described under "How to Sell Shares." The telephone exchange privilege is not
available for accounts for which share certificates remain outstanding.
A shareholder may also make an Automatic Exchange Election. This election
authorizes an exchange as described above from one Principal Fund to any or all
of the other Principal Funds on a monthly, quarterly, semiannual or annual
basis. The minimum amount that may be exchanged into any Principal Fund must
equal or exceed $300 on an annual basis. The exchange will occur on the date of
the month specified by the shareholder in the election so long as the day is a
trading day. If the designated day is not a trading day, the exchange will occur
on the next trading day occurring during that month. If the next trading day
occurs in the following month, the exchange will occur on the trading day prior
to the designated day. The Automatic Exchange Election may be made on the open
account application, on 10 days written notice or, if telephone transaction
services apply to the account from which the exchange is made, on 10 days notice
by telephone to the Fund from which the exchange will be made. See "How to Sell
Shares" for an explanation of the applicability of telephone transaction
services. Exchanges from a Fund used to fund the shareholder's retirement plan
to a Principal Fund not used to fund the shareholder's retirement plan will
result in a taxable distribution from the retirement plan. Shareholders should
consult their tax adviser prior to making such an exchange. A shareholder may
modify or discontinue the election on 10 days written notice or notice by
telephone to the Fund from which exchanges are made.
General - An exchange, whether in writing, by telephone or other means, by
any joint owner shall be binding upon all joint owners. If the exchanging
shareholder does not have an account with the Fund in which shares are being
acquired, a new account will be established with the same registration, dividend
and capital gain options and dealer of record as the account from which shares
are exchanged. All exchanges are subject to the minimum investment and
eligibility requirements of the Fund being acquired. A shareholder may receive
shares in exchange only if they may be legally offered in the shareholder's
state of residence. If a certificate has been issued an exchange will be made
only upon receipt of the certificate of shares to be exchanged. In order to
establish a systematic accumulation plan or a periodic withdrawal plan for the
new account, an exchanging shareholder must file a specific written request.
The exchange privilege is not intended as a vehicle for short-term trading.
Excessive exchange activity may interfere with portfolio management and have an
adverse effect on all shareholders. In order to limit excessive exchange
activity and in other circumstances where the Directors or Principal Management
Corporation believes doing so would be in the best interest of the Fund, the
Fund reserves the right to revise or terminate the exchange privilege, limit the
amount or number of exchanges or reject any exchange. Shareholders would be
notified of any such action to the extent required by law. A shareholder may
modify or discontinue an election on 10 days written notice or notice by
telephone to the Fund from which exchanges are made.
HOW TO SELL SHARES
Each Fund will redeem its shares upon request. Shares are redeemed at the
net asset value calculated after the Fund receives the request in proper form,
less any applicable CDSC. There is no additional charge for redemptions.
Redemptions, whether in writing or by telephone or other means, by any joint
owner shall be binding upon all joint owners. The amount received for shares
upon redemption may be more or less than the cost of such shares depending upon
the net asset value at the time of redemption. The Funds generally send
redemption proceeds the business day after the request is received. Under
unusual circumstances, the Funds may suspend redemptions, or postpone payment
for more than three business days, as permitted by federal securities law. A
Fund will redeem only those shares for which it has received payment. To avoid
the inconvenience of a delay in obtaining redemption proceeds, shares may be
purchased with a certified check, bank cashiers check or money order.
A request for the redemption of shares used to fund certain employee
benefit plans must be made in accordance with the procedures provided in the
Plan and the written service agreement. Princor usually requires additional
documentation for the sale of shares by a corporation, partnership, agent or
fiduciary, or a surviving joint owner. Contact Princor for details. Shareholders
may redeem by mail, by telephone or, in the case of Class A shares of Money
Market Fund accounts, by a checkwriting service. The Fund reserves the right to
modify any of the methods of redemption or to charge a fee for providing these
services upon written notice to shareholders.
By Mail - A shareholder simply sends a letter to Princor, at P.O. Box
10423, Des Moines, Iowa 50306, requesting redemption of any part or all of the
shares owned by specifying the Fund account from which the redemption is to be
made and either a dollar or share amount. The letter must provide the account
number and be signed by a registered owner. If certificates have been issued,
they must be properly endorsed and forwarded with the redemption request. If
payment of less than $100,000 is to be mailed to the address of record, which
has not been changed within the three month period preceding the redemption
request, and is made payable to the registered shareholder or joint
shareholders, or to Principal Mutual Life Insurance Company or any of its
affiliated companies, the Fund will not require a signature guarantee as a part
of a proper endorsement; otherwise the shareholder's signature must be
guaranteed by either a commercial bank, trust company, credit union, savings and
loan association, national securities exchange member, or by a brokerage firm. A
signature guaranteed by a notary public or savings bank is not acceptable.
By Telephone - Shareholders may redeem shares valued at up to $100,000 from
any one Fund by telephone, unless the shareholder has notified the Fund of an
address change within the three month period preceding the date of the request.
Such redemption proceeds will be mailed to the shareholder's address of record.
Telephone redemption proceeds may also be sent by check or wire transfer to a
commercial bank account in the United States previously authorized in writing by
the shareholder. A wire charge of up to $6.00 will be deducted from the Fund
account from which the redemption is made for all wire transfers. If proceeds
are to be used to settle a securities transaction with a selected dealer,
telephone redemptions may be requested by the shareholder or upon appropriate
authorization from an authorized representative of the dealer, and the proceeds
will be wired to the dealer. The telephone redemption privilege is available
only if telephone transaction services apply to the account from which shares
are redeemed. Telephone transaction services apply to all accounts, except
accounts used to fund a Princor IRA or TDA or certain employee benefit plans,
unless the shareholder has specifically declined this service on the account
application or in writing to the Fund. The telephone redemption privilege will
not be allowed on shares for which certificates have been issued.
Shareholders may exercise the telephone redemption privilege by telephoning
1-800-247-4123. If all telephone lines are busy, shareholders might not be able
to request telephone redemptions and would have to submit written redemption
requests. Although the Funds and the transfer agent are not responsible for the
authenticity of redemption requests received by telephone, the right is reserved
to refuse telephone redemptions when in the opinion of the Fund from which the
redemption is requested or the transfer agent it seems prudent to do so. The
shareholder bears the risk of loss caused by a fraudulent telephone redemption
request the Fund reasonably believes to be genuine. Each Fund will employ
reasonable procedures to assure telephone instructions are genuine and if such
procedures are not followed, the Fund may be liable for losses due to
unauthorized or fraudulent transactions. Such procedures include recording all
telephone instructions, requesting personal identification information such as
the caller's name, daytime telephone number, social security number and/or birth
date and names of all owners listed on the account and sending a written
confirmation of the transaction to the shareholder's address of record. In
addition, the Fund directs redemption proceeds made payable to the owner or
owners of the account only to an address of record that has not been changed
within the three-month period prior to the date of the telephone request, or to
a previously authorized bank account.
By Checkwriting Service - Shareholders of Class A shares of the Money
Market Funds may redeem shares, other than shares subject to a CDSC or shares
used to fund a Princor IRA, TDA, SEP, SAR-SEP or certain employee benefit plans,
by writing checks on their accounts if this service is elected when completing
the Fund application. Upon receipt of the properly completed form and signature
card, the Fund will provide withdrawal checks drawn on Norwest Bank Iowa, N.A.
These checks may be payable to the order of any person in the amount of not less
than $100. Shareholders will continue to earn dividends until the check clears.
After a check is presented to Norwest Bank for payment, a sufficient number of
full or fractional shares will be redeemed from the account to cover the amount
of the check. Shareholders currently pay no fee for the checkwriting service,
but this may be changed in the future upon written notice to shareholders. The
checkwriting service is not available on shares for which certificates have been
issued.
Shareholders utilizing withdrawal checks will be subject to Norwest Bank's
rules governing checking accounts. Shareholders should make sure their accounts
have sufficient shares to cover the amount of any check drawn. If insufficient
shares are in the account, the check will be returned marked "Insufficient
Funds" and no shares will be redeemed. The checkwriting service may be revoked
on accounts on which "Insufficient Funds" checks are drawn. Accounts may not be
closed by a withdrawal check because the exact amount of the account will not be
known until after the check is received by Norwest Bank.
Moreover, following a purchase by check, redemptions from the Money Market
Funds pursuant to the checkwriting service or any of the Principal Funds
pursuant to the telephone withdrawal procedure will not be permitted until
payment has been collected on the check. During the period prior to the time the
redemption is effective, dividends on the Money Market Funds' shares will accrue
and be paid and the shareholder will be entitled to exercise all other rights of
beneficial ownership.
Reinvestment Privilege - Within 60 days after redemption, shareholders who
redeem all or part of their Class A shares for which a sales charge was paid or
which were acquired by the conversion of Class B shares, or Class B shares for
which a CDSC was paid, have a onetime privilege to reinvest the amount redeemed
in Class A shares of any of the Funds without a sales charge.
The reinvestment or exchange will be made at the net asset value next
computed after written notice of exercise of the privilege is received in proper
and correct form by Princor. All reinvestments or exchanges are subject to
acceptance by the Fund or Funds and Princor. The redemption which precedes such
reinvestment or exchange is regarded as a sale; therefore, if the shareholder
has realized a gain on the redemption, such gain may be taxable and exercising
the reinvestment privilege will not alter any tax payable. If a loss is realized
on the redemption of Fund shares, the reinvestment may be subject to the "wash
sale" rules, resulting in a postponement of the recognition of such loss for
federal income tax purposes. Accurate records should be kept for the duration of
the account for tax purposes.
PERIODIC WITHDRAWAL PLAN
A shareholder may request that a fixed number of Class A shares or Class B
shares ($25 initial minimum amount) or enough Class A shares or Class B shares
to produce a fixed amount of money ($25 initial minimum amount) be withdrawn
from an account monthly, quarterly, semiannually or annually. As described under
"Offering Price of the Funds' Shares," withdrawals from certain Class A shares
of the Funds other than the Money Market Funds, and Class B shares may be
subject to a CDSC. However, each year a shareholder may make periodic
withdrawals of up to 10% of the value of an account for Class B shares without
incurring a CDSC. The amount of the 10% free withdrawal privilege for an account
is initially determined based upon the value of the account as of the date of
the initial periodic withdrawal. If a periodic withdrawal plan is established at
the time Class B shares are purchased, the amount of the initial 10% free
withdrawal privilege may be increased by 10% of the amount of additional
purchases in that account made within 60 days after Class B shares were first
purchased. After a periodic withdrawal plan has been established the amount of
the 10% withdrawal privilege will be re-determined as of the last business day
of December each year. The Fund from which the periodic withdrawal is made makes
no recommendation as to either the number of shares or the fixed amount that the
investor may withdraw. Shareholders considering the implementation of a Plan
using shares of the Tax-Exempt Bond Fund are cautioned that the portion of
redemption proceeds which represents tax-exempt income which has been accrued
but not declared as a dividend by the Fund may be taxed at capital gains rates.
See "Distribution of Income Dividends and Realized Capital Gains." An investor
may initiate a Periodic Withdrawal Plan by signing an Agreement for Periodic
Withdrawal Form and depositing any share certificates that have been issued or,
if no certificates have been issued and telephone transaction services apply to
the account, by telephoning the Fund.
A shareholder of Class A shares of the Money Market Funds may establish a
Pre-Authorized Check (PAC) Withdrawal Service to enable a shareholder's creditor
to receive monthly installment payments from the shareholder's account if the
shareholder's creditor is capable of providing this service. The shareholder's
creditor will provide the necessary forms to establish a PAC Withdrawal Service.
Redemptions to pay insurance premiums - Upon completion of the necessary
authorization, shareholders of Class A shares of the Money Market Funds who pay
insurance or annuity premiums or deposits to Principal Life Insurance Company or
its affiliated companies may authorize automatic redemptions from Class A shares
of the Fund to pay such amounts. Details relative to this option may be obtained
from the Funds.
Cash withdrawals are made out of the proceeds of redemption on the day
designated by the shareholder, so long as the day is a trading day, and will
continue until cancelled. If no date is designated, redemptions will occur on
the fifteenth day of the month. If the designated day is not a trading day, the
redemption will occur on the next trading day occurring during that month. If
the next trading day occurs in the following month, the redemption will occur on
the trading day prior to the designated day. Withdrawal payments will be sent on
or before the third business day following such redemption. The redemption of
shares to make payments under this Plan will reduce and may eventually exhaust
the account. An investor will be disadvantaged by making additional purchases of
shares of any investment company on which there is a sales charge at the same
time that a Periodic Withdrawal Plan is in effect since a duplication of sales
charges will result. No purchase payments for shares of any Fund except Cash
Management Fund or Tax-Exempt Cash Management Fund will be knowingly accepted by
Princor Financial Services Corporation while periodic withdrawals under this
plan are being made, unless the purchase represents a substantial addition to
the shareholder's account.
Each redemption of shares may result in a gain or loss, which may be
reportable for income tax purposes. An investor should keep an accurate record
of any gain or loss on each withdrawal. Shareholders should consult their tax
advisors prior to establishing a periodic withdrawal plan from an Individual
Retirement Account. Any income dividends or capital gains distributions on
shares held under a Periodic Withdrawal Plan are reinvested in additional shares
at net asset value. Withdrawals may be stopped at any time without penalty,
subject to notice in writing which is received by the Fund.
PERFORMANCE CALCULATION
From time to time, the Funds may publish advertisements containing
information (including graphs, charts, tables and examples) about the
performance of one or more of the Funds and about a Fund's largest industry
holdings and largest five to ten specific securities holdings in its portfolio.
The funds may also quote rankings, yields or returns as published by independent
statistical services or publishers, and information regarding the performance of
certain market indices. The Funds' yield and total return figures described
below will vary depending upon market conditions, the composition of the Funds'
portfolios and operating expenses. These factors and possible differences in the
methods used in calculating yield and total return should be considered when
comparing the Funds' performance figures to performance figures published for
other investment vehicles. Any performance data quoted for the Funds represents
only historical performance and is not intended to indicate future performance
of the Funds. For further information on how the Funds calculate yield and total
return figures, see the Statement of Additional Information.
Growth-Oriented and Income-Oriented Funds
The Income-Oriented Funds may advertise their respective yields and average
annual total returns. The Growth-Oriented Funds may advertise their respective
average annual total returns. Yield is determined by annualizing each Fund's net
investment income per share for a specific, historical 30-day period and
dividing the result by the ending maximum public offering price for Class A
shares or the net asset value for Class B shares of the Fund for the same
period. Average annual total return for each Fund is computed by calculating the
average annual compounded rate of return over the stated period that would
equate an initial $1,000 investment to the ending redeemable value assuming the
reinvestment of all dividends and capital gains distributions at net asset
value. The same assumptions are made when computing cumulative total return by
dividing the ending redeemable value by the initial investment. These
calculations assume the payment of the maximum front-end load (in the case of
Class A shares) or the applicable CDSC (in the case of Class B shares). The
Funds may also calculate total return figures for a specified period that
reflect reduced sales charges available to certain classes of investors and
figures that do not take into account the maximum initial sales charge or
contingent deferred sales charge to illustrate changes in the Funds' net asset
values over time. A tax-equivalent yield may also be advertised by the
Tax-Exempt Bond Fund.
Money Market Funds
From time to time the Money Market Funds may advertise their respective
yield and effective yield. The yield of each Fund refers to the income generated
by an investment in that Fund over a seven-day period. This income is then
annualized. That is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The effective yield is calculated
similarly but, when annualized, the income earned by an investment in the Fund
is assumed to be reinvested. The effective yield will be slightly higher than
the yield because of the compounding effect of this assumed reinvestment. A
tax-equivalent yield may also be advertised by the Tax-Exempt Cash Management
Fund.
The yield for the Money Market Funds will fluctuate daily as the income
earned on the investments of the Funds fluctuates. Accordingly, there is no
assurance that the yield quoted on any given occasion will remain in effect for
any period of time. The Funds are open-end investment companies and there is no
guarantee that the net asset value or any stated rate of return will remain
constant. A shareholder's investment in the Funds is not insured. Investors
comparing results of the Funds with investment results and yields from other
sources such as banks or savings and loan associations should understand these
distinctions. Historical and comparative yield information may, from time to
time, be presented by the Fund.
GENERAL INFORMATION ABOUT A FUND ACCOUNT
Share certificates will be issued to shareholders only when requested.
Shareholders of the Funds will receive a statement of account for the Fund in
which they have invested. The Funds treat the statement of account as evidence
of ownership of Fund shares.
This is known as an open account system. Each Fund bears the cost of the open
account system.
A confirmation statement indicating the current transaction and the total
number of Fund shares owned will generally be provided each time a shareholder
invests in a Fund. However, there are certain exceptions, described below, when
quarterly or monthly confirmation statements will be provided.
Quarterly Statements. A quarterly statement disclosing information
regarding purchases, redemptions, and reinvested dividends or distributions
occurring during the quarter, as well as the balance of shares owned and account
values as of the statement date will be provided to shareholders for the
following types of accounts:
1. Accounts for which the only activity during a calendar quarter is the
purchase of shares due to the reinvestment of dividends and/or capital
gains distributions from the Fund or from another Principal Fund as a
result of a Dividend Relay Election;
2. Accounts from which redemptions are made pursuant to a Periodic
Withdrawal Plan;
3. Accounts for which purchases are made pursuant to a Systematic
Accumulation Plan;
4. Accounts from which purchases or redemptions are made pursuant to an
automatic exchange election;
5. Accounts used to fund certain individual retirement or individual
pensions plans qualified under the Internal Revenue Code; and
6. Accounts established through an arrangement involving a group of two or
more shareholders for whom purchases of shares are made through a
person (e.g. an employer ) designated by the group. A statement
indicating receipt of the total amount paid by the group will be sent
to the designated person at the time each purchase is made. If the
payment on behalf of the group is not received from the designated
person within 10 days of the date such payments are to be made, each
member will be notified and thereafter each member will receive a
statement at the time of each purchase for the three succeeding
payments. If a payment is not received in the current quarter on behalf
of a member for whom a payment had been received in the previous
quarter, a statement will be sent to such group member reflecting that
a payment was not received on the member's behalf.
Monthly Statements. Shareholders of the Money Market Funds for whom
quarterly statements are not available, will receive a monthly statement
disclosing the current balance of shares owned and a summary of transactions
through the last business day of the month.
Signature Guarantee. The Funds have adopted the policy of requiring
signature guarantees in certain circumstances to safeguard shareholder accounts.
A signature guarantee is necessary under the following circumstances:
1. If a redemption payment is to be made payable to a payee other than the
registered shareholder or joint shareholders, or Principal Life
Insurance Company or any of its affiliated companies or selected
administrators of qualified retirement plans;
2. To make a Dividend Relay Election directing dividends from a Fund
account which has joint owners to a Fund account which has only one
owner or different joint owners;
3. To change the ownership of the account;
4. To add telephone transaction services to an account established prior
to March 1, 1992 or to any account after the initial application is
processed;
5. When there is any change to a bank account designated under an
established telephone withdrawal plan; and
6. If a redemption payment is to be mailed to an address other than the
address of record or to an address of record that has been changed
within the preceding three months.
A shareholder's signature must be guaranteed by a commercial bank, trust
company, credit union, savings and loan association, national securities
exchange member, or brokerage firm. A signature guaranteed by a notary public is
not acceptable.
Minimum Account Balance. Although there currently is no minimum balance,
due to the disproportionately high cost of maintaining small accounts, the Funds
reserve the right to redeem all shares in an account with a value of less than
$300 and to mail the proceeds to the shareholder. Involuntary redemptions will
not be triggered solely by market activity. Shareholders will be notified before
these redemptions are to be made and will have thirty days to make an additional
investment to bring their accounts up to the required minimum. The Funds reserve
the right to increase the required minimum.
RETIREMENT PLANS
Shares of the Funds, except the Tax-Exempt Bond and Tax-Exempt Cash
Management Fund, are offered to fund certain retirement plans for which
Principal Life Insurance Company acts as custodian. These retirement plans
include Individual Retirement Accounts (IRAs), Simplified Employee Pension and
Salary Reduction Simplified Employee Pension Plans (SEPs and SAR/SEPs) all of
which are described in Section 408 of the Internal Revenue Code, and salary
deferral TDA plans as described in Section 403(b)(7) of the Internal Revenue
Code. The necessary forms to establish one of the Princor retirement plans,
including an application, may be obtained from a registered representative of
Princor or by calling 1-800-451-5447. DO NOT USE THE APPLICATION INCLUDED IN
THIS PROSPECTUS TO START A PRINCOR RETIREMENT PLAN. The Systematic Accumulation
Plan may be used to purchase shares of the Funds for a Princor retirement plan.
See "How to Purchase Shares." Telephone redemptions are not available on
accounts used to fund a Princor retirement plan. See "How to Sell Shares."
Investors should consult their tax counsel for retirement plan tax information.
SHAREHOLDER RIGHTS
The following information is applicable to each of the Principal Funds.
Each Fund's shares (except Tax-Exempt Bond Fund and Tax-Exempt Cash Management
Fund) are currently divided into three classes. Shares of the Tax-Exempt Bond
Fund are divided into two classes. The Tax-Exempt Cash Management Fund is only
offered in Class A shares. Each Fund share is entitled to one vote with
fractional shares voting proportionately. All classes of shares for each Fund
will vote together as a single class except where required by law or as
determined by the Fund's Board of Directors. Shares are freely transferable, are
entitled to dividends as declared by the Fund's Board of Directors and, if the
Fund were liquidated, would receive the net assets of the Fund. Shareholders of
a Fund may remove any director of that Fund with or without cause by the vote of
a majority of the votes entitled to be cast at a meeting of shareholders.
Shareholders will be assisted with shareholder communication in connection with
such matter.
The Board of Directors of each Fund may increase or decrease the aggregate
number of shares which the Fund has authority to issue and may issue two or more
classes of shares having such preferences and special or relative rights and
privileges as the Directors may determine, without shareholder approval.
The Funds are not required to hold an annual meeting of shareholders in any
year unless required to do so under the Investment Company Act of 1940. The
Funds intend to hold shareholder meetings only when required by law and at such
other times as may be deemed appropriate by their respective Boards of
Directors. However, each Fund will hold a meeting of shareholders when requested
to do so in writing by the holders of 10% or more of the outstanding shares of
that Fund.
Shareholder inquiries should be directed to the appropriate Fund at
Principal Financial Group, Des Moines, Iowa 50392.
As of October 31, 1997, Principal Life Insurance Company and its
subsidiaries and affiliates owned 25% or more of the outstanding voting shares
of each Fund as indicated:
Percentage of
Number of Outstanding Shares
Fund Shares Owned Owned
---- ------------ ------------------
Capital Value Fund 5,332,094 29.30%
International Emerging Markets Fund 1,000,000 77.70%
International SmallCap Fund 1,000,000 71.20%
Limited Term Bond Fund 1,111,843 50.37%
ADDITIONAL INFORMATION
Organization: The Funds were incorporated in the state of Maryland on the
following dates: Balanced Fund - November 26, 1986; Blue Chip Fund - December
10, 1990; Bond Fund - December 2, 1986; Capital Value Fund - May 26, 1989
(effective November 1, 1989 succeeded to the business of a predecessor Fund that
had been incorporated in Delaware on February 6, 1969); Cash Management Fund -
June 10, 1982; International Emerging Markets Fund - May 27, 1997; Government
Securities Income Fund - September 5, 1984; Growth Fund - May 26, 1989
(effective November 1, 1989 succeeded to the business of a predecessor Fund that
had been incorporated in Delaware on February 6, 1969); High Yield Fund -
November 26, 1986; International Fund - May 12, 1981; International SmallCap
Fund - May 27, 1997; Limited Term Bond Fund - August 9, 1995; MidCap Fund -
February 20, 1987; Real Estate Fund - May 27, 1997; SmallCap Fund August 13,
1997; Tax-Exempt Bond Fund - June 7, 1985; Tax-Exempt Cash Management Fund -
August 17, 1987; Utilities Fund - September 3, 1992.
Custodian: Bank of New York, 48 Wall Street, New York, New York 10286, is
custodian of the portfolio securities and cash assets of each of the Funds
except the International Emerging Markets Fund, International Fund and
International SmallCap Fund. The custodian for the International Emerging
Markets Fund, International Fund and International SmallCap Fund is Chase
Manhattan Bank, Global Securities Services, Chase Metro Tech Center, Brooklyn,
New York 11245. The custodians perform no managerial or policymaking functions
for the Funds.
Capitalization: The authorized capital stock of each Fund consists of
100,000,000 shares of common stock (2,000,000,000 for Principal Cash Management
Fund and 1,000,000,000 Principal Tax-Exempt Cash Management Fund), $.01 par
value.
Financial Statements: Copies of the financial statements of each Fund will
be mailed to each shareholder semiannually. At the close of each fiscal year,
each Fund's financial statements will be audited by a firm of independent
auditors. The firm of Ernst & Young LLP has been appointed to audit the
financial statements of each Fund for their respective present fiscal years.
Registration Statement: This Prospectus omits some information contained in
the Statement of Additional Information (also known as Part B of the
Registration Statement) and Part C of the Registration Statements which the
Funds have filed with the Securities and Exchange Commission. The Funds'
Statement of Additional Information is hereby incorporated by reference into
this Prospectus. A copy of this Statement of Additional Information can be
obtained upon request, free of charge, by writing or telephoning Princor
Financial Services Corporation. You may obtain a copy of Part C of the
Registration Statements filed with the Securities and Exchange Commission,
Washington, D.C. from the Commission upon payment of the prescribed fees.
Principal Underwriter: Princor Financial Services Corporation, P.O. Box
10423, Des Moines, IA 50306, is the principal underwriter for each of the
Principal Funds.
Transfer Agent and Dividend Disbursing Agent: Principal Management
Corporation, The Principal Financial Group, Des Moines, Iowa, 50392, is the
transfer agent and dividend disbursing agent for each of the Principal Funds.
